TAXATION LAWSI INTRODUCTION TO INCOME TAX LEARNING OBJECTIVES: To know about the Income Tax Act To know about

bout the history of income tax act To know about various basic concepts used in Income tax Act To know about various objectives of income tax act

SCHEME OF INCOME TAX: The present law of income tax is contained in the Income tax act, 1961 and the income tax rules, 196 as amended up!to!date" It extends to the whole of India and came into force on 1st April 196 " Thou#h Income tax is a central levy, its net proceeds are shared between both the $entre and the states except that any surchar#e on income tax levied for the purpose of the %nion accrues wholly to the $entral &overnment, and is excluded from the divisible pool" Income tax plays an important role in the national economy and is also a valuable toll for achievin# the socio!economic objectives" IMPORTANCE: The taxes levied by the #overnment form a pool of resources to be used of the collective benefit of the public" The taxation is an exercise in the collective solution of individual problems" The state takes upon itself the duty of solvin# the problems of the underprivile#ed and need finance for this purpose" The #overnment can mobili'e resources by imposin# taxes on the privile#ed ones" The taxation structure of the country can play a very important role in the workin# of our economy" (ome time back the emphasis was on hi#her rates of tax and more incentives" )ut recently the emphasi'e has shifted to decrease in rates of taxes and withdrawal of incentives" *hile desi#nin# the taxation structure it has to be seen that it is in conformity with our economic and social objectives" It should not impair the incentives to personal savin#s and investment flow and on the other hand it should not result into decrease in revenue for the state"

In our present day economic structure income tax plays a vital role as source of revenue and a measure of removal of economic disparity" +ur taxation structure provides for two types of taxes direct and indirect, the income tax, wealth tax and #ift tax are direct taxes where as sales tax and excise duties are indirect taxes" HISTORY: The income tax was introduced in India for the first time 1-6. by )ritish rulers followin# mutiny of 1-/0" the period between 1-6. to 1--6 was period of experiments in the context of income tax" This period ended in 1--6 when first income tax act came into existence" The pattern laid down in it for levyin# of tax continues to operate even to day thou#h in some chan#ed form" In 191- another act income tax act 191- was passed but it was short lived and was replaced by income tax act 19 operation till 11st 2arch 1961" PRESENT ACT: +n the recommendation of 3aw commission and 4irect taxes en5uiry committee and in consultation with law ministry a bill was framed" This bill was referred to a select committee and finally passed in (eptember 1961" This act came into force from 1st April 196 in whole of the country" Income tax act 1961 is comprehensive act and consists of 9- sections, sub sections runnin# into thousands, schedules, rules and sub rules etc" and is supported by other acts and rules" This act has been amended by several amendin# acts since 1961" the annual finance bills presented to parliament alon# with bud#et make far reachin# amendments in this act every year" FUNDAMENTAL CONCEPTS: ASSESSEE [SEC-2(7 !: An assessee is a person who is liable to pay any sum under the Income tax act or in respect of whom the proceedin#s have been initiated under this act" It is not necessary that the income in respect of which a person is considered an assessee should be his own, that is a person can be a deemed assessee on some other person6s income as well" and it remained in existence and

The followin# are the in#redients of the definition of an assessee7 L"#$"%"&' &( )#' &#* (+ #,' (&-.+ /01 [/.232 (7 ! The assessee means a person by whom any tax or any other sum of money is payable under this act" Any other sum includes a fine, an interest, a penalty or a surchar#e on income tax" I,"&"#&"(, (4 #//.//1.,& )+(2..5",6/ [/.232 (7 #! The assessee includes every person in respect of whom any proceedin#s under this act has been initiated, irrespective of whether or not he is liable to pay tax or any other sum" (uch proceedin#s may be 8i9 for the assessment of his income or for the income of any other person in respect of which he is assessable or 8ii9 for the loss sustained by him or by such other person or 8iii9 for the amount of refunds which is due to him or to any other person" Therefore, mere initiation of the assessment proceedin# a#ainst a person makes him an assessee, even if he is not liable to pay any tax or any other sum" D..1.5 A//.//.. [/.232 (7$ ! The 4eemed assessee is a person who has been treated as an assessee only by law" The deemed assessee is assessed on the income or loss of any other person" :or example, the le#al representative of the deceased the #uardian of a minor, the a#ent of a non!resident and the trustee of a trust etc, are termed as deemed assessee" 4eemed to be an assessee in default ;sec" 80c9< A person is deemed to be an assessee in default if he does not comply with his statutory duty under the income tax act" :or example, if any person who is re5uired to deduct tax at source does not deduct it, or after havin# deducted, fails to pay it to the $entral #overnment, he is deemed to be an assessee by default in respect of the tax" P.+/(, [/.232 (78 ! The definition of a person under the Income tax act is very comprehensive and includes both a natural as well as an artificial or a judicial person" The incidence of tax rests on a person and only a person can be assessee" The term person includes the followin#7 I,5"9"50#% [S.232 (78 (" : An individual is a natural person includin# male, female, major, minor or even a lunatic" =owever, the income of a minor or a lunatic can only be assessed in the hands of le#al #uardian or mana#er actin# as deemed assessee"

HUF: S.2 2(78 ("" The expression =indu undivided family is not defined by the income tax act" A joint family consists of all persons linearly descended from a common ancestor includin# their wives and unmarried dau#hters" A sin#le person does not constitute a family which implies plurality of persons" All those who are #overned by the provisions of the >=I?4%@ code are included in the term =I?4% even thou#h their reli#ions may be different" Therefore, Aains and (ikhs are =I?4%( for the purpose of Income tax law in the absence of any custom or usa#e to the contrary" $ompany7 ;(ec" 81198iii9< In brief, a company means an Indian company incorporated under the companies act, 19/6, or a corporation established under a central state or provincial act, or any corporate incorporated under the laws of a forei#n country or any institution, association or body, whether incorporated or not whether Indian or forei#n, declared by the board to be a company" F"+1: S.232 (78 "9: :irm has the same meanin# assi#ned to it by the Indian partnership act, 191 " Association of persons7 An association of persons is the one in which two or more persons join for a common purpose or common action with a view to produce income, profits or #ains" The association need not necessarily be on the basis of a contract, consent and understandin# may be presumed" B(5' (4 I,5"9"50#%/: S.232 (78 9 )ody of individuals means a con#lomeration of individuals who carry on some activity with the object of earnin# income" The word body would re5uire an association for some common purpose or there must be unity under some common tie or occupation" A mere collection of individuals without a common tie or common aim cannot be assumed to be a body of individuals"

L(2#% #0&-(+"&': S.232 (78 9" The term local is not defined by the act" The #eneral clauses act, 1-90 defines a local authority as a municipal committee, district board, body of port commissioners, or other authority le#ally entitled to or entrusted by the #overnment" +ther artificial Audicial person7 (ec" 8119vii It includes every artificial juridical person, not fallin# within any of the precedin# sub! clauses" This is a residuary clause, an idol, deity, a university, #uru #ranth sahib and trust etc, are covered under this clause" A//.//1.,& '.#+: [S.232 (: ! The term assessment year means the period of 1 months commencin# on the first day of April every year" Thus, the assessment year always be#ins on 1st April and ends on 11st 2arch every year" This period is also known as the financial year" P+.9"(0/ Y.#+ [/.23 7! The year in which income is earned is termed as the previous year" Income tax is char#ed on the total income of the previous year, and the income earned durin# the previous year is assessed to tax at the rates and as per the provisions applicable for the assessment year relevant to the previous year" In other words, the income char#eable to tax in the assessment year is the one actually earned in the previous year" :inancial year to be the previous year ;sec"1 819<7 It should be noted that financial year is the previous year for tax purpose only, and the assessee is free to follow an accountin# year different from the financial year" =owever, is the assessee6s accountin# year is different from the financial year, he will still be re5uired to maintain accounts for every financial year for the purpose of submittin# the income tax returns" P+.9"(0/ '.#+ 4(+ # ,.; /(0+2. (4 ",2(1.: *here a new source of income comes into bein# in a financial year either by way of set up of new business or profession or otherwise, the period of the first previous year will be#in 8i9 with the date of settin# up of the business or profession, or 8ii9 the date on which new source of income comes into existence and will end with the said financial year" Therefore, in such cases the first previous year may be less than 1 months"

I,2(1. [S.232 (2< ! The concept of income is very important as it is the income that is taxed under the income tax act" The definition of income under this act is a very wide and includes profits and #ains, dividends, voluntary contributions, per5uisites, allowances, dischar#e of an obli#ation, compensation receipts, profits on sale of license, cash assistance received a#ainst exports, recovery of loss or expenditure, recovery of bad debts, any wins from lottery, cross word pu''les, races, card #ames, #amblin#, bettin# etc" H.#5/ (4 I,2(1.: [/.238<! :or the purpose of char#e of income tax, all incomes are classified under five heads of income, namely, (alaries, =ouse property, profits and #ains of business or profession, $apital #ains and income from other sources" Cxempted Incomes ;(ec"1. and (ec"-6< These incomes are either fully or partially exempted from income tax and therefore, to the extent of exemption, do not form a part of the total income and hence are not taxable" D.502&"(,/ 4+(1 ",2(1.: Income tax act allows certain specific reductions to be made from the income of an assessee while computin# the total income" These reductions are termed as deductions" Two type of deductions have been provided under the act, i"e" deductions from the specific heads of income and deductions from #ross total income" G+(// &(&#% ",2(1. [S.23=>B (? ! The a##re#ate of net taxable income under various heads of income is termed as &ross total income" This a##re#ation is not a mathematical process but a le#al concept" It is computed after allowin# for the deductions specific to various heads of income, set off of losses and allowances or set off of carry forward losses and allowances and clubbin# of income of any other person that may be liable to be included in assesses total income" T(&#% I,2(1. [S.232 (<? ! Total income, computed in accordance with sec"/ accordin# to residential status, is arrived at after allowin# deductions under (ec"-.$$$ to -.% from the #ross total income" The char#e of income tax is on total income of an assessee" Incomes exempted from income tax do not form a part of total income"

C(1)0&#&"(, (4 &#* %"#$"%"&': Income tax is a char#e on total income of previous year and is calculated by applyin# rates of tax prescribed for the relevant assessment year to the total income of the previous year" The net tax liability is then computed by allowin# any rebates of relief due to the assessee, addin# the surchar#e, education cess and #ivin# credit for any tax paid in advance of deducted at source" R#&./ (4 I,2(1. &#*: The rates of income tax are prescribed every year by the finance act which follows a combination of flat and slab rates for char#in# tax on total income" R.$#&. [/.23=7! Debate is a reduction allowed in the amount of income tax computed in case of certain types of assessee" R.%".4 4+(1 &#* [/.23=:! *here an assessee receives arrears of salary or advance of salary or profits in lieu of salary durin# previous year and it becomes taxable durin# the same previous year by virtue of a provision of the income tax act there by causin# the assessee to be taxed at a hi#her rate than he would otherwise have been assessed, relief may be allowed under Dule 1A from tax so computed at the hi#her rate" The act provides for the relief only in case of arrears of salary or salary received in advance or family pension" D.502&"(, 9@/ R.$#&./ 9@/ R.%".4: *hile the basic purpose of all the three is to benefit the assessee by reducin# the incidence of tax, they differ #reatly in the way they achieve their common objective and the conditions under which they pass on the relief" *hile the deductions reduce the amount of income char#eable to tax, rebates and relief reduces the amount of tax computed on the char#eable income" S0+2-#+6.: (urchar#e is a char#e levied on the amount of income tax computed under the act" This is levied by the #overnment to raise revenue for special purpose for the union and accrues wholly to the central #overnment" In simple terms surchar#e is tax on income tax"

S0+2-#+6. 9@/ I,2(1. &#*: Income tax is a char#e on total income while surchar#e is a levy on income tax" :irst, income tax is computed on total income at prescribed rates and then surchar#e is worked out on the amount of income tax so computed to arrive at the total tax liability" E502#&"(, #,5 SHEC: Cducation cess and secondary and hi#her education cess are levied on the a##re#ate of income tax and surchar#e" These are fully assi#ned to the central #overnment to enable it to finance universali'ed basic education" Income tax vEs surchar#e vEs Cducation cess7 Income tax is levied on total income" (urchar#e is levied on income tax" Cducation cess and (=C$ are char#ed on the a##re#ate of income tax and surchar#e" SETTLEMENT OF TAX LIABILITY: An assessee is re5uired to file his return of income and deposit the tax with the authorities within the prescribed time, failin# which the act provides wide ran#in# power for recovery of tax besides the fines and penalties for late payment" A59#,2. &#*: *here the tax liability of the assessee is Ds"/,... or more, provisions have been enacted to spread the payment of tax in three or four installments" This also eases the cash flow for the assessee by allowin# him to pay in installments" Advance tax is payable durin# any financial year on the estimated total income that would be char#eable to tax in the immediately followin# assessment year" T#* #& /(0+2.: 4eduction of tax at source is a method of collection tax whereby it is obli#atory for certain persons to deduct tax, surchar#e and education cess at prescribed rates from certain type of payments and deposit the tax so deducted with the authorities to the credit of the person from whose payment it was deducted" Therefore, it is a tax on income at its very source deducted by the payer and deposited to the #overnment on behalf of the person earnin# that income" An assessee can claim credit for any tax deducted at source from his income durin# the previous year"

A59#,2. &#* 9@/ &#* #& /(0+2.: The primary difference between the two is that while the onus to pay advance tax is on the assessee himself, the responsibility for deductin# and payin# tax at source lies with the person makin# the payment which is liable to be taxed at source" Tax deduction at source is particularly helpful in ensurin# tax revenue from individuals and small unre#istered entities who otherwise may not disclose these incomes" Defunds7 where on completion of the assessment, it is determined that the amount of tax paid by the assessee is in excess of what was actually due from him, the excess so paid by the assessee is termed as refund and is due back to him from the #overnment" CONCEPT OF INCOME: The concept of income is central to the Income tax as it is the income that is taxed by it" Anythin#, which can be defined as income is taxable unless specifically exempted from tax" +n the other hand, a receipt that cannot be termed as income, cannot be assessed" WIDE SCOPE OF THE AMBIT OF INCOME: The Income tax Act uEs 8 B9 specifically includes 6 types of receipts or benefits to be considered as income" This act also specifies various other national items which are also deemed as income for the tax purposes" (ince, the definition of income under this act is an inclusive definition, items not specifically defined as income or deemed as income by the act will have to be evaluated accordin# to the natural expression of a very elastic ambit and it is difficult to confine its scope to the boundaries of any precise definition" All relevant circumstances under which a receipt or benefit accrues to a person needs to be taken into consideration in determinin# if it can be dubbed as income" I,2(1. 0,5.+ &-. #2& "/ 5"/&",2& 4+(1 #, #22(0,&#,&A/ 2(,2.)& (4 ",2(1.: :or the purpose of income tax, income is computed with reference to provisions of the income tax act" Account books of an assessee may form an important startin# point to compute assessable income under the act but cannot be determinative of taxable income"

ITEMS SPECIFICALLY DEFINED AS INCOME: The income tax has adopted twin phraseolo#y to specify the items which will be assessable to income tax" :irst, it includes a list of items in the definition of income and second, it has coined many deemin# provisions to brin# also the notional receipts within the ambit of definition of income" DEFINITION OF INCOME [SEC32 (2< !: The act has specifically included the followin# B types of receipts and benefits as income7 i" ii" iii" Frofits and #ains 4ividends Goluntary contributions received by a trust of institution, created wholly or partly for charitable or reli#ious purpose, or scientific research association, sport association or any fund or institutionEany trust or institution wholly for public reli#iousEcharitable purposes and notified by the central #overnment or any universityEeducational institution or hospitalEother medical institution approved by the prescribed authority" iv" v" The value of any per5uisite or profits in lieu of salaries Any special allowance or benefit specifically #ranted to the assessee to meet his expenses wholly and necessarily and exclusively for the performance of his duties" vi" Any allowance #ranted to the assessee either to meet his personal expenses at the place where he performs his duties or to compensate him for the increased cost of livin#" vii" Fer5uisite or benefit received by a director, relative of a director or a substantially interested person7 The value of any benefit or per5uisite, whether convertible into money or not, obtained from a company either by a director or a person substantially interested or by a relative of director or such person

1.

viii"

4ischar#e by a company of an obli#ation of director, relative of a director or a substantially interested person, any sum paid by company in respect of any obli#ation which, but for such payment, would have been payable by any of the three individuals stated in 8vii9

ix"

)enefit or per5uisite obtained by a representative assessee7 The value of any benefit or per5uisite, whether convertible into money or not, obtained by any representative assessee or beneficiary" :urther, any sum paid by the representative assessee in respect of any obli#ation which, but for such payment, would have been payable by the beneficiary is also an income" It is operative from the assessment year 19-.!-1 and subse5uent years"

x"

$ompensation receipts7 any compensation due to or received by any person, by whatever name called, who is mana#in# the affairs of any company in India, for the termination of his mana#in# a#ency or for the modification of the terms and conditions relatin# thereto"

xi"

Income of trade or professional association from specific services to members7 Income derived by a trade, professional or similar association from specific services performed for its members"

xii" xiii"

$ash assistance received or receivable by any person a#ainst exports under any scheme of the #overnment of India" Any duty or exercise drawback or custom or excise repaid or repayable as a drawback to any person a#ainst exports under the custom and central excise duties drawback rules"

xiv"

The value of any benefit or per5uisite from business or profession, whether convertible into money or not, arisin# from business or the exercise of a profession"

xv" xvi" xvii" xviii"

Any remuneration char#eable under (ec" -8G9 Any recovery in respect of loss or expenditure which was allowed to be deducted in any year Cxcess of sale proceeds of a scientific research asset over its amorti'ed value to the extent of deduction allowed" Any recovery in respect of a debt which was allowed as a bad debt

11

xix" xx"

Any profits and #ains char#eable under section B/ The profits and #ains of any business of insurance carried on by a mutual insurance company or by a cooperative society"

DEEMED INCOMES: [SEC327 (2 ! Income tax act has enacted many deemin# provisions to brin# into tax net notional or fictional incomes which, but for such provisions, would not be assessable as income" 1" income from self occupied house " presumptive incomes under sec"BB4 1" unexplained cash credits B" unrecorded and unexplained investments /" unexplained expenditure 6" amount borrowed or repaid on hundi otherwise by way of an account payee che5ues" INCOME EXEMPT FROM TAX: Income tax act provides a scheme of exemptions, deductions and tax rebates" Incomes fully exempt from income tax do not form part of the total income at all" Incomes partly exempt from tax are to be included in the total income only to the extent to which they are in excess of the 5uantum of exemption available" Incomes for which deductions have been specified by the act are also liable to be included in the #ross total income, but a deduction is allowed to the extent of the 5uantum specified" (imilarly, incomes which are entitled to rebate or relief from tax are basically included in the total income only for the purpose of determinin# the #ross tax liability and a rebate from the #ross tax liability is then allowed in the manner specified" Debate able incomes are therefore included in the total income only for determinin# the slab rate of tax applicable to the assessee"

A6+"20%&0+#% I,2(1. [S.238> (8 ! A#ricultural income is exempt from income tax" =owever, it is included in the total income only for the purpose of determinin# the slab rate of tax applicable to the assessee" E*.1)&"(, 4(+ 2.+&#", B/#%#+' ",2(1./C The followin# incomes fallin# under the head salaries are exempt from tax subject to certain conditions7 1" 3eave travel concession or assistance to employees " Allowances or per5uisites to #overnment employees servin# abroad 1" 4eath cum retirement #ratuity B" $ommuted value of pension /" Cncashment of earned leave by retirin# employees 6" Detrenchment compensation to workmen 0" $ompensation received by an employee on his voluntary retirement or termination of his service -" Tax paid by an employer on the value of non monetary per5uisite provided by him under section 10 8 9 9" payment of statutory provident fund 1." payment from reco#ni'ed provident fund 11" =ouse rent allowance 1 " Fayment from approved superannuation fund 11" special allowance to reimburse expenses incurred by an employee in the performance of official duties or to compensate him for personal expenses incurred at the place of his postin# or residence or to compensate him for the increased cost of livin#" RECEIPTS BY MEMBERS FROM HUF: Any sum received by an assessee in his capacity as member of an =%: is exempt from tax to avoid double taxation as =%: is also assessable separately on its income in its own capacity"

11

The sum should be received in the capacity as a member of the =%:7 If the recipient is not a member of =%:, he cannot claim the exemption" The sum should be received wither out of the income of the =%:, or out of the income of impartible estate, owned by the =%:" S-#+. (4 )+(4"&/ 4+(1 )#+&,.+/-") 4"+1: *here any person is a partner in a firm, his share of profit in the total income of the firm is exempt from tax" The share of profit of a partners in the total of the firm is to be computed by dividin# the total income of the firm in profit sharin# ratio specified in the partnership deed" ?o partner will pay tax on the share of his income from a firm" (hare of income from the firm is exempt in the hands of partner" (hare of loss from the firm cannot be set off by partners a#ainst their personal income" The share of loss from a source, the income of which is exempt from tax, cannot be set off a#ainst any taxable income from any other source" I,&.+./& (+ )+.1"01 #22+0",6 &( ,(,-+./"5.,&/: In the case of a non!resident the followin# incomes are exempt7 Any income from interest on securities and bonds notified by the central #overnment prior to 1st Aune .. is exempt" Any income from premium on the redemption of such bonds as aforesaid is also exempt" Any interest on moneys standin# under non!resident 8external9 account in any bank in India is exempt, such account can be maintained only by individuals, resident outside India of the forei#n exchan#e re#ulation act, 1901" Interest from notified savin#s certificates to a non!resident Indian citi'en or non!resident F+I ;sec"1. 8B)9< Any income from interest on savin#s certificates issued before 1st Aune .. by the central #overnment and notified by it is fully exempt, provided the followin# conditions are satisfied7

1B

a9 Assessee is a non!resident Indian citi'en or a non!resident forei#n national of Indian ori#in" Therefore, a non!resident individual who is neither an Indian citi'en nor a person of Indian ori#in cannot avail this exemption" b9 $ertificate should be subscribed in forei#n currency remitted from outside India in accordance with forei#n exchan#e re#ulation act 1901" if the certificates are subscribed from forei#n currency not remitted from out side India or in violation of :CDA, the exemption cannot be availed" E*.1)&"(, &( 4(+."6, 2"&"D.,/ [/.238> (E ! The followin# exemptions are provided to individuals who are not citi'ens of India" Demuneration of diplomatic personnel of forei#n countries ;sec"1. 869 ii< The remuneration received by a forei#n citi'en as an official of an embassy, hi#h commission, le#ation, commission, consulate or the trade representative of a forei#n state or as member of staff of any of these officials for services in such capacity is exempt subject to the followin# conditions" Demuneration of trade commissioner or official representative of a forei#n #overnment is exempt only on reciprocal basis, ie, only if the correspondin# official of Indian #overnment posted in that country enjoys a similar exemption" Demuneration of an employee of a forei#n enterprise ;sec"1. 869 vi< The remuneration received by such individual as an employee of a forei#n enterprise for services rendered by him durin# his stay in India may be exempt if the followin# conditions are fulfilled" CONDITIONS: a9 The forei#n enterprise is not en#a#ed in any trade or business in India b9 =is stay in India does not exceed in a##re#ate a period of 9. days in such previous year c9 (uch remuneration is not liable to be deducted from the income of the employer char#eable under this act"

1/

(alary of ?on!resident forei#n crew of a forei#n ship ;(ec"1. 869 viii< Any income char#eable under the head Hsalaries6 received by or due to an individual, who is not a citi'en of India and also not!resident in India, as remuneration for services rendered in connection with his employment on a forei#n ship is exempt, provided his total stay in India does not exceed in the a##re#ate 9. days in the previous year" Demuneration of forei#n #overnment employee in connection with his trainin# in India at specified undertakin#s ;(ec"1. 869 xi< Demuneration received by non!Indian citi'en employee of a forei#n state durin# his stay in India in connection with his trainin# is exempt" Cstablishment for trainin#7 The trainin# may be imparted in any establishment or office of, or in any undertakin# owned by, a9 The #overnment or b9 Any company in which the entire paid up share capital is held by the central #overnment or any state #overnment, partly by the central #overnment and partly by one or more state #overnment, or c9 Any company which is the subsidiary of a company referred to in item 8b9 or d9 Any corporation established by or under a central, state, or provincial act, or e9 Any society re#istered under the society6s re#istration act 1-6. or under any other correspondin# law for the time bein# in force and wholly financed by the central #overnment or any state #overnment or partly by the central #overnment and partly by one or more state #overnment" T#* (, R('#%&' (+ &.2-,"2#% /.+9"2. 4.. )#'#$%. &( # 4(+."6, 2(1)#,' [/.28> (EA ! *hen a forei#n company derives any royalty or fees for technical services from #overnment or an Indian concern and the tax on such income is payable by the #overnment or an Indian concern, the tax so paid is not to be treated as income of the forei#n company" Demuneration of an individual in connection with technical assistance pro#ramme7

16

*here an individual is assi#ned duties in India in connection with any technical assistance pro#ramme and project in accordance with an a#reement entered into by the central #overnment and an international or#ani'ation, the followin# incomes are exempt7 a9 Any remuneration received by the individual, directly or indirectly, from approved non!resident consultant" The individual may or may not be an employee of the consultant" b9 Any other income of such individual which accrues or arises outside India but not deemed to accrue or arise in India, in respect of which such individual is re5uired to pay any income or social security tax to the country of his ori#in is also exempt subject to the followin# conditions7 i9 ii9 iii9 the individual is an employee of the consultant the individual is either not a citi'en of India or bein# a citi'en of India is not ordinarily resident in India the contract of service of such individual is approved by the prescribed authority before commencement of his service" P#'1.,& 0,5.+ B-()#% 6#/ %.#F 5"/#/&.+ [S.238> (8>BB ! *here any payment is made to a person under the )hopal #as leak disaster act 19-/, and any scheme framed there under, it fully exempt from income tax" =owever, where the assessee has been allowed a deduction in respect of such payment under the act on account of any loss or dama#e caused to him by such disaster, it will not exempted" SECTION----A 8a9 4efine Income" 8b9 *hat is A#ricultural incomeI 8c9 *ho is a personI 8d9 (tate the heads of IncomeI 8e9 *hat is &ross total incomeI 8f9 *hat is total incomeI 8#9 *hat are exempted incomesI

10

SECTION----B a" Cxplain various exempted incomes under section 1. of the Income tax actI b" Cxplain the followin#7 Income, &ross total income, total income, advance tax"

CHAPTER -----2 RESIDENTAIL STATUS AND SCOPE OF TOTAL INCOME: Desidential status of an assessee refers to his presence in India durin# the previous year in accordance with the provisions of (ec"6 of the Income tax act" (uch presence may either be as a physical stay in India for a specified period or by virtue of the control and mana#ement of its affairs bein# exercised in India" Accordin#ly, an assessee may be a resident or non!resident in India durin# the previous year" A resident individual and resident =%: are further sub!classified as resident and ordinarily resident or resident but not ordinarily resident" Desidential status of an assessee on his total world6s income and lowest on a non!resident who is assessed only in respect of his India6s income" R./"5.,&"#% /&#&0/ 9@/ /2(). (4 &(&#% ",2(1. 9@/ &#* %"#$"%"&': Income tax liability arises on the total income of an assessee" The scope of total income is #reatly influenced by the residential status of an assessee, the country of citi'enship is of no conse5uence" :or example, a person resident in India to pay income tax on his total world income" +n the other hand, citi'en of India, non!resident in India, a forei#n national non!resident in India, is liable to income tax only on his Indian income"

1-

RESIDENTIAL STATUS: The followin# #eneral rules must be kept in mind while determinin# the residential status of assessee7 1" RESIDENTIAL STATUS IS DETERMINED SEPARATELY FOR EACH FDCGI+%( JCAD7 Desidential status may differ from year to year" In one year the assessee may be resident while in another year he may be non!resident" " RESIDENTIAL STATUS IS ALWAYS DETERMINED FOR THE PREVIOUS JCAD7 Desidential status of an assessee in the assessment year is immaterial for tax purposes" 1" DIFFERENT RESIDENTIAL STATUS FOR DIFFERENT SOURCES OF I?$+2C ?+T FCD2I((I)3C7 If a person is resident in India in a previous year in respect of any source of income, he is deemed to be resident in India in respect of each of his other sources of income as well" RESIDENTIAL STATUS OF AN INDIVIDUAL [SEC3E(8 (E #!: An individual may be resident and ordinarily resident, or resident but not ordinarily resident, or non!resident" The specific conditions defined by the act to determine residential status of an individual are #iven as follows7 CONDITIONS OF PART A: BASIC CONDITIONS TO MAGE AN INDIVIDUAL BRESIDENTC IN INDIA3 a9 (tay in India for a period or periods of 1- days or more durin# the previous year or b9 i" (tay in India for a period of 6. days or more durin# the previous year and ii" (tay in India for a period or periods of 16/ days or more out of B years immediately precedin# the previous year" 83 RESIDENT: If any one of the conditions a or b of Fart A is satisfied, such individual is resident in India durin# that previous year" There after, additional conditions of Fart ) needs to be applied to determine if he is resident and ordinarily resident or resident but not ordinarily resident"

19

" ?on!resident7 If none of the conditions of Fart A are satisfied, such individual is non! resident in India durin# that previous year" EXCEPTION: The period of 6. days or more in 8b9 8i9 is extended to 1- days or more in the case of7 i" ii" An Indian citi'en, leavin# overseas for employment or as a crew of an Indian ship An Indian citi'en or person of Indian ori#in, outside India, visitin# India durin# the previous year" CONDITIONS OF PART B: A55"&"(,#% 2(,5"&"(,/ 4(+ 5.&.+1",",6 "4 # BR./"5.,& individual@ is Desident but not!ordinarily resident@ in India durin# the previous year" (# RESIDENT BUT ORDINARILY RESIDENT: If both the followin# conditions are satisfied, a resident individual is classified as >Desident and ordinarily resident@7 i" =e has been a resident in India for previous year, and ii" =e has been in India for 01. days or more out of 0 years precedin# the previous year" 8b9 Desident but not ordinarily resident7 If any one of the followin# conditions is satisfied, a resident individual is classified as >Desident but not ordinarily resident@7 i" ii" =e has been a ?on!resident in India in 9 out of 1. years precedin# the previous year, or =e has been in India for 0 9 days or less out of 0 years precedin# the previous year" T-. )%#2. (4 /&#' (+ &-. )0+)(/. (4 /&#' "/ "11#&.+"#%: It is not essential that an assessee should stay at the same place durin# this period" =e may #o from place to place or from house to house or from hotel to hotel" (imilarly, the purpose of the visit is of no or more years out of 1. precedin# the

relevance" It may be that he come on business or to visit his relatives or to obtain medical advice or he simply visits India for pleasure" S&#' ", I,5"# ,..5 ,(& $. 2(,&",0(0/: T-. /&#' (4 8=2 5#'/ (+ 1(+. 1#' ,(& $.

continuous" It is sufficient if it is for a minimum period of 1- days in a##re#ate" The calculation of 1- days in respect of such broken days should be made an hourly basis" A total of B hours of stay spread over two or more days is to be counted as e5uivalent to the stay of one day" The days of entry exit, both should be taken into account for determinin# the period of stay" In countin# the period of stay in India, the days of entry and exit, both should be taken into account" In absence of the details of hourly stay of the assessee, the entry and exit days are taken as full days in countin#" T-. 9"/"& &( I,5"# 50+",6 &-. 4(0+ )+.2.5",6 '.#+/ 1"6-& $. +.60%#+ (+ "++.60%#+: De#ularity of visits to India is not essential" The individual may come to India every year for a definite duration so that his minimum stay is 16/ days in the precedin# B years or he mi#ht have stayed in India for a full year in the first year and there bein# a complete #ap in remainin# three years" INCOME WHICH ACCRUE OR ARISE OUTSIDE INDIA [SEC3?! *here the assessee is >not ordinarily resident@ income accruin# or arisin# outside India in the previous year is taxable only if such income is earned from a business controlled in India or from a profession set up in India" If such income is earned from any other source, e#" =ouse property or capital #ains or other sources, etc, it is not taxable"

T-. 2-#+6.#$"%"&' (4 4(+."6, ",2(1. "/ ", &-. 4(%%(;",6 &#$%.: Income which accrues or arises outside India from 1" )usiness controlled in India " controlled out side India " Frofession7 (et up in India (et up out side India 1" any other7 Irrespective of the place of control D"+"D" Taxable D")%T ?+T +"D" Taxable ?+?! DC(I4C?T ?ot taxable

Taxable Taxable Taxable Taxable

?ot taxable Taxable ?ot taxable ?ot taxable

?ot taxable ?ot taxable ?ot taxable ?ot taxable

M.#,",6 (4 BP+(4.//"(, /.& 0) ", I,5"#C: Frofession set up in India would imply that it was started in India and later on extended to forei#n countries" The expression >controlled in India@ would imply that the head and brain who directs the business activities is situated in India" 2ere entry in balance sheet of a forei#n income does not in itself amount to receipt in India7 Income accruin# or arisin# outside India is not deemed to be received in India because of the fact that it is taken into account in a balance sheet prepared in India" Thus, where the profits of a forei#n branch, not received in India, are incorporated in the account books of head office in India, the incorporation of entries in the books of account do not amount to receipts of such profits in India" If such forei#n profits 8not received in India9 are taken not only in accounts books but are also taken in determinin# the amount to be paid as dividend, it does not amount to receipt of forei#n profits in India" (imilarly, the fact that the forei#n profits are distributed amon# the partners in a firm6s account in India does not by itself amount to receipt of the profit in India"

PROBLEMS: 2r" Krishna discloses followin# particulars of his receipts durin# the financial year ..-! .97 FADTI$%3AD( A2+%?T i" (alary income earned at 4elhi, but received in Faris 1,/.,... ii" Frofits earned from a business in Faris which is controlled in India, 1, .,... half of the profits bein# received in India iii" Income from property, situated in Cn#land and received there iv" Income from a#riculture in ?epal and brou#ht to India v" 4ividend paid by an Indian company but received in 3ondon vi" Interest on %(A development bonds and one half of which was received in India vii" Fast forei#n untaxed income brou#ht to India viii" &ift of L 1,... from father, settled in %(A, received in India ix" 3and sold in 4elhi, consideration received in $eylon, resultin# into /,... B-,... ,... B,... ,1.,... B.,... /.,...

capital #ain x" Income from structure desi#nin# consultancy service, set up in B,..,... &ermany, controlled from India, profits bein# received outside India xi" 3oss from forei#n business, controlled from India, sales bein# 8! ,..,...9 received in India

4etermine his taxable income for the previous year ..-!.9 if he is Desident and ordinarily resident, resident but not ordinarily resident, non!resident"

(+3%TI+?7 FADTI$%3AD( +: I?$+2C D"+"D D")%T +"D" 1,/.,... ?+T ?+?! DC(I4C?T 1,/.,...

(alary earned at 4elhi but 1,/.,... received at Faris 1

Frofits earned from a business in Faris, controlled in India a" +ne half of profits are taxable on receipt basis b" other half profits

6.,...

6.,...

6.,...

6.,... Income from property in /,... Cn#land and received in India Income from a#riculture in B-,... ?epal and brou#ht to India7 4ividend paid by an Indian !!!!!!! company but received in 3ondon Interest on %(A development 1 ,... bonds7 a" +ne half is taxable on receipt basis b" other half is taxable only in 1 ,... case of >ordinarily resident as it is forei#n income accruin# or arisin# outside India Fast untaxed forei#n income !!!!!!!!! brou#ht to India" It is not income in India" :urther more, it is not the income of previous year ..-!.9" =ence, it is not taxable in any case &ift from a relative not taxable !!!!!!!!!!!! $apital #ain is deemed to accrue /.,... or arise in India Income from consultancy B,..,... profession, set up outside India, profit bein# received outside India 3oss from forei#n business, ! ,..,... controlled from India T+TA3 I?$+2C 6,10,...

6.,... !!!!!! !!!!!!! !!!!!!!! 1 ,...

6.,... !!!!!! !!!!!! !!!!!!! 1 ,...

!!!!!!!!

!!!!!!!!!

!!!!!!!!!

!!!!!!!!!

!!!!!!!!!!!!!! /.,... !!!!!!!!!

!!!!!!!!!!! /.,... !!!!!!!

! ,..,... 1,1 ,...

! ,..,... 0 ,...

PROBLEM 2: 2r" &opal, an Indian citi'en, earns the followin# income durin# the financial year ..-! .9" FADTI$%3AD( A2+%?T

i" ii" iii" iv" v" vi" vii"

Frofits from a business in 2umbai mana#ed from 3ondon B, .,... Fension for services rendered in $anada, but kept with state 6.,... )ank in $anada with the permission of the D)I Income from property in Fakistan, received in India /-,... Frofits from business in )an#ladesh and deposited in a bank 1,1 ,... there Income received in Kenya from a profession, which was set up in India, extended to Kenya and mana#ed from Kenya Frofit on sale of machinery in India but received in :rance Frofits, before allowin# depreciation, from business in Iran, B.M of profits were received in India Total 4epreciation Interest on forei#n bank deposit, received by his minor son in 0.,... 6,... ,..,... ,/.,... 0.,...

viii"

India" )ank deposit was made out of funds #ifted by #randfather ix" A &erman company credited commission to his bank account 1,0/,... outside India for sale of #oods by him in India x" $ommission earned and received by him outside India for sale of #oods by him in India xi" 4ividends remitted in India by an C#yptian company to him under his instruction throu#h bank of )aroda 4etermine his taxable income for the previous year ..-!.9, if he is D+D, ?+D, ?D" ,1.,... -.,...

SOLUTION: FADTI$%3AD( +: I?$+2C D+D i" Frofits from a business B, .,... at 2umbai, mana#ed from 3ondon ii" Fension for services 6.,... rendered in $anada, received there iii" Dent of house property, /-,... situated in Fakistan but received in India iv" Frofits from business in 1,1 ,... ?+D B, .,... !!!!!!!! /-,... !!!!!!! ?D B, .,... !!!!!!! /-,... !!!!!!!!!

)an#ladesh and deposited in bank there v" Income from profession 0.,... in Kenya which was set up in India, received there, mana#ed from there" vi" Frofit on sale of 6,... machinery in India but received in :rance vii" Frofit from forei#n ,..,... business7 4epreciation of forei#n ! ,/.,... business viii" Income of a minor child is 6-,/.. included in total income of that parent whose income, before includin# such income is #reater, however, an exemption up to Ds"1,/.. is to be allowed ix" $ommission from &erman 1,0/,... company received outside India is deemed to accrue or arise in India because of business connection in India" x" $ommission earned and ,1.,... received outside India on export orders collected in India is deemed to accrue or arise in India xi" 4ividends from forei#n -.,... company received out side India

0.,...

!!!!!!!!!!!!

6,... -.,... !1,..,... 6-,/..

6,... -.,... !1,..,... 6-,/..

1,0/,...

1,0/,...

,1.,...

,1.,...

!!!!!!!

!!!!!!!

PROBLEM 7: 2rs"(owmya discloses the followin# particulars of his income durin# the previous year ..-!.9" FADTI$%3AD( A2+%?T 8D("9 i" 4ividends from (ri 3anka companies received in India, ,..,...

4ividends were received partly in cash and partly in shares" :ace value of shares is Ds"-.,... but their market value is Ds"1, .,..." =owever, currently there is no buyer in the market ii" Fension remitted to him in India by (ri 3ankan #overnment after 0.,...

deduction of tax source Ds"/,... iii" :ees received in (ri 3anka for ar#uin# a patent case in 4elhi 1,..,... =i#h court on behalf of a fellow lawyer friend of 2umbai iv" $ommission credited to his account in India under his 1, .,... instructions by law firms in India, for referrin# clients from outside India but commission was received in 2yanmar v" (tate of income from his =%:, received in Kolkata /.,... vi" Income from law practice in 2yanamar and (ri 3anka received B,-.,... there but practice was set up in 4elhi vii" /M commission for the year ..-!.9 from publishers of law 1, .,... books on their annual profits, received in India, commission has been paid after settin# off Ds"1.,... for books purchased by him" =e has purchased the dealership ri#hts from 2umbai law house on 1st Aanuary ..9" viii" &ift from a forei#n client, received outside India .,...

4etermine his total income for the previous year ..-!.9 if his residential status durin# the previous year is D+D, ?+D +D ?D" (+3%TI+?7 $+2F%TATI+? +: T+TA3 I?$+2C :+D AJ FADTI$%3AD( 4ividend received in India a" $ash dividend 1, .,... !!!!!!!!! 1,..,... !!!!!!!! 1,..,... D+D !!!!!!! ?+D !!!!!!!! ?D !!!!!!

b" dividend in kind 1, .,... Fension received outside India and 0.,... not deemed to accrue or arise in India :ees for ar#uin# patent case in 4elhi, 1,..,... but received in $eylonNIncome from

business connection deemed to accrue or arise in India $ommission credited to the account 1, .,... of payee under his instruction in the books of payer is a deemed receipt (hare of income received from =%: !!!!!!!! !!!!!!!! B,-.,... !!!!!!!! B,-.,... 1, .,... 1, .,...

exempt from tax Income from profession set up in B,-.,... India, extended outside India7 Income bein# received outside India $ommission on account of dealership 1,/.,... ri#hts, received in India O /M of annual profits of the publishers7 $ommission not be apportioned between seller and purchaser on time basis &ift from a forei#ner client, received outside India T+TA3 .,... 11,-.,...

1,/.,...

1,/.,...

!!!!!!!! 1.,9.,...

!!!!!!!!! 6,1.,...

PROBLEM <: 2r"A, a Aapanese national discloses the followin# particulars of his income durin# financial year ..-!.9" FADTI$%3AD( A2+%?T Income from house property in Aapan, remitted by tenant to him in 1,..,... India throu#h ()I 3oss from business in India !/,..,... Frofits from speculation business in India ,..,... Interest received on bonds of Indian companies outside India B/,... ?et dividends received from Aapanese companies outside India 8tax 1,1/,... deducted at source Ds"1/,...9 Interest received on compensation of land, ac5uired by #overnment of India durin# the financial year .. !.1 6.,...

Frofit from business in Aapan, controlled and mana#ed from India but 1.,..,... profits bein# received in Aapan 4etermine his total income for the previous year in the followin# cases D+D, ?+D A?4 ?D" $+2F%TATI+? +: T+T3 I?$+2C :+D AJ FADTI$%3AD( D+D Income from house property in Aapan 1,..,... received in India 3oss from business in India to be set !/,..,... off a#ainst business profits and thereafter a#ainst any other income except salary income and winnin#s from lotteriesEhorse race etc" Frofits from speculation business in India Frofits from business in ,..,... ,..,... 1.,..,... ,..,... !!!!!!!! ?+D 1,..,... !/,..,... ?D 1,..,... !/,..,...

Aapan, 1.,..,...

Ds"1.,..,... received outside India, control and mana#ement of forei#n business in India is not relevant in the case of non!resident Interest on public sector companies in India deemed to accrue or arise in India thou#h received outside India 4ividends received from Aapanese companies outside India not accruin# or deemed to accrue or arise in India Interest for land compensation taxable on accrual basis 9,9.,... -,//,... !1,B/,... 86.,...E6P1.,...9 T+TA3 I?$+2C 1.,... 1.,... 1.,... 1,1/,... !!!!!!!! !!!!!!!! B/,... B/,... B/,...

?ote7 ?on!resident is entitled to carry forward business loss of Ds"1,B/,... for next assessment years" PROBLEM?: The followin# amounts of income have been computed for 2D"Dam chand for the previous year ended on 11st 2arch" (alary accrued and received in India /,... Frofit from hotel business in Aapan /.,... 4ividends declared in Aapan received in India 1.,... &ain from transfer of capital asset in India /,... Interest on debentures of a company in ?ew Jork received in India 0,... Doyalty received in &ermany from a resident in India for technical .,... services provided for a business in &ermany Interest received in %K from Dobert, non!resident, on loan provided to him for business in India :ees from an Indian company carryin# on business in the %K for technical services rendered in 3ondon, directly deposited in his bank account in India $ompute the total income of 2r" Dam for the relevant assessment year if he is D+D, ?+D A?4 ?D" $+2F%TATI+? +: T+TA3 I?$+2C +: 2D"DA2 :+D T=C AJ ..9!1." FADTI$%3AD( D+D (alary accrued and received in India /,... Frofit from hotel business in Aapan /.,... 4ividends declared in Aapan received in 1.,... India &ains from transfer of capital asset in India deemed to accrue or arise in India Interest on debentures of a company in ?ew Jork but received in India Doyalty received in &ermany from a resident in India for technical services provided for a business in &ermany Interest received in %K from 2r" Dobert, a 1. 6,... 6,... 6,... /,... 0,... .,... ?+D /,... !!!!!!!! 1.,... /,... 0,... !!!!!!! ?D /,... !!!!!!!! 1.,... /,... 0,... !!!!!! 6,... /,...

non!resident, on loan provided on loan provided to him for business in India :ees from an Indian company, carryin# on business in %K for technical services rendered in 3ondon, directly deposited in his book account in India T+TA3 I?$+2C 1,6-,... 9-,... 9-,... /,... /,... /,...

PROBLEM E: 2r"Q furnishes the followin# particulars of his income earned durin# previous year ended on 11st 2arch ..97 i" ii" iii" iv" v" Income from a#riculture in )an#ladesh, received there Ds"1,-.,... but later on remitted in India" Interest on Fakistani development bonds, Ds"6.,..., one sixth of which received in India &ift of Ds"0.,... received in forei#n currency from a relative in India Arrears of salary Ds"1,/.,... received in Fakistan from a former employer in India Income from property received outside India Ds"1,..,... 8Ds"1,..,... is used in )ahrain for the educational expenses of his son in )ahrain, and Ds" ,..,... later on remitted to India9 vi" vii" viii" ix" x" Income from business in Iran which is controlled from India 8Ds"1,..,... bein# received in India9 Ds" ,..,... %ntaxed profit for the previous years brou#ht to India in Auly ..- ,/.,... 4ividends received on 1.!.6! ..- outside India from an Indian company Ds" ,/.,..." Frofit 8computed9 on sale of buildin# in India received in Fakistan Ds" 1,..,..." Frofit from business in Kolkata mana#ed from outside India Ds"9.,..., 6.M of which is received outside India

11

:ind out &ross total income of 2r"Q for AJ if he is D+D, ?+D, ?D" $+2F%TATI+? +: &D+(( T+TA3 I?$+2C :+D AJ ..9!1." FADTI$%3AD( Income from a#riculture D+D in 1,-.,... ?+D !!!!!!!!!!!!! ?D !!!!!!!!!!

)an#ladesh, received there but later on remitted to India Interest on Fakistan development 1.,... bonds 1E6 of Ds"6.,... bein# received in India /E6 of Ds"6.,... bein# received /.,... in Fakistan &ift received from a relative (alary arrears received Cx in 1,/.,... !!!!!!!!!!! Cx 1,/.,... !!!!!!!!!! Cx 1,/.,... 1.,... 1.,...

Fakistan from a former employer in India Income form property received 1,..,... outside India but later on remitted to India Frofit from Iran business 1,..,... 1,..,... an !!!!!!!!!!!!!!! 1,..,... 1,..,... !!!!!!!!!!!!!!!!! 1,..,... !!!!!!!!!! !!!!!!!!!!!!!!!!! !!!!!!!!!!!!!! !!!!!!!!!!

controlled from India7 Frofits received in India Frofits received outside India 4ividends received from

Indian company, outside India, deemed to accrue or arise in India %ntaxed forei#n profit brou#ht to !!!!!!!!!!!!! India Frofit from Kolkata business 9.,... !!!!!!!!!!!!!!!!!! 9.,... !!!!!!!!!!!!!!!!! 9.,...

mana#ed from outside India 6.M received outside India Frofit on sale of buildin# in India, received outside India deemed to 1,..,... 1,..,... 1,..,...

accrue or arise in India &D+(( T+TA3 I?$+2C

1 ,-.,...

/,/.,...

B,/.,...

RESIDENTIAL STATUS PROBLEMS: PROBLEM 8: 2r" (teve *au#h, a forei#n citi'en leaves India for the first time in the last . years on ?ovember /, ..6" durin# the calendar year ..0, he comes to India on (eptember 1, and stays for a period of . days" 4urin# the calendar year ..- he does not visit India at all but comes to India on Aanuary 1/, ..9" 4etermine his residential status for the assessment year ..9!1." 4CTCD2I?ATI+? +: DC(I4C?TIA3 (TAT%( +: 2D" (TCGC *A%&= Delevant previous year .1".B" ..- to 11".1" ..9 (tay in India 8i9 8ii9 1/!.1! ..9 to 11!.1! ..9 ;10R 9R11P00 days< =e fails to fulfill the first basic condition, but he fulfills the followin# tests7 =is stay exceeds 6. days durin# relevant previous year, and =is stay durin# B previous years precedin# the relevant year also exceeds 16/ days" =ence he is DC(I4C?T uEs 68198b9" =e cannot claim the beneficial status of ?+D as he was Desident of India for 9 previous yeas and he was in India for more than 01. days durin# 0 previous years precedin# the relevant previous year" =ence he is +D4I?ADJ DC(I4C?T" PROBLEM 2: 2r" Dao, a senior scientist #oes to ?i#eria on a job approved by the $entral #overnment for a period of 1 years on 1/th (eptember ..-" =e has never been out of India before" 4etermine his residential status for the previous year ..-!.9" DETERMINATION OF RESIDENTIAL STATUS: Delevant previous year .-!.9 11

(tay in India .1!.B! ..- to 1/!.9! ..- ;1.R11R1.R11R11R1/P16- days< =e fails to fulfill the first basic condition as his stay in India is less than 1- days" =e is covered under explanation to 6819b as he is in India citi'en #oin# abroad on a job approved by #overnment" =is status is non!resident as his stay is less than 1- days" PROBLEM 7: 2r" (in#h, an Indian citi'en went to %(A on 1.th +ctober ... and returned to India after two years stay there" A#ain on 1.th Au#ust ..B, he went to Iran but returned on 1.th 2ay ..-" =e made another attempt to #o abroad and finally succeeded to #o to $anada" =e left 4elhi for $anada on 1.th :ebruary ..9" :ind out his residential status for the assessment year ..-!.9 and ..9!1."

ASSESSMENT YEAR 2>>=->:: (tay in India durin# relevant previous year7 ?I3 8he was absent throu#h out the previous year9 As such he does not satisfy any of the two tests of sections, hence he is ?on! resident" ASSESSMENT YEAR 2>>:-8> Frevious year 1!B! ..- to 11!1! ..9 (tay in India durin# relevant previous year P 00 days =e fulfills the first test #iven uEs 6819a, hence he is resident" =e cannot claim the status of ?+D as he was7 8i9 8ii9 resident of India for more than previous years out of 1. previous years precedin# the relevant previous years, and his stay in India exceeds 01. days durin# 0 previous years out of 1. previous years precedin# the relevant previous year" =ence, he is +D4I?ADJ DC(I4C?T"

1B

PROBLEM <: 2r"Ginayak came to India from %(A the first time on 1.th (eptember ..1 to join an American concern, as &eneral 2ana#er" After reportin# for duty, =e left for Aapan on
nd

+ctober .. to finali'e the company6s transaction" =e returned to India on 1.th +ctober .. and stayed in India till 11st Auly ..0 when he went back to the %(A" =e a#ain came back to join duty on 1.th ?ovember ..-" *hat is his residential status for the previous year ..-!.9" &ive reasons" 4CTCD2I?ATI+? +: DC(I4C?TIA3 (TAT%( +: 2D"GI?AJAK7 2D" Ginayak was in India durin# the relevant previous year ie" 1!B! ..- to 11!1! ..9 for the period from 1.th ?ovember ..- to 11st 2arch ..9 for 1B1 days" =e does not fulfill the first test #iven uEs 6819 as his stay is less than 1- days durin# the relevant previous year" )ut he fulfills the
nd

test uEs 6819 as his stay exceeds 6. days durin# the

relevant previous year and 16/ days durin# B previous years precedin# the relevant previous year" =ence, he is Desident" %nder the provisions of section 6869 he can not claim the beneficial status of Desident but not ordinarily resident as he was7 8i9 8ii9 resident of India for year and his stay durin# 0 previous years precedin# the relevant previous year is more than 01. days" As such he is ordinary resident" PROBLEM ?: 2r")abu a married citi'en of India left for &ermany for the first time on 1/!9! ..0 on a business trip" =e returned to India on /!6! ..-" durin# his absence from India he out of 1. previous years precedin# the relevant previous

1/

maintained a dwellin# house for himself in $alcutta" *hat will be his residential status for the assessment year ..9!1." 4CTCD2I?ATI+? +: DC(I4C?TIA3 (TAT%( +: 2D")A)%7 Delevant previous year 1!B! ..9 to 11!1! .1. (tay in India in this previous year7 total 16- days =e fails to fulfill test 8a9 of 6819 Test 8b9 of 6819 8i9 8ii9 his stay exceeds 6. days durin# the relevant previous year and stay exceeds 16/ days durin# B previous years precedin# relevant previous year, as he was never out of India before" =ence, he is resident uEs 6819 b and he cannot claim the beneficial status of not ordinarily resident as he was7 8i9 8ii9 resident of India for year and his stay durin# the 0 previous years precedin# the relevant previous year is more than 01. days" =ence he is ordinary resident" PROBLEM E: 4D" 2ahesh, an Indian national is workin# in %(A every year he comes to India on leave and stays with parents who are in )an#alore" *hat would be the residential status of doctor durin# the assessment year ..9!1. under the followin# circumstances7 8i9 8ii9 ..1" =e came to India on 19th 4ecember ..- and stayed up to /th :ebruary ..9" =is total stay durin# the precedin# 0 years was 1.. days" =e came to India on .th (eptember ..- and stayed upto 11st march ..9" =is total stay durin# the precedin# 0 years was /.. days, he had left India on 11!1! out of 1. previous years precedin# the relevant previous

16

As 4r"2ahesh is an Indian citi'en renderin# service in %(A ie, outside India and comes to India on leave, accordin# to explanation to section 6819 of the income tax act, 1961 his residential status for assessment year ..9!1. would be as follows7 8a9 he would be treated as non!resident as his total stay in India is less than 1- days durin# the previous year 8b9 he would be treated as resident uEs 6819a as he stayed in India for more than 1days =e is resident but not ordinarily resident as he was not in India for 01. days durin# 0 previous years precedin# the relevant previous year" PROBLEM 7: 2r" Krishnaiah, an en#ineer, left India for 3ondon on 1/th 2arch ..- for takin#

practical trainin# in an en#ineerin# firm there" =e returned to India on -th 2arch ..9" he was never out of India in the past" (tate #ivin# reasons what will be the residential status of 2r"Krishnaiah for the previous year ..-!.9" 4CTCD2I?ATI+? +: DC(I4C?TIA3 (TAT%( +: 2D"KDI(=?AIA= Delevant previous year 1!B! ..- to 11!1! ..9 (tay in India -!.1! ..9 to 11!.1! ..9 ie B days

=e fails to fulfill either of the two tests of 6819 as his stay is less than 6. daysE1- days" =ence, he is ?+?!DC(I4C?T uEs 81.9" PROBLEM =: A person after about 6 years stay in India retired to Cn#land in April ..0 and returned to India on 1/th :ebruary ..9 to take up a salaried appointment" *hat is his residential status for the previous year ..-!.9I

10

4CTCD2I?ATI+? +: DC(I4C?TIA3 (TAT%( +: A FCD(+?7 Delevant previous year .1!.B! ..- to 11!.1! ..9 (tay in India 1/! ! ..9 to 11!.1! ..- ;B6 days< =is residential status is ?on!resident as he cannot fulfill either of the two tests of (ec"6819 as his stay does not exceed 6.E1- days in relevant previous year" PROBLEM :: 2r" &owda went to &ermany for diploma course on / th Au#ust ..- and came back to India on /th :ebruary ..9" his family remained in India" =e had never been out of India before" *hat is his residential status for the year endin# 11st 2arch ..9" 4CTCD2I?ATI+? +: DC(I4C?TIA3 (TAT%( +: 2D"&+*4A7 Delevant previous year .1!.B! ..- to 11!.1! ..9 (tay in India 1!B! ..- to /!-! ..-P1 0 days /! ! ..9 to 11!.1! ..9P16 days T+TA3P161 4AJ( =e fails to fulfill test 8a9 of 6819 but proves test 8b9 of 6819 as his stay in India durin# relevant previous year is more than 6. days and durin# B previous years precedin# relevant previous year is more than 16/ days 8he was never out of India9 hence, he is resident uEs 6819b" =e cannot claim the status of ?+D as7 8i9 8ii9 he is resident of India for year and his stay durin# 0 previous years precedin# the relevant previous year is more than 01. days" =C?$C, =C I( +D4I?ADJ DC(I4C?T" out of 1. years precedin# the relevant previous

1-

PROBLEM 8>: *hat is residential status of an individual who came to India for the first time in ..6!.0 and who has in India as follows7 FDCGI+%( JCAD ..-"9 ..0"..6"0 FDC(C?$C I? I?4IA 1-/ days 1/ days 6 days

:ind out his residential status in the assessment year ..9!1." 4CTCD2I?ATI+? +: DC(I4C?TIA3 (TAT%(7 Delevant previous year7 .1!.B! ..- to 11!.1! ..9 (tay in India7 1-/ days =e fulfills the test 8a9 of section 6819 as his stay exceeds 1- days" =ence, he is resident uEs 6869 as7 8i9 8ii9 he was non!resident for 9 previous years out of 1. previous years precedin# the relevant previous year and his stay durin# 0 previous years precedin# the relevant previous years is less than 01. days" SECTIONA a" *ho is a residentI b" *ho is a ?on!residentI c" *ho is ?ot ordinarily residentI d" (tate the )asic conditionsI

19

e" (tate the additional conditionsI f" *hat is previous yearI #" *hat is assessment yearI SECTIONB #3 2r" &owda went to &ermany for diploma course on /th Au#ust ..- and came back to India on /th :ebruary ..9" his family remained in India" =e had never been out of India before" *hat is his residential status for the year endin# 11st 2arch ..9I $3 A person after about 6 years stay in India retired to Cn#land in April ..0 and returned to India on 1/th :ebruary ..9 to take up a salaried appointment" *hat is his residential status for the previous year ..-!.9I 23 2r" Krishnaiah, an en#ineer, left India for 3ondon on 1/th 2arch ..- for takin# practical trainin# in an en#ineerin# firm there" =e returned to India on -th 2arch ..9" =e was never out of India in the past" (tate #ivin# reasons what will be the residential status of 2r"Krishnaiah for the previous year ..-!.9" 53 4D" 2ahesh, an Indian national is workin# in %(A every year he comes to India on leave and stays with parents who are in )an#alore" *hat would be the residential status of doctor durin# the assessment year ..9!1. under the followin# circumstancesI 8iii9 8iv9 ..1" .3 2r" (in#h, an Indian citi'en went to %(A on 1.th +ctober ... and returned to India after two years stay there" A#ain on 1.th Au#ust ..B, he went to Iran but returned on 1.th 2ay ..-" =e made another attempt to #o abroad and finally succeeded to #o to $anada" =e left 4elhi for $anada on 1.th :ebruary ..9" :ind out his residential status for the assessment year ..-!.9 and ..9!1." =e came to India on 19th 4ecember ..- and stayed up to /th :ebruary ..9" =is total stay durin# the precedin# 0 years was 1.. days" =e came to India on .th (eptember ..- and stayed upto 11st march ..9" =is total stay durin# the precedin# 0 years was /.. days, he had left India on 11!1!

