WEALTH TAX

Wealth tax is imposed on the richer section of the society. The intention of doing so is to bring
parity amongst the taxpayers. However, wealth tax was abolished in the budget of 2015
(effective FY 2015-16) as the cost incurred for recovering taxes was more than the benefit is
derived. Abolishing the wealth tax also simplified the tax structure. As an alternative to the
wealth tax, the finance minister hiked the surcharge from 2% to 12% for the super rich section.
Individuals with an income of above Rs.1 crore and companies with an income of over Rs.10
crore fall under the ambit of the super-rich segment.

2. Who is Liable to pay wealth tax?

Wealth tax is applicable to individuals, HUFs, and companies. The deciding factor for
applicability of wealth tax is the residential status. The thumb rule is the resident Indians are
subject to wealth tax on their global assets. However, NRI’s fall under the ambit of wealth tax
for the assets held in India.

3. Charge on Wealth
If the total net wealth of an individual, HUF or company exceeds Rs. 30 lakhs, on the valuation
date, tax @1% will be leviable on the amount in excess of Rs. 30 lakhs. Every person whose
net wealth exceeds such limit shall furnish a return of net wealth. The due date is same as that of
Income tax return.

4.Computation of Net Wealth

Value of Assets belonging to the assessee on the valuation date XXX

Add: Deemed wealth XXX

Less: Exempt Assets XXX

Less: Debts incurred in relation to the assets XXX

Total XXX
5. Components of Wealth
Assets: An asset is a resource which is held and has future
economic benefit
1. Any building or land appurtenant whether used for residential/ other purposes, but
doesn’t include:

a. House allotted by accompanying/ employer to be used exclusively for residential purposes,

where the gross total salary of the assessee is less than Rs.10 lakhs
b. House which forms part of Stock in trade
c. House occupied by the assessee for business/ professional purpose
d. Residential property let out for minimum of 300 days in the previous year
e. Property in the nature of commercial establishment or complex
2. Motorcars, other than those used for running them on hire or those held as stock in trade
3. Jewellery, bullion, furniture, utensils or other articles made fully/ partly of gold, silver,
platinum or such precious metals
4. Yachts, boats and aircrafts other than those used for commercial purpose
5. Urban land situated in the Specified area, other than:
a. Those classified as agricultural land and used for such purpose
b. Those in which building construction is not permissible
c. Land occupied by building, which was constructed with the approval of the appropriate
authority
d. Unused land held by assessee for industrial purposes for a period of 2 years from the date of
acquisition.
e. Land held by the assessee as stock in trade for over 10 years from the date of acquisition
6. Cash in hand in excess of Rs. 50,000

Deemed Assets: These are assets, though not legally belonging

to the assessee, are clubbed as his assets while computing his
net wealth
1. Assets transferred to Spouse otherwise than in connection with agreement to live apart.
2. Assets transferred to a person/ Association of Persons for the immediate or deferred
benefit of assessee or spouse.
 3. Assets transferred to son’s wife.
4. Assets transferred to a person/ Association of Persons for the immediate or deferred
benefit of son’s wife.
5. Assets held by minor child other than those acquired using the skills of minor or those
belonging to a minor with disability.
6. Interest of assessee in the asset of a firm/association of people where he is a partner or
member.
7. Self-acquired property that is converted as the property of the family/transferred with
inadequate consideration.
8. Assets transferred under revocable transfer.
9. Gift of money made in books maintained by assessee, by way of mere book entries.
10. Impartible assets held by assessee
11. Building allotted to assessee under a Homebuilding scheme.
12. Building in which a person is allowed to take/ retain possession in part performance of a
contract.
13. Building for which assessee has acquired the rights.

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Exempted Assets: Assets which are not considered as a part

of wealth for the computation of wealth tax
1. Property held under trust/ for the purpose of charitable/religious purposes.
2. Interest in coparcenary property of Hindu Undivided family.
3. Jewellery in possession of ruler not being his personal property.
4. Money/Asset brought by a person of Indian origin/by an Indian citizen.
5. In case of an Individual/HUF, a house/ part of house or plot of land not exceeding
50sq.mtr in area.

Tax Planning Relating to Merges

and Demergers to Companies
THEINTACTFRONT9 DEC 2018 2 COMMENTS
Section 2(1B) of Income Tax Act defines ‘amalgamation’ as merger of one or more companies
with another company or merger of two or more companies to from one company in such a
manner that

(I) All the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation.

(II) All the liabilities of the amalgamating company or companies immediately before the
amalgamation becomes the liabilities of the amalgamated company by virtue of the
amalgamation.

(III) Shareholders holding at least three-fourths in value of the shares in the amalgamating
company or companies (other than shares already held therein immediately before the
amalgamated company or its nominee) becomes the shareholders of the amalgamated company
by virtue of the amalgamation.

