Direct and Indirect Taxation Paper – I-munotes

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INTRODUCTION AND BASIC CONCEPTS
Unit Structure :
1.1 Introduction and Objectives
1.2 Assessment Year
1.3 Previous Year
1.4 Person
1.5 Assessee
1.6 Assessment
1.7 Income
1.8 Gross Total Income
1.9 Total Income
1.10 Scheme of charging income tax
1.11 Self Examination Questions
1.1 INTRODUCTION AND OBJECTIVES :
Under Entry 82 of the Schedule VII to the Constitution of India, the
Central Government is empowered to levy “Tax on income other than
agricultural income in India”.
Accordingly, the parliament enact ed Income Tax Act, 1961 [“The Act”] to
provide for the scope and machinery for levy and collection of income tax
in India.
The Act is supported by Income Tax Rules, 1962 and several other
subordinate rules and regulations.
Further, the Central Board of D irect Taxes (CBDT) and the Ministry of
Finance, Government of India are empowered to issue from time to time
circulars and notifications dealing with various aspects of the levy of
Income tax.
Unless otherwise stated, references to the sections throughout this book
will be the reference to the sections of the Income Tax Act, 1961.
Section 4 is the charging section. It says that income tax is a tax on the
total income of a person called the assessee , of the previous year
relevant to the assessment year at the rates prescribed in the relevant
Finance Act. munotes.in

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2 This phrase sets the tone and agenda of any study on income tax law
including the basic framework for levy of income tax in India.
This lesson will explain various aspects, basic concepts and terms used in
the income tax law, which include: -
(a) Assessment Year
(b) Previous Year,
(c) Person,
(d) Assessee,
(e) Meaning of income i.e. What is regarded as income?
(f) What is not regarded as income
(g) Income chargeable to tax
(h) Income not chargeable to income tax i.e. exempt income
(i) How to charge tax on income,
(j) Gross Total Income,
(k) Total Income or Taxable Income and
(l) Income -tax rates
1.2 ASSESSMENT YEAR – Section 2(9)
Section 2(9) defines an “Assessment year” as “the period of twelve
months starting from the first day of April every year ”
An assessment year begins on 1st April every year and ends on 31st March
of the next year.
Illustrations
1. Assessment year 2018 -19 means the period of one year beginning on
1st April, 2018 and ending on 31st March, 2019.
2. Assessment year 2022 -23 will mean t he period of one year beginning
on 1st April, 2022 and ending on 31st March, 2023.
Income of an assessee during the previous year is taxed in the relevant
assessment year. Assessment year is sometimes also called as the “ tax
year ”


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Introduction and basic concepts
3 1.3 PREVIOUS YEAR - Sectio ns. 2(34) & 3
3.1. Defintion:
As per section 3 “previous year” means “the financial year immediately
preceding the assessment year” .
The year in which income is earned is called the “previous year ”.
The income earned by an assessee in one financial year ( previous year ) is
taxed in the next financial year called the “assessment year”.
Illustrations
3. Income earned during financial year 2021 -22 will be taxed in the
financial year 2022 -23.
Hence, 2022 -23 will be the assessment year.
The financial year 2021 -22 being the financial year immediately preceding
the assessment year will be the previous year.
4. For the assessment year 2017 -18, previous year will be 2016 -17 i.e.
from 1st April, 2016 to 31st March 2017.
3.2. Common previous year for all source of inc ome:
A person is liable to pay taxes on total income earned by him during the
previous year from all sources of income.
The previous year will be common for all sources of income, even if he
maintains records or books of account separately for different sources of
income.
Illustration
5. Particulars of income earned by Ashok during the financial year
2021 -22 are : -
Rs (lakh) Salaries from X Limited 2.40 Salaries from Y Limited 4.80 Professional income 2.50 Dividend 1.20 Interest 1.75 Aggregate Income 12.65
Ashok has earned the aggregate income of Rs 12.65 lakh from different
sources during the financial year 2021 -22. Hence, the previous year for
all these sources of income will be the financial year 2021 -22 and the
relevant ass essment year will be 2022 -23. munotes.in

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4 Ashok will be liable to pay tax on aggregate income of Rs. 12.65 lakh
from all the sources of income for the previous year 2021 -22 relevant to
assessment year 2022 -23.
3.3. New Business or Profession:
Where during a financial year where a
(a) business is newly set up or
(b) new source of income has arisen
during that financial year, the previous year will be the period (obviously
less than one year) commencing from the date of setting up of the new
business or the date of arisi ng of the new source of income and ending on
the 31st March next.
Illustration
6. R sets up a business on 01 March 2022. The period of one month
beginning on 1st March 2022 and ending on 31st March, 2022 will be the
previous year 2021 -22 and taxed in the as sessment year 2022 -23. It is
Immaterial that previous year is of a period of less than 12 months.
3.4. Exceptions
The general rule that income of the previous year is taxable in the next
assessment year is subject to some exceptions and the assessee is liable t o
pay tax on the income in the same previous in which he earns it. In such
cases, previous year and assessment year will be the same.
These exceptional cases ensure safeguards to smooth collection of income
tax from a class of taxpayers who may not be tr aceable until the
commencement of the normal assessment year.
Some of such exceptions are as under: -
a) Income of non -residents from shipping business -Section 172
b) Income of persons leaving India permanently or for a long period of
time and not likely to r eturn back –Section 173 and 174;
c) Income of bodies formed for short duration for a particular event or
purpose – Section 174A;
d) Income of a person trying to alienate his assets with a view to avoiding
payment of tax – Section 175 ,
e) Income of a discontinued b usiness - Section 176
f) bad debts written off allowed as deduction in earlier years is taxable
in the year of realization vide Section 41(1)
g) Deemed dividend – Section - 56 munotes.in

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Introduction and basic concepts
5 1.4 PERSON –SECTION 2(31 )
4.1 Definition:
As per section 2(31) “person” includes:
a) an in dividual;
b) a Hindu undivided family (HUF);
c) a company;
d) a firm;
e) an association of persons(AOP) or a body of individuals,(BOI) whether
incorporated or not;
f) a local authority; and
g) every artificial juridical person not falling within any of the preceding
categories
4.2 Inclusive definition:
The definition of “person” is inclusive, not exhaustive. Accordingly an
entity not falling in the above seven categories may still be treated as
“person” inviting the provisions of the Act.
4.3 Profit motive not necessary :
Expl anation to section 2(31) makes it clear that an entity need not be
formed for profit. Absence of profit motive will not be the criteria to
exclude any entity from being a “person”. Accordingly a non -profit
Organisation s or charitable trusts will also be co vered by the definition of
“person” although their income is not taxable under the Act on satisfying
the certain terms and conditions.
4.4 Description of types of persons :
A brief description of these seven categories is as follows:
a. Individual means any liv ing persons of blood and flesh.
Examples Aruna, Arvind, Fatima, Albert, Ibrahim, Rose etc.
b. Hindu Undivided Family (HUF) or a Hindu joint family is regarded
as separate tax entity in view of the specific law of succession
prevalent among the Hindus.
c. Company as per section 2(31), includes any
 Indian or foreign company,
 Public or private Company, munotes.in

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6  Charitable or non -profit company incorporated under section 8 of the
Companies Act, 2013 ( corresponding to old section 25 of the
Companies Act, 1956). Howe ver, such company is eligible to claim
exemption from tax, on compliance of the legal conditions given in
other provisions of the Act, or
 Any institution declared by CBDT as a company.
d. Partnership firm including a limited liability partnership (LLP) is
regarded as distinct taxable unit separate from its partners.
Accordingly, a firm is taxed separately as a firm and its partners are
taxed separately in their personal capacity.
e. Body of individuals (BOI) and Association of Persons (AOP) are the
group of per sons carrying on some activities to earn income such as
joint venture.
f. On the other hand, BOI may be due to circumstances such as joint
owners of an estate. Clubs, societies, charitable trusts etc. are covered
under this head.
Normally, AOPs are contractu al in nature like a joint venture agreement if
such venture not formed as a partnership or a company.
g. Local authorities include Municipal Corporations, Panchayats,
Cantonment Boards, Zila Parishads etc.
h. The seventh and final category is residual catego ry , which covers all
such persons which are not covered in any of the above six categories.
Illustration
7. Determine the category of the following entities as person as per
secion 2(31) of the Income Tax Act, 1961:
Person Status
Rajul Individual
Smita Individual
Reliance Infra Limited Company
Gokul Co - Op Society Ltd AOP
Indian Red Cross Society AOP
Legal heirs to receive property of late
Shri Nusserwanji BOI
Tata Power Ltd Company
Virat Kohli Individual
Board for Cricket Control in In dia AOP
Family of Shri PB Hindu HUF
Pune Cantonment Board Local Authority
Pune University Artificial Juridical Person
Ramu Brothers doing business in
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Introduction and basic concepts
7
1.5 ASSESSEE –SECTION 2(7)
5.1 Definition
As per section 2(7), “assessee” means a person by whom income tax or
any other sum of money is payable under the Act and it includes:
a. every person in respect of whom any proceeding under the Act has
been taken for the assessment of his income or assessment of fringe
benefits or of the income of any other person in respect of which he
is assessable, or of the loss sustained by him or by such other person,
or of the amount of refund due to him or to such other person ;
b. every person who is deemed to be an assessee under any provision of
this Ac t ;
c. every person who is deemed to be an assessee in default under any
provision of this Act.
5.2 The definition of “assessee” is also an inclusive definition. The
definition is so wide in scope as to include any other person not covered in
the above categor ies.
Further ,the definition covers not only a person but also his representative
such as legal heir, trustee, liquidator of a company assessee etc.
Moreover, importance is given not only to the amount of tax payable but
also to refund due and the pro ceedings taken.
5.3 Thus, an assessees may be : -
(i) A person by whom income tax or any other sum of money is payable
under the Act
(ii) A person in respect of whom any proceeding under the Act has been
taken for the assessment of his :
a. income or
b. loss or
c. the a mount of refund due to him
(iii) A person who is assessable in respect of income or loss of another
person or
(iv) A person who is deemed to be an assessee,
(v) an assessee in default under any provision of the Act
5.4 A minor child is a separate assessee only in respec t of the income
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8 a. out of activities performed by him like singing in radio jingles,
acting in films, tuition income, delivering newspapers, etc. or
b. from an asset assets acquired from the minor’s sources of income
Other income of a minor child will be clubbed with or included in the
income of the parent having the higher income subject to a maximum
deduction of Rs 1500 per child under section 10 in respect of income so
clubbed .
1.6 ASSESSMENT - Section 2(8)
The Act does not define “assessment”. I nstead, section 2(8) states “ an
assessment includes reassessment”.
In common parlance, assessment is the procedure to determine the taxable
income of an assessee and the tax payable by him.
Section 139, requires an assessee to file in prescribed form a self-
declaration of his income and tax payable by him called “return of
income”.
The Income Tax officer may accept the return summarily without making
any enquiry into its contents. This is called as the ‘summary assessment’
under section 143(1).
Altern atively, the officer may call upon the assessee to explain his return
of income and after making necessary enquiry, frame a reasoned order
determining the total income and the tax payable by the assessee this is
called the “regular assessment” under sectio n 143(3).
Completed assessment becomes final except in certain circumstances.
These circumstances are:
1.7 Under section 147, an assessment can be reopened to assess income
which has escaped assessment,
1.8 Under section 263 , the Commissioner of Income Tax may ask an
assessment to be redone if the assessment order is erroneous and
prejudicial to the interest of the revenue ,
1.9 Under section 264, the Commissioner of Income Tax at the
application of an assessee or suo motu , may ask an assessment to be
redone. This is normally done to give relief to the assessee.
1.10 Under section 254, the Income Tax Appellate Tribunal (ITAT) in
appeal proceedings may pass an order directing the assessment to be
redone.
In all the above cases “reassessment” of the income is required to b e done.
The definition of assessment includes the regular assessment and reopened
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Introduction and basic concepts
9 1.7 INCOME - Section 2(24)
7.1 Definition:
Section 2(24) gives an inclusive definition of income. It states that
Income " includes —
(i) profits and gains ;
(ii) dividend;
(iia) voluntary contributions received by
 A trust or any other legal obligation created wholly or partly for
charitable or religious purposes or
 an institution established wholly or partly for such purposes or
 an association or institut ion referred to in section 10(21) or (23), or
 a fund or trust or institution referred to in sub -clause (iv) or (v) or
 any university or other educational institution referred to in sub -
clause (iiiad) or (vi) or
 any hospital or other institution referred to in sub -clause 10
(23C)(iiiae) or (via) or
 an electoral trust.
(iii) the value of any perquisite or profit in lieu of salary taxable under
section 17 (2) and (3) ;
(iiia) any special allowance or benefit, other than perquisite included
under sub -clause (iii), specifically granted to the assessee to meet
expenses wholly, necessarily and exclusively for the performance of the
duties of an office or employment of pro fit ;
(iiib) any allowance granted to the assessee either to meet his personal
expenses at the place where the duties of his office or employment of
profit are ordinarily performed by him or at a place where he ordinarily
resides or to compensate him for t he increased cost of living ;
(iv) the value of any benefit or perquisite, whether convertible into money
or not, obtained from a company either by a director or by a person who
has a substantial interest in the company, or by a relative of the director or
such person, and any sum paid by any such company in respect of any
obligation which, but for such payment, would have been payable by the
director or other person aforesaid;
(iva) the value of any benefit or perquisite, whether convertible into
money or not, obtained by any representative assessee mentioned in
section 160 (1) (iii) (iv) or by any person on whose behalf or for whose
benefit ("beneficiary") any incom e is receivable by the representative munotes.in

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10 assessee and any sum paid by the representative assessee in respect of any
obligation which, but for such payment, would have been payable by the
beneficiary ;
(v) any sum chargeable to income -tax under section28 (ii) and (iii)
or section 41 or section 59 ;
(va) any sum chargeable to income -tax under section28 (iiia);
(vb) any sum chargeable to income -tax unde r section28 (iiib) ;
(vc) any sum chargeable to income -tax under section2 8 (iiic);
(vd) the value of any benefit or perquisite taxable under section 28 (iv);
(ve) any sum chargeable to income -tax under section 28 (v);
(vi) any capital gains chargeable under section 45 ;
(vii) the profits and gains of any busi ness of insurance carried on by a
mutual insurance company or by a co -operative society, computed in
accordance with section 44 or any surplus taken to be such prof its and
gains by virtue of provisions contained in the First Schedule ;
(viia) the profits and gains of any business of banking (including
providing credit facilities) carried on by a co -operative society with its
members;
(viii) [Omitted by the Finance Ac t, 1988, w.e.f. 1 -4-1988.
(ix) any winnings from lotteries, crossword puzzles, races including horse
races, card games and other games of any sort or from gambling or betting
of any form or nature whatsoever.
For this purpose —
(i) "lottery" includes winnin gs from prizes awarded to any person by draw
of lots or by chance or in any other manner whatsoever, under any scheme
or arrangement by whatever name called;
(ii) "card game and other game of any sort" includes any game show, an
entertainment programme on television or electronic mode, in which
people compete to win prizes or any other similar game ;
(x) any sum received by the assessee from his employees as contributions
to any provident fund or superannuation fund or any fund set up under the
provisions o f the Employees' State Insurance Act, 1948 , or any other fund
for the welfare of such employees ;
(xi) any sum received under a Keyman insurance policy including the sum
allocated by way of bonus on such policy.
(xii) any sum referred to in section 28 (va);
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Introduction and basic concepts
11 (xiii) any sum referred to inspection (2) (v);
(xiv) any sum referred to in section 56 (2) (vi) ;
(xv) any sum of money or value of property referred to in se ction 56 (2)
(vii) or (viia);
(xvi) any consideration received for issue of shares as exceeds the fair
market value of the shares referred to in 56 (2)(viib);
(xvii) any sum of money referred to in 56 (2) (ix);
(xviia) any sum of money or value of prop erty referred to in 56 (2) (x);
(xviib) any compensation or other payment referred to in section 56 (xi);
(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 ca lled) by the Central Government or a State Government or any
authority or body or agency in cash or kind to the assessee other than, —
(a) 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 section 43(1) explanation 10,
(b) the subsidy or grant by the Central Government for the purpose of the
corpus of a trust or institution established by the Central Government or a
State Government, as the case may be;
7.2. Section 2(24) gives an inclusive definition of “income”., which
covers income in its natural and general sense and also several items not
otherwise considered as income.
Income means not only the revenue receipts arising or accruing regularly
but also capital receipts like gifts and even donations and gifts. On the
other hand, certain revenue receipts like agricultural income are left out
from the scope of the term income.
Some of the principles that have emerged out as a result of customs,
practices and judicial pronouncements to ascertain as to what does or does
not c onstitute income are as follow :
1. Ordinarily Income is a regular periodical receipt, received or
derived from a certain source.
2. The source of income must be external. No one can earn in come by
or from himself.
3. On this principle, income accruing to clubs, societies etc. from their
own members are not taken as taxable income on the ground of
mutuality.
4. Normally, only revenue receipts are regarded as income unless
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12 5. On C apital receipts are not treated as income unless the law
specifically provides e.g. capital gains, gifts, maturity proceeds of
keyman insurance policy, sales tax subsidy, voluntary contribution
by a donor to a trust, which are included in income in spite of being
capital receipts.
Income is like the fruit of a tree, where tree is the source, or the
capital asset.
6. Income may be in cash or kind.
7. Income need not be legal. It may even be derived from illegal
sources like, smuggling, theft, bribery , corruption etc.
8. It is the receipt, which is income not its application or use.
9. Any receipt diverted at the origin or the source by overriding title
will not be regarded as income.
10. Any dispute in the title of the income does not take away its natu re
as income.
11. A gift is a capital receipt given for personal considerations.
However, the is no longer valid proposition as the law specifically
provides for taxation of gifts, e.g.: -
 Gift by an employer to an employee is deemed to be taxable sala ry
u/s 17.
 Gift by a client or customer is deemed as the income under the head
profits and gains from business or profession u/s 28. Hence, a gift
given by a client to his lawyer or chartered accountant or a patient to
his doctor, or a disciple or pupil to his guru, will be taxable as the
income of the recipient (donee) from business or profession u/s 28 .
 Personal gifts in excess of Rs. 50,000, from all sources are taxable as
income from other sources u/s 56 subject to certain exceptions.
Further. Inadequate consideration on transfer of immovable or
movable assets is also considered as taxable gift u/s 56. This aspect is
dealt with in great detail in the lesson relating to income from other
sources
12. Income may be recognised either on receipt basis or on accrual basis
depending upon the facts and circumstances of and the method of
accounting applied in each case.
13. Income must be certain. Contingent income is not regarded as
income unless and until such contingency occurs and the income
arises to the assessee.
14. Income is the sum total of all receipts from all the sources and
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Introduction and basic concepts
13 15. Pin money received by a woman for personal expenses or even the
savings made by her from such receipts is not considered as income.
However, the husband w ill not get any credit from his income for
these payments.
16. Income may be received in lump sum or in instalments. Thus, arrears
of salary received by a person in lump sum are regarded as his
income.
17. Awards received by a professional sportsperson would be i ncome,
unless the award is in nature of a gift for personal consideration.
18. Income of wife is be taxable in the hands of the husband if the assets
out of which the income is arising have not been acquired out of the
sources of the wife or from an asset gif ted by the husband except as
consideration for living apart.
19. Income of minor children is be taxable in the hands of the parents
having higher income [ mother or father] except when the income is
arising from the efforts of the minor child say modeling c harges.
1.8 GROSS TOTAL INCOME - Section 14
Section 14 of the Act defines the gross total income as the aggregate of the
incomes computed under the five heads after adjusting for set -off and
carry forward of losses. The five heads of income are as follows namely:
1. Income from salaries
2. Income from house property
3. Profits and gains from business & profession
4. Capital gains
5. Income from other sources
From the above it appears that: -
 The Gross Total Income is the aggregate of income computed under the
five heads in accordance with the provisions of the Act
 Any income exempted from tax u/s 10 or other provisions E.G.,
conveyance allowance, capital gains on sale of personal effects,
dividend income, etc. is not considered or excluded from the income
computed under the respective heads.
 The aggregate income is before making any deduction under chapter
VIA i.e. sections 80C to 80U.

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14 1.9 TOTAL INCOME:
The total Income of an assessee is computed by deducting from the Gross
Total In come all permissible deductions available under the Chapter VI A
of the Income Tax Act, 1961. This is also referred to as the “Net Income”
or “Taxable Income”.
1.10 SCHEME OF CHARGING INCOME TAX
Income tax is a tax on the total income of an assessee for a part icular
assessment year. This implies that;
. Income -tax is an annual tax on income.
. Income of previous year is chargeable to tax in the next following
assessment year at the tax rates applicable for the assessment year This
rule is, however, subject to some exceptions discussed above.
. Tax rates are fixed by the annual Finance Act and not by the Income -
tax Act. For instance, the Finance Act, 2022 fixes tax rates for the
financial year 2021 -22 relevant to assessment year 2022 -23. Tax rates
are given in the le sson dealing with computation of income.
. Tax is charged on every person if the total income exceeds the
minimum income chargeable to tax.
1.11 SELF ASSESSMENT QUESTIONS
1. Income of a previous year is chargeable tax in the immediately
following assessment year. Is there any exception to this rule? Discuss
2. Define the term “person”
3. How would you calculate income tax for the assessment year 2018 -
19 in the case of different assesses?
4. Explain how education cess will be computed for the assessment year
2022 -23? [ Ans: 4% ]
5. What will be the previous year for X, who starts his business on
April 6, 2021[ Ans: A.Y. 2022 -23]
6. Will the answer to Q 5 be different, if X starts his business on 28th
March,2021? [ Ans: A.Y. 2021 -22]
7. Explain that a financial year is a previous year and also an
assessment year. Every financial year can also be an assessment year,
8. Previous year is a financial year immediately preceding the
Assessment year Comment
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15 9. What will be the status of University of Mumbai?
[Ans: Artificial j uridical person ]
10. Indicate whether the following persons will be taxed as individuals:
a) X a partner of a firm
b) Y, a managing director of A Ltd;”
c) Z is the member of Z HUF
d) Municipal Commissioner of Mumbai in respect of the Income of
the Municipal Corporation
e) Municipal Commissioner of Mumbai in respect of his salary from
the Municipal Corporation
f) A minor acting in TV commercials
[Ans: All except (d) will be taxed, Firm X , A Ltd , Z HUF , Mun
Corpn. Separate tax entities ]



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16 2

BASIS OF CHARGE AND INCIDENCE
OF TAX

Unit Structure
2.1 Introduction and Objectives
2.2 Basic Charge of Income Tax
2.3 Residential Status
2.4 Residential status and incidence of tax
2.5 Heads of Income
2.6 Self-Examination Questions
2.1 INTRODUCTION AND OBJECTIVES
Sections 4 to 9 contain provisions with regard to the basis of charging
income tax, scope of total income, on which tax is to be levied along with
the residential status and its effect on tax liability of the assessee,
periodicity of the tax and other incidental matters. Thus lesson will deal
with the provisions which define the mechanism of levy of income tax in
India.
2.2 BASIS OF CHARGE OF INCOME TAX (S ections 4.9)
I. Charge of income tax - Section 4
Section 4(1) is the charging secti on, which provides that income tax shall
be charged for any assessment year at any rate or rates prescribed in the
Finance Act in respect of the total income of the previous year of every
person.
Accordingly, Income tax is charged: -
 on the total income of
 from a person called assessee
 earned for himself or in representative capacity such as legal heir of
estate, parent of a minor child etc.
 during the previous year or a period other than the previous year
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17  relevant to the assessment year.
 at the rate or rates prescribed in the Finance Act for that year.
 payable by way deduction at the source (TDS) , tax collection at
source (TCS), Advance Tax or Self - assessment Tax or other manner
prescribed by the Act.
II. Scope of Total Income - Section 5
As per section 5, total income of an assessee is chargeable to tax
depending upon -
a) the residential status of a person; and
b) place and time of accrual of such income.
III. Residential status and place – Section 6
Sectio n 6 lays down rules for determining residential status of different
types of persons
IV. Income accrued or received in India – Sections 7 -8-9
Section 7 specifies the incomes, which are not received in India but are
deemed to be received in India.
Section 8 de als with the year of taxability of dividend income.
Section 9 specifies the incomes though not accrued or arisen in India
but are deemed to accrue or arise in India.
2.3 RESIDENTIAL STATUS –SECTION 6
3.1 Classification of persons:
Section 6 divide sd assessee s (persons) into different categories ,
a) Individual
b) Hindu Undivided Family (HUF)
c) Firm, Body of Individual, (BOI), Association of Persons(AOP);
d) Company and
e) Every other person
The section then proceeds on to prescribe different criteria for each
category for determination of the residential status of a person falling in
that category as discussed below:.


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18 3.2 Residential status of individual
3.2.1 Basic conditions: - Section 6(1):
As per section 6(1), an individual is said to be a resident in India in any
previous y ear, if he satisfies at least one of the following two basic
conditions: —
a) He is in India in that previous year for a period or periods amounting
in all to 182 days or more ; or
b) He has been in India for a period or periods amounting in all to
I. 365 days or more during the 4 years immediately preceding
that previous year; and
II. 60 days or more during that previous year.
Exception:
The period of stay of 60 or more in India a s per condition (b -II) will be
extended to 120/ 182 days or more in following two c ircumstances:
A. 182 days or more in case of : -
i. An Indian citizen leaving India during the previous year
a. for the purpose of taking up employment outside India ; or
b. as a member of the crew of an Indian ship.
ii. An Indian citizen or a Person of Indian Origin ( PIO) coming to
India on visit during the previous year.
B. 120 days or more in case of : -
i. An Indian citizen or
ii. A Person of Indian Origin (PIO)
having total income, other than the income from foreign sources
exceeding 15 lakh rupees during the previous year.
A person is said to be of Indian origin (PIO) if either he or any of his
parents or grandparents was born in undivided India.
Net effect of the above exception is that time limit for stay in India gets
extended from 60 day to 120 or 182 days as the case may be to become
resident in India.
These may result in following two propositions that in a particular
previous year and individual -
(a) does not satisfy any of the two basic conditions; or
(b) satisfies any one or both of the two basic conditions., munotes.in

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Basis of Charge and Incidence of Tax
19 Then the residential status of the individual will be: -
i. a non- resident in case(a), and
ii. a resident of India in case (b).
3.2.2 Residence under section 6(1A)
As per newly inserted section 6(1A) with effect from A.Y. 2021 -22 an
Indian citizen, who is not reside nt in India in a particular previous year as
per section 6(1) shall still be deemed to be resident in India for that year if
such individual -
i. has total income, other than the income from foreign sources,
exceeding 15 lakh rupees during the previous year, and
ii. is not liable to tax in any other country or territory by reason of his
domicile or residence or any other criteria of similar nature.
Liable to tax
As per section 2(29A) “liable to tax ”, in relation to a person, means that
there is a liability of ta x on such person under any law for the time being
in force in any country, and shall include a case where subsequent to
imposition of tax liability, an exemption has been provided.
Income from foreign sources
"Income from foreign sources" means income whic h accrues or arises
outside India (except income derived from a business controlled in or a
profession set up in India) and which is not deemed to accrue or arise in
India.
To sum up, under section 6(1A) an individual will be treated as resident
of India for a particular previous year who does not satisfy any of the two
conditions given in section 6(1) but
i. has Indian income of more than Rs 15 lakh and
ii. is not liable to pay tax in any other country or territory by reason of his
domicile or residence or any other criteria of similar nature.
3.2.3 Resident & Ordinarily Resident [R &OR ] -Section -6(6)
Once a person becomes a resident of India in a particular previous year as
per section 6(1), next step would be to determine whether he will be a
resident and ordina rily resident of India in that previous year as per section
6(6).
Section 6(6) provides that a person will be “resident and ordinarily
resident” in India in any assessment year if he is -
A. an individual, who satisfies BOTH of the following conditions: munotes.in

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20 (a) he has been a resident of India in two out of ten previous years
immediately preceding that previous year as per section 6(1) AND
(b) he was in India for a period or periods amounting in all to 730 days
or more during the seven previous years preceding that previous
year.
B. a citizen of India, or a Person of Indian Origin (PIO), having total
income, other than the income from foreign sources, exceeding 15
lakh rupees during the previous year, who has been in India for a
period or periods amounting in all to 18 0 days or more.
3.2.4 Resident & Not Ordinarily Resident [R &NOR] –Section 6(6)
As per section 6(6), Resident and Not Ordinarily Resident [R &N O R]
will include the following: -
A. an individual who
(a) has been a non -resident in India in nine out of the ten previou s years
preceding that year, or
(b) has during the seven previous years preceding that year been in India
for a period of, or periods amounting in all to 729 days or less;
B. a citizen of India, or a Person of Indian Origin (PIO), having total
income, other tha n the income from foreign sources, exceeding 15
lakh rupees during the previous year, who has been in India for a
period or periods amounting in all to 120 days or more but less than
180 days; or
C. a citizen of India who is deemed to be resident in India un der section
6(1A).
3.2.5 Non- Resident
Any person, who is not a resident in India for any previous year, will be a
non-resident for that year that is to say -
1. An individual who does not satisfy any of the two basic conditions
under section 6(1) although such pe rson may satisfy the two additional
conditions under section 6(6).
2. An Indian citizen or PIO who has total income from domestic sources
of Rs 15 lakh or less , irrespective the number of days of his stay in
India unless such person is covered under secti on 6(1).
3. An Indian citizen or PIO who has income from domestic sources of
more than Rs 15 lakh but who is in India for 119 days or less.



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21 3.3.1 SUMMARY
An individual can either be:
(a) resident and ordinarily resident in India;
(b) resident but not ordinarily res ident in India; or
(c) non-resident
Following table gives the summary of the provisions

Status Conditions
Resident of India Any individual, who satisfies any one of the
conditions of stay in India under section 6(1):
i. 182 days or more during the relevant
previous year or
ii. 365 days or more in 4 previous years prior
to that year AND
additional stay of 60 or 182 days in the relevant
previous year
An Indian citizen or PIO , who
i. has total income from domestic sources of
more than Rs 15 lakh and
ii. is in In dia for 120 days or more.
An Indian citizen or PIO who
i. has total income from domestic sources of
more than Rs 15 lakh and
ii. is not liable to pay tax in any other country
or territory by reason of his domicile or
residence or any other criteria of simil ar
nature.
Resident
and Ordinarily
Resident Any individual who satisfies
i. either of the two conditions under section
6(1) and
ii. both of the additional Conditions under
section 6(1).
An Indian citizen or PIO, who
i. has income from domestic sources of
more than Rs 15 lakh and
ii. is in India for 180 days or more.
Resident but Not
Ordinarily
Resident Any individual , who
i. satisfies either of the two conditions under
section under section 6(1) but
ii. does not satisfy one or both of the
additional conditions un der section 6(6)
An Indian citizen or PIO, who
i. has income from domestic sources of
more than Rs 15 lakh and
ii. is in India for a period of 120 days to 179 munotes.in

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22 days;
An Indian citizen who is
i. having Indian income of more than Rs 15
lakh and
ii. not liable to pay tax in any other country
or territory by reason of his domicile or
residence or any other criteria of similar
nature.
Non- Resident Any person, who does not satisfy any of the two
basic conditions under section 6(1).
IT IS NOT RELEVANT if he Satisf ies the two
additional conditions .
An Indian citizen or PIO who has income from
domestic sources of Rs 15 lakh or less,
irrespective the number of days of his stay in
India unless he is covered under section 6(1)
An Indian citizen or PI, who
i. has income from domestic sources of
more than Rs 15 lakh but
ii. is in India for 119 days or less.

3.3.2 Some Important points:
a) In computing the days on which a person is in India
i. Stay may be at one place or more than one place. Stay at
difference places in India will be aggregated.
ii. Stay in India may be continuous or in intervals. Stay in intervals
will be aggregated.
iii. Both the day of arrival in India and departure from India shall be
considered even if on such days the person is in India only for a
part of a day. However, the courts have held that a total of 24
hours of stay spread over a number of days is to be counted as
being equivalent to the stay of one day. Students are advised to
consider the day of departure and arrival both as two days, if
the hours of arrival and departure are not given.
b) A person, who is in India for 182 days or more, will always be a
resident of India .
c) Conversely, a person, who is in India for 59 days or less, will always
be Non -Resident of India except when covered under section6(1A).
d) An Indian citizen must leave India for employment or as crew to
avail extended limit of 182 days instead of 60 days.
e) An Indian citizen leaving India Resident and ordinarily in India will
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Basis of Charge and Incidence of Tax
23 f) The condition is relaxed only for Indian citizens and not for persons,
who are not Indian citizens.
g) Indian citizens or persons of Indian origin( PIO) must come to India
on visit for any purpose; pilgrimage, medical treatment or tourism; but
not busin ess or job to avail extended limit of 182 days Indian
citizenship is not the requirement for this purpose.
h) While computing the period of stay, note that 2008, 2012 and 2016
and 2020 were leap years with one extra day.
3.3.3 Illustrations :
1. Ankit leaves Ind ia for the first time on May 20, 2015. During the
financial year 2021 -22, he came to India on June 10 for a period of 55
days.
Ankit is in India only for 55 days during the previous year 2021 -22. He
will be a non -resident in India for the assessment year 2022 -23 as he does
not satisfy any of the basic conditions laid down in section 6(1).
2. Aman, an U.S. citizen arrives in India for the first time in Pune on
April 16, 2019. Thereafter , on April 29, 2017, he moves to Mumbai. He
leaves Mumbai for his na tive country on October 8, 2021. Determine his
residential status for the assessment year 2022 -23.
During the previous year 2021 -22, Aman is in India for 191 days.
April May June July August September October Total 30 31 30 31 31 30 8 191
He is a Resident in India as he satisfies the first condition under section
6(1).
During the previous year 2019 -20, Aman was in India for 351 days (leap
year) and full 365 days during the previous year 2020 -21. Thus, he
satisfies the first additional condition u nder section 6(6) that he must be a
resident in India in at least two year out of the ten preceding years.
However, Aman does not satisfy the second condition under section 6(6)
as he was in India for a period of 716 days only (351+ 365 days in th e
previous year’s 2019 -20 & 2020 -210 being less than 730 days specified in
the section.
Aman is a resident but not ordinarily resident in India for the assessment
year 2022 -23 because he satisfies one of the basic conditions and only one
of the two addi tional conditions,
3. Ravi, an Indian citizen leaves India on June 30, 2021 to join a job in
Canada.
During previous year 2021 -22 Ravi was in India for 91 days (April - 30
days + May 31 days+ June 30 days) being less than 182 days. He is an munotes.in

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24 Indian citi zen leaving India to take up a job. Hence he is covered by the
exception under section 6(1). Hence, Ravi is Non -resident for the
assessment year 2022 -23 although he was in India for more than 365 days
during the four years preceding the previous years
4. Assuming that Ravi leaves India for world tour,he will not be covered
by the exception under section 6(1).
Accordingly he will a be resident of India as he satisfies the second basic
condition under section 6(1) of 365 days’ stay in the preceding four years
and 60 days stay during the previous year 2021 -22.
Since Ravi also satisfies both the additional conditions of being resident in
India for two years in preceding 10 years and stay of 730 years in seven
preceding years, he will be Resident and Ordinar ily Resident of India.
5. Ravi wants to postpone his departure for Canada, then he should depart
latest by September 28, 2021 so that his stay in India during the previous
year 2021 -22 is of 181 days (less than 182 days).
6. Assuming that Ravi is Nepali citizen settled in India, he will not get
the benefit of 182 days under section 6(1) as he is not an Indian citizen. He
satisfies the basic condition (b) and both the additional conditions of 730
days in 7 preceding years and 2 years resident in precedin g 10 years, he
will be a resident and ordinary resident in India.
7. Bret Lee an Australian citizen comes to India to coach Indian cricket
team for a period of 95 days each year from the previous year 2013 -14
onwards.
Bret Lee, was in India during the pr evious year 2021 -22 for 95 days and
380 days during the preceding four years.
He satisfies the second basic condition under section 6(1) but not covered
by the exception of 182 days instead of 60 days India because he is not a
person of Indian origin no r he comes in India on visit is a resident of India.
He will be Resident in India.
However he does not satisfy the two additional conditions as he was in
India for only 95X7=665 days being less than 730 days in the preceding 7
years
8. The position wi ll not be different if Bret Lee is a resident of
Bangladesh as he has not come on visit but as a professional coach,
although he is Person of Indian origin (PIO), Bangladesh being a part of
undivided India.
9. If Bret lee is a Bangladeshi citizen visit ing India as a tourist , he will
get the extended limit of 182 days and will be a Non - resident.

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25 3.4. Residential status of HUF
3.4.1 Resident
As per section 6(2), a Hindu Undivided Family (HUF) will be:
(a) Resident in India if control and management of its affairs is wholly
or partly situated in India.
(b) Non- resident in India only if control and management of its affairs
is situated wholly outside India.
3.4.2 Resident and Ordinarily resident (ROR)
As per section 6(6), a HUF can be Resident and Ordinarily Residen t if its
Karta or manager satisfies both of the following two conditions viz. the
Karta or the manager : -
(a) has been a non -resident in India in 9 out of the10 previous years
preceding that year, and
(b) has during the 7 previous years preceding that year bee n in India
for a period of, or periods amounting in all to 729 days or less
It may be noted that additional conditions are same as those applicable to
the individual but applicable on the Karta or the manager of a HUF.
3.4.3 Resident and Not Ordinarily reside nt (ROR)
If the Karta does not satisfy both of the two additional conditions, the
HUF will be treated as a resident but not ordinarily resident (RNOR)in
India
3.4.4 Non-Resident
A HUF will be non- resident in India only if control and management of
its affairs is situated wholly outside India.

