Unit 1,2 With Questions and Answers

MEANING:
BUSINESS: According to Sec 2(13) of the Income Tax Act, Business

means any trade, manufacture or commerce.
In other words, it would mean any economic activity, dealing with the
purchase and sale of goods and services in order to earn profits.
Example: Mr X dealing in the business of Masks and Sanitizers.
Profession- Under Section 2(36) of the Income Tax Act, Profession
means activities undertaken to earn a livelihood and which requires
specialized knowledge and skills. Example – Doctors, Lawyers,
Chartered Accountants ….
Vocation: Vocation refers to any activity which a person practices to

earn a livelihood or otherwise. Example – Preacher, Painter, Artists
BASIS BUSINESS PROFESSION VOCATION
Meaning Activities in the Services Resulting out of

nature of trade , intended to earn passion or an
manufacture a livelihood Inner Calling
and commerce
Objective Profits / Gains Professional Remuneration
Fees
Qualification No minimum
qualification
required
Code of No prescribed A prescribed No prescribed
Conduct code of conduct code of conduct code of conduct
A speculation business means any business in which a contract for the
purchase and sale of any commodity including stocks and shares are
periodically or ultimately settled otherwise than by the actual delivery
or transfer of the commodity or scrips.
Specimen for computation of Income from Business and Profession.
Particulars Amount Amount
Net Profit as Per Profit and Loss Account Xxxxx
Add: Inadmissible expenses, personal Xxx
expenses, non-business expenses
Business Income not credited in P&L Xxx
Account Xxxxx
Overvaluation of Opening Stock and Xxx
Undervaluation of Closing Stock Xxx
Xxx
Less: Non Business income credited to Xxx
P&L Account xxxxx
Business expenses not debited to P&L xxxxx
Account
Undervaluation of Opening Stock or
Overvaluation of Closing Stock
Taxable Income from Business / Profession
INCOME TAX – II
COM204A62
PROFITS AND GAINS FROM
BUSINESS OR PROFESSION
UNIT 1
MEANING AND DEFINITION OF BUSINESS
• Meaning: Business means any kind of economic activity carried on by an

individual for earning profits.
• Definition: Sec. 2(3) has defined the term as “ any trade, commerce,
manufacturing activity or any adventure or concern in the nature of trade,
commerce and manufacture”.
• In this connection it is not necessary that there should be a series of transactions
in a business and also it should be carried on permanently.
PROFESSION
• Meaning: Activity Involves use of professional , intellectual and technical skills

• Definition: According to sec. 2(36) of Income Tax Act, “profession” includes
vocation.
• Profession involves the use of intellectual or manual skill to earn a livelihood
• For instance, an auditor carrying on his practice, the lawyer or a doctor, a painter,
an actor, an architect or sculptor, would be persons carrying on a profession and
not a business.
VOCATION
• Vocation simply means a way of living for which one has special fitness.
• A vocation does not involve any organized or systematic activity like business.
• So vocation simply means any type of activity which a person is passionate about
and proceeds from an inner calling or urge
• The practice of a religion may also amount to vocation. Writing of articles in the
magazines is also a vocation.
DIFFERENCE BETWEEN BUSINESS AND PROFESSION
BUSINESS PROFESSION
1.Involves trade , manufacture and commerce 1.Involves use of professional , intellectual and
technical skills
2.Receives profits and gains 2. Receives professional fees
3.No minimum required qualification 3. Requires professional qualification and
specialised knowledge is required.
4.Involves tangible Goods and Services . 4. Involves Intangible services only.
5.No prescribed code of conduct is required for 5.Prescribed code of conduct is required for the
the delivery of business. delivery of profession.
6.Objective is to earn profits and livelihood and 6. Objective is to earn livelihood , passion and
satisfaction. satisfaction.
Meaning of Profits
• (i) Profits in cash or in kind: Profits may be realised in money or in money’s
worth, i.e., in cash or in kind. Where profit is realised in any form other than cash,
the cash equivalent of the receipt on the date of receipt must be taken as the value
of the income received in kind.
• (ii) Capital receipts: Capital receipts are not generally to be taken into account
• (iii) Voluntary Receipts: Payment voluntarily made by persons who were under no
obligation to pay anything at all would be income in the hands of the recipient, if
they were received in the course of a business or by the exercise of a profession or
vocation
• (iv) Application of the gains of trade is immaterial: Gains made even for the
benefit of the community by a public body would be liable to tax.
Meaning of Profits
(v) Legality of income: The illegality of a business, profession or vocation does not
exempt its profits from tax. The revenue is not concerned with the taint of illegality in
the income or its source.
(vi) Income from distinct businesses: The profits of each distinct business must be
computed separately but the tax chargeable under this section is not on the separate
income of every distinct business but on the aggregate profits of all the business
carried on by the assessee.
(vii) Computation of profits: Profits should be computed after deducting the losses
and expenses incurred for earning the income in the regular course of the business,
profession, or vocation unless the loss or expenses is expressly or by necessary
implication, disallowed by the Act. The charge is not on the gross receipts but on the
profits and gains.
Specimen for Computation of Taxable Income from
Business
Particulars Amount Amount
Net profit as per profit and loss account XXXX
Add
• Inadmissible non business expenses/ excess expense debited to profit and XXX
loss account
• Business income not credited to profit and loss account XXX
• Overvaluation of opening stock XXX
• Undervaluation of closing stock XXX
XXXX
Less
• Allowed admissible expenses not debited to profit and loss account XXX
• Non business income credited to profit and loss
• Undervaluation of opening stock XXX
• Over valuation of closing stock
XXX
XXX
XXXX
Total XXXX
Disallowed /Inadmissible Expenses
• Personal Expenses (Household expenses, premium on life and medical insurance of proprietor, savings
made in NSC, PF etc, Proprietor salary)
• Any payment made in excess of 10,000 either in cash or in bearer cheque, entire amount is
inadmissible
• Income Tax, Advance income tax
• Interest on Loan taken for personal purpose
• Provision/Reserve for Bad and doubtful debt
• Bonus and commission paid to employees if it is paid after the due date of filing the returns (31st July
2020)
• GST and Customs Duty if it is paid after the due date of filing the returns (31st July 2020)
• Losses capital in nature, purchase of capital asset, renovation of building etc.
• Donations and Charities
Disallowed /Inadmissible Expenses
• Cost of Sign board fixed on office premises
• Contribution to staff welfare funds and political party
• Speculation losses
• Difference in trial balance
• 4/5th of preliminary expenses, Employer contribution to URPF, Interest on capital
• Over and excess depreciation
• Expenses related to other heads on income, Personal gifts and presents, penalties and fines on excise
and customs duty
• Salary paid to family members who are not professionally qualified
• Payment made outside India without deducting TDS or if TDS is not paid on or before the due date
of filing return of income (30% is disallowed)
• Legal expenses to defend criminal cases
Business Income not credited to P&L A/c
• Bad debts recovered allowed earlier
• Sundry Income/commission, discount, brokerage received
• Interest from Debtors
• Refund of Customs Duty
• Sales tax refund (allowed earlier)
• Income from Smuggling
• Profit on sale of import license and Export incentives
Allowed Expenses (Expenses incurred for
earning business income)
• General office expenses, rent, taxes, audit fees, salaries etc
• Bad debts, discount allowed, depreciation, travelling expenses related to business
• Insurance premium paid (any mode other than cash) for the health of employees,
fire insurance premium paid and group insurance premium paid
• Bonus or commission to employees on actual payment basis before due date
• Expenditure on scientific research, Demurrage to railways
• Sales tax paid before due date
• Theft in office premises, pooja expenses at office, guest house and holiday home
facilities
• Contribution to RPF, staff welfare expenses
Allowed Expenses (Expenses incurred for
earning business income)
• Revenue advertisement expenditure, establishment expenses, audit fees
• Interest on loan taken for business purposes
• Loss of goods or cash embezzled by employess
• Printing and stationery, electricity, water and telephone charges
• Legal expenses incurred to avoid business liability
• Legal expenses for filing Income Tax Appeal
• Depreciation
Non Business Income (Income not part of
Business but credited to P/L A/c
• Interest on Securities, Agricultural Income, Income from House property
• Bad debts recovered but not allowed earlier
• Profit on sale of fixed assets and investments, dividend received
• Interest on deposits, dividend on UTI and mutual funds, LIC amount
received
• Gifts received from relatives, winnings from lottery/crossword
puzzles/horse race
• Income tax refund
• Share of income fromHUF
Depreciation
Rates of Depreciation
Question 1
• Following is the Profit and Loss Account of Mr.Shekar for the year ending 31.03.2021
Particulars Amount Particulars Amount

To Salaries 3,30,000 By Gross Profit 5,00,000 Additional Information:
To Office Expenses 36,000 By Bad Debts 20,000 1. Salaries include Rs.12,000 paid
Recovered to workers employed at home
To Depreciation 28,000 By Rent From 18,000 2. Legal expenses include Rs.2,000
House Property paid to the lawyer in connection
To GST 18,000 By Commission 20,000 with personal case
To Legal Expenses 16,000 By Brokerage 20,000 3. Out of bad debts recovered
To Income Tax 14,000 By Sundry Receipts 10,000 only Rs.8,000 were allowed as
To Expenses On 24,000 By Share Of Income 6,000 deduction earlier.
Acquisition Of From HUF
Compute taxable income from
Patent Rights
business of Mr.Shekar for the
To Repairs 12,000
A.Y.2021-22
To Donations 4,000
To Provision For Bad 6,000
Debts
To General Expenses 24,000
To Net Profit 88,000
6,00,000 6,00,000
Question 2
• The following is the profit and loss a/c of Mr. Anil compute his taxable income from Business for the
assessment year • General expenses include a sum
To office salary 30000 By gross profit 160000
of Rs.5000 as compensation paid
to a accountant who has to be
General expenses 14000 Profit on sale of car 30000
removed from service in the
Bad debts 2000 Recovery of bad debts 10000 interest of the business and Rs.
Advertisement 7400 Interest on government 7000 6000 as contribution paid to govt.
expenses securities for laying electric cables for the
company’s plant
Fire insurance 2000 Dividend 7000 • Depreciation as regard the
premium
relevant block of assets under
Depreciation 10000 Gifts 10000
the income tax act Rs.7000
Reserve for bad debts 6000 • In the earlier year the assessing
Donation to school 5000 officer had refused to allow
Car expenses 4000 deduction for the bad debts of
Rs.5000 now recovered
Net profit 143600
• Car expenses included Rs.1000
224000 224000 attributable to the use of
personal work
COMPUTATION OF TAXABLE INCOME FROM BUSINESS
ASSESSE MR A AY 2021-22
STATUS RESIDENT PY 2020-21
PARTICULARS AMOUNT AMOUNT

NET PROFIT AS PER PROFIT AND LOSS ACCOUNT
ADD: NON BUSINESS EXPENSES
BUSINESS INCOMES NOT CREDIT TO P&L
A/C
OVER VALUATION OF OPENING STOCK
UNDERVALUATION OF CLOSING STOCK
LESS : NON BUSINESS INCOMES
BUSINESS EXPENSES NOT DEBITED TO P&L
A/C
UNDERVALUATION OF OPENING STOCK
OVERVALUATION OF CLOSING STOCK
FOLLOWING ARE THE DETAILS OF THE INCOMES AND EXPENSES

INCURRED BY MR AMARNATH
PARTICULAR AMOUNT PARTICULARS AMOUNT
TO OPENING STOCK 10,000 BY SALES 5,00,000
TO PURCHASES 2,00,000 BY WINNINGS FROM 10,000
HORSE RACES
TO GENERAL EXPENSES 10,000 BY INTEREST ON 50,000
GOVT SECURITIES
TO DRAWINGS 20,000 BY BETTING 5,000
TO GOODWILL WRITTEN OFF 10,000 BY CLOSING STOCK 1,00,000
TO REPAIRS OF CAR USED 2,500
FOR PERSONAL PURPOSE
NET PROFIT 4,12,500
TOTAL 6,65,000 TOTAL 6,65,000
Opening stock is Rs 20,000 and the actual Closing Stock is Rs 80,000. Compute the
taxable Income from Business.
ASSESSE MR AMARNATH AY 2021-22
NET PROFIT AS PER P&L A/C 4,12,500
ADD: Drawings 20,000
Goodwill written off 10,000
Repairs for personal use 2,500 32,500
LESS : Undervalued Opening Stock 10,000

