Professional Documents
Culture Documents
This material consists of total of 63 pages and is to the best of my knowledge sufficient.
However, kindly note that I have not written notes under Unit I as the same relates to
basic/general points covered primarily under 1.1 (Income Tax Act). Also, as regards unit
3.7 (packaged scheme of incentives) I have not written notes for the same as I couldn’t
find sufficient material for it. It has not been done in class either. As regards the
computation of VAT (3.8), the same is not part of the syllabus for the exam and hence I
have not mentioned it here. Also, I am unsure about my notes on set-off under the VAT
here as the notes which I used for it do not seem very reliable. Please check up on that if
you want to. Please remember to practice the sums given in class with respect to the IT
Act. The source of this material is class notes, Manoharan and Hari, the bare acts (both IT
Act and MVAT Act) and a particular book on MVAT (Snow White). Hope these notes
are sufficient. Happy reading and Best of Luck!
Regards
Ankita Das
TAXATION LAWS-I
1. Entry II of the Constitution provides powers to the ministry to levy taxes on the
income of a person.
2. The revenue of the government from the collection of taxes is nearly 18%.
3. The Income Tax Act first came into force in 1961. However, it is amended each
year by way of the Finance Bill (which later becomes the Finance Act) during the
period of presentation of the budget in the month of February. It becomes
applicable from April to March.
4. The finance bill is first presented before both houses of Parliament by the Finance
Minister on behalf of the Government. It then goes for the President’s assent.
After receiving such assent, it gets published in the Official Gazette. The bill/act
comes into effect from the date of publication in the gazette.
5. Part IV of the budget incorporates the Finance Act.
6. In case of necessary commodities, the budget comes into effect from the time the
President gives his assent as in case of petroleum products.
7. In all other cases, a notification in the official gazette is required.
8. The Central Board of Direct Taxes (CBDT) is the highest authority with respect
to Income Tax. It has the power under S.119 of the Income Tax Act (hereafter
referred to as the Act) to issue notices and circulars to all tax authorities which
shall be binding on them.
1. Person- S. 2(31)- Person includes (please note that the information given under
the various categories are not included under the definition)-
(a) An individual
(b) A Hindu Undivided Family (hereafter referred to as HUF)
(c) A company
(d) A firm- includes a partnership, LLP s
(e) An Association of persons (hereafter referred to as AOP)- includes an
unregistered partnership firm
(f) A body of individuals (hereafter referred to as BOI)
(g) Local authorities
(h) Every other artificial juridical person not included in the above categories
6. Generally speaking, Income means periodical monetary return with some sort of
regularity. It is generally recurring in nature and is essentially the increase in
wealth of a person during a fixed period of time.
7. S. 2(24) states that income includes the following-
(a) Profits and gains
(b) Dividend
(c) Voluntary contributions received by trust
(d) Perquisites in the hands of the employee
(e) Any special benefit or allowance
(f) City Compensatory Allowance or Dearness Allowance
(g) Any benefit or perquisites given to directors
(h) Any benefit or perquisites given to a representative assessee
(i) Capital gains
(j) Insurance Profits
(k) Banking income of cooperative society
(l) Winnings from lottery
(m)Employee’s contribution to provident fund
(n) Amount received under keyman insurance policy
(o) Amount received as gift exceeding INR 50,000 by an individual or HUF
8. Incase of disputed income, it shall not be considered till such dispute is settled.
9. Contingent income is not considered as being an income.
10. There are two kinds of receipts- Capital receipts and revenue receipts.
11. Capital receipts are obtained by selling capital assets. They shall be exempted
from tax unless expressly taxable such as under S. 45. (capital gains)
12. Revenue Receipts include any form of investment. Whatever returns are obtained
will be treated as an income. They shall be taxable unless expressly exempted
such as under S.10.
13. Gross Total Income- S.14 provides for the following heads which form part of the
gross total income-
(a) Income from salary
(b) Income from house property
(c) Profits and gains from business or profession
(d) Capital gains
(e) Income from other sources
14. Net Total Income= Gross Total Income- Set off losses
15. Net Taxable Income= Net Total Income- deductions under Ss.80C to 80U
16. With respect to income under profits and gains from business and profession and
income from other sources, the accounting method regularly followed by the
assessee must be followed. With regards the rest, the method of accounting is
irrelevant. (Generally, mercantile system and cash system followed)
17. Tax rates provided in Appendix 1 of the Act.
1.1.2 Basis of Charge, Sources of Income, Residence in India, Deemed Income, Income
excluded from total income
Basis of Charge-
2. S.7 provides as to what income may be considered as being deemed to have been
received in the previous year and chargeable to tax even in the absence of any
actual receipt.
3. Such deemed income includes the following-
(a) Contribution made to the recognized provident fund by the employer in
excess of 12 % of the employee’s salary.
(b) Interest credited to the recognized provident fund of the employee in
excess of 9.5%.
(c) Contribution made by the Central Government or any Employer to the
notified pension scheme.
(d) Any unexplained cash credit investment, jewellery or other valuable
articles.
(e) Tax Deducted at Source (hereafter TDS) is deemed to be received in the
hands of
Residence in India-
1. For tax payers, the residential status is either that of a resident or a non-resident.
2. Incase of a non-resident, only his Indian income is taxable.
3. A resident can further be-
(d) Resident and ordinarily resident
(e) Resident and not ordinarily resident.
5. Exceptions to (b)-
(a) Incase the person leaves India for the purpose of employment, the
requirement of 60 days shall be replaced by 182 days
(b) Incase a person who is of Indian origin or is an Indian citizen comes to
visit India, the requirement of 60 days shall be replaced by 182 days.
Example-
A citizen of USA has been staying in India since 1987. He leaves India on July 16, 2009
and returns on January 4, 2010. Determine his residential status for the previous year
2009-10.
April- 30 days
May- 31 days
June- 30 days
July- 16 days
2010- (starting from January 4 as he reaches India on such date till March 31st as
it is the end of the financial year)
Total- 87 days
April- 30 days
May- 31 days
June- 30 days
July- 31 days
August- 31 days
September- 21 days (inclusive of September 21, 2009)
6. Incase of resident but not ordinarily resident, the condition to be fulfilled that he
must be resident in India for atleast 2 previous years in the 10 previous years
immediately preceding the relevant preceding year and 730 days during the 7
years immediately preceding the relevant preceding year. (This condition has
been fulfilled in the previous example)
7. S. 6(2)- residential status of HUF-
(a) HUF said to be a resident if it is present wholly in India or partially in
India and partially abroad.
(b) If however, the management and control of the HUF is situated wholly
outside India, it will be regarded as being a non-resident.
(c) HUF shall be treated as resident and ordinarily resident when the Karta
must be a resident of India for 2 years out of 10 previous years
immediately preceding the previous year and must be in India for atleast
730 days during the 7 years immediately preceding the relevant previous
year. If these 2 conditions are not fulfilled, the HUF shall be treated as a
resident but not ordinarily resident.
Example: X Ltd. is an Indian company however its business is carried on in UK and all
shareholders are residents of UK. The board meetings are also held in the UK. Determine
its residential status.
Example: X Ltd. is a foreign company whose business is partly controlled in India and
partly in Canada. Determine its residential status and calculate its income to be taxed as
per the following particulars-
Income from property situated in Canada (rent received outside India)- 20,40,000 INR
Income from property situated in Mumbai (rent received outside India) 23,10,000 INR
Royalty from the Government of India (paid outside India)- 6,00,000 INR
Technical fees received from a Canadian company (paid outside India but it is utilized by
the Canadian Company for carrying on a business in India)-18,00,000 INR
Income from business in India- 8,00,000 INR
1. Incomes which are not taxable are regarded as being exempted incomes.
2. These have been categorized as under-
(a) Incomes excluded from total income of a person. (S.10)
(b) Income of any undertaking established in Free Trade Zones.
(c) Income of any newly established undertaking in Special Economic Zones.
(d) Income of any export oriented undertaking.
(e) Profits and gains of undertakings engaged in export of eligible articles or
things. (Amended by the Finance Act 2010-11)
(f) Income from property held for religious or charitable purposes.
(g) Income of political parties.
(h) Income of electoral trust.
3. Certain incomes exempted from being taxed under S.10 have been listed as
follows-
(a) Agricultural income- includes income from horticulture, excludes dairy
farming and nursery.
(b) Income of a member of an HUF from the family income.
(c) Profits of a partner from a firm.
(d) Interest received by non-resident from prescribed securities.
(e) Interest received by person resident outside India on amounts credited to
the Non-Resident Account.
(f) Leave travel concession provided by employer to employee.
(g) Income of a notified foreign company with respect to projects connected
with security outside or inside India.
(h) Allowances given by Government of India to their employees abroad.
(i) Relief given to victims of Bhopal Gas Tragedy.
(j) Income of Trade Unions.
(k) House Rent Allowance subject to certain limits.
(l) Income from an international sporting event.
(m)Any kind of scholarship
(n) Amounts received under an LIC policy (not keyman insurance), including
the bonus amount.
(o) Daily allowances of members of Parliament, State Legislature and any
other allowances subject to certain conditions.
(p) Notional property income of any one palace occupied by a former ruler.
(q) Income of local authorities.
(r) Retrenchment compensation.
(s) Subsidy received by planters
(t) Income of notified non-profit body/organization.
