Income Tax AY 18-19 Vol I PDF

INCOME TAX
VOLUME I
AY 2018-19
CA Raj K Agrawal
All India CA Rank Holder
© All rights reserved
CA. Raj K Agrawal
Every effort has been made to present this publication in the most authentic form without any
errors and omissions. In spite of this errors might have inadvertently crept in, or there may be a
difference of opinion on certain points. Any mistake, error or discrepancy noted may be kindly
brought to the notice of the Author, which shall be dealt with suitably. It is notified that the Author
does not guarantee the accuracy or completeness of any information published herein, and will not
be responsible for any damage or loss, of any kind, in any manner, arising out of use of this
information.
No Part of this publication may be reproduced or copied in any form or translated in any other
language without prior written permission of the Author.
About the Book
I am pleased to commend to readers the Revised Edition of Taxation, which has been
revised and enlarged as per law applicable for AY 2018-19. It is a comprehensive
presentation of the subject matter in a lucid form understandable to the students. The
book also contains solved problems from key professional and academic
examinations. These will help students to maintain a meaningful focus on examination
requirements.
The book is intended to serve as a standard text for students pursuing their CA-
Intermediate, CS-Executive, CMA-Intermediate, BBA, B.Com, B.Com (Hons) and
many more Professional Courses.
The following are the main features of the book:
• Simple Language
• Chart expressions
• Self-explanatory notes
• Illustrations
• Solved and Unsolved practical problems.
I hope this edition will endear itself to students and peers. I welcome comments and
suggestions for improving the utility of this book.
CA. Raj K Agrawal

Index
S. No. Topics Page No.
1 Basic Concepts 1 - 21
2 Residential Status 22 - 38
3 Exempt Income 39 - 49
4 Salary 50 - 112
5 House Property 113 - 151
6 Profits & Gains from Business or Profession 152 - 220
1 BASIC CONCEPTS
Tax is a financial burden imposed by Government on a Person
Tax
Direct Tax Indirect Tax
GST
Income Tax
Custom
Miscellaneous
other Taxes
Income Tax Law
Comprises of the following:
• Income Tax Act, 1961

• Income Tax Rules, 1962
• Government Notification
• Finance Act - Annual
• Circular & Clarification of CBDT
• Judicial Decision
2 INCOME TAX
Income-tax Act, The Income-Tax Act, 1961 is the charging Statute of Income Tax in
1961 India. It provides for levy, administration, collection and recovery of
Income Tax. The Income Tax Act is the most complex statute in
India. But this is soon to change.
Income Tax CBDT is empowered to frame rules from time to time to carry out
Rules, 1962 the purpose and proper administration of the Act. All forms,
procedures and principles of valuation of perquisites prescribed
under the Act are provided in the Rules framed by CBDT.
Government Notification issued by Central/ State Government from time to time
Notifications to deal with provisions of Income Tax.
Finance Act The Finance Minister presents the Finance Bill in both houses of
(Annual) Parliament. Part A of the Budget contains proposed policies of the
Government in fiscal areas and Part B contains the detailed tax
proposals. Once the Finance Bill is approved by the parliament and
gets the assent of the President, it becomes the Finance Act.
Circulars & CBDT issues Circulars and Notifications from time to time, these
Clarification of Circulars clarify doubts regarding the scope and meaning of the
CBDT various provisions of the Act. These Circulars are binding on
Assessing Officers but not on assesses and Courts and are issued by
the CBDT which shall not be contrary to the provisions of the Act.
Judicial Decision The decision of High Court is applicable to respective state while
decisions of Supreme Court becomes law and applies to all state
except Jammu and Kashmir.
Previous Year [Sec. 3]

The Financial Year in which income is earned is known as previous year. It is of 12 months
period commencing from April 1 and ending on March 31 of the next year. It can be of less
than 12 months in case of:
Starting with the date of commencement of

Newly set-up business or
business or profession
profession
Ending with
31st March
New Source of Income Starting with date when income comes
into existence
Example:
1. A is running a business from 2015 onwards. Determine the previous year for the
Assessment Year 2018-19.
- The previous year will be 1.4.2017 to 31.3.2018.
BASIC CONCEPTS 3
2. A Chartered Accountant sets up his profession on 1st July, 2017. Determine the
previous year for the assessment year 2018-19.
- The previous year will be from 1.7.2017 to 31.3.2018.
Assessment Year [Sec. 2(9)]

The Financial Year in which income earned in the previous year is taxed is known as
Assessment Year. “Assessment Year” means the period of 12 months starting from April 1
and ending on March 31 of the next year. For instance, the Assessment Year 2018-19 which
will commence on April 1, 2018, will end on March 31, 2019.
Income of previous year of an assessee is taxed during the next following Assessment Year
at the rates prescribed by the relevant Finance Act.
Person [Sec. 2(31)]

The term “person” includes:
1. An Individual
2. A Hindu Undivided Family
3. A Company
4. A Firm and Limited Liability Partnership
5. An Association of Persons
6. A Body of Individuals
7. A Local Authority i.e. Gram Panchayat, Municipal Corporation.
8. Every Artificial Juridical Person (not falling within any of the preceding categories) i.e.
University, Temple.
Hindu Undivided Family Vs Hindu Coparcenary

Particulars HUF Hindu Coparcenary
1. Composition All persons lineally Only male members acquire
descended from a interest in joint coparcenary
common ancestor property, being sons, grandsons
including their wives and and great grandsons.
unmarried daughters.
2. Maximum number No upper limit. Limited to members within four
of degrees degrees inclusive of common
ancestor.
3. Size Wider body than Part of HUF
Coparcenary
4. Fluctuations in Size fluctuates by births, Size fluctuates by births, deaths
size deaths, marriage and and adoption.
adoption
4 INCOME TAX
Notes:
1. Jain Undivided family is to be assessed as HUF.
2. Different Schools of Hindu Law: There are two schools of Hindu Law i.e. Dayabhaga
School (applicable only in West Bengal & Assam) and Mitakshara (applicable in rest of
India).
3. No HUF in Kerala: There is no HUF status in the state of Kerala.
4. Members Share Exempt [Sec. 10(2)]: Share Income of Member of HUF from income
of the HUF is exempt subject to Section 64(2).
5. Share of married daughter and widow daughter: If a married daughter or widowed
daughter receives share from father’s family income, it is not exempt from Income Tax.
Assessee [Sec. 2(37)]

“Assessee” means:
1. A person by whom Income-Tax or any other sum of money (interest or penalty) is
payable under the Act.
2. Person in respect of whom any proceeding under the Act has been taken for the
assessment of his income or loss.
3. Person who is deemed to be assessee (person who is assessable in respect of income or
loss of another person).
4. Person who is deemed to be an assessee in default.
(a) Fails to comply with the provision of TDS
(b) Fails to pay advance tax
Deemed Assessee
Deemed Assessee means a person who is treated as an assessee under the Income Tax Act.
This would include –
1. Trustee of a trust,
2. Legal representative of a deceased person u/s 159,
3. Representative Assessee of a Non-Resident u/s 160(2) (Agent of a Non-Resident),
4. Legal Guardian or manager entitled to receive the income on behalf of a Minor, Lunatic
or Idiot, Court of Wards/ Official Trustee/ Receiver entitled to receive Income on behalf
of any other person.
India [Sec. 2(25A)]

The term India means-
1. The territory of India as per Article 1 of the Constitution,
2. Its Territorial waters, seabed and subsoil underlying such waters,
3. Continental shelf,
4. Exclusive Economic Zone, or
5. Any other specified Maritime Zone and the air space above its territory and Territorial
waters.
BASIC CONCEPTS 5
Income for Income-Tax Purpose

1. Tainted/ Illegal Income: Income is income, though tainted. For purposes of Income-
Tax, there is no difference between legal and tainted income. Even illegal income is
taxed just like any legal income.
2. Disputed Income: Any dispute regarding the title of the income cannot hold up the
assessment of the income in the hands of the recipient. The recipient is, therefore,
chargeable to tax though there may be rival claims to the source of the income.
3. Pin Money: Pin money received by a woman for her dress or private expenditure as
also small savings effected by a housewife out of moneys given to her by her husband
for running the expenses of the kitchen would not be income in the eyes of the law. Any
property acquired with the aid of such money or savings would form a capital asset
belonging to the lady.
4. Income must come from outside: A person cannot earn income from himself. In case
of mutual activities, where some people contribute to the common fund and are
entitled to participate in the fund and a surplus arises which is distributed to the
contributors of the fund, such surplus cannot be called income.
5. The income, which has in any preceding year been included in the total income of a
person on accrual basis, shall not again be included on its receipt by him in India during
the previous year.
6. Any income is to be included in the total income only if it is taxable as per the
provisions of the Income-Tax Act and shall be computed as per the provisions of the
Act. Exempt income shall not form part of total income.
7. Income in cash or in kind: Income is taxable whether it is received in cash or in kind.

Where income is received in kind, its value should be determined as per the provisions
of the Income-Tax Act for purpose of inclusion in the taxable income.
6 INCOME TAX
Computation of Total Income
Determination of residential status
Classification of Income under 5 heads
Salary Income from Profits and gains Capital Income from

house property of business or gains other
profession sources
Aggregation of income
Application of clubbing provisions
Set-off/carry forward and set-off of losses
Gross Total Income
Deductions under chapter VI A
Total Income
Method of Accounting for Heads of Income

Heads of Income Relevance of Method of Accounting
Chapter IV-A Taxable on due basis or on receipt basis, whichever is earlier.
Salaries (Sec. 15-17)
Chapter IV-C Income from house property is taxable only on accrual basis.
House Property (Sec. 22-
27)
BASIC CONCEPTS 7
Chapter IV-D Cash or Mercantile system of accounting regularly employed

Business or Profession by the assessee.
Income
(Sec. 28-44DB)
Chapter IV-E Taxable during the previous year in which the Capital Asset is
Capital Gains (Sec. 45-55A) transferred (i.e.) year of accrual.
Chapter IV-F Cash or Mercantile system of accounting, regularly employed
Other Sources (Sec. 56-59) by the assessee.
Tax Rate [AY 2018-19]

1. For Resident Very Senior Citizen i.e. 80 years or more at any time during P.Y.
[Born before April 1, 1938]
Income Tax Rate
0 – 5,00,000 Nil
5,00,001 - 10,00,000 20%
More than 10,00,000 30%
2. For Resident Senior Citizen i.e. 60 years or more but less than 80 years at any
time during P.Y. [Born during April 1, 1938 and March 31, 1958]
Income Tax Rate
0 - 3,00,000 Nil
3,00,001 - 5,00,000 5%
5,00,001 - 10,00,000 20%
More than 10,00,000 30%
3. For Other Individual, HUF, AOP, BOI & AJP

Income Tax Rate
0 - 2,50,000 Nil
2,50,001 - 5,00,000 5%
5,00,001 - 10,00,000 20%
More than 10,00,000 30%
Other Individuals mean:

1. A male or female whether resident or non- resident below 60 years.
2. Non-resident very senior or senior citizen.
4. Firm & Limited Liability Partnership

Flat tax rate of 30%.
8 INCOME TAX
5. Domestic Company
Domestic Company Tax Rate
A domestic company set up and registered on or after 1st march 2016 25%
and engaged in the manufacture and production of any article or thing or
research relating thereto. Provided the total income of such company is
computed without claiming depreciation, deduction u/s 10AA or Chapter
VI-A (other than Sec. 80JJAA) or any other profit or investment linked
deduction. The option is to be exercised on or before the due date of
filling return of income and it cannot be subsequently withdrawn in any
previous year.
If the turnover / gross receipts of the company in the PY 2015-16 does 25%
not exceed ` 50 crore.
All other Domestic Company 30%
6. Foreign Company
Flat tax rate of 40%
Surcharge
Assessee Threshold Limit Rate of Surcharge
(If Total Income
Exceeds)
Individual/HUF/AOP/BOI/AJP 50 lakh 10%
Individual/HUF/AOP/BOI/AJP 1 Crore 15%
Firm/LLP 1 Crore 12%
Domestic Company 1 Crore 7%
Domestic Company 10 Crore 12%
Foreign Company 1 Crore 2%
Foreign Company 10 Crore 5%
Rebate [Sec. 87A]

A resident individual having total income upto ` 3,50,000 shall be eligible for a rebate of
` 2,500, restricted to the amount of tax payable by him. Rebate u/s 87A not available to any
other assessee. This rebate is available before charging cess.
Education Cess: For all the above assessees @ 2% of Total Tax Payable.
Secondary Higher Education Cess: For all the above assessees @ 1% of Total Tax Payable.
Rounding off of Income [Sec. 288A]

Taxable income is rounded off to the nearest multiple of ` 10.
For Instance: 1. If the taxable income is ` 4,65,294.95 then the income shall be taken as
`4,65,290.
BASIC CONCEPTS 9
2. If income is ` 4,65,495, it shall be taken as ` 4,65,500.
Rounding off of Tax [Sec. 288B]

Tax payable or the refund due shall be rounded off to the nearest multiple of `10.
Special Rates of Income Tax

On Short-term Capital Gain Covered u/s 111A (Listed Share/ Unit) 15%
On Long-term Capital Gain (Listed Share/ Unit) Exempt
On Long-term Capital Gain covered by Proviso to Sec. 112 (Listed Bond/
Debenture) 10%
On Long-term Capital Gain covered u/s 112 (Other Capital Asset) 20%
On Winning of Lotteries, Crossword Puzzles, Card Game, Races etc u/s 115BB 30%
Illustration 1: Mrs. X is non-resident in India for the Assessment Year 2018-19. For the
previous year 2017-18, her income chargeable to tax in India is ` 8,30,000. Find out tax
liability.
Solution: In the case of a non-resident exemption limit is ` 2,50,000.
Taxable Income 8,30,000
Calculation of Tax on it
On first ` 2,50,000 Nil
` 2,50,001 - ` 5,00,000 @ 5% 12,500
`5,00,001 - ` 8,30,000 @ 20% 66,000
78,500
+ EC @ 2% 1,570
+ SHEC @ 1% 785
Tax Payable 80,855
Tax Payable (Rounded off u/s 288B 80,860
Illustration 2: Mr. X is resident in India for the Assessment Year 2018-19. For the previous
year 2017-18, his income chargeable to tax in India is ` 4,30,000. Find out tax liability.
Solution: In the case of a resident individual exemption limit is ` 2,50,000.
` 2,50,001 - ` 4,30,000 @ 5% 9,000
9,000
+ EC @ 2% 180
+ SHEC @ 1% 90
Tax Payable 9,270
10 INCOME TAX
Illustration 3: Mr. Y is resident in India for the Assessment Year 2018-19. For the previous
year 2017-18, his income chargeable to tax in India is ` 2,65,000. Find out tax liability.
Solution: In the case of a resident individual exemption limit is ` 2,50,000.
` 2,50,001 - ` 2,65,000 @ 5% 750
750
(-) Rebate u/s 87A (` 5,000, subject to maximum of tax payable) 750
Tax Payable Nil
Illustration 4: Calculate tax payable when Mr. X having income of ` 10,56,240 was born on
(i) 15th Jan, 1938 (ii) 15th Jan, 1939.
Solution: (i)
` 5,00,001 - ` 10,00,000 @ 20% 1,00,000
` 10,00,001 - ` 10,56,240 @ 30% 16,872
1,16,872
+ EC @ 2% 2,337
+ SHEC @ 1% 1,169
Tax Payable 1,20,378
Tax Payable (rounded off u/s 288B) 1,20,380
(ii)
` 3,00,001 - ` 5,00,000 @ 5% 10,000
` 5,00,001 - ` 10,00,000 @ 20% 1,00,000
` 10,00,000 - ` 10,56,240 @ 30% 16,872
1,26,872
+ EC @ 2% 2,537
+ SHEC @ 1% 1,269
Illustration 5: Mrs. X is resident in India for the Assessment Year 2018-19. For the previous
year 2017-18, her income chargeable to tax in India is ` 15,54,810. Find out tax liability if
date of birth of Mrs. X is (a) March 31, 1958, or (b) April 5, 1958.
BASIC CONCEPTS 11
Solution: In case resident taxpayer is 60 years or more at any time during the previous
year, the exemption limit is ` 3,00,000.
Situation (a) Mrs. X is 60 years on March 31, 2018. Consequently, she becomes a senior
citizen for the assessment year 2018-19 and the exemption limit would be ` 3,00,000.

` 3,00,001 - ` 5,00,000 @ 5% 10,000
` 5,00,001 - ` 10,00,000 @ 20% 1,00,000
` 10,00,001 - ` 15,54,810 @ 30% 1,66,443
2,76,443
+ EC @ 2% 5,529
+ SHEC @ 1% 2,764
In Situation (b) However, when she is below 60 years on March 31, 2018, the exemption
limit is ` 2,50,000. Tax liability will be calculated as follows-

` 2,50,001 - ` 5,00,000 @ 5% 12,500
`5,00,001 - `10,00,000 @ 20% 1,00,000
` 10,00,000 - `15,54,810 @ 30% 1,66,443
2,78,943
+ EC @ 2% 5,579
+ SHEC @ 1% 2,789
Illustration 6: Taxable income is ` 5,78,668, calculate tax payable if:-

(i) Income earned by Mrs. Y, born on Aug 15, 1990.
(ii) Income earned by Mr. Y (Non-resident), born on Aug 15, 1950.
(iii) Income earned by Mrs. Y, born on Aug 15, 1929.
(iv) Income earned by Mrs. Y, born on Aug 15, 1951.
12 INCOME TAX
Solution:
(i)
Taxable Income (rounded off u/s 288A) 5,78,670
` 2,50,001 - ` 5,00,000 @ 5% 12,500
` 5,00,001 - ` 5,78,670 @ 20% 15,734
28,234
+ EC @ 2% 565
+ SHEC @ 1% 282
Tax Payable 29,081
Tax Payable (rounded off u/s 288B) 29,080
(ii)
` 2,50,001 - ` 5,00,000 @ 5% 12,500
` 5,00,001 - ` 5,78,670 @ 20% 15,734
28,234
+ EC @ 2% 565
+ SHEC @ 1% 282
Tax Payable 29,171
(iii)
` 5,00,001 - ` 5,78,670 @ 20% 15,734
15,734
+ EC @ 2% 315
+ SHEC @ 1% 157
Tax Payable 16,206
BASIC CONCEPTS 13
(iv)
` 3,00,001 - ` 5,00,000 @ 5% 10,000
` 5,00,001 - ` 5,78,670 @ 20% 15,734
25,734
+ EC @ 2% 515
+ SHEC @ 1% 257
Tax Payable 26,506
Illustration 7: Calculate tax payable on taxable income of ` 2,24,05,725 by

(i) Individual
(ii) Firm
(iii) Indian Company [Turnover > 50 Crore in PY 2015-16]
(iv) Indian Company [Turnover < 50 Crore in PY 2015-16]
Solution: Situation [i]

Taxable Income 2,24,05,725
Taxable Income (rounded off u/s 288A) 2,24,05,730
` 2,50,001 - ` 5,00,000 @ 5% 12,500
` 5,00,001 - ` 10,00,000 @ 20% 1,00,000
` 10,00,001 - ` 2,24,05,730 @ 30% 64,21,719
65,34,219
Surcharge @ 15% 9,80,133
75,14,352
+ EC @ 2% 1,50,287
+ SHEC @ 1% 75,144
Situation [ii]
Taxable Income (Rounded off u/s 288 A) 2,24,05,730
Tax on it @ 30% 67,21,719
+ Surcharge @ 12% 8,06,606
14 INCOME TAX
75,28,325
+EC @ 2% 1,50,567
+ SHEC @ 1% 75,283
Tax payable 77,54,175
Tax payable (rounded off u/s 288 B) 77,54,180
Situation [iii]
Tax on it @ 30% 67,21,719
+ Surcharge @ 7% 4,70,520
71,92,239
+EC @ 2% 1,43,845
+ SHEC @ 1% 71,922
Situation [iv]
Tax on it @ 25% 56,01,433
+ Surcharge @ 7% 3,92,100
59,93,533
+EC @ 2% 1,19,871
+ SHEC @ 1% 59,935
Illustration 8: Calculate tax payable by a foreign company having taxable income of

` 11,40,50,998.
Solution:
Tax on it @ 40% 4,56,20,400
+ Surcharge @ 5% 22,81,020
4,79,01,420
+ EC @ 2% 9,58,028
+ SHEC @ 1% 4,79,014
Tax Payable 4,93,38,462
Tax payable (rounded off u/s 288 B) 4,93,38,460
BASIC CONCEPTS 15
Marginal Relief
Marginal relief shall be allowed in all the cases to ensure that the additional amount of
Income-Tax payable including surcharge, on the excess of income over ` 1 crore is limited
to the amount by which the income is more than ` 1 crore.
Applicable in case of only those assessee having Total Income > ` 1 Crore
• Marginal Relief = Increase in Tax - Increase in Income [If it is Nil or Negative, No relief is
allowed]
• Education Cess & Secondary Higher Education Cess shall be applied only after
permitting Marginal Relief.
Illustration 9: X has total income of ` 1,00,60,000. Compute his tax liability for Assessment
Year 2018-19.
Solution:
`
Total Income 1,00,60,000
` 2,50,001 - ` 5,00,000 @ 5% 12,500
` 5,00,001 - ` 10,00,000 @ 20% 1,00,000
` 10,00,001 - ` 1,00,60,000 @ 30% 27,18,000
28,30,500
Add: Surcharge @ 15% 4,24,575
32,55,075
Less: Marginal Relief = (Increase in Tax - Increase in Income)

= (`32,55,075–`28,12,500) – (` 1,00,60,000 - ` 1,00,00,000)
= (` 4,42,575 – ` 60,000) 3,82,575
Tax before Education Cess 28,72,500
Add: Education Cess @ 2% 57,450
Secondary Higher Education Cess @ 1% 28,725
Tax Liability 29,58,675
Illustration 10: XY Traders, a firm, has total income of ` 1,00,60,000. Compute its tax
liability for Assessment Year 2018-19.
Solution:
`
Tax on ` 1,00,60,000 at flat rate @ 30% 30,18,000
16 INCOME TAX
33,80,160
= (` 33,80,160 – ` 30,00,000) – (` 1,00,60,000 - ` 1,00,00,000)
= (` 3,80,160 – ` 60,000) 3,20,160
Illustration 11: X Ltd., a domestic company, has gross total income of ` 1,01,25,000 and
deduction allowed u/c. VIA are ` 65,000. Compute tax liability for assessment year 2018-19.
Solution:
`
Gross Total Income 1,01,25,000
Less: Deductions u/s. 80C to 80U 65,000
Tax on ` 1,00,60,000 at flat rate @ 30% 30,18,000
32,29,260
= (`32,29,260–`30,00,000) – (`1,00,60,000 - ` 1,00,00,000)
= (` 2,29,260 – ` 60,000) 1,69,260
When income of Previous Year is not taxable in the immediately following

Assessment Year:
The rule that the income of the previous year is assessable as the income of the immediately
following Assessment Year has following exceptions:
(a) Income of non-resident from shipping;
(b) Income of persons leaving India either permanently or for a long period of time;
(c) Income of bodies formed for short duration;
(d) Income of a person trying to alienate his assets with a view to avoiding payment of tax;
(e) Income of a discontinued business.
In these cases, income of a previous year may be taxed as the income of the Assessment
Year immediately preceding the normal Assessment Year. These exceptions have been
incorporated in order to ensure smooth collection of income-tax from the aforesaid
BASIC CONCEPTS 17
taxpayers who may not be traceable if tax assessment procedure is postponed till the
commencement of the normal assessment.
Previous Year for undisclosed sources of income

1. Cash Credit [Sec. 68]
Where any sum is found credited in the books of an assessee maintained for any
previous year and the assessee offers no explanation about the nature and source
thereof or the explanation offered by him is not, in the opinion of the Assessing Officer,
satisfactory, the sum so credited may be charged to Income-Tax as the income of the
assessee of that previous year.
Also in case of a closely held company, if the amount credited is by way of share
application money, share capital, share premium or any such amount by whatever
name called, the explanation offered for the credit will not be considered to be
satisfactory, unless the person (being a resident) in whose name the amount is credited
also offers explanation about the source and nature of the amount credited. Further,
such explanation should be found to be satisfactory by the assessing officer. In the
event of failure to do so, the entire amount credited will be taxed. The provision does
not apply to amount received from a venture capital fund or a venture capital company.
2. Unexplained Investment [Sec. 69]

Where in the financial year immediately preceding the assessment year, the assessee
has made investment which are not recorded in the books of account, if any,
maintained by him for any source of income and the assessee offers no explanation
about the nature and source of the investments or the explanation offered by him is
not, in the opinion of the Assessing Officer, satisfactory, the value of the investment
may be deemed to be the income of the assessee of such financial year.
3. Unexplained Money, etc. [Sec. 69A]

Where in any financial year the assessee is found to be the owner of any money, bullion
jewellery or other valuable article and such money, bullion, jewellery, or other valuable
article is not recorded in the books of account, if any, maintained by him for any source
of income and the assessee offers no explanation about the nature and source of
acquisition of the money, bullion, jewellery or other valuable article, or the explanation
offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money
and the value of the bullion, jewellery or other valuable article may be deemed to be the
income of the assessee for such financial year.
4. Amount of investment, etc., not fully disclosed in books of account [Sec. 69B]
Where in any financial year the assessee has made investments or is found to be the
owner of any bullion, jewellery or other valuable article, and the Assessing Officer find
that the amount expended on making such investments or in acquiring such bullion,
18 INCOME TAX
jewellery or other valuable article exceeds the amount recorded in this behalf in the
books of account maintained by the assessee for any source of income, and the assessee
offers no explanation about such excess amount or the explanation offered by him is
not, in the opinion of the Assessing Officer, satisfactory, the excess amount may be
deemed to be the income of the assessee, for such financial year.
5. Unexplained Expenditure, etc. [Sec. 69C]

Where in any financial year an assessee has incurred any expenditure and he offers no
explanation about the source of such expenditure or part thereof, or the explanation, if
any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the
amount covered by such expenditure or part thereof, as the case may be, deemed to be
the income of the assessee for such financial year.
The proviso to section 69C provides that notwithstanding anything contained in any
other provision of the Act, such unexplained expenditure which is deemed to be the
income of the assessee shall not be allowed as a deduction under any head of income.
6. Amount borrowed or repaid on hundi [Sec. 69D]

Where any amount is borrowed on a hundi from, or any amount due thereon is repaid
to, any person otherwise than through an account payee cheque drawn on a bank, the
amount so borrowed or repaid shall be deemed to be the income of the person
borrowing or repaying the amount aforesaid for the previous year in which the amount
was borrowed or repaid, as the case may be. To avoid double taxation, it has been
provided that if any amount borrowed on hundi has been deemed under the provisions
of this section to be the income of any person, such person should not be liable to be
assessed again in respect of such amount under the provision of this section on
repayment of such amount. Moreover, for the purposes of this section, the amount
repaid includes the amount of interest paid on the amount borrowed.
All the above amounts shall be chargeable to tax under the head “Income from other
Sources”.
Taxation of Cash Credits, Unexplained Money, Investments, etc. [Sec. 115BBE]

Unexplained amounts treated as income under sections 68, 69, 69A, 69B, 69C and 69D of
the Act will now be taxed at a flat rate of 60% (plus 25% surcharge and cess as
applicable) without granting any deduction of expenditure or allowance there against. The
benefit of threshold exemption and lower slab rates for individuals and HUFs will not be
available to such amounts. Also no set off of any loss shall be allowable in respect of such
income. Assessee now permitted to disclose such income on his own in ITR. Earlier, it was
considered AO’s prerogative to invoke this provision. If unexplained income is detected by
AO, penalty @ 10% of tax also payable u/s 115 BBE.
BASIC CONCEPTS 19
Implication of Unexplained Income
Self Declaration Detected by AO
Total Tax = 77.25% Total Tax = 83.25%

(60+15+2.25) (60+15+2.25+6)
Heads of Income Vs. Source of Income

For the purposes of assessment all income chargeable to income tax have been divided into
five categories viz. Income from Salary; Income from House Property; Profits and Gains
from Business or Profession; Capital Gains; Income from Other Sources. These five
categories of income are known as Heads of Income under the Income Tax Act, 1961.
Under each head there may be several sources of income. Thus, an assessee may be carrying
3 business say, that of Chemical, Paper and Tea. In that case 3 businesses will constitute 3
sources of income all chargeable under the head Profits and Gains from Business or
Profession.
Exemption Vs. Deductions

Those items of income which do not form part of gross total income are known as
Exemptions.
Example: Agricultural Income is exempt from tax u/s 10(1).
The provisions relating to Deductions are covered under Chapter VIA. Income from which
deductions are allowed are first included in Gross Total Income and then deductions are
allowed to arrive at Total Income. Thus, if there is no Gross Total Income, no deductions will
be permissible.
Application of Income Vs. Diversion of Income

An obligation to apply the income in a particular way before it is received by the assessee or
before it has accrued or arisen to the assessee results in the diversion of the income. On the
other hand, an obligation to apply income which has accrued or arisen or has been received
amounts merely to application of the income. Diversion of income is not regarded as income
but when an assessee applies an income to discharge his obligation after the income
reaches the hands of the assessee it would be an application of income and hence taxable.
Example: Mr. A and Mr. B jointly write an article for its publication in Magazine on the
understanding that the remuneration is to be shared equally. On its publication, Mr. A
receives the entire amount say ` 5,000. Mr. A pays Mr. B ` 2,500 as per the agreement. The
amount so paid by Mr. A is a diversion of income. Since the sum paid to Mr. B never accrued
to Mr. A as income, it will not be regarded as his income and therefore not taxable. Out of `
2,500, Mr. A Pays ` 2,000 towards rent. This ` 2,000 is an application of income – as it is a
discharge of obligation out of the income of the assessee.
20 INCOME TAX
Subsidy or grant or cash incentive, duty drawback etc. deemed to be income [Sec.
2(24)(xviii)]
Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement (by whatever name called) by the Central Government or a
State Government or any authority or body or agency in cash or kind to the assessee other
than the subsidy or grant or reimbursement which is taken into account for determination
of the actual cost of the asset in accordance with the provisions of Explanation 10 to section
43(1) shall be deemed to be income.
BASIC CONCEPTS 21
Unsolved Exercise
Q1: A resident individual Mr. A age 35 years has gross total income of ` 9,65,000. Calculate
tax on it. [Ans. `1,08,670]
Q2: Calculate tax payable when Mr. X was born in 1985 having income of ` 5,56,240.
[Ans. ` 24,460]
Q3: Mrs. X (Resident woman) born in 1941 has taxable income of ` 5,42,357. Calculate tax
payable by Mrs. X. [Ans. ` 19,030]
Q4: Calculate tax payable by a firm having taxable income of ` 1,39,05,624.

[Ans. ` 48,12,460]
Q5: Mr. Ramesh is resident in India for the assessment year 2018-19. For the previous year
2017-18, his income chargeable to tax in India is ` 2,68,000. Find out tax liability.
[Ans. ` Nil]
Q6: Calculate tax payable by a Indian company having taxable income of ` 1,39,05,624.
Turnover of Company in PY 2015-16 is less than ` 50 Crore.
[Ans. ` 38,31,350]
Q7: Calculate tax payable by Mrs. X born on 26th Oct, 1951 having taxable income of `
3,25,952. Also calculate if Mrs. X was born in 1965 & 1932.
[Ans. Nil; ` 1,340; Nil]
Q8: Taxable income is ` 6,32,156, calculate tax payable if:-

(i) Income earned by Mr. X, born on Oct 26, 1986.
(ii) Income earned by Mr. X, born on Oct 26, 1941.
(iii) Income earned by Mrs. X, born on Oct 26, 1930.
(iv) Income earned by Mrs. X (Non-resident), born on Oct 26, 1939.
[Ans. ` 40,100; ` 37,530; ` 27,230; ` 40,100]
2 RESIDENTIAL STATUS
STATUS
Different Taxable Entities
All taxable entities are divided in the following categories for the purpose of determining
residential status:
1. Individual
2. Hindu Undivided Family
3. Company
4. Firm or any other Person
Residential Status
An individual and a Hindu undivided family can either be:
1. Resident and ordinarily resident in India; or
2. Resident but not ordinarily resident in India; or
3. Non-resident in India
Types of Residents
Resident Non-Resident
Ordinarily Not Ordinarily

Resident Resident
All other assessees (viz., a firm, a company and every other person) can either be:
a. Resident in India; or
b. Non-resident in India.
RESIDENTIAL STATUS 23
Types of Residents
Resident Non-Resident
Rules to determine Residential Status of an Individual

Basic Conditions to test when an Individual is said to be Resident in India [Sec. 6(1)]
An individual is said to be resident in India in any previous year, if he satisfies any one of
the following basic conditions:
(a) He is in India in the previous year for a period of 182 days or more.
(b) He is in India for a period of 60 days or more during the previous year and 365 days or
more during 4 years immediately preceding the previous year.
Exceptions
The period of “60 days” referred to in Basic Condition (b) above has been extended to 182
days in case of:
1. An Indian citizen who leaves India during the previous year for the purpose of
employment outside India or an Indian citizen who leaves India during the previous
year as a member of the crew of an Indian ship.
2. Indian citizen or a person of Indian origin who comes on a visit to India during the
previous year.
Note
1. Purpose of employment does not mean leaving India for taking employment outside
India but leaving India for the purposes of employment (the employment may be in
India or may be outside India). Thus, the individual need not be an unemployed person
who leaves India for taking employment outside India.
2. A person is deemed to be of Indian origin if he, or either of his parents or any of his
grand-parents, was born in undivided India. It may be noted that grand-parents include
both maternal and paternal grand-parents.
3. It is not essential that the stay should be at the same place or continuous.
4. The place of stay or the purpose of stay is not material.
5. In case a person is in India only for a part of a day, the calculation of number of days of
stay in India in respect of part of day should be made on an hourly basis. A total of 24
hours of stay considering both day of entry and departure is to be counted as
equivalent to the stay of one day.
24 INCOME TAX
6. If, information is not available to calculate the period of stay of an individual in India in
terms of hours, then both the days (i.e. the day of entry and departure) shall be taken as
stay of the individual in India.
Non-Resident
An individual is a non-resident in India if he satisfies none of the basic conditions [i.e.,
condition (a) or (b)].
Additional Conditions to test when a Resident Individual is said Ordinarily Resident
in India [Sec. 6(6)]
A resident individual is treated as “resident and ordinarily resident” in India if he satisfies
both the additional conditions:
(i) He has been resident in India in at least 2 out of 10 previous years immediately
preceding the relevant previous year.
(ii) He has been in India for a period of 730 days or more during 7 years immediately
preceding the relevant previous years.
Resident but not Ordinarily Resident

An individual who satisfies at least one of the basic conditions [i.e., condition (a) or (b)] but
does not satisfy both the additional conditions [i.e., conditions (i) and (ii)], is treated as a
resident but not ordinarily resident in India.
Rules to determine Residential Status of an HUF [Sec. 6(2)]

Place of Control Residential Status of
Family
Control and management of the affairs of a HUF is:
Wholly in India Resident
Wholly out of India Non-resident
Partly in India and Partly outside India Resident
Control and management is situated at a place where the decisions concerning the affairs of
the family are taken. Although, it is karta who normally has control and management of the
affairs of a Hindu Undivided Family yet any other coparcener can control and manage the
affairs.
When a Resident Hindu Undivided Family is Ordinarily Resident in India

A resident Hindu Undivided Family is an ordinarily resident in India if karta of the family
satisfies both the following additional conditions:
(i) Karta has been resident in India in at least 2 out of 10 previous years immediately
preceding the relevant previous year.
(ii) Karta has been present in India for a period of 730 days or more during 7 years
immediately preceding the previous year.
When a Resident Hindu Undivided Family is not Ordinarily Resident in India

If karta of a resident Hindu Undivided Family does not satisfy any of the additional
conditions, the family is treated as resident but not ordinarily resident in India.
Rules to determine residential status of Companies [Sec. 6(3)]

A person being a company shall be said to be resident in India in any Previous year if −
1. It is an Indian Company, or
2. Its place of effective management at any time in that year, is in India.
Note:
1. A company cannot be “ordinarily” or “not ordinarily resident”.
2. Place of Effective management to mean the place where key management and
commercial decisions that are necessary for the conduct of the entity’s business as a
whole, are, in substance made.
Rules to determine residential status of Firm, AOP, BOI [Sec. 6(2)] or any other
person [Sec. 6(4)]
Place of Control Residential Status
Control and management of the affairs of a firm/other persons is:
Wholly in India Resident
Wholly outside India Non-resident
Partly in India and partly outside India Resident
Note:
1. A firm/ other persons cannot be “ordinarily” or “not ordinarily resident”.
2. The residential status of the partners/ members of the firm/ association is not relevant
in determining the status of the firm/ association.
3. Control and management is situated at a place where the decisions concerning its
affairs are taken. In the case of a firm, control and management is vested in partners
and in case of an AOP/BOI it is vested in Principal Officer.
Relationship between residential status and incidence of tax

Incidence of tax on a taxpayer depends on his residential status and type of income.
Type of Income
Indian Income
If income is received (or deemed to be received) in India during the previous year or
accrues (or arises or is deemed to accrue or arise) in India during the previous year or
received and accrues both in India during the previous year is said to be Indian Income.
Any income chargeable under head salary payable by Government of India to a citizen of
India for his services outside India shall be deemed to accrue or arise in India.
26 INCOME TAX
Foreign Income
If income is neither received (or not deemed to be received) in India; nor it accrue or arise
(or not deemed to accrue or arise) in India is said to be foreign income.
Incidence of tax for different taxpayers

Resident and Resident but not Non-resident in
ordinarily ordinarily resident in India
resident in India India
Indian Income Taxable in India Taxable in India Taxable in India
Foreign Income Taxable in India Taxable in India if Not taxable in
business is controlled India
wholly or partly from
India or the profession
is set up in India.
Royalty, Interest Taxable in India Taxable in India Taxable in India
& Fee for
Technical
Services
received from
Indian Company
Illustration 1: Different situations are covered in the table given below:

Conclusion – Is it taxable in India
for the AY 2018-19
Resident Resident Non
Nature of Income Reasons
and but not resident
ordinarily ordinarily
resident resident
1. Rental income of ` It is Indian income. Yes Yes Yes
36,000 is received in Indian income is
India on May 10, always taxable.
2017 (it may accrue
outside India or in
India).
2. Interest income of It is Indian income. Yes Yes Yes
` 46,000 accrues in Indian income is
India on March 31, always taxable.
2018 (it may be
received in India or
outside India).
3. Income of ` 56,000 is It is Indian income. Yes Yes Yes

deemed to be Indian income is
received in India on always taxable.
April 20, 2017 (it may
accrue outside India
or in India).
4. Income of ` 66,000 is It is Indian income. It Yes Yes Yes
deemed to accrue or is always taxable.
arise in India during
the previous year
2017-18 (it may be
received in India or
outside India).
5. Business income/ It is foreign income. It Yes No No
professional income is taxable in the case
of ` 76,000 is of resident and
received and accrued ordinarily resident
outside India during taxpayer. It is not
the previous year taxable in the case of a
2017-18 (business is non-resident. Since it
controlled from is business/profession
outside India or income and business
profession is set up is controlled from
outside India). outside India or
profession is set up
outside India, it is not
taxable in the case of
resident but not
ordinarily resident
taxpayer.
6. In situation 5, It is foreign income. Yes Yes No
suppose business is Since it is
controlled from India business/professional
or profession is set up income and the
in India. business is controlled
from India or
profession is set up in
India, it is taxable in
all cases except non-
resident.
28 INCOME TAX
7. Rental income or It is foreign income. It Yes No No

salary income of ` is taxable in the case
86,000 is received of resident and
outside India in the ordinarily resident
previous year 2017- taxpayer. It is not
18 and at the same taxable in the case of
time it accrues or non-resident. Since it
arises outside India. is foreign income
which is neither
business income nor
professional income, it
is not taxable in the
case of resident but
not ordinarily
resident.
8. Gift of ` 2 lakh It is foreign income. It Yes No No
received outside is taxable in the case
India by an individual of resident and
on November 6, 2017 ordinarily resident
from a friend. taxpayer. It is not
taxable in the case of
non-resident. Since it
is foreign income
which is neither
business income nor
professional income,
is not taxable in the
case of resident but
not ordinarily
resident.
9. Gift of ` 1 lakh It is Indian income. It Yes Yes Yes
received in Delhi by is taxable.
an individual on
November 30, 2017
from a friend.
10. Income of ` 96,000 This income pertains No No No
earned and received to the previous year
outside India in 2013- 2013-14. It cannot be
14 but later on taxed at the time of
remitted to India in remittance in 2017-
2017-18. 18.
Illustration 2: For the previous year 2017-18, X reports the following income.
`
Fees for technical services paid by a non-resident company for a project
situated outside India (Income is received outside India and later on it is 97,000
gifted to Mrs. X)
Income from a profession set up in India, service is rendered from India but 1,24,000
amount is received in USA (later on remitted to India)
Rental income from house property situated in Kenya (amount is received in 80,000
USA which is entirely used for the education of his daughter in USA)
Agricultural income from Bhutan (received in Nepal and agricultural 2,00,000
operations are controlled from India) 70,000
Agricultural income from Kerala
Rental income of property situated in Kenya pertaining to the previous year 75,000
2016-17 is remitted to India in the current year
Technical fees paid by Government of India for a foreign project (amount is 90,000
received outside India)
Find out the income of X chargeable to tax for the Assessment Year 2018-19 if X is (i)
resident and ordinarily resident; (ii) resident but not ordinarily resident and (iii) non-
resident in India.
Solution:
Nature of Resident Not Non
income ` ordinarily resident
resident `
`
Fees for technical services Foreign income 97,000 Nil Nil
Profession set up in India Indian income 1,24,000 1,24,000 1,24,000
House property in Kenya Foreign income 80,000 Nil Nil
Agricultural income from Bhutan Foreign income 2,00,000 2,00,000 Nil
Agricultural income from Kerala Exempt income Nil Nil Nil
Income of earlier year remitted to Net income of
India Current Year Nil Nil Nil
Technical fees by Government of
India Indian income 90,000 90,000 90,000
Net Income 5,91,000 4,14,000 2,14,000
Illustration 3: From the following information given by X, determine his net income for the
Assessment Year 2018-19 assuming that X is (i) resident but not ordinarily resident; or (ii)
non-resident in India:
30 INCOME TAX
1. Remuneration for consultancy service rendered by X in Singapore : ` 9,50,000. Out of

which ` 5,00,000 is directly received in India. Remaining ` 4,50,000 is received in
Singapore and later on gifted by X to Mrs. X in Singapore. Mrs. X has utilized this gifted
money for purchasing jewellery in Singapore.
2. Income from business in Singapore received in Singapore: ` 11,35,000. The business is
partly controlled from India and partly from outside India.
3. Gift received in Singapore from brother of his father-in-law: ` 2,00,000.
4. Interest on deposit in a bank of Singapore: ` 37,25,000. It is received in Singapore.
5. Pension for services rendered in India: ` 7,24,000. He retired from service during 2012-
13. Pension is paid to him in Singapore.
Solution: Computation of income of X for the Assessment Year 2018-19.
Nature of income Resident but Non
Not ordinarily resident
resident `
`
Remuneration for consultancy service
in Singapore, received in India Indian income 5,00,000 5,00,000
Remuneration for consultancy service
in Singapore, received in Singapore
and later on gifted to Mrs. X Foreign income -- --
Business income in Singapore Foreign income 11,35,000* --
Gift received in Singapore Foreign income Nil # Nil
Bank interest Foreign income Nil Nil
Pension from service rendered in
India Indian income 7,24,000 7,24,000
Net income 23,59,000 12,24,000
* It is business income and business is wholly or partly controlled from India.
# It is neither income from a business controlled from India nor it is income from a
profession set up in India).
Illustration 4: The following information is given by X pertaining to the previous year

ending March 31, 2018:
`
Technical fees received from A Inc., a company incorporated in Spain (for a
manufacturing project to be set up in India, project will be set up by the
foreign company in India in 2019) (amount is paid to X in foreign currency in
UK) 9,32,000
Honorarium received from the Kerala Government ( ` 19,000 is incurred as
travelling expenditure) 3,00,000
Profit earned from a business Kerala controlled from Spain 2,75,000
Technical fees received from Kerala Government (for a manufacturing

