Income Tax Book by CA Suraj Agrawal - May & Nov 2020 Exam - Compressed

Assessment
Year 2020-21 CA-INTER 17th Edition
INCOME TAX
PAPER 4
TAXATION
CA SURAJ AGRAWAL SIR

Way to Pinnacle India no #1 CA Institute providing TAXATION classes for CA Inter by CA Suraj Agrawal Sir.
CA Suraj Agrawal is a Commerce Graduate [B.Com (H)] from Kolkata University and has qualified CA in
November 2005 in First Attempt from Kolkata. He has also secured All India 27th Rank in CA-Foundation –
1st level (First Attempt – 70% marks).
Besides CA, he has completed Certification Course of International Taxation of the ICAI in 2009. He has also
qualified CPA (Certified Public Accountant) examination from AICPA (USA) in 2009 with more than 90 Marks
in each of four papers in First Attempt.
He has started his career by joining Direct Tax Department of Reliance Industries Limited, Mumbai and
worked for near 2 years in core tax team. He has also worked in Taxation Division of Chaturvedi & Shah
(Chartered Accountants), Delhi followed by Tax Division of Ernst & Young, Gurgaon, India (A Leading Big 4
Firm having International Presence). During the working tenure of more than 4 years, he is exposed to in-
depth theoretical and practical knowledge of Direct Taxation & has a consultancy exposure in various
industries including Energy - Oil & Gas, Airlines, Retail, Infrastructure and Shipping Industries.
With the above academic and practical knowledge, he is in teaching profession since Year 2010 to serve
professional students (taught 15,000 Students till date). His in-depth coverage of legal provisions in Tax
with practical approach is very well recognized among the students.
CA Suraj Agrawal Sir’s Taxation face to face classes are available in Laxmi Nagar.
CA SURAJ AGRAWAL Taxation pendrive classes and virtual classes are also available for pan India.
“CA Rank Holder, Quali ied CPA (USA), B.Com (H)”
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LAW & AUDIT ACCOUNTS & ADV. ACCOUNTS TAXTATION

CA SUMIT TYAGI SIR CA SURAJ AGRAWAL SIR
THIS BOOK HAS BEEN A REALITY
ONLY BECAUSE OF MY FAMILY &
STUDENTS.
CA SURAJ AGRAWAL
PREFACE
Taxation is a dynamic subject, which is not only a vast subject but also difficult to
comprehend in view of frequent amendments. Yet it is the scoring subject of your
syllabus. In addition, practice in the field of Taxation is also highly remunerative.
My association with the students has helped me to bring this book in its present form –
simplified, comprehensive and easy to understand.
The present edition of this book is designed to bridge the gap between theory &
applications and incorporates the following:
Updated with Finance Act 2019 & Finance (No. 2) Act 2019 (AY 2020-21)
Updated with The Taxation Laws (Amendment) Act, 2019
Covers entire syllabus with theoretical concepts, examples etc
Contains more than 1000 practical problems with solutions
Chapter-wise short notes (separate volume) for revision purpose.
Hope this book serves the purpose of the students. I shall be thankful to the readers for
their suggestions, criticism and feedback if any.
ACKNOWLEDGEMENT
This book is a result of sincere efforts of our family members, colleagues, associates,
well-wishers and students, whose contribution cannot go unacknowledged.
Master Reyaan, my wife CA Monika Agrawal and my mother deserve special mention
for the time (on which they had the first right) they allowed me for this book.
I dedicate this book to my beloved late grandparents & Papa.
CA Suraj Agrawal
Updated as on 29.01.2020 (17th Edition – 3rd Print)
“One more step towards success”

INDEX
S. No. Particulars Page No.
1. Introduction to Income Tax 1.01 – 1.12
1A. Agriculture Income 1A.01 – 1A.08

Practical Questions & Solution 1B .01 – 1B.02
2. Residential Status 2.1 – 2.20

Practical Questions 2A .1 – 2A.6
Solutions 2B.1 – 2B.8
3. Income from House Property 3.1 – 3.24

4. Income under the head “Salary” 4.1 – 4.66

Practical Questions 4A.1 – 4A.18
5 Income from Other Sources 5.01 – 5.14

6 Capital Gain 6.01 – 6.46

7 Deduction under Chapter VIA [80C to 80U] 7.01 – 7.24

8 Depreciation & Capital Gain on Depreciable Assets 8.01 – 8.12

9 PGBP 9.01 – 9.38

10 AOP & Firm [Section 40(ab) & Section 40(b)] 10.01 – 10.10
11 HUF 11.1 – 11.6
12 Clubbing of Income 12.1 – 12.18

Practical Questions 12A.1 –12A.6
13 Set-off, Carry Forward & Set-off of Losses 13.1 – 13.12

14 Return of Income 14.1 – 14.10

15 Advance Tax & Interest u/s 234A, B & C 15.1 – 15.2

16 TDS & TCS 16.01 – 16.22

17 Deduction u/s Section 10AA 17.1 – 17.06
18 Various Exemptions u/s 10 18.1 – 18.02
19 Alternate Minimum Tax 19.1 – 19.02

INTRODUCTION & TAX RATE 1.1
OVERVIEW OF INCOME-TAX LAW IN INDIA

INCOME TAX is the most significant direct tax. The Parliament has been empowered by Entry No. 82
of the Union List of Schedule VII of the Constitution of India to levy tax on all income other than
agriculture income. Various Components of the income-tax law in India are:
INCOME TAX ACT’ 1961

The levy of income-tax in India is governed by the Income-tax Act, 1961 (‘Act”).
This Act came into force on 1st April, 1962.
The Act contains XXIII Chapters divided into 298 Sections and XIV Schedules.
Each Section is further divided into sub-section, clauses and sub-clauses which further clarify
the provisions contained in section with explanations and Proviso.
These undergo change every year with additions and deletions brought about by the Finance Act
passed by Parliament.
In pursuance of the power given by the Income-tax Act, rules have been framed for smooth
administration of the Income-tax Act.
THE FINANCE ACT
Every year, the Finance Minister of the GOI presents the Budget to the Parliament. Part A of the
budget speech contains the proposed policies of the Government in fiscal areas. Part B of the budget
speech contains the detailed tax proposals.
In order to implement the above proposals, the Finance Bill is introduced in the Parliament. Once the
Finance Bill is approved by the Parliament and gets the assent of the President, it becomes the Finance
Act.
INCOME TAX RULES

The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT).
The CBDT is empowered to make rules for carrying out the purposes of the Act. These rules are
collectively called Income-tax Rules, 1962.
CIRCULAR & NOTIFICATIONS

Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify
doubts regarding the scope and meaning of the provisions. These circulars are issued for the guidance
of the officers and/or assessees. The department is bound by the circulars. While such circulars
are not binding on the assessees they can take advantage of beneficial circulars.
CASE LAWS
The study of case laws is an important and unavoidable part of the study of income-tax law. The
Supreme Court is the Apex Court of the country and the law laid down by the Supreme Court is
the law of the land.
LEVY OF INCOME-TAX
Income-tax is a tax levied on the Total Income of the previous year of every person.
CA Suraj Agrawal
COMPUTATION OF INCOME FOR AN ASSESSMENT YEAR
` `
1. Income from salaries [Section 15 – 17] ....
Income from salary ....
Income by way of allowances ....
Taxable value of perquisites ....
Gross salary ....
Less: Deduction under section 16 ....
Statutory Deduction @ ` 50,000 (For AY 2020-21) ....
Entertainment allowance ....
Professional tax ....
Income from salaries ....
2. Income from house property [Section 22 – 27] ....
Adjusted Net Annual Value ....
Less: Deduction under section 24 ....
Income from house property ....
3. Profits and gains of business or profession [Section 28 – 44DB] ....
Net profit as per profit and loss account ....
Add: Amounts which are debited to P & L a/c but are not allowable as ....
deduction under the Act
Less: Expenditure which are not debited to P & L a/c but are allowable ....
as deduction under the Act
Less: Income which are credited to P & L a/c but are exempt under ....
section 10 or are taxable under other heads of income
Add: Those income which are not credited to P & L a/c but are taxable ....
under the head "Profits and gains of business or profession"
Profits and gains of business or profession ....
4. Capital gains [Section 45 – 55A] ....
Amount of capital gains .....
...
Less: Amount exempt under sections 54, 54B, 54D, 54EC, 54F, 54G, ....
54GA, 54GB or 54H
Income from capital gains ....
5. Income from other sources [Section 56 – 59] ....
Gross income ....
Less: Deductions under section 57 ....
Income from other sources ....
GROSS TOTAL [(1) + (2) + (3) + (4) + (5)] ....
Add: Clubbing of Income [Loss] [Section 60 – 69D]
Less: Adjustment on account of set-off and carry forward of losses
[Section 70 – 80]
GROSS TOTAL INCOME
Less: Deductions under sections 80C to 80U [Chapter VIA]
Total Income or Net Income or Taxable Income
CA Suraj Agrawal
COMPUTATION OF TAX LIABILITY
Tax on Net Income [As per applicable Rates]
Less: Rebate u/s 87A
Total
Add: Surcharge, if applicable
Tax and surcharge
Add: Health and Education cess – 4%
Total Tax (After Surcharge & Cess)
Less: Relief under section 89 (Salary Chapter)
Tax after Relief
Less: Pre-paid taxes
TDS [Tax Deducted at Source] [Section 190 – 206AA] or TCS
Advance Tax [Section 207 – 219]
Self-Assessment Paid u/s 140A
NET TAX LIABILITY
CA Suraj Agrawal
Discuss the significance of Heads of Income [Section 14]
1. Significance of Heads of income:
(a) Income chargeable under a particular head cannot be charged under any other head.
(b) The Act has self contained provisions in respect of each head of income.
(c) If any income is charged under a wrong head of income, the assessee will lose the benefit of
deduction available to him under that head.
2. Relevance of method of accounting for heads of income:

Heads of Income Relevance of Method of Accounting
Chapter IV-A (a) Taxable on due basis or on receipt basis, whichever is earlier.
Salaries (b) The Method of accounting is not relevant.
[Section 15 -17]
Chapter IV-C (a) Income from house property is taxable only on accrual basis.
House Property (b) The Method of accounting is not relevant.
[Section 22 - 27]
Chapter IV-D The assessee may follow either Cash or Mercantile system of
Business Income accounting
[Section 28 - 44DB]
Chapter IV-E a. Income from Capital Gains shall be taxable during the previous
year in which the Capital Asset is transferred.
Capital Gains
b. The method of accounting is not relevant.
[Section 45 - 55A]
Chapter IV-F The assessee may follow either Cash or Mercantile system of
accounting
Other Sources
[Section 56 - 59)
Section 4 - Charge of income-tax
1. Where any Central Act enacts that income-tax shall be charged for any assessment year at
any rate or rates, income-tax at that rate or those rates shall be charged for that year in
accordance with, and subject to the provisions (including provisions for the levy of
additional income-tax) of, this Act in respect of the total income of the previous year of
every person:
Provided that where by virtue of any provision of this Act income-tax is to be charged in
respect of the income of a period other than the previous year, income-tax shall be charged
accordingly.
2. In respect of income chargeable under sub-section (1), income-tax shall be deducted at the
source or paid in advance, where it is so deductible or payable under any provision of this
Act.
CA Suraj Agrawal
MEANING OF ASSESSMENT YEAR AND PREVIOUS YEAR
Assessment year [Section 2(9)]
“This means a period of 12 months commencing on 1st April every year”. The year in which
tax is paid is called the assessment year while the year in respect of the income of which the tax is
levied is called the previous year. For example, for the AY 2020-21, the relevant PY is 2019-20
(1.4.2019 to 31.3.2020).
Previous year [Section 3]

It means the financial year immediately preceding the assessment year. The income earned during
the previous year is taxed in the assessment year.
Business or profession newly set up during the financial year - In such a case, the previous
year shall be the period beginning on the date of setting up of the business or profession and
ending with 31st March of the said financial year.
Newly Source of Income: If a source of income comes into existence in the said financial year,
then the previous year will commence from the date on which the source of income newly comes
into existence and will end with 31st March of the financial year.
CERTAIN CASES WHEN INCOME OF A PREVIOUS YEAR WILL BE ASSESSED IN THE

PREVIOUS YEAR ITSELF – EXCEPTION TO SECTION 4 – 5 Marks
The income of an assessee for a previous year is charged to income-tax in the assessment year
following the previous year. However, in a few cases, this rule does not apply and the income is taxed
in the previous year in which it is earned. The exceptions are as follows:
(1) Income of a Non resident from Shipping Business;
(2) Income of persons Leaving India either permanently or for a long period of time;
(3) Income of bodies formed for short duration;
(4) Income of a person trying to alienate his assets with a view to avoiding payment of tax and
(5) Income of a discontinued Business
CA Suraj Agrawal
PERSON [Section 2(31)] – 4 Marks
Section 2(31) - The definition is inclusive i.e. a person includes,

(A) An Individual
(B) A Hindu Undivided family [HUF]
(C) A Company
(D) A Firm (including LLP)
(E) An AOP or a BOI, whether incorporated or not
(F) A local authority
(G) Every artificial juridical person, not covered above, but which are separate entities in the eye of
law
DOMESTIC COMPANY [Section 2(22A)]

Domestic Company means an Indian company or any other company which, in respect of its income liable to
income-tax, has made the prescribed arrangements for the declaration and payment of dividends (including
dividends on preference shares) within India, payable out of such income.
As per Rule 27, the prescribed arrangements are:
(a) The share register of the company for all its shareholders must be kept and maintained at its principle
place of business in India.
(b) The general meeting for passing of the accounts for the PY and declarations of dividends shall be held at
any place within India
(c) Dividends declared in India shall be payable within India.
INDIAN COMPANY [Section 2(26)]:
Two conditions should be satisfied so that a company can be regarded as an Indian company:
(a) the company should have been formed and registered under any law relating to companies which was or
is in force in any part of India, and
(b) the registered office or the principal office of the company should be in India.
FOREIGN COMPANY [SECTION 2(23A)]:
Foreign company means a company which is not a domestic company.
Definition of “Assessee” – 4 Marks
As per Section 2(7), “assessee” means a person by whom any tax or any other sum of money is payable
under the Income-tax Act, 1961. In addition, the term includes –
Every person in respect of whom any proceeding under the Income-tax Act, 1961 has been taken for the
assessment of –
his income; or
the income of any other person in respect of which he is assessable; or
the loss sustained by him or by such other person; or
the amount of refund due to him or to such other person.
Every person who is deemed to be an assessee under any provision of the Income-tax Act, 1961;
Every person who is deemed to be an assessee-in-default under any provision of the Income-tax Act,
1961.
CA Suraj Agrawal
APPLICABLE RATE OF TAX – AY 2020-21

(A) Individuals [except (B) & (C)], HUF, AOP’s & BOI’s & every Artificial Juridical Person:
TOTAL INCOME AMOUNT OF TAX
Up to ` 2,50,000 NIL
On next ` 2,50,001 - 500,000 5%
On next ` 5,00,001 – 10,00,000 20%
On the balance amount [Above ` 10,00,000] 30%
(B) For a Resident individual, being a Sr. Citizen, Age ≥ 60 yrs (but less than 80 years)
at any time during the PY.
Up to ` 3,00,000 NIL
On next ` 300,001 - ` 500,000 5%
On next ` 500,001 - ` 10,00,000 20%
On the balance amount [Above ` 10,00,000] 30%
(C) For a resident individual, being a Very Sr. Citizen, Age ≥ 80 yrs:
Up to ` 5,00,000 NIL
On next ` 500,001 – ` 10,00,000 20%
On the balance amount ` 10,00,001 & above 30%
Surcharge on Individual / HUF / AOP / BOI / Artificial Juridical Person

Total Income Surcharge Rate
Total Income (including the income under the provisions of Section 10% of income-tax
111A & 112A)** exceeds ` 50 Lakhs but not exceeding ` 1 crores
111A & 112A) exceeds ` 1 crores but not exceeding ` 2 crores
Or Total Income (including the income under the provisions of

Section 111A & 112A) exceeds ` 2 crores but not covered below
Total Income* (excluding the income under the provisions of Section 25% of income-tax
111A & 112A)** exceeds ` 2 crores but not exceeding `5 crores
***(15% of income
tax related to
Income covered
u/s 111A & 112A)
111A & 112A)** exceeds ` 5 crores
***above applicable
* Inserted by Finance (No. 2) Act 2019 for FY 2019-20
** Inserted by the Taxation Laws (Amendment) Act, 2019, w.r.e.f 01/04/2019
Health and Education Cess
From AY 19-20, in all above cases, Income Tax (including surcharge, if any) shall be further
increased by Health and Education Cess @ 4% (Amended by Finance Act 2018)
CA Suraj Agrawal
Clarification regarding attaining prescribed age of 60 years/80 years on 31st March itself, in case
of senior/very senior citizens whose date of birth falls on 1st April [Circular No. 28/2016, dated
27-07-2016]
An individual who is resident in India and of the age of 60 years or more (senior citizen) and 80 years or
more (very senior citizen) is eligible for a higher basic exemption limit of ` 3,00,000 and ` 5,00,000,
respectively.
The CBDT has, vide this Circular, clarified that a person born on 1st April would be considered to have
attained a particular age on 31st March, the day preceding the anniversary of his birthday. In particular,
the question of attainment of age of eligibility for being considered a senior/very senior citizen would be
decided on the basis of above criteria.
Therefore, a resident individual whose 60th birthday falls on 1st April, 2020, would be treated as having
attained the age of 60 years in the P.Y. 2019-20, and would be eligible for higher basic exemption limit
of ` 3 lakh in computing his tax liability for A.Y. 2020-21.
Likewise, a resident individual whose 80th birthday falls on 1st April, 2020, would be treated as having
attained the age of 80 years in the P.Y. 2019-20, and would be eligible for higher basic exemption limit
of ` 5 lakh in computing his tax liability for A.Y. 2020-21.
CA Suraj Agrawal
CONCEPT OF MARGINAL RELIEF – Applicable in case of all assessee
The additional amount of Income tax payable with surcharge in excess of income over
` 1 Crore should not be more than the amount in excess of ` 1 Crore.
Calculation of Marginal Relief:
Marginal Relief = Tax on Total Income including Surcharge

Less: (Total Income - ` 1 Crore) + (Tax on ` 1 Crore including
surcharge if applicable)
Tax Payable = Tax on Total Income including Surcharge

Less: Marginal Relief as computed above
Add: H&EC
Note: Marginal Relief is available at all levels – ` 50 Lakhs / ` 1 Crores / ` 2 Crores / ` 5 Crores /
` 10 Crores
Rounding-off of Income [Section 288A]:

The Total Income computed under this Act, shall be rounded off to the nearest multiple of ` 10.
Rounding-off of Tax [Section 288B]:

The amount of tax including Tax Deducted at Source (TDS) and advance tax, interest, penalty, fine or
any other sum payable, and the amount of refund due under the Income Tax Act, shall be rounded off
to the nearest multiple of ` 10.
Rebate of ` 12,500 for resident individuals having total income up to

` 5 lakh [Sec. 87A] – FOR AY 2020-21
As amended by Finance Act 2019
With a view to providing tax relief to the individual taxpayers who are in lower income bracket, a rebate is provided
for under section 87A.
Conditions - This rebate will be available if the following two conditions are satisfied -
a) Taxpayer is a Resident Individual (he may be ordinarily resident or not ordinarily resident).
b) His total income or net income or taxable income (Le., GTI minus deduction under sections 80C
to 80U) is ` 3,50,000 ` 5,00,000 or less
Amount of Rebate: If the above two conditions are satisfied, the resident individual can claim rebate under
section 87A. The amount of rebate is 100 per cent of income-tax payable on total income or ` 12,500 ` 2,500,
whichever is less. This rebate will be available from income-tax (before adding Health & Education Cess).
CA Suraj Agrawal
In case of other category of Persons: AY 20-21
OTHERS AMOUNT OF TAX SURCHARGE

FIRM & LLP @30% @ 12% of Tax Payable if TOTAL
INCOME > ` 1 Crore
Local Authority @30% @ 12 % of Tax Payable if TOTAL
INCOME > ` 1 Crore
Co-operative On first ` 10,000 @10% @ 12 % of Tax Payable if TOTAL
Societies On next ` 10,000 @20% INCOME > ` 1 Crore
For the Balance @30%
Companies Domestic Co.: @30% @ 7 % of Tax Payable if TOTAL

(If Total Turnover / Gross INCOME > ` 1 Crore
receipts during PY 17-18
PY 16-17 does not exceeds @ 12 % of Tax Payable if TOTAL
` 400 Crore ` 250 Cr then Tax INCOME > ` 10 Crore
rate is 25%)
Foreign Co.: @40% @ 2 % of Tax Payable if TOTAL

INCOME > ` 1 Crore
@ 5 % of Tax Payable if TOTAL

INCOME > ` 10 Crore
From AY 19-20, in all above cases, Income Tax (including surcharge, if any) shall be further
increased by Health and Education Cess @ 4% (Amended by Finance Act 2018)
Note: New tax rates related to company are given in Section 115BA (25%), 115BAA (22%) &
115BAB (15%). Section 115BAA & Section 115BAB are inserted by the Taxation Laws
(Amendment) Act, 2019.
The above rates are prescribed by the annual Finance Acts. However, in respect of
certain types of income, as mentioned below, the Act has prescribed specific rates –
Section Income Income—tax

111A STCGs on Transfer of Listed Securities (being equity shares) etc and subject 15%
to Securities Transaction Tax (STT)
112 Long Term Capital Gain [Other than LTCG Taxable u/s 112A] 20%
112A Long Term Capital Gain from sale of equity shares etc. (STT paid) 10%
115BB Income in respect of winnings from lotteries, cross word puzzles, races and 30%
horse races, card games, gambling or betting - all assesses.
[Causal Income]
Note: Tax rates given above are subject to Surcharge (if applicable) and Health & Education Cess.
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CLASS NOTES
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CLASS NOTES
CA Suraj Agrawal
AGRI INCOME 1A.1
AGRICULTURAL INCOME
AGRICULTURE INCOME - Exempt u/s Section 10(1)
Section 10(1) provides that agricultural income is not to be included in the total income of the
assessee.
CONCEPT OF TAXATION OF THE AGRICULTURE INCOME

Agriculture Income is totally exempt under the Act, but shall be included in the total income in case
of certain assessee for the purpose of determining the rate of tax on the non-agriculture income
known as partial integration of taxes. It is applicable to Individuals, HUF, AOP, BOI and
Artificial Juridical Persons.
Two conditions which need to satisfied for partial integration are:
1. The Net Agricultural Income should exceed ` 5,000 p.a., AND
2. Non-Agricultural Income should exceed the maximum amount not chargeable to tax.
(i.e. ` 500,000 for Very Senior Citizen, ` 3,00,000 for Senior Citizens, ` 2,50,000 for all other
individuals.)
It may be noted that aggregation provisions do not apply to company, firm, co-operative society and
local authority. The object of aggregating the net agricultural income with non-agricultural income is to
tax the non-agricultural income at higher rates.
Tax calculation in such cases is as follows:

Step 1: Add non-agricultural income with net agricultural income. Compute tax on the aggregate
amount.
Step 2: Add net agricultural income and the maximum exemption limit available to the assessee
(i.e. ` 2,50,000 / ` 3,00,000 / ` 500,000). Compute tax on the aggregate amount.
Step 3: Deduct the amount of income tax calculated in step 2 from the income tax calculated in step 1
i.e. Step 1 – Step 2.
Step 4: The sum so arrived at shall be increased by Health & Education Cess @4%. [Deduct
Rebate u/s 87A before cess if applicable]
[Note: In case TOTAL INCOME excluding LTCG/STCG(111A)/Casual Income does not

exceeds the maximum exemption limit, partial integration of tax will not be applicable.
Example:
Mr. X, a resident, has provided the following particulars of his income for the P.Y. 2019-20
i. Income from PGBP - ` 2,80,000
ii. Income from house property - ` 5,00,000
iii. Agricultural Income - ` 1,90,000
iv. Expenses incurred for earning above agricultural income - ` 1,20,000
Compute his tax liability assuming his age is 45 years.
CA Suraj Agrawal
AGRI INCOME 1A.2
Solution:
Computation of total income of Mr. X for the A.Y. 2020-21
Particulars Amount (`)
Income from PGBP 2,80,000
Income from house property 5,00,000
Net agricultural income [` 1,90,000 – ` 1,20,000] 70,000
Less: Exempt under section 10(1) (70,000) NIL .
Gross Total Income 7,80,000
Less: Deductions under Chapter VI-A -
Total Income 7,80,000
(a) Computation of tax liability (age 45 years)
For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions:
1. Net agricultural income exceeds ` 5,000 p.a., and
2. Non agricultural income exceeds the basic exemption limit of ` 2,50,000.
His tax liability is computed in the following manner:

Step 1: ` 7,80,000 + ` 70,000 = ` 8,50,000.
Tax on ` 8,50,000 = ` 82,500
Step 2: ` 70,000 + ` 2,50,000 = ` 3,20,000.

Tax on ` 3,20,000 = ` 3,500 (i.e. 5% of ` 70,000)
Step 3 : ` 82,500 – ` 3,500 = ` 79,000.
Step 4 : Total tax payable = ` 79,000 + 4% of ` 79,000

= ` 82,160.
CA Suraj Agrawal
AGRI INCOME 1A.3
DEFINITION OF AGRICULTURAL INCOME [Section 2(1A)]
Agricultural income may arise in any one of the following three ways:-
(1) It may be Rent or Revenue derived from land situated in India and used for agricultural
purposes.
(2) It may be income derived from such land
a. through agriculture or
b. through the performance of a process ordinarily employed by a cultivator or receiver of rent
in kind to render the produce fit to be taken to the market or
c. through the sale of such agricultural produce in the market.
(3) It may be derived from any Farm Building required for agricultural operations
Further, Income derived from saplings or seedlings grown in a nursery would be deemed to be
agricultural income, whether or not the basic operations were carried out on land.
SOME IMPORTANT ASPECTS
1. “AGRICULTURE” and “AGRICULTURE PURPOSES”:
(a) “Agriculture” means tilling of the land, sowing of the seeds and similar operations. These are
basic operations and require the expenditure of human skill and labour on land itself.
(b) Operations to be performed after the produce sprouts from the land (e.g., weeding, digging etc.)
are subsequent operations. These subsequent operations would be agricultural
operations only when taken in conjunction with and as a continuation of the basic
operations.
(c) However, the term ‘agriculture’ cannot be extended to all activities which have some distant
relation to land like dairy farming, breeding and rearing of live stock, butter and cheese making
and poultry farming.
(d) Income derived from cultivation is agricultural income. Even when income derived is rental
income, it should be in the nature of rent for the use of such land for agricultural purposes.
(e) Assessee growing mulberry leaves, feeding them to silk worms and obtaining silk
cocoons; will not result in agricultural income. Section 2(1A), which defines the term
agricultural income, does not contemplate sale of commodity different from what is for market
and not to bring about an altogether new commodity. Income attributable to growing
mulberry leaves alone shall be treated as agricultural income.
2. GAIN ARISING ON TRANSFER OF URBAN AGRICULTURE LAND:

The capital gains arising from the transfer of such urban agricultural land would not be treated as
agricultural income under section 10 but will be taxable under section 45.
CA Suraj Agrawal
AGRI INCOME 1A.4
INCOME WHICH IS NOT REGARDED AS AGRICULLTURAL INCOME
1. Income from butter and cheese making 6. Income from fisheries, poultry farming, dairy
farming and animal husbandry.
2. Commission as a percentage of Agriculture
Income: 7. Income from supply of water for irrigation
purposes is not an agriculture income.
3. Dividend from a company engaged in
Agriculture Activity 8. Income from Brick Making
4. Income from sale of forest trees of

spontaneous growth. 9. Income from land used for storing agriculture
produce
5. Royalties Income of mines.
CA Suraj Agrawal
AGRI INCOME 1A.5
INCOME FROM COMPOSITE ACTIVITY OF AGRICULTURE AND BUSINESS
Where the agricultural produce like tea, cotton, tobacco, sugarcane etc. are subjected to a
manufacturing process and the manufactured product is sold, the profit on such sales will consist of
agricultural income as well as business income. That portion of the profit representing agricultural
income will be exempted. For this purpose, Rules 7, 7A, 7B & 8 of Income-tax Rules, 1962 provides
the basis of apportionment.
Amount of Non-agricultural
Nature of Income Agricultural Income i.e.
Income business income
1. Income from sale of TEA Grown and
Manufactured by the assessee in India
60% 40%
2. Income from RUBBER plants Grown by the seller
in India
65% 35%
3. Income derived from the sale of COFFEE Grown
and Cured by the seller in India
75% 25%
4. Income derived from the sale of COFFEE Grown,
Cured, Roasted and Grounded by the seller in 60% 40%
India
Rule 7 - Agricultural produce other than Tea, rubber etc. used as Raw
Material in a Manufacturing Concern
Where income is partially agricultural income and partially income chargeable to income-tax under the
head ‘profits and gains of business’, the market value of any agricultural produce which has been
raised by the assessee or received by him as rent in kind and which has been utilised as raw material in
such business or the sale receipts of which are included in the accounts of the business shall be
deducted. No further deduction shall be made in respect of any expenditure incurred by the
assessee as a cultivator or receiver of rent in kind.
Question:
Mr. B grows sugarcane and uses the same for the purpose of manufacturing sugar in his factory.
30% of sugarcane produce is sold for `10 lacs, and the cost of cultivation of such sugarcane is ` 5
lacs. The cost of cultivation of the balance sugarcane (70%) is ` 14 lacs and the market value of the
same is `22 lacs. After incurring ` 1.5 lacs in the manufacturing process on the balance sugarcane,
the sugar was sold for ` 25 lacs. Compute B’s business income and agricultural income.
CA Suraj Agrawal
AGRI INCOME 1A.6
Rule: 7A – Income from the Growing & Manufacturing of Rubber in India
This rule is applicable when income derived from the sale of latex or cenex or latex based crepes or
brown crepes manufactured from field latex or coagulum obtained from rubber plants grown
by the seller in India.
Income derived from the sale of rubber obtained from rubber plants grown in India shall be
computed as under:
Step: 1 – Compute the income u/h. PGBP after allowing deduction u/s. 33AB
Step: 2 – Computation of agriculture and non-agriculture income in the following manner:
35% of such income is liable to tax
65% (balance) of such income is exempt from tax
Illustration:
Mr. C manufactures latex from the rubber plants grown by him in India. These are then sold
in the market for `30 lacs. The cost of growing rubber plants is ` 10 lacs and that of
manufacturing latex is ` 8 lacs. Compute his total income.
Solution
The total income of Mr. C comprises of agricultural income and business income. Total profits from
the sale of latex = ` 30 lacs – ` 10 lacs – ` 8 lacs. = ` 12 lacs.
Agricultural income = 65% of ` 12 lacs. = ` 7.8 lacs
Business income = 35% of ` 12 lacs. = ` 4.2 lacs
Rule: 7B – Income from the Growing & Manufacturing of Coffee in India

Income derived from the sale of COFFEE GROWN AND CURED in India shall be computed as
under:
Step: 1 – Compute the income under head PGBP after allowing deduction under section 33AB
Step: 2 – Computation of agriculture and non-agriculture income in the following manner:
Income derived from the sale of COFFEE GROWN, CURED, ROASTED AND GROUNDED in
India shall be computed as under:
Step: 1 – Computer the income under head PGBP after allowing deduction under section 33AB
Step: 2 – Computation of agriculture and non-agriculture income in the following manners:
Rule: 8 – Income from the Growing & Manufacturing of Tea in India

This rule applies only in cases where the assessee himself grows tea leaves and manufactures tea in
India. Income derived from the sale of tea grown and manufactured in India shall computed as
under
Step: 1 – Compute the income under head PGBP after allowing deduction under section 33AB
Step: 2 – Computation of agriculture and non-agriculture income in the following manners:
40% of such income is liable to tax as business income under the head “PGBP”
60% (balance) of such income is exempt from tax.
CA Suraj Agrawal
AGRI INCOME 1A.7
Class Notes
CA Suraj Agrawal
AGRI INCOME 1A.8
Class Notes
CA Suraj Agrawal
AGRI INCOME 1B.1
Practical Questions
1) Coimbatore Cotton Mills is engaged in the business of growing cotton and manufacturing thread.
For the financial year 2019-20, the company manufactured 5000 spools of thread and sold them
for a value of ` 60,00,000/-. They used 2000 bales of cotton grown by them. The market price per
bale of cotton is ` 1,500/-. Cultivation expenses incurred for producing 2000 bales of cotton was
` 38,00,000/-. Determine the business income chargeable to tax for AY 2020-21.
2) Mr. Raman derived income of ` 10,00,000/- from the activity of sale of coffee grown and cured by
him for the year ended 31.03.2020. Compute the tax liability for the AY 2020-21.
3) In Question No. 2, in case Mr. Raman is engaged in roasting and grounding of coffee apart from
growing and curing what will be the tax liability for the AY 2020-21.
4) Hind Latex Ltd. derived an income of ` 12 crores from sale of centrifuged latex for the year ending
31.03.2020, Compute the taxable income of the assessee for the AY 2020-21.
5) Mr. Tony had estates in Rubber, Tea and Coffee. He derives income from them. He has also a nursery
wherein he grows plants and sells. For the previous year ending 31-3-2020, he furnishes the following
particulars of his sources of income from estates and sale of plants (all amounts in `) -
(a) Manufacture of Rubber 500000

(b) Manufacture of Coffee grown and cured 350000
(c) Manufacture of Tea 700000
(d)Sale of plants from nursery 100000
You are requested to compute the taxable income for the AY 2020-21
6) Miss Vivitha, a resident and ordinarily resident in India, has derived the following income from
various operations (relating to plantations and estates owned by her) during the year ended 31-3-
2020 (amounts in `) :
(i) Income from sale of centrifuged latex processed from rubber plants grown in Darjeeling. 3,00,000
(ii) Income from sale of coffee grown and cured in Tamil Nadu. 1,00,000
(iii) Income from sale of coffee grown, cured, roasted and grounded, in Colombo.
(Sale consideration was received at Chennai.) 2,50,000
(iv) Income from sale of tea grown and manufactured in Simla. 4,00,000
(v) Income from sapling and seedling grown in a nursery at Cochin. 80,000
(Basic operations were not carried out by her on land)
You are required to compute the business income and agricultural income of Miss Vivitha for the
AY 2020-21.
CA Suraj Agrawal
AGRI INCOME 1B.2
SOLUTION
Answer 5:
Computation of taxable income of Tony for the Assessment Year 2020-21
Business Agricultural
income (`) income (`)
Income from growing and manufacturing rubber (Rule 7A) -35% : 65% 175,000 325,000
Income from growing and curing coffee (Rule 7B) -25% : 75% 87,500 262,500
Income from growing and manufacturing tea (Rule 8) - 40% : 60% 280,000 420,000
Sale of plants from nursery (It is an agricultural income) 0 100,000
TOTAL 542,500 1,107,500
Hence, total income of Mr. Tony = ` 5,42,500.
Answer 6:
Computation of taxable income of Miss Vivitha (amounts in `)
Particulars Business Agricultural

income income
Income from growing & manufacturing rubber in India (Rule 7A)-35% : 65% 105,000 195,000
Income from growing and curing coffee in India (Rule 7B) -25% :75% 25,000 75,000
Income from growing/curing/roasting etc. coffee out of India in Columbo 250,000 0
(Sri Lanka) - Since the operations have taken place outside India, hence, no
part of such income can be regarded as agricultural income (Rule 7B will not
apply). Since Miss Vivitha is resident in India, hence, this income will be taxed
in India.
Income from growing and manufacturing tea in India (Rule 8) - 40% : 60% 160,000 240,000
Sale of plants from nursery (It is deemed agricultural income even if no 0 80,000
basic operations have been carried out as per explanation)
TOTAL (Amount in `) 540,000 590,000
Always discuss about the Rule 7A, 7B & 8 regarding nature of business and percentage in working note.
Solution of Illustration:
Income from sale of sugarcane gives rise to agricultural income and from sale of sugar gives rise to
business income.
Business income = Sales – Market value of 70% of sugarcane produce – Manufacturing
expenses
= ` 25 lacs – ` 22 lacs - ` 1.5 lacs
= ` 1.5 lacs.
Agricultural income = Market value of sugarcane produce – Cost of cultivation

= [` 10 lacs + ` 22 lacs] – [` 5 lacs + ` 14 lacs]
= ` 32 lacs – ` 19 lacs = ` 13 lacs.
CA Suraj Agrawal
Residential Status 2.1
RESIDENTIAL STATUS [Section 6]

IMPORTANCE OF RESIDENTIAL STATUS
1. The incidence of tax on any assessee depends upon his Residential Status.
2. If any receipt is chargeable to tax, it has to be seen whether the assessee is liable to tax in respect
of that income or not considering his Residential Status.
3. The taxability of a particular receipt would thus depend upon not only the nature (Capital or
Revenue) of the income and the place of its accrual or receipt but also upon the assessee’s
residential status.
Broad Category of Tax-Payers
Taxpayers are classified into three broad categories on the basis of their residential
status:
1. Resident and Ordinarily Resident [“ROR”]
2. Resident but Not Ordinarily Resident [“RNOR”]
3. Non-Resident [“NR”]
RESIDENTIAL STATUS
Individual & HUF Others
Resident Non Resident Resident Non Resident
Ordinarily Not Ordinarily

Resident Resident
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
Important Concept
1. Year-wise Status: Residential Status is always determined for the previous year because we
have to determine the Total Income of the previous year only.
2. Continuity not required: It is not necessary that he stay should be for a continuous period or at
any one place in India.
3. India includes its territorial waters and therefore Presence in territorial waters of India would
also be regarded as presence in India. [upto 12 Nautical Miles from Sea-base]
4. For the purpose of counting the number of days stayed in India, both the date of departure as
well as the date of arrival are considered to be in India.
5. Resident of many countries: A person may be resident of more than one country for any
previous year.
6. Citizenship Vs Residential Status:

Citizenship of a country and Residential Status of that country are separate concepts. The
residence of an individual for income-tax purpose has nothing to do with citizenship, place of
birth or domicile. A person may be an Indian National / Citizen, but he may not be a Resident of
India and vice-versa.
RESIDENTIAL STATUS OF AN INDIVIDUAL [Section 6(1)]
Under section 6(1), an individual is said to be Resident in India in any previous year, if he satisfies
any one of the following BASIC conditions:
1. He has been in India during the previous year for a total period of 182 days or more,
OR
2. He has been in India during the 4 years immediately preceding the previous year for a total
period of 365 days or more AND has been in India for at least 60 days in the relevant PY.
NOTE: IF BOTH THE ABOVE CONDITIONS ARE NOT SATISFIED, THE INDIVIDUAL IS A
NON-RESIDENT.
Exceptions:
The following categories of individuals will be treated as Residents only if the period of their stay
during the relevant previous year amounts to 182 days or more.
[In other words even if such persons were in India for 365 days during the 4 preceding years and 60
days in the relevant previous year, they will not be treated as resident.]
1. Indian Citizen who leaves India as a member of the crew of an Indian ship,
2. Indian Citizen who leaves India for the purpose of employment outside India OR
3. Indian Citizen or Person of Indian origin engaged outside India coming on a visit to India.
Note: A person is said to be of Indian origin if he or either of his parents or either of his
grandparents were born in undivided India.
CA Suraj Agrawal
Period of stay of Crew Member (Indian Citizen) of Foreign Bound Ship
Finance Act 2015
“In case of an Individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India,
the period or periods of stay in India shall, in respect of such voyage, be determined in the prescribed manner and
subject to the prescribed conditions”
Rules notified are as follows

For the purposes of Section 6(1), in case of an individual, being a citizen of India and a member of the crew of a
ship, the period or periods of stay in India shall, in respect of an eligible voyage, not include the period
beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the
said individual and ending on the date entered into the Continuous Discharge Certificate in respect of
signing off by that individual from the ship.
"Eligible voyage" shall mean a voyage undertaken by a ship engaged in the carriage of passengers or freight in
international traffic where
i. For the voyage having originated from any port in India, has as its destination any port outside India; and
ii. For the voyage having originated from any port outside India, has as its destination any port in India.'
Question
Mr. Anand is an Indian Citizen and a member of the crew of a Singapore bound Indian Ship engaged in
carriage of passengers in international traffic departing from Chennai Port on 6th June, 2019. From the
following details for the PY 2019-20, determine the residential status of Mr. Anand for A.Y. 2020-21,
assuming that his stay in India in the last 4 previous years (preceding P.Y. 2019-20) is 400 days and last
seven previous years (preceding P.Y. 2019-20) is 750 days:
Particulars Date
th
Date entered into the Continuous Discharge Certificate in respect of 6 June, 2019
Joining the ship by Mr. Anand
th
Date entered into the Continuous Discharge Certificate in respect of 9 December, 2019
Signing off the ship by Mr. Anand
Answer
As per Section 6, an individual is treated as resident if he has stayed for 182 days in India during the previous
year or if he has stayed for 60 days in the current previous year and 365 days in total during the four preceding
previous years. However, where an Indian citizen leaves India as a member of crew of an Indian ship or for the
purpose of employment outside India, he will be resident only if he stayed for atleast 182 days during the previous
year.
Further, For the purposes of Section 6(1), in case of an individual, being a citizen of India and a member of the
crew of a ship, the period or periods of stay in India shall, in respect of an eligible voyage, not include the period
beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the
said individual and ending on the date entered into the Continuous Discharge Certificate in respect of
signing off by that individual from the ship
In this case, the voyage is undertaken by an Indian ship engaged in the carriage of passengers in international
traffic at a port outside India (i.e., the Singapore port). Hence, the voyage is an eligible voyage for the purposes of
th th
Section 6(1). Therefore, the period beginning from 6 June, 2019 and ending on 9 December, 2019, being the
dates entered into the Continuous Discharge Certificate in respect of joining the ship and signing off from the ship
by Mr. Anand , an Indian citizen who is a member of the crew of the crew of the ship, has to be excluded for
computing the period of his stay in India. Accordingly, 187 days [25+31+31+30+31+30+9] have to be excluded
from the period of his stay in India. Consequently, Mr. Anand’s period of stay in India during the P.Y. 2019-20
would be 179 days [i.e., 366 days – 187 days]. Since his period of stay in India during the P.Y. 2019-20 is less
than 182 days, he is a non-resident for AY 2020-21.
CA Suraj Agrawal
ADDITIONAL CONDITION [Section 6(6)]: Resident but Not-Ordinarily Resident
(Individual)
Only Individuals and HUF can be Resident but Not Ordinarily Resident in India.
A Not-Ordinarily Resident person is one who satisfies any one of the conditions
specified under section 6(6) which are:
1. If such individual has been Non-Resident in India in any 9 out of the 10 previous years
immediately preceding the relevant previous year,
OR
2. If such individual has during the 7 previous years immediately preceding the relevant previous year
been in India for a period of 729 days or less.
In other words, an Individual has to satisfy the both additional conditions in

order to become Ordinarily Resident (ROR) in India:-
I. Resident in India in any 2 out of the last 10 previous years immediately preceding the relevant
previous year
AND
II. Total stay in India for 730 days or more during 7 previous years immediately preceding the
relevant previous year.
General Cut-off Date for Resident / Non-Resident:

Cut-off date for leaving India for employment outside India:
Any person leaving India for the first time during the previous year either on 29th September or
subsequently during any previous year shall always be Resident.
Cut-off date for visiting India by Indian Citizen or Person of Indian Origin:
nd
Any person arriving India either on or before 1st October (2 October in case of leap year) and
subsequently not left India during the previous year, shall always be Resident.
General Cut off date for Non-Resident:

st
Any person leaving India before 30th May or arriving in India after 31st January (after 1
February in case of Leap Year) shall always be Non-Resident.
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
RESIDENTIAL STATUS OF HINDU UNDIVIDED FAMILY (HUF) [Section 6(2)]
A HUF would be Resident in India if the control and management of its affairs is situated wholly or
partly in India. If the control and management of the affairs is situated wholly outside India it would
become a non-resident.
STATUS
If Control & Management of its affairs is wholly / partly situated in India - Resident
If Control & Management of its affairs is wholly situated outside India - Non-Resident
Resident and Ordinarily Resident (HUF)
If the HUF is Resident, then the status of the Karta determines whether it is ROR or RNOR. For this
purpose, additional conditions of Section 6(6) are relevant.
RESIDENTIAL STATUS OF A COMPANY [Section 6(3)]
IF PERSON IS: STATUS
An Indian Company [as defined under section 2(26)] - Resident
Company other than Indian Company will be Resident in India in any previous year if its Place of
Effective Management [POEM], in that year, is in India.
“POEM” to mean a place where key management and commercial decisions that are necessary for the
conduct of the business of an entity as a whole are, in substance made.
RESIDENTIAL STATUS OF PERSONS OTHER THAN ABOVE [Section 6(4)]

(FIRMS/AOP/BOI/Local Authority/Artificial Judicial Persons)
STATUS
If Control & Management of its affairs is wholly / partly situated in India - Resident
If Control & Management of its affairs is wholly situated outside India - Non-Resident
CA Suraj Agrawal
Example
ABC Inc., a Swedish company headquartered at Stockholm, not having a permanent
establishment in India, has set up a liaison office in Mumbai in April, 2019 in compliance with
RBI guidelines to look after its day to day business operations in India, spread awareness about
the company's products and explore further opportunities. The liaison office takes decisions
relating to day to day routine operations and performs support functions that are preparatory
and auxiliary in nature. The significant management and commercial decisions are, however, in
substance made by the Board of Directors at Sweden. Determine the residential status of ABC
Inc. for AY 2020-21.
Answer
Section 6(3) provides that a company would be resident in India in any previous year, if
i. it is an Indian company; or
ii. its place of effective management, in that year, is in India.
In this case, ABC Inc. is a foreign company. Therefore, it would be resident in India for P.Y. 2019-20
only if its place of effective management, in that year, is in India.
Explanation to Section 6(3) defines "place of effective management" to mean a place where key
management and commercial decisions that are necessary for the conduct of the business of an entity
as a whole are, in substance made.
In the case of ABC Inc., its place of effective management for P.Y. 2019-20 is not in India, since the
significant management and commercial decisions are, in substance, made by the Board of Directors
outside India in Sweden.
ABC Inc. has only a liaison office in India through which it looks after its routine day to day business
operations in India. The place where decisions relating to day to day routine operations are taken and
support functions that are preparatory or auxiliary in nature are performed are not relevant in
determining the place of effective management.
Hence, ABC Inc., being a foreign company is a non-resident for A.Y. 2020-21, since its place of
effective management is outside India in the P.Y. 2019-20.
CA Suraj Agrawal
SCOPE OF TOTAL INCOME [Section 5] – Tax Incidence vs Residential Status
Section 5 provides the scope of total income in terms of the residential status of the assessee because
the incidence of tax on any person depends upon his residential status.
The scope of Total Income of an assessee depends upon the following three important
considerations:
The Residential Status of the assessee;
The place of accrual or receipt of income, whether actual or deemed; and
The point of time at which the income had accrued to or was received by or on behalf of the
assessee.
1) Resident and Ordinarily Resident [ROR]
The total income of a resident assessee would, under section 5(1), consists of:
a) income received or deemed to be received in India during the previous year;
b) income which accrues or arises or is deemed to accrue or arise in India during the previous
year; and
c) income which accrues or arises outside India even if it is not received or brought into India
during the previous year.
In simpler terms, a ROR has to pay tax on the total income accrued or deemed to accrue,
received or deemed to be received in or outside India.
2) Resident but Not Ordinarily Resident [RNOR]
Under section 5(1), the computation of total income of RNOR is the same as in the case of ROR
stated above except for the fact that the income accruing or arising to him outside India is not to be
included in his total income.
However, where such income is derived from a business controlled from or profession set
up in India, then it must be included in his total income even though it accrues or arises
outside India.
3) Non-Resident [NR]
A Non-Resident’s total income under section 5(2) includes:

a) Income received or deemed to be received in India in the previous year; and
b) Income which accrues or arises or is deemed to accrue or arise in India during the previous
year.
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
A Tabular Presentation:
NATURE OF INCOME R & OR RNOR NR
a) Income received or deemed to be received in Taxable Taxable Taxable

India during the year
(whether accrues in India or not)
[Indian Income]
b) Income accrues/arises or deemed to accrue/ Taxable Taxable Taxable

arise in India during year - whether received
in India or not
[Indian Income]
(c) Income accrues/arises and received outside

India and derived from:
[Foreign Income]
(i) A business / Profession controlled/ Taxable Taxable Not Taxable

setup in India
(ii) A business / Profession controlled/ Taxable Not Taxable Not Taxable

setup from outside India
(d) Past income (earned and received abroad) Not Taxable Not Taxable Not Taxable
remitted to India in Previous year
Explanation 1 to Section 5 specifically provides that an item of income accruing or arising outside
India shall not be deemed to be received in India merely because it is taken into account in a balance
sheet prepared in India.
Further, Explanation 2 to Section 5 makes it clear that once an item of income is included in the
assessee’s total income and subjected to tax on the ground of its accrual/deemed accrual or receipt, it
cannot again be included in the person’s total income and subjected to tax either in the same or in a
subsequent year on the ground of its receipt – whether actual or deemed.
CBDT Circular: CBDT has clarified that salary accrued to a non-resident seafarer for services
rendered outside India on a foreign going ship (with Indian Flag or foreign flag) shall not be included in
the Total Income merely because the said salary has been credited in the NRE account maintained
with an Indian bank by the seafarer.
CA Suraj Agrawal
MEANING OF “INCOME RECEIVED OR DEEMED TO BE RECEIVED”
The receipt of income refers to only the first occasion when the recipient gets the money
under his control. Subsequent transmission of the income to another place is remittance of
income. While the receipt of income is liable to tax, subsequent remittance of the same income will
not attract tax liability again.
An assessee receives $ 100,000 in USA on May 16, 2019. Out of $ 100,000, he remits Rs. 50,000
to India on May 18, 2019. In this case, income is “received” outside India on May 16, 2019.
The position remains the same if income is received outside India by an agent of the assessee
i.e. payee (maybe a bank or some other person) who later on remits the same to India.
However, in case the person who brings money from outside India acts as agent of the payer,
his income will be said to have been received in India.
Income Deemed to be Received [Section 7]

The following shall be deemed to be received by the assessee during the previous year irrespective
of whether he had actually received the same or not:
a) Tax Deducted at Source [TDS]

b) Deemed profit under section 41 [Refer PGBP]
c) Interest credited to recognized provident fund account of an employee in excess of 9.5% p.a.
d) Excess contribution of employer in the case of Recognized Provident Fund – RPF (i.e. the amount
contributed in excess of 12 percent of salary)
e) The taxable transferred balance from URPF to RPF (being the employer’s contribution and interest
thereon).
f) The contribution made by the CG or any other employer to the account of an employee under a
pension scheme u/s 80CCD.
CA Suraj Agrawal
INCOME DEEMED TO ACCURE OR ARISE IN INDIA [Section 9]
Section 9 applies to all assesses irrespective of their residential status and place of business. The
categories of income which are deemed to accrue or arise in India are as under:
Income Accruing/Arising from Business Connection etc. [Section 9(1)(i)]

All income accruing or arising, whether directly or indirectly,
through or from any Business Connection in India, or
through or from any property, asset or source of Income, or
through the transfer of a capital asset situated in India i.e. if the source of income is in India.
shall be deemed to accrue or arise in India
Note:
1. Existence of Professional connection amounts to existence of business connection. (for
example when foreign lawyer is called upon in India to plead the case in Indian courts.
2. In the case of a business where all operations are not carried out in India, only such part of
the income as is reasonably attributed to the operations in India shall be deemed to arise or
accrue in India.
Salaries Earned in India [Section 9(1)(ii)]
Any income under the head “Salaries”, for services rendered in India, whether such salary income
payable for the rest period or leave period and forms part of the service contract of employment shall be
deemed to accrue or arise in India. Salary includes pension.
Salaries Payable by Indian Govt. [Section 9(1)(iii)]
Any income chargeable under head “salaries” payable by the Indian Govt. to a citizen of
India for service rendered outside India shall be deemed to accrue or arise in India.
Foreign Allowances by the Govt. Employer - Section 10(7) –Exempted

Any allowance or perquisite paid or allowed outside India, by the Indian Govt. to a citizen of India, for
rendering service outside India is fully exempt.
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
INCOME FROM DIVIDEND [Section 9(1)(iv)]
All dividends paid by an Indian company must be deemed to accrue or arise in India.
Under Section 10(34), income from dividends [upto ` 10,00,000] referred to in section 115-O are
exempt from tax in the hands of the shareholder [Except dividend u/s Section 2(22)(e)]
It may be noted that dividend distribution tax under section 115-O is now applicable to
deemed dividend under section 2(22)(e), which is fully exempt u/s 10(34) in the hands of
shareholder.
INTEREST [Section 9(1)(v)]

Under section 9(1)(v), an interest is deemed to accrue or arise in India [Taxable in the
hands of recipient] if it is payable by:
1) the Government; or
2) a person resident in India except where it is payable
a) in respect of any money borrowed and used for the purposes of a business or profession carried
on by him outside India OR
b) for the purposes of making or earning any income from any source outside India) ; or
3) a Non-Resident when it is payable in respect of any debt incurred or moneys borrowed and used
for the purpose of a business or profession carried on in India by him. (Only Business)
IMP: Interest on money borrowed by the non-resident for any purpose other than a business or
profession, will not be deemed to accrue or arise in India.
Thus, if a non-resident ‘A’ borrows money from a non-resident ‘B’ and invests the same in shares of an
Indian company, interest payable by ‘A’ to ‘B’ will not be deemed to accrue or arise in India.
ROYALTY [Section 9(1)(vi)]

Royalty will be will be deemed to accrue or arise in India when it is payable by –
2) a person who is a resident in India except in cases where it is payable
a) for the transfer of any right or the use of any property or information or for the utilization of
services for the purposes of a business or profession carried on by such person outside India
OR
b) for the purposes of making or earning any income from any source outside India; or
3) a non-resident only when the royalty is payable
a) in respect of any right, property or information used or services utilised for purposes of a
business or profession carried on in India OR
b) for the purposes of making or earning any income from any source in India.
CA Suraj Agrawal
4) Class Notes
CA Suraj Agrawal
FEES FOR TECHNICAL SERVICES [Section 9(1)(vii)]
Any fees for technical services will be deemed to accrue or arise in India if they are payable by:
2) a person who is resident in India, except in cases where the fees are payable
a) in respect of technical services utilised in a business or profession carried on by such person

outside India OR
b) for the purpose of making or earning any income from any source outside India; or
3) a person who is a non-resident, only where the fees are payable in respect of
a) services utilised in a business or profession carried on by the non-resident in India OR
b) where such services are utilised for the purpose of making or earning any income from
any source in India.
GIFT [Section 9(1)(viii)] w.e.f AY 2020-21 [05 JULY 2019 onwards]

Added by Finance (No. 2) Act 2019
Income arising outside India, being any sum of money referred to in sub-clause
(xviia) of clause (24) of section 2, paid on or after the 5th day of July, 2019 by a person
resident in India to a non-resident, not being a company, or to a foreign company.
Note: Section 2(24)(xviia) – Income includes any sum of money or value of property referred to
in clause (x) of sub-section (2) of section 56.
Explanation to Section 9
Income deemed to accrue or arise in India to a non-resident by way of interest, royalty and fee
for technical services to be taxed irrespective of territorial nexus
Explanation to section 9 clarifies that income by way of interest, royalty or fee for technical services
which is deemed to accrue or arise in India by virtue of clauses (v), (vi) and (vii) of section 9(1), shall be
included in the total income of the non -resident, whether or not:
(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India.
CA Suraj Agrawal
Business Connection in India shall include
Explanation 2 to Clause (i) of Sub-section (1) of Section 9
Any business activity carried out through a person acting on behalf of the non-resident and such person
a) [FA 2018] - has and habitually exercises in India, an authority to conclude contracts on
behalf of the non-resident or habitually concludes contracts or habitually plays the
principal role leading to conclusion of contracts by that non-resident and the contracts
are-
(i) in the name of the non-resident; or
(ii) for the transfer of the ownership of, or for the granting of the right to use, property
owned by that non-resident or that non-resident has the right to use; or
(iii) for the provision of services by the non-resident;
b) maintains in India a stock of goods from which he delivers goods on behalf of the non-
resident or
c) secures orders in India, mainly or wholly

for the non-resident or
for that non-resident and other non-residents
under the same common control & managements
however, Business Connection shall not include the cases where the non-resident carries on
business through a broker, general commission agent or any other agent of an independent
status.
Independent status: Where a broker, general commission agent or any other agent not works
mainly or wholly on behalf of a NR or other non-residents under the same common control &
management.
Following cases shall not be treated as Business connection in India:

Explanation 1 to Clause (i) of Sub-section (1) of Section 9
1) No income shall be deemed to accrue or arise in India to NR, through or from operations,
which are confined (limited) to the purchase of goods in India for the purpose of export.
2) No income shall be deemed to accrue or arise in India to NR, engaged in the business of
running a news agency or publishing newspapers, magazines or journals, through or from
activities which are confined to the collection of news and views in India for transmission
out of India.
3) No income shall be deemed to accrue or arise in India to a non-resident if the operations is

confined to shooting of cinematography films in India but if NR is
(i) An Individual - He should not be citizen of India.
(ii) A Firm- No partner should be citizen of India or Resident in India.
(iii) A Company - None of the shareholder should be citizen of India or Resident in India.
4) In the case of a foreign company engaged in the business of mining of diamonds, no
income shall be deemed to accrue or arise in India to it through or from the activities which are
confined to the display of uncut and unassorted diamond in any special zone notified by
the Central Government in the Official Gazette in this behalf.
CA Suraj Agrawal
Added by Finance Act 2018
Explanation 2A to Clause (i) of Sub-section (1) of Section 9
Significant economic presence of a non-resident in India shall constitute "business

connection" in India {Theory Question – 4 Marks}
Significant economic presence of a Non-Resident in India shall constitute "business

connection" in India and
"significant economic presence" for this purpose, shall mean-
a) transaction in respect of any goods, services or property carried out by a non-resident in India
including provision of download of data or software in India, if the aggregate of payments
arising from such transaction or transactions during the previous year exceeds such amount
as may be prescribed; or
b) systematic and continuous soliciting of business activities or engaging in interaction with

such number of users as may be prescribed, in India through digital means:
Provided that the transactions or activities shall constitute significant economic presence in
India, whether or not,—
i. the agreement for such transactions or activities is entered in India; or
ii. the non-resident has a residence or place of business in India; or
iii. the non-resident renders services in India:
Provided further that only so much of income as is attributable to the transactions or activities referred
to in clause (a) or clause (b) shall be deemed to accrue or arise in India.
CA Suraj Agrawal
5) Class Notes
CA Suraj Agrawal
Residential Status 2A. 1
RESIDENTIAL STATUS – PRACTICAL QUESTION

1) Mr. X, an Indian citizen goes to Maldives for employment during the previous year 2019-20 on 1st
September 2019. He was in India from his birth during the year 1978. Identify his Residential
Status for the PY 2019-20.
2) Mr. Y was sponsored by his employer in India for training in USA. He left India on 03.06.2019. He
came back to India on 05.04.2020. Determine his residential status for the PY 2019-20
assuming that he did not go out of India previously.
3) A, a British national, comes to India for first time during 2015-16. During financial years 2015-16,
2016-17, 2017-18, 2018-19 and 2019-20 he was in India for 65 days, 60 days, 80 days, 160 days &
70 days respectively. Determine his residential status for the AY 2020-21.
4) Mr. Devendra, an India citizen leaves India for the first time on September 20, 2017 for taking
employment outside India. He comes to visit India for 152 days on April 10, 2018. He comes back
on May 13, 2019 to India. Determine his residential status for the PY 2019-20.
5) Mr. Border, a foreign citizen, comes to India for the first time on June 22, 2017. From June 22,
2017 to March 31, 2020, he is present in India for days (2017-18; 59 days, 2018-19; 306 days, and
2019-20: 92 days). Determine the residential status of Mr. Border for the PY 2019-20.
6) Mr. Samuelson, foreign citizen, comes to India for the first time on May 10, 2019. On August 6,
2019, he leaves India for Burma on a business trip. He comes back on January 1, 2020. He
maintains a dwelling place in India from the date of his arrival in India (i.e., May 10, 2019) till
February 15, 2020 when he leaves for Pakistan. Determine his residential status for the PY
2019-20.
7) Mr. Samuel, a foreign citizen (not being a person of India origin) comes to India for first time in last
12 years on March 01, 2019. On 5th September 2019 he leaves India for Singapore on a business
trip. He comes back on March 2, 2020. Determine his residential status for the PY 2019-20.
8) Mr. B, a Malaysian citizen leaves India, after a period of 10 years stay on 1.6.2017. During the
financial year 2018-19, he comes to India for a period of 46 days. Later he returns to India on
10.10.2019. Determine his residential status for the PY 2019-20. Will your answer be
different if his date of departure was 15.5.2017?
9) Mr. Jackie Chan, a Foreign National, leaves India after 10 years of stay on 15.6.2019 to settle
down in China for doing business. During 2019-20, he visits India on 2-1-2020 and leaves on the
last day of March 2020. Determine his residential status for the PY 2019-20.
10) Identify the residential status of the following persons for the PY 2019-20.
i) Mr. A, Indian citizen leaves India for taking up employment in Singapore on 15.9.2019.
ii) Mr. B, a person of Indian origin settled in Australia, visits India for the first time during
2019-20 and stays for 191 days.
iii) Mr. C, an Indian Citizen and staying in Canada since 2005, arrived in India on 14th Nov
2018 and leaves for Canada on 22nd Sep 2019.
11) ‘Mr. A’ a citizen of India left India on 2-5-1999 for employment abroad. He did not come to India
upto PY 2016-17. During 2017-18 and 2018-19, he visited India for 145 & 195 days respectively. In
PY 2019-20 he came India on 7-4-2019 and left on 30-11-2019. Determine his status for the PY
2019-20.
12) Andrew Symonds, an Australian cricketer has been coming to India for 100 days every year since
2000-2001 for IPL matches:
a) Determine his residential status for the assessment year 2020-21.
b) Will your answer be different if he has been coming to India for 110 days instead of 100 days
every year.
CA Suraj Agrawal
13) ‘Mr. A’ was born in Lahore in 1942. He has been staying in UK since 1972. He came to visit India
on 2-10-2019 and returns on 30-3-2020. Determine his residential status for the PY 2019-20.
14) Indian citizen and businessman Mr A, who resides in Bhopal, went to Italy for employment
purposes on 15-8-2019 and came back to India on 10-11-2020. He has never been out of India in
the past.
a) Determine residential status of Mr. A for the PY 2019-20.
b) Will your answer be different if he had gone on a leisure or Business trip?
15) Mr. A came to India from USA for the first time on 10-10-2019. He returns to his home county after
staying in India upto 5-7-2020. Will he be a resident in India for the PY 2019-20?
16) ‘Mr. A’, a citizen of India left India on 16-5-2001 for employment abroad. He did not come to India
upto previous year 2016-17. During 2017-18 and 2018-19, he visited India for 140 days and 200
days respectively. In the previous year 2019-20 he came to India on 6-4-2019 and left on 30-12-
2019. Determine his residential status for the PY 2019-20.
17) Mr. Pal, an Indian citizen, left India for first time on 1st April, 2019 for joining job in China, came to
India on 11th October, 2019 for only 190 days. Determine his residential status for the PY 2019-
20.
18) Mr A, aged 29 years, left India for first time on May 31, 2019. Determine his residential status
under the following situations for the previous year 2019-20.
i) He left India for employment purpose
ii) He left India on world tour.
19) Ms Herley, a foreign national, comes India every year for 90 days since 2000-01.
i) Determine her residential status for the previous year 2019-20.
ii) Will your answer differ, if she comes India for 100 days instead of 90 days every year.
20) G an American citizen, is appointed by a Multi-national company to its branch in New Delhi
in 2016. G has never been to India before this appointment. He arrives in Mumbai on 15th April,
2016 and joins the New Delhi office on 20th April, 2016. His wife and children join him in India on
20th October, 2016. The company allotted him a leased residence for the purposes of his stay.
This residence is occupied by him from the beginning of October 2016. On 10th February, 2017,
he is transferred by his employer, on deputation basis, to be the regional chief of his employer’s
operations in South East Asia having headquarters in Hong Kong. He leaves New Delhi, on 11th
February 2017 and arrives in Hongkong on 12th February, 2017. G leaves behind his wife and
children in India till 14th August, 2018, when they leave alongwith him for Hong Kong. G had come
to India earlier on 15th June, 2018 on two months leave. The members of the family occupied the
residence till date of departure to Hongkong. At the end of the period of deputation, G is reposted
to India and joins the New Delhi office of his employer as chief of Indian operations on 31st
January, 2020. In what residential status G will be assessable, for the various years, to
income tax in India?
21) The business of a HUF is transacted from Australia and all the policy decisions are taken there. Mr.
E, the karta of the HUF, who was born in Kolkata, visits India during the P.Y.2019-20 after 15
years. He comes to India on 1.4.2019 and leaves for Australia on 1.12.2019. Determine the
residential status of Mr. E and the HUF for the PY 2019-20.
22) During the P.Y. 2019-20, the affairs of an HUF are managed partly from India and partly from UK.
Mr. A (Karta) is in India for a period of 192 days in every financial year. Discuss the Residential
status of the HUF for the PY 2019-20.
CA Suraj Agrawal
23) Discuss the Residential Status in the following cases:-
a) Z Ltd. an Indian company situated in Bombay.
b) Y Ltd. a foreign company situated in Delhi, but POEM is in Australia.
c) XYZ Associates a foreign company Registered in UK but POEM is in India.
d) PQR Ltd a foreign company situated USA and POEM is in USA.
e) M/s ABC, a partnership firm, is having its business in Delhi and Assam and controlled partly
from Delhi and partly from Assam.
f) If in above case (e), the firm is wholly controlled from Dubai.
24) During the financial year, Mr. Kumar had the following income: `
a) Salary income (computed) received in India for services rendered in Nepal 10,000
b) Income from profession in India, but received in China 3,000
c) Property income in Uganda (out of which ` 3,000 was remitted to India). 6,000
d) Profits earned from business in Bangalore 5,000
e) Agricultural income in Canada 10,000
f) Profits from a business carried on at Nepal but controlled from India. 20,000
Compute the income of Anil Kumar for the PY 2019-20 if he is (i) resident and ordinarily
resident, (ii) Not ordinarily resident, and (iii) Non-resident in India.
25) ‘X’ earns the following income during the financial year: `
a) Interest from an Indian company received in UK. 1,000
b) Pension from former employer in India received in USA 54,000
c) Profits earned from a business in Paris which is controlled in India,
half of the profits being received in India. 20,000
d) Income from agriculture in Bhutan and remitted to India 5,000
e) Income from property in England received there. 4,000
f) Past foreign untaxed income brought to India. 10,000
Compute his income if he is:

i) Resident and ordinarily resident in India.
ii) Not ordinarily resident in India.
iii) Non-resident in India.
26) X is resident and ordinarily resident in India for the PY 2019-20. He gives the following
information in respect of his income for the previous year: `
i) Capital gain on sale of a house situated in Pune 40,000
(sale consideration is received in Nepal)
ii) Salary income received in Sri Lanka for rendering service in Tamilnadu (computed) 50,000
iii) Interest received from Government of India (it is paid to him in Sri Lanka, the money is
utilized by the Government outside India) 60,000
iv) Royalty received from A Ltd. (a foreign company which is non-resident in India) outside
India (royalty is paid for a manufacturing business situated outside India) 70,000
Find out the taxable income of X.
27) The following are the particulars of income of Mr A for the previous year `
a) Rent from a property in Delhi received in USA 80,000
b) Income from a business in USA controlled from Delhi 1,20,000
c) Income from a business in Bangalore controlled from USA 1,80,000
d) Rent from a property in USA received there but subsequently remitted to India 60,000
e) Interest from deposits with an Indian company received in USA 20,000
f) Profit for the year 2018-19 of a business in USA remitted to India
during the previous year 2019-20 75,000
Compute his income if he is:
i) Resident and ordinarily resident in India,
ii) Not ordinarily resident in India,
iii) Non-resident in India.
CA Suraj Agrawal
28) X furnished the following particulars of his income earned during the previous year:
`
i) Interest on German Development Bonds (two-fifths is received in India) 60,000
ii) Income from agriculture in Bangladesh, received there but later on ` 50,000 is
remitted to India (agricultural activity is controlled from Bangladesh) 1,81,000
iii) Income from property in Canada received outside India (` ` 76,000 is used in
Canada for meeting educational expenses of X’s daughter in USA and ` 10,000
is later on remitted to India) 86,000
iv) Income earned from business in Kampala (Uganda) which is controlled from Delhi
(`
` 15,000 is received in India) 65,000
v) Dividend paid by a foreign company but received in India on April 10, 2019 46,500
vi) Past untaxed profit of 2003-04 brought to India in PY 2019-20 10,43,000
vii) Profits from a business in Madras and managed from outside India 27,000
viii) Profit on sale of a building in India but received in Sri Lanka 14,80,000
ix) Pension from a former employer in India, received in Rangoon 86,000
x) Gift in foreign currency from a friend received in India on January 20, 2020 80,000
Find out the gross total income of X, if he is (i) ROR, (ii) RNOR, or (iii) NR in India.
29) Arun, a citizen of India residing in Germany for the past 10 years, came back to India for the
first time during January 2020. During the financial year 2019-20, he received the following
income-
a) He works in a company in Germany and earns a salary of Euro 1,000 per month;
b) He owns agricultural land near Bangalore and a residential house in Delhi, which has been let-
out.
c) While the agricultural income is being remitted to his account in Germany every year, the rental
income of ` 84,000 (Computed) is being deposited in his bank account at Delhi; and
d) He also owns shares in various Indian companies and receives dividend every year, which has
been regularly deposited in his bank account at Delhi.
He seeks your advice as to taxability of the above income under the provisions of the
Income-tax Act, 1961 as he is an Indian citizen and earning income in India.
30) Raman has furnished the following particulars for the PY 2019-20. Calculate his total
income if he is a non-resident (amounts in `)
a) Salary for 3 months received in India (computed) 9,000
b) Dividend received in Germany from British companies out of which ` 3,000 22,000
Were remitted to India
c) Income from business in Pakistan being controlled from India 10,000
d) Interest on Fixed deposits in State Bank of India 1,000
e) Amount brought in India out of past untaxed profit earned in Japan 20,000
f) Income from house property in India (computed) 3,400
31) Adarsh had following income during the previous year ended 31st March, 2020: `
a) Salary Income (computed) in India for three months 9000
b) Income from house property in India 13470
c) Interest on Fixed Deposit in SBI 1000
d) Amount brought into India out of the past untaxed profits earned in Germany 20000
e) Income from agriculture in Indonesia being invested there 12350
f) Income from business in Bangladesh, being controlled from India 10150
g) Dividends received in France from Belgium companies out of which
` 2,500 remitted to India 23000
You are required to compute his total income for the PY 2019-20, if he is a – (a) resident;
(b) not ordinarily resident; and (c) non-resident.
CA Suraj Agrawal
32) Mr. A. a citizen of India, left for UK for the purposes of employment on 1.5.2018. He has not visited
India thereafter. Mr. A borrows money from his friend Mr. B who left India one week before Mr. A’s
departure, to extent of ` 20 Lakhs and buys shares in ABC Ltd, an Indian Company. Discuss the
taxability of the interest charged in B’s hands where the same has been received in New
York in respect of AY 2020-21.
33) X, a Non-resident lent ` 6 lakhs to Y, resident in India. Y used the money borrowed by him for the
purpose of business on India. Y paid an interest of ` 90,000 during the year ended 31st March,
2020 to X in the UK. Discuss the tax liability of such interest in the hands of X in India.
34) Motorola, a South Korean Company, a Non-resident under the Income-tax Act, 1961, had the
following receipts of royalty in AY 2020-21. Indicate whether that will be taxable in India. Give
reasons for your answer:
a) ` 50,000 from Govt. of India under an agreement approved by the Govt. of South Korea and
India.
b) ` 1,00,000 from Calcutta Co. Ltd., a Resident Indian Co., for import of technical know-how use
in a business in India.
c) ` 75,000 from Bombay Co., a Indian Resident, for import of drawings for use in its business in
Singapore & Malaysia.
d) ` 50,000 from Keshav, a non-resident under Indian tax law for use of a formula for a business in
India.
e) ` 40,000 from X, an Indian NR, for use of drawings and technical know-how for a business in
the UK.
35) A firm of solicitors in Delhi generally engages a barrister of London for arguing their case before
the Supreme Court in India. A payment of $ 50,000 was made to the barrister in London according
to the term of the professional engagement. It is claimed that since the payment is made outside
India, no tax is payable on the fee paid. How should the Assessing Officer proceed in this
matter?
36) Determine the taxability of income of US based company Heli Ltd., in India on entering
following transactions during the financial year:
a) ` 5 lacs received from an Indian domestic company for providing technical know how in India.
b) ` 6 lacs from an Indian firm for conducting the feasibility study for the new project in Finland.
c) ` 4 lacs from a non-resident for use of patent for a business in India.
d) ` 8 lacs from a non-resident Indian for use of knowhow for a business in Singapore.
e) ` 10 lacs for supply of manuals land designs for the business to be established in Singapore
37) X and Mrs. X are foreign citizens. They came to India on September 3, 2019 for a visit of 170
days. In the earlier previous years, they are in India as follows:
X Mrs. X
2018-19 365 days 240 days
2017-18 20 days 340 days
2016-17 15 days Nil
2015-16 120 days 118 days
2014-15 5 days 350 days
2013-14 8 days 190 days
2012-13 15 days 160 days
2011-12 18 days 332 days
2010-11 140 days 192 days
2009-10 10 days 221 days
During the previous year 2019-20, X and Mrs. X have the following income:
X ` Mrs. X `
Interest on company deposit in India 48,000 7,10,000
Income deemed to be earned in India 32,000 55,000
Income from business situated in Nepal and controlled from India 64,000 38,000
(40 percent is received in India and 60 percent is received outside
India)
CA Suraj Agrawal
Dividend declared by an Indian company 30,000 48,000
Salary received in India for service rendered outside India 142,000 136,000
Interest received from the Government of India (received outside 58,000 16,000
India)
Interest received from a foreign company outside India (on capital 70,000 5,000
which is utilized outside India)
Interest received from a foreign company outside India (on loan 38,000 92,000
which is utilized for doing business in India)
Royalty received in India from the Government of India 10,000 5,000
Royalty received in India from a non-resident in respect of 18,000 7,000
technology used by such person outside India
Place of birth Year of birth
X Dubai 1951
Mrs. X Sri Lanka 1952
Place of birth Year of birth
Father of X Muscat 1921
Mother of X Kathmandu 1924
Grandmothers of X Mexico and Dubai 1892 and 1895
Grandfathers of X Taipei and Logos 1890 and 1890
Father of Mrs. X Dubai 1925
Mother of Mrs. X Belfast 1926
Grandmothers of Mrs. X Chicago and Muscat 1901 and 1902
Grandfathers of Mrs. X Karachi and Dubai 1901 and 1900
Compute the Total Income of X & Mrs X.
38) Determine the taxability of the following incomes in the hands of a resident and ordinarily
resident, resident but not ordinarily resident, and non -resident for the PY 2019-20.
1. Interest on UK Development Bonds, 50% of interest received in India 10,000
2. Income from a business in Chennai (50% is received in India) 20,000
3. Profits on sale of shares of an Indian company received in London (unlisted) 20,000
4. Dividend from British company received in London 5,000
5. Profits on sale of plant at Germany 50% of profits are received in India 40,000
6. Income earned from business in Germany which is controlled from Delhi
(Rs.40,000 is received in India) 70,000
7. Profits from a business in Delhi but managed entirely from London 15,000
8. Rent from property in London deposited in a Indian Bank at London, brought to India
50,000
9. Interest for debentures in an Indian company received in London. 12,000
10. Fees for technical services rendered in India but received in London 8,000
11. Profits from a business in Bombay managed from London 26,000
12. Pension for services rendered in India but received in Burma 54,000
13. Income from property situated in Pakistan received there 16,000
14. Past foreign untaxed income brought to India during the previous year 10,000
15. Income from a business in Russia, controlled from Russia 20,000
16. Dividend from Reliance Petroleum Limited, an Indian Company 5,000
17. Agricultural income from a land in Rajasthan 15,000
CA Suraj Agrawal
Residential Status 2B. 1
RESIDENTIAL STATUS – SOLUTION

1. NR
2. Since Mr. Y is in India for a period of 64 days (30 + 31 + 3) during the previous year and was in India for all
the preceding 4 years (i.e. 365 days or more), therefore, he satisfies second basic condition and is, therefore,
resident in India. Exception to basic condition will not be applicable here as he is going for training and not for
the purpose of employment.
3. During the previous year 2019-20, A was in India for 70 days and during 4 years immediately preceding the
previous year, he was in India for 365 days as shown below: -
Year 2015-16 2016-17 2017-18 2018-19 Total
No. of days stayed in India 65 60 80 160 365
Thus, he satisfies the second basic condition and is, therefore, resident in India for the previous year 2019-20.
Further, he satisfies additional conditions to become RNOR as follows -
(a) He was non resident in India in all of the last 10 preceding years;
(b) He resided in India only for 365 days during the 7 preceding previous years.
Accordingly, he is 'Not Ordinarily Resident in India' for the previous year 2019-20.
4. Since Mr. Devendra is in India for a period of 324 days (366 - 30 - 12) during the previous year-ending 31st
March 2020 hence he is a resident. He is also a ROR as he is not satisfying any of additional two conditions
to become RNOR.
5. Since Mr. Border is in India for a period of 92 days during the previous year and 365 days during 4 years
proceeding the previous year hence, he is resident. He satisfies the additional conditions as follows -
(a) He was non resident in India for 9 years out of 10 preceding previous years;
(b) He was in India for 365 days during 7 preceding previous years. Hence, he is 'Not ordinarily resident'
in India.
6. Since Mr. Samuelson is in India for a period of 135 days (22 + 30 + 31 + 6 + 31 + 15) during the previous year
st
ending 31 March 2020 and has come for the first time in India, hence, he is a non resident.
7. Since Mr. Samuel is in India for a period of 188 days (30 + 31 + 30 + 31 + 31 + 5 + 30) during the previous
st
year ending 31 March 2020, he is a resident. He satisfies additional conditions as follows -
1) He was non resident in India in all of the last 10 preceding years;
2) He resided in India only for 31 days (March 2019) during the 7 preceding previous years. Hence, he is a
not ordinarily Resident in India.
8. During the financial year 2019-20, Mr. B stays in India from 10.10.2019 onwards amounting to 174 days.
Therefore, he does not fulfill the first basic condition, but he fulfills the second basic condition as he has
stayed for more than 60 days during 2019-20 and he has stayed for more than 365 days during the preceding
four financial years. Hence he is a resident. He was resident in 9 out of 10 preceding previous years and was
staying for more than 729 days during the 7 preceding previous years. Therefore, he does not satisfy any of
the additional conditions. By fulfilling the second basic condition and not fulfilling any of the additional
conditions, Mr. B is a resident and ordinarily resident for the assessment year 2020-21.
If the date of departure during 2017-18 happens to be 15.05.2017, Mr. B fails to fulfill either of the basic
conditions (since he had stayed only for 45 days in the previous year 2017-18) making him a non-resident,
Besides he does not fulfill any of the basic conditions for the previous year 2018-19 (he has stayed for 46
days in that year). Therefore, Mr. B was a non-resident in only 2 out of the 10 preceding previous years. He
was resident in 8 out of 10 preceding previous years and he stayed for a period of more than 729 days in
seven preceding previous years. Being a resident and by not fulfilling any of the additional conditions, he
becomes resident and ordinarily resident for the assessment year 2020-21. Hence answer remains the same
even if he departs from India on 15.05.2017 instead of 01.06.2017.
9. ROR
10. (i) NR (ii) RNOR (iii) NR
11. RNOR
CA Suraj Agrawal
12.
1) Andrew Symonds satisfies the condition (b) of Sec. 6(1), because he is in India for more than 60 days
during the relevant previous year and for 400 days during four years preceding the relevant previous year.
Therefore, he is a resident.
Further, his stays in India during 7 years proceeding the previous year is only for 700 days. He shall,
therefore, be a resident but not ordinarily resident in India.
2) Yes. He will be resident and ordinarily resident in India. Because, he does not satisfies both the conditions
of Sec. 6(6) as he was in India for 770 days in the last seven years and he was resident in all 10 previous
years immediately preceding the relevant previous year.
13. During the previous year 2019-20, 'A' stays in India for 181 days (30 + 30 + 31 + 31 + 29 + 30). He does not
satisfy the condition u/s. 6(1)(a) of 182 days. Further, he also does not satisfy the condition u/s 6(1)(b)
because 60 days will be substituted by 182 days as he is a person of Indian origin (He was born in undivided
India) and visits India during the previous year. He is, therefore, a Non-Resident.
14.
1) The previous year for the assessment year 2020-21 is 2019-20. During this period he was in India for 137
days (30 + 31 +30 + 31 + 15). As he is not in India for 182 days, he does not satisfy the first condition of
Section 6(1). The second condition of Section 6(1) is also not satisfied because he is a citizen of India and
leaves India during the previous year for employment outside India and is therefore, covered under
exception, where 60 days will be substituted by 182 days. Therefore, he is a non-resident.
2) When he had gone for a business trip: In this case, although he does not satisfy the first condition of
Section 6(1), he satisfies the second condition as he was in India for more than 60 days in the relevant
previous year and was also here for more than 365 days during four preceding previous years. He is
therefore, resident in India. The exception will not be applicable to him because he did not leave India for
the purpose of employment.
Further, he does not satisfy both the conditions of Section 6(6) because he has always been in India
before 15-8-2019. Therefore, the status of the assessee for the P/Y: 2019-20 will in this case be ROR in
India.
15. In this case although A has been in India for a continuous period of 271 days but it falls in two previous years
i.e., previous year 2019-20 and previous year 2020-21. During the previous year 2019-20, his stay in India
was only 174 days (22 + 30 + 31 +31 + 29 + 31). Therefore, he will be a non-resident in India in previous
year 2018-19 as he does not satisfy the condition of Sec. 6(1 )(a) i.e., 182 days stay in India during the
previous year. Further, the condition of Sec. 6(1)(b) is also not satisfied as, although, he was in India for more
than 60 days in the relevant previous year, he was not here for 365 days or more in 4 preceding previous
years.
He would also be non-resident in previous year 2020-21, for the same reasons, if he does not come to India
thereafter, as the period of stay in India will be 96 days only. The second condition is also not satisfied as in
the preceding 4 years he was here only for 174 days.
16.
Conditions u/s. 6(1)
P/Y: 2019-20: Stay in India is for 269 days (25 + 31 + 30 + 31+ 31 + 30 + 31 + 30+ 30). He is, therefore,
Resident in India.
Conditions u/s. 6(6)

Previous year No. of days' stay Resident/Non-resident
2018-19 200 Resident
2017-18 140 Non-resident
As he is a citizen of India and visits India during the previous years 2018-19 and 2017-18, the period of stay in
India shall be substituted by 182 days instead of 60 days.
As he is resident only for one previous year, out of 10 preceding previous years, he does satisfy the condition
u/s. 6(6)(i) i.e., being non resident in at least 9 out of 10 previous years immediately preceding the relevant
previous year. There is no need to see the condition u/s. 6(6)(ii) as the condition u/s. 6(6)(i) itself is satisfied.
He is, therefore, "not ordinarily resident in India".
CA Suraj Agrawal
17. Number of days Mr. Pal stayed in India can be calculated as under:
P.Y. Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
19-20 1 - - - - - 21 30 31 31 29 31 174
20-21 17 - - - - - - - - - - 18
Since Mr. Pal left India for employment purpose, hence for becoming resident he has to stay in India for at
least 182 days. However, he is in India for only 174 days during the PY, hence he is non-resident for the PY
2019-20.
18. During the previous year 2019-20, Mr. A was in India for 61 days as shown below -
P.Y. Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
19-20 30 31 - - - - - - - - - - 61
During the previous year 2019-20 X stayed in India for 61 days. Further, he was in India for more than 365
days during 4 years immediately preceding the relevant previous year (as he left India for first time).
1) Since he left India for employment purpose, condition of Sec. 6(1) shall not be applicable on such
assessee. He will be treated as resident in India, if and only if, he resided in India for at least 182 days
during the previous year. Hence, Mr. X is a non-resident in India for the previous year 2018-19.
2) Since he left India on world tour, which is not an exception of Sec. 6(1), satisfaction of any one condition
of sec. 6(1) makes him resident in India for the previous year 2019-20. As he satisfies 2nd condition of sec.
6(1), he is resident in India. Further, he does not satisfy any of conditions specified u/s. 6(6) (since he left
India for first time). Therefore, he is an ordinarily resident for the previous year 2019-20.
19.
1) Since Miss Herley stayed for 90 days during the previous year 2019-20 and for 360 days (90 days x 4
years) during the 4 years immediately proceeding the previous year, hence, she is not satisfying any of
the conditions of sec. 6(1). Thus, she is a non-resident for the previous year 2019-20.
2) Since Miss Herley stayed for 100 days during the previous year 2019-20 and for 400 days (100 days x 4
years) during the 4 years immediately proceeding the previous year, hence, she is satisfying sec. 6(1).
Thus, she is resident for the previous year 2019-20. Further, she resides for only 700 days (100 days x 7
years) during the 7 years immediately preceding the previous year. Hence, she does satisfy one of the
conditions of sec. 6(6). Thus, she is resident but not ordinarily resident for the previous year 2019-20.
20.
G's presence in India is given below
Previous Years Presence in India
2016-17 303 days
2017-18 NIL
2018-19 61 days
2019-20 61 days
During P.Y. 2016-17, G was in India for 303 days. He is resident in India. As he comes to India for the first
time on April 15, 2016, he has satisfied the additional condition laid down by Section 6(6)(a). He is therefore,
resident but not ordinary resident in India.
P.Y.-2017-18 to 2019-20: As G satisfied none of the basic conditions, he is non-resident for the previous year
2017-18 to 2019-20.
21. Status of Mr. E – RNOR; HUF- NR.