4. S.11 lays down the following four heads under which income is exempted from
being taxed-
(a) Income from property held in trust applied wholly in India for charitable and
religious purposes where 85% of the total income is spent on the purposes of the
trust.
(b) Income from property applied in part for charitable or religious purpose.
(c) Income from property which is applied for charitable purpose outside India.
(d) Voluntary contributions forming part of such purpose. (These need to be
deducted from the total expense to arrive at the sum from which 85% is spent on
the purposes of the trust.
5. S.11 (5) directs the trust to use unused amounts for specified investments only.
6. Unless the trust is registered under S.12A, the income of such trust shall be
taxable for the entire year.
7. Under S.12A first, application must be filed in form 10A alongwith a copy of the
constitution of the trust, name and address of the trust and property of the trust.
8. This should be submitted before the end of the financial year in which the trust is
created.
9. The IT Commissioner shall after verification of such application grant a
certificate or registration which shall come into effect from the date of
registration.
10. The trust shall thereafter be assessable as an association of persons.
11. S.13 lays down certain restrictions with respect to Ss.11 and 12.
12. Under the following circumstances, the trust shall not be eligible for exemption
under Ss.11 and 12-
(a) Income from property held under trust for private religious purpose.
(b) Where it has been created for a particular community or caste which came
into being after 01/04/62.
(c) Where the income of the trust is applied for the benefit of specified persons
such as the settler, trustee or relatives of such settler/trustee.
(d) Where the income of the trust is partly applied, directly or indirectly for the
benefit of such specified persons.
(e) Where the trust functions in contravention of S.11 (5).
13. Also, such exemption will not be applicable with respect to anonymous
donations. (check)
14. When returns are filed for the trust, the gross receipt from the income and
expenditure account is considered and from the same, the amount on corpus for a
specified direction is deducted and expenses on the object of the trust are deducted.
The balance is then subject to interest rates as applicable to an association of persons.
15. The income of political parties are also exempted.
16. However, the following conditions must be satisfies-
(a) Such party is recognised under the Representation of People’s Act and by the
Election Commission.
(b) It must maintain books of accounts.
(c) Such books of account must be audited.
(d) A register of persons, with their names and addresses contributing more than
Rs.20,000 shall be maintained.
(e) The treasurer of the party is required to submit yearly reports under S. 29(c) (3) of
the Representation of People’s Act.
1. Salary has been defined under S. 17(1) of the IT Act as including the following-
(a) Wages
(b) Annuity or Pension
(c) Gratuity
(d) Any commission, fees, profits or perquisites received in lieu of salary
(e) Any advance of salary
(f) Any amount received by him for leave not availed by him
(g) Any amount annually credited to the balance of credit of a recognised
provident fund in which the employee participates in excess of 12% and interest
in excess of 9.5%
(h) Aggregate amount transferred to the employee contributing to a recognised
provident fund in excess of any sum exempted under S. 10.
(i) Contribution made by the Central Government or any other employee under
any pension scheme as mentioned under S. 80CCD.
ALLOWANCES-
PERQUISITES-
1. This has been provided under S.17(2) which states that perquisites shall include
the following-
i. The value of rent free accommodation provided by the employer to the
employee.
ii. The value of any concession with respect to rent for an accommodation
provided by the employer to the employee.
iii. Any amenity or benefit granted or provided by the employer to specified
employees free of cost or at concessional rates.
iv. Any sum paid by the employee to an employer as part of an obligation on
behalf of the employee.
v. Any sum payable by the employee to effect an assurance on the life of an
employee or to effect a contract for annuity.
vi. The value of specified securities or sweat equity shares made available to
employees free of cost or at concessional rates.
vii. Any contribution to an approved superannuation fund upto the extent it
exceeds Rs.1 Lakh.
2. Any amount of perquisite which is recovered from the employee by the employer
shall be reduced from the valuation of such perquisite.
3. Tax which is borne by the employer at his option with respect to non-monetary
perquisites is exempted under S. 10(cc).
4. After the amendment act of 2005, Chapter XII has been inserted and thus certain
perquisites which were earlier chargeable as salary for employees have now been
shifted to as being taxable in the hands of the employers and this includes fringe
benefits. Hence, the employee is exempted from being taxed for any fringe
benefits.
5. With respect to rent free accommodation, the following are considered as being
part of the salary, namely-
(a) Basic Pay
(b) Allowances
(c) Commission or bonus
(b) Where such accommodation is taken or leased by the employer, either the
actual rent paid by the employer shall be taxable or 15% of the salary shall be
taxable, whichever is less.
12. Furniture for this purpose includes television sets, radio sets, refrigerators, air
conditioners, other household appliances, plantor’s equipments and other such
gadgets and appliances.
13. Incase the employee is provided such accommodation in any hotel by the
government or by any other employer, 24% of the salary or actual charges for the
hotel shall be taxable as perquisite in the hands of the employee, whichever is
lower.
14. Hotel includes licensed accommodation in the nature of motel, service apartment
or guest house.
15. However, if such accommodation is provided for a period not exceeding 15 days
in total on account of transfer of the employee, the same shall be treated as a non-
taxable perquisite.
16. If accommodation is provided in a remote area (8kms away from the local limits
of the municipal corporation or other municipal facilities), the value of the
perquisite shall be treated as being nil.
17. Remote area means 40kms away from the town having a population of not less
than 20,000 as per the latest census.
18. As regards S. 17(2) (ii), for the valuation of accommodation given at concessional
rent, first the value of the perquisite must be calculated as if it were given rent
free and then whatever was paid by the employee to the employer as regards the
same must be subtracted.
19. Salary with respect to the same shall be considered to be of the same value as that
under rent free accommodation.
20. The perquisites under S.17(2)(iii) and (iv) would seem quite similar but are infact
different.
21. Perquisites under (iii) are those benefits which are provided and paid for directly
by the employer while those under (iv) are such that with respect to which the
employer is under an obligation to pay, i.e. the employer reimburses the employee
as regards the same.
22. Another point of difference is that under (iii), only specified employees’ income
is taxable for such benefits while under (iv), all employees are to be charged.
23. Under S. 17(2) (iii), even if members of the employee’s household avail such
benefits, the same is taxable. Such persons include their respective spouses,
children and their spouses, parents, servants and dependants.
24. Specified employees include the following-
(a) A Director employee of a company
(b) Any employee with substantial interest, i.e. 20% or more in the company.
(c) Any person whose chargeable income under the head salaries exceeds
Rs.50,000 and this doesn’t include non-monetary benefits, monetary benefits
which are exempted under S.10 and deductions under S. 16(ii) and (iii), i.e.
entertainment allowance and profession tax.
25. Such benefits as provided under (iii) and (iv) include the following-
a. Perquisite with respect to domestic servant- If employer pays for
the salary of any gardener, watchman, sweeper or personal attendant, the value of
the perquisite shall be the amount actually paid by the employer for the same. If
the employee pays a part of such amount, the same shall be deductible.
b. Perquisite with respect to gas, electric energy and water- If the
employer provides the same from his own sources, the value of the perquisite
shall be the total manufacturing cost of the same as borne by the employer. If the
source is an outside agency, the value of the perquisite shall be the actual amount
paid by the employer towards the same. Any amount paid by the employee shall
be deducted.
c. Perquisite with respect to educational facilities- Where such
facility is provided by the employer for free or at a concessional rate, the actual
amount paid by the employer shall be the value of the perquisite. Where the
educational institution is wholly owned or maintained by the employer or where
the facilities are provided in an institution where the employer is employed, the
value of the perquisite shall be the amount charged in such similar educational
institution in the same area or locality. However, where the cost for the same per
child doesn’t exceed Rs.1000 per month, the same shall not be taxed as perquisite.
Any amount paid by the employee shall be deducted.
d. Perquisite with respect to interest free or concessional loans-
Where the employee or any member of his household has been advanced an
interest free loan or loan at concessional rates, the value of the benefit shall be the
interest charged by the SBI with respect to loans for the same purpose as
according to rates prevailing on the first day of the previous year.
e. Perquisite with respect to usage of movable assets- Where any
movable asset owned or hired by the employer is used by the employee or any
member of his family, if it is owned then 10% per annum of its actual cost is the
value of the perquisite and if it is hired then the charges for such hire is the value
of such perquisite. This however doesn’t include such assets as are being used for
official use such as laptops and mobile phones. They also do not include furniture
and cars or any other asset previously covered.
f. Perquisite with respect to transfer of movable assets- Where the
employer transfers any asset directly or indirectly to the employee or any member
of his household, the value of such perquisite shall be determined as per the
Reducing Balance Method with respect to motor cars, computers and electronic
gadgets (depreciation to be taken as 20% of Written Down Value or WDV with
respect to motor cars and 50% with respect to computers and electronic gadgets)
and the Straight Line Method with respect to other assets. In order to compute the
same, depreciated value till the date of transfer and cost of transfer to be
considered and their difference to be taken. In the reducing balance method, there
is a reduction in the WDV every year by the rate of depreciation while in case of
the straight line method, the same value is taken every year.(check again)
26. Under S.17(2)(viii), certain other perquisites have also been provided which
include the following-
(a) Motor car
(b) Free or concessional tickets
(c) Free or concessional meals
(d) Travelling, touring and accommodation.
(e) Membership in a club
(f) Other benefits and amenities.