B.

SECTION--C a" 2r"Q furnishes the followin# particulars of his income earned durin# previous year ended on 11st 2arch ..97 xi" xii" xiii" xiv" xv" Income from a#riculture in )an#ladesh, received there Ds"1,-.,... but later on remitted in India" Interest on Fakistani development bonds, Ds"6.,..., one sixth of which received in India &ift of Ds"0.,... received in forei#n currency from a relative in India Arrears of salary Ds"1,/.,... received in Fakistan from a former employer in India Income from property received outside India Ds"1,..,... 8Ds"1,..,... is used in )ahrain for the educational expenses of his son in )ahrain, and Ds" ,..,... later on remitted to India9 xvi" xvii" xviii" xix" xx" Income from business in Iran which is controlled from India 8Ds"1,..,... bein# received in India9 Ds" ,..,... %ntaxed profit for the previous years brou#ht to India in Auly ..- ,/.,... 4ividends received on 1.!.6! ..- outside India from an Indian company Ds" ,/.,..." Frofit 8computed9 on sale of buildin# in India received in Fakistan Ds" 1,..,..." Frofit from business in Kolkata mana#ed from outside India Ds"9.,..., 6.M of which is received outside India :ind out &ross total income of 2r"Q for AJ if he is D+D, ?+D, ?D" b" The followin# amounts of income have been computed for 2D"Dam chand for the previous year ended on 11st 2arch" (alary accrued and received in India /,...

B1

Frofit from hotel business in Aapan /.,... 4ividends declared in Aapan received in India 1.,... &ain from transfer of capital asset in India /,... Interest on debentures of a company in ?ew Jork received in India 0,... Doyalty received in &ermany from a resident in India for technical .,... services provided for a business in &ermany Interest received in %K from Dobert, non!resident, on loan provided to him for business in India :ees from an Indian company carryin# on business in the %K for technical services rendered in 3ondon, directly deposited in his bank account in India $ompute the total income of 2r" Dam for the relevant assessment year if he is D+D, ?+D A?4 ?D" c" 2r"(omayaiah discloses the followin# particulars of his income durin# the previous year ..-!.9" FADTI$%3AD( A2+%?T 8D("9 ii" 4ividends from (ri 3anka companies received in India, ,..,... 4ividends were received partly in cash and partly in shares" :ace value of shares is Ds"-.,... but their market value is Ds"1, .,..." =owever, currently there is no buyer in the market ii" Fension remitted to him in India by (ri 3ankan #overnment after 0.,... 6,... /,...

deduction of tax source Ds"/,... iii" :ees received in (ri 3anka for ar#uin# a patent case in 4elhi 1,..,... =i#h court on behalf of a fellow lawyer friend of 2umbai iv" $ommission credited to his account in India under his 1, .,... instructions by law firms in India, for referrin# clients from outside India but commission was received in 2yanmar v" (tate of income from his =%:, received in Kolkata /.,... vi" Income from law practice in 2yanmar and (ri 3anka received B,-.,... there but practice was set up in 4elhi vii" /M commission for the year ..-!.9 from publishers of law 1, .,...

books on their annual profits, received in India, commission has been paid after settin# off Ds"1.,... for books purchased by him" =e has purchased the dealership ri#hts from 2umbai law house on 1st Aanuary ..9" viii" &ift from a forei#n client, received outside India .,...

4etermine his total income for the previous year ..-!.9 if his residential status durin# the previous year is D+D, ?+D +D ?D" d" 2r"A, a Aapanese national discloses the followin# particulars of his income durin# financial year ..-!.9" FADTI$%3AD( A2+%?T Income from house property in Aapan, remitted by tenant to him in 1,..,... India throu#h ()I 3oss from business in India !/,..,... Frofits from speculation business in India ,..,... Interest received on bonds of Indian companies outside India B/,... ?et dividends received from Aapanese companies outside India 8tax 1,1/,... deducted at source Ds"1/,...9 Interest received on compensation of land, ac5uired by #overnment of 6.,...

India durin# the financial year .. !.1 Frofit from business in Aapan, controlled and mana#ed from India but 1.,..,... profits bein# received in Aapan 4etermine his total income for the previous year in the followin# cases D+D, ?+D A?4 ?D" e" 2r" &opal, an Indian citi'en, earns the followin# income durin# the financial year ..-!.9" FADTI$%3AD( A2+%?T viii" Frofits from a business in 2umbai mana#ed from 3ondon B, .,... ix" Fension for services rendered in $anada, but kept with state 6.,... x" xi" xii" )ank in $anada with the permission of the D)I Income from property in Fakistan, received in India /-,... Frofits from business in )an#ladesh and deposited in a bank 1,1 ,... there Income received in Kenya from a profession, which was set up B1 0.,...

xiii" xiv"

in India, extended to Kenya and mana#ed from Kenya Frofit on sale of machinery in India but received in :rance Frofits, before allowin# depreciation, from business in Iran, B.M of profits were received in India Total 4epreciation Interest on forei#n bank deposit, received by his minor son in

6,... ,..,... ,/.,... 0.,...

viii"

India" )ank deposit was made out of funds #ifted by #randfather ix" A &erman company credited commission to his bank account 1,0/,... outside India for sale of #oods by him in India x" $ommission earned and received by him outside India for sale of #oods by him in India xi" 4ividends remitted in India by an C#yptian company to him under his instruction throu#h bank of )aroda 4etermine his taxable income for the previous year ..-!.9, if he is D+D, ?+D, ?D" ,1.,... -.,...

CHAPTER---7 CAPITAL AND REVNUE LEARNING OBJECTIVES: To understand the meanin# of $apital and revenue receiptsEexpenses $apital vEs revenue Tests of distinction $apital loses vEs revenue losses 3e#al opinions

BB

Income tax is levied on income of assessee and not on every receipt which he receives" The method of tax on different types of receipts is different" Income tax act, 1961 provides a separate head >capital #ains@ for levyin# tax on capital receipts" (imilarly, while calculatin# net taxable income of an assessee only revenue expenses are allowed to be deducted out of revenue receipts" Farticularly while calculatin# business profit or professional #ain only revenue receipts and revenue expenses are considered" This makes the distinction between capital and revenue of vital importance" :or this distinction capital and revenue items can be divided into three sub!parts7 CAPITAL RECEIPTS V@S REVENUE RECEIPTS: As discussed above the capital receipts are to be char#ed to tax under the head >capital #ains@ and revenue receipts are taxable under other heads, it is of vital importance to understand which receipts is a capital receipts and which one is a revenue receipt" IMMATERIAL CONSIDERATIONS: In decidin# whether a particular receipt is of a revenue capital or revenue type, the followin# considerations are considered to be immaterial and not #oin# to decide or chan#e the character of nature of the receipt" 1" DC$CIFT I? 3%2F (%2 +D I? I?(TA32C?T(7 *hether any income is received in lump sum or in installments, it will not make any difference as re#ards its nature, e#, an employee is to #et a salary of Ds"1,... pm " instead of this he enter into an a#reement to #et a sum of Ds"16,... in lump sum to serve for a period of three years" The receipt where it is monthly remuneration or lump sum for 1 years is revenue receipt" It has been decided in so many court cases that a lump sum receipt may be an item of revenue nature and an annual receipt recurrin# over few years may be a capital receipt" Thus, whether a receipt is a periodic receipt or a sin#le receipt is immaterial for the purposes of determinin# its nature"

B/

" ?AT%DC +: DC$CIFT I? T=C =A?4( +: DC$IFIC?T7 whether a receipt is capital or revenue will be determined in the hands of the persons receivin# such income" ?o attention will be paid towards the source from which the amount is comin#" (alary even if paid out of capital by a new business will be it revenue receipt in the hands of employee" 1" 2A&?IT%4C +: DC$CIFT7 The ma#nitude of receipt, whether bi# or small, cannot decide the nature of the receipt althou#h the si'e of a receipt in a transaction is not an entirely irrelevant consideration" A receipt of Ds"1.,... may be of revenue nature where as a receipt of only Ds"1.,... may be capital receipt" (upreme $ourt has ruled in a case the ma#nitude of a receipt is immaterial for the purpose of determinin# its nature" B" ?A2C &IGC? )J FADTIC( A?4 TDCAT2C?T I? )++K( +: A$$+%?T(7 *hat name the recipient or payer of the receipt has #iven in the books of accounts or with what name he has called a particular payment by a dealer may be a revenue receipt in the hands of the recipient" The character of the receipt shall be decided by considerations other than by what name the parties call it" The nature of the receipt will be determined in the hands of the person receivin# such income" /" Fayment made out of capital7 ?o attention will be paid towards the source from which amount is comin#" (alary even paid out of capital by a new business will be a revenue receipt in the hands of the employee" It was also decided in a case that if a receipt is made out of capital, the receipt may also be a capital receipt" If a recipient is beneficially entitled not only to the income but also to the capital, payments #iven to him by his trustees out of the corpus would be capital receipts" 6" TI2C +: DC$CIFT7 The nature of the receipt has to be the receipt has to be determined at the time when it is received and not afterwards when it has been appropriated by the recipient" 0" S%A3ITJ +: DC$CIFT7 *hether the income is received voluntarily or under a le#al obli#ation, it will not make any difference as re#ards its nature"

B6

DISTINGUISHING TESTS: It is very difficult to draw a line of demarcation between capital receipts and revenue receipts" Cven the courts have found it difficult to lay down some points of distinction on the basis of which a capital receipt may be distin#uished from a revenue receipt, some tests, however, can be applied in particular cases" These tests are7 1" +? T=C )A(I( +: ?AT%DC +: A((CT(7 if a receipt is referable to fixed asset, it is capital receipt and if it is referable to circulatin# asset it is revenue receipt" :ixed asset is that with the help of which owner earns profits by keepin# it in his possession e#" Flant and machinery , buildin# or factory etc" $irculatin# asset is that with the help of which owners earn profit by partin# with it and lettin# others to become its owner e# stock in trade" $irculatin# asset is asset which is turned over and while bein# turned over yields profit or loss where as fixed asset is one on which the owner earns profit by keepin# it in his own possession" Frofit on the sale of motor car used in business by an assessee is a capital receipt where as the profit earned by an automatic dealer, dealin# in cars, by sellin# a car is his revenue receipt" " TCD2I?ATI+? +: (+%D$C +: I?$+2C7 any sum received in compensation source of income is capital receipt e#, compensation received by an employee from its employer on termination of his services is capital receipt" 1" A2+%?T DC$CIGC4 I? (%)(TIT%TI+? +: I?$+2C7 Any sum received in substitution of income is revenue receipt" C"#" A $ompany purchased the ri#ht to produce a film from its earlier producer with the condition that no other producer will be #iven these ri#hts" Afterwards, it is found that the ri#hts for producin# this film had already been sold" The A company claimed dama#es and was awarded Ds"B.,..." it was held that dama#es received are the compensation for the profits which were to be earned" =ence, this is revenue receipt"

B0

B" $+2FC?(ATI+? DC$CIGC4 +? TCD2I?ATI+? +: 3CA(C7 where a sum is received as compensation for termination of a lease, it is capital receipt because it is termination of source of income" /" $+2FC?(ATI+? +? (%DDC?4CD +: A DI&=T7 any amount received as compensation on surrenderin# a ri#ht is capital receipt where as any amount received for loss of future income is a revenue receipt" An author #ives up his ri#ht to publish a book and receives Ds"1,..,... as compensation" It is capital receipt but if he receives it as advance royalty for / years it is revenue receipt" 6" TC(T( A( T+ T=C F%DF+(C +: KCCFI?& A? ADTI$3C7 if a person purchases a piece of sculpture to keep as decoration piece in his house, if sold later on, will brin# causal receipt but if the same sculpture is sold by an art dealer it will be his revenue receipt" If an article is ac5uired for the purpose of trade, the profit arisin# from it is revenue receipt" CQA2F3C( A?4 I33%(TDATI+?(7 $AFITA3 DC$CIFT(7 The followin# are some important examples of capital receipts decided by courts7 1" salami or ?a'rana received for #rant of permanent lease " compensation received for loss of ri#ht to future remuneration 1" $ompensation received from the employer for loss of employment due to premature termination of service" B" Frice received on sale of know!how /" 4ama#es received by an employer who is wron#ly dismissed or a payment received by an employee in lieu of notice" 6" amount received by the assessee for di##in# and removin# earth from his land for brick makin#" 0" $ontribution received by electric supply company from consumer for installation of service lines 8excess of amount over cost of installation9" DCGC?%C DC$CIFT(7

B-

1" 3ump sum royalty received in advance " A pu#ree received by the owner of the house property from tenant 1" 4ama#es awarded by a court to a company for breach of contract by another company B" A passen#er is injured in a railway accident and is temporarily disabled thus losin# income for a short period" Any receipt as compensation shall be revenue receipt, but if the passen#er is permanently disabled, the compensation received would have been a capital receipt" SOME LEGAL OPINIONS: 1" $+2FC?(ATI+? DC3ATI?& T+ (T+$K!I?!TDA4C7 A company of buildin# contractors was refused permission by the local authority to build house on a certain piece of land and was paid compensation" $ompensation was held to be a revenue receipt as buildin# of houses for sale was presumed to be a tradin# asset or stock in trade" " CQ$C(( +: A2+%?T DC$+GCDC4 +GCD A$T%A3 $+(T7 An electricity #eneratin# company collected contributions from the consumers for layin# of service lines from its distributin# main lines" The contributions collected exceeded the actual cost of layin# the service lines" (upreme court held that the amount so collected from the consumers is essentially the reimbursement of capital expenditure incurred by the company in layin# service lines and hence the receipt includin# the excess recovered over the actual cost was a capital receipt" 1" $+2FC?(ATI+? :+D DC(TDAI?T +? TDA4I?& +D +? CQCD$I(C +: FD+:C((I+?7 such a compensation received is considered to be a capital receipt as it is in substitution of the source of income and not of only income" A company sold its business includin# #oodwill to another company for a certain sum" The company also entered into a convenat restrainin# itself from startin# a similar business for 1. years for separate consideration of Ds"1.,... FA" It was held in a case that the capital receipt had been spread over 1. years period and so the annual receipt of Ds"1.,... was a capital receipt" B" $+2FC?(ATI+? :+D )DCA$= +D $A?$C33ATI+? +: $+?TDA$T7 compensation received for breach or cancellation of a contract, dama#es received

B9

for non!completion of non!execution of a contract within the stipulated time were held to be in the nature of a tradin# receipt" The receipt in the nature of dama#es shall be capital assets of the trade" /" $+2FC?(ATI+? :+D 3+(( +: C2F3+J2C?T, A&C?$J +D +T=CD +::I$C +D :+D $C((ATI+? +: )%(I?C((7 followin# receipts have been held to be capital receipts" (uch a compensation may be voluntary and recipient may not have any le#al ri#ht to demand such a compensation" 8i9 8ii9 8iii9 8iv9 $ompensation for cancellation of a service a#reement $ompensation for loss of office or employment or cessation of business $ompensation for abandonment of the contractual ri#hts of recipient" $ompensation for loss of office on cessation of business or compensation for loss of employment are althou#h capital receipts yet these receipts are taxable if fallin# under section 1/ or -8ii9 6" $+2FC?(ATI+? :+D DCS%I(ITI+?, A$S%I(ITI+?,I?TCD:CDC?$C *IT= )%(I?C(( )J &+GCD?2C?T7 :+33+*I?& receipts were held to be revenue or capital receipts in a number of court cases7 REVENUE RECEIPTS 8i9 8ii9 8iii9 (um paid by the #overnment, for use of re5uisitioned premises $ompensation for loss of profits to the assessee due to controllin# and interferin# with assesse6s ri#ht of carryin# on of a business" $ompensation received in respect of stock in trade dama#ed or destroyed by enemy action" CAPITAL RECEIPTS: 8i9 8ii9 8iii9 $ompensation received for ac5uisition of TA2I?4ADI lands $ompensation for divestin# the assessee of his ri#ht to mana#e his business $ompensation for cancellation by the #overnment of a license resultin# in a cessation of business the

/.

8iv9

$ompensation for re5uisition of business premises resultin# into stoppa#e of assesse6s business or injury to the profit makin# apparatus"

0" ?AT%DC +: (%)(I4IC( +D &DA?T( DC$CIGC4 :D+2 F%)3I$ )+4IC(7 where #overnment #ives #rants or subsidies to assist a trader in his business, these are #enerally re#arded as revenue receipts" *here the #rant or subsidy is #iven for a specific purpose e#, to enable the undertakin# to take steps to relieve unemployment it is not taxable as income" -" D+JA3TIC( +: *DITCD(7 royalty received by the authors of books etc" are taxable under the head >Income from other sources as revenue receipts" 9" DC$+GCDJ +: A? C2)CTT3C4 (%27 *here an assessee had been allowed deduction re#ardin# the amount embe''led by an employee as tradin# loss and subse5uently it is recovered from that employee, it will form as his revenue receipt" 1." 4A2A&C( :+D FCD2A?C?T A?4 TC2F+DADJ 4I(A)I3ITJ7 If, in an accident an assessee suffers a permanent disability any amount of dama#es received by the assessee shall be of capital nature, where as if the injury is of a temporary nature the amount of dama#es shall be a revenue receipt" 11" DC:%?4 +: A DCGC?%C FAJ2C?T7 Any revenue payment made to dischar#e a liability, if refunded later on, shall be revenue receipt when it is so refunded" :or example, an assessee was allowed a deduction in respect of payment of a license fee, it was held to be a revenue receipt when refunded in a subse5uent year" 1 " 3%2F (%2 DC$CIFT +D DC$%DDC?T A?4 FCDI+4I$ I?$+2C7 3ump sum amount received in lieu of future royalty, sin#le amount received in advance as #innin# char#es of cotton for ten years, a lump sum amount taken in communication of a ri#ht to future, commission, remuneration etc" have all been held to be revenue receipts and taxable as income" CAPITAL EXPENSES V@S REVENUE EXPENSES:

/1

:or computin# profits of a business taxable under this act, only revenue expenses are allowed to be deducted" =ence, it becomes essential to distin#uish a revenue expenditure from a capital expenditure" The followin# tests can be applied for this purpose7 8i9 ?AAT%DC +: A((CT(7 any expenditure incurred to ac5uire a fixed asset or in connection with installation of fixed assets is capital expenditure" *here as, any expenditure incurred as price of #oods purchased for resale alon# with other necessary expenses incurred in connection with such purchase are revenue expenses" 8ii9 ?AT%DC +: 3IA)I3ITJ7 A payment made by a person to dischar#e a capital liability is a capital expenditure" *here as, an expenditure incurred to dischar#e a revenue liability is revenue expenditure, e#, amount paid to a contractor for cancellation of contract to construct a factory buildin# is capital expenditure where as amount paid by a person with whom he has entered into contract for supply of #oods for a period of / years but he fails to supply #oods after 1 years, the compensation will be a revenue expenditure as it is to dischar#e the revenue liability" 8iii9 ?AT%DC +: TDA?(A$TI+?7 if the amount is spent on increasin# the earnin# capacity of an asset, it is capital expenditure, e#" Furchase of patents to produce picture tubes of TG sets" *here as, an expenditure incurred to earn an income is revenue expenditure e#" (alary of the staff, advertisement expenses etc" 8iv9 F%DF+(C +: TDA?(A$TI+?7 If the amount is spent on increasin# the earnin# capacity of an asset, it is capital expenditure, e#, expenditure incurred for fittin# new windows of factory buildin#, where as, any expenditure incurred on keepin# an asset in runnin# condition is revenue expenditure, e#, amount spent on protection of fixed assets which have already been ac5uired" 8v9 ?AT%DC +: FAJ2C?T I? T=C =A?4( +: FAJCD7 If an expenditure is incurred by an assessee as a capital expenditure, it will remain as capital expenditure even if the amount may be revenue receipt in the hands of receiver, e#, purchase of motor car by a businessman is capital expenditure in his hands althou#h it is revenue receipt in the hands of car dealer" (imilarly, if

the nature of payment in the hands of payer is of revenue nature, it will be a revenue expenditure even if it is capital receipt in the hands of receiver" CAPITAL EXPENDITURE: 19 $ost of reconstructin#, refurnishin#, etc" of a business buildin# 9 Fayment made by the assessee with a view to keepin# his competitor out of his field of business 19 Cxpenditure incurred in convertin# business premises when switchin# over from manufacture of one product to another B9 Cxpenditure on liti#ation in connection with ac5uirin# or curin# a defect in assesse6s title to the assets of the business /9 $ompensation paid for cancellation of contract for the purchase of machinery 69 Frice paid for the purchase of partner6s share in the firm 09 Cxpenditure incurred on the maintenance of business reputation" REVENUE EXPENDITURE: 19 Fayments made for use of 5uota ri#hts, or for use of patents and trade marks 9 Fayment made for technical assistance and access to the fruits of continuin# research 19 Cxpenditure incurred by professionals on study tour abroad to ac5uire latest knowled#e B9 Any expenditure necessary at the time of purchase to render the asset so purchased, serviceable, will be added to the initial cost as capital expenditure" )ut any expenditure on the replacement of part of a plant which does not brin# any additional advanta#e to the business of assessee is revenue expenditure" /9 Cxpenditure incurred to send employees abroad for practical trainin# in the field of the business of the assessee" 69 Cxpenditure incurred by way of fee paid to valuer for assessin# the business premises

/1

09 Cxpenditure incurred in raisin# loans, e#, stamp duty, re#istration and le#al fees, brokera#e etc" -9 Cxpenditure to oppose threatened nationali'ation of the industry 99 Cxpenditure incurred to secure overdraft facilities from a bank 1.9 Fayment to the #overnment to obtain monopoly to run buses on a route 119 $ompensation or other payment made to #et rid of a servant or a mana#in# a#ent in the interest of the business 1 9 Any such expenditure incurred wholly, totally, necessarily for the business" REVENUE LOSSES V@S CAPITAL LOSSES: It is very difficult to distin#uish between a capital loss and a revenue loss on the basis of certain principles" +n the basis of court jud#ments, followin# decisions have become distin#uishin# points7 8i9 3oss due to sale of assets7 where there is loss on sellin# a capital asset, it is a capital loss where as any loss incurred durin# the sale of stock in trade is a revenue loss" 8ii9 8iii9 3oss due to embe''lement7 where there is embe''lement done by an employer and this causes loss to the business, it is of revenue nature" 3oss due to withdrawal of money from bank7 +nce the amount is deposited in bank and then it is withdrawn by an employee and is misappropriated it is capital loss" 8iv9 3oss due to li5uidation of company7 Amount deposited by a person with manufacturin# industry to #et its a#ency and lost due to company bein# li5uidated is a capital loss" 8v9 3oss due to theft by an employee7 3oss occurrin# due to theft or embe''lement or misappropriation committed by an employee is revenue loss" PROBLEM: The followin# items are found debited to the profit and loss account of a company" Are these items deductible in computin# the income of the company for income tax purposesI &ive reasons for your answer7

/B

a9 Ds"1.,... spent on reconditionin# of imperfect machinery purchased b9 Ds"1.,... commission paid by the company for securin# a contract in the course of its business" c9 Ds" .,... bad debts written off" The bad debts were sustained by the company in respect of loans advanced to customers and written off" d9 Ds"-.,... loss on shares written off" The company has formed another company to take over its buyin# a#ency at 4elhi and had taken up -. shares of Ds"1,... each therein" The new company bein# unsuccessful, the amount Ds"-.,... paid on shares was lost and hence written off" (+3%TI+?7 a9 The sum of Ds"1.,... spent on reconditionin# the machinery is a capital expenditure" =ence it is not deductible" =ow ever depreciation will be allowed" b9 Ds"1.,... paid as commission by the company for securin# a contract in the course of its business is a revenue expenditure, hence it is deductible" c9 Ds" .,... bad debts written off in respect of loans advanced to customers is not deductible unless the business of the company is bankin# or money lendin#" d9 Ds"-.,... loss on investment in shares is a capital loss, hence it is not deductible"

PROBLEM: (tate, #ivin# reasons, whether the followin# are capital or revenue receipts7 8i9 8ii9 8iii9 8iv9 $ompensation received for compulsory vacation of place of business )onus shares received by a dealer of shares 2oney received by a tyre manufacturin# company for sale of technical know how re#ardin# manufacture of tyre" 4ividend for interest for investments

(+3%TI+?7

//

8i9 8ii9 8iii9

Devenue receipt as it is in compensation of assesse6s profit which it would have earned If the assessee has also converted the bonus shares into stock in trade then it is a revenue receipt other wise it is an accretion in the capital asset" Devenue receipt but in case the sale of technical know how results into substantial deduction in value of the tyre company or company closes down its business in that particular line then the receipt would be a capital receipt"

8iv9

Assessee #ets the income of dividend and interest re#ularly and from a definite source and it is a return for the use of his asset by some body else and do it is a revenue receipt"

PROBLEM: (tate whether the followin# are capital or revenue receipts7 8i9 8ii9 8iii9 8iv9 8v9 $ompensation received for nationali'ation Fremium on issue of new shares (ales tax collected from purchase of #oods Annuity %nclaimed dividends

(+3%TI+?7 8i9 8ii9 8iii9 8iv9 $ompensation is in substitution of assesse6s source of income and hence it is a capital receipt It is not a receipt which results out of assesse6s tradin# activities and so cannot be a revenue receipt This receipt results out of assessee6s ordinary course of business and so it is a revenue receipt Annuity would be a revenue receipt if it is paid as a specified sum payable at periodical intervals" Annuity received from an employer is a salary income

/6

and in all other cases, annuity shall be char#eable under the head >Income from 8v9 other sources@ this shall not be a taxable income in cases where the assessee exchan#es his share for a capital sum payable in installments" %nclaimed dividend cannot be deemed to be profit of business as dividend is neither allowed as an allowance or as deduction" It is not taxable as a receipt" HUESTIONS: SECTION--- A 1" *hat is a revenue receiptI " *hat is a capital receiptI 1" *hat is capital expenditureI B" *hat is revenue expenditureI /" *hat is revenue lossI 6" *hat is capital lossI SECTION --- B 1" *hat tests would you apply to distin#uish capital receipts from revenue receiptsI " 4istin#uish between revenue expenditure and capital expenditure" &ive distinction between capital losses and revenue losses" 1" *hy is it necessary to distin#uish between a capital receipt and revenue receiptI =ow would you determine whether a particular receipt is a capital receipt or a revenue receiptI B" (tate whether the followin# are capital or revenue receipts7 8i"9 8ii"9 8iii"9 8iv"9 8v"9 $ompensation received for nationali'ation Fremium on issue of new shares (ales tax collected from purchase of #oods Annuity %nclaimed dividends

/" (tate, #ivin# reasons, whether the followin# are capital or revenue receipts7 $ompensation received for compulsory vacation of place of business

/0

)onus shares received by a dealer of shares 2oney received by a tyre manufacturin# company for sale of technical know how re#ardin# manufacture of tyre" 4ividend for interest for investments 6" The followin# items are found debited to the profit and loss account of a company" Are these items deductible in computin# the income of the company for income tax purposesI &ive reasons for your answer7 e9 Ds"1.,... spent on reconditionin# of imperfect machinery purchased f9 Ds"1.,... commission paid by the company for securin# a contract in the course of its business" #9 Ds" .,... bad debts written off" The bad debts were sustained by the company in respect of loans advanced to customers and written off" h9 Ds"-.,... loss on shares written off" The company has formed another company to take over its buyin# a#ency at 4elhi and had taken up -. shares of Ds"1,... each therein" The new company bein# unsuccessful, the amount Ds"-.,... paid on shares was lost and hence written off" 0" The followin# items are found debited to the profit and loss account of a company" Are these items deductible in computin# the income of the company for income tax purposesI &ive reasons for your answer7 i9 Ds"1.,... spent on reconditionin# of imperfect machinery purchased j9 Ds"1.,... commission paid by the company for securin# a contract in the course of its business" k9 Ds" .,... bad debts written off" The bad debts were sustained by the company in respect of loans advanced to customers and written off" l9 Ds"-.,... loss on shares written off" The company has formed another company to take over its buyin# a#ency at 4elhi and had taken up -. shares of Ds"1,... each therein" The new company bein# unsuccessful, the amount Ds"-.,... paid on shares was lost and hence written off"

/-

CHAPTER--< SALARIES: LEARNING OBJECTIVES7 To understand the concept of salaries %nderstand the characteristics of salary $omputation of (alary Income Allowances, Fer5uisites and their treatment Frofits in lieu of salary 4eductions uEs 16

The scope of the word >(alaries@ under the Income tax Act is very side" It comprehends every payment, due or received, by an employee from an employer or former employer on account of services rendered" Cvery non!monetary benefits and per5uisites are valued in accordance with specified rules and assessed to tax" Any income from salary is taxed either on due basis or on receipt basis, whichever is earlier" Cven the arrears of salary, if not taxed in relevant earlier years, will be assessed in the previous year in which they are received" (imilarly, where salary is received in advance, it will be taxed in the previous year of receipt and not in the previous year in which it will accrue to the employee" =owever, such salary received in advance will not be taxed a#ain when it will accrue to the employee to avoid double taxation of the same income" =owever, relief has been provided to miti#ate any increased tax liability that may result due to char#e on salary on receipt basis" CONDITION FOR CHARGEABILITY OF SALARY: RELATIONSHIP OF EMPLOYER AND EMPLOYEE IS ESSENTIAL: [SEC38?! The touchstone of char#eability of an amount as salary is the relationship of an employer! employee between the person makin# the payment and the person receivin# such payment" It is a cardinal principal that any amount char#eable to tax under the head salaries must come to the assessee only from or on behalf of his employer or former employer and that too only account of employment or services rendered by him to the employer and not by virtue of personal considerations" /9

(alary is a payment for services rendered" There must be a master at whose command services are rendered, and a servant who renders the services" +nly those payments can be char#ed as salaries which are paid or due to the employee for services rendered" Fayments made by an employer on account of personal consideration cannot be taxed as salaries" Cmployer may be any entity, e#" A local authority, or a company, or any other public body or association, or central or state #overnment, or forei#n #overnment or any other private employer like a firm, =%:, A+F, company or even an individual" The followin# points in subse5uent sections may be taken into account while determinin# the relationships of employer and employee" (A3ADJ +D FC?(I+? +: %?ITC4 ?ATI+?( C2F3+JCC I( CQC2FT :D+2 TAQATI+?7 %nder (ec" of the %? Act 19B0, any salary of a %nited ?ations employee is fully exempt from income tax" In view of this, pension of former %? official is also exempt, as salary includes pension also" )esides, the amount allowable as a child6s benefit is not the income of the assesseeNemployee because the beneficiary is the child and not the participant employee" The amount does not fall under >salary@ within the provisions of (ec"10"

EMPLOYMENT IS DISTINCT FROM PROFESSION [S.238?! If employment is merely incidental to the exercise of a profession, the #ains from such employment are not char#eable to tax under the head, >salaries@" :or example, movie artists si#n short term contracts for actin# in movies" (uch an en#a#ement cannot be considered as an employment, but it is merely an en#a#ement in the course of exercisin# a profession" The position is different when a professional permanently accepts an employment and exchan#es his profession for service" The remuneration in that case is char#eable to tax under the head salaries"

6.

T-. +.%#&"(,/-") (4 &-. )+",2")#% #,5 &-. #6.,& 1#' (+ 1#' ,(& $. (4 #, .1)%('.+ #,5 .1)%('..: If a#ent has to work under the direct control and supervision of the principal and has no discretion of his own in the performance of his duties, he is deemed to be an employee and the remuneration payable to him in such a case is char#eable to tax under the head salaries" +n the other hand, if the principal exercises only a supervisory control in respect of work entrusted to the a#ent and the a#ent has wide discretion of his own in the execution of the policies of the principal, the presumption is that the a#ent is not employee" The remuneration payable to the a#ent in such a case is liable to be taxed under the head, >profits and #ains of business of profession@" =owever, no firm rule can be laid down in this re#ard and each case must be evaluated on its own facts and merits" GENERAL YARDSTICG: NATURE OF SERVICE AND DEGREE OF AUTHORITY MAY DETERMINE WHETHER THE RELATIONSHIP IS THAT OF A PRINCIPAL AND AGENT OR MASTER AND SERVANT: A person who is en#a#ed in mana#in# a business may be a servant or an a#ent accordin# to the nature of his service and the authority of his employment" :or ascertainin# whether a person is a servant or an a#ent, a rou#h and ready test is whether, under the terms of his employment, the employer exercises a supervisory of his master" An a#ent, on the other hand, in the exercise of his work is not subject to the direct control and supervision of his master" An a#ent, on other hand, in the exercise of his work is not subject to the direct control or supervision of the principal, thou#h he is bound to exercise his authority in accordance with all lawful orders and instructions which may be #iven to him from time to time by his principal" )ut this test is not universal in its application and does not determine in every case, havin# re#ard to the nature of employment, that he is a servant" WHETHER A DIRECTOR@MANAGING DIRECTOR IS AN EMPLOYEE OF THE COMPANYDEPENDS ON THE SERVICE AGREEMENT AND ARTCILES OF THE COMPANY:

61

Thou#h a director simpliciter is not a servant of a company, but there is nothin# to prevent a director from bein# a servant of the company under a special contract of service with the company" In such case, he may be treated as a mana#in# director under a contract of service" In order to decide the 5uestion whether a director is an employee of the company or not, one has to find out as to whether the relationships of master and servant exist between the company and the director" The nature of a director6s employment may be determined by the articles of association of a company andEor the a#reement, if any, under which a contractual relationship between the director and the company ahs been brou#ht about" :or example, if a company is itself carryin# on the business and the assessee is employed to mana#e its affairs in terms of its articles and the a#reement, and he could be dismissed, or his employment can be terminated by the company if his work is not satisfactory, it can hardly be said that he is not a servant of the company" A PARTNER IS NOT AN EMPLOYEE OF THE FIRM [SEC38?!

Any salary, bonus, commission, etc, to a partner from firm is not treated as salary income" It is treated as business income under -8v9" A firm is not a le#al person and has no le#al existence apart from its partners" Thou#h under income tax law, it is a unit of assessment by virtue of special provisions, it cannot be considered that the firm is employer of its partner" (alary received by partner is not received from an employer and it constitutes business income" The partners in a firm work for themselves and not for any employer" They are their own masters" Thus, the salary drawn by the partners is only a different name for their share in profits" The doubt, if any, was set at rest by the incorporation of sec" - 8v9, where in it was provided that >any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm such firm >is@ char#eable to income tax >under the head profits and #ains of business or profession@"

A MEMBER OF A LEGISLATURE IS NOT AN EMPLOYEE OF THE GOVERNMENT:

The salaries of members of parliament are #overned by the salaries and allowances of members of parliament act 19/B" A member of parliament is not a #overnment employee" &overnment does not exercise any control on the member of the le#islature, rather it is the le#islature which exercises control over the &overnment" Therefore, the salary received by him as 2"F" is not char#eable to income tax under the heads, salaries but as income from other sources under section /6" similarly, salary paid to the state le#islatures is taxable as income from >other sources@" FDC(I4C?T(, &+GCD?+D( A?4 2I?I(TCD( ADC &+GCD?2C?T (CDGA?T(7 The salaries of Fresident, &overnors and 2inisters are taxable under the head >salaries@ as they are #overnment servants" BASIS OF CHARGE: [S.238?! $har#e on (alary is either on due basis or receipt basis, which ever is earlier7 Any salary due from an employer or former employer to an assessee in the previous year, whether paid or not, is char#eable to tax" The expression due implies that there is an obli#ation on the part of the employer to pay that amount and a ri#ht has accrued to the employee to claim the same" The fact that the employee has not received the salary or the salary has been paid to a third person, that is, to a decree!holder under court6s order, is immaterial" *hen any salary is received by an employee in the previous year before it becomes due to him, such salary is taxed on the receipt basis" Thus, an advance of salary is taxable on receipt basis" $har#e is either on due basis or on receipt basis but not on both the basis7 *hen a salary is taxed on due basis, it cannot be assessed a#ain on receipt" (imilarly, when any salary

61

paid in advance is included in the total income of any person for any previous year on receipt basis, it is not a#ain char#eable when such salary becomes due basis" Arrears of salary7 *hen any arrears of salary, not char#ed to tax in any earlier previous year, are paid or allowed to an employee in the previous year, such arrears are on receipt basis" :or example, when arrears of salary are paid on account of revision of pay scales with retrospective effect, such arrears are taxed on receipt basis" It is immaterial that the arrears relate to a year in which they were not char#eable to tax" (ection 1/8c9 applies to arrears of salary provided such arrears had not been char#ed to income tax for any earlier previous year" The words used in clause 8c9 are >if not char#ed to income tax@ and are wide enou#h to cover cases where the char#e could or could not have been imposed" :ictitious salary not char#eable to tax7 salary does not include fictitious salary, that is , which is not really due" :or example, when a person is appointed as a teacher under a written a#reement specifyin# his salary, but there is simultaneously another a#reement by which the identical sum is to be retained as donation and there is never any intention either to pay of receive salary, the teacher is not assessable on such fictitious salary" Flace of accrual of salary ;sec"9 819 8ii9< Income fallin# under the head salaries is deemed to accrue or arise in India if it is earned in India" (uch income is treated as earned in India if it is payable for services rendered in India" In other words, salary income payable for services rendered in India is deemed to accrue or arise in India" SCOPE OF INCOME FROM SALARIES [SEC387!

(alaries as defined by section 10819 include the followin#7 i" ii" iii" *a#es Any annuity or pension Any #ratuity 6B

iv" v" vi" vii"

Any fees, commission, per5uisites or profits in lieu of or in addition to salary or wa#es Any advance of salary Any payment received by an employee in respect of any period of leave not availed by him" The annual accretion to the balance at the credit of an employee participatin# in a reco#ni'ed provident fund, to the extent to which it is char#eable to tax rule 6 of part A of the fourth schedule"

viii"

The a##re#ate of all sums that are comprised in the transferred balance as referred to in sub!rule8 9 of rule 11 of part A of the fourth schedule of an employee participatin# in the reco#ni'ed provident fund, to the extent to which it is char#eable to tax under sub rule B

ix"

The contrition made by the central #overnment or any other employer in the previous year, to the account of an employer under a pension scheme specified under section -.$$4"

*ide scope of the definition of salary7 The definition of salary is inclusive of the aforesaid items but not limited to them only" The scope of an inclusive definition of salary cannot be restricted only to those words which occur in such a definition, but will extend to many other thin#s not mentioned in it" Therefore, any other item not listed in the definition of salary will have to be evaluated in accordance with the #eneral and commercial meanin# of the word salary" These seem hardly anythin# which can escape taxation as salary if the payment is made to an employee by an employer or a former employer by virtue of employment" The payment may be made durin# the employment or at the termination of the employment" SALARY AND WAGES [SEC387 (8 ("

(alary and wa#es si#nify payments for services rendered by an employee to his employer7

6/

The words (alary and *a#es are Interchan#eable7 $onceptually, there is no difference between salary and wa#es, both bein# a recompense for work done or services rendered, thou#h ordinarily the former expression is used in connection with services of non! manual type while the latte is used in connection with manual service" The expression >wa#es@ does not imply that the compensation is to be determined solely upon the basis of time spent in service, it may be determined by the work done, it could be estimated in either way" 4ate on which salary falls due7 *hen salary is taxable on due basis, the date on which salary falls due become important" There are no specified rules to determine a date when salary falls due" It is a matter of contract between employer and employee" The contract of service specifies the date on which salary falls due" %nless specified otherwise, salary falls due on the date of the month" *hen salary falls due on the last day of the month, the period of calculation will be from 1st April to 11st 2arch 81 months9" *hen salary does not fall due on the last day of the month, but on any specified date in the followin# month, the period of calculation durin# the previous year will be from 1st 2arch to the end of :ebruary 81 months9 DEDUCTION FROM SALARY TO BE IGNORED: Any deduction from salary by the employer is a part of taxable salary" *hen rate of salary per month is #iven, deductions from salary may be i#nored" The rate of salary may be multiplied by the period of previous year" *hen net salary is #iven after various deductions, e#" Cmployee6s contribution to provident fund, tax deducted at source, etc, net salary and deductions from salary should be a##re#ated to find out taxable salary which is due to the assessee" &DA4C +: (A3ADJ7 *hen salary scale or #rade is #iven, salary for the relevant previous year may be worked on the basis of #iven facts takin# into account the annual increments for the service period"

66

ADDCAD( +: (A3ADJ7 Arrears of salary will be taxed on receipt basis if the same has not been taxed due basis" Thus, where an employee is promoted with retrospective effect, such arrears of salary will be taxed on receipt basis" The assessee is also entitled to relief under (ec"-9819" A4GA?$C +: (A3ADJ ;(C$"108198G9< Advance of salary is to be included in the salary income in the previous year in which it is received" Advance of salary does not become taxable a#ain when such salary becomes due" $=ADA$TCD(TI$( +: (A3ADJ 1" Delationship of employer and employee7 :or a payment to fall under the head salaries, the relationship of employer and employee must exist between payee and the receiver of the salary" The employer may be a #overnment, a local authority, a company or any other public body or an association or =%: or even an individual" Cvery kind of payment to every kind of servant, public or private, however hi#h or low placed he may be is covered under the provisions of this act" " (alary from more than one employer7 Any amount of salary received or due from one or more than one employerEsource shall be taxable under this head" (uch situation may arise when an employee is workin# with two employees simultaneously or has worked with one employer and later on serves with another employer after leavin# service with first employer, salary from both the employer shall be taxable under this head" 1" (alary from present, part or prospective employer7 (alary received or due from present, past or future employer is also taxable under this head"

60

B" Tax free salary7 (ometimes, the employer allows an employee to draw tax free salary, e#" The employer pays full salary to the employee and also pays tax on this directly to the department" The employee6s assessment is to be made not on the amount of salary he is drawin# but on #ross amount ie" (alary drawn plus the tax paid by the employer" /" (alary received as 2ember of Farliament7 (alary received by a member of parliament is not taxable under the head salaries" It is taxable as income from other sources" Any allowance received by them is fully exempted from tax" 6" Deceipts from persons other than employer7 Fer5uisites or benefits or any other remuneration received from persons other than the employer, would be taxable not under the head salaries but under the head income from other sources even if they accrue to the employee by reason of his employment or while he was dischar#in# his normal duties, e#, amount received by a professor of a colle#e for actin# as an examiner in a university"

0" Flace of accrual of salary income7 (alary accrues at that place where the services are rendered" If the services are rendered in India, the salary accrues in India and if the services are rendered outside India, the salary accrues outside India" Thus, if a person employed in India #oes on leave to Cn#land and #ets his leave salary there, the salary is said to accrue in India and not in Cn#land, because it is paid for services rendered in India" -" (alary or pension received by %?+ employees7 It is fully exempted"

6-

9" (alary as partner7 Any salary, commission or remuneration received by a workin# partner from a firm assessed as firm shall not be taxable under the head salaries" It is fully taxable under the head profits and #ains" 1." Fayment received by le#al heirs of a deceased employee7 Any Cx!#ratia payment or compensation #iven to widow or le#al heirs of an employee who dies durin# service is not taxable as salary income but family pension received is taxable under the head other sources" COMPUTATION OF SALARY INCOME: (alary income of an employee is to be computed in accordance with the provisions laid down in section 1/, 16 and 10" (ection 1/ #ives scope of the word salary, section 16 #ives deductions to be allowed out of incomes taxable under this head" (ection 10 819 defines the word salary, 108 9 and 10819 further define the terms FCDS%I(ITC( and profits in lieu of salary" 4efinition of word salary ;section 10 819< Accordin# to this section salary includes the followin# amounts received by an employee from his employer, durin# the previous year7 8i9 8ii9 8iii9 8iv9 8v9 8vi9 *a#es Any annuity or pension Any #ratuity Any fees, commission, per5uisites or profits in lieu of or in addition to any salary or wa#es Any advance of salary Any payment received by an employee in respect of any period of leave not availed of by him

69

8vii9

The annual accretion to the balance at the credit of an employee participate in a reco#ni'ed provident fund, to the extent to which it is char#eable to tax under rule 6 of part A of the fourth schedule

The above definition of word >(alary@ uEs 10819 includes the above mentioned items" These can be explained in the followin# manner7 I" *a#es7 any amount received by a person for work done or job rendered is called wa#es" It may be received under the name of FAJ, )A(I$ FAJ, (A3ADJ, )A(I$ (A3ADJ or DC2%?CDATI+?" It may be for actual work or leave salary or actually received or due durin# the relevant previous year" (alary in lieu of notice" It is fully taxable uEs1/ if received durin# the relevant previous year" II" Any annuity or pension7 any amount received by employee from past employer after attainin# the a#e of retirement or superannuation is fully taxable" It may be received direct as pension or out of a superannuation fund created by employer, in both cases it is taxable" III" Any #ratuity7 any sum received by employee from his past employer as a token of #ratitude for services rendered in past is called #ratuity" This amount is exempted upto certain limits #iven uEs 1.81.9 and it is dealt with in this chapter" IG" Any feeNany amount received from employer under the name of fee is also fully taxable"

Any commission #iven by employer to employee is fully taxable"

Any commission received by a director for standin# #urantee for repayment of loan and if he is not employee of the company, shall be taxable under the head Income from other sources" G" Any salary in lieu of leave received durin# service is fully taxable" GI" Any advance salary7 In case an assessee receives some salary in advance in previous year and which was actually not due in that year shall be taxable in the year of receipt" It does not include any loan or advance taken from employer"

0.

PROVIDENT FUNDS: To encoura#e savin#s for the social security of employees, the #overnment has set up various kinds of provident funds" The employee contributes a fixed percenta#e of his salary towards these funds and in many cases employer also contributes" The whole contribution alon# with interest is credited to employee6s account" If the employee dies his heirs will #et the full payment" FD+GI4C?T :%?4( are of four kinds7 8i9 8ii9 8iii9 8iv9 (tatutory provident fund Deco#ni'ed provident fund %nreco#ni'ed provident fund Fublic provident fund

STATUTORY PROVIDENT FUND: (F: is the oldest type of fund" It was started in the year 19 / throu#h a provident fund act of 19 /, this fund was started with a view of promotin# savin#s amon#st #overnment employees" &enerally this fund is maintained by #overnment or semi #overnment departments like railways, reserve bank of India, colle#es, %niversities, local bodies, insurance companies etc" The employer6s contribution towards the employee6s (F: and the amount of interest earned on the accumulated balance to the employee6s credit balance are not to be included in the income of employee and so it is i#nored" *hen the employee retires or leaves the service and receives any amount from the accumulated balance to his credit in the (F:, the amount so received will not be included in employee6s total income bein# exempted income" DC$+&?I(C4 FD+GI4C?T :%?47

01

It is the provident fund which is not reco#ni'ed by the $ommissioner of Income tax" The employee and the employer both contribute towards this fund" The employee6s contribution is added in this salary and he will not be allowed any deduction uEs -.$ Interest on Frovident fund credit balance upto prescribed rate is exempted, but interest credited over and above such rate is deemed to employee6s salary income and is included in salary income of that previous year" %?DC$+&?I(C4 FD+GI4C?T :%?47 It is the provident fund which is not reco#ni'ed by the commissioner of Income tax" The employee and the employer both contribute towards this fund" The employee6s contribution is added in this salary and he will not be allowed any deduction uEs -.$ re#ardin# this contribution while computin# the total income of the employee" The employer6s contribution and interest on the accumulated credit balance of the fund are not to be included in employee6s salary income from year to year" A payment received out of this fund is taxable so far it represents the employer6s contribution and interest thereon" The employee is entitled to relief under section -9819" The employee6s contribution is i#nored because it was taxed when it was contributed" Interest on the employee6s own contribution will be taxable as >Income from +ther (ources@ and not as salary income"

TDA?(:CDDC4 )A3A?$C7 *hen the %DF: is reco#ni'ed for the first time, the credit balance in the employee6s %DF: is transferred to the reco#ni'ed provident fund account" This balance is known as transferred balance" In such case fund will be treated as DF: from the day of its inception and exemption will be allowed in same manner" +nly excess of amount transferred to DF: over exempted amount shall form taxable portion of transferred balance" F%)3I$ FD+GI4C?T :%?47

(o far all these funds were for the salaried people" +n Auly 1, 196- a new fund known as FF: was started so that self employed people may also enjoy the benefit of deduction uEs -.$" (elf employed people are doctors, lawyers, accountants, actors, traders, pensioners" This fund can suit all types of pockets and its workin# is also very simple" The interested people can open their account in ()I and its subsidiaries" The subscription can be between Ds"/.. and Ds"0.,... in one year" At one time one can deposit in multiples of /. and in one month only one deposit is possible and in the year minimum subscription should be Ds"/.. and the maximum Ds"0.,..." :ull withdrawal is possible after 1/ years but in case of death of the subscriber full repayment will be made to the le#al heir of nominee" Fartial withdrawal and loans are also possible" The subscription towards this type of fund is eli#ible for rebate in the similar manner, as in the case of statutory provident fund" Interest credited in this account is fully exempted" PROBLEM: $alculate the taxable amount of annual accretion to DF: if followin# information is provided by assessee7 8i9 8ii9 8iii9 8iv9 Fay Ds" 0,/.. $ommission received by him on the basis of turnover achieved by him Ds"6,..." Cmployer6s contribution to DF: O 1BM of salary Interest credited durin# the year to DF: balance O1 M is Ds" B,..."

$A3$%3ATI+? +: TAQA)3C F+DTI+? +: A??%A3 A$$DCTI+? Cmployer6s contribution to DF: O 1BM of (alary 81BM of 96,...9 3ess7 1 M of (alary bein# exempted Taxable portion Interest credited to DF: )alance O 1 M B,... 11,BB. 11,/ . 1,9 .

01

3ess7 Cxempted upto 9"/M

19,...

/,... 6,9 .

TAQA)3C F+DTI+? +: A??%A3 A$$DCTI+?

?+TC7 (A3ADJ :+D T=C A)+GC F%DF+(C I( FAJ F3%( $+22I((I+? +? T=C )A(I( +: T%D?+GCD A$=ICGC4 )J =I2" DC:%?4 :D+2 FD+GI4C?T :%?47 ;(ection 108198ii9< Any lump sum amount received or refund taken from accumulated credit balance of reco#ni'ed provident fund shall be fully exempted subject to some conditions as mentioned in rule - of part A of the fourth schedule7 As per rule -, exemption is allowed in the followin# cases7 8i9 8ii9 In case employee is takin# the refund after puttin# up continuous service for a period of / years or more In case employee has not completed / years service but he is takin# the refund as his service has been terminated duet to ill health, discontinuance of employer6s business, the contract of service was for less than / years or any other case beyond the control of the employee" It simply means that the employee is leavin# not of his own sweet will" 8iii9 In case employee has #ot job with another employer and his provident fund account was transferred to such new employer and total service with both the employers is / years or more" A33+*A?$C(7 ;(C$TI+? 10819< The term allowance has been derived from the word >to allow@" As per +xford 4ictionary the word >Allowance@ means >any amount or sum allowed re#ularly@" As such allowances are #iven in cash alon# with salary by the employer" These allowances are #iven to an employee to meet some specific type of loss or expenditure of employee or to help him to meet certain type of expenses" :or example, house rent allowance is

0B

#iven to help the employee to pay house rent or to #et a house on rent" These are divided into three cate#ories on the basis of their tax treatment" These are7 :%33J CQC2FTC4 A33+*A?$C(7 :orei#n allowance only in case of #overnment employees posted out side India =ouse rent allowance #iven to jud#es of hi#h court and supreme court (umptuary allowance #iven to jud#es of hi#h court and supreme court Allowances from %?+

:%33J TAQA)3C7 4earness allowance $$A $apital compensatory allowance 3unch allowance Tiffin allowance 2arria#e allowance :amily allowance 4eputation allowance *arden ship allowance ?on practicin# allowance Froject allowance +vertime allowance :ixed medical allowance Cntertainment allowance *ater and electricity allowance (ervant allowance

FADTIA33J TAQA)3C, =DA Cntertainment allowance 0/

=elper allowance %niform allowance Academic allowance $onveyance allowance Travelin# allowance Any special allowance in the nature of composite hill compensatory allowance or hi#h altitude allowance or uncon#enial climate allowance Any special compensatory allowance in the nature of border area or remote area or difficult area or disturbed area allowance Transport allowance Tribal area allowance Dunnin# allowance #iven to employees of transport sector $hildren education allowance =ostel expenditure allowance =ostel expenditure allowance $ompensatory field area allowance $ompensatory modified field area allowance

FULLY TAXABLE ALLOWANCES: 1" 4earness allowance7 employees havin# fixed income suffer the most due rise in prices and to compensate their loss, they are paid such allowances" (o 4A is nothin# but an additional salary and it is fully taxable" (ome times it is mentioned that7 8i9 8ii9 8iii9 8iv9 4A enters into pay for service benefits or 4A enters into pay for retirement benefits or 4A is #iven under the terms of employment or 4earness pay

It is treated as part of salary for certain purposes such as provident fund, value of rent free house, house rent allowance, bonus, #ratuity, leave encashment etc"

06

PROBLEM: 2r"Krishna, receives salary of Ds"B,... F2 and 4A O Ds"1,... F2 =is employer declares half of 4A as pay 8ie" Cnters into pay for service benefits9" $ompute his salary" =is salary shall be computed as under7 (alary O Ds"B,... F2 4A 8which enters into pay for service benefits9 Dest of 4A D("/B,... A?4 ?+T D("B-,..." " $$A7 $ity $ompensatory Allowance7 These are #iven to compensate for the hi#h cost of livin# in a particular bi# city of India or any other capital city" These are also fully taxable" 1" 3unchETiffinE2arria#eE:amilyE4eputationE*ardenshipE?on! This allowance is fully taxable irrespective of any B-,... 6,... 6,...

:+D A33 FDA$TI$A3 F%DF+(C( (A3ADJ +: 2D"KDI(=?A (=A33 )C

practisin#EFrojectE+vertimeE:ixed medical allowance7 These allowances are fully taxable" B" Cntertainment allowance7 expenditure incurred on entertainment of #uests or customers" )ut in case any amount is reimbursed a#ainst any expenditure incurred by employee on entertainment of #uest or customers it shall be fully exempted" %E( 168ii9 a deduction is allowed to those persons who receive this allowance" Till assessment year ..1!. this deduction was admissible both to #overnment as well as private sector employees" )ut with effect from assessment year ..1!.B this deduction is admissible only to #overnment employees for an amount e5ual to least of followin#7 a" (tatutory limit Ds"/,... b" 1E/th of basic salary only or

00

c" Actual entertainment allowance received durin# the previous year FADTIA33J TAQA)3C A33+*A?$C(7 1" =+%(C DC?T A33+*A?$C7 8a9 Cmployees livin# in hired 8rented9 houses7 (ome times the employer does not provide rent free accommodation but instead makes provision to pay some amount in cash, so that the employee may be compensated to some extent as far as rent is concerned" The amount of cash paid is known as =DA" +ut of total =DA received an amount e5ual to the minimum of the followin# three items is exempted from tax uEs 1.811A97 The three items are7 8i9 8ii9 8iii9 /.M of salary in case of 2etropolitan cities and B.M of salary in case of all other cities Actual =DA received The amount by which the actual rent paid by the employee exceeds 1.M of his salary This exemption shall be available even is employee is livin# in a rented house at a place other than the place of employment" 8b9 Cmployees livin# in their own house or in such houses for which they are not payin# any rent7 =ouse rent allowance received is fully taxable and no portion of it is exempted under any provision of law" 8c9 =ouse rent allowance received by Aud#es of =i#h court and supreme court7 Any amount received by them is fully exempted under =i#h $ourt Aud#es Act 19/B and (upreme court jud#es act 19/-" FD+)3C27 2D"Jo#esh is employed at Amritsar on salary of Ds"1,... p"m" the employer is payin# =DA of Ds"1/. F2 but the actual rent paid by Jo#esh is Ds"/.. F2" =e is also #ettin# M commission on turn over achieved by him and turnover is Ds"1,/.,..."

0-

$+2F%TATI+? +: &D+(( (A3ADJ7 (alary O Ds"1,... F2 $ommission O M of turn over =DA DC$CIGC47 3ess7 Cxempted uEs 1.811A9 8note 19 &ross salary ?+TC 17 CQC2FTI+? +: =DA %E( 1.811A9 8i9 8ii9 8iii9 Actual =DA received Cxcess if rent paid over 1.M of salary B.M of salary B, .. ,1.. 1/,6.. B, .. ,1.. ,1.. B1,1.. 16,... 1,...

