Chapter 1 - 5

Income Tax Assessment Year 2010-11
CHAPTER-1
BASIC CONCEPTS OF INCOME TAX
TAX - MEANING THEREOF - Every state needs funds to govern the country. The
need of funds can be fulfilled by taking loans from their countries, grants & aids
from other countries, share of profit in govt. run organizations and through taxes.
Therefore, tax is that amount which is borne by the persons and
paid to the state for running the state.
KINDS OF TAXES - Taxes are of two kinds:-
(1) Direct Taxes; and (2) Indirect taxes.
DIRECT TAXES - These are borne and paid by the same person. For example:
Income tax, Wealth tax, Gift tax (Gift tax has been abolished in India) and
Interest tax.
INDIRECT TAXES - These are borne by persons who are different from the
payers. For example: Custom duty, Excise duty, Sales Tax, Entertainment tax,
Octroi etc.
INCOME TAX ACT, 1961 -
The current Income tax Act was regulated from 1.4.1961 and its
rules were brought into working from 1.4.1962. Every year the finance minister
of the country proposes for various changes in the Act through the Finance Bill.
This bill, when gets nod in the parliament, becomes ' The Amendment Act.'
SPECIFIC TERMS TO BE USED IN THE ACT-
PREVIOUS YEAR (SECTION 3): It refers to the year in which a person earns his
income which is taxable in the relevant assessment year. The period of previous
year is normally of 12 MONTHS starting from 1st April to 31st March in the next
calendar year. But in case of NEWLY SET-UP Business/profession or new
source of income the period of previous year may be less than 12 months. Thus
the period of previous year can be of less than 12 months in case of new source of
income but afterwards the period is always equal to 12 months.
ASSESSMENT YEAR [SECTION 2(9)]: It refers to the year in which income of a
person (who has earned his income in the relevant previous year) is charged to
tax. THIS MEANS THAT EACH PREVIOUS YEAR HAS A UNIQUE ASSESSMENT
YEAR. ALSO THE ASSESSMENT YEAR ALWAYS FOLLOWS THE PREVIOUS YEAR
e.g.
a) PREVIOUS YEAR RELEVANT ASSESSMENT YEAR
2004-05 2005-06
(1.4.2004 TO 31.3.2005) (1.4.2005 TO 31.3.2006)
INCOME EARNED INCOME CHARGED TO TAX
b) PREVIOUS YEAR RELEVANT ASSESSMENT YEAR
2009-10 2010-11
(1.4.2009 TO 31.3.2010) (1.4.2010 TO 31.3.2011)
INCOME EARNED INCOME CHARGED TO TAX
This also leads to the conclusion that every financial year (1st April
to 31st March) is :- (1) ASSESSMENT YEAR for preceding Financial year; AND
Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 1

(2) PREVIOUS YEAR for next financial year.

PERSON [SECTION 2(31)]: The definition as per the act is 'INCLUSIVE' one and
it includes:-
(1) INDIVIDUAL (may be minor, insane or lunatic).
(2) HINDU UNDIVIDED FAMILY
(3) COMPANY (Indian or Foreign or an entity recognised as Company by
C.B.D.T.).
(4) FIRM (a Partnership firm including a Limited Liability Partnership as per
The Limited Liability Partnership Act, 2008).
(5) ASSOCIATION OF PERSONS/BODY OF INDIVIDUALS (e.g. Co-op. society)
(6) LOCAL AUTHORITY (e.g. Municipal Corporation, Port Trust etc.).
(7) EVERY OTHER ARTIFICIAL JURIDICAL PERSON (e.g. Indian Railways,
University).
ASSESSEE [SECTION 2(7)]: Assessee means a person (as referred above) who is
liable to pay income tax or any other amount (interest or penalty) under the Act.
It also includes a person on whom any proceeding has been taken for
assessment of his income/loss or refund due to him.
It also includes a person who represents some other person who is liable
to pay tax. He is called “REPRESENTATIVE ASSESSEE’ or ‘DEEMED ASSESSEE’
(e.g. Father, filing the return of his working minor child, on his behalf).
It also includes a person who has made default under any provision of the
Income Tax Act. He is called ' ASSESSEE IN DEFAULT'. For example if a person
was responsible to deduct the Tax at Source but has not deducted the tax or after
deducting the tax he has not deposited such tax. Another example may be a
person who was liable to pay advance tax but he has not paid such advance tax.
INCOME [SECTION 2(24)]: The definition of 'Income’ under the Act is inclusive
and not exhaustive. It includes:
a) Profits and gains from business or profession;
b) Dividends;
c) Voluntary contributions received by a WHOLLY OR PARTLY CHARITABLE
OR RELIGIOUS TRUST/INSTITUTION EXCEPT the contribution forming
part of the CORPUS of the trust;
d) Perquisites and profit in lieu of salary;
e) ALLOWANCES or BENEFITS received by the assessee to meet his expenses
for PERFORMANCE OF HIS DUTIES;
f) ALLOWANCES received by the assessee to meet his personal expenses at
the place of duty or compensation for increased cost of living;
g) BENEFITS OR PERQUISITES enjoyed (by a Director or a person having
substantial interest or a relative of Director/such person) in a Company;
h) BENEFITS OR PERQUISITES obtained by REPRESENTATIVE ASSESSEE OR
any amount paid by representative assessee for the benefits of the
BENEFICIARY which is required to be paid by the beneficiary only;
i) Compensation (or similar payments) received by or due to a person under
PGBP;
J) Income of Trade associations (Professional also) who provide specific

services to its members;

k) BENEFITS OR PERQUISITES from BUSINESS OR PROFESSION;
l) Export Incentives to Exporters;
m) Any interest, salary, bonus, commission received by a partner from Firm;
n) Any sum received under Key man Insurance Policy;
o) Profit and Gains of Managing Agency;
p) Income from speculative transaction;
q) Recovery of any amount which has been allowed as deduction in any
preceding Assessment Year;
r) Income from sale of any fixed asset (except land) put to scientific research
without using it for any other purpose before sale;
s) Recovery of Bad debts, allowed as deduction in any preceding Assessment
Year;
t) Amount transferred to Special Reserve under section 36(i) (viii);
u) Recovery out of any discontinued business or profession;
v) Capital gains;
w) Insurance profit computed under section 44;
x) Casual Income;
y) Any sum received by employer from his employees as contribution to
RPF or any other approved fund and the amount not deposited with in
'DUE DATES’ as per section 43B.
z) Any sum received under a Key-man Insurance Policy.
za) any gift of money received by an individual from non-specified person(s)
in excess of Rs.50000.
THE POINTS TO BE NOTED:-
- A REVENUE INCOME IS TAXABLE UNLESS OTHERWISE STATED IN THE
ACT.
- A CAPITAL INCOME IS EXEMPTED UNLESS OTHERWISE STATED IN THE
ACT.
- PERSONAL GIFTS ARE NOT INCOME IN THE HANDS OF RECIPIENT
(EXCEPT GIFT OF MONEY EXCEEDING RS. 50000 RECEIVED
BYINDIVIDUAL OR HUF WITHOUT CONSIDERATION).
- PIN MONEY IS NOT INCOME OF THE HOUSEWIFE.
- AWARDS RECEIVED BY A PROFESSIONAL SPORTS PERSON IS TAXABLE
BUT AWARDS RECEIVED BY AMATEURE SPORTS PERSON IS NOT
TAXABLE AS INCOME.
- THE BURDEN OF PROVING THAT A RECEIPT IS TAXABLE IS ON THE
INCOME TAX DEPARTMENT. BUT THE BURDEN OF PROVING THAT AN
INCOME IS EXEMPT IS ON THE ASSESSEE.
CAPITAL RECEIPTS vs. REVENUE RECEIPTS:
As discussed earlier, that the revenue receipts are taxable, unless
these are specifically exempted from tax under the Act and the Capital Receipts
are exempted unless these are specifically charged to tax under the Act, so it
becomes necessary to understand the difference between the two. We have only
the cases decided by the courts with the help of which we can draw general

conclusions. These are as follows:-

a) The receipt is capital or revenue is to be considered only from recipient’s
point of view. The payer's motive is to be ignored.
b) Lump sum payments or payment received in Installment do not affect the
nature of the receipt.
c) Compensation received lieu of source of income is CAPITAL RECEIPT
whereas the compensation received for temporary disablement is a
revenue receipt.
d) Income from wasting assets (like mines and quarries are treated as
revenue income).
e) Insurance receipt for loss of current asset or against loss of profit is
Revenue Receipt. But Insurance claim for loss of Fixed Asset is capital
Receipt. The insurance claim for loss of goods, which are not for
business/profession, is Capital Receipt.
f) The receipt due to change in exchange rate of the currency on current
assets is Revenue receipt. But the receipt due to change in exchange rate of
the currency on FIXED ASSETS/INVESTMENTS is CAPITAL RECEIPT.
g) The subsidy received for setting up a business or completing a project is
CAPITAL RECEIPT. But the subsidy received for carrying out business
activities and after the commencement of production is REVENUE
RECEIPT.
HEADS OF INCOME: The Income Tax is levied an income of a person. This
income is divided into five heads as follows:-
1) INCOME UNDER HEAD SALARY
Income due/received by an employee from his past/present/future
employer is taxable under this head.
2) INCOME UNDER HEAD HOUSE PROPERTY
Income received/earned/deemed to be earned by a person from house
property is charged under this head.
3) INCOME UNDER HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION
Income received/earned by a person from his business or profession is
charged to tax under this head.
4) INCOME UNDER HEAD CAPITAL GAINS
Income earned /received by a person from sale/transfer of any capital
asset is charged under this head.
5) INCOME FROM OTHER SOURCES
Income from all other sources which can't be covered under first four
heads is charged to tax under this head.
IMPORTANT: INCOME TAX IS CHARGED ON ALL INCOMES OF A PERSON.
VARIOUS INCOMES ARE NOT CHARGED TO TAX SEPARATELY. For example: Mr.
X has income from:
a) Salary Rs. 10, 00,000/-; b) House property Rs. 2, 00,000/-; c) Profit from
cloth business Rs. 2, 00,000/-; d) Profit from Gold business Rs. 1, 00,000/-;
and e) Interest income of Rs. 50,000/-.
All these incomes will be charged to tax in only one RETURN OF INCOME i.e. of

Mr. X. All these incomes will be shown in the above said Return of Income only.
METHOD OF ACCOUNTING: Under the Act only two accounting methods are
allowed - a) Mercantile system and; b) Cash system.
But these two methods can only be employed for computing income
under head-a) Profit & Gain of Business or profession; & b) Income from other
sources.
The remaining three heads of Income i.e. a) 'Salary; b) House
property and; c) Capital Gain do not recognize any method of accounting
followed by the person/assessee. Under these three heads, income is calculated
as per provisions given in the chapter concerned.
Previous Year for Cash Credits, Investments, Money etc.
1. Cash Credit (sec 68): Where any sum is found credited in the books of an
assessee for any previous year for which the assessee has no satisfactory
explanation then such cash credit is treated as income of the assessee of the
previous year in which such income was credited.
2. Unexplained Investments (sec 69): Where in any previous year the assessee
has made any investments which are not recorded in the books of account
maintained by him and the assessee has no satisfactory explanation about the
source of investment then such unexplained investment is treated as income of
the assessee of the previous year in which such investment was made.
3. Unexplained Money (Sec 69A): Where in any previous year the assessee is
found to be the owner of any money, bullion, Jewellery or other valuable article
which is not recorded in the books of account and the assessee has no
satisfactory explanation about the source of money etc. then such unexplained
money etc. is treated as income of the assessee of the previous year in which the
assessee was found to be the owner.
4. Investments not fully disclosed in the books of account (sec 69B): Where
in any previous year the assessee has made any investments which are recorded
in the books of account maintained by him at an amount less than amount
expended and the assessee has no satisfactory explanation about the source of
excess amount expanded in investment then such excess amount is treated as
income of the assessee of the previous year in which such investment was made.
5. Unexplained Expenditure (Sec 69 C): Where in any previous year an
assessee has incurred any expenditure and the assessee has no satisfactory
explanation about the source of expenditure or part thereof then such
unexplained explained expenditure or part thereof is treated as income of the
assessee of the previous year in which such expenditure was incurred. Also such
unexplained expenditure can not be allowed as deduction under any head of
income.
6. Amount borrowed or repaid on Hundi (sec 69D): Where any amount is
borrowed on a Hundi from, or any amount due thereon is repaid to, any person
otherwise than through an account payee cheque drawn on a bank, the amount
so borrowed or repaid shall be deemed to be the income of the borrower or
repayer for the previous year in which such amount was borrowed /repaid. If
amount borrowed has already been taxed then there will be no tax levied at the

time of repayment of such amount.

EXECPTIONS TO THE GENERAL RULE THAT INCOME OF A
PREVIOUS YEAR IS CHARGED TO TAX IN THE RELEVANT
ASSESSMENT YEAR:
1. Non resident shipping business (sec 172) – In case of a non-resident
assessee owning a ship or ship is chartered by such assessee carrying passengers,
livestock, goods or mail shipped at any Indian Port then 7.5% of fare on account
of such carriage is deemed to be the income of such assessee. Such income is
taxable in the same year in which such fare was collected. It is immaterial
whether such assessee has any agent or representative in India or not.
2. Persons leaving India (sec 174) – If it appears to the Assessing Officer that
an individual may leave India during the previous year or shortly thereafter and
the such individual has no intention of returning back to India then the income of
such individual upto the probable date of his departure from India shall be
charged to tax in the same previous year itself.
3. AOP/BOI/ juridicial person formed for short duration (sec174A) – If an
AOP/BOI/ artificial juridicial person is formed for short duration for a particular
event or purpose and if it appears to the Assessing Officer that such AOP etc. may
be dissolved during the previous year or shortly thereafter then the income of
such AOP etc. of the previous year shall be charged to tax in the same previous
year itself.
4. Person trying to alienate (transfer) his assets to avoid tax liability (sec
175) -- If it appears to the Assessing Officer that an individual may sell, transfer,
dispose off or otherwise part with any of movable or immovable asset with a
view to avoid payment of any liability under the Income Tax Act then the income
of such individual upto date of starting proceedings under this section shall be
charged to tax in the same previous year itself.
5. Discontinued Business (sec 176) – If any business or profession is
discontinued during the previous year then the Assessing Officer may charge the
income of the previous year to tax in the previous year itself. Alternatively, the
Assessing Officer may charge such income to tax in the relevant assessment year.
PERFORMA OF COMPUTATION CHART OF INCOME TAX

Name of person :
Address :
Father's Name (if applicable) :
Date of Birth (if applicable) :
Previous Year :
Assessment year :
Ward/Circle/Range :
Permanent Account Number :

PARTICULARS AMOUNT
1. INCOME UNDER HEAD 'SALARIES' + 

2. INCOME UNDER HEAD 'HOUSE PROPERTY' + 
3. INCOME UNDER HEAD 'PROFITS & GAINS + 
OF BUSINESS'
4. INCOME UNDER HEAD 'CAPITAL GAINS’ + 
5. INCOME UNDER HEAD ‘OTHER SOURCES’ + 
Less: Setting off of brought forward losses - 

GROSS TOTAL INCOME (OR G.T.I.)
Less: Deduction under Chapter VI A - 

(Section 80C to 80U)
NET INCOME (OR NET TAXABLE INCOME)
(OR TOTAL INCOME)
TAX LIABILITY
Tax on special Incomes (like casual Income or long 

term Capital Gains or undisclosed Incomes or
incomes of non-residents)
Tax on Normal Income + 
TOTAL
Add: Surcharge (if applicable) + 

Add: Education Cess @2% of Tax and surcharge + 
Add: Secondary & Higher Education Cess @1% of
Tax and surcharge + 
TOTAL
Less: Rebate u/s 86, 89, 90 & 91 - 
Add: Interest u/s 234 A,234 B & 234 C + 
Less: Tax Deducted or collected at source - 
Advance Income Tax - 
Self Assessment Tax - 
NET AMOUNT PAYABLE / REFUND DUE
RATES OF TAX FOR ASSESSMENT YEAR 2010-11-
A. On Normal Income -
1(a) for woman, resident in India and below 65 years of age till 31.03.2010
Upto Rs. 1,90,000 Nil
From Rs.1,90,010 to Rs. 3,00,000 10%
From Rs.3,00,010 to Rs. 5,00,000 20%
Above Rs. 5,00,000 30%

1(b) For an Individual (man or woman), resident in India who is of 65 years of

age or more at any time during the previous year
From Rs.2,40,010 to Rs. 3,00,000 10%
From Rs.3,00,010 to Rs. 5,00,000 20%
Above Rs. 5,00,000 30%
1(c) For Individuals (other than those mentioned above), HUF, AOP/BOI (other
than co-operative societies)
From Rs.1,60,010 to Rs. 3,00,000 10%
From Rs.3,00,010 to Rs. 5,00,000 20%
Above Rs. 5,00,000 30%
1(d) For Firms (including LLP’s) – A firm’s normal income is taxable @ 30%.
1(e) (i) For Domestic Company normal income is taxable @ 30%.
(ii) For Foreign Company normal income is taxable @ 40%.
1(f) For Co-operative societies
Upto Rs. 10,000 10%
From Rs.10,010 to Rs. 20,000 20%
Above Rs. 20,000 30%
1(g) For Local Authorities: A Local Authority’s normal Income is taxable @ 30%.
(B) On Special Incomes:
1. Short Term Capital Gain u/s 111 A is taxable @ 15%.
2. Long Term Capital Gain u/s 112 is taxable @20%.
3. Winning from Lotteries, crossword puzzles, card games etc. u/s 115 BB is
taxable @ 30%.
SURCHARGE: In case a Company (Domestic or Foreign) has a total income not
exceeding Rs. 1,00,00,000 then there is no surcharge otherwise there is
surcharge of 10% (in case of Domestic Company) and 2.5% in case of foreign
company on income tax less rebate (if any).
In above case there is marginal relief of surcharge.
For other persons there is no surcharge for A.Y. 2010-11.
EDUCATION CESS: Education cess is 2% of total tax (including surcharge) for all
assessees.
SECONDARY & HIGHER EDUCATION CESS: It is 1% of total tax (including
surcharge) for all assessees.
* * *

CHAPTER-2
RESIDENTIAL STATUS
A person may earn/receive his income from a source or at a place
with in India or outside India. Such income is charged to a person on the basis of
Residential Status. Residential Status is different from 'Nationality’ or ‘Domicile.’
Before starting the concept of understanding different types of residential status
it is necessary to understand that:
1) Each and every person has a distinctive residential status for every
relevant previous year. It means that the person can be either '
ORDINARILY RESIDENT' or 'NOT ORDINARILY RESIDENT’ or ‘NON
RESIDENT’:
2) Every person has to consider his residential status in every relevant
previous year. It means that a person Resident in A.Y.2009-10 may be non-
resident in AY 2010-11 according to the rules to be studied later on.
3) It is not necessary that a person, who is resident in India, can't be Resident
in any other country in the same previous year. It simply means that a
person can be Resident in more than one country in the same previous
year.
4) If a person is resident in a particular previous year for one source of
income then he is also resident for other sources of income for that
previous year. This means that a person has same residential status
for incomes of a particular previous year.
The residential status is studied by dividing the persons in following
five categories:-
a) Individual b) H.U.F. c) Firm/AOP or BOI.
d) Company e) every other person.
A) RESIDENTIAL STATUS OF INDIVIDUAL: An individual can be:

i) Resident; ii) Resident but not ordinarily resident; or iii) Non-resident.
RESIDENT & ORDINARILY RESIDENT [Sec 6(1), 6(6)(a)]: An individual is
resident in India in a previous year if he fulfills at least one of the following
two conditions:
a) He is in India for at least 182 days in the previous year; or
b) He is in India for at least 60* days in the previous year and at least 365
days in four years preceding the relevant previous year.
*This period of 60 days is to be replaced by 182 days if:
i) Individual is Indian Citizen or a person of Indian origin who comes for a
visit to India; or
ii) Individual is Indian Citizen who leaves India during the relevant previous
year for employment purpose outside India or as a crew member of Indian
Ship.
NOTE: AN INDIVIDUAL IS A PERSON OF INDIAN ORIGIN IF HE OR EITHER OF
HIS PARENTS OR ANY OF HIS GRAND PARENTS (BOTH PATERNAL &
MATERNAL) WAS BORN IN UNDIVIDED INDIA.

An individual, who fulfills either of 'a' or 'b' or both conditions given

above, has to fulfill both of the conditions given below to be ordinarily Resident:-
a) He is resident in India for at least 2 years out of 10 years immediately
preceding the relevant previous year; &
b) He is in India for at least 730 days in 7 years preceding the relevant
previous year.
RESIDENT BUT NOT ORDINARILY RESIDENT [SEC6 (1), 6(6)(a)]: An
individual who fulfills at least one of the Basic conditions of resident but does not
fulfill both of the conditions for ordinarily resident is RESIDENT BUT NOT
ORDINARILY RESIDENT.
NON RESIDENT:- An individual who does not fulfill any of the basic condition of
resident is called NON-RESIDENT.
B) RESIDENTIAL STATUS OF H.U.F.: Like Individual, the H.U.F. can also be i)

Resident and ordinarily resident; ii) Resident but not ordinarily resident; & iii) Non
resident.
RESIDENT & ORDINARILY RESIDENT [Sec.6 (2)]: The H.U.F. is resident in
Indian in a previous year if de-facto (actual) control and management of its
affairs is situated wholly or partly in India.
The H.U.F., who is Resident, has to fulfill both of the conditions given
below to be ordinarily resident:-
a) The Karta (Manager) is resident in India for at least 2 years out of 10 years
immediately preceding the relevant previous year; &
b) The Karta is in India for at least 730 days in 7 years preceding the relevant
previous year.
RESIDENT BUT NOT ORDINARILY RESIDENT: The HUF who is resident in India
(i.e. the Control & Management of its affairs is in India either wholly or partly)
but it does not fulfill both of the conditions for ordinarily resident is resident but
not ordinarily resident.
NON-RESIDENT: The H.U.F., control & management, of whose affairs, is wholly
outside India is Non-resident.
C) RESIDENTIAL STATUS OF FIRM/AOP OR BOI [Sec. 6 (2)]: A firm can be

either i) resident; or ii) Non resident.
RESIDENT: A firm is resident in India if control and management of its affairs is
situated wholly or partly with in India.
NON RESIDENT: A firm/AOP or BOI is non resident in India if Control and
management of its affairs is situated wholly outside India.
NOTE: A Firm is not 'ordinarily' or 'not ordinarily resident’.
D) RESIDENTIAL STATUS OF A COMPANY [Sec 6(3)]: The company can be

either: i) Resident; or ii) Non- resident
RESIDENT: The Company, which is registered in India (Called Indian Company),
is always resident in India. A foreign company is resident in India if control and
management of its affairs is situated wholly with in India.