Winnings from Horse races 10,000
Interest on Investments 50,000
Betting Income 5,000
Overvalued Closing Stock 20,000 95,000
Taxable Income from Business 3,50,000
Compute the Taxable Income of Mr A from the following information:

To Purchases 5,00,000 By Sales 10,00,000
To Rent and rates 60,000 By Interest on Securities 10,000
To Insurance 10,000 By Short term Capital 15,000
Gains
To Postage and Stationery 10,000 By Bad debts recovered 25,000
(allowed as a deduction
earlier)
To General expenses 20,000
To Depreciation 25,000
To Transfer to Staff Welfare Fund 2,00,000
To Income Tax 50,000
To Bad Debts 50,000
Total 10,50,000 Total 10,50,000
ASSESSE MR A AY 2021-22
NET PROFIT AS PER P&L A/C 75,000
Add: Transfer to Staff welfare Fund 2,00,000
Income Tax 50,000
2,50,000
Less: By Interest on Securities 10,000
By Short term Capital Gains 15,000 25,000
Taxable Income from Profits and Gains from Business Rs 3,00,000

Mr Sai , a trader furnishes the following information:
PROFIT AND LOSS ACCOUNT
To General Expenses 4,80,000 By Gross Profit 22,00,000
To Salary to Staff 2,40,000 By Commission 40,000
Salary to Sai 1,20,000 By Bad debts 60,000
recovered (earlier
allowed)
To Interest on 60,000 By interest on Listed 1,00,000
Capital Debentures
To Interest on 40,000
Overdraft
To extension of 1,50,000
Building
To Interest on Loan 40,000
To depreciation 1,20,000
To office expenses 80,000
To Audit fees 72,000
To fire insurance 78,000
To Bonus to staff 1,00,000
To contribution to 1,22,000
RPF
To advertisement 2,00,000
To Reserve for bad 60,000
debts
To bad debts written 90,000
off
To Net Profit 3,48,000
Total 24,00,000 Total 24,00,000
Other information:
1. Depreciation allowable as per IT Rules Rs 1,40,000
2. Advertisement includes Rs 50,000 being cost of permanent Sign
Board
3. Income of Rs 60,000 accrued during the year not entered in the
accounts
4. Loan was taken to pay Income Tax arrears
5. Rs 40,000 paid as damages for failure to fulfill a contract in time is
included in general expenses
6. Office expenses includes Rs 5,000 paid as salary to his wife, who
casually helps in the business.
Compute taxable Income from Business.

ASSESSSE-SAI AY 2021-22
Net Profit as per P&L a/c 3,48,000
Less: Interest on Debentures 1,00,000
Depreciation 1,40,000 2,40,000
Add: Salaries to Himself 1,20,000
Interest on Capital 60,000
Extension of Building 1,50,000
Interest on Loan 40,000
Depreciation 1,20,000
Advertisement 50,000
Reserve on doubtful debts 60,000
Income not included earlier 60,000
Office expenses (pymt to wife) 5,000 6,65,000
Taxable Income from Business Rs 7,73,000
Sri Dhoni is owner of the business his profit and loss Account for the year ended
31/3/2022 is as follows. Compute taxable income from business for the AY 2021-2022
To salaries 5000 By gross profit 55000

Rent and rates 2900 Interest on investment 5000
Printing and stationery 750 Rent received 6000
Personal expenses 3000 Winning from lottery 10000
Commission 2000
Discount and allowance 450
Provision for bad debts 1200
Postage and telegram 270
Law charges 450
Advertisement 1550
Gifts and presents 150
Fire insurance premium on stock 500
GST 1250
Repairs and renewal ( not for 480
business)
Loss on sale of machinery ( used for 1800
private purpose )
Life insurance premium 1700
Drawings 740
Interest on capital 730
Audit fee 300
Interest on bank loan 1380
Provision for depreciation 2500
Provision for income tax 3900
Net profit 43000
Total 76000 Total 76000
1) Actual bad debts were Rs.500

2) Actual amount of income tax paid during the year 4000
3) Allowable depreciation as per IT rules 1500
4) Advertisement expenses included Rs. 450 spent on special advertisement campaign to open
a new shop
5) He carried out the business in a rented house 40% of which is used for his residence
6) Rent and rates included Rs. 2400 paid as rent of the property during the year
ASSESSE MR DHONI AY 2021-22

Net Profit as per Profit and Loss Account 43,000
Add: Disallowed expenses
Rent (2400*40%) 960
Personal expenses 3000
Provision for bad debts 1200
Gifts and Presents 150
Repairs and Renewals 480
Loss on sale of machinery 1800
Life Insurance Premium 1700
Drawings 740
Interest on Capital 730
Provision on Depreciation 2500
Provision for Income Tax 3900 17160
Less: Non Business Income

Bad debts recovered 500
Depreciation 1500
Interest on Investments 5000
Rent Received 6000
Winnings from Lottery 10000 23000
Taxable Income from Business 37,160
Mr. Manu a resident of Mumbai submits the following profit and loss account for the
year ended 31/3/2021
To Opening stock 110000 By sales 3600000

Purchases 1400000 By closing stock 220000
Wages 300000
Gross profit 2010000
Total 3820000 Total 3820000
To advertisement 200000 By gross profit b/d 2010000
Salary to staff 660000 By rent 240000
Manu salary 120000 Commission 150000
Audit fee 60000 Bad debts recovered 70000
(earlier disallowed )
Bad debts 40000 Dividend on SRM ltd 30000
Reserve for bad debts 50000
General expenses 250000
Municipal tax 24000
Fire insurance premium 26000
Depreciation 78000
Patents right 160000
Staff welfare fund 40000
Employee RPF 50000
GST 190000
Donation to NDF 100000
Premium on life insurance 36000
Net profit 416000
Total 25,00,000 Total 25,00,000
 Opening and closing stock were overvalued by 10%
 Advertisement includes Rs. 100000 being cost of permanent Sign board
 Business income of 70,000 was not recorded in profit and loss A/c
 General expenses include Rs. 50,000 paid for securing business orders and Rs.
60,000 spent for Manu's birthday
Depreciation allowable on all assets including permanent sign board but excluding
patent rights as per IT rules was Rs. 90,000.Patent rights were acquired on
11.10.2020 on which depreciation allowable at 25%
ASSESSE MR GOVINDA AY 2021-22

Net Profit as per Profit and Loss Account 4,16,000
Business Income 70,000
Advertisement 1,00,000
Salary to self 1,20,000
Reserve on bad debts 50,000
General expenses 60,000
Municipal Taxes 24,000
Depreciation 78,000
Patent Rights 1,60,000
Staff welfare fund 40,000
Donation to NDF 1,00,000
Premiuk on Life Insurance 36,000
Overvaluation of Opening Stock (110000*110/10) 10,000 8,48,000
12,64,000
Over valuation of Closing Stock (220000*110/10) 20,000
Depreciation allowable as per IT 90,000
Depreciation on Patent rights (160000*25%*1/2) 20,000
Rent 2,40,000
Bad Debts recovered (earlier disallowed) 70,000
Dividend 30,000 4,70,000
The following is the profit and loss a/c of Mr. Anil compute his taxable income from
Business for the assessment year
To office salary 30000 By gross profit 160000

General expenses 14000 Profit on sale of car 30000
Bad debts 2000 Recovery of bad debts 10000
Advertisement expenses 7400 Interest on government 7000
securities
Fire insurance premium 2000 Dividend 7000
Depreciation 10000 Gifts 10000
Reserve for bad debts 6000
Donation to school 5000
Car expenses 4000
Net profit 143600
Total 2,24,000 Total 2,24,000
a) General expenses include a sum of Rs.5000 as compensation paid to a accountant who
has to be removed from service in the interest of the business Rs. 6000 as contribution
paid to govt for laying electric cables for the company’s plant
b) Depreciation as regard the relevant block of assets under the income tax act – 7000
c) In the earlier year the assessing officer had refused to allow deduction for the bad debts
of Rs.5000 now recovered
d) Car expenses included Rs.1000 attributable to the use of personal work
ASSESSE MR ANIL AY 2021-22

Depreciation 10,000
Reserve for doubtful debts 6,000
Donation 5,000
Car Expenses 1,000 22,000
Depreciation 7,000
Profit on sale of car 30,000
Recovery of bad debts 5,000
Interest on govt securities 7,000
Dividends 7,000
Gifts 10,000 66,000
Taxable Income from Business 99,600
Dr. Kuvempu has prepared the following Profit and Loss Account for the year ending
31.03.2021
To Salary 48,000 By Gross Profit B/D 2,37,300
To Advertisement 24,000 By Rental Income 1,65,000
To Sundry Expenses 54,500 By Dividends From An Indian 24,000

Company
To Interest On Own Capital 12,000 By Winnings From Lottery 1,15,000
To Fire Insurance (Rs.10,000 Relates 30,000 By Interest on Non- 1,92,000

To House Property) Government Securities
To Income Tax 27,000
To Household Expenses 42,500
To Bad Debts 11,000
To Provision For Bad Debts 10,500
To Repairs To House Property 10,000

To Municipal Taxes of House Property 36,000
To Life Insurance Premium 6,000
To Donation - Political Party 12,000
To Depreciation (Allowable) 23,800
To Net Profit (C/D) 3,86,000
Total 7,33,300 Total 7,33,300
Dr.Kuvempu owns a house property having 3 units, out of which unit 1 having 25%
carpet area is used for own business purpose. Determine the income under the head
‘Profits and Gains of Business or Profession’ of Dr. Kuvempu for the A.Y.2021-22
ASSESSE DR KUVEMPU AY 2021-22
STATUS: RESIDENT PY 2020-21
Add: Disallowed Business expenses
Interest on own capital 12,000
Fire insurance-HP (10,000*3/4) 7,500
Income Tax 27,000
Household expenses 42,500
Provision for bad debts 10,500
Repairs – HP 7,500
Municipal tax – HP 27,000
Insurance Premium on own life 6,000
Donation to political party 12,000 1,52,000
Less : Disallowed Incomes 5,38,000
Rental Income 1,65,000
Dividend from Indian Company 24,000
Winning from Lottery 1,15,000
Interest on non govt security 1,92,000 4,96,000
Taxable Income from Business Rs.42,000

Following is the Profit and Loss Account of Mr.Shekar for the year ending 31.03.2021
To Salaries 3,30,000 By Gross Profit 5,00,000
To Office Expenses 36,000 By Bad Debts Recovered 20,000
To Depreciation 28,000 By Rent From House Property 18,000
To GST 18,000 By Commission 20,000
To Legal Expenses 16,000 By Brokerage 20,000
To Income Tax 14,000 By Sundry Receipts 10,000
To Expenses On Acquisition 24,000 By Share Of Income From 6,000

Of Patent Rights HUF
To Repairs 12,000
To Donations 4,000
To Provision For Bad Debts 6,000
To General Expenses 24,000
Total 6,00,000 Total 6,00,000
Additional Information:
1. Salaries include Rs.12,000 paid to workers employed at home

2. Legal expenses include Rs.2,000 paid to the lawyer in connection with personal
case
3. Out of bad debts recovered only Rs.8,000 were allowed as deduction earlier.
Compute taxable income from business of Mr.Shekar for the A.Y.2021-22
ASSESSE DR KUVEMPU AY 2021-22
STATUS: RESIDENT PY 2020-21
Net Profit as per Profit and Loss Account 88,000
Add: Disallowed Business expenses
Salaries 12,000
Legal expenses 2,000
Income Tax 14,000
Patent Rights 24,000
Donations 4,000
Provision for bad debts 6,000 62,000
Less : Disallowed Incomes
Bad debts disallowed earlier 12,000
Dividend 6,000
Rent from House Property 18,000
Share of Income from HUF 6,000
Depreciation on patent rights(24000*25%) 6,000 48,000

10)Mr Sai , a trader furnishes the following information:
PROFIT AND LOSS ACCOUNT
To General Expenses 4,80,000 By Gross Profit 22,00,000
To Salary to Staff 2,40,000 By Commission 40,000
Salary to Sai 1,20,000 By Bad debts recovered 60,000
(earlier allowed)
To Interest on Capital 60,000 By interest on Listed 1,00,000
Debentures
To Interest on Overdraft 40,000
To Extension of Building 1,50,000
To Depreciation 1,20,000
To Office expenses 80,000
To Audit fees 72,000
To Fire insurance 78,000
To Bonus to staff 1,00,000
To Contribution to RPF 1,22,000
To Advertisement 2,00,000
To Reserve for bad debts 60,000
To Bad debts written off 90,000
Total 24,00,000 Total 24,00,000
Other information:
1. Depreciation allowable as per IT Rules Rs 1,40,000
2. Advertisement includes Rs 50,000 being cost of permanent Sign Board
3. Income of Rs 60,000 accrued during the year not entered in the accounts
4. Loan was taken to pay Income Tax arrears
5. Rs 40,000 paid as damages for failure to fulfill a contract in time is
included in general expenses
6. Office expenses includes Rs 5,000 paid as salary to his wife, who
casually helps in the business.
Compute taxable Income from Business.