Cxempted =DA I( ,1.." A33+*A?$C( $+GCDC4 %E( 1.81B9 :ollowin# are the prescribed allowances for the purpose of section 1.81B9 and their respective treatment in computin# the income under the head salaries7 8i9 8ii9 =elper allowance7 It is exempted up to actual amount spent on en#a#in# a helper re5uired to perform the official duties" %niform allowance7 It is also exempted up to actual expenditure incurred on ac5uirin# or maintainin# of the official uniform" Cxcess, if any will be taxable" 8iii9 8iv9 Academic research allowance7 It is exempted up to actual expenditure incurred for research" Cxcess if any is taxable" $onveyance allowance7 It is exempted up to actual expenditure incurred in performance of official duties" In case amount received is more than actual expenditure, excess if any will be taxable" 8v9 Travelin#, transfer or daily allowance7 It is exempted up to actual expenditure incurred for the purpose of employment" Cxcess, if any, will be taxable"

09

8vi9

Any special allowance in the nature of composite hill compensatory allowanceE=i#h altitude allowanceE%nrecon#enial climate allowanceEsnow bound area allowance7 Cxemption allowed up to Ds"1.. F2

8vii9 8viii9 8ix9 8x9 8xi9

$ompensatory field area allowance7 Cxemption allowed up to Ds" ,6.. F2" $ompensatory modified field area allowance7 Cxemption allowed up to Ds"1,... F2 =i#hly active field area allowance7 Cxemption allowed up to Ds"B, .. F2 %nder #round allowance #iven to coal mine workers7 Cxemption allowed up to Ds"-.. F2 Tribal area allowance7 This allowance is exempted upto Ds" ..F2 in the states of 2adhya Fradesh, Tamil ?adu, %ttar Fradesh, Karnataka, Tripura, Assam, *est )en#al" )ihar and +rissa"

8xii9

Any runnin# fli#ht allowance7 &ranted to an employee of transport system to meet his personal expenditure durin# the duty performed in the course of runnin# of such transport from one place to another provided that such employee is not is receipt of daily allowance, it exempted up to 0.M of such allowance or Ds"6,... F2 which ever is less"

8xiii9

$hildren education allowance7

If any amount is #iven by employer to

employee as education allowance for the education of own children in India, it shall be exempted up to Ds"1.. F2 per child for two children only" 8xiv9 =ostel expenditure allowance, Any allowance #ranted by employer to meet the hostel expenditure of employees children it shall be exempted up to Ds"1.. pm per child maximum for two children only" 8xv9 Any special allowance7 In the nature of counter insur#ency allowance #iven to the members of the armed forces operatin# in areas away from their permanent locations for a period of more than 1. days shall be exempted up to Ds"1,1.. F2" PROBLEM:

-.

2r" Karthik is employed at =yderabad at a )asic salary of Ds" /,... F2 and he is also #ettin# followin# allowances7 a" 4earness allowance b" 3unch allowance c" (ervant allowance d" Transport > f" =ostel > to one child ,... F2 1,... F2 1,... F2 1,... F2 /.. F2 -.. F2 B,... F2 ,... F2 1, .. F2 ,... F2 -.. F2 6.. F2 /,... F2

e" Cducation > .. F2 per child for three children #" $onveyance > h" +vertime > i" +fficiatin# > j" $ash allowance k" Cntertainment > l" 2edical m" $$A n" =DA >

=e is havin# a family house at the place of his postin# but he is livin# in a rented house and in payin# a rent of Ds"0,... pm find out his #ross salary" $+2F%TATI+? +: &D+(( (A3ADJ +: 2D"KADT=IK )asic salary O Ds" /,... pm 4earness allowance 3unch allowance (ervant allowance Transport allowance 3ess7 Cxemption Cducation allowance 3ess7 Cxemption =ostel allowance 3ess7 Cxemption $onveyance allowance +ver time allowance 1 ,... 9,6.. 0, .. ,B.. 6,... 1,6.. ,B.. 9,6.. B,... B,-.. ,B.. 1,..,... B,... 1 ,... 1 ,...

-1

+fficiatin# allowance $ash allowance Cntertainment allowance 2edical allowance $$A =DA 3ess7 3east of the followin#7 Deceived Ds"6.,... B.M of salary Ds"1, .,... Dent paidN1.M of salary Ds"/B,... 86.,...N/B,...9 &D+(( (A3ADJ FCDS%I(ITC( ;(C$TI+? 108 9<

B,... 1B,B.. B,... 9,6.. 0, ..

6,... B,06,B..

%E( 10819 >(alary@ includes the value of any per5uisite allowed or amenity provided by employer to employee" The word per5uisite has not been defined under Income tax act 1961" Fer5uisite simply means any casual emolument attached to an office" +xford Cn#lish 4ictionary also defines per5uisite as >any casual emolument, fee or profit attached to an office or position, in addition to salary or wa#es@" Fer5uisites may be #iven in a variety of forms" If the per5uisite does not accrue to the employee it will not be taxable" They may be received in cash or in kind" :or income tax purposes it is immaterial whether the per5uisites are paid voluntarily or under a contractual obli#ation" *here #oods are presented to an employee, the value to be taxed is not their cost to the employer but their value to the employee" Galue of per5uisites is char#eable to tax under the head salary only if these perks are received by an employee from his or her employer and employer may be a present, past or prospective one" In case any perks has been received from a person other than employer, then also the value of perk is taxable but either under the head business or profession or Income from other sources"

Any benefit derived by an employee from his employer whether received in lump sum of is bein# received every month and if such benefit comes out of employment a#reement and it is providin# a personal benefit to the employee or his family members, value of such a benefit is char#eable to tax under the head salary" TYPES OF PERGS: Ferks can be divided into four cate#ories7 8i9 8ii9 8iii9 8iv9 Ferks exempted for all employees Ferks which are exempted for employees but are taxable for employer under :rin#e benefits tax Ferks taxable for all employees Ferks taxable only for specified employees

TAXABILITY OF PERHUISITES: EXEMPTED FOR ALL EMPLOYEES: :ree medical facilities :ree refreshments durin# workin# hours :ree recreational facilities Frovision of telephone whether basic of cellular exclusively for official use :ree meals provided in remote area or at off shore installation are fully exempted :ree education trainin# or refresher course for employees 3eave travel concession :ree ration received by members of armed forces Fer5uisites allowed by #overnment to its employees posted abroad Dent free house #ive to an officer of parliament, a %nion 2inister and lead of +pposition in parliament :ree residence and conveyance facilities to Aud#es of supreme court and =i#h court

-1

:ree conveyance provided by employer to employee for #oin# to or comin# from place of employment" Any amount contributed by employer towards pension of deferred annuity scheme Cmployer6s contribution to staff #roup insurance scheme $omputers, laptops #iven to an employee for officialEpersonal use Transfer of a moveable asset more than 1. years old without consideration Accident insurance premium paid by employer for his own benefit Galue of any shares or debentures #ive free of cost or at concessional rate to employees under stock option scheme approved by the $entral #overnment Tax on perks paid by employer Dent free accommodation #iven in remote or offshore areas"

TAXABLE FOR ALL EMPLOYEES: Dent free house $oncessional rent house +bli#ation of employee met by employer Any other frin#e benefits #iven by employer to employee, such as, free meals if provided durin# workin# hours and value exceeds Ds"/. per day excess is taxable, interest free loan or loan at concessional rate of interest if more than Ds" .,... and if not for medical treatment difference between prescribed rate and rate char#ed is taxable" Any amount of life insurance premium paid by employer durin# the previous year" TAXABLE FOR SPECIFIED EMPLOYEES ONLY: &as, water and electricity facility Cducation facility for children :ree transport allowed by employer en#a#ed in transport business

-B

(ervices of domestic servants includin# sweeper, watchman, &ardner provided by employer Any other benefit or amenity

FCDK( CQC2FTC4 :+D C2F3+JCC( )%T TAQA)3C :+D C2F3+JCD )%T TAQA)3C :+D C2F3+JCD %?4CD :DI?&C )C?C:IT TAQ7 Galue of followin# benefits is not taxable in the hands of an employee" The employer has to pay tax on deemed income calculated as percenta#e of expenditure incurred" 1" Any free or concessional ticket provided by the employer for private journeys of his employees or their family members, " Any contribution by the employer to an approved superannuation fund for employee 1" 8A9 Cxpenditure incurred on entertainment 8)9 Cxpenditure incurred on provision of hospitality of every kind by the employer to any person, whether by way of provision of food or bevera#es or in any other manner what so ever and whether or not such provision is made by reason of any expenses or implied contract or custom or usa#e of trade" 8$9 Cxpenditure incurred on conference for the purpose of this clause, any expenditure on conveyance, tour and travel or boardin# and lod#in# in connection with any conference shall be deemed to be expenditure incurred for the purpose of conference, 849 Cxpenditure incurred on sales promotion includin# publicity, 8C9 Cxpenditure incurred on employee6s welfare, 8:9 Cxpenditure incurred on conveyance, tour and travel 8&9 Cxpenditure incurred on repair, runnin# and maintenance of aircrafts on leased telephone lines, 8=9 Cxpenditure incurred on festival celebrations 839 Cxpenditure incurred on use of health club and similar facilities 829 Cxpenditure incurred on #ifts and 8?9 Cxpenditure incurred on scholarships

-/

RULES REGARDING CALCULATION OF VALUE OF RENT FREE HOUSE: 1" :or %nfurnished accommodation7 A3 OWNED BY EMPLOYER: 8a9 &overnment employees7 The value of house is rent fixed by the #overnment for such house" It can be rent char#ed b #overnment from another employee of same status for similar type of house" 8b9 +ther employees7 Galue of house is calculated in followin# manner7 8i9 8ii9 8iii9 In cities whose population is more than B lakhs 7 .M of salary is taxable In cities whose population is up to B lakhs =otel accommodation 8for more than 1/ days +n transfer from one place to other9 is less is taxable" B3 HIRED BY EMPLOYER: 2>I (4 /#%#+' OR A2&0#% +.,& )#"5 (+ )#'#$%. ;-"2- ever is less is taxable in all cities" FOR FURNISHED ACCOMODATION: In case of all types of employees calculate value of unfurnished house If furniture is owned by employer add 1.M of cost of furniture If furniture is hired actual hire char#es are added" MEANING OF SALARY: :or the calculation of value of rent free accommodation the word salary includes7 8i9 8ii9 8iii9 )asic salary or pay 4A if term of employment so provide or it enters into salary for calculation of value of service or retirement benefits $ommission 7 BM of salary 8for the period of days for which accommodation is provided in hotel9 or actual bill which ever 7 1/M of salary is taxable

-6

8iv9 8v9 8vi9 8vii9 8viii9

)onus :ees Galue of all taxable allowances Any other monetary payment, by what ever name called 3eave encashment of salary only if it relates to the leave earned durin# the previous year in which rent free house is provided to the employee"

SALARY DOES NOT INCLUDE: 8i9 8ii9 8iii9 8iv9 8v9 8vi9 4A if not paid as per terms of employment Any other allowance which is exempt one Cmployer6s contribution in employee6s provident fund Galue of other per5uisites fallin# uEs 108 9 3eave encashment of salary if it relates to the leave earned in earlier previous years Income tax of employee is paid by employer

PROBLEM: 2r"&owda is workin# in a $entral &overnment office at simla" =is salary particulars are as follows7 (alary =ill compensatory allowance Transport allowance Frovided with rent free house 8annual license fee9 $ost of furnishin# $alculate value of rent free house" $A3$%3ATI+? +: GA3%C +: DC?T :DCC A$$+2+4ATI+? &D+(( (A3ADJ7 :or &overnment employees the value of rent free house is license fee fixed by it which is in present case is Add71.M of cost of furnishin# ;1.M of Ds"B/,...< 0, .. B,/.. 11,0.. B/,... 0 ,... 1 ,... 9,6.. 0, .. 4A ;:%33 C?TCD( I?T+ D)< B-,...

-0

PROBLEM: 2r"(hankar #ets salary of Ds"1 ,... F2 and is provided with rent free unfurnished accommodation at 3udhiana 8population more than B lakhs9 whose fair rental value is Ds"1,1.. F2" =e #ets leave encashment for the current previous year of Ds"6,... durin# the year" =ouse was provided to him with effect from 1!0! ..-" his salary is due on 1 st day of every month" $alculate the value of rent free accommodation and #ross salary" $A3$%3ATI+? +: GA3%C +: DC?T :DCC A$$+2+4ATI+?, &D+(( (A3ADJ7 (alary O Ds"1 ,... F2 3eave Cncashment for the current previous year Galue of per5uisite7 Dent free Accommodation (alaryP1,BB,...R6,...P1,/.,... .M of salary P 1.,... Deduced to - months 81.,... Q -E1 9 &D+(( (A3ADJ CONCESSIONAL RENT HOUSE: PROBLEM: CALCULATE VALUE OF RENT FREE HOUSE AS PER ABOVE AND DUDUCT RENT PAID BY EMPLOYEE: :rom the particulars #iven below compute his #ross salary7 (alary )onus :ree #as and water etc, Ds"0-,... Dent received from the employee 1 ,... 1,B-,... 1 ,... 6,... .,... 1,0.,... 1,BB,... 6,...

:urnished flat provided to the employee for which actual rent paid by the company

--

:urniture at cost

/.,...

COMPUTATION OF SALARY INCOME: (alary )onus Total salary GA3%ATI+? +: FCDS%I(ITC(7 :urnished flat at concessional rent .M of salary includin# bonus +r Actual rent paid *hich ever is less is taxable Add per5uisite of furniture 81.M of cost ie, 1.M of /.,...9 3ess7 Dent recovered by $o, Fer5uisite of free #as and water &D+(( (A3ADJ /,... 10,... 1 ,... /,... 6,... 1,91,... 1 ,... 0-,... 1 ,... 1,B-,... 1 ,... 1,6.,...

OBLIGATION OF EMPLOYEE MET BY EMPLOYER: In case any of the followin# payments are made by employer these are fully taxable" These are7 8a9 &as and electricity bills7 Issued on the name of employee but paid by employer U actual expenses met by employer are taxable" 8b9 Cducation of children bills issued on the name of employee but paid by employer!!!! actual expenses met by employer are taxable" Deimbursement of tuition fee of children is also fully taxable" 8c9 Income tax, professional tax of employee paid by employer!!! actual expenses met by employer are taxable 8d9 (alary of domestic servants employed by employee but paid by employer!!!!!actual amount paid by employer is taxable"

-9

FRINGE BENEFITS GIVEN BY EMPLOYER TO EMPLOYEE: %nder this provision only those benefits are covered which are not included under the provisions of :)T7 a" 2edical bills for treatment in private or unnotified hospitals issued on the name of employee but paid by employer shall be taxable for an amount exceedin# Ds"1/,..." b" Interest free or concessional loan from employer7 Interest free or interest char#ed at a concessional rate on loan #iven by employer to an employee or any member of hisEher family is a per5uisite #iven to an employee which is char#eable to tax" Galuation of this perk shall be made keepin# in mind the followin# points7 19 Interest is to be calculated at the rate char#ed by ()I on similar type of loan as on the 1st day of the relevant previous year" ()I notifies the lendin# rate from time to time" 9 Interest is to be calculated for each month of the relevant previous year on the maximum out standin# monthly balance" 19 Interest paid by employee, if any, is to be deducted out of total interest for the full previous year calculated as above" B9 >2aximum outstandin# monthly balance@ means the amount of each loan due to the employer on the last day of each month" This means that in case any amount of loan has been repaid in any month the same is to be deducted and only the balance amount due to the employer shall be known as maximum outstandin# monthly balance" PERGS TAXABLE IN SPECIFIED CASES ONLY: :ollowin# perks are taxable only if employee is either a director of company or has substantial interest 8 .M or more e5uity shares9 or his salary is more than Ds"/.,... p"a" this salary means all monetary emoluments, which are taxable under the head salary after allowin# deductions uEs 167

9.

W-( "/ /).2"4".5 .1)%('..: a" *ho is director of the company or b" *ho is substantial interest in the affairs of the company ie, he holds at least .M of the votin# power 8e5uity shares9 in the company or c" =is monetary salary is more than Ds"/.,... p"a" (alary for this purpose means all what he #ets in cash from one employer or more than one employer if he works for more than one employer simultaneously whether full time or part time, and is taxable under the head salary" The total of these items is to be treated as #ross salary out of which deductions uEs 168ii9 and 8iii9 are to be allowed7 2onetary salary includes7 1" basic salary " 4AE4F 1" )onus, commission, fees and all taxable allowances or taxable portion of allowance B" Any per5uisites received in cash or in monetary form /" &ratuity, pension, leave salary but arrears of salary and salary received in advance is to be excluded 6" In case employee is workin# simultaneously with more than one employer, salary from all the employers is to be included" 0" 2onetary salary of Ds"/.,... shall be calculated after allowin# deductions uEs 168ii9 and 168iii9 VALUE OF FOLLOWING PERGS IS TAXABLE ONLY IF EMPLOYEE BECOMES AN EMPLOYEE OF SPECIFIED CATEGORY: THESE PERGS ARE: 1" :ree education7 If employer provided free education to the members of the family of the employee in an institution owned or maintained by it, a reasonable amount which employee would have spent on similar type of education shall be taxable but after allowin# exemption of Ds"1,... F2 per child" " :ree #as, li#ht and water7 In case connection is on the name of employer and employer also pays bill, actual cost of such benefit is taxable 1" :ree servants7

91

a9 In case employee employs servants but their salary is paid by employer!!!! full salary is taxable for all employees uEs 108 98iv9 b9 In case employer provides services of sweeper and watchman full salary of these employees is taxable and it shall be reduced by any amount paid by employee" c9 In case #ardener is provided for rent free house owned by employer its salary is added in :DG and is not taxable separately" )ut, if house is owned by employer or is hired by employer, full salary of #ardener is taxable" d9 In case employer provides any other servant his full salary is taxable e9 Taxable for full month even if #iven for part of month B" Any other bill on the name of employer for personal expenses of employee paid by employer shall be taxable" In case medical bills are in the name of employer and are paid by employer these shall be taxable only after allowin# exemption as per rule #iven earlier for specified employees only" PROFITS IN LIEU OF SALARY: 8i9 The amount of any compensation due to or received by an assessee from his employer or former employee at or in connection with the termination of his employment or the modification of terms and conditions relatin# threto" 8ii9 Ant payment 8other than any payment referred to in clause 81.9, clause 81.A9, clause 1.) , clause 11, clause 1 , 11 8with effect from 1!B!1996 or clause 11A of section 1., 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 which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a key man insurance policy includin# the sum allocated by way of bonus or such policy" 8iii9 Any amount due to or received whether in lump sum or otherwise by any assessee from any person7 a" )efore his joinin# any employment with that person or

b" After cessation of his employment with that person PAYMENTS EXEMPTED U@S 8> Any payment received whether from present or past employer, is taxable as profit in lieu of salary" The followin# receipts, however are exempted7 83 LEAVE TRAVEL CONCESSION [SECTION 8>(? ! Any time amount received by an employee from his employer for proceedin# on leave any where in India or on proceedin# to any place in India after retirement is exempted up to the extent of an amount provided uEs 1.8/9 and rules framed there under" This benefit is available to employee for self and any member of his family" The word >family@ includes spouse children of the individual and parents, brother or sisters who are mainly dependent on such individual" The exemption under this section shall be available subject to rules and re#ulations framed by the $entral &overnment" " PERHUISITES AND ALLOWANCES PAID BY GOVERNMENT TO ITS EMPLOYEES POSTED OUTSIDE INDIA [SECTION 8>(7 ! Any per5uisite or allowance #iven by #overnment to its employees who are workin# outside India is full exempt from tax" As such motor car provided to employee workin# outside India or house rent allowance or any other such benefit is fully exempted form tax" 73 DEATH CUM RETIREMENT GRATUITY: Important points to be kept in view while calculatin# exempted amount of #ratuity uEs 1.81.97 19 Cmployees of statutory corporation will be covered under the cate#ory of non! #overnment employees" 9 Any #ratuity received by the le#al heirs of #overnment employees is fully exempted" :or others it shall 5ualify for exemption in the same manner but taxable under the Income form other sources"

91

19 In case employee has worked with more than one employer but is receivin# #ratuity only from present employer, his total service ie" :rom all previous employer from whom he has not received any #ratuity, shall be counted" B9 In case employee has retired but has been re!employed by same employer, exemption shall be allowed" /9 In case employee receives #ratuity from two employer under whom he is workin# simultaneously, exemption shall be allowed subject to maximum of Ds"1,/.,..." 69 In case #ratuity is received while employee is still in service with the same employer it is fully taxable" 09 Cxemption of #ratuity shall be allowed only if relationship of employer and employee does exist" It simply means that #ratuity paid to an a#ent shall not be exempted as there is no relationship of employer and employee between an a#ent and his principal" 8i9 GRATUITY RECEIVED FROM CENTRAL@STATE GOVERNMENT@LOVSL BODIES: A,' /02- +.2."9.5 $' &-. .1)%('../ workin# in $ivil or 4efence services of #overnment of India or any post of state #overnment or local authority covered under Devised Fension Dules of the $entral &overnment shall by fully exempted" 8ii9 GRATUITY RECEIVED UNDER PAYMENT OF GRATUITY ACT 8:72: Fayment of &ratuity act 190 followin# cate#ories7 a" *orkers workin# in every factory, mine, oil field, port, plantation and railway b" *orkers workin# in every shop or establishment in which 1. or more persons are employed or were employed on any day of the precedin# 1 months c" *orkersEEemployees workin# in any other establishment or class of establishment in which 1. or more persons are employed or were employed on any date of the precedin# 1 months and as the $entral &overnment may by notification specify in this behalf" applies to employees or workers of

9B

In case of employees covered by the Fayment of &ratuity act 190 , an amount bein# least of followin# three items shall be exempted and excess if any, will be taxable" These items are7 a" 1/ days salary 80 days in case of employees workin# in seasonal factories9 for each year of completed service or part thereof in excess of six months" *hile calculatin# len#th of service period exceedin# 6 months or more is to be taken as one year" If it is less than 6 months it shall be i#nored" b" ?otified limit Ds"1,/.,... c" &ratuity actually received by the employee >(alary@ means salary last drawn by the employee and it also includes dearness allowance" Avera#e salary shall be calculated by takin# 6 days as the maximum number of workin# days in a month" :or example if the employee was drawin# Ds"1,1.. at the time of his retirement, then 1/ days avera#e salary shall be Ds"1,1..Q1/E 6P0/." PROBLEM: 2r" Jadav retired on 1.!11! ..- from a coal mine after puttin# a service of - years and 1. months" At the time of his retirement he was #ettin# a salary of Ds"16,...F2 and he used to #et an increment of Ds"/.. F2 on 1st April every year" =is 4A was Ds" ,... F2 &ratuity received Ds"1,B.,..." find out his taxable #ratuity" COMPUTATION OF TAXABLE GRATUITY (WHERE PAYMENT OF

GRATUITY ACT 8:72 APPLIES AGCDA&C 2+?T=3J (A3ADJ7 T+TA3 (A3ADJ :+D 1. 2+?T=( P 1,09,... AGCDA&C (A3ADJ P 1,09,...E1. P 10,9.. 10,9..Q1/E 6Q 9 P ,99,B-1 EXEMPTION SHALL BE LEAST OF 7 AMOUNTS: 1" (tatutory limit " Actual received P 1,/.,... P 1,B.,...

9/

1" V months6 salary for each year of service P Cxempted &ratuity P ,99,-B1

,99,B-1

Therefore, taxable #ratuity P 1,B.,... U ,99,B-1 P B.,/19 ?+TC7 :ull amount of 4A is taken into account for calculation of avera#e monthly salary" In case of employee where payment of #ratuity act 190 applies, a year in which more than 6 months has been completed is to be treated as full completed year" GRATUITY RECEIVED BY ALL OTHER EMPLOYEE: E*.1)&.5 0)&( %.#/& (4 &-. followin#7 8i9 ?otified limit Ds"1,/.,... 8ii9 V month6s avera#e salary for every completed year of service ;months to be i#nored< 8iii9 Actual &ratuity received

In case #ratuity is received from private employer, an amount e5ual to least of the above there items shall be exempted" AVERAGE SALARY: the avera#e salary is to be computed by takin# salary of last 1. months precedin# the month in which retirement or death occurs" In case employee retires on any date durin# the month salary of that part of month is to be i#nored" (alary7 the word salary here has the same meanin#s as is assi#ned to it for provident fund purposes ie, the basic pay plus dearness pay or any portion of 4A which enters into pay for service benefits plus commission received on fixed percenta#e of turn over achieved by him" NOTIFIED LIMIT: the limit of Ds"1,/.,... is applicable for whole servin# life of employee" In case #ratuity is received from more than one employer the a##re#ate amount of #ratuity received must not exceed Ds"1,/.,..."

96

)y amendin# the provisions of section 1.81.9 the #overnment has taken over the powers to raise the limits of exempted #ratuity by just issuin# a notification" PROBLEM7 2r"&irish retired on 1/!6! ..- from a manufacturin# company after puttin# service of 1. years and 0 months" =e received a &ratuity of Ds"1,6.,..." )asic salary of 2r"&irish was Ds" .,... F2 durin# ..- and Ds" ,... durin# ..9" he was also #ettin# 4A O Ds"/,... F2 which was increased from Ds"B,... on 1!B! ..9" /.M of 4A is presumed to enter into salary for computation of service benefits" $ompute his taxable #ratuity" EXEMPTION ALLOWED SHALL BE LEAST OF FOLLOWING 7 AMOUNTSJ a" (tatutory amount b" Actual amount received c" V month6s salary for each year completed service 8 1,1..E Q1.9 Cxemption allowed P Ds"1,B6,/.. Taxable &ratuityP Ds"1,6.,... U Ds"1,B6,/.. P 11,/.. PENSION: [SEDCTION 8> (8>A ! 8A9 Fension received on a monthly basis7 Any amount of pension received from #overnment or any other employer will be fully taxable if it is received on a monthly basis" 8)9 Fension received on a commuted basis7 In case employee #ets his pension commuted, it is exempted as under7 8i9 $ommuted pension received by employees of #overnment and semi #overnment basis, the amount received by an employee as commuted value of pension is fully exempted if received from7 a9 $entral #overnment b9 A (tate #overnment or c9 A corporation set up under central, state or provisional act It is also fully exempted in case of Aud#es of =i#h courts and supreme court 1,/.,... 1,6.,... 1,B6,/..

90

$ommuted pension received by employees workin# in private sector" ANY PAYMENT RECEIVED IN COMMUTATION OF PENSION [SECTION 8>(8>A ! Any amount of pension received monthly or otherwise from any employer is fully taxable but any amount received in lump sum as commuted value is to be treated in the followin# manner7 The amount received by the employer as commuted value of pension is fully exempted is he receives it from, a" $entral #overnment b" (tate #overnment c" 3ocal authority d" A corporation set up under $entral, (tate or Frovincial act, under the civil pensions rules of the $entral #overnment or e" As Aud#e of (upreme court or =i#h court in India In case of other employees, any amount received on commutation of pension is exempted subject to followin# limits7 8i9 In case where the employee receives any #ratuity, the exempted amount shall be commuted value of one!third of pension which he is normally entitled to receive" 8ii9 PROBLEM: 8i9 In case where the employer does not receive #ratuity, the exempted amount shall be the commuted value of one half of such pension" FIND OUT THE TAXABILITY OF PENSION IN THE FOLLOWING CASES: 2D" &opal retires from a public limited company on 11 st Au#ust ..- and his pension was fixed at Ds"1,/.. F2 =e does not commute any part of pension" 8ii9 2rs" Dadha retires from #overnment service on 1.th (eptember ..- and her pension was fixed at Ds"1,... F2 she does not commute any portion of pension"

9-

8iii9

2r" Daju retires from Funjab &overnment service on 1.th Aune ..- and his pension has been fixed at Ds"1, .. F2 =e #ets 1E1 rd of his pension commuted for Ds"6.,..."

8iv9

2r"Deddy retires from private service on 1.th April ..- and his pension has been fixed at Ds"1,/.. F2 =e #ets V of his pension commuted and #ets Ds"-.,..." =e also received Ds"0/,... as #ratuity" =e #ets his pension commuted durin# Aanuary ..9"

In all cases pension becomes payable on the 1st day of each month" 8i9 8ii9 8iii9 %ncommuted pension received from private sector is fully taxable" %ncommuted pension received by 2rs"Dadha is fully taxable" =er taxable pension shall be Ds"1,...Q/P/"..." $ommuted portion of pension received by 2r"Daju ie" Ds"6.,... is fully exempted" %ncommuted portion of pension O Ds"-.. F2 will be fully taxable" 2r"Daju6s un commuted portion shall be Ds"-..Q-P6,B.. durin# the previous year" 8iv9 $ommuted portion of pension of 2r"Deddy shall be taxable as under7 :or V portion of pension he #ets :or full portion of pension he #ets P Ds"-.,... P -.,... Q P Ds"/1,111 Taxable portion of commuted pension shall be P -.,... U /1,111 P 6,660 %ncommuted portion of pension of Ds"1,/..Q1E P0/. F2 for taxable" /" Amount received as 3eave Cncashment on retirement ;(ection 1.81.AA9< 819 3eave encashed durin# service7 In case employee #ets any leave salary or #ets hisEher leave encashed while still in service, it is fully taxable in the year in which it is encashed" months is

1E1rd portion of commuted pension shall be exempted P -.,...Q E1Q1E1

fully taxable" %ncommuted pension of Ds"1,/.. F2 for - months is also fully

99

8 9 3eave encashment at the time of retirement or leavin# the service7 %E( 1. 81.AA9 employed shall be entitled to exemption if he #ets his leave encashed at the time of leavin# the service includin# at the time of resi#nin# from the job" a" $entralEstate &overnment employees!!! any payment received as the cash e5uivalent of the leave salary in respect of the earned leave to his credit at the time of his retirement or on leavin# the service shall be fully exempted" b" +ther employees!!! any payment received as the cash e5uivalent of the leave salary to his credit at the time of superannuation or on leavin# the service shall be exempted up to least of the followin# amounts7 A" Actual amount received )" Amount calculated at avera#e salary for 1. months 8avera#e salary means avera#e of salary drawn by employee durin# 1. months immediately precedin# his retirement9, or $" ?otified limit Ds"1,..,... 4" The cash e5uivalent of the leave salary to his credit at the time of retirement" LEAVE ENTITLEMENT STANDING TO THE CREDIT OF EMPLOYEEK ;-"%. calculatin# leave entitlement the employee is entitled only 1. days leave in one completed year of service" MEANING OF SALARY: It shall mean basic salary R 4A 8if #iven under the terms of employment or if it enters into pay for retirement benefits R $ommission as fixed percenta#e of turnover achieved by him" CALCULATION OF AVERAGE SALARY: (alary for 1. months precedin# the date of retirement is to be taken" (alary for this purpose has the same meanin# as for provident fund ie, payR4A 8which enters into pay for retirementEservice benefits9 R commission on turnover achieved by him"

1..

FD+)3C27 2r" Jadav retires on 1st Auly ..- after 1- years of service and receives Ds"0/,... as amount of leave encashment for 1/ months" =is employer allows B/ days leave for every one year of service" 4urin# service he has already encashed leave for 1 months" $alculate the taxable amount of leave encashment if his salary durin# 1!0! ..0 to 1!0! ..- was Ds"/,... F2" COMPUTATION OF TAXABLE AMOUNT OF LEAVE ENCASHMENT OF MR3YADAV 3eave due as per section 1.81.AA9 O one month leave for every +ne year of service 3ess7 3eave already availed 3eave due at the time of retirement 3I2IT(7 8i9 8ii9 8iii9 8iv9 ?otified limit 1. months avera#e salary 81.Q/,...9 $ash e5uivalent of leave due at the time +f retirement 86Q/,...9 Actual amount received 3east of above ie, Ds"1.,... is exempted Taxable Ds"0/,...N1.,... P Ds"B/,... ANY AMOUNT RECEIVED AS COMPENSATION ON TERMINATION OF EMPLOYMENT: [SECTION 8>B! (uch compensation is tax free up to the limits #iven below provided he #ets compensation under the provision of the Industrial 4isputes Act7 8i9 8ii9 An amount calculated in accordance with the provisions of clause 8b9 of section /: of the Industrial disputes act ?otified limit7 The monetary ceilin# has been removed with effect from assessment year 19-9!9." the limit shall be prescribed by the $entral 1.,... 0/,... 1,..,... /.,... 1- months 1 months .6 months

1.1

#overnment from time to time in +fficial &a'ette" The limit will not be less than Ds"/,..,..." 8iii9 Actual compensation received which ever is less"

%nder industrial disputes act, a workman is allowed retrenchment compensation e5ual to 1/ days avera#e pay for each completed year of service or any part thereof in excess of six months" The limits of sec 1.81.)9 shall not apply in cases where the compensation is paid under any scheme approved by $entral #overnment" ANY AMOUNT RECEIVED ON VOLUNTARY RETIREMENT [SECTION 8>(8>C ! %nder this section any payment received by an employee at the time of his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of public sector company, a scheme of voluntary separation, is exempted bein# least of B months as mentioned below" This exemption shall be allowed if the employee voluntary retire from the followin# bodies7 a" A public sector company b" Any other company c" An authority established under a central, state or provincial act d" A local authority e" A co!operative society f" Any state #overnment or #" $entral #overnment INCOME BY WAY OF TAX ON PERGS [SECTION 8>(8>CC ! In case employer pays, at its option, tax on value of perks #iven by it to an employee 8not provided by way of monetary payment9 it shall be fully exempted in the hands of employee"

ANY PAYMENT RECEIVED FROM A STATUTORY PROVIDENT FUND OR PUBLIC PROVIDENT FUND IT IS FULLY EXEMPTED FROM TAX PAYMENT RECEIVED FROM RPF:

1.

It is tax free in followin# cases only7 a" The employee has rendered / years continuous service b" Thou#h he has not rendered / years continuous service but the service has come to an end because of reasons beyond his control" The finance act 190B has added a clarification to this exemption" If the accumulated balance standin# in the name of employee is transferred from one reco#ni'ed provident fund to another similar type of fund, such balance will not be added in the total income of the assessee" The period of five years will be counted by addin# the period for which the fund remained with previous employer to the period for which the fund remains with the present employer from whom he is #ettin# refund" ANY PAYMENT FROM SUPERANNUATION FUND [SECTION 8>(87 ! A,' )#'1.,& 4+(1 #, #))+(9.5 /0).+#,,0#&"(, 40,5 1#5.: 8i9 8ii9 8iii9 8iv9 +n the death of a beneficiary or +n retirement or on becomin# incapacitated or )y way of refund of contribution on the death of a beneficiary or Any refund of contributions of employee earlier than his retirement or on his becomin# incapacitated to the extent of his own contribution made prior to the commencement of this act and interest thereon, shall be fully exempted" ANY SPECIAL ALLOWANCE [SECTION 8>(8< ! If any allowance is #iven by employer to employee to meet certain expenditure wholly and exclusively incurred in the performance of duties it is tax free up to the extent it is incurred for such purposes such as out of pocket allowance or out fit allowance received by ?$$ officers" This section does not #rant any exemption for any allowance #iven to meet the expenses at a place where the employee ordinarily resides and performs duties e#" $$A which is fully taxable" D.502&"(,/ (0& (4 G+(// /#%#+': (ome employees are re5uired to incur expenditure on the entertainment of customers, clients etc, who come to meet them in connection with their official or business work" In

1.1

case employee is #iven a fixed amount every month to meet this type of expenditure then it is fully added in salary and out of #ross total salary, a deduction uEs 168ii9 shall be allowed only to #overnment employees" This means that in case this allowance is #iven to employees workin# in private sector, it is fully taxable" )ut in case any amount is reimbursed a#ainst any expenditure incurred by employee, it shall be fully exempted" 4eduction uEs 168ii9 admissible to #overnment employees shall be an amount e5ual to least of the followin#7 a" (tatutory limit Ds"/,... FA b" 1E/th of basic salary c" Actual amount of entertainment allowance received durin# the previous year TAX ON EMPLOYMENT U@S 8E(""" In case any amount of professional tax is paid by the employee or by his employer on his behalf it is fully allowed as deduction" PROBLEM: :rom the followin# particulars, find out the taxable salary of 2rs" Dadhika workin# at $oimbatore" 8population more than B lakhs9 a" (alary Ds"1 ,... F2 b" 4A Ds"1,/.. Fm c" Cmployers contribution to DF: 1BM of basic salary d" D:A !!!! fair rental value is Ds"-.,... FA expenses on maintenance of #arden met by employer Ds"1,... e" Interest on F: balance O 11M FA Ds"1,9.. f" A car 81"B lt" capacity9 is provided by employer" All expenses are borne by employer" It is used both for performance of duties and private purposes" $ar was used by employee for only 11 months durin# the year" #" (he paid professional tax Ds" .. h" (he received Ds"/.. F2 as fixed medical allowance COMPUTATION OF SALARY INCOME:

1.B

(alary O Ds"1 ,... pm 4A O 1,/.. pm Cmployer6s contribution to DF: 3ess7 exempted upto 1 M of salary Interest credited on DF: balance 11M 3ess7 exempted 81,9..Q9"/E119 :ixed medical allowance GA3%C +: D:A (alary P 1,BB,... R 6,... P 1,/.,...7 .M of salary Galue of car per5uisite exempted &ross salary 4eductions uEs 16 Frofessional tax uEs 168iii9 (alary income

1,BB,... 1-,... .,16. 10, -. 1,9.. ,-/. ,--. 1,./. 6,... 1.,... ?il ,.1,91. .. ,.1,01.

?+TC7 4A is not added in salary for the calculation of value of D:A because it does not enter into service benefits"

PROBLEM: 2r" Arvind is workin# with two employees simultaneously and submits the followin# A)$ 3T4 1.,... F2 B,... F2 1 ,... ,... pm QJT 3T4 1,... F2 6.. F2 /,... 1.. pm particulars of his income for the year endin# 11!1! ..9" (alary 4A )onus $onveyance allowance

=e spends 6.M of conveyance allowance received from 1 st employer and B.M of such amount received from
nd

employer for employment purposes" =e joined service with

A)$ 3td, in 19/1 and since then he has been receivin# Ds"B.. pm as Cntertainment allowance" A)$ ltd has provided him rent free house at $hennai for which it pays rent of Ds"B,... pm" (ervices of &ardner have also been placed at the disposal of 2r"Arvind, for which company is payin# Ds"-.. pm" The house has been furnished with all items costin# Ds"1,..,..."

1./

$ompute his #ross salary" COMPUTATION OF GROSS SALARY OF MR3ARVIND: 1st employer (alary 4A )onus $onveyance allowance 3ess7 6.M spent for employment Cntertainment allowance (ervices of #ardner O -.. pm nd employer (alary 4A )onus $onveyance allowance 3ess7 B.M spent for employment Galue of D:A from 1st employer 8note 9 &ross salary 1, .,... B-,... 1 ,... B,... 1B,B.. 9,6.. B,-.. 9,6.. 16,... 0, .. /,... 1,6.. 1,BB. ,16. B0,91 1,. , 0

?+TC7 GA3%C +: DC?T :DCC =+%(C AT $=C??AI7 DC?T FAI4 )J C2F3+JCD P Ds"B-,... (alary 1, .,...R1 ,...R9,6..R16,...R/,...R ,16.RB,-.. P 1,-9,/6. .M of salary +r actual rent paid Ds"B-,... 8which ever is less9 Add7 1.M cost of furnishin# Galue of furnished rent free house PROBLEM: 2r" &"D"GI(=*A?AT= returned to India after servin# a )ritish company for / years" =e joined service with an Indian company at 2umbai durin# previous year" =e furnishes the followin# details and asks you to compute his salary income if he is7 a" +rdinary resident or b" Desident but not ordinarily resident 1.,... B0,91 10,91 10,91

1.6

8i9 8ii9 8iii9 8iv9 8v9 8vi9 8vii9 8viii9

(alary ;he was on leave for two months and durin# this period he received his salary in )ritain< Ds" /,... pm $$A Ds"/.. pm Dation bill paid by employer 1B,... :ixed medical allowance B.. pm Cducation allowance for his son who is studyin# in 2)A in 2umbai 1,... pm Dent free house hired by employer, rent paid Ds" ,... pm and cost of furnishin# is Ds"1, .,... =e and his employer contribute Ds"B,... pm each towards DF: =e was #ettin# a monthly pension of Ds"1/,... from his )ritish employer which was bein# credited to his bank account in 3ondon"

$+2F%TATI+? +: (A3ADJ I?$+2C7 DC(I4C?T (alary 1,..,... 8fully taxable for 1 months as it accrues in India9 $$A Dation bill paid by employer :ixed medical allowance Cducation allowance Cxcess of employer6s contribution to DF: over 1 M of salary Dent free house hired by employer7 .M of 6,... 1B,... B,-.. 1.,-.. 1 ,... D )%T ?+D 1,..,...

6,... 1B,... B,-.. 1.,-.. 1 ,...

salary

16,...

16,...

;1,..,...R6,...RB,-..R1.,-..P1, 1,6..< 6B,1 . or rent paid by employer Ds" B,... which ever is less P B,... R 1.M of cost of furnishin# Ds"1 ,...< Fension accrued and received in 3ondon 1,-.,... taxable only for resident (A3ADJ I?$+2C /,61,6.. ?I3 1,-1,6..

FD+)3C27 1.0

2r" 2ohan is a production mana#er of an industrial unit at $hennai" The particulars of his salary income are as under7 )asic salary 1/,... pm 4A #iven under the terms of employment /,... pm Cntertainment allowance 1,... pm 2edical allowance /.. pm =DA B,... pm Dent paid /,... pm $ar of 1" liter capacity is provided by employer for private and official use Cmployer meets expenses of car =e and his employer each contribute 1/M of salary to DF: 2r" 2ohan had taken interest free loan of Ds"1/,... to purchase refri#erator $ompute his income under salary" (+3%TI+?7 (alary 4A 2edical allowance CA Cmployer6s contribution to DF: 3ess7 1 M of salary ; ,B.,... Q 1 =DA 3ess7 least of the followin#7 i" Actual =DA received ii" Dent paid U 1.M of salary iii" /.M of ,B.,... Taxable =DA :ree use of car &ross salary 4eductions uEs 16 I?$+2C :D+2 (A3ADIC( 1,-.,... 6.,... 6,... 1 ,... M< B-,... 16,... 1, .,... 16,... -,-.. B-,... 0, ..

16,... Cxempted

1 ,... ?I3 ,00, .. ?I3 ,00, ..

PROBLEM: 2D(" DCGAT=I submits the followin#7 19 ?et salary received after deduction of the followin# 1,/.,...

1.-

Income tax deducted at source +wn contribution to DF: Dent of residential house provided 9 profit bonus 19 CA B9 she went on tour for official purposes and received TA /9 she was ill and was treated in a notified hospital 69 she was provided with D:A owned by co, and also with a &ardner whose salary was /.. pm 09 The electricity and water bill of the above house paid by co, -9 she was provided with a car of 1" 3T for all purposes 99 The co, contributed Ds" B,... towards DF: SOLUTION: ?et salary received after deductions 1,/.,... A447 income tax deducted at source 6,... +wn contribution to DF: .,... Dent of residential house provided B,... Frofit bonus CA Travelin# allowance on official tour Cxempted Deimbursement of medical bills Cxempted D:A7 .M of salary 81,-.,...R B,...R1 ,...P ,16,...9 B1, .. 3ess7 rent paid by employee deducted out of salary B,... Clectricity and water bill of the house paid by employer (mall car Cmployer6s contribution to DF: 3ess7 exempted up to 1 M of salary (A3ADJ I?$+2C PROBLEM: Cxempted B,... 1,6..

6,... .,... B,... B,... 1 ,... FA 6,... 1-,...

1, .. pm

1,-.,... B,... 1 ,...

19, .. 1B,B..

,B.. ,0 ,...

2r" Qavier an employee of DA?$=I based company provides the followin# particulars of his salary7 )asic salary 1 ,... pm

1.9

Frofit bonus 1 ,... $ommission on turnover achieved by him B ,... CA ,... pm $lub facility 6,... Transport allowance 1,... pm :ree use of car of more than 1"6 lt" capacity for both personal and employment purposes, expenses are met by employer D:A provided by employer lease rent paid by employer 6,... pm :ree education facility for three children of the employee )ills issued in the name of the employer ,/.. &as, water and electricity bills issued in the name of employee but 16,-.. paid the employer $+2F%TC =I( (A3ADJ I?$+2C7 (+3%TI+?7 (alary Frofit bonus $ommission CA $lub facility exempted Transport allowance 3ess exempted up to Ds"-.. pm )enefit of car exempted Cducation facility for children &as, water and electricity bill paid by employer Galue of D:A7 rent paid by employer Ds"0 ,... (alary for this purpose 81,BB,...R1 ,...RB ,...R B,...R ,B..P , B,B..9 .M of employee6s salary ie, Ds"BB,--. or rent paid by employer Ds"0 ,... *C3 &D+(( (A3ADJ 3C((7 deductions Income from salary PROBLEM: 2r" &owda provides the followin#7 (alary 4A as per terms of employment )onus $$A 1/,... pm .M of salary 1/,... ,B.. pa 1,BB,... 1 ,... B ,... B,... ?I3 1 ,... 9,6.. ,B.. ,/.. 16,-..

BB,--. 1,.-,/-. ?I3 1,.-,/-.

11.

3unch allowance

/.. pm

Deimbursement of medical expenses incurred on treatment of wife from a private nursin# home is Ds" ,..." =e is #iven a choice to select either, 8a9 Dent from house owned by employer at $handi#arh ;population below B lakhs< +D 8b9 =DA O Ds"B,/.. pm" =e can hire similar type of house O Ds" ,/.. pm advise him which option he should choose from taxation point of view"

COMPUTATION OF RFA: (alary 4A .M of salary )onus $$A 3unch allowance Deimbursement of medical expenses Galue of D:A 1/M of salary (alary 81,-.,...R16,...R1/,...R6,...R ,B.. P ,19,B..9 &D+(( (A3ADJ 4eductions uEs 16 Income under the head salary COMPUTATION OF HRA: (alary 4A )onus $$A 3unch allowance Deimbursement of medical expenses 8 ,... U 1/,...9 =DA /B,... 3ess7 Cxempted -,B.. &D+(( (A3ADJ 3C(( 4C4%$TI+?( %( 16 I?$+2C %?4CD T=C (A3ADJ 1,-.,... 16,... 1/,... ,B.. 6,... 0,... B/,6.. ,-6,... ?I3 ,-6,... 1,-.,... 16,... 1/,... ,B.. 6,... 0,... 1/,91. ,- ,11. ?I3 ,- ,11.

111

TAQ F3A??I?&7 =e should select the option of takin# cash =DA" In this option he saves Ds" B,... ;=DA received Ds"/B,... FA less rent paid Ds"1.,... FA< in cash" *here as he has to pay extra tax on excess income of Ds"1,69. ;Ds" ,-6,... U ,- ,11.< which is 1.M of Ds"1,69. P Ds"1,1.0 R M education cess Ds" P1,1 9" as such he saves cash Ds" P+($%.1: 4r" 2anmohan sin#h is employed at =yderabad" Farticulars of his salary income are #iven below7 (alary 8net of tax, rent of house provided by employer and sin#h6s contribution to F:9 (in#h6s contribution to F: Cmployer6s contribution to F: Dent of residential house provided by employer and deducted out of salary Frofessional tax deducted at source Interest credited to F: O -"0/M FA 3eave travel allowance received Dent free house provided to employee7 rent paid on house in =yderabad )onus e5ual to one month salary Demote locality allowance O Ds"1,... pm ;notified to be exempted up to Ds" .. pm< Dunnin# allowance $hildren education allowance for children O Ds"B.. pm each 8one of his son is livin# in hostel9 CA Amount contributed to FF: SOLUTION: ?et salary received A447 professional tax deducted at source Add7 contribution to F: Add7 rent of residential house provided by employer and deducted out of salary :ull salary Cmployer6s contribution to F: 3ess7 exempted up to 1 M of salary 3eave travel allowance 11 ,B-,... ,B.. B.,... 9,6.. 1,..,... B.,... 16,... B,... 0,-.. ,... pm ,B-,... B.,... B.,... 9,6.. ,B.. BB,... 0,-.. 66,... ,-01" 8Ds" B,... !! 1,1 99

0.. F2 0.,...

)onus e5ual to one month6s salary ;1,..,...x1E1 < Demote locality allowance O Ds"1,... pm 16,... 3ess7 notified to be exempted up to Ds" .. pm ,B.. Dunnin# allowance Ds" ,... pm B,... 3ess exempted upto 0.M 16,-.. $hildren6s education allowance for 1 children Ds"B.. 1B,B.. pm each 3ess exempted ;1 ..R1 ..< CA Galue of concessional rent &D+(( (A3ADJ 3C((7 4C4%$TI+?( %E( 16 Frofessional tax paid Income from salary ,B..

/,... 11,6.. 0, ..

1 ,... -,B.. /6,B.. B,/B,B.. ,B.. B,/ ,...

?+TC(7 $+2F%TATI+? +: GA3%C +: $+?$C((I+?A3 DC?T =+%(C AT =J4CDA)A4 =IDC4 )J C2F3+JCD7 (alaryP 1,..,...R0,-..R /,...R0, ..R1 ,...R-,B..R11,B..P1,9B,... .M of salary P 0-,-.. or actual rent Ds"66,... *C3 is taxable 3ess7 rent paid by employee Taxable value 66,... 9,6.. /6,B..

In case of actual expenditure is not #ive full amount of leave travel allowance is taxable" Interest credited to F: O -"0/M FA is fully exempted as rate is below 9"/M FA PROBLEM: 2r" (harma an Indian citi'en is workin# with Indian #overnment in the department of external affairs at 4elhi" =e was #ettin# the followin# emoluments and perks7 (alary 1/,... pm 4A received in India only 16M of salary $$A received in India only /M of salary =e was provided with a rent free house at 4elhi whose rental value fixed by the #overnment was Ds"1, .. pm" The house was furnished at a cost of Ds"/.,..." an air conditioner was hired O Ds"1, .. pm and installed at his residence for the period 1"/" ..- to 11"-" ..-" =e had been provided with a car of 1"6 lt capacity which he used only

111

for employment purposes" :rom 1"1 " ..- he was transferred to Indian embassy at Tokyo in Aapan" =e was paid Ds"1.,... pm as forei#n allowance" Air fare for him self and all his family members was paid by the #overnment" 4urin# his stay there he was provided with free use of car and rent free furnished house" $alculate his income under the head salary for the year endin# 11"1" ..9 if his salary is due on first day of every month" COMPUTATION OF SALARY INCOME :+D 9 2+?T=( AT 4C3=I7 (alary 4A O 16M of salary $$A O /M of salary $ar used only for employment purposes D:A7 rent fixed by #overnment A447 1.M of cost of furnishin# Dent of air conditioner 81, .. x B9 :+D 1 2+?T=( AT T+KJ+ (alary 4A $$A Air fare Dent free house :orei#n allowance :ree use of car (A3ADJ I?$+2C PROBLEM: 2D, Damesh an employee of a company at )an#alore 8population above / lakhs9 furnishes the followin# particulars of his income for the year endin# 11"1" ..9" )asic salary 4A /.M +: (A3ADJ 8/.M enters into service benefits9 2arria#e allowance $hildren6s education allowance )onus one month salary CA 1 ,... pm 6.. pm 6.. pm 1 ,... 1, .. pm 1,1/,... 1,6.. 6,0/. Cxempted 1.,-.. 1,0/. B,-.. Cxempted Cxempted > > > > , 0,0..

19,1/. B/,...

+wn contribution to DF: at the rate of 1 M of salary, his employer is contributin# 1B"/M" =is employer is also contributin# 0"/M of salary to an approved superannuation 11B

fund" 2r"Damesh owns a car which he is usin# for his personal purposes only and his employer meets all expenses on this car which are Ds"1 ,1.." =e is provided with a rent free house at )an#alore the fair rental value of which is Ds"9,/.. pm" =e is re5uired to #ive up the ri#ht of occupation durin# the period he was on leave" =e was on leave from 1"11" ..- to 11"1 " ..-" he paid life insurance premia of Ds"1 ,..., Ds"B,... and Ds"1,... on the life of self wife and married dau#hter" $alculate income under the head salaries and 5ualifyin# amount for deduction uEs -.$ if two children of 2r"Damesh are studyin# in a school" COMPUTATION OF SALARY INCOME: (alary 4A 2arria#e allowance Cntertainment allowance $hildren6s education allowance 0, .. 3ess7 exempted for children 81..Q Q1 9 ,B.. )onus Cmployer6s contribution to DF: O 1B"/M 6,1.. 3ess7 Cxempted O 1 M 1,6.. $ar expenses met by employer for personal use Cxempted Galue of rent free house for 1. months at )an#alore (alaryP;1,BB,...R16,...R0, ..RB,-..R1 ,...R1B,B.. 1 ,06. P ,1-,B..< 1/M of salary Deduced to 1. months ;1 ,06.Q1.E1 < (A3ADJ I?$+2C S%A3I:JI?& A2+%?T :+D 4C4%$TI+? %E( -.$ +wn contribution to DF: 3ife insurance premium S%A3I:JI?& A2+%?T PROBLEM: 2r" 4ass is an employee is Assam ; /. km from city limits in a remote area and furnishes the followin#7 )asic salary 4A 8under the terms of employment B.M enter into pay benefits9 /,... pm 1..M of salary 1,6.. 10,... 1-,6.. 1,BB,... 0 ,... 0, .. 1B,B.. B,-.. 1 ,... B,/..

0,1.. ,-6, ..

11/

$hildren6s education allowance 8his two children are studyin# in a 6.. pm school9 )onus 1.M of basic CA 1,... pm +wn contribution to DF: 1 M +: (A3ADJ Cmployer6s contribution to DF: 1B"/M of salary Cmployer6s contribution to an approved superannuation fund 0"/M of salary Interest credited to DF: balance O 1 M B,... 2r" 4ass received an amount of Ds"/.,... as compensation from +riental Insurance company for a motor accident in which he was injured two years a#o" The court has awarded a sum of Ds"/,... as interest for delayed payment of compensation" It was also received by him alon# with compensation" =e owns a car of 1" lt capacity which he uses both for official and personal purposes, the expenses bein# met by the company which amounted to Ds"1-,B.." it is estimated that .M of these expenses relate to personal use" =e is provided with a D:A with in the plantation area, the fair rent of which is Ds"9.. pm" =e is not eli#ible for the house durin# the period of annual vacations for two months" The ori#inal cost of the furniture provided at the house is Ds"B.,..." =e was paid a sum of Ds"1.,... by his employer as he saved the company from heavy dama#es" $ompute his income under salaries" (alary 4A O 1..M of salary 8B.M under the terms of 6.,... 6.,...

employment9 $hildren6s education allowance 0, .. 3ess7 exempted 8 Q1..Q1 9 ,B.. B,-.. )onus 1.M of salary 1-,... Cmployer6s contribution to DF: O 1B"/M 1 ,1-. 3ess7 exempted 1 M 1.,.-. ,1.. CA 1 ,... Interest credited to DF: O 1 M less 9"/M -11 $ar perk exempted ?I3 Amount paid by employer to save #oodwill 1.,... Galue of D:A exempted in remote area ?I3 (alary income 1,60,011 NOTE: INTEREST ON DELAYED PAYMENT OF COMPENSATION IS TAXABLE UNDER THE HEAD OTHER SOURCES3 116

PROBLEM: :rom the followin# particulars #iven below calculate salary income of 2r" Jadav for the assessment year7 8i9 8ii9 8iii9 8iv9 8v9 8vi9 8vii9 8viii9 8ix9 8x9 8xi9 )asic pay Ds"1/,... F2 ;due on last day of month< 4A 6.M of salary ;/.M of 4A forms part of salary < )onus7 basic salary for one month $ommission Ds"66,... 3eave encashment Ds" .,..." it relates to encashment of current year6s leave" =e has en#a#ed an helper at Ds"1, .. F2 and his employer pays him Ds"1,/.. F2 on this account 2edical bills for Ds"/.,... were reimbursed in followin# manner7 from a notified hospital Ds"1 ,... and from a private nursin# home Ds"1-,..." 2obile telephone bills paid by employer Ds"1/,... =e has employed a cook for his personal use at Ds"1,... pm and his employer has reimbursed such salary" =e has employed a cook for his personal use at Ds"1,... pm and his employer has reimbursed such salary" +n 1!1 ! ..- he had taken a loan of Ds"1,..,... from his employer to purchase a car" Date of interest is /M pa Depayment of loan O Ds"/,... pm is to start after B months from the date of takin# of loan" Frescribed rate of interest by ()I as on 1!B! ..- is 9M 8xii9 8xiii9 8xiv9 8xv9 Interest credited on the accumulated balance of DF: O 1.M is Ds" .,... =e received Ds" .,... as leave travel concession but has not traveled any where" =e has been provided with free use of a car of 1"- lt" car is used by partly for personal and partly for employment purpose" =e has been provided with a rent free house hired by employer at Ds" .,... pm

110

COMPUTATION OF SALARY INCOME: )asic pay 4A )onus $ommission 3eave encashment =elper allowance 3ess7 actual expenditure 2edical reimbursement received 3ess7 Cxempted notified hospital Amount of reimbursement relatin# to treatment 1,-.,... 1,.-,... 1/,... 66,... .,... 1-,... 1B,B.. /.,... 1 ,... 1-,... 1,6.. 1,...

from notified hospital 1/,... 2obile bill Cxempted (alary of cook 1... pm $oncession in respect of interest on loan taken for purchase of car7 81,..,... Q BM Q BE1 9 Cmployers contribution to DF: 3ess7 exempted Interest credited to DF: 3ess exempted $ar perk 3eave travel concession Galue of D:A house hired by employer .M of salary or actual rent *C3 (A3ADJ I?$+2C 16,... 1, . .,... 19,... Cxempted

1 ,... B,...

1 ,0-. 1,... .,... /9,6 . /, /,...

PROBLEM: 2r"4ev is workin# as a business executive with a company at 4elhi" =e submits the followin# particulars of his income for the previous year7 compute his salary income" (alary 4A Cntertainment allowance )onus $onveyance allowance =is and employer6s contribution to DF: O 1/M of salary each Interest credited to DF: balance O 1 M =e is provided with D:A whose rent paid by the company Dent of air conditioner for / months /,... pm ,/.. pm /,... pm 6.,... 16,... pa 1, .,... pa 1,... pm

11-

=e owns a car of 1"- lt capacity which he uses both for official and personal purposes and claims to have spent whole of conveyance allowance" The assessin# officer has a#reed that 1/M of the time car is used for personal purposes" =e is provided with the services of #ardner, sweeper and watchman whose salary O Ds"/.. pm each is paid by the employer" 4urin# the previous year he had received was included in last year6s income" =e deposited Ds"1.,... in FF: and invested Ds"1.,... in notified infrastructure units of %TI" COMPUTATION OF SALARY INCOME: )asic salary 8for 1. months as he has paid tax on two month6s salary9 4A for 1 months $onveyance allowance 81/M for personal use9 Cntertainment allowance )onus Cmployer6s contribution to DF: O 1/M of Ds"1,..,... 3ess exempted O 1 M interest credited on DF: balance Cxempted O 9"/M :acility of #ardener, sweeper, watchman O /.. pm each Galue of rent free house &D+(( (A3ADJ 4eductions %E( 16 Frofessional tax 16 8iii9 Income under the head salary VALUE OF RFA: Dent paid by employer P Ds"1, .,... 1/M of salary P 6B,-9. Actual rent paid or 1/M of salary *C3 6B,-9. Add 1.M of cost of furnishin# Add rent of aid conditioner 1.,... /,... ,/.,... months basic salary as advance salary which

1.,... 1 ,6.. 6.,... 6.,... B/,... 16,... 1-,... 1B, /. 9,... 1,0/. 1-,... 09,-9. /, 1, B. ,/.. /, .,0B.

