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Indian Institute of Management, Ahmedabad
Course Outline: Business Taxation
PGP II / Term 5, 2018-20
Sept. and Oct. 2019
Course Context:
India has several taxes which relate to business activity. Income tax applies to all
individuals and corporate persons who earn income. Goods and Service Tax (GST)
applies to supply of goods and services. Custom duty is levied when any person
imports goods. Each of the taxes has a different basis. In addition, some taxes are
applied by the states, for example, Land Revenue, Stamp Duty etc., while others are
levied by the Centre.
Every stage of business or management practice involves incidence(s) of taxation.

Towards compliance with the requirements of the tax law, business practices have to
be optimally structured. Further, every contract or project has to be conceived with
incidences of taxation. As the incidences of taxation change every year, the
relationship of taxation and management practices have to be continually appraised.
Thus, it is imperative for a manager to be well versed with the foundation and
incidences of taxation in India.
Objective
The objective of the course is to introduce the participants to the basis, incidence and
application of the main taxes in India, namely, Income Tax and Goods and Service
Tax.
Evaluation
The following are the components of evaluation for the course.
 Class Participation and Attendance 20%

 Quizzes 35%
 End Term 45%
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Course Instructor:
Prof. Savan Godiawala, PhD

Visiting Faculty
Partner, Deloitte Touche Tohmatsu India LLP
Email: sgodiawala@deloitte.com
Reference material:
1. Printed study material / exercise book prepared for the course

2. Book on Business Taxation by Prof. Akhileshwar Pathak and Savan Godiawala
published by McGraw Hill Education (this being an older edition, there are
amendments in certain provisions of law which will be discussed during the
sessions)
Session Plan
Income Tax
Session 1 Topic: Income Tax: Introduction
Reading:
Chapter on Introduction to Income Tax
Session 2 Topic: Income from House Property
Reading:
Chapter on Income from House Property
Session 3 Topic: Business Income
Reading:
Chapter on Income from Business and Profession
Chapter on Capital Asset and Depreciation
Session 4 Topic: Business Income
Reading:
Chapter on Capital Asset and Depreciation
Chapter on Business Income: Special Provisions
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Session 5 Topic: Capital Gain
Reading:
Chapter on Capital Gain
Session 6 Topic: Capital Gain
Reading:
Chapter on Capital Gain: Depreciable Assets
Session 7 Topic: Other Sources and Salary
Reading:
Chapter on Income from Salary
Chapter on Income from Other Sources
Session 8 Topic: Aggregation and Carry Forward of Losses, and Exemptions

& Deductions
Reading:
Chapter on Aggregation and Carry Forward of Losses
Goods and Service Tax
Session 9 Topic: Goods and Service Tax
Reading:
Chapter on GST in the study material and exercise book
Session 10 Topic: Goods and Service Tax; and Course review / summary
Reading:
Chapter on GST in the study material and exercise book
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Contents
Introduction to Income Tax ............................................................ 7

Income from House Property........................................................ 15
Income from Business and Profession ........................................... 21
Business Income: Depreciation of Capital Assets ........................... 29
Capital Gains ................................................................................ 42
Capital Gains of Depreciable Assets .............................................. 51
Income from other Sources .......................................................... 56
Aggregation of Income ................................................................. 63
Carry Forward of Losses................................................................ 75
Goods and Services Tax (GST) ....................................................... 80
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Introduction to Income Tax
Section 4 of the Income Tax Act states the basis for charging income tax. It provides
that income tax is to be charged for ‘any assessment year … in respect of the total
income of the previous year of every person.’ The section is compact. Its key terms
are:
 Every Person
 Income of Previous Year
 Total Income
 Assessment Year
Who all are persons?
Section 2(31) defines a ‘person’ in the following extended sense:
(i) an individual
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or
not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding sub-
clauses.
The term ‘firm’, in economics, refers to any entity engaged in business. However, in
law, it refers to partnership. A partnership is a contract between persons to engage
together for earning profit. Earning of profit distinguishes it from other associations of
individuals.
In the table below, in column 2 a description is given. Identify where the person would
fall by putting a tick mark in the appropriate box.
S. Person Tick mark the person under a category

No.
1. Nilesh, a post-graduate student teaches Individual/ Company /partnership
music and earns to pay his college fee and Association of person/
living expenses. Body of Individuals/
Local Authority/ Artificial legal person
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2. Save the Children is registered as a society. Individual/ Company /partnership
It prints and sells cards designed by Association of person/
children. The surplus is used for running Body of Individuals/
projects for the benefit of children. Local Authority/ Artificial legal person
3. SAL Retail Private Limited is engaged in Individual/ Company /partnership

retailing of consumer goods. Association of person/
Body of Individuals/
4. Sonar Limited is a company engaged in the Individual/ Company /partnership

business of manufacturing and selling of Association of person/
music systems. Body of Individuals/
5. A group of students organised a musical Individual/ Company /partnership

performance. The tickets for the show were Association of person/
priced. The proceed was to be utilized for Body of Individuals/
running schools for street children. Local Authority/ Artificial legal person
6. Ahmedabad Municipal Corporation. Individual/ Company /partnership

Association of person/
7. Anita is a widow, supporting herself on the Individual/ Company /partnership

pension from the pension fund of her late Association of person/
husband. Body of Individuals/
8. Ravi and Deep are partners in running a Individual/ Company /partnership

management consultancy service. Association of person/
9. Life Insurance Corporation (LIC) is created Individual/ Company /partnership

by an Act of the parliament. Association of person/
10. Indian Institute of Management, Individual/ Company /partnership

Ahmedabad. Association of person/
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Previous Year and Assessment year
Section 4: Income tax is to be charged ‘in respect of the total income of the previous
year of every person.’
Section 2(9) defines "assessment year" to mean the period of twelve months starting
from April 1 every year. For example, April 1, 2015 to March 31, 2016. Section 3
defines "previous year" to mean the financial year immediately preceding the
assessment year.
Thus, for all the income a person earns during April 1, 2014- March 31, 2015, the
previous year is April 1, 2014- March 31, 2015. The corresponding assessment year
is April 1, 2015- March 31, 2016.
A company earned the income as indicated in the table below. Identify the Previous
Year and Assessment year for each income.
(Amount in Rs.‘000)
S. Date Amount Previous Year Assessment Year

No.
1 January 14, 2016 200
2 March 22, 2016 100
3 June 12, 2016 200
4 August 17, 2017 600
5 November 18, 2018 300
The financial year starts from April 1 of the year and ends on March 31 of the next
year. The Act has made the previous year and the assessment year co-terminus with
the financial year. The short-form for writing the financial year, for example, April 1,
2015 to March 31, 2016, is 2015-16. Hereafter, we will write the Previous Year and
Assessment year in the short form.
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Sonar Limited received Rs. 5,000,000 on February 7, 2016, Rs. 3,000,000 on April 15,
2016 and Rs. 1,000,000 on November 18, 2017. Complete the table below.
(Amount in Rs. Mn)
Income Previous Year Assessment Year
Daman gets a salary of Rupees 50,000 a month. The salary is credited to his bank
account on the last day of the month. Daman joined the job on February 1, 2018 but
left it on September 30, 2018. Complete the table below.
Previous Year Assessment Year Income in ‘000
D, an architect, received the following fee from clients. Complete the table.
Sr. Date of receipt Amt. Rs.’000 Previous Year Assessment Year
1 January 14, 2017 200
2 March 24, 2015 150
3 April 4, 2015 250
4 May 14, 2016 300
5 April 14, 2017 100
6 February 8, 2018 200
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Heads of income
We now come to the ‘income’ of the person for the previous year. Section 2(24) of the
Income Tax Act, defines income very widely to include profits, gains, dividend,
perquisites, benefits, allowance, and winnings and prizes. Almost every receipt,
potentially, attracts the definition of income. However, it is the balance of the receipts
and expenditure.
Towards giving a treatment to the receipt and deduction of expenditure, Section 14 of

the Act makes five heads of income and requires:
… all income shall, for the purposes of charge of income-tax and computation
of total income, be classified under the following heads of income:
Salaries.
Income from house property.
Profits and gains of business or profession.
Capital gains.
Income from other sources.
Identify the head of income in the table below.
S. Income Tick mark the appropriate

No. head of income
1. Sunbright Limited is a company engaged in manufacture Salary

of ceramic products. It has invested some of its profits in House Property
the equity of another company. It received Rs. 2 million Business and Profession
as dividend from the company. Capital gains
Other sources
2. Moon bank runs a credit card operation. It gives a choice Salary

to its card holders to pay up to 10% of the money owed House Property
for the billing period. The remaining sum can be paid in Business and Profession
the next six months. The bank charges interest for this Capital gains
facility. The bank earned Rs. 20 million in interest. Other sources
3. Sapphire Ltd. is a company involved in manufacture of Salary

office equipment. It owns a residential building in Mumbai. House Property
Some of the flats were occupied by its executives while 2 Business and Profession
of the flats were rented out. The company received Rs. Capital gains
1.8 million as rent during the previous year. Other sources
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4. Rubicon Ltd. is a company involved in manufacture of Salary
office equipment. The company owned an office building House Property
in Mumbai. It sold off the office building for Rs. 200 million Business and Profession
to pay some of its debts. Capital gains
Other sources
5. Ashutosh is a lawyer. He is engaged by four companies Salary

on a retainer basis. He gives one day to each company in House Property
a week to attend to all their legal work. He receives Rs. Business and Profession
250,000 from each company. Capital gains
Other sources
6. Tej is a student who received a scholarship from his Salary

college. House Property
Business and Profession
Capital gains
Other sources
Identify the head of income for the following incomes earned by a person.
S. No. Income Write the head of

income
1. Interest received by an Individual on deposits
2. Professional income of a management consultant
3. Income of a Tea Stall owner from serving tea
4. Commission received from an Employer
5. Scholarship received by a student from an institution
6. Rent received from let-out of apartment
7. Profit on sale of Gold jewellery held as investments
8. Loss incurred in business by a retail store
9. Winning from horse races
10. Prize money won on a television show
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Exemptions
The Income Tax Act, having taken ‘every person’ and all ‘income’ in the ‘previous year’,
makes exemptions to certain kinds of income or to certain kinds of persons. Section
10 provides a long list of income which is exempted. An abridged version of the section
is given below:
10. Incomes not included in total income.- 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-
(1) agricultural income;
(2A) in the case of a person being a partner of a firm which is separately

assessed as such, his share in the total income of the firm. …
(5) in the case of an individual, the value of any travel concession or

assistance received by, or due to, him,-
(a) from his employer for himself and his family, in connection with
his proceeding on leave to any place in India ….
Provided that the amount exempt under this clause shall in no

case exceed the amount of expenses actually incurred for the
purpose of such travel.
(10) (i) any death-cum-retirement gratuity received under the revised

