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What is Tax
1. Income-tax was introduced for the first time in 1860, by Sir James Wilson in order to
meet the losses sustained by the Government on account of the Military Mutiny of 1857.
Thereafter; several amendments were made in it from time to time.
2. A separate Income tax Act was passed in 1886. This Act remained in force up to, with
various amendments from time to time.
3. In 1918, a new Income-tax Act was passed and again it was replaced by another new Act
which was passed in 1922. This Act remained in force up to the assessment year 1961-62
with numerous amendments.
4. The Income Tax Act of 1922 had become very complicated on account of innumerable
amendments. The Government of India therefore referred it to the Law Commission in
1956 with a view to simplify and prevent the evasion of tax.
5. The Law Commission submitted its report-in september 1958, but in the meantime the
Government of India had appointed the Direct Taxes Administration Enquiry Committee
which submitted its report in 1956.
6. In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed.
7. The Income Tax Act 1961 has been brought into force with 1 April 1962. It applies to the
whole of India including Jammu and Kashmir.
Overview of Income-Tax Law in India
Income-tax is the most significant direct tax. The income-tax law in India consists of the
following components.
3. Finance Act
Assessment Year 2(9): “Assessment year” means the period starting from April 1 and ending on
March 31 of the next year. Income of previous year of an assessee is taxed during the assessment
year at the rates prescribed by the relevant Finance Act for tax rates.
Previous year (section 3): Income earned in a particular year is taxable in the next year. The
year in which income is earned is known as previous year. In other words, previous year is the
financial year immediately preceding the assessment year.
Exceptions to the general rule that “previous year’s income is taxable during the assessment
year”
In the following situations income of an assessee is liable to be assessed to tax in the same year
in which he earns the income:
b. Income of persons leaving India either permanently or for a long period of time;
d. Income of a person trying to alienate his assets with a view to avoiding payment of tax;
1. An individual;
3. A company;
4. A firm;
7. Every artificial juridical person not falling with in any of the preceding categories.
Assessee 2(7):
Every person in respect of whom, any proceeding under the act has been taken for the
assessment of his income or of the income of any other person in respect of which he is
assessable or of the loss sustained by him or by such other person or the amount of refund due to
him or to such other person may be called an assessee.
Deemed Assessee:
A person who is deemed to be an assessee for some other person is called “Deemed Assessee”.
Assessee in Default:
When a person is responsible for doing any work under the Income Tax Act and he fails to do it,
he is called an “Assessee in default”.
INCOME - 2 (24):
The definition of the term “income” in section 2(24) is inclusive and not exhaustive. Therefore,
the term “income” not only includes those things that are included in section 2(24) but also
includes those things that the term signifies according to its general and natural meaning.
Income, in general, means a periodic monetary return which accrues or is expected to accrue
regularly from definite sources. However, under the Income-tax Act, 1961, even certain incomes
which do not arise regularly are treated as income for tax purposes e.g. Winnings from lotteries,
crossword puzzles.
As per section 14, the income of a person is computed under the following five heads:
1. Salaries.
4. Capital gains.
If the income is not derived from any of the above sources, it is not taxable under the Act. The
aggregate income under these heads is termed as “gross total income”.
Total income means the amount left after making the deductions under section 80C to 80U from
the gross total income.
Chapter 2-Basis of Charge
Income tax is levied on the taxable income of every person. For calculation of income tax,
taxable income is the basis. To determine taxable income, residential status of the person and
scope of total income are the initial steps. There are two types of taxpayers from residential point
of view – Resident in India and Non-resident in India. Indian income is taxable in India whether
the person earning income is resident or nonresident. Conversely, foreign income of a person is
taxable in India only if such person is resident in India. Foreign income of a non-resident is not
taxable in India. Therefore, the determination of the residential status of a person is very
significant in order to find out his tax liability.
An assessee’s residential status must be determined with reference to the previous year in respect
of which the income is sought to be taxed (and not with reference to the assessment year).
However, individual cannot be simply called resident in India. If individual is a resident in India
he will be either;
Under Section 6(1) of the Income-tax Act, an individual is said to be resident in India in any
previous year if he:
(a) is in India in the previous year for a period or periods amounting in all to one hundred and
eighty-two days or more i.e., he has been in India for at least 182 days during the previous year;
or,
(b) has been in India for at least three hundred and sixty-five days (365 days) during the four
years preceding the previous year and has been in India for at least sixty days (60 days) during
the previous year except in following cases; where if condition (a) is satisfied then an individual
is resident otherwise he will be Non-Resident.
– Citizen of India, who leaves India in any previous year as a member of the crew of an Indian
ship, or for the purpose of employment outside India, or
– Citizen of India or Person of Indian origin engaged outside India (whether for rendering
service outside or not) and who comes on a visit to India in the any previous year.
An individual may become a resident and ordinarily resident in India if he has satisfy both the
following conditions given u/s 6(1) besides satisfying any one of the above mentioned
conditions:
(i) he is a resident in at least any two out of the ten previous years immediately preceding the
relevant previous year, and
(ii) he has been in India for 730 days or more during the seven previous years immediately
preceding the relevant previous year.
An individual is not ordinarily resident in any previous year if he has been a non-resident in
India in at least nine out of the ten previous years preceding that previous year, or has during the
seven previous years preceding that previous year been in India for a period of, or periods
amounting in all to, seven hundred and twenty-nine days (729 days) or less. In other words, if
resident individual is not able to satisfy both the additional conditions, then he will be resident
but not ordinary resident (RNOR).
Step 1: Determine whether the person falls under exception to basic condition;
Step 2: If yes, apply only first basic condition, if satisfied, then he will be resident otherwise non-
resident. If no, then apply both basic conditions and Individual becomes Resident on satisfaction
of any one condition.
Step 3: Resident Individual will be called ROR if satisfies both the additional conditions,
otherwise he will be called RNOR.
Residential status of HUF
A Hindu undivided family is said to be resident in India if control and management of its affairs
is wholly or partly situated in India.
A resident Hindu undivided family is an ordinarily resident in India if the karta or manager of the
family (including successive kartas) satisfies the following two additional conditions as laid
down by section 6(6)(b).
Additional conditions
(i) Karta has been resident in India in at least 2 out of 10 previous year’s preceding the relevant
previous year.
(ii) Karta has been present in India for a period of 730 days or more during 7 previous years
immediately preceding the relevant previous year.
If the Karta or manager of a resident Hindu undivided family does not satisfy the two additional
conditions, the family is treated as resident but not ordinarily resident in India.
A HUF will be non-resident if the control and management of its affairs is situated wholly
outside India during the previous year.
As per section 6(2), a partnership firm and an association of persons are said to be resident in
India if control and management of their affairs are wholly or partly situated within India during
the relevant previous year. They are, however, treated as non-resident in India if control and
management of their affairs are situated wholly outside India.
i. Any income received or deemed to be received in India during the previous year by or on
behalf of the assessee ; or
ii. Any income accrues or arises or deemed to accrue or arise to him in India during the
previous year ; or
iii. Any income accrues or arises to him outside India during such year.
i. Any income received or deemed to be received in India during the previous year by or on
behalf of the assessee ; or
ii. Any income accrues or arises or deemed to accrue or arise to him in India during the
previous year ; or
iii. Any income accrues or arises to him outside India from a business controlled in or a
profession set up in India.
Non- resident:
i. Any income received or deemed to be received in India during the previous year by or on
behalf of the assessee ; or
iv. Any income accrues or arises or deemed to accrue or arise to him in India during the
previous year.
Chapter 3- Incomes Exempted from Tax
Section 10 provides that in computing the total income of an assessee, any income which falls in
its ambit shall not be included in the total income, provided the assessee proves that a particular
item of income is exempt and falls within a particular clause. The onus is on the assessee i.e. the
assssee has to prove that his income falls under Section 10.
Agriculture income is exempt under the Indian Income Tax Act. This means that income earned
from agricultural operations is not taxed. The reason for exemption of agriculture income from
Central Taxation is that the Constitution gives exclusive power to make laws with respect to
taxes on agricultural income to the State Legislature. However while computing tax on non-
agricultural income agricultural income is also taken into consideration.
a. Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes, or.
b. Any income derived from such land by agricultural operations including processing of
agricultural produce, raised or received as rent in kind so as to render it fit for the market,
or sale of such produce.
c. Income attributable to a farm house subject to the condition that building is situated on or
in the immediate vicinity of the land and is used as a dwelling house, store house etc.
In order to consider an income as agricultural income certain points have to be kept in mind:
(g) Income of salt produced by flooding the land with sea water.
Partly agricultural income consists of both the element of agriculture and business, so non
agricultural part of the income is taxed. Some examples for partly agricultural income are given
below:
This rule applicable to agricultural produce like cotton, tobacco, and sugarcane etc, here the
market value of the agricultural produce raised by the assessee for utilizing it as raw material for
his business will be deducted out of the total profit of such assessee while calculating tax on his
income.
If a person using his own tealeaves grown by him for his tea manufacturing business, then 60%
of his income will be treated as agricultural income and the remaining 40 % will be treated as
business income. So he has to pay tax on that remaining 40% of income.
