Ch.

1 BASIC CONCEPTS

Financial Year: The year starting from April 1 and ending on March 31 of the next year is known as a financial year. Assessment Year: AY is a financial year in which the income earned during the previous year is taxed. Previous Year (sec 3): The year in which the income is earned is called the previous year. E.g.: 1. Income earned by XYZ Ltd in the year 2007-2008 will be taxed in the year 2008-2009. The same would be taxable irrespective of the accounting year followed by the assessee. In the aforesaid the year 2007-08 is the previous year and the year 2008-09 is the assessment year. 2. The income of X comprises of only property income till March 10, 2006. On March 10, 2006 he starts a new business of computer hardware. From the date given below, find out the taxable income of X or the assessment years 2005-06 to 2007-08. Property income: Rs. 42,000/- every year. Business income: Rs 10,000/- for the period ending 31 March 2006 and Rs.56000/-for the period ending 31 march 2007. What would be the taxable income of X for the AY 05-06, 06-07, 07-08? Income earned during the previous year is taxed during the assessment year. Therefore a year is an assessment year and previous year simultaneously. However in certain cases the income is taxed in the year in which it is earned. The exceptions to the rule are as under: 1. Income of non-resident from shipping. (sec172) 2. Income of persons leaving India either permanently or for long period of time (sec174) 3. Income of bodies formed for short duration. (sec174A) 4. Income of persons trying to alienate his assets with view to avoiding payment of his tax. (sec 175) 5. income of discontinued business.(sec176)

“Person “sec 2(31): The term persons include: a) an individual b) a Hindu undivided family c) a company d) a firm e) an association of persons and a body of individuals whether incorporated or not f) a local authority g) Every artificial jurisdictional person not falling under any of the preceding category. The aforesaid is an inclusive list and the last category covers all those that do not fall in any of the preceding classification.

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Assessee [sec2 (7)]: Assessee means a person by whom any tax or any other sum of money (i.e. penalty or interest is payable under the act. It includes: 1. Every person in respect of whom any proceeding under the act has been taken for the assessment of his income or loss or the amount of refund due to him. 2. any person who is deemed to be an assessee.(representative assessee) 3. an assessee in default ( advance tax and TDS not deducted) Overview of tax on income: Income Tax is an annual Tax charged at the tax rates applicable for the assessment year, which are fixed by the annual finance act. Basic concept of Income: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Regular and definite source Different form of income (cash/kind) Receipt v/s accrual Illegal income Disputed title Relief or reimbursement of expense is not income Diversion of income by over riding title v/s application of income Surplus from mutual activity not an income. Temporary or permanent income tax free income Receipt on account of dhrmada, gaushala etc is not an income. devaluation of currency Income includes loss. Appropriation of payment between capital and interest. same income cannot be taxed twice income should be real and not fictional charge on person Award receipt by sports man revenue receipts v/s capital receipts voluntary payment prize of winning

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Extended meaning of income sec 2(24): 1. profits and gains 2. Dividend: dividend declared by domestic company is taxable in the hands of company and not shareholders 3. Voluntary contribution received by trust. 4. Perquisites in the hands of employee 5. Any special allowance and benefits 6. City compensatory allowance 7. Benefits or perquisites of director 8. Benefit or perquisites to a representative assessee 9. Any sum chargeable u/s 28, 41 and 59 10. Capital gains 11. Insurance profit 12. banking income of a cooperative society 13. winning from lottery 14. employees contribution towards provided fund

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15. amt received under keyman insurance policy 16. amount exceeding 50,000 by way of gift

Gross total income As per section 14, the income is computed under five heads: Rs Computation of total income: Income from salaries Income from House properties profit and gains from business and profession Capital gains Income from other sources Gross Total Income Less: deductions u/s 80 C to 80 U Net total Income (rounded off) Computation of Tax Liability: -------Rs

Tax on total income Less: rebate u/s 88E Balance Add: surcharge Total Add: education cess Tax Less: Prepaid taxes ( TDS, self assessment and Advance tax) Tax Liability
Rounding off total Income: The total income is to be rounded off to the nearest multiple of ten rupees.

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Non-resident in India. 3. Residential status is to be determined for each previous year. 2. A person can be a resident of two countries at once. Whether a person is a resident or non-resident is a question of fact and its duty of the assessee to place all relevant fact in front of the assessing officer 4 . joint stock company and every other person. Different residential Status for different Taxable entity: Individual/ Hindu undivided Family Category Category 1 Ordinary resident Resident In India Non-ordinary resident Category 2 Non resident in India Non resident in India Resident in India Firm/association of persons. 4. Individual Hindu Undivided Family A firm or an association of persons a joint stock company every other person Residential status: 1. Resident but not ordinary resident in India 3.2 RESIDENTIAL STATUS AND ITS TAX EFFECT Different Taxable Entity: 1. Resident and ordinary resident in India 2.Ch. 5.

Place of control Residential status of HUF Ordinary resident or not 5 . Determine the residential status for the AY 07-08. he comes back to India on May 27 for a period of 53 days.Residential status of individual (sec 6): Basic conditions: To be an Indian resident a person should satisfy atleast one of the two conditions as under: 1. During the calendar year 2006. X left India for the first time on May 20. Additional Conditions: For a resident to be classified as an ordinary resident the following two additional conditions should be fulfilled. 2. He is in India in the previous year for a period of 182 days or more. 2006. In case of an Indian citizen who leaves India for the purpose of employment or as a member of the crew of an Indian ship. Determine the residential status of X for the AY 2007-08. 2. 2007. He is in India for 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year. 2004. During the calendar year 2005.   Residential Status of a Hindu undivided Family sec 6(2): HUF is classified as a resident and non resident according to its control and management status. Determine the residential status for the AY 2008-09. Eg:  X foreign citizen comes to India for the first time on March 20. Control and management means the de facto control and management and not just the right to control and manage. 2004. 2006 he leaves for Nepal on a business trip. 2. In case any one of them is not fulfilled then the person will be under the category of resident but not an ordinary resident. During the FY 2007-08. On Sep 1. He comes back on February 26. 2007. 1. He should be in India for at least 730 days out of the immediately preceding 7 years. X a foreign citizen leaves India for the first time in the last 20 years on Nov20. he comes to India on Sep 1 for 30 days. 1. Exceptions: In the following two cases a person will be a resident if he satisfies only the first condition. In the case of an Indian citizen or a person of Indian origin who comes on a visit to India in the previous year. He should be resident in India for at least 2 years out of the preceding 10 years. he does not visit India at all but come on January 16. the second condition is not applicable.

During the previous year 06-07. is resident but not ordinary resident in India for the AY 07-08. Eg:  X an individual. Add condition 2 If karta or manager of a resident HUF does not satisfy the above two conditions then it would be treated as resident but not ordinary resident.Control and mangt is wholly in India Control and mangt is wholly outside India Control and mangt is partly in India and partly outside India Resident Non-resident Resident Next table -Next table Condition for being ordinary resident: Add condition 1 Karta has been resident in India at least 2 out of 10 previous years immediately preceding the relevant previous year. the affair of X (HUF). whose Karta is X is partly managed from India and partly from Nepal. Karta has been present in India for a period of 730 days or more during the 7 years immediately preceding the previous year. Determine the residential status of X (HUF) for the financial year 07-08? Residential status of firm and association of persons: sec6 (2) Place of control Control and management of the affairs of a firm/association of persons is• Wholly in India • Wholly outside India • Partly in India and Partly outside India Residential status Resident Non-resident Resident Residential status of a company sec 6(3): Place of control Control and management of the affairs of the company is situated• Wholly in India • Wholly outside India • Partly in India and Partly outside India Residential status Indian Company Other company Resident Resident Resident Resident Non resident Non resident 6 .

Tax incidence on Individual and HUF is as under: Resident and ordinary resident Indian Income Taxable in India Foreign Income • Business is controlled wholly or party from India • Income from profession set up in India • Business is controlled from outside India • Profession is set up outside India • Any other foreign Income Resident but not ordinary resident Taxable in India Non resident Taxable in India Taxable in India Taxable in India Taxable in India Taxable in India Taxable in India Taxable in India Taxable in India Not taxable in India Not taxable in India Not taxable in India Not taxable in India Not taxable in India Not taxable in India Not taxable in India Not taxable in India 7 . Residential status of every other person sec 6(4): Place of control Control and management of his affairs are situated• Wholly in India • Wholly outside India • Partly in India and Partly outside India Residential status Resident Non. disposal of profits and vital things regarding the management of a company.The term control and management refers to head and brain that directs the affair of policy. finance.resident Resident Incidence of Tax for different Taxpayers: Incidence of tax on taxpayers depends on his residential status and also on the place and time of accrual and receipt of his income.

firm etc) as under: Resident in India Indian Income Foreign income Taxable in India Taxable in India Non. Income that is exempt from Tax 8 .Tax incidence on any other taxpayer (company.resident in India Taxable in India Not Taxable in India Ch3.

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Return of income should be submitted on Time. Any income derived from such land by agricultural operations including processing of the agriculture produce. Income attributable to a farmhouse subject to certain conditions. By virtue of sec 2(1A) the expression Agriculture Income means: 1. Books of account should be audited 6.kind so as to render it fit for the market or sale of such produce. 10 . • The building should be occupied by a cultivator (as a landlord or tenant). • The building is used as a dwelling house or as a store house or other out building. If the above conditions are satisfied then. 3.Agriculture Income: Agriculture income is exempt from tax by virtue of sec 10(1). Sale consideration should be remitted to India in convertible foreign exchange. • The land is assessed to land revenue or local rates or alternatively the land is situated outside “urban areas” i. Agriculture income is included for tax rate purposes only. It must begin manufacture or production in free trade Zone 2. any area which is comprised within the municipality jurisdiction having a population of not less than 10. • He should be in immediate vicinity of agriculture land. 5. 2.000 persons or within 8 kms from the limits of any such municipality. It should not be formed by splitting/ reconstruction of business. Any rent or revenue derived from land. 3. • The land should be in India • The land should be for agriculture purpose. • Rent or revenue should be derived from land (may be in cash or kind). Special Provisions in respect for newly established undertaking Sec 10(A): Eligibility: Any undertaking which satisfy the following conditions is eligible to get deduction: 1. income from a farm building is exempt from tax. It should not be formed by transfer of old machinery. which is situated in India and is used for agriculture purpose.e. raised or received as rent-in. (Second hand imported and 20%) 4.

medical relief and the advancement of any other object of general utility.50% of such profits and gains in deductible. Next 2 years. which has been received by the assessee. 12 and 13. (First 5 consecutive years). Here the charitable purpose includes relief to the poor. Charitable and Religious trusts and institutions: Income of a charitable trust is exempt according to the provisions of section 11.a further deduction is available to the extent of 50% of the profit provided an equivalent amount is created as Special Economic Zone re-investment Allowance Reserve. • Voluntary contribution or donations are deemed to be a part of income derived from property held under trust. The aforesaid deduction is not available to any undertaking from the assessment year 2010-11.Amount of deduction The deduction under sec 10A is as under: Profit of the business of the undertaking x Export turnover . The trust should be one established in accordance with law and its objects should fall within the definition of the term “ charitable purpose”. Next 3 years. is available as follows for 10 assessment years: First 5 years-100% of profit derived from the export of such articles or things or computer software. Special Provisions: Incase of an undertaking. Total turnover of the business carried on by the undertaking Export turnoverIt means the consideration in respect of export by the undertaking of articles or things or computer software received in or bought in India by the assessee in convertible foreign exchange within the prescribed period. education. • The amount deducted as tax at source cannot be considered as income for this purpose. • Depreciation should be allowed while computing income for this purpose. 11 . which begins to manufacture or produce things or computer software between 1April 2002 to March 31 2005 in any special economic zone. Period of Deduction: The assessee can claim deduction for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Income of the trust: • Income means the real income.

90. 12 .000 c. Income for the benefit of interested persons 4. 85.30. Income from property held in trust During the previous year 2006-07.000 for the purpose of construction of a charitable hospital up to March 31. Voluntary contribution (without specific direction) 18. Income for private religious purposes only 2. 8. Such income so accumulated will not form the income of the trust.to the charitable trusts. Income for the benefit of particular religious community 3.2012. During the previous year immediately following the year in which the income is derived. Application of the income of the trust: If the income applied to charitable or religious purposes. during the previous year fall short of 85% of the income derived during the year due to below mentioned reasons then the trust can us the income as below: Reason for less than 85% application of income Income has not been received during the previous year Any other reason When the income can be spend The year in which the income is received or the following subsequent year.• If a voluntary contribution is made with a specific direction than it shall form a part of the corpus of the trust and not deemed as the income of the trust. a charitable trust gets the following income: a.000 b. Funds not invested in specified securities/ deposits Eg: During the previous year 2006-07. Forfeiture of exemption: If the benefits of any amenities or services are derived by any specified persons as per section 13 then the exemption given to trust stand forfeited. Voluntary contribution (with specific direction that they Rs shall form part of the corpus of trust 12.90.480/. 14. The following income do not qualify for exemption: 1. Besides it gives donation of Rs. It sets apart Rs.000 for charitable purpose in India. the trust spends Rs. If the income is not applied during the extended time then the income will be taxable in the next year. Accumulation of income: The trust or institution may accumulate or set apart either the whole or part of its income for future application for such purposes.00.