NON RESIDENT: A foreign company is non resident in India if control &

management of its affairs is wholly or partly outside India.
NOTE: A company is never 'ORDINARILY RESIDENT' or 'NOT ORDINARILY
RESIDENT.
E) RESIDENTIAL STATUS OF EVERY OTHER PERSON [SEC 6(4)]: In case
of every other person, same rules are applicable as are in case of a
FIRM/AOP/BOI.
TAX INCIDENCE FOR DIFFERENT RESIDENTIAL STATUS:

PARTICULARS ORDINARILY RESIDENT NON
RESIDENT BUT NOT RESIDENT
ORDINARILY
RESIDENT
1 Income received in India TAXABLE TAXABLE TAXABLE
(Where ever accrued)
2 Income deemed to be TAXABLE TAXABLE TAXABLE
received in India
(wherever accrued )
3 Income accrued in TAXABLE TAXABLE TAXABLE
India(wherever received)
4 Income deemed to be TAXABLE TAXABLE TAXABLE
accrued in India
(wherever received)
5 Income accrued and TAXABLE TAXABLE NOT
received outside India, TAXABLE
from a business controlled
from India or a profession
set up in India (wholly or
partly)
6 Income accrued and TAXABLE NOT TAXABLE NOT
received outside India, TAXABLE
from a business controlled
from outside India or a
profession set up outside
India
7 Income accrued and NOT TAXABLE NOT TAXABLE NOT
received outside India TAXABLE.
during any preceding
previous year but
remitted to India during
the previous year.
INCOME DEEMED TO BE RECEIVED IN INDIA: The following are incomes which

are deemed to be received in India:-
i) Annual accretion to balance in Recognised provident fund of an employee

i.e. interest credited at a rate exceeding 9.5%.

ii) Contribution in excess of 12% of General Salary (to be discussed in chapter
'Salary') by the Employer towards R.P.F.
iii) Transfer balance from U.R.P.F. to R.P.F.
iv) Tax Deducted at source on income of payee.
v) Deemed Profit u/s 41 and 59 i.e. Recovery of any deduction or bad debts or any
income after closure of business or profession or sale of any asset used for
scientific research.
vi) Contribution by Central Government towards pension fund of its employees
under section 80 CCD.
vii) Special Incomes like cash credits, unexplained money etc..
INCOME DEEMED TO ACCRUE OR ARISE IN INDIA: The following are incomes

deemed to accrue or arise in India:-
i) Income from Business connection in India.
ii) Income from property or any source of Income which is situated in India.
iii) Income from Transfer of Capital Asset situated in India.
iv) Salary (other than allowances and perquisites) received by Indian National
(citizen) Government employees posted outside India.
v) Salary of an individual if service is rendered in India.
vi) Dividend received by any person from an Indian Company.
vii) Income by way of interest or royalty or fees from technical service
received by any person from Central or State Govt.
viii) Income by way of interest or royalty or fees for technical service received
by any person from any other person if the fund or money or source of
income from royalty is used in India.
NOTE: Business connection may be of many types i.e. an agent in India or an

Indian Branch Office etc.. But in case of a Non-resident person the
following are not treated as business connection in India:
a) Activities confined to purchase of goods in India for exports;
b) Activities confined to collection of news and views for transmission
outside India by or on behalf of Non-resident engaged in business of news
agency or publishing newspapers, magazines or journals;
c) Activities confined to shooting of cinematographic film in India if such
Non-resident is:
i) an individual- not an Indian citizen; or
ii) a firm- having no partner being Indian Citizen or Indian Resident; or
iii) a company- having no shareholder being Indian Citizen or Indian
Resident.
* * *

Chapter-3
INCOME UNDER HEAD "SALARIES"
The first head of Income is ‘Income from Salaries’. First of all let us understand
some important concepts about it:-
a) EMPLOYER-EMPLOYEE RELATIONSHIP: The relationship between payer
and the payee must be that of employer and employee (i.e. master and
servant relationship). Whether the relationship is of master & servant or
not, is decided on case to case basis. The general rule is that a master is a
person who directs the servant WHAT IS TO BE DONE, WHEN IT IS TO BE
DONE, & HOW IT IS TO BE DONE. But this rule can't be applied in all cases.
[for example in case of a teacher or a doctor the above rule fails].
 Remuneration received by a Member of Parliament is not chargeable as
salary because the relationship between him and the Government is not of
employer & employee. [It is chargeable under head “Income from other
sources”].
 Remuneration received by a partner from his partnership firm is not
chargeable as salary because the relationship between him and the firm is
not of employer & employee. [It is chargeable under head "Profits & Gains
of business and profession"].
b) SURRENDER OF SALARY: Any salary surrendered by the employee to the
Central Government under Section 2 of The Voluntary Surrender of
Salaries (Exemption from taxation) Act, 1961 is not charged to tax. The
employee may be in private, public or Government service.
c) FOREGOING OF SALARY: If any salary is foregone by the employee (not
surrendered as per point (b) then it is to be charged to tax.
d) PLACE OF ACCRUAL OF SALARY: The salary income is accrued where the
employee renders the services. The place of receipt of salary is of NO
IMPORTANCE.
* But there is one exception to this rule. The salary, received by Indian
National Government Employee posted outside India, is deemed to accrue
or arise in India.
e) TAX FREE SALARY: If an employee receives tax free salary from his
employer then it simply means that tax has been paid by the employer.
The tax paid by employer will be added back to find total salary due to the
employee.
f) SALARY PAID BY FOREIGN EMPLOYER: If employee rendering service in
India is paid salary by his foreign employer; it is taxable in India (unless
otherwise stated to be exempt u/s 10).
g) SALARY DUE OR RECEIVED IN FOREIGN CURRENCY: If the employee
earns/receives salary in foreign currency, it will be converted in Rupees by
applying. TELEGRAPHIC TRANSFER BUYING RATE on the last day of the
month preceding the month in which salary is due or paid or is in arrears.
h) DISTINCTION BETWEEN SALARY & WAGES NOT IMPORTANT: The Act

does not make any difference between salary and wages. Both are
chargeable under 'SALARY'.
i) BASIC SALARY IN GRADE SYSTEM: Under this system, the annual
increments to be given to the employee are already fixed in the grade. Let
us take an example of an employee, who joins service on 1.7.2008 and is in
the grade of 15000-500-20000-1000-40000. It means that in the first year
of service i.e. from 1.7.2008 to 30.6.2009 he will get Rs. 15,000 per month.
In the next year from 1.7.2009 to 30.6.2010, his basic salary will be Rs.
15,500 (including increment of Rs. 500). He will get annual increments of
Rs. 500 till his basic is Rs. 20,000. Then his annual increments will be Rs.
1,000 till his basic is Rs. 40,000. After then there will be no increment.
j) SALARY FROM MORE THAN ONE SOURCE: If an employee gets his salary
from more than one employer then all the salary is taxable under head
income from 'SALARIES.'
k) SALARY FROM PAST, PRESENT OR FUTURE EMPLOYER: Any
remuneration received from past, present or future employer is to be
charged under head 'SALARIES'.
l) SALARY WHEN DUE: There are two approaches - i) Salary is due on the
last date of month; and ii) Salary is due on the first date of next month.
m) BASIS OF ACCOUNTING IRRELEVANT: The books of accounts kept by
employee (if any) and accounting method followed by him (cash or
mercantile) are not relevant for calculating salary income of the employee.
MEANING OF SALARY U/S 17(1): The definition of Salary is inclusive one. It

includes:-
- Wages;
- Any annuity or pension;
- Any Gratuity;
- Any fees, commissions, perquisites or profits in lieu of or in addition to any
salary or wages;
- Any advance of Salary;
- Any payment received by an employee in respect of any period of leave not
availed by him;
- Annual accretion to the balance at the credit of an employee participating
in a recognized provident fund to the extent to which it is chargeable to
tax;
- The aggregate of all sums that are comprised in the transferred balance of
an employee participating in a recognised provident fund to the extent to
which it is chargeable to tax.
- The contribution made by the Central Government to the account of an
employee under pension scheme referred to in section 80 CCD.
The above definition is inclusive. But in general, Salary
includes all the payments made by employer to employee (including gratuitous
payments, allowances and perquisites).

PROCESS OF COMPUTING SALARY INCOME:

It can be understood from the following table:-
Basic Salary + 
Fees and Commission + 
Bonus + 
Entertainment Allowance + 
Other Allowances (Taxable parts only) + 
Perquisites (Taxable parts only) + 
Retirement Benefits (taxable parts only) + 
GROSS SALARY
Less: Deduction for Entertainment - 
Allowance u/s 16 (ii)
Less: Deduction for Professional/ - 
Employment tax u/s 16(iii)
INCOME UNDER HEAD SALARY
BASIS OF CHARGE (SECTION 15): Salary is charged to tax in "due or receipt"

basis whichever is earlier. But advance salary is taxable on Receipt basis. Arrears
of Salary is taxable on receipt basis if not charged to tax in any previous year on
due basis. Similarly Bonus is taxable on receipt basis if not charged to tax earlier
on due basis. Salary in lieu of notice period is always taxable on Receipt basis.
Now we shall study all the components of salary and their taxability one by
one.
BASIC SALARY: It is taxable or due on receipt basis whichever is earlier.
FEES & COMMISSION: It is also taxable on due or receipt basis w.e. is earlier.
BONUS: It is taxable on receipt basis if not charged to tax earlier on due basis.
However relief u/s 89 can be claimed if it is taxed on receipt basis.
SALARY IN LIEU OF NOTICE PERIOD [Section 15]: It is taxable only on receipt
basis.
ADVANCE SALARY [Section 17(1)(v)]: It is taxable on receipt basis because it is
never due. However relief u/s 89 can be claimed.
ARREARS OF SALARY: It is taxable on receipt/ allowed basis if it is not taxed
earlier on due basis. However relief u/s 89 can be claimed.
ANNUITY: It is taxable on due or receipt basis w.e. is earlier. If it is received from
present employer, it is taxed as Salary. If it is received from past employer, it is
taxed as profits in lieu of Salary.
RETIREMENT BENEFITS
There are following types of retirement benefits:
1. Gratuity
2. Pension
3. Leave Salary
4. Retrenchment Compensation
5. Compensation on voluntary retirement.
6. Provident Fund

7. Approved Superannuation fund

Now we shall study these one by one:
GRATUITY (DEATH-CUM-RETIREMENT)[Section 10(10)]:
Gratuity is received by employee from his employer in appreciation of past
services. It can be received by either:-
i) The employee himself on his retirement; or
ii) The legal heir on the death of employee.
The Gratuity received by employee is taxable under head ' Salaries'
but the Gratuity received by the Legal heir is not taxable (if employee died
while in service). But some part of Gratuity is exempt u/s 10(10). For this
the employees are divided into three categories:
i) Central/ State Government employees and employees of local authorities.
ii) Employees covered under ' The payment of Gratuity Act, 1972’.
iii) Other Employees.
EXEMPTION FOR CENTRAL/STATE GOVT. EMPLOYEES & EMPLOYEES OF

LOCAL AUTHORITIES [SECTION 10(10)(i)]: Full amount of Gratuity received
by the employee is EXEMPT from tax.
EXEMPTION FOR EMPLOYEES COVERED UNDER 'THE PAYMENT OF

GRATUITY ACT, 1972 [SECTION 10(10)(ii)]: Least of the following three
amounts is exempt from tax:
a) Actual Gratuity Received;
b) 15 days of salary for every completed year of service a part thereof in
excess of six months;
c) Rs. 3,50,000/-.
NOTE 1) In case of seasonal employee 15 days are to be replaced with 7 days.
2) The number of days in a month are taken as 26.
3) Salary means Basic salary and Dearness Allowance last drawn.
4) Salary in case of a piece-rated employee is calculated on the basis of average of
last three months’ wages (excluding wages for overtime work) preceding
retirement.
4) The payment of Gratuity Act, 1972 is applicable in case of every
shop/establishment (employing more than 9 workers) and every factory, mine,
oilfield, port, plantation etc.
EXEMPTION FOR OTHER EMPLOYEES (SECTION 10(10)(iii)]: Least of the

following is exempt from tax:
a) Actual Gratuity Received;
b) ½ month’s average Salary for each completed year of service;
c) Rs. 3,50,000/-.
NOTE: 1) Salary means Basic Salary, Dearness Allowance (if terms of
employment so provide) and commission based on fixed percentage of turnover
ACHIEVED BY THE EMPLOYEE.
2) Average Salary means salary (discussed as above) for 10 months immediately

preceding the month of retirement/resignation/leaving the job.

3) In case of employees not covered under The payment of Gratuity Act, 1972 the
maximum amount of Gratuity exempt from tax in their lives is Rs.3,50,000 .
PENSION [SECTION 17(1) (ii)]:

Pension is paid by the employer after retirement or death of employee in
appreciation of his past services. It can be received by either:
i) The employee himself on his retirement; or
ii) The legal heir on the death of the employee.
The pension received by employee is taxable under head ‘Salaries’. The
pension received by the legal heirs is called 'Family Pension’ and it is taxable
under head ‘Income from other sources’.
Pension can be either commuted or uncommuted.
Uncommuted Pension: It is received on monthly basis by the employee after
retirement. It is fully in taxable in case of all employees.
Commuted pension: It is received by the employee on lump-sum basis.
Exemption is available as follows:-
Exemption for Central or State Government or Local Authority or Statutory
Corporation Employees:
Commuted pension received by these employees is fully exempt from tax.
Exemption in case of other employees:
a. If the employee receives gratuity also: The commuted value of
1/3rd of the pension is EXEMPT from tax.
b. If the employee does not receive gratuity: The commuted value of ½
of the pension is EXEMPT from tax.
Pension scheme for Employee Central Government or any other employer
joining on or after 1st January, 2004:- The conditions to be fulfilled:
1) The assessee is an Individual.
2) He is employed by the Central Government or any other employer on or
after 1st January, 2004.
3) He has paid or deposited any amount not less than 10% of salary in his
account under a pension scheme notified by the Central Government in the
previous year.
4) The employer also contributes an amount equal to 10% of his salary in his
pension account. Such contribution is fully taxable under head Salaries.
5) Employee’s contribution as above (not exceeding 10% of his salary) plus
Employer’s contribution to the above pension fund (not exceeding 10% of
his salary) is deductible under section 80CCD.
6) If the employee or his nominee receives any amount on account of closure
of the account or as pension during the previous year then such amount
received will be taxable in the hands of the employee or his nominee, as
the case may be, in the year of receipt.
7) Salary means Basic Salary plus Dearness Allowance, if the terms of
employment so provide.

LEAVE SALARY [Section 10(10)]: The Employees are entitled to various types
of leaves while in service like casual leaves, medical leaves, outstation leaves etc.
The employee can take all these leaves. But if he does not avail all leaves then
some of the leaves may either lapse or be cancelled while some may be earned
(earned leaves). These earned leaves can be encashed by the employee either in
the same year or any other year while he is in service OR he may get earned leave
encashed on retirement or resignation or his legal heirs may get this amount
after his death.
A) If leave Salary is encashed by the employee when he is in service with the
same employer then it is FULLY TAXABLE. However relief u/s 89 can be
claimed.
B) If Leave Salary is encashed by the employee at the time of retirement or
leaving the job then the exemption is as follows:
i) Exemption for Central or State Government Employees [SECTION
10(10AA)(i)]: Leave encashment at the time of retirement/leaving the job
is FULLY EXEMPT.
ii) Exemption for other employees [SECTION 10 (10AA)(ii)]: Leave
encashment at the time of retirement/ leaving the job is exempt to the least of
following:
(a) Leave Encashment actually received;
(b) 10 months X Average Salary;
(c) (Total leave entitlement by taking maximum 30 days for every completed
year of service - Months of leaves availed/encashed) X Average Salary.
(d) Rs 3,00,000/- (Rupees Three Lac only).
NOTE:
1. Salary Means Basic Salary, Dearness Allowance (if the terms of
Employment so provide) and Commission based on fixed percentage of
turnover achieved by the employee.
2. Average Salary means “Salary of 10 months immediately preceding
retirement/leaving the job.
3. Leave salary paid to legal heirs of the deceased employee is not taxable.
4. In case of other employees, maximum amount of leave salary exempt from
tax is Rs. 3,00,000. This is applicable if the employee has more than one
employer in his life.
RETRENCHMENT COMPENSATION [SEC 10(10B)]: Any compensation received

by a workman at the time of his retrenchment is exempt to the least of following:
a. Actual amount received;
b. Amount as per section 25 F (b) of the Industrial Disputes Act, 1947;
c. Rs 5,00,000/- (Rupees five Lac only).
Note: Under The Industrial Disputes Act, 1947, a workman is entitled to receive
compensation equal to 15 days’ average salary for every completed year of
service a part thereof in excess of six months.
COMPENSATION ON VOLUNTARY RETIREMENT [SEC 10(10C) & RULE 2 BA]:

The compensation received by the employee at the time voluntary retirement is

exempt if following conditions are satisfied –
1. Compensation is received by the employee at the time of voluntary
retirement/ separation.
2. Compensation is received by an employee of the following undertakings:
a. an Authority established under a Central, State or Provincial Act;
b. local Authority;
c. university;
d. an Indian Institute of Technology;
e. the State Government;
f. the Central Government;
g. a notified institute having importance throughout India or any State;
h. a notified institute of management;
i. a public sector company;
j. any company or a co-operative society.
3. Compensation is received in accordance with the scheme of voluntary
retirement/ separation which is framed in accordance with prescribed guidelines
as per Rule 2BA.
4. Where exemption has been allowed to an employee under section 10(10C) for
any assessment year, no exemption there under shall be allowed to him in
relation to any other assessment year.
EXEMPTION AMOUNT IS LEAST OF THE FOLLOWING.
(a) Actual Compensation received;
(b) Rs 5,00,000/- (Rupees five Lac only).
GUIDELINES OF VOLUNTARY SCHEME [RULE 2BA]:
(1) The employee must have completed at least 10 years of service or be of at
least 40 years of age.
(2) The employee may be worker or executive but not Director of Company/
Co-operative Society.
(3) The voluntary retirement is to reduce the existing strength of employees
and no appointment will be made for the vacancy caused by Voluntary
retirement.
(4) The retiring employee is not to be employed in other concern belonging to
the same management.
(5) The amount receivable is least of –
(a) Three months salary for each completed year of service.
(b) Number of Months for retirement x Salary at the time of retirement.
NOTE: Salary means Basic Salary, Dearness Allowance (if the terms of
employment so provide) and commission (based on fixed %ge of turnover
achieved by the employee) last drawn.
PROVIDENT FUND: There are four types of Provident Funds:

(a) Statutory Provident fund (SPF or GPF): It is set up under the provisions
of The Provident Funds Act, 1925. This fund is for employees of Central
Government, State Government, Local Authorities, Semi-Government

Organisations, Railways, Universities and recognised Educational

Institutions.
(b) Recognised Provident fund (RPF): It is set up under the provisions of
The Employees’ Provident Fund and Miscellaneous Provisions Act,
1952. This fund is for employees of those establishments which have
employed 20 or more workers. The establishments having less than 20
workers can also join this scheme. Any establishment has two options
for RPF: 1) Join scheme of the Government set up under the above Act;
or 2) To have own scheme of provident fund and to get it recognised
from the Commissioner of Income Tax as per rules under Part A of the
IV schedule to The Income Tax Act.
(c) Unrecognised Provident fund (URPF): Any establishment having own
scheme of provident fund but fails to get it recognised from the
Commissioner of Income Tax as per rules under Part A of the IV
schedule to The Income Tax Act then such provident fund is known as
unrecognised provident fund.
(d) Public Provident Fund (PPF): The Central Government has established
Public Provident Fund for general public. Any individual can be
member PPF (whether employee or not) by opening PPF account at
Post Office or nationalized banks. PPF is different from others because
even a non–employee can have PPF Account. Thus in PPF employer
does not contribute any amount.
TREATMENT FOR TAX PURPOSES
PARTICULARS SPF RPF URPF
1 Employer’s Fully Exempt Exempt up to Ignore for the
Contribution 12% of Salary time being
(NOTE-1)
2 Employee’s Deduction u/s Deduction Deduction u/s
contribution 80C available u/s 80C 80C not available
available
3 Interest on P.F Fully Exempt Exempt UPTO Ignore for the
Balance. 9.5% p. a. time Being.
4. Receipt of Lump sum Fully Exempt Generally Note-3

amount on Exempt
Retirement or (Note-2)
Resignation
NOTE:
1) Salary means Basic Salary, Dearness Allowance (if the terms of employment so
provide) and commission based on fixed percentage turnover achieved by the
employee.
2) The receipt of Lump sum amount on Retirement/ resignation on shall be
exempt if:

(a) The employee has completed continuous service for 5 years or more; OR
(b) The employee has been terminated due to employee’s ill health, closure
of employer’s business or other reason beyond control of the employee;
OR.
(c) The employee continues with same Provident fund Account with other
employer.
(3) The receipt of Lump-sum amount on URPF balance shall be treated on
follows:-
(a) Employer’s Contribution (total) + Interest on employer’s Contribution
shall be fully taxable as Salary.
(b) Interest on Employee’s Contribution Shall be fully taxable as ‘Income from
other Sources’;
(4) PPF: Annual contribution by individual/ HUF fully qualifies for Deduction
u/s 80C. The annual Interest on PPF is fully exempt. The Lump sum
amount received is also fully exempt.
APPROVED SUPERANNUATION FUND: Superannuation fund is also one of the

schemes of retirement benefits. If such fund has been and continues to be
approved by the Commissioner of Income Tax according to rules contained in
Part B of IV schedule of the Income Tax Act. The tax treatment is as follows-
1. Employer’s Contribution during the previous year is exempt from tax in
the hands of employee upto Rs. 1,00,000. Excess contribution is charged to tax.
2. Employee’s Contribution qualifies for Deduction under section 80C.
3. Interest on fund Balance is fully exempt from tax.
4. Any payment from fund shall be fully exempt if-
(a) It is made on the death of a beneficiary; or
(b) It is made on retirement at or after specified age or employee becoming
incapacitated before such retirement; or.
(c) It is made as refund of contributions on the death of beneficiary; or
(d) It is made as refund of contribution of employee leaving service (other
than due to (b)) to the extent of contributions made before 1/4/1962.
TRANSFERRED BALANCE (URPF Converted in to the RPF): Whenever the

URPF is converted in to the RPF, the employee may opt to transfer his URPF A/c
balance (either fully or partially) to RPF A/c. Such balance transferred to RPF A/c
on the date of conversion is called transferred balance. The tax treatment is as
under –
(a) The URPF Shall be treated as RPF from the beginning. Each year’s
Employer’s Contribution in excess of 12% Salary (10% of salary till A.Y
1997-98) is calculated. This amount is taxable in the year URPF is
converted in to RPF.
(b) The Interest on RPF balance in excess of 9.5% p.a. (12% p.a. till A.Y2001-
02) is calculated. This amount is taxable in the year when URPF is
converted into RPF.