22. ROR
23. (a) Resident (b) Non-Resident (c) Resident (d) Non-Resident (e) Resident (f) Non-Resident.
24. Computation of Taxable Income of Mr. Kumar for the PY
Particulars R&OR R but NOR Non-Resident
(1) Income received in India wherever accrues
Salary income received in India for services rendered in Nepal.
Income accrued in India wherever received 10,000 10,000 10,000
(2) Income accrued in India wherever received
(i) Profit earned from business in Bangalore. 5,000 5,000 5,000
(ii) Income from profession in India but received in Germany. 3,000 3,000 3,000
(3) Income accrued and received outside India
(i) Property income in Uganda. 6,000 — —
(ii) Agricultural income in Canada. 10,000 — —
(iii) Profits of a business carried on in Nepal but controlled from 20,000 20,000 —
India.
Total Income 54,000 38,000 18,000
CA Suraj Agrawal
25. Particulars R&OR RNOR NR
(1) Income deemed to accrue / arise in India
Interest from Indian Company. 1,000 1,000 1,000
Pension from employer in India (54,000 – 50,000) 4,000 4,000 4,000
(2) Income received in India
50% of profits of business in Paris. 10,000 10,000 10,000
(3)Income earned and received outside India, from a business
controlled from India
50%of profits of business in Paris. 10,000 10,000 —
(4) Income earned and received outside India other than (3) above
Income from Agriculture in Bhutan. 5,000 — —
Income from Property in England. 4,000 — —
34,000 25,000 15,000
Note: Past foreign untaxed or taxed income is not to be included because it is not the income of the P/Y:
2019-20.
26. 1. As the house is situated in India, capital gain on its transfer is deemed to accrue or arise in India.
It is Indian income. It is taxable in all cases 40,000
2. As service is rendered in India, income is deemed to be accrued in India. It is Indian
income. It is taxable in all cases 50,000
3. As interest is received from the Government of India, it is deemed to be accrued in India.
It is Indian income. It is taxable in all cases 60,000
4. It is received outside India. It is accrued outside India. It is foreign income. It is taxable in
the case of resident and ordinarily resident 70,000
Total 2,20,000
27. Particulars R&OR R but NOR Non-Resident

(1) Income earned / deemed to accrue / arise in India
Rent from a property in Delhi [Less Std Deduction of 30%] 56,000 56,000 56,000
Income from business in Bangalore 1,80,000 1,80,000 1,80,000
Interest from Indian company 20,000 20,000 20,000
(2) Income earned and received outside India, from a business
controlled from India
Income from business in U.S.A. 1,20,000 l',20,000 —
(3) Income earned and received outside India other than (2) above
Rent from property in U.S.A. [Less Std Deduction of 30%] 42,000 — —
4,18,000 3,76,000 2,56,000
Note: Profit of 2018-19 is not income of the previous year 2019-20 and hence cannot be included in the
income for assessment year 2020-21.
28.
ROR RNOR NR Reasons
` ` `
Interest on German Development Bonds :
• Two-fifths is taxable on receipt basis 24,000 24,000 24,000 See Note 1
• Three-fifths is taxable in the case of resident
and ordinarily resident on accrual basis 36,000 — — See Note 2
Income from agriculture in Bangladesh :
• Income accrued and received outside India 1,81,000 — — See Note 3
Income from property in Canada received outside India :
• Income accruing and arising outside India 86,000 — — See Note 2
Income earned from a business in Kampala, controlled from Delhi :
• ` 15,000 is taxable on receipt basis 15,000 15,000 15,000 See Note 1
• Balance is not taxable in the case of non
resident 50,000 50,000 — See Note 4
• Dividend paid by a foreign company :
• Income received in India 46,500 46,500 46,500 See Note 1
Past untaxed profit brought to India :
• Not an income of the previous year 2019-20
relevant for the assessment year 2020-21, hence not taxable — — — See Note 5
Profits from a business in Madras and managed from outside India:
Income accrued in India 27,000 27,000 27,000 See Note 6
Profit on sale of a building in India but received in Sri Lanka:
CA Suraj Agrawal
• Income deemed to accrue or arise in India 14,80,000 14,80,00014,80,000 See Note 7
Pension from an Indian former employer received in Rangoon:
• Income deemed to accrue or arise in India 36,000 36,000 36,000 See Note 8
Gift from a friend
• It is taken as an income 80,000 80,000 80,000 See Note 9
Total 20,61,500 17,58,500 17,08,500

Notes —
1) It is Indian income. It is always taxable.
2) It is received as well as accrued outside India, It is foreign income. It is not business income or income
from profession. It is taxable only in the case of resident and ordinarily resident taxpayer.
3) It is received outside India (remittance of ` 50,000 to India is not "receipt" of income in India). It is accrued
outside India. It is foreign income from a business, which is controlled from outside India. It is, therefore,
taxable in India only in the case of resident and ordinarily resident taxpayer.
4) It is accrued outside India. It is received outside India. It is foreign income. It is taxable in the case of
resident and ordinarily resident taxpayer. It is not taxable in the case of non-resident. Since it is business
income and business is controlled from India, it is taxable in the hands of resident but not ordinarily
resident taxpayer.
5) It is income of the previous year 2003-04. It cannot be taxed at the time of remittance in 2019-20.
6) As the income is accrued in India, it is Indian income. It is, therefore, taxable in all cases.
7) As the building is situated in India, income is deemed to be accrued in India. Consequently, it is Indian
income and is chargeable to tax in all cases.
8) Service was rendered in India. Pension income is deemed to accrue in India. It is Indian income and is
chargeable to tax in all cases. Deduction u/s 16(ia) is claimed to the extent of ` 50,000.
9) If the aggregate amount of gift(s) received by an Individual from all persons (not being relatives) during a
financial year exceeds ` 50,000, it is taxable as income.
29. Mr. Arun is Non Resident in India. Hence, his following Income shall be taxable - `)
(`
Income from residential House property (Computed) (property situated in India) 84000
Income from Agriculture in India [(Exempt u/s 10(1)] —
Dividend from shares of Indian Company [(Exempt u/s 10(34)] —
Salary from Company in Germany (Not taxable in India as neither earned nor received in India) —
Total Income 84000
30. Computation of Total income of Raman (Amount in `)

Salary received in India for Three Months (computed) 9000
Income from house property in India 3400
Income from Business in Pakistan being controlled from India (Not taxable in India) —
Interest on Fixed bank deposits in State Bank in India 1000
Dividend received in Germany form British companies out of which ` 3,000 were
remitted to India (Not taxable in India) —
Amount brought to India out of past untaxed profit earned in Japan (Not taxable as
1 income not of current year)- —
Total Income 13400
31.
Computation of Total income of Mr. Adarsh (Amount in `)
Resident Not-ordinarily Non
resident resident
Salary Income in India for three months 9000 9000 9000
Income from house property in India 13470 13470 13470
Interest on Fixed Deposit in SBI 1000 1000 1000
Amount brought into India out of the past untaxed profits — — —
earned in Germany (Not taxable as income not of current year)
Income from agriculture in Indonesia being invested there 12350 — —
Income from business in Bangladesh, being controlled from India 10150 10150 —
Dividends received in France from Belgium companies 23000 — —
Total Income 68970 33620 23470
32. U/s. 9(1)(v), Interest paid by Non-resident (Mr. A) to any person (Mr. B) (other than for carrying on business or
profession in India) is not taxable. Hence, interest received by Mr. B from Mr. A is not taxable in India, as the
income is not deemed to accrue or arise in India.
CA Suraj Agrawal
33.
1. U/s 9(1)(v), interest paid by a Resident is deemed to accrue or arise in India in the hands of the
Nonresident if the money borrowed outside India is used to carry on business in India.
2. In the given case, Y is a resident paying interest to X, a Non-resident.
3. Interest received by X from the Resident is deemed to accrue or arise in India & so the sum or ` 90,000 is
chargeable to tax in India.
34.
Nature of Income Amount taxable Reasons

Royalty from Government ` 50,000 Royalty paid by Govt. is deemed to accrue or arise
in India.
Technical know-how fees ` 1,00,000 Technical know how fees paid resident is deemed
received from resident to accrue or arise in India.
Fees paid by Bombay Co. for Technical know how fees paid for usage of
us in its business in Singapore Not taxable drawings outside India is not deemed to accrue or
and Malaysia arise in India.
Technical know-how fees from ` 50,000 Know how fees paid by a NR for using the same in
Mr. Keshav business in India is deemed to accrue or arise in
India.
Amount aid by Mr. X, Non- Not taxable Amount paid by a Non-resident for use of drawings
resident, for use of drawings outside India is not deemed to accrue or arise in
India.
35.
1. Income from business connection in India shall be deemed to accrue or arise in India & chargeable to tax.
2. Business connection includes professional connection also.
3. In the given case, the London Barrister has earned $ 50,000 through a Firm of solicitors based at Delhi
and the income has been earned only through the professional connection in India & the same is deemed
to accrue or arise in India & chargeable to tax in India.
4. Hence, the A.O. shall charge the same to tax in the hands of the London Barrister.
36. Computation of Taxable Income

Particulars Taxability ` Reason
1. Income received from an Indian domestic Payer is an Indian Company, being a
company for providing technical know-how in resident in India, technical know-how used
Taxable 5,00,000
India for business in India deemed to accrue or
arise in India
2. Income received from an Indian firm for Payer is an Indian Firm, being a Resident in
conducting the feasibility study for the new Not India, Fees for feasibility study conducted
Nil
project in Finland Taxable for business outside India not deemed to
accrue or arise outside India.
3. Income received from a Non Resident- for Payer, being a Non Resident, income
the use of patent for a business in India Taxable 4,00,000 received for patent used for business in
India deemed to accrue or arise in India.
4. Income received from a Non Resident Payer, being a Non Resident, income
Indian for use of know-how for a business in Not received for use of know-how for a business
Nil
Singapore Taxable outside India not deemed to accrue or arise
in India.
5. Income received for supply of manuals & Payer, being a Resident (assumed), Income
designs for the business to be established in Not received for supply of manuals and designs
Nil
Singapore Taxable for business outside India not deemed to
accrue or arise in India.
Taxable Income 9,00,000 Assumed income is after deducting
allowable expenses
CA Suraj Agrawal
37. X and Mrs. X are foreign citizens. While Mrs. X is a person of Indian origin [one of her grandfathers was
born in undivided India (Karachi)], X is not a person of Indian origin (X or his parents or grandparents were
not born in undivided India).
X and Mrs. X can become resident in India only if they satisfy any of the following basic conditions:
X Mrs. X
Presence of X in Presence of X in Presence of Presence of
India during India during Mrs. X in India Mrs. X in India
2019-20 April 1, 2015 and during 2019-20 during April 1, 2015
March 31, 2019 and March 31, 2019
Condition 1 182 days - 182 days -
Condition 2 60 days 365 days Non-functional
As X satisfies basic condition 2, he is a resident in India. Further, he does satisfy one of the two additional
conditions (stays in India is less than 730 days during 7 previous year preceding the previous year). X is,
therefore, resident but not ordinarily resident in India for the assessment year 2020-21. Mrs. X is a non-
resident in India, as she is not present in India for at least 182 days during the previous year 2019-20.
Net income of X and Mrs. X shall be determined as follows:
X Mrs. X
(RNOR)(Non-resident)
` `
Interest on company deposits in India 48,000 7,10,000
Income deemed to be earned in India 32,000 55,000
Income from business in Nepal
- 40% received in India 25,600 15,200
- 60% received outside India (as business is controlled in India) 38,400 —
Dividend by an Indian company — —
Salary from outside India [less: Deduction u/s 16(ia)] 92,000 86,000
Interest from Government of India 58,000 16,000
Interest from foreign company (borrowed money is utilised outside India) — —
Interest from a foreign company (borrowed money is utilised in India) 38,000 92,000
Royalty from the Government 10,000 5,000
Royalty received in India 18,000 7,000
Gross total income 3,60,000 9,86,200
38. ROR: ` 3,01,000 RNOR: ` 200,000 NR: ` 170,000
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
House Property 3.1
INCOME FROM HOUSE PROPERTY

PARTICULARS SECTION
BASIS OF CHARGES 22
ANNUAL VALUE 23
DEDUCTION 24
INTEREST ON BORROWED CAPITAL (PAYABLE OUTSIDE INDIA) 25
RECOVERY OF UNREALIZED RENT & ARREAR RENT 25A
CO-OWNERSHIP 26
DEEMED OWNER 27
HOW TO COMPUTE INCOME FROM HOUSE PROPERTY:

Gross Annual Value [GAV] XXX
Less: Municipal Taxes PAID by owner during the P.Y. XXX
Net Annual Value (Sec 23) [NAV] XXX
Less: Deductions u/s 24
(a) Statutory deduction @ 30% of NAV XXX
(b) Interest on Loan XXX .
Income from House Property (Computed) XXX
CHARGEABILITY [SECTION 22]
The annual value of property consisting of any buildings or lands appurtenant thereto of which
the assessee is the owner shall be subject to Income-tax under the head 'Income from house property'
provided such property, or any portion of such property is not used by the assessee for the
purposes of any business or profession, carried on by him, the profits of which are chargeable to
Income-tax.
[The Basis of calculating income from House property is the Annual Value. This is the inherent capacity
of the property to earn income. Income from the head House Property is the only head that is charged
on a notional basis]
CA Suraj Agrawal
House Property 3.2
CONDITIONS FOR CHARGEABILITY
1) Property should consist of any building or land appurtenant thereto:
(a) Buildings include not only residential buildings, but also factory buildings, offices, shops,
godowns and other commercial premises.
(b) Land appurtenant means land connected with the building like garden, garage etc.
(c) Temporary structures shall not be considered as buildings for the purpose of Income from
House property. Eg. Circus tents, exhibition structures, etc.
(d) Buildings do not include incomplete units or which are in not in a condition to use.
(e) Income from letting out of vacant land is, however, taxable under the head “Income
from other sources”.
2) Assessee must be the owner of the property

a) Owner is the person who is entitled to receive income from the property in his own right.
b) The requirement of registration of the sale deed in the name of owner is not necessary.
c) Ownership includes deemed ownership
d) The person who owns the building need not also be the owner of the land upon which it
stands.
e) Income from subletting is not taxable as income from house property [It will be taxable in
IOS]
3) Property must not be used by the assessee for his own business/profession.
CA Suraj Agrawal
House Property 3.3
Exceptions:
Annual value of the following properties are chargeable under the head “Profits and gains of
business or profession” –
(i) Portions of property occupied by the assessee for the purpose of any business or profession
carried on by him
(ii) Properties of an assessee engaged in the business of letting out of properties.
Property held as stock-in-trade etc.

Annual value of house property will be charged under the head “Income from house property”,
where it is held by the assessee as stock-in-trade of a business also.
However, the annual value of property being held as stock in trade would be treated as NIL for a period
of two year (amended by Finance Act 2019 w.e.f. AY 2020-21) one year from the end of the
financial year in which certificate of completion of construction of the property is obtained from the
competent authority, if such property is not let-out during such period. [Section 23(5)]
Letting out is supplementary to the main business:

Where the property is let out with the object of carrying on the business of the assessee in an efficient
manner, then the rental income is taxable as business income. Related expenses are also deductible in
computing such business Income.
CA Suraj Agrawal
House Property 3.4
No Notional Income for House Property Held as Stock in Trade-Sec 23(5)
Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade
and the property or any part of the property is not let during the whole or any part of the previous year,
the annual value of such property or part of the property, for the period up to TWO one year
(amended by Finance Act 2019 w.e.f. AY 2020-21) from the end of the financial year in which the
certificate of completion of construction of the property is obtained from the competent authority, shall
be taken to be NIL
[The Delhi High Court in case of CIT v. Ansal Housing & Construction Ltd. held that the assessee
engaged in business of construction and sale of flats is liable to pay tax on notional rent in respect of
unsold flats, owned by the assessee at the end of the relevant financial year if these flats are not let for
the whole of the previous year. Above amendment is introduced to provide relief to builders]
Assessee engaged in the Business of Letting out House Properties

“The income earned by an assessee engaged in the business of letting out of properties on rent would
be taxable as business income”
Recently, the Supreme Court in case of “Rayala Corporation Pvt. Ltd. v. ACIT” held that Income
from Letting out of Property on rent by an assessee engaged in the business of letting is assessable
as “Business Profits” u/s 28 and not as “Income from House Property” u/s 22 and there is no concept of
notional rent under the head “Profits and Gains of Business of profession”
Also, the Supreme Court in case of “Chennai Properties & Investment Ltd. v. CIT” held that where
the assessee company is incorporated with main objective, as stated in the MOA to acquire the
properties in the city & let out those properties and the assessee had rented out such properties, rental
income from such properties is a business income & cannot be taxed as Income from House Property
u/s 22.
CBDT Circular: Lease Rent from letting out buildings/developed space

along with other amenties in Industrial Park/SEZ
In case of an undertaking which develops, develops and operates or maintains and operates a notified
Industrial Park/SEZ, the income from letting out of premises/developed space along with other
amenties/facilities in such park/SEZ is to be charged to tax under the head ‘PGBP’.
CA Suraj Agrawal
House Property 3.5
COMPOSITE RENT
The owner of a property may sometimes receive rent in respect of building as well as –
1) other assets like say, furniture, plant and machinery.
2) for different services provided in the building, for eg. –
(a) Lifts;
(b) Security;
(c) Power backup;
The amount so received is known as “COMPOSITE RENT”.
TAX TREATMENT OF COMPOSITE RENT

Where composite rent includes rent of building and charges for different services (lifts, security
etc.) / Charges for other assets (furniture) & both are separable, the composite rent is has to be
split up in the following manner:
(a) the sum attributable to use of property is to be assessed under section 22 as “Income
from House Property”;
(b) the sum attributable to use of services/assets is to charged to tax under the head
“PGBP” or under the head “IOS”
If the same is not separable, then whole such sum is taxable either as business income or
income from other sources;
INCOME FROM HOUSE PROPERTY SITUATED OUTSIDE INDIA

1. Taxability of Income from HP will depend upon the Residential Status of the Assessee.
2. In case of a Resident in India (Resident and Ordinarily Resident in case of Individuals and
HUF), Income from property situated outside India is always taxable in India, whether such
income is brought into India or not.
3. In case of a NR or RNOR (in case of Individual/HUF), Income from a property situated outside
India is taxable in India only if Rent is received in India.
4. Any tax or expenditure (prescribed one) incurred towards earning such income shall be allowed
as a deduction.
5. Income accruing or received in Foreign Currency should be converted into Indian Rupees in TT
Buying Rate on the last day of the previous year. [Rule 115]
Question: X, an American national, is a ROR in India during the previous year ending on 31.3.2020. He was
owner of a building located in New York. The same was let out on rent at US $12,500 per month. The Municipal
Corporation of New York was paid taxes on such building of US $ 10,000 on 12.2.2020. Besides the above
property, he purchased a piece of land at Delhi for construction of a house. The said land was given on rent for
running a dairy @ ` 3,000 per month with effect from 1.10.2019. The value of one US $ in Indian rupee
throughout the year remained at ` 46.50. X wants to know his taxable income.
Answer: HP Income – ` 45,57,000; Income from other Source: ` 18,000
CA Suraj Agrawal
House Property 3.6
Class Notes
CA Suraj Agrawal
House Property 3.7
DETERMINATION OF ANNUAL VALUE [SECTION 23]
This involves 3 steps:
Step 1: Determination of Gross Annual Value (GAV).
[Tax under the head “Income from House Property” is not a tax upon rent of a
property. It is a tax on inherent capacity of a building to yield income. {Section
23(1)}]
Step 2: From the GAV computed in step 1, we deduct municipal tax paid by the owner during
the previous year.
Step 3: The balance will be the Net Annual Value (NAV), which as per the Income-tax Act is the
annual value.
DETERMINATION OF ANNUAL VALUE IN DIFFERENT SITUATION
(1) Where the property is let out throughout the previous year
[Section 23(1)(a)/(b)]
Where the property is let out for the whole year, then the Gross Annual Value (GAV) would be
the higher of –
(a) Annual Letting Value (ALV) OR EXPECTED RENT and
(b) Actual rent received or receivable during the year as reduced by Unrealised Rent.
ALV (or Expected Rent) means Municipal Valuation or Fair Rent (Market Rent), whichever
is more, subject to maximum of Standard Rent. In brief,
(i) Municipal Valuation

Higher
(ii) Fair Rent
Lower (ALV)
(iii) Std. Rent
Higher will be GAV.
(iv) Actual Rent [Less Unrealised Rent]
CA Suraj Agrawal
House Property 3.8
NOTE:
1) As per section 23(1)(a), the annual value of any property shall be the sum for which the
property might reasonably be expected to be let from year to year.
2) Municipal value is the value determined by the municipal authorities for levying municipal taxes
on house property.
3) Fair Rent means rent which similar property in the same locality would fetch.
4) The Standard Rent is fixed by the Rent Control Act.
5) Municipal Tax paid by Tenant is neither to be added to the Actual Rent, nor to be allowed as
deduction.
6) As per section 23(1)(a), ALV cannot exceed standard rent (SR)
7) Repair Expenses met by the Tenant shall not be added to Actual Rent.
8) Advance rent cannot be rent received / receivable of the year of receipt.
9) Commission paid by owner of a property to a broker for rental income is not deductible.
10) A Non-Refundable Deposit will be included in rent received or receivable on pro-rata basis.
Example 1: Find out the ALV
Municipal Value 50 60 70
Fair Rent 55 58 80
Standard Rent 54 75 50
ALV/Expected Rent
Example 2: Compute the GAV of each house:

Particulars House I House II House III House IV House V
Municipal Value 80,000 55,000 65,000 24,000 75,000

Fair Rent 90,000 60,000 65,000 25,000 80,000
Standard Rent N.A. 75,000 58,000 N.A. 78,000
Actual rent 72,000 72,000 60,000 30,000 72,000
(Received/Receivable)
CA Suraj Agrawal
House Property 3.9
(2) Where Let Out Property is vacant for part of the year [Section 23(1)(c)]
Where let out property is vacant for part of the year and owing to vacancy, the actual rent is lower
than the ALV, then the actual rent received or receivable will be the GAV of the property.
NOTE:
1. If Actual Rent received or receivable (after Vacancy or Unrealised Rent) is higher than ALV,
than Section 23(1)(c) will not apply and Actual rent received/receivable will be GAV.
2. If Actual Rent received or receivable (After Unrealised Rent) is lower than the ALV, than
Section 23(1)(c) will not apply even if there is Vacancy as lower rent is not due to Vacancy.
Example 3: Compute the Gross Annual Value (Loss Due to Vacancy):

I II III IV
Municipal Value 60 68 70 75
Fair Rent 65 60 64 70
Standard Rent 63 70 45 72
Actual Rent (12 Months) 72 48 60 66
Vacancy 2 Months
GAV
Example 4: Compute the Gross Annual Value:

I II III IV
Municipal Value 60 68 70 75
Fair Rent 65 60 64 70
Standard Rent 63 70 45 72
Actual Rent (12 Months) 72 84 60 66
Unrealised Rent 10 12 14 16
Vacancy 2 Months
CA Suraj Agrawal
House Property 3.10
Class Notes
CA Suraj Agrawal
House Property 3.11
(3) In case of Self-Occupied Property or Unoccupied Property [Sec 23(2)]
(a) Where the property is self-occupied (one house) for own residence or unoccupied throughout
the previous year, its ANNUAL VALUE WILL BE NIL, provided no other benefit is derived by
the owner from such property.
(b) The benefit of “Nil” Annual Value is available only for upto two self-occupied or
unoccupied house properties i.e. for either one house property or two house properties
(Amended by Finance Act 2019 w.e.f. AY 2020-21)
(c) The benefit of exemption is available only to an individual/HUF.
(d) The expression “Unoccupied property” refers to a property which cannot be occupied by the
owner by reason of his employment, business or profession at a different place and he
resides at such other place in a building not belonging to him.
(e) No deduction for municipal taxes is allowed in respect of such property.
(4) Where a house property is Let-out for Part of the year and Self-occupied
for part of the year
(a) If a single unit of a property is self-occupied for part of the year and let-out for the remaining
part of the year, then the ALV for the whole year shall be taken into account for
determining the GAV.
(b) The ALV for the whole year shall be compared with the actual rent for the let out period
and whichever is higher shall be adopted as the GAV.
(c) Further, Property taxes for the whole year is allowed as deduction provided it is paid by the
owner during the previous year.
(5) In case of Deemed to be Let Out Property [Section 23(4)]

(a) Where the assessee owns more than TWO one properties for self-occupation, then the
income from any TWO one such property, at the option of the assessee, shall be
computed under the self occupied property category and its annual value will be NIL. The
other self occupied/ unoccupied properties shall be treated as “deemed let out
properties”.
(b) This option can be changed year after year in a manner beneficial to the assessee.
(c) In case of deemed let-out property, the ALV shall be taken as the GAV.
(d) The question of considering actual rent received/receivable does not arise. Consequently, no
adjustment is necessary on account of property remaining vacant or unrealized rent.
(e) Municipal taxes actually paid by the owner during the previous year can be claimed as
deduction.
CA Suraj Agrawal
House Property 3.12
Class Notes
CA Suraj Agrawal
House Property 3.13
(6) In case of a house property, a portion let out and a portion self-occupied
(a) Income from any portion or part of a property which is let out shall be computed separately under
the “let out property” category AND the other portion or part which is self occupied shall be
computed under the “self-occupied property” category.
(b) There is no need to treat the whole property as a single unit for computation of income
from house property.
(c) Municipal valuation/fair rent/standard rent, if not given separately, shall be apportioned between
the let-out portion and self-occupied portion either on plinth area or built-up floor space or on such
other reasonable basis.
(d) Property taxes, if given on a consolidated basis can be bifurcated as attributable to each portion
or floor on a reasonable basis.
PROPERTY TAXES [MUNCIPAL TAXES]

1. Property taxes levied are allowable as deduction from the GAV subject to the following two
conditions:
a) It should be borne by the assessee (owner); and
b) It should be actually paid during the previous year.
2. Deduction if Paid: If property taxes levied by a local authority for a particular previous year is not
paid during that year, no deduction shall be allowed in the computation of income from house
property for that year.
3. However, if in any subsequent year the arrears are paid, then the amount so paid is allowed as
deduction in computation of income from house property for that year.
Thus, we find that irrespective of the previous year in which the liability to pay such taxes arise
according to the method of accounting regularly employed by the owner, the deduction in respect of
such taxes will be allowed only in the year of actual payment.
4. In case of property situated outside India, taxes levied by local authority of the country in which
the property is situated is deductible.
5. Municipal Tax includes services related tax like Water Tax and Sewerage Tax levied by any Local
Authority.
6. Municipal Tax can be claimed as a deduction only in respect of let-out or deemed to be let-out
properties (i.e. more than one property self-occupied).
CA Suraj Agrawal
House Property 3.14
NOTIONAL INCOME Vs REAL INCOME
Under this head of income, there are circumstances where notional income is charged to tax
instead of real income. They are:
1. Where the assessee owns more than TWO house property for the purpose of self
occupation, the annual value of any TWO of those properties, at the option of the
assessee, will be nil and the other properties are deemed to be let-out and income has to
be computed on a notional basis by taking the ALV as the GAV.
2. In the case of let-out property throughout the previous year, if the Expected Rent (ER)
exceeds the actual rent received or receivable, then ER is taken as the GAV.
3. In the case of let-out property which is vacant for part of the year, if the actual rent
received or receivable for let out period is less than the Expected Rent (ER) for whole year
not owing to vacancy, then ER for whole year is taken as the GAV.
4. In case of a house property held as stock-in-trade by assessee (which is not let out),
income has to be computed on a notional basis by taking the Expected Rent (ER) as the
GAV after 2 years from the end of the financial year in which certificate of completion of
construction of the property is obtained from the competent authority.
CA Suraj Agrawal
House Property 3.15
TREATMENT OF UNREALISED RENT [Explanation to Section 23(1)]
1) The Actual rent received/receivable used in calculating GAV should not include any amount of
rent which is not capable of being realised.
2) RULE – 4: However the conditions prescribed in Rule 4 should be satisfied. They are
(a) the tenancy is bona fide;
(b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the
property;
(c) the defaulting tenant is not in occupation of any other property of the assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings for the
recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings
would be useless.
DEDUCTIONS FROM ANNUAL VALUE [SECTION 24]

There are Two Deductions from Annual Value. They are:
(1) 30% of NAV; and

(2) interest on borrowed capital
(1) 30% of NAV is allowed as deduction under section 24(a)

This is a flat deduction and is allowed irrespective of the actual expenditure incurred.
In case of self-occupied property where the annual value is nil, the assessee will not be
entitled to deduction of 30%, as the annual value itself is nil.
No Deduction will be given in respect of Repairs, Land Revenue, Brokerage, Recovery agent
charges etc.
(2) Interest on borrowed capital is allowed as deduction under section 24(b)

(a) Interest payable on loans borrowed for the purpose of Acquisition, Construction, Repairs,
Renewal or Reconstruction can be claimed as deduction.
(b) Interest payable on a fresh loan taken to repay the original loan raised earlier for the aforesaid
purposes is also admissible as a deduction.
(c) ACCRUAL BASIS: Deduction under section 24(b) for interest is available on accrual basis.
Therefore interest accrued but not paid during the year can also be claimed as deduction.
(d) Where a buyer enters into an arrangement with a seller to pay the sale price in installments
along with interest due thereon, the seller becomes the lender in relation to the unpaid purchase
price and the buyer becomes the borrower. In such a case, unpaid purchase price can be treated
as capital borrowed for acquiring property and interest paid thereon can be allowed as
deduction under section 24.
(e) Interest on unpaid interest is not deductible.
(f) No deduction is allowed for any brokerage or commission for arranging loan.
(g) Interest payable outside India without deduction of tax at source and in respect of which no
person in India is treated as an agent u/s 163 shall not be an allowable expenditure.
(h) The Assessee should furnish a certificate from the person from whom the amount is borrowed,
specifying the amount of Interest.
CA Suraj Agrawal
House Property 3.16
(i) Date of completion not relevant: Interest relating to the year of completion of construction
can be fully claimed in that year irrespective of the date of completion.
(j) Interest may include Interest for the year (Current Year Interest) & 1/5th of the
interest, if any, pertaining to the pre-acquisition or pre-construction period.
Pre-acquisition/pre-construction period = Period Starting from the date of borrowing and

ending on the,
(i) 31st March immediately prior to the date of completion of construction or acquisition of property,
or,
(ii) Date of repayment of loan, whichever is earlier.
Period of Deduction: 1/5th of the interest of pre-acquisition or pre-construction period, for 5

consecutive years starting from the previous year in which the property is acquired or constructed.
Deduction of 5 installment will be available even if the loan outstanding is repaid before 5
year period
(k) Maximum Limit of deduction in respect of interest on capital borrowed in

case of one/two self-occupied property
In this case, the assessee will be allowed a deduction (or, as the case may be, the aggregate of
the amount of deduction) on account of Interest (including 1/5th of the Accumulated Interest
of Pre-Construction Period) as under –
A Where the property has been acquired, constructed, Actual interest payable in
repaired, renewed or reconstructed with borrowed aggregate for one or two self-
capital before 1.4.99. occupied properties, subject to
maximum of ` 30,000.
B Where the property is acquired or constructed with Actual interest payable in aggregate
capital borrowed on or after 1.4.99 and such for one or two self-occupied
acquisition or construction is completed within 5 properties, subject to maximum of
years from the end of the financial year in which the ` 2,00,000
capital was borrowed.
C Where the property is repaired, renewed or Actual interest payable in

reconstructed with capital borrowed on or after aggregate for one or two self-
1.4.99. occupied properties, subject to
maximum of ` 30,000.
Note: Total deduction for all loans cannot exceeds ` 200,000 in case of TWO one Self-
occupied Property.
CA Suraj Agrawal
House Property 3.17
Class Notes
CA Suraj Agrawal
House Property 3.18
Class Notes
CA Suraj Agrawal
House Property 3.19
INADMISSIBLE DEDUCTIONS [SECTION 25]
Interest chargeable under this Act which is payable outside India shall not be deducted if tax has not
been paid or deducted from such interest or there is no person in India who may be treated as an agent
under section 163.
TAXABILITY OF RECOVERY OF UNREALISED RENT & ARREARS OF RENT

RECEIVED [SECTION 25A]
(i) Unrealised rent is deducted from actual rent in determination of annual value under section 23,
subject to fulfillment of conditions under Rule 4. Subsequently, when the amount is
realised it gets taxed under Section 25A in the year of receipt.
(ii) If the assessee has increased the rent payable by the tenant and the same has been in dispute and
later on the assessee receives the increase in rent as arrears, such arrears is also assessable
under section 25A.
S. No. Unrealised rent [Section 25A] Arrears of rent [Section 25A]
1 Taxable in the hands of the assessee Taxable in the hands of the assessee
whether he is the owner of that property or whether he is the owner of that property or
not. not.
2 Taxable as income of the previous year in Taxable as income of the year in which he
which he recovers the unrealized rent. receives the arrears of rent.
3 30% of the amount of recovery shall be 30% of the amount of arrears shall be
allowed as deduction. allowed as deduction.
Example
Mr. Anand sold his residential house property in March, 2019. In June, 2019, he recovered rent
of ` 10,000 from Mr. Gaurav, to whom he had let out his house for two years from April 2012 to
March 2014. He could not realise two months rent of ` 20,000 from him and to that extent his
actual rent was reduced while computing income from house property for A. Y. 2014-15.
Further, he had let out his property from April, 2014 to February, 2019 to Mr. Satish. In April,
2017, he had increased the rent from ` 12,000 to ` 15,000 per month and the same was a subject
matter of dispute. In September, 2019, the matter was finally settled and Mr. Anand received
` 69,000 as arrears of rent for the period April 2017 to February, 2019.
Would the recovery of unrealised rent and arrears of rent be taxable in the hands of Mr. Anand,
and if so in which year?
Solution
Since the unrealised rent was recovered in the P.Y. 2019-20, the same would be taxable in the A.Y.
2020-21 under section 25A, irrespective of the fact that Mr. Anand was not the owner of the house in
that year. Further, the arrears of rent was also received in the P.Y. 2019-20, and hence the same would
be taxable in the A.Y. 2020-21 under section 25A, even though Mr. Anand was not the owner of the
house in that year.
CA Suraj Agrawal
House Property 3.20
A deduction of 30% of unrealised rent recovered and arrears of rent would be allowed while computing
income from house property of Mr. Anand for A.Y. 2020-21.
Computation of income from house property of Mr. Anand for A.Y. 2020·21
S. No. Particulars `
i. Unrealised rent recovered 10,000
ii. Arrears of rent received 69,000
iii. Total 79,000
iv. Less: Deduction@30% 23,700
v. Income from house property 55,300
CA Suraj Agrawal
House Property 3.21
TREATMENT OF INCOME FROM PROPERTY OWNED BY A PARTNERSHIP
FIRM
1. Where an immovable property or properties is included in the assets of a firm, the income from
such property should be assessed in the hands of the firm only.
2. Hence, the property income cannot be assessed as income of the individual partner in respect
of his share in the firm.
TREATMENT OF INCOME FROM CO-OWNED PROPERTY [SECTION 26]

1. Where property is owned by two or more persons, whose shares are definite and ascertainable,
then the income from such property cannot be taxed as income of an AOP.
2. Where the house property owned by co-owners is self occupied by each of the co-owners, the
annual value of the property of each co-owner will be NIL and each co-owner shall be entitled to a
deduction of ` 30,000 or ` 2,00,000, as the case may be.
3. Where the house property owned by co-owners is let out, the income from such property shall
be computed as if the property is owned by one owner and thereafter the income so computed
shall be apportioned amongst each co-owner as per their specific share.
Question:
“Mr. Raman is a co-owner of a house property alongwith his brother:
Municipal value of the property ` 1,60,000
Fair Rent ` 1,50,000
Standard Rent under the Rent Control Act ` 1,70,000
Rent received ` 15,000 p.m.
The loan for the construction of this property is jointly taken and the interest charged by the bank is
` 25,000 out of which ` 21,000 have been paid. Interest on the unpaid interest is ` 450. To repay this
loan, Raman and his brother have taken a fresh loan and interest charged on this loan is ` 5,000. The
Municipal Taxes of ` 5,100 have been paid by the tenant. Compute the income from this property
chargeable in the hands of Mr. Raman. [Income from HP- ` 48,000]
CA Suraj Agrawal
House Property 3.22
Class Notes
CA Suraj Agrawal
House Property 3.23
DEEMED OWNERSHIP [SECTION 27]
The following persons, though not legal owners of a property, are deemed to be the owners for the
purposes of section 22 to 26:
(i) TRANSFER TO A SPOUSE [Section 27(i)]
In case of transfer of house property by an individual to his or her spouse otherwise than for
adequate consideration [Except in connection with an agreement to live apart], the transferor
is deemed to be the owner of the transferred property.
(ii) TRANSFER TO A MINOR CHILD

In case of transfer of house property by an Individual to his or her MINOR CHILD [Except a
transfer to Minor Married Daughter] otherwise than for adequate consideration, the transferor
would be deemed to be owner of the house property transferred.
(iii)HOLDER OF AN IMPARTIBLE ESTATE

The impartible estate is a property which is not legally divisible.
(iv) Member of a co-operative society etc. [Section 27(iii)]

A member of a co-operative society, company or other association of persons to whom a building
or part thereof is allotted shall be deemed to be owner of that building allotted to him although the
co-operative society/company/ association is the legal owner of that building.
(v) Person in possession of a property [Section 27(iiia)]

A person who is allowed to take or retain the possession of any building or part thereof in part
performance of a contract of the nature referred to in section 53A of the Transfer of Property
Act shall be the deemed owner of that house property.
(vi) Person having right in a property for a period not less than 12 years [Section
27(iiib)]:
A person [Lessee] who acquires any rights in any building or part thereof, by virtue of any
transfer by way of lease for not less than 12 years, shall be deemed to be the owner of that
building or part thereof.
Exception – In case of any rights by way of lease from month to month or for a period not
exceeding one year, Lessee shall not be treated as deemed owner.
(vii)DISPUTED OWNERSHIP:
If the title of ownership is disputed in a court of law, the income shall be taxable in the
hands of recipient.
CA Suraj Agrawal
House Property 3.24
CASES WHERE INCOME FROM HOUSE PROPERTY IS EXEMPT FROM TAX
S. No. Section Particulars

1 10(1) Income from any Farm House forming part of agricultural income.
2 10(19A) Any one palace of an ex-ruler.
3 10(20) Income from house property of a local authority.
4 10(21) Income from house property of an approved scientific research
association.
5 10(23C) Property income of universities, educational institutions, etc.
6 10(24) Property income of any registered trade union.
7 11 Property held for charitable or religious purpose.
8 13A Property income of any political party.
9 22 Property used for own business or profession
10 23(2) TWO One Self-occupied property of an individual/HUF
CA Suraj Agrawal
House Property 3A. 1
HOUSE PROPERTY – PRACTICAL QUESTION