Salary to Sai 1,20,000
Interest on Capital 60,000
Extension of Building 1,50,000
Interest on Loan 40,000
Office expenses 5,000
Reserve for bad debts 60,000
Income accrued 60,000 6,65,000
Less: Non Business Incomes

Interest on Debentures 1,00,000 2,90,000
Following is the Profit and loss Account of Mr Clarence …

PARTICULARS AMOUNT PARTICULARS AMOUNT
To Rent 60,000 By Gross Profit 5,23,000
To Rates 6,000 By Interest on 28,000
Debentures
To Salary to staff 54,000 By Rent from house 24,000
Property
To Diwali Pooja 2,000 By sundry income 16,000
expenses
To Interest on Loan 1,25,000 By commission 37,000
To Sundry expenses 55,000 By bad debts recovered 10,000
disallowed earlier
To Bad debts 6,000
To Charity 1,000
To Reserve on bad 2,000
debts
To Entertainment 8,500
expenses
To Loss by theft 14,000
To GST penalty 10,000
Total 6,38,000 Total 6,38,000
Information:
1. Rent includes Rs 12,000 of a shop belonging to the assesse.
2. Salary of staff includes salary of Rs 24,000 to the son who is a BCOM
student and who casually helps in business
3. A loan of Rs 60,000 at 15% pa is taken from wife out of funds advanced
by him and interest is included in interest on Loan
4. Sundry expenses include Rs 9,000 being expenses incurred on pilgrimage
to Haridwar.
5. Entertainment expenses include Rs 1500 spent on snacks for the guests of
a local MLA.
6. Loss by theft worth Rs 6,000 stolen from office and Rs 8000 was stolen
from home
7. He earned Rs 40,000 in gold smuggling business not shown in the books
of accounts
8. Rates include Rs 4,000 for the property let out
9. GST paid and depreciation not taken to Profit and Loss account Rs 8,000
and Rs 5,000 respectively.
Compute the taxable Income from Business.

Add: Non business expenses
To Rent 12,000
To Rates 4,000
To Salary to staff 24,000
To Sundry expenses 9,000
To Charity 1,000
To Reserve on bad debts 2,000
To Entertainment expenses 1,500
To Loss by theft 8,000
To GST penalty 10,000
Gold smuggling 40,000 1,20,500
Less: Disallowed Incomes

By Interest on Debentures 28,000
By Rent from house Property 24,000
By bad debts recovered disallowed earlier 10,000
GST 8,000
Depreciation 5,000 75,000
Taxable Income from Business Rs3,40,000

INCOME FROM PROFESSION
Dr Rekha, is a registered medical practitioner and following is the Receipts and Payments
Account:
RECEIPTS AMOUNT PAYMENTS AMOUNT
To Balance b/d 1,30,000 By Salaries 66,000
To Visiting fees 1,40,000 By Clinic Rent 96,000
To Consultation fees 4,76,000 By Motor car expenses 70,000
To Special medical camp 50,000 By Drivers Salary 60,000
remuneration
To Rent from House Property 1,20,000 By Medical books 30,000
To Gifts 60,000 By Motor car purchased 5,00,000
To Dividend from Sun Pharma 11,600 By Household expenses 92,000
To Interest on Debentures 18,800 By Telephone 29,000
By Travel expenses 20,000
By Surgical Equipment 33,000
By Balance c/f 10,400
Total 10,06,400 Total 10,06,400
 Remuneration received from special medical camp is donated to an orphanage.
 30 % of motor car usage is for personal use
 20% of travel expenses relate to personal use
 25% of Telephone expenses relate to personal use
 Allow depreciation as per IT rules
 50% of gifts are from patients
 Medical books include annual publications worth Rs 10,000 and the remaining are
general medical books.
 Compute the taxable income from Profession
COMPUTATION OF TAXABLE INCOME FROM PROFESSION

PROFESSIONAL RECEIPTS
Visiting fees 1,40,000
Consultation fees 4,76,000
Special medical camp remuneration 50,000
Gifts from Patients 30,000
Total Professional Receipts 6,96,000
Less: Professional Expenses
Salaries 66,000
Clinic Rent 96,000
Motorcar expenses (70000*70%) 49,000
Drivers Salary (60000*70%) 42,000
Depreciation on Books (30000*40%) 12,000
Depreciation on Motor Car (5,00,000*15%*70%) 52,500
Telephone (29,000*75%) 21,750
Travel (20,000*80%) 16,000
Depreciation on Surgical Equipment (33,000*15%) 4950
Total Professional Expenses 3,59,700
Taxable Income from Profession 3,36,300

To Balance b/d 1,20,000 By Clinic Rent 25,000
To Consultation fees 65,000 By Staff salary 80,000
To Visiting fees 80,000 By Rent and Taxes 25,000
To Sale of Medicines 45,000 By Electricity and water 14,000
To Operation Theatre Rent 25,000 By Purchase of medical 14,000
books
To Dividend 25,000 Purchase of surgical 40,000
equipment
Motor car expenses 10,000
Medical Association 5,000
membership fees
By Audit fees 20,000
By staff welfare expenses 12,000
By Diwali expenses 6,000
By Entertainment expenses 12,000
By Medicines purchased 30,000
By Balance c/d 67,000
Total 3,60,000 3,60,000
Additional information:
 Gifts from patients Rs 4,000 was not included in the account
 ¼ of motor car expenses relate to personal use
 Interest received on bank deposits Rs 10,000
 Audit fees include income tax appeal expenses of Rs 10,000
Compute his taxable Income from Profession

Consultation fees 65,000
Visiting fees 80,000
Sale of medicines 45,000
Operation Theatre Rent 25,000
Professional Expenses:
Clinic Rent 25,000
Staff salary 80,000
Rent and Taxes 25,000
Electricity and water 14,000
Depreciation on Surgical equipment (40000*15%) 6,000
Motor car expenses (10000*3/4) 7,500
Medical Association membership fees 5,000
Audit fees 20,000
Staff welfare expenses 12,000
Medicines purchased 30,000
Diwali expenses 6,000
Entertainment expenses 12,000 2,48,100
Loss from Profession ( 29,100)
Dr. Punith submits the following particulars. Calculate the income from profession for the
Assessment Year 2021-22.Receipts and Payments A/c for the year ending 31-03-2021
To Opening balance 25,000 By Salary to staff 36,000
To Consultation fees 75,000 By Purchase of medicine 18,000
To Visiting fees 62,500 By Professional Books 10,000
To Agricultural income 40,000 By Purchase of car 2,40,000
To Interest on bank deposits 10,000 By car expenses 20,000
To Gifts from patients 15,000 By Computer purchased 50,000
To Rent from house property 48,000 By Personal expenses 45,000
To Loan from bank for profession 1,50,000 By Income tax 15,000
To Operation charges 90,000 By LIC premium 10,000
To Sale of medicines 32,500 By Repayment of loan 35,000
By Municipal tax on house 5,000
property
By Interest on loan 7,500
By closing balance 56,500
Total 5,48,000 Total 5,48,000
(1) 25% of car expenses related to personal use
(2) Rate of depreciation on professional books 40%, car 15%, and computer 40%
(3) A cash gift of Rs.2500 received from a patient was not recorded in the books.

Consultation Fess 75,000
Visiting fees 62,500
Gift from patents 15,000
Operation charges 90,000
Sale of medicines 32,500
Cash gift rec. from a patient 2,500
Less : Professional Expenses
Salary to staff 36,000
Purchase of medicines 18,000
Depreciation on Professional books (10,000*40%) 4,000
Depreciation on Car (2,40,000*15%*75%) 27,000
Car expenses (20000*75%) 15,000
Depreciation on Computer (50,000*40%) 20,000
Interest on Loan 7500
Total Professional expenses 1,27,500
Following is the Receipts and Payments Account of Mr Hari,maintains his books on cash
system of accounting
Receipts Amount Payments Amount
To Bal b/d 1,40,000 By Rent from clinic 1.80.000
To Consultation fees 2019-20 36,000
2019-20 25,000 2020-21 1,44,000
2020-21 5,25,000
2021-22 30,000
To visiting fees 1,60,000 Surgical equipment 1,00,000
To winnings from Lottery 1,00,000 Computer 50,000

To Interest on Investments 60,000 Interest on Loan for Prof 40,000
To gifts from patients 80,000 Electricity and Water 18,000
To share from HUF 50,000 Newspapers 12,000
To sale of medicines 2,40,000 Professional Books 30,000
To Loan from Bank 3,00,000 Purchase of medicines 1,00,000
Household expenses 25,000
Income tax 25,000
LIC 36,000
Gift to mother 24,000
Subscription to AIMA 20,000
Subscription to prof journals 10,000
Car expenses 60,000
Telephone exp 30,000
Lottery tickets 50,000
Staff salary 2,40,000
Balance c/d 6,60,000
Total 17,10,000 Total 17,10,000
Car is used 60% for official purpose.

PARTICUARS AMOUNT AMOUNT
Professional receipts :
Consultation fees 5,80,000
Visiting fees 1,60,000
Sale of Medicines 2,40,000
Rent of Clinic 1,80,000
Depreciation on surgical equipment (1,00,000*15%) 15,000
Depreciation on Computer ( 50,000*40%) 20,000
Interest on Loan for Profession 40,000
Electricity and Water 18,000
Newspapers 12,000
Professional Books – Depreciation (30,000*40%) 12,000
Purchase of medicines 1,00,000
Subscription to AIMA 20,000
Subscription to Professional journals 10,000
Car expenses (60,000*60%) 36,000
Telephone expenses 30,000
Taxable Income from Profession Rs 3,27,000
PROBLEMS ON CHARTERED ACCOUNTANTSS
Sri Krishna is a CA. He gives you the following Income and Expenditure A/C for the year
ending 31-01-2021
INCOME AND EXPENDITURE
EXPENDUTIRE AMOUNT INCOME AMOUNT
To Office expenses 20,000 By Audit fees 3,41,000
To Books 10,000 By gift from father in law 10,100
To employees Salary 10,000 By Financial consultancy service 16,000
To Personal expenses 2,01,000 By Profit on sale of investments 12,900
To Donation 5,000 By Accountancy works 60,000
To Interest 1,400
To Income tax 26,600
To Car expenses 4,000
To Surplus 1,62,000
Total 4,40,000 Total 4,40,000
Adjustments:
(1) The car is used equally for professional and personal purpose.
(2) Allowed depreciation on car for official purpose Rs.10,000
(3) Staff salaries include Rs.4000 paid to domestic servant.
(4) Loan was taken for personal use.
COMPUTATION OF TAXABLE INCOME FROM PROFESSION:

Audit fees 3,41,000
By Financial consultancy service 16,000
By Accountancy works 60,000
PROFESSIONAL RECEIPTS 4,17,000
Depreciation on books (10000*40%) 4,000
Employees Salary (10000-4000) 6,000
Car expenses (4000*50%) 2,000
Depreciation on Car (10,000 * 50%) 5,000
Total Professional Expenses 37,000
The following is the receipts and payment account of Mr.Ramki, a Chartered Accountant for the
PY ended 31.03.2021
To Balance b/d 1,50,000 By staff salary 3,00,000
To Audit fee 2,00,000 By stipend to audit clerks 1,00,000
To Tax consultancy fee 2,50,000 By Office rent 90,000
To Project report fee 2,50,000 By Software development 10,000
expenses
To Accounting software charges 50,000 By office expenses 1,25,000
To guest lectures in CA institutes 25,000 By Book 60,000
To Bank interest 25,000 By car expenses 65,000
To Remuneration as member of 20,000 By CA institute membership 5,000
tax reforms commission fee
By contribution to PPF 50,000
By balance c/d 1,65,000
Total 9,70000 Total 9,70000
Other information:
(i) ¼ car usage is personal.
(ii) Depreciation on car Rs.10,000
(iii) Depreciation on office furniture Rs.7000
Professional Receipts :
Audit fee 2,00,000
Tax consultancy fee 2,50,000
Project report fee 2,50,000
Accounting software charges 50,000
Remuneration as member of tax reforms commission 20,000
Total Professional receipts 7,70,000
Stipend to audit clerks 1,00,000
Office rent 90,000
Software development expenses 10,000
office expenses 1,25,000
Car expenses (65000*3/4) 48,750
CA institute membership fee 5,000
Depreciation on Car (10,000*3/4) 7,500
Depreciation on Office Furniture 7,000
Total Expenses 7,17,250
Taxable Income from Profession Rs 52,750
Rama Krishna is a Chartered Accountant in Bangalore and he has submitted the following
Income and Expenditure A/c for the year 2020-21 .Compute Income from Profession for the
Assessment year 2021-22.
EXPENDITURE AMOUNT INCOME AMOUNT
To Office rent 33,000 By Audit fees 3,00,000
To Salary to staff 75,000 By Financial consultancy service 60,000
To Charities 5,000 By Interest on deposit in a bank 22,000
To Gifts to relatives 6,000 By Dividend on units of UTI 6,000
To Subscription for journal 2,400 By Accountancy works 32,000
To Drawings 16,000
To Car expenses 24,000
To Household expenses 8,600
To NSCs purchased 20,000
To Net income 2,30,000
Total 4,20,000 Total 4,20,000
1. Office rent Rs.3000 though paid is not recorded.
2. Depreciation of car during the year is Rs.6,000
3. 30% of car expenses are related to personal purposes.

Professional Receipts
Audit fees 3,00,000
Financial consultancy service 60,000
Accountancy works 32,000
Less Professional expenses
Office rent (33,000 + 3,000) 36,000
Salary to staff 75,000
Subscription for journal 2,400
Car expenses (24,000*70%) 16,800
Depreciation of Car (6000*70%) 4,200
PROBLEMS ON LAWYERS
Shri Ganesh is a leading Advocate .He maintains the book on cash basis. He gives you the
following Receipts and Payments A/C for the year ending 31-03-2021
To Balance b/d 12,800 By Staff salary 14,300
To Consultation fee 37,700 By Office rent 6,000
To Special commission 30,000 By Professional books 7,500
To Presents from clients 12,500 By Furniture purchased 15,000
To Remuneration from articles 22,500 By car expenses 9,000
published in professional
journals
To Loan from banks 65,000 By Computer purchased 30,000
To Share of income from HUF 10,000 By Repayment on loan 14,250
To Arbitration fee 23,500 By Interest on loan 9,300
To Income from betting 30,000 By Household expenses 12,500
By Medical insurance premium 7,500
By Car purchased 1,00,000
By Balance b/d 18,400
Total 2,43,750 Total 2,43,750
Adjustments:
(1) Loan is borrowed for professional purpose.
(2) Out of the car expenses, 25% relates to use of car for personal purpose.
Compute his Professional Income for the assessment year 2021-22.

Professional Receipts:
Consultation fee 37,700
Special commission 30,000
Presents from clients 12,500
Remuneration from articles published in professional journals 22,500
Arbitration fee 23,500
Staff salary 14,300
Office rent 6,000
Depreciation on Professional books (7500*40%) 3,000
Depreciation on Furniture purchased (15000*10%) 1,500
Car expenses (9000*75%) 6,750
Depreciation on Computer purchased (30,000*40%) 12,000
Interest on loan 9,300
Depreciation on Car (1,00,000*15%*75%) 11,250
Mr.Anand , an advocate residing in Delhi submits his Receipts and Payments account for the
previous year 2020-21.Receipts and Payments Account for the year ending 31-3-2021
To Balance c/d 5,000 By Staff salary 28,000
To Sitting fee 1,20,000 By Professional books 9,000
To Legal counselling fee 15,000 By Subscription to journals 1,000
To Loan from bank 12,500 By Refreshment charges 2,000
To Rent from property 22,500 By Rent to office 7,500
To Interest on bank FD 10,500 By Telephone charges 9,000
To Dividend from ABC Ltd 4,000 By Printing charges 1,500
To Share of income from HUF 50,000 By Electricity charges 3,000
By Purchase of car 1,25,000
By Computer purchased 25,000
By Car expenses 3,500
By Contribution to RPF 5,000
By NSC purchased 7,000
By BAR Association fees 1,000
By Balance c/d 12,000
Total 2,39,500 Total 2,39,500
Additional information
1. 1/2 of the car expenses pertain to personal use
2. 25% of the telephone expenses pertain to personal use.
4. Half of the electric charges are for house property
5. Gifts from clients Rs.5000 not included in above account.
6 Loan from bank is for personal use.
Compute his total income from Profession for the Assessment year 2021-2022.

Professional Receipts:
Sitting fee 1,20,000
Legal counselling fee 15,000
Gifts from clients 5,000
Staff salary 28,000
Depreciation on Professional books (9000*40%) 3,600
Subscription to journals 1,000
Refreshment charges 2,000
Rent to office 7,500
Telephone charges (9000*75%) 6,750
Printing charges 1,500
Electricity charges (3000*1/2) 1,500
Depreciation on car (1,25,000*15%*1/2) 9,375
Depreciation on Computer purchased (25000*40*) 10,000
Car expenses (3500*1/2) 1,750
BAR Association Fees 1,000
Mr. Kishore lives in Bangalore .He is a lawyer and he gives you the following receipts and
payment account for the year ending 31.3.2021
To Opening balance 2,000 By Books purchased 1,000
To Salary as part time lecturer 4,000 By Repairs to house 1,200
To fee received 2,20,000 By Car expenses 1,800
To Interest on bank deposit 1,500 By local taxes 1,200
To Exam remuneration from 2,500 By Office expenses 3,000
university
To Cash received on car sold 20,000 By Personal expenses 11,000
To Shares sold 15,000 By Purchase of plant for office 1,000
To Dividend received 1,500 By Car purchased 20,000
By Life insurance premium 6,000
By Donations 1,100
By Gifts to daughters 500
By Income tax paid 3,000
By Income tax appeal expenses 300
By Bank deposit 12,000
By PPF deposit 3,000
By Closing Balance 2,00,400
Total 2,66,500 Total 2,66,500
Adjustments:
1.1/3rd of the house is used for profession and 2/3rd for self-residence.
2. The car is used for professional and personal work equally.
3. Books purchased for teaching Rs.300 and remaining for profession.
Professional Receipts :
Fee received 2,20,000
Less : Professional expenses
Depreciation on Books purchased (1000-300=700*40%) 280
Repairs to house property (1200*1/3) 400
Car expenses (1800*50%) 900
Local taxes (1200*1/3) 400
Depreciation on purchase of plant for office (1000*15%) 1,50
Depreciation on Car (20,000*15%*50%) 1,500
Income tax appeal expenses 300
Professional Expenses 6,930
Introduction to Income under the Head Capital Gain
BASIS OF CHARGE [SEC. 45]
Income is taxable under the head “Capital Gains” if the following conditions are satisfied:
1. There should be a capital asset.
2. The capital asset is transferred by the assessee during the previous year.
3. Any profit or gains arises as a result of such transfer.
4. Such profit or gains is not exempt from tax under section 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA
and 54GB.
If the aforesaid conditions are satisfied, then capital gain is taxable in the assessment year relevant to
the previous year in which the capital asset is transferred.
CAPITAL ASSET [SEC. 2(14)]
“Capital asset” means –
1. Property of any kind held by an assessee (whether or not connected with his business or profession).
2. Any securities held by a Foreign Institutional Investor which has invested in such securities in
accordance with the regulations made under the SEBI Act.
However, “capital asset” does not include the following:
1. Any stock-in-trade (other than the securities referred to in point 2 above), consumable stores or raw
material held for the purpose of business or profession;
2. All personal belongings of the assessee except Jewellery;
3. Agricultural land in India in a rural area; Note:
Rural area for this purpose means any area which is outside the jurisdiction of a municipality or a
cantonment board having a population of 10,000 or more and also which does not fall within distance
given below:
a. 2 kilometres from the local limits of municipality/ cantonment board, if the population of the
municipality/ cantonment board is more than 10,000 but not more than 1 lakh; or
b. 6 kilometres from the local limits of municipality/ cantonment board, if the population of the
municipality/ cantonment board is more than 1 lakh but not more than 10 lakh; or
c. 8 kilometres from the local limits of municipality/ cantonment board, if the population of the
municipality/ cantonment board is more than 10 lakh.
4. 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds,
1980;
5. Special bearer bonds, 1981;

6. Gold Deposit Bonds issued under Gold Deposit Scheme, 1999; and
7. Deposit certificates issued under the Gold Monetisation Scheme, 2015.
LONG-TERM CAPITAL ASSET [SECTION 2(29)A]
“Long-term capital asset” means a capital asset held by an assessee for more than 36 months
immediately prior to its date of transfer. Thus, capital gain arising from the transfer of long-term capital
asset is called Long-Term Capital Gain.
Exceptions:
(i) In case of listed securities or units of UTI or unit of equity oriented fund or zero- coupon bond held by
the assessee, the long-term capital asset will mean such assets held by the assessee for more than 12
months.
(ii) If unlisted shares of a company or land or building or both held by the assessee, the long-term capital
asset will mean such asset held by the assessee for more than 24 months.
(iii) In case of Land or Building or both:
(a) transferred up to March 31, 2017- 36 months.
(b) If transferred on or after April 1, 2017- 24 months
SHORT-TERM CAPITAL ASSET [SECTION 2(42)A]
“Short term capital asset” means a capital asset held by an assessee for not more than 36 months (or 24
months in case of unlisted shares and immovable property), immediately prior to its date of transfer.
In the following cases, however, such period is taken as 12 months:
1. Equity or preference shares in a company listed on a recognized stock exchange in India.
2. Securities (like debentures, bonds, Government securities, etc.) listed on a recognized stock exchange
in India.
3. Units of UTI (whether quoted or not).
4. Unit of an equity oriented mutual fund (whether quoted or not).
5. Zero coupon bonds (whether quoted or not).
In the aforesaid cases, if the asset is held for more than 12 months immediately prior to its date of
transfer, then it is “long-term capital asset”.
Note:
In the case of transfer of a depreciable asset (other than an asset used by a power generating unit
eligible for depreciation on straight line basis), capital gain (if any) is taken as short-term capital gain,
irrespective of period of holding.
Long Term and Short Term Capital Gain
TRANSFER OF CAPITAL ASSET [SEC. 2(47)]
Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the
compulsory acquisition thereof under any law.
However, certain transactions are not included in transfers:
1. Distribution of assets in kind by a company to its shareholders on its liquidation;
2. Distribution of capital assets in kind by a HUF to its members at the time of total or partial partition;
3. Any transfer of capital asset under a gift or a will or an irrevocable gift (exception – gift of ESOP shares is chargeable to tax) [In case of gift of
ESOP shares, fair market value on the date of gift is taken as full value of consideration] ;
4. Any transfer of capital asset by a holding company to its 100% Indian subsidiary company;
5. Transfer of capital asset under a scheme of amalgamation/ demerger, if the transferee company is an Indian company;
6. Transfer of shares in amalgamating company/ demerged company in lieu of allotment of shares in amalgamated company/ resulting
company in the above case;
7. Transfer of capital asset in a scheme of amalgamation of a banking company with a banking institution;
8. Any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificate in any form, of a company into shares or
debentures of that company;
9. Any transfer of capital asset in a reverse mortgage;
10. ‘Transfer by an individual of Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond Scheme, 2015, by way of redemption’; and
11. Any transfer by way of conversion of preference shares of a company into equity shares of that company
COMPUTATION OF CAPITAL GAIN/ LOSS [SEC. 48]
It is to be noted that no deduction is allowed in respect of securities transaction tax in computing income under the head “Capital gains”.
Full value of consideration

Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which he has transferred. Such
consideration may be received in cash or in kind. If it is received in kind, then fair market value (FMV) of such assets is taken as full value of
consideration.
However, in few cases, “fair value of consideration” is determined on notional basis according to the different provisions given in the Income-tax
Act.
Expenditure on transfer
Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from full value of consideration. The
expression “expenditure incurred wholly and exclusively in connection with such transfer” means expenditure incurred which is necessary to effect
the transfer.
Examples of such expenses are: brokerage or commission paid for securing a purchase, cost of stamp, registration fees borne by the vendor,
traveling expenses incurred in connection with transfer, litigation expenditure for claiming enhancement of compensation awarded in the case of
compulsory acquisition of assets.
Cost of Acquisition
Cost of acquisition of an asset is the value for which it was acquired by the assessee. Expenses of capital nature for completing or acquiring the title
to the property are includible in the cost of acquisition. Interest on money borrowed to purchase the asset is part of actual cost of asset.
Cost of Improvement
Cost of improvement is capital expenditure incurred by an assessee in making any additions/ improvement to the capital asset. It also includes any
expenditure incurred to protect or complete the title to the capital assets or to cure such title. Any expenditure incurred to increase the value of the
capital asset is treated as cost of improvement. Cost of improvement includes only expenditure on improvement incurred on or after April 1, 2001
(whether incurred by the previous owner or by the assessee).
Financial year CII

2001-02 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301
WHEN THE BENEFIT OF INDEXATION IS NOT AVAILABLE

In the following cases, benefit of indexation is not available even if a long-term capital asset is transferred:
1. Bonds or debentures (other than capital indexed bonds issued by the Government);
2. Shares in or debentures of an Indian company acquired by utilizing convertible foreign exchange as mentioned under first proviso to section
48* (applicable to a non-resident assessee only); and
3. Bonds/ debentures or Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond Scheme, 2015.
Computation of Capital Gains in Certain Special Cases
CAPITAL GAIN EXEMPT FROM TAX UNDER SECTION 10

Long-term capital gain on transfer of securities not chargeable to tax in cases covered by transaction tax [Section 10(38)]:
Section 10(38) is applicable for all the assesses, if the following conditions are satisfied:
a. The asset which is transferred is a long-term capital asset.
b. Such asset is equity share in a company or units of equity oriented mutual fund.
c. Such transaction takes place on or after October 1, 2004 in a recognized stock exchange in India.
d. At the time of transfer as well as at the time of acquisition of shares, the transaction is chargeable to securities transaction tax*.
If the above conditions are satisfied, long-term capital gain is exempt from tax under section 10(38).
However, in the case given above, if the asset is short-term capital asset, short- term capital gain is taxable under section 111A @ 15% +
Surcharge (if any) + cess @ 4%.
COMPUTATION OF CAPITAL GAINS IN CERTAIN SPECIAL CASES

In the following cases the method of computation is different from what we have discussed above:
Cost of asset to the Previous Owner [Sec. 49(1)]

Cost of asset to the previous owner shall be deemed to be the cost of acquisition of assessee in case of inheritance, gift, will, etc.
Further, in order to find out whether the capital asset is short-term or long-term in such cases, the period of holding of the previous owner shall be
taken into consideration.
Cost of acquisition being Fair Market Value as on April 1, 2001

In the following cases, the assessee may take at his option, either actual cost or the fair market value of the asset (other than a depreciable asset),
as on April 1, 2001 as cost of acquisition:
1. Where the capital asset became the property of the assessee before April 1, 2001; or
2. Where the capital asset became the property of the assessee by any mode referred to in section 49(1) and the capital asset became the
property of the previous owner before April 1, 2001.
Notes –
a. The option is available only when an asset was acquired by the assessee [or by the previous owner in case section 49(1) is applicable] before
April 1, 2001.
b. The option is not available in the case of depreciable assets.
c. When option is available, the cost of the asset or FMV as on April 1, 2001, whichever is higher, is taken as the cost of acquisition.
d. The option is not available in respect of transfer of a capital asset being goodwill of a business; trademark/ brand name associated with a
business; right to manufacture, produce or process any article or thing; right to carry on business; tenancy right; route permits or loom hours
(whether self-generated or otherwise).
Cost of acquisition in case of Depreciable Assets [Sec. 50]

Section 50 is applicable in the case of transfer of a depreciable asset but not applicable in the case of transfer of a depreciable asset by a power-
generating unit claiming depreciation on the basis of straight-line basis method.
By virtue of section 50, computation of capital gain/ loss can be made in the case of transfer of a depreciable asset only in the following two
situations:
a. When written down value (WDV) of block of assets (BOA) on the last day of the previous year is zero [Section 50(1)]:
If the resulting figure is negative, then section 50(1) is not applicable and capital gain is not chargeable to tax (unless the case comes under
situation 2 which is explained below).
Notes –
a. If a depreciable asset (not being the case of power unit as stated above) is transferred and the case does not fall under any of the above two
situations, then capital gain is not chargeable to tax.
b. It is not necessary that depreciation is allowed for the year under consideration. If the depreciation is allowed in the current year (or any of
the earlier years), the above provisions of section 50 would be applicable.
c. For the purpose of section 50, it is not necessary that the asset should be put to use.
d. In the above two situations, the capital gain/ loss is always short-term.
e. While deducting actual cost from sale consideration to compute capital gain/ loss, any depreciable asset which is acquired otherwise than by
an account payee cheque/ draft or use of electronic clearing system through a bank account (and the payment exceeds Rs. 10,000), such payment
shall not be eligible for deduction while computing capital gain/ loss.
f. When a single asset like the building is transferred, consideration has to be apportioned between the depreciable portion (i.e.,
superstructure) and the non- depreciable portion (i.e., land) for implementing section 50.
Advance money forfeited

Advance money forfeited during the previous year 2014-15 (or any subsequent previous year) is taxable in the hands of recipient under the head
“Income from other sources” in the year in which advance money is forfeited.
However, advance money forfeited during the previous year 2013-14 (or any earlier previous year) is not taxable as “Income from other sources”.
Instead, it is deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in
computing the cost of acquisition.
Computation of capital gain in case of Self-generated assets

An asset which does not cost anything to the assessee in terms of money in its creation or acquisition is a self-generated asset.
When a self-generated asset is transferred, the following special rules are applicable:
1. Goodwill of a business (not a profession), right to manufacture/ produce any article/ thing or right to carry on any business or profession:
In the case of transfer of these capital assets, cost of acquisition and improvement are taken as nil. Expenses on transfer are, however, deductible
on the basis of actual expenditure.
2. Tenancy rights, route permit, loom hours, trade mark or brand name associated with a business:
In the case of transfer of these capital assets, cost of acquisition is taken as nil. Cost of improvement and expenses on transfer are, however,
deductible on the basis of actual expenditure.
3. Any other self-generated asset:
In the case of transfer of any other self-generated capital asset, capital gain is not chargeable to tax.
It is to be noted that even if the above mentioned self-generated assets are acquired before April 1, 2001, the option of adopting the fair market
value on the said date is not available.
Fair market value of the asset disclosed under Income Declaration Scheme, 2016
For ‘asset disclosed under Income Declaration Scheme, 2016, fair market value of the asset declared under the scheme on June 1, 2016 (on the
basis of which tax, surcharge and penalty is paid under the scheme) is taken as the cost of acquisition.
Cost of acquisition of Bonus Shares

If bonus shares were allotted prior to 1st April, 2001, the fair market value on 1st April, 2001 is taken as the cost of acquisition. If bonus shares are
allotted on or after April 1, 2001, cost of acquisition is taken as Nil.
Capital gain on transfer of Right Shares

Following two situations can arise in case of transfer of right shares –
1. Rights entitlement (which is renounced by the assessee in favour of a person):
In such a case, cost of acquisition is Nil.
However, in such a case, the amount realized by the original shareholder by selling his rights entitlement will be short-term capital gains in his
hands (as the cost is taken as nil).
The period of holding of the rights entitlement will be considered from the date of offer made by the company to subscribe to shares to the date
when such right entitlement is renounced by the person.
2. Right shares purchased by the person in whose favour rights entitlement has been renounced:
In such a case, cost of acquisition is equal to the purchase price paid to renouncer of rights entitlement plus amount paid to the company which
has allotted the rights shares.
Transfer of Land and Buildings [Sec. 50C]

This section is applicable if the following conditions are satisfied:
1. There is a transfer of land or building or both. The asset may be long-term capital asset or short-term capital asset. It may be depreciable or
non-depreciable asset.
2. The sale consideration is less than the value adopted (or assessed) by any authority of a State Government for the purpose of payment of
stamp duty (hereinafter referred to as “Stamp duty authority”) in respect of such transfer.
If the above conditions are satisfied, the value adopted by the Stamp duty authority shall be taken as ‘full value of consideration’ for the purpose
of computing capital gain. However, ‘full value of consideration’ depends upon the following situations:
Exception:
Where the assessee claims before the Assessing Officer that value adopted by Stamp duty authority is more than the fair market value (but he has
not disputed or challenged such valuation under the Stamp Act), then two possibilities arises:
a. Fair market value determined by the Valuation Officer (if it is less than the stamp duty valuation) is taken as full value of consideration.
b. Stamp duty valuation (if the fair market value determined by the Valuation officer is more than the Stamp duty valuation) is taken as full value
of consideration.
Computation of capital gain in case of transfer of unlisted shares in a company [Sec. 50CA]
Where consideration for transfer of shares in a company (other than quoted shares) is less than the FMV of such share, the FMV shall be deemed to
be the full value of consideration for the purpose of computing “Capital Gains”.
Capital Gains Exempt from Tax
CAPITAL GAINS EXEMPT FROM TAX

Any gains arising from the transfer of the following assets are exempt from tax.
Transfer of residential house property [Sec. 54]: Any gain is exempt subject to the following
conditions:
i. Available to an individual or a HUF
ii. Residential house property (long-term) is transferred
iii. Assessee has purchased another residential house within one year before or within two years after sale of original house or constructed another
house within three years after sale of original house
§ Amount of exemption is investment in new asset or LTCG, whichever is lower
§ Exemption is available if 1 residential house is purchased or constructed in India. A taxpayer may sell two house properties and he may purchase/
construct 1 house property for the purpose of availing the exemption
Deposit Scheme:
In case, the assessee is not interested in purchasing or constructing the house till due date of filing return of income, he has to deposit the amount
in Capital Gains Deposit Account Scheme till the due date of filing return of income to get the exemption. On the basis of this deposit, exemption
under section 54 can be claimed. But assessee has to actually withdraw the deposited amount and utilize this deposited amount within the
prescribed time limit for purchasing or constructing the house.
In case the deposited amount is not fully utilized in purchasing or constructing the house within eligible time limit, then the unutilised amount will
be taxable as LTCG in the year in which the maximum time limit for making new investment (i.e., 3 years for construction) expires.
§ Withdrawal of exemption:
If the new asset on which exemption is claimed under section 54 is transferred within 3 years of its acquisition/ construction, exemption given will
be taken back. For calculating STCG on transfer of new asset, cost of acquisition will be calculated as original cost of acquisition minus exemption
availed under section 54.
Sale of land used for agricultural purposes [Sec. 54B]