-- Income from Salary Income by way of allowance Taxable value of perquisites --- 13 . 8. Any salary received in the previous year whether actually due or not. Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer. any advance on salary 6. Relationship of an employer and employee Salary and wages not conceptually different Salary can be from more than one source It can be in cash or kind Salary Sec 17(1): Salary under 17(1). 3. Computation of income from Salary: Rs.Ch. any fees. 4. 7. commission. 2. 3. any gratuity 4.4 INCOME UNDER THE HEAD SALARIES Meaning of salary 1. Any salary due from an employer whether actually received or not. or profits in lieu of or in addition to any salary or wages. ---Gross Salary Less: deductions u/s 16 Entertainment Allowance Professional Tax Income from salaries Leave Salary: ---Rs. the contribution made by the central government to the account of an employee under a pension scheme. 2. is defined to include the following: 1. any payment received by an employee in respect of any period of leave not availed by him. wages 2. any annuity or pension 3. 5. if not charged to income tax for any previous year. perquisites. Basis of Charge Sec 15: 1. the portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognized provident fund to the extent it is taxable.

000 as amount of leave encashment for 15 months. His employer allows 45 days leaves for every completed year of services. Gratuity Sec 10(10): Gratuity is a retirement benefit and is generally payable at the time of cessation of employment and on the basis of duration of service.50. During service he has encashed leave for a period of 12 months. (cannot exceed more than 30 days in a year) 2.000) 4. Amt specified by Govt.50. Period of earned leave (in no.per month. Leave encashment actually received Note: Any part of the year is to be ignored. 10 x average monthly salary (Avg monthly salary= basic salary+ dearness allowance+ commission on turnover) 3. 1972 Non government employee not covered by the payment of Gratuity Act.Leave Salary refers to the encashment of the leave standing to the credit of an employee either at the time of his retirement/ or leaving his job or at any time during his service. Calculate the taxable amount of leave encashment if his salary during 1/7/06 to 1/7/07 is Rs.000/14  Gratuity actually received  Half-month average salary for each completed year of service. 80. 1972 Exempted to the Least of the following:  3. (300. Non government employee getting Leave encashment at the time of retirement / leaving the job: In case of a non-govt employee including a local authority or public sector undertaking. Pradeepkumar retires on 1st July 2007 after serving 18yrs of service and receives Rs.000/ Gratuity actually received  15 days last drawn salary x length of service/26 Exempted to the Least of the following:  3. leave salary is exempt from tax on the basis of following: 1. 5000/. of months) to the credit of employee x Average Salary per month. Mr. . Tax treatment: Nature of Leave encashment Leave encashment during continuity of employment Leave encashment at the time of retirement / leaving the job Leave encashment at the time of retirement / leaving the job Status of employee Government/ non government employee Government employee Whether it is taxable Chargeable to Tax Fully exempted Non government employee Fully or partly exempted from tax in some cases. Status of employee Government Employee Tax treatment Fully exempted from Tax Non government employee covered by the payment of Gratuity Act. Eg: 1.

) 2. X retired on 1st April 2007 after serving for 30 years and 7 months. is exempt from tax.and Rs. 78. 2) In the above example calculate the amount of exemption if X was not covered by the Gratuity Act. 1972. Uncommuted Pension is always chargeable to tax for both government and non-government employee.400/.000 pm (forming part of salary for computation of retirement benefits) and 2%commission on sales achieved by him. 1972 then the years are the completed years of service( any fraction is to be ignored).200/. He retires on December 12. Commuted Pension: Lump sum payment in lieu of periodical payment.000. Eg: 1) X. 15 .000. 1972 then the year is to be rounded off to the nearest whole. Pension Sec 17(1)(ii): Uncommuted Pension: Periodical payment of pension. which he is normally entitled to receive.00. He was getting salary Rs. In case where the employee is covered by gratuity Act. 1. Compute the exempted amount of gratuity. He received a gratuity of Rs.56.Note: 1. 5. 800 respectively. 3) Mr.pm from 1/1/2006 to 31/12/2006 and thereafter Rs. 1972. Turnover achieved by him during 10 months (preceding the month in which he retired) Rs.2. He received DA @ Rs. At the time of retirement his monthly basic salary and dearness allowance was Rs.000/. Taxability of commuted pension: Status of employee Government Employee Gratuity received/ not received Gratuity may or may not be received Gratuity is received Exemption Exempted from Tax One-third of the pension. receives Rs. (above 6 months the year to be rounded off to one. Non-Government Employee Gratuity is not received One-half of the pension. 5.000 as gratuity. 1. which he is normally entitled to receive. is exempt from tax. Calculate the amount of exemption. He is covered by the payment of gratuity Act.pm. Ltd. 2006 after rendering services of 38 years and 8 months. an employee of PQ Co. In case where the employee is not covered by the gratuity Act. 8.

1. When the pension is received out of the aforesaid amount it will be taxable in the hands of recipient. 5000/. He was not in receipt of any gratuity at the time of retirement. Upto 30th June 2007. The excess of rent paid over 10% of the salary. 2004: Under the new scheme it is compulsory for an employee to contribute 10% of salary every month towards their pension account and a matching contribution will be made by the government. He gets a pension of Rs. Kolkatta. X retires from a private company on 30th April 2007.Eg: 1. Pension Scheme for an employee joining Central Government on or after Jan 1. Entertainment Allowance: Entertainment Allowance is first included in the salary income and thereafter a deduction is given on the following basis: 16 . He is getting a basic salary of Rs. Eg:  Mr.pm. in the above ex. Delhi or Chennai and an amount equal to 40% of salary where residential house is situated at any other place. 2.pa. 24. It is fixed. if X was in receipt of Gratuity as per gratuity Act 1972. An amount equal to 50% of the salary. Salary means basic salary and includes dearness allowance and commission based on the fixed percentage of turnover.500/. commission based on fixed percentage of turnover Rs. Compute the taxable amount of pension for the assessment year 2008-09. 2. House Rent Allowance received by the employee.pm. 24000/. Different form of Allowances: Allowances is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions for that service. predetermined and given irrespective of actual expenditure. where the residential house is situated at Mumbai. Actual rent paid by the assessee Rs. Dearness allowance @10% of basic pay. 2. Calculate the taxable pension of X for the AY 2008-09. House rent Allowance: The least of the following amount would be taxable: 1. From 1st July 2007 onwards he gets two-third of his pension commuted for Rs.000/-.000/. X is employed in a company in Agra. 3.50. Compute the taxable amount of HRA. Such contribution will be deductible under u/s 80 CCD.per month.

he receives Rs. 8. In addition. 40. Research Allowance 6.g. Orrisa.500 as entertainment allowance. Given for children education Exemption Rs.: X. His actual expenditure on entertainment for official purpose however exceeds Rs. Hostel Expenditure Allowance This allowance is granted to an employee to meet the hostel expenditure on is child 17 . Traveling Allowance/ transfer allowance 2. 9000/-. Karnatka. Conveyance allowance 3. Daily allowance 4. Bihar. Assam. 5000 b) 20% of basic salary c) actual amount of entertainment allowance Entertainment allowance is not deductible Non-government employee E. Helper allowance 5. 300/per month per child limited to a maximum of two children.000 per annum as basic pay. Tamil Naidu. Tripura. a government employee gets Rs. What would be the amount of deduction? Special Allowances: When exemption depends upon actual expenditure by the employee: In these below mentioned cases the amount of expenditure is the least of the  Amount of allowance  The amount utilized pertaining to allowance List of the allowances is as under: 1.Status of Employee Government Employee Exemption Amount Least of the following is deductible: a) Rs. 200 pm Children Allowance Education Exemption limited for Rs. Exemption limited for Rs. Uttar Pradesh. Uniform Allowance When exemption does not depend upon the expenditure: These allowances are exempt to the least of the following:  Amount of allowance  ‘Amount specified in rule 2BB Name of allowance Tribal Area/ scheduled area allowance Nature of allowance This allowance if given in Madhya Pradesh. West Bengal. 100/per month per child limited to a maximum of two children.

When not an obligation of employee: In any other case. 300 per month to Rs. 7000 per month. any sum payable by the employer. unnatural climate in underground mines. derived by virtue of employers authority Perquisites: Sec 17(2) The term perquisite is defined to include the following: 1. 800/. the below table list all perquisites which are taxable in the hands of the employee. Value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the below cases: a) by a company to an employee who is a director thereof b) by a company to an employee.800 per month. 18 . the value of any other fringe benefits or amenity as may be prescribed. It includes any special allowance in the nature of special compensatory (hill areas) allowance or high altitude allowance or uncongenial climate allowance or avalanche allowance.000/4. having an substantial interest in the company c) any person not included in any of the above two categories having a cash salary of more than 50. Taxability of perquisites: When it is an obligation of Employee: If the employer meets an obligation of an employee then the perquisite is always chargeable to tax. resulting in the nature of personal advantage to the employee e. allowed by an employer to an employee b. then they are taxable in the hands of employee. If the employer. allowed during the continuance of his employment c.per month Special Compensatory ( Hill Areas) Allowance Amount exempt varies from Rs. 2. to effect an assurance on the life of the assessee or to effect a contract for an annuity 6. Remaining perquisites are not taxable in employees hands regardless of the expenditure incurred by the employer. Perquisites: Perquisites can be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee 5. The value of rent –free accommodation provided to the assessee by his employer. Exempted to the extent of Rs. Underground allowance Exemption limited to Rs. Underground allowance is granted to an employee who is working in uncongenial. pays any bills which are in the name of employee. Therefore a perquisite to be taxable under the head salaries: a.Transport Allowance It is given to an employee to meet his expenditure for commuting from his office to his residence. where it is not an obligation of an employee. The value of any concession in rent for accommodation provided by the employee 3. directly dependent upon service d.

000/-. Taxable in the hands of Specified person only Taxable in the hands of Specified person only Taxable in the hands of Specified person only Exempted if it is given twice in a block of four years.000. Following are exempted:  Loan not exceeding 20. Any contribution to recognized provident fund or super annuation fund is exempted. c) any person not included in any of the above two categories having a salary (excluding the value of all benefits/ amenities not provided by way of monetary payment) of more than 50. watchman or personal attendant Supply of gas. Valuation of rent-free unfurnished accommodation: a) Central and State Government Employees: The value of such accommodation provided to employee is equal to the license fee. gardener. electricity or water for household purpose Education Facility to employee’s family members Leave travel Concession Amount payable by an employer directly or indirectly to effect an assurance on the life of employee or to effect a contract of an annuity Interest free or concessional loan Providing use of movable asset Transfer of movable asset Medical expenditure reimbursement in excess of Rs.  hotel accommodation in case of transfer for not exceeding 15 days.Taxable Perquisites in the hands of the employee Furnished/ unfurnished house without rent or at concessional rent Exceptions Exceptions are:  A rent free house in a remote area. having a substantial interest in the company: 20% or more voting power in the employer-company. which would have been determined by the central or state government. 15.  Loan for medical treatment Providing use of computer/ laptop or motor car None Following are exempted:  In employer/ govt hospital  Expenditure in case of specified treatment  Health insurance premium  Medical facilities outside India Services of a sweeper. 19 .000 Specified/ Non specified Employee: The following are specified employees: a) An employee who is a director b) An employee.

000 as dearness allowance(forming part of salary). 5000 as commission . 50.b) Private sector or other employees: Value of the perquisite depends on salary of the employee and lease rent of the accommodation.000 basic salary. 10.a. 300. the company provides a rent free accommodation in Ajmer. if furniture is hired by the employer. an employee of ABC(P) Ltd is posted in Ajmer( population 18 Lakhs). b) Valuation of furniture is done:  10% per annum of the original cost of the furniture if the furniture is owned by the employer  actual hire charges payable. Besides. Valuation of rent-free furnished accommodation: Accommodation is not in a hotel: a) Find out the value of the perquisite on the assumption that the accommodation is unfurnished. Determine the taxable value of perquisite. if terms of employment so provide c) Bonus d) Commission e) Fees f) All other taxable allowance (excluding amount not taxable) g) Any monetary payment which is chargeable to Tax Eg: X. Rs. 20 .000 p. The house is owned by company and has a fair rent of Rs. Population of city as per 2001 census where accommodation is provided Exceeding 25 lakhs Where the accommodation is owned by the employer 15% of salary in respect of the period for which the accommodation is occupied by the employee 10% of salary in respect of the period for which the accommodation is occupied by the employee 7. draws Rs.5% of salary in respect of the period for which the accommodation is occupied by the employee Where the accommodation is taken on lease or rent by the employer Lower of amount of lease rent paid/ payable or 15% of the salary Lower of amount of lease rent paid/ payable or 15% of the salary Exceeding 10 Lakhs but not exceeding 25 lakhs Any other Lower of amount of lease rent paid/ payable or 15% of the salary SALARY: For the purpose of valuation the salary includes a) Basic salary b) Dearness allowance. and Rs.

Employer pays Rs. His employer has also provided a rent-free furnished flat in Mumbai. What difference would it make if X was provided a hotel accommodation through out the year (tariff being Rs.000. 10.2006) are owned by the employer ( cost price Rs. the total amount of the salary paid or payable by the employer (or any other person on his behalf) for such services as reduced by the amount paid by the employee for such services.2007. 50. 162. b) X is the managing director of ABC(P) Ltd. emolument consisting of basic pay: Rs. shall be the actual cost to the employer.000: special allowance: Rs 17. that is. Eg: X received during the previous year ending March 31. 120. a gardener. 36000).000 per annum) Valuation provided at concessional rent: The below rules will apply for furnished as well as unfurnished accommodation:  Find out the value of perquisites on the assumption that no rent is charged by the employer. 3800/-. Mode of valuation If purchased from outside If supplied by the employer from own sources Manufacturing cost per incurred by the employer unit Cost to employer (A) Amount paid /payable by the employer to the outside agency Recovery from the employee Sub: Amount recovered from the employee (B) Taxable Value perquisite (A-B) of Recovery from the employee Balancing amount Balancing amount 21 . Valuation of perquisite in respect of gas. Some of the household appliance provided to X (with effect from June1 .000 and reimbursement of medical expenditure: Rs. Valuation of perquisite in respect of free domestic servant: The value of benefit to the employee (or any member of his household) resulting from the provision by the employer for services of a sweeper.Accommodation in a hotel: The perquisite is valued at the lower of the two amounts: a) 24% of salary paid or payable for the period during which such accommodation is provided in the previous year.000 as hire purchase charges for the three air conditioners installed. electricity or water provided free of cost: This perquisite is taxable in the hands of specified employees only provided the connection is in the name of employer. Compute the value of perquisite if: a) X is a Secretary in the ministry of Law and Rs. 4000 is the license fee of unfurnished flat as per the Central Government rules.  From the value so arrived deduct the rent charged by the employer from the employee. Lease rent of the unfurnished flat is Rs. b) Actual charges paid or payable by the employer to the hotel. a watchman or a personal attendant. If in the name of employee then the employer would be paying on behalf of the employee and is taxable in all cases.