3. Income from the manufacturing of centrifuged latex or cenex.
If a person manufacturing centrifuged latex by using his own made raw then, 65 % of the income
derived from the sale of the same is treated as agricultural income so he has to pay tax remaining
part of the income.
a) 75% of the income derived from the sale of coffee grown and cured by the seller in India is
deemed to be agricultural income 25% is taken as business income.
b) 65% the income derived from the sale of coffee grown, cured, roasted and grounded by the
seller in India is deemed to be agricultural income 35% is taken as business income.
With effect from assessment year 1974-75, agricultural income is integrated with non
agricultural income in certain cases of assesses. The integration is done only in those cases where
assessee has both agricultural and non-agricultural income.
When to integrate:
1. Integration is done only in case of individuals, HUF, AOP, BOI and artificial juridical
persons.
2. Integration is done only if non-agricultural income of all the persons mentioned above
exceed exemption limit.
3. Integration is done only if net agricultural income of all the above persons exceeds Rs
5,000 in the relevant previous year.
How to integrate:
1. Net agricultural income is added with non agricultural income if above conditions are
fulfilled.
2. Tax is calculated on this total at current rates of tax.
3. Net agriculture income is added with the agricultural is added with the exempted limit
i.e., Rs 250,000/ Rs 300,000/ Rs 500,000.
4. Tax is calculated on this total at current rates of tax.
5. Tax calculated at point (4) is deducted out of tax calculated at point (2) above.
6. Add surcharge @10% of tax if total income exceeds Rs 1 crore.
7. Add education cess @ 2% plus SHEC @1% of such tax + surcharge if any.
8. Total is tax payable.
chacha
According to section 14 of the Income Tax Act, the income of a person is
computed under the following five heads:
1. Income from Salaries [section 15, 16 and 17] (Deductions U/S 16)
3. Profits /Gains from Business or Profession [section 288 to 44](Deductions U/S 30-37)
Salary ____
Allowances ____
Perquisites ___
Gross Salary
Less: Deduction under section 16 ___
___
(a) entertainment allowance [sec.16(ii)] ___
(b) professional tax [sec. 16 (iii)]
Resulting figure is Income from ‘Salaries’
Note: professional tax is deductible on payment basis. If it is paid by the employer on the
behalf of employee, then same is first included in the gross salary as perquisite and then
deduction is made under section 16(iii).
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Children education - Exempted from tax up to the limit of Rs. 100 per child
allowance per month for a maximum of 2 children.
Hostel expenditure - It is exempt from tax up to the limit of Rs.300 per month
allowance per child for a maximum of two children.
Transport allowance - It is exempted up to Rs. 1600 per month;
- for handicapped or disabled employees, it is exempted
up to Rs. 3200
Allowance for - allowance provided to the transport employees to meet
transport employees their personal expenditure during duty in course of
running such transport from one place to another; it is
exempt from tax up to the limit of least of the following,
(a)- 70 % of the allowance or (b) Rs. 6,000 per month
Travelling/ - Exemption is allowed up to the extent the amount is
conveyance allowance utilized for the specific purpose for which the allowance
is created.
Transfer/ helper/ - Exemption is allowed up to the extent the amount is
uniform/ academic utilized for the specific purpose for which the allowance
research allowance is created.
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Free Domestic Taxable value is the actual expenditure incurred by the
Servants employer on the servants less by any amount paid by the
employee.
Free Education Any expenditure incurred by the employer for the training
Facility of the employee is not taxable.
If the education facility is provided to the family members
of the employee, then expenditure incurred by the employer
is the taxable value of the perquisite.
if the education facility is provided to the family members
through the education institution owned by the employer,
then exempted limit is Rs.1000 per child per month and rest
is taxable value of the perquisite.
Free Gas, The taxable value is the actual amount incurred by the
Electricity or employer less any amount paid by the employee.
Water
Medical facilities in Not taxable if provide in a hospital owned or maintained by
India the employer.
Not taxable if provided in a Govt. hospital, approved
hospital or a private hospital (if recommended by the Govt.
for the treatment of Govt. employees).
Medical Insurance Not chargeable to tax
Premium paid by
the employer
Medical Facility Expenditure incurred by the employer on the medical
outside India treatment of the employee (including boarding and lodging)
is not taxable in the hands of the employee up to the limit
prescribed by the RBI.
If the employer provides travelling expenses for going
outside India for medical treatment purpose, then the whole
amount is taxable in the hands of employee.
Leave Travel Only 2 journeys in a block of 4 years is exempted from
Concession (LTC) taxable, however, carryover concession is available.
Use of Employers Taxable up to 10% of the actual cost of asset to the
Movable Assets employer or any hire charges less any amount recovered
from the employee.
in case of computer/ laptop; nothing is taxable
Concessional Loan/ Not taxable if the loan provided does not exceed Rs. 20,000.
interest free loan
if exceeds Rs. 20,000, then find out the maximum
outstanding balance on the last date of each month, multiply
it with the SBI landing rate on the first day of previous year.
Any amount recovered from the employee in the form of
interest payment is deductible to reach at the figure of
taxable amount.
If loan is provided for the purpose of medical treatment of
the employee or his family members, then it is exempted
from tax.
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Sale of Movable Actual cost of the asset to the employer less depreciation and
Asset sales consideration paid by the employee is taxable.
Depreciation for each year of use is calculated as; (a) for
electronic items/ computers, 50% by reducing installment
method, (b) for car it is 20% by reducing installment method,
and (c) 10% of the cost on any other asset.
Motor Car if car is owned/hired by the employer, expenses incurred by
the employer;
a) If partly used for official and partly for personal
purpose, then the value of perk which is taxable is as; Rs.
18,00 per month (up to 1600 cc), Rs 24,00 (above 1600 cc)
and Rs. 900 per month for driver.
b) Used wholly for personal purpose; entire expenditure
incurred by the employer including depreciation is taxable in
the hands of employee. The rate of depreciation is 10 % per
annum on the actual cost of the car. Any expense incurred by
the employee in this regard is deductible.
c) Wholly for office purpose; not considered as a perk
If car owned/hired by the employer used partly for the
official and partly for the personal purpose and expenses
are met by the employee, then taxable value for the car
perquisite is as; (a) Rs. 600 pm (up to 1600 cc), Rs. 900 pm
(above 1600 cc), and Rs. 900 pm for the driver. Any
expenditure recovered from the employee is not deductible.
Conveyance facility provided in case of Supreme Court
Judge, High Court Judge and serving Chairman/ Member
of UPSC; Not taxable.
Conveyance facility provided to the employee of an
organization between office and residence is not taxable.
Free Transport Considered as a taxable perquisite in the hands of employee at
the value at which the employer offers such benefit to the
public, deduct any amount recovered from the employee in this
regard.
In case of railways and airlines, it is considered as tax free
perquisite.
Telephone/mobil Not taxable
e Phone
Perquisite Not chargeable to tax up to 2 years.
received by a
Teacher or
Researcher from
a SAARC
Member State
Approved Employers contribution in excess of Rs. 1,00,000 per
Superannuation assessment year is taxable
Fund
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Lunch, refreshment Any food or non-alcoholic beverages provided in working
etc hours in remote area or off shore installation is fully
exempted from tax.
Any food or lunch provided at any other place and the cost
in excess of Rs.50 per meal is taxable value of perquisite in
the hands of employee less any expenditure recovered from
that employee.
Any tea or snakes provided during the working hours is not
taxable perquisite.
Travelling , Touring When such kind of facility is available uniformly to all
Accommodation employees; taxable perquisite on the basis of actual
expenditure of the employer less any amount recovered
from the employee.
When such kind of facility is not available uniformly to
all employees; taxable perquisite on the basis of value at
which such facilities are provided by other agencies to the
public less any amount recovered from the employee.
Any Gift, Voucher or Taxable on the basis of actual expenditure incurred by the
Token employer;
Gift may be provided to the employee or any member from
his family.
Any gift provided in kind up to the amount of Rs. 5000 per
annum is not taxable.
Credit Card Facility Taxable up to the actual amount incurred by the employer
less actual expenditure pertaining to the official use less
any amount recovered from the employee by the employer.
Specified Security or Taxable up to fair market value of the shares or securities
Sweat equity Shares on the date on which option is exercised by the employee if
such shares or securities are allotted on or after 1 April
2009 less any amount recovered from the employee.
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Treatment of Employee’s Provident Fund
1. Statutory Provident Fund:
Deduction u/s 80C on employee’s contribution available;
All other contributions/interest or any lump sum payment is exempted
from tax.
2. Recognized Provident Fund:
Deduction u/s 80C is available.
Excess of employer’s contribution over 23 % of salary is taxable.
For this purpose salary is the sum of Pay + DA + commission on
turnover.
Excess of interest over 9.5 % is taxable.
3. Unrecognized Provident Fund:
No availability of deduction u/s 80C.
Employer’s contribution plus interest are exempted from tax.
Lump sum payment received at the time of retirement (except
employee’s contribution) is taxable income.
For the computation of tax under this head following points should be taken into
consideration
1. Building or land appurtenant thereto: it includes the income from buildings or lands
attached or situated in the vicinity of the building i.e. the land which is not appurtenant to
any building does not come within the purview of this section.