Tax Relief’s and Benefits in case of Amalgamation

If an amalgamation takes place within the meaning of section 2(1B) of the Income Tax Act,
1961, the following tax reliefs and benefits shall available:-

1. Tax Relief to the Amalgamating Company:

Exemption from Capital Gains Tax [Sec. 47(vi)]: Under section 47(vi) of the Income-tax Act,
capital gain arising from the transfer of assets by the amalgamating companies to the Indian
Amalgamated Company is exempt from tax as such transfer will not be regarded as a transfer for
the purpose of Capital Gain.

Exemption from Capital Gains Tax in case of International Restructuring [Sec. 47(via)]:
Under Section 47(via)} in case of amalgamation of foreign companies, transfer of shares held in
Indian company by amalgamating foreign company to amalgamated foreign company is exempt
from tax, if the following two conditions are satisfied:

At least twenty-five per cent of the shareholders of the amalgamating foreign company continue
to remain shareholders of the amalgamated foreign company, and

Such transfer does not attract tax on capital gains in the country, in which the amalgamating
company is incorporated

2. Tax Relief to the shareholders of an Amalgamating Company:

Exemption from Capital Gains Tax [Sec 47(vii)]: Under section 47(vii) of the Income-tax Act,
capital gains arising from the transfer of shares by a shareholder of the amalgamating companies
are exempt from tax as such transactions will not be regarded as a transfer for capital gain
purpose, if:

The transfer is made in consideration of the allotment to him of shares in the amalgamated
company; and

Amalgamated company is an Indian company.

3. Tax Relief to the Amalgamated Company:

o Carry Forward and Set Off of Accumulated loss and unabsorbed depreciation of the
amalgamating company [Sec. 72A]: Section 72A of the Income Tax Act, 1961 deals with the
mergers of the sick companies with healthy companies and to take advantage of the carry
forward of accumulated losses and unabsorbed depreciation of the amalgamating company. But
the benefits under this section with respect to unabsorbed depreciation and carry forward losses
are available only if the followings conditions are fulfilled:-

There should be an amalgamation of –

(a) a company owning an industrial undertaking (Note 1) or ship or a hotel with another
company, or

(b) a banking company referred in section 5(c) of the Banking Regulation Act, 1949 with a
specified bank (Note 2), or

(c) one or more public sector company or companies engaged in the business of operation of
aircraft with one or more public sector company or companies engaged in similar business.

Merger and Demerger

of Companies
AKTUTHEINTACTONE26 JUL 2019 1 COMMENT

The term ‘Amalgamation’ or ‘Merger’ or ‘De-merger’ is not defined in the Companies Act,
1956. Chapter V of Part VI of Companies Act comprising sections 390 to 396A contain
provisions regarding Compromises, Arrangement and Reconstructions.

In simple terms, a Merger or Amalgamation is an arrangement whereby the assets of two or

more companies become vested in one company (which may or may not be one of the original
two companies). It is a legal process by which two or more companies are joined together to
form a new entity or one or more companies are absorbed by another company and as a
 consequence the amalgamating company loses its existence and its shareholders become the
shareholders of the new or amalgamated company.

De-merger is an arrangement whereby some part /undertaking of one company is transferred to

another company which operates completely separate from the original
company. Shareholders of the original company are usually given an
equivalent stake of ownership in the new company.

De-merger is undertaken basically for two reasons. The first as an exercise in corporate
restructuring and the second is to give effect to kind of family partitions in case of family owned
enterprises. A de-merger is also done to help each of the segments operate more smoothly, as
they can now focus on a more specific task.

Examples of Mergers & Demergers:

1. Maruti Motors operating in India and Suzuki based in Japan amalgamated to form a new company called
Maruti Suzuki (India) Limited
2. DCM Ltd. demerged into DCM Ltd., DCM Shriram Industries Ltd., DCM Engineering Industries Ltd., and
Rath Foods Ltd.

SECTION 2: UNDERSTANDING SOME IMPORTANT CONCEPTS

1. AMALGAMATION/MERGER:
Accounting Standard 14 defines amalgamation as –

“Amalgamation means an amalgamation pursuant to the provisions of Companies Act, 1956 or

any other statute which may be applicable to companies”.

AS 14 provides for two types of amalgamation: “Amalgamation in the nature” of merger and
“Amalgamation in the nature of purchase”. Amalgamation in the nature of merger is an
amalgamation which satisfies all the following conditions.

(i) All the assets and liabilities of the transferor company become,
after amalgamation, the assets and liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately before
the amalgamation, by the transferee company or its
subsidiaries or their nominees) become equity
shareholders of the transferee company by virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee company is
discharged by the transferee company wholly
by the issue of equity shares in the transferee company, except that cash may be paid in
respect of any fractional shares.

(iv) The business of the transferor company is intended to be carried on,

after the amalgamation, by the transferee company.