Pension Rules of the Central Government …
(ii) any gratuity received under the Payment of Gratuity Act, 1972
…
(iii) any other gratuity received by an employee …
(10D) any sum received under a life insurance policy, including the sum
allocated by way of bonus on such policy….
(11) any payment from a provident fund to which the Provident Funds
Act, 1925 … applies or from any other provident fund set by the Central
Government ….
(16) scholarships granted to meet the cost of education;
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(34) any income by way of dividends referred to in section 115-O (i.e.
from an Indian Company);
However, where total income of the assessee (not being a
domestic company or certain specified trusts / institutions) by way of
dividend from domestic company/ies, exceeds ten lakh rupees in
aggregate, income-tax is payable at the rate of ten percent on such
dividend income for the amount in exceeding ten lakh rupees.
(35) any income by way of,-
(a) income received in respect of the units of a Mutual Fund …
Provided that this clause shall not apply to any income arising
from transfer of units …
(43) any amount received by an individual as a loan, either in lump sum

or in instalment, in a transaction of reverse mortgage referred to in clause
(xvi) of section 47.
Referring to section 10, decide whether the following income of a student, Aman, is
exempt or not:
Previous Year: 2018-19
Income Head Amount Exemption

under Section
10. Yes or no
Salaries Rs. 800,000 (From Datamatic Ltd.)
Rs. 50,000 (From Provident Fund)
Income from Rs. 6,00,000 (House in Bangalore)
house property
Profits and gains Rs. 1,000,000 (broker commission for real estate deal)
of business or Rs. 300,000 (share of profit from a partnership firm)
profession
Capital gains Rs. 120,000 (Sale of jewellery purchased in Oct 2008)
Rs. 60,000 (sale of shares acquired through a stock
broker in April, 2018)
Other Sources Rs. 90,000 (Scholarship to meet education cost)
Rs. 30,000 (Dividend from an Indian company)
Rs. 25,000 (Dividend received from Mutual fund)
Rs. 16,500 (Interest from bank savings account)
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Income from House Property
What is a ‘house property’?
Income from renting of ‘house property’ falls under the head of ‘income from house
property’. Section 22 gives the scope of ‘house property’. The following is an edited
version of section 22.
22. Income from house property: … any buildings or lands appurtenant

thereto of which the assessee is the owner, other than …occupy for the
purposes of any business or profession ...
There are three key words or concepts for the application of the section. One, it applies
to ‘any building’ and also lands adjoining a building. Two, it applies only if the person
is the owner of the property. Three, it does not include building which has been
occupied for business or profession. Such buildings will be treated under the head of
business and profession.
Decide whether the following income would fall under the head of income from house
property.
1. M owned an open plot at a prime location which he rented out to a decorator for
conducting marriages
2. Q Ltd. owns an office premises which is given on rent to a society engaged in charity
work.
3. Raman is a management consultant. He works from an office owned by him.
4. Ajay owns a building with an open parking area. He has rented out half of the parking
area to a car owner.
5. N is a tenant of a house belonging to O. N rented out the house on a sub-let

arrangement to P and received rental income.
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Annual Value of a house Property
The provision takes a notional value as the rent. This may or may not be the actual
rent received by the owner. This is called ‘annual value’. Section 23 describes how
annual value is to be computed. An edited version of Section 23 is as follows:
23. Annual value how determined: …the annual value of any property shall
be deemed to be-
(a) the sum for which the property might reasonably be expected to let from year
to year; or
(b) where the property or any part of the property is let and the actual rent
received or receivable by the owner in respect thereof is in excess of the sum
referred to in clause (a), the amount so received or receivable;
… the taxes levied by any local authority in respect of the property shall be
deducted … in determining the annual value of the property of that previous
year in which such taxes are actually paid by him.
Thus, we will take the following steps to work out the annual value of a property. One,
take the higher of the two, the actual rental received or receivable and the expected
rent for the year. From the value settled, subtract the actual taxes paid on the property
to any local authority. The value arrived is the annual value of the property. The table
below gives the details on renting out of offices by companies. Calculate the annual
value for the house properties.
(In Rs. ‘000)
Owners of Office Expected Actual rent Actual Annual

Rent received municipal value
taxes paid
Company 1 140 150 15
Company 2 190 200 -
Company 3 200 175 20
Company 4 250 240 25
Company 5 275 300 -
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Deduction
After settling on ‘Annual value’, which can be seen as a deemed receipt for a house
property, the provisions attend to the expenditures. Every house property gets a
deduction of 30% of the annual value. Section 24 provides:
24. Deductions from income from house property.
Income chargeable under the head "Income from house property" shall be
computed after making the following deductions, namely:-
(a) a sum equal to thirty per cent. of the annual value;
The table below gives the details on renting out of offices by companies. Calculate the
income from the renting of the offices after the allowed deductions.
(In Rs. ‘000)
Owners of Expected Actual Actual Actual Deduction Income

Office Rent rent municipal expenses @ 30% from
received taxes in repairs house
paid property
Company 135 165 15 4.5
1
Company 190 200 20 -
2
Company 200 175 20 6.0
3
Company 250 240 - 2.5
4
Company 275 300 30 7.5
5
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Additional Deduction of interest
In addition to the standard deduction of 30% of the annual value for a house property,
Section 24 allows further deduction of interest paid on capital borrowed for
development of ‘house property’. Towards understanding this, we first need to note
that if a person owns only up to two houses and has occupied it (self-occupied), (in
other words, not rented it out), the annual value of up to two houses is taken to be nil.
If a person has more than two self-occupied house, he can claim nil annual value for
only two of the houses. For all other self-occupied houses, the annual value will be the
expected rental and it will be chargeable under the head of house property. We can
now note the additional deduction:
(b) where the property has been acquired, constructed, repaired, renewed or
reconstructed with borrowed capital, the amount of any interest payable on such
capital:
Provided … [for a self-occupied property/ies whose annual value is nil under

Section 23(2)] the aggregate of the amounts of deduction under this clause shall
not exceed two lakh rupees.
Thus, if a house property has been acquired or constructed with borrowed capital, full
interest payable in the previous year is allowed as deduction. However, if the annual
value of the house, or houses, is deemed to be nil due to self-occupancy, aggregate
interest only up to Rs. 200,000 a year can be claimed as deduction.
Calculate income under the head of house property after deduction in the following
cases:
Case 1: Mr. Baxi inherited two flats, one in Delhi and the second in Shimla. The
expected rental value per annum for the properties is Rs. 300,000 and Rs. 200,000.
Mr. Baxi lives in the house in Delhi and the Shimla house is used as summer home for
vacation by the family. Work out the income from the house property.
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Case 2: Mr. Singh bought his first and the only house with a bank loan. For the year,
the capital repayment to the bank was Rs. 300,000 and interest payment was Rs.
250,000. Work out the income from the house property for the following different
situations.
1. Mr. Singh lives in the house.

2. Mr. Singh has rented out the house for Rs. 400,000, which is higher than the
expected market rent.
Case 3: Mr. Kumar bought two flats in a building complex with a bank loan. He lived in
one house and kept the second one locked up. The expected rental value of each flat
was Rs. 300,000. On each flat, in the year, the capital repayment to the bank was Rs.
300,000 and interest payment was Rs. 180,000. Work out the income from the house
property for the two flats.
Case 4: Raj bought two flats in a building complex with a bank loan. He lived in one
house and rented the second one for Rs. 500,000 a year. Expected market rent for
second flat it Rs. 400,000. On each flat, in the year, the capital repayment to the bank
was Rs. 300,000 and interest payment was Rs. 250,000. Work out the income from
the house property for the two flats.
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Case 5: Deep bought three flats in a building complex with a bank loan. He lived in one
house, kept the second one locked up and rented the third one for Rs. 600,000 a year.
The expected rental value of each flat was Rs. 500,000. On each flat, in the year, the
capital repayment to the bank was Rs. 400,000 and interest payment was Rs. 300,000.
Calculate the income under the head of house property for the three flats.
Case 6: Ajay bought a house by taking a loan from a bank. He rented out the house
for Rs. 1,100,000 a year. The expected rental value of the house was Rs. 1,000,000.
Capital repayment for the year to the bank was Rs. 600,000 and interest payment was
Rs. 300,000. Ajay paid Rs. 100,000 in taxes to Municipal Corporation on the house
property. Calculate the taxable income under the head of house property.
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Income from Business and Profession
Rajiv, an MBA student, earned the following revenue. Identify the head of income.
S.No Income Head of

Income
1. Developed a software for a company and received Rs.
100,000 from the company
2. Rs. 50,000 from an Engineering Company as stipend for

summer training
3. Rs. 600 in interest on his savings account
4. Scholarship of Rs. 20,000 from his Institute to meet cost

of education
Megatron Limited is an electronics consumer appliances manufacturing company.

Identify the head of income for the following income of the company.
S.No Income Head of Income
1. Rs. 200 million profit from sales of television sets
2. Rs. 2 million in membership fee from recently started

credit card operations
3. Rs. 6 million by renting surplus office space
4. Rs. 3 million in dividend from Indian Companies on share

investments
Income tax applies to the ‘profits and gains’. Income from business and profession
arises as one deploys capital and makes expenditure. The gain will be the balance of
the receipts and the expenditures. Towards working out the gains, the expenditures
are classified as capital expenditure and revenue expenditure.
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Revenue Expenditure: Rental of premises, maintenance of premises, purchase of
goods and raw material, salary of employees, insurance etc.
Capital Expenditure: Purchase of plant, machinery, building, furniture, computers, IPR

etc.
Correspondingly, income is classified as revenue receipt and capital receipt.
The revenue expenditure will be deducted from the revenue receipt for the year. The
capital expenditure, which has led to the acquisition of capital assets, will be
depreciated and the depreciation claimed each year. Let us explore these principles.
Classify the expenditure of Star Hotels Limited.
Sr. Particulars Capital / Rev.
1 Renovation of floor & ceiling
2 New tables & chairs
3 Kitchen equipments
4 Raw material after opening
5 Electricity bill after opening
6 Staff salary before opening
Classify the receipts of Star Hotels Limited.
Sr. Particulars Capital / Rev.
1 Subscription of shares
2 Term Deposits by Directors
3 Income from ‘dine-in’ and ‘take away’ after

opening
4 Income from outside catering
5 Bank term loan received after opening
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Towards the deduction of revenue expenditure, let us first note Sections 30, 31, 36
and 37.
30. Rent, rates, taxes, repairs and insurance for buildings. In respect of rent,
rates, taxes, repairs and insurance for premises, used for the purposes of the
business or profession, the following deductions shall be allowed-
(a) where the premises are occupied by the assessee-

(i) as a tenant, the rent paid for such premises; and further if he
has undertaken to bear the cost of repairs to the premises, the
amount paid on account of such repairs;
(ii) otherwise than as a tenant, the amount paid by him on account
of current repairs to the premises;
(b) any sums paid on account of land revenue, local rates or municipal
taxes;
(c) the amount of any premium paid in respect of insurance against risk
of damage or destruction of the premises.
31. Repairs and insurance of machinery, plant and furniture. In respect of

repairs and insurance of machinery, plant or furniture used for the purposes of
the business or profession, the following deductions shall be allowed-
(i) the amount paid on account of current repairs thereto;
(ii) the amount of any premium paid in respect of insurance against risk
of damage or destruction thereof.
Section 36. Other Deductions. (1) The deductions provided for in the following
clauses shall be allowed … in computing the income referred to in Section 28
…
(i) the amount of any premium paid in respect of insurance against risk
of damage or destruction of stocks or stores used for the purposes of
the business or profession;
(ib) the amount of any premium paid to effect or to keep in force an

insurance on the health of his employees …
(ii) any sum paid to an employee as bonus or commission for services

rendered …
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(iii) the amount of the interest paid in respect of capital borrowed for the
purposes of the business or profession. …
(iv) any sum paid by the assessee as an employer by way of contribution

towards a recognised provident fund or an approved super-annuation
fund …
(v) any sum paid by the assessee as an employer by way of contribution

towards an approved gratuity fund …
(vii) … the amount of any bad debt … which is written off as irrecoverable
in the accounts of the assessee for the previous year….
37. General.- (1) Any expenditure (not being expenditure of the nature
described in Sections 30 to 36 and not being in the nature of capital expenditure
or personal expenses of the assessee), laid out or expended wholly and
exclusively for the purposes of the business or profession shall be allowed in
computing the income chargeable under the head "Profits and gains of business
or profession".
The coverage of the provisions could be summarised as follows:
Section 30: Rent, rates, taxes, repairs and insurance for buildings.
Section 31: Repairs and insurance of machinery, plant and furniture.
Section 36: Other Deductions viz. Premia, Employee cost, Interest, Bad debts
etc.
Section 37(1): General (Revenue expenditure not included above)
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Let us explore the above provisions with the following exercise.
Classify the expenses incurred by Bio-Medical Pharmaceutical Ltd as capital or

revenue in the following table. Identify the section in case of revenue expenditure.
Particulars Capital/ Section