27. Consider the following information and table with respect to motor car as a
perquisite-
i. When the motor car is owned by the employee and expenses for the
same are paid for by the employee, the question of perquisites doesn’t arise.
ii. Where the motor car is provided by the employer or owned by the
employee but the same is used for wholly official purposes, there are no taxable
perquisites even though the employer pays the expenses for the same.
iii. But, in the above case, all documents with respect to such conveyance
must be maintained by the employer.
iv. Also, conveyance from the employee’s place of residence till his place
of work shall be considered as being use for official purposes.
v. Other categories as chargeable under the head of perquisite with
respect to motor car-
S.no. Car owned Expenses Wholly personal use Partly personal use
by borne by
1. Employee Employer Actual expenses paid Actual expenses paid by
shall be perquisite employer reduced by the
following-
(i) When engine
capacity is upto 1.6ltrs
cc- Rs.1800 p.m.
(ii) When engine
capacity is above 1.6ltrs
cc- Rs.2400 p.m.
Driver’s salary-Rs.900
p.m.
2. Employer Employee Wear and tear, hire (i) When engine
charges, driver’s salary capacity is upto 1.6ltrs
cc-Rs.600 p.m.
(ii) When engine
capacity is above 1.6ltrs
cc-Rs.900 p.m.
Driver’s salary-Rs.900
p.m.
3. Employer Employer Wear and tear charges, (i) When engine
hire charges, running capacity is upto 1.6ltrs
and maintenance cc- Rs.1800 p.m.
expenses, driver’s (ii) When engine
salary less the amount capacity is above 1.6ltrs
chargeable from the cc- Rs.2400 p.m.
employee for the same.
Driver’s salary-Rs.900
p.m.
vi. Where any other conveyance is provided by the employer, the value of
perquisite is as follows-
(a) When the same is for personal use- running and maintenance charges
(b) When the same is for partly personal use- actual expenses incurred by the employer
less the driver’s salary.
i. Where free or concessional meals are provided by the employer, they shall be
chargeable as perquisites.
ii. However the following shall not be chargeable as perquisites-
(a) Free meals provided by the employer during working hours in the place of work
or business upto Rs.50.
(b) Free meals provided through paid vouchers which are not transferable and may be
used at eating joints for meals upto the value of Rs.50.
(c) Tea or snacks provided during office hours.
(d) Free meals provided during working hours in a remote area or offshore
installation.
iii. Where the value of any gift or voucher or a token in lieu of such gift is received by an
employee or any member of his household for any ceremonial occasion or otherwise,
the value of the same shall be treated as a perquisite.
iv. However, where the aggregate value of such gift in the previous year is less than
Rs.5000, the value of perquisite shall be taken as being nil.
32. Other benefit or amenity- Where the employer provides any other benefit or amenity to
the employee, the same shall be chargeable as perquisite at its market value as reduced by
the employee’s contribution. However, this shall not include any expenses paid by the
employer towards the employee’s phone bills or mobile phone charges.
33. The following have been considered as being tax free perquisites, namely-
i. Medical facilities or medical reimbursement upto Rs.15000.
ii. Recreational facilities when provided to a group and not to individuals.
iii. Amount spent on training.
iv. Use of health clubs.
v. Employer’s contribution to an approved superannuation fund upto Rs.1lakh.
vi. Perquisite available outside India for services rendered in India.
vii. Residence to officials of Parliament.
viii. Educational facilities for children of employees.
ix. Leave Travel Concession.
33. Leave Travel Concession has been dealt with under S.10 (5).
34. It has been provided under this section that leave travel concession (LTC) shall be
made available where the LTC is for leave to any place in India which may even be after
retirement from service or termination of service and the journey if the following
conditions are fulfilled-
i. Incase of travel by air, the amount not exceeding the air fare for economy
class by a national carrier by the shortest distance between the place of origin and the
destination shall be exempted.
ii. Incase the place of origin and the destination are connected by rail and the
employee travels by any mode of transport other than by air, then the amount exempted
shall be the value of a first class A/C fare by railway for the shortest distance between the
two places.
iii. If road transport is used and the same is by way of recognised public
transport, the amount not exceeding first class or deluxe class fare shall be exempted.
iv. Incase of travel by road not by way of a recognised public transport, the
amount equivalent to the first class A/C fare for such journey shall be exempted.
35. The assessee can claim LTC with respect to 2 journeys in a period of 4 years.
36. If the assess has not exercised such option of 2 journeys within a period of 2
years, he can have one journey immediately in the next calendar year.
37. This concession is not available for more than 2 children and must not exceed the
actual expenses incurred.
Exemptions-
I. GRATUITY-
4. The salary for this purpose shall be taken to mean the basic salary and the DA.
5. With respect to any other employee, gratuity shall be exempted incase of death,
resignation, termination or retirement to the extent of the following-
(a) Rs.3, 50,000
(b) Half month’s salary on the basis of 10 month’s average immediately preceding the
month in which any such event occurs for each completed year of service (fraction to be
ignored).
(c) Actual amount of gratuity paid.
6. The salary for this purpose shall mean basic salary (taken to be average of last 10
month’s salary), DA and commission on the turnover.
7. However, gratuity received during the tenure of employment is fully taxable irrespective
of what kind of employee the person is.
II. PENSION-
4. Salary for the basis of the same shall be basic salary, DA and commission on turnover.
5. Leave salary received during the period of service is taxable.
1. This has been provided under S.10 (13A) to be read with rule 2A.
2. House Rent Allowance shall be exempted upto the extent of the least of the following-
(a) Excess of rent paid over 10% of salary due for the relevant period.
(b) 50% of salary incase accommodation situated in Delhi, Bombay or Calcutta and 40% of
salary if it is situated in any other place due for the relevant period.
(c) Actual HRA paid.
3. Exemption however is not available to such employee who lives in his own house or in
such house where he doesn’t pay rent.
4. Salary for this purpose shall mean basic salary, DA and commission on the turnover
achieved by the employee, calculated on a due basis for the relevant period.
5. The relevant period here would mean the period during which the said accommodation was
occupied by the assessee during the previous year.
3. Salary (last drawn) includes the basic salary, DA and commission on turnover.
Any payment from a statutory provident fund or public provident fund established by the
Central Government is exempt from tax.
2. With respect to Unrecognised Provident Fund, the following principles must be followed-
(a) Employer’s contribution- Not taxable at the time of contribution
(b) Employee’s contribution- No rebate allowed
(c) Interest credit- Interest on own contribution is taxable under income from other
sources
(d) Amount received on retirement- Employer’s contribution and interest on the same is
fully taxable as salary
1. For income from house property to be calculated, the following conditions must
be fulfilled under S.22-
(a) The property must consist of a building and land adjacent to the building.
(b) Such property must belong to the assessee.
(c) It must be used for any purpose other than for business or profession for profits
chargeable to tax.
2. It is generally the annual rent which is taken into consideration irrespective of the fact as
to whether there is any actual rent received or not. Such rent is determined by the
corporation.
3. If the annual rent is not there, then actual rent or expected rent of that area is taken into
consideration. Exception is made only when the property is transferred. (check)
4. Income under this head is chargeable to the owner or the deemed owner.
5. S. 27 deals with deemed ownership and regards the following as deemed owners-
(a) Any person who transfers the property to his or her spouse for inadequate
consideration or to his minor child not being a minor daughter.
(b) Any person who is the holder of an impartible estate shall become the owner of all
such properties in the estate.
(c) Any person who is a member of a company, cooperative society or any other
association of persons and thus is allotted or leased under a house building scheme such
land/property.
(d) Any person who is allowed to retain possession of a house property in part
performance of a contract under S.53A of TOPA.
(e) Any person who acquires rights with respect to land or property for a period not
less than 12 years.
6. The following shall not be regarded as being house property for the purpose of
this Act-
(a) Any farm house- this is because the same is considered as being agricultural property.
This includes income from any building owned by an agriculturist or receiver of rent of
such land provided the building is in immediate vicinity of agricultural land and is used
as a dwelling house or a store house or any other building. However, a man made forest
is not considered to be agricultural land.
(b) Any such property used for charitable purposes. (S.11)- This may include any public
or private trust.
(c) Any property used for business of the individual.
(d) Any house property used by a registered trade union
(e) One palace of a former ruler.
7. Incase of open land for the purpose of marriages, the same shall be taxable under income
from house property.
8. But where the property is in the name of the wife but all expenses are paid by the
husband, the amount is taxable in the name of the husband.
9. Income from house property is essentially calculated in the following cases-
(a) House property which is let out for the whole of the year. (let out)
(b) House property which is let out but remains vacant for part of the year or whole of the
year. (let out and deemed let out)
(c) House property which is let out for part of the year and for the rest remains self-
occupied. (let out and deemed let out- If house is let out even for one day during the year,
it is deemed to have been let out throughout the year)
(d) House property which is self occupied but remains vacant due to employment in
another place. (self occupied or unoccupied)
10. Hence, property would essentially be self occupied/unoccupied or let-out/deemed let-out.
11. Let out property gives rise to income. However, with respect to self occupied property,
there is a deeming provision and notional income is chargeable.
12. Incase of deemed let out, similarly notional income is chargeable.
13. Both self occupied as well as let-out property may be for commercial purposes or for
residential purposes.
14. However, self-occupied property for commercial purposes is considered under the head
of income from business or profession.
15. The Gross Annual Value (GAV) of all self-occupied and unoccupied property is taken as
being nil.
