Taxation – III (Direct Taxes- II)-munotes

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1 MODULE - I
1
CLUBBING OF INCOME (SECTION 60 -65)
Unit Structure
1.0 Learning Objectives
1.1 Introduction
1.2 Scenarios Under Clubbing Of Income
1.3 Transferring Of Income Without Transferring Asset (Section 60)
1.4 Transferring Of Asset Which Ca n Be Revoked (Section 61)
1.5 Income Of Minor Child (Section 64(1a)
1.6 Salary, Commission, Fees, Remuneration, Or Any Other Form Or
By Any Mode I.E. Cash Or Kind Paid To Spouse From A Concern
In Which An Individual Has A Substantial Interest. (Section 6( 1)(Ii)
1.7 Assets Transferred To Spouse For Inadequate Consideration (Section
64(1)(Iv))
1.8 Assets Transferred To Daughter -In-Law (Son‟s Wife) For
Inadequate Consideration (Section. 64(1)(Vi))
1.9 Assets Transferred To Any Person Or Association Of Person s For
The Immediate Or Deferred Benefits Of Spouse (Section 64(1)(Vii).
1.10 Assets Transferred To Any Person Or Association Of Persons For
The Immediate Or Deferred Benefits Of Daughter -In-Law (I.E.
Son‟s Wife) - (Section 64(1)(Viii).
1.11 Conversion Of Individual‟s Property Into His Huf‟s Property
(Section 64(2)
1.12 Practical Problems
1.13 Exercises
Multiple Choice Questions
True/ False
Short Notes
Practical Problems
1.0 LEARNING OBJECTIVES After reading this chapter learner will be able to:
 To underst and the concept of clubbing of income and how it relates
to taxation.
 To be familiar with the numerous provisions of the Income Tax Act
that deal with the clubbing of income, including the situations where
clubbing of income is applicable and the different kinds of income
that can be clubbed. munotes.in

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Taxation - III (Direct Taxes- II)
2  To familiarize with the legal guidelines for clubbing income, with
respect to Sections 60 –64 of the Income Tax Act.
 To determine the amount of income that must be clubbed in a variety
of situations, such as when money is transferred to a spouse, a minor
child, or a person for the taxpayer's benefit.
 To comprehend the effects of income clubbing, such as the rate of
taxation, fines, and others.
 To improve one's capacity for detection of scenarios in which
clubbing of inco me is applicable and for recommending suitable tax -
planning techniques to lessen its effects.
1.1 INTRODUCTION As the term suggests, clubbing of income means adding or including the
income of another person (mostly family members i.e. spouse, minor son ,
daughter etc) to one‟s own income.
Section 60 to 65 of the Income Tax Act, 1961 contains the provisions
related to the “Clubbing of Income” whereby income of one person is
taxed in the hands of another person.
For example: Income of minor son which is s hown to be the income of his
parent is clubbed in the income of his parent who earn a higher income
and is taxable in the hands of the parent. Under the Income Tax Act a
person has to pay taxes on his income.
1.2 SCE NARIOS UNDER CLUBBING OF INCOME While computing total income of an individual and also not all income of
specified person can be clubbed. As per Section 64 of the Income Tax Act,
certain restrictions pertaining to specified person(s) and specified
scenarios are mandated to discourage this prac tice. Section Scenarios under Clubbing of Income Sec. 60 Transferring of Income without transferring asset. Sec. 61 Transferring of asset which can be revoked Sec. 64(1A) Income of Minor Child Sec. 64(1)(ii) Salary, Commission, Fees, remuneration, or any other form or by any mode i.e cash or kind paid to spouse from a concern in which an individual has a substantial interest. Sec. 64(1)(iv) Assets transferred to spouse for inadequate consideration Sec. 64(1)(vi) Assets transferred to daughter-in-law for inadequate consideration munotes.in

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Clubbing of Income (Section 60-65)
3 Sec. 64(1)(vii) Assets transferred to any person or association of persons for the immediate or deferred benefits of spouse Sec. 64(1)(viii) Assets transferred to any person or association of persons for the immediate or deferred benefits of daughter-in-law Sec. 64(2) Conversion of individual‟s Property into his HUF‟s property
Each of the above scenarios is discussed as below :
1.3 TRANSFERRING OF INCOME WITHOUT TRANSFERRING ASSET (SECTION 60) Conditions :
i. The person has transferred his income to another person.
ii. But Income generating assets is not transferred to such other person.
iii. Thus, the income from such an asset is taxed in the hands of the
transferor (i.e. person transferring the income).
Illustration 1.1 :
Mr. Prakas h owns a house which fetches a rent ` 20,000 per month. He
transfers the rent to his friend Mr. Rakesh but retains the ownership of a
house.
In this case,
i. Mr. Prakash has transferred his income to his friend Mr. Rakesh
ii. Mr. Prakash retains the ownership of a house (i.e. income generating
assets)
iii. Hence, as per Sec. 60 of the Income Tax Act, Mr. Prakash (i.e.
transferor) must include the rental income while computing his total
income.
1.4 TRANSFERRING OF ASSET WHICH CAN BE REVOKED (SECTION 61) When a person transfers an asset to another person and the transferor has
retained a right to reacquire the asset back from the transferee in future.
Such a situation is called “Revocable Transfer”.
Conditions :
i. The person has transferred his assets to another person revocably. munotes.in

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Taxation - III (Direct Taxes- II)
4 ii. Then any income arising from that asset is taxed in the hands of
transferor (i.e. person transferring the assets)
iii. The provisions of section 61 will not apply in following cases:
a) transfer by way of trust which is not revocable during the life tim e of
the beneficiary or a transfer which is not revocable during the lifetime
of the transferee.
b) Transfer made prior to 01 -04-1961 and not revocable for a period
exceeding 6 years.
Illustration 1.2 :
Arjun transferred his house property to Krishna. There is a condition in
agreement that asset will transfer back to Arjun after 2 years.
In this case,
i. Arjun has transferred his assets to Krishna keeping a clause in the
transaction which empowers transferor to take back after 2 years.
ii. Then any income arising from that asset is taxed in the hands of
transferor (i.e. Arjun)
1.5 INCOME OF MINOR CHILD (SECTION 64 (1A) Conditions :
i. Any income earned by a minor child
ii. It is clubbed in the hands of either of his/her parents, whose income
(excluding minor child income) is greater.
Illustration 1.3 :
If a F ixed deposit taken in the name of a minor child, the interest earned
Will be clubbed with the income of the highest earning parent.
However, as per Income Tax provisions there are certain situations in
which the clubbing of income provisions will not appl y. These are:
iii. When minor child is suffering from any disability as mentioned in Sec
80U, or
iv. When income is earned by minor child through manual work, or
v. Income earned by minor child through his skill, talent, knowledge etc.
For e.g. minor child wins money on TV shows like Indian Idol Junior
winner, Voice India Kids etc.
vi. Moreover, an exemption of Rs 1500 is provided u/s 10 (32) on
income earned by each minor child to the parent under which the
minor‟s income is being clubbed. munotes.in

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Clubbing of Income (Section 60-65)
5 1.6 SALARY, COMMISSION, FEES, RE MUNERATION, OR ANY OTHER FORM OR BY ANY MODE I.E CASH
OR KIND PAID TO SPOUSE FROM A CONCERN IN
WHICH AN INDIVIDUAL HAS A SUBSTANTIAL
INTEREST. (SECTION 6(1)(ii) Conditions:
i. The individual is having substantial interest in a concern (*).
ii. Spouse of the indi vidual is employed in the concern in which the
individual is having substantial interest.
iii. The spouse of the individual is employed without any technical or
professional knowledge or experience (i.e. remuneration is not
justifiable).
(*) An individual shal l be deemed to have substantial interest in any
concern, if such individual alone or along with his relatives beneficially
holds at any time during the previous year 20% or more of the equity
shares (in case of a company) or is entitled to 20% of profit (i n case of
concern other than a company). Relative for this purpose includes
husband, wife, brother or sister or lineal ascendant or descendent of that
individual [ section 2(41)].
iv. The nature of income arising to the spouse is salary, commission, fees
or any other form of remuneration whether in cash or in kind.
v. Spouse does not possess any technical or professional qualification
and remuneration is not solely attributable to application of that
knowledge/ qualification.
Illustration 1.4 :
Mr. Kavi is b eneficially holding 21% equity shares of Blokraft Chemical
Pvt. Ltd. Mrs. Kavita is employed as Manager (in accounts department) in
Blokraft Chemical Pvt. Ltd. at a monthly salary of ₹ 84,000. Mrs. Kavita
is not having any knowledge, experience or qualific ation in the field of
accountancy. Will the remuneration (i.e., salary) received by Mrs. Kavita
be clubbed with the income of Mr. Kavi?
In this situation,
i. Mr. Kavi is having substantial interest in Blokraft Chemical Pvt. Ltd.
ii. The remuneration of Mrs. K avita is not justifiable (i.e., she is
employed without any technical or professional knowledge or
experience)
iii. Hence, salary received by Mrs. Kavita from Blokraft Chemical Pvt.
Ltd will be clubbed with the income of Mr. Kavi and will be taxed in
the hands of Mr. Kavi. munotes.in

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Taxation - III (Direct Taxes- II)
6 Note :
Where both the husband and wife have a substantial interest in a concern
and both are in receipt of the remuneration from such concern both the
remunerations will be included in the total income of husband or wife
whose total income, e xcluding such remuneration, is greater.
1.7 ASSETS TRANSFERRED TO SPOUSE FOR INADEQUATE CONSIDERATION (SECTION 64(1)(iv)) Conditions :
i. The assessee/taxpayer is an individual.
ii. The assessee/taxpayer transfers assets belonging to him/her.
iii. The assets are tr ansferred either directly or indirectly.
iv. The assets are transferred without adequate consideration. Moreover,
there is no agreement to live apart.
v. Then any income arising from such assets shall be deemed to be the
income of the transferor (i.e. assessee/ta xpayer who has transferred
the assets)
Illustration 1.5 :
Mr. Ram transfers his house property to his wife without adequate
consideration. Rental Income arising from such property of ₹ 5,000 p.m.
will be clubbed and taxable in the hands of Mr. Ram.
Above provision of clubbing of Income u/s 64(1)(iv) is not appli cable in
the following cases :
i. If assets are transferred before marriage.
ii. If assets are transferred for adequate consideration.
iii. If assets are transferred in connection with an agreement to live apart.
iv. If on the date of accrual of income, transferee is n ot spouse of the
transferor.
v. If property is acquired by the spouse out of pocket money (i.e. an
allowance given to the wife by her husband for her dress and usual
household expenses).
1.8 ASSETS TRANSFERRED TO DAUGHTER -IN-LAW (SON’S WIFE) FOR INADEQUATE CONSIDERATION
(SECTION. 64(1)(vi)) Conditions :
i. The assessee/taxpayer is an individual. munotes.in

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Clubbing of Income (Section 60-65)
7 ii. The assessee/taxpayer transfers assets belonging to him/her.
iii. The assets are transferred either directly or indirectly.
iv. The assets are transferred without adequate consi deration.
v. The assets are transferred to daughter -in-law (i.e. to Son‟s wife)
vi. Then any income arising from such assets shall be deemed to be the
income of the transferor (i.e. assessee/taxpayer who has transferred
the assets)
Illustration 1.6 :
If Mr. Manoj have, 10,000 10% Debentures of Rs 100 each which he has
transferred to his daughter -in-law without any consideration. Now interest
income of Rs 1,00,000 will be included and taxable in the hands of Mr.
Manoj as per Section 64(1)(vi).
1.9 ASSETS TRANSFERRED TO ANY PERSON OR ASSOCIATION OF PERSONS FOR THE IMMEDIATE
OR DEFERRED BENEFITS OF SPOUSE (SECTION
64(1)(vii). Conditions :
i. The assessee/taxpayer is an individual.
ii. The assessee/taxpayer transfers assets belonging to him/her.
iii. The assets are transferred eit her directly or indirectly.
iv. The assets are transferred without adequate consideration.
v. The assets are transferred to any person or an association of persons.
vi. The assets are transferred for immediate or deferred benefits of
spouse.
vii. Then any income arising from such assets shall be deemed to be the
income of the transferor (i.e. assessee/taxpayer who has transferred
the assets)
1.10 ASSETS TRANSFERRED TO ANY PERSON OR ASSOCIATION OF PERSONS FOR THE IMMEDIATE
OR DEFERRED BENEFITS OF DAUGHTER -IN-LAW
(i.e. SON’ S WIFE) (SECTION 64(1)(viii). Conditions :
i. The assessee/taxpayer is an individual.
ii. The assessee/taxpayer transfers assets belonging to him/her. munotes.in

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Taxation - III (Direct Taxes- II)
8 iii. The assets are transferred either directly or indirectly.
iv. The assets are transferred without adequate considerat ion.
v. The assets are transferred to any person or an association of persons.
vi. The assets are transferred for immediate or deferred benefits of
Daughter -in-law (i.e. Son‟s wife)
vii. Then any income arising from such assets shall be deemed to be the
income of the transferor (i.e. assessee/taxpayer who has transferred
the assets)
1.11 CONVERSION OF INDIVIDUAL’S PROPERTY INTO HIS HUF’S PROPERTY (SECTION 64(2) Conditions :
i. The assessee/ taxpayer is an individual.
ii. An individual being a member of HUF
iii. An individual con verted his self -acquired property into his HUF‟S
property through the act of impressing such separate property with the
character of property belonging to the family or throwing it into the
common stock of the family.
iv. The assets are transferred either dir ectly or indirectly.
v. The assets are transferred without adequate consideration.
vi. Then any income arising from such assets shall be deemed to be the
income of the transferor (i.e. assessee/taxpayer who has transferred
the assets)
Illustration 1.7 :
Pradeep ha ve a house from which rental income of B 5,00,000 p.a. is
earned by him. When Pradeep transferred this house to HUF without
consideration then income of B 5,00,000 will be taxed in the hands of
Pradeep.
Note: After partition of the HUF, such property is di stributed amongst the
members of the family. In such a case income derived from such property
by the spouse of the transferor will be clubbed with the income of the
individual and will be charged to tax in his hands.
1.12 PRACTICAL PROBLEMS Illustration 1.8:
Mr. Rajesh has given a car owned by him on rent. Annual rent of the car
is B. 1,40,000. He transferred entire rental income to his friend Mr. Sonu.
However, he did not transfer the car. munotes.in

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Clubbing of Income (Section 60-65)
9 In this situation, rent of B. 1,40,000 will be taxed in the hand s of Mr.
Rajesh.
Illustration 1.9 :
Mr. Hritik is beneficially holding 21% equity shares of Bhagya Minerals
Pvt. Ltd. Mrs. Hritik is employed as Manager (in accounts department) in
Bhagya Minerals Pvt. Ltd. at a monthly salary of Rs. 40,000. Mrs. Hritik
is not having any knowledge, experience or qualification in the field of
accountancy. Will the remuneration (i.e., salary) received by Mrs. Hritik
be clubbed with the income of Mr. Hritik?
Solution :
In this situation, Mr. Hritik is having substantial interest in Bhagya
Minerals Pvt. Ltd. and remuneration of Mrs. Hritik is not justifiable (i.e.,
she is employed without any technical or professional knowledge or
experience) and, hence, salary received by Mrs. Hritik from Bhagya
Minerals Pvt. Ltd. will be clubbed with the income of Mr. Hritik and will
be taxed in the hands of Mr. Hritik.
Illustration 1.10 :
Mr. A holds shares carrying 30% voting power in Z Ltd. Mrs. A is
working as accountant in Z Ltd. getting income from salary (computed) of
B 3,60,000 without any qualification in accountancy. Mr. A also receives B
30,000 as interest on securities. Mrs. A ow ns a house property which she
has let out. Rent received from tenants is B 6,000 p.m. Compute the gross
total income of Mr. A and Mrs. A for the A.Y. 2023 -24.
Solution :
Since Mrs. A is not professionally qualified for the job, the clubbing
provisions shall be applicable as per Section 64(1)(ii)
Computation of Gross Total Income of Mr. A Particulars Amount in B Income from salary of Mrs. A (computed) 3,60,000 Income from other sources Interest on Securities 30,000 Gross Total Income 3,90,000
Computation of Gross Total Income of Mrs. A Particulars Amount in B Amount in B Income from Salary (clubbed in the hands of Mr. A) Nil Income from House Property munotes.in

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10 Gross Annual Value (B 6,000 * 12) Less: Municipal Taxes Paid Net Annual Value (NAV) Less: Deduction u/s 24 - 30% of NAV i.e. 30% of B 72,000 - Interest on Loan Gross Total Income 72,000 - 72,000 (21,600) - 50,400 50,400
Illustration 1.11 :
Mrs. Mrug en transferred her immovable property to ABC Co. Ltd. subject
to a condition that out of the rental income, a sum of B 36,000 per annum
shall be utilized for the benefit of her son‟s wife. Mrs. Mrugen claims that
the amount of B 36,000 (utilized by her son ‟s wife) should not be included
in her total income as she no longer owned the property. State with
reasons whether the contention of Mrs. Mrugen is valid in law.
Solution :
The clubbing provisions under section 64(1)(viii) are attracted if the
person sati sfied following conditions:
i. The assessee/taxpayer is an individual.
ii. The assessee/taxpayer transfers assets belonging to him/her.
iii. The assets are transferred either directly or indirectly.
iv. The assets are transferred without adequate consideration.
v. The asset s are transferred to any person or an association of persons.
vi. The assets are transferred for immediate or deferred benefits of
Daughter -in-law (i.e. Son‟s wife)
vii. Then any income arising from such assets shall be deemed to be the
income of the transferor (i. e. assessee/taxpayer who has transferred
the assets)
Therefore, income of B 36,000 meant for the benefit of daughter -in-law is
chargeable to tax in the hands of transferor i.e., Mrs. Mrugen in this case.
The contention of Mrs. Mrugen is, hence, not valid in law
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Clubbing of Income (Section 60-65)
11 Illustration 1.12 :
Mr. Abhay has three minor chi ldren – two twin daughters, aged 12 years,
and one son, aged 16 years. Income of the twin daughters is B 2,000 p.a.
each and that of the son is B 1,200 p.a. Mrs. Abhay has transferred her flat
to her minor son on 1.4.2021 out of natural love and affection. The flat
was let out on the same date and the rental income from the flat is B
10,000 p.m. Compute the income, in respect of minor children, to be
included in the hands of Mr. Abhay and Mrs. Abhay u/s 64(1A) (assuming
that Mr. Abhay‟s total income is hig her than Mrs. Abhay‟s total income,
before including the income of minor children).
Solution:
Taxable income in respect of minor children, in the hands of Mr.
Abhay is Particulars Amount in B Amount in B Twin minor daughters (B 2,000 * 2) 4,000 Less: Exempt u/s 10(32) [B 1,500 * 2] 3,000 1,000 Minor Son 1,200 Less: Exempt u/s 10(32) [restricted to B 1,500] 1,200 Nil Income to be clubbed in the hands of Mr. Abhay 1,000
Note:
Mrs. Abhay is the deemed owner of house property transferred to her
minor son. Natural love and affection do not constitute adequate
consideration for this purpose. Accordingly, the income from house
property of B 84,000 [i.e., B 1,20,000 ( -) B 36,000, being 30% of B
1,20,000] would be taxable directly in her hands as the d eemed owner of
the said property.
Consequently, clubbing provisions u/s 64(1A) would not be attracted in
respect of income from house property, owing to which exemption u/s
10(32) cannot be availed by her.
Illustration 1.13 :
Compute the gross total income of Mr. & Mrs. B from the following
information :
(a) Salary income (computed) of Mrs. B B 2,30,000
(b) Income from profession of Mr. B B 3,90,000
(c) Income of minor son C from company deposit B 15,000 munotes.in

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Taxation - III (Direct Taxes- II)
12 (d) Income of minor daughter D from special talent B 32,000
(e) Interest from bank received by D on deposit made out
of her special talent B 3,000
(f) Gift received by D on 30.09.2021 from friend of Mrs. B B 2,500
Detailed computation under various heads of income is not required.
Solution :
The Gross Total Income of Mrs. B is B 2,30,000. The total income of Mr.
B giv ing effect to the provisions o f section 64(1A) is as follows:
Computation of Gross Total Income of Mr. B for the A.Y 2023 -24 Particulars Amount in B Amount in B Income from Profession 3,90,000 Income of minor son C from company deposit Income from company deposit 15,000 Less : Exemption u/s 10(32) 1,500 13,500 Income of minor daughter D From special talent - not to be clubbed - Interest from Bank 3,000 Gift of B 2,500 received from a non-relative is not taxable under section 56(2)(x) being less than the aggregate limit of B 50,000 Nil 3,000 Less: Exemption u/s 10(32) 1,500 1,500 Gross Total Income 4,05,000
Note :
i) As per the provisions of section 64(1A) of the Income -tax Act, 1961,
all the income of a minor child has to be clubbed i n the hands of that
parent whose total income (excluding the income of the minor) is
greater. The income of Mr. B is B 3,90,000 and income of Mrs. B is B
2,30,000. Since the income of Mr. B is greater than that of Mrs. B, the
income of the minor children h as to be clubbed in the hands of Mr. B.
It is assumed that this is the first year when clubbing provisions are
attracted.
ii) Income derived by a minor child from any activity involving
application of his/her skill, talent, specialized knowledge and
experience is not to be clubbed. Hence, the income of minor child D
from exercise of special talent will not be clubbed. munotes.in

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Clubbing of Income (Section 60-65)
13 However, interest from bank deposit has to be clubbed even when deposit
is made out of income arising from application of special talent.
Illus tration 1.14 :
Mr. Ramdev gifted a sum of B 6 lakhs to his brother's wife on 01 -06-2022.
On 02 -07-2022, his brother gifted a sum of B 5 lakhs to Mr. Ramdev's
wife. The gifted amounts were invested as fixed deposits in banks by Mrs.
Ramdev and wife of Mr. Ramdev's brother on 01 -09-2022 at 9% interest.
Examine the consequences of the above under the provisions of the
Income -tax Act, 1961 in the hands of Mr. Ramdev and his brother.
Solution :
In the given case, Mr. Ramdev gifted a sum of B 6 lakhs to his brother‟s
wife on 01.06.2022 and
simultaneously, his brother gifted a sum of B 5 lakhs to Mr. Ramdev‟s
wife on 02.07.2022. The gifted amounts were invested as fixed deposits in
banks by Mrs. Ramdev and his brother‟s wife.
Accordingly, the interest income arising to Mrs. Ramdev in the for m of
interest on fixed deposits would be included in the total income of Mr.
Ramdev and interest income arising in the hands of his brother‟s wife
would be taxable in the hands of Mr. Ramdev‟s brother as per section
64(1), to the extent of amount of cross transfers i.e., B 5 lakhs.
This is because both Mr. Ramdev and his brother are the indirect
transferors of the income to their respective spouses with an intention to
reduce their burden of taxation.
However, the interest income earned by his spouse on fixed deposit of B 5
lakhs alone would be included in the hands of Mr. Ramdev‟s brother and
not the interest income on the entire fixed deposit of B 6 lakhs, since the
cross transfer is only to the extent of B 5 lakhs.
Illustration 1.15
Mr. B has gifted a house property va lued at B 60 lakhs to his wife, Mrs. C,
who in turn has gifted the same to Mrs. D, their daughter -in-law. The
house was let out at B 25,000 per month throughout the year. Compute the
total income of Mr. B and Mrs. D.
Will your answer be different if the s aid property was gifted to his son,
husband of Mrs. D?
Solution:
In this case, Mr. B would be the deemed owner of the house property
transferred to his wife Mrs. C without consideration.
As per section 64(1)(vi), income arising to the son‟s wife from ass ets
transferred, directly or indirectly, to her by an individual otherwise than munotes.in

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Taxation - III (Direct Taxes- II)
14 for adequate consideration would be included in the total income of such
individual.
Income from let -out property is B 2,10,000 [i.e., B 3,00,000, being the
actual rent calculated at B 25,000 per month less B 90,000, being deduction
under section 24 @ 30% of B 3,00,000]
In this case, income of B 2,10,000 from let -out property arising to Mrs. D,
being Mr. B‟s son‟s wife, would be included in the income of Mr. B,
applying the provisions of section 27(i) and section 64(1)(vi). Such
income would, therefore, not be taxable in the hands of Mrs. D.
In case the property was gifted to Mr. B‟s son, the clubbing provisions
under section 64 would not apply, since the son is not a minor child.
Therefore, the income of B 2,10,000 from letting out of property gifted to
the son would be taxable in the hands of the son.
Illustration 1.16 :
A proprietary business was started by Smt. Rani in the year 2020. As on
1.4.2021 her capital in business was B 3,00,000.
Her husband gift ed B 2,00,000 on 10.4.2021, which amount Smt. Rani
invested in her business on the same date. Smt. Rani earned profits from
her proprietary business for the FY 2021 -22, B 1,50,000 and FY 2022 -23 B
3,90,000. Compute the income, to be clubbed in the hand s of Rani‟s
husband for AY 2023 -24 with reasons.
Solution :
Section 64(1) of the Income -tax Act, 1961 provides for the clubbing of
income in the hands of the individual, if the income earned is from the
assets transferred directly or indirectly to the spous e of the individual,
otherwise than for adequate consideration. In this case Smt. Rani received
a gift of B 2,00,000 from her husband which she invested in her business.
The income to be clubbed in the hands of Smt. Rani‟s husband for
A.Y.2023 -24 is comput ed as under: Particulars Smt. Rani’s Capital Contribution (B) Capital Contribution out of gift from husband (B) Total (B) Capital as at 01.04.2021 3,00,000 - 3,00,000 Investment on 10.04.2021 out of gift received from her husband - 2,00,000 2,00,000 3,00,000 2,00,000 5,00,000 Profit for F.Y. 2021-22 to be apportioned on the basis of capital 1,50,000 - 1,50,000 munotes.in

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Clubbing of Income (Section 60-65)
15 employed on the first day of the previous year i.e., on 1.4.2021 Capital Employed as at 01.04.2021 4,50,000 2,00,000 6,50,000 Profit for F.Y. 2022-23 to be apportioned on the basis of capital employed as at 1.4.2021 (i.e. 45: 20) 2,70,000 1,20,000 3,90,000
Therefore, the income to be clubbed in the hands of Smt. Rani‟s husband
for A.Y. 2023 -24 is B 1,20,000.
1.13 EXERCISES 1. Multiple choice qu estions
1. ___________aims to prevent tax avoidance by diversion of income.
a - double taxation b - DTAA
c - Clubbing of income d - both b & c
2. A transfe r is revocable if transferor can /has ______________
a- re-transfer the income or asset b- right to re -assume power
c- both a & b d- none of these
3. For provisio ns of section 60 to be applicable, whether transfer is
revocable or irrevocable is _____________________
a- important b- primary condition
c- material d- immaterial
4. As per section 61, all incomes arising to any person by virtue of a
__________transfer of assets is to be included in total income of
transferor.
a- revocable b- transfer
c- both a & b d- None of the above
5. Transfer to obtain religious or spiritual benefits is not transfer
for_______________.
a- adequate consideration b- inadequate consideration
c- clubbing provisions d- both b & c
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Taxation - III (Direct Taxes- II)
16 6. All income which arises or accrues to the minor shall be clubbed in
the inc ome of his ___________.
a- father b- mother
c- parents d- none of the above
7. Income derived by mino r from ________________ will not be
clubbed.
a- manual work b- application of his talent
c- capital gains d- both a & b
8. Income of mi nor child is included in income of parent
___________________
a- having greater total income b- as decided by court
c- as decided by parents d- both a & b
9. Minor child __________step child.
a- includes b- excludes
c- a or b as decided by the court d- none of the above
10. Clubbing of income __________ clubbing of loss
a- excludes b- exempt
c- restricts d- includes
Answers : (1-c, 2-c, 3-d, 4-a, 5-a, 6-c, 7-d, 8-a, 9-a, 10 -d)
2. True/false
1. Individuals can be taxed in respect of his own income only.
2. Clubbing of income aims to prevent tax avoidance by diversion of
income.
3. Total income to be clubbed is added as a separate head called
„clubbed income‟
4. Section 60 applies only to revocable transfer.
5. Section 61 applies only to irrevocable transfer.
6. Sale with a condition of re -purchase is an example of irrevocable
transfer.
7. Transfer includes any settlement, trust, covenant, lease, agreement or
arrangement.
8. Association of person includes a „Trust‟. munotes.in