The place of control and management of HUF is relevant to determine its
status under section 6(1) whether it is Resident or Non -Resident.
However, the two additional conditions Under section 6(6) are applicable
with re ference to its Karta or Manager to determine to R & OR status
Summary
Thus, like an Individual a HUF may be either: -
(a) Resident and ordinarily Resident (R&OR) in India if is controlled or
management wholly or partly in India or
(b) Non-resident in India if i ts control or management is wholly outside
India .
(c) Resident and not ordinarily Resident (R&NOR) in India if two
additional conditions as per section 6(6) are satisfied by the Karta /
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26 3.5. Residential Status of Other Non -Company Persons
(Section 6(2) & 6(4)

3.5.1 Resident –Section 6(2)
Under section 6(2) Residential status of all non -company persons viz a
firm an Association of Persons (AOP) or a Body of Individuals (BOI)
and every other person also depends upon the place of control and
manageme nt like HUFs.
Any such person will be:
(a) Resident in India if control and management of its affairs is wholly or
partly situated in India, ;
(b) Non-resident in India if control and management of its affairs is
situated wholly outside India.
3.5.2 Non Resident
An AOP, BOI or a firm will be non -resident in India if control and
management of its affairs is situated wholly outside India.
These persons can only be either resident or not resident but not ordinarily
resident .
Illustration
1. An entity operating in India takes instructions from Dubai either
wholly or partly. It will be Resident of India in all the cases a HUF,
AOP, d) BOI or other artificial juridical person.
2. If the above entity is wholly controlled from Mauritius , it will be
Non -Resident of India in all the cases .
Control and management means de facto (actual) control or management ,
not merely the right to control or manage. Place of control and
management is situated where the decision making of the entity as a
whole is situated.
3.6. Residential Status of a Company –Section 6(3)
A company will be resident of India in any previous year, if —
(i) it is an Indian company; or
(ii) its place of effective management (POEM), in that year, is in India.
"Place of effective management" means a place where key management
and commercial decisions that are necessary for the conduct of business
of an entity as a whole are, in substance made.
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27 From the above , it follows that : -
1 Residential status of a company is based on its place of regis tration and
control and management.
2 An Indian company will be resident in India irrespective of where
their control or management is.
3 Any other company( i.e.. a foreign company ) will be a Resident in
India if place of effective management (POEM) ) o f such company is
situated in India .
4 A foreign company will be non -resident will be resident if their control
and management is wholly in India if place of effective management
(POEM) ) of such company is situated outside India.
The legal provisions are summarised in the following table.
Company Status
Indian company Resident
Foreign company - POEM situated in India Resident
Foreign company - POEM situated outside India Non resident

Illustrations
1. Residential status of A Ltd. , which is an Indian company managed
from India is resident in India. Place of management is immaterial.
2. Residential status of, B Ltd., an Indian company managed from
London, will also be Resident in India. Place of management is
immaterial,
3. Residential stat us of C Ltd. , which is a British company managed from
India , will be resident in India as its POEM is situated in India.
4. Residential status of D incorporated , which is an American company
managed from Paris , will be a Non -resident in India as its POEM is
wholly situated outside India.
3.7. Miscellaneous:
(a) Residential status for each previous year:
Residential status of a person shall be determined for each previous year
independently.
(b) Different residential status for different assessment years:
Residen tial status may change from previous year to previous year and a
person may have different residential status for different assessment
years. For instance, if a person leaves India for two years and then comes
back, he can be non - resident for those two years and resident for other
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28 (c) Resident in India and abroad:
A person may be “resident” in two or more countries in a particular year.
Similarly , in a particular assessment year, a person may be a non -resident
in India as well as other countries.
In other words, It is not necessary that a person, who is “resident” in
India, will necessarily be non -resident in all the other countries for the
same assessment year.
This is particularly true of a person, who has changed his country two
three times in a year and he does not fall in any category of residents
anywhere in the world.
(d) Residence for all sources :
If a person is a resident for one source of income in a previous year, he
shall be deemed to be a resident for all other sources of income also.
[Section 6(5)]
2.4 RESIDENTIAL STATUS AND INCIDENCE OF TAX
Provisions of section 5, which defines the scope of total income taxable
in India , are given below.
4.1. Scope of total income for a Resident
As per section 5(1), the total income o f any previous yea r of a person ,
who is a resident includes all income from whatever source derived
which —
(a) is received or is deemed to be received in India in such year by or on
behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India du ring
such year ; or
(c) accrues or arises to him outside India during such year .
4.2. Person not ordinarily resident in India
Total income of a person, who is not ordinarily resident in India within the
meaning of section 6(6) shall not include the income which ac crues or
arises to him outside India unless it is derived from a business controlled
in or a profession set up in India. Thus the Income of such person shall
include the following income from whatever source derived which —
(a) is received or is deemed to be received in India in such year by or on
behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during
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Basis of Charge and Incidence of Tax
29 (c) accrues or arises to him outside India during such year if such income
is derived from a business co ntrolled in or a profession set up in India
4.3. Person who is a non -resident
As per Section 5(2), the total income of any previous year of a person
who is a non -resident includes all income from whatever source derived
which —
(a) is received or is deemed to b e received in India in such year by or on
behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India
during such year.
Thus the total income of a non -resident shall not include accrues or arises
to him outside India d uring such year.
4.4. Important points
(a) Incidence of tax on a taxpayer depends on : -
 the residential status, and
 the place and time of accrual or receipt of income.;
(b) Income accruing or arising outside India shall not be deemed to be
received in India by reason only of the fact that it is considered in a
balance sheet prepared in India.
(c) Income which has been included in the total income of a person on
the basis that it has accrued or arisen or is deemed to have accrued or
arisen to him shall not again be so inclu ded on the basis that it is received
or deemed to be received by him in India.
(d) Indian income will be taxable in all cases. Indian income or Income
received, accruing or arisen in India or deemed to be received, accruing or
arising in India will be include d in the income of every person regardless
of his residential status whether resident , non -resident, or R & OR or R
& NOR.
(e) Income may be “ Indian income” in a previous year if : -
 Income is received or deemed to be received in India and such
income is also accrued or arisen or deemed to be accrued or arisen in
India;
 If income is received or deemed to be received in India but it accrues
or arises outside India; or
 If income is received outside India but it accrues, arises, or is deemed
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30 (f) “Foreign income” or income, which is not Indian Income or Income
not received , accrued or arisen in India nor deemed to be received ,
accrued or arisen in India is taxable as under: -
I. Foreign income is not included in the total income of a non -
resident.,
II. Foreign Income is included in the total income of a resident
and ordinarily resident. ,
III. Foreign income will not be included in the total income of a
resident but not ordinarily resident R&NOR unless such
income is derived from:
 a bus iness controlled in India or
 profession set up in India.
Non-business foreign income will not be included in the income of a
person who is resident but not ordinarily resident in India. Thus foreign
income taxable only by a R&OR and conditionally by R&NOR
(g) Under section 7 some incomes are deemed to be received in India e.g.
Transfer balance of PF. Similarly ,As per Section 9, certain incomes are
deemed to accrue or arise in India even though they may actually accrue
or arise outside India e.g. income attr ibutable to any business connection
in India or any property in India or any asset or any source of income in
India or the transfer of a capital asset situated in India. Hence, rent from an
Indian building or dividend of shares of an Indian company will b e
deemed to accrue in India.
(h) Residents are liable in respect of all income Indian or foreign but
Non- residents liable for Indian income only
(i) The “receipt” of income refers to the first occasion when the recipient
gets the money under his control. Once a n amount is received as income,
any remittance or transmission of the amount to another place does not
result in “receipt” at the other place.
(j) It is not necessary that an income should be actually received in India
in order to attract tax liability. An inc ome deemed to be received in India
in the previous year is also included in the taxable income of the assessee.
The Act enumerates the certain incomes which were dealt with earlier.
E.g. If a resident holds an immovable property in Delhi and the rent
received thereon is transferred to his bank account in Mauritius, the rent
would still be subject to income tax though the income has not been
received in India.
(k) Income is said to be receiv ed when it reaches the assessee when the
right to receive the income be comes vested in the assessee, it is said to
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Basis of Charge and Incidence of Tax
31 (l) Section 8 deals with tax treatment of dividend. As per the section final
dividend is taxable on the date of AGM when it was declared. Interim and
deemed dividend are taxable on the date of distri bution .
Summary :
Scope of total income –Section 5
Income Status
Resident &
Ordinarily
Resident Resident & Not
Ordinarily Resident Non Resident
Indian income Taxable Taxable Taxable
Foreign income Taxable Taxable if income
is from
 a business
controlled
from India or
 a profession
set up in India Not Taxable

Illustrations
1. Determine the scope of total income in respect of the following
incomes if the assessee is a (1) resident or (2) a resident and ordinarily
resident or (3) a residen t but not ordinarily resident:
Income Rs
Interest from U.S. Bonds received in India 80,000 Interest from U.S. Bonds received in U.S. 80,000 Interest from U.S. Bonds received in U.S but remitted to India 80,000 Capital gain on house in Mumbai sold in London 80,000 Capital gain on house in Mumbai sold in Mumbai 80,000 Rent of a villa in Paris received in Paris 80,000 Rent of a villa in Paris received in Mumbai 80,000 Agricultural Income from Tea Gardens in Nepal received in
Nepal 80,000 Agricultural Income from Tea Gardens in Sri Lanka received in
Mumbai 80,000 Profit from a Branch in Sydney 80,000 Profit from a branch in Mumbai 80,000 Salary for working in Pune received in Pune 80,000 Salary for working in Pune received in Londo n 80,000 Salary for working in London received in Mumbai 80,000 Salary for working in London received in London 80,000

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32 Solution
Particulars R&OR R&NOR N R
Interest from U.S. Bonds received in
India 80,000 80,000 80,000 Interest from U.S. Bon ds received in
U.S. 80,000 - - Interest from U.S. Bonds received in
U.S but remitted to India 80,000 - - Capital gain on house in Mumbai sold
in London 80,000 Capital gain on house in Mumbai sold
in Mumbai 80,000 80,000 80,000 Rent of a villa in Paris received in Paris 80,000 - - Rent of a villa in Paris received in
Mumbai 80,000 80,000 80,000 Agricultural Income from Tea Gardens
in Sri Lanka received in Sri Lanka
80,000 - - Agricultural Income from Tea Gardens
in Sri Lanka received in M umbai
80,000 80,000 80,000 Profit from a Branch in Sydney 80,000 80,000 - Profit from a branch in Mumbai 80,000 80,000 80,000 Salary for working in Pune received in
Pune 80,000 80,000 80,000 Salary for working in Pune received in
London 80,000 80,000 80,000 Salary for working in London received
in Mumbai 80,000 80,000 80,000 Salary for working in London received
in London 80,000 - - Total 12,00,000 8,00,000 7,20,000 *if controlled from India
2.5 HEADS OF INCOME - SECTIONS 14 -14A
5.1. Classificatio n of income
Aggregate income from all sources is liable to Income tax. Such income
has to be classified under different heads of income according to its nature
as the income tax law provides for specific treatment, rules and method for
computation of inco me for each head of income. Section 14 gives 5 heads
of income for classification of income , viz.:.
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33 2) Income from house property -Section 22 – 27
3) Profits & gains from business or profession -Sectio n 28 – 44
4) Capital gains -Section 45 – 55
5) Income from other sources -Section 56 – 59
5.2. Importance of different heads
The law provides different scheme for computation of taxable income
under that head . This comprises of deeming provisions, exclusions a nd
deductions and deductions of expenses etc. under the head.
5.3. Heads to be mutually exclusive
It is imperative that income is computed under the specified head only. If
any income is considered under a particular head e.g. Income from house
property, it w ill not be taken into consideration for another head e.g.
Profits and Gains from business and profession.
However, an income, not falling under any of the first four heads, will be
taxed under the head “Income from other sources”.
Illustration
Three off ices are compositely let out on rent by alongwith services like
intercom, security guard, telephone connection, furniture and fixtures, etc.
of Swayam will be taxable.
As per departmental clarification, the income in respect of properties
should be taxe d as “Income from House Property” and the income out of
rentals of the other services to be taxed under “Income from Other
Sources”.
Alternatively, the entire income arising out of the property as well as the
services could be taxable as “Income from Busin ess or Profession”
5.4. Tax on aggregate income under all the heads
Aggregate of income under all the five heads will be the gross total
income of the assessee, from which deductions are made under chapter
VIA. The net result is called the total inc ome or some times taxable
income , which is subject to tax at the prescribed rates , except in case of
income for which different rates are given. E.G. Long term capital gains
on securities taxable now at 10% and on other assets at 20%, short -term
capital gain on sale of equity shares at 15%, l income from lotteries, horse
races etc. at the maximum rate of tax @ 30%. Such income will be
deducted from the aggregate total income and the balance of the total
income will be taxable at prescribed rates.

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34 5.5. Common reside ntial status for all the heads
As per section 6 a person is resident for the purpose of any particular
head of income, will also be considered as resident for the purposes of
computation of income under all the heads of income.
5.6. Separate sources of in come under one head.
A particular head of income may have different sources of income falling
under that head. For instance a person may be in receipt of his salary from
more than one employer or rent from two or more house properties or
more than one bu siness. All such sources will be clubbed together to
arrive at the income from that head.
5.7. Expenses under each head of income
It may be noted that expenses may be allowed under each head of income
according to the provisions applicable. The recent trend I s to restrict and
standardize the allowance of expenditure. For instance no expenses except
professional tax are allowed under the head salaries. Capital gains
envisage deduction if only the cost of acquisition and improvement and
transfer expenses and so on and so forth.
5.8. Expenditure incurred in relat ion to income not includible in
total income
Section 14A provides that no deduction shall be allowed in respect of
expenditure incurred by the assessee in relation to exempted income that is
the income which does not form part of the total income under this Act
2.6 SELF ASSESSMENT QUESTIONS:
1. Why determination of residential status is important to ascertain the
income tax liability?
2. Discuss the legal provisions in respect of residential status of an
individual.
3. Briefly state the provisions for determination of the residential status
of an (a) AOP (b) Firm (c) Company.
4. What is meant by the control and management of business?
5. When the income is deemed to accrue or arise or be received in India?
6. The incidence of inco me-tax depends upon the residential status of an
assessee”. Discuss.
7. Determine whether the following is true or false:
8. The business income received by X Ltd. an Indian company in New
York is foreign income of X. munotes.in

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Basis of Charge and Incidence of Tax
35 9. The dividend received from a foreign company in India is Indian
Income
10. Write short notes on the following:
a. Income received in India
b. Income deemed to accrue or arise in India
c. Control and management of a business
11. Enumerate various heads of income.
12. State with reason that can an Income be compu ted under two heads of
income.
13. How are the different heads mutually exclusive?
14. Would expenses in respect of collection of dividend be deductible
from income from other sources?
15. Ascertain residential status for the assessment years 2021 -22 and
2022 -23 of Tu rner an Australian citizen, came to India as a
commentator during the following period:
From To Purpose
10.2. 20 -21 20-04-20-21 World Cup
6-10-20-21 25-12-20-21 England Tour
04-01-2022 12-01-2022 Training Camp 02-03-2022 29-03-2022 Triangular Cup
Besides, Turner was in India for 340 days in four previous years from and
260 days in three previous years prior to that
(Ans: 2022 -23 Non-resident, 2022 -23 R but RNOR)
16. Determine the residential status of Parthiv, who made his debut in
international cri cket on 11 -03-2021. In the first match, he was injured
and had to be hospitalized in U.S. He was discharged from the
hospital on 29 -03-2022. He returned to India took over as coach for
Indian cricket team visiting Pakistan. Parthiv submits the following
details of his stay outside India:
From To Purpose/ Place
10-04 2020 28-04-20-20 World Cup in Dhaka 03-05-20-20 09-07-20-20 England Tour
27-08-20-20 10-09-20-20 Canada Tour
11-09-20-20 01-10-20-20 US holidays
04-01-2021 26-03-2021 Pakistan Tour
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36 17. Ashok, an Indian citizen, leaves India on May 22, 2012 for vacation to
Uganda and returns on April 9, 2018. Determine the residential status
of X for the assessment year 2022 -23? (Ans: Non -Resident)
18. Determine the residential status for th e assessment year 2022 -23, of
Sheila, a foreign citizen , who visits India since 1985 every year for a
period of 90 days (Ans: Non -Resident )
19. Fletcher, a foreign citizen comes to India, for the first time on March
20, 2018. On September 1, 2018, he leaves India for Nepal on a
business trip. He comes back on February 26, 2021 to permanently
stay in India . Determine the residential status of X for the assessment
year 2021 -22 and 2022 -23
( Ans Resident and Not Ordinarily Resident for both the years )
20. Determin e residential status for the assessment year 2022 -23 of
Marconi, an Italian citizen, who comes to India for the first time on
May 28, 2020.
(Ans: Resident and Not Ordinarily Resident)
21. Determine the scope of total income in respect of the following
incomes if the assessee is a (1) resident or (2) a resident and ordinarily
resident or (3) a resident but not ordinarily resident
New York business income controlled from India Rs. 100000 Mumbai Business Controlled from Paris Rs. 40000 Salary in New York as Indian ambassador Rs. 90000 Profit on sale of shop in Kolkata paid in Karachi Rs. 50000 Acting in Indian film –fee received in Rome Rs. 70000 Past untaxed profits remitted to India from London Rs. 120000 (Ans. Resident 350000, R & OR 250000, R& NOR 350000/ past profits
not taxable)
22. Blair, a French Citizen had the following incomes during the year
ended 31/3/2022. Compute his Total Income for Asst. Year 2022 -23
if he is a (1) resident or (2) a resident and ordinarily resident or (3) a
resident bu t not ordinarily resident.
Income from House property in India Rs. 30000 Income from property in Rome Rs. 20000 Interest from Bank account in India Rs. 2400 Income from business in Bangladesh controlled from India Rs.32000 Interest from Bank accoun t in U.S. Rs. 22000 Salary earned and received in Tokyo Rs. 24000 Income earned and received in London Rs. 26000 Dividend from British Company received in India Rs.34000 (Ans. Resident 19400, R&OR Rs. 98600 R but NOR Rs 66400) munotes.in

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Basis of Charge and Incidence of Tax
37 23. Following are the pa rticulars of income of X for the previous year
2022 -23
i. X is employed in India and receives Rs. 24,000 as salary.
ii. Dividend received in London on June 3, 20 2121 Rs. 31,000 from a
foreign company;
iii. Share of profit received in London on December 15, 2021 fro m a
business situated in Sri Lanka but controlled from India:
iv. Rs. 60,000; remittance from London on January 15, 2022 out of
past untaxed profit of 2003 -04 earned and received there. Rs.
30,000 and interest earned and received in India on May 11, 2022
Rs. 7 6,000.
Find out his gross total income, if he is (a) resident and ordinarily
resident, (b) resident but not ordinarily resident, and (c) non -resident
for the assessment year 2022 -23
(Ans: R&OR, his gross total income will be Rs. 105000i.e. Rs. 24,000
+ Rs. 31,000 + Rs. 60,000 R& N OR Rs. 84,000 i.e., Rs. 24,000 + Rs.
60,000). Non -resident, Rs.24,000.
The remittance from London of Rs. 30,000 is not taxable it is not
“receipt” of income. The interest of Rs. 76,000 earned and received
in India is taxable 2023 -24.)



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38 3
SALARIES SECTIONS 15, 16 & 17
Unit Structure
3.1 Introduction and Objectives
3.2 Basis of Charge
3.3 Meaning and characteristics
3.4 Scope of salary income
3.5 Tax Treatment of some receipts:
3.6 Taxable Value of cash allowances -
3.7 Taxable Val ue of Perquisites
3.8 Classification of Perquisites
3.9 Valuation of Perquisites
3.10 Profits in lieu of Salary
3.11 Deductions -Standard Deduction Entertainment Allowance,
Profession Tax
3.12 Practical illustrations
3.13 Self- Assessment Questions
3.1 INTROD UCTION AND OBJECTIVES:
“Salaries” is the first and most important of the five heads of income
given in section14. The Act assigns “Salaries” a very wide meaning and
includes not only the salary in common parlance but also various other
receipts, gifts, pe rquisites and benefits.
The lesson deals with various provisions as to what constitutes salaries,
other relevant terms such as allowances, perquisites and benefits, their
types and valuation and other applicable provisions contained in sections
15,16 and 17 as well as computation of income under the head salaries.
3.2 BASIS OF CHARGE AND MEANING - Section 15
2.1. Basis of charge
Section 15 provides the basis of charging salary income. Section 17
explains it. Section 16 prescribes the deductions to be mad e from salary
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Salaries Sections 15, 16 & 17
39 Under section 15, the term salary embodies past (arrears), present and
future salary (Advance). The section states that the following income shall
be chargeable to income tax under the head "Salaries" —
(a) any salary due from an empl oyer or a former employer to an assessee
in the previous year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf
of an employer or a former employer though not due or before it became
due to him;
(c) any arrear s of salary paid or allowed to him in the previous year by or
on behalf of an employer or a former employer, if not charged to income -
tax for any earlier previous year.
It may, however be noted that where any salary paid in advance is
included in the total income of any person for any previous year, it shall
not be included again in the total income of the person when the salary
becomes due.
The section excludes any salary, bonus, commission or remuneration, by
whatever name called, due to, or received by, a partner from the firm from
the “salary” under this section. This is because these items are considered
as business income under section 28.
3.3 MEANING AND CHARACTERISTICS
Section 15 states that salaries –past, present and future will be taxable
under the head “salaries”. It does not define salaries. Hence, it becomes
necessary to determine, whether any particular income is to be taxed under
the head ‘’Salaries’’ or not with the help of common practices, tests,
norms, judicial decision developed over the years. These are discussed in
detail as under: -
1. Employer -employee relationship:
Salary may be defined generally as the remuneration paid by an employer
to an employee for rendering personal services by the employee to the
employer under an expressed or im plied contract for rendering such
services.
The definition salary implies the existence of an express of implied
contract for employment between the employer and the employee whereby
the employee provides personal services to the employer for
remuner ation.
2. Compensation for services rendered :
Salary is paid as a compensation for the services rendered as an employee
and not in any other capacity.
Therefore, remuneration paid by a hospital to a doctor employee for taking
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40 by that doctor to patients in his private clinic will not be salary as the he
is not an employee of the patients. Payment received from patients will not
be salary but his professional income.
It will be true of services rendered by other professionals like doctors,
architects; lawyers, Chartered Accountants etc. to their clients and the fee
paid by their clients will be professional fees not salary.
3. Name or form not important:
Any remuneration paid as c ompensation for services rendered by an
employee to his employer will be treated as salary regardless of the name
by which such remuneration is called such as salary, wages gift,
perquisites or otherwise so long as -
(a) the relationship between the payer and payee is that of employer and
employee; and
(b) the payment is made as a compensation for the services rendered by
the employee.
4. Mode of Payment
Salary may be paid in cash or kind.
5. More than One Source :
Salary may be from more than one empl oyer.
6. Type of Employment :
Salary may be for any type of employment whether part -time or full time
employment.
7. Past, Present and prospective employer
Salary may be received from not just the present employer but also a
prospective employer and in some cas es even from a former employer
such as pension received from a former employer.
8. Real intention to pay :
Salary income must be real and not fictitious. There must exist an
intention or an obligation to pay and `receive salary.
9. Subsequent Surrender of Salar y not tax -free;
Salary is taxable when it becomes due. Subsequent surrender of the salary
will not be tax -free except where an employee surrenders his salary to the
central government, and then the salary so surrendered will not be treated
as taxable inco me of the employee.

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Salaries Sections 15, 16 & 17
41 10. Tax- Free salary
Salary paid as tax -free is also taxable in the hands of the employee, though
contractually income tax on such is borne not by the employee but by the
employer.
11. Time of taxability ;
Salary is taxable at the time of its accrual or receipt, whichever is earlier.
Method of accounting employed by the employee is not relevant to
determine the taxability of salary. Hence -
(i) Current salary is taxable when it is accrued although it may be payable
later.
(ii) Past salary or arrears are taxable, when they are actually received, if
they were not taxed earlier.
(iii)Advance salary is taxable at the time of receipt and it will not be taxed
again when it is accrued.
12. Salary received by individuals only
Salary is a compensation for personalised services; which can be rendered
only by normal human beings. No other type of person such as a firm,
HUF, company or a body corporate can earn salary.
13. Voluntary payments taxable as salary
Voluntary payments like gift by an employer to an employee also form
the part of taxable salary.
14. Salary in respect of services rendered in India
Under section 9, salary, leave salary and pension paid outside India are
deemed to accrue and arise in India and are taxable in India. Similarly,
salary paid to Indian dip lomats by the Government of India is deemed to
accrue and arise in India although the same is exempted under section 10.
15. Gross salary Taxable ;
Compulsory deductions from salary such as employees’ contribution
to provident fund, deduction for medical scheme or staff welfare scheme
etc. are examples of instances of application of income. In these cases, for
computing total income, these deductions have to be added back in the net
salary received and gross salary will be taxable. .
3.4 SCOPE OF SALARY INCOME - Section 17
4.1.Section 15 defines the scope and basis of salaries and section 17
explains it in an inclusive definition.
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42 Salary includes: -
a. Wages;
b. Any Pension or Annuity;
c. Any Gratuity;
d. Any fees, commission, perquisites or profits in lieu of or in
additio n to salary or wages;
e. Any advance of salary;
f. Any encashment of leave salary;
g. Annual accreditation to provident fund above the prescribed
limits; and
h. Any amount of credit to provident fund of employee to the
extent it is taxable.
4.2.“Salary" includes the b asic salary and fees, commission, bonus,
taxable value of cash allowances and perquisites, retirement benefits,
encashment of leave salary, advance of salary, arrears of salary, various
allowances such as dearness allowance, entertainment allowance, house
rent allowance, conveyance allowance, value of perquisites by way of free
housing, free car, free schooling for children of employees, etc.
3.5 TAX TREATMENT OF SOME RECEIPTS
5.1. Basic Salary
Basic salary is the amount of salary fixed as per the terms of employ ment.
It may be a pre -determined fixed sum, or a graded amount enhanced by
pre-fixed annual increment.
Under the graded system, the terms of employment fix the salary at say
Rs.10000 -200-15000 -500-20,000. The starting salary of the employee will
be Rs 10, 000 , which will be raised by Rs 200 to Rs. 10,200 in the next
year and so on till he reaches he reaches the level of Rs 15,000 p.m.
Thereafter, the annual increment will be Rs 500 per annum till he reaches
level of Rs 20,000 p.m. After reaching the level of Rs 20,000 p.m.
increment will not be given, unless he is promoted and placed in other
grade.
5.2. Fees, Commission and Bonus
Any fees, commission, bonus, or incentive paid or payable to an employee
by an employer is taxable and is included in salary. Such Commission etc.
may be payable as a fixed amount or as a percentage of turnover or partly
fixed and partly as a percentage of turnover. When commission is based
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Salaries Sections 15, 16 & 17
43 basic salary for the p urpose of grant of retirement benefits and for
computing, certain exemptions discussed later
5.3. Arrears of salary:
Arrears of salary are taxed on receipt basis, if the same has not been taxed
earlier. However, the employee will be entitled to claim relief un der
section 89 in respect of such arrears.
5.4. Advance Salary:
Salary received in advance is taxable on receipt basis. There will be no
tax again in the year in which the salary actually accrues. The employee
can claim relief under section 89 in respect of ad vance salary. However,
advance or loan against salary will not be taxable.
5.5. Gratuity - Section 10(10) :
Gratuity is a lump -sum payment to reward an employee for his past
services, on his retirement or termination.
Amount received as gratuity on terminatio n is exempt under section
10(10) as under: -
1 Employees of Central or State governments or local authorities fully
exempt
2 Employees in a concern covered under the Payment of Gratuity Act,
1972 exempt amount lowest of the following:
a. Amount of grat uity received,
b. Rs 10,00,000
c. 15 days’ salary for every completed or part thereof in excess of six
months, year of service computed based on last salary drawn taking
numerator of 26.
*Completed year of service X 15 days X Last Drawn Salary 26
3 Employees in a concern not covered under the Payment of Gratuity
Act, 1972 exempt amount lowest of the following:
a. Amount of gratuity received,
b. Rs 10,00,000
c. Half month’s salary for every completed year of service in excess of
six months (ignoring the fraction) computed based on average salary
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44 [*Completed year of service includes a year or part thereof in excess of six
months]
Illustrations
A retires on 1 June 20 21 after 22 years and 9 months’ service. He receives
gratuity of Rs 15,00,000 . Determine the amount of exemption of gratuity
if he was drawing a basic Salary for 10 months preceding the month o f his
retirement at Rs 40,000 p.m. The exemption will be as follows: -
(a) If A is a government employee, gratuity of Rs 15,00,000 is fully
exempt under section 10(10).
(b) If A was working with an employer covered under the Payment of
Gratuity Act, 1972,
(i) Actual amount received Rs. 15,00,000
(ii) Notified amount Rs. 10,00,000
(iii)15-day’s salary based on last drawn
salary Rs.40, 000* 15/26 *23 years Rs 5,30,769
Exempt amount lowest of the above Rs 5,30,769
(iv) Taxable amount Rs 15,00,000 -5,30,7 69= 9,69,231
(c) If A was working with an employer not covered under the Payment of
Gratuity Act, 1972 :
(i) Actual amount received Rs. 15,00,000
(ii) Notified amount Rs. 10,00,000
(iii)15-day’s salary based on last drawn Rs 4,40,000
salary Rs.4 0, 000 X 11 months
23*0.5 -fraction ignored
Exempt amount Lowest of the above Rs 4,40,000
(iv) Taxable amount Rs 15,00,000 -4,40,000= 10,60,000
5.6. Commuted Pension (Section 10(10A) :
Pension is a regular payment made at monthly or annual intervals by an en
employer to his employee on retirement his retirement of an employer as a
reward for his past services. When an employee is allowed to forgo a
portion of pension in lieu of a lump sum amount called commutation of
pension. Tax treatment of these two kin ds of pension is as under:
a) Regular payment of pension, monthly or quarterly or at some other
interval, periodical or uncommuted pension is fully taxable in the hands of
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Salaries Sections 15, 16 & 17
45 b) Lump sum payment received by an employee on commutation of
pension as per service rules will be -
i. fully exempt for employees of the Central or State Government or a
Local Authority or a Statutory Corporation
ii. partially exempt for other employees to the extent of -
a. One half of t he total value of pension If the employee has not
received any gratuity on termination of employment, and
b. One-third of the total value of pension, if the employee has
received any gratuity on termination of employment.
Illustrations
1. B receives monthly pension of Rs 50,000 from the Government, -
Pension fully taxable.
2. B receives monthly pension of Rs 50,000 from a private employer, then
also it will be fully taxable. It is immaterial who the employer is.
3. B retires from government service on 01 -06-2021. B receives pension
@ Rs 6000 p.m. till 31 -12-2021. On 01 -01-2022, B opts for commutation
of 40 per cent of the value of his pension for a lump sum amount of Rs
1,60,000. After commutation, B gets Rs 3,000 per month being 60% of
the total pension. Determi ne the taxability of pension if no gratuity is paid
to B.
a) Lump sum amount of Rs. 1,60,000 received on commutation of
pension will be exempt as B is a government employee
b) Regular pension Received during financial year 2021 -22 Rs 52,800
will be fully taxa ble
01-06-2021 to 31 -12,2021@ Rs 6,000 P.M= Rs 42,000
01-01-2022 to 31 -03-2022 @ Rs 3600 p. m= Rs 10,800
Total Rs 52,800
4. What will be the position in the above cases if B is a private employee?
Commutation of Pension
Amount Received on co mmutation of 40% of salary Rs.
1,60,000 Full Value of Pension = 1,60,000 /40% 4,00,000 Amount Received on commutation 1,60,000 ½ of full value of pension Rs 4,00,000* ½ 2,00,000 Exempted Amount - being the lower of the two 1,60,000 Taxable Amount NIL munotes.in

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46 Regular pension of Rs 52.800 will be taxable irrespective of the fact that B
is government employee or a private employee or whether or not he is in
receipt of any gratuity.
5. Ascertain the taxability if B also re ceives Rs 50,000 as gratuity.
Solution:
a. Regular pension of Rs. 52,800 fully be taxable in all cases.
b. If B is a government employee, the amount received on commutation
of pension will be fully exempt regardless of the fact that he also
receives gratuity.
c. If B is a non - governmental employee and is in receipt of gratuity,
from Rs 1,60,000 received on commutation, B will be entitled to
exemption of Rs 1,33,333 being 1/3 of full value of pension (1/3 of
Rs 4,00,000). Balance Rs 27,667 will be taxable.
5.7. Encas hment of Leave Salary -Section 10(10AA)
When an employee, instead of enjoying leave at his credit, gets the same
encashed, following tax treatment will be given: -
a. Amount received on encashment of leave during the continuity of
employment by all the employ ees, will be taxable in the year of
receipt. However, the employee will be entitled to relief under section
89.
b. Amount received on encashment of leave at the time of retirement
by way of superannuation or otherwise, will be -
i. fully exempt in case of an employee of the Central or State
Government ; and
ii. Partially exempt in case of any other employee including
employees of any local authority or statutory corporation to the
extent of the lowest of the following and only the balance will be
taxable: -
i. Actual amount received
ii. Notified Amount currently Rs 3,00,000;
iii. 10 months’ average salary or
iv. Cash equivalent of leave to be encashed
i.e. (Leave Entitlement - Leave Availed) X Average Salary


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Salaries Sections 15, 16 & 17
47 Following points are important in this regard:
(a) Salary for the purpose of calculating the exempt leave encashment
means total of basic salary, dearness allowance and commission on
sales achieved by salesmen.
(b) Average salary means average salary of 10 months immediately
preceding the retirement.
(c) Leave e ntitlement is to be taken at 30 days for each completed year of
service. Part of the year will be ignored and not considered as
completed year of service.
(d) If leave is encashed from more than one employer, the exemption limit
will be taken in respect of a ll the employers.
(e) Superannuation means retirement on attaining a certain age e.g. 60
years. Courts have held that termination and even resignation of the
employee will entitle them to exemption under this section.
(f) Leave to the credit of the employee means total leave available as
reduced by total leave availed.
Illustrations
1. On 01 -06-2021, A retires from his job with the Government of Goa
service of 22 years and 9 months. For 10 months prior to retirement, his
basic salary was Rs 10,000 p.m. A was entitl ed to 2 months’ leave for
every year of service or part thereof.
A availed total earned leave of 10 months and encashed unavailed leave
for 36 month for Rs 3,60,000 @ Rs 10,000 p.m.
A is government employee. Leave encashment pf Rs 3,60,000 on
retirem ent is fully exempt under section 10(10AA).
2. If A was employed with MTNL, a statutory corporation. Exemption
will be as under : -

Amount Received on leave encashment Rs.
3,60,000 Notified Amount 3,00,000 10 months’ average pay@ Rs. 10,000 p . 1,00,000 Encashment of unavailed leave 12 months 1,20,000 Exempted Amount - being the lower of the two 1,00,000 Taxable Amount [3,00,000 - 1,00,000] 2,00,000 *Leave entitlement – 22 months – Leave availed 10 Months ignoring
fractiona l period of service of 9 months as it is not rounded off . MTNL at
par with a private employee as statutory corporation is not considered
Government.
3. What will be the exempt amount if A receives the leave encashment
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48 Solution
Leave en cashment during continuance of employment is fully taxable
regardless of who the employer is.
5.8. Retrenchment compensation –Section.10 (10B)
Any compensation received by a workman at the time of retrenchment or
closure or transfer of undertaking including c hange of management
resulting in interruption of service is exempt fully if it is paid under a
scheme of closure approved by the central government and in other cases,
least of the following amounts would be exempt:
 Notified amount, presently Rs. 5,00,000
 15 days’ average pay for every completed year of service or any part
thereof in excess of six months
 Actual amount.
Other points;
(i) Compensation under a Voluntary Retirement Scheme is also exempt
under section10 (10C).
(ii) Where an assessee has to pay higher tax on account of such lump sum
receipts, he is entitled to relief under section 89.
(iii)If an assessee claims exemption under this section, then he can not
claim relief under section 89[1].
Illustration
A workman was retrenched after 20 year and 10 months’ service His
average salary was Rs 10,000 per month. He was paid Rs 1,40,000 as the
retrenchment compensation. Calculate the exempt amount.
Solution
The exempt amount will be least of the following:
Rs.
Actual Amount Received 1,40,000 Notified Amou nt 5,00,000 #10-1/2 months’ average salary
Rs 10,000 per month 1,05,000 Exempted ( Lowest of the above 10,500 Taxable 1,40,000 -1,05,000 35,000 #(15 days for 20 years and 10 months rounded off to next number. Relief
under section 89 not availabl e if he claims the above exemption.

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49 5.9. House Rent Allowance (Section 10 -13A)
House Rent Allowance or HRA paid by the employer to the employee to
meet the housing expenses of the employee, is exempt from tax Under
section 10(13A) being the least of the follo wing:
(i) HRA actually received.
(ii) Rent paid by employee in excess of 10 per cent of salary during the
previous year.
(iii) 50 per cent of salary, if employee is residing in the 4 metro cities of
Mumbai, Delhi, Chennai or Kolkata and 40 per cent of salary, if t he
employee is residing at any other place.
Salary for the purpose of calculating the amount of deduction from HRA
means the aggregate of Basic Salary, Dearness Allowance and
Commission received by salesman on sales achieved by him but it does
not include other receipts such as overtime pay, conveyance allowance,
etc.
In simple words, so long, the rent paid is upto 10% of the salary, no HRA
will be exempt. It is only if the rent paid is more than 10 %, then the
actual HRA may be exempt to the extent of 40% or 50% of the salary.
Illustrations
1. For an employee residing in Delhi ,who is in receipt of basic salary - Rs.
60,000, Dearness allowance -Rs. 30,000 and HRA - Rs 35,000, exemption
of HRA will be the least of the following assuming he paid rent - Rs
15,000 per annum.
Rs.
Actual HRA Received 35,000 Rent paid in excess of 10 % of salary
15,000 - {10 %( 60,000+30,000)} 6,000 50% of salary 45,000 Exempted ( Lowest of the above ) 6,000 Taxable 35,000 -6,000 29,000
2. Exempt amount If rent paid is -Rs. 50,000 :
Rs.
Actual HRA Received 35,000 Rent paid in excess of 10 % of salary
50,000 - {10 %( 60,000+30,000)} 41,000 50% of salary 45,000 Exempted ( Lowest of the above 35,000 Taxable NIL
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50
3. Exempted HRA for an employee be based in Pune :
Rs.
Actual HRA Received 35,000 Rent paid in excess of 10 % of salary
50,000 - {10 %( 60,000+30,0 00)} 41,000 40% of salary 36,000 Exempted ( Lowest of the above) 35,000 Taxable NIL Note - The time and notified amounts, wherever applicable in this lesson,
are technically not i n syllabus but given to keep the text logically
complete. These should be available in question.
3.6 TAXABLE VALUE OF CASH ALLOWANCES:
Most employers offer allowances or fixed monetary amounts to the
employees over and above basic salary normally paid t o meet some
personal expenses like house rent, conveyance etc. or for performance of
their duties such as entertainment or telephone allowance or partly for
personal and partly for official purpose.
All such allowances are taxable and included in gross sa lary unless
specific exemption is provided in respect of such allowance. Accordingly,
the allowances are of four categories –
a) Fully taxable allowances;
b) Allowances fully and unconditionally exempt
c) Allowance, which are tax -free or taxable subject to ce rtain conditions
or limits.
d) Allowances, in respect of which exemption is allowed only for a sum
prescribed on ad hoc basis.
Some of these allowances are dealt with as under: -
6.1 Allowances Fully Taxable :
a. Dearness allowance, a compensatory allowance paid to meet high
prices and increased cost of living.
b. City compensatory allowance also a compensatory allowance paid to
employees posted in big cities like Delhi, Mumbai to compensate the
high cost of living in such cities
c. Non- practicing allowance normally paid to compensate professionals
in government service like doctors, chartered accountants, engineers,
scientists etc , who are prohibited from doing private practice,
d. Warden or proctor allowance paid in educational institutions for
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51 e. Deputation allowance paid to an employee sent from his permanent
place of service to some place or institute on deputation for a
temporary period,
f. Overtime allowance paid as extra wages paid to an em ployee putting
in extra working hours over and above his normal hours of duty,
g. Servant allowance , if paid in cash even if the employee may have
employed servants.
h. Other allowances by whatever name called such as family allowance,
project allowance, marria ge allowance, education allowance, holiday
allowance etc. as these allowances are not specifically exempt.
6.2 Wholly and unconditionally exempt Allowances
a. Allowances paid to Judges of the High Courts and the Supreme
Court,
b. Allowances paid by the Unites Nations organization to its
employees.
c. Foreign allowance paid by the government to its employees being
Indian citizen posted out of India for rendering services abroad
d. Pension to gallantry award winners like Paramvir Chakra, Mahavir
Chakra, Vir Chakra etc. under section 10(18)
6.3 Wholly or partly tax -free Allowances:
Following allowance are wholly or partly tax -free. Some of the
exemptions are conditional. Most of the conditions and monetary limits,
though prescribed in rules are incorporated in brief to make the subject
comprehensive. Brief description of these allowances is as follows:
a. Entertainment allowance - Section 16 (ii)
Entertainment allowance paid to private sector employees for entertaining
the business relations and clients of the employer is fully taxable by even
if the entire amount may have been spent by them.
For the Government employees, the allowance is partially exempt by way
of deduction under section 16(ii) upto 20 per cent of basic salary, or Rs
5,000 per annum, whichever is lower. Full amount is first included in the
salary and then the exempted amount is reduced.
b. Fixed medical allowances
Fixed medical allowance is taxable but reimbursement of medical
expenses is exempt upto Rs 15,000
c. Tiffin / lunch allowance
Tiffin / Lunch Allo wance paid in cash is fully taxable, but Cost of lunch
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52 redeemable with restaurants is a tax -free perquisite subject to fulfillment
of certain conditions prescribed by the CBDT.
d. Transport a llowance - Section 10(14)
Any allowance or benefit given to meet the expense wholly and
necessarily in the course of employment is fully exempt under section
10(14) subject to the assessee presenting the proof in this regard.
Under Rule 2BB transport or con veyance allowance paid to meet
conveyance expenses of the employee from place of residence to place of
work and back is exempt upto Rs 1600 per month ( Rs 3,200 in case of a
handicapped employee) .
For example, if A is in receipt transport allowance @ Rs 2,000 per month,
Rs 400 per month (Rs 2000 -Rs 1,600) will be included in total income of
A.
e. Other allowances for official purposes - Section 10(14)
Under section 10(14) allowances (other than conveyance between
residence and office) are exempt to the ext ent of amount actually spent
from those allowances by the employee in meeting the official expenses.
For example, where an employee receives uniform allowance of Rs 10,000
and sends Rs 4000 on uniforms, then Rs 4,000 actually spent will be
exempt and unspe nt sum of Rs 6,000 will be taxable in the hands of the
employee.
Some other examples of the allowances paid for meeting expenses
incurred exclusively in performance of official duties are travelling
allowance, daily allowance, conveyance allowance, helper allowance,
research allowance.
f. Education allowance:
Education Allowance given to meet the education expenses of the
employee’s is taxable in hands of employee. However ,under rule 2BB a
sum of Rs 100 per month per child or Rs 300 per month if the child s tays
in a hostel subject to maximum of two children is allowed as exemption
from such allowance received by the employee.
g. Out of station allowance
An allowance granted to an employee working in a transport system to
meet his personal expenses in perform ance of his duty in the course of
running of such transport from one place to another is exempt upto 70% of
such allowance or Rs.6000 per month, whichever is less.


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53 3.7 TAXABLE VALUE OF PERQUISITES
7.1 Definition and meaning of perquisites:
Although value of perquisites allowed to an employee is
chargeable to tax under section 17(2), but the section does not define what
constitutes perquisites. In normal commercial parlance, perquisites denote
any casual emoluments or benefits attached to an office or posit ion in
addition to salary or wages. Perquisites are normally allowed in kind , not
in cash and are measurable in monetary terms.
7.2 Taxability of perquisites:
Perquisites are included in taxable salary only if they are:
-allowed by an employer to an emp loyee,
-allowed during the continuation of employment,
-directly dependent on service,
-resulting in personal advantage to the employee; and
-derived by virtue of employer’s authority.
3.8 CLASSIFICATION OF PERQUISITES
Section 17(2) gives the following li st of taxable perquisites:
i. Value of rent-free accommodation provided to the employee by the
employer.
ii. Value of concession in rent in respect of accommodation provided to
the employee by his employer.
iii. Value of any benefit or amenity granted free of cost or at a
concessional rate in any of the following cases:
a) by a company to an employee who is a director thereof
b) by a company to an employee who has substantial interest in the
company
c) by any employer to an employee who is neither a director, nor has
substantial interest in the company, but his monetary emoluments
under the head ‘Salaries’ exceeds Rs.50,000.
iv. Any sum paid by the employer towards any obligation of the
employee
v. Any sum payable by employer to effect an assurance on the life of
assessee
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54 The perquisites may be broadly classified in 3 categories:
(i) Perquisites taxable in all cases,
(ii) Perquisites not taxable at all and
(iii)Perquisites taxable only in the hands of s pecified employees.
8.1 Perquisites taxable in all cases:
The following perquisites are taxable under section 17(2) in the hands of
all type of employees, whether specified or not:
(i) Value of Rent free house provided by employer
(ii) Value of house provided at conces sional rate
(iii) Any obligation of employee discharged by employer e.g. payment of
club or hotel bills of employee, salary to domestic servants engaged by
employee, payment of school fees of employees’ children etc.
(iv) Any sum paid by employer in respect of insu rance premia on the life
of employee.
8.2 Perquisites tax -free for all the employees
As per section 17, following perquisites are not taxable in the hand of
the employees: -
i. Medical benefits within India:
Exempted medical benefits within India, include: -
i. Medica l treatment provided to an employee or any member of
his family in a hospital maintained by the employer.
ii. Any sum paid by the employer in respect of any expenditure
incurred by the employee on medical treatment of himself and
members of his family:
iii. In a ho spital maintained by government or local authority or
approved by the government for medical treatment of its
employees.
iv. In respect of the prescribed diseases or ailments in any hospital
approved by the Chief Commissioner.
v. If the ordinary medical treatment of the employee or any
member of his family is done at any private hospital, nursing
home or clinic, the exemption is restricted to Rs.15000.


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55 ii. Medical benefits outside India
Exempted medical Treatment outside India includes:
i. Any expenditure incurred by employer on the medical
treatment of the employee or any member of his family outside
India.
ii. Any expenditure incurred by employer on travel and stay
abroad of the patient being the employee or member of his
family and one attendant who accompanies the pati ent in
connection with such treatment, shall be exempt to the
following extent :
(i) The expenditure on medical treatment and stay abroad shall be
exempt to the extent permitted by the Reserve Bank of India.
(ii) The expenditure on travel shall be exempt i n full provided the
gross total income of the employee (including this expenditure)
does not exceed Rs.2,00,000.
iii. Medical Health Insurance within India
Exempted perquisites in respect of medical Health Insurance
include: -
i. Premium paid by the employer on h ealth insurance of the
employee under an approved scheme under section 36(1)(ib)
ii. Premium on insurance of health of an employee or his family
members paid by employer on any scheme approved under section
80D (Mediclaim).
iv. ESOP or Sweat Equity
Any benefit pr ovided by a company free of cost or at a concessional rate
to its employees by way of allotment of shares, debentures or warrants
directly or indirectly under any Employees Stock Option Plan or Scheme
ESOP/ESOS of the company offered to such employees in a ccordance
with the guidelines issued in this behalf by the Central Government.
However, the difference between the fair Market Value and the issue price
will be treated, when such equity is issued at concessional price, as the
taxable perquisite value of E SOP.
v. Transport
Amenity or benefit granted or provided free of cost or at concessional rate
for use of any vehicle provided by a company or an employer for journey
by the assessee from his residence to his office or other place of work, or
from such office or place to his residence.

