FINAL COURSE STUDY MATERIAL

PAPER

Direct Tax Laws

Assessment Year 2013-14
[Relevant for May 2013 and
November 2013 examinations]

Volume I

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

The Institute of Chartered Accountants of India

This study material has been prepared by the faculty of the Board of Studies. The
objective of the study material is to provide teaching material to the students to enable
them to obtain knowledge and skills in the subject. Students should also supplement their
study by reference to the recommended text book(s). In case students need any
clarifications or have any suggestions to make for further improvement of the material
contained herein they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for
the students. However, the study material has not been specifically discussed by the
Council of the Institute or any of its Committees and the views expressed herein may not
be taken to necessarily represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

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October, 2012

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A WORD ABOUT STUDY MATERIAL

Direct tax laws is one of the core competence areas of the Chartered Accountants. A
thorough knowledge of direct tax laws is, therefore, necessary for the students of the CA
Final course. In the Final course, Direct Tax Laws constitutes Paper7. Students are
expected to acquire advanced knowledge of the provisions of direct tax laws after
undergoing this course and apply such knowledge to various situations in actual practice.
The first part of this study material deals with income-tax. There are 28 chapters under
income-tax. The second part of this study material is on wealth-tax. There are 3 chapters
under wealth-tax. The subject matter in this study material is based on the law as
amended by the Finance Act, 2012 and applicable for A.Y. 2013-14. In this study
material, efforts have been made to present the complex direct tax laws in a lucid manner.
The latest amendments have been given in bold italics. Chapters are organised in a
logical sequence to facilitate easy understanding. Further, the amendments made by
the Finance Act, 2012 and incorporated in this study material have been tabulated
chapter-wise with the corresponding section reference and given as Significant
Amendments Incorporated in this Edition. The illustrations which have undergone changes
due to these amendments as well as the new illustrations have been given in a shaded
background.
The taxation laws in our country undergo many amendments. In order to help the students
to update their knowledge relating to the statutory developments in the field of direct and
indirect tax laws, the Board of Studies brings out, every year, a Supplementary Study
Paper containing all the amendments in direct and indirect tax laws. This is an essential
read for all our students.
A word of advice to the students please make it a habit of referring to the Bare Acts as
often as possible. This will not only facilitate the process of understanding the law and
the sequence of sections in these Acts, but will also equip them with the professional
expertise that is expected.
Study Material of Direct Tax Laws is made in three volumes for ease of handling by the
students. Volume I contains Chapters 1 14 of Income-tax, and Volume II contains
Chapters 15 28 of Income-tax and Chapters 1 3 of Wealth-tax. Volume III is the
Practice Manual.
Finally, we would welcome suggestions to make this study material more useful to the
students. In case of any doubt, students are welcome to write to the Director of Studies,
The Institute of Chartered Accountants of India, A-29, Sector - 62, Noida 201 301, India.
Happy Reading and Best Wishes!

The Institute of Chartered Accountants of India

SYLLABUS
PAPER 7 : DIRECT TAX LAWS
(One paper Three hours 100 Marks)
Level of Knowledge: Advanced knowledge
Objectives:
(a)

To gain advanced knowledge of the provisions of direct tax laws,

(b)

To acquire the ability to apply the knowledge of the provisions of direct tax laws to
various situations in actual practice.

Contents:
I.

The Income-tax Act, 1961 and Rules thereunder (90 marks)

II.

The Wealth-tax Act, 1957 and Rules thereunder (10 marks)

While covering the direct tax laws, students should familiarise themselves with
considerations relevant to tax management. These may include tax considerations with
regard to specific management decisions, foreign collaboration agreements, international
taxation, amalgamations, tax incentives, personnel compensation plans, inter-relationship
of taxation and accounting, with special reference to relevant accounting standards and
other precautions to be observed to maximise tax relief. Further, they should have a basic
understanding about the ethical considerations in tax management and compliance with
taxation laws.
Note If new legislations are enacted in place of the existing legislations relating to
income tax and wealth tax, the syllabus will accordingly include such new legislations in
the place of the existing legislations with effect from the date to be notified by the
Institute.