119

Galue of furnished rent free house PROBLEM:

09,-9.

2r" Genkatesh is the $hairman of Indian (teel company Kolkota" =is salary and other particulars for the year endin# are as follows7 (alary 4A not considered for retirement benefits )onus for the year Arrears of earlier year6s bonus $ommission Advance salary Cmployer6s contribution to provident fund Frofessional tax paid by the employer Income tax paid by the company Clectricity bills for the year paid by the company :ees for attendin# board meetin# of other companies 6.,... pm 1.,... pm 0 ,... 1.,... -.,... 6.,... 1BM of salary ,... pa 1/,... pm -,... 11,...

The company has provided him a contessa car 1"- lt capacity which is used by him both for official and personal purpose" The entire runnin# and maintenance cost amountin# to Ds"B/,... for the year has been met by the company" =is two children are studyin# in 4oon school 4ehradun, the education expenses durin# the year bein# Ds"B.,... fully met by the company" =e has also been #iven a spacious bun#alow free of rent" The company owns the bun#alow" The fair rental value of the bun#alow is Ds"1-,... pm" There is a swimmin# pool inside the bun#alow compound the maintenance cost of which came to Ds" .,... for the year" The company met it" The #arden inside the compound wall is maintained by the company" The #ardner is paid a salary of Ds"1,... pm the maintenance cost came to Ds"6,... durin# the year" The $hairman has also been provided with a security #uard and a sweeper whose salaries amountin# to Ds"1,6.. pm each have been paid by the company" The entire bun#alow is richly furnished with furniture costin# Ds"B,/.,..." determine the value of rent free house and salary income also" COMPUTATION OF SALARY INCOME: 1 .

(alary 4A )onus Arrears of bonus $ommission Advance salary Cmployer6s contribution to DF: O1BM 1,..,-.. 3ess exempted upto 1 M of salary -6,B.. Frofessional tax paid by employer Income tax paid by employer Clectricity bill paid employer $ar facility Cxempted Cducational expenses of children met by employer (ervices of sweeper 1,6.. pm (ervices of security 1,6.. pm Galue of D:A &D+(( (A3ADJ 4eductions %E( 16 Frofessional tax 8iii9 (alary income Galue of D:A7 1/M of salary A447 1.M $+(T +: :%D?I(=I?& GA3%C +: DC?T :DCC =+%(C PROBLEM: 1,1.,-.. B/,... 1,0/,-..

0, .,... 1, .,... 0 ,... 1.,... -.,... 6.,... 1B,B.. ,... 1,-.,... -.,... B.,... 19, .. 19, .. 1,0/,-.. 1/, .,6.. ,... 1/,1-,6..

A resident individual is servin# in Q 3td, ?ew delhi and furnishes the followin# particulars of his income earned durin# the year ended" (alary Ds"1, .,... =is own contribution to DF: Ds"1/,... Cmployer6s contribution to the said fund Ds"1/,... )onus 8out of this Ds"6,... is #ratuitous9 1-,... 8i9 =e is provided with a motor car 1"B/ lt capacity which is owned by the employer, all expenses of maintenance and runnin# bein# met by employer" =e is also provided with a driver for the said car for which no char#e is made to him by the employer" 2r"A uses the car for his personal purpose also"

1 1

8ii9 8iii9 8iv9 8v9 8vi9

3ife insurance premium paid by the employer amountin# to Ds"1/,... =e is provided with D:A the :DG of which is Ds"6.,... pa and actual rent of hired furniture Ds"-.. pm &as bill paid by employer Ds"1 ,... =e was provided with the services of #ardener, watchman and domestic servant and salary of each of them was Ds"/.. pm" =e availed 3T$ durin# 4ecember ..- and visited &oa by air alon# with his wife and two major children" =is employer paid him a lump sum amount of Ds"-B,..." the normal one way air fare for economy class is Ds"0,/.. per person"

8vii9 8viii9

=e insured his own life and life of his wife and paid Ds"1 ,... as premium in 2ay ..- out of his a#ricultural income =is deposited Ds" .,... in C3(( and another Ds"1.,... in FF: in march ..9"

$ompute his income from salary" COMPUTATION OF SALARY INCOME: (alary )onus Cmployer6s contribution to DF: 3ess7 exempted :ree use of small car with driver 3I$ premium paid by employer &as bill paid by employer (ervices of watchman (ervices to domestic servant 3T$ 3ess exempted Galue of D:A (alary ;1, .,...R1 ,...P1,1 ,...< 1/M of salary Add rent of furniture (A3ADJ I?$+2C PROBLEM: 2r"%day is workin# as a mana#er at Ds"0, .. pm with =idustan tools ltd" Aammu" =e is receivin# Ds"1,-.. pm as 4A and Ds"1,... pm as =DA" =e stays in his own house" =e 1, .,... 1-,... 1/,... 1B,B.. Cxempted 6.. 1/,... 1 ,... 6,... 6,... -B,... 6.,... 19,-.. 9,6.. B,...

9,B.. ,11,...

received Ds"1B,... as travelin# allowance and he could spend only Ds"1 ,/.." his salary accrues on 1st day of every month" =e retired from service with effect from Aan 11 ..- and received the followin# amounts7 8i9 8ii9 8iii9 8iv9 Detirement #ratuity Ds"1,6 ,B.. 8he retired after renderin# 1B years service and his salary durin# ..-!.9 was 0, .. pm" =is pension was fixed O Ds" ,-.. pm he #ets 1EBth of his pension commuted for a lump sum Ds" ,1.,..." =e received Ds"1, B,... as refund from DF: half of it consists of his own contribution plus interest threon" 3eave encashment of Ds"16,... bein# / months salary received on 11!1! ..9

$ompute his salary income" (alary 4A =DA 1,...Q11 8fully taxable as he lives in his own house9 Travelin# allowance 3ess actual expenses %ncommuted portion of pension for one month Detirement benefits7 8a9 &ratuity received 3ess exempted 8b9 commuted value of pension 3ess exempted Defund from DF: 3eave encashment 3ess exempted (A3ADJ I?$+2C E*.1)&"(, (4 G+#&0"&' Avera#e salary 80, .. Q 1.E1.P0, .. pm9 Cxempted upto least of followin#7 a" ?otified limit b" V month6s avera#e salary for each completed Jear of service c" Actual #ratuity received 1 1 1, ,B.. 1,6 ,B.. 1,/.,... 1B,... 1 ,/.. 1,6 ,B.. 1, ,B.. ,1.,... 91,111 Cxempted 16,... 16,... 09, .. 19,-.. 11,...

1,/.. 0.. B.,... 1,16,660 ?I3 ,9.,-60

3east is exempted PROBLEM:

1,

,B..

2rs" (owmya is a software en#ineer employed at 2umbai" :ollowin# are the details7 (alary Ds" .,... pm 4A Ds"/,... pm $ompany provided her a laptop costin# Ds"1/,... $ompany sold her a washin# machine for Ds" .,... cost of which was Ds"1.,... Travelin# expenses to abroad Ds"B.,... are borne by the company" Cmployer contributed Ds"1.,... towards %3IF (he is provided with D:A 5uarter in 2umbai value Ds"/,... pm and furniture and fittin#s value Ds"1/,... (pecial marria#e #ift #iven to employee Ds"/.,... Flannin# allowance Ds"/.. pm 2edical expenses paid by company Ds"1.,... 2edical allowance O Ds"1, /. pm Assume that the salary is due on the last day of every month" COMPUTATION OF TAXABLE SALAYY: (alary 4A (ale of washin# machine8difference taxable9 %3IF D:A7 (alary of employee for this purposeP ,61,... 1/M of employee6s salary A447 1.M of cost of furnishin# 2arria#e #ift #iven to the employee 2edical allowance Flannin# allowance &D+(( (A3ADJ 4C4%$TI+?( %( 16 I?$+2C :D+2 (A3ADJ ,B.,... 6.,... 1.,... 1.,... 19,1/. 1,/..

B.,6/. /.,... 1/,... 6,... B,11,6/. ?I3 B,11,6/.

NOTES: SPECIAL MARRIAGE GIFT IS TAXABLE

1 B

Cmployee is presumed to be treated in private hospital" PROBLEM: :rom the followin# information compute taxable salary" (alary Ds"-,... pm Arrears of salary Ds"B,... 4A Ds" ,... pm Cmployer is payin# insurance premium of Ds"1.,... FA on employee6s life )onus received Ds"1/,... Cducation allowance for #rand child Ds"B.. pm $ash #ift Ds"1.,... $$A Ds"1,... pm 2edical allowance paid by employer D("6,... =e contributes 1/M of his salary to a F: and his employee contributes the same =e is #iven lunch allowance O1.. per day for /. days durin# the previous year =e is provided with a mobile, bill of which is paid by company Ds"6,..." )asic salary Arrears of salary 4A 3I$ premium paid by employer )onus Cducation allowance of #rand child $ash #ift $$A 2edical expenses paid by employer 8up to 1/,... exempted9 Cmployers contribution to DF: 3unch allowance 2obile bill &D+(( (A3ADJ 4C4%$TI+?( %E( 16 I?$+2C :D+2 (A3ADJ PROBLEM: &anesh an employee workin# in 4reams 3td" 2umbai has presented the followin# particulars of his salary" )asic salary Ds" .,... pm which is due on the last day of the month 4A -.M of salary ;/.M forms part of salary< 1 / 96,... B,... B,... 1.,... 1/,... B,-.. 1.,... 1 ,... ?illlllll ,--. ,/.. ?il ,.1,6-. ?I3 ,.1,6-.

)onus basic salary of one month $ommission Ds"66,... 3eave encashment ;relatin# to current year< Ds" .,... =e has en#a#ed a helper at Ds"1, .. F2 and his employer pays him Ds"1,/.. pm on this account" 2edical bills for Ds"6.,... were re!imbursed in followin# manner +f a notified hospital Ds" ,... +f a private hospital Ds"1-,... 2obile telephone bill paid by employer Ds"1/,... =is employment tax paid by employer Ds" ,/.. +n 1!1 ! ..- he has taken a loan of Ds"1,..,... from his employer to purchase a car" Date of interest is /M FA repayment of loan O Ds"/,... pm is to start after B months from the date of takin# of loan" Frescribed rate of interest by ()I as on 1!B! ..- is 1 M" =e and his employer contribute Ds"1, .. pm each towards DF: Interest credited on the accumulated balance of DF: O 1.M is Ds" .,... =e received Ds" .,... as 3T$ but has not traveled any where" =e has been provided with free use of a car of 1"- lt car is used partly for personal also" =e has been provided with a D:A owned by employer 8:DG of house Ds"-,... pm9 alon# with facility of #ardner costin# employer Ds"6,... pa furniture costin# Ds"1,..,... 8*4G Ds"0/,...9 has also been provided for his use by employer" =is personal club bills paid by employer Ds" /,... pa 3I$ premium on his life paid by employer Ds"/,... pa" other savin#s of 2D"&anesh include contribution to FF: Ds"1,/.. 3I$ premium on the life of his father Ds"/,..." COMPUTATIONS OF TAXABLE INCOME FROM SALARY: )asic salary 4A 4A does not enter )onus $ommission 3eave encashment =elper allowance 3ess exempt 2edical bills reimbursed 1 6 ,B.,... 96,... 96,... .,... 66,... .,... 1-,... 1B,B.. 1,6.. Cxempted

2edical

bills

reimbursed

by

employer

1,... Cxempted ,/.. 1-,B.. B.,1 . Cxempted 1,... .,... Cxempted /,... 0,... Cxempted

treatment in private hospital 2obile phone bill Cmployment tax paid by employer Cmployer contributions to DF: 3ess exempt 1 M Interest on DF: balance in excess of 9"/M pa 3T$ $ar facility 3I$ FDC2I%2 FAI4 )J C2F3+JCD 3oan from employer for car at concessional rate $lub bills paid by employer D:A (alary for this purpose B,B/,6.. Q 1/M P 66,-B. Add7 1.M cost of furniture 1.,... &D+(( (A3ADJ 3ess deductions Tax on employment I?$+2C %?4CD T=C =CA4 (A3ADJ (C$TI+?NA 8a9 *hat is conveyance allowanceI 8b9 *hat is %DF:I 8c9 *hat is DF:I 8d9 *hat is (F:I 8e9 *hat is FF:I 8f9 *hat is commutation of pensionI 8#9 *hat is D:AI 8h9 (tate the provisions of D:AI 8i9 (tate the provisions of =DAE 8j9 *hat is #ratuityI 8k9 *hat is encashment of earned leaveI 8l9 *hat is #ross salaryI 8m9*hat is net salaryI 8n9 (tate provisions of section 16I

06,-B. 0,.9,1B. ,/.. 0,.6,-B.

1 0

(C$TI+? U ) a" 2D, Damesh an employee of a company at )an#alore 8population above / lakhs9 furnishes the followin# particulars of his income for the year endin# 11"1" ..9" )asic salary 4A /.M +: (A3ADJ 8/.M enters into service benefits9 2arria#e allowance $hildren6s education allowance )onus one month salary CA 1 ,... pm 6.. pm 6.. pm 1 ,... 1, .. pm

+wn contribution to DF: at the rate of 1 M of salary, his employer is contributin# 1B"/M" =is employer is also contributin# 0"/M of salary to an approved superannuation fund" 2r"Damesh owns a car which he is usin# for his personal purposes only and his employer meets all expenses on this car which are Ds"1 ,1.." =e is provided with a rent free house at )an#alore the fair rental value of which is Ds"9,/.. pm" =e is re5uired to #ive up the ri#ht of occupation durin# the period he was on leave" =e was on leave from 1"11" ..- to 11"1 " ..-" he paid life insurance premia of Ds"1 ,..., Ds"B,... and Ds"1,... on the life of self wife and married dau#hter" $alculate income under the head salaries and 5ualifyin# amount for deduction uEs -.$ if two children of 2r"Damesh are studyin# in a school" b" 2r" (harma an Indian citi'en is workin# with Indian #overnment in the department of external affairs at 4elhi" =e was #ettin# the followin# emoluments and perks7 (alary 1/,... pm 4A received in India only 16M of salary $$A received in India only /M of salary =e was provided with a rent free house at 4elhi whose rental value fixed by the #overnment was Ds"1, .. pm" The house was furnished at a cost of Ds"/.,..." an air conditioner was hired O Ds"1, .. pm and installed at his residence for the period 1"/" ..- to 11"-" ..-" =e had been provided with a car of 1"6 lt capacity which he used only for employment purposes"

1 -

:rom 1"1 " ..- he was transferred to Indian embassy at Tokyo in Aapan" =e was paid Ds"1.,... pm as forei#n allowance" Air fare for him self and all his family members was paid by the #overnment" 4urin# his stay there he was provided with free use of car and rent free furnished house" $alculate his income under the head salary for the year endin# 11"1" ..9 if his salary is due on first day of every month" d" 2r" &owda provides the followin#7 (alary 4A as per terms of employment )onus $$A 3unch allowance 1/,... pm .M of salary 1/,... ,B.. pa /.. pm

Deimbursement of medical expenses incurred on treatment of wife from a private nursin# home is Ds" ,..." =e is #iven a choice to select either, i" Dent from house owned by employer at $handi#arh ;population below B lakhs< +D iii" =DA O Ds"B,/.. pm" =e can hire similar type of house O Ds" ,/.. pm advise him which option he should choose from taxation point of view" (C$TI+?!! $ a" &anesh an employee workin# in 4reams 3td" 2umbai has presented the followin# particulars of his salary" )asic salary Ds" .,... pm which is due on the last day of the month 4A -.M of salary ;/.M forms part of salary< )onus basic salary of one month $ommission Ds"66,... 3eave encashment ;relatin# to current year< Ds" .,...

1 9

=e has en#a#ed a helper at Ds"1, .. F2 and his employer pays him Ds"1,/.. pm on this account" 2edical bills for Ds"6.,... were re!imbursed in followin# manner +f a notified hospital Ds" ,... +f a private hospital Ds"1-,... 2obile telephone bill paid by employer Ds"1/,... =is employment tax paid by employer Ds" ,/.. +n 1!1 ! ..- he has taken a loan of Ds"1,..,... from his employer to purchase a car" Date of interest is /M FA repayment of loan O Ds"/,... pm is to start after B months from the date of takin# of loan" Frescribed rate of interest by ()I as on 1!B! ..- is 1 M" =e and his employer contribute Ds"1, .. pm each towards DF: Interest credited on the accumulated balance of DF: O 1.M is Ds" .,... =e received Ds" .,... as 3T$ but has not traveled any where" =e has been provided with free use of a car of 1"- lt car is used partly for personal also" =e has been provided with a D:A owned by employer 8:DG of house Ds"-,... pm9 alon# with facility of #ardner costin# employer Ds"6,... pa furniture costin# Ds"1,..,... 8*4G Ds"0/,...9 has also been provided for his use by employer" =is personal club bills paid by employer Ds" /,... pa 3I$ premium on his life paid by employer Ds"/,... pa" other savin#s of 2D"&anesh include contribution to FF: Ds"1,/.. 3I$ premium on the life of his father Ds"/,..." b" 2rs" (owmya is a software en#ineer employed at 2umbai" :ollowin# are the details7 (alary Ds" .,... pm 4A Ds"/,... pm $ompany provided her a laptop costin# Ds"1/,... $ompany sold her a washin# machine for Ds" .,... cost of which was Ds"1.,... Travelin# expenses to abroad Ds"B.,... are borne by the company" Cmployer contributed Ds"1.,... towards %3IF (he is provided with D:A 5uarter in 2umbai value Ds"/,... pm and furniture and fittin#s value Ds"1/,...

11.

(pecial marria#e #ift #iven to employee Ds"/.,... Flannin# allowance Ds"/.. pm 2edical expenses paid by company Ds"1.,... 2edical allowance O Ds"1, /. pm c" 2r" Genkatesh is the $hairman of Indian (teel company Kolkota" =is salary and other particulars for the year endin# are as follows7 (alary 4A not considered for retirement benefits )onus for the year Arrears of earlier year6s bonus $ommission Advance salary Cmployer6s contribution to provident fund Frofessional tax paid by the employer Income tax paid by the company Clectricity bills for the year paid by the company :ees for attendin# board meetin# of other companies 6.,... pm 1.,... pm 0 ,... 1.,... -.,... 6.,... 1BM of salary ,... pa 1/,... pm -,... 11,...

The company has provided him a contessa car 1"- lt capacity which is used by him both for official and personal purpose" The entire runnin# and maintenance cost amountin# to Ds"B/,... for the year has been met by the company" =is two children are studyin# in 4oon school 4ehradun, the education expenses durin# the year bein# Ds"B.,... fully met by the company" =e has also been #iven a spacious bun#alow free of rent" The company owns the bun#alow" The fair rental value of the bun#alow is Ds"1-,... pm" There is a swimmin# pool inside the bun#alow compound the maintenance cost of which came to Ds" .,... for the year" The company met it" The #arden inside the compound wall is maintained by the company" The #ardner is paid a salary of Ds"1,... pm the maintenance cost came to Ds"6,... durin# the year" The $hairman has also been provided with a security #uard and a sweeper whose salaries amountin# to Ds"1,6.. pm each have been paid by the company" The entire bun#alow is richly furnished with furniture costin# Ds"B,/.,..." determine the value of rent free house and salary income also" 111

Assume that the salary is due on the last day of every month" d" 2r"4ev is workin# as a business executive with a company at 4elhi" =e submits the followin# particulars of his income for the previous year7 compute his salary income" (alary 4A Cntertainment allowance )onus $onveyance allowance =is and employer6s contribution to DF: O 1/M of salary each Interest credited to DF: balance O 1 M =e is provided with D:A whose rent paid by the company Dent of air conditioner for / months /,... pm ,/.. pm /,... pm 6.,... 16,... pa 1, .,... pa 1,... pm

=e owns a car of 1"- lt capacity which he uses both for official and personal purposes and claims to have spent whole of conveyance allowance" The assessin# officer has a#reed that 1/M of the time car is used for personal purposes" =e is provided with the services of #ardner, sweeper and watchman whose salary O Ds"/.. pm each is paid by the employer" 4urin# the previous year he had received was included in last year6s income" =e deposited Ds"1.,... in FF: and invested Ds"1.,... in notified infrastructure units of %TI" months basic salary as advance salary which

I?$+2C :D+2 =+%(C FD+FCDTJ 3CAD?I?& +)AC$TIGC(7 8a9 4efinin# house property income 8b9 (ection of the act 8c9 4eemed ownership 8d9 (ection B of the act

11

8e9 Froblems involvin# various adjustments on &AG, ?AG, deductions under section B 4efinition of the =ead ;(ection <

The income from houses, buildin#s, bun#alows, #odowns etc" is to be computed and assessed to tax under the head >Income from house property@" The income under this head is not based upon the actual income from the property but upon notional income or the annual value of that buildin#" (ection of the Income!tax Act says7

The annual value of property consistin# of any buildin# or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are char#eable to income!tax, shall be char#eable to income!tax under the head HIncome from house property6" :or income to be taxed as HIncome from house property6 the followin# points should be noted carefully7 83 )uildin# or 3and Appurtenant thereto" The scope of this head of income is limited to the income from buildin#s or lands appurtenant 8attached or situated in the vicinity of buildin#9 to buildin#s only" )uildin#s include residential houses, bun#alows, docks, warehouses, any block of bricks or stone work covered by a roof etc" 3and which is not appurtenant to any buildin#s does not come within the scope of this section" 23 Annual value" The meanin# of word HAnnual value6 is very si#nificant because the annual value of the buildin# or land appurtenant thereto is to be taxed and not the rent received" The annual value is to be determined accordin# to the provisions of section 1 of Income!tax Act" 73 The Assessee should be the owner of the property" It is only the owner of the house property who can be taxed under this head of income" The tax under this

111

section is in respect of the le#al or beneficial owner and not the occupation or possession of house property6" Therefore, income from sublettin# will be char#eable under the head HIncome from other sources6 and not under house property6" (o only the owner, may be le#al or deemed owner, is liable to tax under this head of income, unless the house property is used by him for the purposes of his own business or profession" The 5uestion of ownership may be noted in the followin# cases7 8i9 If the land was taken on lease 8lon# time9 and a super!structure constructed, the person who takes land on lease will be treated as its owner" 8ii9 8iii9 8iv9 8v9 *here the property is mort#a#ed, it is the mort#a#er alone and not the mort#a#ee who can be treated as the owner" *here the property was constructed in the name of partnership, it is the firm which is assessable as owner and not the individual partners" A person whose property is vested in the $ustodian of Cvacuee Froperty is not the Howner6 thereof for the purposes of this section" *here the assessee takes a buildin# on lease and he is derivin# some income by sublettin# or re!lettin#, this income will be taxable under the head HIncome from other sources6 and not under the head HIncome from house property6" 8vi9 In case houses were constructed by a cooperative buildin# society and allotted or leased out to its members, the member shall be deemed to be the owner of the buildin#s or part thereof, as the case may be" In one of the cases, (upreme $ourt decided that the owner must be a person who can exercise the ri#hts of the owner, not on behalf of the owner but as his own ri#ht" 4eemed +wner of =ouse Froperty Accordin# to (ection 0 of Income!tax Act the assessee in followin# cases is deemed to be the owner of the house property, thou#h not owner of the house property7

11B

8i9

An individual who transfers otherwise than for ade5uate consideration any house property to his or her spouse, not bein# a transfer in connection with an a#reement to live apart or to a minor child not bein# a married dau#hter, shall be deemed to the owner of the house property so transferred"

8ii9 8iii9

The holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate" A member of a co!operative society to whom a buildin# or part thereof is allotted or leased under a house buildin# scheme of the society, shall be deemed to be the owner of that buildin# or part thereof"

<3 It is not used for purposes of assessee6s business or profession" *here the assessee is carryin# on business or profession in his own house, buildin# or in a portion of it and the income of such business or profession, is taxable under the head HFrofits or #ains of business or profession6, the annual value in respect of property or portion of it is not taxable under this head of income" As the business is bein# carried on in the assessee6s own premises, so no rent will be allowed as expenditure to the assessee in respect of these premises" )ut where the profits of such business or profession are not char#eable to tax, the annual value of the 8owned9 premises shall be computed and char#ed under the head Hhouse property6" ?3 4ispute about ownership" It is the owner who is liable to pay tax on the income of the house property and in case of a dispute about ownership the person who receives rent shall be liable to pay tax till the dispute about ownership is settled" E3 =ouse Froperty situated in a forei#n country" In case an assessee who is resident of India owns a house in a forei#n country, income from such a house is taxable in India under the head house property" (o income from house property in case of not ordinary resident and a non resident shall be exempted but a#ain it will be taxable in India if it is received or it is payable in India" 73 $ases when rented income from buildin# is not treated as house property income 8i9 3ettin# out of house property for smooth conduct of assessee6s businessEprofession" If a person lets out any house property for smooth

11/

conduct of his businessEprofession, the rental income from such house property shall not be treated as house property income rather it shall be treated as income under the head businessEprofession" Cxample 1" Suarters let out to the employees of assessee6s own business Cxample " )uildin# let to a )ank, Fost +ffice, Folice (tation, Cxcise department or Folice department etc" (imilarly, if a person carryin# on any businessEprofession lets out his house property to a )ank, Fost +ffice, Folice (tation, Cxcise 4epartment or other department and the main purpose of lettin# is not to earn rental income but to facilitate its own businessEprofession, the rented income shall not be taxable as house property income rather it will be treated as business income of the person" =3 Income from sub!lettin# of house property" If a person occupies a buildin# as tenant and lets out full or part of the hired buildin# to another person, it is called sub!lettin#" The income from sub!lettin#, if any, is taxable under the head Hincome from other sources6 and not under the head Hhouse property6" It is so because the person sub!lettin# the buildin# is not the owner of that buildin#" (uch income is calculated as per section /6 after deductin# all the expenses relatin# to sub!let portion" :3 $omposite lettin# out of buildin# alon# with furniture etc" If a person lets out buildin# alon# with furniture, plant, machinery and other facilities etc", for a composite rent and such composite rent can not be separated between 8a9 rent of buildin# and 8b9 rent of other itemsEfacilities then such composite rent shall be treated either as income under the head other sources or an income under the head business or profession, if such lettin# is the business of the assessee" =owever, if such composite rent can be split up in parts and rent of buildin# can be separately known, then such rent shall be treated as house property income and rent of other itemsEfacilities shall be taxable as other source incomeEbusiness or profession income" 8>3 Income from hotel businessEpayin# #uest accommodation" If a person runs the hotel business or runs the business of providin# payin# #uest accommodation,

116

such

rented

income

shall

be

taxable

as

income

under

the

head

)usinessEFrofession" =owever, if a person has a buildin# in the nature of a hotel and he lets out such buildin# as such to another person for carryin# on hotel business, such rental income shall be taxable as Hincome under the head house property6" Illustration 1" 2r" Dama Dao had taken a shop on rent at monthly rent of Ds" ,..." =e has sub!let /M of the area to 2r" 4"K" Dai O Ds" 1,... p"m" =e incurred Ds" B,... on repairs of the shop" $alculate his income from sub!lettin#" (olution" Income from other sources: sub-letting Ds" Dent Deceived O Ds" 1,... p"m" 3ess7 Actual expenses relatin# to sub!let portion Dent paid 8 /M of Ds" B,...9 Depairs 8 /M of Ds" B,...9 Income from sub!lettin# Cxempted Incomes from =ouse Froperty %nder section 1. of the Income!tax Act 1961 followin# incomes from house property are exempted from tax" These incomes are not to be included in the total income of assessee" =ence no tax is payable on such incomes" These incomes are7 19 A#ricultural =ouse Froperty ;(ection 8198c9<" Income from such house property which is situated on or in the immediate vicinity of a#ricultural land which is used for a#ricultural purposes by cultivator is exempted from tax" 9 =ouse property held for charitable purposes ;(ection 11<" Any income from a house property held for charitable or reli#ious purposes e"#", rent from shops owned by a temple is also exempted" 19 (elf!occupied but vacant house ;(ection 1819<" In case an assessee keeps one of his own houses reserved for self!occupation but is livin# in a rented house Ds" 6,... 1,... 0,... /,... 1 ,...

110

elsewhere due to his employment or profession the income from such house is taken to be nil" B9 =ouse used for own business or profession" There is no income char#eable to tax under this head from such house property" /9 Froperty held by re#istered trade union ;(ection 1.8 B9<" Income from a house property owned by a re#istered trade union is not to be included in its &"T"I" 69 Income from house property held by followin# shall be exempted 8i9 8ii9 8iii9 8iv9 8v9 =ouse property held by a local authority" =ouse property held by a scientific research institution" =ouse property held at a political party" =ouse property held by a university and any other educational institution workin# for spreadin# education and not to earn profit" =ouse property held by a hospital or medical institution workin# for the spreadin# of medical services to people and is not meant for earnin# profit" 09 +ne house property 8a palace9 owned by a former ruler of Indian states" Cx!rulers of Indian states may be ownin# many palaces but only one palace of their choice shall be treated as a self occupied house and shall be exempted" -9 +ne self occupied house" In case assessee owns one residential house, the net annual value of the same shall be taken as nil but in case he owns more than one house, then only one of his choice but normally of hi#her value shall be treated as a self occupied one and otherEothers are treated as deemed to be let out" In case of a $ooperative (ociety Income from followin# house properties is includible in &ross Total Income but a deduction is allowed from the &ross Total Income" 83 Income from any other property ;(ection -.F8 98b9<" In case the #ross total income of a co!operative society does not exceed Ds" .,..., any income derived by it from house property and included in its #ross total income, the whole of such income is allowed as deduction while computin# its total income" $o!operative society in this case should not be a housin# society or an urban consumer6s co! operative society or a society carryin# a transport business"

11-

23 3ettin# out of #odown by co!operative societies ;(ection -.F8 9W<" If a co! operative society lets out #odowns or warehouses for stora#e, processin# or facilitatin# the marketin# of commodities, the whole of its income derived from lettin# out of houses or stora#es etc" is deductible in computin# its total income" A??%A3 GA3%C The term annual value is very important as calculation of income from house property depends upon correctly calculated annual value" It takes into consideration not only the rent received but also the expected rent a house can fetch under the #iven situation and not only once but from year to year" 4efinition of Annual Galue ;(ection 1< 1" :or the purposes of section to be7 8a9 The sum for which the property mi#ht reasonably be expected to let from year to year, or 8b9 *here the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause 8a9, the amount so received or receivable, or 8c9 *here the property or any part of the property is let and was vacant durin# the whole or any part of the previous year and ownin# to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause 8a9, the amount so received or receivable7 Frovided that the taxes levied by any local authority in respect of the property shall be deducted 8irrespective of the previous year in which the liability to pay such taxes was incurred by the owner accordin# to the method of accountin# re#ularly employed by owner in determinin# the annual value of the property of that previous year in which such taxes are actually paid by him" , the annual value of any property shall be deemed

119

Cxplanation" :or the purposes of clause 8b9 or clause 8c9 of this sub!section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot reali'e" " *here the property consists of a house or part of a house which 8a9 Is in the occupation of the owner for the purposes of his own residence, or 8b9 $annot actually be occupied by the owner by reason by reason of the fact that owin# to his employment, business or profession carried on at any other place, he has to reside at that other place in a buildin# not belon#in# to him the annual value of such house or part of the house shall be taken to be nil" 1" The provisions of sub!section 8 9 shall not apply if 7 8a9 The house or part of the house is actually let durin# the whole or any part of the previous year, or 8b9 Any other benefit there from is derived by the owner" B" *here the property referred to in sub!section 8 9 consists of more than one house7 8a9 The provisions of that sub!section shall apply only in respect of one of such houses, which the assessee may, at his option, specify in this behalf" 8b9 The annual value of the house or houses, other than the house in respect of which the assessee has exercised an option under clause 8a9, shall be determined under sub!section 819 as if such house or houses had been let" (ection 1819 of Income!tax Act has defined the word Hannual value6, as >the sum for which the property mi#ht reasonably be expected to let from year to year@" The annual value is the value which any house can fetch from the market under the prevailin# circumstances such as local conditions, the demand for house, municipal valuation, type and standard of construction, rent for similar type of house in the similar type of locality, etc" :rom the explanation it should be clearly understood that the annual value does not mean the rent derived or rental value of the house but the notional rent at which the house can reasonably be let out" A property can be let out at a rent which is lower than its reasonable rent but its annual value will be its reasonable rent"

1B.

The :inance Act ..1 has chan#ed the definition of the, Annual value as under7 In case of a let out house property, section 1819 has defined this term as follows7 1" *here the house property or any part of it is let out, any sum of money received or receivable in the previous year or from year to year shall be treated as annual value" " *here any house property is let out and the rent received or receivable is in excess of the sum referred above Xin point 819Y, the sum of money so received or receivable shall be treated as annual value" 1" *here a let out house property remains vacant durin# the previous year or durin# any part of the previous year and due to vacancy the actual rent received or receivable is less than the sum of money referred above in point 819, the sum of money so received or receivable shall be treated as annual value" 2unicipal or 3ocal Taxes To determine the net annual value, all municipal or local taxes actually paid by the owner durin# the previous year are to be deducted" This means any part of municipal tax due but not paid will not be deducted and such tax belon#in# to any past or future year if actually paid durin# the current previous year shall be allowed to be deducted" 3ocal or municipal taxes include service taxes like7 8i9 8ii9 8iii9 8iv9 :ire Tax *ater Tax $onservancy Tax Cducation $ess, etc"

4ifferent Types of Dental Galues 1" Actual Dent" It is the rent actually received by the owner of the house property from the tenant" In case tenant pays composite rent i"e", rent of buildin#, plant and machinery, furniture etc" and rent is separable, actual rent is reduced by the amount of rent of plant and machinery, furniture, etc" )alance is

1B1

actual rent of house property" Any amount of local taxes paid by tenant, cost of repairs borne by tenant or any interest on advance deposit are not to be added" As per explanation attached to section 1819 for the purposes of calculatin# Annual Gale the actual rent received or receivable shall not include any amount of unreali'ed rent if it fulfils certain conditions" " Deal Dental Galue ;DDG<" In case cost of common facilities such as lift and pump maintenance, salary of common #ardener and watchman, li#htin# of common stairs and corridors and water and electricity bills 8if included in rent9 are borne by the owner and rent includes the cost of these items" (uch cost is reduced out of actual rent received and balance is called Deal Dental Galue 8D"D"G"9" In case cost of followin# facilities is borne by the owner it shall be deducted out of actual rent before comparin# it with other rental values" 8a9 8b9 8c9 8d9 8e9 3ift and pump maintenance char#es, (wimmin# pool maintenance char#es, (alary of common #ardener and watchman, 3i#htin# of common stairs and corridors *ater and electricity char#es 8only if it is

mentioned that rent includes them9" In case the cost of facilities is char#ed separately by owner i"e", over and above the rent, it is treated as a separate source of income" The expenses incurred on such facilities are deducted out of amount so collected and balance 8IncomeE3oss9 is taxable under the head, >Income from +ther (ources"@ In case house property is divided in parts and a part is let out and other part is self!occupied, the fair rental value of the house shall be proportionately increased in followin# manner7 Cxample7 2r" Q owns a house, E1rd portion of the house is let out O Ds" B,...p"m" and remainin# 1E1rd portion is self occupied for 0 months and let out for / months" $alculate its fair rental value" Dent of E1rd portion of house :air rental value of full house shall be Ds" B,...x1E P Ds" B,... p"m" Ds" 6,... p"m"

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Illustration " 2r" Q has constructed a multistory buildin# at 4elhi consistin# of B. flats" Cach flat is let out O 1,... p"m" The municipal authorities have fixed the rental value of this property as Ds" B,/.,... p"a" followin# expenses7 Ds" 3ift maintenance Fump maintenance (alary of &ardener and *atchman (wimmin# pool expenses $ompute the Annual Dental Galue for the property" (olution" $omputation of Annual Dental Galue 2unicipal Dental Galue Ds" Actual Dent 8B. x 1,... x 1 9 3ess7 3ift maintenance Fump maintenance (alary of &ardener and *atchman (wimmin# pool expenses 1 ,... -,... 1,6.. 9,... 1 ,6.. B,B0,B.. *hichever is hi#her is ADG i"e", 2unicipal Dental Galue of Ds" B,/.,... shall be taken as ADG" 1" 2unicipal Dental Galue 82DG9" :or the purposes of levyin# local taxes the local, authority i"e", 2unicipal $orporationE$ommittee etc" conducts a periodical survey of the house properties in their local limits" +n the basis of such survey the rental values are fixed which serves as the basis for levyin# tax" The rental value so fixed is called 2unicipal Dental Galue 82"D"G"9" Ds" B,-.,... Ds" B,/.,... 1 ,... p"a" -,... p"a" 1,6.. p"a" 9,... p"a" The owner bears the

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B" property can fetch"

:air Dental Galue ;:DG<" It is the rental value a house It is based on the rent prevailin# for similar type of

accommodation in same or similar type of locality" It is based on the principle that rent prevailin# in same locality for similar si'ed property is almost the same" (uch rental value is called :air Dental Galue 8:"D"G"9" /" 6" A" 8i9 2unicipal Dental Galue 8ii9 :air Dental Galue 8iii9 )" 8ii9 2unicipal Dental Galue 8ii9 :air Dental Galue 8ii9 (tandard Dent In case standard rent has been fixed, the expected rent cannot exceed standard rent" (o firstly compare 2unicipal rental value and fair rent and find out the hi#her one and the amount so calculated cannot exceed amount of standard rent but if actual rent received is more than standard rent, then actual rental value shall be treated as expected rental value" In a (upreme $ourt decision, it has been clearly laid down that the expected rent cannot exceed the standard rent but it can be less than the standard rent" Balbir Singh v/s MCD (198 ! 1 " I#$ %88(SC!& Illustration" :rom the fi#ures #iven below calculate the Cxpected Dental Galue in each case separately7 Dental value 2DG $ase A Ds" 1.,... $ase ) Ds" 1.,... 1BB $ase $ Ds" 1.,... Actual Dent Deceived" In case standard rent has been fixed *hichever hi#her shall be treated as expected rental value" (tandard Dent ;(" DC?T<" The rent fixed under Dent Cxpected Dental Galue 8CDG9" The expected rental value In case standard rent has not been fixed $ontrol Act, where so ever applicable, is called (tandard Dent" shall be determined as under7

:DG (tandard Dent

16,... ?"A"

16,... 11,...

16,... B ,...

(olution" $alculation of Cxpected Dental Galue A" (tandard Dent is not applicable 2DG :DG *hichever is hi#her is CDG )" (tandard Dent is applicable 2DG :DG *hichever is hi#her Ds" 1.,... 16,... 16,... Ds" 1.,... 16,... 16,...

This fi#ure is more than the (tandard Dent which is Ds" 11,... and the CDG cannot exceed the (tandard Dent, as such the (tandard Dent of Ds" 11,... shall be CDG" $" (tandard Dent is applicable 2DG :DG *hichever is hi#her of Ds" 16,... is CDG" The above illustration is based on the jud#ment #iven by the =on6ble (upreme $ourt of India in a case )albir (in#h vs" 2$4 ;19-/< 1/ ITD 1--8($9" Accordin# to this case CDG cannot exceed (tandard Dent but it can be less than or e5ual to the (tandard Dent except when Deal Dent is more than (tandard Dent" 4CTCD2I?ATI+? +: A??%A3 GA3%C The annual value of house property can be determined in followin# manner in different type of situations" These situations are7 A" Annual Galue of 3et out =ouse Froperty 1" =ouse property is let out for full year and there is no vacancy or unreali'ed rent" 1B/ Ds" 1.,... 16,... 16,...

This fi#ure is less than the (tandard Dent which is Ds" B ,... as such this fi#ure

" =ouse property is let out and there is vacancy7 8a9 If rent actually received or receivable is more than CDG 8b9 If rent actually received or receivable is less than CDG 1" =ouse property is let out and there is unreali'ed rent7 8a9 If rent actually received or receivable 8after deductin# unreali'ed rent as per conditions #iven9 is more than CDG 8b9 If rent actually received or receivable 8after deductin# unreali'ed rent as per conditions #iven9 is less than CDG" B" =ouse Froperty is let out, there is vacancy also and there is unreali'ed rent" )" Annual Galue of (elf!+ccupied =ouse Froperty 1" +nly one house under own occupation" " 2ore than one house under own occupation" 1" =ouse property consists of various independent units and one is under own occupation and others are let out" B" =ouse property is partly let out and partly self under own occupation" /" =ouse property is used for own business or profession" (election of Annual Dental Galue 8&ross Annual Galue9 for 3et +ut =ouse Froperty 1" =ouse property is let out for full year and there is neither vacancy nor unreali'ed rent (tep 1" $ompare 2DG with :DG and whichever is hi#her is compared with (tandard Dent and whichever is less is CDG" (tep " 8i9 If actual rent received or receivable is more than CDG 8Cxpected Dental Galue9 such rent received or receivable is Annual Dental Galue 8ADG9" 8ii9 If actual received or receivable is less than CDG 8Cxpected Dental Galue9 such CDG is Annual Dental Galue 8ADG9 and step applicable" is not

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89a property" 89b is no unreali'ed rent" 89c are not to be added back"

This rule is applicable only if

property is actually let out and not in case of deemed to be let This rule is applicable only if there Taxes paid by tenant, cost of

repairs borne by tenant, or interest on deposit made by tenant Illustration" $alculate ADG from the particulars #iven below7 2DG A" p"a" or )" p"a" (olution7 (olution A" If actual rent is Ds" 0 ,... Ds" 2DG 6.,... :DG 66,... *hichever is hi#her 66,... or (tandard Dent 69,... *hichever is less is CDG 66,... )ut in this case actual rent is 0 ,... hi#her hence Actual rent is ADG i"e" 0 ,... (olution )" If actual rent is Ds" 61,... Ds" 2DG 6.,... :DG 66,... *hichever is hi#her, or 66,... (tandard Dent 69,... *hichever is less is CDG i"e" 66,... Actual Dent 61,... Is less than CDG as such CDG is ADG 66,... If Actual Dent is Ds" 61,... p"a" and (tandard Dent is Ds" 69,... Ds" 6.,... p"a" :DG Ds" 66,... p"a" If Actual Dent is Ds" 0 ,... p"a" and (tandard Dent is Ds" 69,...

Illustration" $alculate &ross Annual Galue from followin# information7 2DG :DG (tandard Dent Actual Dent 2unicipal Taxes =ouse!A -.,... 1,..,... 0.,... 1, .,... -,... =ouse!) -.,... 1,..,... 1, .,... 9.,... -,... 8only /.M paid9

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It is assumed that both the houses were let out throu#hout the year and there was also no unreali'ed rent" (olution" $omputation of &ross Annual Galue =ouse!A -.,... 1,..,... 1,..,... 0.,... 0.,... 1, .,... 1, .,... =ouse!) -.,... 1,..,... 1,..,... 1, .,... 1,..,... 9.,... 1,..,...

2DG :DG w"e" is hi#her (tandard rent w"e" is less is Cxpected Dent Actual Dent Deceived w"e" is hi#her is &ross Annual Galue

Therefore, &ross Annual Galue To find out ?et Annual Galue, deduct municipal or local taxes actually paid by the owner durin# the previous year" &ross Annual Galue 3ess7 2unicipal Taxes ?et Annual value " 1, .,... -,... 1,1 ,... 1,..,... B,... 96,...

=ouse property is let out and there is vacancy A" If house property was vacant for full year the ADG is taken as ?I3" )" If house property was vacant for part of the year (" If rent actually received or receivable is more than CDG (tep I" $ompare 2DG with :DG and whichever is hi#her is compared with (tandard Dent and whichever is less is CDG" (tep II" If rent actually received or receivable for full year is more than CDG 8Cxpected Dental Galue9 such rent received or receivable is Annual Dental Galue 8ADG9" (tep III" (uch ADG is reduced by loss due to vacancy i"e" an amount of actual rent in proportion of vacancy" 8ii9 If rent actually received or receivable is less than CDG (tep I" $ompare 2DG with :DG and whichever is hi#her is compared with (tandard Dent and whichever is less is CDG"

1B-

(tep II" If rent actually received or receivable for full year is less than CDG 8Cxpected Dental Galue9 then CDG so calculated shall be treated as Annual Dental Galue 8ADG9" (tep III" (uch ADG is reduced by loss due to vacancy i"e" an amount of actual rent in proportion of vacancy" Illustration" $alculate ADG from the particulars #iven below7 2DG :DG Ds" 6.,... p"a" Ds" 66,... p"a" Actual Dent Ds" 0,... p"m" (tandard Dent Ds" 69,... p"a"

8a9 =ouse was vacant for full year durin# the previous year ..-!.9" 8b9 =ouse was vacant for two months durin# the previous year ..-!.9" 8c9 Actual Dent of the house is Ds" B,... p"m" and was vacant for two months" (olution A" $alculation of ADG As the house property was vacant for full year durin# previous year ..-!.9 hence its ADG is ?I3" (olution )" $alculation of ADG 2DG :DG *hichever is hi#her is taken (tandard Dent *hichever is less is CDG Actual Dent for full year It is more than CDG Actual rent is ADG i"e" 3ess loss due to vacancy ;-B,... x E1 < Annual Dental Galue 1" Ds" 6.,... or 66,... 66,... or 69,... 66,... -B,... 66,... -B,... 1B,... 0.,... (olution $" $alculation of ADG Ds" 2DG 6.,... or :DG 66,... *hichever is hi#her is taken 66,... or (tandard Dent 69,... *hichever is less is CDG i"e" 66,... Actual Dent for full year B-,... It is less than CDG 66,... (o CDG is ADG 66,... 3ess loss due to vacancy -,... ;B-,... x E1 < Annual Dental Galue /-,...

=ouse property is let out and there is unreali'ed rent 8i"9 If rent actually received or receivable 8after deductin# unreali'ed rent as per conditions #iven below9 is more than CDG7 (tep I" $ompare 2DG with :DG and whichever is hi#her is compared with (tandard Dent and whichever is less is CDG"

1B9

(tep II" If rent actually received or receivable 8after deductin# unreali'ed rent as per conditions #iven below9 is more than CDG 8Cxpected Dental Galue9 such rent received or receivable is Annual Dental Galue 8ADG9" Important Foints If followin# conditions are fulfilled, the amount of unreali'ed rent shall be deducted out of actual rent received7 8a9 That the tenancy is bonafide 8b9 That the tenant has vacated the house or steps have been taken to #et the house vacated 8c9 The tenant is not occupyin# any other house owned by the assessee and 8d9 That all efforts to reali'e the rent have failed or the assessin# officer is satisfied that there is no way to recover the rent 8e9 %nreali'ed rent of earlier years is not deductible Illustration" $alculate the ADG from the particulars #iven below7 Actual Dent :DG (olution" $alculation of ADG 2DG :DG *hichever hi#her is (tandard Dent *hichever is less is CDG is i"e" Actual rent ;Ds" -B,... less unreali'ed rent 8Ds" 0,... x Actual rent is more than CDG =ence such actual rent is ADG 8ii"9 Ds" 6.,... 66,... 66,... or 69,... 66,... 0.,... P 1B,...9< 0.,... Ds" 0,... p"m" Ds" 66,... p"a" 2DG (tandard Dent Ds" 6.,... p"a" Ds" 69,... p"a"

4urin# previous year ..-!.9 assessee could not reali'e rent for two months"

If rent actually received or receivable 8after deductin# unreali'ed rent as per conditions #iven9 is less than CDG7 (tep I" $ompare 2DG with :DG and whichever is hi#her is compared with (tandard Dent and whichever is less is CDG"

1/.

(tep II" If rent actually received or receivable 8after deductin# unreali'ed rent as per conditions #iven9 is less than CDG 8Cxpected Dental Galue9 such CDG is treated as Annual Dental Galue 8ADG9" Illustration" $alculate the ADG from the particulars #iven below7 Actual Dent :DG (olution" $alculation of ADG 2DG :DG *hichever hi#her is (tandard Dent *hichever is less is CDG i"e" Actual Dent ;Ds" 0 ,... less unreali'ed rent 8Ds" 6,... x Actual rent is less than CDG =ence such CDG is treated as ADG i"e" B" Ds" 6.,... or 66,... 66,... or 69,... 66,... 6.,... P 1 ,...9< 66,... Ds" 6,... p"m" Ds" 66,... p"a" 2DG (tandard Dent Ds" 6.,... p"a" Ds" 69,... p"a"

4urin# the previous year ..-!.9 assessee could not reali'e rent for two months"

=ouse property is let out, there is both vacancy and unreali'ed rent (tep I" (tep II" $ompare 2DG with :DG and whichever is hi#her is compared with (tandard Dent and whichever is less is CDG" If rent actually received or receivable for full year 8after deductin# unreali'ed rent as per conditions #iven9 is more than CDG 8Cxpected Dental Galue9 such rent received or receivable is Annual Dental Galue 8ADG9" (tep III" (uch ADG is reduced by an amount of actual rent in proportion of vacancy" :irstly deduct unreali'ed rent out of annual rent receivedEreceivable and compare and take the hi#her one and then deduct the loss due to vacancy and the value so arrived at shall be the #ross annual value"

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(tep IG"

If rent actually received or receivable 8after deductin# unreali'ed rent and vacancy as per conditions #ive9 is less than CDG, such CDG is ADG"

Illustration" 8a9 $alculate ADG from the particular #iven below7 Actual Dent :DG p"a" Assessee could not reali'e rent for two months and house also remained vacant for months durin# the previous year ..-!.9" 8b9 *hat difference it would make if every thin# else remainin# the same but actual rent received is Ds" 6,... p"m" (olution" (olution A" $alculation of ADG if actual Dent is Ds" 0,... p"m" 2DG :DG *hichever is hi#her is (tandard Dent *hichever is less is CDG i"e" Actual Dent received is ;Ds" -B,... less unreali'ed rent 80,... x P 1B,...9< *hichever is hi#her is ADG i"e" 0.,... It shall be reduced by rent of 1B,... vacancy period 80,... x 1B,...9 as per attached to sec" 18198c9 The balance shall be ADG P explanation /6,... Ds" 6.,... 66,... 66,... or 69,... 66,... or 0.,... (olution )" $alculation of ADG if actual Dent is Ds" 6,... p"m" 2DG :DG *hichever is hi#her is (tandard Dent *hichever is less is CDG Actual Dent ;Ds" 0 ,... less unreali'ed rent ;6,... x P1 ,...9< *hichever is hi#her is ADG 66,... It shall be reduced by rent of 1 ,... vacancy period 6,... x attached to sect" 18198c9 The balance shall be ADG P 1 ,...9 as per explanation /B,... Ds" 6.,... 66,... 66,... or 69,... 66,... or 6.,... Ds" 0,... p"m" Ds" 66,... p"a" 2DG Ds" 6.,... p"a" Ds" 69,... (tandard Dent

1/

/"

If house property is let out for a part of the year because it is either purchased or constructed durin# the previous year ..-!.9 Take all the rental values only for that period for which house property is in existence or owned by assessee durin# the previous year" $ompare them and select ADG accordin#ly"

Illustration" $ompute ADG from particulars #iven below7 2DG (tandard Dent 4ate of completion Ds" 6.,... p"a" Ds" 61,... p"a" 11!/! ..:DG Deal Dent 4ate of lettin#7 Ds" 66,... p"a" Ds" 6,... p"m" 1!-! ..-

(olution" $omputation of annual Dental Galue As the house was in existence for 1. months, hence rental values may be taken for 1. months" 2DG 6.,... x 1.E1 :DG 66,... x 1.E1 *hichever is hi#her +r (tandard Dent 61,... x 1.E1 *hichever is less is CDG +r Deal Dent for 1. months *hichever is hi#her is ADG 3ess loss due to vacancy ;two months< Ds" /.,... //,... //,... / ,/.. / ,/.. 6.,... 6.,... 1 ,... B-,...

A4A%(T2C?T( +%T +: A??%A3 DC?TA3 GA3%C :+D 3CT +%T =+%(C FD+FCDTJ 8i"9 8ii"9 (elect annual rent value as per above 4educt amount of 2unicipalElocal taxes actually paid by the owner durin# the previous year" 3ocal taxes shall include service char#es such as (anitation $ess, (ewera#e Tax or $onservancy $ess etc" levied by local authority" ?o deduction for any amount of local or municipal taxes paid by the tenant" In case property is situated outside India, local taxes levied in that country shall be allowed to be deducted" The important point to be noted is that the deduction will be allowed in case of those municipal levies only which are borne by the landlord or the owner

1/1

of the house property, i"e", if any part of municipal or local taxes is met or paid by the tenant, the same shall not be allowed to be deducted while calculatin# net annual values" It may be noted that the municipal or local taxes are allowed as deduction only in the previous year in which these taxes are actually paid" )alance amount is called ?et Annual Galue 8?AG9 Illustration" 2r" Ashok is the owner of a house which is let!out at a rent of Ds" /.. p"m" The municipal taxes are e5ual to 1.M of the rent received" $ompute the annual value of the house, if 8i"9 8ii"9 8i"9 The municipal taxes are paid by 2r" Ashok, and V of the municipal taxes are borne by the tenant" (olution" Annual Dental Galue ;O Ds" /.. p"m"< 3ess7 2unicipal Taxes O 1.M of rent received ?et Annual Galue 8ii"9 Annual Dental Galue O Ds" /.. p"m" 3ess7 2unicipal TaxesN/.M paid by owner ?et Annual Galue Ds" 6,... 6.. /,B.. 6,... 1.. /,0..

Illustration" :rom the particulars #iven below calculate net annual value for the previous year endin# on 11!1!.9" A 2unicipal Dental value ;4ate of completion is 1!0! ..0< Actual Dent received Taxes levied by local authority and paid by owner 8a9 =ouse Tax 8b9 (anitation $ess 4ate of completion 1!6! ..Dent Deceived O Ds"B,... p"m" 2unicipal Dental value 2unicipal Taxes are 1.M of 2DG =e paid /.M of taxes durin# the year ..-!.9" Ds" 6.,... p"a" Ds" 0 ,... p"a" Ds" 6,... p"a" Ds" 1,... p"a" Ds" B.,... Ds" 16,... p"a"

(olution" $omputation of ?et Annual Galue

1/B

:or full year as house was completed in ..0!.2unicipal Dental Galue Actual Dent Deceived *hichever is hi#her is ADG 3ess local taxes7 8i9 =ouse Tax 8ii9 (anitation $ess 4ate of completion 1!6! ..- ;:or 1. months< 2unicipal Dental Galue ;1. months< Annual Dent ;1. months< *hichever is hi#her is ADG" =ence, ADG is 3ess 2unicipal taxes 8actually paid by owner9 /.M of 81,6.. x 1.E1 9 ?et Annual Galue

Ds" 6.,... 0 ,... 6,... 1,... 1.,... B.,...

Ds" 0 ,... 0,... 6/,...

B.,... 1,/.. 1-,/..

(election of Annual Dental Galue for (elf!+ccupied =ouse Froperty ("3 (""3 ("""3 +nly one =ouse under own +ccupation" Annual value is taken as nil 2ore than one house under own occupation" Annual value of one house is taken as ?I3 and other houseEhouses are deemed to be let" =ouse Froperty consists of various independent units and one is under own occupation and others are let out" Annual value of one unit is taken as ?I3 and other unitEunits are treated as let out" ("93 If house property is partly let out and partly self!occupied, it is to be treated as7 8a9 If units are inseparable and it is treated as one house then no benefit of self!occupation shall be allowed 8b9 If units are separable, each unit or part is to be treated as a separate house and it shall #et respective treatment" (93 =ouse property is let out for part of the year and under own occupation for part of the year" *hole property is treated as let out house property and no benefit of self!occupancy shall be allowed" )ut actual rent is taken only for number of months house property is actually let out" As such it #ets the same treatment as is for unreali'ed rent"

1//

Illustration"

2r" Q owns a house at $handi#arh"

This house property is used in

followin# manner7 1E1rd of the house is used for own business, 1E1rd of the house is used for own residence 1E1rd of the house is used by a tenant to whom it is let out O Ds" 1,... p"m" and it was self!occupied for one month durin# the previous year" The municipal rental value of the house is Ds" 96,... p"a" on which municipality levies 1.M tax" These taxes are paid by the occupants" $ompute net annual value of the house property for the previous year ..-!.9 if each portion is an independent unit" (olution" $omputation of net annual value Ds" %nit A" 1E1rd portion used for own business!?AG is %nit )" 1E1rd portion used for own residence!?AG is %nit $" 1E1rd portion let out for 11 months Z self!occupied for 1 month Actual rent received for 11 months 2DG ;96,... x 1E1< *hichever is hi#her is ADG i"e" 3ess municipal taxes paid by the owner ?et Annual Galue of let out portion ?et Annual value of house property months< (9"3 =ouse property is used for own business or profession" It is not treated under the head house property and ?AG is taken as ?I3" ?o rent can be debited under the head Frofits and &ains" A" (elf!occupied house whose net annual value has been reduced to nil 8i"9 3oan taken for repair or alteration or renovation of the house +nly one deduction of interest on loan taken to repair or renovate the house is allowed" Actual interest paid or payable durin# the previous year or Ds" 1.,... p"a" whichever is less is allowed as deduction" 3oss of self!occupied 11,... 1 ,... 11,... ?I3 11,... 11,... Ds" ?I3 ?I3

;In the above case rent is taken for 11 months as actual rent reali'ed is only for 11

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house shall be set off from income of any other head and unadjusted portion shall be allowed to be carried forward" 8ii"9 3oan taken for ac5uisition or construction of the house (# =ouse is completed or loan is taken before 1!B!1999" In case a loan is taken for ac5uisition or construction of the property before 1!B!1999 or it is completed before 1!B!1999 interest on such loan shall be allowed upto Actual interest paid or payable durin# the previous year R 1E/th of pre!construction interest or Ds" 1.,... p"a" whichever is less" ($ =ouse is completed on or after 1!B!1999 8construction may have started before 1"B"19999 and loan is also taken on or after 1!B!1999" *here the property is ac5uired or constructed with borrowed capital on or after the 1st day of April, 1999 and such ac5uisition or construction is completed within three years from the end of financial year in which capital is borrowed, the deduction of interest on loan shall be allowed upto actual interest paid or payable durin# the previous year R 1E/th of pre!construction interest 8to be explained later under let out house property9 or Ds" 1,/.,... whichever is less" To claim this deduction the assessee shall have to furnish a certificate from loan #ivin# authority specifyin# the amount of interest payable by the assessee" In case loan is taken for repairs, renovation etc" or house is not ac5uired or completed within 1 years from the end of the financial year in which amount was borrowed, a deduction upto Ds" 1.,... only shall be allowed" Illustration" 2r" (hama Deddy started the construction of his house on 1!6!199- and for this he took a loan of Ds" ,..,... O 11"/M from )ank" =e took another loan of rs" 0,..,... O 11M p"a" on 1!B! ..6 to complete the house" The construction was

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completed on 1.!11! ..- and was self!occupied from 1!1 ! ..-" $ompute his income under the head house property for the assessment year ..9!1." (olution" $omputation of Income from (elf!occupied =ouse Ds" ?et Annual Galue 4eduction uEs B Interest on loan7 :or the previous year ..-!.97 11"/M of Ds" ,..,... 1E/th of pre!construction interest 199-!1999 1999! ... ...!.1 ..1!. .. !.1 ..1!.B ..B!./ ../!.6 ..6!.0 ..0!.Total 1E/th of F$I ;1E/ of ,6/,/..< Total interest )ut restricted to maximum Add7 11M of new loan of Ds" 0,..,... ;1!B! ..- to 11!1! ..9< Add 1E/th of pre construction interest ;1E/th of interest for ..6!.0 Ds"91,... R for ..0!.Ds" 91,...< Total interest 16,B.. 1, 0,B.. 1,/0,B.. 91,... 11"/M x ,..,... x 1.E1 11"/M x ,..,... 11"/M x ,..,... 11"/M x ,..,... 11"/M x ,..,... 11"/M x ,..,... 11"/M x ,..,... 11"/M x ,..,... 11"/M x ,..,... 11"/M x ,..,... Ds" ,/.. 0,... 0,... 0,... 0,... 0,... 0,... 0,... 0,... 0,... ,6/,/.. /1,1.. -.,1.. 1.,... 0,... ?I3 Ds"

1/-

)ut restricted to maximum of 3oss from self!occupied house

1,/.,... 1,/.,...