Revenue
Purchase of Active Pharma Ingredients
Purchase of Formulation Machinery
Maintenance of Air-conditioners
Interest to bank on borrowed working

capital
Rent for the premises
Repairs of Formulation Machinery
Contribution to approved Gratuity Fund
Payment to a consultant – Pharmacist
Salary to employees
Insurance of raw material
Repairs of building rented by the company
Insurance of air-conditioners
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Identify the expenditure allowed to be deducted from income and mention the section
for allowable revenue expenditure:
Particulars Yes/No Section
Purchase of raw material
Purchase of machinery
Annual maintenance of machinery
Yearly subscription to anti-virus software
Insurance of office air-conditioners
Purchase of IPR from the competitor
Expenses for marriage of director’s daughter
Sponsorship of an event giving publicity
Expenditure incurred on illegal activities
Expenditure to support a friend’s business
Repairs of building rented by the company
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Case
Ocean Pearls Ltd., engaged in manufacturing, has the following income and
expenditure. Work out the balance of revenue income and expenditure (leaving aside
depreciation of capital assets). Towards this, first categorise each of the income and
expenditure, whether it falls under the head of business and profession. Next,
categorise whether income and expenditure is revenue or capital.
(Amt. in Million)
Expenditure Rs. Income Rs.
Machinery 50 Sales 230
Machine installation 5 Trade commissions 10
Material cost 105 Interest on bank FD placed as 5

margin for trade LCs to
optimize working capital in
business
Manufacturing 35 Dividend on shares investment 4
Selling / Distribution 30 Rent from office let out 6
Interest on bank loans 15
Computer purchase 5
Insurance of stock 2
Travelling 8
Cash v. Mercantile system of Accounting
In the cash system of accounting, income and expenditure are recorded only when
received or paid, irrespective of when these were earned. In the mercantile system,
income and expenditure are recorded at the time of their occurrence during the
previous year, irrespective of when these are received or would be received. The
Income Tax Act gives the freedom to the assessee to consistently follow either of the
two systems for income under the head of business and profession, and other sources.
However, the Companies Act (earlier 1956 and now 2013) requires companies to
account in the mercantile system. The mercantile system is also called accrual system.
27
Case
M/s. Cash-N-Carry Retail had following Income/Expenditure. Identify Previous Year

according to the Mercantile system and Cash system.
Date of Date of Income / Amount Previous Previous

payment occurrence Expense (Rs.Mn.) Year Year for
for Cash Mercantile
System System
29/1/16 31/1/16 Salary 2
15/4/16 31/3/16 Bank loan 10

interest
31/3/16 15/4/16 Raw material 200
15/4/17 31/3/16 Consultancy 5

fees
30/4/16 29/2/16 Sale of office 15
30/6/17 31/3/17 Audit fees 5
1/5/16 15/3/16 Stationery 1

supply
1/1/16 21/4/16 Sale of goods 120
31/3/18 15/5/18 Imported 75

machinery
28
Business Income: Depreciation of Capital Assets
Revenue expenditure is deducted from the receipts while capital expenditure is meted
out a different treatment. The deduction of capital expenditure is spread out over a
number of years. This is called depreciation. Towards claiming depreciation, the
Appendix I under Rule 5(1) of the Income Tax Rules, 1962 requires all capital assets
to be constituted into different block of assets as provided in the abridged table below.
For each block of assets, there is a different rate for claiming the depreciation
allowance.
Block of Assets Rate
Part 1: Tangible Assets
1. Building
a) Buildings mainly used for residential purpose except hotels and 5%

boarding houses
b) Buildings other than those used for residential purpose 10%
2. Furniture and Fittings
a) Furniture and fittings including electrical fittings 10%
3. Machinery and Plant
a) General Plant and Machinery 15%
b) Motor cars other than those used in business for running them on hire 15%
c) Pollution Control Equipment 100%
d) Computers including Computer Software 40%

(Computer software" means any computer program recorded on
any disc, tape, perforated media or other information storage
device. …)
e) Energy Saving Devices 40%
f) Renewable Energy Devices 40%

29
Part B: Intangible Assets
a) Know-how, patents, copyrights, trademarks, licenses, franchises or 25%

any other business or commercial rights of similar nature
Identify the block of Assets and depreciation rate for the following assets held by a
Textile Mill for its business.
Asset Block of Asset Rate
Office premises
Spinning machines
Motor cars
Furniture & fixtures
Computers
Purchased IPR
Factory building
Factory Land
Wind Mills
Having constituted the block of assets, the law for claiming the depreciation allowance
for the block of assets is as follows. Begin with the written down value of the block of
assets on April 1. Add the cost of acquisition of all the assets during the previous year.
Subtract the amount received / receivable from the sale of any asset in the block during
the year. This is the Written Down Value of the block of assets on March 31 before
depreciation. It can be expressed as follows:
Written Down Value on March 31 before depreciation = Written Down Value of April 1
+ Value of all assets acquired during the year – Net value from the sale of assets
30
The depreciation allowance for the year is the rate of depreciation (percentage) of the
Written Down Value of March 31 with the qualification that the assets put to use for
less than 180 days in that previous year will be allowed 50% of the depreciation
normally allowable. Thus, the depreciation allowance could be expressed as follows:
Depreciation allowance =
[(Written Down Value of April 1 + Value of all assets put to use for 180 days or more –
Net value from sale of assets during the year) x Depreciation rate(%)] + [(1/2) (Value
of all assets put to use for less than 180 days) x Depreciation rate(%)]
The written down value on March 31 is subtracted by the depreciation allowance to

give the value of the written down value on April 1 for the next year.
We will notice later that new plant and machinery for manufacturing gets further
additional depreciation. Thus, all the examples which follow will refer to old plant and
machinery.
Case
Neogen is an engineering company. It bought a used machining equipment on 2nd

July, 2016 for Rs. 60 million. As the equipment was not up to the customer’s
requirements, the company purchased another used advanced equipment for Rs. 89
million on 4th May, 2017. Calculate the WDV and Depreciation for the Previous Year
2016-17 and the subsequent Previous Year.
Name of the Block of Assets:
Rate of Depreciation:
PY WDV on WDV on Dep @ WDV on

1 April March 31 March 31
before depreciation after
depreciation
2016-17
2017-18
2018-19
31
Case
Seogen, an engineering company, bought a used machining equipment on 2nd July,

2016 for Rs. 60 million. It purchased another used advanced equipment for Rs. 89
million on 4th May, 2017. The company sold off the first machine on January 25, 2018
for Rs. 40 million. Calculate the WDV and Depreciation for the Previous Year 2016-17
and the subsequent Previous Year.

depreciation
2016-17
2017-18
2018-19
Case
Neo, an engineering company, bought a used machining equipment on 2nd July, 2016
for Rs. 60 million, and on 4th May, 2017 for Rs. 89. It sold off the first machine on
January 25, 2018 for Rs. 40 million. On March 7, 2018, it purchased an old packing
machine for Rs. 20 million.
32
depreciation
2016-17
2017-18
2018-19
Additional Depreciation for New Plant and Machinery
Additional depreciation is given for new plant and machinery for an assessee engaged
in manufacture of article or things. The requirements for claiming the allowance are as
follows:
1. The assessee must be engaged in manufacture/ production of any article or thing.
2. The plant and machinery should not be one among the followings i.e. additional
depreciation will not be allowed in respect of:
 Ships or aircrafts
 Used plant or machinery
 Plant or machinery used in office or residential accommodation
 Office appliances or road transport vehicles
 Whole of the cost is allowed as a deduction in any previous year
33
In the table below indicate whether the following plant and machinery are eligible for
the additional depreciation.
Plant and Machinery Yes/No ?
New computer installed in chemical plant
Old lathe machine
New Power plant in a textile company
Cargo ship
Guest house Computer
Refurbished formulation plant machinery
New motor lorries in a mining company
Helicopter purchased by petroleum Co.
Air-conditioner plant in office building
New computer aided gear mfg. machine
Blow seal machine by a research company
The additional depreciation is claimed as follows. The rate of depreciation for the plant
and machinery for the year of its acquisition is added by 20%. All other principles
remain the same. The addition depreciation is only for the year of the acquisition. That
is, the asset will get half depreciation if put to use for less than 180 days in the previous
year.
34
Case
Ocean Pearl Limited is a watch manufacturing company. The WDV of the block of
assets comprising of plant and machinery was Rs. 200 million on April 1, 2017. The
company bought a new machine for making components of the watch in May, 2017 for
Rs. 100 million. Calculate the WDV and Depreciation for the Previous Year 2017-18
and the subsequent Previous Year.

depreciation
2017-18
2018-19
Case
Axel Limited is a glass manufacturing company. The WDV of the block of assets
comprising of plant and machinery was Rs. 400 million on April 1, 2017. The company
bought a new machine for shaping glass in Nov, 2017 for Rs. 200 million. Calculate
the WDV and Depreciation for the Previous Year 2017-18 and the subsequent
Previous Year.
35
depreciation
2017-18
2018-19
Case
The details of Anagram Consulting Solutions Private Limited, a company engaged in

financial consultancy for the previous year 2017-18 is as follows:
WDV on April 1, 2017 (computers): Rs. 400,000
WDV on April 1, 2017 (Furniture): Rs. 100,000
Two new computers are purchased and put to use on June 15, 2017 for a total amount
of Rs. 100,000.
Income from consultancy: Rs. 4 million
Total revenue expenses: Rs. 2 million
Calculate the taxable income for 2017-18.
36
In-house Scientific Research
Section 35 allows special deductions for in-house scientific research. The section
provides as follows:
35. Expenditure on scientific research.- (1) In respect of expenditure on

scientific research, the following deductions shall be allowed-
(i) any expenditure (not being in the nature of capital expenditure) laid
out or expended on scientific research related to the business. …
(iv) in respect of any expenditure of a capital nature on scientific research

related to the business carried on by the assessee, … Provided that no
deduction shall be admissible under this clause in respect of any
expenditure incurred on the acquisition of any land…
(2AB)(1) Where a company engaged in the business of bio-technology or in any

business of manufacture or production of any article or thing, not being an article
or thing specified in the list of the Eleventh Schedule …any expenditure on
scientific research (not being expenditure in the nature of cost of any land or
building) … shall be allowed a deduction of a sum equal to one and one half
times of the expenditure so incurred.
Some prominent entries in Schedule XI are as follows:
1. Beer, wine and other alcoholic spirits

2. Tobacco and tobacco preparations
3. Cosmetics and toilet preparations
4. Tooth paste, dental cream, tooth powder and soap
5. Aerated waters in the manufacture of which blended flavouring concentrates in any
form are used
6. Confectionery and chocolates
Thus, Section 35 deals with the revenue and capital expenditure of a company on in-
house scientific research, related to the manufacturing business activity of the
assessee. The treatment of such expenditure can be in one of the following three ways:
one, its deduction may not be allowed; two, full deduction may be allowed; or three,
deduction of twice the amount of the actual expenditure might be allowed. The table
below lists some forms of expenditure. Decide whether deduction of each of these
would be ‘not allowed’, ‘allowed’, or allowed with a weightage of one and one half times.
37
Case
Innovision Ltd. is a company engaged in manufacturing of computer chips. It incurs

following expenditure towards in-house research during the P.Y. 2017-18. Calculate
the allowed deductions:
(Amt. in Mn.)
S. Nature of Expenditure Expenditure Weightage Deduction
No
1. Purchase of Research equipment 10
2. Salary to Research scientists 2
3. Purchase of Land for research center 15
4. Research center building 6

construction
5. Administrative expenditure for 2

research center
6. Consultancy fees to outside 0.5
scientists
7. Trial run expense at research center 1.2
38
Case
Blue Ocean Ltd. is a company engaged in manufacturing of cosmetics. It incurs

following expenditure towards in-house research during the P.Y.2017-18. Calculate
the allowed deductions:
(Amt. in Mn.)
S. Nature of Expenditure Expenditure Weightage Deduction
No
1. Purchase of Research equipment 10
2. Salary to Research scientists 2
3. Purchase of Land for research center 15
4. Research center building 6

construction
5. Administrative expenditure for 2

research center
6. Consultancy fees to outside 0.5
scientists
7. Trial run expense at research center 1.2
Amortisation of Expenditure
Income and expenditure fall under the head of business and profession only when the
business has started. Thus, expenses incurred towards setting of the business do not
get deducted. Expenses which are of a capital nature will become the capital assets
on the start of the business. Section 35 D provides for absorbing some of the other
expenses made before the commencement of new business, or in connection with
extension of the existing business or setting up of a new unit. This is called
amortisation. It includes three checks to prevent the misuse of amortisation. One,
amortisation can be claimed only after the business has commenced. Two, only the
expenses listed in the section can be amortised. Three, there is a limit on the total
expenses that can be amortised. The limit is fixed according to the size of the business.
39
The kinds of expenses which are eligible for amortisation are:
1. Expenditure in connection with preparation of feasibility report, project report;

conducting market survey or any other survey; engineering services relating to
the business of the assesse.
2. Legal charges for drafting any agreement between the assessee and any
other person for any purpose relating to the setting up or conduct of the business
of the assesse.
3. Legal charges for drafting the Memorandum and Articles of Association of the
company.
4. On printing of the Memorandum and Articles of Association.
5. Registering the company under the provisions of the Companies Act.
6. Public subscription of the shares of the company, including underwriting