ALLOWANCES
Allowance is fixed amount of money paid/payable by the employer
to the employee for meeting some expense-the expense may be official or
personal. All allowances are taxable UNLESS OTHERWISE CLEARLY STATED TO
BE EXEMPT. The taxable allowances are taxed on due or receipt basis whichever
is earlier. The allowances can be studied under following heads –
(a) Fully exempted allowances.
(b) Allowances Exempted UPTO some Limit.
(c) Entertainment allowance.
(d) Fully Taxable Allowances.
Now we shall study them one by one.
FULLY EXEMPTED ALLOWANCES: These are:
(1) Allowances (all) to Indian National Government Employees posted out
side India.
(2) Allowances to High Court Judges under section 22A (2) of the High court
Judges (Conditions of service) Act, 1954.
(3) Sumptuary Allowance to High court and Supreme Court Judges.
(4) Allowances to UNO employees.
ALLOWANCES EXEMPT UPTO SOME LIMIT: These can be studied as:

 House Rent Allowance u/s 10 (13 A); &
 Notified Allowances u/s 10 (14).
HOUSE RENT ALLOWANCE [SEC. 10 (13 A) & RULE 2 A]:

House Rent Allowance is exempt to the least of the following-
(a) Actual HRA received (period of occupation of rented place only).
(b) Rent Paid- 10% of Salary (period of occupation of rented place only).
(c) 40 % (50% in case of rented place at Mumbai, Delhi, Calcutta or Chennai) of
Salary (period of occupation of rented place only).
NOTE: 1. Salary means Basic Salary, Dearness Allowance (if the terms service so
include) and commission based on fixed %ge of turnover achieved by the
employee.
2. Salary for this purpose is determined on DUE Basis only.
3. If there is any change in Salary, Rent, Place of Residence or HRA in the year
then the exemption shall be calculated in parts.
NOTIFIED ALLOWANCES U/S 10 (14) & RULE 2BB:

The allowances are further sub-divided in to three categories as follows-
(A) ALLOWANCES- (AMOUNT RECEIVED OR AMOUNT SPENT WHICH EVER
IS LESS IS THE AMOUNT EXEMPT):
(1) Travelling Allowance- It is given to meet cost of travel on tour or on
transfer of duty.
(2) Daily allowance- It is given to meet daily ordinary charges due to absence
from normal place of duty when on official tour or on transfer of duty.
(3) Conveyance Allowance – It is given to meet conveyance expenses for

official purpose.
(4) Helper Allowance: It is given to meet expenditure of helper for official
purpose.
(5) Academic Allowance: It is given to meet academic/ research/ training
costs in Educational & Research Institutions.
(6) Uniform Allowance: It is given to meet the cost of purchase and
maintenance of uniform for official purpose.
(B) ALLOWANCES–(AMOUNT RECEIVED OR LIMIT SPECIFIED WHICH

EVER IS LESS IS THE AMOUNT EXEMPT): In case of following allowances actual
expenditure is not considered at all:
(1) Children Education allowance – Exempt up to actual amount received
per child or Rs 100 p.m. per child up to maximum of 2 children w.e. is less.
(2) Hostel Expenditure Allowance- Exempt up to actual amount received
per Child or Rs 300 p.m. per child up to maximum of 2 children w. e. is less.
(3) Tribal Area Allowance – Exempt up to actual amount received or Rs 200
p.m. w.e. is less.
(4) High Altitude allowance (Special Composite Hill Compensatory
Allowance): Exempt from Rs. 300 p.m. to Rs.7,000 p. m. depending upon
level of difficulty.
(5) Border Area/ Remote Area & Disturbed Area Allowance- Exempt from
Rs. 200 p. m. to Rs 1,300 per month.
(6) Compensatory field Area Allowance- Exempt up to Rs 2,600 p.m.
(7) Compensatory Modified field Area Allowance- Exempt up to Rs 1,000
p.m.
(8) Counter Insurgency allowance- Exempt up to Rs 3,900 p.m.
(9) Transport Allowance- It is given to meet cost of commuting between
office to home. Exempt up to Rs 800 per month (In case of Disabled
persons u/s 80 U it is Rs 1,600 p.m.)
(10) Under ground Allowance – It is given to coal mine workers. Exempt up to
Rs 800 p.m.
(11) High Altitude (Uncongenial climate) allowance- It is given to member
of armed forces. Exempt up to Rs 1,060 p.m. (for altitude of 9000 ft to
15000 ft) and up to Rs. 1,600 p.m. (for altitude of above 15000 ft).
(12) Special Compensatory highly active field area Allowance- It is given to
members of armed forces. Exempt to the extent of Rs 4,200 p.m.
(13) Island duty allowance- It is given to members of armed forces for
Andaman & Nicobar & Lakshadweep Islands. Exempt up to Rs 3,250/-p.m.
(C) TRANSPORT ALLOWANCE-(CERTAIN %GE OF AMOUNT RECEIVED OR

CERTAIN LIMIT WHICH EVER IS LESS IS EXEMPT):
An employee of transportation employer receiving fixed allowance to meet
his duties of running such transport from one place to another can claim
exemption as follows –
(a) 70% of allowance; or

(b) Rs 6,000 p.m. w. e .is less.

But such employee can’t get benefit of this allowance plus Daily allowance
simultaneously.
ENTERTAINMENT ALLOWANCE
This allowance is given to entertain various persons while
performing official duty. This is fully taxable. But in case of Central/ State
Government Employees, a deduction u/s 16(ii) can be claimed to the least of the
following:
(a) Actual Entertainment allowance;
(b) 20% of Basic Salary;
(c) Rs 5,000 (Rupees five Thousand only).
ALLOWANCES WHICH ARE FULLY TAXABLE

All other allowances are full taxable. Some of these are -
 City Compensatory Allowance;
 Dearness allowance;
 Medical allowance;
 Lunch/Tiffin allowance;
 Over time allowance;
 Servant allowance ;
 Warden Allowance;
 Non practicing allowance;
 Family Allowance.
PERQUISITES
Perquisites (or perks) are the benefits/ facilities in cash or in kind
provided by the employer to the employee either free of cost or at concessional
rate. The most important feature of perk is that the employee must have a right
to the same and it should not be voluntary or contingent (i.e. may or may not be)
payment.
PERQUISITES AS PER SECTION 17 (2) – DEFINITION:

The Act gives inclusive definition. Accordingly perquisites include-
(a) The value of Rent free Accommodation provided to the employee by the
employer;
(b) The Value of Concessional Rent Accommodation provided to the employee
by the employer;
(c) The VALUE of any benefit or facility provided or granted either free or at
concessional rates in the case of specified employees (to be discussed later
on);
(d) The obligation of employee paid by employer;
(e) The amount paid/payable (on accrual basis) by the employer for Life
Insurance or Contract of Annuity of the employee (except RPF, approved
superannuation fund & deposit Linked Insurance fund);

(f) The value of sweat equity shares or any specified security (like Debentures
or Warrants) allotted or transferred (directly or indirectly) by the employer
either free or at concessional rates to the employee;
(g) The amount of employer’s contribution towards approved
superannuation fund in excess of Rs. 1,00,000;
(h) The value of any other benefit or amenity as may be prescribed.
NOTE: The perquisites from (a), (b), (d), (e) and (h) are taxable in the hands of all
employees whether specified or non-specified. In case of specified employees
perquisites mentioned in (c) are also taxable. Perquisites as per (f) and (g) are
taxable only if conditions mentioned therein are fulfilled.
TAXABILITY OF PERQUISITES
Perks are divided into three categories as follows-
1) Perks taxable in case of all the employees.
2) Perks taxable in case of specified employees only.
3) Perk of sweat equity shares or any specified security (like Debentures
either free or at concessional rates to the employee.
4) Perk of employer’s contribution towards approved superannuation fund in
excess of Rs. 1,00,000.
5) Tax-free or exempted perks.
PERQUISITES TAXABLE IN CASE OF ALL EMPLOYEES

The following perquisites are taxable in case of all employees-
1. The Value of Rent Free Accommodation provided to the employee by the
employer;
2. The Value of Concessional Rent Accommodation provided to the employee
by the employer,
3. The monetary obligation of employee paid by the employer;
4. The amount paid/payable (on accrual basis) by the employer for life
Insurance or Contract of Annuity of employee (except RPF, approved
superannuation fund and Deposit Linked Insurance Fund);
5. The value of any other benefit or amenity (excluding the fringe benefits
chargeable to tax under Chapter XII- H) as may be prescribed.
PERQUISITES TAXABLE IN CASE OF SPECIFIED EMPLOYEES ONLY

First of all, let us understand who is a specified employee-
SPECIFIED EMPLOYEE
 It includes a Director of the company (Full/part time Director for full year
or a single day); or
 An employee having substantial interest (being beneficial owner of 20% of
the voting power) in the employer company; or
 An employee having Monetary Salary exceeding Rs 50,000. Here monetary
Salary refers to all taxable Cash payments less deduction u/s 16 (ii) & 16 (iii) of
Entertainment allowance and Professional tax.

All monetary obligations of employee paid by employer are taxable

perquisites in the hands of ALL EMPLOYEES. But if the employer provides non-
monetary benefit to the employee then they are taxable in the hands of
SPECIFIED EMPLOYEES only. Some examples are-
 If watchman/sweeper/gardener/personal attendant is employed by
the employee and his salary is reimbursed by the employer then it’s
taxable in all cases being the obligation of the employee met by the
employer. But if the watchman/sweeper/gardener/personal attendant is
provided by the employer then this perk is taxable only in case of specified
employees.
 Free or concessional use of gas/electricity/water for household
consumption is taxable in all cases if the bills for above facilities are in the
name of employee being the obligation of the employee met by the
employer. If such bills are in the name of employer then it will be
perquisite in case of specified employee only.
 If the school fees of children of the employee is reimbursed to him or
paid by employer on his behalf to the school then such amount shall be
perquisite in case of all employees being the obligation of the employee
met by the employer. If the children of employee are studying in a school
maintained by employer or in a school with which the employer has an
agreement then if shall be perquisite in case of specified employee only.
 Free or concessional use of motor car
 Private journey of employee and/or any member of household provided
free of cost or at concessional rates
 Any other benefit provided to the employee
So any non-monetary benefit (other than exempted perks and perks which
are taxable in all cases) is taxable in case of specified employees only.
NOTE: Besides above the following perks are also taxable if conditions
mentioned therein are fulfilled:
(i) The perk of sweat equity shares or any specified security (like Debentures
either free or at concessional rates to the employee;
(ii) The perk of amount of employer’s contribution towards approved
superannuation fund in excess of Rs. 1,00,000;
PERQUISITES TAXABLE IN CASE OF ALL EMPLOYEES

RENT FREE ACCOMODATION [RULE 3 (1)]
The term ‘accommodation’ includes a house, flat, farm house (or a part
thereof), or accommodation in a hotel, motel, service apartment, guest house,
mobile home, ship or any other floating structure.
The accommodation provided may be unfurnished or furnished. The
Employees are divided into two categories:-
(a) Central and state Government Employees
(b) Private Sector or other employees.
The accommodation is valued as under:

FOR CENTRAL & STATE GOVERNMENT EMPLOYEES:

This employee’s category includes Government employees on deputation
and presently working with any undertaking under Control of Govt. However
employees of foreign Government are not covered under this category.
1. Where the accommodation is unfurnished – The value of perk shall be
‘Licence fee’ determined by Government in accordance with rules framed
by it.
2. Where the accommodation is furnished –The value of perk shall be: Value
of unfurnished accommodation plus 10% p.a. of ‘ACTUAL COST’ of
furniture (if owned by the employer) plus actual hire charges
paid/payable by the employer (if furniture is hired by the employer)..
FOR PRIVATE SECTOR & OTHER EMPLOYEES: This category includes those
employees who are not covered under the above category.
i) Where the accommodation is unfurnished.
Population of It accommodation is owned If accommodation
City as per by employer taken on lease or rent
2001 census by the employer
More than 15% of salary in respect of 15% of salary OR actual
25,00,000 period during which the rent paid/payable by
accommodation is occupied by the employer which
the employee. ever is less.
More than 10% of salary in respect of
10,00,000 but period during which Same as above
up to 25,00,000 accommodation is occupied by
the employee.
Any other city 7.50% of salary in respect of
period during which Same as above
accommodation is occupied by
the employee.
ii) Where the accommodation is furnished:- The value of perk shall be :

value of unfurnished accommodation plus 10% p.a. of actual cost of
furniture (if owned by the employer) plus actual hire charges
paid/payable by the employer (if furniture is hired by the employer).
SPECIAL NOTE: FOR ACCOMMODATION PROVIDED BY EMPLOYER

(GOVERNMENT OR OTHER) IN A HOTEL
The perk is not taxable if:-
a) Such accommodation is provided for a period not exceeding 15 days; AND
b) It has been provided on transfer of the employee.
In every other case it will be valued as:-
i) 24% of salary for the previous year; or
ii) Actual charges of such hotel whichever is less, for the period for which the
accommodation in hotel is provided.

NOTE:
- MEANING OF SALARY FOR RENT FREE ACCOMMODATION: For this
purpose, salary includes:-
Basic salary, dearness allowance / pay (if the terms of employment
so provide), Bonus, Commission, fees, all taxable parts of allowances and
all monetary payments chargeable to tax (like leave encashment, pension
of current year).
For this purpose salary does not include:-
Dearness allowance / pay (if the terms of employment do not so
provide), employer’s contribution to PROVIDENT FUND ACCOUNT of the
employee, all allowances or part of allowances exempt from tax, value of
perquisites specified under section 17 (2) of the Act.
- Accommodation includes house, flat, farm house or part there of or
accommodation in a hotel, motel, service apartment, guest house, caravan,
mobile home, ship or other floating structure.
- Hotel includes licensed accommodation in motel, service apartment or
guest house.
- Salary is to be computed an accrual basis.
- Salary from all employers (in case of two or more employers) will be taken
into consideration for the period during which the accommodation is
provided.
- If employee is provided accommodation is a remote area and the employee
is working at mining site or onshore oil exploration site or project
execution site or an offshore site of similar nature then value of such
accommodation in NIL.
- If an employee is transferred from one place to other and he is provided
accommodation at new place while he occupies the old accommodation
also then value of perk will be only for one accommodation having lower
value till first 90 days and thereafter both the accommodations will be
charged to tax.
VALUATION OF ACCOMMODATION PROVIDED AT CONCESSIONAL RATE: The

value calculated as Rent Free Accommodation (other than hotel accommodation)
as above is reduced by actual Rent paid by the employee. In case of hotel
accommodation rent paid or payable by the employee is deducted from
calculated value of Rent Free Accommodation.
VALUATION OF OBLIGATION OF EMPLOYEE MET BY EMPLOYER: If any

monetary obligation of employee is met by the employer then value of such perk
is equal to AMOUNT SPENT BY THE EMPLOYER in this regard. This perk is
taxable in case of ALL EMPLOYEES. Some examples are :-
a) Salary of watchmen/ sweeper/ gardener (engaged by the employee)
paid/reimbursed by the employer;
b) Gas, electricity or water bill (in the name of employee) paid/reimbursed
by the employer;

c) Income tax/professional tax of employee paid/reimbursed by the

employer;
d) Medical Expenses reimbursed in excess of Rs.15,000.
VALUATION OF LIFE INSURANCE PREMIUM/DEFERRED ANNUITY: Any
amount paid/payable by the employer as life Insurance premium or deferred
annuity premium is a perk taxable in case of ALL EMPOYEES. The value of perk
shall be AMOUNT PAID/PAYABLE (ON DUE BASIS) AS PREMIUM FOR SUCH
POLICY. This is perk only if the EMPLOYEE HAS VESTED INTEREST IN THE
POLICY.
* ESI/ Group Insurance/ Fidelity Guarantee Premium paid by employer is NOT A
PERK as such scheme is generally for the benefit of the employer.
VALUATION OF FRINGE BENEFITS:
The fringe benefits provided by the employer to the employees are taxable in the
hands of all employees. According to rule 3(7), the following are prescribed
benefits:-
i) Interest free or concessional loan
ii) Travelling, accommodation and any other expenses paid/ borne/
reimbursed by the employer for any holiday availed of by the employee
and/or any family member
iii) Free food and beverages
iv) Any gift voucher or token
v) Expenses on credit cards
vi) Club membership and expenses in club
vii) Use of any moveable Assets by the employee.
viii) Transfer of any moveable assets by the employer in favour of the
employee (directly or indirectly).
i) Interest free or concessional loans [Rule 3(7)(i)]:- The value of benefit

from loan availed by the employee (directly or indirectly) from the employer is
calculated as follows :-
Purpose of loan Period or Amount of loan Rate to be applied for
valuation of perks
a) For house Up to 5 years 9.75%^ ,10.25%*
Above 5 years but up to 15 years 10%^,10.50%*
Above 15 years but up to 20 years 10.25%^,10.75%**,
11%***
b) For Car Up to 3 years (below Rs. 7.50 Lac) 11.75%
Up to 3 years (Rs. 7.50 Lac and 11.50%
above)
Above 3 years but upto 5 years 11.75%
Above 3 years but up to 7 years 12%
c) For Two 16.25%
Wheelers
c)For Education Loan Amount up to Rs. 4 Lac 11.75%^^
Loan Amount above Rs. 4 Lac up 13.25%^^

to Rs. 7.50 Lac

Loan amount above Rs. 7.50 Lac 12.50%^^
d)Personal 16.50%
Loan
e) ESOP Loan 14.50%
^ Up to Rs. 30 Lac
* Above Rs. 30 Lac
** Above Rs. 30 Lac but up to Rs. 75 Lac
*** Above Rs. 75 Lac
The interest shall be calculated on Maximum monthly balance outstanding.
If any interest is ACTUALLY PAID by the employee (directly or indirectly) then.
Value of benefit will be reduced by such interest actually paid.
But In The Following Cases There Will Be No Perk:
- If the amount of loans do not exceed Rs. 20,000; OR
- If the loan is for medical treatment of specified diseases (as per rule 3A).
But if any amount is reimbursed by the Insurance Company to the
employee then benefit shall be taxable on amount so reimbursed by
Insurance Company from the month of such reimbursement.
- Maximum monthly outstanding balance means outstanding balance on last
day of each month.
- The term directly means employee and ‘indirectly’ means spouse, children
and their spouses, parents, servants and dependents.
ii) Valuation of Perk of Travelling, accommodation and any other

expenses paid or borne or reimbursed (to employee) by employer for
any holiday availed by the said employee or any member of
household [Rule 3(7)(ii)]:
Situation Value of perk
1) If such facility (maintained by Value at which such facilities are
employer) is not available to all offered by other agencies to public.
employees
2) If employee (on official tour) Value equal to such amount of
takes any member of his household expenditure incurred
and expenses are incurred by
employer on such member
3) If official tour is extended as Value equal to amount of
vacation expenditure incurred for vacation
period
4) In any other case Value equal to amount of
expenditure incurred
Note: If any amount is paid by or recovered from employee for such benefit then
the value of perk will be reduced by such amount.
iii) Valuation of Perk of free food and non-alcoholic beverages [[Rule
3(7)(iii)]:

1) Tea or snacks during working Nil

hours
2) free food and non-alcoholic Nil
beverages during working hours in
remote area or offshore installation
3) free food and non-alcoholic Nil if amount is up to Rs. 50 per
beverages during working hours; meal. Excess amount is value of
a) at office or business premises; or perk. Such perk is to be reduced by
b) through non-transferable paid amount recovered from employee.
vouchers usable only at eating joints
4) In any other case Value equal to amount incurred by
employer. Such perk is to be
reduced by amount recovered from
employee.
iv) Valuation of perk of Gift, Token or Voucher [Rule 3(7)(iv)]:

1) If gift is in cash or gift cheque/ Value equal to actual amount of
voucher convertible into cash cash gifted/gift cheque or voucher.
2) If gift is of other item and value of Nil
such non-cash gift, token etc is upto
Rs. 5,000
2) If gift is of other item and value of Value equal to actual amount of gift
such non-cash gift, token etc is less Rs. 5,000
above Rs. 5,000
v) Valuation of membership fees and expenses on credit cards [Rule

3(7)(v)]:
1) If such expenses are incurred Nil*
wholly and exclusively for official
purposes
2) In any other case Value equal to amount
paid/reimbursed by the employer.
Such perk is to be reduced by
amount recovered from employee.
*The employer: a) has to maintain a complete detail of such expenses; and
b) has to give a certificate in this regard that such expenses are incurred
wholly and exclusively for official purposes.
vi) Valuation of perk of Club membership and expenses incurred in a

club [Rule 3(7)(vi)]:
1) If such expenses are incurred Nil*
wholly and exclusively for official

purposes
2) In any other case Value equal to amount
paid/reimbursed by the employer.
Such perk is to be reduced by
amount recovered from employee.
*The employer: a) has to maintain a complete detail of such expenses; and
b) has to give a certificate in this regard that such expenses are incurred
wholly and exclusively for official purposes.
vii) Use of moveable assets (owned or hired by employer) [Rule

3(7)(vii)]:
1. Use of laptops and computer Nil.
2. Movable assets except as per i)10% p.a. of actual cost of assets
point (1) and already specified in owned; and
the rules. ii)actual hire charges (paid/
payable) on assets hired; less
amount recovered from the
employee.
viii) Transfer of movable assets owned by employer [Rule 3(7)(viii)]:

Asset transferred Value of benefit
1. Computers and electric items Actual cost less 50% of WDV for
each completed year less amount
paid by the employee.
2. Motor cars Actual cost less 20% of WDV for
each completed year less amount
paid by the employee.
3. Any other assets Actual cost less 10% of original
cost for each completed year less
amount paid by the employee.
Note: Completed years means full number of years from date of asset put to use
till date of transfer to employee. Any part of the year is to be ignored.
ix) Valuation of any other benefit, amenity, facility etc. provided by the
employer [RULE 3 (7) (ix)]: The value of such benefit (for example: sale of
goods to employee at concessional rates) shall be cost to the employer under an
arm’s length transaction less employee’s contribution. But this rule does not
apply to perk of telephones and mobiles which is fully exempt.
PERQUISITES TAXABLE IN CASE OF SPECIFIED EMPLOYEES

i) Valuation of perk of motor car and other vehicles [RULE 3 (2)]: This
perk is taxable to specified employees only except when the car is owned by the
employee and expenses are met by the employer (as it becomes obligation of
employee met by the employer).

Circumstances Value of Perk

I. If car is owned by employee
a) Car expenses met by employee Nil. (not a perk)
b) Car expenses are met by employer
i) Car used wholly for official Nil. (NOTE- I)
purpose
ii) Car used wholly for private Actual expenditure incurred by
purpose employer
iii) Car used partly for official and Actual expenditure by employer
partly for private purpose less amount (@ Rs. 1800 pm. for
car upto 1.6 litres capacity and
Rs. 2400 p.m. for car exceeding
1.6 litres capacity plus @ Rs. 900
p.m. if chauffeur is provided) or
higher amount for official
purpose (as per note -1)
II. If car is owned/hired by employer
a) Car expenses are met by employee
i) Car used wholly for official Nil. (Not a perk)
purpose
ii) Car used wholly for private 10%p.a. of Actual cost of car
purpose (owned by employer) OR Actual
hire charges of car (hired by
employer) plus actual salary of
chauffer (if provided)
iii) Car used partly for official and Rs. 600 pm. for car up to 1.6
partly for private purpose litres capacity or Rs. 900 pm. for
car more than 1.6 litres capacity
plus RS. 900 pm. for chauffer (if
provided).
b) Car expenses are met by the
employer
i) Car used wholly for official Nil. (Note -1)
purpose
ii) Car used wholly for private Actual expenses of running and
purpose maintenance plus actual salary of
chauffer (if provided) plus 10%
p.a. of actual cost (if car owned
by employer) OR actual hire
charges (if car hired by
employer)
iii) Car used partly for official and Rs. 1800 p.m. for car up to 1.6
partly for private purpose. litres capacity and Rs. 2400 p.m.

for car exceeding 1.6 litres

capacity plus Rs. 900 p.m.. for
chauffer (if provided)
III If any other automotive
conveyance owned by employee
and running & maintenance
expenses are met by employer
i) Used wholly for official purpose Nil (Note -1)
ii) Used partly for official and Actual expenses incurred by
partly for private purpose employer less amount @ Rs. 900
p.m. or higher amount for official
purpose (as per note-1)
Note :-
1. Car is used for official purpose wholly only if following conditions are fulfilled:
a) Employer has maintained full detail of journey for official purpose; &
b) Employer gives certificate in this regard.
2. Month means complete month as per English calendar and part of the month is
ignored.
3. If employee is allowed to use more than one car then perk of one of the cars
will be as if car is used partly for official and partly for private purpose and perk
of other cars will be as if these are used wholly for private purpose.
4. If employee pays some amount for the perk enjoyed then such amount shall be
deducted from the value of perk. But in case of car used partly for official &
partly for private purpose nothing will be deducted if car is owned/leased by
the employer.
5. Use of car by employee from residence to office and back is not chargeable to
tax.
6. Conveyance facility to High Court Judges and Supreme Court Judges in not
taxable.
ii) Valuation of perk of Sweeper, Gardener, Watchman or Personal

Attendant [RULE 3 (3)]: The value of benefit is actual cost paid / payable by the
employer less any amount recovered from the employee (if any). This perk is
taxable to all employees if such workman is engaged by the employee (as it
becomes obligation of employee met by the employer). Otherwise it is taxable in
case of specified employees only. But the method of valuation of perk is same in
both situations.
Note: If gardener is provided to employee along with rent free or concessional
rent accommodation owned by the employer then salary of gardener is not
taxable as it is not a perk.
iii) Valuation of perk of gas, electricity or water [RULE 3(4)]: If the

connection is in the name of the employee than this perk is taxable is case of all
employees (as it becomes obligation of employee met by the employer).