This loss can be adjusted from income from any other head" If it still remains unadjusted it can be carried forward for - succeedin# previous years to be set off from Income under the head =ouse Froperty" )" In case of all other house properties 1" (tandard 4eduction 1.M of net annual value is allowed as deduction every year irrespective of any expenditure" " Interest on loan 8a9 3oan must be taken to repair, construct, renovate or purchase the house" 8b9 Interest on mort#a#e is not allowed unless purpose of loan is connected with house" 8c9 Interest for the previous year ..0!.- is fully allowed" 8d9 Interest for the period ;no limit of time< prior to the completion of house is called" Fre!$onstruction Interest 8F$I9" It is allowed to be deducted over a period of / years i"e", 1E/th every year" ?o deduction after / years" In case interest is paid to a non!resident who does not pay tax in India deduction re#ardin# interest will not be allowed without T4(" >Amounts not deductible from income from house property uEs / If interest on loan is paid to a non!resident deduction shall be allowed only if tax is deducted at source" 8e9 Interest on delayed payment of interest is not allowed" Treatment of unreali'ed rent recovered ;up to assessment year ..1!. < 1" If amount of unreali'ed rent recovered is less than or e5ual to an amount, which was disallowed earlier, it shall not be taxable" " If amount unreali'ed rent recovered is more than the amount which was disallowed earlier, excess of amount reali'ed over amount disallowed earlier shall be deemed as income from house property"

1/9

1" ?o deduction shall be allowed out of such deemed income" B" (uch amount shall be taxable under the head HIncome from =ouse Froperty6 even if the assessee does not own that house in the current previous year" Illustration" In the previous year ...!.1, there was unreali'ed rent of Ds" 1.,... but the owner could claim a deduction of Ds" .,... only as the income from house property was only Ds" .,..." :ind out the deemed income from house property uEs /A in each case separately if the assessee recovers7 $ase I" Ds" -,... $ase II" Ds" 1/,... $ase III" Ds" 1.,... (olution" $omputation of deemed income from house property uEs /A %nrealised Dent Ds" 1.,... 1.,... 1.,... $laimed deduction Ds" .,... .,... .,... as Demainin# unadjusted Ds" 1.,... 1.,... 1.,... Decovered Ds" -,... 1/,... 1.,... Taxable Ds" ?I3 /,... .,...

$ase I $ase II $ase III

The amount of unreali'ed rent recovered is taxable only if assessee had claimed and had been allowed deduction in case amount recovered is less than the amount of deduction, it is exempted from tax" $ase I" Amount of unreali'ed rent recovered is less than the amount of deduction allowed hence it is fully exempted" $ase II" The amount of unreali'ed rent recovered is more than the amount of deduction allowed hence taxable amount as deemed income from house property is Ds" 1/,... less Ds" 1.,... P Ds" /,... $ase III" The amount of unreali'ed rent recovered is more than the amount of deduction allowed hence taxable amount as deemed income from house property is rs" 1.,... less Ds" 1.,... P Ds" .,..." Treatment of unreali'ed rent recovered ;:rom AEJ .. !.1 onwards< 16.

It shall be deemed as income of the year in which recovered" *hile calculatin# deemed income from houses property for unreali'ed rent recovered, it shall be seen that on how much amount the assessee had saved tax in that previous year in which deduction was claimed" A comparison will be made between the amount of rental value on which tax has been paid and the rental value on which he would have paid tax, had there been no unreali'ed rent" Illustration" $alculate the taxable amount of unreali'ed rent recovered in followin# case7 FEJ ..0!.2r" Q 1, .,... 1,16,... 1,1.,... 1,6.,... .,... ?I3 FEJ ..-!.9 2r" Q 1, .,... 1,16,... 1,1.,... 1,6.,... ?I3 1-,...

2DG :DG (tandard Dent Annual Dent %nrealised Dent %nrealised Dent Decovered (olution" 2r" Q assessment year ..-!.9 2DG :DG *hichever is hi#her +r (tandard Dent *hichever is less +r Annual Dent!unrealised

2r" J 1, .,... 1,16,... 1, /,... 1,1/,... .,... ?I3

2r" J 1, .,... 1,16,... 1, /,... 1,1/,... ?I3 1-,...

Ds" 1, .,... 1,16,... 1,16,... 1,1.,... 1,1.,... rent 1,B.,...

2r" Q assessment year ..9!1. 4eemed income from =ouse property +ut of amount of unreali'ed rent recovered he shall pay tax on Ds" 1-,... as he has saved tax on full amount of %nreali'ed rent"

;1,6.,... U .,...< *hichever is hi#her is ADG As such he will pay tax on ADG of Ds" 1,B.,... =ad there been no unreali'ed rent he would have paid tax on Ds" 1,6.,... and as such he has saved tax on full amount of unreali'ed rent of Ds" .,..." 2r" J assessment year ..-!.9 Ds" 2r" J assessment year ..9!1.

161

2DG :DG *hichever is hi#her +r (tandard Dent *hichever is less is CDG +r Annual Dent!unrealised

1, .,... 1,16,... 1,16,... 1, /,... 1, /,... rent 1,1/,...

4eemed

income

from

=ouse

property +ut of amount of unreali'ed rent Decovered he shall pay tax on Ds" -,... only as he has saved tax on +nly Ds" 1.,... and had paid tax

;1,1/,... U .,...< +n Ds" 1.,..." *hichever is hi#her is ADG 1, /,... As such he will pay tax on ADG of Ds" 1, /,... =ad there been no unreali'ed rent he would have paid tax on Ds" 1,1/,... and as such he has saved tax on Ds" 1.,... ;1,1/,... U 1, /,...<" +ut of unreali'ed rent of Ds" .,... he has paid tax on Ds" 1.,..." (pecial provision for arrears of rent received ;(ection /)< In case any arrears of rent of any earlier years are recovered these are deemed as income from house property after allowin# 1.M as (tandard deduction" *hile calculatin# deemed income from house property for arrears of rent, it shall be seen that on how much amount the assessee had saved tax in that previous year to which arrears the related" A comparison will be made between the amount of rental value on which tax has been paid and the rental value on which he would have paid tax, had he received full rent in that very year" Illustration" 2r" & has #iven his premises on hire from 1!B! ..B to a company for its office" =e submits the followin# particulars" Ds" 2DG :DG (tandard rent Actual rent 1,/.,... 1,66,... 1,6.,... 1,/6,... 2unicipal taxes Interest on loan for purchase of house ,... Ds" 1 ,... p"a"

As per a#reement rent increases to Ds" 1B,... p"m" from 1!1.! ..0" )ut amount of increased rent is paid in 2ay ..-" $ompute his income for the previous year ..-!.9" (olution" $omputation of income from house property for the assessment year ..9!1.

16

2DG 1,/.,... :DG 1,66,... *hichever is hi#her +r standard rent *hichever is less is CDG +r actual rent ;1B,...x1 < *hichever is hi#her is ADG 3ess 2unicipal Taxes ?et Annual Galue 4eductions uEs B7 (tandard deduction7 1.M of ?"A"G" Interest on loan for purchase of house Income from house property 4eemed income from house property Arrears of rent from 1!1.! ..0 to 11!1! ..- ;(ee note 1< 3ess 1.M standard deduction Income under the head house property

1,66,... 1,6.,... 1,6.,... 1,6-,... 1,6-,... 1 ,... 1,/6,... B6,-.. ,... ,... 6.. 1,B.. --,6.. 6-,-.. -0, ..

?ote 1" Frevious year ..0!.-7 if he had received increased rent in that very year7 Ds" Ds" Ds" 2DG 1,/.,... :DG 1,66,... *hichever is hi#her 1,66,... +r (tandard Dent 1,6.,... *hichever is less is CDG 1,6.,... +r Actual Dent ;11,... x 6 R 1B,... x 6< 1,6 ,... *hichever is hi#her is ADG 1,6 ,... Frevious year ..0!.-7 if he had not received increased rent in that very year7 Ds" Ds" Ds" 2DG 1,/.,... :DG 1,66,... *hichever is hi#her 1,66,... +r (tandard Dent 1,6.,... *hichever is less is CDG 1,6.,... +r Actual Dent ;11,... x 1 < 1,/6,... *hichever is hi#her is ADG 1,6.,... As such he has saved tax only on Ds" ,..., hence in the previous year ..-!.9 he shall pay tax on only Ds" ,..."

161

Froperty owner by co!owners ;(ection 6< If share of co!owners is determinate, the income of such house property is calculated as one house and income is divided amon#st the co!owners" They shall be entitled to relief uEs 18 9 as if they are individually owners of such property" Illustration" A, ) and $ are three friends ownin# e5ually a house property consistin# of six identical units" It was constructed on 1st Auly ../" +ne unit is self!occupied by each one of them for their residence" The remainin# three units are let out on a monthly rent of Ds" 0,/.. per unit" The municipal value of house property is Ds" /,..,... and municipal tax is Ds" 1, /,... 8Ds" /,... due9" The other expenses were as follows7 8i9 $ollection and repair char#es 8ii9 Insurance premium 8iii9 Interest on loan taken for construction of house Ds" 0,/.. Ds"1/,... Ds" 1,6 ,/..

+ne of the let out units remained vacant for two months" 2r" ) could not occupy his unit as he was transferred to some other city" =e does not own any other house property" The other taxable incomes of A, ) and $ are Ds" 1,/.,..., Ds" ,..,... and Ds" 1,..,... respectively" $ompute the taxable income under the head income from house property for the assessment year ..9!1." (olution" $omputation of house property income of A, ) and $ for AEJ ..9!1. Three persons own this house property and they are to be treated as co!owners" =alf of the property consistin# of three units is let out and other three units are self occupied by them" As such income for half let out property shall be computed as one house and then the income shall be distributed but other half of three units shall be computed separately as each co!owner can claim benefit of self!occupation" 3et out three units 2DG of half property ;/.M of property< ;/.M of Ds" Ds" ,/.,... ,0.,... ,0.,... 1/,... Ds"

/,..,...< Actual Dent for three units ;0,/.. x 1 x 1 < *hichever is hi#her 3ess loss due to vacancy ;1 unit x months x

16B

0,/..< Actual Dental Galue 3ess amount of municipal taxes!actually paid ?et Annual Galue 4eductions uEs B (tandard 4eduction 1.M of ?AG Interest on loan Income from let out A ?I3 8!9 0,.-1 8R9 .,0/. ) ?I3 8!9 0,.-1 8R9 .,0/. ;/.M 1,6 ,/..< of Ds"

,//,... /.,... ,./,... 61,/.. -1, /. 1,B ,0/. 6 , /. $ ?I3 8!9 0,.-1 8R9 .,0/.

property (elf!occupied three units Annual value 3ess interest on loan ;-1, /. x 1E1 each< (hare of income from let out property ;6 , /. x 1E1< 3oss from house property +ther incomes Total income Aoint Cxpenses whichever is #iven in this order of preference" 3oss from =ouse Froperty

8!96,111 1,/.,... 1,B1,660

8!96,111 ,..,... 1,91,660

8!96,111 1,..,... ,91,660

4ivide the expenses in the ratio of 2DG or 2unicipal taxes or :ire Insurance Fremium

This loss can be set off from any income of the same year" *ith effect from assessment year 1999! ... any loss under the head >=ouse Froperty@ whether from let out or self occupied house which remains unadjusted, can be carried forward for - succeedin# previous years to be set off from Income under the head >=ouse Froperty@ only" ?e#ative Annual Galue This situation is possible only when amount of municipal taxes actually paid by the owner are more than Annual Dental Galue" In such case only one deduction of interest on loan is allowed as per above rules" =ence there will be loss from such house property"

16/

Illustration" 2DG of the residential house is Ds" B,... and actual rent is Ds" ,/.. p"m" 4urin# the previous year ..-!.9 house was vacant for two months" The 2unicipal Taxes are O 1.M of 2DG" 4urin# the year owner paid Ds" 1.,... as arrears of 2unicipal Taxes" Interest on loan taken for the construction of house payable to his employer is Ds" 16,..." $ompute income from house property" (olution" $omputation of income from house property 2DG Actual Dent ; ,/.. x 1 < *hichever is hi#her is ADG 3ess loss due to vacancy Annual Dental Galue 3ess amount of municipal taxes actually paid by the owner durin# the previous year 7 for ..-!.9 Amount of arrears paid durin# the year Annual Galue 8?e#ative9 4eduction uEs B7 (tandard deduction 1.M of ?AG Interest on loan 3oss from =ouse Froperty Ds" B,... 1.,... 1.,... /,... /,... ,B.. 1.,... 1 ,B.. 8!90,B.. ?I3 16,... 8!916,... 1,B..

Illustration" $ompute the total income of 2r" Deddy from the particulars #iven below for the previous years ..-!.9 and ..9!1.7 =ouse Froperty (elf occupied house Interest on loan /,... 3et out house 3oss due to interest and 16,... other expenses Income from other sources Frevious year 8 ..-!.99 Ds" Frevious year 8 ..9!1.9 Ds" /,... ?I3 8R911,...

8R911,...

(olution" $omputation of total income Assessment year ..9!1. 8Frevious year ..-!.99 =ouse Froperty (elf occupied =ouse Interest on 3oan 166 Ds" /,... Ds"

3et out house 3oss due to interest on 3oan and other expenses 16,... 3oss under the head =ouse Froperty ;To be set off from any other head< +ther (ources Income from other sources Total Income 3oss of Ds" 1.,... under the head house property shall be carried forward" Assessment year .1.!11 8Frevious year ..9!1.9 =ouse Froperty 3oss from (elf occupied =ouse +ther (ources Income Total Income

8!9B1,... 11,... ?I3

Ds" 8!9/,... 8R911,... 6,...

?ote7 )E: loss from previous year ..-!.9 cannot be set off as assessee does not have any income under the head H=ouse Froperty6" It is allowed to be carried forward" Illustration" 2r" ) owns a house property at $ochin" It consists of 1 independent units and information about the property is #iven below7 %?IT 1 7 +wn residence %?IT 7 3et out %?IT 1 7 +wn business 2DG :DG (tandard Dent Dent %nrealised rent Depairs Insurance Interest on money borrowed for purchase of property 2unicipal Taxes 4ate of completion (olution" Ds" 1, .,... p"a" Ds" 1,1 ,... p"a" Ds" 1,.-,... p"a" Ds" 1,/.. p"a" for three months Ds" 1.,... Ds" ,... Ds" 96,... Ds" 1B,B.. 1!11! ..1

160

$ompute income from house property %nit 17 +wn residence Annual Galue is Interest on loan ;96,...x1E1< or Ds"1.,... whichever is less 3oss from self occupied unit %nit 7 3et out 2DG71, .,... p"a" x 1E1 :DG 7 1,1 ,... p"a" x 1E1 *hichever is hi#her +D (tandard Dent 1,.-,... p"a" x 1E1 *hichever is less is CDG +D Actual rent less unreali'ed rent ;B ,...!1.,/..< *hichever is hi#her is ADG 3ess7 2unicipal Taxes ;1B,B.. x 1E1< ?et Annual Galue 4eductions uEs B7 (tandard 4eduction O 1.M of AG;1.M of 11, ..< Interest on loan ;96,... x 1E1< 3oss from 3et out unit %nit 17 +wn business Annaul value is 3oss under the head house property

Ds" ?I3 1.,... !1.,... B.,... BB,... BB,... 16,... 16,... 11,/.. 16,... B,-.. 11, .. 9,16. 1 ,... B1,16. !1.,16. ?I3 !B.,16.

?ote7 819 It is assumed that all the three units are independent units and thus are bein# treated as separate houses" 8 9 Interest on loan taken to construct the house!bein# used in own business i"e", 1E1rd of 96,... shall be treated as business expenditure" Illustration" :ind out the taxable income from property of (ri &yan Farkash of Amritsar from the followin# particulars7 =e owns three houses, the municipal valuation of which is Ds"1 ,..., Ds" B,... and Ds" 1,... respectively" The followin# are further details about three houses7 8a9 The first house built in ..., has been let out on a monthly rent of Ds" ,/.." The expenses in connection with this house were7 Interest on 2ort#a#e Ds" 1, .., 3and Devenue Ds" /., :ire Insurance Fremium Ds" 0/., Interest on loan for the construction of the house Ds" 1,6.., 2unicipal Taxes Ds" 1, .." The house remained vacant for two months, %nrealised rent of the current year amounts to Ds" /,..." The Assessin# +fficer has been satisfied about this unreali'ed rent"

16-

8b9 The second house was built in 199B and is used for owner6s residential purposes" In connection with this house Ds" 1.. were spent on repairs and Ds" 1.. were paid as :ire Insurance Fremium" The house remained vacant for three months as the owner had to stay in )ombay in a rented house in connection with his profession" 8c9 The construction of third house was completed on 1.th Aune ../ and from 1st Auly ../ it was let out for residential purposes on a rent of Ds" 1,/.. p"m" 2unicipal Tax Ds" ,1.. and interest on loan Ds" 1B,... were paid durin# the year ..-!.9" =is income from other sources amounted to Ds" 0 ,..." (olution" $omputation of income from house property of (ri &yan Frakash of Amritsar 1st =ouse7 2DG Deal Dent less unreali'ed rent;1.,...!/,...< *hichever is hi#her 3ess7 3oss due to vacancy Annual Dental Galue 3ess 2unicipal Taxes ?et Annual Galue 4eductions uEs B7 (tandard 4eduction7 1.M of ?et Annual Galue Interest on loan taken for construction of the house Income from 1st house rd 1 =ouse7 2unicipal Dental Galue is CDG +r Actual Dent Deceived As CDG is hi#her than actual rent hence CDG is ADG 3ess7 2unicipal TAxes ?et Annual Galue 4eductions uEs B7 (tandard 4eduction7 1.M of Annual Galue /,60. Interest on loan 8for construction9 1B,... rd 3oss from 1 house nd =ouse7 (elf occupied Annual Galue of such house is taken as ?il for the period it is actually self!occupied uEs 18 98a9 and it is taken as ?il for the period it could not be Ds" 1 ,... /,... Ds" /,... /,... .,... 1, .. 1-,-.. /,6B. 1,6.. 9, B. 9,/6. 1,... 1-,... 1,... ,1.. 1-,9.. 19,60. 8!900. ?I3 Ds"

169

occupied as owner had to stay in a hired house at 2umbai due to his profession uEs 18 98b9 Income under the head =ouse Froperty -,09.

Illustration" A is the owner of B houses" +ne house is let to a tenant for Ds" 1,... p"a" The second house, the municipal valuation of which is Ds" B,/.. p"a" is in his own occupation" The third house remained vacant throu#hout the whole year as it was not in rentable condition" The fourth house, the municipal valuation of which is Ds" 6,... is used by A for his business" =is expenses in respect of these houses are as follows7 Interest on loan taken to repair the residential house :ire Insurance premium for 1st, nd and Bth house $ollection char#es &round rent in respect of nd house The first house, which is let, remained vacant for two months, $alculate A6s income from house property" (olution" $omputation of =ouse Froperty income of 2r" A $omputation of =ouse Froperty income of 2r" A 1st =ouse7 3et out Annual Dental Galue less vacancy ;1,...! E1 of 1,...< 3ess7 2unicipal Taxes ?et Annual Galue 4eductions uEs B7 (tandard 4eduction7 1.M of ?et Annual Galue Income from 1st house nd house7 (elf!occupied Annual value is taken as 3ess7 Interest as 3oan 3oss from self!occupied house rd 1 =ouse7 This house was not let out for full year as such Annual value of this house is taken as ?il Bth =ouse7 This house is bein# used for assessee6s business" (o no income will be taken under this head of HIncome from =ouse Froperty6" Its income and expenses are treated under the business head of income" This 10. Ds" ,/.. ?I3 ,/.. 0/. 1,0/. ?I3 B.. 8!9B.. ?I3 ?I3 Ds" Ds" Ds" B.. 1,B1. 1/. ..

house is outside the purview of this head of income Income from =ouse Froperty

1,1/.

Illustration" 2r" F is the owner of a house property in Kanpur" It has been let out for Ds" 9.,..." The tax payable by the owner comes to Ds" -,B.. on municipal valuation of Ds" -B,... but the landlord has taken an a#reement from the tenant statin# that the tenant would pay tax direct to the municipality" The landlord, however, bears the followin# expenses on tenant6s amenities7 *ater char#es 8as per a#reement9 3ift 2aintenance (alary of &ardener 3i#htin# of (tairs The landlord claims the followin# deductions7 Depairs 3and Devenue $ollection $har#es 3e#al char#es incurred on purchase of land on which house property is B,..." $ompute the taxable income from house property" (olution" $omputation of Income from =ouse Froperty of 2r" F Actual rental value 4educt7 Cxpenses met by landlord on amenities provided to the tenants 1" *ater char#es " 3ift 2aintenance 1" (alary of &ardener B" 3i#htin# of (tairs Annual Dental value 82DG Ds" -B,... or Deal Dent Ds" -6,... w"e" is hi#her9 3ess7 2unicipal Taxes ?et A"G" 4eductions uEs B7 (tandard 4eduction7 1.M of ?et Annual Galue Income from =ouse Ds" Ds" 9.,... Ds" 1,... Ds" 1,... Ds" 1, .. Ds" -.. Ds" 1.,... Ds" 1,... Ds" ,... situated Ds"

1,... 1,... 1, .. -..

B,... -6,... -6,... ?I3 -6,... /,-.. 6., ..

Illustration" A house was completed on April 1, ..- and followin# information is available about this house7

101

2unicipal Galue of the =ouse Ds" 1.,... p"a" :air Dental Galue of the =ouse Ds" 1 ,... p"a" Actual Dent Ds" B,... p"m" 2unicipal Taxes Ds" 6,... p"a" 3et out for the period 1!B! ..- to 11!1 ! ..- and self occupied from 1!1! ..9 onwards" :ire Insurance Fremium Ds" 1,6.. 3and Devenue Ds" 6,... Interest on 3oan for the period 8a9 1!B! ../ to 11!1! ..Ds" B/,... 8b9 1!B! ..- to 11!1! ..9 Ds"1/,... $alculate income from house property for the previous year endin# on 11!1! ..9" (olution" $omputation of Income from =ouse Froperty ;Treated as let out house no benefit of self occupancy< 2unicipal Dent Galue :air Dental Galue *hichever is hi#her is ADG Actual Dental Galue ;Ds" B,... x 9 months< w"e" is hi#her is #ross annual value 3ess7 2unicipal Taxes ?et Annual Galue 4eductions uEs B7 (tandard 4eduction7 1.M of ?et Annual Galue Interest on 3oan for the year ..-!.9 F$I7 Interest on 3oan for the period 1!B! ../ to 11!1! ..1E/th of F$I 8B/,... x 1E/9 Ds" 1.,... 1 ,... 1 ,... 16,... Ds"

16,... 6,... 1.,... 9,... 1/,... 9,...

11,... 3oss from ="F" 1,... ?ote7 In case a house is letout for the part of year and self!occupied for remainin# part of the year, such house is to be treated as fully let out house and benefit of self!occupancy shall not be allowed" Actual rent received is to be taken for the actual number of months house is let!out" Illustration" :rom the particulars #iven below compute income from house property which consists of two independent units havin# 1E1rd and E1rd area7 4ate of $ompletion 2unicipal Dental Galue :air Dental value (elf!occupied 1!11! ..1 Ds" 96,... Ds" -B,... E1 portion 10

3et!out 2unicipal Taxes :ire Insurance Fremium &round Dent Interest on 3oan

1E1 portion from 1!B! ..- to 11!-! ..- O Ds" 0, .. p"m" and self!occupied from 1!9! ..- onwards" Ds" 6,... p"a" Ds" ,... p"a" Ds" B,... p"a" Ds" 0,/..

(olution" $omputation of =ouse Froperty Income As each portion is an independent unit, the income shall be computed in followin# manner7 A E1rd house 8%nit!19 under own occupation ?et Annual Galue 4eduction re#ardin# interest on loan taken ; E1rd of Ds" 0,/..< 3oss from self!occupied unit 1E1rd house 8%nit! 9 let out ;?o benefit of self!occupation< 2DG 896,... x 1E19 Actual rent received 8for the period it is actually let out9 +r :DG ;1E1rd of Ds"-B,...< *hichever is hi#her is ADG 3ess municipal taxes ;1E1rd of Ds" 6,...< ?et Annual Galue 4eductions uEs B (tandard 4eduction7 1.M of ?AG Interest on loan ;1E1rd of Ds" 0,/..< Income from let out unit Income from house property Ds" Ds" ?I3 /,... 8!9/,... 1 ,... 16,... -,... 16,... ,... 1B,... 1., .. ,/.. 1 ,0.. 1,1.. 16,1.. Ds"

Illustration" 2r" Da#hav owns a residential house property" It has two e5ual residential units!%nit!I and %nit!II" *hile %nit!I is self occupied by Da#hav for his residential purpose, %nit!II is let out 8rent bein#s Ds" 6,... per month, rent of two months could not be recovered9" 2unicipal value of the property is Ds" 1,1.,..., standard rent is Ds" 1, /,... and fair rent is Ds" 1,B.,..." 2unicipal Tax is imposed O 1/M which is paid by Da#hav, +ther expenses for the previous year 101 ..-!.9 bein# repairs Ds" -..,

insurance Ds" 1,/.., interest on capital 8borrowed durin# 199-9 for constructin# the property7 Ds" 61,..." :ind the house property income of Da#hav for the assessment year ..9!1." (olution" $omputation of house property income of 2r" Da#hav for the AEJ ..9!1." ?ote" Two e5ual residential units of a house are treated as two separate houses" %nit!II" 3et out 2unicipal Galue of property Ds" 1,1.,... x 1E :air rent of property Ds" 1,B.,... x V w"e" is hi#her (tandard rent of property P 1, /,... x V It cannot exceed standard rent, value to be taken Actual rent receivable Ds" 6,... p"m" 3ess unreali'ed rent for months 6/,... 0.,... 0.,... 6 ,/.. 6 ,/.. 0 ,... 1 ,... 6 ,/.. 9,0/. / ,0/.

6.,... (tandard rent or Actual rent received, w"e" is hi#her is &ross Annual Galue 3ess7 2unicipal Taxes O 1/M of 2"G" 8i"e" 1/M of 6/,...9 ?et Annual Galue 4eductions uEs B7 (tandard deduction 1.M of ?"A"G" 1/,- / Interest on borrowed money U V of 61,... 11,/..

Income from let out unit %nit!I" (elf occupied ?et Annual Galue is treated as ?I3 4eductions uEs B Interest on borrowed money V of 61,... 11,/.. )ut restricted to 1.,... 3oss from self!occupied house !1.,... 3oss from house property 8!9 B,/0/ Illustration" 2r" (urinder Kumar owns a house at 4elhi" 4urin# the previous year ..-! .9, 1EBth portion of the house is occupied for self!residence for full year and 1EB th portion is let out for residential purposes from 1"B" ..- to 11!1 ! ..- on a rent of Ds" 0.. p"m" :rom 1!1! ..9 this portion was used for own residency by him" 2unicipal valuation of the entire house is Ds" .,... and fair rental value is Ds" B,..." Cxpenses incurred in respect of the house property were7 2unicipal Taxes Ds" 6.,..., Depairs Ds" ,..., :ire insurance premium Ds" 1,/.., 3and Devenue Ds" B,... and &round Dent Ds" .." These expenses were paid durin# the year"

B0,1 / /,B /

10B

A loan of Ds" 6.,... was taken on 1!B! ../ O 1/M p"a" for the construction of the house which was completed on 11!1! ..6" 3oan is still outstandin#" :ind out his income from house property for the assessment year ..9!1." (olution" $omputation of house property income of 2r" (urinder Kumar for the AEJ ..9!1. (elf!occupied U 1EBth portion ?et Annual Galue is treated as 4eduction uEs B Interest on borrowed money 6.,... ' 1/ 1 ' 1.. B /,... 6,... 6,1.. 6,1.. 1,/.. B,-.. 1,BB. , /. 1,69. Income from let out portion 3oss from house property R1,11. !/,6B. ?I3 6,0/. 8!96,0/.

3oss from self!occupied portion 3et out U 1EBth portion 2unicipal Galuation P .,... x [ P :air Dental Galue P B,... x [ P Actual rent received ;1!B!.- U11!1 !.-< 0.. p"m" x 9 w"e" is hi#her is #ross annual value 3ess7 2unicipal Taxes!1EBth of 6,... ?et Annual Galue 4eductions uEs B (tandard deduction!1.M of B,-.. Interest on borrowed money 6.,... ' 1/ 1 ' 1.. B

Illustration" :ollowin# are the particulars of two house properties owned by 2r" (wami" 2unicipal Galuation :air Dent (tandard Dent Actual Dent received (elf occupied 3et out 2unicipal Taxes due =ouse ! I 96,... --,... 9.,... 9,... p"m" 1!B!.-!!!1.!11!.1!1 !.-!!!11!1!.9 6,... 10/ =ouse ! II 9.,... 96,... 1,.-,... 1.,... p"m" 1!1 !.-!!!11!1!.9 1!B!.-!!!1.!11!.-,...

Faid Interest on borrowed 2oney

1,... 1.,...

?I3 B ,...

3oan taken to construct =ouse!II is still outstandin#" 3oan was taken in 1990" :ind out 2r" (wami6s income from house property" (olution" $omputation of 2r" (wami6s income from house property for the AEJ ..9!1. *here a house property is self!occupied for a part of the year and let out for remainin# part of the year, the benefit of self!occupancy uEs 18 98a9 is not available and the income of such a house property will be computed as if the house is let out" =ouse U I 2unicipal Galuation :air Dental Galue w"e" is hi#her (tandard rent w"e" is less is taken Actual rent received 1!1 !.-!!!11!1!.9 for B months O 9,... w"e" is hi#her is #ross annual value 3ess7 2unicipal Taxes U Actually paid ?et Annual value 4eductions uEs B (tandard deduction!!!1.M of -0,... Interest on borrowed money Income from =ouse I Ds" 96,... --,... 96,... 9.,... 9.,... 16,... 9.,... 1,... -0,... 6,1.. 1.,... 16,1.. /.,9.. Ds" Ds"

=ouse U II 2unicipal Galuation :air Dental Galue w"e" is hi#her (tandard rent w"e" is less is taken Actual rent received 1!B!.-!!!1.!11!.- for - months x 1.,... w"e" is hi#her is #ross annual value Ds" 9.,... 96,... 96,... 1,.-,... 96,... -.,... 96,... Ds" Ds"

106

3ess7 2unicipal Taxes U Actually paid ?et Annual value 4eductions uEs B (tandard deduction!!!1.M of 96,... Interest on borrowed money Income from =ouse II Income from =ouse Froperty

?I3 96,... -,-.. B ,... 0.,-.. /, .. 06,1..

?ote7 As per (upreme $ourt decision in )albir (in#h vEs 2$4 819-/9 1/ ITD 1-expected rent cannot exceed standard rent whereas if actual rent received is more than standard rent, then actual rent shall be expected rent" Illustration" 2r" Fatnaik is the owner of a house which consists of 1 independent units" &round floor which is e5ual to B.M is self occupied and 1st floor is also e5ual to B.M and is let!out" (econd floor which is e5ual to .M is also let out" +ther informations re#ardin# the house are as follows7 :air Dental value 9.,... p"a" 2unicipal valuation 1,..,... p"a" (tandard Dent -.,... p"a" 2unicipal Taxes 1.M of 2DG Depairs expenses 1.,... p"a" &round rent /,... p"a" Actual rent received7 :irst :loor unit /,... p"m" (econd :loor unit ,... p"m" :irst floor unit remained vacant for months" 2r" Fatnaik started the construction of the house in ../" =e borrowed Ds" / lacs O 1BM on 1!0! ../ for the completion of the house and the house was finally completed on 1/th Auly, ..0" 2r" patnaik returned loan of Ds" 1 3ac on 11st 2arch, ..-" 4etermine 2r" Fatnaik6s house property income for the AEJ ..9!1."

(olution" $omputation of income from =ouse Froperty

100

%nit I Area (elf!occupied Ds" :DG 2DG *hichever is hi#her +r (tandard Dent *hichever is less is CDG CDGPDs"-.,...; 7 71< +r Actual Dent *hichever is hi#her is taken 3ess loss due to vacancy &ross annual value 3ess 2unicipal Taxes ?et Annual value De(uctions %Es B7 (tandard 4eduction !1.M of ?AG Interest on loan for ..-!.9 ;8/,..,...!1,..,...9 x 1BM< ; 7 1E/th of F$I ;/,..,... x 1BM x 1 year 9 m< ; 7 7 1< IncomeE3oss 3oss under the head =ouse Froperty Illustration" 8!99,-.. 8!91 , .. 7 1< 8!9 ,B.. ?I3 ?I3 ?I3 1 ,... Ds"-.,... 9.,... 1,..,... 1,..,...

%nit II 3et out Ds"

%nit III 3et out Ds"

1 ,... 6.,... 6.,... 1.,... /.,... B,... B6,... 11,-.. 1 , .. 8!9 ,B.. 9,-.. 8!99,-.. ?I3

16,... B,... B,... !!! B,... ,... ,... 6,6.. 1/,B.. 8!911, .. B, .. 8!9B,9.. 8!90.. 8!9 1 , .. 8!9 1 ,9..

2r" )asu of Kolkata submits the followin# particulars of his let out

residential house"

10-

Dent received for house as well as for various amenities provided to the tenant7 8i9 :or house 8ii9 :or lift maintenance 8iii9 :or security char#es 8iv9 :or electricity Z water 2unicipal Galuation :air Dental value (tandard Dent 2unicipal Taxes 8/.M to be paid by tenant U 1.M of 2DG9 Depairs expenses met by tenant Insurance premium paid by 2r" )asu Annual $har#e imposed by $ourt in favour of his mother Interest on loan taken in ../ for the renovation of the house /,... 1,... 1.,... p"a" .,... p"a" 6,... p"m" /.. p"m" /.. p"m" 1,... p"m" 0.,... p"a" /6,... p"a" 6.,... p"a"

In ..1!.B a tenant defaulter in the payment of rent to the tune of Ds" 16,... but 2r" )asu could claim a deduction of Ds" 6,... only in the previous year ../!.6" After a lon# liti#ation 2r" )asu could recover from the tenant only Ds" previous year ..-!.9" 2r" )asu spent Ds" 16,... only to provide the above mentioned amenities to the tenant" $ompute 2r" )asu6s income from house property and any other income for the Assessment Jear ..9!1." (olution A" $omputation of =ouse Froperty Income 2DG :DG *hichever is hi#her is or (tandard Dent *hichever is less is CDv or Actual Dent Deceived *hichever is hi#her is ADG )ess 2unicipal Tax /.M 81.M of 0.,...9 ?et Annual value (tandard 4eduction7 1.M of ?AG Interest on loan taken Ds" 0.,... /6,... 0.,... 6.,... 6.,... 0 ,... 0 ,... 1,/.. 6-,/.. .,//. .,... B.,//. Ds" .,... durin# the

109

Income from =ouse *(( 4eemed Income from =F7 unreali'ed rent recovered 3ess disallowed earlier Income from =ouse Froperty )" $alculation of Income from other (ources Amount received from tenants for common facilities 8i9 :or 3ift 2aintenance 8ii9 :or (ecurity $har#e 8iii9 :or *ater and Clectricity 3ess actual expenses incurred Income from other sources

0,9/. .,... 1.,... 1.,... 10,9/.

6,... 6,... 1 ,...

B,... 16,... -,...

Illustration" 2r" Damachandran owns two houses at $hennai" $ompute his income from house property for the assessment year ..9!1." :DG Actual Dent 2unicipal Dental Galue (tandard Dent 2unicipal Tax 16,... p"a" B,... p"m" B.,... p"a" 1-,... p"a" 1.M of 2DG R M of 2unicipal tax Actual repairs expenses &round Dent $ollection char#es Interest on loan Gacancy period )onafide unreali'ed rent of current year as sewera#e cess B,... ,... /.. 1 ,... 1 months ! 1, .,... p"a" 1 ,... p"m" 1,1.,... p"a" ?"A" 1.M of 2DG R M of 2" Taxes as sewera#e cess 1 ,... ,/.. 1, .. B-,... 16,...

$onstruction of house II started on 1st ?ovember ..B and he borrowed Ds" B,..,... O 1 M on 1st Auly, ../ for the completion of construction" The house was completed on 1.th ?ovember ..0 and since then it is let out" (olution" $omputation of Income from =ouse Froperty

Farticulars

=ouse I Ds 1-.

Ds"

=ouse II Ds"

Ds"

:DG 2DG *hichever is hi#her (tandard Dent *hichever is less is CDG or Annual rent *hichever is hi#her is ADG 3ess loss due to vacancy ADG II" Actual rent less %nrealised rent ;1,BB,...!16,...< P 1,.-,... *hichever is hi#her is annual

16,... B.,... B.,... 1-,... 1-,... B-,... B-,... 1 ,... 16,...

1, .,... 1,1.,... 1,1.,... ?I3 1,1.,...

1,.-,... 16,... 11,... B,.-. 11,9 . 6. 1/,. B-,... 16,-.. 1,/06 1.,1BB 99,16,9111, 6. 1,16,0B. 1,1.,...

rental value 3ess municipal taxes 1.M of B,... 2DG (ewera#e cess M of taxes ?et Annual Galue 4eductions uEs B7 (tandard 4eduction7 1.M -. of 9,/06

?AG Interest on loan taken7 for FEJ 1 ,... ..-!.9 1E/th of F$I 8II only9 ?I3 ;B,..,... x 1 M x 1 year 9 months< Income from =ouse

Income under the head =ouse Froperty ;1.,1BB R 16,91-< P 0, 6 " Illustration 11" 2r" * owns two self!occupied houses in Ambala" :rom the followin# information find out that which house he should choose as self occupiedI =ouse A Ds" 16,... B ,... B,... 1, .. 1, .. 1,... =ouse ) Ds" /6,... 6 ,... BB,... 1, .. 1, .. /..

(tandard Dent fixed under Dent $ontrol Act :air rent 2unicipal Galuation 2unicipal Taxes 8Faid9 2unicipal Taxes 84ue9 &round Dent 8Faid9

1-1

4ate of completion of these houses was 11!1! ..6" 2r" * had taken a loan of Ds" ,/.,... O 1.M p"a" for construction of =ouse A on 1!6! ..B and he repaid Ds" ,..,... on 1!1.! ..-" (olution" 4etermination of income from house property (tep 1" $alculate the value of both the houses assumin# them to be let out7 =ouse A =ouse ) Ds" Ds" Ds" Ds" :air Dent B ,... 6 ,... 2unicipal Galuation B,... BB,... *hichever is hi#her B ,... 6 ,... +r standard rent 16,... /6,... *hichever is less is ADG 16,... /6,... 3ess7 2unicipal taxes paid 1, .. 1, .. ?et Annual Galue 1B,-.. /B,-.. 4eductions uEs B (tatutory deduction O 1.M 1.",BB. 16,BB. Interest on loan7 :or Frevious year ..-!.9 ; ,/.,... x 1.E1.. x 6E1 R /.,... x 1/,... ?I3 1.E1.. x 6E1 < 1E/ of pre!construction interest ; ,/.,... x 1.E1.. x 1.E1 < x 1E/

9,6.0 ?I3 /,191 (tep " Assume that house A is self!occupied and house ) is let out7 Income from =ouse A ;3oss due to interest on loan 1/,... R B,160< Income from =ouse ) Income from =ouse Froperty (tep1" Assume that house ) is self!occupied and house A is let out7 Income from =ouse A Income from =ouse ) Income from =ouse Froperty

B,160

16,BB. 1-,16. 8!919,160 1-,16. 19,191 /,191 ?I3 /,191

As such it will be beneficial for him to choose house ) as self!occupied and house A as let out" Illustration" 2r" Q completed a house on 1!B! ..- jointly with his wife and invested Ds" 1.,..,..." =ouse consists of two e5ual units" +ne unit is self!occupied by 2r" Q and his family and other unit 8owned by 2rs" Q9 is let out at Ds" 1.,... p"m" The municipal value of the house is Ds" ,16,... p"a" on which municipality levies 1.M tax and M of 1-

tax as surchar#e" A loan of Ds" 6,..,... was taken on 1!11! ../ O 9M p"a"" $ompute the income from house property for the assessment year ..9!1. if7 8a9 *hole of capital is supplied by 2r" Q and loan is also taken on his name" 8b9 /.M of capital is supplied by 2r" Q and /.M by 2rs" Q and loan is also taken jointly in same proportion and 2rs" Q is herself a tax payee" (olution" $omputation of income from house property V 3et out 2DG Actual Dent for the year *hichever is hi#her is ADv )ess 7 2unicipal Taxes 1.M of 2DG (urchar#e O M of tax Annual value 4eductions uEs B7 (tandard 4eduction O 1.M of AG Interest on loan7 :or the year ..-!.9 9M of Ds" 6,..,... ;1E of /B,...< 1E/th of Fre $onstruction Interest ;1!11! ../ to 11!1! ..- P years and / months< 6,..,... x 9E1.. x J U /2< P 1,1.,/.. 1E/th of 1,1.,/.. P 6,1.. x V Income from let out house7 V (elf +ccupied Annual Galue 4eductions uEs B7 Interest on loan7 :or the year ..-!.9 9M of Ds" 6,..,... ;1E of /B,...< 1E/th of Fre $onstruction Interest ;1!11! ../ to 11!1! ..- P years and / months< 6,..,... x 9E1.. x J U /2< P 1,1.,/.. 1E/th of 1,1.,/.. P 6,1.. x V 3oss from self occupied house7 3oss under the head =ouse property Ds" 1,.-,... 1, .,... Ds" 1, .,. .. 1.,-.. 16 11,.16 1,.-,9 -B 1 ,69/ 0,... Ds"

11,./.

0 ,0B/ 16, 19 ?I3

0,...

11,./.

B.,./.

8!9B.,./. 1,-11

1-1

8a9 :ull $apital is supplied by 2r" Q he shall be deemed as sin#le owner of house property uEs 0 2r" Q6s shall have a loss of Ds" 1,-11 under the head =ouse property and he can adjust this loss from his individual income" 8b9 /.M of $apital is supplied by 2r" Q and 2rs" Q supplies /.M of capital as joint owners" 2r" Q6s income" V (elf +ccupied 3oss of Ds" B.,./. as computed above shall be 2r" Q6s loss and he can adjust it from his individual income" 2rs" Q6s income V let out Income of Ds" 16, 19 as computed above shall be 2rs" Q6s income and shall be added in her other individual income" Illustration 1/" 2r" ("2" Krishna is the owner of a bi# house consistin# of 1 e5ual and independent units" %nit I is let out at a rent of Ds" -,... p"m" %nit II is bein# used in owner6s own business, whereas %nit III is bein# used for his own residence" +ther particulars of the house are as follows" 2unicipal Galuation :air Dental Galue (tandard rent as per rent control Act 2unicipal taxes Depairs Interest on borrowed money %nit I remained vacant for tenant" 2r" Krishna6s income from his business without debitin# any expenditure related to own house bein# used in his own business is Ds" ,..,..." 4etermine 2r" Krishna6s income from business and home property for the assessment year ..9!1." Ds" 1,/.,... Ds" 1,9/,... Ds" 1,-6,... Ds" 1/,... Ds" 1 ,... Ds" 6.,... months and one month6s rent could not be reali'ed from a

1-B

(olution" $omputation of house property income of 2r" Krishna for the assessment year ..9!1." %nit I!3et out 2unicipal value U 1E1rd :air Dental Galue U 1E1rd (tandard Dent U 1E1rd 2unicipal Galuation or :air Dental value, w"e" is hi#her )ut not exceedin# standard rent value to be taken Dent receivedEreceivable )ess: %nreali'ed rent for one month *hichever is hi#her to be taken )ess: 3oss due to vacancy for months &ross annual value )ess: 2unicipal taxes U 1E1rd ?et annual value 4eductions uEs B (tandard deduction U 1.M of ?"A"G Interest on borrowed money U 1E1rd Income from let out unit %nit II!%nit bein# used in owner6s own business (ince %nit!II is bein# used in owner6s own business, property head hence no income under the head" %nit!III! (elf +ccupied %nit ?et Annual Galue is treated as 4eduction uEs B Interest on borrowed money U 1E1rd of 6.,... 3oss from self occupied unit )usiness Income Frofit 8#iven9 3ess expenses related to %nit III 8?ot taken into AEc earlier9 2unicipal taxes U 1E1rd of 1/,... Depairs U 1E1rd of 1 ,... Interest on borrowed money U 1E1rd of 6.,... )usiness Frofit /,... B,... .,... 9,... 1,01,... /.,... 6/,... 6 ,...

6 ,... 96,... -,... --,... --,... 16,... 0 ,... /,... 60,... B.,1.. 6,9..

.,1.. .,...

and so excluded from house

?I3 8!9 .,... 8!9 .,... ,..,...

?ote7 4epreciation of %nit!III will be an allowable business deduction but in this case depreciation cannot be calculated as cost or *"4"G of the %nit III is not #iven in the 5uestion"

1-/

Income from house +ro+ert, Income from %nit U I Income from %nit U II 3oss from %nit U III Income from home property 6,9.. ?I3 8!9 .,... 6,9..

Illustration" 2r" 3amba owns followin# four house properties" +ther particulars are as follows7 =ouse I (elf occupied =ouse II (elf occupied =ouse III 3et out to a )usiness 2unicipal valuation (tandard rent :air Dental value Actual rent received Gacancy %nreali'ed rent 2unicipal taxes Depairs Interest on borrowed money 2r" 3amba borrowed Ds" ,..,... O 1 M for the construction of =ouse ?o" 111 on 1 st +ctober, ..B and the houses was completed on in +ctober ..6 and since then it is letout" A part of the loan of Ds" /.,... was repayed on 1/ th +ct, ..0" 4etermine the house property income of 2r" 3amba" (olution" =ouse ?o" I and II are self occupied houses" +nly one at the choice of the owner and in the absence of the choice normally of hi#her value shall be treated as a self! occupied one, wlhereas the other one shall be a deemed to be let!out" In this case house I shall be treated as a self occupied house" =ouse II" (elf +ccupied ?et Annual Galue treated as 4eductions uEs B Interest on borrowed money ?I3 1.,... .,... ! 6,... ! ?I3 ! /,... B,... -,... /.,... ! 6.,... ! ?I3 ! ,... ,... 1.,... house 0.,... 0 ,... -.,... 96,... 1 month 16,... 6,... -,... ! =ouse IG )ein# used in own business B/,... B-,... /.,... ! ?I3 ! B,... /,... !

1-6

3oss from self occupied house =ouse ?o" I" 4eemed to be let out house 2unicipal valuation :air Dental value w"e" is hi#her is #ross annual value 3ess7 2unicipal taxes ?et Annual value 4eductions uEs B (tandard deduction 7 1.M of B,... Interest on borrowed money Income from house =ouse ?o" III" 3e out to a business house 2unicipal valuation :air Dental Galue (tandard Dent 2unicipal valuation or :"D"G" w"e" is hi#her but not exceedin# standard rent (tandard rent to be taken Actual rent received )ess: %nrealised rent w"e" is hi#her shall be taken )ess: Gacancy for one month &ross Annual value )ess: 2unicipal taxes 4eduction uEs B7 (tandard 4eduction7 1.M of ?"A"G" Interest on borrowed money for ..-!.97 1,/.,... O 1 M :or pre!construction period 1!1.! ..B U 11!1! ..6 ..B!./ ,..,... O 1 M for 6 month ../!.6 ,..,... O 1 M for one month

1.,... .,... 6,... 6,... ,... B,... 0, .. -,... 0.,... -.,... 0 ,... 1/, .. -,-..

0 ,... 96,... 16,... -.,... -.,... 6,660 01,111 6,... ., .. 1-,...

60,111

1 ,... B,... 16,...x1E/ 0, ..

Income from let out house =ouse ?o" III" 3e out to a business house This type of house is excluded from the house property head" All expenses of this type of house are debited to the FZ3 AEc of the business for which own house is bein# used" =ouse Froperty Income =ouse ?o" I !1.,... =ouse ?o" II -,-.. =ouse ?o" III 1,911 =ouse ?o" IG ?I3 .,011

/, .. B/,B.. 1,911

1-0

(C$TI+?!! A 8a9 *hat is &AGI 8b9 *hat is ?AGI 8c9 *hat is standard deductionI 8d9 *hat is pre!construction periodI 8e9 *hat is section BI 8f9 (tate deductions under section BI 8#9 *hat is unreali'ed rentI 8h9 *hat is Gacancy periodI 8i9 *hat is standard rentI 8j9 *hat is fair valueI 8k9 *hat is fair rental valueI

SECTION-- B 8a9 (tate the steps followed in the process of determinin# &AG and ?AGI 8b9 Cxplain the followin#7 Gacancy period, %nreali'ed rent, sub!lettin#, ?AG" 8"c9" 2r" Q completed a house on 1!B! ..- jointly with his wife and invested Ds" 1.,..,..." =ouse consists of two e5ual units" +ne unit is self!occupied by 2r" Q and his family and other unit 8owned by 2rs" Q9 is let out at Ds" 1.,... p"m" The municipal value of the house is Ds" ,16,... p"a" on which municipality levies 1.M tax and M of tax as surchar#e" A loan of Ds" 6,..,... was taken on 1!11! ../ O 9M p"a"" $ompute the income from house property for the assessment year ..9!1. if7 *hole of capital is supplied by 2r" Q and loan is also taken on his name" /.M of capital is supplied by 2r" Q and /.M by 2rs" Q and loan is 8d9 :ollowin# are the particulars of two house properties owned by 2r" (wami" 2unicipal Galuation :air Dent (tandard Dent Actual Dent received (elf occupied =ouse ! I 96,... --,... 9.,... 9,... p"m" 1!B!.-!!!1.!11!.1-=ouse ! II 9.,... 96,... 1,.-,... 1.,... p"m" 1!1 !.-!!!11!1!.9

3et out 2unicipal Taxes due Faid Interest on borrowed 2oney

1!1 !.-!!!11!1!.9 6,... 1,... 1.,...

1!B!.-!!!1.!11!.-,... ?I3 B ,...

3oan taken to construct =ouse!II is still outstandin#" 3oan was taken in 1990" :ind out 2r" (wami6s income from house property SECTION--C 1" 2r" ("2" Krishna is the owner of a bi# house consistin# of 1 e5ual and independent units" %nit I is let out at a rent of Ds" -,... p"m" %nit II is bein# used in owner6s own business, whereas %nit III is bein# used for his own residence" +ther particulars of the house are as follows" 2unicipal Galuation :air Dental Galue (tandard rent as per rent control Act 2unicipal taxes Depairs Interest on borrowed money %nit I remained vacant for tenant" 2r" Krishna6s income from his business without debitin# any expenditure related to own house bein# used in his own business is Ds" ,..,..." 4etermine 2r" Krishna6s income from business and home property for the assessment year ..9!1." " 2r" Damachandran owns two houses at $hennai" $ompute his income from house property for the assessment year ..9!1." :DG Actual Dent 2unicipal Dental Galue (tandard Dent 2unicipal Tax 16,... p"a" B,... p"m" B.,... p"a" 1-,... p"a" 1.M of 2DG R M of 2unicipal tax as sewera#e cess 1-9 1, .,... p"a" 1 ,... p"m" 1,1.,... p"a" ?"A" 1.M of 2DG R M of 2" Taxes as sewera#e cess Ds" 1,/.,... Ds" 1,9/,... Ds" 1,-6,... Ds" 1/,... Ds" 1 ,... Ds" 6.,... months and one month6s rent could not be reali'ed from a

Actual repairs expenses &round Dent $ollection char#es Interest on loan Gacancy period )onafide unreali'ed rent of current year

B,... ,... /.. 1 ,... 1 months !

1 ,... ,/.. 1, .. B-,... 16,...

$onstruction of house II started on 1st ?ovember ..B and he borrowed Ds" B,..,... O 1 M on 1st Auly, ../ for the completion of construction" The house was completed on 1.th ?ovember ..0 and since then it is let out" 1" 2r" )asu of Kolkata submits the followin# particulars of his let out residential house" Dent received for house as well as for various amenities provided to the tenant7 8i9 :or house 8ii9 :or lift maintenance 8iii9 :or security char#es 8iv9 :or electricity Z water 2unicipal Galuation :air Dental value (tandard Dent 2unicipal Taxes 8/.M to be paid by tenant U 1.M of 2DG9 Depairs expenses met by tenant Insurance premium paid by 2r" )asu Annual $har#e imposed by $ourt in favour of his mother Interest on loan taken in ../ for the renovation of the house /,... 1,... 1.,... p"a" .,... p"a" 6,... p"m" /.. p"m" /.. p"m" 1,... p"m" 0.,... p"a" /6,... p"a" 6.,... p"a"

In ..1!.B a tenant defaulter in the payment of rent to the tune of Ds" 16,... but 2r" )asu could claim a deduction of Ds" 6,... only in the previous year ../!.6" After a lon# liti#ation 2r" )asu could recover from the tenant only Ds" previous year ..-!.9" 2r" )asu spent Ds" 16,... only to provide the above mentioned amenities to the tenant" $ompute 2r" )asu6s income from house property and any other income for the Assessment Jear ..9!1. .,... durin# the

19.

B" 2r" (urinder Kumar owns a house at 4elhi" 4urin# the previous year ..-!.9, 1EB th portion of the house is occupied for self!residence for full year and 1EB th portion is let out for residential purposes from 1"B" ..- to 11!1 ! ..- on a rent of Ds" 0.. p"m" :rom 1! 1! ..9 this portion was used for own residency by him" 2unicipal valuation of the entire house is Ds" .,... and fair rental value is Ds" B,..." Cxpenses incurred in respect of the house property were7 2unicipal Taxes Ds" 6.,..., Depairs Ds" ,..., :ire insurance premium Ds" 1,/.., 3and Devenue Ds" B,... and &round Dent Ds" .." These expenses were paid durin# the year" A loan of Ds" 6.,... was taken on 1!B! ../ O 1/M p"a" for the construction of the house which was completed on 11!1! ..6" 3oan is still outstandin#" :ind out his income from house property for the assessment year ..9!1."

/" A, ) and $ are three friends ownin# e5ually a house property consistin# of six identical units" It was constructed on 1st Auly ../" +ne unit is self!occupied by each one of them for their residence" The remainin# three units are let out on a monthly rent of Ds" 0,/.. per unit" The municipal value of house property is Ds" /,..,... and municipal tax is Ds" 1, /,... 8Ds" /,... due9" The other expenses were as follows7 8i9 $ollection and repair char#es 8ii9 Insurance premium 8iii9 Interest on loan taken for construction of house Ds" 0,/.. Ds"1/,... Ds" 1,6 ,/..

+ne of the let out units remained vacant for two months" 2r" ) could not occupy his unit as he was transferred to some other city" =e does not own any other house property" The other taxable incomes of A, ) and $ are Ds" 1,/.,..., Ds" ,..,... and Ds" 1,..,... respectively" $ompute the taxable income under the head income from house property for the assessment year ..9!1." 6" A house was completed on April 1, ..- and followin# information is available about this house7 2unicipal Galue of the =ouse Ds" 1.,... p"a"

191

:air Dental Galue of the =ouse Ds" 1 ,... p"a" Actual Dent Ds" B,... p"m" 2unicipal Taxes Ds" 6,... p"a" 3et out for the period 1!B! ..- to 11!1 ! ..- and self occupied from 1!1! ..9 onwards" :ire Insurance Fremium Ds" 1,6.. 3and Devenue Ds" 6,... Interest on 3oan for the period 8a9 1!B! ../ to 11!1! ..Ds" B/,... 8b9 1!B! ..- to 11!1! ..9 Ds"1/,... $alculate income from house property for the previous year endin# on 11!1! ..9"

FD+:IT( A?4 &AI?( +: )%(I?C(( +D FD+:C((I+?