(v) No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the
transferee company except to ensure uniformity of accounting policies.

Amalgamation in the nature of purchase is an amalgamation

which does not satisfy any one or more of the conditions specified in sub-paragraph (e)
above.

According to Income Tax Act amalgamation means:

“amalgamation“, in relation to companies, means the merger of one or more companies with
another company or the merger of two or more companies to form one company (the company or
companies which so merge being referred to as the amalgamating company or companies and the
company with which they merge or which is formed as a result of the merger, as the
amalgamated company) in such a manner that:

(i) All the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation;

(ii) All the liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities of the amalgamated company by virtue of the
amalgamation;

(iii) Shareholders holding not less than 3three-fourths in value of the shares in the amalgamating
company or companies (other than shares already held therein immediately before the
amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become
shareholders of the amalgamated company by virtue of the amalgamation.

2. DEMERGER

Section 2(19AA) of the Income Tax Act, 1961 added by the Finance Act, 1999 provides that
“demerger” in relation to companies, means the transfer, pursuant to a scheme of arrangement
under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of
its one or more undertakings to any resulting company in such a manner that:

(i) All the property of the undertaking, being transferred by the demerged company, immediately
before the demerger, becomes the property of the resulting company by virtue of the demerger;
(ii) All the liabilities relatable to the undertaking, being transferred by the demerged company,
immediately before the demerger, become the liabilities of the resulting company by virtue of the
demerger;

(iii) The property and the liabilities of the undertaking or undertakings being transferred by the
demerged company are transferred at values appearing in its books of account immediately
before the demerger;

(iv) The resulting company issues, in consideration of the demerger, its shares to the
shareholders of the demerged company on a proportionate basis;

(v) The shareholders holding not less than three-fourths in value of the shares in the demerged
company (other than shares already held therein immediately before the demerger, or by a
nominee for, the resulting company or, its subsidiary) become share-holders of the resulting
company or companies by virtue of the demerger, otherwise than as a result of the acquisition of
the property or assets of the demerged company or any undertaking thereof by the resulting
company;

(vi) The transfer of the undertaking is on a going concern basis;

(vii) The demerger is in accordance with the conditions, if any, notified under sub-section (5) of
section 72A by the Central Government in this behalf.

In cases of demergers where only one of the many undertakings or part of an undertaking is
transferred as an exercise in corporate restructuring, the transferor company would continue to
exist to carry on its other businesses. However in case where all the undertakings of a business
are transferred to different transferee companies, there is no need for the transferor company to
exist and therefore it can be dissolved without winding up.