2. Annual Value: only the annual value of the building or land appurtenant thereto is to be
taxed not the rent received. (annual value to be calculated according to section 23 of
income tax act)
3. The assessee should be the owner of the house property: only the real owner or
deemed owner is considered as assess and to be taxed under this head of income.
Therefore, income from subletting is not included under this head and is treated as
‘Income from other sources’.
Section 27 of the income tax act considers the assessee in the following cases as a deemed
owner of the house property.
1. An individual who transfers any house property to his or her spouse otherwise than
for adequate consideration, not being a transfer in conformity with an agreement to
live apart, or transfer to a minor child not being a married daughter.
2. The holder of an impartial estate shall be considered as a deemed owner of the
whole estate.
3. A member of a cooperative society to whom a building or any part thereof is
allotted or leased under the house building scheme of the society.
4. A person who retains the possession of any building or any part thereof in part
performance of contract of the nature referred to in section 53 A of the transfer of
property Act1882.
5. A person who acquires any rights in or with respect to any building or any part
thereof, by virtue of transfer by way of lease for a period of not less than 12 years
whether originally or by extension
4. The property should not be used by the assessee for his own business or profession.
Remember: income from the following house property is chargeable to tax under the
head income from house property;
1) Hose property held as stock in trade by the assessee in the course of carrying on
the business of purchase and sale of such house property.
2) House property of a partner used by the firm for the purpose of its business or
profession, the annual value of such property shall be chargeable to tax under the
head income from house property in the hands of the partner.
3) House property held in the name of the business but not used actually for that
business is to be assessed under the head income from house property.
5. In case of disputed ownership; it is actually the person who receives the rent is
considered as owner of that property and thus assessed for tax.
6. House property situated in foreign country: an assessee who is resident of India
having any house property situated in foreign country, the income of such house property
to taxable in Indian under the head income from house property.
7. Letting out of building along with plant, machinery, furniture, fittings or some
additional facilities: if rent is chargeable separately for additional facilities then rent
received will be split into two parts, via, (i) rent from building and (ii) rent from plant,
machinery, furniture, fittings and other amenities. The rent from second part will be
chargeable to tax not under this head but ‘Income from other sources’ or ‘Income from
business or profession if such letting is the business of the assessee.
8. Income from subletting: when the main tenant lets out full or part of the hired building
to another person, then it is called sub-letting and any income from sub- letting is
chargeable to tax not under this head but ‘Income from other sources’. and such income
is computed as per section 56 of the Act after deducting all the expenses relating to the
subletting. [ for any clarification, refer to illustration and question no. 1 respectively
from the book Tax Laws and Practice assessment year 2015-16]
Exempted incomes from house property Section 10 of the Income tax Act
Following are the incomes which are not included in the total income of the assessee
these are:
1) Agricultural house property. [Sec. 2(1) (c)]. Income from house property which is
situated on or in the close vicinity of the agriculture land used for the agriculture
purpose is exempted from tax.
2) House property used for charitable purpose [ sec. 11]
3) Self – occupied but vacant house [sec 23(3)]. In case the assessee is not living in
his self occupied house and is residing in rented house elsewhere due to his
employment or profession, then income from such house is exempted from tax.
4) One self occupied house: in case assessee owns more than one house then under
such situation only one house shall be treated as self occupied usually on the
choice of the assessee normally with high value and rest of the houses will be
deemed as let out.
5) Property held by the registered trade union, [ sec.10 (24)]
6) Income from the house property held by the following persons shall be exempted
from tax.
a) House property held by the local authority.
Tax treatment
b) House propertyof house
held byproperty in case
the scientific of Cooperative
research institution. Society
c) House property held by a political party.
In case the
d) gross
Housetotal income occupied
property of a co-operative society [notand
by a university beingany
a housing society, urban
other education
consumer cooperative
institution society
workingorforany society carrying
spreading educationa transport
and not forbusiness]
earning does not exceed
profits.
Rs. 20000 e) and thereproperty
House is income from
held by house property
a hospital includedinstitution
or medical in its gross total income,
working for the then
whole of such income
medical is deductible
services for the while
peoplecomputing
and not foritsearning
total income.
profits.
If a cooperative society lets out godowns or warehouses for storage, processing or
facilitating of marketing activates, then whole of income derived from such let out is
deductible while computing its total income.
Self occupied Only one house of assesssee’s choice will be exempted and
house other houses shall be deemed to be let out.
Part of the year Treated to be let out for the whole year and no benefit for the
let-out and part of self occupation.
the year self-
occupied
More than one Each such unit/ house/ flat shall be treated as separate house
unit/ house and shall be treated respectively.
Co-owners of Treated as separate assessee if their shares are determinable
house property and income from house property will be included in their
individual income.
Unrealized rent Amount of unrealized rent to be deducted from the actual rent
received for the calculation of Annual Rental Value (ARV) if
conditions are fulfilled.
Recovery of Deemed to be the income of that year in which realized
unrealized rent
Arrears of rent Deemed as income from house property of the year in which
recovered but after allowing standard deduction @ 30%.
Joint expenses of Apportioned on the basis of Municipal Rental Value
two or more
houses
Loss from house Loss from house property can be set off from income under
property any other head. Loss from self occupied house due to interest
on loan can also be set off from income under any other head
and loss from both the houses can be carry forward under the
head ‘House Property’ for 8 succeeding previous years.
House used for
assessees own Annual value of such property is taken nil
business or
profession
Description of different types of rental values
1. Actual Rent: it is the rent which is actually received by the owner of the house from the
tenant. It should be noted that if the tenant pays the composite rent comprising of rent for
building, plant and machinery, furniture and fixtures etc and is separable, then actual rent is
reduced by the amount of rent of plant and machinery, furniture and fixtures etc and the
balance is actual rent of the house property.
2. Real rental value (RRV): real rental value is the value which is calculated by deducting the
certain types of expenses common facilities provided by the owner like pump maintenance,
salary of gardener and watchman, lighting of common stairs and corridor and water and
electricity bills from the actual rent and the balancing figure is real rental value (RRV).
It should be noted that if cost of such facilities as stated above is charged separately by
the owner i.e. above the rent, then it is treated as separate source of income and is taxable
under the head ‘Income from other sources’.
3. Municipal Rental Value (MRV): it is that rental value which is fixed by the local authority
i.e. Municipal Corporation/Committee and Municipal Corporation collects different types of
municipal taxes on the basis of this value.
4. Fair Rental Value (FRV): it is that type of rental value which a house property can fetch in
the situated locality as compared to similar size of accommodation or house in that locality.
5. Standard Rental Value (SRV): it is the rental value which is fixed under the Rent Control
Act wherever applicable.
[SECTION 28-44DB]
Profits and gains of business or profession are calculated under section 28 to 44
of the Income Tax Act 1961 and constitute an important part of the total income
of an assessee.
Method of Accounting: Income from business or profession is calculated on the
basis of method of accounting employed by the assessee;
if the assessee has adopted mercantile system of accounting, then income is
calculated on accrual basis and expense which are allowed as deduction are
also deductible on accrual basis.
(ii) If the assessee has followed cash system of accounting, then income is
followed on receipt basis and admissible expenses will be deducted only on
payment basis.
Definition of business: in common terminology business means an economic
activity carried on for the purpose of earning profits. But according to section 2
(13) of the Income Tax Act business “any trade, commerce, manufacture or any
adventure or concern in the nature of trade, commerce and manufacture”.
Definition of Profession: profession refers to the occupational activities where
the individuals earn their livelihood through their intellectual or manual skills.
For example, engineer, doctor, author or writer, lawyer etc. According to section
2(36) of the Income Tax Act, ‘Profession includes Vocation’.
Vocation simply means any type of activity which is conducted by the
individual for earning their livelihood and it does not necessarily mean
organized or systematic activities.
Business or Professional Income: The profits and gains of any business or
profession carried on by the assessee at any time during the previous year
whether continued throughout the year or not are assessed under the head
‘Profits and Gains of Business or profession. [ section 28(i)]
Specific Deductions allowed under section 30 to 37
Sections
1 Rent, rates, taxes, repairs, and insurance for building used by the 30
assessee purely for the business or profession.
2 Repairs and insurance of plant, machinery and furniture used in the 31
business or profession.
3 Depreciation of building, plant, machinery or furniture 32
4 Tea development account and reserve for shipping companies 33AB,
33AC
5 Expenditure on scientific research 35
6 Expenditure on Patents and copyrights 35A
7 Expenditure on know-how 35AB
8 Expenditure on eligible projects or schemes 35AC
9 Expenditure in the form of payments associations and institutions 35CCB
carrying out Rural Development Programme
10 Amortization of certain preliminary expenses 35D
11 Expenditure on demerger or amalgamation 35DD
12 Expenditure incurred under voluntary retirement scheme 35DDA
13 Expenditure on prospecting, etc, for certain minerals 35E
Certain other deductions in the form of expenses which are; 36
Insurance premium of stock in trade or stores
Bonus or commission to employees
Bad debts
Discount on zero coupon bonds
Transfer of money to special reserve only in case of financial
institutions
Interest on borrowed capital
Employer’s contribution to the recognized Provident and other
funds
Employees contribution to the approved gratuity fund and
approved superannuation fund
Expenditure incurred on family planning
(only in case of companies)
Interest on borrowed capital
Employee’s towards staff welfare schemes
Securities transaction tax if assessee is dealer in securities
14 Any other type of expense incurred not covered under section 30 to 37
36
General deduction under section 37 (1)
Following are some of the expenses allowable as deduction under this section;
1. All the expenses and payments made for the purchase of raw materials, manufacture
and sale of goods.