3CAD?I?& +)AC$TIGC(7 %nderstand the meanin# of )usiness and Frofession Assessment of Income of )usiness and Frofession Garious provisions relatin# to the assessment of )usiness and Frofessional income The provisions re#ardin# income char#eable under the head HFrofits and &ains of )usiness of Frofession6 are contained in sections - to BB4 of the Income Tax Act, 1961" )efore studyin# these provisions it is necessary to understand the meanin# of certain terms" Business ;(ec" 8119<" )usiness means the purchase and sale of manufacture of a commodity with a view to make profit" It includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture" It is not necessary that there should be a series of transactions in a business and that it should be carried on permanently" ?either repetition nor continuity of similar transactions is necessary" Frofit of an isolated transaction is also taxable under this head, provided that it

19

is a venture in the nature of business or trade" In this connection, it is important that the purchase or manufacture should be to sell at a profit" Frofession ;(ec" 8169<" Frofession means the activities for earnin# livelihood which re5uire intellectual skill, e"#", the work of lawyer, doctor, auditor, en#ineer and so on, are in the nature of profession" Frofession includes vocation" Gocation means activities which are performed in order to earn livelihood, e"#", brokera#e, insurance a#ency, music, dancin#, etc" As the rules for the assessment of business, profession or vocation are the same, there is no important of makin# any distinction between them for income tax purposes" 4emer#er ;(ec" 819AA9<" In relation to a company demer#er means the transfer by a demer#ed company of its one or more undertakin# to any resultin# company in which fulfils the prescribed conditions" 4emer#ed $ompany ;(ec" 819AAA9<" It means the company whose undertakin# is transferred, pursuant to a demer#er, to a resultin# company" Desultin# $ompany ;(ec" 8B1A9<" It means 8i9 one or more companies8includin# a wholly owned subsidiary thereof to which the undertakin# of the demer#ed company is transferred in a demer#er, 8ii9 the resultin# company in consideration of such transfer of undertakin# issues shares to the shareholders of the demer#ed company, and iv9 includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demer#er" PROFITS OF BUSINESS OR PROFESSION &ains of )usiness or Frofession67 The Frofits and #ains of any business or profession which was carried on by the assessee at any time durin# the previous year, Any compensation due to or received by 7 (Sec. 28)

The followin# incomes are char#eable to income tax under the head HFrofits and

191

any person, mana#in# the whole or substantially the whole of the affairs of an Indian $ompany in connection with the termination of his mana#ement or the modification of the terms and conditions relatin# thereto, any person, mana#in# the whole or substantially the whole of the affairs in India, of any other company in connection with the termination of his office or the modification of the terms and conditions relatin# thereto, any person, holdin# an a#ency in India for any part of the activities relatin# to the business or any person in connection with the termination of a#ency or the modification of the terms and conditions relatin# thereto, any person, for or in connection with the vestin# in the &overnment, or in any corporation owned or controlled by the &overnment, under any law for the time bein# in force, of the mana#ement of any property or business" $ompensation received by person on cancellation of consultancy a#reement is a capital receipt and not assessable uEs - 8ii98c9" -CI# vs& Seshasa,ee Bros& (.!& )t(&(1999! "%9 I#$ /01 (Ma(&!1 Income derived by a trade, professional or similar association from specific services performed for its members , 8iiia9 Frofit on sale of a licence #ranted under the Imports $ontrol +rder 19// , 8iiib9 $ash assistance received or receivable by any person a#ainst exports under any scheme of the &overnment of India6 8iiic9 Depayment of any customs or excise duty to any person a#ainst exports" 8iiid9 Any profit on the transfer of the 4uty Cntitlement Fass )ook (cheme, bein# 4uty Demission (cheme, under the export and import policy, 8iiie9 Any Frofit on the transfer of the 4uty :ree Deplenishment $ertificate, bein# the 4uty Demission (cheme, under the export and import policy, The value of any benefit or per5uisite whether convertible into money or not, arisin# from business or the exercise of a profession, e#", where a lawyer in consideration of his services to a company #ets free accommodation, the value will be assessable in the hands of the assessee as his income under the head HFrofits and &ains of )usiness or Frofession6"

19B

Any interest, salary, bonus, commission or remuneration due to or received by a partner of firm from the firm provided that it has been allowed as deduction in computin# the taxable profits of such firm" Income from speculative transactions" Interest on securities, if the business of the assessee is to invest in securities, otherwise interest on securities shall be char#eable to income tax under the head >Income from +ther (ources@" Any sum received under a Key man Insurance Folicy includin# bonus" Any sum, whether received or receivable in cash or kind, under an a#reement for7 8a9 not carryin# out any activity in relation to any business, or 8b9 not sharin# any know!how, patent, copyri#ht, trade!mark, licence, franchise or any other business or commercial ri#ht to similar nature of information or techni5ue likely to assist in the manufacture or processin# of #oods or provision of services" =owever, any sum, whether received or receivable, in cash or kind, on account of transfer of the ri#ht to manufacture, produce or process any article or thin# or ri#ht or ri#ht to carry on any business, which is char#eable under the head H$apital #ains6 shall not be treated as income under this clause" :or the purpose of 8iii9 above , trade association means an association of businessman for the protection and advancement of their common interest, e"#", a $hamber of $ommerce" (ection -8iii9 dose not apply to other social associations, e"#", a sports club, or cricket club and so on" *here speculative transactions carried on by an assessee are of such a nature as to constitute a business, the shall be called H(peculation business6 and it shall be deemed to be distinct and separate from any other business" H(peculative transactions6 means transaction in which a contract for the purchase or sale of any commodity, includin# stocks and shares in settled otherwise than by the actual delivery or transfer of the commodity or scrip" IMPORTANT RULES REGARDING ASSESSMENT OF PROFITS AND GAINS OF BUSINESS OR PROFESSION

19/

Business or .rofession carrie( on b, the assessee& Tax is char#eable from the person who carries on the business or profession" It is immaterial if the assessee 8owner of the business throu#h a mana#er or other servant, or any other a#ent duly authori'ed by him" #a' is chargeable on the aggregate income from all businesses or +rofessions carrie( on b, an assessee& The profits and #ains of different businesses or professions carried on by an assessee are not taxable separately, but tax is char#eable under one head on the a##re#ate income from all businesses or professions carried on by the assessee" .rofits an( )osses of s+eculation business are 2e+t se+arate& Frofits and losses of speculation business carried on by an assessee are kept separate, i"e", if there is a loss in a speculation business it can be set!off only a#ainst profits of speculation business" The business or profession is carried on by an assessee for any durin# the previous year" The assessee should have carried on by an the business or profession for any time durin# the business year, i"e", whether for full year or for a part of previous year only" .rofits on sale of assests on the 3in(ing u+ of a business& Frofits made in windin# up of business by, the sale of assets in one lot are not taxable as business profit but as capital #ain" 4o ta' is +a,able on antici+ate( or notional +rofits& Tax is levied on the actual profit of the previous year and not on the anticipated profits" If in a business there is an expectation of earnin# some profits in the near future no tax can be levied on such profits" 5'+enses of an isolate( transaction& An isolated transaction of purchase and sale is in the nature of trade" :or determinin# the profit earned by the assessee years prior to the year of account shall be allowed as a deduction" Income of illegal business or +rofession& Tax is payable on the income of every business or profession whether le#al or ille#al" The expenses incurred to earn income from ille#al business which are incidental to such business are to be allowed as deduction out of the income earned from ille#al business" =owever, penalties levied for in such a transaction, the expenses incurred by him in respect of that transaction durin# the

196

infraction of law and expenses incurred in 4efence of criminal proceedin#s are not allowed" 3oss computed under ille#al business cannot be set!off a#ainst the profits of le#al business" 5'+enses incurre( before setting u+ a business& These expenses are not admissible" In the case of a company expenses incurred before incorporation are not allowable but those incurred after incorporation but before commencement of business are allowable" =owever, specified preliminary expenses incurred by an Indian $ompany or any other resident person is allowed under section 1/ 4" 6eneral commercial +rinci+les to be 2e+t in vie3 3hile (etermining the real +rofits of a business& It is essential to keep in view the #eneral commercial principles while determinin# the real profits of a business" De(uctible Business )osses& )usiness losses which are not of a capital nature and which have been sustained durin# the previous year and which are incidental to the business carried on by the assessee are deductible while computin# income under the head H)usiness or Frofession6" Sums +reviousl, allo3e( as (e(uction are ta'able if recovere( (uring the +revious ,ear& If an assessee receives durin# the previous year any 81 9(ums previously allowed as deduction are taxable if recovered durin# the previous year" If an assessee receives durin# the previous year any sum connected with the business, which durin# any precedin# year was allowed as a deduction 8bein# in the nature of the loss, expenditure or a liability9then while computin# the taxable profits of that year, it will be taxable as a business income durin# the previous year in which they are recovered" 811964harmada6 collected from the customers is not a tradin# receipt and hence not liable to tax" 81B9The underwritin# commission earned by the assessee on the shares subscribed by the public is assessable as business income whereas the underwritin# commission on shares subscribed by the underwriter himself reduces the cost of shares and is not taxable" COMPUTATION OF PROFITS OF BUSINESSOR PROFESSION

190

The profits and #ains of business or profession are computed in accordance with the provisions contained sections 1. to B14"(ections 1. to 10contain those deductions which are expressly allowed while computin# profits of business or profession" (ection B. provides those expenses which are expressly disallowed" )esides these ,there are some other deductions which are allowed on the basis of #eneral commercial principles while computin# profits of business or profession" It is necessary to know those principles before studyin# deductions expressly allowed while computin# profits of business or profession" The #eneral commercial principles are as under7 819Frofits should be computed accordin# to the method of accountin# re#ularly employed by the assessee, provided that actual profit can be ascertained by this method" 8 9+nly those expenses and losses are allowed as deductions which were incurred or sustained durin# the relevant previous year" 819These losses and expenses should be incidental to the operation of the business ":or example, embe''lement by an employee durin# the course of business is a loss incidental to the business" (imilarly, loss fro dacoity in a bank is also a loss incidental to the business of a bank" 8B9+nly the expenses incurred in connection with the business of the assessee are allowed as deductions" 8/9If a business has been discontinued before the commencement of the previous year, it expenses cannot be allowed as deductions a#ainst the income of any other runnin# business of the assessee" 869There are some essential expenses, thou#h neither expressly allowed nor disallowed, but are deductible while computin# the profits of business or profession on the basis of #eneral commercial principles provided that these are not expenses or losses of a capital nature or personal nature" 809Any expenditure incurred in consideration of commercial expediency is allowed as deduction" 8-94eduction can be made from the income of that business only for which the expenses were incurred" The expenses of one business cannot be char#ed a#ainst the income of any other business"

19-

RULES FOR ADUJUSTMENT OF THE PROFIT AND LOSS ACCOUNT PREPARED BY THE ASSESSEE The profit and loss account prepared by the assessee is not correct from the income tax point of view as 8i9 several such expenses are char#ed to it which are wholly or partly inadmissible under the Income Tax act,8ii9 some admissible expenses are omitted from it, 8iii9some taxable incomes are not credited to it, and8iv9 some such incomes are credited which are either not taxable under the head H)usiness or profession6 or are not taxable at all" =ence, this profit and loss account has #ot to be adjusted from the income tax point of view, so that the profit taxable under the head H)usiness or profession6 is determined incorrectly" The followin# are the rules for adjustment of the Frofit and 3oss account7 Those expenses or losses which are char#ed to Frofit and 3oss Account but are not allowed under the Income Tax Act, should be added to the profit, as shown by the Frofit and 3oss Account prepared by the assessee" If any expense is partly disallowed , only the disallowed part of it shall be added to the profit" If any admissible expenses are omitted from profit and 3oss Account, they should be deducted from the above profit" If some taxable incomes are omitted from the profit and 3oss Account, they should be added to the above profit" If some such incomes have been credited to the Frofit and 3oss Account, which are either not taxable under the head H)usiness or Frofession6, or are not taxable at all, they should be deducted from the above profits" ?ote 7 If instead of profit there is loss as per the Frofit and 3oss Account, the above rules shall be reversed, i"e", items to be added shall be deducted and those to be deducted shall be added, If after makin# some adjustments the profit is converted into loss, the above rules shall be reversed for subse5uent adjustments" The above rules can well be illustrated with the help of the followin# statement7 profit as per F Z 3 AEc .... """" *(( : 8i9 Cxpenses or losses disallowed but char#ed in F" Z 3" AEc 8ii9 Incomes taxable as business income but not credited to the" " " " F"Z 3" AEc

199

8iii9 Cxpenses or losses allowed but not debited to F" Z 3" AEc " " " " 8iv9 +ver!valuation of closin# stock and under!valuation of openin# stock \ Taxable Income from )usiness " " " " " " " " " " " " " " " "

?otes 71":or loss as per F" Z 3" AEc the above rules will be reversed" "The same rules will apply to Income and Cxpenditure Account" (econd 2ethod of $omputin# the taxable profits or losses of business or profession In this method a fresh profit and loss account or income and expenditure account is prepared to determine the profit or loss" The format of this method may be as under7 819 Add to#ether all taxable incomes under this head which relate to the previous year concerned" " " " " " " " " 8ii9 4educt admissible business losses" " " " " " " " " Taxable profits or losses of business or profession (econd method is #enerally used in case of professions" 4C4%$TI+?( CQFDC((3J A33+*C4 *hile computin# profits of business or profession the followin# deductions are expressly allowed by sections 1. to 107 1" Cxpenses in respect of business 8(ec" 1.9" The followin# deductions are allowed for premises used for the purpose of the business or profession" *here the premises are occupied by the assessee as a tenant7 Dent paid for such premises" If he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs" Cxplanation 7 The amount of paid on account of repairs shall not include any expenditure in the nature of capital expenditure" Any sums paid on account of land revenue, local taxes or municipal taxes" 8 9 8i94educt all admissible expenses under this head which relate to

..

The amount of any premium paid in respect of insurance a#ainst risk of dama#e or destruction of the premises" *here the premises are occupied by the assessee as owner 7 Depairs char#es" The amount of land revenue, local taxes or municipal taxes" Insurance premium re#ardin# buildin#" Flease ?ote 7 8i9 8ii9 If the business premises belon# to the assessee no deduction in respect of rent will be allowed to him" If the assessee is a partnership firm and the business premises belon#s to a partner of the firm, the rent payable to the partner will be an allowable deduction" 8iii9 If the assessee is a tenant in that premises an a part of the premises is used by him as dwellin# Uhouse and the other part is used for his business, the amount of deduction in respect of expenses shall be allowed proportionately" " $e+airs an( insurance of machiner,7 +lant an( furniture 8(ec"119" In respect of machinery, plant and furniture used for the purposes of the business or profession the followin# deductions are allowable 7 8i9 Amount of expenditure incurred on current repairs of machinery, plant or furniture explanation" The amount paid on account of current repairs shall not include any expenditure in the nature of capital expenditure" 8ii9 The amount of any premium paid in respect of insurance a#ainst risk of dama#e or destruction of these assets" 1" De+reciation& 4atural re(uction in the value of an, fi'e( asset is terme( as (e+reciation&" B" #ea Develo+ment *ccount7 Coffee Develo+ment *ccount an( $ubber Develo+ment *ccount& 8(ec"11A)9" This deduction is allowed to assessee6s who are #rowin# and manufacturin# and tea or coffee or rubber in India" The salient features of this section are as under 7

.1

819 The assessee a should deposit in a special account with the ?ational )ank for A#riculture and Dural 4evelopment in accordance with the scheme approved by the Tea )oard or the $offee )oard or the Dubber )oard or deposit any amount in an account opened by the assessee 8know as deposit Account9 in accordance with deposit scheme framed by the Tea )oard or the $offee )oard or the Dubber )oard, as case may be" 8 9 The deposit should be made within a period of six months fro the end of the previous year or before furnishin# the Deturn of his income", whichever is earlier" 819 In computin# the taxable profits from the above business the followin# deduction will be allowed in respect of the above deposit7 8a9 a sum e5ual to the amount so deposited, or 8b9 B.M of the profits of such business 8before makin# deduction under this section and before settin# off brou#ht forward business losses9, which ever is less" /" De(uction 3ill be allo3e( in res+ect of +ros+ecting for7 or e'traction or +ro(uction of +etroleum or natural gas or both in In(ia 8(ec" 11 A)A9" The main provisions of this section are as under 7 819 8 9 4eduction will be allowed if the $entral &overnment has entered into an a#reement with the assessee" The assessee has before the end of the previous year has deposited the amount7 8a9 in a special account with the state bank of India, for the specified purposed in a scheme approved in this behalf by the &overnment of India in the 2inistry of Fetroleum and ?atural &as, or 8b9 in an account!(ite Destoration Account 8("D"A9 for the purposes specified in a scheme framed by the 2inistry aforesaid" 819 Suantum of deduction7 e5ual to the amount or the a##re#ate of the amounts so deposited, or 8a9 A sum

8b9 .M of the profits of such business 8computed under the head HFrofits and #ains of business or profession69 before makin# any deduction under this section, wherever is less" 6" 5'+en(iture on Scientific $esearch& (sec&% !& The followin# deductions shall be allowed in respect of expenditure on scientific research" (i) Devenue expenditure incurred by the assessee himself ;(ec" 1/8198i9<" *here the assessee himself carries on scientific research in relation to his own business any revenue expenditure" 0" 5'+en(iture incurre( on the ac8uisition of +atent rights or co+,rights (Sec& 1/A9" 8a9 any capital expenditure incurred before 1"B"199- on the ac5uisition of a patent ri#ht or copyri#ht used for the business shall be allowed as a deduction in 1B e5ual annual installments over a period of 1B previous years commencin# from the previous year in which the expenditure is incurred" If these Hri#hts6 are ac5uired in any year prior to previous year in which the expenditure in incurred the deduction shall be allowed in e5ual annual installments in as many years as are left after deduction from 1B, of the years that have elapsed before the year in which such expenditure is incurred" 8b9 *here such expenditure is of capital nature and incurred after 11"1"199-, depreciation shall be allowed on it O /M on the basis of *"4"G" method" -" Ca+ital 5'+en(iture to obtain licence to o+erate telecommunication services 8(ec" 1/A))9" Any capital expenditure incurred on the ac5uisition of any ri#ht to operate telecommunication services either before the commencement of the business to operate telecommunication services or thereafter at any time durin# any previous year and for which payment has actually been made to obtain a licence will be allowed as a deduction in e5ual instalments over the relevant previous years" HDelevant previous years6 means 7 8A9 in a case where the licence fee is actually paid before the commencement of the business to operate telecommunication

.1

services, the previous years be#innin# with the previous year in which such business commenced , 8)9 in any other case, the previous years be#innin# with the previous year in which the licence fee is actually paid, and the subse5uent previous years durin# which the licence, for which the fee is paid, shall be in force" 9" *(missibilit, of e'+en(iture on eligible +ro9ect or scheme 8(ec" 1/A$9" 1..M deduction will be allowed from business or professional income in respect of the expenditure incurred for an eli#ible project scheme" Cli#ible project or (cheme, It means such project or scheme which is meant for promotin# social and economic welfare or uplift or the public, as specified by the $entral &overnment consistin# of persons of eminence in public life" $onditions to be fulfilled7 8i9 It should be paid to either a public sector company, or local authority or to an approved association or institution for carryin# out any eli#ible project or scheme" 8ii9 The $laim for deduction should be supported by a certificate from the payee concern and attached with the Deturn of Income" 8iv9 In case of companies, direct expenditure can also be incurred for any eli#ible project or scheme and in their case a certificate from the $hartered Accountant will suffice" 1." .a,ment to $ural Develo+ment :un( (Sec& % D!& %nder this section 1..M deduction is allowed to an assessee who pays any sum to 7 8i9 8ii9 The ?ational :und or Dural 4evelopment8set!up and notified by the $entral &overnment in this behalf 9, or The ?ational Foverty Cradication :und 8set!up and notified by the $entral &overnment in this behalf9" 11" *morti;ation of certain +reliminar, e'+enses (Sec& % D! *here an Indian $ompany or an non!corporate person resident in India incurs after 11 st 2arch, 199- any preliminary expenditure of the nature specified below, the assessee shall be allowed a deduction of an amount e5ual to one!fifth of such expenditure for each of the five successive previous year be#innin# with the

.B

previous year in which the business commences or the extension work is completed or the new industrial unit commences production or operation, as the case may be" ?ote7 1" *here such expenditure was incurred before 1"B 199-, one Utenth of such expenditure for each of the ten successive previous years is deductible" " *"e"f A"J" ..9!1., the word industrial shall be omitted" Thus, the benefit of deduction will be available to all sectors" The followin# expenditure is included in preliminary expenses 7 8a9 Cxpenditure in connection with7 8i9 8ii9 8iii9 8iv9 Freparation of feasibility report, Freparation of project report, $onductin# market survey or any other survey necessary for the business of the assessee, Cn#ineerin# services relatin# to the business of the assessee" other person for any relatin# to the settin# up or conduct of the assessee" 8c9 If the assessee is a company, in addition to the above expenses, the followin# expenditure is also included in preliminary expenses7 8i9 8ii9 8iii9 8iv9 3e#al char#es for draftin# the 2emorandum and Articles of Association of the $ompany, Frintin# char#es of the 2emorandum and Articles of Association, :ees paid for re#isterin# the company, Cxpenses re#ardin# issue of shares or debentures of the company, includin# under!writin# commission, brokera#e and char#es for draftin#, typin#, printin# and advertisement of the prospectus" 8v9 (uch other item of expenditure as may be prescribes" 2aximum 3imit7 the 2aximum amount eli#ible for deduction under this section shall not exceed /M of the Hcost of the project6, or if the assessee is an Indian $ompany, at the option of the amal#amation or demer#er of an undertakin#, it shall be allowed a deduction of /M of such expenditure 8b9 3e#al char#es for draftin# any a#reement between the assessee and any

./

for each of five successive previous years be#innin# with the year in which amal#amation or demer#er takes place" 1 " 5'+en(iture for amalgamation or (emerger of an un(erta2ing 8(ec 1/449" *here an Indian $ompany incurs expenditure after 11"1"1999 wholly and exclusively for the purposes of amal#amation or demer#er of an undertakin#, it shall be allowed a deduction of .M of such expenditure for each of five successive previous year be#innin# with the year in which amal#amation or demer#er takes place" 11" 5'+en(iture on voluntar, retirement ((ec"1/44A9" *here an assessee pays any sum to an employee in any previous year in connection with his voluntary retirement, he shall be be#innin# with the year in which the expenditure was incurred" The deduction shall not be allowed to the 8i9 amal#amatin# company, or 8ii9 resultin# company, or 8iii9 the successor company in the same manner as it have been allowed to the transferor of business" 1B" 5'+en(iture on +ros+ecting7 etc& for (evelo+ment of certain minerals ((ec" 1/C9" *here and Indian $ompany or any other person resident in India incurs, any expenditure wholly and exclusively on the prospectin# of specified mineral or on the development of mines or other natural deposit of any such mineral, the assessee shall be allowed a deduction of an amount e5ual to 1E1.th of such expenditure for each of the ten successive previous years be#innin# with the year of commercial production" 1/" <ther (e(uctions: %nder (ection 16, the followin# other deductions are permissible while computin# profits of business or profession" 8i9 Insurance Fremium" The amount of any premium paid in respect of insurance a#ainst risk of dama#e or destruction of stocks or stores used for the purpose of business or profession, is allowed as deduction" 8ii9 Insurance Fremium for cattle paid by a federal milk co!operative society" The amount of any premium paid by a federal milk co! operative society on the life of the cattle owned by a member of a

.6

primary milk co!operative society affiliated to the federal milk co! operative society, is allowed as deduction" 8iii9 Insurance Fremium for the health of employees" The amount of any premium paid by an employer by any mode of payment other than cash for insurance on the health of his employees in accordance with a scheme framed by 8A9 the &eneral Insurance $orporation of India and approved by the $entral &overnment, 8)9 any other insurer and approved by the Insurance De#ulatory and 4evelopment Authority is allowed as deduction" 8iv9 )onus or $ommission" Any bonus or commission paid to an employee for services rendered shall be deductible only if such sum could not, in any way be paid as profits or dividend" 8v9 Interest on borrowed capital" The amount of the interest paid in respect of capital borrowed for the purpose of the business or profession, is allowed as deduction" Any amount of interest paid in respect of capital borrowed for extension of exitin# business or profession 8whether capitali'ed in the books of account or not9 for any period be#innin# from the date on which the capital was borrowed for ac5uisition of the asset till the date on which the capital was borrowed for ac5uisition of the asset till the date on which such asset was first put to use, shall not be allowed as a deduction" 8vi9 4iscount on Tero coupon bond" Fro rata amount of discount on 'ero coupon bond havin# re#ard to the period of life of such bond shall be allowed as a deduction" 8vii9 $ontribution to Frovident :und" (um paid by the assessee as an employer by way of contribution towards a reco#ni'ed provident fund or an approved superannuation fund is allowed as deduction" 8viii9 Approved &ratuity :und" (um paid by the assessee as an employer by way of contribution towards an approved #ratuity fund is allowed as deduction"

.0

8ix9

Cmployee6s $ontribution to Frovident :und, or (uperannuation :und etc" (um received by the employer from any of his employees as contribution to any provident fund or superannuation fund or any fund set!up under the Cmployees (tate Insurance Act or any other fund for the welfare of such employee6s treated as his income" If such sum is credited by the employer to employee6s account in the relevant fund on or before the Hdue date6 it is allowed as a deduction"

4ue date means the date, by which the employer is re5uired to credit an employee6s contribution to the employees account in the relevant fund under any Act, rule, order or notification or $ontract of (ervice" 8x9 3oss re#ardin# Animals" In respect of animals which have been used for the purposes of business or profession 8not as stock!in!trade9 and have died or become permanently useless for such purpose, amount of loss e5ual to the difference between the actual cost to the assessee of the animals and the amount, if any, reali'ed in respect of the carcasses of animals, will be allowed as deduction" 8xi9 Ba( (ebts& The amount of any debt or its part which is written Uoff as irrecoverable in the accounts of the assessee for the previous year shall be allowed as a deduction, subject to the followin# conditions7 8i9 If such debt has been taken into account in computin# the income of the assessee of that previous year or an earlier previous year or represents money lent in ordinary course of the business of bankin# or money!lendin# which is carried on by the assessee" 8ii9 It has been written Uoff as irrecoverable in the accounts of the assessee for that previous year" In respect of bad debts followin# further rules are to be observed" 8a9 If the amount ultimately recovered on any such debt is less than the difference between the debt and the amount of bad debt allowed, the deficiency shall be between the deductible in the previous year in which the ultimate recovery is made"

.-

8b9

*here a deduction has been allowed in respect of a bad debt and the amount subse5uently recovered on any such debt is #reater than the difference between the debt and the amount so allowed, the excess shall be deemed to the Hprofit and #ains of business or profession6, and accordin#ly char#eable to income tax as the income of the previous year in which it is recovered" It is immaterial whether the business or profession in respect of which the deduction has been allowed is in existence in that year or not"

8c9

In the case of an assessee to which 8xii9 applies the deduction for bad debt shall be only of the amount in excess of provision for bad and doubtful debts account made under 8xii9"

8xii9

Frovision for bad and doubtful debts" The Frovisions re#ardin# deduction for provision for bad and doubtful debts in respec/t of banks and financial institutions are #iven below7 Allowable 4eduction

In the case of scheduled banks 8excludin# 0"/M of Total Income before forei#n bank9or non!scheduled bank or a co! makin# credit society or a primary co!operative 1.M of this deduction and operative bank 8other than a primary a#ricultural deductions uEss -.$ to -.% and a##re#ate avera#e a#ricultural and rural development bank9" In the case of :orei#n )anks" advances made by rural bankers of these banks" /M of Total makin# this Income deduction before and

deductions uEss -.$ to -.%" Fublic :inancial Institutions, (tate :inancial !4o! $orporation and (tate Industrial Investment $orporation" Dural )ranch, It means a branch of a scheduled bank or a non!scheduled bank

situated in a place which has a population of not more than 1.,..., accordin# to the last census"

.9

?ote7 *"e"f" A"J" ..B!./, a bank mentioned in 819 shall, at its option, be allowed a further deduction for an amount not exceedin# the income derived from redemption of securities in accordance with a scheme framed by the $entral &overnment, provided such income has been disclosed in the return of income under the head >profits and #ains of business or profession" 8xiii9 entity" Suantum of 4eduction 8i9 .M of the profit derived from eli#ible business or 8ii9 The amount credited to specified reserve account, whichever is less" =owever, no deduction is allowed in this respect as soon as the special Deserve becomes e5ual to twice the paidUup share capital and #eneral reserves" (pecified entities and eli#ible business are 7 8A9 8i9 A financial corporation specified in (ec" BA of the $ompanies Act, 19/6, or 8ii9 A financial corporation which is a public sector company, or 8iii9 A bankin# company or co!operative a#ricultural and rural development bank" Frovides lon#!term finance for industrial or a#ricultural development or development of infrastructure facility in India or construction or purchase of houses in India for residential purposes" 8)9 residential purposes" 8$9 public company" Frovides lon#!tem finance for development of infrastructure facility in India" Cxplanation" H3on#!term finance6 means any loan or advance which is not repayable prior to the expiry of five years" Any other financial corporation includin# a A =ousin# finance company" Frovides lon#!term finance for the construction or purchase of houses in India for 8iv9 A $o!operative bank other than a primary a#ricultural credit society or a primary (pecial reserve created by a specified entity" 4eduction shall be allowed re#ardin# special reserve created and maintained by a specified

1.

8xiv9

Cxpenditure on family plannin#7 Any expenditure bonafide incurred by a company for the purpose of promotin# family plannin# amon#st its employees is allowed as a deduction" If such expenditure is of a capital nature it shall be allowed as a deduction in five e5ual annual installments commencin# from the previous year in which the expenditure is incurred"

The unabsorbed part of the capital expenditure on family plannin# is treated in the same manner as unabsorbed depreciation" ?ote 7 Devenue expenses incurred by employer 8other than a company9 on promotin# family plannin# amon#st his employees, is deductible uEs 10E 819" +n capital expenditure for family plannin# he is entitled to claim depreciation uEs 1 " 8xv9 Any expenditure 8not bein# capital expenditure9 incurred by a corporation or body corporate shall be allowed as a deduction if 7 8a9 It is constituted or established by a $entral, (tate or Frovincial Act, 8b9 It is notified by the $entral &overnment" 8c9 The expenditure is incurred for the objects and purposes authori'ed by the Act under which it was constituted or established" 8xvi9 Any amount of bankin# transaction tax paid durin# the previous year shall be allowed as a deduction" 8xvii9 Any sum paid by a public financial institution by way of contribution to such credit as a #uarantee fund trust for small industries as the $entral &overnment may notify" 8xviii9 Cxpenses in connection with income tax proceedin#s" Cxpenses incurred for services in as business expenditure uEs 10819" 8xix9 Cntertainment expenses, advertisement expenses ;except as provided in sec" 10 8 ).<, expenses on travelin# for business or professional purposes and expenses on #uest house are fully deductible"

11

8xx9

Amount paid in respect of taxable securities transactions, if income from securities transaction has been computed under the has >Frofits and #ains of business of profession@"

8xxi9

Amount paid in respect of taxable commodities transaction, if income from commodities transactions has been computed the head >Frofits and #ains of business or profession@" ;w"e"f" A"J" ..9!1.9<

16"

6eneral De(uction 8(ec" 10819 <" It is a residuary section" %nder section 10819, the followin# conditions should be fulfilled, in order that a particular item of expenditure may be deductible under this head 7 8i9 8ii9 The expenditure should not be of the nature described in sections 1. to 16" It should be in respect of a business or profession carried on by the purpose and the profits and #ains of which are to be computed and assessed" 8iii9 8iv9 8v9 8vi9 It should not be in the nature of personal expenses of the asseessee" It should have been laid out or expended wholly and exclusively for the purpose of such business or profession" It should not be in the nature of capital expenditure It should relate to the previous year concerned"

Cxplanation, Any expenditure incurred by an assessee for nay purpose which is an offence or which is prohibited by law, shall not be allowed as a deduction" It means protection money, extortion, hafta, bribes, etc", will not be allowed as a deduction" The followin# are the few examples of admissible #eneral deductions under section 107 819 Cxpenses incurred in the purchase, manufacture and sale #oods" 8 9 &eneral expenses incurred in the day to day runnin# of the business" 819 Cxpenses incurred in defendin# a case for dama#es fir breach of contract" 8B9 Amount of sales!tax paid and expenses incurred in connection with sales Utax proceedin#s includin# appeals" 8/9 $ompensation paid to an undesirable employee for the retrenchment of his services or to a director to #et rid of his services"

869 $ontribution made to provident fund maintained for the benefit of employees under an Act and with previous approval of a (tate &overnment may not be allowable uEs 168198iv9 but allowable uEs 10819" 809 $ommission7 etc", paid for securin# orders for the business," 8-9 $ompensation paid to employees in connection with injury sustained by them or accident met by them while on duty" 899 Doyalties paid in connection with mines" 81.9 8119 81 9 8119 Insurance Fremium under a policy insurin# its employees a#ainst injury or Deasonable expenses incurred on the occasion of 4ussehra, 4iwali, $ompulsory subscription or a subscription #iven to a association in the 3e#al expenses incurred in connection with the business or profession7 a#ainst liability for compensation in respect of accident to its workmen" commencement of the business etc", interest of the business" 8i9 in the normal course of business or 8ii9 to avoid a business liability, i"e", for alle#ed breach of tradin# contract, or 8iii9 to defend the assessee6s title to his assets, or 8iv9to terminate a disadvanta#eous tradin# relationship, or 8v9 to resist a windin# Uup petition by some shareholders" 81B9 3e#al expenses incurred by a director of a company in defendin# as suit brou#ht a#ainst him to challen#e the validity of his election as a director, as it is incurred to save his income from the source" 81/9 8169 8109 81-9 8199 Interest on unpaid purchase price of any business assets purchased by an Cxpenditure incurred to oppose nationali'ation or to prevent extinction of ;2or#an Gs" Tata Z 3yle 3td" 819/B9 6 ITD 19/< %nder executive instructions, cost of installin# new telephone" ?ormal advertisement expenditure incurred to maintain the sales not assessee and put to use will be allowed" business"

covered by section 10 8 )9"

11

8 .9

Fenalty paid by the assessee for savin# from confiscation the #oods which

he purchased from a third party without knowin# that they had been ille#ally imported" 8 .9 Amount paid by a director of a company in li5uidation for compoundin# misfeasance proceedin# started a#ainst him by the li5uidator" 8 19 *elfare expenditure incurred by the assessee" 8 9 Fayment of excise duty" purchase of 8 19 &uarantee fee paid to the &overnment for loan obtained for machinery" 8 B9 Cxpenditure incurred in connection with alterations made in the 2emorandum or Articles of Association of a company if these alterations are warranted by the chan#es made in $ompanies Act" -CI# vs" 5l+hinston S+inning an( =eaving Mills )t(& 8190/9 1.. ITD 119< 8 /9 If an assessee stands surety for the debt of another and it is usual in this trade to #uarantee debts, any payment made as a result of such #uarantee may be allowed as a business loss" 8 69 Frofessional tax levied by local authorities the payment of which is a necessary condition for the carryin# on the business within the area of a local authority" 8 09 Debate #ranted by co!operative stores to their members on the value of the purchases made by them" 8 -9 The interest payable on arrear of cess is in the nature of compensation paid to the &overnment for delay in the payment of cess and not as penalty, hence it is deductible" (imilarly, interest paid for delay in payment of municipal taxes is also allowable as deduction" 8 99 Amount spent by an assessee in purchasin# loom hours is deductible as revenue expenditure" 81.9 Amount paid as dama#es to the &overnment 4epartment for delay in the execution of contracts was held to be allowable deduction, if the delay was inherent in the nature of business carried on by the assessee" 8119 Annual listin# fee paid to (tock Cxchan#e by public limited company is allowable" 81 9 Interest levied for failure to pay installment of the assets purchased on hire!purchase

1B

basis is allowable" 8119 Cxpenditure incurred on inau#uration ceremony is allowable" 81B9 Cxpenditure incurred on forei#n tour of director purposes of expansion of business of the mana#ed company is allowable" 81/9 *ife of chairman!cum!mana#in# director accompanyin# him for fulfillin# social aspects" Cxpenses incurred on forei#n tour of wife are deductible" Appollo Tyres 3td" 8199-9 1B9 $TD /B/8Ker,9< 8169 3iability of pay debenture premium is to be spread over the years between date of issue and date of redemption" ; ?ational Cn#ineerin# Industries 3td" Gs" $IT 819999 16 ITD /00 8$al"9< 8109 4eposit under Tatkal Telephone 4eposit (cheme" $ertain Allowable 3osses 3osses which are directly incidental to the business or profession of the assessee are allowable" :ollowin# are some examples of such losses7 819 Dobbery or 4acoity" 3oss caused by robbery or dacoity is not deductible" )ut, if it ;$IT vs"

is incidental to business it will be allowed as a deduction and this upon the specific circumstances and conditions" :or example, if cash is sent for disbursement at different centres by a su#ar factory in rural area, it is incidental to business and is, therefore, allowed, ;2otipur (u#ar :actory 3td" Gs $IT 819//9 - ITD -<" Any loss due to robbery in a bank will be allowed as the bank is under an obli#ation to maintain some cash outside the stron# room for payments" 8 9 Cmbe''lement, Theft, etc" The loss of money due to embe''lement by an employee handlin# the funds of the business while dischar#in# his official duties is allowed as deduction" It is deductible when discovered 8Tadalam &" 4warkanath Z $o"Gs $IT 819999 19 ITD 8Kar"9< *hen an employee #oes to bank to deposit the cash or takes with him for disbursement and he takes away the money for his own use, even thenm, the loss is allowable" Theft by a cashier, who is inchar#e of cash is also an allowable loss" A theft committed after office hous, is also allowable someone the loss sustained by the assessee is incidental to business and is, therefore, allowable"

1/

CQFC?(C( CQFDC((C3J 4I(A33+*C4 8I9 4isallowance of expenditure on advertisement in any souvenir, etc published by as political party" ;(ec" 10 8 )9<" Any expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet, etc", published by a political party, shall not be allowed as a deduction in computin# the profits and #ains of business or profession" A9 8i9 In the case of any assessee Fayments outside India etc", Any interest, royalty, fees for technical services,

etc", which is payable8a9 outside India or 8b9 I India to a non!forei#n company on which tax is deductible at source an such tax has not been deducted at source or after prescribed time, shall not be allowed as a deduction" =owever, if in respect of any such tax has been deducted in any subse5uent year, or has been deducted in the previous year but paid in subse5uent year after the prescribed time, such sum shall be allowed as a deduction in computin# the income of that year in which such tax has been paid" 8ia9 Fayments to residents" 8a9 Any interest, commission or brokera#e, rent royalty, fees for professional services or fees for technical services payable to a resident, or 8b9 amounts payable to a resident contractor or sub!contractor for carryin# our any work, on which tax is deductible at source and such tax has not been deducted or, after deduction has not been paid 7 8A9 *here the tax was deducted durin# the last month of the previous year, it has not been paid on or before the due date specified in (ec" 119 819 , or 8)9 in any other case, it has not been paid on or before the last day of the previous year, it shall not be allowed as a deduction" =owever, if in respect of such sum tax has been deducted in any subse5uent year, or has been deducted7 8A9 durin# the last month of the previous year but paid after the due date specified in Sec& 119819, or 8)9 durin# any month of the previous year but paid after the end of the said previous year, such sum shall be allowed as a deduction in computin# the income of the

16

previous year in which such tax has been paid" 8ib9 Any sum paid on account of securities transaction tax shall not be allowed as a deduction" 8+mitted w"e"f" AJ" ..9!1.9 8ic9 Any ] paid on account of frin#e benefit tax shall not be allowed as a deduction" 8ii9 #a' on .rofits an( 6ains& Any sum paid on account of any tax levied on the profits and #ains of any business or profession shall not be allowed as a deduction" 8iia9 =ealth ta'& *ealth tax char#eable under *ealth Tax Act shall not be allowed as a deduction" 8iii9 Salaries .a,able outsi(e In(ia or to a 4on-resi(ent& It is not allowed as a deduction, if tax has not been paid thereon nor deducted at source" 8iv9 .a,ment to .&:&7 etc& Any payment to a provident or other funds shall not be allowed as^ a deduction unless it is ensured that tax shall be deducted at source from" any payments made from the fund provided it is char#eable to tax" 8v9 #a' on +er8uisites of em+lo,ee& Any tax actually paid by an employer on the value of per5uisites provided to an employee which is exempt uEs 1.81.$$9" 8)9 In the case of an, +artnershi+ firm 8i9 Any payment of salary, bonus, commission or remuneration made by the firm to any partner of the firm, who is, not a workin# partner, shall not be allowed as a deduction" 8ii9 Fayment of salary, etc"^ to workin# partners will be allowed as a deduction, only if it is authorised by and is in accordance with the terms of partnership deed" It is further provided that the terms of partners deed will not have retrospective effect in this respect" 8iii9 Interest to partners will be allowed at the maximum rate of 1 M simple interest" =owever, it will be allowed only if it is authorised by and is in accordance with the terms of partnership deed" 8iv9 In the case of workin# partners payment of salary, bonus, coi A77l"47tission or remuneration to all partners taken to#ether will be allowed as a deduction subject to the followin# limit7

10

(a)

In the case of a +rofessional firm 7 or in case of a loss

+n the first Ds" 1,..,... of the book!profit 8ii9 +n the next Ds" 1,..,... of the book!profit 8iii9 +n the balance of the book!profit 8b9 In the case of an, other firm: 8i9 +n the first Ds" 0/,... of the book!profit or in case of a loss Ds" /.,... or O 9.M of the )ook!profit, whichever is more" 8ii9 +n the next Ds" 0/,... of the book!profit O6.M 8iii9 +n the balance of the book!profit O B.M In clause 8iv9 above, ^)ook!profit^ means the net profit as Ds" /.,... or O 9.M shown in the profit and loss account computed in the of the book!profit, manner laid down in the Act, as increased by the whichever is more" a##re#ate amount of remuneration paid or payable to O6.M all the partners of the firm, if sum amount has been OB.M deducted while computin# the net profit" ^*orkin# partner^ means a partner who is actively en#a#ed in the business of the firm" 8$9 In the case of an *ssociation of .ersons or Bo(, of In(ivi(uals (other than a Com+an, or a Co-o+erative Societ,! In such a case any payment of interest, sa1ary, bonus, remuneration to a member of such association or body shall not be allowed as a deduction" Cxpenses not deductible in certain circumstances 8Sec&/>*! (1! 5'cessive +a,ments& Any payment of an expenditure, to a relative or to an associate concern shall be disallowed if the Assessin# +fficer considerEit to be excessive or unreasonable havin# re#ard to all the circumstances of the case" +nly the excessive or unreasonable part is to be disallowed" :or this purpose, relative means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual who is the assessee" Associate

1-

concern is a concern which has a substantial interest in the business of the tax! payer or in which the tax!payer or any relative has a substantial interest" -Sec&/>*("!1 ("! .a,ments in cash& Any expenditure in respect of which payment 8or a##re#ate of payments made to a person in a day w"e"f" A"J" ..9!1.9 is made exceedin# Ds" .,... otherwise than by an account payee che5ues drawn on a bank or by an account payee bank draft it will be disallowed" *here a deduction of expenditure is claimed in one year and the payment is made a#ainst such expenditure in any subse5uent year in violation of Sec& B+A819, such expenditure will be deemed to be profits and #ains of business of the year in which the payment is made" 5'ce+tions& In the followin# cases even if the payment in cash exceeds Ds" .,..., it shall not be disallowed7 8i9 8ii9 Fayment made in rural areas or small towns where, no bankin# facilities are available to a person who ordinarily resides there" Fayment made to cultivator, #rower or producer for purchase of a#ricultural or forest produce, or the produce of animal husbandry 8includin# hides and skins9 or dairy or poultry farmin#, or fish or fish products or products of horticulture or a#riculture or products of cotta#e industries which are run without the aid of power" 8iii9 8iv9 Fayment made to )anks or 3ife Insurance $orporation, etc" Fayment to employee or to the member of his family in respect of #ratuity, retrenchment compensation, etc", where the a##re#ate of such sums does not exceed Ds" /.,..." 8v9 Fayment is made to &overnment and such payment is re5uired to be made in le#al tender" 8v9 Fayment is made by way of adjustment a#ainst the amount of any liability incurred by the payee for any #oods supplied or services rendered by the assessee to such payee" 8vii9 Fayments which is re5uired to be made on a date on which the banks are closed" 8vi9 Fayment is made by any mode throu#h a bank" ($ule 6449 :urther, the limit of Ds" .,... applies to the payment made to a party at a

19

time and not the a##re#ate of the payments made to a party in the course of a day" -CI# G)" *loo Su++l, Co& (198>! 1 1 ITD 6-. 8+ri"9< -Sec& B.A819< (%! .rovision of gratuit,& 2ere provision made for the payment of #ratuity to the employees on retirement or on termination of services will not be allowed as a deduction in computin# taxable profits of the business or profession" =owever, provision made for #ratuities due durin# the current previous year will not be disallowed" Frovision made for makin# contribution towards an approved #ratuity fund will also be allowed" ;(ec"B.A809< 8B9 ?o deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the settin# up of, or as contribution to, any unapproved fund" =owever, where such sum is so paid for the purpose of reco#nised provident fund or statutory provident fund or an approved superannuation fund or approved #ratuity fund is allowed as deduction" -Sec& B.A899< ( ! <ther 5'+enses& In addition to the above expenses, which are expressly disallowed under sections B. and B.A the followin# expenses, losses and allowances are also not allowable as deduction in computin# the profits and #ains of business or profession7 8i9 4rawin#s or personal expenses of proprietor or partners" 8ii9 Any provision or transfer to reserve except transfer to reserves, as provided in the Act" 8iii9 Amounts paid as charity or presents" 8iv9 Fast losses char#ed to Frofit Z 3oss Account" 8v9 Any expenditure not incurred wholly and exclusively for the purposes of the business or profession" 8vi9 Cxpenditure incurred to buy off competition" 8vii9 Fenalties paid by the assessee for infrin#ement of law" 8viii9 Fayments made by an assessee in the nature of sharin# the profits to the sole sellin# a#ents under an a#reement are not deductible" -CI#vs& .ani+at =oollen an( 6eneral Mills Co& )t(& 819069 1.1 ITD 66 8($9< 8ix9 3iti#ation expenses for re#istration of shares" 8x9 $ontribution to a political party where there is no direct relationship between con! tribution and the business of the assessee" 8xi9 Insurance premia paid by a firm on life insurance policies of its

partners" 8xii9 Cxpenditure on shiftin# of re#istered office" 8xiii9 :ees paid for increase of authorised capital" 8xiv9 Cxpenses incurred for issuin# shares" 8xv9 Fayments made for ac5uisition of #oodwill" 8xvi9 Cxpenditure incurred in violation of another statute" fCI# G)" In(ia Cement )t(& 8 ...9 B1 ITD 6 82ad"9< 8xvii9 &ifts made on the occasion of marria#es in the families of friends and others with whom assessee has business dealin#s cannot 5ualify as business expenditure even on #rounds of commercial expediency" fCI# G)" ?eevan(as )al9ee Z Sons 819999 1/0 $TD /6 82ad"9<

4C4%$TI+?( A33+*A)3C +?3J +? A$T%A3 FAJ2C?T (Sec& B1)9 The followin# deductions are allowable only on actual payment7 8a9 Any sum payable by the assessee by way of tax, duty, cess or fee" 8b9 Any sum payable by him as an employer by way of contribution to any provident fund, superannuation fund or #ratuity fund or any other fund for the welfare of employees" 8c9 Any sum payable to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profit or dividends if it had not been paid as bonus or commission" 8d9 Any sum payable by the assessee as interest on any loan or borrowin# from any Fublic :inancial Institution or a (tate :inancial $orporation or a (tate Industrial Investment $orporation" 8e9 Any sum payable by the assessee as interest to a scheduled bank on any loan or advance from a scheduled bank" 8f9 Any sum payable by the assessee in lieu of earned leave" If actual payment is made either durin# the relevant previous year or on or before the due date for furnishin# the return of income %E( 119819, the deduction will be allowed in the relevant previous year" If the amount is paid after the due date of furnishin# the return, the deduction will 1

be allowed in the year of payment" Any sum payable by the assessee as interest ;under 8d9 or 8e9< is converted into a loan or borrowin#, it shall not be deemed as actual payment" FD+:IT( $=AD&CA)3C T+ TAQ The followin# profits are also char#eable to tax under the head ^Frofits and #ains of business or profession67 (1! $ecover, of an, loss or e'+en(iture allo3e( as (e(uction in an earlier ,ear -Sec& B1819< 8a9 If any sum allowed as deduction as a loss or expenditure in an earlier year, is recovered in a subse5uent year, the amount so recovered shall be treated as deemed profit and shall be char#eable to income tax in the year of recovery" 8b9 If any loss or expenditure has been allowed as deduction in an earlier year and thereafter if the business has chan#ed hands and subse5uently the successor in business has realised any amount in respect of such loss or expenditure, the amount shall be deemed to be profits char#eable to tax in the hands of the successor" ("! .rofit on Sale of *ssets on 3hich (e+reciation is claime( on Straight )ine Metho( -Sec& /1("!1 *here any buildin#, machinery, plant or furniture which is 8i9 owned by the assessee, 8ii9 in respect of which depreciation has been claimed on (trai#ht 3ine 2ethod, and 8iii9 which has been used in business is sold, discarded, demolished or destroyed and the moneys payable in respect of such asset to#ether with the amount of scrap value exceeds the written!down value, the excess upto the difference between the actual cost and the written!down value shall be taxable as deemed profit" The deemed profit is assessable even if the business to which it relates has been closed down" @ls B18 9 money refers only to cash and not money^s worth" *here an asset is reinstated by Insurance $ompany, benefit derived from reinstatement is not covered by Sec& B18 9" -el# G(" Aasturi Z Sons )t(& 819999 10 ITD B 8("$"9< -Sec& B1819< (%! Sale of asset use( for scientific research

If a capital asset used for scientific research is sold without havin# been used for other purposes, and the sale proceeds to#ether with the deductions allowed uts 1/ exceed

the amount of capital expenditure incurred on it, such surplus or the amount of deductions allowed, whichever is less, is char#eable to tax as business income of the previous year in which the sale took place" If the deduction allowed is less than the aforesaid surplus, the excess of surplus over the deduction allowed is char#eable to tax as capital #ain" (/! Ba( Debts $ecovere( -Sec& B18B9< If a bad debt allowed as deduction in an earlier year is recovered in a subse5uent year, it is taxable as deemed business pro]t in the year of recovery, even if the business or profession, to which the recovery relates, is closed before the year of recovery" ( ! $ecover, after (iscontinuance of business or +rofession -Sees& 10681A9 and 8B9< If any business or profession is discontinued in any year, and any sum is recovered afterwards, it will be deemed to be income of the recipient and char#ed to tax in the year of receipt, provided that ifit had been received before the discontinuance of the business or profession, it would have been char#eable to tax" (B! =ith(ra3al from S+ecial $eserve -Sec& B18BA9< *here any amount is withdrawn from the special reserve created and maintained by a specified entity ;under section 1681Qviii9< it shall be deemed to be the char#eable profits of the previous year in which such amount is withdrawn from the Deserve Account" *here the amount is withdrawn from the Deserve Accounts in the previous year in which the business is no lon#er in existence, it will be char#eable to tax as if the business is in existence in that previous year" (et!off of losses a#ainst profits char#eable to tax -Sec& B18/9< Any loss of business or profession of the year in which it ceased to exist and which could not be set!off a#ainst any other income of that Jear, shall be set!off a#ainst the aforesaid profits under section B1" =owever, such a loss from speculation business cannot be so set!off" 2aintenance of Accounts (Sec& BBAA9 :or the purpose of provisions relatin# to maintenance of accounts, the business or profession has been classified into the followin# three cate#ories7 I 819 (pecified Frofessions, 8 9 ?on!specified profession or business,

819 )usiness under sections BBA4, BBAC and BBA:" 819 S+ecifie( .rofessions& The followin# professions are specified professions7 8a9 3e#al, 8b9 2edical, 8c9 Cn#ineerin#, 8d9 Architectural, 8e9 Accountancy, 8. Technical $onsultancies, 8#9 Interior 4ecoration, 8h9 such other profession as may be notified by the $entral )oard of 4irect Taxes" The )oard has notified the followin# professions for the purposes of this section7 8i9 The profession of authori'ed representative, 8ii9 The profession of film artists, and 8iii9 The profession of information technolo#y" (uch persons are re5uired to maintain prescribed books of account if their #ross receipts in the profession exceeds Ds" 1,/.,... in anyone of the three years immediately precedin# the previous year, or where the profession has been newly set! up in the previous year, his #ross receipts in the profession for that year are likely to exceed the said amount" -4otification 4o& 11119 dated 6"B" ...< .rescribe boo2s 7 8i9 $ash )ook, 8ii9 Aournal 8if accounts are maintained on the basis of mercantile system9, 8iii9 A led#er, 8iv9 $arbon copies of bills issued exceedin# Ds" /, 8v9 +ri#inal bills, and 8vi9 Deceipts re#ardin# expenses exceedin# Ds" /." ("! 4on-S+ecifie( .rofession or Business& 8i9 *hose income from such profession or business exceeds Ds" 1, .,..., or 8ii9 Total sales, turnover or #ross receipts exceed Ds" 1.,..,... in anyone of the three years immediately precedin# the previous year, or 8iii9 In the case of newly set!up profession or business incomeEtotal

salesEturnoverE#ross receipts are likely to exceed the aforesaid amounts" They are re5uired to maintain such books of account and other documents as may enable the Assessin# +fficer to compute their total income" ?o books are prescribed B

for them" (%! Businesses un(er sections BBA4, BBAC and BBA:" *here the assessee claims that the profits and #ains of business of civil construction (Sec& _A49 or plyin#, hirin# or leasin# #oods carria#e (Sec& BBAC9 or the business of retail trade (Sec& BBA:9 are lower than the deemed profits under these sections, he has to maintain the books of account of such business" $ompulsory Audit of Accounts (Sec& BBA)9 (1! #urnover E gross recei+ts e'cee( +rescribe( limit& It is obli#atory for a person carryin# on business to #et his accounts audited before 1.th (eptember 8w"e"f" A"J" ..-!.99, if the total sales, turnover or #ross receipts in business for the previous year exceed Ds" B. lakh" A person carryin# on profession has also to #et his accounts audited before 1.th (eptember if his #ross receipts in profession for the previous year exceed Ds" 1.1akh" (uch persons are re5uired to obtain before 1.th (eptember a report of the audit in the prescribed form and submit it alon# with the return of income" ("! Businesses un(er sections BBA4, BBAC and BBA:" *here the assessee claims that the profits and #ains of business of civil construction (Sec& _A49 or plyin#, hirin# or leasin# #oods carria#e (Sec& BBAC9 or the business of retail trade (Sec& BBA:9 are lower than the deemed profits %nder these sections, he has, to #et his accounts audited and furnish by 1.th (eptember a report of the audit in the prescribed form" 819 *ssessee claims (e(uction un(er sections 11A), 11A)A, 1/4 or 1/C" *here the assessee claims deduction under ^Tea development a_count^, ^(ite restoration fund^, ^Freliminary expenses^ or ^Cxpenditure on prospectin#, etc", for certain minerals^, he has to #et his accounts audited and furnish by 1.th (eptember a report of the audit in the prescribed form" *here such person is re5uired by or under any other law to #et his accounts audited, he need not #et them audited a#ain, but he should #et the audit done before the specified date and #et its report as well as another report in the form prescribed under this section" S+ecial +rovisions for com+uting +rofits an( gains of business of Civil Construction7

etc& (Sec& BBA49 This scheme is applicable to an assessee who is en#a#ed in the business of civil construction or supply of labour for civil construction and the #ross receipts paid or payable to the assessee from such business in the previous year do not exceed Ds" B. lakh" The income from such business shall be deemed to be -M of the #ross receipts paid or payable to the assessee durin# the previous year" 5'+lanation 7 ^$ivil $onstruction^ includes 7 8a9 the construction or repairs of any buildin#, brid#e, dam or other structure or any canal or road and also, 8b9 the execution of any works contract" Illustration 1 2r" ?ath is en#a#ed in business of civil construction" =is #ross receipts from such business are Ds" 1/1akh durin# the previous year ..0!.-" =e wants to pay tax on his income assumin# the income O -M of #ross receipts u/s BBA4" :urther a#ainst such income he wants to claim depreciationO 1/M on plant and machinery *"4"G" Ds" 1. lakh on 1"B" ..0, which he used for the aforesaid business" :ind out his income assessable under the head ^Frofits and &ains of )usiness or Frofession^ and *"4"G" of plant and machinery on 1"B" ..9" Solution *hen 2r" ?ath wants to pay tax on assumed income u/s BBA4, he is not entitled to claim any deduction as expense in computin# the business income" =ence, he is not entitled to claim depreciation on plant and machinery used for this business purposes" :urther, it will be assumed that the assessee has claimed the depreciation on the asset used for the purposes of business and it had been actually allowed" Accordin#ly his assessable business income and *"4"G" of FI2 on 1"B" ..9 shall be as under7 Assessable business profits7 -M of Ds" 1/ lakh $omputation of*"4"G" of plant and machinery on 1"B" ..97 Ds" ,-.,...

*"4"G" on 1"B" ..)ess: 4eemed depreciation allowed O 1/M *"4"G" on 1"B" ..9 leasing goo(s carriages 8(ec"BBAC9

1.,..,... 1,/.,... -,/.,...

S+ecial +rovisions for com+uting +rofits an( gains of business of +l,ing7 hiring or This scheme is applicable to an assessee, who is en#a#ed in the business of plyin#, hirin# or leasin# of #oods carria#es 8trucks9 ownin# not more than 1. #oods carria#es at any time durin# the previous year" The income of such business char#eable to tax under the head ^Frofits and #ains of business or profession^ shall be deemed to be the a##re#ate of the profits and #ains from all the #oods carria#es owned by him in the previous year and will be computed as under7 8i9 the profits and #ains from each heavy #oods vehicle shall be Ds" 1,/.. for every month or part of a amount durin# which the heavy #oods vehicle is owned by the assessee in the previous year, 8ii9 the profits and #ains from other than a heavy #oods vehicle shall be Ds" 1,1/. for every month or part of a month durin# which the vehicle is owned by the assessee in the previous year" *here an assessee has taken #oods carria#e on hire purchase or on instalments, he shall be deemed to be the owner of such #oods carria#e" Illustration " A truck operator assessee owns heavy #oods vehicles for 9 months 1B days, 1 medium #oods vehicles for 1. months - days and B li#ht #oods vehicles for 0 months 1 days, durin# the previous year ..0!.-" =e did not keep any accounts for frei#ht receipts and expenses" $ost of Gehicles is Ds" . lakh" $ompute his Income from )usiness uEs BB AC of Income Tax Act Solution The assessee is not ownin# more than 1. vehicles, hence, the income shall be deemed as under 7 8i9 =eavy #oods vehicles7 Income is deemed Ds" 1,/.. p"m" or part of a month per vehicle 7 x 1,/.. x 1. P Ds" 0.,...

