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Income from House Property (S.

22-27)
Section 22 is the charging section
S.23 – Determination of annual value
S.24 – Deductions
S.25 – what cannot be deducted
S.25A – unrealized rent
S.25B – arrears of rent
S.2 – conce!t of co"ownershi!
S.2# – Deemed $wner of the !ro!ert%
&. 'hat incomes are income of house !ro!ert%. 'e have seen before that each head is
e(clusive of each other. )ro!ert% for house !ro!ert% is the building and land
appurtenant to the building. *he land has to b !art of the land and not se!arate land.
2. *he Assessee must be the owner of the !ro!ert%.
3. +f one is using the building for business or !rofession, then its not house !ro!ert%.
Because it is a se!arate head altogether. -ust not be used for business !ur!ose.
'hat is building. – An% /ind of structure which is generating income. +ncludes, tents and huts.
0ven o!en swimming !ool, theatre are buildings under house !ro!ert%. +ts not essential to have a
roof. 0ven letting of house !ro!ert% if it is the business of the !erson, that shall be treated as
income from house !ro!ert% and not as income from business. 0g., 1eal estate
'hat is ownershi!. – 2nder common law it is similar to legal title. 3or income ta(, the
registration of deed not im!ortant. 4egal owner, 4ease owner or Deemed owner shall be coming
under the !urview of this Act
I! ". Poddar ement P"t #td. $%%7 22& I!' &2( S. *he su!reme court held that owner is a
!erson who is entitled to receive income on his own right. 1egistration of sale deed is not re5d
under S.22. ownershi! also im!lies right to e(clude others as well. 3or income ta( act, legal
owner is the owner. 'e must also remember that subletting is not !art of +ncome frm 6ouse
)ro!ert%. the Also, Deemed $wner
)eemed owner is defiend under the Act in S.2#. there are 5 situations where one can be a
deemed owner.
&. +f an individual transfers his house to his wife or to minor child, for a minor consideration
2. 4l
3. 6older of an im!artible estate – if it is im!aratable !ro!ert% – ten onl% the eldest shall
win him7
4. S.33A of *$)A )art )erformance
a. 'rtitten agreement
b. 0ither !aid or !a%abe b% the transferee
c. *ransferee is in !ossession of tranfere – transferee shll b
5. *ransfer u8s 29 2A :3; – for more than a year at a time and if there is a lease made
and it goes on for a substantial time $2 years in aggregate then lessee shall be the
deemed owner.
$nl% income from house !ro!ert% can be ta(ed on the basis of notional income. 'here there is
no income as well, it shall be ta(ed. *he Annual <alue is calculated on what the
*he !ro!ert% should not be used in his business or !rofession. Su!!ose there is one 623 and the
/arta becomes the !artner in the firm in !ersonal ca!acit%, which is using the building on the
623=s land. >ow the members also become !artners in the firm. So this business is that of the
firm and not that of the 623
omposite 'ent * nt sub+ect to ta,
'hat are hotels guest houses etc.... 4etting out of !ro!ert% can never be
?om!osite rent is not for the house alone but various other services. +t is not se!arable – the
charges for one service are not se!arable – then the whole income shall be that from business.
6owever if it is se!arable, li/e the accounts are clear that other services are se!arated – sa% what
is for a sho! and what is for securit% – then the charges for other services shall be income from
other sources and >$* business and the income from the building shall be that of 6ouse
!ro!ert%.
I! ". -ational Storage Pri"ate #td. $%&7 && I!' (%& S * house owning howsoever
!rofitable cannot be income from the in
S? said that nature of o!eration and not the ca!acit% of owner that is im!ortant.
0(em!ted from house !ro!ert%
$. .sing his house property for business or profession
2. omposite rent
a. 1ent is se!arable from other sources
b. 1ent is not se!arable
3. #etting out is incidental to the main business or subser"ient to main business – eg.
?om!an%, which might have accommodation for their em!lo%ees, directors, manager and
getting rent out of it. 6ere letting out is not the business of the com!an% but is incidental
to the main business. 4etting out is not business. +f letting out is business then howsoever
it is !rofitable it shall be income from house !ro!ert% and not from business. I! ".
/odi Industries #td. $%%0 2$1 I!' $ ()el) – in this case the court held that if the
letting out is incidental then it is not chargeable under house !ro!ert%
$ther e(em!tions
a. +ncome from a farm house is e(em!ted under S.&@:&; and 2:&A;:c;
b. Annual value of one !alace in the occu!ation of e("ruler &@:&9A;
c. )ro!ert% income of local authorit% S.&@:2@;
d. )ro!ert% income of an a!!roved scientific research association S.&@:2&;
e. )ro!ert% income of an educational instn and hos!itals S.&@:23?;
f. )ro!ert% income of registered trade union S.&@:24;
g. +ncome from !ro!ert% held for charitable !ur!oses S.&&
h. )ro!ert% income of a !olitical !art% S.&3A
i. +ncome from !ro!ert% used for his own business or !rofession S.22
A. Annual value of one self"occu!ied !ro!ert%. S.23:2;
/. )ro!ert% income of a mutual coo!erative societ% or mutual societies – though
there is no section in the Act, S? has held this if it is onl% for the members and on
a no !rofit and no loss basis. !ollygun+e lub ". I! and helmsford lub ".
I! (2111 202 I!' 3% S) – Doctrine of mutualit%
)a%ing guest accommodation is also income from business – /anohar Singh " I! &95 5B
+*1 592 :) C6; – here a building had thirteen rooms and was let out along with services li/e
lunch, brea/fast and other services. $ne shall not be ta/ing these rooms other than for these
services and hence this was ta/en to be income from business.
4tu5al Shopping omple, ". I! – this is the sho!!ing mall case where if the boo/s show that
there are se!arate heads shown then it shall be income from house !ro!ert% while other heads
shall be income from other sources.
6ast India Housing and #and )e"elopment !rust ". I! ($%&$ 02 I!' 0% S) * if their
whole obAective of the com!an% is to let out the house then it shall be income from house
!ro!ert% and not income from business.
)etermination of 4nnual 7alue
3irst to be determined is the Dross Annual <alue :DA<; from which we deduct -unici!al *a(es
:-*; and then we shall get the >et Annual <alue :>A<;. *hen on the >A< we have std
deduction :3@E under section 24;, then there is +nterest deductible under various heads :home
loans and interest !aid on that;. *his gives us the !a,able 4nnual 7alue.
847 * /! 9 -47
-47 * (Std. )eduction : ;thr )eductions) 9 !a,able 4nnual 7alue
'hat is annual value :DA<;.
Before &9# it was the notional value fo the house !ro!ert% – the inherent ca!acit% to earn
income. But in F# thr was an amendment it was !ut as either the notional value or the actual rent
which ever is higher.
• 1easonable 0(!ected 1ent :101; or Actual 1ent, which ever is higher
• +f actual rent is less than 101 due to the "acancy of the house then Actual rent is the
annual value of the house !ro!ert%

8ross 4nnual 7alue (847) * Section 22
i. >otional rent8!resum!tive rent $1
ii. Actual rent
:which ever is higher;
>otional rent
i. -unici!al <aluation :rateable value is determined b% munici!alit%; $1
ii. 3air rent :in the similar or same location – rent in the neighbourhoods;
'hichever is higher but subAect to ma(imum ceiling of the standard rent
iii. Standard 1ent :rent determined b% the rent control Act if one is there;. *his
condition shall be a!!licable
&
even if the tenant has not a!!lied to the fi(ation of
rent under the 1ent ?ontrol Act, when it is a!!licable in the cit%.
0(am!le – four !ro!erties are there
-< G 3@@@@H 31 G 4@@@@H S1 G >AH Actual 1 G @@@@
2nrealized rent shall be deducted from the Actual 1ent onl% under certain circumstances
• 'hen tenanac% is bonafide
• Ste!s have been ta/en to vacate the tenant
• 4egal !roceedings have been started or that it shall be useless
• +ts not in the occu!ation of someone less
4oss due to <A?A>?I shall be deducted from Annual <alue
23:&;:c; – J!ro!ert% or an% !art of the !ro!ert% is let and was vacant during the whole or an%
!art of the !revious %earK – im!lies
)eduction under Section 20
2 t%!es of !ro!ert%
• 4et out !ro!ert%
• Self occu!ied )ro!ert%
3or 4et out !ro!ert%
• 3@E of net annual value as SD
• +nterest on borrowed ca!ital
2
for construction, renewal, re!air, reconstruction, !urchase –
there is no monetar% limit to interest
3or Self"occu!ied !ro!ert%
• >o SD
• +nterest is deductible
o +f loan has been ta/en for repair< renewal< reconstruction or the construction
or the ac=uisition of the !ro!ert% before A!ril &, &999 then interest deductible is
ma(imum 3@,@@@ 8"
o +f loan was ta/en on or after A!ril &, &999 for the construction and the
ac=uisition of the !ro!ert% then ma(imum deduction is &,5@,@@@ 8". *he house
must be constructed within 3 %ears from the !reious %ear when u too/ the loan the
house must be constructed
o After A!ril &, &999 if loan is ta/en for repair< renewal or reconstruction then
ma(imum deduction shall be 3@,@@@8"
*here are no other deductions other than the deductions abovementioned. *his deduction is
e(haustive. >ot even bro/erage, the registration fees, stam! dut% etc.
Salar% and 6ouse )ro!ert% for test on 4
th
-arch, 2@&@
4et"out Self"occu!ied
&. *wo deductions
• 3@E SD
• Dedcution of interest
amount !aid or !a%able
• 3or munici!al ta(es
however onl% !aid ta(es
shall be ta/en into
account
• Deduction of interest onl%
• +f loan has been ta/en for repair< renewal<
reconstruction or the construction or the ac=uisition of
the !ro!ert% before A!ril &, &999 then interest deductible
is ma(imum 3@,@@@
• +f loan was ta/en on or after A!ril &, &999 for the
construction and the ac=uisition of the !ro!ert% then
ma(imum deduction is &,5@,@@@ 8". *he house must be
constructed within 3 %ears from the !reious %ear when u
too/ the loan the house must be constructed
• After A!ril &, &999 if loan is ta/en for repair< renewal or
reconstruction then ma(imum deduction shall be
3@,@@@8"

*here are 2 /inds of self occu!ied !ro!ert%
&. *he usual /ind – where one is using it for !ersonal use
2. 'here due to em!lo%ment at some other !lace one is not in a !osition to occu!% that.
:this !rovision was there as >ehru was being charged on notional value for his Allahabad
!ro!ert%;
a. $ne should not derive an% other benefit from that !ro!ert% – otherwise there shall
be no e(em!tion – it should be vacant for the whole %ear – even if its let out for a
month even, then for the whole %ear it shall be treated as a let"out !ro!ert%.
b. +f a !art of the !ro!ert% is let out and the rest is used for self"occu!ation, then
a!!ortionment shall be there.
+llustrationL :Don=t get confused, ver% badl% written;
M=s *a(able Salar% :after deduction of allowances; – 3@@,@@@
M has ta/en home loan of &@,@@@,@@
Annual 0-+ is 2,@@,@@@
$ut of this two la/hs, one la/h is interest and one la/h is !rinci!al amount
6ow do u calculate the income of -r. M.
*he !ro!ert% is self"occu!ied
Annual value is nilH no deduction of 3@E " so deduction shall be of one la/h for the interest. But
there is nothing to set it off from. So this one la/h shall be deducted from his ta(able income as a
loss from 6ouse )ro!ert%. So it now becomes 2,@@,@@@8". >ow the one la/h of the !rinci!al shall
be deducted under B@? and hence the income now becomes &,@@,@@@8" which is not ta(able.
+t is to be noted that interest amount :here &,@@,@@@; can be carried forward as loss.
+f a new loan is ta/en to re!a% original loan, then also the interest shall be deductible, although
there shall be no relation between the construction and the ca!ital borrowed. ?a!ital borrowed
and construction of house !ro!ert% must usuall% have a intimate connection. +t cannot be that the
ca!ital borrowed can be used for some other !ur!ose than construction of house !ro!ert%.

Su!!ose !ro!ert% is in foreign countr% – what shall b the ta( treatment – it shall be the same
treatment as !ro!ert% in +ndia, but it shall be im!ortant to determine the residential status of an
individual.
Section 25 – if loan is ta/en from outside countr% for house !ro!ert% in +ndia, then interest
!a%ment shall be deductible onl% frm income frm house !ro!ert%
i. if withhold ta( or ta( has been deducted at source or
A. if there is an agent of the foreign com!an% in +ndia who shall !a% the ta( in +ndia.

Section 25A :a!!licable before 2@@&; and 25AA :after &
st
A!ril, 2@@&;
+n the !revious %ear one has claimed benefit of deductions – bt in subse5uent %ears one realizes
unreali>ed rent – then in that %ear it will be ta(able as income from house !ro!ert% in the hands
of the assessee irres!ective of the fact whether the assessee is the owner of the house !ro!ert% or
not. *here shall be no deduction on this value as the benefits of such deduction has alread% been
ta/en before.
S.25B – 4rrears of 'ent – su!!ose in 2@@2"@3 one has let out a !ro!ert% to a ban/. Ban/ is
giving 5@@@8" as rent. +n 2@&@"&& Ban/ sa%s that it shall give the arrears of rent from 2@@5. +t
shall be ta(able as income of house !ro!ert% after 3@E SD.
S.2 – o-ownership – there !ortion is definite and ascertainable then each one is liable for ta(
in their individual ca!acit% as individual owners and not as an association of !ersons.
Profits and gains from ?usiness and Profession
Section 23-00
Section 2B – ?harging Section
Section 29 – -ethod of ?om!utation
Section 3@"43B" Deductions – Allowed and >ot Allowed
Section 44 onwards – S!ecial !rovisions s!ecial cases, com!anies.
Section 2 :&3; – Business includesL
• trade
• commerce
• manufacture
• adventure in the nature of trade, commerce or manufacture :classificator% in nature;

Adventure – Single or isolated transaction
0g." )urchased !lot sold in small !ieces to earn more !rofit.
Section 2:3; – )rofession includes vocation :an% calling to !ass %our life;
<ocation includes business.
+t refers to s!ecialized /nowledge in a field.
• ITO v. Rani Ratnesh Kumari :&9B@; &23 +*1 343 :All; – +nitial intention of assessee is
im!ortant but not conclusive to ascertain adventure.

NSee ircular -o.0 of 2117 – 3++L business or investment.O
*radeL )urchase and sell commodities in small lots, small scale.
?ommerceL +n large scale, re!etitive activit%.
State of Punjab v. Bajaj Electronics :&9B; #@ +*1 #3@ :S?; – Definition of *rade !er Shah, P.
• *rade means the e(changing of goods for goods on mone% :!rimar%;.
• 1e!eated activit% in the nature of business carried on with a !rofit motive :secondar%
meaning;. *he activit% being manual or mercantile as distinguished from liberal acts or
learned !rofession.
• ?ommerce vs. *rade – +f a !erson !urchased goods with !ur!ose of selling them it is
trade. +f such an activit% is re!eated on a large scale, it is commerce.
/anufacture (under 6,cise 4ct) – broad definition
0(cise Act – *here must be change in theL
i. ?haracter
ii. 2se
iii. >ame of the goods
change in character, use and name.
Deduction u8s B@ for manufacture under +* Act.
-anufacture is the subset of )roduction.
4d"enture in the nature of trade@ * +t is a single and isolated transaction, ma%be in the nature
of trade.
• ?ircular 4 of 2@@# – 6ow business is different from investment.
ITO v. Ram Ratesh Kumari, &9B@ &23 +*1 343 :All;
• *he initial intention of the !arties is irrelevant but is not conclusive evidence to determine
whether it is adventure in the nature of trade.
• De!ends on the nature of activit% of the !artner.
P';A6SSI;- * Section 2(2&)
• 3or ta( !ur!ose, there is no difference between business or !rofession.
• )rofession includes vocation. <ocation is an% calling in which a !erson !asses his life.
CIT v. B V Raju, :S?;
• )olitics is a !rofession.
8eneral haracteristics of ?usiness Income
86-6'4# P'I-IP#6S – 'hen income is ta(able under business or !rofession.
&. *he business must be carried on b% the assessee or his agent during the !revious %ear.
2. +f the business is discontinued during !revious %ear, then the !eriod of discontinuation is
ta(able under income from business or !rofession, remaining !eriod shall be income
from other sources.
3. $nl% the !rofit of the !revious %ear is chargeable. )rofits mean the actual or real !rofit of
the assessee.
4. 4ease of commercial assets. *otal income will be income of business or !rofession.

o Laxmi Singhania v. IT :&99; +*1 29& :S?; – onl% !rofit of !revious %ear is
ta(able. 6e is not authorized to do esca!ed assessment. *herefore, merchantile
s%stem was being followed. 1e"assessment ma% be as/ed for.
o IT v. T !iles "istribution :&99; 2&9 +*1 & :S?; – !re"incor!oration !rofit
b% !romoterH ta(able u8s 2B if com!an% acce!ts what the !romoter has done,
otherwise ta(able in the hands of the !romoter.

'inding u! H
• +f li5uidators do business, chargeable u8s 2B.
• 4ease of commercial assets.


8@382@&@
Income from business and profession
" IT v. Shree Laxmi Sil# !ills Lt$. :&95&; 2@+*1 45& :S?;
1enting out the factories" income chargeable under business and !rofession. *hese are
commercial assets. +f %ou are not able to use these assets and lease them out to an%one and %ou
are earning rental income that is income from business and !rofession.
+ntention is to let out the commercial assets and not the building as such.
" IT v. Rajasthan Lan$ "evelo%ment or%. :&995; 2&&+*1 59# :1aA;" +nterest on the
investment of sur!lus fund" whether this is business income of the com!an%. +t is income from
other sources for the com!an% and not business income.
+nterest from income of the fi(ed de!osit of a com!an%" +f com!an% business is not mone%
lending then this investment or fi(ed de!osit, then interest that accrues from it is income from
other sources.
• IT v. B.&. 'ggar(al ) o. (2112) 259+*1 #54 :S?;" Arbitrator=s award" the% also
!rovide some com!ensation with interest. 'hether that interest is business income or
not. *his interest is revenue recei!t. But it will be income from other sources and not
business income.

• "irector of State Lotteries v. IT :&999; 23B +*1 99&" income accrued to an agent or
trader on unsold or un!la%ed lotteries. +t is income from business and !rofession and not
income from lotteries.

Section 23 * harging section under income from business and profession
)rofit and gains of business and !rofession.
&. An% !rofit or gain arising from a business or !rofession" general !rovision covering
ever%thing.
2. An% com!ensation or other !a%ment due to or received
a. b% a !erson managing the whole or substantiall% the whole affairs of an +ndian
com!an% at an% !lace, in connection with termination or modification of terms
and conditions of management.
b. b% a !erson managing the whole or substantiall% the whole affairs of an% com!an%
in +ndia in connection with termination or modification of terms and conditions of
management.
c. An% !erson b% whatever name called holding an agenc% in +ndia – termination of
agenc% or modification in terms and conditions of agenc%" com!ensation received
in that regard is ta(able as income from business and !rofession.
d. An% !erson for or in connection with industr% of Dovernmetn or an% cor! owned
or controlled b% Dovernment, or !ro!ert% of Dovernment, then an% com!ensation
received b% him.

3. +ncome of *rade or )rofessional Association" +ncome derived b% a trade, !rofession or
similar association for s!ecific services !erformed for its members.

0(am!le" An% association if the% are !roviding s!ecial services, then an% fees charged
for s!ecific service, then it is income from business or !rofession. 0g" ?++, 3+??+.
6owever, social clubs are e(em!ted.
4. 0(!ert incentives – if %ou receive an% cash assistance from government
a. ?ash assistance from Dovt.
b. Dut% drawbac/
c. Sale of im!ort license
d. An% !rofit on transfer of dut% entitlement )ass Boo/ Scheme
:a; )rofit on sale of a license granted under the im!ort control order. 4icense is a good.
:b; ?ash assistance received or receivable b% a !erson on e(!ort.
:c; An% transfer of Dut% 0ntitlement )assboo/ scheme, etc., as an e(!ort incentive is
income from business and !rofession.
:d; Dut% draw bac/ as e(!ort incentive. – if %ou im!ort something to e(!ort, then that is
dut% draw bac/ for whatever im!ort dut% has been !aid.
5. <alue of an% benefit or !er5uisite, whether convertible into mone% or not, arising out of
business or !rofession. +f director of com!an% :not an em!lo%ee; is receiving an% benefits
then that is ta(able under business and !rofession. Same rule as a!!licable for salaried
em!lo%ees is a!!licable for !rofessionals as well.
0(" !er5uisites to Actors given b% !roducers of a film. But it should be attributable to the
!erson. – David Dhawan v. CIT
. An% salar%, bonus, commission or remuneration to the !artner of a firm is income from
!rofession.
#. An% sum, whether received or receivable in cash or /ind, under an agreement for not
carr%ing out an activit% related to an% business or not selling an% /now how, !atent,
co!%right, trademar/ etc. :non com!eting agreements;. +t is ca!ital recei!t. 6owever it is
ta(able under income from business and !rofession.
Agreement includes an% arrangement, agreement, whether it is in writing or not, ma% or
ma% not be enforceable b% law. 1estraint of trade – Section 29.
'hether this section will also include non com!eting agreement between !rofessionals.
?ircular 495 of &99 states that business does not include !rofession. But these circulars
are of course not binding on the courts.
B. An% sum received under the /e%man insurance !olic% :defined under Section &@ :b;;.
*his insurance !olic% is ta/en on the life of the em!lo%ee, on which the em!lo%ers !a%
!remium. *he% receive bonus and this is income in the hands of the em!lo%er.
9. 0(!. 2" where s!eculative transactions carried on b% an assessee are of such a nature as to
be construed as a business, is se!arate and distinct from an% other business.

Speculati"e !ransaction * Section 43:5;
S!eculative transaction in the nature of business" S!eculative transactions is defined under
S.43:5;. S.#3 sa%s that an% income or an% loss of s!eculative business can onl% be set off against
an% other s!eculative business or it can be carried forward and set off ne(t %ear against an%
s!eculative business. – IT v. *ose%h *ohn :&9B; #+*1 #4" Burden of !roof is on the assessee
to show that he is hedging. Derivate contracts or transactions are e(em!ted, but not alwa%s.
*here are certain conditions on whose fulfillment the% will be e(em!ted.
0(ce!tionL
&. Hedging ontracts * 0ligible transactions are e(em!ted – eligible transactions defined
under Section 43:5; –
2. )eri"ati"e !ransaction from 3I 2@@"@# – ?ontract with res!ect to raw materials
entered into b% a !erson in relation to the manufacture or merchant business.
&. Stoc/ 0(change :recognised under S?1A;
2. Stoc/ bro/ers registered under S0B+ Act
3. QQQQQ Stam! ?ontrol >otes – 2+> and )A>
Actual deliver% – im!lies constructive deliver% as well.
Davenport and Co. V. CIT, &9#5 &@@ +*1 #&5 :S?;
?usiness #ossB !rading #oss
• >o rule regarding loss but S? discussions em!hasize on real"!rofit method i.e. if there is
revenue loss then the same needs to be deducted from the !rofit before ta(.
• -ust be deducted on the basis of general accounting !rocess.
• 0ssential conditions for deductionL
i. 4oss should be revenue in nature
ii. 4oss should be incurred during the !revious %ear
iii. 4oss should be incidental to the business
iv. 4oss should be real
v. *here should not be an% direct or indirect restrictions under +* Act.
Calcutta Co. Ltd. V. CIT, :&959; 3# +*1 & :S?;
• Deneral commercial !rinci!le needs to be /e!t in mind while determining real !rofit8 loss
of business.
CIT v. ainital Ban! Ltd., :&95; 55 +*1 #@# :S?;
• 'here loss is incidental to the business, it is a 5uestion of fact and the nature of the
transaction needs to be considered.
Badri Das v. CIT, :&95B; 34 +*1 &@
• 0mbezzlement b% em!lo%ee – loss to the em!lo%ee who was in the mone% lending
business – embezzlement has been treated as a loss due to the QQQQQ nature of the
business.
B8@382@&@
)6).!I;-S
&. Business 4oss" its based on general !rinci!le of accounting and commercial e(!edienc%.
+ncome *a( Act no where !rescribes an% such loss. +f there is real loss :not notional; to
the assessee then it must be deducted from the !rofit.
*here is a difference between e(!enditure and loss. 0(!enditure is an obligation that %ou
are !a%ing from %our own !oc/et. )urchasing raw material is also e(!enditure.
De!reciation is also e(!enditure :ca!ital e(!enditure;, and not loss. But if there is heav%
rain and %our stoc/ in trade has been destro%ed, or there is ban/ dacoit%, etc., its loss.
4oss is unforeseen. +f something has been destro%ed b% enem% action then that is also
loss. But to recover the loss if %ou are doing something then that is e(!enditure.
Su!!ose loss is there and %ou have recovered from %our insurance, then that will be
!rofit.
An% e(!enditure for illegal business is not allowable under +* Act – "ureshi Case. But if
!olice has seized the stoc/ in trade, then it is loss, even if it is illegal stoc/. *herefore loss
will be allowable, although e(!enditure isn=t.
i. 4oss should be revenue in nature" it is a 5uestion of fact as to what is revenue and
what is ca!ital. ?ash is the stoc/ in trade of the business of a ban/. *hat is trading
asset, and it is revenue loss. +f there is some com!an% ma/ing some machiner%
then theft of machiner% will be revenue loss. 6owever, if a factor% is using some
machiner% and that is stolen, it is ca!ital loss.
ii. +t must be real and not notional loss or antici!ated loss.
iii. 4oss must be incurred in the !revious %ear.
iv. +t must be incidental to the business – there must be !ro(imate and direct
relationshi! between the loss and the business. 'hat is incidental or not is a
5uestion of fact. 0(" loss of cash in case of ban/ dacoit% is incidental to the
business. 0mbezzlement in case of mone% lending business is incidental to the
business.
o IT v. &ainital Ban# Lt$. :&95; 55+*1 #@# :S?; – 'hen loss is incidental to
the o!eration of business it is a 5uestion of fact to be decided on the 3acts of the
case having regard to the nature of cor!oration carried on b% assessee and the
nature of ris/ involved in the business.
o Ba$ri "as v. IT :&95B; 34 +*1 &@ :S?; – embezzlement b% the em!lo%ee in
mone% lending business is incidental to the business. So this is allowed as a
business loss and is deducted from the !rofit.
o alcutta om%an+ Lt$. v. IT :&959; 3# +*1 & :S?; – *he S? said that one has
to /ee! the general accounting !rinci!le and commercial e(!edienc% test to allow
business loss as deduction from !rofit of the business.
2. Deductions from business income !rescribed under the +ncome *a( Act –
Section 2% – method of com!utation of income from business and !rofession.
*he income referred to in Section 2B shall be com!uted in accordance with the !rovisions
contained in sections 3@ to 43D.
Section 21" 1ents, 1ates, *a(es, 1e!airs and +nsurance for building
An% rent !aid for the building which is used for business is deductible. Su!!ose
businessman is !a%ing rent for the building which he is using as tenant for his business, it
is deductible from the !rofit. 1oad, bridges etc are all buildings.
o IT v. !aharaja "hiraja Kamesh(ar Singh – if the assessee ta/es !remises on
lease to carr% on their business and !rofession and agrees to !a% the arrears of rent
of the !revious tenant then whether this arrear is deductible from business. But
this is not deductible from !rofit. *hus, arrears of rent are the ca!ital e(!enditure
to ac5uire the right to use the building, and no deduction can be claimed on this.
1ent v. )remium
)remium in the form of advanced rent – then deductible.
)remium as advance securit% – not deductible.
1ent – mone% !aid !eriodicall%.
Su!!ose !remium is !aid initiall%. +f it is in the form of advance rent, then that is deemed to be
rent and is deductible. Su!!ose the !remium is as a securit% de!osit, then that is not deductible.
Section 3& – 1e!airs and insurance of machiner%
Does not include – machiner% ta/en on rent. 6ence, rent for machiner% ma% be claimed under
Section 3#.
-achiner% must be in use for B8).
2sed – also includes Fto be read% to be used= – can be used merel% as s!are – hence, shall include
machiner% /e!t in store houses.
2se – Active
• )assive
CIT v. ational #$ndicate, &9& 4& +*1 225 :S?;
• 2se includes both active and !assive use. +t can be used merel% for a !art of the %ear, it
does not mean that it needs to be used for the entire %ear.
1ates – 4ocal ta(es on the building such as munici!al ta(es, water ta(es, electricit% ta( etc. are
all deductible.
1e!airs – it is not renewal or reconstruction. +t means current re!airs, such as da% to da% re!airs.
+f it is a !art of reconstruction or renewal then that is not deductible. ?ost of re!air must not be
ca!ital e(!enditure, it must be revenue e(!enditure. 1e!air means to !reserve and maintain what
the alread% e(isting building. ?urrent re!airs
Balimal aval Kishore v. CIT, &99# 224 +*1 4&4 :S?;
+nsurance !remium – an% insurance !remium against ris/ of damage to the buidling is
deductible.
Section 2$" 1e!airs and insurance of the machiner%, !lant and furnitures.
o IT v. &ational S+n$icate :&9&; 4& +*1 225 :S?; – re!airs or insurance on the
machiner% !lant and furniture will onl% be allowable if the% are used for the
!ur!ose of business and !rofession. Su!reme ?ourt states that use includes both
active use and !assive use. )assive use means that it is read% to be used an%time,
even if it is /e!t in some store house. +f some machine is installed but could not
be started at all, even then that is !assive use. +t has to be re!aired.

N>otesL De!reciation on boo/s can also be chargedO

98@382@&@
)6P'6I4!I;-- Section 22
*%!es of de!reciation under S.32 are 3L
i. >ormal De!reciation Allowance
ii. Additional De!reciation K
iii. )ower sector com!an% de!reciation.

-ethod of accounting !rescribes 2 t%!es of de!reciation called Straight forward method, 'ritten
down value method.
Straight Aorward /ethod"
Su!!ose actual cost is &@,@@,@@@8". 1ate of de!reciation is &@E. +n case of S3 method, ever% %ear
%ou deduct &@E of the actual cost.
&
st
%ear it is :&@@@@@@;" &@E of &@@@@@@.
So the amount is alwa%s calculated on the initial value or cost.
Critten )own 7alue /ethod
Su!!ose &@E is the rate of de!reciation and &@ lac is the value.
3irst its &@E of &@ lac which is deducted. +t becomes 9 lacs.
2
nd
%ear its &@E of 9 lac which is deducted.
+n +ncome *a( we follow the written down value method. But onl% in case of !ower sector
com!anies the straight forward method is followed, in order to give that sector s!ecial benefits.
alculation
'e rel% on the boo/ !rofit. *he net !rofit is ta/en from the )84 account. *here are adAustments
after that. 3or instance, some e(!enditure that is not allowable in the +* Act, will be added to the
net !rofit. And some e(!enditure allowable in the +* act will be deducted from the net !rofit.
Similarl%, in case of de!reciation, it has to be adAusted.
onditions
&. De!reciation is onl% allowable on the s!ecified assets.
2. S!ecified assets must be used in the business and !rofession.
3. *he ca!ital asset must be owned b% the assessee.
4. De!reciation is alwa%s allowed on the bloc/ of assets, not on the individual assets e(ce!t
the !ower sector com!anies.

S!ecified Assets
&. *angible assets " building, !lant and machiner%, furniture. Building does not include land,
as it cannot be a subAect of de!reciation.
0(am!le" Su!!ose total value of building is 2@ lac. +t also includes the value of land.
*hus a!!ortionment has to be made between the !rice of land and building, and
de!reciation is a!!licable onl% on building and not land.
2. +ntangible assets :/now how, co!%right, trademar/, !atent, license, franchise etc.;
de!reciation is allowable onl% after &
st
A!ril &99B.

$wner of ca!ital asset" Deemed owner, leased owner, legal owner. 1egistration in the name of
the assessee is also not re5uired. Su!!ose the !artnershi! firm has !urchased a car and is used b%
the !artner, then the notice is in the name of the !artner and not the firm.
+n case of com!an% there is difference of o!inon. +f the com!an% has !urchased the car which is
used b% the Director, then some sa% that it is !ro!ert% of the com!an%, and some sa% it is that of
the director. But with !artnershi! firm there is no such difference of o!inion.
0(am!le" +n case %ou have ta/en a building on lease, then %ou can claim de!reciation on that
building.
Bloc/ of assets – S.2:&&; – defined on the nature of ca!ital asset and the rate of de!reciation.
*here are &3 bloc/s under +* Act.
i. Buildings – there are 3 bloc/s.
• 1esidential building" 5E is the 1oD :1ate of de!reciation;
• -anufacturing business, 3actor% building etc. – &@E is the 1oD.
• *em!orar% buildings – &@@E 1oD. *em!orar% buildings are li/e wooden structures etc.

ii. )lant and -achiner%" )lant is defined under S.43:3;. 0ven boo/s are !lants.
*here are B bloc/s under this and the 1oD varies in case of different /inds of
!lants and machiner%
• &5E
• 2@E
• 3@E
• 4@E
• 5@E
• @E
• B@E
• &@@E
)lant and -achiner% – defined under section 43:3; – includes boo/s.
De!reciation – Section 32
&. S!ecified assets
2. 2sed in B8)
3. Asset must be owned b% assessee
4. $n the bloc/s of assets
Asset re5uired in 2@@B"@9 !ut to use in 2@@9"&@ "R can charge full de!reciation even if used onl%
for 2"3 months
• +f ac5uired and !ut to use in the same %ear – if used for less than &B@ da%s – onl% 5@E
de!reciation can be deducted.
• 0g. &@E de!reciation on 1s. &,@@,@@@ asset
&@8&@@ ( &,@@,@@@ G &@,@@@
5@E of &@,@@@ G 5@@@
%$sore %inerals v. CIT, &999 239 +*1 ##5
• $wnershi! means – e(ercising ownershi! rights in his own management
• >o registration re5uired to charge de!reciation
• 0g. +f car !urchased for firm but in the name of !artner – firm can still claim
de!reciation.
iii. 3urnitures – &@E 1oD in all cases. 3urniture includes fittings also, li/e wirings,
switchboards etc. – IT v. Taj ,otel :S? Audgment;
iv. +ntangible Assets – 25E 1oD on all intangible assets.

*herefore there are &3 bloc/s of assets.
+f there are 4 residential buildings, that will be one bloc/. *hus, we calculate the written down
value of the bloc/ and not the individual asset.
Critten down "alue (C)7)– defined under S.43:;
3irst date of the !revious %ear what is the value of the bloc/ of assets.
Su!!ose there are 4 business buildings and 1oD is &@E.
Su!!ose 'D< of this bloc/ of buildings on &
st
A!ril 2@@9 is 3 lac.
Su!!ose on 3&
st
-a% @9 %ou !urchase another business building, 0 which is of 2 lac.
Su!!ose on 3&
st
Dec @9 %ou sold building A and B for 5 lac.
?alculate the 'D< for !revious %ear 2@@9"&@.
'D< on &
st
A!r @9 G 3 lac.
<alue of 0 G 2 lac
*otal G 5 lac.
Sold A and B b% charging 5 lac.
*herefore the 'D< G @. *here is no 'D<. *here is bloc/ of assets, but now %ou cannot charge
an% de!reciation on this.
Su!!ose sale !roceeds of building A and B is lac, then & lac will be short term ca!ital gain and
%ou have to !a% ta( on this.
*here ma% be that there is 'D< and there is no asset.
Same e(am!le. Iou !urchase 0 also for 2 lac. After that %ou sold all the !ro!ert% and sale
!roceed is 4 lac. *hen the 'D< will be & lac. So, there is 'D< but no assets. *hus, there can be
no de!reciation. So this & lac will be short term ca!ital loss which can be set off, or carried
forward.

<alue in )I – de!reciation
G 'D< for the current %ear
A,B,?,D – 2,@@,@@@ on 3&
st
-arch, F@9
De!reciation G 2@,@@@
'D< on &
st
A!ril, =@9 G &,B@,@@@
3&
st
-a%, =@9, 0 !urchased for 2,@@,@@@
3&
st
August, =@9, A,B sold for 3,@@,@@@
3&
st
-arch, 2@&@
&,B@,@@@ S 2,@@,@@@ G 3,B@,@@@
" 3,@@,@@@
B@,@@@
+f sold for 4,@@,@@@ – &@E de!reciation G B,@@@
*hen – 2@,@@@ 'D< G #2,@@@
+f A,B,?,D,0 sold on 3&838&@ – &,@@,@@@
3,B@,@@@
" &,@@,@@@
2,B@,@@@ " short term ca!ital loss
" write off for %ears
+f sold A,B,?,D – &,@@,@@@
3,B@,@@@
" &,@@,@@@
2,B@,@@@ " 'D< of 0

&@8@382@&@
*here are 2 situations where asset is ac5uired before !revious %ear and !ut to use in the !revious
%ear, and where it is ac5uired !rior to the )I and !ut to use in the )I.
Su!!ose some asset has been ac5uired before the ).I. 2@@9"&@, that is, in 2@@B"@9. But it is !ut
to use in the %ear 2@@9"&@ :)I;. *he time factor is not im!ortant, which means it is !ut to use
onl% for 2 months or so, doesn=t matter. But if it is ac5uired and !ut to use in the )I itself, then if
it is used for less than &B@ da%s, then onl% 5@E of the de!reciation is allowed. $therwise the
entire de!reciation is allowed.
'D< :Section 43:;;" means in case of asset ac5uired in the )I the actual cost. +n case it is
ac5uired before the )I the actual cost to the assessee less the de!reciation actuall% allowed to
him under this Act. +f there is an% unabsorbed de!reciation that is carried forward, then that is
also !art of the 'D< in this %ear.
'D< means the 'D< as a!!licable on &
st
A!ril @9 minus all de!reciation :de!reciation actuall%
allowableG current de!reciation S some de!reciation that is carried forward from earlier;.
N>oteL :Bomba% 6? case;there is a case !ending in S? regarding whether the BS0 membershi!
card is a ca!ital asset or not. +n m% o!inion it should be a ca!ital asset, because under Section 32
as it includes an% other similar rights.O
4ctual ost
*here is a difference between cost and actual cost. Actual cost is defined in Section 43:&;. *here
are more than &5 e(!lanations of this definitionTTTT
Actual cost means the actual cost of the assets to the assessee reduced b% that !ortion of the cost
thereof if an% as he has met directl% or indirectl% b% an% other !erson or an% other !art%.
So if government has !rovided some subsid% on !urchase of !lant and machiner%, then that must
be reduced or subtracted from the cost to the assessee. Subsid% might be in the form of ta(
benefits etc. *hus, the resulting cost is the actual cost.
Su!!ose %ou are im!orting !lant and machiner%, then trans!ortation charges, im!ort charges, etc
is all added into actual cost. An% e(!enditure incurred b% assessee to start the machiner% or
establish the !lant, is !art of the actual cost. But an% income received b% assessee before the
commencement of the business then that must be reduced from the actual cost.
o halla%alli Sugars Lt$. v. IT :&9#5; 9B +*1 &# :S?; – *he actual cost should
be construed in the sense which no commercial man would misunderstand and
that the acce!ted rules of the accountanc% should be ado!ted for determining the
actual cost.
o IT v. Bo#aro Steels Lt$. :&999; 23 +*1 3&5 :S?; – 0(!enses on the test run
!rior to the !roduction. Pust to test the !lant and machiner% before it is bought,
%ou s!end some mone%. *hese e(!enses incurred in test run are !art of actual
cost.
Su!!ose the cost is &@,@@,@@@8"
0(!enses in test run G &,5@,@@@8"
Sale !rice G 5@,@@@
*hen actual cost G :&@,@@,@@@ S &,5@,@@@; – 5@,@@@ G &&,@@,@@@
+f sale !rice G 2,@@,@@@8"
*hen actual cost G 9,5@,@@@8"
Su!!ose %ou have ta/en loan to construct a business building and there is some interest that is
accrued on the loan. *his interest is added in the actual cost of the construction of the building,
!lant, machiner%, etc. *his should be before the commencement of the business.
Su!!ose before starting the business the% have !urchased !lant and machiner% which the% have
let out to some other businessman. *he% charge some rent. *hen this rent received b% the
com!an% must be deducted from the actual cost.
&28@382@&@
Section 02($)- 4ctual ost
0(!lanation &" An asset used in scientific research" when assets are used in scientific research
there are directions under Section 35 which is about all e(!enditures incurred during scientific
research. +t is totall% &@@E deductible. Since the assets have been used in scientific research it
has totall% been reduced to zero, hence now if we use it again, then the actual cost will be nil.
Since benefit has alread% been claimed under S.35, the same cannot be claimed again for
de!reciation.
0(am!le" A building has been used in scientific research. +t is totall% deductible. So, if its used
again for business !ur!oses, then the actual cost is zero.
*he value of the !articular asset which will fall in the bloc/ of asset.
1educed b% cost made b% an% other !erson.
0g. Subsid% !rovided b% Dovt.
)lant and machiner% !urchased outside +ndia
*rue G &@,@@,@@@
*rans!ortation G ((
?ustom Dut% G ((
?<D G ((
(( " Actual cost
0(em!tion !rovided b% Dovt. $r an% other agenc% would be deducted from its actual cost.
+nterest on loan ta/en for construction of building – added to the cost of construction of building
:Actual ?ost;.
1ent received from contractors for !re"construction cost – deducted from the actual
Actual cost G ((
1ent received G " ((
Actual cost charged for +* G ((
0(!enses incurred during trial run of machiner% – added to actual cost.
?ost " &@,@@,@@@
*est run "
a. 1aw material &,5@,@@@
i. Sale of !roduct :5@,@@@;
&&,@@,@@@ " Actual cost
ii. +f sale !roceeds :2,@@,@@@;
9,5@,@@@ " Actual cost
CIT v. Bo!aro #teels Ltd, &999 23 +*1 3&5 :S?;
C& #u'ars Ltd. V. CIT, &9#5 9B +*1 &# :S?;
• Actual cost should be construed in a commercial sense of general accounting !rinci!les.
0(!lanation &
+f %ou have used this building for scientific research, and then %ou sell it, then the sale !roceeds
will be ca!ital gain in case it=s more than the alread% e(isting 'D< of the bloc/ of assets "
Actual cost – shall be >il – &@@E de!reciation
Actual ?ost
" &@@E de!reciation
>+4
0(!lanation 2" Asset ac5uired b% wa% of gift or inheritance"
i. 'hen the asset was used b% the donor in his business and !rofession"
Actual cost to the !revious owner minus all the de!reciation actuall%
allowable to the owner G Actual cost for the donee
ii. 'hen the asset was not used b% the donor in his business and !rofession"
Actual cost to the !revious owner with no de!reciationG Actual cost of
asset for the donee as well.

A gifted !ro!ert% worth 1s. 5 lac to B which he bought in 2@@2"@3 and not used it. *hen the
actual cost for B is also 1s. 5 lac.
A bought and used a !ro!ert% worth 1s. 5 lac in 2@@2"@3 and then gifted it to B in 2@@9"&@.
actual cost of the !ro!ert% for B is 1s. 5 lac minus all the de!reciation allowable to A till 2@@9"
&@.
N>oteL even if it is used for a da% for business and !rofession, then it is deemed to be used for the
entire !revious %earO
0(!lanation 3" 'hen asset is transferred to evade ta( – when transfer is made for the !ur!ose of
reduction of ta( liabilit%.
Su!!ose A is using an asset M in his business and !rofession from 2@@2"@3. A transferred that
asset to B, an% relative :even if financial relationshi! is there that is relative;, b% charging 1s. 5
lac. But the actual cost of the asset determined b% the assessing officer is su!!ose 1s. & lac. 'hat
is actual cost for B. the cost to B will be 1s. & lac. But income to A will be 5 lac. So, B can
charge de!reciation on onl% 1s. & lac.
0(!lanation 4" Assets which are reac5uired b% the assessee" Su!!ose asset has been !urchased
and uses it in his buisiness and !rofession and then sells it to an%one :not relative; and reac5uires
the asset. *he actual cost to the assessee is the actual cost to him in the !revious occasion minus
all the de!reciation actuall% allowable, that is, the de!reciation that would have been allowed to
the assessee if he had it all along, or the actual cost of the asset when reac5uired b% him,
whichever is less.
0(!lanation 4A" Sell and lease bac/ transaction" S? treats it as a valid transaction.
• CIT v. &unja( #tate )lectricit$ Board :2@@9 )unA 6?;" valid transaction and not for the
evasion of ta(.
+n case of !ower cor!orations &@@E de!reciation is allowable on !lant and machiner% and the%
right off the total cost in one %ear. *hen the% sell it again, and then lease it bac/ to get deduction
on the rent !aid :1ent being revenue e(!enditure;.
0(!lanation 5" Building brought into use for business subse5uent to its ac5uisition"
Su!!ose %ou have !urchased building in 2@@2"@3 and its cost is 2@ lac. Iou are using it in %our
business and !rofession onl% in 2@@9"&@. the actual cost will then be the actual cost in 2@@2"@3
minus all the de!reciation that would have been chargeable from the date of ac5uisition of the
building.
&58@382@&@
4dditional )epreciation * Sec. 22($)(iia)
+f a new !lant or machiner% has been ac5uired and installed after 3& -arch 2@@5, then there is
additional de!reciation of 2@E on this !lant and machiner%. Assessee must be engaged in the
business of !roduction or manufacture of an% article.
Sec. 22(2) * .nabsorbed )epreciation
De!reciation could not be absorbed because of less !rofit. )rofit is less than de!reciation
allowance. +t ma% be set off or ma%be carried forward for an indefinite !eriod. *here is no time
limit for such de!reciation.
)eductions
Sec. 22 4? and 'ule ( 4
• *ea develo!ment account
• ?offee develo!ment account
• 1ubber develo!ment account
&. Assessee must be involved in the business of manufacturing tea, coffee or rubber.
2. *he% should de!osit the !rofit with >ABA1D or De!osit account governed b% the *ea8
?offee8 1ubber Board.
Duantum of deductionE the amount de!osited in this scheme or 4@E of business !rofit,
whichever is less. :6ere the 4@E will be 4@E of 4@E of the business !rofit, as the income in this
case is !artiall% agricultural and !artiall% non"agricultural;
Pro"isoE *here is also restriction on the utilization of this amount. +t ma% be utilized for
!articular !ur!oses mentioned in the scheme onl%. +t ma% be withdrawn but has to be utilized in
the scheme onl%. +t cannot be utilized for other !ur!oses. +f used for other !ur!oses, the amount
de!osited in this scheme will be treated as business income of the !revious %ear and added to the
!rofits.
;ther cases when the amount can be withdrawnE
&. ?losure of business
2. Death of assessee
3. )artition of 623
4. Dissolution of the firm
5. 4i5uidation of com!an%
+n cases of :&; and :4;, total amount will be treated as business income from the !revious %ear.
Pro"isoE 'hen mone% has been withdrawn from the scheme and some asset is ac5uired and such
asset is transferred to an%one within B %ears :loc/ing !eriod;, whatever is the difference between
sale !roceeds and the cost of the asset will be income in the hands of the assessee.
Sec. 2( * Scientific 'esearch
Scientific research defined under sec. 43:4; – not onl% natural science but even a!!lied science
or social science, either in house research, or research on behalf of somebod% else.
All the revenue e(!enditure and ca!ital e(!enditure for scientific research &@@E e(em!ted.
Sec. 35 has overriding effect on sec. 32.
Pro"isoE +f the assets are sold after scientific research, the difference between net sale !roceeds
and the cost of assets is income :2@@9 Amendment;.
Sec. 2( 4?? * 6,penditure for obtaining license to operate telecommunication ser"ices
*he e(!enditure is e(em!ted on !ro!ortionate basis. Su!!ose the license is of for 2@ %ears and
the e(!enditure is 2@ la/hs, it should be e(em!ted !ro!ortionatel% over the entire !eriod of
license.
Sec. 2( ) * Preliminary e,penses
Available to two classesL
i. +ndian com!an%
ii. other than com!an%, resident in +ndia
'hatever e(!enditure incurred b% assessee before the commencement of business or after the
commencement for the e(!ansion of business or for new industrial underta/ings – )re!aration of
feasibilit% re!ort, !roAect re!ort, for conducting mar/et surve%, engineering services, legal
charges for drafting agreement to start the business8 AoA8 -oA8 !ros!ectus8 registration under
1o?, t%!ing e(!enses etc. – 0(haustive list.
Duantum of )eduction * Deduction will not e(ceed 5E of the total cost of the !roAect or ca!ital
involved for this !ur!ose. +t must be in 5 e5ual instalments from the %ear of commencement.
&8@382@&@
Section 2&
S. 3 :&; :iii; – Interest on borrowed capital for the purpose of business
-ust be used for the !ur!ose of business. *here is dis!ute regarding !ur!ose of business. +t is
not onl% for the !ur!ose of earning !rofit. +f there is loan borrowed for constructing a road from
the main road to the !remises, or to bu% a bus for the !ur!ose of the em!lo%ees, it is also a
business !ur!ose.
6owever, there must be an agreement of refund.
S.'. Buil$ers v. IT :2@@#; 2BB +*1 & :S?; – Ffor the !ur!ose of business and !rofession= is
different from the !ur!ose of earning !rofit :liberal inter!retation;. Business and !rofession is
ver% wide in meaning. *he holding com!an% transferred the loan to the sister concern for B8)
without charging interest. *he business of sister concern is also !ur!ose of business of the
holding com!an%.
S. 3 :&; :iv; – ?ad debts
'hen debt becomes irrecoverable, that is bad debt. 'hen %ou write it off in %our )84 a8c, it is
bad debt. *otal amount is e(em!ted. +f it is recovered in the subse5uent %ears, that will be
deemed !rofit and subAect to ta(.
F*est of ?ommercial 0(!edienc%= – 28S 3#.
All revenue e(!enditure for the !ur!ose of business and !rofession is deductible u8s 3#.
:1esiduar% deduction for B8);.
Bad debt
• debt becomes unrecoverable.
• +f the debt is written off from the )rofit 4oss A8c, it can be deducted from )rofit.
:1B+ guidelines for Ban/ing and 3inancial +nstitutions;
• Subse5uent realization of bad debts is treated as deemed !rofit u8s 4&:4;.
o TR- LT". :2@&@; S? +*1 – 1e5uirement under S. 3:&; :vii;. Debt should
become unrecoverable and it should be written off in the )rofit 4oss A8c . :>ot
necessaril% a bad debt;.

Section 27
8eneral )eductions for ?usiness and Profession
• An% e(!enditure other than u8s 3@"3, ca!ital e(!enditure, !ersonal e(!enditure, which
are for the !ur!ose of Business and )rofession.

0(!lanation – An% e(!enditure for an% offense is not deductible.
o "r. T.'. .ureshi v. IT :2@@; &5# *a(mann 5&4 :S?; " B2*, deduction under
e(!enditure is different from business loss.


?onditions under S.3#
• not covered under s. 3@"3
• not a !ersonal e(!enditure8e(!enses
• not ca!ital e(!enditure
• must be laid out wholl% and e(clusivel% for the !ur!ose of business and !rofession
• must not be incurred for an% offense.

Section 3# is subAect to overriding effects of Sections 3# :2B;, 4@, 4@A and 43B.
As !er Section 4@, for the !erson to be able to use !rovision of deduction of e(!enditure, the ta(
on such e(!enditure has to be deducted at source.
Personal 6,penditure
o State of !a$ras v. oelho :&94; 53 +*1 &B :S?; – )ersonal e(!enditure would
include e(!enses on the !erson of the assessee or to satisf% his !ersonal needs
such as clothes, food etc., for the !ur!ose not related to the business for which
deduction is !aid.
0ver% e(!enses to discharge a !ersonal obligation cannot become !ersonal
e(!enses. 0g – -edical e(!enditure on the !erson.
o !a$hav Prasa$ *ati+a v. IT :&9#9; &&B +*1 2@@ :S?; – interest !aid on a
borrowing to enable an assessee to ma/e a gift to meet a !ersonal obligation is not
a !ersonal e(!enditure. Dift to clients8em!lo%ees is not !ersonal e(!enditure.
o IT v. Kohinoor Pa%er /or#s :&99#; 22 +*1 :-); – ?ost of education of
!artner is allowed as deduction.
o ,in$ustan ,osier+ Lt$. v. IT :&994; 2@9 +*1 353 :Bom; – such e(!enditure is
disallowed b% Bom 6?.
o ! Subramanian v. IT :2@@&; 25@ +*1 #9 :-ad; – ?laim relating to
e(!enditure on education of children of the !artner, on the condition that he will
Aoin the firm as a !artner. *his is held to be !ersonal e(!enditure.
o IT v. RKKR Steels Pvt. Lt$. :2@@2; 25B +*1 3@ :-ad; – Allowed as business
e(!enditure :same issue;.
o
&B8@382@&@
Section 27($) - 8eneral )eduction
&. 0(!enditure must not be covered under secs. 32"3.
2. +t must not be ca!ital in nature, onl% revenue e(!enditures are deductible.
3. -ust not be !ersonal e(!enses.
4. 'holl% and e(clusivel% for the !ur!ose of business or !rofession.
5. 0(!enditure must be incurred in the !revious %ear.
*here is no clear definition of ca!ital and it de!ends on the facts of the circumstances. +f
some e(!enditure is from the fi(ed ca!ital side, its ca!ital and if its circulating ca!ital
side, then its revenue e(!enditure. But these tests are not e(clusive. +f there is an
enduring benefit it is ca!ital. But in some cases, even that might be revenue e(!enditure.
>ow there is !rogressive liberalization of e(!enditure. *oda%, most e(!enditure is
revenue in nature.
1evenue alwa%s tries to restrict the coverage of the section and assessee alwa%s wants to
e(!and the coverage of the Section. 6ence, it is a dis!utable section and has a number of
cases.
IT v. !a$ras 'uto Services Pvt. Lt$. :&99B; 233 +*1 4B – in this case 3 more cases have been
discussed, such as La*mi #u'ar %ills Co. v. CIT :&9#&; B2 +*1 3# S?, L+ #u'ar ,actor$ and
Oil %ills v. CIT, CIT v. -ssociated Cement Companies. After discussing these cases, the% have
made some guidelines regarding what is revenue and ca!italL
i. $utla% is deemed to be ca!ital if it is made for the e(!ansion of business, re!lacement
of business or initiation of business.
ii. 0(!enditure ma% be treated as !ro!ert% attributed to ca!ital when its made not onl%
once and for all, but with a view to bring with an enduring benefit or advantage to the
trade, then its ca!ital e(!enditure.
iii. +f e(!enditure incurred was !art of its fi(ed ca!ital of the business its ca!ital
e(!enditure or !art of the circulating ca!ital :Aust to run the business; will be revenue
e(!enditure.
iv. Uuantum of e(!enditure is not a test for deciding whether its ca!ital or revenue
e(!enditure. IT v. La#e Palace ,otels :2@@2; 25B +*1 52 :1aA;" 6otel has incurred
e(!enditure to strengthen the facilities for accommodation of facilities for
commonwealth ministers. )urchase of furniture, decorative lam!s, mattresses, car!ets
etc. has been made. *ribunal said that it is ca!ital e(!enditure as these are enduring
benefits. But 6? allowed this as revenue e(!enditure as the% have !rofit motive for
doing all this as the% are not re!lacing something or e(!anding their business.
 Bi#aner 0+%sum Lt$. v. IT :&99&; & +*1 – )a%ment was made for
shifting the railwa% station to remove an obstacle to facilitate the business
of mining. *he S? said that it is revenue e(!enditure.
 *he e(!enditure has been incurred in obtaining feasibilit% re!ort to
convert co/e !lant into cement !lant and this has been allowed as a
revenue e(!enditure.
So, after doing business, if %ou are doing mar/et surve%, re!orts etc., that can be
covered under revenue e(!enditure and deduction can be claimed under this
Section.
3. 0(!enditure must be incurred wholl% and e(clusivel% for the !ur!ose of business

F'holl% and e(clusivel%=" S? states that it does not mean it has to be necessar%
e(!enditure. 0ven if it is not re5uired for the business it is revenue e(!enditure. 3or
instance, an% e(!enditure in furtherance of ?or!orate Social 1es!onsibilit% :?S1; it is
allowed as revenue e(!enditure. *he% state that Fwholl%= means 5uantum of e(!enditure
and Fe(clusivel%= refers to the motive, obAect and intention of the e(!enditure.
 Sassoon "avi$ ) o. v. IT :&9#9; &&B +*1 2&" wholl% and e(clusivel%
does not mean necessaril%. $rdinaril% it is for the assessee to decide what
e(!enditure should be incurred for the business and if it incurred for
!romoting the business.
 Shree !eena#shi !ills Lt$. v. IT :&9#; 3 +*1 2@# :S?; – litigation
e(!enses were allowed as wholl% and e(clusivel% for the !ur!ose of
business.
F3or the !ur!ose of business= is wider than Ffor the !ur!ose of earning !rofit= which is
stated in Section 5#.
-otive of !rofit is not a deciding factor of whether it is wholl% and e(clusivel% for
!ur!ose of business.
0(!enditure for commercial e(!edienc% is also revenue e(!enditure. Distributing *itan
watches to its em!lo%ees is revenue e(!enditure. 0( gratia !a%ment has been made to the
de!endant of the em!lo%ee, incentive wages !aid to the em!lo%ee, even though its not
!art of the contract. *his is for commercial e(!edienc% and is covered as revenue
e(!enditure.
?ric/eter incurring e(!enditure on treatment of his coach=s wife is also revenue
e(!enditure according to the ?ourt.
Personal 6,penditure
#tate o. %adras v. / 0 Coelho,&94 53 +*1 &B :S?;
• 'hatever e(!enditure e(!ensed on the !erson of the assessee – clothes, food etc.
+f it is a !art of the business, it is for business !ur!ose. -edical e(!enditure on the !erson,
s!ecial suits etc.
'holl% and e(clusivel% for the !ur!ose of business – ?ourt has given a ver% wide connotation.
CIT v. Kamal, :1aA 6?;
• 3ountain for beautification !ur!oses, held to be in business !ur!oses.
#assoon 0. David 1 Co. &. Ltd. V2s. CIT, Bom(a$ :&9#9; &&B +*1 2& :S?;
• *he e(!ression Jwholl% and e(clusivel%K used in section &@:2;:(v; of the +ncome"ta(
Act, &922, does not mean Jnecessaril%K
0(!enditure must be incurred in the !revious %ear.
ontingent #iability
• Bharat Earth !overs v. IT :2@@@; 245 +*1 42B :S?; – 0(!enditure must be incurred in
the !revious %ear. But if %ou are maintaining the account in the mercantile s%stem. 'hen
liabilit% will be incurred in the future time that is contingent liabilit%. But S? said that if
the business liabilit% has definitel% arisen in the accounting %ear the deduction should be
allowed although it ma% be 5uantified and discharged on a future date. +n this case the
assessee has made a fund for the !ur!ose of encashment of leave after retirementH the%
contribute something each %ear towards this fund. *he S? allowed this as business
liabilit%, and what is uncertain or contingent is onl% the 5uantification and discharge of
the liabilit%, which is de!endant on his retirement. *herefore, as the liabilit% is certain, it
is not contingent liabilit%.

&98@382@&@
*here was an amendment in Section 43B. in 43B it states that certain deductions are allowable
on the basis of actual !a%ment and not a!!roval. *he% have included Jan% sum !a%able b%
assessee as an em!lo%er in lieu of an% leave at the credit of the em!lo%ee.K So, whenever actual
!a%ment has been made b% em!lo%er to em!lo%ee onl% then can %ou get deduction under S.3#.
But, the S? states in Bharat Earth !overs case that this is not contingent liabilit%. 'henever
!rovision has been made for encashment of leave and the% transfer some amount for the same,
then it is allowable as deduction.
Section 43B is a!!licable when actual !a%ment has been made.
2@@# ?alcutta 6? case – struc/ down this !rovision :amendment to Section 43B; as
unconstitutional. *here is no re5uirement of actual !a%ment.
4itigation e(!enses is also e(!enditure. Denerall% it is said that for criminal litigation it is not
allowed. An% litigation e(!enses for civil !roceedings are allowable. But if the !erson is
ac5uitted, then he can claim it as e(!enditure.
0(!enditure towards the Advertisement" Deferred revenue e(!enditure :accounting term;. Since,
the e(!enditure is over a !eriod of time and hence, will be a!!ortioned in that res!ect. Deduction
is allowed.

Section 27 (2?)< 01(a)< 01 4 and 02 ? ha"e o"erriding effect on S.21 to S.27
Section 3#:2B;" An% e(!enditure for advertisement in an% souvenir, tem!late, brochure of an%
!olitical !art% is ta(able.
">o allowance shall be made for e(!enditure made in advertising b% a !olitical !art%, such as b%
wa% of soveneir, brochure, !am!hlet. +f the assessee is !a%ing to advertise about his com!an% on
the souvenir then that e(!enditure is not allowable.
Section 27 (2?) *Sections 3#:2B;, 4@:a;, 4@A, 43B have an overriding effect on Sections 3"3B.
Section 3B" furniture used !artl% for business and !artl% for !ersonal use. A!!ortionment to be
done.
Section 4@:a; – this is related to transfer !ricing. *his includes transactions mainl% within +ndia.
Section 92 is a s!ecific !rovision on transfer !ricing and has overriding effect on this Section.
i. An% interest, ro%alt% fees for technical services !aid to an% !erson outside +ndia,
or an% !erson in +ndia who is a non resident, and no deduction has been made at
source, then whatever !a%ment has been made will not be allowed as deduction
on the hands of the !a%er.
0(." A is ma/ing !a%ment of 1s. 2@,@@,@@@ to B outside +ndia or ? in +ndia who is
a non resident, then such !a%ment for interest, ro%alt% fees for technical services
etc., then no allowance is made. *hus, the !a%er should com!ulsoril% deduct *DS.
But if later the ta( has been !aid, or *DS deducted, then it is deductible.
ii. Section 4@:a;:ii; – An% sum !aid on account of an% rent or ta( levied on the !rofit
or gain of an% business or !rofession :so an% sum !aid as income ta( or ta( on
!rofit; is not deductible.
&roviso " +f an% ta( has been !aid outside +ndia then credit can be claimed under
Section 9@, 9@A and 9&. *a( credit is whatever ta( has been !aid outside +ndia.
Su!!ose 1s. 2@,@@@ rs has been !aid as ta( outside +ndia, then that can be claimed
as ta( credit while !a%ing ta( in +ndia. Su!!ose total ta( %ou have to !a% in +ndia
is 1s. & lac, then %ou get a credit of 1s. 2@,@@@, and hence, the ta( that %ou will
!a% in +ndia is 1s. B@,@@@. *his is a unilateral benefit !rovided to all residents, and
is a!!licable in case of absence of an% D*A.
+f ta( has been !aid on turnover :such as in *hailand;, and not on income or
!rofit, this condition will not a!!l%.
iii. An% sum !aid on account of wealth ta( is also not deductible.
iv. )a%ment of salar%"
v. S** is also deductible under S.3. :Section 4@:a;:i;:b; – deductible under Section
3. before this amendment it was a rebate under Section BB0.
vi. 3B* – Section 4@:a;:i;:c; – now this has been omitted. +t was an%wa% not
deductible.

228@382@&@
Section 4@A
Payment to 'elati"es – Section 4@A:2;. 0(!enses or !a%ments not deductible in certain
circumstancesL
'here the assessee incurs an% e(!enditure in res!ect of which !a%ment has been made or is to
be made to an% !erson referred to an% !erson :relatives; mentioned here, and the assessing
officer is of the o!inion that the e(!enditure is e(cessive with regard to the fair !rice in the
mar/et. So much e(!endtire as is considered to be e(cessive or unreasonable, then the same will
not be allowed for deduction.
0g." Su!!ose A !a%s &@@@8" !er 5uintal of !add% to B, and he has !urchased &@@@ 5uintal of
!add% from B. but mar/et !rice of !add% is onl% 9@@8" !er 5uintal. So the e(cessive !a%ment is
1s.&@@8" !er 5uintal, and &@@ ( &@@@ G &@@@@@ will not be allowed for deduction. But the
condition is that B must be relative of A.
But in case of !rofession, how do %ou /now the fair mar/et value of the same. 4i/e if we engage
6arish Salve, or >ariman as our advocate, then what is the fair mar/et value.
• Racon !achines Tools Pvt. Lt$. v. IT :2@@; &55 *a(mann 252 :Var; " *here cannot be
an% %ardstic/ in the matter of !rofessional services or technical services.
• '1tec Soft(are v. 'IT :2@@#; 294 +*1 32 :Bangalore A!!ellate tribunal; S!ecial Bench
– 3irst and leading case on transfer !ricing. 6as been followed b% the S? also.

Section 4@A:3; – An% !a%ment e(ceeding 1s. 2@@@@ in a da% b% account !a%ee che5ue or ban/
drafts, the e(!enditure will be allowed. An% !a%ment made to an% !erson e(ceeding 2@@@@8" in
one da%, if it is made through account !a%ee che5ue or account !a%ee ban/ draft, the total
e(!enditure is allowed as deductible.
Su!!ose A has !urchased raw material from B, and the total !a%ment has been made in one da%
in se!arate forms, that is, &@@@@ S &#@@@ S &2@@@, then the aggregate will be deductible.
*he unaccounted !a%ment should not e(ceed 2@@@@8".
So, if 1s. &@@@@ and &#@@@ are made through account !a%ee che5ue and &2@@@ is made b% cash,
then the entire amount will be deductible. 6owever, if instead of &2@@@, another 2@@@@ is made
b% cash, then that is not deductible, and onl% 2#@@@ is deductible.
2nder rule DD there are certain e(ce!tions, such as an% !a%ment made to financial or
institutional ban/s, government, !a%ment towards ta(, dut%, cess, farmers, etc. then this
!rovision is not a!!licable.
Section 43B – certain deductions onl% on actual !a%ment. A!!licable when account is
maintained b% mercantile s%stem.
+f there is an% !a%ment relating to these issues, and there is actual !a%ment onl% then can %ou
claim deduction. So, no claim on accrual basis.
0g." an% !a%ment made as interest, no claim on accrual basis.
Sum !aid b% em!lo%er b% wa% of contribution towards some fund.
An% sum !a%able b% em!lo%er b% wa% of encashment of leave.
Exi$e Batteries v. 2OI – ?alcutta 6? case – decided that this section stating that encashment of
leave has to be on actual !a%ment basis is unconstitutional.

22
nd
/arch< 21$1
Section 01(a) – 'ithholding of ta( or deduction of ta(
Subclause :i; – if the !a%ment is relating to the interest, ro%alt% or an% fees for technical services
or salar% to a !erson who isL
i. $utside +ndia
ii. >on"resident in +ndia
And if no *DS or withholding ta(es have been deducted, then there is no deduction of these
!a%ments. *he% are income under section 9 in the hands of the non"resident.
+n the case of non"residents, we call it withholding ta(. +n the case of residents, we call it *DS.
Subclause :ia; – resident !a%ers
*he !a%er and !a%ee both are residents, and it this condition *DS will not be deducted.
Subclause :ib; – Securit% *ransaction *a( :S**;
2@@5"@ to 2@@B"@9 Nunder section BB0, from @B"@9, deductible under section 3:&;:(v;O – full%
deductible.
Subclause :ii; – +ncome ta( is not deductible.
SubAect to section 9@, 9@A, 9& – D*AA, unilateral benefits
+f %ou !a% ta( on turnover in some countr% such as *hailand, it is deductible.
Subclause :iia; – 'ealth ta( – not deductible.
Section 014(2) * )a%ment made to relatives :transfer !ricing;
4iable to be disallowed in com!uting business !rofits to an e(tent that such e(!enditure is
unreasonable /ee!ing in mind the current mar/et values.
1elative defined under section 2:4&;
'hat ha!!ens if the relative is rendering !rofessional services. 6ow to determine mar/et !rice
in such cases. S8" 5E is allowed" burden lies on the assessing officer to show it is unreasonable.
Recon %achine Tolls &vt Ltd v. CIT,2@@ &55 *a(mann 244 :Var;
• )rofessional service
-3tec #o.twares v. CIT, Bangalore *ribunal, 2@@# 294 +*1 32 :A!!ellate *ri. S!l Bench;
• *ransfer !ricing, ver% im!ortant
Section 01(4)(2) * 'here the assessee incurs an% e(!enditure in res!ect of which he !a%s 1s.
2@,@@,@@@ in one da% to one !erson for one bill, total e(!enditure will be disallowed if it is not
made through A8? !a%ee che5ue or DD.
1ule DD !rovides e(ce!tions to this rule.
Section 02? * ?ertain deductions will onl% be allowed whenever actual !a%ment has been made,
not on the basis of accrual.
+nterest will onl% be deductible if there is actual !a%ment.
An% sum !a%able b% assessee as interest on an% loan.
An% amount for the encashment of leave.
Some other conditions also

S6!I;- 0$
)eemed Profit " 'here an allowance or deduction has been made in the assessment for an%
%ear in res!ect of loss, e(!enditure or trading liabilit% incurred b% assessee and subse5uentl% in
an% )I has been obtained b% assessee.
0(am!les"
Su!!ose in 2@@&"@2, there is certain loss incurred b% assessee A and is claimed as deduction in
the )I 2@@&"@2 itself.
0g. 4oss due to fire and damage to stoc/ in trade has been claimed as business loss. Su!!ose in
2@@4"@5, A receives some amount as insurance claim. *his claim will be ta(able as a deemed
!rofit.
Some bad debt has been written off in one %ear and subse5uentl% in another %ear, some !art of
the debt is received b% the !erson. *hen this mone% will be deemed !rofit in this %ear and will be
ta(able as deemed !rofit.
Su!!ose in 2@@&"@2, there is sales ta( !a%ment b% A. he has de!osited this !rofit in !rotest and
has filed a claim in the 6?. Su!!ose in 2@@4"@5, 6? refunds 5@@@@ to him. *his is deemed !rofit
in 2@@4"@5.
• Pol+%hlex In$ia Pvt. Lt$. v. IT :2@@2; &24 *a(mann 3#3 :S?; – Deemed !rofit.

)roblem arises in case of trading liabilit%, such as in case where a!!eal has been made, !a%ment
of ta( etc.
)eemed Profit (section 0$ subclause 0)
'here an allowance or deduction has been made in the Assessment %ear
a. 4oss, e(!enditure, trading liabilit% :e(cise dut%;
b. 1ecovered in the subse5uent %ear
Deemed !rofit chargeable under section 2B.
CIT v. %oolchand, &9B& &3& +*1 #@ :Del;
4OI v. 0K #$nthetics Ltd, &993 &99 +*1 &4 :S?;
#$nclair &vt Ltd v. CIT,&9#4 9# +*1 &5 :S?;
S6!I;- 00
Presumpti"e !a,ation
+n case of retail business, trans!ortation services, construction services, what is the amount that
is charged under ta(.
Section &#2 sa%s that #.5E of total recei!t will be ta/en as income and ta( will be levied on that
amount onl%. *his is also !resum!tive ta(ation. *he% !resume that #.5E of the recei!t is income.

Section 0044 and 004? * ompulsory /aintenance of 4ccounts and ompulsory 4udit
)rofessionals – 2 t%!es :1ule 3;
a. S!ecified
b. >on"s!ecified
-onetar% limit – total turnover of 1s &,5@,@@@ in the !revious %ear
Section 44AA and Section 44ABL -aintenance of Accounts and ?om!ulsor% maintenance of
accounts :audit;
44AA is a!!licable to businessmen and !rofessionals. *here are two categories, s!ecified
!rofessionals and non"s!ecified !rofessionals. 1ule 3 defines these two. S!ecified )rofession,
legal, medical, 0ngineering, Architecture, accountanc%, *echnical su!!ort. And other notified
Aobs li/eL
W 3ilm ArtistL ever%thing related to films.
W Authorised 1e!resentatives
W ?om!an% Secrataries
+f their gross recei!t in !rofession e(ceeds &,5@,@@@ in an% of the three %ears immediatel%
!receding the !revious %ear, or if the% are starting the business in the !revious %ear, their income
e(ceeds &,5@,@@@ the% are re5uired to maintain such boo/s and accounts as !er the rules. 4i/e
ledgers, original bills.
+n case of non"s!ecified !rofessionals, the% must maintain accounts Aust to satisf% the assessing
officer, but there is no other re5uirement of maintaining accounts.
Section 44AB, if his gross recei!t, total sales and turnover e(ceeds, 4@,@@,@@@ in an% !revious
%ear, he must ma/e a com!ulsor% audit. 4@,@@,@@@ has been increased to @,@@,@@@ in the recent
finance act.
ompulsory 4udit * *otal !roceeds8 turnover e(ceeds 1s 4@,@@,@@@ :2@&@"&& – 1s @,@@,@@@;,
in case of !rofessionals, 1s &@,@@,@@@ :2@&@"&& – 1s &5,@@,@@@;
3or the !rofessionals if his salar% e(ceeds &@,@@,@@@ there must be a com!ulsor% audit and it has
been increased to 5@,@@,@@@.
W Iou get a months e(tension if %ou need to do this audit, and %ou must submit it with the return.
*here is a !enalt% under section 2#&A.
W +f a freighting, insurance etc. businesses :where !rofit is fi(ed at a certain E; sa% that there is
no !rofit at all, the% must ma/e an audit.
4PI!4# 84I-S
2&B12B21$1
'elated Sections * 2($0)< 2(2%4)< 2(2%?)< 2(024)< 2(02?)< $1(2&)< $1(27)< 2(02)< $$$< $$(<
2(07)
Section 45 to 55AL ?a!ital Dains
W Section 2:&4; defines ca!ital asset,
W section 2:29a; defines long term ca!ital asset,
W section 2:&9b; defines long term ca!ital gain, section 2 :42A; Short term ca!ital asset,
W Section 2:42B; short term ca!ital gain,
W section 2:42c; defines slum! sale,
W Section 2:4#; ,
W section &@:3; long term ca!ital gain on eligible e5uit% shares. *his is !ro!osed to be abolished.
&@:3B; *he transaction must be subAect to S**.
Section &@:3#; com!ensation received on com!ulsor% ac5uisition of agricultural land in urban
area is e(em!ted.

Section 45,
W ?a!ital AssetL
o )aintings, drawings, artefacts, inserted b% amendment 2@@#
o Bearer Bonds removed
o +t must be a ca!ital asset on the date of transfer
W -ust be transfer in !revious %ear
W 'ill arise in the !revious %ear
W 0(em!tions, li/e com!ulsor% ac5uisition, then when the com!ensation is received that is when
the ca!ital gain will ta/e !lace.
6eld :not necessaril% owned; b% an assessee, actual !h%sical !ossession, constructive !ossession
and the s%mbolic !ossession all counts.
• Savanti lal !ane# Lal seth v IT, &9B B +*1 5@3
Section 07 * ?harging Section" the following conditions are necessar% for the a!!lication of
ca!ital gains.
a; ?a!ital Asset
b; *ransfer
c; *ransfer in the )revious Iear
d; >ot covered under an% e(em!tions under Section 54
Section 2($0)- ?a!ital Asset does not include the following
a; Stoc/ in trade
b; raw materials for !ur!oses of business or !rofession.
c; )ersonal effects or movable !ro!ert% held for !ersonal use b% assessee or member of famil% or
de!endant :e*ceptions are jeweller$, drawin's, paintin's etc.5
d; +t also e(cludes agricultural land not being situated within Aurisdiction of a munici!alit%, etc.
IT v Sita$evi Po$$ar 6789:5 7:9 ITR ;<= 6Bom5 > Silver utensils of the /ind used in the
/itchen and dining room were held to be !ersonal assets and not ca!ital assets.
!aharaja Rana !! Singhji v IT 678?=5 7<= ITR =7 > Silver coins or gold coins offered to
deit% at time of )uAa are Aeweller% and hence ca!ital assets.
!ypes of apital 4ssets
i; *he rate of charging is different for different ca!ital assets.
ii; 1ate of Short *erm ?a!ital Dains is &5E
iii; 3or short term ca!ital gains, !eriod of holding of ca!ital asset should be less than 3 months
or less than &2 months for shares8securities8zero cou!on bonds8mutual funds.
Ex%lanation
i; +n determining the !eriod for which the ca!ital asset is held b% the assessee, for a com!an% in
li5uidation, the !eriod of li5uidation shall be e(cluded.
Long Term a%ital 'sset 3 Section 4546'7 3
a; 1ate of charge is 2@E
b; )eriod of holding should be more than 3 months for normal assets and more than &2 months
for shares8securities8zero cou!on bonds, etc.
c; 4ong term ca!ital gain on shares is e(em!t from ta( under section &@
Ex%lanation of Short Term a%ital gains
i; )eriod of holding for amalgamation – Shares ac5uired on &
st
Pan. ?om!an% amalgamated on &
st
>ov. *hen the !eriod of holding is till &
st
Panuar%.
ii; +f A ac5uires !ro!ert% in &9B@, B inherits !ro!ert% on &
st
Se!tember 2@&@ and sells on 3@
th
>ov 2@&@, !eriod of holding is from &9B@.
iii; Same a!!lies in case of -aAorit% ?om!an%.
iv; +f a right is relin5uished and the later owner ta/es u! the right, the !eriod of holding is from
the date of holding of the !revious owner.
v; +n case of cor!oratization of shares, the !eriod of holding will be from date of holding
initiall%.
Short !erm apital 4sset
N3or shares and securities the !eriod of &2 months is limit. +f its one da% before &2 months, it is
ta(able at the rate of &5E. 6owever, in case of long term ca!ital gain in case of shares is non
ta(able.
3or other assets, the !eriod of holding is 3 months.O
Short term ca!ital asset means one held b% assessee for not more than 3 months immediatel% on
the date of transfer. *ime of holding G the date of ac5uisition to date of transfer.
+n case of shares of com!an%, unit of 2*+, securities listed in an% stoc/ e(change, unit of -utual
3und, or a Xero ?ou!on Bond, the word &2 months is substituted in !lace of 3 months.
0(!lanation & – Share held in a com!an% in li5uidation – how do %ou calculate the !eriod of
holding. 'e have to e(clude the time subse5uent to the date on which the com!an% goes into
li5uidation.
+f A holds a share of a com!an% which goes into li5uidation, then for the !eriod of holding, the
!eriod subse5uent to when the com!an% goes into li5uidation has to be e(cluded. So even if %ou
hold the shares for 2 to 3 months !ost li5uidation, that doesn=t count.
0(!lanation 2 – in case of ca!ital asset which becomes the !ro!ert% of the assessee, b% wa% of
gifts and inheritance, the !eriod of holding of !revious owner will be included in the !eriod of
holding of the subse5uent owner.
+f !ro!ert% is gifted on A!ril &, 2@@2, and it was being held b% the original owner from A!ril 3@,
2@@2. then for calculating the !eriod of holding, the !eriod of holding of original owner is also
counted.
0(!lanation 3 – Shares in an +ndian amalgamated com!an% – Since %ou alread% have the shares
of the amalgamating com!an%, which are now the shares of the amalgamated com!an%, then the
!eriod of holding is counted from the date of ac5uisition of shares in the amalgamating com!an%.
N>oteL +n this case the transfer is called Je(tinguishment of rightK, where the shares are
transferred from amalgamting com!an% to the amalgamated com!an%.
1elin5uishment of right – is also transfer.O
0(!lanation 4 – Share in resulting com!an% in case of demerger – Same rule as in case of
amalgamation
0(!lanation 5 – *rading or dealing rights of recognized stoc/ e(change – if %ou have an% trading
rights before cor!oritizaiton or deutilization of stoc/ e(change.
Su!!ose %ou have trading rights of BS0 from &
st
A!ril 2@@2. the cor!oritization of BS0 ta/es
!lace in 2@@5. >ow %ou are selling %our right in 2@@#. then what is the !eriod of holding. *he
!eriod of holding will be counted from &
st
A!ril 2@@2. 0ven if %ou ac5uire some e5uit% shares on
cor!oritization of BS0, then also the !eriod of holding will be counted from &
st
A!ril 2@@2 and
not from 2@@5.
0(!lanation " 1ight issues of the shares – the date of ac5uisition is from the date of offer of
such right in favour of that !erson, so for that !erson, the !eriod of holding will be from date of
offer.
0(!lanation " +n case of Bonus Shares – the !eriod of holding commences from the date when
%ou ac5uire the shares.
• IT v. Bimal chan$ 0o+alchan$ :&993; 2@& +*1 442 :1aA; " A bu%s land in 2@@2. 6e
starts construction in 2@@5 and com!letes the building in 2@@B. he sells it in 2@@9. 'hat
is the !eriod of holding. A!!ortionment has to be made between the land and the
su!erstructure. +n this case, the land has been held since 2@@2 and therefore it is long term
ca!ital asset. 6owever, the building was com!leted in 2@@B, therefore the ac5uisition of
the building will be calculated from 2@@B. therefore, in case of the su!erstructure it is
short term ca!ital asset.
• IT v. 'l%s Theatre :&9#; 5 +*1 3## S? – for the !ur!ose of de!reciation s!lit
between the land and the su!erstructure needs to be made.
!ransfer * Section 2(07) – +nclusive of transfer of immovable !ro!ert% as defined under Section
29 2A. Definition of transfer includes, conversion, com!ulsor% ac5uisition. An% sale under
*$)A or S$DA are also included, etc.
"efinition of relin8uishment9 Diving u! right in favour of another !erson.
*his was discussed in the case of K.R. Srinath v 'ssistant ommissioner IT – +n this case, A
gave 1s &,4@,@@ as advance to B for !urchasing his !ro!ert%. After one %ear, B relin5uished his
right over the !ro!ert% and gave A the freedom to sell it off to an%one. A gave 1s 5@,@@@ in lieu
of this right. *his is ca!ital gains in hands of B.
2$B12B21$1
Sec 0(($4) –
7ania Sil5 /ills " I! &99& 59 *a(man 3 :S?; – +n this case, there was insurance on
machiner% which was damaged b% fire. *he% received some mone% on claim. S? said that
insurance claim does not amount to ca!ital gain. After this 45:&A; was added b% the amendment
act of &999 states that if an% mone% is received from insurer due to fire, calamit%, fire, action b%
enem%, then an% !rofit arising from it is chargeable to ca!ital gains. S? said in the above case
that there was no asset at all as the asset has been damaged. +n case of ca!ital gain, there should
be transfer of an asset. +n this case there was no transfer or an% asset. +n case of damage, !artial
or com!lete, there is no 5uestion of transfer and hence there is no ca!ital gain.
6owever, in IT v. !:S 0race ollis 2@@& 24B +*1 323 :S?;, the above amendment has been
favoured. *his is a case of amalgamations. +t sa%s that transfer includes e(tinguishment of rights.
:6ence it includes total destruction of !ro!ert%;. *hus in case of amalgamation, there is
e(tinguishment of an entit% :analog% drawn;. *hus the <ania -ills case was overruled in the
case.
Sec 0((2) – on"ersion of capital asset into stoc5 in trade. Su!!ose a !erson A !urchases
&5@@ gms of gold in &99&. ?ost of ac5uisition of this gold was 1s 4 la/h. +n the %ear 2@@#"@B he
started the business of selling Aeweller%. 6e converted the gold into Aeweller%. *hus the gold was
a ca!ital asset till 2@@#. >ow it has been converted into stoc/ in trade. Su!!ose the fair mar/et
value of this gold is 1s &@ la/h. >ow as !er sub section 2 this conversion of ca!ital asset into
stoc/ in trade is trans.er. 6owever no ca!ital gain incurs at this !oint. +f however he sells it at 1s
&2 la/h in 2@@9, then since it is a long term ca!ital gain :held for so man% %ears;L"
&2,@@,@@@ minus
ost of ac=uisition :4,@@,@@@; F ost inflation inde, of %ear of transfer :2@@#"@B;:sa% 53@;
ost Inflation Inde, of Gear of ac=uisition :&99&; :sa% 23@;
G 9,2&,@@@ :sa% 9,@@,@@@;
i.e. &2,@@,@@@ – 9,@@,@@@ G 3,@@,@@@  a%ital 0ain
+n addition to this, we need to calculate the business income in 2@@9 i.e. &2,@@,@@@ – &@,@@,@@@ G
2,@@,@@@  Business income
$B0B21$1
$. +n conversion of ca!ital asset, we ta/e the fair mar/et value and not the sale
consideration. Sec 03 – 3air mar/et value on the rate of conversion shall be a!!licable
and not the sale value.
2. Sec 0((24) – *ransfer of beneficial interest – +t sa%s that when an% !erson has had at an%
time an% beneficial interest in an securities, then transfer made b% de!ositor% to the
beneficial owner shall be ta(able as ca!ital gain in the hands of the beneficial owner and
not the de!ositor%. -ethod to count the !eriod of holding of securities – 3+3$ :3irst in
first out;. ircular no 7&3 of $%%3 tal/s about ta( chargeable to beneficial owner of
securities.
2. Sec 45:3; – *he !rofit or gains arising from the transfer of ca!ital asset to a firm or A$)
or B$+ b% a !artner of such firm.
e.g. MIX is a firm. I transfers a building to the firm. 4et mar/et !rice be &@ lac. 4et
entr% in boo/s of value be 5 lac. *his section sa%s that the transfer consideration shall be
the boo/ value of the !ro!ert% and not the mar/et value. *hus 5 lac shall be considered
for com!utation of ca!ital gain. >ow, if the !ro!ert% was ac5uired b% I in &99@"&99&. +f
at that time, the cost of ac5uisition was 1s & lac.
apital 8ain G ?oo5 "alue :5 lac; ?ost of Ac5uisition F ?++ of %ear of transfer
?++ of %ear of ac=uisition
*his ca!ital gain is ta(able at the rate of 21 H.
0. Sec 0((0) – *ransfer of ca!ital assets on the dissolution of firm – +f boo/ value of assets
is 5 lac on date of transfer of assets b% firm to the !artners due to dissolution and the fair
mar/et value is &@ lac, then the fair mar/et value i.e. 1s &@ lac shall be considered for the
com!utation of ca!ital gains.
(. *he ca!ital gain in the above case is alwa%s short term ca!ital gain. 0(!lanation – Sa%
the firm was formed in &99@ and dissolved in 2@@#, ever% %ear de!reciation is charged
and hence ever% %ear, the cost of ac5uisition changes. 6ence the ca!ital gain chargeable
is alwa%s short term in such cases. *hus in all cases of de!reciable assets, there shall
never be an% long term ca!ital gain. 3or de!reciable assets, cost of ac5uisition changes
ever% %ear
&. Sec 0((() – ?om!ulsor% ac5uisition of land b% the government" >otwithstanding
an%thing in sub sec &, ca!ital gain arising out of an% com!ulsor% ac5uisition of land b%
government, then the same shall be chargeable in the %ear of recei!t and not the %ear of
transfer. :*his is an e(ce!tion to the afore"mentioned cases;. +f in future, the court
enhances the com!ensation, the recei!t of the same shall be ta(able in the %ear of
enhancement.
e.g. Iear of ac5uisition &99&
Iear of giving com!ensation &992 :*hen ?D chargeable in &992;
Iear of enhancement of com!ensation is &994 :*hen ?D chargeable in &994;
?a!ital gain is then calculated b% deducting e(!enditure incurred b% the assessee
7. Section 0&($) – +t is a charging Section. – ?a!ital gain on the distribution of assets b% a
com!an% in li5uidation. 'hen assets of a com!an% are distributed to shareholders on
dissolution, it shall not amount to transfer. 6ence no ca!ital gains shall be charged.
Howe"er< if on dissolution of the com!an%, the s8h receives an% cash or asset, the same is
chargeable to ca!ital gains.
e.g. -r. M !urchases &@,@@@ shares of a com!an% AB? ?o 4td Y 1s. &@ !er share.
?om!an% goes into li5uidation in 2@@#.
Let the .ollowin' (e the Balance sheet at time o. li@uidation
Liabilities 'ssets
7<,<<< shares > Rs 7< la!h Rs =; la!h
-ccumulated pro.it > Rs ;< la!h
Dividend Distri(ution Ta* > Rs =; la!h
$n li5uidation, -r M receives 2@@ shares of MIX com!an% worth 1s B la/h S cash in
hand of 1s 2.5 la/h hence a total of 1s &@.5 la/h is the total recei!t. >ow dividend is
calculated from accumulated !rofit at &@ E. *herefore &@ E of accumulated !rofit is 1s 5
la/h. *his is subtracted from total recei!t.
&@.5 la/h – 5 la/h G 5.5 la/h  *his is the full "alue of consideration. >ow cost of
ac5uisition needs to be subtracted from this to get capital gains.
i; ost of ac8uisition 5short term7 sa% :&2 !er share; G &@,@@@ M &2 G &.2 la/h
6ence 5.5 la/h * &.2 la/h 9 4.3 la/h  ?a!ital gain
ii; ost of ac8uisition 5long term; G &.2 la/h F ?++ of %ear of transfer
?++ of %ear of ac5uisition
6ence apital 8ains G 5.5 la/h – the above amount
2B0B21$1
$. Sec 0&(2)- & Bhag(ati 'mman v IT 2@@3 259 +*1 #B – S? said 4 :2; is the charging
section. +t sa%s that when S86 receives an% mone% or assets :irres!ective of the fact that
there is transfer of ca!ital asset; on dissolution of com!an%, he has to !a% ca!ital gains
ta(. 6owever this is against the notion of Section 45 becauseL"
i) 6e is not the transferor or transferee
ii) *he assets ma% not be a ca!ital asset. 6ence under Section 4:2; he has to !a% ta(
even if the asset is not a ca!ital asset.
*his is also an e(ce!tion to Section 24@
2. Section 0& 4 * ?a!ital gain on bu%bac/ of shares
2. Section 07 * *ransactions not regarded as transfer. Section 2:4#; defines transfer. Section
4# defines what is Fnot transfer=. *he following are not transferL"
i) Section 4:&; – ?om!an% distributing assets to S86 on dissolution of com!an%.
ii) Distribution of ca!ital assets on total or !artial !artition of 623
iii) An% transfer under gift or will
:&roviso > 'i.t o. shares as )#O& is considered as trans.er;
i") An% transfer of ca!ital asset from holding com!an% to the +ndian subsidiar% com!an%
:6olding com!an% holds &@@ E shares of the subsidiar% com!an%; then it is not transfer.
") An% transfer of ca!ital asset from +ndian subsidiar% to com!an% to the holding
com!an%. 4:5;
"i) An% transfer in the scheme of arrangement from the transferring com!an% to the
resulting com!an%, it does not amount to transfer. :6owever, amalgamated com!an% must
be +ndian com!an%;
"ii) +f there is amalgamation of 2 foreign com!anies :A and B;. A is holding certain
shares of an +ndian com!an%. *he transfer of assets won=t be chargeable to ca!ital gains
ifL"
a; 2( H of S86 of amalgamating com!an% is retained in the resulting com!an%
b; >o ca!ital gains is charged on such transfer in the countr% in which the
amalgamating com!an% is incor!orated.
"iii) +n case of demerger from a foreign to a resulting com!an%, the same !rovision as
above a!!lies e(ce!t that the !ercentage of shareholders in the resulting entit% must be 7(
H and not 2( H and such e(em!tion must be granted in the countr% in which the foreign
demerging com!an% is incor!orated.
i,) An% transfer of shares b% S86 in case of scheme of amalgamation such that
shareholders of amalgamating com!an% are allotted share in the amalgamated com!an%,
it does not amount to transfer.
,) An% transfer of ca!ital assets being bonds or DD1 b% a non resident to a resident is not
transfer.
,i) 0(!lanation – An% transfer of a ca!ital asset being agricultural land before the first
da% of &9#@ is not transfer. +t became ta(able after &9#@. 6owever, in case of com!ulsor%
ac5uisition, it gets e(em!tion under &@:3#;
,ii) An% transfer b% wa% of conversion of bonds, debentures, etc is not transfer.
,iii) An% transfer made on or before 3&
st
da% of &99B, b% a !erson having trading right in
a stoc/ e( is not transfer
,i") An% transfer of ca!ital assets or intangible assets b% a firm to a com!an% is "
:incomplete5
,") An% transfer of ca!ital asset in transaction of Jreverse mortgageK in a scheme
formulated b% ?entral Dovt. is not transfer. *his !rovision was inserted for old citizens
b% 2@@B amendment. 1everse mortgage means that successors or sons of old !eo!le who
have mortgaged !ro!ert% to fund their living can !a% bac/ the mone% and ta/e bac/ the
!ro!ert%.
3inance Bill 2@&@ sa%s that the conversion of a !rivate com!an% into an 44) is not
transfer :su(ject to certain conditions5
(B10B21$1< &B10B21$1 and 7B10B21$1
$. Sec * 074 – ?ertain conditions for fulfillment after transfer :for transaction not to be
regarded as transfer;. +n these conditions, it is transfer. +f shares are transferred within B
%ears from holding to subsidiar% com!an%, its amounts to transfer and is subAect to
?a!ital gains.
2. Sec * 03 – -ode of com!utation
Short !erm apital 8ains #ong !erm apital gains
3ull value of consideration
Less – 0(!enditure received in connection with
transfer
Less > ?ost of ac5uisition
Less" ?ost of +m!rovement
G Short Term a%ital 0ains
3ull value of consideration
Less – 0(!enditure received in connection with
transfer
Less > +nde(ed cost of ac5uisition
Less > inde(ed cost of im!rovement
G Long Term a%ital 0ains
2. Aull "alue of considerationE-
;aishnath haturbhuj v IT :&9#; 3 +*1 43 :Bom;
a. A transfers a !ro!ert% to B who is a develo!er for 1S 4 la/h. B !romised free flat to A. 3ull
value consideration G 3air mar/et value of 3lat S 4 la/h.
b. A transfers land to B and B gives 1s 4@,@@@ as advance. B could not bu% land and A forfeited
1s 4@,@@@. A transfers land to ? and ? gives 1s &@@,@@@ in advance. ? could not bu% the land
and A forfeited the mone%. 4ater A transferred the land to D for 1s &@ la/h.
3ull value consideration G 1s &@,@@,@@@ – :&@@,@@@ S 4@,@@@; G 1s. B,@,@@@
c. I! " /an+ulata Iaysa :2@&@; 35 S$* &@5 :Bom;
6 +nheritance ) +nheritance +nheritance 4 gift ?
:&94; :&9#&; :2@@&; :2@@5; :2@&@;
0 had ac5uired the !ro!ert% initiall%. )eriod of holding of B starts from the time when 0 ac5uired
the same :&94;. >ow ?ost of ac5uisition is calculated as followsL"
?ost of ac5uisition G 3air mar/et <alue in &9B& :since inde(ation started in &9B&; ;' actual cost
of ac5uisition :whichever is higher;. 3air <alue consideration is true value of consideration.
+f there is no cost of ac5uisition then there is no ?a!ital Dain. 0.g. Self made goodwill or a calf
from a cow will not amount to ca!ital gain as there is no cost of ac5uisition.
IT v Sumita Singh9 Sec 49 – deals with deemed cost of ac5uisition. >ow there are certain wa%s
of getting !ro!ert% mentioned in Section 49:&;, 49:2;, 49 :3; and 49 :4;. 6owever none of these
methods shall amount to ac5uisition b% !revious owner onl% if the ac5uisition is done in a
manner different from these.
+f there is no !revious owner, then there would be no ca!ital gain.
Section 0%(2) – ?ost of ac5uisition of amalgamating com!an% G cost of shares of amalgamating
com!an%.
Section 0%(24) – Same cost as was when the% ac5uire the !ro!ert%.
Section 0%(244) – 'hen ?a!ital Dains arise from s!ecified securit% or !er5uisites, cost of
ac5uisition is the 3ull -ar/et value at the time of obtaining the securit% 8!er5uisite.
Section 0% (2; – Demerged ?om!an%" ?ost of Ac5uisition of resulting com!an%.
ost of ac=uisition of resulting company G
ost of ac=uisition of Demerged ?o. F >et ?oo5 "alue :on date of transfer of Demerged ?o.;
-et Corth :!aid u! share S general reserve; of the demerged com!an%
Section 0%(2) " ?ost of ac5uisition in case of transfer of asset – 'hen there is transfer of asset
from holding com!an% to the subsidiar% com!an% :or vice versa; within B %ears :in case of
conversion of asset to stoc/ in trade;. 'hen the% have ac5uired the asset from the
holding8subsidiar% com!an%.
Section 0%(079 IT v B Srinivasa Shett+ &9B& &2B +*1 294" Self generated goodwill is not
subAect to ?a!ital Dains ta(.
Section (1 – ?om!utation of ?a!ital Dains ta( for de!reciable asset :same as discussed in
de!reciable assets;.
Section (14 – A transfers to B a de!reciable asset for 1s 5,@@,@@@. As !er the Assessing $fficer
the value of asset G 1s 4,@@,@@@. 3or A, the value is 5,@@,@@@ but for B it is 1s 4,@@,@@@.
Section (1 ? * Slum! sale" Slum! sale is defined in Section 2:42?;. Slum! sale refers to the sale
of whole or !art of an underta/ing for a lum! sum consideration as an ongoing concern. +f
su!!ose, 2 underta/ings A and B are transferred, A being short term ca!ital asset and B being
long term ca!ital asset, the whole transfer would be subAect to short term ca!ital gain ta(.
?alculationL"
apital 8ain G Aull 7alue consideration – :-et worth of com!an% Se,penditure for transfer;
-et worth G *otal value " 4iabilities
Section (1 * Special pro"ision for -ull ;alue consi$eration
1e5uisites for a!!lication of this sectionL"
i; *ransfer of land and building in return for consideration.
ii; <alue of land and building charges b% transferor is less than the value determined b% the State
stam! valuation authorit%. 0.g. +f A transfers his land to B at 1s &@ la/h and as !er the State
valuation authorit% the value is &2 la/h, then &2 la/h is full value consideration.
iii; *he assessee claims the amount to be more than the 3air -ar/et value then the matter is
returned to the Assessing authorit% who will refer it to the valuation officer. +f the% have
challenged it in the ?ourt then ?ourt will decide the 3ull <alue ?onsideration.
Section ($ * Advance mone% received during !revious negations to be deducted from cost of
ac5uisition– e.g. A !urchased a !ro!ert% from D on &848&99&. ?ost of ac5uisition G 1s 2 la/h.
Again agreement of B to !urchase from A. B !a%s 5@,@@@ in advance. *ransaction fails. A forfeits
the mone%. ? !a%s 5@,@@@ as advance. *ransaction fails. A forfeits the mone%. *herefore cost of
ac=uisition 9 's 2 la5h * ((1<111 :(1<111) 9 's $ la5h. 6ence 3ull <alue consideration !aid to
D is 1s & la/h.
Section (( * -eaning of Jcost of im!rovementK, Jcost of ac5uisitionK and JadAustedK
?ost of im!rovement –
i; >o ?ost of im!rovement in cases of goodwill, right to manufacture !roduce, !rocess, etc.
ii; >o cost of im!rovement in cases of intangible assets.
iii; An% im!rovement made before A!ril &9B& will not be considered as cost of im!rovement.
iv; >o cost of im!rovement is allowed if 3@E standard deduction is ta/en.
?ost of ac5uisition"
i; +n case of asset !urchased from !revious owner, the cost of ac5uisition is the !urchase !rice
ii; >o cost of ac5uisition for self generated assets.
iii; 3or right issues, and bonus shares the cost of ac5uisition will be value of original financial
assets.
Section (((2)(b)
+f ca!ital asset was ac5uired before &
st
A!ril, &9B& – 3air mar/et value or actual !rice :whichever
in beneficial; is cost of ac5uisition. +f it is not feasible to find out the ?ost of ac5uisition then the
3air mar/et value of &9B& or the fair mar/et value of the date of !urchase is ta/en whichever is
beneficial.
3B10B21$1
Sec <= – Sale of residential house – +f the assessee is an individual or 623 and if he transfers his
residential !ro!ert% and subse5uentl% !urchases a new !ro!ert% within 2 %ears:!urchase of a new
!ro!ert%; or 3 %ears:if he is constructing a !ro!ert%;, ca!ital gains will be adAusted with cost of
ac5uisition.
on$itions>9
+f the new residential house !ro!ert% within 3 %ears, :loc/ in !eriod;, total consideration will be
chargeable as ca!ital gain. 0.g. &8482@@2 assessee sells his house at &@ la/h :ca!ital gain;. >ew
house !urchased on &8582@@3 at &2 la/h. 1s &@ la/h will be e(em!ted from cost of ac5uisition. +n
&8582@@4 he sells the !ro!ert% for &5 la/h.
?a!ital Dain G consideration :&5 la/h; – cost of ac5uisition :&2 – &@ la/h; G &3 la/h :as sale is
within 3 %ears;. +f sold after 3 %ears, it will be
+f in a different case &8482@@2 assessee sells his house at &5 la/h :ca!ital gain;. >ew house
!urchased on &8582@@3 at &2 la/h. 1s :&5"&2; will be deducted and 3 la/h will be chargeable as
ca!ital gain. +n &8582@@4 he sells the !ro!ert% for &5 la/h. *hen cost of ac5uisition is >+4.
?a!ital Dain G consideration :&5 la/h; – cost of ac5uisition :>+4; G &5 la/h :as sale is within 3
%ears;.
Chat is the meaning of purchaseJ IT v T&. 'rvin$a Re$$+ :&9#9; &2@ +*1 4 :S?;
Assessee was the eldest of 4 brothers constituting a co!arcenar%. 6e sold his own house and
occu!ied the common house from his 3 brothers. *he 3 brothers e(ecuted a release deed in
favour of eldest brother. *he% charged 3@,@@@ each as consideration. *he% have also adAusted this
consideration towards eldest brother as an e(tra share :0$est Bha'a in +indu law5. *hus after
sale of his own house, the eldest brother !urchased a house from his brothers for a consideration
of 1s 9@,@@@. S? held this is new !urchase and hence the ca!ital gain from the sale of his own
house can be set off against the consideration !aid.
IT v R.L. Soo$ :2@@@; 245 +*1 #2# :Del; – !eaning of $ate of %urchase
6igh ?ourt said that date of agreement to !urchase is the date of !urchase and not the date of
registration of the !ro!ert%.
!rs. Prema P. Shah v ITO :2@@;
'jit ;asvani v "IT :2@@&; &&# *a(mann &23
*ribunal said that there need not be a direct or live lin/ between ca!ital gain and investment. +f
one sells a house and still ta/es a home loan and !urchases a new house with it, he will get
?a!ital Dains e(em!tion.
ITO v Susheels !. ?averi :2@@#; &@# +*A* 32#
0(em!tion under 54 is available for onl% one residential !ro!ert% and not two. +n case of two
!ro!erties, the assessee has the o!tion of selecting an% one of the two houses.
IT v ;. &atrajan :2@@; 2B# +*1 2#& :-ad;
+n this case, the assessee has !urchased the !ro!ert% under his wife=s name. ?ourt said that the
same is allowed for the !ur!ose of a!!lication of Section 54.
%B10B21$1
Sec (0? – ?a!ital gains arising out of transfer of an% land :not necessaril% agricultural land;
used for agricultural !ur!oses. 6ence the re5uirements areL"
i; *ransfer of land
ii; 4and must be used for agricultural !ur!oses. :As !er the decision of S? in Raja Bina+ Kumar
Saha case ..see notes of !revious modules;:Basic o!eration Ssubse5uent o!eration;
iii; Section is a!!licable onl% on individuals. 0ven though the section does not mention
individual, it is subAect to sub section 2 which sa%s that for the section to a!!l%, the land must be
used for agricultural !ur!ose in !receding 2 %ears b% JassesseeK or J!arent of assessee
iv; ?a!ital gain arising out of transfer of the land. After the transfer of the land used for
agricultural !ur!ose, he must !urchase a new land which can be an+ land used for agricultural
!ur!ose and thus can claim the a!!lication of this section. +f within three %ears the ne( lan$ is
!urchased b% the assessee then the cost of ac5uisition will be >+4.
Sec 54D, 540, 54 0A, 54AB offer same line of e(em!tion as above.
&e( !o$ule > I-;/6 A';/ ;!H6' S;.'6S
Sections (& to (3
Sec (&($) * general !rovision" +ncome of ever% /ind which is not to be e(cluded from total
income under Section &@, and not ta(able under the heads :salar%, house !ro!ert%, business and
ca!ital gain;, then such income shall be chargeable under Section 5.
i; *here must be income
ii; -ust not be e(em!ted under Section &@
iii; >ot ta(able under an% other head
Section (&(2) – S!ecific – *he following incomes will alwa%s be chargeable under 5
i; Dividend :whether received b% investor or dealer of shares;. Dividend must be ta(able in
hands of shareholders. Deemed dividend is ta(able in hands of Shareholders :2:22;;.
ii;Section 2:24;:viii; omitted in &9BB
iii; +ncome referred in 2:24;:9; – 'innings from crossword, lotter%, horse race, etc. But income
of lotter% dealer is income from business.
iv; 2:24;:&@;" An% sum received b% em!lo%er as a contribution towards !rovident fund from the
em!lo%ee is income in hands of em!lo%er. But if the same is given in time it amounts to
deduction.
v; +ncome b% interest on securities.
vi; +ncome from !lant and machiner% belonging to assessee and let on hire.
vii; +ncome referred to under 2:24;:&&; – An% sum received under scheme of insurance !olic%.
viii; a; Section 5:2; :#; – 'here individual or 623 receives from an% !erson in )I an% sum of
mone% which e(ceeds 1s 5@,@@@ in aggregate :not a!!licable for single transaction;.
)'. - receives 'i.t o. Rs A;,<<< .rom B, A;,<<< .rom C and A;,<<< .rom D in the same &B, then
the a''re'ate Rs ?;,<<< will (e ta*a(le.
:b; +mmovable !ro!ert% received without consideration b% assessee and the stam! dut% value
e(ceeds 1s 5@,@@@ then the stam! dut% value of the !ro!ert% will be ta(ed. 6owever if
consideration is !aid b% the assessee, such amount being less than the stam! dut% value, then the
consideration will be deducted from the stam! dut% value. Such deducted amount is income in
the hands of the assessee. :>o aggregate value is considered here. +t is for single transactions;
c; +f the !erson receives movable !ro!ert% from someone and the value e(ceeds 1s 5@,@@@
:aggregate value; then the whole aggregate value is income in hands of the assessee.
*his clause shall not a!!l% to an% sum of mone% or !ro!ert% received from relative or on
occasion of marriage or under will or b% inheritance or local authorit% or educational institutions
or trusts or hos!itals. +n case of marriage it ma% be before the da% of marriage as well.
$2B10B21$1
Stam! dut% value is defined in this section. *he value of the !ro!ert% on which the dut% is to be
levied is determined b% the Dovernment of each State as !er the localit% in which the !ro!ert% is
situated.
Section (&(2)("iii) * +nserted b% 3inance Act 2@@9, a!!licable from &8482@&@. $n com!ulsor%
ac5uisition of land, an% interest on the com!ensation or enhanced com!ensation is income from
other sources. *his !rovision was inserted to get rid of confusion whether interest 5ualifies as
ca!ital gains or income from other sources.
Section (7- Deductions for income from other sources.
i; +n case of dividends, an% reasonable sum !aid as remuneration8commission8bro/erage to
ban/er< then the same should be allowable as deduction from dividend income. 0.g. A ta/es a
loan to !urchase shares. :1s & la/h;. 6e !a%s &@@@ for the monthl% !a%ment of the loan. 6e
receives dividend of 1s &@,@@@ !er month. *hen this &@@@ shall be deduction. 6ence income in
hands of A is 9@@@.
ii; +f there is an% e(!enditure incurred for income from lotter%, crossword, etc, then the same is
deductible. *his can also include trans!ort e(!enses for !artici!ating in a game show.
iii; 3amil% !ension" &83 of !ension or 5@,@@@ whichever is lower is deductible.
Section (7(2)
An% other e(!enditure not being ca!ital e(!enditure laid out e(clusivel% for the !ur!ose of
earning income under Section 5 is deductible. *his Jfor the %ur%ose of earning incomeK is a
restricted definition. Section 3# :An% other e(!enditure not being ca!ital e(!enditure laid out
e(clusivel% for the !ur!ose of business is deductible.; has been given wide inter!retation b% S?.
+t has held that Jfor the %ur%ose of businessK shall also include cor!orate social res!onsibilit%.
+ncome from vacant land 5ualifies as income from other sources. 6ence an% e(!enditure towards
it shall be deductible.
6nhanced compensation * +n case of income that is referred as interest on enhanced
com!ensation 5@ E of the interest shall be deducted.
Section (3 * Amounts not deductible – +t has overriding effect on all the other sections dealing
with e(!enditures incurred.
&e( !o$ule> S6! ;AA 4-) 4''G A;'C4')
Sections 71 to 31
$) Inter source *Section 71 – 4oss of one source can be set off from another. +f there are 3
business, A, B and ?, there is business loss from A of &@,@@@, B of &@,@@@ and there is !rofit of
3@@@@ from ? then the losses from A and B can be set off from ? under inter source set off.
S? has said that if there are 2 businesses, A and B, both incurring losses of 1s &@,@@@ and there
is business ? in which one deals with shares. Dividend received in ? is 5@,@@@, then the losses
can be set off from the income from ? if the shares are held as Jstoc/ in tradeK even though
income under ? amounts to income from other sources. 4osses from s!eculative business cant be
set off from a general business.
/estern State Tra$ing or% Lt$. ; IT 3 78?7 9< ITR A7 #C > +nter source adAustment is
between sources, !ro!ert% from another !ro!ert%, etc. *here are certain e(ce!tion within inter
source. 0.g.
i; 4ong term ca!ital loss can=t be set off against short term ca!ital gain. Short term ca!ital loss
can be set off from long term ca!ital gain.
ii; 4osses from s!eculative business can=t be set off from a general business.
iii; An% loss can=t be set off against income from winning from lotteries, crosswords, etc.
2) Inter head * Section 7$" +ncome from business can be set off from income from house
!ro!ert% or vice versa. Similarl% 6ouse !ro!ert% loss can be set off against salar% income but
business loss can=t be set off against salar% income. An% loss cannot be set off against winnings
from lotter%, crossword, etc. ?a!ital loss cannot be set off against an% other loss. +t can onl% be
set off against ca!ital gain. 4ong term ca!ital loss can onl% be set off against long term ca!ital
gain. Short term ca!ital loss can be set off against long term ca!ital gain. Also short term ca!ital
loss can=t be set off against salar%.
2) arry forward- +n carr% forward, if house !ro!ert% loss if carried forward, it can onl% be set
off against gain from house !ro!ert%.
i; 6ouse !ro!ert% loss can be carried forward for B %ears and can be set off inter source not inter
head. 0.g. +n 2@@&"@2 there is house !ro!ert% loss of 1s &@,@@@, it can be carried forward till
2@@9.
ii; Business loss can be carried forward for B %ears.
iii; ?a!ital loss can be carried forward for B %ears.
iv; Securities and Business loss can be carried forward for 4 %ears.
v; 2nabsorbed de!reciation can be carried forward indefinitel%.
+n case of set off, the general rule is that if the assessee has incurred a loss, onl% he can set off or
carr% forward the loss. 6owever there are certain e(ce!tions to this. +n case of amalgamating or
demerging com!an%, the loss can be carried forward or set off against the resulting com!an%.
Section 0$(() – +t tal/s about deemed !rofit. +f business is not carried on b% the assessee, then
!rofit earned b% successor can be considered as deemed !rofit of assessee. *he business might
not be same as well. 6ence this will also o!erate as an e(ce!tion to the general rule. *hus if A
receives 1s &@,@@@ loss from amalgamating com!an% and after some %ears, it receive 1s &@,@@@
as deemed !rofit from the same com!an%, then the loss ma% be set off against the deemed !rofit.
Section 31 – +f there is an% business loss, it can onl% be carried forward if the assessee has filed
the return for the loss. 6ence in order to set off or carr% forward business, assessee has to file
return. +n case of house !ro!ert% or ca!ital loss, there is no re5uirement for filing return to set off
losses.
&e( !o$ule AI#I-8 ;A '6!.'- 4-) 4SS6SS/6-!
($0B10B21$1)
Cho must file returnJ Section &39 tal/s about filing of return. &39 sa%s that Jever% !ersonK,
has to file returnL"
i; Being a com!an% or
ii; 3irm
:In both the abo"e cases< return has to be filed in all cases)
iii; +f it is a !erson other than com!an% or firm such as individual, 623, B$), etc then it shall
file return ;-#G if his total income in the )I e(ceeds ma(imum e(em!tion limit.
3iling of return is com!ulsor%. +n case of non filing of return, there shall be best Audgment
assessment as !er Section &44.
Section &39:3; – 3iling of return in case of loss
!ypes of returnE-
i) Original return (&39:&;)- 1eturn being filed for the first time before the due date
Due date for the individual is 3&
st
Pul%, for com!an% and firm, it is 3@
th
Se!tember but if audit is
re5uired it is 3&
st
$ctober. 3or !revious %ear 2@@9"2@&@, we file return before 3&
st
Pul% 2@&@, but
we have alread% !aid the ta( in 2@@9.
ii) Belate$ return :&39:4;;" +f return is not filed under section &39:&; $1 notice has been given
b% the A$ under &42:&; before the assessment to file a return, then the assessee ma% file a
belated return. *he time for filing a belated return is one %ear from the relevant assessment or
before the assessment, whichever is longer. 0.g. )I is 2@@9"2@&@ and AI is 2@&@"2@&&. 6ence
belated return can be filed u! to 3&
st
-arch 2@&2 or before the com!letion of assessment. +f
su!!ose assessment :best Audgment assessment :section &44; even without filing return; is
com!lete on &5
th
-arch 2@&& then the belated return has to be filed on such date. 0ven before
Best Pudgment Assessment under &44, there is show"cause notice issued for filing belated return.
onse8uences of belate$ return 3 )enalt% of 1s 5@@@ and interest.
iii) Revise$ return :&39:5;;" +f assessee has filed return under &39:&; or &42:&; and after the
same if it comes to the /nowledge of the assessee that there has been wrong filing of return then
a return ma% be filed before the due date as mentioned above. +n fact he ma% file an% number of
revised returns. 6owever, such omission or wrong statement has to be discovered b% the
assessee. +f the A$ discovers the fault, the assessee can=t file a revised return.
IT v Ra$he+ Sh+am @6AB @4C ITR @4<9 Benefit of filing a revised return cannot be claimed b%
a !erson if he has filed the !revious return /nowing it to be false.
IT v 0ra+ oast -oun$r+ /or#s 4BBD 66 IT" <@< 5'hm$7 3 +f omission or wrong statement is
discovered b% the A$ or the de!artment and !rior to that there is filing of revised return to
correct the same, it shall not be considered as a revised return.
&o revise$ return can be file$ after filing belate$ return.
Revise$ return $oes not mean correction of return. ?orrection of return is done b% filing an
a!!lication before the authorit% and correcting a !articular as!ect. 6owever in case of revised
return, the !revious return is substituted b% the new one.
i") "efective Return :&39:9;; – 'here the assessing officer considers that the return filed b% the
assessee is defective, he ma% intimate such defect to the assessee and !rovide for rectification of
the same within &5 da%s or a longer !eriod if the same is re5uested b% the assessee b% an
a!!lication. +f such rectified return is not filed within &5 da%s or the e(tended !eriod, the return
filed b% the assessee shall be treated as an invali$ return. +n such case, the assessee shall be
liable to be !rosecuted.
*he e(!lanation to this section defines defective return. *here are certain conditions that need to
be fulfilled. 0.g. omission of signature, non submission of audit re!orts, etc. 6owever, if there is
unintentional omission, it is not defective return and is subAect to reassessment.
Section ($2%(04)) – 3iling of return b% !olitical !arties. ommon ause v 2OI @66D 444 ITR
4DB 5S7 3 )olitical !arties are under statutor% obligation to file income for each assessment %ear
even though their income is e(em!ted from ta(.
Section 2%2 ? * >o return of income, assessment, notice shall be declared invalid if there is
defect b% mere omission to fill u! a !articular as!ect. *he rationale behind this is that the
conse5uences of invalid return are of grave nature :e.g. !rosecution;
Section $2% 4 * P4- ()ermanent Account >umber;. +t is com!ulsor% for an% !erson. +f there is
no )A> number, *+> :*a( identification number; is used for filing return. D+> is also a
substitute to )A> number. )A> is a &@ digit al!hanumeric code which includes the !lace of
residence, name, residential status, etc.
Section $2% ? * Scheme for submission of return through *1)s :*a( return !a%ers;. *here are a
lot of illiterate !ersons who do not /now how to file a return. So *1)s hel! these !eo!le to file
return in e(change for a fee. *his !rovision has been made a!!licable from 2@@.
Section $2% * >o need of filing documents with return.
Section $01 * +n case of com!an%"-D, firm "managing !artner, 44) –managing !artner,
!olitical !art%" chief e(ecutive shall be the authorized signatories for filing return.
&e( !o$ule 4SS6SS/6-!
($(B10B21$1)
Section &3 – Assessment is a Audicial !roceeding.
7arious types of assessmentE- i; Self assessment :&4@ A; ii; Summar% assessment :&43:&;; iii;
Scrutin% assessment:&43:3;; iv; Best Audgment assessment :Section &44; v; +ncome esca!ing
assessment or reassessment vi; Bloc/ Assessment :during search and seizure;
Self 4ssessment * 0ver%one is under obligation to file self assessment. 0ver%one does self
assessment during filing of returns.
Summary 4ssessment- 'henever one files a return, an ac/nowledgment is !rovided. *his is
intimation under Section :&5 and &5#; that the assessment is com!lete. *he% tentativel% loo/
into the return and give intimation that the ta( has been !aid.
Scrutiny 4ssessment- Section &42 tal/s about en5uir% before the assessment. Section &42:&;
tal/s about issue of notice. Such notice is given if return is not filed. >otice is also given to file
documents, boo/s of account, etc. Section &42:2A; tal/s about #pecial audit. 2nder this
!rovision, the Assessing $fficer can as/ for the s!ecial audit also. Section &42 A states that the
Assessing $fficer, having regard to the com!le(it% of the boo/s of account and the interests of
the revenue, he ma% as/ for a s!ecial audit.
Rajesh Kumar v "IT :2@@; 2B# +*1 9& :S?; and Sahara In$ia v IT :2@@B; 3@@ +*1 4@3
:S?;
– -eaning of e(!ression Jhavin' re'ard toK in &42 A. *he e(!ression is relevant while
considering whether the A$ should as/ for a s!ecial audit. *he factors mentioned in Section &42
A are not e(haustive. 6ence regard must be had to the factors mentioned in the section and such
other factors. )rinci!le of natural Austice must be a!!lied in cases of issue of s!ecial audit. 6ence
there should be material record for the Assessing $fficer to form an o!inion. *hus before issuing
a notice for s!ecial audit, notice must be given to assessee to clarif% his !rovision.
!otorola Inc v "IT :2@@5; 95 +*D 29 :Del; – *his case also discussed )rinci!les of natural
Austice. *here must be a!!lication of mind on the !art of the A$ while issuing notice for s!ecial
audit.
'men$ment has been ma$e in 4BBE sa%ing that e(!enses for s!ecial audit must be borne b%
?entral Dovernment.
S(a$eshi Pol+tex Lt$. ; ITO N&9B3O &44 +*1 &#& :S?; – +n this case, the auditors refused to
audit boo/s of account. ?onse5uences of failure to audit areL"
i) +t will be invalid return and there will be best Audgment assessment.
ii) )enalt% under section 2#&
iii) )rosecution under 2#
i") +ssue of warrant of authorization under Section &#2.
6owever the argument was raised that if the auditor failed to audit, it is not fault of assessee.
Scrutin+ 'ssessment 3 'hen additional evidence or documents of additional !roof of income is
given and assessment is made, it is called scrutin% assessment. After com!letion of scrutin%
assessment, there must be intimation sent b% the A$ about refund of dut% or due amount !a%able.
Best *u$gment 'ssessment 3 +f an% !erson fails to ma/e the return under &39:&; or &39 :4; or
:5; or fails to com!l% with all the terms of notice under Section &42:&; or &42 :2A; or if he has
not com!lied with notice under &43:2; for additional documents, then best Audgment assessment
shall be made. *hen the assessing officer, after ta/ing into account all the material on record,
shall issue notice as to wh% best Audgment assessment should not be made.
Section $23 * Disclosure of information relating to the assessee. *he Board or an% other
authorit% ma% furnish or cause to be furnish if necessar% in !ublic interest, the !ersonal
information of a !erson.
$&B10B21$1
Section $07B$03 * Income esca%ing assessment or reassessment * +t states that if the A$ has
reason to believe that an% income has esca!ed assessment in an% !receding %ear or relevant
assessment %ear, he ma% reassess the income, or recom!uted the income. +f in the !rocess of
reassessment, if A$ finds that there is some other income which esca!ed assessment, he ma%
reassess the same even though no notice is issued for it. 1eassessment can be done upto 0 %ears
from date of Assessment %ear or & years in case the esca!ed income is more than & la/h.
Section $03 tal/s about issue of notice to the assessee.
Section $(2 - -a(imum time limit for com!letion of assessment or reassessment.
i) 3or summar%8scrutin% or best Audgment assessment – 2& months from relevant assessment
%ear.
ii) +f reference is made to *ransfer )ricing officer under 92 ?:a; then the !eriod will be e(tended
further b% &2 months.
iii) +f it is assessment or reassessment under &4# – ma(imum time limit is 9 months from the date
of notice when it is served to the assessee. +f the matter is referred to the *)$ then &2 additional
months are given.
i") 3resh assessment under order of court – 3resh assessment is made under Section 25@, 254,
23 and 24. 3resh assessment is com!leted within 9 months from the date the order has been
received b% the ?ommissioner A!!eals in the financial %ear. *he time limit is a!!licable onl%
when the order is given b% the ?ommissioner of A!!eals and not b% 6igh ?ourt or Su!reme
?ourt. 3or 6igh ?ourt and Su!reme ?ourt there is no time limit.
Section $00 * 4lternate dispute resolution panel * >ew !rovision inserted b% the 3inance
Act, 2@@9. *he assessee in case of dis!ute regarding order of A$ regarding assessment ma%
ma/e a reference to the dis!ute resolution !anel. *he !anel is made of a collegium of 3
commissioners. *he dis!ute resolution !anel was constituted for transfer !ricing matters as well.
21
th
4pril< 21$1
8eneral )eductionsE Section 31 to 31.E *his is im!ortant for individual and 623. +t is the
onl% section where the% can ma/e deductions. *he aggregate amount can=t e(ceed gross total
income in an% case. 'hat is the meaning of Dross *otal +ncomeL it is all the income including the
short term ca!ital gain and long term ca!ital gain etc "&&5a, &&5ab, &&5dda, &&5d, &&5ac, &&5ad.
0.g. Su!!ose A is individual whose gross total income is 1s. &,4@,@@@8" and his ca!ital gain in
the !revious %ear is 1s. &,@@,@@@8", so the total ca!ital gain would be 1s. B@,@@@8" since we have
set off 1s. 2@,@@@ therefore &,@@,@@@"2@,@@@G B@,@@@. +f the income is above the ma( limit then
the ta( will be !aid se!aratel% on the ca!ital gain and gross total income.
I.'. 0lobal Solution Lt$ v. IT, :Bangalore *ribunal;,
$. +f one is filing the return and the gross total income :D+*; is 2,5@,@@@ and gross total
deduction is &,@@,@@@, the total income would be &,5@,@@@. Since it is below the e(em!tion
limit, no ta( would be !aid.
2. Su!!ose +ncome is 5@,@@@ and deduction claimed under S.B@? is &,@@,@@@8", during the
!rocedure of transfer"!ricing , if income is increased due to arms length then on such income
one can=t claim an% deduction under S.B@?.
2. >ow onwards the order !assed b% the officer is binding.
+t is the dut% of the officer to give de!reciation even if not claimed. 6owever the same shall not
a!!l% in the case when the deductions are made. 0ver% assessee needs to claim the deductions.
Section 31E +t includes B@??A and B@??D, the ma( 5ualif%ing amount is &,@@,@@@ however
now it has been raised to much more amount after finance bill 2@&@ that in case of debentures,
e5uit% schemes, !ension fund contributions, ))3 contributions, >S0 etc. *his list is and
ma(imum amount which can be deducted is &,@@,@@@.
Section 31)L -edical +nsurance )remium is se!aratel% dealt in this section. -edical +nsurance
can be claimed as deductions where the limit is &5,@@@8". 6ere the assessee needs to be
individual for the !ur!ose of health of his famil% members. 3or !arents there is se!arate
e(em!tion of 1s.&5,@@@8", so both can be claimed. *he !roviso sa%s that if %our !arents come
under the categor% of senior citizen then 2@,@@@8" can be claimed as deduction instead of
&5,@@@8". *here is a new circular which sa%s that this would constitute income for the hos!ital
and hence withholding can be done b% the insurance co.
Section 31))E +t=s a!!licable to both individual and 623. +n case 4@E or more disablement
then 5@,@@@8" is deducted. +n case of B@E of disablement then &,@@,@@@8" is deducted.
Section 31))?E -edical *reatmentL +f the amount incurred on him or famil% members wholl%
or !artiall% relied on him then the ma(. limit is 4@,@@@8" if his !arents come under the categor% of
senior citizen then its @,@@@8". 6owever, if one receives an% amount in insurance claim then that
would be included in the income of the assessee.
Section 316E Deduction on loan ta/en for 6igher 0ducationL +ncome used for !a%ment of
interest for loan ta/en for the !ur!ose of higher education – ma( %ear is # from the first !a%ment.
0.g. 2@&@"&&" interest can be !aid till # %ears starting from this %ear.
Section 318E Deduction on donationsL su!!ose the D*+ is &@,@@,@@@ and then one donated
&,@@,@@@ then deduction can be claimed till 5@E of such donation. *here are certain amendments
done" 3inal draft need to be made in D*? itself.
Section 3188E Deduction in case of 1ent !aid" li/e 61A in case of salaried !erson then !erson
can claim this deduction. 6owever, a !erson who is not a salaried !erson or self em!lo%ed li/e
chaiwala then the% can also claim deduction under this section for the residential !erson. -a(
limit is 2@@@ !m or 25E of the total income or e(cess of actual rent !aid &@E over total income
whichever is low that is deductedH on certain conditionL"
• *a( !a%er must be self em!lo%ed
• -ust be individual
• 6e should not own an% residential accommodation where he is claiming the rent
• 6e should be ac5uiring an% !ro!ert% where he is claiming benefit under 23 then
this !rovision won=t a!!l%
• +t residential accommodation is on the name of his s!ouse, child then this section
won=t a!!l%.
2$B10B21$1
&e( ha%ter> S64'H 4-) S6IK.'6 (Section $2$< $22< $22 4< $22)
*he widest !ower has been given to the 1evenue under Search and Seizure. Section &32 is a
com!lete code in itself.
Section $2$ – Discover% and !roduction of evidence. *hus the de!artment has the !owers under
?)? of com!elling !roduction of boo/s of account, e(amination of witnesses including
de!artment em!lo%ees on oath, issuing commissions. *he% ma% im!ound or detain an%
documents used in an% !roceeding of the +* Act :e.g. documents filed during return;.
Section $22
i) 'here the Director Deneral or ?hief ?ommission of +*, etc in conse5uence of information in
his hand has reason to believe that there has been failure to !roduce boo/s of account after notice
has been issued, then a warrant of search or seizure can be issued.
ii) Such warrant can be issued even if it is believed that even on issuance of notice, such
documents will not be !roduced.
iii) *hirdl%, if an% !erson is in !ossession of Aeweller% which he has not declared in an% %ear,
then such warrant can be issued.
Lac# of juris$iction (ill not invali$ate an+ search or sei1ure. +* de!artment is a central
government de!artment. 0.g. DD of -umbai ma% conduct search or seizure in Podh!ur with the
hel! of even the -umbai !olice if such information is received in -umbai. 6owever after search
and seizure, the same will be handed over to the local revenue de!artment. Assessment shall be
made b% the authorities in Podh!ur. 6ence Aurisdiction is onl% for the !ur!ose of assessment and
not search and seizure.
Powers *
i) *he% can enter or search under !remises, vehicle, etc where the% are of the belief that such
documents etc are to be found therein. *here must be information and a reason to believe in
ever% case of search and seizure.
ii) *he% can brea/ o!en, loc/, wall, floor etc if /e% is not !rovided. Such officers can=t be made
accountable.
ITO v Seth Brothers &99 #4 +*1 B3
S? said that if the !owers under Section &32 have been e(ercised in a bonafide manner and all
!rocedures have been followed then the mere error in the Audgment will not invalidate the search
or seizure.
Sibal v IT &9#5 &@& +*1 &&2 – *he% raided -r. Sibal=s house and he had a heart attac/ as a
result of it. 6? said that Section &32 confers enormous to the +* de!artment regarding search and
seizure which invades u!on !rivac% and freedom of ta( !a%er. +t has to be e(ercised /ee!ing
statutor% re5uirements and !rinci!les of natural Austice in mind and not arbitraril%. 6ere the raid
was conducted at midnight. 6owever there have been cases where such raids have been allowed.
'jit *ain v 2OI 2@@& &&# *a(man 2@@5 :Del; – -eaning of Jreason to (elieveK. JReason to
(elieveK means that a reasonable man under the circumstances would form a belief which will
im!el him to ta/e action under the law. *he formation of o!inion has to be in good faith and not
under mere !retence.
'ights and )uties of persons searched
i; 1ight to see warrant of authorization dul% signed and sealed.
ii; 1ight to verif% identities of each member of search !art%.
iii; 1ight to ma/e search of all member of search !art%.
iv; *o insist on !ersonal search of ladies to be ta/en b% 4ad% $fficer with decenc%. 22B10B21$1
v; *o have !resent 2 inde!endent residents of the localit% as witnesses.
vi;+f there is a lad% occu!%ing an a!artment she has the right to withdraw from the !lace of
search if as a custom, she is not su!!osed to show herself to outsiders :e.g. !ardanasheen
women;
vii; -edical ambulance to be !resent during search in case of medical emergenc%
viii; *o allow children to go to school after chec/ing their bags.
i(; *o allow the resident to have their meals at the !ro!er times
(; A Mero( co!% of the seized materials have to be given to the assessee.
(i; After com!leting the seizure, within 9 months assessment needs to be com!leted. After
assessment, if the !ro!ert% is retained for more than 3@ da%s, central Dovt. will !rovide Sim!le
+nterest at &.5 E.
)eemed Sei>ure – +t ma% not be !ossible to carr% awa% certain items. So the same are seized at
that same !lace. :Section &42 Second !roviso;