TAX PLANNING FOR EMPLOYEES REMUNERATION

As is well-known, income-tax is deducted at source in respect of income from ‘Salaries’.
As the income of salaried tax-payers is fixed, they are more susceptible to inflationary
pressures. Therefore, there have been progressive attempts in the past, to grant relief
to salaried tax-payers. In order to subserve the aforesaid objective, a number of
exemptions and deductions in respect of various allowances and other receipts, have
been provided in the Income-Tax Act, 1961 (the Act), over a period of time.
Most of the employers make best use of the aforesaid provisions, in order to minimize
the tax incidence in the case of their employees, so as to make their pay-package most
attractive. In a given case, it is possible to so arrange the basic salary, allowances and
perquisites, that the incidence of taxation is minimized. In other words, the pay-package
of a salaried tax-payer can be planned in such a manner, within the four corners of law,
that the income-tax payable in respect thereof is kept to the minimum.
Now-a-days flexi pay-package is very popular amongst the employees. As per the flexi
pay-package, within the over-all consolidated amount of remuneration or cost to the
employer fixed per month or per annum, the employee is allowed to choose the items of
payment / benefit, which are most suitable to him. It may be stated here that in a flexi
pay-package certain items like basic salary, dearness allowance, etc. are fixed,
whereas the other items of payment / benefit are left to the choice of the employee.
At the outset, it may be stated that no hard and fast guidelines may be laid-down for the
purpose of tax-planning in respect of the pay-package of a salaried tax-payer, so as to
minimize the incidence of taxation in his case.
In order to formulate some broad guidelines for the aforesaid purpose, the relevant
provisions of the Act and the Income-Tax Rules, 1962 (the Rules), will have to be
examined. In addition, the relevant case-law will also have to be referred to. The same
are examined / discussed hereinafter.
1. Charge on salary income – Section 15
Section 15 is the charging section in respect of income from ‘Salaries’. This section
brings to charge the following categories of salary-
(i) Any salary due in the previous year, whether paid or not
(ii) Advance salary, and
(iii) Arrears of salary
Income tax relief for Salary Received in Advance and on Arrears of Salary Received for
earlier years
A combined reading of sections 15 and 16 will reveal the following basis for charging
salary to tax.
(a) Due basis
(b) Payment basis, and
(c) Allowance basis
Any salary due from an employer or former employer to an employee in the previous
year, whether paid or not, is chargeable to tax. Clauses (b) and (c) of section 15 charge
salary to tax when it is paid or allowed, viz. by way of advance salary or arrears of
salary.
Under section 17(2), perquisites, when granted or allowed or provided to an employee
by an employer, like rent-free accommodation, accommodation on concessional rent,
etc., the value thereof, is to be included in salary and is chargeable to tax as such.
Therefore, they are chargeable on ‘Allowance basis’.
2. Deductions from salaries – Section 16
clause (ia) has been inserted by the Finance Act, 2018, which states, a deduction of
forty thousand rupees or the amount of the salary, whichever is less shall be allowed
w.e.f. 1-4-2019
Entertainment allowance under section 16(ii), received by an employee is to be included
in the income of the employee under the head ‘Salaries’ and thereafter, a deduction
therefrom, is permissible subject to the conditions and limits laid-down under section
16(ii) of the Act.
As per the provisions of section 16(iii),any sum paid by an employee on account of the
tax on employment (i.e. Profession tax), which is levied by a State Government, is
allowable as a deduction from the salary of the employee, provided it has been paid by
him.
The employer may allow deduction for the Profession tax paid by the employee while
computing the tax to be deducted at source from ‘Salaries’.
3. Perquisites – Section 17(2)
Section 17(2) of the Act, gives an inclusive definition of ‘perquisites’. This clause
comprises six sub-clauses followed by two provisos, and they deal with the following
perquisites.
(i) Value of rent-free accommodation provided to the assessee by his employer. [Sub-
clause (i)]
(ii) Value of any concession in respect of rent respecting any accommodation provided
to the assessee by his employer. [Sub-clause (ii)]
(iii) Sums paid by the employer in respect of any obligation which, but for such payment,
would have been payable by the assessee. [Sub-clause (iv)]
(iv) any sum payable by the employer, whether directly or through a fund, other than a
recognised provident fund or an approved superannuation fund or a Deposit-linked
Insurance Fund established under section 3G of the Coal Mines Provident Fund and
Miscellaneous Provisions Act, 1948 (46 of 1948), or, as the case may be, section 6C of
the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952),
to effect an assurance on the life of the assessee or to effect a contract for an annuity;.
[Sub-clause (v)]
(v) the value of any specified security or sweat equity shares allotted or transferred,
directly or indirectly, by the employer, or former employer, free of cost or at
concessional rate to the assessee.[Sub-clause (vi)]
(vi) the amount of any contribution to an approved superannuation fund by the employer
in respect of the assessee, to the extent it exceeds.[Sub-clause (vii)]
(vii) the value of any other fringe benefit or amenity as may be prescribed.[Sub-clause
(viii)]
(vii) Under the first proviso to clause(2) of section 17, medical benefits are not treated
as perquisite in certain specific situations.
As per sub-clause(viii) of section 17(2), ‘Perquisites’ also includes the value of any
other benefit or amenity, as may be prescribed.
The valuation of ‘Perquisites’ is to be made as per Rule 3 of the Income-Tax Rules,
1962.
Sub-Rules (1) to (6) deal with the valuation of perquisites as follows:-
(a) Valuation of rent-free / concessional accommodation – Rule 3(1)
(b) Valuation of provision of domestic servants – Rule 3(3)
(c) Valuation of provision of gas / electricity / water – Rule 3(4)
(d) Valuation of provision of free or concessional educational facilities – Rule 3(5)
4. Specified employees
As per section 17(2)(iii), ‘Perquisite’ includes the value of any benefit or amenity granted
or provided free of cost or at concessional rate in respect of certain employees. Such
employees may be called as specified employees. The specified employees in this
context are as follows:-
(i) Director – employee
(ii) An employee having 20 per cent or more of voting power in employer Company, and
(iii) An employee who is drawing salary in excess of Rs.50,000 and does not fall in the
aforesaid two categories.