Rs.

8ii9 2edium #oods vehicles and li#ht #oods vehicles 7 Income is deemed Ds" 1,1/. p"m" or part of a month per vehicle 1 x 1,1/. x 11 P Ds" 1,.1,9/. B x 1,1/. x - P Ds" 1,..,-.. Income uEs BBAC Ds" ,0B,0/. " Illustration % A F:A( is en#a#ed in the business of plyin# and hirin# #oods carria#e" compute the business income of firm 7
Rs. 36,00 36,00 0 67,50 45,00 0 30,48

1,26,000 21,000 1,51,200 2,98,200 72,000 2,26,200

1,20,000 1,06,200

The firm wants to compute its income uEs BBAC" :rom the followin# information The firm has five heavy #oods vehicles, out of which two were purchased on hire purchase 7 system on ."1" ..-" It has four #oods carria#es other than heavy #oods vehicles" As per partnership deed partners A and ) are entitled to 8i9 salary Ds" /,... p"m" each, and interest O 1 M p"a" on capital of Ds" 1,..,... each" $omputation of )usiness Income of the :irm 4eemed income of heavy #oods vehicles Ds" 1,/.. p"m" or for a part of month per vehicle 1 x 1,/.. x 1 x 1,/.. x 1 4eemed income of other vehicles Ds" 1,1/. p"m" or for a part of month per vehicle 8B x 1,1/. x 1 9 3ess 7 Interest to partmerns 7 A ) )ook!profits 3ess 7 Demuneration to partners 7 9.M ofDs" 0/,... 6.M ofDs" 0/,... B.M ofDs" 06, ..

or Ds" 1, .,... as per deed, whichever is less )usiness Income of the :irm Illustration / 2r" & retired from &overnment (ervice in 2arch ..-" =e #ot Ds" 1-1akh on account of retirement benefits" +ut of the aforesaid sum, he purchased on 1rd April, ..0 a few motor vehicles and #ot their delivery on that date" The particulars of the vehicles are #iven below7 Cost of the Cehicle 8i9 =eavy #oods vehicles! 8ii9 2edium #oods vehicles!B 8iii9 3i#ht commercial vehicles!1 Ds" -,..,... B,..,... 1,..,...

=e formed &2 and Associates 8a sole proprietorship concern9, alon# with his son 2 as an employee on 1"6" ..- and started plyin# the vehicles from B"6" ..+n an avera#e every vehicle remains off the road for about a week for repairs and maintenance" &2 and Associates maintains no account and vouchers" =owever, it maintains a rou#h record of its receipts and out#oin#s which is #iven below7 Ds" 11,B.,... Deceipts B,1.,... )ess: Cxpenses 8excludin# depreciation and salaries to 29 9,1.,... Jou are re5uired to compute the total income of &2 and Associates from business of #oods carria#e for F"J" ..-!.9 relevant to the A"J" ..9!1." Assume the rate of depreciation 1.M and salary to 2 at Ds" 1,..,... p"a" Solution $omputation of income of &2 Z Associates from business of #oods carria#e for A"J" ..9!1. 7 (i) The assessee does not own more than 1. #oods carria#es" 8ii9 The assessee does not maintain proper accounts re#ardin# the aforesaid business, hence, income shall be computed on the basis of deemed income uEs BBAC" Sec& BBAC provides that income from each heavy #oods vehicle shall be Ds"

1,/.. p"m" or part of a month and other than a heavy #oods vehicle Ds" 1,1/. p"m" or part of a month durin# which the vehicle is owned by the assessee in the previous year" Accordin#ly income shall be computed w"e"f" April ..0 8date of delivery of vehicles9 and not w"e"f" Aune ..0 8date of plyin# the vehicles9" Income for A"J" ..9!1. shall be 7 =eavy #oods vehicles 8 x 1,/.. x 1 9 2edium #oods vehicles 8B x 1,1/. x 1 9 3i#ht commercial vehicles 81 x 1,1/. x 1 9 Ds" -B,... 1,/1, .. 1,11,B.. 1,B-,6.. ?either the amount of depreciation on vehicles nor salary paid to 2 is deductible from the income Ds" 1,B-,6.." S+ecial .rovisions for Com+uting .rofits an( 6ains of $etail #ra(e (Sec& BBA:9 This scheme is applicable to an assessee who is en#a#ed in the business of retail trade in any #oods or merchandise provided the total turnover of such business in the previous year does not exceed Ds"B. lakh" The income from such business shall be deemed to be /M of the total turnover durin# the previous year" Some common +rovisions a++licable to Section BBA4, Section BBAC and Section BBA: The common provisions are as under7 819 *hen the income is` deemed uEs BBA4 .1^ uEs BBAC or uEs BBA: no deduction under sections 1. to 1- shall be allowed a#ainst the deemed income as it is presumed that all such deductions have already been allowed" :urther, it shall be deemed that the assessee had claimed the depreciation on the assets used for the purposes of the above business and it had been actually allowed, and the written!down value will be calculated accordin#ly" *here the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed aforesaid subject to the conditions and limits prescribed in section B.8b9"

1.

8 9 The assessee shall not be re5uired to maintain accounts under section BBAA and #et the accounts audited u/s BBA) relatin# to the aforesaid businesses" 819 If the assessee is en#a#ed in any other business also alon# with any of the aforesaid business in computin# the monetary limits under sectionS BBAA and BBA) 8for other business9 the #ross receiptsEincome from aforesaid respective business shall be excluded" (4) The scheme is optional and if the assessee claims that the profits from any of the aforesaid businesses are less than the deemed profits, he has to maintain proper account books, #et these audited and the report of audit must be furnished by the specified date uEs BBA)" GA3%ATI+? +: (T+$K`I?`=A?4 There are no provisions in the Income Tax Act re#ardin# the valuation of stock! in!hand in a business" =ence, it is valued accordin# to the #eneral principles of accountin#" &enerally, the valuation of stock is done as under7 8i9 on the basis of cost, or 8ii9 on the basis of market price, or 8iii9 on the basis of cost or market price, whichever is less" The assessee is free to adopt any method, but once a method is adopted it has #ot to be adhered to year to year" It means that once a particular basis of valuation is adopted, it cannot be chan#ed by the assessee at his own sweet will, but only with the previous approval of the Assessin# +fficer" Sec& 1B/A provides that the value of the inventory on the first and the last day of the previous year shall be determined accordin# to the method of accountin# re#ularly employed by the assessee" It shall also include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force" *here an assessee converts his, capital assets into stock!in!trade and starts dealin# in them the value of such stock will be the market value as on the date of their conversion into stock!in!trade and not ori#inal cost" =owever, such conversion shall be a transfer uEs 8B09 and liable to tax under the head ^$apital #ains^"

11

)ank valuin# stock!in!trade 8investments9 at cost in balance sheet in accordance with )ankin# De#ulation Act and valuin# same investments at cost or market price, whichever is less, for income tax purposes" The method is valid and cannot be rejected" -@nite( Commercial Ban2 G)" CI# 819999 B. ITD 1// 8($9< 4C4%$TI+?( CQFDC((3J A33+*C4 AT A &3A?$C Cxpenses in respect of buildin#s!rent, repairs, land revenue, local taxes, insurance premium" Cxpenses in respect of plant, machinery, furniture!Depairs and insurance premium" 1" buildin#s, plant and (a!De+reciation on #angible *ssets: Tan#ible assets are machinery and furniture" 8b9 De+reciation on Intangible *ssets: Intan#ible assets are know!how, " patents, copyri#hts, trademarks, licences, franchises and commercial ri#hts" 4eduction re#ardin# deposit in Tea 4evelopment Account, $offee 4evelopment Account or Dubber 4evelopment Account!4eduction shall be allowed on the amount deposited or B.M of the profits of such business, whichever is less" 1" 4eduction re#ardin# deposit in special account for prospectin# for, or extraction or production of petroleum or natural #as!4eduction shall be allowed on the amount deposited or .M of the profits of such business, whichever is less" B" Cxpenditure on (cientific Desearch7 8i"9 8ii"9 Devenue expenditure and capital expenditure (um paid for scientific research or social or statistical research 8iii"9 8iv"9 4eduction 1 /M of sum paid Cxpenditure on in!house research and development! 4eduction 1/.M of the expenditure"

/" 4eduction re#ardin# capital expenditure to obtain licence to operate telecommunication services" 6" Cxpenditure on eli#ible project or scheme" 0" Fayment to Dural 4evelopment :und, ?ational Foverty Cradication :und" -" 4eduction to an Indian company or resident in India re#ardin# preliminary expenses!4eductible in five previous years upto a specified limit" 9" 4eduction to an Indian company re#ardin# expenditure for amal#amation or demer#er of an undertakin#!4eductible in five e5ual instalments annually" 1." Cxpenditure on voluntary retirement durin# any previous year!4eductible in five instalments annually" 11" 4eduction to an Indian company or resident in India re#ardin# expenditure on prospectin# of minerals etc"! 4eductible in ten instalments annually" 1 " +ther deductions7 8i9 Insurance premium re#ardin# stocks and stores" 8ii9 Insurance premium for the health of employees" 8iii9 )onus or commission to employees" 8iv9 8v9 Interest on borrowed capital" 4iscount on 'ero coupon bond" 8vi9 $ontribution to reco#nised provident fund, approved superannuation fund, approved #ratuity fund" 8vii9 8viii9 3oss re#ardin# animals used for business or profession" )ad debts" 8ix9 4eduction to banks and financial institutions re#ardin# provision for bad and doubtful debts upto a specified limit"

11

8x9

Deserve created by specified entity deductible .M of profits or amount credited to special reserve account, whichever is less"

8xi9 Cxpenditure on family plannin# by a company to promote family plannin# amon#st its employees7 8a9 $apital expenditure!!!deductible in five e5ual instalments annually" 8b9 Devenue expenditure" 8xii9 Cxpenses in connection with income tax proceedin#s" 8xii9 8xiii9 Cntertainment expenses" )ankin# Transaction Tax paid" 11"&eneral deduction!provided7 8i9 it is not personal expense of the assessee, 8ii9 it is not in the nature of capital expenditure, 8iii9 it is expended wholly and exclusively for the purpose of business or profession durin# previous year" 4C4%$TI+?( CQFDC((3J 4I(A33+*C4 AT A &3A?$C 8A9 :or all assessees 7 1" Cxpenditure on advertisement in any souvenir, etc" published by a political party" " Fayment out of India or in India to a non!resident or a forei#n company!+n which tax is deductible at source but tax has not been deducted or after deduction has not been paid" Fayment to residents of interest, commission or brokera#e, rent, royalty, fees for technical or professional services or to contractor or sub!contractor on which tax is deductible at source but tax has not been deducted or after deduction has not been paid" B" (um paid on account of (ecurities Transaction Tax" /" Income Tax and *ealth Tax" 6" (um paid on account of :rin#e )enefit Tax"

1B

0" (alaries payable outside India or to a non!resident on which tax has not been deducted at source or paid" -" Tax paid by the employer voluntarily on the value of per5uisites provided to employees" 8)9 :or :irms 7 9" (alary, bonus, commission or remuneration to workin# partners in excess of prescribed limit" 1." Interest on capital or loan to partners in excess ofO 1 M p"a" 8$9 :or A+F or )+I 7 Fayment of interest, salary, bonus, commission or remuneration to members of A+F or )+I is disallowed"

CQFC?(C( ?+T 4C4%$TI)3C I? $CDTAI? $ID$%2(TA?$C( AT A &3A?$C Fayment to relative or associate concern in excess of market rate" Fayment in cash exceedin# Ds" .,...!1..M of payment shall be disallowed" There are certain exceptions" Frovision for #ratuity provided the #ratuity fund is not an approved fund" $ontribution to any unapproved fund by the employer" Illustration / (tate with reasons whether the followin# items are admissible under the Indian Income Tax Act, 19617 8a9 $ommission of Ds" /.. paid in order to secure orders for the business" 8b9 The assessee was carryin# on money!lendin# business and in the course of this business he ac5uired certain property in lieu of debts owin# from a debtor which he kept as stock!in!trade" The property so ac5uired was destroyed in war, the assessee claimed this loss as a deduction in computin# his taxable income under the head ^)usiness^" 8c9 3oss of Ds" 1,... which were snatched away from the 2ha;ancheeDs possession while #oin# to bank to deposit the amount" 8d9 3oss due to embe''lement by an employee" 8e9 )rokera#e paid for raisin# loan for the business"

1/

8f9 Ds"1,... spent in connection with installation of a new telephone connection" 8#9 :ees paid to lawyer on 1"6" ..- for draftin# the 4eed of A#reement with an outsider relatin# to the settin#!up the business" 8h9 Fension paid to the widow and children of a deceased en#ineer of the factory voluntarily" 8i9 Interest paid for funds borrowed specifically for the ac5uisition of a capital asset" Solution 8a9 The commission of Ds" /.. paid in order to secure orders for the business is an expenditure in the ordinary course of business and hence it is admissible" 8b9 In the course of his money!lendin# business the assessee ac5uired certain property in lieu of debts and kept it as stock!in!trade" This loss is allowable as it is the loss of stock!in!trade" 8c9 This loss is admissible as it was part of his duty to carry cash for depositin# it in bank and hence it is incidental to the business" 8d9 It is admissible as it has been sustained durin# the ordinary course of business" 8e9 )rokera#e paid for raisin# a loan for the business is an admissible expenditure" -ln(ia Cement )t(& G)" CI# 819669 6. ITD / 8(ec9< (f! It is an admissible deduction under executive instruction" 8#9 It is not admissible as it is in the nature of capital expenditure, but 1E/th of it will be allowed under section 1/4 for five successive previous years" 8h9 Fension paid to the widow and children of a deceased en#ineer is not allowed as deduction as it is not an obli#atory expenditure in connection with the business" 8i9 Interest paid for funds borrowed specifically for the ac5uisition of a capital asset will be capitalised from the date of borrowin# till the date asset is put to use ;uEs 1681Qiii99" Illustration B Advise an assessee about the admissibility or otherwise of the claims, with re#ard to the followin# items, #ivin# reasons 7 8a9 $ompensation paid to an employee for premature termination of his services" 8b9 Amount spent in a successful suit filed a#ainst another for infrin#in# the

16

assessee^s trademark" 8c9 Fenalty paid to customs authorities for importin# prohibited #oods which yielded a lar#e mar#in of profits" 8d9 Travellin# expenses of a director who went to Curope for ne#otiatin# the purchase of a new heavy machinery which was eventually installed next year" 8e9 $ost of erectin# a medical annexe^to the factory for the emer#ency treatment of the employees" 8f9 3ump!sum consideration paid on 1"0" ..- for ac5uirin# know!how Ds" 6,..,..." Solution 8a9 Assumin# that the termination of the services of an employee was in the interest of the business, this item will be treated as an admissible expenditure" 8b9 It is admissible as the expenditure has been incurred to maintain an asset (vi;&7 the trademark9" 8c9 Fenalty paid for ille#al activities of the assessee are not to be allowed as expend it under the Income Tax Act" 8d9 It is inadmissible as it is incurred for the ac5uisition of a new asset" 8e9 It is not an admissible expenditure, bein# of a capital nature" =owever, depreciation can be claimed uEs 1 819" 8f9 +n the cost of know!how depreciation shall be allowed O /M on *"4"G7 basis uEs 1 819" Illustration 0 4iscuss with reasons the admissibility or otherwise of the followin# expenditure by assessee under the provisions ofIncome Tax Act, 1961 7 8a9 A sum ofDs" 1.,... was provided towards (ales tax liability in the accounts for the J^ endin# 11"1" ..-" 8b9 An expenditure of Ds" 1/,... incurred towards the cost of ?eon (i#n )oard fixed office premises, advertisin# its products" 8c9 (tock!in!trade was lost in fire amountin# to Ds" 1.,... and was debited to Frofit 3oss Account"

10

8d9 Interest paid on borrowed capital in the construction of property till the date of lettin#" Solution 8a9 Frovision for sales tax liability is deductible only if it is paid on or before the due for furnishin# the return of income" If it is paid after the due date of furnishin# the ret income, then deduction will be available in the assessment year relevant to the previous in which the payment is made" =owever, if a (tate &overnment has amended its (ales Tax to the effect that deferment of sales!tax by the (tate &overnment will be deemed to be sales paid, it will also be deemed to have been paid under the Income Tax Act and will, therefore, allowable as deduction" 8b9 Cxpenditure incurred towards the cost of ?eon (i#n )oard fixed on office premises, advertisin# its products, is capital expense" =ence, cannot be allowed" =owever, depreciation can be claimed uEs 1 819" 8c9 3oss of stock!in!trade due to fire amountin# to Ds" 1.,... is a tradin# loss and hence it is deductible" 8d9 %nder section B8b9, interest paid on borrowed capital for the construction of property for the period after the property^s construction is completed is allowed in full in the relevant previous year for that previous year" :or the period prior to the previous year in which the construction is completed, it is allowable in five e5ual annual instalments commencin# from the year in which the construction is completed" Illustration (tate, #ivin# brief reasons, whether the followin# items are allowable while computin# profits and #ains of business or profession7 8i9 8ii9 8iii9 8iv9 4onation to a political party" 8ii9 :ees paid to the lawyer for draftin# a new Fartnership 4eed" (ums paid to a 3abour leader to call off the strike" (alary paid to son, who is workin# in the office" The salary is reasonable"

1-

8v9 8vi9 8vii9

Dent paid to dau#hter for office block which was #ifted to her at the time of her marria#e" )onus to partner for extra services" Interest paid to wife on money borrowed from her" patients"

8viii9 (ubscription for ma#a'ines paid by a 4octor for the benefit of his 8ix9 8x9 8ix9 2ajor repairs to the air!conditioner in the office" In the course of money!lendin# business, the assessee ac5uired certain properties in lieu of debts and held them as stock!in!trade" The properties so ac5uired were destroyed by enemy action and the assessee claims the loss as deduction" 8xi9 Solution 8i9 8ii9 8iii9 8iv9 8v9 8vi9 Sec& B.8b9" 8vii9 8viii9 8ix9 8x9 8xi9 It is allowed provided it is reasonable" It is allowed as it is in the interest of profession" It is allowed provided it is in the nature of current repairs" It is allowed as it is the loss of stock!in!trade" The properties were kept as 4iscontinuin# a branch is not discontinuance of business" =ence, expenses -See CI# G)" .rithvi Insurance Co& )t(& 819609 61 ITD 61 ?ot allowed as it has nothin# to do with the purpose of the business" Allowed uEs 10819 ?ot allowed" The payment is just a protection money which is a#ainst It is allowed since it is reasonable" (alary paid to relatives is allowable" It is allowed provided it is reasonable" Allowed provided it is as per Fartnership 4eed and fulfils all conditions of =owever, he is entitled to deduction from #ross total income uEs -+&&$" Cxpenses incurred in respect of a branch the business of which was discontinued durin# the year"

public policy" -5'+lanation Sec& %0(1!1

stock!intrade" are allow! able"

19

8("$9 Illustration 9 (ri ?ehru is the proprietor of a business" =is Frofit and 3oss Account for the year ended "2arch 11, ..9, is as follows 7 Ds" Cstablishment Dent, Dates Z Taxes &eneral $har#es =ousehold Cxpenses B,-.. ,9.. 0/. /1,01. &ross Frofit Interest on &ovt" (ecurities Dent from =ouse Froperty /,B.. /,B.. Ds" 1,/.,-B.

$ommission 4iscount Z Allowances Frovision for )ad 4ebts Fosta#e Z Tele#rams 3aw $har#es Advertisin# :ire Insurance Fremium 8for #oods9 (ales Tax Faid Depairs Z Denewals 8not for business premises9 3oss on (ale of 2otor!car 8used for private purposes9 3ife Insurance Fremium *ealth Tax Interest on $apital Audit :ee Interest on )ank 3oan 1,-..

1,/..

B/. 1, .. 0. B/. 1,//.

61. 1,B/. 61.

1,09. 0B. 1/. 1.. 1, 1-.

B.

Frovision for 4epreciation Frovision for Income tax ?et Frofit transferred to $apital AEc

,/.. 1,9.. -.,-B. Ds" 1,61,6B.

:ollowin# further information is &iven7 8a9 Actual )ad 4ebts written!off durin# the year amount to Ds" //." 8b9 Amount of Income tax actually paid durin# the year is Ds" B, .." 8c9 4epreciation allowable is Ds" 1,0.. as per Income tax Dules" 8d9 Advertisin# Cxpenses include Ds" //. spent on special advertisin# campai#n to open a new shop in the market" (e) 3aw char#es are in connection with protection of a trademark" 8f9 (ri ?ehru carries on his business from a rented premises, half of which is used as his residence" Dent, Dates and Taxes include Ds" premises durin# the year" 8#9 )ank loan is taken for business purposes" $ompute the bwii-ess income of (ri ?ehru and his total income for the A"J" ..-!.9" ; Kanpur, ..B< $omputation of Income from )usiness for the *ssessment Eear ">>9-1> ?et Frofits as per Frofit Z 3oss Account *((: 5'+enses not allo3e( 7 Dent of one!half premises =ousehold Cxpenses Frovision for )ad 4ebts 3oss on sale of 2otor!car Depairs and Denewals 3ife Insurance Fremium *ealth Tax Interest on $apital Frovision for 4epreciation Ds" 1, .. /1,01. 1, .. 1,-.. 61. 1,09. 0B. 1/. ,/.. Ds" -.,-B. ,B.. paid as rent of the

B1

Frovision for Income tax )ess: Items allowed but not char#ed7 )ad 4ebts 4epreciation )ess 7 Items not taxable under business head7 Interest on &ovt" (ecurities Dent from =ouse Froperty Income from )usiness

1,9..

6/,-B. 1,B6,6-.

//. 1,0.. , /. 1,BB,B1. /,B.. /,B.. 1.,-.. Ds" 1,11,61.

(tatement of Total Income

for the *ssessment Eear ">>9-1> 1" "& %& Income from =ouse Froperty 8A"G"9 )ess: 1.M of A"G" Frofits of )usiness Income from +ther (ources 8Interest on (ecurities9 &ross Total Income 3ess 7 4eduction under section -. $!3IF Total Income /,B.. 1,6 . 1,0-. 1,11,61 /,B.. Ds" 1,B ,-1. 1,09. 1,B1,. .

4otesF 1" Cxpenses incurred on special advertisin# campai#n to open a new shop in the market are admissible as these are incurred for better marketin# of the #oods" ;Gin(ustan Commercial Ban2 3td" vs" CI# 819/ 9 1 ITD 1/1 8All"9< " 3aw char#es are incurred for the maintenance of an existin# trademark and hence they are allowed" 1" ?ow deduction under section (+3 is not allowable" B" Depairs and Denewals are not for business premises, hence not allowable as business expenditure" Illustration 1> (hri Dadhey 3al, the proprietor of a flour mill, has prepared the followin# Frofit and 3oss Account for the year endin# 11st 2arch, ..-" Jou are re5uired to compute his

income from business and his #ross total income for the Assessment Jear ..9!1. 7 Frofit and 3oss Account Trade Cxpenses Cstablishment $har#es Dent, Dates Z Taxes 4iscount Z Allowance Income tax Advertisement Cxpenses Fosta#e Z Tele#rams &ifts and Fresents for publicity :ire Insurance Fremium $harities 4onations Depairs and Denewals Audit :ees ?et Frofit transferred to $apital Account (olution $omputation of Income from )usiness :or the Assessment year ..9!1. Frofit as per Frofit and 3oss Account Add 7 Cxpenses not allowed 7 Income Tax $harities 4onations 3ess 7 Income from Froperty 8)ein# not business income9 4ivided 8)ein# not business income9 /.. ,6.. 1,1.. Ds" 0.. 10/ B.. 1,B0/ 1,1B,1 / Ds, 1,1 ,-/. 1,1 ,-/. Ds" 1,B1,... Ds" 1,B1,... B/. &ross Frofit , .. 4ividends from a $o!operative 1,B.. (ociety .. Dent from Froperty 0.. )ad debts recovered 1,B.. 8Allowed as deduction 1.. in an earlier year9 1 / /. 10/ B.. /. /. ,6.. /.. ,... 1,1/,9..

B1

Ds" 1,11, (tatement of &ross Total Income 1" Income from =ouse Froperty " Income from )usiness 1" Income from other (ources 7 4ividends &ross Total Income ,6.. 1,11,

/ 1/. /

Ds" 1,1B,10/

?otes 7 Total Income 4otes: 1" Income from =ouse Froperty has been computed as under7 Dent AG" )ess: 1.M of AG" business income" &ifts and presents for publicity are in the nature of advertisement, hence allowed" Illustration 11 2r" +m is a cloth merchant" :rom the followin# F Z 3 */c for the year ended 11st 2arch, ..- compute his income from business and his &ross Total Income for the assessment year ..9!1. 7 Ds" (alaries and *a#es Dent and Taxes 4omestic Cxps" Income Tax Fostal $har#es 4onation 3ife Insurance Fremium Audit :ees )ad 4ebts Deserve )ad 4ebts 1/,... B,... ,/.. 1, .. 1,/.. ,/.. ,... 1,/.. 1,-.. ,/.. BB &ross Frofit 4ividend on (hares 8&ross9 Dent from buildin# let out 1,0.,... B,... 1.,... /.. 1/.

)ad 4ebts recovered, which had been allowed in an earlier year, is taxable as

4epreciation ?et Frofit <ther informations:

/,... 1,BB,1/.. 1,-B,... 1,-B,...

8a9 Dent and Taxes include Ds" ,... paid as 2unicipal Tax on buildin# let out" 8b9 Galue of 3ife Insurance Folicy is Ds" 1-,..." 8c9 4onation was #iven to an approved institution" 8d9 Fermissible 4epreciation was Ds" B,..." (Bho+al7 1999!

Solution $omputation of Income from )usiness Z =ouse Froperty for the *ssessment Eear ">>9-1> Income from Business ?et Frofit as per Frofit and 3oss */c )ess 7 Dent of )uildin# not char#eable under the head business 4ividend on shares *(( 7 Items disallowed7 8i9 Dent paid to the extent of municipal taxes paid 8ii9 4omestic expenses 8iii9 Income tax 8iv9 4onation 8v9 3ife Insurance Fremium 8vi9 )ad 4ebts Deserve 8vii9 Cxcess 4epreciation )usiness Income ,... ,/.. 1, .. ,/.. ,... 1,-.. 1"... 11,... Ds, 1,B1,/.. 1.,... B,... 1B,... 1,1.,/.. Ds" Ds"1,BB,/..

B/

Illustration" (tate whether the followin# items are deductible or not and why7 1" (ales!tax and *ealth!tax" " 4onation to a political party" 1" $ost of installin# a new telephone" B" :ees paid to the lawyer for draftin# partnership deed" /" 3oss due to embe''lement by an employee" 6" Fenalty paid to custom authorities for violatin# custom rules" 0" $ommission paid while purchasin# raw materials" -" (ome amount paid to a labour leader to call off the strike" 9" )ad debts" 1." In the course of money!lendin# business, the assessee ac5uired certain properties in lieu of debts and held them as stock!in!trade" The properties so ac5uired were destroyed by enemy action and the assessee claims the loss as deduction" 11" )rokera#e paid for raisin# a loan" 1 " Ds" 1,... were snatched from the cashier while he was #oin# to the bank to deposit the amount" 11" 3e#al expenses paid to protect the buildin# of the business" 1B" Ds" /,... paid as a commission to purchase machinery and Ds" /.. were also spent as travelin# expenses on the person who went to purchase the machinery" 1/" (ubsidy received under export promotion scheme from &overnment" (olution" 1" *ealth!tax is expressly disallowed" *ealth!tax is levied on the value of assets and so this tax has nothin# to do with the carryin# on the business" It is tax on wealth and is not payable while earnin# profit" The payment of tax on sales in the normal runnin# of the business and is made for the purpose of the business" (ales!tax is an admissible deduction" " :ew years back, this type of donation was allowed but now the donation to a political party is not an allowable deduction" This amount is disallowed on the #round that it has nothin# to do with the purposes of the business"

B6

1" To a layman and to the students of accountancy, this expenditure seems to be capital expenditure" %nder executive instructions, the cost of installin# a new telephone is an admissible deduction" B" Cxpenditure incurred on draftin# a partnership deed is a capital expenditure and so it is not an admissible deduction" /" The employees of the business have access over cash in the business and in routine or normal runnin# of the business, embe''lement of cash by employee is possible" As this loss occurs in the ordinary course of the business, so it is an admissible item" 6" Fenalty was imposed upon the assessee for his ille#al work" (o penalty paid on ille#al work cannot be allowed as deduction" 0" This type of commission is paid in the ordinary course of the business and for the purpose of the business, so it is an admissible deduction" -" If the receipt of voucher of this type of expenditure is available, then this item can be an allowable item because the payment was made in the interest of the business" It may not be allowable item due to non!availability of proof of this type of payment" 9" In the ordinary course of the business few debtors or some percenta#e of debtors normally do not pay" (o the debts which are not recoverable and actually written off in the books of the assessee, are allowed as deduction" 1." This loss is allowable as it is the loss of stock!in!trade" The properties were kept as stock!in!trade" 11" )rokera#e paid for raisin# a loan for the purpose of the business is an allowable deduction" =owever, brokera#e paid for raisin# capital is not allowed" 1 " This type of loss is considered as revenue loss, so it is an allowable deduction" 11" Cxpenditure incurred to protect the interest of the business is an allowable expenditure" (o the le#al expenses are allowed as deduction" 1B" $ommission paid to purchase a capital asset is a capital expenditure" Cxpenses incurred on travelin# are also treated as capital" (o Ds" /,/.. cannot be allowed as deduction, bein# a capital expenditure" These are added to the cost of asset"

B0

1/" Any subsidy received by an assessee as an export subsidy under an export! promotion scheme promul#ated by &overnment was held to be taxable income from business uEs -" Illustration" Frofit and 3oss Account of 2Es Daju Z $ompany" &eneral Cxpenses :ire Insurance Fremium )ad debts (alaries Advertisement 8in cash9 Froprietor6s salary Interest on capital Income!tax 4epreciation (ales!tax 8due9 Advance income!tax paid 4onations 2otor car expenses 2unicipal taxes of 5uarters let to employees ?et profit Ds" 0,... ,... 1,... 6/,... , /. 1 , /. ,... 1,... ,... /,... 1,... /.. 0/. /,... 19,... 1,66,... &ross Frofit )ad debts, recovered but disallowed earlier Interest from &ovt" (ecurities Dent received from employees Interest from debtors for delayed payment Ds" 1,B.,... B,... B,... 1 ,... 6,...

1,66,...

&eneral expenses include Ds" B,... paid as compensation to an old employee whose services were terminated in the interest of the business and Ds" , .. by way of help to a poor student" 4epreciation calculated accordin# to the rates comes to Ds" ,9.." (ales tax was paid on 1!/! ..9" 4ate of filin# of return is 11!0! ..9" /.M of 2otor!car expenses are for proprietor6s personal use" $ompute business income" (olution" $omputation of )usiness Income Ds" ?et Frofit as per F Z 3 AEc *(( : Ina(missible e'+enses Advertisement in case81..M of Froprietor6s salary , /.9 , /. 1 ,/.. Ds" 19,...

B-

Interest on capital Income!tax Advance Income!tax 4onation 2otor car expenses =elp to poor student 4epreciation )ess e'+enses allo3e( but not (ebite( 4epreciation )ess incomes not ta'able un(er this hea( )ad debt recovered disallowed earlier Interest on &ovt" (ecurities Taxable )usiness Income

,... 1,... 1,... /.. 10/ , .. ,... B1,- / - ,- / ,9.. 09,9 / B,... B,... -,... 01,9 /

Illustration" :rom the followin# Frofit and 3oss Account of a manufacturer, calculate the income under the head HFrofits and &ains of )usiness or Frofession6 for the year endin# on 11st 2arch" (alaries to employees Advertisement expenses 8in cash9 &eneral expenses Cntertainment expenses )ad debts 4rawin#s by the proprietor (ales!tax 8due and paid on 1!0! ..-9 Interest on proprietor6s capital Depairs Dent 3e#al expenses 4epreciation )onus 8due9 )onus to the proprietor $ar purchased Cxpenses on car durin# the year 4onations Frovisions for bad debts Ds" 9/,... B,... 16,... ,... 1,/.. B,... 6,... 0,... ,/.. 1,... /,... 1/,... 6,... B,... 0 ,... 1 ,... ,... 6,... &ross Frofit Interest on securities Income from house property )ad debts recovered 8allowed earlier9 Ds" 1,-.,... 1B,... /,... 1 ,...

B9

?et Frofit

9.,... B,11,... B,11,... :rom the examination of books of accounts, the followin# other information are available7 1" advertisement expenses were spent on insertions in news papers" " Ds" 1,... were spent on purchase of land and are included in le#al expenses" 1" =alf of the repair expenses were on let!out buildin#" B" 4epreciation allowable on all assets includin# car is Ds" 1B,B.." /" )onus was paid to employees on 1.!6! ..9 and date of filin# of return is 11!0! ..9" (olution" $omputation of business income of a cycle manufacturer Ds" Ds" 9.,...

Frofit as #iven in the Frofit and 3oss AEc *((: Ina(missible 5'+enses 4rawin#s Interest on proprietor6s capital )onus to proprietor $ar purchased 4onations Frovisions for bad debts 3e#al char#es 8bein# $apital Cxp"9 Depairs on let!out buildin# 4epreciation Advertisement expenses paid in cash )ess: Income to be treate( un(er se+arate hea(s: Income from interest on securities Income from house property )ess: *llo3able (e+reciation Income from business

B,... 0,... B,... 0 ,... ,... 6,... 1,... 1, /. 1/,... B,... 1,/-, /. ,B-, /. 1B,... /,... 19,... ,.9, /. 1B,B.. 1,9B,-/.

Illustration" :rom the profit and loss account #iven below, calculate the taxable business income of the Fartnership firm for the year endin# on 11st 2arch ..97

/.

Ds" +penin# stock 1,6.,... (ales Furchases /,6.,... $ommission *a#es /.,... Interest (alaries B.,... $losin# stock )ad debts 1,/.. Dent 1.,... Interest 1.,... &eneral char#es 1/,... Income!tax 8firm6s9 /,... 3e#al char#es -,... Insurance ,/.. $onveyance -,... 4epreciation 1.,... )ad dept reserve /,... ?et profit 1, /,... 1.,/.,... :ollowin# information was detected from the scrutiny of the accounts7 8i"9 8ii"9 1.,... respectively"

Ds" -,..,... /.,... .,... 1,-.,...

1.,/.,...

(alaries include payment of salary to partners Alfa and beta, Ds" B,... and Ds" Interest account includes payments made to partners on their capital at the rate of 1.M p"a" as per terms of partnership deed7 Alfa Ds" ,..., )eta Ds" ,/.., &ama Ds" ,/.."

8iii"9 8iv"9 8v"9 8vi"9 8vii"9 8viii"9 8ix"9

Dent includes rent paid to partner &ama Ds" 6,... Travellin# expenses of Ds" 6,... were spent on a tour to the %"K" by partner &ama to canvass for business, which are included in #eneral char#es" 3e#al char#es include7 Fenalty paid for violation of custom rules Ds" B,/.. partnership deed expenses Ds" /.. &eneral char#es include a purchase of furniture of Ds" 1,... and cash shorta#e of Ds" .." =alf of the conveyance expenses are related to private use of the partners" ?ew machinery of Ds" /.,... was installed durin# the year" The unit is en#a#ed in the production of pesticides" Allowable 4epreciation on all assets includin# new F Z 2 and :urniture amounts to Ds" 1/,/.."

/1

8x"9

2r" Alfa is workin# partner of the firm" As per partnership a#reement he is entitled to salary as per above and a copy of deed was submitted to the assessin# officer"

(olution" $omputation of business income of the Fartnership firm assessed as firm Ds" Frofit as shown in the Frofit and 3oss AEc *((: Ina(missible e'+enses Income!tax /,... 4epreciation 1.,... )ad 4ebts Deserve /,... (alary to Fartner )eta 1.,... (alary to Fartner Alpha B,... 3e#al char#es re#ardin# partnership deed 8bein# capital expenditure9 /.. Fenalty 8it is not allowable deduction9 B,/.. :urniture purchased 8bein# capital expenditure9 1,... $ash shorta#e 8bein# capital loss9 .. $onveyance Cxpenses 8/.M bein# personal expenses of partners9 )ess: De+reciation )ook Frofit )ess: allowable remuneration uEs B. 8b9 )usiness Frofit B,... 1,.6, .. ,11, .. 1/,/.. 1,9/,0.. B,... 1,01,0.. Ds" 1, /,...

Illustration" :rom the followin# statement, compute the income from profession of 4r" ("K" Kapoor if accounts are maintained on mercantile system7 To 4ispensary rent To Clectricity and water char#e To Telephone expenses To (alary to nurse and compounder To 4ep" on sur#ical e5uipment To purchase of medicines To 4epreciation on Q!ray machine To Income tax To 4onation to Dama Krishna 2ission Ds" 16,... 6,... 6,... 16,... 6,... 16,... B,... /,/.. B,... )y visitin# fees )y $onsultation fees )y (ales of medicines )y 4ividends Ds" B/,... 1, /,... 0 ,... /,...

To 2otor car expenses To 4ep" +n car To ?et Income

9,6.. B,-.. 91,1.. ,B0,... ?otes7 1" Clectricity and water char#es include domestic bill of Ds" ,/.. " =alf of motor car expenses are for professional use" 1" Telephone expenses include B.M for personal use"

,B0,...

B" +penin# stock of medicines was Ds" 6,... and closin# stock was Ds" B,... (olution" $omputation of Frofessional Income of 4r" ("K" Kapoor Ds" .rofessional $ecei+ts: Gisitin# fees $onsultation fees (ale of medicines )ess: .rofessional 5'+enses 4ispensary rent Clectricity and *ater char#es 86,... U ,/..9 Telephone expenses 86,... x 6.M9 (alary of staff 4epreciation on sur#ical e5uipment $ost of medicines ;6,... R 16,... ! B,...< 4epreciation on Q!ray machine 2otor car expenses 89,6.. U B,-..9 4epreciation on $ar 8B,-.. U ,B..9 Frofessional &ain B/,... 1, /,... 0 ,... ,B ,... 16,... 1,/.. 1,6.. 16,... 6,... 1-,... B,... B,-.. ,B.. 1,1B,1.. 1,.0,0.. Ds"

Illustration" :ollowin# is the Frofit and 3oss Account of 2r" ("K" for the year endin# 11! 1! ..9" 4ebits To (alary To repairs To patents ;1E1Bth part< To )ad debts To provision for bad debts Ds" /,6.,... .,... 0,... 1 ,... 11,... /1 $redits )y &ross profit )y $ommission )y (undry receipts )y Dent from let out Ds" 1 ,1.,... 1 ,... 1-,... 1.,...

house )y Frofit from sale of 16,...

To Devenue expenditure on (cientific Desearch To Cxpenditure on promotion of family employees To 4onation to an approved institution 1/,... To =ealth insurance premium of employees 16,... To $ontribution to employees 1.,... provident fund O 1/M of employees salary To Advertisements To Cxpenses on &uest =ouse To interest on borrowed money To Cntertainment expenses To 3oss of stock due to theft by B.,... 16,... /.,... .,... -,... plannin# amon#st 1B,... .,...

old machine )y )ad debt recovered )y Interest on &ovt" (ecurities 8investment made out of business funds9 )y interest on income tax refund

1.,...

.,... -,...

an employee To (ales tax penalty 1 ,... To 4onation to a university for B.,... research To &ratuity To 4epreciation To Income tax To Frovision for income tax To ?et Frofit Total 1.,... 1, .,... B.,... .,... ,.1,... 11, B,...

Total

11, B,...

Additional information7 1" /.M of health insurance of employees has been paid in cash" " Income tax provision is excessive to the tune of Ds" -,..." 1" Fatents were ac5uired on 1!11! ..-" B" Income accrued durin# the year but not credited to F Z 3 account Ds" .,..."

/B

/" Cxpenses on advertisement include an expenditure of Ds" 1/,... on neon si#n board" 8Date of dep" Is 1/M9 6" *4G of machine sold was ?il" 0" Desearch conducted by the university is not related to assessee6s field of business" -" *4G of assets on 1!B! ..- was7 :actory buildin# Ds" ,..,..., ?on!factory buildin# Ds" 1,..,..." Flant and machinery Ds" 1,..,..." A new machinery costin# Ds" ,..,... was ac5uired on 1/!1 ! ..- and was actually put to use on 1/!1! ..9" :rom the information #iven above calculate the business income of 2r" ("K" for the assessment year ..9!1." (olution" $alculation of business income of 2r" ("K" for the assessment year ..9!1."

Ds" ?et profit as per F Z 3 account *((7 Cxpenses debited but not allowed under the act7 Fatents ;1EBth part< Frovision for bad debts Cxpenditure on promotion of family plannin# amon#st employees 4onation to an approved institution (ales tax penalty 4epreciation Income tax Frovision for income tax =ealth insurance premium of employees!/.M paid in cash Advertisements!cost of si#n board bein# capital expenditure )ess: Cxpense allowed but not debited 4epreciation7 //

Ds"

Ds" ,.1,...

0,... 11,... 1B,... 1/,... 1 ,... 1, .,... B.,... .,... -,... 1/,... ,6 ,... B,6/,...

+n patent ri#hts 0,... x 1BE1 P 9-,...x /Mx1E year +n neon si#n boards 1/,... x 1/M :actory buildin# ,..,... x 1.M ?on!factory buildin# 1,..,... x /M F Z 2 +ld F Z 2 ?ew Additional 4ep" +n new F Z 27 ,..,... x .M x 1E Amount #iven to university for research allowed O 1 /M of Ds" B.,... 3ess already debited )ess7 Incomes credited but not taxable under this head Dent from let out house )y profit from sale of old machine )y interest on &ovt (ecurities 8investment9 )y interest on Income tax refund Add income accrued but not credited Taxable business income 1 , /. , /. .,... 1/,... B/,... 1/,... .,... 1, 9,/.. /.,... B.,... 1.,... 1.,... 16,... .,... -,... 0B,... ,/1,/.. .,... ,01,/.. 1,19,/.. 1, /,/..

Illustration" The followin# is the Frofit and 3oss Account of a merchant for the year endin# 11st 2arch ..9" FD+:IT A?4 3+(( A$$+%?T To +ffice (alary To )ad 4ebts written off To Frovision for )ad 4ebts To Advertisement To :ire Insurance Fremium 8=ouse Froperty9 To &eneral Cxpenses To 4epreciation To interest on $apital To interest on )ank 3oan 8due9 To ?et Frofit Ds" 6,/.. 1,0.. 1,... 1,-.. //. ,0/. 1, .. ,... 1,1.. ,/.. B/,1.. )y &ross Frofit )y $ommission )y 4iscounts )y (undry Deceipts )y Dent of )uildin# Ds" 16,0/. 1, /. /.. .. 1,6..

)y Frofit on (ale of 1,... Investments

B/,1..

/6

$ompute the taxable profits from business" The amount of depreciation is Ds" ,..." Interest on )ank loan was paid on 1!-! ..9" 4ue date of filin# of return is 11!0! ..9" (olution" $omputation of )usiness Frofits Ds" ?et profit as per F Z 3 AEc *((: 5'+enses not allo3e( Frovision for )ad 4ebts :ire Insurance Fremium 4epreciation Interest on $apital Interest on )ank loan paid on 1!-! ..9 )ess: Allowable depreciation )ess: Incomes chargeable to ta' un(er other hea(s: Dent of buildin# Frofit on sale of investments )usiness Income 1,6.. 1,6.. 6,6.. ,9/. 1,... //. 1, .. ,... 1,1.. -,./. 1.,//. 1,... 9,//. Ds" ,/..

Illustration" 2r" 4"4" 4ewan Z $ompany are $hartered Accountants in 4elhi" They have submitted the followin# Income and Cxpenditure Account for the year" $ompute the income from profession" Cxpenses To 4rawin#s To +ffice rent To Telephone installation 1/,... B, .. 66,... 1, .. 9,6.. 1,... ,/.. Ds" B-,... B ,... Income Ds" )y Audit fees , B,... )y :inancial $onsultancy service 9-,... )y 4ividends from an Indian company 8&ross9 )y 4ividend on units of %TI )y Accountancy works 6,... B,... B,...

char#es under +"J"T" scheme To Clectricity )ill To (alary of (taff To $harities To &ifts #iven to relatives To $ar Cxpenses To (ubscription for Aournals

/0

To Institute fee To (tipends #iven to trainees To ?et Income

1, .. 1 ,... 1,11,1.. 1,/6,... ?otes7 1" 4epreciation of car durin# the year amounts to Ds" /,..." " 1.M of the time car is used for personal purposes"

1,/6,...

(olution" $omputation of income from profession of 2Es 4"4" 4ewan Z $o" Ds" .rofessional recei+ts Audit fees :inancial $onsultancy works Accountancy works &ross Frofessional Deceipts )ess: .rofessional 5'+enses +ffice rent Telephone Installation $har#es Clectricity )ill (alary of (taff $ar Cxpenses ; 1,... x 0.M< (ubscription for journal Institute fees (tipends to trainees 4epreciation Frofessional &ain , B,... 9-,... B,... 1,B6,... B ,... 1/,... B, .. 66,... 1B,0.. ,/.. 1, .. 1 ,... 1,/.. 1,61,1.. 1,-B,9.. Ds"

Illustration" :rom the followin# particulars, compute the business income of 2r" (" Dan#nathan" To (alaries To Dent and Taxes To (ervice $har#es To 3e#al expenses To Deserve for Income!tax To 4epreciation To Cxpenses on ac5uisition of patent ri#hts To +ffice expenses To $ontribution to D"F":" Ds" 9.,... .,... B,... /,... 6,... 1 ,... /6,... B ,... 1 ,... )y &ross Frofit )y 4ividend )y )ad debts recovered 8allowed earlier9 )y Interest from Fost office (avin#s )ank Ds" 1,/.,... B,... B,B.. 1, ..

/-

To )ad 4ebts B,/.. To 4onation to ?"4":" ,/.. To ?et Frofit 1,./,6.. Total 1,/9,6.. Total 1,/9,6.. ?otes7 1" 3e#al expenses include Ds" ,... incurred by assessee for defendin# a case for dama#es for breach of contract which was decided in favour of assessee" " 4epreciation of the year on assets other than patent ri#hts is Ds" 16,9.." 1" $ontribution to DF: due on 11!1! ..9 Ds" ,..." (olution" $omputation of business income of 2r" (" Dan#anathan Ds" ?et profit as per Frofit and 3oss AEc *((: 5'+enses claime( but not allo3e( Deserve for Income!tax 4epreciation Fatent ri#hts 4onation $ontribution to DF: 8due9 )ess: Allowable expenses 4epreciation on other assets 4ep" on patent ri#hts 8 /M of /6,...9 )ess: Incomes not taxable under this head7 4ividend Interest from Fost +ffice (avin#s )ank )usiness Frofit 6,... 1 ,... /6,... ,/.. ,... 0-,/.. 1,-B,1.. 16,9.. 1B,... 1.,9.. 1,/1, .. B,... 1, .. /, .. 1,B-,... Ds" 1,./,6..

Illustration" &iven below is the Frofit and 3oss Account of (hri 4ur#a $otton 2ills 3td" :or the year ended 11st 2arch ..9" Ds" /,/.,... //,6.,... 6,..,... B,/.,... 1,... /,... 1 ,... /9 Ds" )y (ales -1,69,... )y Dent of (taff Suarters 10,/.. )y $losin# stock -,B9,/..

To +penin# (tock To Furchases To Dailway :rei#ht, +ctroi etc" To (alaries and wa#es To 4irector6s :ees To Audit :ees 8Faid in cash9 To 3e#al Cxpenses

To Depairs to )uildin# and 11,... 2achinery To *elfare Cxpenses 1.,... To &eneral $har#es /,... To Interest Faid ,..,... To %nderwritin# $ommission for issue of share capital To Deserve for )ad 4ebts To )ad 4ebt written off To 4epreciation To 2ana#in# A#ent6s remuneration To Annual $ontribution to 1.,... 0,... B.,... 1.,... 1.,...

4ebenture (inkin# :und /,... To Frovision for Taxation /,..,... To $ontribution of (taff 1,..,... *elfare :und To &eneral Deserve To Froposed 4ividends To )alance to )alance (heet Total 1,..,... 6,..,... 1,66,... 9.,/6,...

Total

9.,/6,...

Jou are re5uired to compute company6s taxable income from business for the assessment year ..9!1. after takin# into account the followin# information7 8a9 A sum of Ds" /,... on account of liability fore#one by a creditor has been carried to a special reserve" The said sum was char#ed by the company in the revenue account of the precedin# year" 8b9 &eneral char#es include7 8i"9 8ii"9 8iii"9 Ds" 0,... U Cmer#ency Insurance Disk Fremium" Ds" 1,... U 4onation to $hief 2inister6s :lood Delief :und" Ds" ,... U :amily Flannin# expenditure amon#st company employees"

8c9 *elfare expenses include Ds" 1,/.. bein# cost of pucca well built for use by company workers" 8d9 3e#al expenses include Ds" /.. paid to a chartered accountant for conductin# income!tax appeal and Ds" ,... 8paid to an advocate9 in connection with

6.

prosecution of 2ana#in# A#ents for smu##lin# #oods from Fakistan" company made a profit of Ds" .,... on these smu##led #oods"

The

8e9 Depairs to )uildin# include Ds" 1.,... bein# cost of additions to business premises" 8f9 4epreciation 8includin# additions to buildin#9 is Ds" 0,/.." (olution7 $omputation of )usiness Income Ds" Frofit as per #iven in the F Z 3 AEc *((: Ina(missible (e(uctions Deserve for )ad debts 4epreciation Annual $ontribution to 4ebenture (inkin# :und Frovision for Taxation &eneral Deserve Froposed dividend (taff *elfare :und 3iability for#one by creditor 4onation to :lood Delief :und Cxpenses on the construction of pucca well 0,... 1.,... /,... /,..,... 1,..,... 6,..,... 1,..,... /,... 1,... Ds" 1,66,...

8bein# capital expenditure9 1,/.. 3e#al expenses bein# expenses incurred a#ainst the prosecution of mana#in# a#ents $ost of addition to business buildin# 8bein# capital expenditure9 %nderwritin# $ommission! BE/th of Ds" 1.,... Audit fees ;bein# paid in cash7 disallowed uEs B.A819 upto 1..M< )ess: *llo3able (e+reciation *((: +ther )usiness Incomes7 Income from smu##lin# business Cxpenses incidental to smu##lin# business ?ot allowed $ompany6s )usiness Income 61 .,... ?I3 .,... 1/,/1,... ,... 1.,... -,... /,... 11,9B,/.. 1/,6.,/.. 0,/.. 1/,11,...

Illustration" :ollowin# is the Frofit and 3oss Account of 2r" A for the year endin# 11!1! ..9" 4ebits To (alary To +ffice expenses To 4epreciation To Audit fees To Depairs To Amount transferred to special reserve To Cxpenditure on 9.,... 4iwali 1.,... Ds" 1, .,... B-,... -.,... /,... B-,... $redits )y &ross profit )y )ad debt recovered )y $ommission )y (undry receipts )y $ustom duty recovered 8disallowed earlier Ds" 1.,-/,... 1/,... ,... 11,... 1.,...

festival To $ontribution to unapproved #ratuity fund To Interest payable To Cxpenses on research To Frovision for income tax To )onus To Frovision for sales tax To Cmployer6s contribution to employees6 F: To 3e#al expenses To ?et Frofit Total +ther information is7 1" 4epreciation includes Ds" .,... bein# unabsorbed depreciation of earlier years" " Depairs include Ds" 1-,... bein# expenditure on construction of wash rooms which were completed on 11!1 ! ..-" 1" Desearch expenses include Ds" 1.,... bein# cost of a computer ac5uired for research, which is not connected to assessee6s field of business" B" Interest payable includes Ds" /,... paid as penalty for late payment of Interest" /" (ales tax is actually paid on 1.!B! ..9" 6" (alary includes payment of Ds" B.,... #iven as compensation to the widow of a deceased employee" 6 1-,... 0.,... /.,... 6.,... 1-,... 1/,... 11,... 1.,... ,9 ,... 11,6/,...

Total

11,6/,...

0" +ut of bad debts recovered only Ds" 1.,... were allowed as deduction earlier" :rom the information #iven above calculate the business income of 2r" A for the assessment year ..9!1." (olution" $alculation of business income of 2r" A for the assessment year ..9!1." Ds" ?et profit as per F Z 3 account *((: Cx;emses debited but not allowed under the act7 Amount transferred to special reserve $ontribution to unapproved #ratuity fund Frovision for income tax %nabsorbed depreciation Depairs!cost of washrooms bein# capital expenditure $ost of computer for research not related to own field Fenalty for late payment of interest )ess: Cxpenses allowed but not debited 4epreciation on wash rooms ;1-,... x 1.M x V year< 3ess income credited but not taxable under this head )ad debt recovered disallowed earlier ;1/,... less allowed earlier 1.,...< $ustom duty recovered ! not allowed as deduction earlier )usiness income of the year 3ess unabsorbed depreciation Income under the head Frofit and &ains 9.,... 1-,... 6.,... .,... 1-,... 1.,... /,... Ds" ,9 ,...

,B1,... /,11,... 9.. /,1 ,1..

/,... 1.,...

1/,... B,90,1.. .,... B,00,1..

Illustration" 2r" (unil a retail trader of $ochin #ives the followin# Tradin#, Frofit and 3oss AEc of the year endin# 11st 2arch, ..9" To openin# (tock To Furchases To &ross Frofit To (alary To Dent, Dates and Taxes To Interest on 3oan Ds" 1,.-,... 9,B6,... ,B6,... 11,..,... /B,... B,... 1.,... )y (ales )y )ank Interest )y 2isc" )usiness receipts )y $losin# (tock )y &ross Frofit )y Interest on debtors )y )ad debts recovered Ds" 11,/.,/.. 11,... 1,/.. 1,1/,... 11,..,... ,B6,... /.,... 1.,...

61

To 4epreciation 1,11,... To Advertisement B,... To (undry expenses ,9B. To 3oss on sale of assets 9,... 8short!term9 To +ther Cxpenses To ?et profit 9,.6. 6.,... 1,.6,...

1,.6,...

Additional information7 +penin# stock was under debited by 1.M and closin# stock was under credited by 1.M" (alary includes rs" B,... paid to his brother, which is unreasonable to the extent of Ds" 6,..." The whole amount of advertisement was paid in cash" The 4epreciation provided in the Frofit and 3oss Account Ds" 1, .,... was based on the followin# information7 The written down value of Flant and 2achinery is Ds" 1,6.,..." A new plant havin# same rate of depreciation, i"e", 1/M was bou#ht on 11!6! ..- for Ds" 1,1-,..." +ne old plant was sold on 11!1! ..9 for Ds" 6,B.." Dent and rates includes (ales Tax liability of Ds" B,1.. paid on 0!0! ..9" +ther )usiness receipts include Ds" B, .. received as refund of excise duty relatin# to ..6!.0" +ther expenses include Ds" B,... paid as 4onation to a place of worship for all reli#ions" Jou are re5uired to advise (unil whether he can offer his business income under sectionBBA:, i"e", presumptive taxation" (olution"

8A9 )usiness income if he does not opt for presumptive assessment uEs BBA: Ds" ?et profit as per profit and loss account Add disallowed expenses7

Ds" 6.,...

6B

8a9 $losin# stock under credited ;81,1/,...x1..E9.9!1,1/,...< 8b9 Amount of unreasonable salary paid to brother;(ection B.A8 9< 8c9 1..M of advertisement expenses paid in cash ;(ection B.A819< 8d9 4onations 8e9 4epreciation 8f9 3oss on sale of assets 3ess expenses allowed but not debited7 8a9 +penin# stock under debited ;81,.-,... x ..E9.9 U 1,.-,...< 8b9 4epreciation under debited 8(ee note9

1/,... 6,... B,... B,... 1,11,... 9,... 1,01,... ,11,... 1 ,... 9 ,0.. 1,.B,0.. 1, 6,1.. 11,... 1,1/,1..

8c9 Income from )ank Interest Income from business ?ote7 4epreciation as per Income!tax Dules has been computed as under7 +penin# written down value 1,6.,... Additions durin# the year 1,1-,... B,9-,... )ess: 2oney reali'ed 6B,... *ritten down value as on 11!1! ..9 B,1B,... 4epreciation O 1/M 6/,1.. Additional 4epreciation O .M of Ds" 1,1-,... 0,6.. 9 ,0.. 8)9 )usiness income if he opts for presumptive assessment uEs BBA: In that case his income from business shall be computed as under7 /M of sale of retail trade, i"e" Ds" 11,/.,/.. /0,/ / *((: 2isc" business receipts 1,/.. Taxable Income 61,. / Therefore, he should opt for computation of business income under section BBA:, i"e", the presumptive income assessment" Illustration" FD+:IT Z 3+(( A$$+%?T (alary to staff Advertisement expenses paid in cash +ffice expenses 6,1.,... -,... 1,.6,... &ross Frofit /,6/,6.. (undry receipts 6,... $ustom duty recovered 8not allowed as deduction earlier9 1 ,... Interest on )ank deposits 1,.-,... Frofit of sale of import licence 6/,...

Dent and repairs -B,... 3e#al expenses for filin# income tax appeal 16,...

6/

)ad debts 4epreciation Deserve for bad and doubtful debts Interest on bank loans :rin#e benefit tax $ommission Interest on own capital =ousehold expenses Income tax for ..6!.0 )ankin# cash transaction tax (ales tax (ales tax penalty Cntertainment expenses Cxtension of business premises ?et profit +ther additional informations are7

B ,... &ift from father ,1.,... Frofit on sale of shares 1-,... )ad debts recovered -.,... 16,... ,... 1B,... .,... 1/,... -,... 16,... 1 ,... .,... ,..,... 11,11,6.. -,9.,6..

1-,... -.,... 16,...

-,9.,6..

