TaxationDirect-Indirect-munotes

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INTRODUCTIO NAND BASIC CO NCEPTS
Unit Structure
1.1 Introduction and Objectives
1.2 Assessment Year
1.3 Previous Year
1.4 Person
1.5 Assessee
1.6 Assessment
1.7 Income
1.8 Gross Total Income
1.9 Total Income
1.10 Scheme of charging income tax
1.11 SelfExamination Questions
1.1 INTRODUCTIO NAND OBJECTIVES :
Entry 82 of theSchedule VII t otheConstitution ofIndia
empowers theCentral Government tolevy ‘Tax on income other than
agricultural income in India ’.
In exercise of its rights under this en try,the parliament enacted the
Income Tax Act, 1961[“The Act”] .
The Act provide sforthe scope and apparatus forlevy and
collection of Income Tax in India .I ti s supported by theIncome Tax
Rules, 1962and several other subordinate rules and regulation s.
Under the Act, theCentral Board of Direct Taxes ( ‘CBDT ’) and
the Ministry of Finance, Government of India have been empowered to
issue from time to time circulars andnotifications dealing with various
aspects of the Act .
Unless otherwise stated , references to the sections will be the
reference to the sections of the Income Tax Act, 1961.
Section 4 isthecharging section .It defines the scope of any law
relating to ley of income tax in India. It states that income tax shall be
charged for any assessment year inrespect of the total income ofthe
previous year ofevery person at the rates prescribed in the relevant
Finance Act for that year. Thus, asper the section, the study oflaw
relating to ley ofincome tax in India would cover thefollowi ng:-munotes.in

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2(a)Meaning of person called assessee under the Act
(b)Concept of assessment year vis-à-visprevious year
(c)Meaning of income chargeable to tax under the Act.
(d)Income exempt from tax under the Act
(e)Taxable income, Gross total Income and Total Income
(f)Rates atwhich tax would be charged on income.
This lesson seeks toexplain the above aspects in the context of the
basic framework for levy of income tax in India andexplain the basic
concepts and terms used in the Act.
1.2 ASSESSME NT YEAR
1.2.1.Defin ition
As per section 2(9) an “Assessment year” is“the period of twelve
months starting from the first day of April every year ”
1.2.2.Explanation
As per section 4 , income tax shall be charged for any assessment
year in respect of the total income of t he previous year of every person.
In other words, income of an assessee during the previous year will
betaxable for assessment year relevant to the previous year. Assessment
year, is therefore, also called as the “tax year”
As per section 2(9) an asses sment year is period of 12 month s
which begins on 1stApril every year and ends on 31stMarch of the next
year. Hence, the a ssessment year 2021-22means the period of one year
beginning on1stApril ,2 021and ending on 31stMarch, 2022.
1.3PREVIOUS YE AR
1.3.1 Definition
Section 3 defines “previous year”as“the financial year
immediately preceding the assessment year ”.
1.3.2 Explanation
As per section 4, income tax shall be charged for any assessment
year in respect of the total income of the p revious year of every person.
In other words , i ncome earned by an assessee in one financial year
is taxed in the next financial year. The year in which income is earned is
called the “previous year” and the year in which it is taxed is called the
“assessment year”.
For instance income earned during thefinancial year 2020 -21,
previous year will be th e financial year 2020-21 and the relevant
assessment year will be the financial year 2021 -22.Accordingly, f or themunotes.in

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3assessment year 2021 -22previo us year will be the immediately preceding
financial year 2020-21.
1.3.3 Common previous year for all source ofincome
The previous year will be common for all sources of income of a
person even if the sources are unrelated to each other and separ aterecords
or books of accounts have been maintained for each such source and
aggregate income earned of all such source ischargeable to tax for that
assessment year.
Illustration
During the financial year 20 20-21In come of Ashok is as under : -
Salaries from A Ltd Rs10,00,000
Salaries from B Ltd Rs2,00,000
Professional Income Rs 2,00,000
Interest on fixed Deposits Rs.3,00,000
Total Rs.17,00,000
Financial year 2020 -21will be the previous year for allthe four
different sources of income and theaggregate income of Rs 17,00,000
earned during the previous year 2020 -21will be chargeable to income tax
in the assessment year 2021 -22.
1.3.4 New Business or Profession
In case where during a financial year :-
a busines s is newly set up or
a new source of income has arisen ,
the previous year will be the period (obviously less than one year)
commencing from the date of setting up of the new business or the date of
new source of income arising, and ending on 31stMarch ne xt.
Illustration
Ramesh sets up a new business in January, 2021.The period of
three months beginning on 1st January , 2021and ending on 31st March ,
2021will be the previous year 2020-21relevant to assessment year 2021-
22.It is Immaterial that prev ious year is of a period of less than 12
months.
1.3.5 Exception:
Ordinarily, previous year isthe financial year immediately
proceeding the assessment year and accordingly income earned inthe
previous year is taxable in the assessment year , which is th e financial year
next following the previous year.
The above rule is subject to some exceptions and where a n
assessee is liable to pay tax on theincome in the same previous in which
he earns it.In such cases, previous year and assessment year will b e the
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4These exceptional cases ensure safeguards forsmooth collection of
income tax from a class of taxpayers who may not be traceable until the
commencement of the normal assessment year. Some of such exceptions
areasunder: -
a)Vide Section 172 ,income of non -residents from shipping business
may be assessed inthe same assessment year and the return is required
to be filed within a maximum time of thirty days from the date of
departure of the ship .
b)As per section 174 ,income of person leaving India permanently or
for a long period of time and not likely to return back may be assessed
for the period between the expiry of last previous year and till the date
of his departure in the current assessment year .
c)Vide section 174A, income of associati on of persons ,body of
individuals or artificial juridical person sformed for a particular event
or purpose and dissolved after such event or purpose may be assessed
in the same assessment year.
d)As per section 175 ,income of a person trying to sell , part with or
transfer hisassets with a view to avoiding payment of tax may be
assessed in the same assessment year.
e)As per section 176, i ncome of a discontinued business or profession
can be assessed at the discretion of the assessing officer in the same
assessment year .
1.4PERSO N
1.4.1 Definition
As per Section 2(31)“Person” includes: -
a)anindividual ’
b)a Hindu undivided family (HUF ),
c)acompany ,
d)afirm,
e)anassociation of persons (AOP)or a body of individuals,( BOI)
whether incorporated ornot
f)a local authority ,and
g)every artificial juridical person not falling within any of the
preceding categories .
1.4.2 Inclusive definition
Thedefinition of “person” isinclusive one,not exhaustive .A n y
other entity not falling in the above seven categories may still be treated as
“person” attracting theprovisions of the Act .
1.4.3 Profit motive not necessary
As per explanation to section 2 (31), an entity need not be formed
for profit .Non-profit organisation sor charitable trust sa r e also covered by
the def inition of “person” although their income is not taxable under the
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51.4.4 Types of entities included in thedefinition of person
a.Individuals
Individuals means all human beings or living persons of blo od
and flesh e.g. Ramesh, Shyam, Gopal , Albert, Ibrahim ,etc.
b.Hindu Undivided Families (HUF)
Hindu Undivided Families orHindu joint families are entities
prevalent among the Hindus as per the specific law of succession
governing them and they are treated as separate tax entities .
c.Compan y
Company as defined in section 2(31) includes any Indian , foreign,
public or private compan yor a non -profit company incorporated u/s 8
of the Companies Act, 2013 (corresponding to section 25 of the
Compani es Act, 1956) for charitable purpose .In addition, t he CBDT has
the power to declare any institution as a company.
d.Partnership firms
Partnership firms formed under the Partnership Act, 1932 and
limited liability partnerships (LLPs )constituted und er The Limited
Liability Partnership Act , 2008 are considered as distinct taxable entities
separate from their partners. Therefore, under the Act, firms are taxed
separately in their f irmname partners are taxed separately in their
personal capacity.
e.BOI,AOP etc .
Body of individual (BOI)andassociation of persons (AOP )are
group sof persons carrying on some activities to earn income such as joint
venture.
Normally ,anAOP iscontractual in nature like a joint venture
agreement ifsuch venture notformed as a partnership or a company ,
while, BOI owes its existence circumstances such as joint owner of a
estate. clubs, societies, charitable trusts et c.
f.Local Authorities
Municipal corporations ,panchayats, cantonment boards, zila parishads
etc.are examples of Local authorities.
g.Residual
Residual category is the last category covering all such artificial
juridical persons which arenot covered in any of the above six categories.munotes.in

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6Illustration
Determine the status in the following pe rsons as per theIncome
Tax Act, 1961:
Person Status
Ramesh Agrawal Individual
Asha Jain Individual
Reliance Industries Limited Company
Warna Co -operative Society Ltd AOP
Indian Red Cross society AOP
Legal heirs to receive property of
late Sh ri NusserwanjiBOI
Tata power Ltd Company
Sachin Tendulkar Individual
Board for Cricket Control in India AOP
Family of Shri PB Hindu HUF
Pune Cantonment Board Local Authority
Mumbai University Artificial Juridical
Person
Ramsay Brothers doi ng business in
partnershipFirm
1.5ASSESSEE
1.5.1 Definition
As per section 2(7) “assessee” means a person by whom income
tax or any other sum of money is payable under the Act and it includes:
a.Every person in respect of whom anyproceeding und er the Act has
been taken for the assessment of his income orassessment of
fringe benefits or of the income of any other person in respect of
which he is assessable, or of the loss sustained by him or by such
other person, or of the amount of refund due to him or to such
other person ;
b.Every person who is deemed to be an assessee under any provision
of this Act.
c.Every person who is deemed to be an assessee in default under any
provision of this Act.
1.5.2 The definition of “assessee” is also inc lusive andbroad in itsscope .
The definition covers not only a person but also his representative such as
legal heir, trustee ,liquidator of a company assessee etc. A person may be
not only the one by whom the amount of tax ispayable but also the one to
whom any refund isdueor against whom any proceedings aretaken.
Further the definition includes any other person not covered in the above
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71.5.3 From the above definition, an assessees may be: -
a)Aperson by whom income tax or any other sum of money is
payable under the Act
b)A person in respect of whom any proceeding under the Act has
been taken for the assessment of his :
(i)income or
(ii)loss or
(iii)the amount of refund due to him
c)A person who is assessable in respect of income or loss of anothe r
person or
d)A person who is deemed to be an assessee,
e)an assessee in default under any provision of the Act .
1.5.4 Aminor child isaseparate assessee, but his income is included in
the income of t he parent having the higher income unless ,such incom ei s
from an asset assets acquired from the minor’s sources of income or
income generated out of activities performed by him like singing in radio
jingles, acting in films, tuition income, delivering newspapers, etc.
1.6ASSESSME NT
As per section 2( 8)“an assessment includes reassessment”.
The definition is an inclusive one, but it does not specify what is
an assessment .As per the scheme of the Act , assessment is the procedure
to determine the taxable income or loss of an assessee and the tax payable
byor refund due to him .
Under section 139 of the Act, every assessee is required to file a
self-declaration of his income and tax payable by him called “return of
income ”.
The Income Tax Officer may accept the return summarily without
making a ny enquiry into itscontents. This is called as the ‘summary
assessment’ under section 143(1).
Alternatively, the officer may call upon the assessee under section
143(2) to explain his return of income and after making necessary enquiry ,
frame a reason ed order determining the total income or loss and the
amount tax payable by or refund due to the assessee . This is called the
“regular assessment ” under section 143(3).
Ac ompleted assessment becomes final except in certain
circumstances . These circ umstances are:
a.Under section 147, an assessment can be reopened to assess income
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8b.Under section 263 , the Commissioner of Income Tax may ask an
assessment to be redone if the assessment order is erroneous and
prejudicial to th e interest of the revenue ,
c.Under section 264, the Commissioner of Income Tax at the
application of an assessee or suomotu ,may ask an assessment to be
redone. This is normally done to give relief to the assessee.
d.Under section 254, the Income Tax Appella te Tribunal (ITAT) in
appeal proceedings may pass an order directing the assessment to be
redone.
In all the above cases “reassessment” of the income is required to
bedone. The definition of assessment includes the regular assessment and
reopened or reas sessment.
1.7INCOME
1.7.1 Definition :
Section 2(24)defines income in aninclusive manner . As per the
section “ Income " includes —
(i) profits and gains.
(ii)dividend.
(iia) voluntary contributions received by
a trust created wholly or partly fo r charitable for religious
purposes, or
anyinstitution ,an association or a fund or trust or institution fo r
scientific research under section 10(21)/(23);
any university or other educational institution referred to in section
10 (23) (iiiad) or(vi) (sports body) ;
any hospital or other institution under section 10(23C) (iiiae) or
(via),
by an electoral trust ;
For this purpose, "trust" includes any other legal obligation ;
(iii) the value of any perquisite or profit in lieu of salary taxable under
section 17 (2) / (3) ;
(iiia) any special allowance or benefit, (other than perquisite ),
specifically granted to the assessee to meet expenses wholly,
necessarily and exclusively for the performance of the duties of an
office or employment of profit.
(iiib) any allowance granted to the assessee either to meet his personal
expenses at the place where the duties of his office or employment
of profit are ordinarily performed by him or at a place where he
ordinarily resides or to compensate him for the increase d cost of
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9(iv) the value of any benefit or perquisite, whether convertible into money
or not, obtained from a company either by a director or by a person
who has a substantial interest in the company, or by a relativ e of the
director or such person, and any sum paid by any such company in
respect of any obligation which, but for such payment, would have
been payable by the director or other person aforesaid ;
(iva) the value of any benefit or perquisite, whether conv ertible into
money or not, obtained by any representative assessee mentioned in
section 160(1) (iii) or (iv) of or by any person on whose behalf or
for whose benefit any income is receivable by the representative
assessee (the "beneficiary") and any sum pa id by the representative
assessee in respect of any obligation which, but for such payment,
would have been payable by the beneficiary ;
(v) any sum chargeable to income -tax(( Balancing charge) under section
28(i i )/(iii) or section 41 or section 59 );
(va) Duty drawback under section 28 (iiia);
(vb) Cash Assistance under section 28 (iiib);
(vc) DEPB under section 28 iiic);
(vd) the value of any benefit or perquisite taxable under section 28(iv);
(ve) any sum chargeable to income -taxunder section 28(v);
(vi) any capital gains chargeable under section 45;
(vii) the profits and gains of any business of insurance carried on by a
mutual insurance company or by a co -operative society, computed
in accordance with section 44 or any surplus taken to be such profits
and gains by virtue of provisions contained in the First Schedule ;
(viia) the profits and gains of any business of banking (including
providing credit facilities) carried on by a co -operative society with
itsmembers ;
(viii) Omitted
(ix) an y winnings from lotteries, crossword puzzles, races including horse
races, card games and other games of any sort or from gambling or
betting of any form or nature whatsoever ;
For thispurpose, —
(i) "lottery" includes winnings from prizes awarded to any person by
draw of lots or by chance or in any other manner whatsoever, under
any scheme or arrangement by whatever name called ;
(ii) "card game and other game of any sort" includes any game show, an
entertainment programme on television or electronic mod e, in which
people compete to win prizes or any other similar game ;
(x) any sum received by the assessee from his employees as contributions
to any provident fund or superannuation fund or any fund set up
under the provisions of the Employees' State Insur ance Act, 1948 ,
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10(xi) any sum received under a Keyman insurance policy including the
sum allocated by way of bonus on such policy ;
(xii) any sum referred to in section 28 (va);
(xiii) any sum referred to in section 56 (2)(v );
(xiv) any sum referred to in section 56 (2) (vi);
(xv) any sum of money or value of property referred to in section
56(2) (viia);
(xvi) any consideration received for issue of shares as exceeds the fair
market value of the shares referred to section 56(2) (viib)
(xvii) any sum of money referred to in section 56 (2)(ix );
(xviia) any sum of money or value of property referred to in section 56
(2)(x)
(xviii) assistance by way asubsidy or grant or cash incentive or duty
drawback or waiver or concession or reimbursement (by whatever
name called) by the Central Government or a State Government or
any authority or body or agency in cash or kind to the assessee other
than, —
(a) the subsidy or grant or reimbursement which is reduced from the
actual cost of the asset under section 43 (1) Explanation 10 ;or
(b) the subsidy or grant by the Central Government for the purpose of the
corpus of a trust or institution established by the Central
Government or a State Government ;
1.7.2Sec2(24)gives an inclusive definition of income ;As per the section,
“income ”covers not only the income in its natural and general sense but
also several items not otherwise considered as income ;
Hence, Income means not only the revenue receipts arising or
accruing regularly but also capital receipts like gifts and even donations
and gifts .On the other hand, certain revenue receipts like agricultural
income are left out from the scope of the term income.
Some of the principles that have emerged out as a resu lt of customs,
practices and judicial pronouncements to ascertain as to what does or does
not constitute income are as follows :-
1.Ordinarily Income is aregular periodical receipt, received or derived
from a certain source .
2.Thesource of income must be exte rnal.No one can earn income by or
from himself.
3.On this principle, income accruing to clubs, societies etc.from their
own members are not taken as taxable income on the ground of
mutuality.
4.Normally ,only revenue receipts are regarded as income unless
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115.On the other hand, capital receipts are not treated as income unless the
law specifically provides e .g.capital gains ,gifts, m aturity proceeds of
keyman insurance policy , sales tax subsidy, voluntary contribution by
a donor to a t rust,which are included in income in spite of being
capital receipts. Income isoften compared to the fruit of a tree, where
tree is the source or the capital asset.
6.Income may be in cash or kind.
7.Income need not be legal ;Itmay even bederived from i llegal sources
like, smuggling, theft, bribery, corruption etc.
8.It is the receipt, which is income not its application or use.
9.Any receipt diverted at the origin orthesource by overriding title will
notbe regarded asincome.
10.Any dispute in the titl e of the income does not take away its nature as
income.
11.A gift is a capital receipt given for personal considerations ;However,
thisisno longer avalid proposition as the law specifically provides for
taxation of gifts such as : -
Giftby an empl oyer to an employee isdeemed to be taxable salary
u/s17.
Gift by a client or customer is deemed as the income under the
head profits and gains from business or profession u/s 28 .Hence, a
gift given by a client to his lawyer or chartered accountant ora
patient to his doctor, or a disciple or pupil to his guru ,w i l l be
taxable as the income of the recipient (donee) from business or
profession u/s 28 .
Personal gifts inexcess of Rs .50,000 from all sources are taxable
as income from other sources u/s56subject to certain exceptions .
Further inadequate consideration on transfer of immovable or
movable assets is also considered as taxable gift u/s 56 .This aspect
is dealt with in great detail in the lesson relating toincome from
other sources .
12.Incom e may be recognised either on receipt basis or on accrual basis
depending upon the facts and circumstances and the method of
accounting applied in each case.
13.Income must be certain .Contingent income is not regarded as income
unless and until such conting ency occurs and the income arises to the
assessee.
14.Income is the sum total of all receipts from all the sources and
considered accordingly .
15.Pin money received by a woman for personal expenses or even the
savings made by her from such receipts is not cons idered as income ;
However, the husband will not get any credit from his income for
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1216.Income may be received in lump sum or in instalments ;Thus, arrears
of salary received by a person in lump sum are regarded as his income .
17.Awards received b y a professional sportsperson would be income ,
unless the award is in nature of a gift forpersonal consideration.
18.Income of wife is taxable in the hands of the husband if the assets out
of which the income is arising have not been acquired out of the
sources of the wife or from an asset gifted by the husband except as
consideration for living apart.
19.Income of minor children is taxable in the hands of the parents having
higher income [ mother or father] except when the income is arising
from the efforts of the minor child say modeling charges.
1.8GROSS TOTAL I NCOME
Section 14 of the Act defines the gross total income as the
aggregate of the incomes computed under the five heads after adjusting for
set-off and carry forward of losses .The five head s of income are as
follows namely:
1;Income from Salaries
2;Income from House Property
3;Profits and Gains from Business & Profession
4;Capital Gains
5;Income from Other Sources
The gross total income is the aggregate ofincomecomputed in
accordance with the provisions of the Act under the five heads ,before
making any deduction under sections 80C to 80U ;It may be noted that
any income exempted from tax u/s 10 or other provisions e.g.conveyance
allowance, capital gains on s ale of personal effects, dividend income, etc .
is not considered or excluded from the income computed under the
respective heads .
1.9TOTAL I NCOME
The total income of an assessee is computed by deducting from the
gross total income all permissible deduc tions available under the Chapter
VI A of the Income Tax Act, 1961 ;This is also referred to as the “Net
Income” or “Taxable Income” .
1.10SCHEME OF CHARGI NGINCOME TAX
Income tax is a tax on the total income of an assessee for a
particular assessment y ear.This implies that:-
(i) Income -tax is an annual tax on income .
(ii)Income of previous year is chargeable to tax in the next following
assessment year at the tax rates applicable for the assessment ;year
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13(iii)Tax rates are fixed by the annual Finance Act and not by the
Income -taxAct;For instance, the Finance Act, 2021fixes tax rates
forthefinancial year 2021 -22relevant toassessment year 2022-23
Tax rates are given in the lesson dealing with computation of
income .
(iv)Tax is charged on every person if the total income exceeds the
minimum income chargeable to tax .
1.11SELF ASSESSME NT QUESTIO NS
1.Income of a previous year is chargeable tax in the immediately
following assessment year ;isthere any exception to this rule? Discuss
2.Define the term “person”
3.How would you calculate income tax for the assessment year 2021-
22in the case of different assesses?
4.Explain how cess will be computed for the assessment year 2021 -22?
[Ans: 4%]
5.What w ill be the previous year for X, who starts his business on April
6,2020[ [Ans:2020-21]
6.Will the answer to Q 5 be different ,if X starts his business on 28th
March, 2019?[Ans:2 0 1 8-19]
7.Explain that a financial year is a previous year and also an assessment
year;Every financial year can also be an assessment year ,
8.Previous year is a financial year immediately preceding the
Assessment year Comment
9.What will be the status of University of Mumbai?
[Ans: Artificial juridical person]
10.Indicate wh ether the following persons will be taxed as individuals:
a)X a partner of a firm
b)Y,a managing director of A Ltd ;”
c) Z is the member of Z HUF
d) Municipal Commissioner of Mumbai in respect of the Income of the
Municipal Corporation
e)A minor acting in TV commercials
[Ans: All except (d)will be taxed, Firm X , A Ltd , Z HUF , Mun
Corpn;Separate tax entities ]

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142
BASIS OF CHARGE A ND
INCIDE NCE OF TAX
Unit Structure
2.1 Introduction and Objectives
2.2 Basic Charge of Income Tax
2.3 Residential Status
2.4 Residential status and incidence of tax
2.5 Income deemed to be received in India
2.6 Income deemed to accrue or arise in India
2.7 Receipt vs. Remittance
2.8 Actual receipt Vs. Deemed Receipt Total Income
2.9 Receipt vs. Accrual
2.10 Basis of Charge of Dividend Income
2.11 Heads of Income
2.12 Self-Examination Questions
2.1 INTRODUCTIO NAND OBJECTIVES
Section 4 to 9 provide for the basis of charging income tax,
income on which tax is to be levied, the persons from whom the tax is to
be levied, status of such persons and effect of the status on the incidence
of tax.
This lesson seeks to explain all these provisions, which define the
structure, basis, methodology, periodicity, extent and basis of charge of
income tax in India an d other incidental matters.
2.2 BASIS OF CHARGE OF I NCOME TAX
2.2.1. Charging Section
Section 4is the charging section. It says that income tax shall be
charged for any assessment year at any rate or rates prescribed in the
Finance Act for that year in respect of the total income of the previous
year of every person.
Accordingly, Income ta x is charged: -
from a person called assessee
on the total income of
earned for himself or in representative capacity such as legal heir of
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15during the previous year or a period other than the previous year
(vide pr oviso to section 4 ).
relevant to the assessment year.
at the rate or rates prescribed in the Finance Act for that year.
payable by way deduction at the source(TDS) , tax collection at
source (TCS) or Advance Tax or Self -assessment Tax or other
manner prescribed by the Act.
2.2.2. Scope of Total Income
Section 5defines the scope of total income of an assessee, which
would be chargeable to tax. It depends upon: -
a)the residential status of a person, and
b)place and time of accrual of such income.
2.2.3. Residential Status
Section 6prescribes the rules for determining residential status of
different types of persons
2.2.4. Income Accrued or Received in India
Section 7 specifies the incomes not received in India butdeemed to
be received in India.
Section 8 deals with the year of taxability of dividend income.
Section 9 specifies the incomes though not accrued or arisen in
India but are deemed to accrue or arise in India.
2.3 RESIDE NTIAL STATUS
2.3.1 Under section 5, total income ofis chargeable to tax depending upon
the residential status of a person (assessee), place and time of accrual of
such income.Section 6 prescribes the rules for determining residential
status of different categories of persons , viz.: -
a)Individuals;
b)Hindu Undivided Families (HUF)
c)Firms, Bodies of Individuals (BOI) or Associations of
Persons(AOP);
d)Companies; and
e)Every other person.
2.3.2 Residential Status of an Individual –RESIDE NT
I. Basic conditions -
Under se ction 6(1), an individual is said to be a resident in India in
any previous year, if he satisfies at least one of the following two basic
conditions viz .:-
a)he is in India in that previous year for a period or periods amounting in
all to 182 days or more ormunotes.in

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16b)he has been in India for a period or periods amounting in all to 365
days or more during 4 years immediately preceding that previous year
AND for a period or periods amounting in all to 60 days or more
during that previous year.
Exception
The limit for stay in India for 60 days or more as per condition (b)
will be extended to: -
A.182 days or morein case of : -
i.An Indian citizen LEAVINGIndia during the previous year
for the purpose of taking up employment outside India ; or
as a member of th e crew of an Indian ship.
ii.An Indian citizen or a Person of Indian Origin (PIO) COMING to
India ON VISIT during the previous year.
B.120 days or more in case of an Indian citizen or a Person of Indian
Origin (PIO)having total income, other than the income fr om foreign
sources exceeding 15 lakh rupees during the previous year.
A person is said to be of Indian origin (PIO) if either he or any of his
parents or grandparents was born in undivided India .
For a particular previous year an individual -
a)may satisfy any one condition or both of the above two basic
conditions; or
b)may not satisfy any of the above two conditions
Then status of the individual for thatyear shall be
a)a resident in India i n case(a),
b)anon-resident in case (b).
c)With effec tfrom A.Y.2021 -22 , with the insertion of section 6(1A) an
Indian citizen , who is not resident in India in the previous year as per
section 6(1)shall be deemed to be resident in Indiainprevious year if
during that year -
(i)he has total income, other than the income from foreign sources,
exceeding 15 lakh rupees during the previous year, and
(ii)he is not liable totax in any other country or territory by reason of his
domicile or residence or any other criteriaof similar nature.
As per section 2(29A) “liable to tax”, in relation to a person, means
that there is a liability of tax on such person under any law for the time
being in force in any country, and shall include a case where subsequent to
imposition of tax liability, an exemption has been provided.munotes.in

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17For this purpose "income from foreign sources"means income
which accrues or arises outside India (except income derived from a
business controlled in or a profession set up in India) and which is not
deemed to accrue or arise in India .
Thus an individual, who does not satisfy any of the two conditions
given in section 6(1) but has Indian income of more than Rs 15 lakh and
who is not liable to pay tax in any other country or territory by reason of
his domicile or residence or any other criteria of similar n ature, individual
shall still be a resident in India u/s 6(1A) for that particular assessment
year.
2.3.3 Resident and Ordinarily Resident [R & O R ]
Status of an individual, who is a resident of India within the
meaning of section 6(1) or 6(1A), will be further classified under section
6(6) whether or not such individual will be a resident and ordinarily
resident of India in that previous year.Section 6(6) provides that following
will be treated as Resident and Ordinarily Resident [R & O R ] in India in
any previous year: -
A.an individual, who
(a)has been a resident of India in two out of ten previous years
immediately preceding that previous year AND
(b)wasin India for a period or periods amounting in all to730 days or
more during the seven previous years preceding that previous
year.
B.a citizen of India, or a Person of Indian Origin (PIO), having total
income, other than the income from foreign sources, exc eeding 15
lakh rupees during the previous year, who has been in India for a
period or periods amounting in all to 180 days or more.
2.3.4 Resident and Not Ordinarily Resident [R & NOR]
As per section 6(6),Resident and Not Ordinarily Resident [R &N
O R ] will include the following : -
A.an individual who
(a)has been a non -resident in India in nine out of the ten previous
years preceding that year, or
(b)has during the seven previous years prece ding that year been in
India for a period of, or periods amounting in all to729 days or
less;
B.a citizen of India, or a Person of Indian Origin (PIO), having total
income, other than the income from foreign sources, exceeding 15
lakh rupees during the pre vious year, who has been in India for a
period or periods amounting in all to 120 days or more but less than
180 days; ormunotes.in

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18C.a citizen of India who is deemed to be resident in India under section
6(1A).
2.3.5 Non-Resident
Any person,who is not a resident in India for any previous year,
will be a non -resident in India for that year. Accordingly : -
1.An individual who does not satisfy any of the two basic conditions u/s
6(1) will be non -resident although such person may satisfy the two
additional condition s u/s 6(6).
2.An Indian citizen or PIO who has total income from domestic sources
of Rs 15 lakh or less , irrespective the number of days of his stay in
India will be a non -resident unless such person is covered u/s 6(1).
3.An Indian citizen or PIO who has income from domestic sources of
more than Rs 15 lakh but who is in India for 119 days or less.
2.3.6 The above provisions are summarised in the table below:StatusConditionsAny individual satisfying any one of the conditionsof stay in India under section 6(1) viz.
182 days or more during the relevant previous
year or
365 days or more in 4 previous years prior to that
year and additional stay of 60 or 182 days in the
relevant previous yearAn Indian citizen or PIO
who has total income from domestic sources ofmore than Rs 15 lakh and
who is in India for 120 days or more.Resident of IndiaAn Indian citizen or PIO
who has total income from domestic sources ofmore than Rs 15 lakh and
who is not liable to pay tax in any other country
or territory by reason of his domicile or residence
or any other criteria of similar nature.Resident
and Ordinarily
ResidentAnyindividual who satisfies
either of the two conditions under section u/s
6(1)and
both of the additional Conditions under sectionu/s 6(1).munotes.in

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19An Indian citizen or PIO
who has income from domestic sources of more
than Rs 15 lakh and
who is in India for 180 days or more.Any individual
who satisfies either of the two conditions under
section u/s 6(1)but
does not satisfy one or both of the additional
conditions under section 6(6)An Indian citizen or PIO
who has income from domestic sources of more
than Rs 15 lakh and
who is in India for a period of 120 days to 179
days;Resident but Not
Ordinarily
ResidentAn Indian citizen who is
having Indian income of more than Rs 15 lakh
and
not liable to pay tax in any other country or
territory by reason of his domicile or residence or
any other criteria of similar nature.Any person
who does not satisfy any of the two basic
conditions under section 6(1).
Satisfying the two additional conditions
irrelevant.An Indian citizen or PIO
who has income from domestic sources of Rs
15 lakh or less , irrespective the number of days
of his stay in India
unless covered u/s 6(1)Non-ResidentAn Indian citizen or PIO
who has income from domestic sources of more
than Rs 15 lakh but
who is in India for 119 days or less.
2.3.7 Some Important points
(a)The day on which a person arrives in India and the day of departure
out of India both will be counted in computing the number of days
of stay ‘in India”even if such person may be in India only for a part
of the day.munotes.in

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20(b)Stay may be at one or more places.
(c)Stay in India may be continuous or in intervals.
(d)Stay at different places or intervals will be aggregated.
(e)A person, who is in India for 182 days or more, will always be a
resident of India.
(f)Conversely, a person, who is in India for 59 days or less, will alw ays
be Non -Resident of India.
(g)An Indian citizen must leave India for employment or as crew in a
ship to avail extended limit of 182 days instead of 60 days.
(h)The extended limit of 182 days is not available to
a.non-citizens,
b.Indian citizens leaving India for any other purpose such as
medical treatment , pilgrimage, tourism etc.
(i)Indian citizens or persons of Indian origin( PIO)
a.must come to India on visit for any purpose –pilgrimage,
medical treatment or tourism
b.but NOT business or job to avail extende d limit of 182 days
c.Indian citizenship is not the requirement for this purpose.
(j)In computing days , leap years in 2008, 2012, 2016 and 2020with
one extra day February.
(k)the extended limit of 120 -180 days available only to Indian citiz ens
or persons of Indian origin( PIO) with Indian total income of Rs 15
lakh or more,
(l)Indian citizens having Indian total income of Rs 15 lakh and liable
to tax will be only considered as Resident and Not Ordinarily
resident.
2.3.8 Illustrations
1)Rajes h leaves India for the first time on December 20, 2010. During
the financial year 2020 -21 he came to India on May 27,2020 for a period
of 45 days. Determine his residential status for the assessment year 2021 -
22
Solution
During the previous year 2020 -21, Rajesh is in India only for 45
days He does not satisfy any of the basic conditions laid down in section
6(1). Hence, Rajesh is a non -resident in India for the assessment year
2021 -22.
2)Mahesh comes to India, for the first time, on April 16, 2018. He
stays in Chennai up to April 29, 2019 and thereafter shifts to Mumbai. He
departs from Mumbai for his native country on October 5, 2020.
Determine his residential status for the assessment y ear 2021 -22munotes.in

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21Solution
Mahesh is in India for more than 182 days* d uring the previous
year 2020 -21. He satisfies the first basic condition under section 6(1).
Hence, he is a resident of India.
(*April 30+May 31+ June 30+ July 31+ August 31+ Sep t 30 +Oct. 5)= 188
days
Mahesh was in India for 350 days from 16 -04-2018 to 31 -03-2019
during the previous year 2018 -19 and 366 days during the previous year
2019 -20 (leap year). He was resident of India for these two years. Hence,
Mahesh satisfies the first additional condition under Section 6(6) of being
a resident of India in at least two year out of the ten preceding years.
Since he was in India only for a period of 716 days only i.e. 351
days (2015 -16)+ 365 days (2016 -17), which is less than the prescribe
period of 730 days’ stay required in the seven preceding years, he does not
satisfy the second additional condition as per Section 6(6).
Mahesh satisfies one of the basic conditions and only one of the
two additional conditions, he is, therefor e, resident but not ordinarily
resident in India for the assessment year 2021 -22
3)Determine residential statusof Udit, an Indian Citizen who leaves
India for employment in Canada on July 2, 2020for assessment year
2021 -22.
Solution
Udit is an Indian ci tizen. During the previous year 2020 -21 he was
in India for 93 days*
( * April 30+ May 31+June30+ July 2=93 days)
Uditwas in India for more than 365 days during the 4 years
preceding 2020 -21. Sincehe left India to take up job in Canada, he will
get the extended limit of 182 days’ stay under section 6(1)(b).
Udit does not satisfy the first condition of stay in India for 182
days nor the second condition of stay in India for more than 365 days and
extended stay of 182 days during the previous year 2020 -21.Hence,Udit
will be a Non -resident.
4)What will be the position in the above case, if Udit leaves India for
world tour?
Solution
Udit will be Resident and Ordinarily Resident of India as he
satisfies the second basic condition u/s 6(1)(b) of 365 days’ stay in the
preceding four years and 60 days stay during the previous year 2020 -21.
He also satisfies both the additional condition under section 6(6), as beingmunotes.in

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22a person born in India, of being resident in India for two years in
preceding 10 years and st ay of 730years in seven preceding years.
5)What would be the last date upto which Uditshould leave India?
Solution
Udit is covered by the exception, he should depart latest by
September 28, 2020 so that his stay in India during the previous year
2020 -21is of 181* days (less than 182 days).
*(April 30+May31+June30+July31+ July 28=181)
6)Will the residential status change in the above case if Udit is a
Nepali citizen settled in India?
Solution
Uditwill not be get the extend limit of stay for 182 days under
section 6(1)(b) as he is not an Indian citizen. He satisfies the basic
condition and both the additional conditions under section 6(6) of 730
days in 7 preceding years and 2 years resident in preceding 10 years, he
will be a resident and ordinary resident in India
7)Bret Lee an Australian Citizen plays for Mumbai Indians Indian
Premier League (IPL) since 2016 -17. For all the five years he has been
coming to India every year for a period of 95 days.Determine his
residential status for assessment year 2021 -22.
Solution:
Bret Lee was in India for 95 X4=380 days (which is more than 365
days) during the 4 years preceding2020 -21 and 95 during the financial
year 2020 -21, which is more than 60 days. Lee is not a person of Indian
origin nor he comes in India on visit. He is not eligible for extended time
limit of 182 days. Hence, he satisfies the second basic condition under
section 6(1)(b). He is Resident in India.
However, in none of the 4 years his cumulative stay for preceding
4 years exceeds 365 days. He is not a resident for at least two years out of
previous 10 years nor he was in India for 730 days during the preceding 7
years.
He does not satisfy any of the additional two conditions under
section 6(6).Hence, he will be Resident but not Ordinarily Resident of
India [RN OR] for the Assessment Year 2021 -22
8)Will the position be different ifBret Lee is a resident of Bangladesh?
Solution
Since Lee comes to India for carrying on his vocation not on visit
but, he will not get the advantage of extended stay of 182 days. He will bemunotes.in

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23Resident but not Ordinarily Resident of India [RNOR]although
Bangladesh was part of undivided India.
9) Will the above position change If Lee is a Pakistani citizen and
visits India as a tourist?
Solution
Pakistan is part of undivided India; hen ce Lee will be a PIO
eligible for the extended limit of 182 days. Hence, he will be Non -
resident.
2.3.9 Residential status of HUF
2.3.9.1 Resident
Under section 6(2), a Hindu Undivided Family (HUF) will be
resident of India if control and management of its affairs is wholly or
partly situated in India and will be Non -resident in India only if control
and management of its affairs is situated wholly outside India .
2.3.9.2 Resident and Ordinarily resident (ROR)
Under section 6(6) , a HUF can will be Resident and Ordinarily
Resident if its Karta or manager satisfies both of the following two
conditions viz.the Karta or the manager : -
(a)has been a non-resident in India in 9 out of the10 previous years
preceding that year, and
(b)has during the 7previous years preceding that year been in India for a
period of, or periods amounting in all to 729 days or less
It may be noted that additional conditions are same as those
applicable to the individual but applicable on the Karta or the manager of
aH U F .
2.3.9.3 Resident and Not Ordinarily resident (ROR)
If the Karta does not satisfy both of the two additional conditions,
the HUF will be treated as a resident but not ordinarily
resident (RNOR)in India
2.3.9.4 Non-Resident
A HUF will be non-resident in India ONLY if control and
management of its affairs is situated wholly outside India
It is important that place of control and the management of HUF i s
relevant to determine whether the HUF is Resident or Non -Resident.
To determine ROR status the two additional conditions under
section 6(6)will be applicable with reference to its Karta or Manager.munotes.in

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242.3.9.5 Summary
Like an Individual a HUF may be eit her:-
(a)Resident and ordinarily in India if control or management iswholly or
partly in India or
(b)Non-resident in India if its control or management is wholly outside
India.
(c)Resident and ordinarily in India if two additional conditions are
satisfied as p er section 6(6) by the Karta / Manager.
2.3.10 Residential Status of Other Non-Company Persons
2.3.10.1 Resident
Under section 6(2), residential status of all non -company persons
viz a firm an Association of Persons (AOP) or a Body of Individuals
(BOI) and every other person also depends upon the place of control and
management like HUFs.
Any such person will be:
Resident in India if control and management of its affa irs is wholly
or partly situated in India, ;
non-resident in India if control and management of its affairs is
situated wholly outside India.
2.3.10.2 Non-Resident
An AOP, BOI or a firm will be resident in India, if control and
management of its affa irs is situated partly or wholly inIndia.
Any such entity shall be non -resident in India if control and
management of its affairs is situated wholly outside India. any such entity
These persons can only be either resident or non -resident but not
ordinari ly resident.
“Place of control and management”means the place, where
decision making of the entity as a whole is situated. “Control and
management means de facto (actual) control or management; not merely
the right to control or manage.
2.3.10.3 Illustrations
11) What will be the residential status of an entityXYZ, which operates
India on the instructions from London either wholly or partly if XYZ is (a)
HUF b) AOP c) BOI ord) Artificial juridical person?
Solution
De facto control of XYZ will be situated in London if it receives
instructions wholly from London and XYZ will be non -resident in all the
cases.munotes.in

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25However, de facto control of XYZ is only partly from London,
itwill be Resident and Ordinarily Resident in India.
12) What wil l be the status in the above cases if XYZ is wholly
controlled from Mauritius ?
Solution
De facto control of XYZ will be situated in Mauritius, it will be
non-resident in all the cases.
3.1.Residential Status of a Company
Under Section 6(3), acompany will be resident of India in any previous
year, if —
(i)it is an Indian company; or
(ii)itsPlace of Effective Management (POEM), in that year, is in
India.
"Place of effective management" means a place where key
management and commercial deci sions that are necessary for the conduct
of business of an entity as a whole are, in substance made.
Following important points emerge out from the above: -
1Residential status of a company depends on the place of its registration
and the place of its cont rol and management.
2An Indian company will be residentof India irrespective of the place
where its control or management is situated.
3Any other company( i.e. a foreign company ) will be a resident in India
if place of effective management (POEM) ) of such company is
situated in India.
4A foreign company will be non -resident if place of effective
management (POEM) ) of such company is situated outside India.
The legal provisions are summarised in the following table.
Company Status
Indian company irrespective of POEM Resident
Foreign company if POEM situated in India Resident
Foreign company if POEM situated outside India Non resident
3.2.Illustrations
13) What will be the residential status of X L td.an Indian company
managed from India?
Solution
X Ltd. being an Indian company will be Resident in India. Place
of management is immaterial.munotes.in

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2614) What will be the residential status of Y L td.an Indian company
managed from London?
Solution
Y Ltd. being an Indian company will be Resident in India . Place
of management is immaterial .
15) What will be the residential status of T L td.a British company
managed from India?
Solution
T Ltd. will be resident in India as its POEM is situated in India.
16)What will be the residential status of U Inc.a US Company managed
from London?
17) What will be residential status of U Inc. managed fully from New
York.
Solution
U Inc. will be Non -resident in India as its POEM is wholly situated
outside India.
3.3.Miscellaneous
Following points are noteworthy:
1.Residential status of a person is independently determined for each
previous year.
2.Residential status of a person may chang e from previous year to
previous year.
3.A person may have different residential status for different assessment
years. E.g. A takes up a job in UK for two years and thereafter he
comes back. It is possible that he may be non -resident for those two
years and resident for other years.
4.It is not necessary that a person, who is “resident” in India, will
necessarily be non -resident in all the other countries for the same
assessment year. A person may be “resident” or non -resident in two or
more countries in a particular year or “resident” in one or more
countries and non -resident in other county or countries as per
respective laws of the concerned countries.
In the modern times, this may be particularly true of a person changing
countries from time to time because of business or vacation etc. and he
may not fall in any category of residents anywhere in the world. Section
6(1A) inserted from A.Y. 2021 -22 deals with such situation and deems a
PIO as R &NOR in certain cases.munotes.in