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Clubbing of Income (Section 60-65)
17 9. Minor child excludes illegitimate child.
10. Clubbing of income also includes clubbing of losses. Answers:
Answers : (1-F, 2-T, 3-F, 4-F, 5-F, 6-F, 7-T, 8-T, 9-T, 10 -T)
3. Write Short notes.
1. Substantial interest.
2. Revocable transfer & explain of its clubbing provisions.
3. Under section 63, which transfer are treated as revocable transfer.
4. Exclusions form c lubbing provisions u/s 62.
5. Incomes that can be clubbed in the income of other person.
6. Exceptions to clubbing of minor‟s income.
7. Who is eligible to get exemption u/s 10 (32) and how much?
8. Clubbing of income includes negative income e xplain.
9. What are the conditions for clubbing of income u/s 60? Explain with
the help of example.
10. State the provisions for clubbing of remuneration received by spouse
u/s 64 (1) (ii).
4. Practical p roblems.
1) A proprietary business was started by Smt. Ra jani in the year 2020.
As on 1-04-2022 her capital in business was ₹ 7,50,000. Her husband
gifted ₹ 2,00,000 on 10-04-2020. Wh ich amount Smt. Rajani i nvested
on the same date. Smt. Rajani earned p rofits from her p roprietary
business for the financial year 2021-22 ₹ 3,50,000 and financial year
2022-23 ₹ 4,80,000. Compute the income to be clubbed in the hands
of Rajani‟s husband for the assessment year 2023-24 with rea sons.
[Ans. Amount to be clubbed 4,80,000 x 2,00,000 / 7,50,000 = ₹ 1,28,000]
2) Mr. Ya gya and his wife Mrs. K avita furnish the following
information: B I. Salary income (computed) of Mrs. Kavita 7,75,000 II. Income of minor son Mohit who suffers from disability specified in Section 80U 2,40,000 III Income of minor son Ansh from singing 98,000 IV. Income from profession of Mr. Yagya 9,00,000 V. Cash gift received by Ansh on 2-10-2022 from friend of Mrs. Kavita 45,000 munotes.in

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Taxation - III (Direct Taxes- II)
18 VI. Income of minor married daughter Aarchi from company deposit 25,000
Compute the total income of Mr. Yagyadutt & Mrs. K avita f or the
assessment year 2023-24.
[Ans. Mr. Yagya 9,00,000 + 25,000 - 1,500 = B 9,23,500; Kavita B
7,75,000]
3) Ravindra is the Karta of a HUF, whose members derive income as
given be low: B I. Income from Ravindra‟s own business 2,00,000 II. Mrs. R avindra a dermatologist draws salary 4,50,000 III Minor son Kavish earning interest on fixed deposits
with ba nk which were gifted to him by his
grandfather 27,000 IV. Minor daughter Nikita gave dance performance &
received remuneration 1,25,000 V. Sweta got winnings from lottery (Gross) 1,50,000
Explain how the above will be taxed.
[Ans. Mr. Ravindra B 20,000; Mrs. Ravindra 4,50,000 + 27,000 +
1,50,000 + 2,15,000 – 1500 = 6,27,000; Swe ta : B NIL; Nikita B 1,25,000]
4) Mr. Surendra has four minor children consisting two daughters & two
Sons. The annual income of two daughters were B 10,500 & B 7,000
and sons was B 6,300 and B 1,750 respectively. The daughter who was
having income of B 7,000 was suffering from disability specif ied
under section 80U. Workout the amount of income earned by minor
children to be clubbed in the hands of Mr. Surendra.
[Ans. Mr. Surendra B 13,800]
5) Compute the total income of Mr. and Mrs. Jacob from the following
information: B I. Salary income (computed) of Mr Jacob 3,70,000 II. Income from profession of Mr. Jacob 4,05,000 III Income from minor sons Kevin from company deposit 17,000 IV. Income of minor daughter Zoe from special talent 62,000 V. Interest from bank received by Zoe on fixed deposit made out of her special talent 6,500 munotes.in

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Clubbing of Income (Section 60-65)
19 VI. Gift received by Zoe on 30-09-2022 from friend of Mrs. Jacob 12,000
Brief working is sufficient. Detailed computation under various heads of
income is not required.
[Ans. Mr. Jacob 3,70,000; Mrs. Jacob 4,05,000 + 17,000 - 1,500 + 6,500 –
1500 = 4,25,000]

Source: ICAI
https://resource.cdn.icai.or g/71143bos57143 -cp5.pdf


*****


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20 MODULE - II
2
SET OFF & CARRY FORWARD OF
LOSSES (SECTION 70 TO 74)
Module Structure
2.0 Learning Objectives
2.1 Set Off Of Losses
2.2 Intra Head Set -Off / Inter Source Adjustment (Section 70)
2.3 Inter -Head Set -Off / Inter Head Adjustment (Section 71)
2.4 Carry Forward of Losses
2.5 Carry Forward & Set Off Unabsorbed Depreciation (Section 32(2)
2.6 Carry Forward & Set Off Losses From House Property (Section
71b)
2.7 Carry Forward & Set Off Losses From Non -Speculative Business Or
Profession (Regular Business Loss) (Section 72)
2.8 Carry Forward & Set Off Losses From Speculative Business
(Section 73)
2.9 Carry Forward & Set Off Losses Under The Head Capital Gains
(Section 74)
2.10 Carry Forward & Set Off Losses From Owning And Maintaining
Race -Horses (Section 74a)
2.11 Practical Problems
2.12 Exercises
Multiple Choice Questions
True/ False
Short Notes
Practical Problems
2.0 LEARNING OBJECTIVES After reading this chapter learner will be able to :
 To understand the concept of Set off and Carry Forward of Losses
and its significance in taxation.
 To develop knowledge of the various kinds of losses that can be set
off against income, such as speculative losses, capital losses, and
business losses.
 To understand the provisions of the Income Tax Act related to Set
off and Carry Forward of Losses, inc luding the time limits and
conditions for carrying forward losses. munotes.in

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Set Off & Carry Forward of Losses (Section 70 To 74)
21  To understand the calculation of the amount of loss that can be set
off or carried forward under different scenarios.
 To understand the impact of Set off and Carry Forward of Losses on
tax liabilities, including the effect on the tax payable and the amount
of refund that can be claimed.
 To develop the ability to identify situations where Set off and Carry
Forward of Losses can be applied and to suggest appropriate tax
planning strategies to minimize the impact of losses.
2.1 SET OFF OF LOSSES Set off of losses means adjusting the losses against the profit or income of
that particular year. Losses that are not set off against income in the same
year can be carried forward to the subsequent years for set off against
income of those years.
A set -off could be :
 an int ra-head set -off (Section -70)
 an inter -head set -off (Section - 71)
2.2 INTRA HEAD SET -OFF / INTER SOURCE ADJUSTMENT (SECTION 70) The losses from one source of income can be set off against income from
another source under the same head of income.
Example 1:
Loss from Business A can be set off against profit from Business B, where
Business A is one source and Business B is another source and the
common head of income is “Business”.
Example 2:
Loss from one house property i.e. C can be set off against profit from
another house property i.e. D where house property C is one source and
house property D is another source and the common head of income is
“House Property”
Exceptions :
 Losses from a Spe culative business will only be set off against the
profit of the speculative business. One cannot adjust the losses of
speculative business with the income from any other business or
profession.
 Loss from an activity of owning and maintaining race -horses w ill be
set off only against the profit from an activity of owning and
maintaining race -horses. munotes.in

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Taxation - III (Direct Taxes- II)
22  Long -term capital loss will only be adjusted towards long -term capital
gains. However, a short -term capital loss can be set off against both
long-term capital ga ins and short -term capital gain.
 Losses from a specified business will be set off only against profit of
specified businesses. But the losses from any other businesses or
profession can be set off against profits from the specified businesses.
2.3 INTER -HEAD SET -OFF / INTER HEAD ADJUSTMENT (SECTION 71) After the in tra-head adjustments, the taxpayers can set off remaining
losses against income from other heads.
Example 1:
Loss from house property can be set off against salary income.
Example 2:
Business loss other than speculative business can be set off against any
head of income except income from salary.
Exceptions :
 Loss under the Profit & Gain form Business or Profession cannot be
set off against under the head Sala ries.
 Loss from capital gai ns cannot be set off against any other heads.
 The maximum loss from house property which can be set off against
any income from any other head is ₨. 2,00,000
 Speculation losses cannot be set off against any other head of income.
 Specified business losses, horse racing losses cannot be s et off against
any other heads.
2.4 CARRY FORWARD OF LOSSES It means to take the excess losses of the current year to the next years and
then adjust with the profits of those coming years. The rules as regards
carry forward differ slightly for different hea ds of income.
2.5 CARRY FORWARD & SET OFF UNABSORBED DEPRECIATION (SECTION 32(2) Conditions :
 Unabsorbed Depreciation is that amount of unutilized depreciation
which the assessee will not be able to claim as an expense due to lack
of sufficient profit in P& L Account. munotes.in

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Set Off & Carry Forward of Losses (Section 70 To 74)
23  Such unabsorbed depreciation can be set off against any heads of
income and the remaining balance can be carried off till for any
number of periods.
2.6 CARRY FORWARD & SET OFF LOSSES FROM HOUSE PROPERTY (SECTION 71B) Conditions :
 If loss under the head “Income from house property” cannot be fully
adjusted in the year in which such loss is incurred, then unadjusted
loss can be carried forward to next year.
 In the subsequent years(s) such loss can be adjusted only against
income char geable to tax under the head “Income from house
property”.
 Can be carry forward up to next 8 assessment years from the
assessment year in which the loss was incurred.
 Can be carried forward even if the return of income for the loss year is
belatedly filed.
2.7 CARRY FORWARD & SET OFF LOSSES FROM NON-SPECULATIVE BUSINESS OR PROFESSION
(REGULAR BUSINESS LOSS) (SECTION 72) Conditions :
 Can be carry forward up to next 8 assessment years from the
assessment year in which the loss was incurred
 Can be adjusted only against Income from business or profession
 Not necessary to continue the business at the time of set off in future
years
 Cannot be carried forward if the return is not filed within the original
due date u/s 139(1) of The Income Tax Ac t.
2.8 CARRY FORWARD & SET OFF LOSSES FROM SPECULATIVE BUSINESS (SECTION 73) Conditions :
 Can be carry forward up to next 4 assessment years from the
assessment year in which the loss was incurred.
 Can be adjusted only against Income from speculative busi ness.
 Cannot be carried forward if the return is not filed within the original
due date u/s 139(1) of The Income Tax Act. munotes.in

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Taxation - III (Direct Taxes- II)
24  Not necessary to continue the business at the time of set off in future
years
2.9 CARRY FORWARD & SET OFF LOSSES UNDER THE HEAD CAPITAL GAINS (SECTION 74) Conditions :
 Can be carry forward up to next 8 assessment years from the
assessment year in which the loss was incurred.
 Long -term capital losses can be adjusted only against long -term
capital gains.
 Short -term capital lo sses can be set off against long -term capital gains
as well as short -term capital gains
 Cannot be carried forward if the return is not filed within the original
due date u/s 139(1) of The Income Tax Act.
2.10 CARRY FORWARD & SET OFF LOSSES FROM OWNING AND MAINTAINING RACE -HORSES
(SECTION 74A) Conditions :
 Can be carry forward up to next 4 assessment years from the
assessment year in which the loss was incurred.
 Cannot be carried forward if the return is not filed within the o riginal
due date u/s 139(1) of The Income Tax Act.
 Can only be set off against income from owning and maintaining
race-horses.
2.11 PRACTICAL PROBLEMS Illustration 2.11.1 :
If Z has the following income :
Business income C 2,40,000
Capital Gains :
Long -term capital gain C 80,000
Short -term capital loss C 50,000
Determine total income and carry forward loss, if any
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Set Off & Carry Forward of Losses (Section 70 To 74)
25 Solution :
Name of the Assessee: Mr. Z
Assessment Year : 2023 -24 Previous Year : 2022 -23
Legal Status : Individual Residential Status : R & OR
Computation of Total Income Particulars C C Business Income 2,40,000 Capital Gain:  Long term capital Gain  Short-term capital loss 80,000 (50,000) 30,000 Gross Total Income 2,70,000
Note :
Short -term capital losses can be set off against long -term capital gains as
per Sec. 74
Illustration 2.11.2 :
Rahim submits the following information pertain ing to the previous year
2022 -23.
(a) Income from salary : C 15,00,000
(b) Loss from self -occupied property : C 80,000
(c) Business loss (including unabsorbed depreciation) : C 1,00,000
(d) Banks interest : C 80,000
Determine total income and carry forward loss, if any
Solution :
Name of the Assessee : Mr. Rahim
Assessment Year : 2023 -24 Previous Year : 2022 -23
Legal Status : Individual Residential Status : R & OR
Computation of Total Income Particulars C Income from Salary 15,00,000 Income from House Property  Loss from self-occupied property (80,000) munotes.in

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Taxation - III (Direct Taxes- II)
26 Income from Business or Profession  Business Loss (including unabsorbed depreciation) (1,00,000) Income from other sources  Bank Interest 80,000 Gross Total Income 14,20,000
Note :
 It includes salary income of C 14,20,000 after adjusting house
property loss.
 Business loss of C 1,00,000 is set -off against bank interest and
remaining business loss of C 20,000 will be carried forward.
Illustration 2.11.3 :
Income of Mr. Raju for the previous year 2022 -23 is as follows: Particulars C Business income before depreciation
Less: Depreciation for the current year
Business income after depreciation
Other income 1,40,000 (20,000) 1,20,000 8,45,000 He wants to adjust the following brought forward losses : Particulars Business Loss (C) Depreciation (C) For the Assessment Year 2006-07 For the Assessment Year 2017-18 2,00,000 1,30,000 30,000 40,000
Determine total income and carry forward loss, if any
Solution :
Name of the Assessee: Mr. Raju
Assessment Year : 2023 -24 Previous Year : 2022 -23
Legal Status : Individua l Residential Status : R & OR
Computation of Total Income Particulars C C Income from Business or Profession - Business income before depreciation - Less: Depreciation for the current year - Business income after depreciation - Less: Business Loss for A.Y 2016-17 1,40,000 (20,000) 1,20,000 (1,20,000) Nil munotes.in

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Set Off & Carry Forward of Losses (Section 70 To 74)
27 Income from other sources - Other Income - Less: Unabsorbed Depreciation A.Y 2006-07 - Less: Unabsorbed Depreciation A.Y 2017-18 8,45,000 (30,000) (40,000) 7,75,000 Gross Total Income 7,75,000
Note:
 In this case, business loss pertaining to the Assessment Year 2006 -07
cannot be adjusted (it can be adjusted before the expiry of 8 years,
i.e., up to the assessment year 2013 -14).
 The business loss pertaining to the assessment year 2017 -18 can be
adjuste d against the business income of C 1,20,000 and the balancing
amount of C 10,000 will be carried forward for being set off against
business income up to the assessment year 2024 -25 (it cannot be
adjusted against other incomes).
 On the other hand, unabsorbed d epreciation can be carried forward
without any time -limit and it can be set off against any income.
Illustration 2.11.4 :
Mr. Mukesh informs you the following for assessment year 2023 -24:
(i) Taxable salary C 5,20,000.
(ii) Loss from House property at Pune C 60,000.
(iii) Income from House property at Mumbai C 40,000.
(iv) Brought forward business loss - A.Y 2018 -19 C 1,00,000.
(v) Current year business income C 80,000.
(vi) Bank interest C 20,000.
Determine total income and carry forward loss, if any
Solution :
Name of the Assessee: Mr. Mukesh
Assessment Year : 2023 -24 Previous Year : 2022 -23
Legal Status : Individual Residential Status : R & OR
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Taxation - III (Direct Taxes- II)
28 Computation of Total Income Particulars C C Taxable Salary 5,20,000 Income from House Property - Loss from HP at Pune - Income from HP at Mumbai (60,000) 40,000 (20,000) Income from Business & Profession - Business Income - Less: B/f loss- Business loss of A.Y 2018-19 restricted to 80,000 (80,000) Nil Income from other source - Bank Interest 20,000 Gross Total Income 5,20,000
Note :
 The assessee can carry forward unabsorbed business loss of C 20,000
(C 80,000 - C 1,00,000) to next year.
Illustration 2.11.5 :
Mr. Dinesh furnishes the following information for the year ending of
31-3-2023. Particulars C (a) Income from business: Loss from trading in securities in the nature of derivatives (Not a speculative business) Profit from non- speculative business (b) Capital gains: Long term capital loss on sale of unlisted shares Short term capital loss on sale of shares Short term capital gain on sale of jewellery (50,000) 1,50,000 (25,000) (90,000) 75,000
From the above information compute the gross total income of Mr. Dinesh
and the loss to be carried forward
Solution:
Name of the Assessee: Mr. Dinesh
Assessment Year : 2023 -24 Previous Year : 2022 -23
Legal Status : Individual Residential Status : R & OR
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Set Off & Carry Forward of Losses (Section 70 To 74)
29 Computation of Total Income Particulars C C (I) Income from business: (a) Profit from non- speculative business (b) Loss from derivatives trading (Note 1) 1,50,000 (50,000) 1,00,000 (II) Capital gains: (a) Long term capital loss (Note 2) (b) Short term capital gain Less: Short term capital loss (Note 3) Carried forward to next year (25,000) 75,000 (90,000) (15,000) Nil Gross Total Income 1,00,000
Note :
(1) Loss from trading in derivatives is not a speculative loss as per
exception to sec 43 (5). Therefore, the loss is eligible for set off
against profit fro m the non - speculative business.
(2) Long term capital loss can be set off only against long ter m capital
gain. Unabsorbed long -term capital loss of C. 25,000 for the
assessment year 2023 -24 is eligible for carried forward to subsequent
8 assessment years for set off in accordance with Sec 74.
(3) Short term capital loss of C. 90,000 is entitled for i nter source
adjustment.
(4) According to Sec 71, loss under the head - ”Capital Gains” cannot be
set-off against any other income. Therefore, in this case the net loss of
C. 15,000 shall be carried forward to subsequent assessment years for
set off against income under the head Capital Gains.
(5) The following is the summary of losses eligible for carried forward to
A Y 2024 -25
Long Term Capital Loss C 25,000
Short Term Capital Loss C 15,000
Illustration 2.11.6 :
From the following figures, you are required to compute the total income
of Pawar for assessment year 2023 -24 Head of Income Income/ (Loss) C Income from Property Capital Gains : Short term Long term (N/A) Other sources (10,000) 1,05,000 (75,000) 10,000 munotes.in

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Taxation - III (Direct Taxes- II)
30 Solution:
Name of the Assessee: Mr. Pawar
Assessment Year : 2023 -24 Previous Year : 2022 -23
Legal Status : Individual Residential Status : R & OR
Computation of Total Income Particulars C C I. Income from House Property (loss) (10,000) II. Capital Gains a. Short term capital gain b. Long term capital loss 75,000 1,05,000 III. Income from other sources 10,000 Gross Total Income 1,05,000
Note: According to Section 70, long term capital loss is not eligible for set
off against short term capital gains. Therefore, in the given case a sum of C
75,000 shall be carried forward to assessment year 2024 -25 for set off
against any long -term capital gains as per Sec 74.
Illustration 2.11.7:
Mr. Rohan, an individual submits the following information relevant for
A. Y. 2023 -24:
(i) Income from Salary C omputed C 65,000
(ii) Income from House Property:
House I (Income) C 35,000
House II (Loss) C 25,000
(iii) Income from Business:
Business I (speculative) - Profit C 45,000
Business II (non -speculative) – Loss C 55,000
Find out the net taxable income of Mr. Rohan for A. Y. 2023 -24 applying
the provisions of set of f and carry forward for losses.
Solution:
Name of the Assessee: Mr. Rohan
Assessment Year : 2023 -24 Previous Year : 2022 -23
Legal Status : Individual Residential Status : R & OR munotes.in

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Set Off & Carry Forward of Losses (Section 70 To 74)
31 Computation of Total Income Particulars C C (i) Income from Salary Computed 65,000 (ii) Income from House Property : - House I (Income) - House II (Loss) - House III (Loss) 35,000 (17,000) (25,000) (7,000) (iii) Income from Business: - Business I (speculative) – Profit - Business II (non-speculative) – Loss (Loss to be c/f to A.Y 24-25) 45,000 (55,000) (10,000) Nil Gross Total Income 58,000
Note :
(1) Loss from House property can be set off against income from salary.
(2) Loss from non -speculation business can be set off against speculation
profit.
(3) Loss of C 10,000 will be c/f to AY 2024 -25.
Illustration 2.11.8:
Mr. Rajnish is a resident in dividual submit the following information for
the previous year ended 31/03/2023.
(i) Income from Salary 90,000.
(ii) Taxable Income from House Property 3,50,000.
(iii) Income from Business 2,00,000.
(iv) Long Term Capital gain 1,50,000.
(v) Income from speculative business 80,000.
(vi) Other details unabsorbed depreciation and brought forward loss are:
- Unabsorbed depreciation 90,000.
- Loss from spe culative business. 1,20,000.
- Short term capital loss 1,00,000.
- Unrealised rent 20,000.
Find out the gross taxable income for the Assessment Year 2023 -24
applying provisions of set off and carry forward losses.
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Taxation - III (Direct Taxes- II)
32 Solution:
Name of the Assessee : Mr. R ajnish
Assessment Year : 2023 -24 Previous Year : 2022 -23
Legal Status : Individual Residential Status : R & OR
Computation of Total Income Particulars C C Income from salary 90,000 Income from House Property 3,50,000 Income from Business Less: Unabsorbed Depreciation 2,00,000 (90,000) 1,10,000 Income from Speculative Business Less: Loss from Speculative Business C/f Losses from Speculative Business 80,000 (1,20,000) (40,000) Nil Long Term Capital Gain Less: Short Term Capital loss 1,50,000 (1,00,000) 50,000 Gross Total Income 6,00,000
Note:
Unrealised rent cannot be deducted.
2.12 EXERCISE 1. Multiple choice questions
1. Section70 does not apply to ____________.
a. Speculative loss
b. Long term capital loss
c. loss from activity of owning and maintaining race horses
d. all of the above
2. Speculative loss can be set off against________________.
a. Short term capital b. Speculative income
c. both a & b d. none of the above
3. Long term capital loss can be set off against _______________.
a. Short term capital gain b. Speculative income
c. Long term capital gain d. any income munotes.in

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Set Off & Carry Forward of Losses (Section 70 To 74)
33 4. As per section 71A, this rule does not apply to______________.
a. Speculation loss b. capital loss
c. both a & b d. None of the above
5. There cannot be ‘Loss’ under the head ____________.
a. house property b. other sources
c. Salary d. both b & c
6. ___________________ means adjustment of losses under the same
head of income.
a. inter-source adjustment b. inter-head adjustment
c. Intra-source adjustment d. intra-head adjustment
7. Short term capital loss can be set off against ________________.
a. short term capital gain b. long term capital gain
c. both a & b d. none of the above
8. Long term capital loss can be set off against __________________.
a. short term capital gain b. long term capital gain
c. both a & b d. none of the above
9. Loss from __________________cannot be set off.
a. Capital Asset b. house property
c. exempt source d. other source
10. Loss cannot be set off against____________________.
a. Winnings from lotteries b. gambling all betting income
c. winnings from horse races d. all of the above
Answers : (1-d, 2-b, 3-c, 4-c, 5-c, 6-a, 7-c, 8-b, 9-c, 10 -d)
2. True/false
1. Section 71A allows set off losses within same year.
2. Speculative loss can be set off against any business income.
3. Speculation loss can be set off in the same year only against the
speculation profit.
4. Unabsorbed speculation loss cannot be carried forward. munotes.in

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Taxation - III (Direct Taxes- II)
34 5. Short term capital loss can be set off ag ainst short term or long -term
capital gain.
6. Long term capital loss can be set off against short term or long -term
capital gain.
7. Unabsorbed short -term loss can be carried forward for 4 years.
8. Unabsorbed long -term loss can be carried forward for 8 y ears.
9. There cannot be a loss under the head ‘salaries’.
10. Set off means adjustment of losses against tax liability.
Answers : (1-F, 2-F, 3-T, 4-F, 5-T, 6-F, 7-F, 8-T, 9-T, 10 -F)
3. Write Short notes.
1. Inter -source adjustment U/S 70.
2. Inter -head ad justment U/S 71.
3. Explain the provision of loss under the head profits and gain of
business and profession U/S 72.
4. Set off carried forward of losses in speculation business U/S 73.
5. Set off carried forward of losses under the head capital gains U/S 74.
6. Carry forwards and set off of losses from house property U/S 71B.
7. Difference between loss in speculation business and loss under the
head capital gain.
8. Difference between loss under the head profits and gains of business
or profession and loss under head capital gain.
9. Difference between set off loss from one source against income from
another source under the same head of income and set off loss from
one head against income from other heads.
10. What do you mean by speculative transaction?
PRACTICAL PROBLEMS
(1) Mr. Ritik has Income under the head
- house property C 2,00,000
- Loss from long term capital gains C 30,000
- income from short term capital gains C 50,000
- income from owning and maintaining race camels C1,50,000
- loss from owning and maintaining race horses C 55,000 munotes.in

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Set Off & Carry Forward of Losses (Section 70 To 74)
35 Compute his total income for the A.Y. 2023 -24 and loses to be carried
forward.
[Ans.: 4,00,000]
(2) Mr. Kavi has income and losses as given below :
(a) Income from growing and curing coffee C 2,25,000
(b) Income from growing and manufacturing mango juice C 75,000
(c) Income from growing and selling wheat C 3,00,000
(d) Income under the head salary C4,50,000
(e) Long term capital loss on sale of agricultural land in
the village C 2,00,000
(f) Short term capital gain on sale of house property C 1,75,000
(g) Income from speculation business C 5,00,000
Compute his total income and carried forward losses for A.Y. 23 -24.
[Ans.: 17,25,000]
(3) Raghu, engaged in various types in various types of activities, give
the following particulars of her income for the year ended 31/3/2023.
(a) Profit of business of consumer and household products
C 50,000
(b) Loss of business of readymade garments C 10,000
(c) Brought forward loss of catering business which was closed in
Assessment year 2019 -20. C 15,000
(d) Short -term loss on sale of securities and shares C 15,000
(e) Loss of speculative transactions of assessment year 2018 -19. No set
off till Assessment ye ar 2020 -21 C 15,000
(f) Profit of speculative transactions entered into during the year
C 12,500
Compute the total income of Raghu for the A/Y 2023 -24.
[Ans.: 37,500]
(4) Determine the net income of Ratnesh for the A. Y. 2023 -24, Mr. Ziddi
furnishes the following particulars of his income for the P. Y. 2022 -
23.
N: Business loss C 4,00,000 munotes.in