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56 vi. Refreshments
Refreshment provided by an employer to the employee during working
hours in office environment.
vii. Others:
a. Value of Leave Travel Concession in India.
b. Amount spent by the employer as its contribution to staff welfar e
schemes.
c. Laptops and computers provided for personal use.
d. Rent free official accommodation provided to a Judge of High
Court or Supreme Court or an official of Parliament including
Minister and Leader of Opposition in Parliament.
e. Recreational facilities extended not to a particular employee but
to a class of employees.
f. Amount spent on training of employee or fees paid for refresher
course.
g. Telephone provided to an employee at his residence.
h. Goods manufactured by the employer sold to employees at
concessi onal rates.
i. Allowances to employees of UNO.
8.3 Perquisites taxable by specified employees only
Under section 17(2)(iii) the value of any benefit or amenity granted
or provided free of cost or at concessional rate to specified employees
only will be taxable. S pecified employee means an employee who is -
(a) a director of the employer ;or
(b) who has a substantial interest (more than 20% voting power)
in the company where he is employed or
(c) any other employee (of any employer including a company)
whose income under th e head salaries exceeds fifty thousand
rupees
Salary for this purpose means salary due from, or paid or allowed by,
one or more employers, exclusive of the value of all benefits or
amenities not provided for by way of monetary payment,
The taxable per quisites are: -
1. Free supply of gas, electricity or water supply for household
consumption;
2. Free or concessional educational facilities to the members of
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57 3. Free or concessional transport facilities;
4. Sweeper, watchman, gardener , personal attendant and
5. Any other benefit or amenity.
3.9 VALUATION OF PERQUISITES:
Perquisites are benefits granted in kind. Monetary value of the perquisites
taxable is taxable in the hands of the employees. Broad principles for
determining the value o f taxable perquisites are stated as under: -
a) The amount actually spent by the employer will be the full taxable
value of perquisite allowed entirely for personal benefits of the
employee.
b) Taxable value of the perquisite allowed to an employee for offic ial
purposes only shall be nil and perquisites will not be taxable in the
hands of employee.
c) Taxable value of the perquisites allowed partly for personal and
partly for official purpose, will be the amount of perquisites
reasonably used for personal purpo ses.
Though the actual valuation rule are beyond the scope of the syllabus,
general principles for valuation of perquisites may be considered.
a. Accommodation & Furniture
Value of furnished and unfurnished accommodation is determined
according to the Valu ation Rules. 10 per cent of the cost will be added to
the value of accommodation, if the employer owns the furnishings.
b. Transport
No perquisite value is taken in the hands of individual employees in case
where: -
(a) common transport such as bus provided t o all the employees; or
(b) the employer is in the transport business; or
(c) the car is provided only for official use or for the purpose of travel
from residence to office.
In other cases, a reasonable cost of such transport facilities will be treated
as taxab le value of perquisites in respect of such facilities
Where a car owned by the employer is provided to an for exclusive
personal use by the employee, the taxable value of the perquisite will be
determined by taking reasonable expenses incurred by the em ployer on
the maintenance of car and depreciation on the car as per income tax
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58 If such car is used both for private and official purposes, then a reasonable
proportion of the perquisite value relatable to the personal use will be
taken as the tax able value of the car perquisite in the hands of the
employee.
c. Domestic servant
Salary of domestic servants of employer paid by the employer, perquisite
value will be taken as per rules.
d. Gas, water or electricity:
i. Taxable perquisite of providing sup ply of gas, water, or electricity will
be nil, if the employer himself is engaged in the business providing
these facilities.
ii. If the employer is not in the business of supply of gas, water or
electricity, then the amount spent by the employee in providing the
facilities to the employee will be the taxable value of perquisites in the
hands of the employee provided the entire facilities are for the personal
use of the employees only. Any amount recovered from the employee
will be reduced from the perquisite value.
iii. Where the connection for gas, electricity, water supply is in the name
of employee and the bills are paid or reimbursed by the employer, it is
an obligation of the employee discharged by the employer. Such
payment is taxable in case of all employees under Section 17(2)(iv).
e. Educational facilities:
i. Taxable perquisite value of education provided by an employer being a
school, college or an educational institution, will be taken as nil.
ii. If the employer is not a school, college or an educational inst itution, but
is engaged in some other business or profession, the value of school
fees or colleges fees of the children of the employee paid by the
employer will be the taxable value of perquisites in respect if such
facility.
iii. If the children of the emplo yee are allowed free education in an
institute run by the employer where the employer is engaged in other
activities, then the value of the perquisites is reasonable cost of
education and deem ed by the income tax officer in the hands of
specified employees .
f. Medical facilities
(i) A sum of up to Rs 15000 paid by the employer to the employee by
way of reimbursement of medical expenses of the employee and his
family will be exempt perquisite in the hand of the employee. Any
payment made in excess of Rs.15000 w ill be taxable.
(ii) If the treatment is taken in a government approved hospital or
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59 as the perquisite value in respect of such medical treatment
reimbursement.
(iii) If the medical treatment is d one outside India, then up to the amount
approved by the RBI for such treatment, no perquisite value will be
added to the taxable income of the employee. If payments made by
the employer to the employee in this connection exceed the amount
approved by the RBI, then such excess will be treated as taxable
salary in the hands on of the employee.
(iv) If the employer himself is a medical institution, provision of medical
facilities will not attract any tax in the hands of the employee.
From the above, it follows tha t there will be no taxable perquisite value in
the hands of the employee in respect of transport, education or medical
facilities provided by an employer’s own institution.
3.10 PROFITS IN LIEU OF SALARY – Section 17(3)
Under section 17 (3), profit in lieu o f salaries includes:
1. Compensation for termination of employment or modification of
terms & conditions
The amount of any compensation due to or received by an assessee from
his employer or former employer at or in connection with the termination
of his employment or the modification of the terms and conditions
relating thereto.
2. Payment from employer from PF or other fund
Any payment (other than any pension, gratuity, HRA, Retrenchment
compensation, etc) due to or received by an assessee from an employ er or
a former employer or from a provident or other fund , to the extent to
which it does not consist of contributions by the assessee or interest on
such contributions.
3. Keyman Insurance Policy
Any sum received under a Keyman insurance policy including t he sum
allocated by way of bonus on such policy.
4. Sums received from future or former employer
Any amount due to or received, whether in lump sum or otherwise, by any
assessee from any person -
(A) before his joining any employment with that person or
(B) after cessation of his employment with that person.

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60 5. Payment of employee’s obligation by the employer
Any sum paid by the employer in respect of any obligation which, but for
such payment, would have been payable by the assessee.
6. Payments from certain fund s :
Any sum payable by the employer, whether directly or through a fund,
other than a recognised provident fund or an approved superannuation
fund or a Deposit -linked Insurance Fund established under section 3G of
the Coal Mines Provident Fund and Miscella neous Provisions Act, 1948
or under section 6C of the Employees Provident Fund and Miscellaneous
Provisions Act, 1952 to effect an assurance on the life of the assessee or to
effect a contract for an annuity.
7. Treatment of annual accretion to provident fun d;
Provident Funds are established to provide for the retirement benefits of
the employees. Under the scheme of funds both the employer and the
employee make contribution to the funds and interest is accumulated
therein till an employee is retired. The funds are of three types, Viz.: -
i. Statutory Provident Fund(SPF) set up, established and administered
by the Government.
ii. Recognised Provident Fund (RPF)set up by other employers but
recognised by the Commissioner of Income Tax
iii. Unrecognised Provident F und (UPF) set up by other employers but
not recognised by the Commissioner of Income Tax due to non -
compliance with the guidelines laid down for recognition.
Following is the summary of tax treatment of different funds :
(a) Employer’s Contribution to sta tutory PF, interest thereon and the
amount paid on retirement of the employee, all three are exempt.
(b) Employer’s Contribution to statutory RPF is exempt upto 12% of
basic salary and interest on PF is exempt upto 8.5% p.a. Excess
contribution or interest wi ll be taxable. The amount paid on
retirement of the employee will be exempt subject to rules.
(c) Employer’s Contribution to UPF and interest thereon is exempt from
tax but it will be taxable, when paid on retirement of the employs
under section 17(3).
(d) Emp loyer’s Contribution to all the three funds is exempt at the time
of contribution.
(e) If the P.F. is deducted from the salary of the employee, salary will
have to be grossed up in all the three cases.
(f) Employees’ Contribution when received back on retirement i s exempt
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61 (g) Interest on Employees’ Contribution from UPF will be treated as
Income from Other Sources.
8. Transferred Balance: - Section 17
When an unrecognised provident fund is subsequently recognised and the
balan ce standing in the unrecognised provident fund is transferred to the
Recognised Provident Fund, it is called transferred balance. As per section
17(1), Transferred Balance shall be deemed to be the salary income of that
year to the extent such balance comp rises of employees’ contribution in
excess of 12% of basic salary and interest credited in excess of 8.5% p.a.
9. Salaries exempt under section 10
Section 10 provides for exemption of salaries to certain classes of
employee and in respect of certain types of allowance and perquisites. A
broad list of such exemptions is given below.
a. Exemption of salaries to foreigners and non -resident employees
1. Interest income of non -resident persons of Indian origin from
notified securities, saving certificates/ NRE Acco unt purchased in
convertible foreign exchange –Section 10(4).
2. Remuneration / salary of
(i) Foreign diplomats - Section 10(6),
(ii) trainees of foreign governments - Section 10(6)(xi),
(iii) foreign national as an employee of foreign enterprises –
Section 10(6)(vi),
(iv) Non-Resident employees of foreign ships -Section 10(6)(viii),
(v) Persons from foreign governments under Co -operative
Technical Assistance Programme/ projects - section 10(8),
(vi) a consultant under Grant Agreement between the International
Organisation and the Gov ernment of Foreign State -
Section10(8A)
(vii) non-residents engaged by the agency for rendering technical
services in India in connection with any technical assistance
programme or project, provided in accordance with an
approved agreement. - section 10(8A)
(viii) An Individual who is assigned to duties in India in
connection with any Technical Assistance Programme and
Project in accordance with an Agreement entered into by the
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62 (ix) an individual who is assigned to duties in India in connection
with any technical assistance programme and project from a
consultant referred to section 10(8A), income - section 10(8B).
3. Income other than salary, royalty or fees for technical services
from Government or an Indian concern under an approved
agreement and if their tax liability is paid by the employer the tax
so paid is exempt from tax. section 10(6B)
4. Income accruing or arising outside India by any family member
of persons covered under section 10(8),(8A) or (8B), in respect o f
which such member is required to pay any income tax or social
security tax to the Government of that foreign state. – section
10(9)
5. Amount of tax actually paid by an employer, at his option, on non -
monetary perquisites on behalf of an employee in the ha nds of the
employee. section – 10(10CC).
b. Other Exemptions to salaried employees
A broad list of all the important exemptions in respect of allowances
granted to employees discussed above in this lesson is given below: -
(i) Value of travel concession/ ass istance - section 10(5),
(ii) allowance paid by the government to a Indian citizen rendering
service outside India - section 10 (7)
(iii) Death cum Retirement gratuity - section 10(10)
(iv) Commuted pension section 10 (10A),
(v) Leave encashment section 10 (10AA)
(vi) Retrench ment compensation -Section 10(10B)
(vii) Voluntary Retirement Compensation - section 10(10C)
(viii) Value of tax -paid perquisite - section 10(10CC)
(ix) Payment from statutory PF - section 10(11)
(x) Any payment from National Pension Trust or upto 40% on
closure of such acc ount - section 10(12A /12B)
(xi) house rent allowance section 10(13A),
(xii) Special allowances etc. section 10(14).
3.11 DEDUCTIONS FROM SALARIES - SECTION 16
From the aggregate of taxable amounts chargeable as taxable salary viz.
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63 under the head "Salaries" shall be computed after making the following
deduc tions under section 16, namely: -
a) Standard Deduction
A deduction of Rs 50,000 or the amount of the salary, whichever is less.
b) Entertai nment Allowance
A deduction in respect of any allowance in the nature of an entertainment
allowance specifically granted by an employer to the assessee who is in
receipt of a salary from the Government, a sum equal to one -fifth of basic
salary (exclusive of any allowance, benefit or other perquisite) or Rs
5,000,whichever is less.
No deduction is allowable to employees in private sector.
c) Profession Tax:
A deduction of any sum paid by the assessee on account of a tax on
employment ( profession tax) levi able by or under any law by the state
government.
Other than that, no further deductions are allowed under this head.
3.12 ILLUSTRATIONS
1. R was appointed as Finance Manager with ABC Bank on 1 -4-2013
in the Salary grade of Rs. 12000 – 500 – 20000 – 1000 – 30000. Other
details are as under: -
1. Leave travel Concession for proceeding on leave of Rs. 4000. Actual
expenditure amounted to Rs. 5000.
2. Tiffin Allowance Rs. 6000. Actual lunch expenses amounted to
Rs.10,000.
3. Rs. 50,000 as reimbursement of his of medical expenses from the
employer for treatment of himself and his family in private clinic.
4. The Bank has provided free unfurnished flat at Mumbai (rent paid by
Bank: Rs.80,000). However, the perquisite value of that Flat was Rs.
30000.
5. The employer provided two watchmen drawing salary Rs. 5000 per
month each.
6. R is entitled to free use of Santro car for official use and for journey
between office and residence.
7. Free refreshments provided at place of work @ Rs. 100 per day for 200
days.
Compute Salary Income for the Assessment Year 2022 -23. munotes.in

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64 Solution:
Computation of Salary Income R for Assessment Year 2022 -23
Particulars Rs.
Basic salary (Rs 12,000 + 8 increments of Rs 500
R. 16000 X 12 1,92,000 Leave Travel Concession (Exempt) NIL Tiffin Allowance ( Ta xable) 6,000 Medical Expenses Reimbursed (50000 – 15000) 35,000 Rent Free Accommodation (Given) 30,000 Watchmen’s Salary (5000 * 2 *12) 1,20,000 Santro Car only for Office use NIL Free Refreshments at workplace NIL 3,83,000 Less Standard Deduction under section 16(1) 50,000 Taxable Salary 3,33,000
8. X is in negotiation with two employer A &B, who have made the
following offers to X. Help him in making an appropriate choice.

Particulars Rupees
A B
Basic Salary 5,00,000 5,00,000 HRA – Actua l Rent Rs. 200000 2,50,000 0 Free House –fair rental value 50000 0 2,50,000 Transport Allowance 1,00,000 0 Free Use of Car – Amount spent 1,00,000 Education Allowance for one child 50,000 0 Free Education for 1 child. Amount spent 0 50,000 Gardener Allowance 60,000 0 Gardener’s salary paid by employer 60,000 Salary 9,60,000 9,60,000




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65 Solution
Taxable salary from employer A
Basic Salary 5,00,000 HRA (Actual)
Less : Exempt (HRA or 50 per cent of salary or Rent paid less 10 per cent of salary 2,00,000 - 10% of 5,00,000) 2,50,000 1,50,000 1,00,000 Education Allowance
Less : Exempt (100*12) 50,000 1,200 48,800 Gardener Allowance 60,000 Transport Allowance
Less : Exempt (800*12) 1,00,000 9,600 90,400 7,99, 200 Less: Standard Deduction under section 16(1) 50,000 Taxable Salary 7,49,200
Taxable salary from employer B
Basic Salary 5,00,000 Free House Value 50,000 Free Education for 1 child 50,000 Gardener's Salary(120 * 12) 1,440 Free Car 1,00,000 8,51,440 Less: Standard Deduction under section 16(1) 50,000 Taxable Salary 8,01,440
Taxable salary will be less with B, He should be preferred to A .






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66 9. XY Ltd offers a job with following options to P, who is neither a
director nor he has sub stantial interest in the company :
PARTICULARS I II
Rs. Rs.
Basic Salary 2,70,000 2,70,000 Bonus 10,000 10,000 Education Allowance for 2 children 10,200 -- Education facility for 2 children in an Institution maintained by the employer -- 10,200 Sweeper Allowance 10,000 -- Free Sweeper -- 10,000 Entertainment Allowance 6,000 -- Club Facility -- 6,000 Conveyance Allowance for personal use 12,000 -- Free Car Facility for Personal Use -- 12,000 Medical Allowance 18,000 -- Medical Facility for M and Family Members in
own hospital -- 18,000 Free gas, electricity and water supply -- 4,500 Fair Rent Rent -free unfurnished house: 24,000 24,000
Which option M must choose on the assumption that he and XY LTD will
both contribute 10% of sala ry towards unrecognised PF?
SOLUTION:
PARTICULARS I II
Rs. Rs.
Income from Salary
Basic Salary 2,70,000 2,70,000 Bonus 10,000 10,000 Education Allowance (10,200 - 2,400) 7,800 Exempt Education Facility -- Exempt Sweeper Allowance/Facility 10,00 0 -- Entertainment Allowance/Club Facility 6,000 6,000 Conveyance Allowance/Car Facility 12,000 Exempt Medical Allowance/facility 18,000 -- Allowance for gas/electricity/water/free facility 4,500 -- Rent free unfurnished house 13,430 7,600 Gross Sala ry 3.51,730 2,93,600 Less: Standard Deduction u/s 16(1) 50,000 50,000 Taxable Salary 3,01,730 2,43,600 Taxable income is lower in option II, it should be preferred. munotes.in

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67 3.13 SELF ASSESSMENT QUESTIONS
1. What is meant by Salary?
2. Distinguish profits in lieu of sa lary from perquisites.
3. How are the perquisites for different employees treated?
4. Explain various deductions available under the head salary.
5. Non- specified employees pay less tax than specified employees”.
Comment.
6. Rajesh is an employee of ABC Ltd. Since 1997, he is receiving
entertainment allowance of Rs. 500 p.m. He submits following further
information as on 31.03.2022 with the request to compute his taxable
salary.
a) Net Salary of Rs. 4,000 p.m. (including entertainment allowance of
Rs. 500 p.m. but aft er deducting income tax Rs. 500, Provident Fund
Rs. 500 and Profession tax Rs. 70)
b) He is provided car for his exclusive use during office hours for
office work. The petrol and other maintenance expenses come to Rs.
12,000 p.a.
c) Receives Leave travel concess ion for himself and his family for
proceeding on leave to hometown of Rs. 5,000 as prescribed, while
actual amount spent by him was Rs. 3,500.
d) During the year, he received free services of a cook. (Cost to the
employer Rs. 4,400)
e) Received Rs. 8,000 on enca shment of leave to his credit.
7. R was an employee of R India Ltd since 1968 covered by the Payment
of Gratuity Act, 1972, retired on 31 January 2021 after 35 years and 7
months’ service. On retirement, her employer paid gratuity of Rs.
85,000; exempt under section 10(10) Rs. 50,000. R also received Rs.
50,000 as the accumulated balance of Recognised Provident Fund.
The due date of salary etc was 1st day of the next month and were paid
on due date. She was entitled to a monthly pension of Rs. 400 with
effect from 1st day of February 2021, which becomes due on the last
day of the month. Compute her taxable income for Assessment Year
2022 -23
8. From the following information furnished by H , Compute his
taxable income of H for the Assessment Year 2022 -23 :
(A) Basic Salary Rs. 2,50000 p.m.
(B) House Rent Allowance Rs. 40,000 p.m. Taxable value is 50% of
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68 (C) Project Allowance paid during the year Rs. 12,000.
(D) Bonus paid during the year Rs. 3,6000.
(E) In retirement, on encashment of earned leave at his credit of 15
months he received Rs. 40,000 (Exempt under section 10(10AA)
Rs. 24,000)
9. S submits the following information pertaining to the year 31.3. 2022
and asks you to compute his income from salaries for the Assessment
Year 2022 -23.
a) Basic Salary Rs. 25,000 p .m.
b) Dearness Allowance Rs. 30,000 p.m.
c) Bonus @ 20% on salary plus Dearness Allowance
d) Employee contribution 12.5% of basic salary+ DA to RPF.
Employer also contributes an equal sum.
e) Interest on balance credited to his RPF @ 14% p.a. Rs. 17,500
f) House Rent Allowance Rs. 1,50,000 p.a. Rent paid Rs . 12,500 p.m.
g) Profession tax paid by employee Rs. 840.
h) S received Rs 2,40,000 as the commuted value of 40% of pension
on his retirement from service on 31.3.2021 as the only terminal
befit beside the balnce in hi s PF account at Rs 20,00,000.


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69 4
INCOME FROM HOUSE PROPERTY
SECTION S 22- 27
Unit Structure
4.1 Introduction and objectives
4.2 Basis of Charge
4.3 Deemed owner
4.4 Income Exempt
4.5 Computation of income
4.6 Miscellaneous provisions
4.7 Illustrations
4.8 Self - Examination Questions
4.1 INTRODUCTION AND OBJECTIVES
Section s 22 to 27 deal with computation of income from house property.
This lesson deals with the provisions in detail as unlike other heads of
income, computation under this head covers actual as well as notional
income
4.2 SCOPE AND BASIS OF CHA RGE: SECTION - 22
2.1 Section s dealing with income from house property
Section Subject matter
22 Scope of income under the head income from house
property
23 Mode of computation of income
24 Deduction available under this head
25 Amounts not deductible
26 Property owned by co -owners
27 Deeming provisions, where a person not being an owner of
the property will be taxed as the deemed owner of such
property
2.2 Section 22 is the charging Section which provides that annual value
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70 which the assessee is the owner, shall be chargeable under the head
income from house property. However, the Section expressly excludes
property occupied for the purpose of assessee’s own business or
profession.
2.3 As per Section 22, income from building or land appurtenant or
adjacent thereto only be covered under this head.
2.4 For this purpose :-
‘Building ‘means any habitable four -wall structure covered by a roof. It
is immaterial whether the building is residential o r commercial such as
warehouse, office or factory godown, wedding hall, auditorium, business
centre, etc .
‘Land appurtenant’ means the land connected or adjacent to the building
e.g. open space, approach roads, courtyard, compounds, courtyards,
backyards, playgrounds, parking spaces, etc.
2.5 Income from any other property e.g. rental Income from a vacant
plot of land is not chargeable to tax under this head unless it is
appurtenant to a building.
2.6 The assessee must be the owner or deemed owner of house proper ty
during the previous year. Any subsequent change in the ownership of the
property is immaterial.
2.7 Any person may the owner whether an individual, HUF, firm,
company, cooperative society or an association of persons.
2.8 A tenant is not the owner of a prop erty. Hence, income of a tenant
from sub -letting a rented property to another tenant is also not covered
under this head. It will be taxable as business income or income from
Other Sources.
2.9 The property is either let -out or used for own residence. The Section
specifically excludes a property used for assessee’s own business or
profession.
4.3 DEEMED OWNER - SECTION 27
Under Section 27, following classes of persons shall be deemed to be the
owner of a property although they may not be the legal owner thereof.
a) An individual, who transfers any property to his spouse or a minor
child, other than a married daughter, for inadequate consideration, shall be
treated as deemed owner of that property although in such cases, legal
owner of the property is the spouse or th e minor child.
b) The holder of an impartible estate is deemed to be the owner of the
entire property. E.g., an HUF jointly holding a property on behalf of all its
members shall be deemed to be the owner of such property although the
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71 c) A member of co -operative society, company or other association of
persons to whom a building has been allotted under a house building
scheme of such society or company or AOP shall be deemed to be the
owner of that property.
d) A purchaser, who has received possession of a property in part
performance of a contract within the meaning of Section 53A of the
transfer of property Act, shall be deemed to be the owner of that property
despite the fact that the agreement for b uying of property has not been
registered with the appropriate authority.
e) A lessee, who has acquired right by way of long -term lease of
property for period of more than 12 years, shall be deemed to be the owner
of such property. However, this provision is not applicable on any right by
way of a lease renewable from month to month or for a period not
exceeding one year.
4.4 EXEMPT INCOME
4.1 Under the Section s 10 to 13 income from house property, of certain
persons, institutions and organisations is exempt from tax. Some of such
exemptions are as under: -
(a) A farmhouse used for agricultural purpose Section - 10(1)
(b) Income of one Palace of an ex - Ruler - Section 10(19A)
(c) A local authority Section -10(20)
(d) A scientific research association -Section 10(20),
(e) An Institut ion for development of Khadi & Village Industries -
Section 10(23BB)
(f) Khadi & Village Industries Board -Section 10(23BB)
(g) A body for administration of charitable & religious trusts &
endowments -Section 10(23BBA)
(h) Approved funds, educational institutio ns or hospitals -
Section 10(23C),
(i) A trade union or association of trade union - Section 10(24)
(j) Resident of Ladakh district -Section 10(26A)
(k) Statutory corporations/ other institution or association finance by the
government for promoting the interests of the members of the
scheduled caste and scheduled tribes - Section 10(26B)
(l) Co-operative society for promoting the interests of the members of the
scheduled caste and scheduled tribes - Section 10(27)
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72 (n) A property held by a political party -Section 13
4.2 As per Section 22, a property used for own business or profession,
e.g. letting out property, or using it as a shop, office, factory, guest house
for business clients or for providing accommo dation to, partners, directors
or employees, will be excluded from the income from house property.
Any income arising from such property will be chargeable income of
the business or profession, not as income from house property.
4.3 As per Section 23(1), one self -occupied property of an individual or
a HUF assessee is exempt. This benefit is not available to a property
which is let out or to non -living entities like firms, companies, etc.
4.5 COMPUTATION OF HOUSE PROPERTY INCOME
5.1 Income from house property is computed in two steps:
I Determining annual value of the house property as per Section 23
II Reducing from the annual value the deductions available under
Section 24.
5.2 Annual Value - Section 23
Section 2(22), which defines the term annual does not give any definitive
meaning to it. Instead it only says annual value means “the annual value
determined under Section 23.
In normal commercial terms ‘annual value’ means the inherent capacity
of a property to earn income or the amount for which the property may
reasonably be expected to be let out from year to year.
It is important to note that annual value does not refer to the rent of a
property actually received but the capacity or worth of the property to
fetch rent.
This implies that a property need not ne cessarily be let out. Moreover, the
annual value of a property depends on the use of the property - self
occupied, let out or partly vacant and several other factors like its location,
age etc.
5.3 Gross Annual Value [GAV]
As per Section 23(1)(a), annua l value of a property is its -
(i) actual rent ( AR), or
(ii) reasonable lettable value ( RLV );
whichever is higher.
Actual rent [ AR] means the rent received or receivable, where the
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73 Reasonable lettable value [ RLV ] means the expected rent, which the
property might reasonably be expected to yield from year to year. It is not
necessary that a property must be let out.
Where a property is not let out, RLV may be estimated on the basis of the
following fact ors:
(a) Fair rent or the rent of similar properties in the same locality. The
fair rent may be different in different circumstances or different
contractual obligations.
(b) Municipal value (MV) i.e. the ratable value of a property fixed by
the local authorities for the purposes of assessment of local taxes
payable. Municipal Value is fixed according to prevalent market
rent receivable in respect of a property, hence it is considered as a
reliable criterion to determine the reasonable letting value of the
property .
(c) Standard rent or the rent fixed under the rent control laws to
control or limit the rents prevailing in a locality. These laws
prohibit the landlords from charging rent in excess of the standard
rent. However, the landlord is at liberty to charge rent at a rate
lower rent than the standard rent. Hence, actual rent can be more
or less than the fair rent but can never exceed the standard rent.
5.4 Comparison of RLV and AR - Section 23(1(b)
As per Section 23(1)(a), annual value of a property is higher of its actual
rent (AR) vis -à-vis its reasonable lettable value (RLV).This may result in
following situations: -
(a) AR is more than RLV. In that case AR will be GAV.
(b) AR is less than RLV ( i.e. RLV is more than AR) and the reason for
actual rent being l ess is because of -
I. Vacancy only and no other reason, then the AR , even if it is lower,
will be the GAV under Section 23(1)(c)
II. any other reason, RLV shall be the GAV.
5.5 Other Important points :-
(i) Actual rent will be relevant only if property is l et-out. Obviously
no rent will be received if the property remains vacant or nor let out at
all or the property is self - occupied. In such cases, reasonable letting
value will be sole guiding factor.
(ii) The amount of rent actually received/ receivable durin g the previous
year will be arrived after deducting rent for the period for which the
property was vacant and unrealised rent or bad debts.
(iii) In case of composite rent, expenses on providing amenities to the
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74 (iv) Actual rent shall not include the rent, which cannot be realised by
the owner. However, the following conditions need to be satisfied for
this:
(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 satisfied the
Assessing Officer that legal proceedings would be useless.
Illustrations
1. A property is let out at a monthly rent of Rs. 11,000. Its Municipal
ratable value is Rs. 10,000 per month, the fair rent is Rs. 14,000 per month
and standard Rent is Rs. 12,000 p. m. The GAV will b e computed as under Rs Rs
I. Actual rent :Rs 11,000 p.m. 1,32,000 II. (a) Fair rent: Rs. 14,000 p.m. 1,68,000 (b)Municipal value @ Rs.10,000 p.m. 1,20,000 Higher of the (a) and (b) – fair rent 1,68,000 Standard Rent Rs 12,000 p.m. 1,44,000 Fair rent cannot exceed the Standard Rent. Reasonable lettable
value RLV restricted to:
1,44,000 Gross Annual Value (GAV) higher of AR/RLV 1,44,000
2. If the standard rent Rs. 18,000 p.m. , GAV will be as under :
Rs Rs
I. Actual rent: Rs 11,000 p.m. 1,32,000 II (a) Fair rent – Rs. 14,000 p.m. 1,68,000
(b)Municipal value: Rs. 10,000 p.m. 1,20,000
Higher of the (a) and (b) – Fair Rent 1,68,000
Standard Rent Rs 18,000 p.m. 2,16,000
Reasonable Lettable Value RLV 1,68,00 0 Gross Annual Value Higher of the Two 1,68,000 munotes.in

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75 Standard rent being only a limiting factor is ignored .
3. If the actual rent Rs. 17,000 per month, the GAV will be : -
Rs Rs.
I. Actual Rent -Rs 17,000 per month 2,04,000 Ii. (a) Fair rent - Rs. 14,000 per month 1,68,000 (b)Municipal value@ Rs .10,000 p.m. 1,20,000 Higher of the (a) and (b) – Fair Rent 1,68,000 Standard Rent Rs 12,000 per month 1,44,000 RLV cannot exceed Standard Rent 1,44000 Gross Annual Value higher of AR/ RLV) 2,04,000 Note: - For tax purposes legality not relevant although it is an offence to
charge excess rent than the standard rent.
4. A house is let out for Rs 15,000 per month for six months. Its RLV is
Rs 3,60,000.
In this case AR is Rs 1,80,000. Th ere is shortfall of Rs 1,80,000 between
the AR and RLV, which is only because there was a vacancy of six
months.
Hence, GAV will be Rs. 1,80,000
5. A house is let out for @ Rs 50,000 per month. Its fair rent is Rs
4,50,000.
AR Rs 6,00,000 and RLV Rs 4,50,0 00. Shortfall not due to vacancy s
house let out for full year.
Hence, GAV will be Rs 6,00,000(AR) being higher than RLV.
6. RLV of a house is Rs 3,00,000 but the actual rent is Rs 20,000 per
month. GAV will be Rs 3,00,000 (RLV) being higher than (AR).
7. A house is let out for 8 months for monthly rent of Rs. 50,000 per
month. For the remaining 4 months, the house remained vacant.
Reasonable lettable value of the house is Rs. 2,40,000.
The RLV Rs. 6,00,000 for the full year.
AR Rs 4,00,000 i.e. Rs. 50,000 p.m. for 8 months.
Shortfall of Rs 2,00,000 solely on account of vacancy as the AR for full
year would be Rs. 6,00,000, if there is no vacancy. The GAV will be Rs.
4,00,000 being the actual rent.
5.6 Computation of Net Annual Value (NAV)
Section 23 classifi es the house properties into different categories as
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76 (i) Self-occupied business properties:
Incomes from house property used for own business or profession is
exempt from tax. Any rent or other income generated from such property
will be trea ted as business income.
On the other hand, expenses incurred on such property such as municipal
taxes, repairs, insurance premium etc. will be admissible as business
expenses.
(ii) Self-occupied Residential Properties (SOP):
Following are the provisions in res pect of the annual value of a self -
occupied residential property .
A. Annual value to be taken as NIL
Under Section 23(2)(a), annual value of a house or part of a house which
is in the occupation of the owner (self - occupied property ) for the
purposes of h is own residence shall be taken to be nil.
The exemption will be available even if the property can not be actually
occupied because the owner resides at a different place in a building not
belonging to him only because of his employment, business or pro fession
carried on at any other place.
B. Exceptions - Section 23(3)
Exemption to a SOP will be denied in two cases, viz.: -
a) If the house or part of the house is actually let during the whole or
any part of the previous year; or
b) any other benefit therefrom is derived by the owner .
C. More than one properties – Section 23(4)
Where the self -occupied property consists of more than one house, then
the exemption shall be available only in respect of any two such houses,
which the assessee may, at his option, specif y in this behalf. Earlier the
exemption was available in respect of any one house only. Now, the
second house will also be treated as self -occupied and thereby necessity
of paying tax on notional rent has been removed
The annual value of the other house o r houses shall be determined as if
such house or houses had been let out (Deemed to be let out property
(DLP).
In other words, where the assessee owns more than one self-occupied
properties, the assessee, at his option, may choose any one property as
self-occupied by him.
The remaining properties will be deemed or assumed to have been let -out
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77 Annual Value of DLP will be determined on the basis of the notional RLV
even if no rent has actually been received by the assessee. However, other
deductions under Section s 23 or 24 will be allowed in the normal manner.
D. Exemption only to individuals and HUFs:
Exemption for SOP is available only to individuals and HUFs . Other non -
living persons canno t avail this exemption.
E. No Deductions allowed from SOP except Interest :
Where the annual value of a SOP is taken as nil, no deduction will be
allowed from such annual value under Section 23 or 24 except in respect
of interest paid or payable on borrowed f unds.
In other words, municipal taxes will not be allowed as deduction nor
repair allowance of 30% of annual value will be allowed under Section 24
while computing the NAV of SOP.
F. Deduction of interest : -
(i) Amount deductible
Interest payable on funds borrowed for acquisition , construction repair,
renovation or reconstruction of two self -occupied houses will be allowed
subject to following limits in aggregate for both the houses: -
a) Funds borrowed prior to 01 -04-1999 to acquire, construct, renew or
restructure the property – Rs 30,000.
b) Funds borrowed on and after 01 -04-1999 -
I) Rs 30,000 if the funds are borrowed for repairs of the property ,
and
II) Rs 2,00,000 if the funds are borrowed to acquire or construct the
property and such acquisition or co nstruction of the property is
completed within 3 years from the end of the financial year in which
capital was borrowed.
(ii) Pre-construction interest
Interest payable on capital borrowed to acquire or construct the house
property, for the period prior to the previous year in which the property
has been acquired or constructed, will be allowed as deduction in five
equal installments beginning from that previous year and for each of the
four immediately succeeding previous years:
(iii) Interest allowed under other pr ovisions
Amount of interest will be reduced to the extent it is allowed under any
other provision of the Act.
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78 (iv) Interest on new loan to pay old loan :
Interest payable on new loan taken by an assessee subsequently to make
repayment of the capital borrowed for construction or acquisition etc. will
also be allowed. However, any interest payable on interest will not be
allowed as deduction.
(v) Accrual basis
Interest on capital borrowed is allowed as deduction when it is
accrued. Actual payment during the previo us year is not necessary.
(vi) Other provisions
I. Brokerage or commission paid to arrange a loan for house
construction is not allowed as deduction.
II. Interest payable on loan taken for construction etc. of a property is
allowed and not on any loan taken for p ayment of interest.
III. Any loss arising under the head ‘income from house property’ may
be set -off against the other heads in the same assessment year for a
period of 8 years from the year of loss.
IV. The assessee is required to furnish a certificate, from t he person to
whom any interest is payable on the capital borrowed, specifying
the amount of interest payable by the assessee for the purpose of
such acquisition or construction of the property, or, conversion of
the whole or any part of the capital borrowe d which remains to be
repaid as a new loan.
Illustrations
1. On 01 -06-2018, A borrows Rs 15 lakh @ 8% p.a. to construct a house
for own residence. The construction is completed in May 2021.
The construction is completed within three years of taking the loan,
Interest of Rs 1,20,000 for the financial year 2021 -22 will be allowed.
Interest for the previous financial year 2018 -19, 2019 -20 and 2020 -21 Rs
3,40,000 will be allowable in five equal installments of Rs 68,000 for five
years beginning from the finan cial year 2021 -22 (Assessment Year 2022 -
23) subject to a limit of Rs 2,00,000.
2. Assuming the capital was borrowed, the deduction would be restricted
to Rs. 30.000.
3. If capital borrowed is used for renovation or repairs of the bungalow,
the deduction wou ld be restricted to Rs. 30.000.
4. If the construction of the house could not be completed till December
2021 i.e. within three years of taking loan, the deduction will be restricted
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79 (iii) Let-out Properties (LOP)
Following principles will be applica ble for determination of annual value
of properties let out including deemed to be let out self -occupied
properties (DLOP)
1. Net Annual Value (NAV)
Vide Proviso to Section 23(1). net annual value of a let -out property
value (NAV) is arrived at by deducting Municipal taxes actually paid
by the owner from GAV.
NAV= GAV - Municipal Taxes paid by the owner.
Two important points to be noted are: -
I) Municipal taxes will be deducted on payment basis, not accrual
basis.
II) Municipal taxes paid or borne by the tena nt are not deductible
2. Deductions under Section 24:
a) Standard deduction
Standard deduction to the extent of 30% of the net annual value is
allowed in respect of repairs and collection charges irrespective of whether
the assessee has actually incurred the e xpenses or not. However, this
deduction will not be allowed in the hands of the owner of the property, if
the repairs are borne by the tenant,
(b) Interest on funds borrowed
Deduction in respect of interest on funds borrowed for acquisition,
construction , renewal, repairs or reconstruction of let -out properties is
allowable on accrual basis without limit of Rs 30,000/ 2,00,000 as in the
case of SOP.
As in the case of SOP, 1/5th of the pre -construction interest is allowed as
deduction for each of the 5 yea rs from the date of the loan to the end of the
previous year in which the construction was completed.
Illustration
On 01 -10-2014 A borrowed Rs 10,00,000 @ 12% p.a. for the construction
of his house. The house was finally constructed on 31 -03- 2017 and let
out.
The construction of house is completed within the three years of
borrowing funds. Hence interest for pre -construction period 01 -10-2014
to 31 -03- 2017 amounting to Rs 3,00,000 will be amortized in five equal
installments of Rs 60,000 each from 2018 -19 to 2022 -23.
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80 (iv) Property let -out and self -occupied for part of the year
A property let -out for whole or any part of the year and self -occupied for
the remaining part of the year, shall be treated as let -out property and
computation will be made accor dingly by comparing actual rent with the
fair rent for the whole property under Section 23(1).
It will not be treated as SOP as Section 23(3) makes it clear the SOP shall
not be let -out for any part of the year nor should any benefit be derived
from it.
(v) Property partly let -out and partly self -occupied
If a part of the property – say one or two floors or few rooms have been let
out and another part of the property is self - occupied, then for each portion
the calculation will be made separately. Relevant exp enses like property
taxes and interest will be allocated suitably for each portion and
deductions will be allowed separately for each portion.
Note the difference between properties let out /SOP for split period and
with split portion used for letting out/ SOP.
(vi) Co-ownership – Section 26
A property owned by more than one owners having definite and
ascertainable share therein, will not be assessed as an association of
persons but share of each owner shall be included in his individual
income. If co -owners them selves occupy the property, share of each owner
will be treated as nil. Each of the co -owners would be entitled to the
deduction in respect of interest subject to the limit of Rs 30,000 or Rs
2,00,000 as the case may be.
4.6 MISCELLANEOUS
A. Recovery or real ization of past arrears/ unrealisd rent
Under Section 25A,any arrears of rent or any unrealisd rent will be
taxable in the year when it is realised or recovered irrespective of whether
the assessee does or does not own the property in the that year. S uch rent
shall be eligible for deduction @ 30% in that year.
B. TDS
Interest paid outside India to a non -resident without deduction of tax at
source will not be allowed as deduction.
C. Set off and carry forward of losses :
Any loss arising under the head “Inc ome from House Property” in respect
of interest only can be set off against income arising from other heads and
the remaining loss will be allowed to be set off and carried forward for a
period of 8 assessment years
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Income From House Property Sections 22 - 27
81 D. No other Deductions allowed;
No deduct ion would be available in respect of charges like electricity, land
revenue, ground rent, insurance, etc. even though they may be actual
outgoings since the standard deduction of 30% is supposed to take care of
all expenses.
4.7 ILLUSTRATIONS:
1. Find out th e Gross Annual Value in the following cases: -
Particulars Property I II III IV V
Municipal value 8000 8000 8000 8000 8000 Rent received 8200 8200 8700 8700 9000 Fair rental value 8600 8600 8600 8800 9100 Standard rent under
[Rent Control Act] NA 8500 8500 8500 10300
Solution:
vi. I II III IV V
Municipal value 8000 8000 8000 8000 8000 Rent received 8200 8200 8700 8700 9000 Fair rental value 8600 8600 8600 8800 9100 Standard rent NA 8500 8500 8500 10300 Gross Annual Value vii. 8600 8500# 8700@ . 8500 # . 9100$ # Fair rent limited to standard rent Rs 8,500
@ Actual rent even if it’s more than standard rent.
$ Standard rent is only a limiting factor, hence ignored.
2. Ashok owns two houses. He lets out House A throughout the previous
year and occupies Hou se B for nine months for own residence and let -out
for three months on a monthly rent of Rs 5,000. Determine Taxable
income, given the following details: -