2. Day-to-day expenses to carry on the business.
3. Expenses incurred in case of advertisement for the enhancement of sale.
4. Royalty paid for the use of intangible assets like patents, trade mark, copyrights etc.
5. Payment of sales tax and all those expenses in relation to sales tax appeal.
6. Subscription to be paid compulsorily for the protection of business interests.
7. Any commission paid for the procurement of business orders.
8. Expenses incurred for the welfare activities of the employees.
9. Reasonable expenses incurred on the occasion of Diwali, Puja, Mahurat or other
festivals.
10. Legal expenses incurred to claim damages or compensation under the situation of
non-fulfillment of a contract.
11. Pension, gratuity, and any other voluntary payment given to the employees.
12. Any gift given to the employees provided such gifts do not prevail in the category of
perquisites.
13. Any commission paid to the employee for the termination of his/her service.
14. Any commission paid to the managing agent for the termination of his agency.
15. Any bonus paid as industrial award to the employees.
16. Insurance premium paid for the insure policy of the employees against injury,
accident or any other mishap during working and any amount paid to the employees
due to such injury or accident. (It should be noted that any compensation received
from the insurance company on this behalf shall be treated as taxable income and
credited to profit and loss account.
17. Embezzlement by an employee during the normal course of business.
18. Expenses incurred for making the necessary alterations in the memorandum of
association and article of association.
19. Any amount of expenses paid by the assessee to the rivals for not competing with the
business of assessee.
20. Any expense incurred on entertainment of the employees.
21. Any legal expenses incurred for the interest or betterment of the business.
22. Expenses incurred in connection with the raising of loans or issuing of debentures
whether short term or long term.
23. Any other expense in addition to above stated ones which satisfy the income tax
department that such expenses were incurred for the betterment of the business.
To avail deductions according to section 37 (1), the following conditions should be
satisfied:
1) The expenditure should not be of the nature described in section 30 to 36.
2) It should not be a capital expenditure.
3) It should not be the personal expenditure of the assessee.
4) It should have been incurred for the business only.
5) It should have been incurred in the previous year.
6) It should have not been incurred for the purpose which is prohibited by any law.
Expenditure on Scientific research [section 35]
Specific Disallowances: Section 372b, 40, 40A, and 43B cover those
expenses which are not allowed.
There are certain expenses which are deductible only on the payment
basis i.e. only deductible if paid by the assessee. These are as:
1) Any sum payable by the way of tax, fee or cess under any law for
the time being in force.
2) Any amount payable by the employer as contribution to the
provident fund, superannuation fund or any other fund meant for
welfare of the employees.
3) Any sum payable to the employees as bonus or commission for the
service rendered.
4) Interest on loan taken from scheduled bank including a cooperative
bank or a public financial institution like ICICI, IFCI, IDBI, LIC
and UTI.
5) Any amount payable by the employer in lieu of leave at the credit
of his employee.
Exception: When deductible on accrual basis; these payments are
deductible on accrual basis if the payment is actually made on or
before the due date of submission of return of income.
Pro Forma Showing Computation of Profits and Gains of Business or Profession
Deduct ( from the total arrived at A )any of the following expenses which are
allowed under the Act but not debited to P and L A/C: A
II (i)- Depreciation not charged to P and L A/C
(ii)- Any bad debt not debited to P and L A/C
(iii)- Any other expenditure incurred but not debited according to the provisions
of the Law
(iv)- Difference due to over debiting of stock
Deduct total of all these from A as stated above to get
continue
B
III Deduct from B those incomes which are either exempted or not taxable
under this head
(a) incomes which are exempted from tax under this head
(i)- Agricultural receipts ___
(ii)- Income Tax refund ___
(iii)- Post office saving bank interest ___
___
(iv)- Any bad debt recovered but disallowed earlier
___
(v)- Any capital receipt
___
(vi)- Life insurance maturity amount ___
(vii)- Any gift from relatives
(viii)- Withdrawal from PPF ___
(b) incomes which are not taxable under this head ___
(i)- Capital gains ___
(ii)- Interest on securities ___
(iii)- Rent from let out house property ___
(iv)- Dividend, Bank interest ___
(v)- Winnings from lotteries, horse races etc.
(vi)- Part-time salary ___
_________
After deducting above stated incomes or receipts from B, we get profit
which is taxable from business
Amount
Professional Receipts
(i)- Consultation fees __
(ii)- Visiting fees __
(iii)- Operation fees __
(iv)- Sale of medicine __
(v)- Any gift from patients __
(vi)- Nursing home receipts __
(vii)- Any other professional receipts __
Total of above
(Less): Professional Expenses __
(i)- Cost of medicine
- If accounts are maintained on cash basis, then cost of actual
medicine
- If accounts are maintained on mercantile system, then opening
stock + purchases – closing stock __
(ii)- Depreciation on surgical equipments and x-ray machine __
(iii)- Dispensary expenses __
(iv)- Motor car expenses like depreciation if used for the professional
work __
(v)- Nursing home expenses __
(vi)- Cost of books used for professional purposes __
(vii)- Any other professional expenditure
The resulting figure is income from profession of a doctor
Computation of Taxable Income in case of a chartered Accountant
Amount
Professional Receipts: ___
(i)- Audit fees ___
(ii)- Income from accountancy ___
(iii)- Institution fees ___
(iv)- Examination fees ___
(v)- Consultancy services ___
(vi)- Any gift from clients
Total of above
Less: Professional Payments: ___
(i)- Institute expenses ___
(ii)- Office expenses ___
(iii)- Cost of books used for the profession ___
(iv)- Membership fees ___
(v)- Motor car expenses if used for the profession ___
(vi)- Depreciation on office equipments, furniture, car etc if used for the ___
profession
(vii)- Subscriptions
(viii)- Stipend to trainees
The resulting figure is income from profession
CHAPTER 8 PROFITS AND GAINS OF BUSINESS OR
PROFESSION-II
Depreciation: the Income Tax Act 1961 nowhere defines the term depreciation,
however in common terminology, the word ‘depreciation’ means gradual/
permanent and continuous decrease in the value of an asset due to its wear and
tear, exhaustion, obsolescence or efflux of time.
In other words, depreciation is the process of allocating the cost of usage of a
long term asset in a systematic and rational manner. With the passage of time,
the real value of a fixed asset goes on diminishing and this decreasing value is
measure through the process of depreciation in monetary terms which is treated
as business expenses and ultimately debited to profit and loss account.
Category of Charging Depreciation: depreciation can be charged on:
1) Profits and Gains of Business or Profession by the assessee during the
relevant previous year;
2) Under the head ‘Income from Other Sources’ under the situation when
the assets are let out for a certain period of time and letting is not the
regular business of the assessee.
Conditions for claiming Depreciation:
1. Depreciation is allowable on capital assets only.
2. It is available on both tangible as well as intangible assets; tangible assets like
building, plant and machinery, furniture and fixtures, motor vehicles etc.
intangible assets like patents, trademarks, copyrights, licenses, franchises, any
other business or commercial right.
3. The asset must be owned by the assessee.
4. It must be used for the purpose of assesssee’s business or profession.
5. It should be used during the relevant previous year. And
6. The assessee cannot claim the depreciation in the year of sale of asset.
7. Depreciation is allowed on the written down value of the asset.
Method of charging Depreciation:
The Income tax Department computes the depreciations on ‘block of assets’
basis rather than individual basis.
Block of assets [section 2(11)]: block of assts means a a group of assets falling
within a class of assets and assets have been divided into blocks on the basis of
rates of depreciation under rule 5 of the Income Tax Act and it comprises;
a) Tangible assets- buildings, plant, machinery or furniture.
b) Intangible assets- patents, trademarks, copyrights, licenses, franchises or
any other commercial or business right.
Written down value of the asset: as already mentioned above, depreciation is
calculated on the written down value of the asset and written down value for the
block of assets for the assessment year 2015-16 can be determined as follows;
1. Find out the depreciated value of the block on 1 April 2014.
2. Add actual cost of the asset falling in the block acquired during the previous
year 2014-15.
3. From the resulting figure, deduct money received or receivable along with
scrap value in respect of the asset falling in the block of asset which is sold,
discarded or destroyed during the previous year 2014-15.