Otherwise it is taxable in case of specified cases only. The value of perk is as

follows:-

a) If supply is from employer’s own Perk @ manufacturing cost per
source without purchasing from unit. Such perk is to be reduced
outside agency. by amount recovered from
employee.
b) In any other case Value equal to amount
paid/reimbursed by the
employer. Such perk is to be
reduced by amount recovered
from employee.
iv) VALUATION OF FREE/CONCESSIONAL EDUCATIONAL FACILITIES

[RULE 3(5)]:
a) If the educational institution is
owned and maintained by the
employer or employer has an
agreement with the institution.
i) Education facility is provided to Cost of such education in similar
employee’s children in situation in or near the locality
less Rs. 1000 p.m. per child less
amount recovered from the
employee.
ii) Education facility is provided to Cost of education in similar
any member (other than children) institution in or near the locality
less amount recovered from the
employee.
b) In any other case Amount incurred by the
employer less amount recovered
from the employee.
Note:
1. Perk of Free education covered under point (b) is taxable in case of all
employees. Perk covered under point (a) is taxable in case of is taxable in
case of specified employees only.
2. Free education facility and training of employees in not taxable.
3. Fixed education allowance in exempt up to Rs. 100 p.m. per child (for
maximum of two children) and Hostel allowance is exempt up to Rs. 300
pm. per child (for maximum of two children). Excess is taxable.
4. Scholarship to children of employee by the employer solely at employer’s
discretion is not a perquisite.
VALUATION OF PERK OF FREE/CONCESSIONAL JOURNEY IN CASE

EMPLOYEES OF A TRANSPORTER EMPLOYER [RULE 3(6)]:

The value of benefit is amount offered by such employer to the
public as reduced by amount recovered from the employee. This perk is taxable
only in case of specified employees.
NOTE: Privilege passes and tickets granted to Railway and Airline Employees are
Tax Free perks.
VALUATION OF SWEAT EQUITY SHARES [RULE 3(8)] & SPECIFIED
SECURITIES [RULE 3(9)]:
The value of such specified securities or sweat equity shares shall be
their fair market value on the date when the option is exercised by the employee
as reduced by the amount recovered from him in respect of such security or
shares.
Note: The fair market value is:
CASE 1: Equity Share is listed in only one recognised stock exchange:
a) Average of opening price and closing price on the date when option is
exercised.
b) Closing price on the date closest to date of exercise of option preceding such
date of exercise if no trading has been done on date of exercise.
CASE 2: Equity Share is listed in more than one recognised stock exchange:
a) Average of opening price and closing price on the date when option is
exercised in that exchange where there is highest volume of trade on that date.
b) Closing price on the date closest to date of exercise of option preceding such
date of exercise in that exchange where there is highest volume of trade on that
date.
CASE 3: Equity Share is not listed in any recognised stock exchange:
Value determined by a merchant banker on the date of exercise of option
or any date not more than 180 days earlier than date of exercise.
CASE 4: Specified security not being equity share in the company:
Value determined by a merchant banker on the date of exercise of option
or any date not more than 180 days earlier than date of exercise.
Employer’s contribution towards approved superannuation fund:
Employer’s contribution towards approved superannuation fund in excess of Rs.
1,00,000 is taxable perquisite in the hands of the employee.
TAX FREE PERQUISITES
These perks are exempted from tax in case of all (whether specified or
non-specified) employees.
1. Medical Facilities or Medical reimbursement:
a) Medical facility provided to an employee or any member of his
family in hospital/ nursing home/dispensary maintained by the employer
is FULLY EXEMPT.
b) Medical Reimbursement of any expenditure by employee on his or
any of his family member’s treatment in hospital maintained by Govt /
Local Authority or any other Govt approved hospital is fully EXEMPT.
c) Medical Reimbursement of any expenditure by employee on his or
any of his family member’s treatment for PERSCRIBED DISEASES (as per

Rule 3A of Income tax Rules, 1962) in approved hospital is Fully EXEMPT.

d) Medical Reimbursement of any other expenditure by employee on
his family member’s treatment is EXEMPT UPTO MAXIMUM OF Rs. 15,000.
e) Group Medical Insurance (Mediclaim) obtained by employer for his
employees or reimbursement of Mediclaim insurance premium (for his
health or any of his family member’s health) is Fully EXEMPT.
2. Food & non- alcoholic Beverages provided by the employer during
working hours:
a) in the office or factory; or
b) through non-transferable paid vouchers which are usable at only
the eating joints is EXEMPT up to Rs. 50 per meal;
c) Tea or snacks is fully exempt;
d) free food and non-alcoholic beverages during working hours in
remote area or offshore installation is fully exempt.
3. Recreational facilities provided to a group of employees (not to only a few
employees) is FULLY EXEMPT.
4. Interest free/ Concessional Interest Loan to Employee:
a) If the loans to employee do not exceed Rs 20,000 then the value of
benefit of such loan is FULLY EXEMPT.
b) If the loan to employee is given for treatment of specified diseases (as
per Rule 3A of the Income Tax Rules, 1962), then the value of benefit of
such loan is FULLY EXEMPT.
5. Perquisites to Indian National Government Employees posted outside
India are FULLY EXEMPT.
6. The benefit of training of employee and cost met by the employer for
refresher management course is FULLY EXEMPT.
7. Rent free Accommodation and free conveyance facility given to a Judge
of High Court or Supreme Court is FULLY EXEMPT.
8. Rent Free accommodation to officer of Parliament, union Minister or
leader of opposition is FULLY EXEMPT.
9. Rent free/ concessional Rent accommodation provided to employee in
remote area at mining site or oil exploration site (offshore), or project
execution site is Fully EXEMPT.
10. Free Education provided to children of employee in educational institute
(either maintained and owned by employer; or other institute) is exempt
up to Rs.1000 per month per child (no limit on number of children).
11. Use of health club, sports facilities provided to Employees is Fully
EXEMPT.
12. USE (not ownership) of laptops/ computers by the employee or any of his
family members for official / personal purpose is FULLY EXEMPT.
13. Expense on telephone/ mobile phone incurred by the employer for the
employee is FULLY EXEMPT.
14. Employer’s Contribution to approved superannuation fund up to Rs.
1,00,000 is exempt. Excess contribution is taxable.
15. Pension or Deferred Annuity Scheme or or Deposit Linked Insurance fund

is fully exempt.
16. Employer’s Contribution to Staff Group Insurance Scheme is FULLY
EXEMPT.
17. Premium paid by employer on personal accident policy of employee is
FULLY EXEMPT.
18. Transfer (without consideration) of a movable asset (other than computer,
electronic item and car) by the employer to the employee after using it for
10 years or more is FULLY EXEMPT.
19. Tax paid by the employer on non-monetary perquisites of the employee is
FULLY EXEMPT.
20. Leave Travel Concession is exempt upto limits mentioned in the rules of
valuation discussed later on.
Medical facility or Medical Reimbursement

(a) Medical facility- Medical facility provided to an employee or any member
of his family in hospital/ nursing home/dispensary maintained by the employer
is FULLY EXEMPT.
(b) Medical Reimbursement (With in India)-
-Medical Reimbursement of any expenditure by employee on his or any of his
family member’s treatment in hospital maintained by Govt / Local Authority or
any other Govt approved hospital is fully EXEMPT.
-Medical Reimbursement of any expenditure by employee on his or any of his
family member’s treatment for PERSCRIBED DISEASES (as per Rule 3A of Income
tax Rules, 1962) in approved hospital is Fully EXEMPT.
-Medical Reimbursement of any other expenditure by employee on his family
member’s treatment is EXEMPT UPTO MAXIMUM OF Rs. 15,000/-(SEE NOTE-2).
-Group Medical Insurance (Mediclaim) obtained by employer for his employees
or reimbursement of Mediclaim insurance premium (for his health or any of his
family member’s health) is Fully EXEMPT.
(c) Medical facility/Medical Exp. Reimbursement for treatment of the
employee or any of his family member is exempt as follows (OUT OF INDIA
TREATMENT) –
-Amount Spent in Medical treatment-Exempt up to amount permitted by RBI.
-Amount spent on Stay abroad of patient and one attendant-Exempt up to
amount permitted by RBI.
-Amount Spent on Travel of patient and one attendant – EXEMPT only if GROSS
TOTAL INCOME (before this perk of travelling) does not exceed Rs, 200,000/-
NOTE: 1 Family means the spouse and children of employee (dependent or non-
dependent); and parents, brothers and sisters of employee, wholly or mainly
dependent on the employee.
1. If medical bills are in the name of the employee then these are taxable in
case of ALL EMOPLOYEES and if the bills are in the name of employer, then these
are taxable in the hands of Specified employees only.
LEAVE TRAVEL CONCESSION [Sec 10(5)]:

(a) For all employees- The LTC received/receivable by the employee from his
present/past employer is entitled for exemption if-
 he proceeds on leave to any place in India; or
 he proceeds to any place in India after retirement/ termination of his
service.
AMOUNT OF EXEMPTION
IF JOURNEY IS PERFORMED BY AIR EXEMPT UPTO ECONOMY FARE OF
NATIONAL CARRIER BY SHORTEST
ROUTE.
IF JOURNEY PERFORMED OTHER EXEMPT UPTO 1ST CLASS AC FARE BY
THAN BY AIR & ORIGIN & SHOTREST ROUTE
DESTINATION PLACES ARE
CONNECTED BY RAIL
IF ORIGIN AND DESTINATION EXEMPT UPTO 1ST CLASS FAIR OF
PLACES ARE NOT CONNECTED BY RECOGNISED PUBLIC TRANSPORT BY
RAIL SHOREST POSSIBLE ROUTE.
IN CASE OF NO RECOGNISED PUBLIC
TRANSPORT. EXEMPT UPTO 1ST
CLASS AC FARE OF RAIL BY
SHORTEST ROUTE (IMAGINING
JOURNEY PERFORMED BY RAIL)
NOTE: 1The Amount Exempt can never be more than actual amount spent on
Fare.
1. The LTC exemption is allowed 2 times in block of 4 calendar years. If LTC
Exemption is not availed in any block then only one LTC exemption can be
carried forward to first year of next block of 4 years.
2. The other expenses of journey (like boarding, lodging, conveyance) are not
subject to exemption.
3. LTC is for family (including spouse and children of the employee; parents,
brothers and sisters of employee wholly/mainly dependent upon him).
4. From 1st October, 1998, the benefit of LTC is for only 2 children. But
children borne before 1.10.1998 as well as multiple birth after one child
after 30.9.1998 are eligible for exemption.
LTC FOR FOREIGN CITIZENS
Passage money received by foreign citizen is fully chargeable to tax.
PROFITS IN LIEU OF SALARY [SECTION 17 (3)]: The payments are received in

lieu of or in addition to salary. These include:-
1. Retrenchment compensation (taxable portion only).
2. Compensation due to modification in terms of employment.
3. Employer’s contribution to URPF/ unrecognised superannuation fund and
interest there on (at the time of retirement/leaving the job).
4. Amount received by employee under Keyman insurance policy.
5. Amount received before joining employment and after leaving the job.

6. Any other sum received by the employee form the employer like:-
a) Taxable part of gratuity.
b) Taxable part of pension.
c) Taxable part of RPF
d) Taxable part of approved superannuation fund
e) Taxable part of HRA.
Therefore except terminal and other payments exempt under sec 10
(10) to sec 10 (13A), all other payments received by the employee from
past/present/future employer is taxed as profit in lieu of salary.
DEDUCTIONS FROM SALARIES

Till now we have learnt about taxability or exemption of various
components of salary. All these taxable components and full entertainment
allowance when added become ‘GROSS SALARY’. From gross salary, the following
two deductions are allowed:-
1. Entertainment Allowance U/S 16 (ii).
2. Professional tax/tax an employment U/S 16 (iii)
ENTERTAINMENT ALLOWANCE U/S 16(ii):

In case of Central or State Government employees least of the
following is amount of deduction:
a) Actual entertainment allowance;
b) 20% of basic salary;
c) Rs. 5,000 (Rupees five thousand only).
PROFESSIONAL TAX/TAX ON EMPLOYMENT U/S 16 (iii):

Professional tax (levied by a state under article 276 of the
Constitution of India) actually paid is allowed as deduction.
If professional tax is paid by employer then it is taxable perk in all
cases (as it becomes obligation of employee met by employer) then the same is
deductible U/S 16 (iii).
DEDUCTION UNDER SECTION 80 C

This Deduction from Gross Total Income is allowed to Individual and H.U.F. only.
The deduction can be calculated in following manner:-
Step 1.:- Calculate Gross qualifying amount.
Step 2.:- Calculate Net qualifying amount.
Step 3.:- Calculate amount of deduction U/S 80 C.
STEP 1. GROSS QUALIFYING AMOUNT: Find the aggregate of the following:
1. Life insurance paid (up to maximum of 20% of sum assured) by individual
to effect/keep in force an insurance on his life of spouse or any child. In
case of HUF, premium paid (up to maximum of 20% of sum assured) must
be on life of any member of the family.
2. Any payment by individual for non-commutable deferred annuity (except
as per point 10 below).

3. Any sum deducted from salary payable by or on behalf of Government to

an individual for securing him a deferred annuity OR making provision for
his spouse or children. The sum deducted should not be more than 20% of
salary.
4. Employee’s contribution to RPF or SPF (other than repayment of loan).
5. Contribution to 15-year PPF account (other than repayment of loan).
6. Employee’s contribution to approved superannuation fund.
7. Subscription to National Saving Scheme 1992 (discontinued with effect
from 1.11.2002).
8. Subscription to National Saving Certificates. Interest accrued on these
NSC’s also qualifies for first five years.
9. Contribution to unit link insurance plan of UTI and LIC mutual fund ( i.e.
ULIP and Dhanraksha).
10. Payment made to effect or keep in force notified annual plan of LIC or any
other insurer (e.g. New Jeevan Dhara, New Jeewan Akshay etc.).
11. Subscription to notified units i.e. Equity Linked Saving Schemes of UTI and
approved mutual fund.
12. Contribution by Individual to a notified pension fund set up by UTI or
approved mutual fund.
13. Any sum paid ( including interest) to home loan account scheme of
national housing Bank or contribution to notified pension fund set up by
the national housing Bank.
14. Any sum paid as subscription to scheme of :-
a) A public sector company which is engaged in providing long term
finance for construction or purchase of houses in India for residential
purposes; OR
b) Any authority constituted in India by as under any law enacted
either for purpose of dealing with and satisfying the need for housing or
for the purpose of planning development or improvement of cities/villages
or both.
15. Any payment made towards cost of purchase/construction of a new
residential house property. This amount does not include interest on loan
or cost of addition / renovation/repair of property. But this includes
stamp duty and other expenses for purchase of such property. The Loan
must be taken from Government, Bank, Co-op. Bank, LIC, National Housing
Bank, assessee’s employer being Public Company/ Public Sector
Company/ University/ Co-op. Society/ Authority or Board or Corporation
established/ considered under a Central or State Act.
16. Any sum paid by an Individual as Tuition Fees (not being development
fees/ donation/ payment of similar nature) to any university/ college/
educational institution in India for full time education of his children for a
maximum of two children.
17. Amount invested in shares / debentures of a public company engaged in
infrastructure (including power sector) or units of mutual funds the
proceeds of which are utilised for development and maintenance of

infrastructure.
18. Any sum deposited in a term deposit with a scheduled bank for a period
not less than 5 years in accordance with the scheme framed and notified
by the Central Government.
19. Subscription to notified bonds of NABARD.
20. Any sum deposited in an account under Senior Citizen Saving Scheme.
21. Any sum deposited in 5 years term deposit account in Post Office as per
the Post Office Time Deposit Rules, 1981.
STEP 2. NET QUALIFYING AMOUNT
The aggregate of payments from (1) to (21) above is the Gross Qualifying
Amount. The Net Qualifying Amount is determined as follows:
a) Gross Qualifying Amount; or
b) Rs. 1,00,000 whichever is less.
STEP:3 AMOUNT OF DEDUCTION
The net qualifying amount as calculated in step 2 is the amount of deduction
under section 80 C. The point to remembered is that the aggregate of deductions
under section 80 C, 80 CCC and 80 CCD cannot exceed Rs. 1,00,000.
*****

Chapter 4
INCOME FROM HOUSE PROPERTY
CHARGEABILITY [SECTION 22]: The annual value of a property, consisting of

any buildings or lands appurtenant thereto of which the assessee is the owner
shall be charged to tax under the head ‘Income from house property’ after
claiming deduction u/s 24 provided such property (or any portion of such
property) is not used by the assessee for the purpose of any business or
profession carried on by him, the profit of which are chargeable to Tax.
There are three conditions to be fulfilled for calculation of Income from
house property. These are:-
1) The property must consist of Buildings or lands appurtenant there to; AND
2) The assessee must be owner of such property; AND
3) The property must not be used by the owner for the purpose of any business
or profession carried on by him, the profits of which are chargeable to tax.
These three conditions are discussed in detail as below:-
(A) PROPERTY MUST CONSIST OF BUILDINGS OR LANDS APPURTENANT
THERETO: The term ‘building’ is not defined in the Act. But many courts
have given the interpretations according to which it may be said that
building is enclosure of brick or stone work or even mud walls having a
roof. But for a non-residential Building (like open air stadium, open air
swimming pool) roof is not necessary.
The term ‘Land appurtenant thereto’ means approach road to and from
public streets, courtyard, backyard, playground, kitchen garden, motor
garage, stable, cattle shed etc. for Residential Buildings. In case of non-
residential Buildings it means car parking space, roads connecting
different departments, playgrounds etc.
It is to be noted that Income from vacant plot of land is not taxable under
this head, but is taxable either under head ‘Profits & Gains of Business or
Profession’ or under head ‘Income From other sources’.
(B) ASSESSEE MUST BE OWNER OF THE SAID PROPERTY: The income is
taxable under this head of only if the assessee is owner of the said
property. The term ‘ownership’ includes legal owner (either through
Registered Deeds as per Transfer of Properties Act, 1881 or through
Agreement and Power of Attorney only) and Deemed Owner. The assessee
need not to be owner of the land/site on which such building stands.
Ownership includes ‘Freehold’ as well as ‘Leasehold’ Rights.
DEEMED OWNERSHIP (SECTION 27) : The following persons are deemed
to be the owners of the house property:
a) Transfer to a spouse: If an individual transfers any house property to
his/her spouse otherwise than adequate consideration, then the transferor
in such case is deemed to be the owner of such property transferred. But
this provision is not applied if such transfer is in connection with
agreement to live apart.

b) Transfer to minor child: If an individual transfers any house property to

his/her minor child otherwise than adequate consideration, then the
transferor in such case is deemed to be the owner of such property
transferred. But this provision is not applied if such transfer is to married
minor daughter.
NOTE : If the individual transfers cash to his/her spouse or minor child (as
above) and the recipient of cash acquires a house property out of such
cash, then transferor shall not be deemed to be owner of house property.
However income from such property shall be clubbed as per provisions of
Sec. 64(1) in the hands of transferor of cash.
c) Holder of impartible estate: In case of HUF, which has been discontinued
/broken, if any property has not been divided among the co-parceners,
then the holder of such property is deemed to be the owner.
d) Member of Co-operative Society, Company etc: A member of a Co-
operative society/company/other AOP (to whom a building or a part
thereof is allotted or leased under a House Building Scheme of a
society/company /AOP) shall be deemed to be owner of that Building or
part thereof ALTHOUGH the legal ownership is with the Co-operative
Society/Company/other AOP.
e) Deemed owner as per section 53 A of Transfer of Properties Act. : As
per this section if : a) there is a written contract for sale (agreement to
sell); b) the sale consideration has been paid or the buyer is willing to pay
to the seller; and c) the buyer has taken possession of such property, then
such buyer shall be deemed to be owner of the said property even if it is
not registered in his name.
f) Right in a property for a period net less than 12 years: A person who
acquires any right in any building or part thereof by way of LEASE FOR
NOT LESS THAN 12 YEARS shall be deemed to be the owner of that
property.
C) PROPERTY MUST NOT BE OCCUPIED BY THE OWNER FOR HIS
BUSINESS OR PROFESSION: When a person carries on a business or
profession in his own house property, then Annual value of such house
property is not chargeable under this head if such business or profession is
chargeable to tax. This rule is applicable even if in any year the income of
such business is NIL or is in negative (LOSS).
NOTE: There are some typical cases which are given as follows:
1) House property in foreign country: An ordinarily resident person has to
pay tax on the property in a foreign country. The ‘Not ordinarily Resident’
person or ‘Non-Resident’ person has to pay tax on such property only if income
from such property is received in India. When such income is taxable it will be
presumed as if such property is situated in India.
2) Disputed Ownership: If the ownership of a house property is under
dispute in a court of law then the Income Tax Department decides the owner for
tax purpose. Generally the person enjoying the possession of house property or
who receives the income is treated as owner.