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Taxation - III (Direct Taxes- II)
36 Unabsorbed depreciation C 2,00,000
M: Business profit C 10,00,000
Income from house property C 2,00,000
Carried forward losses and allowance ;
J: business was discontinued on 31 -12-2020 leaving the following
unabsorbed :
(a) Business loss C 3,00,000
(b) Depreciation C 2,00,000
K: business was discontinued on 1 -3-2021 leaving the following
unabsorbed :
(a) Business loss C 30,000
(b) Depreci ation C 1,00,000
Compute his total income for A. Y. 23 -24.
[Ans : Nil]
(5) From the following particulars of Mr. Rishikesh for previous year
ending 31/3/2023 compute the total taxable income and losses to be
carried forward.
1) Income from business (Proprietary concerns)
(a) Net adjusted profit from textile trade C 20,000
(b) Net adjusted loss from automotive trade C (30,000)
(c) Loss in shares traded (Shares were never taken
Delivery and the transaction were set off
against each other C (40,000)
2) Negative income from house property C (25,000)
3) Capital Gains
(a) Short -Term loss C (20,000)
(b) Long Term gain C (45,000)
[Ans.: Nil]
*****
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37 MODULE - III
3
COMPUTATION OF TAX LIABILITY OF
INDIVIDUAL & HUF
Unit Structure
3.0 Learning Objective
3.1 Computation of Tax Liability of Individual and H UF
3.1.1 Deduction from Gross Total Income
3.1.2 Slab Rates: Old Tax Regime (Default Rate) For A.Y. 2022 -
2023
3.2 Computation of Tax Liability
3.3 Deductions under Chapter V IA
3.3.1 Deduction u/s 80C
3.3.2 80CCC - Contribution to Pension Funds of LIC or any other
insurer (applicable to individual)
3.3.3 Deduction u/s 80 D
3.3.4 Deduction u/s 80 DD
3.3.5 Deduction u/s 80 E
3.3.6 Deduction u/s 80 EE
3.3.7 Deduction u/s 80EEB
3.3.8 Deduction u/s 80 TTA & u/s 8 0 TTB
3.3.9 Deduction u/s 80U
3.4 Rebate of Income Tax in case of certain Individuals [Section 87A]
3.5 Exercise
3.6 References
3.0 LEARNING OBJECTIVE  Understand the deductions applicable in respect of specific incomes
earned
 Calculate the amount of deductions and Tax liability allow ed for an
Individual
 Calculate the amount of deductions and Tax liability HUF assessee.
3.1 COMPUTATION OF TAX LIABILITY OF INDIVIDUAL AND HUF 3.1.1 Deduction from Gross Total Income :
As per sec 80A, of the Income tax Act 1951, deductions reflected in
Chap ter VI A u/s 80C to 80U are allowed to be deducted from Gross Total munotes.in

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Taxation - III (Direct Taxes- II)
38 Income of an assessee. However, the total amount of deduction not to
exceed the Gross Total Income of an assessee.
As per Sec 80AC, it is mandatory to furnish the return of income on or
prior to the due date [as per Sec 139(1)] of the Act to avail benefit of
deductions. Computation of Total Income Rs. Income from Salaries xx Income from House Property xx Profit and Gains from Business and Profession xx Income from Capital Gains xx Income from Other Sources xx Gross Total Income xx Less : Deduction under Chapter VI -A (Section 80C to 80 U) xx Total income xx Rounding off total income to nearest Rs. 10/ - (Sec- 288A) xx
3.1.2 Slab Rates: Old Tax Regime (Default Rate) For A.Y. 202 2-2023 :
(Assessee did not opt for Sec 115 BAC*)
a. For other individuals Total Income Tax rate Upto Rs. 2.5 lakhs NIL > Rs. 2.5 lakhs to Rs. 5,00,000 5% > Rs. 5 lakhs to Rs. 10,00,000 20% > Rs. 10 lakhs 30%
b. For resident senior citizens (60 years to less t han 80 years) Total Income Tax rate Upto Rs. 3 lakhs NIL > Rs. 3 lakhs to Rs. 5,00,000 5% >Rs. 5 lakhs to Rs. 10,00,000 20% >Rs. 10 lakhs 30%
c. For resident senior citizens (80 years & above - Super senior citizens) Total Income Tax rate Upto Rs. 5,00,000 NIL >Rs. 5 lakhs to Rs. 10,00,000 20% > Rs. 10 lakhs 30% munotes.in

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Computation of tax liability of Individual & HUF
39
 Sec 115 BAC gives an option to the assessees to choose the new tax
regime
Surcharge :
Surcharge (for Individual & HUF) Total Income Surcharge Rs. 50 Lakhs to Rs. 1 crore 10% of Income tax Above 1 crore to Rs. 2 crores 15% of Income tax Above 2 crores to Rs. 5 crores 25% of Income tax Above 5 crores 37% of Income tax
Surcharge (for Partnership firm) Total Income Surcharge Above 1 crore 12 % of Income tax
Cess : Levy of health & education cess Rate Education cess 2% Secondary & higher education cess 1% Health cess 1% Total 4%
SLAB RATES: NEW TAX REGIME FOR A.Y. 2022 -2023
(Assessee needs to opt for Sec 115 BAC) Upto Rs. 2.5 lakhs NIL > Rs. 2.5 lakhs to Rs. 5,00,000 5% > Rs. 5 lakhs to Rs. 7,50,000 10% > Rs. 7.5 lakhs to Rs. 10,00,000 15% > Rs. 10 lakhs to Rs.12,50,000 20% > Rs. 12.5 lakhs to Rs. 15,00,000 25% >15 lakhs 30%
3.2 COMPUTATION OF TAX LIABILITY Net taxable income XXXXX  Casual Income (taxed @30%) xx  Long term Capital Gains (Check for deficit / carry forward of (taxed 20%**) xx munotes.in

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Taxation - III (Direct Taxes- II)
40 losses) [**subject to provisions u/s 112] (# 10% if indexation is applicable)  Short term Capital Gains (taxed@ 15%) xx  Balance (Check slab rates) xx Total tax on Income xx Add: Surcharge on total tax (if applicable) xx Less: Rebate u/s 87A (if applicable) xx Add: Health & Education cess@ 4% [4% on (Total tax + surcharge)] xx Tax liability xx
3.3 DEDUCTIONS UNDER CHAPTER VIA 3.3.1 Deduction u/s 80C :
1. Maximum deduction under Section 80C from Gross Total Income can
be claimed to the extent of Rs. 1,50,000. This deduction is allowed to
an individual or HUF.
2. Deduction applicable to assessee (Individual/ HUF) for investment in :
 Deferred Annuity
 Provident Fund contribution
 Tax saver mutual funds
 ULIP
 Tax saving FD’s
 Term deposits for FD (not less than 5 years) with scheduled bank or
Post office
 Tuition fees paid to university or college in India for full time
education of 2 children.
 Subscription paid to notified schemes of Central Government or sum
towards notified annuity plan of LIC or another insurer.
3.3.2 80CCC - Contribution to Pension Funds of LIC or any other
insurer (applicable to individual) :
 Amount of deduction (80C or 80CCC)= Actual amount inve sted
OR Rs. 1,50,000 WHICHEVER IS LESS. munotes.in

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Computation of tax liability of Individual & HUF
41  80CCD - Contribution to pension scheme notified by the Central
Government (max 10% of the salary) - ADDITIONAL
DEDUCTION OF 50,000 allowed ab ove deduction u/s 80C.
 80CCG – available to new retail individual investors.
Amount allowed as deduction - 50% of the amount invested in
notified equity savings scheme. (Max deduction: Rs. 25,000)
3.3.3 Deduction u/s 80 D :
Deduction in respect of Medical /He alth Insurance Premium
1. The deduction is applicable for individual (Resident or non -resident)
and H.U.F.
2. The scheme of insurance must be framed by the General Insurance
Corporation of India and approved by the Central Government or any
other insurer and app roved by IRDA.
3. Amount should be spent on Mediclaim insurance premium or
preventive health checkup.
4. Deduction is allowed in respect of any sum out of chargeable to tax
income by any mode of payment (Cheque, draft, electronic system of
bank ECS, NEFT or RTGS ) other than cash (for preventive checkup
cash payment allowed) towards an insurance policy taken on the
health of the assessee or spouse or dependent children or parents and
for H.U.F, non -senior citizen.
5. Deduction allowed : Individual (if not senior citizen 60 yrs and above) Maximum deductible amount subject to actuals  Deduction for individual and family (spouse and dependent children) Rs. 25,000  Deduction for parents (if parents are senior citizen 60 yrs and above) Rs. 50,000 PREVENTIVE HEALTH CHECKUP Rs. 5,000 HUF Maximum deductible amount subject to actuals  HUF members Rs. 25,000  If member is a senior citizen 60 yrs and above Rs. 50,000

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Taxation - III (Direct Taxes- II)
42 3.3.4 Deduction u/s 80 DD :
Deduction in respect of Handicapped Dependent :
1. This deduction is allowed to a residen t individual and HUF.
2. Deduction is allowed in respect of expenditure incurred for medical
treatment (including nursing), training and rehabilitation of a
handicapped relative who is dependent upon him and is not dependent
on any other person for support or maintenance.
3. The assessee shall have to submit every year a copy of certificate
issued by medical authority along with return of income in the
prescribed form u/s 139 in respect of the year for which the deduction
is claimed.
4. Deduction allowed : Fixed deduction (actual expense incurred is irrelevant) Disability from 40% to 79% Rs. 75,000 80% and above- severe disability Rs. 1,25,000
Note :
 A handicapped relative means a relative who is suffering from
eminent physical disability (including blindness ) or who is subject to
mental retardation. They should be of the nature specified in IT Rules
and should be certified as such by a physician, a surgeon, or a
psychiatrist working in a government hospital. Further, it should have
the effect of reducing cons iderably such person’s capacity for normal
work or engaging in gainful employment or occupation.
 A person suffering from any of the following disabilities not less than
40% as certified by medical authority, i.e. blindness, low vision,
hearing impairment, locomotor disability, mental disability, mental
illness.
 A person with severe disability is one who is suffering with 80% or
more disabilities as referred to in sub -Section (4) of Section 56 of the
persons of disabilities (Equal opportunities, protection of rights and
full participation) Act, 1995 or as mentioned in (f) above.
3.3.5 Deduction u/s 80 E :
Interest on Loan taken for Higher Education :
1. Deduction is allowed to an individual assessee or any relative who has
taken loan for higher full -time educati on. munotes.in

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Computation of tax liability of Individual & HUF
43 2. The assessee is entitled for deduction in that previous year in which
he starts paying the interest on loan and in seven succeeding previous
years or until the full amount of interest is paid (whichever is earlier).
3. This deduction is also available fo r the purpose of higher education of
relatives.
4. Loan to be repaid by assessee in the previous year taken from any
financial institution for the purpose of pursuing higher education.
5. Relative includes spouse, children, or the student for whom the
individual is legal guardian.
6. Higher education means a course pursued after passing SSC or
equivalent exam in India.
3.3.6 Deduction u/s 80 EE :
Interest on loan for residential house property :
1. This deduction is allowed to individual first -time home buyers.
2. Amount of such loan not to exceed Rs. 35 lakhs and the value of such
house cannot exceed Rs. 50 Lakhs.
3. Loan should be sanctioned between April 1, 2016 and March 31,
2017.
4. The assessee should not own any other house property on the date of
sanction of loan.
5. If the deduction for interest on loan for residential house property is
claimed u/s 80EE, then it cannot be claimed under any other section
of this Act.
6. Deduction under his Section (80 EE) shall be allowed in computing
the total income of the individual for t he assessment year beginning
on 01.04.2017 and subsequent assessment years.
7. This deduction is available upto Rs. 50,000/ - on interest amount on
home loans taken from specified financial institution such as banks
and housing finance company.
3.3.7 Deductio n u/s 80EEB :
Tax incentives for interest on loan to purchase Electric Vehicles:
1. Deduction shall be payable to an assessee for interest on loan taken
from any financial institution to purchase an electric vehicle.
2. Loan approval should be from financial insti tutions or banks between
April 1,2019 to March 31, 2022.
3. Amount of deduction is Rs. 1,50,000 for interest on purchase of
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Taxation - III (Direct Taxes- II)
44 3.3.8 Deduction u/s 80 TTA & u/s 80 TTB :
Deduction for interest on deposits in savings A/c For Senior citizen Others Section 80TTB Section 80TTA Deduction is applicable for resident individual with age of 60 years or more. Deduction is applicable to individual assessee (other than Sr. citizens) and HUF (if the total income includes interest on deposits [excl time deposits] in savings a/c.) Deduction in respect of interest from fixed term deposits or savings a/c of a bank. (Includes interests on FD and savings a/c) Deduction in respect of interest on deposits in Savings a/c of the bank. Maximum amount of deduction is actual amount received on savings a/c interest or Rs.50,000; whichever is less. Maximum amount of deduction is actual amount received on savings a/c interest or Rs.10,000;whichever is less. Savings a/c can be with any bank; cooperative society engaged in
banking business or post office in India. Note : Post office savings bank interest is exempt to Rs. 3,500 u/s 10(15) for single holder. So, assessee shall first take exemption from other sources and then claim deduction for the balance amount of interest received.
3.3.9 Deduction u/s 80U :
Deduction to an as sessee with physical disability :
1. Deduction is available to resident individual certified as physically
disable by the medical authority.
2. Lumpsum deduction = Rs. 75,000 (disability from 40% to less th an
80%)
Rs.1,25,000(disability 80% and above - severe disability)
3. Copy of certificate issued by the prescribed medical authority is
required to be furnished by the assessee along with the return of
income u/s 139 of the income tax act.
3.4 REBATE OF INCOME TAX IN CASE OF CERTAIN INDIVIDUALS [SECTION 87A]  Rebate is applicable to assessee whose Net Taxable Income does not
exceed Rs. 5,00,000. munotes.in

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Computation of tax liability of Individual & HUF
45  Amount of Rebate: Rs. 12,500 or 100% of Income tax (before
charging health & education cess) whichever is les s.
3.5 EXERCISE I. Write Short notes on
a. Deductions u/s 80C
b. Deduction to resident for amount paid towards health insurance
premium
c. Deduction u/s 80E
II. Explain the quantum of deduction applicable u/s 80U along with the
applicable cond itions
III. Explain the provisions of deduction ap plicable to individual assesse
for receipt of Interest on savings a/c under Income tax act.
IV. Practical Questions :
1. Sanjay (age 43 years) is an Indian citizen. During the year 2021 -2022,
he pays Mediclaim insur ance of Rs. 7,000 for self ; 11,000 for spouse
and Rs. 15,000 for his independent daughter by cheque. He also pays
Rs. 30,000 for his father who is a senior citizen. Calculate amount of
deduction u/s 80D for Mr. Sanjay.
(Ans: Rs. 48,000)
2. Parab’s Net income from salary is Rs. 7,00,000; He incurred Rs.
27,000 as medical expense for his mother (sr. citizen); Rs. 5,000 for
self-insurance using cheque. He paid Rs. 15,000 in cash for
preventive health checkup for his spouse.
He paid Rs. 75,000 for medical treatme nt of dependent sister with
severe disability.
Calculate the amount of deduction under Chapter VI A.
(Ans: Rs. 1,62,000)
3. Compute the tax liability of Mr. Vijay (age 38) an Indian citizen from
the following information during the previous year 2021 -2022.
Net income from salary of Rs. 30,00,000; Income from house
property Rs. 15,00,000 and income from other sources of Rs. 3,00,000
assuming that Vijay has not opted for N ew scheme under section
115BAC.
Miss Nisha, an Indian citizen aged 35 years has a net taxab le income
from salary of Rs. 3,00,000 and Rs. 1,40,000 from other sources
during 2021 -2022. Calculate her net tax liability for the assessment
year 2022 -2023. munotes.in

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Taxation - III (Direct Taxes- II)
46 V. Fill in the blanks choosing correct option
1. Deduction u/s 80TTA for interest earned is applicable to ______.
a. Individual & HUF b. Company
c. Firm d. Company
2. Maximum amount of deduction u/s 80TTB for interest earned is
______.
a. Rs. 10,000 b. Rs. 20,000
c. Rs. 50,000 d. Rs. 5,000
3. Deduction under Sec 80U is applicable to _____
a. Resident individual b. HUF
c. Firm d. Company
4. Maximum amount of deduction for preventive health checkup for
individual and his parents under Sec 80D is Rs. ____
a. Rs. 5,000 b. Rs. 10,000
c. Rs. 50,000 d. Rs. 1,00,000
5. If assessee pays Rs. 10,000 as Mediclaim insurance for self; Rs.
25,00 0 for his parents by cheque, then the amount of deduction
applicable to the assessee u/s 80D is Rs. _______
a. 10,000 b. 25,000
c. 35,000 d. 15,000
6. Deduction under Sec 80 C for contribution to Sukanya samriddhi
yojana, PPF is available for ______
a. Individual b. HUF
c. Company d. Individual & HUF
7. Deduction under Sec 80C can be claimed for term deposits ( fixed
deposit) made in the scheduled bank, if minimum period of deposit is
_______ years
a. 5 b. 6
c. 10 d. 15
8. Mrs. A ‘s mother is dependent on her and suffers fro m 85% disability.
She incurred medical expense for her mother of Rs.60,000 during
2021 -2022. The amount of deduction that can be claimed by her for
the AY 22 -23 is Rs. ____.
a. 1,25,000 b.75,000
c. 50,000 d. 60,000 munotes.in

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Computation of tax liability of Individual & HUF
47 9. Mr. B’s is dependent daughter suffers from 50% disability. She
incurred medical expense for her mother of Rs.80,000 during 2021 -
2022. The amount of deduction that can be claimed by her for the AY
22-23 is Rs. ____.
a. 1,25,000 b. 75,000
c.50,000 d. 80,000
10. Mr. Swayam, aged 68 years earns interest on s avings a/c of Rs.
28,000 and on time deposits of Rs. 10,000. Deduction available to
him u/s 80TTB is Rs. _______.
a. 28,000 b. 10,000
c.38,000 d. 18,000
Ans : 1-a 2-c 3-a 4-a 5-c 6- d 7- a 8-a 9-b 10-c
VI. State whether the following is true or false .
a. Maximum amount of deduction u/s 80C for contribution towards
investments is Rs. 25,000.
b. Deductions are given under chapter VI A of the Income tax Act.
c. Maximum amount of deduction applicable u/s 80U allowed to a
person with 90% disability is Rs.1,25,000
d. Rebate u/s 87A for AY 2022 -23 for income not exceeding Rs.
5,00,000 is Rs. 12,500 or tax liability whichever is less
e. If total taxable income of an individual (age 25 years) is Rs. 3,40,000
for the AY 2022 -2023; his Net tax liability after considering rebate is
NIL.
f. If total taxable income of an individual (age 38 years opting for old
scheme) is Rs. 6,00,000 for the AY 2022 -2023; his Net tax liability is
Rs. 23,400
g. Total tax liability of the HUF with income of Rs. 22,50,000 (if
assessee opts for old scheme) is Rs. 4,2 9,000.
h. If total tax of an individual is Rs. 4,12,500; HEC @4% is Rs. 16,500.
i. If the total taxable income of the individual is below Rs. 5,00,000;
the assessee is eligible for rebate u/s 87A.
j. If Mediclaim insurance premium of Rs. 50,000 for Sr. citizens pa id by
cash, amount allowed as deduction u/s 80D is Rs. 25,000 munotes.in

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Taxation - III (Direct Taxes- II)
48 Ans:
True: b, c, d, e, f, g, h, i
False : a, j
3.6 REFERENCES 1. Websites :
 https://incometaxindia.gov.in/Pages/e -services.aspx
 https://www.indiabudget.gov.in/budget2022 -23/doc/memo.pdf
 https://incometaxindia.gov.in/Budgets%20and%20Bills/2022/NOTES
-ON-CLAUSES.pdf
2. Direct Tax MCQ Old and New Syllabus Latest Edition CA Fi nal By
Vinod Gupta
3. VG's Direct Tax Summary for CA Final May 2018 (Old & New
course) Exam by CA. Vinod Gupta
4. Direct Taxes Ready Reckoner with Tax Planning, Dr. Girish Ahuja &:
Dr. Ravi Gupta, Commercial law publisher
5. Practical Approach to Direct & Indirect Taxes, Dr. Girish Ahuja &:
Dr. Ravi Gupta, Commercial law publisher
6. Direct taxes law and Practice & Dr. Kapil Singhania & Dr. Vinod K.
Singhania, Taxmann publishers


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49 4
COMPUTATION OF TAX LIABILITY OF
INDIVIDUAL & HUF
Unit Structure
4.0 Learning Objectives
4.1 Practical Sums
4.0 LEARNING OBJECTIVES After reading this unit:
 Learner will be able to compute Net Taxable Income
 Learner will be able to compute Tax Liability
4.1 PRACTICAL SUMS HOUSE PROPERTY+ OTHER SO URCES+ 80C+ 80TTA
Q.1 Calculate the taxable income of Mr. Suraj, an Indian citizen for the
AY 2022 -2023 Suraj owns a property and has let it out on rent of
Rs. 3,50,000 p.a. Particulars Rs. Municipal valuation 2,00,000 Municipal taxes (paid by the tenant) 3,600 Repairs (paid by the tenant) 4,000 Insurance premium paid 1,500 Collection charges 3,000 Interest on borrowed capital (for its construction taken in 2020-2021) 15,000
Other Incomes/ expenses Other Incomes Rs. Dividend from foreign companies 10,000 Interest on deposits in PPF a/c 15,000 Income from units of UTI 6,000 Interest from fixed deposits with SBI 18,000 Payment of LIC premium 35,000 Paid Rs. 10,000 each in St. Mary's school as tuition fees for 2 children. ?? Interest from savings a/c with SBI 16,000 Investment in PPF 1,00,000 munotes.in

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Taxation - III (Direct Taxes- II)
50 Soln:
Computation of Total Income of Mr.Suraj Particulars Rs. Rs. Income from House property 2,30,000 Income from other sources 65,000 Gross Total Income 2,95,000 Less: Deduction under Chapter VI-A Deduction u/s 80C Tuition fees for 2 children 20,000 Investment in PPF 1,00,000 Payment of LIC premium 35,000 Restricted to: -1,50,000 Deduction u/s 80TTA (Interest on savings a/c- Max: 10,000) -10,000 1,60,000 Total Income 1,35,000 Note 1:
Income from House property (Let out property) Rs. Gross Annual value Municipal value Rs.2,00,000 Rent received Rs. 3,50,000 Higher of two: 3,50,000 3,50,000 Less: Municipal taxes (if borne by assessee) NIL Net Annual value 3,50,000 Less: Deduction u/s 24 Standard deduction (30%) 1,05,000 Interest on Loan 15,000 Income from House property 2,30,000
Interest on loan for Let out property has no limit whereas for Self-
occupied property has a maximum limit of Rs. 2,00,000 (subject to
conditions).
Note 2:
Income from other sources Rs. Dividend from foreign companies 10,000 Interest on deposits in PPF a/c 15000 munotes.in

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Computation of Tax Liability of Individual & HUF
51 Income from units of UTI 6,000 Interest from fixed deposits with SBI 18000 Interest from savings a/c with SBI 16,000 Income from other sources 65,000
SALARIES + OTHER SOURCES+ 80C+ 80D
Q.2 Mr. Sanjay, an Indian citizen of 45 years earns income from the
following sources : Rs. Income from Salaries 25,00,000 Income from other sources 20,00,000 Total 45,00,000 His investments/ payments during the financial year 2021 -2022 are as
under :
 Rs. 1,00,000 contributed towards Public provident fund (PPF)
 Rs. 50,000 paid as school fees at St. Xavier’s school , Calcutta for his
son’s education studying in 9th standard.
 Repayment of housing loan Rs. 30,000
 Tax saver Fixed deposit (Period: 5 years) Rs. 10,000.
 Rs. 1,00,000 paid as contribution for approved pension scheme
 Rs. 80,000 paid for medical treatment of d ependent relative (with
40% disability).
Compute the deductions u/s 80 and total income of Mr. Sanjay for the
assessment year 2022 -2023
Solution: Computation of Total Income Particulars Rs. Rs. Income from Salaries 25,00,000 Income from other sources 20,00,000 Gross Total Income 45,00,000 Less: Deduction under Chapter VI-A Deduction u/s 80C -1,50,000 Deduction u/s 80D -75,000 2,25,000 Total Income 42,75,000 munotes.in

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Taxation - III (Direct Taxes- II)
52 SALARIES + HOUSE PROPERTY+ OTHER SOURCES+ 80C+
80TTA
Q.3 Ajay, an Indian citizen, of 35 years is a salaried employee in Delhi.
He receives the following from his employer during the previous year
ending 31.3.2022. Basic salary Rs. 7.68,000 Bonus Rs. 1,00,000 Commission (fixed) Rs. 20,000 House Rent allowance Rs. 60,000 (exempt u/s 10 (13A) Rs. 28,000) Transport allowance Rs. 18,000 Profession tax paid Rs. 2,500
He owns a house property which has been let out. Municipal valuation of
house property is Rs. 1,80,000 and fair rent is Rs. 1,00,000. He received
rent of Rs. 2,40,000. He makes the following expenditure in respect of
House Property : Municipal taxes : Rs. 2,500 House Insurance : Rs. 1,600 Interest on housing loan taken for this house : Rs 50,000
He received Rs 15,000 as interest on savings a/c fro m Maharashtra bank
and Rs. 10,000 as dividend from Indian companies. He also deposited
Rs. 1,20,000 in PPF during the previous year.
Calculate the net taxable income of Ajay for the assessment year
2022 -2023.
Sol:
Computation of Total Income of Ajay for AY 2022 -2023 Particulars Rs. Rs. Income from Salaries (Note 1) 8,85,500 Income from house property (Note 2) 1,16,250 Income from other sources (Note 3) 25,000 Gross Total Income 10,26,250 Less: Deduction under Chapter VI-A Deduction u/s 80C (PPF) [Max amount : 1,50,000] (1,20,000) Deduction u/s 80 TTA (Interest on savings a/c) [Max amount: Rs. 10,000] Amount received :Rs 15,000. (10,000) (1,30,000) Total Income 8,96,250 munotes.in

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Computation of Tax Liability of Individual & HUF
53 Note 1: Income from Salaries














Note 2: Income from House Property (let out)