Project to be set up by Kerala Government in Bangladesh) (amount is paid to X
in foreign currency outside India) 9,43,000
Profit earned from a business in Karachi, controlled from Karachi (paid in UK
which is immediately remitted to India on the next day) 24,50,000
Dividend from a UK company credited to his account in Spain 7,69,000
Agricultural income from Bhutan (received in Bhutan but later on remitted to
India, agricultural activity is controlled from Uttar Pradesh) 12,15,000
Determine the net income of X for the Assessment Year 2018-19 if X is a (i) resident and
ordinarily resident (Case 1), (ii) resident but not ordinarily resident (Case 2), and (iii) non-
resident in India (Case 3).
Solution: Income of X will be calculated as follows:
Nature of Case 1 Case 2 Case 3
income ` ` `
Technical fees for an Indian project Indian Income 9,32,000 9,32,000 9,32,000
Honorarium from Kerala Government Indian Income 2,81,000 2,81,000 2,81,000
Profit from Kerala business Indian Income 2,75,000 2,75,000 2,75,000
Technical fees from Kerala government Indian Income 9,43,000 9,43,000 9,43,000
Profit from Karachi business Foreign Income 24,50,000 Nil Nil
Dividend from UK company Foreign Income 7,69,000 Nil Nil
Agricultural activity in Bhutan Foreign Income 12,15,000 12,15,000* Nil
Net income 68,65,000 36,46,000 24,31,000
* Business is controlled from India.
Illustration 5: Mr. Peter, a foreigner, came to India from Poland for the first time on 1st
April, 2011. He stayed here continuously for 3 years and went to France on 1st April, 2014.
He, however, returned to India on 1st July, 2014 and went to Poland on 1st Dec., 2015. He
again came back to India on 25th January, 2018 on a service in India. What is his residential
status for the A.Y. 2018-19?
Solution:
Assessment Year 2018-19 (Previous Year 1.4.2017 to 31.3.2018)
(i) He is in India from 25.1.2018 to 31.3.2018, i.e. 7 + 28 + 31 = 66 days.
(ii) In the preceding four years his stay in India is as under:
1.4.2016 to 31.3.2017 – Nil
1.4.2015 to 31.3.2016– 30+31+30+31+31+30+31+30+1=245 days
1.4.2014 to 31.3.2015 – 31+31+30+31+30+31+31+28+31=274 days
1.4.2013 to 31.3.2014 – 365 days.
Thus, in all he remained in India for 245 + 274 + 365 = 884 days during the four years and
in PY for more than 60 days (i.e., 66 days), hence he is resident for the Assessment Year
2018-19, as per basic condition (b).
Now let us see whether he is ordinarily resident or not.
32 INCOME TAX
He was not non-resident in India for nine out of ten previous years preceding the previous
year and he has been in India for more than 729 days during seven years preceding the
previous years, he is ordinarily resident in India for the A.Y. 2018-19.
Illustration 6: Mr. John, a foreign national came to India for the first time on June 15, 2012.
During the financial years 2012-13, 2013-14, 2014-15, 2015-16, 2016-17 & 2017-18 he
stays in India for 120 days, 115 days, 15 days, 191 days, 124 days and 80 days respectively.
Determine his residential status for the Assessment Year 2018-19.
Solution: During the previous year 2017-18 his stay in India was for only for 80 days, so he
does not satisfy the first condition of becoming a resident as he was not in India for at least
182 days during the previous year. He was, however, in India for more than 365 days during
the four years preceding the previous year, i.e., his stay during the previous years 2013-14
to 2016-17 was for 445 days and during the previous year 2017-18 he stayed in India for
more than 60 days (i.e., 80 days), he is resident for the Assessment Year 2018-19 as per
basic condition (b).
Now let us see whether he is ordinarily resident or not.
Mr. John was not in India for more than 729 days during seven years preceding the previous
year; hence he is not ordinarily resident in India for the Assessment Year 2018-19.
Illustration 7: Mr. Hilton, foreign cricketer comes to India for 100 days every year since the
financial year 2005-2006. Find out his residential status for the assessment year 2018-19.
Solution: During the previous year 2017-18 he did not stay in India for 182 days; but
during the four years preceding the previous year he remained in India for (100 x 4) = 400
days (i.e., more than 365 days) and during the previous year 2017-18 he has been in India
for more than 60 days. Hence, basic condition (b) is fulfilled and he is resident in India for
the Assessment Year 2018-19.
However, he has not been in India for more than 729 days during seven years preceding the
previous year (he stayed for 7 x 100 = 700 days), he will be not ordinarily resident in India
for the A.Y. 2018-19.
Illustration 8: A Hindu Undivided Family carries on the business of export of dry fruits
from Afghanistan, and for this purpose it has a permanent office there which is controlled
by the younger brother of the karta of the family who resides there permanently. The karta
permanently resides in India but sometimes visits his office in Afghanistan for a few days.
The Policy decisions are taken by the karta but in emergency his younger brother can also
take decision himself. Day to day affairs are, however, controlled by the younger brother.
What is the residential status of the family?
Solution: As the control and management of the family business is, at least, partially
situated in India and as the karta permanently resides in India but only sometimes visits
Afghanistan for a few days, he becomes resident and ordinarily resident in India. Hence, the
family is ordinarily resident in India.
Illustration 9: X, a German tourist, comes to India for the first time on June 20, 2017. He
leaves India on August 10, 2017. Determine his residential status for the Assessment Year
2018-19. Does it make any difference if he comes to India on a business trip or if he is an
Indian citizen?
Solution: X is a foreign citizen. He is not a person of Indian origin. During the previous year
2017-18, he is in India from June 20, 2017 to August 10, 2017 (i.e., June 2017: 11 days + July
2017: 31 days + August 2017: 10 days = 52 days). He is unable to satisfy any of the basic
conditions. Consequently, he is non-resident in India. The answer will remain the same even
if X comes to India on a business trip or X is an Indian citizen.
Illustration 10: X, an Italian citizen, comes to India for the first time (after 30 years) on
April 2, 2017 and stays up to November 26, 2017. Determine his residential status for the
Solution: During the previous year 2017-18, X is in India for a period of 239 days as
follows:
April 2017 29 days August 2017 31 days
May 2017 31 days September 2017 30 days
June 2017 30 days October 2017 31 days
July 2017 31 days November 2017 26 days
By satisfying the first basic condition, X becomes resident in India. However, he is unable to
satisfy any of the additional condition, as he comes to India for the first time in last 30 years
on April 2, 2017. He satisfies one of the basic conditions and none of the additional
conditions. He is, therefore, resident but not ordinarily resident in India for the previous
year 2017-18.
Illustration 11: X, a foreign citizen, comes to India for the first time on July 27, 2017. On
November 10, 2017, he leaves India for Burma on a business trip. He comes back on
February 15, 2018. He maintains a dwelling place in India from the date of his arrival in
India (i.e., July 27, 2017 till February 27, 2018 when he leaves for Kuwait). Determine his
residential status for the Assessment Year 2018-19. Does it make any difference if X is a
person of Indian origin?
Solution: During the previous year 2017-18, X is in India for a period of 120 days as
follows:
July 2017 5 days October 2017 31 days
August 2017 31 days November 2017 10 days
September 2017 30 days February 2017 13 days
He satisfies none of the basic conditions and consequently he is non-resident in India for the
As X is in India for only 120 days in A.Y. 2018-19, so he is non-resident even if he is a person
of Indian origin.
34 INCOME TAX
Illustration 12: X, a foreign citizen (not being a person of Indian origin), comes to India for
the first time on May 2, 2012. From May 2, 2012 to March 31, 2019, he is present in India
for 962 days (2012-13: 190 days; 2013-14: 300 days; 2014-15: 90 days; 2015-16: 10 days;
2016-17: 200 days; 2017-18: 72 days and 2018-19: 100 days. Determine the residential
status of X for the Assessment Year 2018-19.
Solution: During the previous year 2017-18, X is in India for 72 days and during earlier 4
years he is in India for 600 days. He satisfies one of the basic conditions and consequently
he is resident in India. A resident individual is either ordinarily resident or not ordinarily
resident. For this purpose, there are two additional conditions given as under:
Previous years Presence in India (number of Resident (R) or non-

days) resident (NR)
2016-17 200 R
2015-16 10 NR
2014-15 90 R
2013-14 300 R
2012-13 190 R
First additional condition: This condition requires that an individual should be resident in
India for at least 2 out of 10 years preceding the relevant previous year. X, in the present
case, is resident in India for 4 years out of 10 years. He, thus, satisfies this condition.
Second additional condition: This condition requires that an individual should be present
in India for at least 730 days during 7 years preceding the relevant previous year. X is in
India for 790 days during last 10 years. X satisfies one of the basic conditions and two
additional conditions. He is, therefore, resident and ordinarily resident in India for the
Illustration 13: Mr. X came to India for the first time on 1st November, 2016. During his
stay in India upto 30th October, 2017 he stayed at Mumbai upto 10th May, 2017, and
thereafter remained in Bangalore till his departure from India. Determine his residential
status for the Assessment Year 2018-19.
Solution: During the previous year 1st April, 2017 to 31st March, 2018, Mr. X stayed in India
for 213 days.
April, 2017 30 days
May, 2017 31 days
June, 2017 30 days
July, 2017 31 days
August, 2017 31 days
September, 2017 30 days
October, 2017 30 days
213 days
Mr. X satisfies the first basic condition of being present in India for more than 182 days
during the previous year. Hence he is resident. However, he has not been in India for more
than 729 days during the 7 previous years preceding 2017-18, he is resident but not
ordinarily resident in India.
36 INCOME TAX
Unsolved Exercise
Q1. Mr. A, who was born in Uganda, is currently residing in London. His grandmother was
born in India in 1948 and his grandfather was born in India in 1945. He visits India
during the previous year 2010-2011, 2013-2014 and 2016-17 – 135 days, 190 days and
200 days respectively. He didn’t visit India in any of the other previous year for the past
10 years.
Determine his residential status, if for the previous year 2017-18, he was in India for
175 days.
What would be your answer if he is not a person of Indian origin and he is an UK
citizen?
[Ans. NR, RNOR]
Q2. Mr. X was born in Pakistan in 1945. His son Y was born in India in 1950. He left India on
1.6.17 for employment in UK. His stay in India during 16-17 was 70 days, in 15-16 80
days, in 14-15 90 days & in 13-14 130 days. Determine his status during P/Y 2017-18.
[Ans. RNOR]
Q3. X a foreign citizen, comes to India for the first time on June 20, 2017. On September 6,
2017, he leaves India for Burma on a business trip. He comes back on January 1, 2018.
He maintains a dwelling place in India from the date of his arrival in India (i.e., June 20,
2017) till January 15, 2018 when he leaves for Kuwait. Determine his residential status
for the A/Y 2018-19. Does it make any difference if X is a person of Indian origin?
[Ans. NR, No]
Q4. X, a foreign citizen (not being a person of Indian origin) leaves India for the first time in
the last 12 years, on June 15, 2015. During the calendar year 2016, he comes to India on
November 20 for a period of 46 days. During the calendar year 2017, he does not come
to India at all. He finally comes back on January 30, 2018 at 10.30 p.m.
Determine his residential status for the A/Y 2018-19.
[Ans. ROR]
Q5. X is a foreign citizen. Since 1981, he comes to India every year in the month of April for
105 days. Find out the residential status of X for the A/Y 2018-19 if:
(i) X is not a person of Indian origin;
(ii) X was born in Lahore on March 8, 1940;
(iii) Grand mother of X was born in Dhaka in 1870; or
(iv) X was born in Poona in 1941.
[Ans. ROR, NR, NR, NR]
Q6. The Head Office of XY, a Hindu Undivided Family, is situated in Hong Kong. The family
is managed by Y (Since 1980) who is resident in India in 3 out of 10 years immediately
preceding the previous year 2017-18 and who is present in India for more than 729
days during last 7 years. Determine the status of the family for the A/Y 2018-19 if
affairs of family business are
(i) Wholly controlled from Hong Kong;
(ii) Partly controlled from India.
[Ans. NR, ROR]
Q7. Determine residential status in the following cases for the Assessment Year 2018-19:
(i) The control and management of a HUF is situated in India. The manager of the
HUF visited England with his wife from 14-8-17 to 30-6-18. Earlier to that he was
always in India.
(ii) A company, whose registered office is in America, had place of effective
management for sometime in India.
(iii) In a partnership firm, there are three partners namely A, B and C. A and B reside in
India while C lives in Germany. The firm is fully controlled by C. During the
previous year Mr. C stayed for 6 months in India.
(iv) A V.I.P. Club is in India, whose director Mr. X belongs to China. The Club is
controlled fully by Mr. X. In the previous year, Mr. X did not come for a single day
to India.
[Ans. ROR, R, NR, NR]
Q8. X is a citizen of Bangladesh. His grandmother was born in a village near Dhaka in 1940.
He came to India for the first time since 1981 on 3-10-2017 for a visit of 190 days.
Determine the residential status of X for the A/Y 2018-19. Assuming that wife of X is a
resident but “not ordinarily resident in India” for the same year.
[Ans. NR, NR]
Q9. U was born in 1975 in India. His parents were also born in India in 1948. His grand
parents were, however, born in England. ‘U’ was residing in India till 15-3-2015.
Thereafter he migrated to England and took the citizenship of that country on 15-3-
2017. He visits India during 2017-18 for 90 days. Determine the residential status of ‘U’
for A/Y 2018-19.
[Ans. ROR]
Q10. M an Indian citizen left India for the first time on 24-9-2016 for employment in USA.
During the previous year 2017-18, he comes to India on 5-6-2017 for 165 days.
Determine the residential status of ‘M’ for A/Y 2017-18 and 2018-19.
[Ans. NR, NR]
38 INCOME TAX
Q11. Mr. Kohli, a citizen of India, is an export manager of Arjun Overseas Limited, an Indian
company, since 1-5-2013. He has been regularly going to USA for export promotion. He
spent the following days in USA for the last five years.
Previous Year ended No. of days spent in USA
31.3.2014 319 days
31.3.2015 150 days
31.3.2016 270 days
31.3.2017 310 days
31.3.2018 295 days
Determine his residential status for A/Y 2018-19. Assuming that prior to 1-5-2013 he
had never travelled abroad.
[Ans. ROR]
Q12. R Ltd. and S Ltd. companies are registered in Nepal and India respectively. All
meetings of Board of Directors of R Ltd. were held in India, whereas all board meetings
of S Ltd. were held in Nepal during the previous year 2017-18. Determine the
residential status of both the companies for the A/Y 2018-19.
[Ans. Both are Resident]
Q13. During the P/Y 2017-18, R and sons HUF was partly controlled from India by its Karta
R who is citizen of India but stays outside India. For the purpose of managing the
affairs of the HUF, R has been regularly visiting India. Determine the residential status
of the HUF for the A/Y 2018-19 if:
(i) R has been visiting India for 100 days every year for the last 12 years.
(ii) R has been visiting India for 110 days every year for the last 12 years.
(iii) R has been visiting India for the last 12 years. During the immediately preceding 4
P/Y he was in India for 50 days every year & prior to that for 200 days every year.
[Ans. RNOR, ROR, ROR]
Q14. X, a German national, came to India for the first time on 1-7-2011. During the period
from 1-7-2011 to 31-3-2018, he stayed in India as follows –from 1-7-2011 to 31-10-
2011, from 1-5-2012 to 31-10-2012, from 1-11-2013 to 31-12-2013 and from 1-7-
2016 to 31-8-2017. During the P/Y ended on 31-3-2018, X’s income consisted of:
(i) Business in India: ` 40,000
(ii) Interest from an Indian company: ` 2,000
(iii) Dividend from non-Indian co received in Germany but remitted to India: ` 5,000
(iv) Business in Germany (controlled from India): ` 25,000
(v) Income from house property in Germany: ` 8,000
Determine, giving full reasons, the gross total income of X for the A/Y 2018-19 after
ascertaining his residence for the purpose of Income Tax.
[Ans. NR; ` 42,000]
3 EXEMPT INCOME
All receipts, which give rise to income, are taxable under the Income-Tax Act unless it is
specifically provided that it does not form part of total income. Such incomes which do not
form part of total income are called exempt income. As per section 10 to 13B, certain
incomes are either totally exempt from tax or exempt up to a certain amount.
Incomes which do not form part of Total Income
1. Incomes not to be included in total income of any person (Sec. 10)
2. Income of newly established units in Special Economic Zones (Sec. 10AA)
3. Income from property held for charitable or religious purposes (Sec. 11-13)
4. Income of Political Parties (Sec. 13A)
5. Income of a Electoral Trust (Sec. 13B)
Incomes not to be included in Total Income of any person [Sec. 10]
Agricultural Income [Sec. 10(1)]
Agricultural Income is totally exempt. Agricultural income, though exempt, is to be
aggregated in case of certain assesses for the purpose of determining the rate of tax on non-
agricultural income.
Agricultural Income u/s 2(1A) means:
(a) Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes.
(b) Any income derived from such land by way of agricultural operations including the
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) Any income derived from any building, farmhouse or land utilized in connection with
cultivation of agricultural produce.
As per Explanation 3 to Section 2 (1A) Income derived from saplings or seedlings grown in
a nursery shall be deemed to be agricultural income.
Whether Agricultural Income?

S. N. Particulars Yes/ No
1. Dividend from Company whose entire income is derived from No
agriculture
2. Interest on arrear of rent receivable in respect of agricultural land No
3. Natural growth of trees & its sale No
4. Director’s Remuneration from an agricultural Co. as fixed %age of Net No
Profit
5. Interest received by a money lender in the form of agricultural produce No
6. Income from supply of water for irrigation purpose No
40 INCOME TAX
7. Income from lease of land for grazing of cattle required for agricultural Yes
purpose
8. Salary to an active partner from a firm whose entire income is derived Yes
from agricultural operations
9. Interest on Capital to any partner from a firm whose entire income is Yes
derived from agricultural operations
10. Sale of trees replanted in forest and subsequent operations Yes
11. Compensation received from insurance Company for damage of any Yes
agricultural crop
Disintegration of income which is partially Agricultural and partially from Business

For disintegrating a composite business income which is partly agricultural and partly non-
agricultural, the following rules are applicable-
Non-agricultural income Agriculture
income
• Growing and manufacturing tea in 60%
40%
India
• Rubber 35% 65%
• Sale of coffee grown and cured by 75%
25%
seller
• Sale of coffee grown, cured, roasted
and grounded by seller in India with
or without mixing chicory or other 60%
40%
flavouring ingredients
• For Other Composite Business In computing Business Market Value
Income the Market Value of Agricultural
of the agricultural Products
produce is to be deducted.
Scheme of partial integration of non-agricultural income with agricultural income for

tax computation:
The scheme of partial integration of non-agricultural income with agricultural income is
applicable if the following conditions are satisfied:
1. Assessee is an individual, a HUF, a BOI, an AOP or an artificial juridical person.
2. Assessee has non-agricultural income exceeding the amount of exemption limit.
3. The agricultural income of assessee exceeds ` 5,000.
The aforesaid scheme is not applicable in the case of a firm, company, co-operative society,
etc.
EXEMPT INCOME 41
Computation of Tax
Step 1 Tax on Total Income including Agricultural Income
Step 2 Tax on (Agricultural Income + Minimum Slab)
Step 3 Tax = Step 1 – Step 2.
Illustration 1: Miss Sonam, a resident and ordinarily resident in India, has derived the
following income from various operations (relating to plantations and estates owned by
her) during the year ended 31-3-2018:
`
(i) Income from sale of centrifuged latex processed plants grown in Darjeeling 3,00,000
(ii) Income from sale of coffee grown and cured in Yercaud, Tamil Nadu 1,00,000
(iii) Income from sale of coffee grown cured, roasted and grounded, in
Colombo. Sale consideration was received at Chennai 2,30,000
(iv) Income from sale of tea grown and manufactured in Shimla 4,00,000
(v) Income from sapling and seedling grown in a nursery at Cochin. Basic
operations were not carried out by her own land 1,05,000
Solution:
Computation of business income and agricultural income of Ms. Sonam for the A.Y.
2018-19
SI. Source of income Gross Business Agricultural
No. income income
% Amount Amount
(`) (`) (`)
(i) Sale of centrifuged latex from 3,00,000 35% 1,05,000 1,95,000
rubber plants grown in India
(ii) Sale of coffee grown and cured in 1,00,000 25% 25,000 75,000
India.
(iii) Sale of coffee grown, cured, 2,30,000 100% 2,30,000 --
roasted and grounded outside
India. (See Note 1 below)
(iv) Sale of tea grown and 4,00,000 40% 1,60,000 2,40,000
manufactured in India
(v) Saplings and seedlings grown in 1,05,000 -- 1,05,000
nursery in India (See Note 2
below)
Total 5,20,000 6,15,000
Note:
1. Where income is derived from sale of coffee grown, cured, roasted and grounded by the
seller in India, 40% of such income is taken as business income and the balance as
agricultural income. However, in this question, these operations are done in Colombo,
42 INCOME TAX
Srilanka. Hence, there is no question of such apportionment and the whole income is
taxable as business income. Receipt of sale proceeds in India does not make this
agricultural income. In the case of an assessee, being a resident and ordinarily resident,
the income arising outside India is also chargeable to tax.
2. Explanation 3 to section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery would be deemed to be agricultural income whether or
not the basic operations were carried out by her on land.
Illustration 2: For the Assessment Year 2018-19 net agricultural income of Mrs. X (age: 37
years) is ` 8,20,000 and non-agricultural income is ` 3,00,000. Mrs. X pays ` 25,000 as life
insurance premium. Determine her tax liability.
Solution:
`
Gross total income 3,00,000
Less: Deduction under section 80C 25,000
Net Income 2,75,000
Income-Tax will be computed as under:
Income-Tax on ` 10,95,000 (i.e., agricultural income ` 8,20,000 + non-
agricultural income ` 2,75,000) 1,41,000
Income-Tax on ` 10,70,000 (i.e., agricultural income ` 8,20,000 + exempted
slab of income ` 2,50,000) 1,33,500
Income-Tax computed at (1) minus income-Tax computed at (2) 7,500
(-) Rebate u/s 87A 2,500
5,000
(+) EC @2% 100
(+) SHEC @1% 50
Tax liability (rounded off) 5,150
Illustration 3: For the Assessment Year 2018-19, Z, an individual (age 70 years), submits
the following information:
`
House Property Income 2,35,000
Revenue from the business of growing and manufacturing roasted coffee in India
(gross) 7,00,000
Expenditure on earning coffee income 3,20,000
Determine the tax liability of Z for the Assessment Year 2018-19 on the assumption that he
purchases NSC of ` 40,000.
EXEMPT INCOME 43
Solution:
Computation of Income Agricultural Non-
Income agricultural
` income
`
House Property Income -- 2,35,000
Income from growing and manufacturing coffee (i.e., `
7,00,000 - ` 3,20,000) [60% of ` 3,80,000 is agricultural
income and balance is treated as non-agricultural income] 2,28,000 1,52,000
Total 2,28,000
Gross Total Income 3,87,000
Less: Deduction under section 80C 40,000
Net Income 3,47,000
Computation of tax Liability on Non-Agricultural
Income
Income-Tax on ` 5,75,000 (` 2,28,000 + ` 3,47,000) 25,000
Income-Tax on ` 5,28,000 (i.e., agricultural income `
2,28,000 + exempted slab of income ` 3,00,000) 15,600
Balance [i.e., (1) – (2)] 9,400
Less: Rebate u/s 87A 2,500
6,900
Education cess @2% 138
Secondary and higher education cess @1% 69
Tax liability (rounded off) 7,110
Sum received by a Member from HUF [Sec. 10(2)]

Any sum received by an individual, as a member of HUF, shall be exempt in the hands of the
member whether received out of the income of the family, or out of the income of the
impartible estate belonging to the family.
Share of Profit of a Partner from a Firm [Sec. 10(2A)]

Share in the total income of the firm received by a partner shall be exempt from tax.
Allowances or perquisites outside India [Sec. 10(7)]

Any allowances or perquisites paid or allowed, outside India by the Government to a citizen
of India, for rendering services outside India, are exempt.
Exemption for compensation received or receivable on account of any disaster [Sec.

10(10BC)]
Any amount received or receivable from the Central Government or a State Government or
a Local Authority by an individual or his legal heir by way of compensation on account of
44 INCOME TAX
any disaster shall be exempt. However, the exemption is not allowable in respect of amount
received or receivable to the extent such individual or his legal heir has been allowed a
deduction under the Income-Tax Act on account of any loss or damage caused by such
disaster.
Amount received under a Life Insurance Policy [Sec. 10(10D)]

Any sum received under a life insurance policy, including the sum allocated by way of bonus
on such policy, is wholly exempt from tax. However, the following sums received are not
exempt:
(1) Any sum received under a Keyman Insurance Policy
A keyman insurance policy which has been assigned to any person during its term,
with or without consideration, shall continue to be treated as a keyman insurance
policy.
This amendment has been brought because it was noticed the policies taken as keyman
insurance policy are being assigned to the keyman before its maturity. The keyman pays
the remaining premium on the policy and claims the sum received under the policy as
exempt on the ground that the policy is no longer a keyman insurance policy. Thus, the
exemption under section 10(10D) is being claimed for policies which were originally
keyman insurance policies but during the term these were assigned to some other person.
The Courts have also noticed this loophole in law.
(2) Any sum received, under an insurance policy issued on or after 1-4-2003 in respect of
which the premium payable for any of the years during the terms of the policy exceeds
20% of the sum assured. However, such sum received on the death of a person shall be
exempt.
(3) Any sum received, under an insurance policy issued on or after 1-4-2012 in respect of
which the premium payable for any of the years during the terms of the policy exceeds
10% of the sum assured. However, such sum received on the death of a person shall be
exempt.
(4) Any sum received by a person with disability or severe disability referred to in Sec. 80U
or suffering from disease or ailment referred to in Sec. 80DDB, under an insurance
policy issued on or after 1-4-2013 in respect of which the premium payable for any of
the years during the terms of the policy exceeds 15% of the sum assured. However,
such sum received on the death of a person shall be exempt.
Payment from Sukanya Samriddhi Account Scheme [Sec. 10(11A)]

Any payment from an account opened in accordance with the Sukanya Samriddhi Account
Rules, 2014 shall not be included in the total income of the assessee.
Exemption in case of Income by way of Interest [Sec. 10(15)]

• Railway Bond
• 7 % Capital Investment Bonds
EXEMPT INCOME 45
• 9% Relief Bonds, 1987

• Interest on notified bonds/debentures of a public sector company
Interest payable by any public sector company in respect of such bonds or debentures
specified by the Central Government is exempt in the hands of investor. The Central
Government has specified the issue of following tax free, secured, redeemable, non-
convertible bonds of –
National Highways Authority of India (NHAI)
India Railways Finance Corporation Ltd. (IRFCL)
Housing and Urban Development Corporation Ltd. (HUDCL)
Power Finance Corporation (PFC)
Rural Electrification Corporation Ltd. (RECL)
The tenure of the bonds shall be 10 or 15 years.
• Interest on securities held by the Welfare Commissioner, or interest on deposits for the
benefit of the victims of the Bhopal gas leak disaster
• Notified bonds issued by local authority or by State Pooled Finance Entity
• Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by
the Central government
• Interest on Public Provident Fund
• Interest on Sukanya Samriddhi Account Scheme
• Interest on Post Office Saving Bank Account. Interest beyond ` 3,500 & ` 7,000 (in Case
of Joint Post office saving bank A/c) shall be taxable.
Note: Interest on NSC is taxable. But accrued interest of initial 5 year is eligible for
deduction u/s 80C.
Scholarships granted to meet the Cost of Education [Sec. 10(16)]

Scholarships granted to meet the cost of education are exempt.
Daily and Constituency allowance, etc. received by MPs and MLAs [Sec. 10(17)]
Daily and Constituency allowance received by any person by reason of his membership of
Parliament or of any State Legislature shall be exempt.
Award or Reward [Sec. 10(17A)]

Any payment made, whether in cash or in kind, shall be exempt from tax provided it is
made:
(i) in pursuance of any award instituted in the public interest by the Central
Government or any State Government or instituted by any other body and approved
by the Central Government in this behalf; or
(ii) as a reward by the Central Government or any State Government for such purposes
as may be approved by the Central Government in this behalf in the public interest.
46 INCOME TAX
Income of a Local Authority [Sec. 10(20)]

Following income of a local authority are exempted:
(i) Income from house property,
(ii) Capital gains
(iii) Income from other sources
(iv) Income from supply of a commodity or service (not being water or electricity) within
its own jurisdictional area
(v) Income from the supply of water or electricity within or outside its own jurisdictional
area.
For the purpose of this clause, the expression “local authority” means
(i) Panchayat
(ii) Municipality
(iii) Municipal Committee and District Board,
(iv) Cantonment Board
Income of an approved Research Association [Sec. 10(21)]

Income of an association, which is approved for the purpose of carrying on any research,
whether in the nature of scientific research or research in the field of social sciences or
statistical research is exempt.
Income of specified News Agency [Sec. 10(22B)]

Any income of such news agency, set-up in India solely for collection and distribution of
news, as the Central Government may notify, in this behalf, is totally exempt, provided the
news agency applies its income solely for collection and distribution of news and does not
distribute its income to its member.
Income of Prasar Bharti [Sec. 10(23BBH)]

Income of Prasar Bharti (Broadcasting corporation of India) will be exempt from tax.
Income of Educational Institutions [Sec. 10(23C)]

Income of the following educational institutions which exist solely for educational purposes
and not for the purposes of profit is exempt from tax:
1. If Government grant to such educational institution exceeds 50% of total receipt
including any voluntary contribution.
2. If the aggregate annual receipts do not exceed the amount of annual receipts as may be
prescribed (i.e. ` 1 crore).
3. Any university or other educational institution other than those mentioned above and
which is approved by the prescribed authority (i.e., the Chief Commissioner).
EXEMPT INCOME 47
Income of Hospital [Sec. 10(23C)]

Income of the following hospital which exists solely for philanthropic purposes and not for
the purpose of profit is exempt from tax:
1. If Government grant to such hospital exceeds 50% of total receipts including any
voluntary contribution.
2. The aggregate annual receipts of such hospital or institution do not exceed the amount
prescribed (i.e., ` 1 crore); or
3. Approved by the prescribed authority (i.e., the Chief Commissioner).
Income of Swachh Bharat Kosh & Clean Ganga Fund [Sec. 10(23C)]
Income of Swachh Bharat Kosh & Clean Ganga fund is exempted.
Any income of Venture Capital Company or Venture Capital Fund from investment in
a Venture Capital undertaking [Sec. 10(23FB)]
Any income of a venture capital company or a venture capital fund from investment in a
venture capital undertaking shall be exempt. VCC will be exempt from tax irrespective of the
nature of business carried out by the VCU, as long as it satisfies the conditions imposed by
SEBI.
Any income accruing or arising or received by a person out of investments made in a VCC or
VCF shall be taxable in the same manner, or current year basis, as if the person had made
direct investment in the VCU.
Income of Trade Union [Sec. 10(24)]

Following income of a Trade Union registered under Trade Unions Act or an association of
registered Unions shall be exempted:
(i) Income from house property
(ii) Income from other sources.
Income of ‘Sikkimese’ Individual [Sec. 10(26AAA)]

The following income, which accrues or arises to a Sikkimese individual, shall be exempt
from income-tax-
(a) From any source in the state of Sikkim; or

(b) Dividend or interest on securities from any place,
The exemption is not available to a sikkimese women who on or after 1.4.2008 marries an
individual who is not a sikkimese.
Exemption of amount received by an individual as loan under reverse mortgage

scheme [Sec. 10(43)]
Any amount received by an individual as a loan, either in lump sum or in installment, in a
transaction of reverse mortgage referred to in section 47(xvi) shall be exempt.
48 INCOME TAX
Income received by certain foreign companies [Sec. 10(48)]

Any income of a foreign company received in India in Indian currency on account of sale of
crude oil or sale any other goods or rendering of services notified by Central
Government to any person in India shall be exempt from income-tax subject to the
following conditions:
(i) The receipt of money is under an agreement or an arrangement which is either

entered into by the Central Government or approved by it.
(ii) The foreign company, and the arrangement or agreement has been notified by the
Central Government having regard to the national interest in this behalf.
(iii) The receipt of the money is the only activity carried out by the foreign company in
India.
Deduction under Section 10AA

Situated Commenced
Section Undertaking Deduction
In Production
Undertaking Export Turnover #
Manufacturing / PGBPx
After 1-4-05 Total Turnover
10AA Producing eligible SEZ
Before 31-3-20 5 yrs 5 yrs 5 yrs
articles or things or + +
computer software 100% 50% 50% *
# Export Turnover = Amount realized in the form of convertible foreign exchange before
filing return of income
* (50% X PGBP X ) or Amount transferred to SEZ Reinvestment Allowance Reserve A/c
whichever is lower.
Note:
1. Balance in Reserve to be utilized within 3 years for acquiring Plant & Machinery.
2. New undertaking is not formed by split up or reconstruction of a business already in
existence. Exception – Revival of undertaking referred to in Sec. 33AB.
3. Not formed by transfer of Plant & Machinery previously used for any purpose.
Exception – (i) Plant & Machinery used outside India (ii) Old Plant & Machinery to the
extent of 20% allowed.
4. Return of Income to be filed within due date u/s 139(1).
5. Deduction shall be computed with reference to the total turnover of the undertaking in
SEZ and not w.r.t. the total turnover of the assessee.
Illustration 4: X Ltd. is a manufacturing and trading company. It owns 3 units. Unit A

manufactures goods in a special economic zone for export purposes and qualified for
exemption under section 10AA. Unit B is a manufacturing unit and goods are sold in
EXEMPT INCOME 49
domestic market. It is not qualified for any tax holiday. Unit C owns retail outlets in different
parts of the country.
From the information given below find out net income of X Ltd. for the assessment year
2018-19
Unit Unit Unit
A B C
Net profit as per profit and loss account 90 (-)40 100
Turnover 1,200 400 1,500
Out of above, export turnover is 1,180 10 --
Amount remitted in convertible foreign exchange up to
1,002 2 --
September 30, 2018
Freight and insurance (charged over and above sale price from
importers and included in amount remitted in convertible 10 -- --
foreign exchange as well as turnover given above)
Solution: Exemption under section 10AA shall be calculated as follows:

` in lakh
Net profit of unit A (a) 90
Export turnover of Unit A ( ` 1,002 lakh – freight and insurance : ` 10 lakh) (b) 992
Total turnover of Unit A ( ` 1,200 lakh – freight and insurance : ` 10 lakh) (c) 1,190
Amount deductible under section 10AA [(a) x (b) ÷(c)] 75.03
Computation of income of X Ltd.
Income of Unit A (` 90 lakh – deduction under section 10A : ` 75.03 lakh) 14.97
Income of Unit B (-)40
Income of Unit C 100
74.97
4 SALARY
Relationship of the Receiver with Payer

Income under head salary is taxable only if there is employer-employee relationship
between payer and payee. And this relation is said to exist only if there is control over the
method of doing the work of other person. Control is said to exist if the payer can direct
what has to be done, when, how and by whom it has to be done, and the receiver is bound to
follow all his instructions.
Few common examples when there is no control of payer over payee are
• Partner of a firm – any salary, bonus etc. by whatever name called received by a partner
from the firm shall not be regarded as salary.
• Director who is not employee.
• Members of Parliament.
• Guest Lecturers etc.
In all these cases income of the receiver is not taxable under head salary.
Taxability of Salary
Particulars Treatment
Wages for Workers The same would be treated as “Salary” and would be
taxable accordingly. There arises no difference between
wages & salary
Salary received by a partner Such remuneration would be treated as “Business
of a firm Income” since the partner is not an employee of the entity
Director Fees Sitting fees paid to directors for attending Board Meeting
is not a salary but taxable as “ Other Income”
Director Remuneration Any amount payable to any whole time directors who are
also an employee of the company would be treated as
salary.
In any other case, the same would be treated as “Other
Income”
Pension to retired employee Pension is paid in pursuance to the terms of employment.
Hence any amount received as pension would be
considered as “Salary” in the hand of the recipient
Pension to legal heir of the Amount received by legal heir of the deceased employee,
deceased employee who is not an employee of the organization, would be
considered as
“Income from Other Sources” and not as “Income from
Salary”
SALARY 51
Remuneration paid to teacher Any such remuneration would be treated as “Salary” if

of any University / College the terms of employment provide a condition for
checking such any paper. However, in any other case,
such income shall be considered as “Other Income”
Voluntary Retirement Since the employee would get the amount in accordance
payment by employer to with the terms of employment obligation, the same
employees would be considered as “Salary”
Remuneration to the MP / Such income shall be considered as “Income from Other
MLA Sources” as there exist no employer / employee
relationship
Employer includes
• Former
• Present
• Prospective Employer
More than one Employer

• Salary from each source is taxable under the head salary
• Example: Mr. A works in two places as part time job. His salary from both place is
calculated under the head salary.
Basis of Charge [Section 15]

Salary is taxable on receipt or due basis whichever is earlier.
Illustration 1: Until August 31, 2017, X is in the employment of Nokia Ltd. on the fixed
salary of ` 35,000 per month which becomes “due” on the first day of the next month. On
September 1, 2017, X joins LG Ltd. (salary being ` 40,000 per month which becomes “due”
on the last day of each month). Salary is actually paid on the seventh day of the next month
in both cases. Find out the amount of salary chargeable to tax for the Assessment Year
2018-19.
Solution: Computation of Salary for the Previous Year 2017-18:
Different months “Due date or “receipt” date, whichever is earlier Amount
`
1. March 2017 April 1, 2017 35,000
2. April 2017 May 1, 2017 35,000
3. May 2017 June 1, 2017 35,000
4. June 2017 July 1, 2017 35,000
5. July 2017 August 1, 2017 35,000
6. August 2017 September 1, 2017 35,000
7. September 2017 September 30, 2017 40,000
52 INCOME TAX
8. October 2017 October 31, 2017 40,000

9. November 2017 November 30, 2017 40,000
10. December 2017 December 31, 2017 40,000
11. January 2018 January 31, 2018 40,000
12. February 2018 February 28, 2018 40,000
13. March 2018 March 31, 2018 40,000
Total 4,90,000
Salary due or received in foreign currency

If the salary is earned in foreign currency, it will be converted into rupees.
• Conversion rate - T.T. buying rate on specified date.
• Specified date - Last date of the month immediately
Preceding the month in which the salary is
Due /paid in advance /paid in arrears.
Computation of salary in the grade system

Example: If any employee joins the service on 1-5-2017 and is placed in the grade of `
32,500 – 500 –38,000 – 800 – 44,400. It means that –
• He will get a basic salary of ` 32,500 w.e.f. 1-5-2017
• He will get annual increment of ` 500 p.m. w.e.f. 1-5-2018 & onwards till his salary
reaches ` 38,000.
• Thereafter, he will get on annual incremental of ` 800 p.m. till his salary reaches `
44,400.
• No further increment will be given thereafter till he is placed in other grade.
TDS on Salary Vs. Tax free Salary

Under the concept of TDS, employer will calculate and deduct tax on the monthly basis
before handing over salary to employee. But in case of tax free salary employer will pay tax
on the salary income of employee out of his own pocket and therefore such amount of tax is
added in the salary of the employee.
Salary
Basic + DA + Allowances Perquisites

Commission etc
[Normal components]
SALARY 53
Performa of computing taxable income from Salary

` `
Basic salary xxx
Dearness allowance xxx
Bonus xxx
Commission xxx
Employer’s contribution in excess of 12% of Salary to RPF xxx
Interest in excess of Specified percentage on RPF xxx
Taxable allowance xxx
Taxable perquisites (after proper valuation) xxx
Taxable part of gratuity xxx
Taxable part of computation of pension xxx
Leave Salary xxx
Lump sum received from URPF (employer’s contribution & interest thereon) xxx
Gross Salary xxx
Less : Deduction u/s 16
(i) Entertainment allowance xxx
(ii) Employment tax xxx xxx
Taxable Salary /Net Salary
xxx
Leave Salary [Sec. 10(10AA)]
Leave Salary
During the tenure of Service After the tenure of Service
Fully Taxable
Non-Govt. Employee Govt. Employee
Least of the following is exempt: Fully Exempt
(1) Unearned leave* x Average ȫ

monthly salary#.
(2) 10 x Average monthly salary.
(3) 3,00,000 less amount exempted
earlier.
(4) Leave encashment actually received.
54 INCOME TAX
* (Total Leave – Leave Availed)/ 30

Where Total leave cannot exceed 30 days for each completed year of service.
ȫ Average of immediately preceding 10 month from the date of retirement.
# Basic Salary + DA (forming part of retirement benefit) + Commission (fixed % on
turnover)
Note: Leave Encashment received by the legal heirs of a deceased employee is not taxable.
Illustration 2: Mr. H was employed by Elite Ltd. up to March 15, 1998. At the time of
leaving Elite Ltd., he was paid ` 3,50,000 as leave salary out of which ` 72,000 was exempt
from tax under section 10(10AA)(ii). Thereafter he joined XYZ (P) Ltd. and received `
5,00,250 as leave salary at the time of his retirement on December 31, 2017. Determine the
amount of taxable leave salary from the following information.
Salary at the time of retirement (per month) ` 28,000

Average Salary received during 10 months ending on Dec, 31, 2017
- From March 1, 2017 to July 31, 2017 (per month) ` 27,000
- From August 1, 2017 to December 31, 2017 (per month) ` 27,500
Duration of service (a) 14 Year & 8 Month
Leave entitlement for every year of service (b) 44 days
Leave availed while in service (c) 80 days
Leave at the credit of employee at the time of retirement [( 14 X 44 –
80) ÷ 30] 17.866 Month
Leave salary paid at the time of retirement at the rate of ` 28,000
per month (i.e., ` 28, 000 X 17.866) 5,00,250
Solution: The amount of exemption under section 10 (10AA) will be computed as under:
Step (a) – Length of service [14 years & 8 month, rounded off] 14 years
Step (b) – Rate of leave entitlement [actual rate is 44 days for each year of
service, it cannot exceed 30 days leave for each year of service] for each year 30 days
Step (c) – Leave availed while in service 80 days
Leave to the credit of the employee at the time of retirement
[(14 X 30 – 80) ÷ 30] 11.333 months
`
Average monthly salary (for 10 months ending on December 31, 2017) [i.e., (`
27,000 X 5 + ` 27,500 X 5) ÷ 10] 27,250
a. Unavailed leave X Average monthly salary (i.e., 11.333 months X ` 27,250
per month) 3,08,833
b. 10 months X average monthly salary (i.e., ` 27,250 X 10) 2,72,500
c. Maximum amount not taxable [` 3,00,000 less amount exempted earlier] 2,28,000
SALARY 55
d. Amount received from the employer 5,00,250

Amount not taxable under section 10(10AA) [i.e., least of (a), (b), (c) or (d)] 2,28,000
Amount taxable for the assessment year 2018-19 (` 5,00,250 – ` 2,28,000) 2,72,250
Foregoing of Salary
Waiver by an employee of his salary is forgoing of salary. Once salary accrues, subsequent
waiver does not absolve him from liability to income-tax.
Surrender of Salary
If any employee surrenders his salary to the Central Government under the Voluntary
Surrender of Salaries (Exemption from Taxation) Act, 1961, the surrendered salary would
not be included in computing his taxable income, whether he is a Private/Public Sector or
Government Employee.
Gratuity
Gratuity
Govt. Employee Other Employee
Fully Exempt Covered by payment Not covered by

of Gratuity Act payment of Gratuity
Least of the following is Least of the following is exempt:-

exempt:-
1. Last drawn Salary* x 15/26 x 1. Average^ monthly Salary** x

No. of years of service (rounded 15/30 x No. of completed years#
off)$ of service.
2. ` 10,00,000.. 2. ` 10,00,000##
3. Amount actually received. 3. Amount actually received.
56 INCOME TAX
* Basic Salary + DA (Full).

** Basic Salary + DA (under retirement benefit) + Commission (fixed % of turnover).
^ Average Salary of 10 month immediately preceding the month in which retirement
took place.
# Includes no. of completed years of service under previous employer in case gratuity
was not received from previous employer.
## In case gratuity was received from previous employer & was also exempt under
section 10 (10), then the limit of `10,00,000 shall be reduced by the exemption
claimed earlier.
$ 20 year & 6 month = 20 year, 20 year, 6 month & 1 day = 21 year
Note:
1. Gratuity received by legal heirs of a deceased employee is taxable under head income
from other sources. In this case, exemption is calculated in same manner.
2. If it is not provided what percentage forms part of retirement benefit. It shall be
assumed that nothing forms part of retirement benefit.
Illustration 3: Mr. L, an employee of Lovely Co. Ltd., receives ` 1,20,000 as gratuity. He is

covered by the payment of Gratuity Act, 1972. He retires on December 12, 2017 after
rendering service of 29 years and 8 months. At the time of retirement his monthly basic
salary and dearness allowance (40% forming part of retirement benefit) was ` 4,000 and `
1,500, respectively. Is the entire amount of gratuity exempt from tax?
Solution:
Out of ` 1,20,000 received as gratuity, the least of the following will be exempt from tax:
a. ` 95,192 ( 5,500 x 15/26 x 30)
b. ` 10,00,000; or
c. ` 1,20,000 (being gratuity actually received).
Hence ` 95,192 is exempt from tax and the balance of ` 24,808 is taxable for the assessment
year 2018-19.
Illustration 4: Mr. D, who is not covered by the Payment of Gratuity Act, 1972, retires on
November 20, 2017 from Divya Ltd. and receives ` 2,50,000 as gratuity after service of 35
years and 11 months. His salary is ` 10,000 per month up to July 31, 2017 and ` 12,000 per
month from August 1, 2017. Besides, he gets ` 1,000 per month as dearness allowance
(60% of which is part of salary for computing retirement benefits). What amount of gratuity
will be exempt from tax?
Solution: Computation of average monthly salary `
Basic salary from Jan 1, 2017 to Oct 31, 2017 (i.e., ` 10,000 X 7 + ` 12,000 X 3) 1,06,000
60% of dearness allowance (i.e., 60% of ` 1,000 X 10) 6,000
Total 1,12,000
SALARY 57
Out of ` 2,50,000 received as gratuity, the least of the following three is exempt from tax:
a. ` 10,00,000
b. ` 1,96,000 (being half month’s average salary for each year of completed service, i.e., `
11,200 X ½ X 35);
c. ` 2,50,000 (being amount received as gratuity).
` 1,96,000, being the least, is exempt from tax and the balance of ` 54,000, is taxable for the
assessment year 2018-19.
Pension
Pension
Commuted Pension Uncommuted Pension
Govt. Employee (including Non Govt. Employee Fully Taxable

Statutory Corporation)
Fully Exempt When Gratuity not received When Gratuity received
Exemptions = 1/2 x Exemption = 1/3 x

Commuted value of Full Pension Commuted value of Full Pension
Tax treatment of Pension in other cases

S. No. Different Situations Tax Treatment
1. Pension is received from UNO by the Not chargeable to tax
employee or his family members
2. Family pension received by the family Exempt under section 10(19)
members of armed forces
3. Family pension received by family Taxable in the hands of recipient u/s 56 under the
members after the death of an head “Income from other sources”. Standard
employee deduction is available u/s 57 which is ⅓rd of such
pension or ` 15,000, whichever is lower.
58 INCOME TAX
Illustration 5: Determine the amount of pension taxable for the assessment year 2018-19
in the following cases on the assumption that it becomes due on the last day of each month:
1. X receives ` 825 per month as pension from the Central Government during the P/Y
2017-18
2. X receives ` 1,200 p.m. as pension from the Government of Punjab during the P/Y
2017-18.
3. X receives ` 1,000 per month as pension from ABC Ltd., a public limited company
during the previous year 2017-18.
4. X retires from the Central Government Service on May, 2017 he gets pension of ` 900
per month up to November 30, 2017 (i.e. ` 900 x 6). With effect from December 1,
2017. He gets one-third of his pension commuted for ` 46,000.
5. X retires from ABC Co. on June 30, 2017. He gets pension of ` 2,000 per month up to
January 31, 2018. With effect from February 1, 2018, he gets 60% of pension commuted
for ` 40,800. Does it make any difference if he also gets gratuity of ` 4,000 at the time of
retirement?
Solution:
1. Fully Taxable (825 x 12) = ` 9,900
2. Fully Taxable (1,200 x 12) = ` 14,400
3. Fully Taxable (1,000 x 12) = ` 12,000
4. Commuted Pension of ` 46,000 is exempt whereas uncommuted pension of ` 7,800 is
taxable (900 x 6 + 600 x 4)
5. Uncommuted Pension of ` 15,600 is taxable (2,000 x 7 + 800 x 2)
(i) Commuted Pension 40,800
- Exempt ½ × 40,800/60% 34,000
Taxable 6,800
(ii) If Gratuity is also received
Commuted Pension 40,800
- Exempt 1/3 x 40,800/60% 22,667
Taxable 18,133
Illustration 6: Mr. Ashok, who retired from the services of Hotel Taj Ltd., on 31.1.2018 after
putting on service for 5 years, received the following amounts from the employer for the
year ending on 31.3.2018:
• Salary @ ` 16,000 p.m. comprising of basic salary of ` 10,000. Dearness allowance of `
3,000, City compensatory allowance of ` 2,000 and Night duty allowance of ` 1,000.
• Pension @ 30% of basic salary from 1.2.2018.
• Leave salary of ` 75,000 for 225 days of leave accumulated during 5 year @ 45 days
leave in each year. He has not availed any earned leave during his tenure of 5 years and
utilized only his casual leave.
• Gratuity of ` 50,000.
Compute the total income of Mr. Ashok for the assessment year 2018-19.
SALARY 59
Solution: Computation of total income of Mr. Ashok for A.Y. 2018-19.

Particulars Amount Amount
` `
Income from Salaries
Salary received 1.4.16 to 31.1.17 @ ` 16,000 p.m. (` 16,000 x 10) 1,60,000
Pension for 2 months @ 30% of the basic salary of ` 10,000 p.m. 6,000
Leave Salary 75,000
Less: Exempt under section 10(10AA) (Note 1) 50,000 25,000
Gratuity 50,000
Less: Exempt under section 10(10) (Note2) 25,000 25,000
2,16,000
Note:
1. Leave encashment is exempt to the extent of least of the following:
Particulars Amount (`)
(i) Statutory limit 3,00,000
(ii) Unavailed leave × Avg. Month Salary (30 × 5 – 0/30 × 10,000) 50,000
(iii) 10 months average salary (10 x ` 10,000) 1,00,000
(iv) Actual amount received 75,000
Therefore, ` 50,000 is exempt under section 10(10AA).
2. Gratuity is exempt to the extent of least of the following:
Particulars Amount (`)
(ii) Half month’s salary for 5 years of service (5 x ` 5,000) 25,000
(iii) Actual gratuity received 50,000
Therefore, ` 25,000 is exempt under section 10(10). It is assumed that the employee is not
covered under The Payment of Gratuity Act, 1972.
Retrenchment Compensation [Section 10(10B)]
Least of the following amount is exempt
(a) Average Monthly Salary X 15/26 X No. of Years of service (rounded off)
(b) Amount notified by govt. (presently amount notified is 5,00,000)
(c) Amount received
Note:
1. Salary includes all but does not include bonus and employer’s PF contribution.
2. Average salary for preceding 3 months preceding the date of retirement is taken.
3. Rounding off shall be done as under:
20 year 5 month 20 years
20 year 6 month 20 years
20 year 6 month 1 day 21 years
60 INCOME TAX
Compensation on Voluntary Retirement [Section 10(10C)]

Least of the following amount is exempt:
(i) Amount received or receivable
(ii) ` 5,00,000
(iii) Higher of two:
(a) Last drawn Salary × 3 × No. of completed years of Service
(b) Last drawn salary × No. of months left for employment
Note:
1. Salary includes Basic, DA (under retirement benefit)
2. If exemption is claimed in one A/Y then exemption shall not be allowed in another A/Y.
3. Exemption shall be allowed only to Employees of Central/State Government, Public
Sector undertakings, any other company, Statutory Corporation, Local Authority,
University, IIT or notified institute of management.
House Rent Allowance [Section 10(13A)]
Least of following shall be exempt:-
(i) HRA actually received
(ii) Rent paid less 10% of Salary
(iii) 50% of salary – if House taken on rent is situated in Kolkata, Chennai, Delhi and
Mumbai or 40% of salary – for other cities.
Note:
(a) Meaning of Salary: Salary includes Basic, DA (Under retirement benefit) & commission
(If fixed percentage of turnover). Salary shall be determined on due basis.
(b) Exemption is given only for that period for which house is taken on rent. Therefore,
HRA and salary are taken only for that period during which house is taken on rent.
(c) Calculation for that period can be made collectively during which all following are
same:-
(i) Actual HRA
(ii) Rent paid
(iii) Salary
(iv) Location of the house taken on rent
Illustration 7: Mr. Giri who resides in Chennai, gets ` 6,00,000 p.a. as basic salary. He
receives ` 1,00,000 p.a. as house rent allowance. Rent paid by him is ` 80,000 p.a. Find out
the amount of taxable house rent allowance for the AY 2018-19.
Solution: Out of ` 1,00,000 received as house rent allowance, the least of the following will
be exempt from tax:
a. ` 3,00,000 (being 50% of salary);
b. ` 1,00,000 (being the house rent allowance received); or
c. ` 20,000 (being the excess of rent paid over 10% of salary, i.e., ` 80,000 – ` 60,000).
` 20,000 (being the least of the three) is exempt from tax the balance of ` 80,000 (i.e., `
1,00,000– ` 20,000) will be chargeable to tax.
SALARY 61
Illustration 8: Mr. Gurvindar who is posted in Delhi but resides in Noida, gets ` 90,000 per
annum as basis pay. He gets ` 13,500 per annum as house rent allowance, though he pays `
18,000 per annum as rent. During the previous year 2017-18, he receives ` 7,500 as
advance salary of April 2018. Can he claim the entire amount of house rent allowance as
exempt from tax for the assessment year 2018-19?
Solution: Out of ` 13,500 received as house rent allowance, the least of the following is
exempt from tax:
a. ` 36,000 (being 40% of salary);
b. ` 13,500 (being the amount of house rent allowance); and
c. ` 9,000 (being the excess of rent paid over 10% of salary, i.e., ` 18,000 – ` 9,000).
` 9,000 (Being the least of the three) is exempt from tax. The balance of ` 4,500 (i.e., `
13,500 – ` 9,000) is chargeable to tax for the assessment year 2018-19.
Note: Salary of a period other than the relevant previous year is not taken into account
while computing the amount of house rent allowance exempt from tax. Therefore, the
advance salary of April 2018 is ignored.
Entertainment Allowance
Entertainment allowance is first included in salary income under the head “Salaries” and
thereafter a deduction is given from total salary. Deduction can be availed only in the case of
a Government Employee (i.e., a Central Government or a State Government Employee). The
least of the following amount is deductible:
a. ` 5,000;
b. 20% of basic salary; or
c. Amount of entertainment allowance received during the previous year.
Note:
1. Amount actually expended towards entertainment (out of entertainment allowance
received) is not taken into consideration.
2. In the case of a non-Government employee (including employees of statutory
corporation and local authority), entertainment allowance is not deductible.
Illustration 9: Mr. Rishi, a government employee, gets ` 2,40,000 p.a. annum as basic pay.
In addition, he receives ` 15,000 as entertainment allowance. His actual expenditure on
entertainment for official purposes, however, is ` 30,000. Can he claim deduction of actual
amount spent by him on entertainment?
Solution: Expenditure on entertainment is not taken into account while computing
deductible entertainment allowance. The least of the following is deductible from salary
income:
(a) ` 5,000;
(b) ` 48,000, being 20% of salary; or
(c) ` 15,000, being the entertainment allowance granted during the previous year.
Therefore, in this case, ` 5,000 (being the least of the three sums) is deductible from salary
income.
62 INCOME TAX
When Exemption Depends Upon Actual Expenditure by the Employee

The following allowances are exempt under section 10(14) to the extent the amount is
utilized for the specified purpose for which the allowance is received. In other words, the
amount of exemption under section 10(14) is –
(a) The amount of the allowance; or
(b) The amount utilized for the specific purpose for which allowance is given, whichever is
lower;
Name of Allowance Nature of Allowance

Conveyance Conveyance allowance granted to meet the expenditure on
allowance conveyance in performance of duties of an office (expenditure
for covering the journey between office and residence is not
expenditure in performance of duties of the office and,
consequently, such expenditure is not exempt from tax).
Daily allowance Allowance granted to meet the ordinary daily charges incurred
by an employee on account of absence from his normal place of
duty.
Travelling Allowance Allowance granted to meet the cost of travel on tour or on
transfer
Transfer allowance Sum paid in connection with transfer, packing and
transportation of personal effects on transfer.
Helper allowance Allowance to meet the expenditure on a helper where such
helper is engaged for the performance of official duties.
Research allowance / Allowance granted for encouraging the academic research.

Academic allowance
Uniform allowance Any allowance to meet the expenditure on the purchase or
maintenance of uniform for wear during the performance of
duties of an office
Illustration 10:
Amount actually
spent for the Amount
Amount of
purpose for chargeable
Nature of allowance allowance
which allowance to tax*
`
is received `
`
1. Conveyance allowance for official
purposes 25,000 23,000 2,000
2. Travelling allowance for official
purposes 15,000 18,000 Nil
SALARY 63
3. Transfer allowance given at the

time of transfer of Arvind from
Goa to Varanasi 20,000 18,000 2,000
4. Helper allowance for engaging
helper for official purposes 60,000 45,000 15,000
5. Research allowance 50,000 45,000 5,000
6. Uniform allowance for official
purposes 10,000 12,000 Nil
*Amount chargeable to tax shall be lower of Amount of Allowance or Amount actually spent
for the purpose whichever is lower.
When Exemption does not depend upon Expenditure

Regardless of the amount of expenditure, the allowances below are exempt to the extent of
(a) The amount of allowance; or
(b) The amount specified in rule 2BB.
whichever is lower.
Name of Nature of Allowance Exemption as specified in rule

Allowance 2BB
Tribal areas/ Tribal areas allowance is given in Tribal ` 200 per month
Scheduled Area
areas
Allowance
It is an allowance granted to an The amount of exemption is-
Allowance
employee working in any transport a. 70% of such allowance; or
for transport
system to meet his personal b. ` 10,000 per month,
Employees
expenditure during his duty performed whichever is lower.
in the course of running of such
(Running
transport provided that such employee
Allowance)
is not in receipt of daily allowance.
Children
This allowance is given for children’s ` 100 per month per child up to
Education
education. a maximum of two children.
Allowance
Hostel This allowance is granted to an
` 300 per month per child up to
Expenditure employee for children’s hostel
a maximum of two children.
Allowance expenditure.
Transport Transport allowance is granted to an ` 1600 per month (` 3,200 per
Allowance employee to meet his expenditure for month in case of an employee
the purpose of commuting between the who is blind or orthopedically
place of his residence and place of duty. handicapped)
64 INCOME TAX
Underground allowance is granted to an

Underground employee who is working in
` 800 per month.
allowance uncongenial, unnatural climate in
underground mines.
Illustration 11:
Amount of
`
Tribal area allowance for X’s posting in Assam for two months 900
Child education allowance for X’s elder son 2,000
Child education allowance for X’s younger son 750
Child education allowance for X’s daughter 1,000
Hostel expenditure allowance for X’s elder son 7,500
Transport allowance for commuting between office and residence 15,000
Solution:
Amount
Amount of
Amount of exemption chargeable
` to tax
`
`
Tribal area allowance for X’s
posting in Assam for two months 900 200 p.m. x 12 = 400 500
Child education allowance for X’s
elder son 2,000 100 p.m. x 12 = 1,200 800
Child education allowance for X’s
younger son 750 -- 750
Child education allowance for X’s 100 p.m. x 12 = 1,200 or
daughter 1,000 1,000 whichever is lower Nil
Hostel expenditure allowance for 300 p.m. x 12 month =
X’s elder son 7,500 3,600 3,900
Transport allowance for 15,000 1600 p.m. x 12 month = Nil

commuting between office and 19,200 or 15,000
residence whichever is lower
SALARY 65
Other Allowances
Allowances Taxability
Dearness Allowance (DA)
This allowance is paid to compensate the employee against the rise in
price level in the economy. Although it is a compensatory allowance
against high prices, the whole of it is taxable. When a part of Dearness Fully Taxable
allowance is converted into Dearness pay, it becomes part of basic
salary for the grant of retirement benefits and is assumed to be given
under the terms of employment.
City Compensatory Allowance (CCA)
This allowance is paid to employees who are posted in big cities. The
purpose is to compensate the high cost of living in cities like Delhi, Fully Taxable
Mumbai etc.
Medical Allowance
Medical allowance is fully taxable even if some expenditure has actually Fully Taxable
been incurred for medical treatment of employee or family.
Tiffin / Lunch / Dinner Allowance
Fully Taxable
It is given for lunch to the employees.
Overtime Allowance Fully Taxable
Servant Allowance
It is fully taxable whether or not servants have been employed by the Fully Taxable
employee.
Warden or Proctor Allowance
These allowances are given in educational institutions for working as a Fully Taxable
Warden of the hostel or as a Proctor in the institution.
Non-Practicing Allowance
This is normally given to those professionals (like medical doctors,
chartered accountants etc.) who are in government service and are Fully Taxable
banned from doing private practice. It is to compensate them for this
ban.
Family Allowances Fully Taxable
Special Allowances Fully Taxable
Gift Allowances Fully Taxable
Deputation Allowance
When an employee is sent from his permanent place of service to some
Fully Taxable
place or institute on deputation for a temporary period, he is given this
allowance.
Allowances to Government Employees outside India Fully Exempt
Allowances to High Court Judges & Supreme Court Judges Fully Exempt
Salary & Allowances paid by UNO to its employees Fully Exempt
66 INCOME TAX
All other Allowance not mentioned

There may be several other allowances like family allowance, project
Fully taxable
allowance, marriage allowance, education allowance, and holiday
allowance etc.
Illustration 12: Mr. Chonga is an area manager of M/s Bokaro. Steels Co. Ltd. During the
financial year 2017-18, he gets the following emoluments from his employer:
Basic salary
Up to 31.8.2017 ` 20,000 p.m.
From 1.9.2017 ` 25,000 p.m.
Transport allowance ` 2,800 p.m.
Contribution to recognized provident fund 15% of basic salary
Children education allowance ` 500 p.m. for two children
City compensatory allowance ` 300 p.m.
Hostel expenses allowance ` 380 p.m. for two children
Tiffin allowance (actual expenses ` 3,700) ` 5,000 p.a.
Tax paid on employment ` 2,500
Compute taxable salary of Mr. M for the Assessment Year 2018-19.
Solution:
Computation of taxable salary of Mr. Chonga for the Assessment Year 2018-19
(`) (`)
Basic Salary (` 20,000 x 5) + (` 25,000 x 7) 2,75,000
Transport allowance (` 2,800 x 12) 33,600
Less: Exempt under section 10(14) (` 1600 x 12) 19,200 14,400
Children education allowance (` 500 x 12) 6,000
Less: Exempt under section 10(14) (` 100 x 2 x12) 2,400 3,600
City Compensatory Allowance (` 300 x 12) 3,600
Hostel Expenses Allowance (` 380 x 12) 4,560
Less: Exempt under section 10(14) (` 300 x 2 x 12 i.e. ` 7,200) but
restricted to the actual allowance of ` 4,560) 4,560 Nil
Tiffin allowance (fully taxable) 5,000
Tax paid on employment [See Note Below] 2,500
Employer’s contribution to R.P.F in excess of 12% of salary (i.e. 3% of
` 2,75,000) 8,250
Gross salary 3,12,350
Less: Tax on employment under section 16(iii) 2,500
Taxable salary 3,09,850
SALARY 67
Note:
Professional tax paid by employer should be included in the salary of Mr. M as perquisite
since it is discharge of monetary obligation of the employee by the employer. Thereafter,
deduction of professional tax paid is allowed to the employee from his gross salary.
Illustration 13: Mr Raj, an IAS officer was posted to USA by the government of India on
11.7.17 for a period of 3 years. He was paid salary of ` 3 lac for the period 1.4.17 to 10.7.17
and ` 12 lac for the period upto 31.3.18. He left, India for USA in the night of 10.7.17 and did
not come even for a day up till 31.3.18. Determine Income to be subject to tax in AY 2018-19
in India.
Solution: Any income chargeable under head salary payable by the Government to a citizen
of India for his services outside India shall be deemed to accrue or arise in India. Therefore,
total salary of ` 15 lac shall be subject to tax in India in AY 2018-19.
Perquisite
Perquisite may be defined as any emolument in addition to salary or wages. It is not
necessary that a recurring and regular receipt alone is a perquisite. Even a casual and non-
recurring receipt can be perquisite if the aforesaid conditions are satisfied. Perquisites,
received from a person other than employer, are taxable under the head “Profits and gains
of business or profession” or “Income from other sources”. A benefit or advantage would be
taxable as perquisites only if it has a legal origin. An unauthorized advantage taken by an
employee without his employer’s authority would not amount to “perquisite” taxable under
the Act. On the other hand, if the benefit has been conferred unilaterally without the aid of
agreement between the parties, the employee can be taxed on the perquisites. It is not
necessary that the benefit should have been received under an enforceable right.
Definition as per section 17(2)

Section 17(2) gives an inclusive definition of ‘perquisite’. As per this section ‘perquisite’
includes:
(i) The value of Rent-free accommodation.
(ii) The value of any accommodation provided at concessional rent.
(iii) The value of any benefit or amenity granted or provided free of cost or at
concessional rate to specified Employee. The following are specified employee:
(a) Director
(b) An employee who has a substantial interest in the company;
(c) An employee to whom the provisions of clause (a) and (b) do not apply but
whose income under the head Salaries exclusive of non - monetary Perquisite > `
50,000.
(iv) Any sum paid by the employer in respect of any obligation for which payment would
have been made by the employee.
68 INCOME TAX
(v) Any sum payable by the employer whether directly or through a fund, other than a
recognized provident fund or deposit linked insurance fund.
(vi) The value of any specified security or sweat equity shares allowed free of cost or at
concessional rate to the assessee.
(vii) The amount of any contribution to an approved superannuation fund by the
employer in respect of the assessee to the extent it exceeds ` 1,00,000; and
(viii) The value of any other fringe benefit or amenity as may be prescribed.
Perquisites which are taxable only in the case of specified employees

(i) Services of a sweeper, gardener, watchman or personal attendant,
(ii) Free or concessional use of gas, electric energy and water of household consumption,
(iii) Free or concessional educational facilities,
(iv) Use of motor car,
(v) Personal or private journey provided free of cost or at concessional rate to an
employee or member of his household,
Illustration 14: Miss Sonal is employed on part time basis with two companies i.e. Alpha
Company Ltd. and Beta Company Ltd. The particulars of her income for the previous year
2017-18 are as under:
Alpha Beta
Particulars
` `
Basic salary 30,000 15,000
Education allowance for one child -- 1,800
Reimbursement of electricity bills 3,000 --
Medical allowance -- 1,400
Employer’s contribution to recognized provided 1,800 1,500
fund
Value of rent free accommodation taken by the 3,000 --
employer on rent
Sonal is neither a Director nor a substantial shareholder of either Alpha or Beta. Is she a
specified employee?
Solution:
` `
Basic Salary 45,000
Education Allowance 1,800
Less: Exempt 1,200 600
Reimbursement of electricity bills 3,000
Medical allowance 1,400
50,000
SALARY 69
As the monetary income of Sonal does not exceed ` 50,000, she is not a specified employee.
For this purpose, value of rent free accommodation has not been included in the gross
salary as it is a non monetary perquisite although it shall be fully taxable.
Valuation of Perquisites
Rent free accommodation or accommodation provided at concessional rate
Rent Free Accommodation
Govt. Employee (Central/State) Non Govt. Employee
License fee determined by Accommodation not

Accommodation
Govt. would be the value of Owned by employer
Owned by employer
perquisite
Population# of Population# of City Population# of 15% of Salary* or

City upto 10 lac > 10 lac to 25 lac City > 25 lac Rent paid
whichever
is lower
7.5% of Salary* 10% of Salary* 15% of Salary*
*Salary means
Basic Salary
+ DA (under retirement benefit)
+ Bonus
+ Fee
+ Commission (also includes fixed commission)
+ Taxable allowances
+ Monetary payment not being perquisites (e.g. Leave encashment)
# Population of the city as per 2011 census.

Accommodation may be provided:
(i) Rent free; or
(ii) At concessional rate.
Note: In case the house is provided at concessional rate, the value determined above shall
be reduced by the rent, if any, actually paid by the employee.
70 INCOME TAX
Further, such Accommodation provided to the employee may be-

(i) Unfurnished
(ii) Furnished
Where the accommodation is furnished

The value of perquisite shall be determined as if it is an unfurnished accommodation (i.e.
value determined as per chart given). Such value shall be increased by 10% p.a. of the cost
of furniture (including television sets, radio sets, refrigerators, other household appliances,
air conditioning plant or equipment or other similar appliances or gadgets) or if such
furniture is hired from a third party, the actual hire charges payable for the same. Such
valuation of furniture shall be as reduced by any charges paid or payable for such furniture
by the employee during the previous year.
Where the accommodation is provided by the employer (Government or other

employer) in a hotel
The value of the accommodation shall be-
(i) 24% of salary paid or payable for the period during which such accommodation is
provided.
(ii) The actual charges paid or payable to such hotel;
whichever is lower
However, if the employee pays any rent, the value so determined shall be reduced by the
rent, actually paid or payable by the employee.
The above rules shall not apply in certain cases

(i) If the accommodation is provided in a hotel for a period not exceeding 15 days during
the transfer of the employee from one place to another.
(ii) Accommodation provided at certain site or in a remote area

The accommodation provided by the employer shall be a tax free perquisite if the
accommodation is provided to an employee working at mining site or an onshore oil
exploration site or a project execution site, or a dam site or power generation site or
an offshore site which is of a temporary nature.
(iii) Accommodation provided at new place of posting on transfer while retaining

the accommodation at the other place
Where on account of his transfer from one place to another, the employee is provided
with accommodation at the new place of posting while retaining the accommodation
at the other place, the value of perquisite shall be determined with reference to only
one such accommodation which has the lower value (as determined according to the
above provisions) for a period not exceeding 90 days and thereafter the value of
perquisite shall be charged for both such accommodations.
SALARY 71
Illustration 15: Ritika submits following information regarding her salary income for the
previous year 2017-18.
1. Basic salary ` 16,000 p.m.
2. D.A. (forming part of salary for retirement benefit) 40% of basic salary
3. City Compensatory Allowance ` 300 pm.
4. Children education allowance ` 200 p.m. per child for 2 children
5. Transport allowance ` 1,800 p.m.
She is provided with a rent free unfurnished accommodation which is owned by the
employer. The fair rental value of the house is ` 24,000 p.a.
Compute the gross salary assuming accommodation is provided in a city having population:
(A) Not exceeding 10 lakhs as per 2011 census.
(B) Exceeding 10 lakhs but not exceeding 25 lakhs as per 2011 census.
(C) Exceeding 25 lakhs as per 2011 census.
Solution: Computation of gross salary for assessment year 2018-19
Situation A Situation B Situation C
Basic Salary 1,92,000 1,92,000 1,92,000
DA 76,800 76,800 76,800
CCA 3,600 3,600 3,600
Children Education Allowance [4,800 –2,400] 2,400 2,400 2,400
Transport allowance [21,600 – 19,200] 2,400 2,400 2,400
Value of rent free unfurnished accommodation 20,790 27,720 41,580
Gross salary 2,97,990 3,04,920 3,18,780
Note - Meaning of salary of rent free accommodation: ` 1,92,000 + 76,800 + 3,600 + 2,400 +
2,400 = ` 2,77,200.
When the accommodation is provided in a city having population:
(a) Not exceeding 10 lakhs - 7.5% of Salary ` 20,790
(b) Exceeding 10 lakhs but not exceeding 25 lakhs - 10% of Salary ` 27,720
(c)Exceeding 25 lakhs - 15% of Salary ` 41,580
Illustration 16: In the above illustration, assume the house was not owned by the employer
but was taken on rent @ 24,000 p.a. Compute the value of rent free accommodation.
Solution: Since the house has been taken on rent by the employer, the value in all the three
cases shall be:
(a) 15% of salary, i.e. 15% of ` 2,77,200 = 41,580, or
(b) The actual rent paid/payable by the employer i.e. ` 24,000
Whichever is less
Therefore value in all the three cases will be ` 24,000
72 INCOME TAX
Illustration 17:
(i) Mr. Goel, an employee of IOL, New Delhi, a private sector company, received the
following for the financial year 2017-18:
`
1. Basic pay 2,50,000
2. House rent allowance 1,00,000
3. Special allowance 50,000
Mr. Goel was residing at New Delhi and paying a rent of ` 10,000 a month. Compute
the eligible exemption under section 10(13A) of the Income-tax Act, 1961, in respect
of house rent allowance received.
(ii) If Mr. Goel opt for rent free accommodation whereby IOL would be paying a rent of `
10,000 per month to the landlord and recovers a sum of ` 2,500 per month from Mr.
Goel which was in excess of his entitlement, what will be the perquisite value in
respect of such rent free accommodation?
(iii) Which of the above would be beneficial to Mr. Goel i.e., house rent allowance or rent
free accommodation?
Solution:
(i) The eligible exemption under section 10(13A) in respect of house rent allowance
received would be least of the following:
` `
(a) Actual rent allowance (HRA) received 1,00,000
(b) Excess of rent paid over 10% of basic salary rent paid
(10,000 x 12) 1,20,000
Less: 10% of basic pay (i.e. 10% of ` 2,50,000) 25,000 95,000
(c) 50% of salary (i.e. 50% of ` 2,50,000) 1,25,000
Least of the above 95,000
The house rent allowance received by Mr. Goel would be exempt to the extent of `
95,000 under section 10(13A). The balance of ` 5,000 is includible in his total
income.
(ii) Perquisite value in respect of concessional accommodation

As per rule 3(1). Where the accommodation is taken on lease or rent by the
employer, the actual amount of lease rental paid or payable by the employer or 15%
of salary, whichever is lower, as reduced by the rent, if any, actually paid by the
employee is the value of the perquisite.
(a) Actual rent paid by the employer = 10,000 x 12 = 1,20,000
(b) 15% of salary = 15% of basic pay plus special allowance = 15% of ` 3,00,000 = `
45,000
SALARY 73
Lower of the above is ` 45,000, which should be reduced by the rent of ` 30,000 paid
by the employee (i.e. 2,500 x 12 = 30,000). The perquisite value is, therefore, `
15,000.
(iii) We have to see the cash flow from both the options to find out which is more
beneficial.
Option 1: HRA ` `
Cash inflow [Basic Pay + HRA + Special Allowance] 4,00,000.00
Less: Cash outflows:
Rent paid 1,20,000
Tax (See Working Note 1 below) 1,20,257.50
Net cash flow 257.50 2,79,742.50
Option 2: Concessional Accommodation
Cash inflow [Basic Pay + Special Allowance] 3,00,000.00
Less: Cash outflows:
Rent paid to employer 30,000
Tax (See Working Note 2 below) 30,772.50
Net cash flow 772.50 6,69,227.50
Since the net cash inflow is higher in Option 1, Mr. Goel should opt for HRA as it would be
more beneficial to him.
Working Notes:
`
1. Computation of tax under Option 1(HRA):
Salary:
Basic Pay 2,50,000
HRA (taxable) 5,000
Special allowance 50,000
Total salary 3,05,000
Tax on ` 3,05,000 (including cess & allowing rebate) 257.50
2. Computation of tax under Option 2 (Concessional accommodation)
Salary:
Basic Pay 2,50,000
Special allowance 50,000
Concessional accommodation 15,000
Total salary 3,15,000
Tax on ` 3,15,000 (including cess & allowing rebate) 772.50
74 INCOME TAX
Valuation of Motor Car
Valuation of Motor Car
Owned or hired by employer and used Owned by employee and used but running
& maintenance incurred by employer
Exclusively Exclusively Partly official Exclusively Partly official Fully for

for official for private and partly for official and partly private use
purpose purpose personal purpose personal
Total Actual Actual

Nil taxable Running & Maintenance - Nil taxable
Expenditure for office expenses
if specified Actual if specified
and personal use incurred by
document Chauffeur - Actual document
Less: 1,800/2,400 employer
maintained Wear & Tear - 10% p.a. of maintained
Less: 900 for chauffer shall be
cost or hire charges
(if any) taxable
Less: Amt recovered from
employee
However, if actual
expenditure for
official purpose is
more than the limits
Running & Running & then actual
Maint expense Maint expenses expenditure can be
by Employer by Employee deducted by
maintaining specified
documents
Upto 1.6 ltrs cc - ` 1,800 Upto 1.6 ltrs cc - ` 600 p.m.
p.m. shall be taxable shall be taxable
Exceeding 1.6 ltrs - ` 2,400 Exceeding 1.6 ltrs - ` 900
p.m. shall be taxable p.m. shall be taxable
Add: ` 900 p.m. if chauffeur is also provided

Amt recovered from employee not deductible
Note:
1. Specified document
(i) The employee has maintained complete details of journey undertaken for official
purpose which may include date of journey, destination, mileage and the amount
of expenditure incurred thereon
(ii) The employer gives a certificate that expenditure was incurred wholly and
exclusively for official purposes
2. If employee has been provided with more than one car, which are not used exclusively
for official purposes then
(i) Value of one car shall be ` 1,800 or 2,400 + ` 900 p.m. for driver (if any) as the case
may be and
SALARY 75
(ii) The value of other cars shall be as if they are used exclusively for personal
purposes
3. Month denotes completed month and part of the month is left out of consideration.
4. Motor Car facility (or any other conveyance facility) for covering the distance between
the office and residence is not taken as perquisite chargeable to tax.
Illustration 18: X has been provided with the benefit of a car by his employer, a sole
proprietary concern. Compute the perquisite value of the car for the assessment year 2018-
19. In the following situation if the taxable monetary emoluments of X are ` 1,50,000:
(i) The car is owned by X but the running and maintenance expenses amounting to `
40,000 during the previous year are met by the employer. The car is used
(a) For personal benefit of X
(b) Only for official duties
(c) 30% for personal benefit and 70% for official use
(ii) The employer provides a car of 1.5 ltr. engine cubic capacity costing ` 5,00,000
exclusively for the personal benefit of X. The expenses incurred on the car are `
52,000
(iii) The employer provides a car (below 1.6 lt.) along with a driver to X partly for official
and partly for personal purpose. The expenses incurred by the company are:
`
(a) Running and maintenance expenses 32,000
(b) Driver’s salary 36,000
(iv) In case (iii) the employer maintains a log book and it is established than 30% of the
total coverage of the car is for personal use of X and 70% for official duties.
(v) The employer provides a car (above 1.6. lt.) to X which is used for official work and is
also used by X for commuting from his residence to office and back.
(vi) X is provided with 2 cars to be used for official and personal work and the following
information is available from the companies records:
Car 1 Car 2
Exceeding 1.6 lt. Below 1.6 lt.
` `
Cost of the car 6,00,000 4,00,000
Running and maintenance 60,800 48,000
Salary of driver 44,000 44,000
Solution: The solution in each case shall be as under:
(i) (a) The entire amount of expenditure of ` 40,000 met by the employer shall be a
taxable perquisite. This is an obligation of the employee being discharged by
the employer and is therefore, a perquisite taxable in the hands of all
employees.
(b) Not a perquisite, if the specified documents are maintained.
76 INCOME TAX
(c) In this case, the proportion of official and private use is not known. The
perquisite value shall be the amount of expenditure incurred by the employer
as reduced by ` 1,800/2,400 as the case may be, unless the specified
documents are maintained to claim deduction higher than ` 1,800/2,400 p.m.
Therefore, ` 40,000 – 21,600 = 18,400 will be a perquisite.
(ii) The entire running and maintenance expenses and 10% of being the normal wear
and tear of car will be a perquisite i.e. ` 52,000 + 50,000 = ` 1,02,000 will be
taxable.
(iii) The perquisite value shall be:
`
For Car: (` 1,800 x 12) 21,600
For Driver: (` 900 x 12) 10,800
32,400
(iv) Same as calculated under (iii) above.
(v) In this case there is no perquisite because the car is not used for the personal
benefit of X. Conveyance facility for commuting from residence to office and back is
not considered as a perquisite. However, the specified documents shall have to be
maintained.
(vi) In this case, for one car the perquisite value shall be as if it is used for official and
personal benefit. The other car will be valued as if it is used exclusively for the
personal purposes of X.
The perquisite value shall be calculated as under:
Step 1: Assume car 1 is used for personal and official use and car 2 is exclusively for X.
The value shall be as under:
`
Car 1 (2,400 X 12) + (900 X 12) 39,600
Car 2
Running and maintenance expenses 48,000
10% of the cost normal wear and tear 40,000
Salary of driver 44,000
1,32,000
Step 2: Assume car 2 is used for personal and official use and car 1 is exclusively for X.
The value shall be as under:
`
Car 2 (1800 X 12) + (900 X 12) 32,400
Car 1
Running and maintenance expenses 60,800
10% of the cost for wear and tear 60,000
Salary of driver 44,000
1,64,800
Therefore total value of perquisite = ` 32,400 + ` 1,64,800 = 1,97,200
SALARY 77
In this case, he should treat car 1 to be used partly for performance of duties and partly
for personal use. Thus the perquisite value of the cars shall be ` 1,71,600.
Valuation of leave travel concession in India

Leave travel assistance extended by an employer to an employee for going anywhere in
India along with his family is exempt to the extent given below or the amount spent
whichever is less:
Different Situations Amount of Exemption
Where journey is performed by air Amount of economy class air fare of the
national carrier by the shortest route.
Where journey is performed by rail Amount of air-conditioned first class rail
fare by the shortest route.
Where the places of origin of journey and Amount of air-conditioned first class rail
destination are connected by rail and journey fare by the shortest route.
is performed by any other mode of transport
Where the places of origin of journey and
destination (or part thereof) are not
connected by rail
• Where a recognized public transport First class or deluxe class fare by the
system exists shortest route.
• Where no recognized public transport Air-conditioned first class rail fare by the
system exists shortest route (as if the journey had been
performed by rail).
Note:
1. Family Means
(a) Spouse
(b) Children
(c) Dependent Parents, brothers & Sisters.
2. Only two journeys in a block of 4 years is exempt- Exemption on the aforesaid basis
is available in respect of two journeys performed in a block of four calendar years. The
different blocks are-
(a) 2006-2009 (i.e., January 1, 2006 to December 31, 2009);
(b) 2010-2013 (i.e., January 1, 2010 to December 31, 2013);
(c) 2014-2017 (i.e., January 1, 2014 to December 31, 2017)
(d) 2018–2021 (i.e., January 1, 2018 to December 31, 2021)
3. “Carry-over” concession- If an assessee has not availed one or both the travel
concession during any of the specified four-year block exemption can be claimed in the
first calendar year of the next block (but in respect of only one journey).
78 INCOME TAX
4. Exemption is based upon actual expenditure- The quantum of exemption is limited

to the actual fare incurred on the journey. In other words, without performing any
journey and incurring fare thereon, no exemption can be claimed. Also, no other
expenses, like scooter or taxi charges at both ends, porterage expenses during the
journey and lodging/boarding expenses are qualified for exemption.
5. Fare of more than 2 children- Not eligible for exemption- The exemption shall not
be available to more than 2 surviving children of an individual after October 1, 1998.
However, this restriction does not apply in respect of children born before October 1,
1998 and also in respect of multiple births after one child. In other words, the
exemption will be admissible to all surviving children born before October 1, 1998; and
only two surviving children born on or after October 1, 1998 (in reckoning this limit of
two children, children born out of multiple birth after the first child will be treated as
‘one child only’).
Medical Facilities in India

Nature of medical
Hospital (including clinic, Is it
facility to employees
dispensary or nursing Expenditure chargeable to
and their family
home) tax
members
Maintained by the employer Incurred by Not chargeable
the employer to tax (no
Any
monetary
ceiling)
Maintained by- Incurred or Not chargeable
- Central / State reimbursed by to tax (no
Government employer monetary
- Local authority ceiling)
- Any other person but Any
approved by the
Government for the
treatment of its
employees
Approved by the Chief Incurred or Not chargeable
For treatment of
Commissioner having regard reimbursed by to tax (no
prescribed diseases
to the prescribed guidelines the employer monetary
given in rule 3A(2)
ceiling)
SALARY 79
Health insurance policy (i.e., Medical Not chargeable

group medical insurance insurance to tax (no
premium for employees or premium paid monetary
--
medical insurance premium or reimbursed ceiling)
for employees and family by the
members) employer
Maintained by any other Incurred or Not chargeable
person (for example a reimbursed by to tax up to `
Any
private clinic) employer 15,000 in
aggregate.
Medical Facilities outside India

Any expenditure incurred by the employer (or reimbursement of expenditure incurred by
the employee) on medical treatment of the employee or any member of the family of such
employee outside India subject to the conditions given below-
Perquisite not chargeable to tax Condition to be satisfied
Medical treatment of employee or any Expenditure shall be excluded from perquisite
member of family of such employee only to the extent permitted by RBI
outside India
Cost on travel of the employee / any Expenditure shall be excluded from perquisite
member of his family and one attendant only in the case of an employee whose gross
who accompanies the patient in total income, as computed before including
connection with treatment outside India therein the expenditure on travelling, does not
exceed ` 2,00,000
Cost of stay abroad of the employee or Expenditure shall be excluded from the
any member of the family for medical perquisite only to the extent permitted by RBI
treatment and cost of stay of one
attendant who accompanies the patient
in connection with such treatment
Note: Family means:
(1) Spouse
(2) Children
(3) Dependent Parent, brothers and sisters.
Illustration 19: Compute the taxable value of the perquisite in respect of medical facilities
availed of by X from his employer in the following situations:
(a) The employer reimburses the following medical expenses:
(i) Treatment of X by his family physician ` 5,500
(ii) Treatment of Mrs. X in a private nursing home ` 2,500
(iii) Treatment of X’s mother (dependent upon him) ` 1,200 by a private doctor
(iv) Treatment of X’s brother (not dependent upon him) ` 900
80 INCOME TAX
(v) Treatment of X’s grandfather (dependent upon him) ` 1,800
(b) The employer pays an insurance premium of ` 8,000 under a health insurance scheme
on the health of X.
(c) The employer maintains a hospital for the employees where they and their family
members are provided free treatment. The expenses on treatment of X and his family
members during the previous year 2017-18 were as under:
`
(i) Treatment of X’s major son (dependent upon him) 4,500
(ii) Treatment of X 5,600
(iii) Treatment of X’s uncle 2,200
(iv) Treatment of Mrs. X 18,000
(v) Treatment of X’s widowed sister (dependent upon him) 7,000
(vi) Treatment of X’s handicapped nephew 3,000
(d) Expenses on cancer treatment of married daughter of X at Tata Memorial Hospital,

Bombay paid by the employer ` 50,000 and reimbursement of expenses for medical
treatment of himself amounting to ` 20,000. Hospital is approved by chief CIT for
treatment of prescribed disease.
(e) The following expenses on treatment of X’s major son outside India were paid by the
employer.
Actual
Permitted
Expenses
by RBI
`
(i) Medical expenses 75,000 60,000
(ii) Expenses on stay abroad of X’s son and brother who
accompanied the patient 65,000 45,000
(iii) Travelling expenses of X’s son and X’s brother 1,20,000 --
Assume that the other income of X is (a) ` 1,50,000 (b) `
1,80,000
Solution: (a)
Expenses exempt Expenses
upto ` 15,000 Taxable
` `
(i) Treatment of X 5,500
(ii) Treatment of Mrs. X 2,500
(iii) Treatment of X’s mother 1,200
SALARY 81
(iv) Treatment of X’s brother ------ 900

(v) Treatment of X’s grandfather ------ 1,800
9,200 2,700
Hence only ` 2,700 shall be taxable perquisite.
(b) Payment of insurance premium on the health of the employee is a tax-free perquisite.
Hence nothing is taxable.
(c) The expenses of medical treatment of the employee and his family members in a
hospital maintained by the employer are tax-free. Therefore, expenses on treatment of
X, X’s major son, X’s widowed sister and Mrs. X are not taxable.
Only the following expenses are taxable:
`
(i) Treatment of X’s uncle 2,200
(ii) Treatment of X’s handicapped nephew 3,000
Taxable perquisite 5,200
(d) Expenses on medical treatment of the employee/family members in respect of

prescribed diseases, in any hospital approved by the Chief Commissioner of Income-tax,
are tax-free. In this case as cancer is a prescribed disease and Tata Memorial Hospital,
Bombay is approved by Chief Commissioner of Income-tax, there is no taxable
Perquisite. Further, reimbursement of expenses of his medical treatment shall be
exempt to the extent of ` 15,000. ` 5,000, therefore, shall be taxable perquisite.
(e) In respect of medical treatment outside India, the expenses on actual treatment and on
stay abroad (of the patient and one attendant) are exempt from tax to the extent
permitted by R.B.I. i.e. upto ` 60,000 and ` 45,000, respectively. Therefore, balance `
15,000 and ` 20,000 shall be taxable perquisites. Expenses of travel are exempt only if
the gross total income of the employee is upto ` 2,00,000. In case (a) Gross total income
shall be ` 1,85,000 (1,50,000 + 15,000 + 20,000) hence the entire expenditure on travel
is tax free perquisite. In case (b) Gross total income shall be ` 2,15,000 (1,80,000 +
15,000 + 20,000), hence the entire expenditure on travel amounting to ` 1,20,000 shall
be taxable perquisite. ` 15,000 + ` 20,000 included above are on account of taxable
amount of medical perquisites as these are in excess of amount permitted by RBI.
82 INCOME TAX
Other Perquisite
Nature of Perquisite Taxable Value of Note

Perquisite
Free Domestic Servant Actual cost of the employer
Service of sweeper, gardener or Less: Amount paid by
watchman or personal attendant employee
Supply of gas, electricity or The amount

water for household determined shall be
consumption reduced by the
(a) Procured from outside Amount paid to outside amount, if any
Agency agency recovered from the
employee for such
(b) Resources owned by Manufacturing cost per unit benefit
employer himself
Education Facilities for

Children 1. Amount paid for
(a) Free Education to Cost to the Employer free training of the
employee’s own children Less: ` 1,000 per month employee is not
in the school owned/ Less: Amount recovered taxable
maintained by the from employee 2. Payment or
employer or the school reimbursement of
sponsored by the school fee is
employer taxable in all cases
(b) Other Schools Cost to the Employer 3. No restriction on
Less: Amount recovered number of
from employee children
(c) For other (other than Cost of education to
children i.e., grand Employer
children and other Less: Amount recovered
household members) from employee
SALARY 83
Interest free or Concessional Outstanding Balance for Not taxable if-

Loan each loan on last day of 1. Loan ≤ 20,000
Provided to Employee or each month × Rate of 2. Loan for diseases
household members. Interest charged by SBI on specified in rule
1st day of the relevant PY. 3A (Cancer, TB,
Less: Interest charged AIDS, Disease
requiring surgical
operation, mental
disorder,
caesarean
operation).
However, not
applicable to so
much of the loan
as has been
reimbursed to the
employee under
medical insurance
scheme.
Travelling, Touring,
Accommodation The amount
(a) Where such facility is It will be the value at which determined shall be
maintained by the employer, such facilities are offered by reduced by the
and is not available other agencies to the public. amount, if any
uniformly to all employees. recovered from the
(b) Where the employee is on The amount of expenditure employee for such
official tour and the so incurred. benefit
expenses are incurred in
respect of any member of
his household
accompanying him.
(c) Where any official tour is The value will be limited to
extended as a vacation. the expenses incurred in
relation to such extended
period of stay or vacation
(d) In any other case, where A sum equal to the amount
such facility is given to the of expenditure incurred by
employee or any member of the employer.
his household. (Facility
available uniformly to all
employee)
84 INCOME TAX
Free Food and Non-Alcoholic Working hours include

Beverages extended office hours
(a) Tea or snacks provided Nil (like working on
during working hours holidays, over time)
(b) Free food and non-alcoholic Nil

beverages during working
hours provided in a:
(i) Remote area; or
(ii) An offshore installation.
(c) Free food and non-alcoholic Cost to the employer in
beverages provided by the excess of ` 50 per meal
employer during working Less: Recovery from the
hours: employee
(i) At office or business
premises; or
(ii) Through paid vouchers
which are not
transferable and usable
only at eating joints.
(d) In any other case Actual amount of
expenditure incurred by the
employer
Less: Recovery from the
employee
Value of any Gift, Voucher or

Token Gifts made in cash or
The value of any gift, or voucher, The amount shall be convertible into
or token received by the determined as the sum money (like gift
employee or by member of his equal to the amount of such cheques) are not
household on ceremonial gift, beyond ` 5,000. exempt.
occasions or otherwise from the
employers
Where the value of such gift, The value of perquisite shall
voucher or token, as the case be nil.
may be, is below ` 5,000 in the
aggregate during the previous
year.
SALARY 85
Expenses on Credit Cards

Expenses including membership The amount paid for or
fees and annual fees are incurred reimbursed by the
by the employee or any member employer.
of his household, which is Less: Expenditure on use
charged to a credit card, for official purpose
provided by the employer or Less: Amount recovered
otherwise are paid for or from employee
reimbursed by the employer
Club Membership
The payment or reimbursement The actual amount of
by the employer of any expenditure incurred or
expenditure incurred (including reimbursed by the
the amount of annual or employer.
periodical fee) in a club by the Less: Expenditure on use
employee or by any member of for official purpose
his household Less: Amount recovered
from employee
Use of Moveable Assets
(a) Use of laptops and Nil The amount
computers determined shall be
(b) Moveable assets other than (i) If owned by employer reduced by the
Laptops and computers then 10% per annum of amount, if any paid or
the actual cost of such recovered from the
asset, or employee for such
(ii) If taken on hire by benefit.
employer the amount
of rent or charge paid,
or payable by the
employer as the case
may be.
Transfer of any Moveable
Assets
(a) Computers and Electronic Actual cost of such asset to The amount
Items the employer as reduced by determined shall be
50% for each completed reduced by the
year during which such amount, if any paid or
asset was put to use by the recovered from the
employer, on the basis of employee for such
reducing balance method. benefit.
86 INCOME TAX
(b) Motor Cars Actual cost of such asset to

the employer as reduced by
20% for each completed
year during which such
asset was put to use by the
employer, on the basis of
reducing balance method.
(c) Any Other Asset Actual cost of such asset to
the employer as reduced by
10% of the actual cost to
the employer for each
completed year during
which such asset was put to
use by the employer.
Free Transport The said perquisite
(a) Employees of Railways/ Nil applies only to
Airlines employees of
(b) Other Transport employee Value at which such benefit Transport System.
is offered by employer to
the public
Less: Recovery from
Employee
Illustration 20: Mr. A and Mr. B are working for M/s. Jagdamba Ltd. As per salary fixation
norms, the following perquisites were offered:
(i) For Mr. A, who engaged a domestic servant for ` 500 per month, his employer
reimbursed the entire salary paid to the domestic servant i.e. ` 500 per month.
(ii) For Mr. B, he was provided with a domestic servant @ ` 500 per month as part of
remuneration package.
You are required to comment on the taxability of the above in the hands of Mr. A and Mr. B,
who are not specified employees.
Solution: In the case of Mr. A, it becomes an obligation which the employee would have
discharged even if the employer did not reimburse the same. Hence, the perquisite will be
covered under Section 17(2)(iv) and will be taxable in the hands of Mr. A. This is taxable in
the case of all employees.
In the case of Mr. B, it cannot be considered as on obligation which the employee would
meet. The employee might choose not to have a domestic servant. This is taxable only in the
case of specified employees covered by section 17(2)(iii). Hence, there is no perquisite
element in the hands of Mr. B.
SALARY 87
Illustration 21: Following benefits have been granted by Vista Company Ltd. to one of its
employees Mr. Jovan:
(i) Housing loan @ 6% per annum. Amount outstanding on 1.4.2017 is ` 6,00,000. Mr.
Jovan pays ` 12,000 per month, on 5th of each month.
(ii) Air-conditioners purchased 4 years back for ` 2,00,000 have been given to Mr. Jovan
for ` 90,000.
Compute the chargeable perquisite in the hands of Mr. Jovan for the A.Y. 2018-19.
The lending rate of State Bank of India as on 1.4.2017 for housing loan may be taken as 8%.
Solution: Prequisite value for housing loan
The value of the benefit to the assessee resulting from the provision of interest-free or
concessional loan made available to the employee or any member of his household during
the relevant previous year by the employer or any person on his behalf shall be determined
as the sum equal to the interest computed at the rate charged per annum by the State Bank
of India (SBI) as on the 1st day of the relevant previous year in respect of loans for the same
purpose advanced by it. This rate should be applied on the maximum outstanding monthly
balance and the resulting amount should be reduced by the interest, if any, actually paid by
him.
“Maximum outstanding monthly balance” means the aggregate outstanding balance for loan
as on the last day of each month.
The perquisite value for computation is 8% - 6% = 2 %
Month Maximum outstanding balance as Perquisite value at 2%
on last date of month for the month
April, 2017 5,88,000 980
May, 2017 5,76,000 960
June, 2017 5,64,000 940
July, 2017 5,52,000 920
August, 2017 5,40,000 900
September, 2017 5,28,000 880
October, 2017 5,16,000 860
November, 2017 5,04,000 840
December, 2017 4,92,000 820
January, 2018 4,80,000 800
February, 2018 4,68,000 780
March, 2018 4,56,000 760
10,540
Total value of this perquisite

Perquisite Value of Air Conditioners
`
Original cost 2,00,000
Depreciation of SLM basis for 4 years @ 10% i.e. ` 2,00,000 x 10% x 4 80,000
88 INCOME TAX
Written down value 1,20,000

Amount recovered from the employee 90,000
Perquisite value 30,000
Chargeable perquisite in the hands of Mr. Jovan for the assessment year 2018-19
`
Housing loan 10,540
Air Conditioner 30,000
Total 40,540
Illustration 22: X is employed by A Ltd. on June 1, 2017 the company gives an interest free
loan of ` 18,00,000. Loan is repayable within 5 years. SBI lending rate 8.75%.
Solution: ` 1,31,250 (being interest @ 8.75% on ` 18,00,000 from June 1, 2017 to March
31, 2018) is taxable in the hands of X.
Illustration 23: D Ltd. gives the following interest free loan to Dishu, an employee of the
company: ` 15,000 for child’s education and ` 5,000 for refrigerator. No other loan is given
by D ltd.
Solution: Nothing is taxable in the hands of Dishu as the amount of loan does not exceed
` 20,000.
Illustration 24: Yash is working as a General Manager of Zerox Ltd. on a monthly salary of
` 20,000. In the previous year ending 31.3.2018, the Company provided him the following
interest free loan (on 1.10.2017)
(i) For residential flat purchase (repayable in 8 years) (SBI Rate 12.25%) ` 5,00,000
(ii) Education loan (for son) (SBI Rate 11.5%) ` 15,000
(iii) Loan for purchase of computer on 1.10.2017 (8% interest p.a.) ` 30,000 (SBI Rate
15.25%)
You are required to state the basis for calculation and compute the taxable perquisite.
Solution: Computation of taxable perquisite in respect of interest-free or concessional
loans
Interest on Housing Loan (` 5,00,000 X 12.25% X 6/12) 30,625
Education Loan for Son (` 15,000 X 11.50% X 6/12) 863
Loan for purchase of Computer [` 30,000 X (15.25% - 8%) X 6/12] 1,088
Taxable value Perquisite 32,576
Tax Treatment of Approved Superannuation fund

1. Approved SAF means a SAF which is approved by CIT.
2. Employer’s contribution:
Up to ` 1,50,000 exempt
In excess of 1,50,000 it will be taxable as perquisites in the hand of employee.
SALARY 89
3. Employee’s contribution: Should not be treated as income as it has already included in

his salary sheet. However it is allowed as deduction u/s 80C.
4. Interest on balance of SAF = fully exempt from tax u/s 10(13)
5. At the time of withdrawal = fully exempt from tax
Cost of acquisition in case of shares/debentures received under ESOP Section

49(2AA)
If the employer has issued sweat equity shares to the employees, in such cases as per
section 17(2)(vi), market value of the shares shall be taxable in the hands of the employee.
The value of sweat equity shares is taxable in the hands of employees. In the assessment
year relevant to the previous year in which shares or securities are allotted to the employee.
Fair market value of shares or securities will be calculated on the date on which the
employee exercises the option. Amount actually paid or recovered from the employee in
respect of such shares or securities shall be deducted.
Illustration 25:
Exercise
Vesting Period Period
1st Year 2nd Year 3rd Year 4th Year 5th Year
Option Acquired Date of Date of

100 shares @ 20 Date of Vesting Exercise Allotment
MP = ` 100 MP = ` 150 MP = ` 175 MP = ` 200
Solution:
Perquisite = MV on the date of Exercise – Amount recovered from employee
= 100 Shares X ` 175 — 100 Shares X ` 20
= ` 17,500 —` 2,000
= ` 15,500
But taxable in the year of allotment (i.e. 5 year).
Any other benefit, amenity, etc.

This is a residual head. It covers any other benefit or amenity, service, right or privilege
provided by any employer. However, it does not cover the following-
1. Perquisite already included in preceding paras.
2. Telephone / Mobile Phone- The perquisite in respect of telephone/mobile phone is not
taxable under this head.
Mode of Valuation- The value of benefit, amenity, service, right or privilege which come
under this residual head, shall be determined on the basis of cost of the employer under an
arm’s length transaction as reduced by the employee’s contribution, if any.
90 INCOME TAX
Advance Salary
Advance salary is taxable on receipt basis in the assessment year relevant to the previous
year in which it is received, irrespective of incidence of tax in the hands of the employee.
Arrear Salary
It is taxable on receipt basis, if the same has not been subjected to tax earlier on due basis.
Relief when Salary is paid in Arrears or in Advance [Section 89(1)]

Step 1: Calculate tax payable of the P/Y in which the arrears / advance salary is received on
(a) Total Income inclusive of additional salary
(b) Total Income exclusive of additional salary
The difference between (a) and (b) in the tax on additional salary included in the total
income.
Step 2: Calculate the tax payable of every P/Y to which the additional salary relates
(a) on total income including additional salary of that particular P/Y
(b) on total income excluding additional salary
Calculate the difference between (a) and (b) for every P/Y to which the additional salary
relates and aggregate the same.
Step 3: The excess between the tax on additional salary as calculated under step 1 and step
2 shall be the relief admissible u/s 89(1).
If the tax calculated in step 1 is less than tax calculated in step 2, the assessee need not
apply for relief.
Illustration 26: Mr. Ashok Kumar, an employee of a PSU, furnishes the following
particulars for the previous year ending 31.3.2018:
`
(i) Salary income for the year 5,25,000
(ii) Salary for Financial year 2006-07 received during the year 40,000
(iii) Assessed Income for the Financial Year 2006-07 1,40,000
You are requested by the assessee to compute relief under section 89 of the Income-tax Act,
1961, in terms of tax payable for assessment year 2018-19.
The rates of Income-tax for the assessment year 2007-08 are:
Tax Rate (%)
On ` 1,00,000 - ` 1,50,000 10
On ` 1,50,000 - ` 2,50,000 20
Above ` 2,50,000 30
Education cess 2
SALARY 91
Solution:
Computation of Relief under section 89 for the Assessment Year 2018-19
(`) (`)
Assessment Year 2018-19
Salary Income for the year excluding the arrears 5,25,000
Add: Arrears relating to Financial Year 2006-07 40,000
Total income 5,65,000
Tax on total income including arrears (i.e. `
5,65,000) (A) 26,265
Tax on total income excluding arrears (i.e. `
5,25,000) (B) 18,025
Difference between A & B I 8,240
Assessment Year 2007-08

Total Income assessed 1,40,000
Add: Arrears relating to Financial year 2006-07 40,000
Total Income (including arrears) 1,80,000
Tax on total income including arrears (i.e. `
1,80,000) (C) 11,220
Tax on income excluding arrears (i.e. ` 1,40,000) (D) 4,080
Difference between C & D II 7,140
Relief under section 89 1,100
Tax payable for A.Y. 2018-19 (` 26,265 - ` 1,100) (I-II) 25,165
Provident Fund
Statutory Public
Recognized Unrecognized
provident provident
provident fund provident fund
fund fund
Employer’s Employer
Exempt Exempt up to 12%
contribution to Exemption from tax does not
from tax of salary.
provident fund contribute
Deduction
under section
Available
80C on Available Available Not Available
employee’s
contribution
92 INCOME TAX
Exempt from tax if

rate of interest does
Interest not exceed notified
Exempt Exempt
credited to rate [i.e., 9.5%]; Exempt from tax
from tax from tax
provident fund excess of interest
over notified rate is
taxable
Payment received in
respect of:
1. Employee’s own
Contribution –
Exempt
2. Interest on
Lump sum
employee’s
payment at the
contribution –
time of Exempt Exempt
Exempt from tax taxable u/h
retirement or from tax from tax
Income from
termination of
Other Sources
service
3. Employer’s
Contribution
and interest
thereon –
Taxable u/h
Salary
# Salary means Basic + DA (under retirement benefit) + Commission (fixed percentage of
turnover)
Illustration 27: Kamal is employed by Aayus Ltd., a garment manufacturing company

(salary being ` 40,000 per month). Besides, he has been provided the following perquisites-
1. Fixed and mobile telephone (expenditure of the employer: ` 20,000 per annum
approximately).
2. X can purchase every year up to 10 Jeans manufactured by the company at a
concessional price of ` 500 per Jeans (manufacturing cost to the employer: ` 2,000 per
Jeans, MRP: ` 3,000 per Jeans, discount given to whole sellers: 20% on MRP). During
the previous year, X has purchased 6 Jeans.
3. Rent-free house owned by the employer in Delhi.
Find out the value of perquisites chargeable to tax in the hands of X.
Solution:
Value of perquisites given in the problem will be determined as follows-
1. Telephone including mobile phone- It is not chargeable to tax.
SALARY 93
2. Sale of garments at concessional rate- Value of the perquisite being ` 9,000, i.e., (`
2,000 – ` 500) x 6.
3. Residential House- It will be taxable in the hands of X (value being ` 72,000, i.e., 15%
of the salary).
Illustration 28: Interest @ 11% amounting to ` 17,952 is credited to the RPF account of
the employee. Calculate the amount exempt.
Solution:
Interest Credited 17,952
Less: Exempt 17,952 x 9.5/11 = 15,504
Taxable 2,448
Illustration 29: For the previous year 2017-18, Udai submits the following information –
Basic salary: ` 1,80,000; dearness allowance: ` 60,000 (46% of which is part of salary for
retirement benefits); commission: ` 6,000 (i.e., 1% of ` 6,00,000, being turnover achieved
by Udai) and children education allowance for his 2 children: ` 7,200. The employer
contributes ` 20,000 towards provident fund to which a matching contribution is made by
Udai. Interest credited in the provident fund account on March 15, 2018 @ 11% comes to `
93,500. Income of Udai from other sources is ` 1,00,000. Find out the net income of Udai for
the assessment year 2018-19 if the provident fund is (a) statutory provident fund, (b)
recognized provident fund, (c) unrecognized provident fund.
Solution:
Statutory Recognized Unrecognized
PF PF PF
Basic Salary 1,80,000 1,80,000 1,80,000
Dearness Allowance 60,000 60,000 60,000
Commission [1% of ` 6,00,000] 6,000 6,000 6,000
Education allowance [` 7,200- ` 100 X 2 X 12] 4,800 4,800 4,800
Employer’s contribution towards recognized
PF in excess of 12% of salary (salary for this
purpose is ` 1,80,000 + 46% of ` 60,000 + -- -- --
` 6,000)
Interest credited to recognized provident
fund account in excess (i.e. ` 93,500 x 1.5/11) -- 12,750 --
Income from salary 2,50,800 2,63,550 2,50,800
Income from other sources 1,00,000 1,00,000 1,00,000
Gross total income 3,50,800 3,63,550 3,50,800
Less: Deduction under section 80C 20,000 20,000 Nil
Net income (rounded off) 3,30,800 3,43,550 3,50,800
Note: Udai can claim deduction under section 80C in respect of his contribution towards
statutory/ recognized provident fund.
94 INCOME TAX
What are permissible deductions from salary income [Sec. 16]

The income chargeable under the “Salaries” is computed after making the following
deductions:
(a) Entertainment Allowance
(b) Professional Tax
Entertainment Allowance: As explained earlier, entertainment allowance is first included

in salary and thereafter a deduction is allowed in accordance with the rules mentioned
earlier.
Illustration 30: Mr. Bharat who joined the ABC (P.) Ltd. in 1955, he receives ` 9,000 as
basic salary and ` 400 per month as entertainment allowance during the previous year
2017-18. Determine the amount of income chargeable under the head “Salaries”.
Solution:
`
Basic salary (` 9,000 X 12) 1,08,000
Entertainment allowance (` 400 X 12) 4,800
Less: Deductions
Entertainment allowance [not deductible in the case of non-Government
employees] ----------
Income under the head “Salaries” 1,12,800
Professional tax or tax on employment
Professional tax or tax on employment, levied by a State under article 276 of the
Constitution, is allowed as deduction. Deduction is available only in the year in which
professional tax is paid.
Illustration 31: Satish is employed by Viva (P) Ltd. (basic salary being ` 40,000 per
month). Besides, he gets ` 3,000 per month as entertainment allowance. He pays
professional tax of ` 2,000. Find out the salary chargeable to tax for the assessment year
2018-19. Does it make any difference if the professional tax is paid by Viva (P) Ltd.
Solution:
If professional tax If professional tax is
is paid by Satish paid by the employer
` i.e., Viva Ltd.
`
Basic Salary (` 40,000 X 12) 4,80,000 4,80,000
Entertainment Allowance 36,000 36,000
Professional tax paid by the employer -- 2,000
SALARY 95
Gross Salary 5,16,000 5,18,000

Less: Deduction under section 16
Entertainment allowance [not allowed] -- --
Professional Tax 2,000 2,000
Income under the head “Salaries” 5,14,000 5,16,000
Illustration 32: Mr. Dev is the General Manager of a transport company drawing a salary of
` 15,000 per month. The company has provided him with accommodation in Meerut for
which 10% of his basic salary is deducted. Actual rent paid by the company for the
accommodation is ` 1,20,000 per annum. He is also receiving entertainment allowance of `
500 per month. He is provided by the company with a car having engine cubic capacity of
1.8 lts. for his personal and official use but running and maintenance expenses for the same
are borne by the assessee himself. He is in receipt of bonus equivalent to 2 month’s salary.
Compute his taxable income under the head “Salary” for the assessment year 2018-19.
Assume the population of Meerut is 20 lakhs.
Solution:
` `
Salary (15,000 X 12) 1,80,000
Bonus 30,000
Entertainment allowance 6,000
Car facility (900 X 12) 10,800
Value of accommodation at concessional rate
15% of salary i.e. 2,16,000 or ` 1,20,000 whichever is less 32,400
Less: Received from the employee 18,000 14,400
Gross Salary 2,41,200
Less: Deduction account of entertainment allowance Nil
Income from Salaries 2,41,200
Illustration 33: On the basis of the following information compute the taxable income of
Om Prakash under the head “Salaries” for the assessment year 2018-19
`
(i) Basic pay 8,400 p.m.
(ii) Dearness allowance 1,200 p.m.
(iii) Entertainment allowance 750 p.m.
(iv) Tribal area allowance 350 p.m.
(v) His own contribution towards statutory provident fund 1,000 p.m.
(vi) Employer’s contribution 1,000 p.m.
(vii) Interest credited to SPF @ 10% p.a. 13,000
(viii) House rent allowance 1,600 p.m.
Om Prakash is an employee of the Government of UP. He is paying ` 2,400 p.m. as house
rent.
96 INCOME TAX
Solution:
`
(i)Basic Pay (8,400 X 12) 1,00,800
(ii)Dearness Allowance (1,200 X 12) 14,400
(iii)Entertainment Allowance (750 X 12) 9,000
(iv) Tribal Area Allowance 4,200
Less: Exempt @ 200 p.m 2,400 1,800
(v) House Rent Allowance (19,200 – 18,720) 480
Less: Deduction on account of entertainment allowance 5,000
Income from Salaries 1,21,480
Note:
1. Taxable portion of House rent allowance is calculated as under:
`
(i)Actual HRA received 19,200
(ii)40% of Salary (1,00,800) 40,320
(iii)Excess of rent paid over 10% of Salary (28,800 – 10,080) 18,720
The minimum of the above amounts i.e. 18,720 is exempt and the balance (19,200 –
18,720) ` 480 is taxable.
2. Entertainment allowance is deductible to the following extent, as he is a Government
employee.
`
(i) Actual allowance 9,000
(ii) 20% of Basis 20,160
(iii) Specified amount 5,000
The minimum of the above amounts i.e. 5,000 is allowed as allowed as deduction.
3. In the case of a statutory provident fund interest is exempt without any limit. Similarly
employer’s contribution is also totally exempt.
Illustration 34: Mr. Alok was employed on a salary of ` 18,000 p.m. On 1-8-2017 he was
retrenched and his services were terminated. On 1-12-2017, he got another employment at
` 19,000 p.m. He took from his employer an advance equal to 4 month’s salary on 1-2-2018.
The salary of each month becomes due on 1st of subsequent month. Compute his taxable
salary for the assessment year 2018-19.
Solution:
`
(i) Salary @ 18,000 p.m. for 5 months 90,000
(ii) Salary @ 19,000 p.m. for 3 months 57,000
(iii) Advance salary for 3 months 57,000
Net income from Salary 2,04,000
SALARY 97
Note:
1. As the salary becomes due on the 1st of the next month. Salary from the former
employer from 1st of April to 1st of Aug. i.e. for 5 months and from the present employer
from 1-1-2018 to 1-3-2018 will included in his taxable income.
2. 4 month’s advance salary was taken on 1st February. Salary due on 1st March will be
adjusted against the advance. Hence 3 month’s advance salary will be included in the
income of the previous year.
Illustration 35: Mr. K. Sonu is Asstt. Manager of a Textile Company of Jaipur, since 1987. He
has submitted the following particulars of his income for the financial year 2017-18:
(i) Basic salary ` 46,000.
(ii) Dearness Allowance ` 5,000 per month (` 200 p.m. enters into retirement
benefits).
(iii) Education allowance for two children at ` 150 p.m. per child.
(iv) Commission on sales 1% of turnover of ` 10,00,000.
(v) Entertainment allowance ` 700 p.m.
(vi) Travelling Allowance for his official tours ` 30,000. The entire amount is spent on
the official tour.
(vii) He was given cloth worth ` 1,000 by his employer free of cost.
(viii) He resides in the flat of the company. Its market rent is ` 2,000 p.m. A watchman
and a cook have been provided by the company at the flat who are paid ` 400 per
month each.
(ix) He has been provided with a motor car of 1.8 ltr. Engine capacity for his official as
well as personal use. The running and maintenance costs are borne by the
Company.
(x) Rent of house recovered from Sonu ` 4,600.
Compute income from salaries for the assessment year 2018-19. Assume the population of
Jaipur is 26 lakhs as per 2011 census.
Solution:
` `
Basic Salary 46,000
Dearness Allowance @ ` 5,000 p.m. 60,000
Education Allowance 3,600
Less: Exempt 2,400 1,200
Commission on Sales 10,000
Entertainment Allowance @ 700 p.m. 8,400
Travelling Allowance 30,000
Less: Amount actually spent 30,000 Nil
Cloth given free of cost (tax free perquisite) --
Value of accommodation at concessional rate:
98 INCOME TAX
15% of salary of ` 68,000 10,200

Less: Rent deducted 4,600 5,600
Value of facility of cook @ ` 400 p.m. 4,800
Value of facility of watchman @ ` 400 p.m. 4,800
Value of car facility (2,400 X 12) 28,800
Income from Salary 1,69,600
Note:
1. Commission on sales has been taken to be a part of salary as it is a fixed percentage on
turnover.
2. Salary for purpose of accommodation will include Basic 46,000, DA 2,400, Education
Allowance 1,200, Commission 10,000, Entertainment Allowance 8,400.
Illustration 36: Sri Bhagawan Das is a Purchase Officer in a company in Jaipur. He

furnished the following particulars regarding his income for previous year 2017-18:
(i) Basic salary ` 84,000;
(ii) Bonus ` 5,000;
(iii) Dearness allowance ` 3,000 p.m.;
(iv) Travelling allowance ` 45,000. He spends ` 30,000 for official purpose;
(v) Reimbursement of medical bills ` 25,000 (treatment was done in a Government
hospital in India);
(vi) He lived in a bungalow belonging to the company. Its fair rent is ` 2,500 per month.
The company has provided on this bungalow, the facility of a watchman and a cook
each of whom is being paid a salary of ` 250 per month. The company paid in
respect of this bungalow ` 5,000 for electric bills and ` 3,000 for water bills.
(vii) He has been provided with 1.5 ltr. Engine capacity car for official and personal use.
The maintenance and running expenses of the car (including driver) are borne by
the company.
(viii) The following amounts were deposited in his provident fund account;
(a) Own contribution ` 8,400,
(b) Company’s contribution ` 12,000, and
(c) Interest @ 12% p.a. ` 12,600.
(ix) Rent of house recovered from Bharat ` 3,600.
Compute his taxable income from salary for the assessment year 2018-19. Assume the
population of Jaipur is 26 lakhs as per 2011 census.
Solution:
` `
Basic salary 84,000
Bonus 5,000
Dearness Allowance 36,000
Travelling Allowance (45,000 – 30,000) 15,000
Electricity Bills paid by employer 5,000
SALARY 99
Water Bills paid by employer 3,000

Value of accommodation at concessional rate
(being 15% of salary i.e. of ` 1,04,000) (84,000 + 5,000 + 15,000) 15,600
Less: Rent paid 3,600 12,000
Benefit of cook 3,000
Benefit of watchman 3,000
Benefit of car (1,800 + 900) = 2,700 X 12 32,400
Employer’s contribution to RPF in excess of 12% of salary (12,000 –
10,080) 1,920
Interest on PF @ 12% 12,600
Less: Exempt (12,600 x 9.5/12) 9,975 2,625
Less: Deduction u/s 16 Nil
Income from salary 2,02,945
Note: Medical reimbursement is exempt in full as treatment was done in a Government
Hospital.
Illustration 37: Mr. Abhi, a Director of ABC Pvt. Ltd. Pune is offered an employment with
the following two alternative packages:
I II
` `
Basic Pay per annum 1,98,000 1,98,000
Conveyance allowance for private use 9,000 --
Motor car facility for private use of Abhi and his family members -- 9,000
(Valued)
Entertainment Allowance 18,000 --
Club facility (Valued) -- 18,000
Children Education Allowance (for 2 children) 9,700 --
Free Education Facility in institution run by employer for Children
(Valued) -- 9,700
Rent free unfurnished house with fair rental value 30,000 30,000
Which of the two packages should Abhi opt for on the assumption that both employer and
employee will contribute 20% of the basic pay towards an unrecognized provident fund.
Assume the population of Pune is more than 25 lakhs as per 2011 census.
Solution: The Taxable Income of Abhi under the two options will be as under:
I II
` `
Basic pay per annum 1,98,000 1,98,000
Conveyance allowance for private use 9,000 --
Motor car facility for private use of Abhi and his family members -- 9,000
Entertainment allowance 18,000 --
100 INCOME TAX
Club facility -- 18,000

Children education allowance (9,700 – 2,400) 7,300 --
Free education facility for children -- --
Rent free unfurnished house 34,845 29,700
Income from Salary 2,67,145 2,54,700
Note: As the taxable income under the second package is less therefore, Abhi should opt for
the second package.
Illustration 38: Mr. Vignesh, Finance Manager of KLM Ltd., Mumbai, furnishes the following
particulars for the financial year 2017-18.
(i) Salary ` 46,000 per month
(ii) Value of medical facility in a hospital maintained by the company ` 7,000
(iii) Rent free accommodation owned by the company
(iv) Housing loan of ` 6,00,000 at the interest rate of 6% p.a. (No repayment made during
the year, SBI Rate 10% p.a.)
(v) Gifts in kind made by the company on the occasion of wedding anniversary of Mr.
Vignesh ` 4,750.
(vi) A wooden table and 4 chairs were provided to Mr. Vignesh at his residence (dining
table). This was purchased on 1.5.14 for ` 60,000 and sold to Mr. Vignesh on 1.8.2017
for ` 30,000. This was given for use from the date of purchase by employer to Mr.
Vignesh.
(vii) Personal purchases through credit card provided by the company amounting to `
10,000 was paid by the company. No part of the amount was recovered from Mr.
Vignesh.
(viii) An ambassador car which was purchased by the company on 16.7.14 for ` 2,50,000
was sold to the assessee on 14.7.17 for ` 80,000.
Other income received by the assessee during the previous year 2017-18.
(a) Interest on Fixed Deposits with a company 5,000
(b) Income from specified mutual fund 3,000
(c) Interest on bank deposits of a minor married daughter 3,000
Compute the Gross Total Income of Mr. Vignesh and the tax thereon for the Assessment
year 2018-19.
Solution:
Computation of Gross Total Income of Mr. Vignesh for the Assessment Year 2018-19
`
Income under the head “salaries”
Salary [` 46,000 x 12] 5,52,000
Medical facility [in the hospital maintained by the company exempt] --
Rent free accommodation
[Rule 3(1)]- 15% of salary] 82,800
Use of dining table for 4 months
SALARY 101
[` 60,000 x 10/100 x 4/12] 2,000

Valuation of perquisite of interest on loan
[Rule 3(7)(i)]- 10% is taxable which is to be reduced by actual rate of 24,000
interest charged i.e. [10% - 6% = 4%] [See Note below]
Gift given on the occasion of wedding anniversary ` 4,750 is exempt, --
since its value is less than ` 5,000
Perquisite on sale of dining table
Cost 60,000
Less: Depreciation on straight line method @ 10% for 3 years 18,000
W.D.V 42,000
Less: Amount paid by the assessee 30,000 12,000
Purchase through credit card 10,000
Original cost of car 2,50,000
Less: Depreciation from 16.7.2014 to 15.7.2015 @ 20% 50,000
2,00,000
Less: Depreciation from 16.7.2015 to 15.7.2016 @ 20% 40,000
WDV Value as on 14.07.2017 – being the date of sale to employee 1,60,000
Less: Amount received from the assessee on 14.7.2017 80,000 80,000
Computation of Gross Total Income
(a) Income from salaries 7,62,800
(b) Income from other sources
(i) Interest on fixed deposit with a company 5,000
(ii) Income from specified mutual fund exempt u/s 10(35) Nil
(iii) Interest received by minor daughter (3,000 - 1,500) 1,500 6,500
Note:
(i) It is presumed that the housing loan was availed on 1.4.2017. The rate of interest
charged by SBI as on 1.4.2017 in respect of housing loan is 10% for determining the
perquisite value for A.Y. 2018-19.
(ii) Under Rule 3(7)(viii), while calculating the perquisite value of benefit to the
employee arising from the transfer of any movable asset, the normal wear and tear is
to be calculated in respect of each completed year during which the asset was put to
use by the employer. In the given case the third year of use of ambassador car is
completed on 15.7.2017 where as the car was sold to the employee on 14.7.2017. The
solution worked out above provides for wear and tear for only two years.
102 INCOME TAX
Illustration 39: Raghu submits the following particulars of his medical treatment
expenditure, for the previous year 2017-18:
`
1. Gross annual salary 1,80,000
2. Medical expenditure directly paid by the employer to private
practitioner 30,000
3. Medical expenditure directly to hospital approved by Chief
Commissioner of income-tax 50,000
4. Reimbursement of medical expenses incurred by the employee in a
hospital approved by Chief Commissioner 10,000
5. Expenditure on travelling abroad (including that of attendant) 1,00,000
6. Expenditure incurred on stay and treatment abroad 1,50,000
7. Out of (6) amount permitted by Reserve Bank of India 1,00,000
Compute his Gross Total Income.
Solution:
`
Add:
Medical expenditure directly paid by employer to a private practitioner is
not to be added as perquisite only to the extent of ` 15,000. Hence the 15,000
balance to be added as perquisite.
Medical expenditure directly paid by employer to a hospital approved by
Chief Commissioner and reimbursement of such expenditure in respect of
any of ailments, is exempt under Section 17(2)(v)(ii). Hence, there will be
no perquisite in respect of amounts of ` 50,000 and ` 10,000 as mentioned
in item No. 3 and item No. 4 respectively of the problem. Exempt
Expenditure on travelling for the purpose of treatment abroad (including

expenditure on travelling and of one attendant). The exemption is not be
available in this case as assessee’s gross total income exceeds ` 2 lakhs
(Salary ` 1,80,000 + ` 15,000 the perquisite in respect of treatment from
private practitioner + ` 50,000 medical expenditure not permitted by RBI). 1,00,000
Hence, the same is to be added as perquisite.
Medical expenditure on treatment abroad is to be exempt only to the
extent approved by RBI. Hence, out of ` 1.5 lakhs spent, only ` 1 lakh will
be exempt and the balance of ` 50,000 are liable to be added, in view of
condition (A) to clause (vi) of sub-section (2) of section 17. 50,000
SALARY 103
Illustration 40: Mrs. Lakshmi aged about 66 years is a Finance Manager of M/s. Lakshmi &
Co. Pvt. Ltd., based at Calcutta. She is in continuous service since 1965 and receives the
following salary and perks from the company during the year ending 31.03.2018.
(i) Basic Salary (50,000 x 12) = ` 6,00,000
(ii) D.A. (20,000 x 12) = ` 2,40,000 (forms part of pay for retirement benefits)
(iii) Bonus – 2 months basic pay.
(iv) Commission – 0.1% of the turnover of the company. The turnover for the F.Y.
2017-18 was ` 15.00 crores.
(v) Contribution of the employer and employee to the PF Account ` 3,00,000 each.
(vi) Interest credited to P.F. Account at 8.5% - ` 60,000.
(vii) Rent free unfurnished accommodation provided by the company for which the
company pays a rent of ` 70,000 per annum.
(viii) Entertainment Allowance - ` 30,000.
(ix) Hostel allowance for three children - ` 5,000 each.
Compute the total income for the Assessment Year 2018-19.
Solution: Computation of Total Income of Mrs. Lakshmi for A.Y. 2018-19
`
Income from salary
Basic salary 6,00,000
Dearness allowance 2,40,000
Bonus 1,00,000
Commission (calculated as percentage of turnover) 1,50,000
Children’s hostel allowance 15,000
Less: Exemption (300 x 12 x 2) 7,200 7,800
Interest credited to PF account (exempt) --
Rent free unfurnished accommodation
(Refer working Note 1) 70,000
Excess contribution to PF by employer
(Refer working Note 2) 1,81,200
Working Notes:
1. Value of rent free unfurnished accommodation
Basic salary 6,00,000
Dearness allowance 2,40,000
Bonus 1,00,000
Commission @ 1% of turnover 1,50,000
Children’s hostel allowance 7,800
104 INCOME TAX

15% of salary 1,69,170
Actual rent paid by the company 70,000
The least of the above is chargeable perquisite.
2. Employer’s contribution to P.F. in excess of 12% of

salary 3,00,000
Employer’s contribution 1,18,800
Less: 12% of Basic, DA & Commission ( 12% of ` 9,90,000) 1,81,200
Illustration 41: Ram retired as Manager of YZ Co. Ltd. on 30.11.2017 after rendering
service for 20 years and 10 months. He received ` 3,00,000 as gratuity from the employer.
(He is not covered by Gratuity Act, 1972). His salary particulars are given below:
Basic pay ` 10,000 per month up to 30.6.2017
Basic pay ` 12,000 per month from 1.7.2017
Dearness allowance (Eligible for retirement benefits) 50% of basic pay
Transport allowance ` 2,300 per month
He resides in his own house. Interest on monies borrowed for the self occupied house is `
24,000 for the year ended 31.03.2018.
From a fixed deposit with a bank, he earned interest income of ` 28,000 for the year ended
31.03.2018. Compute taxable income of Ram for the year ended 31.03.2018
Solution: Computation of Taxable Income of Ram for the assessment year 2018-19
` `
Income from salary
Basic pay : April to June (10,000 x 3) 30,000
Basic pay : July to November (12,000 x 5) 60,000
Dearness allowance @ 50% basic pay 45,000
Transport allowance ` 2,300 x 8 less exemption @ ` 1,600 per
month (18,400 – 12,800) 5,600
Gratuity 3,00,000
Statutory limit ` 10,00,000
(i) Half month average salary = ` 8,100 x 20 years = 1,62,000
(ii) Actual amount received = ` 3,00,000
Least of the above is exempt. 1,62,000
Balance is taxable 1,38,000 2,78,600
Income from House property:
Self occupied – NAV Nil
Less: Interest on monies borrowed u/s. 24 24,000
Income from house property (24,000)
Income from other sources: Fixed deposit interest 28,000
SALARY 105
Note: Average salary of 10 months preceding the date of retirement is to be computed:

Basic pay 10,000 x 6 60,000
Basic pay 12,000 x 4 48,000
Total 1,08,000
Add: 50% DA – for retirement benefits 54,000
1,62,000
Average salary: 1,62,000/10 16,200
Half month average salary 16,200/2 8,100
Illustration 42: Mr. Narendra, who retired from the services of Hotel Samode Ltd.,
31.1.2018 after putting on service for 5 years, received the following amounts from the
employer for the year ending on 31.3.2018:
- Salary @ ` 16,000 p.m. comprising of basic salary of ` 10,000, Dearness allowance of `
3,000, City compensatory allowance of ` 2,000 and Night duty allowance of ` 1,000.
- Pension @ 30% of basic salary from 1.2.2018.
- Leave salary of ` 75,000 for 225 days of leave accumulated during 5 years @ 45 days
leave in each year.
- Gratuity of ` 50,000. Employee not covered by Payment of Gratuity Act.
Compute the total income of Mr. Narendra for the Assessment Year 2018-19.
Solution: Computation of total Income of Mr. Narendra for A.Y. 2018-19

(`) (`)
Gross salary received during 1/4/17 to 31/1/18 @ `16,000 p.m.
(` 16,000 x 10) 1,60,000
Pension for 2 month @ 30% of the basic salary of ` 10,000 p.m. 6,000
Leave Salary 75,000
Less: Exempt under section 10(10AA) (Note 1) 50,000 25,000
Gratuity 50,000
Less: Exempt under section 10(10) (Note 2) 25,000 25,000
Total Income 2,16,000
Note:
1. Leave encashment is exempt to the extent of least of the following:
Particulars Amount
(ii) Cash equivalent of leave for 30 days (30/45 x ` 75,000) 50,000
(iii) 10 months average salary (10 x ` 10,000) 1,00,000
(iv) Actual amount received 75,000
Therefore, ` 50,000 is exempt under section 10(10AA)
2. Gratuity is exempt to the extent of least of the following:
106 INCOME TAX
Particulars Amount
(ii) Half month’s salary for 5 years of service (5 x ` 5,000) 25,000
(iii) Actual gratuity received 50,000
Therefore, ` 25,000 is exempt under section 10(10).
Illustration 43: From the following particulars furnished by Mr. X for the year ended
31.3.2018, you are requested to compute his total income and tax payable for the
(a) Mr. X retired on 31.12.2017 at the age of 58, after putting in 25 years and 9 months of
service, from a private company at Mumbai.
(b) He was paid a salary of ` 25,000 p.m. and house rent allowance of ` 6,000 p.m. he paid
rent of ` 6,500 p.m. during his tenure of service.
(c) On retirement, he was paid a gratuity of ` 3,50,000. He was not covered by the payment
of gratuity Act. His average salary in this regard may be taken as ` 24,500 Mr. X has not
received any other gratuity at any point of time earlier, other than this gratuity.
(d) He had accumulated leave of 15 days per annum during the period of his service; this
was encased by Mr. X at the time of his retirement. A sum of ` 3,15,000 was received by
him in this regard. His average salary may be taken as ` 24,500.
Solution: Computation of Salary income Mr. X for A.Y. 2018-19
` ` `
Basic salary (` 25,000 x 9 months) 2,25,000
House rent allowance
Actual amount received 54,000
Less: Exemption u/s. 10(13A) 36,000 18,000
Least of the following
(i) HRA actually received 54,000
(ii) Rent Less 10% of salary
(` 6,500 - ` 2,500) x 9 months 36,000
(iii) 50% salary 1,12,500
Gratuity
Actual amount received 3,50,000
Less: Exemption u/s. 10(10) 3,06,250 43,750
Least of the following is exempt
(i) Actual amount received 3,50,000
(ii) Half month average salary for each year of
completed service (1/2x24,500x25) 3,06,250
(iii) Limit 10,00,000
Leave encashment
Actual amount received 3,15,000
SALARY 107
Less: Exemption u/s. 10(10AA) 2,45,000 70,000

(i) Actual amount received 3,15,000
(ii) 10 months average salary (24,500 x 10) 2,45,000
(iii) Cash equivalent of unveiled leave calculated on
the basis of maximum 30 days for every year of
actual service rendered to the employer from
whose service he retired (see note 2 below) 3,06,250
(iv) Limit 3,00,000 ___ ____
Note: The leave entitlement of Mr. X as per his service rules is not given in the problem. It is
assumed that the leave entitlement of Mr. X as per his service rules is 30 days credit for each
year of service. Since Mr. X had accumulated 15 days per annum during the period of his
service, he would have availed/taken the balance 15 days leave every year.
Leave entitlement of Mr. X on the basis of 30 days for every = 30 days/ year x 25
year of actual service rendered by him to the employer = 750 days
Less: Actual leave taken during the period of his service = 15 days/year x 25
= 375 days
Earned leave to the credit of Mr. X at the time of his = 375 days
retirement
Cash equivalent of earned leave to the credit of Mr. X at the = 375 X 24,500/30
time of his retirement = ` 3,06,250
Illustration 44:
(i) Smt. Savita Rani was born on 01.07.1939. She is a Deputy Manager in a Company in
Mumbai. She is getting a monthly salary and D.A. of ` 45,000 and ` 12,000
respectively. She also gets a House Rent Allowance of ` 6,000 per month. She is a
member of Recognized P.F. wherein she contributes 15% of her salary and half D.A.
Her employer also contributes an equal amount.
(ii) She is living in the house of her minor son in Mumbai.
(iii) Her employer gave her an interest free loan of ` 1,50,000 on 01.10.2017 to one of her
son’s wife for the purchase of an Maruti Car. Nothing has been repaid to the company
towards the loan.
Compute the taxable Salary income of Mrs. Savita Rani for the A.Y. 2018-2019. SBI rate as on
1.4.2017 in respect of car loan is 8%.
Solution: Computation of taxable salary income of Smt. Savita Rani for A.Y. 2018-19.
`
Income from Salary
Basic salary (45,000 x 12) 5,40,000
DA (12,000 x 12) 1,44,000
108 INCOME TAX
House Rent allowance (fully taxable) 72,000

Employer’s contribution to RPF in excess of 12%.
12% of salary is ` 82,080.
Employer’s contribution is 15% of salary = ` 91,800.
Taxable Amount is (` 91,800 - ` 82,080) 9,720
Perquisite in respect of interest free loan (` 1,50,000 x 8% x ½) 6,000
Net Salary 7,71,720
Assuming entire DA forms part of Salary for Retirement Benefit.
SALARY 109
Unsolved Exercise
Q1. Chandan was the General Manager of P Ltd. He retired from service on 31-12-2017
after 30 years of service. The following information has been provided by him:
(i) Salary ` 15,000 p.m. from 1-1-2017. House rent allowance ` 5,000 p.m. from 1-1-
2017.
(ii) Medical allowance ` 1,200 pm.
(iii) ` 5,600 being the cost of 1st class rail-ticket for Chandan and his family for their
visit to home-town was reimbursed by the employer.
(iv) A car of 1.4 ltrs. Engine cubic capacity is provided by the company for official and
personal use and all expenses of running and maintenance of car and salary of
the driver are borne by the company.
(v) Employer contributes 10% of his salary to a recognized provident fund.
(vi) He received ` 2,10,000 as gratuity. His salary for the preceding year was as
under:
`
(a) Year ending 31-12-2014 84,000
(b) Year ending 31-12-2015 90,000
(c) Year ending 31-12-2016 94,000
(vii) He received ` 1,90,000 for encashment of leave being twelve months unavailed
leave of Chandan. He was entitled to one month’s leave for every year of service.
(viii) He lives in his own house.
Compute the income under head salary of Chandan for the assessment year 2018-19.
[Ans. ` 2,55,100]
Q2. Mr. Titu Singh is employed with a transport firm. He is member of an unrecognized
provident fund. He has been drawing salary @ ` 8,000 p.m. since 1-1-2017. Dearness
allowance, forming part of pay for superannuation benefits, is paid @ 10% of his salary.
He gets house rent allowance of ` 1,200 per month. He pays rent of ` 2,000 p.m. He
contributes @ 10% of his salary to the fund and the employer contributes @ 20%. The
employer also reimburses his personal club bills amounting to ` 19,000. Besides, he is
paid ` 400 p.m. as running allowance.
He retires on 1-1-2018 after 28 years and 9 months of service. He gets ` 80,000 as
accumulated balance from the provident fund. It consists of ` 15,000 as his
contribution and ` 11,000 interests thereon. The employer’s contribution is ` 30,000
and interest thereon is ` 24,000. He also gets gratuity of ` 1,60,000.
After retirement, he gets pension @ ` 3,000 p.m. On 1-3-2018 he surrenders on half
pension for a consolidated amount of ` 1,20,000. You are required to compute his
110 INCOME TAX
income under head Salary for the assessment year 2018-19 assuming that he is not
covered by payment of Gratuity Act.
[Ans. ` 2,38,300]
Q3. Mrs. Nanda has the following income during the previous year 2017-18:
`
(i) Salary 1,10,000
(ii) Dearness Allowance (forming part of salary for retirement benefits) 12,000
(iii) Medical Allowance (Actual expenditure ` 4,000) 6,000
(iv) Education Allowance (for three children) 5,200
(v) Rent free house in Delhi for which X Ltd., the employer, paid ` 5,000 per
month as rent. The house is equipped with rented furniture. The rent of
the furniture is ` 300 per month.
(vi) The employer had provided her a domestic servant, a sweeper and a
watchman. The employer paid ` 300 per month to each.
(vii) The employer spent ` 2,500 on her refresher course.
(viii) The employer paid her telephone bills ` 2,200
(ix) Profession tax paid by Mrs. Nanda ` 1,500
Compute her taxable income for the assessment year 2018-19 assuming that she has no
other income.
[Ans. ` 1,63,320]
Q4. Shri Hari is the General Manager of ABC Ltd. From the following details, compute
income under head salary for the Assessment year 2018-19:
Basic salary ` 20,000 per month
Dearness allowance 30% of basic salary
Transport allowance ` 2,000 per month
Motor car running and maintenance charges fully paid by employer ` 36,000
(The motor car is owned and driven by employee Hari. The engine cubic capacity is
below 1.60 litres. The motor car is used for both official and personal purpose by the
employee)
Expenditure on accommodation in hotels while touring on official duties met by `
the employer. 30,000
Loan from recognized provident fund (maintained by the employer) ` 40,000
Value of lunch provided by the employer during office hours. Cost to the
employer ` 12,000
Computer (cost ` 50,000) kept by the employer in the residence of Hari from
1.10.17
[Ans. ` 3,31,200]
SALARY 111
Q5. Compute income under the head salary of Naveen for the assessment year 2018-19
from the following information submitted to you:
`
1. Basic salary 20,000 p.m.
2. D.A. (60% of which is part of retirement benefits) 10,000 p.m.
3. Children education allowance (for two children) 200 p.m. per child
4. Free lunch for 300 days in the office during office hours 120 per meal
5. Reimbursement of expenses incurred on credit card provided by the
employer 12,000
6. Gift of Mobile 15,000
7. Rent free unfurnished accommodation at Delhi, the fair rent value of
which is ` 84,000 p.a.
8. Motor car of 1.8 litre with driver both for official and private purposes
9. Watchman facility by the employer. Wages of watchman paid by employer 1,200
p.m.
10. Telephone facility at his residence. The employer has incurred expenses of `
25,000 for the same.
[Ans. ` 5,06,560]
Q6. Mrs. Pandey is an employee of a private college in Moradabad (whose population is 10
lakhs) which is not registered as a charitable trust with the Income-tax Department.
She is in the grade of ` 14,500-400-16,500-600-19,500 since 1-1-2016. She gets ` 2,000
per month as dearness allowance and CCA is ` 100 p.m. She has been provided with a
furnished accommodation by the college. The college is not the owner of this house.
The rental value of the house is ` 2,500 p.m. and the furniture costing ` 4,000 has been
provided by the college. She has been given car of engine capacity of 1.4 ltrs. Which in
addition to college work, is used by her for private purposes. The driver’s remuneration
and all the expenses relating to the use of the car are borne by the college.
She has been provided with the facility of a gardener, a watchman and a servant who
are paid by the college ` 300 per month each. She contributes 10% of her pay to the
statutory provident fund to which the college also contributes 10%. She purchased
books of her subject for ` 1,000 and paid employment tax of ` 500 during the financial
year 2017-18.
Her salary becomes due on the first day of the next month. Determine her income
under the head “Salaries” for the assessment year 2018-19.
[Ans. ` 2,75,020]
Q7. Rahul has been in service of Yes & Co (P) Ltd., since 1st February 1987, in Delhi. During
the financial year ending 31-3-2018, Rahul received from the company salary @ `
9,000 p.m., dearness allowance @ ` 1,500 p.m., city compensatory allowance @ ` 200
p.m., entertainment allowances @ ` 500 per month and house rent allowance @ ` 2,500
112 INCOME TAX
p.m. Rahul resides in the house property owned by his HUF for which he pays a rent of
` 3,000 p.m.
Rahul contributes ` 1,000 p.m. to the recognized provident fund. The company is also
contributing an equal amount. Rahul retires from the service of the company on 31-12-
2017 when he was allowed a gratuity (not covered by Gratuity Act) of ` 1,20,000 and
pension of ` 4,000 p.m. On 1-2-2018 he got one half of the pension commuted and
received ` 1,50,000 as commuted pension. He also received ` 2,00,000 as the
accumulated balance of the recognized provident fund.
Compute his income under the head salary for the assessment year 2018-19
[Ans. ` 1,62,400]
5 HOUSE PROPERTY
PROPERTY
Charging Section [Sec. 22]
Income is taxable under the head “Income from house property” if the following 3
conditions are satisfied:
1. The property should consist of any buildings or lands appurtenant thereto.
2. The assessee should be owner of the property.
3. The property should not be used by the owner for the purpose of any business or
profession carried on by him, the profits of which are chargeable to income-tax.
1. Property consisting of any buildings or lands appurtenant thereto

Rental income of a vacant plot (not appurtenant to building) is not chargeable to tax
under the head “Income from house property” but is taxable either under the head
“Profits and gains of business or profession” or “Income from other sources”.
2. Assessee should be owner of the property
Income is taxable under the head, “Income from house property” only if the assessee is
the owner of a house property. The word “owner” includes legal owner as well as
deemed owner.
Deemed Owner: Besides the legal owner, Section 27 provides that the following persons
are to be treated as deemed owner of house property for the purpose of charging tax on
annual value under the head “Income from house property”.
(i) Transfer to Spouse or Minor Child: If the property is transferred without
adequate monetary consideration by the assessee to his/her spouse (not being a
transfer in connection with an arrangement to live apart) or to his/her minor child
(not being a married daughter), then the individual who has transferred the property
would be deemed as “owner” of the property.
(ii) Holder of Impartible Estate: The holder of impartible estate is deemed as owner of
the property.
(iii) Property held by a Member of Co-operative Society/Company/AOP: A member
of co-operative society, company or other association of persons to whom a building
(or a part thereof) is allotted or leased under the house building scheme of the
society, company or association, is treated as deemed owner of such property.
(iv) A Person who has acquired a right in a Building under Lease: Acquiring a
property on lease for a term of not less than 12 years (whether fixed originally or
there is a provision for extension of term and the aggregate period is not less than 12
years where each renewal should also be of one year or more.) Lessee is deemed
owner.
114 INCOME TAX
3. Property should not be occupied by the owner for his own business or profession
Annual value of a house property is not chargeable to tax under the head “Income from
house property”, if the owner of the property utilizes the property for the purposes of
carrying on his business or profession, income of which is chargeable to tax. This rule is
applicable even if in a particular year income from business or profession is nil or there
is loss.
Property Held as Stock-in-Trade [Sec. 23]

As specific head of charge is provided for income from house property, annual value of
house property cannot be brought to tax under any other head of income. It will remain so
even if:
(a) The property is held by the assessee as stock-in-trade of a business but where the
house property held as stock in trade which is not let during the whole or any part of
the previous year, the annual value of such property or part of the property for the
period upto 1 year from the end of the financial year in which the certificate of
completion of construction of the property is obtained from the competent authority
shall be taken to be Nil, or
(b) If the assessee is engaged in the business of letting out of property on rent, or
(c) If the assessee is a company which is incorporated for the purpose of owning house
property.
Exceptions: The rule that income from ownership of house property is taxable under the
head “Income from house property” has the following exceptions:
1. If letting is only incidental and subservient to the main business of the assessee, rental
income is not taxable under the head “Income from house property” but is chargeable
as business income. For e.g. Renting of servant quarters.
2. If income is received not only for letting out of property but also for incidental services
or facilities (e.g., a furnished paying guest accommodation, a well equipped theatre, a
safe deposit vault), then it cannot be said to be derived from mere ownership of house
property but because of facilities and services rendered. Income in such case may be
assessable as income from business.
House Property income not charged to tax

In the following cases income from property is not charged to tax:
(a) Farm house: Income from any building owned or occupied by an agriculturist or
receiver of rent/revenue of such land provided that the building is in the immediate
vicinity of agricultural land and is used as a dwelling house or as a store house.
(b) Property held for charitable purposes: As per Section 11, where the property is held
for charitable or religious purposes the income from such property is exempt from tax.
(c) House property used for own business/profession.
(d) Self-occupied house: Annual value of one self-occupied house shall be taken as Nil.
HOUSE PROPERTY 115
(e) House property of registered trade union/local authority: The income from
property held by a registered trade union/local authority is not taxable.
(f) Palace of ex-ruler: The annual value of any one palace in the occupation of an ex-ruler
shall be exempted from tax.
(g) Property held by Political Party.
Computation of Income from House Property
Gross Annual Value XX

Less: Municipal Taxes (Paid by owner either of Previous Year or any
other year) XX
Net Annual Value XX
Less: Deduction U/s 24
Sec. 24(a) Standard deduction @ 30% XX
Sec. 24(b) Interest on borrowed Capital XX XX
Income from House Property XX
Standard deduction @ 30% will not be allowed if NAV is (-)ve. However interest on
borrowed capital will be allowed.
Notes:
1. Municipal Value (MV): This is ratable value of property determined by Municipal
Corporation.
2. Fair Rent (FR): Rent charged by similar property.
3. Standard Rent (SR): Maximum Rent a person can legally recover under Rent Control
Act.
4. Annual Rent (AR): Rent for the period for which property is available for letting out.
Electricity and Building maintenance charges paid by owner of house shall be
deductible. Rent is taken for 12 months period except in the case of:
(i) Property purchased during the previous year,
(ii) Property sold during the previous year,
(iii) Property self occupied for part of the year.
5. MV, FR, SR to be taken for the period House Property is held i.e. 12 months period
except in the year of purchase or sale.
Steps to Compute Gross Annual Value (if there is no vacancy i.e. let out throughout the
previous year)
Step 1: Expected Rent = Municipal Value or Fair rent whichever is higher subject to
Standard Rent.
Step 2: Actual Rent = Annual Rent - Unrealised rent.
Step 3: GAV = Step 1 or Step 2 whichever is higher.
116 INCOME TAX
Notes:
1. Unrealised rent is rent for the period when tenant doesn’t pay rent & also doesn’t
vacant property.
2. Unrealised rent will be allowed to be deducted from actual rent only if following
(a) The tenancy is bona fide.
(b) The defaulting tenant has vacated, or steps have been taken to compel him to
vacate the property.
(c) The defaulting tenant is not in occupation of any other property of the assessee.
(d) The assessee has taken all reasonable steps to institute legal proceedings for the
recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings
would be useless.
3. Deduction on account of unrealized rent of earlier years is not permitted.
Illustration 1: Mr. X owns 5 houses in Chennai, all of which are let-out. Compute the GAV of
each house from the information given below:
Particulars I II III IV V
Municipal Value 80,000 55,000 65,000 24,000 75,000
Fair Rent 90,000 60,000 65,000 25,000 80,000
Standard Rent N.A. 75,000 58,000 N.A. 78,000
Annual Rent 72,000 72,000 60,000 30,000 72,000
Solution:
Particulars I II III IV V
Step 1: MV or FR 90,000 60,000 58,000 25,000 78,000
Subject to SR
Step 2: AR 72,000 72,000 60,000 30,000 72,000
Step 3: GAV = Higher of 90,000 72,000 60,000 30,000 78,000
Step 1 or Step 2
Illustration 2: Find out the gross annual value in respect of following let out properties for
the AY 2018-19.
(` in lakhs)
A B C D
Municipal Value (MV) 50 50 50 50
Fair Rent (FR) 52 52 52 52
Standard Rent (SR) -- 51 51 51
Annual Rent 48 48 48 48
Unrealized rent of the previous year 2017-18 2 2 2 2
Unrealized rent of the previous year 2016-17 -- 1 1 1
HOUSE PROPERTY 117
Solution:
A B C D
Computation of gross annual value
Step I –Expected rent of the property [MV or FR,
whichever is higher, but subject to maximum of SR] 52 51 51 51
Step II – Rent received/receivable after deducting
unrealized rent of the current previous year (unrealized 46 46 46 46
of earlier year is not considered)
Step III – GAV = Amount computed in Step I or Step II, 52 51 51 51
whichever is higher
Step to Compute Gross Annual Value (If property is partly vacant)

Step 1: Expected Rent (ER) = Municipal Value or Fair rent whichever is higher subject to
Standard Rent.
Step 2: Actual Rent (AR) = Annual Rent - Unrealised rent.
Step 3:
GAV
ER > AR AR > ER AR = ER
GAV = ER GAV = AR – Loss due to vacancy
Illustration 3: Compute GAV of the following properties

Particular A B C D E F
Expected Rent 100 100 100 120 100 100
Annual Rent 108 48 120 120 108 108
Unrealized Rent - - - - 10 4
Loss due to Vacancy 9 4 10 10 9 9
Solution:
Particular A B C D E F
Step 1: Expected Rent 100 100 100 120 100 100
Step 2: Actual Rent = Annual Rent – Unrealized Rent 108 48 120 120 98 104
Step 3: Higher of Both AR ER AR Equal ER AR
Step 4: GAV 99 100 110 110 100 95
118 INCOME TAX
Illustration 4: Municipal value of a house is ` 90,000, Fair Rent ` 1,40,000, Standard Rent `
1,20,000. The House property has been let for ` 12,000 p.m. and was vacant for one month
during the previous year 2017-18. Municipal taxes paid during the year were ` 40,000.
Compute the annual value for AY 2018-19.
Solution:
Compute Gross Annual Value (which shall be higher of the following two)
Step 1: Expected rent which shall be municipal value (` 90,000) or fair rent
(` 1,40,000) but limited to standard rent (` 1,20,000) 1,20,000
Step 2: Actual rent = Annual Rent – Unrealized Rent 1,44,000
Step 3: Gross annual value shall be Actual Rent – Loss due to Vacancy
(1,44,000 – 12,000 x1) 1,32,000
Less: Municipal Taxes paid 40,000
Net annual value 92,000
Illustration 5: Assume in above question, the property was vacant for 3 months. Determine
the net annual value for the AY 2018-19.
Solution:
(a) Expected rent (as determined above) ` 1,20,000
(b) Actual rent received/receivable (12,000 x 12) `1,44,000
`
GAV (1,44,000 – 12,000 x 3) 1,08,000
Illustration 6: R has a house property in Delhi whose Municipal Value is ` 1,00,000 and the
Fair Rental Value is ` 1,20,000. It was self-occupied by R from 1-4-2017 to 31-7-2017. W.e.f.
1-8-2017 it was let out at ` 9,000 p.m. Compute the annual value of the house property for
the AY 2018-19 if the municipal taxes paid during the year were ` 20,000.
Solution:
The gross annual value shall be higher of the following two:
(a) Expected rent (Municipal value ` 1,00,000 or 1,20,000
FRV ` 1,20,000 whichever is higher)
(b) Actual rent received/receivable for let out period i.e. (9,000 x 8) 72,000
Gross annual value 1,20,000
Less: Municipal taxes 20,000
Net annual value 1,00,000
Computation of Gross Annual Value (If property is Deemed Let out)

Where an assessee owns more than one property for self-occupation, then the income from
any one such property shall be computed as self occupied Property and its NAV will be Nil.
HOUSE PROPERTY 119
The other properties shall be treated as deemed let out properties whose GAV is equal to
Expected Rent.
Illustration 7: R owns 3 house Properties situated in Delhi. The particulars of these let out
houses are as under:
House 1 House 2 House 3
(1) Municipal Value 1,00,000 1,50,000 2,00,000
(2) Fair Rent 1,40,000 1,80,000 2,40,000
(3) Standard Rent 1,20,000 2,00,000 --
(4) Actual Rent p.m. 12,000 17,500 21,000
(5) Period of vacancy Nil 1 month 6 months
(6) Municipal taxes of the year 20% of municipal 40,000 50,000
value
(7) Municipal taxes paid during the year 20,000 80,000 30,000
Compute the income under the head House Property of all the 3 properties.
Solution:
Particular House 1 House 2 House 3
Step 1: MV or FR whichever is higher subject to SR 1,20,000 1,80,000 2,40,000
Step 2: Actual Rent 1,44,000 2,10,000 2,52,000
Step 3:GAV 1,44,000 1,92,500 1,26,000
(2,10,000 - (2,52,000 –
17,500) 21,000 x 6)
(-) Municipal Taxes (Paid during the year) 20,000 80,000 30,000
NAV 1,24,000 1,12,500 96,000
Less: Deduction u/s 24
24(a) Standard deduction @ 30% 37,200 33,750 28,800
Income from House Property 86,800 78,750 67,200
Interest on Borrowed Capital

Pre Construction Period
Case I: When Capital borrowed is repaid in a year after the year of completion of
house property
0 1 2 3 4 5
Loan Property Loan

Taken Completed Repaid
Pre Construction period
120 INCOME TAX
Case II: When Capital borrowed is repaid in a year before the year of completion of
house property
0 1 2 3 4 5
Loan Loan Property

Taken Repaid Completed
Case III: When Capital borrowed is repaid in the year of completion of house property
0 1 2 3 4 5
Loan Loan Property

Taken Repaid Completed
Pre Construction Interest

Interest for the period pertaining to pre construction period is called pre construction
interest. This interest is allowed as deduction in five equal installment beginning with the
year in which property is completed.
Current Period Interest

• Current period interest will never arise in case II.
• In Case I, Current period interest will start from first day of the year in which property
is completed & will continue for each year till the Loan is repaid.
• In Case III, Current Period interest will start from first day of the year in which property
is completed, till the date loan is repaid.
Note:
1. If capital is borrowed for the purpose of purchasing a plot of land, interest liability is
deductible even if construction is financed out of own funds.
2. Interest on borrowed capital is deductible on “accrual” basis. It can be claimed as
deduction on yearly basis, even if the interest is not actually paid during the year.
3. Interest on unpaid interest is not deductible.
4. No deduction is allowed for any brokerage or commission for arranging the loan.
HOUSE PROPERTY 121
5. Interest on a fresh loan, taken to repay the original loan raised for the aforesaid
purposes, is allowable as deduction.
6. Interest is charged for the day of borrowing but not for the day of repayment.
7. Interest payable outside India shall not be deducted if tax has not been paid nor
deducted from such interest.
Illustration 8: Mr. X took a loan of ` 20,00,000 for construction of a house on 1-5-14, the
property was completed on 31-12-17.
Case A: Loan was repaid on 31-3-2023.
Case B: Loan was repaid on 31-3-2020.
Case C: Loan was repaid on 31-3-2016.
Case D: Loan was repaid on 31-1-2018.
Case E: Loan was repaid on 31-10-2017.
Rate of interest charged by bank is 10% pa. Compute interest to be allowed as deduction for
AY 2018-19 in each of above 5 cases:
Solution:
Case A: Loan was repaid on 31-3-2023
For FY 2017-18 Current year interest = 2,00,000
It will continue till 2022-23
Period Current year
Interest
2017-18 2,00,000
2018-19 2,00,000
2019-20 2,00,000
2020-21 2,00,000
2021-22 2,00,000
2022-23 2,00,000
Pre Construction Period = 1-5-14 to 31-3-17
= 2 Year 11 Month
11
Pre Construction Interest = ` 20,00,000 X 10% X 2 + ` 20,00,000 X 10% X
12
Current Year Interest = ` 20,00,000 X 10%
= ` 2,00,000
Interest on borrowed capital allowed u/s 24(b)
1
Pre Construction interest ` 5,83,333 X 1,16,667
5
Add: Current Year Interest 2,00,000
3,16,667
Case B: Loan was repaid on 31-3-2020
Same as Case A
122 INCOME TAX
Case C: Loan was repaid on 31-3-2016

Pre Construction Period = 1-5-14—31-3-16
= 1 Year 11 Months
11
Pre Construction Period = ` 20,00,000 X 10% + ` 20,00,000 X 10% X
12
= ` 3,83,333

1
Pre Construction interest ` 3,83,333 X 76,667
5
Add: Current Year Interest Nil
76,667
Case D: Loan was repaid on 31-1-2018
Pre Construction Period = 1-5-14—31-3-17
= 2 Year 11 Months
11
Pre Construction Period = ` 20,00,000 X 10% X 2 + ` 20,00,000 X 10% X
12
= ` 5,83,333
10
Current Year Interest = ` 20,00,000 X 10% X
12
= ` 1,66,667

1
5
2,83,334
Case E: Loan was repaid on 31-10-2017
Pre Construction Period = 1-5-14 to 31-3-17
= 2 Year 11 Months
11
Pre Construction Interest = ` 20,00,000 X 10% X 2 + ` 20,00,000 X 10% X
12
= ` 5,83,333
7
Current Year Interest = ` 20,00,000 X 10% X
12
= ` 1,16,667
1
5
2,33,334
HOUSE PROPERTY 123
Interest on Borrowed Capital in case of Self Occupied Property

Interest will be allowed subject to limit of ` 30,000 or ` 2,00,000. If all the following
conditions are satisfied, interest will be allowed up to ` 2,00,000:
(i) Capital is borrowed on or after 1-4-1999.
(ii) Loan is taken for acquisition or construction of property.
(iii) Acquisition or Construction is completed within 5 years from the end of Financial
Year in which Capital was borrowed.
If any of the above condition not satisfied, deduction will be subject to maximum ceiling of
` 30,000.
Note: 1. When more than 1 loan has been taken, one for construction & other for renewal,
total deduction for interest on all loan cannot exceed ` 2,00,000 in case of self-
occupied property.
2. Deduction u/s 24(b) is available only if the interest is payable on borrowed fund. If the
assessee has taken interest free loan from employer taxable as perquisite, deduction
can’t be availed.
3. Where a buyer enters into an arrangement with a seller to pay the sale price in
installments along with interest due thereon, the seller becomes the lender in relation
to the unpaid purchase price and the buyer becomes the borrower. In such a case
unpaid purchase price can be treated as capital borrowed for acquiring property and
interest paid there on can be allowed as deduction u/s 24(b).
Tax incidence on Self-occupied House Property

Self-occupied property Condition to be fulfilled Tax treatment
If such property is used by Income of the above Income is not taxable
the owner for the purpose of business or profession is under the head “Income
carrying on his business or chargeable to tax. from house property”. Any
profession. income and expenditure in
respect of such property
will be considered while
calculating PGBP income
under section 28.
If such property is used 1. The property (or part Nothing is taxable. Only
throughout the previous year thereof) is not actually interest on borrowed
for own residential purposes, let during whole (or any capital is deductible
it is not let out or put to any part) of the previous subject to a maximum of `
other use. year. 30,000/ 2,00,000.
2. No other benefit is
derived there from.
If such property could not be 1. He has to reside at that Same as above.
occupied throughout the other place in a building
previous year because of not owned by him.
124 INCOME TAX
employment, business or 2. The property (or part

profession of the owner is thereof) is not actually
situated at some other place. let out during whole (or
any part of the previous
year).
3. No other benefit is
derived from the above
property by the owner.
When a part of the property House property consists of Income from the
is self-occupied and the other two or more independent independent unit, which is
part is let out. residential units, of which self-occupied, will not be
few is self – occupied for taxable. Interest on
own residential purposes borrowed capital in
and other unit(s) are let out. respect of each unit is
deductible up to ` 30,000/
` 2,00,000. Income from
the unit which is let out is
to be computed as if the
unit is let out.
When such property is self- No concession is available.
occupied for a part of the The house will be taken as
year and let out for the other let out property. No limit
part of the year for deduction of interest
on borrowed capital.
If more than one property is Only one property
used for residential purpose. selected by the taxpayer
will be treated as self-
occupied. Other remaining
properties will be deemed
as let out.
Illustration 9: Mr. Nitish has two houses, both of which are self occupied. The particulars of
the house are as under:
1st House (`) 2nd House (`)
Municipal Value 60,000 90,000
Fair Rental Value 72,000 1,20,000
Standard Rent -- 1,00,000
Municipal taxes (Accrued during the year) 9,000 9,000
Municipal taxes (Paid during the year) 6,000 9,000
HOUSE PROPERTY 125
Suggest which house should be opted by Mr. Nitish to be assessed as self occupied so that
his tax liability is minimum.
Solution: Assume both houses to be let out
1st House 2nd House
(`) (`)
Gross annual value 72,000 1,00,000
Less: Municipal taxes 6,000 9,000
Net Annual Value 66,000 91,000
Less: Statutory deduction @ 30% 19,800 27,300
Income from HP 46,200 63,700
If house I is opted to be self-occupied, the income of house property shall be: `

House I Nil
House II 63,700
63,700
If House II is opted to be self-occupied, the income of house property shall be: `
House I 46,200
House II Nil
46,200
House II should be opted by Mr. Nitish to be assessed as Self Occupied.
Illustration 10: What will be your answer if in the above question in case of house II, the
interest on money borrowed for repair for the property during the current year is ` 40,000
Compute the income from house property for the AY 2018-19.
Solution: Assume both houses to be let out
1st House (`) 2nd House (`)
Gross Annual Value 72,000 1,00,000
Less: Municipal taxes 6,000 9,000
Less: (a) Statutory deduction @ 30% 19,800 27,300
(b) Interest on money borrowed --- 40,000
Net annual value 46,200 23,700
If house I is opted to be self-occupied the income of house property `
shall be: Nil
House I 23,700
House II 23,700
If house II is opted to be self-occupied the income of house property `
shall be: 46,200
House I (-) 30,000
House II 16,200
House II should be opted by Mr. Nitish to be self occupied.
126 INCOME TAX
Taxability of Unrealized Rent Subsequently Realized and Arrears of Rent [Sec. 25A]
1. Provisions for taxability of Unrealized Rent and Arrears of Rent made uniform.
2. Unrealized Rent means the rent which has been deducted from actual rent in any
previous year for determining annual value.
3. Arrears of rent is in respect of rent not charged to income tax for any previous year.
4. Taxable in the hands of the assessee whether he is now owner of that property or not.
5. Taxable as income of the previous year in which he recovers the unrealized rent or
arrears of rent.
6. An amount equivalent to 30% of such unrealized rent/arrears of rent will be allowed as
deduction therefrom.
7. No claim will be allowed for expenses incurred for realizing unrealized rent.
Illustration 11: X owns a house property which is given on rent. For the previous year
2011-12, he claims a deduction of ` 90,000 on account of unrealized rent, out of which the
Assessing Officer allows only ` 75,000 as deduction. What are the tax consequences if X
recovers on October 15, 2017 from the defaulting tenant (a) ` 10,000, (b) ` 15,000 or (c) `
40,000 as full and final payment?
Solution:
Amount Rent outstanding Realization of
recovered during ` (90,000 - 75,000) unrealized rent Taxable
2017-18 `
(a) 10,000 15,000 - Nil
(b) 15,000 15,000 - Nil
(c) 40,000 15,000 25,000 25,000-30% x
25,000 = 17,500
Property owned by Co-owners [Sec. 26]

Sometimes the property consisting of buildings or the buildings and lands appurtenant
thereto is owned by two or more persons, who are known as co-owners. In such cases, if
their respective shares are definite and ascertainable, such persons shall not be assessed as
an AOP in respect of such property, but the share of each such person in the income from
the property, shall be included in his total income as under:
(a) Where house property is self-occupied by each co-owner: Where the house
property owned by the co-owners is self occupied by each of the co-owner, the annual
value of the property for each of such co-owner shall be nil and each of the co-owner
shall be entitled to the deduction of ` 30,000/2,00,000 under section 24(b) on account
of interest on borrowed money.
(b) Where the entire or part of the property is let: As regards, the property or part of
the property which is owned by co-owners is let out, the income from such property or
part thereof shall be first computed as if this property/ part is owned by one owner and
thereafter the income so computed shall be apportioned amongst each co-owner as per
their definite share.
HOUSE PROPERTY 127
Rent Received/ Receivable in Foreign Currency

Rent received/ receivable in foreign currency shall be converted into Indian currency at TT
Buying Rate of SBI as on last day of previous year.
Illustration 12: Three brothers A, B and C having equal share are co-owners of a house
property consisting of six identical units, the property was constructed on 31-5-1996. Each
of them occupies one unit for his residence and the other three units are let out at a rent of `
12,000 per month per unit. The Municipal Value of the house property is ` 6,00,000 and the
Municipal Taxes are 40% of such Municipal Value, which were paid during the year. The
other expenses were as follows:
(i) Repairs 25,000
(ii) Collection charge 15,000
(iii) Insurance Premium (paid) 18,000
(iv) Interest payable on loan taken for construction of house 2,52,000
One of the let out units remained vacant for three months during the year. A could not
occupy his unit for six months as he was transferred to Mumbai. He does not own any other
house. Compute the income under the head “Income from House Property” of the three
brothers for AY 2018-19.
Solution:
` `
Let out Property (50% i.e. 3 units)
Gross annual value
(a) Municipal value (50% of ` 6,00,000) 3,00,000
(b) Actual rent (12,000 x 12 x 3) 4,32,000
Less: Vacancy of one unit for 3 months 36,000 3,96,000
Less: Municipal taxes paid (50% of ` 2,40,000) 1,20,000
Less: Deductions u/s 24
(a) Standard deduction @ 30% 82,800
(b) Interest on loan (50%) 1,26,000 2,08,800
Income from let out property 67,200
Therefore, share of each co-owner is 1/3rd of 67,200 22,400
A B C
Self-occupied Property
` ` `
Annual value Nil Nil Nil
Less: Deduction u/s 24(b)
Interest on loan (` 1,26,000 ÷ 3 = 42,000)
restricted to maximum ` 30,000 for each co-owner 30,000 30,000 30,000
Income from self-occupied property (-) 30,000 (-) 30,000 (-) 30,000
128 INCOME TAX
Computation of the total income of the three A B C

brothers ` ` `
Income from House Property
Let out portion 22,400 22,400 22,400
Self-occupied portion (-) 30,000 (-) 30,000 (-) 30,000
Net income from house property (-) 7,600 (-) 7,600 (-) 7,600
Note: Interest on borrowed capital is allowable subject to maximum of ` 30,000/ 2,00,000;

even if the assessee could not occupy the house property for part/entire previous year due
to his employment elsewhere.
Composite Rent
Letting
House Property + Plant & House Property + Services

Machinery/Furniture (Lift + Security Check)
Separable Non-Separable Organised Not Organised
House Property →HP Income from Other PGBP House Proper → HP

Income Sources (If unorganised) Income
Plant & Machinery/ or PGBP (If organised) Services → Income
Furniture →Income from Other Sources
from Other Sources
or PGBP
Illustration 13: X (age: 36 years) owns a house property at Calicut which is let out for
residential purposes, particulars of which are as follows:
`
Rent of house and amount charged for different amenities (` 1,92,000 includes
charges for the following amenities – water charges : ` 16,000, electricity
charges: ` 48,400, lift charges : ` 24,000 and security charges : ` 22,000) 1,92,000
Rent of 1 month could not be collected (1/12 of ` 1,92,000) 16,000
Municipal taxes paid by the tenant 6,000
Municipal valuation (MV) 72,000
Fair rent (FR) 76,000
HOUSE PROPERTY 129
Standard rent (SR) 78,000

Expenditure:
Repairs (met by the tenant) 4,000
Insurance 2,000
Collection charges and litigation expenses for collection of rent 14,000
The construction of the property was completed on October 31, 2007.
During the previous year 1999-2000, X had claimed deduction of unrealized rent of `
30,000 out of which ` 22,000 was allowed as deduction for that year. On August 10, 2017, X,
however, recovers ` 14,000 from the defaulting tenant (expenditure on recovery of rent: `
1,200).
For providing the different amenities, the following expenses are incurred by X:
`
Expenses/depreciation
Water bills 600
Electricity bills 38,800
Lift maintenance 9,200
Salary of liftman 12,000
Depreciation on lift (as per section 32) 5,600
Salary of guard 36,000
Assuming that income of X from business is ` 4,00,000, find out Gross Total income of X for
the assessment year 2018-19.
Solution: No deduction is available in respect of insurance, collection charges and litigation

expenses.
`
Municipal valuation (MV) 72,000
Fair rent (FR) 76,000
Standard rent (SR) 78,000
Annual rent of the property (` 1,92,000 - ` 16,000 - ` 48,400 - `
24,000 - ` 22,000) 81,600
Unrealized rent (1/12 of ` 81,600) 6,800
Loss due to vacancy Nil
Gross Annual Value
Step I – Reasonable expected rent of the property [MV or FR,
whichever is higher, but subject to maximum of SR] 76,000
Step II – Rent received/receivable after deducting unrealized rent
(81,600 - 6,800) 74,800
Step III – GAV (Amount computed in Step I or Step II, whichever is
higher) 76,000
Less: Municipal taxes (not deductible as paid by the tenant) Nil
130 INCOME TAX
Less: Deductions under section 24 [being Standard deduction (30%

of ` 76,000)] 22,800
Income from house property 53,200
Rent recovered from the defaulting tenant during previous year
2017-18 chargeable under section 25A [i.e., ` 6,000 – 30% of 6,000] 4,200
Income under the head “Income from house property” 57,400
Business income 4,00,000
Income from other sources:

Amount collected from tenant for providing different amenities [i.e.,
11/12 of (` 16,000 + ` 48,400 + ` 24,000 + ` 22,000)] 1,01,200
Less: Expenses and depreciation (i.e., ` 600 + ` 38,800 + ` 9,200 + `
12,000 + ` 5,600 + ` 36,000) 1,02,200 (-)1,000
Illustration 14: R has the following properties:

(a) Flat in Mumbai purchased on 1-6-2016 which is let out on a monthly rent of ` 4,000.
The building in which the flat is located was completed on 1-5-2015.
(b) Flat in Delhi (construction completed on 10-5-2014) which is self occupied.
(c) Godown in Kolkata constructed in 2004 which is let out on a monthly rent of ` 8,000.
(d) The expenses actually incurred during the year against rental income are:
Mumbai Delhi Kolkata

(`) (`) (`)
Municipal taxes actually paid during the PY ending 31-3-2018 7,000 2,400 11,000
Building Co-operative maintenance charges 2,000 900 --
Electricity charges -- 4,200 6,800
Fire insurance premium -- -- 2,600
Collection charges 750 -- 1,400
Repairs 320 1,900 14,000
The following further information is given:

(1) The flat in Delhi, if let out, would fetch a monthly rent of ` 7,000, however, standard
rent of the house according to the Delhi Rent Control Act is ` 6,000 per month.
(2) R carries on business in which he suffered a loss of ` 600 during year ended on 31-3-
2018.
(3) R received a consolidated salary of ` 4,000 p.m. during the year from a part time
employment.
HOUSE PROPERTY 131
(4) R took a loan of ` 3,60,000 on 1-4-2008 from a bank at 12% interest per annum, to
construct the house in Delhi. However, on 5-5-2014 it is repaid along with interest.
Compute R’s Gross Total income for the year ending 31-3-2018.
Solution:
`
Income from House Property at Mumbai

Gross annual value (F.R.V = 4,000 x 12) 48,000
Less: Municipal Taxes 7,000
Statutory deduction @ 30% 12,300
Income from flat at Mumbai 28,700
Income from let out godown at Kolkata
Gross annual value (` 8,000 x 12) 96,000
Statutory deduction@ 30% 25,500
Income from godown at Calcutta 59,500
Income from self-occupied property in Delhi
Annual value Nil
1/5th of pre-construction period interest
3,60,000 x 12/100 x 6 = 2,59,200
1/5th of ` 2,59,200 = 51,840
Restricted to maximum ` 30,000 30,000
Income from self-occupied property (-) 30,000
Computation of Taxable Income of R

Salary 48,000
Flat at Mumbai 28,700
Flat at Delhi (-) 30,000
Godown at Calcutta 59,500 58,200
Business loss (-) 600
132 INCOME TAX
Note:
(i) Electricity charges and building maintenance charges are deductible from actual
rent for the computation of GAV.
(ii) Computation of GAV of the house property at Mumbai. Higher of
FR = 4,000 x 12 = 48,000
AR = 48,000 – 2,000 = 46,000
(iii) Computation of GAV of the house property at Calcutta.
FR = 8,000 x 12 = 96,000.
AR = 96,000 – 6,800 = 89,200. Whichever is higher.
Illustration 15: Mr. X owns one residential house in Mumbai. The house is having two
units. First unit of the house is self occupied by Mr. X and another unit is rented for ` 8,000
p.m. The rented unit was vacant for 2 months during the year. The particulars of the house
for the previous year 2017-18 are as under:
Standard rent ` 1,62,000 p.a.
Municipal valuation ` 1,90,000 p.a.
Fair rent ` 1,85,000 p.a.
Municipal tax paid 15% of municipal valuation
Light and water charges ` 500 p.m.
Interest on borrowed capital ` 1,500 p.m.
Lease money ` 1,200 p.a.
Insurance charges ` 3,000 p.a.
Repairs ` 12,000 p.a.
Compute income from house property of Mr. X for the A.Y. 2018-19.
Solution:
Computation of Income from house property for A.Y. 2018-19
(a) Rented unit (50% of total area – See Note 1 below)
Step I – Computation of Annual Letting Value ` `
Municipal valuation (` 1,90,000 x ½) 95,000
Fair rent (` 1,85,000 x ½) 92,500
Standard rent (` 1,62,000 x ½) 81,000
Annual letting value is higher of municipal valuation and fair rent, but
restricted to standard rent 81,000
Step II – Actual Rent

Rent receivable for the whole year (` 8,000 x 12) 96,000
Gross annual value (` ` 96,000 – ` 16,000) 80,000

Less: Municipal taxes (15% of ` 95,000) 14,250
Net Annual value 65,750
Less: Deductions under section 24
HOUSE PROPERTY 133
(i) 30% of net annual value 19,725

(i) Interest on borrowed capital (` 750 x 12) 9,000 28,725
37,025
Taxable income from let out portion
(b) Self occupied unit (50% of total – See Note 1 below)
Annual value Nil
Interest on borrowed capital (` 750 x 12) 9,000 9,000
Notes:
(1) It is assumed that both the units are of identical size. Therefore, the rented unit would
represent 50% of total area and the self-occupied unit would represent 50% of total
area.
(2) It is assumed that the municipal taxes have been paid by the owner during the year.
(3) No deduction will be allowed separately for light and water charges, lease money paid,
insurance charges and repairs.
Illustration 16: The following particulars of Mr. X are given for the AY 2018-19.
House 1 House 2
Property Income ` `
Fair Rent 75,000 85,000
Rent 78,000 78,000
Municipal Valuation 76,000 75,000
Municipal tax (due) 3,000 14,000
Repairs 3,500 4,700
Insurance 2,000 3,000
Land revenue (paid) 2,500 4,000
Ground rent (due) 1,600 6,000
Interest on capital borrowed by mortgaging House 1 14,000
(funds are used for construction of House 2)
Nature of Occupation Let out for let out for
residence Business
Date of Completion of Construction 30-4-1996 7-4-1998
Determine the House Property income of Mr. X for AY 2018-19
134 INCOME TAX
Solution:
House I House II
` ` ` `
Higher of the following two:
(a) Expected rent 76,000 85,000
(b) Actual rent received or receivable 78,000 78,000
Gross annual value 78,000 85,000
Less: Municipal tax (Due not allowed) ________ ________
Net annual value 78,000 85,000
(a) Statutory deduction @ 30% 23,400 25,500
(b) Interest on borrowed capital --------- 23,400 14,000 39,500
Income from House Property 54,600 45,500
Total Income from HP = 54,600 + 45,500 = ` 1,00,100
Illustration 17: R, S and G are the three equal co-owners of the property situated in Delhi,
which has 6 units of identical size. R and S have occupied one unit each for their residence.
Other four units are let out to one tenant at a rent of ` 25,000 p.m. The Municipal Valuation
of the house is ` 3,00,000.
The other particulars of the House Property are as under: `
Municipal taxes paid 30,000
Insurance premium paid 6,000
Interest on money borrowed (for construction of the house) 2,10,000
Compute the income u/h house property and the income of each co-owner for the let out
portion.
Solution: Let out Property:
` `
Gross annual value
(a) Actual rent (25,000 x 12) 3,00,000
(b) Municipal valuation (3,00,000 x 4/6) 2,00,000
GAV (whichever is more) 3,00,000
Less: Municipal taxes paid (30,000 x 4/6) 20,000
Interest on loan borrowed (2,10,000 x 4/6) 1,40,000 2,24,000
Income from let out portion 56,000
Income from let out portion shall be distributed among three co-owners R, S and G in the
ratio of 1:1:2 as out of 6 identical units R and S are occupying one unit each for self
residence. Hence, income of R, S and G shall be ` 14,000, ` 14,000 and ` 28,000 respectively.
HOUSE PROPERTY 135
Unit self-occupied by R & S

` `
Annual Value Nil Nil
Less: Interest on money borrowed (-) 30,000 (-) 30,000
(`35,000 per co-owner but limited to ` 30,000 per co-owner)
(-) 30,000 (-) 30,000
Income from house property

R S G
Income from let out portion 14,000 14,000 28,000
Income from self occupied portion (-) 30,000 (-) 30,000 --------
(-) 16,000 (-) 16,000 28,000
Illustration 18: X, a chartered accountant, has a house property situated at Delhi, which
has 4 identical units, Unit I was used by him for his professional purposes, Unit II was let out
for residential purpose at ` 5,000 p.m., Unit III and IV were self occupied.
Other particulars of the property are as under:-
Date of completion 31-1-1997
Municipal Taxes Paid 20,000
Interest on money borrowed for construction of house property 60,000
Compute his income under the head house property for the AY 2018-19.
Solution:
Unit II Unit III + IV
Let out Self occupied
Gross Annual Value 60,000 Nil
Municipal Taxes paid 5,000 Nil
Net annual value 55,000 Nil
Standard deduction @ 30% 16,500
Interest on borrowed capital 15,000 30,000
Income from House Property 23,500 (-) 30,000
Total Loss = ` 23,500 – 30,000 = (-) 6,500
Illustration 19: Rahul owns two identical houses in Delhi, both of which are self-occupied.
From the particulars given below, suggest which house should be treated as self-occupied.
House 1 House 2
` `
Standard Rent under Delhi Rent Control Act. 33,000 33,000
Municipal Value 30,000 30,000
Fair Rent 36,000 36,000
136 INCOME TAX
Municipal Taxes (paid) 3,000 1,000

Insurance Premium (paid) 2,000 Nil
Construction of both the houses was completed in Sep. 2014. X had borrowed ` 75,000 @
8% p.a. for construction of House II (Date of Borrowing 1-6-2013) Date of repayment of
entire loan 30-6-2017.
Solution:
He should opt for House II to be self-occupied. `
House I (Deemed to be let out) (see working note) 21,000
House II (self-occupied) (see working note) (-) 2,500
Working Note:
When both the houses are deemed to be House – House –
let out I II
` `
Gross Annual value 33,000 33,000
Less: Municipal taxes paid 3,000 1,000
(a) Statutory deduction @ 30% 9,000 9,600
(b) Interest on loan for three months
` 1,500 + 1/5 of pre-construction period
` 5,000 = ` 1,000 ----- 9,000 2,500 12,100
21,000 19,900
(a) Assume House – I to be self occupied and House – II deemed to be let out `
Income from House I Nil
Income from House II 19,900
Income from House Property 19,900
(b) Assume House – II to be self occupied and House – I deemed to be let out `
Income from House I 21,000
Income from House II (-) 2,500
Income from House Property 18,500
Pre – Construction Period = 1.6.2013 to 31.3.2014 = 10 months.
Illustration 20: Mr. X owns a house in Delhi. During the PY 2017-18, 3/4th portion of the
house was self-occupied for full year and 1/4th portion was let out for residential purpose
from 1-4-2017 to 31-12-2018 on a rent of ` 700 p.m. From 1-1-2018, this portion was also
used for own residence. M.V. of the house is ` 20,000.
He incurred the following expenditure in respect of the house property:
Municipal taxes due ` 6,000; Repairs ` 2,000; Fire Insurance Premium ` 3,500; Land
Revenue ` 4,000; Ground Rent ` 200 were paid during the year.
HOUSE PROPERTY 137
A loan of ` 1,00,000 was taken on 1-4-2013 @ 9% p.a. for the construction of the house
which was completed on 28-3-2014. Nothing was repaid on loan account so far.
Find out his income from house property for the AY 2018-19.
Solution: There are two units of the house. Unit 1 with 3/4th floor area is self-occupied
throughout the year and no benefit is derived from that unit, hence it is self-occupied and its
annual value shall be nil. Unit 2 with floor area of 1/4th is though self-occupied but part of
the year let out. Hence the annual value of unit 2 shall be determined as per section 23 (1).
` `
Unit 1: Annual Nil
Less: Deduction u/s 24 (b)
Interest 75% of ` 9,000 6,750
Income from self-occupied (-) 6,750
th
Unit 2: (1/4 floor area)
Gross annual value higher of the following two:
(a) Expected rent 8,400
(b) Actual rent received or receivable (700 x 9) 6,300
Gross annual value 8,400
(a) Statutory deduction @ 30% 2,520
(b) Interest (1,00,000 x 9%) ¼ 2,250 4,770
3,630
Income from house property (-) 6,750 + 3,630 = (-) ` 3,120
No interest for pre-construction period is allowed, as the loan was taken in the previous
year 2013-14 and the property was also completed in the same previous year. The entire
interest of previous year 2013-14 must have been allowed, as current interest in the
previous year 2013-14 itself.
Illustration 21: Mrs. R. is the owner of a two storied house in Madras. She gets a monthly
rent ` 7,000 from her tenant in the ground floor. The first floor, identical in all respect with
the ground floor used to be occupied by a friend of Mrs. R from whom she charged a rent of
` 5,000 p.m. during the year ended 31-3-2018, the friend stayed in Mrs. R house up to 31-
12-2017. On 1-1-2018, it was again let out to tenant at rent of ` 7,000 p.m. Details of
expenses incurred by Mrs. R during the year ending 31-3-2018 in respect of the house were
as under:
(1) Cost of repairing ground floor 7,500
(2) Cost of repairing first floor 50,000
(3) Interest on Loan taken for construction of first floor 20,000
(4) Municipal, tax paid by owner 6,000
(5) Monthly salary of an employee for collecting rent 1,000
Compute Mrs. R’s income from house property for the AY 2018-19 on the basis of the above
noted data.
138 INCOME TAX
Solution: Computation of income from house property of Mrs. R

(For the assessment year 2018-19)
` `
Ground Floor
Income from ground floor 56,700
First Floor
Gross annual value, higher of the following two:
Expected rent (7,000 x 12) 84,000
Actual rent received or receivable
(5,000 X 9) + (7,000 x 3) 66,000 84,000
(b) Interest on borrowed capital 20,000
Income from first floor 36,700
Total income from House Property (` 56,700 + ` 36,700) 93,400
Illustration 22: Mrs. X (57 years) owns a commercial property in Chennai. Municipal value
of the property is ` 9,00,000. Market rent of a similar property in the same locality is `
10,00,000. However, market rent of a similar property in a different locality in Chennai is `
12,00,000. Standard rent of the property owned by Mrs. X is ` 12,50,000. This property is
let out to a departmental store with effect from May 15, 2017 on monthly rent of ` 70,000.
During March 10, 2017 and May 14, 2017, the property remains vacant as suitable tenant is
not available. Mrs. X could not realize 3 months’ rent from the tenant during the previous
year 2017-18. Most probably the tenant will pay rent before September 2018.
Mrs. X makes the following expenditure in respect of the house property: Municipal tax at
the rate of 15% (amount actually paid by the tenant during the previous year 2017-18 is `
80,000); Repairs (incurred by the tenant): ` 75,000; Fire insurance premium (paid by Mrs.
X): ` 30,000. A loan of ` 40,00,000 was taken on April 1, 2008 at the rate of 9% p.a. from
PNB for construction of the commercial property which was completed on March 1, 2013.
Nothing is repaid up to March 31, 2016. During the previous year 2016-17, Mrs. X has
repaid ` 10,00,000. Further, on March 31, 2018, she pays a sum of ` 5,00,000 to PNB on
account of housing loan. Compute Income under head House Property of Mrs. X for the
HOUSE PROPERTY 139
Solution : `
Municipal value (MV) 9,00,000
Fair rent (FR) 10,00,000
Standard rent (SR) 12,50,000
Annual rent (` 70,000 x 12) 8,40,000
Unrealized rent (unrealized rent is not deductible, as there is a possibility of
recovering the amount) Nil
Loss due to vacancy (` 70,000 x 1.5) 1,05,000
Step I – Reasonable expected rent of the property [MV or FR, whichever is
higher, but subject to maximum of SR] 10,00,000
Step II – Rent received/receivable after deducting unrealized rent but before 8,40,000
adjusting
Step III – Gross annual value (∵ ER > AR, ∴GAV = ER) 10,00,000
Less: Municipal tax Nil
Standard deduction @ 30% 3,00,000
Interest from borrowed capital (9% of ` 30,00,000) 2,70,000
Income from HP 4,30,000
Note: Interest of pre-construction period is deductible in 5 years in 5 equal installments.
First installment is deductible in the year in which construction is completed. In this case,
first installment is deductible in the previous year 2012-13. The fifth installment is
deductible in the previous year 2016-17. Nothing is, therefore, deductible on account of pre-
construction period’s interest in the previous year 2017-18.
Illustration 23: R is the owner of a residential house whose construction was completed on
31-8-2013. It has been let out from 1-1-2014 for residential purposes. Its particulars for the
FY 2017-18 are given below:
`
(i) Municipal valuation 65,000
(ii) Expected fair rent (p.a.) 72,000
(iii) Standard rent under the Rent Control Act (p.m.) 7,000
(iv) Actual rent p.m. 7,000
(v) Municipal taxes paid (including ` 5,000 paid by tenant) 20,000
(vi) Water / sewerage benefit tax, levied by State Government paid under
protest 5,000
(vii) Interest on loan taken for the construction of the house. The interest has
been paid outside India to a non-resident without deduction of tax at
source (non-resident had agreed to pay income-tax on such interest
direct to the Government) 15,000
140 INCOME TAX
(viii) Legal charges for the recovery of rent 4,000

(ix) Stamp duty and registration charges in respect of the lease agreement of
the house 2,000
Compute Taxable income under head House Property for the AY 2018-19.
Solution:
Annual rent 84,000
Less: Municipal taxes paid by owner 15,000
Annual value 69,000
(i) Statutory deduction @ 30% 20,700
(ii) Interest: Paid to non-resident without deducting tax at
source, hence, not deductible -------- 20,700
Illustration 24: Gopal is owner of 3 houses in Bangalore, particulars of which for year
ended 31-3-2018 are as follows.
1 House 2 House 3 House
Construction started on 01-04-95 01-08-96 01-07-83
Construction completed on 31-12-98 31-01-98 31-12-83
Vacancy / Unoccupied period -- -- 3 months
Cost of Repairs borne by Owner Owner Owner
Actual rent received (Let out for residential ` 40,000 ` 9,000 Own residence
purposes)
Fair Rent 45,000 9,000 17,800
Total Municipal tax 4,200 900 1,600
Municipal tax paid by Gopal 4,200 450 1,600
Municipal tax paid by tenant -- 450 --
Collection charges 500 300 --
Insurance premium 1,000 100 260
Interest on loan taken for house construction 15,000 3,000 16,000
Unrealized rent allowed in AY 2013-2014 20,000 -- --
recovered during the year
Gopal resided in Mysore for 3 months during the PY in connection with his business and
during this period, his dwelling house at Bangalore remained vacant. During his stay at
Mysore, he paid a rent of ` 300 p.m. for a house. Compute income under the head house
property for the AY 2018-19.
HOUSE PROPERTY 141
Solution:
`)
I (` `)
II (` `)
III (`
Gross Annual value 45,000 9,000 Nil
Less: Municipal taxes 4,200 450 --
Net Annual value 40,800 8,550 Nil
Less: Deduction u/s 24 12,240 2,565 --
(a)Statutory deduction @ 30% 15,000 3,000 16,000
(b) Interest 13,560 2,985 (-) 16,000
Income from:
House I 13,560
House II 2,985
House III (-) 16,000
545
Unrealized Rent Recovered (20,000-30% x 20,000) 14,000
Income from House property 14,545
Illustration 25: Mr. A and B constructed their houses on a piece of land purchased by them
at New Delhi. The built up area of each house was 1,000 sq. ft. ground floor and an equal
area in the first floor. Mr. A started construction on 1.04.15 and completed it on 31.03.17.
Mr. B started the construction on 1.04.17 and completed the construction on 30.06.17. A
occupied the entire house on 01.04.17. B occupied the ground floor on 01.07.17 and let out
the first floor for a rent of ` 15,000 per month. However, the tenant vacated the house on
31.12.17 and B occupied the entire house during the period 01.01.18 to 31.03.18.
Following are the other information
(i) For rental value of each unit ` 1,00,000 per annum
(ground floor/first floor)
(ii) Municipal value of each unit ` 72,000 per annum
(ground floor/first floor)
(iii) Municipal taxes paid by A – 8,000
B – 8,000
(iv) Repair and maintenance charges paid by A – 28,000
B – 30,000
A has availed a housing loan of ` 20 lakhs @ 12% p.a. on 01.04.15. B has availed a housing
loan of ` 12 lakhs @ 10% p.a. on 01.07.16. No repayment was made by either of them till
31.03.18. Compute income from house property for A and B.
Solution: Computation of income from house property of Mr. A for A.Y. 2018-19
Particulars ` `
Annual value (since house is self occupied) Nil
Less: Deduction u/s 24(b)
Interest paid on borrowed capital ` 20,00,000 @ 12% 2,40,000
142 INCOME TAX
Pre-construction interest ` 2,40,000 / 5 48,000

2,88,000
Section 24(b), interest deduction restricted to 2,00,000
“Income from House Property” of Mr. A (2,00,000)
Computation of income from house property of Mr. B for A.Y. 2018-19

Particulars Ground First
floor (self floor
occupied)
Gross annual value (See note below) Nil 90,000
Less: Municipal taxes (for first floor) ______ 4,000
Net annual value (A) Nil 86,000
(a) 30% of net annual value 25,800
(b) Interest on borrowed capital
Current year interest
12,00,000 x 10% = 1,20,000
Pre-construction interest
12,00,000 x 10% x 9/12 = 90,000 60,000 60,000
90,000 allowed in 5 equal instalments
90,000 / 5 = ` 18,000 per annum 9,000 9,000
Total deduction u/s 24 69,000 94,800
Income from house property (A)-(B) (69,000) (8,800)
Loss under the head “income from house property” or Mr. B (B) (77,800)
( both ground floor and first floor)
Note: GAV of first floor of B
Step 1 = M V of F R, Whichever is higher, subject to SR
54,000 or 75,000, whichever is higher = 75,000
Step 2 = Actual Rent less Unrealized rent (90,000 – 0) 90,000
Step 3 = Gross Annual Value 90,000
Where,
Fair rent = 1,00,000 x 9/12 = ` 75,000
Municipal value = 72,000 x 9/12 = ` 54,000
Actual rent = ` 90,000 (` 15,000 p.m. for 6 months from July to December)
Illustration 26: R is a Cost Accountant in HIFI Ltd., Mumbai, and he gets ` 18,000 per
month as salary. He owns two houses, one of which has been let out to the employer
company which in turn was provided to him as rent-free accommodation. Determine the
taxable income of R for the AY 2018-19 after taking into account the following information
relating property income:
HOUSE PROPERTY 143
House 1 (`) House 2 (`)

Fair rent (Rent Control Act is not applicable) 60,000 1,82,000
Actual Rent 63,000 1,84,000
Municipal Valuation – Annual Value 61,000 1,85,000
Municipal Taxes paid 14,000 40,000
Repairs 3,500 7,700
Insurance premium on building 3,000 33,000
Land revenue 7,500 24,000
Ground Rent 4,000 7,800
Interest on borrowed capital by mortgaging House 1
(funds are used for construction of House 2) 18,000 --
Nature of occupation Let out to HIFI Let out to G for
Ltd. business
Date of completion of construction March, 1999 April, 2002
Solution:
Computation of taxable income of R (For the assessment year 2018-19)
` `
Salary
Basic salary (` 18,000 x 12) 2,16,000
Rent free accommodation (Refer note 1) 32,400 2,48,400
House – 1 (Let out for residence):
63,000
Gross annual value
(a) Max. of fair rent and municipal value ` 61,000
(b) Actual rent received or receivable ` 63,000
Less: Municipal Tax
14,000
Net annual value
49,000
Statutory deduction @ 30%
Interest on capital borrowed 14,700
(As the funds are utilized for house 2, it is not Nil 14,700
deductible from house 1) 34,300
House 2 (Let out for business)
Gross Annual value
(a) Maximum of fair Rent and municipal value ` 1,85,000
1,85,000
(b) Actual rent received or receivable ` 1,84,000
144 INCOME TAX

Net Annual Value 1,45,000
(b) Interest on funds borrowed: 18,000 61,500
(As the amount is borrowed for construction of
83,500
House 2, it is deductible even if House 1 is
mortgaged)
Income under the head House Property 1,17,800
Note:
Free accommodation: R has let out House 1 to his employer company HIFI Ltd, which
provides the same to him as rent free accommodation. Rental income received by R as
owner will be taxable as “income from house property”. As he uses the house only as an
employee of the tenant, value of perquisite for rent free house is taxable under the head
“Salaries”. He is not entitled to the benefits permissible under section 23(2), as he occupies
the house not as owner as a sub-tenant of the employer company. Value of perquisites in
respect of rent free house: 15% Salary of ` 2,16,000 i.e. ` 32,400 or actual rent i.e. 63,000
whichever is lower.
Illustration 27: Mrs. Rohini Thomas, a citizen of the U.S.A., is a resident and ordinarily
resident in India during the financial year 2017-18. She owns a house property at Los
Angeles, U.S.A., which is used as her residence. The annual value of the house is $ 20,000.
The value of one USD ($) may be taken as ` 45.
She took ownership and possession of a flat in Chennai on 1.7.2017, which is used for self-
occupation, while she is in India. The flat was used by her for 7 months only during the year
ended 31.3.2018. Whilst the municipal valuation is ` 32,000 p.m., the fair rent is ` 4,20,000
p.a. She paid the following to Corporation of Chennai:
Property Tax ` 16,200
Sewerage Tax ` 1,800
She had taken a loan from Standard Chartered Bank for purchasing this flat. Interest on loan
was as under:
`
Period prior to 1.4.2017 49,200
1.4.2017 to 30.6.2017 50,800
1.7.2017 to 31.3.2018 1,31,300
She had a house property in Bangalore, which was sold in March, 2015. In respect of this
house, she received arrears of rent of ` 60,000 in March, 2018. This amount has not been
charged to tax earlier.
Compute the income chargeable from house property of Mrs. Rohini Thomas for the
assessment year 2018-19, exercising the most beneficial option available.
HOUSE PROPERTY 145
Solution: Since the assessee is a resident and ordinarily resident in India, her global income
would from part of her total income i.e., income earned in India as well as outside India will
form part of her total income. She possesses a self-occupied house at Los Angeles as well as
at Chennai. At her option, one house shall be treated as self-occupied, whose annual value
will be nil. The other self-occupied house property will be treated as “deemed let out
property”.
The annual value of the Los Angeles house is ` 9,00,000 and the Chennai flat is ` 3,15,000.
Since the annual value of Los Angeles house is obviously more, it will be beneficial for her to
opt for choosing the same as self-occupied. The Chennai house will therefore, be treated as
“deemed let out property”.
As regard the Bangalore house, arrears of rent will be chargeable to tax as income from
house property in the year of receipt under section 25B. it is not essential that the assessee
should continue to be the owner. 30% of the arrears of rent shall be allowed as deduction.
Accordingly, the income from house property of Mrs. Rohini Thomas will be calculated as
under:
Particulars ` `
1. Self-occupied house at Los Angeles
Annual value Nil
Less: Deduction u/s 24 Nil
Chargeable income from this house property Nil
2. Deemed let out house property at Chennai
Annual value (Higher of municipal value and fair rent)
[35,000 x 9] 3,15,000
Less: Municipal Taxes (Property Tax + Sewerage tax) 18,000
Net Annual Value (NAV) 2,97,000
30% of NAV 89,100
Interest on borrowed capital (See Note below) 1,91,940 2,81,040
15,960
3. Arrears in respect of Bangalore property
Arrears of rent received
60,000
Less: Standard Deduction @ 30% 42,000
18,000
Income chargeable under the head “Income from house property" 57,960
Note: Interest on borrowed capital
`
Interest for the current year (` 50,800 + ` 1,31,300) 1,82,100
Add: 1/5th of pre-construction interest (` 49,200 x 1/5) 9,840
Interest deduction allowable under section 24 1,91,940
146 INCOME TAX
Illustration 28: Discuss the following issues relating to Income from house property.
(i) Income earned by residents from house properties situated in foreign countries.
(ii) Properties which are used for agricultural purposes.
Solution:
(i) In case of resident individual, his global income is taxable in India. Therefore, income
earned by residents from house properties situated in foreign countries is taxable in
India.
If the income from house properties situated outside India is chargeable to tax in
India the annual value of such property would be computed as if the property is
situated in India. Further, municipal taxes paid under the laws of that country can
also be deducted while arriving at the Annual Value of the property. No distinction
should be made between a house property situated in India and a house property
situated abroad, while computing taxable income.
(ii) If the property is used for agricultural purposes, the annual value of such property
would be treated as “Agricultural Income” and it is exempt under section 10(1) of
Act. However, if the house property is used for purpose other than agriculture the
annual value of such property cannot be treated as agricultural income.
Illustration 29: Mr. Kalpesh borrowed a sum of ` 30 lakhs from the National Housing Bank
towards purchase of a residential flat. The loan amount was disbursed directly to the flat
promoter by the bank. Though the construction was completed in May, 2018, repayments
towards principal and interest had been made during the year ended 31.3.2018.
In the light of the above facts, state:
(i) Whether Mr. Kalpesh can claim deduction under Section 24 in respect of interest for
the assessment year 2018-19.
(ii) Whether deduction under Section 80C can be claimed for the above assessment year,
even though the construction was completed only after the closure of the year?
Solution:
(a) Interest on borrowed capital is allowed as deduction under section 24(b)
Interest payable on loans borrowed for the purpose of acquisition, construction,
repairs, renewal or reconstruction of house property can be claimed as deduction
under section 24(b). Interest payable on borrowed capital for the period prior to the
previous year in which the property has been acquired or constructed, can be claimed
as deduction over a period of 5 years in equal annual installments commencing from
the year of acquisition or completion of construction.
It is stated that the construction is completed only in May, 2018. Hence, deduction in
respect of interest on housing loan cannot be claimed in the assessment year 2018-19.
(b) Section 80C is attracted where there is any payment for the purpose of purchase or
construction of a residential house property, the income from which is chargeable to
tax under the head ‘income from house property’. Such payment covers repayment of
any amount borrowed from the National Housing Bank.
HOUSE PROPERTY 147
However, deduction is prima facie eligible only if the income from such property is
chargeable to tax under the head “Income from House Property”. During the
assessment year 2018-19, there is no such income chargeable under this head. Hence,
deduction under section 80C cannot be claimed for A.Y. 2018-19.
Illustration 30: Mrs. Indu, a resident individual, owns a house in U.S.A. She receives rent @
$ 2,000 per month. She paid municipal taxes of $ 1,500 during the financial year 2017-18.
She also owns a two storied house in Mumbai, ground floor is used for her residence and
first floor is let out at a monthly rent of ` 10,000. Standard rent for each floor is ` 11,000 per
month and fair rent is ` 10,000 per month. Municipal taxes paid for the house amounts to `
7,500. Mrs. Indu had constructed the house by taking a loan from a nationalized bank on
20.6.2013. She repaid the loan of ` 54,000 including interest of ` 24,000. The value of one
dollar is to be taken as ` 45. Compute total income from house property of Mrs. Indu.
Solution: Computation of Income from House Property of Mrs. Indu for AY 2018-19.
Particulars ` `
House property in USA
GAV – Rent received {treated as fair rent}($ 2,000 p.m. 10,80,000
x ` 45 per USD x 12 months)
Less: Municipal taxes paid ($ 1,500 x `45 per USD) 67,500
30% of NAV 3,03,750 7,08,750
House property in Mumbai (Let out portion – First
Floor)
Annual Letting Value (lower of std rent and fair rent)
Standard Rent (` 11,000 x 12) 1,32,000
Fair rent (` 10,000 x 12) 1,20,000
Actual rent received (10,000 x 12) 1,20,000
Gross Annual Value (higher of ALV and actual rent) 1,20,000
Less: Municipal taxes paid (50% of ` 7,500) 3,750
30% of NAV 34,875
Interest on housing loan (50% of ` 24,000) 12,000 46,875 69,375
Income from House property in Mumbai (Self-
occupied portion – Ground Floor)
Net Annual Value (NAV) Nil
30% of NAV Nil
Interest on housing loan (50% of ` 24,000) 12,000 (-)12,000
Income from house property 7,66,125
148 INCOME TAX
Illustration 31: X (44 years) owns a residential property in Ranchi. Municipal valuation of
the property is ` 8,00,000. Rent of similar property in the same locality of Ranchi is `
12,00,000. Standard rent of the property under the relevant Rent Control Act is ` 10,00,000.
It is let out to A Inc. (a foreign company) on monthly rent of US $ 3,100 (amount is
deposited in New York branch of Citibank, with prior permission of RBI). There is no
unrealized rent. However, property remains vacant for one month commencing from March
16, 2018 when A Inc. has vacated the property. With effect from April 15, 2018, the same
property is let out to B Ltd., an Indian company.
The following expenses are incurred by X during the previous year 2017-18.
Municipal tax : ` 1,70,000 (actually paid).
Collection charges : ` 10,000
Interest on borrowed capital : ` 3,00,000 (actual amount paid is ` 2,30,000).
Fire insurance premium : ` 30,000.
Find out income under head House Property of X for the assessment year 2018-19. For
conversion of rent into Indian currency, the following telegraphic transfer buying / selling
rates of US $ adopted by SBI are given:
Buying (1 US $) Selling (1 US $)
On April 1, 2017 47 49
On March 31, 2018 45 46
Solution: For converting rental income received in foreign currency into Indian currency,
the telegraphic transfer buying rate offered by SBI on the last date of the previous year shall
be adopted. This rule is applicable if rent is not remitted up to March 31 of the previous
year.
`
Standard rent (SR) 10,00,000
Annual rent (US $ 3,100 x 12 x ` 45) 16,74,000
Unrealized rent Nil
Loss due to vacancy (US $ 3,100 x ` 45 x ½) 69,750
Step II – Rent received/receivable after deducting unrealized rent but before
adjusting loss due to vacancy 16,74,000
Step III – Amount computed in Step I or Step II, whichever is higher 16,74,000
Step IV – Loss due to vacancy 69,750
Step V – Gross annual value is Step III minus Step IV 16,04,250
Less: Municipal tax 1,70,000
HOUSE PROPERTY 149

Interest from borrowed capital 3,00,000
Income from House Property 7,03,975
Illustration 32: X (40 years) owns a commercial property in Bangalore. It is let out to
different tenants. Municipal valuation of the property is ` 25,00,000. Market rent of a
similar property is ` 32,00,000. Annual rent (if there is no vacancy and no unrealized rent)
is ` 40,00,000. Standard rent is not applicable. Unrealized rent is ` 3,20,000 [there are two
tenants who have defaulted – A : ` 1,20,000 and B : ` 2,00,000]. It is not possible to realize
anything from A and B. B have also occupied a property owned by Mrs. X. One flat in the
property (annual rent being ` 60,000) remains vacant for 4 months during the previous
year. Another flat (annual rent being ` 90,000) remains vacant for 8 months during the
previous year.
Annual rent of ` 40,00,000 includes ` 10,00,000 pertaining to different amenities provided
in the building. ` 30,00,000 is rent of building and ` 10,00,000 is for different amenities
which is calculated as follows-
1. Lift maintenance charges: ` 3,50,000.
2. Electricity charges: ` 2,00,000.
3. Air-conditioning charges: ` 3,50,000.
4. Security guard charges: ` 1,00,000.
X has incurred following expenses in respect of the aforesaid property:
1. Advocate fees and court charges for drafting lease agreements with tenants: ` 75,000.
2. Municipal tax of 2017-18: ` 4,70,000 (however, 10% rebate is obtained for payment
before due date).
3. Arrears of municipal tax of 2016-17 paid during the current year: ` 1,20,000 (it
includes interest on arrears of ` 15,000).
4. Expenditure on lift maintenance: ` 2,10,000 (a payment of ` 30,000 is made in cash).
5. Electricity bill: ` 2,40,000.
6. Airconditioner maintenance : ` 80,000 (an amount of ` 40,000 paid to B Ltd. in which X
is director holding 15 % share capital, similar services can be obtained from any other
person for ` 18,000).
7. Salary to security guard : ` 1,25,000.
8. Salary of staff for supervising lift maintenance and airconditioner services : ` 2,40,000.
9. Salary of staff for collecting rent and other charges : ` 90,000.
10. Insurance of building : ` 1,17,000.
11. General repair of building : ` 80,000.
12. Interest on loan taken from a foreign company payable outside India for construction of
the property: ` 7,50,000 (Tax is not deducted by X under section 195).
150 INCOME TAX
13. Interest on the same loan for the previous year 2016-17: ` 2,00,000 (paid during the
current year after deducting tax at source).
Besides, the above expenses, X can claim depreciation on lift and airconditioning system
which comes to ` 5,07,500. Assuming that income of X from business is ` 9,20,000, find out
Gross Total Income of X for the AY 2018-19.
Solution:
Annual rent is ` 40,00,000. Out of which annual rent of the property is ` 30,00,000 and
charges for different amenities (like lift, air-conditioning, electricity, security guard) are `
10,00,000. In other words, 75% of the annual rent pertains to rent of building and 25% of
rent pertains to charges for different amenities. From the data given in the problem, the
following calculation can be made:
Total Rent of Charges for
building different
` (75% of amenities
total) (25% of
` total)
`
Annual rent if there is no vacancy and no unrealized 40,00,000 30,00,000 10,00,000
rent
Less: Unrealised rent (` 1,20,000 + ` 2,00,000) 3,20,000 2,40,000 80,000
Rent after deducting unrealized rent 36,80,000 27,60,000 9,20,000
Less: Loss due to vacancy [(` 60,000 x 4 ÷ 12) +
(` 90,000 x 8 ÷12)] 80,000 60,000 20,000
Balance 36,00,000 27,00,000 9,00,000
`
Standard rent (SR) NA
Annual rent 30,00,000
Unrealized rent 2,40,000
Loss due to vacancy 60,000
Step II – Rent received/receivable after deducting unrealized rent but before
adjusting loss due to vacancy 27,60,000
Step III – GAV (∵ ER is higher, GAV = ER) 32,00,000
Less: Municipal tax [(90% of ` 4,70,000) + (` 1,20,000 - ` 15,000)] 5,28,000
HOUSE PROPERTY 151

Interest from borrowed capital Nil
Income 18,70,400
Note: Interest payable outside India is not deductible if proper tax has not been deducted
by the taxpayer. Interest of last year (in respect of which tax is deducted during the current
year) is not deductible during the current year.
Computation of income from other sources:
`
Amount collected for different amenities (after excluding vacancy and
unrealized amount, as calculated above) (` 9,20,000 - ` 20,000) 9,00,000
Less: Expenses and depreciation
Legal expenses for drafting agreements (25% of ` 75,000) 18,750
Lift maintenance expenditure (` 2,10,000 – Cash payment of ` 30,000 to be
disallowed) 1,80,000
Electricity 2,40,000
Airconditioner maintenance (` 80,000 –excess payment to B Ltd., i.e., `
22,000) 58,000
Security guard 1,25,000
Supervisor salary 2,40,000
Salary of staff for collecting rent and other charges (25% of ` 90,000) 22,500
Depreciation 5,07,500
Income from other sources (-) 4,91,750
Computation of income and tax liability:
Income from house property 18,70,400
Business income 9,20,000
Income from other sources (-) 4,91,750
PROFITS & GAINS
6 FROM BUSINESS
OR PROFESSION
PROFESSION
Basis of Charge [Sec. 28]
The following incomes are chargeable to tax under the head “Profits and gains of business
or profession”:
1. Profits and gains of any business or profession.
2. Any compensation received by a person holding an agency, in connection with
termination of agency or the modification of any terms and conditions relating thereto.
3. Income derived by a trade, professional or similar association from specific services
performed for its members.
4. The value of any benefit or perquisite, whether convertible into money or not, arising
from business or the exercise of a profession.
5. Export incentive available to exporters.
• Profit on sale of Import Entitlement License EXIM SCRIP
• Cash Assistance received by any person against exports
• Duty Drawback
• Profit on transfer of Duty Entitlement Pass Book Scheme
• Profit on transfer of Duty free Replenishment Certificate
6. Any interest, salary, bonus, commission or remuneration received by a partner from
firm (to the extent allowed u/s 40(b) to the firm).
7. Any sum received for :
• not carrying out any activity in relation to any business or profession
• not to share any know-how, patent, copyright, trademark, etc.
8. Any sum received under a Keyman insurance policy including bonus.
9. Any sum received (or receivable) in cash or kind, on account of any capital asset (other
than land or goodwill or financial instrument) being demolished, destroyed, discarded
or transferred, if the whole of the expenditure on such capital asset has been allowed as
a deduction under section 35AD.
10. Income from speculative transaction. (However, such speculative business shall be
deemed to be distinct and separate from other business). The term speculative
transaction means a transaction in which a contract for purchase or sale of shares, is
settled otherwise than by way of actual delivery. However, it does not cover transaction
in respect of trading in derivatives or commodity derivatives chargeable to CTT. Also, it
does not cover transaction by a company, the principal business of which is the
PROFITS & GAINS FROM BUSINESS OR PROFESSION 153
business of trading in shares or banking. For such companies, the income is chargeable
to tax as PGBP.
Meaning of Profession or Vocation

Profession includes vocation. The word “profession” implies professed attainments in
special knowledge which is “to be acquired only after patient study and application”.
“Vocation” implies natural ability of a person for some particular work. As profits and gains
of a business, profession or vocation are chargeable to tax under the head “Profits and gains
of business or profession”, distinction between “business”, “profession” and “vocation” does
not have any material significance.
Illegal Business
The income-tax law is not concerned with the legality or illegality of a business or
profession. It can, therefore, be said that income of illegal business or profession is also
taxable.
Specific deductions under the Act

Sections 30 to 37 cover expenses which are expressly allowed as deduction while
computing business income.
Rent, Rates, Taxes, Repairs and Insurance for Building [Sec. 30]
The following deductions are allowed in respect of rent, rates, taxes, repairs and insurance
for premises used for the purpose of business or profession:
1. Where the premises are occupied by the assessee:
• As a tenant, rent paid for such premises; and further if he has undertaken to bear
the cost of repairs to the premises, the amount paid on account of such repairs;
• As a landlord, the amount paid by him on account of current repairs to the
premises. Current repairs are those repairs which are done to maintain the
building.
2. Any sum on account of land revenue, local rates or municipal taxes subject to the
conditions as specified by section 43B; and
3. Amount of any premium in respect of insurance against risk of damage or destruction
of the premises.
Explanation
If the business premise belongs to the assessee no deduction in respect of rent will be
allowed to him. If the assessee is a partnership firm and the business premises belongs to a
partner of the firm, the rent payable to the partner will be an allowable deduction and, on
the other hand, the rent from such a building will be income under the head ‘Income from
House Property’ in the hands of the partner.
If the assessee is a tenant in that premises and a part of the premises is used by him as
dwelling-house and the other part is used for his business, the amount of deduction in
154 INCOME TAX
respect of rent shall be allowed proportionately. Similarly, land revenue, local taxes,
insurance premium, etc., shall be proportionate to that part of the premises which is used
for business.
Relevant Case Laws

1. If an assessee takes premises on lease for carrying on a business or profession and
agrees to pay arrears of rent of previous tenant, such arrears of rent cannot be
deducted, whether arrears of rent are paid under legal obligation or voluntarily.
2. A fluctuating item like share in profit cannot be treated as rent.
3. Painting the outside of a house is repair.
Repairs and Insurance of Machinery, Plant and Furniture [Sec. 31]

The expenditure incurred on current repairs (not being capital expenditure) and insurance
in respect of plant, machinery and furniture used for business purposes is allowable as
deduction u/s 31.
Depreciation Allowance [Sec. 32]

Condition for allowance of Depreciation
1. Asset must be owned, wholly or partly by the assessee.
2. It must be used for the purpose of business or profession.
Asset should be owned by Assessee

The asset should be owned by the assessee or the assessee should be the co-owner of the
asset.
• Registered ownership is not necessary. CONTROL AND PREVENT OTHER FOR USING
• In case of financial lease also, depreciation is available to the lessor (not to lessee).
• In the case of hire purchase, depreciation will be available to the hirer (hire purchaser)
as he gets substantial ownership rights at the time when contract is made.
Asset must be used for the purpose of Business or Profession

The asset in respect of which depreciation is claimed, must have been put to use for the
purpose of business or profession. Put to use means commercially put to use, taking trial
run on plant & machinery cannot be said put to use. If a machine is kept ready for use,
although in fact it has not worked during the year, the machinery can be said to be “used”
for the purpose of the business. Any forced idleness of the machinery cannot disentitle the
assessee from getting the benefit of depreciation allowance.
Important terms for computation of Depreciation Allowance

• Block of Assets
• Actual Cost
• Written Down Value
Block of Assets [Sec. 2(11)]

The term “block of assets” means a group of assets falling within a class of assets
comprising:
(a) Building
(b) Furniture & Fitting
(c) Plant & Machinery
(d) Intangible Assets
In respect of which the same percentage of depreciation is prescribed.
Rate of
Nature of Assets Depreciation
(WDV)
Buildings
Residential 5%
General 10%
Temporary Structure 40%
Furniture & Fittings 10%
Plant & Machinery
General 15%
Motors cars other those used in a business of running them on hire 15%
Motor buses, lorries, vans and taxis used in a business of running them
on hire 30%
Books owned by assesses carrying on a profession 40%
Books owned by assesses carrying on a business 15%
Books owned by assesses carrying business of running libraries 40%
Ships 20%
Airplanes 40%
Air Pollution Control Equipments, Water Pollution Control Equipments 40%
Computers including Computer Software (Operating System only) 40%
Intangible Assets
Software, Knowhow, patents, copy-rights, trade marks, licences, 25%
franchises or any other business or commercial rights of similar nature
Note:
(i) “Building” means the superstructure only and does not include site.
(ii) Buildings include roads, bridges, wells and tubewells.
(iii) A building shall be deemed to be used mainly for residential purposes if the built up
floor area used for residential purposes is not less than 2/3rd of the total built up
floor area.
(iv) No Depreciation will be allowed on the land. If land is purchased and then house is
built up, depreciation will be allowed only on the construction cost. If house is
156 INCOME TAX
purchased and land cost is not decided separately then also depreciation will be
allowed on the cost of house only excluding the land cost on the basis of market
value.
(v) The cost of wooden doors and windows in the house is a part of building and it is not
a part of furniture and fitting.
(vi) “Plant” includes ships, vehicle, books, scientific apparatus and surgical equipments
used for the purpose of business or profession. It does not include tea bushes or
livestock.
(vii) One block for P&M eligible for 15% depreciation & Motor Car other than used for
running on hire.
(viii) No specific rate of depreciation prescribed for Scooter, Motor Cycle, Tractor, Road-
roller, so depreciation on such vehicle will allowed @ 15%.
(ix) “Computer Software” means any computer programme recorded on any disc, tape,
perforated media or other information storage device.
(x) Depreciation is mandatorily available (it is a must, it is not at the option of the
assessee to claim, or not to claim, depreciation).
Illustration 1: Guru starts a new business on April 10, 2017 and he purchases the following
assets.
Cost (` ‘000)
Building A – Office building 600
Building B – Residential building for manager 420
Building C – Factory building 750
Plant and machinery A – Office computer 15
Plant and machinery B – Fax machine 10
Plant and machinery C – Cars 70
Plant and machinery D – Air pollution control equipment 25
Plant and machinery E – Telephone system 20
Plant and machinery F – Air – conditioners 70
Plant and machinery G – Scooters for employees 20
Furniture – Office furniture 30
Furniture – Furniture for welfare centre of employees 45
Know-how – know-how to manufacture goods 30
Categorise these asset in different block of assets.
Solution:
Block 1- Buildings (rate of depreciation : 5%)
Building B – Residential building 420
Block 2- Buildings (rate of depreciation: 10%)

Building A – Office building 600
Building C – Factory building 750
Total 1,350
Block 3 – Plant & Machinery (rate of depreciation: 15%)

Plant B – Fax Machine 10
Plant E – Telephone 20
Plant F – Air-conditioners 70
Plant G – Scooters 20
Plant C – Cars 70
Total 190
Block 4 – Plant and Machinery (rate of depreciation: 40%)

Plant A – Office computer 15
Plant D – Air Pollution Control Equipment 25
Total 40
Block 5 – Furniture (rate of depreciation: 10%)

Office furniture 30
Furniture for welfare centre 45
Total 75
Block 6 – Know-how (rate of depreciation: 25%)

Know – how to manufacture goods 30
“Actual Cost” [Sec. 43(1)]

It means the actual cost to the assessee as reduced by the proportion of the cost thereof, if
any, as has been met, directly or indirectly, by any other person or authority. The cost of the
fixed asset is to include:
• Cost price of the asset
• Interest on money borrowed for purchase of the asset till the asset is put to use
• Bank charges
• Carriage inwards, loading and unloading charges
• Installation charges
• Cost of repairs and modification prior to use of the asset to make it workable
• Training expenses of the staff before the use of the plant
• Expenses on essential construction work such as, cold storage rooms, cooling towers,
etc.
• Expenses on insurance, power and fuel, incurred before commencement of business
• Expenditure on travelling incurred for acquiring assets.
Provided that any expenditure on acquisition of any asset shall be ignored if such
expenditure is made in cash exceeding ` 10,000 per day. For e.g. If a machine has been
purchased by paying ` 15,000 in cash & balance ` 30,000 in account payee cheque,
depreciation eligibility will be only on ` 30,000.
158 INCOME TAX
Written Down Value [Sec. 43(6)]

Written down value for the assessment year 2018-19 will be determined as under:
Depreciated value of the block on the April 1, 2017 xx
Add: Asset acquired during the PY 2017-18 xx
Less: Asset sold, discarded, or demolished during the PY 2017-18 xx
WDV of Block relevant for depreciation of AY 2018-19 xx
Note:
1. The amount of reduction for Asset sold cannot exceed the sum of Opening WDV and
asset acquired.
2. Consideration received in kind for asset sold cannot be deducted.
Explanation to Section 32 states that the provisions relating to Depreciation shall apply
whether the assessee claims depreciation in computing the total income or not. This means
that even if the assessee does not claim depreciation while computing the total income the
provisions of Section 32 shall apply and next year he can claim depreciation only on the
reduced amount of WDV.
No Depreciation shall be allowed in the following case:

1. If written down value of the block of assets is reduced to zero, though the block is
not empty
When sale proceed exceeds the sum of Opening WDV and Additions, the resulting
figure is termed as short term capital gain. Suppose opening WDV is ` 1,00,000
additions during the year is ` 50,000 and one asset in the block costing ` 25,000 is sold
for ` 1,75,000 then the block of asset will be shown in the following manner:
Opening WDV on 1/4/2017 ` 1,00,000
Add: Additions during the year ` 50,000
` 1,50,000
Less: Sale value of one asset ` 1,75,000 restricted to ` 1,50,000
Nil
Balance ` 25,000 is Short term Capital Gain.
2. If the block of assets is empty or ceases to exist on the last day of the PY (though
the WDV is not zero)
When all the assets in the block are sold. Resulting figure is short term capital gain or
short term capital loss.
Suppose opening WDV is ` 1,00,000 additions during the year is ` 50,000 and all asset
in the block is sold for ` 1,75,000 then the block of asset will be shown in the following
manner:
Opening WDV on 1/4/2017 ` 1,00,000
` 1,50,000
Less: Sale value of all asset ` 1,75,000 restricted to ` 1,50,000
Nil
Balance ` 25,000 is Short term Capital Gain.
Suppose opening WDV is ` 1,00,000 additions during the year is ` 50,000 and all asset
in the block is sold for ` 1,25,000 then the block of asset will be shown in the following
manner:
Opening WDV on 1/4/2017 ` 1,00,000
` 1,50,000
Less: Sale value of all asset ` 1,25,000
Nil
Balance ` 25,000 is Short term Capital Loss.
Depreciation allowance is limited to 50% of normal depreciation

Depreciation allowance is limited to 50% of normal depreciation, if the following two
(i) Where an asset is acquired during the PY and
(ii) It is put to use for less than 180 days during that year.
Illustration 2: The depreciated value of a block of assets (consisting of Plants A and B)

(rate of depreciation 30%) is ` 1,27,000 on April 1, 2017 [Plant A: ` 1,00,000 + Plant B: `
27,000]. The following information is available:
Rate of
When it is put to
Asset depreciation Date of purchase Actual cost `
use
(%)
Plant C 30 March 10, 2017 April 10, 2017 20,000
Plant D 30 March 1, 2017 December 3, 2017 30,000
Plant E 30 May 6, 2017 May 6, 2017 50,000
Plant F 30 May 15, 2017 January 2, 2018 60,000
Plant G 30 July 8, 2017 April 15, 2018 75,000
Plant A is sold on August 16, 2017 for ` 86,000. Determination of Depreciation for the
previous year 2017-18.
Solution:
Depreciated value of the block on April 1, 2017
Plant A: ` 1,00,000 `
Plant B: ` 27,000
Plant C: (Purchased in FY 2016-17) ` 20,000
Plant D: (Purchased in FY 2016-17) ` 30,000 1,77,000
Add: Cost of Plant E acquired during the year 2017-18 and put to use for more than
160 INCOME TAX
180 days [usual depreciation will be available] (+)50,000
Add: Cost of Plant F which is acquired during 2017-18 and it is put to use for less than
180 days [it will be qualified for half-depreciation] (+)60,000
Total 2,67,000
Less: Sale proceeds of Plant A (-) 86,000
Written down value of the block consisting of Plants B, C, D, E and F 2,01,000
Amount of depreciation [i.e., 15% of ` 60,000 + 30% of ` 1,41,000] 51,300
If, however, in this case Plant A is sold for ` 2,40,000, then depreciation shall be determined
as under:
Total [as determined above] 2,87,000
Less: Sale proceeds of Plant A (-)2,40,000
Written down value 47,000
Since the written down value is less than the cost of Plant F which is eligible for half-
depreciation, depreciation shall be 15% of ` 47,000. i.e. ` 7,050.
Note : Plant D is put to use for less than 180 days, during the previous year 2016-17. Since it
was purchased last year, usual depreciation will be available during the previous year 2017-
18.
Illustration 3: A car purchased by Amar on 10.8.2013 for ` 3,25,000 for personal use is
brought into the business of the assessee on 1.12.2017, when its market value is ` 1,50,000.
Compute the actual cost of the car and the amount of depreciation for the Assessment Year
2018-19 assuming the rate of depreciation to be 15%.
Solution: In this case, the car was purchased for personal use on 10.8.2013 for ` 3,25,000
and subsequently brought into the business of the assessee on 1.12.2017. The “actual cost”
of car is ` 3,25,000. The admissible depreciation for A.Y. 2018-19 is ` 48,750 (i.e., 15% of `
3,25,000). As the car was not acquired during the previous year 2017-18, full depreciation
is available for the year even if it is put to use for less than 180 days during the previous
year. The condition of restricting depreciation to 50% of the prescribed percentage would
apply only where the asset was acquired by the assessee in the previous year.
Treatment of Trial Run Expenses and Income earned during Trial Run Period
Illustration 4: X Ltd. acquired a printing machine for ` 25,00,000. Transport Cost, including
loading and unloading charges ` 35,000. Expenses incurred during the trial run period `
2,00,000. Output generated during trial run period was sold for ` 90,000. Depreciation @
15% . Compute WDV. Would your answer differ if the output generated during trial run
period was ` 3,00,000.
Solution: Computation of Depreciation
Particulars Amount (``) Amount (` `)
Expenses incurred during trial run period 2,00,000 2,00,000
Less : Income from sale of output generated during trial (90,000) (3,00,000)
run period
Net Cost / Gain 1,10,000 (1,00,000)

Actual Cost of the Machine 25,35,000 25,35,000
Add : Net Cost during trial run 1,10,000 —
Less : Net Gain during trial run — (1,00,000)
Actual Cost of Machine for charging depreciation 26,45,000 24,35,000
Less : Depreciation @ 15% 3,96,750 3,65,250
Written Down Value (W.D.V.) 22,48,250 20,69,750
Treatment of Currency Exchange Fluctuation

Illustration 5: Z Ltd. purchased machinery (rate of depreciation 15%) from Japan for US$
2,50,000 on 17.08.2016 (US $ = ` 43.25) by borrowing from Hero Bank Ltd. Z Ltd. made the
payment on 11.07.2017, when the exchange rate was ` 45.70 per US$. This was put to use
from 23.11.2016. Compute Depreciation for the Previous Years 2016-17 and 2017-18.
Solution: Computation of Depreciation and Written Down Value :
Particulars Amount (``)
Cost of the Asset ( US$ 2,50,000 × ` 43.25) 1,08,12,500
Less : Depreciation @ 50% of 15% (since Put to Use < 180 days) (8,10,938)
for PY 2016-17 (` 1,08,12,500 × 50% × 15%)
WDV as on 01.04.2017 1,00,01,562
Add : Exchange Rate Difference [US$ 2,50,000 × ` (45.70 – 43.25)] 6,12,500
WDV for claiming depreciation 1,06,14,062
Less : Depreciation @ 15% for the PY 2017-18 (` 1,06,14,062 × 15%) 15,92,109
WDV as on 01.04.2018 90,21,953
CENVAT Credit Adjustment

Illustration 6: Elite Ltd. imported machinery from Germany on 17.6.17 at a cost of ` 40
crores. Customs Duty paid on it @ 20%. Government granted subsidy of ` 25 crores. The
entire logisitics was supported by Concepts Courier Ltd., an Indian Company. Total Service
charges paid to them ` 20 lacs including service tax of ` 2,20,000. Compute Actual Cost, if
assessee, avail CENVAT credit adjustment.
Solution: Computation of Actual Cost for the purpose of Depreciation:
Particulars Amount
` crores)
(`
Cost of Purchase 40.000
Add: Customs Duty @ 20% on ` 40 crores 8.000
Add: Courier Service charges 0.200
Less: Government subsidy granted 25.000
162 INCOME TAX
Less: CENVAT Credit (Service Tax paid included in the payment made to
Concepts Courier Ltd.) 0.022
Actual Cost for the purpose of charging depreciation 23.178
Computation of Additional Depreciation [Sec. 32(1)(iia)]

Additional depreciation shall be available @ 20% of the actual cost of new plant and
machinery. If, however, the asset is put to use for less than 180 days in the year in which it
is acquired, the rate of additional depreciation will be 10%. Balance 10% of the additional
depreciation shall be allowed in the immediately succeeding financial year.
To claim additional depreciation, the following conditions should be satisfied :

1. The assesee must be engaged in manufacture/production of any article or thing.
2. New plant and machinery should be acquired and installed during the PY.
3. It should be an eligible plant and machinery.
Additional Depreciation at the rate of 35%

In order to incentivise acquisition and installation of plant and machinery for setting up of
manufacturing units in the notified backward area in the State of Andhra Pradesh, Bihar,
Telangana and West Bengal, higher additional depreciation at the rate of 35% (instead
of 20%) shall be allowed. This higher additional depreciation shall be available in the
respect of acquisition and installation of any new machinery or plant for the purposes of the
said undertaking or enterprise during the period beginning on the 1st day of April, 2015 and
ending before the 1st day April, 2020.
Manufacture/ Production of any article

The assessee should be engaged in the manufacture or production of any article or thing
(may be priority sector item or even non-priority sector item given in the 11th Schedule).
Also available to an assessee engaged in the business of generation or generation and
distribution of power.
New Plant and Machinery installed and acquired

Additional depreciation is available only in respect of new plant and machinery acquired
and installed. Additional depreciation shall not be available if any machinery or plant which,
before its installation by the assessee, was used either within or outside India by any other
person.
Eligible Plant and Machinery

Any plant and machinery which has been acquired and installed during the previous year by
an assessee is qualified for additional depreciation. However, the following assets are not
eligible for additional depreciation:
(i) Ships and aircrafts; or
(ii) If installed in any office premises or any residential accommodation, or

accommodation in the nature of a guest house; or
(iii) Road transport vehicles; or
(iv) Any machinery or plant, the whole of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise).
Illustration 7: `
Depreciated value of the block of assets (consisting of Plants A, B and C) on 1.4.2017
14,80,000
Addition of eligible Plant D made on 1.9.2017 (it is put use on 8.9.2017) 1,60,000
Cost of eligible Plant E purchased on 24.12.2017 3,10,000
Sale proceeds of Plant A (sold on 3.3.2018) which was originally purchased
on 1.4.2007 for ` 1,20,000 16,30,000
Assuming that the assessee is an industrial undertaking and rate of depreciation is 15%,
find out the admissible depreciation and income under the head ‘Capital gains’ for the
Solution:
` `
Block: Plant 15% 14,80,000
Written down value of block as on 1.4.2017
Add: Additions during the previous year
Plant D (for 180 days or more) 1,60,000
Plant E (for less than 180 days) 3,10,000 4,70,000
19,50,000
Less: Assets sold during the previous year Plant A 16,30,000
Written down value as on 31.3.2017 3,20,000
Less: Normal depreciation
On ` 3,10,000 x 7.5% 23,250
On ` 10,000 x 15% 1,500 24,750
Add: Additional depreciation
On ` 1,60,000 @ 20% 32,000
On ` 3,10,000 @ 10% 31,000 63,000
WDV as on 1.4.2018 2,32,250
No capital gains on sale of plant A because sale proceeds are less than the written down
value of block of asset.
Illustration 8: Vishal Ltd. is engaged in the business of manufacture of computer hardware

since 1996. During the previous year 2017-18, the following assets are acquired and put to
use:
164 INCOME TAX
` in thousand)
(`
Block Block Block
1 2 3
Rate of depreciation 15% 30% 60%
Number of assets in the block 11 12 17
Depreciated value of the block on April 1, 2017 18,00 25,00 5,00
Additions of plants (new) during the previous year 2017-18
Plant A 57,00 -- --
Plant B -- 4,00 --
Plant C -- -- 17,00
Sale of old plants (one plant in each block) 8 28,70 42,00
Plants A, B and C are acquired during May 2017 and put to use during September 2017.
However, Plant B is put to use in the last week of March 2018. Find out the amount of
depreciation, additional depreciation and capital gains.
Solution: Computation of additional depreciation:
Plant A Plant B Plant C
Whether Additional Depreciation is available Yes Yes Yes
Rate of Additional Depreciation 20% 10% 20%
` ` `
Actual cost 57,00,000 4,00,000 17,00,000
Additional depreciation (total ` 15,20,000) 11,40,000 40,000 3,40,000
Computation of normal depreciation:
Block 1 Block 2 Block 3
Rate of depreciation 15% 30% 60%
` ` `
Depreciated value of block on April 1, 2017 18,00,000 25,00,000 5,00,000
Add: Actual cost of Plants A, B and C acquired
during the previous year 57,00,000 4,00,000 17,00,000
Total (a) 75,00,000 29,00,000 22,00,000
Less: Sale proceeds of old plants (-) 8,000 (-)28,70,000 (-)42,00,000
Written down value of block on Mar 31, 2017 74,92,000 30,000 Nil
Less: Normal depreciation 11,23,800 4,500 Nil
Less: Additional depreciation as computed
earlier 11,40,000 40,000 3,40,000
Depreciated value of block on April 1, 2017 52,28,200 Nil Nil
Computation of Capital Gains
Sale Proceeds of old plants 42,00,000
Less: Cost of acquisition 22,00,000
Short-term capital gain 20,00,000
Note: Vishal Ltd. can claim normal depreciation of ` 11,28,300 [i.e., ` 11,23,800 + ` 4,500].
Besides, it is also eligible for additional depreciation of ` 15,20,000 as computed above.
Residential Quarters
When occupation of residential quarters by the assessee’s employees is subservient to and
necessary for the business, the property is considered as occupied by owner for the purpose
of his business. Depreciation is, therefore, allowable on such buildings. Similarly, fans, air-
conditioners, refrigerators, furniture, etc., provided by the assessee-employer at the
quarters of employees is considered to have been used wholly for the purpose of employer’s
business and depreciation is admissible.
Depreciation in the case of succession or amalgamation or business re-organisation

or demerger
Where in the previous year there takes place:
(i) Succession of a partnership firm by a company or of a proprietary concern by a
Company
(ii) Succesion of private limited company or unlisted public company by LLP
(iii) Succession of any business other than death or
(iv) Amalgamation or demerger of Companies, then
1. The depreciation shall be at first computed as if amalgamation, demerger, succession
etc has not taken place.
2. Such deduction shall be apportioned between the transferee and transferor Company
in the ratio of the number of days for which the assets were used by them.
Illustration 9: M/s Sidhant & Co., a sole proprietary trading concern is converted into a
company, Sidhant Co. Ltd. with effect from November 29, 2017. The written down value of
assets as on April 1, 2017 is as follows:
Items Rate of Depreciation WDV as on 1st April, 17
Building 10% ` 3,50,000
Furniture 10% ` 50,000
Plant and Machinery 15% ` 2,00,000
Further, on October 15, 2017, M/s Sidhant & Co. purchased a plant for ` 1,00,000 (rate of
depreciation 15%). After conversion, the company added another plant worth ` 50,000
(rate of depreciation 15%).
Compute the depreciation available to (i) M/s Sidhant & Co. and (ii) Sidhant Co. Ltd. for
Asst. year 2018-19.
Solution: In the case of conversion of sole proprietary concern into a company as per
section 47(xiv), the depreciation should be first calculated for the whole year assuming that
no succession had taken place. Thereafter, the depreciation should be apportioned between
the sole proprietary concern and the company in the ratio of the number of days for which
166 INCOME TAX
the assets were used by them. It is assumed that in this case, the conditions specified in
section 47(xiv) are satisfied.
Computation of depreciation allowable to Sidhant & Co. for A.Y. 2018-19
Particulars ` `
Building
WDV as on 1.4.2017 3,50,000
Depreciation @ 10% 35,000
Furniture
WDV as on 1.4.2017 50,000
Plant and Machinery
WDV as on 1.4.2017 2,00,000
Add: Additions during the year (purchased on 15.10.17) 1,00,000
3,00,000
Less: Depreciation for the year
(15% of ` 2,00,000 + 50% of 15% of ` 1,00,000) 37,500
(30,000 + 7,500) (Depreciation on new machinery is restricted to
50% of eligible depreciation, since the asset is put to use for less than
180 days in that year) _ ___ _
Total depreciation for the year 77,500
Proportionate depreciation allowable to Sidhant & Co. for 242 days

On existing assets (i.e. 1.4.17 to 28.11.17) (i.e. 242/365 × ` 70,000) 46,411
 45 
On new machine for 45 days i.e.,  x 7,500  2,009 48,420
 168 
Computation of depreciation allowable to Sidhant Co. Ltd. for A.Y. 2018-19
Particulars `
(i) Depreciation on the assets on conversion
Proportionately for 123 days i.e. after conversion period
(123/365 × ` 70,000) + (123/168 × 7,500) = 23,589 + 5,491 29,800
(ii) Depreciation @ 50% of normal rate of 15% on ` 50,000, being the value of
plant purchased after conversion, which was put to use for less than 180
days 3,750
Depreciation allowable to Sidhant Co. Ltd. 32,830
Unabsorbed Depreciation
If the whole amount of current depreciation allowance is not deductible on account of the
insufficiency of income (under various heads of income), the remaining unabsorbed amount
is called ‘Unabsorbed Depreciation’.
Set-off and Carry-forward of Depreciation (i.e., Unabsorbed Depreciation)

1. If on account of the insufficiency of profit full amount of allowable depreciation cannot
be deducted from the profits of the business in that year, the balance of unabsorbed
depreciation shall first be set-off against the profits of any other business or
profession carried on by him.
2. If still some part of unabsorbed depreciation is left unabsorbed, the amount left
unabsorbed can be set-off against income under any other head for that assessment
year.
3. If unabsorbed deprecation cannot be wholly set-off, the amount of depreciation not set-
off shall be carried forward to the following assessment year.
4. If there is no business loss brought forward, the unabsorbed depreciation shall be
added to the depreciation allowance for the following P.Y. or for the succeeding
previous years till such time it is fully deducted. In other words the unabsorbed
depreciation shall be treated as part of the current year’s depreciation.
If there is brought forward business loss along with unabsorbed depreciation, the order
of set off shall be as under:
`
(i) Business profits before depreciation for current year xx
(ii) Less : Current year’s depreciation xx
Balance xx
(iii) Less: B/f Business loss xx
Balance xx
(iv) Less: B/f Unabsorbed depreciation xx
Balance xx
Still if there is any unabsorbed depreciation left it can be set-off against income under
any other head.
Notes:
1. No time-limit is fixed for the purpose of carrying forward of unabsorbed depreciation;
it can be carried forward for indefinite period, if necessary.
2. Continuity of business is not relevant for the purpose of above set off and carry
forward.
3. Unabsorbed Depreciation can be carry forward by the same assessee. This rule is,
however, not applicable in case of business reorganization (amalgamation, demerger
etc).
Illustration 10: Vikash submits the following particulars:

Previous Years
2017-18 2018-19
` `
Income from salary 1,00,000 2,00,000
Business profits (before depreciation) 16,000 18,000
168 INCOME TAX
Current depreciation 1,40,000 1,31,000

Income from other sources 15,000 80,000
Determine the taxable income of Vikash for the assessment years 2018-19 and 2019-20.
Solution:
Assessment Year 2018-19 (Previous Year 2017-18) ` `
Profit and Gains of Business or Profession:
Business Profits 16,000
Less: Depreciation 1,40,000 Nil
Depreciation not deductible against business profits 1,24,000
Income from salary
Salary 1,00,000
Less: Depreciation 1,00,000 Nil
Income from other sources
Other Income 15,000
Less: Depreciation 15,000 Nil
Net Income Nil
Note: Unabsorbed depreciation of ` 9,000 will be carried forward.
Assessment Year 2019-20 (Previous Year 2018-19) ` `

Profits and Gains of Business or Profession:
Business Income 18,000
Less: Depreciation (i.e., current depreciation: ` 1,31,000 +
unabsorbed depreciation of the previous year 2017-18: ` 9,000) 1,40,000
Depreciation not deductible against business income 1,22,000
Income from Salary (2,00,000 – 1,22,000) 78,000
Income from other sources 80,000
Net Income 1,58,000
Assets partly used for business purposes [Sec. 38]

Expenses u/s 30-32 (repairs, insurance, taxes, depreciation, etc.) on assets being building,
plant & machinery and furniture, used partly for business purposes and partly for other
purposes, shall be allowed proportionately.
Illustration 11: Assessee purchased a car on 01.07.17 for ` 4,00,000 (depreciation rate
15%). He submitted with you the following statement for consideration:
Income u/h PGBP (before car depreciation) 2,00,000
Less: Depreciation on car (as per books) 45,000
Income u/h PGBP 1,55,000
He further submitted that he used car 60% for business purposes and 40% for personal
purposes. Compute his income u/h PGBP for AY 2018-19. Assume no other car is owned by
assessee. Also, calculate opening WDV for next year.
Solution:
Profit before depreciation 2,00,000
Less: Depreciation 60,000
(-) Disallowed 40% 24,000 36,000
Income u/h PGBP 1,64,000
WDV of Asset For Next Year would be 4,00,000 – 36,000 = ` 3,64,000.
Assets used partly for Business & partly for Agricultural purposes
Where the income of an Assessee is derived both from agriculture and business of the
Assessee chargeable to tax, then for computing the WDV of the assets, the depreciation will
be computed and allowed as if the whole income is derived from the business chargeable to
the income tax under the head “Profits and Gains from Business and Profession.
Illustration 12: Following information is available in respect of assessee carrying on

business of growing and manufacturing tea in India, calculate depreciation admissible for
AY 2018-19 and Opening WDV for next assessment year.
Opening WDV as on 01.04.2017 ` 2,00,000

Add: Purchases as on 05.05.2017 ` 1,00,000
Less: Sales NIL
WDV 3,00,000
Solution:
WDV 3,00,000
Opening WDV as on 01.04.2018 2,55,000
Depreciation allowable in PY 2017-18 (40%* of ` 45,000) 18,000

(that can be claimed for computing business profits (non-agricultural
activity profits)
* 60% is considered to be agricultural income in tea growing and manufacturing business.
Since income from agricultural activities is exempt, therefore, expenses pertaining to such
activities shall not be allowed. But For calculating opening WDV of next year full
depreciation shall be deducted.
Note: This provision shall be applicable only in case of business activities vs. agricultural
activities. In case asset used for business as well as for personal use, section 38 shall prevail.
170 INCOME TAX
Depreciation on Straight-Line Basis in the Case of Power Units

An undertaking engaged in generation or generation and distribution of power can claim
depreciation according to any one of the following methods:
Depreciation be claimed according to straight-line basis in the case of
Straight-
tangible assets at the percentage specified on the actual cost of
Line Basis
individual asset.
Alternately, such undertaking can claim depreciation, at its option,
Written according to written down value method like any other assessee. The
Down Value option for this purpose shall be exercised before the due date of
Basis furnishing return of income. Once the option is exercised, it shall be final
and shall apply to all the subsequent years.
Terminal Depreciation (i.e., Loss on Transfer) or Balancing Charge (in the Case of
Gain) in the Case of Power Units
When a depreciable asset (on which depreciation is claimed on straight line basis) of a
power generating unit is sold, discarded, demolished or destroyed in a previous year, then
terminal depreciation (in case of loss) is deductible or balancing charge (in case of gain) is
taxable.
Terminal depreciation is calculated as follows:

Find out the written down value of the depreciable asset on the first day of
Step one the previous year in which such asset is sold, discarded, demolished or
destroyed.
Step two Find out the sale consideration.
Terminal depreciation
If the amount calculated under Step two is less than the amount of Step one, then the
deficiency is deductible as terminal depreciation. The following points should be noted:
1. When the asset is sold, discarded, etc., in the previous year in which it is first put to use,
any loss arising thereform is not be allowed as terminal depreciation but is treated as
capital loss.
2. Terminal depreciation allowance cannot be claimed if the asset is not used for the
purpose of business or profession of the assessee at least for sometime during the
previous year in which the sale takes place.
Balancing charge under section 41(2) and capital gain under section 50A
If the amount calculated under Step two is more than the amount of Step one then tax
treatment of such surplus is as follows:
1. So much of the surplus which is equal to the amount of depreciation already claimed, is
taxable as balancing charge under section 41(2) as business income.
2. The remaining surplus (if any) is taxable according to the provisions of section 45
under the head “Capital gains”.
Summary
Sale Consideration (of asset on which depreciation was charged on SLM) xx
(-) WDV of Asset on 1st day of PY xx
Balance Xx
Balance
Negative Figure Positive Figure
Deductible as terminal depreciation
Sale Consideration < Original Cost Sale Consideration > Original Cost
Taxable as Balancing Charge as PGBP
Sale Consideration – Original Cost Original Cost – WDV
Taxable as STCG Taxable as Balancing charge as

PGBP
Disintegration of composite income which is partially agricultural and partially from

business
For disintegrating a composite business income which is partly agricultural and partly non-
agricultural, the following rules are applicable:
Non-agricultural Agriculture
income income
• Growing and manufacturing tea in India 40% 60%
• Rubber 35% 65%
• Sale of coffee grown and cured by seller 25% 75%
• Sale of coffee grown, cured, roasted and
grounded by seller in India with or without
mixing chicory or other flavoring ingredients 40% 60%
172 INCOME TAX
Tea/ Coffee/ Rubber Development Account [Sec. 33AB]

An assessee can claim deduction under section 33AB on satisfying the following conditions:
1. The assessee must be engaged in tea, coffee or rubber plantation.
2. It must make a deposit in:
a. National Bank for Agriculture and Rural Development (NABARD) in accordance
with, a scheme approved by the Tea Board or Coffee Board or Rubber Board; or
b. Deposit Account opened by the assessee in accordance with, an approved scheme
framed by the Tea Board or Coffee Board or Rubber Board with the previous
approval of the Central Government.
3. The amount shall be deposited within 6 months from the end of the PY or before the
due date of furnishing the return of income, whichever is earlier.
4. The accounts of the assessee should be audited.
Amount of Deduction : Amount of deduction is lower of the two:
(i) Amounts deposited.
(ii) 40% of the profit.
Withdrawal from deposits: Withdrawal from these deposits shall be allowed either for the
purposes specified in the scheme or in circumstances specified below:
• Closure of business;
• Death of an assessee;
• Partition of a HUF;
• Dissolution of a firm;
• Liquidation of a company.
If withdrawal is made on account of closure of business or on account of dissolution of the

firm, the whole of such amount shall be taxable as business profit of that previous year. But
if the withdrawal is made on account of the death of the assessee, or partition of the H.U.F.
or the liquidation of a company, the amount withdrawn will not be taxable even if the
amount is not utilized for any purposes specified in the scheme.
Prohibition of Utilization: Where any amount from the Account is utilized during any
previous year for the purchase of the following:
(i) Any machinery or plant to be installed in any office premises or residential
accommodation, including a guest-house;
(ii) Any office appliance (not being computers);
(iii) Any machinery or plant, the whole of the actual cost of which is allowed as a
deduction.
(iv) Any new machinery or plant to be installed in an industry producing any article
specified in the Eleventh Schedule.
The amount so utilized shall be deemed to be the profits of that previous year and
chargeable to tax.
Consequence if the new Asset is transferred in 8 years: The new asset acquired out of
the amount withdrawn should be held for atleast a period of 8 years. The deduction allowed
under this section shall be withdrawn if the asset acquired out of the money withdrawn
from the special account is sold or otherwise transferred within 8 years from the end of the
previous year in which the asset is acquired. However, deduction shall not be withdrawn if
transferred:
• To the Central Government, a State Government, a local authority, a statutory
corporation or a Government company.
• In a scheme of succession of a firm by company.
Illustration 13: Find out the tax consequences in the following cases:
1. Business profit of Walt Ltd., a tea growing and manufacturing company, is ` 85 lakhs
for the assessment year 2018-19. It deposits ` 30 lakhs in the “special account” for
claiming deduction under section 33AB. It wants to claim set-off of brought forward
business loss of ` 10 lakhs.
2. By withdrawing ` 20 lakhs on January 20, 2018 from the “special account”, X Ltd.
Purchases a non-depreciable asset for ` 15 lakhs according to the scheme framed by
the Tea Board. The remaining amount of ` 5 lakhs is not utilized up to March 31, 2018.
3. The asset which is purchased for ` 15 lakhs is sold to Y for ` 25 lakh on December 3,
2020.
Solution:
1. Amount deductible for the assessment year 2018-19 is :
(a) ` 34 lakhs (i.e., 40% of ` 85 lakhs); or
(b) ` 30 lakhs (being the deposit with the “special account”).
Whichever is lower.
` 30 lakhs is, therefore, deductible. Taxable income of X Ltd. shall be determined as
under –
` in lakh
Business income 85
Less: Deduction under section 33AB 30
Net income 55
40% of ` 55 lakhs is taken as non-agricultural income which is
chargeable to tax and the balance 60% is treated as agricultural
income which is not taxable.
Non-agricultural income [i.e., 40% of ` 55 Lakhs] 22
Less: Brought forward loss 10
Net income 12
2. ` 5 lakhs, being the amount not utilized up to March 31, 2018, will be business income
(40% of which will be taxable as non-agricultural income) for the assessment year
2018-19.
174 INCOME TAX
3. The new asset is transferred within eight years from March 31, 2018. Consequently, the
taxable income for the assessment year 2021-22 (i.e., previous year 2020-21 in which
the asset is transferred) will be determined as follows:
Business income ` 15,00,000 [40% of which taxable as non-agricultural] 6,00,000
Short-term capital gain (i.e., ` 25 lakhs – ` 15 lakhs) 10,00,000
Site Restoration Fund [Sec. 33ABA]

An assessee can claim deduction under section 33ABA if the following conditions are
satisfied:
1. Assessee must be engaged in production of petroleum/ natural gas in India.
2. It must make a deposit:
• with SBI in an account
• in site restoration account in accordance with a scheme.
3. Assessee has an agreement with Central Government.
4. Deposit should be made within specified time-limit. i.e. before end of PY.
5. Accounts of the assessee should be audited.
Amount of Deduction:
(a) Amounts deposited
(b) 20% of the profit whichever is less.
Withdrawal from deposits

Provisions similar to Sec. 33AB
Prohibition of utilization
Consequence if the new Asset is transferred in 8 years
Scientific Research Expenditure [Sec. 35]
Section Nature of Expense Purpose Deduction Exception

35(1)(i) Revenue Scientific Research
PY - All carried on by
3 years preceding date assessee related to
100%
of commencement of business of assessee
In the year in
business whether incurred
which
Salary to research staff himself or paid to
business is
(excluding perquisites) other person for
commenced
Materials used in research during PY
research
35(1)(ii) Contribution to Scientific Research 150%

scientific research whether related or (100% w.e.f.
association, university, unrelated to 1.4.2020)
college, other institution business of assessee
35(1)(iia) Contribution to Indian
100%
company
35(1)(iii) Contribution to Social/ Statistical
university, college, other Research whether
institution or Indian related or unrelated 100%
company to business of
assessee
35(1)(iv) Capital Scientific Research

PY - All carried on by
3 years preceding date assessee related to 100% Land
of commencement of business of assessee
business – All
35(2AA) Contribution to IIT, Scientific research 150%
National Laboratory, related to business (100% w.e.f.
university or specified of assessee 1.4.2020)
person
35(2AB) Capital + Revenue In house research 150% Land &
by assessee (only If research Building
company) engaged and However,
in business of development expenditure
manufacturing any facility on building
article or thing, not approved by will be
being article prescribed allowable @
specified in 11th authority. 100% u/s
Schedule. (100% w.e.f. 35(1)(iv)
1.4.2020)
Sec. 41(3) Where the scientific research asset is sold without having used for other
purposes, then:
• Sale Proceed upto the Actual Cost of Asset PGBP
• Sale Proceed over and above Actual Cost of Asset CG (STCG/ LTCG)
Indexed Cost
Where the scientific research asset is used in the business after it ceases to be used for
scientific research, then asset shall be shown at Nil value.
176 INCOME TAX
Note:
• The set off and carry forward of unabsorbed scientific research capital expenditure is
in the same manner as that of depreciation.
• If land and building is purchased through a composite agreement, then the cost of land
& building shall be bifurcated on the basis of their fair market value. Cost of land is not
allowable as deduction and cost of building shall be allowed as deduction u/s 35(1)(iv).
Illustration 14: X Ltd. furnishes the following particulars for the P.Y. 2017-18. Compute the
deduction allowable under section 35 for A.Y. 2018-19, while computing its income under
the head “Profits and gains of business of profession”.
Particulars `
1. Amount paid to Indian Institute of Science, Bangalore for scientific 1,00,000
research
2. Amount paid to IIT, Delhi for an approved scientific research 2,50,000
programme
3. Amount paid to X Ltd., a company registered in India which has as its 4,00,000
main object scientific research and development, as is approved by the
prescribed authority
4. Expenditure incurred on in-house research and development facility as
approved by the prescribed authority
(a) Revenue expenditure on scientific research 3,00,000
(b) Capital expenditure (including cost of acquisition of land ` 5,00,000) on 7,50,000
scientific research
Solution:
Computation of deduction under section 35 for the A.Y. 2018-19
Particulars ` Section % of Amount of
weighted deduction
deduction (`)
Payment of scientific research
Indian Institute of Science 1,00,000 35(1)(ii) 150% 1,50,000
IIT, Delhi 2,50,000 35(2AA) 150% 3,75,000
X Ltd. 4,00,000 35(1)(iia) 100% 4,00,000
Expenditure incurred on in-
house research and
Development facility
Revenue expenditure 3,00,000 35(2AB) 150% 4,50,000
Capital expenditure 2,50,000 35(2AB) 150% 3,75,000
(excluding cost of acquisition of
land ` 5,00,000)
Deduction allowable u/s 35 17,50,000
Illustration 15: Vivitha Bio-medicals Ltd. is a manufacturer. The following expenses were
incurred in respect of activities connected with scientific research:
Year ended Item Amount (`)
31.03.2015 Land 10,00,000
(Incurred after 1.9.2014) Building 25,00,000
31.03.2016 Plant and machinery 5,00,000
31.03.2017 Raw materials 2,20,000
31.03.2018 Raw materials and salaries 1,80,000
The business was commenced on 01.09.2017.
In view of availability of better model of plant and machinery, the existing plant and
machinery were sold for ` 8,00,000 on 1.3.2018.
Discuss the implications of the above for the assessment year 2018-19 along with brief
computation of deduction permissible under section 35 assuming that necessary conditions
have been fulfilled. You are informed that the assessee’s line of business is eligible for
claiming deduction under section 35 at 150% on eligible items.
Solution:
1. As per section 35 where a company engaged in the business of biotechnology incurs
any expenditure on scientific research during the current year, it is eligible for claiming
weighted deduction of a sum equal to 150% of the eligible expenditure.
The eligible expenditure and quantum of deduction will be:
(a) Current year capital or revenue expenditure incurred for scientific research
(weighted deduction @ 150%).
(b) Any expenditure incurred during earlier 3 years immediately preceding the date of
commencement of business on payment of salary or purchase of materials, or
capital expenditure incurred other than expenditure on acquisition of land [actual
expenditure qualifies for deduction under section 35(1)].
The deduction available under section 35 for scientific research will, therefore, be:
Particulars `
(a) Land Nil
(b) Building 25,00,000
(c) Revenue expenses of last 3 years 2,20,000
(d) Capital expenditure of last 3 years: Plant and machinery 5,00,000
Expenditure allowable under section 35(1) 32,20,000
Current year revenue expenditure ` 1,80,000 [150% of ` 1,80,000 is
allowable under section 35(2AB)] 2,70,000
Total deduction under section 35 34,90,000
2. Section 43(3) provides that where a capital asset used for scientific research is sold,
without having been used for other purposes, the lower of sale proceeds or the total
amount of deduction earlier allowed under section 35 will be considered as income
from business of the previous year in which the sale took place.
178 INCOME TAX
Therefore, income chargeable to tax u/s 41(3) should be lower of the following:
(1) Sale proceeds i.e. ` 8,00,000
(2) Total amount of deduction earlier allowed under section 35 i.e. ` 5,00,000
` 5,00,000 will be deemed to be the income chargeable to tax under section 41(3).
3. The difference between sale proceeds and business income under section 41(3) will be
treated as short-term capital gain.
Sale proceeds of plant and machinery 8,00,000
Less: Business Income as per section 41(3) 5,00,000
Short-term capital gain 3,00,000
Expenditure for obtaining right to use spectrum for telecommunication services [Sec.
35ABA]
Any capital expenditure incurred and actually paid by the assessee on acquisition of any
right to use spectrum for telecommunication services by paying spectrum fee shall be
allowed as deduction over the period for which the right to use spectrum remains in force.
In case the aforesaid expenditure has been incurred before the commencement of business,
the deduction shall be available for the period beginning from the year of commencement of
business.
Amortization of Telecom Licence Fees [Sec. 35ABB]

Any expenditure incurred for acquiring any right to operate telecommunication services
shall be allowed as deduction u/s 35ABB in equal instalments over the period starting from
the year in which such payment has been made or business commenced whichever is later
and ending in the year in which the licence comes to an end.
Profit or Loss on Sale of Telecom Licence

Different Situations Tax Treatment
1. Entire telecom licence is transferred
• When sale consideration is less WDV minus sale consideration is allowed as
than WDV. deduction under section 35ABB in the year of
sale.
• When sale consideration is The excess of sale consideration over WDV is
more than WDV. taxable as business income in the year of sale.
2. When a part of telecom licence is
transferred
• When sale consideration is less WDV minus sale consideration will be allowed
than WDV. as deduction over the unexpired period.
• When sale consideration is The excess of sale consideration over WDV is
more than WDV. taxable as business income in the year of sale.
WDV is the written down of value (i.e., the expenditure incurred remaining unallowed) on
the first of the previous year in which telecom licence is transferred.
Illustration 16: ‘X’ Ltd. is engaged in providing telecommunication services in India. For
this purpose, it enters into an agreement on 1.4.2016 with the Department of
Telecommunication, Government of India. As per agreement, ‘X’ Ltd. is given a licence for
providing telecommunication services in M.P. State for a period of 10 years from 1.4.2016.
Licence fees are fixed at ` 18 lakhs payable in two equal instalments on 10.4.2016 and
10.4.2017. Assuming that the two instalments are paid by ‘X’ Ltd. on due dates, find out the
admissible deduction u/s 35ABB for the previous year 2017-18. Business commenced
during P.Y. 2016-17.
Solution:
Business commenced during P.Y. 2016-17:
1st Instalment paid during P.Y. 2016-17 ` 9,00,000
2nd Instalment paid during P.Y. 2017-18 ` 9,00,000
Duration of licence 10 years
Deduction for the P.Y. 2017-18:
1/10th of ` 9,00,000 90,000
1/9th of ` 9,00,000 1,00,000
Deduction allowable 1,90,000
Illustration 17: Vague Telecom took telecom licence for ` 3,000 crores for operation in
entire India. When the Cost of acquisition remaining unallowed was ` 2,100 crores, the
company sold the licence as under:
1. Entire Licence for ` 1,500 crores

5. Part Licence for ` 1,500 crores
Discuss tax treatment.
180 INCOME TAX
Solution:
` in Crores)
(`
Case 1 2&6 3&7 4&8 5
Sale Consideration 1,500 2,400 2,100 3,200 1,500
(-)Unamortised 2,100 2,100 2,100 2,100 2,100
value
600 300 Nil 1,100 600
Allowed as Business No Tax 900 PGBP Allowed as
deduction u/s income Treatment 200 CG deduction
33ABB in the (LTCG/STCG) u/s 33ABB
year of sale over
unexpired
period
Illustration 18: Swadeshi Ltd., which follows mercantile system of accounting, obtained
licence on 1.6.2016 from the Department of telecommunication for a period of 10 years. The
total licence fee payable is ` 18,00,000. The relevant details are:
Year ended Licence fee payable Payments made
st
31 March for the year
` Date Amount (`)
2017 10,00,000 30.03.17 3,70,000
15.05.17 6,30,000
2018 8,00,000 28.02.18 5,40,000
Balance of ` 2,60,000 is pending as on 31.3.2018.
Compute the amount of deduction available to the assessee under section 35ABB for the
assessment years 2017-18 and 2018-19. Can any deduction be claimed under section 32
also?
Solution: As per section 35ABB, any amount actually paid for obtaining licence to operate
telecommunication services, shall be allowed as deduction in equal installments during the
number of years for which the licence is in force. Therefore, the year of actual payment is
relevant and not the previous year in which the liability for the expenditure was incurred
according to the method of accounting regularly employed by the assessee.
1. ` 3,70,000 paid on 30.03.2017 [P.Y. 2016-17]
Unexpired period of licence 10 years
Hence ` 37,000 [i.e. ` 3,70,000/10] can be claimed under section 35ABB for period of 10
years commencing from A.Y. 2017-18.
2. ` 11,70,000 paid during year ended 31.03.18 [P.Y. 2017-18]
Unexpired period of licence 9 years
Hence, ` 1,30,000 [i.e. ` 11,70,000/9] can be claimed under section 35ABB for a period
of 9 years commencing from A.Y. 2018-19.
3. Amount of deduction u/s 35ABB
Assessment year Amount (`)

2017-18 37,000
2018-19 37,000 + 1,30,000 = 1,67,000
4. Where deduction under section 35ABB is claimed and allowed, deduction under section
32(1) cannot be allowed for same previous year or any subsequent previous year.
Deduction in respect of expenditure on specified business [Section 35AD]

Specified Business Eligible Assessee Date of
Commencement
of Business on or
after
Setting up & operating a cold chain facility for Any assessee April 1, 2009
agricultural produce, meat, poultry products,
processed food, etc.
Setting up & operating a warehousing facility Any assessee April 1, 2009
for storage of agricultural produce
Laying & operating a cross-country natural gas Indian company or April 1, 2007
pipeline network for distribution including consortium of such
storage facilities companies
Laying & operating a cross-country Indian company or April 1, 2009
crude/petroleum oil pipeline network for consortium of such
distribution including storage facilities companies
Building and operating anywhere in India, a Any assessee April 1, 2010
new hotel of 2 Star or above category
New Hospital with atleast 100 beds Any assessee April 1, 2010
Developing and building a housing project Any assessee April 1, 2010
under a scheme for slum redevelopment or
rehabilitation
Developing and Building housing project under Any assessee April 1, 2011
a notified shares for affordable housing
Production of fertilizer in India Any assessee April 1, 2011
Setting up & operating an inland container Any assessee April 1, 2012
depot or freight station
Warehousing Facility for Storage of Sugar Any assessee April 1, 2012
Beekeeping & Production of Honey & beeswax Any assessee April 1, 2012
Laying & Operating of slurry pipelines for Any assessee April 1, 2014
transportation of iron ore
Operating Semi-conductor water fabrication Any assessee April 1, 2014
manufacturing units.
182 INCOME TAX
Where the pipeline is used as common carrier, of the total capacity 1/3rd will be made
available for natural gas pipeline and 1/4th for petroleum product pipeline.
Deduction
• 100% deduction of capital expenditure incurred during the previous year.
• 100% of capital expenditure incurred prior to commencement of business shall be
allowed in year of commencement of business only if same has been capitalized on the
date of commencement of business.
• Capital expenditure shall not include land, goodwill & financial instrument.
• 150% Deduction of capital expenditure incurred on or after April 1, 2012 in respect of
certain specified businesses commencing operations on or after April 1, 2012 viz. Cold
Chain facility, warehousing for of agricultural produce, hospital with at least 100 Beds,
notified affordable housing project and production of Fertilizer.
• No deduction if expenditure exceeding ` 10,000 is incurred by any mode other than
account payee cheque drawn on a bank or an account payee demand draft or use of
electronic clearing system through a bank account.
Other Provisions
• Business should be new business i.e. should not be formed by splitting/reconstruction
of old business.
• Business should not be set up by transfer of old plant & machinery. Old plant &
machinery should not be more than 20% of total plant & machinery used for the
business.
• Deduction u/c VI-A shall not be allowed in respect of such business for any assessment
year.
• Actual cost of asset for which deduction has been allowed under section 35AD shall be
taken as Nil.
• Capital asset to be used for specified business shall be held for atleast 8 years.
• If such asset is used for any purpose other than the specified business, the total amount
of deduction so claimed and allowed in any previous year in respect of such asset, shall
be deemed to be income of the assessee chargeable under the head “Profits and gains of
business or profession” of the previous year in which the asset is so used.
Illustration 19: XYZ Ltd. commenced operations of the business of a new three-star hotel in
Madurai, Tamil Nadu on 1.4.2017. The company incurred capital expenditure of ` 50 lakhs
during the period January, 2017 to March, 2017 exclusively for the above business, and
capitalized the same in its books of account as on 1st April, 2017. Further, during the P.Y.
2017-18, it incurred capital expenditure of ` 2 crores (out of which ` 1.50 crores was for
acquisition of land) exclusively for the above business. Compute the deduction under
section 35AD for the A.Y. 2018-19, assuming that XYZ Ltd. has fulfilled all the conditions
specified in section 35AD and has not claimed any deduction under Chapter VI-A.
Solution: The amount of deduction allowable under section 35AD for A.Y. 2018-19 would
be:
Particulars `
Capital expenditure incurred during the P.Y. 2017-18 (excluding the
expenditure incurred on acquisition of land) = ` 200 lakhs - ` 150 lakhs 50 lakhs
Capital expenditure incurred prior to 1.4.2017 (i.e., prior to commencement
of business) and capitalized in the book of account as on 1.4.2017 50 lakhs
Total deduction under Section 35AD for AY 2018-19 100 lakhs
Deduction in respect of Expenditure on Agricultural Extension Project [Sec. 35CCC]

Weighted deduction of 150% (100% w.e.f. AY 2021-22) will be allowed in respect of
expenditure incurred for project under taken by assessee for training, education and
guidance of farmers.
Deduction in respect of Expenditure on Skill Development project [Sec. 35CCD]

Weighted deduction of 150% (100% w.e.f. AY 2021-22) will be allowed in respect of
expenditure (other than cost of land & building) incurred on skill development project
notified by the board in accordance with prescribed guidelines.
Amortisation of Preliminary Expenses [Sec. 35D]

Deduction u/s 35D is available to all resident assessee except foreign company. Non-
resident assessee or a foreign company even if it is resident in India, cannot claim any
deduction u/s 35D.
Qualifying Expenditure
• Legal charges for drafting any agreement between the assessee and any other person
relating to the setting up of the business of the assessee.
• Legal charges for drafting the memorandum and articles of association if the taxpayer
is a company.
• Printing expenses of the memorandum and articles of association if the taxpayer is a
company.
• Registration fee of a company under the provisions of the Companies Act.
• Expenses in connection with the public issue of shares or debentures of a company,
underwriting commission, brokerage and charges for drafting, typing, printing and
advertisement of the prospectus.
• Any other expenditure which is prescribed.
184 INCOME TAX
The following shall be qualifying expenditure only if the work is carried on by the assessee
itself or by a concern approved by the Board:
• Preparation of feasibility report.
• Preparation of project report.
• Conducting market survey (or any other survey necessary for the business of the
assessee).
• Engineering services relating to the business of the assessee.
Qualifying Amount of Expenditure

Maximum Ceiling: The aggregate expenditure cannot exceed the following:
In the case of a corporate assessee In the case of a non-corporate assessee
a. 5% of cost of project; or 5% of cost of project
b. 5% of capital employed,
whichever is more
Cost of Project: It means the actual cost of fixed assets which are shown in the books of the
assessee as on the last day of the PY in which the business of the assessee commences.
Capital Employed: It means the aggregate of:

• Issued share capital,
• Debentures, and
• Long-term borrowings (term ≥ 5 years, if borrowing from outside India term ≥ 7 years)
as on the last day of the PY in which the business of the company commences.
Amount of Deduction
1/5th of the qualifying expenditure is allowable as deduction in each of the five successive
years beginning with the year in which the business commences.
Illustration 20: Mohan Ltd. is incorporated in Bangalore on September 6, 2017. It

commences production on March 15, 2018. The following expenses are incurred by the
company before commencement of business:
(a) Expenses on incorporation, issue of shares, etc.: ` 1,05,000.
(b) Preparation of feasibility report, project report and conducting market survey (the
work is completed by the taxpayer itself): ` 1,45,000.
(c) Engineering services (work is carried on by a concern which is not approved by the
Board): ` 1,60,000.
Determine the amount of deduction under section 35D assuming the following figures of
fixed assets and capital on March 31, 2018 (i.e., the last day of the year in which the
taxpayer start production)
` in Lakh
Cost of fixed asset 60
Share capital 45
Debentures 16
Long-term borrowing from a financial institution (repayable for not less 9
than 7 years)
Solution:
`
Cost of project 60,00,000
Capital employed (i.e., ` 45 lakhs + ` 16 lakhs + ` 9 lakhs) 70,00,000
Maximum qualifying expenditure [i.e., 5% of ` 60 lakhs or ` 70 lakhs,
whichever is higher] (a) 3,50,000
Qualifying expenditure
Expenses on incorporation (these are included even if the work undertaken
by a person not approved by the Board) 1,05,000
Preparation of feasibility report, project report and conducting market survey
(these are included only if the work is done by the taxpayer or it is
undertaken by a concern approved. 1,45,000
Engineering services (the expenditure is included only if the work is done by
the taxpayer or it is undertaken by a concern approved by the Board; since it
is completed by a concern not approved by the Board, it is not included) --
Total (b) 2,50,000
Amount eligible for amortization [(a) or (b), whichever is lower] 2,50,000
Amount deductible in 5 years for the assessment year 2018-19 to 2022-23 50,000
Note: Expenditure on engineering services in this case is not qualified for deduction under
section 35D. These expenses may be capitalized by the taxpayer to claim depreciation.
Ammortisation of Expenditure in the case of Amalgamation/ Demerger [Sec. 35DD]

The Expenditure is allowed as deduction in 5 Successive years in five equal installments to
an Indian company. The first installment is deductible in the PY in which amalgamation or
demerger takes place.
Expenditure incurred under voluntary retirement scheme [Sec. 35DDA]

• Expenditure on payment to employee at the time of his voluntary retirement
• Shall be allowed as deduction in 5 equal instalments for 5 years
• Starting from the year of payment
• If payment is made by the employer in more than one year, then deduction shall be
allowed in five instalment for payment made in each previous year.
186 INCOME TAX
Illustration 21: According to voluntary retirement scheme of X Ltd., each employee will get
voluntary retirement compensation in three instalments (35% at the time of voluntary
retirement, 10% on November 1 of the first financial year immediately after retirement and
remaining 55% on December 1 of the second financial year immediately after retirement).
The scheme is opened for the financial year 2017-18 only. During the financial year, 17
employees take voluntary retirement (total compensation of ` 80 lakh payable by way of 3
instalments as stated above).
1st instalment of ` 2nd instalment of 3rd instalment of
28 lakh (being ` 8 lakh (being ` 44 lakh (being
PY in which
35% payable 10% payable on 55% payable on Total
the payment
during PY 2017- November 1, December 1, `
is deductible
18) 2018) 2019)
` ` `
2017-18 5,60,000 -- -- 5,60,000
2018-19 5,60,000 1,60,000 -- 7,20,000
2019-20 5,60,000 1,60,000 8,80,000 16,00,000
2020-21 5,60,000 1,60,000 8,80,000 16,00,000
2021-22 5,60,000 1,60,000 8,80,000 16,00,000
2022-23 -- 1,60,000 8,80,000 10,40,000
2023-24 -- -- 8,80,000 8,80,000
Provision of Bad and Doubtful Debt of Bank [Sec. 36]

Deduction available to a scheduled bank, non-scheduled bank or a co-operative bank for
bad and doubtful debt would be 8.5% of total income.
Insurance premium [Sec. 36(1)(i)]

The amount of any premium paid in respect of insurance against risk of damage or
destruction of stocks or stores, used for the purposes of business or profession, is allowable
as deduction.
Insurance premium paid by a federal milk co-operative society [Sec. 36(1)(ia)]

Insurance premium paid by a federal milk co-operative society on the lives of cattle, owned
by the members of a primary milk co-operative society affiliated to it, is allowable as
deduction.
Premia for insurance on health of employees [Sec. 36(1)(ib)]

An employer can claim deduction in respect of premia paid by him by any mode other than
cash for insurance on the health of his employees.
Bonus or Commission to Employees [Sec. 36(1)(ii)]

Bonus or commission paid to an employee is allowable as deduction subject to certain
conditions:
• Admissible only if amount payable to employees as bonus or commission should not
otherwise have been payable to them as profit or dividend.
• Deductible subject to Sec. 43B.
Interest on Borrowed Capital [Sec. 36(1)(iii)]

Interest on capital borrowed is allowed as deduction if the following conditions are
satisfied:
1. The assessee must have borrowed money.
2. The money so borrowed must have been used for the purpose of business.
3. Interest is paid or payable on such borrowing.
Discount on Zero Coupon Bonds [Sec. 36(1)(iiia)]

Discount on notified zero coupon bonds (being the difference between amount received and
the amount payable on redemption/maturity by the issuing company) is allowed as
deduction on pro rata basis. The pro rata deduction is available under section 36(1)(iiia)
having regard to the period of life of such bond. “Period of life of the bond” means the
period commencing from the date of issue of the bond and ending on the date of the
maturity or redemption of such bond.
Zero Coupon Bonds

According to section 2(48), zero coupon bond must satisfy the following three conditions:
1. It is a bond issued by any infrastructure capital company or infrastructure capital fund
or public sector company or scheduled bank.
2. In respect of such bond, no payment / benefit is received (or receivable) before
maturity / redemption from infrastructure capital company or infrastructure capital
fund or public sector company or scheduled bank.
3. Such bond is specified by the Central Government by notification in the Official Gazette.
Illustration 22: Zero coupon bonds are issued by Elite Ltd. (infrastructure capital
company) on October 4, 2017 (issue price: ` 85, face value as well as amount payable at the
time of redemption: ` 100, redemption date: July 10, 2028, number of bonds subscribed by
public: 1,00,000). These bonds are notified by the Government as zero coupon bonds.
Solution:
Pro rata deduction available to Elite Ltd.
Date of issue: October 4, 2017
Date of issue (rounded off): October 1, 2017 (if fraction is 15 days or more, it is taken as one
month)
Date of redemption: July 10, 2028
188 INCOME TAX
Date of redemption (rounded off): June 30, 2028 (if fraction is less than 15, days, it shall as
one ignored)
Amount of discount offered by X Ltd. [(` 100 – ` 85) X 1,00,000]: ` 15,00,000 (a)
Period of life of the bond (June 30, 2028 minus October 1, 2017): 129 months (b)
Pro rata deduction for 1 month: ` 11,628 [(a) ÷ (b)] (c)
Amount deductible for the previous year 2017-18: ` 69,767 [(c) x 6]
Amount deductible for the previous years 2018-19 to 2022-23 : ` 1,39,535 [(c) x 12]
Amount deductible for the previous year 2028-29: ` 34,884 [(c) X 3]
Employer’s contribution towards Statutory Fund [Sec. 36(1)(iv)] & [Sec. 36(1)(v)]
Employer’s contribution towards as recognized provident fund, an approved
superannuation fund and approved gratuity fund is allowable as deduction subject to Sec.
43B.
Employee’s contribution towards staff welfare schemes [Sec. 36(1)(va)]

Any sum received by the taxpayer as contribution from his employees towards provident
fund or any welfare fund of such employees shall be allowed as deduction only if such sum
is credited by the taxpayer to the employee’s account in the relevant fund on or before the
due date (the date by which the assessee is required as an employer to credit such
contribution to the employee’s account in the relevant fund). If payment of employees
contribution is delayed by employer i.e. not paid before due date of such act, it is disallowed
forever.
Write off of allowance for animals [Sec. 36(1)(vi)]

In respect of animals which are used for the purposes of business or profession (not as
stock-in-trade) and have died or become useless, the difference between the actual cost of
the animals to the assessee and the amount realized (if any) in respect of carcasses or sale
of animals, is allowable as deduction.
Bad Debts [Section 36(1)(vii)]

A Bad debt shall be allowed as deduction if the debt has been taken into account in
computing the income of the previous year or any earlier previous year and the amount of
such debt or part thereof becomes irrecoverable (as notified in ICDS). It shall be deemed
that such debt or part thereof has been written off as irrecoverable in the accounts for the
purpose of this clause.
Explanation:
The assessee gives an advance of ` 10,000 for purchase of raw material to Mr. X. Mr. X could
not supply the goods as he had become bankrupt and the advance of ` 10,000 cannot be
recovered from him. The assessee writes off the debt as bad debt.
Here, the condition that the debt should have been taken into account in computing the
income of the previous years in which deduction is claimed or any earlier previous year, is
not satisfied and therefore, the debt cannot be allowed under section 36(1)(vii). However,
the same can be claimed under section 37(1) as a trading loss.
Bad Debt recovery [Sec. 41(4)]

Where a deduction has been allowed in respect of a bad debt and the bad debt is
subsequently recovered, then the amount so recovered shall be deemed to be the income
under the head PGBP of the previous year in which the amount is so recovered. This shall
apply even if the business or profession is not in existence in the previous year in which
recovery is made.
For example, ` 1,00,000 is recoverable from a debtor Mr. A. The assessee writes off ` 40,000
as bad debt in the previous year 31st March, 2013. Subsequently, in the previous year 31st
March, 2018, ` 70,000 is recovered from Mr. A. Here, ` 60,000 shall be deemed to have been
recovered towards the debt and ` 10,000 towards the recovery of bad debt of ` 40,000.
` 10,000 will be taxable as PGBP under section 41(4) in the previous year 31st March, 2018.
Relevant Case Laws

1. P.K. Kaimal
In this case, a firm claimed and was allowed bad debt of ` 1,00,000 in the previous year
2011-12. The firm was dissolved and was taken over by a partner Mr. A. The partner
Mr. A recovers ` 1,00,000 bad debt in the previous year 31st March, 2018.
Held, that for the applicability of section 41(4), the assessee who claimed the deduction
of bad debt and the assessee who recovers the bad debt must be the same. Where a bad
debt has been allowed to a firm and the firm makes the recovery thereof, then section
41(4) is attracted in the hands of the firm. But if the firm is dissolved and the business
is continued by any partner, then recovery made by the partner towards bad debt will
not attract section 41(4) since the assessee has changed. In the present case, ` 1,00,000
is not taxable in the hands of the firm or the partner and the same is a capital receipt in
the hands of the partner.
2. Veerabhadra Rao (Supreme Court)
In this case, a firm made a sale to Mr. X of ` 1,00,000. The firm was succeeded to by a
company and the debtor Mr. X was also transferred to the company. The company
writes off the debtor Mr. X of ` 1,00,000 and claims deduction of bad debt.
The Supreme Court in Veerabhadra Rao held that a successor to business will be
entitled to claim an allowance for bad debt even though the debt did not relate to the
business of the assessee but to the business it has succeeded. The court held that even if
the relevant debt had been taken into account in computing the income of the
predecessor only and had been written off as irrecoverable in the accounts of the
successor assessee, the assessee will be entitled to the deduction of bad debt. In the
present case ` 1 lakh is deductible as bad debt in the hands of the company.
190 INCOME TAX
Family Planning Expenditure [Sec. 36(1)(ix)]

Any bona fide expenditure incurred by a company for the purpose of promoting family
planning among its employees, is allowable as deduction. If however, such expenditure is of
capital nature, one-fifth of such expenditure is allowable as deduction for the previous year
in which it was incurred and the balance is deductible in equal installment in the next four
years.
Note:
1. No deduction is available under section 36(1)(ix) in the case of a non-corporate
assessee.
2. Any family planning capital expenditure which is not allowed as deduction due to
inadequacy of profit, shall be set off and carry forward as if it is unabsorbed
depreciation.
Securities Transaction Tax & Commodities Transaction Tax (Sec. 36)

STT paid on sale or purchase of security held as stock-in-trade or intra-day transaction is
allowed as deduction.
Similarly, CTT paid in the course of business shall be allowable as deduction if the
income arising from such taxable commodities transactions (non-agricultural future
contracts) is included in the income computed under the head PGBP. Trading in
commodities not to be considered as a speculative transaction.
General Deduction [Sec. 37(1)]

Section 37(1) is a residuary section. In order to claim deduction under this section, the
following conditions should be satisfied:
1. The expenditure should not be of the nature described under section 30 to 36.
2. It should not be in the nature of capital expenditure.
3. It should not be personal expenditure of the assessee.
4. It should have been incurred in the previous year.
5. It should be in respect of business carried on by the assessee.

6. Cost of Production of Abandoned feature films (i.e. certificate of Board of Film censors
is not received)
7. It should not have been incurred for any purpose which is an offence or is prohibited by
any law. Thus penalty paid under any law is not deductible.
Particulars Deduction u/s 37 (1)

Penalties imposed for infraction of law Not allowed
Penalty paid on failure to deduct TDS Not allowed
Interest paid in respect of delayed payment on income Not allowed
tax
Any interest/penalty paid under Income Tax Not allowed
Interest paid under GST Law Allowed
Demurrage paid to port authorities in connection with Allowed as it is not a fine
release of confiscated goods paid for infraction of law
Interest paid under Employees Provident Fund & Misc Allowed
Provision Act 1952
Penalty paid by the assessee contractor for non- Allowed as it is not a fine
completion of contract within stipulated time paid for infraction of law
Corporate Social Responsibility (CSR) expense not deductible

Under the Companies Act, 2013 certain companies (which have net worth of ` 500 crore or
more, or turnover of ` 1,000 crore or more, or a net profit of ` 5 crore or more during any
financial year) are required to spend certain percentage of their profit on activities relating
to Corporate Social Responsibility (CSR). Under the existing provisions of the Act
expenditure incurred wholly and exclusively for the purposes of the business is only
allowed as a deduction for computing taxable business income.
As the CSR expenditure (being an application of income) is not incurred for the purposes of
carrying on business, such expenditures cannot be allowed under section 37 of the Income-
Tax Act.
Therefore, in order to provide certainty on this issue, it is clarified that for the purposes of
section 37(1) any expenditure incurred by an assessee on the activities relating to
corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall
not be deemed to have been incurred for the purpose of business and hence shall not be
allowed as deduction under section 37.
Circular No. 5/2012 dated 01.08.2012

Inadmissibility of expenses incurred in providing freebees to medical practitioner by
pharmaceutical and allied health sector industry
CBDT has clarified that the claim of any expense incurred in providing freebees to medical
practitioner is in violation of the provisions of Indian Medical Council (Professional
192 INCOME TAX
Conduct, Etiquette and Ethics) Regulations, 2002, the expenditure so incurred shall be
inadmissible u/s 37(1), being an expense prohibited by the law. The disallowance shall be
made in the hands of such pharmaceutical or allied health sector industry or other assessee
which has provided aforesaid freebees.
This circular also clarified that a sum equivalent to value of freebees enjoyed by the
aforesaid medical practitioner or professional associations is also taxable as business
income or income from other sources, as the case may be.
Advertisement Expenses [Sec. 37(2B)]

Deduction is not available in respect of expenditure incurred by an assessee on
advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political
party. Expenditure on Neon Sign is Capital Expenditure and depreciation is claimed on it.
Specific disallowances under the Act

Interest, Royalty, Fees for Technical Services etc. payable Outside India or Payable to
a Non-Resident [Sec. 40(a)(i)]
If the following three conditions are satisfied the assessee (i.e., the payer) is supposed to
deduct tax at source (TDS) under section 195:
1. The amount paid is interest, royalty, fees for technical services or any other sum (other
than Salary).
2. The aforesaid amount is chargeable to tax under the Act in the hands of the recipient.
3. The aforesaid amount is paid/ payable (a) outside India to any person; or (b) in India to a
non-resident.
If the above three conditions are satisfied, the assessee (the payer) is supposed to deduct
tax at source and deposit the same with the Government within the time-limit specified by
section 200(1).
Due date of Deposit of TDS

If amount deductible in April to Feb 7th of Next Month
If amount deductible in March April 30th
TDS defaults- TDS defaults may be broadly grouped in the following categories
1. Tax is deductible at source but the assessee has not deducted it, on the date it was
supposed to be deducted.
2. Tax is deducted during the current year but is not deposited on or before due date of
submission of return of income u/s 139(1).
Consequences if tax is deposited subsequently

If the above expenditure is not allowed in the current year, deduction will be available while
computing the business income of the subsequent previous year in which such tax will be
paid (i.e., in the year in which tax deducted by the assessee will be paid to the Government).
Illustration 23: Consider the following cases pertaining to payment of interest, royalty,
technical fees or any other sum to a non-resident which is subject to the provisions of tax
deduction at source under section 195 (in all cases liability is incurred during the previous
year 2017-18). Assume due date of filing return of income is 30th Sep 2018.
When tax
Date on Actual should be Previous
which tax is date of deposited year in
Date of deposit of TDS
supposed to tax under which it is
be deducted deduction section deductible
200(1)
September 1, 2017 (i.e.,
June 26,
June 26, 2017 July 7, 2017 deposited during the current 2017-18
2017
financial year 2017-18)
April 1, 2018 [i.e., deposited in
July 26, August 7,
July 26, 2017 the next financial year before the 2017-18
2017 2017
due date u/s 139(1)]
April 30, 2018 (deposited in the
March 31, March 31, April 30, next financial year but before the
2017-18
2018 2018 2018 due date)
November 1, 2018 [deposited in

March 20, March 20, April 30,
the next financial year but after 2018-19
2018 2018 2018
the due date u/s 139(1)
May 16, June 7, Not
May 16, 2017 Not deposited
2017 2017 deductible
Not Not
Dec. 1, 2017 -- Not deposited
deducted deductible
June 10,
June 10, 2017 July 7, 2017 July 20, 2019 2019-20
2017
Not Not
Dec 1, 2017 Jan 7, 2017 Jan 7, 2017
Deducted Deductible
194 INCOME TAX
Compliance of TDS provisions in case of a Resident [Sec. 40(a)(ia)] Section 40(a)(ia) is

applicable if the following conditions are satisfied:
1. It covers all expenses on which tax is required to be deducted (including Salary).
2. In the above cases recipient is resident in India.
Consequences if the above Conditions are Satisfied - If the aforesaid conditions are
satisfied, 30% of the expenditure is not deductible in the following cases:
Is such expenditure deductible in any
Cases
subsequent previous year
Case 1 – Tax is deductible but not If tax is deducted in any subsequent year, the
deducted before the end of PY. expenditure will be deducted in the year in which
TDS will be deposited by the assessee with the
Government.
Case 2 – Tax is deductible (and is so If tax is deposited with the Government after the
deducted) before the end of PY but it is due date of submission of return of income, the
not deposited on or before the due date expenditure will be deductible in that year in
of submission of return of income which tax will be deposited.
under section 139(1).
However no disallowance u/s 40(a)(ia) shall be made, if the deductee furnishes his return
of Income by including the said income in his return and pays tax due on income declared
by him in such return of income.
Illustration 24: Assuming due date of filing return is 30th September in all the cases.
PY in Refer
which Note
Date of Date of
S. Nature of Date of Date of deduction
Deduction Deposit of
No. Expense Payment Credit of
of TDS TDS
expense
is allowed
Interest on
1 -- 31-3-2018 31-3-2018 16-8-2018 2017-18 --
loan
Interest on
2 -- 31-3-2018 31-5-2018 30-9-2018 2018-19 1
loan
Payment to
3 16-9-2017 -- 31-3-2018 30-9-2018 2017-18 --
Contractor
Payment to
4 16-9-2017 -- 15-4-2018 30-9-2018 2018-19 2
Contractor
5 Audit Fee 15-3-2018 31-3-2018 10-10-2018 2018-19 3
6 Rent -- 30-6-2017 31-3-2018 30-9-2018 2017-18 --
7 Rent -- 30-6-2017 31-5-2018 30-9-2018 2018-19 4
Notes:
1. The tax should have been deducted on 31-3-2018. As tax has been deducted after 31-3-
2018, deduction of expense will be allowed in the year in which such tax has been paid
i.e. Previous Year 2018-19
2. As tax has been deducted after 31-3-2018, deducted of expense will be allowed in the
year in which such tax has been paid i.e. Previous Year 2018-19.
3. As tax has been deposited after the due date of filing of the return of income, the
deduction of expense will be allowed in the year in which such tax has been paid i.e.
Previous Year 2018-19.
4. As tax has been deducted after 31-3-2018, deducted of expense will be allowed in the
year in which such tax has been paid i.e. Previous Year 2018-19.
Income Tax [Sec. 40(a)(ii)]

Any sum paid on account of income tax is not deductible. Similarly, any
interest/penalty/fine for non-payment or late payment of income-tax is not deductible. This
rule is applicable whether income tax is payable in India or outside India. Legal charges paid
for filing of income tax return & income tax proceedings is allowed as deduction.
Salary Payable Outside India Without Tax Deduction [Sec. 40(a)(iii)]

Section 40(a)(iii) is applicable if the following conditions are satisfied:
1. The payment is chargeable under the head “Salaries” in the hands of the recipient.
2. It is payable:
(a) Outside India (to any person resident or non-resident); or
(b) In India to a non-resident.
3. Tax has not been paid to the Government nor deducted at source before the due date
of filing of return of income.
If the aforesaid conditions are satisfied, then the payment is not allowed as deduction.
Illustration 25: The following illustration is given in respect of salary payable for the
Previous Year 2017-18 by a company to (a) any person outside India or (b) a non-resident
in India:
Date on which Previous
When tax
tax is supposed year in
should be
Amount to be deducted Actual date of Actual date of which
deposited
` (i.e, the date of tax deduction tax deposit salary
under section
salary payment is
200(1)
payment) deductible
40,000 July 31, 2017 July 31, 2017 August 7, 2017 Nov 10, 2017 2017-18
90,000 March 31, 2018 March 31, 2018 April 7, 2018 April 7, 2018 2017-18
1,60,000 March 31, 2018 March 31, 2018 April 7, 2018 April 12, 2018 2017-18
70,000 March 31, 2018 Not deducted April 7, 2018 April 12, 2018 2017-18
196 INCOME TAX
75,000 March 31, 2018 March 31, 2018 April 7, 2018 Not deposited 2017-18
95,000 March 31, 2018 Not deducted April 7, 2018 Not deposited Not
deductible
Maximum Permissible Remuneration to Partner in Firm [Sec. 40(b)]

To allow remuneration the following specific conditions, as prescribed by section 40(b),
should be satisfied:
1. Remuneration should be paid only to a working partner.
2. Remuneration must be authorized by the partnership deed.
3. Remuneration should not pertain to period prior to partnership deed.
4. Remuneration should not exceed the permissible limit.
If the above conditions are satisfied remuneration to partners is allowable as deduction in
the hands of the firm. However, the maximum amount of such payment to all the partners
during the previous year should not exceed the limits given below:
Book Profit Maximum amount deductible in respect of
remuneration to partners u/s 40(b)
If book profit is negative ` 1,50,000
In case book profit is positive
On first ` 3 lakh of book profit ` 1,50,000 or 90% of book profit, whichever is
more
On the balance of the book profit 60% of book profit
Any remuneration above this limit is not allowed as deduction in the hands of firm and also
not taxable in the hands of partner.
Computation of Book Profit for Remuneration u/s 40(b)
`
NP as per P/L A/c (before Income Tax) xx
Less: Income under all other head (except PGBP) xx
Add: Remuneration to Partner appearing in P/L xx
Add: Excessive Interest to Partner on Capital xx
Less: B/F Depreciation (not b/f loss) xx
Book Profit xx
Maximum Permissible Interest on Capital to Partner in Firm [Section 40(b)]
The following specific conditions should be fulfilled to obtain deduction of interest paid to
the partners:
1. Payment of interest should be authorized by the partnership deed.
2. Payment of interest should pertain to the period after the partnership deed.
3. Rate of interest should not exceed 12 %.
Any interest exceeding this limit is not allowed as deduction to firm and also not taxable in
the hands of partner.
Illustration 26: Profit and loss account of X Co. for the year ending March 31, 2018 is as
follows:
` `
Cost of goods sold 7,90,000 Sales 26,00,000
Remuneration to partners Rent of house property (1/2 50,000
X 6,00,000 portion) 60,000
Y 9,00,000 Interest on debentures (non-trade
Z 55,000 investment)
Income-tax 8,000
Interest to partners @ 13.5%
X 40,000
Y 10,000
Z 60,000
Municipal tax of house
property (entire property) 5,000
Other expenses 2,10,000
Net profit 32,000
27,10,000 27,10,000
Other information:
1. Out of other expenses, ` 48,500 is not deductible under sections 36, 37(1) and 43B.
2. On January 15, 2018, the firm pays on outstanding sales tax liability of ` 2,922 of the
previous year 2016-17. As this amount pertains to the previous year 2016-17, it has not
been debited to the aforesaid profit and loss account.
3. Z is not a working partner.
4. The firm owns a house, the ground floor is used for business purposes, the first floor is
given on rent. Municipal tax is paid on May 10, 2018.
Find out the net income of the firm (and tax treatment of the payments to partners in their
hand) for the assessment year 2018-19.
Solution:
`
Computation of remuneration deductible under section 40(b):
Net profit as per profit and loss account 32,000
Less: Income not chargeable to tax under section 28
Rent (-) 50,000
Interest (-) 60,000
Balance (-) 78,000
Add: Expenses debited to profit and loss account but which are not
deductible
198 INCOME TAX
Remuneration (taken separately) (+) 15,55,000

Interest to partners [amount in excess of 12% which is not allowable as
deduction] (+) 12,222
Income-tax (+) 8,000
Municipal taxes of house property half portion given on rent (+) 2,500
Other expenses (+) 48,500
Balance 15,48,222
Less: Outstanding sales tax paid during 2017-18 (deductible by virtue of
section 43B) 2,922
Book profit 15,45,300
Maximum amount which is deductible on account of payment of remuneration to partners:

` `
First ` 3,00,000 @ 90% 2,70,000
Balance of ` 12,45,300 @ 60% 7,47,180 10,17,180
Computation of Income of the firm
Income from house property
Less: Municipal tax of ` 2,500 [not deductible as it is paid after the --
end of the previous year]
Less: Standard deduction (30% of ` 50,000) 15,000 35,000
Book profit 15,45,300

Less: Remuneration to partners (amount deductible is actual
payment of ` 15,55,000 subject to a maximum of ` 10,17,180) 10,17,180 5,28,120
Interest on debentures 60,000
Net income 6,23,120
Tax treatment in the hands of Partners

X Y Z
` ` `
Share of Profit (exempt) -- -- --
Salary (to the extent allowed as deduction to the firm;
` 10,17,180 shall be distributed in ratio of 6:9 to X and Y;
salary to Z is not allowed as deduction as Z is not a
working partner) 4,06,872 6,10,308 --
Interest to partner (to the extent allowed as deduction) 35,556 8,889 53,333
Amount taxable in the hands of partners 4,42,428 6,19,197 53,333
Amounts not deductible in respect of excessive payment to relative [Sec. 40A(2)]

Where the assessee incurs any expenditure in respect of which payment has been or is to
be made to certain specified persons, the Assessing Officer may disallow so much of the
expenditure as he considers to be excessive or unreasonable having regard to the fair
market value of goods, services or facilities for which payment is made.
Specified Person Referred to in Section 40A(2)

Tax Payer
Specified Person
(Who has incurred
(to whom payment is made)
Expenditure)
Relative (Spouse , Brother, Sister or any lineal ascendant or
Individual
descendant)
HUF Member of Family or relative of such member
Director, any relative of Director or person having substantial
Company
interest
Firm Partner, any relative of Partner
AOP Member of AOP or relative of such member
Note: A Person shall be deemed to have substantial interest in a business or profession if:
(a) In a case where the business or profession is carried on by a company, such person is,
at any time during the previous year, the beneficial owner of shares carrying not less
than 20% of the voting power.
(b) In any other case, such person is, at any time during the previous year, beneficially
entitled to not less than 20% of the profits of such business or profession.
Illustration 27: Assessee company sells goods manufactured by it to its directors for `
3,00,000. The market price of such goods is ` 4,00,000. Assessing officer wants to invoke
section 40A(2). Advise.
Solution: Section 40A(2) can be invoked where expenditure has been incurred by the
assesse for which payment has been or is required to be made to certain specified persons.
Since in the present case no expenditure has been incurred by the company for which
payment has to be made, section 40A(2) cannot be invoked.
Illustration 28: Apex company pays salary of ` 40,000 p.m. to its director. The company
decides to pay further 1% of its net profits to the director in addition to the salary payment.
Advise.
Solution: If the assessee company proves that the salary and commission are reasonable
having regard to the services rendered by the director, then section 40A(2) cannot be
invoked. If, however, the A.O. proves that the salary and commission paid is unreasonable
having regard to the services rendered by the director, then the A.O. can disallow the
unreasonable portion under section 40A(2).
200 INCOME TAX
Note: It may be noted that the salary or the commission disallowed under section 40A(2)
shall be taxable in the hands of the director.
V.V.V IMPORTANT
Amounts not deductible in respect of expenditure exceeding ` 10,000* [Sec. 40A(3)]
1. The assessee incurs any expenditure exceeding ` 10,000* which is otherwise
deductible under the other provisions of the Act for computing business/profession
income.
2. A payment (or aggregate of payment made to a person in a day) in respect of the above
expenditure exceeds ` 10,000*
3. The payment is made otherwise than by an account payee cheque or an account payee
demand draft or use of electronic clearing system through a bank account. (It is made in
cash or by a bearer cheque or by a crossed cheque or by a crossed demand draft)
If all the above conditions are satisfied, then 100% of such payment will be disallowed.
Note:
1. *The monetary limit of ` 10,000 raised to ` 35,000 in case of payment made to
transporter for plying, hiring or leasing goods carriage.
2. Sec. 40A(3) applies to expenses which are otherwise deductible under head PGBP,
hence not applicable for donation.
3. The payment so made shall be deemed to be PGBP chargeable to Income Tax as income
of the subsequent year (i.e year of payment).
Exceptions [Rule 6DD]

No disallowance u/s 40A(3) shall be made in the cases and circumstances specified
hereunder, namely:
(a) Where the payment is made to Bank, LIC, IFCI, UTI & Financial Institutions.
(b) Where the payment is made to Government (i.e. taxes etc)
(c) Where the payment is made by.
(i) Any letter of credit arrangements through a bank;
(ii) A book adjustment from one account in a bank to other account in that or any
other bank;
(d) Where the payment is made by way of adjustment against the amount of any liability
incurred by the payee for any goods supplied or services rendered by the assessee to
such payee;
(e) Where the payment is made for purchase of
(i) Agricultural or forest produce; or
(ii) Produce of animal husbandry (including hides and skins) or dairy or poultry
framing; or
(iii) Fish or fish products; or
(iv) The products of horticulture or apiculture, plantation variety
To the cultivator, grower or producer of such articles, produce or products;
(f) Where the payment is made for the purchase of the products manufactured or
processed without the aid of power in a cottage industry, to the producer of such
products;
(g) Where the payment is made in a village or town, which on the date of such payment is
not served by any bank, to any person who ordinarily resides, or is carrying on any
business, profession or vocation, in any such village or town;
(h) Where any payment by way of gratuity, retrenchment compensation or similar
terminal benefits, is made to an employee of the assessee or the heirs of any such
employee on or in connection with the retrenchment, resignation, discharge or death of
such employee, if the payment does not exceed ` 50,000;
(i) Where the payment is made by an assessee by way of salary to his employee after
deducting the income tax from salary in accordance with the provisions of section 192
of the Income – Tax Act and when such employee :
(a) Is temporarily posted for a continuous period of 15 days or more in a place other
than his normal place of duty or on a ship and
(b) Does not maintain any bank account in any bank at such place or ship.
(j) Where the payment was required to be made on a day on which the banks were closed
either on account of holiday or strike. Note: It has to be proved that payment was
required to be made on the day on which bank was closed and the payment could not
have been made on a working day.
(k) Where the payment is made by any person to his agent who is required to make
payment in cash for goods or services on behalf of such person.
(l) Where payment is made by an authorized dealer or money changer against purchase of
foreign currency or travelers cheques in the normal course of his business.
Illustration 29: Determine the amount of disallowance in the cases given below:
1. Generally, Hemant pays salary to his employees by account payee cheques. Salary of
December 2017 is, however, paid to three employees Anil, Bhavesh and Charan by
bearer cheques (Payment being ` 6,000, ` 10,000 and ` 10,500, respectively).
2. Sanjay Ltd. purchases goods on credit from Uttam Ltd. on May 6, 2017 for ` 46,000
which is paid as follows:
a. ` 8,000 in cash on May 11, 2017
b. ` 17,000 by a bearer cheque on May 31, 2017;
c. ` 21,000 by an account payee cheque on May 16, 2017.
3. Kamal Ltd. purchases goods on credit from Atul Ltd. on May 10, 2017 for ` 8,000 and on
May 30, 2017 for ` 7,000. The total payment of ` 15,000 is made by a crossed cheque
on June 1, 2017.
4. Ansul Ltd. purchases goods on credit from a relative of one of its director on June 20,
2017 for ` 50,000 (Market value : ` 42,000). The amount is paid in cash on June 25,
2017.
rs 8000 40A(2)
rs 42000 40A(3)
202 INCOME TAX
5. B Ltd. purchases raw material on credit from A who holds 20% equity share Capital in
B Ltd. (the amount of bill being ` 26,000, market price being ` 9,000). It is paid in cash
on July 26, 2017.
6. Payment in respect of a business expenditure for ` 15,000 through a cheque duly
crossed as “& Co.”
Solution:
1. ` 10,500, being 100% of salary paid by bearer cheque to Charan will be disallowed.
2. Nothing will be disallowed out of the payment of ` 8,000 in cash on May 11, 2017, as
the payment does not exceed ` 10,000. 100% of ` 17,000 will be disallowed. Nothing
will be disallowed out of ` 21,000.
3. Though the amount of payment exceeds ` 10,000, nothing shall be disallowed. To
attract disallowance, the amount of bill as well as the amount of payment should be
more than ` 10,000.
4. Out of the payment of ` 50,000, ` 8,000 (being the excess payment to a relative) shall
be disallowed under section 40A(2). As the payment is made in cash and the remaining
amount exceeds ` 10,000, 100% of the balance (i.e., ` 42,000) shall be disallowed under
section 40A(3).
5. Out of the payment of ` 26,000, ` 17,000 (being the excess payment to a person holding
a substantial interest) shall be disallowed under section 40A(2). The remaining amount
(i.e., ` 9,000) does not exceed ` 10,000. Nothing shall be disallowed under section
40A(3) even if the payment is made in cash.
6. Payment through a cheque crossed as “& Co.” will attract 100% disallowance u/s
40A(3).
Expenses Deductible on Payment Basis (Sec. 43B)

The following expenses are deductible only if paid before due date of filing of return of
income:
(a) Any sum payable by way of tax, or duty, to Government; EMPLOYER CONTRIBUTION
(b) Any sum payable by an employer by way of contribution to provident fund or

superannuation fund or any other fund for the welfare of employees;
(c) Any sum payable as bonus or commission to employees for service rendered;
(d) Interest on any loan or advance taken from a scheduled bank including a co-operative
bank or public financial institution;
(e) Leave Encashment.
(f) Any sum payable by the assessee to the Indian Railways for the use of railway assets.
However if the above expenditure is paid after due date of submission of return of income,
it shall be allowed in the year in which payment is made.
Provided further that no deduction shall be made, where such payment has been made
otherwise than in cash, the sum has not been realized within 15 days from the due date of
filing of return of income.
Illustration 30: After negotiations with the bank, interest outstanding of ` 3 lac has been
converted into loan. X Ltd follows mercantile system of accounting. Can the interest of ` 3
lac be claimed as business expenditure?
Solution: Any amount of interest converted into a loan, cannot be taken as paid during the
year. Hence, interest of ` 3 lac shall not be allowed as deduction.
Full Value of Consideration in respect of Transfer of Immovable Property held as

Business Asset [Sec. 43CA]
In case of transfer of immovable property other than capital asset (including stock-in-
trade), if the consideration is less than the value adopted, assessed or assessable for the
purpose of payment of stamp duty, such stamp duty value will be taken as the full value of
consideration for the purpose of computing business income.
It is also provided that if there is a time gap between the date of agreement and the date of
registration, the value for the purpose of the aforesaid comparison can be taken as the value
assessable for stamp duty on the date of the agreement, provided some part of the
consideration has been paid on or before the date of agreement, otherwise than in cash.
Restriction on Accepting Loan [Sec. 269SS]

Prohibition on accepting loan other than by Account Payee Cheque/Draft/ECS in excess of
` 20,000.
electronic clearing system
Restriction on Repaying Loan [Sec. 269T]

Prohibition for repaying loan other than by an Account Payee Cheque/Draft/ECS in excess
of ` 20,000
V.V IMPORTANT
Restriction on Receipt of Cash exceeding ` 2 lakh [Sec. 269ST]
No person shall receive on amount of ` 2 lakh or more –
(a) In aggregate from a person in a day
(b) In respect of single transaction
(c) In respect of transaction relating to one event or occasion from a person.
Otherwise than by an account payee cheque or an account payee bank draft or use of
electronic clearing system through a bank account.
Provided that the provisions of this section shall not apply to –

(a) Government
(b) Any banking company, post office or co-operative bank.
If a person receives only sum in contravention of the provisions of Sec. 269ST, he shall be
liable to pay, by way of penalty, a sum equal to 100% of amount involved.
204 INCOME TAX
Following instances are violation of Sec. 269ST

(i) If you receive ` 2,00,000 on one single date against 5 different invoices of `40,000
each.
(ii) If you collect ` 20,000 on 10 different days against single bill of ` 2,00,000.
(iii) If you collect ` 1,50,000 on one day & ` 50,000 on another day towards decoration
for an event.
(iv) Any cash deposit directly into your bank accounts by others (including customers)
of ` 2 lakh or more in a day or with respect to a single transaction or event or
occasion.
(v) Cash gift of ` 2 lakh or more received from a person on occasion of marriage.
Maintenance of Accounts (Sec. 44AA)
Books of Account
BUSINESS
Specified Profession Others
NON-SPECIFIED
PROFESSION
Total Income > ` 2,50,000
Mandatorily required or
to maintain books of Sales / Receipts > ` 25,00,000 turnover
Account in any one of 3 preceding Previous Year
Yes No
Not required to
Maintain books of
maintain books of
accounts
accounts.
Specified Profession [Sec. 44AA(1)]

Legal, medical, engineering, architectural, accountancy, technical consultancy or interior
decoration or other notified profession.
Prescribed Books (Rule 6F)

Books prescribed to be maintained by person doing specified profession -
(i) Cash books (ii) Journal (if accrual method adopted)
(iii) Ledger (iv) Carbon copies of bills exceeding ` 25
(v) Bills & Vouchers in respect of expenses
In case of medical profession additional book (i) Daily case register (Form 3C) (ii) Stock
register.
These books are required to be kept and maintained for 6 years from end of relevant A/Y.
Audit of Account is Compulsory [Sec. 44AB]

Following persons are required to get their accounts compulsorily audited by a chartered
accountant:
When they are covered by the provision of
Different taxpayers
compulsory audit under section 44AB
A Person earning income in If the total commission or brokerage for the relevant
the nature of commission, year exceeds ` 1 Crore.
brokerage or carrying on
agency business
If his gross receipts# in profession for the relevant year
A person carrying on
exceeds ` 50 lakh. Out of Pocket Expense & Advance
Profession
Receipt not included
If the total turnover for the relevant year exceeds ` 2
A person carrying business
Crore.
If such person claims that the profits and gains from the
A person covered under
business are lower than the profits and gains computed
section 44AD, 44ADA, 44AE
under these sections (irrespective of his turnover).
Due date for getting books audited and form no. of Audit Report
Due Date for
Different taxpayers Audit Form No. e-filing Tax
INCOME TAX AUDIT + ANY ONE AUDIT Audit Report
In the case of a person who carries on business or
profession and who is required by or under any law 3CA & 3CD Due Date of
to get his accounts audited furnishing ROI
In the case of a person who carries on business or u/s 139(1) 30
3CB & 3CD Sept
profession but not being a person referred to above
ANNEXURE
ONLY INCOME TAX AUDIT MAIN AUDIT REPORT

206 INCOME TAX
Presumptive Taxation
Computation of income on estimated basis in the case of taxpayers engaged in any
business except the business of plying, hiring or leasing goods carriage [Sec. 44AD]
Conditions - The provisions of section 44AD will be applicable only if the following
1. The assessee should be resident individual, HUF, a partnership firm (not being a limited
liability firm).
2. The assessee should be engaged in any business except the business of plying, hiring
or leasing goods carriages referred to in section 44AE.
3. Total turnover/ gross receipt in the previous year should not exceed ` 2 Crore.
Sec 44AD is not applicable to:
(i) a person carrying on profession as referred to in sub-section (1) of section 44AA;
(ii) persons earning income in the nature of commission or brokerage income; or
(iii) a or a person carrying on any agency business.
Consequences if the Above Conditions are Satisfied : If the above conditions are
satisfied, the income from the eligible business is estimated at 8% of the gross receipt or
total turnover and 6% in respect of turnover received through digital modes. The following
points should be noted:
1. The assessee can voluntarily declare a higher income in his return.
2. All deductions under sections 30 to 38, including depreciation and unabsorbed
depreciation, are deemed to have been already allowed and no further deduction is
allowed under these sections. Also, in the case of a firm, no deduction in respect of
salary and interest to partners under section 40(b) shall be allowed.
3. The written down value is calculated, where necessary, as if depreciation as applicable
has been allowed.
4. It will be assumed that disallowance, if any, under sections 40, 40A and 43B has been
considered while calculating the estimated income @ 8%/ 6%.
5. An assessee opting for the above scheme shall be exempted from payment of advance
tax related to such business.
6. An assessee opting for the above scheme shall be exempted from maintenance of books
of account related to such business as required under section 44AA.
Is it Possible to Declare Lower Income- A taxpayer can declare his income to be lower
than the deemed profits and gains as stated above. The following consequences are
applicable if the taxpayer declares his income which is lower than the deemed profits and
gains as stated above-
1. The taxpayer will have to maintain the books of account as per section 44AA
(irrespective of income or turnover) if his total income exceeds the exemption limit.
2. The taxpayer will have to get his books of account audited under section 44AB
(irrespective of turnover) if his total income exceeds the exemption limit.
Computation of income on estimated basis for professionals [Sec. 44ADA]

Conditions - The provisions of section 44ADA will be applicable only if the following
1. The assessee should be resident individual, HUF, a partnership firm (not being a limited
liability firm).
2. The assessee should be engaged in the following profession:
(i) Legal
(ii) Medical
(iii) Engineering or architectural
(iv) Accountancy
(v) Technical Consultancy
(vi) Interior Decoration
(vii) Any other profession as notified by CBDT
3. Total turnover/ gross receipt in the previous year should not exceed ` 50 lakh.
4. Benefit of Sec. 44ADA will not be available for next 5 years if the assessee does not claim
the same during any previous year (w.e.f. PY 2016-17).
5. Advance tax liability to be paid through one installment only i.e. by 15th March instead of
four installments.
Consequences if the Above Conditions are Satisfied: If the above conditions are satisfied,
the income from profession is estimated at 50% of the gross receipt or total turnover. The
following points should be noted:
1. The assessee can voluntarily declare a higher income in his return.
2. All deductions under sections 30 to 38, including depreciation and unabsorbed
depreciation, are deemed to have been already allowed and no further deduction is
allowed under these sections. Also, in the case of a firm, no deduction in respect of
salary and interest to partners under section 40(b) shall be allowed.
3. The written down value is calculated, where necessary, as if depreciation as applicable
has been allowed.
4. It will be assumed that disallowance, if any, under sections 40, 40A and 43B has been
considered while calculating the estimated income @ 50%.
5. Liable for payment of advance tax related to such profession.
6. An assessee opting for the above scheme shall be exempted from maintenance of books
of account related to such business as required under section 44AA.
7. All other provisions similar to Sec. 44AD.
Computation of income on estimated basis in the case of taxpayers engaged in the

business of plying, leasing or hiring goods carriage (Sec. 44AE)
Section 44AE is applicable only if the following conditions are satisfied:
1. The taxpayer may be any assessee.
2. Taxpayer is engaged in the business of plying, hiring or leasing goods carriages.
208 INCOME TAX
ownership not neccesssary
3. The taxpayer owns not more than 10 goods carriages at any time during the previous
year. For this purpose, a taxpayer, who is in possession of a goods carriage, whether
taken on hire purchase or on instalments and for which the whole or part of the
amount payable is still due, shall be deemed to be the owner of such goods carriage.
Consequences if Section 44AE is Applicable - If the aforesaid conditions are satisfied then
section 44AE is applicable. Income from the aforesaid business shall be calculated at ` 7,500
for every month (or part of a month) during which the goods carriage is owned by the
taxpayer. Liable for payment of advance tax related to such business.
All other provisions similar to Sec. 44AD.
usefulness not considered
Illustration 31: Pawan Ltd. is engaged in the business of carriage of goods. On April 1,
2017, it owns 10 trucks (6 out of which are “heavy goods vehicle”). On May 6, 2017, one of
the heavy goods vehicles is sold by Pawan Ltd. to purchase a light goods vehicle on May 10,
2017 which is put to use only from June 17, 2017. Find out net income of Pawan Ltd. for the
AY 2018-19 taking into consideration the following data:
`
Freight collected 8,90,000
Less:
Operational expenses 6,40,000
Depreciation as per section 32 1,90,000
Other office expenses 15,000
Net profit 45,000
Other business/ non-business income 6,70,000
Solution:
Income shall be computed under section 44AE as follows-
Number of
months Rate
Period during which trucks are
Type of carriage (including per Amount
owned
a part of month
month)
9 Light goods vehicles April 1, 2017 to March 31, 2018 12 7,500 8,10,000
1 Heavy goods vehicle April 1, 2017 to May 6, 2017 2 7,500 15,000
1 Light goods vehicle May 10, 2017 to March 31, 2018 11 7,500 82,500
Total 9,07,500
Computation of Income `
Income from carriage of goods 9,07,500
Other income 6,70,000
Net income 15,77,500
Mr. Pawan may claim lower Profits and gains if he keeps and maintains proper books of
account as per sec. 44AA and gets the same audited u/s 44AB. If Mr. Sukhvinder does so,
then his income for tax purposes from goods carriages would be ` 45,000 and his total
income would be ` 7,15,000.
Special Provisions for Computing Profits & Gains for Non-Residents

Section Nature of Business Profit- %
on Turnover
44B Shipping business in case of non-resident. 7-1/2%
44BB Business of providing services or facilities in connection with 10%
or supplying plant and machinery on hire used in the
prospecting for or extraction or production of mineral oils in
case of non-resident.
44BBA Business of operation of aircraft in case of non-resident. 5%
44BBB In case of foreign company engaged in 10% of the gross
i) Civil construction amount paid or
ii) erection of plant or machinery payable in India
iii) testing or commissioning thereof in connection with or out of India.
turnkey power project approved by the Central Government
Permissible methods of Valuation of Closing Stock

Neither the Income-tax Act nor the Income-tax Rules prescribes any particular method of
valuation of stock. An assessee may value its stock either at cost price or at market price,
whichever is less. Once a particular method of valuation is adopted, the same should be
continued is subsequent year. To put it little differently, an assessee cannot be permitted to
arbitrarily change the mode of valuation to suit his own purpose. The method of valuation
of stock may, however, be varied with the permission of income-tax authorities. If valuation
of closing stock is made on the basis of the lower of cost or market price, it can be done on
the basis of individual method or global method. Under the individual method, one has to
take cost or market price, whichever is less, in respect of each item of stock, on the closing
day of the previous year; whereas in the case of global method, value of stock is taken as the
total cost of all items of stock or market price of all items of stock, whichever is less.
Illustration 32: In the following case, ` 68,300 is the stock valuation on the basis of
individual method, while ` 70,800 is the valuation of stock on the basis of global method. In
both cases the method adopted is cost or market price, whichever is less.
210 INCOME TAX
Cost or market price,

Stock Cost price Market price
whichever is less
items ` `
`
A 1,000 800 800
B 2,500 3,000 2,500
C 30,000 32,000 30,000
D 60,000 35,000 35,000
Total 93,500 70,800 68,300
Though in the above case, value of stock is higher under the global method, as compared to
the individual method, but both are acceptable under Income Tax Act.
Illustration 33: Mr. Vasudeva furnishes the following manufacturing, profit and loss
account for the previous year ending 31.3.2018:
Amount Amount
Particulars Particulars
(`) (`)
To Stock 11,000 By Sales 2,84,500
To Purchases 80,000 By Stocks 26,400
To Manufacturing wages 65,900
To Factory Rent Rates and Taxes 30,000
To Depreciation on machinery and
building 15,000
To Gross profit c/d 1,09,000
3,10,900 3,10,900
Profit and Loss Account

` `
To Office Salaries 27,000 By Gross profit b/d 1,09,000
To Establishment Expenses 6,100 By Rent of staff quarters 19,000
To Interest on Capital 3,300 By Refund of income-tax 2,000
To Fire Insurance 200 penalty
To Bad Debts 7,000 By Sale of a machinery 25,000
To Income tax 6,000 By Recovery of Bad debts,
To Exp on GST proceedings 2,000 not allowed to be
To Exp of income-tax proceedings 13,000 deducted in earlier years 6,000
To Diwali Expenses 4,000 By Sundry Receipts 35,000
To Legal Expenses 7,000
To Medical Expenses of the proprietor 3,000
To Staff Welfare Expenses 2,000
To Repair of Staff Quarters 4,000
To Security Deposit (telex connection) 10,000
To Bonus Payable to Employees 20,000

To Provision Sales tax and Excise Duty 25,000
To Municipal taxes for staff quarters 4,000
To General Reserve 26,000
To Entertainment expenses 16,000
To Net profit 10,400
1,96,000 1,96,000
You are required to compute the taxable profits from business after taking the following
into consideration:
(i) Purchase include a petty purchase of ` 21,000. Its payment was made by a crossed
cheque.
(ii) Assessee has always valued the stock at cost price but on 31st March 2018, he has
valued it at market price which was in excess of the cost price by 10%.
(iii) Office salaries paid include ` 10,400 to the proprietor of the business
(iv) Diwali expenses include gifts ` 1,000 made to the relatives.
(v) The written down value (WDV) of the block consisting of machinery as on 1.4.2017 is
` 59,000. One machine whose WDV as on 1.4.2017, was ` 5,000 was sold for ` 25,000
during the year.
(vi) The written down value (WDV) of the block consisting of factory buildings as on
1.4.2017 is ` 90,000.
(vii) Sales Tax and Excise Duties amounting to only ` 20,000 were paid on or before
25.6.2018.
Solution: Computation of Income from Business of Mr. Vasudeva for the AY 2018-19
` `
Net profit as per P & L A/c 10,400
Add: Items to be added back
Opening stock over valued Nil
Purchases not through an account payee cheque 21,000
Depreciation shown in P & L A/c 15,000
Salary paid to self 10,400
Interest on capital 3,300
Income-tax 6,000
Diwali expenses (gift to relatives) 1,000
Medical expenses of proprietor 3,000
Bonus not paid to staff 20,000
Provision for sales-tax and excise
(not paid upto last date of filing of I.T. return) 5,000
Transfer to General Reserve 26,000 1,10,700
1,21,100
Less: Items to be deducted
Closing stock over valued 2,400
212 INCOME TAX
Refund of Income-tax penalty 2,000

Sale of machinery 25,000
Bad debts recovered 6,000
Depreciation allowed on machinery (as per income tax) 5,100
Deprecation on building 9,000 49,500
Income from business 71,600
Note:
1. Cash/ crossed cheque or draft payment for any expenses (including those for
purchases) in excess of ` 20,000 shall be disallowed in full.
2. Depreciation @ 15% of (WDV ` 59,000 – sale price ` 25,000) i.e. ` 34,000 is ` 5,100.
Illustration 34: Following is the Profit and loss account Mr. A for the year ended 31.3.2018:
` `
To Repairs on building 1,30,000 By Gross profit 6,01,000
To Advertisement 51,000 By Income Tax Refund 4,500
To Amount paid to Scientific 1,00,000 By Interest from company
Research Association approved deposits 6,400
u/s 35 By Dividends 3,600
To Interest 1,10,000
To Traveling 1,30,000
To Net Profit 94,500 _
6,15,500 6,15,500
Following additional information is furnished:
(1) Repairs on building includes ` 95,000 being cost of raising a compound wall for the
own business premises.
(2) Interest payments include interest of ` 12,000 payable outside India to a resident
Indian on which tax has not been deducted and penalty of ` 24,000 for contravention of
Central Sales Tax Act.
Compute the income chargeable under the head ‘Profits and gains of business or profession’
of Mr. A for the year ended 31.3.2018 ignoring depreciation.
Solution:
Profit and gains of business or profession of Mr. A for the year ended 31.3.2018
Particulars ` `
Net profit as profit and loss account 94,500
Add: Expenses not allowable
(i) Expenses on raising compound wall–capital expenditure,
hence disallowed 95,000
(ii) Interest payable outside India to a resident, as tax has not been
deducted at source [Section 40(a)] 12,000
(iii) Penalty for contravention of CST Act [Penalty paid for violation
or infringement of any law is not allowable as deduction under
section 37(1)] 24,000

(iv) Contribution for scientific research (to be treated separately) 1,00,000 2,31,000
3,25,500
Less: Income not forming part of business income
Interest from company deposits 6,400
Dividend 3,600
Income Tax refund 4,500 14,500
3,11,000
Less: Deduction under section 35 for scientific research (See Note 1,50,000
below)
Profit and gains of business or profession 1,61,000
Note: Contribution to approved scientific research association qualifies for deduction @

150% under section 35(1)(ii).
Illustration 35: State with reasons whether the following expenses are admissible as
deduction while computing income from business or profession:
(i) Stock –in-trade was lost in fire, amounting to ` 12,000 and was debited to Profit and
Loss Account.
(ii) Amount spent on a successful suit filed against a person for infringing trade mark of
the assessee ` 10,000
(iii) Interest paid to bank ` 15,000 in connection with overdraft obtained for paying
dividend.
(iv) Entertainment expenses of ` 28,000 incurred during the previous year.
(v) Capital expenditure of ` 1,00,000 has been incurred towards promotion of family
planning amongst employees of ABC Ltd.
(vi) ` 20,000 were spent in the previous year in connection with statutory income tax
proceedings.
(vii) ` 3,000 spent in connection with installation of a new telephone connection.
(viii) Travelling expenses of a Director of ABC Ltd. ` 20,000 incurred on a tour to U.S.A. In
connection with the negotiation of purchase of a new machinery.
(ix) Compensation paid to the widow and children of deceased employee of the factory
on the orders of Labour Court.
Solution:
(i) Loss of stock-in-trade by fire is deductible from ‘Profit and gains of business or
profession’.
(ii) Amount spent on a suit filed for infringing the trade mark of ` 10,000 is fully
admissible because it is a commercial expediency for security or registration of
trade mark.
(iii) Interest of ` 15,000 paid to bank for overdraft for payment of dividend is allowed.
(iv) Entertainment expenditure is covered under section 37(1) hence fully allowed.
214 INCOME TAX
(v) Expenditure on promotion of family planning incurred by a company amongst its

employee is allowed but if it is of capital nature then 1/5th of the amount spent is
allowed in the previous year is which it is incurred and balance in four equal
instalments in next four previous years. In this case ` 20,000 is allowed in the current
previous year and balance in next four previous years (` 20,000 each year).
(vi) Amount spent on income-tax is allowed as legal charges, hence ` 20,000 is
deductible.
(vii) ` 3,000 is allowed as deduction which are incurred for installation of a new
telephone connection.
(viii) Travelling expenses of a Director to be treated as part of the cost of new machine, i.e.
capitalized.
(ix) Compensation paid to the widow and children of the deceased employee as per the
order of court are fully allowed.
Unsolved Exercise
Q1. Shri Kapoor is the owner of a small manufacturing unit. He gives you the following
details drawn from his books of accounts for year 2017-18:
1. Computed net profit, after charging the following items. ` 27,500
2. Provisions and reserves debited to profit and loss account:
(i) Provision for doubtful debts ` 15,000
(ii) Depreciation reserve ` 20,000
3. House hold expenses ` 46,000
4. Donation to PM National Relief fund ` 10,000; other charitable donations ` 20,000
5. Cheques issued for purchases ` 60,000
6. Advertisement expenses ` 5,000 spent on neon sign given to a customer;
Advertisement gifts to 50 customers at a cost of ` 100 each.
7. Audit fee charged ` 20,000, including expenses on income- tax assessment`15,000
8. Patents purchased for ` 70,000 during the previous year.
9. Incomes credited to profit and loss account were:
(i) Bank interest on F.D. ` 5,000.
(ii) Interest on Post-Office saving bank account ` 3,000.
(iii) Interest on UTI units `. 2,000.
10. Opening stock is valued to cost plus 10% basis, whereas closing stock was valued
at cost minus 10% basis. Opening stock valued was ` 66,000; Closing stock valued
was ` 72,000.
Compute the net business income for the assessment year 2018-19.
(Ans. ` 1,99,250)
Q2. Mr. Abhinav (resident) furnishes the following particular of his income for the A/Y
2018-19.
Profit and Loss Account (For the year ending 31-3-2018)
Amount Amount
Particulars Particulars
` `
To Office expenses 12,400 By Gross Profit 2,98,000
To General expenses 12,000 By Sundry Receipts 19,000
To Legal expenses 8,000 By Customs duties recovered
To Depreciation on Machinery 11,000 back from Govt. (earlier not
To Staff Salary 21,000 allowed as deduction) 15,300
To Bonus to Staff 15,000 By Bad Debts recovered
To Contribution to Approved (earlier allowed as 3,000
deduction)
216 INCOME TAX
Gratuity Fund 16,000 By Gift from Son 40,000

To O/s liability for Municipal Tax 18,000
To Audit fees 21,000
To Net Profit 2,40,900
3,75,300 3,75,300
Other relevant particulars
1. Bonus to employees according to the Payment of Bonus Act, 1965 comes to ` 4,200.
2. Depreciation on machinery shown in the profit and loss account is calculated
according to the income-tax provisions.
3. General expenses include payment of ` 9,000 to an approved educational institute
for the purpose of carrying on scientific research in natural science. The research
is, however, not related to the business of the assessee.
4. During the previous year, Mr. Abhinav also made a capital expenditure of ` 5,000
for the purpose of carrying on a scientific research related to his business. The
expenditure is however, not recorded in the profit and loss account.
5. Outstanding liability in respect of Municipal tax amounting to ` 10,500 was paid on
10.4.2018; ` 1,000 on 10.5.2018; ` 2,000 on 30.6.2018; ` 1,000 on 10.7.2018 and `
3,500 is still outstanding. The return is furnished on 31-7-2018 (Last date).
6. No tax has been deducted at source on the audit fee of ` 21,000.
Determine the income of Mr. Abhinav for the A/Y 2018-19.
(Ans. ` 1,85,900)
Q3. Jakab Ltd has computed his income to be ` 20,00,000 and some of the entries noted
from Profit & Loss account are as given below:
(i) Company has debited the amount of opening stock ` 33,00,000 which is
overvalued by 10%.
(ii) Company has received duty drawback of ` 7,00,000 but the amount has not been
credited to the profit & loss account.
(iii) The company has received import license from the government and it was sold
at a profit of ` 3,00,000. The amount has not been credited to the profit and loss
account.
Compute income under the head PGBP of the company for the A/Y 2018-19.
[Ans. ` 33,00,000]
Q4. Calculate the taxable profit of the assessee for the A/Y 2018-19 from the particulars
given below:
`
Profit for the Previous year 2017-18 13,70,000
(Before allowing the following amounts)
1. Amount given to approved scientific Institute 80,000

(research not related to the business of the assessee)
2. Cost of land acquired for constructing research laboratory. 2,00,000
3. Cost of building and plant and machinery required for research 12,00,000
4. Amount given as salary to staff engaged in research (relating to a
field related to assessee own business during 2016-17 (Business
started on 1.4.2017). 90,000
5. Salary given to staff engaged in research within the premises during
2017-18. 1,20,000
(Ans. Profit Nil, Unabsorbed SRCE ` 1,60,000)
Q5. Rohit gives you the following particulars for the year ended 31.3.2018.
`
Net profit as per P & L Account (without allowing the following items) 5,20,000
Capital expenditure on Family planning 70,000
Lump sum consideration for purchase of tech. Know-how developed in govt.
laboratory 1,20,000
Entertainment Expenditure 40,000
Expenditure on acquisition of patent right 80,000
Expenditure on advertisement paid in cash 25,000
Amount paid to Delhi University for an approved Research Program in the field of 60,000
social sciences not connected with his business
Computer his business income for the assessment year 2018-19.
(Ans. ` 3,70,000)
Q6. State with reason whether the following statement are True or False.
1. Insurance premium paid in cash on the life of livestocks by Milk Coperative Society
is not allowed as deduction.
2. Family planning capital expenditure on the employee by a firm shall be allowed as
deduction in 5 installments.
3. In any P/Y if an asset is put to use for less than 180 days, than deprecation is
restricted to 50%.
4. Unabsorbed depreciation can be carried forward for 8 A/Y.
5. Assistance of additional depreciation is available on new furniture to manufacturer
assessee only.
6. Expenditure on advertisement in magazine, brochure, pamphlet etc. published by a
political party shall also be allowed as deduction if the political party does not
contest for election.
218 INCOME TAX
7. Father of spouse is relative to an individual assessee u/s 40A(2).

8. In tea growing and manufacturing business, 40% of profit is considered as
agricultural income.
9. Telecom license fee is amortized over a period of 5 year.
10. STT paid is allowed as deduction from PGBP income (non-speculative).
11. Payment of sales tax exceeding ` 20,000 in cash is not allowed as deduction by
virtue of sec. 40A (3).
12. An assessee engaged in the business of plying, hiring and leasing truck shall not be
able to opt for sec. 44AE if his turnover exceeds ` 2 Crore.
13. Employer’s contribution to PF shall be allowed as deduction only if it has been paid
before the end of P/Y.
14. Depreciation on livestock is allowed @ 15% p.a.
15. Audit u/s 44AB is compulsory if gross receipt of a professional is ` 50 Lakhs.
16. Income Tax Rules prescribes 10% rate of depreciation on Building purchased for
Scientific Research.
17. If TDS is not deposited before due date of furnishing return of income, the expense
on which TDS was deducted shall never be allowed as deduction.
18. Salary paid to a resident without deducting TDS shall not be allowed as deduction.
Q7. Mr. Govind retired from govt. service in March 2017. He got ` 20,00,000 on account of
retirement benefits. Out of the aforesaid sum, he purchased on 23rd April 2016 a few
motor vehicles and got their delivery on that date. The particular of the vehicles are
given below:
Vehicle Number Cost of the vehicle (`)
Heavy goods vehicle 2 9,00,000
Medium goods vehicle 3 4,50,000
Light goods vehicle 4 3,20,000
He formed GM and Associates (A sole proprietorship concern) along with his son Godan
as an employee on 01.06.2017 and started plying the vehicle form 04.06.2017. On an
average every vehicle remains off the road for about a week for repairs and
maintenance. GM and Associates maintains no accounts and vouchers, as per section
44AA. However, it maintains a rough record of its receipts and outgoings which is given
below:
Receipts 3,70,000
Less: Expenses (Excluding depreciation and salaries to Godan) 60,000
3,10,000
You are required to compute the total income of GM and Associates from the business
of goods carriage for the P/Y 2017-18 assuming rate of depreciation is 40% & salary to
Godan is ` 1,00,000 p.a.
(Ans. ` 8,10,000)
Q8. Raunit purchased a car on 15-5-2016 for ` 5,00,000. Calculate the depreciation for the
assessment year 2017-18 to 2018-19, assuming:
1. The car is the only item in the block; and
2. 30% of the use is for personal purposes.
(Ans. ` 52,500 ; ` 46,987)
Q9. An electricity company which was charging depreciation on straight line method and
whose actual cost of the asset was ` 5,00,000 and written down value ` 4,50,000 sold
the said asset during 2017-18 after 2 years. What will be the tax treatment if the asset
is sold for:
(i) ` 3,50,000;
(ii) ` 4,80,000;
(iii) ` 6,00,000;
(Ans. ` 1,00,000 terminal dep; ` 30,000 bal charge; ` 50,000 bal ch & ` 1,00,000 STCG)
Q10. Laxman Ltd., a manufacturing company, which maintains accounts under mercantile
system, has disclosed a net profit of ` 12.50 lakh for the year ending March 31, 2018.
You are required to compute the taxable income of the company for the assessment
year 2018-19 after considering the following information, duly explaining the reasons
for each item of adjustment:
1. Advertisement expenditure includes the sum of ` 60,000 paid in cash to the sister
concern of a director, the market value of which is ` 52,000.
2. Legal charges includes a sum of ` 45,000 paid to a consultant for framing a scheme
of amalgamation duly approved by the Central Government.
3. Repairs of plant and machinery include ` 1.80 lakh towards replacement of worn
out parts of machineries.
4. A sum of ` 6,000 on account of liability foregone by a creditor has been taken to
general reserve.
5. Sale proceeds of import entitlements amounting to ` 1 lakh has been credited to
profit & loss account, which the company claims as capital receipt not chargeable
to income tax.
6. The company incurred the following expenditure on in house research and
development as approved by the prescribed authority: (a) research equipments
220 INCOME TAX
purchased: ` 1,50,000; (b) remuneration paid to scientists: ` 50,000. The total

amount of ` 2,00,000 is debited to the profit & loss account.
7. The company has purchased scrap material amounting to ` 0.60 lakh. The payment
for which was made in cash on 15th August, 2017.
8. General expenses includes gift on Diwali of ` 1,50,000 of which ` 45,000 was to
customer, ` 75,000 to employees and remaining to wife.
9. General expenses includes ` 5,000 for income tax paid and ` 5,000 to Mr. A for
filing of return of income.
10. Interest and penalty paid under GST of ` 2,000 and ` 3,000 respectively.
11. Purchase of ` 35,000 made in FY 2016-17 was paid in cash in FY 2017-18.
12. Expenses on issue of shares for setting up a new unit at Mumbai ` 40,000.
13. Family Planning Capital expenditure and revenue expenditure of ` 25,000 and `
5,000 respectively.
14. Life Insurance Premium and Mediclaim Insurance Premium in respect of employee
of ` 20,000 each paid in cash.
(Ans. ` 13,97,000)

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INCOME TAX

The following are the main features of the book:

CA. Raj K Agrawal

Tax is a financial burden imposed by Government on a Person

Direct Tax Indirect Tax

• Income Tax Act, 1961

Previous Year [Sec. 3]

Starting with the date of commencement of

Assessment Year [Sec. 2(9)]

Person [Sec. 2(31)]

Hindu Undivided Family Vs Hindu Coparcenary

Assessee [Sec. 2(37)]

India [Sec. 2(25A)]

Income for Income-Tax Purpose

7. Income in cash or in kind: Income is taxable whether it is received in cash or in kind.

Computation of Total Income

Determination of residential status

Classification of Income under 5 heads

Salary Income from Profits and gains Capital Income from

Application of clubbing provisions

Set-off/carry forward and set-off of losses

Gross Total Income

Deductions under chapter VI A

Method of Accounting for Heads of Income

Chapter IV-D Cash or Mercantile system of accounting regularly employed

Tax Rate [AY 2018-19]

3. For Other Individual, HUF, AOP, BOI & AJP

Other Individuals mean:

4. Firm & Limited Liability Partnership

Rebate [Sec. 87A]

Rounding off of Income [Sec. 288A]

2. If income is ` 4,65,495, it shall be taken as ` 4,65,500.

Rounding off of Tax [Sec. 288B]

Special Rates of Income Tax

Taxable Income 15,54,810

Taxable Income 15,54,810

Illustration 6: Taxable income is ` 5,78,668, calculate tax payable if:-

Illustration 7: Calculate tax payable on taxable income of ` 2,24,05,725 by

Solution: Situation [i]

Illustration 8: Calculate tax payable by a foreign company having taxable income of

Less: Marginal Relief = (Increase in Tax - Increase in Income)

When income of Previous Year is not taxable in the immediately following

Previous Year for undisclosed sources of income

2. Unexplained Investment [Sec. 69]

3. Unexplained Money, etc. [Sec. 69A]

5. Unexplained Expenditure, etc. [Sec. 69C]

6. Amount borrowed or repaid on hundi [Sec. 69D]

Taxation of Cash Credits, Unexplained Money, Investments, etc. [Sec. 115BBE]

Implication of Unexplained Income

Self Declaration Detected by AO

Total Tax = 77.25% Total Tax = 83.25%

Heads of Income Vs. Source of Income

Exemption Vs. Deductions

Application of Income Vs. Diversion of Income

Q4: Calculate tax payable by a firm having taxable income of ` 1,39,05,624.

Q8: Taxable income is ` 6,32,156, calculate tax payable if:-

Ordinarily Not Ordinarily

Rules to determine Residential Status of an Individual

Resident but not Ordinarily Resident

Rules to determine Residential Status of an HUF [Sec. 6(2)]

When a Resident Hindu Undivided Family is Ordinarily Resident in India

When a Resident Hindu Undivided Family is not Ordinarily Resident in India

Rules to determine residential status of Companies [Sec. 6(3)]