Valuation in respect of providing use of movable assets: The value of benefit to the employee resulting from the use by the employee (or any member of his household) of any movable asset (other than car.Valuation in respect of free education: This perquisite is taxable in the hands of a specified employee only and only in those cases where the educational institute is owned and maintained by the employer or where such education facility is provided in any institute by reason of employee’s employment with the employer. The taxable amount shall be reduced by the amount. Mode of Valuation Perquisite in respect of movable asset Owned by employee Taken on hire by employee 22 . specified and non specified. computer and laptop) belonging to the employer shall be determined at 10% per annum of the actual cost of such asset. The valuation of the facility would be as under: Different Situations Where the education facility is provided to employees children • Where the cost/ value of benefit does not exceed Rs. if any.e. 1000 per child per month • Where such amount exceeds Rs. recovered by the employee. Similarly reimbursement of school fees is also taxable in the hands of both specified and non-specified employees. It is taxable in the hands of all employees i. 1000/Amount chargeable to tax NIL Cost of education in a similar instituted in a similar locality – Rs 1000 – amount recovered by employee Cost of education in a similar instituted in a similar locality – amount recovered by employee Where education facility is provided to other members of the household If the fee is paid by the employer for employees children then there is no exemption available for both specified and non-specified employees.

The following are the exemptions to the rule that is in the following cases there is no monetary ceiling:  In employer hospital  government hospital  Expenditure in case of specified treatment  Health insurance premium  Medical facilities outside India Foreign Medical Facility: For medical treatment outside of the employee or any member of the employee shall be excluded to the extent it is permitted by the Reserve Bank of India. Amount recovered from the employee Taxable Value perquisite (A-B) of 10% p.000 is chargeable to tax. They do not include household appliances. Find the cost to the employer B. (B) Amount recovered by the employee (C) Taxable Value (A-B-C) Items/ Motor car Actual cost to the employer 20% for each completed year by reducing balance method Paid by employee for acquiring such asset Balancing amount (if positive) Any other asset Actual cost to the employer 10% for each completed year of actual cost. 23 . However the cost of travel of the employee/ any member of his family and his one attendant shall be excluded only for those employee whose gross total income excluding such traveling expenditure does not exceed Rs. Valuation of Medical Facilities: Fixed medical Allowance is always chargeable to tax. But Medical expenditure reimbursed in excess of Rs. 15.a of actual cost Amount of rent paid or payable Recovery from the employee Balancing amount (if positive) Recovery from the employee Balancing amount (if positive) Valuation in respect of Transfer of movable Asset: The valuation will be done as follows: Mode of Valuation Perquisite in respect of sale of movable assets to employee Electronic computers Find out the cost to the employer (A) Normal wear and tear for completed years for which the asset was used by the employer for his business.000/-.A. 200. digital diaries and printers. Actual cost to the employer 50% for each completed year by reducing balance method Paid by employee for acquiring such asset Balancing amount (if positive) Paid by employee for acquiring such asset Balancing amount (if positive) Electronic Items refer to data storage and handling devices like computer.

lunch. This fund is maintained by the Government. 2. it is first included in the salary of the employee as a perquisite as it is an obligation of the employee and then allowed as deduction from the gross salary. If the employer pays the professional tax. local authority. Permissible deduction from Salary Income: The following deductions are permitted from the head Income form salaries : 1. railway. credit cards. brothers and sisters of individual who are mainly or wholly dependent on him. b) Recognized Provident Fund: A provident fund to which the provident Fund Act. The exemption is available for the family meaning spouse and two children. And the exemption is available to both Indian citizen and foreign citizen. Professional Tax Professional Tax also known as tax on employment is allowed as deduction in the year in which it is paid. Public Provident Fund: The central government has established a public provident fund with a view to benefit the general public and mobilize saving. clubs etc provided to employee is not taxable in the hands of employee.Leave travel concession: The leave travel concession is exempted twice in a block of four years. Exemption is based on actual expenditure and is available only in respect of fare. The contribution is invested in gilt-edged securities and interest is earned thereon. Any other Facility provided to employee: Any other facility or perquisite like car. 24 . stipulated sum of money is deducted from the employee’s salary and an equal matching contribution is made by the employer. university and recognized educational institutions.1972 applies is a recognized provident fund. 1972. touring gift. semi government organization. Provident Fund: Provident Fund scheme is a retirement benefit scheme. Under this scheme. Entertainment Allowance As discussed earlier the entertainment allowance is first included in the salary and then allowed as deduction. Thus the balance of provident fund consist of: a) Employers contribution b) Interest on employers contribution c) Employees contribution d) Interest on employees contribution Kinds of Provident Fund: Employees provident fund ca be divided into three a) Statuary Provident Fund: It is set up under the provisions of Provident Fund Act. c) Unrecognized Provident Fund: If the commissioner of Income Tax does not recognize a provident fund then it will be under the category of unrecognized provident fund. parents. refreshment. If the journey is performed by the circuitous route then the amount of exemption is available in respect of the shortest route. Any person whether salaried or self employed can invest in the same. This fund is recognized by the commissioner of Income Tax. traveling.

if terms of employment so provide and commission if received as fixed percentage of turnover achieved by employee. excess of interest over this is taxable Exempt from tax Lump sum payment at the time of retirement Exempt from tax Exempt from tax in some cases. the employee obtains employment. 2.  If on the occasion of his retirement. Salary includes basic salary. Excess is taxable Available Unrecognized Provident Fund Exempt from tax Exempt from tax Deductions u/s 80C on employees contribution Not Available Interest credited to provident fund Exempt from tax Exempt from tax up to 9. when not exempt provident fund will be treated as unrecognized provident fund    Employees contribution exempt Interest on employee contribution taxable under income from other sources Employer’s contribution and interest thereon is taxable under the head income form salaries. dearness allowance/ dearness pay. The accumulated balance due and becoming payable to an employee participating in a recognized provident fund will be excluded from his total Income in the following cases:  If he has rendered continuous service with his employer for a period of 5 years or more. Eg: 25 .5%. Statutory Fund Employers contribution provident fund to Available provident Recognized Provident Fund Exempt upto12% of salary. Note: 1. to the extent the accumulated balance due is transferred to another recognized provident fund maintained by such employer.Taxability of contribution to Provident fund.  If the employee is not able to fulfill the conditions of such continues service due to his service having been terminate by reason of his ill health or by reason of the contraction or discontinuance of the employers business or any other reason beyond the control of assessee.

He is a member of a recognized provident fund to which the employer contributes 11. X( age 26) is an employee of a cooperative society at Varanasi. On July 10. • • Practical Problems: Mrs. • • Deduction would be available from gross total income It is available for Hindu undivided family and individuals Deduction is available on the basis of specified qualifying investment/ contribution/ deposit/ payment made by the assessee during the previous year. 1% of turnover 600.760 as interest on company deposits from a private sector undertaking.For the previous year 2006-07. Basis of Charge (Sec 22) Income is taxable under this head “Income from House property” if the following three conditions are satisfied: 1. The employer contributes Rs.e. X gets an interest free loan (repayable within 8 years) of Rs.162 (X also makes a matching contribution).700 afterwards. Rs. 7200. During the previous year 200607. 12. 10. 600 per month to the provident fund. During the previous year 2006-07. dearness allowance: 40. (c) unrecognized provident fund. During the year 2006-07.000 (46% forming part of salary for retirement benefits). (b) recognized provident fund.500.30. Rs.000.5 INCOME FROM HOUSE PROPERTY This chapter deals with any income falling under the head income from house property. 450 per month as dearness allowance( 32% is forming part of the salary for computation of retirement benefits) and Rs. X (age 51 years) is a part time college lecturer in Delhi. 800 per month as bonus and Rs. X submits the following information. 2. she gets basic salary of Rs. 1630 per month as dearness allowance (71% of it forming part of salary for computation of retirement benefits and Rs.000 towards provident fund to which a matching contribution is made by X. Rs.Basic Salary: 120.000. 6500 per month as basic salary. Apart from the minimum contribution.per month. 86. 12300 up to June 30. 2007 @ 11%comes to 93. Interest credited in the provident fund account on March 15. 7500. X on her completing 10 years of service( cost of music system purchased on sep 1.2006 the employer transfer a music system to Mrs. 500 per month as conveyance allowance which is entirely for personal purpose. 2005: 22470) for Rs.330 from the employer for purchasing a house. he gets Rs. 82. 200 per month as medical allowance ( medical expense is however more than Rs 200 per month). 100. 65698 is paid to her for checking answer sheet for different universities. Find the net income of X for the assessment year 2007-08 if the provident fund is (a) statutory provident fund. Deduction u/s 80C: Section 80C is introduced from assessment year 2006-07 and it provides deduction in respect of specified qualifying amount paid or deposited by the assesses in the previous year.000 achieved by him) and children education allowance for his 2 children Rs. Income of X from other source is Rs. commission: 6000 (i. The assessee should be the owner of the property 26 . Maximum amount deductible is Rs. 4000/. Determine the taxable income and tax liability of X for the assessment year 2007-08. Besides he gets Rs. 80CCC and 80 CCD. She is a member of statuary provident fund to which both the employer and employee contributes @ 12% of basic salary. Determine the taxable income and tax liability on the assumption that she is paying a rent of Rs. The property should consist of any building or land appurtenant thereto. Besides she gets 30% of Basic salary as house rent allowance.000 under sec 80C. she makes an additional contribution of Rs. Ch. 20.2006 and Rs.

House property held for charitable purposes. Annual value of ay one palace of any ex-ruler. Property income of an approved scientific research association. Property income of any local authority. d. g. Property income of any educational institution and hospital f. The standard selection of the measure of the income is the annual value. Income from farmhouse.e. One self occupied property. the profit of which are chargeable to income tax.Interest on borrowed capital Income under the head house property Rs. Basis of computing income for a let out house property: Income under the head house Property Gross Annual Value Less Municipal Taxes Net Annual Value Less: Deduction u/s 24 . Property income of a political party i. Property income of a trade union. b. c. All the above conditions should be satisfied for a property income to be made taxable under the head income from house property. Exceptions: In the below mentioned cases rental income is not charged to Tax: a. h.Standard Deduction . he property should not be used by the owner for the purpose of any business or profession carried on by him. e. Gross annual value depends upon the following factors: a) Municipal Valuation b) Fair rent c) Standard rent d) Annual Rent (i.3. Property income used for own business or profession j. rent for the previous year or that part of the previous year when the property is available for letting out and there is no vacancy and unrealized rent) e) Unrealized rent f) Loss of rent because of vacancy g) Actual rent received/ receivable (d-e-f) 27 . --------------------- Gross Annual Value: Sec 23(1) Tax under the head income from house property is a tax on the inherent capacity of the building to yield income and not a tax on rent.

2. these taxes are borne by the owner.3 In case of vacancy the gross annual value so determined is adjusted for the period for which the house is occupied. E. .1 Determine the reasonable expected rent as a) or b) whichever is higher. The tenancy is bona fide.2 If Annual rent less unrealized rent is higher then the amount specified under step 1 then Annual rent less unrealized rent is substituted for the value in step 1. are actually paid by him during the previous year.Steps for determining the gross Annual Value: . or steps have been taken to compel him to vacate the property. Deduct municipal taxes: From the gross annual value municipal taxes have to be deducted to arrive at net annual value. The following two deductions are allowed: 28 . In thousand) D E F When unrealized rent shall be excluded: Unrealized rent shall be excluded from rent received/ receivable only if the following conditions are satisfied: 1. . Deductions u/s 24: The list of deductions u/s 24 is exhaustive that is no other deduction is allowed except whatever are explicitly mentioned.g.: Particular A Municipal valuation (a) Fair rent (b) Standard rent (c) Annual rent if property is let out through the year 06-07 (d) Unrealized rent (e) Period for which property remains vacant Loss due to vacancy (f) 140 145 142 168 14 1 7 180 185 175 168 180 185 175 168 1 ½ 14 140 145 142 168 70 3 42 231 262 241 252 42 5 105 140 150 120 96 -10 80 B C (Rs. The defaulting tenant is not in occupation of any other property of the assessee. 4. If the amount so determined is higher then the amount in c) limit the amount to c). 2. 3. Municipal value are deductible only if 1. The defaulting tenant has vacated. The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the assessing officer that legal proceeding would be useless.

construction. only one house is treated as self. Interest of the current period: a. Capital is borrowed on or after April 1.occupied for the part of year and let out for the part of the year: 29 .occupied and all other houses will be deemed to be let out. In the aforementioned cases the annual value of the house property shall be taken as nil. A house property which is not actually occupied by the owner owing to employment or business/ profession. Interest of pre-construction period: Interest of pre-construction period is allowed as deduction in five equal installments. b. Standard deduction 2.000. One house which is self occupied c. When more than one property is occupied for residential purpose: When more than one house is occupied by a person during the previous year for is residential purpose. 30. repair etc) the maximum amount deductible is Rs. However the loan is taken for the any other purpose (e. 1999: The interest on borrowed capital is allowed as deduction up to Rs. if capital is borrowed for the purpose of purchase. repair. Capital is borrowed before April 1. renewable or reconstruction of the house property.000/Interest on borrowed capital is allowed as deduction even in those cases when the annual value of the house property is nil. 1999: Interest on borrowed capital is allowed as deduction to the extent of Rs. Interest on borrowed capital Standard deduction: 30% of net annual value is deductible irrespective of any expenditure incurred by the taxpayer.000/provided the loan is taken for the acquisition or construction of the property. 30. In case of deemed to be let out the gross annual value is taken to be the higher of municipal valuation or fair rent whichever is higher to the maximum of standard rent. Taxable income from self-occupied property: When the property consist of: a. When a part of property is self-occupied and a part is let out or a house is self.1. Reconstruction. carried on at any other place. 150. Interest on borrowed capital: Interest on borrowed capital is allowable as deduction. Any house which is occupied for own business b.g.