For computing the limit of Rs.50,000, the following items are excluded / deducted:-
(a) Non-monetary benefits
(b) Deduction on account of Profession tax
(c) Exempt entertainment allowance, and
(d) Non-taxable allowance.
From the aforesaid discussion, it may be concluded that any benefit or amenity granted
or provided free of cost or at concessional rate, to an employee with salary not
exceeding Rs.50,000, will not be treated as perquisite in his hands.
5. Special allowance or benefit – Section 10(14)
Certain special allowances or benefits are exempt under section 10(14) of the Act. This
is a very important provision. For the sake of ready reference section 10(14) is
reproduced as follows:-
Incomes not included in total income.
10. In computing the total income of a previous year of any person, any income falling
within any of the following clauses shall not be included—
(14) (i) any such special allowance or benefit, not being in the nature of a perquisite
within the meaning of clause (2) of section 17, specifically granted to meet expenses
wholly, necessarily and exclusively incurred in the performance of the duties of an office
or employment of profit, as may be prescribed, to the extent to which such expenses
are actually incurred for that purpose ;
(ii) any such allowance granted to the assessee either to meet his personal expenses at
the place where the duties of his office or employment of profit are ordinarily performed
by him or at the place where he ordinarily resides, or to compensate him for the
increased cost of living, as may be prescribed and to the extent as may be prescribed :
Provided that nothing in sub-clause (ii) shall apply to any allowance in the nature of
personal allowance granted to the assessee to remunerate or compensate him for
performing duties of a special nature relating to his office or employment unless such
allowance is related to the place of his posting or residence ;
From the aforesaid provisions, it may be seen that under sub-clause (i) of section
10(14), any prescribed special allowance or benefit other than those in the nature of a
perquisite, specifically granted to meet expenses wholly, necessarily and exclusively
incurred in the performance of the duties of an office or employment of profit, is exempt
to the extent to which such expenses are actually incurred for that purpose.
Certificate furnished by the employee in regard to expenditure is adequate evidence
For exemption in respect of any special allowance under section 10(14)(i), there is a
condition that the exemption will be limited upto the extent to which such expenses are
actually incurred.
In this regard a certificate furnished by the employee that he has fully spent the
allowance granted to him in the performance of his duties, will be adequate evidence for
the purposes of TDS under section 192 of the Act. It may also be stated here that
section 192 does not vest any power in the employer to disbelieve the genuineness of
the declarations filed by the employees for the purposes of TDS in respect of their
income from salaries.
The allowances prescribed for this purpose(which are fully exempt) are listed in Rule
2BB(1) of the Income-Tax Rules, 1962. For the sake of ready reference Rule 2BB(1) is
reproduced as follows:-
Rule 2BB.
(1) For the purposes of sub-clause (i) of clause (14) of section 10, prescribed
allowances, by whatever name called, shall be the following, namely :—
(a) any allowance granted to meet the cost of travel on tour or on transfer;
(b) any allowance, whether, granted on tour or for the period of journey in connection
with transfer, to meet the ordinary daily charges incurred by an employee on account of
absence from his normal place of duty;
(c) any allowance granted to meet the expenditure incurred on conveyance in
performance of duties of an office or employment of profit :
Provided that free conveyance is not provided by the employer;
 (d) any allowance granted to meet the expenditure incurred on a helper where such
helper is engaged for the performance of the duties of an office or employment of profit;
(e) any allowance granted for encouraging the academic, research and training pursuits
in educational and research institutions;
(f) any allowance granted to meet the expenditure incurred on the purchase or
maintenance of uniform for wear during the performance of the duties of an office or
employment of profit.
Explanation : For the purpose of clause (a), “allowance granted to meet the cost of
travel on transfer” includes any sum paid in connection with transfer, packing and
transportation of personal effects on such transfer.
Besides,under sub-clause(ii) of section 10(14), any prescribed allowance granted to the
assessee either to meet his personal expenses at the place where the duties of his
office or employment of profit are ordinarily performed by him or at the place where he
ordinarily resides, or to compensate him for the increased cost of living, is exempt upto
the prescribed extent laid down under Rule 2BB(2). For this purpose, a table has been
provided under Rule 2BB(2). For our purpose, the following items are important.
 As per item No. (5) of the aforesaid table, children educational allowance upto Rs.100
per month per child, upto a maximum of two children, is exempt.
 As per item No.(6) of the aforesaid table, any allowance granted to an employee to
meet the hostel expenditure of his children, upto Rs.300 per month per child, upto a
maximum of two children, is exempt.
6. Important exemptions in respect of the salaried employees under Section 10 of
the I.T. Act
There are a number of exemptions provided under sections 10(10) to 10(13A) in respect
of salaried employees. The same may be briefly stated as follows:-
 Any death-cum-retirement gratuity received by Central and State Government Servants
in civil posts or in the defence services and employees of the local authority, which is
exempt under section 10(10)(i).
 Any gratuity received under the Payment of Gratuity Act, 1972 to the extent it does not
exceed an amount calculated in accordance with the provisions of sub-sections (2) and
(3) of section 4 of that Act, which is exempt under section 10(10)(ii).
 Any other gratuity received by an employee from one or more employers on retirement
or incapacitation or by his dependants on his death, not exceeding one half month’s
salary for each year of completed service etc., is exempt under section 10(10)(iii).
 Any payment in commutation of pension received by a servant of the Government, local
authority or public corporation and any such payment received by an employee from a
private employer to the extent it is exempt under section 10(10A).
 Any payment received by a Central or State Government employee in cash equivalent
of the leave salary in respect of the period of Earned leave at his credit at the time of his
retirement is exempt under section 10(10AA)(i) and any payment of the aforesaid nature