commission, brokerage and charges for drafting, typing, printing and
advertisement of the prospectus.
There is a limit on the total amount that can be amortised. This is fixed at 5% of the
‘cost of project’ or, in case of an Indian Company, capital employed in the business.
Section 35 defines the ‘cost of the project’ on the basis of the actual cost of the fixed
assets, including land, buildings, plant, machinery, furniture and fittings of the
business. The final amount eligible for amortisation has to be deducted in five equal
instalments starting with the year in which the business commences. Thus, the
following steps will need to be followed to determine the amount for amortisation:
1. Take the date of commencement of the business and identify all the expenses
incurred before that date, which are eligible to be amortised.
2. Total the expenditure eligible for amortisation.
3. Compare the total expenditure with five per cent of the ‘cost of project’ and take the
lower of the two. This is the value that will be actually amortised.
4. Divide the value to be amortised by five and deduct it in each of the five previous
years, starting with the year in which the business commences.
40
Case
Imperial Enterprise is setting up a new business with Rs. 250 million cost of project.
The expenses incurred are mentioned herein below. Calculate the deduction available
under Section 35D in the year the business commences.
(Amt. in Mn.)
S. Nature of Expenditure Expenditure Eligible Amount
No Yes or no
1. Company formation expenditure 1
2. IPO expenses 9
3. Project feasibility and market study 4
4. Legal fees for drafting of project and 2

joint venture documents
5. Salary paid to marketing employees 1

before commencement of business
Total
Total amount eligible to be amortised

restricted to ____% of project cost
Amount amortised during the

previous year (for five years starting
from the year of commencement of
business)
Case
Hi-fi Rhythms Ltd. has taken the following two loans from a bank. Calculate eligible
deduction for interest payable on bank loan. (Amt. in Rs. mn)
Loan Interest period Interest Eligible deduction
Amt.
Corporate loan Regular business 5

activity
Loan for new editing Before machine is 2

machine put to use
41
Capital Gains
Towards understanding the scope of capital gains, classify the following income under
the heads of income.
S. Income Head of
No Income
1. Ajit invested Rs. 500,000 in opening a restaurant and

earned Rs. 200,000.
2. Ajit bought a house for Rs. 1 million and put it on rent to

earn Rs. 100,000 per year.
3. Ajit bought gold for Rs. 30,000 and sold it off three months
later for Rs. 50,000.
4. Ajit bought shares of a company for Rs. 70,000 and sold it off
the next month for Rs. 80,000.
5. Ajit bought a lottery ticket for Rs. 10 and got a prize of Rs.
200,000.
Which incomes have got listed under the head of capital gains? Can we infer from the
above exercise as to what constitutes capital gains?
Section 2(14) “capital asset” means–
(a) Property of any kind held by an assessee, whether or not connected with
his business or profession; ….
But does not include–
(i) Any stock-in-trade, consumable stores or raw materials held for the
purposes of his business or profession;
(ii) Personal effects, that is to say, movable property (including wearing
apparel and furniture) held for personal use by the assesse or any
member of his family dependent on him, but excludes–
(a) Jewellery;
(b) Archaeological collections;
(c) Drawings;
42
(d) Paintings;
(e) Sculptures; or
(f) Any work of art ….
(iii) Agricultural land in India, not being land situate– ….
(b) in any area within the distance, measured aerially,– ….
(III) not being more than eight kilometres, from the local limits of
any municipality …. which has a population of more than ten
lakhs.
Capital Assets
In relation to a business, identify whether the following are capital assets.
Sr. Asset Capital

Asset?
1 Crane for a construction company
2 Office building of a bank
3 Cars with a textile company
4 Cars with Maruti Ltd.
5 Buildings meant for sale with a construction company
6 Shares held by a pharmaceutical company
7 Fabric with a garment company
8 Patent rights
9 Unlisted shares held by a garment company
What constitutes a capital asset of a business? The question can be asked in reverse.
What does not constitute the capital asset in relation to a business?
43
In relation to an individual, identify what constitutes a capital asset.
Sr. Asset Capital

Asset?
1 Shares
2 Building
3 Wooden Furniture
4 Car
5 Jewellery
6 Gold
7 Clothes
8 Painting
9 Furniture studded with precious stones
Section 45(1) Any profits or gains arising from the transfer of a capital asset effected
in the previous year shall, …. , be chargeable to income-tax under the head “Capital
gains”, ….
Section 2(47) “transfer”, in relation to a capital asset, includes,–

(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) in a case where the asset is converted by the owner thereof into, or is
treated by him as, stock-in-trade of a business carried on by him, such
conversion or treatment; or ….
Mode of computation: Section 48. The income chargeable under the head “Capital
gains” shall be computed, by deducting from the full value of the consideration received
or accruing as a result of the transfer of the capital asset the following amounts,
namely:–
(i) expenditure incurred wholly and exclusively in connection with such
transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement
thereto: ….
44
Short Term Capital Gain and Long Term Capital Gain
Short term and long term capital assets can be summarised as follows
Nature of Asset Short Term Long Term
Shares and securities of a company listed on 1 Year or less More than 1

a stock exchange, or a unit of equity oriented Year
fund, or Zero coupon bonds
Share of an unlisted company 2 Year or less More than 2

Year
Immovable property being land or building or 2 Year or less More than 2

both Year
All other capital assets 3 years or less More than 3

years
Classify the following assets as long term or short term assets.
Sr. Particulars Dt. Of Dt. Of LT/ST

Purchase Sale
1 Silver utensils of a person 10/4/14 23/1/17
2 Fabric of a garment company 5/5/17 17/5/17
3 Unit of a mutual fund 14/7/16 22/10/17
4 Equity shares (unlisted) 21/1/16 20/2/17
5 Debentures of unlisted company 18/7/14 4/3/17
6 Painting of an artist (not in ‘profession’) 28/8/15 31/10/16
7 Urban land 20/2/14 20/2/16
8 Gold 31/12/08 5/1/17
9 Flat of a person 12/11/14 15/10/17
10 Shares sold on stock exchange 15/5/16 11/5/17
45
The significance of short term and long term capital gain is that the cost of acquisition
and improvement of long term capital asset is indexed for cost inflation while short term
capital gain is not. The table for indexing long term capital gain is as follows.
Finance Year Cost Inflation Finance Year Cost Inflation

Index Index
2001-02 100 2010-11 167
2002-03 105 2011-12 184
2003-04 109 2012-13 200
2004-05 113 2013-14 220
2005-06 117 2014-15 240
2006-07 122 2015-16 254
2007-08 129 2016-17 264
2008-09 137 2017-18 272
2009-10 148 2018-19 280
Note: Where the capital asset became the property of the assessee before 1/4/2001,
he has the option of substituting the fair market value as on 1/4/2001 in place of original
cost.
In each case below, identify whether the capital gain is long term or short term. If the
capital gain is long term, the cost of acquisition will need to be indexed. Calculate the
capital gain.
Case
Luxuria Ltd. sold slow-moving stocks lying in its show room for Rs. 500,000 on 14-9-
2017. The said stock was purchased on 13-9-2014 for Rs. 400,000. Calculate the
capital gain.
46
Case
Ruby bought gold jewellery for Rs. 200,000 in August 2009. She sold it for Rs. 1.5
million in July, 2017. Is the capital gain long term or short term? Calculate the capital
Calculate the capital gain.
Step 1 Whether a Capital Asset
Step 2 Long term / Short term
Step 3 Net Sale Consideration
Step 4 Cost of acquisition
Step 5 Indexation
Step 6 Indexed Cost of acquisition
Step 7 Long Term Capital Gain
Case
Deep bought a painting for Rs. 200,000 in August 2003. He sold it for Rs. 300,000 in
July, 2014. Calculate the capital gain.
47
Case
Two brothers jointly owned a house, each owning half of the house. Ground floor was
the share of the elder brother and the upper floor, of the younger brother.
Ajay bought the share of the elder brother on September 10, 2005 for Rs. 1.2 million.
Later, he bought the share of the younger brother on October 15, 2013 for 1.6 million.
And thus, came to own the entire house. Ajay sold the house on November 20, 2014
for 4.8 million (valued as Rs. 2.4 million each for ground and first floor). Is the capital
gain of Ajay long term or short term? Calculate the capital gain(s).
Case
Mr. Singh bought an apartment for Rs. 400,000 in January 1999. Estimated value of
the apartment on 1st April 2001 was Rs. 500,000. He undertook major repairs of the
apartment in May 2003 to improve its condition. It cost him Rs. 200,000. He sold the
apartment in June 2017 for Rs. 6,225,000. A real estate agent charged him a
commission of Rs. 25,000 at the time of sale. Calculate the capital gains.
48
When a transaction in a share is done through a stock exchange, Securities
Transaction Tax (STT) is charged on the value of the transaction. A long term or short
term capital gain, on which STT is charged, attract income tax at a lower rate. The
following cases will require application of this principle.
Long Term Capital Gain exceeding Rs. 100,000 on listed equity shares and equity
oriented mutual funds on which STT is paid will be taxed at flat rate of 10% without
indexation benefit.
Case
Pure Water Ltd. acquired 600 shares listed on the Bombay Stock Exchange for Rs.
240,000 in Oct, 1997. The company sold the shares in July, 2018 for a net
consideration of Rs. 500,000. STT was charged on the sale. FMV as on 31 January
2018 was Rs. 400,000. Calculate capital gains.
Case
Sigma Ltd. acquired 500 shares listed on the Bombay Stock Exchange for Rs. 300,000
on January 10, 2018. It sold the shares on April 20, 2018 for a net consideration of Rs.
500,000 through a recognised stock exchange. STT was charged on the sale. FMV as
on January 31, 2018 was Rs. 450,000. Calculate capital gains.
49
Case
Future Vision Private Limited Ltd. acquired 100 shares listed on the NSE for Rs.
100,000 on March 12, 2013. It sold the shares on April 20, 2018 through an ‘off market’
transaction (without going through a recognised stock exchange) for Rs. 250,000. As
it was ‘off market’, STT was not charged on the transaction. FMV as on January 31,
2018 was Rs. 275000. Calculate capital gains.
Case
Salt Lake Ltd. acquired 600 shares listed on the Bombay Stock Exchange for Rs.
240,000 during in Oct 1996. FMV as on April 1, 2001 was Rs. 800 per share. The
company declared bonus shares 1:1 during 2003-04. Another bonus issue was made
on January 10, 2018 where SLL received 1 share for every two shares held. SLL sold
all the shares of the company for Rs. 600 per share through a recognised Stock
Exchange with payment of Securities Transaction Tax on July 6, 2018. FMV as on
January 31, 2018 was Rs. 500 per share. Calculate capital gains.
50
Capital Gains of Depreciable Assets
When a depreciable capital asset (put to business) is sold, it yields a capital gain.
However, for convenience, the Income tax law, as we have seen earlier, subtracts the
value from the Written Down Value for the block of assets. However, the system fails
in two cases. One, where the block of assets becomes empty and two, the written
down value become negative. In these cases, the value is taken as short term capital
gain. If the WDV is negative, it is a short term capital gain; and if the WDV is positive
but assets in the block is empty, it is a case of short term capital loss.
Case
Neogen is an engineering company. The WDV of the block of assets comprising of

plant and machinery was 40 lakhs on April 1, 2016. It bought a used machining
equipment on 2nd July, 2016 for Rs. 20 lakhs. It sold off the machine for 65 lakhs on
Nov 13, 2017. Calculate the depreciation allowance/ short term capital gain.
Previous Year WDV on WDV on Depreciation WDV on March

April 1 March 31 @ 31- After
Depreciation
2016-17
2017-18
Case
Luxuria Ltd. sold slow-moving stocks lying in its show room for Rs. 5 lakhs on Sep 14,
2015. The said stock was purchased on Sep 13, 2012 for Rs. 4 lakhs. Calculate the
capital gain.
Step 1 Whether a capital

asset?
Step 2 Capital Gain
51
Case
Manu Chemicals Limited owned three plants under the block of assets ‘plant and
machinery’. The WDV of the block of assets on April 1, 2017 was Rs. 250,000. The
company sold one of the plants on February 2, 2018 for Rs. 400,000. Calculate the
depreciation for F.Y. 2017-18.