000 36. 30 .000 Nil 28. It means the house tax and interest on loan attributable to self-occupied portion/period cannot be deducted to arrive at income from house property.m.: From the following information. Municipal taxes are paid at the rate of 20%.Rs.000 170. compute the annual value of the house for AY 07-08 Municipal Value.000 36000 The above properties have been let out throughout the previous years 2006-07 and 2007-08.occupied period/ portion should be excluded in determining the annual value. Problems: 1.000 Y (Rs) 190. 20.000 NIL 28.g.000 House was occupied for the first six months and for remaining six months it was let out @ Rs. Similarly the house tax and interest in loan attributable to ®elf-occupied period/ portion should be ignored.000 30.°00 216.In computing the income in the aforesaid situation the fair rent attributable to the self. find out the income under the head “ Income under the house property” for the assessment year 2007-08 and 2008-09. E. 90.0. 8000 p.000 175. X (Rs) Municipal valuation Fair rent Standard rent Annual rent Unrealized rent for the previous year 2006-07 Unrealized rent for the previous year 2007-0¸ Unrealized rent of 2006-07 realized during 2007-08 Interest on borrowed capital 1. Special provisions when unrealized rent is recovered subsequently: When a deduction has been allowed to the assessee for any unrealized rent during the previous year and realized subsequently then that amount shall be deemed to be the income of the previous year and shall be chargeable to tax under the head “income from house property” as per the provisions of the act whether the assessee is an owner of that property or not.000 Municipal taxes paid.000 30.000 170. From the information given below.000 195.Rs.000 185.

income from a speculative transaction 10. This chapter deals with provisions which have a bearing on the computation of taxable income. Any drawback of any duty of customs or excise.6 Income under the head Business & Profession This head is covered by sec 28 to sec 44D. commission or remuneration received by a partner from firm. patents. The value of any benefit or perquisites. bonus. Cash assistance (subsidy received by any person against exports under any scheme of government 6.Ch. • Any compensation received from government or a corporation on taking over of management of property or business. Any sum received for not carrying out any activity in relation to any business or not to share any know-how. Profits from an illegal business. 9. 8. professional or similar association from specific services performed for its members. 4. 31 . arising from the business or the exercise of any profession. Any interest. Profit and gain of any business and profession 2. trademarks etc. salary. Profit on sale of license (export/ import license) 5. Basis of charge (sec 28): The following income is chargeable to tax under the head “Profit and gains from business and profession”: 1. whether convertible into any money or not. 2. Income derived by a trade. 7. copyrights. any compensation or other payment due or received by any person specified in sec 28(ii) • any compensation received on termination of a managing agency of a foreign company • any compensation received on termination of a managing agency of a Indian company • Any compensation received on termination of any agency or modification of terms of agency. 3.

rates taxes repairs and insurance for building (Sec 30): Under this section following deductions are allowed for premises used for business or profession: 32 . Business losses can be allowed as deduction if the following conditions are satisfied: 1. section 40. Business or profession should be carried on by assessee. Legal ownership v/s beneficial ownership. Loses incidental to business: General commercial principles have to be kept in view while determining the real and true profits of a business and profession. 40A and 43B cover expenses which are not deductible. The term business is a word of wide import and in terms of fiscal statue it must be construed in a broad rather than in a restricted sense. Profits can only arise out of the trading receipts and only the profit element of such receipt can be made taxable. commerce or manufacture”. 6. Rent. While the term vocation implies natural ability of a person for some work. Capital receipts are not taxable.Meaning of term business: The term business refers to any economic activity carried out with a view to earn profit. Losses should be incidental to the business and profession carried on by assessee. 6. Basic Principles for arriving at business Income: One has to keep in mind the following general principles for arriving at business income: 1. 5. The definition covers every facet of an occupation carried on by a person with a view to earn profit. manufacture or any adventure in the nature of trade. 2. Recovery of sum already allowed as deduction. Business or profession should be carried on during the previous year. 8. 3. profession or vocation is not important for the purpose of income tax. Losses should be incurred during the previous year. It should have been actually incurred and not merely anticipated to incur in future. Tax incidence arises in respect of all business or profession. The distinction between the term business. The term profession is an occupation of requiring purely intellectual skill or manual skill attained in special knowledge. Specific deductions under the Act : Section 30 to 37 cover expenses which are expressly allowed as deduction while computing business income. 3. It should not be notional or fictitious 5. Income of the previous year is taxable during the following assessment year. Mode of book entries not relevant. Profession and Vocation: As per sec 2(36) profession includes vocation. commerce. 2. buying and selling of goods to make profits and providing services to others are different form of business. Thus Production of goods from raw material. As per section 2(13) term business is defined as “any trade. 4. 4. There should not be any direct or indirect restriction under the act against the deductibility of such loss. Losses are revenue in nature. Real profit v/s anticipated profit 7.

even if the asset is used for a single day. Repairs and insurance of machinery. Depreciation Allowance (Sec 32) In order to avail depreciation u/s 32. one can claim depreciation on the following assets: Tangible Asset Intangible Assets acquired after March 31. if the following two conditions are satisfied: • Where an asset is acquired during the previous year • It is used for the purpose of business or profession for less than 180 days during that previous year. the assessee would be entitled to 50% of normal depreciation.e. 2. Depreciation Available: Under the Indian Income Tax. Any sum on account of land revenue. If the above conditions are satisfied. being know-how. trade marks. Asset must be owned by the assessee. machinery or furniture Know-how. Plant. 2. licenses. patents. machinery.1. licenses. The rent of premises. or any other business or commercial rights of similar nature In respect of which the same percentage of depreciation is prescribed. patents. or any other business or commercial rights of similar nature. It should be used for the relevant previous year 4. if he has undertaken to bear the cost of repair. Use of the asset in the previous year: The asset in respect of which depreciation is claimed must have been used for the purpose of the business. local rates or municipal taxes. copyrights. the following conditions need to be satisfied: 1. 1998 Building. Block of Assets sec 2(11): The term block of assets means a group of assets falling within a class of assets comprising of: • Tangible assets. Depreciation allowance is limited to 50% of normal depreciation. Amount of any premium in respect of insurance against risk of damage or destruction of the premises. plant and furniture (sec31): The expenditure incurred on current repair (not being capital expenditure) and insurance in respect of plant. ** The amount is deductible as per the provision of sec 43B. franchise. It must be used for the purpose of business or profession 3. Written down Value sec 43(6): Written down value for the year is determined as under: 33 . ** 3. full year depreciation) is available if an asset is used is put to use at least for sometime during the previous year. trade marks. plant or furniture • Intangible assets. copyrights. the amount of repair (not being capital expenditure). Normal depreciation (i. franchise. Depreciation is available on tangible as well as intangible asset. being building. machinery and furniture used for business purpose is allowed as deduction u/s 31.

deduct money received/ receivable (together with scrap value) in respect of that asset which is sold.000 2700 Rate of depreciation (%) 25 40 15 100 1/10/2006 20/06/2006 30/11/2006 6/12/2006 Determine the amount of depreciation for the assessment year 2007-08. Exception 2: If the block of asset ceases to exist If a block of assets ceases to exist or if all assets of the block have been transferred and the block of assets is empty on the last day of the previous year.) 20. 2006 (Rs. discarded. 5. The amount of reduction under step 3 cannot exceed the value of asset computed under step 1 and step 2.170 900.000 Rate of depreciation (%) 10 10 20 15 40 During the previous year 2006-07. However the following exceptions are there for the aforesaid: Exception 1: When the written down value of a block of assets is reduced to zero. the following assets are purchased by X: Date Purchase of Date when the asset is put to use 9/10/2006 22/06/2006 1/12/2006 10/12/206 Asset Trade Mark Plant Furniture Books for professional use Cost Rs. 2006: Assets Furniture Building Plant and Machinery Plant and Machinery Plant and Machinery Written down value on April 1.000 190. the balance of depreciation allowance is called unabsorbed depreciation.1. no depreciation is admissible in such case. Steps for dealing with unabsorbed depreciation: 34 . demolished or destroyed during that year. Computation of depreciation Depreciation is calculated at the prescribed rate on the written down value. 15.000 205. Ex: X owns the following assets on April 1. From the resultant year. Find out the depreciated value at the beginning of the year as on 1st of April. 4. The resulting amount is the written down value of the block for that year. though the block of assets does not cease to exist on the last day. 2. No depreciation is admissible where written down value has been reduced to zero. 3. To this value add actual cost of the asset acquired during the year. Unabsorbed Depreciation: When in the assessment of the assessee full effect cannot be given to depreciation allowance in any previous year owing to there being no profit/ gain or there being insufficient profit/ gain.000 140.500 210.000 6400.

2. The below points are also to be kept in mind: 1. 2. If depreciation allowance.000 134. is still unabsorbed then it can be carried forward to the subsequent assessment year(s).000 18. Unabsorbed depreciation For the above setoff continuity of the business is not necessary. whichever is earlier. The accounts of the assessee should be audited. It must make a deposit in special Account opened with NABARD( National bank for Agriculture and rural development) 3. The amount has to be deposited within 6 months from the end of the previous year or before the due date of furnishing the return of income. The following priority order is to be followed when the unabsorbed depreciation is to be set off in subsequent year: a. When a deduction is claimed under this section. Tea/ coffee/ rubber development account (Sec33AB) To claim the deduction under this section the following conditions need to be satisfied: 1.000 80. no deduction shall be allowed in respect of such amount in any other year.Step 1 Depreciation allowance of the previous year is first deductible from the income under the head “Profit & gains from business and Profession”. The assessee must be engaged in tea. 4. it is deductible from income chargeable under the other head of income (except income from salary) for the same assessment year. Brought forward business loss c. 40% of profit of such business computed under the head “profit and gains of business and profession” before making any deduction under section 33AB and also before adjusting any bought forward losses. coffee or rubber plantation. Step 2 Step 3 There is no time limit for the purpose of carrying forward of unabsorbed depreciation. 35 . Current depreciation b.000 10. Amount of deduction: The least of following is allowed as deduction: 1.000 2007-08 200.000 Determine the taxable income of X for the assessment year 2007-08 and 2008-09. A sum equal to the amount deposited in the special account as discussed above.000 16. Ex: X submits the following details Previous years 2006-07 Income from salaries Business Profit (before depreciation) Current depreciation Income from other sources 100.000 132. If depreciation cannot be fully deducted under the head “Profit & gains from business and Profession” because of inadequate or no profit. it can be carried forward for indefinite period.

Any new plant or machinery to be installed for setting up of a new unit to produce any article included in eleventh schedule. When a deduction is allowed and claimed under this section to an association of persons or body of individuals no deduction shall be allowed to any member of the association or body in respect of the same. Any excess deposit in special account made during the previous year is not treated as deposit in any other year. Amount cannot be utilized for certain purpose: No deduction can be claimed in respect of any amount utilized for the purpose of 5. closure of business 2. before the end of previous year. It must make a deposit in special account to be opened with SBI or deposited in an account named site restoration fund to be opened in accordance with Government of India with the ministry of Petroleum. 5. Any office appliances except computer 7. 4. The deposit should be made within specified time limit i. b) 20% of the profit of the business as computed under the head profit and gains from business and profession before this deduction. Withdrawal of amount: The amount standing to the credit of the special account may be withdrawn only in case of: 1. 4. Any plant or machinery whose full cost is allowed to be debited to P& L account. Withdrawal of amount: The amount can be withdrawn only for the purpose specified in the scheme or deposit scheme. 3. When a deduction is allowed and claimed under this section to an association of persons or body of individuals no deduction shall be allowed to any member of the association or body in respect of the same. Amount of Deduction: a) Sum equal to amount deposited in the special account. The accounts of assessee should be audited. 3. Any office appliances except computer 3.2. The assessee has an agreement with the agreement with the central government. The assessee must be engaged in production of petroleum/ natural gas in India. Whichever is less is allowed as deduction. death of an assessee 4. partition of HUF 5. 2.e. Site restoration fund (Sec 33ABA): An assessee can claim deduction u/s 33ABA if he satisfies following conditions: 1. Any machinery or plant installed in the residential houses or a guest house. dissolution of firm 3. When a deduction is claimed under this section. Any machinery or plant installed in the residential houses or a guest house. 2. The below points are also to be kept in mind: 1. liquidation of company Amount cannot be utilized for certain purpose: No deduction can be claimed in respect of any amount utilized for the purpose of 1. Any plant or machinery whose full cost is allowed to be debited to P& L account. no deduction shall be allowed in respect of such amount in any other year. 2. 6. 36 .