1) Compute GAV of the following houses let out throughout the year (Amount in `)
A B C D
Municipal Value 84,000 84,000 72,000 80,000
Fair Rent 72,000 72,000 84,000 70,000
Standard Rent 60,000 1,20,000 60,000 -
Actual Rent Receivable (12 month) 1,20,000 90,000 90,000 84,000
Unrealised Rent 24,000 30,000 15,000 14,000
2) Find out the GAV in each case (amount in `) [Vacancy]
House - I House - II House – III
Municipal Value 30,000 26,000 35,000
Annual Rent 42,000 36,000 30,000
Fair Rent 36,000 28,000 30,000
Standard Rent 30,000 35,000 36,000
Unrealised Rent 7,000 9,000 2,500
Period vacancy 1 month 2 months 3 months
3) Determine the GAV in the following cases:

a. Deep owns a flat which assessed by the local authority with annual value of 1,00,000/. The property
was let out for ` 8,500/- p.m. However the tenant vacated the property on 31.10.2019. For the months
of November 2019 to February 2020 the flat was vacant as no proper tenant could be identified. In
March 2020 a new tenant occupied at a rent of ` 12,000 p.m. [Vacancy]
b. Ram owned a flat, (Annual letting Value ` 90,000) in which he was living. By the end of May 2019 he
st
completed construction of an independent house and on 1 of June 2019, shifted to the new
independent house. From June 2019, the flat was let out to his relative for a rent of ` 7,000/- p.m.
c. Laxman living in his apartment (fair rent ` 1,02,000) till the end of April 2019 shifted to an
accommodation provided by his employer. His apartment was vacant for 4 months (May to August)
and could be let out only from September for ` 17,000 p.m. [Vacancy]
4) Mr. Aakash owns three house properties in Mumbai, the particulars of which are given below:
House I House II House III
Particulars (``) (`
`) (`
`)
Municipal Valuation 2,00,000 1,50,000 1,00,000
Fair Rent 2,80,000 1,80,000 1,20,000
Standard Rent 2,40,000 2,00,000 N.A.
Actual Rent(p.m.) 22,000 17,500 10,500
Period of vacancy [Vacancy] Nil 1 month 6 month
Municipal Taxes paid 40,000 80,000 15,000
Compute income from HP in all the 3 cases.

st
5) Mr. Ramesh completed construction of his house property on 31 May 2019 on a leasehold land. The
house property was self – occupied during June and July 2019 and let- out thereafter for a rent of
` 10,000 per month. The amount paid for during the year: Municipal taxes ` 6,000; Repairs ` 12,000;
Ground rent ` 24,000 and insurance premium ` 4,000. Determine the taxable income from house
property. [Fair Rent – 70,000 p.a.]
6) Mr. X owns a building property, the income from which is chargeable under the head “Income from house
property”. He incurs, apart from making payment towards land revenue, repairs, collection charges, etc.,
stamp duty and registration charges in respect of lease deed and also salary paid to caretaker. He wants
to know whether he can claim such expenditure?
7) In the following cases State the head of income under which the receipt is to be assessed and
comment:
(i) X Ltd. lets out its property Y. Y sublets it. How is subletting receipt to be assessed in the hand of Y.
(ii) X has built a house on a leasehold land. He has let-out the property and claims income from House
property under “Other Sources” and deducted expenses on repair, security charges, insurance and
collection charges in all amounting to 40% of receipts.
CA Suraj Agrawal
8) A house property is let out for ` 6,000 PM including ` 1,000 PM as consideration for electricity facility.
Total municipal taxes of ` 5,000 are also paid by the tenant. Compute total income of the owner if he
has actually paid electricity bills of ` 15,000 during the P.Y.
9) Ramesh, a foreign national, is a resident and ordinarily resident in India during the PY 2019-20. He owns
a house in USA, which he has let out at $ 12,000 p.m. The municipal taxes paid to the Municipal
Corporation of USA is $ 8,000 during the PY 2019-20. The value of one $ in Indian rupee to be taken at `
40. Compute Ramesh’s taxable income.
10) Anirudh has a property whose municipal valuation is ` 1,30,000 p.a. The fair rent is ` 1,10,000 p.a. and
the standard rent fixed by the Rent Control Act is ` 1,20,000 p.a. The property was let out for a rent of `
11,000 p.m. throughout the previous year. Unrealised rent was ` 11,000 and all conditions prescribed by
Rule 4 are satisfied. He paid municipal taxes @10% of municipal valuation. Interest on borrowed capital
was ` 40,000 for the year. Compute the income from house property of Anirudh.
11) Mr. Ajay furnishes the following particulars in respect of a house property:
Municipal Valuation : ` 2,00,000
Fair Rent : ` 2,40,000
Actual Rent : ` 20,000 PM
Municipal Taxes paid : ` 10,000
The property was vacated on 1.11.2019 and thereafter the property was let out for ` 25,000 PM. The
assessee could not realize rent for the month of September and october 2019 due to death of the earlier
tenant. Compute the income for HP.
12) Ganesh has a property whose municipal valuation is ` 2,50,000 p.a. The fair rent is ` 2,00,000 p.a. and
the standard rent fixed by the Rent Control Act is ` 2,10,000 p.a. The property was let out for a rent of
` 20,000 p.m. However, the tenant vacated the property on 31.1.20. Unrealised rent was ` 20,000 and all
conditions prescribed by Rule 4 are satisfied. He paid municipal taxes @8% of municipal valuation.
Interest on borrowed capital was ` 65,000 for the year. Compute the income from house property of
Ganesh. [Vacancy]
13) Mr. X took a loan of ` 6,00,000 @ 10% on 1/07/2016. The construction is actually completed on
31/05/2018. The assessee repaid loan of ` 2,00,000 on 30/06/2017 & ` 3,00,000 on 31/12/2019.
Compute deduction of Interest.
14) X takes a loan of ` 40,000 @ 15% per annum for construction a house on June 1, 2014. Construction of
the house is completed on January 20, 2020. Date of repayment of loan is
a. January 16, 2023, or b) June 30, 2021, or c) October 31, 2017.
Compute the interest allowable as deduction under section 24.
15) Arvind had taken a loan of ` 5,00,000 for construction of property on 1.10.2018. Interest was payable @
10% p.a. The construction was completed on 30.6.2019. No principal repayment has been made up to
31.3.2020. Compute the interest allowable as deduction under section 24 for the PY 2019-20.
16) Mr. Amit took a loan of ` 2,00,000 @ 14% for construction of house on 01/07/2016. The construction is
actually completed on 31/12/2019. Calculate deduction of Interest on loan.
17) Arvind commenced construction of a residential house intended exclusively for his residence, on
1.11.2018. he raised a loan of ` 5,00,000 at 16% interest for the purpose of construction on 1.11.2018.
Finding that there was an over-run in the cost of construction he raised further loan of ` 8,00,000 at the
same rate of interest on 1.10.2019. What is the interest allowable under section 24, assuming that
the construction was completed on 31.3.2020?
18) Compute Income from house property of Mr. X, having house property in Delhi, for PY 2019-20:
Municipal Valuation : ` 1,75,000 PA
Fair Rent : ` 2,50,000 PA
Std. Rent : ` 2,10,000 PA
Actual Rent : ` 22,500 Per Month
Municipal taxes are ` 40,000 PA and Repairs towards the house are ` 23,000. Also X has taken a loan of
` 8,00,000 @ 10% on 1.7.2016 for construction of house which is completed on 20.2.2019. The loan is
still not paid.
CA Suraj Agrawal
19) Mr Anil borrowed a loan of ` 8,00,000 on 1.7.2014 @ 12%. The construction is completed on 31.11.2016.
Compute Income if house is self occupied for PY 2019-20. Other details are as under:
Municipal Valuation ` 3,50,000. Fair Rent ` 250,000. Standard Rent ` 4,20,000. Municipal Taxes Paid `
20,000.
20) Ms. Ramya owns a house property the construction of which was completed in November 2016. The
house is let-out for a rent of ` 9,000 per month. On 1 April 2014 she borrowed a loan of ` 3 lakhs for the
th
purpose of construction @ 18% interest. On 30 November, 2016, she borrowed a loan of ` 2 lakhs @
15% interest and utilized this amount along with interest free rental advance of ` 1 lakh obtained from the
tenant and repaid the original loan of ` 3,00,000/-. The house is insured and the premium of ` 2,000 is
regularly paid each year. Property taxes paid is ` 15,000/-. Compute the income from house property.
21) [Vacancy] Lakdawala completed construction of a residential house on 1.4.2015. Interest paid on loans
borrowed for purpose of construction during the 2 years prior to completion was ` 20,000. The house was
let-out on a monthly rent of ` 4,000. Annual Corporation Tax paid is ` 6,000. Interest paid during the year
is ` 15,000. Amount spent on repairs is ` 2,000. Fire Insurance Premium paid is ` 1,500 p.a. Property
was vacant for 3 months. Annual letting value is ` 30,000. Compute the income chargeable under the
head “Income from House Property”.
22) Puja has one house property at Indra Nagar in Bangalore. She stays with her family in the house. The
rent of similar property in the neighbourhood is ` 25,000 p.m. The municipal valuation is ` 23,000 p.m.
Municipal taxes paid is ` 8,000. The construction of the house was started in the year 2013 with a loan of
` 20,00,000 taken from SBI Housing Finance Ltd. The construction was completed on 30.11.2016. The
accumulated interest up to 31.3.2016 is ` 1,50,000. During the previous year 2019-20, Puja paid `
1,88,000 which included ` 1,44,000 as interest. Compute Puja’s income from house property.
23) Compute Income from house property of Mr Yatin, having house property in Delhi, for P.Y. 2019-20
(Let out for 10 Months and Self occupied for 2 month):
Municipal Valuation : ` 3,15,000 P.A.
Fair Rent : ` 3,50,000 P.A.
Std. Rent : ` 3,20,000 P.A.
Actual Rent (Let out for 10 Month) : ` 25,000 P.M.
Municipal taxes are 20% of MV and half of the amount is paid. Yatin also has taken a loan of ` 10,00,000
@ 10% on 1.7.2014 which is fully repaid on 31.12.2017 and construction of house is completed on
20.4.2018.
24) Smt. Rajni owns a house property at Adyar in Kolkata. The municipal value of the property is
` 5,00,000, fair rent is ` 4,20,000 and standard rent is ` 4,80,000. The property was let-out for ` 50,000
p.m. up to December 2019. Thereafter, the tenant vacated the property and Smt. Rajni used the house for
self-occupation. Rent for the months of November and December 2019 could not be realised in spite of
the owner’s efforts. All the conditions prescribed under Rule 4 are satisfied. She paid municipal taxes
@12% during the year. She had paid interest of ` 25,000 during the year for amount borrowed for repairs
for the house property. Compute her income from house property.
25) Raja owned a house property at Chennai which was occupied by him for the purpose of his
residence. He was transferred to Mumbai in June, 2019 and therefore he let-out the property with effect
st
from 1 July, 2019 on a monthly rent of ` 3,000 [Fair Rent – ` 25,000]. The corporation tax payable in
respect of the property was ` 6,000 of which 50% was paid by him before 31.03.2020. Interest on money
borrowed for the construction of the property amounted to ` 20,000. Compute the income from house
property.
26) X owns a property at Delhi (municipal value ` 1,64,000, fair rent: ` 2,16,000, standard rent: `
1,80,000). The house is let out up to January 31, 2020 (monthly rent being ` 14,000). From February 1,
2020, the property is self-occupied for own residential purposes. Expenses incurred by X are: municipal
tax: ` 6,000 (actually paid), repairs: ` 2,100, insurance : ` 1,100, interest on capital borrowed (dated of
borrowing being June 10, 1996) for acquiring the property: ` 1,23,000. Assuming that the income of x
from other sources is ` 1,86,000, find out the net income of X. Does it make any difference if
property is let out up to January 31, 2020 @ ` 19,000 per month? There is no unrealized rent.
CA Suraj Agrawal
27) X owns a residential house property. It has two equal residential units- Unit 1 and Unit 2. While
Unit 1 is self – occupied by X for his residential purpose, Unit 2 is let out on rent being ` 6,000 per month,
rent of 2 months could not be recovered). Municipal value of the property is ` 1,30,000, standard rent is `
1,25,000 and fair rent is ` 1,40,000. Municipal tax is imposed @ 12% which is paid by X. Other expenses
for the previous year being repairs: ` 250, insurance: ` 600, interest on capital (borrowed during 1998) for
constructing the property: ` 63,000. Find the income of X on the assumption that income of X from
other sources is ` 1,80,000.
28) ½ portion of the house has been let out during the P.Y. @ ` 30,000 PM ; ¼ portion is self occupied for
own residence and balance ¼ is used for own business purposes. Total municipal taxes paid ` 40,000. A
loan was taken for renovation of house and Interest paid on the same during the PY was ` 36,000.
Calculate Income u/h HP.
29) [Vacancy] Mr. X is the owner of a house property. 30% portion is self occupied and remaining 70%
is let out on monthly rent of ` 13,500 pm. The let out portion remains vacant for 2 months and one month
rent could not be realized. The MV, FR and SR of complete house property are ` 2,00,000, ` 2,50,000 &
` 2,10,000. Municipal taxes @ 10% are paid by the owner of the house property. Compute total income
from house property.
30) [Vacancy] Mr. X owns one residential house in Mumbai. The house is having two units. First unit of the
house is self occupied by Mr. X and another unit is rented for ` 8,000 p.m. the rented unit was vacant for
2 months during the year. The particulars of house for the previous year 2019-20 are as under:
Standard rent ` 1,62,000 p.a.
Municipal valuation ` 1,90,000 p.a.
Fair rent ` 1,85,000 p.a.
Municipal tax 15% of municipal valuation
Light and water charges ` 500 p.m
Interest on borrowed capital ` 1,500 p.m.
Lease money ` 1,200 p.a.
Insurance charges ` 3,000 p.a.
Repairs ` 12,000 p.a.
Compute income from house property of Mr. X.
31) Ajay owns a house in Madras. During the previous year 2019-20, 2/3 rd portion of the house was
self-occupied and 1/3rd portion was let out for residential purposes at a rent of ` 8,000 p.m. Municipal
value of the property is ` 3,00,000 p.a., fair rent is ` 2,70,000 p.a. and standard rent is ` 3,30,000. He
paid municipal taxes @ 10% of municipal value during the year. A Loan of ` 25,00,000 was taken by him
during the year 2013 for acquiring the property. Interest on loan paid during the previous year 2019-20
was ` 1,20,000. Compute Ajay’s income from house property.
32) Mrs. Rohini Devi, a citizen of the U.S.A., is a resident and ordinarily resident in India during the
financial year 2019-20. She owns two house properties at Los Angeles, U.S.A. which is used as her
residence. The annual value of the house is $ 20,000 & $ 25,000 respectively. The value of one USD may
be taken as ` 70.
She took ownership and possession of a flat in Chennai on 1.7.2019, which is used for residence, while
she is in India. The flat was used by her for 7 months only during the year ended 31.3.2020. Whilst the
municipal valuation is ` 32,000 p.m., the fair rent is ` 4,20,000 p.a. She paid the following to Corporation
of Chennai:
Property Tax ` 16,200
Sewerage Tax ` 1,800
She had taken a loan from Standard Chartered Bank for purchasing this flat. Interest on loan was as
under:
`
Period prior to 1.4.2019 49,200
1.4.2019 to 30.6.2019 50,800
1.7.2019 to 31.3.2020 1,31,300
She has a house property in Bangalore, which was sold in March, 2013. In respect of this house, she
received arrears of rent of ` 60,000 in March, 2020. This amount has not been charged to tax earlier.
Compute the income chargeable from house property of Mrs. Rohini Ravi, exercising the most
beneficial option available.
CA Suraj Agrawal
33) Mrs. Indu, a resident individual, own a house in USA. She receives rent @ $ 2,000 per month. She
paid municipal taxes of $1,500 during the financial year 2019-20. She also owns a two storied house in
Mumbai, ground floor is used for her residence and first floor is let out at a monthly rent of ` 10,000.
Standard rent for each floor is ` 11,000 per month. Fair rent for each floor is ` 140,000. Municipal taxes
paid for the house amounts to ` 7,500. Mrs. Indu had constructed the house by taking a loan from a
nationalized bank on 20.6.2013. She repaid the loan of ` 54,000 including interest of ` 24,000. The value
of one dollar is to be taken as ` 45. Compute total income from house property of Mrs. Indu.
34) [Vacancy] - Y owns a big house (erection completed on 31.03.2010). The house has three
independent units. Unit – I (50% of the floor area) is let out for residential purpose on monthly rent of `
8,200. Unit – I remains vacant for 1 month when it is not put to any use. A sum of ` 700 could not be
collected from the tenant. Unit –II (25% of the floor area) is used by Y for the purpose of his profession,
while Unit – III ( the remaining 25%) is utilized for the purpose of his residence. Other particulars of the
house are as follows:
Municipal valuation: ` 60,000, fair rent: ` 70,000, standard rent under the Rent control Act: ` 90,000,
municipal taxes: ` 15,000, repairs: ` 4,000, interest on capital borrowed for renewal of the property:
` 36,000, ground rent: ` 6,400, annual charge created under the will by father in favour Mrs. Y: ` 9,000
and fire insurance premium paid: ` 15,000. Income of Y from profession is ` 7,95,000 (without debiting
house rent and other incidental expenditure including admissible depreciation on the portion of house
used for profession: ` 8,000). Determine the taxable income of Y.
35) For the assessment year 2020-21, X (age: 66 years) submits the following information: [Vacancy]
Property income House I House: II
` `
Fair Rent 3,30,000 3,20,000
Municipal Valuation 3,60,000 3,50,000
Standard Rent 3,00,000 5,00,000
Annual Rent 6,00,000 4,20,000
Unrealised Rent of the P/Y 2014-15 10,000 80,000
Unrealised Rent of the P/Y 2013-14 - 3,00,000
Vacant Period (number of months) (2) (4)
Loss on account of vacancy 1,00,000 1,40,000
Municipal Taxes paid 40,000 50,000
Repairs 5,000 7,000
Insurance 20,000 30,000
Land Revenue 25,000 40,000
Ground Rent 66,000 82,000
Interest on capital borrowed by mortgaging House 1,40,000 -----
–I (funds are used for construction of House – II)
Nature of occupation Let out for Let out for
residence business
Determine the taxable income and tax liability of X.
36) Deemed Ownership: Answer the following:

a) Mr. Ram transfers a property of market value ` 10,00,000 to his wife only for ` 4,00,000. The income
from such property is ` 1,50,000. How will the property income be taxed?
b) Mr. Rohan gifts a property valuing ` 5,00,000 to his minor child being a married daughter. The annual
income from such property is ` 25,000. How will the property income be taxed?
c) Mr. Sohan gifts ` 20,00,000 to his wife and the wife purchases a house property of ` 20,00,000 out of
such money. Will Mr. Sohan be the deemed owner of the house property?
d) Mr. A gives his house property on lease to Mr. B for a total period of 13 years, but the lease is to be
renewed by Mr. B annually during this period. In whose hands will the property income be assessed?
e) Mr. X gives his house property on lease to Mr. Y for a period of two year. Mr. Y can get the lease
renewed for another two years on payment of a specified sum and so on for indefinite period. In
whose hands will the property income be assessed?
f) Mr. P leases his house property to Mr. Q for 8 months, which can be renewed every six months for
indefinite period. In whose hands will the property income be assessed?
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
House Property 3B.1
HOUSE PROPERTY – PRACTICAL SOLUTION

1. 96000, 84000, 75000 & 80,000.
2.
3. (a) 71,500 [Section 23(1)(c)]

(b) 90,000 & NIL
(c) 119000
4. House I - GAV – Actual rent being Higher – ` 22,000 x 12. Income from HP – ` 1,56,800.
House II - GAV – Actual rent being Higher – ` 17,500 x 11. Income from HP – ` 78,750.
House III - GAV – Actual rent being lower due sec 23(1)(c)– ` 10500 x 6. Income from HP – ` 33,600.
5. Income from House Property

Particulars Amount `
Gross Annual Value [` 80,000 (10,000 x 8)] 80,000
Less: Municipal taxes 6,000
Net Annual Value 74,000
Less : Deduction u/s.24
- 30% of Net Annual Value 22,200
Income from House Property 51,800
Where the house property comes into existence only during the previous year, the annual value shall be
computed only for the period for which the house existed. In this case, therefore, the annual value is
computed only for 10 months, i.e. from June 2019 to March 2020. The same analogy would apply where the
assessee purchases or sells the house property during the year and consequently owns the house property
only for part of the year.
6. Assessee cannot claim deduction in respect of such payments as they are not specified as deduction either
u/s.23 or u/s.24.
7.
(a) Income from sub-letting is taxable under the head "Income from other sources". However, if the subletting
constitutes a business activity, the same shall be taxable under the head 'Profit and gains of business and
profession'.
(b) A person who owns the building need not necessarily be the owner of the land on which the building is
constructed. The rent is derived from the building. In the present case the rent is derived from the house
on a leasehold land. Therefore the income so received is taxable under the head 'Income from house
property' and Mr. X is entitled to statutory deduction of 30% of such rent so received under/ section 24(a).
8. HP 42000 + Other Source – Electricity Facility (3,000) = ` 39,000
9. For the P.Y. 2019-20, Mr. Ramesh, a foreign national, is resident and ordinarily resident in India. Therefore,
income received by him by way of rent of the house property located in USA is to be included in the total
income in India. Municipal taxes paid in USA is be to allowed as deduction from the gross annual value.
Computation of Income from house property of Mr. Ramesh

Particulars `
Gross Annual Value ($ 12,000 × 12 × 40) 57,60,000
Less: Municipal taxes paid ($ 8,000 × 40) 3,20,000
Net Annual Value (NAV) 54,40,000
Less: Deduction u/s 24
(a) 30% of NAV = 30% of ` 60,80,000 16,32,000
CA Suraj Agrawal
House Property 3B.2
10. Computation of Income from house property of Mr. Anirudh
Particulars Amount in `
Computation of GAV
Step 1 Compute ALV
ALV = Higher of MV of ` 1,30,000 p.a. and FR of ` 1,10,000 p.a.,
but restricted to SR of ` 1,20,000 p.a. 1,20,000
Step 2 Compute actual rent received/receivable
Actual rent received/receivable less unrealized rent as per
Rule 4 = ` 1,32,000 - ` 11,000 1,21,000
Step 3 Compare ALV of ` 1,20,000 and Actual rent
received/receivable of ` 1,21,000.
Step 4 GAV is the higher of ALV and Actual rent
received/receivable 1,21,000
Gross Annual Value (GAV) 1,21,000

Less: Municipal taxes (paid by the owner during the previous
year) = 10% of ` 1,30,000 13,000
Net Annual Value (NAV) = ` 1,21,000 - ` 13,000 1,08,000

(a) 30% of NAV 32,400
(b) Interest on borrowed capital
(actual without any ceiling limit) 40,000 72,400
Income from house property (` 1,08,000- ` 32,400- ` 40,000) 35,600
11. Income from House Property – ` 161000.
12. Computation of income from house property of Ganesh

Computation of GAV
Step 1. Compute ALV
ALV = Higher of MV of `.2,50,000 p.a. and FR of
` 2,00,000 p.a., but restricted to SR of ` 2,10,000 p.a. 2,10,000
Step 2. Compute Actual rent received/receivable
Actual rent received/receivable for let out period less
unrealized rent as per Rule 4 = ` 2,00,000 - ` 20,000 1,80,000
Step 3. Compare ALV and Actual rent received/receivable
Step 4. In this case the actual rent of ` 1,80,000 is lower than
ALV of ` 2,10,000 owing to vacancy, since, had the
property not been vacant the actual rent would have been
` 2,20,000 (` 1,80,000 + ` 40,000). Therefore, actual
rent is the GAV. 1,80,000
year) = 8% of ` 2,50,000 20,000
Net Annual Value (NAV) = (` 1,80,000 - ` 20,000) 1,60,000
(a) 30% of NAV = 30% of ` 1,60,000 48,000
(b) Interest on borrowed capital
(actual without any ceiling limit) 65,000 1,13,000
Income from house property = (` 1,60,000 - 48,000 - 65,000) 47,000
13. 10000 + 22500 + 1/5 [40000 x 21 /12 + 20000] = ` 50,500.
CA Suraj Agrawal
House Property 3B.3
14. If date of repayment of loan is January 16, 2023 or June 30, 2021, then pre-construction period ends on
March 31, 2019 (being March 31 immediately prior to the date of completion of construction/ acquisition).
Interest on ` 40,000 @ 15 per cent per annum from June 1, 2014 to March 31, 2019 is ` 29,000. Amount of
installment deductible in first 5 years is ` 5,800 {i.e., ` 29000/5).
st
If date of repayment is 31 October 2017, than pre-construction period ends on same date only as no loan is
outstanding thereafter. Month – 41 month. Total Int. - 20500
Year Ending
on March
31, 2020
`
If date of repayment of loan is January 16, 2023:
Current year's interest 6,000
Pre-construction period's interest 5,800
Total deduction 11,800
If date of repayment of loan is June 30, 2021

Current year's interest 6,000*
Pre-construction period's interest 5,800
Total deduction 11,800
If date of repayment of loan is October 31, 2017:

Current year's interest Nil
Pre-construction period's interest [1/5 of 20500] 4,100
Total 4,100
15. Interest for the year (1.4.19 to 31.3.20) = 10% of ` 5,00,000 = ` 50,000
Pre-construction interest = 10% of ` 5,00,000 for 6 months (from 1.10.18 to 31.3.19) = ` 25,000
Pre-construction interest to be allowed in 5 equal annual installments of ` 5,000 from the year of completion of
construction i.e. in this case, PY 2019-20.
Therefore, total interest deduction under section 24 = 50,000+5,000 = ` 55,000.
16. Pre Construction Period : 1.7.2015 to 31.03.2018 – 33 month

Pre Construction Interest – ` 77,000
Interest Deductible: 200000 x 14% + 77,000 / 5.
17. Computation of Interest allowable under section 24 in the hands of Mr. Arvind.
Assumption : Construction completed on 31.3.2020.
In the present case,

Pre construction period starts from
1.11.2018 (date of commencement of construction & borrowing) and ending on
31.3.2019 (being 31st March immediately prior to year of completion which is 31.3.2020)
Loan Amount ` 5,00,000.
Computation of Interest for pre construction period.

` 5,00,000 x 16% * 5/12 = ` 33,333
This interest is to be allowed in five equal installments commencing from the year in which the construction is
completed i.e. interest on account of pre-construction period for assessment year 2020-21 is ` 33,333 * 1/5 =
` 6,667.
Computation of total interest for the period 1.4.2019 to 31.3.2020 `

Current year interest On loan of ` 5,00,000
` 5,00,000 x16% 80,000
On further loan of ` 8,00,000 (for the period 1.10.19 to 31.3.20)
` 8,00,000 × 16 / 100 × 6 / 12 64,000
1,44,000
Interest for pre construction period 6,667
Total interest 1,50,667
CA Suraj Agrawal
House Property 3B.4
18. GAV – 270,000; NAV – 230,000; Deduction u/s 24(a) - 69,000 + u/s 24(b) Interest – 28,000 (1/5 of 140,000) +
80,000 Income from House property – ` 53,000
19. NIL (Self Occupied) Less Interest – 96000 + 33600 [1/5 for 21 months]
20. GAV – 108000; Pre Construction – 108000/5. Income from House Property: ` 13,500.
21. GAV – 36,000; M. Tax – 6,000; NAV -30,000; Std Ded - @ 30% - ` 9,000; Interest – 15000 + 1/5 of 20000
Income from House Property – ` 2,000
22. Computation of income from house property of Smt. Puja

Particulars Amount
Annual Value of one house used for self-occupation under section 23(2) Nil
Less: Deduction under section 24
Interest on borrowed capital
Interest on loan was taken for construction of house on or after 1,74,000
1.4.99 and same was completed within 5 years - interest paid or
payable subject to a maximum of ` 1,50,000 (including
apportioned pre-construction interest) will be allowed as deduction.
In this case the total interest is ` 1,44,000 + ` 30,000 (Being
1/5th of ` 1,50,000) = ` 1,74,000.
Loss from house property -1,74,000
23. GAV – 320,000. Mun tax – 31500 (Half Paid), Pre Construction Interest – 350000 [42 month]
Income from House Property – ` 131950.
24. Computation of income from house property of Smt. Rajni

Particulars Amount in rupees
Computation of GAV
Step 1. Compute ALV for the whole year
ALV = Higher of MV of ` 5,00,000 and FR of
` 4,20,000, but restricted to SR of ` 4,80,000 4,80,000
Step 2. Compute Actual rent received/receivable
Actual rent received/receivable for the period let out less
unrealized rent as per Rule 4 = (50000x9)-
(50000x2)=4,50,000-1,00,000= 3,50,000
Step 3. Compare ALV for the whole year with the actual rent
received/receivable for the let out period i.e. ` 4,80,000
and 3,50,000
Step 4. GAV is the higher of ALV computed for the whole year
and Actual rent received/receivable computed for the letout
period. 4,80,000

year) = 12% of ` 5,00,000 60,000
Net Annual Value (NAV) = 4,80,000-60,000 4,20,000
(a) 30% of NAV = 30% of ` 4,20,000 1,26,000
(b) Interest on borrowed capital 25,000 1,51,000
CA Suraj Agrawal
House Property 3B.5
25. Computation of income chargeable under the head 'Income from house property
[For the assessment year 2020-21]
` `
Annual value ` 3,000 × 9 27,000
[w.e.f 1.7.19 to 31.3.20]
Less: Corporation tax paid during the relevant
previous year ` 6,000 x 50% 3,000
24,000
(a) 30% statutory deduction 7,200
(b) Interest on money borrowed for the construction
of the said property 20,000 27,200
Income from house property (-) 3,200
26.
If rent is If rent is
` 14,000 ` 19,000
per month per month
` `
Municipal valuation (MV) 1,64,000 1,64,000
Fair rent (FR) 2,16,000 2,16,000
Standard rent (SR) 1,80,000 1,80,000
Annual rent 1,40,000 1,90,000
Gross annual value
Step I - Reasonable expected rent of the property [MV or FR, whichever is
higher, but subject to maximum of SR] 1,80,000 1,80,000
Step II - Rent received/receivable after deducting unrealized rent but before
adjusting loss due to vacancy 1,40,000' 1,90,000
Step III - Amount computed in Step 1 or Step II, whichever is higher 1,80,000 1,90,000
Step IV - Loss due to vacancy Nil Nil
Step V - Gross annual value is Step III minus Step IV 1,80,000 1,90,000
Less: Municipal tax 6,000 6,000
Net annual value 1,74,000 1,84,000
Standard deduction (30%) 52,200 55,200
Interest on borrowed capital 1,23,000 1,23,000
Income from property (-) 1,200 5,800
Other income 1,86,000 1,86,000
Net income 1,84,800 1,91,800
27. Unit 1 - Self-occupied `

Gross annual value Nil
Less: Municipal tax Nil
Net annual value Nil
Less: Interest on borrowed capital [1 /2 of ` 63,000 or ` 30,000 whichever is lower] 30,000
Income of Unit 1 (-) 30,000
Unit 2- Let out

Municipal value (50% of ` 1,30,000) (MV) 65,000
Fair rent (50% of ` 1,40,000) (FR) 70,000
Standard rent (50% of ` 1,25,000) (SR) 62,500
Annual rent (` 6,000 X 12) 72,000
Unrealised rent 12,000
Gross Annual Value

Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject
to maximum of SR] 62,500
Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss
due to vacancy 60,000
Step III - Amount computed in Step I or Step II, whichever is higher 62,500
Step IV - Loss due to vacancy NIL
CA Suraj Agrawal
House Property 3B.6
Step V - Gross annual value is Step III minus Step IV 62,500
Less: Municipal tax (50% of 12% of ` 1,30,000) (7,800)
Net annual value 54,700
Standard deduction (30% of ` 54,700) (16,410)
Interest on borrowed capital (50% of ` 63,000) (31,500)
Income of Unit 2 6,790
Computation of income of X `
Income from house property
Unit 1: ` (-) 30,000
Unit 2: ` 6,790 (-) 23,210
Other income 1,80,000
Net income 1,56,790
28. GAV – 360000, MT – 20,000; NAV – 340,000; Interest – 18000. Income from half Portion – 220,000.
Income from Self occupied Portion – Loss of Interest 9000.
29. GAV – 13500 x 9 = 121500 [Loss due to Vacancy – Section 23(1)(c) - ALV is ` 2,10,000 x 70%]
M.Tax - 200000 x 10% x 70%
Income from House Property – ` 75,250 [121500 – 14000 – 30% (121500-14000)]
30. Computation of Income chargeable under the head 'Income from House Property" of Mr. X
Particulars 50 % self occupied 50% let out
Gross Annual Value Nil 80,000
Less: Municipal taxes Nil 14,250
Net Annual Value Nil 65,750
Less: Deductions under section 24 19,725
(a) Statutory deduction @ 30% of NAV Nil
(b) Interest on borrowed capital for purpose of house 9,000 9,000 9,000 28,725
(9,000) 37,025
Income from house property 28,025
Note: It has been assumed that both the units are of equal area. Thus, both the units occupy half area of the
total residential house in Mumbai.
31. There are two units of the house. Unit I with 2/3rd area is used by Ajay for self-occupation throughout the year
and no benefit is derived from that unit, hence it will be treated as self occupied and its annual value will be
nil. Unit 2 with 1/3rd area is let-out through out the previous year and its annual value has to be determined as
per section 23(1).
Computation of Income from house property of Mr. Ajay

Particulars Amount in rupees
Unit I (2/3rd area – self-occupied)
Annual Value Nil
Less: Deduction u/s 24(b)
2/3rd of ` 1,20,000 80,000
Income from Unit I (self-occupied) -80,000
Unit II (1/3rd area – let out)

Computation of GAV
Step 1. – Compute ALV
ALV = Higher of MV and FR, restricted to SR. However, in this
case, SR of ` 1,10,000 (1/3rd of ` 3,30,000) is more than the
higher of MV of ` 1,00,000 (1/3rd of ` 3,00,000) and FR of
` 90,000 (1/3rd of ` 2,70,000). Hence the higher of MV and FR
is the ALV. In this case, it is the MV. 1,00,000
Step 2. – Compute actual rent received/ receivable
8,000 x 12 = ` 96,000 96,000
Step 3. – GAV is the higher of ALV and actual rent
received/receivable i.e. higher of ` 1,00,000 and ` 96,000 1,00,000
CA Suraj Agrawal
House Property 3B.7
Less: Municipal taxes paid by the owner during the previous year relating to let-out portion
1/3rd of (10% of ` 3,00,000) = ` 30,000/3 = 10,000 10,000
Net Annual Value (NAV) = (1,00,000-10,000) 90,000
Less: Deductions under section 24
(a) 30% of NAV = 30% of ` 90,000 27,000
(b) Interest paid on borrowed capital (relating to let out portion)
1/3 rd of ` 1,20,000 40,000 67,000
Income from Unit II (let-out) 23,000
Loss under the head “Income from house property” = - 80,000 + 23,000 - 57,000
32. Since the assessee is a resident and ordinarily resident in India, her global income would form part of her total
income i.e., income earned in India as well as outside India will form part of her total income.
She possesses 3 self-occupied house at Los Angeles as well as at Chennai. At her option, two house shall be
treated as self-occupied, whose annual value will be nil. The other self-occupied house property will be
treated as "deemed let out property".
The annual value of the Los Angeles houses are higher as compare to Chennai flat. Since the annual value of
Los Angeles house is obviously more, it will be beneficial for her to opt for choosing the same as self-
occupied. The Chennai house will, therefore, be treated as "deemed let out property"
As regards the Bangalore house; arrears of rent will be chargeable to tax as income from house property in
the year of receipt under section 25A. It is not essential that the assessee should continue to be the owner.
30% of the arrears of rent shall be allowed as deduction.
Accordingly, the income from house property of Mrs. Rohini Ravi will be calculated under:
Particulars ` `
(a) Self-occupied house at Los Angeles (two houses)
Annual value Nil
Less: Deductions under section 24 Nil
Chargeable income from this house property Nil
(b) Deemed let out house property at Chennai

Gross Annual Value
(Higher of municipal value and fair rent) 3,15,000
[` 35,000 x 9]
Less: Municipal Taxes (Property tax + Sewerage tax) 18,000
Statutory deduction u/s 24(a) @ 30% of NAV 89,100
Interest on borrowed capital (See Note below) 1,91,940
2,81,040
15,960
(c) Arrears in respect of Bangalore property
Arrears of rent received 60,000
Less: Statutory deduction u/s 24(a) @ 30% 18,000
42,000
Income chargeable under the head "Income from house property 57,960
Note: Interest on borrowed capital `

Interest for the current year (` 50,800 + ` 1,31,300) 1,82,100
Add: 1/5th of pre-construction interest (` 49,200 × 1/5) 9,840
Interest deduction allowable under section 24 1,91,940
CA Suraj Agrawal
House Property 3B.8
33. Computation of taxable Income from House Property
House No.1 House No.2

at USA at Mumbai
(Let out) (Let out)
` `
Gross annual value [2000 x 12 x 45] 10,80,000 1,32,000
Less : Municipal tax paid by the owner[1500x 42] 67,500 3,750
10,12,500 1,28,250
(a) Statutory deduction @30% 3,03,500 38,475
(b) Interest on borrowed capital Nil 3,03,500 12,000 50,475
Income from house property 7,08,750 77,775
House No. 3 (Self occupied)

Annual value Nil
Less : Interest on loan for current year 12,000
(-)12,000
In Nutshell
Incomes taxable under the head Income from House Property
House No. 1 7,08,750
House No.2 77,775
7,86,525
House No. 3 (-) 12,000
7,74,525
Working Note:
Annual value of property at Mumbai
1. Annual value of the property
Notional rent or expected rent - it is the higher of MV or FR but it cannot exceed SR
Municipal Value: Not given
Fair Rental Value: 140,000
Standard Rent: ` 11,000 × 12 = ` 1,32,000
Notional rent or expected rent ` 1,32,000
Actual rent received: ` 10,000 × 12 = ` 1,20,000 ` 1,20,000
Annual value is the higher of notional rent or actual rent
34. Unit 1 (let out)

Municipal valuation (50% of ` 60,000) (MV) 30,000
Fair rent (50% of ` 70,000) (FR) 35,000
Standard rent (50% of ` 90,000) (SR) 45,000
Annual rent (` 8,200 x 12) 98,400
Unrealized rent 700
Loss of rent because of vacancy 8,200
Gross Annual Value

Step I - ALV of the property [MV or FR, whichever is higher, but subject to maximum of SR] 35,000
Step II - Rent received / receivable after deducting unrealized rent and loss due to vacancy 89,500
Step III - Gross annual value = Amount computed in Step I or Step II, whichever is higher 89,500
Less: Municipal tax (50% of ` 15,000) 7,500
Standard deduction (30% of ` 82,000) 24,600
Interest (50% of ` 36,000) 18,000
House Property Income of Unit 1 39,400
Unit 3 (self-occupied)
Net annual value Nil
Less: Interest (25% of ` 36,000) 9,000
House Property Income of Unit 3 (-) 9,000
CA Suraj Agrawal
House Property 3B.9
COMPUTATION OF PROFESSIONAL INCOME ` `
[Unit II – Used for Profession]
Income 7,95,000
Less: Municipal taxes (1/4 of ` 15,000) 3,750
Repairs (1/4 of ` 4,000) 1,000
Interest (1/4 of ` 36,000) 9,000
Ground rent (1/4 of ` 6,400) 1,600
Annual charge (*personal expenditure not deductible) *Nil
Insurance premium (1/4 of ` 15,000) 3,750
Depreciation 8,000 27,100
7, 67,900
COMPUTATION OF TOTAL INCOME
Income from house property:
Unit 1 39,400
Unit 3 (-) 9,000 30,400
Income from profession 7,67,900
Gross total income 7,98,300
Less: Deduction under section 80C Nil
Net income 7,98,300
Note - Ground rent, annual charge and fire insurance premium are not deductible while calculating
property income.
35. `
HOUSE -1
Gross Annual Value
Step I - ALV of the property [MV or FR, whichever is higher, but subject to maximum of SR] 3,00,000
Step II - Rent received / receivable after deducting unrealized rent and loss due to vacancy 5,00,000
[Note: UR of PY 14-15 is not deductible]
Step III - Amount computed in Step I or Step II, whichever is higher 5,00,000
Gross Annual Value 5,00,000
Net Annual Value 4,60,000
Less: Deductions under section 24 `
Standard deduction (30% of ` 4,60,000) 1,38,000
Interest (*as the funds are utilised for the construction of House II, it
is not deductible from the income of House I) *Nil 1,38,000
Income from House I 3,22,000
HOUSE II
Gross Annual Value
Step I - Reasonable expected rent of the property
[MV or FR, whichever is higher, but subject to maximum of SR] 3,50,000
Step II - Rent received / receivable after deducting unrealized rent and loss due to vacancy 2,80,000
[` 35000 per month rent x 8 month]
Step III - Gross annual value – Actual rent as it is lower due to vacancy – Section 23(1)(c) 2,80,000
Net Annual Value 2,30,000