The Institute of Chartered Accountants of India

Volume 1
INCOME TAX
CONTENTS
CHAPTER 1 : BASIC CONCEPTS
1.1

Overview of Income-tax law in India ............................................................... 1.1

1.2

Charge of income-tax .................................................................................... 1.2

1.3

Rates of tax .................................................................................................. 1.2

1.4

Concept of income ......................................................................................... 1.6

1.5

Total income and tax payable ......................................................................... 1.7

1.6

Important definitions ................................................................................... 1.11

1.7

Other basic concepts .................................................................................. 1.25

CHAPTER 2 : RESIDENCE AND SCOPE OF TOTAL INCOME

2.1

Residential status ......................................................................................... 2.1

2.2

Scope of total income ................................................................................... 2.5

2.3

Deemed receipt and accrual of income in India .............................................. 2.7

2.4

Meaning of Income received or deemed to be received ................................ 2.7

2.5

Meaning of income accruing and arising .................................................. 2.7

2.6

Income deemed to accrue or arise in India ...................................................... 2.8

CHAPTER 3 : INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

3.1

Introduction ................................................................................................... 3.1

3.2

Incomes not included in total income ............................................................. 3.1

3.3

Tax holiday for newly established units in SEZ .............................................. 3.55

3.4

Charitable or religious trusts and institutions ................................................ 3.59

CHAPTER 4 : INCOME FROM SALARIES

4.1

Salary .......................................................................................................... 4.1

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4.2

Definition of salary ......................................................................................... 4.2

4.3

Basis of charge ............................................................................................. 4.3

4.4

Place of accrual of salary ............................................................................... 4.3

4.5

Profits in lieu of salary ................................................................................... 4.3

4.6

Advance salary .............................................................................................. 4.4

4.7

Loan or advance against salary ...................................................................... 4.5

4.8

Salary arrears ............................................................................................... 4.5

4.9

Annuity ......................................................................................................... 4.5

4.10

Gratuity ......................................................................................................... 4.5

4.11

Pension ........................................................................................................ 4.5

4.12

Leave salary.................................................................................................. 4.6

4.13

Retrenchment compensation ......................................................................... 4.6

4.14

Compensation received on voluntary retirement ............................................. 4.6

4.15

Provident fund ............................................................................................... 4.6

4.16

Approved superannuation fund ..................................................................... 4.10

4.17

Salary from United Nations Organisation ...................................................... 4.11

4.18

Allowances .................................................................................................. 4.11

4.19

Perquisites .................................................................................................. 4.12

4.20

Valuation of perquisites ............................................................................... 4.18

4.21

Deductions from salary ................................................................................ 4.36

4.22

Deduction under section 80C ....................................................................... 4.38

4.23

Relief under section 89 .4.38

CHAPTER 5 : INCOME FROM HOUSE PROPERTY

5.1

Chargeability ................................................................................................. 5.1

5.2

Conditions for chargeability ............................................................................ 5.1

5.3

Composite rent .............................................................................................. 5.2

5.4

Income from house property situated outside India .......................................... 5.3

5.5

Determination of annual value ........................................................................ 5.3

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5.6

Deductions from annual value ....................................................................... 5.7

5.7

Computation of Income from house property for different categories

of property .................................................................................................... 5.9

5.8

Inadmissible deductions ............................................................................... 5.17

5.9

Taxability of recovery of unrealised rent & arrears of rent received ................ 5.17

5.10

Treatment of income from co-owned property ............................................... 5.18

5.11

Treatment of income from property owned by a partnership firm .................... 5.18

5.12

Deemed ownership ...................................................................................... 5.18

5.13

Cases where income from house property is exempt from tax ........................ 5.19

CHAPTER 6 : PROFITS AND GAINS OF BUSINESS OR PROFESSION

6.1

Meaning of Business, Profession and Profits ........................................... 6.1

6.2

Income chargeable under this head ............................................................... 6.2

6.3

Speculation business .................................................................................... 6.4

6.4

Computation of income from business ........................................................... 6.6

6.5

Admissible deductions .................................................................................. 6.7

6.6

Inadmissible deductions .............................................................................. 6.67

6.7

Expenses or payments not deductible in certain circumstances .................... 6.71

6.8

Profits chargeable to tax ............................................................................. 6.78

6.9

Special provisions for deduction in case of business for prospecting

etc. for mineral oil ....................................................................................... 6.79

6.10

Changes in rate of exchange of currency ..................................................... 6.80

6.11

Certain deductions to be allowable only on actual payment .......................... 6.81

6.12

Special provisions for computation of cost of acquisition of certain assets ..... 6.84

6.13

Special provisions in case of income of Public Financial Institutions ............. 6.84

6.14

Insurance business ..................................................................................... 6.85

6.15

Special provisions in the case of certain associations ................................... 6.85

6.16

Compulsory maintenance of accounts .......................................................... 6.85

6.17

Audit of accounts of certain persons carrying on business or profession......... 6.88

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6.18

Special provision for computing profits and gains of business on

presumptive basis ...................................................................................... 6.89

6.19

Special provision for computing profits and gains of business of

plying, hiring or leasing goods carriages ...................................................... 6.90

6.20

Special provision for computing Profits and gains of shipping

business of non-residents ........................................................................... 6.91

6.21

Provisions for computation of taxable income from activities

connected with exploration of mineral oil ..................................................... 6.91

6.22

Special provision for computing profits and gains from business

of operation of aircraft by non-residents ....................................................... 6.92

6.23

Profits and gains of foreign companies engaged in the business of civil

construction etc. in certain turnkey power projects ....................................... 6.93

6.24

Special provisions for computing income by way of royalties etc. in case

of non-residents ........................................................................................ 6.94

6.25

Method of computing deduction in the case of business

reorganisation of co-operative banks ............................................................ 6.94

6.26

Computation of business income in cases where income is partly

agricultural and partly business in nature ...................................................... 6.98

CHAPTER 7 : CAPITAL GAINS

7.1

Introduction ................................................................................................... 7.1

7.2

Capital asset ................................................................................................. 7.1

7.3

Short-term and long-term capital assets.......................................................... 7.3

7.4

Transfer: what it means ................................................................................. 7.5

7.5

Scope and year of chargeability .................................................................... 7.5

7.6

Capital gains on distribution of assets by companies in

liquidation .................................................................................................... 7.9

7.7

Capital gains on buyback, etc. of shares ...................................................... 7.10

7.8

Transactions not regarded as transfer .......................................................... 7.10

7.9

Important definitions .................................................................................... 7.15

7.10

Withdrawal of exemption in certain cases ..................................................... 7.17

7.11

Mode of computation of capital gains ............................................................ 7.17

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7.12

Ascertainment of cost in specified circumstances .......................................... 7.19

7.13

Cost of improvement .................................................................................... 7.25

7.14

Cost of acquisition ....................................................................................... 7.27

7.15

Computation of capital gains in case of depreciable asset ............................. 7.33

7.16

Capital gains in respect of slump sales ......................................................... 7.34

7.17

Special provision for full value of consideration in certain cases .................... 7.35

7.18

Fair Market Value of the capital asset on the date of transfer to be

taken as sale consideration in cases where the consideration is not
determinable .............................................................................................. 7.35

7.19

Advance money received ............................................................................. 7.36

7.20

Exemptions of capital gains.......................................................................... 7.38

7.21

Reference to valuation officer ....................................................................... 7.49

7.22

Short term capital gains tax in respect of equity shares/units of an

equity oriented fund ..................................................................................... 7.50

7.23

Tax on long-term capital gains ..................................................................... 7.50

7.24

Exemption of long term capital gains on sale of equity shares/units

of an equity oriented fund ............................................................................ 7.51

CHAPTER 8 : INCOME FROM OTHER SOURCES

8.1

Introduction ................................................................................................... 8.1

8.2

Incomes chargeable under this head ............................................................. 8.1

8.3

Bond washing transactions and dividend stripping ......................................... 8.10

8.4

Applicable rate of tax in respect of casual income ........................................ 8.11

8.5

Deductions allowable ................................................................................... 8.11

8.6

Deductions not allowable ............................................................................. 8.12

8.7

Deemed income chargeable to tax ................................................................ 8.13

8.8

Method of accounting ................................................................................. 8.13

CHAPTER 9 : INCOME OF OTHER PERSONS INCLUDED IN ASSESSEES TOTAL

INCOME
9.1

Clubbing of income - An introduction .............................................................. 9.1

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9.2

Transfer of income without transfer of the asset .............................................. 9.1

9.3

Income arising from revocable transfer of assets............................................. 9.1

9.4

Exceptions where clubbing provisions are not attracted even in case

of revocable transfer ...................................................................................... 9.2

9.5

Clubbing of income arising to spouse ............................................................. 9.2

9.6

Transfer of assets for the benefit of the spouse ............................................... 9.5

9.7

Income arising to sons wife from the assets transferred without

adequate consideration by the father-in-law or mother-in-law .......................... 9.5

9.8

Transfer of assets for the benefit of sons wife ............................................... 9.5

9.9

Clubbing of minors income ............................................................................ 9.6

9.10

Cross transfers .............................................................................................. 9.7

9.11

Conversion of self-acquired property into the property of a HUF ...................... 9.7

9.12

Income includes loss ..................................................................................... 9.7

9.13

Distinction between section 61 and section 64 ................................................ 9.8

9.14

Liability of person in respect of income included in the income

of another person .......................................................................................... 9.8

CHAPTER 10 :SET-OFF AND CARRY FORWARD OF LOSSES

10.1

Aggregation of income ................................................................................. 10.1

10.2

Concept of set off and carry forward of losses ............................................... 10.1

10.3

Inter source adjustment ............................................................................... 10.1

10.4

Inter head adjustment .................................................................................. 10.2

10.5

Set-off and carry forward of loss from house property.................................... 10.3

10.6

Carry forward and set-off of business losses ................................................. 10.4

10.7

Carry forward and set-off of accumulated business losses and

unabsorbed depreciation allowance in certain cases of
amalgamation/demerger, etc. ....................................................................... 10.5

10.8

Set-off of losses of a banking company against the profits of a banking

institution under a scheme of amalgamation ................................................. 10.8

10.9

Provisions relating to carry forward and set-off of accumulated losses

and unabsorbed depreciation in business reorganisation of co-operative
banks .......................................................................................................... 10.9
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10.10

Losses in speculation business ................................................................... 10.10

10.11

Carry forward and set-off of losses by specified business ............................. 10.11

10.12

Losses under the head capital gains .......................................................... 10.12

10.13

Losses from the activity of owning and maintaining race horses ................... 10.12

10.14

Carry forward and set off of losses in case of change in

constitution of firm or succession ................................................................ 10.14

10.15

Carry forward and set-off of losses in case of closely held companies ........... 10.14

10.16

Order of set-off of losses ............................................................................ 10.14

CHAPTER 11 : DEDUCTIONS FROM GROSS TOTAL INCOME

11.1

General Provisions ..................................................................................... 11.1

11.2

Deductions in respect of payments .............................................................. 11.3

11.3

Deductions in respect of incomes ............................................................... 11.27

11.4

Other deductions ........................................................................................ 11.59

CHAPTER 12 : INTER-RELATIONSHIP BETWEEN ACCOUNTING AND TAXATION

12.1

Recognition of accounting principles by judicial forums while

settling tax disputes ..................................................................................... 12.1

12.2

Accounting Standards and Income-tax law - Convergence and divergence ..... 12.3

12.3

Treatment of income-tax expense under Accounting Standards ..................... 12.8

12.4

Relevance of method of accounting under the Income-tax Act, 1961 ........... 12.15

12.5

Valuation of inventory [Section 145A vs. AS-2]............................................. 12.19

12.6

Requirement of compulsory maintenance of prescribed books of account

under the Income-tax law ............................................................................ 12.21

12.7

Relevance of profit and loss account prepared in accordance with the

provisions of part II of Schedule VI to the Companies Act, 1956
for computing book profit for levy of MAT ..................................................... 12.23

12.8

Conclusion ................................................................................................. 12.24

CHAPTER 13 : ASSESSMENT OF VARIOUS ENTITIES

13.1

Assessment of Companies ........................................................................... 13.1

13.2

Assessment of Other Entities ...................................................................... 13.39

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13.3

Liability in Special Cases ............................................................................ 13.71

CHAPTER 14 : TAX PLANNING AND ETHICS IN TAXATION

14.1

Basic concepts ........................................................................................... 14.1

14.2

Tax planning considerations in respect of salary income ............................. 14.22

14.3

Tax planning considerations in relation to business ..................................... 14.25

14.4

Ethics in Taxation ....................................................................................... 14.46

CHAPTERS 15 28 of Income Tax and CHAPTERS 1 3 of Wealth Tax are available

in Volume 2.

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DIRECT TAX LAWS

SIGNIFICANT ADDITIONS IN THE EDITION
Chapter
No.

Particulars

Section

Unexplained share capital, share premium etc. credited

in the books of account of a closely held company to be
treated as income of such company

68

Unexplained money, investments etc. to attract

maximum marginal rate of tax @30%

115BBE

Income-tax
1.

Basic Concepts
Rates of tax

2.

3.

Residence and scope of total income

Gains from offshore transactions to be taxed if
underlying assets are located in India

9(1)(i), 2(14),
2(47) & 195(1)

Consideration for use or right to use of computer

software is royalty

9(1)(vi)

Incomes which do not form part of total income

Exemption of income of Prasar Bharati (Broadcasting
Corporation of India)
Removal of sectoral restrictions on VCUs

6.

10(23BBH)
10(23FB)

Exemption in respect of income received by certain

foreign companies in India in Indian currency from sale
of crude oil to any person in India

10(48)

Exemption to be denied to a charitable trust having its

main object as advancement of any other object of
general public utility if its trading receipts exceed the
specified threshold irrespective of withdrawal of
approval or cancellation of registration or rescindment of
notification

10(23C) & 13

Profits and gains of business or profession

Benefit of additional depreciation@20% extended to
new plant and machinery acquired and installed in
power sector undertakings

32(1)(iia)

Extension of sunset clause for claiming weighted

35(2AB)

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deduction@200% of expenditure on in-house scientific

research and development incurred by a company

7.