the amount so utilized for other purpose shall be deemed as profit of the previous year in which it is so utilized. a deduction is allowed only if the research is related to the business. Contribution to an approved scientific 2. Until the acquisition of a new ship. Acquiring a ship for the purpose of business of assessee. it cannot be sold or otherwise transferred for 8succeding previous years from the previous year in which it s acquired. In case it is sold or transferred before the expiry of 8 succeeding previous years. In case amount of reserve is not utilized to acquire a ship within 8 exceeding previous. Revenue expenditure 1. such reserve may be utilized for the business of the assessee but not for distribution by way of dividends or profits or remittance outside India as profits or for the creation of any asset outside India. c. b. In case amount of reserve is not utilized in the aforesaid manner the amount of reserve shall be treated in the following manner: a. The amount to be credited to such reserve account must not exceed twice the amount of the paid up share capital (excluding the amount capitalized from reserves) of the assessee company. animal husbandry or fisheries. Any new plant or machinery to be installed for setting up of a new unit to produce any article included in eleventh schedule. Expenditure on an approved in-house 2. 37 . Reserve for shipping business (Sec 33AC): No deduction under section 33AC is available from the assessment year 2005-06. 3. The amount of deduction to be claimed must be transferred to a reserve account. In case amount of reserve is utilized for a purpose other than as given above. Under this section amount deductible in respect of scientific research may be classified as under: Expenditure on research carried on by Contribution to outsiders assessee 1. b. In case ship is acquired within succeeding previous years. Payment to National Laboratory research Revenue expenditure incurred by assessee: Revenue expenditure incurred by assessee himself on scientific research. the amount of reserve utilized in acquiring the ship shall be deemed as profit of previous year in which ship is sold or transferred. the amount so unutilized shall be deemed as income of the previous year next following the period of 8 succeeding previous years. Expenditure on Scientific Research (Sec 35): Scientific research means any activities for the extension of knowledge in the fields of natural or applied science including agriculture.8. The quantum of deduction is an amount not exceeding 100% of the total income ( computed before making any deduction under this section and u/s 80) as is debited to the profit and loss account of the previous year in respect of which the deduction shall be allowed shall be admissible. In the year in which the reserve exceeds this limit deduction u/s 33AC will be restricted to the amount which is sufficient to reach this limit. The amount credited to the reserve account shall be utilized by the assessee company before the expiry of 8 succeeding previous yrs for a. Capital expenditure research association.

35AC: Deduction is available under this section for promoting social and economic welfare. Carry forward and set off deficiency shall be done in the same manner as for the unabsorbed depreciation. 38 .Pre-commencement period expense: Any pre-commencement expenditure being revenue in nature (other than expenditure providing perquisites to employee) incurred before the commencement of business on scientific research related to the business are deductible in the previous year in which the business is commenced. the whole of such expenditure incurred in any previous year is allowable as deduction for that year. The research and development facility is approved by the prescribed authority and sufficient provision for audit is done for the accounts maintained by the facility. 4. Contribution made to outsiders: Where the assessee does not himself carry on scientific research but makes contributions to other institutions for this purpose. a weighted deduction is allowed. Any taxpayer can claim deduction by making a payment of any sum to a public sector company or a local authority or to an association or institution approved by a national committee for carrying out eligible project or scheme. Expenditure on approved in-house research: A weighted deduction is allowed in respect of expenditure on in-house research and development expense incurred by the assessee. 3. The expenditure is incurred either before the commencement of business or thereafter at any time during any previous year. It is incurred for acquiring any right to operate telecommunication services. Amortization of telecom license fees (sec 35ABB): Deduction under this section is available if the following conditions are satisfied: 1. And no depreciation is allowable on such capital asset. The amount of deduction is equal to one and one fourth times of any sum paid to a scientific research association or to a university. A company can also directly incur expenditure in respect of eligible project and claim the same as deduction. The taxpayer is a company 2. Capital expenditure incurred by assessee himself: Where the assessee incurs any expenditure of a capital nature on scientific research related to his business. The expenditure is capital in nature. Expenditure on eligible product or scheme Sec. Any profit or loss on sale of telecom license is to be taken into consideration while computing business income. However the following points need to be kept in view: 1. Scientific research carried on above may or may not be related to the business of the assessee. 3. The aforesaid deduction is not available in respect of capital expenditure incurred on the acquisition of any land. college or other institution or to a national laboratory. The payment will be allowed as deduction in equal installment over the period for which the license is valid. The deduction is available even if the relevant asset is not put to use for research and development in that particular year. 2. Amount of deduction A sum equal to one-one half times of expenditure so incurred shall be allowed as deduction. It is engaged in the business of bio-technology or in the business of manufacture or production of articles or things notified by the board. The payment for the above has been actually made to obtain license.

3. Maximum ceiling: The aggregate expenditure cannot exceed the followingIn the case of corporate Assessee • • In the case of non-corporate Assessee 5% of the cost of project. The taxpayer is an Indian company. whichever is more Cost of Project means the actual cost of fixed assets which are shown in the books of assessee as on the last day of the previous year in which the business of the assessee commences. The expenditure is allowed as deduction in five successive years in five equal installments. Deduction under this section is available to an Indian company or a resident non corporate assessee. The expenditure is incurred for the purpose of amalgamation or demerger. 2. • Legal charges for drafting the memorandum and articles of association if the taxpayer is a company. The national Urban Poverty Eradication Fund set up and notified by the government. brokerage and charges for drafting. 3. Qualifying Expenditure: • Legal charges for drafting any agreement between the assessee any other person relating to setting up of business of the assessee. • Printing expenses of the memorandum and article of association if the taxpayer is a company. 4. 4. underwriting commission. Any association or institution which has its object for carrying out any program of rural development approved. • Expenses in connection with the public issue of shares or debentures of a company. Any association or institution which has its object the training of persons for implementation of a rural development program. The first installment is deductible in the year in which amalgamation or demerger takes place. Amortization of expenditure in the case of amalgamation / demerger (Sec 35DD) The provisions of the section are as under: 1. Amount of deduction: One fifth of the qualifying expenditure is allowable as deduction in each of the five successive years beginning with the year in which the business commences. • Registration fees of a company under the provisions of the company’s Act.Payment to associations and institutions for carrying out rural development programmes: This section provides deduction of sums paid by assessee to: 1. printing and advertising of the prospectus. 5% of cost of project 5% of capital employed. Amortization of expenditure under voluntary retirement scheme (Sec 35 DDA) 39 . Amortization of preliminary expenses (Sec35D): Those expenses which are incurred before commencement of business for setting up any undertaking or business are termed as preliminary expenditure. typing. The national fund for rural development set up by the government. 2.

40 . 2005. Theft or death is allowed as deduction. Write off allowance for animals Provided the animals are used for business or profession then loss on sale. Bonus or commission to employee Any bonus or commission paid to employee is allowable as deduction on payment basis and the amount given should not be otherwise payable as profit or dividend. 9. 4. 8. 3. the deduction for the remaining period shall be available to the resulting company. firm or proprietary concern. in the year of transfer and subsequent years. Where the undertaking of an Indian company entitled to deduction for amortization of voluntary retirement expenses is transferred before the expiry of 5 years in a scheme of amalgamation or demerger. 7. 2. 10. The expenditure which is incurred during the 4 years prior to the commercial production is allowed as deduction in 10 equal installments over a period of 10 years. In case where the installment of amortized expenditure relating to a given year cannot be wholly absorbed by the profit against which the amortisation is to be allowed. Amortisation of Expenditure on prospecting etc for certain minerals (Sec35E): This section provides for the amortisation of expenditure incurred wholly and exclusively on any operation relating to prospecting for the minerals or group of associated minerals or on the development of a mine or other natural deposit of any such minerals or group of associated minerals as specified in the seventh schedule. no deduction will be available to the amalgamating company. Expenditure is incurred in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement. Premium on the health of employee Insurance premium paid on the health of employee is allowable as deduction. Discount on zero coupon bonds Discount on zero coupon bonds (being the difference between the amount received and amount payable on the redemption/ maturity of bonds) is allowed as deduction on prorata basis over the life of bond. Similar provisions are applicable in the case of succession of firm or proprietary concern. Such expenditure is allowed as deduction in five equal installments beginning with the year in which the expenditure was incurred.1. Employer contribution to Provident Fund and Superannuation fund: The deduction is allowed as per the limits laid down for the same. the unabsorbed amount is to be carried forward to the subsequent year. 2. However. demerged company. Contribution towards approved gratuity fund. Insurance premium by federal milk cooperative society: Insurance on the life of cattle owned by the members are allowed as deduction. Employees contribution towards staff welfare scheme Any sum received from employee towards contribution for Provident fund or staff welfare scheme is allowed as deduction provided it is paid on or before date. 5. 6. Other deductions (Sec 36): The following deductions are provided under this section: 1. Insurance premium: The amount of any premium paid in respect of insurance of stock or stores used for the purpose of business or profession is allowed as deduction. These are issued by any infrastructure capital company or a public sector company on or after June 1. Such carry forward is permitted till the tenth year from the commercial production after which it will lapse. Interest on borrowed capital If the money is borrowed for the purpose of business or profession then the interest thereon is allowed as deduction.

Any amount paid by employer as premium under keyman’s insurance scheme is fully allowed. • It must have been taken into account in computing assessable income. It should not be personal expenditure of the assessee. 12. Specific disallowances under the Act: The following expenses given by sections 40. Amount not deductible under sec 40 The following amounts are not deductible from the income as per this section: 1. 14. 6. It should not have been incurred for any purpose which is an offence or prohibited by law. The expenditure should not be in the nature prescribed by section 30 to 36. It should have been expended wholly and exclusively for the purpose of business. It should have been incurred in the previous year. Any expenditure which could not be allowed as deduction due to inadequate profit shall be set off and carried forward as unabsorbed depreciation. Advertising Expense Deduction is not available in respect of expenditure incurred by an assessee on advertising in any souvenir. General Deduction (Sec37) This is a residuary section in order to claim deduction under this section. 5. the following conditions need to be satisfied: 1. It should not be in the nature of capital expenditure. A bad debt is allowable as deduction subject to the following conditions: • There must be a debt • Debt must be incidental to the business or profession of the assessee. 7. • 200% of (paid up share capital and general reserve as on the last day of the previous year) minus the balance of the special reserve account.40A and 43B are expressly disallowed under the act. Amount of Deduction: • The amount transferred during the previous year to the special reserve account. Family Planning Expenditure: Any bona fide expenditure incurred by a company for the purpose of promoting family planning among its employees. brochure. 3. If the expenditure is of capital nature. is allowable as deduction. pamphlet or the like published by political party. 13. 41 .11. Whichever is lower of the above. 4. tract. • Debt must have been written off in the books of account of the assessee. Any sum paid for which TDS was deductible but was not deducted or was deducted but paid to the government within the previous year or in subsequent year within the prescribed time. Bad Debt. It should have been incurred with respect to the business carried on by the assessee. 2. • 40% of the profits derived from the business activities. one-fifth of such expenditure is allowable as deduction for the previous year in which it was incurred and the balance in four equal installments. Transfer to Special reserve: Under this section deduction is available to a financial corporation including a public and government company which is engaged in providing the long term finance for industrial or agriculture development. • Transfer to provision for bad and doubtful debts shall not be taken into account.

Recovery against deduction In any earlier years a deduction was allowed to the taxpayer in respect of loss of expenditure or against trading liability incurred by the assessee will be taxable in the current year if he has obtained a refund of such trading liability whether the concerned business is being carried on or not. or in a place where no banking facility exist. 2.by way of cash or by a bearer cheque then 20% of the said payment will be disallowed as deduction. Any sum payable by an employer by way of contribution to provident fund or superannuation fund or any other fund for the welfare of employee.000/. Amount not deductible in respect of contributions to non-statuary funds. payment made for agriculture produce. any sum payable by way of tax. duty or fees 2. facilities etc. However if payment is made before the due date of filing of return then the deduction will be allowed in the year in which the expense is incurred.is allowed as deduction like when the payment is to government or bank. Deemed profits and their chargeability: The following receipts are chargeable to tax as business income: 1. 3. However if the tax is paid subsequently then the deduction is allowed in the year in which it is paid. Amounts not deductible in respect of the expenditure exceeding Rs.000/If an assessee makes any payment in respect of any expenditure for an amount exceeding Rs. Hence if the expenditure is excessive or unreasonable having regard to the fair market value of the goods. Recovery of Bad Debts: 42 . 2. Amount not deductible under sec 40A 1. cess. 5.2. 4. Any sum payable as bonus or commission to employee for service rendered. 20. then the excessive portion shall be disallowed. 3. 20. Interest on any loan or advance taken from a scheduled bank including co-operative bank. 5. Any sum payable by an employer in lieu of leave at the credit of his employee. Amount not deductible under (sec 43B) The following expenses are allowed as deduction only on payment basis: 1.20. 6. However. services. Sale of assets used for scientific use: Where any capital asset used in scientific research is sold without having been used for other purposes and the sale proceeds to the extent of deduction earlier allowed u/s35 will be chargeable to tax as profits from business and profession whether the business for which the deduction was allowed is in existence or not. 3. Any sum payable as interest on any loan or borrowing from a public financial institution or a state financial corporation or a state industrial investment corporation. horticulture or animal husbandry etc. in some cases payment in excess of Rs. Securities transaction tax Fringe Benefit Tax Income tax Wealth Tax Tax on non monetary perquisites paid by the employer. 3.000/. 4. Any payment made by an assessee to a relative or a person having substantial interest in the company is disallowed to the extent it is excessive or unreasonable. 6. The above expenses are deductible in the year in which the payment is made.