received by an employee other than an employee of the Central or State Governments,
within certain limits, is exempt under section 10(10AA)(ii).
 Any compensation received by a workman under the Industrial Disputes Act or under
any other Act, Rule, Order or Notification or under any Award at the time of
retrenchment subject to certain conditions, is exempt under section 10 (10B)
 Any payment received by an employee of Public Sector Company at the time of his
voluntary retirement in accordance with any scheme approved by the Central
Government having regard to the economic viability of such Company, is exempt under
section 10(10C).
 Any payment from a Provident Fund which the Provident Fund’s Act, 1925, applies or
any other Provident Fund set-up and notified by the Government is exempt under
section 10(11).
 The accumulated balance due and becoming payable to an employee participating in a
Recognized Provident Fund, to the extent provided on Rule 8 of Part A of the Fourth
Schedule, is exempt under section 10(12).
 Any payment received from an Approved Superannuation Fund to the extent it is
exempt under section 10(13); and
 Any special allowance granted to an assessee by his employer to meet his house rent
expense to the extent exempt under section 10(13A).
7. Pay more special allowances to the employees, which are exempt in their
hands
In view of the reasons stated in earlier para (7), it would be advisable to pay more
special allowances to the employees, which are exempt in their hands under section 10
or 17(2). In this context, Rule 2BB(1) is very relevant. As per Rule 2BB(1)(c), any
allowance granted to meet the expenditure incurred on conveyance in performance of
duties of an office or employment of profit, is exempt from tax. In this regard, a
certificate from the employee that he has fully spent the aforesaid allowance for the
purpose of his duties, will be sufficient, as regards the employer and no tax will be
required to be deducted at source in respect thereof.
Therefore, a special allowance should be preferred to payment by way of
reimbursement on the expenditure incurred by the employees.
8. Deductions under section 80C, etc.
Section 80C provides that an assessee, being an individual or a Hindu Undivided
Family, will be allowed a deduction from gross total income of an amount not exceeding
Rs.1.50 lakh in respect of amount paid or deposited in the previous year in the specified
savings listed in section 80C(2).
The deductions include payment of life insurance premia and contributions to provident
fund, etc. Such payments also include contribution to certain pension funds,
subscription towards units of mutual fund / UTI, payment of tuition fees for children,
payment for repayment of loan in respect of purchase / construction of a residential
house. The most important point to be noted here is that total deduction under sections
80C as well as 80CCC and 80CCD, should not exceed Rs.1.50 lakh.
9. Tax-planning measures
No hard and fast guidelines can be provided for the purpose of tax-planning, so as to
reduce the incidence of taxation to the minimum. In the light of the discussion, in the
preceding paragraphs, some broad guidelines by way of tax-planning measures, may
be provided as follows:-
(i) The basic salary may be taken at 35-40% of the total pay-package
(ii) It should be ensured that dearness allowance forms part of salary as per the terms of
employment.
(iii) House rent allowance (HRA) paid by the employer, is exempt under section
10(13A), as per the limits prescribed by Rule 2A of the Income-Tax Rules, 1962. It is,
therefore, advisable to pay house rent allowance to the employees in preference to
providing rent-free accommodation to them.
(iv) All these special allowances exempt under section 10(14) r.w.rule 2BB should be
provided to the extent possible.
Same instances of these allowances are, as follows:-
(a) Conveyance allowance
(b) Transport allowance for commuting between the office and residence upto Rs. 1600
per month. However wef A.Y 2019-20 this allowance has been withdrawn and standard
deduction of Rs 40000 has been allowed u/s 16 in lieu of Transport Allowance and
Medical Reimbursement)
(c) Uniform allowance, if the employer has uniform code in the organisation.
(d) Helper allowance where such helper is engaged in the performance of official duties,
and
(e) Education allowance, etc.
(v) Leave travel allowance may be provided as a part of pay-package.
(vi) Expenditure on medical treatment should also be made a part of pay-package. Such
expenditure is exempt, vide proviso to section 17(2) after clause (vi) thereof.
It may be noted that medical reimbursement of actual expenditure upto Rs. 15,000 per
year, is also exempt in the hands of the employee till financial year 2017-18. However
wef A.Y 2019-20 this allowance has been withdrawn and standard deduction of Rs
40000 has been allowed u/s 16 in lieu of Transport Allowance and Medical
Reimbursement)
(vii) If employee owns a house, which he has occupied for his own residence, such
house may be taken by the employer on lease and thereafter, the same may be allotted
to the employee as rent-free accommodation.
(viii) Maximum benefit must be availed of, in respect of the exemptions provided to
salaried employees under section 10 of the Income-Tax Act. This issue has been
discussed in the aforesaid para (6). Some instances of such exemptions are as follows:-
(a) Gratuity : section 10(10)
(b) Commutation of pension : section 10(10A)
(c) Encashment of leave salary : section 10(10AA)
(d) Recognised Provident Fund : section 10(12), and
(e) Approved Superannuation Fund : section 10(13)
(ix) Maximum benefit must be availed of, in respect of deduction under section 80C, etc.
This issue has been discussed in the aforesaid para (10).
(x) Motor-car for office and private use, along with driver, if necessary, may be provided
to senior employees of the organization.
(xi) Computer or lap-top for office and private use may also be provided to the
employee.
(xii) Free tea, coffee, snacks, refreshment, lunch / dinner in office or factory, may be
provided to the employees. If feasible paid meal vouchers may also be provided to the
employees in the absence of canteen or other such arrangement.
10. Conclusion
As already pointed out, no hard and fast parameters can be laid-down for the purpose
of tax-planning in respect of income from ‘Salaries’. Only broad guidelines may be
provided in this regard and the same have been discussed in the preceding paragraphs.
In the light of the aforesaid reasons, the Human Resource Department (HRD) of an
organization will have to try different permutations and combinations in respect of the
pay-package of the employees of the organization, on the basis of their peculiar needs
and circumstances.
The aforesaid broad guidelines may be used as tax-planning measures in respect of the
pay-package of the employees of an organization