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82 House A House B
Municipal value 30,000 60,000 Fair rent 40,000 50,000 Rent received 48,000 15,00 0 Municipal taxes paid 6,000 4,000 Insurance premium (not yet paid) 2,000 2,500 Ground rent 1,000 1,500 Maintenance charges 3,000 3,500 Electricity bill 5,000 6,000
Solution: House A House B
Gross annual value AR -House A
( municipal value for B 48,000 60,000 Less : Municipal taxes paid 6,000 4,000 Net annual value 44,000 56,000 Less : Deduction under Section 24 xvi. Repairs & Collection charges @ 30% 13,200 22,400 Taxable Income 30,800 33,600
4.8 SELF EXAMINATION QUESTIONS :
1. What is annual value? How is it determined?
2. Discuss briefly the various expenses and allowances that are
deductible under the head “Income from House Property”
3. Mention the amounts which are not deductible from Income from
House Property
4. Write a short note on prope rty owned by co -owners
5. Explain briefly (a) Owner of a house property (b) A member of a co -
operative society (c) Annual Value
6. What do you mean by “Self -occupied house property”? How is the
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83 7. Explain briefly, house pro perty “deemed to be let -out” and how the
income from such house property is determined?
8. Is interest paid on a housing loan out of India allowable as a
deduction?
9. Explain with reason if the Interest paid by the assessee on borrowed
capital in the constructi on of the property, till the date of letting out an
admissible expenditure.
10. Discuss the provisions of regarding unoccupied residential house?
11. Enumerate and explain if any , the exceptions to the rule that
Ownership is the criterion for assessment of Incom e from house
property under Section 22”
12. Discuss tax liability of arrears of rent.
13. Explain the provisions of the Income Tax Act with respect to the
computation of income from a self -occupied house property.
14. Explain the tax treatment of unrealized rent.
15. Lakdawala completed construction of a residential house on 1.4.1999.
Interest paid on loans borrowed for construction during the 2 year
prior to completion was Rs 20,000/ - and for the current years was Rs
10,000 The house was let out on a monthly rent of Rs. 4,000/ -.
Annual Municipal tax was Rs. 6,000/ -. Interest paid during the year is
Rs. 15,000/ -. Amount spent on repairs is Rs. 2,000/ -. Fire insurance
premium paid is Rs. 1,500/ - p.a. The property was vacant for 3
months. Annual letting value is Rs. 30,000/ -. Compute the ”Income
from House Property” for AY 2022 -23 (Ans. Rs. 8,500 )
16. Ram owned a house property at Chennai which was occupied by him
for the purpose of his residence. He was transferred to Mumbai in
June 2021 and therefore he let -out the property wi th effect from July
1, 2021 on a monthly rent of Rs. 3,000/ -. The municipal tax payable
in respect of the property was Rs. 6,000/ - of which only 50% was paid
by him before 31.3.2022. Interest on money borrowed for the
construction of the property amounted to Rs. 20,000/ - Compute the
income from house property for the AY 2022 -23( Ans. Loss Rs 8250 )
17. Arvind commenced construction of his residential house intended
exclusively for his residence on 1.11.2020. He raised a loan of Rs.
5,00,000/ - at 10% interest fo r the purpose of construction on
1.11.2017. Finding that there was an overrun in the cost of
construction he raised a further loan of Rs.8 lakh at the same rate of
interest on 1.10.2018. What is the interest allowable under Section 24
assuming that the con struction was completed on 31.3.2021?
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84 18. S owns a residential house actually let out for 10 months for total rent
of Rs. 25,000. Fair rent of this house is Rs. 27,000 and municipal
ratable valuation is Rs. 24,000. Total outgo on account of this house
included repairs of Rs. 9,000, Municipal taxes of 18 months Rs. 9,000
and insurance premium of Rs. 1,500. Interest on funds borrowed
amounted to Rs. 1,75,000.
He also owns another residential house at Andheri, which is used for
own residence. Fair rent of this house is Rs. 80,000 and municipal
ratable valuation is Rs. 75,000. Total outgo on account of this house
included repairs of Rs. 6,000, Municipal taxes Rs. 18,000 and
insurance premium of Rs. 1,50 0. Construction of this house was
complete in 2019 from the funds borrowed from HDFC. During the
current year, interest amounting to Rs. 90,000 was paid for the current
year and Rs. 60,000 for the last year. A further interest of Rs. 65,000
was paid on loa ns taken for renovation necessitated due to heave
rains. The interest pertains equally to this year as well as the last year.
Compute income from House Property
(Ans: L.O.P - loss 1,63,000 , SOP 1,50,000 –interest paid )
19. State with reason whether the foll owing incomes will be taxable as
income from house property.
a) R lets out his house to Y for using it as his office.
b) R uses his house as the godown to store his factory goods.
c) R rents out his property as residential quarters to the workers in his
factory at a nominal rent of Rs.500 p.m.
d) R enters into a written agreement to purchase a property from Y for
Rs. 5,00,000 . He has paid the consideration and taken the possession
of the property, but the property is yet to be registered in the name of
R.
e) R owns a pr operty, which is given on lease to Y for a period of 6
years, lease rent being Rs.10,000 per month. Y has a right to get the
lease renewed for a further period of 6 years.
f) R owns a property, which is given on lease to Y for a period of one
month, Y has a r ight to get the lease renewed for a period of one
month, in each subsequent month, and such renewal is possible with
mutual consent till 2022 .
g) R owns a property, which is given on rent to Y. Y annually pays
Rs.1,50,000 as rent of the building as well as th e charges for different
services ;lift, security, etc. provided by R.
h) R owns an air -conditioned furnished lecture hall. It is let out, annual
rent being Rs 5,00,000, which includes rent of building as well as rent
of air conditioner and furniture.
(Ans: a, d, e, f, and g]
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85 5
PROFITS AND GAINS OF BUSINESS OR
PROFESSION (Sections 28 to 44)
Unit Structure
5.1 Introduction and objective
5.2 Concept of business & Profession
5.3 Scheme of computation
5.4 Deductions expressly allowed under the Act
5.5 General deductions
5.6 Illustrations
5.7 Self-Assessment Questions
5.1 INTRODUCTION AND OBJECTIVE
The third and one of the most important head of income is “Profits and
gains of business and profession” in as much as this head covers the entire
commercial activity of the nation in their different forms , types and
variants such as trade, commerce, manufacture, business profession,
vocation and any adventure in the nature of trade or manuf acture.
This lesson will cover the detailed structure for computation of income
under this head, general and specific deductions allowable under this head
and also items not allowed as deduction to the extent contained in Sections
28 to 32, 35 , 36, 3 7, 40, 40A, 43B.
5.2 CONCEPT OF BUSINESS AND PROFESSION :
2.1 Definitions
2.1.1. Business :
Section 2(3) defines “business” in any inclusive manner:
“Business includes any trade, commerce, manufacture or any adventure
or concern in the nature of trade, commerc e or manufacture.”
The definition includes “business” not only in its general commercial
sense but also several other activities, namely - trade, commerce,
manufacture and any adventure in the nature of trade, commerce or
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86 Business, trade an d commerce refer to buying and selling of goods or
services for profit and other incidental activities, manufacturing means
producing new goods or articles.
2.1.2. Profession
Section 2( 36) defines “profession ” also in an inclusive manner viz.
“Profession " inc ludes vocation”.
“Profession’ in common parlance means rendering of skilled services like
as those of doctors, architects, lawyers, chartered accountants or other
professionals.
Vocation means a specified occupation, profession, trade, calling or
career especially a religious one such as services of management gurus,
yoga gurus, astrologers, tarot readers, palmists priests, plumbers,
mechanics priests or preachers delivering sermons or discourses or
performing havan or pooja etc.
2.1.3. Adventure
The phrase “ Adventure in the nature of trade, commerce or manufacture”
indicates that business or profession need not be organised, systematic or
regular. A single act may constitute a business or profession.
For instance, when a land was purchased, developed and s ubdivided in
smaller plots for resale, it was held an adventure in the nature of trade or
commerce or manufacture.
2.1.4. Provisions to apply uniformly
Income under the head “Profits and gains of business and profession” will
be uniformly chargeable to tax reg ardless of the following considerations: -
a) Type or description whether any activity is business, profession,
vocation or an adventure in the nature of trade, commerce or manufacture
although there are some provisions such as presumptive tax applicable to
different activities.
b) Legality or illegality whether the income is from a legal and
legitimate business or profession or from any illegal , immoral,
illegitimate or criminal activity such as theft, bribery, gambling,
smuggling, extortion or other crimin al or illegal activities.
c) Regularity or irregularity whether the business or profession is
regular, irregular or occasional. Even a single activity or adventure will be
chargeable under this head if it is in the nature of trade, commerce or
manufacture .
d) Organised or unorganised ; and
e) Whether or not requires personal talents or skill.
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87 5.3 SCHEME OF COMPUTATION -Sections 28 -29
3.1. Chargeable income - Section 28
Section 28 is the charging section. It defines the scope of income under the
head profits and gains of business or profession as the aggregate of all
income from different sources specified below in this section in respect of
a business or profession carried on by the assessee any time during the
previous year: -
(i) the profits and gains of any bus iness or profession which was
carried on by the assessee at any time during the previous year;
Compensation for termination or modification of contracts
(ii) any compensation or other payment due to or received by any person
at or in connection with the termi nation of contract modification of
the terms and conditions relating thereto for ;
a. managing the whole or substantially the whole of the affairs of an
Indian company,
b. managing the whole or substantially the whole of the affairs in India
of any other com pany,
c. holding an agency in India for any part of the activities relating to
the business of any other person by any person,
d. vesting in the Government, or in any corporation owned or
controlled by the Government, under any law ,of the management of
any pro perty or business ;
(iii) income derived by a trade, professional or similar association from
specific services performed for its members;
Export incentives
(iiia) profits on sale of an import licence ;
(iiib) cash assistance received or receivable by an y person against
exports under any scheme of the Government of India ;
(iiic) duty drawback in respect of customs or excise duty person against
exports ;
(iiid) any profit on the transfer of the Duty Entitlement Pass Book
Scheme (DEPB);
(iiie) any pr ofit on the transfer of the Duty Free Replenishment
Certificate;
(iv) value of any benefit or perquisite, whether convertible into money or
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88 (v) any interest, salary, bonus, commission or remuneration due to or
received by a partner of a firm as adjusted by any amount not
allowed to be deducted under section 40(b);
Non- compete agreement
(va) any sum, whether received or receivable, in cash or kind, under an
agreement for not carrying out any activity in relation to any business or
profession or not sharing any know -how, patent, copyright, trade -mark,
licence, franchise or any other business or commercial right of similar
nature or information or technique likely to assist in the manufacture or
processing of goods or provision for services if such amount is -
 chargeable under the head "Capital gains" or
 received as compensation, from the multi -lateral fund of the
Montreal Protocol on Substances that Deplete the Ozone layer under the
United Nations Env ironment Programme(UNEP), in accordance with the
terms of agreement entered into with the Government of India.
(vi) any sum received under a Keyman insurance policy including the sum
allocated by way of bonus on such policy.
(vii) any sum, whether received or receiva ble, 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 (Scientific R esearch) in earlier years
(viii) Amount recovered on account of bad debts allowed in the earlier
years;
(ix) Speculation Business
Speculation bu siness carried on by an assessee is deemed to be distinct
and separate from any other business if speculative transactions, which are
settled by payment of difference in price of goods or securities and not by
actual delivery are of such a nature as to con stitute a business.
(x) Income on receipt of capital asset or stock in trade by specified
person from specified entity - Section 9B
As per the newly inserted section 9B , if there is any -
1. transfer of any capital asset or stock in trade or both
2. by a specified entity being a firm, AOP , BOI but not a company or
a co-operative society
3. to a specified person being any partner or member thereof
4. in connection with any dissolution or reconstitution of such entity,
then any profits or gains arising f rom such transfer of capital asset
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Profits and Gains of Business or Profession (Sections 28 to 44)
89 “Business or Profession” respectively of such specified entity of the
previous year in which such capital asset or stock in trade or both
were received by the specified person.
Other points
1. Fair market value of the capital asset or stock in trade or both on the
date of its receipt by the specified person shall be deemed to be the full
value of the consideration received or accruing as a result of such deemed
transfer of the capital asset or stock in trade or both by the specified entity.
2. Reconstitution of the specified entity means,
(a) Retirement of one or more partners or members, of such entity; or
(b) Admission of one or more new partners or members, in s uch
specified entity along with one or more partners or members,
continuing as partner or partners or member or members after the
change;
(c) Change in share of some or all of the old partners or members
continuing.
3.2. Computation of business income –Sectio n-29
Section 29 spells out the mode of computation of taxable income
under this head by deducting from the aggregate income, expenses
incurred by the assessee during the previous year for earning such income
subject to the following principles or conditi ons:-
a) Expenses will not be deducted, if the business or profession is closed
down during the previous year.
b) Expenses incurred before setting of the business will not be allowed
except where specifically provided by law.
c) Some expenses are fully deductib le, while others are deductible
only partially ;
d) Similarly, some deductions are assessee -specific i.e. allowable to
some classes of assessees e.g. a company or a firm but not to others ;
e) Some deductions are without conditions, while others are subject to
fulfillment of conditions attached with the deduction.
f) The expenses may be deducted in accordance with the conditions
attached in section 28 - 43D, viz.
(i) Sections 30 to 35 provide expressly for deduction of expenses in
some cases
(ii) Sections 36 and 37 pr ovide for general deductions.
(iii) Sections 40, 40A and 43B provide for disallowance of expenses in
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90 (iv) Sections 44A to 44D deal with the computation of income on
presumptive basis in case of smaller assessees like professionals,
retailers, insurance agents, transporters etc.
3.3. Method of Accounting: (Sec 145 / 145A)
As per section 145(1), income chargeable under the head “Profits gains of
business or profession” or “income from other sources may be computed
according to either cash or mercantile system of accounting regularly
employed by the assessee.
a) Mercantile system or accrual system of accounting
Under the mercantile or accrual system of accounting, income and
expenditure accrued during the previous year will be recorded in the books
and the taxable income from profits or gains from such a business or
profession will be the difference between the expenses or income accrued
during that previous year.
Actual receipt of the income or payment of expenses duri ng the year is not
mandatory. Instead, such income may be received, or expenses may be
paid in the previous year or in a year preceding or following the previous
year.
b) Cash system of accounting
Under the cash system of accounting, incomes actually receiv ed, and
expenses actually paid during a particular previous year will be recorded
and considered for computing taxable profits or gains from a business or a
profession. Net profit under the cash system will be equal to the
difference of incomes received a nd expenses paid during the accounting
year whether such receipts and payments relate to that particular year or
some other year or years.
c) Hybrid system of accounting
Hybrid system of accounting combines the features of both the methods.
Accounts may be m aintained as per the accrual or mercantile system, but
some items of income or expenses on cash or receipt basis or vice versa.
Even statutorily, section 43B provides for deduction of specified statutory
dues only when they are actually paid although the m ethod of accounting
employed may be mercantile.
Illustration
A earns commission in the financial year 2020 -21 but receives it in the
year 2021 -22. Under the mercantile system, the commission will be taxed
in the year of earning it 2020 -21 assessment year 2021 -22 although not
actually received during that year.
Under the cash system, it would be taxed in the year of actual receipt
2021 -22 or assessment year 2022 -23 although not earned in that year.
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Profits and Gains of Business or Profession (Sections 28 to 44)
91 d) Income Computation & Disclosure Standards
As per Se ction 145(2), the Central Government may notify in the official
gazette from time to time Accounting Standards to be followed by any
class of assessees or in respect of any class of income. Such accounting
standards are called Income Computation and Disclo sure Standards
(ICDS). So far, the CBDT has notified 10 Income Computation and
Disclosure Standards (ICDS), effective from assessment year 2017 -18
onwards.
5.4 DEDUCTIONS EXPRESSLY ALLOWED
The following expenses are expressly allowed as deductions agains t
profits and gains of business or profession:
4.1 Rent, Rates, Taxes, Repairs & Insurance for Building - Section 30
Vide section 30, rent, rates, taxes, repairs and insurance for premises, used
for the purposes of the business or profession are deductible as under: -
a) The amount paid as rent or on account of repairs of in respect of the
premises occupied by the assessee as tenant.
b) The amount paid on account of current repairs to the premises
occupied by the assessee otherwise than as a tenant,
c) Any sums p aid on account of land revenue, local rates or municipal
taxes subject to the provisions of section 43B ; and
d) The amount of insurance premium paid against risk of damage or
destruction of the premises.
The deduction is subject to the following modificat ions: -
(i) Capital expenses are not allowed as deduction under this section.
(ii) Where a part of any premises is partly used as dwelling house by the
assessee, the deduction will be restricted to proportionate amount of
rent or repairs determined by th e assessing office applicable the part
of the premises used for business/ profession - section 38.
4.2 Repairs & Insurance of Machinery, Plant & Furniture - Section
31:
Vide section 31, following deductions are allowed in respect of repairs
and insurance of machinery, plant or furniture used for the purposes of the
business or profession: —
(i) The amount paid on account of current repairs thereto if such expenses
are revenue expense, not capital expenses;
(ii) The amount of any insurance premium paid agai nst risk of damage or
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92 In a case, where the building, machinery, plant or furniture is not
exclusively used for the purposes of the business or profession, the
deduction shall be restricted to a fair proportionate part thereof which th e
assessing officer may determine, having regard to the user of such
building, machinery, plant or furniture for the purposes of the business or
profession.
Machinery hire charges are allowed under section 37 as residual expenses
not under this section.
4.3. Depreciation - Section -32:
4.3.1 Conditions for claiming depreciation :
Under section 32 an assessee is entitled to claim deduction in respect of
depreciation in computing the total income if he fulfills the following
conditions: -
(i) Claim not necessary
Depre ciation will be allowed as deduction irrespective of whether or not
the assessee has made a claim for deduction so long as the conditions for
the allowance of depreciation are satisfied.
(ii) Depreciation allowed on eligible assets only :
Depreciation will be a llowed only on the following assets called
depreciable assets:
Tangible assets ; being
Buildings, machinery, plant or furniture,
Intangible assets being
Know -how, patents, copyrights, trademarks, licences, franchises or any
other business or commercial rights of similar nature.
“Building” means only the superstructure, not the land on which it is
constructed.
“Plant” includes ships; vehicle, books including technical know -how;
scientific apparatus and surgical equipment used for the purpose of
business or profession but does not include tea bushes or livestock or
buildings or furniture and fittings.
(iii) Assets not eligible for depreciation
Following assets are not eligible for depreciation:
a) Foreign car acquired between 01 -03-1975 and 31 -03- 2001.
However foreign cars purchased on or after 01 -04-2001 will be eligible
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Profits and Gains of Business or Profession (Sections 28 to 44)
93 b) Any machinery or plant if the actual cost thereof is allowed as a
deduction in one or more years under an agreement entered into by the
Central Government under section 4 2.
(iv) Ownership – Partial ownership :
Assessee must own the depreciable asset wholly or partly as the sole
owner or the co -owner thereof. In case of an asset owned by different
assessees, each co -owner will be entitled to depreciation on his
contribution to the cost of asset.
Exception:
Depreciation will be allowed on capital work or renovation or construction
of any structure in building though not owned by the assessee, which is
held on lease or other right of occupancy and the new structure is owned
by the assessee
(v) Purpose or user of the assets
The assessee must use the asset for the purpose of his business or
profession.
(vi) User of the assets during the previous year :
If an asset acquired by the assessee during the previous year, is put to use
for the purposes of his business or profession for a period of -
 180 days or more, the deprecation will be allowed at full rate
prescribed.
 180 days; i.e. 179 days or less; depreciation will be allowed @ 50% of
the rate prescribed.
The condition is applicabl e on an a sset acquired during the year not on
other asset. This is because the machinery would undergo wear and tear
even if it was not put to actual use
Illustration
A Machine is purchased on 31 -03-2021 is put to use on 01 -04- 2021.
No depreciation wi ll be allowed depreciation in assessment year 2021 -22
because the machine though acquired, is not put to use during the previous
year 2020 -21. Full depreciation will be allowable assessment year 2022 -
23
4.3.2 Additional Depreciation - Section 32(1)(iia)
Section 32(1)(iia) read with Sec 32AD provides for allowing additional
depreciation over and above the normal depreciation as per the following
scheme: -
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94 (i) Eligibility assessee
Any assessee being an industrial undertaking engaged in the business of
manufacture o r production of any article or thing or transmission of
power.
(ii) Rate of additional depreciation allowable
a) 20% of the actual cost of new plant or machinery (not being ships or
aircrafts) acquired and installed after 31st March, 2005.
b) 35% of the actual cost in case of the assessee being a manufacturing
undertaking or enterprise set up in the notified backward areas of the
States of Andhra Pradesh, Bihar, Telangana and West Bengal on or
after 1st April, 2015 and the Assessee acquires and installs new
plant & machinery between 01 -04 2015 & 31 -03-2020.
c) 50% of the above rates i.e. 10% or 17.5%, where the plant or
machinery is acquired and installed for less than 180 days of the
relevant previous year and the balance 50% will be allowed in the
immediately s ucceeding previous year
(iii) Assets not be eligible for additional depreciation: -
a. Ships and aircrafts;
b. Second hand machinery used by any other person in or out of India;
c. Machinery installed in a residential premises or a guesthouse;
d. Any office appliances or road transport vehicles;
e. Any plant or machinery, actual cost of which is already allowed as a
deduction e.g. asset for scientific research; and
f. Buildings, furniture & fittings and old plant
4.3.3 Important Terms :
(i) Block of Assets
As per section 2(11) “block of assets” means a group of assets falling
within a class of assets comprising of —
a) Tangible assets, being buildings, machinery, plant or furniture;
b) intangible assets, being know -how, patents, copyrights, trademarks,
licenses, franchises or any other business or commercial rights of similar
nature, not being goodwill of a business or profession in respect of which
the same percentage of depreciation is prescribed.
Thus by definition, block of assets is a classification of assets based on the
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Profits and Gains of Business or Profession (Sections 28 to 44)
95 (a) Class of asset viz. building, plant, furniture or machinery to which
the asset belongs to ; and
(b) Rate applicable on the asset within that class.
 The assets within a class eligible for same rate will form a block of
assets but
 not assets from di fferent groups having same rate nor
 the assets from different classes having same rate.
 A block may have a single asset in it.
(ii) Written Down Value (WDV) of an asset
Written down value of an asset means:
a. actual cost to the assessee of the asset acqui red in the previous year,
and
b. the actual cost to the assessee less all depreciation actually allowed
thereafter.
(iii) Written Down Value (WDV) of block of assets
Written down value of any block of assets, means
a. the opening WDV of the block of
 the assesse e or
 the previous owner or entity, in case of slump sale, amalgamation,
succession of business , demerger, conversion into company etc. or
holding/subsidiary company
b. adjusted by: -
(i) the increase by the actual cost of any asset falling within that
block, acquired during the previous year; and
(ii) the reduction of the moneys payable in respect of any asset falling
within that block, which is sold or discarded or demolished or
destroyed during that previous year together with the amount of the
scrap val ue, if any, so, however, that the amount of such reduction
does not exceed the written down value as so increased.
(iii) at opening WDV for A.Y. 2021 -22 of block of asset under which
“goodwill of a business or profession” is included shall be reduced
by the WDV of goodwill of a business or profession.
Other important points:
(i) Any other things or benefit which can be converted in terms of money
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96 (ii) If the resultant block value figure is negative because the sale
proceeds exceed the origina l block value plus increases, it will be
treated as short term capital gain.
(iii) If depreciation was claimed on goodwill forming part of the block of
the assets in the A.Y. 2020 -21; then while computing opening WDV
for A.Y. 2021 -22, the amount of reduction cal culated in above shall
not exceed the WDV of such block of assets. A.Y. 2022 -23 on wards
there will be no depreciation on goodwill.
Illustration
 Opening value of block having four machines (depreciation @ 15%) Rs
7,00,000 as at 01 -04-2021.
 On 01 -06-2021 , another machine Purchased with depreciation @ 25%
for Rs 3,00,000.
 Sold an existing machine for Rs 6,00,000. Ascertain depreciation for the
A.Y.2022 -23 and the closing value of block as on 31 -03-2022.

Solution Rupees
WDV as on 1 -4-2021 7,00,000 Add: Purchase during the year 3,00,000 10,00,000 Less: Sales during the year 6,00,000 Adjusted Block 4,00,000 Depreciation @ 15 per cent 60,000 WDV of block as on 31 -3-2022 3,40,000
(iv) Actual Cost
Actual cost is determined on the following p rinciples
i. Subsidy or grant to be reduced to determine actual cost
As per section 43(1), Actual cost means the actual cost of the assets to
the assessee, reduced by that portion of the cost thereof, if any, as has been
met directly or indirectly by any other person or authority such as subsidy
or grant and expenses incurred for acquiring the asset or installation
Grant or subsidy whether of revenue or capital nature are taxable as
income, unless it has been reduced from the actual cost of a depreciable
asset.

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97 Illustration
ABC purchases a machine for Rs 12 lakh with non - refundable subsidy of
Rs. 3 lakh from the Government Actual cost of the machine will be Rs. 9
lakh [ Rs. 12 lakh -Rs 3 lakh].
ii. Scientific Research Asset
Actual cost of asset purcha sed for scientific research and brought into
business use will be Actual Cost minus deduction available under section
35.
Illustration
Purchases a machine for scientific research for Rs 12 lakh with the non -
refundable subsidy of Rs. 5 lakh from SIDBI. T he machine is eligible for
deduction under section 35 to the extent of Rs. 3 lakh. Actual cost of the
machine will be Rs. 4 lakh i.e. Rs. 12 lakh - Rs 5 lakh - Rs. 3 lakh.
iii. Gift, inheritance etc.
Actual cost of asset acquired by way of gift or inheritance will be the
WDV to the previous owner.
Illustration
If A gifts away to B the machinery in the above illustration, the cost of
machine to B will also be Rs. 4 lakh, which was the cost to A.
iv. Enhanced cost
Where in the opinion of the assessing officer, an asset is acquired at an
enhanced cost to claim more depreciation and reduce tax liability, actual
cost will be equal to the actual cost of asset used and transferred earlier
but now reacquired or cost of repurchase, whichever is less.
Illustration
A sol d a machinery with WDV of Rs 9 lakh for Rs. 10 lakh and
repurchased it after two years at the prevailing market value of Rs. 20
lakh. If the assessing officer is of the opinion that the machine is
repurchased for claiming more depreciation, he can ignore the enhanced
purchase value of Rs. 20 lakh and treat Rs. 9 lakh as the actual cost.
4.3.4 Mode of computation
Following principles are important in computing the depreciation:
 Depreciation is calculated on the WDV of the block after adjusting the
sales and purchase during the year in that block.
 Rates of depreciation for different assets are taken as prescribed in
rules.
 Depreciation will not be allowed on a block if - munotes.in

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98  WDV of that block comes to zero, even if some assets in that block
may be existing.
 No assets are left in the block and the become empty, or ceases to exist.
WDV of the block will be treated as short term loss.
 Depreciation will be allowed at 50% of the prescribed rate, if the asset
is put to use for less than 180 days in the year of ac quisition.
 Straight Line Method (SLM ) method is applied in case of the assets of
the power companies or the undertakings engaged in generation or
generation and distribution of power at the prescribed rates of
depreciation on the actual cost of the asse ts.
 Additional depreciation of 20% or 35% on actual cost is allowable as
discussed above.
 Depreciation will not be allowed on scientific research assets, entire
cost of which is allowed as deduction under section 35.
4.3.5 Succession of Business
Successio n means takeover of a business by another new entity e.g.
 Conversion of a firm or sole proprietor to company -Section
47(xiii)/(xiv),
 Succession of a private or unlisted public company, by limited
liability partners hip- Section 47(xiiib), or
 Amalgamatio n - deme rger- succession of business - Section 170.
In such cases, aggregate depreciation for the year will not exceed the
amount of depreciation, had such event not taken place and such
depreciation shall be apportioned between the old and new entity
Illustration
Under a scheme of amalgamation, A Ltd, transfers to B Ltd, machinery
having WDV of Rs 7,30,000 on 1 -08-2021. Calculate the depreciation in
the hands of A Ltd. & B Ltd. If rate of depreciation is 10%.
Solution:
 Depreciation for the full yea r if the ama lgamation has not taken place
Rs. 73,000 [10% on Rs. 7,30,000 ]
 Aggregate depreciation for assessment year 2021 -22 cannot exceed
Rs. 73000


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Profits and Gains of Business or Profession (Sections 28 to 44)
99  Pro rata a llocation of depreciation for the two periods :
Pre amalgamation – 122/365 X 73000 = Rs 24,400
[01-04-2021 to 31 -07-2021= 122 days] Post amalgamation – 243/365 X
73000 = Rs 4,8600
[01-09-2021 to 31 -03-2022=243 days]
4.3.6 Depreciation to be allowed even if no claim made
As per explanation 5 to section 32, the depreciation will be allowed
whether o r not the assessee has claimed the deduction in respect of
depreciation in computing his total income
4.3.7 Loss on Sale of Machinery
When an asset is sold, discarded, demolished or destroyed in the previous
year following rules apply:
a) The block has some assets and some value left in it, that is the block
does not become empty because any assets are sold from it and other
assets are still existing in it and the value of the block also does not
become zero also some value is still left in the block, sales proceed s -
scrap value will be deducted from the value of the block. Depreciation will
be allowed on the on the resultant value of the block after increase by the
actual cost of assets acquired , if any.
Illustration
A car in a block of 4 cars with opening W DV of Rs15 lakhs is sold for Rs.
5 Lakh. Rate of depreciation is 10%. The block has not become empty as
3 cars are still left in it, depreciation Rs 1 lakh will be allowed at 10% on
the resultant WDV of Rs 10 lakh in that block.
b) When the value of the block comes to zero, but assets still exist, but
the block has not become empty, depreciation will not be allowed.
Illustration
A car in a block of 4 cars with opening WDV of Rs15 lakhs is sold for
Rs. 15 Lakh. The value of the adjusted block will be zero. No
depreciation will be allowed although 3cars still exist in it.
c) If the sale proceeds are more than the adjusted WDV of the block,
the resultant surplus will be treated as short term capital gain regardless of
the fact that assets are still left in the block or the block is empty.
Illustration
In the above example, the car is sold for Rs 18 lakh; the resultant surplus
of Rs 3 lakh will be taxable as short - term capital gain.
d) If there are no assets left and the block becomes empty but the
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100  there will be no depreciation allowance and
 existing WDV will be treated as terminal loss or short term capital loss
due to cessation of the block as result of sales.
Illustration:
All assets in a block with opening WDV o f Rs 4 lakh sold for Rs 1.50
lakh. The block becomes empty as there are no assets in it. No
depreciation will be allowed and the balance of Rs 2.50 lakh will be
treated as terminal depreciation or short term capital loss
e) When the depreciation is allowed on the actual cost - WDV of the
assets of the undertakings engaged in generation or destitution of power
called power companies, following rules will apply:
 When an asset viz. any building, machinery, plant or furniture in
respect of which depreciation is allowed, is sold, discarded, demolished
or destroyed in the previous year not being the year in which it is first
brought into use, terminal depreciation will be allowed.
 Terminal depreciation is the deficiency or shortfall between the written
down value and the sales proceeds or moneys payable including scrap
value, insurance, salvage or compensation moneys payable in respect
thereof.
 Terminal depreciation is not allowed in the year in which it was first
brought to use.
 Such deficiency must be actually w ritten off in the books of the
assessee.
 Any surplus arising therefrom is called the balancing charge and taxed
as income under section 43.
 Any moneys received over and above the depreciation allowed will be
treated as capital gains under section 50A.
 Sale includes a transfer by way of exchange or compulsory acquisition
under any law in force for the time being but does not include a transfer
in a scheme of amalgamation.
Illustrations
1. Depreciation of Rs 70,000 was written off in respect of a machine
actual cost of which is Rs 1 lakh, is sold for Rs 18,000. Its WDV is Rs
30,000 (Rs.1,00,000 -70,000). Deficit Rs 12,000 (Rs.30,000 -18,000)
will be terminal depreciation.
2. If this machine is sold for Rs. 50,000, the surplus of Rs 20,000 (Rs
50,000 -30,000) wil l be the balancing charge - maximum to the extent
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Profits and Gains of Business or Profession (Sections 28 to 44)
101 3. If the sale price of this machine is Rs.1,25,000, leaving surplus of Rs
95,000 (1,25,000 -30,000), then there will be balancing charge of Rs.
70,000 being the amount of the deprec iation allowed and the balance
of Rs.25,000 will be treated as capital gain.
4.3.8 Unabsorbed Depreciation - Section 32(2)
Where the depreciation can not be wholly or partly deducted in any
previous year due to inadequate profits or gains the amount of
deprec iation not deducted is treated as unabsorbed depreciation and
allowed to be carried forward as per section 32(2) to the following
previous year and deemed to be part of allowance for that year.
Iif there is no such allowance for that previous year, amount so brought
forward shall be deemed to be the allowance for that previous year,
succeeding previous years and so on.
Unabsorbed depreciation is treated as part of the current depreciation and
can accordingly be set -off against any other head of income ev en where
the business has been discontinued.
Illustrations
1. Assuming depreciation allowable Rs 60,000 and profit before
depreciation is Rs 20,000 ,claim for depreciation will be allowed to the
extent of available profits i.e. Rs 20,000. The balance of Rs 40,000 will be
unabsorbed depreciation to be carried forward to the subsequent years.
2. Determine taxable income &unabsorbed depreciation :
Particulars Rs.
Business Income before depreciation) 13,00,000 Depreciation allowable as per Income Tax Act 18,00,000 Income from other sources 8,00,000 Solution :
Particulars Rs.
Business Income before depn.
Less: Depn. to the extent of profits 13,00,000 13,00,000 NIL Income from other sources
Balance of the current depreciation
(18,00,000 -13,00,000 ) 8,00,000 5,00,000 3,00,000 Taxable Income Rs. 3,00,000


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102 3. Assuming claim for depreciation is of Rs. 25,00,000. Solution :
Particulars Rs.
Business Income before Depn. Depreciation to
the extent of profits 13,00,000
13,00,000 NIL
Income from other sour ces
Unabsorbed Depreciation for the current year to
the extent of income 8,00,000
8,00,000 NIL
Taxable Income NIL Unabsorbed Depreciation to be carried forward to next year 25 lakh -13 lakh - 8lakh) 4,00,000
4. Ascertain value of block on 31 -03-2022 :
A. Written down value on April 1, 2021
Particulars & Depn Rate) Rs.
Plant A,B & C -20% 1,50,000 Plant D & E – 30% 2,40,000 Plant F – 40% 90,000 Building A & B -5% 2,00,000 Building C&D - 10% 7,00,000 Building E -Temporary Sheds E -100% 9,00,000
B. Purchase during the previous year 2021 -22
Date Particulars Rs.
02-04-2021 Plant G -40% 60,000 01-05-2021 Plant H - 20% 20,000 01-06-2021 Furniture -10% 60,000 01-08-2021 Building G - 10% 5,00,000 01-09-2021 Computer -60% 2,00,000 01-10-2021 Franchis e Rights -25% 8,00,000
C. Sales during the previous year 2021 - 22
DATE PARTICULARS RS.
31-10-2021 Plant C 25,000 31-01-2021 Plant D 15,000 01-06-2021 Furniture 50,000 06-03-2022 Building E 2,00,000
Temporary sheds were put to use in the previous y ear.
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103 Solution
Computation of Depreciation - Cost of Block
Block Rate Block
01-04-2021 Purchase Sales Block Dep. Block
31-03-2022
Plant A -B-C -H 20% 1,50,000 20,000 25,000 1,45,000 29,000 1,16,000
Plant D -E 30% 2,40,000 - 15,000 2,25,000 67,500 1,57,500
Plant F - G 40% 90,000 60,000 - 1,50,000 60,000 90,000
Building A& B, 5% 2,00,000 - - 2,00,000 10,000 1,90,000
Building C -D -G 10% 7,00,000 5,00,000 - 12,00,000 1,20,000 10,80,000
Building E 100% 9,00,000 - 2,00,000 7,00,000 0 0
Furniture 10% - 60,000 50,000 10,000 0 0
Computer 60% - 2,00,000 -- 2,00,000 1,20000 80,000
Franchise rights 25% - 8,00,000 - 8,00,000 2,00,000 6,00,000
Note: No depreciation will be allowed on block of temporary sheds, which
ceases to exist. Balance in the Block Rs 6,00,000 will be treated as short
term capital loss. Similarly, no deprecation will be allowed on furniture
purchased and sold in the same year.
5. Opening WDV of a block of assets consisting of three cars (rate of
depreciation @ 20%) is Rs. 5,00,000. Dur ing the year 2021 -22, new car is
purchased for Rs. 10,00,000 and an old vintage car was sold for Rs.
15,00,000. Compute depreciation for Assessment Year 2022 -23.
Solution
Computation of the value of Net Block
Particulars Rs.
Opening WDV of block -3 Cars 5,00,000 Add: cost of new car purchased 10,00,000 Total -4 cars 15,00,000 Less: sales price -1 car Sold 15,00,000 Closing Balance of block -3 cars 0 Depreciation allowable - WDV is nil
although 3 cars still exist in the block 0
6. What would b e the position, if all of the above four cars were sold for
Rs. 2,00,000 ?


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104 Solution
Computation of the value of Net Block
Particulars Rs.
Opening WDV of block -3 Cars 5,00,000 Add: cost of new car purchased 10,00,000 Total -4 cars 15,00,000 Less: sales price -4 cars sold 2,00,000 Closing Balance -No Cars 13,00,000 Depreciation allowable ( empty block) 0 Short term capital loss on sale of cars 13,00,000
4.4. Expenditure on Scientific Research –Sec. 35
Section 43(4) defines “scientific research ”, which means “any activity for
the extension of knowledge in the fields of natural or applied sciences
including agriculture, animal husbandry or fisheries”.
Following amounts are exempt under section 35.
A. Expenditure on in -house Research relating to own business –
Sections 35(1)(i) ,(iv) and 35[2]
Following are the salient features of the provisions;
(i) Deduction is allowed in respect of both revenue and capital expenses.
(ii) Revenue expenses include salaries of the research staff or research
material used in scientific research
(iii) Capital expenses include expense on plant, equipment, construction of
building other than cost of land.
(iv) Expense may be incurred during the previous year.
(v) Expenses incurred three years prior to commencement of business
will be allowed in the previous year in which the business is
commenced.
(vi) Expenses should be incurred in relation to assessee’s own business.
Expenses not related to assessee’s own business would not be
allowed.
(vii) Deduction is available, even if the relevant asset is not put to use for
research and development during the previous year.
(viii) An asset used in scientific research covered under section 35, is not
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Profits and Gains of Business or Profession (Sections 28 to 44)
105 depreciation when such asset is put to use for bus iness after cessation
of scientific research,
(ix) On sale of a scientific research asset the sales price of the asset or
amount allowed as deduction under section 35, whichever is less, will
be treated under section 41(3) as business income of the previous ye ar
in which the sale took place. The excess of sale price over cost (or
indexed cost) of acquisition will be treated as “Capital gains”.
Illustrations
1. AB Ltd incurs expenses on scientific research related to its business
@ Rs 1.50 Lakh per year from the f inancial years 2016 -17 onwards. It
commences the business during the financial year 2021 -22.
Deduction under section 35 will be allowed at Rs 6 lakh in aggregate of
expenses incurred in assessment year 2021 -22, the year in which the
business was commenced and 3 years prior to that i.e. from 2018 -19 to
2020 -21. Expenditure incurred in the years 2016 -17 & 2017 -18 will be
ignored.
2. If a scientific resear ch asset purchased on 01 -01-2019 at a cost of
Rs. 3 lakh, on which full deduction was allowed under secti on 35 in
Assessment Year 2015 -16 is sold on 31 -03-2022 for Rs. 7 lakh, then Rs 3
lakh being the amount of original deduction allowed, will be charged as
the business income and excess over the cost Rs. 4 lakh will be chargeable
as capital gain in assessmen t year 2018 -19.
B. Sum paid for research to others -Section35(1)(ii)
An amount equal to one and one half times of any sum paid to a research
association which has as its object the undertaking of scientific research or
to any university, college or other ins titution approved to be used for
scientific research
C. Sum paid to a R &D company – Section 35(1)(iia)
Any sum paid to a scientific R&D company registered in India and
approved by the prescribed authority to be used by it for scientific research
D. Sum paid for social sciences etc. - Section 35(1)(iii)
Any sum paid to any approved research association which has as its object
the undertaking of research in social science or statistical research or to a
university, college or other institution to be used for res earch in social
science or statistical research.
E. Sum paid for approved research - Section 35(1)(iii)
A sum equal to One and one -half times of the sum paid by an assessee
to a National Laboratory or a University or an Indian Institute of
Technology or a specified person with a specific direction that the said
sum shall be used for scientific research undertaken under a programme
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106 F. Approved in -house Research in drugs, bio - technology etc. -
Section 35(2AB )(a)
A sum equal to one and one -half times of the capital or revenue
expenditure (except on land & Building ) incurred on scientific research
(clinical drug trial, obtaining approval from any regulatory authority under
law and filing an application for a p atent) ;
 by a company ( not allowed to other assessees)
 engaged in the business of
 bio-technology or
 manufacture or production of any article or thing , not being an
article or thing specified in the XI Schedule),
 In-house research & development facil ity approved by the
prescribed authority subject to the condition that the company enters
into an agreement with it for co -operation in such research and
development facility and fulfils such other prescribed conditions with
regard to maintenance of acco unts and audit thereof and furnishing of
reports.
Some relevant points
1. Goods specified schedule XI include b eer, wine & other alcoholic
spirits, tobacco products like cigars, cheroots, cigarettes, biris,
smoking mixtures for pipes and cigarettes, chewi ng tobacco, snuff ,
cosmetics and toilet preparations, tooth paste, dental cream, tooth
powder, soap, aerated waters, confectionery, chocolates,
gramophones, record -players, projectors, photographic apparatus and
goods , office machines and apparatus such as typewriters, calculating
machines, cash registering machines, cheque writing machines,
intercom machines and teleprinters but NOT Computers, furniture,
made partly or wholly of steel , safes, strong boxes, cash and deed
boxes, strong room doors, latex foam sponge, polyurethane foam,
crown corks, and other fittings of cork.
2. Cost of building will be eligible for deduction under section 35(2).
3. The expenditure, on which weighted deduction is allowed under this
section, will not be eligible for deduc tion under any other provisions
of the Act.
4. "Expenditure on scientific research", in relation to drugs and
pharmaceuticals, shall include expenditure incurred on clinical drug
trial, obtaining approval from any regulatory authority under any
Central, State or Provincial Ac t and filing an application for a patent.
5. Scientific research by at the approved institutes need not be related
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107 6. Contribution eligible for weighted deduction under this section will
not be eligible for ded uction under other provisions of the Act.
7. In case of any subsequent cancellation or withdrawal of approval to
a notified university, college, research association or other institution
or any approved programme is withdrawn, weighted deduction will
not b e denied to the assessee.
8. Any violation of condition for approval will result into withdrawal of
the deduction as a mistake apparent from record.
9. On amalgamation the provisions will continue to apply to the
amalgamated company as if the amalgamating compa ny had not sold
or otherwise transferred the asset .
4.5. Amortisation of Preliminary Exp. -Section 35D
The provisions of section 35 D for Amortisation of Preliminary Expenses
are summarised as under: -
A. Eligible assessee :
a) an Indian company, or
b) a resident non -corporate assessee.
A foreign company irrespective of its residential status and a non -
resident or N.O.R non company entity are not eligible under this section
B. Time and purpose of preliminary expenses –
1. For Setting up an undert aking or business BEFORE commencement of
business; or
2. In connection with:
a) extension of an industrial undertaking; or
b) setting up a new industrial unit
AFTER commencement of business.
Expenses incurred after commencement of business, in connection with
extension of or setting up a non -industrial undertaking will not be eligible.
C. Eligible Expenditure :
(a) Expenditure in connection with:
- preparation of feasibility report,
- preparation of project report,
-conducting a market survey (or any other s urvey necessary for the
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108 -engineering services related to the business of the assessee, carried out
by the assessee himself or by a concern approved by the CBDT.
(b) Legal charges for drafting any agreement for setting up or condu ct of
the business.
(c) Legal charges for drafting the Memorandum and Articles of
Association. (M -A)
(d) Printing expenses of the Memorandum and Articles .
(e) Registration fees of a company under the Companies Act.
(f) Expenses in connection with the public issue of shar es or debentures of
a company, underwriting commission, brokerage and charges for
drafting, typing, printing and advertisement of the prospectus.
(g) Any other prescribed expenditure.
D. Qualifying Expenditure:
The aggregate expenditure exceeding the followi ng limits will not be
eligible for deduction under this section: -
a) corporate assessee - Higher of the following :
 5% of cost of project; or
 capital employed, whichever is more
b) non-corporate assessee: 5 per cent of cost of project
E. Definitions of the terms
(i) Cost of project :
Cost of project means the aggregate of actual cost of fixed assets
appearing in the books of the assessee as on the last day of the previous
year in which the business of the assessee commences.
Fixed assets include land, building s, leaseholds, plant, machinery,
furniture, fittings and railway sidings (including expenditure on
development of land and buildings),or additional cost incurred after
commencement of business in connection with extension or setting up an
industrial undert aking) of fixed assets.
(ii) Capital employed –
Capital employed means the aggregate of the -
 issued share capital,
 debentures, and
 long-term borrowings, as on the last day of the previous year in which - munotes.in