Note 3: Income from other sources Rs. Interest on savings a/c from Maharashtra bank 15,000 Dividend from Indian companies (taxable) 10,000 25,000
PROFITS/GAINS FROM BUSINESS & PROFESSION, OTHER
SOURCES, 80C, 80D

Rs. Rs. Basic salary 7,68,000 Bonus 1,00,000 Commission 20,000 HRA 60,000
Less exempt -28,000
32,000 Transport allowance 18,000 Gross salary 9,38,000 Less: Deduction u/s 16 Standard deduction 50,000 Profession tax (Sec 16(iii)) 2,500 52,500 Net salary 8,85,500 Rs. Gross Annual value
Municipal value Rs.1,80,000
Fair rent Rs. 1,00,000
Whichever is higher: 1,80,000
Rent received Rs. 2,40,000
Higher of two: 2,40,000




2,40,000 Less: Municipal taxes paid - 2,500 Net Annual value 2,37,500 Less: Deduction u/s 24 Standard deduction (30%) 71,250 Interest on Loan (let out property: no limit) 50,000 Income from House property 1,16,250 munotes.in

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Taxation - III (Direct Taxes- II)
54 Q.4 Mrs Sharada, aged 45 years is a doctor. Expenses of clinic run by her
for the year en ded 31.3. 2022 is as follows : Receipts & Payments a/c Receipts Rs. Payments Rs. Balance b/d 50,000 Staff salary 45,000 Consultation fees 2,55,000 Rent of clinic 50,000 Dividend from Indian companies 2,000 Medicines purchased 85,000 Winnings from Lottery 7000 Motor car expenses 25,000 Dividend from foreign companies 25,000 Administration expenses 25,000 Gifts from patients 7,000 Donation to school 5,500 Sale of medicines 1,25,000 Daughters’ marriage expenses 25,000 Gift from mother 25,000 Rent of operation room 25,000 Visiting fees 1,50,000 Travelling expenses 25,000 Income tax paid 10,000 Membership fees 2,000 Balance c/d 3,23,500 Total 6,46,000 Total 6,46,000
Additional information:
1. 1/4 of the motor car expenses are for her per sonal use .
2. She paid Rs. 11,000 as mediclaim insurance premium (for self) by
cheque and Rs. 55,000 as mediclaim insurance premium for her
dependent father who is a senior citizen.
3. She also paid Rs 50,000 towards LIC premium .
4. Depreciation on Motor car is Rs. 15,000 .
5. She also received a Best doctor award and given Rs. 5,500 .
Sol:
Computation of Total Income of Mrs. Sharada for AY 2022 -2023 Particulars Rs. Rs. Profits/ gains from Business & Profession (Note 1) 2,40,000 Income from other sources (Note 2) 34,000 Gross Total Income 2,74,000 munotes.in

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Computation of Tax Liability of Individual & HUF
55 Less: Deduction under Chapter VI-A Deduction u/s 80C (PPF) [Max amount: 1,50,000] -50,000 Deduction u/s 80 D (Mediclaim insurance premium) (11000+ 50,000) (self: Max 25,000) Paid:11,000 (sr. citizen: Max 50,000) Paid : 55,000 -61,000 - 1,11,000 Total Income 1,63,000
Note 1: Income from Business & Profession Rs. Rs. Taxable receipts Consultation fees 2,55,000 Gifts from patients 7,000 Sale of medicines 1,25,000 Visiting fees 1,50,000 5,37,000 Less: Taxable payments Staff salary 45,000 Rent of clinic 50,000 Medicines purchased 85,000 Motor car expenses 18,750 Administration expenses 25,000 Rent of operation room 25,000 Travelling expenses 25,000 Income tax paid 10,000 Membership fees 2,000 Depreciation on Motor car 11,250 2,97,000 Profits/ gains from Profession 2,40,000
Note 2: Income from other sources Rs. Dividend from Indian companies 2,000 Winnings from Lottery 7000 Dividend from foreign companies 25,000 Best doctor award (exempt) NIL Income from other sources 34,000
(HUF+ Income from House property+ Income from Business &
Profession + 80D) munotes.in

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Taxation - III (Direct Taxes- II)
56 Q.5 Mr. Kashyap Bhatt, Karta of HUF gives the following information for
the previous year ended 31.3.2022.
Calculate the Ne t taxable income for the A.Y 2022 -2023 Particulars Rs. Particulars Rs. To Office expenses 1,20,000 By Gross Profit 4,50,000 To Staff salary 26,000 By Rent received 65,000 To Embezzlement of cash 31,000 To Repairs of House property 18,000 To Advertising 3,000 To Printing & stationery 1,600 To Charges to collect rent 1,300 To Mediclaim insurance premium 21,000 To Municipal taxes of house property 12,000 To Sales tax 4,600 To Interest paid for housing loan 5,000 To Reserve for bad debts 12,000 To Net profit 2,59,500 5,15,000 5,15,000
Additional information :
1. Salary includes salary p aid to Bhat's daughter and is reasonable as per
her qualification.
2. Mediclaim insurance premium is paid by cheque.
3. Mr. Kashyap Bhatt, Karta of HUF is suffering from disability (to the
extent of 50%).
Soln:
Computation of Total Income of Mr. Kashyap (Karta) for AY 2022 -
2023 Particulars Rs. Rs. Income from house property (Note 1) 32,100 Profits/ gains from Business & Profession (Note 2) 2,63,800 Gross Total Income 2,95,900 Less: Deduction under Chapter VI-A Deduction u/s 80U (applicable for individuals not for HUF) NIL Deduction u/s 80 D (Mediclaim insurance premium) (self: Max 25,000) Paid:21,000 -21,000 -21,000 Total Income 2,74,900 munotes.in

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Computation of Tax Liability of Individual & HUF
57 Note 1 :
Income from House property Rs. Gross Annual value 65,000 Less: Municipal taxes (if borne by assessee) 12,000 Net Annual value 53,000 Less: Deduction u/s 24 Standard deduction (30%) 15,900 Interest on Loan 5,000 Income from House property 32,100 Note 2 :
Profits/gains from Business & Profession Rs. Profit as per P& L a/c 2,59,500 Less: Income considered separately Rent received 65,000 Add: Expenses disallowed/considered separately Repairs of House property 18,000 Charges to collect rent 1,300 Mediclaim insurance premium 21,000 Municipal taxes of house property 12,000 Interest paid for housing loan 5,000 Reserve for bad debts 12,000 Gross total income 2,63,800
(HUF+ Profits/gains from Business & Profession+ Income from other
sources + 80D+80U+ 80C)
Q.6 Mr. Shiwale, Karta of a HUF furnishes the following information for
the yea r ended 31.3.2022. Compute the gross total income of HUF.
Profit & Loss a/c for the year ended 31.3.2022 Particulars Rs. Particulars Rs. To Purchases 1,20,000 By Gross sales 5,50,000 To Staff salary 50,000 By Dividend from Indian companies 65,000 To Free samples distribution 1,500 By Dividend from foreign companies 6,000 To Insurance 18,000 By Bad debts recovered 4,000 munotes.in

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Taxation - III (Direct Taxes- II)
58 To Advertising 3,000 By Winning from horse race 5,000 To Printing & stationery 1,600 By Profit on sale of import licence 3,000 To Mediclaim insurance premium 21,000 By Income tax refund 2,000 To Bad debt provision 1,700 To Sales tax 5,400 To Advance tax 4,000 To Income tax 4,600 To Depreciation 12,000 To Wealth tax 4,500 To Life insurance premium 1,00,000 To Net profit 2,87,700 6,35,000 6,35,000
Additional information:
 Bad debts recovered were not allowed as a deduction in the earlier
years which it was written off.
 Depreciation allowed under Income tax rules is Rs. 10,000
 Mr. Shiwale, Karta of HUF has disability to the extent of 75%.
 He received proceeds from maturity of Life insurance policy -Rs.
15,000
Solution :
Computation of Total Income of Mr. Shiwale (Karta) for AY 2022 -
2023 Particulars Rs. Rs. Profits/gains from Business & Profession (Note 1) 3,41,800 Income from other sources (Note 2) 80,000 Gross Total Income 4,21,800 Less: Deduction under Chapter VI-A Deduction u/s 80U (applicable for individuals not for HUF) NIL Deduction u/s 80C (max Rs. 1,50,000) 1,00,000 Deduction u/s 80 D (Mediclaim insurance premium) -5,000 -1,05,000 munotes.in

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Computation of Tax Liability of Individual & HUF
59 (self: Max 25,000) Paid : 5,000 Total Income 3,17,800
Note 1 :
Profits/gains from Business & Profession Rs. Profit as per P& L a/c 2,87,700 Less: Income considered separately Dividend from Indian companies 65,000 Dividend from foreign companies 6,000 bad debts recovered 4,000 Winning from horse race 5,000 Income tax refund 2,000 Depreciation under Income tax rules 10,000 Add: Expenses disallowed/considered separately Mediclaim insurance premium 21,000 Advance tax 4,000 Income tax 4,600 Depreciation 12,000 Life insurance premium 1,00,000 Wealth tax 4,500 Gross total income 3,41,800
Income tax, Income tax refund, wealth tax and advance tax are considered
as personal.
Note 2 : Income from other sources Rs. Dividend from Indian companies 65,000 Dividend from foreign companies 6,000 Bad debts recovered 4,000 Winning from horse race 5,000 Proceeds from LIC (exempt) NIL Income from other sources 80,000
TAX LIABILITY COMPUTATION
Q.7 Mr. Uday (age: 42 years) is an Indian citizen and an employee of Elite
Ltd. He earns following emoluments and benefits during the previous
year 2021 -2022. munotes.in

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Taxation - III (Direct Taxes- II)
60 Basic salary Rs. 3,50,000 per month
Bonus 20% of Basic salary
Profession tax paid Rs.2,500.
Elite Ltd. allotted him 10,000 sweat equity shares @ Rs. 100 per share in
April 2021. FMV of shares was Rs. 120. He sold all his shares for Rs. 150
on 31.3.2022 after payment of STT.
Additional information:
He receives rent f rom tenant of Rs. 30,000 per month from May
2021.Municipal taxes on the same property of Rs. 20,000 ; outstanding
since 2 years, were paid by him in October 2021 . He has availed a
housing loan of Rs. 10,00,000 from SBI @ 5% p.a. He paid LIC premium
of Rs. 50,500 for self.
He paid Mediclaim insurance premium of Rs. 4,500 by cash for self and
Rs. 5,000 by cheque, for his son, who is not dependent on his father.
Compute his gross taxable income and tax liability for the previous year
2021 -2022 considering th at the individual selects the default (old regime)
Soln:
Computation of Total Income of Mr. Uday for AY 2022 -2023 Particulars Rs. Rs. Income from salary (Note 1) 51,87,500 Income from house property (Note 2) 1,75,333 Income from capital gains (Note 3) 3,00,000 Gross Total Income 56,62,833 Less: Deduction under Chapter VI-A Deduction u/s 80C (max Rs. 1,50,000) 50,500 Deduction u/s 80 D (Mediclaim insurance premium) (mediclaim insurance premium not allowed for independent son and should not be paid by cash) NIL (50,500) Total Income 56,12,333
Computation of tax liability of Uday for the AY 2022 -2023 Rs. Rs. Tax on STCG@ 15% on 3,00,000 45000 Tax on other income of Rs. 53,12,333 Upto 2,50,000 NIL 2,50,001 to 5 lakhs @ 5% 12,500 munotes.in

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Computation of Tax Liability of Individual & HUF
61 5,00,001 to 10 lakhs @20% 1,00,000 10,00,001 to 53,12,333 @30% 12,93,700 14,06,200 14,51,200 Add: Surcharge @10%(since income above 50 lakh) 1,45,120 15,96,320 Add: Health & Education cess @ 4% of 1596320 63,853 Total tax liability 16,60,173 Tax liability (rounded off) 16,60,170
Note 1:
Income from Salaries Particulars Rs. Basic salary 42,00,000 Bonus 8,40,000 Perquisite value of equity shares 2,00,000 (120-100) x 10,000 Gross salary 52,40,000 Less: Standard deduction 50,000 Profession tax 2,500 Net taxable salary 51,87,500
Note 2:
Income from House property Rs. Gross Annual value (for 11 months: actual rent received) 3,30,000 Less: Municipal taxes (if borne by assessee and paid during the year) 20,000 Net Annual value 3,10,000 Less: Deduction u/s 24 Standard deduction (30% of 3,10,000) 93,000 Interest on Loan (10,00,000 x 5%x 10/12) 41,667 Income from House property 1,75,333

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Taxation - III (Direct Taxes- II)
62 Note 3 :
Income from Capital Gains Rs. Sale of Sweat equity shares Sale consideration (10,000 x Rs.150) Less: Cost of acquisition (10,000 x Rs. 120) 15,00,000 (12,00,000) Taxable short term capital gains 3,00,000
TAX LIABILITY COMPUTATION
Q.8 Mr. Vishnu, aged 48 years is an Indian citizen. He reflects the
following information for the year ended 31.3.2022 Particulars Rs. Income from house prope rty 10,00,000 Income from Business & Profession 4,50,000 Income from other sources 50,000 Taxable income from capital gains (short term) 1,00,000
a. Amount paid for repayment of principal amount of housing loan: Rs.
80,000
b. Interest received on savings ban k a/c Rs. 18,000 (already included in
Income from other sources)
c. Mediclaim insurance paid by Vishnu for self and his wife by cheque
Rs. 5,000.
Compute his gross taxable income and tax liability for the previous year
2021 -2022 considering that the individua l selects the default (old regime)
Soln:
Computation of Total Income of Mr. Vishnu for AY 2022 -2023 Particulars Rs. Rs. Income from house property 10,00,000 Profits/ gains from Business & Profession 4,50,000 Income from capital gains (short term) 1,00,000 Income from other sources 50,000 Gross Total Income 16,00,000 Less: Deduction under Chapter VI-A u/s 80C (max Rs. 1,50,000) 80,000 u/s 80TTA (max Rs. 10,000) 10,000 u/s 80 D (Mediclaim insurance premium) 5,000 95,000 Total Income 15,05,000 munotes.in

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Computation of Tax Liability of Individual & HUF
63 Computation of tax liability of Vishnu for the AY 2022 -2023 Rs. Rs. Tax on STCG@ 15% on 1,00,000 (u/s 111) 15,000 Tax on other income of Rs. 14,05,000 Upto 2,50,000 NIL 2,50,001 to 5 lakhs @ 5% 12,500 5,00,001 to 10 lakhs @20% 1,00,000 10,00,001 to 14,05,000 @30% 1,21,500 2,34,000 2,49,000 Add: Surcharge (since total income is below 50 lakhs) NIL 2,49,000 Add: Health & Education cess @ 4% of 2,49,000 9,960 Total tax liability 2,58,960
TAX LIABILIT Y COMPUTATION
Q.9 Mr. Vikas, aged 48 years is an Indian citizen. He reflects the
following information for the year ended 31.3.2022 Rs. Taxable income from Salaries 12,00,000 Income from Business & Profession 3,00,000 Income from capital gains (short term) 5,750
a. Amount paid for repayment of principal amount of housing loan:
Rs. 50,000
b. Amount paid for LIC premium: Rs. 1,20,000
c. Mediclaim insurance paid by Vikas for self and his wife by cheque
Rs. 28,000.
Compute his gross taxable income and tax liabili ty for the previous year
2021 -2022 considering that the individual selects the default (old regime)
Soln:
Computation of Total Income of Mr. Vikas for AY 2022 -2023 Particulars Rs. Rs. Income from Salaries 12,00,000 Profits /gains from Business & Profession 3,00,000 Income from capital gains (short term) 5,750 munotes.in

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Taxation - III (Direct Taxes- II)
64 Gross Total Income 15,05,750 Less: Deduction under Chapter VI-A Deduction u/s 80C (max Rs. 1,50,000) amount paid [1,20,000 +50,000] restricted to 1,50,000 1,50,000 Deduction u/s 80 D (Mediclaim insurance premium) 25,000 (1,75,000) Total Income 13,30,750
Computation of tax liability of Mr. Vikas for the AY 2022 -2023 Rs. Rs. Tax on STCG@ 15% of Rs,5,750 863 Tax on other income of Rs. 13,25,000 Upto 2,50,000 NIL 2,50,001 to 5 lakhs @ 5% 12,500 5,00,001 to 10 lakhs @20% 1,00,000 10,00,001 to 13,25,000@30% 97500 2,10,000 2,10,863 Add: Surcharge (since total income is below Rs. 50 lakhs) NIL 2,10,863 Add: Health & Education cess @ 4% of Rs. 210863 8435 Total tax liability 2,19,298 Tax liability (rounded off) 2,19,300
TAX LIABILITY COMPUTATION
Q.10 From the following information of Mr. Sachin, an Indian citizen
(aged 35 years); compute his total income and total tax liability for
the assessmen t year 2022 -2023 Particulars Rs. Income from Salaries (taxable) 62,000 Income from Business & Profession 4,00,000 Amount paid as health insurance premium 4,500 Amount paid for LIC premium 5,000


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Computation of Tax Liability of Individual & HUF
65 Soln :
Computation of Total Income of Mr. Sachin for A Y 2022 -2023 Particulars Rs. Rs. Income from Salaries 62,000 Profits/gains from Business & Profession 4,00,000 Gross Total Income 4,62,000 Less: Deduction under Chapter VI-A Deduction u/s 80C (max Rs. 1,50,000) 5,000 Deduction u/s 80 D (Mediclaim insurance premium) 4,500 (9,500) Total Income 4,52,500
Computation of tax liability of Mr. Sachin for the AY 2022 -2023 Rs. Rs. Tax on income of Rs. 4,52,500 Upto 2,50,000 NIL 2,50,001 to 5 lakhs @ 5% 10125 5,00,001 to 10 lakhs @20% 0 10,00,001 to 13,25,000@30% 0 10125 10,125 Less: Rebate u/s 87A (since total income is below Rs. 5 lakhs) (10,125) NIL Add: Health & Education cess @ 4% NIL Total tax liability NIL

*****
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66 MODULE - IV
5
COMPUTATION OF INCOME OF
PARTNERSHIP FIRM IN RELATION TO
SEC 40(B) AND TAX THER EON WITH
APPLICABLE RATE OF TAX
Unit Structure
5.0 Learning Objectives
5.1 Computation of Tax Liability of Partnership Firm
5.2 Computation of Taxable Income of Partners of Partnership Firm
5.3 Computation of Income of Partnership Firm
5.4 Cond itions to Claim Deduction of Interest Paid to Partners
5.5 Self-assessment questions
5.6 References
5.0 LEARNING OBJECTIVES After reading this unit :
Learner will be able to
 Understand which income is taxable for the Partnership Fi rms
 Understand the Exemptions allowed to Partnership Firms
 Treat the remuneration received by the partners
 Treat the interest received by the partners
 Understand how to calculate the Tax Liability of the HUF
5.1 COMPUTATION OF TAX LIABILITY OF PARTNERSHIP FIRM Rs. Adjusted total income = Rs.XXXXX  Casual Income / Winnings from lottery/races (taxed @30%) xx  Long term Capital Gains [**subject to provisions u/s 112] (# 10% if indexation is applicable) (taxed @20%**) xx munotes.in

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Computation of Income of Partnership Firm in Relation to Sec 40(B) and Tax Thereon with Applicable Rate of Tax
67  Short term Capital Gains (taxed@ 15%) xx  Balance (taxed @30%) xx Total tax on Income XX Add: Surcharge on total tax (if income exceeds Rs. 1 crore) @12% xx Less: Rebate u/s 87A (if applicable) xx Add: Health & Education cess@ 4% [4% on (Total tax + surcharge)] xx Tax liability xx
Minimum alternate tax = [@ 18.5% + Surcharge+ Health & Education
cess] of the adjusted total income.
5.2 COMPUTATION OF TAXABLE INCOME OF PARTNERS OF PARTNERSHIP FIRM  Share of profit Exempt u/s 10(2A) If condition u/s 184 & s ec 40b are satisfied  Remuneration paid to partners Taxable as business income  Interest / salary paid to partners Taxable as income from salary & expenses incurred to earn interest/ salary can be claimed as deduction u/s 30 to 37 If condition u/s 184 & sec 40b are not satisfied  Remuneration paid to partners Remuneration /salary/ interest paid to partners will be disallowed in hands of firm u/s 40b & 184 hence it is not taxable in the hands of partners.  Interest / salary paid to partners
‘Partnership’ as per Indian Partnership Act 1932 refers to relation between
two persons who have agreed to share profits of the business carried on by
all or any of them acting for all. Their business is carried on by individual
partners under the firm’s name.
Eg: Mr. A, Mr. B are partners entering into partnership firm – M/S AB.
5.3 COMPUTATION OF INCOME OF PARTNERSHIP FIRM  As per the Income tax act, a partnership firm (incl LLP) is taxable as a
separate entity apart from their partners. munotes.in

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Taxation - III (Direct Taxes- II)
68  Salary, commission, bonus or remuneration received by the partners
from the Partnership firm is allowed as a deduction to the firm since it
is taxable in the hands of the partners.
 Interest paid by firm to partner: Interest is allowed as a deduction upto
12% p.a to the firm. This am ount is taxable in the hands of the
partner.
 Income tax rate: Firms income is charged @30%.
 Surcharge: if the income of the firm exceeds Rs. 1 crore, surcharge is
applicable @12% of Income tax.
 MAT: Minimum alternate tax is applicable for LLP and Partnersh ip
firm.
Amount of Deduction is Allowed If :
 Conditions u/s 184 are satisfied
 Conditions u/s 40b are satisfied
Sec 184 :
 As per Sec 184, certified copy of partnership deed is required to be
submitted along with the return of income for the first year to cla im
expenses on interest or remuneration as deduction by the firm. (If not
submitted, then certified copy should be retained by partnership firm
and produced if demanded by assessing officer)
 The firm should submit a revised partnership deed in case of chan ge
in constitution or change in Profit sharing ratio.
 The partnership deed should reflect profit sharing ratio amongst
individual partners of the firm.
Sec 40b :
Conditions to Claim Deduction of Remuneration to Partners
 Remuneration should be paid only to working partner.
 Remuneration should be paid as per the terms prescribed in the
partnership deed.
 Remuneration should for period after execution of partnership deed.
Limits for remuneration : Book Profits* Remuneration to partners First Rs. 3,00,000 OR Loss Higher of Rs. 1,50,000 or 90% of book profit Balance book profit 60% of the book profit munotes.in

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Computation of Income of Partnership Firm in Relation to Sec 40(B) and Tax Thereon with Applicable Rate of Tax
69 Calculation of Book profits : Rs. Net profit as per P& L a/c xx Adjustments u/s 28 to sec 44DB xx Add: Remuneration to partners (if debited to P&L a/c) xx Book Profits xx
Note :
1. Income chargeable under house property, capital gains and other
sources is not a part of book profits.
2. Business profits brought forward need not be deducted from book
profits.
3. Unabsorbed depreciation can be deducted from Book p rofits
4. Deductions from Gross Total Income from Sec 80C to 80U are to be
ignored while computing book profits.
5.4 CONDITIONS TO CLAIM DEDUCTION OF INTEREST PAID TO PARTNERS 1. Interest is deducted if firm satisfies the condition u/s 184
2. Payment of interest sh ould be authorized by the partnership deed.
3. Payment of interest should be for the period after execution of
partnership deed.
4. Rate of interest paid should not exceed 12%.
Sec 78 :
Set off / carryforward of losses if there is retirement or death of partner in
partnership firm
 If there is change in the constitution of partnership firm due to
retirement/ death of a partner, firm cannot carryforward its losses
applicable to such partner.
 Losses from house property, business loss and capital loss due to
owning and maintaining horse race can be carried forward or set off
by firm as per the following:
a. Find the share of outgoing partner in profit/ loss of the firm during the
year of change of firm’s constitution.
b. Find share of loss of outgoing partner in losses bro ught forward
Calculate the difference between (a) & (b). Such loss cannot be allowed to
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Taxation - III (Direct Taxes- II)
70 Carry forward of Unabsorbed depreciation
Sec 78 is not applicable to carryforward the unabsorbed depreciation or
unabsorbed ca pital expenditure incurred for scientific research.
Problems :
1. Shruti, Niti and Dhriti are partners of a software firm SND software.
The book profit of the firm was Rs. 6,00,000 for the year ended
March 31,2021. The firm has paid salary of Rs. 4,60,000 duly
authorized by partnership deed to the working partners. Calculate the
amount of salary allowed as deduction to SND software for A.Y.
2022 -2023.
Soln :
Amount allowed as deduction Soln :to SND software= Rs. 4,50,000.