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275.AsSection 6(5)]if a person is a resident for one source of income in a
previous year, he shall be deemed to be a resident for all other sources
of income.
2.4 RESIDE NTIAL STATUS A NDINCIDENCE OF TAX
Section 5 defines the scope of total income of an assessee, which
would be chargeable to tax. It depends upon: -
The residential status of a person, and place and time of accrual of
such income. Provisions of thesection are explained below: -
4.1.Scope of total income for a Resident
Under section 5(1), total income of any previous year of a person
who is a resident includes all income from whatever source derived
which —
(a)is received or is deemed to be received in India in such year by or on
behalf of such person ; or
(b)accrues or arises or is deemed to accrue or arise to him in India during
such year ; or
(c)accrues or arises to him outside India during such year.
4.2.Person not ordinarily resident in India
The section provides that total income of a person who is not
ordinarily resident in India within the meaning of section 6(6) shall not
include the income which accrues or arises to him outside India unless it is
derived from a business controlled in or a profession set up in India. Thus
the Income of such person shall include the following income from
whatever source derived which —
(a)is received or is deemed to be received in India in such year by or
on behalf of such person ; or
(b)accrues or arises or is deemed to accrue or arise to him in India
during such year ; or
(c)accrues or arises to him outside India during such year if such
income is derived from a business controlled in or a profession set
up in India.
4.3.person who is a non -resident
As per section 5(2),total income of any previous year of a person
who is a non -resident includes all income from whatever source derived
which —
(a)is received or is deemed to be received in India in su ch year by or on
behalf of such person ; ormunotes.in

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28(b)accrues or arises or is deemed to accrue or arise to him in India
during such year.
Thus ,total income of a non -resident shall not include income,
which accrues or arises to him outside India.
4.4.Important points
Following are some important points with regard to the scope of
total income as per the provisions of section 5: -
(a)Incidence of tax on a taxpayer depends on: -
his residential status, and
the place and time of accrual or receipt of income
(b)Income accruing or arising outside India shall not be deemed to be
received in India by reason only of the fact that it is considered in a
balance sheet prepared in India.
(c)Income which has been included in the total income of a person when
it accrues or ar ises or is deemed to have accrued or arisen to him shall not
again be so included when such income is received or deemed to be
received by him in India.
(d)Indian income will be included in the income of every person
regardless of his residential status whether resident, non -resident, or R &
ORor R & NOR.
Indian income means : -
Income received or deemed to be received in India and such income
is also accr ued or arisen or deemed to be accrued or arisen in India;
Income received or deemed to be received in India but accrued or
arisen outside India; or.
Income received outside India but accrued, arisen, or is deemed to
accrue or arise in India .
(e) “Foreign in come” means income which is not Indian Income i.e.
Income not received, accrued or arisen in India nor deemed to be received,
accrued or arisen in India. Taxability of foreign income will be as under : -
Foreign income is not included in the total income of a non -resident,
Foreign Income is included in the total income of a resident and
ordinarily resident.
Foreign income will not be included in the total income of a resident
but not ordinarily resident (RNOR) unless such income is derived
from:
(a)a busine ss controlled in India or
(b)a profession set up in India.munotes.in

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29Non-business foreign income will not be included in the income of
a person who is resident but not ordinarily resident in India.
Thus foreign income taxable only by a ROR and conditionally by RNOR.
(f) Residents will be liable in respect of all income Indian or foreign
but Non -residents only for Indian income.
The Scope of total income is summarised as follows:Scope of Total Income –Section 5StatusIncomeResident &
Ordinarily
ResidentResident & Not
Ordinarily ResidentNon ResidentIndian incomeTaxableTaxableTaxableForeign incomeTaxableTaxable if income
is from
a business
controlled
from India or
a profession
set up in IndiaNot Taxable
2.5 INCOME DEEMED TO BE RECEIVED I NINDIA
As per Section7, following income will be included in the total
income even if such income is not actually received in India:
1.Annual accretion to the credit balance of an employee in the case of
recognized provident fund to the extent provided under rules
2.Excess contribution of employer in the case of recognized provident
fund to the extent as provided in the rules.
3.Transfer bala nce to a recognized provident fund from unrecognized
provident fund to the extent as provided under the rules.
2.6 INCOME DEEMED TO ACCRUE OR ARISE I N
INDIA
Under Section 9, which is a deeming section, following incomes
shall be deemed to accrue or arise in India although such incomes may
actually accrue or arise outside India:
1.All incomes accruing or arising whether directly or indirectly through
or from -
a.Anybusiness connection in India or
b.Any property in India or
c.Any asset or any source of income in India or
d.The transfer of a capital asset situated in India.munotes.in

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30Exceptions: No income is deemed to accrue or arise in following cases:
I.Purchase of goods India by a Non -resident for export
II.Collection of news by a non -resident running a new agency, or
publishing newspapers, magazines or journals
III.Shooting of film in India by a non -resident foreign citizen
individual or a company or firm in which no Resident Indian
citizen is a partner or shareholder
IV. Indian Income to be taken pro rata if all operations of a business
not carried in India
Explanation: ” business connection” includes a person, who –
I.holds or habitually exercises holds an authority to conclude contract
on behalf of the non -resident, except for purchase of goods or
merchandises
II.has no such authority but maintains stock of goods and merchandise in
India, from which he regularly delivers stock or merchandise on behalf
of the non -resident.
III.Secures orders in India for the non -resident and other non -resident,
controlling, controlled by or subject to the same common control as
that of non -resident.
However, there will be no business connection as above if a non -
resident carries on a busi ness through a broker, general commission agent
or any other agent of independent status, acting in ordinary course of
business.
For this purpose, a broker, general commission agent or an agent
shall be deemed to be of an independent status if he does not work mainly
or wholly on behalf of the non -resident.
Further, no income deemed to accrue or arise in India to a foreign
mining c ompany (FMC) through or from the activities which are confined
to display of uncut and unassorted diamonds in a Special NotifiedZone
2.“Salary” earned or salary payable for services rendered inIndia
including salary paid for the rest period or leave period preceded and
succeeded by services rendered in India and forms part of service
contract of employment.
3.Salary received by Indian national from the government in respect
of services rendered out of India. However, any allowance or any
perquisite paid abroad is fully exempt from tax under section 10(7).
4.Anydividend paid by an Indian company outside India.
5.Interest payable by: -
a.Government or a resident person, unless such interest is payable in
respect of borrowed funds used for a business or profession carr ied outmunotes.in

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31of India, or by a non -resident person on funds borrowed for the
business or profession carried in India.
b.the permanent establishment in India of a non -resident assessee
and engaged in the business of banking in India to such resident or its
head office or any permanent establishment or any other part of such
non-resident outside India.
6.Royalty payable by the government or a resident person unless such
royalty is in respect of any right of property or services utilised for a
business or professi on carried out of India for the purpose of earning
any income out of India or by a non -resident person in respect of any
right of property or services utilised for the purpose of business or
profession carried in India or for the purpose of earning any inc ome in
India.
Exception:
(i)Royalties payable for the transfer of any data, drawings, etc.
outside India or imparting of information outside India under an
approved agreement by the Central Government made before the
1st day of April, 1976.
(ii)Royalties paid In lump sum, by a resident for transfer of computer
software, supplied by a non -resident along with the computer or
computer -based equipment under a scheme duly approved by
Government of India.
7.Fees for technical services payable by the gove rnment or a resident
person unless such fees are payable in respect of services utilised in a
business or profession for earning any income out of India or by a non -
resident person for services utilised in a business or profession carried
on by him in Indi a or for earning any income from any source in India.
Exception: fees are payable under agreement made before the 1st day of
April, 1976 and approved by the Central Government.
The income of a non -resident is deemed to accrue or arise in India
under any of the above clauses, shall be included in the total income of the
non-resident, whether or not, the non -resident has -
(i)a residence or place of business or business connection in
India; or
(ii)has rendered services in India.
Eligible Fund Managers in India wi ll however not to constitute business
connection of offshore funds as per an exception inserted vide Section 9A.
2.7RECEIPT VS. REMITTA NCE
The “receipt” of income refers to the first occasion when the
recipient gets the money under his control. Once an amount is received asmunotes.in

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32income, any remittance or transmission of the amount to another place
does not result in “receipt” at the other place.
2.8ACTUAL RECEI PT VS. DEEMED RECEIPT
It is not necessary that an income should be actually received in
India in order to attract tax liability. An income deemed to be received in
India in the previous year is also included in the taxable income of the
assessee. The Act enumerates the certain incomes which were dealt with
earlier. E.g. If a resident holds an immovable property in Delhi and the
rent received thereon is transferred to his bank account in Mauritius, the
rent would still be subject to income tax though the i ncome has not been
received in India.
2.9 RECEIPT VS. ACCRUAL
Income is said to be received when it reaches the assessee; when
the right to receive the income becomes vested in the assessee, it is said to
accrue or arise.
2.10 BASIS OF CHARGE FOR DIVI DENDINCOME
Dividend is the shareholders’ share in the profit of the
company.Under the companies Act, 2013, dividend can be declared by a
company only at its Annual General Meeting (AGM). Hence, date of
AGM is the date on which dividend is declared.
Dividend declared at the AGM is popularly called the final
dividend. Dividend upon its declaration at the AGM become final and
can not be reduced or called back.
Interim dividend is dividend declared by the Board of Directors
during the year between two A GMs and hence the same can be reversed or
reduced later.
Accordingly, as per section 8 final dividend is deemed to be the
income of the previous year in which it is declared irrespective of the fact
when it was received by the shareholder.
However, inter im dividend will be deemed to be the income of the
previous year in which the amount of such dividend is unconditionally
made available by the company to a shareholder irrespective of the date of
declaration of interim dividend.
Deemed Dividend under S ection 2(22) is deemed to accrue or arise
in the year in which it was paid or distributed.munotes.in

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33In view of the express provisions regarding its taxability of
dividend, the method of accounting dividend is not relevant.
This can be summarised as follows:TypeDate of chargeabilityFinal DividendDate of declarationInterim DividendDate of distributionDeemed dividendDate of Distribution
Illustration
10) Determine the sco pe of total income in respect of the following
incomes if the assessee is (1) resident or (2) resident and ordinarily
resident or (3) resident but not ordinarily resident:
Income Rs
Interest from U.S. Growth Bonds received in India 10,000
Interest from U.S. Growth Bonds received in U.S. 60,000
Interest from U.S. Growth Bonds received in U.S but remitted
to India60,000
Capital gain on house in Mumbai but sold in London 60,000
Capital gain on house in Mumbai but sold in Mumbai 60,000
Rent of a villa in Paris received in Paris 60,000
Rent of a villa in Paris received in Paris 60,000
Agricultural Income from Tea Gardens in Sri Lanka received in
Sri Lanka60,000
Agricultural Income from Tea Gardens in Sri Lanka received in
Mumb ai60,000
Profit from a Branch in Sydney 60,000
Profit from a branch in Mumbai 60,000
Salary for working in Jaipur received in Jaipur 60,000
Salary for working in Jaipur received in Lahore 60,000
Salary for working in Lahore received in Jaipur 60,000
Salary for working in Lahore received in Lahore 60,000munotes.in

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34Solution
Particulars R&OR R&NOR NR
Interest from Uncle Sam Bonds U.S.A.
received in India60,000 60,000 60,000
Interest from Uncle Sam Bonds U.S.A.
received in U.S60,000 ___ ___
Interest from Uncle Sam Bonds U.S.A.
received in U.S but remitted to India60,000 ___ ___
Capital gain on house in Mumbai but
sold in London60,000 60,000 60,000Capital gain on house in Mumbai andsold in Mumbai60,000 60,000 60,000
Rent of a villa in Paris received in Paris 60,000 ___ ___
Rent of a villa in Paris received in
Mumbai60,000 60,000 60,000
Agricultural Income from Tea Gardens
in Sri Lanka received in Sri Lanka60,000 ___ ___
Agricultural Income from Tea Gardens
in Sri Lanka received in Mumbai60,000 60,000 60,000
Profit from a Branch in Sydney 60,000 60,000* __
Profit from a branch in Mumbai 60,000 60,000 60,000
Salary for working in Jaipur received in
Jaipur60,000 60,000 60,000
Salary for working in Jaipur received in
Lahore60,000 60,000 60,000
Salary for working in Lahore received
in Jaipur60,000 60,000 60,000
Salary for working in Lahore received
in Lahore60,000 60,000 60,000
Total 9,00,000 6,60,000 6,00,000
*if controlled from Indiamunotes.in

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352.11 HEADS OF I NCOME
11.1.Classification of income
An assessee is liable to pay tax on his total income from all the
source of incomee.g. salary, interest, rent etc.Each source of incomehas its
own unique nature a nd features. Hence, the Act prescribes elaborate rules
and methods for computation of income from each such source.To begin
with section 14 classifies the sources under five broad heads of income,
viz:-
1) Salaries (Section 15 –17);
2) Income from house p roperty (Sections 22 –27);
3) Profits&gains from business or profession (Sections: 28 -44);
4) Capital gains (Sections 45 –55); and
5) Income from other sources (Section 56 –59)
11.2.Importance of different heads
Each head of income provides a different sche me of computation
of taxable income under that head depending upon the nature of income
and the complexities attached with that head of income. For this reason,
each of the head of income has its own deeming provisions and provisions
for exclusions and ded uctions and deductions of expenses etc.
It is therefore, necessary that an income belonging to a specific
head must be computed under that head only. If an income cannot be
placed under any of the first four heads, it will be taxed under the head
“Incom e from other sources”.
Aggregate of net income under various heads gives total income of
the assessee person, from which deductions are made under chapter VIA.
The net result is called the total income or sometimes taxable income.
Therefore, computation of income under different heads provides the
starting point of determining the tax liability.
11.3.Heads to be mutually exclusive
All the heads of income are mutually exclusive. Any income
considered under a particular head of income e.g. Income from house
property, will not be taken into consideration for another head e.g. profits
and gains from business and profession and vice vers a. Sometimes, it may
not be possible to have water -tight compartmentalization because of the
nature of the income. In such cases the income is classified under the most
plausible head of income or as the residual income under the head income
from other sou rces.
Illustration
11) Under which head would the income of 3 offices, which are
compositely let out on rent by alongwith services like intercom, security
guard, telephone connection, furniture and fixtures, etc. of Swayam will
be taxable ?munotes.in

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36Solution
The r ent in respect of the commercial property is taxableunder the
head “Income from House Property”. However, income arising out of
rentals of the other services should be taxable under the head “Income
from Other Sources”. Alternatively, the entire income ari sing out of the
property as well as the services could be taxable as “Income from
Business or Profession”
As per departmental clarification, the income in respect of
properties should be taxed as “Income from House Property” and the
income out of rentals of the other services is taxable under the head
“Income from Other Sources”.
11.4.Tax on aggregate income under all the heads
Although the income is computed under five different heads of
income, tax will be computed on the aggregate or total income from all t he
sources taken together at the prescribed rates. However, different tax
treatment is given to different items. For instance, long -term capital gains
(LTCG) are generally taxed at 20%. But LTCG on listed securities is
exempt from tax subject to some cond itions. Similarly, short -term capital
gain on sale of equity shares is taxed at 15%. The amount of such short -
term capital gains would be deducted from the aggregate total income and
accordingly tax rates are applied. Similarly, shipping companies are tax ed
based on tonnage of the shipping fleet. Lotteries, horse races , Income
from undisclosed sources cash credits etc. are taxed at the maximum rate
of tax @ 30% All such incomes are excluded and tax is computed on rest
of the total income.
11.5.Common residen tial status for all the heads
Section. 6 provides that where a person is resident for the purpose
of any particular head of income, he will also be considered as resident for
the purposes of computation of income under all the heads of income.
11.6.Separate sources of income under one head.
Income is classified for each head of income. That head of income
may have different sources of income falling under that head. For instance
a person may be in receipt of his salary from more than one employer or
rent from two or more house properties or more than one business. All
such sources will be clubbed together to arrive at the income from that
head.
11.7.Expenses under each head of income
There are different provisions for allowing expenses under each
head of income. The recent trend Is to restrict and standardize the
allowance of expenditure. For instance only professional tax and standard
deductionare allowed under the head salaries. Standard deduction of 30%
for repairs etc. is allowed from the income f rom house property. Similarly
cost of acquisition and improvement and transfer expenses are allowed
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3711.8.Expenditure incurred in relation to income not includible in
total income
Section 14A provides that no deduction shall be a llowed in
respect of expenditure incurred by the assessee in relation to exempted
income that is the income which does not form part of the total income
under this Act
2.12 SELF ASSESSME NT QUESTIO NS
1.Why determination of residential status is important t o ascertain the
income tax liability?
2.Explain the legal provisions in respect of residential status of an
individual.
3.Briefly state the provisions for determination of the residential status
of an (a) AOP (b) Firm (c) Company.
4.What is meant by the control and management of business?
5.When the income is deemed to accrue or arise or be received in India?
6.Explain that the incidence of income -tax depends upon the residential
status of an assessee”.
7.Determine whether the following is true or false:
a.The business income received by X Ltd. an Indian company in
New York is foreign income of X.
b.The dividend received from a foreign company in India is Indian
Income
8.Write short notes on the following:
a. Income received in India
b. Income deemed to accrue o r arise in India
c. Control and management of a business
9.Enumerate various heads of income.
10.State with reason that an Income be computed under two heads of
income.
11.How are the different heads mutually exclusive?
12.Would expenses in respect of collection of d ividend be deductible
from income from other sources?
13.Ascertain residential status for the assessment years 2021 -21 and
2020 -21 of Greg, an Australian citizen, came to India as a
commentator during the following period:munotes.in

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38From To Purpose
10.2. 2019 20-04-2019 World Cup
6-10-2019 25-12-2019 England Tour
04-01-2020 12-01-2020 Training Camp
02-03-2020 29-03-2020 Triangular Cup
Greg was in India for 340 days in four previous years from 2014 -15 and
2018 -19 and 260 days in three previous years from 2011 -12 to 2013 -14 .
(Ans: 2021 -22 Non -resident, 2020 -21-R but RNOR)
14.Determine the residential status of Parthiv ,who made hi s debut in
international cricket on 11 -03-2019. In the first match, he was
injured and had to be hospitalized. In U.S. He was discharged from
the hospital on 29 -03-2020. He returned to India took over as coach
for Indian cricket team visiting Pakistan. .P arthiv submits the
following details of his stay outside India :
From To Purpose/ Place
10-042020 28-04-2020 World Cup in Dhaka
03-05-2020 09-07-2020 England Tour
27-08-2020 10-09-2020 Canada Tour
11-09-2020 01-10-2020 US holidays
04-01-2021 26-03-2021 Pakistan Tour
(Ans: Non -Resident)
15.Ashok, an Indian citizen, leaves India on May 22, 2019 for vacation
to Uganda and returns on April 9, 2020. Determine the residential
status of X for the assessment year 2021 -22-19?(Ans: Non -Resident)
16.Determ ine the residential status for the assessment year 2021 -22, of
Sheila, a foreign citizen , who visits India since 1985 every year for
a period of 100 days
(Ans: Non -Resident )
17.Fletcher, a foreign citizen comes to India, for the first time on March
20, 20 18 On September 1, 2018, he leaves India for Nepal on a
business trip. He comes back on February 26, 2021 to permanently
stay in India . Determine the residential status of X for the
assessment year 2020 -21 and 2021 -22
( Ans Resident and Not Ordinarily Res ident for both the years )
18.Determine residential status for the assessment year 2021 -22of
Marconi, an Italian citizen, who comes to India for the first time on
May 28, 2019.
(Ans: Resident and Not Ordinarily Resident)munotes.in

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3919.Determine the scope of total income in respect of the following
incomes if the assessee is a (1) resident or (2) a resident and
ordinarily resident or (3) a resident but not ordinarily resident
New York business income controlled from India Rs. 100000
Mumbai Business Controlled from Paris Rs. 40000
Salary in New York as Indian ambassador Rs. 90000
Profit on sale of shop in Kolkata paid in Karachi Rs. 50000
Acting in Indian film –fee received in Rome Rs. 70000
Past untaxed profits remitted to India from London Rs. 120000
(Ans. Resident 350000, R & OR 250000, R& NOR 350000/ past profits
not taxable)
20.Blair, a French Citizen had the following incomes during the year
ended 31 -03-2021. Compute his Total Income for Asst. Year 2021 -
22 if he is a (1) resident or (2) resident and ordinarily resident or (3)
resident but not ordinarily resident.
Income from House property in India Rs. 30000
Income from property in Rome Rs. 20000
Interest from Bank account in India Rs. 2400
Income from business in Bangladesh controlled from India Rs.32000
Interest from Bank account in U.S. Rs. 22000
Salary earned and received in Tokyo Rs. 24000
Income earned and received in London Rs. 26000
Dividend from British Company received in India Rs.34000
(Ans. Resident 19400, R&OR Rs. 98600 R but NOR Rs 66400)
21.Following are the particulars of income of X for the previous year
2020 -21:
i.X is employed in India and receives Rs. 24,000 as salary.
ii.Dividend received in London on June 3, 2020 Rs. 31,000 from a
foreign company;
iii.Share of profit received in London on December 15, 2020 from a
business situated in Sri Lanka but controlled from India:
iv.Rs. 60,000; remittance from London on January 15, 2020 out of
past untaxed profit of 2013 -14 earned and received there: Rs.
30,000 and interest earned and received in India on May 11, 2020
Rs. 76,000.munotes.in

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40Find out his gross total income, if he is (a) resident and ordinarily
resident, (b) resident but not ordinarily resident, and (c) non -resident
for the assessment year 2021 -22
(Ans: R&OR, hi s gross total income will be Rs. 105000i.e. Rs. 24,000
+ Rs. 31,000 + Rs. 60,000 R& N OR Rs. 84,000 i.e., Rs. 24,000 + Rs.
60,000). Non -resident, Rs.24,000.
The remittance from London of Rs. 30,000 is not taxable it is not
“receipt” of income. The inte rest of Rs. 76,000 earned and received
in India is taxable 2015 -16. )


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413
SALARIES
(Sections 15, 16 & 17)
Unit Structure :
3.1 Introduction andObjectives
3.2 Basis of Charge
3.3 Scope ofSalary income
3.4 Tax Treatment of Some Receipts:
3.5 Taxable Value of Cashallowances -
3.6 Taxable Value of Perquisites
3.7 Classific ation of Perquisites
3.8 Valuation of Perquisites
3.9 Profits in Lieu of Salary
3.10 Deductions -Entertainment Allowance, Profession Tax
3.11 Practical Illustrations
3.12 Self-Assessment Questions
3.1 INTRODUCTIO NANDO B J E C T I V E S :
“Salaries” isthefirst and most important of thefiveheadsof
income given in section 14. Concept of “Salaries” u nder the tax laws
is very wide than what is understood in common parlance . It includes
not only the salary but also various other receipts, gifts, perquisite s and
benefits.
The lesson takes up for detailed discussion these provisions
contained in section s15,16 and 1 7. Section 15 defines the basis of
charging salar ies. Section 17 defines salaries and section 16 prescribes
the deductions to be made while comp uting the income under the head
“Salaries”
3.2 BASIS OF CHARGE ,MEA NING
2.1.Basis of charge
Section 15 provides that t he following income shall be chargeable
toincome tax under the head "Salaries" :-
(a) any salary due from an employer or a for mer employer to an
assessee in the previous year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on
behalf of an employer or a former employer though not due or
before it became due to him;munotes.in

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42(c) any arrears of salary p aid or allowed to him in the previous year by
or on behalf of an employer or a former employer, if not charged to
income -tax for any earlier previous year
Explanation 1. —For the removal of doubts, it is hereby declared that
where any salary paid in advance is included in the total income of any
person for any previous year it shall not be included again in the total
income of the person when the salary becomes due.
Explanation 2. —Any salary, bonus, commission or remuneration, by
whatever name called, due to , or received by, a partner of a firm from
the firm shall not be regarded as "salary" for the purposes of this
section.
2.2.Scop e
The scope of section 15 is very wide and covers the following in
the ambit of what is taxable under the head "Salaries :-
1.Pastsalaries or arrears of salaries paid during the previous year ,
if the same has not been taxed anytime in the past.
2.Present salaries whether paid or not.
3.Future salaries or salaries in the nature of advance .However
thesection clarifies that where any salary paid in advance is
included in the total income of any person for any previous
year it shall not be included again in the total income of the
person when the salary becomes due.
4.Salaries received from a former employer of present employer .
The section by way of explanation clarifies that any salary, bonus,
commission or remuneration, by whatever name called, due to, or
received by, a partner from the firm is deemed to be the income under
the head profits and gains from business and professi onunder section
28, and accordingly the same shall not taxable under the head
“salaries”.
2.3.Meaning and Characteristics
Section 15 does not define “salaries ”.Instead, i tonly says past,
present and future salary will be taxable under the head “s alaries” .
Hence, it becomes imperative toascertain with the help of common
practices, tests, norms, yardsticks, criteria and essential characteristics
whether any particular income is ‘salary” or no t.Some of these criteria
are as under :-
1.Employer -emplo yee relationship
In common parlance, s alary means theremuneration paid by
an employer to the employee for rendering personal services to the
employer under an expressed or implied contract for rendering such
services .
Accordingly, the term salary impli esexistence of following
conditions namely :-
a)There are two parties –the employer and theemployee .
b)Theparties have an agreement of employment .munotes.in

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43c)The agreement can be express or implied.
d)Agreement is for rendering of personal services by the
employee to the employer .
e)In consideration of the services rendered, theemploye r makes
payment of remuneration to the employee .
2.Compensation for services rendered :
Salary is paid as a compensation forthe services rendered in
his capacity of anemployee ,notinany other capacity. Remuneration
paid byal a wf i r m tolawyer employee for representing cases of firm’s
clients before the courts , will be salary . But if the lawyer receives fees
from his personal clients for representing them before the courts ,itwill
not be salary but his professional income because he is not an
employee of the clients.
Itwill be true of services rendered by other professionals like
doctors, architects; lawyers, Chartered Accountants etc. to their clients
andthe fee paid by their clients will be professional fees not salary.
3.Nameor form not important
Any remuneration paid as compensation for services rendered
by an employee to his employer will be treated as salary regardless of
name given such as salary or wages or otherwi seso long as -
the relationship between the payer and payee is that of employer
and employee; and
the payment is made as a compensation for the services rendered
by the employee
Section 17 specifically provides that salary includes payment made in
other forms like gift, perquisites etc.
4.Mode of Payment
Salary may be paid in cash or kind.
5.More than One Source
Salary may be from more than one employer .
6.Type of Employment
Salary may be in any capacity like part -time employment or full
time employment.
7.Past, Present and prospective employer
Salary may be received from not just the present employer but also
a prospective employer and in some cases even from a former
employer for example pension received from a former employer.
8.Real int ention to pay
Salary income must be real and not fictitious. T here must exist an
intention oran obligation topay and `receive salary.
9.Subsequent Surrender of Salary not tax -free
Salary is taxed on due basis. A subsequent surrender of salary will
not be tax -free except where an employee surrenders his salary to themunotes.in

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44central government, and then the salary so surrendered will not be
treated as taxable income of the employee.
10.Tax-Free salary
Salary paid as tax-freeis also taxable in the hands of the e mployee,
though contractually income tax on such is borne not by the employee
but by the employer.
11.Time of taxability ;
Salary is taxable in the year of receipt or in the year of earning or
accrual of the salary income, whichever is earlier .Therefor e, method
of accounting employed by the employee is not relevant to determine
the taxability of salary. Taxability of salary in different situations will
be as under :
Current salary will be taxable on accrual basis ,as it will be
payable later.
Past salaryo r arrears will be taxable ,when they are actually
received, if they were not taxed earlier.
Advance salary will be taxable at the time of receipt, butit will
not be taxed again when it is accrued.
12.Salary received by individuals only
Only an indiv idual can earn salary because it is a compensation for
personalised services . Other persons such asfirm, HUF ,compan y,
AOP, BoI, Artificial Juridical Person (AJP) or a body corporate cannot
earn salary as they are incapable of rendering personal service .
13.Voluntary payments taxable as salary
Voluntary payments like gift by an employer to an employee also
form the part of taxable salary as per section 17.
14.Salary in respect of services rendered in India
Salary leave salary and pension paid outside Indi aincluding salary
paid to Indian diplomats by the Government of India are deemed to
accrue and arise in India under section 9 andare taxable in India
although t he same is exempted u /s 10.
15.Gross salary Taxable
Compulsory deductions from salary such as professional tax,
income tax, employees’ contribution to provident fund, medical
scheme or staff welfare scheme etc. are instances of application of
income. While computing total income, these deductions areadded
back in the net salary received and gross sa lary will be taxable.
3.3SCOPE OF SALARY I NCOME
Section 15defines the scope and basis of taxation of salaries.
Section 17gives an inclusive definition ofsalary.
Salary includes: -
a.Wages;
b.Any Pension or Annuity;
c.Any Gratuity;munotes.in

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45d.Any fees, commissio n, perquisites or profits in lieu of or in
addition to salary or wages;
e.Any advance of salary;
f.Any encashment of leave salary;
g.Annual accreditation to provident fund above the prescribed
limits; and
h.Any amount of credit to provident fund of employee t o the
extent it is taxable.
The term “salary" includes not only the basic salary but also
fees, commission ,bonus, taxable value of cash allowances and
perquisites, retirement benefits, encashment of leave salary, advance of
salary, arrears of salary, va rious allowances such as dearness
allowance, entertainment allowance, house rent allowance, conveyance
allowance ,value of perquisites by way of free housing, free car, free
schooling for children of employees, etc. Tax treatment of all such
receipts is given later in this lesson.
3.4TAX TREATME NTO FC E R T A I NRECEIPTS
3.4.1 Basic Salary
Basic salary is the amount of salary fixed as per the terms of
employment .Itmay be apre-determined fixed sumora graded amount
enhanced by pre -fixed annual increment. Under th egraded system, the
terms of employment fix the salary at say Rs.12000 -300-15000 -500-
20,000. This means that the employee begin shis job with a basic
salary of Rs 12,000 per month. Next year the salary will be raised to Rs
12,300 p.m. after an annual increment of Rs. 300 .The annual
increment will continue tillhereaches level of Rs15,000 p.m.
Thereafter , the annual increment will be Rs 500 per annum till he
reaches level of Rs 20,000 p.m. Once his salary becomes Rs 20,000
p.m. ,his annual inc rement will be frozen .No further increment will
begiven thereafter ,unless he is promoted and placed in other grade.
3.4.2 Fees, Commission and Bonus
Any fees, commission, bonus, or incentive paid or payable to
an employee by an employer is taxable and is included in salary. Such
Commission etc.may be payable as a fixed amount or asa percentage
of turnover or partly fixed and partly as a percentage of turnover.
When commission is based on fixed percentage of turnover achieved
by employee, it is incl uded in basic salary for the purpose of grant of
retirement benefits and for computing, certain exemptions discussed
later
3.4.3 Arrears of salary:
Arrears of salary are taxed on receipt basis, if the same has not
been taxed earlier. However, the employe e will be entitled to claim
relief u/s 89 in respect of such arrears.
3.4.4 Advance Salary:
Salary received in advance is taxable on receipt basis in the
year of receipt .There will be no tax again in the year in which the
salary actually accrues. The em ployee can claim relief under section 89munotes.in

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46in respect of advance salary. It is important to note that salary received
in advance is taxable not advance or loan against salary .For example,
salary for three months is given in advance, it will be taxable whe n
received. But loan or advance is granted against three months’ salaries
will not be taxable.
3.4.5 Gratuity
Gratuity is alump -sum payment to reward an employee for his
past services, on his retirement or termination .Amount received as
gratuity on te rmination is exempt under section 10(10) asunder: -
1Employees of Central or State governments or local authorities
fully exempt
2Employees in a concern covered under the Payment of Gratuity
Act, 1972 isexempt subject to the lowest of the follow ing
amounts :
a.Amount of gratuity received,
b.Rs20,00,000
c.15 days’ salary for every completed or part thereof in
excess of six month s,year of service computed based
onlast salary drawn taking n umerator of 26.
*Completed year of service X 15 days X Last Drawn Salary
26
3Employees in a concern NOT covered under the Payment of
Gratuity Act, 1972 is exempt subject to the lowest of the
following amounts :
a.Amount of gr atuity received,
b.Rs10,00,000
c.Half month’s salary for every completed year of service
inexcess of six months (ignoring the fraction)
computed based on average salary of last 10 months
preceding the retirement.
*Completed year of service *½*Avg Salary for last 10 months
[*Completed year of service includes a year or part thereof in excess of
sixmonths]
Illustrations
1.Ashik, a government servant, retires 1June 2020after 22 years and
9months’ service. Hereceives gratuity of Rs 15,00,000. Determine the
Determine the amount of exemption of gratuity if he was drawing a
basic Salary for 10 months preceding the month of his retirement at Rs
40,000 p.m.
Solution
Since A shik is a government employee, amount received as
gratuity on retirement is fully exempt U/s 10(10).munotes.in

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472.In the above case, what will be the effect if Ashik was working with
ABC Limited, covered under the Payment of Gratuity Act , 1972?
Solution:
Since Ashik is the employee of a private employer ABC
Limited covered under the Payment of Gratuity Act , 1972 ,e xempt
amount will be Rs5,30,769 being theleast of the following:
I. Actual amount received 15,00,000
II. Notified amount 10,00,000
III.15-day’s salary based on last drawn salary
Rs.40, 000* 15/26 *23 ye ars5, 30,769
Taxable 9,69,231
3.In the above case, what will be the effect if ABC Limited isNOT
covered under the Payment of Gratuity Act ,1972?
Solution:
Ashik is the employee of a private employer ABC Limited not
covered under the Payment of Gr atuity Act , 1972 .Exempt amount will
bethe lowest of the following:
I. Actual amount received 15,00,000
II. Notified amount 10,00,000
III.15 -day’s salary based on last drawn salaryRs.40, 000 X (11) = 23*0.5 -fraction ignor ed)4,40,000
Taxable 10,60,000
3.4.6 Commuted Pension
Pension is a regular payment made at monthly or annual
intervals by an en employer to his employee o nhisretirement as a
reward for his past services. When an employee is allowed to forgo a
portion of pension in lieu of alump sum amount called commutation of
pension. Tax treatment of these two kinds of pension as per (Section
10(10A) is as under:
a) Regular payment of pension ,monthly or quarterly or at some
other interval ,periodical o r uncommuted pension is fully taxable in the
hands of all employee s,whether government or non -government.
b)Lump sum payment received by an employee on commutation of
pension as per service rules will be -
i.fully exempt foremployees of the Central or State Gove rnment
or a Local Authority or a Statutory Corporation
ii.partially exempt for other employees to the extent of -
a.One half of the total value of pension If the employee has
not received any gratuity on termination of employment,
and
b.One-third of t he total value of pension ,if the employee ha s
received any gratui ty on termination of employment.munotes.in

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48Illustration s
4.Determine the amount of taxable pension ,if A receives a monthly
pension of Rs 50,000 from the government .
Solution:
Regular m onthly payment o f pension received from
government will be fully taxable.
5.Determine the amount of taxable pension ,if A receives a monthly
pension of Rs 50,000 a private limited company.
Solution:
Regular monthly payment of pension received from
government will also be fully taxable .It is immaterial who the
employer is .
6.A retires from government service on 01-06-2020 . He receives a
pension of Rs 5000 p.m. till 31-12-2020.
On01-01-2021,Aopts for commutation of 40 per cent of the value of
his pension for al u m p sum amount of Rs1,20,000.After
commutation, A gets Rs 3,000 per month being 60% of the total
pension.
Determine the taxability of pension if n o gratuity is paid to A.
Solution:
a)Lump sum amount of Rs. 1,20,000 received on commutation of
pension will beexempt as A is a government employee
b)Regular pension Received during the year 20 20-21Rs 44,000
*will be fully taxable
Period Rate
Rs Per MonthTotal
Pension Rs.
01-06-2020 to 31 -12-20205,00035000
01-01-2021 to 31 -03-2021 3000 9000
44000
7.What will be the position if Ais a private employee?
Solution
Rs. Commutation of Pension
Amount Received on commutation of 40% of salary 1,20,000
Full Value of Pension = 1,20,000 /40% 3,00,000
Amount Received on commutation 1,20,000
½offull value of pension Rs 3,00,000* ½ 1,50,000
Exempted Amount -being the lower of the two 1,20,000
Taxable Amount [1,20,000 -1,20000] NIL
Regular pension of Rs 44,000 will be taxable irrespective of the fact
that A is government employee or a private employee orwhether or
not he is in receipt of any gratuity.
8.Ascertain tax ability ,ifAa l s o receives Rs 50,000 as gratuity .munotes.in

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49Solution:
a.Regular pension of Rs. 4 4,000 fully be taxable in all cases.
b.If A is a government employee, the amount received on
commutation of pension will be fully exempt regardless of the fact
that he also receives gratuity.
c.If A is a non -governmental employee and is in receipt of gratuity
andhe receives Rs 1,20,000 on commutation, he will be entitled to
exemption of Rs 1,00,000 being 1/3of full value of pension (1/3 of
Rs 3,00,000). Balance Rs 20,000 will be taxable .
3.4.7 Encashment of Leave Salary {Section 10(10AA)}
When an employee, instead of enjoying leave at his credit, gets
the same encashed, following tax treatment will be given: -
a.Amount received on encashment of leave during the continuity of
employment byall the employees ,will be taxable in the year of
receipt . However, the employee will be entitled to relie f u/s 89.
b.Amount received on encashment of leave at the time of retirement
by way of superannuation or otherwise, will be -
i.fully exempt in case of an employee oftheCentral or State
Government ;and
ii.Partially exempt in case of any other employee including
employees of a local authority or a statutory corporation to the
extent of thelowest of the following and only the balance will
betaxable: -
i.Actual amount received
ii.Notified Amount currently Rs 3 ,00,000;
iii.10 months ’average salary or
iv.Cash e quivalent of leave to be encashed
i.e. (Leav e Entitlement -Leave Availed) X Average Salary
Other Points
a)Salary for the purpose of calculating the exempt l eave encashment
means total of basic salary, dearness allowance and commission on
sales achieved by salesmen.
b)Average salary means average salary of 10 months immediately
preceding the retirement.
c)Leave entitlement is to be taken at 30days for eachcompleted
year of service. Part of the year will be ignored and not considered
as complete d year of service.
d)If leave is encashed from more than one employer , the exemption
limit will be taken in respect of all the employers.
e)Superannuation means retirement on attaining a certain age e.g . 60
years . Courts have held that termination and even r esignation of the
employee will entitle them to exemption under this section.
f)Leave to the credit of the employee means total leave available as
reduced by total leave availed.munotes.in

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50Illustration
9.Ar e t i r e s from his job with the Government of Maharashtra on 01 -
06-2020after rendering services for 22 years and 9 months .He was
drawing a basic Salary for 10 months preceding the month of his
retirement at Rs 8000 p.m. Under the service rules, Aw a s entitled to 2
months’ leave for every year of service or part th ereof against which A
availed total earned leave of 10 months .On Retirement, A received
Leave entitlement of Rs 2,88,000 i.e. 36 months @ Rs 8000 p.m
worked out as Leave entitlement -23years @ 2 months 46 months for
every year of service or part there ofless-leave availed 10 months .
Compute amount of exemption of encashment of leave salary
Solution :
Since A is a government employee amount, received as leave
encashment on retirement is fully exempt U/s 10(10AA).
10. What will be the exemp tamount if A was employe dw i t h
MSFC?
Solution:
MSFC is astatutory corporation not regarded as government .
Hence, exemption would be at par with a private employee and worked
out as the least of the following:
Rs.
Amount Received on leave encashment 2,88,000
Notified Amount 3,00,000
10 months’ average pay@ Rs. 8,000 p. 80,000
Encashment of unavailed leave 12months 96,000
Exempted Amount -being the lower of the two 80,000
Taxable Amount [ 2,88,000-80,000] 2,08,000
*Leave entitlemen t–22 months –Leave availed 10 Months ignoring
fractional period of service of 9months as it is not rounded off .
11. What will be the exempt amount if A receive sthe leave
encashment while in service?
Solution
Leave encashment during continuance of empl oyment isfully
taxable regardless ofwho the employer is.
3.4.8 Retrenchment compensation
Any compensation received by a workman at the time of
retrenchment or closure or transfer of undertaking including change of
management resulting in interruption of service is exempt fully if it is
paid under a scheme of closure approved by the central government
and in other cases, least of the following amounts would be exempt
under section 10(10B ):
Notified amount presently Rs. 5,00,000
15 days’ average pay for every completed year of service or any
part thereof in excess of six months
Actual amount.
Other points;
Compensation under a Voluntary Retirement Scheme is exempt
under section 10(10C).munotes.in

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51Where an assessee has to pay higher tax on account of such lump
sumreceipts, he is entitled to relief u/s 89.
If an assessee claims exemption under this section , then he can not
claim relief under section 89[1] .
Illustration
12. A workman was retrenched after 20 year and 10 months service
Hisaverage salary was Rs 15,000per month. He was paid Rs 1,80,000
as the retrenchment compensation. Calculate the exempt amount.
Solution
The exempt amount will be least of the following:
Rs.
Actual Amount Received 1,50,000
Notified Amount 5,00,000
#10-1/2 months’ average salary
Rs 15,000 per month1,42,500
Exempted ( Lowest of the above 1,42,500
Taxable 1,50,000 -1,42,500 7,500
#(15 days for 20 years and 10 months rounded off to next number .
Relief u/s 89 not available if he claims theabove exemption.
3.4.9House Rent Allowance
House Rent Allowance or HRA paid by the employer to the
employee to meet the housing expenses of the employee, is exempt
from taxunder section 10(13A ) being the least of the following :
HRA actually received.
Rent paid by employee in ex cess of 10 per cent of salary during the
previous year.
50 per cent of salary, if employee is residing in the 4 metro cities of
Mumbai, Delhi, Chennai or Kolkata and 40 per cent of salary, if
the employee is residing at any other place.
Salary for the purp ose of calculating the amount of deduction
from HRA means the aggregate of Basic Salary, Dearness Allowance
and Commission received by salesman on sales achieved by him but it
does not include other receipts such as overtime pay, conveyance
allowance, etc.
In simple words, so long, the rent paid is upto 10% of the
salary, no HRA will be exempt. It is only if the rent paid is more than
10 % , then the actual HRA may be exempt to the extent of 40% or
50% of the salary.
Illustration s:
13. Calculate the amount of HRA exempt under section 10(13A)
in respect of an employee residing in Mumbai who was in receipt of
basis salary of Rs. 65 ,000 Dearness allowance of Rs. 35 ,000 and HRA
of Rs 25 ,000.and he paid the actual rent of Rs 15 ,000 per annum .munotes.in