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Profits and Gains of Business or Profession (Sections 28 to 44)
109  the business of the company commences, or
 addition al capital borrowings etc. brought after commencement of
business in connection with extension or setting up an industrial
undertaking,
Long term borrowings for this purpose means moneys borrowed in India
by any company from the Government or Financial i nstitutions like ICICI,
IFCI etc. or banks or foreign borrowings in connection with acquisition of
plant and machinery repayable after a term of seven years or more.
F. Amount of deduction :
One-fifth of the qualifying expenditure is allowable as deduction in each
of the five successive years beginning from the year of –
 commencement of the business, or
 completion of extension of industrial undertaking , or
 commencement of production or operations by the new industrial unit.
G. Other Points:
1. Non- corporate as sessees are required to get their account audited for
claiming deduction under this section.
2. On amalgamation - demerger of the assessee company with other
company, deductions can be claimed by the amalgamating or
demerged company.
3. Amount deducted under this section will not be eligible for deduction
under any other provision of the Act.
Illustration
ABC Ltd is an existing Indian company engaged in developing and
providing computer software services. It incurs the following expenditure
in connection with t he setting up of a new unit. The project is complete
in March 2018. Determine the amount deduction admissible under section
35D.
Particulars Rs
Preparation of project report 2,50,000 Market Survey 4,00,000 Legal charges for additional capital for ne w unit 3,50,000 Engineering services not approved by CBDT 5,00,000 Cost of the Project as on 31 -03-2022* 50,00,000 Capital employed as on 31 -03-2022 60,00,000 munotes.in

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110 Solution: Eligible Expenditure:
Particulars Rs
Preparati on of project report 2,50,000 Market Survey 4,00,000 Legal charges - additional capital for new unit 3,50,000 Engineering services not approved - ineligible 0 Total 10,00,000 Gross Qualifying Amount:
5% of cost of the project - (5% X 50,00,000) 2,50,000 5% of the capital employed (5% X 60,00,000) 3.00,000 Gross Qualifying Amount ( higher of the two ) 3,00,000
Qualifying Amount:
Net qualifying amount Rs 3,00,000 being the lower of the following:
I. Gross qualifying amount :Rs 3,00,000 or
II. Actual amount of preliminary expenses: Rs 10,00,000
Amount of Deduction :
1-5th of the net qualifying amount (1/5 x 3,00,000) Rs. 60,000 each for 5
assessment from assessment year 2022 -23 onwards.
4.6. Specific deductions: - Section 36
Section 36(1) expressly allow s the following specific deductions in
computing taxable income under the head profits and gains of business or
profession:
4.6.1. Insurance premium – Section 36(1)(i) -(ia)-(ib)
Any amount of any insurance premium paid
 To cover risk of damage or destruc tion of business stocks used in
business or profession; - Section 36(1)(i)
 on the life of the cattle owned by the milkmen being member of a
primary co -operative society, by a federal milk co -operative society -
Section 36(1)(ia)
 on the health of his em ployees by an employer , paid by any mode of
payment other than cash (e. g. cheque) an approved scheme framed by
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111 4.6.2. Bonus or commission - Section 36(1)(ii) :
Any sum paid to an employee as bonus or commission for services
rendered, where such sum would not have been payable to him as profits
or dividend if it had not been paid as bonus or commission. Under section
43B, bonus or commission will be deducted only on payment thereof on or
before the due date of furnishing return under section139.
4.6.3. Interest on capital borrowed - Section 36(1)(iii) :
Interest paid or payable on borrowed funds used for the purpose of
business or profession.
Borrowed fund include recurring subscriptions paid peri odically by
shareholders - subscribers in Mutual Benefit Societies, which fulfill the
prescribed conditions is deemed to be capital borrowed.
Interest paid/payable in respect of capital borrowed for acquisition of an
asset for extension of existing busine ss or profession whether capitalized
in the books of account or not will be allowed only when an asset is put
to use.
Interest for the period from the date of borrowing till the date when the
asset is put to use will not be allowed but be added to the co st of the asset.
This is in harmony with ICDS - IX, which mandates commencement of
capitalization of interest from the date of borrowing of funds till the asset
is first put to use, irrespective of whether acquisition of the asset is for
extension of exis ting business or not.
4.6.4. Zero Coupon Bonds - Section 36(1)(iiia) :
Discount on notified (by Central Government) Zero Coupon Bonds issued
by an infrastructure capital company or infrastructure capital fund or a
public sector company is allowable on pro rata basis provided no other
benefit or payment is received in respect of such bonds before their
maturity.
Zero Coupon Bonds are the bonds, which do not carry coupon rate of
interest. Instead, these bonds are issued at a price lower than their
redemption value. The difference between issue price and redemption
value or the discount is allowed as deduction on pro rata basis having
regard to the period of life i.e. date of issue to the date of maturity or
redemption of such bonds. Briefly, discount on Zero Coupo n is amortised
over the life time of the Bonds.
Illustration -25:
ICC Ltd . issues 50 lakh duly notified Zero Coupon Bonds of Rs. 500 each
at a price of Rs. 404 on 01 -01-2019. The bonds are redeemable at par on
31-12-2021. Show how the discount would be ded ucted from the total
income of the company.
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112 Solution:
Face value of Bond - Rs 500
Issue price - Rs 404
Discount offered Rs 500 -404 = Rs 96
Total discount offered on 50 lakh bonds - Rs. 48 Crore
The tenure of the coupon is three years or 36 months.
Pro rata deduction to be allowed
Assessment year 2019 -20-
3 months
from 01 -01-2019 to 31 -03-2019
3/36X48Cr
Rs.4 Cr.
Assessment year 2020 -21
full year 12/36X48Cr Rs16 Cr.
Assessment year 2021 -22
full year 12/36X48Cr Rs16 Cr.
Assessment year 202 2-23
9 months
01-04 -2021 to 31 -12-2021
9/36X48Cr
Rs 12 Cr.
4.6.5. Contribution towards RPF - Approved Superannuation Fund
–Section - 36(1)(iv) :
Any contribution paid by the assessee as an employer towards a
recognised provident fund - approved superannuatio n fund, subject
prescribed limits and conditions subject to the provisions of Section 43B.
4.6.6. New Pension Scheme - Section - 36(1)(iva)
Any contributions by employer to a pension scheme referred to in section
80CCD(2) on account of employee to the extent of 1 0% of his salary plus
dearness allowance but excluding all other all other allowances and
perquisites.
4.6.7. Approved gratuity fund - Section 36(1)(v) :
Any sum paid by the assessee as an employer by way of contribution
towards an approved gratuity fund created by him for the exclusive benefit
of his employees under an irrevocable trust;
4.6.8. PF - ESIC - Section 36(1)(va)
Contribution received by an employer from his employees for crediting in
any fund e.g. Provident Fund (PF) or Employees State Insurance
Contribution ( ESIC) and credited by the assessee to the employees’’
account in the relevant fund or funds on or before the due date prescribed
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Profits and Gains of Business or Profession (Sections 28 to 44)
113 Such contributions from employees are treated as income of the
employer under section 2(24(X) whe n received and allowed as deduction
when paid by the due date in terms of section 43B.
4.6.9. Death of animals —Section 36(1)(vi)
The difference between the actual cost to the assessee of the animals and
the amount, if any, realised in respect of the carcasses or animals used for
the purposes of the business - profession otherwise than as stock -in-trade
but died or become permanently useless for such purposes,
Where the animals are treated as stock in trade, the loss or profit is the part
of normal sales and pur chase, therefore this provision is not applicable.
4.6.10. Bad debts - Section 36(1)(vii)
Under Sec section 36(1)(vii) and 36(2), any amount of bad debt or part
thereof, which is written off as irrecoverable in the accounts of the
assessee for the previous year is allowable subject to following conditions -
(a) There is relationship of debtor and creditor.
(b) The debt is incidental to the business or profession.
(c) The debt has been considered in the computation of income, or it
represents money lent in ordinary course of the business of banking or
money -lending.
(d) Bad debt is written off as irrecoverable in assessee’s accounts in the
previous year
(e) Any debt written off but not allowed earlier may be deducted as bad
debts
(f) Bad debts will not include any provision for bad a nd doubtful debts
made in the accounts of the assessee;
(g) Any deficiency will be deductible in the previous year in which the
ultimate recovery is made;
(h) any such debt or part of debt written off as irrecoverable in an earlier
previous year may be deducted if the deduction was not allowed on the
ground that it had not been established to have become a bad debt in
that year;
(i) The assessing officer may deduct bad debts written off in the current
year in an earlier previous year under section 155(6) with in a period of
4 years if he is satisfied that the debt became irrecoverable in earlier
years .
(j) A bad debts can be claimed without recording in books of account as
irrecoverable or bad as per second proviso to section 36(1)(vii) if the
debt was considered in the computation of income as per the notified
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114 4.6.11. Provision by banks -Section 36(1)(viia) :
Under section 36(1)(viia) deduction is allowed to schedule and non -
scheduled Indian banks, financial institutions and non -banking financial
companies in re spect of provision for bad and doubtful debts upto the
following limits namely - :
 8.5% of total income by a scheduled Indian bank other non -scheduled
bank,
 5% of total income a public financial institution or a State financial
corporation or a State in dustrial investment corporation and a foreign
bank of the total income (computed before making any deduction
under this clause and Chapter VI -A) and
 10% of the aggregate average advances made by the rural branches of
such bank computed in the prescribed ma nner, and subject to certain
conditions or
 5% of total income of a non - banking financial company;
 5% of Non -Performing Assets or NPAS in accordance with the RBI
guidelines shown in the books of account of the bank on the last day
of the previous yea r a bank at the option of the bank.
The deduction is subject to two conditions:
(a) Assessee has debited the amount of such debt or part of debt in that
previous year to the provision for bad and doubtful debts account.
(b) Deduction relating to any such debt or part thereof shall be limited to
the amount by which such debt or part thereof exceeds the credit
balance in the provision for bad and doubtful debts account.
4.6.12. Special reserve - Section 36(1)(viii)
Under Sec tion 36(1)(viii) financial institutions will be allowed a deduction
upto 40% of their profits in respect of amounts transferred to a special
reserve created and maintained by them subject to a ceiling of twice the
amount of the paid -up share capital and of the general reserves.
Financial cor poration mean
 a corporation which is engaged in providing long -term finance for
industrial, agricultural development or development of infrastructure
facility in India ,or
 a public company formed and registered in India with the main object
of carryi ng on the business of providing long -term finance for
construction or purchase of houses in India for residential purposes,
Profit means profits derived from such business of providing long -term
finance computed under the head Profits and gains of busines s or
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115 4.6.13. Promotion of family planning - Section 36(1)(ix)
Vide section 36(1)(ix) bonafide expenditure incurred by a company for
promotion of family planning amongst employees is allowable:
 in full if t he expenditure is of revenue nature; and
 One fifth of capital expenditure for each of the five years beginning
from the year in which it was incurred.
Unabsorbed family planning expenditure will be allowed to be carried
forward and set off in the same m anner as depreciation.
4.6.14. Expenses by statutory bodies: section36(1)(xii)
Under section 36(1)(x), revenue expenditure incurred, by any statutory
corporation or a body corporate for the objects and purposes authorised
by the Act under which it is constitute d or established will be deductible.
4.6.15. Cash Transaction Tax - Section 36(1)(xiii)
Any amount of banking cash transaction tax paid by the assessee is
deductible under section 36(1)(xii):
4.6.16. Credit Guarantee Fund - Section - 36(1)(xiv)
Any sum paid by a public fi nancial institution by way of contribution to a
specified credit guarantee fund trust for specified small industries will be
deductible under section 36(1)(xiv).
4.6.17. Security Transaction Tax - Section 36(1)(xv) :
The security transaction tax (STT) paid by t he assessee will be deducted
under section 36(1)(xv ), if the income arising from taxable securities
transactions is included in the income computed under the head "Profits
and gains of business or profession.
4.6.18. Commodity Transaction Tax Sec 36(1)(xvi)
The c ommodity transaction tax paid by the assessee will be deducted
under section 36(1)(xvi ), if the income arising from such taxable
commodity transactions is included in the income computed under the
head "Profits and gains of business or profession.
4.6.19. Expendi ture by Co -operative Society for purchase of
Sugarcane [Section 36(1)(xvii)]
The expenditure incurred by a co -operative society engaged in the
business of manufacture of sugar for purchase of sugarcane at a price,
which is equal to, or less than the price fixed or approved by the
Government, will be allowed as a deduction under section 36(1)(xvii) .

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116 4.6.20. Losses as per IDCDS -Section 36(1)(xviii)
Marked to market loss or other expected loss as computed in
accordance with notified income computation and disclo sure standards.
5.5 GENERAL DEDUCTIONS – Section 37
Section 37 is the residual section. It provides for deduction of all the
expenditure as under: -
(a) The expenditure should be incurred wholly and exclusively for the
purposes of the business - profession carried o n by the assessee , in
respect of which income is computed under this head.
(b) The expenditure, subject to the provisions of Section 43B, should be
incurred during the previous yea.r
(c) expenses should be incurred after the business or profession is set up
(d) Expen ses must be revenue expenses in nature e.g. expenses by way of
cost of raw materials, tools, spares , cost of labour, salary , brokerage ,
commission, legal fees, litigation expenses, professional tax, trade
mark registration, lease rent or other business e xpenses incurred by
the assessee;
(e) Under section 37, following expenses are not allowed as deduction:
i. Capital expenditure e.g. expenditure on acquisition or renovation of
assets , conveyance or registration of land, eviction of a tenant etc. ;
ii. Personal expenses e.g. income tax or wealth tax, drawings or
household expenses of the assessee;
iii. Expenses expressly allowed in Section 30 to 36;
iv. Expenses incurre d for any purpose which is an offence, or which is
prohibited by law, e.g. penalty, bribery, composition money paid in
respect of any offences or breach of law or penal interest under any
law etc.
v. Expenses on advertisement in any souvenir, brochure, tract ,
pamphlet or the like published by a political party specifically
excluded from the purview of the section - Section 37(2B)
vi. any expenditure incurred by an assessee on the activities relating to
corporate social responsibility referred to in section 135 of the
Companies Act, 2013
5.6 SPECIFIC DISALLOWANCES – Sections 40 -40A-43B
6.1. Some expenses are not allowed be deducted from while
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117 (a) Not satisfying the inherent conditions attached with the allowan ce.
For instance section 37 allows only revenue expenses incurred wholly
and exclusively in the course of business or profession. Hence,
personal and capital expenses will be disallowed.
(b) Absolute disallowances for policy reasons such as political
adverti sement and CSR expense, which are expressly disallowed
under section 37.
(c) Defaults such as non -deduction of tax at source.
(d) Deferment or time factor. E.g., Unpaid taxes, bonus etc. covered
under section 43B are disallowed in the year of accrual.
(e) Personal ele ment, e.g., drawings by an individual, interest and
remuneration in case of a firm.
(f) Reasonableness e.g. unreasonable payments to relative under section
40A(2),
(g) Cash payments under section 40A (3)
(h) Partial disallowance due to ceilings, e.g. interest and rem uneration
payable to partners.
(i) Express disallowance , e.g. CST expenses
These disallowances are discussed below,
6.2. Disallowance for any assessee – Section 40(a)
1. Payments to Non -Residents without TDS -Section 40(a)(i)
Any interest, royalty, fees for te chnical services or other sum chargeable
under this Act, which is payable, —
(A) outside India; or
(B) in India to a non -resident, not being a company or to a foreign
company,
on which tax is deductible at source and such tax has not been deducted
or, aft er deduction, has not been paid on or before the due date for filing
return of income under section 139 (1).
The amount so disallowed will be allowed as a deduction in computing
the income of a subsequent previous year in which such tax has been paid.
Illustration
A pays commission of Rs. 1,00,000 to a Non -Resident for the previous
year 2021 -22, on which tax of Rs 20,000 is required to be deducted. Show
whether the commission will be allowable in the following situations. -
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118 a) A does not deduct tax a t source at all.
b) A deducts tax at source but not does not pay the tax to the Government
in time.
c) A deducts tax at source but not and pays it to the Government in time.
d) A pays the tax to Government after deducting the same in December
2022
Soluti on:
In cases (a) and (b) commission will be disallowed under section 40(a)(i)
because the assessee fails to deduct the TDS or pay the amount of TDS to
the Government.
In case(c) deduction will be available in assessment year 2022 -23.
In case(d), deduc tion will be allowed in assessment year 2023 -24.
2. Payments to residents without TDS - section 40(a)(ia)
30% of any sum paid or payable to a resident , on which tax is deductible
at source and such tax has not been deducted or, after deduction, has not
been paid on or before the due date for filing return of income under
section 139 (1) shall be disallowed under section 40(a)(ia).
Such disallowance will not be made if the recipient of the income has paid
the due tax thereon and as a result thereof the a ssessee is not deemed to be
an assessee in default under section 201(1).
The sum of 30% so disallowed will be allowed as deduction in computing
the income of a later previous year in which such tax has been paid :
3. Payment of fringe benefit tax Section 40( a)(ib)]:
4. Any sum paid on account of any rate or tax levied on the profits or
gains of any business - profession or assessed at a proportion of, or
otherwise on the basis of, any such profits or gains .- Section 40(a) (ii);
5. Payment on account of wealth -tax-Section 40(a) (iia)
6. Any amount paid by way of royalty, licence fee, service fee, privilege
fee, service charge or any other fee or charge, by whatever name
called, which is levied exclusively on; or which is appropriated,
directly or indirectly, from, a St ate Government undertaking by the
State Government. - Section 40(a) (iib)
7. Salary payable outside India or to a non -resident, and if the tax has not
been deducted or deducted and has not been paid therefrom under
Chapter XVII -B.
However, such salaries will be allowed as a deduction in the year in which
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119 8. Any payment to a provident or other fund established for the benefit of
employees of the assessee, unless the assessee has made effective
arrangements to secure that tax shall be deducted at source from any
payments made from the fund, which are chargeable to tax under the head
Salaries. Such payment will not be allowed as a deduction if tax has not
been deducted in the year in which such paym ents have been made.
However, these payments will be allowed as a deduction in the year in
which tax has been paid. -Section40(a) (iv)
8 Any tax actually paid by an employer on perquisites under section10
(10CC) -Section 40 (a) (v)
6.3. Disallowan ces in the case of any firms - Section 40(b)
a. Remuneration to partners – Section 40(b)
Following are the provision about remuneration payable to partners of a
firm assessable as such namely. -
(i) Any payment of remuneration to any partner ,
a. who is not a working partner ; or
b. who is a working partner , but such payment of remuneration is not
authorised by, or is not in accordance with, the terms of the
partnership deed;
c. a working partner but payment of remuneration though authorised,
relates to any period falling prior to the date of such partnership
deed or
For this purpose, “working partner" means an individual who is actively
engaged in conducting the affairs of the business or profession of the firm
of which he is a partner;
(ii) any payment of remuneration, to a working pa rtner though authorised
and otherwise allowable, if the remuneration to all partners in aggregate
exceeds the following limits:
Book Profits Remuneration allowable
on the first Rs. 3,00,000 of the
book profit or in case of a loss Rs.1,50,000 or 90 % o f the book -
profit, whichever is more;
on the balance of the book -profit 60 % of the book profits

“Book -profit “means the net profit, as shown in the profit and loss account
for the relevant previous year, computed in the manner laid down in
Chapte r IV-D as increased by the aggregate amount of the remuneration
paid or payable to all the partners of the firm if such amount has been
deducted while computing the net profit. In other words, Book Profit
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120 “Remuneration means “any payment of salary, bonus, commission or
remuneration by whatever name called.
b. Interest to Partners -Section 40(b)
(i) Any payment of interest to any partner which is not authorised by or is
not in accordance with, the t erms of the partnership deed; or
(ii) Interest , to partner thought authorised, relating to any period falling
prior to the date of such partnership deed
(iii)Interest in accordance with the deed of partnership but in excess of the
amount calculated at the rate of twelve per cent simple interest per
annum;
Following points are also relevant in this regard: -
(i) A partnership deed may, at any time during the said previous year be
amended to provide for payment of interest but such amendment will
be applicable only pros pectively. Retrospective effect cannot be given
to such terms.
(ii) The interest will be considered in the same capacity in which it is paid.
Illustrations
1. A is a partner in a firm as a trustee of B. A advances his personal
money and also B’s money to the fir m. The firm pays interest to A in his
personal capacity and as the representative or trustee of B.
Interest payable to A in his capacity of trustee will be considered under
section 40(b). Interest paid in his individual capacity will be ignored. On
the ot her hand, if A is a partner in his individual capacity, then interest
paid to him in his representative capacity shall be ignored.
2. For the financial year 2021 -22 a firm shows net profit of Rs 50,000
after debiting the following amounts:
(i) Remuneration to A ( not a working partner) Rs 50,000.
(ii) b) Remuneration to B - Rs 5,00,000 for the full year. The firm has
made provision for his remuneration by a partnership deed dated 01 -
7-2017
(iii)c) Interest to partners @ 18% p.a. Rs. 90,000.
Compute the business profit s for assessment year 2020 -21



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121 Solution:
Computation of Business Profits
Assessment Year 2020 -2021
Particulars Rupees Business Profits as per P/L A/c 50,000 Add back - Salaries & Interest paid to partners
(50,000+5,00,000+90000) 6,40,000 Book Profits b efore interest & remuneration 6,90,000 Less: Interest authorised by partnership deed
restricted to 12% i.e. 90,000 X 12 -18 60,000 Book Profit Before Remuneration 6,30,000 Remuneration to Partners
( Lowest of the following ) 3,75,000 A –( Nor working partner NIL B- Actual Remuneration 5,00,000 Remuneration allowed from the date
of deed - 9 months from 01 -07-
2017 to 31 -03-2018
5,00,000 X9 -12 3,75,000 Maximum allowable 4,75,200 90% of Rs 300000 of book profit
Rs 2,70,000 60% of the balance book profit of Rs
(6,42,000 -3,00,000) - 2,05,200 Profits from Business 2.55,000
c. Payment of Remuneration and Interest by an association of
persons(AOP) -body of individuals (BOI) -Section 40(ba):
In respect of a ny payment of interest, salary, bonus, commission or
remuneration, by whatever name called, made by an association of persons
(AOP) body of individuals (BOI) to a member of such association or body
following points are relevant: -
a. Association or “Body” does not include a company or a co -operative
society or a society registered under the Societies Registration Act,
1860, or other registered charitable trusts).
b. Unlike a partnership firm, no part of interest paid to a member is
allowable in case of an associat ion or a body. Hence, capacity or
status of the member in such AOP or BOI is relevant. Accordingly –
i. Interest paid by a member in his representative capacity to the
association or body or vice versa shall be ignored if he is a member in
his individual capa city.
ii. Conversely, Interest paid by a member in his individual capacity to
the association or body or vice versa shall also be ignored if he is a
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122 iii. Interest paid by a member in his representative capacity to the
assoc iation or body or vice versa shall be considered if he is a
member in his representative capacity.
iv. Interest paid by a member in his individual capacity to the association
or body or vice versa shall be considered if he is a member in his
individual capac ity
c. Where, interest is paid to a member on funds borrowed by him, the
disallowances will be only on the net amount receivable by such
members.
d. Remuneration or interest to members of AOP/BOI are not allowed to
be deducted for computing income from business and profession
Illustration
X is a member of BOI. X borrows a sum of Rs. 1,00,000 from market with
interest rate of 12% and advances it to the BOI. BOI pays Interest @ 15%
p. a. to X. Determine the amount to be disallowed.
Solution:
Particular Rs
Inter est payable by BOI to X
15% on Rs 1,00,000 15,000 Interest payable by X on his borrowing 12% on Rs 1,00,000 12,000 Disallowable under section 40(b) ( Net) 3,000
6.4. Disallowances In the case of all assesses –S.40A
Section 40A provides for disallowance of certain expenses in certain
circumstances. Most of these disallowances are anti -avoidance measures
in nature and as such are overriding and prevailing. Section 40A(1)
expressly states that: -
“ The provisions of this section shall have effect notwithsta nding anything
to the contrary contained in any other provision of this Act relating to the
computation of income under the head "Profits and gains of business or
profession".
The disallowances are discussed as under: -
1. Excessive payment to relative s - Section 40A (2)
Under section 40A(2)(a) , any expenditure resulting in any payment to any
specified person may be disallowed to the extent it is excessive or
unreasonable in the opinion of the assessing officer having regard to the
market value of the goods or services and the benefit to the business or
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123 The section specifically excludes domestic transaction referred to
in section 92BA, if such transaction is at arm's length price as defined in
92F(ii).
Section 40A(2)(b) gives a long list o f specified persons , which is
summarised as under : -
A. Persons connected with the assessee
Status of assessee Specified person
Individual any relative of the assessee;
Company any director or his relative
Firm any partner or his relative
Association of Persons any member or his relative
Hindu Undivided Family any member or his relative
B. Sister concerns
Entity holding substantial interest of the assessee
Person holding a substantial
interest in the business or
profession of the assessee Specified person
Individual Individual or his relative
Company any director or his relative
Firm any partner or his relative
Association of Persons any member or his relative
Hindu Undivided Family any member or his relative
C. Persons connected with the sister concerns If partner of a firm, or director of company or member of a HUF or
AOP hold substantial interest in another company , firm, AOP or HUF,
then such entity along with other directors, partners, members and their
relatives will be the specified persons. ( The above table will be
applicable to the concerns of where such persons are partners directors
or members) D : Reverse connection :
Where assessee or his relatives, or if the assessee is a company, firm,
HUF or, AOP. its directors , members or partners etc. or their relatives ),
hold substantial interest in the business of other individual, company,
firm, AOP or HUF, the latter will be treated as the specified persons .

“Relative” in this context means husband, wife, and broth er, sister or any
lineal ascendant or descendent of the individual.
A person holding “Substantial interest ” means a person holding 20%
voting power in a company at any time during the previous year or twenty
per cent of the profits of other concern viz pr oprietary concern, HUF,
AOP, BOI etc.
Illustrations of specifies persons under section 40A(2)
a. A is an individual. His wife Mrs A and his relatives will be specified
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124 b. A is a firm having B,C & D is as partners, B , C & D and their
relatives will b e the specified persons
c. If A is a HUF with B, C & D as members, B , C & D and their
relatives will be the specified persons
d. If A is a AOP with B, C & D as members, B, C & D and their
relatives will be the specified persons
e. If A is a Company with B, C & D as directors B, C & D and their
relatives will be the specified persons.
f. In the above cases B is a company, B and all directors of B will be the
specified persons.
g. If C is a firm, C and all partners of C will be the specified persons
h. If D is A HUF or AOP , all the members as well as D will be the
specified persons.
2. Payments exceeding Rs 10,000 -35,000 other than by way of
crossed cheque or demand draft – Section 40A(3)/(3A)
Under section 40A(3)/(3A), in respect of any expenditure, payment
exceeding Rs . 10,000 (Rs. 35,000 in cases of payments made for plying,
hiring or leasing goods carriages) during a single day is made otherwise
than by an account payee cheque drawn on a bank or account payee bank
draft, or use of electronic clearing system(ECS) throu gh a bank account,
no deduction shall be allowed in respect of such expenditure .
Following points require attention:
1. Limit of Rs. 10,000/ 35,000 will be considered with reference to the
aggregate of all payments made in a single day.
2. Total payment will be disallowed if it crosses the limit of Rs. 10,000 or
35,000 in cash. There is no threshold limit of 10,000/35,000.
3. If an expenditure is allowed in past on the basis of its accrual and
subsequently cash payment is made in respect of such liability in exc ess
of Rs. 10,000 or 35,000, such excess payment will be deemed to be the
business profit in the year of payment.
4. Rule 6D gives some exceptions, when disallowance will not be made if
the payment exceeding Rs 10,000 or 35000 is made otherwise than by
way of crossed cheque - bank draft etc. some of these circumstances are
payment to new buyer, bank holiday, lack of banking facility, etc.
5. Section 40A (4) forbids a person to raise an issue in a suit for being
offered payment by account payee cheque or draft and not in cash.

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Profits and Gains of Business or Profession (Sections 28 to 44)
125 Illustrations
1. Legal fee provided during the financial year 2015 -16 for Rs. 80,000 is
paid by cash on 31.03.2022.
Solution
Legal fee of Rs 80,000 allowed as deduction in assessment year 2015 -16
will be deemed be the profit of the assessm ent year 2022 -23 when it was
paid cash.
2. A makes a payment of Rs. 12,000 by a bearer cheque for purchase of
goods and claims that disallowance under section 40A(3) is not applicable
and even if it is applicable, it will be restricted only on Rs. 2,000 being ,
the amount exceeding Rs. 10,000. Examine his claim.
Solution
If payment in excess of Rs 10,000 is made otherwise than by an account
payee cheque or draft etc., total payment of Rs 12,000 will be disallowed
without any basic limit. Bearer cheque and cas h are not acceptable modes
of payment.
3. Provision for Gratuity -Section 40A (7 )
Any provision for payment of gratuity to employee on their retirement or
termination of their services for any reason will not be allowed under
section 40A (7). But if such provision is made by contributing to an
approved gratuity fund or for payment of gratuity that has become payable
during the previous year, will be allowed as deduction.
Hence, gratuity is allowed as a deduction only when it has become due
and payable. Ho wever, once the provision for gratuity has been allowed as
deduction in any year, then any subsequent payment thereof will not be
deductible again.
4. Provision for non - statutory funds –Section 40A (9)
Under section 40A(9), deduction will not be allowed in respect of any
sum paid by the assessee as an employer towards the setting up or
formation of, or as contribution to, any fund, trust, company, association
of persons, body of individuals, society or other institution for any
purpose, except where such sum is paid for the purposes and to the extent
provided by or under section 36(1)(iv)/(v) or as required by or under any
other law for the time being in force like approved provident -gratuity
funds etc. However, any bona fide sum actually spent out of such fund
will be allowed as deduction under section 40(10). Further, under section
40 (11) assessee will be entitled to receive back the unutilised part of any
such fund -assets.
5. Unpaid Liabilities -Section 43B
Section 43B provides an exception to the mercan tile system of accounting
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126 the previous year, in which they are actually paid irrespective of the
previous year in which the liability to pay such sum was incurred by the
assessee ac cording to the method of accounting regularly employed by
him.
The section covers any sums payable by the assessee: -
(a) by way of tax duty, cess or fee, by whatever name called, under any
law for the time being in force, or
(b) as an employer by way of contribution to any provident fund or
superannuation fund or gratuity fund or any other fund for the welfare
of employees, or
(c) as bo nus or commission to employees under section 36(1)(ii) ; or
(d) as interest on any loan or borrowing from any public financial
institutions i.e. ICICI, IFCI, UTI, IDBI LIC or a State financial
corporation or a State industrial investment corporation, in accordance
with the terms and conditions of the agreement governing such loan
or borrowing , or financial arrangement or
(e) as interest on any loan or advances from a scheduled bank, a co -
operative bank other than a primary agricultural credit society, a
primary co -operative agricultural or rural development bank
accordance with the terms and conditions of the agreemen t governing
such loan or advances, or
(f) as an employer in lieu of, any leave at the credit of his employee, or
(g) as user , to Indian Railways for use of railway assets.
Sec 43B provides will not be applicable if : —
1. The payment is actually made on or before the due date of submission
of return of income; and
2. the evidence of such payment is submitted along with the return of
income.
In brief section43B provides that
1. Sums accrued and paid within the same previous year would be
allowed in that year ;
2. Sums accrued in one year and paid in the following year but before the
due date of filing will also be allowed on accrual basis on submission
of proof of payment .
3. Other sums will be allowed only on cash basis and not on mercantile
basis.

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Profits and Gains of Business or Profession (Sections 28 to 44)
127 Following t able summarises the position:
Application of Section 43B
Case Year of deduction
Accrued and paid in same year Year of payment - accrual as both are in
same year
Paid after the end of the year in which it is
accrued but on or before the due dat e of
submission of return of income for that year
and the proof of deposit is submitted along
with the return of income year of accrual
Any other time not covered above, or proof
not attached with return Year of payment

Illustrations
1. ABC Limited p ays Sales Tax for the financial year 2022 -23 before
30-09-2022. Determine the assessment year in which the sales tax may be
claimed as deduction.
Solution
Tax is paid before due date for filling return of income viz. 30 -09-2018.
Hence, it will be allowed o n accrual basis in Assessment Year 2022 -23.
2. ABC Ltd pays GST for the previous year 2021 -22 on 01 -03-2022. In
which Assessment Year will it be allowed?
Solution
Deduction will be allowed only in the year of actual payment year 2022 -
23 relevant to assessm ent year 2023 -24 as the payment has been made tax
after the due date for filling return of income.
3. From the following record of GST payments made during financial
year 2021 -22. Show the year in which the GST will be deducted from the
business profits of t he assessee.
S. No. Date of payment Rupees
1 02-05-2021 40,000 2 20-07-2021 75,000 3 16-08-2021 60,000 4 05-12-2021 30,000 5 12-06-2022 35,000 6 02-12-2022 20,000 7 Outstanding 90,000 Total 3,50,000 munotes.in

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128 Solution
Date of payment Rupees Asses sment
year in which
deducted Reason
02-05-2021 40,000 2022 -23 Due & paid in same
Financial year 20-07-2021 75,000 2022 -23
16-08-2021 60,000 2022 -23
05-12-2021 30,000 2022 -23
12-06-2022 35,000 2022 -23 Paid before by due
date of return if proof
of payment is
furnished along with
return of income
02-12-2022 20,000 2023 -24 Delayed , paid after
due date of return
Outstanding 90,000 NA Allowable in the
year when paid

5.6 ILLUSTRATIONS:
1. From the following I ncome & Expenditure account of Advocate
Mohan for the year ending March 31, 2022, compute the total income. of
the firm.
To Administrative. Expenses 18,50,000 Professional
Receipts 65,00,000 To Depreciation 80,000 To Remuneration to Propriet or 2,50,000 By Other fees 90,000 To Interest on proprietor’s
capital 1,60,000 To Net Profit 42,50,000 Total 65,90,000 65,90,000
Other Information:
1. Expenses include salary paid in cash Rs 2,00,000 and transport Rs
25,000 to a single party o n a single day .
2. Depreciation allowable under section 32 Rs. 3,50 000



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Profits and Gains of Business or Profession (Sections 28 to 44)
129 Solution
Computation of Total Income of Mohan for A. Y. 2022 -23
Net profit as per Income & Exp account 42,50,000 Add: Expenses not allowable
40A(3) - Cash salary paid over R s. 10,000 2,00,000 Remuneration to proprietor 2,50,000 Interest to proprietor 1,60,000 48,60,000 Less: Depreciation under section 32 (3,50,000 -
80,000) 2,70,000 Total Income 45,90,000
2. From the given Trading and P & L A/c of A for the year ended 31st
March 2022, compute taxable income for the A. Y. 2022 -23.
Particulars Rs. Particulars Rs.
To Opening Stock 75,000 By Sales 20,00,000 To Purchases 15,00,000 By Closing
Stock 85,000 To Gross Profit 5,10,000 Total 20,85,000 Total 20,85,000 To Salaries 2,50,000 By Gross
Profit 5,10,000 To Sales Commission 40,000 By Bad Debts
Recovery 25,000 To Sales Tax 35,000 To General Expenses 5,000
Advance Income Tax 54,000
To Interest on Loan 42,000
To Interest on Capital 18,000
To Depreciation on
Furniture & Fittings 4,000
To Advertisement 16,000
To Free Distribution
of Samples 3,000
To Insurance premium
on Life of Partners 8,500
To Printing &
Stationery 3,500
To Net Profit 56,000
Total 5,35,00 0 Total 5,35,000
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130 Additional information:
1. Salaries include Rs. 40,000 paid to proprietor .
2. General Expenses are incurred for the purposes of pleasure tour of
proprietor and his family members to Goa.
3. Income Tax includes Rs. 14,000 paid for the proprietor .
4. Bad Debts recovered were earlier allowed as a deduction.
5. Cash expenses over Rs 35,000 for carriage of Rs. 40,000 and over
Rs 10,000 in respect of other expenses Rs 60,000.
SOLUTION
Computation of Total Income of X & Y Co.
Assessment Year 2022 -23
Particulars Rs. Rs.
Profit as per Profit and Loss Account 56000 Add: Exp. disallowed -considered separately Salaries to the proprietor 40000 General Expenses incurred for
personal purpose by the partners 5000 Cash expenses 40A(3) 100000 Income Tax (Advance) 54000 Interest on Capital 18000 Insurance on Life of Proprietor 8500 225500 Business income 281500
5.7 SELF -EXAMINATION QUESTIONS:
1) Define and explain “Business”.
2) Explain any six deductions which are specifically allowed as a
deduction while computing income from business or profession.
3) Give a detailed note on depreciation
4) Is Depreciation always allowed on Written down Value?
5) What happens, when block ceases to exist?
6) Discuss the tax treatment when block comes to zero.
7) What a re the incomes chargeable under the head “Profits and Gains of
Business or Profession”?
8) Explain the items of expenses, which are expressly not allowed as
deductions while computing income from “Profits and Gains of
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Profits and Gains of Business or Profession (Sections 28 to 44)
131 9) Explain “while computing Prof its and Gains of Business or
Profession” , “Section 37(1) is the residuary section to claim
deduction.
10) Explain expenses allowed on payment basis under section 43B.
11) State the disallowance under Section 40A (3) if a purchase bill of Rs
45,000 was immediate ly paid by cash. ( Ans: Rs. 45,000)
12) State whether following expenses are allowed as a deduction or not
while computing income from business or profession, if not, give
reasons:
a. Interest paid outside India wherefrom no tax has been deduct ed nor
there is any representative assessee.
b. Income tax paid by the firm.
c. Salary paid outside India wherefrom no tax has been deducted nor
there is any representative assessee.
d. Salary paid to a partner.
e. Guest House expenses.
f. Advertisement expenses.
g. Contrib ution to Gratuity Fund.
h. Interest on borrowed capital.
(Ans: Item f & h only allowable, d allowed subject to book profits )
13) Discuss the admissibility and - or inadmissibility of the following
expenditure under the Provision of Income Tax Act, 1961
a. A technical consultant was paid consultancy fee of Rs. 20,000 in cash
by assessee and a deduction was claimed towards the expenditure.
b. A senior advocate conducted the Income tax proceeding before the
Income Tax authority and was paid Rs 18,000.
c. Provision made for gra tuity as per actuary valuation of Rs 1,00,000.
d. A sum of Rs 1,30,000, was paid towards sales tax liability in the
account for the year ending 31.3.2016
e. Stock -in-trade was lost to fire amounting to Rs 10,000 -- and was
debited to Profit and Loss Account. (Ans : a, b & e allowable )
f. Discuss the implication of the following transactions in the case of a
doctor running a nursing home:
g. Amounts received from the employees of the nursing home as
contribution towards Provident Fund for the month of March 2022 paid
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132 h. Cash paid for purchase of medicines –Rs 50,000
(Ans. 25000 Income under section - 43 B (2) Rs 50,000 disallowed
under section 40A(3)
i. Are the following expenses allowable as deduction under section 37(1):
(a) Liti gation expenses for official purposes. (b) Expenses relating to
purchase of stationary for official purpose and (c) interest on loan taken
for the purpose of paying income -tax. ( Ans; 1&2 allowable )
14) From the P -L A-c of X for the year ending 31 -03-2018, ascertain
total income for the Assessment Year 2018 -19 :
Expenses Rs. Income Rs.
General expenses 13,400 Gross profits 3,64,500 Bad debts 22,000 Commission 8,600 Advance tax 21,000 Brokerage 37,000 Insurance 600 Sundry receipts 2,500 Salary to staff 26,000 Salary to X 32,000 Interest on overdraft 4,000 Interest on loan to Mrs. X 42,000 Interest on capital of X 23,000 Depreciation 48,000 Advertisement exp. 7,000 Contribution to RPF 13,000
Net profit 1,60,600
Total 4,12,600 Total 4,12,600

Other information:
(A) Depreciation allowable is Rs. 37,300 as per the I.T. Rules.
(B) Gen. exp. include Rs. 500 for arranging a party to a friend
(Ans160600+21000+32000+23000+48000 -37300+500 = 247800)
15) From the following data, calculate the depreciation admissible to an
individual carrying on business, for Assessment Year 2022 -23
Particulars % WDV
Factory Building 10 5,00,000 Plant & Machinery 20 8,00,000 Addition to Plant 1,00,000 Sale proceeds of Plant (cost 1 lakh) 5,00,000 Furniture & Fixtures 10 1,00,000 Motor Car 20 60,000 New computer 60 60,000 (buildg. Rs. 50,000, P&M . 60,000, Comp. Rs.36000, Furni. Rs.10,000 &
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Profits and Gains of Business or Profession (Sections 28 to 44)
133 16) From the following, ascertain depreciation admissible and other
liabilities, if any. In respect of the previous year relevant to the AY 2022 -
23
Particulars Plant & Mach Building
Rate of Depreciation 25% 10% WDV at the beginning of the year Rs2,50,000 Rs 5,00,000
Additions during the year Rs 3,00,000 Nil Sales during the year Rs10,00,000 Rs 2,00,000 (Ans. P&M Rs. Nil Rs. 2,00,000 Short term capital gain, Building Rs.
5,000)
17) X Ltd. owns two plants A & B on 1 -4- 2017 (depreciation -15% per
cent) wit h opening depreciated value of the block Rs. 2,37,000. It
purchases Plant C with depreciation -15% on 31 -5- 2017 for Rs. 20,000
and sells Plant A on 10 -04-2017 for Rs 10,000, Plant B on 12 -12-2017
for Rs. 15,000 and Plant C on1 -03-2018 for Rs. 24,000. Determine the
WDV of the block as on 31 -03-2014 and also the depreciation
{Ans. 237000+20000 -49000 = 208000 Short Term Capital Loss, block
empty, Depn –NIL})
18) Compute depreciation for ASSESSMENT YEAR2018 -19 from the
following:
Plant & Machinery A, B & C – WDV on 1 -4- 2017 Rs. 5,00,000 rate of
dep.15%. Plant D purchased on 12 -06-2017 Rate of dep. 15% for Rs.
40,000. Plant A sold on 8 -12- 2017 for Rs. 1,60,000.
(Ans Value of Block500000+40000 - 160000 = 380000 Dep. 57000 )