Depreciation
2017-18
Case
The WDV on April 1, 2017 for the block of asset comprising of an office, a factory and
warehouse, of Datamatics Limited was Rs. 875,000. It sold off all the three assets on
Feb 2, 2018 for a total of Rs. 700,000. Calculate the depreciation for F.Y. 2017-18.

Depreciation
2017-18
Case
The WDV on April 1, 2017 of the block of assets ‘plant and machinery’ comprising of
three items of Sun Chemicals Limited was Rs. 250,000. It sold off one plant on
February 2, 2018 for Rs. 50,000. Calculate the depreciation for 2017-18.

Depreciation
2017-18
52
Case
Ideacom Ltd. bought 75 computers for Rs. 40,000 each on July 7, 2017. It sold off 40
computers for Rs. 25,000 each on February 4, 2019 and sold another 35 computers
for Rs. 20,000 each on April 21, 2019. Work out the WDV/ Capital Gains for the
P.Y.2017-18, 2018-19 and 2019-20.
Depreciation
2017-18
2018-19
2019-20
Capital Gains: Special Provisions- Conversion of Capital Assets
Conversion of Capital Assets into stock-in-trade is treated as a transfer. A fair market

value of the capital asset on the date of conversion is deemed the consideration for
the transfer by way of conversion of capital asset into stock-in-trade. The capital gains
is converted as if the assets have been sold for the fair market value. However, the
notional profit is chargeable in the year in which stock-in-trade is finally sold.
Case
Krishna converts capital asset acquired in August 1969 for Rs. 57,000 (fair market
value on 1/4/2001-Rs. 150,000) into stock-in-trade on July 14, 2016 (fair market value
– Rs. 600,000) and subsequently sold the said stock-in-trade on Feb 5, 2019 for Rs.
900,000). Calculate the capital gains arising from the conversion.
53
Capital Gains: Special Provisions- Conversion of Capital Assets
The law considers the following transfer of capital assets to be special cases.
-Under gift or will

-By succession, inheritance, devolution
-Transfer from Holding company to Wholly Owned Subsidiary company
-Transfer from Wholly Owned Subsidiary company to Holding company
The law does not consider these to be an incidence of a capital gain. Instead, when
the person who has received the capital asset further transfers it, capital gains arise
for him. We would call the first party in the chain as the previous owner and the second,
the owner. The incidence of capital gains will arise for the owner.
In calculating the capital gain, the cost of acquisition by the previous owner is deemed
to be the deemed cost for the owner (seller). For deciding whether the capital gain is
long term or short term, the period is counted from the time the previous owner
acquired the capital asset to the time the owner sold it. However, due to an anomaly
in the law, indexing is only done for the period the owner came to hold the asset.
Case
X purchased a diamond necklace for Rs. 150,000 on July 25, 1995. He gifts the
necklace to his daughter Y on May 2, 2010. The fair market value of the necklace in
May, 2010 was Rs. 300,000. Y sells the necklace on May 15, 2016 for Rs. 450,000.
Compute Capital Gains in the hands of X and Y.
54
Case
Smart Bros. Ltd. transferred the following assets to its Wholly Owned Subsidiary co.
Sharp Sons Ltd. On 15/5/2015. The cost and date of acquisition by Smart Brothers Ltd.
is as follows.
Asset Patent Unlisted shares House Property
Cost of acquisition NIL-Self generated 150,000 240,000

Date of acquisition Since Inception 5/2/2015 12/3/2014
(1/1/1992)
Sharp Sons Ltd. sold all the three assets on 29/11/2016 for the following sale
considerations:
Patent: Rs. 500,000

Unlisted shares: Rs. 250,000
House Property: Rs. 300,000
Calculate the capital gains arising from the transactions for the two companies.
55
Income from other Sources
Income from other sources is a residuary head of income. Classify the following income
under the heads of income.
Income Head
Interest received on Govt. of India Bonds / Securities?
Scholarship received by a student from a trust for pursuing higher

studies.
Rent income received from sub-let of house property by the original

tenant.
Rent received from open plot of land.
Income from letting of plant & machinery (discontinued business).
Sitting fees received by independent directors from the company.
Dividend received from a foreign company.
Gift of jewellery worth Rs. 51,000 received from a friend.
While it is a residuary head, some incomes are listed under the head and would
necessarily fall under the head. These include:
 Dividends.
 Winnings from lotteries, crossword puzzles, horse races, card games and other
games of any sort or from gambling or betting.
 Interest income if does not fall under the head of business and profession.
 Let out of machinery, plant or furniture of discontinued business (with or without

building).
 Gift from a non-relative in cash or kind of a value more than Rs. 50,000.
56
Expenditure, other than capital expenditure, made for earning the income is allowed
as deduction. Further, in the case of let-out of plant and machinery, depreciation is
allowed. However, in the case of winnings from lotteries, crossword puzzles, horse
races, card games, gambling or betting, no expenditure is allowed.
Identify whether the following income fall under the head of other sources and are
taxable.
Income Rs. ‘000 Taxable
Interest from investment in Debentures 120
Agricultural income outside India 100
Dividend from co-operative bank 10
Fees to Director drawing salary 15
Income from sub-let of property 90
Income from discontinued business 60
Interest on GOI tax-free Bonds 75
Income from professional painting 25
Case
Ram received Rs. 80,000 as interest on Bonds of a company after a TDS @ 20%.
Calculate his income taxable under “other sources”.
57
Case
Sun Biosciences Ltd. invests in shares of a foreign company by borrowing capital.

During P.Y.2015-16, Sun received dividend of Rs. 300,000, interest on borrowed
capital is Rs. 350,000. Calculate the company’s income taxable under “other sources”.
What if dividend received during the year is “zero”?
Case
Jupiter Investments Limited is in the business of investing in equity shares. The

dividends earned are its income. Its income and expenditure in 2017-18 were as
follows:
Income from dividends: Rs. 6 million

Revenue Expenditure: Rs. 3 million
Capital expenditure: Rs. 200,000 (Two computers bought on June 1, 2017)
WDV on April 1, 2015 (Computers): 0
Calculate the tax liabilities of the company.
58
Taxability of transactions without consideration or for inadequate consideration:
Section 56(x) where any person receive, in any previous year, from any person or
persons on or after the 1st day of April, 2017,––
(a) any sum of money, without consideration, the aggregate value of which
exceeds fifty thousand rupees, the whole of the aggregate value of such
sum;
(b) any immovable property,––
(A) without consideration, the stamp duty value of which exceeds fifty
thougsand rupees, the stamp duty value of such property;
(B) for a consideration, the stamp duty value of such property as exceeds
such consideration, if the amount of such excess is more than the higher
of the following amounts, namely:––
(i) the amount of fifty thousand rupees; and
(ii) the amount equal to five per cent of the consideration: ….
(c) any property, other than immovable property,––
(A) without consideration, the aggregate fair market value of which exceeds
fifty thousand rupees, the whole of the aggregate fair market value of
such property;
(B) for a consideration which is less than the aggregate fair market value of
the property by an amount exceeding fifty thousand rupees, the
aggregate fair market value of such property as exceeds such
consideration:
Provided that this clause shall not apply to any sum of money or property
received––
(I) from any relative; or
(II) on the occasion of the marriage of the individual; or
(III) under a will or by way of inheritance; ….
Case
Ajay sold gold jewellery to Deep for Rs. 200,000. The fair market value of the jewellery
was Rs. 300,000. What are the tax implications for Deep?
59
Case
Rakesh made a distress sale of a shop premises for Rs. 600,000 to Deep on Nov 20,
2017. The stamp duty value of the shop premises was Rs. 700,000. What are the tax
implications for Deep?
Case
Vijay made a distress sale of gold jewellery to a jewellery company, Shine Jewellers
Pvt. Ltd.. He sold the jewellery for Rs. 200,000. The fair market value of the jewellery
was Rs. 300,000. What are the tax implications for the company?
60
Deductions:
Section 57. The income chargeable under the head “Income from other sources”
shall be computed after making the following deductions, namely:–– ….
(iii) any other expenditure (not being in the nature of capital expenditure)
laid out or expended wholly and exclusively for the purpose of making
or earning such income; ….
Amounts not deductible:
Section 58. …. the following amounts shall not be deductible in computing the
income chargeable under the head “income from other sources”, namely:––
(a) in case of any assesse,––

(i) any personal expenses of the assessee; ….
The following table gives the income, and expenditure incurred for earning the
income, during the previous year. In the last column, enter the taxable value for the
income.
Sr Particulars Income Direct Exp. Taxable

Rs.000 Rs.’000
1 Interest on Securities 150
Interest on borrowed funds 25
2 Dividend from Indian Cos. 100
3 Dividend from Foreign Co. 15
4 Winning from lotteries 50
Cost of tickets, travel etc. 10
Income from Other Source
61
The following table gives the income and expenditure incurred for earning the income.
In the last column, enter the taxable value for the income.
Sr Particulars Income Direct Exp. Taxable

Rs.000 Rs.’000
Rent from let-out machinery 140
1 Maintenance Exp. 15
Depreciation on machinery 25
2 Gift from friend’s mother 75
3 Gift from grand-father 40
4 Gift -motor cycle from friend 60
Income from other sources
62
Aggregation of Income
The followings are the principles for set off of loss from a source under a head of
Income (Section 70(1)).
1. Loss from a source under the head of house property is to be set off against gain
from another source under the head of house property.
2. Loss from a source under the head of business and profession is to be set off against
gain from another source under the head of business and profession.
3. Loss from a source under the head of other sources is to be set off against gain from
another source under the head of other sources.
Set off the losses in the following tables.
Salaries
Sr Particulars Income Total

income of
Head
1 Salary from Employer A 360
2 Salary from Employer B 240
Total Income from Salaries
63
House Property

income of
Head
1 Rent from Let-out House 120
Less: a) Municipal taxes 20
b) Deduction u/s. 24(a)
Income from let-out prop.
2 Interest paid on loan for Self-occupied (160)

house property
Income from Self-occupied prop.
Total Income from House Property
Business and Profession

income of
Head
1 Income from Profession A 200
2 Income from Business B (350)
3 Income from Business C 50
Total Income from

Business or Profession
64
Other Sources

income of
Head
1 Interest from Govt. taxable Bonds 150
2 Net income from machinery let-out (45)
3 Director’s sitting fees 10
4 Scholarship received 5
5 Interest on loans given (net of interest paid 20

on borrowing therefor)
Total Income from Other sources
Set off of Capital Loss
Capital loss has to be set off as follows:
1. A short term capital loss from a transaction can be set off against a long-term capital
gain or a short term capital gain (Section 70(2)).
2. A long term term capital loss from a transaction can be set off against only a long-
term capital gain (Section 70(3)).
65
Set off the losses in the following tables:
Case

income of
Head
1 Short-term capital gain (asset A) (275)
2 Short-term capital gain (asset B) 200
Short-term Capital gain
Case

income of
Head
1 Short-term capital gain (asset A) (125)
2 Short-term capital gain (asset B) 50
3 Long-term capital gain (asset C) 25
4 Long-term capital gain (asset D) 100
Long-term gain
Case

income of
Head
1 Long-term capital gain (asset A) (250)
2 Long-term capital gain (asset B) 150
Long-term Capital gain