TAX PLANNING THROUGH DEPRECIATION

:
Depreciation can be used as an effective tool for tax planning. According to section 32 (1), depreciation
can be claimed in respect of building, machinery, plant or furniture and w.e.f. assessment year 1999-
2000 depreciation on intangible assets such as know-how, patent rights, copyrights, trade marks,
licenses, franchises, or any other business or commercial rights acquired on or after 1.4.98 can also be
claimed, which are owned by the assessee and used for the purposes of business or profession.

It may be noted that for the purpose of depreciation “Building” includes roads, bridges, culverts ,wells and
tubewells. Likewise, plant and machinery includes Typewriters, Photocopiers, Telex & Fax Machines,
Computers, Tools and Books (used by the professionals). Depreciation is allowed at prescribed
percentage, which varies between 5% to 100% for various blocks of assets on the written down value.
However, as per second proviso to section 32(1),depreciation shall be restricted to 50% of the prescribed
percentage in respect of such asset which is acquired by the assessee during the previous year and put
to use for the purpose of business or profession for a period of less than 180 days in that previous year.
Another important point is that the first proviso to section 32(1) , which provided for full deduction of the
actual cost of any machinery or plant costing upto Rs.5,000,has been omitted by the Finance Act , 1995
with effect from Assessment Year 1996 -97. However depreciation on professional books has been
allowed at the rate of 100% with effect from Assessment Year 1996-97.
CLAIMING 100% DEPRECIATION & REDUCING TAX LIABILITY :
Wind mills and other special devices including electric generators and pumps running on wind energy,
bio-gas plant, bio-gas engines, agricultural and municipal waste conversion devices producing energy
and electrically operated vehicles including battery powered or fuel-cell powered vehicles, solar power
generating systems etc., are some of the items included in machinery and plant which are eligible for
100% depreciation. An existing industry having considerable taxable profits may plan diversification in the
industries and can claim 100% depreciation in respect of the new plant and machinery. In the recent past
many companies have successfully done such tax planning, which is absolutely within the legal frame
work and in accordance with the Govt. policy to promote investments in certain sectors.
IS IT MANDATORY TO CLAIM DEPRECIATION OR IS TAX PLANNING POSSIBLE BY DEFERRING
THE CLAIM ?
In the case of - CIT v. Mahendra Mills and ors. [2000] 243 ITR 56 (SC). Supreme court has held that
the provision for claim of depreciation is for the benefit of the assessee. If he does not wish to avail of
that benefit for some reason, the benefit cannot be forced upon him. It is for the assessee to see if the
claim of depreciation is to his advantage. Income under the head ' Profits and gains of business or
profession' is chargeable to income-tax under section 28 and income under section 29 is to be computed
in accordance with the provisions contained in sections 30 to 43A. The argument that since section 32
provides for depreciation it has to be allowed in computing the income of the assessee cannot in all
circumstances be accepted in view of the bar contained in section 34. If section 34 is not satisfied and
the particulars are not furnished by the assessee his claim for depreciation under section 32 cannot be
allowed.Section 29 is thus to be read with reference to other provisions of Act. It is not in itself a complete
code.
If the revised return is a valid return and the assessee has withdrawn the claim of depreciation it cannot
be granted relying on the original return when the assessment is based on the revised return. Allowance
of depreciation is calculated on the written down value of the assets, which written down value would be
the actual cost of acquisition less the aggregate of all deductions "actually allowed" to the assessee for
the past years. "Actually allowed" does not mean "notionally allowed". If the assessee has not claimed
deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing
is "allowed" when it is claimed. A subtle distinction is there when we examine the language used
in section 16 and sections 34 and 37 of the Act. It is rightly said a privilege cannot be a disadvantage and
an option cannot become an obligation. The Assessing Officer cannot grant depreciation allowance when
the same is not claimed by the assessee.
NON-CLAIMING OF DEPRECIATION :
Non-claiming of depreciation may at times be more beneficial rather than claiming it. Accordingly one
may plan not to claim depreciation in a particular year and to claim the same in a subsequent year, in
which depreciation can be claimed at a higher written down value due to non-claiming of depreciation in
the earlier year. In this process the benefit of depreciation is not lost but it is deferred only.