16. Further, it must be noted that if a person has 2 houses, he has to choose which property
shall be considered as being self occupied for the purpose of computation of tax. The
other property shall be deemed to have been let-out and the provisions with respect to let-
out/deemed let-out property shall become applicable.
17. Generally, the house with the interest element will be regarded as being self-occupied as
it will fetch negative income and thus tax will be lesser. In both cases however the GAV
must be calculated to find out the more beneficial option.
18. If part of the house is let out and part is self occupied, the GAV is to be calculated on a
proportionate basis and municipal taxes must also be divided accordingly.
19. There are 2 deductions under the IT Act with respect to Income from house property
under S.24, namely- standard deduction and interest on borrowed funds.
20. Standard deduction has now been introduced as there were previously various deductions
and thus now there is a 30% flat rate of deduction irrespective of any repairs or
improvements made, other expenses, etc.
21. Interest on borrowed funds essentially means interest on any loans taken for construction,
repairs, purchase, reconstruction, etc of the house property.
22. The following are deductible as interest on borrowed funds-
(a) Interest paid or due on loan which is still outstanding- deducted till the time the loan
is subsisting.
(b) Interest on loan taken to repay original housing loan- deducted till the time the loan id
subsisting.
(c) 1/5th share of interest of pre-construction period- In this case, interest is accumulated
from the time the loan is taken prior to construction till the end of the previous year
immediately preceding the previous year in which property is completed. Then, 1/5th
share is deducted every year till a period of five years from the date of completion. E.g.
Loan is taken on 01/04/2004 and property is completed in the previous year 2007-08. The
interest is accumulated from 2004 till the previous year 2006-07. Then, 1/5th is deducted
every year for five years starting from 2007-08.
23. Interest for the year of completion of house property shall be granted for the entire year
irrespective of the date of completion.
24. S. 25 states that interest shall not be deductible where the same is payable outside India.
25. However, it is allowed only if bankers are paying interest in India. (check)
26. Format for determining income from house property incase of let out/deemed let our
property-
1. GAV
a) Municipal value v. Fair Rent Take higher of the two
(called fair rent only)
b) Fair rent only v. Standard rent Take lower of the two
(called reasonable expected rent/
fair rent)
Note: Incase of deemed let out property, last step not required as there is no actual rent
received
27. Format for determining income from house property incase of self occupied/unoccupied
property
1. GAV Nil
b) Interest on borrowed XX
funds-
(i) Incase of loan for purchase or
Construction, following conditions
must be fulfilled-
Loan was taken on or after
01/04/1999
Property is completed within
3 years from the end of the year
in which loan was taken (end of
the year being 31st March)
34. Under S.25AA, it has been provided that if after a certain period, the unrealised
rent is made good, then the same shall be added as a rent received by the assessee.
35. Computation of GAV incase of unrealised rent-
(a) Take municipal value and fair rent and take whichever is higher as fair rent only.
(b) Take standard rent and the fair rent only (from (a) as above) and take whichever
is lower as reasonable expected rent.
(c) Take reasonable expected rent and actual rent, take whichever is higher.
(d) From the result you get in step (c), deduct the unrealised rent to get the GAV.
38. S. 25(b) provides that whenever there are arrears of rent and the same are realized
later, they shall be added to the income of the assessee as income from house
property.
39. S. 26 deals with co-ownership. In such case, where there are two or more owners
of the same house property, after computation of Net Annual Value, the same shall
be divided proportionately amongst them depending on their respective shares in
such house property.
40. Thereafter, deductions shall be granted separately to them as they are different
entities in the eyes of law.
INCOME FROM OTHER SOURCES
1. S.56 (1) deals with income from other sources. This is a residuary head which
covers all incomes not covered under any of the other four heads.
2. The following conditions must be satisfied for a particular income to be regarded as
being an income under this category-
(a) It must be an income. Every first receipt in the hands of an assessee is regarded
as being an income.
(b) It must not be covered under any of the other four heads.
(c) It must not be exempted under the Act.
3. S. 56(2) states that income from other sources shall include the following-
(a) Dividends
(b) Any amount received from winnings from lotteries, crossword puzzles, games,
races including horse races, betting, etc.
(c) Any sum received by the assessee due to contribution of the employees to a
provident fund.
(d) Any sum received from a keyman insurance policy including bonus.
(e) Any sum exceeding Rs.50, 000 or any immovable property or property other
than immovable property received without consideration or with inadequate
consideration by an individual or HUF.
(f) Any interest on securities
(g) Any income from plant, machinery or furniture and where the same is attached
to any building and the same is inseparable, then the total amount received from the
building alongwith such plant, machinery or furniture.
(h) Income by way of interest on compensation.
5. Dividend income though exempted in the hands of shareholders under S.10 (34) is
covered under income from other sources.
6. Dividend has been defined under Ss. 22(2) (a) to (e).
7. Dividend as under S. 22(a) to (d) is fully exempted in the hands of shareholders.
However, dividend covered under S. 22(e) is taxable under the head ‘income from
other sources’.
8. This includes any payment made after 31/03/1987 by way of loan or advance to a
person who is a beneficial shareholder holding not less than 10% of the shares of a
company in which the public is not interest or having substantial interest in such
firm or company. (check)
9. For the dividend to be exempted, it must be declared, distributed and paid by a
domestic company and must be covered under Ss. 22 (a) to (d).
10. With respect to income from lotteries, races, betting, etc. even illegal acts are taken
into consideration as the IT Act doesn’t take legality or illegality into consideration
and only looks into the matter of taxability.
11. In such cases 30% is deducted at source (TDS) but while computing income from
other sources, the same is not taken into consideration.
12. As regards any receipts without consideration or gifts (taxable under this head after
01/10/2009), when any amount (cash/DD/cheque) or property, movable or
immovable, received without consideration or with inadequate consideration shall
be taxable when they are above Rs.50, 000.
13. Thus, if the amount is above Rs.50, 000, the entire amount is taxable.
14. They were earlier taxable under the gift tax act but now the same has been
abolished.
15. However, under the following circumstances, they will not be regarded as being
taxable-
(a) When received from a relative
(b) When received by a local authority
(c) When received on the occasion of marriage
(d) When received by a charitable institution under S. 12AA
(e) When received from any fund, institution, educational institution, hospital, etc.
under S.10 (23)
(f) When received in anticipation of death of the payer
(g) When received by will or inheritance
17. Where the gift has been received from an unrelated person, the same is taxable as
well.
18. The taxability of such gifts is as follows-
(a) When amount of more than Rs.50, 000 is received without consideration or with
inadequate consideration, the same is fully taxable.
(b) Incase of immovable property which is received without any consideration and
whose stamp duty is above Rs.50, 000, the entire amount of the stamp duty is
taxable.
(c) Incase of immovable property received for inadequate consideration and whose
stamp duty is above Rs.50, 000 and the consideration is less than such stamp duty,
the difference between the consideration and the stamp duty is taxable.
(d) Incase of movable property received without consideration and whose fair
market value is above Rs.50, 000, the entire fair market value is taxable.
(e) Incase of movable property received for inadequate consideration and whose fair
market value is above Rs.50, 000 and the consideration paid is less than the fair
market value, the difference between the consideration paid and the fair market
value shall be taxable.
19. With respect to other incomes as covered under S.56 such as interest on securities,
sum received under the keyman insurance policy, rental income on machinery, plant
and furniture let out on hire with or without being attached to any building,
employees’ contribution towards staff welfare scheme, the same is taxable under
income from other sources if the same is not derived from any business or
profession.
20. Keyman is any person who is important to an organisation and if he leaves, the
organisation will come to a stop. However, he need not be an employee.
21. Where an insurance policy is taken out in the name of such keyman and the bonus
or other amount is received by the employer, it is treated as an income from
business. When it is received by an employee, it is an income from salary and when
it is received by someone else it is treated as an income from other source.
22. S. 57 deals with permissible deductions which are as follows-
(a) Incase of dividends which are not exempted, any charges paid to acquire the
same will be deducted.
(b) Incase of income, any charges paid to acquire the same will be deducted.
(c) When payment is made to any welfare fund and the same doesn’t form part of
income from business or profession, the same is deductible if paid on the relevant
due date under the act concerned.
(d) Family pension- deductible upto 33 1/3rd % or Rs.15, 000 whichever is lower.
(e) With respect to letting plant, machinery or furniture with or without building,
amount spent on insurance, depreciation and repairs to be deductible.
(f) Any other expenses which are not capital expenses, with respect to income are
deductible.
(g) Interest on compensation or enhanced compensation deductible upto 50%.
24. It must be noted that even income from owning and maintaining a horse are
regarded as being income from other sources.
25. S.59 deals with deemed income. It states that any loss which is previously incurred
but from which a benefit is derived later shall be treated as being a deemed income.
1. With respect to business, the main motive of the activity must be to gain profit.
2. Such activity must be systematic, repetitive and consistent.
3. S. 2(13) defines business as any trade, commerce or manufacture and includes any
adventure in the nature of trade, commerce or manufacture.
4. Trading includes any activity of purchasing and selling.
5. Such inter-state trading is known as commerce.
6. Manufacture consists of three elements- raw material, process and commercial
commodity made out of such raw material and process.
7. It is derived from the latin terms manu which means hand and facere which means
to make.
8. In Duncan Coffee Purchasing case, it was held that when manual labour was used
and the process of mixing was applied to coffee seeds and chikori powder, a new
product was created and hence there was manufacture.