§ Available to an individual or a HUF
§ Any short-term or long-term capital asset (being agricultural land) is transferred which was used by assessee (or his/ her parents) or a HUF for
agricultural purposes for a period of two years immediately before transfer
§ Assessee has purchased other agricultural lands (whether in rural area or in urban area) within two years from the date of transfer of original
asset
§ Amount of exemption is investment in new asset or capital gain, whichever is lower
Deposit Scheme:
In case, the assessee is not interested in purchasing the land till due date of filing return of income, he has to deposit the amount in Capital Gains
Deposit Account Scheme till the due date of filing return of income to get the exemption. On the basis of this deposit, exemption under section
54B can be claimed. But assessee has to actually withdraw the deposited amount and utilize this deposited amount within the prescribed time limit
for purchasing the land.
In case the deposited amount is not fully utilized in purchasing the land within eligible time limit, then the unutilised amount will be taxable as
LTCG or STCG (depending upon the original gain) in the year in which the maximum time limit for purchasing land (i.e., 2 years) expires.
Withdrawal of exemption:
If the new asset on which exemption is claimed under section 54B is transferred within 3 years of its acquisition/ construction, exemption given will
availed under section 54B.
Compulsory acquisition of land and building forming part of industrial undertaking [Sec. 54D]
§ Available to all taxpayers
§ Such land or building (short-term or long-term) was used by the assessee for the purpose of the industrial undertaking for at least 2 years
preceding the date of compulsory acquisition
§ Assessee has purchased any other land or building (for industrial purposes) within a period of 3 years from the date of receipt of
compensation or constructed a building within such period
§ Amount of exemption is investment in new asset or capital gain, whichever is lower
Deposit Scheme:
In case, the assessee is not interested in purchasing land or building or constructing a building till due date of filing return of income, he has to
deposit the amount in Capital Gains Deposit Account Scheme till the due date of filing return of income to get the exemption. On the basis of this
deposit, exemption under section 54D can be claimed. But assessee has to actually withdraw the deposited amount and utilize this deposited
amount within the prescribed time limit for purchasing the land or building or constructing the building.
In case the deposited amount is not fully utilized in purchasing the land or building or constructing the building within eligible time limit, then the
unutilised amount will be taxable as LTCG or STCG (depending upon the original capital gain) in the year in which the maximum time limit for
making new investment (i.e., 3 years) expires.
If the new asset on which exemption is claimed under section 54D is transferred within 3 years of its acquisition/ construction, exemption given will
availed under section 54D.
LTCG from any asset but investment should be in bonds of NHAI or REC or notified bonds [Sec.
54EC]
§ Any long-term capital asset is transferred
§ Investment in specified assets [bonds of NHAI or/ and REC] or in any bonds (redeemable after 3 years) issued by any other authority but notified
by the Central Government for this purpose, within 6 months from the date of transfer
§ Maximum investment in one financial year is Rs. 50,00,000. Investment made by an assessee in the NHAI/ REC bonds, out of capital gains arising
from transfer of one or more original asset, during the financial year in which the original asset or assets are transferred and in the subsequent
financial year should not exceed Rs. 50,00,000.
If the new asset is transferred within 3 years of its acquisition or converted into money, exemption will be taken back and the amount of exemption
given earlier under section 54EC will become LTCG of the year in which the assessee commits the default.
LTCG from any asset but investment should be in units of a specified fund [Sec. 54EE]
§ Any long-term capital asset is transferred
§ Investment in units of a specified fund within 6 months from the date of transfer
§ Maximum investment in one financial year is Rs. 50,00,000. Investment made by an assessee in long-term specified assets, out of capital gains
arising from transfer of one or more original asset, during the financial year in which the original asset or assets are transferred and in the
subsequent financial year should not exceed Rs. 50,00,000.
If the new asset is transferred within 3 years of its acquisition or converted into money, exemption will be taken back and the amount of exemption
given earlier under section 54EE will become LTCG of the year in which the assessee commits the default.
Sale of any long-term capital asset other than a residential house [Sec. 54F]
§ Available to an individual or a HUF
§ The taxpayer will have to purchase/ construct 1 residential house property within the specified period in India.
§ The specified period is 1 year before, or within 2 years after the date of transfer of the original asset in case of purchase option. However, in
case of construction option, the construction should be completed within 3 years from the date of transfer of original asset.
§ Under section 54F, exemption is available only if on the date of transfer of the original asset, the taxpayer does not own more than one
residential house property (other than the new house on which exemption under section 54F is claimed).
§ Deposit Scheme:
In case, the assessee is not interested in purchasing or constructing the house till due date of filing return of income, he has to deposit the amount
in Capital Gains Deposit Account Scheme till the due date of filing return of income to get the exemption. On the basis of this deposit, exemption
under section 54F can be claimed. But assessee has to actually withdraw the deposited amount and utilize this deposited amount within the
prescribed time limit for purchasing or constructing the house.
In case the deposited amount is not fully utilized in purchasing or constructing the house within eligible time limit, then the
proportionate unutilised amount (
X Unutilised amount)will be taxable as LTCG in the year in which the maximum time limit for making new investment (i.e.,
3 years for construction) expires.
§ Withdrawal of exemption:
1. If the new house on which exemption is claimed under section 54F is transferred within 3 years of its acquisition/ construction, capital gain
which arises on the transfer of new house will be taken as STCG. Besides, the capital gain which was exempt under section 54F shall be treated as
LTCG of the year in which the new house is transferred.
2. If the assessee purchases, within a period of 2 years from the date of transfer of original asset (or constructs within a period of 3 years from
the date of transfer of original asset), anther residential house (other than the new house on which exemption under section 54F is claimed), then
the capital gain which was exempt under section 54F shall be deemed to be income by way of LTCG of the year in which such another residential
house is purchased or constructed.
S.No. Basis Section 54 Section 54B Section 54D
Exemption is Allowed Exemption is Allowed

Exemption is Allowed provided the
provided the Assesse provided the Assesse
Assesse has Long Term Capital
1) Transfer has Capital Gains on has Capital Gains on
Gains on transfer of Residential
transfer of Agricultural Compulsory Acquisition of
House
Land Industrial Undertaking.
2) Allowed To Individual/HUF Individual/HUF All Assesses
a.) The Assesse Should have

a.) The Assesse Should have a.) The Assesse Should
Invested the Amount in Land
purchased one house either one have purchased one or
and Building for the purpose
year before or two years after the more Agricultural Land
of Industrial Undertaking
date of transfer OR The Assesse within a period of two
within a period of Three
should Construct one house within years after the date of
years after the date of
three years after the date of transfer transfer
Payment by Government.
Conditions to be
3) b.) The Assesse or his b.) The Assesse should have
Satisfied
b.) The Assesse Should either parents should have been been using such Land and
Purchase or Construct only one using Agricultural Land so Building for the purpose of
House within the specified time transferred for a period of Industrial Undertaking for a
period. at least 2 years at the time period of at least 2 years at
of Sale the time of Acquisition.
c.) The House so purchased or c.) The Land so c.) The Land and Building so
constructed should not be purchased should not be purchased should not be

transferred for a period of at least transferred for a period of transferred for a period of at
Three Years at least Three Years least Three Years
Amount of Exemption Amount of Exemption shall

Amount of Exemption shall be
Amount of shall be equal to Amount be equal to Amount
4) equal to Amount Invested(Subject
Exemption Invested(Subject to Capital Invested(Subject to Capital
to Capital Gains)
Gains) Gains)
Capital Gain
Accounts
5) Applicable Applicable Applicable
Scheme,1988
Applicability*
If Assesse Violates If Assesse Violates
If Assesse Violates Condition c.) Condition c.) stated above Condition c.) stated above
stated above Exemption earlier Exemption earlier allowed Exemption earlier allowed
allowed shall be withdrawn in shall be withdrawn in shall be withdrawn in special
6) Consequences special manner i.e. While special manner i.e. While manner i.e. While
Computing Capital Gains, Cost of Computing Capital Gains, Computing Capital Gains,
Acquisition shall be reduced by the Cost of Acquisition shall Cost of Acquisition shall be
amount of exemption earlier taken. be reduced by the amount reduced by the amount of
of exemption earlier taken. exemption earlier taken.

MISCELLANEOUS POINTS
1. Relief is available from LTCG as well as from STCG under section 111A [This relief is available to a resident individual/ a resident HUF]:
If net taxable income excluding LTCG and STCG of section 111A is less than the exemption limit (i.e., Rs. 5,00,000; Rs. 3,00,000 or Rs. 2,50,000,
depending upon the case) of an assessee, then the difference between net taxable income (after deducting LTCG and STCG of section 111A) and
exemption limit is the amount of relief. This difference (i.e. relief) will be deducted from LTCG or STCG of section 111A, as the case may be and on
the balance amount, capital gain will be chargeable to tax.
2. STCG (if covered under section 111A) is taxable @ 15% + Surcharge (if any) + Cess @ 4% and normal STCG is taxable as per slab rates of the
assessee.
3. No deduction under section 80C to 80U is available from LTCG or from STCG under section 111A.
4. LTCG is taxable @ 20% + Surcharge (if any) + Cess @ 4%. However, in the following 2 cases, LTCG can be taxable @ 10% + Surcharge (if any)
+ Cess @ 4%.
In the following 2 cases, LTCG is taxable @ 10%:
a. If unlisted securities (i.e., unlisted shares, unlisted debentures, etc.) are transferred by a non-resident/ foreign company, long-term capital
gain is taxable @ 10% + Surcharge (if any) + Cess @ 4%. However, this rule is applicable only if indexation benefit is not claimed and capital gain is
calculated without giving effect to the first proviso to section 48 (under first proviso to section 48, capital gain is calculated in foreign currency if a
few conditions are satisfied).
b. If listed securities (i.e., shares, bonds, debentures, Government Securities) or zero-coupon bonds are transferred by any taxpayer and the
taxpayer does not avail the benefit of indexation, LTCG can be taxable @ 10% + Surcharge (if any) + Cess @ 4%. In this case, the taxpayer has an
option available. Tax can be paid by the assessee @ 20%, if indexation benefit is claimed or @ 10%, if indexation benefit is not claimed.
However, it is to be noted that in case of transfer of listed debentures or listed bonus shares, option of paying tax @ 10% is always better.
Problems & Solutions on Capital Gains
1. Miss Latha brought a Diamond Stud in August 2005 for Rs. 3,60,000 she sold
this diamond stud for Rs. 15,60,000 in January 2021. Calculate taxable capital
gains if the expenses on transfer were Rs. 20,000.
a. If the diamond stud was brought on August 1984 for Rs. 45,000
Solution:
Computation of Taxable Capital Gain
Assesse: Miss Latha AY: 2021-22
Status: Resident PY: 2020-21
PARTICULARS AMOUNT(RS.) AMOUNT(RS.)
Sale Consideration 15,60,000

Less: Transfer expenses 20,000
Net Sale Consideration 15,40,000
Less: Indexed Cost of Acquisition

= 3,60,000 x 301/117 9,26,154
-
Less: Indexed Cost of
Improvement (9,26,154)
Taxable Long Term Capital Gain Rs. 6,13,846

If the diamond stud was brought on August 1984 for Rs. 45,000 . Compute
Capital Gains
Assesse: Miss Latha AY: 2021-22


= 45,000 x 301/100
1,35,450
- (1,35,450)
Improvement
Taxable Long Term Capital Gain Rs. 14,04,550

1. Mr. Vinod purchased a residential house in Mysore on 1/4/1999 for Rs.
4,25,000 and added first floor in the year 2000 for Rs. 7000. On 1st November
2010 he gifted his house to his son, and he added 2 rooms in June 2014 at a
cost of Rs. 20,000. On 1st January 2021 Mr. Anand sold the property for
Rs. 10,00,000. Compute long term capital gains if the Fair Market Value of
the house is Rs. 1,75,000 as on 1/4/2001
Solution:
Assesse: Mr. Anand AY: 2021-22
Less: Transfer expenses -