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52Solution:
Exemption of HRA will be the least of the following:
Rs.
Actual HRA Received 25,000
Rent paid in excess of 10 % of salary
15,000 -{10 %( 65,000+35,000)}5,00050% of salary50,000
Exempted ( Lowest of the above ) 5,000
Taxable 25,000-5,000 20,000
14. Compute the exempt HRA If rent paid is Rs. 50 ,000.
Solution:
Rs.
Actual HRA Received 25,000
Rent paid in excess of 10 % of salary
50,000 -{10 %( 65,000+35,000)}40,00050% of salary50,000
Exempted ( Lowest of the above 25,000
Taxable 25,000 -25,000 NIL
15. Calculate the amount of HRA exempt under section 10(13A)
in respect of an employee resid ing in Agra who was in receipt of basis
salary of Rs. 65,000 Dearness allowance of Rs. 35,000 and HRA of Rs
60,000 and he paid the actual rent of Rs 50,000 per annum .
Solution: Rs.
Actual HRA Received 60,000
Rent paid in excess of 10 % of sal ary
50,000 -{10 %( 65,000+35,000)}40,000
40% of salary40,000
Exempted ( Lowest of the above ) 40,000
Taxable 60,000-40,000 20,000
Note -The time and notified amounts , wherever applicable in this
lesson, are technically not in syllabus but given to keep the text
logically complete. These should be available in question.
3.5 TAXABLE VALUE OF CASH ALLOWA NCES
Most employers give different types of allowances orfixed monetar y
amount sto the employee sover and above basic salary . These
allowances are paid to meet some personal expenses like house rent,
conveyance etc. or forperformance of his duties such as entertainment
or telephone allowance or partly for personal and partl y for official
purpose .
All s uch allowances a re taxable and included in gross salary
unless specific exemption is provided in respect of such allowance.
Accordingly, the allowances are offourcategories –
a)Allowances ,which are fully taxable ;
b)Allowances ,which are w holly and unconditionally exempt
c)Allowance, which aretax-free or taxable subject to certain
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53d)Allowances, in respect of which exemption is allowed only fora
sumprescribed onad hoc basis.
Some of these allowances are dealt with as under: -
3.5.1 Allowances Fully Taxable :
a.Dearness Allowance a compensatory allowance paid to meet
high prices and increased cost of living .
b.City compensatory allowance also a compensatory allowance
paid to employees posted in big cities like Delhi, Mumbai to
compensate the high cost of living in such cities
c.Non-practicing allowance normally paid to compensate
professionals in government service like doctors, chartered
accountants, engineers ,scientists etc.,who a reprohibited from
doing private practice .
d.Warden or proctor allowance paid in educational institutions for
working as a Warden of the hostel or as a Proctor in the
institution .
e.Deputation allowance paid to an employee sent from his
permanent place of service to some place or i nstitute on
deputation for a temporary period .
f.Overtime allowance paid a s extra wages paid to an employee
putting in extra working hours over and above his normal hours of
duty.
g.Servant allowance ,if paid in cash even ifthe employee may
have employed se rvants .
h.Other allowance sby whatever name called such as family
allowance, project allowance, marriage allowance, education
allowance, holiday allowance etc.as these allowances are not
specifically exempt.
3.5.2Wholly and unconditionally exempt Allowan ces
a.Allowances paid to Judges of the High Courts and the Supreme
Court .
b.Allowances paid by the Unites Nations organization to its
employees.
c.Foreign allowance paid by the government to its employees
being Indian citizen posted out of India for renderi ng services
abroad
d.Pension to gallantry award winners like Param vir Chakra,
Mahavir Chakra , Vir Chakra etc .-section 10(18) .
3.5.3 Wholly or partly tax -free Allowances:
Following allowance are wholly or partly tax -free. Some of
the exemptions are co nditional . Most of the conditions and monetary
limits, though prescribed in rules are incorporated in brief to make the
subject comprehensive. Brief description of these allowances is as
follows :-munotes.in

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54a.Entertainment allowance
Entertainment allowance received by the private sector
employees for entertaining the business relations and client sof the
employer is fully taxable by even if the entire amount may have been
spent by them.
For the Government employees , the allowance is partially
exempt by way of deduc tionunder section 16(ii) upto 20 per cent of
basicsalary , orRs5,000 per annum , whichever is lower. Fullamount
is first included in the salary and then the exempted amount is reduced.
b.Fixed medical allowances
Fixed medical allowance is taxable butreimbursement of
medical expenses is exempt upto Rs 15,000
c.Tiffin / lunch allowance
Tiffin / Lunch Allowance paid in cash is fully taxable butCost
oflunch provided to employees on their workplace or even lunch
coupons redeemable with restaurants is atax-free perquisite subject to
fulfillment of certain conditions prescribed by the CBDT .
d.Transport allowance
Any allowance or benefit given to meet the expense wholly and
necessarily in the course of employment is fully exempt under section
10(14) subje ct to the assessee presenting the proof in this regard.
Under Rule 2BB , Transport or conveyance allowance paid to
meet conveyance expenses of the employee from place of residence to
place of work and back is exempt upto Rs1600 per month (R s 3,200
in cas e of a handicapped employee) .
For example ,ifAis in receipt transport allowance @Rs2,000
per month ,R s 400 per month (Rs2000-Rs1,600 )will be included in
total income of A
e.Other allowances for official purposes
Under section 10(14 ) allowances (other than conveyance
between residence and office ) are exempt to the extent of amount
actually spent from those allowances by the employee in meeting the
official expenses .
For example, where an employee receives uniform allowance
of Rs 5000 and s ends Rs 4000 onuniforms, then Rs 4,000 actually
spent will be exempt and unspent sum of Rs1000 will be taxable in the
hands of the employee.
Some other examples of the allowances paid for meeting
expenses incurred exclusively in performance of official duti es are
travelling allowance, daily allowance, conveyance allowance, helper
allowance, research allowance .
f.Education allowance:
Education Allowance given to meet the education expenses of
the employee’s is taxable in hands of employee. However, under rulemunotes.in

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552BB a sum of Rs 100 per month per child per year (Rs 300 if the child
stays in a hostel) subject to maximum of twochildren is allowed as
exemption from such allowance received by the employee .
g.Out of station allowance
An allowance granted to an emplo yee working in a transport
system to meet his personal expenses in performance of his duty in the
course of running of such transport from one place to another is
exempt upto 70% of such allowance or Rs.6000 per month, whichever
is less.
3.6TAXABLE VALUE OF PERQUISITES
1. Definition and Meaning of Perquisites
Under s ection 17(2) ,value of perquisites allowed to an employs
is chargeable to tax, but it does not define the term .Innormal
commercial parlance, perquisites denote anycasual emoluments or
benef its attached to an office or position in addition to salary or wages .
Perquisites are normally allowed in kind -not in cash ;and are
measurable in mone taryterms .
2. Taxability of perquisites
Perquisites are included in taxable salary only if they are :
-allowed by an employer to an employee,
-allowed during the continuation of employment,
-directly dependent on service,
-resulting in personal advantage to the employee ;and
-derived by virtue of employer’s authority.
3. Taxable perquisites
Sec.17 (2 ) provides thefollowing list of taxable perquisites:
i.Value of rent-free accommodation provided to the employee by
the employer.
ii.Value of concession in rent in respect of accommodation provided
to the employee by his employer.
iii.Value of any benefit or ame nity granted free of cost or at a
concessional rate in any of the following cases:
a) by a company to an employee who is a director thereof
b)by a company to an employee who has substantial interest in
the company
c) by any employer to an employee who isneithe r is a director,
nor has substantial interest in the company, but his monetary
emoluments under the head ‘Salaries’ exceeds 50 ,000rupees .
iv.Any sum paid by the employer towards any obligation of the
employee
v.Any sum payable by employer to effect an assuranc e on the life of
assessee
vi.The value of any other fringe benefit given to the employee as may
be prescribed.munotes.in

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564.Classification of Perquisites
As per s ection 17(2), perquisites are of three broad categories :
Perquisites taxable in all cases
Perquisites not ta xable at all
Perquisites taxable only in the hands of specified employees .
A.Perquisites taxable in all cases:
The following perquisites are taxable u/s 17(2) in the hands of all
type of employees, whether specified or not:
1.Value of Rent free house pr ovided by employer
2.Value of house provided at concessional rate
3.Any obligation of employee discharged by employer e.g. payment
of club or hotel bills of employee, salary to domestic servants
engaged by employee, payment of school fees of employees’
childre ne t c .
4.Any sum paid by employer in respect of insurance premia on the
life of employee
B.Perquisites, which aretax-freefor all the employees
Section 17 specifically states that the following will not be
taxablein the hand of the employees :-
a.Medical benefits within India
Exempted m edical benefits within India, include :-
i.Medical treatment provided to an employee or any member
of his family in a hospital maintained by the employer.
ii.Any sum paid by the employer in respect of any expenditure
incurred by the employee on medical treatment of himself
and members of his family:
iii.In a hospital maintained by government or local authority or
approved by the government for medical treatment of its
employees.
iv.In respect of the prescribed diseases or ailments in any
hospital approved by the Chief Commissioner.
v.If the ordinary medical treatment of the employee or any
member of his family is done at any private hospital, nursing
home or clinic, the exemption is restricted to Rs.15000.
b.Medical benefits outside India
Exempted m edical Treatment outside India includes :
i.Any expenditure incurred by employer on the medical
treatment of the employee or any member of his family
outside India.
ii.Any expenditure incurred by employer on travel and stay
abroad of the patient being theemployee or member of his
family and one attendant who accompanies the patient in
connection with such treatment, shall be exempt to the
following extent :munotes.in

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57(i) The expenditure on medical treatment and stay abroad shall
be exempt to the extent permitte d by the Reserve Bank of
India.
(ii) The expenditure on travel shall be exempt in full provided
the gross total income of the employee (including this
expenditure) does not exceed Rs.2 ,00,000.
c.Medical Health Insurance within India
Exempted perquisites in respect of medical Health Insurance
include: -
i.Premium paid by the employer on health insurance of the
employee under a n approved scheme u/s 36(1)(ib)
ii.Premium on insurance of health of an employee or his
family members paid by employer on any scheme approv ed
under section 80D (Mediclaim).
d.ESOP or Sweat Equity
Any benefit provided by a company free of cost or at a
concessional rate to its employees by way of allotment of shares,
debentures or warrants directly or indirectly under any Employees
Stock Option Plan or Scheme ESOP /ESOS of the company offered
to such employees in accordance with the guidelines issued in this
behalf by the Central Government .However, the difference
between the fair Market Value and the issue price will be treated ,
when such equity is issued at concessional price ,a s thetaxable
perquisite value of ESOP
e.Transport
Amenity or benefit granted or provided free of cost or at
concessional rate for use of any vehicle provided by a company or
an employer for journey by the assessee from hi s residence to his
office or other place of work, or from such office or place to his
residence,
f.Refreshments
Refreshment provided by an employer to the employee during
working hours in office environment .
g.Others
a.Value of Leave Travel Concession in India.
b.Amount spent by the employer as its contribution to staff
welfare schemes.
c.Laptops and computers provided for personal use.
d.Rent free official accommodation provided to a Judge of High
Court or Supreme Court or an official of Parliament including
Minister and Leader of Opposition in Parliament.
e.Recreational facilities extended not to a particular employee but
to a class of employees.
f.Amount spent on training of employee or fees paid for refresher
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58g.Telephone provided to an employee at his reside nce.
h.Goods manufactured by the employer sold to employees at
concessional rates
i.Allowances to employees of UNO
Since FBT has been discontinued, value of cars and other
perquisites will be taxable in the hands of the employees.
C.Perquisites taxable by specified employees only
Under section 17(2) (iii) the value of any benefit or amenity
granted or provided free of cost or at concessional rate specified
employees only will be taxable .Specified employee means an
employee who is -
a director of the em ployer ;or
who has a substantial interest i.e. more than 20 %voting
power in the company; where he is employed or
anyother employee (of any employer including a company)
whose income under the head salaries exceeds fifty
thousand rupees
Salary for thi s purpose means salary due from, or paid or allowed
by, one or more employers, exclusive of the value of all benefits or
amenities not provided for by way of monetary payment,
Thetaxable perquisites are:-
1. Free supply of gas, electricity or water su pply for household
consumption ;
2. Free or concessional educational facilities to the members of
employee’s household ;
3. Free or concessional transport facilities ;
4. Sweeper, watchman, gardener ,personal attendant ; and
5. Any other benefit or amenity
3.7VALUATIO NOF PERQUISITES :
Perquisites are benefits granted in kind. Hence, monetary value
of the perquisites taxable in the hands of the employee is required to be
determined. B road principles for determining the value of taxable
perquisites arestated asunder: -
a)The amount actually spent by the employer will be the f taxable
value of perquisite allowed entirely for personal benefits of the
employee.
b)Taxable value of t he perquisite allowed to an employee for
official purposes only shall be nil and perquisites will not be
taxable in the hands of employee.
c)Taxable value of the perquisites allowed partly for personal and
partly for official purpose ,will be an amount of perquisites
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59Actual valuation rule sNOT IN the syllabus, general principle s
for valuation of perquisites are given for information
a.Accommodation & Furniture
Valuation of furnished and unfurnished accommodation is
made according to Valuation Rules. If the employer owns the
furnishings, then 10 per cent of the cost will be added to the value of
accommodation.
b. Transport
Broadly, no perquisite value is taken in the hands of individual
employees in case where :-
common transport such as bus provided toall the employees;
or
the employ eris in the transport business; or
a car is provided only for official use or for the purpose of
travel from residence to office .
In other cases ,a reasonable cost of such transport facilities will
be treated as taxable value of perquisites in respect of s uch facilities
In case of a carowned by the employer is provided to an
employee exclusively forhispersonal uses, the taxable amount will be
determined by taking reasonable expenses incurred by the employer on
the car maintenance anddepreciation on the car as per income tax
rules.
Ifsuch car is used both for private andofficial purposes ,then a
reasonable proportion oftheperquisite value relatable to the personal
use will be taken as the taxable value of the car perquisite in the hands
of the empl oyee.
c. Domestic servant
Salary of domestic servants of employer paid by the employer,
perquisite value will be taken as per rules.
d. Gas, water or electricity:
i. Taxable perquisite of providing supply of gas, water, or
electricity will be nil ,i fthe em ployer himself is engaged in the
business providing these facilities.
ii. If the employer is not in the business of supply of gas, water or
electricity, then the amount spent by the employee in providing
the facilities to the employee will be the taxable value of
perquisites in the hands of the employee provided the entire
facilities are for the personal use of the employees only. Any
amount recovered from the employee will be reduced from the
perquisite value.
iii. Where the connection for gas, electricity, water supply is in the
name of employee and the bills are paid or reimbursed by the
employer, it is an obligation of the employee discharged by the
employer. Such payment is taxable in case of all employees
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60e. Educational facilities:
i.Taxable perquisite value of education provided by an employer
being a school, coll ege or educational institution, will be nil.
ii.If the employer is not a school, college or educational institution,
but is engaged in some other business or profession, the value of
school fees or colleges fees of the children of the employee paid by
the employer will be the taxable value of perquisites in respect if
such facility.
iii.If the children of the employee are allowed free education in an
institute run by the employer wher e the employer is engaged in
other activities, then the value of the perquisites is reasonable cost
of education and deem edby the income tax officer in the hands of
specified employees.
f. Medical facilities
(i)A sum up to Rs 15000 paid by the employer to the employee by
way of reimbursement of medical expenses of the employee and
his family will be exempt perquisite in the hand of the employee.
Any payment made in excess of Rs 15000 will be taxable.
(ii)If the treatment is taken in a government approved hospit al or
recognized hospital, or in government hospital, no value will be
taken as the perquisite value in respect of such medical treatment
reimbursement.
(iii)If the medical treatment is done outside India, then up to the
amount approved by the RBI for such tre atment, no perquisite
value will be added to the taxable income of the employee. If
payments made by the employer to the employee in this
connection exceed the amount approved by the RBI, then such
excess will be treated as taxable salary in the hands on o f the
employee.
(iv)If the employer himself is a medical institution, provision of
medical facilities will not attract any tax in the hands of the
employee.
In other words, if an employer’s own institution provides
transport, education or medical faci lities ,there will be no taxable
perquisite value in the hands of the employee.
3.8 PROFITS INLIEU OF SALARY
As per section 17 (3) ,profit in lieu of salaries i ncludes:
1.Compensation for Termination of Employment or modification
of Terms & Conditions
The amount of any compensation due to or received by an assessee
from his employer or former employer at or in connection with the
termination of his employment or the modification of the terms and
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612.Payment from Employer from PF or Other Fund
Any payment (other than any pension, gratuity, HRA,
Retrenchment compensation, etc) due to or received by an assessee
from an employer or a former employer or from a provident or other
fund , to the extent to whi ch it does not consist of contributions by the
assessee or interest on such contributions.
3.Keyman Insurance Policy
Any sum received under a Keyman insurance polic y including
the sum allocated by way of bonus on such policy.
4.Sums Received from Future or Former Employer
Any amount due to or received, whether in lump sum or
otherwise, by any assessee from any person -
(A) before his joining any employment with that p erson or
(B)a f t e r cessation of his employment with that person.
5.Payment of Employee’s Obligation Employer
Any sum paid by the employer in respect of any obligation
which, but for such payment, would have been payable by the
assessee;
6.Payments from Ce rtain Funds :
Any sum payable by the employer, whether directly or through
a fund, other than a recognised provident fund or an approved
superannuation fund or a Deposit -linked Insurance Fund established
u/s3G of the Coal Mines Provident Fund and Miscell aneous
Provisions Act, 1948 or u/s 6C of the Employees Provident Fund and
Miscellaneous Provisions Act, 1952 to effect an assurance on the life
of the assessee or to effect a contract for an annuity;
7.Treatment of Annual Accretion to Provident Fund;
Provi dent Funds are established to provide for the retirement
benefits of the employees. The Scheme of funds envisages annual
contributions from both the employer and the employee and the
accumulation of interest on the balances. The funds are of three types ,
Viz.
i.Statutory Provident Fund setup or established and administered
by the Government.
ii.Recognised Provident Fund set up by others but recognised by the
Commissioner of Income Tax
iii.Unrecognised Provident Fund set up by others but not recognised
by th e Commissioner of Income Tax due to non -compliance
with the guidelines laid down for recognition.munotes.in

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62The above position is summarised in the following table:Tax Treatment under Different Provident Fund Schemes(PF)Type of
FundEmployer’s
Contrib utionInterest on PFPayment on
RetirementStatutoryExemptExemptExemptRecognisedExempt upto 12% of
Basic Salary ,Excess
taxableExempt up to
notified rate.
Excess
Taxabl eExempt
subject to
rulesUnrecognisedExemptExemptEmployers’
Contributi on
& interest
taxable
Other Points
1.Employer’s Contribution to all the three funds is exempt a t the time
ofcontribution.
2.If the P.F. is deducted from the salary of the employee, salary will
have to be grossed up in all the three cases.
3.Employee s’ Contribution when received back on retirement is
exempt in all the three above mentioned cases.
4.Interest on Employees’ Contribution from Unrecognised Provident
Fund will be treated as Income from Other Sources.
8.Transferred Balance:
When an unrecognised provident fund is subsequently
recognised, the balance standing in the unrecognised provident fund
are transferred to the Recognised Provident Fund is called transferred
balances and deemed to be the salary income of that year as per
section 17(1). Such amount to the extent such balance comprises of
employees’ contribution in excess of 12% of basicsalary and interest
credited in excess of 8.5%p.a.
3.9 DEDUCTIO NSF R O MS A L A R I E S
The income chargeable under the head "Salaries" i.e.the
aggre gate of taxable amounts chargeable as taxable salary viz. salary,
bonus , allowances and perquisites shall be computed after making the
following deductions under section 16:—
a)Standard Deduction
Adeduction of rupees 50,000 or the amount of the salary,
whichever is less; (With effect from A.Y. 20 20-21)
b)Entertainment Allowance
Adeduction in respect of any entertainment allowance specifically
received by a government employee , a sum equal to one -fifth of
hisbasic salary or Rs. 5,000 whichever is less ;munotes.in

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63c)Profession Tax:
Adeduction of any sum paid by the assessee on account of a
tax on employment ( profession tax) leviable by or under any law by
the state government.
Other than that, no further deductions are allowed under this head.
3.10ILLUSTRA TIONS
1)R, a Chartered Accountant was appointed as Finance Manager with
ABC Bank on 01/04/2012in the Salary grade of Rs. 12000 –500–
20000 –1000 –30000.
He was entitled to Leave Travel Concession for proceeding on
leave of Rs. 4000. His actual exp enditure on this account amounted to
Rs. 5000.
As the bank is situated at a place where home food is available,
Rw a s offered Tiffin Allowance Rs. 6000, His actual lunch expenses
amounted to Rs.10 ,000
Reimbursement of medical expenses for treatment of R and his
family in private clinic was Rs. 50 ,000
The Bank has provided free unfurnished flat at Mumbai (rent
paid by Bank: Rs.80,000). However, the perquisite value of that Flat
was Rs. 30000.
The employer provided two watchmen (salary Rs .2000 per
month each).
Free use of car for official use, car can be used for journey
between office and residence.
Free refreshments provided at place of work (Rs. 100 per day
for 200 days).
Compute Salary Income for the assessment 2021-22
Solution:
Computation of Sala ry Income ofR for AY 2021-22(F.Y. 2020 -21)
Particulars Rs.
Basic salary ( Rs 12,000 + 8increments of Rs 500 p.a. 1,92,000
Leave Travel Concession (Exempt) NIL
Tiffin Allowance ( Taxable) 6,000
Medical Expenses Reimbursed (50000 –15000) 35,000
Rent Free Accommodation (Given) 30,000
Watchmen’s Salary (2000 * 2 *12) 48,000
Santro Car only for Office use NIL
Free Refreshments at workplace NIL
Taxable salary 3,11, 000munotes.in

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642)X is in negotiation with two employer A &B, who have made the
following offer s to X. Help him in making an appropriate choice.
Rupees Particulars
A B
Basic Salary 500000 50,0000
HRA –Actual Rent Rs. 200000 25,0000 0
Free House –fair rental value 50000 0250000
Transport Allowance 100000 0
Free Use of Car –Amount spent 100000
Education Allowance for one child 5,0000 0
Free Education for 1 child. Amount spent 0 50000
Gardener Allowance 60000 0
Gardener’s salary paid by employer 60000
Salary 960000 960000
Solution
Taxable salary from employer A
Basic Salary 500000
HRA (Actual)
Less : Exempt(HRA or 50 per cent of salary or Rent paid less10 per cent of salary 200000 -10% of 500000)250000
150000 100000
Education Allowance
Less : Exempt (100*12)50000
1200 48800
Gardener Allowanc e 60000
Transport Allowance
Less : Exempt (800*12)100000
9600 90400
Taxable Salary 799200
Taxable salary from employer B
Basic Salary 500000
Free House Value 50000
Free Education for 1 child 50000
Gardener's Salary(120 * 12) 1440
Free Car 100000
Taxable Salary 851440
Taxable salary will be less with B, He should be preferred to A.munotes.in

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653)XYLtd offers a job with following options to M, who is neither a
director nor he has substantial interest in the company :
I IIPARTICULARS
Rs. Rs.
Basic Salary 1,70,000 1,70,000
Bonus 6,000 6,000
Education Allowance for 2 children 10,200 --
Education facility for 2 children in an
Institution maintained by the employer -- 10,200
Sweeper Allowance 10,000 --
Free Sweeper -- 10,000
Entertainment Allowance 6,000 --
Club Facility -- 6,000
Conveyance Allowance for personal use 12,000 --
Free Car Facility for Personal Use -- 12,000
Medical Allowance 18,000 --
Medical Facility for M and Family Members
in own hospital -- 18,000
Free g as, electricity and water supply -- 4,500
Fair Rent Rent -free unfurnished house: 24,000 24,000
Which option M must choose on the assumption that he and XY L td.
willboth contribute 10% of salary towards unrecognised PF?
SOLUTIO N:
I IIPARTICULARS
Rs. Rs.
Income from Salary
Basic Salary 1,70,000 1,70,000
Bonus 6,000 6,000
Education Allowance (10,200 -2,400) 7,800 Exempt
Education Facility -- Exempt
Sweeper Allowance/Facility 10,000 --
Entertainment Allowance/Club Facility 6,000 6,000
Conveyance Allowance/Car Facility 12,000 Exempt
Medical Allowance/facility 18,000 --
Allowance for gas/electricity/water/free
facility 4,500 --
Rent free unfurnished house 13,430 7,600
Gross Salary 2,47,730 1,89,600
Taxable income is lower in opti on II, it should be preferred.munotes.in

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663.11SELF ASSESSME NTQ U E S T I O NS
1.What is Salary?
2.Discuss the difference profits in lieu of salary and perquisites.
3.Discuss various deductions available under the head salary.
4.Discuss the tax treatment of the perquisites for different employees .
5.Non-specified employees pay less tax than specified employees.
Comment.
6.Rajesh is an employee of ABC Ltd. Since 1997, he is receiving
entertainment allowance of Rs. 500 p.m. He submits following
further information as on 31.03. 2021with the request to compute
his taxable salary.
a)Net Salary of Rs. 4,000 p.m. (including entertainm ent
allowance of Rs. 500 p.m. but after deducting income tax Rs.
500, Provident Fund Rs. 500 and Profession tax Rs. 70)
b)He is provided car for his exclusive us e during office hours for
office work. The petrol and other maintenance expenses come
to Rs. 12,000 p.a.
c)Receive sLeave travel concession for himself and his family for
proceeding on leave to hometown of Rs. 5,000 as prescribed,
while actual amount spent b y him was Rs. 3,500.
d)During the year, he received free services of a cook. (Cost to
the employer Rs. 4,400)
e)Received Rs. 8,000 on encashment of leave to his credit.
7.Rita ,a n employee of R India Ltd covered by the Payment of
Gratuity Act, 1972, retired o n31January 2021after 35 years and 7
months’ service. At the time of retirement heremployer paid
gratuity of Rs. 65,000 (exempt u/s 10(10) Rs. 51,000 ). She
received Rs. 50,000 being the accumulated balance of recognised
Provident Fund. The due date of s alary etcwas 1stday of the next
month and were paid on due date. Shewas entitled to a monthly
pension of Rs. 400 with effect from 1stday of February 2021 ,
which becomes due on the last day of the month. Compute her
total income for A.Y. 2021 -22.
8.Compu te the taxable income of Hitesh for the AY 2021 -22.on the
basis of the following further information:
(A)Basic Salary Rs. 2,500 0p.m.
(B)House Rent Allowance Rs. 400 0p.m. Taxable value is 50% of
the amount received.
(C)Project Allowance paid during the year Rs. 12 ,000.
(D)Bonus paid during the year Rs. 3,600 0.
(E)In retirement, on encashment of earned leave at his credit of 15
months he received Rs. 37,500. (Exempt u/s 10(10AA) Rs.
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679.Suhas submits the following information pertaining to the year
31.3. 2021and asks you to compute his income from salaries for
the AY 2021-22.
a)Basic Salary Rs. 5,000 p.m.
b)Dearness Allowance Rs. 3,000 p.m.
c)Bonus @ 20% on salary plus Dearness Allowance
d)Employee contribution 12.5% of basic salary +DA toRPF
Employer also contributes an eq ual sum.
e)Interest on balance credited to his RPF @ 14% p.a. Rs. 17,500
f)House Rent Allowance Rs. 10,000 p.a.
g)Profession tax paid by employee Rs. 840.
He retired from services on 31.3.20 21opting forcommutation of
pension @60% and received Rs. 2,40,000 as the only terminal benefit.

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684
INCOME FROM HOUSE PROPERTY
(SECTIO NS 22-27)
Unit Structure
4.1 Introduction and Objectives
4.2 Basis of Charge
4.3 Deemed Owner
4.4 Income Exempt U/s 10
4.5 Computation ofIncome from House Property
[GAV, NAV SOP, deemed letout partly let-out and partly self-occupied
Co-ownership, deductions ]
4.6 Miscellaneous -Arrears, Losses, TD Sandother deductions
4.7 Illustrations
4.8 Self-Examination Questions
4.1 INTRODUCTIO NAND OBJECTIVES
This lesson explains the complex provisions related to “Inco me
from house property”. Income from house Property is significantly
different from the other heads of income unlike the other heads as it
covers not only the actual income but also the notional income.
4.2 SCOPE A NDBASIS OF CHARGE
2.1 Sections 22 to 27 p rescribe the law in relation to taxation of
income from house property. Brief gist of these provisions is as follows :
Section 22 defines the scope of Income from House Property.
Section 23 gives the mode of computation of income,
Section 24 specifies th e amounts deductible therefrom.
Section 25 deals with the amounts not deductible.
Section 26 deals with the income of co -owners of a property .
Section . 27 gives the cases where a person not being an owner of
the property will be taxed as the deemed owner of such property.
2.2 Section 22 provides that Annual Value of property consisting of
any building or lands appurtenant thereto of which theassessee is the
owner , shall be chargeable under the head Income from House Property .
The section specifically excl udes property occupied for the purpose of
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692.3 An analysis of the section brings about the following attributes to
attract chargeability under the head the income from house property :-
(a) The head “ Income from House Pro perty” extends to a property
being a building or land appurtenant or adjacent thereto.
‘Building means any habitable four -wall structure cover ed by a
roof. It is immaterial whether the building is residential or commercial
such as warehouse, office or fac tory godown , wedding hall , auditorium ,
business centre ,etc.
‘Land appurtenant ’means the land connected or adjacent to the
building e.g. open space, approach roads, courtyard , compounds ,
courtyards, backyards, playgrounds, parking spaces ,etc.
(b) Income fr om any other property e.g. re ntal Income from a vacant
plot of land is not chargeable to tax under this head unless it is
appurtenant to a building.
(c) Theassessee owns the property .Only owner or deemed owner of
house property is liable to tax on income under this head.
Following points are important in this regard:
(i)Any person may betheowner whether an individual ,HUF, firm,
company, cooperative society oranassociation of persons .
(ii)Such person is the owner of the property in the previous year .
Any s ubsequent change in the ownership of the property is
immaterial .
(iii)A tenant is not the owner of a property. Hence, income of a
tenant from sub -letting a rented property to another tenant is also
not covered under this head . It will be taxable as business inc ome
orincome from Other Sources.
(d) The property is either let -outor used for own residence. The
section specifically excludes a property used for assessee’s own business
orprofession .
4.3 DEEMED OW NER
Section 27provides exceptions to the principle t hat ownership is
the basis of charging income under the head ‘ Income from House
Property ” The section states that following classes of persons shall be
deemed to be the owner of a property although they may not be the legal
owner thereof .
a) When an individua ltransfer sany property tohis spouse ora
mino rchild other than a married daughter for inadequate consideration,
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70In such cases although the legal owner of the property isthe spouse
orthe minor child ,the transferor shall be treated as owner for the purpose
of charging income under the head income from house property.
b) The holder of an impartible estate isdeemed to be the owner of
the entire property .E.g., an HUF jointly holding a property on behalf of
all its members shall be deemed to be the owner of such property although
the property may be in the name of an individual member of family.
c) Amember of co -operative society, company or other
association of persons to whom a building ha s been allotted under a
house building scheme of society will also be deemed to be the owner of
that property.
d) Apurchaser ,who hasreceived possession of a property in part
performance of a contract within the meaning ofsection 53A of the
transfer of pro perty Actisdeemed to be the owner of that property
despite the fact that the agreement for buying of property has not been
registered with the appropriate authority.
e) A person being a lessee, who has acquired right by way of long -
term lease of property for period of more than 12 years, is deemed to be
the owner of such property and income from that property will be
chargeable as the income from house property. This provision is not
applicable on any right by way of a lease renewable from month to month
orfor a period not exceeding one year.
4.4 HOUSE PROPERTY INCOME EXEMPT U/S 10
Section 10, 11and13 prescribe exemptions in respect of Income
from house property of certain institutions , organisations or persons orin
certain circumstances . Some of su ch exemptions are as under:
i.A farmhouse used for agricultural purpose section -10(1)
ii.Income of one Palace of an ex-Ruler -section 10(19A)
iii.A local authority section -10(20)
iv.A scientific research association -section 10(20),
v.An Institution for developme nt of Khadi & Village Industries -
section 10(23BB)
vi.Khadi & Village Industries Board -section 10(23BB)
vii.A body for administration of charitable & religious trusts &
endowments -section 10(23BBA)
viii.Approved funds, educational institutions orhospitals -sectio n
10(23C),
ix.A trade union or association of trade union -section 10(24)
x.Resident of Ladakh district -section 10(26A)munotes.in

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71xi.Statutory corporations/ other institution or association finance by the
government for promoting the interests of the members of the
sched uled caste and scheduled tribes -section 10(26B)
xii.Co-operative society for promoting the interests of the members of
the sched uled caste and scheduled tribes -section 10(27)
xiii.A Property held for charitable purposes -section 11
xiv.Apolitical party -Section 13
Besides , under Section 22aproperty used for own business or
profession such as letting out property to paying guests, employees’
quarters, residence of partners or directors is excluded from the income.
If such property yields any income, it will be chargeable as business
income and not house property income.
Under section 23(1) one self -occupied property of an individual or
aHUFassessee is exempt. This benefit is not available to a property
which is let out nor tonon-living entities l ike firms , companies ,etc.
4.5 COMPUTATIO NHOUSE PROPERTY INCOME
Section 23 lays down the methodology for computing the income
from house property. Under the section , first step is to determine the
annual value of the house property.
Section 24 provide sfor deductions to be made from the annual
values determined u /s23,
These provisions are explained below:
5.1Annual Value
Section 2(22) defines annual value “ as the annual value
determined under Section 23. The section assigns no definitive mean ing
tothe term annual value . Hence ,the term annual value is to be construed
incommon parlance.
‘Annual value’ refers to the inherent capacity of aproperty to earn
income orthe amount for which the property may reasonably be expected
to be let out fro my e a rt oy e a r .
Thus, it isnot the receipt of the actual rent but the capacity of the
property to fetch rent which is determinant of its annual value. This
implies that a property need not necessarily be let out. Annual value of a
property depends theuse of the property -self occupied, let out or partly
vacant etc.
The provisions of section 23 for determination of annual value are
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725.2Determination of Gross Annual Value [GAV]
As per section 23(1)(a), Annual value of a property is higher ofthe
two viz. :-
a)Actual rent (AR) , or
b)Reasonable lettable value (RLV ).
Actual rent[AR] means the rent received or receivable if the property is
actually let out by the owner ;and
Reasonable lettable value [RLV] means the expected rent, which the
property might reasonably be expected to yield from year to year. It is not
necessary that a property must be let out. Where a property is not let out ,
RLV may be estimated based on the following factors:
i.Fair rent or the rent of similar properties in the same locality. The
fair rent may be different in different circumstances or different
contractual obligations.
ii.Municipal ratable value is t he value of the property fixed by the local
authorities for the purposes of assessment of local taxes payable. It is
normally based on the market rent receivable in respect of a property
and is therefore considered as a reliable yardstick to determine the
reasonable letting value of the property.
iii.Standard Rent isthe rent fixed under the Rent Control Act to control
orlimit the prevailing rents in a locality. The landlord cannot charge
more rent than the limit fixed under the law. However, the landlord
is free to charge lower rent than the rent fixed under the law. Thus,
actual rent can be more or less than the fair ren t but can never exceed
the standard rent.
The following diagram depicts the legal position:Gross Annual Value -GAV
Higher of the two
Reasonable lettable value -RLV
Higher of the twoFair rentMunicipal valueActual rent
Cannot exceed Standard Rent
Illustration s
1.Find out the Gross Annual Value from the details given in respect ofa
premises :
Actual Rent: Rs 10,000 per month.
Rent of similar premises in the area Rs. 15,000 per month.
Municipal ratable value Rs. 8000 per month
Standard Rent f ixed under the Rent Control Act. Rs. 12,000 p.m.munotes.in

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73Solution:
Rs Rs
Actual rent : Rs 10,000 p .m. 1,20,000
(a)Fair rent :Rs. 15,000 p.m. 1,80,000
(b)Municipal ratable value @8000 p.m. 96,000
Higher of the (a) and (b) –fair rent 1,80,000 z
Standa rd Rent Rs 12,000 p .m. 1,44,000
Fair rent cannot exceed the Standard Rent .Reasonable lettable
value RLV restricted to : 1,44000
Gross Annual Value Higher of two 1,44,000
2.What will be the GAV if the Standard rent Rs.18,000 p.m.?
Solution:
Rs Rs
Given Actual Rent :Rs 10,000 p.m. 1,20,000
(a)Fair rent -Rs. 15,000 p .m. 1,80,000
(b)Municipal ratable value :Rs. 8000 p.m. 96,000
Higher of the (a) and (b) –Fair Rent 1,80,000
Standard Rent Rs 18,000 p .m. 2,16,000
Reasonable Lettable Va lueRLV 1,80000
Gross Annual Value Higher of the Two 1,80,000
Standard rent being only a limiting factor is ignored .
3.What will be the annual value of the property if the Actual rentin the
above case is Rs. 20,000 permonth; fair rent, ratable value and standard
rent remain at the same level of Rs. 15,000, 8000 and 12,000 per month
respectively.
Solution: Rs Rs.
Given Actual Rent -Rs 20,000 per month 2,40,000
(a)Fair rent -Rs. 15,000 per month 1,80,000
(b)Municipal ratable value @8000 p.m. 96,000
Higher of the (a) and (b) –Fair Rent 1,80,000
Standard Rent Rs 12,000 per month 1,44,000
Fair rent cannot exceed the Standard Rent Reasonable Lettable
Value RLV restricted to1,44000
Gross Annual Value (Higher of two ) 2,40,000
5.2.Compar ison of RLV and AR
Gross annual value is the higher ofthe two values ,namely the rent
received or receivable ascompared with the reasonable letting value .
Such comparison may throw two possibilities viz: -Actual rent received/
receivable is more than the reasonable letting value .I nsuch a case, actual
rent will be the Gross Annual Value u/s 23(1 )(b).ORmunotes.in

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74(a)Conversely, t he reasonable letting value is more than the actual rent
received/ receivable . In this case if the reason for deficiency or
shortfall between the actual rent the reasonable letting value is :
I.Vacancy only and no other reason , such lower rent will be taken as
the gross annual value u/s 23(1)(c) orand
II.Any other reason, reasonable letting value will be the gross annual
value.
The above position is shown in the following diagram:SituationGross Annual ValueActual Rent >R L VActual RentReason VacancyActual Rent = GAVRLV > Actual Rent
Other reason RLV =GAV
5.3.Other Important points :-
(i)Actual rent is relevant only if the property is let out. For a property,
which remains vacant or is nor let out at all or a self -occupied
property cannot have any actual rent ,reasonable letting value alone
will be the guiding factor.
(ii)The amount of rentactually received/ receivable du ring the previous
year will be arrived after deducting rent for the period for which the
property was vacant and unreali sed rent or bad debts,
(iii)In case of composite rent, expenses on providing amenities to the
tenant such as water will be deducted to find out the actual rent.
(iv)Fordetermining the Annual value, the actual rent shall not include
therent, which cannot be reali sed by the owner. However, the
following conditions need to be satisfied for this:
(a)The tenancy is bona fide;
(b)The defaulting tenant has v acated, or steps have been taken to
compel him to vacate the property.
(c)The defaulting tenant is not in occupation of any other property
ofthe assessee;
(d)The assessee has taken all reasonable steps to institute legal
proceedings fortherecovery of the unpa id rent or satisfied the
Assessing Officer that legal proceedings would be useless.
Illustration
4.Find out the annual value of a house let out for @ Rs2,000 per month.
Reasonable Lettable Value is Rs 20,000.
Solution:
Annual value will be the actual ren tofRs24,000 because it is
higher than the reasonable lettable value of Rs 20,000 .munotes.in

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755.What will be the GAV if the reasonable lettable value is Rs 30,000 but
the actual rent is Rs 2,000 per month?
Solution:
Annual value will be the reasonable lettable va lue i.e. Rs. 30,000
being higher than the actual rent of Rs. 24,000,
6.A house was let out on a monthly rent of Rs . 20,000 for 8 months only.
Remaining 4 months it remained vacant. Reasonable lettable value of the
house is Rs. 2,40,000. What would be its an nual value?
Solution :
Actual rent is Rs. 1, 60,000 for 8 months .However, RLV is Rs.
2,40,000 for the full year. There is a shortfall of Rs . 80,000 compared to
thereasonable lettable value.
Actual rent for full year will Rs. 2,40,000, if there is no vacancy .
Since t heshortfall of Rs .80,000 is solely on account of vacancy, the gross
annual value will be Rs. 1,60,000 being the actual rent.
6.1Computation of net annual value :
Section 23 classifies the house properties into different categories
asdiscussed below :
A)Self-occupied business properties :
Income from house property used for own business or profession is
exempt from tax. If any rent or other income is generated from s uch
property , the same should be treated as business income .Similarly ,
municipal taxes, repairs, insurance premium ,and other expenses incurred
on such property etc. will be admissible as business expenses.
B)Self-occupied Residential Properties (SOP):
Following are the provisions in respect of the annual value of a self -
occupied residential property .
a)Annual value to be taken asNIL
Under Section 23(2) annual value of a house or part of a house
which is in the occupation of the owner (self-occupied property )for the
purposes of his own residence shall be taken to be nil.
The exemption will be available in respect of a property which
cannot actually be occupied by the owner by reason of the fact that owing
to his employment, business or profession carried on at any other place
andhe has to reside at that othe r place in a building not belonging to him
b)Exceptions -Section 23(3)
Theexemption will not be available in following two cases: -
a)Ifthe house or part of the house is actually let during the whole or
any part of the previous year; or
b)any other benef it therefrom is derived by the owner .munotes.in

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76c)More than one properties –Section 23(4)
Where the self -occupied property consists of more than one house,
then the exemption shall be available only in respect of one of such
houses, which the assessee may, at hi soption, specify in this behalf.
The annual value of the other house or house shall be determined if
such house or houses had been let out.
In other words, where the assessee owns more than one self-
occupied properties, the assessee, at his option, may choose any one
property as self -occupied by him .
Theremaining properties will be deemed or assumed to have been
let-out(DLP) even if they are occupied b y him and not actually let out.
Annual Value of such properties deemed to have been let -out will be
determined based on their notional rental value as if the properties were
let-out even if no rent has actually been received by the assessee.
Deductions u/s 23 & 24 will be allowed in the normal manner on such
property.
d)Exemption only to individuals and HUFs:
This exemption is available only toindividuals and HUF s. Other
non-living persons cannot avail this exemption.
e)No Deductions allowed from SOP except Interest :
Where the annual value of aS O P istaken as nil, no deduction will
be allowed f rom such annual value u/s 23 or 24 except in respect of
interest paid or payable on borrowed funds. In other words, municipal
taxes will not be allowed as deduction while computing, nor repair
allowance of 30% of annual value will be allowed u/s 24.
f)Provisions regarding deduction of interest :-
Following is the gist of provisions in respect of deduction of
interest on borrowed capital from income from house property: -
i)Amount of deduction
Deduction in respect of the amount of any interest paya bleon capital
where the property has been acquired, constructed, repaired, renewed or
reconstructed with borrowed capital will be allowable .The amount of
deduction will be restricted to actual amount subject to following limits :-
a)Rs 30,000 if the amo unt was borrowed prior to01-04-1999 toacquire,
construct, renew or restructure the property.
b)Rs 30,000 if the amount is borrowed after 01 -04-1999 forrepairs of
the house property
c)Rs2,00,000 if the amount was borrowed after 01 -04-1999 to
borrowed
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77(ii)such acquisition or construction of the property is completed
within 3 years from the end of the financial year in which
capital was borrowed,
ii)Pre-construction interest
Interest payable on capital borrowed to acquire or construct the house
property ,for the period prior to the previous year in which the property
has been acquired or constructed, will be allowed as deduction infive
equal instalments beginning from that previous year and for each of the
fourimmediately succeeding previous years:
iii)Interest allowed under other provisions :
Amount of interest will be reduced to the extent it is allowed under
any other provision of theAct.
iv)Interest on new loan to pay old loan
Where the assessee ,subsequent to the capital borrowed for
construction or acquisition etc. of property takes a new loan to make
repayment of old loan , interest payable on such new loan will also be
allowed. However, any interest payable on interest will not be allowed as
deception .
v)Accrual basis
Interest on capital borrowed is allowed as deduction when it is
accrued. Actual payment during the previous year is not necessary.
vi)Other provisions :
a)Brokerage or commission paid to arrange a loan for house
construction isnot allowed as deduction .
b)Interest payable on loan taken for construction etc. of a property is
allowed and not on any loan taken for payment of interest.
c)Any loss arising under the head ‘income from house property’ may be
set-off against the other heads in the same assessment year for a
period of 8 years from the year of loss.
d)Theassessee is required to furnish a certificate, from the person to
whom any interest is payable on the capital borrowed, specifying the
amount of interest payable by t he assessee for the purpose of such
acquisition or construction of the property, or, conversion of the whole
or any part of the capital borrowed which remains to be repaid as a
new loan.INTERST ALLOWABLE O NLOA NST A K E NBefore
01/04/1999AFTER 01/04/1 99For Acquisition or
ConstructionFor Renovation or RepairsRs 30,000Rs2,00,000Rs 30,000munotes.in