4. The net resulting figure is the written down value of the block of assets on
31 March 2015.
Different Rates of Depreciation via Written Down Value Method (WDV)
A tax payer may have 13different block of assets for the purpose of computing
depreciation which are as follows;
Nature of Asset Rates
A. Tangible Assets
1 All Residential Buildings except hotels and boarding houses 5% block
2 All Non-residential buildings 10% Block
3 Buildings for installing machinery and plant forming part of 100%block
water supply project or water treatment system; and
temporary erections like wooden structures
4 Furniture and fittings including electric fittings 10% block
5 (i)- Plant and machinery (except 6,7,8,9,10,11 or 12
block)
(ii)- Motor cars, motor cycle, scooters, bus, truck (other 15% block
than those in a business of running them on hire)
(iii)- Air-conditioners
(iv)- Surgical equipments
6 Plant and machinery- ocean going ships, vessels ordinarily 20% block
operated on inland waters including speed boats
7 (i)- Motor buses, lorries and taxies used in the business of
running them on hire 30% block
(ii)- Machinery used in a semi- conductor industry
(iii)- Moulds used in rubber and plastic goods industry
8 Aircraft, aero engines and life saving medical equipments 40% block
9 Containers made of glass and plastic used as refills 50% block
10 (i)- Computers including computer software,
(ii)- books used for professional use other than annual
publications 60% block
(iii)- gas cylinders, burners, Direct fire glass melting
(iv)- Mineral Oil concerns
11 Energy saving devices, renewal energy devices, rollers in 80% block
flour mills, sugar works and steel industry
12 Air pollution control equipment, water pollution control 100%
equipments, solid waste control equipments, recycling and block
resource recovery system.
B. Intangible Assets (acquired after 31 March 1998)
Additional Depreciation [ section 32(1)(iiA)]
The additional depreciation is applicable on plant and machinery form the
assessment year 2006-07.
The rate of additional depreciation is @ 20% of the actual cost of the plant and
machinery.
To claim the additional depreciation, the following conditions should be fulfilled
by the assessee.
1) The assessee must be engaged in the manufacturing/production of articles
or goods or generation and distribution of power.
2) The plant and machinery should be totally new not used earlier.
3) New plant and machinery should be acquired and installed after March 31,
2005.
4) The additional depreciation is applicable @ 20% on the actual cost and the
asset must be used for not less than 180 days in the previous year. If the
plant and machinery is used less than 180 days, then only 10% will be
allowed and remaining 10 % will be allowed in the next previous year.
5) The additional depreciation is not applicable in case of aircrafts, ships,
second hand assets, road transport vehicles and assets installed in office,
residence, guest house, office appliances etc.
6) It is not applicable even for those assets which are eligible for 100%
deduction in the first year under any provisions of the Act
Under section 45(1), of the Income Tax Act, any income arising from the
transfer of a capital asset in the relevant previous year shall be chargeable to
income tax under the head ‘Capital Gains’ and shall be deemed to be the
income of the previous year in which transfer of asset takes place.
It means tax is to be levied on any profit or gain occurring on the transfer of
a capital asset.
Capital Asset: Section 2(14) of the Income Tax Act define the capital asset
as,
a) Property of any kind held by an assessee whether or not
connected with his business or profession.
b) Any security held by a Foreign Institutional Investors which has
invested in such security in accordance with the regulations made
under SEBI Act 1992. (from the assessment year 2015-16)
1) As per the section 2(14), the term capital assets includes all types of
properties, whether tangible or intangible, movable or immovable, fixed or
floating.
2) Any right, or in relation to, goodwill, right to subscribe for shares, an Indian
company including right of management or control, share of a partner in
partnership firm or any other right whatsoever are also considered as capital
assets under this head.
Items not included in the Capital Assets: as per Section 2(14), following
are the assets excluded from the definition of capital assets;-
1) Stock in trade, raw materials or stores.
2) Personal effects. It means any movable property held for the personal
use of the owner or for the use of any member of his family does not
come under the preview of capital assets and it includes wearing
apparel, furniture, motor car, electric appliances etc.
3) the term personal effects under the Act does not include, jewellery,
archaeological collections, drawings, paintings, sculptures or any art
work held for the personal use.
4) Agricultural land in a rural area in India, it should not be situated in;
(i)- any area within the jurisdiction of a municipal or a cantonment
boar having a population of 10,000 or more; or
(ii)- Area within 8 kilometers from the local limit of such
municipality/cantonment. This limit is 2 kms if population of
the municipality/cantonment is from 10,001 to 1, 00000; or 6
kms if the population of the municipality/ cantonment is from
1, 00001 to 10, 00000.
5) Special Bearer Bonds 1991.
6) Gold Deposit Bond issued under the Gold Deposit Scheme 1999.
Continue
Types of Capital Assets
There are two types of capital assets;
(1) Short term capital assets (2) long term capital assets.
if the assessee holds the capital asset up to 36 months, then asset is
considered as long term;
If the assessee holds the capital asset up to less than 26 months, then asset
is considered as short term.
However, the capital asset held by the assessee for more than 12 months is
treated as long term in the following cases;
a) if transfer of any share in a company, Govt. securities, listed
debentures, units of UTI/ mutual fund and zero coupon bond takes
place on or before 10 July 2014; or
b) If transfer of listed shares in any company, Govt. securities, listed
debentures, units of equity oriented mutual fund and zero coupon
bonds takes place after 10 July 2014.
Concept of Transferability
The gain from capital asset arises only on its transfer.
If the any asset transferred is not a capital asset, then no capital gain shall arise.
The transfer includes, sale, exchange or relinquishment of the capital assets; or the
extinguishment of any rights therein; or the compulsory acquisition thereof under any
law.
There are certain cases which are not treated as ‘transfer’ and as such no
capital gain will arise, these are as follows;
1. Distribution of capital assets in kind by a company to its shareholders on its
liquidation.
2. Distribution of capital assets in kind by a Hindu Undivided Family to its members
on its full or partial partition.
3. Transfer of capital assets between holding company and its 100 % subsidiary
company, provided the transferee company is an Indian company.
4. Any transfer of capital asset under gift or at will or an irrevocable trust.
Exception; Gift of ESOP shares are chargeable to tax and fair market value of the
share is taken as sales consideration on the date of gift.
5. Transfer of capital assets in case of amalgamation/demerger, provided the
transferee company is an Indian company.
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6. Transfer of shares in the amalgamating company/demerged company in place of
allotment of shares in amalgamated company/resulting company.
7. Transfer of capital assets in case of amalgamation of a banking company with a
banking institution.
8. Transfer of shares in an Indian company held by a foreign company to another
foreign company in case of amalgamation/demerger of two foreign companies.,
provided a few conditions are satisfied.
9. Any transfer of capital asset in a reverse mortgage.
10. Any transfer involved in scheme of lending of securities, if a few conditions are
satisfied.
11. Transfer of capital assets at the time of conversion of a firm or a sole proprietary
concern in a company, if a few conditions are satisfied.
12. Transfer of capital assets by a private company or a unlisted public company to a
limited liability partnership (LLP) during the case of conversion of company into
limited liability partnership.
13. Any transfer by way of conversion of bonds or debentures or debenture-stock or
deposit certificate into share or debentures of any company.
14. Any piece of land transferred by a sick industrial company if few conditions are
satisfied.
15. Transfer of a capital asset by a non-resident of foreign currency convertible bonds
or Global Depository Receipts to another non-resident, if the transfer id made
outside India.
16. Transfer of any work of art, archaeological, scientific or art collection, book,
manuscript painting, photograph, drawing or print to the Govt. or a University or
to a National Museum, National Art Gallery or any other notified public museum.
17. Transfer of a capital asset , being share of a special purpose vehicle to a business
trust in exchange of units allotted to the transferor.
18. Transfer of a capital asset, being a Govt. Security carrying a periodical payment
of interest made outside India, through an intermediary dealing in settlement of
securities by a non- resident to another non- resident.
Statement Showing Computation of Capital Gain
For short term capital gain: (arises on transfer of short term capital asset)
___
- Value of consideration ___
Less; - cost of acquisition
___
- cost of improvement
- any expenditure incurred for transfer by the transferor
Long term Capital Gain: (arises on transfer of long term capital asset)
___
-Value of consideration ___
Less; - Indexed cost of acquisition
___
- Indexed cost of improvement
- any expenditure incurred for transfer by the transferor
Cost of improvement × Cost Inflation Index (CII) of the year of transfer of asset
÷ CII of the year in which improvement took place
Note: For Cost Inflation Index (CII) of different previous years, refer to any
book on tax Laws and practices.
Exempted Capital Gains (under section 10)
-The amount recorded in the books of account of the firm is taken as full
value of consideration.
Distribution of capital asset by a firm to the partners at the time of
dissolution:
Self- Generated Assets:
a) In case of transfer of self-generated assets like goodwill, right to manufacture
/produce an article or right to carry on business, the cost of acquisition and
cost of improvement are taken as nil.
b) In case the transfer of self-generated assets is in the form of tenancy right,
route permit, trade name or brand name, then cost of acquisition is taken as
nil.
c) In case of transfer of any other self-generated asset, capital gain is always
taken as zero.
d) if the capital asset is purchased being in the form of goodwill of business,
right to manufacture/produce an article/thing, or right to carry on business,
then at the time of transfer, cost of improvement is taken as nil.
Compulsory acquisition of a capital asset:
a) Initial compensation is taken as full value of consideration.
b) Capital gain is chargeable to tax in the year in which the initial compensation
or part thereof is first received.