Standard deduction (30% of ` 3,00,000) 69,000
Interest on capital (*as the capital is borrowed for construction of House II, it is deductible,
even if House I is mortgaged by X for this purpose) * 1,40,000 2,09,000
Income from House II 21,000
Note: Deduction on account of unrealised rent of earlier years is not available. Moreover, insurance, land
revenue and ground rent are not deductible.
CA Suraj Agrawal
House Property 3B.10
36. The above issues can be answered as follows -
(a) Here Mr. Ram has transferred his house property to his spouse otherwise than for adequate
consideration. Therefore, he will be deemed to be owner of the property to the extent of such
inadequacy of consideration i.e. 60% of the house and the part of house representing the consideration
i.e. 40% of the house shall be assessed in the hands of the spouse.
In other words, the property income shall be assessed as follows -
In the hands of Mr. Ram: ` 1,50,000 × 6,00,000 ÷10,00,000 = ` 90,000
In the hands of Mrs. Ram: ` 1,50,000 × 4,00,000 ÷ 10,00,000 = ` 60,000
(b) In case of property transferred by way of gift to minor child being a married daughter, the transferor
shall not be deemed to the owner of the property because section 27 specifically excludes married
daughter from this purview.
(c) Section 27(i) speaks of transfer of house property and not the transfer of any other asset. In this case, Mr.
Sohan doesn't transfer house property but what is transferred is money. It is immaterial that out of such
money the Mrs. Sohan purchases a house property. The owner of the house property will be Mrs. Sohan.
Mr. Sohan cannot be deemed to be the owner of such house property.
(d) In this case the lease is for a period exceeding 12 years, but the same is to be renewed annually i.e. for a
period not exceeding one year. Hence, the same doesn't fall u/s 27 and therefore, Mr. B is not the
deemed owner of the property u/s 27. The property income will be assessed in the hands of Mr. A.
(e) The lease is to be renewed after every two years but the lessee i.e. Mr. Y has a right to get it renewed
after every two years for indefinite period. Hence, the total period of lease can be more than 12 years and
therefore, Mr. Y will be deemed to be the owner of the house property and property income will be
assessed in his hands.
(f) Since the lease is to be renewed every six months i.e. for a period not exceeding one year, therefore,
lease doesn't fall under section 27 and Mr. Q cannot be deemed to be the owner of the house property.
Thus, the property income will be assessed in the hands of Mr. P.
CA Suraj Agrawal
SALARY 4.1
INCOME UNDER THE HEAD OF SALARIES

[Chapter IV-A & Sections 15 – 17]
Income from Salary XXX
Add: Income by way of Allowances XXX
Add: Taxable Value of Perquisites XXX
Gross Salary XXX
(ia) Statutory Deduction 40,000 50,000
(Amended by Finance Act 2019)
(ii) Entertainment Allowances XXX
(iii) Professional Tax XXX XXX
INCOME UNDER THE HEAD “SALARIES” XXX
CONDITION FOR CHARGING INCOME UNDER THE HEAD OF “SALARIES”

Income is taxable under the head ‘salaries’ only if there exists employer-employee relationship between
the payer and the payee.
IMPORTANT FEATURES OF EMPLOYER-EMPLOYEE RELATIONSHIP:
1. Contract of Services (Salary) Vs Contract for services (PGBP)
2. Master-Servant Relationship.
3. Direct supervision and control of the employer.
4. It is distinct from principle-agent relationship.
INSTANCES WHERE EMPLOYER-EMPLOYEE RELATIONSHIP

EXISTS/DOES NOT EXIST
1) Director of a company: In the case of a Director of a company, employer – employee relationship
cannot be presumed but should be ascertained based on the service agreement, if any, executed or
the Articles of Association of the company.
2) MPs/MLAs: The CBDT has issued instructions that salaries of MPs and MLAs [Member of
legislative assemblies] is not chargeable under the head 'salaries' but it is chargeable under the
head 'income from other sources' since there is no employer – employee relationship between them
and the Government.
3) Paper-setters/Examiners: Where a teacher of college receives remuneration for setting question

paper for examination or works as an invigilator in University then the remuneration received by
him will be taxable under the head ‘income from other sources’.
4) Judges: It was held that what the Judges receive is salary since there is employment as created by
the constitution of India.
CA Suraj Agrawal
SALARY 4.2
Class Notes
CA Suraj Agrawal
SALARY 4.3
SECTION 17(1) - ‘SALARY’ includes:
a) Wages,
b) any Annuity or Pension,
c) any Gratuity,
d) any Fees, Commission, Perquisite or Profits in lieu of or in addition to any Salary or Wages,
e) any Advance of salary,
f) any payment received in respect of any period of leave not availed by him i.e. Leave Salary or
leave encashment,
g) the portion of the annual accretion in any previous year to the balance at the credit of an
employee participating in a recognised provident fund to the extent it is taxable,
h) the aggregate of all sums that are comprised in the transferred balance of an employee
participating in a recognized provident fund to the extent it is taxable,
i) the contribution made by the Central Government or any other employer in the previous year
to the account of an employee under a pension scheme referred to in section 80CCD.
SECTION 15 - BASIS OF CHARGE

The following Income shall be chargeable to income tax under the head “Salaries”
• Salary Due: Any Salary due from an employer or a former employer to an assessee in the
previous year, whether paid or not.
• Advance Salary: Any salary paid or allowed to the assessee in the previous year by or on behalf
of an employer or a former employer though not due or before it became due to him
• Arrears of Salary: Any arrears of salary paid or allowed to assessee in the previous year by or on
behalf of an employer or a former employer, if not charged to income-tax for any earlier previous
year.
Note:
1. Salary chargeable to tax either on ‘due’ basis or on ‘receipt’ basis whichever is earlier.
2. Accounting method of the employee is not relevant
1.2
SALARY IN THE GRADE SYSTEM:
Refer Class Notes
CA Suraj Agrawal
SALARY 4.4
Class Notes
CA Suraj Agrawal
SALARY 4.5
TAX TREATMENT OF DIFFERENT FORM OF ‘SALARY’
Advance Salary:
Salary can’t be taxed twice i.e. where any salary paid in advance is taxed on receipt basis (in
the yr. of receipt) it can’t be taxed again on the due basis (in the yr. in which it becomes due).
Arrear of Salary:
Arrear of Salary received by an assessee is charged to tax on receipt basis (if it was not taxed
earlier on due basis).
Salary to Partners {Explanation 2 to Section 15}:
Any salary, bonus, commission or remuneration received by a partner from his firm is taxed as
business income and not as salary income.
Fees & Commission:
Fees & Commission paid to an employee are taxed as salary income.
Overtime Payment:
Overtime payment is a taxable salary income.
Annuity {Section 17(1) (ii)}:
Annuity received from present employer will be taxed as salary.
Bonus:
Bonus is taxed in the year of receipt, it is not taxed on due basis.
Salary from UNO {Sec. 2 of UN (Privileges & Immunities Act, 1947)}:
Salaries, emoluments & pension paid by UNO to its officials are exempt from tax.
Full-time or part-time employment:
It does not matter whether the employee is a fulltime employee or a part-time one. Once the
relationship of employer and employee exists, the income is to be charged under the head
“salaries”.
Foregoing of Salary:
Once salary accrues, the subsequent waiver by the employee does not absolve him from liability
to income-tax. Such waiver is only an application and hence, chargeable to tax.
Surrender of Salary:
If an employee [Govt/PSU/Pvt] surrenders his salary to the Central Government under Section
2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary
so surrendered would be exempt while computing his taxable income.
CA Suraj Agrawal
SALARY 4.6
Class Notes
CA Suraj Agrawal
SALARY 4.7
TDS on Salary:
As Per Section 192, every employer has to deduct Tax on the Taxable salary of his employee if
such salary is more than the basic exemption limit and handover the net salary which is after TDS,
to the employee. While calculating taxable Income of employee ‘Salary before TDS’ has to be
taken and not the net salary after TDS.
Salary Paid Tax-Free:
In this arrangement, the employer bears the burden of the tax on the salary of the employee. In
such a case, the income from salaries in the hands of the employee will consist of his salary
income and also the tax on this salary paid and bears by the employer.
Loan or Advance Against Salary:
Loan is different from salary. When an employee takes a loan from his employer, which is
repayable in certain specified installments, the loan amount cannot be brought to tax as salary of
the employee.
Similarly, advance against salary is different from advance salary. It is an advance taken by the
employee from his employer. This advance is generally adjusted with his salary over a specified
time period. It cannot be taxed as salary.
PLACE OF ACCRUAL OF SALARY

Section 9(1)(ii) provides that salary earned in India is deemed to accrue or arise in India even if it
is paid outside India or it is paid or payable after the contract of employment in India comes to an
end.
[Pension paid abroad in respect of services rendered in India & leave salary paid abroad in
respect of leave earned in India is deemed to accrue or arise in India]
Section 9(1)(iii) provides that salaries payable by the Government to a citizen of India for
services outside India shall be deemed to accrue or arise in India.
Foreign Allowances by the Govt. Employer - Section 10(7) –Exempted
Any allowance or perquisite paid or allowed outside India, by the Indian Govt. to a citizen of India,
for rendering service outside India is fully exempt.
Example: If an employee gets pension paid abroad in respect of services rendered in India, the same
will be deemed to accrue in India. Similarly, leave salary paid abroad in respect of leave earned in
India is deemed to accrue or arise in India.
Example: A, a citizen of India is posted in the United States as our Ambassador. Obviously, he
renders his services outside India. He also receives his salary outside India. He is also a non-resident.
The same will be deemed to accrue or arise in India.
CA Suraj Agrawal
SALARY 4.8
Class Notes
CA Suraj Agrawal
SALARY 4.9
SECTION 17(3) – “PROFITS IN LIEU OF SALARY” INCLUDES
(a) TERMINAL COMPENSATION:
The amount of any compensation due to or received by employee from his employer or former
employer in connection with the termination of his employment or the modification of the terms
and conditions relating thereto.
[Usually, such compensation is treated as a capital receipt. However, by virtue of this provision,
the same is treated as a revenue receipt and is chargeable as salary.]
(b) PAYMENT FROM AN UNRECOGNIZED PROVIDENT FUND:

Any payment due / received by an assessee from unrecognized Provident Fund or other
Fund to the extent to which it does not consist of employee’s contributions or interest on such
contributions.
(c) PAYMENT UNDER KEYMAN INSURANCE POLICY:

Any payment due to or received by an assessee under a Keyman Insurance policy including
the sum allocated by way of bonus on such policy.
(d) ANY AMOUNT, WHETHER IN LUMPSUM OR OTHERWISE, DUE TO THE ASSESSEE OR

RECEIVED BY HIM, FROM ANY PERSON
i. before joining employment with that person, or
ii. after cessation of his employment with that person.
(e) ANY OTHER PAYMENT due to or received by an assessee from an employer or a former
employer or any fund [Other than the payments exempt under section 10]
CA Suraj Agrawal
SALARY 4.10
Class Notes
CA Suraj Agrawal
SALARY 4.11
DEDUCTIONS FROM SALARY
The income chargeable under the head ‘salaries’ is computed after making the following deductions:
ENTERTAINMENT ALLOWANCE [SEC.16 (ii)]

• First the entire entertainment allowance received by an employee is added to the gross salary.
• Then deduction u/s 16(ii) shall be allowed as under.
Government (CG/SG) employees Non-Government employees
Least of the following is deductible- (No deduction)
a. Amount actual received

b. ` 5,000
c. 20% of salary
(Salary=Basic Salary)
Note – Actual expenditure towards entertainment is not deductible. It is irrelevant.
PROFESSIONAL TAX [SEC. 16 (iii)]

Professional tax or taxes on employment levied by a State is allowed as deduction only when it is
actually paid by the employee during the previous year (deduction on paid basis).
If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount
so paid is first included as salary income and then allowed as a deduction under section 16.
Question 1:
X is employed by A Ltd. (basic salary being ` 38,750 per month). Besides, he gets ` 3,000 per
month as entertainment allowance. He pays professional tax of ` 1,000. Find out the salary
chargeable to tax. Does it make any difference if the professional tax is paid by A Ltd.
Answer:
If
professional If professional
tax is paid tax is paid by
by X the employer
A Ltd.
` `
Basic Salary (`
` 38,750 x 12) 4,65,000 4,65,000
Entertainment allowance 36,000 36,000
Professional tax paid by the employer — 1,000
Gross Salary 5,01,000 5,02,000
Less : Deduction under section 16
Standard deduction 50,000 50,000
Entertainment allowance [not allowed] — —
Professional tax 1,000 1,000
Income under the head "Salaries" 4,50,000 4,51,000
CA Suraj Agrawal
SALARY 4.12
Question 2
A furnishes the following particular for his remuneration from Delta Pvt. Ltd.
Basic salary ` 9,300 p.m.
Dearness Allowance (forming part of salary for retirement benefits) ` 4,500 p.m.
Entertainment Allowance ` 2,250 p.m.
He had paid ` 3,500 towards professional tax to State Government. Compute his income from salary.
Question 3:
Mr. Goyal receives the following emoluments during the previous year ending 31.03.
Basic pay ` 40,000
Dearness Allowance ` 15,000
Commission ` 10,000
Entertainment allowance ` 4,000
Professional tax paid ` 3,000 (` ` 2,000 was paid by his
employer)
He has no other income. Determine the income from salary, if Mr. Goyal is a State Government
employee.
CA Suraj Agrawal
SALARY 4.13
CLASS NOTES
CA Suraj Agrawal
SALARY 4.14
CLASS NOTES
CA Suraj Agrawal
SALARY 4.15
GRATUITY [SECTION 10(10)]
Any gratuity received by an Individual on his death or retirement is eligible for exemption u/s 10(10)
as under –
IN CASE OF GOVT. EMPLOYEES (CG/SG), EMPLOYEE OF LOCAL AUTHORITY (BUT NOT

STATUTORY CORPORATION)
Gratuity received is FULLY EXEMPT
IN CASE OF OTHER EMPLOYEES
(a) If covered under Payment of Gratuity Act, 1972, then least of the following is
exempt:-
(i) Actual Amount received

(ii) ` 10,00,000 ` 20,00,000 (notified w.e.f. 29/03/2018)
15
(iii) days * last drawn salary for each completed year of service or part thereof
26
in excess of 6 months
Note:
1. Salary means Basic Salary and Dearness Allowance (Whether or not forming
part of retirement benefit) on DUE BASIS
2. In case of SEASONAL ESTABLISHMENT – “15 days” will be replaced with “7

days”.
(b) If not covered under Payment of Gratuity Act, 1972, then least of the following is
exempt:-
(i) Actual amount received

(ii) ` 10,00,000 ` 20,00,000 (notified on 08/03/2019 but effective from 29/03/2018)
(iii) Half month’s salary (based on last 10 months’ average salary immediately
preceding the month of retirement or death) for each completed year of
service (fraction to be ignored)
Note:
1. Salary means Basic Salary and Dearness Allowance, if provided in the terms of
employment for retirement benefits, forming part of salary and commission which
is expressed as a fixed percentage of turnover achieved by the employee.
[Basic Salary + DA (R) + Commission (Sales)] - [Gestetner Duplicators Pvt.
Ltd (SC)]
2. It should be on DUE BASIS.
3. Half Month Salary should be read as 15/30.
CA Suraj Agrawal
SALARY 4.16
Notes on Gratuity:
1. Gratuity received during the period of service is always taxable for all employees.
2. If Employee receives gratuity from two or more employers, then aggregate amount of gratuity
exempt from tax cannot exceed ` 20,00,000.
3. Where the employee has received gratuity in any earlier year & also receives gratuity from another
employer in a later year, the limit of ` 20,00,000 will be reduced by the amount of gratuity exempt
from tax in any earlier year.
4. Exemption under this provision will be available only in case where employer employee relationship
exists.
Question 4:
Mr. Ravi retired on 15.6.2019 after completion of 26 years 8 months of service and received
gratuity of ` 12,00,000. At the time of retirement his salary was:
Basic Salary : ` 6,000 p.m.

Dearness Allowance : ` 4,000 p.m. (60% of which is for retirement benefits)
Commission : 1% of turnover (turnover in the last 12 months was `12,00,000)
Bonus : ` 20,000 p.a.
Compute his taxable gratuity assuming:

(a) He is non-government employee and covered by the Payment of Gratuity Act 1972.
(b) He is non-government employee and not covered by Payment of Gratuity Act 1972.
(c) He is a Government employee.
Question 5:
Mr. Hari retires on 15th October 2019, after serving 30 years and 7 months. He gets ` 3,80,000 as
gratuity. His salary details are given below:
FY 2019-20 Salary ` 16,000 pm D.A. 50% of salary. 40% forms part of retirement
benefits.
FY 2018-19 Salary ` 15,000 pm D.A. 50% of salary. 40% forms part of retirement
benefits
Determine his taxable gratuity in the following cases:

(i) He retires from government service
(ii) He retires from seasonal factory in a private sector, covered under Payment of Gratuity
Act, 1972.
(iii) He retires from non-seasonal factory, covered by Payment of Gratuity Act, 1972
(iv) He retires from private sector, not covered by payment of Gratuity Act
CA Suraj Agrawal
SALARY 4.17
PENSION [SEC 10(10A)]
“Pension” may be defined as a periodic payment made especially by Government or a company or
other employers to the employee in consideration of past service payable after his retirement.
Pension is of two types: Commuted and Uncommuted
Uncommuted Pension:
Uncommuted pension refers to pension received periodically. It is fully taxable in the hands of
both government and non-government employees.
Commuted Pension:
Commuted pension means lump sum amount taken by commuting the whole or part of the
pension.
Taxability:
EMPLOYEES OF THE CENTRAL/STATE GOVERNMENT/LOCAL AUTHORITIES/STATUTORY

CORPORATION
Any commuted pension received is fully exempt from tax.
IN CASE OF OTHER EMPLOYEES:
Case I: If the Employee receives the Gratuity also:
Then Exemption = 1/3 * Full Commutable value of

Pension.
Case II: If the Employee DOES NOT receive any Gratuity:
Then Exemption = 1/2 * Full Commutable value of Pension.
Here, Full Commutable value of Pension = Commuted Amount

% of Commutation
Question 6:
Mr. Sagar retired on 1.10.2019 receiving ` 5,000 p.m. as pension. On 1.2.2020, he commuted 60% of
his pension and received ` 3,00,000 as commuted pension. You are required to compute his taxable
pension assuming:
a) He is a government employee.
b) He is a non-government employee, receiving gratuity of ` 5,00,000 at the time of retirement.
c) He is a non-government employee and is in receipt of no gratuity at the time of retirement.
CA Suraj Agrawal
SALARY 4.18
CLASS NOTES
CA Suraj Agrawal
SALARY 4.19
LEAVE SALARY [SECTION 10(10AA)]
It provides exemption in respect of amount received by way of encashment of unutilised earned leave
by an employee at the time of his retirement whether on superannuation or otherwise.
In case of Central or State Government Employees [Employee of Local Authority/Statutory

Corporation excluded]:
- Fully Exempt
In case of other Employees:
- Leave salary received at the time of retirement is exempt from tax to the extent of least of
the following:
i) ` 3,00,000
ii) Leave salary actually received
iii) 10 months X Average Salary
iv) Earned leave to the credit of employee x Average Salary
Where:
(1) ‘Average salary’ will be determined on the basis of the salary drawn during the period
of ten months immediately preceding the date of his retirement whether on
superannuation or otherwise.
(2) Salary means Basis Salary + DA (R) + Commission (Sales).
(3) Earned leave to the credit of the employee =
{Annual Leave Entitlement (Not exceeding 30 days) X Completed years of actual

service rendered (Fractions will be ignored)} – Leave availed during the
service
Note:
(1) Leave salary received during the period of service (i.e. during continuity of employment) is
fully taxable.
(2) Leave encashment on retirement by way of resignation will also be eligible for exemption.
(3) Where leave salary is received from two or more employers in the same year, then the aggregate
amount of leave salary exempt from tax cannot exceed ` 3,00,000.
(4) Where leave salary is received in any earlier year from a former employer and again received from
another employer in a later year, the limit of ` 3,00,000 will be reduced by the amount of leave
salary exempt earlier.
CA Suraj Agrawal
SALARY 4.20
Question 7
Mr. G retired on 1.12.2019 after 20 years 10 months of service, receiving leave salary of
` 5,00,000. Other details of his salary income are:
Basic Salary: ` 5,000 p.m. (`

` 1,000 was increased w.e.f. 1.4.19)
Dearness Allowance: ` 3,000 p.m. (60% of which is for retirement benefits)
Commission: ` 500 p.m.
Bonus: ` 1,000 p.m.
Leave availed during service: 480 days
He was entitled to 30 days leave every year. You are required to compute his taxable leave salary
assuming:
(a) He is a government employee.
(b) He is a non government employee.
RETRENCHMENT COMPENSATION [SECTION 10(10B)]

Any compensation received by a workman at the time of his retrenchment, under the Industrial Disputes
Act, 1947, shall be exempt to the extent of least of the following:
(i) Actual amount received;

(ii) An amount calculated in accordance with Section 25F(b) of the Industrial Disputes Act, 1947 i.e.
15 / 26 day’s average pay [3 months basis] for every completed year of service or part
thereof in excess of 6 months;
(iii) ` 5,00,000.
[In case where the retrenchment scheme is approved by the Central government, the entire
amount is exempt.]
Note: Pay will include Basic Salary + D.A (Whether or not forming part of retirement
benefit)………………………..etc.
Question 8:
Mr. Agrawal received retrenchment compensation of ` 10,00,000 after 30 years 4 months of service. At
the time of retrenchment, he was drawing basic salary ` 20,000 p.m.; Dearness allowance ` 5,000 p.m.
Compute his taxable retrenchment compensation.
CA Suraj Agrawal
SALARY 4.21
Class Notes
CA Suraj Agrawal
SALARY 4.22
Class Notes
CA Suraj Agrawal
SALARY 4.23
COMPENSATION RECEIVED at the time VRS / VSS under Golden
Handshake Scheme – [SECTION 10(10C)]
(A) Compensation received is exempt from tax if the following conditions are satisfied:
1) Compensation is received at the time of Voluntarily Retirement Scheme or Voluntarily

Separation Scheme.
2) Compensation is received by the employees of -
a. Central & State Govt.
b. Local Authority
c. Statutory Corporation
d. Co – Operative Society
e. Public Sector Company; or any other Company
f. Approved University
g. I.I.T.
h. Notified Institution
i. Some Notified institute of management (i.e. IIM and IIFT)
3) Compensation is received in accordance with VRS / VSS framed in accordance with guidelines.
4) Exemption u/s. 10(10C) shall be once for any assessment year [Means “in life”].
5) No Exemption if relief availed u/s 89:
Where any relief has been allowed to an assessee under section 89 for any AY in respect of any
amount received or receivable on his voluntary retirement or termination of service or voluntary
separation, no exemption under this section shall be allowed to him in relation to such, or
any other, AY.
Further, once relief is claimed u/s 89, the right to claim exemption in respect of VRS
compensation is lost forever.
(B) Quantum of Exemption: Least of the following is exempt: Least of the

following is exempt:
1) Actual Compensation Received
2) Statutory Limit: ` 5,00,000
3) 3 months’ salary for each completed year of service
4) Salary at the time of retirement x balance months of service left
[Salary = Last drawn Basic Pay + DA (R) + Comm. (Sales)]
(C) Following guidelines should be noted for the purpose of claiming exemption [Rule 2BA]:
a) The employee must have completed 10 year of service or attained 40 years of age except
in the case of an employee of a PSU;
b) The employee must not be a director in a company or co-operative society;
c) The scheme results in overall reduction in the existing strength of the employees;
d) The vacancy caused on such VRS / VSS shall not be filled up.
e) The retiring employee shall not be employed in another company or concern belonging to
the same management group; and
Question 9:
Mr. A received voluntary retirement compensation of ` 8,00,000 after 30 years 4 months of service. He
still has 6 year of service left. At the time of voluntary retirement, he was drawing basic salary ` 20,000
p.m.; DA (which forms part of pay) ` 5,000 p.m.; compute his taxable VRS.
CA Suraj Agrawal
SALARY 4.24
VALUATION OF LEAVE TRAVEL CONCESSION
[Section 10(5) read with Rule 2B]
1. An employee is entitled to exemption under section 10(5) in respect of value of travel concession or
assistance due to or received by him from his employer or former employer for himself and his
family , in connection with his proceedings-
a. on leave to any place IN INDIA, or

b. to any place in India after retirement from service or after the termination of his service.
FAMILY MEANS: (Spouse + Children) & (Dependent Parents / Brothers / Sisters of the
individual)
2. Availability of Exemptions:
a. Exemption is available in respect of 2 journeys performed in a block of 4 calendar years.

The current block is 2018-2021 (9th).
b. However, if individual does not avail such LTC during any such block then he can claim the
exemption of one journey in the calendar year immediately succeeding the end of the said
block.
c. Exemption shall not be available to more then 2 surviving children of an individual after
1.10.1998. However, this restriction does not apply in respect of children born before
1.10.1998 & also in respect of multiple births after one child.
3. Amount of exemption CANNOT EXCEED the amount of expenditure actually incurred for the
purposes of such travel. It is allowable only in respect of FARE.
CA Suraj Agrawal
SALARY 4.25
4. VALUE OF TRAVEL CONCESSION: Exemption u/s. 10(5) is subject to the following
conditions:
Different situations Amount of Exemption
Where journey is performed by AIR Amount of ECONOMY CLASS AIRFARE

OF NATIONAL CARRIER by the shortest
route OR the amount spent, whichever is
less
Where journey is performed by RAIL Amount of AC FIRST CLASS RAIL FARE

by the shortest route OR amount spent,
whichever is less.
Where the places of origin of journey & Amount of AC FIRST CLASS RAIL FARE
destination are connected by Rail and by the shortest route OR amount spent,
journey is performed by any other Mode of whichever is less.
Transport
Where the places of origin of journey and destination or part thereof are not connected by
RAIL:
Where a Recognised Public Transport FIRST CLASS OR DELUXE CLASS FARE

System exists by the shortest route OR the amount spent,
whichever is less.
Where a Recognised Public Transport
System does not exists AC FIRST CLASS RAIL FARE by the
shortest route (as if the journey had been
performed by rail) OR the amount actually
spent, whichever is less.
Question 10:
Mr. D went on a holiday on 25.12.2019 to Delhi with his wife and three children (one son – age 5 years;
twin daughters – age 2 years). They went by flight (economy class) and the total cost of tickets
reimbursed by his employer was ` 60,000 (` ` 45,000 for adults and ` 15,000 for the three minor
children).
Compute the amount of LTC exempt.
Question 11:
In the above question, will be there be any difference if among his three children the twins were 5 years
old and the son 3 years old? Discuss.
Question 12:
Mr. J is working with ABC Ltd. getting the basic salary of ` 20,000 pm and DA of ` 5,000 pm. He is
given bonus of ` 5000 in the August 2020 which was due in March 2020. He has availed the benefit of
LTC during the current year and goes to Goa with his family. He takes along with him his wife, one
financially independent son, one married daughter, his dependent mother, his financially
independent father, his financially independent sister and dependent father in law. The employer
has spent ` 15,000 per head on tickets in Jet Airways’ Airlines where as the fare of Indian Airlines is `
11,000 per head. Calculate his taxable Salary.
CA Suraj Agrawal
SALARY 4.26
CLASS NOTES
CA Suraj Agrawal
SALARY 4.27
HOUSE RENT ALLOWANCE [Section 10(13A) read with Rule 2A]
If HRA is received by the assessee and he incurs the expenditure of rent on residential
accommodation, then an exemption of least of the following amount is allowed:
(1) Actual Amount received [HRA]
(2) Rent Paid Less 10% of Salary
(3) 50% of Salary (in Metro cities) OR 40% of Salary (in other cities)
Here, Salary = Basic Pay + DA (forming part) + Commission (based on % of Sales Turnover)
Notes:
(a) If the employee receives HRA but does not incur any expenditure of Rent on residential
accommodation, then HRA received is fully taxable.
(b) Exemption is not available to an assessee who lives in his own house.
(c) The exemption shall be calculated on the basis of where the accommodation is situated.
(d) If Place of employment, Rent, HRA, Salary etc is the same for the whole year, then exemption shall
be calculated for the whole year.
(e) If there is a change in place, change in rent paid, Change in HRA or change in Basic Salary
structure during the previous year, then it shall be calculated on monthly/periodic basis.
(f) Exemption should be calculated in respect of the period during which rental accommodation is
occupied by the Employee during the previous year.
(g) Salary means Salary on Due Basis.
Question 13:
Mr. A working in Delhi, receives the following amounts:
(a) Basic salary ` 6,000 PM
(b) DA Rs. 2,000 pm (50% is forming part of salary)
(c) Commission based on production ` 30,000 annually
(d) Commission based on Sales @ 2% on sales of ` 6,00,000 achieved by A
(e) HRA ` 5,000 pm (Rent of ` 4,500 p.m. paid in Delhi).
Compute Total Income.
Question 14:
Mr. Raj Kumar has the following receipts from his employer:
(1) Basic pay ` 3,000 p.m.
(2) Dearness allowance (D.A.) ` 600 p.m.
(3) Commission ` 6,000 p.a.
(4) Motor car for personal use (expenditure met by the employer) ` 500 p.m
(5) House rent allowance ` 900 p.m.
Find out the amount of HRA eligible for exemption to Mr. Raj Kumar assuming that he paid a
rent of ` 1,000 p.m. for his accommodation at Kanpur. DA forms part of salary for retirement
benefits.
CA Suraj Agrawal
SALARY 4.28
CLASS NOTES
CA Suraj Agrawal
SALARY 4.29
CLASS NOTES
CA Suraj Agrawal
SALARY 4.30
CLASS NOTES
CA Suraj Agrawal
SALARY 4.31
ALLOWANCES U/S 10(14)
Different types of allowances are given to employees by their employers. Generally allowances are
given to employees to meet some particular requirements like house rent, expenses on uniform,
conveyance etc. Under the Income-tax Act, allowance is taxable on due or receipt basis,
whichever is earlier.
ALLOWANCES EXEMPT TO THE EXTENT ACTUALLY EXPENDED FOR THE OFFICIAL

PURPOSES [SECTION 10(14) (i)]
These allowances are given for official purposes and lower of the below two is the Exempted amount:
I. Amount of Allowance Actually Received from the Employer; OR

II. Amount Spent for official purpose.
S.No. Nature Particulars
(a) Traveling Allowance To meet the cost of travel on tour or on transfers

(including any sum paid in connection with transfer,
packing and transportation of personal effects on such
transfer.
(b) Daily Allowance For ordinary daily charges on account of absence from
his normal place of duty on tour or journey in
connection with transfer
(c) Conveyance Allowance To meet the expenditure on local conveyance in

performance of official duties if free conveyance is not
provided by the employer
(d) Helper Allowance Granted to meet the expenditure incurred on a helper

(Servant Allowance is different) engaged for the duties.
(e) Academic / Research allowance Granted for encouraging academic research & other
professional pursuits.
(f) Uniform Allowance Granted to meet the expenditure incurred on the

purchase or maintenance of uniform for wears during
the performance of the duties.
ALLOWANCES MEANT FOR PERSONAL EXPENSES EXEMPT TO THE EXTENT NOTIFIED BY

RULES [SECTION 10(14(ii)]
In these allowances, the actual amount spend by the assessee is not relevant. Lower of the below
two amount is Exempted amount:
I. Amount of Allowance Actually Received from the Employer OR

II. Limit specified in the Act
S. Allowances Extent of Exemption

No.
1 Children Education Allowance ` 100 p.m. per child upto a max. of two
children
CA Suraj Agrawal
SALARY 4.32
2 Hostel Expenditure Allowance: ` 300 p.m. per child upto a max. of two
children.
3 Tribal or Scheduled Area Allowance ` 200 P.M.
4 Transport Allowance ` 1,600 PM This exemption is now not

available from AY 19-20
` 3,200 PM in case of Blind/Handicapped

Employee
5 Underground Allowance (In coal ` 800 P.M.

Mines)
6 Allowances granted to employees of Lower of below two is exempt:

transport system to meet personal
expenditure during his duty, provided - 70% of allowance received from the
he is not in receipt of daily allowances Employer; OR
- ` 10,000 P.M.
7 Hill Compensatory Allowances ` 300 p.m.
ALLOWANCES WHICH ARE FULLY TAXABLE

1) City Compensatory Allowance:
City Compensatory Allowance is normally intended to compensate the employees for the higher
cost of living in cities. It is taxable irrespective of the fact whether it is given as compensation for
performing his duties in a particular place or under special circumstances.
2) Entertainment Allowance:
This allowance is given to employees to meet the expenses towards hospitality in receiving
customers etc. The Act gives a deduction towards entertainment allowance only to a Government
employee. The details of deduction permissible are discussed later on in this Unit.
3) Dearness Allowance:
It is fully taxable allowance. It is of following 2 types:
DA which is forming part of salary for computation of retiremental benefits as per the terms of
employment.
DA which is NOT forming part of salary for computation of retiremental benefits as per the
terms of employment.
Note: If the Question is silent, it is to be assumed that DA is not forming part of salary.
4) Medical Allowance: It is a fully taxable allowance.
5) Lunch Allowances / Tiffin Allowances / Cash Allowance / Deputation Allowance
6) Overtime Allowances / Servant Allowances / Warden Allowance / Family Allowance etc.
CA Suraj Agrawal
SALARY 4.33
ALLOWANCES WHICH ARE EXEMPT IN CASE OF CERTAIN PERSONS
1) Allowances to a citizen of India, who is a Government employee, rendering services outside
India. [Section 10(7)]
2) Travelling Allowances to High Court judges
3) Sumptuary allowance to HC/SC judges & Serving member/Chairmen of UPSC.
4) Allowance received by an employee of UNO from his employer.
Question 15:
Mr. Srikant has two sons. He is in receipt of children education allowance of ` 150 p.m. for his elder son
and ` 70 p.m. for his younger son. Both his sons are going to school. He also receives the following
allowances:
Transport allowance: ` 1,000 p.m. (amount spent ` 600 p.m.)
Tribal area allowance: ` 500 p.m. Compute his taxable allowances.
Question 16:
Mr. X receives Basic salary of ` 10,000 PM and DA of ` 4,000 PM. He retires on Oct 31st of the PY
and pension is fixed at ` 3,000 PM. He receives the following amounts as well:
(a) HRA ` 4,000 PM (he lives in his own house)
(b) Medical allowance ` 600 PM (Actual expenditure on medical treatment is more than ` 600 PM)
(c) Children Education allowance ` 250 PM per child for 3 children.
(d) Children hostel allowance ` 250 PM for 1 child.
(e) Travelling allowance ` 1,000 PM (60% spent on official duties)
(f) Transport allowance ` 900 PM (Actual expenditure ` 850 PM)
(g) Uniform allowance ` 1,000 PM
CA Suraj Agrawal
SALARY 4.34
Class Notes
CA Suraj Agrawal
SALARY 4.35
SECTION 7 – INCOME DEEMED TO BE RECEIVED
The following incomes shall be deemed to be received in India in the previous year:
I. Employer’s contribution to RPF in excess of 12% of the salary of the employee.

II. Interest credited to RPF balance in excess of 9.5% p.a.
III. The taxable transfer balance from URPF to RPF.
IV. Contribution made, by the any employer, to the account of an employee under a pension scheme
referred to in Sec. 80CCD.
SECTION 10(11) AND (12) – PAYMENT FROM PROVIDENT FUNDS

Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time of
his retirement. Under this scheme, a specified sum is deducted from the salary of the employee as his
contribution towards the fund. The employer also generally contributes the same amount out of his
pocket, to the fund. The contribution of the employer and the employee are invested in approved
securities. Interest earned thereon is also credited to the account of the employee. Thus, the credit
balance in a provident fund account of an employee consists of the following:
a) Employee’s Contribution
b) Interest on Employee’s Contribution
c) Employer’s Contribution
d) Interest on Employer’s Contribution.
The accumulated balance is paid to the employee at the time of his retirement or resignation. In the
case of death of the employee, the same is paid to his legal heirs. The provident fund represents an
important source of small savings available to the Government. Hence, the Income-tax Act gives certain
deductions on savings in a provident fund account.
THERE ARE FOUR TYPES OF PROVIDENT FUNDS:
(i) STATUTORY PROVIDENT FUND [SPF]

The SPF is governed by Provident Funds Act, 1925. It applies to employees of government,
railways, semi-government institutions, local bodies, universities and all recognised educational
institutions.
(ii) PUBLIC PROVIDENT FUND [PPF]

Public provident fund is operated under the Public Provident Fund Act, 1968. A membership of
the fund is open to every individual though it is ideally suited to self-employed people. A salaried
employee may also contribute to PPF in addition to the fund operated by his employer. An
individual may contribute to the fund on his own behalf as also on behalf of a minor of whom he is
the guardian.
(iii) RECOGNISED PROVIDENT FUND [RPF]

Recognised provident fund means a provident fund recognised by the Commissioner of Income-
tax for the purposes of income-tax. A fund constituted under the Employees’s Provident Fund and
Miscellaneous Provisions Act, 1952 will also be a Recognised Provident Fund.
(iv) UNRECOGNISED PROVIDENT FUND [UPF]

A fund not recognised by the Commissioner of Income-tax is Unrecognised Provident Fund.
CA Suraj Agrawal
SALARY 4.36
THE TAX TREATMENT IS GIVEN BELOW:
Particulars SPF PPF RPF URPF

Employer’s Fully Exempt N.A. in excess of 12% of Not taxable at the
Contribution salary* is taxable time of contribution
Ded. u/s 80C Available Available Available Not Available
(Employee’s [500 – 150,000]
Cont)
Interest Fully Exempt Fully Exempt in excess of 9.5% p.a.
credited (IOS Head) is taxable (Salary) ----
Amount Fully Exempt Fully Exempt Fully Exempt sub. to Intt. on

received on u/s. 10(11) u/s. 10(11) condition u/s. 10(12) Employee’s
retirement, Contribution is
death etc. taxable u/h.
“IOS”
Employer’s
Contribution and
intt. on such
Contribution is
fully taxable as
salary u/s. 17(3)
*Salary = Basic Pay + DA (if forming part of Ret. Benefits) + Comm. (if based on % of Sales T/O)
The payment from R.P.F. balance is fully exempt from tax in following
cases:
Accumulated balance in RPF payable to an employee (subject to certain following conditions).
Condition 1– Employee has rendered continuous service for a period of atleast 5 years; or
Condition 2– Where employee could not complete 5 years of service by reason of
- ill-health; or
- discontinuance of the employer’s business or
- other cause beyond the control of the employee.
In any other case, the payment from RPF is fully taxable in the manner given below:
(i) Interest on Employee’s contribution is fully taxable u/h Other Sources.
(ii) Employer’s contribution and Interest thereon is taxable as salary u/s 17(3).
Note: If employee gets transfer of balance of RPF with another employer who also maintains RPF,
then, the period of service under former employer shall also be included in calculating the period of
continuous service.
Question 17:
Mr. A, working in ABC Pvt. Ltd., receiving Basic Salary of ` 9,000 P.M. retires from service on 31st dec
of the P.Y. He contributes 15% of salary to his URPF balance to which an equal amount is contributed
by the employer. On retirement he receives ` 1,00,000 from his URPF which consists of ` 60,000 as
total of Employee and Employer’s contribution and ` 40,000 as total interest. Compute TI if monthly
pension is fixed at ` 4,000 P.M.
CA Suraj Agrawal
SALARY 4.37
CONVERSION OF URPF INTO RPF
When a URPF gets converted into RPF, then, the income that would have been taxed had the fund
been recognised from the date of its institution would be taxed as the income of the employee during
the P.Y. in which the funds gets such recognition. The amount not transferred to RPF & paid out of
URPF will be taxable in the same manner as the lumpsum payment from URPF is taxed.
APPROVED SUPERANNUATION FUND

1. It means a superannuation fund which has been and continues to be approved by the
Commissioner in accordance with the rules framed in this regard.
2. The tax treatment of contribution and exemption of payment from tax are as follows:
a) Employer’s contribution upto ` 150,000 is exempt from tax in the hands of employee.
b) Employee’s contribution qualifies for deduction under section 80C;
c) Interest on accumulated balance is exempt from tax.
3. Section 10(13) grants exemption in respect of payment from the fund—

a) Paid to legal heirs on death of the employee, or
b) Paid to employee on his retirement or
c) Paid to employee on his becoming incapacitated prior to such retirement.
4. Any payment from fund by way of transfer to the account of the employee under a pension scheme
(New Pension Scheme u/s 80CCD) shall be EXEMPT.
CA Suraj Agrawal
SALARY 4.38
Class Notes
CA Suraj Agrawal
SALARY 4.39
PERQUISITES
1) The term ‘perquisite’ indicates some extra benefit in addition to the amount that may be legally
due by way of contract for services rendered.
2) Perquisite may be provided in cash or in kind.
3) Perquisite may arise in the course of employment or in the course of profession. If it arises from a
relationship of employer-employee, then the value of the perquisite is taxable as salary. However,
if it arises during the course of profession, the value of such perquisite is chargeable as profits
and gains of business or profession.
4) Perquisite will become taxable only if it has a legal origin.
5) Reimbursement of expenses incurred in the official discharge of duties is not a perquisite.
Types of perquisites: Perquisites may be divided into three broad categories:

Perquisites taxable in the case of all employees
Perquisites exempt from tax in the case of all employees
Perquisites taxable only in the hands of specified employees.
TAXABILITY OF PERQUISITE
Section 17(2) of the Income Tax Act gives an inclusive definition of perquisite. Perquisite includes:
i) VALUE OF RENT-FREE ACCOMMODATION [RFA] PROVIDED to the assessee by his

employer [Section 17(2)(i)].
ii) Value of CONCESSION IN RENT IN RESPECT OF ACCOMMODATION PROVIDED to the

assessee by his employer [Section 17(2)(ii)].
iii) The value of any benefit or amenity GRANTED OR PROVIDED free of cost or at
concessional rate to SPECIFIED EMPLOYEES i.e.
a. by a company to an employee in which he is a director;
b. by a company to an employee being a person who has substantial interest in the company
(i.e. 20% or more of the voting rights of the company);
c. by any employer (including a company) to an employee to whom the provisions of (a) & (b) do
not apply and whose income under the head ‘salaries’ (whether due from, or paid or allowed
by, one or more employers) exclusive of the value of all benefits or amenities not
provided for by way of monetary benefits exceeds ` 50,000 - Section 17(2)(iii);
[i.e. Salary for this purpose = Basic Salary + D.A. + Commission, whether payable
monthly or turnover based + Bonus + Fees + Advance Salary + Arrear Salary + Any
other taxable payment + Any taxable allowances + Any other monetary benefits –
Deductions under section 16 (ia) / (ii) / (iii)]
Such benefits are:
1. Motor Car
2. Sweeper, Gardener, Watchman etc.
CA Suraj Agrawal
SALARY 4.40
3. Gas, Electricity & Water
4. Free Education Facility
5. Free / Concessional Fare
iv) AMOUNT PAID by an employer in respect of any obligation which otherwise would have
been payable by the employee [Section 17(2)(iv)].
v) AMOUNT PAYABLE by an employer directly or indirectly to effect an assurance on the life of the
assessee or to effect a contract for an annuity, other than payment made to RPF or approved
superannuation fund - Section 17(2)(v).
a. However, there are schemes like group annuity scheme, employees state insurance
scheme and fidelity insurance scheme, under which insurance premium is paid by
employer on behalf of the employees. Such payments are not regarded as perquisite in view
of the fact that the employees have only an expectancy of the benefit in such schemes.
b. In Case employer has paid life insurance premium on behalf of the employee then it will be
taxable for the employee and further employee can claim deduction under section 80C from
GTI
vi) The Value Of Any Specified Security Or Sweat Equity Shares ALLOTTED OR
TRANSFERRED, directly or indirectly, by the employer or former employer, free of cost or at
concessional rate to the assessee – Section 17(2)(vi).
vii) the amount of any CONTRIBUTION TO AN APPROVED SUPERANNUATION FUND by the

employer in respect of the assessee, to the extent it EXCEEDS ` 1,50,000 – Section 17(2)(vii).
viii) The value of any other fringe benefit or amenity as may be prescribed by the CBDT – Section
17(2)(viii). They are
a) Concessional or Interest Free Loan

b) Travelling, touring & accommodation other than LTC
c) Free Food & Beverage to employees during office hours
d) Gift to the employees
e) Credit Card expenses
f) Club Expenses
g) Use of Movable assets by the employees
h) Transfer of any Movable Assets to the employees
i) Value of any other benefit or amenity, service, right / privilege
CA Suraj Agrawal
SALARY 4.41
Exempted Perquisites
Following perquisites are exempted in hands of employee:
1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided during working hours.
2. Food: Food provided by employer in working place upto Rs. 50 per meal. Remote area – full
exempt.
3. Recreational facilities: Recreational facilities extended to a group of employees.
4. Goods sold to employee at concessional rate: Goods manufactured by employer and sold by
him to his employees at concessional (not free) rates.
5. Conveyance facility: Conveyance facility provided -
• to employees for journey between office and residence and vice versa.
• to the judges of High Court and Supreme Court
6. Training. Amount spent on training of employees including boarding and lodging expenses of the
employees on such training.
7. Services rendered outside India: Any perquisite/allowances allowed outside India by the
Government to a citizen of India for rendering services outside India.
8. Contribution in some specified schemes
• Employer's contribution to staff group insurance scheme.
• Payment of annual premium by employer on personal accident policy affected by him in respect
of his employee.
9. Loans
• Loan given at nil or at concessional rate of interest by the employer provided the aggregate
amount of loan does not exceed ` 20,000.
• Interest free loan for medical treatment of the diseases specified in Rule 3A.
10. Medical facility
A provision of medical facility at office is exempt.
11. Periodicals and journals: Periodicals and journals required for discharge of work.
12. Telephone, mobile phones: Expenses for telephone, mobile phones actually incurred on behalf of
employee by the employer whether by way of direct payment or reimbursement.
13. Free education facility: Free education facility to the children of employee in an institution owned
or maintained by the employer provided cost of such facility does not exceed Rs.1000 per month
per child.
14. Computer or Laptop: Computer or Laptop provided whether to use at office or at home (provided
ownership is not transferred to the employee).
15. Movable assets: Sale or gift of any movable asset (covered under SLM method) to employee after
being used by the employer for 10 or more years.
16. Leave Travel Concession: Leave Travel Concession (LTC) to the extent of lowest cost incurred.
17. Rent-free accommodation
• Rent-free official residence provided to a Judge of a High Court or the Supreme Court.
• Rent-free furnished residence (including maintenance thereof) to Official of Parliament, a Union
Minister or a Leader of opposition in Parliament.
18. Accommodation: Accommodation provided -
• on transfer of an employee in a hotel for a period not exceeding 15 days in aggregate.
• in a remote area to an employee working at a mining site or an onshore exploration site or a
project execution site or a dam site or a power generation site or an offshore site.
19. Tax on non-monetary perquisite paid by employer on behalf of employee.
20. Health club. Sports club facility
CA Suraj Agrawal
SALARY 4.42
Class Notes
CA Suraj Agrawal
SALARY 4.43
Class Notes
CA Suraj Agrawal
SALARY 4.44
Class Notes
CA Suraj Agrawal
SALARY 4.45
VALUATION OF PERQUISITES
Rule 3 of the Income-tax Rules, 1962 contains the guidelines for the purpose of valuation of
perquisites:
VALUATION OF RENT FREE UNFURNISHED ACCOMMODATION

(a) IN CASE OF GOVT. EMPLOYEES [CG/SG] : As per License Fee determined by Govt.
(b) IN CASE OF NON – GOVT. EMPLOYEES:
(i) If Accommodation is not owned by Employer: Value shall be the lower of
(i) Rent paid by the Employer OR

(ii) 15% of salary
(ii) If Accommodation is owned by Employer: Value shall be
If population < 10 Lakhs : 7.5% of Salary
If 10 Lakhs < Population < 25 Lakhs : 10% of Salary
If Population > 25 Lakhs : 15% of Salary
If ACCOMODATION IS PROVIDED AT CONCESSIONAL RATE then value = Value determine as

above Less Rent actually paid by employee.
RENT FREE FURNISHED ACCOMMODATION

Value of unfurnished accommodation shall be calculated as above and shall be increased by value of
furnished accommodation, which is:
10% p.a. of the original COST OF FURNITURE if owned by employer
and/or
The actual hire charges paid/payable, if hired from a third party
Note: The valuation shall be reduced by any amount recovered from the employee.
SALARY FOR THE PURPOSE OF VALUATION OF ACCOMMODATION

Basic Salary + DA (Forming Part of Salary) + Bonus + Fees + Commission + All other Taxable
Allowance + Any monetary payment by employer to employee, by whatever name called
[Above does not include Perquisites (Monetary or Non-Monetary) and Employer’s contribution
to PF + Arrear Salary + Advance Salary]
Note:
1. Salary are to be considered on due basis for the relevant period for which accommodation is
provided.
2. If the employee receives salary from more than one employer, the aggregate of the salary
received from both the employers has to be taken into account for valuation of rent free
accommodation.
CA Suraj Agrawal
SALARY 4.46
VALUATION OF ACCOMMODATION PROVIDED IN A HOTEL:
Where the accommodation is provided by the employer (Government or other employer) in a hotel, the
value of the perquisite will be lower of:
a. 24% OF SALARY paid or payable for the previous year OR
b. the actual charges paid or payable to such hotel for the period during which such
accommodation is provided.
The above value is reduced by the rent, if any, actually paid or payable by the employee.
Note:
The value of this perquisite will not be calculated if the employee is provided such
accommodation for a period not exceeding in aggregate 15 days on the transfer from one
place to another.
ACCOMMODATION PROVIDED AT THE TIME OF TRANSFER:

FOR FIRST 90 DAYS - ANY ONE
Where on account of his transfer from one place to another, the employee is provided with
accommodation at the new place of posting while retaining the accommodation at the other place, the
value of perquisite shall be determined with reference to ONLY ONE SUCH ACCOMMODATION which
has the lower value (as determined according to the above provisions) for a period not exceeding 90
days and thereafter the value of perquisite shall be charged for both such accommodations in
accordance with the valuation rules.
EXCEPTIONS:
However, none of the above valuation rules would be applicable to any accommodation provided to an
employee working at a mining site/onshore oil exploration site/project execution site/dam
site/power generation site/offshore site which:
a. being of a temporary nature and is located at least 8 kms away from the local limits of any
municipality or cantonment board; or
b. is located in a remote area.
[Remote area means an area that is located at least 40 kms away from a town having a population not
exceeding 20,000 based on latest published all India census].
CA Suraj Agrawal
SALARY 4.47
Question 18:
Ramnath is employed with Mega Limited and is paid Basic Salary ` 15,000/ – p.m.; – ` 2,000/ – p.m.
as Commission; D.A not forming part of retirement benefits ` 1,250/ – p.m. and travel allowances of
` 1,000/ – p.m. Bonus paid during the year is ` 12,000/ – 60% of the travel allowance is not spent and
the balance is spent for office purpose.
Compute the taxable salary by also taking into account the fact that he is provided rent free
furnished accommodation where population is 15 lakhs. Original cost of furniture provided in the house
` 30,000/ – (W.D.V. ` 6,000). Hire charges ` 450 pm for hired furniture provided.
[Answer: Taxable Salary – 2,18,920]
Question 19:
Mr. Ritesh is provided with an accommodation in Kolkata since April 2019. Salary ` 40,000 p.m.
Cost of furniture provided ` 80,000. On 1st October, 2019, following a promotion with a increase
in Salary by ` 15,000, he was transferred to Nagpur (population less than 25 lakhs but more than
10 lakhs), and was also provided an accommodation there. Mr. Ritesh was allowed to retain the
Kolkata accommodation till March, 2020. Compute taxability.
Solution: Phase 1: Value of Furnished Accommodation (Kolkata) (April to September 2019)

Particulars `
Value of unfurnished accommodation (15% of 40,000 × 6 months) 36,000
Add: Value of Furniture provided:
• 10%p.a. of original cost of such furniture
(10% of ` 80,000 x 6 / 12 months) 4,000
Value of Furnished Accommodation 40,000
Phase 2: Valuation of accommodation (October 2019 to December 2019)
(a) For the first 90 days of transfer: Where accommodation is provided both at existing place of
work and in new place, the accommodation, which has lower value, shall be taxable.
(b) After 90 days: Both accommodations shall be taxable.
Computation for the first 90 days of transfer: (October 2019 to December 2019) Lower of:
(i) Value of accommodation at existing place of work
(ii) Value of accommodation at new place
Value of accommodation at existing place of work (Kolkata)
15% of salary for 3 months (i.e. 90 days) = 15% of ` 55,000 x 3 months =24,750
Add: Cost of furniture provided: 10% of ` 80,000 x 3 months / 12 = 2,000
Total Value of Perquisite 26,750
Value of accommodation at new work place (Nagpur)
10% of salary for 3 months (i.e. 90 days) = 10% of ` 55,000 x 3 months = ` 16,500
Therefore, the assessee shall be assessed to tax on ` 16,500 (being the lower)
Phase 3: Valuation of accommodation (after 90 days) (January 2020 to March 2020)
For Kolkata accommodation: 15% of ` 55,000 x 3 months = ` 24,750
Add: Cost of furniture provided: 10% x ` 80,000 x 3 months / 12 = ` 2,000
Total value of perquisite ` 26,750
For Nagpur accommodation: 10% of ` 55,000 x 3 months = ` 16,500
Total value of perquisite:
Particulars Taxable value of
perquisite
Phase 1: Accommodation in Kolkata 40,000
Phase 2: Accommodation in Nagpur (being the lower during 90 days) 16,500
Phase 3: Accommodation in Kolkata 26,750
Phase 4: Accommodation in Nagpur 16,500
Total Value of Taxable Perquisite 99,750
CA Suraj Agrawal
SALARY 4.48
Class Notes
CA Suraj Agrawal
SALARY 4.49
MOTOR CAR [RULE 3(2)] – SPECIFIED EMPLOYEE
Owner of Car Expenses Purpose Taxable Value of Perquisite
met by
1(a) Employer Employer Fully Official use Not a Perquisite, provided the documents
specified in Rule 3(2)(B) are maintained. [See
Note 2 below]
1(b) Employer Employer Fully Personal use Aggregate of

(a) Actual expenditure on Car
(b) Remuneration to Chauffeur
(c) 10% p.a. of the Cost of Car (normal wear &
tear)
Less: Amount charged from Employee
1(c)(i) Employer Employer Partly for Official Cubic Capacity of Car Engine
and
partly for Personal upto 1.6 Litres: ` 1,800 p.m. + ` 900 p.m. for
use Chauffeur
above 1.6 Litres: ` 2,400 p.m. + ` 900 p.m. for

Chauffeur
1(c)(ii) Employer Employee Partly for Official Cubic Capacity of Car Engine
and
partly for Personal upto 1.6 Litres ` 600 p.m. + ` 900 p.m. for
use Chauffeur
above 1.6 Litres ` 900 p.m. + ` 900 p.m. for

Chauffeur
2(i) Employee Employer Fully Official use Not a Perquisite, provided the documents
specified in Rule 3(2)(B) are maintained. [See
Note 2 below]
2(ii) Employee Employer Partly for Official Subject to Rule 3(2)(B)

and
partly for Personal Actual Expenditure incurred Less
use
upto 1.6 Litres: ` 1,800 p.m. + ` 900 p.m. for
Chauffeur
above 1.6 Litres: ` 2,400 p.m. + ` 900 p.m. for

Chauffeur
3(i) Employee Employer Fully Official use Not a Perquisite, provided the documents
owns other specified in Rule 3(2)(B) are maintained.
automotive but [See Note 2 below]
not Car
3(ii) Employee Employer Partly for Official Subject to Rule 3(2)(B)

owns other and
automotive but partly for Personal Actual expenditure incurred by Employer Less: `
not Car use 900 p.m.
CA Suraj Agrawal
SALARY 4.50
CLASS NOTES
CA Suraj Agrawal
SALARY 4.51
Notes:
1. Pool of Cars owned or hired by Employer: If the Employee is permitted to use any or all Cars for
both official and personal use, the treatment will be as under
For one Car Valued as per 1(c)(i)

For more than one Valued as per 1(b), as if fully used for personal purpose
Car
2. Documents required for claiming 'Not Taxable Perquisite' or higher deduction wherever
applicable. [Rule 3(2)(B)]:
(a) Employee should maintain complete details of journey undertaken for official purpose, which
includes date of journey, destination, mileage and amount of expenditure incurred thereon.
(b) Certificate of supervising authority of the Employee, wherever applicable, to the effect that the
exp. was incurred for wholly and exclusively for performance of official duties, should be
provided.
PROVISION OF DOMESTIC SERVANTS [Rule – 3(3)]

(Sweeper, Gardener, watchman or a personal attendant)
Servant Servant’s Value of perquisite Taxable in the hands of
appointed by salary paid by
Employee Employee Nil Not applicable
Employee Employer Actual cost incurred by the All employees

Employer on the servant
Employer Employer Actual cost incurred by the Specified employee

Employer on the servant
Employer Employee Nil Not applicable
Note:
1. Where the employee is paying any amount in respect of such servant facility, the amount so paid
shall be deducted from the value of perquisite determined above.
2. Domestic Servant Allowance given to an employee is always chargeable to tax.
QUESTION 20:
Mr. E is employed with N Ltd. he also gets the services of sweeper and watchman. E has
paid employment tax of ` 800. Determine his gross salary in the following cases:
1) His salary is ` 8,400 pm. Employer provides the services of sweeper and watchman. N Ltd.
pays them ` 600 pm and ` 500 pm;
2) His salary is ` 8,400 pm. Sweeper and watchman are engaged by Mr. E at the rates given in
clause(1) above but their wages are reimbursed by the employer;
3) His salary is ` 9,000 pm. Employer provides the services of sweeper and watchman at the
above rates but he recovers from Mr. E ` 200 pm and ` 300 pm respectively.
CA Suraj Agrawal
SALARY 4.52
SUPPLY OF GAS, ELECTRICITY OR WATER FACILITY [Rule –
3(4)]
Facility in the VALUE OF PERQUISITE Taxable in the hands
name of of
Provided from own Provided from
source outside
Employer Mfg. cost to the employer Amount paid to the Specified employees
supplier
Employee Mfg. cost to the employer Amount paid to the All employees
supplier
Note:
1. Where the employee is paying any amount in respect of such above facility, the amount so paid
shall be deducted from the value of perquisite determined above.
2. Gas/Electricity/Water Allowance given to an employee is always fully chargeable to tax.
QUESTION 21:
G Ltd. provides electricity to its employee, P. Annual consumption as per meter reading
comes to 2,250 units. Determine the value of the perquisite in the following cases:
1) Electricity meter is in the name of P and the rate of electricity is ` 3 per unit
2) Electricity meter is in the name of G Ltd. the rate of electricity is ` 3 per unit.
3) G Ltd. is a power-generating company. Manufacturing cost is 90 paise per unit but supplied to
public @ ` 2 per unit. However, it charges 30 paise per unit from employees.
FREE OR CONCESSIONAL EDUCATION FACILITY [Rule – 3(5)]

The value of perquisite is determined as under:
Facility provided Value of perquisite Taxable in
to the
Provided in a school Provided in any other hands of
owned by the employer school
[Case 1] [Case 2]
Children Cost of such education in Cost of such education Specified
[Any No.] similar school* employee
(There would be no
perquisite if the cost of
education does not exceed
` 1,000 p.m. per child)
OTHER Cost of such education in Cost of such education Specified

HOUSEHOLD similar school incurred employee
MEMBER
Note:
1) If the employee incurs the expenditure of school fees and the same is reimbursed by the
employer, then the entire amount of reimbursement so made, shall be fully taxable in the hands of
all employees.
2) Child includes step child as well as the adopted child of the employee.
* If cost of education exceeds ` 1,000 p.m. then full amount is taxable. An alternate view
possible is that only the sum in excess of ` 1,000 per month is taxable.
CA Suraj Agrawal
SALARY 4.53
Class Notes
CA Suraj Agrawal
SALARY 4.54
VALUATION IN RESPECT OF FREE TRANSPORT [Rule – 3(6)]
In case of employees of Taxable value
Railways / Airlines Nil
Any other transport Value at which such benefit is offered by the xxx
undertaking employer to the public
Less: Recovery from the employee xxx
END OF SECTION 17(2)(iii) – Perquisites for Specified Employee only
VALUATION IN RESPECT OF SHARES & SECURITIES ISSUED

UNDER ESOP [SECTION 17(2)(vi)]
• The value of any specified security or sweat equity shares allotted or transferred, directly or
indirectly, by the employer or former employer, free of cost or at concessional rate to the
assessee shall be taxable as perquisite.
• The value shall be the FMV of such security or shares on the date on which the option is
exercised by the assessee, as reduced by any amount actually paid by, or recovered from,
the assessee.
• FMV FOR LISTED SHARES:

Perquisite Value of listed sweat equity shares allotted or transferred free of cost or at
concessional rate shall be average of opening and closing price of shares listed on
stock exchange on date of exercise of option less any amount recovered from the
employee
Question 22:
IT Limited, under its Employment Stock Option Plan, allotted 500 equity shares to its finance
manager, Pooja on 15th May, 2019, when she exercised her option. The option was granted on
15th January, 2018 and the shares vested with her on 15th January, 2019. The company's shares
are quoted in Bombay Stock Exchange, where the opening price and closing price on the date
of exercise of option were ` 250 and ` 256, respectively. The company recovered ` 50 per share
from Pooja. Compute the value of perquisite for the previous year 2019-20.
CA Suraj Agrawal
SALARY 4.55
Class Notes
CA Suraj Agrawal
SALARY 4.56
SECTION 17(2)(viii) -VALUATION OF OTHER FRINGE BENEFITS
AND AMENITIES [Sub-rule (7) of Rule 3]
INTEREST FREE OR CONCESSIONAL LOAN [Rule 3(7)(i)]
1. Value of perquisite =
Interest computed as per SBI rates [as on 01.04.2019] on Maximum Outstanding Monthly
Balance xxx
Less: Interest recovered by the employer from the employee xxx
2. “Maximum outstanding monthly balance” means the aggregate outstanding balance for each
loan as on the last day of each month.
3. Nothing is taxable if-
- Amount of Such Loans are not exceeding in the aggregate ` 20,000
- Such loans are given for medical treatment in respect of diseases specified in rule 3A.
- Where loans are made available for medical treatment, referred to above, the exemption
shall not apply to so much of the loan as has been reimbursed to the employee
under any medical insurance scheme.
Question 23:
Determine the taxable value of the perquisite in the following cases:
1. Z Ltd. gives an interest-free housing loan ` 10,00,000 to its employee on 1 October 2019. Loan is
repayable within 5 years. SBI lending rate, as on 1.4.2019 is 10% p.a.
2. A, an employee, takes a personal loan of ` 1,25,000 from Alfa Ltd. @ 6% p.a. on April 1, 2019,
[SBI lending rate may be assumed, as on 1.4.2019 is 14% p.a.]
3. A purchased a Car on March 1, 2019 from a loan of ` 9,00,000 taken at concessional rate of 7%
p.a. from his employer. It is repayable in monthly installments of ` 25,000 starting from January 1,
2020 Compute the taxable value of perquisite in respect of concessional loan for the previous year
2019-20 SBI lending rate may be assumed, as on 1.4.2019 is 12.25% p.a.
CA Suraj Agrawal
SALARY 4.57
Travelling, Touring & Accommodation [Rule 3(7)(ii)]
Valuation of perquisite in respect of traveling, touring, accommodation and any other expenses paid /
reimbursed by employer for any holiday availed by EMPLOYEE (OR ANY MEMBER OF
HOUSEHOLD) other than LTC (section 10(5) read with Rule 2B):
(a) Where such facility is maintained by the employer and available uniformly to all employees,
then value shall be:-
Expenditure incurred by the employer LESS Amount recovered from the employee.
(b) Where such facility is maintained by employer and not available uniformly to all employees,
then value shall be:-
Value at which such facilities are offered by other agencies to the public LESS Amount
recovered from the employee.
Notes:
(1) Where the employee is on official tour & the expenses are incurred in respect of any member of his
household accompanying him, the amount of expenditure so incurred in respect of such member
only shall be liable to be tax as perquisite.
(2) Where any official tour is extended as vacation, then expenses incurred in relation to such extended
period of stay or vacation, shall be treated as perquisite.
Free LUNCH/refreshment/ Beverages etc [Rule 3(7)(iii)]

THE TAXABLE VALUE OF THIS PERQUISITE SHALL BE:
Cost incurred by the employer LESS Amount recovered from the employee
However, facility in the following cases is exempt from Tax:
FREE FOOD AND NON-ALCOHOLIC BEVERAGES UPTO RS. 50 PER MEAL provided by
employer,
during working hours at office or business premises; or
through paid voucher which are not transferable and usable only at eating joints;
Tea or snacks provided during working hours; or
Free food and non-alcoholic beverages during working hours provided in a remote area or an off-
shore installation.
Note:- Working hours includes extended office hours (like working on holiday, over-time etc).
GIFT, VOUCHER OR TOKEN [Rule 3(7)(iv)]
The Value of any gift, or any voucher/ token made by employer to THE EMPLOYEE OR HIS
HOUSEHOLD MEMBER, in excess of ` 5,000, is fully taxable.
If the value of such gift, voucher or token is below ` 5,000 in the aggregate during the previous
year, the value of perquisite shall be taken as NIL.
The aforesaid exemption of ` 5,000 shall be denied in case of cash gift.
CA Suraj Agrawal
SALARY 4.58
Note:
An alternate view possible is that only the sum in excess of ` 5,000 is taxable in view of the language of
Circular No. 15/2001 that such gifts upto ` 5,000 in the aggregate per annum would be exempt, beyond
which it would be taxed as perquisite. As per this view, the value of perquisite would be difference
between Gift Value & ` 5,000.
Class Notes
CA Suraj Agrawal
SALARY 4.59
Class Notes
CA Suraj Agrawal
SALARY 4.60
CREDIT CARD [Rule 3(7)(v)]
The amount of expenses including membership fees and annual fees incurred by THE
EMPLOYEE OR ANY MEMBER OF HIS HOUSEHOLD which is charged to a credit card (including
add on card) provided by the employer or otherwise, paid for or reimbursed by the employer shall
be taken to be the value of perquisite chargeable to tax.
Amount recovered from such employee will be reduced from the value determined.
However, such expenses incurred wholly and exclusively for official purposes would not be
treated as a perquisite if it is supported by necessary documents.
CLUB EXPENDITURE [Rule 3(7)(vi)]

If employer reimburses or makes payment of any expenditure incurred in a club including the
amount of annual or periodical fee for the EMPLOYEE OR ANY MEMBER OF HOUSEHOLD,
the actual amount of such expenditure shall be the value of perquisite.
Amount recovered from such employee will be reduced from the value determined.
Initial fee paid for acquiring corporate membership is not a taxable perquisite
No taxable perquisites in case health club, sports club and similar facilities provided uniformly
to all employees
No taxable perquisite if the club expenditure is incurred wholly and exclusively for business
purposes.
USE of Employer’s MOVABLE ASSETS [Rule – 3(7)(vii)]

If the facility of usage of any movable asset (Except LAPTOP & Computers) is provided by employer to
EMPLOYEE OR ANY MEMBER OF HIS HOUSEHOLD, the taxable value shall be:
- 10% P.A. OF THE ACTUAL COST of asset (if owned by the employer) or
- Actual amount of hire charges (if taken on hire by the employer)
Note:
1. Where the employee is paying any amount in respect of such asset, the amount so paid shall be
deducted from the value of perquisite determined above.
2. Member of household shall include- (a) Spouse; (b) Children and their spouses; (c) parents;
and (d) Servants and dependents.
TRANSFER of any Movable Asset [Rule – 3(7)(viii)]

If any movable asset is transferred by the employer to employee, then, taxable value of this perquisite
shall be:
Actual cost of the asset to the employer
Less: Dep. for every completed year of usage by employer
Less: The amount charged from the employee.
The following will be the rate and method of depreciation:
S.N. Asset Rate Method
1. Computer & electronic items 50% W.D.V.

[Not covering Household appliances]
2. Motor Car 20% W.D.V.
3. Any other asset 10% Straight Line
CA Suraj Agrawal
SALARY 4.61
Other Benefit or Amenity [Rule – 3(7)(ix)]
2)
Residual Head- The value of any other benefit or amenity, service, right or privilege provided by the
employer shall be determined on the basis of cost to the employer under an arms' length transaction as
reduced by the employee's contribution, if any.
SECTION 10(10CC) – INCOME IN THE NATURE OF PERQUISITE –

Exempted
As per section 10(10CC), tax paid by employer on non-monetary perquisite income of employee shall
be exempt in the hands of employee.
TAX IMPLICATION IN HANDS OF EMPLOYER: Section 40(a)(v) disallows such expenditure in the
hands of the employer. Therefore, the tax so paid by the employer will not be deductible expenditure in
his hands.
CA Suraj Agrawal
SALARY 4.62
Class Notes
CA Suraj Agrawal
SALARY 4.63
Medical Facilities Provided by Employer [Proviso to Section 17(2)]
MEDICAL TREATMENT IN INDIA:

In the following cases, medical facilities/ reimbursement incurred for employee/his family member are
treated as tax FREE perquisites:-
I. Expenditure incurred in a HOSPITAL MAINTAINED BY THE EMPLOYER.

II. Sum paid by the employer for any expenditure for medical treatment:
in any hospital maintained by
o the Govt. or local authority or
o an approved hospital under CGHS or
of prescribed diseases/ ailment in a hospital approved by CCIT. [Certificate is required]
III. Group Medical Insurance paid u/s 36(1)(ib).
IV. Medical Insurance paid u/s 80D.
V. Premium of Accidental Insurance Policy.
VI. Any other medical expenditure reimbursed to the extent of ` 15,000 in the Previous Year. This
exemption is not available from AY 19-20.
MEDICAL TREATMENT OUTSIDE INDIA:
The following expenditure incurred by employer on treatment of the employee/his family members,
outside India is also a tax-free perquisite:
1. EXPENSES ON MEDICAL TREATMENT OF THE EMPLOYEE OR ANY FAMILY MEMBER:
Exempt to the extent permitted by RBI.
2. EXPENSES ON STAY ABROAD OF THE PATIENT AND ONE ATTENDANT:
Exempt to the extent permitted by RBI
3. TRAVEL EXPENSES FOR ABROAD OF THE PATIENT AND ONE ATTENDANT:
Travel expenses shall be wholly exempt if the employee’s GTI before including therein, the said
travel expenditure ≤ ` 2,00,000.
Notes
Family = Spouse + Children + Dependent [Parents + Brothers + Sister]
Hospital includes a dispensary or a clinic or a nursing home.
Fixed medical allowance – always taxable.
CA Suraj Agrawal
SALARY 4.64
RELIEF UNDER SECTION 89
Where by reason of any portion of an assessee’s salary being paid in arrears or in advance or by
reason of his having received in any one financial year, salary for more than twelve months or a
payment of profit in lieu of salary under section 17(3), his income is assessed at a rate higher than that
at which it would otherwise have been assessed, the AO shall, on an application made to him in this
behalf, grant such relief as prescribed.
Similar tax relief is extended to assessees who receive arrears of family pension as defined in the
Explanation to clause (iia) of section 57.
[No relief shall be granted in respect of any amount received or receivable by an assessee on his
voluntary retirement or termination of his service, in accordance with any scheme or schemes of
voluntary retirement or a scheme of voluntary separation (in the case of a public sector company), if
exemption under section 10(10C) in respect of such compensation received on voluntary retirement or
termination of his service or voluntary separation has been claimed by the assessee in respect of the
same assessment year or any other assessment year.]
COMPUTATION OF RELIEF IF SALARY RECEIVED IN ARREARS OR IN ADVANCE
Steps Procedure
1 Compute the tax payable (after HEC) on the total income, including the additional salary,
of the relevant previous year in which the same is received.
2 Compute the tax payable (after HEC) on the total income, excluding the additional
salary, of the relevant previous year in which the same is received.
3 Find out the difference between the tax at (1) and (2).
4 Compute the tax (after HEC) on the total income after including the additional salary in
the previous year to which such salary relates.
5 Compute the tax (after HEC) on the total income after excluding the additional salary in
the previous year to which such salary relates.
6 Find out the difference between tax at (4) and (5).
7 If tax computed in step (3) > tax computed in step (6) then the excess amount
is admissible as relief u/s 89.
If tax computed in step (3) ≤ tax computed in step (6) then NO RELIEF is
admissible u/s 89. In such a case, the assessee employee need not apply for relief.
CA Suraj Agrawal
SALARY 4.65
MEANING OF GOVERNMENT EMPLOYEES FOR DIFFERENT PURPOSE
S. No. Purpose Government employees

1. GRATUITY [SECTION 10(10)] CG/SG/LA
2. PENSION [SECTION 10(10A)] CG/SG/LA/SC
3. LEAVE SALARY [SEC 10(10AA)] CG/SG
RENT FREE ACCOMODATION

4. CG/SG
[SECTION 17(2)(i) & 17(2)(ii)]
ENTERTAINMENT ALLOWANCE
5. CG/SG
[SECTION 16(ii)]
MEANING OF SALARY FOR COMPUTATION
SECTION Purpose of computation Salary includes

16(ii) Entertainment allowance Basic salary
10(10) Gratuity [if gratuity Act, 1972 is Basic salary + DA
applicable]
10(10) Gratuity [it Act not applicable] Basic salary + DA (R) + % Commission on Sales.
10(10AA) Leave Salary DO
10(10B) Retrenchment Compensation Basic salary + DA
10(13A) HRA Basic salary + DA (R) + % Commission on Sales.
10(10C) VRS DO
10(12) RPF DO
17(2)(i) & RENT FREE ACC [RFA] OR Basic + Allowance +Bonus + Commission + DA(R) + Any
17(2)(ii) ACCOMMODATION AT money payment ( which in chargeable to tax)
CONFESSIONAL RATE But does not include –
1. Employer’s contribution to RPF
2. Value of perquisite specified in Sec 17(2)
[from one or more employer]
17(2)(iii) SPECIFIED EMPLOYEE Basic Salary + D.A. + Commission, whether payable

monthly or turnover based + Bonus + Fees + Advance
Salary + Arrear Salary + Any other taxable payment + Any
taxable allowances + Any other monetary benefits –
Deductions under section 16
[from one or more employer]
DEARNESS ALLOWANCE (DA)

If in question DA is given, then it will not be treated as forming part of salary unless question specifically
says that –
• If forming part of retirement benefit
• Under the terms of employment
• Consider for retirement benefit
DEARNESS PAYS (DP)

It means it is forming part of retirement benefit unless question says otherwise.
MEMBERS OF HOUSEHOLD
= Spouse, Children, Spouse of children, Parents, Servants & all other Dependents.
FAMILY = Spouse + Children + Dependent [Parents + Brothers + Sisters]
CA Suraj Agrawal
SALARY 4.66
CLASS NOTES
CA Suraj Agrawal
SALARY 4A.1
Problems under the head “Salary”

1) Mr. X has joined ABC Ltd. on 01.10.2006 in the pay scale of 10,000 – 900 – 16,300 – 1,100 –
25,100 – 1,500 – 32,600. The employer has allowed him dearness allowance @4.35% of basic pay
up to 30.09.2018, @7.5% up to 31.12.2019. Thereafter, it was allowed @10.5% of the basic pay.
Compute employee’s gross salary.
2) Raghav furnished the following particulars and requests you to compute his taxable income
for the previous year ending 31.3.2020:
a) Joined service on 1.10.2019, on a consolidated salary of ` 25,000 per month.
b) He was paid ` 1,30,000 in September, 2019, so that he should not join elsewhere.
c) He contributed towards:
i) Life Insurance Premium ` 20,000
ii) National Saving Certificates ` 10,000
3) Up till June 30, 2019, X is in the employment of A Ltd. on the fixed salary of ` 25,000 per month
which becomes "due" on the first day of the next month. On July 1, 2019, X joins B Ltd. (salary
being ` 30,000 per month which becomes "due" on the last day of each month). Salary is actually
paid on the seventh day of the next month in both cases. Find out the amount of salary
chargeable to tax.
4) Mr. Sunil is working as an employee in ABC Ltd. He received the following amounts during
the previous year 2019-20. Compute the gross salary:
(a) He received ` 1,85,000 as salary after deducting ` 15,000 as income tax and ` 12,000 as
contribution towards provident fund.
(b) He received ` 4,000 as guarantee commission.
(c) He was also acting MP and received ` 1,25,000 as salary from the consolidated fund of India.
(d) He took 1 month's salary as loan for his daughter's marriage.
5) Rajesh Kumar, an Indian citizen, is posted in the Indian High Commission at London during the PY
2019-20. His emoluments consist of basic pay of ` 1,00,000 per month and overseas allowance of `
2,000 per month. Besides, he is entitled to airfare for going from and coming to India and also to
free use of Government's car at London. He has no taxable income except salary income stated
above. His employer did not deduct tax at source.
Rajesh Kumar argues that

i) he is not liable to pay tax on salary earned and received outside India since he is a non –
resident during the PY 2019-20 and
ii) even if any tax is due, it is the duty of his employer to deduct tax at source and as such he
has no responsibility to pay the tax.
Discuss whether his contention is correct. Will it make any difference if Rajesh Kumar is
foreign citizen? Give reasons.
6) Mr. Shyam, an employee of AB Ltd. receives ` 90,000 as gratuity under the Payment of Gratuity
Act, 1972. He retires on August 15, 2019 after rendering service for 32 years and 4 months. The
last drawn salary was ` 3,250 p.m. Calculate the amount of gratuity chargeable to tax.
CA Suraj Agrawal
SALARY 4A.2
7) Ms. Uma, not being covered by the Payment of Gratuity Act, 1972 retires during 2019-20 from SR
Private Ltd, and receives ` 45,000 as gratuity after a service of 40 years 11 months. Her average
monthly salary during the last 10 months of service was ` 2,200. Determine the taxable gratuity in
her case. What would be your answer if she retired after serving for another 2 months?
8) X, who is not covered by the Payment of Gratuity Act, 1972, retires on November 20, 2019 from
ABC Ltd. and receives ` 1,86,000 as gratuity after service of 38 years and 10 months. His salary is
` 8,000 per month up to July 31, 2019 and ` 9,000 per month from August 1, 2019. Besides, he
gets ` 500 per month as dearness allowance (69 per cent of which is part of salary for computing
retirement benefits). What amount of gratuity will be exempt from tax?
9) X, a marketing specialist of Bombay, is working with two companies, viz., A Co. and B Co. He
retires from A Co. on November 30, 1992 (salary at the time of retirement: ` 2,600) and receives `
22,000 as gratuity out of which ` 20,000 is exempt under section 10(10). He also retires from B Co.
on December 10, 2019 after 38 years and 8 months of service and receives ` 3,90,000 as death –
cum – retirement gratuity. His average basic salary drawn from B Co. for the preceding 10 months
ending on November 30, 2019 is ` 18,200 per month. Besides, he has received ` 1,000 per month
as dearness allowance, 80 per cent of which forms part of salary for the purpose of computation of
retirement benefits and 6 per cent commission on turnover achieved by him. Total turnover
achieved by him during 10 months ending on November 30, 2019 is ` 2,00,000.
Determine the amount of gratuity exempt under section 10(10).
10) Determine the amount of pension taxable for the previous year in the following cases on the
assumption that it becomes due on the last day of each month:
a) X receives ` 18,250 per month as pension from the Central Government during the previous
year 2019-20.
b) X receives ` 21,000 per month as pension from the Government of Punjab during the previous
year 2019-20.
c) X receives ` 20,000 per month as pension from ABC Ltd., a public limited company in the
private sector, during the previous year 2019-20.
d) X retires from the Central Government service on May 31, 2019. He gets pension of ` 15,000
per month up to November 30, 2019 [i.e., ` 15,000 x 6]. With effect from December 1, 2019, he
gets one – third of his pension commuted for ` 7,18,000.
e) X retires from ABC Co. on June 30, 2019. He gets pension of ` 20,000 per month up to January
31, 2020. With effect from February 1, 2020, he gets 60 per cent of pension commuted for
` 10,71,000. Does it make any difference if he also gets gratuity of ` 40,000 at the time of
retirement?
11)
a) Mr. Kumar retires from Government service on 1-1-2020. He was drawing a salary of ` 6,000
p.m. He was drawing dearness allowance of ` 1,200 p.m. On retirement, he receives a gratuity
of ` 1,20,000. He is paid monthly pension of ` 4,200. Compute the Gross salary in his case.
b) Mr. Dalai retires from an employment covered by Payment of Gratuity Act on 30.11.2019 and he
is paid gratuity of ` 55,000. While the last drawn salary is ` 1,950, the average of last 10 months
salary is ` 1,800. He served for 36 years and 4 months before retirement. Compute the taxable
gratuity in his case.
c) Mr. Rohit not covered by Payment of Gratuity Act, retires on 28th Feb 2020 after serving the
employer company for a period of 18 years and 10 months. He was drawing a salary of ` 5,000
up to Sep 2019 and thereafter ` 6,000/ – per month. On retirement he is not in receipt of
pension but gratuity of ` 60,000 is paid. Compute Gross salary.
CA Suraj Agrawal
SALARY 4A.3
12) Determine the gross amount of taxable pension includible in salary income for the AY 2020-
21 in the following cases:
a) On 30th June 2019, Mr. Santhosh retires from Central Government service and gets pension of
` 3,000 p.m. up to 31-1-2020. With effect from 1-2-2020 he gets 1/3 of his pension commuted
for ` 1,20,000.
b) Mr. Kamath retires from X Ltd., on 31.10.2018. He gets pension of ` 2,000 p.m. up to 31-10-
2019. With effect from Nov 1, 2019 he gets 60% of pension commuted for ` 30,000. He is not in
receipt of gratuity.
13) Calculate taxable pension includible in the salary income in the below cases for AY 2020-21.
a) Mr. Ram Singh retired from the Indian Revenue Service on 16 – 3 – 2018. He gets pension of `
4,000 p.m. upto 31.12.2019. With effect from 01.01.2020 he gets 25% of his pension commuted
for ` 75,000.
b) Mr. Sundar retires from RG Co. on 31-3-2019. He is paid ` 1,800 p.m. as pension. On his
request, RG Co. pays ` 36,000 in lieu of 50% of pension from 01.12.2019.
Assume that (i) gratuity is paid (ii) no gratuity has been paid.
14) Mr. K retired from Indian Revenue Service on 31.8.2019. He was paid a pension of ` 5,000 p.m.
On 01.01.2020, he commuted 60% of the pension and received ` 72,000. Compute taxable
pension in his case.
15) Mr. Thomas employed in a private company retires on 30.06.2019. He is paid a pension of ` 6,000
p.m. up to January 2020. On 1st February he commutes 75% of his pension and receives `
1,20,000. Calculate the taxable pension assuming he is not in receipt of gratuity.
16) Mr. Daniel resigned from his employment and is paid leave salary of ` 92,400. He completed 32
years of service and he was drawing a salary of ` 4,200 p.m throughout the period of 10 months
before retirement. During service he availed 10 months leave. Calculate the leave salary taxable
in his case. [Company Policy – 1 Month]
17) Mr. Arif retired from service after serving for 12 years and encashed leave of 15 months to his credit
at ` 60,000. As per the rules of employment he was eligible for 2 months leave per year of
completed service and he was drawing ` 4,000 p.m. as salary throughout the period of 10 months
before retirement. Determine taxable amount of leave salary.
18) Shri A.K. Gupta was employed in a factory in Faridabad. He retired on 1.1.2020 after completing a
service of 26 years and 5.months. He had been getting a salary of ` 23,000 per month and a
dearness allowance of ` 2,000 per month (forming part of retirement benefits) for the last four years.
His pension was determined @ ` 9,000 p.m. and 3/4 portion of it was commuted for ` 2,70,000. In
addition to this he received a gratuity of ` 4,00,000 and as per entitlement of 30 days earned leave
for each year of service, he also received ` 3,00,000 for encashment of earned leave of 12 months
during the previous year. Compute gross salary of Shri Gupta, assuming he is not covered
under Payment of Gratuity Act.
CA Suraj Agrawal
SALARY 4A.4
19) X was employed with ABC Ltd. He retired w.e.f. 1.2.2020 after completing a service of 24
years and 4 months. He submits the following information :
Basic Salary ` 5,000 per month (at the time of retirement)
Dearness Allowance 100% of Basic Salary (40% of which forms part of salary for
retirement benefits).
Last increment ` 500 w.e.f. 1.7.2019
His pension – was determined at ` 3,000 per month. He got 50% of the pension commuted w.e.f.
1.3.2020 and received a sum of ` 1,00,000 as commuted pension. In addition to this, he received a
gratuity of ` 1,20,000 and leave encashment amounting to ` 56,000 on account of accumulated
leave of 240 days. He was entitled to 40 days leave for every year of service.
Compute his Gross Salary assuming that he is not covered under Payment of Gratuity Act.
20) Mr. Narendra, who retired from the services of Hotel Samode Ltd., on 31.1.2020 after putting
on service for 5 years, received the following amounts from the employer for the year ending
on 31.3.2020:
Salary @ ` 16,000 p.m. comprising of basic salary of ` 10,000, Dearness allowance of ` 3,000, City
compensatory allowance of ` 2,000 and Night duty allowance of ` 1,000. Pension @ 30% of basic
salary from 1.2.2020. Leave salary of ` 75,000 for 225 days of leave accumulated during 5 years @
45 days leave in each year. Gratuity of ` 50,000.
Compute Gross Salary of Mr Narendra.
21) Mr. Zakaria, staying at Chennai, receives ` 12,500 monthly as basic salary; ` 1,500 as D.A.PM.
provided in terms of employment and 4% as commission on turnover achieved by him. He is paid
an house rent allowance of `1,800 p.m. The turnover achieved by him for the year is `15 lakhs.
House rent paid by him is ` 2,500 p.m. He received advance salary of ` 50,000/ – in March 2020
relating to the period April to July 2020. Determine the taxable quantum of HRA.
22) Mr. Kapil is in receipt of the following allowances and seeks your advice about the taxable
quantum of these allowances for FY 2019-20:
i) Helper allowance ` 300 p.m. Mr. Kapil had appointed a helper for 9 months during the year
to whom he paid ` 200 p.m.
ii) Conveyance allowance of ` 750 p.m. Mr. Kapil owner car which is used both for personal
purposes and official purposes. Total monthly expenses Amounts to ` 1,200 of which 40% is
attributable to office use.
iii) During the year Mr. Kapil received education allowance for his 3 children a sum of ` 250 per
month each towards education and hostel expenditure. All the children are staying in hostel.
iv) During the year for six months Mr. Kapil was posted at Khandala, a hilly area loc; at a height
of 1,200 mts. above sea level. Hill compensatory allowance of ` 2,400 has been received by
him at ` 400/ – per month.
CA Suraj Agrawal
SALARY 4A.5
23) Compute the gross salary of Mr. Kamlesh on the basis of the following information:
a) Basic pay ` 8,000 per month
b) Dearness allowance - 40% of basic pay
c) City compensatory allowance -10% of basic pay.
d) Medical allowance- ` 800 per month
e) Children education allowance - ` 80 per month per child for 3 children
f) Hostel expenditure allowance - ` 400 per child per month for 2 children.
g) Tribal area allowance- ` 500 per month
h) Travelling allowance - ` 12,000 (However actual expenditure was only ` 8000 for official
duties)
i) Conveyance allowance - ` 500 per month. (The whole amount was spent for official duties)
j) Transport Allowance - ` 28,200
k) Overtime allowance - ` 4,000
24) Mr. Khanna, an employee of lOL, New Delhi, a Private Sector Company, received the
following for the FY 2019-20: `
1. Basic pay . 1,20,000
2. House rent allowance 90,000
3. Special allowance 30,000
X was residing at New Delhi and was paying a rent of ` 10,000 a month.
Compute eligible exemption under section 10(13A) of Income – tax Act, 1961, in respect of
HRA received.
25) Mr. M is an area manager of M/s N. Steels Co. – Ltd. During the financial year 2019-20, he
gets following emoluments from his employer:
Basic Salary
– Up to 31.08.2019 ` 20,000 p.m.
– From 01.09.2019 ` 25,000 p.m.
Transport allowance ` 1,200 p.m.
Contribution to recognized provident fund 15% of basic salary and D.A.
Children education allowance ` 500 p.m. for two children
City compensatory allowance ` 300 p.m.
Hostel expenses allowance ` 380 p. m. for two children
Tiffin allowance ` 5,000 p.a.
(actual expenses ` 3700)
Tax paid on employment ` 2,500
Compute taxable salary of Mr. M.
26) Mr. D is employed in Nainital Transport Corporation as a conductor with basic pay ` 4,000 p.m.
upto 30.09.2019 and ` 4,500 p.m. with effect from 01.10.2019. Dearness allowance is allowed @
12% of the basic pay and 10% of it is taken into consideration as per terms of employment. The
employer has paid him outstation allowance of ` 1,200 p.m., transport allowance of ` 300 p.m.
(savings ` 100 p.m.), conveyance allowance for personal purpose ` 100 p.m.
He has resigned from Nainital Transport Corporation with effect from 01.03.2020 and has joined
Haryana Transport Corporation at a consolidated pay of ` 8,500 p.m.
Compute his income under the head salary.
CA Suraj Agrawal
SALARY 4A.6
27) Mr A, a civil engineer was in Government service till 30.06.2019. He joined as an adviser (part
time) from 1st October, 2019 in a organisation on an honorarium of ` 32,000 per month. He owns a
house properly which is self occupied. From the following further information, furnished for the
year ending 31st March, 2020, you are requested to
(a) compute his income under the head salary
`
(a) Salary from Government service 30,000
(b) Leave at credit (encashment) 50,000
(c) Provident fund 78,000
(d) Commuted pension 35,000
(e) Uncommuted Pension 20,000
(f) House rent allowance 5,000
(g) Gratuity Received 1,20,000
(h) Repayment to Housing Development Finance Corporation Ltd. 24,000
(Paid in July 2020-Principal ` 10,000+Interest ` 14,000 on loan taken for construction of house)
(i) Deposit in public provident fund account 32,000
28) Mr. X, a resident individual is retired from A Co. Ltd. w.e.f. 1st February, 2020, after 20 years and 9
months of service. He joined B Co. Ltd. on the same day, i.e. 1st February, 2020 and remained in
service till 31st March, 2020.
He furnished the following information:

Salary and allowances from 01.04.2019 to 31.01.2020 from A Co. Ltd. `
Basic salary 10,000 p.m.
Dearness allowance 1,500 p.m.
Commission calculated @ 4% on turnover achieved by Mr. X 4,000
Gratuity received 1,25,000
(not covered by the Payment of Gratuity Act, 1972)
Salary and allowance from B Co. Ltd.