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78Illustration s
7.Find out the interest deductible U/s 24 for A.Y. 2021 -22,ifA borrows
Rs. 25,00,000 @ 6%p.a.on01-04-2017 to construct a Bungalow for ow n
residence completed in May ,20 20.
Solution:
The Bungalow is constructed within three years of taking the loan ,
Rs.1,50,000 will be allowed out of interest payable Rs . 2,50,000 .Interest
paid in F.Y 2017 -18,2018-19and 2019-20Rs4,50,000 will be a llowable
in five equal instalments of Rs 90,000 for fiveyears beginning from A.Y.
2021 -22Total deduction will be limited to Rs 2,00,000 .
8.Determine the amount of interest allowable in the above illustration if
the money was borrowed in 1998.
Solution
The deduction would be restricted to Rs. 30.000.
9.What would be amount of deductible interest if the loan was used for
repairs of the bungalow ?
Solution
The deduction would be restricted to Rs. 30.000.
10. If the construction of the Bungalow was completed in June 2015,
what would be the amount of deductible interest?
Solution:
The construction is not completed within three years of taking
loan, the deduction will be restricted to Rs 30,000.
1)Let-out Properties (LOP)
Following principles will be applicab lefor determination of annual
value of properties let out including deemed to be let out self-occupied
properties (DLP)
5.5.1Net Annual Value (NAV)
Net annual value of a l et-out property value (NAV) isarrived at
bydeducting Municipal taxes paid by the o wner from GAV -(Proviso to
S. 23(1) .Municipal taxes paid or borne by the tenant are not deductible.
Municipal taxes are taken on cash basis and not accrual basis.NAV= [GAV ]-[Municipal Taxes paid by the Owner ]
5.5.2Deductions under section 24:
a)Stand ard deduction
From the net annual value (NAV) ,a standard deduction in respect
ofrepairs and collection charges is allowed to the extent of 30% of the net
annual value irrespective of whether the assessee has actually incurred the
expenses or not. How ever,if the repairs are borne by the tenant, this
deduction will not be allowed in the hands of the owner of the property.munotes.in

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79(b)Interest on funds borrowed
Interest on loan taken for acquisition, construction, renewal,
repairs or reconstruction is allowed on let -out properties without limit of
Rs 30,000/ 2,00,000 unlike in case of aSOP. The interest on loans, is
allowable on accrual basis. Similarly, pre-construction interest from the
date of the loan to the end of the previous year before the previous year in
which the house was acquired is amortized 1/5th per year for 5 years as in
case of SOP from the financial year in which the construction was
completed. .
Illustration
11. A took a loan on 01/10/ 2010of Rs 10,00,000 @ 10% interest p.a
for the const ruction of his house. The house was finally constructed on
March 31 , 2013. Calculate the pre -construction period interest and also
mention the A Ysin which the deduction for such interest may be allowed.
Solution
Loan was taken on 01/10/20 14
the house con structed in F.Y. 2016-17(A.Y. 2017 -18)
Interest for preconstruction period 01-10-2014to 31 -03-2017
2-1/2years XRs 10,00,000 X 10% = Rs 2,50,000 .
Interest to be amortized in five equal instalments of Rs 50,000 each
from A .Y 201 7-18till2021 -22.
6.Prop erty let -out and sel f-occupied for part of the year
Aproperty is let -out for whole or any part of the year and self -
occupied for the remaining part of the year, shall be treated as let -out
property and computation will be made accordingly by com paring actual
rent with the fair ren t for the whole property u/s 23 (1). It will not be
treated as SOP as section 23(3) makes it clear the SOP shall not be let -out
for any part of the year nor should any benefit be derived from it.
7.Property partly let -outand partly self -occupied:
If a part of the property –say one or two floors or few rooms have
been let out and another part of the property is self -occupied, then for
each portion the calculation will be made separately. Relevant expenses
like property ta xes and interest will be allocated suitably for each portion
and deductions will be allowed separately for each portion.
Notethe difference between properties let out /SOP for split period
and with split portion used for letting out/ SOP.
8.Co-ownership
Vide section 26 , property owned by more than one owners having
definite and ascertainable share therein, will not be assessed as an
association of persons but share of each owner shall be included in his
individual income. Supposing the co-owners themsel ves occupy the
property , share of each owner will be treated as nil. Each of the co -owners
would be entitled to the deduction in respect ofinterest subject to the limit
ofRs 30,000 or Rs 1,50,000, as the case may be.munotes.in

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804.6 MISCELLA NEOUS:
A.Recovery or reali zation ofpast arrears /unrealsied rent.
As per the section 25A, which has been introduced in place of the old
sections 25A, 25AA and 25B ,arrears of rent / or any unrealised rent will
be taxable in the year when it is reali sed or recovered regardle ss of
whether the assessee does or does not own the property in the that year
and 30 % deduction is allowable in that year .
B.TDS
Interest paid to a non -resident outside India without deduction of tax
at source will not be allowed as deduction.
C.Set off and carry forward of losses :
Any loss arising under the head “Income from House Property” in
respect of interest only can be set off against income arising from other
heads and the remaining loss will be allowed to be set off and carried
forward for a per iod of 8 assessment years
D.Noother Deductions allowed;
No deduction would be available in respect of charges like electricity,
land revenue, ground rent, insurance, etc. even though they may be actual
outgoings since the standard deduction of 30% is sup posed to take care of
all expenses.
4.7 ILLUSTRATIO NS:
Find out the Gross Annual Value in the following cases: -
Property
Particulars I II III IV VV
Municipal Value 5000 5000 5000 5000 5000
Rent Receiv ed 5200 5200 5700 5700 6000
Fair Rental Value 5600 5600 5600 5800 6100
Standard Rent under
[Rent Control Act ]NA 5500 5500 5500 7300
Solution:
I II III IV V
Municipal Value 5000 5000 5000 5000 5000
Rent Received 5200 5200 5700 5700 6000
Fair Rental Value 5600 5600 5600 5800 6100
Standard RentunderRent ActNA 5500 5500 5500 7300
Gross Annual Value 5600 5500 5700 5700* 6100*munotes.in

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81House I-Fair Rent being highest
House II-fairrent Rs 5,600 limited to Standard Rent Rs 5,500
House III : Actual Rent being higher Rs 5700
House IV Actual r ent Rs 5,700 being higher than RLV i.e. Fair Rent
Rs 5800 limited toStandard rent RS 5,500
House V –Fair rent being the highest Rs 6100. Standard rent is only a
limiting factor, hence ignored .
12. A owns two houses, I & II. House I is let -out through out the
previous year. House II is self -occupied for nine months and let -out for
three months on a monthly rent of Rs 5,000. Determine Taxable income,
given the following details: -
House I House II
Municipal Value 40,000 50,000
Fair Rent 50,000 48,000
Rent Received 48,000 15,000
Municipal Taxes paid 4,000 5,000
Insurance Premium (not yet paid) 2,000 2,500
Ground Rent 1,000 1,500
Maintenance Charges 3,000 3,500
Electricity Bill 5,000 6,000
Solution:
House I House II
Gross Rental Val ue(fair rent for house I andmunicipal value forhouse –II50,000 50,000
Less : Municipal Taxes paid 4,000 5,000
Net Rental Value 46,000 45,000
Less : Deduction u/s 24
Repairs & Collection Charges 30% 13,800 13,500
Taxabl e Income 32,200 31,500
4.8 SELF EXAMI NATIO NQUESTIO NS:
1.What is annual value? How is it determined ?
2.Discuss briefly the various expenses and allowances that are deductible
under the head “Income from House Property”
3.Mention the amounts which are not ded uctible from Income from
House Property
4.Write a short note on property owned by co -owners
5.Explain briefly (a) Owner of a house property (b) A member of a co -
operative society (c) Annual Valuemunotes.in

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826.What do you mean by “Self -Occupied house property”? How is the
annual value of such property determined?
7.Explain briefly, house property “deemed to be let -out” and how the
income from such house property is determined?
8.Is interest paid on a housing loan out of India allowable as a deduction?
9.Explain with reason if theInterest paid by the assessee on borrowed
capital in the construction of the property, till the date of letting out an
admissible expenditure.
10.Discuss the provisions of Income Tax Act regarding unoccupied
residential house?
11.Enumerate and explain if any , the exceptions to the rule that
Ownership is the criterion for assessment of Income from house
property under Section 22”
12.Discuss tax liability of arrears of rent.
13.Explain the provisions of the Income Tax Act with respect to the
computation of income from a self -occupied house property.
14.Explain the tax treatment of unrealized rent.
15.Lakdawala completed construction of a residential house on 1.4.1999.
Interest paid on loans borrowed for construction during the 2 year
prior to completion was Rs 20,000/ -and f or the current years was Rs
10,000 The house was let out on a monthly rent of Rs. 4,000/ -. Annual
Municipal tax was Rs. 6,000/ -. Interest paid during the year is Rs.
15,000/ -. Amount spent on repairs is Rs. 2,000/ -. Fire insurance
premium paid is Rs. 1,500 /-p.a. The property was vacant for 3
months. Annual letting value is Rs. 30,000/ -. Compute the ”Income
from House Property” for AY 2021-22(Ans.R s . 8,500 )
16.Ram owned a house property at Chennai which was occupied by him
for the purpose of his residence. He was transferred to Mumbai in June
2017and therefore he let -out the property with effect from July 1,
2017on a monthly rent of Rs. 3,000/ -. The municipal tax payable in
respect of the property was Rs. 6,000/ -of which only 50% was paid by
him before 31 .3.20 18. Interest on money borrowed for the construction
of the property amounted to Rs. 20,000/ -Compute the income from
house property for the AY 2021-22( Ans. Loss Rs 8250 )
17.Arvind commenced his construction of a residential house intended
exclusively f or his residence on 1.11.2 012. He raised a loan of Rs.
5,00,000/ -at 10% interest for the purpose of construction on
1.11.200 6. Finding that there was an overrun in the cost of
construction he raised a further loan of Rs. 8 lakh at the same rate of
interest on 1.10.20 14. What is the interest allowable under Section 24
assuming that the construction was completed on 31.3.20 16?
(Ans. Loss Rs. 1 ,50,000 pre-construction interest 1/5th)
18.From the following particulars of his property furnished by S ,
compute income from house property .So wns a residential housemunotes.in

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83actually let out for 10 months for total rent of Rs. 25,000. Fair rent of
this house is Rs. 27,000 and municipal ratable valuation is Rs. 24,000.
Total outgo on account of this house included repairs of Rs. 9,000,
Municipal taxes of 18 months Rs. 9,000 and insurance premium of Rs.
1,500. Interest on funds borrowed amounted to Rs. 1 ,75,000.
He also owns another residential house at Andheri, which is used for
own residence. Fair rent of this house is Rs. 80,000 and municipal
ratable valuation is Rs. 75,000. Total outgo on account of this house
included repairs of Rs. 6,000, Municipal taxes Rs. 18,000 and
insurance premium of Rs. 1,500. Construction of this house was
complete in 20 16from the funds borr owed from HDFC. During the
current year , interest amounting to Rs. 90,000 was paid for the current
year and Rs. 60,000 for the last year. A further interest of Rs. 65,000
was paid on loans taken for renovation necessitated due to heave rains.
The interest pertains equally to this year as well as the last year. ((Ans:
L.O.P -loss 1,63,000 , SOP 1,50,000 –interest paid )
19.State with reason whether thefollowing income s will be taxable as
income from house property.
a)Rlets out his house to Y for using it as his office.
b)Ruses his house as the godown to store his factory goods .
c)Rrents out his property as residential quarters to the workers in his
factory at a nominal rent of Rs.500 p.m.
d)Renters into a written agreement to purchase a property from Y for Rs.
5,00,000 . He has paid the consideration and taken the possession of
theproperty but the property is yet to be registered in the name of R.
e)Rowns a property, which is given on lease to Y for a period of 6 years,
lease rent being Rs.10, 000 per month. Y has a right to get the lease
renewed for a further period of 6 years.
f)Rowns a property, which is given on lease to Y for a period of one
month, Y has a right to get the lease renewed for a period of one
month, in each subsequent month, and such renewal is possible with
mutual consent till 2020.
g)Rowns a property, which is given on rent to Y. Y annually pays
Rs.1,50,000 as rent of the building as well as the charges for different
services ;lift,security, etc. provided by R.
h)Rowns an air -conditioned furnis hed lecture hall. It is let out, annual
rentbeing Rs 5,00,000 ,which includes rent of building as well as rent
of air conditioner and furniture.
(Ans : a, d, e, f,andg]


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845
PROFITS A NDG A I NSO F BUSI NESS
OR PROFESSIO N
(Sections 28 to 44)
Unit Structure
5.1 Introduction and Objective
5.2 Concept of Business & Profession
5.3 Scheme of Computation
5.4 Deductions Expressly Allowed
5.5 General Deductions
5.6 Specific Disall owances
5.7 Chargeability of Profits
5.8 Miscellaneous Provisions
5.9 Presumptive Income
5.10 Typical Illustrations
5.11 Self-Assessment Questions
5.1 INTRODUCTIO NAND OBJECTIVE
Thislesson deals with thethird and most important head of incom e
“Profits and Gains of Business and Profession”.
Income under this head includes “profits” and “gains” of “Business
“and “Profession” including different types and forms viz. vocation,
trade, commerce, manufacture or any adventure in the nature of trade or
profession.
Sections 28 to 44 contain detailed provision sdealing with various
aspects of the income under this head including inter alia computation of
income, general and specific items allowable or not allowable as
deduction under this head to the extent contained in Sections 28 to 32,35,
36,37, 40,40A, 43B etc.
5.2 CONCEPT OF BUSI NESS A ND PROFESSIO N:
2.1Definitions
2.1.1.Business :
Section 2(13) gives an inclusive defin ition of business -“Business
includes any trade, commerce, manufacture or any adventure or concern
in the nature of trade, commerce o rmanufacture .”munotes.in

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85The definition of “business ”includes not only “business ”in its
general commercial sense but also trade , commerce, manufacture orany
adventure in the nature of tr ade, commerce or manufacture .
Business, trade and commerce refer to buying and selling of goods
orproviding services for profit and other incidental activities .
Manufacturing means producing new goods or articles .
2.1.2.Profession
Section 2(36)gives a n inclusive definition of “profession ” viz.
“Profession " includes vocation ”.
“Profession ’incommon parlance means rendering of skilled
services like those bydoctors, architects, lawyers, chartered accountants or
other professionals.
Vocati on mean aspecified occupation calling or career
especially areligious onesuch as services ofpriests, preachers delivering
sermons or discourses , management gurus, yoga gurus, palmists and
astrologers, tarot readers, plumbers, mechanics ,priests perfor ming havan
orpooja etc.
2.1.3.Adventure
The definition also alludes to the phrase “Adventure in the nature
oftrade, commerce or manufacture” . The definition indicates that an
adventure need not necessarily be organised, systematic or regular. A
single act m ay constitute a business or profession. A single act of an
assessee , who purchased land ,develop ed and subdivided it in smaller
plots and sold the plots was held to be an adventure in the nature of trade
or commerce or manufacture.
2.1.4.Provisions to appl y uniformly
Income under this head wi llbe uniformly chargeable to tax
regardless of the following considerations: -
a)Type or description of an activity although there are provisions
dealing with some specific cases such as presumptive tax applicable
to different activities.
b)Legality or illegality of the activity will not affect the chargeability of
income. Accordingly, income from illegal activities like theft,
bribery or smuggling or other crim eswill be chargeable to tax as
much as the income of a leg al and legitimate business or profession.
c)Regularity or irregularity of the business or profession. Thebusiness
orprofession may beregular ,irregular or occasional . Even a single
activity or adventure may be chargeable under this head if it isin the
nature of a business or a profession
d)Organised or unorganised ; and
e)Whether or not require spersonal talents or skill .munotes.in

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865.3 SCHEME OF COMPUTATIO N
3.1.Chargeable income
Under section 28following income arechargeable to income -tax
under the head " Profits and gains of business or profession" —
(i)the profits and gains of any business or profession which was carried
on by the assessee at any time during the previous year;
Compensation for termination or modification of contracts
(ii)any compensation o r other payment due to or received by any person
at or in connection with the termination of contract modification of
the terms and conditions relating thereto for;
a.managing the whole or substantially the whole of the affairs of
an Indian company ;
b.manag ing the whole or substantially the whole of the affairs in
India of any other company ;
c.holding an agency in India for any part of the activities relating
to the business of any other person byany person ;
d.vesting in the Government, or in any corporation o wned or
controlled by the Government, under any law ,of the
management of any property or business;
e.the termination or the modification of the terms and
conditions, of any contract relating to his business;
(iii)income derived by a trade, professional or simi lar association from
specific services performed for its members;
Export incentives
(iiia) profits on sale of a n import licence ;
(iiib) cash assistance received or receivable by any person against
exports under any scheme of the Government of India ;
(iiic) duty drawback in respect of customs or excise duty person
against exports ;
(iiid) any profit on the transfer of the Duty Entitlement Pass Book
Scheme (DEPB) ;
(iiie) any profit on the transfer of the Duty Free Replenishment
Certific ate;
(iv)value of any benefit or perquisite, whether convertible into money or
not, arising from business or the exercise of a profession;
(v)any interest, salary, bonus, commission or remuneration due to or
received by a partner of a firm as adjusted by any am ount not allowed
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87Non-compete agreement
(va) any sum, whether received or receivable, in cash or kind, under an
agreement for not carrying out any activity in relation to any
business orprofession or not sharing any know -how, patent,
copyright, trade -mark, licence, franchise or any other business or
commercial right of similar nature or information or technique
likely to assist in the manufacture or processing of goods or
provision for services ifsuch amount is-
chargeable under the head "Capital gains" or
received as compensation, from the multi -lateral fund of the
Montreal Protocol on Substances that Deplete the Ozone layer
under the United Nations Environment Programme (UNEP) ,i n
accordance with the terms of agreement entered into with the
Government of India.
(vi)any sum received under a Keyman insurance policy including the sum
allocated by way of bonus on such policy.
(via)the fair market value of inventory as on the date on which it is
converted into, or tr eated as, a capital asset determined in the
prescribed manner;".
(vii)any sum, whether received or receivable, in cash or kind, on account
of any capital asset (other than land or goodwill or financial
instrument) being demolished, destroyed, discarded or trans ferred, if
the whole of the expenditure on such capital asset has been allowed
as a deduction under section 35AD (scientific research) in earlier
years ;
(viii)Amount rec overed on account of bad debts allowed in the earlier
years;
(ix)Speculation Business
A business is deemed to be s peculation business distinct and separate
from any other business ,carried on by an assessee iftransactions are of
such a nature to constit ute a business , where the transactions are settled
by payment of difference in price of goods or securities and not by actual
delivery .
3.2.Scheme of Computation
1.Section 28 is the charging section. As per the section,
aggregate ofIncome of all sources orbusiness or profession
carried on by the assessee
any time during the previous year.
constitutes income under the head profits and gains of business or
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882.Section 29 prescribes the mode of computation that is by deducting ,
from the agg regate income under the head profits and gains of
business or profession ,expenses
incurred by the assessee
during the previous year
for earning such income in accordance with the provisions of -
(i)Sections 30 to 35 ,which provide expressly for deductio n of
expenses in some cases
(ii)Sections 36 and 37 , which provide for general deductions.
(iii)Section 40, 40A and 43B , which provide for non -deduction in
certain circumstances; of expenses, which are otherwise
deductible.
3.The expenses will be allowed the basis of the following principles or
conditions: -
(i)Expenses should beincurred in respect of a business or
profession carried on by the assessee.
(ii)Expenses incurred in respect of a business w hich is closed down
during the previous year will not be allowed.
(iii)Expen ses incurred before setting of the business unless
specifically provided by law, also will not be allowed.
(iv)Barring some specific exceptions, only revenue expense are
allowed as deduction.
(v)Weighted deduction is allowable in some specific cases e.g.
scienti ficresearch under section 35.
(vi)Some expenses are allowable in full but the other may be
allowed only partially.
(vii)Some deductions are assessee -specific, allowed only to specific
classes of assessees e.g. company or firm but not to others.
(viii)Some expenses are allowable without specific conditions while
others are subject to fulfillment of conditions attached with the
deduction
4.Section 44A to 44D provide for computation of income on
presumptive basis in case of smaller assessees like insurance agents
retaile rs, construction contractors, transporters etc.
3.3.Method ofAccounting
As per section145(1) , income chargeable under the head “Profits
gains of business or profession” or income from other sources may be
computed according to either cash or mercantile s ystem of accounting
regularly employed by the assessee.munotes.in

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89a)Mercantile or accrual system of accounting
Under the mercantile oraccrual system of accounting , income and
expenditure accrued during theprevious year will be recorded in the books
and the tax able income from profits or gains from such a business or
profession will be the difference between the expenses or income accrued
during that previous year.
Actual receipt of the income or payment of expenses during the
year is not mandatory. Instead, such income may be received, or expen ses
may be paid in the previous year or in a year preceding or following the
previous year.
b)Cash system of accounting
Under the cash system of accounting , incomes actually received, and
expenses actually paid during aparticular previous yearwill be recorded
and considered for computing taxable profits or gains from a business or a
profession. Net profit under the cash system will be equal to the
difference of incomes received and expenses paid during the accounting
year whether such receipts and payments relate to th at particular year or
some other year or years.
c)Hybrid system of accounting
Hybrid system of accounting combines features of both the
methods. Under this system, accounts of some items of income or
expenses are maintained according to accrual or mercantile system and
some items of income or expenses on cash or receipt basis e.g.specified
statutory dues are allowed to bededucted on payment basis although the
method of accounting employed may be m ercantile.
Illustration
1.A earns commission in financial year 2019 -20,which is paid in the
financial year 202 0-21.In this case:
Under the mercantile system, the commission will be taxed in the
financial year 2019 -20being the year of earning although it was
not actually received during that year.
Under the cash system, it would be tax able in the year of actual
receipt 2020 -21(assessment year 2021-22) although it was not
earned in that year.
3.4.Income Computation &Disclosure Standards
As per section 145(2), the Central Government may notify in the
official gazette from time to time Accounting Standards to be followed by
any class of assessees or in respect of any class of income. Such
accounting standards are called Income Computation and Dis closure
Standards (ICDS). So far , theCBDT has notified 10 Income Computation
and Disclosure Standards (ICDS) ,effective from A.Y. 2017 -18 onwards.munotes.in

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905.4 DEDUCTIO NS EXPRESSLY ALLOWED
In computing income under the head profits and gains of business
or profession, following expenses are expressly allowed as deductions :
4.1.Rent, Rates, Taxes, Repairs &Insurance for Building
Section 30 provides for deductions of the following amounts paid
towards rent , repairs etc.:-
a)Asrent orforrepairsof the premises o ccupied by the assessee as
tenant.
b)forcurrent repairs to the premises o ccupied by the assessee otherwise
than as a tenant,
c)forland revenue, local rates or municipal taxes subject to the
provisions of section 43B ; and
d)asinsurance premium paid against risk of damage or destruction of
the premises .
The deduction is subject to the following modifications: -
(i)Only revenue expenses will be allowed. Capital expen sesare not
allowed as deduction under this section.
(ii)Where anypremises ispartly used as dwelling house by the assessee ,
only proportionate amount of rent or repairs determined by the
assessing officer will be allowed as per section 38.
4.2.Repairs & Insurance of Machinery, Plant &Furniture
Section 31provides for deductions of payments of following sums
towards repairs and insurance of machinery, plant or furniture “-
(i)Payment forcurrent repairs of machinery, plant or furniture if such
expenses are revenue expense and no tcapital expenses ;
(ii)Paym entforinsurance premium paid against risk of damage or
destruction such machinery, plant or furniture.
The deduction is subject to the following modifications: -
(i)Where any machinery, plant or furniture isonly partly used for
business or profession o f the assessee ,only proportionate amount of
above payments determined by the assessing officer will be allowed.
(ii)Machinery hire charges are notallowed under section 31butunder
section 37as residual expenses .
4.3.Depreciation
4.3.1.Conditions for claimi ng depreciation :
Section 32 provides for d eduction in respect of depreciation
subject to certain conditions given below :-munotes.in

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91(i)Claim not necessary
Depreciation will be allowed as deduction irrespective of whether
or not the assessee makes ac l a i mf o r deduction so long as the conditions
forthe allowance of depreciation are satisfied .
(ii)Depreciation allowed on eligible assets only :
Depreciation will be allowed only on the following assets called
depreciable assets:
a)buildings, machinery, plant or f urniture, being tangible assets ;
b)Know -how, patents, copyrights, trademarks, licences, franchises or
any other business or commercial rights of similar nature, being
intangible assets .
“Building” means only the superstructure , not the land on which it is
constructed.
“Plant” includes ships, vehicle, books including technical know -how,
scientific apparatus and surgical equipment used for the purpose of
business or profession but does not include tea bushes or livestock or
buildings or furniture and fitti ngs.
(iii)Assets not eligible for depreciation
Following assets are not eligible for depreciation:
a)Foreign car when acquired between 01 -03-1975 and 31 -03-2001
and
b)Any machinery or plant if the actual cost thereof is allowed as a
deduction in one or more y ears under an agreement entered into by
the Central Government under section 42.
(iv)Ownership –Partial ownership :
Assessee must own the d epreciable asset wholly or partly as the
soleowner or the co -owner thereof. In case of an asset owned by different
assessees, each co -owner will be entitled to depreciation on his
contribution to the cost of asset.
Exception
Depreciation will be allowed on capital work orrenovation or
construction of any structure in building though not owned by the
assessee , whi chis held on lease or other right of occupancy and the new
structure is owned by the assessee
(v)Purpose or user of the assets
Theassessee must use the asset for the purpose of hisbusiness or
profession .
(vi)User of the assets during the previous year:munotes.in

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92Theassessee will entitled to claim deprecation
a.at full rate prescribed in respect of an asset acquired by the
assessee during the previous year and isput to use for the
purposes of his business or profession for a period of 180 days or
more .
b.at50% of the rate prescribed, if the asset is put to use during the
previous year for a period of less than 180 days; i.e. 179 days or
less.
The condi tionis applicable on an asset acquired during the year
andnoother asset. This is because the machinery wou ld undergo wear and
tear even if it was not put to actual use
Illustration
2.A Machine purchased on 31-03-2020 ,is put to use on 01-04-2021 .
Depreciation will not be allowed in the previous year 2019 -20 as
the m achine is acquired but not put to use .Howe ver, f ulldepreciation will
be allowable in the previous year 2021 -22 (Assessment Year 2022-23)
4.3.2.Additional Depreciation
Section 32(1)(iia) andsection 32AD allow deduction of a dditional
depreciation over and above the normal depreciation as per the following
scheme: -
(a)Eligibility assessee
Anyassessee being an industrial undertaking engaged in the business
of manufacture or production of any article ,thing or transmission of
power .
(b)Rate of additional depreciation allowable
(i)20%ofthe actual cos t of new plant or machinery (not being
ships or aircrafts) acquired and installed after 31st March,
2005.
(ii)35%of the actual cost in case of the assessee being a
manufacturing undertaking or enterprise set up in the notified
backward areas of the States of Andhra Pradesh, Bihar,
Telangana and West Bengal on or after 1st April, 2015 and the
Assessee acquires and installs new plant & machinery between
01-042015 & 31 -03-2020 .
(iii)50% of the above rates i.e. 10% or 17.5%, where the plant or
machinery is acquired and installed for less than 180 days of
the relevant previous year and the balance 50% will be allowed
in the immediately succeeding previous year
(c)Assets not eligible for additional depreciation
a.Ships and aircrafts;
b.Second hand machinery used by any oth er person in or out of
India;munotes.in

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93c.Machinery installed in a residential premises or a guesthouse;
d.Any office appliances or road transport vehicles;
e.Any plant or machinery, actual cost of which is already allowed
as a deduction e.g. asset for scientific researc h; and
f.Buildings, furniture & fittings and old plant
4.3.3Important Terms :
(i) Block of Assets
As per Sec 2(11) “block of assets ” means a group of assets falling
within a class of assets comprising of —
a) Tangible assets being buildings, machinery, plant or furniture;
b)Intangible assets being know -how, patents, copyrights, trademarks,
licenses, franchises or any other business or commercial rights of
similar nature, in respect of which the same percentage of depreciation
is prescribed.
Thus, “ block of assets ”is a classification of assets based on the
twin criteria viz:-
(a)Class of asset viz. building, plant, furniture or machinery to which
the asset belongs to ; and
(b)Rate applicable on the asset within th atclass .
The assets within a class eligible for same rate will form a block of
assets butnotassets from different groups having same rate nor the
assets from different classes having same rate.A block may have
a single asset in it.
(ii) Written Down Value (WDV) of an asset
Written down valu e of an asset means:
a.actual cost to the assessee of the asset acquired in the previous
year, and
b.the actual cost to the assessee less all depreciation actually allowed
thereafter .
(iii)Written Down Value (WDV) of block of assets
Written down value of any block of assets, means
a.theopening WDV of the block of assets of
the assessee or
the previous owner or entity ,in case of slump sale,
amalgamation, succession of business ,demerger, conversion
into company etc . orholding /subsidiary company )
b.adjusted by: -
(i) the increase by the actual cost of any asset falling within that block,
acquired during the previous year; andmunotes.in

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94(ii)thereduction of the moneys payable in respect of any asset falling
within that block, which is sold or discarded or demolished o r
destroyed during that previous year together with the amount of the
scrap value, if any, so, however, that the amount of such reduction
does not exceed the written down value as so increased.
This is depicted in thefollowing chart :Opening W.D.V. of the block as on 01-04-2020
ADDActual cost of new assets acquired falling within the block of assets
inthe financial year 2020 -21
DEDUCTMoney received/ receivable / scrap value of the asset falling within the
block sold, discarded, demoli shed or destroyed
during the financial year 2020 -21
RESULT ( BAL ANCE)Negative :
Taxable as
short term capital
gainZero:
No depreciationBalance but no assets
left in block:
No depreciation
short term capital
Loss
Balance of adjusted block with a ssets
DEDUCTDepreciation at applicable rate
RESULTClosing W.D.V. of the block as on 31-03-2021
(iv)Other important points :
a.Any other things or benefit which can be converted in terms of
money cannot be deducted
b.If the resultant block value figur e is negative because the sale
proceeds exceed the original block value plus increases, it will be
treated as short term capital gain.
Illustration
3.Opening balance of a block of assets comprising of 4machines
(depreciation @25%)isRs 5,00,000 as at 01-04-2020 .A new machine
with depreciation @ 25% was purchased On 01 -06-2020 for Rs 2,00,000
andan existing machine was sold for Rs 4 ,00,000.
Ascertain the closing value of block as on 31 -03-2021depreciatio n
for the A ssessment Year .Y.2021-22.
Solution Rupees
WDV as on 1/4/ 2020 5,00,000
Add: Purchase during the year 2,00,000
7,00,000
Less: Sales during the year 4,00,000
Adjusted Block 3,00,000
Depreciation @ 25 per cent 75,000
WDV of block as on 31 /3/ 2021 2,25,000munotes.in

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95(v)Actua l Cost
Actual cost is determined on the following principles
(a)Subsidy or grant to be reduced to determine actual cost
As per section 43(1) , actual cost means the actual cost of the assets to
the assessee asreduced by that portion of the c ost thereof, if any, as has
been met directly or indirectly by any other person or authority by way of
subsidy or grant and expenses incurred for acquiring the asset or
installation .
Grant /subsidy whether ofrevenue nature or ofcapital nature are
taxable as income, unless it has been reduced from the actual cost of a
depreciable asset.
Illustration
4.ABCpurchases a machine for Rs 10 lakh with non -refundable subsidy
of Rs. 4 lakh from SIDBI. Actual cost of the machine will be Rs. 6 lakh
i.e.Rs. 10 lakh-Rs 4 lakh.
(b)Scientific Research Asset
Actual cost of asset purchased for scientific research and brought
into business use will be Actual Cost minus d eduction available under
section 35.
Illustration
5.Apurchases a machine for scientific research for Rs 10 lakh with the
non-refundable subsidy of Rs. 5lakh from SIDBI. The machine is eligible
for deduction under section 35 to the extent of Rs. 3 lakh.Actual cost of
the machine will be Rs. 2lakh i.e. Rs. 10 lakh-Rs5lakh-Rs. 3 lakh
(c)Gift , inheritance etc.
Actual cost of asset acquired by way of giftorinheritance will be
theWDV to the previous owner .
Illustration
6.If A gifts away to B the machinery in the above illustration, the cost
of machine to B will also be Rs. 2lakh, which was the cost to A.
(d)Enhanced cost
Where in the opinion of the assessing officer, anasset is acquired
at an enhanced cost to claim more depreciation and reduce tax liability,
actual cost will be equal to the a ctual cost of asset used and transferred
earlier but now reacquired or cost of repurchase ,whichever is less.
Illustration
7.A sold a machinery having WDV of Rs 2 lakh for Rs. 3 lakh and
repurchased itafter two years at the prevailing market value of Rs. 10
lakh.If the assessing officer is of t he opinion that the machine is
repurchased for claiming more depreciation ,he can ignore the enhanced
purchase value of Rs. 10 lakh andtreat Rs. 2 lakh as the actual cost.munotes.in

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964.3.3Mode of computation
Depreciation is calculated ontheWDV of theblock af ter adjusting
the sales and purchase during the year in thatblock.
Rates of depreciation for different assets are taken as prescribed in
rules.
Depreciation will not be allowed on a block if-
(i)WDV ofthatblock comes tozero, even if some assets in that block
may be existing.
(ii)no assets areleftin the block and the become empty , orceases to
exist, .W D V of the block will be treated as short term loss.
Depreciation will be allowed at 50% of the prescribed rate, if the
asset is put to use for less th an 180 days in the year ofacquisition.
Straight Line Method (SLM )method is applied in case of the
assets of the power companies i.e. undertakings engaged in generation or
generation and distribution of power at the prescribed rates of depreciation
on theactual cost of the assets.
Additional depreciation of 20% or 35% on actual cost is allowable
as discussed above.
Different treatment is given to depreciation on foreign cars
purchased between 1975 -2001 as depreciation has been denied to such
cars s ubject to some exceptions discussed earlier.
Depreciation will not be allowed on scientific research assets,
entire cost of which is allowed as deduction under section 35.
4.3.4Succession of Business
In case of succession or takeover of a business of one entity by
another entity, aggregate depreciation for a year will not exceed the
amount of depreciation, had such event not taken place and such
depreciation shall be apportioned between the old and new entity . Some
cases of succession are as under : -
a.conversion of a firm orsole proprietor intoacompany -section
47(xiii)/(xiv),
b.conversion of a private or unlisted public company, into a limited
liability partnership -section 47(xiiib),and
c.amalgamation ,demerger orsuccession of business -section 170.
Illustration
8.Under a scheme of amalgamation, A Ltd, transfers to B Ltd,
machinery having WDV of Rs 3,65,000 on 1 -09-2020. Calculate the
depreciation in the hands of A Ltd. & B Ltd. if rate of depreciation is 20%.munotes.in

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97Solution:
a.Depreciation for the full year if the amalgamation has not taken place :
Rs. 73000 [20% on Rs. 3 ,65,000 ]
b.Aggregate depreciation for A.Y. 2021-22cannot exceed R s. 73000
c.Pro rata a llocation of depreciation for the two periods :
Pre amalgamation –153/36 5X 73000 = Rs 30, 600
[01-04-2020to 31-08-2020-=153days]
Post amalgamation –212-365X 73000 = Rs 42,4 00
[01-09-2020to 31 -03-2021=212days]
4.3.5Depreciation to be allowed even if no claim made
As per explanation 5 to section 32, depreciation will be allowed
wheth er or not the assessee has claimed the deduction in respect of
depreciation in computing his total income
4.3.6Loss on Sale of Machinery
When an asset is sold, discarded, demolished or destroyed in the
previous year following rules apply:
a)When theblock does not become empty ,assets are still existing
therein andsome value is left in the block, sales proceeds/ scrap value will
be deducted from the value of the block and depreciation will be allowed
on the on the resultant value of the block after addin gactual cost of
assets acquired ,if any .
Illustration
9.One of the assets from ablock with d epreciation @30% having WDV
of Rs. 5 Lakh is sold for Rs. 1 Lakh; the resultant value of the block will
be Rs. 4 Lakh and the depreciation will be Rs. 1.20 Lakh
b)When the block does not become empty, assets are still existing
therein but no value is left in the block, depreciation will not be
allowed.
Illustration
10.One car from a bloc kof four cars having opening WDV of Rs 5 lakhs
is sold for Rs. 5 Lakh.Thevalue of the adjusted block will be zero. No
depreciation will be allowed although three cars stillexist in the block .
c)Where the sale proceeds are more than the adjusted WDV of the
block, the resultant surplus will be treated as short term ca pital gain
regardless of the fact that assets are still left in the block or the block
is empty.
Illustration
11.Intheabove example, the car is sold for Rs 8 Lakh ,the resultant
surplus ofRs 3 lakhwill be tax ableas short -term capital gain.
d)Where noassets are left in the block and the block becomes empty
buttheWDV is not fully written off, thenmunotes.in

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98there will be no depreciation allowance and
existing WDV will be treated as terminal loss or short term capital loss
due to cessation of the block as result of sales,
Illustration
12.All assets in a block having opening WDV of Rs 5 l akhsold for Rs 3
Lakh . The block becomes empty as there areno assets in it. No
depreciation will be allowed and the balance of Rs 2 lakhwill be treated as
terminal depr eciation or short term capital loss
e)When the depreciation is allowed on the actual cost / WDV of the
assets of the undertakings engaged in generation or destitution of
power called power companies, following rules will apply:
When an asset viz. any build ing, machinery, plant or furniture in
respect of which depreciation is allowed, is sold, discarded,
demolished or destroyed in the previous year not being the year in
which it is first brought into use, terminal depreciation will be allowed.
Terminal depre ciation is the deficiency or shortfall between the written
down value and the sales proceeds / or moneys payable including
scrap value, insurance, salvage or compensation moneys payable in
respect thereof.
Terminal depreciation is not allowed in the year in which it was first
brought to use.
Such deficiency must be actually written off in the books of the
assessee.
Any surplus arising therefrom is called the balancing charge and taxed
as income under section 43.
Any moneys received over and above the depre ciation allowed will be
treated as capital gains under section 50A.
Under the old laws , actual cost motor cars was restricted to Rs.
25,000, although the actual cost could b e higher. In such a case actual
cost/deficiency will be taken proportionately in the ratio of actual cost
andRs.25,000
Sale includes a transfer by way of exchange or a compulsory
acquisition under any law for the time being in force but does not
include a transfer, in a scheme of amalgamation.
Illustrations
13.A machine costing Rs1 lakh is sold for Rs 15,000. D epreciation
of Rs 80,000 was written off on it.
The Written down value of the machine
Rs.1,00,000 -80,000 = Rs 20,000 .
The deficit ( 20,000 -15,000) = Rs 5,000
Terminal depreciati on= Rs 5,000.munotes.in

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9914.Ifthemachine is sold for Rs. 90,000 ,
Surplus -(Rs 90,000 -20,000) = Rs 70,000
Balancing charge Rs 70,000
Maximum to the extent of depreciation allowed .
15.If the sale price isRs.1,05,000 ,
Surplus (1,05,000 -20,000 )= Rs 85,000
Balancing Charge =Rs. 80,000 (totheextent of depreciation allowed ) ,
Balance Rs 5,000 Capital Gain
4.3.7Unabsorbed Depreciation
Vide Section 32 (2) ,amount of depreciation not deducted in any
previous year due to lack or inadequacy of profits or gains is treated as
unabsorbed depreciation.
Unabsorbed depreciation will be carried forward to the next
following previous year and deemed to be part of allowance for that year .
If there is no deprecation allowance for that previous year ,t h e
carried forwar d unabsorbed depreciation shall be deemed to be the
allowance for that previous year, and so on for the succeeding previous
years for indefinite period . In other words, the unabsorbed depreciation
is treated as part of the current depreciation and can a ccordingly be set -off
against any other head of income even where the business has been
discontinued .
Illustration s
16.Ifthedepreciation allowable is Rs 80,000 but the profits before
depreciation isRs 50,000 , then depreciation of Rs 50,000 will be
deducted and the balance of Rs 30,000 will be unabsorbed depreciation.
17.Determine taxable income &unabsorbed depreciation :
Particulars Rs.
Business Income (before depreciation) 10,00,000
Depreciation allowable as per Income Tax Act 16,00,000
Income from other sources 8,00,000
Solution :
Particulars Rs.
Business Income before depn.
Less: Dep n.to the extent of profits10,00,000
10,00,000 NIL
Income from other sources
Balance of the current depreciation
(16,00,000 -10,00,000 )8,00,000
6,00,000 2,00,000
Taxable Income Rs. 2,00,000munotes.in

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10018.Assume depreciation of Rs. 20,00,000 in above case.
Solution :
Particulars Rs.
Business Income before Depn. Depreciation to
the extent of profits10,00,000
10,00,000NIL
Income from other sources
Unabsorbed Depreciation for the current year to
the extent of income8,00,000
8,00,000 NIL
Taxable Income NIL
Unabsorbed Depreciation to be carried forward 2.00.000
19.Find value of block on 31 -03-2021from the following:
A.Written down value on April 1, 20 20
Particulars & Dep Rate) Rs.
Plant A,B & C -15% 1,00,000
Plant D & E –40% 2,60,000
Plant F –50% 70,000
Building A & B -10% 2,00,000
Building C&D -5% 7,00,000
Building E-Temporary Sheds E -100% 8,00,000
B.Purchase during the previous year 20 20-21
Date Particulars Rs.
02-04-2020 Plant G -50% 60,000
01-05-2020 Plant H -15% 18,000
01-06-2020 Furniture -10% 60,000
01-08-2020 Building G -5% 5,00,000
01-09-2020 Computer -60% 1,00,000
01-10-2020 Franchise Rights -25% 10,00,000
C.Sales during the previous year 201 5-16
DATE PARTICULARS (RS.)
31-10-2020 Plant C 25,000
31-01-2020 Plant D 15,000
01-06-2020 Furniture 50,000
06-03-2021Building E 2,00,000
Temporary sheds were put to use inthe previous year.munotes.in