3) Property held as stock in trade: If the house property is held by the

assessee as stock in trade or if the assessee is engaged in the business of letting
out of property on rent, the annual value of such property is chargeable under
this head only.
4) Property owned by co-owners: If a house property is owned by two or
more persons, then share of each co-owner in the income from house property
shall be included in his total income.
5) Property let out for running the business efficiently: If the property is
let out to run the business efficiently then the income from such property shall be
taxed under head ‘Income from Business or Profession’.
6) Properties Let out the rent of which is inseparable (COMPOSITE
RENT): When the property is let out with some other facilities also (like plant &
machinery, furniture etc.) and the two lettings are inseparable (i.e. letting one is
not possible without letting of the other) then such income is taxable under head
‘Profit & Gains of business or profession’ or ‘Income from other sources’. But if
such lettings are separable (i.e. letting of house property and other facilities can
be given to different persons) then the rental income of Building shall be taxed
under this head and Rental Income of facilities shall be taxed under head 'Profits
and Gains of Business or profession' or ‘Income from other sources'.
CASES WHEN INCOME FROM HOUSE PROPERTY IS NOT TAXABLE

In the following cases the income from house property is not
taxable:
a) Income from farm house.
b) Annual value of one palace of ex-ruler.
c) Property income of a local authority.
d) Property income of approved scientific research association.
e) Property income of approved Educational Institution / Hospitals.
f) Property income of Registered Trade Unions.
g) House property held for charitable purpose (approved).
h) Property income of a political party.
i) Property used for own business or profession.
j) One self occupied property (only in case of individual and HUF assessee).
TYPES OF HOUSE PROPERTIES

It is very important to understand that it is not the Actual Income
from house property which is charged under this head. A person may be charged
to tax under this head even if he has not earned any house property income in
the previous year. There are following three types of house properties:
a) Actually let out houses
b) One self occupied house property
c) Deemed to be let out house property.
The let out house includes the property let out for residential as well
as commercial purpose. The self occupied property means the house property
used for own residence by the assessee and no other benefit is derived from such

property. This also includes a house property which is not actually occupied by
the owner due to employment or business carried on at any other place. If an
assessee is owner of more than one self occupied house properties then only one
house is treated as self occupied and other houses as Deemed to be let out
houses.
A) INCOME FROM LET OUT HOUSE (INCLUDING DEEMED TO BE LET OUT
HOUSE PROPERTY):
It is calculated as under:
Gross annual value ***
Less: Municipal taxes actually paid by owner ***
__________
NET ANNUAL VALUE 
Less: Deduction U/s 24

-Standard Deduction @ 30% of Net Annual Value ***
-Interest on Borrowed capital ***
__________
INCOME FROM LET OUT / DEEMED TO BE 
LET OUT HOUSE: ___________
How to calculate GROSS ANNUAL VALUE (ANNUAL RENTAL VALUE):

Gross annual value of let out house or deemed to be let out house is
dependent upon following values:
a) Municipal valuation: It means value determined by the Local Authority of
the house for charging municipal taxes.
b) Fair Rent: It means rent fetched by similar property in same or similar
locality.
c) Standard Rent: It means rent of property as per Rent Control Acts (if
applicable).
d) Actual rent received / receivable: It means rent of actually let out
property on accrual basis for full year.
e) Unrealised Rent: It means rent which could not be realized if:
(1) tenancy was bonafide;
(2) the defaulting tenant has vacated or steps have been taken to vacate
the house;
(3) the defaulting tenant is not occupying any other property of the
assessee;
(4) all reasonable steps have been taken by the assessee for recovery of
unpaid rent or the legal proceedings in this regard are useless (in case of
death of tenant).
f) Loss of Rent due to vacancy: If, in case of let out property, the property
remained vacant for some period then loss of rent due to vacancy shall be
calculated on the basis of actual annual rent for vacancy period.
Thus gross annual value is dependent on:

Municipal valuation = (a)

Fair Rent = (b)
Standard Rent = (c)
Actual Annual Rent = (d)
Unrealised Rent = (e)
Loss of Rent due to vacancy= (f)
STEP I: Expected Rent of house is (a) or (b) w.e. is higher subject to maximum of
(c). If step 2 and step (3) are not applicable then expected rent is gross annual
value (It will be so in case of deemed to be let out house).
STEP II: Find out Actual Annual Rent less unrealized rent i.e. [d- e].
STEP III: Find out amount which is higher of amount as per Step 1 or amount as
per step II.
STEP IV: From the amount as per step 3 deduct Loss due to vacancy. This is
Gross annual value. i.e. GAV = Amount as per Step III – (f).
NOTE: If the ownership of such house property is for a period less than 12
months then values as per (a), (b), (c) and (d) shall be calculated for period of
ownership only.
DEDUCTION OF MUNICIPAL TAXES
The municipal taxes levied by the local authority on such house
property are deducted from gross annual value only if these are borne and
actually paid by the owner during the previous year.
The amount after deduction of municipal tax is called NET ANNUAL
VALUE or ANNUAL VALUE.
STANDARD DEDUCTION U/S 24(a): The standard deduction is 30% of Net
Annual Value.
INTEREST ON BORROWED CAPITAL U/S 24(b): The interest on capital
borrowed (for purchase, construction, repair, renewal or re-construction of the
house) is deductible on accrual basis. Interest is divided into two parts:
a) Interest on loan for pre – construction period: It is a period starting
from date of borrowal till 31st March immediately preceding the date of
completion of construction/date of purchase or date of repayment of loan w.e. is
earlier. This is deductible in FIVE EQUAL ANNUAL INSTALMENTS STARTING
FROM THE YEAR OF COMPLETION OF CONSTRUCTION / YEAR OF PURCHASE.
b) Interest on post construction period: It is deductible in the year to
which it belongs on ACCRUAL BASIS.
Note :
1) Interest on unpaid interest is not deductible.
2) Interest on fresh loan taken to repay original housing loan is deductible.
3) It is not necessary that such property must be given as security for availing
such loan.
4) If interest on such loan is payable out of India, it is available for deduction
only if TDS has been deducted on such interest.
B) INCOME FROM SELF-OCCUPIED HOUSE (INCLUDING HOUSE NOT

OCCUPIED DUE TO EMPLOYMENT REASONS):

It is calculated as under:
Gross Annual Value NIL
Less: Municipal Taxes NIL
Net Annual Value NIL

Standard Deduction NIL
Interest on borrowed capital ***
Income from Self occupied house (-)
DEDUCTION OF INTEREST ON BORROWED CAPITAL: The provisions for

deduction of interest on borrowed capital are same except that maximum limit
for self occupied property is fixed at Rs. 30,000*.
* Rs. 30,000 is replaced with Rs. 1,50,000 if following conditions are fulfilled:
a) Capital is borrowed after 31/3/1999 for acquisition / construction of
house property (NOT for repair, renewal or reconstruction); AND
b) Construction / acquisition should be complete within three years from the
end of financial year in which the capital was borrowed; AND
c) The person granting the loan certifies that such interest is on the loan
given for acquisition or construction of the house.
NOTE:
1. The above provisions are applicable in respect of only one self occupied
House (of assessee’s choice) of the assessee in case assessee owns more than one
self occupied house.
2. The above provisions are also applicable if the assessee owns a house
which could not be occupied by him due to employment / business reasons and
he has not derived any other benefit from such house.
C) INCOME FROM HOUSE PARTLY SELF OCCUPIED PARTLY LET OUT: If
assessee is the owner of one house property which consists of two or more units
one of which is self occupied and other unit(s) is (are) let out then the income is
calculated as follows :
1. Unit self occupied - Calculation as per income form self occupied
house.
2. Units let out - Calculation as per income from let out house.
D) INCOME FROM HOUSE SELF OCCUPIED FOR PART OF THE YEAR AND
LET OUT FOR PART OF THE YEAR: In this case the calculation shall be made
assuming the house was let out for full year. Only difference is that in this case
actual rent for let out period is taken in (d).
NOTE: The ‘Individual’ and ‘H.U.F.’ are entitled to benefits of SELF OCCUPIED
HOUSE. Other persons can’t occupy the house for residential purpose.
UNREALISED RENT ALLOWED EARLIER BUT RECOVERED LATER ON –
TAXABILITY THEREOF:
a) Deduction allowed in assessment year 2001-2002 or earlier (Sec.
25A) : If unrealized rent is recovered in any previous year then it is
deemed to be income of the year in which it is recovered. It is to be remembered

that firstly, the unrealized rent which was not allowed as deduction earlier will
be covered and balance if any is taxable. This is taxable as income from house
property whether or not the assessee is owner of the said house in the year of
recovery.
b) Deduction allowed in assessment year 2002-2003 or subsequent year
(Sec. 25AA): If the assessee cannot realize rent during previous year 2001-2002
or any subsequent year (and it is allowed as deduction in that year) and the
assessee realizes such rent, the amount so realized (to the extent it has not been
included in ANNUAL VALUE earlier) shall deemed to be the income of previous
year in which rent is realized whether not the assessee is owner of that property
in that previous year.
ARREARS OF RENT RECEIVED – TAXABILITY THEREOF (SEC. 25B) If
the owner of house property receives arrears of rent not charged to tax in any
previous year then it is taxable in the year of receipt after standard deduction @
30% of such amount under head ‘Income from house property’. It is immaterial
whether or not the assessee is owner of that property in that previous year.
* * *

CHAPTER - 5
INCOME UNDER HEAD “PROFITS AND GAINS OF BUSINESS OR PROFESSION”
BASIS OF CHARGE (SEC. 28): The following incomes shall be charged to tax
under this head:
a) The profits and gains of any business carried on by the assessee at any
time during the year;
b) Any COMPENSATION or other payments due to or received by:
1. any person in connection with termination/modification of his
agreement for managing the whole or substantially the whole of the affairs
of an Indian Company or any other company;
2. any person holding an agency in India for any part of the activities
relating to the business of any other person at or in connection with
termination / modification of the terms of the agency;
3. any person for or in connection with the vesting in the Government (or
in any corporation owned by or controlled by Government) under any law
for the time being imposed, of the management of any property or
business.
c) Income derived by a trade, professional or similar association from
specific services performed for its members.
d) Exports incentives, which include:
1. profits on sales of import licences granted under imports (control) order
on account of exports;
2. cash assistance (by whatever name called), received or receivable
against exports;
3. Duty drawbacks of Customs and Central Excise Duties;
4. Profit on transfer of Duty Entitlement Pass Book Scheme;
5. Profit on transfer of Duty Free Replenishment Certificate
e) the value of any benefit or perquisite whether convertible into money or not
arising during the course of carrying on of any business / profession;
f) any interest, salary, bonus, commission, or remuneration due to or
received by a partner of firm from the firm in which he is a partner. Such
amount shall be adjusted according to provisions of Section 40 (b);
g) any sum received / receivable in cash or in kind under agreement for:
1. not carrying out activity in relation to any business; or
2. not sharing know how, patent, copyright, trade mark, licence, franchise
or any other business or commercial right of similar nature or information
or technique likely to assist in the manufacture or processing of goods or
provision for services.
But the point g (i) above shall not apply where the amount is received /
receivable for TRANSFER / SALE of rights (which is chargeable under head
‘Capital Gains’).
h) any sum received under a Keyman Insurance Policy including the sum
allocated by way of bonus on such policy;
i) where speculative transactions carried on by an assessee are of such a

nature as to constitute a business then such speculative business shall be

deemed to be distinct and separate from any other business.
BASIC PRINCIPLES FOR ARRIVING AT BUSINESS INCOME: The following are
basic principles for arriving at business income:
1) Business includes trade, commerce, manufacture or any adventure in
the nature of trade, commerce or manufacture: This head includes trade
(purchase of goods for resale), commerce (trade at large scale), manufacture
(selling the goods which are produced by conversion of goods purchased by
applying physical labour or mechanical power) and any such transaction in the
nature of trade, commerce or manufacture. There must be profit motive for
business. Also business can not be carried on by entering into a transaction with
himself only.
2) Business / Profession carried on by the assessee: The assessee must
have right to carry on the business and the business must have been carried on in
exercise of that right by the assessee either personally or through his agent or
servant. It is not necessary that the assessee must carry on the business
physically himself.
3) Business / Profession must be carried on during the previous year:
The business or profession should be carried on by the assessee at any time
during the previous year. It is not necessary that the business or profession
should be carried on for whole previous year or till end of previous year.
However, the following receipts are taxable even if no business or profession is
carried on by the assessee during the previous year:
a) Recovery of any loss, expenditure or trading liability earlier allowed as
deduction [Sec. 41(1)];
b) Balancing charge in case of Electricity Companies [Sec. 41(2)];
c) Sale of capital asset used for scientific research [Sec.41 (3)];
d) Recovery against Bad debts [Sec.41 (4)];
e) Amount withdrawn from special reserve created under section 36 (1)
(viii) [Sec. 41 (4A)];
f) Sum received after discontinuance of business or profession [Sec. 176
(3A)/4].
4. Income of previous year is taxable in relevant assessment year:
General rule is that income of previous year is taxable in relevant
assessment year. But there are some exceptions as follows:
a) Income of Non-resident Shipping Company;
b) Income of a person leaving India for good;
c) Income of bodies formed for short duration;
d) Income of a person trying to dispose off his assets to avoid tax liability;
e) Income of discontinued business.
5. Tax incidence is on all business or professions: The tax incidence arises
on all business or professions carried on by the assessee. Incomes and losses of
all business professions are combined to calculate tax liability. However the
business is divided into two categories- (a) speculative, (b) non-speculative.
6. Legal ownership versus beneficial ownership: The courts can go into

the question of beneficial ownership and decide who should be held liable for tax.
7. Real profit versus anticipated profits: The profits or losses which may
occur in future are not considered for calculating business or profession income
for previous year. However there is one exception: Stock in trade is valued at
cost or market price which ever is lower.
8. Real Profits versus notional profits: Real profits are charged to tax and
notional profits are not taxable. So no profit can be shown on drawing of goods
by the proprietor by treating them (at sale price) as sale.
9. Mode of book entry is not relevant: The mode of book entry cannot
change the basic character of a transaction. So a trading receipt will remain
trading receipt even if it is shown in the books as capital receipt.
10. Illegal Business: It is immaterial whether business is legal or illegal. Both
businesses are taxable under the law.
11. Business loss or Loss incidental to trade: Business profit is computed
after allowing deduction for business loss. Business loss should be trading loss
and must fulfill following conditions:
a) Loss should be real loss and not notional / fictitious
b) Loss should be revenue in nature.
c) Loss should be incurred during the pervious year.
d) Loss must have actually arisen and been incurred, not merely anticipated
as certain to occur in future.
e) Loss should be incidental to business and profession carried on by the
assessee.
f) There should not be any, direct or indirect, prohibition under the Act
against deductibility of such loss.
The following losses are deductible as business loss:
- Losses of stock in trade as result of enemy action.
- Losses of stock in trade by an act of God.
- Losses arising out of failure on the part of assessee to accept delivery of
goods.
- Losses caused by confiscation of cash from gold smuggler by custom
authorities.
- Depreciation in funds kept in foreign currency for purchase of stock in
trade.
- Loss due to exchange rate fluctuations of foreign currency held on revenue
account.
- Loss arising from sale of short term investments.
- Loss of cash and securities in bank on account of dacoity (with in or after
working hours).
- Loss on realization of amount advanced in connection with business.
- Loss due to embezzlement by the employee.
The following losses are not deductible:
- Loss of capital asset.
- Loss on sale of Trade / Non-trade investment.
- Depreciation of funds kept in foreign currency for capital purposes.

- Loss arising from non-recovery of tax paid by an agent on behalf of the

non-resident.
- Anticipated future losses.
- Losses relating to any business / profession discontinued before
commencement of the relevant previous year.
CERTAIN INCOMES NOT TAXABLE UNDER HEAD “PROFITS AND GAINS OF

BUSINESS”
1. Rent from house property: The income from letting of house property is
always taxable under head “Income from House Property”. But if residential
houses / flats are let out to the employees for efficient conduct of assessee’s
business (not of letting of house property) then such income shall be taxable as
business income. Also in case of Composite Rent (when the letting of house is
inseparable from letting of other assets), the income is taxable either as ‘business
income’ or ‘income from other sources’.
2. Dividend income: An assessee who is carrying on the business of dealing in
shares and securities and earns dividend income then such dividend income shall
be taxable under head ‘Income from other sources’.
3. Winning from lotteries, races etc.: Any winning from lotteries, races etc. is
taxable under head ‘Income from other sources’, even if it is regular business
activity.
METHOD OF ACCOUNTING [SECTION 145 & 145A]: The accounting methods

may be either 'mercantile' ‘or 'cash’. An accounting method once followed cannot
be changed in ordinary course.
Further the profit from business and profession shall be computed in
accordance with accounting standards which may be prescribed by Central
Government from time to time. Accordingly there two accounting standards to be
followed by the assessee maintaining books on MERCANTILE system:-
a) Accounting standard I relating to disclosure of accounting policies.
b) Accounting standard II relating to disclosure of prior period and extra
ordinary items and changes in accounting policies.
Further valuation of purchase and sale of goods and inventory for
the purpose of determining the income chargeable under the head “profits and
gains of business or profession” shall be:-
a) In accordance with method of accounting regularly followed by the
assessee; and
b) Further adjusted to include the amount of tax, duty, cess or fees (by
whatever name called) actually paid or incurred by the assessee to bring
the goods to the place of its location and condition as on the date of
valuation.
It may be noted that even if the assessee is allowed modvat / cenvat credit
of EXCISE DUTY or CVD of CUSTOM DUTY paid by him, such duty shall be
included in valuation of purchase and sale of goods and inventory in determining
the business income.

SCHEME OF BUSINESS DEDUCTIONS / ALLOWANCES: The deductions are

covered from section 30 to section 43D. Before studying the deductions let us
study the principles of admissibility of deductions:-
1. Onus of proof: It is the responsibility of the assessee to prove that a
particular deduction is admissible in his case.
2. Allowances are cumulative: Deductions from section 30 to 36 are
expressive and deduction U/S 37 is residuary. If a particular expense is expressly
dealt with by a particular section, its admissibility under section37 cannot be
denied unless the particular section prohibits any deduction under any other
provision.
3. Expenditure should relate to the relevant previous year: It is self
explanatory. However for incomes under section 41 and 176 any expenditure
incurred for such income is deductible whether or not they are incurred in the
relevant previous year.
4. Business carried on during the previous year: If business is
discontinued before the commencement of previous year, no deduction is
permissible in respect of such discontinued business.
5. Expenditure should be incurred for assessee’s own business:
Deduction is allowed only if expenditure is incurred for assessee's own business
otherwise it is disallowed.
6. Benefit of expenditure may extend to some body else: The benefit of
expense may extend to some body else even then it is allowed as deduction. For
example- insurance, repair of leased plant & machinery incurred by Lessor are
deductible from income of Lessor even though the benefit may be to the lessee.
7. Benefit of expenditure may extend beyond relevant previous year: A
revenue expenditure incurred during the year is deductible even of benefit of
expenditure is extended beyond the year of expenditure.
8. No allowances in respect of wasting assets: No deduction is admissible
on diminution or exhaustion of Capital Asset from which income is derived.
Wasting assets such as mines and quarries are capital assets and their exhaustion
is capital loss which is not allowed as deduction.
9. No allowance for non-assessable business: If income from a business is
not taxable in India then any deduction can be claimed regarding expenditure or
losses of such business.
10. Expenditure of illegal business: The expenditure of illegal business is
deductible from business income. However the penalty or damages paid in
connection with infringement of law are not deductible.
11. Revenue expenditure and capital expenditure: Deductions from
section 30 to 36 are deductible expressively. These may include capital
expenditure also. The deduction U/S 37 is only for revenue expenditure.
12. No deduction in respect of depreciation of Investments: No deduction
in respect of depreciation of investment in shares and securities is allowed.
13. No allowance in respect of expenditure incurred before setting up of
a business: Except the deductions under section 35A, 35D and 35E , no
expenditure which is incurred before setting up of a business shall be allowed as

deduction from income under the head ‘Profits and Gains of Business or
Profession’.
14. No allowance in respect of anticipated losses: Except while valuing the
closing stock (at cost or realisable value whichever is less), no deduction is
allowed for any anticipated loss from income under the head ‘Profits and Gains of
Business or Profession’.
EXPENSES EXPRESSLY ALLOWED AS DEDUCTION: - Section 30 to 37 cover

expenses expressly allowed as deduction. There are as follows:-
1. Rent, rates, taxes, repairs and insurance for buildings [section 30]: The
premises used for the purpose of business or profession has entitlement of
following deductions:-
a) Where the premises are occupied by the assessee as:-
i) A tenant: The rent for such premises, and if he has undertaken to bear the
cost of repairs of such premises, the amount paid on such repairs (not
being capital expenditure).
ii) Otherwise than as a tenant: The amount paid by him for current repairs of
the premises;
b) Any sum paid (whether as owner or tenant) as land revenue, municipal
taxes etc. However these are allowable subject to provisions of section 43B (i.e. if
these are claimed on due basis, the payment of the same must be made on or
before the due date of furnishing the return of income or actual date of furnishing
the return which ever is earlier);
c) Any insurance premium paid (whether as owner or tenant) in respect of
insurance against risk of damage or destruction of the premises.
2. Repairs and insurance of plant, machinery and furniture [sec.31]: The

expenditure incurred on current repairs and insurance of plant, machinery and
furniture is allowed as deduction if such plant, machinery and furniture are used
business purposes.
3. Depreciation (sec. 32): One should satisfy the following condition for
claiming depreciation:-
A) Assessee must be the OWNER of the asset;
B) The asset must be used for business or profession;
C) The assets should be used during the previous year;
D) Depreciation is available on tangible as well as intangible assets.
a) Asset must be used for business or profession: The owner is the
person who can exercise the rights of the owner not on behalf of own but in his
own rights. Owner needs not to be registered owner. If the assessee carries on
business or profession from leasehold building then he is entitled to depreciation
on capital expenditure incurred by him. In any other case, the depreciation is
available to the Lessor.
b) Asset must be used for business or profession: The depreciation is
allowed only if the asset is used for business or profession. If asset is used for

business partly and partly for other purposes then depreciation is allowed only
for use for business or profession. When residential quarters are given to
employees for efficient running of business then depreciation is allowed on such
buildings and other assets like fridge, fans etc. given to employees.
c) Asset should be used during the previous year: The asset must be used
at least for some time during the relevant previous year for business purpose to
claim normal depreciation. However 50% of normal depreciation is allowed if
following two conditions are satisfied:-
i) Asset is acquired during the preview year; AND
ii) It is put to use for the purpose of business or profession for less than 180
days during that year.
d) Depreciation is available on tangible assets as well as intangible
assets: i) Tangible assets mean and include building, Machinery, plant and
furniture.
ii) Intangible assets means assets acquired after 31st March, 1998 and include
know-how, patents, copyright, trademarks, license, franchises or any other
business or commercial rights of similar nature.
NOTE: From assessment year 2002-03 depreciation is available whether the
assessee has claimed deduction for depreciation in computing his income or not.
STEPS FOR CALCULATION OF DEPRECIATION: The depreciation is calculated
on BLOCK OF ASSETS on WRITTEN DOWN METHOD as per RATES OF
DEPRECIATION PRESCRIBED UNDER THE ACT. However from 1.04.1997
ONWARDS, an undertaking engaged in generation OR generation and
distribution of power can claim depreciation on STRAIGHT LINE METHOD.
Now are shall understand the meaning of following terms:-
 BLOCK OF ASSETS
 WRITTEN DOWN VALUE
 ACTUAL COST
1. Block of assets [sec. 2 (11)]: It means a group of assets falling with in a class
of asset namely :-
a) Tangible assets being buildings, machinery, plant or furniture.
b) Intangible assets being know-how, patents, copyrights, trademarks,
licences, franchises or any other business or commercial rights of similar nature.
There are 13 different blocks out of which 1 to 12 are in respect of tangible assets
and block13 is for intangible assets.
BLOCK NATURE OF ASSET Rate of
Depreciation
1. Buildings: Residential other than Hotels and boarding
houses. 5%
2. Buildings: Office, factory etc. not being residential
buildings (it includes hotels and boarding houses but does 10%
not include block I & 3).
3. Buildings –a) Temporary wooden or other structure 100%
b) Buildings acquired on or after 1-09-2002 for installing
plant & Machinery for water supply project or water

treatment system for providing INFRASTRUCTURAL

FACILITIES under section 80 I A (4) (i).
4. Furniture: Any furniture including electrical fitting. 10%
5. Plant and Machinery: Any plant or machinery (not 15%
covered from block 6 to 12) and Motor cars (other than
those used in business of running on hire) acquired or put
to use after 31-03-1990.
6. Plant & machinery: Ocean going ships, vessels ordinarily 20%
operating on inland waters including speed boats
7. Plant & machinery: buses, lorries and taxies used in the 30%
business of running on hire, machinery used in semi-
conductor industry, moulds used in rubber and plastic
goods factories and life saving medical equipment
8. Aero planes, commercial vehicle acquired after 40%
30.09.1998 but before 01.04.1999 and put to use before
01.04.1999 for business or profession, Specified life
saving medical equipment as per rule 5(2).
9. Plant & machinery – a) Containers of glass or plastic used 50%
as refills.
b) New commercial vehicle acquired during 2001-02 and
put to use before 31.03.02 for business or profession.
c) Machinery used in weaving processing and garment
sector of textile industry which is purchased under TUFS
(Technology up-gradation fund scheme) during 1-04-01
to 31-03-04 and put to use before 31-03-04.
10. Plant & machinery:
a) Computers including computer software
b) New commercial vehicle acquired in replacement of
vehicles of 15 years of age and put to use before 01-04-99 60%
(if acquired from 1-10-98 to 31-03-99) or before 01-04-
2000 (if acquired from 01.04.99 to 31.03.00)
c) Books of professional (other than annual publications)
d) Gas cylinders, plants used in field operations by
mineral oil concerns, direct fire glass melting furnaces
11. Plant & machinery: Energy saving devices; renewal 80%
energy devices; rollers in flour mills, sugar works and
steel industry.
12. Plant & machinery: Air pollution control equipments,
water pollution control equipments; solid waste control
equipments, recycling and resource recovery systems, 100%
machinery acquired and installed after 31.08.2002 in
water supply project or water treatment system, wooden
parts of artificial silk manufacturing machines,
cinematograph films, bulbs of studio lights, wooden
match frames, Tubs, ropes and safety lamps in mines and

quarries, salt pans, reservoirs made of earthy or sandy or

clayey material;
books (being annual publication) owned for profession,
books owned by libraries (may be annual or not).
13. Intangible assets: Know how, Patents, Copyrights, Trade 25%
Marks, Licences, Franchises and other rights acquired
after 31.3.98
WRITTEN DOWN VALUE [SEC. 43 (b)] : The WDV for assessment year 2010-11
is determined as follows :-
(a) Find out depreciated value of block of asset as on 1.04.2009.
(b) To this, add “Actual Cost” of assets falling in the same block acquired during
the previous year 2009-10.
(c) From the resultant figure deduct money received / receivable (including
scrap value) in respect of that asset falling in the same block of assets which is
sold, discarded, demolished or destroyed during the previous year 2009-10.
However the net figure can not be negative.
This net figure is written down value of the block of assets on 31-03-2010.
WRITTEN DOWN VALUE IN CASE OF SLUMP SALE: Slump sale as per section 2
(42C) means the transfer of one or more undertakings as a result of the sale for a
lump-sum consideration without values being assigned to individual assets and
liabilities.
Here also first three steps are same as in the above said case. Step (d) is added for
calculation. a), b), and c) are same as in simple cases of WDV. d) In case of slump
sale, deduct actual cost of asset falling within that block as reduced :
(i) By the amount of depreciation actually allowed to him in respect of any
previous year till 31.03.1987; and
(ii) By the amount of depreciation that would have been allowable to the
assessee from 1.04.-1987 onwards if the asset was only asset in the relevant
block of assets. However the net figure can’t be negative. The resultant figure
shall be WDV of the block of assets on 31-03-2010 after slump sale.
COMPUTATION OF NORMAL DEPRECIATION: The normal depreciation is
calculated by multiplying the WDV of block of asset as on 31-03-10 with rate of
depreciation. But this rule has following exceptions:
1. If the WDV of the block of assets is reduced to zero (though the block
assets does not cease to exit on 31-03-2010) NO DEPRECIATION is
charged on such block.
2. If a block of assets ceases to exist (i.e. all the assets of the block have been
transferred and the block is empty on 31-03-2010) NO DEPRECIATION is
charged on such block.
3. IMPORTED CARS: a) If it is used for running it on hire for tourist or for
business or profession outside India then DEPRECIATION IS ALLOWED AT
USUAL RATE.
b) If it is used for business or profession in India No depreciation is
available if it is acquired from 1-03-1975 to 31-03-2001. Otherwise usual
depreciation is available.