2. Avi, Gavi & Kavi are working partners of M/s AGK sharing profits &
losses equally. M/S AGK had a Net profit of Rs. 6,20,000 during the
year 2021 -2022. The net profit was arrived at before ded ucting
interest on capitals to the partners @ 15% of 1.5 lakhs. The partner’s
salary was Rs. 1.8 lakhs (as per partnership deed).
Calculate the total income of the firm chargeable to tax for the A.Y. 2022 -
2023.
Sol: Computation of total income of M/S AGK Rs. Net Profit of the firm 6,20,000 Less: Interest @12% 1,20,000 Book profits 5,00,000 Less: Deduction u/s 40b (note 1) 1,80,000 Taxable profit of the firm 3,20,000
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Computation of Income of Partnership Firm in Relation to Sec 40(B) and Tax Thereon with Applicable Rate of Tax
71 Note 1 :

3. Anish, Tanish and Manish are working partners of a consultancy f irm-
ATM consultants, sharing profits & losses equally. ATM consultants
had a Net loss of Rs. 4,40,000 during the year 2021 -2022. The net
profit was arrived at before allowance as salary of Rs. 1,20,000 each
to all the partners.
4. Calculate the income of th e firm from business & profession
chargeable to tax for the A.Y. 2022 -2023.
Sol :
Computation of total income of M/S ATM Rs. Book profits -4,40,000 Less : Deduction u/s 40b (note 1) -1,50,000 Income/ Loss under Profits/ gains from Business & Profession -5,90,000
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Taxation - III (Direct Taxes- II)
72 5. Arun, Varun and Tarun are working partners of M/s AVT engaged
as a tax consultant firm. M/S AVT had a Net profit of Rs.9,00,000
during the year 2021 -2022. The partnership deed did not reflect any
information on interest on partners’ capita l. The partner’s salary was
Rs. 25,000 each per month for all 3 partners.
Calculate the taxable profit of the firm chargeable to tax for the A.Y.
2022 -2023.
Sol:
Computation of total income of M/S AVT Rs. Book profits 9,00,000 Less: Deduction u/s 40b (note 1) -6,30,000 Taxable profit of the firm 2,70,000

6. Vishwa, a partner of a partnership firm received Rs. 15,000 as share
of income from the firm for the year ended31.3.2021. He also
received an interest @ 12% per annum on the capital invested in th e
firm of Rs. 18,000.
Calculate the income taxable to Vishwa for the assessment year 2022 -
2023.
Soln :
Calculation of taxable income of Mr. Vishwa Particulars Rs. Profits/ gains from Business & Profession (Interest @ 12%) 18,000 Taxable Income 18,000 munotes.in

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Computation of Income of Partnership Firm in Relation to Sec 40(B) and Tax Thereon with Applicable Rate of Tax
73 Note:
a. Share of income from the firm is exempt from tax.
b. To compute profits & gains from Business & Profession of firm,
interest given to partners to the extent of 12% is allowed. Hence it is
taxable in the hands of partners under the head Profits/ gains f rom
Business or profession.
7. Income & expenditure a/c of Mehta & Co., Chartered accountants’
firm for the year ended 31.3.2021 is as follows : Particulars Rs. Particulars Rs. To Office expenses 59,10,000 By Audit fees 25,00,000 To Interest to partners 57,000 By Receipts from clients 35,00,000 To Depreciation 2,95,000 By Dividend from Reliance ltd. 2,10,000 To Partners salary 2,08,000 By Net loss 2,60,000 64,70,000 64,70,000
Additional information :
1. Office expenses of Rs. 40,000 is not allow ed u/s 36.
2. Depreciation allowed as per income tax u/s 32 is Rs. 45,000.
3. Interest paid to partners is allowed as per partnership deed.
4. Conditions u/s 40(b)and section 184 are satisfied by the firm.
Sol: Computation of total income of Mehta & Co, Firm Rs. Net Profit of the firm -2,60,000 Add: Office expenses 40,000 Add: Depreciation not allowed (2,95,000- 45,000) 2,50,000 Add: Salary to partners 2,08,000 Less: Dividend from RIL (IFOS) -2,10,000 Book profit 28,000 Less: Deduction u/s 40b (Note 1) 1,50,000 Business income -1,22,000 Income from other sources 2,00,000 Net taxable income 78,000

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Taxation - III (Direct Taxes- II)
74 Note 1:

5.5 SELF -ASSESSMENT QUESTIONS I. Write Short notes on
a. Deductions u/s 40b
b. Computation of tax liability of a partnership firm
II. Explain the conditions u/s 18 4 fulfilled by the partnership firm to
avail deduction for remuneration /interest paid to partners.
III. Explain the conditions u/s 40(b) to claim deduction of remuneration
of partners by the firm.
State whether the following are true/ false :
a. Surcharge on tot al tax for firms’ income exceeding Rs. 1 crore is
@12%.
b. Health & Education cess applicable to the partnership firm is @ 4%
on total tax and surcharge.
c. In book profits of partnership firm is Rs. 9,00,000; the maximum
remuneration u/s 40b allowed to partners is Rs. 6,30,000.
d. Maximum allowable amount of salary u/s 40b paid to working
partners in partnership firm with book profit of Rs. 6,00,000 is Rs.
4,50,000.
e. If the profits earned by the partnership firm is Rs. 1,40,000; the
maximum amount of deduction u/s 4 0b deductible from the profit for
the AY 2022 -2023 is Rs. 1,50,000.
f. Short - and long -term Capital Gains of the partnership firm is taxed@
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Computation of Income of Partnership Firm in Relation to Sec 40(B) and Tax Thereon with Applicable Rate of Tax
75 g. Change in constitution u/s 184 includes change due to admission/
retirement or death of a partner.
h. Share of profit s of partners in the partnership firm is exempt in the
hands of the partner.
i. Partnership deed is a legal instrument containing terms of partnership
and share of partner’s profit.
j. Remuneration u/s 40b is allowed as deduction to the firm only if it is
paid t o working partners.
Ans:
True : a, b, c, d, e, g, h, i, j.
False : f
5.6 REFERENCES 1. Websites :
 https://incometaxindia.gov.in/Pages/e -services.aspx
 https://www.indiabudget.gov.in/budget2022 -23/doc/memo.pdf
 https://incometaxindia.gov.in/budgets%20and%20bills/2022 /notes -
on-clauses.pdf
2. Direct Tax MCQ Old and New Syllabus Latest Edition CA Final By
Vinod Gupta
3. VG's Direct Tax Summary for CA Final May 2018 (Old & New
course) Exam by CA. Vinod Gupta
4. Direct Taxes Ready Reckoner with Tax Planning, Dr. Girish Ahuja &:
Dr. Ravi Gupta, Commercial law publisher
5. Practical Approach to Direct & Indirect Taxes, Dr. Girish Ahuja &:
Dr. Ravi Gupta, Commercial law publisher
6. Direct taxes law and Practice & Dr. Kapil Singhania & Dr. Vinod K.
Singhania, Taxmann publishers

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76 MODULE - V
6
RETURN OF INCOME
(SECTION 139)
Unit Structure
6.0 Learning Objectives
6.1 Introduction
6.2 Compulsory Filing of “Return of Income” By Various Persons
6.3 Various Return Forms For Filing Return of Income
6.4 Mode of “Submission of Income -Tax Re turn”
6.5 Due Date for Filing of Income Tax Return
6.6 Loss Return (Section 139(3)
6.7 Belated Return (Section 139(4)
6.8 Revised Return (Section 139(5)
6.9 Defective Return (Section 139(9)
6.10 Updated Return (Section 139(8a)
6.11 Practical Problems
6.12 Exercises
Multiple Choice Questions
True/ False
Short Notes
Practical Problems
6.0 LEARNING OBJECTIVES After reading this chapter learner will be able:
 To Understand the concept of income tax and its implications.
 To Know the types of income tax return s and their applicability.
 To Know the forms and information required for filing income tax
returns.
 To get familiarize with the due dates, consequences of non -
compliance, and the filing procedure .
6.1 INTRODUCTION Every person, if his total income or the total income of any other person in
respect of which he is assessable under this Act during the previous year
exceeded the maximum amount which is not chargeable to income -tax,
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Return of Income (Section 139)
77 during the previous year in the prescribed form and verified in the
prescribed manner.
Section 139 of the Income Tax Act of 1961 has several subsections
defining norms and regulations as per different cases and circumstances.
6.2 COMPULSORY FILING OF “RETUR N OF INCOME” BY VARIOUS PERSONS The following persons shall submit return of Income on compulsory basis
(applicable even in the case of a non -resident): Section Different Situations 139(1)(a) A company/firm is required to submit its return of
income (regardless of the quantum of income or
loss). 139(1)(b) A person (other than an individual/
HUF/company/firm) is required to submit his/its
return of income, if income exceeds exemption limit. 139(1)(b), read with fifth proviso Individual/HUF is required to submit his/its return of
income, if income [without claiming deduction under
sections 10A, 10B, 10BA, 80C to 80U and under
section 10(38)] exceeds the amount of exemption
limit. 139(4A) A person in receipt of income derived from property held under a trust for charitable or religious purposes is required to submit return of income if its income (without giving exemption under section 11 or 12) exceeds exemption limit. 139(4B) Chief executive officer of every political party is required to submit income-tax return if income of the political party (without giving exemption under section 13A) exceeds exemption limit. 139(4C) If total income (without claiming any exemption u/s 10(21), 10(22B), 10(23A), 10(23AAA), 10(23B), 10(23C), 10(23D), 10(23DA), 10(23EC), 10(23ED), 10(23EE), 10(46), 10(47) of the assessee (who is qualified to claim above exemption) exceeds the exemption limit 139 (4D) Any university/college/other institution referred to in section 35(1)(ii)/ (iii) is required to submit return of income (return has to be submitted whether there is income or loss. Such return has to be submitted even if it is not required by any other provision) 139(4E)/(4F) These sub-sections cover submission of return by business trust/investment fund. munotes.in

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Taxation - III (Direct Taxes- II)
78 6.3 VARIOUS RETURN FORM S FOR FILING RETURN OF INCOME ITR Forms Subject ITR-1 (i.e. SAHAJ) For an individual who is resident and ordinarily resident (total income does not exceed C 50 lakh) having income from salary/one house property (not being brought forward loss or loss to be carried forward)/income from other sources (not being loss and not being winning from lottery/income from race horsest etc.), and agricultural income upto C 5,000 ITR-2 For an individual/HUF where the total income does not
include income under the head business or profession ITR-3 For an Individual/HUF having income under the head
business or profession ITR-4 (i.e. SUGAM) For Individuals, HUFs and Firms (other than LLP)
being a resident having total income upto C 50 Lakh and
having income from busines s and profession which is
computed under sections 44AD, 44ADA or 44AE and
agricultural income upto C 5,000. ITR-5 For persons other than - (i) individual, (ii) HUF, (iii)
company and (iv) person filing Form ITR -7 ITR-6 For Companies other than companies claiming exemption under section 11 ITR-7 For persons including companies required to furnish return under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) only ITR-V Where the data of the return of income in Forms ITR-1, ITR-2, ITR-3, ITR-4 and ITR-5 transmitted electronically without digital signature
6.4 MODE OF “SUBMISSION OF INCOME -TAX RETURN ” Return of income can be filed in paper mode or in e -filing mode. If return
of income is filed through electronic mode, then the assessee has
following three options:
(1) E-filing using a Digital Signature
(2) E-filing without a Digital Signature
(3) E-filing under electronic verification code
If return of income is filed using a digital signature or under electronic
verification code, then there is no requi rement of sending the signed copy,
ITR V (i.e., acknowledgement of return filed electronically) to Bangalore
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Return of Income (Section 139)
79 However, if the return is filed without using digital signature or without
electronic verification code, the assessee shall send the signed c opy of ITR
V on the following address within 120 days of uploading the return either
by ordinary post or by speed post only:
Income Tax Department – CPC, Post Bag No. -1, Electronic City Post
Office, Bangalore -560100, Karnataka
6.5 DUE DATE FOR FILING OF I NCOME TAX RETURN Category of Taxpayer Due date for Tax Filing * (unless extended) Individual / HUF/ AOP/ BOI (books of accounts not required to be audited) 31st July Businesses (Requiring Audit) 31st October Businesses requiring transfer pricing reports (in case of international/specified domestic transactions) 30th November Revised return 31 December Belated/late return 31 December Updated retun 24 months from the end of the relevant A.Y
6.6 LOSS RETURN (SECTION 139(3) Section 139(3) deals w ith filing income tax returns in the case of a loss. It
is usually quite useful to file for the return in the case of losses, as the loss
is allowed to be carried forward, reducing the tax liability in subsequent
years. The following are specifically defin ed cases -
 For an individual taxpayer, the tax return is not mandatory for the loss
incurred in the previous financial year. However, for companies, a tax
return for losses is mandatory.
 If the incurred losses fall in any income under the head' Capital Gain s'
or the head' Profits and Gains of Business and Profession', then the
income tax return should be filed before the due date provided under
Section 139(1) of the Income Tax Act.
 For losses under "House or residential property," the loss can be carried
forward even though the return is filed after the due date.
 Offsetting losses against gains in another category in the same year is
permitted even if the returns are filed after the due date.
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Taxation - III (Direct Taxes- II)
80 6.7 BELATED RETURN (SECTIO N 139(4) If the person fails to file the return of income within the time -limit
prescribed in this regard, then as per section 139(4) he can file a belated
return. A belated return can be filed at any time 3 months before the end of
the relevant assessment year or before completion of assessment ,
whichever is earlier.
The taxpayers who are filing an income tax return late may have to pay a
penalty of C 5,000 or where the total income of the person does not exceed
C 5,00,000, the fee payable shall not exceed C 1,000, as mentioned under
Section 271 F of the Income Tax Act, 1961. However, there will be no
penalty on returns that were not needed to be mandatorily filed according
to Section 139(1) of the Income Tax Act.
6.8 REVISED RETURN (SECTION 139(5) Sometimes the taxpayer may omit to include certai n information in the
return or may commit any mistake at the time of filing the return of
income. In such case any unintentional mistake or error or omission in the
return of income filed by the taxpayer can be corrected by filing a revised
return.
A retur n can be revised at any time 3 months before the end of the relevant
assessment year or before the completion of the assessment, whichever is
earlier. It should be noted that only a return filed under section 139(1) or
belated return filed under section 13 9(4) can be revised.
A return of income filed pursuant to notice under section 142(1) of Act
cannot be revised under section 139(5).
6.9 DEFECTIVE RETURN (SECTION 139(9) Section 139(9) provides the list of situations in which the return of income
filed by the taxpayer can be treated as defective return. If the Assessing
Officer finds the return of income to be defective under section 139(9),
then he may intimate such defect to the taxpayer and may give an
opportunity to him to rectify such defect.
The taxpa yer shall rectify such defect in the return of income within a
period of 15 days of such intimation or within such further period as the
Assessing Officer may allow.
If the defect is not rectified within the period of 15 days or the further
period so allow ed (as the case may be), then, notwithstanding anything
contained in any other provision of the Act, the return shall be treated as
an invalid return and the provisions of the Act shall apply as if the
taxpayer had failed to furnish the return.

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Return of Income (Section 139)
81 6.10 UPDA TED RETURN (SECTION 139(8A) Section 139(8A) enables the filing of "Updated Return" (i.e. ITR -U) by
the taxpayers. Section 139(8A) has come into effect from 01st Apr 2022.
Updated Returns can be filed by the taxpayers who have not filed the
return or have f iled the returns u/s 139(1) - Original, 139(4) -Belated and
139(5) -Revised. The Objective of introducing this facility is to promote
voluntary tax compliance and reduce litigation.
ITR-U cannot be filed in the following cases:
 Updated return is already filed
 For filing nil return/ loss return
 For claiming/enhancing the refund amount.
 When updated return results in lower tax liability
 Search proceeding u/s 132 has been initiated against you
 A survey is conducted u/s 133A
 Books, documents or assets are seized or called for by the Income Tax
authorities u/s 132A.
 If assessment/reassessment/revision/re -computation is pending or
completed.
 If there is no additional tax outgo (when the tax liability is adjusted
with TDS credit/ losses and you do not have any additi onal tax
liability, you cannot file an Updated ITR)
6.11 PRACTICAL PROBLEM Illustration 6.1:
Miss Bhagyashree is a salaried employee. Her taxable salary income for
the year 2022 -23 is C 10,00,000 (she does not have any other income).
What will be the due date of filing the return of income for the financial
year 2022 -23?
Solution:
In case assessee is an Individual / HUF/ AOP/ BOI whose books of
accounts not required to be audited, then due date for filing the return of
income will be 31st July.
In this ca se, Miss Bhagyashree is an Individual having only Salary income
and hence the due date for filing the return of income of the financial year
2022-23 will be 31st July, 2023.
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Taxation - III (Direct Taxes- II)
82 Illustration 6.2:
Mr. Rupesh is an Advocate. Gross receipts for the year 2022 -23 came to C
15,50,000. He opts for the presumptive taxation scheme of section
44ADA. What will be the due date for filing of return of income by Mr.
Rupesh for the financial year 2022 -23?
Solution:
The gross receipts for the year are less than C 50,00,000 an d Mr. Rupesh
has opted for the presumptive taxation scheme of section 44ADA. Hence
Mr. Rupesh will not be liable to get his accounts audited i.e. he is not
covered by audit. Hence, the due date for filing the return of income of the
year 2022 -23 will be 31 st July, 2023 .
Illustration 6.3:
Mr. Kushal is a partner in Roundtrip Enterprises. The turnover of the firm
for the financial year 2022 -23 amounted to C 3,40,00,000. Apart from
remuneration, interest and share of profit from the firm, Mr. Kushal is not
having any other source of income. What will be the due date for filing the
return of income by the partnership firm and by Mr. Kushal for the
financial year 2022 -23?
Solution:
The turnover of the firm exceeds C 2,00,00,000 and, hence, the firm will
not be el igible for presumptive taxation scheme under section 44AD.
Further, the firm shall be liable to get its accounts audited under section
44AB. Hence, the due date for filing the return of income of the year
2022 -23 (in case of the firm as well as Mr. Kushal) will be 31th October,
2023 .
Illustration 6.4:
Blokraft Engineering Pvt Ltd. is a company engaged in trading of minerals
and liable to furnish a report in Form No. 3CEB and under section
92E.What will be the due date for filing the return of income for the
financial year 2022 -23?
Solution:
In this case Blokraft Engineering Pvt Ltd. is a private limited company
and liable to furnish a report in Form No. 3CEB and under section 92E.
hence, the due date for filing the return of income of the year 2022 -23 will
be 30th November, 2023.
Illustration 6.5:
Mr. Mahesh is a trader of garment products. Turnover of his business for
the previous year 2022 -23 amounted to Rs. 90,00,000. He has not opted
for the presumptive taxation scheme of section 44AD i.e. not declaring
income at 8% of sales. He declared income at less than 8% of sales. What
will be the ‘due date’ for filing his return of income for the financial year munotes.in

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Return of Income (Section 139)
83 2022 -23? If he fails to file the return of income by the due date then by
what date he can file a belated return?
Solution:
In this case, as Mr. Mahesh had not opted for presumptive taxation scheme
of section 44AD, and declared income at less than 8% of sales, he will be
required to get his accounts audited under section 44AB and hence, the
due date for filing the return of income of the year 2022 -23 will be
31stOctober, 2023.
If he cannot file the return of income by the due date, i.e., by 31st October,
2023, then he can file a belated return 3 months before end of the relevant
assessment year or before comple tion of assessment, whichever is earlier.
In other words, he can file a belated return upto 31 -12-2023. If the
assessment is completed before 31 -12-2022, then he can file a belated
return at any time before the completion of assessment.
6.12 EXERCISE 1. Multi ple Choice question .
1. The return of income is to be furnished in _______
(a) ITNS 281 (b) Form 26AS
(c) Form 26Q (d) IT R 1 – to 7 (as the case may be)
2. _______ is the acknowledgement of filing the return of income.
(a) ITR - 4 (b) ITR - V
(c) Form 26AS (d) Form 26QB
3. A super senior citizen (i.e., an individual whose age is 80 years or
more at any time during the previous year) can file return in paper
form if he is filing _________.
(a) ITR - 1 (b) ITR - 2
(c) ITR - 4 (d) ITR 1 or ITR - 4
4. Loss Return filed u/s _________________
(a) 139(1) (b) 139(2)
(c) 139(3) (d) 139(4)
5. Updated Return filed u/s _________________
(a) 139(1) (b) 139(2)
(c) 139(3) (d) 139(8A)
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Taxation - III (Direct Taxes- II)
84 2. True/False .
1. The return of income can be filed w ith the Income -tax Department in
electronic mode only.
2. A company can file its return electronically without digital signature.
3. A firm or an individual or a Hindu Undivided Family (HUF) whose
books of account are required to be audited under section 44AB shall
furnish the return of income electronically under digital signature.
4. A resident and ordinarily resident individual/HUF having any assets
(including financial interest in any entity) located outside India or
signing authority in any account located ou tside India shall furnish the
return of income electronically with digital signature.
5. A partnership firm required to get its books of account audited shall
file the return of income electronically with or without digital
signature.
(Ans: True -3 , False – 1,2,4,5)
3. Write Short Notes.
1. Due date of filing of Income Tax Return
2. Loss Return
3. Belated Return
4. Revised Return
5. Defective Return
6. Updated Return
4. Practical Problems .
1. M/s C K Engineering is a partnership firm having a Turnover C 48
Lakh and business loss C 2,50,000 for the previous year ended
31.03.2023. When is it liable to file its return of income for the
relevant Assessment Year? Mr. C is a partner in the said firm and has
earned interest on debentures of C 60,000, dividend of C50,000 as
other incomes. When is he liable to file the income -tax return for the
A.Y?
(Ans: 31st July)
2. During the previous year ended 31 -3-2023, Mr. X has earned salary of
C 94,000 profits form partnership firm C 66,000 wherefrom he has also
received salary as Partner of C 50,000 and has paid to the firm interest
on capital (Debit bal.) of C 25,000 and also has own Proprietory
business wherefrom he has earned a taxable profit of C 90,000 which
amounted to 1% of its Sales Turnover. The said Partnership firm has a
Turnover of C 98 lakhs during the said year. Determine, with reasons, munotes.in

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Return of Income (Section 139)
85 due date of filing of the income -tax return of Mr. X for the relevant
assessment year.
(Ans: 31 Oct as firm covered u/s 44AB)
3. The total income of a University without giving effect to exemption
under section 10(23C) is C 50 lakhs. Its total income however is nil.
Should the University file its return of income?
(Ans: yes u/s 139(1)
4. Mr. A is a resident Indian. During the F. Y. 2022 -23, interest of
C1,24,000 was credited to his Non -Resident (External) Account w ith
the SBI. C 30,000 being interest on fixed deposit with SBI was
credited to his savings bank account during this period. He also
earned C 4,000 as interest on this savings account. Is Mr. A Required
to file return of income?
(Ans: Not required since in come less than basic exemption limit)

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86 MODULE - VI
7
TAX DEDUCTED AT SOURCES
Unit Structure
7.0 Learning Objectives
7.1 Introduction
7.2 TDS on Salary (Section 19 2)
7.3 TDS on Interest Other Than Interest on Securities (Section 194a)
7.4 TDS on Payment to Contractors and Sub -Contractors (Section 194c)
7.5 TDS on Commission or Borkerage (Section 194h )
7.6 TDS on Rent (Section 194i)
7.7 TDS on Profession al Fees (Section 194j)
7.8 Exemption
7.9 Practical Problems
7.10 Exercises
Multiple Choice Questions
True/ False
Short Notes
Practical Problems
7.0 LEARNING OBJECTIVES After reading this chapter learner will be able to:
 The understand the concept of TDS
 The Circumstances under which TDS is to be deducted
 The identify the Incomes on which TDS is to be deducted
 The determine the rate at which TDS is to be deducted
 To study the impact of TDS on the calculation of the Tax payable.
7.1 INTRODUCTION TDS or Tax Deducted at Source is basically a part of income tax. It has to
be deducted by a person at the time of making specified payment such as
rent, commission, professional fees, salary, interest etc. The deductee from
whose income tax has been deducted at source would be entitled to get
credit of the amount so deducted on the basis of Form 26AS or TDS
certificate issued by the deductor.
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Tax Deducted at Sources
87 7.2 TDS ON SALARY (SECTION 192) Payer Any employer responsible for paying any income chargeable under the head “salaries” is required to deduct TDS on the amount payable to the employees. Payee Any employee [resident or non-resident] Nature of Payment Any income chargeable under the head “salaries” Threshold Limit for TDS applicability Deduct TDS if salary exceeds the basic exemption limit of Income Tax. When tax should be deducted? Tax is to be deducted at the time of payment of
salary Rate of TDS Normal Sla b Rate (or) New Tax Regime Slab
Rate as opted by employee
7.3 TDS ON INTEREST OTHER THAN INTEREST ON SECURITIES (SECTION 194A) Payer - Any person other than individual or HUF - Any individual or HUF whose books of accounts are required to be audited in the preceding financial year. Payee Any resident Nature of Payment Interest other than interest on securities (i.e. Interest on Bank Deposit, Post office Deposit, Banking Co-Society Deposit etc.) Threshold Limit for TDS applicability If payer is Banking Co./Post office/Banking Co-Op. Society a) If payee is senior citizen and interest paid exceed C 50,000 b) In any other case, interest paid exceed C 40,000 If payer is other than Banking Co./Post office/Banking Co-Op. Society a) If interest paid exceed C 5,000 When tax should be deducted? Tax is to be deducted at the time of payment. Rate of TDS - If interest paid exceed above mentioned Threshold limit then TDS deducted @ 10% - If PAN is not furnished then TDS deducted @ 20%

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Taxation - III (Direct Taxes- II)
88 7.4 TDS ON PAYMENT TO CONTRACTORS AND SUB -CONTRACTORS (SECTION 194C) Payer - Central Government or State Government, local authority, statutory corporation, a company, co-operative society, Trust, University, a Firm or - Individual and HUF whose books of accounts are required to be audited in the preceding financial year. Payee Any resident person. Nature of Payment Any payment made to a resident contractor or
sub-contractor for carrying out any work
(including supply of labour for carrying out any
work) in pursuance of a contract. Threshold Limit for TDS applicability TDS shall be necessary if: - If the consideration paid or credited to the account of the contractor/sub-contractor exceeds C 30,000 in a single payment or - If the consideration paid or credited to the account of the contractor/sub-contractor exceeds C 1,00,000 in a aggregate during a financial year. When tax should be deducted? Tax is to be deducted at the time of payment or at the time of credit of such sum to the account of the contractor, whichever is earlier. Rate of TDS TDS rate are as follows: For Individual/ HUF contractor/ sub -
contractor @ 1% Other than Individual/ HUF
contractor/ sub -contractor @ 2% Contractor/sub -contractor in transport
business (if PAN is furnished) Nil

7.5 TDS ON COMMISSION OR BORKERAGE (SECTION 194H) Payer - Any person other than individual or HUF - Any individual or HUF whose books of accounts are required to be audited in the preceding financial year. Payee Any resident person. Nature of Payment Payment made by way of commission (other than insurance commission) or brokerage except payable by BSNL or MTNL or their franchisees munotes.in

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Tax Deducted at Sources
89 Threshold Limit for TDS applicability If commission or brokerage paid exceeds 15,000 during the financial year. When tax should be deducted? Tax is to be deducted at the time of payment or at the time of credit of such sum to the account of the payee, whichever is earlier. Rate of TDS - TDS deducted @5%
7.6 TDS ON RENT (SECTION 194I) Payer - Any person other than individual or HUF
- Any individual or HUF whose books of
accounts are required to be audited in the
preceding financial year. Payee Any resident person. Nature of Payment Any paym ent made in excess of specified limit, by
way of lease, sub -lease, tenancy or any other
agreement for the use either separately or jointly
of any: land, building, factory, land appurtenant
to, machinery, plant, equipment, furniture and
fittings. Threshold Limit for TDS applicability If rent paid exceeds C 2,40,000 during the financial year. When tax should be deducted? Tax is to be deducted at the time of payment or at the time of credit of such sum to the account of the payee, whichever is earlier. Rate of TDS TDS rate are as follows: In case of Plant & Machinery &
Equipment (u/s 194 -I(a)) @ 2% In case of Land or Building or
Furniture or Fittings (u/s
194-I(b)) @ 10%

7.7 TDS ON PROFESSIONAL FEES (SECTION 194J) Payer - Any person other than individual or HUF - Any individual or HUF whose books of accounts are required to be audited in the preceding financial year. Payee Any resident person. Nature of Payment Any payment made in excess of specified limit, by the way of fees for professional services or technical service or royalty or non-compete fees referred to in section 28(va) munotes.in

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90 Threshold Limit for TDS applicability If fees paid exceeds C 30,000 during the financial year. When tax should be deducted? Tax is to be deducted at the time of payment or at the time of credit of such sum to the account of the payee, whichever is earlier. Rate of TDS TDS rate are as follows: In case of payee, engaged only in the
business of operation of call centre @ 2% In any other cases @ 10%

7.8 EXEMPTION There are certain circumstances under which no TDS is not applicable :
a. When the amount is paid to government or any government body and
Reserve Bank of India.
b. Amount is paid to notified mutual funds under Section 10(23D).
c. When de ductee has certificate of no -deduction under Section 192 of
the Income Tax Act.
d. When amount is paid to state or central financial corporations.
e. Any payment made by an advertising agency to print media/
electronic media.
f. Interest credited or paid to:
i. Banks or Banking Company
ii. Life Insurance Corporation, Unit Trust of India or any other
insurance company
iii. National Savings Certificate
iv. Kisan Vikas Patra
v. Non Resident External Account
vi. Banking Co -operative society
vii. Savings account and Recurring deposits of banks and co-
operative society
g. Notified body for non -deduction of tax