However, the amount of compensation received in pursuance of an interim
order of the court, tribunal or other authority shall be chargeable to tax in the
previous year in which the final order from such court, tribunal or other
authority is made.
c) Indexation benefit is available up to the year in which the asset was
compulsory acquired.
d) Additional compensation received; if court/tribunal/authority enhances
compensation, then it will be taxable in the year of receipt. For this purpose,
cost of acquisition and cost of improvement are taken as nil, although any
litigation expenses incurred for obtaining the additional compensation is
deductible.
Capital gain on transfer of shares/debentures in the hands of non-residents:
if a non-resident acquires shares or debentures of an Indian company by utilizing
foreign currency, then the capital gain will be calculated in the same foreign
currency and after the calculation capital gain in foreign currency, it will be
converted into Indian currency. The benefit of indexation is not available.
Bonus Shares:
1) If bonus shares were allotted before April 1, 1981, then cost of acquisition is
the fair market value on April 1, 1981.
2) If bonus shares are allotted after April 1, 1981, then cost of acquisition is
taken as zero.
Transfer of rights entitlement for additional shares:
1) If the existing shareholder transfers the right by selling the rights
entitlement of acquiring additional shares in the company at a
predetermined price, then amount so released from the transfer is taxable
in the year of transfer of the right entitlement.
2) The cost of acquisition of right entitlement is always taken as zero.
3) The capital gain is always taken as the short term capital gain.
Conversion of debentures/bonds into shares:
1) Conversion not considered as transfer of the asset.
2) Cost of acquisition of bonds/debentures will become the cost of
acquisition of shares.
3) In order to determine whether shares are long-term or short-term capital
asset, the time period of holding the shares shall be counted right from the
allotment of shares.
4) The indexation benefit is available from the allotment of shares.
Demat securities:
- The cost of acquisition and period of holding any security in Demat form
shall be determined on the basis of first-in-first-out (FIFO) method
Insurance Compensation:
1) Taxable in the year of receipt.
2) The amount of compensation will be taken as full value of consideration.
3) This rule is applicable only when the insurance compensation is received
in lieu of damage to the capital assets occurred because of the following;
(i)- Cyclone, hurricane, earthquake, flood or other convulsion of nature.
(ii)- Any riot or civil disturbance.
(iii)- Accidental fire explosion.
(iv)- Action by an enemy or action taken in combating an enemy.
Note: if insurance compensation is received with regard of a capital asset
because of any other reason apart from stated above, then it shall not be
taxable.
Transfer of Sweat Equity shares:
1) If shares are allotted during 1999-2000 or on or after 1 April 2009, cost
of acquisition is the market value on the date of exercise of option.
2) If shares are allotted during 1 April 2007 and 31 March 2009, then cost
of acquisition is the fair market value on the date of vesting of option.
3) If shares are allotted before 1 April 2007 (not being during 1999-2000),
the amount actually paid by the employee will be the cost of acquisition.
Conversion of Firm into Company: [Exempted U/S 47(xiii)]
The transfer of capital assets in case of conversion of a firm into company is
exempted from tax, if the following conditions are satisfied;
1) All the assets and liabilities of the firm immediately before succession
become the assets and liabilities of the company.
2) All the partners of the firm immediately before succession become the
shareholders of the company in the same proportion in which their capital
accounts stood on the date of succession.
3) The partners of the firm do not receive any consideration or any other
benefit directly or indirectly in any form whatsoever other than by way of
allotment of shares in the company.
4) The aggregate of the shareholding of the partners in the company is not
less than 50 % of the total voting power in the company and their
shareholding continues successively up to 5 years from the date of
succession.
Transfer in case of Buy-back of shares:
1) If shares are Listed; Capital gain whether short-term or long-term is
calculated in the hands of shareholder and shareholder is liable to pay the
tax.
2) If shares are Unlisted;
(i)- Capital gain is exempted in the hands of shareholder.
(ii)- The company which buy-backs its own shares is liable to pay the
tax (at the rate of 20% + SC + EC + SHEC) on ‘distribution
income’ U/S 115QA.
‘Distribution Income purpose is the amount paid by the company
at the time of Buy-back less amounts received at the time of
allotment of shares.
Transfer of Land and Building: [ U/S 50C]
- If the sale consideration is less than the assessed value assed by the
stamp duty authority for the purpose of collecting stamp duty, stamp
value shall be taken as full value of consideration.
- The transferor before the stamp duty authority can challenge the stamp
duty valuation if not satisfied.
If the consideration as a result of transfer is not determinable (U/S 50D):
- Then fair market value of the asset on the date of transfer is taken as full
value of consideration.
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Capital Gain in case of Slump sales: [Exempted U/S 50B]
1) Any profits or gains arising from the slump sale affected in the previous
year shall be chargeable as long term capital gains and deemed to be the
income of the previous year in which the transfer took place.
But, if the capital asset being one or more undertakings owned and held by
the assessee for more than 36 months is transferred under the slump sale,
then capital gain shall be deemed as short term capital gain.
2) The benefit of Indexation shall not be available.
3) In case the capital asset being one or more undertaking, then the ‘net worth’
of the undertaking shall be taken as the cost of acquisition and the cost of
improvement.
Net worth in this regard will be the aggregate value of the total assets of the
undertaking or division reduced by the value of liabilities as appearing in
the books of accounts. It should be noted that no change shall be
incorporated in case of revaluation of assets while computing the net worth.
In case of depreciable assets, the aggregate value of total assets of such
undertaking shall be the written down value of the block of assets and book
value for all other assets.
4) If net worth is negative, then it is taken as equal to zero an d sale
consideration will become capital gain.
1. Exemption U/S 54
Type of assessee An individual or HUF
Type of asset eligible for A residential house property (long term)
Exemption
Type of asset to be acquired Only one residential house property situated in
for claiming the exemption India
Purchase of another house within one year or
Time limit for acquiring the two years after the sale
new asset Construction of another house within three
years after the sale.
Limit of Exemption Investment in the new asset or capital gain ,
whichever is lower.
The new asset should not be transferred within 3
years from the date of acquisition.
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2. Exemption U/S 54 B
Type of assessee An individual or HUF
Agriculture land if used for agricultural purpose
Type of asset eligible for
during at least 2 years immediately prior to
Exemption
transfer.
Type of asset to be acquired Agricultural land (urban or rural)
for claiming the exemption
Time limit for acquiring the 2 years after the sale
new asset
Limit of Exemption Investment in the new asset or capital gain,
whichever is lower.
The new asset should not be transferred within 3
years from the date of acquisition of new asset.
3. Exemption U/S 54D
Type of assessee Any Taxpayer
Land or building forming the part of an
industrial undertaking which is compulsorily
Type of asset eligible for
acquired by the Govt.
Exemption
used for the industrial purposes during 2 years
prior to its acquisition
Type of asset to be acquired Land or building for industrial purposes
for claiming the exemption
Time limit for acquiring the 3 years after the sale
new asset
Limit of Exemption Investment in the new asset or capital gain,
whichever is lower.
The new asset should not be transferred within 3
years from the date of acquisition of new asset.
4. Exemption U/S 54EC
Type of assessee Any Taxpayer
Type of asset eligible for Any long term capital asset sold or transferred
Exemption after March 31, 2000
Bond of National Highways Authority of India
(NHAI) or Rural Electrification Corporation
(REC).
Type of asset to be acquired Maximum limit of investment in 1 financial year
for claiming the exemption is Rs. 50 lakh, however, the investment made in
the above stated bonds from the capital gains
arising from transfer of one or more original
assets should not exceed Rs. 50 lakh.
Time limit for acquiring the 6 months after the sale
new asset
Limit of Exemption Investment in the new asset or capital gain,
whichever is lower.
The new asset should not be transferred within 3
years from the date of acquisition of new asset.
The new asset should not be converted into
money or loan or any advance should not be
taken on the security within 3 years from the date
of acquisition of the asset.
5. Exemption U/S 54 F
Type of assessee An individual or HUF
Type of asset eligible for Any long term capital asset (other than a
Exemption residential house property.
Type of asset to be acquired one residential house property situated in India
for claiming the exemption
Time limit for acquiring the purchase; 1 year backward or 2 years forward
new asset construction; 3 years forward
Limit of Exemption Investment in the new asset ÷ (Net sales
consideration × capital gain.
The new asset should not be transferred within 3
years from the date of acquisition of new asset.
6. Exemption U/S 54G
Type of assessee Any Taxpayer
Land, building, plant or machinery transferred
Type of asset eligible for
in order to shift an industrial undertaking from
Exemption
urban area to rural area.
Land, building, plant or machinery in order to
Type of asset to be acquired
shift an industrial undertaking from urban area
for claiming the exemption
to rural area.
Time limit for acquiring the 1 year before or 2 years after sale.
new asset
Limit of Exemption The difference between capital gain and cost of
new asset is taxable u/s 45.
If capital gain is less than cost of new asset,
then it is fully exempted..
7. Exemption U/S 54GA
Type of assessee Any Taxpayer
Land, building, plant or machinery transferred
Type of asset eligible for
in order to shift an industrial undertaking from
Exemption
urban area to any special economic zone (SEZ).
Land, building, plant or machinery in order to
Type of asset to be acquired
shift an industrial undertaking to any special
for claiming the exemption
economic zone (SEZ).
Time limit for acquiring the 1 year before or 3 years after sale
new asset
Limit of Exemption Investment in the new asset or capital gain,
whichever is lower.