4. In case of SUCCESSION, AMALGAMATION, BUSINESS REORGANISATION

OR DEMERGER the following points are kept under consideration:-
a) The aggregate depreciation allowable to the predecessor and the
successor shall not exceed depreciation calculated as if there was no
succession/amalgamation/demerger; and
b) Such depreciation shall be apportioned between the predecessor and
the successor in the ratio of number of days for which the assets were used
by them.
5. If the asset is acquired during the previous year; AND it is put to use for
period of less than 180 days then depreciation shall be restricted to 50%
of the amount calculated at the prescribed percentage . It is to be noted
that this restriction is applicable only in the year in which the asset is
acquired and not in subsequent years. This is also not applicable in case of
successor, dissolution, partition of HUF.
COMPUTATION OF ADDITIONAL DEPRECIATION ON NEW PLANT &
MACHINERY: An additional depreciation is allowed to give a boost to the
manufacturing sector. Such additional depreciation is allowed apart from normal
depreciation. It is allowed to all kinds of persons.
1. ASSESSEES ELIGIBLE FOR ADDITIONAL DEPRECIATION: An assessee which
is an INDUSTRIAL UNDERTAKING i.e. he is engaged in the business of
manufacture or production of any article or thing, shall only be eligible for such
additional depreciation.
2. ASSETS ON WHICH ADDITIONAL DEPRECIATION IS ALLOWED: Any new
machinery or plant which has been acquired and installed by the above said
assessee after 31-03-2005 is eligible for additional depreciation. But following
assets are not eligible for additional depreciation:
(a) Ship or aircraft;
(b) Any machinery or plant which before its installation by the assessee was
used by any other person either with in or outside India;
(c) Any machinery or plant installed in any office premises or any residential
accommodation, including accommodation in the nature of a guest house;
(d) Any office appliances or road transport vehicles;
(e) Any machinery or plant, the whole of the actual cost of which is allowed as
deduction (whether by way of depreciation or otherwise) in computing the
Income under head "Profits and gains of business or profession” of any previous
year.
(3) RATE OF ADDITIONAL DEPRECIATION: Additional Depreciation shall be
allowed @ 20% of actual cost of the eligible asset. However if the asset is put to
use for less then 180 days in the year in which it is acquired, the rate of
depreciation shall be 10%.
NOTE: 1. Additional depreciation is allowed only once i.e. in the previous year in
which asset was acquired and installed.
2. Additional Depreciation allowed is deducted while calculating opening WDV
for the next year.
MEANING OF ACTUAL COST: Actual cost means actual cost to the assessee as

reduced by that portion of the cost thereof if any, as has been met directly or
indirectly by any other person or authority.
1) INTEREST TO BE INCLUDED/ EXCLUDED IN ACTUAL COST:
(a) Interest pertaining to the period till the asset is first put to use should be
added to the actual cost of the asset.
(b) Interest incurred relatable to any period after the asset is first put to use,
cannot be included in the Actual Cost. It is to be treated as deduction u/s
36 (i)(iii).
Note: It does not matter whether the business is new or existing one.
2) TRAVELLING EXPENDITURE: For acquiring depreciable assets is a part of
Actual Cost.
3) NOTIONAL ACTUAL COST: In the following cases, the actual cost shall be
a notional cost as follows:
(a) Assets used in Business after it ceases to be used for Scientific Research-
NOTIONAL ACTUAL COST 'NIL'
(b) Asset acquired by gift or inheritance- Actual cost to previous owner MINUS
Depreciation actually allowed till 31.03.1987 MINUS Depreciation
allowable on that asset after 31.03.1987 assuming it is only asset in the
block.
(c) Asset transferred to reduce tax liability by claiming Depreciation at
enhanced cost – Actual cost determined by Assessing officer with approval
of Joint Commissioner. However genuine cases are not covered.
(d) Assets earlier transferred re-acquired by the assessee- Notional Actual
cost will be – (Actual price for which re-acquired) OR (original cost minus
depreciation actually allowed to him till 31.03.1987 MINUS Depreciation
allowable on that asset after 31.03.1987 assuming it is only in the block)
which ever is less.
(e) Asset previously used by any person and on which depreciation was
allowed to him is acquired by another person but leased back to seller-
NOTIONAL ACTUAL COST in the hands of LESSOR shall be equal to W.D.V
of the asset to the seller at the time of transfer thereof.
(f) Buildings brought into use for business purpose subsequent to its
acquisition- NOTIONAL ACTUAL COST shall be. Original Cost of building
MINUS A DEPRECIATION that would have been allowable had the building
been used for business since acquisition.
(g) Assets transferred by holding Company to 100% Subsidiary or vice versa
where the transferee Company is an Indian Company – NOTIONAL
ACTUAL COST to the transferee Company shall be the same value as would
have been to the Transferor Company if it continued to hold it.
(h) Assets transferred under a scheme amalgamation- Notional Actual cost to
the Amalgamating Company shall be same value as would have been to the
Amalgamating Company, if it continued to hold it. This rule is also
applicable if the Amalgamated Company is Indian Company.
(i) Asset transferred to the to the Resulting Company in case of Demerger:
Notional Actual cost to Resulting Company shall be same value as would

have been to the Demerged Company, if it continued to hold it.

(j) Actual Cost of CENEVATABLE ASSET shall be Original COST MINUS DUTY
OF EXCISE/ CUSTOMS for which credit of CENVAT has been taken.
(k) Asset acquired where position of cost met by some other person-
ORIGINAL COST MINUS COST MET BY SOME OTHER PESON shall be
Notional Actual Cost.
(l) Assets acquired by Non-Resident outside India but brought by him to India
for purpose of Business or Profession Notional Actual Cost shall be
ORIGINAL COST MINUS DEPRECIATION THAT WOULD HAVE BEEN
ALLOWABLE in India since date of acquisition.
(m) Assets acquired by a Company under a scheme of Corporatisation of a
Recognised stock Exchange in India – Notional Actual Cost to the Company
shall be the amount which would have been regarded as actual Cost had
there been no such Corporatisation.
(n) Capital Asset on which deduction has been allowed or allowable under
section 35 AD – Notional actual cost shall be NIL.
UNABSORBED DEPRECIATION: The following procedure is followed for
charging depreciation:
1. Depreciation of the previous year is deductible from income chargeable
under head ‘Profit & Gains of Business or Profession’.
2. If Depreciation is not fully deductible under head ‘Profit & gains of
Business or Profession’ due to absence or inadequacy of profits it is deductible
from income chargeable under other heads of Income (except Income under head
Salaries) for same previous year.
3. If Depreciation is still not deductible, it can be carried forward to
subsequent assessment year(s) for indefinite period, if necessary.
4. In next year(s), unabsorbed depreciation can be set off against any income
from ‘Profits and Gains of Business Profession’ or under any other head (except
Income under head Salaries). The same business may or may not be continued. In
next years, following priority order should be maintained-
 Current year’s Depreciation.
 Brought forward Business Loss.
 Unabsorbed (Brought Forward) Depreciation.
 So, if in any subsequent year(s), there is no brought forward business Loss,
unabsorbed depreciation can be added to current depreciation for claiming the
deduction u/s 32.
DEPRECIATION ON STRAIGHT LINE BASIS: An undertaking engaged in

generation OR generation and distribution of power can claim depreciation in
respect of assets acquired after 31.03.1997 according to either WDV basis or
straight Line Basis (the rates of Depreciation as per SLM are given in Appendix
1A of the Income Tax Rules). The option shall be exercised before due date of
furnishing the return of Income. Once the option is exercised, it shall be final and
shall apply to all subsequent years.
(a) TERMINAL DEPRECIATION: If an asset of a power unit on which

depreciation has been claimed on Straight Line Basis is sold, demolished or

destroyed in any previous year; terminal depreciation can be claimed. The
amount of terminal Depreciation is simply the Loss on sale of such asset.
However following points are to be considered:
(i) When the asset is sold, discarded etc in the previous year in which it is first
put to use, any loss arising there from shall not be TERMINAL DEPRECIATION
but will be SHORT TERM CAPITAL LOSS.
(ii) Terminal Depreciation is allowed only if the asset is sold after using if for
sometime in the year of sale.
(iii) Terminal Depreciation is allowed only if it is actually written off in the books
of the assessee.
(b) BALANCING CHARGE- If an asset of a POWER UNIT on which depreciation
has been claimed on straight Line Basis is sold discarded, demolished liked or
destroyed in any previous year, balancing charge is treated as Business Income.
Balancing charge is least of following two:
(i) Actual Profit on sale of such asset; OR
(ii) Accumulated Depreciation on such asset.
The above Provisions apply even if the business is not in existence in the year
when the money payable the on such asset became due.
(c) CAPITAL GAIN: When money payable including scrap value of the asset sold,
discarded etc, exceeds the cost of acquisition of such asset such Excess shall be
treated as Capital Gain.
TEA or COFFEE or RUBBER DEVELOPMENT ACCOUNT (SECTION 33 AB): An

assessee can claim deduction u/s 33 AB if he fulfills the following conditions:-
(a) The assessee is engaged in the business of growing and manufacturing tea
or coffee or rubber in India;
(b) The assessee has, with in six months from the end of previous year or
before furnishing return of income whichever is earlier –
(i) Deposited with National Bank for Agriculture and Rural Development
(NABARD) any amount(s) in a special account maintained by the assessee
with that bank in accordance with and for the purpose specified in a
scheme approved in this behalf by the TEA BOARD OR COFFEE BOARD OR
RUBBER BOARD; OR
(ii) Deposited any amount in TEA DEPOSIT ACCOUNT opened by the
assessee in accordance with and for the propose specified in a scheme
framed by the TEA BOARD OR COFFEE BOARD OR RUBBER BOARD with
the previous approval of Central Government;
(c) The assessee must get its accounts audited by a CHARTERED
ACCOUNTANT and furnish the report of such audit in form 3AC along with the
return of Income.
AMOUNT OF DEDUCTION: The deduction is LEAST of:-
(a) The amount (s) deposited in schemes as above; or
(b) 40% of profits of such business under head ‘Profits and Gains of Business
or profession’ before this deduction and before adjusting brought forward

business Losses.
NOTE: If separate accounts are not maintained for growing and manufacturing of
tea or coffee or rubber IN INDIA then profits from such tea or coffee or rubber
Business will be calculated as under:
Profit from Tea (or coffee or rubber) Business=
Profit of business x Turnover of tea or coffee or rubber Business / Total turnover.
(ii) Where deduction has been allowed u/s 33 AB, no deduction shall be
allowed in respect of such amount in any other previous year.
(iii) Where a deduction has been claimed and allowed under this section, to an
Association of Persons or Body of Individuals, no deduction shall be allowed to
any member of AOP or BOI in respect of the same deposit.
(iv) Any excess deposit made during a previous year is not treated as a deposit
made in next year or other year.
UTILISATION OF DEPOSITED AMOUNT: The amount standing to the credit of
the assessee in special account of NABARD or TEA OR COFFEE OR RUBBER
DEVELOPMENT Account is to be utilised for the business of the assessee with
respect to the points as per the scheme. But no deduction shall be allowed for the
purchase of:
1. Any machinery or plant to be installed in any office or residential place
(including guest house);
2. Any office appliances (not being computer(s));
3. Any machinery or plant, the whole of the actual cost of which is allowed
as deduction (whether by Depreciation or otherwise) in computing
Income chargeable under head ‘profit & gains of Business or Profession' of
any previous year;
4. Any new machinery or plant to be installed in an Industrial undertaking
for purpose of business of construction, manufacture or production of any
article or thing specified in eleventh Schedule of Income tax (i. e. low
priority items).
WITHDRAWAL OF DEPOSIT: Any amount deposited as above shall not be
withdrawn except for the purposes specified in the scheme. Otherwise it is
allowed to be withdrawn in following circumstances: (i) closure of business; (ii)
Death of the assessee; (iii) Partition of HUF; (iv) Dissolution of firm; (v)
liquidation of Company.
Amount withdrawn for (i) & (iv) reasons in taxable as profits in the year of
withdrawal while for remaining cases such withdrawal is not taxable.
WITHDRAWAL OF DEDUCTION: In following cases deduction is withdrawn:
(a) Any amount withdrawn but not utilised with in same previous year for the
specified purpose shall be treated as income of that year;
(b) Any asset acquired to the scheme, is sold or transferred before expiry of 8
years from end of year of purchase; the cost of such asset relatable to deduction
allowed will be income in the year of sale of asset or transfer of asset.
However these provisions are not applicable in case of conversion of firm into a
company and sale of asset to Government, Local Authority, Statutory Corporation
or government Company.

SITE RESTORATION FUND [SECTION 33ABA]: An assessee can claim deduction

u/s 33ABA if he fulfills following conditions:
a) The assessee is carrying on the business of prospecting for or extraction or
production of PETROLEUM OR NATURAL GAS OR BOTH in India and for which an
agreement has been entered into with the Central Government.
b) The assessee has before the end of the previous year:
i) Deposited with State Bank of India, any amount(s) in a special
account maintained by the assessee in a scheme approved in this behalf by
the Ministry of Natural Gas and Petroleum of Govt. of India; OR
ii) Deposited any amount in the site Restoration Account opened by
the assessee in a scheme framed by the aforesaid ministry (this is called as
DEPOSIT SCHEME).
c) The accounts of assessee should be audited by a Chartered
Accountant and the report of auditor in FORM 3AD is filed along with the
return of relevant assessment year.
AMOUNT OF DEDUCTION: The amount of deduction is LEAST OF:
a) The amount deposited in the scheme referred to above; or
b) 20% of profit of such business computed under head 'Profits and Gains of
Business or profession' before deduction under this section and before adjusting
brought forward business loss.
NOTE: 1) Profits from business in this case are to be calculated in the same
manner as in section 33AB.
2) In case of a firm, AOP or BOI, no deduction shall be allowed in computation
of Income of any partner or member.
3) Where deduction has been claimed under this section, no deduction
shall be allowed in respect of such amount in any other previous year.
4) Any interest credited to such special Account or Site Restoration Fund
shall be deemed to be a deposit.
UTILISATION OF DEPOSITED AMOUNT: This provision is same as in section
33AB for TEA DEVELOPMENT ACCOUNT.
WITHDRAWL OF DEPOSIT: Any amount deposited in the SPECIAL account
maintained with State Bank of India or SITE RESTORATION account shall not be
allowed to be withdrawn EXCEPT for the purpose specified in the
scheme/Deposit scheme.
WITHDRAWL OF DEDUCTION: The provisions are same as in section 33AB of
Tea Development Account. The following extra provision is applicable:
On closure of account by the assessee The amount so withdrawn
from the account as reduced by amount payable to central Government as share
of profit shall be deemed to be income under head 'Profit & Gains of Business’ of
that previous year (even if this business is not existence in that previous year).
EXPENDITURE ON SCIENTIFIC RESEARCH [SEC.35]: The term scientific

research means any activity for extension of knowledge in the field of natural or
applied sciences including agriculture, animal husbandry research is classified
as:

a) REVENUE EXPENDITURE:
(i) Incurred by the assessee himself relating to his own business;
(ii) As contribution made to outside agencies engaged in scientific work.
b) Capital Expenditure incurred by the assessee himself relating to his own
business.
c) Revenue or Capital Expenditure for approved in-house research.
Now we shall study these in detail.
a)(i) Revenue Expenditure incurred by Assessee himself [Sec 35(1)(i)]:
1. All revenue expenses laid out or expended on scientific research during the
previous year are fully allowed as deduction.
2. It has been further provided that following revenue expenses laid out or
expended during three years immediately preceding the date of commencement
of business shall be deemed to be the expenditure of the previous year in which
the business commences and therefore shall be allowed in that year to the extent
these are certified by the prescribed authority:
i) Payment of salary (except perquisites) to employees engaged in
scientific research; and
ii) Purchase of material used for scientific research
NOTE: It is to be noted that the research must relate to the business of the
assessee.
a)(ii) Contribution made to outsiders [Sec 35(1)(ii), (iia) & (iii)]:
Where the assessee does not himself carry on scientific research but
makes contribution to other the institutions for this purpose then a weighted
deduction is allowed of 125% of any sum paid to a scientific research association
or university, college or other institution (APPROVED BY CENTRAL GOVT.)
NOTE: It is to be noted that the research may or may not relate to the business of
the assessee.
Contribution made to National Laboratory or University or IIT [Sec
35(2AA)]: Where the assessee pays any sum to a 'NATIONAL LABORATORY' or
'UNIVERSITY' or ‘INDIAN INSTITUTE OF TECHNOLOGY' or a ‘SPECIFIED
PERSON' (means a person approved by prescribed authority), then such sum is
eligible for weighted deduction of 125% of such sum paid.
National Laboratory means a scientific laboratory functioning at national
level under the aegis of Indian Council of Agricultural Research, Indian Council of
Medical Research, The Council of Scientific and Industrial Research, The Defence
Research and Development Organisation, The Department of Electronics, the
Department of Bio-Technology and The Department of Atomic Energy Prescribed
Authority shall be the head of a National Laboratory or a University or an Indian
Institute of Technology as the case may be. In the case of 'specified person' the
prescribed authority shall be The Principal Scientific Advisor to the Government
of India.
NOTE: It may be noted that the research may or may not relate to the business of
the assessee.
b) Capital Expenditure incurred by assessee himself [Sec 35(1)(iv)]:
1. Where the assessee incurs any expenditure of capital nature RELATED TO

THE BUSINESS OF THE ASSESSEE, the whole of such expenditure incurred in any
previous year is allowable as deduction for that previous year.
2. Further capital expenditure incurred during three years immediately
preceding the date of commencement of business shall be deemed to be expenses
of the previous year of the commencement of business and allowed in that year.
Capital Expenditure may be for acquisition of plant or equipment or construction
of Building (excluding cost of Land), acquisition of vehicles for scientific research.
NOTE: 1. No Depreciation is available on an asset used in scientific research.
2. If the asset is sold without having been used for other purposes, surplus (i.e.
sale price) or deduction allowed under section 35 whichever is less shall be
chargeable to tax as business income of the previous year in which the sale took
place. The excess of sale price over cost of acquisition (or indexed cost of
acquisition) is chargeable to tax under head capital gain and the deficiency is
treated as capital loss under the same head.
c) Expenditure on in-house Research & Development by a Company
assessee [Section 35(2AB)]: A weighted deduction of 150% of sum incurred
will be allowed to a COMPANY assessee if:
i) It is engaged in business of manufacture or production any article or thing
except those notified I the Eleventh Schedule; and
ii) It has incurred expenditure (except on Land and Building) on in house
scientific research and development facility approved by the prescribed
authority.
iii) It has entered into agreement with prescribed authority for co-operation in
such research and for audit of the accounts maintained for that facility.
NOTE:1. The expenditure on Building acquisition or construction shall be
allowed @ 100%.
2. No weighted deduction @150% will be allowed to Company assessee after
31.03.2012.
3. If capital expenditure on scientific research can not be allowed due to absence
or inadequacy of profits of the business, the deficiency so arising is to be carried
forward as if it is unabsorbed depreciation.
4. In pursuant to an agreement of arrangement of the amalgamation if the
amalgamating company, transfers to the amalgamated company which is an
Indian company, any asset representing the capital expenditure on scientific
research, the above said provisions of section 35 shall apply to the amalgamated
company as if there is no amalgamation.
EXPENDITURE FOR OBTAINING LICENSE TO OPERATE

TELECOMMUNICATION SERVICES [SECTION 35 ABB]: Where any capital
expenditure is incurred by the assessee for acquiring any right to operate
telecommunication services either before the commencement of the business to
operate telecom service or thereafter any time during any previous year and for
which payment has been actually made to obtain a licence, a deduction will be
allowed in equal installments over the period for which the license remains in
force subject to following:

1. If the fees is paid for acquiring any right to operate telecommunication

services before the commencement of such business - the deduction shall be
allowed for the previous years beginning with the previous year in which such
business commenced.
2. If the fees is paid for acquiring such rights AFTER commencement of such
business - the deduction shall be allowed for the previous years beginning with
the previous year in which the licence fees is actually paid.
Sale or Transfer of Licence:
Case a) the entire licence is transferred:
i) If the sale Proceeds of transfer are less than WDV of the licence, a
deduction equal to such WDV as reduced by the proceeds of transfer shall
be allowed in respect of previous year, in which the licence has been
transferred.
ii) If the sale proceeds of transfer are more than WDV of the Licence
then such excess (i.e. profit) is taxable as under:
a) Where sale proceeds are less than Original Cost of Licence: The
Sale Value of Licence as reduced by WDV shall be income under this
section.
b) Where sale proceeds are more than Original Cost of Licence:
-The Original Cost of Licence as reduced by WDV shall be income
under this section.
-The Sale Value as reduced by Original Cost of Licence (indexed cost
in case licence is held for more than 36 months) is treated as Income
under head 'Capital Gains' is the previous year in which the licence
has been transferred.
Case b) If a part of the licence is transferred:
i) If a part of the licence is transferred for a sum less than the WDV of
the total licence, then the balance amount not yet written off shall be
allowed as deduction in balance number of equal installments over the
unexpired period.
ii) If a part of licence is transferred for a sum more than written down
value of total licence, then such excess(i.e. profit) is taxable as under:
a) Where sale proceeds are less than Original Cost of Licence: The
Sale Value of Licence as reduced by WDV shall be income under this
section.
b) Where sale proceeds are more than Original Cost of Licence:
-The Original Cost of Licence as reduced by WDV shall be income
under this section.
-The Sale Value as reduced by Original Cost of Licence (indexed cost
in case licence is held for more than 36 months) is treated as Income
under head 'Capital Gains' is the previous year in which the licence
has been transferred.
Note: 1. In case of amalgamation/demerger the above provisions are applicable
as if there is no amalgamation/demerger if the amalgamated/resulting company
is Indian company.