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Tax Deducted at Sources
91 7.9 PRACTICAL PROBLEMS Illustration 7.1:
Examine the applicability of tax deduction at source in the following
situations:
(a) Ram, an individual carrying on business and made gross turnover of C
70,00,000 for the year ended 31 -03-2023, effected a payment of C
35,000 to Times of India newspaper for recruitment of staff;
(b) Blokraft private limited has paid a sum of C 1.5 crores to Manthan C
& F limited towards clearing and forwarding charges;
(c) C.K Engineering limited paid a sum of C 28,000 to A.S parcel service
and C 10,00,000 to Indian Railways towards freight charges.
(d) Kartiki Private limited entered into a contract with Trimax Limited for
supply of materials amounting to C 30,00,000.
Solution:
(a) If the consideration paid or credited to the account of the
contractor/sub -contractor exceeds C 30,000 in a single payment then
TDS shall be deducted @ 2% if payee is Other than Individual/ HUF
contractor/ sub -contractor.
In given case Ram as an Individual make a single payment of C 35,000 to
Times of India newspaper (other than individual or HUF). Hence TDS
shall be deducted @2% of C 35,000 under section 194C of the Income Tax
Act.
(b) If the consideration paid or credited to the account of the
contractor/sub -contractor exceeds C 30,000 in a single payment or C
1,00,000 in aggregate then TDS shall be deducted @ 2% if payee is
Other than Individual/ HUF contractor/ sub -contractor.
In given case Blokraft Pvt Ltd as a company make a payment of C 1.50
Crores to Manthan C & F limited (i.e. company). Hence TDS shall be
deducted @2% of C 1.50 Crores under section 194C of the Income Tax
Act.
(c) Freight Payment to A.S Parcel Services not subject to TDS as the
value of contract does not exceed C 30,000 and payme nt to Railways
is exempt from TDS
(d) Supply of materials shall not be considered to be “work” and
therefore not subject to tax.
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92 Illustration 7.2:
Compute the amount of tax to be deducted at source in the following
cases:
a. Blokraft Ltd. takes a buildin g on rent and sublets it is Ranu Ltd. -
Ranu Ltd pays C 8,00,000 as rent.
b. Manthan Ltd takes a building on rent from Priyal (rent being C 21,000
p.m)
c. Reliance Ltd takes a commercial building on rent (rent being C
5,00,000). Rent is payabl e in December to three co -owners as follows:
- Amar : C 1,80,000
- Akbar : C 2,50,000
- Anthony : C 70,000
Solution: Sr. No. TDS
u/s Rate
of
TDS TDS on C Amount of TDS C Remarks a. 194-I(b) @ 10% 8,00,000 80,000 Since Rent paid exceeds C 2,40,000 during the financial year. b. 194-I(b) @ 10% 2,52,000 25,200 Since Rent paid exceeds C 2,40,000 during the financial year. c(i) 194-I(b) Nil 1,80,000 Nil Since Rent paid does not exceeds C 2,40,000 during the financial year. c(ii) 194-I(b) @ 10% 2,50,000 25,000 Since Rent paid exceeds C 2,40,000 during the financial year. c(iii) 194-I(b) Nil 70,000 Nil Since Rent paid does not exceeds C 2,40,000 during the financial year.
Illustration 7.3:
Ascertain the amount of TDS for the following independent situations.
1. Union Bank of India has to pay interest of C1,00,000 to Mr. Sajan.
2. Union Bank of India has to pay interest of C 2,00,000 to Karan Ltd.
3. Union Bank of India has to pay interest of C 4,000 to Mr. Salman on
time deposit.
4. Bihar Rubber Ltd. has to pay rent of C 20,000 p.m. for a ware house
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93 5. Bihar Rubber Ltd. has to pay a sum of C 2,50,000 to an engineer.
6. Mr. Sujay has to pay C 20,000 as professional charges.
Solution: Sr. No. TDS u/s Rate of TDS TDS on C Amount of TDS C Remarks 1. 194A 10% 1,00,000 10,000 Since interest exceeds C 40,000 2. 194A 10% 2,00,000 20,000 Since interest exceeds C 40,000 3. 194A Nil 4,000 Nil Since interest paid on
time deposit does not
exceed C 40,000 and the
payer is a banking
company 4. 194I Nil 2,40,000 Nil Since the payee is
Government, there is no
requirement of deducting
TDS 5. 194J 10% 2,50,000 25,000 Since the recipient is a professional and the amount exceed C 30,000 6. 194J Nil 20,000 Nil Since amount paid to Professional does not exceed C 30,000.
Illustration 7.4:
Moon Ltd. makes the following payments during the F.Y 2022 -23 Sr. No. Paid to Nature of Payment C 1. T.B. Karnik & Co. Audit Fees 19,000 2. Sai and Co. Account Writing fees 40,000 3. Sai and Co. Reimbursement of out of pocket expenses (under separate bill) 25,500 4. D’souza & Co. Fees for interior Decoration : office 50,000 5. Ghadi & Co. Brokerage for arranging office on Rental basis 10,000
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94 Determine the amount of TDS for the following independent situations
Solution: Sr. No. TDS u/s Rate of TDS TDS on C Amount of TDS C Remarks 1. 194-J Nil 19,000 Nil Since amount paid to Professional does not exceed C 30,000. 2. 194-J 10% 40,000 4,000 Since amount paid to Professional does exceed C 30,000. 3. Nil Nil Nil Nil Since amount paid as Reimbursement of out of pocket expenses under separate bill is not subject to TDS 4. 194-J 10% 50,000 5,000 Since amount paid to Professional does exceed C 30,000. 5. 194-H Nil 10,000 Nil Since amount paid as a brokerage does not exceed C 15,000
Illustration 7.5: Sr. No. Payer Payee Nature of Payment C 1. Pune University Mr. Ravi Contract Charges for construction of over-bridge. 50,000 2. Raje and Bros (HUF) having tax audit u/s 44AB Mr. Kavi For Interior Decoration work carried out of home 80,000 3. BSNL Mr. Raju (PCO Operator) Commission on PCO collection 5,500 4. Sun Ltd Radhe Ltd Accommodation of Manager 2,50,000 5. Nirasha Ltd. Mr. Hemant Refundable Deposit for flat taken on lease. 2,00,000
Determine the amount of TDS for the following independent situ ations
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95 Solution: Sr. No. TDS u/s Rate of TDS TDS on C Amount of TDS C Remarks 1. 194-C Nil 50,000 Nil Since Payer is Mumbai University 2. 194-C Nil 80,000 Nil Since Interior decoration work carried out at home as it is a personal expense 3. 194-H Nil 5,500 Nil Since commission on PCO collection is payable by BSNL 4. 194-I 10% 2,50,000 25,000 Since rent paid exceed C 2,40,000 5. Nil Nil 2,00,000 Nil Since Deposit refundable for flat taken on lease.
Illustration 7.6:
Discuss the rate at which tax is deductible in the following cases during
Finan cial year 2022 -23.
(1) X Ltd. pays C 40,000 to Doordarshan.
(2) An advertising company pays C. 1,00,000 to The Times of India on
account of publication of its advertisement.
(3) A publishing company sponsors a seminar and pays C. 1,00,000 to the
organiser (an AOP).
(4) A garment manufacturing company pays C. 80,000 to an advertising
company on. It includes Rs. 65,000 being bill of media.
(5) X, an individual (having only rental income), pays C. 30,000 to a
contractor for carrying out routine repair work.
(6) X Ltd. pays Rs. 30,001 to a contractor for carrying out routine repair
work.
Solution: Sr. No. TDS u/s Rate of TDS TDS on C Amount of TDS C Remarks 1. 194-C Nil 40,000 Nil Since the Doordarshan is a Government agency. 2. 194-C Nil 1,00,000 Nil Since payment made by an advertising agency to munotes.in

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96 print media/ electronic media 3. 194-C 2% 1,00,000 2,000 Since payment made to payee as a contractor 4. 194-C 2% 80,000 1,600 Since payment made by an company to print media/ electronic media 5. 194-C Nil 30,000 Nil Since amount paid to contractor does not exceed C 30,000 6. 194-C 1% 30,001 300 Since amount paid to contractor exceed C 30,000
7.10 EXERCISES 1. Multiple Choice Questions .
1) Income is earned _________________ .
a. during a year b. at the end
c. over a period of time d. anytime
2) The Income tax act has made a provision to _______________ tax at
source on accrual of income u/s192 to 206B.
a. deduct b. collect
c. both a & b d. none of the above
3) Person who ____________ payment is resp onsible to deduct tax at
source and deposit the same to government treasury.
a. makes b. receives
c. transfers d. both a & c
4) The recipient of income gets __________ amount and is liable to tax
on ________ amount.
a. net, net b. net, gross
c. gross, gross d. none of the above
5) The amount of tax deducted is adjusted against __________ .
a. final tax liability b. net amount
c. advance tax d. tax collected at source
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97 6) Section 194A deals with TDS on_____________ .
a. interest paid by bank b. interest
c. interest other than interest on securities d. interest on loan
7) TDS is to be deducted @ _________ u/s 194A
a. 30% b. 15%
c. 5% d. 10%
8) TDS is to be deducted @ ________ u/s194H .
a. 1% b. 2%
c. 5% d. 20%
9) Section ____________ deals with TDS on rent .
a. 194A b. 194C
c. 194H d. 194I
10) Service tax shall be __________ while deducting tax on rent
a. included b. excluded
c. added d. none of the above
Answers : 1-c, 2-b, 3-a, 4-b, 5-a, 6-c, 7-d, 8-c, 9-d, 10-b
2. True/False .
1) The person responsible for deducting TDS is the person who pays the
amount
2) The amount deducted at source is adjusted against final tax liability
3) TDS is to be deducted if interest paid by bank exceeds rs10000
4) TDS u/s 194A is deducted @15%
5) TDS u/s 19 4A deals with any interest paid
6) TDS u/s 194H is to be deducted @20%
7) The rate of deduction of tax at source for interest is 5%
8) TDS is not deducted if commission paid is rs20000
9) Rent paid for building is liable for TDS @10%
10) TDS on professional fe es is deducted after excluding service tax
Answers : 1-t, 2-t, 3-t, 4-f, 5-f, 6-f, 7-f, 8-f, 9-t, 10-f
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98 3. Short No tes On .
1) T. D. S from Salary.
2) T. D. S from Dividend.
3) T. D. S on Interest on Securities.
4) T. D. S for payment to contractors.
5) T. D. S on Rent.
6) Tax Deducted at Source.
7) Tax Deduction Account Number.
8) Section 194J TDS on professional fees
9) Explain the provisions under the income tax act, 1961 for tax
deduction at source.
10) T.D.S on commission
4. Practical Questions .
1. Mr.ganesh is e mployed with AJ industries ltd as well as BJ ltd for a
salary of C 25,000 and C 30,000 respectively on part time basis .He
selects AJ industries ltd for deducting tax at source on aggregate
salary .Calculate tax to be deducted by each company.
[ans: tax o n salary to be deducted by BJ ltd = C 5720
tax on salary to be deducted by AJ ltd = C40560]
2. Mr. Ram is employed with Yuma ltd up to 31st October
(salary; C50000 p.m).On 1st november , he joined Zumba ltd (salary
C70000 p.m).Calculate tax to be deducted by each company.
[ans: tax on salary to be deducted by Yuma ltd = C 2,600
Tax on salary to be deducted by Zumba ltd = C 52,000]
3) Compute the amount of tax to be deducted at source in the following
cases:
a) KOTA ltd takes a bui lding on rent and sublets it is B ltd –B ltd pays C
8,00,000 as rent.
b) KOTS ltd takes a building on rent from Mahavir (rent being C 16,000
p.m)
c) Religare ltd takes a commercial building on rent (rent being C
4,00,000). Rent is payable in december to th ree co -owners as follows :
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Tax Deducted at Sources
99 Farhan – C 200000
Rancho – C 10000
[ans: a - [800000*10%=80,000]
b - [nil]
c - [nil]
3) 1. SBI has to pay interest of C400000 to Mr Aman
2. SBI has to pay interest of C400000 to Arunima
3. SBI has to pay i nterest of C3000 to Mr Akki on time deposit.
4. Apar ltd has to pay rent for a ware house owned by the state
government.
5. Apar ltd has to pay a sum of C400000. to an engineer.
6. Mr.Sahil has to pay C19000 as professional charges
[ans: TDS amoun t:
1- 40000
2- 40000
3- nil
4- nil
5- 40000
6- nil]
4) Examine the tax applicability of tax deduction at sou rce in the
following situations :
a) Anmol an individual carrying on business and made gross turnover of
C7000000 for the year ended 31.3.2023, effected a payment of C35000
to Times of India newspaper for recruitment of staff.
b) Anshi has paid a sum of C1.5cr to Sical ltd towards clearing and
forwarding charges
c) Nikita paid a sum of C28000 to Harsh and C10000 00 to Indian
Railways forwarding freight charges
d) KK ltd entered into a contarct with Thermax ltd for supply of material
amounting to C3000000.
[ans: a) tax shall be deducted @2% of 35000
b) liable for tax deduction @2% munotes.in

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100 c) Freight paymen t to Harsh not subject to tax as the value of
contract exceeds C 30000 and payment to railways is exempt
from TDS
d) Supply of materials shall not be considered to be work and
therefore not subject to tax
5) What would be the TDS rate applicable :u /sec 194c
1) A company paid C500000 to govt dept on 5.5.2023
2) A company involved in advertising business pay C60000 to an artist
on
3) Kota ltd pays 180000 to a contractor (individual) for carrying out
routine repair work
4) Perry ltd pays advertisement pri nting bill of C 200000 to an imdiviual
[ans: 1)nil
2)10%
3)1%
4)1%
5) Madan ltd makes a payments during the financial year 2022 -23 Paid To Nature of Payment C Disha and co. audit fees 18000 Luv and co. account writing fees 35000 Kush and co. fees for interior design : office 40000 Hira and co. brokerage for arranging on rental basis 2000
[ans: 1) nil
2) 3500
3) 4000
4) nil]

*****
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101 8
ADVANCE TAX (SECTION 207 -211)
Unit Structure
8.0 Learning Objectives
8.1 Introduction
8.2 Liability for Payment of Advance Tax (Section 207)
8.3 Conditions of Liability for Payment of Advance Tax (Section 208)
8.4 Computation of Advance Tax ( Section 209)
8.5 Payment of Advance Tax by the Assessee of his Own Accord or in
Pursuance o f Order of Assessing Officer (Section 210)
8.6 Due Dates of Payment of Advance Tax (Section 211)
8.7 Practical Questions
8.8 Exercises
Multiple Choice Questions
True/ False
Short Notes
Practical Problems
8.0 LEARNING OBJECTIVES After reading this chapter learner will be able:
 To understand the circumstances under which Advance Tax is
payable
 To calculate the Advance Tax payable
 To get familiarize with the due dates , consequences of non -payment
of Advance Tax.
8.1 INTRODUCTION Advance tax is the income tax paid in advance for the income earned in a
particular financial year. Usually, the tax is to be paid when the income is
earned. Still, under the tax provisions of advance tax, the payer has to
estimate the income for the entire year. These payments have to be made
in instalments as per due dates provided by the Income Tax Department.
8.2 LIABILITY FOR PAYMENT OF ADVANCE TAX (SECTION 207) As per the various provisio ns of advance tax [sections 208 to 219], tax
shall be payable in advance during the financial year in respect of the total
income of the assessee which would be chargeable to tax for the
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102 e.g. If in come earned during the financial year 2022 -23 shall be charged to
tax in the A.Y 2023 -24. But assessee is required to pay tax, in advance on
the taxable income of financial year 2022 -23 during the financial year
2022 -23 itself.
Exception:
Advance tax will not be payable in the case of a senior citizen, if
following conditions are satisfied:
 The tax payer is an Individual
 The tax payer is resident in India
 The tax payer is of the age of 60 year or more i.e. senior citizen at any
time during the previous year .
 The tax payer does not have any income chargeable under the head “
Profit and Gains of Business or Profession”
8.3 CONDITIONS OF LIABILITY FOR PAYMENT OF ADVANCE TAX (SECTION 208) Provision of advance tax is applicable on all assessee, whose tax liabilit y
payable is C 10,000/ - or more.
8.4 COMPUTATION OF ADVANCE TAX (SECTION 209) 1. Estimate your income :
Estimate total taxable income including income from ongoing projects or
new assignments for the year.
2. Subtract eligible deductions and expenses :
 Deduc t all eligible deductions such as tax -saving investments and
payments (under the old tax regime) and expenses from total
estimated income.
 Deduct the expenses which are directly related to your business or
profession.
3. Calculate the tax liability :
Now ca lculate the tax liability for the total income on the applicable rates
and reduce the taxes paid such as previously paid tax, TDS which has
already been deducted from income.
4. Assess the net tax liability :
Accordingly, if the resulting tax liability is equal to or more than C 10,000
then the assessee are liable to pay advance tax on an instalment basis as
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103 8.5 PAYMENT OF ADVANCE TAX BY THE ASSESSEE OF HIS OWN ACCORD OR IN PURSUANCE OF
ORDER OF ASSESSING OFFICER (SECTION 210) Section Explanation 210(1) Every person who is liable to pay advance tax under section-208 shall, of his own accord, pay, on or before each of the due dates specified in section-211, the appropriate percentage, specified in that section, of the advance tax on his current income, calculated in the manner laid down in section-209. 210(2) A person who pays any instalment or instalments of
advance tax under sub -section (1), may increase or reduce
the amount of advance tax payable in the remaining
instalment or instalm ents to accord with his estimate of his
current income and the advance tax payable thereon, and
make payment of the said amount in the remaining
instalment or instalments accordingly. 210(3) In the case of a person who has been already assessed by way of regular assessment in respect of the total income of any previous year, the Assessing Officer, if he is of opinion that such person is liable to pay advance tax, may, at any time during the financial year but not later than the last day of February, by order in writing, require such person to pay advance tax calculated in the manner laid down in section-209, and issue to such person a notice of demand under section-156 specifying the instalment or instalments in which such tax is to be paid. 210(4) If, after the making of an order by the Assessing Officer under sub-section (3) and at any time before the 1st day of March, a return of income is furnished by the assessee under section-139 or in response to a notice under sub-section (1) of section-142, or a regular assessment of the assessee is made in respect of a previous year later than that referred to in sub-section (3), the Assessing Officer may make an amended order and issue to such assessee a notice of demand under section-156 requiring the assessee to pay, on or before the due date or each of the due dates specified in section-211 falling after the date of the amended order, the appropriate percentage, specified in section-211, of the advance tax computed on the basis of the total income declared in such return or in respect of which the regular assessment aforesaid has been made. 210(5) A person who is served with an order of the Assessing Officer under sub-section (3) or an amended order under sub-section (4) may, if in his estimation the advance tax payable on his current income would be less than the amount of the advance tax specified in such order or munotes.in

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104 amended order, send an intimation in the prescribed form 28A to the Assessing Officer to that effect and pay such advance tax as accords with his estimate, calculated in the manner laid down in section-209, at the appropriate percentage thereof specified in section-211, on or before the due date or each of the due dates specified in section-211 falling after the date of such intimation. 210(6) A perso n who is served with an order of the Assessing
Officer under sub -section (3) or amended order under sub -
section (4) shall, if in his estimation the advance tax
payable on his current income would exceed the amount of
advance tax specified in such order or amended order or
intimated by him under sub -section (5), pay on or before
the due date of the last instalment specified in section -211,
the appropriate part or, as the case may be, the whole of
such higher amount of advance tax as accords with his
estimate , calculated in the manner laid down in section -
209.]
8.6 DUE DATES OF PAYMENT OF ADVANCE TAX (SECTION 211) Tax is paid on the following dates of financial year. Due date of advance tax On or before In case of Individual and Corporate Taxpayers other than taxpayers opting for presumptive income u/s 44AD Taxpayers opting for presumptive income u/s 44AD 15th June 15% of net tax payable Nil 15th Sept. 45% of net tax payable Nil 15th Dec. 75% of net tax payable Nil 15th Mar. 100% of net tax payable 100% of net tax payable
8.7 PRACTICAL PROBLEMS Illustration 8.1:
Mr Jayesh suggests that his estimated taxable income for the current year
will be Rs.10,00,000. Based on the assumption that no income deductions
were claimed, the taxes to be paid will be Rs.1 12,500.
As per the rule, calculate the instalments of advance tax and due date of
advance tax.

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105 Solution: Due date of advance tax On or before In case of Individual and Corporate Taxpayers other than taxpayers opting for presumptive income u/s 44AD Instalment amount of Advance Tax C 15th June 15% of net tax payable i.e. (1,12,500*15%) 16,875 15th Sept. 45% of net tax payable i.e. (1,12,500*45%)-16,875 33,750 15th Dec. 75% of net tax payable i.e. (1,12,500*75%)-50,625 33,750 15th Mar. 100% of net tax payable i.e. (1,12,500*100%)-84,375 28,125
Illustration 8.2:
Kavi (26 years) is employed by a manufacturing company. For the
previous year 2022 -23 his estimated income is as follows: C C Estimated gross salary Less: Ravi contribution towards recognised provident fund Tax deduction at source by employer Take home pay Estimated bank interest Less: Tax deduction at source by the bank Net interest likely to be received by X from bank 13,50,000 1,40,200 1,02,000 1,50,000 15,000 11,07,800 1,35,000
Solution:
If advance tax payable is C 10,000 or more, then Kavi is liable to pay
advance tax during the financial year 2022 -23. For this purpose, the
calculation shall be made as follows:
Name of assesse : Kavi
Legal Status : Individual Residenti al Status: R & OR
A/Y: 2023 -24 P/Y: 2022 -23 Particulars C C Gross Salary 13,50,000 Less: Deduction u/s 16 50,000 Income from Salary 13,00,000 munotes.in

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106 Bank Interest 1,50,000 Gross Total Income 14,50,000 Less: Deduction u/s 80C 1,40,200 Net Income 13,09,800 Tax on Net Income 2,05,440 Add: Cess @4% 8,218 Tax Liability 2,13,658 Less: TDS By employer 1,02,000 By Bank 15,000 1,17,000 Advance Tax payable during F.Y 2022-23 96,658 By 15th June, 2022 (96,658*15%) 14,499 By 15th September, 2022 (96,658*45%)-14499 28,997 By 15th December, 2022 (96,658*75%)-43496 28,997 By 15th March, 2023 (96,658*100%)-72493 24,165
Illustration 8.3:
The following are the particulars submitted by different taxpayers f or the
assessment year: 2023 -24 Particulars A (an individual) (35 years) C B (HUF) C C (a firm) C (1) (2) (3) Salaries 1,20,000 0 0 Income from house property 65000 780000 8000 Profits and gains of business or profession 1200000 -5000 623560 Capital gains (short-term) 10000 0 12560 Income from other sources 5000 40000 25000 Gross total income 14,00,000 8,15,000 6,69,120 Less: Deductions under sections 80C to 80U Under section 80C 150000 75000 0 Under section 80D 15000 12500 0 Under section 80D 0 14000 106300 Net income 12,35,000 7,13,500 5,62,820 Tax 183000 55200 168846 Add: Health and education cess @ 4% 7320 2208 6754 Total 190320 57408 175600 munotes.in

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107 Less: Tax deducted or collected at source 170045 5636 180000 Balance (a) 20275 51772 -4400
Determine the amount of advance ta x payable during the financial year
2022 -23.
Solution:
Advance tax payable for the financial year 2022 -23 will be as under: A C B C C C Adv tax payable on/before 15th June, 2022 (15% of (a)) 3041 7766 0 Advance tax payable on or before September 15, 2022 [45% of (a)] – Adv tax upto 15th June 6083 15532 0 Advance tax payable on or before December 15, 2022 [75% of (a)] – Adv tax upto 15th Sept. 6083 15532 0 Advance tax payable on or before March 15, 2023 [i.e., 100% of (a)] – paid upto 15th Dec. 5069 12943 0
Since in the case of C, amount of tax Refund as shown at (a) is C (4,400) it
is not necessary to pay advance tax. As C is a firm, flat 30% tax is applied
Illustration 8.4:
Assuming the total tax payable for an Individual assessee is C 15,750 and
TDS is of C 1,000 calculate the Advance Tax payable on the respective
due dates for F.Y 2022 -23
Solution: Particulars C C Estimated Total Tax payable 15750 Less : TDS 1000 Net tax payable (a) 14750 Adv tax payable on/before 15th June, 2022 (15% of (a)) 2213 Advance tax payable on or before September 15, 2022 [45% of (a)] – Adv tax upto 15th June 4425 Advance tax payable on or before December 15, 2022 [75% of (a)] – Adv tax upto 15th Sept. 4425 munotes.in

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108 Advance tax payable on or before March 15, 2023 [i.e., 100% of (a)] – paid upto 15th Dec. 3688 14750
Illustration 8.5:
Assuming the total tax payable for Ltd. Company assessee is C 55,560 and
TDS is of C 10,000 calculate the Advance Tax payable on the respective
due dates for F.Y 2022 -23
Solution: Particulars C C Estimated Total Tax payable 55560 Less : TDS 10000 Net tax payable (a) 45560 Adv tax payable on/before 15th June, 2022
(15% of (a)) 6834 Advance tax payable on or before September 15, 2022
[45% of (a)] – Adv tax upto 15th June 13668 Advance tax payable on or before December 15, 2022
[75% of (a)] – Adv tax upto 15th Sept. 13668 Advance tax payable on or before March 15, 2023 [i.e., 100% of (a)] – paid upto 15th Dec. 11390 45560
Illustration 8.6:
M/s Priya Ltd. an Indian Co., gives the following details to determine
advance tax liability for the A.Y 2023 -24. Particulars C Taxable Business Income 9,65,000 Income from other sources 2,10,000 Expected TDS 2,00,000
Solution:
Name of assesse : Priya Ltd
Legal Status : Company Residential Status : R & OR
A/Y : 2023 -24 P/Y : 2022 -23 Particulars C Business Income 965000 Income from other sources 210000 Gross total income 11,75,000 Less: Deductions under sections 80C to 80U 0 munotes.in

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Advance Tax (Section 207-211)
109 Net income 11,75,000 Tax 352500 Add: Health and education cess @ 4% 14100 Total 366600 Less: Tax deducted or collected at source 200000 Balance (a) 166600 C Advance tax payable on/before 15th June, 2022 (15% of (a)) 24990 Advance tax payable on or before September 15, 2022 [45% of (a)] – Adv tax upto 15th June 49980 Advance tax payable on or before December 15, 2022 [75% of (a)] – Adv tax upto 15th Sept. 49980 Advance tax payable on or before March 15, 2023 [i.e., 100% of (a)] – paid upto 15th Dec. 41650
Illustration 8.7:
From the following details to determine advance tax liability of Mr. Gufi
for the A.Y 2023 -24. Particulars C Taxable Business Income 7,56,000 Income from other sources 2,50,000 Less: Deduction under chapter VIA 1,50,000 Expected TDS 60,000
Solution:
Name of assesse : Mr. Gufi
Legal Status : Individual Residential Status : R & OR
A/Y : 2023 -24 P/Y : 2022 -23 Particulars C Business Income 756000 Income from other sources 250000 Gross total income 10,06,000 Less: Deductions under sections 80C to 80U 150000 Net income 8,56,000 Tax 83700 Add: Health and education cess @ 4% 3348 Total 87048 munotes.in

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Taxation - III (Direct Taxes- II)
110 Less: Tax deducted or collected at source 60000 Balance (a) 27048 C Advance tax payable on/before 15th June, 2022 (15% of (a)) 4057 Advance tax payable on or before September 15, 2022 [45% of (a)] – Adv tax upto 15th June 8114 Advance tax payable on or before December 15, 2022 [75% of (a)] – Adv tax upto 15th Sept. 8114 Advance tax payable on or before March 15, 2023
[i.e., 100% of (a)] – paid upto 15th Dec. 6762
8.8 EXERCISES 1. Multiple Choice Question .
(a) The first due date fo r payment of Advance Tax for company is
__________.
(i) 15th March (ii) 15th June
(iii) 15th September (iv) 15th December
(b) The first due date for Payment of Advance tax for Asseessee other
than companies is __________.
(i) 15th March (ii) 15th Jun e
(iii) 15th September (iv) 15th December
(c) Advance tax is payable in cases where tax payable for an assessee is
__________ or more.
(i) C10,000 (ii) C15,000
(iii) C25,000 (iv) C50,000
(d) Advance tax instalment due on 15th September is applicable to
__________.
(i) Registered Firms. (ii) Companies.
(iii) All Assessees (iv) Individual Only
(e) On or before 15th December a company has to pay total advance tax
instalment of not less than __________.
(i) 30% of tax liability. (ii) 60% of tax liability.
(iii) 75% of tax liability. (iv) 100% of tax liability
(Ans: a-ii, b-ii, c-iii, d-iii, e-iii) munotes.in

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Advance Tax (Section 207-211)
111 2. True/False .
(a) There are 4 due dates for payment of advance tax in case of
companies.
(b) Advance tax is also payable or capital gains income earned by the
assessee.
(c) Advance tax is payable if the tax liability is C 5,000 or more.
(d) There are 4 due dates for payment of advance tax in case of assesses
other than companies.
(e) Individual assessee is not required to pay advance tax.
(Ans: True - a, False – b, c, d, e)
3. Write Short Notes .
1. Due dates of payment of advance tax
2. Income liable to advance tax
3. Due date of Advance tax u/s 211
4. Payment of advance tax by the assessee on his own accord u/s 210
5. Computation of advance tax u/s 209
4. Practical Question .
1. For A.Y 2023 -24 Dukhi Ltd. has estimated its tax payable to be C
1,00,000. Show the amount of advance tax due and th e instalments.
(Ans: Company assessee: 15.06.2022 - C 15,000 , 15.09.2022 - C 30,000,
15.12.2022 C-30,000, and 15.03.2023 C 25,000)
2. Mr. Right has estimated his tax payable for A.Y 2023 -24 C 2,00,000.
Show the amounts and due dates of advance tax instal ments.
(Ans: Individual assessee: 15.06.2022 - C 30,000 , 15.09.2022 - C 60,000,
15.12.2022 C-60,000, and 15.03.2023 C 50,000)
3. Compute the amount of advance tax payable for the A.Y. 2020 -21 in
the following cases.
(a) When the total income of Mr. Vijai is C2,20,000;
(b) When the total income of Mr. Adi, aged 66 years is C3,40,000;
(c) When the annual salary of Ms. Sai, employed in Pavithra Computers
Pvt. Ltd. is C5,90,000 and TDS on such salary is C20,000. munotes.in

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Taxation - III (Direct Taxes- II)
112 (Ans:
(a) Nil, since the amount of tax payable by the Assessee during the year
is less than C10,000
(b) C10,000. Section 208 applies when the amount of tax payable for a
FY is C10,000 or more.
(c) C29,000. Since the advance tax is payable after reducing the amount
of tax by the TDS as per Sec. 209. )
4. Madhu earned C 54,00,000 under the head PGBP and C 18,00,000 by
way of long term capital gains on sale of property on 14th Dec, 2022.
What is the amount of advance tax payable by the assessee in each
instalment during A.Y 2023 -24 assuming TDS of C 23,250 on
business income.