9. In Rajshree Cassette Recording case, it was held that as the recording in a cassette
can be erased, the same is not treated as a manufacture.
10. The meaning of manufacture becomes important as depreciation is more with
respect to manufactured products.
11. Adventure is something done with respect to specified activity and for a relatively
shorter time period.
12. Profession is when intellectual skill of a person is applied. For example as in case of
a doctor.
13. Vocation means an activity on which a person spends major part of his time in order
to earn his livelihood.
14. In CID v. Dharma Reddy, it was held that an activity which constitutes business
need not really include profession, vocation, etc. and it may even be in the form of
rendering services.
15. A person who conducts coaching classes for example indulges in a business as he
doesn’t necessarily conduct all the classes.
16. S. 28 states as to what shall be chargeable under the head of income from business
or profession-
(a) Any profits or gains arising from business or profession carried on by the
assessee at any time of the year.
(b) Any compensation of other amount received in connection with the following-
i) Termination or modification of a contract relating to management of affairs of an
Indian company or any other company.
ii) Termination or modification of a contract relating to agency for business activity
in India.
iii) Vesting of the management of any business in favour of the government or any
corporation managed by the government (nationalization).
(c) Income from any trade, profession or any similar association from services
provided to its employees
(d) Income received by a partner in a firm by way of profits, bonus, commission,
etc.
(e) Any benefit or perquisite arising from business or profession.
(f) Export incentives such as cash assistance, license fees, excise or customs duty
repaid, etc.
(g) Any amount paid not to carry out any similar business activity or not to share
any know-how, patent, copyright, trademark, license, franchise or any other similar
right.
(h) Any sum received under a keyman insurance policy including bonus.
(i) Any capital asset with respect to which deduction has been allowed which has
been destroyed, discarded, demolished or transferred.
17. The following are the exceptions to S.28 and will be allowed as an income even
where the business is discontinued-
(a) Recovery against any loss or liability which was earlier deducted under S.41.
(b) Balancing charge in case of an electricity company.
(c) Sale of capital asset for the purpose of scientific research.
(d) Recovery against bad debts.
(e) Amount received from any special reserve.
(f) Receipt of discontinued business under cash system of accounting.
18. The following losses which are incidental to the business are however allowed-
(a) Loss due to embezzlement.
(b) Loss of stock in trade on account of fire, any natural calamity, negligence of the
employer, etc.
(c) Loss due to theft, robbery, etc.
(d) Loss because of issue of demand draft on forged letter of the company.
(e) Loss on account of failure of the bank in which money is deposited.
(f) Loss due to fluctuation in inflation rate.
(g) Loss of raw materials and finished goods in transit.
(h) Loss occurred due to financing a subsidiary.
19. The following losses are not deducted from business income-
(a) Loss incurred before commencement of business.
(b) Loss incurred while closing down business.
(c) Loss incurred due to damage to or deconstruction of capital assets.
(d) Loss due to violation of any law, i.e. by way of any penalty.
20. The following incomes from a business are not taxable under this head-
(a) Rent from house property- where the assessee has the business of owning and
letting out houses. (treated as income from house property)
(b) Dividends- where the assessee has a business of dealing with shares and
securities. (treated as income from other sources)
(c) Winnings from lotteries and races. (treated as income from other sources)
21. Format for computation of business income-
Add-
Items debited to profit
and loss A/c not allowed
under this head
(i)--------------------- XX
(ii) --------------------- XX
(iii) ----------------------- XX
(iv) ----------------------- XX
XX
Add-
Items credited to profit
and loss A/c but chargeable
as business/professional income
(i)--------------------- XX
(ii) --------------------- XX
(iii) ----------------------- XX
(iv) ----------------------- XX
XX
Less-
Items credited to profit and
loss A/c not chargeable under
this head
(i)--------------------- XX
(ii) --------------------- XX
(iii) ----------------------- XX
(iv) ----------------------- XX
XX
Less-
Items debited to profit and
loss account deductible from
income from business/profession
under the Act
(i)--------------------- XX
(ii) --------------------- XX
(iii) ----------------------- XX
(iv) ----------------------- XX
XX
22. General principles for allowing deductions under income from business/profession-
(a) Expenses should have been incurred in the previous year.
(b) It must be incurred with respect to business or profession.
(c) No deductions shall be allowed incase of a discontinued business or expenses
incurred prior to commencement of business.
23. Deductions with respect to income from business or profession have been
categorized as follows-
(a) Specific deductions under Ss.30 to 36.
(b) General Deductions under S. 37
(c) Overriding provisions
26. The legislature realized that not all deductions could be specifically covered under
the head of deductions and thus added S.37 which provides for general deductions.
27. S. 37 provides that in order that a particular expenditure be deductible under income
from business or profession, it must satisfy the following conditions-
(a) It must not be covered under Ss. 30 to 36.
(b) It must not be a capital expenditure.
(c) It must not be a personal expenditure.
(d) It must be expended wholly and exclusively for the purpose of business or
profession.
34. This section also provides that any remuneration paid to a partner in the form of
salary, bonus, commission, etc. is not deductible unless the following conditions are
satisfied-
(a) It is in accordance with the partnership deed.
(b) It is with respect to a time period after the filing of the partnership deed.
(c) It doesn’t exceed the prescribed limits.
(d) It is paid to a working partner, i.e. a partner who is actively engaged in
conducting the affairs of the business or profession of the firm of which he is a
partner.
35. S. 40A deals with certain expenses and payments which are not deductible and have
overriding effect over the other provisions of the act with respect to income from
business or profession. They may be stated as follows-
(a) Any expenditure incurred by the assessee towards goods supplied, services
rendered or facilities provided by a specified employee will not be deductible if the
same is unreasonable or excessive (depending on the fair market value for such
goods or services).
(b) Any payment made by the assessee not by cheque or bank draft but by cash
beyond Rs.20, 000 shall not be deductible. However, with effect from 01/10/2009,
any payment made with respect to plying, hiring or leasing goods carriages, which
exceeds Rs.35, 000 shall not be deductible.
(c) Any provision made by an employer to pay gratuity to an employee on
retirement or termination of employment shall not be deductible. But, where such
provision is made for payment into an approved gratuity fund or where the payment
of gratuity has become payable during the previous year, the same shall be
deductible.
(d) Any contribution by the assessee to a non-recognised or a non-statutory welfare
fund shall not be deductible.
36. S. 43B deals with certain expenses which will not be allowed as deductions unless
actually paid with the specified period. These are as follows-
(a) Any duty, cess or fee under any law in force.
(b) Any contribution to a recognised provident fund or superannuation fund or
gratuity fund or welfare fund.
(c) Any bonus or commission payable to employees.
(d) Any interest paid with respect to loans from public financial institutions or state
financial corporations.
(e) Any interest paid with respect to loans and advances from scheduled banks.
(f) Any sum payable by the assessee as an employer in lieu of leave at the credit of
the employee.
37. The above shall be allowed as deductions only when payment is made within the
due date of filing of return. Else, it shall be deducted only in the year in which
payment is actually made.
38. With respect to interest on term loans from specified financial institutions or
scheduled banks, the same when not paid is treated as a loan. Disallowance of
deduction under S.43B shall be made applicable with respect to the same.
39. In order to avoid disallowance, the assessee must show that payment has actually
been made.
40. Under sales tax legislation, where sales tax has been deferred under any scheme but
is treated as being paid, the same shall be treated as being paid under S.43B and
shall be allowed as a deduction.
41. S.43B overrides the provisions of Ss. 35 and 36. It must be noted that when these
sections are read with S.43B, the expenses covered under these sections shall be
allowed only when they have been paid.
42. The following even though are not in the nature of income shall be deemed to be
income for the purposes of this head-
(a) Cash Credit (S.68)- Any sum credited to the books of account but unexplained
by the assessee and the IT Officer is not satisfied with respect to the same shall be
treated as an income for that previous year in which it is credited.
(b) Unexplained investment (S.69)- Any investment made which is not recorded in
the books of account and the assessee cannot give an explanation as to the nature
and source of such investment, the value of the same shall be treated as an income.
(c) Unexplained money (S. 69(a))- Any jewellery or money or other valuable thing
in the possession of the assessee, for which he has no explanation as to its source or
when such explanation has not been accepted by the IT officer, where the same has
not been recorded in the books of account, the value of the same shall be treated as
income.
(d) Unexplained expenditure (S. 69(c))- Where any expenditure is incurred by the
assessee for which he has no explanation as to the source from which he has
received the amount to be spent shall be treated as an income.
(e) Deemed profit (S.41) - Deemed profit shall include the following-
(i) Any liability of the assessee which later gives rise to a benefit.
(ii) Any amount realized on transfer of an asset used for scientific research
subject to deductions under S.35.
(iii) Any amount recovered by the assessee against bad debt which was earlier
allowed as deduction shall be taxed as income in the year in which it was received.
43. S. 44A provides that Books of Accounts must be maintained by all assessees
carrying on business or profession under Rule 6F which deals with the profession of
law, medicine, accountancy, architecture, etc in the following cases-
(a) Where the income received in any of the preceding 3 years exceeds Rs.1, 20,000
or incase of a newly set up business, it is likely to exceed Rs.1, 20,000 in the current
previous year.
(b) Where the turnover or sales or gross receipts has exceeded Rs.10, 00,000 in any
of the 3 preceding years or incase of a newly set up business, it is like to exceed
Rs.10, 00,000 in the current previous year.