2. If a deduction is claimed under this provision it shall not be allowed under any
other provision of the Act for any year.
EXPENDITURE ON ELIGIBLE PROJECTS/SCHEMES [SEC 35AC]: Where an

assessee incurs any expenditure by way of payment of any sum to:
a) Public sector company; or
b) A local authority; or
c) An association or institution approved by National Committee
for carrying out any eligible project or scheme for PROMOTING SOCIAL AND
ECONOMIC WELFARE OF OR UPLIFT OF PUBLIC as Central Government may
specify, the AMOUNT SO PAID shall be allowed as deduction provided a certificate
in form No.58A is obtained from the said institution and furnished along with the
return of Income.
However in case of a company, the deduction of such expenditure is
allowed along with direct expenditure incurred directly by the company on the
eligible project or scheme undertaken by it. The deduction will be allowed for
direct expenditure if a certificate from a Chartered Accountant in Form No.58 B is
NOTE: If a deduction is claimed under this provision it shall not be allowed under
any other provision of the Act for any year.
EXPENDITURE ON SPECIFIED BUSINESS [Section 35 AD]: This section has

been introduced w.e.f. A.Y. 2010-11 for promoting investment certain specified
business. The following conditions are to be fulfilled under this section:
1. The assessee is carrying on any of following specified business:
a) Setting up and operating a cold chain facility;
b) Setting up and operating a warehousing facility for storage of
agricultural produce;
c) Laying and operating a cross country natural gas or crude or petroleum
oil pipeline network for distribution, including storage facilities being
integral part of such network (only for Indian Company or their
Consortium or Authority set up under any Central or State Act as approved
by Petroleum and Natural Gas Regulatory Board).
2. The above business should have commenced on or after 1st April, 2009.
3. The above business is not formed by splitting up or reconstruction of a
business already in existence.
4. It is not formed by transfer to a new business of machinery or plant previously
used for any purpose. However any such old plant machinery can be transferred
to new industrial undertaking provided value of such old plant or machinery
does not exceed 20% of total value of plant and machinery of new industrial
undertaking.
Amount of Deduction: 100% of Capital Expenditure incurred, wholly and
exclusively, for the specified business is deductible in the previous year in which
such expenditure was incurred.
However, if the capital expenditure was incurred prior to commencement of its
operations and such amount is capitalized in the books of account of the assessee

then such expenditure will be allowed as deduction for the previous year in
which the operations were commenced.
EXPENDITURE BY WAY OF PAYMENTS TO ASSOCIATIONS AND

INSTITUTIONS FOR CARRYING OUT RURAL DEVELOPMENT PROGRAMS [SEC
35CCA]: Any assessee who is carrying on a business/profession shall be allowed
a deduction of the amount of expenditure incurred by way of payment of any sum
to:
a) An association or institution, which has as its objectives the undertaking of
any rural development programme approved by the prescribed authority;
b) An association or institution engaged in training of persons for
implementing rural development programmes;
c) National fund for Rural Development set up by the Central Government;
d) National Urban Poverty Eradication Fund set up and notified by the
Central Governments.
NOTE:1. For clause (a) and (b) deduction for making the payment to an
association/institution shall be allowed provided the project has been approved
by the prescribed authority before 1st March, 1983.
2. If deduction is claimed u/s 35 CCA, it shall not be allowed under any other
provision of the Act.
AMORTISATION OF PRELIMINARY EXPENSES [SEC 35D]: Deduction under

this section can be claimed by:
a) Indian Company; or
b) A RESIDENT Non-Corporate assessee.
A foreign company can't claim deduction under this section even if it is Resident
in India.
Time and Purpose of Preliminary Expenditure
When expenses incurred Why expenses is incurred
a) before commencement of For setting up any undertaking or

business business.
b) After commencement of In connection with extension of an
business Industrial unit or in connection with
setting up a new Unit.
Expenses qualified for deduction:

Work carried on by assessee itself or Work carried on by assessee itself or
by a concern approved by Board by any concern ( approved or not)
Expenses incurred in connection with a) Legal charges for drafting any
preparation of a feasibility report or agreement between the assessee and
project report, conducting survey for any other person relating to setting up
the business of the assessee or or conduct of the business of the
engineering services relating to the assessee;
business of the assessee b) When the assessee is Company:

expenditure by way of legal charges for

drafting the Memorandum and Articles
of Association of the Company, on
printing of the same, on Registration
fees of the company, public issue
expenses of share or debentures of the
company;
c) Any other expenditure which is
prescribed. (till now nothing is
prescribed)
AMOUNT QUALIFYING FOR DEDUCTION: The aggregate of expenditure

referred to in clauses (a) to (d) shall not exceed 5% of cost of project in case of all
assessees other than company.
In case of a company it can't exceed 5% of:
i) Cost of Project; or
ii) Capital employed in the business of company
whichever is beneficial to the company.
AMOUNT OF DEDUCTION: The qualifying amount as above shall be allowed as a
deduction in 5 equal installments beginning with the year in which the business
commences or as case may be the previous year in which extension of
undertaking is completed or new unit starts production or operation.
NOTE:1. In case of non-corporate Assessee, the deduction under this section is
available only if Audit Report in Form 3AE is taken from a Chartered Accountant.
2. In case of amalgamation/demerger, the provision of this section shall apply as
if no amalgamation or demerger has taken place, if the amalgamated/resulting
company is Indian company.
3. The chart given below explains how the expenditure is deductible under
various circumstances:
Nature of Expense Incurred by new Incurred by existing
concern before concern after
commencement of commencement of
business business
Expense on Issue of Allowed under sec 35 D Allowed under sec 37(1)
bonus shares
Expense on Issue of Allowed under sec 35 D Allowed under sec 35 D
shares (not being Bonus
Shares)
Expense on Issue of Allowed under sec 35 D Allowed under sec 37(1)
Debentures
Expense on Raising of Allowed under sec 35 D Allowed under sec 37(1)
Loan (long term or short
term)
AMORTISATION OF EXPENDITURE IN CASE OF AMALGAMATION or

DEMERGER [SEC 35 DD]: Where an assessee, being an Indian Company incurs

any expenditure, an or after 01.04.1999 wholly and exclusively for the purpose of
amalgamation or demerger of an undertaking the assessee shall be allowed a
deduction of amount equal to 1/5th of such expenditure for each of five
successive previous years beginning with the previous year in which the
amalgamation or demerger takes place.
Note: No deduction shall be allowed in respect of the expenditure mentioned
above under any other provisions of the Act.
AMORTISATION OF EXPENDITURE INCURRED UNDER VOLUNTARY

RETIREMENT SCHEME [SEC 35DDA]: Where an assessee incurs any
expenditure in any previous year by way of payment of any sum to an employee
at the time of his voluntary retirement in accordance with any scheme(s) of
voluntary retirement, 1/5th of the amount so paid shall be deducted in
computing the profits and gains of the business for that previous year and the
balance shall be deducted in equal installments for each of the four immediately
succeeding previous years.
NOTE:1. No deduction shall be allowed in respect of such expenditure under any
other provisions of the Act.
2. Where the undertaking of Indian company entitled to deduction for
amortization of voluntary retirement expense is transferred before the expiry of
the period specified to another Indian company in a scheme of amalgamation or
demerger the deduction shall continue to be available to the amalgamated or
resulting Company (as the case may be) as if the amalgamation or demerger had
not taken place.
3. Similarly in case of reorganization where a firm or proprietary concern is
succeeded by a company, the deduction shall continue to be available to the
successor company.
4. In the year of transfer, no deduction shall be available to the amalgamating
company, the Demerged Company or to the firm or proprietary concern.
AMORTISATION OF EXPENDITURE ON PROSPECTING ETC. FOR CERTAIN

MINERALS [SEC.35E and RULE 6AB]: Where an Assessee being Indian company
or a person (other than a company) resident in India, is engaged in any
operations relating to prospecting for or extraction or production of specified
minerals (mentioned in seventh Schedule) and incurs any specified expenditure
after 31st March, 1970, the assessee shall be allowed to amortize such
expenditure.
SPECIFIED EXPENDITURE: The expenditure should be incurred by the
assessee at any time during the year of production and any one or more of the
four years immediately preceding that year, wholly and exclusively on any
operations relating to prospecting for any mineral or a group of associated
minerals specified in part A or part B respectively of 'seventh schedule' or on the
development of a mine or other natural deposit of any such mineral or group of
associated minerals.

EXPENSES NOT INCLUDED IN SPECIFIED EXPENDITURE: The following are

excluded in qualified expenditure:
i) Expenditure met directly or indirectly by any person or authority;
ii) Any proceeds realised by the assessee from sale, salvage, compensation or
insurance in respect of any property or rights brought into existence as a result
of such expenditure;
iii) Expenditure on acquisition of the site of the source of any specified
minerals or group of associated minerals or of any rights in or over such site.
iv) Expenditure on the acquisition of the deposits of any of the specified
minerals or groups of associated minerals or of any rights in or over such deposit.
v) Expenditure of a capital nature in respect of any building, machinery, plant
or furniture for which depreciation is admissible under section 32.
QUANTUM AND PERIOD OF DEDUCTION: The amortization of specified
expenditure is allowed in equal installments over a period of 10 years. The
amount deductible for each year (starting from year of commercial production)
is:
i) 1/10th of specified expenditure; or
ii) Income (before deduction u/s 35E) of the previous year arising from
commercial exploration of mine or deposit of minerals of any other nature;
whichever is less.
NOTE:1. The assessee (not being a company) shall be allowed this deduction only
if audit report in form 3B is obtained from a Chartered Accountant.
2. No deduction shall be allowed in respect of such expenditure under any
other provisions of the Act.
3. In case of amalgamation/demerger, the provision of this section shall
apply as if no amalgamation/demerger has taken place if the
amalgamated/resulting company is Indian company.
INSURANCE PREMIUM [SECTION 36(1)(i)]: The amount of any premium paid

in respect of insurance against risk of damage or destruction of stocks or stores
used for the purposes of business or profession is allowed as deduction.
INSURANCE PREMIUM PAID BY A FEDERAL MILK CO-OPERATIVE SOCIETY

[SECTION 36(1)(ia)]: Insurance premium paid by a federal milk co-operative
society, on the lives of cattle owned by the members of a primary milk co-
operative society affiliated to it is allowed as deduction.
INSURANCE ON HEALTH OF EMPLOYEES [SEC36(1)(ib)]: An employer can

claim deduction in respect of premium paid by him by any mode other than Cash
for insurance on health of his employees in accordance with the scheme framed
by the General Insurance Corporation (and approved by the Central
Government) or any other insurer (and approved by IRDA).
BONUS OR COMMISSION TO EMPLOYEES [SEC 36(1)(ii)]: Bonus or

commission paid to an employee is allowable as deduction subject to certain

conditions:-
a) The amount payable to employees as bonus or commission should not
otherwise have been payable to them as profit or dividend.
b) Bonus or Commission is allowed as deduction only where payment is
made: i) during the previous year; or
ii) on or before due date or actual date of filing the return
which ever is earlier [As per provisions under section 43 B if assessee follows
accrual basis].
INTEREST ON BORROWED CAPITAL [SECTION 36(1)(iii)]: Interest on

borrowed capital is allowed as deduction if:
a) The assessee has borrowed money; and
b) The money so borrowed is used for business purposes; and
c) The assessee has paid the interest or is payable on borrowings (in case
mercantile basis).
NOTE:1) Interest paid to shareholders on paid up capital is not allowed as
deduction.
2) Interest paid by firm to partners is deductible according to the provisions
of section 40(b). But interest paid by AOP/BOI to its members is not deductible.
3) The Income Tax department has no right to question the need of
borrowing (in case the assessee has ample funds of own).
4) Interest on money borrowed for meeting income tax liability, interest for late
payment or non-payment of advance tax or for late filing of returns is not allowed.
5) Interest paid/payable for capital Asset pertaining to the period from the
date of borrowal till the asset is first put to use is to be added in actual cost of the
Capital Asset. Interest on capital borrowed pertaining to the period after the
asset is first put to use is deductible under section 36.
6) Interest paid outside India is allowed as deduction only if tax has been paid
or tax has been deducted at source.
7) Interest on money borrowed for payment of dividend is allowed as
deduction.
8) Interest on borrowings from financial Institutions and interest on term
loan from a scheduled bank is allowed as deduction only if the payment is made
during the previous year OR on or before due date of furnishing the return of
income [As per provisions under section 43 B if assessee follows accrual basis].
9) No deduction shall be allowed in respect of any expenditure (including
interest) incurred by assessee is relation to income which does not form part of
the total income.
DISCOUNT ON ZERO COUPON BONDS [SEC 36(1)(iiia)]: The discount on zero

coupon bonds (redemption value less amount received on issue) shall be allowed
as deduction during the period of life of Bond on pro-rata basis.
EMPLOYER'S CONTRIBUTION TO RECOGNISED PROVIDENT FUND OR

APPROVED SUPERANNUATION FUND [SEC.36(1)(iv)]: Employer's

contribution towards a recognised provident fund and approved superannuation

fund are allowed as deduction (subject to limits laid down by fourth schedule and
Rules 87 and 88) [As per provisions under section 43 B if assessee follows
accrual basis].
EMPLOYER'S CONTRIBUTION TO APPROVED GRATUITY FUND [SECTION

36(1)(v)]: Employer's contribution towards approved gratuity fund created by
him exclusively for the benefit of his employees under an irrevocable trust is
allowed as deduction [As per provisions under section 43 B if assessee follows
accrual basis].
EMPLOYEE'S CONTRIBUTION TOWARDS CERTAIN STAFF WELFARE

SCHEMES [SEC 36 (1) (va)]: Any sum deducted from the salary of the employees
as their contribution towards PF, ESI etc is treated as income of the employer
under section 2(24)(x). However, if such contribution is actually paid on or
before due dates mentioned above, the deduction shall be allowed for the same.
WRITE OFF OF ALLOWANCE OF ANIMALS [SEC 36(I)(vi)]: In respect of

animals which are used for purpose of business or profession (not as stock in
trade) and have died or become useless, the difference between the actual cost of
the animals to the assessee and the amount realized (if any) for carcasses or sale
of animals is allowed as deduction.
BAD DEBTS [SEC 36(1)(vii)]: The following conditions must be fulfilled:

a) There must be a Debt;
b) The debt must be incidental to the Business or profession of the assessee.
It includes money lent in ordinary course of business of banking or money
lending carried on by the assessee.
c) Such debt must have been taken into account in computing the income of
the assessee or it is money lent in ordinary course.
d) The Debt must have been written off in the books of account of the
assessee for the previous year. Such Bad Debt is fully allowed as deduction in the
previous year in which it is written off.
NOTE:1)Provision for bad debts is not deductible in case of non-banking
concern.
2) No debts can be claimed as bad in respect of business which has been
discontinued before the commencement of previous year.
3) Bad debt allowed earlier and recovered in subsequent years is treated as
income of the previous year in which such amount is recovered.
PROVISION FOR BAD AND DOUBTFUL DEBTS OF CERTAIN BANKS AND

FINANCIAL INSTITUTIONS [SEC 36(1) (viia)]
a) A scheduled bank or a non-scheduled bank (except foreign Bank or co –
operative bank) is allowed deduction for provision for doubtful debts of:
1) Amount not exceeding 7.5% of total Income (before deduction under

this clause and chapter VI A); and

ii) Amount not exceeding 10% of aggregate average advance made by rural
branches of such bank computed in prescribed manner.
However an option has been given to above Banks to claim further deduction in
respect of provision made by it for doubtful or loss Assets of an amount not
exceeding income derived from redemption of securities as per scheme framed
by Central Government.
b) A bank incorporated by or under any foreign laws or a public Financial
Institution or State Industrial Corporation or a State Industrial Investment
Corporation, deduction for provision for doubtful debts is allowed of amount not
exceeding 5% of the total income (before deduction under this clause and before
chapter VI A).
SPECIAL RESERVE CREATED AND MAINTAINED BY FINANCIAL

CORPORATION ETC [SEC 36(I)(viii)]: The deduction under this section is
allowed in case of following:
Entity Eligible Business
1. a) Finance Corporation as per section Engaged in providing long term finance
4A of The Companies Act, 1956 for (a) Industrial or agricultural
b) Finance Corporation being a public development in India; or (b) for
sector company development of infrastructure facility
c) Banking Company in India or (c) for development of
d) Co-operative Bank (other than housing in India
primary agricultural credit society or
primary co-operative agricultural and
rural development bank)
2. A Housing Finance Company Engaged in providing long term finance
for construction or purchase of houses
in India for residential purposes
3. Any other financial corporation Engaged in providing long term finance
including public Company for development of infrastructure
facility in India
QUANTUM OF DEDUCTION: Least of following is deduction:

a) amount transferred to special reserve during the previous year;
b) 20% of profits from such business before this deduction;
c) 200% of paid up share capital and general reserve on last day of the
previous year minus balance of special reserve account on the first day of the
previous year.
AMOUNT WITHDRAWN FROM RESERVE ACCOUNT: If in any year any amount
is withdrawn from such reserve on which deduction was allowed under this
section, it will be charged to tax in the year in which it is withdrawn.
FAMILY PLANNING EXPENDITURE [SECTION 36(1)(ix)]: Any bona fide

expenditure incurred by a COMPANY for promoting family planning among its

employees is allowable as deduction. However, if such expenditure is of capital

nature, 1/5th of such expenditure is allowed as deduction for the previous year in
which it was incurred and the balance is deductible in equal installments in next
four years.
REVENUE EXPENDITURE INCURRED BY ENTITIES CREATED UNDER ACT OF

PARLIAMENT [SEC 36(1)(xii)]: Any revenue expenditure incurred by such
notified entity (having no profit motive) is allowed as deduction in calculating
income under head Profits & Gains of Business or Profession.
CONTRIBUTION BY FINANCIAL INSTITUTIONS TO NOTIFIED CREDIT

GUARANTEE FUND TRUST FOR SMALL INDUSTRIES [SEC 36(1)(xiv)]: Any
sum paid by public financial institution as contribution to notified credit
guarantee fund trust for small industries is allowed as deduction.
SECURITIES TRANSACTION TAX [SEC 36(1)(xv)]: Securities transaction tax

paid by the assessee during the previous year on taxable securities transactions
entered into by him in the course of his business is allowed as deduction from
income under head ‘Profits & Gains of Business or Profession’, if income from
such taxable securities transactions is included in the income under head ‘Profits
& Gains of Business or Profession’.
EXPENSES DEDUCTIBLE UNDER SECTION 37(1): This section is residuary in

nature. The following condition must be fulfilled:
a) The Expenditure should not be covered by section 30 to section 36.
b) It should not be of capital nature.
c) It should not be personal expenditure of the assessee.
d) It should have been incurred in the previous year.
e) It should be in respect of business carried on by the assessee.
f) It should have been wholly and exclusively spent for the purpose of such
business.
g) It should not have been incurred for any purpose which is an offence or is
prohibited by any law.
NOTE:1) The examples of Expenses allowed under this section are: Salary to
employees, Advertisement Expenses, Legal Expenses, Fines or Penalty or
damages (other than Fees or penalties paid for breach of any Act), Expenses on
raising of Loans (after commencement of business), printing & stationery,
Freight & Carriage Expenses, Postage & Telephone Expenses, Travelling &
Conveyance Exp., General Expenses etc.
2) Expenses on shifting of registered office are not deductible.
3) Fees or penalties paid for breach/violation/infringement of any Act is
disallowed.
4) Diwali and Mahurat expenses are allowed as deduction.
5) Deposit for telephone or telex is treated as deduction under this section.
6) Advertisement in any souvenir, brochure etc. of a political party is

disallowed.
7) First time expenditure on fluorescent lights is treated as fixed asset but all
replacement expenses of tubes are allowed as deduction.
BUILDING, PLANT & MACHINERY OR FUNITURE NOT EXLUSIVELY USED FOR

BUSINESS OR PROFESSION [SEC. 38(1) & (2)]:
1. Where a part of any premises occupied as a tenant is used as dwelling house by
the assessee, the deduction of rent, repairs, land revenue, local rates and
municipal tax under section 30 shall be only for the part of the premises used for
the purpose of the business or profession.
2. Where any building (occupied otherwise as a tenant), plant and machinery,
furniture is not exclusively used for the purpose of the business or profession,
the deduction on account of current repairs and insurance premium and
depreciation in respect of these assets shall be only a fair proportionate part
thereof with regard to the use of such assets for the purposes of business or
profession.
EXPENSES NOT DEDUCTIBLE

Section 40, 40 A and 43B are in the nature of overriding provisions that even if an
expenditure or allowance comes within the provisions of any of sections 30 to 37
(1) as well as 40, 40A or 43B, sections 40,40 A and 43 B shall prevail and the
provisions of sections 30 and 38 shall have no application.
AMOUNTS NOT DEDUCTIBLE UNDER SECTION 40
A) In case of any assessee [section 40 (a)]:
i) Any interest, royalty, fees for technical services or other similar sum
chargeable under income tax act which are payable:
a) outside India; or
b) in India to a non-resident (other than a Company) or to a Foreign
Company; on which tax has not been deducted at source or after deduction
tax has not been paid during the previous year or in subsequent year
before the expiry of time prescribed under section 200(1).
However if in any subsequent years, the tax is paid on any such sum or
tax is deducted at source after the expiry of time limit given in section
200(1), such sum shall be allowed as a deduction in computing the income
of the previous year in which such sum has been paid;
ii) Any interest, commission or brokerage, fees for professional services or
fees for technical services, or amounts payable to a contractor or sub-
contractor payable to a resident on which tax is deductible at source under
Chapter XVIIB and such tax has not been deducted or after deduction has
not been paid:
a) in case Tax was deductible and was so deducted during the last
month of previous year- on or before the expiry of time limit
prescribed under section 139(1).
b) in any other case- on or before last day of the previous year.
However if in any subsequent years, the tax is paid on any such sum or

tax is deducted at source after the expiry of time limit given in section
200(1), such sum shall be allowed as a deduction in computing the income
of the previous year in which such sum has been paid;
iii) Any sum paid on account of any rate or tax levied on the profit or gains
of any business or profession or assessed at a proportion of or otherwise
on the basis of, any such profits or gains;
iv) Any sum paid on account of wealth tax under the Wealth Tax Act and
any tax of a similar character chargeable under any law in force in any
country outside India;
v) Salary payable:
a) out of India (to a resident or non-resident);
b) in India to a non-resident;
if tax has not been paid nor deducted at source.
vi) Any payment to provident fund or other fund established for the
benefit of employees of the assessee, unless the assessee has made
effective arrangements to secure that tax shall be deducted at source from
any payments made from the funds, which are chargeable to tax under the
head ‘Salaries’.
vii) Any tax actually paid by employer on non-monetary perquisites
provided to the employees.
B) In case of partnership firm [section 40 (b)]:-
These will be discussed in detail in the chapter ‘Assessment of
partnership firms’. Interest on partners’ capital/loan is allowed up to 12% p.a.
and salary, commission etc. to a WORKING PARTNER is allowed up to certain
limits and as per terms to the partnership Deed.
C) In case AOP/BOI [section 40 (ba)]:-
This will be discussed in detail in the chapter ‘Assessments of
AOP/BOI’. Any amount paid to member of AOP/BOI as salary, remuneration,
bonus or commission is fully disallowed.
EXPENSES/PAYMENTS NOT DEDUCTIBLE UNDER SECTION 40A(2):- Any

amount is disallowed under this section only if following three conditions are
fulfilled:-
i) The payment is in respect of any expenditure;
ii) The payment has been made or is to be made or a specified person in
respect of such expenditure;
iii) The payment for expenditure is considered excessive or unreasonable
having regard to :-
a) The fair market value of goods, services or facilities; or
b) The legitimate business needs of the assessee's business or profession;
or
c) The benefit derived by or accruing to the assessee from the payment.
AMOUNT OF DISALLOWANCE: If the above conditions are fulfilled, the assessing
officer can disallow the expenditure to the extent he considers it excessive or
unreasonable by the above standards.