Source: ICAI
https://resource.cdn.icai.org/71144bos57143 -cp6.pdf

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113 9
INTEREST PAYABLE U/S 234A, 234B, 234C
Unit Structure
9.0 Learning Objectives
9.1 Introduction
9.2 Interest for Delay i n Filing The Return of Income (Section 234a)
9.3 Interest for Defaults in Payment of Advance Tax (Section 234b)
9.4 Payment of Advance T ax Not On Time or Interest for Deferment of
Advance Tax (Section 234c)
9.5 Practical Problems
9.6 Exercises
Multiple Choice Questions
True/ False
Short Notes
Practical Question s
9.0 LEARNING OBJECTIVES After reading this unit, learner will be able:
 To unde rstand the different types of income tax payments, due dates,
and consequences of delayed or underpaid tax payments.
 To identify the interest rate payable under various sections and the
methods of calculation of such interest.
 To Understand the different s cenarios under the different sections
which are applicable, such as non -payment of advance tax and non -
payment of tax due on regular assessment.
 To understand the importance of timely payments of taxes to avoid
the levy of penalty and interest, and the pro cess of filing an
application for waiver or reduction of interest under these sections.
9.1 INTRODUCTION In case assessee forget to pay their income tax on time due to some reason,
they should be aware of the method of calculating the interest penalty
unde r sections 234A, 234B, and 234C that assessee will have to pay in
order to avoid any future confusion.
It is essential to pay income tax, on time. A delay or not paying tax can
attract fine, according to the amount pending. Here is how interest penalty
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114 9.2 INTEREST FOR DELAY IN FILING THE RETURN OF INCOME (SECTION 234A) Under section 234A, interest is levied for delay in filing the return of
income, filing of an updated return or filing of a return in respon se to
notice issued under section 142(1).
Interest under section 234A is levied for delay in filing the return of
income. In other words, if the taxpayer files the return of income after the
due date specified by the authorities or files an updated return , interest
under section 234A will be levied.
Rate of Interest U/S 234A :
Interest under section 234A is levied for delay in filing the tax return of
income. Interest is levied at 1% per month or part of a month on the tax
amount outstanding. The interest n eeds to be paid is simple interest. The
taxpayer is liable to pay a simple interest at 1% per month or part of a
month for delay in filing their tax return.
Period of Levy of Interest :
Interest under Section 234A starts right from the date immediately
following the due date of filing the income tax return, and ending on the
date of furnishing the return of income. In cases where no return has been
furnished, the interest starts to build up until the date of completion of the
assessment under Section 144.
Amount on Which Interest is To Be Levied :
In case of delay in filing of income tax return, interest shall be liable to
pay on the amount of the tax on the total income as determined under sub -
section (1) of section 143, and where a regular assessment is made , on the
amount of the tax on the total income determined under regular
assessment, as reduced by the amount of
a) Advance tax, if any paid;
b) Any tax deducted or collected at source;
c) Any relief of tax allowed
9.3 INTEREST FOR DEFAULTS IN PAYMENT OF ADVANCE TAX (SECTION 234B) Interest under section 234B of the Income Tax Act is levied in two
cases :
1) If the taxpayer has failed to pay advance tax, which he is liable to pay
if his estimated tax liability for the year is B 10,000 or more,
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Interest Payable U/S 234A, 234B, 234C
115 2) If the adva nce tax paid by the taxpayer is less than 90% of the
assessed tax, which is the amount of tax as calculated under section
143(1) and where regular assessment is made, the tax on the total
income determined under such regular assessment.
Rate of Interest U/S 234B :
Interest under 234B is levied for default in payment of advance tax.
Interest is levied at 1% per month or part of a month. The interest needs to
be paid is simple interest. The taxpayer is liable to pay a simple interest at
1% per month or part of a month for default in payment of advance tax.
Period of Levy o f Interest :
Interest under section 234B is levied from the first day of the assessment
year (mostly from 1st April) till the date of determination of income under
section 143(1) or when a regu lar assessment is made. In case where the
income is increased basis the assessment or re -computation, the interest is
levied on the differential amount from the first day of the assessment year
till the date of assessment or re -computation.
Amount on Which Interest is To Be Levied :
The taxpayer is liable to pay interest on the amount as follows:
a) If the taxpayer has failed to pay advance tax, on the amount equal to
the assessed tax, or
b) If the advance tax paid by the taxpayer is less than 90% of the
assessed tax, on the amount by which the advance tax paid as
aforesaid falls short of the assessed tax.
9.4 PAYMENT OF ADVANCE TAX NOT ON TIME OR INTEREST FOR DEFERMENT OF ADVANCE TAX
(SECTION 234C) Section 234C of the Income Tax Act defines the rate of in terest and
conditions if you delay the advance tax instalments. Everyone, including
salaried taxpayers, is required to pay advance tax every quarter of the
financial year.
If assessee’s advance tax instalments have been delayed then assessee are
required t o pay a penalty as defined in section 234C of the Income Tax
Act. Interest under section 234C is levied in case of deferment of different
instalments of advance tax, in following cases:
1) For taxpayers other than those who have opted for presumptive
taxation scheme under section 44AD or section 44ADA, interest shall
be levied :
a) If advance tax paid on or before 15th day of June is less than 12% of
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Taxation - III (Direct Taxes- II)
116 b) If advance tax paid on or before 15th day of September is less than
36% of the tax payable on the returned income,
c) If advance tax paid on or before 15th day of December is less than
75% of the tax payable on the returned income, and
d) If advance tax paid on or before 15th day of March is less than 100%
of total tax due on returned income.
2) For taxpayers who have opted for presumptive taxation scheme under
section 44AD or section 44ADA, interest shall be levied if advance
tax paid on or before 15th day of March is less than 100% of tax due
on returned income.
Late payment interest under this Section, too, is applied at the rate of 1%
on the outstanding amount of tax, starting from the individual dates listed
above, up to the payment date.
Period of Levy o f Interest :
Interest under section 234C is levied for a p eriod of 1 month in case of
short fall in payment of the last instalment and for a period of 3 months in
case of short fall in payment of 1st, 2nd and 3rd instalments.
Amount on Which Interest i s To Be Levied :
The taxpayer shall liable to pay interest on t he amount of shortfall of
advance tax of respective individual instalment, in case of shortfall
therein.
9.5 PRACTICAL PROBLEMS Illustration 9.1:
Mr. Gaitonde is a doctor. His tax liability for the financial year 2022 -23
amounted to B 9,100. The due dat e of filing the return of income in his
case is 31st July, 2023. On 5th August, 2023 he paid tax of B 9,100 and
filed his return of income. Will he be liable to pay interest under section
234A?
Solution:
Interest under section 234A is levied for delay in f iling the return of
income. The due date for filing the return of income in the case of Mr.
Kapoor is 31st July, 2023 and he has paid the tax and filed the return on
5th August 2023. Hence, he will be liable to pay interest under section
234A on the outsta nding tax liability @ 1% per month or part thereof for
delay in filing the return of Income.
Illustration 9.2:
Mr. Vishwanath is an engineer. The due date of filing the return of
income in his case is 31st July, 2023. He filed his return of income on 9t h munotes.in

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Interest Payable U/S 234A, 234B, 234C
117 December, 2023. His tax liability for the financial year 2022 -23 is B 9,200
(which is paid on 9th December, 2023). Will he be liable to pay interest
under section 234A, if yes then what will be the period of levy of interest?
Solution:
The due date of f iling the return of income is 31st July, 2023, and return of
income is filed on 9th December, 2023 i.e. after the due date and hence,
Mr. Vishwanath will be liable to pay interest under section 234A. While
computing interest, part of the month will be take n as full month. In this
case, there is a delay of 5 months and 9 days. Part of the month i.e. 9 days
will be considered as full month and hence, interest will be levied for 6
months.
Illustration 9.3:
Mr. Sonu is running a medical store. The due date fo r filing the return of
income in his case is 31st July. He filed his return of income on 3rd
December. Tax liability of Mr. Sonu for the year is B 39,100 (which is
paid on 3rd December). Advance tax paid by him is B 15,000 and he has
TDS credit of B 5,000. Will he be liable to pay interest under section
234A, if yes then how much?
Solution:
Mr. Sonu has filed his return of income after the due date i.e. after 31st
July and hence, he will be liable to pay interest under section 234A.
Interest will be levied at 1% per month or part of the month. The due date
of filing the return of income is 31st July and the return of income is filed
on 3rd December and hence, there is a delay of 4 months and 3 days. Part
of the month i.e. 3 days will be considered as full m onth and hence,
interest will be charged for a period of 5 months. Interest will be levied at
1% per month on B 19,100 (*) for 5 months. Thus, interest under section
234A will come to B 955.
(*) Advance tax of B 15,000 and TDS of B 5,000 are to be deducte d from
the tax liability of B 39,100, hence, net liability after deducting advance
tax and TDS will come to B 19,100. Thus, interest will be levied on B
19,100.
Illustration 9.4:
Mr. Kush is running a shop. Tax liability of Mr. Kush for the year is Rs.
41,800. He has not paid any advance tax till 31st March. Entire tax was
paid by him at the time of filing the return of income. Will he be liable to
pay interest under section 234B?
Solution:
Interest under section 234B is levied in following two cases:
a) When the taxpayer has failed to pay advance tax; or munotes.in

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Taxation - III (Direct Taxes- II)
118 b) Where the advance tax paid by the taxpayer is less than 90% of the
assessed tax.
As per section 208 every person whose estimated tax liability for the year
is Rs. 10,000 or more, shall pay his t ax in advance in the form of “advance
tax”. The tax liability of Mr. Kush is Rs. 41,800 (i.e., not less than Rs.
10,000), thus, he is liable to pay advance tax. However, he has not paid
any advance tax and, hence, he will be liable to pay interest under se ction
234B
Illustration 9.5:
Mr. Murthy is running a shop. Tax liability of Mr. Murthy for the year is
Rs. 58,400. He has paid advance tax of Rs. 56,000 till 31st March.
Balance tax of Rs. 2,400 is paid by him at the time of filing the return of
income. Will he be liable to pay interest under section 234B?
Solution:
Interest under section 234B is levied in following cases:
(a) When the taxpayer has failed to pay advance tax; or
(b) Where the advance tax paid by the taxpayer is less than 90% of the
assessed tax.
In this case, Mr. Murthy has paid 95% of the advance tax (*) i.e. more
than 90% and thus, no interest will be levied under section 234B.
(*) The tax liability of Mr. Murthy is Rs. 58,400 and he has paid advance
tax of Rs. 56,000. The quantum of advance tax paid by him will come to
95% (i.e., Rs. 56,000/Rs. 58,400) of the total tax liability.
Illustration 9.6:
Mr. Sajan is a businessman. His tax liability as determined under section
143(1) is Rs. 38,400. He has not paid any advance tax but t here is a TDS
credit of Rs. 10,000 in his account. He has paid the balance tax on 31st
July i.e. at the time of filing the return of income. Will he be liable to pay
interest under section 234B, if yes, then how much?
Solution:
In this case, the tax liabi lity (after allowing credit of TDS) of Mr. Suraj
comes to Rs. 28,400 (i.e. Rs. 38,400 – Rs. 10,000) which exceeds Rs.
10,000 and hence, he will be liable to pay advance tax. He has not paid
any advance tax and hence, he will be liable to pay interest under section
234B. Interest under section 234B will be levied at 1% per month or part
of the month. In this case, Mr. Sajan has paid the outstanding tax on 31st
July and hence, interest under section 234B will be levied for the period
from 1st April to 31st Ju ly i.e. for 4 months. Interest will be levied on
unpaid tax liability of Rs. 28,400. Interest at 1% per month on Rs. 28,400
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Interest Payable U/S 234A, 234B, 234C
119 Illustration 9.7:
In the case of Ms. Sakshi, you are furnished the following details from
whic h you are expected to calculate interest u/s. 234A. 234B and 234C:
Tax on total income Rs 10,000; Due date of filing returns: 31 -07-2018;
Date of filing the return 1 -8-2017; Tax and interest thereon fully paid on
31-7-2019.
Solution:
Name of Assessee : Ms. Sakshi
P.Y : 2019 -20
A.Y : 2020 -21
Computation of Interest u/s 234A, 234B, 234C Particulars E F Interest u/s 234A = 10,000 *1% 100 Interest u/s 234B = 10,000 *1% *4 months 400 15,000 *1% *3 months 45 Interest u/s 234C = 4,500 *1% *4 months 135 7,500 *1% *3 months 225 Interest u/s 234C = 4,500 *1% *4 months 100 905 Total Interest Payable 1005
Note:
Self-assessment tax paid u/s 140A on 31.07.2017 amounting to Rs. 10,000
shall not be considered for computation of interest u/s 234A.
9.6 EXERCISES 1. Multiple choice questions .
1. The assessee is required to pay interest u/s234A in respect of his
default in________
a. depositing insufficient advance tax
b. furnishing return of income
c. payment of advance tax instalments
d. all of the above
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120 2. The assessee is liable to pay ___________for every month u/s234A
a. simple interest @1% b. compound interest @1%
c. penalty d.either a or c
3. The interest u/s234A is applicable on __________
a. assessed income b. returned income
c. tax on assessed income d. tax on returned income
4. Interest u/s234B is liable if _____________
a. assessee is liable to pay advance tax u/s208 and has failed to do so
b. advance tax paid by assessee is less than 90% of the assessed tax
c. both a &b tog ether
d. either a or b
5. An assessment made for the 1st time u/s147 or u/s153A is regarded as
a __________ .
a. regular assessment b. best judgement assessment
c. self assessment d. income tax assessment
6. In respect of shortfall in payment of ____inte rest is required to be
calculated u/s234C
a. advance tax b. instalment of advance tax
c. self assessment tax d. regular assessment tax
7. Any payment made after 15th march but on or before 31st march of
the previous year avoids levy of___________________
a. interest u/s234A b. interest u/s234B
c. interest u/s234C d. penalty
8. For calcula ting interest u/s234A/234B/234C , all calculations are
rounded off to nearest ___
a. B 10 b. B 1000
c. B 50 d. B 100
9. Tax due on ____________income is not relevant for interest u/s234C
a. assessed b. returned
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Interest Payable U/S 234A, 234B, 234C
121 10. Interest u/s234B is calculated on the amount by which advance tax
paid falls short of _________.
a. returned tax b. advance tax
c. self-assessment tax d. assessed tax
[answers: 1-b,2-a,3-c,4-d,5-a,6-b,7-b,8-d,9-a,10-d]
2. True/False .
1. Assessee is required to pay interest u/s234A for delay or default in
filing of return of income.
2. Interest u/s234A is not levied if return is not furnished
3. Interest u/s234A is applicable on t ax on returned income
4. The assessee shall be liable to pay simple interest @1% for every
month or part of the month
5. Interest u/s 234B is levied if the advance tax that has been deposited
in insufficient
6. Interest u/s234B is not applicable if adva nce tax that has been paid is
less than 90% of the assessed tax
7. Interest u/s234B is applicable on tax on assessed income and not on
returned income
8. Interest u/s 234C is levied on shortfall in payment in payment of
installments of advance tax
9. Interest u/s 234C is calculated from 1st april of relevant assessment
year
10. Interest u/s234B is calculated up to 31st march of the relevant year
previous year
[answers : 1-t,2-f,3-f,4-t,5-t,6-f,7-t,8-t,9-f,10-f]
3. Short notes on
1. How is the interest pay able u/s.234C by non -corporate assesses
calculated
2. Advance tax provisions for income arising out of capital gains /or
casual income
3. Interest u/s 234A
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122 5. Interest u/s234C
6. Assessed tax
7. Difference between interest u/s 234B and interest u/s234C
8. Calculation of interest in case of corporate assessee
9. Calculation of interest in case of non -corporate assessee
10. Difference between interest u/s234A and 234C
4. Practical Questions.
1. Mr. Harsh has estimated his tax liability to be B 2,10,000 and has paid
advance tax accordingly but subsequently his tax liability was found
to be B 2,70,000. Find out interest payable by him under section 234C
[Ans: Interest u/s234C:270+810 +1350+600=3030 ]
2. Ramesh co. pvt ltd has estimated his ta x liability of B 5,00,000 for the
A.Y 2023 -24 visa vis actual liability of B 8,00,000. He paid advance
tax as follows C 5,00,000 (15.6.22 B 75000; 15.9.22 B 1,50,000;
15.12.22 D 1,50,000; 15.3.22 B 1,25,000) calculate interest B
[Ans: interest:1350;2700;27 00;2250 total E 9000 ]
3. Mr ram has tax liability of B 3,50,000 for A.Y 2023 -24 .He has paid
advance tax as:
Up to 15th sep21 -C75,000
Up to 15th dec21 -B1,00,000
Up to 15th mar22 -B 75,000
balance amount of tax paid on 1st oct 2023 while filing the return.
compute his liability for the A.Y for interest u/234A,234B &234C
[Ans: 234A -2000 234B -6000 234C -3,000 ]
4. The ‘tax due on the returned income for the assessment year 2023 -24
is Rs. 15,000 (i.e. tax on returned income less tax deductible or
collectible at s ource). Advance tax paid is Rs. 14,000 (Rs. 1,000 on
15.9.2022, Rs. 4,000 on 15.12.2022 and Rs. 9,000 on 15.3.2023).
Calculate the interest u/s 234C assuming that the assessee is an
individual.
[Ans.: If assessee is an individual, interest payable u/s 234C is Rs. 188 ]
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Interest Payable U/S 234A, 234B, 234C
123 5. Mr Z has tax liability of B 4,90,000 for A.Y 2023 -24. He has paid
advance tax as:
Up to 15th sep21 - B 30,000
Up to 15th dec21 - B 80,000
Up to 15th mar22 - B 1,00,000
balance amount of tax paid on 10th Dec 2023 while filing the return.
compu te his liability for the A.Y for interest u/234A,234B &234C
(Due date of filing return is 31 oct, 2023)
[Ans: 234A -5,600 234B -25,200 234C -8,400 ]

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124 MODULE - VII
10
DTAA US 90 & 91
Unit Structure
10.0 Learning Objectives
10.1 Introduction
10.1.1 How Double Taxation Works
10.1.2 Reason for Double taxation
10.1.3 Double Taxation Relief
10.2 Agreement with foreign countries U/S 90
10.2.1 UNILATERAL REL IEF U/S 91
10.3 Illustrations
10.4 Summary
10.5 Theory Question
10.0 LEARNING OBJECTIVES


10.1 INTRODUCTION A tax principle known as "double taxation" refers to paying income taxes
twice on the same source of income. When income is subject to both
corporate and individual taxes, it may happen. When the same income is
taxed in two separate nations for the same investment or transaction, this
is known as double taxation.
10.1.1 How Double Taxation Works:
Because businesses are regarded as distinct legal entities from their
stockholders, double taxation frequently happens. As a result, businesses
pay taxes on their yearly income just as people do. Even if the earnings
that supplied the funds to pay the dividends were previously taxed at the
corporate leve l, when businesses distribute dividends to shareholders, the
dividend payments result in income -tax obligations for the shareholders
who receive them.
Double taxation is sometimes an unforeseen result of tax law. Tax
authorities try to avoid it whenever fe asible because it is typically viewed
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125 Worldwide Double Taxation:
Issues with double taxes are a common problem for multinational
corporations. Income may be subject to taxation in both the nation where
it is earned and the country where the firm is domiciled. Sometimes the
overall tax rate is so high that engaging in foreign commerce b ecomes
prohibitively expensive.
Countries all around the globe have ratified hundreds of agreements to
prevent double taxation in orde r to avoid these problems, frequently using
the Organization for Economic Cooperation and Development's (OECD)
model agreements as a guide. (IECD). In order to increase commerce
between the two countries and prevent double taxation, member states to
these treaties agree to restrict their taxation on foreign company.
10.1.2 Reason for Double taxation :
It is possible to be subjected to double taxation when a taxpayer resides in
one nation but derives income from a different nation. Based on (1) the
source ru le and (ii) the residency rule, the same income may be taxed by
both the nation of resident and the country where the source of income
exists. Regardless of whether the income accrues to a resident or a non -
resident, the source rule states that it must be taxed in the nation where it
originated. According to the residency rule, the authority to tax should lie
with the nation where the taxpayer resides. The expense of doing business
internationally goes up due to double taxes, which also slows down
globalisa tion.
10.1.3 Double Taxation Relief :
There are two approaches to avoid double taxation: the exemption
techn ique and the tax credit method.
Specific income is taxed in one of the two nations under the exemption
method and exempt in the other.
The income is taxed jointly with the countries included in the income tax
treaty, in addition to the country of residence, under the tax credit method.
The tax credit or deduction for the tax owed in the country of residence
will thereafter be authorised.
In order to p rotect Indian residents and citizens from double taxation, the
government of India has signed the Double Tax Avoidance Agreement, a
bilateral agreement, with more than 150 nations.
8.2 AGREEMENT WITH FOREIGN COUNTRIES U/S 90 (BYE LAW) (1) The Central Gov ernment may enter into an agreement with the
Government of any country outside India or specified territory
outside India, -
(a) for the gr anting of relief in respect of - munotes.in

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126 (i) income on which have been paid both income -tax under this Act and
income -tax in that country or specified te rritory, as the case may be,
or
(ii) income -tax chargeable under this Act and under the corresponding
law in force in that country or specified territory, as the case may be,
to promote mutual economic rela tions, trade and inve stment, or
(b) for the avoidance of double taxation of income under this Act and
under the corresponding law in force in that country or specified
territory, as the case may be, 47[without creating opportunities for
non-taxation or reduced taxation throug h tax evasion or avoidance
(including through treaty -shopping arrangements aimed at obtaining
reliefs provided in the said agreement for the indirect benefit to
residents of any other country or territory),] or
(c) for exchange of information for the prev ention of evasion or
avoidance of income -tax chargeable under this Act or under the
corresponding law in force in that country or specified territory, as
the case may be, or investigation of cases o f such evasion or
avoidance, or
(d) for recovery of incom e-tax under this Act and under the
corresponding law in force in that country or specified territory, as
the case may be, and may, by notification in the Official Gazette,
make such provisions as may be necessary for implementing the
agreement.
(2) Where the Central Government has entered into an agreement with
the Government of any country outside India or specified territory
outside India, as the case may be, under sub -section (1) for granting
relief of tax, or as the case may be, avoidance of double tax ation,
then, in relation to the assessee to whom such agreement applies, the
provisions of this Act shall apply to the extent they are mo re
beneficial to that assessee.
(2A) Notwithstanding anything contained in sub -section (2), the
provisions of Chapter X -A of the Act shall apply to the assessee
even if such provisions are not beneficial to him.
(3) Any term used but not defined in this Act or in the agreement
referred to in sub -section (1) shall, unless the context otherwise
requires, and is not inconsis tent with the provisions of this Act or the
agreement, have the same meaning as assigned to it in the
notification issued by the Central Government in the O fficial
Gazette in this behalf.
(4) An assessee, not being a resident, to whom an agreement referre d to
in sub -section (1) applies, shall not be entitled to claim any relief
under such agreement unless a certificate of his being a resident in
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127 case may be, is obtained by him from the Government of that
country or specified territory.
(5) The assessee referred to in sub -section (4) shall also provide such
other documents and information, as may be prescribed.
Explanation 1 :
For the avoidance of dispute, it is therefore stated that the taxation of a
foreign company at a rate higher than the rate at which a domestic
business is subject to taxation shall not be deemed a less favourable
taxation of such foreign company.
Explanation 2 :
For the purposes of this provision, "specified territor y" refers to any region
outside of India that the Central Government may designate as such.
Explanation 3 :
To clear up any confusion, it is hereby stated that any term used in an
agreement entered into under subsection (1) that is not defined in the
agreem ent itself or the Act but is given a definition in the notification
issued under subsection (3), and said notification is in effect, shall be
deemed to have the definition given to it as of the date the agreement
entered into force.
Explanation 4 :
For the purpose of clearing up any confusion, it is hereby stated that any
term used in an agreement entered into pursuant to subsection (1) shall
have the same meaning as assigned therein; alternatively, if the term is not
defined in the said agreement but is def ined in the Act, it shall have the
same meaning as assigned therein and any justification provided therefor
by the Central Government.
8.2.1 Unilateral Relief U/S 91 (Bye Law):
Provision:
(1) If any person who is resident in India in any previous year pro ves that,
in respect of his income which accrued or arose during that previous
year outside India (and which is not deemed to accrue or arise in
India), he has paid in any country with which there is no agreement
under section 90 for the relief or avoidanc e of double taxation,
income -tax, by deduction or other under the law in force in that
country, he shall be entitled to the deduction from the Indian income -
tax payable by him of a sum calculated on such doubly taxed income
at the Indian re of tax or the r ate of tax of the said country, whichever
is the lower, or at the Indian rate o f tax both the rates are equal.
(2) If any person who is resident in India in any previous year proves that
in respect of his income which accrued or arose to him during that
previous year in Pakistan he has paid in that country by deduction or munotes.in