66
Case

income of
Head
1 Long-term capital gain (asset A) (275)
2 Long-term capital gain (asset B) 125
Long-term gain
3 Short-term capital gain (asset C) 250
Inter-head Set Off (Section 71)
Having done the set off under each head, we would get a net value. This value may
be negative. The set off of a negative value would be done as follows.
1. A loss from a source under the head of house property is to be set off against gain
under any other head.
2. A loss from a source under the head of business and profession is to be set off
against gain under any other head.
3. A loss from a source under the head of other sources is to be set off against gain
under any other head.
67
Exceptions for inter-head set-off during the same assessment year:
Section 71(2A): A Business or Profession loss cannot be set-off against Salary

income
Section 71(3): A loss under Capital gain cannot be set-off against any other head of
income
Section 71(3A): A loss under House Property can be set-off against any other head
of income up to a limit of two lakh rupees.
Set off losses across the heads in the following cases for the previous year 2016-17:
Case 1
(Amt. in ‘000)
Sr Particulars Income Income Total
income
1 Salaries 430
2 House Property (130)
3 Capital gains
Short-term Capital gain 100
Long-term Capital gain 150
Total Capital gains 250
4 Business or Profession 300
5 Other sources 50
Total Income
68
Case 2
(Amt. in ‘000)
income
1 Salaries 50
3a Short-term Capital gain 0
3b Long-term Capital gain 0
Total Capital gain 0
5 Other sources 15
Total Income
Case 3
(Amt. in ‘000)
income
1 Salaries 360
2 House Property 140
3 Capital gains
Short-term Capital gain (200)
Long-term Capital gains
5 Other sources 75
Total Income
69
Case 4
(Amt. in ‘000)
income
1 Salaries 0
2 House Property 50
4 Business or Profession (225)
5 Other sources 25
70
Set off against Salary
Section 71(2A) disallows set off of loss from a source under business and profession
against salary. Apply the provision in the following cases.
Case 5
(Amt. in ‘000)
income
1 Salaries 600
5 Other sources 50
Total Income
Case 6
(Amt. in ‘000)
income
1 Salaries 550
5 Other sources 25
Total Income
71
Set off of Capital Losses
Section 71(3) provides that of loss under the head of capital gains cannot be set off
against income under any other head of income. Within the head of capital gains, a
loss under the head of short term capital gain can be set off against short term capital
gain and long term capital gain. However, a loss under the head of capital gain can be
set off only against long term capital gains. Apply the provisions in the following cases.
Case 7
(Amt. in ‘000)
income
1 Salaries 410
2 House Property 90
3 Capital gains
Short-term Capital gain (250)
5 Other sources 25
Total Income
72
Case 8
(Amt. in ‘000)
income
1 Salaries 560
3 Capital gains
Short-term Capital gain 200
Long-term Capital gain (450)
Capital gain
5 Other sources 25
Total Income
Case 9
(Amt. in ‘000)
income
1 Salaries 350
3a Short-term Capital gain (50)
3b Long-term Capital gain (100)
Total Capital gain
5 Other sources 50
Total Income
73
Case 10
(Amt. in ‘000)
income
1 Salaries 400
2 House Property 0
3a Short-term Capital gain (200)
Total Capital gain
5 Other sources 25
Total Income
Case 11
(Amt. in ‘000)
income
1 Salaries 550
2 House Property 50
3b Long-term Capital gain (350)
5 Other sources 25
Total Income
74
Carry Forward of Losses
After doing the intra-head set-off followed by inter-head set-off, the net value under a
head may be a loss. The loss under the head is to be carried forward to the subsequent
years and set-off against gain under the same head. The provision on carry forward is
as follows:
1. A loss under the head of house property is to be carried forward and set off for eight
succeeding years against gains from house property.
2. A loss under the head of business and profession (excluding income from
speculative business) is to be carried forward and set off for eight succeeding years
against gains from business and profession.
3. A loss arising from speculative business is to be carried forward and set off for four
succeeding years against gains from speculative business only.
4. A loss under the head of short term capital gain is to be carried forward and set off
for eight succeeding years against gains from short term and long term capital gain.
5. A loss under the head of long term capital gain is to be carried forward and set off
for eight succeeding years against gains from long term capital gain only.
To summarize, speculative business loss and loss under long term capital gain are
singled out for a different treatment.
Sequence to be followed for set-off of losses:
Step 1: Section 70 – Intra head set off in the same assessment year
Step 2: Section 71 – Inter head set off in the same assessment year
Step 3: Sections 71B, 72, 74 – Carry forward & set off under same head in eight
succeeding assessment years (speculative loss allowed to be carried forward for only
four succeeding assessment years)
Exceptions for inter-head set-off during the same assessment year:
Section 71(2A): Business or Profession loss cannot be set-off against Salary
Section 71(3): A loss under Capital gain cannot be set-off against any other head
Section 71(3A): A loss under House Property can be set-off against any other head
of income up to a limit of two lakh rupees.
75
Case 1:
Unabsorbed house property loss 2014-15 is Rs. 2 million.

Income of PY 17-18:
(Amt. in Mn.)
Sr Particulars Income Income Total income
1 Salaries 5
2 House Property 4
3a Short-term Capital 0
gain
3b Long-term Capital loss 0
Total Capital loss 0
4 Business or - 1.5
Profession
5 Other sources - 0.5
Total Income
Case 2:
Unabsorbed house property loss 14-15: Rs. 1 mn.

Income of PY 17-18:
(Amt. in Mn.)
Sr Particulars Income Income Total income
1 Salaries 4.5
2 House Property 0.5
3b Long-term Capital loss 0
Total Capital loss 0
5 Other sources 0
Total Income
76
Case:
The table below gives the unabsorbed losses of the earlier years. Set-off the losses
and work out the income for the head for the previous year 17-18.
(Amt. in Mn.)
Sr Particulars Loss P.Y. Income Total
income
1 Unabsorbed House Property loss 08-09 (5)

carried forward.

carried forward

carried forward.
4 House property Income 17-18 50
Total House Property Income 17-18
Case:
(Amt. in Mn.)
Sr Particulars Loss P.Y. Income Total
income
1 Unabsorbed Business loss carried 08-09 (25)

forward

forward

forward
4 Business Income 17-18 55
Total Business Income 17-18
77
Case:
(Amt. in Mn.)
Sr Particulars Loss Income Total
P.Y. income
1 Unabsorbed speculative business loss 12-13 (12.5)

carried forw.
2 Unabsorbed speculative business loss 13-14 (15)

carried forw.
3 Unabsorbed non-speculative business 14-15 (25)

loss carried forward.
4 Speculative Income 17-18 17.5
Speculative Income 17-18
Case:
(Amt. in Mn.)
Sr Particulars Loss P.Y. Income Total income
1 Unabsorbed ST Capital Loss 08-09 (12.5)
2 Unabsorbed LT Capital Loss 09-10 (15)
3 Unabsorbed ST Capital Loss 10-11 (25)
4 Unabsorbed LT Capital Loss 13-14 (17.5)
5 ST Capital gain 17-18 (7.5)
6 LT Capital gain 17-18 75
Long / Short term Capital Gain 17-18
78
Case:
(Amt. in Mn.)
Sr Particulars Loss P.Y. Income Total income
1 Unabsorbed ST Capital Loss 08-09 (12.5)
2 Unabsorbed LT Capital Loss 10-11 (15)
3 Unabsorbed ST Capital Loss 12-13 (25)
4 Unabsorbed LT Capital Loss 14-15 (17.5)
5 ST Capital gain 17-18 45
6 LT Capital gain 17-18 (20)
Long / Short term Capital Gain 17-18
Case:
In the table below, follow the sequence of set off and carry forward to work out the
total income for the previous year 17-18.
Sr Particulars P.Y. Rs.000 Rs.000 Total
1 Business loss c/f 13-14 (125)
2 Current House Prop. Loss 17-18 (150)
3 Current Business A gain 17-18 250
4 Current Business B loss 17-18 (50)
Sub-total
Sub-total
Total Income 17-18
79
Goods and Services Tax (GST)
Basic Concepts
Concept of Value Added Tax:
An indirect tax is usually charged on the selling price of goods or the value of services.
Raw material generally passes through the following processes before it reaches the
ultimate consumer:
First First Stage Second

Distributor Retailer Consumer
Manufacturer Dealer Stage Dealer
Snowballing effect of taxes:
Let us consider following example which demonstrates the cascading or the

snowballing effect of taxes:
Details 1st 2nd Distributor Retailer

Manufacturer Manufacturer
–A -B
Purchase - 110 165 220
Value Added 100 40 35 30
Selling Price 100 150 200 250
Tax = 10% 10 15 20 25
Total 110 165 220 275
For 2nd Manufacturer, the break-up of Rs. 15 paid as tax is given as follows:
1) Rs. 100 X 10% = Rs. 10 (Tax on value provided by A)

2) Rs. 40 X 10% = Rs. 4 (Tax on value addition by B)
3) Rs. 10 X 10% = Rs. 1 (Tax on tax paid by A)
If a manufacturer always considers the selling price for the purpose of calculation of
taxes on his sales, there shall be multiple levies of taxation, not only on value already
taxed previously by the previous manufacturer, but also on taxes already paid. This
compounding of taxes is called the “cascading effect of taxes” or “snowballing effect of
taxes”.
To avoid such cascading effect of taxes, the solution is that tax should be paid only on
the value added at each level and not on the entire selling price.
The tax on value added in the above example shall be the total of value added at each
level multiplied by the rate of tax i.e. (100+40+35+30)*10% = 20.5
Instead the tax paid here is Rs. (10+15+20+25) = 70
80
Value added for a manufacturer shall be the difference between the cost of raw
material purchased and the selling price of the goods.
However, it is not always possible to calculate the value added at each level due to
practical difficulties in the supply chain.
An easier approach is to calculate the tax on the entire selling price (excluding any
taxes paid on purchases) and then deduct the taxes paid on inputs or raw materials.
This is known as availing of “Input Tax Credit”. By availing such credit, the tax is
restricted to the value added at each level and hence, such a tax structure is known as
a Value Added Tax (“VAT”) structure. In the above example, the net tax payable at
each level in the supply chain is shown hereunder:
Details A B C D
Purchase - 100 140 175
Value Added 100 40 35 30
Sub-total 100 140 175 205
Tax = 10% 10 14 17.5 20.5
Less: Input tax paid - 10 14 17.5
Net tax payable 10 4 3.5 3
GST is also based on VAT principles. It is a destination based consumption tax levied
at each and every stage of supply till the point, goods or services are consumed by
final consumer.
Purpose of introduction of GST:
The purpose of introduction of GST is to have a common national market and avoid
cascading of taxes significantly prevalent in pre-GST tax structure.
Effective Date for GST Implementation – 1st July 2017
Indirect tax structure in India until 1st July 2017:
Under the pre-GST tax structure, levy of indirect taxes was divided between the Central
and the State Governments. Excise duty (duties on manufacturing of goods), Service
Tax, Tax on inter-state sale of goods and Customs Duty (i.e. the duty on imports /
exports), were levied by the Central Government.
Whereas, the tax on the intra-state sale of goods, Entry tax, Octroi and Luxury Tax and
few other levies were charged by the State Governments.
81
However, there existed several defects in the indirect tax regime until GST came into
force:
1) Higher incidence of tax on account of unavailability of full set off of input taxes
thereby leading to cascading effect of taxes (tax on tax). For eg: credit of excise
duty and service tax paid at the stage of manufacture is not available to the
traders paying the state level sales tax or VAT. Further, no credit of state taxes
paid in one state can be availed in another state.
2) India does not have a unified national market due to invisible barriers of Central
Sales Tax, Entry Tax and State VAT and visible barriers of check posts (where
not only millions of man-hours and truck hours are lost but also the possibility
of huge corruption).
3) Complex and conflicting principles in indirect tax structure, adding to multiple

compliance and administrative costs.
4) No uniformity in tax rates across the country.
Taxes subsumed under GST:
Except the Basic Customs Duty, most of the indirect taxes have been subsumed in the
GST regime:
The following levies of the Central Government have been subsumed under the GST
regime:
• Excise Duty
• Additional Duties of Customs
• Special Additional Duties of Customs
• Service Tax
• Central Sales Tax
• Cesses and surcharges
The following levies of the State Government have been subsumed under the GST
regime:
• State VAT
• Purchase Tax
• Luxury tax
• Entry tax
• Entertainment tax
• Other state cesses
82
All goods and services have been classified into one of the following tax brackets as
decided by the GST Council.
Type of Products/ Service Rates

No tax goods (includes exports) Nil
Essential Goods 5%
Products or services with basic necessities 12%
Revenue Neutral Rate 18%
Demerit Goods 28% + GST
Compensation cess,
wherever applicable
Taxable Event for GST:
GST shall be levied on supply of goods or services or both.
Definition of Supply: Section 7 of the Central Goods and Services Tax Act, 2017
7. (1) For the purposes of this Act, the expression “supply” includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter,
exchange, licence, rental, lease or disposal made or agreed to be made for a
consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of
business; and
(c) the activities specified in Schedule I, made or agreed to be made without a

consideration;
(1A) where certain activities or transactions constitute a supply in accordance with the
provisions of sub-section (1), they shall be treated either as supply of goods or supply
of services as referred to in Schedule II.
(2) Notwithstanding anything contained in sub-section (1),––
(a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Government, a State

Government or any local authority in which they are engaged as public authorities, as
may be notified by the Government on the recommendations of the Council,
shall be treated neither as a supply of goods nor a supply of services.
(3) Subject to the provisions of sub-sections (1), (1A) and (2), the Government may, on
the recommendations of the Council, specify, by notification, the transactions that are
to be treated as—
(a) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a supply of goods.