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101Solution
Comp utation of Depreciation / Cost of Block
Block Rate Block
01-04-2020Purchase Sales Block Dep. Block
3-03-2018
Plant A/B/C 15% 1,00,000 18,000 25,000 93,000 13,950 79,050
Plant D/E 40% 2,60,000 - 15,000 2,45,000 98,000 1,47,000
Plant F/ G 50% 70,00 0 60,000 - 1,30,000 65,000 65,000
Building A& B, 10% 2,00,000 - - 2,00,000 20,000 1,80,000
Building C/D /G 5% 7,00,000 5,00,000 -12,00,000 60,000 11,40,000
Building E 100% 8,00,000 -2,00,000 6,00,000 0 0
Furniture 10% - 60,000 50,000 10,000 0 0
Computer 60% - 1,00,000 -- 1,00,000 60000 40,000
Franchise rights 25% - 10,00,000 -10,00,000 2,50,000 7,50,000
Note: The block of temporary sheds ceases to exist .Hence,no
depreciation will be allowed and the balance of Rs 6,00,000 will be
treated as short term capital loss.
No deprecation will be allowed on furniture purchased and sold in the
same year.
20.Opening balance in a block of assets co nsisting of three cars (rate of
depreciation @20%) is Rs. 18,00,000. During the year 20 20-21,n e wc a r
is purchased for Rs. 6,00,000 and an old vintage car was sold for Rs.
24,00,000. Compute depreciation for A.Y. 2021-22.
Solution
Computation of the value of Net Block
Particulars Rs.
Opening WDV of block -3Cars) 18,00,000
Add: cost of new c ar purch ased 6,00,000
Total -4c a r s 24,00,000
Less: sales price -1c a r Sold 24,00,000
Closing Balance of block -3c a r s 0
Depreciation allowable
Because WDV is Nilalthough three
cars still exist in the block0
21.What would be the position, if all of the above four cars were sold for
Rs. 2,00,000 ?munotes.in

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102Solution
Computation of the value of Net Block
Particulars Rs.
Opening WDV of block -3 Cars) 18,00,000
Add: cost of new car purchased 6,00,000
Total -4c a r s 24,00,000
Less: sales price -4cars s old 20,00,000
Closing Balance -No Cars 4,00,000
Depreciation allowable ( empty block ) 0
Short term capital loss on sale of cars 4,00,000
4.4.Expenditure on Scientific Research
Scientific research as per section 43(4) means
“any activity fo r the extension of knowledge in the fields of natural
or applied sciences including agriculture, animal husbandry or fisheries”.
Under section 35, the expenditure on scientific research will be
allowed as deduction as under: -
A.Expenditure on i nhouse R esearch relating to own business
Under s ections 35(1)(i), 35(1)(iv) and 35 (2),deduction of
expenditure is allowed as under : --
i.The expenditure must be incurred by the assessee on in -house
research relating to own business
ii.Expenses not related to assessee’s own business would not be
allowed
iii.Expen diture may be revenue in nature or capital such as plant or
equipment for research or construction of building for research
(excluding cost of land) or other expenses of capital nature connected
with the r esearch .
iv.Expenses whether capital orrevenue incurred up to three years prior
to the commencement of business including salaries of the research
staff or research material used in scientific research will be allowed
inthe previous year in which the busi ness is commenced .
v.Deduction is available ,even if the relevant asset is not put to use for
research and development during the previous year.
vi.No depreciation will be allowed on an asset used in scientific
research covered under this section .However, when the asset is put
to use for business after cessation of scientific research, depreciation
will be allowable .
vii.As per section 41(3), t he cost price of a scientific research asset or
amount allowed as deduction under this section, will be treated as
business income of the previous year in which ascientific research
asset is sold andthe excess of sale price over cost ( or indexed cost) of
acquisition will be treated as “Capital gains”.munotes.in

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103Illustration
22.AB Ltd incurs expenses on scientific research relate dt oi t s
business during the financial year 20 15-16onwards @ Rs 1 Lakh per
year. It commences the business during the financial year 2020 -21.
Ascertain the deduction of scientific research expenditure.
Solution
The aggregate expenditure incurred in f inancial year 2020 -21 ,
the year in which the businesses commenced and three years prior to that
i.e.2017 -18,2018 -19 and 2019 -20, works out to Rs 4 lakh , which will be
allowable as deduction under section 35inassessment year 2021-22.
Expenditure inc urred in prior to the fin ancial year 2017 -18will be
ignored.
23.A scientific research asset having cost of Rs 5 lakh, which was fully
allowed as deduction in assessment year 2015 -16,issold on 31 -03-2021
for Rs. 7 lakh.Then the amount of rupees 5 l akh originally deducted will
betreated as the business income and the balance of Rs 2 lakh over the
cost will be chargeable as capital gain in assessment year 2021 -22.
B.Sum paid for research to others
Under section 35(1)(ii) , weighted deduction equal toone and one
half times will be allowed in respect of any sum paid to a nyresearch
association having object ofundertaking of scientific research or to any
university, college or other institution approved to be used for scientific
research .
C.Sum paid to aR& D company
Under s ection 35(1)(ia ),deduction will be allowed in respect of
any sum paid to a scientific R&D company registered in India and
approved by the prescribed authority to be used by it for scientific
research .
D.Sum paid for social s ciences etc.
Under s ection 35(1)(iii ),deduction will be allowed in respect of
any sum paid to any approved research association which ha ving object
ofundertaking of research in social science or statistical research or to a
university, college or other i nstitution to be used for research in social
science or statistical research is allowed .
E.Sum paid for approved research
Under section 35(1)(iii), weighted deduction equal to one and one
half times will be allowed in respect of any sum paid to a Nationa l
Laboratory or a University or an Indian Institute of Technology or a
specified person with a specific direction that the said sum shall be used
for scientific research undertaken under a programme approved in this
behalf by the prescribed authority .munotes.in

Page 104

104F.Approved inhouse Research in drugs ,bio-technology etc.
Asum equal to one and one -half times will be allowed as
deduction under s ection 35(2AB)(a) in respect of the capital or revenue
expenditure (except on land & Building) incurred on scientific research
clinical drug trial, obtaining approval from any regulatory authority under
law and filing an application for a patent;
by a company (not allowed to other assesses)
engaged in the business of
bio-technology or
manufacture or production of any article or thing, not being an
article or thing specified in the XI Schedule,
in-house research &development facility approved by the
prescribed authority
subject to the condition that the company enters into an agreement
with itfor co -operation i n such research and development facility and
fulfils such other prescribed conditions with regard to maintenance of
accounts and audit thereof and furnishing of reports.
G.Some relevant points
1.Goods specified inSchedule XI include beer, wine & other a lcoholic
spirits, tobacco products like cigars , cheroots, cigarettes, biris,
smoking mixtures for pipes and cigarettes, chewing tobacco, snuff ,
cosmetics and toilet preparations, tooth paste, dental cream, tooth
powder, soap, aerated waters, confectioner y, chocolates, gramophones,
record -players, projectors, photographic apparatus and goods , office
machines and apparatus such as typewriters, calculating machines,
cash registering machines, cheque writing machines, intercom
machines and teleprinters but NOT Computers, furniture, made partly
or wholly of steel , safes, strong boxes, cash and deed boxes, strong
room doors, latex foam sponge, polyurethane foam, crown corks, and
other fittings of cork.
2.Cost of building will be eligible for deduction under section 35(2) .
3.The expenditure ,on which weighted deduction is allowed under this
section will not be eligible for deduction under any other provisions of
the Act.
4."Expenditure on scientific research", in relation to drugs and
pharmaceuticals, shall include expenditure incurred on clinical drug
trial, obtaining approval from any regulatory authority under any
Central, State or Provincial Ac t and filing an application for a patent .
5.Other important provisions
(a)Scientific research by at the approved institute sneed not be related
to the business of the assesseemunotes.in

Page 105

105(b)Contribution eligible for weighted deduction under this section will
not be eligible for deduction under other provisions of the Act .
(c)In case of any subsequent cancellation or withdrawal o fapproval
toa notified university, college , research association or other
institution or any approved programme is withdrawn ,weighted
deduction will not be denied to the assessee.
(d)Any violation of condition for approval will result into withdrawal
ofthe deduction as a mistake apparent from record.
(e)On amalgamation the provisions will continue to apply to the
amalgamated company as if the amalgamating company had not
sold or otherwise transferred the asset .
(f)
(g)Bottom of Form
(h)
4.5.Amortisation of Spectru mF e e
As per section 35ABA ,any capital expenditure incurred for
acquisition of any right to use spectrum for telecommunication services
will be deducted equally over a period of the expenditure .
4.6.Amortisation of licences Fee
Under section 35ABB,a ny capital expenditure incurred for obtaining
licence by a telecommunication operator will be deducted equally over a
period of the expenditure and the deduction so granted in respect of
licence fees or spectrum fees may be withdrawn as wrongly allowed as a
mistake apparent from record in case of non -compliance of provisions
like transfer of spectrum or licence.
On amalgamation the provisions will continue to apply to the
amalgamated company as if the amalgamating company had not sold or
otherwise transferred the asset
Illustration
24.Vodafone pays 5G fees of Rs 50 Cr. with a validity of 10 years.
Vodafone will be allowed to amortize the fees 1/10 X50 or Rs 5 Cr
every year beginning from the year of actual payment or commencement
of business whichever is later. In case of amalgamation with Idea, the
deduction will be allowed to Idea as if no transfer has taken place.
4.7.Specified infrastructure projects
Under section 35AD(1 ),capital expenditure incurred by an assessee
wholly and e xclusively for any specified business carried on by him will
be allowed to be deducted i n the year in which such expenditure is
incurred or the year of commence ment of operations in the case of the
expenditure incurred prior to the commencement of its operations if the
amount is capitalised in hisbooks of account .munotes.in

Page 106

106The provisions like continuance of application of provisions on new
entity in case of amalgamation , transfer of hotels etc .andwithdrawal of
deduction for non -compliance are applicab le*mutatis mutandis (w i t h
necessary changes) .
One addition alcondition is that the business must be new not
restructure of old business.
Specified business includes:
i)setting up and operating a cold chain facility;
(ii) setting up and ope rating a warehousing facility for storage of
agricultural produce;
(iii) laying and operating a cross -country natural gas or crude or petroleum
oil pipeline network for distribution, including storage facilities
being an integral part of such network;
(iv) building and operating, anywhere in India, a hotel of two -star or
above category ;
(v)building and operating, anywhere in India, a hospital with at least one
hundred beds for patients;
(vi) developing and building a notified housing project under a sc heme
for slum redevelopment or rehabilitation framed by the
Government ;
(vii) developing and building a housing project under a notified
Government scheme for affordable housing;
(viii) production of fertilizer in India;
(ix) setting up and operating notified or approved an inland container
depot or a container freight station;
(x)bee-keeping and production of honey and bees wax;
(xi)setting up and operating a warehousing facility for storage of sugar;
(xii) laying and operating a slurry pipeline for the transportation of iron
ore;
(xiii) setting up and operating a notified semi-conductor wafer fabrication
manufacturing unit ;
(xiv) developing or maintaining and operating or developing, maintaining
and operating a new infrastructure facility viz.:-
(i)a road including toll road, a bridge or a rail system;
(ii) a highway project including housing or other activities being an
integral part of the highway project;
(iii) a water supply project, water treatment system, irrigation project,
sanitation and sewerage system or solid waste management
system;munotes.in

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107(iv) a port, airport, inland waterway, inland port or navigational
channel in the sea;
4.8.Expenditure onAgricultural Extension Project .
W.e.f.A.Y. 2021 -22 u nder section 35CCC,a n assessee shall be
allowed a deduction *equal to the expenditure incurred on notified
agricultural extension project. The amount so deducted be deduction shall
not be allowed again under any provisions of the Act for the same or any
other assessment year. (*Before that 1-1/2 ti mes)
4.9.Expenditure .onSkill Development project
W.e.f.A.Y. 2021 -22 , u nder section 35CC Dacompany assessee
(other assessees excluded)shall be allowed a deduction *equal to the
capital or revenue expenditure (not being cost of land & building)
incurre d on notified skill development project. The amount so deducted
shall not be allowed again under any provisions of the Act for the same or
any other assessment year.
( *Before that 1 -1/2 times)
4.10.Amortisation of Preliminary Expenses
Section 35 D allow s amortisation ofpreliminary expenses subject
to following conditions :-
A.Eligible assessee
a)anIndian company ,or
b)a resident non -corporate assessee.
A foreign company regardless of its residential status and a non -
resident or N.O.R non company entity arenot eligible under thissection
B.Time and purpose of preliminary expenses
i.ForSetting up an undertaking or business before commencement
ofbusiness; or
ii.inconnection with:
a)extension of an industrial undertaking ;or
b)setting up a new industrial unit
Expense sincurred after commencement of business, in connection
with extension of or setting up a non -industrial undertaking will not be
eligible under this section .
C.Eligible Expenditure
(a)Expenditure in connection with:
preparation of feasibili ty report,
preparation of project report,
conducting a market survey (or any other survey necessary for
the business of the assessee ) ormunotes.in

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108engineering services related to the business of the assessee ,
carried out by the assessee himself or by a concern approved
by the CBDT.
(b)Legal charges for drafting any agreement for setting up or conduct
of the business.
(c)Legal charges for drafting the Memorandum and Articles of
Association .(M/A)
(d)Printing expenses of the Memorandum andArticles .
(e)Registration fees of a company under the Companies Act.
(f)Expenses in connection with the public issue of shares or
debentures of a company, underwriting commission, brokerage and
charges for drafting, typing, printing and advertisement of the
prospe ctus, and
(g)Any other prescribed expenditure.
D.Qualifying Expenditure
The aggregate expenditure exceeding the following limits will not be
eligible for deduction under this section :-
a)corporate assessee
5%ofcostof project; or
capital employed, whichever is more
b)non-corporate assessee: 5per cent of cost of project
E.Definitions of the terms
(i)Cost of project
Cost of project means the aggregate of actual cost of fixed assets
appearing in the books of the assessee as on the last day of the previous
year in which the busin ess of the assessee commences.
Fixed assets include land, buildings, leaseholds, plant, machinery,
furniture, fittings and railway sidings (including expenditure on
development of land and buildings),or additional cost incurred after
commencement of business in connection with extension or setting up an
industrial undertaking) of fixed assets,
(ii)Capital employed
Capital employed means
a.theaggregate of the
issued share capital,
debentures ,and
long-term borrowings
ason the last day of the previous year in which the business of the
company commences ,ormunotes.in

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109b.Additional capital borrowings etc .brought after
commencement of business in connection with extension or
setting up an industrial undertaking,
Long term borrowings for th is purpose means moneys borrowed in
India by any company from the Government or Financial institutions like
ICICI ,I F C I etc. orbanks or foreign borrowings in connection with
acquisition of plant and machinery repayable after a term of seven years or
more.
F.Amount of deduction
One-fifth of the qualifying expenditure is allowable as deduction in
each of the five successive years beginning from the year of -
commencement of the business , or
completion of extension of industrial undertaking ,or
commence ment of production or operation s by the new industrial
unit.
G.Other Points
1.Non-corporate assessees are required to get their account audited
before the due date of filing return for claiming deduction under this
section .
2.On amalgamation / demerger of the a ssessee company with other
company, deductions can be claimed by the amalgamating or demerged
company.
3.Amount deducted under this section will not be eligible for deduction
under any other provision of the Act.
Illustration
25.ABC Ltd isan existing Indian company engaged in developing and
providing computer software services .I tincurs the following expenditure
in connection with the setting up of anew unit. The project complete din
March 2021.Determine the amount deduction admissible under section
35D.
Particulars Rs
Preparation of project report 2,00,000
Market Survey 6,00,000
Legal charges for additional capital for new unit 3,00,000
Engineering services not approved by CBDT 5,00,000
Cost of the Project as on 31/03/201 8* 60,00,000
Capital employed as on 31-03-2018
Last day of the year of commencement of project.50,00,000munotes.in

Page 110

110Solution:
Eligible Expenditure
Particulars Rs
Preparation of project report 2,00,000
Market Survey 6,00,000
Legal issue ofadditional capital for new unit 3,00,000
Engineering services not approved -ineligible 0
Total 11,00,000
Gross Qualifying Amount
5% of cost of the project -(5% X 60,00,000) 3,00,000
5% of thecapital employed (5% X 50,00,000) 2,50,000
Gross Qualifying Amount (higher of the two ) 3,00,000
NetQualifying Amount
Rs 3,00,000 being the lower of the following:
I.Gross qualifying amount :Rs 3,00,000 or
II.Actual amount of preliminary expenses :Rs 11,00,000
Amount of Deduction
1/5thof the net qual ifying amo unt(1/5 X 3,00,000) Rs.60,000 each for 5
assessment from A.Y. 2021-22onwards .
4.11.Expenditure on amalgamation/ demerger
Under section 35DD, any expenditure incurred wholly and
exclusively for the purposes of amalgamation or demerger of an
undertaking, the assessee, being an Indian company shall be allowed a
deduction of an amount equal to one -fifth of such expenditure for each of
the five successive previous years beginning with the year of the
amalgamation or demerger. No deduction shall be allowed in respect of
such expenditure under any other provision of this Act.
4.12.Expenditure under voluntary retirement Scheme
Under section 35DDA one fifth ofthe payment made to an
employee in connection with his voluntary retirement under any voluntary
retirement Scheme (VRS) by an assessee is deducted in the year and four
consecutive years each thereafter.
In case of amalgamation/ demerger/ reorganisation from one ent ity
to another of a company assessee, the deduction wi ll be available to the
amalgamated / resultant company or the successor entity .munotes.in

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111No deduction shall be allowed in respect of such payment under any
other provision of this Act
4.13.Expenditure on prospecting, etc., for minerals
Under sectio n35E,expense incurred on prospecting of specified
minerals or any deposits thereof incurred by an Indian company or a
resident non -company assessee engaged in mining operations are debited
equally in 10 instalment sbeginning from theyear of commencem entof
the commercial production .
Other relevant points:
(i)Such expenses should beincurred in the year of commercial
production orimmediately preceding four years.
(ii)Expense will not include the following;
a.Any part of expenses met directly or indirect ly by any other person
or authority
b.any sale, salvage, compensation or insurance moneys realised by
the assessee in respect of any property or rights brought into
existence as a result of the expenditure
c.anycapital expenditure foracquisition of the min es or deposits of
such mineral or any rights therein
(iii)operation include exploring, locating or proving deposits of any
mineral, and includes any such operation which proves to be
infructuous or abortive .
(iv)Non-company assessees are required to get thei r account audited
before the due date of filing return and furnish the report thereof
along with the return of income
(v)Provision for continuance in case of amalgamation, merger, demerger,
restructure of business or conversion of one entity to another are also
applicable as per the section mutatis mutandis
(vi)In case of inadequacy of profits , the unabsorbed amount will be
added in next year’s claim and so on up to the tenth previous year
from the year of commercial production.
4.14.Specific deductions
Section 36(1) expressly allows the following specific deductions in
computing taxable income under the head profits and gains of business or
profession :
4.14.1 .Insurance premium
Anyamount of insurance premium paid
to cover risk of damage or d estruction of business stocks used in
business or profession; -Section 36(1)(i)
on the life of the cattle owned by the milkmen being member of a
primary co -operative society, by a federal milk co -operative society -munotes.in

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112Section 36(1)(ia)
on the health of his employees by an employer , paid byany mode of
payment other than cash (e. g. cheque )an approved scheme framed
bytheGIC or other insurer approved by theIRDA )-Section 36(1)(ib)
4.14.2. Bonus or commission -
Any sum paid to an emp loyee as bonus or commission for services
rendered, where such sum would not have been payable to him as profits
or dividend if it had not b een paid as bonus or commission .-Section
36(1)(ii)
Under section 43B, bonus or commission will be deducted onl y
on payment thereof on or before the due date of furnishing return under
Section 1 39.
4.14.3. Interest on capital borrowed
Interest paid or payable on borrowed funds usedfor the purpose of
business or profession -Section 36(1)(iii)
Recurring sub scriptions paid periodically by shareholders /
subscribers in Mutual Benefit Societies, which fulfill the prescribed
conditions is deemed to be capital borrowed.
Interest (paid/payable in respect of capital borrowed for acquisition
of an asset for ext ension of existing business or profession whether
capitalized in the books of account ornot) will be allowed only when an
asset is put to use .
Interest for the period from the date of borrowing till the date
when the asset is put to use will not be a llowed but beadded to the cost of
the asset. This is in harmony with ICDS -IX, which mandates
commencement of capitalization of interest from the date of borrowing of
funds till the asset is first put to use, irrespective of whether acquisition of
theasset is for extension of existing business or not.
4.14.4. Zero Coupon Bonds
Discount on notified (by Central Government) Zero Coupon Bonds
issued by aninfrastructure capital company or infrastructure capital fund
or a public sector company is allowa ble on pro rata basis provided no
other benefit or payment is received in respect of such bonds before their
maturity -Section 36(1)(iiia)
Zero Coupon Bonds are the bonds, which do not carry coupon
rate of interest. Instead, the bonds are issued at a p rice lower than their
redemption value .The difference between issue price and redemption
value or the discount is allowed as deduction onpro rata basis having
regard to the period of life i.e.date of issue to the date of maturity or
redemption of such bonds .Discount on Zero Coupon is amorti sed over the
life time of the Bonds.munotes.in

Page 113

113Illustration
26.Infrastructure Capital Company issues 1 Crore duly notified Zero
Coupon Bonds of Rs. 1000 each at a price of Rs. 640 on 01 -1-2018.T h e
bonds are redeemable at par o n31-12-2020. Show how the discount would
be deducted from the total income of the company.
Solution:
Face value of Bond -Rs 1,000
Issue price -Rs 640
Discount offered Rs 1000 -640 = Rs 360
Total discount offered on 1 Crorebonds -Rs. 360 Crore
Thetenure of the coupon is three years or 36 months.
Pro rata deduction to be allowed
A.Y. Period Working Amt
2018 -19
-3 months01-01-2018 -
31-03-20183/36X360Cr Rs.30Cr.
2019 -20
-12 Months01-04-2018
31-03-201912/36X360Cr Rs120Cr.
2020-21
-12 Months01-04-2019
31-03-202012/36X360Cr Rs120Cr.
2021-22
-9months01-04-2020
31-12-20209/36X360Cr Rs 90Cr.
4.14.5. Contribution towar dsRPF / Approved Superannuation Fund
Any contribution paid by the assessee as an employer towards a
recogni sed provident fund /approved superannuation fund, subject to
prescribed limits and conditions -section 36(1)(iv) subject to the
provisions of section 43B.
4.14.6. New Pension Scheme
Any contributions by employer to a pension scheme referred to in
section 80CCD(2) on account of employee to the extent of 10% of his
salary plus dearness allowance but excluding all other all other allowances
and perquisites -Section 36(1)(iva)
4.14.7. Approved Gratuity Fund )
Any sum paid by the assessee as an employer by way of
contribution towards an approved gratuity fund created by him for the
exclusive benefit of his employees under an irrevocable trust -Section
36(1)(v ).
4.14.8.PF / ESIC
Contribution received by an employer from his employees for
crediting in any fund e.g.provident fund oremployee’s state insurance
scheme a ndcredited by the assessee to the employees’ account in the
relevant fund or funds on or before the due date prescribed under the
relevant law -Section 36(1)(v a).munotes.in

Page 114

114Such contributions from e mployees are treated as income of the
employer under section 2(24( x) when received and allowed as deduction
when p aid by the due date in terms of section43B.
4.14.9. Death of animals
The difference between the actual cost to the assessee of the
anim als and the amount, if any, realised in respect of the carcasses or
animals used for the purposes of the business /profession otherwise than as
stock -in-trade butdied or become permanently useless for such purposes
Where the animals are treated as st ock in trade, the loss orprofit is
the part of normal sales and purchase, therefore this provision is not
applicable -Section 36(1)(vi) .
4.14.10.Bad debts
Any amount of bad debt or part thereof, which is written off as
irrecoverable in the accounts o f the assessee for the previous year -
Sections 36(1)(vii) and 36(2) , subject to following conditions:
(a)There isrelationship of debtor and creditor.
(b)The debt isincidental to the business or profession.
(c)The debt hasbeen considered in the computation of income, or it
represents money lent in ordinary course of the business of
banking or money -lending.
(d)Bad debt iswritten off as irrecoverable in assessee’s accounts in
theprevious year
(e)Anydebt written off but not allowed earlier may be deducted as
baddebts
(f) Bad debts will not include any provision for bad and doubtful
debts made in the accounts of the assessee;
(g) Any deficiency will be deductible in the previous year in which
the ultimate recovery is made;
(h)any such debt or part of debt written off as irrecoverable in an
earlier previous year may be deducted if the deduction was not
allowed onthe ground that it had not been established to have
become a bad debt in that year;
(i)The assessing officer may deduct bad debts written off in the
current ye ar in an earlier previous year under section 155(6) with in
a period of 4 years if he is satisfied that the debt hadbecome
irrecoverable in earlier years .
(j)A bad debts can be claimed without recording in books of account
as irrecoverable or bad as per second proviso to section 36(1)(vii)
if the debt was c onsidered in the computation of income as per the
notified ICDSs .
4.14.11.Provision by banksmunotes.in

Page 115

115Provision for bad and doubtful debts Under made by Indian
schedule &non-scheduled banks ,financia linstitutions and non -banking
financial companies upto the following limits namely :-
8.5% o f total income by a scheduled Indian bank other non -scheduled
bank,
5%of total income a public financial institution or a state financial
corporation or a stateindustrial investment corporation and a foreign
bank of the total income (computed before making any deduction
under this clause and Chapter VI -A) and
10% of the aggregate average advances made by the rural branches of
such bank computed in the prescribed manner, and subject to certain
conditions or
5% of total income of a non -banking financial company;
5% of Non -Performing Assets or NPAS in accordance with the RBI
guidelines shown in the books of account of the bank on the last day
of the previous y ear a bank at the option of the bank. -Section
36(1)(viia),
The deduction is subject to two conditions :
(a)Assessee has debited the amount of such debt or part of debt in that
previous year to the provision for bad and doubtful debts account .
(b)Deduc tion relating to any such debt or part thereof shall be limited to
the amount by which such d ebt or part thereof exceeds the credit
balance in the provision for bad and doubtful debts account.
4.14.12. Special reserve
40% of profits of financial inst itutions in respect of amounts
transferred to a special reserve created and maintained by them subject to
a ceiling of twice the amount of the paid -up share capital and of the
general reserves -Section 36(1)(viii) .
Financial corporation mean :-
a corpor ation which is engaged in providing long -term finance for
industrial ,agricultural development or development of infrastructure
facility in India ,or
a public company formed and registered in India with the main object
of carrying on the business of pr oviding long -term finance for
construction or purchase of houses in India for residential purposes,
Profit means profits derived from such business of providing long -
term finance computed under the head Profits and gains of business or
profession before m aking any deduction under this clause
4.14.13. Promotion of family planning -munotes.in

Page 116

116Expenditure incurred bona fide by a company for promotion of
family planning amongst employees -
in full if the expenditure is of revenue nature; and
One fifth of capita l expenditure for each of the five years beginning
from the year in which it was incurred .
Unabsorbed family planning expenditure will be allowed to be carried
forward and set off in the same manner as depreciation -section
36(1)(ix).
4.14.14. Expendit ureby Statutory bodies
Revenue expenditure incurred by any statutory corporation or a
body corporate for the objects and purposes authorised by the Act un der
which it is constituted or established -section 36(1)(x).
4.14.15. Cash Transaction Tax
Any amount of banking cash transaction tax paid by the
assessee -section 36(1)(xii) .
4.14.16.Credit Guarantee Fund
Any sum paid by a public financial institution by way of
contribution to a specified credit guarantee fund trust for specified small
industries -section 36(1)(x iv).
4.14.17.Security Transaction Tax)
Thesecurity transaction tax (STT) paid by the assessee if the
income ar ising from taxable securities transactions is included in the
income computed under the head "Profits and gains of business or
profession .-section 36(1)(xv ),
4.14.18. Commodity Transaction Tax
Thecommodity transaction tax paid by the assessee, if the
income arising from such taxable commodity transactions is included in
the income computed under the head "Profits and gains of business or
profession .-section36(1)(xvi ).
4.14.19. Expenditure by Co -operative Society for purchase of
Sugarcane
Theexpenditure incurred by a co -operative society engaged in the
business of manufacture of sugar for purchase of sugarcane at a price,
which is equal to, or less than the price fixed or approved by the
Government .-section 36(1)(xvii) .
4.14.20.Losses as pe rICDS
Marked to market loss or other expected loss as computed in
accordance with the notified income computation and disclosure
standards -section 36(1)(xviii) .munotes.in

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1175.5GENERAL DEDUCTIO NS
Section 37 is the residual section .I tallows deduction of a ll the
expenditure not claimed specifically under the other provisions , subject to
thecondition that such expenses must be incurred :-
(a)wholly and exclusively for the purposes of the business /profession
carried on by the assessee ,in respect of which income is computed
under this head.
(b)during the previous year , subject to the provisions of section 43B,
(c)after the business or profession is set up
(d)asrevenue expenses in nature e.g. expenses by way of cost of raw
materials, tools, spares , cost of lab our, salary , brokerage ,
commission, legal fees, litigation expenses, professional tax, trade
mark registration, lease rent or other business expenses .
However, following expenses will not be allowed under this
section :-
i.Capital expenditure e.g. expe nditure on acquisition orrenovation of
assets , conveyance or registration ofland,eviction of a tenant etc.;
ii.Personal expenses e.g. income taxorwealth tax, drawings or
household expenses of the assessee ;
iii.Expenses expressly allowed in sections 30to36;
iv.Expenses incurred for any purpose which is an offence, or which is
prohibited by law, e.g. penalty, bribery, composition money paid in
respect of any offences or breach of law orpenal interest under any
lawetc.
v.Expenses on advertisement in any souvenir, brochure, tract,
pamphlet or the like published by a political party s pecifically
excluded from the purview of the section 37(2B)
vi.any expenditure in curred by an assessee on the activities relating to
corporate social responsibility referred to in section 135 of the
Companies Act, 2013 .
5.6SPECIFIC DISALLOWA NCES
6.1.Some expenses are not allowed be deducted ,while computing profits
and gains from busi ness and profession for a number of reasons such as :
Not satisfying the inherent c onditions attached with the allowance .
E.g.personal and capital expenses will be disallowed under section
37, which allows only revenue expenses incurred wholly and
exclusively in the course of business or profession .munotes.in

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118Absolute d isallowances for policy reasons such as political
advertisement and CSR expense , which are expressly disallowed
under section 37.
Default ssuch as non -deduction of tax at source .
Deferment or time factor. E.g., Unpaid taxes , bonus etc. covered
under section 43B are disallowed in the year of accrual .
Personal element, e.g., drawings by an individual, interest and
remuneration in case of a firm.
Reasonableness e.g. unreasonable payments to relative under section
40A(2),
Mode for payment e.g. Cash payments under section 40A (3)
Partial disallowance due to ceilings, e.g. interest and remuneration
payable to partners.
Express disallowance , e.g. CS Rexpenses
These disallowances are discussed below
6.2. Disallowance in case of any assessee
(i) Payments to Non -Residents without TDS Under s ection 40(a)(i)
any interest ,royalty, fees for technical services or other sum chargeable
under this Act, which is payable, —
(A)outside India; or
(B) in Ind ia to a non -resident, not being a company or to a foreign
company, on which tax is deductible at source and such tax has not
been deducted or, after deduction, has not been paid on or before the
due date for filing return of income under section 139(1).
The amount disallowed as above will be allowed as a deduction in
computing the income of a subsequent previous year in which such tax has
been paid.
Illustration
27.During the financial year 2020 -21,Amakes payment of commission
ofRs.1,50,000 to B,whoi sa non-resident ,Tax of Rs 30,000 is required
to be deducted at source from the commission.
Show whether the commission will be allowable inthe following
situations when A -
(i)does not deduct tax at source .
(ii)deducts the taxbut not does not pay itto the Government in time.
(iii)deducts thetaxandpays it to the Government in time.
(iv)deducts the tax but pays it to the Government late in financial year
2021 -22.munotes.in

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119Solution:
In cases (a) and (b) commission will be disallowed under section 40(a) (i)
because theassessee fails to deduct the TDS or pay the amount of TDS to
the Government.
In case (c) deduction will be available in inA.Y. 20 21-22.
In case (d),deduction will be allowed in A.Y. 20 22-23.
(ii) Payments made to residents without TDS
When any sum ispaid or payable to a resident, on which tax is
deductible at source and the assessee does not deduct such tax or,
after deduction, does not pay the same to government on or before
the due date for filing return of income under section 139( 1), 30%
of such sum shall be disallowed under section 40(a)(ia).
However , s uch disallowance will not be made if the recipient of
the income has paid the due tax thereon and as a result thereof the
assessee is not deemed to be an assessee in default under section
201(1).
30% of the sum disallowed under this section willbedeductible in
computing the income ofsubsequent previous year in which such
tax has been paid.
(iii)Payment offringe benefit tax -Section 40(a) (ib)]:
(iv)Any sum paid on acc ount of any rate or tax levied on the profits or
gains of any business /profession or assessed at a proportion of, or
otherwise on the basis of, any such profits or gains i.e. income tax -
Section 40(a) (ii) ;
(v) Payment ofwealth -tax.-Section 40(a) (iia)
(vi) Any amount paid by way of royalty, licence fee, service fee,
privilege fee, ser vice charge or any other fee or charge, by
whatever name called, which is levied exclusively on; or which is
appropriated, directly or indirectly, from, a State Government
undertaking by the State Government. -Section 40(a) (iib)
(vii)Salary payable outside Ind iaor to a non -resident, if the tax has not
been deducted or deducted and has not been paid therefrom under
Chapter XVII -B.
However, such salaries will be allowed as a deduction in the year
in which the tax has been paid in respect of the salary. -Sectio n
40(a) (iii)
(viii)Any payment to a provident or other fund established for the
benefit of employees of the assessee, unless the assessee has made
effective arrangements to secure that tax shall be deducted at
source from any payments made from the fund, which are
chargeable to tax under the head Salaries. Such payment will not
be allowed as a deduction if tax has not been deducted in the year
in which such payments have been made. However, thesemunotes.in

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120payments will be allowed as a deduction in the year in which tax
has been pai d-Section 40(a) (i v).
(ix)Any tax actually paid by an employer on perquisites under
section 10(10CC) -Section 40(a) (v)
6.3.Disallowances in the case of any firms
a.Remuneration to Partners : As per section 40(b) ,any payment of
remuneration to any partner of a firm assessable as such ,
i)who is not a working partner ; or
ii)who is aworking partner, but such payment of remuneration isnot
authorised by or is not in accordance with the terms of the partnership
deed;
iii)aworking partner but payment of rem uneration t hough authorised,
relatesto any period falling prior to the date of such partnership deed
or
iv)“Working partner" means an individual who is actively engaged in
conducting the affairs of the business or profession of the firm of
which he is a part ner;
v)any p ayment of remun eration, to aworking partner though authorised
and otherwise allowable, if the remuneration to all partners in
aggregate exceeds the following limits:Book ProfitsRemuneration allowableon the first Rs. 3,00,000 of the
book profit or in case of a lossRs.1,50,000 or 90 %of the book -
profit, whichever is more;on the balance of the book -profit60% of the book profits
“Book -profit “means the net profit, as shown in the profit and loss
account for the relevant previous year, computed in the manner laid down
in Chapter IV -D as increased by the aggregate amount of the remuneration
paid or payable to all the partners of the firm if such amount has been
deducted while computing the net profit. In other words, Book Profit
means net profit before providing for remuneration to partners.
“Remuneration means “ any payment of salary, bonus, commission or
remuneration by whatever name called.
b.Interest to Partners
As per section 40(b), any payment of interest to any partner of a firm
assessable as such
(i)which is not authorised byor is not in accordance with, the terms of
the partnership deed; or
(ii)which , thought authorised, relat esto any period falling prior to the
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121(iii)Which is in accordance with th e deed of partnership but in excess of
the amount calculated at the rate of twelve per cent simple interest per
annum.
Following points are also relevant in this regard: -
(i)Apartnership deed at any time during the previous year may be
amended to provide forpayment of interest but such amendment will
be applicable only prospectively. Retrospective effect cannot be given
to such terms.
(ii)The interest will be considered in the same capacity in which it is paid.
Illustration s
28.Ais a partner in a firm as a trustee of B.A advance shis personal
money as well as B’s money to the firm. The firm pays interest to A in his
personal capacity and as the r epresentative or trustee of B.
Interest payable to A in his capacity of trustee will be considered under
section40(b) . Interest paid inhisindividual capacity will be ignored. On
the other hand, if A is a partner in his individual capacity, then interest
paidto him in his representative capacity shall be ignored.
29.For the financial year 20 20-21afirm shows n et profit of Rs 50,000
after debiting the following amounts:
Remuneration to A ( not a working partner) Rs 50,000.
b)Remuneration to B-Rs5,00,0 00for the full year . The firm has made
provision for his remuneration b y a partnership deed dated 01/7/ 2020
c)Interest to partners @ 18% p.a.Rs.90,000.
Compute the business profits for A.Y. 2021 -22
Solution:
Computation of Profits and gains from Business & Profession -
Assessment Year-2021-22
Particulars Rupees
Business Profits as per Profit & Loss A/c 50,000
Add back -Salaries & Interest paid to partners
(50,000+5,00,000+90000)6,40,000
Book Profits before interest & remuneration 6,90,000Less: Interest authorised by partnership deedrestricted to 12% i.e. 90,000 X 12/1860,000
Book Profit Before Remuneration 6,30,000
Remuneration to Partners
( Lowest of the following )3,75,000
A–Notworking partner NIL
B-Actual Remuneration 5,00,000
Remuneration allowed from the date
of deed -9 months from 01-07-
2020to 31 -03-20213,75,000munotes.in

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1225,00,000 X9/12
Maximum allowable 4,68,000
90% of Rs 300000 of book profit
Rs 2,70,000
60% of the balance book profit of Rs
(6,30,000-3,00,000) -1,98,000
Profits and gains from Business & Profession 2.55,000
c.Remuneration/Interest byan association of persons (AOP) /body of
individuals (BOI)
Any payment of interest, salary, bonus, commission or remuneration,
by whatever name called, made by an association of persons ( AOP) /body
of individuals (BOI) to a member of such association or body .-Section .
40(ba)
“Association or “body” does not include a company or a co -operative
society or a society registered under the Societies Registration Act, 1860,
or other registered charitable trusts.
Following points are also relevant: -
a.Unlike a firm, no part of interest paid to a member is allowable in case
of an association or a body. Hence , capacity or status of the member
in such AOP or BOI isrelevan t.Accordingly –
i.Interest paid by a member in his representative capacity to the
association or body or vice versa shall be ignored if he is a member
in his individual capacity.
ii.Conversely , Interest paid by a member in his individual capacity
to the a ssociation or body or vice versa shall also be ignored if he
is a member in his representative capacity
iii.Interest paid by a member in his representative capacity to the
association or body or vice versa shall be considered if he is a
member in his represe ntative capacity.
iv.Interest paid by a member in his individual capacity to the
association or body or vice versa shall be considered if he is a
member in his individual capacity
b.Where ,interest is paid to a member on funds borrowed by him, the
disallowan ces will be only on the net amount receivable by such
members.
c.Remuneration or interest to members of AOP/BOI are not allowed to
be deducted for computing income from business and profession
Illustrationmunotes.in