(c) Where the profits and gains from the business are deemed to be profits and gains
of the assessee under Ss. 44AD, 44AE, 44AF, 44BB or 44BBB.
The books of account for the above persons shall be audited every year by a
chartered accountant before the specified date (30th September of the relevant
previous year unless extended by the CBDT by way of a notification), else such
income shall be treated as being defective.
45. As per Rule (g), the audit report must be furnished in Form 3CA and Form 3CD for
income from business and in Form 3CB and Form 3CD for income from profession.
46. S.271 (b) provides a penalty upto Rs.1, 00,000 for non-submission of audit reports
and for not getting accounts audited.
47. S. 44AD deals with civil construction business (which includes construction or
repair of any building, bridge, dam, etc. and the execution of any works contract).
48. It states that where any person is engaged in such business or provides labour for
such business whose gross receipts from the same do not exceed Rs.40, 00,000, a
sum equal to 8% of such gross receipts paid or payable to the assessee or such
higher amount as declared by the assessee shall be deemed to be income from the
same.
49. The assessee however is not required to maintain books of accounts and only the
receipts of civil construction business must be considered for calculation of
turnover.
50. S. 44AE states that where a person is engaged in the business of plying, hiring or
leasing goods carriages and owns not more than 10 goods carriages at any time
during the year, his income from the same shall be deemed to be Rs.3500 for one
heavy vehicle and Rs.3150 for all other vehicles every month or part of every
month for which the goods carriages are in his possession during the previous year
or such higher sum as declared by the assessee.
51. S.44AF states that where the assessee is in retail business with respect to goods or
merchandise and the total turnover doesn’t exceed Rs.40, 00,000, the income from
such business shall be deemed to be 5% of the turnover or such other higher sum
declared by the assessee. However, this provision doesn’t apply when the assessee
is partly engaged in retail business and partly in wholesale business.
52. Where an assessee who is a non-resident is engaged in shipping business, his gross
profits shall be deemed to be 7.5% of the sum paid or payable to him on account of
carriage of passengers, goods, livestock or mail where the same is shipped to any
part of India or even outside India. (S.44B)
53. Under S.44BB, where a non-resident is engaged in the business of providing plant
and machinery for the extraction or production of mineral oils, the gross profits of
such person shall be deemed to be 10% of the sum payable or paid inside or outside
India.
54. S. 44BBA states that where a non-resident is engaged in the business of operating
an aircraft, the gross profits shall be deemed as being 5% of the sum payable or paid
with respect to such business inside or outside India.
55. S.44BBB states that where a foreign company is engaged in civil construction
business or in the erection of any plant or machinery or testing or commissioning
thereof with regards to any turnkey power project approved by the Central
Government, the gross profits shall be deemed to be 10% of the sum paid or
payable inside or outside India with respect to such business.
INCOME FROM CAPITAL GAINS
1. It is the only head under which capital receipt is charged and thus it deals with such
income which is received by way of selling assets.
2. To get charged under the head of capital gains, the following 2 conditions must be
satisfied-
(a) There must be a transfer. (as per the definition of transfer)
(b) A capital asset must be transferred.
3. There may either be long term capital gain or short term capital gain depending on
whether the asset is a short term capital asset or a long term capital asset.
4. Format for computation of income from short term capital gain-
Full value of
Consideration XX
Less-
Expenses on transfer XX
Net sale consideration XX
Less-
Cost of acquisition XX
Less-
Cost of improvement XX
Gross Capital Gain XX
Less-
Exemptions XX
Short term capital gain XX
Full value of
Consideration XX
Less-
Expenses on transfer XX
Net sale consideration XX
Less-
Index cost of acquisition XX
Less-
Index Cost of improvement XX
Gross Capital Gain XX
Less-
Exemptions XX
Long term capital gain XX
6. Short term capital gain is chargeable on a slab basis while long term capital gain is
chargeable at a flat rate of 20%.
7. There may also be short term or long term capital loss.
8. The definition of a capital asset has been provided under S.2 (14) however the same
is not exhaustive.
9. According to the definition, capital asset includes all assets in the hands of the
assessee, whether or not the same is from any business or profession but doesn’t
include the following-
(a) Stock-in-trade
(b) Any movable asset held by the assessee for personal use or use by any member
of his family except for jewellery, drawings, pictures, sculptures, archeological
collections, other works of art, etc.
(c) Agricultural land not being land situate within the local limits of a municipal
corporation or cantonment board, having a population of not less than 10,000 as per
the last census OR within 8kms from the local limits of such municipal corporation
or cantonment.
10. Earlier gold bonds and special bearer bonds were part of the definition of capital
asset but now the same has been excluded.
11. Jewellery here includes any ornaments made of gold, silver, platinum or any
precious metal or alloy containing one or more of such precious metals, whether or
not the same have been sewn or worked into any wearing apparel. It also includes
precious and semi-precious stones whether or not set in any furniture, utensil or
other article or sewn or worked into any wearing apparel.
12. Agricultural land will be regarded as being a capital asset only when it is situate in a
specified area.
13. A specified area is an urban area located within the local limits of a municipal
corporation/cantonment board or within 8kms from such local limits, having a
population of not less than 10 lakhs as per the last census.
14. S. 2 (29a) defines a long term capital asset as a capital asset which is not a long
term capital asset and S.2 (29b) defines long term capital gain as capital gain arising
from transfer of such long term capital asset.
15. S.2 (42a) defines a short term capital asset as a capital asset which is held by the
assessee for a period not exceeding 36 months (3 years), except in case of shares,
securities listed on a recognised stock exchange in India and the units of the UTI or
any mutual fund or a zero coupon bond for which shall period shall be 12 months (1
year).
16. S.2 (42b) defines short term capital gain as any gain arising from the transfer of
such short term capital asset.
17. S.2 (47) defines transfer as including the following-
(a) Sale, exchange, relinquishment of the asset
(b) Extinguishment of any rights therein
(c) Compulsory acquisition under any law in force
(d) Transaction involving allowing possession of immovable property in part
performance of contract
(e) Case where the asset is converted to stock in trade by the assessee, e.g. furniture
for personal use put for sale.
(f) Maturity or redemption of a zero coupon bond
(g) Any transaction which has the effect of transferring or enabling the enjoyment
of any immovable property
18. In a cooperative society, a flat owner can merely transfer his share and not the
property as the same belongs to the society. This is also referred to as transfer under
the IT Act.
19. S. 45 deals with the chargeability of capital gains as follows-
(a) Damage to capital asset and compensation paid thereafter- This may include
compensation for damage to any asset due to earthquakes, cyclones, riots, accidents,
etc. The income from capital gains (where any benefit is derived due to such loss
say by way of insurance) shall be chargeable in the year in which such
compensation is received. The full value of compensation or the fair market value
of the asset so destroyed in the relevant previous year shall be taken as income from
capital gains.
(b) Conversion of capital asset to stock in trade- The fair market value of the asset
so converted in the year in which such conversion/transfer takes place shall be
treated as being the income from capital gain. The year in which the stock in trade
is sold or transferred shall be taken as the year in which such capital gain is
chargeable.
(c) Transfer of beneficial interest in securities- It must be noted that even where the
depository is the registered owner of the securities, it is infact the beneficial owner
to whose account such amount is chargeable as capital gain. The income from
capital gain shall be taxable in the relevant previous year in which such transfer
took place.
(d) Transfer of capital asset to corporation, body of individuals or other association
of persons for becoming a member- It will be chargeable as capital gain from the
income of such individual in the relevant previous year when the transfer takes
place.
(e) Distribution of capital assets by corporation or firm on dissolution- It shall be
taxable as capital gain from the income of the firm or corporation in the relevant
previous year when such distribution/transfer took place.
(f) Compensation or Enhanced compensation received due to any compulsory
acquisition under law- Incase of compensation or enhanced compensation, they
shall be chargeable as capital gain in the year in which they are first received. With
respect to any deductions as made by the court thereafter, the assessed capital gain
of the year in which such reduction takes place shall be recomputed.
(g) Repurchase of units referred to in S.80CCB (2)- The difference between the
amount received on repurchase and the capital value of the units to be taken to be
the capital gain, chargeable in the year in which repurchase takes place or the year
in which the plan (as referred to in the above section) gets terminated.
20. S.49 (1) provides that where asset is transferred by way of will, gift, partition of
HUF, inheritance, amalgamation of companies or amalgamation of banking
companies, business reorganization of cooperative banks, liquidation of a company,
transfer to revocable/irrevocable trust, conversion from self acquired property to
joint family, etc., the cost of acquisition of the previous owner shall be taken as the
cost of acquisition.
21. In all other cases, the cost of acquisition of the assessee shall be taken into
consideration.
22. S. 49(2A) provides that where bonds, debentures, debenture stock or deposit
certificates of a company are converted to get shares and debentures, the cost of
acquisition of such bonds, debentures, debenture stock or deposit certificates must
be taken into consideration.
23. S.55 provides that where the asset was acquired prior to 01/04/1981, the assessee
has the option of taking the fair market value of such asset on 01/04/1981 as the
cost of acquisition.
24. S.51 provides that where the asset concerned was part of a negotiation and advance
for the same had been paid, but the transaction couldn’t be completed, such amount
paid must be deducted from the cost of acquisition or fair market value or written
down value whichever is more suitable.