the same will be treated as income of the previous year in which such credit appears in the books of accounts of assessee.000 no specified books have been prescribed and the assessee has to maintain such books to enable the assessing officer to assess the income of the assessee. Cash Credit (Section 68: ) Under the section 68 unexplained cash credit in the books of the assessee for which the assessee is unable to offer any explanation or if the explanation offered is not to the satisfaction of the assessing officer. Unexplained money (Section 69A): Any unexplained money. Unexplained Expenditure (Section 69C): Any unexplained expenditure in any financial year for which the assessee offers no satisfactory explanation about the source is taxable as income in the financial year where such unexplained expenditure is incurred.50. Recovery after discontinuance of business or profession: Where any business or profession is discontinued by reason of the retirement or death of the person carrying on such business. In case of specified profession if the gross receipt from profession exceeds Rs 1. authorized representative. 3. 6. film artiest. accountancy.Similarly any bad debts allowed as deduction which was recovered subsequently will be assessed as income to the extent of deduction allowed whether the business is in existence or not. company secretaries. Unexplained Investment (Section 69: ) Under section 69 unexplained investment for which the assessee is not able to offer satisfactory explanation or which is not recorded in the books of the assess will be deemed to the income of the assessee in the financial year. Journal if accrual System of accounting is followed c. any sum recovered after the discontinuance of the business or profession will be deemed to be the income of the recipient and charged to tax in the year of receipt. Section 44 A For the purpose of this section specified profession means a profession of medicine. 2. Taxability of undisclosed Income / Investment: 1. architecture. Ledger 43 . 4.50. bullion or jewellery which is not recorded in the books of assessee for which the assessee is not able to offer explanation to the satisfaction of assessing officer will be treated as the income of the assessee in the financial year in which the assessee is found to be the owner of the same. Amount borrowed or repaid on hundi (Section 69D): Money borrowed by hundi and repayment of it otherwise through an account payee cheque or bank draft will be treated as income in the previous year in which such borrowing or repayment is made otherwise than through account payee cheque. engineering. In the case of specified profession if the gross receipt from profession do not exceed Rs 1. Cash Book b. jewellery or other valuable articles the value of which is not fully recorded in books for which assessee do not give any satisfactory explanation will be treated as income of the financial year for which it is found 5. amount of investment etc not fully disclosed in the books of account (Section 69B) Any investment in bullion.000 prescribed books like a. 4.

Company.d. 2. AOP. AOP.000 such books which may enable the assessing offices to compute the income should be maintained Section 44 AB Following person are required to get their accounts Audited Different Tax payers When they are covered by the provisions of compulsory audit under section 44AB.20. A tax payer can declare his income to be lower than the deemed profit but than he has to maintain books of accounts as per section 44 AA and is also required to get his books of accounts audited under section 44 AB. 5. 44AF. If he so assessed than he is not required to maintain books of accounts as per section 44 AA and is also not required to get his books of accounts audited under section 44 AB. Co-operative Society or any other person who is engaged in the business of plying. Income from above mentioned business is calculated as below: 44 . Income from above mentioned business is estimated at 8% of the gross receipt and all deduction under section 32 to 38 including depreciation is deemed to have been already allowed and no further deduction is allowed. BOI. Special Provisions for computing income on estimated basis Taxpayers engaged in the business of civil construction (Sec44AD) 1. HUF.20. 3. 4.000 no requirement for maintaining any books of accounts In the case of non specified profession or business where the income exceeds Rs 1. Original bill and receipt for any payment exceeding Rs 50 to be maintained In the case of non specified profession or business where the gross income do not exceed Rs 1. firm. HUF. The taxpayer owns not more than 10 goods carriage at any time during the previous year. Taxpayer engaged in the business of plying. 44BB or 44BBB If such person claims that the profits and gains from the business are lower than the profits and gains computed under this section (irrespective of his turnover). profession If his gross receipt in profession for the previous year(s) relevant to the assessment year exceeds Rs 10 Lakhs. 44 AE. Co-operative Society or any other person who is engaged in the business of civil construction or supply of labor for civil construction work is covered under the section. Any Taxpayer who is an individual. Company. turnover or gross receipt in business for the business previous year(s) relevant to the assessment year exceed or A person carrying on exceeds Rs 40 Lakhs.000 or gross receipt do not exceed Rs 10. A person carrying on If the total sales.00. Any Taxpayer who is an individual. A person covered under section 44AD. leasing or hiring trucks (Sec 44AE) 1. firm.00. 2. Serially numbered receipt for any receipt exceeding Rs 25 e. hiring or leasing goods carriages. BOI. Any person whose gross receipt from Business does not exceed Rs 40 Lac.000 or gross receipt exceeds Rs 10.

g.840 5. All deduction under section 32 to 38 including depreciation is deemed to have been already allowed and no further deduction is allowed.800 1.790 740 350 Particulars By Gross profit By Interest on govt securities By Rent from house property Amount 1. 5.: Sri Nebukumar is the proprietor of a business. Company. Co-operative Society or any other person who is engaged in the business of retail trade of any goods or merchandise is covered under the section. HUF. AOP. 4. 4.800 2. 3. BOI.900 750 51. E.400 45 . Particulars To establishment To Rent.400 5. Income from above mentioned business is estimated at 5% of the gross receipt and all deduction under section 32 to 38 including depreciation is deemed to have been already allowed and no further deduction is allowed. A tax payer can declare his income to be lower than the deemed profit but than he has to maintain books of accounts as per section 44 AA and is also required to get his books of accounts audited under section 44 AB. rates and taxes To General charges To Household expenses To Commission To discount and allowance To provision for bad debts To Postage and telegrams To Law Charges To advertisement To Gifts and Presents To Fire Insurance Premium (for goods) To Sale Tax To Repairs and renewals (not for business premises) To Loss on sale of motor car (used for private purpose) To life Insurance Premium on life of his grandson To Wealth tax To Interest on Capital Amount 4.450 480 1. 3. Rs 3250 for every month (or part of a month) during which the goods carriage is owned by the tax payer.200 270 450 1550 150 360 1.Type of goods Carriage Heavy goods Vehicle Other than Vehicle heavy goods Estimated Income Rs 3500 for every month (or part of a month) during which the goods carriage is owned by the tax payer. 2.500 450 1. 5. 2003 is as follows. A tax payer can declare his income to be lower than the deemed profit but than he has to maintain books of accounts as per section 44 AA and is also required to get his books of accounts audited under section 44 AB.730 1. Any Taxpayer who is an individual. Taxpayers engaged in the business of retail traders (Sec44AF) 1. If he so assessed than he is not required to maintain books of accounts as per section 44 AA and is also not required to get his books of accounts audited under section 44 AB. If he so assessed than he is not required to maintain books of accounts as per section 44 AA and is also not required to get his books of accounts audited under section 44 AB. firm.50. Any person whose gross receipt from Business does not exceed Rs 40 Lac. His profit and loss account for the year ended March 31.

000 on Advertisement in a souvenir published by a political party) (6) Provision for excise duty 40. (8) Holiday home Expenses (9) Premium paid to the general insurance corporation 10.000 Amount 200. Mr. (c) Advertisement expenses include Rs 550 spent on special advertisement campaign to open a new shop in the market.900 80.000 50.640 161.000 46 . (e) Law Charges are in connection with a Trademark. nothing has been deducted To P & L account this year on this account (4) Provision for Income Tax and Wealth Tax (5) Advertisement expenses (This includes Rs 4. The research does not relate to the business of assessee.700 as per Income Tax Rules. (f) Sri Nebukumar carries on his business from rented premises. rates and taxes include Rs 2. (d) Depreciation allowable is Rs 1.000 (11) Interest on late payment of sale tax Compute income from Business 1. half of which is used as his residence. Particular (1) Net profit s per Profit and Loss A/c (2) Contribution to un recognized provident fund (3) Lump sum consideration paid during 1997-98 For acquiring know – how. Rent. 2003.500 3.000 (7) Amount paid to ambedkar university for research in 10.000 30.000 120.To Audit Fee To Interest on Bank Loan To provision for depreciation To provision for Income Tax To Net profit transferred to Capital Total 300 1.840 161.000 20.380 2. All items except (iii) have been debited to P & L A/c. X gives you the following particulars from his account for the year ended 31st March. (b) Amount of income tax actually paid during the year is Rs 4.000 Social science.640 Following further information is given: (a) Actual Bad debts written off during the year amount to Rs 550. Compute the Business Income of Sri Nebukumar. Working notes are to form part of your answer.200.400 paid as rent of the premises during the year.000 Of India by cheque for the Insurance of health of employees (10) Penalty imposed by costumes authority for breach of law 25.000 35.

Any asset which is held by assessee for more than 36 month is known as Long Term Capital Asset.5% Gold Bonds. 54 EC. 54G. 4. 54 B. 2. Transfer of a capital asset by a Company to its 100% subsidiary. 54 G. 54F. Capital Assets: A capital asset is defied to include property of any kind. excluded from the definition of “Capital Assets”. Distribution of assets at the partition of HUF. 1977 or 7% Gold Bonds. 5. The following assets are. 4. Agricultural land in India. which is situated in rural area. tangible or intangible. 54B. 3. 2. 6. 1999. Short term / Long Term Capital Asset: Short Term capital assets means a capital asset held by an assessee for not more than 36 months immediately prior to its date of Transfer. movable or immovable. Special bearer bonds. Movable property including wearing apparels and furniture held for his personal use or for the use of any member of is family. however. 1991. Distribution of capital assets at the time of liquidation of a Company. 54 D. • Equity or preference share in a Company. consumable or raw material held for the purpose of Business or profession. 54 F. government securities) • Units of UTI • Units of a mutual fund specified under section 10(23D) • Zero Coupon bonds Transfer of Capital Assets: Transfers in relation to capital assets include sale. Gold Deposit Bonds issued under Gold Deposit Scheme. Transfer of a capital asset under a gift or will or under an irrevocable trust. 54D. Exception: In the following cases an asset held for not more than 12 months is treated as short term capital asset. Any stock and Trade. 6. 1980 or national defense Bonds. 54GA. • Securities (like debentures. Basis of charge sec 45: Capital gain’s gain tax liability arises only when the following conditions are satisfied: • There should be a capital asset • The capital asset is transferred by the assessee • Such Transfer takes place during the previous year • Any profit or gain arises as a result of transfer • Such profit or gain is not exempt from tax under Sec 54. 1. 54 GA & 54H gives the list of exemptions.Ch. Sec 46. whether fixed or circulating.7 INCOME UNDER THE HEAD CAPITAL GAIN Any profit and gain arising on Transfer of a capital asset is chargeable under sec 45. 47 . While Sec 54. Following transactions are not regarded as Transfer: 1. exchange or relinquishment of asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law {Sec 2 (47)}. 54EC. 3. 47 gives such transactions which are not considered as Transfer. 1980 issued by Central Government.

5. Transfer of share of Indian Company held by a foreign company to another foreign company in case of amalgamation. 6. Transfer of capital asset of a banking Company to another banking company n case of amalgamation. 7. Transfer in a demerger of capital assets by the demerged company to the resulting company. 8. Transfer of capital assets (being FCCB or GDR) by a non resident to another non resident. 9. Transfer of agricultural land in India march 1, 1970. 10. Transfer of a capital asset (being work of art, manuscript, painting etc) to government / university / national museum etc. 11. Transfer by way of conversion of bonds or debentures into shares. 12. Transfer by way of exchange of a capital asset being membership of a recognized stock exchange for shares of a company. 13. Transfer of land by a sick Industrial Company which is managed by its workers Cooperative. 14. Transfer of a capital asset by a firm to Company in case of conversion of firm into Company. 15. Transfer of a capital asset, being a membership right held by a member of recognized stick exchange in India. 16. Transfer of a capital asset to a Company in the case of conversion of preparatory concern into a Company. 17. Transfer involved in a scheme of lending of securities.

Mode of computation of capital gains (Sec48): Computation of Short Term Capital Gain • Find out full value of consideration • Deduct the following  Expenditure incurred wholly and exclusively in connection with such transfer  Cost of acquisition  Cost of improvement • From the resulting sun deduct the exemption provided by section 54B, 54D, 54G and 54GA • The balancing amount is short term capital gain. Computation of Long Tern Capital Gain • Find out full value of consideration • Deduct the following  Expenditure incurred wholly and exclusively in connection with such transfer  Index cost of acquisition  Index cost of improvement • From the resulting sum deduct the exemption provided by sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA. • The balancing amount is long term capital gain.

Cost of Acquisition (Sec 49): Cost of Acquisition of an asset is the value for which it was acquired by the assessee. Expenses in the capital nature for completing the title for the property are included in the cost of acquisition.