Basic Salary 7,000 p.m.
Entertainment allowance 1,000 p.m.
Fixed medical allowance 500 p.m.
House rent allowance 600 p.m.
Leave salary received (During the service) 5,000
Other information:
Mr. X resides in his own house throughout the year.
Mr. X paid a premium of ` 12,000 on the policy of ` 150,000 on life of his minor child. Contribution
to an approved superannuation fund and the Jeevan Dhara Scheme of the LIC covered under
section 80C amounted to ` 8,000 and ` 5,000 respectively.
Compute Mr. X's total income.
CA Suraj Agrawal
SALARY 4A.7
29) From the following particulars furnished by Mr. X for the year ended 31.03.2020. Compute
his total income.
a. Mr. X retired on 31.12.2019 at the age of 59, after putting in 25 years and 11 months of
service, for a private company at Delhi.
b. He was paid a salary of ` 30,000 p.m. and house rent allowance of ` 7,000 p.m. He paid rent
of ` 6,500 p.m. during his tenure of service.
c. On retirement, he was paid a gratuity of ` 3,75,000. He was not covered by the payment of
Gratuity Act. His average salary in this regard may be taken as ` 26,500. Mr. X has not
received any other gratuity at any point of time earlier, other than this gratuity.
d. He had accumulated leave of 15 days per annum during the period of his service; this was
encashed by Mr. X at the time of his retirement. A sum of ` 3,20,000 was received by him in
this regard. His average salary may be taken as ` 26,500.
e. Mr. X has invested ` 20,500 in recognised provident fund, ` 45,000 in public provident fund
and ` 29,500 in National Savings Certificates.
30) Mr. A retires from service on December 31, 2019, after 25 years of service. Following are the
particulars of his income/investments for the previous year 2019-20:
Particulars `
Basic pay @ ` 16,000 per month for 9 months 1,44,000
Dearness pay (50% forms part of the retirement benefits) ` 8,000 per month
for 9 months 72,000
Lumpsum payment received from the Unrecognised Provident Fund 6,00,000
Deposits in the PPF account 40,000
Out of the amount received from the provident fund, the employer’s share was ` 2,20,000 and the
interest thereon ` 50,000. The employee’s share was ` 2,70,000 and the interest thereon ` 60,000.
What is the taxable portion of the amount received from the unrecognized provident and in
the hands of Mr. A? Will your answer be any different if the fund mentioned above was a
recognised provident fund?
31) Mr. B is working in XYZ Ltd. and has given the details of his income for the P.Y. 2019-20. You
are required to compute his gross salary from the details given below:
Basic Salary ` 10,000 p.m.
D.A. (50% is for retirement benefits) ` 8,000 p.m.
Commission as a percentage of turnover 1%
Turnover during the year ` 5,00,000
Bonus ` 40,000
Gratuity ` 25,000
His own contribution in the RPF ` 20,000
Employer’s contribution to RPF 20% of his basic salary
Interest accrued in the RPF @ 13% p.a. ` 13,000
32) X retires on June 30, 2019 He submits the following information —
Basic salary (since January 2018); ` 20,000 per month, dearness allowance : ` 6,000 per month
(1/3 of which is part of salary for retirement benefits), employer's contribution towards provident
fund : ` 3,000 per month (X makes a matching contribution); interest credited at the rate of 15 per
cent on April 30, 2019 : ` 7,500; pension after retirement : ` 10,000 per month; and payment of
provident fund at the time of retirement: ` 7,60,000 (out of which employer's contribution: `
3,30,000, interest thereon ` 44,000, X's contributions : ` 3,40,000, interest thereon : ` 46,000).
Salary and pension become due on the last day of each month. X has deposited the entire
provident fund payment with a company (rate of interest: 9 per cent per annum).
Find out the income of X on the assumption that the provident fund is (a) statutory provident
fund, (b) recognised provident fund, or (c) unrecognised provident fund.
CA Suraj Agrawal
SALARY 4A.8
33) Mr. R is employed with a transport firm. He is a member of an unrecognized provident fund. He
has been drawing salary @ ` 10,000 p.m. since 01.01.2019. Dearness allowance, forming part of
pay for superannuation benefits, is paid @ 10% of his salary. He gets house rent allowance @ `
1,300 per month. He pays rent of ` 2,100 p.m. He contributes @ 10% of his salary to the
unrecognized provident fund and the employer contributes @ 15%. The employer also paid his
club bills amounting to ` 8,000. Besides, he is paid ` 1,800 p.m. as outstation allowance.
He retires on 31st December 2019 after 20 years and 10 months of service. He gets ` 1,56,000
accumulated balance from the fund. It consists of ` 30,000 as his contribution and ` 22,000 interest
thereon. The employer's contribution is ` 66,000 and interest thereon is ` 38,000. He also gets
gratuity of ` 90,000.
After retirement, he gets pension @ ` 4,000 p.m. On 1st March, 2020 he surrenders one-half
pension for a consolidated amount of ` 1,20,000.
He has made the following payment/investments during the previous year 2019-20:
(i) Purchases of National Savings Certificates, VIII issue, amounting to ` 4,000.
(ii) Contribution of ` 10,000 under the Jeevan Dhara Scheme of Life Insurance Corporation of
India eligible for deduction under section 80C.
(iii) Life insurance premium amounting ` 4,000 on the policy taken on the life of his married son.
(Sum assured ` 80,000)
(iv) Public provident fund deposit ` 12,000
(v) Repayment of ` 25,000 to the Life Insurance Corporation of India on account of loan taken for
the purchase of a flat, allotted in March, 2018.
(vi) Tuition fees of his son studying in college ` 1,100 per month.
From the above information you are required to compute his income under the head salary.
34) Mr. X is employed in A Ltd. getting basic pay ` 20,000 p.m., dearness allowance ` 7,000 p.m.
The employer has contributed ` 3,500 to the unrecognised provident fund and the employee has
also contributed equal amount. The employee was retired on 31.10.2019 after serving the
employer for 20 years and 6 months and employer has credited interest ` 21,000 to the provident
fund account on 31.10.2019 and interest rate is 12% p.a.
The employer has paid provident fund balance ` 10,00,000 to the employee on 01.11.2019 out of
which employee's contribution is ` 4,00,000 and employer's contribution is also ` 4,00,000 and
balance is interest. Employer has paid gratuity ` 2,60,000 and allowed him pension ` 5,000 p.m.
The employee was allowed commutation of pension on 01.01.2020 for 40% of the pension and has
paid ` 2,40,000. Compute employee's total income for the assessment year 2020-21.
35) Mr. C is a Finance Manager in ABC Ltd. The company has provided him with rent-free
unfurnished accommodation in Mumbai. He gives you the following particulars:
Basic salary ` 6,000 p.m.

Advance salary for April 2020 received in March 20 ` 5,000
Dearness Allowance ` 2,000 p.m. (30% is for retirement
benefits)
Bonus ` 1,500 p.m.
The company allotted the house to him on 1.11.19. Calculate the taxable value of the perquisite.
CA Suraj Agrawal
SALARY 4A.9
36) Using the data given in the previous question No. 35, compute the value of the perquisite if Mr.
C is required to pay a rent of ` 1,000 p.m. to the company, for the use of this accommodation.
37) Using the data given in above question No. 35, compute the value of the perquisite if ABC Ltd.
has taken this accommodation on a lease rent of ` 1,200 p.m. and Mr. C is required to pay a rent of
` 1,000 p.m. to the company, for the use of this accommodation.
38) Using the data given in question No. 35, compute the value of the perquisite if ABC Ltd. has
provided a television (WDV ` 10,000; Cost ` 25,000) and two air conditioners. The rent paid by the
company for the air conditioners is ` 400 p.m. each. The television was provided on 1.1.20.
However, Mr. C is required to pay a rent of ` 1,000 p.m. to the company, for the use of this
furnished accommodation.
39) Using the data given in question No. 38 above, compute the value of the perquisite if Mr. C is
a government employee. The licence fee determined by the Government for this
accommodation was ` 700 p.m.
40) Mr. Prabhu, a private sector employee gets ` 60,000 as basic pay, ` 6,000 as commission, ` 4,000
as bonus, ` 6,000 as Uniform allowance (60% spent for uniform); ` 12,000 as conveyance
allowance (75% utilised for official purposes); and entertainment allowance ` 5,000. His employer
has paid income – tax of ` 3,000 and profession tax of ` 1,000 on his behalf. A rent free unfurnished
accommodation is provided in a place where population is
a) more than 25 lakhs, b) less than 10 lakhs,
c) between 10 lakhs and 25 lakhs. Determine the value of rent free accommodation.
41) X received during the previous year ending March 31, 2020, emoluments consisting of basic pay: `
1,62,000; special allowance : ` 17,000 and reimbursement of medical expenditure : ` 3,800. His
employer has also provided a rent – free furnished flat in Bombay. Lease rent of the unfurnished flat
is ` 50,000. Some of the household appliances provided to X (with effect from June 1, 2019) are
owned by the employer (cost price of which is ` 36,000, date of purchase is April 1, 1960 and
written down value, as on April 1, 2019 is ` 620). Employer pays ` 10,000 annually as hire charges
for three air – conditioners installed throughout the previous year in rent – free flat.
Compute the value of the perquisite if:

a. X is a Secretary in the Ministry of Law and ` 4,000 is the licence fee of unfurnished flat as per
the Central Government rules;
b. X is the Managing Director of ABC (P.) Ltd. Does it make any difference if, X has been provided
a hotel accommodation throughout the year (tariff being ` 1,20,000 per annum) ?
42) X, a regular employee of A Ltd., gets the following emoluments during the PY 2019-20:
Basic salary : ` 6,000 per month (which has been increased to ` 7,000 per month from January 1,
2020); dearness allowance ` 4,000 per month (72 per cent of which is part of salary for computing
retirement benefits); education allowance : ` 550 per month per child for 4 children; medical
allowance : ` 400 per month; transport allowance : ` 350 per month (out of which ` 100 per
month is used for covering the journey between office and residence and ` 250 per month is used
for other purposes). Besides, he gets ` 4,500 per month as house rent allowance upto November
30, 2019 (rent paid at Ghaziabad : ` 5,500 per month). With effect from December 1, 2019, he has
been provided a furnished flat by the employer at Delhi (rent paid by employer: ` 7,500 per month;
rent of furniture provided : ` 500; rent recovered from X : ` 900 per month). Find out the Gross
salary chargeable to tax on the assumption that with effect from January 1, 2020, he joins a
part – time employment with B Ltd. (salary ` 2,000 per month) with the permission of A Ltd
(without leaving the job of A Ltd.)
CA Suraj Agrawal
SALARY 4A.10
43) Mr. X is employed in ABC Ltd. getting basic pay ` 11,000 p.m., dearness allowance ` 7,000
p.m. (10% of the dearness allowance forms part of salary for retirement benefits).
The employer has paid commission of ` 3,000 p.m. on purchase turnover and has allowed him
medical allowance ` 400 p.m. The employee was paid house rent allowance ` 4.000 p.m. The
employee has paid rent of ` 3,000 p.m.
The employer has discontinued payment of house rent allowance with effect from 01.09.2019 and
has provided him rent free accommodation with effect from 01.11.2019. The accommodation was
owned by the employer and the population of the place is 3,00,000. The employee was allowed
arrears of salary ` 10,000 and advance salary ` 20,000. The employee was also provided furniture
with effect from 01.01.2020. Its original cost is ` 1,00,000 and written down value is ` 35,000.
Compute employee's Gross Salary for the assessment year 2020-21.
(b) Presume in the above question the rent free accommodation has been taken on hire basis
and rent paid by the employer is ` 7,000 p.m. and commission on purchase turnover should be
taken as commission on sales turnover and dearness allowance forming part of salary should be
taken as 20%.
44) Mr. X is employed in ABC Ltd. getting basic pay ` 11,000 p.m., dearness allowance ` 5,000
p.m. and 30% of it forms part of salary.
The employee is also getting dearness pay ` 1,000 p.m. and 10% of it forms part of salary. He is
getting bonus ` 1,200 p.m. The employer has provided him one accommodation in Delhi for which
rent paid by the employer is ` 1,200 p.m.
The employee was transferred to Bombay with effect from 01.01.2020 and the employer has
provided him rent free accommodation at Bombay also which is owned by the employer himself.
The employee has received arrears of salary ` 32,000 and advance salary of ` 11,000.
Compute employee's total income.
45) Mrs. Padma (age : 25 years) is offered an employment by Pritam Ltd. at a basic salary of ` 24,000
per month; other allowances according to rules of the company are - Dearness allowance : 18% of
basic pay (not forming part of salary for calculating retirement benefits); Bonus : 1 month basic pay;
and Project allowance : 6% of basic pay.
The company gives Mrs. Padma an option either to take a rent-free unfurnished accommodation at
Mumbai for which the company would directly bear the rent of ` 15,000 per month or to accept a
house rent allowance of ` 15,000 per month and find out her own accommodation. If Mrs. Padma
opts for house rent allowance, she will have to pay ` 15,000 per month for an unfurnished house.
Which one of the two options should be opted by Mrs. Padma in order to minimize her tax
liability?
46) Determine the value of perquisite in the following cases with brief reasons for your answer:
Motorcar (cubic capacity of engine below 1.60 Hz) owned by employer and provided to employee
since 1.04.2005. It is partly used for official and personal purposes by the employee. Expenditure
fully met by the employer ` 25,600. (Car is self – driven by the employee)
CA Suraj Agrawal
SALARY 4A.11
47) Mr. A is provided with two cars, to be used for official and personal work, by his employer
ABC Ltd. The following information is available from the company records:
Car 1 Car 2
` `
Cost of the Car 6,00,000 4,00,000
Running and maintenance
(Borne by the company) 40,800 28,000
Salary of driver (Borne by the company) 24,000 24,000
The taxable monetary emoluments of Mr. A are ` 90,000. Compute the taxable Perk in respect of
Cars, on the assumption car 2, is exclusively used by A.
48) Mr. Guru receives ` 15,000 p.m. as basic salary and ` 1,500 p.m. as D.A. not forming part of
retirement benefit. He has been provided with the following perquisites:
a) Unfurnished accommodation at Bangalore. Rent paid by Mr. Guru towards this accommodation
is ` 1,000/ – p.m.
b) He has provided with the services of cook and watchman. Company pays a salary of ` 1,000
p.m. each to cook and watchman.
Compute the Gross salary. [Ans: ` 2,37,000]
49) Mr. X and Mr. Y. are working for M/s Gama Ltd. As per salary fixation norms, the following
perquisites were offered:
a) For Mr. X who engaged a domestic servant for ` 500/ – per month, his employer reimbursed the
entire salary paid to domestic servant i.e., ` 500 per month.
b) For Mr. Y. he was provided with a domestic servant @ ` 500 per month as part of remuneration
package.
You are required to comment on the taxability of the above in the hands of Mr. X and Mr. Y
who are not specified employees.
50) Mr. X is employed with AB Ltd. on a monthly salary of ` 25,000 per month and an
entertainment allowance and commission of ` 1,000 p.m. each. The company provides him
with the following benefits:
1. A company owned accommodation is provided to him in Delhi. Furniture costing ` 2,40,000
was provided on 1.8.2019.
2. A personal loan of ` 5,00,000 on 1.7.2019 on which it charges interest @ 6.75% p.a. The
entire loan is still outstanding. (Assume SBI rate of interest to be 12.75% p.a.)
3. His son is allowed to use a motor cycle belonging to the company. The company had
purchased this motor cycle for ` 60,000 on 1.5.2016. The motor cycle was finally sold to him
on 1.8.2019 for ` 30,000.
4. Mr. X is provided with free electricity. Cost to the employer is ` 10,000
5. Professional Tax paid by Mr. X is ` 2,000.
Compute the income from salary of Mr. X.
CA Suraj Agrawal
SALARY 4A.12
51) Please determine the taxable value of the perquisite in the following cases :
i) X is employed by A Ltd. On June 1, 2019, the company gives an interest – free housing loan of
` 14,00,000. Loan is repayable within 5 years. [Assumed SBI rate is 8%]
ii) Y is employed by B Ltd. On April 1, 2019, he takes a personal loan of ` 25,000 from B Ltd. B
Ltd. recovers interest @ 7 per cent per annum from Y. [Assumed SBI rate is 16%]
iii) C Ltd. gives the following interest – free loan to Z, an employee of the company - ` 15,000 for
child's education and ` 5,000 for purchasing a refrigerator. No other loan is given by C Ltd.
iv) A purchases a Honda City 1.6 Lxi on March 1, 2019 from a loan of ` 8,00,000 taken at
concessional rate of 7 per cent per annum from his employer XYZ Ltd. As per the agreed terms
of repayment, A is supposed to repay in monthly installments of ` 25,000 starting from January
1, 2020. [Assumed SBI rate is 8%]
Compute the taxable value of perquisite in respect of concessional loan.
52) Find out the taxable value of the perquisite in the following cases–
(1) X is given a laptop by the employer – company for using it for office and private purpose
(ownership is not transferred). Cost of the laptop to the employer is ` 96,000.
(2) On October 15, 2019, the company gives its music system to Y for domestic use. Ownership is
not transferred. Cost of music system (in 2000) to the employer is ` 15,000.
(3) The employer company sells the following assets to the employees on January 1, 2020 —
Name of employee Z A B
Asset sold Car Computer Fridge
Cost of the asset to employer ` 6,96,000 ` 1,17,000 ` 40,000
Date of purchase (put to use - same day) May 15, 2017 May 15, 2017 May 2017
Sale price ` 2,10,000 ` 24,270 ` 1,000
Before sale on January 1, 2020, these assets were used for business purpose by the employer.
53) Find out the perquisite value in the following cases:

Assets Furniture Air- Video Motor car Computer
conditioner camera
Original cost 2,00,000 75,000 60,000 5,40,000 1,20,000
Date of purchase by 07.03.2016 01.07.2018 10.07.2017 01.10.2015 01.01.2017
the
Employer
Date of putting to 31.03.2016 01.07.2018 11.07.2017 01.10.2015 10.01.2017
use by employer
Date of sale of asset 01.09.2019 01.08.2019 01.08.2019 01.01.2020 09.01.2020
to the employee
Payment made by the 40,000 15,000 20,000 1,50,000 25,000
employee
CA Suraj Agrawal
SALARY 4A.13
54) Following benefits have been granted by Ved Software Ltd. to one of its employees Mr.
Badri:
a) Housing loan @ 6% per annum. Amount outstanding on 1.4.2019 is ` 6,00,000. Mr. Badri pays
` 12,000 per month on 5th of each month.
b) Air – conditioners purchased 4 years back for ` 2,00,000 have been given to Mr. Badri for `
90,000.
Compute the chargeable perquisite in the hands of Mr. Badri.
The lending rate of State Bank of India as on 1.4.2019 for housing loan may be taken as 10%.
55) Mr. Raghu Raj is employed with Bhoruka Power Corporation Ltd., as General Manager,
Finance, on a monthly salary of ` 26,000. He has been provided with the following
perquisites:
Rent free accommodation is provided in Bangalore. The company has given him housing loan of ` 4
lakhs repayable in 8 years during the previous year @ 3% per annum [SBI Rate – 10.5%]. The
company had purchased a car on 01.05.2017 for ` 2,50,000/ –. This car is sold to Mr. Raghu Raj on
1 – 7 – 2019 for ` 1,20,000/ –. He made Diwali purchases for office gifts amounting to ` 19,000/ –
on his corporate credit card. This amount along with the annual fee of ` 1,500/ – was paid by the
company. He was allowed to use the video camera and laptop belonging to the company. The
company had purchased these assets for ` 40,000/ – and ` 2 lakhs respectively. Compute taxable
salary of Mr. Raghu Raj.
56) Mr. Syed Zaki receives ` 10,000 p.m. as basic salary and ` 1,000 p.m. as D.A. forming part of
retirement benefit. He has been provided with the following perquisites:
Unfurnished accommodation at Chennai. Rent paid by Mr. Zaki towards this accommodation is `
750/ – p.m. He has been provided with the services of gardener and sweeper. Company pays a
salary is ` 1,000 p.m. each to gardener and sweeper. He has been offered 1000 shares of the
employer company at ` 120 per share under "Employee Stock Purchase Scheme". Public offer is `
140 per share. The said scheme is approved by SEBI. Compute the taxable salary.
57) A Ltd. has offered you a job in Delhi at a basic salary of ` 11,500 per month and an option to
choose any one of the following two packages :
Package I
(1) HRA ` 4,500 p.m. (Rent to be paid ` 4,500 p.m)
(2) Education allowance ` 300 p.m. (for one child)
(3) Telephone allowance ` 1,000 p.m.
(4) Medical Allowance ` 1,500 p.m.
(5) Conveyance allowance ` 1,500 p.m. (for private user)
(6) Lunch allowance – ` 1500 p.m.
Package II
(i) Company owned unfurnished accommodation FRV ` 54,000 p a.
(ii) Education facility for one child valued at ` 300 p.m.(Not owned by employer)
(iii) Free telephone facility at residence upto ` 1,000 p.m.
(iv) Medical reimbursement upto ` 18,000 p.a.
(v) Motor Car facility for private use with expenditure valued at ` 18,000 (including normal
wear & tear).
(vi) Free Lunch (`
` 60 x 300 days)
CA Suraj Agrawal
SALARY 4A.14
The company also offers you the services of watchman, sweeper and gardener in both the above
packages. The salary of each employee is ` 500 p.m.
Which package will you choose so that your tax liability is minimum?
58) Mr. Albert is employed with Sonata Software Ltd., as Vice – President, Marketing, on a
monthly salary of ` 30,000. He has been provided with the following perquisites:
• Rent free accommodation is provided in Hyderabad
• During the previous year, the company has given him interest free housing loan of ` 6 lakhs
repayable within 12 years. (SBI rate of interest – 10%)
• The company had purchased a car on 1-4-2018 for ` 3,50,000/ – . This car is sold to him on
1-5–2019 for ` 1,00,000/ –
• He was allowed to use the Air conditioner and Invertor belonging to the company. The
company had purchased these assets for ` 50,000/ – and ` 75,000/ – respectively.
Compute Gross salary of Mr. Albert.
59) Mr. A, finance manager of Jet Ltd. Mumbai, furnishes the following particulars for the
financial year 2019-20:
i. Salary ` 46,000 per month
ii. Value of medical facility in a hospital maintained by the company ` 17,000
iii. Housing loan of ` 6,00,000 at the interest rate of 5% p.a. (No repayment made during the year,
but the loan is repayable in tenth year) [SBI Rate – 10.5%]
iv. Gifts (in kind) made by the company on the occasion of wedding anniversary of Mr. A ` 3,750
v. Rent free accommodation owned by the company
vi. A wooden table and 4 chairs were provided to Mr. A at his residence. These were purchased
on 01.04.2016 for ` 60,000 and put to use on 01.04.2016 and sold to Mr. A on 01.08.2019 for `
30,000
vii. Personal purchases through credit card provided by the company amounting to ` 30,000 was
paid by the company. No part of the amount was recovered from Mr. A.
viii. An ambassador car which was purchased by the company on 16.07.2016 for ` 2,50,000 and
put to use on the same date. It was sold to the assessee on 14.07.2019 for ` 100,000.
Compute Gross Salary of Mr. A.
60) Mr. G is the General Manager of Software Ltd, which is covered under recognised provident
fund scheme. He voluntarily retired on 31.12.2019 after 20 years of service. He submits the
following particulars of his salary income and approved savings during the previous years
on 2019-20:
(i) Salary @ ` 15,000 per month from 01.02.2019.

(ii) Dearness allowance ` 1,500 per month from 01.02.2019, 50% of the dearness allowance
is part of superannuation benefits,
(iii) Pension @ ` 4,000 per month.
(iv) House rent allowance @ ` 3,000 p.m. from 01.02.2019 rent paid by him is ` 4,000 p.m.
(v) He received ` 5,30,000 as gratuity,
(vi) He received ` 1,57,500 for encashment of 10 month unutilised earned leave. As per rules
of the company, he was entitled to one month leave for every year of service. During his
service, he has availed 10 months earned leave,
CA Suraj Agrawal
SALARY 4A.15
(vii) An ambassador car (with engine capacity 1.6 litres is provided by the company for official
& personal use. Expenses of its running and maintenance : and salary of the driver are
borne by the company,
(viii) He contributes 20% of his salary to the fund which includes 12% voluntary contribution &
8% compulsory contribution. The company's contribution is 12% of the salary to the fund,
(ix) The company paid ` 8,000 to quick gas service for the use of cooking gas by him.
However, it was usual practice of the company to hold its business dinners at his house,
(x) He has invested ` 13,000 in National Saving Certificates VIII issue. He deposited `
14,000 in public provident fund. He paid ` 16,000 towards Life Insurance Premium on the
policy taken on the life of his married son (sum assured ` 120,000).
(xi) The company deducted ` 500 as tax at source.
61) Mr. X employed in ABC Ltd, submits the following particulars of His income for the previous
year 2019-20.
`
Salary after deduction of income tax at source and own
contribution to the Recognised Provident fund 2,25,000
— Income tax deducted at source 25,400
— Own contribution to the recognised provident fund 40,000
Employer's contribution to recognised provident fund 35,000
Interest credited to the provident fund calculated at the rate of 9.5% per 7,000
annum
Mr. X is given free use of 1.8 litres engine capacity car by his employer for personal and official
purposes with effect from 13.12.2019, all the expenses including salary of driver being met by
the latter (employer). A sum of ` 1,500 is, however, recovered from Mr. X.
Mr. X is also provided free service of a watchman with effect from 05.04.2020 and a sweeper
with effect from 07.12.2019. Salary ` 600 per month per person is paid by employer. Income of
Mr. X from other sources is ` 1,25,000 which includes income tax refund of ` 10,000 and ` 800,
being interest thereon.
Compute Mr. X's total income.
CA Suraj Agrawal
SALARY 4A.16
62) Babu joined a Company on 1.6.2019 and was paid the following emoluments and allowed
perquisites as under:
Emoluments:
Basic Pay ` 25,000 per month; DA ` 10,000 per month; Bonus ` 50,000 per month.
Perquisites:
a) Furnished accommodation owned by the employer and provided free of cost. Value of furniture
therein ` 3,00,000.
b) Motorcar owned by the Company (with engine cubic capacity less than 1.6 litres) along with
chauffeur for official and personal use.
c) Sweeper salary paid by Company ` 1,500 per month.
d) Watchman salary paid by Company ` 1,500 per month.
e) Educational facility for 2 children provided free of cost. School is owned and maintained by
company.
f) Interest free loan of ` 5,00,000 given on 1.10.2019 for purchase of a house. No repayment was
made during the year. (SBI Rate 12.25%)
g) Interest free loan for purchase of computer ` 50,000 given on 1.1.2020. No repayment was
made during the year. (SBI Rate 15.25%)
h) Corporate membership of a club. The initial fee of ` 1,00,000 was paid by the Company. Babu
paid the bills for his use of club facilities.
You are required to compute Gross Salary. Suitable assumptions may be made, wherever
necessary.
63) Naresh, who is neither a director nor he has substantial interest in any company, is offered
an employment by Freewheel Ltd., Mumbai with following alternatives :
Alternative I Alternative II
(`
`) (`
`)
Basic pay 92,000 92,000
Bonus 9,000 9,000
Education allowance for 2 children/ Education facility for 2 30,200 30,200
children in a school maintained by employer
Sweeper allowance/ Sweeper facility 10,000 10,000
Entertainment Allowance/Club facility 6,000 6,000
Transport allowance/Free car (1200 cc) facility for personal use (car 21,600 21,600
owned by the employer)
Medical allowance/ Medical facility for Naresh and his family 18,000 18,000
members in a hospital maintained by employer
Allowance for gas, electricity and water supply/ Free gas, electricity 4,500 4,500
and water supply (bills will be in the name of the employer)
Holiday home allowance/Holiday home facility 8,000 8,000
Lunch allowance/ Free lunch (`
` 70 × 200 days + ` 80 × 50 days) 18,000 18,000
Diwali gift allowance/ Gift on Diwali 7,500 7,500
A rent-free unfurnished home — lease rent 14,000 14,000
Which of the two alternatives Naresh should opt for on the assumption that both employer
and employee will contribute 10% of salary towards unrecognised provident fund? Interest-
free loan of ` 20,000 will be given to him for purchasing household items.
CA Suraj Agrawal
SALARY 4A.17
64) Compute the taxable value of the perquisite in respect of medical facilities received by Mr. G
from his employer during the PY 2019-20:
Medical premium paid for insuring health of Mr. G ` 7,000
Treatment of Mr. G by his family doctor ` 5,000
Treatment of Mrs. G in a Government hospital ` 25,000
Treatment of Mr. G’s grandfather in a private clinic ` 12,000
Treatment of Mr. G’s mother (68 years and dependant) by family doctor ` 8,000
Treatment of Mr. G’s sister (dependant) in a nursing home ` 3,000
Treatment of Mr. G’s brother (independent) ` 6,000
Treatment of Mr. G’s father (75 years and dependant) abroad ` 50,000
Expenses of staying abroad of the patient and attendant ` 30,000
Limit specified by RBI ` 75,000
65) Mr. X is employed in ABC Ltd. getting basic pay of ` 9,000 p.m. Employer has provided him
treatment outside India and has incurred a sum of ` 3,60,000 but Reserve Bank of India has
permitted ` 3,50,000. Employer incurred ` 1,50,000 on stay but Reserve Bank of India has
permitted ` 1,05,000; employer has incurred ` 97,000 on travelling and Reserve Bank of India has
permitted ` 60,000.
Employer has paid medical allowance of ` 10,000 during the year and has incurred ` 7,000 on the
treatment of father in law of Mr. X in India. The treatment was provided in a Government hospital
and father in law of Mr. X is dependent on him.
The employee has been provided with a motor car of 1.8 litre engine capacity for official as well as
personal use and all expenses are met by the employee himself but driver has been provided by
the employer. Compute his total income.
66) Satish is a State Government employee and the salary and other emoluments received by
him during the previous year 2019-20 are as under: (all amount in `)
- Basic salary : per month. 10000
- Dearness allowance : 40% of basic salary.
- Entertainment allowance 8000
- Medical expenses reimbursed 25000
- Professional tax paid : ` 5,000 of which ` 4,000 paid by employer.
- Free car facility for official & personal use provided by the employer for which 42000
expenditure incurred by employer is
- Contribution to provident fund 12000
He has no other income. Compute the taxable income of Satish.
67) Mrs. Z is employed with ABC Ltd. on a monthly salary of ` 15,000. She has been provided
with the following perquisite:
a) Rent free accommodation at Delhi with rent paid by the company ` 60,000.
b) A mobile phone and a fixed line telephone at her residence. The bills reimbursed by the
company during the previous year amounted to ` 12,000.
c) On the eve of Silver Jubilee Celebrations of the company she got a gift worth ` 12,000
from the company.
d) She was allowed to use the Video Camera and Laptop belonging to the company. The
company has purchased these assets for ` 75,000 and ` 2,50,000 respectively on 01.04.2019
and the employee has used it throughout the year.
e) She was given a chauffeur driven car (1.6 litres) for private and official use. All expenses of
running and maintenance including driver's salary were paid by the company.
CA Suraj Agrawal
SALARY 4A.18
She also drew the following allowances:
`
(i) Dearness allowance (50% forms the part of basic pay) 5,600 p.m.
(ii) Education allowance for 2 children 300 p.m. per child
(iii) Transport allowance 1,800 p.m.
During the year she got reimbursement from the company ` 20,000 spent on the medical treatment
of her husband at a private nursing home.
She made the following payments and contributions:

i. Life insurance premium paid ` 6,000 each against a policy taken on the life of her husband
and her married daughter, (sum assured ` 60,000 each)
ii. Contributed ` 2,500 p.m. to Recognised provident fund, employer contributing an equal
sum.
You are required to compute her Total Income.
68) Mr. Y.R. Meena, an Indian citizen, was working with UNO till 31st July 2019 and was residing
at USA. On 1st August, he joined Indian-Government service and was deputed to Karachi in
Pakistan.
On 1st December he left the Indian Government service and joined a private company and
started working at its Sri Lanka branch. On 1st March, he has been shifted to the head office
in India. He was provided rent-free accommodation during whole of the year.
His salary structure in various assignments is as under: (in `)
Particulars UNO Government Private Ltd.

service Co.
Basic 10000 p.m. 5000 p.m. 4000 p.m.
Dearness Allowance (forms part of salary 3000 p.m. 5000 p.m. 2500 p.m.
for calculation of retirement benefits)
Project Allowance 1500 p.m. 2500 p.m. 1000 p.m.
Entertainment Allowance 1800 p.m. 1000 p.m. 2000 p.m.
Servant and sweeper facility 4000 p.m. 2000 p.m. 1200 p.m.
Education to two children in employer's 2000 p.m. 2500 p.m. 3000 p.m.
school. Cost per child -
Find Gross salary for the previous year 2019-20.
CA Suraj Agrawal
SALARY 4B.1
SALARY - SOLUTION
Solution 1:
Basic Salary – 21800 x 6 + 22900 x 3 + 22900 x 3
DA – 7.5% upto Dec i.e. for 9 months & 10.5% for balance 3 months
Gross Salary: ` 290,376.
Answer 2: Computation of salary income of Raghav for the previous year 2019-20:
On the assumption that
salary becomes due on
the last day of each
month
`
Basic salary 1,50,000
Lump-sum payment 1,30,000
Gross Salary 2,80,000
Less: Deduction u/s 16(ia) 50,000
Salary Income 230,000
Any other Income Nil
Less: Deduction u/s 80C 30,000
Net Income 2,00,000
Answer 3:
Computation of gross salary for the previous year 2019-20:
"Due" date or "receipt" date, Amount
Difference months
whichever is earlier `
1. March 2019 April 1,2019 25,000
2. April 2019 May 1, 2019 25,000
3. May 2019 June 1, 2019 25,000
4. June 2019 July 1,2019 25,000
5. July 2019 July 31,2019 30,000
6. August 2019 August 31, 2019 30,000
7. September 2019 September 30, 2019 30,000
8. October 2019 October 31, 2019 30,000
9. November 2019 November 30, 2019 30,000
10. December 2019 December 31, 2019 30,000
11. January 2020 January 31, 2020 30,000
12. February 2020 February 28, 2020 30,000
13. March 2020 March 31, 2020 30,000
Total 3,70,000
Solution 4: Computation of Gross Salary of Mr. Sunil (amounts in `)
Salary received 1,85,000

Add: Income tax deducted at source 15,000
Contribution to Provident Fund 12,000 2,12,000
Guarantee commission 4,000
Gross salary 2,16,000
Note:
(1) Salary received as MP is taxable under Income from other sources.
(2) Loan taken against salary cannot be regarded as 'advance' of salary. Hence, the same is not taxable.
CA Suraj Agrawal
SALARY 4B.2
Answer 5:
As per section 9(1)(iii), Income deemed to accrue or arise in India includes, income chargeable under the
head 'Salaries' payable by the Government of India to a citizen of India for services rendered outside India.
As per section 10(7), any allowance or perquisites paid or allowed as such outside India by the Government
to a citizen of India for rendering service outside India shall be exempt.
In view of the above, the computation of taxable income of Mr. Rajesh is as follows.
` `
Basic Pay 100,000 x 12 12,00,000
Overseas allowance 2,000 x 12 24,000
Less: Exempt under section 10(7) 24,000 Nil
12,00,000
Deduction under section 16 50,000
Income under the head Salaries 11,50,000
Contentions of Mr. Rajesh Kumar

(i) The salary shall be deemed to accrue or arise in India and therefore, this contention of Mr. Rajesh Kumar
is not valid.
(ii) As per section 192, the employer is liable to deduct the tax at source from taxable salary. However, if the
employer does not deduct tax, the employee is not granted exemption from tax liability.
If Mr. Rajesh Kumar is a foreign citizen, The above provisions of Sec. 9(1)(iii), shall not apply. Therefore,
there will be no tax liability on Mr. Rajesh Kumar
Answer 6: Computation of taxable gratuity of Mr. Shyam