25. Under S.55, there is no cost of acquisition with respect to self generated business
goodwill. However, with respect to transfer of purchased good will, the actual cost
incurred will be regarded as the cost of acquisition. But, in both cases, there is no
cost of improvement.
26. In the following cases there is no cost of acquisition-
(a) Self generated business goodwill
(b) Tenancy rights
(c) Right to subscribe to rights issue
(d) Right to carry on any business
(e) Right to produce, manufacture or process any article or thing
(f) Bonus shares
(g) Loom hours
(h) Stage carriage permit
(i) Trademark or brand name associated with a business
(j) Trading or clearing rights of a recognised stock exchange under a scheme of
corporatisation or demutualization.
27. S.55 also provides that cost of any capital expenditure incurred towards any
improvement made and not covered under income from any of the other heads shall
be taken as the cost of improvement.
28. Where the capital asset was acquired prior to 01/04/81 either by the assessee or by
the previous owner whose cost of acquisition is taken into consideration while
computing capital gain, the cost of improvement incurred prior to 01/04/81 shall not
be taken into consideration while calculation of capital gain.
29. Cost of improvement with respect of goodwill of business, right to manufacture,
produce or process any article or thing or the right to carry on any business shall be
taken as being nil.
30. With respect to long term gain, the Cost Inflation Index (CII) has been given as a
multiplier so as to account for inflation.
31. Index cost of acquisition= Cost of Acquisition * CII of year of transfer
CII of year in which asset
was first held
33. CII for 1981-82- 100 and CII for 2009-10- 632
34. Certain exemptions available with respect to capital gain have been covered in the
points that follow.
35. S. 54 states that-
(a) Where the assessee is an individual or HUF
(b) Residential house is transferred
(c) There must be a long term capital gain
(d) The income from such asset must be chargeable under the head of income from
house property
(e) Within a year prior to such transfer or 2 years after the date of transfer, a new
residential house is purchased or within 3 years after the date of transfer, a new
residential house is constructed.
(j) Where the cost of the new house is greater than the value of capital gain, the
whole of the capital gain is exempted.
(k) Else, the capital gain to the extent cost of the new house is exempted.
42. S. 54H provides that where compensation with respect to compulsory acquisition of
an asset is not received on the date of transfer, the period available with respect to
acquiring a new asset for the purpose of exemption shall be computed taking into
consideration the date on which such compensation is actually received.
43. There can only be short term capital gain or loss with respect to a depreciable asset.
44. Format for computation of short term capital gain with respect to depreciable
assets-
Full value of XX
Consideration
Less-
Written down value XX
Of asset as on 1st April
Of the previous year
(WDV is the depreciated
Value of the asset at the
beginning of the year)
Add-
Cost of additions made XX
during the year (relates to
similar assets bought during
the year)
Add-
Expenses on transfer XX
45. S.111A deals with tax with respect to short term capital gain.
46. When the same arises out of equity shares or equity oriented fund, it is taxed at a
rate of 15%. Incase of any other short term capital gain, tax will be at slab rate.
47. Where the total income of the assessee includes short term capital gain income as
well as other income, tax is payable on such income from short term capital gain at
15% (if the same arises from equity shares or equity oriented fund) and the rest is
payable at slab rate.
48. Incase of long term capital gain, S.112 becomes applicable.
49. As a general rule, a long term capital asset is charged at 20% flat rate.
50. However, with respect to certain long term capital assets, an option is given to the
assessee to charge the same at 10%. However, in such case, indexation is not
allowed and only the cost of acquisition and cost of improvement shall be taken into
consideration.
51. Such assets with respect to which an option is available include listed securities,
units of a UTI fund or mutual fund and zero coupon bonds.
52. Indexation is not allowed in the following cases-
(a) Transfer of bonds and debentures
(b) Transfer of shares or debentures by a non-resident in foreign companies
(c) Transfer of an undertaking or division in a slump sale
(d) Transfer of units of UTI
(e) Transfer of securities of FIIs.
(f) Transfer of foreign exchange assets by non residents.
53. Slump sale is a lump sum sale where there is transfer of all business assets under an
agreement without bifurcating the valuation of any of such assets.
54. If the agreement doesn’t indicate the valuation of any such assets separately, there
is deemed to be no capital gain from such sale. Hence, it gets exempted.
55. S. 55(a) gives power to IT officers to assess as to whether proper valuation has been
done, by finding out the fair market value of an asset.
3. Deductions under S.80C- It deals with deductions with respect to life insurance
premium, contributions to provident fund, deferred annuity, etc.
4. Applicable to individuals and HUF s as assessees.
5. Certain instances where deduction is available under this head-
(a) Amount actually paid towards life insurance premium
(b) Contribution to unit linked insurance plan, 1971.
(c) Contribution to a provident fund under the Provident Fund, 1925.
(d) Contribution to a recognised provident fund
(e) Investment in National Saving Certificates
(f) Subscription to bonds issued by NABARD
(g) Repayment of a housing loan borrowed for the purpose of construction or
purchase or residential house from a government approved institution, specified
employer, board or a corporation or any other body established under the central or
state acts and includes any expenditure towards stamp duty, registration charges,
etc.
(h) Payment made for any tuition fees to any university, college or school or
educational institution in India but doesn’t include any donation or development
fees. (applicable to 2 children)
38. S.80GGA deals with donations for scientific research, rural development, etc.
39. All such assessees must not have any income under the head of income from
business or profession.
40. They must have made donations to any approved Scientific Research Associations
or Institutions and such deduction shall be granted even if the government revokes
its approval to such institutions later.
41. Deduction when given under this head is not allowed under any other head.
42. Certain other important deductions include-
(a) S.80GGB- contributions by companies to political parties
(b) S.80GGC- contribution by any person to political parties
(c) S.80IA- deductions for industrial undertakings or enterprises engaged in
infrastructural development, etc.
(d) S.80IC- undertakings in special category states especially those in the North
East, HP, etc.
(e) S.80IE- undertakings in north eastern states
(f) S.80P- Income of cooperative societies engaged in special businesses such as
providing banking or credit facilities, cottage industry, marketing or agricultural
produce of its members, labour cooperative societies engaged in fishing, etc.
(g) S.80RRB- deduction of royalties on patents.
(h) S.80U- deduction incase of a person with disability. (as seen earlier)
COMPUTATION OF TOTAL INCOME-
1. General format-
Income from-
(a) Salary XX
(b) Business and Profession XX
(c) House Property XX
(d) Capital Gains XX
(e) Other Sources XX
Less-
Deductions under Ss.80C to 80U XX
(except S.80G)*
(a) Resident individuals, who are the age of 65 years of age or more (senior citizens)-
Add slab rate with tax on capital gains and winnings from lotteries.
Then add education and higher education cess. (3% of total tax) to get Income Tax
.
2. * Under S.80G, there are 3 categories for deductions.
3. Category I consists of such donations with respect to which 100% deduction is
allowed without any limit.
4. Category II consists of the following under which 50% deduction is allowed
without any limit-
(a) Jawaharlal Nehru Memorial Fund
(b) PM’s Drought Relief Fund
(c) National Children’s fund
(d) Indira Gandhi Memorial Trust
(e) Rajiv Gandhi Foundation
5. Under category 3, donations are eligible for 100% or 50% deduction upto a
restricted amount.
6. Such donations as are eligible for 100% deduction upto a restricted amount are-
(a) Any contribution made by a company towards the Indian Olympic Association,
infrastructural development with respect to sports, etc.
(b) Government or local authority or approved institution/association for the
purpose of promotion of family planning.
8. In such case, follow the rules given in earlier notes with under S.80G.
1. Ss.116 and 119 of the Act provide for the Income Tax Authorities.
2. S.116 deals with the appointment of various authorities by the Central Government.
3. The Central Board of Direct Taxes (CBDT) as seen earlier is the highest authority
in this regard.
4. There is also a Director General of Income Tax who is also known as the
Commissioner of Income Tax.
5. There is a separate Commissioner appointed by the CBDT for different
jurisdictions.
6. The Commissioner is empowered to implement the act within such jurisdiction as
available to him.
7. He not only takes part in the administration but is also a forum for the second
appeal against an order of the lower authority.
8. There are also Additional, Deputy and Joint Commissioners so as to distribute the
work of a particular area.
9. There are essentially 2 branches under the act- the appeal branch and the vigilance
branch.
10. The main task of vigilance branch is associated with search and seizure under the
Act.
11. There is also a tribunal for deciding disputes. Its decision is binding on all IT
authorities as well as such lower authorities subordinate to it.
12. However, its decisions may be appealed against in the HC.
13. There are also several IT officers appointed under each jurisdictional area in order
to assess returns filed by persons.
14. Assessment order in writing is sufficient.
15. There are essentially 3 kinds of assessment- self assessment, regular assessment and
ex parte assessment.
1. The system of VAT or Value Added Tax has been introduced primarily to introduce
a uniform system of indirect taxation with respect to sale of goods throughout the
territory of India.
2. Another reason why this system has been introduced is so that the cascading effect
of tax is prevent or simply put so that there is no tax on tax.
3. The concept of VAT was first introduced by Chidambaram in 2003-04.
4. Later, the Empowered Committee was constituted under the chairmanship of Mr.
Dasgupta which recommended that VAT be implemented by all states.
5. VAT introduced in Maharashtra for the first time in 2004-05. This Act replaced the
original Bombay Sales Tax Act.