(alary to staff includes salary paid to a relative employee which is unreachable upto Ds" 1.,..." +ffice expenses include a payment of Ds" 16,... #iven to notified university for carryin# on research" (alary to staff includes a payment of pension of Ds" -,B.. to a widow of a former employee" +ffice expenses include a #ift of Ds" ,... #iven to a sales tax officer on 4ewali" 4epreciation includes depreciation of personal car of mana#er Ds" B,..." Cntertainment expenses include expenses incurred in a five!star hotel for entertainin# a customer" Interest on bank loans includes interest on loan taken to buy a personal car Ds" .,..." 4etermine business income for the assessment year ..9!1." (olution" $omputation of business income for the assessment year ..9!1." Ds" Frofit as per F" Z 3" AEc *(( ina(missible e'+enses: Advertisement expenses paid in cash Deserve for bad Z doubtful debts 4epreciation :rin#e benefit tax Ds" -,... 1-,... ,1.,... 16,... Ds" 11,11,6..

66

Interest on own capital =ousehold expenses Income tax for ..6!.0 (ales tax penalty Cxtension of business buildin# bein# capital expenditure (alary to a relative employee bein# unreasonable Fayment to a notified university for research 8!a wei#hted deduction O 1 /M to be allowed9 Fension to an old employee6s widow!allowed &ift to a sales tax officer on 4ewali Interest on loan taken to buy personal car )ess incomes cre(ite( but are not ta'able: $ustom duty recovered not char#ed in an earlier year &ift from father is not a business income )ess incomes cre(ite( but ta'able un(er other hea(s: Interest on bank deposits Frofit on sale of shares )ess allo3able business e'+enses: 4epreciation Amount #iven to a %niversity for researchUa wei#hted deduction O 1 /M allowed7 16,...x1 /E1.. )usiness income

1B,... .,... 1/,... 1 ,... ,..,... 1.,... 16,... ! ,... .,... /,-1,... 19,1B,6.. 1 ,... 1-,... 1.,... 1-,-B,6..

1,.-,... -.,... 1,--,... 16,96,6.. ,1.,... B,... 1,-6,... .,...

,.6,... 1B,9.,6..

(C$TI+?!!A

60

*hat is businessI 4efine business" *hat is professionI *hat is deferred revenue expenditureI (tate the treatment for sur#ical e5uipmentI *hat is block of assetsI *hat is acceralated depreciationI (tate the features of a professionI *hat is the treatment for under valuation of closin# stockI *hat is the treatment for over valuation of openin# stockI *hat is the treatment for under valuation of openin# stockI *hat is the treatment for over valuation of closin# stockI (C$TI+?!!) )riefly explain the steps involved in computin# business incomeI *hat is professionI Cxplain the features of a professionI (tate different provisions relatin# to computation of business incomeI A truck operator assessee owns heavy #oods vehicles for 9 months 1B days, 1 medium #oods vehicles for 1. months - days and B li#ht #oods vehicles for 0 months 1 days, durin# the previous year ..0!.-" =e did not keep any accounts for frei#ht receipts and expenses" $ost of Gehicles is Ds" . lakh" $ompute his Income from )usiness uEs BB AC of Income Tax Act (C$TI+?!!$ a" 2r" (unil a retail trader of $ochin #ives the followin# Tradin#, Frofit and 3oss AEc of the year endin# 11st 2arch, ..9" To openin# (tock To Furchases To &ross Frofit Ds" 1,.-,... 9,B6,... ,B6,... )y (ales )y )ank Interest )y 2isc" )usiness receipts Ds" 11,/.,/.. 11,... 1,/..

6-

)y $losin# (tock 11,..,... To (alary /B,... To Dent, Dates and Taxes B,... To Interest on 3oan 1.,... To 4epreciation 1,11,... To Advertisement B,... To (undry expenses ,9B. To 3oss on sale of assets 9,... 8short!term9 To +ther Cxpenses To ?et profit Additional information7 9,.6. 6.,... 1,.6,... )y &ross Frofit )y Interest on debtors )y )ad debts recovered

1,1/,... 11,..,... ,B6,... /.,... 1.,...

1,.6,...

+penin# stock was under debited by 1.M and closin# stock was under credited by 1.M" (alary includes rs" B,... paid to his brother, which is unreasonable to the extent of Ds" 6,..." The whole amount of advertisement was paid in cash" The 4epreciation provided in the Frofit and 3oss Account Ds" 1, .,... was based on the followin# information7 The written down value of Flant and 2achinery is Ds" 1,6.,..." A new plant havin# same rate of depreciation, i"e", 1/M was bou#ht on 11!6! ..- for Ds" 1,1-,..." +ne old plant was sold on 11!1! ..9 for Ds" 6,B.." Dent and rates includes (ales Tax liability of Ds" B,1.. paid on 0!0! ..9" +ther )usiness receipts include Ds" B, .. received as refund of excise duty relatin# to ..6!.0" +ther expenses include Ds" B,... paid as 4onation to a place of worship for all reli#ions" Jou are re5uired to advise (unil whether he can offer his business income under sectionBBA:, i"e", presumptive taxation" b" :ollowin# is the Frofit and 3oss Account of 2r" A for the year endin# 11!1! ..9" 4ebits To (alary To +ffice expenses To 4epreciation Ds" 1, .,... B-,... -.,... 69 $redits )y &ross profit )y )ad debt recovered )y $ommission Ds" 1.,-/,... 1/,... ,...

To Audit fees To Depairs To Amount transferred to special reserve To Cxpenditure on

/,... B-,...

)y (undry receipts 11,... )y $ustom duty recovered 8disallowed earlier 1.,...

9.,... 4iwali 1.,...

festival To $ontribution to unapproved #ratuity fund To Interest payable To Cxpenses on research To Frovision for income tax To )onus To Frovision for sales tax To Cmployer6s contribution to employees6 F: To 3e#al expenses To ?et Frofit Total +ther information is7 -" 4epreciation includes Ds" .,... bein# unabsorbed depreciation of earlier years" 9" Depairs include Ds" 1-,... bein# expenditure on construction of wash rooms which were completed on 11!1 ! ..-" 1." Desearch expenses include Ds" 1.,... bein# cost of a computer ac5uired for research, which is not connected to assessee6s field of business" 11" Interest payable includes Ds" /,... paid as penalty for late payment of Interest" 1 " (ales tax is actually paid on 1.!B! ..9" 11" (alary includes payment of Ds" B.,... #iven as compensation to the widow of a deceased employee" 1B" +ut of bad debts recovered only Ds" 1.,... were allowed as deduction earlier" :rom the information #iven above calculate the business income of 2r" A for the assessment year ..9!1." c" :rom the followin# statement, compute the income from profession of 4r" ("K" Kapoor if accounts are maintained on mercantile system7 1-,... 0.,... /.,... 6.,... 1-,... 1/,... 11,... 1.,... ,9 ,... 11,6/,...

Total

11,6/,...

0.

Ds" To 4ispensary rent 16,... )y visitin# fees To Clectricity and water char#e 6,... )y $onsultation fees To Telephone expenses 6,... )y (ales of medicines To (alary to nurse and compounder 16,... )y 4ividends To 4ep" on sur#ical e5uipment 6,... To purchase of medicines 16,... To 4epreciation on Q!ray machine B,... To Income tax /,/.. To 4onation to Dama Krishna 2ission B,... To 2otor car expenses 9,6.. To 4ep" +n car B,-.. To ?et Income 91,1.. ,B0,... ?otes7 1" Clectricity and water char#es include domestic bill of Ds" ,/.. " =alf of motor car expenses are for professional use" 1" Telephone expenses include B.M for personal use"

Ds" B/,... 1, /,... 0 ,... /,...

,B0,...

B" +penin# stock of medicines was Ds" 6,... and closin# stock was Ds" B,... I?$+2C :D+2 +T=CD (+%D$C( 3CAD?I?& +)AC$TIGC(7 To know about #eneral incomes uEs /6819 To know about specific incomes uEs /68 9 Cxpenses expressly disallowed uEs /4eemed profits uEs /Accountin# methods 4ividends uEs 8 9

?ature of the head7 The fifth and residuary head of incomes is Income from other sources" Cvery income which does not specifically fall under any of the precedin# four heads shall be included in this head" (ection /6 in its sweepin# lan#ua#e embraces anythin# which can be described as income and it is taxable under the act unless expressly exempted" This section operates

01

only when a particular income cannot be included in any other head" %nder section /6819 every kind of income which is included in the total income under this act and which is not char#eable to tax under any of the few four heads specified in section 1B is char#eable to income tax under the head Income from other sources" %nder section /68 9 in particular followin# incomes shall be char#eable to income tax under the head Income from other sources7 8i9 8ii9 4ividends Any winnin#s from lotteries, crossword pu''les, races includin# horse races, card #ames and other #ames of any or from #amblin# or bettin# of any form or nature what so ever" These can be called as casual incomes" 8iii9 8iv9 Any income by way of interest on securities if the income is not char#eable to tax under the head profits and #ains of business or profession" Income from machinery, plant and furniture belon#in# to the assessee and let on hire, if the income is not char#eable to tax under the head profits and #ains of business of profession" 8v9 *here an assessee lets on hire, machinery, plant or furniture belon#in# to him and also buildin# and the lettin# of the buildin# is inseparable from the lettin# of the said plant or furniture the income from such lettin# if it is not char#eable to income tax under the head profits and #ains of business or profession" 8vi9 *here any sum of money a##re#ate value of which exceeds fifty thousands rupees is received without consideration by an individual or a =%: in any previous year from any non relative person or persons the whole of the a##re#ate value is char#eable to tax" 8vii9 Any sum received under a key man insurance policy includin# if such a sum is not taxable as salary or business income" &C?CDA3 I?$+2C(7 ;/6!819<

%nder the provisions of section /6819 the head will operate when the first four heads of income are exhausted" The onus will be on the assessee to prove that the particular income does not fall under any of the precedin# four heads" I?(TA?$C +: I?$+2C( :A33I?& %?4CD (C$TI+? /6819 8i9 8ii9 Income derived by a coal mine owner from rent and royalties are included in this head" Income earned by an assessee form licenses #ranted to brick makers to erect brick kilns upon his land and to take away brick earth and use it for makin# bricks" 8iii9 8iv9 8v9 8vi9 8vii9 8viii9 8ix9 8x9 8xi9 8xii9 8xiii9 8xiv9 8xv9 8xvi9 Demuneration received by an assessee from a person other than his employer e#" %niversity remuneration Interest on loans, securities, deposits and current account also come under this head Income received by a professional man as a university examiner Income received on sub lettin# of the house Tips received by a waiter or taxi driver not bein# #iven by his employer :amily pension received by le#al heirs of employee 4eemed incomes Income of other persons to be included in the income of individual Income from writin# articles by a non journalist Income from a#ricultural land situated outside India" Demuneration for lectures delivered outside India" $ommission received by a director for standin# as #uarantor $ommission received by a director for underwritin# the shares of a new company &ratuity received by a non employee director 8xvii9 Any #ratuity or pension received for 3I$ or other insurer uEs -.$$$ I?(TA?$C( +: I?$+2C( :A33I?& %?4CD (C$TI+? /68 9

01

1" 4IGI4C?47 Income from all dividends in specifically included in this head" The shares may be held as stock in trade but any dividend received durin# the period when they are held by the assessee shall be exempted" The term dividend has been defined in any inclusive number under section 8 definition is divided in sub clauses ;a< or ;c< and contains three explanations" 8i9 (ub!clause 8a9 Any distribution by a company of accumulated profit entailin# release of company6s assets" This provision relates to bonus shares" The two conditions which must be fulfilled for includin# a particular distribution of profits by a company as dividend are7 ;a< it must be out of accumulated profits and ;b< it must entail the release of the assets of company" The issue of bonus shares out of capitali'ed accumulated profits does not entail the release of any asset and as such the bonus shares are not dividend when they are issued to holders of e5uity of ordinary shares" )ut the position will be entirely different if the company, instead of issuin# its own shares, purchases, the shares of another company out of its accumulated profits and then issue to share holders" In this case it will amount to release of assets ie, shares of another company, and as such the shareholders receivin# such shares will have to pay tax on the value of such shares" (ometimes company offers two options either to take bonus share or their cash value" If the shareholders opt for bonus shares they will not be liable to tax but if they opt for cash, the amount will be treated as dividend" *hen the redeemable preference shares are issued will be treated as dividend under section ; 8ii9 as bonus shares out of 9" The

accumulated profits and they are paid off, the amount so received by an assessee < sub!clause ;a<"

(ub!clause ;b< any distribution by a company of debentures, stock, deposit certificates and bonus shares to preference shareholders" %nder the provisions of this section, the dividend includes any distribution by a company of

0B

debentures, or stock or deposit certificates to the extent to which the company possesses accumulated profit, whether capitali'ed or not" Any bonus shares distributed amon# the preference shareholders will amount to dividend but bonus shares issued to ordinary shareholders are not treated as dividend" 8iii9 (ub!clause ;c< any distribution made to shareholders on the li5uidation of the company" Any distribution made by a company to its shareholders on its li5uidation to the extent the company possessed accumulated profits before its li5uidation shall amount to dividend" It is immaterial whether such accumulated profits are capitali'ed or not" 8iv9 (ub!clause ;d< distribution on reduction capital, if, at any time, it is felt that company is over capitali'ed and has accumulated profits, if the capital of such company is reduced by way of payin# its share capital in excess of its needs" 8v9 (ub!clause ;e< any payments by a company to its shareholders" If a company in which public are not substantially interested makes a payments of any of the three kinds mentioned below to a person who is the beneficial owner of share Xnot bein# the shares entitled to fixed rate of dividend whether with or without a ri#ht to participate in profits9 holdin# not less than 1.M of the votin# power or to a concern in which such shareholder is a member or a partner holdin# a substantial interest such a payment shall be considered as dividend" The payments may be of any of the followin# three types7 8a9 Any payment amountin# to any sum 8b9 Any payment of behalf to any sum 8c9 Any loan or advance for the individual benefit of a shareholder The company must possess accumulated profits to the extent of any such payment" If the payment exceeds accumulated profits the payment limited to the extent of accumulated profits shall be considered as dividend" 8vi9 4ividend not include!

0/

8a9

referrin# to sub!clauses ;c< and ;d< above if any distribution is

made in respect of any shares issued for full cash consideration, where such shareholder is not entitled, in the event of li5uidation of company, to participate in the surplus assets" 8b9 Deferrin# to sub!clauses ;c< and ;d<, if any distribution is made and such distribution is attribution to the capitali'ed profits of the company representin# bonus shares allotted to its e5uity shareholders after 11st 2arch, 196B and before 1st April, 196/" 8c9 If any payment is made to shareholder under sub!clause ;e<, by a company in ordinary course of its business where the lendin# of money is the substantial part of the business of the company" 8d9 Any dividend paid by a company which is set off by the company a#ainst the whole or any part of sum previously paid by a company as advance or loan under the provisions of sub!clause ;e<" Illustration 1" H)6 is a holder of /,... e5uity shares of Ds" 1.. each 8fully paid9 in H26 Z $o" 3td" +n 1!1! ..9 the company decided to issue to its e5uity shareholders bonus shares out of the balance in the &eneral Deserve Account at the rate of one bonus share of Ds" 1.. each 8fully paid9 for every five shares held by them" +n 11st 2arch, ..9 Hb6 received 1,... bonus shares from the company, the market value of the bonus share on that date bein# Ds" 1 . per share" 4iscuss H)6s liability to tax in respect of the bonus shares received by him" *ould your answer be any different if H)6 had received the bonus shares as a holder of company6s preference sharesI (olution The issue of bonus shares out of capitali'ed accumulated profits does not entail the release of any asset and as such bonus shares are not dividend when they are issued to holders of e5uity and ordinary shares" Two conditions must be fulfilled to include the issue of bonus shares in cate#ory of dividend in the hands of the recipient shareholder" These conditions are7 8a9 4ividend must have been issued out of accumulated profit of the company, and

06

8b9 It must entail the release of the assets of the company" (ince in the above issue of bonus shares to e5uity shareholders does not entail the release of the assets of the company, so this does not constitute dividend in the hands of the shareholder" )ut bonus shares distributed amon#st the preference shareholders will amount to dividend" TAQ TDCAT2C?T +: 4IGI4C?4 :D+2 I?4IA? $+2FA?IC( A?4 I?$+2C :D+2 %?IT( +: %TI A?4 +T=CD 2%T%A3 :%?4( 4ividend It can be received on e5uity or preference shares of a company, units of %TI or shares of a $ooperative (ociety" :ollowin# points are to be noted while treatin# dividend for tax purposes" 8a9 4ividend declared or distributed by an Indian $ompany or by a mutual fund on its units is fully exempted with effect from 1!B! ..1" 8b9 )onus shares allotted to preference sshare holders shall be deemed as dividend and their market price shall be fully taxable" 8c9 In case loan is taken by a person who has substantial interest in the affairs of a Fvt" 3td" $ompany whose business is not money lendin#, such loan is deemed as advance dividend up to accumulated reserves of the company" If such loan is adjusted a#ainst!future dividend, it will not be taxable" A person is said to have a substantial interest if he, his spouse and minor child all to#ether hold 1.M or more shares in such Fvt" 3td" $ompany" 8d9 4eemed dividend as per 8b9 and 8c9 above is fully taxable" " *innin#s from lotteries, crossword pu''les, races includin# horse races, card #ames and #ames of other sorts, or from #amblin# or bettin# of any form or nature ;(ection /68 9 8iv9<" This point can be split up in followin# parts7 8a9 *innin# from lotteries 8b9 *innin# from cross word pu''les 8c9 *innin# from races includin# horse races 8d9 *innin# from card #ames

00

8e9 *innin# from #ames of other sorts such as #ame shows or entertainment pro#rammes on TG or other electronic media in which people compete to win pri'es 8f9 *innin# from #amblin# and bettin# ?o expenditure is allowed to be deducted out of these incomes" Tax is deducted at source at prescribed rates out of followin# incomes7 8a9 *innin#s from lotteries 8b9 *innin#s from crossword pu''les 8c9 *innin#s from card #ames 8d9 *innin#s from T"G" #ame shows 8e9 *innin#s from horse races Frescribed rates of T4( )asic rate of income tax 1.M Add surchar#e O 1.M of tax if total income of individual and =%: exceeds rs" 1.,..,... and O 1.M of tax for firms and domestic companies, if their net income exceeds Ds" 1 crore" Add Cducation cess O 1M of tax and surchar#e for all assesses" In case amount of pri'e is H?et6, HDeceived6 or Hafter deduction of tax6 or is Hcollected by bank6 it has to be #rossed up in this manner7 ?et x 1..E;1..!81. R surchar#e R Cducation cess<" (ince no T4( is re5uired to be made in case of winnin#s from other races, #amblin#, bettin#, etc" so there will be no difference between net and #ross amounts" ?ote" Cducation cess is 1M i"e", M R 1M (enior and =i#her education cess" *here the winnin#s from lottery are wholly in kind or partly in cash and partly in kind and cash is not sufficient to meet the liability of tax on such winnin#s, the person responsible for payin# such pri'e must ensure that tax has been paid in respect of the winnin#s before such pri'e is released" Income from the activity of 2aintenance of =orses for Dace Furposes If pri'e exceeds Ds" /,... If pri'e exceeds Ds" /,... If pri'e exceeds Ds" /,... If pri'e exceeds Ds" /,... If pri'e exceeds Ds" ,/..

In case of winnin#s from other races, #amblin#, bettin# etc" !!!!?o T4(

0-

1" Income from maintenance of horses for race purposes is taxable income under the head HIncome from other sources"6 " 3oss from activity of maintenance of race horses 8as explained at B below9 can be set off only from income of same activity and not from any other income" It cannot be set off even from income by way of bettin# at race course" 1" In case such loss remains unadjusted from income of such activity, it can be carried forward for B succeedin# previous years to be set off only from income of same activity" B" 3oss from maintenance of race horses is to be calculated in followin# manner7 8a9 In case the assessee has no income by way of stake money 8amount received as pri'e money by race horse for bein# placed at 1st or
nd

or any

other position in such races9, the expenses incurred wholly and exclusively for the purpose of maintenance of such horses shall be treated as loss from race horses" 8b9 In case the assessee has income by way of stake money 8as explained above9 the expenses on maintenance of horses shall be adjusted from stake money" If expenses are more than stake money, it shall be called as loss from maintenance of race horses" Illustration " 2r" &" )edi owns horses at )ombay and )an#alore" These horses run for races at the race course" 4urin# the year information7 8i"9 Ds" ,6.,... 8ii"9 Ds" B,1.,... 8iii"9 8a9 Ds" 1, .,... 8b9 Ds" /,..,... )an#alore (take money earned by horses at )ombay Cxpenses on race horses at )an#alore Cxpenses on race horses at )ombay ..-!.9 2r" )edi submits the followin#

09

8iv"9

2r" )edi received Ds" 1,.1,6/. on 1!0! ..- on bettin# durin# horse races at )ombay"

$ompute his taxable income under other sources" (olution" $omputation of income under other sources Activity of maintenance of race horses7 Income 8i9 at )ombay 8ii9 at )an#alore )ess 5'+enses 8i9 at )ombay 8ii9 at )an#alore ,6.,... B,1.,... 6,9.,... 0.,... Ds" 1, .,... /,..,... 6, .,... Ds"

3oss from activity of maintenance of race horses to be $E: Dace winnin#7 Amount received Ds" 1,.1,6/. &ross ;1,.1,6/. x 1..E69"1<

1,/.,...

?ote" 3oss from activity of maintenance of horses for race purposes cannot be set off from any other income includin# race winnin#s" 1" Amount deduced by employer" Any amount deducted by an employer 8not carryin# on business or profession9 as Income!tax, or C"("I" :und contribution or their contribution to provident fund etc" shall be treated as income of the year" B" Interest on securities" The followin# amounts due to an assessee in the previous year shall be char#eable to income!tax under Interest on (ecurities7 8i9 8ii9 Interest on any security of the $entral or (tate &overnment" Interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a $entral, (tate or Frovincial Act" ;(ection *hat is InterestI Interest is the return which a person receives from another person for bearin# the risk of partin# with the money and losin# the income which he would have received on such -. 8 -)9<"

money had he deposited it in a )ank" It simply means the return received by a creditor who has #iven his money as debt" *hat is (ecurityI A security is a document acknowled#in# the debt taken by a specific authority from #eneral public" It may be named as a H4ebt6 H3oan6, HFaper6, H4ebenture6 or 6(ecurity6 or H$ertificate6" It is secured in some manner" $ontents of (ecurity" It contains face value of security, date of maturity, rate of interest, date, place and period of payment of interest etc" These are transferable" *ho can issue a (ecurityI As per section 1-, securities may be issued by followin# authorities7 The $entral &overnment A (tate &overnment A 3ocal Authority A $ompany or A (tatutory $orporation Taxability of Interest Interest on securities accrues after a fixed period as mentioned on the face of the security itself" In India, #enerally, interest accrues after a period of six months" Any interest which accrues to a person durin# the previous year is added in his #ross total income" Interest is taxable on due basis" It is immaterial whether the assessee has received it or not" The interest accrues on the name of that person on whose name securities stand on the date of accrual of interest" It is immaterial that he purchased these securities a few days earlier than the date of accrual of interest" =e has to include full interest in his #ross total income" Interest on securities does not accrue on day!to!day basis" It matures into debt overni#ht, i"e", the day of accrual of interest"

-1

4eduction of tax at source ;(ection 191< )efore makin# payment of interest on securities, it is the duty of the security!issuin# authority to deduct tax at source on such interest payable at the HDates in force6 durin# that previous year" HDates in force6 means the rate or rates specified for the purpose of deduction by :inance Act of the year in which deduction is to be made" The tax deducted at source will be deposited in the &overnment Treasury on behalf of the security!holder" The security!holder6s account is credited with the amount and while payin# tax on the total income the amount deducted at source will be deducted" =owever, in the case of the followin# securities tax is not deducted at source7 8i"9 8ii"9 8iii"9 8iv"9 8v"9 8vi"9 Interest payable on B [ M ?ational 4efence )onds, 190 where the bonds are held by an individual, not bein# a non!resident, or B [M ?ational 4efence 3oan, 196-, or B a M ?ational 4efence 3oan, 190 , provided the interest is payable to an individual, or Interest payable on ?ational 4evelopment )onds" 0!year ?ational (avin#s $ertificates 8:ourth Issue9" 4ebentures issued by any co!operative society or any other institution notified by $entral &overnment or 6 V M &old )onds, 1900 or 0M &old )onds, 19-., where the bonds are held by an individual, not bein# a non!resident and the holder thereof makes a declaration in writin# before, the person responsible for payin# the interest that the total nominal value of &old )onds held by him did not exceed Ds" 1.,... at any time durin# the period to which the interest relates, or 8vii"9 8viii"9 ?o tax will be deducted at source from any security issued by $entral &overnment, or a (tate &overnment" ?o tax will be deducted at source if interest on term deposit with a bank does not exceed Ds" /,... in a previous year" ?o deduction of tax at source in case of interest on debentures ;(ection 191 8v9< In case followin# conditions are fulfilled, the issuin# authority will not deduct any tax at source7 8i"9 4ebentures are issued by a company in which the public are substantially interested

8ii"9 8iii"9 8iv"9 8v"9

Interest is paid to a Desident debenture!holder 4ebentures are listed on a reco#ni'ed stock exchan#e Interest is paid by the company in account payee che5ues, and The total amount of interest payable in the financial year, does not exceed Ds" ,/.. Individual, =%:, A+F, )+I *hen there is ?o surchar#e R Cducation cess 1M of tax *here there is (urchar#e O 1.M R Cducation cess 1M of tax Z (urchar#e AEJ ..9!1. ?I3 ?I3 11"11M $ompany and :irms *hen there is (urchar#e ;Date of surchar#e 1.M of tax R education cess 1M of tax Z (urchar#e< AEJ ..9!1. ?I3 ?I3 11"11M

Income 8a9 4ividend

AEJ ..9!1. on shares

referred to uEs 11/. ?I3 8b9 Interest on units of %TI and 2utual :unds 8c9 )ank Interest exceeds Ds" /,...< 8d9 Interest on securities issued by7 $entral or (tate &overnment ?I3 3ocal authority or statutory corporation $ompany7 3isted securities %nlisted securities 8e9 *innin#s from 3otteries, Daces, Fu''les, $ard #ames, TG #ame shows 1."9M 1."1M 1."1M ."6M ?I3

;If amount of interest 1."1M

?I3 11"11M 11"11M "66M

?I3 11"11M 11"11M "66M

11"99M

11"99M

:or individuals, =%:6s etc" the surchar#e is to be levied only if total income exceeds Ds" 1., ..,..." If net interest, interest received or interest after deduction of T4( is #iven it has to be #rossed up7 &ross interest P ?et x 1..E1..Nrate of T4(" -1

Types of (ecurities A" Cxempted from Tax" Income!tax Act, 1961 provides for exemption of certain interest from tax uEs 1.81/9" Interest on all such securities, certificates, bonds etc" is alto#ether not included in the #ross total income of the assessee and no tax is payable there upon" There are some securities whose interest is exempted from tax but these are no lon#er in existence" These are7 8i"9 8ii"9 8iii"9 8iv"9 ?ational Flan $ertificates ?ational 4efence )onds Treasury savin# deposit certificates (pecial )earer )onds 1991

Interest on followin# bonds issued by public sector $ompaniesEundertakin#s has been notified to be exempted7 8i"9 8ii"9 8iii"9 8iv"9 8v"9 8vi"9 8vii"9 8viii"9 8ix"9 1.M (ecured Dedeemable ?TF$ )onds, 19-6 81st (eries9" 1.M (ecured Dedeemable non!convertible )onds issued by 2ahana#ar Telephone ?i#am 3td" 1.M (ecured Dedeemable non!convertible )onds issued by Indian Dailway :inance $orp" 3td" 9M (ecured Dedeemable non!convertible )onds 19-0 8) series9 issued by ?ational =ydroelectric Fower $orp" 3td" 9M (ecured Dedeemable non!convertible )onds issued by Indian Dailways :inance $orp" 3td" 9M 8tax!free9 (ecured Dedeemable )onds issued by Fower :inance $orp" 3td" 1.M 8tax!free9 (ecured Dedeemable non!convertible )onds issued by Indian Telephone Industries 3td 1. years ! 9M 8tax!free9 (ecured Dedeemable non!convertible ?TF$ )onds U IGth Issue 8private placement9" 1. years ! 9M 8tax!free9 (ecured Dedeemable non!convertible F:$ )onds U II (eries 8private placement9"issued by Fower :inance $orp"

-B

8x"9 8xi"9 8xii"9 8xiii"9

1. years ! 9M 8tax!free9 (ecured Dedeemable non!convertible DC$ )onds, issued by Dural Clectrification $orp" 3td" 1. years ! 9M 8tax!free9 (ecured Dedeemable non!convertible )onds 8$ (eries9 issued by ?eyveli 3i#nite $orp" 3td" 0M $apital Investment )onds" 6"/M, -M, 9M or 1.M ?ational Delief )onds" )"Tax free securities 8a9 Tax!free $ommercial 8?on &ovt"9 (ecurities" These securities are those which are issued by a local authority, (tatutory corporation or a company in the form of debentures or )onds" Actually, these are not tax!free" Tax is paid by the issuin# authority to the &overnment on behalf of such security!holders" The person who is holder of such security is liable to tax not only for the interest he is to receive but also the amount of tax which has been deposited on his behalf" The amount of interest actually received by holder is the net interest, i"e", after deduction of tax at source" *e have to find out the #ross interest, i"e", before deduction of tax, to include it is the #ross total income of assessee" It can be done in the followin# manner7 1.. 81.. rate of ta' 9

&rossin# up P ?et Interest received x

Illustration 1" 2r" A invested Ds" 1,..,... in -M tax!free debentures of a company" *hat will be his taxable interest for the previous year endin# on 11!1! ..9 if the rate of deduction of tax at source is O ."6M Interest accrues on 1st Aanuary every year" (olution" ?et Interest due P 1,..,... ' &ross up P -,... ' = $s"-,... 1..

1.. 1.. = -,... ' = $s"1.,.06 81.. ."69 09"B

Interest to be added in #ross total income of 2r" A for the previous year endin# on 11!1! ..9 shall be Ds" 1.,.06"

-/

8b9

Tax!free &ovt" (ecurities"

These securities are no lon#er in existence"

?ow the word tax free written in &ovt" securities is presumed to mean that interest on such securities is exempted uEs 1.81/9" 8c9 3ess Tax (ecurities" This is the most common form of securities" +ut of the amount of interest due to a security!holder, tax at the prescribed rates has to be deducted by the issuin# authority before payment of interest" The assessee is to pay tax not only on the net amount of interest received, but he shall be liable to pay tax on #ross interest, i"e", amount due before deduction of tax at source" *hen the face value of securities and the rate of interest is #iven, it will directly #ive us the #ross interest which we shall include in his #ross total income, e"#", /.,..., 6M port Trust )onds" &ross interest due P 1,..." It shall be fully added in the &ross Total Income of such person" &rossin# up of inerest In case it is mentioned that7 8a9 amount of interest receive, or 8b9 net amount of interest , or 8c9 interest after deduction oftax, or 8d9 interest collected by bank, or 8e9 interest on tax free non!#overnment securities" such interest is net amount of income and not the #ross amount which has to be included in the total income of a person" As such the amount of interest as mentioned at 8a9 to 8e9 above has to be #rossed up" &ross interest P ?et x 1..E1.. U rate of T4(" In case of interest on securities issued by forei#n #overnment interest is not #rossed up as no tax is deducted at source in India on such income" $ommission on (ale and Furchase of (ecurities Any sum of money incurred by the assessee in respect of purchase or sale of securities e"#" $ommission etc" is not an allowable deduction out of the income of interest on such securities" Any amount of expenses incurred 8e"#" $ommission paid9 at the time of

-6

purchase of these securities are included in the cost of these securities and any such expenses paid on the sale of such securities are allowed to be deducted out of the sellin# price of these securities" Frofit or loss on sale of securities In case assessee is a dealer in securities i"e" the purchase and sale of securities is the business of the assessee, then any amount of profit earned shall be char#eable to tax under the head business or profession and in case there is a loss, the same shall be debited to FZ3 AEc" Any amount of expenses incurred at the time of purchase or sale of securities shall be taken into account while determinin# profit or loss on sale of securities" =owever, in case assessee has purchased these securities and holds them as an investment to earn interest income, then any profit earned on the sale of securities 8investment9 shall be treated as capital #ain which is char#eable to tax uEs B/" 3oss if any, shall be deducted out of the sellin# price of the securities" Interest on securities earned by followin# types of assessees shall be exempted 1" A local authority " Trustees of a reco#ni'ed provident fund and an approved superannuation fund" 1" An approved scientific research association" B" A re#istered trade union" /" 2embers of (cheduled Tribes livin# in tribal areas" 6" Fublic $haritable and reli#ion trusts" 0" Folitical Farties -" A non!resident of Indian ori#in and securities and )ond were issued before 1"6" .. " Interest on Indira Gikas FAtraEKisan Gikas FatraE?ational (avin#s $ertificates GIII issue Interest on these securities is taxable under the head >+ther (ources@ on accrued basis as actual interest is paid only at the time of maturity" The followin# table #ives the amount of interest accrued at different intervals of time7

-0

Amount received as #ift to be treated as income7 ;(ection 8 B98xiii9 and section /68 9 8v97 *here any sum of money, the a##re#ate value of which exceeds Ds"/.,... is received without consideration by an individual or =%: from any person or persons on or after 1!B! ..0, the whole of such sum shall be deemed as income of the previous year in which it is received" Frovided that this clause shall not apply to any sum of money received7 a" :rom any relative or b" +n the occasion of marria#e of the individual or c" %nder a will or by way of inheritance or d" In contemplation of death of the payer e" :rom any fund of foundation, a university or other educational institution or hospital or other medical institution or any trust or institution referred in sec"1.8 1$9 or f" :rom any trust or institution re#istered uEs 1 AA Cxplanation for the purposes of this clause >relative@ means7 8i"9 8ii"9 8iii"9 8iv"9 8v"9 8vi"9 (pouse of the individual )rother or sister of the individual )rother or sister of spouse of the individual )rother or sister of either of the parents of individual Any lineal ascendant or descendant of the individual (pouse of the person referred to in clauses 8ii9 to 8iii9

The above provisions can be explained in the followin# manner7 &I:T( A( TAQA)3C I?$+2C(7 Any amount received by an individual or =%: or is credited to their account on or after 1!B! ..- shall be deemed as income taxable under the head Income from other sources" &I:T( *=I$= ADC ?+T T+ )C TDCATC4 A( I?$+2C(7 :ollowin# amounts received without consideration shall not be considered as income7 8i"9 8ii"9 The sum received before 1!B! ..The sum received by any individual from a relative the term relative means 8as mentioned above9

--

8iii"9 8iv"9 8v"9 8vi"9 8vii"9 8viii"9

The sum received on the marria#e of an individual The sum received by any individual or =%: under a will or by way of inheritance Any sum received in contemplation of death of the payer Any number of #ift or #ifts received durin# the year provided the a##re#ate amount of all #ifts does not exceed Ds"/.,... Any sum of money received a#ainst consideration To conclude it can be said that the a##re#ate amount of #ift or #ifts from all no relatives if exceeds Ds"/.,... in any previous year, it is taxable in the hands of the recipients of such #ifts"

&I:T( I? KI?47 This section relates only to any sum of money as #ift" As such #ifts in kind are not covered under this section" =ence exempted" I33%(TDATI+? B7 2r"Q received the followin# #ifts durin# the previous year" $ompute his taxable income under the head income from other sources" 8i"9 8ii"9 8iii"9 8iv"9 8v"9 8vi"9 Deceived Ds"1,..,... as #ift from a friend on 1!6! ..Deceived a microwave costin# Ds"1B,/.. as #ift from his another friend Deceived Ds"/.,... as #ift from another friend on 1!11! ..Deceived Ds"1.,... as #ift from his sister on 1!1! ..9 Deceived Ds"B.,... as #ift from his friend on 1!1 ! ..Deceived Ds"1,6.,... as #ift from his non resident friend on 1! ! ..9

$omputation of income from other sources7 &ift from a friend &ift from another friend &ift from sister &ift from a friend &ift from non resident friend 2icro wave oven in kind exempted 1,..,... /.,... ?il B.,... 1,6.,... ?il

Income from lettin# of plant, machinery or furniture7 if an assessee owns plant, machinery or furniture and it is let out to some other person, the rent so received by the

-9

assessee shall be char#eable to tax under this head provided lettin# of plant and machinery is not the business of the assessee" If the assessee is en#a#ed in the business of lettin# out plant machinery or furniture, the rent so received shall be char#eable to tax under the head profits and #ains of business or profession" Income from lettin# of plant, machinery or furniture with buildin#7 the rent from a property is taxable under the head Income from house property but when an assessee lets out plant, machinery or furniture which is inseparable from buildin#, the rent of buildin# so received will be taxable under the head income from other sources" The lettin# of plant, machinery or furniture should not be the business of the assessee" Any sum received under a key man insurance policy includin# any sum allocated by way of bonus ;uEs 8 B9 8xi9< if such amount is not taxable under the head profits and #ains of business and profession or under the head salaries" 4C4%$TI+?(7 ;section /0< The taxable income under the head income from other sources shall be computed after allowin# the followin# deductions as provided in section /0 1" In case of dividends and interest on securities7 from the dividend income, a deduction shall be allowed in respect of any sum spent by way of commission or remuneration to a banker or any other person as collection char#es for reali'in# the dividend or interest on securities" " Depairs depreciation etc, in case of lettin# of machinery plant or furniture with or without buildin#7 8i"9 8ii"9 Cxpenditure incurred on current repairs of plant, machinery and furniture" 4epreciation in respect of buildin#s will be allowed only if the assessee is the owner" It will not be allowed if the assessee is lessee or mort#a#ee in possession of the buildin#" 8iii"9 Insurance premium paid re#ardin# these assets 1" 4eduction is respect of employee6s contribution in staff welfare schemes ;/0 8ia9< Any amount received by employer from his employees as their contribution of

9.

provident fund, C(I fund or superannuation fund is deemed as income uEs /98ic9 if not taxable under the head profits and #ains of business or profession" In case employer deposits any amount 8out of these incomes9 in these funds before prescribed due date, such amount is allowed as deduction uEs /0 8ia9" B" (tandard deduction out of family pension (ection /0 8iia9 In case of income in the nature of family pension a deduction of a sum e5ual to 11"11M of such pension or Ds"1/,... which ever is less, shall be allowed" /" deduction from any other income ;section /08iii9< Any expenditure which is spent to earn an income chan#eable to tax under this head shall be deducted from such income" 6" deduction from royalties received by authors7 8+ther than those writin# for films9 Actual expenses can be claimed as deduction" A2+%?T CQFDC((3J 4I(A33+*C47 ;(C$TI+? /-< The followin# expenses are not allowed to be deducted from such income7 In case of any assessee 8i9 any personal expenses of the assessee 8iii9 8iv9 8v9 any interest char#eable under this act which is payable outside India on which tax has not been paid or deducted at source" Any payment which is char#eable under the head salaries if it is payable outside India unless tax has been paid or deducted at source" In case an assessee has income from lotteries, crossword pu''les, races includin# horse races, card #ames and other #ames of any sort or from #amblin# or bettin# of any form or nature whatsoever such assessee shall not be allowed any deduction in respect of any expenditure or allowance in connection with such incomes" 8vi9 In case of every assessee any payment to relatives and associates made in cash may be disallowed under section B.A in certain circumstances" The provisions of section B.A are made applicable under this head also by sub!section .f section /-" I33%(TDATI+?7 2r"Q has the followin# incomes durin# the year endin# 11!1! ..9" 1" 4ividend declared by 2 $o" on 11!1! ..- Ds"6,...

91

" dividend declared by T $o" on 11!1! ..9 Ds"9,... 1" Interim dividend received on 1!/! ..- Ds"1,... B" =e won #old worth Ds"1.,..,... from Funjab state lottery /" durin# march ..9 he earned Ds"1,..,... as pri'e money on horse races" These horses are owned by him and expenditure incurred on maintenance of these horses amounted to Ds"1,6.,..." $ompute income from other sources for the assessment year ..9!1." 4ividend 4eclared by 2 co, on 11!1! ..4ividend 4eclared by T co, on 11!1! ..9 Interim dividend *innin#s from lottery7 &old from Funjab state lottery 3ess7 expenses on maintenance of these horses 1,..,... 1,6.,... 3+((7 to be carried forward 6.,... Income from other sources FD+:IT( $=AD&CA)3C T+ TAQ ;(C$TI+? /9< %nder section /9 8i9 the provision of sub!section 819 of section B1 have been made applicable in computin# the income of assessee under section /6 as they are applicable in computin# the income under the head profits and #ains of business or profession" This provision deals with any allowance or deduction which has been allowed under this head in the assessment of income in any earlier year in respect of any expenditure, loss or tradin# liability incurred by the assessee subse5uently durin# any previous year, the same amount is received or recovered in cash or in any other manner shall be deemed to be the income of that previous year in which it is recovered irrespective of the fact whether the source of income continues to exist in that year or not" AG+I4A?$C +: TAQ )J $CDTAI? TDA?(A$TI+?( I? (C$%DITIC( 8)+?4 *A(=I?&9 ;(C$TI+? 9B< 1" In case a person sells his securities to another person a few days before the accrual of interest and purchases them back after the date of accrual, and assessin# officer is satisfied that the transaction has been made with the intention ?I3 ?I3 ?I3 1.,..,... ?I3 1.,..,...

of avoidin# tax, such interest shall be deemed as income of the transferor and not transferee" " In case a person has any beneficial interest in any securities and as a result of some arran#ement either no income is received by such person or the income received by him is lower than the amount which he would have received, the interest, which would have accrued on such securities had there been no such arran#ement, would be included in the income of person makin# such arran#ement" 1" the above provisions will not be applicable, if such person proves to satisfaction of the assessin# officer that the transaction has not resulted into any avoidance of tax or if at all there was some avoidance it was exceptional as there had not been any avoidance of tax in any of three precedin# previous years" B" In case of dealer of securities if there is a transaction of sale or purchase of securities and as a result the interest becomes receivable by him but is not deemed to be his income due to the above provisions, no account shall be taken of the transaction in computin# profits arisin# from or loss sustained in the business" /" the assessin# officer may direct any person to furnish a detail of securities held by him by servin# upon him a notice for not less than - days"

A$$+%?TI?& 2CT=+4(7 1" $A(= 2CT=+47 %nder this system only such transactions are recorded in which actual receipts and actual payments of the business occur" Cntries in the book are made only when money is actually received or is actually paid" ?o account is maintained for outstandin#, prepaid, accrued or unearned income" This system is best suitable for professional persons like doctors, chartered accountants etc" " 2CD$A?TI3C (J(TC27 In this system proper record of cash as well as credit transactions is made" %nder this system any income which relates to the current year whether it is received or not and any expenditure whether actually paid or not, is taken into consideration for computin# the profits and losses of the

91

business" The profit and loss account prepared under this system shows correct profits and losses and balance sheet #ives correct financial position of the business" 1" =ybrid system7 %nder this system of accountin#, the assessee adopts both the previous methods in a mixed form" (ome transactions are recorded in cash system and some under mercantile system dependin# upon the choice of book keeper" The income tax authorities accept all the three methods of accountin# for the purpose of assessment of profits and #ains" The accountin# system once adopted cannot be chan#ed without the prior approval of Income tax authorities" =e will have to adopt his accountin# method on re#ular basis and not merely for one particular year" I33%(TDATI+?7 2rs" &andhi holds the followin# securities on April 1 ..-7 Ds"9-,... 1 M securities of the %ttranchal #overnment Ds"-.,... 9M less tax non listed debentures of =33 ltd" Interest in both the cases is payable on ?ovember 1 every year +n (eptember 1 ..-, &andhi borrows Ds"B.,... at 1.M FA and invests it in purchasin# Ds"B.,..." 9"/M securities of the kerala #overnment 8due date of interest :ebruary every year9 Interest due on :ebruary - ..9 is received on April 1 , ..9" Interest on loan taken from 1!9! ..- to 2arch ..9 has been paid on 1!0! ..9" 4etermine the #ross taxable income of 2rs" &andhi for the assessment year ..9!1. if, a" (he maintains book of account on cash basis or b" (he maintains books of account on mercantile system $+2F%TATI+? +: I?$+2C :D+2 I?TCDC(T +? (C$%DITIC(7 A" Interest on )" securities (ecurity taxable receipt basis Ds" Ds" 9-,..., 1 M securities of the %tranchal Interest on is securities is taxable on on due basis Ds"

9B

&overnment 11,06. Ds" -.,..., 9M kess!tax non!listed debentures of =3 3td" Ds" B.,..., 9"/M securities of the Kerala &ovt" ;Taxable only in case ) as cash is received in the FEJ ..9!1.< &ross Interest De(uction for interest on )oan ta2en: $ase A not allowed as it has not been paid yet $ase ) allowed ;B.,... x 1.E1.. x 0E1 < Income from interest on securities 1-,96. ?I3 1-,96. 0, .. ?I3

11,06. 0, .. 1,-..

,06. ,111 .,B 0

Illustration" The followin# investments are held by 2r"3axman on 1!B! ..8a9 Ds"B.,..., 1.M %F #overnment loan 8b9 Ds"1/,... -M debentures of a (u#ar mill co, 8c9 Ds"/.,... 1 M debentures of a tradin# co, +n 1!9! ..-, he sold the debentures cum interest of tradin# co, and purchased Ds"6.,..., 1/M debentures cum interest of )eauty tradin# co, interest on investments received half yearly on 1st Auly and 1st Aanuary every year" $alculate income from securities for the previous year ..-!.9" $+2F%TATI+? +: I?$+2C :D+2 +T=CD (+%D$C(7 Ds"B.,... 1.M %F #overnment loan B,... st Ds"/.,... 1 M debentures of tradin# co, 8for six months due on 1 1,... Auly, ..-9 Ds"6.,..., 1/M debentures of beauty tradin# co, 8for 6 months due B,/.. on 1st Aan" ..99 Ds"1/,... -M debentures of a su#ar mill &D+(( I?TCDC(T 3ess7deductions I?$+2C :D+2 +T=CD (+%D$C( ,-.. 1B,1.. ?I3 1B,1..

I33%(TDATI+?7

9/

=arikrishna, a resident individual, submits the followin# particulars of income for the previous year endin# 2arch 11, ..97 4ividend from DC$ International 3td, Ds"B,-.. dividend declared on 16!/! ..- by (uncaram :inance ltd" Ds" ,0.. interest paid on capital borrowed for the purpose of investment in shares of (undaram finance ltd, Ds"B, .." collection char#es in respect of dividend Ds"/." *innin#s from lottery7net amount Ds"69,1.., tax deducted at source Ds"1.,9.., winnin#s from card #ame, Ds" 1,/.." interest on securities issued by the #overnment of (in#apore Ds" .,/0." 4etermine the income char#eable under the head income from other sources for the assessment year ..9!1." 4ividend of DC$ international ltd" Cxempted (undaram finance dividend exempted Cxpenses not allowed *innin#s from lotteries ?il ?il 69,1.. 1,..,... 1,/.. .,0/. 1,BB,.0.

A447 T4( 1.,9.. *innin# from card #ames Interest on securities issued by #overnment of (in#apore Income from other sources

Illustration7 (owmya has the followin# investments and incomes in the previous year ended 11!1! ..9" calculate her income from other sources" 8a9 4ividend from Indian company Ds"0,-.. 8b9 Cxaminer ship remuneration Ds" ,... 8c9 Doyalty by the publication of a book Ds"B-,... 8d9 *innin# from lottery 8net9 ;received on 1!1! ..9< 1B,//. 8e9 Ds,B.,... 1.M debentures of company ;listed< 8f9 Ds"B.,... 1 M Funjab #overnment securities 8#9 Ds"/.,... 11M 3ess tax commercial securities 8h9 Ds"B.,... 1.M Tax free debentures of a company 8i9 Ds"B,.16 as interest on tax free debentures 8listed9 ;received on 1!1! ..-<

96

In +ctober ..- she sold the above Ds"B.,..., 1.M tax free debentures of a company for Ds"B/,..." In 4ecember ..- she inherited Ds"6.,..., 1.M tax free debentures 8listed9 of QJ co 3td, from her father" Interest on above securities falls due on 4ecember 11st of every year" (he submits the followin# deductions7 8j9 $ollection char#es for interest and dividend O M of net amount reali'ed 8k9 Furchase of lottery tickets Ds" ,... I33%(TDATI+?7 2r"Karthik who is resident of India furnished the followin# particulars of his investments for the previous year ended 11st 2arch ..9" a" Ds"1.,... units of 2utual fund #ross income Ds"1, .. b" Ds"1.,... in Fost office savin#s bank account which earns interest O 1"/M per annum" c" Ds"B/,... in fixed deposit account with Allahabad bank on which interest O9M is payable" d" 1 M Ds"B.,... debentures listed of Tea company e" Ds"1,... interest received on the debentures of a co!operative society f" Ds" ,... interest received on ?ational development bonds #" 1.M %F state electricity board bonds Ds" .,... h" Ds"1.,... in 0 year post office ?ational savin#s certificates interest O 0M per annum is payable on the same every year" i" Ds"16,..., 1.M tax free debentures of A#ra 2unicipal corporation" Interest bein# payable on 11st 4ecember j" Ds"9.. received by an account payee che5ues as interest on debentures listed of a company in which public are substantially interested" k" =e collected the entire interest himself and claimed Ds" .. as his own fees for collection of interest" l" Interest on post office ?ational savin# certificates GIII issue Ds"/,..." $alculate the taxable income under the head income from other sources for the assessment year ..9!1." Income from units of mutual fund Cxempted

90

Income from interest on deposits in post office savin#s bank aEc Interest on fixed deposit with Allahabad bank 8B/,...x9E1..9 1 M Ds"B.,... listed debentures of tea company Interest received on ?ational development bonds Interest on debentures of a co!operative society 1.M Ds" .,... %F state electricity board bonds 1.,... 0M post office ?($ 16,... 1.M tax free debentures of A#ra municipal corporation 8net interestP1,6..x1..E-9"09 Interest on debentures 8listed9 of a company Interest on ?($ Income from other sources

Cxempted B,./. B,-.. ,... 1,... ,... Cxempted B,.11 9.. /,... 1,061

Illustration7 4r"2ahesh is a professor and a resident of India" =e submits before you the followin# incomes for computin# his income under the head income from other sources for the assessment year ..9!1." 8a9 (alary Ds"1/,6.. per month from vaishnaw commerce colle#e" 8b9 =e is the author of a test book which fetched him a #ross royalty of Ds" .,... in lump sum and which is in consideration of the transfer of copyri#ht" =e claims the followin# deductions from the amount7 8i"9 8ii"9 8iii"9 (alary to clerk who collected for him necessary data and #oes throu#h the final proof readin# Ds"1,... Furchased books worth Ds"B.. in connection with the revision of the book Telephone expenses of Ds"1,6.. attributed to the publication and sale of his book and other matters in connection with the printin# of the new edition of the book" 8c9 Income from articles which were published in Jojna Ds"B,... 8d9 =e lives in a rented house payin# rent at Ds"1,... p"m" he has sub let 1E1 portion of the house on a rent of Ds"1,/.. per month" =e has under taken the liability of payin# municipal taxes of Ds"/,B.. on the whole house and also the current repairs of the whole house amountin# to Ds"6,..." 8e9 =e received Ds"6. per lecture delivered at Ambedkar institute durin# the previous year" =e delivered . lectures"

9-

8f9 =e is an examinder in university" This source #ave him a remuneration of Ds" ,6.." he incurred Ds"6. on posta#e etc" in connection with the examination work which were reimbursed by the university" =e received Ds"B.. as remuneration for invi#ilation work in the university examination" 8#9 =is other income were7 wins from card #ames and bettin# Ds"6,/.., wins from chess Ds"1,..., received interest on #overnment of ?epal bonds Ds"1,/.." 8h9 Deceived Ds" ,... as dividend from a company in which the public is substantially interested" 8i9 Income from a#ricultural land situated at %jjain Ds"0,... 8j9 Ds"-.. per month scholarship for research work from %&$ $+2F%TATI+? +: I?$+2C :D+2 +T=CD (+%D$C( Doyalty 8#ross9 3C((7 salary to clerk Furchase of books Telephone expenses Income from writin# of articles in Jojna Income from sub lettin# 81,/.. x 1 9 3ess7 Dent paid 2unicipal taxes .,... 1,... B.. 1,6.. 1-,... 1 ,... 1,-.. 1, .. ,6.. B.. 6,/.. 1,... 1,/.. 1B,B..

1/,... B,... , ..

Depairs expenses ,... Fayment received for deliverin# lectures Demuneration from university for paper settin# :or invi#ilation *innin# from card #ame and bettin# *innin# from chess #ame Interest on bonds issued by ?epal #overnment Income from other sources SECTION L A *hat is income from other sourcesI *hat is #rossin# upI *hat is sub!lettin#I *hy is dividend income is exempted in IndiaI *hat is interestI

99

*hat is a securityI SECTION L B 8a9 )riefly explain various provisions of Income from other sourcesI 8b9 Cxplain accountin# methodsI " W The followin# investments are held by 2r"3axman on 1!B! ..Ds"B.,..., 1.M %F #overnment loan Ds"1/,... -M debentures of a (u#ar mill co, Ds"/.,... 1 M debentures of a tradin# co, +n 1!9! ..-, he sold the debentures cum interest of tradin# co, and purchased Ds"6.,..., 1/M debentures cum interest of )eauty tradin# co, interest on investments received half yearly on 1st Auly and 1st Aanuary every year" $alculate income from securities for the previous year ..-!.9" d" 2r"Q has the followin# incomes durin# the year endin# 11!1! ..9" 4ividend declared by 2 $o" on 11!1! ..- Ds"6,... dividend declared by T $o" on 11!1! ..9 Ds"9,... Interim dividend received on 1!/! ..- Ds"1,... =e won #old worth Ds"1.,..,... from Funjab state lottery durin# march ..9 he earned Ds"1,..,... as pri'e money on horse races" These horses are owned by him and expenditure incurred on maintenance of these horses amounted to Ds"1,6.,..." $ompute income from other sources for the assessment year ..9!1." d" what are tax free, free tax securitiesI SECTION L C a" (owmya has the followin# investments and incomes in the previous year ended 11!1! ..9" calculate her income from other sources" 8l9 4ividend from Indian company Ds"0,-.. 8m9Cxaminer ship remuneration Ds" ,... 8n9 Doyalty by the publication of a book Ds"B-,... 8o9 *innin# from lottery 8net9 ;received on 1!1! ..9< 1B,//.

1..

8p9 Ds,B.,... 1.M debentures of company ;listed< 859 Ds"B.,... 1 M Funjab #overnment securities 8r9 Ds"/.,... 11M 3ess tax commercial securities 8s9 Ds"B.,... 1.M Tax free debentures of a company 8t9 Ds"B,.16 as interest on tax free debentures 8listed9 ;received on 1!1! ..-< In +ctober ..- she sold the above Ds"B.,..., 1.M tax free debentures of a company for Ds"B/,..." In 4ecember ..- she inherited Ds"6.,..., 1.M tax free debentures 8listed9 of QJ co 3td, from her father" Interest on above securities falls due on 4ecember 11st of every year" (he submits the followin# deductions7 8u9 $ollection char#es for interest and dividend O M of net amount reali'ed 8v9 Furchase of lottery tickets Ds" ,... 2r"Karthik who is resident of India furnished the followin# particulars of his investments for the previous year ended 11st 2arch ..9" a" Ds"1.,... units of 2utual fund #ross income Ds"1, .. b" Ds"1.,... in Fost office savin#s bank account which earns interest O 1"/M per annum" c" Ds"B/,... in fixed deposit account with Allahabad bank on which interest O9M is payable" d" 1 M Ds"B.,... debentures listed of Tea company e" Ds"1,... interest received on the debentures of a co!operative society f" Ds" ,... interest received on ?ational development bonds #" 1.M %F state electricity board bonds Ds" .,... h" Ds"1.,... in 0 year post office ?ational savin#s certificates interest O 0M per annum is payable on the same every year" i" Ds"16,..., 1.M tax free debentures of A#ra 2unicipal corporation" Interest bein# payable on 11st 4ecember j" Ds"9.. received by an account payee che5ues as interest on debentures listed of a company in which public are substantially interested"

1.1

k" =e collected the entire interest himself and claimed Ds" .. as his own fees for collection of interest" l" Interest on post office ?ational savin# certificates GIII issue Ds"/,..." $alculate the taxable income under the head income from other sources for the assessment year ..97 4r"2ahesh is a professor and a resident of India" =e submits before you the followin# incomes for computin# his income under the head income from other sources for the assessment year ..9!1." 8k9 (alary Ds"1/,6.. per month from vaishnaw commerce colle#e" 8l9 =e is the author of a test book which fetched him a #ross royalty of Ds" .,... in lump sum and which is in consideration of the transfer of copyri#ht" =e claims the followin# deductions from the amount7 8i"9 8ii"9 8iii"9 (alary to clerk who collected for him necessary data and #oes throu#h the final proof readin# Ds"1,... Furchased books worth Ds"B.. in connection with the revision of the book Telephone expenses of Ds"1,6.. attributed to the publication and sale of his book and other matters in connection with the printin# of the new edition of the book" 8m9Income from articles which were published in Jojna Ds"B,... 8n9 =e lives in a rented house payin# rent at Ds"1,... p"m" he has sub let 1E1 portion of the house on a rent of Ds"1,/.. per month" =e has under taken the liability of payin# municipal taxes of Ds"/,B.. on the whole house and also the current repairs of the whole house amountin# to Ds"6,..." 8o9 =e received Ds"6. per lecture delivered at Ambedkar institute durin# the previous year" =e delivered . lectures" 8p9 =e is an examinder in university" This source #ave him a remuneration of Ds" ,6.." he incurred Ds"6. on posta#e etc" in connection with the examination work which were reimbursed by the university" =e received Ds"B.. as remuneration for invi#ilation work in the university examination"

1.

859 =is other income were7 wins from card #ames and bettin# Ds"6,/.., wins from chess Ds"1,..., received interest on #overnment of ?epal bonds Ds"1,/.." 8r9 Deceived Ds" ,... as dividend from a company in which the public is substantially interested" 8s9 Income from a#ricultural land situated at %jjain Ds"0,... 8t9 Ds"-.. per month scholarship for research work from %&$

1.1