= 1,75,000 x 301/100 5,26,750
Less: Indexed Cost of Improvement
= 20,000 x 301/240 25,083 (5,51,833)
Taxable Long-Term Capital Gain Rs. 4,48,167
2. Mr. Xavier purchased the property on 01.04.1998 for Rs. 1,00,000. Addition
of first floor was made by Xavier for Rs 1,10,000 during 2002-03. He gives
his property to his friend. Mr. Yogender on 15-05-2004. Mr. Yogender sold
this property on 01-12-2020 for Rs 15,00,000 FMV of the property as on 01-
04-2001 Rs 4,00,000. Compute the taxable capital gain of Mr. Yogender for
the assessment year 2021-22
Solution:
Assesse: Mr. Yogender AY: 2021-22
= 4,00,000 x 301/100 12,04,000
= 1,10,000 x 301/105 3,15,333 (15,19,333)
Taxable Long-Term Capital Loss Rs. (19,333)
3. Mr. Vignesh purchased the House Property for Rs 42,000 on 01-05-1992 he

gets the first floor constructed in 1995-1996 by spending Rs 20,000. He died
on 15-09- 1998 and the property is transferred to Mrs. Vignesh by his will and
Mrs. Vignesh spend Rs 40,000 and Rs 25,000 during 1999-2000 and 2004-
2005 respectively for the renovation of the property. Mrs. Vignesh sells the
house property for Rs 20,00,000 on 15.03.2021 and paid brokerage Rs 15,000.
The FMV of the property is Rs 3,00,000 as on 01.04.2001. Compute his
taxable capital gain for the A.Y 2021-22).
Solution:
Assesse: Mrs. Vignesh AY: 2021-22
= 3,00,000 x 301/100 9,03,000
= 25,000 x 301/113 66,593 (9,69,593)
4. Miss Vimala had two houses
a. The first house was occupied for her residence. She got this house from
her brother as gift on 15th August 2008. Her brother had purchased this
house in 1999 for Rs. 65,000 [ FMW as on 01/04/2001 is Rs. 1,90,000 ].
She spent Rs. 6500 on its improvement on 10th September 2020. She
sold it on 30-September-2020 for Rs. 18,50,000.
b. She purchased a second house for Rs. 1,56,000 in 2007-08 and sold the
house on 31-Aug-2020 for Rs. 8,50,000 by incurring selling expenses of
Rs. 47,800.
c. She had purchased Jewellery in 2008-09 for Rs. 75,000 and 25th
February 2021 she sold the Jewellery for Rs. 9,00,000.
d. Motor Car sold on 1st December- 2020 for Rs. 90,000 was purchased by
her in Jan 2006 for Rs. 1,40,000 and the WDV of the Car as on
1/4/2020 is Rs. 76,000 (Used for Profession).
Solution:
Assesse: Miss Vimala AY: 2021-22
PARTICULARS HP - I HP - II Jewellery
AMOUNT(RS.) AMOUNT(RS.) AMOUNT(RS.)
Sale Consideration 18,50,000 8,50,000 9,00,000
Less: Transfer expenses - 47,800 -
Net Sale Consideration 18,50,000 8,02,200 9,00,000
Acquisition (5,71,900)
HP – I = 1,90,000 x (3,64,000)
301/100 (1,64,781)
HP – II = 1,56,000 x
301/129 (6500)
Jewellery = 75,000 x
301/137
Improvement
HP – I = 6,500 x
301/301
Taxable Long-Term Rs. 12,71,600 Rs. 4,38,200 Rs. 7,35,219
Capital Gain
Assesse: Miss Vimala AY: 2021-22
PARTICULARS Motor Car
AMOUNT(RS.) AMOUNT(RS.)
Sale Consideration 90,000
Net Sale Consideration 90,000
Less: Cost of Acquisition 76,000
Less: Cost of Improvement - (76,000)
Taxable Short-Term Capital Gain Rs. 14,000
1. Mr. Amith sells a residential house property for Rs.38,00,000 on 24/12/2020.
This was purchased by him in 1982 for Rs. 2,00,000. Its fair market value as
on 1/4/2001 is 10,00,000. He purchased a new house property for
Rs.15,00,000 on 20/1/2021 and deposited Rs.2,00,000 in Capital Gain
Account Scheme on 30/03/2021. Determine the capital gain for the AY 2021-
2022.
Solution:
Assesse: Mr. Amith AY: 2021-22
Sale Consideration
Less: Transfer expenses 38,00,000
-

= 10,00,000 x 301/100 30,10,000
Less: Indexed Cost of Improvement - (30,10,000)
Long-Term Capital Gain Rs. 7,90,000
Less: Exemptions under section 54

[Rs. 15,00,000 + Rs. 2,00,000] =
Rs. 17,00,000 (or)
Capital Gain Rs. 7,90,000 (7,90,000)
[WEL]
Taxable Long-Term Capital Gain NIL

2. Mrs. U.R (age 50 years ) a resident of Bangalore, purchases a residential
House in Bangalore purchases residential house in Bangalore on 17th October
1990 for Rs. 2,26,000. She constructed a room on the ground floor in July
2001 at a cost of Rs.1,60,000 and two more rooms on the first floor in August
20114 at a cost of Rs. 1,50,000. She sold this property on 13th March 2021 for
Rs.45,45,000 after incurring 1% brokerage The FMV as on 1/4/2001 was
Rs.10,00,000. Find out capital gain for the assessment year 2021-2022 if she
purchases a residential flat in Bangalore on 25th March 2021 for Rs.3,20,000.
(CII for 2000-2001=100,2013-2014=220 and 2020-2021 = 301)
Solution:
Assesse: Mrs. U.R AY: 2021-22

= 10,00,000 x 301/100 30,10,000
= 1,60,000 x 301/100 -
4,81,600 6,69,725 (36,79,725)
= 1,50,000 x 301/240 -
1,88,125

Less: Exemptions under section 54
HP purchased [Rs. 3,20,000]
(or) (3,20,000)
Capital Gain Rs. 8,19,825
[WEL]

3. Mr. Shankar sells an agriculture and in Kanpur on 10/06/2020 for 15,00,000
The land was purchased by him on 15/07/2001 for 4,00,000. He purchased
another agriculture and for 6,00,000 on 31.03.2021. Compute the taxable
capital gain of Mr. Shankar for the Assessment year 2021-22.
Solution:
Assesse: Mr. Shankar AY: 2021-22

= 4,00,000 x 301/100 12,04,000
Less: Exemptions under section 54 B

Purchased of agricultural land [Rs.
6,00,000] (or) Capital Gain Rs. 2,96,000
(2,96,000)
[WEL]
4. A Building of Mr Akshay is compulsorily acquired by U.P Government. Its

cost of acquisition to the assesse was Rs 4,80,000 in August 2017. The U.P
Government pays Rs 8,75,000 as compensation as 25.05.2020. Mr. Akshay
purchased another building for Industrial undertaking for Rs 2,00,000 on
24.04.2021. Compute the taxable capital gain for the Assessment year 2021-
22.
Solution:
Assesse: Mr Akshay AY: 2021-22


= 4,80,000 x 301/272 5,31,176
Less: Exemptions under section 54 D

Purchased of new building [Rs.
2,00,000] (or) Capital Gain Rs. (2,00,000)
3,43,824 [WEL]

Problems & Solutions
1. Mr. Bimal sells jewellery on 16-06-2020 for Rs 10,10,000. Cost of Jewellery
on 25- 05-2013 was Rs 4,55,000 and brokerage paid on sales is Rs 10,000. On
15-12- 2020 he purchased a residential house for Rs 5,50,000. Compute his
taxable capital gain for the Assessment year 2021-22.
a. On 15-12- 2020 he purchased a residential house for Rs 11,00,000
Solution:
Assesse: Mr. Bimal AY: 2021-22

= 4,55,000 x 301/220 6,22,523

Less: Exemptions under section 54 F
Purchased HP – Rs. 5,50,000 it is less
than Net Sale Consideration (2,07,612)
= 3,77,477 x 5,50,000/10,00,000

On 15-12- 2020 he purchased a residential house for Rs 11,00,000
Assesse: Mr. Bimal AY: 2021-22
= 4,55,000 x 301/220 (6,22,523)
Purchased HP – Rs. 11,00,000 it is more
than Net Sale Consideration (3,77,477)
Hence, the entire capital gain is fully
exempt from tax
2. Mr. Murthy bought 1000 equity shares of S Ltd in May 2003 at Rs. 40 per
share and he paid brokerage of 1%. He received bonus shares in the ratio of
1:1 in June 2008. Again, he was allotted Right share in the ratio of 1:1 in April
2013 @Rs. 75 per share. He sold all the shares in December 2020 at Rs. 150
per share and he paid brokerage of 0.5%. Compute the taxable capital gain for
the AY 2021-22.
Solution:
Assesse: Mr. Murthy AY: 2021-22
PARTICULARS 1000 1000 2000 4000
Ordinary Bonus Right Total
AMOUNT(RS.) AMOUNT(RS.) AMOUNT(RS.) AMOUNT(RS.)
Sale Consideration 1,50,000 1,50,000 3,00,000 6,00,000
(x150)
Less: Transfer
expenses 750 750 1500 3000
Net Sale 1,49,250 1,49,250 2,98,500 5,97,000
Consideration
Less: Indexed Cost
of Acquisition
Ordinary = 1,11,563 NIL 2,05,227
1000x40 = 40000 -
+1% (3,16,790)
= - -
40,400 x 301/109
Right =
2000x75 = 1,50,000
=
1,50,000 x 301/220
Less: Indexed Cost
of Improvement
Taxable Long- Rs. 37,687 Rs. 1,49,250 Rs. 93,273 Rs. 2,80,210
Term Capital
Gain
3. Mr Chandran sold the following assets:
a. Agricultural Land situated at Mysore was sold for Rs 3,50,000 . It was
purchased in 2008-09 for Rs 1,50,000.
b. Personal car sold for Rs 40,000 which was purchased in 2010-11 for Rs
2,10,000. WDV as on 1/4/2020 Rs 30,000
c. Jewellery sold for Rs 29,00,000 was purchased on 15th October 1982 for
Rs 1,20,000 and the FMV as on 1/4/2001 was Rs 9,50,000.
d. Office furniture sold for Rs 5,000 purchased In December 2003 for Rs
20,000 and WDV as on 1/4/2020 Rs 6,000.
e. Listed Debentures sold for Rs 50,000 was purchased on 15 October 2006
for Rs 45,000.
f. Shop located near Mangalore sold for Rs 8,00,000 which was purchased
for Rs 6,50,000 in November 2014.
The assesse purchased a new residential flat for Rs 10,00,000. Compute
the taxable capital gains for the Assessment Year 2021-22.
Solution:
Assesse: Mr Chandran AY: 2021-22
PARTICULARS Agricultural Jewellery Shop Debentures Total
(RS.) (RS.) AMOUNT(RS.)
Land (RS.) (RS.)
Sale Consideration 3,50,000 29,00,000 8,00,000 50,000 41,00,000
Less: Transfer - - - - -
expenses
Net Sale 3,50,000 29,00,000 8,00,000 50,000 41,00,000
Consideration
Less: Indexed Cost
of Acquisition 3,29,562
Agri. Land = 28,59,500
1,50,000 x 301/137 8,15,208 45,000
Jewellery = - - - - (40,49,270)
9,50,000 x 301/100
Shop =
6,50,000 x 301/240
Less: Indexed Cost
of Improvement
Long-Term Rs. 20,438 Rs. 40,500 Rs. (15,208) Rs. 5000 Rs. 50,730
Capital Gain
Less: Exemptions
under section 54 F
Purchased HP – Rs.
10,00,000 it is less (19,981)
than Net Sale
Consideration
= 65,938 x
10,00,000/33,00,000
Taxable Long- Rs. 30,749
Term Capital Gain

PARTICULARS Office Furniture AMOUNT(RS.)
AMOUNT(RS.)
Sale Consideration 5,000
Net Sale Consideration 5,000
Less: Cost of Acquisition (6,000)
Less: Cost of Improvement - (6,000)
Taxable Short-Term Capital Loss Rs. (1,000)
4. From the following particulars, calculate Capital Gains of Mr Udith:
a. Machinery purchased in 2000-01 is Rs 6,00,000 and depreciation
allowed Rs 4,00,000 and it was sold for Rs 7,50,000 on 30/7/2020.
b. Sale of commercial building for Rs 4,50,000 and it was purchased in
2008-09 at a cost of Rs 1,20,000 and cost of improvement was made in
2008-09 for Rs 50,000.
c. Shares sold for Rs 50,000 on 31/12/2020 . These were bought in October
2001 for Rs 50,000.
d. Sale of listed Debentures for Rs 30,000 on 31/1/2021. These were
bought In June 2020 for Rs 40,000.
e. Sale of residential house which was inherited from his father in 1999. It
was built at a cost of Rs 4,00,000 by his father in 1995. Additions were
made by Mr Udith at a cost of Rs 60,000 in May 2008. The FMV of the
property on 1/4/2001 was Rs 12,00,000. This property was sold for Rs
42,00,000 and selling expenses amounted to Rs 25,000.
Solution:
Assesse: Mr Udith AY: 2021-22
PARTICULARS Commercial Shares Residential Total
building (RS.) HP (RS.) AMOUNT(RS.)
(RS.)
Sale Consideration 4,50,000 50,000 42,00,000 47,00,000
Less: Transfer expenses - - 25,000 25,000
Net Sale Consideration 4,50,000 50,000 41,75,000 46,75,000
Comm. Building = 1,20,000 x 2,63,650
301/137 1,50,500
Shares = 50,000 x 301/100
Residential HP = 12,00,000 x
36,12,000
301/100
Less: Indexed Cost of Improvement 1,09,854 -
Comm. Building = 50,000 x 301/137 1,31,825 (42,67,829)
Residential HP = 60,000 x 301/137
Taxable Long-Term Capital Rs. Rs. Rs. Rs.
Gain 76,496 (1,00,500) 4,31,175 4,07,171
Assesse: Mr Udith AY: 2021-22
PARTICULARS Machinery Debentures Total
AMOUNT(RS.) AMOUNT(RS.) AMOUNT(RS.)
Sale Consideration 7,50,000 30,000 7,80,000
Less: Transfer expenses - - -
Net Sale Consideration 7,50,000 30,000 7,80,000
Less: Cost of 2,00,000 40,000
Acquisition - (2,40,000)
Less: Cost of
Improvement
Taxable Short-Term Rs. 5,50,000 Rs. (10,000) Rs. 5,40,000
Capital Loss
Total = LTCG – 4,07,171