The new asset should not be transferred within 3
years from the date of acquisition of new asset
Continue
8. Exemption U/S 54GB
“Income from other sources” is the fifth and last head of income included while
computing the gross total income of an assessee.
Section 56, 57, 58 and 59 of the Income Tax Act deal with the computation of
income under this head.
According to section 56 (1), every kind of income which is included in the total
income under this Act and which is not charged to tax under any first four heads
specified in section 14 is chargeable to income-tax under the head “ Income from
Other Sources”.
There are two types of income included in this head;
(I) General Incomes covered under section 56(1), and
(II) Specific Incomes covered under section 56(2).
Both general and specific incomes fall under the head of Income from other sources.
While computing the income under the ‘Income from other sources’, certain
deductions are allowed up to certain extent as per section 57 of the Act which
are as:
1. Deduction in case of Dividends and interest on securities: deduction will be
allowed in case of any amount spent by way of providing commission or
remuneration to a banker or any other person as bank charges for realizing the
dividend or interest on securities.
2. Deductions for Repairs, Depreciations in case of letting of machinery, plant
or furniture with or without building;
(i)- Expenditure incurred on current repairs of building, plant, machinery,
furniture.
(ii)- Insurance premium paid of all these assets.
(iii)- Depreciation on plant, machinery and furniture
(iv)- Depreciation on building, provided assessee is the owner. Deduction
will not be allowed if assessee is lessee or mortgagee in possession of
the building.
3. Standard Deduction out of Family Pension: [U/S 57(iia)], If regular monthly
pension is paid by the employer to the legal heirs of the deceased employee. A
deduction is allowed up to the amount equal to 331/3 % of such pension or Rs.
15,000whichever is less.
4. Deduction with regard to the employee’s contribution in staff welfare
scheme. [U/S 57(ia)], amount received by the employer from the employees
as contribution of provident fund, E.S.I fund or superannuation fund is
considered as deemed income if not taxable under the head ‘Profits and gains of
business or profession’.
If employer deposits such amount in these funds before prescribed due date,
then such amount is allowed as deduction.
5. Deduction allowed from royalties received by authors except film writers;
Actual expenditure incurred can be claimed for deduction.
6. Interest on compensation or enhanced compensation; if assessee has
received interest on commission or enhanced commission, then a deduction up
to 50 % of such income is allowed as deduction.
7. Other Deductions [U/S 57(iii)], Any expenditure which is spent to earn
income chargeable to tax under this head is allowable as deduction from such
income.
No TDS for Certain Incomes
- Following are the type of incomes under the head ‘income from other sources’
on which tax cannot be deducted at source ;
1) Incase winning from bettings.
2) Interest on Govt. securities.
3) Deemed dividend under section 2(22) (c).
4) Interest on any security under section 193.
5) Interest paid to an individual or HUF in account payee cheque for an
amount not exceeding Rs.5000 by certain companies.
6) Winning from lotteries, puzzles, card games and games of other sort up to
Rs. 10,000.
7) Winning from races up to amount Rs. 5,000.
8) Bank interest on Fixed deposit credited up to Rs. 10,000.
- Different Rates of TDS Prevailing for Individuals, HUF, Association of
Persons with no Surcharge.
Income tax is levied on the total income of previous year of an assessee. Hence it is necessary to
ascertain the total income by aggregating the income of different heads. An assessee may have
both positive income and negative income (loss). The department of income tax have given relief
to assessees that if there is loss from one head of income it can be set off from other heads of
income. But if a loss cannot be set off in the same assessment year it can be forward and set off
in future against income of that year. Therefore the topic is divided into two headings namely: i)
set-off of losses; and ii) carry forward and set off losses.
A. Set-off of Losses: A loss can be set-off primarily within the same head and if it still
remains unadjusted it can be set off from other heads of income. It has been divided into
following two types:
1. Set-off of loss from one source against income from another source within the
same head of income. (sec.70). The general rule is that loss from one source can be
set-off from another source falling under the same head of income. For example, an
assessee is running two businesses A and B. There is a profit of Rs 200,000 in
business A whereas there is a loss of Rs. 100,000 in business B. The assessee can set-
off loss from business B with the income of business A and his total income will be
Rs 100,000.
However are six exceptions to the rule that a loss can be set-off against any other
income under the same head.
Loss from speculation business cannot be set off against income from other sources.
This loss can be set off only against income from another speculation business.
Loss of specified business under section 35AD cannot be set off against income from
other business. This loss can be set off only against income from other specified
business.
Long term capital loss cannot be set off against short term capital gain. This loss can
be set off only against long term capital gain.
Loss from the activity of owning and maintaining race horses shall be set off against
income from owning and maintaining race horses only and not against any other
income under the head other sources.
Loss in respect of casual income falling under section 56(2)(ib), viz, lottery,
gambling, betting, winning from races (including horse races) cannot be set-off
against any income falling under head other sources. In fact, such a loss can’t be set-
off at all.
Loss from an exempted source can’t be set-off from a source of income which is
taxable. For example, agriculture income can’t be set-off from non agriculture
income.
2. Set-off of loss of one head against the income of another head in the same
assessment year, i.e., inter-head set-off:
The general rule is that loss under one head of income can be adjusted against
income under another head. However, there are certain exceptions to this rule as:
Where the net result of the computation under any head of income (other than
‘Capital Gains’) is a loss, the assessee can set-off such loss against his income
assessable for that assessment year under any other head, including ‘Capital Gains’.
Where the net result of the computation under the head “Profits and gains of business
or profession” is a loss, such loss cannot be set off against income under the head
“Salaries”.
Where the net result of computation under the head ‘Capital Gains’ is a loss, such
capital loss cannot be set-off against income under any other head.
Speculation loss and loss from the activity of owning and maintaining race horses
cannot be set off against income under any other head.
B. Carry forward and set off of losses
If it is not possible to set off the losses during the same assessment year in which they
occurred, so much of the loss as the assessee has not been able to set off out of the
following losses can be carried forward for being set off against his income in the
succeeding years provided the losses have been determined in pursuance of a return filed
by the assessee within the time allowed u/s 139(i) and it is the same assessee who
sustained the loss.
Loss under the head income form house property: Any loss under this head can
be carried forward up to 8 assessment years immediately following the assessment
year for which the loss was first computed and set off from the same head.
Loss of non speculation business or profession: Any non-speculation business loss
can be carried forward up to 8 assessment years immediately following the
assessment year for which the loss was first computed and set off against any income
falling under the business or profession.
Loss of speculation business: Any speculation business loss can be carried forward
up to 4 assessment years immediately following the assessment year for which the
loss was first computed and set off against the profit of any speculation business
carried on by assessee.
Loss of specified business: No limit is prescribed by the Act which means it can be
carried forward till it is set off. But loss can be set-off against prom any specified
business carried on by assessee.
Short term capital loss or long term capital loss: Any loss under this can be carried
forward up to 8 assessment years immediately following the assessment year for
which the loss was first computed.
Mode of set-off: A brought forward long term capital loss can be set-off against long
term capital gain while as brought forward short term capital loss can be set off
against any capital gain.
Loss from activity of owning and maintaining race horses: such loss can be
carried forward up to 4 assessment years and can be set off against income from
owning and maintaining of horses.
With effect from AY 2003-04, unadjusted depreciation can be carried forward till it is fully
adjusted from any income during the succeeding previous years. It shall be treated as
depreciation of succeeding previous years. In case there is carry forward business loss as well as
carry forward unabsorbed depreciation, then the following order should be followed for set off
Firstly current depreciation secondly brought forward business loss and thirdly brought
forward unabsorbed depreciation.
Chapter 12- Deductions to be made from Gross Total Income
The deduction from gross total income is available only where the gross total income is positive.
If however income is negative, the question of any deduction does not arise. Section 80A to 80 U
of the Income-tax Act lays down the provisions relating to the deductions available to assessees
from their gross total income.
The aggregate amount of deduction available u/s 80C, 80CCC and 80CCD shall not in any case
exceed Rs. 1,50,000.
A-4. deduction in respect of investment made under any notified saving scheme (80CCG)
A-8. Deduction in respect of donations to certain funds, charitable institutions etc. (80G):
Any sum contributed by an Indian Company, other than cash, in the previous year to any
political party or to an electoral trust shall be allowed as deduction while computing its
total income.
Any sum contributed by an assessee, other than cash, in the previous year to any political
party or to an electoral trust except local authority and every artificial juridical person
wholly or partly funded by the government shall be allowed as deduction while
computing its total income.
B. Deduction in respect of certain incomes
B-1. Deduction in respect of profits and gains from industrial undertakings or enterprise engaged
in infrastructure development (section 80-IA).
Where gross total income of assessee includes any profits and gains derived by an
undertaking or an enterprise from any eligible business, a deduction shall be allowed to
stated percentage of profit and gains from such business for stated number of years.
1. Undertaking engaged in providing infra structure facility (80IA(40(i))
Eligible business: developing, operating and maintaining or developing operating ang
maintaining infrastructure facility.
Form of organisation: industrial undertaking owned by a company registered in india
or by a consortium of such companies.
Rate of deduction: @100% of profits of such eligible business.