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128 otherwise, tax payable to the Government under any law for the time
being in force in that country relating to taxation of agricultural
income, he shall be entitled to a deduction from th e Indian income -tax
payable by him -
(a) of the amount of the tax paid in Pakistan under any law af oresaid on
such income which is liable to tax under this Act also;
or
(b) of a sum calculated on that income at the Indian rate of tax;
whichever is less.
3) If any non -resident person is assessed on his share in the income of a
registered firm assessed ar resident in India in any previous year and
such share includes any i ncome accruing or arising outside India
during that previous year (and which is not deemed to accrue or arise
in India) in a country with which there is no agreement under section
90 for the relief or avoidance of double taxation and he proves that he
has paid income -tax by deduction or otherwise under the law in force
in that country in respect of the income so included he shall be
entitled to a deduction from the Indian income -tax payable by him of
a sum calculated on such doubly taxed income so included at the
Indian rate of tax or the rate of tax of the said country, whichever is
the lower, or at the Indian rate of tax if both the rate are equal
Explanation: In this section,
(i) the expression "Indian income -tax" means income -tax charged in
accordance with the pr ovisions of this Act;
(ii) the expression "Indian rate of tax" means the rate determined by
dividing the amount of Indian income -tax after deduction of any
relief due under the provisions of this Act but before deduction of
any relief due under this Chapt er, by the total income;
(iii) the expression "rate of tax of the said country" means income -tax
and super -tax actually paid in the said country in accordance with
the corresponding laws in force in the said country after deduction of
all relie f due, but before deduction of any relief due in the said
country in respect of double taxation, divided by the whole amount
of the income a s assessed in the said country:
(iv) the expression "income -tax" in relation to any country includes any
excess pro fits tax or business profits tax charged on the profits by
the Government of any part of that country or a local authority in
that country.
Interpretation:
In cases when there is no DTA between India and the foreign nation,
Section 91 of the Income Tax Ac t offers exemption from double taxation. munotes.in

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129 Through the use of the Income Tax Act's provisions, this section permits
the taxpayer to seek relief from double taxation.
Key provisions of Section 91 :
1. Relief from double taxation:
This provision offers taxpaye rs who are residents of India and have
income accruing or originating outside of India in a nation with which
India does not have a DTA relief from double taxation.
2. Relief claim procedure:
The Section 91 relief claim method is the same as the Section 9 0 relief
claim procedure. To determine their eligibility for relief, the taxpayer must
provide the Indian tax authorities with the required paperwork and
information.
3. Relief calculation:
The Section 91 relief is equal to the lesser of the international tax paid or
the Indian tax due on the same income.
Double taxation is a major worry for people and companies who operate
internationally. Without adequate safeguards against it, double taxation
can dramatically raise the tax burden on the taxpayer and red uce the allure
of international investments. Therefore, the Income Tax Act's Sections 90
and 91 are essential for encouraging international investments and
fostering economic development.
Taxpayers who are residents of India and have income accruing or
originating in a foreign nation with whom India has a DTA are eligible for
double taxation relief under Section 90. The relief is offered as a tax
credit, allowing the person to offset the Indian tax due on the same income
with the foreign tax they have alrea dy paid. The remedy that may be
obtained under a DTA varies according to the terms of the particular
agreement. However, the majority of DTAs offer some type of tax credit
or exemption as a form of relief.
It is crucial to remember that the taxpayer must p rovide specific papers
and information to the Indian tax authorities in order to seek relief under a
DTA. These papers normally comprise a certificate of residency issued by
the foreign tax authorities as well as evidence of payment of foreign taxes.
There fore, it is crucial for taxpayers to keep accurate records and follow
the procedural guidelines outlined in Section 90.
In situations when a DTA between India and the other nation does not
exist, Section 91 offers exemption from double taxation. The main
distinction between Section 91's relief and Section 90's relief is that
Section 91's relief is only applicable to the lower of the tax paid in the
foreign nation or the Indian tax due on the same income. For taxpayers
who conduct business in nations without a DTA with India, Section 91 is a
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130 8.3 ILLUSTRATIONS 1. The information below pertains to Mrs. Vency's income earned during
the assessment year 2022 –2023 as an Indian resident.: Particulars Rs in Lakhs Income from playing snooker matches in country L
Tax paid in country L
Income from playing snooker tournaments in India
Life Insurance Premium paid
Medical Insurance Premium paid for her father aged
62 years(paid through credit card) 12.00 1.80 19.20 1.10 0.54
Compute her total income and tax liability for the assessment year 2022 -
23. There is no Double Taxation Avoidance Agreement between India and
country L.
(C.A., adapted)
Solution:
Computation of Total Income and Tax Liability of Mrs Vency for the
A.Y. 2022 -23 Particulars Rs. in Lakhs Rs. in Lakhs Indian Income (Income from playing snooker tournaments in India) Foreign Income (Income from playing snooker matches in country L) Gross Total Income. Less: Deduction under Chapter VI-A Deduction under Section 80C Deduction under Section 80D Medical insurance premium of 54,000 paid for her father, who is 62 years old, is entirely admissible as a deduction. Life insurance premium of 1,10,000 paid during the previous year deduction is within the overall maximum of 1.5 lakh. Because her father is elderly, the deduction is only permitted up to Rs 50,000. (assuming that her father is also a resident in India). Deduction is also permitted when payment is made in a way other than cash. Due to the use of a credit card, this transaction qualifies for a deduction.. Total Income Tax on Total Income 1,10,000 50,000 7,00,500 28,020 19,20,000 12,00,000 31,20,000 1,60,000 29,60,000 7,28,520 munotes.in

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131 Income-Tax Add: Health and Education cess @ 4% Average Rate of Tax in India 24.61% (i.e. Rs 7,28,520/ 29,60,000 x 100) Average Rate of Tax in Foreign country 15% (.0.1,80,000/ 12,00,000 x 100) Rebate under section 91 on 12 lakh @ 15% Tax (lower of average Indian-tax rate or average foreign tax rate) Tax Payable in India ( 7,28,520-1,80,000) 1,80,000 5,48,520
Note:
Mrs Vency shall be allowed deduction under section 91, since the relevant
conditions are fulfilled :
(a) During the pertinent precedi ng year, she resided in India.
(b) Her income does not qualify as income that accrued or arose in India
during the preceding year because it d id so outside of that country.
(c) She was in possession of the income that was in question when it was
taxed in the foreign nation L, and she paid the tax there.
(d) India and nation L, where the income has accrued or originated, do
not have an arrangement under section 90 to relieve or avoid double
taxation.
2. Aadhiguru, an individual, resident of India, receives the following
payments after TDS during the previous 2022 -23:
(1) Profess ional costs for August 17, 2022
(2) Professional costs as of 4/3/2023
Both of the aforementioned services were provided in Pakistan, and TDS
of 50,000 and 30,000 has been subtracted from each. He had spent
Rs 2,40,000 in order to obtain both of these receipts/income. His other
sources of income in India total Rs 5,000,000, and he has paid Rs75,000
towards LIC.
Compute the tax liability of Aa dhigur and also the relief under section 91,
if any, for assessment year 2022 -23
(CS, June 2015, ICWA, adapted)

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132 Solution :
Computation of Total Income and Tax Liability of Mr. Aadhiguru for
the A.Y. 2022 -23 Particulars Rs. in Lakhs Rs. in Lakhs Income from Profession from Foreign Less: Expenses Income from Profession in India Gross Total Income Less: Deduction u/s 80C Total Income Tax on above Add Health and Education Cess Tax and Cess Payable Average Rate of Tax (Rs 48,360/ 6,70,000 x 100] Rate of Tax in Country X Relief u/s 91 [7.22% of 2,40,000] Tax Payable (rounded off u/s 288B) 4,80,000 2,40,000 2,40,000 5,00,000 7,40,000 70,000 6,70,000 46,500 1,860 48,360 7.22% 16.67% 17,328 31,030
3. Mr. Utharan, a resident Indian, has derived the followin g incomes for
the previous year relevant to A.Y. 2022 -23:
(a) India's incom e from profession was $2,44,000
(b) Income from a profession in country A (taxes paid abroa d at a rate of
5%): Rs 4,50,000
Calculate the assessee's Indian tax obligation assuming that Rs 4,50,000 is
taxable in India under the terms of the treaty between India and Country
A. However, a foreign tax duty may be offset by an Indian tax obligation.
(ICWA, adapted )
Solution:
Computation of Total Income and Tax Liability of Mr . Utharan fo r
the A.V. 2022 -23 Particulars Rs. in Lakhs Income from Profession in India Income from Profession in Country A Gross Total Income Less: Deduction u's Chapter VIA Total Income Tax on above 2,44,000 4,50,000 6,94,000 NIL 6,94,000 51,300 munotes.in

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133 Add: Heath and Education cess @ 4% Tax and Cess Payable Less: Relief us 90 g 4,50.000 x 5%) Tax Payable in India (Rounded off u/s 88B) 2,052 53,352 22,500 30,850
4. Nimmi, who typically resides in India, offers the information below
on his income for the prior year th at is pertinent to the AY, 2022 –23:
Indian income: Rs. 3,40,000
Rs 2,00000 in income from Country Z
PPF investment: Rs 10,000
Additional ly, it should be mentioned that
India and Country Z have a double taxation avoidance agreement.
According to stated agre ement, income is only subject to taxation in the
nation where it is earned. However, in the other nation, such income can
be taken into account when determining the amount of Indian tax that
must be paid (Country Z @ 20%).
(ICWA, adapted)
Solution:
Computa tion of Total Income and Tax Liability of Nimmi for the A.Y.
2022 -23 Particulars Rs. in Lakhs Income from India Income from Country Z Gross Total Income Less: Deduction u/s 80C Investment in PPF Total Income Tax on above Add: Health and Education cess @ 4% Tax and Cess Payable Less: Relief u/s 90 R 2,00,000 x 3.63%) Tax Payable In India [Rounded off u/s 2888] 3,40,000 2,00,000 5,40,000 10,000 5,30,000 18,500 740 19,240 7,260 11,980
Average rate of Indian tax= 19,240/5,30,000 x 100 = 3.63%

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134 5. India n national Mr. Nadhan, a resident, earned the following incomes
during the prior year that ar e relevant to the A.Y. 2020 –21:
Income from a profession: $3,74,000. Royalty on books from a foreign
country: $3,000 (deduction allowed under section 80QQB). (Fore ign
nation tax of 20% paid) - 5,00,000
Calculate the assessee's Indian tax obligation assuming that India and
nation Y do not share any tax treaties.
(ICWA, adapted)
Solution:
Computation of Total Income and Tax Liability of Mr. Nadhan for
the A.Y. 2022 -23 Particulars Rs. in Lakhs Income from Profession Royalty earned in country Y Gross Total Income Less: Deduction u/s 80QQB Total Income Tax on above Add: Health and Education cess @ 4% Tax and Cess Payable Average rate of Tax [28.392/5,74,000 x 100] Rate of Tax in country Y Less: Relief u's 91 [4.95% of 2,00,000] Tax Payable in India [Rounded off u/s 2888] 3,74,000 5,00,000 8,74,000 3,00,000 5,74,000 27,300 1,092 28,392 4.95% 20% 9,900 18,490
Indian average tax rate: 4.95%
Foreign avera ge tax rate: 20.00%
Relief u/s 91 is available at low er of aforesaid rates i.e.4.95%
8.4 SUMMARY The Income Tax Act's Sections 90 and 91 are essential in preventing the
double taxation of income in two nations. They provide tax payers
assistance by enabling them to claim a c redit for taxes paid abroad against
the Indian tax due on the same income. These sections' provisions
guarantee that taxpayers won't experience excessive hardship or pay taxes
on the same income twice. To fully grasp the effects of these sections on
their tax burden, people should speak with a tax specialist.
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135 8.5 THEORY QUESTION 1. Write a note on double taxation
2. Write a note on double tax relief.
3. Explain the provision regarding Double taxation Avoidance
Agreement.

*****

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136 MODULE - VIII
11
TAX PLANNING & ETHICS IN TAXATION
Unit Structure
11.0 Learning Objectives
11.1 Introduction
11.2 Tax Planning
11.3 Tax Avoidance
11.4 Tax Evasion
11.5 Objectives of Tax Planning
11.6 Characteristics of Tax planning, Tax Avoidance, Tax Evas ion & Tax
Management
11.7 Principles of ethics in taxation
11.8 Needs for Ethics in Taxation
11.9 Exercise
11.0 LEARNING OBJECTIVES After reading this unit, learner will be able:
 To Understand the meaning of Tax Planning, Tax Avoidance and Tax
Evasion
 To d ifferentiate between Tax Planning, Tax Avoidance and Tax
Evasion
11.1 INTRODUCTION India's tax laws are undoubtedly complex due to the numerous deductions,
exemptions, relief provisions, and rebates. Therefore, it makes sense that
taxpayers generally arran ge their affairs to result in the lowest possible
incidence of tax. However, tax avoidance is a widespread phenomenon,
and the conflict between the taxpayer and the tax collector in this area
never ends. Both are perceived differently. The taxpayer makes n o effort
to minimise his incidence and maximise his profits. The tax collector, on
the other hand, tries to undermine strategies whose only goal is to reduce
taxes.
Three methods are frequently employed in the context of tax savings:
(a) Tax Planning;
(b) Tax Avoidance; and
(c) Tax Evasion.
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137

11.2 TAX PLANNING The process of making strategic decisions with an intention to reduce the
amount of taxes payable is termed as tax planning. This can be
accomplished by ta king advantage of government -provided deductions,
credits, and other tax benefits as permissible by the Income Tax Act, 1961.
Planning one's finances and investments to maximise tax benefits is
another aspect of tax planning. Tax planning aims to decrease tax
liabilities while still respecting tax obligations.
An effective tax planning can be done by utilising the provisions of
Deduction and Exemptions of the Income Tax Act. The following
illustrations attempts to provide clarity on the same.
Illustration 1 : Deductions under Section 80C of the Income Tax Act
Section 80C of the Income Tax Act provides for deductions from gross
total income for certain investments and expenses. An individual can
claim a deduction of up to C 1.5 lakhs for investments made in ce rtain tax -
saving instruments. This deduction can be claimed against income from
any head, such as salary, house property, or business income.
For example, if an individual invests C 1.5 lakhs in a tax -saving
instrument such as a Public Provident Fund (PPF) , they can claim a
deduction of C 1.5 lakhs from their gross total income. This will reduce
their taxable income and, consequently, their tax liability.
Illustration 2: Depreciation under the Income Tax Act
Businesses can claim a deduction for the depreci ation of assets used for
business purposes. Depreciation is the wear and tear of an asset over time,
and the Income Tax Act provides for a deduction on this basis. The rate of
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138 For example, if a busi ness purchases a computer for C 50,000 and the rate
of depreciation for computers is 40%, they can claim a deduction of C
20,000 as depreciation in the first year. This will reduce their taxable
income and, consequently, their tax liability.
Illustration 3 : Capital Gains Tax
Capital gains tax is a tax on the profit earned from the sale of an asset,
such as property or stocks.
For example , if an individual sells a property after holding it for more
than two years, they will be liable to pay long -term capital gains tax.
However, if they reinvest the proceeds from the sale in another property
within a specified time period, they can claim an exemption under Section
54 of the Income Tax Act. This will reduce their taxable income and,
consequently, their tax liab ility.
Illustration 4: HRA Exemption
House Rent Allowance (HRA) is a common component of the salary
package for salaried individuals. HRA is provided to help individuals meet
the cost of renting a house. Under Section 10(13A) of the Income Tax Act,
HRA is exempt from tax up to a certain limit.
For example, if an individual earns a salary of C 10 lakhs per annum and
receives an HRA of C 2 lakhs per annum, they can claim an exemption of
C 1.5 lakhs under Section 10(13A) of the Income Tax Act. This will
reduce their taxable income and, consequently, their tax liability.
The idea of tax planning has come up in a number of cases before the
Indian Supreme Court. The significance and restrictions of tax planning
have been made clear by some of these cases' landmark rulings. Here are a
few of the important cases:
1. McDowell and Co. Ltd. vs. Commercial Tax Officer (1985) 3 SCC
230:
The McDowell case is one of the most significant cases in the history of
Indian taxation. The case dealt with the issue of tax planning and whether
it was permissible under Indian law. In this case, the Supreme Court held
that tax planning is permissible as long as it is done within the framework
of the law and does not involve the use of artificial or sham transactions.
The court observed that the law recognizes the right of a taxpayer to
arrange his affairs in such a way as to minimize his tax liability. However,
it also noted that tax planning must be distinguished from tax evasion,
which involves the use of illegal means to avoid paying taxes.
2. Azadi Bachao Andolan vs. Union of India (Azadi Bachao Andolan
vs. Union of India (2003) 263 ITR 706 (SC) :
The Azadi Bachao Andolan case is another landmark case that dealt with
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139 permissible as long as it is not contrary to law. The court observed that
taxpayers are entitled to take advantage of tax incentives and exemptions,
but they cannot resort to abusive tax avoidance schemes.
The court also noted that the motive behind a transaction is relevant in
determining whether it is a bona fide transaction or an abusive tax
avoidance scheme. If the transaction is entered into solely for the purpose
of avoiding taxes and has no commercial substance, it will be deemed to
be an abusiv e tax avoidance scheme.
3. Vodafone International Holdings BV vs. Union of India (2012) 341
ITR 1 (SC) :
The Vodafone case is a widely publicized case that dealt with the issue of
tax planning in the context of cross -border transactions. In this case,
Voda fone had acquired a stake in an Indian company through a transaction
that was carried out outside India. The Indian tax authorities had sought to
tax the transaction on the ground that it had resulted in a transfer of assets
located in India.
The Supreme C ourt held that the Indian tax authorities did not have
jurisdiction to tax the transaction. The court observed that the transaction
had been carried out outside India and had not resulted in the transfer of
any assets located in India. The court also noted that the transaction had
been structured in a manner that was permissible under the relevant tax
laws.
As a result, these cases show that tax planning is acceptable so long as it is
carried out legally and without the use of dubious or fictitious transact ions.
Taxpayers are allowed to benefit from tax breaks and incentives, but they
are not allowed to use dishonest tax avoidance tactics. The Supreme Court
has repeatedly ruled that a transaction's motivation matters when
determining whether it is a legitima te business transaction or an unfair tax
avoidance scheme. Taxpayers are required to make sure that their tax
planning techniques are legal and have practical application.
11.3 TAX AVOIDANCE The distinction between tax planning and tax avoidance is blurry and
extremely thin. Tax evasion may also involve elements of malafide
motivation. Any planning that, even when carried out exactly in
accordance with legal requirements, undermines the fundamental purpose
of the legislative mandate underlying the statute m ay be referred to as an
instance of tax avoidance. It is typically accomplished by adjusting the
affairs so that there is no violation of the tax laws and by fully utilising
the loopholes therein to attract the least amount of tax. Tax avoidance
was previo usly thought to be entirely legal, but it now might not be in
some circumstances. The majority of the current amendments aim to
reduce avoidance behaviour.
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140 11.4 TAX EVASION It describes a scenario in which a person tries to lower his tax liability by
intentionally suppressing his income, inflating his expenses to make his
income appear lower than it actually is, and using other types of
intentional manipulation. An assessee guilty of tax evasion is punishable
under the relevant laws. Intentionally making f alse statements, submitting
deceptive documentation, hiding information, failing to keep proper
records of income earned (if required by law), and omitting crucial
information from assessments are all examples of tax evasion. Tax evasion
would be committed by an assessee who dishonestly claims the benefit
under the statute by lying.
11.5 OBJECTIVES OF TAX PLANNING The objectives of tax planning can vary depending on the individual or
organization, but some common objectives include:
1. Reducing tax obligati ons:
The main goal of tax planning is to reduce tax obligations by figuring out
and utilising all available credits, deductions, exemptions, and other tax
benefits. Taxpayers can lower their tax liability by reducing their taxable
income.
2. Maximizing af ter-tax income:
By structuring financial transactions and investments in a tax -efficient
way, tax planning also aims to maximise after -tax income. For instance,
taxpayers may decide to put money into tax -exempt or tax -deferred
retirement accounts in order to lower their current tax burden and boost
their after -tax retirement income.
3. Managing cash flow:
By minimising tax payments and maximising the timing of tax liabilities,
tax planning can also assist people and businesses in managing their cash
flow. To reduce their tax obligations in a particular year, businesses might
decide to accelerate or defer the recognition of some expenses or revenue.
4. Achieving financial objectives:
By reducing tax liabilities and maximising after -tax income, tax planning
can also assist people and businesses in reaching their financial objectives.
Goals like retirement planning, funding a child's education, or making
charitable contributions can fall under this category.
5. Ensuring adherence to tax laws:
Tax planning al so seeks to guarantee adherence to all relevant tax laws
and rules. Taxpayers can organise their finances in a way that is both tax -
efficient and legally compliant by understanding the tax laws and
regulations that apply to their particular financial situa tion. munotes.in

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141 In conclusion, the goals of tax planning are to reduce tax liabilities,
increase after -tax income, control cash flow, reach financial targets, and
make sure that taxes are paid in accordance with the law. Individuals and
businesses can accomplish the se goals and enhance their overall financial
well-being by carefully managing their finances in a tax -efficient manner.
11.6 CHARACTERISTICS OF TAX PLANNING, TAX AVOIDANCE, TAX EVASION & TAX MANAGEMENT Defining characteristics Tax planning Tax Avoidance Tax Evasion Tax Management Definition It is a method of lowering tax obligations by utilising all of the Act's benefits, including its numerous exemptions, deductions, rebates, and relief provisions. It is a process by which the assessee legally exploits the Act's shortcomings. By purposefully suppressing income or sales, raising expenses, etc., which lowers the assessee's overall income, it is illegal to reduce tax liability. It is a process to follow the law's requirements.
Feature Planning your taxes is a way to adhere to the moral requirements of the law. Tax evasion is a method of bending the law without actually breaking it. Tax evasion is morally and legally prohibited. It is a component of the implementation or execution phase of a company's taxation department. Object To lower tax obligations by following the letter and spirit of the law. To minimise tax liability by strictly following the law's script To lower tax liability through the use of unethical methods. To abide by the law's provisions. Approach It has a futuristic and uplifting vibe. The planning is done now to take advantage of future benefits. It is futuristic but only applies to the short term, as future law amendments will close a loophole. It is concerned with the past and what was done after tax liability arose. It is done in a way that violates the law's morals in order to gain an advantage. It is an ongoing process that considers the past (rectification, revisions, etc.), the present (filing returns, etc.), and the future (corrective action). Benefit The benefits in tax planning arises in long run. Benefits arises in short run only. Benefits typically do not result, but there may be It is possible to avoid a fine, interest, and legal munotes.in

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142 penalties and legal action. action. Treatment of Law It makes use of legal advantages. It tries to avail benefits in the loopholes of law. The law is superseded by it. It implements the law. Practice It practices Tax saving. It practices Tax hedging. It practices Tax concealment. It practices tax administration. Morality It is moral in nature. It is immoral in nature It is illegal. It is duty.
11.7 PRINCIPLES OF ETHICS IN TAXATION 1. Honesty: Taxpayers should give the appropriate authorities accurate
and truthful information.
2. Accountability: Taxpayers a re accountable for meeting their
financial commitments and contributing their fair share of taxes.
3. Fairness: Taxpayers should aim for fairness in their tax compliance
and planning, making sure they pay the proper amount of tax
depending on their circumstan ces and income.
4. Transparency: Taxpayers should be open and honest in their
interactions with tax authorities by revealing all pertinent information
and staying away from transactions that are secret or unclear.
5. Respect for the law: Instead of trying to eva de or get around the tax
regulations of their country, taxpayers should respect and follow
them.
6. Social responsibility: Recognizing that taxes finance public goods
and services that benefit society as a whole, taxpayers should take into
account the broader social ramifications of their tax planning and
compliance.
11.8 NEEDS FOR ETHICS IN TAXATION Ethics in taxation is important for several reasons, including:
1. Encouraging fairness and equality:
Taxation ethics contribute to ensuring that everyone pays t heir fair share
of taxes depending on their income and circumstances and that tax laws
are not abused to unjustly favour certain groups over others.
2. Upholding the rule of law:
By ensuring that taxpayers and tax authorities respect the law and that tax
policies are in line with ethical and moral norms, ethics in taxation
contributes to the preservation of the integrity of tax systems. munotes.in

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143 3. Protecting Public Trust:
Maintaining public faith in government institutions and tax systems is
made possible by the promotion of openness, honesty, and accountability
in tax laws and procedures.
4. Ensuring sustainability:
Promoting ethical and effective use of tax revenues and encouraging tax
compliance, ethics in taxes helps ensure that tax systems are sustainable
over the long run.
5. Promoting economic progress:
By encouraging fair competition and reducing tax fraud and avoidance,
which can impede economic growth, ethics in taxes helps level the playing
field for firms and people.
Overall, the promotion of trust, j ustice, and accountability in tax systems,
as well as ensuring that tax policies are in line with ethical, moral, and
social norms, depend on taxation ethics. Individuals and businesses may
support a more just and equitable society by upholding ethical sta ndards
and values in their tax compliance and planning.
11.9 EXERCISE 1. State whether true or false:
a. Saving of taxes by any means is an example of tax planning.
b. Tax Avoidance and tax planning both are legal.
c. Tax Evasion is illegal in nature.
d. It is duty of assessee to mention all the income with honesty.
Ans:
True: c, d
False: a., b.
2. Answer in Brief:
a. What are the objectives of Tax Planning
b. Distinguish between Tax planning, Tax Avoidance & Tax Evasion
3. Short Notes:
a. Tax plan ning
b. Tax Avoidance
c. Tax Evasion
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