In the following situations it is advisable not to claim the depreciation-
i) In case where certain deductions and allowances like brought forward investment allowance may lapse
for insufficiency of profits, in a particular year, if the depreciation is claimed.
ii) In case of non-corporate assessees expecting higher profit in the subsequent year or years, if their
present income is falling in lower tax bracket, as claim of depreciation in the subsequent years will help
them reducing the taxable profits and thereby saving tax, which would have been payable at a higher
rate considering the slab rates.
Non-claiming of depreciation may be used for avoiding the provisions of section 50. It may be noted
that profit on sale of depreciable asset is treated as Short Term Capital Gain under section 50.
Therefore, if any person desires to hold an asset for the purpose of re-sale at a future date, particularly
in cases where such asset is retained for such period which may entitle him to claim it as a long term
asset, then it is advisable not to claim depreciation on the same. In such a process, the profit on sale of
the asset will be beyond the mischief of sec. 50 and shall be treated as Long Term Capital Gain
(LTCG). As a result such assessee will be entitled to the benefit of cost inflation index as well as the
concessional rate of tax on LTCG.
 Further w.e.f. assessment year 1997-98 depreciation can be carried forward for 8 assessment
years only, as such it has become more important to claim it only in the year in which taxable
profit arises.
CLAIM OF DEPRECIATION ONLY WHEN AN ASSET IS USED FOR BUSINESS :
One of the stipulation for claiming depreciation under section 32(1) is that the assessee had used the
asset for the purpose of business or profession. When an asset will be considered to have been used,
has been a matter of controversy. Some important Judicial views are as under :-
Punjab National Bank Ltd. v. CIT 141 ITR 886 (Del.)- That depreciation had to be allowed in full on the
lifts and the air-conditioning plant since they were being used by the assessee for the purpose of its
business, the fact that they might also be utilised by the tenant of one of the floors or customers or
visitors did not make any difference. Plant or machinery could be said to be used by somebody else if
such other person has control over the same. It is the control which determines who is using it. "User"
means not only getting benefit, but also controlling, running, stopping, repairing, replacing, etc.
Whittle Anderson Ltd. v. CIT 79 ITR 613 (Bom.)- The word "used" should be understood in a wide
sense so as to embrace passive as well as active user ; when machinery is kept ready for use at any
moment in a particular factory under an express agreement from which taxable profits are earned, the
machinery can be said to be "used" for the purposes of the business which earned the profits although it
was not actually worked. Western India Vegetable Products Ltd. v. CIT 26 ITR 151 (Bom.)- When a
business is established and is ready to commence then it can be said of that business that it is set up;
but before it is ready to commence business it is not set up. There may however be an interval between
the setting up of the business and the commencement of the business and all expenses incurred during
that interval would be permissible deductions.
CWT v. Ramaraju Surgical Cotton Mills Ltd. 63 ITR 478 (SC)- A unit cannot be said to have been set
up unless it is ready to discharge the function for which it is being set up. It is only when the unit has
been put into such a shape that it can start functioning as a business or a manufacturing organisation
that it can be said that the unit has been set up.
CIT v. Industrial Solvents and Chemicals (P) Ltd. 119 ITR 608 (Bom.)- Even if the finished product
obtained by the assessee could be termed as sub-standard, it cannot be contended that because the end
product then obtained was not of proper standard, the business of the assessee cannot be said to have
been set up though the plant was being worked.
Grasim Industries Ltd. v. CIT 32 TTJ 329 (Bom-Trib.)- A company need not have actually commenced
production to claim depreciation. It was enough if it was merely ready to produce. The bench ruled that
the plant was "ready for" business in fiscal 1992-93, and hence eligible for claiming depreciation.
TREATMENT OF REPAIRS- WHETHER ON REVENUE OR CAPITAL ACCOUNT :
It is more or less an age old tradition to treat only small repairs to an asset as revenue expenditure.
However, there are occasions when heavy repairs are undertaken and/or one whole item of Plant &
Machinery may require replacement. The taxing authority tends to immediately jump to the conclusion
that the same is on capital account. The assessee also succumbs to the assertion of the authorities
under ignorance of law. The result, no appeal thereby inviting heavy taxation.