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12330.X is a member of BOI. X borrows a sum of Rs. 1 ,00,000 from market
with interest rate of 12% and advances it to theBOI. BOI pays Interest @
15% p. a.toX.Determine the amount to be disallowed.
Solution:
Particular Rs
Interest payable by BOI to X
15% on Rs 1,00,00015,000
Interest payable by X on his borrowing
12% on Rs 1,00,00012,000
Disallowable under section 40(b) (N e t ) 3,000
6.4.Disallowances In the case of all assesses
Section 40A (1)provid esfor disallowance of certain expenses in
certain circumstances .These disallowances are anti -avoid ance measures
in nature and are overriding and prevailing over the normal provisions
relating to the computation of income under the head "Profits and gains of
business or profession".
Thedisallowance s are discussed as under: -
i.Excessive payment to re latives
Under section 40A(2)(a) ,anyexpenditure resulting in any payment
to any specified person may be disallowed to the extent it is excessive or
unreasonable in t he opinion of the assessing officer having regard to the
market value of the goods or services and the benefit to the business or
profession. However, the section is not applicable to domestic
transaction s , which are at arm's length price as defined in 9 2F(ii).
Section40A(2) (b) gives a long list of specified persons , which
is summarised as under : -
A.Persons connected with the assessee
Status of assessee Specifie dperson
Individual any relative of the assessee;
Company any director or his relative
Firm any partner or his relative
Association of Persons anymember or his relative
Hindu Undivided Family any member or his relative
B.Entity holding substantial interest of the assessee
(sister concerns)
Person holding a substantial
interes t in the business or
profession of the assesseeSpecified person
Individual Individual or his relative
Company any director or his relative
Firm any partner or his relative
Association of Persons any member or his relative
Hindu Undivided Family any member or his relative
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124If partner of a firm, or director of company or member of a HUF , AOPhold substantial interest , then such company , firm, A OP or HUF will
be the specified person also other direct ors, partners , members and
their relatives will be the specified persons ( The above table will be
applicable to the concerns of where such persons are partners directors
or members)
D.Reverse connection .
Where assessee or his relatives, or if the asse ssee is a company, firm ,
HUF, AOP -its directors , members or partners etc. or their relatives ,
hold substantial interest in the business of other individual, company,
firm, AOP or HUF, the latter will be treated as the specified persons
“Relative ”inthis context means husband, wife , and brother ,sister
or any lineal ascendant or descendent of the individual .
Aperson holding “Substantial interest ”means a person holding
20% voting power in a company at any time during the previous year or
twenty p er cent of the profits of other concern viz proprietary concern,
HUF, AOP, B OI etc.
Illustrations
31.Examples of specifie dpersons under section 40A(2) :
Assessee Specified Person
A-an individual A, Mrs. A , parents ,brothers,sisters and children of A
Firm A having B,C & D as
partnersB ,C & D and their relatives
HUF A having B,C & D as
memb ersB, C & D and their relatives
AOP A with B, C & D as
membersB, C & D and their relatives
Company A with B, C & D as
directorsB, C & D and th eir relatives
Assuming B is a company B and all Directors of B
Assuming Ci saf i r m C and all Partners of C
Assuming Di sa H U Fo rA O P D and all Members of D
ii.Cash payments exceeding Rs 10,000/35,000
Under section 40A(3) / (3A), no dedu ction shall be allowed in respect
of any expenditure in respect of which payment exceeding Rs.10,000 (Rs.
35,000 in cases of payments made for plying, hiring or leasing goods
carriages) during asingle day ismade otherwise than by an account payee
cheque drawn on a bank or account payee bank draft, or use of electronic
mode or clearing system (ECS) through a bank account ..
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1251.The disallowance is on total pay ment ,if it crosses the limit of Rs.
10,000 /35,000 . All payment of Rs 10,001 / 35,001 and more will
face disallowance under this section .
2.All payments made in a single day will be considered in aggregate to
ascertain limit of Rs. 10,000/ 35,000 .
3.Ifcash payment in excess of Rs. 10,000/ 35,000 is made subsequently
in respect of anexpenditure , which was allowed in past on its accrual ,
thesuch excess payment will be deemed to be the business profit in
the year of payment .
4.Under rule 6Dome excep tions are provided from disallowance of
payment sexceed ingRs10,000 /35000 andotherwise than by way of
crossed cheque /bank draft etc.some of these circumstances are new
buyer, bank holiday, lack of banking facility ,etc.
5.Under section 40A (4), no pe rson can raise an issue in a suit for being
offered payment by account payee cheque or draft and not in cash.
Illustration
32.Audit fee provided during the financial year 201 5-16for Rs. 50,000is
paidby cash on 31.03.20 21.
Solution
Audit fee of Rs 50,0 00allowed as deduction in A.Y. 201 5-16will be
deemed be the profit of the A.Y. 2021 -22,w h e ni tw a s paidcash.
Illustration
33.A makes a payment of Rs. 15,000by a bearer cheque for purchase of
goods and c laims that disallowance under section 40A(3)is not applicable
and even if it is applicable, it will be restricted only on Rs. 5 ,000being ,
the amount exceeding Rs. 20 ,000. Examine his claim.
Solution
If payment in excess of Rs 15,000 is made otherwise than by an
account payee cheque or draft etc., entire payment of Rs 15,000 will be
disallowed without any basic limit. Bearer cheque and cash are not
acceptable modes of payment.
iii.Provision for Gratuity
Any provision for pay ment of gratuity to employee on their
retirement or termination of their serv ices for any reason will not be
allowed under section 40A ( 7)unless s uch provision is made by
contributing to an approved gratuity fund orfor payment of gratuity that
has become payable during the previous year .
Hence, gratuity is allowed as a deduction only when it has
become due and payable. However, once the provision for gratuity has
been allowed as deduction in any year, then any subsequent payment
there of will not be deductible again .
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126Under section 40A (9), deduction willnotbeallowed in respect of
any sum paid by the assessee as an employer towards the setting up or
formation of, or as contribution to, any fund, trust, company, association
of persons, body of individuals, society or other institu tion for any
purpose, except where such sum is paid for the purposes and to the extent
provided by or under section 36(1) (iv)/(v) or as required by or under any
other law for the time being in force like approved provident/gratuity
funds etc. However, any bona fide sum actually spent out of such fund
willbe allowed as deduction Under section 40(10). Further ,under section
40 (11) assessee will be entitled to receive back the unutilised part of any
such fund/assets .
v.Unpaid Liabilities
Section 43B provides an exception to the mercantile system of
accounting in respect of taxes and other specified expenses .It states that
these expenses will be allowed on payment basis not accrual basis
irrespective of m ethod of counting regularly employed by theassessee.
The section covers any sums payable by the assessee: -
(a) by way of tax duty, cess or fee, by whatever name called, under any
law for the time being in force,
(b) as an employer by way of contribution to any provident fund or
superannuation f und or gratuity fund or any other fund for the
welfare of employees,
(c)asbonus or commission toemployees under section 36(1)(ii);
(d)asinterest on any loan or borrowing from any public financial
institutions i.e. ICICI, IFCI, UTI, IDBI LIC or a state financial
corporation or a state industrial i nvestment corporation orin
accordance with the terms and conditions of the agreement governing
such loan or borrowing, or financial arrangement ;
da) as interest on any loan or borrowing from any a non -banking financial
company or, systemically important non -deposit taking non -banking
financial company ;
Conversion of interest into loan will not be treated as payment for this
purpose.
(e) as interest on any loan or advances from a scheduled bank ,aco-
operative bank other than a primary agricultural credit society ,a
primary co -operative agricultural orrural development bank
accordance with the terms and conditions of the agreement governing
such loan or advances,
(f)as an employer in lieu of, any leave at the credit of his employee, or
(g)as user , to Indian Railways for use of railway assets.
Previsions of section 43B will not be applicable if : -munotes.in

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127a)Thepayment is actually made on or before the due date of submission
of return of income; and
b)the evidence of such payment is submitted along with the return of
income.
Provisions of section 43Bmay be summarised as under: -
a)Sums accrued and paid within the same previous year would be
allowed in that year .
b)Sums accrued in one year and paid i n the following year but before
the due date of filing will also be allowed on accrual basis on
submission of proof of payment .
c)Other sums will be allowed only on cash basis and not on mercantile
basis.
Following table summarises the position:Applica tion of Section 43BCaseYear of DeductionAccrued and paid in same yearYear of payment /
accrual ;as both are samePaid a fter the end of the year in which it is
accrued but on or before the due date of
submission of return of income for tha ty e a r
and the proof of deposit is submitted along
with the return of incomeyear of accrualAny other time not covered above, or proof
not attached with returnYear of payment
Illustration
34.ABC Limited pays GST for the financial year 2020-21befor e30-09-
2021. Determine the assessment year in which the sales tax may be
claimed as deduction.
Solution
Tax is paid before due date for filling return of income viz.30-09-
2021 . Hence ,i twill be allowed on accrual basis in A.Y. 2021-22.
Illustration
35.ABC Ltd pays excise duty for the previous year 2020 -21on01-10-
2021 Inwhich assessment year will it be allowed?
Solution
ABC Ltd. pays tax after the due date for filling return of income .
Deduction will be allowed only in the year of actual payment in2021 -22
relevant to assessment year 2022-23.
Illustrat ionmunotes.in

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12836.Determine the year in which GST will be deducted from the business
profits of X Ltd. , who made following payment of excise duty
S.No. Date of payment Rupees
1 02-05-2020 25,000
2 20-07-2020 65,000
3 16-08-2020 80,000
4 05-12-2020 20,000
5 12-06-2021 40,000
6 02-12-2021 10,000
7 Unpaid 10,000
Total 2,50,000
Solution
First4items will be as deduction in assessment year 2021 -22 as
theyf e l l dueandwere paid in the same financial y ear2020-21.
Item 5, Rs.40,000 paid on12-06-2021 paid before the due date of
filing return will be allowed as deduction in assessment year 2021 -
22ifproof of payment is furnished along with return of income .
Item 6 -Rs. 10 ,000ispaid on 02-12-2021 after the due date for filing
of return for assessment year 2021 -22,willbe allowed in the year
of payment i .e.assessment year 2022 -23.
Item 7 -unpaid amount of Rs. 10 ,000 will not be allowed as
deduction until it is actually paid.
5.7 CHARGE ABILITY OF PROFITS
Section 41 provides for taxation of the following : -
a.Cessation of liability
As per section 41(1) , a ny amount received or the value of any
benefit accruing to the assessee or his successor in business, whether in
cash or in any o ther manner or by way of remission or cessation such
liability whether by a unilateral act or otherwise, in respect of any loss,
expenditure or trading liability incurred by the assessee and allowed as a
deduction in any year will be chargeable as the in come of the assessee or
the successor in business in the year of receipt of accrual of benefit .
"successor in business " means amalgamated company in case of
amalgamation with another company , the resulting company in case of
demerger , the other firm in case of a firm carrying on a business or
profession is succeeded by another firm,
Illustrations
37.Defective stock written off in books and allowed as deduction in
early years is now sold for Rs 10,000. The sales proceeds of the stock Rsmunotes.in

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12910,000 will b e taxable under section 41(1) even though the business is not
in existence.
38.A has converted his business into a company . The new company
received sales proceeds of the defective stock , the company being the
successor in business will be liable in res pect of that income.
b.Receipts from depreciable asset
Under section 41(2) , w here any depreciable asset being building,
machinery, plant or furniture is owned by the assessee , who uses the same
for the purposes of business and in respect of which dep reciation is
claimed under section 32(1)(i), is sold, discarded, demolished or destroyed
and the moneys payable in respect of such building, machinery, plant or
furniture, as the case may be, together with the amount of scrap value, if
any, exceeds the wri tten down value thereof, so much of the excess as
does not exceed the difference between the actual cost and the written
down value shall be chargeable to income -tax as income of the business of
the previous year in which the moneys payable for the buildin g,
machinery, plant or furniture became due.
Illustration
39.A printer costing Rs 15,000, on which depreciation of Rs 8,000 was
allowed, is sold for Rs.10,000 .
Surplus of Rs 3,000 *will be reduced from the block of assets and if the
bock does not exist , it will be taxable as STCG.
* 10000 -( Rs 15,000 -8000 )
c.Scientific Research Asset
Under section 41(3) ,w here an assessee claims and gets deduction
under section 35 (1)( iv) or 35 (2B) in respect of any capital asset used for
scientific research and subsequently sells the asset without having been
used for other purposes, then the excess of sale proceeds together with
any amount of insurance claim and the amount allowed as deduction ,
which is in excess of the actual cost of the asset shall be chargeable as the
income of the business or profession of the previous year in which the sale
took place.
"Sold" includes a transfer by way of exchange or a compulsory
acquisition under any law for the time being in force but does not include
a transfer, in a scheme of amalgamation, of any asset by the amalgamating
company to the amalgamated company, where the amalgamated company
is an Indian company.
Illustration
40.A machine costing Rs 20,000 fully allowed as deduction under
section 35 in the earlier yea rsis sold for Rs60,000 in financial year 2020 -
21.Rs 20,000 earlier allowed as deduction will be the business income
and Rs 40,000 will be taxed as capital gains in the assessment year 2021 -
22.munotes.in

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130d.Recovery of Bad debts
Under section 41(4), a mount of any debt or part of debt allowed as
bad debt under section 36 (1) vii ) and recovered in subsequent years shall
be deemed to be profits and gains of business or profession in the year in
which it is recovered.
e.Reserve for bad debts
Under section 41 (4A),any amount withdrawn from the special
reserve for bad debts by banking companies allowed as a deduction under
section 36(1)( viii) shall be deemed to be the profits and gains of business
or profession and accordingly be chargeable as the income of the previous
year in which such amount is withdrawn notwithstanding that the business
or profession is no longer in existence in that year.
However , any loss, (except speculation loss) arising in the
previous year in which such business or profession cea sed to exist, and
which could not be set off against any other income of that previous year
will be set off against the income chargeable to tax under this section as
aforesaid.
5.8MISCELLA NEOUS PROVISIO NS
1.Prospecting etc., for mineral oil
As per Sec tion 42 ,in addition to the normal expenses , following
expenses will be allowed in computing the profits or gains of any
business of the prospecting for or extraction or production of mineral oils
including petroleum or natural gas under agreement betw een the central
government and the assessee : -
(a) expenditure by way of infructuous or abortive exploration expenses in
respect of any area surrendered prior to the beginning of commercial
production by the assessee;
(b) after the beginning of commercial production, to expenditure incurred
by the assessee, whether before or after such commercial production, in
respect of drilling or exploration activities or services or in respect of
physical assets used in that connection,
(c) the depletion of mineral o il in the mining area in respect of the
assessment year relevant to the previous year in which commercial
production is begun and for such succeeding year or years as may be
specified in the agreement.
If the assessee transfers the business wholly or in pa rt or any
interest therein as per the agreement, the unallowed expenditure as
reduced by the proceeds of the transfer so far as they consist of capital
sums, shall be allowed in the previous year of the transfer of the business
or interest therein the surp lus, if any, arising as result of such transfer hall
be chargeable as the income of that year even if the business is no longer
in existence in that year. The provision of the section will be applicable tomunotes.in

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131the amalgamated or the resulting company in case o f amalgamation or
demerger of the assessee or its business.
2.Definitions of some relevant terms
Section 43 defines the meaning of certain terms used in sections 28 to
41 unless the context requires otherwise as under. These definitions have
been deal t with at their appropriate places.
3.Changes in rate of exchange of currency
As per Section 43A, i n case of a nyincrease or reduction in the liability
as result of change in exchange rate of Indian rupee at the time of payment
at new rate ,the samewill be adjusted by increasing/ decreasing the cost /
liability due. Such adjusted cost will be reckoned for the purposes of
computing actual cost or expenditure on scientific research under section
35 or 35A or under section 36(1)(ix) or cost of acquisition of a capital
asset under section 50.
No adjustment will be made when the whole or any part of the liability is
met, not by the assessee, but, directly or indirectly, by any other person or
authority.,
Any exchange rate under a future contra ct under FEMA to provide
with a specified sum in a foreign currency on or after a stipulated future
date at the rate of exchange specified in the contract to enable him to meet
the whole or any part of the liability aforesaid, the amount, will also be
adjusted accordingly.
4.Taxation of foreign exchange fluctuation 4
Under section 43 AA, any gain or loss arising on account of any
change in foreign exchange rates shall be treated as income or loss,
computed as perthe income computation and disclosure standar ds in
respect of all foreign currency transactions including those relating to —
(i)monetary items and non -monetary items;
(ii)translation of financial statements of foreign operations;
(iii)forward exchange contracts;
(iv)foreign currency translation reserves
5.Cost of acq uisition of certain assets
Amalgamation
Under section 43C , Where an asset other than the asset defined
under section 45(2), becomes the property of an amalgamated company,
and the amalgamated company sells the asset as its stock -in-trade of the
busin ess carried on by it, then the cost of acquisition of the said asset to
the amalgamated company in computing the profits and gains from the
sale of such asset shall be –
- the cost of acquisition of the said asset to the amalgamating company,
- as increased by the cost, if any, of any improvement made thereto,
and the expenditure, if any, incurred, wholly and exclusively in
connection with such transfer by the amalgamating company.munotes.in

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132Partition , gift, will etc .
Under section 43C ,where an asset becomes the property of the
assessee on the total or partial partition of a Hindu undivided family or
under a gift or will or an irrevocable trust, and the same is sold by the
assessee as stock -in-trade of the business carried on by him, then the cost
of acquisition of the said asset to the assessee in computing the profits and
gains from the sale of such asset shall be the cost of acquisition of the said
asset to the transferor or the donor, as increased by the cost, if any, of any
improvement made thereto, and the expenditure, if any, incurred, wholly
and exclusively in connection with such transfer by way of effecting the
partition, acceptance of the gift, obtaining probate in respect of the will or
the creation of the trust, including the payment of gift -tax, if any, incurred
by the transferor or the donor, as the case may be.
6.Consideration for transfer of assets other than capital assets
As per s ection 43CAdifferent provisions of Section 50C /50CA will
be applicable tobusiness assets and the consideration received or accruing
as a result of the transfer by an assessee of an asset (other than a capital
asset), being land or building or both, is less than the stamp duty value
adopted ,assessed or assessable stamp duty authorities for levy of stamp
duty on s uch transfer , then the stamp duty value shall be deemed to be the
full value of the consideration received or accruing as a result of such
transfer.
Where the date of agreement fixing the value of consideration for
transfer of the asset and the date of r egistration of such transfer of asset are
not the same, the value may be taken as the stamp duty value assessable
on the date of the agreement , only if the amount of consideration or a
part thereof has been received by any mode other than cash on or befo re
the date of agreement for transfer of the asset.
7.Computation of income from construction and service contracts.
Under section 43CB. ,t he profits and gains arising from a construction
contract or a contract for providing services other than a contract for
providing services with duration of not more than ninety days shall be
determined on the basis of percentage of completion method in accordance
with the income computation and disclosure standards .Further, a contract
involving indeterminate number o f acts over a specific period of time shall
be determined on the basis of straight line method. The contract revenue
shall include retention money the contract costs shall not be reduced by
any incidental income in the nature of interest, dividends or capi tal gains.
8.Income of public financial institutions etc.
Vide section 4 3D,Income by way of interest in relation to such
categories of bad or doubtful debts in case of a public financial institution
or a scheduled bank or a state financial corporation or astate industrial
investment corporation, or a public company, whose main object is
carrying on the business of providing long -term finance for construction or
purchase of houses in India for residential purposes shall be chargeable to
tax in the previous year in which it is credited by the as per the guidelinesmunotes.in

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133issued by the Reserve Bank of India or the National Housing Bank in
relation to such debts, or which is actually received by that institu tion or
bank or corporation or company, whichever is earlier .
9.Insurance business
Under section 44 , p rofits and gains of any business of insurance,
including any such business carried on by a mutual insurance company or
by a co -operative society, shall b e computed in accordance with the rules
contained in the First Schedule overriding the normal provisions of the
Act for computation of income under different heads of income.
10.Trade, professional or other association
Section 44A deals with certain t rade, professional or similar
association formed solely for the purposes of protection or advancement of
the common interests of their members and the income of which or any
part thereof is not distributed to its members except as grants to any
association or institution affiliated to it.
When the receipts of such associations by way of subscription or
otherwise falls short of the expenditure, not being capital expenditure,
incurred by such association during that previous year, such deficiency
shall be allowed to be deducted from thenormal income of that
association under the head "Profits and gains of business or profession and
if there is no income assessable under that head or the deficiency
allowable exceeds such income, the whole or the balan ce of the
deficiency, shall be allowed as a deduction in under any other head while
computing the income of the association .
The amount of deficiency to be allowed as a deduction under this
section shall in no case exceed one -half of the total income o f the
association. In computing the income of the association for the relevant
assessment year .Effect shall first be given to any other provision of this
Act under which any allowance or loss in respect of any earlier assessment
year is carried forward an d set off against the income for the relevant
assessment year.
11.Compulsory m aintenance of accounts
Under section 44AA it is mandatory for the following persons to keep
and maintain such books of account and other documents as may enable
the Assessing Of ficer to compute his total income in accordance with the
provisions of this Act : -
(a)Every person who carries on legal, medical, engineering or
architectural profession or the profession of accountancy or technical
consultancy or interior decoration or any o ther notified profession,
(b)Every person who carries on business or profession other than the
above professions , whose income from business or profession
exceeds Rs 1,20,000 (2,50,000 for Individual and HUF s)or total
sales, turnover or gross receipts, in business or profession exceeds Rs
10 lakh ( Re 25 lakh for Individual and HUFs ) in any one of themunotes.in

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134three years immediately preceding the previous year in case of an
existing business or profession .
(c)Every person, in case of a business or profession newly set up in any
previous year, if his income from business or profession is likely to
exceed Rs 1,20,000 /2,50,000 or his total sales, turnover or gross
receipts, in business or profession are or is likely to exceed Rs 10
lakh. Rs 25 lakh during such previous year;
(d)Every assessee, who has claimed his income to be lower than the
profits or gains of his business during a previous year than the
prescribed presumptive income under sections 44 AE, 44BB or
44BBB.
(e)Every person, who has claimed his income t o be lower than the
deemed presumptive income under section 44AD and his income
exceeds the maximum amount which is not chargeable to income -tax
during such previous year.
Other Points
(i)The Board may, having regard to the nature of the business or
professi on carried on by any class of persons, prescribe, by rules, the
books of account and other documents ,including inventories,
wherever necessary ,to be kept and maintained ,the particulars to be
contained therein and the form and the manner in which and th e place
at which they shall be kept and maintained.
(ii)The Board may prescribe, by rules, the period for which the books of
account and other documents to be kept and maintained shall be
retained.
(iii)In cas eofprofessional sopting for presumptive tax up to inco me of Rs
50 lakh and other assessees turnover limit of Rs 5 Cr ,i f cash
transactions do not exceed 5% of turnover ,are also exempt from this
provision.
12.Compulsory Audit of accounts
Under section 44AB, e very person carrying on -
a)business shall, if hi s total sales, turnover or gross receipts, in business
exceed or exceeds Rs. onecrore in any previous year; or
(b) profession shall, if his gross receipts in profession exceeds Rs 50 lakh
in any previous year; or
(c) carrying on the business shall, if the profits and gains from the business
are deemed to be the profits and gains of such person under
section 44AE, 44BB, OR 44BBB and he has claimed his income to be
lower than the profits or gains so deemed to be the profits and gains of
his business, as the ca se may be, in any previous year; or
(d)thebusiness shall, if the profits and gains from the business are
deemed to be the profits and gains of such person under section 44ADmunotes.in

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135and he has claimed su ch income to be lower than the profits and gains
so deemed to be the profits and gains of his business and his income
exceeds the maximum amount which is not chargeable to income -tax
in any previous year get his accounts of such previous year audited by
anaccountant one month before the specified date for furnishing the
return of income under section 139(1) and furnish by that date the
report of such audit in the prescribed form duly signed and verified by
such accountant and setting forth such particulars as may be prescribed
Thelimit of turnover has been increased or Rs 5 Cr (Rs10 Cr
w.e.f A.Y.2022-23) if the cash transactions of sale or purchase doe not
exceed 5% of turnover.
This section does not apply to a person, who derives income of the
nature referred to in Section44B or Sec tion44BBA.
In a case where such person is required by or under any other law
to get his accounts audited, it shall be sufficient compliance with the
provisions of this section if such person gets the accounts of such busi ness
or profession audited under such law before the specified date and
furnishes by that date the report of the audit as required under such other
law and a further report by an accountant in the form prescribed under this
section.
5.9PRESUMPTIVE I NCOME
A.Profits and gains of business
Under section 44AD,a new presumptive income has been devised for
small eligible assessees having turnover of less than Rs 2 Crore from and
eligible business. TheScheme is open to
(a)Any Eligible Assessee being anindividual, Hindu undivided
family or a partnership firm, who is a resident, but not a limited
liability partnership firm (LLP) ,
(b)who is engaged in an eligible business being a business any
business except the business of plying, hiring or leasing goods
carriages covered under section 44AE) ; and
(c)whose total turnover or gross receipts in the previous year does not
exceed an amount of two crore rupees, and
(d)who has not claimed deduction under section s10, 10AA ,10B or
10BA or deduction under any provisions of Chapter VIA under the
heading "C.-Deductions in respect of certain incomes" in the
relevant assessment year .
Under the scheme, following sum shall be deemed t o be the profits and
gains of such business chargeable to tax: -
8%of gross receipts or total turnover ormunotes.in

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1366%of the turnover or gross receipts which is received by an
account payee cheque/ bank draft / use of electronic clearing
system through a bank account or other electronic mode ;
during the previous year or
a sum higher than the afor esaid sum claimed to have been earned
by the eligible assessee.
Other points
(a)Any deduction in respect of expense (including depreciation,
remuneration and interest payable to partners) allowable under the
provisions of sections 30 to 38 shall be deemed to have been
already given full effect to and no further deduction under those
sections shall be allowed .
(b)The written down value of any asset of an eligible business shall be
deemed to have been calculated as if the eligible assessee had
claimed and had b een actually allowed the deduction in respect of
the depreciation for each of the relevant assessment years
(c)This provision will not apply to
(i) a person carrying on profession specified in section 44AA like
doctor, architect, lawyer, C hartered Accountan t, engineer etc.;
(ii)a person earning income in the nature of commission or brokerage;
or
(iii) a person carrying on any agency business.
(d)Such assessee has to opt for the scheme of presumptive tax under
section 44AD, for five consequent years.
(e)If the assessee does not opt for the scheme, during the five
assessment years, he cannot again opt for the scheme for next five
years from that year.
(f)The eligible assessee is to pay advance tax by 15th March of the
financial year.
(g)An eligible assessee who has opted for the scheme shall not be liable
forcompliance of the provisions of section s44AA and 44AB in
respect of maintenances and audit of account etc. .
(h)An eligible assessee ,whose total income is above the taxable limit,
may claim his profits to belower than 6% or8%Such assessee shall
be liable to comply with the provisions of Section 44AA and 44AB in
respect of maintenances of books and other documents and audit of
account and submission thereof.
Illustration :
41.Ashok ,an eligible assess ee has turnover of an eligible business is
150lakh for assessments year 2020 -21and Rs 180lakh 2021 -22.Under
the presumptive scheme under section 44AD his profit from the eligible
business will be assumed to be Rs 12 lakh and Rs 14.40 lakh respectiv ely
@8%of the turnover of that business. Allthe expenses includingmunotes.in

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137depreciation will be deemed have been allowed . However Ashok will be
exempted from maintenance and audit of boos of account .
After opting for the scheme ,Ashok does not opt for the sc heme for
five consecutive assessment years, then under section 44AD (1), he will
not be eligible to again opt for it for next five assessment years
succeeding assessment years 2022 -23 to 2026-27.
B.Profits and gains of profession
Under section 44ADA ,In case of an eligible Assessee
(a)who is engaged in any profession referred to in section 44AA(1) such
as legal, medical, engineering or architectural profession or the
profession of accountancy or technical consultancy or interior
decoration or any other notified profession and ,
(b)whose total gross receipts does not exceed 50lakh rupees in a
previous year, deemed Income will be 50% of the total gross
receipts ,oranyhigher Income claimed by the assessee.
In case of less income the assessee will have to have hi saccounts
audited. Such an assessee will have to pay advance tax by 15 March and
all expenses will be deemed to have been allowed. Provisions relating to
declaring lower income and other matters will be applicable under this
section also.
C.Plying, hiring /leasing goods carriages
Under section 44AE, an assessee, who
(a)owns not more than ten goods carriages at any time during the
previous year and
(b)who is engaged in the business of plying, hiring or leasing such goods
carriages, the income of su ch business chargeable to tax under the
head "Profits and gains of business or profession" shall be deemed to
be the aggregate of the profits and gains, from all the goods carriages
owned by him in the previous year, computed at Rs 7,500 per month
or part of a month during which the goods carriage is owned by the
assessee in the previous year or an amount claimed to have been
actually earned from the vehicle, whichever is higher.
All other provisions like compulsory audit declaring low income or
loss, all expense including depreciation, remuneration etc. deemed as
allowed , are applicable under this section also. Further the section applies
on hired goods carriages also.
D.Shipping business of anon-resident
Under section 44B, an assessee, being a non -resident, engaged in
the business of operation of ships, a sum equal to 7.5% of the aggregate of
the amounts paid or payable (whether in or out of India) to the assessee or
to any person on his behalf on account of the carriage of passengers,
livestock, mail or goods shipped at any port in India and the amount
received or deemed to be received in India by or on behalf of the assesseemunotes.in

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138on account of the carriage of passengers, livestock, mail or goods shipped
at any port outside India including amount received b y way of demurrage
charges or handling charges or any other amount of similar nature shall be
deemed to be the profits and gains of such business chargeable to tax
under the head "Profits and gains of business or profession".
E.Exploration, etc., of mineral oils
Section44BB, applies to a non -resident assessee who is engaged in the
business of providing services or facilities in connection with, or
supplying plant and machinery including ships, aircraft, vehicles, drilling
units, scientific apparatus and equipment, used for the purposes of the said
business; on hire used, or to be used, in the prospecting for, or extraction
or production of, mineral oils, In such cases presumed income shall be
10% of the aggregate of the amount s:-
paid or payable (wheth er in or out of India) to the assessee or to
any person on his behalf on account of the provision of services
and facilities in connection with, or supply of plant and machinery
on hire used, or to be used, in the prospecting for, or extraction or
producti on of, mineral oils including petroleum and natural gas in
India; and
received or deemed to be received in India by or on behalf of the
assessee on account of the provision of services and facilities in
connection with, or supply of plant and machinery o n hire used, or
to be used, in the prospecting for, or extraction or production of,
mineral oils outside India shall be deemed to be the profits and
gains of such business chargeable to tax under the head "Profits
and gains of business or profession except in a case where the
provisions of Section 42, 44D, 44DA, 115A or 293A are
applicable for the purposes of computing profits or gains or any
other income.
An assessee may claim lower income than 10%, if he keeps and
maintains such books of account and other documents as required under
section 44AA and gets the accounts audited and furnishes a report of such
audit under section 44AB and thereupon , the Assessing Officer shall
proceed to make an assessment of the total income or loss of the assessee
under section 143(3) and determine the sum payable by, or refundable to,
the assessee.
F.Operation of aircraft of non -residents
Section 44BBA provides that in the case of an assessee, being a
non-resident, engaged in the business of operation of aircraft, a su m equal
to 5% of aggregate of the amounts the amount paid or payable (whether in
or out of India) to the assessee or to any person on his behalf on account of
the carriage of passengers, livestock, mail or goods from any place in
India; and the amount rec eived or deemed to be received in India by or on
behalf of the assessee on account of the carriage of passengers, livestock,
mail or goods from any place outside India shall be deemed to be themunotes.in

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139profits and gains of such business chargeable to tax under the head
"Profits and gains of business or profession".
G.Foreign companies engaged civil construction, turnkey power
projects etc.
Under section 44BBB, a sum equal to 10% the amount paid or
payable, whether in or out of India to an assessee, being a foreign
company, engaged in the business of civil construction or the business of
erection of plant or machinery or testing or commissioning thereof, shall
be deemed to be the profits and gains of such business chargeable to tax .
The assessee is at liberty to d eclare lower income by maintaining
accounts and other documents under section 44AA and getting the same
audited under section 44AB and submitting the audit report in prescribed
form and thereupon , the Assessing Officer shall proceed to make an
assessment of the total income or loss of the assessee under section 143
(3)and determine the sum payable by, or refundable to, the assessee.
H.Head office expenditure -non-residents
Section 44C provides that deduction in respect of the expenditure in
the nature of h ead office expenditure incurred by a non-resident assessee
shall not exceed 5% of the adjusted total income; or the amount of head
office expenditure as is attributable to the business or profession of the
assessee in India, whichever is less. In case of loss, the deduction shall be
computed @ 5% of the average adjusted total income of the assessee.
"Adjusted total income" means the total income computed without
giving effect to the allowance under section 32,32A 33, 33A, 36(1)
(ix), any loss carried f orward under section 72(1), 73(2),74(3) or
74A(3)or the deductions under Chapter VI -A;
"Average adjusted total income" means one third of the aggregate
adjusted total income of last three years or one half of the aggregate
adjusted total income of last t wo years or , the amount of the adjusted
total income in respect of the previous year relevant to that assessment
year , as the case may be depending upon the number of year the
assessee has been assessed in India
"head office expenditure" means executiv e and general administration
expenditure incurred by the assessee outside India, including
expenditure incurred in respect of
(a) rent, rates, taxes, repairs or insurance of any premises outside India
used for the purposes of the business or profession;
(b) salary, wages, annuity, pension, fees, bonus, commission, gratuity,
perquisites or profits in lieu of or in addition to salary, whether paid or
allowed to any employee or other person employed in, or managing
the affairs of, any office outside India;
(c)travelling by any employee or other person employed in, or managing
the affairs of, any office outside India; andmunotes.in

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140(d) such other matters connected with executive and general
administration as may be prescribed.
I.Royalties, etc., in case of non -residents
Under section 44DA the income of non -residents or foreign companies
in receipt of income by way of royalty or fees for technical services from
Government or an Indian concern under an agreement with them and
such non -resident carries on business or perf orms professional services in
India through a permanent establishment or from a fixed place of
profession situated therein, shall be computed under the head "Profits and
gains of business or profession". No deduction shall be allowed, in
respect of
(i)any expenditure or allowance which is not wholly and exclusively
incurred for the business of such permanent establishment or fixed
place of profession in India; or
(ii) any amounts, (otherwise than towards reimbursement of actual
expenses paid)b yt h ep e rmanent establishment to its head office or to
any of its other offices:
Every such non -resident (not being a company) or a foreign
company shall keep and maintain books of account and other documents
in accordance with the provisions contained in Sec 44 AAget his accounts
audited and furnish along with the return of income, the report of such
audit in the prescribed form.
J.Reorganization of co -operative banks
Section 44DB (1) deals with reorganization of co -operative banks
due to amalgamation or deme rger etc. The section provides for pro rata
deduction under section 32,35D, 35DD or 35DDA to the predecessor
bank in the ratio of number of days upto the date of reorganisation and
correspondingly, the amount of deduction allowable to the successor co -
operative bank the number of days comprised in the period beginning with
the date of business reorganisation and ending on the last day of the
financial year; and the total number of days in the financial year, in which
thebusiness reorganisation has taken place.
Illustration
42.Total amount of deduction allowable to a Bank under different
sections works out to Rs 50,000. Reorganization of a bank takes place on
01-09-2020. The deduction will be allowed to he predecessor bank and
the resultant bank pro rata fo r 153 days (from 01 -04-2020to 31 -08-2020
and 212 days i.e. from 01 -09-2020to 31 -03-2021respectively.
The predecessor bank will be able to deduct Rs 20,959 being Rs
50,000 X 153/365 and the resulting bank will get Rs 29,041 being 50,000
X212/365.
This is subject to some conditions namely : -munotes.in

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141(i)all the assets and liabilities of the undertaking or undertakings
immediately before the transfer become the assets and liabilities of
the resulting co -operati ve bank;
(ii)the assets and the liabilities are transferred to the resulting co -
operative bank at values (other than change in the value of assets
consequent to their revaluation) appearing in its books of account
immediately before the transfer;
(iii)the resulting co -operative bank issues, in consideration of the transfer,
its membership to the members of the demerged co -operative bank on
a proportionate basis;
(iv) the shareholders holding 75% or more in value of the shares in the
demerged co -operativ e bank (other than shares already held by the
resulting bank or its nominee or its subsidiary immediately before the
transfer), become shareholders of the resulting co -operative bank,
otherwise than as a result of the acquisition of the assets of the
demer ged co -operative bank or any undertaking thereof by the
resulting co -operative bank;
(v)the transfer of the undertaking is on a going concern basis; and
(vi) the transfer is in accordance with the conditions specified by the
Central Government, by notifi cation in the Official Gazette, having
regard to the necessity to ensure that the transfer is for genuine
business purposes.
5.10ILLUSTRATIO NS
43.From the following I ncome & Exp enditure account ofLaw Bros. for
theyear ending March 31, 20 21, compute th e total income of the firm.
To Expenses 150,000 Professional
Receipts480,000
To Depreciation 20,000
To Remuneration to partners 250,000 By Other fees 90,000
Interest on Capital topartners @ 20 percent20,000
To Net Profit 130000
Total 570000 570000
Other Information:
1. Expenses include Rs . 18,000 and Rs. 12,000 paid incash as brokerage
to a single party on a single day .
2. Depreciation calculated as per section 32 is Rs. 40,000
Solution
Computation of Total Income of Law Bros. (A. Y.2021 -22)
Net profit as per Income & Exp account 1,30,000munotes.in

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142Add: Expenses not allowable
40A(3) -Cash paid to broker over Rs. 10,000 30,000
40(5) Ex cessinterest to partners -20,000 *8/20 8,000
1,68,000
Less: Depreciation Under section 32(40,000 -20,000) 20,000
1,48,000
Add: Remuneration to partners debited in PLA 2,50,000
Book Profits before remuneration 3,98,000
Remuneration to partners
Actual Rs 2,50,000 or
150000 +60% of Rs 398200 -150000) = 2,98,9202,98,920
Total Income 99,080
44.From the given Trading and P & L A/c of A&B for the year ended
31st March 2021,compute taxable income of the firm for the assessment
year 2021-22,
Particulars Rs. Particulars Rs.
To Opening Stock 75,000 By Sales 20,00,000
To Purchases 15,00,000ByClosing Stock 85,000
To Gross Profit 5,10,000
Total 20,85,000Total 20,85,000
To Salaries 2,50,000 By Gross Profit 5,10,000
To Sales Commission 40,000By Bad Debts
Recovery 25,000
To Sales Tax 35,000
To General Expenses 5,000
ToAdvance Income Tax 54,000
To Interest on Loan 42,000
To Interest on Capital 18,000
To Depreciation on
Furniture & Fittings 4,000
To Advertisement 16,000
To Free Distribution of Samples 3,000
To Insurance premium on Life o f
Partners 8,500
To Printing & Stationery 3,500
To Net Profit 56,000
Total 5,35,000 Total 5,35,000
Additional information :munotes.in

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1431.Salaries include Rs. 40,000/ -paid to partners, as per partnership deed
and well within the limits under section 40(b).
2.General Expenses are incurred for the purposes of pleasure tour of
partners with their family members to Goa.
3.Income Tax includes Rs. 14,000 paidfor the partners.
4.Bad Debts recovered were earlier allowed as a deduction.
5.Interest on Capital to partne rs is in excess of limits specified under
section 40(b) by Rs. 1,500/ -but as per partnership deed.
6.Cash expenses over Rs 35,000 for carriage of Rs. 40,000.
SOLUTIO N:
Computation of Total Income of X & Y Co. for A .Y.2020-21
Particulars Rs. Rs.
Profi t as per Profit and Loss Account 56000
Add: Exp. disallowed /considered separately
Salaries to Partners 40000
General Expenses incurred for
personal purpose by the partners 5000
Cash expenses 40A(3) 40000
Income Tax (Advance) 54000
Interest on Capital 18000
Insurance on Life of Partners 8500 165500
221500
Less: Interest to partners (18000 -1500) 16500
Book Profit 205000
Less: Salaries to partners 40000
Business income 165000
5.11SELF -EXAMI NATIO NQUESTIO NS:
1)Define and explain the term “Business” .
2)Explain any six deductions which are specifically allowed as a
deduction while computing income from business or profession .
3)Give a detailed note on depreciation
4)Isdepreciation always allowed on written down v alue?
5)What happens ,when block ceases to exist?
6)Discuss the tax treatment when block comes to zero.
7)What are the incomes chargeable under the head “Profits and Gains of
Business or Profession”?munotes.in

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1448)Explain the items of expenses, which are expressly not allow ed as
deductions while computing income from “Profits and Gains of
Business or Profession .
9)Explain section 37(1) is the residuary section to claim deduction,
while computing Profits and Gains of Business or Profession
10)Explain expenses allowed on paymen t basis Under section 43B.
11)State the disallowance under Section 40A (3) if a purchase bill of Rs
45,000 was immediately paid by cash. (Ans: Rs. 45,000 )
12)State whether following expenses are allowed as a deduction or not
while computing income from business or profession, if not, give
reasons:
a.Interest paid outside India wherefrom no tax has been deducted nor
there is any representative assessee.
b.Income tax paid by the firm.
c.Salary paid outside India wherefrom no tax has been deducted nor
there is any representative assessee.
d.Salary paid to a partner.
e.Guest House expenses.
f.Advertisement expenses.
g.Contribution to Gratuity Fund.
h.Interest on borrowed capital.
(Ans:Item f & h only allowable ,d allowed subject to book profits )
13)State with rea son, w hether the deduction will be available or not in
respect of the following expenses.
a.Fee of Rs 20,000 paid to a technical consultant in cash .
b.Fee of Rs 20,000 paid by cheque toA senior advocate for
conducting proceeding before the Income Tax auth orities.
c.Provision made for gratuity as per actuary valuation of Rs
1,00,000 .
d.A sum of Rs 1,30,00 0paidtowards GST liability for thefinancial
year 2017 -18on 01 -04-2021
e.Stock -in-trade lost to fire amounting to Rs 10,000 and was debited
to Profit and Loss Account.
(Ans : b & e allowable ,a ,c & d not allowed , d allowed in A.Y.2022 -23)
14)Discuss the implication of the following transactions in the case of a
doctor running anursing home
a.Received from itsemployees contribution towards P rovident
Fund for the month of March 20 21paid and paid to Provident
Fund Account on 15-04-2021 –Rs 25,000
b.Cash purchase ofmedicines –Rs 50,000munotes.in

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145(Ans. 25000 Income Under section /43 B (2)Rs 50,000 disallowed under section
40A(3)
15)Are the followi ng expenses allowable as deduction under section
37(1)
(a) Litigation expenses for official purposes.
(b) Expenses relating to purchase of stationary for official purpose
and
c)interest on loan taken for paying income -tax. (A n s ; a&ballowable )
16)From the P /L A/c of X for the year ending 31-03-2021,ascertain
total income for the assessment year2021-22.:
Expenses Rs. Income Rs.
General expenses 13,400 Gross profits 3,64,500
Bad debts 22,000 Commission 8,600
Advance tax 21,000 Brokerag e 37,000
Insurance 600 Sundry receipts 2,500
Salary to staff 26,000
Salary to X 32,000
Interest on overdraft 4,000
Interest on loan to Mrs. X 42,000
Interest on capital of X23,000Depreciation48,000Advertisement exp.7,000Contribution to RPF 13,000
Net profit 1,60,600
Total 4,12,600 Total 4,12,600
Other information:
(A)Depreciation allowable is Rs. 37,300 as per the I .T.Rules.
(B)Gen.exp.include Rs. 500 forarranging a party to a friend
(Ans160600 +21000+32000+23000+48000 -37300+500 =247800)
17)From the following data, calculate the depreciation admissible to an
individual carrying on business, for A.Y. 2021 -22
Particulars %WDV
Factory Building 105,00,000
Plant & Machinery 208,00,000
Addition to Plant 1,00,000
Sale proceeds of Plant (cost 1 lakh) 5,00,000
Furniture & Fixture s 101,00,000
Motor Car 20 60,000
New computer 60 60,000munotes.in

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146(buildg .Rs. 50,000, P&M . 60,000, C omp.Rs.36000, Furni .Rs.10,000 & Car
Rs.12,000)
18)From the following ,ascertain depreciation admissible and other
liabilities, if any. In respect of the previous year relevant to the AY
2021 -22
Particulars Plant & Mach Building
Rate of Depreciation 25% 10%
WDV at the beginning of the year Rs2,50,000 Rs5,00,000
Additions during the year Rs3,00,000 Nil
Sales during the year Rs10,00,000 Rs2,00,000
(Ans. P&M Rs. Nil Rs. 2,00,000 Short term capital gain, Building Rs. 5,000)
19)X Ltd. owns two plants A& B on 1-4-2020 (depreciation -15%per
cent) with opening depreciated value of the block Rs. 2,37,000. It
purchases Plant C with depreciation -15% on 31 -5-2020 for Rs.
20,000 and sells Plant A on 10-04-2020 for Rs 10,000, Plant B on
12-12-2020 for Rs . 15,000 and Plant C on 1-03-2021for Rs. 24,000 .
Determine the WDV of the block as on 31-03-2021and also the
depreciation
{Ans. 237000+20000 -49000 = 208000 Short Te rm Capital Loss,
block empty, Depn –NIL})
20)Compute depreciation forA.Y. 2021 -22from the following :
Plant & Machinery A, B &C–WDVon 1-4-2020 Rs. 5,00,000
rate of dep .15%. Plant D purchased on 12 -06-2020 Rate of dep. 15%
for Rs. 40,000. Plant A sold on 8-12-2020 forRs. 1,60,000.
(Ans Value of Block 500000+4 0000 -160000 = 380000 Dep. 57000 )

munotes.in

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1476
CAPITAL GAI NS
(Section 45 to 55)
Unit Structure
6.1 Introduction andObjectives
6.2 Basis of Charge
6.3 Capital Asset
6.4 Transfer
6.5 Types of assets –Short Term & Long Term
6.6 Types of Capital Gains
6.7 Period of Holding
6.8 Computation of CapitalGains
6.9 Value of Consideration
6.10 Cost of Transfer
6.11 Cost of Acquisition
6.12 Fair Market Value
6.13 Transactions covered under section 49(1)
6.14 Cost of Improvement
6.15 Indexed cost of Acquisition /Improvement
6.16 Transactions not regarded a s transfer
6.17 Typical Illustrations
6.18 Self Assessment Questions
6.1 INTRODUCTIO NAND OBJECTIVES
Income tax is primarily atax on income . Capital gains arises on
transfer of “capital asset” , which is acquired with the money saved from
the tax pai d income. Hence ,prima facie tax on capital gains isnot in
consonance with income tax .Moreover, capital gain is not income initself
butrepresents only a rise in the value of the asset as a result of reduction
in purchasing power of money o vera long pe rioddue to inflation. Be it as
it may ,globally, capital gain isa precious source of revenue , which no
government could ignore. T he result is a complex tax regime seeking to
tax capital gains.
Thelesson explain sdifferent aspects of tax treatment of capital
gains ,concept of“Capital Asset”, “Transfer ”, what constitute sa capital
asset and what is not acapital asset, types of capital gains, concept of
indexation ,computation of capital gain and other machinery provisions
dealing with contained in sections 45 to 55 .munotes.in