83
Essential Elements of a supply of goods and / or services:
1) Supply involve either movement or delivery of goods and / or services

2) Supply, in common parlance, does not necessarily involve consideration.
(Consideration is necessary for a “sale”). However, under the GST regime,
consideration is a must. Only specified transactions without consideration are
called “supplies”.
3) The transaction should be done in the ordinary course of business or in the
course of furtherance of business of the supplier. The only exception is when
services are imported for a consideration – whether or not in the course or
furtherance of business, such services shall be treated as “supplies”
4) Transfer in title of the any property supplied is not necessary for the transaction
to be a “Supply”
Deemed supply without consideration:
The following transactions shall be treated as supplies of goods and / or services even
in the absence of “Consideration”
1) Supplies to a related person/ distinct person (another unit of the taxable entity
having a different registration number) when made in the course or furtherance
of business
2) Import of services from a related party or another business entity of the person
in the course or furtherance of business
3) Supply of goods by a Principal to his Agent for supplying goods on behalf of the
Principal
4) Supply of goods by an Agent to his Principal who receives the goods on behalf
of the Principal
5) Permanent transfer of Business Assets
Specific exclusions from “Supply”
GST regime specifically excludes the following transaction as “Supplies”
1) Services by an employee to his employer in the course of his employment

2) Services by any court or Tribunal
3) Services of funeral, burial crematorium or mortuary including transportation of
the deceased
4) Sale of land & building
5) Actionable claims, other than lottery, betting and gambling
6) Functions performed by MPs, MLAs, etc
7) Supply of goods from one place to another in the non-taxable territory without
such goods entering into India
8) Supply of warehoused goods before clearance for home consumption
9) Supply of goods by consignee by endorsement of documents of title of goods
after the said goods have been dispatched from the port of origin located outside
India but before clearance for home consumption.
84
Definition of Goods: under section 2(52) of the Central Goods and Services Tax Act,
2017
(52) “goods” means every kind of movable property other than money and securities
but includes actionable claim, growing crops, grass and things attached to or forming
part of the land which are agreed to be severed before supply or under a contract of
supply;
Goods:
Under GST, goods are every kind of movable property other than money and
securities. They include actionable claims, growing crops, grass and things attached
to or forming part of the land which are agreed to be severed before supply or under a
contract of supply.
For e.g.: Standing trees are not goods since they are non-movable unless they are cut.
However, timber from trees shall be considered as goods if:
 It is identified,
 There is a contract to supply and
 It is or can be brought to a deliverable state under the contract.
Intangible Properties can be goods. Though actionable claims are goods, only lottery,
betting or gambling have been specifically included under GST. All other actionable
claims, though are treated as goods shall be outside the purview of GST:
For e.g.: Transfer of unsecured debt to a third party will not be taxable under GST
Definition of Services: Section 2(102) of the Central Goods and Services Tax Act, 2017
(102) “services” means anything other than goods, money and securities but includes
activities relating to the use of money or its conversion by cash or by any other mode,
from one form, currency or denomination, to another form, currency or denomination
for which a separate consideration is charged
Explanation.––For the removal of doubts, it is hereby clarified that the expression

“services” includes facilitating or arranging transactions in securities;
85
Services:
A service contract is one from where parties receive a useful utility or benefit.
Service means a useful result or a product of labour, which is not a tangible commodity
as per Webster’s Concise Dictionary.
They result in value addition but cannot be seen since they are intangible. They perish,
if not used at the time they are provided and cannot be stored. A consideration is
charged for providing the service.
Definition of services under GST is too wide and can also include immovable
properties, sale of land and buildings. Sale of land and building and services by an
employee to an employer have been specifically excluded from GST. Obligation to
refrain from doing an act, or tolerating an act or a situation is a service.
Exercise 1:
Sr. Particulars Whether a

No supply?
1 Supply of jewelry in an exhibition-cum-sale or participation in a
trade fair
2 Import of free online education services of a college
3 Goods sent for job work
4 Donation of equipment to a research institute
5 Import of online education services for a consideration for
educating children of an NGO
6 Stock transfers by a body cream manufacturer in Gujarat to his
own godown in Maharashtra
7 Restaurant Services paid in kind
8 Services of an employee working in the finance department of a
company
9 Sale of a plot of agricultural land by one farmer to another
10 A company located in the suburbs employs an agent in the city
to undertake purchases on behalf of the company
11 Import of services by a branch in India from its HO in the US
without consideration
12 Sale of lottery tickets
13 Construction services
14 Sale of an office premises
86
Exercise 2:
Sr. Particulars Whether Whether

No. Goods or supply
Services or under
none under GST?
GST?
1 Granting temporary usage of intellectual
property rights
2 Financial Lease of movable property
3 Late Delivery Charges
4 Sale of unsecured loans by finance co.
5 Insurance Claims
6 Supply of food in restaurants
7 Electricity
8 Hire Purchase of goods
9 Renting of a house
9 Operating lease
10 Development of a software
11 Interest payments on loans
Composite supply and Mixed Supply:
Some contracts may have both – supply of goods and services or supply of one or
more goods or one or more services.
In such a case, if the supply is such that the multiple supplies are naturally bundled
together, the same shall be called a composite supply. In case of such a supply, the
rate of GST shall be the rate of the goods or service that is pre-dominant in the supply.
In a case, if the supply is such that multiple supplies are not naturally bundled together,
but are only supplied together, such a supply shall be called a mixed supply. In case
of such a supply, the rate of GST shall be the rate of goods or service that has the
highest rate of tax.
87
Time of supply for Goods:
The time of supply in case of goods shall be earlier of the following:
1) Date of issue of invoice or the due date of invoice in case invoice is issued after
the due date
2) Date of receipt of payment
Due date of invoice:
1) In case supply involves movement of goods, the due date shall be the date of
removal of goods
2) In any other case, the due date shall be the date when the goods are delivered
or made available
Date of receipt of payment shall be earlier of the date when the supplier records the
payment in his books or the date of actual receipt in the supplier’ bank account
whichever is earlier.
Exercise 3:
Invoice Invoice Due Payment entry Credit in Time of

Date Date in the bank supply
supplier’s account
books
10 Oct 2017 20 Oct 2017 26 Oct 2017 30 Oct 2017
1 Nov 2017 25 Oct 2017 20 Oct 2017 30 Oct 2017
25 Oct 2017 20 Oct 2017 31 Oct 2017 1 Nov 2017
30 Oct 2017 1 Nov 2017 1 Nov 2017 31 Oct 2017
Exercise 4:
Invoice Date Date of Delivery of Receipt of Time of

removal of goods payment supply
goods
25 Oct 2017 20 Oct 2017 26 Oct 2017 22 Oct 2017
10 Oct 2017 20 Oct 2017 26 Oct 2017 No payment –
inter-state stock
transfer
31 Oct 2017 1 Nov 2017 5 Nov 2017 30 Oct 2017
30 Oct 2017 10 Nov 2017 14 Nov 2017 29 Oct 2017 –
Part payment
20 Nov 2017 –
balance payment
88
Exercise 5:
Invoice Date Receipt of Date of Receipt of Time of

invoice by installation / payment supply
the recipient assembly
30 Oct 2017 5 Nov 2017 26 Oct 2017 10 Nov 2017
20 Oct 2017 10 Nov 2017 26 Oct 2017 24 Nov 2017
20 Oct 2017 10 Nov 2017 24 Oct 2017 18 Oct 2017
5 Nov 2017 7 Nov 2017 1 Nov 2017 15 Oct 2017
advance payment
31 Oct 2017
part payment
15 Nov 2017
balance payment
Time of supply for Services:
The time of supply in case of services shall be:
1) If invoice is issued within the prescribed period – date of invoice or the date of
receipt of payment whichever is earlier
2) If invoice is not issued within the prescribed period – date of provision of service
or the date of receipt of payment whichever is earlier
3) If none of the above apply – the date of which the recipient shows the receipt of
service in his books
Exercise 6:
Invoice Date Date of Payment entry Credit in Time of

provision of in the bank supply
service supplier’s account
books
10 Oct 2017 20 Oct 2017 26 Oct 2017 30 Oct 2017
1 Nov 2017 26 Oct 2017 10 Oct 2017 20 Oct 2017
1 Nov 2017 26 Oct 2017 20 Oct 2017 10 Oct 2017
1 Nov 2017 15 Nov 2017 5 Nov 2017 31 Oct 2017
89
Exercise 7:
Invoice Date Commence- Completion Receipt of Time of

ment of of service payment supply
service
26 Dec 2017 20 Oct 2017 16 Nov 2017 28 Jan 2018
15 Nov 2017 20 Nov 2017 26 Dec 2017 10 Nov 2017
30 Oct 2017 25 Oct 2017 30 Dec 2017 27 Oct 2017 –
Part payment
4 Dec 2017 –
balance payment
26 Nov 2017 15 Oct 2017 25 Nov 2017 31 Oct 2017 –
advance payment
15 Nov 2017 –
part payment
1 Dec 2017 –
balance payment
Exercise 8:
Invoice Date Date of Receipt of Date of Time of

provision of service in the payment supply
service books of the
recipient
Not issued 20 Oct 2017 26 Oct 2017 No payment

Not issued 15 May 2018 31 Mar 2018 No payment
Valuation of supply under GST:
A. Calculation of Value of supply: When the supplier and the recipient are unrelated
persons and when price is the sole consideration for the supply.
Value of Supply = The Transaction Value
Add: All taxes, duties, fees and charges other than GST
Add: Incidental expenses incurred before / at the time of supply
Add: Interest, late fee or penalty for delayed payment
Add: Subsidy directly linked to supply (except govt. subsidy)
Sub: Discount given before or at the time of supply
90
Case 1:
A Limited, a manufacturer of coconut oil, supplies 20 Kg. of coconut oil at a base price
of Rs. 123 per Kg. to B Limited. Over and above, A Limited incurs a packaging charge
of Rs. 20 per Kg., which is charged to B Limited in the invoice. Buying commission of
1% is directly paid by B Limited to B Limited’s agent for purchasing the said goods.
Calculate the total value of the supply on which GST shall be paid.
Case 2:
In the example in Case 1, assume A Limited supplies the goods to B’s agent on 16 th
May 2017 on credit terms of 1 month beyond which B Limited shall be liable to pay
interest at the rate of 18% p.a. interest on base price of coconut oil and packaging cost.
B Limited pays for the goods with interest on 16 th September 2017 (i.e. three months
delay). Calculate the total value of the supply on which GST shall be paid.
Case 3:
In the example above, assuming that A Limited had given a discount of Rs. 3 per kg
as per pre-agreed terms from the base price, and payment is made within the due date,
what should be the value of the supply?
91
Case 4:
In the above example in Case 1, assuming B Limited pays a selling commission to A

Limited’s agent of 2% of the Base Price to A Limited’s agent on behalf of A Limited
over and above invoice value, what should be the value of the supply?
Case 4:
In the above example in Case 1, assuming that B Limited is offered a subsidy of 5% of

the base price by the Coconut Oil Association, what will be the value of supply in such
a case?
Case 5:
In the above example in Case 1, assuming B Limited makes the payment as per the
credit terms through Paytm and is offered cash back of Rs. 5 per kg by Paytm. What
should be the value of supply in such a case?
92
B. Calculation of Value of supply: Where the consideration is not wholly in money or
supply to an unrelated person:
1) Value of supply shall be the Open Market Value of the supply