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Cost of asset for the previous owner Sec 49(1): The cost of previous owner is deemed to be the cost of acquisition to the assessee in cases where capital asset becomes the property of assessee under any of the mode described below: 1. Acquisition of property in case of partial or total partition of HUF 2. Acquisition of property in case of gift or will 3. Acquisition of property in case of : • Succession or inheritance • Any distribution of assets on the dissolution of a firm, BOI or AOP • Distribution of assets on the liquidation of a company • Under a transfer of revocable trust or an irrevocable trust. • Any transfer from a wholly owned subsidiary to its holding company or vice versa. • Under any scheme of amalgamation. The holding period of the previous owner is also counted for determining whether the amount is short term or long term capital asset nut indexation will be allowed from the time when the asset is acquired by the assessee. Cost of Acquisition being the fair market value as on April1, 1981: In the following cases, the assessee may take at his option, either actual cost or the fair market value of the asset ( other than a depreciable asset) as on April 1, 1981 as cost of acquisition: a) Where the capital asset became the property of the assessee before April 1, 1981. b) Where the capital asset became the property of the assessee by any mode referred to in sec 49(1) and the property was originally acquired before Aril 1, 1981. In case of depreciable asset cost of acquisition is taken as the WDV at the end of the previous year along with any expenses on transfer of the asset. Any such capital gain is treated as short term capital gain. Determination of indexed cost of Acquisition/ indexed cost of improvement: Indexed Cost of Acquisition= Cost of Acquisition Cost inflation index for the year in which the asset is acquired/1980-81 Indexed cost of improvement= Cost of improvement incurred x Cost inflation index for the year in Cost inflation index for the year in which which the asset is sold/ transferred the improvement took place E.g.: 1. From the following information compute the capital gains for the assessment yearv200809 House I House II x Cost inflation index for the year in which the asset is sold/ transferred

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Date of Purchase Cost of Acquisition Cost of Add Construction in 1980 Fair market value on 1-4-1981 cost of add construction in 1993-94 Sale of property in 2006-07 Cost inflation index are: 1981-82= 100 1993-94= 244 2006-07= 519

May 1976 190,000 10,000 175,000 48,800 1050,000

Dec 1979 250,000 25,000 350,000 73,200 19,00,000

X Ltd owns the following assets: Units of UTI House Property Cost of Acquisition 140,000 70,000 Date of Acquisition March10, 2004 March 10, 2004 These capital assets (no depreciation is claimed) are transferred by X Ltd to its wholly owned subsidiary company S Ltd on April 1, 2005. On July 7, 2006 these assets are transferred by S ltd for a consideration of Rs. 450,500 (i.e. units Rs.215700, house property Rs.234,800). Compute the capital gain chargeable to tax in the case of S Ltd for the assessment year 2007-08. Capital Gain in case of conversion of capital asset into stock in trade: The fair market value of the capital asset on the date on which it was converted or treated as stock in trade shall be deemed to be full value of the consideration received or accruing as a result of the transfer of the capital asset. Transfer of capital asset by a Partner to a firm: In case an asset is transferred by a partner to a firm then the capital gain is chargeable to tax in the previous year in which such transfer takes place and the amount recorded in the books of account of the firm as the value of asset shall be taken as full value of consideration received as a result of such transfer. Distribution of capital asset on dissolution: In case a firm is dissolved and the asset is given/sold to a partner than the capital gain will be calculated as taxable in the hands of firm and it is taxable as income in the year it is transferred. For computing capital gain the fair market value is taken of the asset is taken as the full value of consideration. Capital gain in case of self generated assets: If any self generated assets like goodwill or right to carry on business, tenancy right route permit etc is sold then the cost of acquisition is taken as nil. Only the cost of transfer is allowed as deduction. Capital Gain on transfer of Bonus share: Different Situations Cost of Acquisition of bonus shares allotted before April 1, 1981 Cost of Acquisition of bonus shares allotted on or after April 1, 1981 Special Provisions Fair market value on April1, 1981 is taken as cost of acquisition Cost of Acquisition is taken as Zero

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A new house property should be purchased / acquired within a specified time limit. Land may be in urban or rural area. 51 . 4. 2. (A) Cost of acquisition of residential house in 1983 -84 -384000 (B) Sale consideration on 2-06-2002 . The amount of capital gain generated on Transfer of agricultural land. b. The amount invested in purchasing a new agricultural land.17. If the amount is not utilized for purchase / construction of the new property till the due date of submission of Return of Income than it should be deposited in capital gain deposit account scheme.300. 5. Particular Time limit For purchasing a new residential property Within One year before or within 2 years after date of Transfer of house property.00. Amount of Exemption:  The amount of capital gain generated on Transfer of Residential house property.  The amount invested in purchasing or constructing new residential property. 4. 3. Agricultural land was used by the taxpayer or his parents for agricultural purpose for a period of two years immediately preceding the date of Transfer. Exemption is available only if the capital asset which is transferred is a residential house property. The tax payer is an individual 2. For constructing a new residential property The Construction should be Complete within 3 years from the date of Transfer of house property. 5. The tax payer has purchased another land of agricultural purpose within a period of two years from the date of transfer. 6. Which ever is lower. House property should be a long term Assets. If the new residential property is transferred within a period of three years from the date of acquisition or completion of construction the amount of assumption given earlier will be taken back. Amount of exemption: a. Only and individual and HUF can claim exemption under this section. whose income is taxable under the head Income from house property.Y 2003-04.000 The due date of filing the return for AY 2003-04 The cost of inflation Index in 1983-84 was 116 and 2002-03 it was 447. 1.000 ( C) Cost of Construction of the new residential house by . Capital Gain arising form the transfer of Agricultural land (Sec 54B) Exemption under this section are available if following provisions are met: 1.Period of holding bonus shares The period of holding shall be determined from the date of allotment of bonus shares (and not from the date of acquisition of original shares) CAPITAL GAIN. 3. he transfers an agricultural land it may be a long term / short term capital assets 3.EXEMPTIONS Capital Gain arising form the transfer of the residential Property (Sec 54) Exemptions under following conditions are met. Example: From the following information compute the capital gains liable to tax in the A. 2.

ii. Newly acquired land or building should be used for the purpose of shifting or reestablishing the said undertaking or setting up another industrial undertaking.Calculate capital gain chargeable to tax in to tax for AY 2003-04. The amount invested in specified asset as discussed above. Capital Gain under compulsory acquisition of land and building forming part of industrial undertaking (section 54D) Exemption under this section is available if following provisions are met: 1. A long term capital asset is transferred by an assessee during the previous year. Amount of Exemption: a. 4. Which ever is lower. 52 . 6. Amount of Exemption: i. 4. 3. 2. The taxpayer may be an individual. Company or any other person 2. The asset may be short term / long term 3. The cost of specified assets shall not be eligible under section 88 and deduction under section 80C. Which ever is lower. Such land or building was used by the assessee for the purpose of the industrial undertaking for at least two years preceding the date of compulsory acquisition. Capital gain arises on transfer by way of compulsory acquisition of land or building which forms a part of an industrial undertaking belonging to the taxpayer.Which ever is lower. 3. 2. Firm. 3. 5. 2. The cost Inflation Index in 1984 – 85 was 125 and 2003-04 was 447. The investment made on or after 01-04-2007 can not exceed Rs 50 lacs. Assessee has purchased nay other land or building within a period of three years from the date of receipt of compensation or constructed a building within such period. Example: Agricultural land purchased in 1984-85 for Rs 46500 is sold for Rs 380000 on 01-052002. HUF. Capital Gain not to be charged on investment in certain bonds (sec 54 EC) The salient features of section are as under: 1. Firm. The amount of capital gain generated on Transfer by way of Compulsory acquisition of land or building. If the amount is not utilized for purchase / construction of the new land of building till the due date of submission of Return of Income than it should be deposited in capital gain deposit account scheme. The amount of capital gain generated on Transfer of capital asset. 5. 3. The amount invested in new land of building. The taxpayer may be an individual. The assessee purchased another piece agricultural land on 1-08-2003 for Rs 70000 and deposited Rs 30000 on 24-06-2003 in capital gain account scheme 1998. 7. 2006 by  National highway authority of India  Rural Electrification Corporation Ltd. If the new agricultural land is transferred within a period of three years from the date of acquisition the amount of exemption given earlier will be taken back. from the assessment year 2006-07 this specified assets are any bonds redeemable after three years issued after march 31. b. Within six month from the date of transfer of the assets the assessee should invest the whole or any part of the capital gain in long term specified assets. If the new land or building is transferred within a period of three years from the date of its acquisition or completion of construction the amount of exemption given earlier under section 54 D would be taken back. If the amount is not utilized for purchase of the new agricultural land till the due date of submission of Return of Income than it should be deposited in capital gain deposit account scheme. Company or any other person 2.

For constructing a new house The Construction should be Complete within 3 years from the date of Transfer of house property. gold.4. Amount of exemption will be calculated as under: Cost of new house x Capital gain Net sales consideration 6. 4. or in consequence of. 8. If the specified asset is transferred / converted into money or any loan or advance is taken on the security of specified asset within 3 year from the date of acquisition than the exemption given will be charged to tax in the year in which it was so transferred / converted into money or any loan or advance is taken Capital Gain on transfer on a long term capital asset other than a house property (Sec 54 F): Exemption under this section is available if following provisions are met: 1. b) Acquired building or land or constructed building for the purpose of his business in the said area. 3. 7. A new house property should be purchased / acquired within a specified time limit. d) Incurred expenses on such other purposes as may be specified in a scheme framed by the central government. If the amount is not utilized for purchase / construction of the new property till the due date of submission of Return of Income than it should be deposited in capital gain deposit account scheme. c) Shifted the original asset and transferred the establishment of such undertaking to such area. within a period of two years of the date of transfer of original asset. a plot of land. If the new residential property is transferred within a period of three years from the date of acquisition or completion of construction the amount of assumption given earlier will be taken back. or construct within a period of 3 years of the transfer of such asset. 2. A capital asset used for the purpose of an industrial undertaking situated in an urban area is transferred. The exemption is available only if on the date of transfer of the original asset. The assessee has within a period of one year before or 3 years after the date on which the transfer took place: a) Purchased a new machinery or plant for the purpose of business of the industrial undertaking in the area to which the said undertaking has shifted. Particular For purchasing a new house Time limit Within One year before or within 2 years after date of Transfer of original asset. Only and individual and HUF can claim exemption under this section. Capital Gain on transfer of assets in cases of shifting of industrial undertaking from urban area (Sec 54G): To claim exemption under this section following conditions need to be fulfilled: 1.g. the taxpayer does not own more than one residential house other than the new house. share etc) 3. 4. the shifting of such industrial undertaking to any area other than an urban area. The amount of exemption is equal to- 53 . a residential house other than the new house then the exemption will be withdrawn. Exemption is available only if the capital asset which is transferred is a long term capital asset but other than a residential house property (e. 5. The transfer is effected in the course of. 2. If the assessee purchases a new house.

000 20.000 600. Besides this the chapter deals with all the provisions of the act which have a bearing on the computation of income taxable as income from other sources.2006outside a recognized stock exchange and secondly on the assumption that equity shares are transferred on February 27.000 • Sales consideration of equity shares Indexed cost of acquisition of equity shares Sales consideration of Gold Indexed cost of acquisition of gold Other income PPF contribution Find out the net income and tax liability of Mrs.000 420. 54 .000 10. E.000 600.: The following information is given by Mrs.000 380.000 Mrs.000 800.000 40. X (26 years) and Mrs. 6.2007in the NSE. 5. section 57 and 58 specifies the basis of computation of such income. If the amount is not utilized for purchase / construction /acquisition of the new asset till the due date of submission of Return of Income than it should be deposited in capital gain deposit account scheme. Y (32 years) for the assessment year 2007-08 Mrs. Whichever is lower.000 145.The amount of capital gain generated on transfer of capital assets in case of shifting of an industrial undertaking • The cost and expenses incurred in relation to all or any of the purposes mentioned in point 3. Section 56 gives the scope of income chargeable under this head. X for the assessment year 2007-08 firstly on the assumption that equity shares are transferred on October 31.8 Income from other sources “Income from other sources” is the last head of income specified under sec 14.g. Y (Rs) 95.000 60. Ch. X (Rs) 70. If the new asset is transferred within a period of three years from the date of its purchase/construction/acquisition the amount of exemption given earlier under section 54 G would be taken back.

Where any sum of money received during a previous year without consideration by an individual or a HUF from any person or persons exceed Rs. Interest on securities sec 2(28B): Interest on securities means: 1. Any sum received by the assessee from his employees as contribution to any staff welfare scheme. A source of income which does not fall under any of the other four heads of income is to be computed and brought to charge under section 56. Interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation. Basis of Charge: Interest on security is charged to tax on cash basis if the assessee maintains his books of account on cash basis. Interest on securities. interest on bank deposit and loans. General Provisions Sec56 (1): Income from other sources is the last and residual head of income. races including horse races. interest on royalty. bonds or certificates.Basis of charge: Special Provisions Sec56 (2): The following incomes are always chargeable under the head Income from other sources: 1. 3. If dividends are distributed after March 31. the whole of such sum. ground rent. dividend 2. such dividend is chargeable to tax in the hands of recipient. agricultural income from outside India etc.g. distributed or paid by a company to its shareholders is chargeable to taxed under the head “Income from other sources” irrespective of the fact whether the shares are held by the assessee as investment or stock in trade. Interest exempt from Tax: Interest on the following is exempt from Tax:  Interest on notified securities. directors fees. Dividend and its taxability: Any dividend declared. 50. Income from machinery. 5. card games and other games of any sort or from gambling or betting of any form or nature whatsoever. 55 .000. 2003. if the same is not taxable as business income under section 28. It is taxable on due basis if the assessee maintains his books of account on mercantile basis. For e. Plant or furniture let out on hire. If a loan or advance given is deemed as dividend under sec 2(22) (e) then such loan or advance is taxable u/s56 a dividend in the hands of recipient. crossword puzzles. However the above exemption is not applicable in the hands of non-domestic company and consequently.: income from subletting. 6. interest on any security of the central government or state government 2. 2003: For dividend declared by a domestic company any dividend declared and distributed or paid after March 31. Interest on securities Sec 56(2) (id): Income by way of interest on security is taxable under the head “Income from other sources”. Any winning from lotteries. 4. On such dividends the company declaring dividend will pay dividend tax under section 115O. then it is not taxable in the hands of shareholders.