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134 6
CAPITAL GAINS
Sections 45, 48, 49, 50, 54
Unit Structure
6.1 Introduction and Objectives
6.2 Basis of charge
6.3 Types of capital assets
6.4 Types of capital gains
6.5 Period of holding
6.6 Computation of Capital Gains
6.7 Value of Consideration
6.8 Cost of Transfer
6.9 Cost of Acquisiti on
6.10 Fair Market Value
6.11 Transactions covered under section 49(1)
6.12 Cost of improvement
6.13 Indexed cost of acquisition /improvement
6.14 Transactions not regarded as transfer
6.15 Illustrations
6.16 Self-assessment questions
6.1 INTRODUCTION AND OBJECTIVES
Tax on capital gains is an exception to the rule that Income tax is tax on
income. There are many who consider capital gains is being a tax on
inflation in the value of capital asset due to erosion in the value of money
is not correct. More so as investment in capital assets is made from the
money saved from the earnings on which tax had already been paid.
This has given birth to a complex set of legal provisions addressing
concerns of taxpayers dealing with novel concepts and terms such as
capital asset, transfer, indexati on, computation, short term capital asset,
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Capital Gains Sections 45, 48, 49, 50, 54
135 This lesson takes a detailed look into different aspects of tax treatment of
capital gains contained in section 45 -55 to the extent mandated by the
syllabus.
6.2 BASIS OF CHARGE - SECTION 45
2.1 Capital Gains defined
Section 45 is the charging section. It reads:
“Any profits or gains arising from the transfer of a capital asset affected
in the previous year shall be the income of the previous year in which the
transfer took place”.
Accordingly, section 45 mandates that following ingredients must
coexist to attract capital gain tax.
(i) Capital Asset
(ii) Transfer
(iii) Transfer effected during the previous year
(iv) Gain or loss as result of transfer.
This le gal position indicates:
(i) Every asset may not be a capital asset as defined in section 2(14).
Hence, transfer of any asset which is not a capital asset within the meaning
of section 2(14), e.g. personal effects, will not attract capital tax.
(ii) Every movement of a capital asset from one person to may not be
transfer as defined in section 2(47). Hence, any change in ownership of
any capital asset, which is not transfer within the meaning of section
2(47), e.g. devolution or transmission of an asset unto heirs by succession
will also not attract capital tax.
2.2 Capital asset
As per section 2(14) “Capital asset” means:
“Property of any kind held by an assessee, whether or not connected with
his business or profession ” but does not include -
a. Any stock -in-trade, consumable stores or raw materials held for
the purposes of his business or profession;
b. Person al effects i.e. movable property including wearing apparel
and furniture held for personal use by the assessee or any member of his
family dependent on him, but excludes
(i) Jewellery;
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136 (iii) drawings;
(iv) paintings;
(v) sculptures; or
(vi) any work of art.
For this purpose, “Jewellery" includes:
(a) ornaments made of gold, silver, platinum or any other precious metal
or any alloy containing one or more of such precious metals, whether or
not containing any precious or semi -precious stone, and whether or not
worked or sewn into any wearing apparel;
(b) precious or semi -precious stones, whether or not set in any furniture,
utensil or other article o r worked or sewn into any wearing apparel;
In this connection two points are noteworthy: -
(i) Jewellery is not personal effect even if it may be held for personal
use bur “capital asset”, transfer of which will attract capital gain tax.
(ii) Jewellery covers only ornaments. Silver or gold utensils and other
such articles will be treated as personal effects.
c. Agricultura l land in India, not being land situate in :
a. areas not in the jurisdiction of any municipality, municipal
corporation, noti fied area committee, town area committee, or any other
committee called by whatever name, or cantonment board having
population of 10000 or more and
b. in any area within the distance, measured aerially, from the local
limits from any area of municipali ty etc. as above -
Distance not more than Population of the area of
municipality etc. as per last
published census
2 KM 10,001 – 1,00,000
6 KM 1,00,001 – 10,00,000
8 KM More than 10,00,000
d. Special Bearer Bonds, 1991
e. 6 -1/2 per cent Gold Bonds, 1977
f. 7 per cent Gold Bonds, 1980
g. National Defence Gold Bonds 1980
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Capital Gains Sections 45, 48, 49, 50, 54
137 Further, “property” includes any rights in or in relation to an Indian
company, including rights of management or control or any other right s
whatsoever.
2.3 Transfer – Section 2(47 )
In an inclusive definition, section 2(47) states “Transfer in relation to
capital assets includes the following: -
(1) sale, exchange or relinquishment of the asset;
Relinquishment of a right means transfer of a righ t in favour of another
person e.g. sale of right to subscribe shares.
(2) extinguishment of rights on the capital asset;
Extinguishment of rights results in cessation or destruction or cancellation
of rights in a capital asset like surrender of tenancy right for e.g. buyback
of shares results in extinguishment of shares.
(3) compulsory acquisition under any law;
(4) conversion of capital asset into stock in trade of a business;
(5) maturity or redemption of a zero coupon bond issued by an
infrastructure capital company, a fund or a public sector company notified
by the central government in respect of which, no payment or benefit is
received before maturity or redemption;
(6) any transfer involving the allowing the possession of an immovable
property under section 53A of the Transfer of Property Act,1872 in part
performance of the contract for transfer of that property;
(7) any transaction involving transfer of membership of a group,
association housing society, company, etc., which have the effect of
transferring or enabling enj oyment of any immovable property or any
rights therein in any manner whatsoever;
(8) distribution of assets on the dissolution of a firm, body of individuals
or association of persons;
(9) transfer of a capital asset by a partner or member to the firm or AOP,
whether by way of capital contribution of otherwise;
(10) transfer under a gift or an irrevocable trust of shares, debentures or
warrants allotted directly or indirectly to its employees under the ESOP
scheme of the company as per the guidelines issued by the Cent ral
Government.
Sections 47 and 47A state what transactions are not regarded as “transfer”
e.g. transfer upon reorganisation of business entitles like amalgamation,
demerger, gift, will etc.
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138 2.4 Other receipts chargeable to capital tax
Section 45 includes following other receipts as capital gains:
a) Insurance money
Money or other assets received during the previous year from an insurer
on account of damage to or destruction of a capital asset, as a result of:
i. Flood, typhoon, hurricane, cyclone, earthquake or other convulsions
of nature or
ii. Riot or civil disturbance or
iii. Accidental fire or explosion or
iv. Action by an enemy or action taken in combating an enemy.
b) Conversion of capital asset into stock
Transfer by way of conversion, by the owner of a capital asset into or its
treatment by him as stock -in-trade of a business carried on by him but is
chargeable to tax in the previous year in which such stock -in-trade is sold
or otherwise transferred by him.
c) Interest in securities
Transfer made by a depository or a pa rticipant of beneficial interest in any
securities during the previous year in which such transfer takes place.
d) Transfer of asset as capital to firm , AOP or BOI
Transfer of a capital asset by a person to a firm or other association of
persons or bod y of individual (not being a company or a co -operative
society) in which he is or becomes a partner or member by way of capital
contribution or otherwise; in the previous year in which the transfer takes
place.
e) Transfer of asset on dissolution of firm , AO P or BOI
Transfer of a capital asset by way of distribution of capital assets on
dissolution of a firm or association of persons or body of individuals (not
being a company or co -operative society) or otherwise, in the previous
year in which the transfer takes place.
f) Compulsory Acquisition
Transfer of capital asset by way of compulsory acquisition under any law
is chargeable to tax in the previous year in which such compensation or
part thereof is received.
Any additional compensation shall be taxable i n the previous year, in
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Capital Gains Sections 45, 48, 49, 50, 54
139 If any court, tribunal or any authority subsequently reduces the initial
compensation, the capital gains assessed in the year of receipt of initial
compensation or enhanced compensation will be amende d to re -compute
the capital gains with reference to such reduced compensation.
g) Repurchase of Units of Mutual Funds
Transfer of capital asset being the units of UTI or other mutual funds
issued under the Equity -Linked Savings Scheme on the repurchase ther eof
by the mutual fund will be taxed in the year of such repurchase.
h) ESOP /ESOS
Sale value of the shares issued to employees under an equity stock option
plan/scheme as reduced by the cost of acquisition / indexed cost of
acquisition of the shares will be taxed in the year of such issue.
i) Buyback - Section 46A -115QA
Section 46A has been deleted and section 115QA has been made
applicable to all the companies. The section provides that consideration
received by the shareholder from a company under a scheme t o buyback
its own shares under section 68 of the Companies Act, 2013 as reduced by
the cost of acquisition/ indexed cost of acquisition will be taxed in the year
of buyback.
j) Joint Development Agreement(JDA) - Section 45(5A)
The value of the capital asset b eing land or building or both transferred by
an individual or a HUF under a registered specified agreement called
Joint Development Agreement(JDA) to develop real estate for a
consideration of a share being land and building or both, whether with or
without or part payment of consideration in cash; shall be the stamp duty
valuation on the date on which the competent authority issues a
completion certificate for the entire property and capital gain will be
chargeable accordingly on that date.
k) Income on receipt of capital asset or stock in trade by specified
person from specified entity - Section 9B.
As per the newly inserted section 9B if there is any
1. transfer of any capital asset or stock in trade or both
2. by a specified entity being a firm, T OP, BOI but not a company or
a co-operative society
3. to a specified person being any partner or member thereof
4. in connection with any dissolution or reconstitution of such entity
then any profits or gains arising from such transfer of capital asset
or stock -in-trade shall be taxable under the head “Capital Gain” or
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140 previous year in which such capital asset or stock in trade or both
were received by the specified person.
Other po ints
1. Fair market value of the capital asset or stock in trade or both on the
date of its receipt by the specified person shall be deemed to be the
full value of the consideration received or accruing as a result of such
deemed transfer of the capital ass et or stock in trade or both by the
specified entity.
2. Reconstitution of the specified entity means,
(a) Retirement of one or more partners or members, of such entity; or
(b) Admission of one or more new partners or members, in such specified
entity along with o ne or more partners or members, continuing as
partner or partners or member or members after the change;
(c) Change in share of some or all of the old partners or members
continuing.
3. Although, capital gain arises to a partner or member on
extinguishment or relinquishment of his right in the specified entity in
connection with reconstitution or dissolution of the specified entity, it
is deemed as income of the specified entity under section 45(4). The
specified entity would be assessed under section 9B r.w.s . 48 for its
own income and under section 45(4) for income arising to partner
thereof.
4. Capital Gain under section 45(4) shall be calculated with the
following formula:
Value of any money received by the partner or member from
the specified entity on the date of such receipt
Add FMV of the capital asset received by the partner or member
from the specified entity on the date of such receipt
Less the amount of balance in the capital account of the partner or
member in the books of account of the specifi ed entity at the
time of its reconstitution without considering increase in the
capital account of the partner or member due to revaluation of
any asset or due to self -generated goodwill or any other self -
generated asset
 If the Value comes to negative, th en capital gain will be deemed to be
zero.
 self-generated goodwill” and “self -generated asset” mean goodwill or
asset, as the case may be, which has been acquired without incurring
any cost for purchase or which has been generated during the course
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Capital Gains Sections 45, 48, 49, 50, 54
141 5. In computing Capital Gain under section 48, capital gain in the hands
of the special entity, the gain above shall be deductible from the full
value of consideration along with cost of acquisition, cost of
improvement and expenditur e incurred exclusively in connection with
transfer, to avoid double taxation of the same.
6. Section 9B deals with incidence of tax arising at the time of
dissolution or reconstitution. Section 45(4) deals with the taxability at
the time of reconstitution onl y. Thus, section 45(4) does not apply at
the time of dissolution.
6.3 TYPES OF CAPITAL ASSETS
Depending upon the period for which the asset is held by the assessee
before its transfer, capital assets may be of two types:
I Short Term Capital Asset (STCA ) or
II Long Term Capital Asset (LTCA)
a) Short Term Capital Asset (STCA) - Section 2(29A)
(i) Generally, short -term capital asset means a capital asset held by an
assessee for less than 36 months before it is transferred.
(ii) The period of 36 months is reduce d to 12 months for the following
assets: -
(a) Equity or preference shares quoted,
(b) Securities like debentures, government securities and notified
derivatives, which are listed in recognised stock exchange under
section 10 -23(D),
(c) Units of UTI
(d) Units of equity or iented mutual funds
(e) Zero coupon bonds.
(iii) the period of holding is reduced to 24 months for the following
assets
(a) unlisted Shares,
(b) immovable property ( land, building or both)
b) Long Term Capital Assets (LTCA) - Section 2(29A)
A long term capital means a capital asset, which is not a short -term capital
asset. In other words, a capital asset will be a long term asset if it is held
for more than 12, 24 or 36 months before it is transferred.
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142 6.4 TYPES OF CAPITAL GAINS
Capital gains arising on the transfer of a capital asset will be short term
capital gain or long term capital gain depending upon the type of the asset
which is transferred that is: -
(i) Short Term Capital Gain (STC G)- Section 2(29B)
Any gain arising on transfer of short term capital ass et (asset held by an
assessee for less than 36/ 24/12 months) will be short term capital gain and
any loss arising on the transfer of short term asset will be short term
capital loss.
In case of slump sale under section 50, gain arising on sale of long t erm
business, assets in a block and surplus left in a block on transfer of all
depreciable assets in the block would be treated as a short term capital
gain (loss).
Long Term Capital Asset (LTCG ) – Section 2(42B)
Long -term capital gain is the gain ari sing on transfer of a long -term asset
or an asset held by an assessee for 36/12/24 months or more. Conversely,
any loss arising on transfer of long -term asset will be long -term capital
loss.
6.5 PERIOD OF HOLDING - SECTION 2(42A)
The principal criterion to de termine whether any asset is long -term asset
or short term asset is the period of holding of an asset by the assessee
before its transfer.
Type of the asset in turn determines whether capital gain arising on
transfer of such asset is long -term capital ga in/loss or short term capital
gain/loss.
The period of holding is determined on the basis of the following
principles: -
1. In case of shares held in company in liquidation, the period subsequent
to the date of liquidation will not be included. Period of holding will stop
running on date of liquidation.
Illustration
A buys some shares in a company on 01 -01-2019. The Company goes into
liquidation on 01 -06-2019. The liquidator settles the claim on 01 -03-
2022.
The period of holding of the shares will be fi ve months from 01 -01-2019
to 01 -06-2019. The period after 01 -06-2019 will not be included in the
holding. munotes.in

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Capital Gains Sections 45, 48, 49, 50, 54
143 2. In case of a capital asset, which becomes the property of the assessee
in circumstances mentioned in section 49(1) such as death, gift etc., the
period for which the previous owner held such capital asset will also be
included in the period of holding.
Illustration
A dies on 01 -01-2022 leaving to his wife Mrs A, his flat bought on 01 -01-
2016.
Mrs. A sells the flat on 20 -03-2022. The period of ho lding will include the
holding by A from 01 -01-2016 to 01 -01-2022.
Since the flat is held for more than two years it will be a long term asset
giving rise to LTCG/ (LTCL).
3. In case of shares of an amalgamated company allotted to a
shareholder against th e shares in an Indian company, which was
amalgamated, the period for which the assessee held the shares in the
amalgamated company will also be included.
Illustration
R buys 1000 shares of S Ltd on 12 -11-2016. On 31 -12-2021 S Ltd
amalgamates with H Ltd an d original 1000 shares in S Ltd were converted
into 300 shares of H Ltd. R sells these 300 shares of H Ltd. on 01 -01-
2022.
The period of holding of 300 shares of H Ltd will include the holding
during the period 12 -11-2016 to 31 -12-2017. The shares will LTC A and
the capital gain arising on sale of these shares will be LTCG.
4. In case of right issue of securities, the period of holding shall start
from the date of allotment on rights issue of shares or other securities
subscribed by the assessee or other pe rson in whose favour such right has
been renounced.
5. In case of renunciation of rights, for the person who has acquired the
rights, the period shall be reckoned from the date of the offer of such
rights by the company or institution.
6. In case of a bonus issu e, allotted without payment on the basis of
holding of any other financial asset, period shall be reckoned form the date
of allotment of such financial asset.
7. In case of shares in a resulting company received under a scheme of
demerge r of a company, the pe riod for which the shares in the demerged
company were held by the assessee will also be included.
8. In case of shares of trading or clearing rights of a recognised stock
exchange acquired by a person under its demutualisation or
corporatisation, the period for which, such person was a member will also
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144 9. In case of equity shares allotted under demutualisation or
corporatisation of a recognised stock exchange in India, the period for
which such person was a member will also be included.
10. Period of ho lding of other capital assets will be decided according to
the rules framed by the CBDT in that regard. As per the CBDT
clarification, date of transfer/ acquisition of shares will be considered on
the basis of the brokers’ note / date of contract or date o f allotment and
FIFO (First in First Out Basis) in the case of Demat Accounts.
11. In case of security or sweat equity, allotted or transferred by the
employer free of cost or at concessional rate to the employees including
former employees, popularly called a s ESOP, the period shall be reckoned
from the date of their allotment or transfer .
12. The period of holding of units acquired in the consolidated scheme
of mutual fund shall include the period for which the units in consolidating
schemes were held by the asse ssee.
13. The period of holding of a capital asset, being share or shares of a
company, acquired by a non -resident assessee on redemption of GDRs
would be reckoned from the date on which a request for such redemption
was made.
6.6 COMPUTATION OF CAPITAL GAINS - SECTION 48
6.1. General Rule
As per section 48, income under the head “Capital Gains” shall be
computed, by deducting from the full value of the consideration received
or accruing as a result of the transfer of the capital asset the following
amounts, n amely : -
(i) Expenditure incurred wholly and exclusively in connection with such
transfer;
(ii) The cost of acquisition of the asset and the cost of any improvement
thereto:
6.2. Long Term Capital Gains
Where the capital gain is to be computed in respec t of a long term asset,
instead of "cost of acquisition" and "cost of improvement", "indexed cost
of acquisition" and "indexed cost of improvement" will be deducted
subject to following exceptions, when benefit of indexation of cost will
not be available, viz.-
a. Capital gain on transfer of shares or debentures of Indian company by
a non -resident will be computed by converting the cost of acquisition, full
value of consideration and expenses incurred for transfer into originally
utilised foreign currency an d reconverting capital gain into Indian
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Capital Gains Sections 45, 48, 49, 50, 54
145 b. Capital gain on transfer of bonds and debentures although they may
qualify as long term capital assets. This is because bonds and debentures
are normally issued and redeemed at par and if benefit of indexat ion is
given, it will always give capital loss, and
c. Capital gain in case of slump sale under section 50B
As per Section 2(42C) “Slump Sale” means the transfer of one or more
undertakings by any means as a result of the sale for a lump sum
consideration wi thout values being assigned to the individual assets and
liabilities in such sales.
This implies that:
STCG =(Sales Consideration -Expenses on Transfer) - (cost of
acquisition+ Cost of Improvement)
LTCG = Sales Consideration - Expenses on Transfer) -(Inde xed cost of
acquisition + Indexed Cost of Improvement)
The Finance Act, 2021 has amended Section 50B(2) to provide that the
fair market value (FMV) of the capital assets (being an undertaking or
division transferred by way of slump sale) as on the date o f transfer shall
be calculated in the prescribed manner. Such FMV shall be deemed to be
full value of the consideration received or accruing as a result of transfer
of such capital asset. Further, the value of capital asset being goodwill,
which has not been acquired by the assessee by purchase from previous
owner, shall be taken as Nil while computing net worth .
6.3. Depreciable Capital Assets – Section 50
Tax treatment on sale or transfer of capital asset in respect of which
depreciation had been allowed , will be as under: -
(a) Written down value(WDV) of the block at the beginning of the year
increased by the cost of acquisition of any new asset falling in the same
block purchased during the year and incidental expenses on transfer the
asset purchased, will be the WDV of the block.
i. There will be no capital gain if sales proceeds of asset sold are equal to
the WDV of the block as increased by the new purchase and the
incidental expense on transfer.
ii. If sales consideration exceeds the WDV of the block as incre ased by
the new purchase and the incidental expense on transfer, such excess
consideration will be treated as short term capital gain.
iii. If sales consideration is less than the WDV of the block as increased by
the new purchase and the incidental expense on transfer, such excess
consideration will be treated as short term capital loss.
(b) If block ceases to exist, i.e., all assets in a block are sold, the WDV in
the block will be short -term capital loss. munotes.in

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Direct Tax
146 Capital gain will arise only if the full value of sale pri ce exceeds the
aggregate of the following: -
 Incidental expenses on transfer
 The written down value of the block at the beginning of the previous
year.
 Cost of acquisition of the asset falling in that block of assets during the
previous year
The resulting f igure will be short term capital gain or short term capital
loss. If block cease to exist, no further deduction will be available, nor will
any further deduction be allowed.
if goodwill of a business or profession is forming part of the block of the
asset as on A.Y. 2020 -21 and depreciation has been claimed on it, capital
gain will be determined as prescribed by the CBDT

Illustration:
From the following particulars in respect of a block of assets ascertain the
capital gains or loss:
a. Opening WDV Rs 80,0 00
b. Cost of new asset purchased Rs 20,000
c. Rate of depreciation 15%
Compute the depreciation or capital gain if -
1. No asset was sold during the year , or
2. Value of the consideration for asset sold was
(a) No asset sold
(b) Rs 70,000
(c) Rs. 1,00,000
(d) Rs. 1,20,000
(e) All assets in the block sold for Rs 40,000




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Capital Gains Sections 45, 48, 49, 50, 54
147 Solution:
Particulars a b c d d
Rupees
Opg. WDV 80,000 80,000 80,000 80,000 80,000 Add-New
Purchase 20,000 20,000 20,000 20,000 20,000 Total 1,00,000 1,00,000 1,00,0 00 1,00,000 1,00,000 Sales 0 70,000 1,00,000 1,20,000 40,000 WDV /Gain 1,00,000 30,000 0 (20,000) 60,000 Depreciation 15,000 4,500 0 0 0 STCG - - - 20,000 - STCL - NA - NA- 60,000 Clos. WDV 85,000 25,500 0 0 0 Notes: No depreciation in case b as WDV in block comes to zero and in
case e, all the assets are sold, hence the block ceases to exist. Residual
WDV of Rs. 60,000 will be short term capital loss.
6.4 Depreciable assets of power undertaking - Section 50A
In respect of a depreciable assets of an undertaking engaged in generation
or distribution of power or energy, short -term gain/loss will be computed
with reference to the cost of acquisition as adjusted under section 43(6).
In case of a composite agreement for sale of a factory building along wit h
the land, depreciable asset will be building not the land because land is not
a depreciable asset.
Land will be considered as general capital asset giving rise to long term
or short term capital gain depending upon the period for which it is held.
6.7 VALUE OF CONSIDERATION - SECTION 48
“Full total value of consideration” means the value received or accruing
because of the transfer.
It indicates the whole of the price in terms of money or money’s worth or
both bargained for between the parties inter s e, which accrues or arises
upon transfer of a capital asset.
The c apital gains will be chargeable on accrual basis and not on cash
basis actual receipt of the value is irrelevant.
Further, “full value of consideration” does not refer to the market value of
the asset transferred or the adequacy of the price except in some specific
cases, where fair market value accruing or arising on transfer of a capital
asset is required to be ascertained foe instance under sections 50C, 50CA
etc. Some specific cases ar e considered below. munotes.in

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Direct Tax
148 (i) There will no capital gain in case of transfer of a property without
consideration or out of natural love and affection. However, the
transaction will be subject to the provisions of section 56.
(ii) Full value of the consideration wil l be the fair market value of any
shares, debentures, or warrants on the date of transfer in case of transfer
by a company of the same as a gift or under an irrevocable trust allotted
directly or indirectly to its employees under employees’ stock option /
scheme (ESOP/ESOS ) as per the guidelines issued by the Central
Government,
(iii)In case of a transfer resulting in exchange of two or more assets, full
value of consideration of the assets transferred will be equal to the fair
market value of the asset rec eived.
Illustration
A exchanges his flat for B’s car In this case “Full total value of
consideration of A’s flat will be the fair market value of the car transferred
by B and vice versa.
(iv) Amount of any insurance claims received in respect assets destro yed
in natural conditions like tsunami, floods, earthquakes, would be deemed
the full value of consideration.
Section 45 specifies the year of the capital gain liability and the value of
consideration arising or accruing in some cases, which are given in the
following table:
Sub Section and the
nature of the transaction Previous year
when taxed
year of Value of consideration
(1) Sale or Transfer Sale or transfer Sales consideration
(1A) Damage or
Destruction Receipt of claim
money Money received or fair
market value
(2) Conversion into stock Sale of stock Market value on the date
of conversion
(2A) Transfer of
securities by depository Transfer determined on FIFO basis Consideration for transfer
(3) Transfer as capital
contribution in f irm / AOP
/ BOI Transfer Value credited in capital
account
(4)Transfer on dissolution
of firm/AOP/BOI Transfer Fair market vale on date
of transfer
(5) Compulsory
acquisition Receipt of
compensation Initial compensation or
enhanced compensation as
the ca se may be
(6)Repurchase of mutual
fund units Receipt or
discontinuation
of scheme Repurchase price munotes.in

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Capital Gains Sections 45, 48, 49, 50, 54
149 Illustration
On 01 -04-2001 Ashok bought personal gold ornaments for Rs 2 lakh. On
01-01-2010, he converted ornaments into stock of his new jewellery
showro om. Fair market value of the ornaments was Rs. 5 lakh on that day.
On 31 -03-2022, he sold the ornaments for Rs. 12 lakh. Determine the tax
incidence.
Solution
On conversion of personal ornaments in to business stock on 01 -01-2010
transfer takes place. The Capital gain will be:
Full values of consideration [FMV 01 -01-2010]
Date of conversion into stock 5,00,000
Less-Indexed Cost of Acquisition( revised)
[2,00,000 X 148/100] 2,96,000
Long Term Capital Gain arising on 01 -01-2010
Taxable i n A.Y. 2022 -23 when ornaments actually sold
along with business profit Rs 7 lakh (12 -5 lakh) 2,04,000

6.8 COST OF TRANSFER – SECTION 48 (1)
While computing the capital gain, expenditure incurred wholly and
exclusively in connection with the transfer of ass et will be deducted from
the total value of consideration subject to the following conditions:
(i) The expenses should be incurred wholly and exclusively in
connection with the transfer.
Lawyers’ fee for transfer, brokerage, travelling expenses for transfer,
advertisement, stamp duty and registration fee, if paid by the seller etc.
will be allowable but normal administrative expenses like salary of staff
for upkeep or maintenance of property will not be allowable .
(ii) The expenses must not be claimed as deduction as expenditure under
any other head.
(iii) No expenses will be allowed in respect of share transactions covered
under the securities transaction tax.
6.9 COST OF ACQUISITION – [SECTIONS 48 - 46 & 49]
Cost of acquisition is the sum total of amounts spent for acqu iring a
capital asset including the following -
(i) price paid by the assessee for purchase of property ; or munotes.in

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150 (ii) fair value on the date of exchange , of the asset transferred in
exchange, where the asset is acquired in exchange for another asset ;
and
(iii) expense s incurred on transfer, registration, stamp duty etc.
The relevant provisions are given as under: -
A. (1) Where asset becomes the property of the assessee by a mode
referred to in section 49(1) before 1 -4-2001
i. Cost of acquisition is the actual cost to the previous owner or the fair
market value as on 1 -4-2001 at the option of the assessee.
ii. Where actual cost to the previous owner cannot be ascertained, fair
market value on the date on which the asset became the property of
the assessee will be taken
iii. Where t here are successive transfers under this mode, the reference to
the previous owner will mean last of such previous owners who has
acquired the assets by a mode otherwise than any of the modes under
section 49(1).
iv. In these case the period for which asset wa s held by the previous
owner is also taken into consideration to determine the period for
which the asset was held
A. (2) Where asset becomes the property of the assessee by a mode
referred to in section 49(1) on or after 1 -4-2001
i. Cost of acquisition is the a ctual cost to the previous owner.
ii. Where the actual cost to the previous owner cannot be ascertained,
fair market value on the date on which the asset became the property
of the assessee will be taken.
iii. Where there are successive transfers under this mode, the reference to
the previous owner will mean last of such previous owners who has
acquired the assets by a mode otherwise than any of the modes under
section 49(1).
B. (1) Where asset becomes the property of assessee by a mode other than
referred to in secti on 49(1) before 1 -4-2001:
Cost of acquisition is the actual cost to the assessee or the fair market
value as on 1 -04-2001 at the option of the assessee.
B. (2) Where asset becomes property of assessee by a mode other than
referred to in section 49(1) on and after 1 -4- 2001, cost of acquisition is
the amount actually spent by the assessee in acquiring the actual asset i.e.
the actual cost of acquisition.
C. Where any asset being cash, movable property, or shares of closely
held company’s immovable property beco mes the property of the assessee munotes.in

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Capital Gains Sections 45, 48, 49, 50, 54
151 subject to tax under section 56 as such asset is received without
consideration or for consideration less than the fair market value, the cost
of acquisition of such asset will be same as the cost adopted under 56. The
section is discussed in detail in the next chapter. The provision is
apparently enacted to avoid double taxation of the same property.
D. Specific Cases:
i. Earnest money forfeited – Section 51 ;
Any earnest money received in advance and forfeited by the assessee, due
to failure in negotiation will be taxable as “income from other sources”.
Illustration -11
On 01 -07- 2020 A receives advance of Rs 5 lakh from a prospective buyer
for sale of his flat purchased on 01 -06-2010 for Rs. 28 lakhs. Later,
negotiations fa iled and A forfeited the advance money. Earnest money of
Rs 5 lakh will be taxable, in A.Y. 2021 -22 as income from other sources.
ii. Self- generated assets
Self-generating assets such as goodwill, patents, copyrights, tenancy
rights, which have no actual co st of acquisition incurred, were judicially
held to be not liable to capital gain tax as the cost of acquisition was nil.
The position has been partially changed and the amended section provides
that “in relation to the goodwill of a business, trade mark o r brand name
associated with a business, tenancy rights, loom hours, route permits, right
to manufacture or produce any process any article, cost of acquisition shall
be taken as the purchase price if such price is paid, or nil, if such price is
not paid.” As a result, effectively, entire sale proceeds less expenses on
transfer of self - generated assets will be treated as capital gain.
iii. Financial assets – shares and other securities
Where an assessee becomes entitled to subscribe to any additional
securit ies, known as “Rights” or where additional shares are issued as
bonus without any payment, the cost of acquisition shall be as follows:
a. Amount actually paid for acquiring such asset by way of subscription
to the securities or
b. Amount actually paid for acqui ring such asset by way of exercising
his right or entitlement.
c. NIL; where rights are renounced for a price, then consideration for
renouncement of rights will be the amount of capital gains as reduced
by transfer cost, if any.
d. Amount paid to the renouncer of rights entitlement and amount paid
to the company, which has allotted the rights shares
e. NIL in case of bonus shares. Sales proceeds of bonus share will be
liable to capital gain as reduced by transfer costs, if any. However, if munotes.in

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152 the bonus shares have be en acquired prior to 01 -04-2001, then the
share market value of bonus shares as on 01 -04-2001 will be treated
as the cost of acquisition.
f. Fair Market Value on the date of distribution of capital assets by a
Company under section 46(2).
g. Cost of acquisition of the original asset consolidation, division,
conversion, reconversion of share into stock or vice versa and where
such cost cannot be reasonably ascertained, the fair market value.
h. Cost of acquisition of the original shares held by the shareholders in
the demerged company as reduced by the amount arrived at under
section 49 (2C).
i. Cost of acquisition of original membership of a recognised stock
exchange when equity share/s allotted to such shareholders under any
scheme of demutualization or corporatisation of the exchange -
section. 55(2)(ab)
j. NIL in respect of trading or clearing rights of stock exchange.
k. Pro rata amount i.e. the amount which bears to the cost of acquisition
of the shares held by the assessee in the demerged company the same
proportion as th e net book value of the assets transferred in a
demerger bears to the net worth of the demerged company
immediately before such demerger will be the cost of acquisition of
Shares in the resulting company – Section 49 (2C).
l. Stock option Specified security is taxable as a perquisite under
section 17(2) – Section 49 (2AA)
m. Actual cost of acquisition in all the other cases.
n. Vide Section 55 , cost of acquisition of purchased goodwill of a
business or profession is to be calculated after reducing depreciation
amount which was allowed for Assessment Years prior to A.Y. 2021 -
22. Cost of acquisition of goodwill of a business or profession other
than purchased shall be taken to be Nil.
6.10 FAIR MARKET VALUE (FMV)
Fair market value in relation to a capital asset means t he price that the
capital asset would ordinarily fetch on sale in the open market on the
relevant date.
If the assessee has acquired the asset prior to 01 -04-2001, he has the
option of substituting the fair share market value of the asset as on 01 -04-
2001 instead of actual cost of acquisition.
Fair market value is adopted, where ascertainment of actual cost is not
possible. Assets distributed on liquidation have already been dealt with at
their appropriate places. Some other cases are considered below: munotes.in

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Capital Gains Sections 45, 48, 49, 50, 54
153 a) Conversion of capital asset into stock -in-trade
When an assessee converts a personal capital asset into stock -in-trade of
his business, such conversion will give rise to notional capital gains or loss
on the date of such conversion, but it will be chargeabl e to tax, when such
capital asset (stock after the conversion) is actually sold.
For this purpose, the fair market value of the capital asset on the date of
conversion will be treated as notional sale consideration from which the
cost of acquisition / in dexed cost of acquisition will be deducted to get the
capital gain.
When the converted capital asset is sold as stock, then the difference
between the actual sale proceeds and notional fair market value taken on
the date of conversion will be taxable as b usiness profit or loss.
Illustration
Ramesh converts his ancestral jewellery into the stock in -trade of his
business on 31 -10-2011. The jewellery was sold on 28 -02-2022 for Rs. 50
Lakh. FMV of the jewellery was Rs. 10 lakh on 01 -04-2001 and Rs. 30
Lakh on 31 -10-2011.
Solution: Deemed consideration on conversion into stock FMV on 31 -10-2011 Rs 30.00 lakh Less - indexed cost of acquisition
Cost on 01 -04-2011: Rs.10 lakh X 184 -100 Rs.18.40 lakh
Capital gain on 31 -10- 2011
taxable on 28 -02-2022 (when sold) Rs 11.60 lakh
Business profit on 28 -02-2022(Rs 50 -30) lakh Rs 20.00 lakh

b) Introduction of capital asset by a partner:
When a partner transfers his personal asset by way of his capital
contribution in a partnership firm, the amount credit ed to his capital
account in respect of this capital asset will be treated as sales proceeds in
the hands of the partner from which the cost or indexed cost of acquisition
will be reduced to get the amount of capital gains or loss taxable in the
hands of t he partner.
c) Takeover of assets by the partner on dissolution of the partnership
firm
When upon the dissolution of a firm, a partner is allocated a capital asset,
the fair market value of the capital asset on the date of dissolution of the
firm will be tr eated as sales proceeds from which the cost of acquisition or munotes.in

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154 indexed cost of acquisition, as the case may be, will be reduced to get the
amount of taxable capital gains in the hands of the firm.
d) Compulsory acquisition of capital asset
In case of compul sory acquisition of any capital asset by the government
or any authority under any law, taxable capital gain or loss will arise in the
year in which such asset is compulsorily acquired but will be chargeable
only in the year, in which the compensation is r eceived.
If the compensation is subsequently enhanced, the additional amount will
be chargeable as capital gains in the previous year in which such
additional compensation is received.
If the compensation amount is subsequently reduced, the capital gain
already charged will be recalculated as if it were a mistake apparent from
the record under section 155.
d) Amount received on liquidation of the company:
Any amount received by the shareholder on liquidation of a company, is
taxable as deemed dividend under section 2(22) to the extent of reserves.
The Balance amount as reduced by the indexed cost of acquisition or cost
of acquisition will be taxable as capital gains arising on sale of the shares.
e) Sale of Shares under depository system
Cost of acquisition sha res sold from a depository account, will be
determined on first in first out (FIFO) basis on the assumption that the
shares deposited in the account first were sold first. Accordingly the cost
of acquisition, date of acquisition and the period of holding w ill be
calculated.
f) Stock Lending
Any share given under any stock -lending scheme approved by SEBI will
not give rise to any taxable capital gain.
g) Corporatisation of Stock Exchanges
In case any person transfers equity shares allotted to him as member of a
recognised stock exchange in India under any SEBI approved scheme of
corporatization of stock exchanges, his original cost of acquisition of
membership of the stock exchange will be the cost of acquisition for
computation of capital gains on those shares.
h) Demerger:
While computing capital gains arising on cost of acquisition of the original
shares in the demerged company shall be reduced by the amount
calculated in respect of the shares in the resulting company determined as
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Capital Gains Sections 45, 48, 49, 50, 54
155 Cost of shares of dem erged company x Net book value of assets
Net worth of demerged company before demerger
i) Taxation of capital gains of listed shares
Under sections 111A/112, short term capital gain in respect of shares
subject to securities transactions tax (STT), is at t he option of the assessee
subject to 15%+4% cess without benefit of indexation or alternatively pay
regular tax under the normal provisions including indexation. Long term
capital gain on sale of shares over Rs 1 lakh is taxable @ 10% plus 4%
cess. There i s a cap of 15% on surcharge.
6.12 SPECIFIC TRANSACTIONS -SECTION 49(1)
As per section 49(1), where a capital asset became the property of the
assessee in certain circumstances the cost of acquisition of such asset shall
be deemed to be
 the cost for which the p revious owner of the property acquired it as be
increased by
 the cost of any improvement of the assets incurred or borne by the
previous owner or the assessee, as the case may be.
The circumstance/modes referred to in section 49, where a capital asset
became property of the assessee are as under: -
(i) any distribution of assets on total or partial partition of a Hindu
undivided family;
(ii) under a gift or will;
(iii) by succession, inheritance or devolution;
(iv) distribution of assets on the dissolution of a firm, body of
individuals, or other association of persons, where such dissolution
had taken place at any time before 01 -04-1987;
(v) distribution of assets on the liquidation of a company;
(vi) under a transfer to a revocable or an irrevocable trust;
(vii) under any such transfer as is referred to in clause (iv)/ (v)/ (vi)/
(via) / (viaa)/(viab)/ (vib) /(vica)/ (vicb)/ (vicc)/ (xiii)/ (xiiib) or
clause (xiv) of section 47 ;
(viii) Conversion of personal asset of the assessee as the joint property of
the HUF referred to in section 64(2);
(ix) under a gift or will not being gift or transfer through an irrevocable
trust of shares, debentures or warrants allotted by a company directly
or indirectly to its employees under a Central Government approved
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156 In such cases, the market value of the shares, debentures or warrants
gifted or transferred to the irrevocable trust on the date of transfer
will be treated as the sale proceeds for the purpose of capital gains.
(x) by succession, inheritance or devolution;
(xi) distribution of assets on liquidation of company;
(xii) under a revocable or irrevocable trust;
(xiii) transfer by a wholly owned Indian subsidiary company from its
holding company and by a parent company to its 100 per cent Indian
subsidiary company;
(xiv) any transfer in scheme of amalgamation by the amalgamated
company from the amalgamating company;
(xv) by Hindu undivided family where one of the members has
converted its self ac quired property into a joint family property;
(xvi) Transfer of units by unit holders on consolidation of plans within a
mutual fund scheme; or
(xvii) Redemption by an individual of sovereign gold bonds issued by
RBI.
Illustration
Ram receives a flat as his share on p artition of his HUF. The HUF had
purchased the flat on 01 -04-2001 for Rs 10 lakh. On 1 November 2021
Ram sells the flat for Rs. 35 lakh.
(i) There will be no liability for capital gain on 01 -04-2001 as partition of
HUF is exempted under section 49.
(ii) When t he flat is sold o 1 -11-2021 (A.Y. 2022 -23), its cost and date
of acquisition will same as that of the previous owner (HUF) i.e. Rs.
10 lakh and 01 -04-2001 respectively. The capital gain will be as
under:
Sales consideration 35,00,000 Indexed cost of Ac quisition 10,00,000 X 317/100 31,70,000 LTCG 3,30,000
6.13 COST OF IMPROVEMENT -SECTION 55(1)(B)
Cost of Improvement in relation to capital asset means any expenditure or
cost of capital nature incurred by the assessee or the previous owner in
case of an asset acquired by an assessee in any of the circumstances under
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Capital Gains Sections 45, 48, 49, 50, 54
157 (a) for substantially improving or raising the value of the capital asset or
(b) in making addition or alteration to capital asset after date of
acquisition or
(c) for any expenditu re incurred to protect or complete the title of the
capital asset or
(d) to cure the title of the property or remove any defect from the title.
Following additional points may be noted:
(1) Where a capital asset is acquired prior to 1 -4-2001 and its fair mar ket
value (FMV) as of 1 -4-2001 is substituted in place of the original cost of
acquisition, cost of improvement incurred by the assessee or the previous
owner prior to 01 -04-2001 will be ignored . The cost of improvement
made upto 1 -4-2021 is impliedly incl uded in the FMV on 1 -4-2021.
However, capital expenditure incurred by the assessee or the previous
owner after 01 -04-2001 in making any additions or alterations to capital
asset will be included in cost of improvem ent.
(2) In any other case, all the capital expenditure incurred in making in
additions or alterations to the capital asset by the assessee after it become
his property.
(3) There will be no cost of improvement to goodwill, right to manufacture
or produce or proc ess any articles or right to carry on any business.
(4) Expenditure deductible from the income from house property will not be
included in cost of improvement.
6.14 INDEXED COST OF ACQUISITION /
IMPROVEMENT
Explanation iii to section 48(iii) defines indexed cost of acquisition,
indexed cost of improvement and cost inflation index as under: -
(a) "Indexed cost of acquisition ” means: -
An amount which bears to the cost of acquisition the same proportion as
cost inflation index for the year in which the asset is transfer red, bears to
the cost inflation index for the first year in which the asset was held by the
assessee or for the year beginning on the 1st day of April, 2001, whichever
is later. In other words –
Indexed cost of acquisition =
Cost of Acquisition X CII in the year of Transfer
CII in the year of acquisition* (or 01 -04-2001)
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158 (b) "Indexed cost of any improvement" means: -
An amount which bears to the cost of improvement the same proportion as
cost inflation index for the year in which the asset is transf erred bears to
the cost inflation index for the year in which the improvement to the asset
took place; i.e.
Indexed Cost of Improvement
Cost of Improvement X CII ( the year of Transfer )
CII in the year of Improvement
(c) "Cost Inflation Index" (CII) means :
“such Index as the Central Government may, having regard to seventy -
five per cent of average rise in the consumer price index for urban non -
manual employees for that year, by notification in the official gazette,
specify in this behalf.
Financial Year Index Financial Year Index 2001 -02 100 2011 -12 184 2002 -03 105 2012 -13 200 2003 -04 109 2013 -14 220 2004 -05 113 2014 -15 240 2005 -06 117 2015 -16 254 2006 -07 122 2016 -17 264 2007 -08 129 2017 -18 272 2008 -09 137 2018 -19 280 2009 -10 148 2019 -20 289 2010 -11 167 2020 -21 301 2021 -22 317 Exceptions:
Indexation benefit is not available in respect of the following:
1. Short term capital assets;
2. Bonds / debentures(except Capital Indexed Bonds) issued by
Government;
3. Shares/Debentures of Indian Company Purchased i n Convertible
Forex by non -residents;
4. Depreciable assets;
5. Units purchased in foreign currency by an Offshore Fund under
section 115AB;
6. GDRs purchased in foreign currency by Non -Residents under section
115AC;
7. Securities purchased by non -residents under se ction 115AD, munotes.in

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Capital Gains Sections 45, 48, 49, 50, 54
159 8. Where option of 15% tax rate is claimed in respect of capital gain on
shares under section 112;
9. Slump Sale under section 50B; and
10. Foreign exchange assets purchased by Non - Resident Indians under
section 115 -O.
6.14 EXEMPTION – SECTION 54
Under sections 54, 54B, 54D, 54EC, 54F, 54G and 54H to capital gains
arising from the transfer of certain capital assets are exempt in certain
circumstances. Only section 54 is covered in the syllabus. Salient feature
of the section are given below:
Profit on sa le of property used for residence -Section 54
A. Eligible assessee -
Exemption is available only to Individuals and HUFs. Other assessees are
not eligible to claim exemption under this section.
B. Eligible capital gain :
Exemption is available only respect of capital gain arising on transfer of a
long term residential house used for self -occupation or let out, the
income of which is chargeable under the head ‘Income from house
property’.