= STCG – 5,40,000
Total Taxable Capital Gain = Rs. 9,47,171
1. Mr Sushant sold the following assets :
a. Shares purchased in April 2019 for Rs 1,00,000 were sold on 28/2/2021
for Rs 1,10,000 and cost of transfer is Rs 2,000.
b. Listed Debentures purchased on 15/5/2018 for Rs 20,000 were sold on
16/5/2020 for Rs 20,000.
c. Self-generated goodwill was sold for Rs 2,00,000. The Goodwill is
related to shop which was established in 2007.
d. Household furniture was sold for Rs 5000. WDV IS Rs 3,000.
e. The Assesse purchased new residential property for Rs 2,50,000.
Compute the taxable Capital Gains.
f. Calculate the exemptions if sale of shares resulted in Short – Term
Capital Gain
Solution:
Assesse: Mr Sushant AY: 2021-22
PARTICULARS Shares Debentures Self-generated Total
(RS.) (RS.) Goodwill AMOUNT(RS
(RS.) .)
Sale Consideration 1,10,000 20,000 2,00,000 3,30,000
Less: Transfer expenses 2,000 - - 2,000
Net Sale Consideration 1,08,000 20,000 2,00,000 3,28,000
Acquisition 1,04,152 20,000 -
Shares = 1,00,000 x 301/289 - - - (1,24,152)
Improvement
Long-Term Capital Gain Rs. 3,848 NIL Rs. Rs.
2,00,000 2,03,848
Less: Exemptions under
section 54 F
Purchased HP – Rs. 2,50,000
it is less than Net Sale (1,65,461)
Consideration
= 2,03,848 x 2,50,000/3,08,000
Taxable Long-Term Capital Gain Rs. 38387
Calculate the exemptions if sale of shares resulted in Short – Term Capital Gain

Assesse: Mr Sushant AY: 2021-22
PARTICULARS Debentures Self-generated Total
(RS.) Goodwill AMOUNT(RS.)
(RS.)
Sale Consideration 20,000 2,00,000 2,20,000
Less: Transfer expenses - - -
Net Sale Consideration 20,000 2,00,000 2,20,000
Shares = 1,00,000 x 301/289 20,000 -
Less: Indexed Cost of Improvement - - (20,000)
Long-Term Capital Gain NIL Rs. Rs.
2,00,000 2,00,000
Purchased HP – Rs. 2,50,000 it is more
than Net Sale Consideration
Hence, the entire capital gain is fully (2,00,000)
exempt from tax

PARTICULARS Shares AMOUNT(RS.)
(RS.)
Less: Cost of Acquisition 1,00,000
Less: Cost of Improvement - (1,00,000)
Taxable Short-Term Capital Gain Rs. 8,000
Total = LTCG – NIL

= STCG – 8,000
Total Taxable Capital Gain = Rs. 8,000
2. During the year ended 31/3/2021, Mr Kumar sold the following assets.
Compute the taxable Capital Gains:
a. Shop purchased in 2002-03 for Rs 60,000 and sold during the year for Rs
1,70,000
b. Machinery purchased in 2009-10 for Rs 60,000 (WDV Rs 45,000) and
sold for Rs 70,000
c. Household furniture purchased on 1/5/2018 for Rs 2,000 and sold for Rs
2500.
d. Machinery (WDV as on 1/4/2020 Rs 12,000) is sold for Rs 14,000.
e. Agricultural Land purchased in 2000-01 for Rs 15,000 (FMV as on
1/4/2001 Rs 80,000) was sold for Rs 3,00,000.
f. Residential House Property purchased in 2004-05 for Rs 90,000 was
sold for Rs 2,80,000.
g. During the year he bought another house property for residential purpose
for Rs 1,70,000.
Solution:
Assesse: Mr Kumar AY: 2021-22
PARTICULARS Shop Agricultural Residential HP Total
(RS.) land (RS.) (RS.) AMOUNT(RS.)
Sale Consideration 1,70,000 3,00,000 2,80,000 7,50,000
Less: Transfer expenses - - - -
Net Sale Consideration 1,70,000 3,00,000 2,80,000 7,50,000
Acquisition 1,72,000
Shop = 60,000 x 301/105 2,40,800
Agri. Land = 80,000 x 2,39,735
301/100 - - - (6,52,535)
Residential HP = 90,000 x
301/113
Improvement
Long-Term Capital Gain Rs. Rs. 59,200 Rs. 40,265 Rs. 97,465
(2,000)
section 54
Purchased HP – Rs. 1,70,000 (40,265)
(or)
Capital Gain – 40,265
(WEL)
= 2,03,848 x 2,50,000/3,28,000
Taxable Long-Term Capital Gain Rs. (2,000) Rs. 59,200 NIL Rs. 57,200

Assesse: Mr Kumar AY: 2021-22
PARTICULARS Machinery Machinery AMOUNT(RS.)
(Rs. ) (RS.)
Sale Consideration 70,000 14,000 84,000
Less: Transfer expenses - -
Net Sale Consideration 70,000 14,000 84,000
Less: Cost of Acquisition 45,000 12,000
Less: Cost of Improvement - - (57,000)
Taxable Short-Term Capital Rs. 25,000 Rs. 2,000 Rs. 27,000
Gain
Total = LTCG – 57,200
= STCG – 27,000
Total Taxable Capital Gain = Rs. 84,200
3. Mr Durga prasad gives you the following information. Compute the taxable
capital Gains:
a. Agricultural Land in Chennai purchased in 2003-04 for Rs 4,25,000 (CII
109) has been sold for Rs 12,50,000 ON 1/8/2020 by paying brokerage
of Rs 25,000 .He purchased another agricultural land in a village for Rs
2,50,000 on 10/6/2020.
b. Household furniture and music system purchased on 1/1/2004 for Rs
22,000 and is sold for Rs 30,000 on 5/12/2020.
c. Machinery purchased on 1/1/2003 for Rs 40,000 (CII 109) is sold for Rs
15,000 on 1/4/2019. The WDV of the machinery on 1/4/2020 was Rs
25,000.
d. Sold a residential house for Rs 40,00,000 on 31/3/2021. The house was
gifted by his mother-in-law in July 1980. The house was purchased by
her in 1999 for Rs 5,00,000 (FMV on 1/4/2001 was Rs 11,50,000)
Additions were made by him on January 1, 2007, by spending Rs
1,10,000. The commission paid on Sales is Rs 30,000. He purchased
another residential property for Rs 2,25,000 and deposited Rs 7,50,000
under Capital Gains Account Scheme on 30/6/2021)
e. Debentures purchased in Dec 2017 for Rs 30,000 were sold for Rs
55,000 on 1/11/2020.
f. Sold 200 Bonus shares of a company on 1/2/2021 for Rs 250 per share
by paying a brokerage of 1% on the selling price. These bonus shares
were issued on 1/4/2003 and the market price of these shares on the date
of issue were Rs 100 per share.
Solution:
Assesse: Mr Durga prasad AY: 2021-22
PARTICULARS Agricultural Residential HP Debentures Shares
land (RS.) (RS.) (RS.) (RS.)
Sale Consideration 12,50,000 40,00,000 55,000 50,000
Less: Transfer expenses 25,000 30,000 - 500
Net Sale Consideration 12,25,000 39,70,000 55,000 49,500
Acquisition 11,73,624
Agri. Land = 4,25,000 x 34,61,500 30,000 -
301/109
Residential HP = 11,50,000 x - 2,71,393 - -
301/100
Improvement
Residential HP = 1,10,000 x
301/122
Long-Term Capital Gain Rs. Rs. Rs. 25,000 Rs. 49,500
51,376 2,37,107
section 54 B
Purchased Agri. Land – Rs. (51,373)
2,50,000 (or)
Capital Gain – 51,373
(WEL) (2,37,107)
Exemptions under section 54
Purchased HP – Rs. 2,25,000
CG a/c Scheme – Rs. 7,50,000
= Rs. 9,75,00
(or) Capital Gain – 2,37,107
(WEL)
Taxable Long-Term Capital NIL NIL Rs. 25,000 Rs. 49,500
Gain

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MEANING:

BUSINESS: According to Sec 2(13) of the Income Tax Act, Business

Vocation: Vocation refers to any activity which a person practices to

BASIS BUSINESS PROFESSION VOCATION

Meaning Activities in the Services Resulting out of

• Meaning: Business means any kind of economic activity carried on by an

• Meaning: Activity Involves use of professional , intellectual and technical skills

Particulars Amount Particulars Amount

PARTICULARS AMOUNT AMOUNT

FOLLOWING ARE THE DETAILS OF THE INCOMES AND EXPENSES

LESS : Undervalued Opening Stock 10,000

Compute the Taxable Income of Mr A from the following information:

Taxable Income from Profits and Gains from Business Rs 3,00,000

COMPUTATION OF TAXABLE INCOME FROM BUSINESS

To salaries 5000 By gross profit 55000

1) Actual bad debts were Rs.500

ASSESSE MR DHONI AY 2021-22

STATUS RESIDENT PY 2020-21

PARTICULARS AMOUNT AMOUNT

Less: Non Business Income

To Opening stock 110000 By sales 3600000

ASSESSE MR GOVINDA AY 2021-22

STATUS RESIDENT PY 2020-21

PARTICULARS AMOUNT AMOUNT

To office salary 30000 By gross profit 160000

COMPUTATION OF TAXABLE INCOME FROM BUSINESS

ASSESSE MR ANIL AY 2021-22

STATUS RESIDENT PY 2020-21

PARTICULARS AMOUNT AMOUNT

Particulars Amount Particulars Amount

To Salary 48,000 By Gross Profit B/D 2,37,300

To Advertisement 24,000 By Rental Income 1,65,000

To Sundry Expenses 54,500 By Dividends From An Indian 24,000

To Interest On Own Capital 12,000 By Winnings From Lottery 1,15,000

To Fire Insurance (Rs.10,000 Relates 30,000 By Interest on Non- 1,92,000

To Income Tax 27,000

To Household Expenses 42,500

To Bad Debts 11,000

To Provision For Bad Debts 10,500

To Repairs To House Property 10,000

To Life Insurance Premium 6,000

To Donation - Political Party 12,000

To Depreciation (Allowable) 23,800

To Net Profit (C/D) 3,86,000

Total 7,33,300 Total 7,33,300

ASSESSE DR KUVEMPU AY 2021-22

STATUS: RESIDENT PY 2020-21

PARTICULARS AMOUNT AMOUNT

Net Profit as per Profit and Loss Account 3,86,000

Add: Disallowed Business expenses

Interest on own capital 12,000

Fire insurance-HP (10,000*3/4) 7,500

Income Tax 27,000

Household expenses 42,500

Provision for bad debts 10,500

Municipal tax – HP 27,000

Insurance Premium on own life 6,000

Donation to political party 12,000 1,52,000

Less : Disallowed Incomes 5,38,000

Rental Income 1,65,000

Dividend from Indian Company 24,000

Winning from Lottery 1,15,000

Interest on non govt security 1,92,000 4,96,000