6. The main aim of the system is to ensure uniform VAT rates throughout the country
and a uniform system of taxation with respect to the same by 2011.
7. VAT is essentially tax paid on any value addition made. It is payable to the
government.
8. For every transaction, VAT needs to be shown so that there can be recovery from
the government.
9. Every purchase invoice must show the amount of VAT if the seller wants such
amount to be adjusted.
10. Certain advantages of VAT may be stated as follows-
(a) It ensures transparency as one is able to know the total tax incidence while
paying for the goods.
(b) Tax credit- The dealers pay tax on the selling price and get credit for the tax
paid by them.
(c) Lower rates- The rates are lower as there is no tax on tax.
(d) Uniform rate- Different rates are not charged for different goods. Goods have
been divided into 5 categories and tax is charged uniformly with respect to goods in
such category.
(e) No exemptions- Previously, exemptions were provided under several tax
legislations so as to exempt certain areas such as tribal areas, etc. from payment of
certain tax. As the VAT doesn’t provide for any exemptions, it leads to uniformity.
However, exemption is given with respect to goods sold to SEZ s under Form I.
(f) Simple classification- Goods have been categorized under 5 heads and are
uniformly taxed under such heads.
12. There are essentially three ways in which sale may be effected-
(a) Sales within the state (Part XIII of the Constitution deals with trade, commerce
and intercourse within India)
(b) Sales amongst states or inter-state sales-(Part XIII of the Constitution deals with
trade, commerce and intercourse within India)
(c) Export sales
13. In Matoshi Textile case, it was observed that where goods are transferred to
purchasers, the same shall amount to the transaction of sale. It was held that
printing of letter head is liable to be taxed under VAT.
14. Certain important definitions under the Act are as follows-
(a) Business (S.2aa)- A business is regarded as any trade, commerce or manufacture
or any adventure or any concern whether or not the same is carried on with any
motive to make profit or gain and whether or not any gain or profit accrues from the
same. It also includes any transaction in connection with or incidental to or
ancillary to such trade, commerce or manufacture or adventure or concern.
Refer to meaning of trade, commerce, manufacture, etc. given in previous notes
(income from business or profession)
(b) Dealer (S.2b)- Dealer is any person who carries on (either regularly or
otherwise) the business of buying, selling, supplying or distributing goods, directly
or indirectly for cash, deferred payment, commission, remuneration or other
valuable consideration and includes- (i) a local authority, cooperative society or any
other society, company, a body corporate, HUF, club, firm or other association of
persons, (ii) a factor, broker, commission agent, del credere agent or any other
mercantile agent engaged in such business, whether or not the name of the principal
is disclosed and (iii) an auctioneer who carries on the business of selling the goods
of the principal whether or not the name of the principal is disclosed and whether or
not the offer of the intending purchaser is accepted by the auctioneer, the principal
or any nominee of the principal.
(c) Goods (S.2d)- Goods includes all materials, articles, commodities and other
kinds of movable property but doesn’t include newspapers, actionable claims,
shares, stocks or securities.
(d) Sale (S.2g)- It means transfer of property in goods from one person to another
for cash, deferred payment or any other valuable consideration and includes-
(i) Transfer otherwise than in pursuance of any contract
(ii) Transfer in pursuance of execution of a works contract (deemed sales)
Note: Works- Value of goods supplied and value of work done in which costs
cannot be bifurcated.
(e) Sale price (S. 2h)- It means the amount payable to the dealer as consideration for
sale of any goods after deducting any amount for discount as per the prevailing
customs with respect to the same and adding any sum charged for anything done by
the dealer with respect to the goods at the time of or before the delivery of goods
other than the cost of freight or delivery or installation charges where such cost is
separately charged
Provided incase of a works contract, the sale price shall be determined and in such
manner after deducting the total consideration for the works contract as may be
prescribed.
(f) Place of business (S.2(18))- It means a warehouse, godown or any other place
where the dealer’s goods are stored or where the books of accounts of the business
are maintained.
1. S.3 deals with the incidence of tax and states that every dealer who immediately
before the appointed day holds a valid or effective certificate of registration or
license under any of the previous laws or who is liable to pay tax under any of the
previous laws or as the case may be in the year ending before the appointed date,
shall if his turnover of sales or purchases exceeds Rs.5, 00,000 or where he is an
importer, his turnover of sales or purchases exceeds Rs.1, 00,000 shall be liable to
pay tax under this Act unless his certificate of registration or license is duly
cancelled under the Act.
2. Turnover of sale as defined under S.2(33) means the aggregate value of sale price
received or receivable by the dealer by way of sale of goods made during a given
period of time after deducting- (i) the sale price which is refunded by the seller to
the purchaser for any goods returned by the purchaser to the seller and (ii) any
deposit if any of it is refunded by the seller to the purchaser in respect of goods sold
by the dealer.
3. Turnover of purchases as defined under S.2(32) means the aggregate of purchase
price paid or payable by the dealer for any goods purchased by him within a
prescribed period after deducting- (i) the purchase price which is refunded by the
seller to the dealer for any goods in respect of any goods purchased by him from the
seller and returned to him and (ii) any deposit if it is refunded to him by the seller
for goods purchased by the dealer from the seller.
4. S. 4 is the charging section under this Act and states that tax is to be levied on every
dealer or every other person liable under the Act in accordance with the taxes levied
or leviable under the act.
5. S.5 states as to what goods shall be exempted under the Act.
6. This mainly includes agricultural products and necessities.
7. Some such goods includes agricultural implements manually operated or animal
driven, aids and implements used by handicapped persons, books, journals and
periodicals, charcoal, vegetables and fruits, condoms and contraceptives, meat, fish,
prawn, etc.
8. These articles or goods have been provided under Schedule A.
9. S.6 deals with the rates of taxes under the Act.
10. These rates have been provided under Schedules B, C, D and E.
11. Schedule B consists of goods which are chargeable at 1% and this includes gold,
silver and precious metals.
12. Schedule C consists of goods chargeable at 4-5%. (w.e.f. 01/04/2010)
13. Declared goods (such as cast iron, brown oil seeds, banarasi rai oil seeds, etc) are
taxed at 4%.
14. Under the Central Sales Tax Act, the State Government has no authority to tax such
declared goods at a rate higher than 4%.
15. 5 % is charged with respect to industrial and IT goods.
16. Schedule D mainly consists of petroleum and liquor products.
17. The liquor products are charged at 20% while the petroleum products are charged at
10-34%.
18. All other goods not included under Schedules A,B,C and D are chargeable at 12.5%
under Schedule E.
19. S.7 further provides that where goods sold are packed in any materials, tax shall be
charged on such material at the same rate as the tax on the goods irrespective of the
fact as to whether or not such packing material is charged separately or included in
the price of the goods sold.
20. If the goods sold are not taxable, the packing material is not taxable either.
21. S.16 deals with registration.
22. It is mandatory to apply for registration within 30 days.
23. Registration may either be voluntary or compulsory.
24. Under voluntary registration, a sum of Rs.25, 000 must be deposited against one’s
tax liability for the next year. It shall be refundable.
25. A registration fee of Rs.5000 shall also be charged.
26. Incase of compulsory registration, an application must be filed within 30 days under
Form 101. All necessary documents need to be filed as well.
27. Such documents include-
(a) Shops Act license
(b) Proof of place of business
(c) Proof of place of residence
(d) PAN card of all (directors, partners, etc.)
(e) Cancelled cheque of current account
(f) Passport size photograph with signature
(g) Proof of constitution (i.e. MoA or otherwise incase of a company)
(h) Statement of sales
(i) Photocopy of invoices more than Rs.10, 000
28. All these documents and applications can now be filed online at
www.mahavat.gov.in
29. The date from which registration becomes effective is the date on which it is
applied for. However, incase the time limit of 30 days is exceeded, then such later
date as may have been decided.
30. The dealer can only sell such goods as are mentioned in his certificate of
registration.
31. Such certificate must be displayed in a conspicuous part of his place of business.
32. Cancellation shall be done in the following circumstances-
(a) Discontinuance of business
(b) Where business has been disposed off
(c) Where the business has been transferred
(d) Where the business has been relocated
(e) Where the turnover of sales/purchases of the registered dealer who has become
liable to pay tax has not exceeded the prescribed limits as required under S. 4(3).
33. The dealer may apply to the Commissioner for cancellation of such registration.
The Commissioner shall then conduct an enquiry into the same and after
cancellation, the certificate of registration shall be returned to the Commissioner.
34. Further, where the Commissioner is satisfied that the business has been
discontinued or disposed off or relocated, he shall cancel such registration after
giving the dealer the opportunity to be heard.
35. However, such cancellation will not affect the dealer’s liability under the act. He
will have to pay all taxes, interest if any, penalties, etc. under the act.
1. S.26 deals with appeal and provides that every original order not being an order
under S.85 shall be appealable if the order is made-
(a) By a sales tax officer or an Assistant Commissioner of sales tax or any other
subordinate officer to the Deputy Commissioner of sales tax.
(b) By the Deputy Commissioner of sales tax or the Senior Deputy Commissioner
of sales tax to the Joint Commissioner.
(c) By the joint commissioner, additional commissioner or commissioner to the
tribunal.
11. S.61 provides that accounts may be audited in certain cases say for example when
turnover of sales or purchases exceeds Rs.40, 00,000.
Consider the following table with respect to penalties and offences under the Act-