Commencement of operation: on or after 1-4-1995
Period of deduction: 10 years out of 20 years (out of 15 years in case of ports airport
etc)beginning with the year in which undertakings develops such infrastructural
facility.
2. Telecommunication services (80IA(4)(ii))
Eligible business: telecommunication services, radio paging, domestic satellite
services, network of trunking, broadband network and internet services.
Form of organisation: all enterprises whether corporate or not.
Commencement of operation: on or after 1-4-1995 but on or before31-3-2005.
Rate of deduction: 100% of profits and gains from such business for first 5
consecutive AY’s out of first 15 years.
3. Industrial Park (80IA(4)(iii))
c
4. Power Sector (80IA(4)(iv))
Eligible business: generation of power; or generation and distribution of power; or
transmission or distribution by laying a network of new transmission; or undertaking
substantial renovation and modernisation of the existing transmission or distribution
lines.
Form of organisation: all enterprises whether corporate or not.
Commencement of operation: after 1-4-1993 to 31-3-20017.
Rate of deduction: 100% of profits and gains from such business for any 10
consecutive AY’s out of first 15 years beginning from the year in which undertaking
starts operation.
5. Undertaking setup for reconstruction or revival of power generating plant
(80IA(4)(v))
Eligible business: reconstruction or revival of power generating plant.
Form of organisation: Indian Co.
Commencement of operation: before 31-3-20017.
Rate of deduction: 100% of profits and gains from such business for any 10
consecutive AY’s out of first 15 years beginning from the year in which undertaking
starts operation.
B-2. Deduction in respect of profits and gains from certain industrial undertakings other than
infra structure development undertakings (section 80-IB).
The deduction under section 80-IB is available to an assessee whose gross total income
includes profits and gains derived from the following business. **for details refer to bare
Act.
B-3. Special provision in respect of certain undertakings or enterprises in certain special category
states (section 80-IC). **for details refer to bare Act.
GTI should include should include profits and gains derived from manufacture of goods
in factory.
Amount of deduction: 30% of additional wages paid to new regular workmen employed
by the assessee in the previous year for three assessment years including the assessment
year relevant to the previous year in which such employment is provided.
Additional wages means the wages paid to new regular workman in excess of 100
workmen employed during the previous year.
However in case of an existing factory additional wages shall be nil if the increase in the
number of regular workmen employed during the year is less than 10% of the existing
number of workmen employed in such factory as on the last day of the preceding year.
B-5. Deduction in respect of royalty income etc., of authors of certain books other than text
books (80QQB).
Amount of deduction: the gross total income of assessee pertaining to the previous year
includes royalty or the copyright fees, there shall, in accordance with and subject to the
provisions of this section, be allowed a deduction of 100% of such income or Rs.
300,000, whichever is less.
(b) a patentee;
(c) in receipt of any income by way of royalty in respect of a patent registered on or after
the 1st day of April, 2003 under the Patents Act, 1970, and
his gross total income of the previous year includes royalty, there shall, in accordance
with and subject to the provisions of this section, be allowed a deduction of 100% of such
income or Rs 300,000, whichever is less.
(b) a co-operative society engaged in carrying on the business of banking (including a co-
operative land mortgage bank or a co-operative land development bank); or
(c) a Post Office as defined in clause (k) of section 2 of the Indian Post Office Act, 1898.
Individual includes both male and female assessees. The total income has to be computed as per
the provisions of the Income-tax Act, 1961. In addition to individuals own income, income of
other persons received by him in some other capacity or received by other persons is to be
clubbed with individual assesses income. An individual may have income under any or all of the
heads of income.
1. As a member of HUF: Exempted u/s 10(2). But where an individual converts his
individual property into common pool of HUF of which he is a member, income from
such property shall be included in his individual income.
2. Income received as share from AOP. Share from AOP is treated as:
If the individual income of all partners does not exceed the exempted first income slab,
then share from such AOP is to fully added. However, if the individual income of any
partner exceeds the first exempted income slab, then share from such AOP is not to be
added in the income of the individual.
3. As a partner of firm assessed as firm u/s 184. Exempted
But remuneration and interest on capital received is taxable under the head profits and
gains to the extent it is allowed as deduction to the firm.
4. As a partner of firm assessed as firm u/s 185. Exempted
But remuneration and interest on capital received from such firm is also exempted.
5. As a share holder of a company. Exempted
The following incomes although accruing to other persons are included in the income of
individual assessee:
The final figures of income or loss under each head of income, after allowing the deductions,
allowances and other adjustments, are then aggregated, after giving effect to the provisions
for clubbing of income and set-off and carry forward of losses, to arrive at the gross total
income.
There are deductions prescribed from gross total income. The allowable deductions in case of
an individual are deductions under sections 80C, 80CCC, 80CCD, 80CCF, 80D, 80DD,
80DDB, 80E, 80G, 80GG, 80GGA, 80GGC, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID,80-IE,
80JJA, 80QQB, 80RRB, 80TTA and 80U. These deductions are allowed as per the rules
prescribed in the incometax act.
After computing the total income, nest step is to compute the tax liability. The following
steps are to be followed:
Constitutional Provisions:
Corporate tax means any tax on income, so far as that tax is payable by companies and is a tax in
case the following conditions are fulfilled:
(a) that it is not chargeable in respect of agricultural income;
(b) that no deduction in respect of tax paid by companies is by any enactments which may apply
to the tax authorised to be made from dividends payable by the companies to individuals;
(c) that no provision exists for taking the tax so paid into account for computing for the purposes
of Indian income tax, the total income of individuals receiving such dividends, or in computing
the Indian income tax payable by, or refundable to, such individuals.
Categories of companies under the Income-tax Act, 1961
1. Indian company
2. Domestic company
3. Foreign company
4. Widely held company
5. Closely held company
6. Company in which public are substantially interested
1. Head wise calculation: the income of a company is computed under all the heads of
income except under the head salaries under various provisions of the Act.
2. Agriculture income of a company: it is totally exempted u/s10 (1). Even there is no
integration of agriculture income.
3. Set off and carry forward of losses: set off and carry forward of losses is done under
relevant provisions of Act.
4. Deductions out of GTI: A company can claim deductions u/s 80G, 80GGA, 80GGC,
80IA, 80IB, 80IC, 80ID, 80IE and 80JJA.
5. Rates of tax
i. On STCG on shares covered under STT @15%
ii. On LTCG @20%
iii. On income from units purchased in foreign exchange @10%
iv. On casual income @30%
v. On dividend received from specified foreign subsidiary company @15%
vi. On any other income @30%
vii. On profits declared, paid or distributed as dividend u/s115O @15%.
CHAPTER 16 - VALUE ADDED TAX
The Value Added Tax (VAT) in India is a state level multi-point tax on value addition which is
collected at different stages of sale with a provision for set-off for tax paid at the previous stage
i.e., tax paid on inputs. It is to be levied as a proportion of the value added (i.e. sales minus
purchase) which equivalent is to wages plus interest, other costs and profits. It is a tax on the
value added and can be aptly defined as one of the ideal forms of consumption taxation since the
value added by a firm represents the difference between its receipts and cost of purchased
inputs. Value Added Tax is commonly referred to as a method of taxation whereby the tax is
levied on the value added at each stage of the production/distribution chain.
Advantages of VAT
To encourage and result in a better-administered system;
To eliminate avenues of tax evasion;
To avoid under valuation at all stages of production and distribution;
To claim credit on tax paid on inputs at each stage of value addition;
Do away with cascading effect resulting in non distortion of the business decisions;
Permits easy and effective targeting of tax rates as a result of which the exports can be
zero-rated;
Ensures better tax compliance by generating a trail of invoices that supports effective
audit and enforcement strategies;
Contribution to fiscal consolidation for the country. As a steady source of revenue, it
shall reduce the debt burden in due course;
To help our country to integrate better in the WTO regime;
To stop the unhealthy tax-rate war and trade diversion among the States, which had
adversely affected the interests of all the States in the past.
Features of VAT
VAT can be computed by using any of the three methods detailed below:
1. The Subtraction method: Under this method the tax rate is applied to the difference
between the value of output and the cost of input;
2. The Addition method: Under this method value added is computed by adding all the
payments that are payable to the factors of production (viz., wages, salaries, interest
payments, etc.);
3. Tax Credit method: Under this method, it entails set-off of the tax paid on inputs from
tax collected on sales. Indian States opted for tax credit method, which is similar to
CENVAT.
Procedure of VAT
The VAT is based on the value addition to the goods and the related VAT liability of the
dealer is calculated by:
Deduct input tax credit from tax collected on sales during the payment period.
This input tax credit is given for both manufacturers and traders for purchase of
input/supplies meant for both sales within the State as well as to the other States
irrespective of their date of utilization or sale.
If the tax credit exceeds the tax payable on sales in a month, the excess credit will be
carried over to the end of the next financial year.
If there is any excess unadjusted input tax credit at the end of the second year then the
same will be eligible for refund.
For all exports made out of the country, tax paid within the State will be refunded in
full.
Tax paid on inputs procured from other States through inter-State sale and stock
transfer shall not be eligible for credit.
VAT has been introduced by 30 States / UTs. However, Central Sales Tax will
continue to govern inter-State Sales and Exports.