Short term capital gains are not eligible for exemption under this se ction

C. Extent of exemption
I. The exemption will be to the extent amount invested by the assessee
or in case of his death, his legal heir who has
a. purchased in India one residential house
i. within one year before such transfer or
ii. two years after such t ransfer or
b. constructed in India one residential house within three years after
such transfer
II. Where the amount of the capital gain does not exceed two crore
rupees, the assessee may, at his option, purchase or construct two
residential houses in India, an d where such option has been exercised, for
the words "one residential house in India", the words "two residential
houses in India" shall be substituted and any reference to to "new asset"
shall be construed as a reference to the two residential houses i n India:
III. However, once during any assessment year, the assessee has
exercised the option ( to buy / construct two houses instead of one house), munotes.in

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160 he shall not be subsequently entitled to exercise the option for the same or
any other assessment year.
D. Other points
(i) Old house (which is sold) must be a residential house In India or
outside India, chargeable under the head income from house
property for self -residence or for letting out.
(ii) New house, purchased or constructed also must be a residential
house si tuated India.
(iii) New house, purchased or constructed outside India will not be
eligible for exemption.
(iv) Purchase of new house may be before or after but construction can
be only after the sale of old house.

Illustration
On 01 -01-2010 Ashok purchased a reside ntial house for self -occupation
for Rs 5 lakh and spent Rs 1 lakh on its registration and improvement.
He sold the house on 01 -01-2022 for Rs 19 lakhs and purchased a new
residential house on 01 -03-2022 for Rs 6 lakh. The exemption under
section 54 will be as under: -
Particulars Rs
Sales consideration 19,00,000 Indexed cost of acquisition + improvement Rs. ( 5,00,000+1,00,000) *317/148
Index for F.Y. 2009 -10 & 2022 -23 12,85,135 LTCG 6,14,865 Exemption under section 54 6,00,000 Taxable capital gain 14,865
(v) Restriction of transfer of new house
If the new house is transferred within a period of three years from the date
of its purchase or construction, the amount exempt under section 54 will
be reduced from cost of the new house and the capital ga in will be
accordingly computed.
(vi) Deposit Account
Unutilized amount of the capital gain for purchase or construction of a
new house is required to be deposited in a specified deposit account with a
bank before the date for furnishing the return of income and the proof of
such deposit is required to be filed with the return of income. Amount so
deposited will be treated as amount utilized towards acquisition of new
house. munotes.in

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Capital Gains Sections 45, 48, 49, 50, 54
161
The amount in deposit account can be utilized for purchase or construction
of house within the specified period.

The unutilised amount is treated as capital gain of the relevant previous
year in which the period of three years from the date of transfer of the old
house expires

6.15 ILLUSTRATIONS
1. State whether the following are the cap ital Asset or not:
(a) Bicycle
(b) Horse
(c) Car
(d) House for self residence
(e) Jewellery
(f) House let out
(g) Silver ornaments
(h) Air Conditioner used as stock in trade
(i) Air Conditioner not used as stock in trade
(j) Rural Agricultural Land
(k) Urban Agricultural Land
Solution:
Items (d) House for self -residence, (e) Jewellery, (f) House let out, (g)
Silver ornaments and (k) urban agricultural land are capital assets.
Items (a) Bicycle, (b) horse, (c), personal car, (i) personal air conditioner
are personal effects, hence not capital a ssets.
Items (h) Air -conditioner used as stock in trade and (j) -Rural agricultural
land are excluded from the definition of capital asset.
2. State whether the following transactions are transfer :
1. A house transferred by way of will to son.
2. Bonus sh ares given by a company to its shareholders.
3. Giving away jewellery for a piece of land.
4. Getting money in lieu of shop in a shopping complex.
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162 Solution
1) Transfer by will is not transfer
2) Issue of bonus share is not transfer
3) Exchange of jewellery with land is transfer of both assets.
4) Money being consideration of shop, it is transfer.
5) Not transfer as asset only hired
3. An asset was acquired on 31 May 2001 for Rs 20,000, it was
substantially improved on 30 June 200 4 for Rs 5,000 and sold on 10
December, 2021 for Rs 85,000. Compute the capital gains.
Solution:
Particulars Rs
Sales consideration 85,000 Indexed cost of acquisition (20,000* 317/100) 63,400 Indexed cost of improvement
5,000 X 317/113). 14,027 77,427 Long Term Capital Gain 7,573
4. Assume that the asset was acquired before 01 -04-2001 & and
improvement were carried before 01 -04-2001 and there is n o change in
fair market value on 01 -04-2001.
Solution:
Sales consideration 85,000
Indexed cost of acquisition
(20,000 X 317/100) on 01 -04-2001* 63,400 Cost of improvement Ign ored (Pre -
01/04/2001 - *Optional 0 63,400 Long Term Capital Profit 21,600
5. A sells a residential house property in Mumbai for Rs. 30,00,000 on
May 15, 2021. The house was purchased by him on June 11, 2002 for Rs
9,00,000. Compute the capital gain

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Capital Gains Sections 45, 48, 49, 50, 54
163 Solution:
Rs. Sales Consideration. 30,00,000 Less- Indexed cost of acquisition
9,00,000X 317 /105 27,17,143 Long Term Capital Gain 2,82,857
6. A sells a flat on 13 April,2021 for Rs 8,00,000. He had acquired the flat
on 15 August 2004 for Rs 1,50,000 and had incurred capital cost of major
repairs of Rs 50,000 in 2007 -08.
Solution

Sales Considerat ion Rs.
8,00,000 Indexed cost of acquisition
1,50,000*317 /113) 4,20,796 Indexed cost of improvement 50,000* 317/ 129) 1,22,868 5,43,664 Long Term Capital Gain 2,56,336
7. X purchased a house property for Rs. 6,00,000 31 -02-2016 and
constructed an a dditional floor in March 2016 for 1,10,000. The house
property was sold for Rs 9,10,000 31 -03-2022. The expenses incurred on
transfer of asset were Rs. 10,000. Compute the capital gains from the
transaction and show the difference, if any, if the house was purchased in
March, 2021

Solution :
Sales consideration 9,10,000 Less: Expenses For Transfer 10,0000
Net Sales Consideration 9,00,000 Indexed cost of acquisition 6 lakh * 317/254 7,48,819
Indexed cost of improvement
1,10,000 x 272/254 1,37,283 8,86,102 Long Term Capital Gain 13,888 Notes: 1. Date of purchase will be the date of acquisition. Construction of
additional floor is improvement to the property.
2. If the house was purchased in March, 2021, it is held for 12 months,
which is less than 24 months. It will be short term capital asset not entitled munotes.in

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164 to indexation. Resultant capital gain of Rs 1,90,000 will be Short Term
Capital gain [Rs. 900000 - (6,00,000+ 1,10,000 )
8. On 1 -7-2022 sold gold jewellery for Rs. 2,50,000. It was purc hased on
1-7-1970 for Rs 9000. Market Value of the jewellery as on 1st April 2001
was Rs. 70,000. Compute taxable amount of capital gain, if the expense on
transfer is.5%.on sales price.
Solution :
Sales Consideration Rs. 2,50,000
Less: Indexed Cost of Acquisition cost as
on 01 -04-2001=70,000x 317/100 2,21,900 Expenditure on transfer (0.5% x 2,00,000) 1,000 2,22,900 Long Term Capital Gains 27,400 9. On 01-03-2020, X invested Rs. 4,00,000 in ornaments and Rs. 80,000
in unquoted equity shares. On 01 -08-2021 X sold the jewellery for Rs.
5,00,000 and shares for Rs.1,60,000. He paid @½% brokerage of
consideration on all the transactions. Calculate the taxable amount of
capital gain.
Solution
A- Capital Gain on sale of Ornaments
Particulars Rs. Rs.
Sales Consideration 5,00,000 Less: Cost of Acquisition 4,00,000 Brokerages on purchases (0.5% x100,000) 2,000 Brokerages on sales (0 .5% x5,00,000) 2,500 4,04,500 Short Term Capital Gain as ornaments held for
30 months (01 -03-2020 to 01 -08-2021) less
than 36 months, hence STCG, no indexation. 95,500
B- Capital Gain on sale of Shares
Particulars Rs. Rs.
Sales Considerati on on Sale of Shares 1,60,000 Less: Indexed Cost of Acquisition 80,000 Brokerages on purchases (0.5% x50,000) 400 80,400 80,400* 317/240 1,06,195 Brokerages on Sales (0.5% x 1,60,000) 800 1,06,995 Long Term Capital Gain(No STT paid, he nce
exemption not available) 53,005 munotes.in

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Capital Gains Sections 45, 48, 49, 50, 54
165 6.16 SELF ASSESSMENT QUESTIONS:
1. Write short note on:
a. Short Term Capital Gain
b. Cost of Acquisition
c. Cost of improvement
d. Expenditure on transfer
e. Transfer
2. Explain the term ‘capital asset.
3. Explain capital gains on compu lsory acquisition of a capital asset.
4. What is “transfer” in relation to a capital asset?
5. State the situations under which the written down value of a “block of
assets” will be reduced to nil.
6. Give any five items are not considered as’ capital asset’.
7. Explain the provisions regarding:
i. Conversion of capital assets to stock -in-trade.
ii. Capital gains in case of depreciable assets.
8. State whether the following are the capital Asset or not:
a. Bicycle
b. Horse
c. Car
d. House for self residence
e. Jewellery
f. House let on hire
g. Silver utensils
h. Air Conditioner used as stock in trade
i. Air Conditioner not used in own house
j. Rural Agricultural Land
k. Urban Agricultural Land
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166 9. Whether the following transactions are transfer in relation to capital
asset.
a. A hou se transferred by way of will to son.
b. Bonus shares given by a company to its shareholders.
c. Giving away jewellery for a piece of land.
d. Getting money in lieu of shop in a shopping complex.
e. Giving the rights to use the asset.
[Ans: only c and d are tr ansfers ]
10. Ajay converted personal investment in unquoted shares into stock in
June, 2015. He had purchased the shares in F.Y. 2011 -12 for Rs.
2,00,000. The market value of the shares, in June 2017 Rs. 8,00,000. He
sold the shares Rs. 9,20,000 on 30 -10-2021. Compute taxable capital
gains .
(Ans: Rs 1.20 lakh business profit and LTCG ( 8 lakh -2 lakh *254 - 182
= Rs 5 ,20,879 in 2015 -16 , taxable in A.Y. 2022 -23
11. Aditya sold his only residential house for Rs 18 lakh on 31 -12-
2021. He had purchased it on 28 -02-2005 for Rs 2 lakh. Determine the
capital gains.
(Ans: LTCG Rs15,02,347 = [18,00,000 - 2,97,653 Rs. 2,00,000X 317/113)
12. Siddharth converts his plot of land purchased in July 2006 for Rs
60,000 into stock -in-trade on 31st March 2014. The fair marke t value on
31.3.2014 is Rs 1,60,000. The stock -in-trade was sold for Rs 2,00,000 in
the month of January 2022. Find out the taxable income, if any, and if so
under which “head” of income and for which “assessment year”.
(Ans: LTCG 1,60,000 -60,000 X 220 -122 = Rs. 91,803 in AY 2014 -15
Business Income Rs. 40,000 taxable in AY 2018 -19)
13. X acquired a plot of land on 30.6.2006 for Rs. 2,20,000. Brokerage
and other incidental expenses on acquisition of plot were Rs. 30,000. X
sold the plot of land on 30.6.2021 f or Rs. 12,50,000. What will be the
amount of capital gain? Can he claim deduction for ground rent paid by
him amounting to Rs. 5,000 during the period when he held the asset?
(Ans: LTCG 12,50,0000 - 6,49,590 - 2,50,000X 317 -122= Rs.6,00,410, No)
14. Raju buys 250 equity shares of A Ltd on 01 -04-2011 @ Rs. 270 per
share and incurs Rs. 500 on brokerage and transfer. On 01 -07-2012, he
gets 200 bonus shares. On 01 -09-2014 he gets 300 right shares @ Rs 140
per share. On 28 -02- 2017 he sells all the 750 shares@ Rs 10 00 per share
and incurs expenditure of Rs. 1,500 on brokerage. Compute his taxable
capital gain.(STT not paid)
(Ans: Sales [750X 1000] - 1500 = Rs 7,48,500 – Purchase
[[250X270+500] X 317/184]= Rs 1,17,152 +0 Bonus+ Right [300X140]X
317/240 = 55,475 LTCLG R s.5,75,873 i.e. { 7,48,500 –1,72,627
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Capital Gains Sections 45, 48, 49, 50, 54
167 15. WDV of the block on 01 -04- 2017 of the block (depreciation 25%)
comprising of two copiers is Rs 6 lakh. Both the copier were discarded on
31-03-2021 and sold for Rs.80,000. Each. New copier was b ought on 01 -
04-2021. For Rs 13 lakh. Compute the amount of capital gain chargeable -
Depreciation. ( Ans: STCL: 4.4 lakh No depreciation on empty block in
AY.2021 -22 . New copier will qualify for dep. In A.Y.2022 -23).
16. Ramesh sold jewellery on 15 -11-2017 f or Rs. 4,50,000. He
purchased it on 01 -04-2014 for Rs. 3,05,000. He paid brokerage of Rs.
4,000 for purchase and Rs. 2.000 for sale. Compute capital gains
chargeable to tax.
(Ans: LTCG RS 39,863= {4,50,000 -2000 -4,08,137 [3,05,000+4000 X
317/240)
17. Mahesh sold his flat 15 -04-2017 for Rs 16.5 Lakh. He had purchased
it for Rs 50,000 on 03 -07-1983. Its market value as on 01 -0-4-2001 was
Rs 5 lakh. He paid brokerage of Rs. 13,000 for the sale transaction.
Compute the total taxable capital gain. (Ans: LTCG 16,50,000 -13,000 -
15,85,000 {5,00,000X 317/100 )= Rs 52,000)
18. A purchased 1000 share of Reliance @ Rs 1000 each. Reliance goes
for right issue in the ratio of 1:1 for Rs 600. A sells (renounces) his rights
for 500 shares @ Rs 50 per share to X. Ascertai n the liability for taxable
capital gains, if any.
(Ans: for A -STCG 500X 25 =12500, Cost of New shares
500X600=3,00,000 For X - Cost of Acquisition of right 500X 600+50
=3,12,500)
19. A sold a residential house for Rs 55 lakhs on 31 -03-2015. He had
inherited the house from his father in 1990, the fair market value of which
as on 1.4.2001 was Rs.10 lakhs. During the year 1992 -1993, he carried out
further construction and improvements, at a cost of Rs. 6 lakhs.
Expenditure in connection with transfer Rs. 5 0,000 Compute capital gains.
(Ans: LTCG Rs 55 Lakh –50,000 -31,70,000 [Rs. 10 lakhs X 317/100 ]=
22,30,000 Improvement in 1992 -93 will be ignored).
20. WDV of Block of 2 machines - (depreciation 15%) owned by K Ltd.
was Rs 9 lakh as on 01 --04-2021. AK purchased a new machine for Rs 8
lakh on 30 -12-2021 and sold the old machines for Rs. 10 lakh. Compute
depreciation and taxable capital gains if any, for AY 20 22-23 . Show the
difference if AK sold the machines for Rs. 8 lakh.
(Ans: a) block Rs 9 lakh + 8 lakh – 10 lakh = 7 lakh. Deprecation @ 15% -
Rs 1,05,000 b)STCG - 1 lakh , Depreciation - Nil.


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168 7
INCOME FROM OTHER SOURCES
(Sections 56 -59)

Unit Structure
7.1 Introduction & Objectives
7.2 Basis of Charge
7.3 Incomes specifically chargeable u/s 56
7.4 Some specific incomes – gifts, dividend
7.5 Deductions
7.6 Amounts not deductible
7.7 Miscellaneous - Balancing charge, Method of accounting
7.8 Self- Assessment Questions
7.1 INTRODUCTION AND OBJECTIVES
This lesson deals with the provisions of section 56 to 59 relating to
“Income from other sources”, its scope, com putation and the deductions
allowable therefrom.
This is the last and residuary head of income. Any income not covered
under any other head of income specified in section 13 is chargeable to tax
under this head.
7.2 BASIS OF CHARGE - SECTION 56
2.1. As per section 56 (1), any income, which is not chargeable to tax
under any other heads of income and which is not to be excluded from the
total income shall be chargeable to tax as residuary income under the head
“Income from Other Sources”.
2.2. As per sectio n 56(2), the following incomes are specifically
chargeable to tax under the head “Income from Other Sources”: -
i. Dividends
ii. Any winnings from lotteries, crossword puzzles, races including horse
races, card games and other games of any sort or from gambling o r
betting of any form or nature whatsoever.
iii. Any sum received by the assessee from his employee as contribution
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Income From Other Sources
(Sections 56 -59)
169 Insurance fund or any other employees’ welfare fund, if not
chargeable under the head ‘profits and gains of business or
profession”.
iv. Interest on securities, if not chargeable under the head ‘profits and
gains of business or profession”.
v. Rental income from machinery, plant or furniture belonging to the
assessee and let on hire if not chargeable under the head ‘profits and
gains of business or profession.”
vi. Composite rental income from letting machinery, plant or furniture
with buildings and letting of the buildings is inseparable from the
letting of the said machinery, plant or furnit ure, if not chargeable
under the head ‘profits and gains of business or profession”.
vii. Any sum including bonus received under keyman insurance policy, if
not taxable as salary or ‘profits and gains of business or profession”.
viii. Any sums of money exceeding R s. 50,000 in aggregate received
without consideration by an individual or HUF.
ix. Fair market value of movable property received without consideration
by an individual or HUF if it exceeds Rs 50,000 in aggregate.
x. The difference between the aggregate fa ir market value and the
consideration received by an individual or HUF in respect of a
movable property or immovable property, if such difference exceeds
Rs 50,000.
xi. The stamp duty value of any immovable property ( whether assessed
or assessable) if it e xceeds by Rs 50,000 than the consideration for
such immovable property received by an individual or HUF.
xii. Shares of closely held companies having aggregate fair market value
exceeding Rs. 50,000 received by a firm or a closely held company
without conside ration or for a consideration which is less than the
aggregate fair market value of the property by an amount exceeding
Rs 50,000.
xiii. Interest received on compensation or on enhanced compensation
referred to in section 145A (b).
xiv. Any sum of money received as a n advance or otherwise in the course
of negotiations for transfer of a capital asset, if such sum is forfeited
and the negotiations do not result in transfer of such capital asset.


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170 7.3 INCOMES S PECIFICALLY CHARGEABLE -
SECTION 56(2)
In addition to the resi duary income chargeable to tax but not covered
under other heads of income, the head “income from other sources” also
covers some well -defined income given as under: -
i. Dividend received from any entity other than a domestic company;
Section 10(34) is deleted, hence dividend received from a domestic
company is not exempt w. e. f. AY. 2021 -22. Dividend received from a
cooperative bank or a foreign company will also be chargeable under
this head.
ii. Pension received by the legal heirs of an employee; Pen sion received
by the employee himself during his lifetime is charged under section
17(3) as the income from salaries;
iii. Any winnings from lotteries, crosswords, puzzles, races including horse
races, card games or other games of any sort or gambling or betti ng of
any form or nature;
iv. Income from letting out any plant, machinery or furniture on hire
where it is not the business of the assessee to do so;
v. Interest on securities if it is not chargeable as the profit and gains of
business or profession;
vi. Employee s’ contribution to any staff welfare scheme received by the
employer, which is not paid within the prescribed time. However
deduction will be allowed in respect of the amount of contribution paid ,
only the balance amount will be taxable;
vii. Income from sub -letting;
viii. Interest on bank deposits and loans and securities;
ix. Royalty;
x. Directors’ fees;
xi. Casual income;
xii. Agricultural income when taxable e.g. land situated in a foreign
country,
xiii. Income from undisclosed sources;
xiv. Rent of plot of land;
xv. Mining rent and royalt y;
xvi. Casual income under a will, contract, trust deed;
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171 xviii. Gratuity received by a director who is not an employee of a company;
and
xix. Any other receipt, which is income but does not fall under the other
four heads of i ncome viz. salary or business income or income from
house property or capital gain.
7.4 SPECIFIC INCOMES COVERED
4.1. Dividend – Section 56(2) (i)
Dividend is the amount of profits distributed by a company among its
shareholders or members. Some impo rtant principles concerning the
dividend are given as under: -
1. Taxable amount of dividend shall be chargeable as income from other
sources.
2. It is not relevant whether dividend is , in cash or kind or out of
taxable profits or tax -free income, out of rev enue profits or capital
gains.
3. Dividend may be final , Interim or deemed dividend
4. Dividend declared at the at the annual general meeting of a company
(AGM) , where the final accounts for the financial year are laid before
the members, is called as the final dividend. Such dividend is
chargeable to tax on the date of AGM, in which it is declared. Date of
actual payment is not relevant. Final dividend , once declared
becomes a debt due and cannot be withdrawn. In case of non -payment
it is earmarked in a separate account as per the Companies Act, 2013.
5. The dividend declared by the board of directors between two AGMs
is called Interim dividend. Interim dividend is taxable when it is made
available or paid to the shareholders.
6. Deemed dividend is not divi dend in real terms. Certain payments
made to shareholders by the company or its liquidator are deemed to
be dividend in the hands of the shareholder in different circumstances
prescribed in Section 2(22) and are chargeable under the head
income from other sources when such sums are actually paid .
4.2. Deemed dividend: -Loan to shareholders - S. 2(22) (e)
Under Section 2(22)(e) any sum paid as loan or advance by a closely
held company
 to a shareholder for his individual benefit, and if such shar eholders
and his relatives holds substantial interest (10 per cent stake in share
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172  to a concern(HUF/Firm etc) where the person having substantial
interest has at least 20 per cent interest, shall be deemed to be the
dividend in the hands of the shareholder.
This provision intends to prevent persons having substantial control and
influence over the affairs of a company to take away all funds of the
company as low -interest loans for their personal benefit to the p rejudice of
the other shareholders.
Some other important points are relevant: -
1. Dividend income will be taxable in the hands of the recipient in the
year in which such loan or advance was given - Section 8 .
2. The section will apply only on cash loans or adv ances.
3. Advances made in kind e.g. of sale of goods on credit in the normal
course of business will not be deemed to dividend.
4. Dividend will be chargeable even if the loan or advance has been
repaid. The courts have repeatedly held that there is no ineq uity in this;
5. A shareholder is entitled to set off the deemed dividend if and when
company declares any dividend.
6. The loan will be taxable as dividend only to the extent of free reserves
of the company;
7. Loans or advance made by the lending company f or which lending is
the main or substantial part of its business will also not be covered by
this section;
8. Any advance or loan made to a shareholder or the concern by a
company in the ordinary course of its business, for purchase of its own
shares or on demerger etc will also be not be covered under this
section;
9. Substantial interest may be existing at any time during the year;
10. Any deemed dividends under section 2(22)(e) or dividend from any
other entity is, however taxable in the hands of the recipie nt; and.
11. Deduction of expenses on collection and interest on loan, taken for
investment in shares, is available against dividend income.
Illustrations
Ascertain the amount of deemed dividend under section 2(22) (e) in the
following situations. The comp anies are closely held, and the shareholder
has substantial interest therein .
1. A borrows Rs one Cr from ABC Private Ltd. and returns the loan next
day, when he makes his own arrangement for finance. The Company was
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173 Solu tion
Out of the loan amount of Rs one Cr. , only Rs. 10 lakhs , to the extent of
free reserve of A Ltd. will be treated as deemed dividend under section
2(22)(e). Repayment of loan does not affect the tax liability. A is entitled
to setoff deemed again st dividend If and when declared. .
2. A takes a loan of Rs 50 lakhs from B Ltd., having free reserves of Rs
50 lakhs.
Solution:
Entire loan amount of Rs 50 lakhs will be deemed dividend in the hands of
B under section 2(22) (e)
3. In the above case, assume t he company is a loss making company
having no free reserves
Solution
Since the company has no free reserves, the loan taken will not be taxable
in the hands of A as dividend.
4. A takes a temporary loan of Rs 10 lakhs from Dee Private Limited for
one mont h only. Thereafter, he transfers the shares. The Company was
having free reserves of Rs 20 lakhs.
Solution
Entire loan amount of Rs 10 lakhs will be deemed dividend in the hands
of B under section 2(22) (e), even if A holds substantial interest only fo r a
part of the year.
4.3. Distribution by Companies: Section 2(22)
Any distribution by a company to its shareholders which entails the assets
of the company, or distribution made on liquidation or reduction of capital
is regarded as dividend to the extent of accumulated profits of the
company.
Similarly, any distribution by a company to its preference shareholder or
debentureholders is also regarded as deemed dividend to the extent of
accumulated profits of the company. Dividend in this class is directly
taxable in the hands of the company.
4.4. Interest on securities
Interest received from debentures of company, mutual funds, and
government securities is taxable as income from other sources except
when such income is exempt under section 10 or is taxed as business
income. If any tax is deducted at source from interest on such securities, it
should be added back and only the gross income should be considered.
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174 there is no deduction or TDS. However, grossing up is required in case of
taxable securities and non -government securities.
From the Interest income from this head, reasonable bank charges and
other collection charges, office and other expenses if the same were
incurred for ear ning the income and interest payable on loans taken for
acquiring securities can be deducted.
Illustration
A received Rs 45,000 as interest net of TDS @ 10% on debentures of B
Ltd worth Rs 2,50,000 held by him. Calculate the interest income and the
amou nt of TDS @ 10% that can be claimed.
Solution:
Dividend received net of 10% TDs: Rs 45,000
Gross Dividend – 45000/90% : Rs 50,000
TDS claim 10 % of Gross dividend Rs 5,000

4.5. Winning from Lotteries, Crossword puzzles, etc
Winnings from, L ottery, crossword puzzles, card games or other games
including any game show like KBC and horse races, betting, gambling etc
are all treated as income from other sources and taxed at the maximum
marginal rate under section 115BB on the gross income withou t
considering -:
 Claiming basic exemption limit
 Deductions under chapter VI -A.
 Expenditure including collection charges, etc or allowances;
 Benefit of set off and carry forward of losses.
Illustration
If A wins Rs 10 lakh in a TV show, it will be subjec t to maximum
marginal rate 30%, + 4% education cess and the Health and Education
Cess HEC (total 31.2%) payable at source. Hence, a will receive only Rs
6, 88,000 and tax will be deducted at source Rs 3,12,000
4.6. Family Pension
Family pension mea ns a regular monthly payment made to the legal heirs
of the employee after his death. This is treated as income from other
source and not salary because there is no employer -employee relationship
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175 Standard deduction equal to 1/3rd of the pension or Rs. 15,000 is available
as deduction from this income. Significantly, pension amount received
during the lifetime of employee is taxable as salaries under section 17(3).
Illustration
Mrs. S receives Rs 60,000 as yearly pension after the death of her
husband. She spends Rs 1000 as expenses for collection of pension .
Solution
Pension amount Rs 60,000
Rs 15,000
Less: Lower of the following :
 1/3 rd of the pension i.e. =
Rs 60,000 X 1/3 = Rs 20,000 or  Rs 15,000
Taxable Pension Rs 45,000 No further deduction will be allowed in respect of collection expenses.
4. 7. Gifts in the hands of individuals and HUFs:
Traditionally the gifts were not taxable being capital receipts. Later,
section 56 has been am ended to bring gifts under the tax net. Provisions
regarding the taxability of gifts are summarised below.
4.7.1 Taxable Gifts
As per section 56(2) ((vii), following receipts by an individual or a Hindu
undivided family, in any previous year from any person or persons will be
taxable as “Income from Other Sources:
a. The whole of the aggregate value of any sum of money, received
without consideration, the aggregate value of which Rs 50,000.
b. Any immovable property ,
i. without consideration, the stamp duty valu e of which Rs 50,000 , the
stamp duty value of such property;
ii. for a consideration which is less than the stamp duty value of the
property by an amount exceeding Rs 50,000,
Following points are important in this regard :
4.7.2 Date of valuation
When the date of agreement and the date of registration are not the same
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176  the date of agreement if any part or whole of the amount of
consideration thereof, has been paid by any mode other than cash on or
before the date of th e agreement;
 the date of registration in all other cases .
4.7.3 Disputed Value
If the stamp duty value of immovable property is disputed by the assessee
under section 50C(2) , the Assessing Officer may refer the valuation of
such property to a Valuation Off icer as per the provisions of sections 50C
and 155(15) will apply for valuation of capital asset.
4.7.4 Any property, other than immovable property -
 without consideration, the aggregate fair market value of which
exceeds Rs. 50,000, the whole of the aggregate f air market value of
such property; or
 for a consideration which is less than the aggregate fair market value
of the property by an amount exceeding Rs 50,000, the aggregate fair
market value of such property as exceeds such consideration.
4.7.5 Exceptions:
The provisions will not apply to any sum of money or property received - :
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer or donor; o r
(e) from any local authority defined in section 10[20] -Explanation
(f) from any fund or foundation or university or other educational
institution or hospital or other medical institution or any trust or
institution referred to in section 10 (23C) ; or
(g) a trust or institution, etc., registered under section 10(23C), 12A or
section 12AA or section 12AB . if the property or money has been
received by the persons other than those referred to under section
13(3).
4.7.6 Meaning of Property:
Property” means th e following capital asset of the assessee: —
a. immovable property being land or building or both;
b. shares and securities;
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177 d. archaeological collections;
e. drawings;
f. paintings;
g. sculptures;
h. any work of art; or
i. Bullion
4.7.7 Meaning of Relative
Relat ive “means:
I. In relation to an Individual :
a. spouse of the individual;
b. brother or sister of the individual.
c. brother or sister of the spouse of the individual ;
d. brother or sister of the either of the parents of the individual,
e. any lineal ascendant or desce ndant of the individual
f. any lineal ascendant or descendant of the spouse of the individual
g. spouse of the persons referred to in (2) to (6) above.
II. In relation a Hindu Undivided Family any member thereof.
4.7.8 . Cost of Acquisition
While computing capital gains, cost of acquisition of a property received
by a transferor from any exempted mode of transfer e.g. will, is taken at
the same cost as that of the previous owner. Further, cost of acquisition of
a property received without consideration and is charg eable u/s 56 when it
is subsequently sold or transferred shall be the value considered u/s 56.
Illustration
A painting valued at Rs 10 lakh is transferred for Rs 8 lakh Difference of
between the consideration and the fair market value of Rs 2 lakh, will be
charged u/s 56 being value of inadequate consideration. The painting is
resold for Rs 15 lakh, the capital gain will be computed by taking the cost
of acquisition of Rs 10 lakh i.e. Rs 15 lakh – 10 lakh = Rs. 5 lakh .
4.8. Issue of shares at premium
Aggregate consideration received by a closely held company (private
company),which issues shares at premium or above their face value
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178 consideration exceeds the fair market value of the shares by Rs 50,000
except when the shares are issued
 to a venture capital company or
 other company notified by the Central government.
Fair market value of the shares will be determined as per the prescribed
rules, i.e. net asset valu e or break -up value method or any other method
as may be substantiated by the company to the satisfaction of the
Assessing Officer, based on the value, on the date of issue of shares, of its
assets, including intangible assets, being goodwill, know -how, patents,
copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature.
Illustration
A company issues 10,000 shares @ Rs 200 as against the fair market
value of Rs 100 per share. then 1000X (200 -100) = Rs 10 lakh will be
treated as “ income from other sources , unless the company is a venture
fund or other notified company. .
Following table summarizes the position of gifts u/s56

TAXABLE GIFTS AT A GLANCE
INDIVIDUALS AND HUFS
RECEIPTS WITHOUT CONS IDERATION
Cash 50,001 Aggregate
Movable Assets 50,001 Aggregate
Immovable Assets 50,001 Per Property
INADEQUATE CONSIDERATION [ FMV - CONSIDERATION]
Movable Assets 50,001 Aggregate
Immovable Assets 50,001 Per Property
Shares 0f Pvt Co.
Recd by firm or Co 50,001 Consideration or
difference with FMV
Sh. Premium by Pvt Co 50,001 Difference with FMV


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Income From Other Sources
(Sections 56 -59)
179 Important Points:
1. Limit of Rs 50,000 is for each category in case of cash and movable
assets and cash but Rs. 50,000 is per immovable prope rty as the section
says “such property’
2. Rs 50,000 is not the basic limit. Once the limit of Rs 50,000 exceeds,
entire sum will be taxable. For instance, A receives cash gift of Rs
40,000 it will be exempt as it is below Rs 50,000 If he receives
another gift of Rs. 10,100 from C. The aggregate gifts of Rs 50,100
will be taxable without any basic exemption.
3. The list of relatives does not include nephews/nieces/ cousins.
4. List of relatives includes Spouses, Siblings - own, spouses’ and parents,
lineal a scendants and descendants and spouses,
5. List of relatives includes uncles and aunts of the individual but not
those of the spouse.
6. Stamp duty valuation will have same meaning as in S 50C.
7. Fair Market Value can be determined by the valuer.
8. Business assets l ike stock are not covered by these provisions and
normal sale or purchase transactions will not attract the provisions of
this section.
9. Any movable property like shares, securities, jewellery, drawings,
paintings, sculptures, work of art or archaeological collections or
immovable , without consideration, having aggregate fair market value
exceeding Rs 50,000 during a previous year, for a consideration falling
short of their aggregate fair market value by more than Rs 50,000 will
be covered by this provis ion.
Illustration
Compute the total income of XYZ, who receives Rs 60,000 in cash and of
500 shares of a company valued at Rs. 120 per share as gift from each of
the following persons:
1. B, his neighbour.
2. C, employer
3. D, one of his patients
4. E, his sister on the occasion of his daughter’s marriage.
5. F, in contemplation of death.
6. Mrs. A
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180 8. H, son of E
9. X, a stranger on his marriage.
Solution
COMPUTATION OF TOTAL INCOME OF XYZ
Particulars Rupees
Salaries -gift from employer C secti on 17 1,20,000 Profits and gains of business & profession -
Gift from patient -D Section 28 1,20,000 Income from Other sources - Section 56 sister E ‘s son [ nephew not exempted]
B- his neighbour 1,20,00X2 2,40,000 Total income 3,00,000
 Gift of shares of Rs . 6,000 and cash Rs 60,000 each treated at par.
Therefore, total gift in each case Rs 1,20,000
 Exempt gifts from – ( with reason in brief )
E - sister – Relative
F in contemplation of death ( Gift mortis Causa ).
Mrs. A - spouse –Relative
G -E’s husband – Sister’s spouse –Relative
On Occasion of marriage (Relationship not relevant )
4.9 Gifts Received by firms and companies
When a firm or a closely held company receives, in any previous year,
from any person or persons, any sha res of another closely held company -
 Without consideration and the aggregate fair value of such shares
exceeds Rs 50,000, the whole of the aggregate fair market value of
such shares or property;
 for a consideration which is less than the aggregate f air market value of
the shares by an amount exceeding Rs 50,000, the aggregate fair
market value of such property as exceeds such consideration .
This section will not how ever apply to transactions not regarded as
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181 4.10. Unde r the new sub -section 56(2)(vii), firms, widely held companies
and AOP are liable to pay tax on the difference between fair market value
and the actual consideration of movable or immovable asset.
Illustration -11:
A Pvt. Ltd. buys shares in B Ltd of Rs 1 5 lakh for Rs 8 lakh from C. the
difference in the consideration and the fair market value amounting to Rs
7 lakh will be taxable under section 56.
A. Important points :
i. The limit of Rs 50,000 is for each category.
ii. Rs 50,000 is not the basic limit. Once the limit of Rs 50,000 exceeds,
entire sum will be taxable. For instance, cash gift of Rs 45,000
received by A, is not taxable being below Rs 50,000. A receives
another gift of Rs. 5,100 from C, then the aggregate gifts of Rs 50,100
will be taxable witho ut any basic exemption.
iii. The limit of Rs. 50,000 is per immovable property.
iv. The list of relatives excludes nephews/nieces/ cousins.
v. List of relatives includes spouses, own siblings, spouses’ siblings and
parents’ siblings, lineal ascendants, descendants and their spouses .
vi. Stamp duty valuation has the same meaning as in S 50C.
vii. Fair Market Value can be determined by the valuers.
viii. Business assets like stock are outside the scope of this section. Hence,
normal transaction of sale and purchase of goods or s tocks will not
attract the provisions of this section .
ix. Any movable property like shares, securities, jewellery, drawings,
paintings, sculptures, work of art or archaeological collections,
without consideration the fair market value of which exceeds Rs
50,000 in aggregate during a previous year, or for a consideration
falling short of their aggregate fair market value by more than Rs
50,000 will be covered by this provision.
x. Partition in HUF, transaction between relatives and trusts are still
excluded from the scope of the section.
xi. Shares received by an individual or HUF as a consequence of
demerger or amalgamation of a company or a business reorganisation
of a co -operative bank shall not to be subject to tax by virtue of
section 56(2)(vii).
xii. The section has been enlarged to include firms and companies in its
purview.
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182 4.11. Additional compensation
Income by way of interest received on compensation or on enhanced
compensation referred to in clause (b) of section 145A.
4.5 DEDUCTIONS -SECTION 57
Section 57 al lows the following deductions in computing the income from
other sources:
I In case of taxable dividend income and interest from securities:
Any reasonable sum paid by way of remuneration or commission for the
purpose of realising such income including in terest on borrowed capital if
such borrowed capital is used for making investment in shares or
securities.
II In case of income from plant, machinery or furniture given out on
hire:
a. Current repairs to building.
b. Current repairs to machinery, plant or furnit ure.
c. Insurance premium paid for insuring the plant, machinery, building or
furniture.
d. Depreciation on building, machinery, plant or furniture.
e. Any expenditure (not being capital expenditure or personal
expenditure) which has been incurred wholly, necessari ly and
exclusively for earning income, such expenditure will also be allowed
as a deduction, e.g. sub -letting expenses. Office stationery, rent,
salaries, etc where maintenance of office is necessary for earning the
income.
III In case of family pension re ceived by legal heirs of an employee ,
A standard deduction of 1/3rd of such amount received as family pension
or Rs. 15,000, whichever is less.
For this purpose, family pension means a regular monthly payment made
to the legal heirs of the employee after his death. Significantly, pension
amount received during the lifetime of employee is taxable as salaries and
not entitled to standard deduction.
IV. Employees’ contribution to Provident or any other fund if deposited
before the due date.
V. Any allowances paid for breeding or maintaining the racehorses.
VI. A deduction of 50% against the enhanced compensation received and
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183 4.6 AMOUNTS NOT DEDUCTIBLE - SECTION. 58
The following amounts are not deductible wh ile computing income under
the head “income from other source”: -
 Personal expenses of the assessee;
 Any interest which payable outside India, on which income tax has not
been paid or deducted at source;
 Any sum paid on account of wealth tax in India or abr oad;
 Any amount not allowable by virtue of it being unreasonable;
 In case of foreign companies, expenditure in respect of royalties and
technical services received under an agreement made after 31/3/76;
and
 Any expenditure in connection with income from wi nning from
lotteries, crosswords, puzzles, races including racehorses, car races
and other games of races, gambling, betting of any form. However,
expenses are allowed as a deduction in computing the income of an
assessee who earns income from maintaining as well as holding
racehorses.
4.7 MISCELLANEOUS
a) Balancing charge taxable -Section. 59
Any amount received, or benefit derived in respect of any expenditure,
incurred or loss or trading liability allowed shall be deemed to be the
income of the year in which su ch benefits is accrued or received as the
case may be.
b) Method of accounting - Section 145
Section 145 relating to method of accounting is also applicable to the
computation of income from other sources. Income under this head is
computed in accordance with the method of accounting regularly
employed by the assessee i.e. if the assessee accounts only on cash receipt
and cash payment basis, income will be treated on cash payment and cash
receipt basis only; otherwise it will be treated on mercantile basis. An
assessee can adopt either the cash method or accrual method of
accounting. Hybrid method is not permissible. However, certain items like
lottery, horse races, dividend under section 2(22)(e) can only be recorded
on cash basis because of their variable natu re.
c) Grossing Up:
Many times, dividends, interest from securities are received after TDS. In
such case amount to be included in total income is gross amount and not
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184 Illustration
A receives taxable i nterest of Rs. 81,000 after deduction of 10% TDS .
Find out the taxable income.
Solution
Amounts to be taxed will be gross amount Rs 90,000 i.e. .81,000 100(100 10)Rs
Rupees 90,000 will be included in the income and cred it for TDS of Rs.
9,000 will be claimed against the tax payable .
4.8 SELF -EXAMINATION QUESTIONS :
1) Enumerate any five items of income, which are included under the
head ‘income from other sources’.
2) Define Dividend. Discuss the taxability of dividend.
3) What are the incomes included under the subhead of winning? What
is the rate of tax on such incomes?
4) What are the deductions allowable in respect of hire charges of plant
and machinery?
5) Are there any amounts, which are not allowed as deductions while
computing the income from other sources? Give examples.
6) A is in receipt of pension as a retired government employee @ Rs.
10000 per month. Besides, he is in receipt of family pension of his
late wife @ Rs. 6ooo per month. Show how the two amounts will be
treated for tax purposes.,
( Own pension salary / wife’s pension other sources with std deduction Rs
15000 )
7) Show the head of income under which the following items would be
charged.
a. Rent received by an event manager on letting out tents /pandal.
b. Hiring charges received by a taxi driver.
c. Car hiring charges received by a company from the cars requisitioned
by the Election Commission
d. Interest on Income Tax Refund
e. Rent received by letting out own house and
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185 g. Computer hiring charges.
h. Salary of director
i. Salary of M.P/ MLA
j. Rent of a house.
k. Rent of a plot of land.
l. Rent of a machine let on hire along with building and letting is
separable.
m. Dividend from domestic company.
n. Winning from TV game show like.
(Hints/Answers: item e/j remaining othe r sources. Director if employee,
then salary)