SPECIFIED PERSONS: The specified persons in case of various assessees are as

under:-
Assessee Specified persons
Individual a) Any relative of such individual i.e. spouse, brother,
sister, lineal ascendant or descendant;
b) Any person in whose business or profession the
individual or his relatives has SUBSTANTIAL
INTEREST.
Company, firm, AOP a) Any director of the company, partner of the firm or
or HUF. member of the AOP or HUF or any relatives of such
person;
b) Any person in whose business or profession the
assessee or director, partner or member of assessee
or any relative of such person has substantial
interest.
c) Any individual who has substantial interest in the
business or profession of the assesses;
d) A company, firm AOP or HUF having
SUBSTANTIAL INTEREST in business/profession of
the assessee or any director, partner or member of
any such person;
e) A company, firm AOP or HUF of which a director,
partner or member has a substantial interest in the
business/profession of the assessee or any director,
partner or member of any such person or any
relative of any such person.
Note:- Substantial interest in the business / profession means :-
a) In case of company, if such person is beneficial owner of at least 20
percent of Equity share capital at any time during the previous year;
b) In case of any other person, if such person is entitled to at least 20 percent
profit of such concern at any time during the previous year;
EXPENDITURE NOT DEDUCTIBLE UNDER SECTION 40A(3)(a): Where an

assessee incurs any expenditure, in respect of which the payment or aggregate of
payments is made to a person in a day, in a sum exceeding Rs. 20,000/Rs.
35,000* otherwise than by an account payee cheque or account payee bank draft,
100% of such expenditure shall not allowed as deduction.
* Rs. 35,000 in case payment is made on or after 1st October, 2009 for plying,
hiring or leasing goods carriage.
However there are certain exceptions provided in rule 6DD under
which the expenditure, even exceeding Rs. 20,000/35,000* shall be allowed as
deduction even though the payment is not made by a crossed cheque / draft.
These are -
a) Payment made to RBI or any other Bank, life Insurance corporation and
primary agricultural credit society or primary credit society.

b) Payment made to government, where such payment is required to be

made in legal tender e.g. payments of sales tax, custom duty, excise duty
etc.
c) Payment made by way of any letter of credit, telegraphic transfer, transfer
from one Bank account to another bank account in same bank or any other
bank, through bill of exchange payable to a Bank, through use of electronic
clearing system through a bank, a credit card or a debit card.
d) Where the payment is made by way of adjustment against the amount of
any liability incurred by the payee for any goods supplied or services
rendered by the assessee to such payee.
e) Payment for purchase of:-
i) Agricultural or forest produce.
ii) The produce of animal husbandry, dairy or poultry farming.
iii) Fish or fish products or
iv) Products of horticulture or apiculture if the payment is made to the
cultivator, grower or producer of such articles, produce or products.
f) Payment made for purchase of products manufactured or processed
without the aid of power in a cottage industry to the producer of such
products.
g) Where the payment is made in a village or town, which is not served by
any bank to any person who ordinarily resides or is carrying on business /
profession in any village/town.
h) Payment by way of gratuity, retrenchment compensation or similar
terminal benefits made to an employee or his legal heirs, if the aggregate of
such sums payable to the employee or his legal heir does not exceed Rs.
50000.
i) Payment by way of salary to its employees after deducting income tax
from the salary if such employee is temporarily posted for continuous
period of fifteen days or more in a place other than his normal place of
duty or on a ship and the employee does not maintain any Bank account at
such place.
j) Where the payment was required to be made on a day on which the Banks
were closed either on account of holiday or strike.
k) Payment made by any person to his agent who is required to make
payments in cash for goods or services on behalf of such person.
l) Where the payment is made by an authorized dealer or a money changer
against purchase of foreign currency or travellers cheques in normal
course of his business.
NOTE :- 1) If an assessee makes payment of two or more bills (none of them
exceeds Rs. 20,000) /Rs. 35,000* at the same time (otherwise than by an
account payee cheque or account payee bank draft), section 40 A (3) is not
applicable even if the aggregate payment is more than Rs. 20,000/Rs.
35,000*.
2) Section 40 A (3) is not applicable if an assessee purchases a capital asset or
in respect of an expenditure which is not to claimed as deduction under

sections 30 to 37.
3) It is possible that a person may make different payments (otherwise than
by an account payee cheque or account payee bank draft) at different time
during the day to the same person and none of the payments during the
day to same party exceeds Rs. 20,000/Rs. 35,000*.But if the aggregate
payment exceeds Rs. 20000/Rs. 35,000* then whole of such payment is
disallowed.
4) Section 40 A (3) is applicable only in computing income under head
‘profits and gain of business or profession’ and ‘income from other
sources'.
* Rs. 35,000 in case payment is made on or after 1st October, 2009 for plying,
hiring or leasing goods carriage.
DISALLOWANCE IN RESPECT OF PROVISION FOR GRATUITY [SECTION

40A(7)] : Gratuity is allowed as deduction only if :-
a) Gratuity has actually become payable during the previous year to the
employees (if not covered as per clause (b)); or
b) Provision is made for payment of a sum by way of any contribution
towards an approved gratuity fund.
Therefore no deduction is allowed in respect of any provision made for payment
of gratuity only unless the said sum is deposited to approved gratuity fund as per
provision of sector 43 B.
DISALLOWANCE IN RESPECT OF CONTRIBUTION TO NON-STATUTORY

FUNDS [SECTION 40A(9)]: The sum contributed by the assessee as an employer
towards approved gratuity fund, recognized provident fund or an approved
superannuation fund shall be allowed as deduction. No deduction shall be
allowed in respect sum paid towards setting up or formation of any other fund,
trust, society etc. for any other purpose which is not approved or recognised.
DISALLOWANCE OF UNPAID LIABILITY [SEC 43B]: When the books of

accounts are maintained on mercantile basis, the deduction of following sums is
allowed only on payment during the previous year or within the stipulated
period mentioned against each of these expenditures:
Nature of expense Stipulated time period
a) Any sum payable by way of tax, duty, Payment should be made on or before
cess or fee, by whatever name called due date of furnishing the return of
under any law for time being in force. income under section 139(1) and the
proof of payment should be enclosed
along with the return of income.
However if payment is made after
due date, deduction can be claimed in
the year of payment.
b) Any sum payable by the assessee as SAME AS ABOVE
employer as contribution to provident

fund or gratuity fund or any other fund

for welfare of employees.
c) Any sum payable to employee as SAME AS ABOVE
bonus or commission for service
rendered.
d) Any sum payable as interest on any SAME AS ABOVE
loans or borrowing from any public
financial institution (i.e. ICICI, IDBI, LIC,
IFCI, UTI etc)
e) Any sum payable as interest on any SAME AS ABOVE
loan or advance from a scheduled Bank
including a co-operative Bank.
f) Any sum payable as employer in lieu SAME AS ABOVE
of leave at the credit of his employee.
NOTE: Employer’s Contribution to provident fund or gratuity fund or any other
fund for welfare of employees is covered under point (b) above u/s 43 B.
But Employee’s Contribution to provident fund or gratuity fund or any
other fund for welfare of employees is allowed as deduction only when the
payment of the same is made on or before the due date mentioned under
respective welfare Acts. Employee’s Contribution to such fund paid after
the due date mentioned under respective welfare Acts is not allowed as
deduction u/s 36(1)(va).
DEEMED PROFITS CHARGEABLE TO TAX: The following deemed profits

chargeable to tax as income under head business or profession:
a) Recovery against any allowance or deduction allowed as deduction:
(i) Any deduction was allowed in any previous year in respect of Loss or
Expenditure (revenue or capital) or trading liability AND during the
current previous year the assessee has obtained refund or remission or
cessation thereof then such amount will be income of assessee under head
Profits & Gains of Business & Profession. [Section 41(1)(a)]
(ii) If in above case, instead of the assessee, the successor had has obtained
refund or remission or cessation thereof then such amount will be income
of successor under head Profits & Gains of Business & Profession. [Section
41(1)(b)]
b) Balancing charges on assets if undertaking engaged in generation or
generation and distribution of power. [Section 41(2)]
c) Sale of scientific research capital asset without putting it for any other use.
[Section 41(3)]
d) Recovery of Bad debts allowed earlier as deduction. [Section 41(4)]
e) Amount withdrawn from special reserve created and maintained by certain
financial institutions. [Section 41(4A)]
f) Losses of previous year in which business ceased to exist can be set off from
deemed incomes under Section 41(1), (3), (4) or (4A) even after period of 8
years has passed and even if return of loss was not submitted in time [section

41(5)].
g) Any sum received after the discontinuation of the Business or Profession is
deemed to be the income of the recipient and is charged to tax in the year of
the receipt [section 176 (3A) and 176(4)].
NOTE: The above incomes are taxable in the year of receipt even if in that year
the business is not in existence.
UNDISCLOSED INCOME AND INVESTMENTS HOW AND WHEN TAXED:- The

tax treatment is as follows :-
a) Cash credits [section 68]:- These are taxable in the year in which
credited in the books of account of the assessee.
b) Unexplained investments [section 69]:- These are taxable in the year in
which such investments were made.
c) Unexplained money etc. [section 69A]:- These are taxable in the year in
which the assessee is found the owner of such money.
d) Investment not fully disclosed in books of accounts [section 69B]:-
The undisclosed amount is taxable in the year in which the assessee has
made such investments.
e) Unexplained expenditure [section 69C]:- These expenses are taxable in
the year in which these are incurred.
f) Amounts borrowed or repaid on Hundi [section 69D]:- These amounts
are taxable in the year of borrowal or repayment. But if amount is taxed in
the year of borrowal repayment shall not be taxed again.
MAINTENANCE OF ACCOUNTS [SECTION 44AA]: To understand compulsory

maintenance of books of account it is necessary to understand the meaning of
‘specified profession’ and ‘Non-specified profession’.
SPECIFIED PROFESSION: Specified profession includes persons carrying on an
legal, medical, engineering, architectural, accountancy, technical consultancy or
interior decoration or any other notified profession [i.e. authorised
representatives, film artists, company secretaries and information technology
professionals].
NON-SPECIFIED PROFESSION: - Non-specified profession is a profession other
than specified profession.
PRESCRIBED BOOKS OF ACCOUNT [Rule 6F]:
a) Category A :- [Persons carrying on ‘specified profession’ and their gross
receipts in profession do not exceed Rs. 1,50,000 in any of three years
immediately preceding the previous year (or in case of newly set up
profession, the gross receipts in profession for the previous year are not
likely to exceed the said amount of Rs. 1,50,000)]. These persons are
required to maintain such “books of accounts and other documents” as
may enable the assessing officer to compute their taxable income under
The Income Tax Act.
b) Category B:- [Persons carrying on ‘specified profession and their gross
receipts in profession exceed Rs. 1,50,000 in ALL of three years

immediately preceding the previous year (or in case of newly set up

profession, the gross receipt in profession for the previous year are likely
to exceed Rs. 1,50,000)] These persons are required to maintain
prescribed books of accounts as per rule 6 F(2) as follows :-
i) cash book. ii) a journal, if mercantile system is followed. iii) a Ledger. iv)
carbon copies of bills (machine numbered) exceeding Rs. 25 issued by a
person, and v) original bills wherever issued to the person and receipts in
respect of expenditure incurred by the person (or if bills and receipts are
not issued and the expenditure incurred is not more than Rs. 50, payment
vouchers prepared and signed by the person).
Apart from above a person carrying on medical profession is required to
keep following additional books :- a) A daily case Register in form 3C; b) an
inventory, on first day and last day of the previous year, of stock of
medicines and other consumable accessories used for his profession.
c) Category C :-[Persons carrying on Non-specified profession or any
business if their from such business or profession does not exceed Rs.
1,20,000 and the total sale, turnover or gross receipt there of are not in
excess of Rs. 10,00,000 in all three years immediately preceding the
previous year (or in case of newly setup business or non-specified
profession total income and total sale, turnover or gross receipt are not
likely to exceed the said amounts)]. These persons are not required to
maintain any books of accounts.
d) Category D :- [Person carrying an ‘Non-specified profession' or any
business if their income from such profession or business exceeds Rs.
1,20,000 or the total sale, turnover or gross receipts there of are in excess
of Rs. 10,00,000 in any of three years immediately preceding the previous
year ( or when the profession or business in newly set up, income / total
sale etc. are not likely to exceed the said amounts)] - These persons are
required to maintain such “Books of accounts and other documents” as
may enable the assessing officer to compute their taxable income under
the income tax Act.
This category also includes assessee covered under section 44 AD or 44AE
or 44AF or 44BB or 44BBB if it is claimed that profits and gains from the
business are lower than profits as per these sections.
COMPULSORY AUDIT OF ACCOUNTS [SECTION 44 AB]: The following persons

are required to get their accounts audited by a chartered accountant:
a) A person carrying on business, if the total sale, turnover or gross receipts
in business for the previous year exceed Rs. 40,00,000.
b) A person carrying in profession, if his gross receipts in profession for the
previous year exceed Rs. 10, 00,000.
c) A person covered under section 44AD, 44AE, 44AF, 44BB or 44BBB who
claims that the profits and gains from such business are lower than the
profits and gains computed under these sections.
DUE DATE OF GETTING BOOKS AUDITED AND FORM: The due date of getting

books audited is 30th September of the assessment year in case of all assessees.
The chartered Accountant gives his audit report in form 3 CA (if the assessee in
required to get his accounts audited under any law) or in form 3 CB (if the
assessee is NOT required to get his accounts audited under any other law). The
details of such audit are given in form 3CD.
SUBMISSION OF AUDIT REPORT: The audit report as per section 44AB is not to
be attached with new return forms. Such audit report should not be submitted to
income tax department before, on or after due date of filing the return i.e. 30th
September. However, the audit report should be obtained on or before due date.
NOTE: - If the date is extended by the income tax department then 30th
September shall replaced by such date.
SPECIAL PROVISIONS FOR COMPUTING INCOME ON ESTIMATED BASIS:

These are given under section 44 AD, 44 AE, 44AF, 44B, 44BB, 44BBA and 44BBB
as follows :-
PROFITS & GAINS OF CIVIL CONSTRUCTION BUSINESS [SECTION 44 AD]: The
conditions of this provision are:-
1. The assessee may be any person and may be a resident or non-resident.
2. The assessee must be engaged in business of civil construction or supply of
labour for civil construction work.
3. The civil construction includes construction or repair of buildings, dams,
bridges or other structures or roads or canals. It also includes electrical fitting,
plumbing, landscaping work.
4. This section is applicable if gross receipts from such business don’t exceed Rs.
40,00,000.
5. The income from such business is estimated at 8% of gross receipt paid or
payable to the assessee. The assessee can voluntarily declare higher income in
his return of income.
6. The income as above is after deduction of all expenses from section 30 to 38
including depreciation. But in case of firm, salary and interest on capital to
partners under section 40(b) shall be allowed from such income.
7. Such assessee is not required to maintain any books of account. He is also not
required to get his accounts audited. But in case he carries any other business
also and total gross receipts of all business is more than Rs. 40, 00,000 then he
will get his accounts audited under section 44 AB.
8. Such assessee is eligible for deductions under chapter VI A, if conditions
therein are fulfilled.
9. Such assessee can however claim his income to be lower but he will have
maintain the books of account as per section 44AA and get his accounts audited
under section 44AB.
PROFITS & GAINS OF BUSINESS OF PLYING, LEASING OR HIRING TRUCKS

[SECTION 44AE]: The features are as follows:
2. The assessee must be engaged in business of plying, hiring or leasing the

trucks.
3. The assessee does not own more than 10 goods carriages at any time during
the year. For this purpose, a goods carriage taken on hire purchase or on
installments shall be deemed to be owned by the assessee.
4. The income of a heavy goods vehicle (the unladen weight of which is more
than 12000 kilogram) is estimated at Rs. 3500/- per month (or part of month)
during which the goods carriage in owned by the assessee.
5. The income of a good carriage other than heavy goods vehicle is estimated at
Rs. 3150/- per month (or part of a month) during which the goods carriage
owned by the assessee.
6. The assessee can voluntarily declare higher income.
7. The income as above is after deduction of all expenses from section 30 to 38
including depreciation. But in case of firm, salary and interest on capital to
partners under section 40(b) shall be allowed from such income.
8. Such assessee is not required to keep any books of accounts. He is also not
required to get his accounts audited.
9. Such assessee is eligible for deductions under chapter VI A, if conditions
therein are fulfilled.
under section 44AB.
PROFITS AND GAINS OF RETAIL TRADERS [SEC 44AF]: The conditions to be

fulfilled are:
2. The assessee must be engaged in retail trade of any goods or merchandise.
3. The turnover of the assessee from the above business does not exceed Rs.
40,00,000.
4. The estimated income from such business is 5% of gross receipts. The assessee
may voluntarily declare higher income in his return of income.
5. The income as above is after all deductions under section 30 t0 38 including
depreciation. But in case of a firm, salary and interest on capital to partners
under section 40(b) shall be allowed from such income.
6. The assessee is not required to maintain any books of account. He is also not
required to get his accounts audited.
under section 44AB.
PROFITS AND GAINS OF SHIPPING BUSINESS OF NON-RESIDENT ASSESSEE

[SEC 44B]: The conditions to be fulfilled are:
1. The assessee is a non-resident person.
2. He is engaged in the business of operation of ships.
3. He has earned any amount, paid or payable whether in or out of India, on
account of carriage of passengers, livestock, mail or goods shipped at any port in

India; and he has received or deemed to received in India, any amount, on

account of carriage of passengers, livestock, mail or goods shipped at any port
outside India.
4. The income of such assessee from operation of ships shall be a sum equal to
7.5% of the amounts referred to in point 3 above.
PROFITS AND GAINS OF NON-RESIDENT ASSESSEE SUPPLYING MACHINERY

ON HIRE FOR EXPLORATION ETC. OF MINERAL OILS [SEC 44BB]: The
conditions to be fulfilled are:
2. He is engaged in the business of providing services or facilities in connection
with, or supplying plant and machinery on hire which is used or to be used in
prospecting for or extraction or production of mineral oils.
account of services or facilities in connection with, or supplying plant and
machinery on hire which is used or to be used in prospecting for or extraction or
production of mineral oils in INDIA; and he has received or deemed to received in
India, any amount, on account of services or facilities in connection with, or
supplying plant and machinery on hire which is used or to be used in prospecting
for or extraction or production of mineral oils outside India.
4. The income of such assessee from such business shall be a sum equal to 10% of
the amounts referred to in point 3 above.
under section 44AB.
PROFITS AND GAINS OF NON-RESIDENT ASSESSEE FROM BUSINESS OF

OPERATION OF AIRCRAFT [SEC 44BBA]: The conditions to be fulfilled are:
2. He is engaged in the business of operation of aircraft.
account of carriage of passengers, livestock, mail or goods from any place in
India; and he has received or deemed to received in India, any amount, on
account of carriage of passengers, livestock, mail or goods from a place outside
India.
PROFITS AND GAINS OF FOREIGN COMPANY FROM BUSINESS OF CIVIL

CONSTRUCTION ETC. IN CERTAIN TURNKEY POWER PROJECTS [SEC.
44BBB]: The conditions to be fulfilled are:
1. The assessee is a foreign company.
2. Such company is engaged in the business of civil construction or erection of
plant and machinery or testing or commissioning thereof, in connection with a
turnkey power project approved by the Central Government.

3. Any amount is received or receivable by such company in connection with the

above said business.
under section 44AB.
METHOD OF VALUATION OF CLOSING STOCK: The method of valuation of

stock of goods is not prescribed under The Income Tax Act or The Income Tax
Rules. The assessee may value its stock at cost or net realizable value (market
value) whichever is less (as is normal practice in financial accounting). Such
valuation can be as per individual method or as per global method. Both opening
and closing stock should be valued on same basis.
Further value of closing stock should include any tax, duty, cess or fee paid or
incurred to bring the goods to the place of its location and condition on the date
of its valuation.
***

Chapter 1 - 5

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Chapter 1 - 5

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Income Tax Assessment Year 2010-11

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 1

(2) PREVIOUS YEAR for next financial year.

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 2

services to its members;

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 3

conclusions. These are as follows:-

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 4

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 5

time of repayment of such amount.

PERFORMA OF COMPUTATION CHART OF INCOME TAX

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 6

1. INCOME UNDER HEAD 'SALARIES' + 

Less: Setting off of brought forward losses - 

Less: Deduction under Chapter VI A - 

Tax on special Incomes (like casual Income or long 

Add: Surcharge (if applicable) + 

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 7

1(b) For an Individual (man or woman), resident in India who is of 65 years of

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 8

A) RESIDENTIAL STATUS OF INDIVIDUAL: An individual can be:

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 9

An individual, who fulfills either of 'a' or 'b' or both conditions given

B) RESIDENTIAL STATUS OF H.U.F.: Like Individual, the H.U.F. can also be i)

C) RESIDENTIAL STATUS OF FIRM/AOP OR BOI [Sec. 6 (2)]: A firm can be

D) RESIDENTIAL STATUS OF A COMPANY [Sec 6(3)]: The company can be

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 10

NON RESIDENT: A foreign company is non resident in India if control &

TAX INCIDENCE FOR DIFFERENT RESIDENTIAL STATUS:

INCOME DEEMED TO BE RECEIVED IN INDIA: The following are incomes which

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 11

i.e. interest credited at a rate exceeding 9.5%.

INCOME DEEMED TO ACCRUE OR ARISE IN INDIA: The following are incomes

NOTE: Business connection may be of many types i.e. an agent in India or an

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 12

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 13

MEANING OF SALARY U/S 17(1): The definition of Salary is inclusive one. It

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 14

PROCESS OF COMPUTING SALARY INCOME:

BASIS OF CHARGE (SECTION 15): Salary is charged to tax in "due or receipt"

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 15

7. Approved Superannuation fund

EXEMPTION FOR CENTRAL/STATE GOVT. EMPLOYEES & EMPLOYEES OF

EXEMPTION FOR EMPLOYEES COVERED UNDER 'THE PAYMENT OF

EXEMPTION FOR OTHER EMPLOYEES (SECTION 10(10)(iii)]: Least of the

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preceding the month of retirement/resignation/leaving the job.

PENSION [SECTION 17(1) (ii)]:

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RETRENCHMENT COMPENSATION [SEC 10(10B)]: Any compensation received

COMPENSATION ON VOLUNTARY RETIREMENT [SEC 10(10C) & RULE 2 BA]:

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The compensation received by the employee at the time voluntary retirement is

PROVIDENT FUND: There are four types of Provident Funds:

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Organisations, Railways, Universities and recognised Educational

4. Receipt of Lump sum Fully Exempt Generally Note-3

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APPROVED SUPERANNUATION FUND: Superannuation fund is also one of the

TRANSFERRED BALANCE (URPF Converted in to the RPF): Whenever the

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ALLOWANCES EXEMPT UPTO SOME LIMIT: These can be studied as: