RATHORE INSTITUTE

Revisionary Class notes on

INCOME TAX

By : CA Anupam Parashar
Visit www.rathoreinstitute.com for details of forthcoming batches at:

(i)Rathore Institute, 2578, Hudson Lane, Kingsway Camp, New Delhi-

110009, Ph : 011-27412649, 27415579

(ii) iSS Rathore Institute, 1/50, iSS Building, Lalita Park, Laxmi Nagar,
New Delhi - 110092 Ph : 09891885266, 011-43073355

CHAPTER - 1

BASIC CONCEPT
What is Tax — Tax is a fee charged by a government There are two types
of taxes

(1) Direct taxes

(2) Indirect taxes.

IMPORTANT DEFINITIONS

ASSESSEE

Sec. 2(7)

'

PERSON

Sec. 2 (31)

INCOME

INDIA

TAXATION OF PREVIOUS YEAR'S INCOME DURING THE SAME YEAR

(1) Shipping business of non-resident [Section 172]

(2) Person leaving India [Section 174]

(3) AOP or BOI or artificial juridical person formed for a particular

event or purpose (Section 174A]

(4) Persons likely to transfer property to avoid tax [Section 175]

(5) Discontinued business [ Section 176]

DEEMED INCOME

(1) Unexplained Cash Credits (Section 68)

(2) Unexplained Investments (Section 69)

(3) Unexplained Money, bullion or jewel or Valuable article (Section

69A)

(4) Investment not fully disclosed (Section 69B)

(5) Unexplained Expenditure (Section 69C)

TAX. RATES FOR ASSESSMENT YEAR 2009-10

 SURCHARGE ON INCOME TAX

MARGINAL RELIEF

CHAPTER 2

SCOPE OF TOTAL INCOME & RESIDENTIAL STATUS

Basic condition

(1) 182 days or more in the relevant previous year; or

(2) 60 days or more during the relevant previous year 365 days or more during 4
previous years immediately preceding the relevant previous year.

Exceptions: There are two exceptions to the above rule:

(1) employment outside India,.

(2) Indian origin,comes on a visit to India in any previous year

ADDITIONAL CONDITIONS
a) 2 out of 10 And

730 days or more, during 7

SECTION 9
 CHAPTER 3

INCOME FROM SALARY

Important concept

Employer and employee relationship

Type of Allowances

House Rent allowance

Section 10(13A)

Specified allowances

DUCHAT

100, 300, 800, 800/1600,200

 70% of such allowance
or Rs, 6,000
p.m. whichever is less.

Treatment of Entertainment Allowance

Allowances which are exempt in case of certain persons

Perquisites

↓ ↓ ↓ ↓
Taxable Tax Free Taxable in hands Other benefit
of under
For All for all specified (Chapter XII H)
employees
↓
→ (1) Rent Free →(6) Leave → (8) Water, gas Tax paid by
Accommodation Travel Employer
concession
Exempt for all
employees
→(2) Loan →(7) Medical →(9) Education

→(3) Use of movable assets →(10)

Attendance

→(4) Transfer of assets

→(5) Reimbursement for all

meeting personal
Expenditure except car
and telephone (FBT)
 Who is a specified employee

Profits in lieu of salary

Retirement Benefits

Pension

Gratuity

Leave Salary

Compensation on voluntary retirement

(i) (a) Three months salary for each completed years of service or

(b) Salary of the balance months of service left before his

normal retirement Which is less

Retrenchment compensation
*Salary includes all but does not include bonus and employer's PF
contribution.

Average salary for preceding 3 months preceding the date of retirement is

taken.

Treatment of Provident Fund for Income-tax Purposes

Deductions from Salaries

(i) Entertainment allowance (Section I6(ii)]

(ii) Tax on employment [Section I6(ii)l

 CHAPTER 4

INCOME FROM HOUSE PROPERTY

Chargeability

Section 22

Deemed owner

Section 27

When income from house property is not charged to tax

 DETERMINATION OF ANNUAL VALUE

Treatment of unrealized rent

Section 23(1)

Deductions

Section 24

No Deduction

Section 25

Recovery of unrealized rent

Section 25AA

Special provisions for arrears of rent received

Section 25B

Co-ownership

Section 26
Can Annual Value (Net Annual Value) be negative?

CHAPTER 5

INCOME FROM BUSINESS OR PROFESSION

Depreciation

Section 32

Proportionate Depreciation

Set off and carry forward of unabsorbed depreciation

Additional Depreciation
Written down value for purpose of charging depreciation if during the previous
" year there is a slump sale:

How to claim depreciation when the asset is not exclusively used for the
purpose of business or profession

Tea/Coffee/Rubber Development Account

Section 33AB

40%

Site Restoration Fund

Section (33ABA)

20%

Scientific Research Expenditure

Section 35

Sale of scientific research asset

Section 41(3)

Expenditure for obtaining licence to operate telecommunication services

Section 35ABB

Sale of
licence
 Expenditure on eligible projects or schemes

Section 35AC

Expenditure by way of payments to associations and institutions for carrying

out Rural Development Programmes Section 35CCA

Preliminary Expenses

Section 35 D

Amortisation of expenditure in case of amalgamation or demerger

Section 35DD

Amortisation of expenditure incurred under voluntary retirement scheme

Section 35DDA

Expenditure on prospecting of minerals

Section 35 E

Expenses Allowed Deductions

u/s 36(1)
 General Deductions

Section 37(1)

Expenses not deductible

Section 40 (a)

Deduction for partnership firm

Section 40(b)

Payment lo specified persons

Section 40 A(2)

Payment in cash

Section 40 A(3)

Provision for gratuity

Section 40 A(7)

Deduction on payment basis

Section 43 B

Maintenance of accounts

Section 44AA

→ exceed Rs. 1,50,000

 → in all the 3 years preceding the P/Y or

non specified profession or any business:

If total income exceeds Rs. 1,20,000 or total sales/receipts exceeds Rs.

10,00,000 in any one of three years preceding the P/Y or

Compulsory audit of accounts

Section 44AB

1. In case of business : If total sales or gross receipts of business

exceed Rs. 40,00,000.

2. In case of profession If gross receipts are more than Rs. 10,00,000.

3. U/s 44AD/AE/AF:

Computation of income on estimation basis

Sec. 44AD/AE/AF

8%

3500/3150

5%

CHAPTER 6

INCOME UNDER THE HEAD CAPITAL GAIN

Capital asset

Section 2(14)
 Type of capital gains

Transfer

Section 2(47)

Transactions not regarded as transfer

Sections 46 and 47

Advance Money Forfeited

Section 51

Cost of improvement

Section 55(1)(b)

Indexed cost of acquisition

Indexation of cost not allowed in certain cases

Indexed cost of improvement [Explanation (iv) to section 48]

Computation of capital gain in certain cases

 Taxation of zero coupon bonds

Section 2(48)

Insurance Claim on destruction

Section 45(1A)

Conversion of capital asset- into stock in trade

Section 45(2)

Transfer of a capital asset by a partner to firm

Section 45(3)

Dissolution of firm

Section 45(4)

Compulsorily acquisition

Section 45(5)

Exemption on compulsory acquisition of agricultural land

Section 10(37)
 Capital gain on conversion of debentures into shares:

Liquidation of a company

Section 46

Conversion of preference shares into equity shares

Capital gain on sale of goodwill of a business/trademark or brand name/

tenancy rights/route permits or loom hours, right to manufacture or
right to carry on any business:

Special provision for full value of consideration in certain cases

Section 50C

Reference to valuation officer

Section 55A

Long-term capital gain on eligible equity shares exempt if the shares are
acquired within a certain period Section 10(36)

Exemption of capital gains on compensation received on compulsory

acquisition of agricultural land situated within specified urban limits
Section 10(37)
Tax on snort-term capital gains in case of equity snares and units or
equity oriented fund

(Section 111A)

Tax on long-term capital gains from listed securities

1. Tax @ 20% on long-term capital gains computed after indexation

or

2. Tax @ 10% on long-term capital gains computed without

indexation of its cost.

CHAPTER 7

INCOME UNDER THE HEAD ‘INCOME FROM OTHER SOURCES’

Method of Accounting

Taxability of Dividend

Section 56(2)(i)

Exemption of income from units

 Section 10(35):

Dividend

Deemed Dividend

Section 2(22)

Winnings from Lotteries, Crossword Puzzles, Horse Races and Card Games

Section 56(2)(ib)

Special rate of Income-tax in case of winnings from lotteries, crossword

puzzles, races, etc. Section 115BB

Grossing up of lottery income, etc.

Rate of TDS for interest

Interest exempt from tax

Section 10(15)

No deduction

Section 14A

Govt. Non-govt.
 Tax-free Others Tax-free Others

Included in total
Income
X √ √ √
Grossing up
X X √ √ Or X

Avoidance of tax by certain transaction in securities

Section 94

Bona Washing Transaction

(2) Loss arising from purchase and sale of securities not allowed in
certain cases (Section 94(7))

(3) Bonus stripping in case of units (Section 94(8)]

Income from letting out of machinery, plant or furniture

Section 56(2)(ii)

Income to include gift of money from unrelated persons

Section 56(2)(vi)
Contribution of the employee towards his welfare fund, deducted/received by
the employer [Section 56(2)(ic)]

Amounts not deductible in computing the income under the head 'Income from
Other Sources' [Section 58]

CHAPTER 13

INCOME OF CHARITABLE TRUST AND POLITICAL PARTY

CHAPTER 12

AGRICULTURAL INCOME

Agricultural income means

 Sec. 2 (1A)

Partly Agricultural and partly non-agricultural income

Disintegration of income in specific composite business

75%,65%,60%.

CHAPTER 8

CLUBBING OF INCOME

Transfer of income where there is no transfer of assets

Section 60

Revocable transfer of assets

Section 61
When a transfer is revocable [Section 63]:

Section 61 not applicable, if the transfer is irrevocable for a specified period

Section 62

Income of an individual to include income of spouse, minor child, etc.

Section 64

Remuneration of spouse from a concern in which the other spouse has

substantial interest [Section 64(1)(ii)]:

Income from assets transferred to the spouse

Section 64(1)(/V)

Income from assets transferred to son's wife

Section 64(l)(vi)

Income from assets transferred to any person for the benefit of the spouse of
the transferor Section 64(I)(vii)
 Income from assets transferred to any person for the benefit of son's
wife

Section 64(I)(viii):

Income of minor child

Section 64(1A)

Rs. 1,500 in respect of each minor child.

Income from self-acquired property converted to joint family property

Section 64(2)

CHAPTER 9

SET OFF AND CARRYFORWARD OF LOSSES

Losses of firms
 Carry forward and set off of losses in case of certain companies

Section 79

Set off and Carry forward of Losses

Nature of Income Set - Off Carry Forward Set - Off

Same Inter- Inter- For From
Source source Head Assessment
under under Year
same same
head head
Salary N.A N.A N.A N.A N.A.
House Property √ √ √ 8 years Same Head
Non- √ √ √ 8 years Same Head
Speculation
Except from the
PGBP salary
Speculation √ X X 4 years Same
Source
Capital Short Term √ √ X 8 years Same Head
Gains Long Term √ X X 8 years Same Head
Winning from X X X
Other
Lottery etc.
Sources
Interests etc. √ √ X
Owning & √ X X 4 years Same
Maintenance Source
race horses
 CHAPTER 10

DEDUCTIONS

Deduction for Life Insurance Premium, PF contribution etc.

Section 80C

Available to: only Individual and HUF,

Investment in Pension Fund

80CCC

Deduction in respect of contribution to pension scheme of Central

Government

Section 80CCD
 Section 80CCE:

Total deduction under section 80C, 80CCC and 80CCDcan not exceed Rs.
1,00,000.

Medical Insurance Premium

Section 80D

15000/20000

Medical treatment of Dependent handicapped

Section 80DD

50000/75000

Expenditure on specified diseases

Section 80DDB

40000/60000

Relative in relation to an individual means spouse, children, brother,

sister or parents of the individual.

Payment of interest on loan for higher education

Section 80E

8year
 Deductions for donations

Section 80G

Adjusted Gross total income means

Gross Total Income

less Long Term Capital Gains

less Short Term Capital Gains u/s 111A

less Deductions under other sections of chapter VI-A [but without

deducting deduction under A, B]

Note:- GTI includes lottery income also. But for calculating Adjusted GTI
lottery has not been excluded. Therefore while calculating Adjusted GTI
lottery shall not be deducted.

Deductions for payment of rent

Section 80GG

Deduction in respect of certain donations for scientific research or rural

development

Section 80GGA

Deduction in respect of contributions given by companies to political

parties
 Section 80GGB

Deduction in respect of contribution given by any person to political

parties

Section 80GGC

Development of infrastructure

Section 80- IA

100% of profits from such business for any 10 years out of 15 years

Development of SEZ

Section 80-IAB

100% of profits from such business for any 10 year-; out of 15 years

Manufacturing in specified areas

Section 80-IC

Amount of Deduction:-
In Sikkim or North East Region 100% of profits for 10 years starting
from the year in which starts
operations
In Himachal Pradesh or Uttaranchal 100% of profits for 5 years starting
from the year

in which starts operations

25% of profits for next 5 years (30%

for company)

Operating Hotels and Convention Centre

Section 80-ID

Amount of deduction:-

100% of profits from such business for 5 consecutive AIY beginning

front the year in which such hotel starts functioning or convention
centre starts operating on commercial basis.

Manufacturing of Specified Articles Eligible Business in Specified Areas

Section 80-IE.

Amount of deduction:
 100% of profits shall be allowed as deduction for 10 consecutive A/Y
commencing from the year in which it begins to manufacture or produce
articles or things, or completes substantial expansion.

Bio-degradable waste for generating power

Section 80JJA

100% profits shall be allowed as deduction for the 5 consecutive Assessment

Years beginning with the year in which such business is commenced.

Employment of New Workmen

Section 80JJAA

Assignment of copyright of any book

Section 80 QQB

Income from Inventions

Section 80RRB

Deduction for handicapped

Section 80U