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1486.2 BASIS OF CHARGE
2.1 Capital Gains Defined
Section 45isthe charging section .I tsays that “anyprofits or gains
arising from the transfer of a capital asset effected in the previous year
shall be the income of the previous year in which the transfer took place ”
Thus the section comes into play when there is any gain or profit
arising on transfer” of a “capital Asset” during the “previous year”.
Hence, thesection willapply if: -
(i)acapital asset ,
(ii)is transferred by the a ssessee,
(iii)during the previous year and
(iv)itresults in some gain or loss .
Section 2(14) defines “capital asset” andsection 2(47) defines
“transfer ”.Every asset may not be a ‘capital asset ” nor every movement of
a capital asset from one person to another can be called “transfer”. If the
two ingredients do not co -exist simultaneously, there will be no liability
for tax under section 45.
For instance, motorcar isa personal effect not a ‘capital asset’
within the meaning of section 2(14). Hence, profit on transfer of a
personal motorcar will not be chargeable as capital gain .
Similarly, devolution or transmission of an asset unto heirs by
succession is not transfer within the meaning of section 2(47). Hence,
where the shares are registered in th e name of a legal heir on the death of a
shareholder ,there will not be a transfer and provisions of section 45 will
not be attracted.
2.2 Other receipts chargeable to capital tax
Section 45extends the term “capital gain ”t o cover several other
receipts ,discussed below: -
a)Insurance money
Money or other assets received during the previous year from an
insurer on account of damage to or destruction of a capital asset, as a
result of:
i)Flood, typhoon, hurricane, cyclone, earthquake or other convulsions of
nature ;
ii)Riot or civil disturbance ;
iii)Accidental fire or explosion ;or
iv)Action by an enemy or action taken in combating an enemymunotes.in

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149b)Conversion of capital asset into stock
Transfer by way of conversion, by the owner of a capital asset into, or
its tre atment by him as stock -in-trade of a business carried on by him but
is chargeable to tax in the previous year in which such stock -in-trade is
sold or otherwise transferred by him.
c)Interest in securities
Transfer made by a depository ora participant of beneficial interest in
anysecurities during the previous year in which such transfer takes place.
d)Transfer of asset as capital to firm ,AOP or BOI
Transfer of a capital asset made by a person to a firm or other
association of persons or b ody of individu al (not being a company or a co -
operative society) in which he is or becomes a partner or member by way
of capital contribution or otherwise ;in the previous year , in which the
transfer takes place.
e)Transfer of asset on dissolution of firm ,A O P or BOI
Transfer of a capital asset by way of distribution of capital assets on
dissolution of a firm or association of persons or body of individuals (not
being a company or co -operative society) or otherwise, in the previous
year in which thetransfer takes place .
f)Compulsory Acquisition
Transfer of capital asset by way of compulsory acquisition under any
law is chargeable to tax in the previous year in which such compensation
or part thereof is received.
Any additional compensation sha ll be taxable in the previous year,
in which it is actually received.
Ifany court, tribunal or any authority subsequently reduces the
initial compensation , the capital gains assessed in the year of receipt of
initial compensation or enhanced compensation will be amended to re-
compute the capital gains with reference to such reduced compensation.
g)Repurchase of Units of Mutual Funds
Transfer of capital asset being the units of U nit Trust of India (UTI) or
other mutual funds issued under the equity -linked savings scheme on the
repurchase thereof by the mutual fund will be taxed in the year of such
repurchase .
h)ESOP -ESOS
Sale value of the shares issued t o employees under an equity stock
option plan(ESOP) or equity stock option scheme (ESOS) as redu ced by
the cost of acquisition orindexed cost of acquisition of the shares will be
taxed in the year of such issue .
i)Buyback
Vide section 46A,the value of a consideration received by the
shareholder from a company under a scheme tobuyback its own shares
under section 77A of the Companies Act, 1956 as reduced by the cost ofmunotes.in

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150acquisition orindexed cost of acquisition will be taxed inthe year of
buyback.
j)Joint Development Agreement (JDA)
Vide section 45(5A), the value of the capital asset ( land or building or
both) transferred by an individual or a HUF under a registered specified
agreement called Joint Development Agreement(JDA) to develop real
estate for a consideration of a share being land and building or both,
whether with or without or part payment of consideration in cash shall be
the stamp duty valuation on the date on which the competent authority
issues a completion certificate for the entire property and capital gain will
be chargeable accordingly on that date.
6.3 CAPITAL A SSET
Section 2(14) defines capital asset as:
“Property of any kind held by an assessee, whether or not
connected with his business or profession, ” but does not include -
a.any stock -in-trade, consumable stores or raw materials held for the
purposes of his business or profession .
b.person aleffects i.e. movable property including wearing apparel sand
furniture held for personal use by the assessee or any member of his
family dependent on him, but excludes -
(a) Jewellery;
b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
For this purpose, “Jewellery" includes:
(a)ornaments made of gold, silver, platinum or any other precious metal
or any alloy containing one or more of such precious metals, whether
or not containing any precious or semi -precious stone, and whether or
not worked or sewn into any wearing apparel;
(b)precious or semi -precious stones, whether or not set in any furniture,
utensil or other article or worked or sewn into any wearing appare l;
Although jewellery is a movable property held for personal use ,itis
deemed to be “capital asset”. The d efinition covers only ornaments ,
not other articles like silver or gold utensils , which are neither
“jewellery nor ornaments ”.
c.Agricultura lland inIndia, not being land situate in:
a.areas not in the jurisdiction of a municipality, municipal
corporation notified area committee, town area committee, town
committee, or by any other name or a cantonment board or
cantonment boar d having population of 10000 or more andmunotes.in

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151b.in any area within the distance, measured aerially, from the local
limits from any area of municipality etc. as above -
Distance not more than Population of the area of
municipality etc. as per last
published census
2K M 10,001 –1,00,000
6K M 1,00,001 –10,00,000
8K M More than 10,00,000
d.Special Bearer Bonds, 1991
e.61-2 per cent Gold Bonds, 1977
f.7 per cent Gold Bonds, 1980
g.National Defence Gold Bonds 1980
h.Gold deposit Bonds under old Deposit Scheme 1 999
Thesection clarifies that“property ” shall include any rights in or
in relation to an Indian company, including rights of management or
control or any other rights whatsoever;
6.4 TRA NSFER
Section 2(47) defines “Transfer” in an inclusive defini tion:
“Transfer in relation to capital assets includes the following: -
(1)sale, exchange or relinquishment of the asset ;
Relinquishment of a right means transfer of a right in favour of
another person e.g. sale of right to subscribe shares.
(2)extinguishme nt of rights on the capital asset;
Extinguishment of rights results in cessation or destruction or
cancellation of rights in a capital asset like surrender of tenancy right
for e.g. buyback of shares results in extinguishment of shares.
(3)compulsory acquisit ion under any law;
(4)conversion of capital asset into stock in trade of a business.
(5)maturity or redemption of a zero coupon bond issued by an
infrastructure capital company, a fund or a public sector company
notified by the central government in respect of which, no payment
or benefit is received before maturity or redemption;
(6)any transfer involving the allowing the possession of an immovable
property under section 53A of Transfer of Property Act, 1882 in part
performance of the contract for transfer of that property;
(7)any transaction involving transfer of membership of a group,
association housing society, company, etc., which have the effect of
transferring or enabling enjoyment of any immovable property or
any rights therein in any manner whatsoever;
(8)distrib ution of assets on the dissolution of a firm, body of individuals
or association of persons;munotes.in

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152(9)transfer of a capital asset by a partner or member to the firm or
AOP, whether by way of capital contribution of otherwise;
(10)transfer under a gift or an irrevocabl e trust of shares, debentures or
warrants allotted directly or indirectly to its employees under the
ESOP scheme of the company as per the guidelines of the Central
Government.
Section s 47 and 47A list out transactions, which are not regarded as
“transf er”e.g. transfer upon reorganisation of business entitles like
amalgamation, demerger, gift, will etc.
6.5 TYPES OF CAPITAL ASSETS
A capital asset may be classified as short term orlong term
capital asset depending upon the period forwhich itisheld by the
assessee before its transfer ,that is to say :-
a)Short Term Capital Asset (STCA)
As per section 2(42A) ,short-term capital asset means a capital asset
held by an assessee for less than 36 months before it is transferred.
The period of 36 months is taken as 12 months in the following cases:
(i)Equity or Preference shares whether quoted or not,
(ii)Securities like debentures, government securities and notified
derivatives, which are listed in recognised stock exchange under
section 10(23D),
(iii)Units of UTI
(iv)Units of equity oriented mutual f unds
(v)Zero coupon bonds
the period of holding is taken as 24 months i nthecase of
- unlisted Shares,
- immovable property (land,building or both )
(reduced from 36 months ).
Hence ,period of holding is 12, 24 or 36months depending upon the
asset.
b)Long Term Capital Asse ts(LTCA)
As per section 2(29A) , a long term capital means acapital asset,
which is not a short -term capital asset . In other words, a capital asset will
be a long term asset if it isheld for m ore than 12 , 24 or 36 months before
itis transferred .munotes.in

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1536.6 TYPES OF CAPITAL GAI NS
Capital gains arising on the transfer of a capital asset will be
short term capital gain or long term capital gain depending upon the type
of the asset which is transferred that is: -
(i)Short Term Capital Gain (STC G)
As per section 2(29B ), c apital g ain arising on transfer of ashort term
capital asset (asset held by an assessee for less than 36 ,24or12months )
will be short term capital gain andany loss ari sing onthetransfer of short
term asset will be short term capital loss .
Further, c apital gains arising on sale of long term business ,assets in a
block in case of a slump sale under section 50and surplus or deficit left in
a block on transfer of alldepreciable asset s in the block, would be treated
as a short term capital gain orloss.
(ii)Long Term Capital Asse ts(LTCG )
As per section 2(42B ), l ong-term capital gain is the gain arising on
transfer of along-term asset or an asset held by an assessee for 36 ,12or
24months or more .Conversely, any loss arising on transfer of long-term
asset will be long-term capital loss .
6.7 PERIOD OF HOLDI NG
Holding of an asset isthe yardstick to determin e whether the type
of capital gains arising on transfe r of the capital asset as per section 2
(42A ). Some important principles to determine the holding of an asset are
given as under: -
1.In case of shares held in acompany in liquidation, the period
subsequent to the date of liquidation will not be included. Period of
holding will stop running on date of liquidation.
Illustration
1.A company goes into winding up on 01-01-2018.The liquidator
settles the claim on 01-01-2021.In computing the period of holding, t he
period after 01-01-2018will not be include d.
2.Incase capital assets have become the property of the assessee in
circumstances mentioned in section 49(1) in determining the period, the
period for which the previous owner held the capital asset will also be
included.
Illustration
2.Adies on 01-01-2020,leaving hishouse , which was purchased on
15-02-2003 to his son B. B sells this house on 20-03-2021.The resultant
gain (loss) w ill be long term because holding of the house will be
reckoned from15 -02-2003 , being the date of acquisition ,onwhich , the
previous owner A held the house .munotes.in

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1543.In case of shares of an amalgamated company allotted to a shareholder
against the shares in an Indian company, which was amalgamated, the
period for which the assessee held the shares in the amalgamated
company will also be included.
Illustration
3.Rpurchased shares ofSLtd on 12-11-2010.SLtd amalgamated with H
Ltd. on 31 -10-2020.Under the scheme of amalgamation, original 1000
shares inSLtdwere converted into 300 shares of HLtd.Rsells these 300
shares of H Ltd. on01-01-2021.The capital gain will be treated as long
term as the period of holding will be reckoned from 12 -11-2010 and not
31-10-2020.
4.In case of rights issue of shares or other securities subscribed to by the
assessee on the basis of his rights to subscribe ,the counting of the period
shall start from the date of allotment by such person or other person in
whose favour such right has been renounced.
5.In case of renunciation of a right ,for the person who has acquired the
rights, the per iod shall be reckoned from the date of the offer of such
rights by the company or institution.
6.In case of a bonus issue , allotted without payment on the basis of
holding of any other financial asset, period shall be reckoned form the
date of allotment of s uch financial asset.
7.In case of shares in a resulting comp any received under a scheme of
demerger of a company , the period for which the shares in the demerged
company were held by the assessee will also be included.
8.In case of shares of trading or clearin g rights of a recognised stock
exchange acquired by a person under its demutualisation or
corporati sation, the period for which, such person was a member will also
be included.
9.In case of equity shares allotted under demutualisation or
corporati sation of a recognised stock exchange in India, the period for
which such person was a member will also be included.
10.Period of holding of other capital assets will be decided according to
the rules framed by the CBDT in that regard.
The CBDT has clarified that date of transfer -acquisition of shares will be
considered on the basis of the brokers ’note -date of contract or date of
allotment and FIFO ( First in First Out Basis) in the case of Demat
Accounts .
11.In case of security or sweat equity, allotted or transferred by the
employer free of cost or at concessional rate to this employees including
former employees, popularly called as ESOP, the period shall be
reckoned from the date of their allotment or transfer .
12.The period of holding of units acquired in the consolida ted scheme of
mutual fund shall include the period for which the units in consolidating
schemes were held by the assessee.munotes.in

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15513.The period of holding of a capital asset, being share or shares of a
company, acquired by a non -resident assessee on redemption of GD Rs
would be reckoned from the date on which a request for such redemption
was made.
6.8 COMPUTATIO NOF CAPITAL GAI NS
8.1.General Rule
Under section 48 the income under the head “Capital Gains” shall be
computed. by deducting from the full va lue of the consideration received
or accruing as a result of the transfer of the capital asset the following
amounts, namely : -
(i) Expenditure incurred wholly and exclusively in connection with such
transfer.
(ii) The cost of acquisition of the asset an d the cost of any improvement
thereto:
8.2.Long Term Capital Gains
Under section 55 Where the capital gain is to be computed in respect
of a long term asset, instead "cost of acquisition" and "cost of
improvement", "indexed cost of acquisition" a nd "indexed cost of
improvement" are to be deducted subject to following exceptions, when
benefit of indexation of cost will not be available, viz.-
a.Oncapital gain on transfer of shares or debentures of Indian company
by a non -resident will be computed by converting thecost of acquisition,
full value of consideration and expenses incurred for transfer into
originally utili sed foreign currency and reconverting capital gain into
Indian currency.
b.Ontransfer of bonds and debentures even though they may qua lify
to be called long term capital assets .This is because bonds and debentures
are normally issued and redeemed at par and if benefit of indexation is
given, it will always give capital loss , and
c.In case of slump sale under section 50B.
d.Treatment of lon g term assets in shares etc.
On transfer of listed shares andequity -oriented mutual funds ,higher
ofthe following : -
(i).Theactual cost of acquisition of such investments; and
(ii)Thelower of-
a.Fair Market Value of such investments as on 31 -01-2018 ; and
b.Full Value of Consideration received or accruing as a result of
the transfer of the capital asset i.e. the Sale Pricemunotes.in

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156This is called the grandfathering rule It is implication is as under : -
(i)Where the investments has been purchased prior to 31 -01-2018 and
a.sold before 01 -04-2018 , Long term capital gain would be
exempt under section 10(38)
b.sold after 01 -04-2018 , Long term capital gain accrued upto
31-01-2018 would be exempt under section 10(38), and the
remaining long term capital gain will be taxa ble @ 10% under
section 112 if aggregate gains exceed 1 lakh rupees.
c.Where the investments has been purchased and sole after 31 -
01-2018 i.e .from 01 -02-2018 long term capital gain will be
taxable @ 10% under section 112
Illustration
14.Radha sold purchase d100 equity shares on 31 -05-2020for Rs
2,10,00 which were purchased on 01 -04-2016 for Rs 1,50,000 . Fair
market value of these shares as on 31 -01-2018 was Rs 2,80,000 .What
will be the long -term capital gain/ loss?
Solution
Cost of Acquisition actual on 01 -04-2016 Rs 2,50,000
Fair Market Value on 31 -01-2018 Rs 2,80,000
Sales Price Rs4,10,000
Hence cost will be taken Rs 2,80,000 , which is higher the actual cost and
FMV as 31 -01-2018 and LTCG will be Rs 1,30,000 i.e. Rs 410000 -
2,80,000)
15.Assume that the share were purchased on01-02-2018 for Rs
2,50,000 and sold on 31 -05-2020 for Rs 4,10,00 , then the taxable long
term capital gain will be of Rs 1,60,000
16.
Mode of compu tation can be depicted as under:COMPUTATION OF CAPITAL GAINSSales ConsiderationLessExpenses on TransferLessIndexed cost of
acquisitionIndexed Cost of
ImprovementsCost of
acquisitionCost of
ImprovementLong Term [LTC G]Short Term [STC G]
Note: The STCG /LTCG computed above are subject to deductions -exemptions
under section s 54,54B, 54D and 54EC, 54ED, 54F 54G etc .
8.3. Depreciable Capital Assets
As per section 50 , w here a capital asset has been sold or
transferred and in respect o f such capital asset depreciation hadbeen
allowed ,theposition will be as shown in the diagram below :munotes.in

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157Depreciable Capital AssetsSales ConsiderationLESSExpenses on TransferLESSOpening WDV + Cost of New PurchaseWDV
becomes
ZEROSurplus
LeftWDV still RemainsIf Block EmptyBlock Not EmptyNo
DepreciationTaxable
as
STCGShort Term capital
Loss
No DepreciationClaim
depreciation on
Balance WDV
Thedetailed rules are as follows :-
A.When there is no sale o f assets from the block
Written down value (WDV) of the block at the beginning of
the year increased by
othe cost of acquisition of any new asset falling in the
same block purchased during the year and
oincidental expense on transfer the asset purchased .
The balance will be the WDV of the block .
Work out depreciation on WDV
There will be no capital gain.
B.In case of sale of asset from the block
Written down value(WDV) of the block at the beginning of
the year increased by
othe cost of acquisition of any new asset falling in the
same block purchased during the year and
oincidental expense on transfer the asset purchased.
The balance will be the WDV of the block
If sales consideration exceeds the WDV ,such excess
consideration will be treated as short term capi tal gain. There
will be n o depreciation
C.If the resulting figure is negative, it will be treated as short term
capital loss , no Depreciation .
D.If block ceases to exist, i.e.,all assets in a block are sold, the
WDV in the block will be short -term capital lo ss.No depreciation
will be allowed.
Thus, capital gain will arise only if the full value of sale price
exceeds the aggregate of the following: -munotes.in

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158Incidental expenses on transfer
The written down value of the block at the beginning of the
previous year.
Cost of acquisition of the asset falling in that block of assets during
the previous year
The resulting figure will be short term capital gain orshort term
capital loss. If block cease to exist, no further deduction will be available,
nor any further dedu ction will be allowed.
Illustration
17.From the following particulars in respect of a block of asset s
a.Opening WDV Rs 50,000
b.Cost of newasset purchased Rs 20,000
c.Rate of depreciation 20%
Compute the depreciation or capital gain if :-
1.No asset was s old during the year ,o r
2.value of the consideration for asset sold was
b.Rs 70,000
c.Rs.40,000
d.Rs.1,00,000
3.All assets in the block sold
e.Rs40,000
Solution:
a b c d d Particulars
Rupees
Opg WDV 50,000 50,000 50,000 50,000 50,000
Add-New
Purchase20,000 20,000 20,000 20,000 20,000
Total 70,000 70,000 70,000 70,000 70,000
Sales 070,000 40,000 1,00,000 40,000
WDV -Gain 70,000 030,000 (30,000) 30,000
Depreciation 14,000 0 6,000 0 0
STCG - - - 30,000 -
STCL - NA - NA-30,000
Clos.WDV 56,000 024,000 0 0
Notes: No depreciation in case bas WDV in block comes to zeroand in c asee,
all the assets are sold , hence t heblock ceases to exist. Residual WDV of Rs .
30,000 will be short term capital loss.
8.4.Depreciable assets of power undertaking :
Vide Section 50A, i n respect of a d epreciable assets of an
undertaking engaged in generation or distribution of power or energy,
short -term gain -loss will be computed with reference to the cost of
acquisitio n as adjusted under section 43(6) .munotes.in

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159In case of a composite agreement for sale of a factory building
along with the land, depreciable asset will be building not the land because
landis not adepreciable asset .
Land will be considered as general capital as setgiving rise to long
term or short term capital gain depending upon the period for which it is
held.
8.5.Assets in Slump Sale
As per section 50B , s lump sale means the transfer of one or more
undertakings by way of sale for a lump sum considerati on without
assigning values to individual assets and liabilities of the undertaking.
In case of slump sale the undertaking itself will be treated as a capital
asset and any profit on sale thereof shall be treated as long term or short
depending upon th e period of holding of such undertaking .
Vide section 50B (2) ,for the purposes of slump sale, ‘net worth’ of
the undertakings shall be the cost of acquisition and improvement and no
indexation under section 48 is allowed in respect of such cost.
Net wor thmeans the aggregate value of total assets i.e . WDV of
depreciable assets and book value of other assets (excluding any
revaluation of assets) asreduced by the value of liabilities of such
undertaking or division
Such net worth must be audited and sub mitted before the due date of
filing return.
8.6.Sale of Land or building
Under section 50C,in case of transfer of a capital asset being
land or building or both , the sales consideration will be the higher amount
of the following.
the actual consideration received or accruing or
value adopted or assessed or assessable by stamp duty authorities or
the purpose of payment of stamp duty in respect of such transfer as
on the date of transfer .
Where the date of agreement and date of transfer are not same ,s tamp
duty value on the date of agreement may be adopted as consideration ,
ifwhole or part of the consideration ispaid by A ccount payee
cheque ,bank draft or ECS through a bank A ccount or other
electronic mode on or before the date of agreeme nt.
However, where the value adopted or assessed or assessable by the
stamp valuation authority does not exceed 110%of the consideration
received or accruing as a result of the transfer, the consideration so
received or accruing as a result of the transf er shall, be deemed to be
the full value of the consideration .".munotes.in

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160If the assessee does not accept the stamp duty valuation and prefers
appeal with the appellant authorities, the value finally determined shall be
treated as the value of consideration.
However, if the assessee does not prefer any appeal but claims that
agreement value is much lower than the valuation adopted by the stamp
duty-registration authorities, the assessing officer may refer it for
valuation. The consideration will not exceed the va lue adopted by the
stamp[ duty a uthorities.
Illustration s
18.Agreement value of a land is Rs 5Lakh , which is valued at Rs 4 lakhs
only by the stamp duty authorities . Agreement Va lueRs 5 lakhs will
be taken as the consideration accruing forcomputing capital gains .
19.Agreement value of a land is Rs 5 Lakh, which is valued at Rs 5.25
lakh by the stamp duty authorities. Agreement Value Rs 5 lakhs will
be taken as the consideration accruing for computing capital gains .
20.Assuming the above land sold for Rs 5 la khis valued at Rs 6 lakh by
thestamp duty authorities , the consideration will be taken at Rs 6 lakh ,
ifthe assessee does not dispute it.
21.If in the above case, the assessee, files an appeal with the stamp duty
authorities, the consideration will be takena t the amount finally
determined by those authorities.
22.If in the above case, the assessee, does not file an appeal with the
stamp duty authorities, but disputes the stamp duty valuation, the
assessing officer will refer the valuation to the Departmental Valuation
Officer. However, such valuation cannot be more than Rs 6 lakhs.
8.7.Transfer of unquoted shares –Section 50CA
Under Se ction 50CA from A.Y. 2018 -19,where the consideration
received or accruing as a result of the transfer by an assessee of unquoted
shares of a company, is less than the fair market value (FMV) determined
in the prescribed manner as per rule 11UAA, shall be deemed to be the
full value of consideration received or accruing as a result of such transfer.
This section read wit hsection s56and50C , will result into buyer and
seller both hav ingto pay the tax on difference of the FMV and the actual
consideration. To help the startups, Rules may provide exemption to a
class of people.
Illustration
23.A transfers to B , unquoted shares costing Rs. 4 lakh for Rs. 8 lakh,
while the FMV works out to Rs 10 lakh. As per section 50CA, FMV of
Rs 10 lakh will be the amount of consideration. Capital gain of Rs. 6
lakh will be chargeable in the hands of A, while the inadequate
consideration of Rs 6lakh will attract section 56 (deemed gift) for B.munotes.in

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1616.9 VALUE OF CO NSIDERATIO N
As per section 48, “Full total value of consideration ”means the
value received or accruing becaus eof the transfer.
It indicates the whole of the price in terms of money or money’s
worth or both; bargained for between the parties inter se,which accrues or
arises upon transfer of a capital asset .
The C apital gains will be chargeable on accrual basis and not on
cash basis Actual receipt of the value is irrelevant.
Further, “full value of consideration ” does not refer to themarket
value of the asset transferred or the adequacy of the price .However, under
some specific provisions fair market value accruing or arising on transfer
of a capital asset is required to be ascertainment e.g. under section 50C,
50CA etc.
If theconsideration cannotbe expressed in money’s worth ,itwill
not form part of full value of the consideration for the transfer .Subject to
the provision of Section 56,there will no capital gain in such a case. Some
of such cases are as follows :-
(i)Incase of transfer of aproperty without consideration orout of
natural love and affection ;subject to the provisions of section 56,
there will no capital gain .
(ii)in case transfer by a company asa gift or under an irrevocable trust
ofanyshares, debentures, or warrants allotted directly or indirectly
to its employees under employees’ stock option scheme (ESOP -
ESOS )as per the guide lines issued by the Central Government ,full
value of the consideration will be the fair market value of shares on
the date of transfer
(iii)In case of a transfer resulting in exchange of two or more assets , full
value of consideration of theassets transferr ed will be equal to the
fair market value of the asset received.
Illustration
24.A exchanges his flat for B’s shop. In this case “Full total value of
consideration of A’s flat will be the fair market value of the shop
transferred by B and vice versa.
(iv)Amo unt of any insurance claims received in respect assets destroyed in
natural conditions like tsunami, floods, earthquakes, would be deemed the
full value of consideration.
Section 45specifies the year of the capital gain liability and the value of
consideration arising or accruing in some cases, which are given in the
following table :munotes.in

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162Sub Section and the
nature of the transactionPrevious year when
taxed
year of -Value of consideration(1)Sale or TransferSale or transferSales consideratio n(1A) Damage or
DestructionReceipt of claim
moneyMoney received or fair
market value(2)Conversion into stockSale of stockMarket value on the date of
conversion(2A)Transfer of securities
by depositoryTransfer determined
onFIFO basisConsideration for transfer(3)Transfer as capital
contribution in firm -
AOP -BOITransferValue credited in capital
account(4)Transfer on dissolution
of firm -AOP -BOITransferFair market vale on date of
transfer(5)Compulsory acquisitionReceipt of
compensationInitial compensation or
enhanced compensation as
the case may be(6)Repurchase of mutual
fund unitsReceipt or
discontinuation of
schemeRepurchase price
Illustration
25.Aj e w e l l e r bought personal gold ornaments forRs 2,00,000 on 01 -04-
2001. On 01 -01-2010, he converted the same into his business stock ,
when the fair market value of the ornaments was Rs.7,00,000. He sold
the ornaments on 31-03-2021for Rs. 12,00,000. Find out the tax
incidence on this transaction.
Solution
Transfer takes p lace on 01 -01-2010being the date of conversion
of personal gold into stock -in-trade and the amount of Capital gain will
be:
Full values of consideration [FMV 01 -01-2010]Rs
7,00,000
Less-Indexed Cost of Acquisition ( revised)
[2,00,000 X 148/100]2,96, 000
Long Term Capital Gain as on 01 -01-2010 4,04,000
LTCG of Rs4,04,0000 will arise on 01-01-2010 but will be
chargeable in assessment year 2021 -22,when actual sales of the
ornaments took place .
Assessment year 2021 -22-business profi t:Rs 12 lakh -7lakh= Rs 5 lakh
will be taxable andLTCG of Rs 4,04,0000 , which arose on 01 -01-2010 .
6.10COST OF TRA NSFER
Under section 48(1) , e xpenditure incurred wholly and exclusively
in connection with the transfer of asset will be deducted f rom the totalmunotes.in

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163value of consideration while computing the capital gain. This is subject to
the following co nditions:
(i)The expenses should be incurred wholly and exclusively in
connection with the transfer .
Lawyers’ fee for transfer, brokerage, travelling expenses for
transfer, advertisement, stamp duty and registration fee, if paid by the
seller etc. will be allowable but normal administrative expenses like salary
of staff for upkeep or maintenance of property will not be allowable .
(ii)The expenses must not be claimed as deduction as expenditure under
any other head.
(iii)No expenses will be allowed in respect of share transactions covered
under the securities transaction tax.
6.11COST OF ACQUISITIO N
Cost of acquisition isthesum total of amounts spent for a cquiring a
capital asset including the following -
(i)pricepaid by the assessee for purchase of property ; or
(ii)fair value on the date of exchange , of the asset transferred in
exchange ,where the asset is acquired in exchange for another asse t;
and.
(iii)expenses incurred on transfer ,registration, stamp duty etc.
The relevant provisions are given as under: -
Cost of AcquisitionDate of Acquisition of Assets
Prior to April,1, 2001 April, 1, 2001 onwardsFair market value of asset as on
01-04-2001 –Optiona lActual cost paid for acquisition of
asset
A.(1)Where the asset becomes the property of the assessee by a
mode referred to in section 49(1) before 1.4.200 1:
i.Cost of acquisition is the actual cost to the previous owner or the
fair market value as on 1.4.2001at the option of the assessee.
ii.Actual cost to the previous owner cannot be ascertained fair market
value on the date on which the asset became the property of the
assessee will be taken
iii.Where there are successive transfers under this mode, the referenc e
to the previous owner will mean last of such previous owners who
has acquired the assets by a mode otherwise than any of the modes
under section 49(1).
iv.In these case the period for which asset was held by the previous
owner is also taken into considerati on to determine the period for
which the asset was heldmunotes.in

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164A.(2)Where the asset becomes the property of the assessee by a
mode referred to in S ection 49(1) on or after 1.4. 2001:
i.Cost of acquisition is the actual cost to the previous owner.
ii.Actual cost to the p revious owner cannot be ascertained fair market
value on the date on which the asset became the property of the
assessee will be taken.
iii.Where there are successive transfers under this mode, the reference
to the previous owner will mean last of such previou s owners who
has acquired the assets by a mode otherwise than any of the modes
under section 49(1).
B.(1) where the asset becomes the property of the assessee by a mode
other than referred to in section 49(1) before 1.4. 2001:
Cost of acquisition is the a ctual cost to the assessee or the fair market
value as on 01-04-2001 at the option of the assessee. The base date
has been advanced from 01 -04-1981 to 01 -04-2001 by the Finance
Act, 2017
B.(2)Where the asset becomes the property of the assessee by a
mode other than referred to in section 49(1) on 1.4. 2001 or
thereafter:
Cost of acquisition is the amount actually spent by the assessee in
acquiring the actual asset i.e. the actual cost of acquisition.
C.Where the asset becomes the property of the assessee subject to
taxunder section 56 :
Where any asset ( cash, movable property, or shares of closely held
company’s immovable property) is received without consideration or
for consideration less than the fair market value, and as a result
becomes taxable under section 56, then, the cost of acquisition of
such asset will be the cost taken under section 56 for income tax
purposes. The section is discussed in detail in the next chapter. The
provision is apparently enacted to avoid double taxation of the same
property.
D.Specific Cases:
i.Earnest money forfeited
Vide section 51, any earnest money received in advance and
forfeited by the assessee, due to failure in negotiation will be taxable as
“income from other sources ”.
Prior to A.Y. 2016 -17 such deposit wasreduced from the actual cost of
acquisition or the fair market value as on 1-4-2001 asthe case may be and
cost of acquisition wasadjusted accordingly. .
Illustration
26.A acquired a building on May 12, 20 10 for Rs. 28 lakhs. In 20 14, He
entered intonegotiation with a prospective buyer , who gave him advance
money of Rs. 5 lakhs at that time. However, the negotiations failed, andmunotes.in

Page 165

165A forfeited the advance money. Subsequently, he actually sold the
building inAugust 2020for Rs 65Lakhs. Calculate the indexed cost of
acquisition and the taxable capital gains on the sale of the building.
Solution:
Particulars Rs Rs
Sales Consideration 65,00,000
Actual Cost
Less: Earnest money forfeited -section 51
(then not taxable)28,00,000
5,00,000
Net Actual Cost 23,00,000
Indexed Cost of Acquisition 23,00,000 X 301-167 41,45,5 08
Long Term Capital Gain 23,54,492
#301and167arethe Index forfinancial years 2020-21&2010-11
W. e. f.A.Y.2017 -18,earnest money would be taxable, andcost of
acquisition will not be adjusted
ii.Self-generated assets
The courts have taken consistent view that self -generating assets
such as goodwill, patents , copyrights, tenancy rights, which have no actual
cost of acquisition incurred were not liable to capital gain tax as the cost of
acquisition was Nil.
The judicial view is no longer valid, andtheamended section
provides that “ in relation to the goodwill of a business, trade mark or
brand name associated with a business, tenancy rights, loom h ours, route
permits, right to manufacture or produce any process any article, cost of
acquisition shall be taken as the purchase price if such price is paid, or
NIL, if such price is not paid. ”
Effectively, entire sale proceeds less expenses on transfer of self -
generated assets will be treated as capital gain.
iii.Financial asset s–shares and other securities
Where an assessee becomes entitled to subscribe any additional
securities , known as ‘Rights” or where additional shares are issued as
bonus i.e. w ithout any payment, the cost of acquisition shall be as follows:
a.Amount actually paid for acquiring such asset by way of subscription
to the securities or
b.Amount actually paid for acquiring such asset by way of exercising his
right or entitlement.
c.NIL; where rights are renounced for a price, then consideration for
renouncement of rights will be the amount of capital gains as reduced
by transfer cost, if any.
d.Amount paid to the renouncer of rights entitlement and amount paid to
the company, which has allott ed the rights sharesmunotes.in

Page 166

166e.NIL in case of bonus shares -in other words, sales proceeds of bonus
share will be liable to capital gain as reduced by transfer costs, if any.
However, if the bonus shares have been acquired prior to 01-04-2001,
then the share market value of bonus shares as on 01-04-2001 will be
treated as the cost of acquisition.
f.Fair Market Value on the date of distribution of capital assets by a
Company under section 46 (2).
g.Cost of acquisition of the original asset Consolidation, division,
convers ion, reconversion of share into stock or vice versa and where
such cost cannot be reasonably ascertained, the fair market value.
h.Cost of acquisition of the original shares held by the shareholders in
the demerged company as reduced by the amount arrived at under
section 49 (2C).
i.Cost of acquisition of original membership of a recognised stock
exchange when equity shares allotted to shareholders of recognized
stock exchange under a scheme of demutualisation or corporatisation
of the exchange –section 55(2)(ab)
j.NIL in respect of trading or clearing rights of stock exchange.
k.Pro rata amount i.e. the amount which bears to the Cost of Acquisition
of the shares held by the assessee in the demerged company the same
proportion as the net book value of the assets transferred in a demerger
bears to the net worth of the demerged company immediately before
such demerger will be the cost of acquisition of Shares in the resulting
company vide section . 49 (2C).
l.Stock option Specified security taxed as perquisites under section
17(2) vide s ection . 49 (2AA)
m.Actual cost of acquisition in all the other cases.
6.12FAIR MARKET VALUE
Fair market value, in relation to a capital asset, means the price that
the capital asset would ordinarily fetch on sale in the open market o n the
relevant date. If the assessee has acquired the asset prior to 01-04-2001 , he
has the option of substituting the fair share market value of the asset as on
01-04-2001 instead of actual cost of acquisition. However, this option is
available to the ass essee only when the asset has been acquired prior to
01-04-2001 .Fair market value is adopted in many cases like where
ascertainment of actual cost is not possible; assets distributed on
liquidation have already been dealt with at their appropriate places. Some
other cases are considered below:
a)Conversion of capital asset into stock -in-trade
Conversion of a capital asset held by the assessee, into stock -in-
trade of his business , will be treated as taxable transfer giving rise to
notional capital gains or loss. For this purpose, the fair market value of the
capital asset on the date of conversion is treated as notional sale proceedsmunotes.in

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167from which the cost of acquisition -indexed cost of acquisition is
deducted to get the capital gain.
Later, when this conv erted capital asset is sold ,there will be
business profit or loss i.e. actual sale proceeds less notional fair market
value taken, as cost will be the taxable business profit or loss. However
business income as well as capital gains will bechargeable to tax only in
the year of actual sale to a third party.
Illustration
27.Aj e w e l l e rc o nverts his ancestral gold ornaments into the stock in -
trade of hisbusiness on 1 -1-2012. The ornaments are actually sold on 31 -
12-2020for Rs. 30Lakh. The market value of the ornaments was Rs. 5
Lakhs on 01-04-2001 and Rs. 22Lakhs on 1 -1-2012.
Solution:
Capital gain arises on the date of conversion of a private asset into stock
in trade i.e. 01 -01-2012
Cost of acquisition as on 01-04-2001 = Rs. 5 lakh .
Indexation in F.Y. 2011-12–Index 184
LTCG = Rs 22lakh –(Rs*5lakh X 184-100)
=R s 22lakh -09.20 lakh = Rs 12.80 lakh
Position on31-12-2020( A.Y. 20 21-22)-Date of Sales
Profit = Sales consideration –FMV on 01-01-2012
=R s 30lakh –Rs22lakh =Rs.8lakh
Amount taxable in assessment year 2021-22
Profits & gains of business & profession =R s 8lakh
LTCG accrued in F.Y. 2011 -12Rs12.80 lakh
b)Introduction of capital asset by a partner:
When a partner transfers his personal asset by way of hi s capital
contribution in a partnership firm, the amount credited to his capital
account in respect of this capital asset will be treated as sales proceeds in
the hands of the partner from which the cost or indexed cost of acquisition
will be reduced to g et the amount of capital gains or loss taxable in the
hands of the partner.
c)Takeover of assets by the partner on dissolution of the partnership
firm
When a partner is allocated a capital asset upon the dissolution of a
firm the fair market value of the capital asset on the date of dissolution of
the firm will be treated as sales proceeds from which the cost of
acquisition or indexed cost of acquisition, as the case may be, will be
reduced to get the amount of taxable capital gains in the hands of the fi rm.munotes.in

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168d)Compulsory acquisition of capital asset
Where there is compulsory acquisition of capital asset by the
government or any government authority under law, there will be a taxable
capital gain or loss in the year of such compulsory acquisition. Howev er,
such capital gain will be chargeable only in the year in which the
compensation is received. If the compensation is enhanced later, then the
receiver of such additional amount is chargeable to capital gains in the
previous year in which such additional compensation is received. If the
compensation amount is subsequently reduced, the capital gain already
charged will be recalculated as if it were a mistake apparent from the
record under section 155.
d)Amount received on liquidation of the company:
Out of the money received by the shareholder on liquidation of the
company , a part of the amount will be treated as deemed dividend under
section 2(22) and the remaining amount less the indexed cost of
acquisition or cost of acquisition, as the case may be, is ta xable as capital
gains on sale of the shares.
f)Sale of Shares under Depository System
Where an assessee has any depository account and any shares are
sold from the depository account, then such cost of acquisition of the
shares sold will be determined on FIFO i.e. on first in first out basis. It will
be assumed that the assessee is shares deposited in the account first were
sold first and accordingly the cost of acquisition, date of acquisition and
the period of holding will be calculated.
g)Stock Lending
Any share given under the stock -lending scheme approved by
SEBI in this behalf will not give rise to any taxable capital gain.
h)Corporati sation of Stock Exchanges
In case any person transfers equity shares allotted to him as
member of a recognised stock exc hange in India under a SEBI approved
scheme of corporatization of stock exchanges, his original cost of
acquisition of membership of the stock exchange will be the cost of
acquisition for computation of capital gains on those shares.
i)Demerger:
Cost of acq uisition of shares in the resulting company in case of a
demerger shall be determined as follows: -
Cost of shares of demerged company x Net book value of assets
Net worth of demerged company before demerger
The cost of acquisition of the original sha res in the demerged
company shall be reduced by the amount calculated as abovemunotes.in

Page 169

169j)Taxation of capital gains of listed shares
Share are treated separately by the provisions of section. 111A -112,
Theshort term capital gain tax is charged at the rate of 1 5%+4% cess
in A.Y. 2021 -22and forego the benefit of indexation or alternatively pay
regular tax under the normal provisions including indexation .
Long term capital gain is charged at the rate of 10% if the gain is above
Rs. 1 lakh subject to grandfath ering rule by computing capital gain on
FMV as at 31 -01-2018 . For securities other than shares and mutual funds
listed on recognized stock exchanges, the long term capital gain tax rate
is 10% .
6.13TRA NSACTIO NSUNDER SECTIO N49(1)
Section 49 provid es that , in cases where capital asset became the
property of the assessee incertain circumstances ,
the cost of acquisition of the asset shall be deemed to be the cost
for which the previous owner of the property acquired it,
as increased by the cost of any improvement of the assets incurred
or borne by the previous owner or the assessee, as the case may be.
These circumstances are as under :_ -
(i) any distribution of assets on the total or partial partition of a Hindu
undivided family;
(ii) under a gift or will;
(iii) by succession, inheritance or devolution,
(iv)distribution of assets on the dissolution of a firm, body of
individuals, or other association of persons, where such dissolution
had taken place at any time before 01-04-1987, or
(v)distribution of assets on the liquidation of a company, or
(vi)under a transfer to a revocable or an irrevocable trust, or
(vii)under any such transfer as is referred to in clause (iv) ;(v);(vi);
(via);(viaa) ;(viab) ;(vib);(vica) ;(vicb) ;(vicc) ;(xiii) ;(xiiib) or
clause (xiv) of section 47;
(viii)Conversion of personal asset of the assessee as the joint property
of the HUF referred to under section 64(2) .
(ix)under a gift or will not being gift or transfer through an irrevocable
trust of shares, debentures or warrants allotted by a company
directly or indirectly to its employees under a Central Government
approved employees stock option -scheme (ESOP -ESOS). In suc h
cases, the market value of the shares, debentures or warrants gifted
or transferred to the irrevocable trust on the date of transfer will be
treated as the sale proceeds for the purpose of capital gains.
(x)by succession, inheritance or devolution.
(xi)distribution of assets on liquidation of company.munotes.in