Expansion of scope of specified business for provision

of investment-linked tax deduction

35AD

Weighted investment-linked tax deduction for certain

specified businesses

35AD(1A)

Owner of a hotel eligible for investment-linked tax

deduction even if he transfers the operation of the hotel
to another person

35AD(6A)

Weighted deduction in respect of expenditure incurred

on notified agricultural extension project

35CCC

Weighted deduction in respect of expenditure incurred

by companies on notified skill development project

35CCD

Increase in threshold limits of total sales/ turnover/

gross receipts for applicability of tax audit

44AB & 44AD

Presumptive taxation provisions not to apply to

profession, brokerage or commission income and
agency business

44AD(6)

Capital Gains
Modification in the conditions to be satisfied in case of
amalgamation and demerger for not being regarded as
transfer

47(vii) & 2(19AA)

Cost of acquisition of the capital asset transferred by a

sole proprietorship or firm to a company on succession,
to be taken as cost to the previous owner i.e. the
predecessor proprietor or firm, where such succession
is not regarded as transfer under section 47

49

Fair market value of the capital asset on the date of

transfer to be taken as sale consideration, in cases
where the consideration is not determinable

50D

Extension of capital gain exemption under section 54B

to a Hindu Undivided Family

54B

Exemption of long-term capital gains on transfer of

residential property if the sale consideration is used for
subscription in equity of a new start-up manufacturing
SME company to be used for purchase of new plant and
machinery

54GB

Assessing Officer enabled to make a reference to the

55A

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Valuation Officer in case the assessee has taken the fair

market value as the cost of acquisition of the asset in
accordance with the estimate made by the Registered
Valuer
Non-residents and foreign companies to be subject to
tax at a concessional rate of 10% (without indexation
benefit or currency fluctuation) on long-term capital
gains arising from transfer of unlisted securities
8.

11.

13.

112

Income from other sources

Any sum of money or property received by a HUF
without consideration or for inadequate consideration
from its members exempt from tax

56(2)(vii)

Consideration received in excess of FMV of shares

issued by a closely held company to be treated as
income of such company, where shares are issued at a
premium

56(2)(viib)

Deductions from Gross Total Income

Life insurance premium up to 10% of minimum capital
sum assured to qualify for deduction under section 80C,
in respect of insurance policies issued on or after
1.4.2012

80C & 10(10D)

One time deduction for investment by a resident

individual in listed equity shares as per notified scheme

80CCG

Eligible age for senior citizen reduced from 65 years to

60 years for availing increased deduction

80D & 80DDB

Deduction for expenditure on preventive health checkup

80D

No deduction in respect of cash donation exceeding of

` 10,000

80G & 80GGA

Extension of sunset clause for tax holiday for powersector undertakings

80-IA(4)(iv)

Deduction in respect of interest on deposits in savings

accounts

80TTA

Assessment of various entities

Income received or receivable by a non-resident
entertainer, from performance in India included within
the scope of Section 115BBA and rate of tax thereunder
increased from 10% to 20%

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115BBA & 194E

Dividends received by Indian companies from specified

foreign companies to be entitled to concessional rate of
tax for one more year

115BBD

Net profit as per profit and loss account prepared in

accordance with the respective Act governing insurance
companies, banking companies, electricity companies
etc. to form the basis for computation of book profit for
levy of MAT in case of such companies

115JB

Amount standing in the revaluation reserve relating to a

retired or disposed asset, to be subject to minimum
alternate tax, if the same is not credited to profit and
loss account

Explanation 1 to
section 115JB

Levy of Alternate Minimum Tax (AMT) extended to all

persons claiming profit-linked deductions, other than
companies [New Chapter XII-BA]

115JC to 115JF

Tax credit for AMT

115JD, 140A,
234A, 234B &
234C

Conversion of an Indian branch of foreign company into

an Indian subsidiary company [New Chapter XII-BB]

115JG

Removal of cascading effect of DDT in multi-tier

corporate structure

115-O

Taxability of income of VCCs/VCFs in the hands of the

investor on accrual basis

115U

Increase in presumptive rate of daily tonnage income

115VG

Note: In the above table the amendments/additions have been indicated against the
chapters where they have been primarily dealt with at length. Some of the amendments
may have also been referred to or discussed in other related chapters. In addition, the
illustrations in each chapter have been modified to give effect to the amendments by
the Finance Act, 2012. New illustrations have also been added to explain the application
of some of the amendments.

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