This is done generally by the high income class assessee to evade the tax while transferring securities to low income class assessee on the eve of getting the interest as interest is charged in the hands of legal owner of securities on the due date of payment of interest. Personal Expenses 2. a person transfers security to another person and reacquires the same or similar securities after interest has been received by the transferee. Interest received by a non resident Indian from notified Bonds. SALES CUM INTEREST Sec (94 (2)) If an assessee having beneficial interest in securities during the previous year sells them in such a way that either no income is received or income received is less than the sum he would have received if interest had accrued from day to day. Interest on securities held by welfare commissioner. Amount specified by sec 40A Ex: 56 . 15.or 331/3 % whichever is less. Commission or remuneration for realizing dividend or interest on securities. Specific Disallowances: 1. 1999. net interest plus tax deducted at source) is taxable. 2. To stop such malpractice the below two sections are introduced. Gross Interest = net interest x 100 100. Grossing up of Interest: Gross Interest (i. Interest on deposit made by a retired government employee or an employee of a public sector company out of money due to him on retirement. Net Interest is grossed up in the hands of recipient if tax is deducted at source by the payer. Interest payable to any foreign bank performing central banking functions outside India. 3. Any other expense for earning income.      Interest on 7% Capital Investment Bonds in the hands of individual and HUF.Rate of TDS Deduction u/s 80L: No deduction is available u/s 80L from the assessment year 2006-07. Standard deduction in case of family Pension to the tune of Rs. Bhopal gas victim. Interest and salary payable outside India on which TDS is not deducted 3. If. Interest on gold deposit bonds issued under the gold deposit Scheme. The transferor would be able to evade tax in respect of such tax. Wealth Tax 4. Deductions Permissible: The income is computed after making the following deductions: 1.e. then income from such security for such year would be deemed as income of such person.000/. Avoidance of Tax (Sec 94) Interest on security does not accrue from day to day but on certain fixed dates. To prevent this sec 94(1) provides that when such transaction takes place then the income will be included in the hands or transferor and not of the transferee. on the eve of due date of payment of interest. BOND WASHING TRANSACTION (Sec 94 (1)) A transaction which consist of selling securities some time before the due date and acquiring the same/ similar after the due date of interest is over is called Bond washing transaction.

Calculate the taxable income of X for the assessment year 2007-08 on the assumption that his business income is Rs. 2006on his marriage anniversary. in respect of income which legally belongs to some other person. however.64.000 8% debentures of PQR Ltd.100. 25. These sections have been introduced to counteract the practices of tax avoidance. The taxpayer owns an asset which is not transferred by him. 2. 57 . Transfer of Income without transfer of asset (sec 60): Section 60 is applicable if following conditions are satisfied: 1. 2006: 5% UP government loan (date of payment of interest: January 1) Rs. In some cases. Chapter 9: Clubbing of income Generally a person is taxed in respect of his own income. 2006. X sells Rs.000 6% Non listed debenture of ABC Ltd.40. 000. (dates of payment of interest: June 1 and December 15 every year) On December 1. 8% debenture of PQR Ltd.000 in foreign currency from a friend on December 1.000 and he has received a gift of Rs. (dates of payment of interest: June 11 and December 11 every year) Rs. The income from such asset is transferred by him to any other person.1000. the income tax deviates from this principle and a person is taxed under section 60 to 64.X holds the following securities on April 1.

If the above conditions are satisfied. The taxpayer is an individual. 3. 3. When an individual is assessable in respect of income from asset transferred to spouse (sec64 (1) (iv)) The following conditions should be satisfied: 1. 4. the income from the asset would be taxable in the hands of transferor. When an individual is assessable in respect of income from asset transferred to son’s wife (sec64 (1) (vi)) 1. 5. 6. 4.  In connection with an agreement to live apart. 2. 4. 2. A transfer containing any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor 2.. Revocable Transfer of Asset (Section 61) By virtue of section 61. The asset is transferred to his/ her spouse. 6. if an asset is transferred under a revocable transfer. He/ she have transferred an asset (other than a house property). It is transferred for the immediate or deferred benefit of his/ her spouse. Spouse of the taxpayer is employed in the above mentioned concern. 5. The taxpayer is an individual and has a substantial interest in a concern. 2. The taxpayer is an individual. 5. The asset may be held by the transferee in the same form or in a different form. If the above conditions are satisfied. 1973 3.. The asset may be held by the transferee. 6. The transfer is without adequate consideration. income from such asset is taxable in the hands of the transferor. When an individual is assessable in respect of income from asset transferred to a person for the benefit of spouse (sec64 (1) (vii)) 1. The above transfer may be revocable or irrevocable. The transfer may be direct/ indirect. The asset is transferred otherwise than  For adequate consideration. Spouse is employed in the concern without any professional or technical knowledge or experience. He/ she has transferred an asset. When an individual is assessable in respect of remuneration of spouse: The provisions of section 64 are given below: 1. any income from such asset shall be deemed to be the income of the taxpayer who has transferred the asset. The transfer may be direct/ indirect. The asset is transferred to his/ her son’s wife. If the above conditions are satisfied. 2. The transfer may be direct/ indirect. The taxpayer is an individual. The asset is transferred otherwise than for adequate consideration. The asset is transferred to a person or an association of persons. 4.3. 3.spouse in the same form or in a different form. Revocable transfer: 1. He/ she has transferred an asset after May 31. If the aforementioned conditions are satisfied then salary income of the spouse will be taxable in the hands of the taxpayer. 58 . A transfer which in anyway gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets. any income from such asset shall be deemed to be the income of the taxpayer who has transferred the asset.

5. The transfer may be direct/ indirect. 6. He/ she has transferred an asset after May 31. 2. Income of a minor child (from all sources) suffering from any physical disability. then income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset. If the amount is invested in the business but as a capital contribution in the partnership firm the amount shall be calculated as under: Value of the assets transferred by Transferor on the first day of PY Total investment on the 1st day Of PY by transferee x the profit share of transferee from business 2. The asset is transferred to a person or an association of persons. However the profit will not be included in the income of the transferor. The transfer is without adequate consideration. The income of the minor will be included in the income of that parent whose total income is greater. Where the marriage of the parent does not subsist. 3. The taxpayer is an individual. the income of minor will be included in the income of that parent who maintains the minor child in the relevant previous year. Appropriation when transferred asset is invested in a business: An asset (whether in cash or kind) is transferred to a spouse or to a son’s wife directly or indirectly without adequate consideration and such asset is invested in the business. When clubbing is not attracted: 1. 4. 1973. If the above conditions are satisfied. then income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset. If the investment is in the nature of capital contribution as a partner in a firm the interest received or receivable from the firm on such capital contribution will be included in the income of the transferor. In case the income of an individual includes the income of his or her minor child then such individual is entitled to exception of Rs. Income of a minor child on account of any manual work. 3. Clubbing in the hands of parent: 1. When an individual is assessable in respect of income from asset transferred to a person for the benefit of son’s wife (sec64 (1) (viii)) 1. Income of a minor child (Sec 64 (1A)): All income which arises or accrues to the minor child shall be clubbed in the hands of his parents. 2.If the above conditions are satisfied. Then the amount of income that will be clubbed in the hands of the transferor will be as under: 1. Income of a minor child on account of any activity involving application of his skill. It is transferred for the immediate or deferred benefit of his/ her son’s wife. talent or specialized knowledge and experience. Cross-transfer: 59 . 1500 in respect of each minor child as per section 10 (32). 2.

: The income of a family is as under: 1.000 5.000 6. Minor son ( from interest from a company) the amount for investment received from grand father 10.000 2. The income derived from the converted property will be included in the hands of individual and not in the hands of the family. Amount of investment etc not fully disclosed in the books of account (Section 69B) Any investment in bullion. bullion or jeweler which is not recorded in the books of assessee for which the assessee is not able to offer explanation to the satisfaction of assessing officer will be treated as the income of the assessee in the financial year in which the assessee is found to be the owner of the same. jeweler or other valuable articles the value of which is not fully recorded in books for which assessee do not give any satisfactory explanation will be treated as income of the financial year for which it is found Unexplained Expenditure (Section 69C): Any unexplained expenditure in any financial year for which the assessee offers no satisfactory explanation about the source is taxable as income in the financial year where such unexplained expenditure is incurred. Unexplained money (Section 69A): Any unexplained money. Ram (from business) Rs. 250. Mr.transfer of assets (for instance A gifts to B’s wife and vice versa) then as per the decision of Madras high court if the cross transfer are independent of each other and real. Cash Credit (Section 68): Under the section 68 unexplained cash credit in the books of the assessee for which the assessee is unable to offer any explanation or if the explanation offered is not to the satisfaction of the assessing officer. 60 . then the transfer shall be regarded as an indirect transfer by the transferor and it will fall within sec 64. such property is known as converted property. Unexplained Investment (Section 69): Under section 69 unexplained investment for which the assessee is not able to offer satisfactory explanation or which is not recorded in the books of the assess will be deemed to the income of the assessee in the financial year. Mrs. Income of mentally handicapped minor child Rs. If two transfers are interconnected and are parts of the same transaction adopted to avoid tax. E. Ram ( salary from a school computed) 140. 40. otherwise than an adequate consideration.When there is cross.000 3. Amount borrowed or repaid on hundi (Section 69D): Money borrowed by hundi and repayment of it otherwise through an account payee cheque or bank draft will be treated as income in the previous year in which such borrowing or repayment is made otherwise than through account payee cheque.000. Income from converted property (Sec64 (2)): Where an individual being a member of HUF transfers is separate property after December 1969 to the family for common benefit of the family. the same will be treated as income of the previous year in which such credit appears in the books of accounts of assessee. Minor son Y (from acting in films) 60.000 4.g. the income must be included in the hands of the recipient. Minor daughter Z ( from lottery) The lottery ticket was gifted to her by her maternal uncle 6.

To calculate total income. loss under any source or head of income is to be adjusted. 3. Exceptions: 1. is a loss. under the same head of income. 2. the assessee is entitled to have the amount of such loss set off against his income form income under any other source under the same head of income for the same assessment year. Loss from a speculation business can be set off only against profit from a speculation business.70) If the net result for any assessment year. SET OFF AND CARRY FORWARD Tax is levied on assessee total income. Carry forward of loss if the loss could not be set off under the above two steps. Discuss in whose hands the incomes are assessable and to what extent? Chapter 10.e.head adjustment in the same assessment year if a loss cannot be set off under step 1. grand father and maternal uncle.The amount for investment received from his father. Inter source adjustment i. in respect of any source under any head of income. The process of setting off and carry forward of losses may be covered as under: 1. 2. Inter. Sec 70 -80 deal with various provisions regarding set off and carry forward of profit and losses. 61 . Inter-source adjustment (sec. Long term capital loss can be set off only against long term capital gain.

The above limit of 8 years is not applicable on unabsorbed depreciation. 5. Loss can be carried forward by the person who incurred the loss. is periodically settled. Loss cannot be setoff against winning from lotteries. The above limit of 8 years is not applicable on unabsorbed depreciation. Carry forward and set off speculation loss: A Speculation transaction is that transaction in which a contract for the purchase or sale of any commodity. capital expenditure on scientific research and family planning expenditure. Loss can be carried forward by the person who incurred the loss. Carry forward of losses: Under the act following losses can be carried forward: 1. Return of loss should be submitted in time prescribed. Loss can be carried forward for 8 years. 4. Return of loss should be submitted in time prescribed. Loss under the head “Profit and gains of business and profession” 3. 5. 62 . 3. 3. Loss can be set off only against business income. Losses under the head capital gain cannot be set off against any income except income under the head capital gain. the same can be set off against the income from other heads. crossword puzzles etc. crossword puzzles etc. Loss from owing and maintain race horses can be set off only against income from such business. Loss can be set off only against speculation income. Loss from the activity of owing and maintaining race horses. 2. 5.3. Carry forward and set off business loss other than speculation loss: 1. Loss can be carried forward for 4 years ( up to assessment year 2005-06 8 yrs) 4. 2. Inter. Short term capital loss can be set off against short-term or long term capital gain. Losses under the head income from house property. Continuity of business not necessary. 3. 2. Loss from a speculation business can be set off only against profit from a speculation business. Such loss can be carried forward for eight assessment years immediately succeeding the assessment year in which the loss was first computed. 4. Loss cannot be setoff against winning from lotteries. capital expenditure on scientific research and family planning expenditure. Other remaining losses cannot be carried forward. otherwise than by actual delivery or transfer of the commodity or scrip. 2. Continuity of business not necessary.head Adjustment: Where the net result of computation made for assessment year in respect of any head of income is a loss. 6. Exceptions: 1. 1. 4. Long term capital loss can be set off only against income of long term capital gain. 6. Business losses cannot be set off against salary income. 2. 3. Loss under the head capital gain 4. Carry forward and set off capital loss: 1. including stocks shares. Loss from owing and maintain race horses can be set off only against income from such business. 6. Long term capital loss can be set off only against long term capital gain.

Long term capital loss on sale of shares 24000 The following items have been bought forward: Business loss AY 2002-03 Loss from house property . Loss on sale of shares. securities or units: In case a person is having securities as stock in trade and has bought forward business loss under the head profit and gains from business such loss can be adjusted from interest on securities.000 4. Ram submits the following particulars of his income and loss for the assessment year 200304: 1. Carry forward and set off loss from house property: If the assessee incurs any loss under the said head and such loss could be setoff during the assessment year.g. Loss can be carried forward for four assessment year immediately succeeding the assessment year in which the loss was incurred. Profit and gains from personal business 25000 3.: Mr.Loss on account of interest 1998-99 .Carry forward and set off loss from owing and maintaining race horses: 1. then the loss can be carried forward and set off in subsequent previous year subject to a limit of 8 assessment years against income from house property. Share of Profit from AOP (AOP has paid tax at Maximum marginal rate) 10. Long term capital gain on sale of building 17000 6.Loss on account of interest 2002-03 Compute his gross total income and deal with the carried forward losses. 30000 17000 21000 63 . 2. Such loss can be carried forward only if the activity of owing and maintaining race horses is carried on by the assessee in the previous year in which the brought forward loss is to be setoff. Income from House Property 18000 2. Short term capital gain 8000 5. E.

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