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186 8
EXCLUSIONS AND DEDUCTIONS
Unit Structure
8.1 Introduction and Objectives
8.2 Exemptions and deductions
8.3 Income exempt under Section 10
a. Agricultural income -Section 10(1)
b. Receipts by a member from HUF -Section 10(2)
c. Share of profit of a partner in firm –Section 10( 2A)
d. Income of minor Child –Section 10(32)
e. Other Exemptions
8.4 Deductions –Section 80 –Chapter VIA
f. Investments –Section 80C
g. Pension Plan –Section 80CCF
h. Mediclaim -Section 80D,
i. Physical Disability –Section 80DD,
j. Treatment f major diseases –Secti on 80DDB,
k. Interest on educational Loans Section 80E,
l. Physical Disability(Own) - Section 80U:
8.5 Solved Examples
8.6 Self-Assessment questions
8.1 INTRODUCTION & OBJECTIVES
Exemption refers to an income not at all considered or excluded while
computing total incom e. Deduction on the other hand may be in respect of
income or expense or both. Income will be considered while computing
total income but once again deducted alongwith deduction s in respect of
expenses.
This lesson deals with the provisions of Income Tax Act 1961 relating to
exemptions contained in Section 10 to 13 and deductions accordance with
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187 8.2 EXCLUSIONS VS DEDUCTIONS
8.2.1 Exclusions or Exemptions
Exempt income means the Income, which is neither chargeable to income
tax nor considered or included in the computation of total income. Exempt
income is altogether excluded and does not form part of total income.
Every receipt is presumed to be chargeable to tax unless such receipt is
proved to be specifically exempt from tax.
Exemptions may of different nature.
(a) Exemptions granted to a person or class of persons such as charitable
trusts in respect all or some of their incomes.
(b) Exemptions in respect of specified incomes exempt in the hands of all
types of assessees such as interest on certain notified securities,
dividend till 2 years ago (now taxable) agricultural income etc.
(c) Exemptions available unconditionally,
(d) Exemptions that can be claimed only on fulfillment of certain
condition such as in case of startups, SEZ etc.
(e) Exemptions to certain incomes exclusively granted under Section s 10
to 13.
(f) Exemption granted under particular head of income while computing
income under Section s 15 to 56 under different heads viz Salaries,
Income from house property, Profits and gains of business &
profession, Capital gains and Income from other sources.
(g) A receipt not falling under the definition of income under Section s
2(14) or a receipt, which is of capital nature, will be excluded unless it
is specifically chargeable to inco me tax.
8.2.2 Deductions
Income (after excluding exempt income) is computed under different
heads of income as provided in Section s 15-56. Aggregate of such income
is called Gross Total Income .
From the Gross Total income so computed, deductions are allowed u nder
the provisions of Section s 80 of chapter VIA of the Act either in respect of
any income or revenue or in respect of any payment or expenditure.
Section s 80IA, 80IB etc. provide for deduction in respect of revenue or
income of a class of assessees l ike software, infrastructure companies,
companies engaged in constructio n of affordable housing etc. while
Section s 80 C , 80D etc. provide for deductions in respect of investments
in specified securities, payment of mediclaim, expense on handicapped
dependent etc.
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188 8.3 INCOME EXEMPT - SECTION 10:
Section 10 provides that any income falling within any of the clauses of
that Section shall not be included in computing the total income of a
previous year of any person. However, burden is on the assessee t o prove
that a particular item of income falls within this Section . Syllabus includes
only exemption available under a particular head. All such exemptions are
taken up with the respective heads of income. Some other exempt
incomes are as under: -
8.3.1 Agricul tural Income
Under the constitution of India, agriculture is in the state list. Central
Government is not constitutionally competent to levy taxes on agriculture.
Accordingly, agricultural income is exempt under Section 10(1) of the
Act. However, agricult ural income is taken for rate purposes, if it exceeds
Rs 5000.
Meaning of agricultural income
As per Section 2 (1A) “Agricultural income” means any: -
A. any rent or revenue derived from land -
(i) which is situated in India and
(ii) is used for agricultural purpose s
B. any income derived from such land by
(i) agriculture; or
(ii) raising the performance by a cultivator or receiver of rent -in-kind
of any process to render the produce raised or received by him fit to
be taken to market or
(iii) the sale of such produce without performing any other process as
stated above. ;
C. any income derived from any building owned and occupied by
owned and occupied by the
(i) receiver of the rent or revenue of any such land, or
(ii) cultivator or
(iii) receiver of rent -in-kind, of any such land
if such building is
a) on or in the immediate vicinity of the land, and
b) required as a dwelling house, or storehouse, or other outbuilding by
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189 (i) assessed to land revenue in I ndia or
(ii) subject to local rates and taxes assessed and collected by the
government and
(iii) situated in any area within the distance measured aerially from the
local limits of any municipality or cantonment board depending
upon its population as per the la st published census namely -
- 2 kms if population is more than 10,000 but not exceeding 1 lakh;
- 6 kms. if population is more than 1 lakh but not exceeding 10 lakh; or
- 8 kms. if population is more than 10 lakh.
Other Points
1. Income from land si tuated in urban area is not exempt.
2. Land situated in areas having population of 10,000 or less will
qualify for exemption.
3. Agricultural income must be received in India.
4. Agricultural income from a foreign country is treated as non -
agricultural income in India.
5. Receipts arising on transfer of agricultural land under Section 2(14)
is not considered agricultural income but may give rise to capital
gain.
6. Any income arising from letting out the building for residential or
business purpose other than ag riculture will not be agricultural
income
Illustration
T employs S to carry out agriculture on his agricultural land at
remuneration based on the value of agricultural produce. S remits the sale
proceeds of the agricultural produce to T after deducting hi s share. .
Income on sale of agricultural produce derived from agricultural in India
being the agricultural income is exempt under Section 10(1) in the hands
of T.
S earns salary for rendering his services. It is not derived from agricultural
land. Hence , it will be chargeable to income tax under the head
“Salaries”.
9 Share of Profit of a partner in a firm –Section 10(2A)
Share of a person being a partner of a firm, which is separately assessed
as such, in the total income of the firm will be exempt from tax under
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190 A firm like a HUF is assessed as a separate entity. Hence the exemption is
provided to avoid double taxation of same income first in the hands of the
firm and then again in the hands of the partners.
The exemption is restricted to share in the total income of the firm not to
payment of any interest on capital or remuneration paid by the firm, which
is taxable in the hands of the partners to the extent it was allowed as a
deduction to the firm.
But any remuneration or interest o n capital in excess of the limits laid
down in Section 40 shall be chargeable to tax in the assessment of the firm
and will form the part of the income allocated to partners exempt under
Section 10(2A).
10 Income of minor child
Under Section 64(1A), income of a minor child is clubbed in the hands of
his parent, who is having higher income except income earned by minor’s
personal efforts or skill. Section 10(32) provides for an exemption of the
amount included in the income of such parent subject to a maximum o f
Rs. 1,500 per child.
Illustrations
1. Income of Rs 1,000 of S, a minor son is included in the income of his
father F. Amount exempt under Section 10 (32) will be Rs. 1000 being
actual income included in the hands of parent or Rs. 1,500, whichever
is less.
2. Assuming income of S is Rs 15,000, exemption under Section 10
(32) will be restricted to Rs. 1,500 only.
3. Assuming income of two minor children S and T amounting Rs 7,500
and Rs 5,500 is clubbed with F’s income, exemption under Section
10(32) w ill be of Rs 3,000 being Rs 1,500 per child.
11 Dividend from domestic companies –Section 10(34)
With effect from 1 April 2020, the erstwhile dividend distribution tax
(DDT) @ 15% u/s 115 -O has been abolished and the dividend income is
now taxable in the ha nds of shareholders
12 Dividend from Units of mutual funds –Section 10(35)
With effect from 1 April 2020 Dividend or income received in respect of
units of mutual fund or administrator of the specified undertaking; or
specified company is taxable in the hand s of the assessee
13 Other Exemptions:
A brief summary of exemptions under Section 10 is given for reference as
it may have a bearing on the computation .
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191 APPENDIX
1. Exemption to Foreigners/ Non Residents
(i) Interest income of non -resident persons of Indian or igin (PIO)
from notified securities, saving certificates/ NRE Account. Purchased in
convertible foreign exchange – Section 10(4).
Remuneration / salary of (ii) foreign diplomats - Section 10(6). (iii) a trainee of a foreign government - Section 10(6)(xi), (iv) a foreign national as an employee of foreign Enterprise -Section 10(6) (v) Non-Resident employee in Foreign Ship – Section 10(6)(viii) (vi) Person from a foreign government under Co -operative Technical
Assistance Programme/projects - Section 10(8) (vii) a consultant under Grant Ag reement between the International
Organisation and the Government of Foreign State - Section 10(8A): (viii) non-resident, engaged by the agency for rendering technical services
in India in connection with any technical assistance programme or
project, provided in accordance with an approved agreement - Section
10(8A) (ix) an Individual who is assigned to duties in India in connection with
any Technical Assistance Programme and Project in accordance with
an Agreement entered into by the Central Government and the
Agenc y - Section 10(8A) (x) an individual who is assigned to duties in India in connection with any technical assistance programme and project from a consultant referred to S 10(8A), income - Section 10(8B) (xi) Income other than salary, royalty or fees for technical s ervices from
Government or an Indian concern under an approved agreement and
if tax is paid by the employer the tax so paid is exempt from tax. -
Section 10(6B) (xii) Income accruing or arising outside India by any family member of
persons covered Section 10 (8),(8A) or (8B) , in respect of which
such member is required to pay any income tax or social security tax
to the Government of that foreign state – Section 10(9) (xiii) Amount of tax actually paid by an employer, at his option, on non -
monetary perquisites on behalf of an employee in the hands of the
employee - Section 10(10CC).
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192 2. Exemption to Salaried Employees (i) Exemption granted to salaried employee have been dealt in detail in
the lesson relating to salaries such as (ii) Value of any travel concession/ assistan ce- Section 10(5), (iii) allowance paid by the government to a Indian citizen rendering
service outside India - Section 10 (7) (iv) Death cum Retirement gratuity - Section 10(10) (v) Commuted pension Section 10 (10A), (vi) Leave encashment Section 10 (10AA) (vii) Retrenchment comp ensation - Section 10(10B) (viii) Voluntary Retirement Compensation Section - 10(10C) (ix) Value of tax -paid perquisite - Section 10(10CC) (x) Leave travel allowance, (xi) Payment from statutory PF - Section 10(11) (xii) Any payment from National Pension Trust or upto 40% on closu re of
such account - Section 10(12A /12B) (xiii) house rent allowance Section -10(13A), (xiv) special allowances etc. Section 10(14) 3. Exemptions to Institutions / Funds The income of the following institutions is exempt subject to certain conditions: (i) Local author ity Panchayats, municipality, municipal committee,
district board, cantonment board -Section 10(20) (ii) Approved Notified scientific and research association applying which
has as its object, undertaking research in social science or statistical
research, and applying its income wholly and exclusively to its
objects, including profits and gains of a business carried on by an
institution, which is incidental to its objects -Section 10(21) (iii) News agency set up in India which applies its income or accumulates
it for application solely for collection and distribution of news and
does not distribute its income in any manner to its members. - Section
10(22B) (iv) Regimental Fund or non -public fund. - Section 10(23AA) (v) Approved fund for the welfare of employees. - Section 10(23A AA) munotes.in

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193 (vi) Pension fund (Jeevan Suraksha) set up by the Life Insurance
Corporation of India or a pension fund of any other insurance
company Section 10(23AAB) (vii) Khadi and Village industries Board Section . 10(23B) (viii) Public charitable trusts , religious institutions an d political trusts -
Section 11 ,12, 13 (ix) European Economic Community. (x) SAARC Fund for Regional Projects. (xi) ASOSAI -Secretariat (xii) Insurance Regulatory and Development Authority (xiii) Prime Minister’s Relief Fund (xiv) National Foundation for Communal Harmony (xv) University/educa tional institution, hospital or medical institution
Section 10 (22)/(22A) (xvi) Professional bodies . Section 10(23A) (xvii) Notified fund, charitable/ religious institution or trust. - Section
10(22B) (xviii) Mutual fund - Section 10(22B) (xix) Notified Investor Protection Fund set up by recognised Stock
Exchanges (xx) Credit Guarantee Fund Trust for Small Industries (xxi) Approved Venture Capital Fund or Venture Capital Company -
Section 10(23FB) (xxii) Prasad Bharati (Broadcasting Corporation of India) Section
10(23BBH) (xxiii) Swachh Bharat Kosh – Sectio n 10(23C(iiiaa) (xxiv) Clean Ganga Fund - Section 10(23C(iiiaaa) (xxv) Core Settlement Guarantee Fund set up by a recognized clearing
corporation in accordance with notified regulations - Section
10(23EE) to the extent of contributions from members fines and
incom e from investments. (xxvi) Trade Union or Association of trade Unions from house property
and other sources. - Section 10(24) (xxvii ) Statutory Provident Fund under P. F. Fund Act. - Section 10(25) munotes.in

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194 (xxviii ) Employees’ State Insurance Fund set up under the ESI Act -
Section 10(25A ) (xxix) Members of scheduled tribes residing in specified areas. –
Section 10(26) (xxx) Statutory Corporation, body, association or institution formed or
established for promoting the interests of the members of
Scheduled Castes/ Schedules Tribes or backward classes o r of
any two or all of them. Section 10(26B) (xxxi) Corporation established by the Central/ State Government for
promoting the interests of a notified minority community. -
Section 10(26BB) (xxxii ) Ex-Servicemen Corporation established under an Act for the
welfare and ec onomic upliftment of ex -servicemen being the
citizens of India. - Section 10(26BBB) (xxxiii ) Co-operative Society formed for promoting the interest of
members of either the Scheduled Caste or Scheduled Tribes. -
Section 10(27) (xxxiv ) Coffee Board, Rubber Board, Tea Board, T obacco Board,
Marine Products Export Development Authority, Agricultural
and Processed Food Products Export Development Authority
and Spice Board. - Section 10(29A) (xxxv ) Subsidy received from the Tea Board for replantation or
replacement of tea bushes or for rej uvenation or consolidation
of areas used for cultivation of tea under any scheme notified
by the Central Government - Section 10(30) (xxxvi ) Subsidy received from the Rubber Board, Coffee Board,
Spices Board or any other Board under any scheme of
replanting or repl acement, etc. - Section 10(31) Exemptions not be available to the institutions under Section 10(23C)
having commercial receipts of Rs. 25,00,000 or more CAPITAL GAINS (xxxvii ) Any long -term capital gain arising on transfer of eligible
equity shares of a company acquired on or after 1 -3-2003 but
before 1 -3-2004 and held for 12 months or more if STT is paid except in case of a transaction undertaken in foreign currency
on a recognised stock exchange located in an International
Financial Services Centre even (xxxviii ) Any long-term capital gains from transfer of equity shares of a
company or units of an equity -oriented fund on or after 1 -10-
2004 and subject to Securities Transaction Tax -Section
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195 (xxxix ) Any capital gain arising to an individual/ HUF on compulsory
acquisit ion of an agricultural land in urban areas (situated
within the jurisdiction of a municipality or a cantonment board
having population of 10,000 or more or within 8 Kms from the
local limits of such municipality/ board), where the
compensation/ considerati on is received by the a ssessee on or
after 1 -4-2004, Provided, the land was being used for
agricultural purposes by the HUF/ individual or his parent(s),
during the period of 2 years immediately before acquisition. (xl) Any income arising from the transfer o f units of US 64 subject to the
condition that any loss arising on transfer of units of US.64 cannot be
set off against any income in the same year in which it is incurred and
the same cannot be carried forward -–Section 10(33) MISCELLANEOUS (xli) Daily allowan ce of Members of Parliament while the parliament is in
session is and Members of State Legislative Assemblies upto Rs.
2000 - Section 10(17) (xlii) Any sum received on life insurance policy (including bonus) not
being the amount received on the following polic ies - a. any sum received Under Section 80DD (3) or 80DDA (3); b. any sum received under a Keyman insurance policy; c. any sum received under an insurance policy (issued after March 31, 2003) in respect of which the premium payable for any of the years
during the term of policy, exceeds 20 per cent of the actual sum
assured except in case of the death of the person and the value of any
premiums agreed to be returned or of any benefit by way of bonus or
otherwise, over and above the sum actually assured, whi ch is received
under the policy by any person, which shall not be taken into account
for the purpose of calculating the actual capital sum assured under
this clause. - Section 10(10D), (xliii) Family pension received by the widow or children or
nominated heirs of a member of the armed forces or paramilitary
forces of the Union is not chargeable to tax from A.Y. 2005 -06, if
death is occurred in such circumstances given below — a. acts of violence or kidnapping or attacks by terrorists or anti-social
elements; b. action against extremists or anti -social elements; c. enemy action in the international war; d. action during deployment with a peace keeping mission abroad; e. border skirmishes; munotes.in

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196 f. laying or clearance of mines including enemy mines as also mine sweeping operations; g. explosions of mines while laying operationally oriented mine-fields or
lifting or negotiation mine -fields laid by the enemy or own forces in
operational areas near international borders or the line of control; h. in the aid of civil power in dealing with natural calamities and rescue
operations; and i. in the aid of civil power in quelling agitation or riots or revolts by demonstrators. - Section 10(19), (xliv) Any income by way of dividend referred to in Section 115-O from a
domestic company or a ny income in respect of units of mutual fund;
UTI, from the administrator units from the specified company is
exempt under Section 10(34)/ (35), (xlv) Interest income arising to certain persons -Section 10(15): (xlvi) Income by way of interest, premium on redemption or other payment
on notified securities, bonds, annuity certificates or other savings
certificates subject to prescribed conditions and limits. (xlvii) Interest from Post Office Savings Bank Account: (1) Rs. 3,500 in case of an individual account. (2) Rs. 7,000 in case of a joint account. (xlviii ) -Interest on deposit certificates issued under the Gold
Monetization Scheme, 2015. (xlix) any income of a foreign company received in India in Indian currency
on account of sale of crude oil to any person in India subject to
approved conditions being satisfied received under a notified
agreement or an arrangement with the Central Government or
approved by it and the receipt of the money is the only activity
carried out by the foreign company in India -Section 10(48) (l) Exemption of inc ome accruing or arising to a foreign company on
account of storage of crude oil in a facility in India and sale of crude
oil therefrom to any person resident in India. if(1) such storage and
sale by the foreign company is pursuant to an agreement or an
arrangement entered into by the Central Government or approved by
the Central Government; and (2) having regard to the national
interest, the foreign company and the agreement or arrangement are
notified by the Central Government in this behalf. - Section 10(48A): (li) If the premium payable during any previous year for a policy issued
on or after 1 -4-2012 exceeds 10% of the actual capital sum assured,
the entire amount received under such policy shall be taxable except
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197 Other Exempt Income (lii) Under Section 10AA export incomes of undertakings in SEZ are
exempt on pro rata basis i.e.
Business Profit X Export Turnover Total Turnover (liii) Incomes of charitable trusts and political parties subject to the
provis ions of Section 11, 12 and 13.


8.4 DEDUCTIONS UNDER CHAPTER VI A
4.1 Section s 80A and 80AB of chapter VIA provide for a basic
framework for deduction to be made from gross total income. Salient
points of such framework are as under: -
(a) Aggregate of total income of an assessee will be computed under
different heads of income as provided in Section s 15-58 before
making any deduction under this chapter called the gross total
income.
(b) From the gross total income long term capital gains, short term
capital ga in under winnings from lottery, crossword puzzles etc.
are excluded as these items are treated differently for tax purposes.
(c) From the gross total income, deductions are allowable under
Section s 80C to 80U of chapter VIA.
(d) The aggregate of all deductions un der this chapter cannot exceed
the amount of gross total income of the assessee
(e) Deduction is admissible to the members of an AOP or BOI in
relation to their share therein under Section s 80G, 80GGA,
80GGC, 80HHA, 80HHB, 80HHC, 80HHD, 80I 80IB , 80IC,
80ID, 80IE, 80J or 80JJA.
(f) No deduction will be allowed if any exemption is claimed and
allowed to eligible assessee, enterprises, units, or undertakings
under Section s10A, 10Aa, 10B, 10BA, or 35AD for that year.
Further, such deduction shall not exceed the profits and gains of
such undertaking or unit or enterprise or eligible business.
(g) As per Section 80A, the above deduction will be available only if
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198 (h) Section 80B clarifies that deduction in respect of any income shall
be allowed if such income is included in gross total income.
(i) For deduction in respect of any payment, the assessee has to
claims the deduction and submit the proof of such payment for
any investments/ expenditure etc.
(j) Deductions und er Chapter VIA are of three types:
I. In respect of expenditure or investments made by the assessee -
Section s 80C to 80G
II. In respect certain income -Section s 80HH to 80RRB
III. Irrespective of whether income or expenditure - Section s 80 U
allowable to a h andicapped person.
Some of the deductions covered by the syllabus are discussed in
the following paragraphs.
4.2 Deduction in respect of investments in specified saving schemes -
Section 80C:
Section 80C provides for deduction in respect of investment or
contribution towards specified saving schemes. The basic scheme of the
Section is as follows:
(i) Only individuals and HUFs are eligible for deduction under this
Section . Other assessees are not eligible for deduction u/s 80C.
(ii) Both residents and the non -resident assessee are eligible for the
deduction under the Section
(iii) The deduction is allowed in respect of the aggregate amount paid
or deposited during the previous year by the assessee in eligible
saving schemes.
(iv) The aggregate amount paid or deposited tow ards these schemes is
called Gross Qualifying Amount .
(v) The payments/investments eligible under this Section are:
(a) Life insurance premium paid on a policy taken or renewed by
 An individual
- on his own life,
- life of the spouse or any child
- child may be de pendent or independent
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199 The premium including the arrears of premium should not exceed 10% of
sum assured if policy is taken after 0 -1-04-2013 (15% for persons with
handicap under Section 80U or person suffering from serious disease
under Section 80DDB on policy taken after 01 -04-2014). Prior to this, the
restriction was up to 20% for all assessees.
(b) Any sum paid under the contract of non –commutable deferred
annuity plan for the purpose o f securing the individual or his
spouse or children to pay a deferred annuity ;
(c) Any sum deducted from salary payable to a Government employee
for the purpose of securing the individual or his spouse or children
to pay a deferred annuity subject to a maxi mum of 20% of salary;
(d) Contribution towards statutory provident fund;
(e) Contribution towards 15 year Public provident fund(PPF) in the
name of himself, wife or child or a family member upto a
maximum of Rs 1,00,000;
(f) Contribution towards Recognized provident f und;
(g) Contribution towards an approved Superannuation Fund;
(h) Investment in 10 / 15 years Post Office Cumulative Term
Deposits ( CTDS);
(i) Subscription to notified deposit scheme e.g. NSS
(j) Subscription to National Savings Certificates , VIII Issue
(k) Contribution fo r participating in the Unit -linked Insurance Plan
(ULIP) of Unit Trust of India;
(l) Contribution for participating in the Unit -linked insurance plan
(ULIP ) of LIC Mutual Fund (i.e. Dhanraksha plan of LIC Mutual
Fund);
(m) Payment for notified annuity plan of LIC (i.e. Jeevan dhara, Jeevan
akshay, New Jeevan Dhara , etc. or any other insurer;
(n) Subscription towards notified units of mutual fund/ UTI
(o) Contribution to notified pension fund set up by mutual fund or
UTI;
(p) Any sum paid including accrued interest as subscript ion to home
loan account scheme of the National Housing Bank (NHB );
(q) Any sum paid as tuition fees (but not donation) to any
university/college/educational Institution in India for full time
education for maximum 2 children;
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200 (s) Any amount paid for the purchase or construction of a residential
house property or for purchase of land;
(t) Term deposits for a fixed period for at least 5 years with a
scheduled bank under a notified scheme;
(u) Deposit in an account under Senior citizens savings scheme, 2004;
(v) 5- years post office time deposit account;
(w) Subscription to notified bonds issued by NABARD;
(x) Subscription to eligible issues of equity shares or debentures of an
Indian public company or a public financ ial institution where the
entire proceeds of the issue is wholly and exclusively for the
purposes of any business specified for developing, maintaining and
operating an infrastructure facility for generation or generation
and distribution of power or for providing telecommunication
services whether basic or cellular or for developing, developing
and operating or operating and maintaining an industrial park or a
special economic zone - SEZ
Amount of deduction allowable u/s 80C : -
 Whole of the aggregate amou nt paid or deposited in the above
mentioned schemes the gross qualifying amount or
 Rs 1,50,000, whichever is less.
 Under sectioon 80CCE , maximum deduction u/s 80C, 80CCC and
80CCD cannot exceed Rs 1,50,000.
(vi) Some important points :
1) Payment for hou se includes the amount paid to authorised developers
or repayment of loans.
2) The amount of investments need not necessarily be made out of the
taxable income
3) Life insurance premium paid for parents will not be allowable even if
parents are dependent on the assessee .
4) Life insurance premium paid for married daughter will be allowable.
5) Dependence of wife or children is not necessary for claiming
deduction under this Section .
6) Refundable premium and bonus on premium are not eligible for
deduction
7) Premature ter mination( before the period shown below) from any
scheme will have the following effects:
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201 9) Premium earlier paid and allowed as deduction will be brought back to
tax in the current year and adde d to the total income in the assessment
year pertaining to the year of withdrawal.

Illustrations
1. On a whole life policy, a premium of Rs. 6,000 was paid upto last year.
Current year’s premium otherwise eligible for deduction u/s 80C is Rs
3,000. The policy is prematurely terminated during the financial year
2021 -22.
Premium paid in financial year 2021 -22 will not be eligible for deduction
under Section 80C. Premium of Rs. 6000 allowed earlier will be added to
the income of assessment year 2022 -23
2. Kanti makes the following payments during the financial year 2021 -22.
His Gross Total Income amounts to Rs 8,00,000, Compute the deduction
available under Section 80C and the taxable income for the A.Y. 2022 -23.
School fees of his 4 children Rs 60,000 University fees of his wi fe Rs 10,000 Life insurance for wife and kids Rs 40,000 Life insurance for parents Rs 15,000 Life insurance for father -in-law Rs 40,000 NSC Rs 60,000 Repayment of principal for house Rs 50,000 Coaching class fees Rs 11.030

Premature withdrawal/Transfer/ Termination
Life insurance Policy Two years for whole life policy
One year for other policy
P/O TDS / SCSS Five Years
Unit Linked Insurance Plan Five Years
House property -Transfer Five Years
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202 Solution
Gross Total Income Rs. 8,00,000
School fees up to 2 children Rs 35,000 University fees of wife - Not allowed NIL Life insurance for wife and kids Rs 40,000 Life insurance for parent Not
allowed NIL Life insurance for father -in-law- Not
allowed NIL NSC Rs 60,000 Repayment of principal for house Rs 50,000 Coaching class fee Not allowed NIL Deduction under Section 80C 1,85,000 –
maximum allowable Rs.1,50,000 Total Income Rs.6,50,000
3. Anshu has a Gross Total Income of Rs 8,00,000 for the AY 20 22-23.
He availed of deduction in AY 2018 -19 of Rs 10,000 in respect of a life
insurance policy, which was prematurely terminated in P.Y. 2021 -22.
During the year , he paid premium of Rs 28,000 on a policy himself for
Rs 1,00,000 , and Rs 25,000 Insuranc e for wife (employed with MNC),
Insurance premium due for son but unpaid Rs 7,500
Compute deduction u/s 80C and the taxable income of Anshu.
Solution
Computation of total income Rs
Gross Total Income 8,00,000 Add: Deduction of last year on termination of policy 10,000 Revised Gross Total Income 8,10,000 Insurance for himself (in excess of 20% of
sum assured Rs 20,000 Insurance for wife (dependence not
relevant Rs. 25,000 Insurance for son (not paid Nil Total deduction u/s 80C 45,000 Total Income 7,65,000 munotes.in

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203 4. Gross Total income of Manu for AY 2022 -23 is Rs 10,00,000. He pays
premium of Rs 22,000 on a policy of Rs 1,00,000 on his own life , Rs
15,000 each for policies of his son and brother, both being dependent on
him. Manu contributes Rs. 20,000 for unrecognized provident fund, Rs
30,000 towards PPF, and Rs 20,000 in ULIP. He repaid housing loan to
ICICI Bank Rs 80,000 with Rs 20,000 towards outstanding interest.
School fees of three his children amounts to Rs 4, 000 Rs. 5,000 and Rs
6,000 respectively.
Compute the deduction/s 80C and the taxable income of Manu.
Solution
Computation of total income Rs
Gross Total Income 10,00,000 Insurance -self- over 20% of sum assured 20,000 Insurance(son) –dependence not relevant 15,00 0 Insurance for brother not allowed Nil Unrecognized PF -Not allowed Nil Public provident Fund 30,000 Unit Linked insurance plan 20,000 Housing loan –Principal 80,000 School fee –2 children – Higher figures considered
6,000=+5,000 11,000 Total deduction u/s 80C -maximum 1,76,000 1,50,000 Total Income 8,50,000
4.3 Deduction in respect of Contribution to certain pension funds –
Section 80CCC .
Section 80CCC is directly not covered in syllabus but is indirectly
relevant as aggregate deducti on under Section s 80C, 80CCC and 80CCD
shall not exceed Rs 1,50,000 .
Under Section 80CCC, deduction is allowed to Individuals in respect of
amounts paid/ deposited (excluding any interest /bonus accrued/ credited o
the assessee) during the previous y ear to effect or keep in force a contract
for any annuity plan of Life Insurance Corporation of India or any other
insurer for receiving pension from the fund under Section 10(23AAB). munotes.in

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204 The amount received by the assess or his nominee a) on account of the
surrender of the annuity plan whether in whole or in part, in any previous
year, or (b) as pension received from the annuity plan shall be deemed to
be the income of the assessee/ nominee, in the year of withdrawal or
when pension is received.
4.4 Health in surance premia - Section 80D:
Provisions of Section 80D, which provides for a deduction in respect of
the health premia paid are summarized as under: --
(a) Eligible Assessee : individual or a Hindu undivided family
(b) Nature of Deduction : payment made tow ards medical insurance
premia paid during the previous year
(c) Mode of Payment: The premium shall be paid by any mode other
than cash, e.g. cheque, ECS or other electronic mode. However, payment
for preventive health check -up may be made by any mode includin g cash.
(d) Amount of Deduction In case of an individual assessee
Premium and checkup for self and family
(i) Deduction shall be aggregate of the following payments made for self
and family , or Rs 25,000, whichever is less
a) the whole of the amount paid(premium) to effect or to keep in force
an insurance on the health of the assessee or his family ; or
b) any contribution made to the Central Government Health Scheme or
other notified scheme (popularly called Mediclaim policy),or
c) any payment made on account of preven tive health check -up of the
assessee or his family upto Rs 5,000
(ii) Medical expenditure for self or family member
The whole of the amount paid on account of medical expenditure incurred
on the health of the assessee or any member of his family being a very
senior citizen if no amount has been paid to effect or to keep in force an
insurance on the health of such person or Rs 50,000, whichever is less.
Thus, an assessee may either pay the insurance premium (Rs 25,000
including 5,000 for medical checkup) or i ncur medical expenditure
subject to a maximum limit of Rs 30,000.
(iii) Premia paid for parents
The amount of deduction shall be aggregate of the following or Rs 25,000
whichever is less
(a) the whole of the amount paid to effect or to keep in force an
insuran ce on the health of the parent or parents of the assessee or munotes.in

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205 (b) any payment made on account of preventive health check -up of the
parent or parents of the assessee as does not exceed Rs 5,000
(iv) Medial Expenditure for parents
The whole of the amount paid on account of medical expenditure incurred
on the health of any parent of the assessee being very senior citizen not
exceeding in the aggregate Rs. 30,000 if no amount has been paid to
effect or to keep in force an insurance on the health of such person
Maxi mum deduction under both the above cases will be restricted to Rs
50,000
(v) Other points
 ‘Family’ means the spouse and the dependent children of the assessee
 "senior citizen" means an individual resident in India who is of the
age of sixty years or more at any time during the relevant previous
year;
 "Very senior citizen" means an individual resident in India who is of
the age of eighty years or more at any time during the relevant
previous year.
 The parents and the spouse may not be dependent upon the asse ssee,
but his children must be dependent for claiming the deduction
 Expenses paid for preventive health check -up have a sub limit of Rs
5,000 within the overall limit of Rs 25,000 /30,000 and such expenses
may be paid in cash.
 Any medical insurance premia paid to effect or keep in force an
insurance on the health of any person being a senior citizen, or a very
senior citizen, the limit of Rs 25,000 ( for individual and HUF) will
be enhanced to Rs 30,000
 Insurer should be notified by the IRDA or Central Government
(e) Amount of Deduction to A Hindu undivided family :
Where the assessee is a Hindu undivided family, amount of deduction
shall be the aggregate of the following, namely: —
(i) whole of the amount paid to effect or to keep in force an insurance
on the health of any member of that Hindu undivided family as does
not exceed in the aggregate Rs 25,000 ; and
(ii) the whole of the amount paid on account of medical expenditure
incurred on the health of any member of the Hindu undivided family
being a very senior citizen as does not exceed in the aggregate Rs
50,000 , if no amount has been paid to effect or to keep in force an
insurance on the health of such person: munotes.in

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206 The aggregate deduction shall not exceed Rs 50,000 .
Sec 80D – Amount of deduction available to an individual
( inclusive of preventive health check -up)
Situation Self,
Spouse &
Dependent
Children
Rs Parent(s)
whether or not
dependent
Rs Total
deduction
u/s 80D

Rs
All below the age of
60 years 25,000 25,000 50,000 Assessee and his
family less than 60
years and parents
above 60 years
25,000 50,000 75,000 Assessee and his
family have attained
the age of 60 years
and above 50,000 50,000 1,00,000 Sec 80 -D Amount of deduction available to a HUF ( inclusive of preventive health check -up)
One or more member of HUF is a senior citizen 50,000 None of the members is a senior citizen 25,000
Illustration
Raj and his wife are not senior citizens. Raj pays med iclaim insurance of
Rs 18,000 for self , Rs 20,000 for his wife ,and Rs 5,000 his two
independent sons. He also pays Rs 18,000 for each of his parents who are
senior citizens .Calculate the amount of deduction allowable u/s 80D.
Solution
Amount of deducti on U/S 80D
Premium in respect of wife Rs 20,000 Premium for himself Rs. 18,000 Premium in respect of children (not dependent) Nil Total Rs 38,000 restricted to Rs 25,000 Add : Premium in respect of parents (senior citizens)
Rs 36,000 restricted to maximum Rs 50,000 Deduction available U/S 80D Rs 75,000

4.5 Deduction in respect of expenses on maintenance and medical
treatment of a dependent who is a person with disability - Section
80DD: munotes.in

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207 (i) Eligible assessee : Individual and Hindu undivided family, who i s a
resident of India. Other assessees not eligible.
(ii) Eligible Payments :
Expenditure incurred for medical treatment including nursing, training
and rehabilitation of a dependent, being a person with disability or
a. any amount paid or deposited under a s cheme framed by th e or any
other insurer or the administrator or the specified company (UTI)approved
by the Board in this behalf for the maintenance of a dependent, being a
person with disability.
(iii) Amount of Deduction : Rs 75,000 in all cases , R s.1,50,0 00, it
dependent person suffers from severe disability
So long the assessee incurs some amount of eligible expenditure, the
deduction will be allowed irrespective of the amount actually spent . It is
not necessary to spend full amount of Rs 75,000 or 1 .50 lakh rupees .
(iv) Conditions for of Deduction :
The following conditions should be satisfied to claim deduction:
(a) Deduction is available in respect of a “dependent " person.
(b) A dependent person means: -
 Spouse, children, parents, brothers or sisters o f an individual or any
of them.
 a member of a Hindu undivided family.
(c) Such person must be dependent wholly or mainly on such
individual or Hindu undivided family for support and maintenance.
(d) Such dependent person must not claim deduction u/s 80U while
computing his total income for that assessment year;
(e) The assessee nominates either the handicapped dependent or any
other person or trust to receive the payment under the scheme for the
benefit of the handicapped dependent;
(f) In the event of the death of the subscriber assessee, the amount of
annuity or lump -sum under the scheme is paid for the benefit of the
handicapped dependent.
(g) If the handicapped dependent predeceases the subscriber assessee,
then the amount so received shall form part of the total inc ome of the
subscriber assessee in the previous year in which the amount is received.
(h) The assessee must furnish a certificate from a neurologist, a
pediatric neurologist, in case of children,) or a civil surgeon or Chief
Medical Officer of a Government hos pital in form 10IA (in case of autism,
cerebral palsy or multiple disability) munotes.in

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208 (i) Where the condition of disability requires reassessment, a fresh
certificate shall have to be obtained on expiry of the period mentioned in
the original certificate.
4.6 Payment for Medical Treatment -Section . 80DDB
Eligible assessee : Individual and Hindu undivided family, who is a
resident of India. Other assessees not eligible
Eligible Payments:
Amount actually paid for medical treatment of specified disease or ailment
of the asse ssee himself or a person dependent on him or a member of
HUF
Amount of Deduction :
- Amount actually paid in the previous year or
- Rs. 40,000 or
- Rs 1,00, 000, if such person or member is a senior citizen,
whichever is lower
Other Points
(a) “Dependent r elative” means
a. an individual himself ,
b. spouse, children, parents or brothers and sisters of an individual ,
or
c. a member of the HUF, who is wholly or mainly dependent for
support and maintenance on the individual or the HUF
(b) “senior citizen" means an i ndividual resident in India who is of the
age of 60 years or more at any time during the relevant previous
year;
(c) "very senior citizen" means an individual resident in India who is of
the age of 80 years or more at any time during the relevant previous
year,
(d) The assessee shall furnish with the return of income, a certificate in
prescribed form, from a neurologist, an oncologist, a urologist, a
hematologist, an immunologist or such other prescribed specialist,
working in a Government hospital :
(e) Amount of deduction shall be reduced by any amount received
under an insurance from an insurer, or reimbursed by an employer
4.7 Deduction in respect of interest on loan taken for higher
education Sec 80E munotes.in

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209 Eligible assessee:
Any individual assessee, (whether resid ent or non -resident) who has
taken loan from a financial institution or any approved charitable
institution for pursuing higher studies of himself or his relative
Amount and term of deduction:
- Interest on such loan paid by the assessee without any limit.
- Upto a maximum period of 8 years from the year in which the
payment of interest on the loan begins or till the interest is paid in full,
whichever is earlier.
Other Points
1) “Higher education’’ means any course or study pursued after passing
Senior Seconda ry Education or its equivalent from any Government
recognized school, Board or university.
2) “Course” may be any post -SSC course whether full -time or part time
any Government recognised school, Board or university.
3) Higher education may be for the assessee h imself or any of his
relatives. Relative means the spouse and children of the assessee or
the student for whom such individual is the guardian.
4) The deduction can be claimed by the student assessee himself if the
interest is paid by him or his relative (sa y father), if interest on the
student’s loan is paid by the relative.
Illustrations
1. A borrows Rs 15 lakh from SBI on 01 -04-2014 for pursuing MBA.
The loan is repayable in 10 equal annual instalment carrying interest @
10%. per annum.
A being the studen t himself, is eligible to get deduction/s 80E upto A.Y.
2021 -22. Thereafter, for the remaining two years, no deduction will be
available. Amount of deduction in respect of interest will be as under: -






2. if father of pays the interest, he will be entitled to claim the deduction.
Assessment Year Interest allowable Under Section 80E
2014 -15 1,50,000
2015 -16 1,35,000
2016 -17 1,20,000
2017 -18 1,05,000
2018 -19 90,000
2019 -20 75,000
2020 -21 60,000
2021 -22 45,000 munotes.in

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210 4.8 Person with Disability – Section 80U
Eligible assessee
- Individual resident of India
- with at least 40% disability
- at any time during the previous year.
Amount of deduction
- Person with minimum disability of 40% - Rs 75,000 ;
- Persons with severe disability of over 80% - Rs. 1,50,000
Other Points
1) The deduction u/s 80U of Rs 75,000 / 1,50,000 is of a flat amount
without any requirement for spending that amount.
2) Mere submission of a disability certificate in the prescribed form will
be enough to avail the deduction along with the retu rn of income of the
assessment year for which the deduction is claimed for the first time.
3) Where the condition of disability requires reassessment of its extent
after a period stipulated in the medical certificate, deduction for any
year falling after the expiry of such period shall be allowed only if a
new certificate is obtained and furnished.
4) “Disability” means blindness, low vision, leprosy -cured, hearing
impairment, locomotor disability, mental retardation, mental illness,
autism, cerebral palsy and mu ltiple disabilities.
5) “Person with disability” & “Person with severe disability” have been
defined in the Persons with Disabilities (Equal Opportunities,
Protection of Rights & Full Participation) Act, or the National Trust for
Welfare of Persons with Au tism, Cerebral Palsy, Mental Retardation &
Multiple Disabilities Act, 1995.
8.5 ILLUSTRATIONS
1. S presents the following data for the previous year 2021 -22.
(a) Business income Rs. 6,50,000
(b) Capital Gains Rs. 2,50,000
(c) Payment of medical insurance premium on o wn life Rs.10,000
(d) He pays Rs. 20,000 to GIC for maintenance of his severely disabled
son under an approved scheme.
(e) He has borrowed Rs 5,00,000 as educational loan for his younger son
who pursues MBA from IIM and pays 10% interest on the loan. munotes.in