2) Where the entire consideration is not in money and where the Open Market
Value of the entire supply is not available, the value shall be the sum of that part
of the consideration that is in money and equivalent amount in money for the
consideration not in money
3) When neither of 1) or 2) cannot be determined, the value shall be the value of
goods or services or both of like kind and quality.
4) If the value cannot be determined by any of the methods as mentioned above,
value shall be 110% of the cost.
5) If value cannot be still determined under any of the above methods, the value
shall be determined using reasonable means
Case 6:
C wants a buy a new phone. His local mobile shop is offering him a deal to purchase
a new phone in exchange of his old phone for a price of Rs. 20,000. Without the
exchange offer, the price of the new phone is Rs. 25,000. If C decides to purchase the
phone, what shall be the value of the supply?
93
Case 7:
C wants to buy a laptop. The shop keeper is willing to offer the laptop at a price of Rs.
40,000 in exchange for the printer manufactured by the same company which has
manufactured the laptop. The fair price of the printer is Rs. 4000. However, the full
price of the laptop is not known. What is the value of the supply?
Place of supply:
Taxable territory definition under the Act:
Section 2(109) “taxable territory” means the territory to which the provisions of this Act
apply
Section 1(2) It extends to the whole of India except the State of Jammu and Kashmir.
The place of supply of goods shall determine the kind of GST to be paid. GST is a dual
structured tax charge by the Central Government and the State Governments. The
Central and the State Government shall charge GST on a common base for every
supply.
The charge shall be determined on the basis of whether the supply is within the state
(Intra-state) or outside the state (Inter-state).
1) When the location of the supplier and the place of supply are in two different
states i.e. in case of an inter-state supply of goods and / or services, the
Integrated Goods and Services Tax (IGST) shall be charged. IGST is a tax levy
by the Central Government.
2) When the location of the supplier and the place of supply are in the same state
i.e. in case of an intra-state supply of goods and / or services, the Central Goods
and Services Tax (CGST) and the State Goods and Services Tax (SGST) shall
be levied by the Central and the State Government respectively.
3) Import of goods and / or services shall be deemed to be inter-state supplies.
94
CGST
Intra-State
SGST
GST
IGST
Inter-State
(CGST+SGST)
CGST SGST IGST
Input CGST Input SGST Input IGST

against – against – against –
• CGST • SGST • IGST CGST SGST
• IGST • IGST • CGST
• SGST
Location of supply and the Place of supply in case of goods:
Location of the supplier: The method to determine the location of the supplier has not
been prescribed under GST
The location of the supplier would ordinarily refer to the site or premise (geographical
point) where the supplier is situated with the goods in his control ready to be supplied
or in other words, it is the physical point where the goods are situated under the control
of the person wherever incorporated or registered, ready to be supplied.
95
Place of supply: The manner of determination of the place of supply of goods has been
detailed below:
1) Where supply involves movement of goods:
a) Where supply of goods involves Place where the movement for

movement of goods delivery of the goods terminates
b) Where supply of goods involves Place where the principle place of
movement and is delivered to a person on business of the third person is located
the instruction of a third person
2) Where supply does not involve movement of goods, place of supply shall be the
place where the goods are located at the time of delivery. This shall also include
deemed supply by the third person to the person to whom the goods were
instructed to be delivered, as mentioned in 1b) above.
3) Where supplies of goods are made by way of installing them or assembling

them at site, place of supply shall be the site where the goods are installed or
assembled.
4) In a case where goods are supplied on board a conveyance, place of supply

shall be the location at which the goods are taken on board.
Exercise 8:
Factory from Termination of Place of supply Tax Levy

where goods are movement of
removed goods
Orissa Assam Assam
Orissa Orissa Orissa
Exercise 9: A supplies goods to B on the instructions of C
Location of Place of Principal Place of Tax Levy

the supplier delivery of place of supply
–A goods - B business of C
Ahmedabad Ahmedabad Amritsar Amritsar

Ahmedabad Amritsar Ahmedabad Ahmedabad
Ahmedabad Bangalore Bangalore Bangalore
Ahmedabad Chandigarh Udaipur Udaipur
96
Exercise 10:
Details Location of Location Location of Place of Tax

supplier of goods/ supply Levy
recipient
Installation
site
Sale of pre- Delhi Bhopal Bhopal
installed DG
Set
Sale of moulds Tamil Nadu Kerela Tamil Nadu
by a job-
worker to the
Principal but
retained at the
job-worker’s
premises
Installation of a Delhi Bhopal Bhopal
weigh bridge
Supply of Karnataka Goa Karnataka
work-stations
Exercise 11:
Details Location of Loading Passenger Place of Tax Levy

supplier of goods boards at supply
Supply of Punjab Punjab Delhi
canned
aerated drinks
on a flight
Sale of Pune Goa Hydrabad
Haldirams
mixtures by their
sales person
during the
journey
Sale of sun- Bangalore Chennai Cochin
glasses on a
ship
97
Location of supply and the Place of supply in case of services:
Location of the supplier: Location of supplier of services has been clearly defined under
the GST Regime.
1) Supply from a registered place of business – Location of the supplier shall be

the location of such business
2) Supply from a place other than a registered place of business – Location of such
other place
3) Supply from two or more places – Location of the supplier shall be the place
more directly concerned with the provision of service
4) If any such place as mentioned above cannot be determined, then the location
of the supplier shall be the usual place of residence of the supplier.
Place of supply of services:
1) If the services directly relate to immovable property i.e. services having

proximity nexus to the immovable property, then the place of supply shall be the
location of the property, if the property is in India and location of the recipient, if
the property is outside India.
2) For restaurant, catering, personal grooming, fitness, beauty treatment, health
service including cosmetic and plastic surgery services, the place of supply shall
be the location where the services are performed.
3) For training and performance appraisal services, if the recipient of services is a
registered recipient, the place of supply shall be the location of the recipient. If
the recipient is not a registered recipient, the place of supply shall be the place
where such services are actually performed
4) For services of admission to a venue, the place of supply shall be the location
of the venue
5) For services of organizing an event - if the recipient of services is a registered
recipient, the place of supply shall be the location of the recipient. If the recipient
is not a registered recipient, the place of supply shall be the location of the venue
6) For services of transportation of goods - if the recipient of services is a
registered recipient, the place of supply shall be the location of the recipient. If
the recipient is not a registered recipient, the place of supply shall be the location
where the goods are handed over for transport. Further, in case of
transportation of goods to a place outside India, place of supply is the place of
destination of such goods
7) For services related to transportation of passengers - if the recipient of services
is a registered recipient, the place of supply shall be the location of the recipient.
If the recipient is not a registered recipient, the place of supply shall be the
location of embarkation
8) For services on board a conveyance, the place of supply shall be the first
scheduled point of departure
98
9) For telecommunication services which involve installation of an in-situ device,
the place of supply shall be the location of such installation
10) For post-paid telecommunication services with respect to portable devices, the
place of supply shall be the billing address of the customer
11) For pre-paid telecommunication services with respect to portable devices, the
place of supply shall be the location of the intermediary who facilitates the
supply or where the payment is received
12) For banking and financial services including stock broking services, the place of
supply shall be the address on record of the recipient. If the address is not
available, then the place of supply shall be the location of the supplier
13) For insurance services, if the recipient of services is a registered recipient, the
place of supply shall be the location of the recipient. If the recipient is not a
registered recipient, the place of supply shall be address on record
14) For services which do not fall in any of the above categories, the place of supply
shall be the location of the recipient, if the recipient is registered or else the
address on record. If the address of the recipient is not available, the place of
supply shall be the location of the supplier.
Exercise 12:
Services Place of supply

An architect from Pune designing a house in Ahmedabad for
a recipient located in Mumbai
Stay in a hotel in Dehradun to a recipient residing in Delhi
Stay in a hotel in Dubai to a recipient residing in Mumbai
Supply of warehouse space

Services of an agent who arranges finance for the purchase
of the property in Hyderabad
A Delhi based legal firm’s general opinion with respect to
capital gains tax liability arising from sale of commercial
property in India to a registered client in Mumbai
99
Input Tax Credit:
Order for utilization of input tax credit:
1) Input tax credit of IGST shall be utilized first against the IGST payable, then
against CGST / SGST
2) Input tax credit of CGST shall be first utilized against CGST payable and
remaining if any, against IGST payable
3) Input tax credit of SGST shall be first utilized against SGST payable and
remaining if any, against IGST payable
Further, the input tax credit of IGST should be entirely exhausted on a priority basis
and only post that, the credit of CGST and SGST can be utilized to set-off the tax
liability.
Calculation of Input tax credit available and its utilization:
Case 1:
Value of intra-state supply of goods = Rs. 1200
Value of intra-state receipt of the goods = 1000
GST Notified Rate on such Goods = 5%
Calculate the input tax credit, the net tax payable and the type of tax to be paid.
Case 2:
Value of intra-state supply of goods = Rs. 800 (GST Rate – 5%) Export of goods = Rs.
400
Value of intra-state receipt of the goods = 1000 (GST Rate – 10%)
100
Case 3:
Value of intra-state receipt of goods = Rs. 1000. (GST Rate – 5%)
Value of intra-state supply of goods = Rs. 600 (50% is sold out of the goods purchased)
(GST Rate – 5%)
Case 4:
A manufacturer procures input goods and services from within the State for Rs. 1000.
SGST & CGST rate on receipts is 6% each.
He manufactures two products out of the inputs.
One product of Rs. 800 is supplied intra-state and is subject to a GST rate of 10%
where as the other product also valued at Rs. 800 was exempt from SGST and CGST
and supplied intra-state.
Case 5:
Value of inter-state supply of services = Rs. 1200
GST Rate on supply of goods = 18%
Value of intra-state receipt of input services = Rs.1000 (GST Rate = 12%)
101
Case 6:
Value of inter-state supply of goods = Rs. 100
Value of supply of goods within State = Rs. 1100
IGST Rate = 18%
Value of intra-state receipt of input goods = Rs.1000 (GST Rate = 12%)
Case 7:
IGST Rate = 18%
102
Case 8:
IGST Rate = 18%
Case 9:
Value of supply of goods exported = Rs. 600
IGST Rate = 18%
103
Case 10:
IGST Rate = 18%
Value of inter-state receipt of input goods = Rs.1000 (GST Rate = 18%)
Case 11:
IGST Rate = 18%
Value of inter-state receipt of input goods = Rs.1000 (GST Rate = 18%)
**************
104
Notes / Rough Work
105
Notes / Rough Work
106

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The material in this volume is for reference during the session.

Kindly bring this volume to the class for each session.

Every stage of business or management practice involves incidence(s) of taxation.

The following are the components of evaluation for the course.

 Class Participation and Attendance 20%

Prof. Savan Godiawala, PhD

1. Printed study material / exercise book prepared for the course

Session 1 Topic: Income Tax: Introduction

Session 2 Topic: Income from House Property

Session 3 Topic: Business Income

Session 4 Topic: Business Income

Session 6 Topic: Capital Gain

Session 7 Topic: Other Sources and Salary

Session 8 Topic: Aggregation and Carry Forward of Losses, and Exemptions

Goods and Service Tax

Session 9 Topic: Goods and Service Tax

Introduction to Income Tax ............................................................ 7

Who all are persons?

Section 2(31) defines a ‘person’ in the following extended sense:

S. Person Tick mark the person under a category

3. SAL Retail Private Limited is engaged in Individual/ Company /partnership

4. Sonar Limited is a company engaged in the Individual/ Company /partnership

5. A group of students organised a musical Individual/ Company /partnership

6. Ahmedabad Municipal Corporation. Individual/ Company /partnership

7. Anita is a widow, supporting herself on the Individual/ Company /partnership

8. Ravi and Deep are partners in running a Individual/ Company /partnership

9. Life Insurance Corporation (LIC) is created Individual/ Company /partnership

10. Indian Institute of Management, Individual/ Company /partnership

S. Date Amount Previous Year Assessment Year

2 March 22, 2016 100

3 June 12, 2016 200

4 August 17, 2017 600

5 November 18, 2018 300

(Amount in Rs. Mn)

Income Previous Year Assessment Year

Previous Year Assessment Year Income in ‘000

Sr. Date of receipt Amt. Rs.’000 Previous Year Assessment Year

1 January 14, 2017 200

2 March 24, 2015 150

3 April 4, 2015 250

4 May 14, 2016 300

5 April 14, 2017 100

6 February 8, 2018 200

Towards giving a treatment to the receipt and deduction of expenditure, Section 14 of

Identify the head of income in the table below.

S. Income Tick mark the appropriate

1. Sunbright Limited is a company engaged in manufacture Salary

2. Moon bank runs a credit card operation. It gives a choice Salary

3. Sapphire Ltd. is a company involved in manufacture of Salary

5. Ashutosh is a lawyer. He is engaged by four companies Salary

6. Tej is a student who received a scholarship from his Salary

S. No. Income Write the head of

2. Professional income of a management consultant

3. Income of a Tea Stall owner from serving tea

4. Commission received from an Employer

5. Scholarship received by a student from an institution

6. Rent received from let-out of apartment

7. Profit on sale of Gold jewellery held as investments

8. Loss incurred in business by a retail store

9. Winning from horse races

10. Prize money won on a television show

(1) agricultural income;

(2A) in the case of a person being a partner of a firm which is separately