Page 170

170(xii)under a revocable or irrevocable trust.
(xiii)on transfer by a wholly owned Indian subsidiary company from its
holding company and by a parent company to its 100 per cent
Indian subsidiary company.
(xiv)on any trans fer in scheme of amalgamation by the amalgamated
company from the amalgamating company.
(xv)by Hindu undivided family where one of the members has
converted its self acquired property into a joint family property.
(xvi)Transfer of units by unit holders on consoli dation of plans within a
mutual fund scheme ;.
If some units are segregated from a portfolio ,then the value of
those units will be taken pro rata and the portfolio balance will be
reduced accordingly.
(xvii)Redemption by an individual of sovereign gold bonds issued by
RBI;
(xviii)In case of transfer of a capital asset from a business under section
28(iva) of ,the cost of acquisition of such asset shall be deemed to
be the fair market value which has been taken into account for that
purpose.
Illustratio n
28.ABCHUF allotted af l a t purchased by it on01-04-2001 for Rs 5 Lakh
toAas his share in HUF property on partition .A sells the flat for Rs. 30
lakhs on 1 April 2020.What will beA’s liability for tax?
Solution :
a)There will be no liability for capita l gain on 01-04-2001 aspartition of
HUF is exempted under section 49.
b)On 01 -04-2020relevant to assessment year is 2021 -22,cost and date
of acquisition are same as previous Owner ( HUF) viz Rs 5 lakhs and
01-04-2001 .The capital gain will be as under :
Sales consideration 30,00,000
Indexed cost of Acquisition 5,00,000 X 301/100 15,05,000
LTCG 14,95,000
6.14 COST OF IMPROVEME NT
As per section 55, Cost of Improvement in relation to capital asset
means any expenditure or cost of capital nature incurred by (a)the
assessee or(b)the previous owner in case of an asset acquired by an
assessee in any of the circumstances under section 49(1) :-munotes.in

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171for substantially improving or raising the value of the capital asset or
in making addition or al teration to capital asset after date of
acquisition or
for any expenditure incurred to protect or complete the title of the
capital asset or
to cure the title of the property or remove any defect from the title.
In other words, cost of improvement inc ludes all those
expenditures, which are incurred to increase the value of the capital asset
Following additional points are noteworthy in this regard
(i)In case of a capital asset acquired prior to 01-04-2001 , where the fair
market value of the capital asset as of 01-04-2001 is substituted in
place of cost of acquisition, all capital expenditure incurred by the
assessee or the previous owner after 01-04-2001 in making any
additions or alterations to capital asset will be included in cost of
improvement but Cost of improvement incurred prior to 01-04-
2001 will be ignored in all cases.
The reason behind it is that for carrying any improvement in asset
before 1st April 2001 , asset should have been purchased before 1st
April 2001.If asset is purchased before 1st April the fair market
value is adopted and the fairmarket value of asset on 1st April 2001
will certainly include the improvement made in the asset.
(ii)In any other case all thecapital expenditure incurred in making in
additions or alterations to the capit al asset by the assessee after it
become his property.
(iii)There will be no cost of improvement to goodwill, right to
manufacture or produce or process any articles or right to carry on
any business.
(iv)expenditure deductible from the income from house property w ill not
be included in cost of improvement.
6.15INDEXED COST
Section 48(iii), vide Explanation iiidefines Indexed Cost of
Acquisition and Indexed cost of Improvement as under: -
"Indexed cost of acquisition ” means -“an amount which bears to the
cost of acquisition the same proportion as Cost Inflation Index for the
year in which the asset is transferred bears to the Cost Inflation Index
for the first year in which the asset was held by the assessee or for the
year beginning on the 1st day of April, 2001, whichever is later; and
"Indexed cost of any improvement" means :-an amount which bears
to the cost of improvement the same proportion as Cost Inflation Index
for the year in which the asset is transferred bears to the Cost Inflation
Index for the y ear in which the improvement to the asset took place .munotes.in

Page 172

172"Cost Inflation Index" (CII) for any year means :-Such Index as the
Central Government may, having regard to seventy -five per cent of
average rise in the Consumer Price Index for urban non -manual
emplo yees for that year, by notification in the Official Gazette, specify
in this behalf Indexed cost of acquisition -improvement can be shown
by the following formula e:
Indexed cost of acquisitionCost of Acquisition X CII (the year of Transfer )CII in the year of acquisition or 01 -04-2001 , whichever is later
Indexed Cost of ImprovementCost of Improvement X CII ( the year of Transfer)CII in the year of Improvement
Exceptions:
Indexation benefit is not available in respect of the followi ng:
1.Short term capital assets
2.Bonds ,debentures other than Capital Indexed Bonds Issued by
Government;
3.Shares ,Debentures of Indian Company Purchased in Convertible
Forex by non -residents ,
4.Depreciable assets ,
5.Units purchased in foreign currency under section 115AB by an
Offshore Fund ,
6.GDRs purchased in foreign currency under section 115AC byNon-
Residents ,
7.Securities under section 115AD purchased by non -residents ,
8.Where option of 1 5%t a xr a t ei s claimed -section 112 in respect of
capital gain on shares,
9.Slump Sale under section 50B
10.Foreign exchange assets under section 115-O by Non -Resident
Indians.COST INFLATION INDEX -REVISEDFinancial YearIndex2001 -021002002 -031052003 -041092004 -051132005 -061172006 -071222007 -081292008 -09137munotes.in

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1732009 -101482010 -111672011 -121842012 -132002013 -142202014 -152402015 -162542016 -172642017 -182722018 -192802019-202892020 -21301
6.16TRA NSACTIO NSNOT ‘TRA NSFER”
A.Section 47 provides that following transactions will n ot be regarded as
transfer for the purpose of section 45 :
1)anydistribution of capital assets on the total or partial partition of a
HUF ;
2)anytransfer of a capital asset under a gift or will or an irrevocable trust
not being issue of securities allotted under ESOP or ESOS by a
company to its employees;
3)anytransfer of a capital asset not being an asset transferred as stock in
trade by a:
i.holding company to its 100% Indian subsidiary company
ii.100% subsidiary company to its Indian holding company ,
4)any transfer, in a scheme of amalgamation,
i.of any capital asset by the amalgamating company to an Indian
amalgamated company or ;
ii.of any shares held in an Indian company by the amalgamating
foreign company to the amalgamated foreign company if at least
25% of the shareholders of the amalgamating foreign company
continue to remain shareholders of the amalgamated foreign
company, and such transfer does not attract tax on capital gains in
the country, in which the amalgamating company is incorporated;
iii.of any capital asset by a banking company to a banking institution
if such scheme is under section 45(7) of the Banking Regulation
Act, 1949;
iv.of any shares held by a shareholder in the amalgamating company,
made in consideration of the allotment to him of any share or shares
in an Indian amalgamated company ;
5)any transfer, in a scheme of demerger,
i.of a capital asset by the demerged company to the resulting Indian
company;
ii.of shares held in an Indian company, by the demerged foreign
company to the resulting foreign company, if the shareholders
holding not less than 3 /4thin value of the shares of the demerged themunotes.in

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174resulting foreign company continue to remain shareholders of the
resulting foreign company and such transfer does not attract tax on
capital gains in the country, in which the demerged foreign company
is incorporated
6)any transfer or issue of shares by the resulting company, to the
shareholders of thedemerged company if the transfer or issue is made
in consideration of demerger of the undertaking;
7)any transfer in a business reorganisation,
i.of a capital asset by the predecessor co -operative bank to the
successor co -operative bank;
ii.of shares in the predecessor co -operative bank by a shareholder,
made in consideration of the allotment to him of any share or shares
in the successor co -operative bank.
8)any transfer of bonds ,Global Depository Receipts derivative or other
notified securities
9)under section 115AC (1), made outside India by a non -resident to
another non -resident;
10)any tran sfer of agricultural land in India effected before 01 -03-1970 ;
11)any transfer of any work of art, archaeological, scientific or art
collection, book, manuscript, drawing, painting, photograph or print, to
the Government or a notified University or the Nati onal Museum,
National Art Gallery, National Archives or any such other public
museum or institution ;
12)any transfer by way of conversion of bonds or debentures, debenture -
stock or deposit certificates in any form, of a company into shares or
debentures of that company;
13)any transfer by way of conversion of bonds referred to section
115AC (1)(a) into shares or debentures of any company;
14)any transfer membership of a recognised stock exchange to a company
made on or before 31 -12-1998 by a person (n ot being a company) in
exchange of shares allotted by that company to the transferor;
15)any transfer by way of conversion of preference shares of a company
into equity shares of that company
16)any transfer of land of a sick industrial company managed by its
workers’ co -operative during the period of loss till the period upto
which the company’s losses are eq ual to or more than its capital ),
under rehabilitation scheme Under section 18of the Sick Industrial
Companies (Special Provisions) Act, 1985;
17)any tran sfer of a capital asset or intangible asset by a firm to a
company as a result of succession of the firm by a company in the
business carried on by the firm, or any transfer of a capital asset to a
company in the course of demutualisation orcorporatisa tionof
arecognised stock exchange in India as a result of which an
association of persons or body of individuals is succeeded by such
company if:
i.allthe assets and liabilities of the firm or of the association of
persons or body of individuals relatin g to the business immediately
before the succession become the assets and liabilities of the
company;munotes.in

Page 175

175ii.all the partners of the firm immediately before the succession
become the shareholders of the company in the same proportion in
which their capital accou nts stood in the books of the firm on the
date of the succession;
iii.the partners of the firm do not receive any consideration or benefit,
directly or indirectly, in any form or manner, other than by way of
allotment of shares in the company; and
iv.the aggre gate of the shareholding in the company of the partners of
the firm is not less than fifty per cent of the total voting power in the
company and their shareholding continues to be as such for a period
of five years from the date of the succession;
v.thedemutualisation orcorporatisation ofrecognised stock exchange
in India is carried out under an approved scheme
18)any transfer of a membership right held by a member of
arecognised stock exchange in India for acquisition of shares and
trading or clearing ri ghts acquired by such member in
thatrecognised stock exchange under an approved scheme
fordemutualisation orcorporatisation ;
19)any transfer of a capital asset or intangible asset by a private company
or unlisted public company to a limited liability par tnership or any
transfer of a share or shares held in the company by a shareholder as a
result of conversion of the company into a limited liability partnership
if–
i.all the assets and liabilities of the company immediately before the
conversion become th e assets and liabilities of the limited liability
partnership;
ii.all the shareholders of the company immediately before the
conversion become the partners of the limited liability partnership
and their capital contribution and profit sharing ratio in the li mited
liability partnership are in the same proportion as their shareholding
in the company on the date of conversion;
iii.the shareholders of the company do not receive any consideration
or benefit, directly or indirectly, in any form or manner, other than
by way of share in profit and capital contribution in the limited
liability partnership;
iv.the aggregate of the profit sharing ratio of the shareholders of the
company in the limited liability partnership shall not be less than
fifty per cent at any time du ring the period of five years from the
date of conversion;
v.the total sales, turnover or gross receipts in the business of the
company in any of the three previous years preceding the previous
year in which the conversion takes place does not exceed sixty Lakh
rupees; and
vi.no amount is paid, either directly or indirectly, to any partner out
of balance of accumulated profit standing in the accounts of the
company on the date of conversion for a period of three years from
the date of conversion.
20) Any transf er of any capital asset or an intangible asset upon
conversion of proprietary concern into a company, ifmunotes.in

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176i.all the assets and liabilities of proprietary concern become the assets
and liabilities of the company upon such conversion ;
ii.sole proprietor holds 50% or more of the total voting power for a
period of five years from the date of the succession; and
iii.the consideration is paid by way of allotment of shares in the
company and not in any other form;
21) any transfer in a scheme for lending of any securities under an
agreement or arrangement, between the lender and the borrower .
22)any transfer of a capital asset in a transaction of reverse mortgage
under a scheme made and notified by the Central Government.
23)Transfer of units by unitholders on consoli dation of plans within a
mutual fund scheme .
24)Redemption by an individual of sovereign gold bonds issued by RBI.
B.Under section 46(1), any distribution of assets of a company under
liquidation by the liquidator to the shareholder is not regarded as
transfer because such distribution is deemed as dividend under section
2(22) .
6.16 EXEMPTIO NS
Section s 54, 54B, 54D, 54EC, 54F, 54G and 54H grant exemption to
capital gains arising from the transfer of certain capital assets under
certain circumstances. Th ese provisions are dealt with below :
1.Profit on sale of property used for residence
Eligible assessee :individual or HUF assessee.
Eligible capital gain :
in respect of capital gain arising on transfer of a long term
residential house used for self -occupation or let out , the income of
which is chargeable under the head, ‘Income from house property’ ;
short term capital gain will not be eligible for exemption
Eligible investment :
the assessee or in case of his death, his legal representative has
i)purchased one residential house in India within
a.a period of one year before such transfer or
b.a period of two years after such transfer, or
ii)constructed one residential house in India within three years after
such transfer .
Following points are relevant in this regard : -
(i)Where the amount of capital gains does not exceed 2 Crore rupees ,
the assessee may exercise option to build or construct TWO houses
instead of one .
(ii)Old house must be a residential house (In India or outside India ,
chargeable u nder the head income from house property whether for
own residence or for letting out. .munotes.in

Page 177

177(iii)The new house (s)also must be a residential house and must be
situated India.
(iv)the new house (s)may be purchased before or after, but construction
should be only af ter the sale of old house.
Extent of exemption
Under section 54 The exemption will be to the extent amount
invested in the purchase or construction of the second house.
Illustration
29.On 01 -01-2010Ashok purchased a residential house for self -
occupation for Rs 5 lakh and spent Rs 1 lakh on its registration and
improvement. He sold the house on 01 -01-2021for Rs 1 9lakhs and
purchased a new residential house on 01 -04-2017for Rs 6 lakh. The
exemption under section 54 will be as under : -
Particulars Rs
Sales consideration 19,00,000
Indexed cost of acquisition + improvement
Rs. ( 5,00,000+1,00,000) * 301/148
Revise dindex for F.Y. 2009 -10 & 20 20-2112,20,270
LTCG 6,79,730
Exemption under section 54 6,00,000
Taxable capital gain 79,730
Restricti on of transfer of new house
If the new house is transferred within a period of three years from the
date of its purchase or construction, the amount exempt under section 54
will be reduced from cost of the new house and the capital gain will be
accordingl y computed.
Deposit Account
Unutilized amount of the capital gain for purchase or construction of a
new house is required to be deposited in a specified deposit account
with a bank before the date for furnishing the return of income and the
proof of su ch deposit is required to be filed with the return of income.
Amount so deposited will be treated as amount utilized towards
acquisition of new house.
The amount in deposit account can be utilized for purchase or
construction of house within the specifie d period.
The unutilised amount is treated as capital gain of the relevant
previous year in which the period of three years from the date of
transfer of the old house expires
2.Transfer of agricultural land
Exemption Under section 54 B is available in res pect of any
capital gain (LTCG or STCG) arising on the transfer of agricultural land ,
which was being used for agricultural purposemunotes.in

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178in the two years immediately preceding the date of transfer bythe
assesee being individual or his parents or the HUF.
Amount of exemption
Amount of capital gain will be exempt
to the extent it is utilized for purchase of any other agricultural
land
within a period of two years after the date of its transfer.
Other points
(i)The new land may be purchased in rural or urban area.
(ii)The New agricultural land so purchased should not be transferred
within three years of its purchase.
(iii)If the new land is sold before the expiry of three years, the cost of the
new agricultural land will be reduced by the amount of exempted
capital gain.
Deposit
The amount of capital gain not utilised by the assessee for purchase of
new agricultural land before the date for furnishing the return of his
income is to be deposited by him, on or before the due date for furnishing
the return of inco me, in an account in any bank or institution specified by
the Central Government. In the same manner as discussed above.
3.Compulsory acquisition of lands and buildings
Under Section 54 D , a ny capital gains arising from the transfer, by
way of compulsor y acquisition,
of any land or building forming part of and used as an industrial
undertaking
belonging to the assessee for at least two years preceding the date
of compulsory acquisition ,
will be exempt to the extent to which
it has been utilized for purchase of any other land and building
within a period of three years from the date of acquisition or
constructed a building within such period
to be used for the shifting or re -establishment of old industrial
undertaking or for setting up new indu strial unit.
If the new asset is transferred by the assessee for a period of three
years from the date of acquisition or construction, the amount of capital
gains arising therefrom, together with the amount of capital gains
exempted earlier, will be charg eable to tax in the year of sale of new land
and building.munotes.in

Page 179

179Deposit
Unutilized capital gains will have to be kept deposited in a deposit
account with a notified account with a bank or other financial institution
before the due date of filing of return.
4.Investments made in specified bonds
Under section 54EC w.e.f. assessment year 2019 -20 ,any capital gain
arising from the transfer of a long -term capital asset being land and/ or
building shall be exempt under section 54EC
to the extent of deposit made in specified long term specified asset
within a period from 6 months from the date of transfer of the
original asset subject to a maximum limit of Rs fifty lakh
In case, the long -term specified asset is
transferred or encashed or
a loan or advanc e has been taken against that asset
within a period of fiveyears from the date of transfer of the original
asset , the amount allowed as deduction will be deemed to be
capital gain in the year of transfer or encashment of the long -term
asset or on t he date on which such loan or advance is taken.
Further, a deduction under section 80C shall not be allowed in respect
of investment in such long -term specified asset. Presently, benefit of the
exemption will be available only if the gains are inve sted in bonds of
National Highways Authority of India NHAI or Rural Electrification
Corporation Limited, RECL.
5.Investment in units of a specified fund
Under section 54EE , where the whole or part of the capital gain
arising on the transfer of a long -term -asset, isinvested by the assessee in
the long -term specified asset with in six months after the date of transfer
of the asset, and
(a) if the cost of the long -term specified asset is not less than the
capital gain ,the capital gain shall be full y exempt;
a) if the cost of the long -term specified asset is less than the capital
gain, the capital gain well be exempt pro rata ; not be charged
under section 45;-.
Cost of investment Capital Gain X
Amount of capital gain
Other points :
(a)Amount o f investment in specified shall not exceed Rs 50 lakh in
respect of all the assets transferred.
(b)In case, the long -term specified asset ismunotes.in

Page 180

180transferred or encashed or
a loan or advance has been taken against that asset
within a period of three years fro m the date of transfer of the
original asset , the amount allowed as deduction will be deemed to
be capital gain in the year of transfer or encashment of the long -
term asset or on the date on which such loan or advance is taken.
Illustration
30.LTCG Rs 25 lakh &Investment in specified asset Rs25 lakh Full
capital gain will be exempt under section 54EE
If the investment is Rs 20 lakh then the amount exempt Rs, 16 lakh i.e.
(20 lakh X 20 /25)
6.Investment made in residential house -Section 54F
Eligible assessee :Individual or HUF assessee.
Eligible capital gain
Capital gain arising on transfer of a long term asset NOT being a
residential house ;
short term capital gain will not be eligible for exemption
Eligible investment
the assessee or in case of his death, his legal representative) has
i) purchased one residential house in India within
a.a period of a period of one year before such transfer or
b.a period of two years after such transfer, or
ii)Constructed one residential house in India withi nthree
years after such transfer.
iii) The new house may be purchased before or after, but
construction should be only after the sale of old house.
Ineligibility
Exemption under this section will not be applicable:
(i) If the assessee owns more than one resid ential house,(other than the
new asset) on the date of transfer of the original asset;
(ii) The assessee purchases any residential house, (other than the new
asset), within a period of one year after the date of transfer of the
original asset; or
(iii)The assess ee constructs any residential house, (other than the new
asset), within a period of three years after the date of transfer of the
original asset; and the income from such residential house, other than
the one residential house owned on the date of transfe r of the original
asset, is chargeable under the head “Income from house property”.munotes.in

Page 181

181Extent of exemption
If the investment in new house is not less than the net
consideration in respect of the original asset received as reduced by
expenses on transfe r of the asset, whole of the capital gain will be exempt .
If the cost of the new asset is less than the net consideration in
respect of the original asset , amount of exemption will be in the
proportion as the cost of the new asset bears to the net cons ideration.
Illustration
31.Ashok purchased a residential house for self -occupation on 01 -01-
2009for Rs 5 lakh and spent Rs 1 lakh on its registration and
improvement. He sold the house on 01 -01-2021for Rs 15 lakhs. He
purchased a new residential house on 01-04-2015 for Rs 6 lakh. The
exemption under section 54F will be as under :
32.
Particulars Rs
Sales consideration 15,00,000
Indexed cost of acquisition + improvement
Rs. ( 5,00,000+1,00,000) * 301-137
Revised index for F.Y. 2008 -09 & 20 20-2113,18,248
LTCG 1,81,772
Exemption under section 54
1,81,772 *6,00,000 /15,00,00072,708
Taxable capital gain 1,09,063
Restriction of transfer of new house
If the new house is transferred within a period of three years from
the date of its purchase or construc tion, the amount exempt under section
54F will be reduced from cost of the new house and the capital gain will
be accordingly computed in the year of such transfer .
Deposit Account
Unutilized amount of the capital gain for purchase or construction
of anew house is required to be deposited in a specified deposit account
with a bank before the date for furnishing the return of income and the
proof of such deposit is required to be filed with the return of income.
Amount so deposited will be treated as amount utilized towards
acquisition of new house.
The amount in deposit account can be utilized for purchase or
construction of house within the specified period.
The unutilised amount is treated as capital gain of the relevant
previous year in which the period of three years from the date of transfer
of the old house expiresmunotes.in

Page 182

1827.Shifting of urban industrial undertaking -Section -54G
Eligibility
Exemption under section 54 G is available in respect of capital
gain :-
arising on transfer of a capital a sset (being plant, machinery, land or
building or any right in land or building used
for the purpose of an industrial undertaking situated in a notified urban
area
in the course of, or in consequence of, the shifting of such industrial
undertaking to any area other than an urban area , and
the assessee has within a period of one year before or three years after
the date on which the transfer took place:
(a) purchased new machinery or plant for the purposes of business of
the industrial undertaking in the area to which the said undertaking
is shifted;
(b) acquired building or land or constructed building for the purposes
of his business in the said area;
(c) Shifted the original asset and transferred the establishment to such
area; and
(d) incurred expense s on such other purpose specified in a scheme
framed by the Central Government ;
Cost and expenses incurred in relation to all or any of the purposes
stated above called new asset.
Extent of exemption
A. Where the amount of capital gain is more than the v alue of
new asset
The capital gains will be exempted to the extent of the value of new
asset and the balance of capital gains will be taxable in that previous year.
The cost of the new asset will be nil if it is transferred within a period
of 3 years of its being purchased, acquired, constructed or transferred,
B. In case of the amount of the capital gain being equal to, or less
than the cost of the new asset,
The capital gain shall not be charged under section 45. The cost of new
asset shall be reduc ed by the amount of the capital gain if it is transferred
within a period of 3 years of its being purchased, acquired, constructed or
transferred
Deposit account
The amount of capital gain not appropriated or utilised by the assessee
for purchase or cons truction of the new asset within one year before
the date on which the transfer of the original asset took place or beforemunotes.in

Page 183

183the date of furnishing the return of income, shall be deposited on or
before the due date of furnishing the return of income, in a s pecified
an account with a bank or institution .
The amount already utilised for purchase or construction of the new
asset, together with the amount so deposited, shall be deemed to be the
amount utilised for the purchase of a new asset.
If the amount dep osited not utilised fully for purchase or construction
of a new asset within the stipulated period, shall be treated as the
capital gain of the previous year in which the period of 3 years from
the date of transfer of original asset expires. .
8.Shifting of industrial undertaking to a SEZ Section . 54GA
Eligibility
Exemption under section 54GA is available
to all categories of assesses
in respect of short -term or long –term capital gains
arising on the transfer of fixed assets machinery, plant, buildin g, land
or any right in building or land(other than furniture and fittings) used
for the business of industrial undertaking in an urban area
effected in the course of shifting of such industrial undertaking to any
Special Economic Zone(SEZ) whether in an y notified urban area or
any other area , and
the assessee has utilized the capital gain within 1 year before or 3
years after the date of transfer for
purchase of new machinery or plant for the purpose of business of the
Industrial Undertaking in the S pecial Economic Zone to which the said
undertaking is shifted;
acquisition of building or land or construction of building for the
purposes of the assessee’s business in the Special Economic Zone;
expenses on shifting of the old undertaking and its establi shment to the
Special Economic Zone; and
incurring of expenditure on such other purposes as specified by the
Central Government for this purpose.
9.Capital Gain on transfer of residential House
Eligibility :
only an individual or a HUF assessee
Under section54GB exemption is allowed in relation of any capital
gain arising on
Transfer before 01 -04-2017 (01-04-2021 in case of a star tup) of a
long-term capital asset, being a residential property -house or plot of
land ,andmunotes.in

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184the assessee, before the due da te of furnishing of return of income
under section 139 (1) utilises the net consideration for subscription in
the equity shares of an eligible company incorporated in India during
the previous year in which the capital gain arises and such company
being
a small or medium enterprise (SME)
engaged in the business of manufacture of an article or a thing; and
the assessee holds more than fifty per cent share capital or more
than fifty per cent voting rights after the subscription in shares by
the assess ee therein ; and
the company has, within one year from the date of subscription in
equity shares by the assessee, utilised this amount for purchase of
new asset.
Extent of exemption
Where the amount of the net consideration is greater than the cost
ofthe new asset,
So much of the capital gain as it bears to the whole of the capital
gain the same proportion as the cost of the new asset bears to the net
consideration, shall not be charged under section 45 as the income of the
previous year; or
Where th e amount of the net consideration is equal to or less than the
cost of the new asset
The capital gain shall not be charged under section 45 as the
income of the previous year.
Deposit
If the company does not utilize the amount of the net consideration
received by it for issue of shares to the assessee for the purchase of the
new asset before the due date of furnishing of the return of income by the
assessee under section 139, it shall deposit the same before the said due
date in specified bank acco unt to be utilised in accordance with a scheme
framed by the Central Government and the return furnished by the
assessee shall be accompanied by proof of such deposit having been made
and the amount, if any, already utilised by the company for the purch ase
of the new asset together with the amount deposited shall be deemed to be
the cost of the new asset.
If the amount so deposited is not utilised, wholly or partly, for the
purchase of the new asset within the specified period the amount of
capital gain exempted shall be charged as the capital gain of the assessee
for the previous year in which the period of one year from the date of the
subscription in equity shares by the assessee expires and the company
shall be entitled to withdraw such amount i n accordance with the scheme.
Transfer
If the equity shares of the company or the new asset acquired by
the company are sold or otherwise transferred within a period of five yearsmunotes.in

Page 185

185from the date of their acquisition, the amount of exempted capital gain
shall be deemed to “Capital gains” of the assessee in the previous year in
which such equity shares or such new asset are sold or otherwise
transferred.
The period of five years will be reduced to three years where the
new asset is computer or computer software isacquired by a startup.
New Asset
“New asset” means new plant and machinery but does not include
(i) any machinery or plant, which, before its installation by the assessee,
was used either within or outside India by any other person;
(ii) any machinery or plant installed in any office premises or any
residential accommodation, including accommodation in the nature of
a guesthouse;
(iii) any office appliances including computers or computer software;
(iv) any vehicle; or
(v) any machinery or pla nt, the whole of the actual cost of which is
allowed as a deduction (whether by way of depreciation or otherwise)
in computing the income chargeable under the head “Profits and gains
of business or profession” of any previous year.
10.Extension of time -Section54H
Section 54H states that where the transfer of the original asset is by
way of compulsory acquisition under any law and the amount of
compensation awarded for such acquisition is not received by the assessee
on the date of such transfer, the period of acquiring the new asset by the
assessee referred to in Section s 54, 54B, 54D, 54EC and 54F or for
depositing or investing the amount of capital gain shall be extended and
the extended period shall be reckoned from the date of receipt of such
compensatio n.L
6.17ILLUSTRATIO NS
33.State whether the following are the capital Asset or not:
1. Bicycle
2. Horse
3. Car
4. House for self residence
5. Jewellery
6. House let on hire
7. Silver utensils
8. Air Conditioner used as stock in trade
9.Personal Air Condi tioner
10. Rural Agricultural Land
11. Urban Agricultural Landmunotes.in

Page 186

186Solution:
Bicycle, horse, personal air conditioner and silver utensils (if used for
personal use )are personal effects , hence not capital assets .
Item 8 Air Conditioner used as stock in trade and Item 10 Rural
agricultural land areexcluded from the definition of capital asset.
All the r emaining items are capital assets including , Item 4 House
for self residence ,item 5 Jewellery ,item 6 House let out on hire ,i t e m7
Silver utens ilsand item 11 Urban agricultural land as they are not
excluded from the definition of capital asset .
34.State w hether the following transactions are transfer :
1. A house transferred by way of will to son.
2. Bonus shares given by a company to its shar eholders.
3. Giving away jewellery for a piece of land.
4. Getting money in lieu of shop in a shopping complex.
5. Giving the rights to use the asset.
Solution
1)Transfer by will is not transfer
2)Issue of Bonus share is not transfer
3)Exchange of jewellery with land is transfer of both assets.
4)Money being consideration of shop, it is transfer.
5)Not transfer as asset only hired
35.An asset was ac quired on 31 May 2001 for Rs 10,0 00, it is
substantially improved on 30 June 2004 for Rs 5,000 and it is sold on 1 0
December, 20 20for Rs 75,000.
Solution:
Particulars Rs
Sales consideration
Indexed cost of acquisition (10, 000* 301/100)30,10075,000
Indexed cost of improvement
5,000 X 301/113).13,318 17,782
Long Term Capital Gain 57,218
36.Assume that the asset was acquired before 01-04-2001 &and
improvement were carried before 01-04-2001 there is no change in fair
market value on 01-04-2001
Sales consideration 75,000
Indexed cost of acquisition
(10,000 X 301/100) on 01-04-2001 *30,100
Cost of improvement Ignored (Pre -01-
04-2001 -*Optional0 30,100
Long Term Capital Profit 44,900munotes.in

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18737.A sells a residential house property in Mumbai for Rs. 30,00,000 on
May 15, 20 20. The house was purchased by him on June 11, 2002 for Rs
2,00,000. Compute the capital gain
Solution:
Sales Consideration.Rs.
30,00,000
Less-Indexed cost of acquisition
9,00,000X 301/10525,80,000
Long Term Capital Gain 4,20,000
38.A sells a flat on 13 March 2021for Rs 7,00,000. He had acquired the
flat on 15 August 2004 for Rs 1,00,000 and had incurred capital cost of
major repairs of Rs 50,000 in 2007 -08.
Solution
Sales ConsiderationRs.
7,00,000
Indexed cost of acquisition
1,00,000 *301/113)2,66,372
Indexed cost of improvement
50,000 *301/129)1,16,667 3,83,039
Long Term Capita lG a i n 3,16,961
39.X purchased a house property for Rs. 4,00,000 on01-07-2015and
constructed the first floor in March 20 16for 1,10,000. The house
property was sold for Rs 7,10,00031-03-2021. The expenses incurred on
transfer of asset were Rs. 10,000 .Compute the capital gains from the
transaction and show thedifference, ifany, if the house was constructed
in March , 2020
Solution :
Sales consideration 7,10,000
Less: Expenses For Transfer 10,0000
NetSales Consideration 7,00,000
Indexed co st of acquisition 4lakh * 301/-254 4,74,016
Indexed cost of improvement
1,10,000 x 301/2541,30,354 6,04,370
Long Term Capital Gain 95,230
Notes: 1.Date of purchase will be the date of acquisition. Construction of
additional floor is improve ment to the property.
2.If the house was constructed in March, 20 20, it is held for 12months ,
which is less than 24months . It will be short term capital asset not entitled
to indexation. Resultant capital gain of Rs 2,90,000 will be Short Term
Capital gain [Rs. 700000 -(4,00,000+ 1,10,000 )munotes.in

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18840. On 1 -7-2017Xsold gold jewellery for Rs. 1,50,000. It was
purchased on 1 -7-1970for Rs 9,000.Market Value of the jewellery ason
1st April 2001 was Rs. 40,000 .Compute taxable amount of capital gain,
ifthe ex pense on transfer is 5%of the sales price.
Solution :
Sales ConsiderationRs.
1,50,000
Less: Indexed Cost of Acquisition cost as on
01-04-2001= -40,000x 301/1001,20,400
Expenditure on transfer (0.5% x 1,50,000) 750 1,21,150
Long Term Capital Gains 28,850
41.X invested Rs. 1,00,000inornaments and Rs. 50,000 in unquoted
equity shares on 1stMarch 2019.He sold t he jewellery for Rs. 1, 20,000
and shares for Rs. 1,00,000 on 1stAugust 20 20.He paid ½% brokerage
on both the investments, both at the time of purchase and sale. Calculate
the taxable amount of capital gain.
Solution
A-Capital Gain on sale of Jewellery
Particulars Rs. Rs.
Sales Consideration of Jewellery 1,20,000
Less: Cost of Acquisition 1,00, 000
Brokerages onpurchases
(0.5% x 100,000)500
Brokerages on Sales
(0.5% x120,000)600 1,01,100
Short Term Capital Gain
Jewellery held for 30 months ( 1-3-
2019to1-8-2020)less than 36
months, hence STCG ,no
indexation.18,900
B-Capital Gain on sale of Shares
Particulars Rs. Rs.
Sales Consideration on Sale of Shares 1,00,000
Less: Indexed Cost of Acquisition 50,000
Brokerages on purchase s
(0.5% x50,000)250
Total 50,250
50,250* 301/240Indexed cost 56,950
Brokerages on Sales
(0.5% x 1,00,000)500 56,450
Long Term Capital Gain being less than
1,00,000 exempt
Assuming grandfathering cost same43,550munotes.in

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1896.18SELF ASSESSME NTQUESTIO NS:
1.Write short note on :
a.Short Term Capital Gain
b.Cost of Acquisition
c.Cost of improvement
d.Expenditure on transfer
e.Transfer
2.Explain the term ‘capital asset.
3.Explain capital gains oncompulsory acquisition of a capital asset.
4.What is“transfer ” in relation to a capital asset?
5.State the situations under which the written down value of a “block of
assets” will be reduced to nil.
6.Give any five items are not considered as’ capital asset ’.
7.Explain the provisions regarding:
i.Conversion of capital ass ets to stock -in-trade.
ii.Capital gains in case of depreciable assets.
8.State whether the following are the capital Asset or not:
a.Bicycle
b.Horse
c.Car
d.House for self residence
e.Jewellery
f.House let on hire
g.Silver utensils
h.Air Conditioner used as stock in trade
i.AirConditioner not used in own house
j.Rural Agricultural Land
k.Urban Agricultural Land
{Ans: item g is not capital asset )
9.Whether the following transactions are transfer in relation to capital
asset.
a.A house transferred by way of will to son.
b.Bonus shares given by a company to its shareholders.
c.Giving away jewellery for a piece of land.
d.Getting money in lieu of shop in a shopping complex.
e.Giving the rights to use the asset.
[Ans: only c and d are transfers ]
10.Ajay converted unquoted shares(kept as invest ment) as his stock in
June,201 5. He had p urchased theshares in F.Y. 201 1-12for Rs.
2,00,000. The market value of the shares , in June 20 20Rs. 8,00,000.
He sold t he shares Rs. 9,20,000 on 30-10-2020. Compute taxable
capital gains .
(Ans: Rs 1.20 lak hbusiness profit and LTCG ( 8 lakh -2l a k h* 2 5 4 -182 =R s5
,20,879 in 2015 -16 , taxable in A.Y. 20 21-22munotes.in

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19011.Aditya sold his only house property occupied by him as residential
house for Rs 18 lakh on 31 -12-2020.The house property was
purchased by him on28-02-2005 fora consideration of Rs 2 lakhs.
Determine the capital gains.
(Ans: LTCG Rs 12,67,257 =[18,00,000 -Rs. 2,00,000X 301/-113)
12.Siddharth converts his plot of land purchased in July 2006 for Rs
60,000 into stock -in-trade on 31stMarch 20 14. The fair market value
on 31 -3-2014 is Rs 1,60,000. The stock -in-trade was sold for Rs
2,00,000 in the month of January 20 21. Find out the taxable income,
if any, and if so under which “head” of income and for which
“assessment year”.
(Ans: LTCG 1,60,000 -60,00 0X220-122=R s . 91,803 in AY 20 14-15Business Income Rs.
40,000 taxable in AY 20 21-22-19)
13.X acquired a plot of land on 30 -6-2006 for Rs. 2,20,000. Brokerage
and other incidental expenses on acquisitio n of plot were Rs. 30,000.
Xsold the plot of land on 30 -6-2017for Rs. 1 2,50,000. What will be
the amount of capital gain? Can he claim deduction for ground rent
paid by him amounting to Rs. 5,000 during the period when he held
the asset?
(Ans: LTCG 1 2,50,0000 -2,50,000X 301-122=Rs.6,33,197 ,N o )
14.Raju Purchases 250 equity shares of ABC Ltd on 01-04-2011 @Rs.
270 per share and incurs Rs. 500 on brokerage and transfer. On01-
07-2012 , hegets 200 bonus shares. On 01-09-2014 he gets 300 right
shares @R s 140 per share. On 28-02-2021he sells all the 750
shares @Rs1000 per share and incurs expenditure of Rs. 1,500 on
brokerage. Compute his taxable capital gain. (STT not paid)
(Ans: Sales [750X 1000 ]-1500 =R s7 , 4 8 , 5 0 0 –Purchase [[250X2 70+500] X 272-
184]=R s1 , 0 0 , 5 2 2 +0Bonus +Right [300X140]X 301/-240=47600 LTCLG
Rs.5,99,278 i.e. {7,48,500 –1,48,122 =[1,00,522 +0+4 7 , 6 0 0 ]subject to
grandfathering clause taking 2018 value
15.WDV of the block on 01 -04-2017 of the block (depreciation 25%)
comprising of two copier is Rs 6 lakh. Both the copier were
discard ed on 31 -03-2021and sold for Rs .80,00 0each. New copier
was bought on 01 -04-2021forRs 13 lakh. Compute the amount of
capital gain chargeable -Depreciation. (Ans: STCL –4.8 lakh 31,000 No
depreciation on empty block . New copier will qualify for dep .I nA . Y . 2 0 22-23).
16.Ramesh sold jewellery on 15 -11-2020for Rs. 4,50,000. He
purchased it on 01 -04-2014 for Rs. 3,05,000. He paid brokerage of
Rs. 4,000 for purchase and Rs. 2.000 for sale. Compute capital
gains chargeable to tax.
(Ans: LTCG RS 1531 2= {4,50,000 -2000 -[3,05,000+4000 X 301/-240)
17.Mahesh sold his flat 15 -04-2017 for Rs 16.5 Lakh. He had purchased
it for Rs 50,000 on 03 -07-1983. Its market value as on 01 -0-4-2001
was Rs 5 lakh. He paid brokerage of Rs. 13,000 for the sale
transaction. C ompute the total taxable capital gain.
(Ans: LTCG 16,50,000 -13,000 -{5,00,000X 272 -100)= Rs 2,77,000)munotes.in

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19118.A purchase d1000 share of Reliance @ Rs 1000 each. Reliance
goes for right issue in the ratio of 1:1 for Rs 600. A sells( renounces )
his rights for 500 shares @ Rs 50 per share to X. Ascertain the
liability for taxable capital gains , if any .
(Ans: for A -STCG 1300 ,For X -Cost of Acquisition of right Rs 5000 )
19.Asold a residential house for Rs 55lakhs on 31 -03-2021.He had
inherited the house from his father in 1990, the fair market value of
which as on 1.4. 2001wasRs.10lakhs. During the year 1992 -1993,
he carried out further construction and improvements, at a cost of Rs .
6 lakhs. Expenditure in connection with transfer Rs . 50,000 Compute
capital gains.
(Ans:LTCG Rs55Lakh –50,000-[Rs.10lakhs X 301-100]=+Rs25,40, 000. Improvement in
1992 -93 will be ignored ).
20.WDV of Block of 2 machines -(depreciation 15%) owned by AK
Ltd. was Rs 9 lakh as on 01 --04-2020.A Kp urchased a new
machine for Rs 8 lakh on 30 -12-2020and sold the old machines for
Rs. 10 lakh . Compute depreciation and taxable capital gains if any,
for AY 20 21-22. Show the difference if AK sold the machines for
Rs.8 lakh. .
(Ans: a) block Rs 9 lak h+ 8 lakh –10 lakh = 7 lakh . Deprecation @ 15% -Rs 1,05,000
b)STCG -1 lakh , Depreciation -Nil.)

munotes.in

Page 192

1927
INCOME FROM OTHER SOURCES
(Sections 56 -59)
Unit Structure
7.1 Introduction &Objectives
7.2.Basis of Charge
7.3.Incomes specifically chargeable u/s 56
7.4.Other incomes chargeable u/s 56
7.5.Some specific incomes –gifts, dividend
7.6.Deductio ns
7.7.Amounts not deductible
7.8.Miscellaneous -Balancing charge, Method of accounting
7.9.Self-Assessment Questions
7.1INTRODUCTIO NAND OBJECTIVES
“Income from other sources” is the last and residuary head of
income specified insection 13 .Incom enot covered under any other head
of income ,will be chargeable to tax under this head. The lesson explains
the scope of “Income from other sources” ,its computation and the
deductions allowable therefrom as given in section 56 to 59 .
7.2 BASIS OF CHARG E
2.1.As per s ection 56 (1),any income ,which is not chargeable to tax
under any other heads of income and which is not to be excluded from the
total income shall be chargeable to tax as residuary income under the head
“Income from Other Sources”.
2.2.As per s ection 56(2) ,thefollowing incomes are specifically
chargeable to tax under the head “Income from Other Sources”: -
i.Dividends
ii.Any winnings from lotteries, crossword puzzles, races including horse
races, card games and other games of any sort or from gambling or
betting of any form or nature whatsoever.
iii.Any sum received by the assessee from his employee as contribution
towards provident fund , superannuation fund or Employee State
Insurance fund or any other employees’ welfare fund, if not
charg eable under the head ‘profits and gains of business or
profession”.munotes.in

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193iv.Interest on securities, if not chargeable under the head ‘profits and
gains of business or profession”.
v.Rental income from machinery, plant or furniture belonging to the
assessee and le t on hire if not chargeable under the head ‘profits and
gains of business or profession.”
vi.Composite rental income from letting machinery, plant or furniture
with buildings and letting of the buildings is inseparable from the
letting of the said machinery, plant or furniture, if not chargeable
under the head ‘profits and gains of business or profession”.
vii.Any sum including bonus received under keyman insurance policy, if
not taxable as salary or ‘profits and gains of busin ess or profession”.
viii.Any sums of m oney exceeding 50,000 rupees in aggregate
received without consideration by an individual or HUF.
ix.Fair market value of movable property received without consideration
by an individual or HUF if it exceeds 50,000 rupees in aggregate.
x.The difference b etween the aggregate fair market value and the
consideration received by an individual or HUF in respect of a
movable property or immovable property, if such difference exceeds
50,000 rupees .
xi.Excess of t he stamp duty value of any immovable property ( wh ether
assessed or assessable) if it exceeds by 50,000 rupees than the
consideration for such immovable property received by an individual
or HUF.
xii.Shares of closely held companies having aggregate fair market value
exceeding 50,000 rupees received by a f irm or a closely held
company without consideration or for a consideration which is less
than the aggregate fair market value of the property by an amount
exceeding 50,000 rupees .
xiii.Interest received on compensation or on enhanced compensation
referred to in section 145A (b).
xiv.Any sum of money received as an advance or otherwise in the course
of negotiations for transfer of a capital asset, if such sum is forfeited
and the negotiations do not result in transfer of such capital asset.
7.3 INCOMES SPECIFICALL Y CHARGEABLE
UNDER THE HEAD I NCOME FROM OTHER SOURCES
Some well -defined incomes will be taxable under the head
“income from other sources” as per s ection 56(2) in addition to the
residual income not charged under theother four heads .These incomes are
as under : -munotes.in