Particulars `
Actual gratuity 90,000
Less: Exempt u/s 10(10) to the extent of least of the following
1. ` 20,00,000
2. 15/26 × ` 3,250 × 32 = ` 60,000
3. Actual Gratuity received – ` 90,000 60,000
Taxable Gratuity ` 30,000
Answer 7:
Computation of taxable gratuity of Ms. Uma
Case 1: 40 years and 11 months service `
Actual Gratuity 45,000
Less : Exempt u/s. 10(10) to the extent of least of the following:
1. ` 20,00,000 (not covered)
2. ` 2,200 x ½ x 40 = ` 44,000.
3.Actual Gratuity received ` 45,000 44,000
Taxable gratuity 1,000
On service of another 2 months - NIL
Answer 8: Computation of average monthly salary

`
Basic salary from January 1, 2019 to October 31, 2019 (i.e., ` 8,000 × 7 ÷ ` 9,000 x 3) 83,000
69% of dearness allowance [i.e., 69% of ` 500 × 10)*] 3,450
Total 86,450
Average monthly salary 8,645
Amount of exempt gratuity is the least of the following:

(a) ` 20,00,000 (not covered)
(b) ` 1,64,255 [being half month's salary for each completed year of service (` 8,645 x ½ x 38)]; and
(c) ` 1,86,000
` 1,64,255, being the least, it exempt from tax.
CA Suraj Agrawal
SALARY 4B.3
Answer 9:
Salary for the purpose of computation of exempt gratuity:
`
Basic salary of 10 months (` 18,200 x 10) 1,82,000
Dearness allowance of 10 months (80% of ` 1,000 x 10) 8,000
Commission @ 6% of turnover of preceding 10 months [6% of ` 2,00,000] 12,000
Total 2,02,000
Average monthly salary (` 2,02,000 / 10) 20,200
Amount of exempt gratuity is the least of the following (not covered)

(a) ` 19,80,000 [` ` 20,00,000 - ` 20,000, being amount of exempt gratuity received from A Co.);
(b) ` 3,83,800 [being half month's salary for each completed year of service (` 20,200 x ½ x 38)]; and
(c) ` 3,90,000 (being amount of gratuity received from B Co.).
` 3,83,800, being the least, it exempt from tax.
Notes :-
(1) Dearness allowance is included in salary for the purpose of computation of exempt gratuity, if it forms part
of salary for the purpose of retirement benefits. In this case, 80% of the dearness allowance forms part of
salary for computation of retirement benefits. Therefore, 80% of the dearness allowance is included in
average monthly salary. (It may be noted that the entire dearness allowance is chargeable to tax).
Commission is included in salary for the purpose of calculating exempt gratuity if it is based on a fixed
percentage of turnover achieved by the employee.
(2) If an employee, who has received gratuity in earlier year from his former employer, receives gratuity from
another employer in the same year or a later year, the limit of ` 20,00,000 is reduced by the amount of
gratuity exempt from tax under section 10(10)(iii) in earlier year. Therefore, ` 20,000, being the amount of
exempt gratuity from A Co., is deducted from ` 20,00,000.
Answer 10:
1. Uncommuted pension of ` 2,19,000 (i.e., ` 18,250 x 12) is chargeable to tax as salary
2. Uncommuted pension of ` 2,52,000 (i.e., ` 21,000 x 12) is chargeable to tax as salary
3. Uncommuted pension of ` 2,40,000 (i.e., ` 20,000 × 12) is chargeable to tax
4. While uncommuted pension is chargeable to tax, commuted pension is exempt from tax in the case of
Government employees. Therefore, commuted pension of ` 7,18,000 is exempt from tax. The amount of
uncommuted pension will be calculated as under :
`
Uncommuted pension up to November 30, 2019 (i.e., ` 15,000 × 6) 90,000
Uncommuted pension from December 1, 2019 to March 31, 2020 (i.e., 2/3 x ` 15,000 x 4) 40,000
Total uncommuted pension 1,30,000
5. In the case of non-Government employee while uncommuted pension is fully chargeable to tax,
commuted pension is partly chargeable to tax and partly exempt from tax. Amount of taxable pension will
be commuted as under
UNCOMMUTED PENSION
Uncommuted pension from July 1, 2019 to January 31, 2020 (i.e., ` 20,000 x 7} 140,000
Uncommuted pension from Feb 1, 2020 to March 31, 2020 (i.e., 40% of ` 20,000 x 2) 16,000
Total uncommuted pension chargeable to tax as salary 1,56,000
COMMUTED PENSION
Commuted value of 60% of usual pension 10,71,000
Commuted value of full pension (i.e., ` 10,71,000 x 100/60) 17,85,000
If X does not receive gratuity

Amount exempt (1/2 of commuted value of full pension (i.e., 1/2 x ` 17,85,000)] 8,92,500
Commuted pension chargeable to tax as salary (i.e., ` 10,71,000 - ` 8,92,500) 1,78,500
if X receives gratuity
Amount exempt [1/3 of commuted value of full pension (i.e., 1/3 × ` 17,85,000)] 5,95,000
Commuted pension chargeable to tax as salary (i.e., ` 10,71,000 – ` 5,95,000) 4,76,000
Note : X can claim relief under section 89 in respect of commuted pension chargeable to tax.
CA Suraj Agrawal
SALARY 4B.4
Answer 11: (a) 6000 x 9 + 1200 x9 + NIL + 4200 x 3 = 77400.
(b) Taxable Gratuity = ` 55,000 – ` 40,500 = ` 14,500 [15/26 x 36 x 1950]
(c) 5000 x6 + 6,000 x 5 + (60,000 – 48,600) = ` 71,400.
Answer 12:
(a) Taxable pension of Mr. Santhosh
Particulars ` `
(1) Uncommuted pension before the date of commutation 21,000
(` 3,000 x 7)
(2) Uncommuted pension after the date of commutation 4,000
(` 3,000 x 2 x 2/3)
(3) Commuted pension 1,20,000
Less : exempt u/s 10 (10A) 1,20,000 Nil
Taxable pension includible in salary 25,000
(b) Taxable pension of Mr. Kamath

Particulars ` `
(1) Uncommuted pension before the date of commutation (` 2,000 x7) 14,000
(2) Uncommuted pension after the date of commutation (` 2,000 x 40% x 5) 4,000
(3) Commuted pension 30,000
Half of the full value of commuted pension is exempt u/s.10(10A) as he is not in receipt
of gratuity (` 30,000 x 100 ÷ 60 x ½) 25,000 5,000
Answer 13:
a) Computation of taxable pension of Mr. Ram Singh
Particulars ` `
(1) Uncommuted pension before the date of commutation 36,000
(4,000 x 9)
(2) Uncommuted pension after the date of commutation 9,000
(4,000 x 3 x 75%)
(3) Commuted pension 75,000
Less: Exempt U/S 10(10A) 75,000 Nil
(b) Computation of taxable pension of Mr. Sundar

Case I: Gratuity is paid ` `
(1) Uncommuted pension before the date of commutation (1,800 x 8) 14,400
(2) Uncommuted pension after the date of commutation (1,800 x 4 x 50%) 3,600
(3) Commuted pension - 1/3rd of full value of commuted pension is exempt 36,000
u/s. 10(10A) as he is in receipt of gratuity (36,000 x 100 / 50 x 1/3) 24,000 12,000
Case II: Gratuity has not been paid ` `

(1) Uncommuted pension before the date of commutation (1,800 x 8) 14,400
(2) Uncommuted pension after the date of commutation (1,800 x 4 x 50%) 3,600
(3) Commuted pension Half of the full value of commuted pension is exempt 36,000
U/S 10(10A) as he is not in receipt of gratuity (` 36,000 x 100 ÷ 50 x ½) 36,000 Nil
Answer 14: Taxable Pension: 5000 x 4 + 2000 x 3 = ` 26,000.
Answer 15: Taxable Pension: 6000 x 7 + 1500 x 2 + 120000 – ½ [120000/75%] =
Answer 16: Leave enactment is exempt to the extent of least of the following:
Particulars Amount
(`)
(i) Statutory limit 3,00,000
(ii) ` 4200 x 22 92,400
(iii) 10 months average salary (10 x ` 4,200) 42,000
(iv) Actual amount received 92,400
Therefore, ` 42,000 is exempt under section 10(10AA)
Taxable Leave = ` 92400 - ` 42000.
CA Suraj Agrawal
SALARY 4B.5
Answer 17:
Leave enactment is exempt to the extent of least of the following:
Particulars Amount
(`)
(ii) ` 4000 x 3 12,000
(iii) 10 months average salary (10 x ` 4,000) 40,000
Therefore, ` 12,000 is exempt under section 10(10AA)
Taxable Leave = 60000 - 12000.
Answer 18:
Computation of Gross Salary of Mr. A.K. Gupta
`
(1) Salary ` 23,000 x 9 2,07,000
(2) DA (2,000 x 9) 18,000
(3) Uncommuted Pension ` 9,000 x 25% x 3 6,750
(4) Commuted Pension Receieved 2,70,000
Less: Exempt [` 2,70,000 x 4/3 x 1/3] 1,20,000 1,50,000
(5) Gratuity Received 4,00,000

Less: Exempt
(i) ` 4,00,000
(ii) [25,000 / 2 x 26] = ` 3,25,000
(iii) ` 20,00,000 (not covered) 3,25,000 75,000
(6) Leave Encashment Received 3,00,000
Less: Exempt – least of the following
(i) Actual 3,00,000
(ii) 12 months x AMS
12 x 25,000 = 3,00,000
(iii) 10 months x AMS = 2,50,000
(iv) Stat. Limit: 3,00,000 2,50,000 50,000
Answer 19:
Computation of Gross Salary
` `
Basic Salary (4,500 x 3 + 5,000 x 7) 48,500
Dearness Allowance (100%) 48,500
Uncommuted Pension (3,000 x 1 + 1,500 x 1) 4,500
Commuted Pension 1,00,000
Less : Exempt [(1,00,000/ 50%) × 1/3] 66,667 33,333
Gratuity :
Amount received 1,20,000
Less : Exempt (Note No. 1) 81,480 38,520
Leave Encashment
Amount received 56,000
Less : Exempt (Note No. 2) Nil 56,000
CA Suraj Agrawal
SALARY 4B.6
Answer 20:
Computation of Total Income of Mr. Narendra
Particulars Amount Amount
(`) (`)
Income from Salaries
Gross salary received during 1/4/19 to 31/1/20 @
` 16,000 p.m. (` 16,000 x 10) 1,60,000
Pension for 2 months @ 30% of the basic salary of ` 10,000 p.m. 6,000
Leave Salary 75,000
Less: Exempt under section 10(10AA) (Note 1) 50,000 25,000
Gratuity 50,000
Less: Exempt under section 10(10) (Note 2) 25,000 25,000
Notes:
1. Leave enactment is exempt to the extent of least of the following:
Particulars Amount
(ii) Cash equivalent of leave for 30 days (30/45 x ` 75,000) 50,000
(iii) 10 months average salary (10 x ` 10,000) 1,00,000
Therefore, Rs. 50,000 is exempt under section 10(10AA)
2. Gratuity is exempt to the extent of least of the following:

Particulars Amount
(ii) Half month's salary for 5 years of service (5 × ` 5,000) 25,000
(iii) Actual gratuity received 50,000
Therefore, ` 25,000 is exempt under section 10(10). It is assumed that the employee is not covered
under the Payment of Gratuity Act, 1972.
Answer 21:
Computation of taxable house rent allowance - Mr Zakaria
Particulars ` `
Actual House Rent allowance 21,600
Less: Exempt U/S. 10(13A) to the extent of least of the following:
1. Excess of rent paid over 10% of the salary (30,000 – 22,800) 7,200
2. 50% of salary 1,14,000
3. Actual HRA received 21,600 7,200
Taxable HRA 14,400
Working Note `
Basic Salary 12,500 x 12 1,50,000
Dearness Allowance 1,500 x 12 18,000
Commission @ 4% on 15,00,000 60,000
Salary for this purpose 2,28,000
Note: Though advance Salary is taxable in A.Y. 2020-21 on receipt basis, it should not be considered in
computing Salary for the purpose of calculating exemption u/s. 10(13A).
Answer 22:
Computation of taxable quantum of various allowances of Mr. Kapil
Particulars ` `
Helper allowance received 3,600
Less: Exempt (Actually spent - 9 x 200) 1,800 1,800
Conveyance allowance received 9,000
Less: Exempt (Actually spent]
` 1,200 x 40% x 12 5,760 3,240
Education & hostel expenditure allowance 250 x 3 x 12 9,000
Less: Education & hostel expenses ` 250 x 2 x 12 6,000 3,000
Hill compensatory allowance 2,400

Less: Exempt ` 300 p.m x 6 months 1,800 600
Taxable amount of allowances 8,640
CA Suraj Agrawal
SALARY 4B.7
Solution 23: Computation of Gross salary of Mr. Kamlesh (amounts in `)
Basic salary (` 8,000 × 12) 96000
Dearness allowance (40% of basic pay) 38400
City compensatory allowance (10% of basic pay) 9600
Medical allowance (800 x 12) 9600
Children education allowance [2880- (80 × 2 × 12)] 960
Hostel expenditure allowance (9,600 - 7,200) 2400
Tribal area allowance (6,000 - 2,400) 3600
Travelling allowance (12,000 - 8,000) 4000
Conveyance allowance Exempt
Transport allowance 28200
Overtime allowance 4000
Gross salary 196760
Answer 24:
Where HRA is
Received
`
Basic pay 1,20,000
Special allowance 30,000
HRA received 90,000
Less: Exemption from HRA u/s 10(13A)
(1) Actual amount received 90,000
(2) Rent paid - 10% of salary (1,20,000-12,000) 1,08,000
(3) 50% of salary 60,000
Least of the above three 60,000 30,000
Answer 25:
Basic Salary
Upto 31.8.19 (20,000 x 5) 1,00,000
from 1.9.19 (25,000 x 7) 1,75,000 2,75,000
Transport allowance 14,400
City Compensatory Allowance (W.N-2) 3,600
Contribution to PPF (in excess of 12% of salary) (W.N-3) 8,250
Children education allowance (W.N-4) 3,600
Hostel Expense Allowance (W.N-5) NIL
Tiffin Allowance (W.N.6) 5,000
Tax paid by employer on employment 2,500
Less: Deduction u/s 16(ia) & (iii) (52,500)
Income from Salary 2,59,850
Working notes:
(1) Transport Allowance is now fully taxable
(2) City Compensatory Allowance is fully taxable
(3) Contribution to recognized PPF is taxable in excess of 12% of salary.
Taxable contribution = Actual - 12% of salary
= (15% x 2,75,000) - (12% x 2,75,000)
= ` 41,250 - ` 33,000 = ` 8,250
(4) Children Education Allowance is exempt upto ` 100 per month per child. (` 500 for 2 Child)
Taxable Allowance = (500 – 100 x 2) x 12 = 3,600
(5) Hostel expense allowance is exempt upto ` 300 per month per child
Taxable Allowance = (380- 300 x 2) therefore NIL
(6) Tiffin Allowance is fully taxable
(7) Tax on employment is paid by Mr. M's employer. Hence it is taxable in his hand i.e. Mr. X.
CA Suraj Agrawal
SALARY 4B.8
Answer 26:
Computation of income under the head Salary `
Nainital Transport Corporation
Basic Pay [(4,000 x 6) + (4,500 x 5)] 46,500
Dearness Allowance (12% of basic pay) 5,580
Outstation Allowance (W. Note1) 3,960
Transport Allowance 3,300
Conveyance Allowance (100 x 11) 1,100
Haryana Transport Corporation
Basic Pay 8,500
Gross Salary 68,940
Income under the head Salary 18,940
Gross Total Income 18,940
Less: Deduction u/s 80C to 80U Nil
Total Income (rounded off u/s 288A) 18,940
Working Note:
1. Outstation allowances
Least of the following is exempt:
1. 70% of 13,200 = ` 9,240
2. ` 10,000 x 11 = ` 1,10,000
Received = ` 13,200
Exempt = ` 9,240
Taxable = ` 3,960
Answer 27:
Computation of income under the head salary ` `
Salary 30,000
House Rent Allowance (As he owns the house where he resides, this is taxable) 5,000
Gratuity (Exempt u/s 10(10)- Government Employee) Nil
Leave encashment at the time of retirement (Exempt u/s 10(10AA)- Government Employee) Nil
Provident Fund (Exempt u/s 10(11)) Nil
Commuted Pension (Exempt u/s 10(10A)) Nil
Pension from Government 20,000
Honorarium from charitable dispensary (Assuming he is in part time employment) (32,000×6) 1,92,000
Less: HP Loss (Interest – self occupied) 14,000
Less: Dedication u/s 80C
Public Provident Fund Contribution 32,000
Repayment of loan taken from HDFC
(As loan is paid after 31.03.2020, it is not qualified
for deduction u/s 80C for the previous year 2019-20) Nil 32,000
Answer 28:
Computation of Income of X, an individual Salary From ABC Co. Ltd. ` `
Basic Salary (10,000 x 10) 1,00,000.00
Dearness Allowance (1,500 x 10) 15,000.00
Commission 4,000.00
Gratuity (W Note 1) 21,000.00
Salary From B Co. Ltd.
Basic Salary (7,000 x 2) 14,000.00
Entertainment Allowance (1,000 x 2) 2,000.00
Medical Allowance (500 x 2) 1,000.00
House Rent Allowance (600 x 2) 1,200.00
(Exemption is not available at X resides in his own house)
Leave Salary 5,000.00
Gross Salary 1,63,200.00
CA Suraj Agrawal
SALARY 4B.9
Less: Deduction u/s 16(ia) 50,000.00
Income under the head Salary 1,13,200.00
Gross Total Income 1,13,200.00
Less: Deduction u/s 80C
Insurance premium on life of minor child 12,000
Approved Superannuation Fund 8,000
Jeevan Dhara Scheme 5,000 25,000.00
Total Income 88,200.00
Working Note:
1. Gratuity
1. ` 1,25,000
2. ` 20,00,000 (not covered)
3. 1/2 x 10,400 x 20 = ` 1,04,000
Received = ` 1,25,000
Exempt =` 1,04,000
Taxable = ` 21,000
Answer 29: ` `
Basic Pay (30,000 x 9) 2,70,000.00
House Rent Allowance (Sec 10(13A) Rule 2A) (W Note 1) 31,500.00
Gratuity {Sec 10(10)} (W Note 2) 43,750.00
Leave Salary {Sec 10(10AA)} (W Note 3) 55,000.00

Recognized Provident Fund 20,500
Public Provident Fund 45,000
National Saving Certificates 29,500 95,000.00
Total Income 2,55,250.00
Working Note:
1. HRA
Least of the following is exempt: 2. Gratuity – least of the following exempt
1. ` 63,000 1. ` 3,75,000
2. ` 58,500 - ` 27,000 = ` 31,500 2. ` 20,00,000 (not covered)
3. 50% of retirement benefit salary = ` 1,35,000 3.1/2 x 26,500 x 25 = ` 3,31,250
(Retirement benefit salary = ` 2,70,000) Received = ` 3,75,000
Received = ` 63,000 Exempt = ` 3,31,250
Exempt = ` 31,500 Taxable = ` 43,750
Taxable = ` 31,500
3. Leave Salary – Lease of the following exempt
1. ` 3,20,000
2. ` 3,00,000
3. 26,500 x 10 = ` 2,65,000
4. 26,500 x 25 * 15/30 = 3,31,250
Received = ` 3,20,000
Exempt =` 2,65,000
Taxable = ` 55,000
CA Suraj Agrawal
SALARY 4B.10
Solution 30:
Taxable portion of the amount received from the URPF in the hands of Mr. A is computed hereunder:
Amount taxable under the head “Salaries”:
Employer’s share in the payment received from the URPF ` 2,20,000
Interest on the employer’s share ` 50,000
Total ` 2,70,000
Amount taxable under the head “Income from Other Sources” :
Interest on the employee’s share ` 60,000
Total amount taxable from the amount received from the fund ` 3,30,000
Note: Since the employee is not eligible for deduction under section 80C for contribution to URPF at the time
of such contribution, the employee’s share received from the URPF is not taxable at the time of withdrawal as
this amount has already been taxed as his salary income.
In case fund is Recognised PF

Since the fund is a recognized one, and the maturity is taking place after a service of 25 years, the entire
amount received on the maturity of the RPF will be fully exempt from tax.
Solution 31: Computation of Gross Salary of Mr. B

Particulars ` `
Basic Salary [`10,000 × 12] 1,20,000
Dearness Allowance [` 8,000 × 12] 96,000
Commission on turnover [1% × ` 5,00,000] 5,000
Bonus 40,000
Gratuity [Note 1] 25,000
Employee’s contribution to RPF [Note 2] -
Employers contribution to RPF [20% of ` 1,20,000] 24,000
Less : Exempt [Note 3] 20,760 3,240
Interest accrued in the RPF @ 13% p.a. 13,000
Less : Exempt @ 9.5% p.a. 9,500 3,500 .
Note 1 : Gratuity received during service is fully taxable.

Note 2 : Employee’s contribution to RPF is not taxable. It is eligible for deduction under section 80C.
Note 3 : Employers contribution in the RPF is exempt up to 12% of the salary. i.e. 12% of [B.S + D.A. for
retirement benefits + Commission based on turnover]
= 12% of [` 1,20,000 + (50% × Rs. 96,000) + ` 5,000]
= 12% of ` 1,73,000 = ` 20,760
Answer 32: Statutory Recognised Unrecognised

provident provident provident
fund fund fund
` ` `
Basic Salary (20,000 x 3) 60,000 60,000 60,000
Dearness allowance (6,000 x 3) 18,000 18,000 18,000
PF by employer [3,000 x 3 - 12% of
(Rs. 60,000 + 1/3 of 18,000)] — 1,080
Interest credited in PF account in excess of 9.5%
[7,500 x 5.5./15] — 2,750
Pension (10,000 x 9) 90,000 90,000 90,000
Payment for provident fund account
Employer's contribution — — 3,30,000
Interest thereon — — 44,000
Gross Salary 1,68,000 1,71,830 5,42,000
Less : Standard deduction 50,000 50,000 50,000
Income from salary 1,18,000 1,21,830 4,92,000
Income from other sources
- Interest on X's contribution to provident fund — — 46,000
- Interest on company deposits (i.e., 9% per annum
on 7,60,000 from July 1, 2018 to March 31, 2019) 51,300 51,300 51,300
Gross total income 1,69,300 1,73,130 5,89,300
Less : Deduction under section 80C 9,000 9,000 Nil
Net Income 1,60,300 1,64,130 5,89,300
CA Suraj Agrawal
SALARY 4B.11
Notes :-
1. X can claim deduction under section 80C in respect of his contribution towards statutory / recognised
provident fund.
2. In the case of recognised provident fund, it is assumed that X has retired after rendering service of 5 years.
Answer 33:
` `
Computation of income under the head Salary
Basic Pay (10,000 x 9) 90,000.00
Dearness Allowance (10% of 90,000) 9,000.00
House Rent Allowance {Sec 10(13A), Rule 2A} (W. Note 1) 2,700.00
Payment of Club Bills {(Sec 17(2)(viii) Rule 3(7)(vi)} 8,000.00
Outstation Allowance {Sec 10(14), Rule 2BB} (W. Note 2) 4,860.00
Employer's Contribution to unrecognized provident fund 66,000.00
Interest on Employer's Contribution to unrecognized provident fund 38,000.00
Gratuity {Sec 10(10)} (W. Note 3) Nil
Uncommuted Pension {Sec 17(l)(ii)} (W. Note 4) 10,000.00
Commuted Pension {Sec 10(10A)} (W. Note 5) 40,000.00
Income under the head Other Sources 22,000.00
Interest on own Contribution to unrecognised provident fund
Less: Deduction u/s 80C 68,200.00
National Saving Certificate 4,000
Contribution in Jeevan Dhara Scheme 10,000
Life insurance premium 4,000
Public provident fund 12,000
Repayment of housing loan 25,000
Tuition fees 13,200
1. HRA
1. ` 11,700
2. ` 18,900 - ` 9,900 = ` 9,000
3. 40% of retirement benefit salary = ` 39,600
{Since place of posting is not given, so it is presumed to be non-metro}
{Retirement benefit salary = ` 90,000 + 9,000 = ` 99,000}
Received = Rs. 11,700 Exempt =` 9,000 Taxable = ` 2,700
2. Outstation allowance 3. Gratuity (not covered)
Least of the following is exempt: Least of the following is exempt:
1. 70% of ` 16,200 = ` 11,340 1. ` 90,000
2. ` 90,000 [9 x ` 10,000 p.m.] 2. ` 20,00,000
Received = ` 16,200 3. ½ x 20 x (10,000 + 1,000) - ` 1,10,000
Exempt =` 11,340 Received = ` 90,000
Taxable - ` 4,860 Exempt = ` 90,000
Taxable = Nil
4. Uncommuted pension
For January and February = ` 4,000 × 2 = 8,000
For March = ½ × 4,000 = 2,000
Total = 10,000
5. Commuted pension
Received = 1,20,000
Exempt= 1/3 of Total Pension
= 1/3 of 2,40,000= 80,000
Taxable = 40,000
CA Suraj Agrawal
SALARY 4B.12
Answer 34:
Basic Pay (20,000 x 7) 1,40,000
Dearness Allowance (7,000 x 7) 49,000
Refund of employer's contribution in unrecognised provident fund 4,00,000
Refund of Interest on employer's contribution in unrecognised provident fund 1,00,000
Gratuity {Sec 10(10A)} (W Note 1) 60,000
Uncommitted Pension (W Note 2) 19,000
Commuted Pension {Sec 10(10A)} (W Note 3) 40,000
Income under the head Salary 7,58,000
Income under the head Other Sources 1,00,000
(Interest on employee's contribution)
Less: Deduction u/s 80C to 80U Nil
Working Note:
1. Gratuity (not covered)
1. ` 2,60,000
2. ` 20,00,000
3. ½ x 20,000 x 20 = ` 2,00,000
Received = ` 2,60,000
Exempt = ` 2,00,000
Taxable - ` 60,000
2. Uncommuted Pension `
For November to December
5,000 x 2 = 10,000'
For January to March
5.000 x 60% x 3 = 9,000
Total = ` 10,000 + ` 9,000 = 19,000
3. Commuted Pension `
Received = 2,40,000
Exempt = ` 2,40,000 / 40% x 100% x 1/3 = 2,00,000
Taxable 40,000
Solution 35: Value of the rent free unfurnished accommodation

= 15% of salary for the relevant period
= 15% of [(` 6000 × 5) + (` 2,000 × 30% × 5) + (` 1,500 × 5)] [See Note below]
= 15% of ` 40,500
= Rs. 6,075.
Note: Since, Mr. C occupies the house only from 1.11.2019, we have to include the salary due to him only in
respect of months during which he has occupied the accommodation. Hence salary for 5 months (i.e. from
1.11.2019 to 31.03.2020) will be considered. Advance salary for April 2020 drawn during this year is not to be
considered because it falls in respect of a period beyond the relevant previous year.
Solution 36:
Value of the rent free unfurnished accommodation [15% of salary] = ` 6,075
Less : Rent paid by the employee (` 1,000 × 5) = ` 5,000
Perquisite value of unfurnished accommodation given at concessional rent = ` 1,075
Solution 37:
Value of the rent free unfurnished accommodation [Note1] = ` 6,000
Less: Rent paid by the employee (` 1,000 × 5) = ` 5,000
Value of unfurnished accommodation given at concessional rent = ` 1,000
Note 1 : Value of the rent free unfurnished accommodation is lower of

(i) Lease rent paid by the company for relevant period = ` 1,200 × 5 = ` 6,000
(ii) 15% of salary for the relevant period (computed earlier) = ` 6,075
CA Suraj Agrawal
SALARY 4B.13
Solution 38:
Value of the rent free unfurnished accommodation (computed earlier) =` 6,075
Add: Value of furniture provided by the employer [Note 1] =` 4,625
Value of rent free furnished accommodation =` 10,700
Less: Rent paid by the employee (` 1,000 × 5) =` 5,000
Value of furnished accommodation given at concessional rent =` 5,700
Note 1: Value of the furniture provided

= (` 400 p.m. × 2 × 5 months) + (` 25,000 × 10% p.a. for 3 months)
= ` 4,000 + Rs.625 = ` 4,625
Solution 39:
Value of the rent free unfurnished accommodation (`700 × 5) =` 3,500
Add: Value of furniture provided by the employer (computed earlier) =` 4,625
Value of rent free furnished accommodation =` 8,125
Less: Rent paid by the employee (`1,000 × 5) =` 5,000
Perquisite value of furnished accommodation given at concessional rent =` 3,125
Answer 40 :
Determination of value of rent free accommodation
Salary for this purpose: `
Basic pay 60,000
Commission 6,000
Bonus 4,000
Uniform allowance (40% of 6,000) 2,400
Conveyance allowance (25% of 12,000) 3,000
Entertainment allowance 5,000
Total ` 80,400
(a) where the population is more than 25 lakhs.
Value of rent free accommodation = 15% of salary
= 15% of ` 80,400 = ` 12,060
(b) where the population is less than 10 lakhs.
Value of rent free accommodation = 7.5% of salary
= 7.5% of ` 80,400 = ` 6,030
(c) where the population is between 10 lakhs and 25 lakhs.
Value of rent free accommodation = 10% of salary
= 10% of ` 80,400 = ` 8,040
Note: Income-tax and Profession-tax are the obligation cast on the employee. In case the same was paid by
the employer they are taxable as perquisite u/s. 17(2)(iv).
Answer 41: Valuation of unfurnished flat:

(1) If X is a Secretary to the Central Government ` 4,000 is the taxable value of the unfurnished flat.
(2) If X is the Managing Director of ABC (P.) Ltd. - Salary for the purpose of calculating taxable value of the
perquisite works out to be ` 1,79,000 (` 1,62,000 + ` 17,000). As lease rent of unfurnished flat (` 50,000)
exceeds 15% of salary, ` 26,850 (being 15% of salary) is taxable value of the perquisite.
Valuation of furniture `
10% per annum of cost of furniture [` 36,000 x 10/100 x 10/12] 3,000
Add : Rent of air-conditioners 10,000
Valuation of furniture 13,000
Valuation of furnished flat :

Valuation of
Unfurnished flat Furniture Furnished flat
If X is a Secretary to the Central Government 4,000 13,000 17,000
If X is a Managing Director of ABC (P.) Ltd. 26,850 13,000 39,850
Valuation of hotel accommodation - ` 42,960 (being 24% of salary or ` 1,20,000, whichever is lower) is
chargeable to tax whether X is a Government employee or non-Government employee.
CA Suraj Agrawal
SALARY 4B.14
Answer 42:
` `
Basic salary (6,000 x 9 + 7,000 x 3) 75,000
Dearness allowance (4,000 x 12) 48,000
Education allowance (550 x 4 x 12) 26,400
Less : Exemption (100 x 2 x 12) 2,400 24,000
Medical allowance (400 x 12) 4,800
Transport allowance (350 x 12) 4,200
House rent allowance (4,500 x 8) 36,000

Less : Exempt [see note 1]] 28,416 7,584
Furnished house [see note 2 5,228
Salary from B Ltd. (2,000 x 3) 6,000
Notes :-
(1) House rent allowance exempt from tax - Salary for this purpose is ` 8,880 per month (basic salary : ` 6,000 per
month + dearness allowance : 72% of ` 4,000 per month). The amount of exemption is —
a) ` 3,552 per month (being 40% of ` 8,880);
b) ` 4,500 per month (being house rent allowance); or
c) ` 4,612 per month (being excess of rent paid over 10% salary, ` 5,500 - ` 888), whichever is lower.
Hence, the amount exempt from tax is ` 3,552 per month from April 1, 2019 to November 30, 2019 - ` 28,416) i.e.
for 8 months
(2) Valuation of the perquisite in respect of furnished flat - X has been provided a furnished flat at Delhi with effect
from December 1, 2019. Salary, for this purpose, from December 1, 2019 to March 31, 2020 is as follows -
`
Basic Salary (6,000 x 1+ 7,000 x 3) 27,000
Dearness allowance (72% of 4,000 x 4) 11,520
Education allowance [(550 x 4 - 100 x 2) x 4] 8,000
Medical allowance (400 x 4) 1,600
Transport allowance [350 x 4] 1,400
House rent allowance (not received during December 1, 2019 to March 31, 2020) —
Salary from B Ltd. (2,000 x 3) 6,000
Total salary 55,520
Lease rent of 4 months (7,500 x 4) : ` 30,000. The perquisite shall be valued as follows -
Value of unfurnished flat (15% of 55,520 or 30,000, whichever is lower) 8,328
Add : Rent of furniture 500
Value of rent-free furnished flat 8,828
Less : Rent paid by X (900 x 4) 3,600
Value of the perquisite 5,228
(3) Transport allowance is now fully taxable.
Answer 43:
Basic Pay (11,000 x 12) 1,32,000.00
Dearness Allowance (7,000 x 12) 84,000 00
Commission (3,000 x 12) 36,000.00
House Rent Allowance (Sec 10(13A). Rule 2A (W. Note1) 10,850.00
Rent Free Accommodation {Sec 17(2)(i), Rule 3(1)} (W. Note2) 8,162.50
Arrears of Salary 10,000.00
Advance Salary 20,000.00
Working Note:
1. HRA
From April to August - 5 months
1. ` 20,000
2. ` 15,000 - ` 5,850 = ` 9,150
3. 40% of salary = ` 23,400
(Salary = ` 11000 x 5 + 7000 x 5 x 10%)
Received = ` 20,000
Exempt =` 9,150 Taxable = ` 10,850
CA Suraj Agrawal
SALARY 4B.15
2. Rent Free Accommodation
From November to March – 5 months
Perquisite value = 7.5% of rent free accommodation salary = ` 5,662.50
Rent free accommodation Salary
= Basic Pay + Dearness Allowance + Commission + Medical Allowance
= ` 55,000 + ` 3,500 + ` 15,000 + ` 2,000 = ` 75,500
Perquisite value of furniture = 10% of (1,00,000 x 3/12) = ` 2,500
Taxable Amount = ` 5,662.50 + ` 2,500 = ` 8,162.50
(b)
Computation of income under the head Salary
Basic Pay (11,000 x 12) 1,32,000.00
Dearness Allowance (7,000 x 12) 84,000,00
Commission (3,000 x12) 36,000.00
House Rent Allowance {Sec 10(13A), Rule2A} (W. Note1) 12,700.00
Arrears of Salary 10,000.00
Advance Salary 20,000.00
Working Note:
1. HRA
From April to August
1. ` 20,000
2. ` 15,000 - ` 7,700 = ` 7,300
3. 40% of salary = ` 30,800
4. (Salary = ` 11000 x 5 + 7000 x 5 x 20% + 3000 x 5 = ` 77,000)
Received = ` 20,000
Exempt =` 7,300
Taxable = ` 12,700
From November to March
15% of rent free accommodation salary or rent paid whichever is less
Basic Pay + Dearness Allowance + Commission + Medical Allowance
= 55,000 + 7,000 + 15,000 + 2,000 = ` 79,000
15% of rent free accommodation salary = 11,850
Rent paid = 7,000 x 5 = 35,000
Perquisite value of rent free unfurnished house 11,850
Perquisite value of furniture - 10% of (1,00,000 x 3/12) = 2,500
Perquisite value of furnished house = 14,350
Answer 44:
Computation of Gross Salary `
Basic Pay (11,000 x 12) 1,32,000.00
Dearness Allowance (5,000 x 12) 60,000.00
Dearness Pay (1,000 x 12) 12,000.00
Bonus (1,200 x 12) 14,400.00
Arrears of Salary {Sec 15} 32,000.00
Advance of Salary {Sec 15} 11,000.00
Working Note:
From April To December
15% of Rent free accommodation Salary or rent paid whichever is less
= Basic Pay + Dearness Allowance + Dearness Pay + Bonus
= 99,000 + 13,500 + 900+ 10,800 = ` 1,24,200
15% of rent free accommodation Salary = `18,630
Rent Paid = `1,200 x 9 = ` 10,800
CA Suraj Agrawal
SALARY 4B.16
(A) Perquisite value of unfurnished house = ` 10,800
From January to March

Rent free accommodation Salary of Delhi
= 33,000 + 4,500 + 300 + 3,600 = ` 41,400
15% of Rent free accommodation Salary = ` 6,210
Rent paid = ` 3,600
Perquisite value of Rent free accommodation of Delhi = ` 3,600
Rent free accommodation of Bombay

= 33,000 + 4,500 + 300 + 3,600 = ` 41,400
15% of Rent free accommodation Salary = ` 6,210
Perquisite value of rent free accommodation of Bombay = ` 6,210
(B) Perquisite value of unfurnished house {least is in Delhi} = ` 3,600 [90 days – only one accommodation
is taxable]
Total Amount = A + B = ` 10,800 + 3,600 = ` 14,400
Solution 45: Computation of Gross Salary of Mrs. Padma

Receipt of HRA Rent-free accommodation
Basic Salary (24,000 × 12) 288000 288000
Dearness Allowance (18% of basic salary) 51840 51840
Bonus (1 month basic pay) 24000 24000
Project Allowances (6% of basic salary) 17280 17280
House Rent Allowance (1,80,000 – 1,44,000) 36000
(See note 1)
Rent Free Accommodation (See note 2) 49392
Gross Salary 417120 430512
Hence, Mrs. Padma should opt for HRA so as to minimize her tax liability.
Note:
(1) Amount of HRA exempt from tax shall be the least of the following - (all amount in `)
(a) Actual amount received 180000
(b) Rent paid less 10% of salary i.e. 1,80,000 - 28,800 151200
(c) 50% of salary 144000
(2) Value of rent free accommodation shall be least of the following -(Amount in `)
(a) Actual rent paid or payable or 180000
(b) 15% of salary i.e. 15% of (2,88,000 + 24,000 + 17,280) 49392
Answer 46:
The perquisite value of the motor car partly used for official and partly for private purpose shall be computed
at the rate of ` 1800 p.m. In the present case the actual expenditure incurred by the employer has no
relevance. Therefore, the perquisite value shall be ` 1800 x 12 = ` 21,600.
Answer 47:
Car1 [(1800+900) x 12] 32,400
Car2 [ (40000+28000+24000)] 92,000
Total 1,24,400
Note : It is assumed that CC rating of the cars does not exceed 1600CC & chauffeur has been
provided.
Answer 48: 180000 + 18000 + 15000 + 24000 = 2,37,000.
Answer 49:
(i) In case of Mr. X, the servant has been engaged by him. The salary of the servant is paid by the employer.
It is therefore, a monetary obligation of the employee discharged by the employer. This perquisite is
taxable in the hands of all employees. Hence, ` 6,000 shall be the value of the perquisite taxable in the
hands of Mr. X even though he is not a specified employee.
(ii) In case of Mr. Y, the domestic servant has been engaged by the employer and facilities of the services of
the domestic servant have been provided to Mr. Y. This perquisite is taxable, only in the hands of
specified employees. As Mr. Y is not a specified employee, it shall not be taxable in his hands.
CA Suraj Agrawal
SALARY 4B.17
Solution 50: Computation of Income from Salary of Mr. X
Particulars ` `
Basic Salary [`25,000 × 12] 3,00,000
Commission [`1,000 × 12] 12,000
Entertainment Allowance [`1,000 × 12] 12,000
Rent free accommodation [Note 1] 48,600
Add : Value of furniture [`2,40,000 × 10% p.a. for 8 months] 16,000 64,600
Interest on Personal loan [Note 2] 22,500
Use of motor cycle [Rs. 60,000 × 10% p.a. for 4 months] 2,000
Transfer of motor cycle [Note 3] 12,000
Free Electricity 10,000
Less : Deduction under section 16
Statutory Deduction u/s 16(ia) 50,000
Professional Tax paid u/s 16(iii) 2,000 52,000
Note 1: Value of rent free unfurnished accommodation

= 15% of salary for the relevant period
= 15% of (`3,00,000 + `12,000 + `12,000) = ` 48,600
Note 2: SBI rate of Interest on personal loan = 12.75% p.a.
Value of perquisite for interest on personal loan
= [` 5,00,000 × (12.75% - 6.75%) for 9 months] = ` 22,500
Note 3: Depreciated value of the motor cycle
= Original cost – Depreciation @ 10% p.a. for 3 completed years.
= ` 60,000 – (` 60,000 × 10% p.a. × 3 years) = ` 42,000.
Perquisite = ` 42,000 – ` 30,000 = ` 12,000.
Answer 51:
For the assessment year 2020-21, the taxable value of the perquisite will be as under
1. The lending rate of SBI on April 1, 2019 for similar loan is 8% per annum. ` 93,333 (being interest @ 8%
on ` 14,00,000 from June 1, 2019 to March 31, 2020) is taxable in the hands of X.
2. The SBI lending rate for a similar loan is 16%. Rs. 2,250 [being interest @ 9% (i.e., 16% - 7%) on is
25,000 for one year] is taxable in the hands of Y.
3. Nothing is taxable in the hands of Z as the amount of loan does not exceed ` 20,000.
4. The lending rate of SBI for a for a similar loan is 8%. Maximum monthly outstanding amount for the
various months in the previous year 2019-20 is as follows:
Month Maximum monthly outstanding Interest
amount on last day of the month
` `
April 30, 2019 8,00,000 666.67 (i.e., Rs. 8,00,000 x 1% x 1/12)
May 31,2019 8,00,000 666.67
June 30, 2019 8,00,000 666.67
July 31,2019 8,00,000 666.67
August 31, 2019 8,00,000 666.67
September 30, 2019 8,00,000 666.67
October 31 2019 8,00,000 666.67
November 30, 2019 8,00,000 666.67
December 31,2019 8,00,000 666.67
January 31, 2020 7,75,000 645.83 (i.e. ` 7,75,000 x 1% x 1/12)
February 28, 2020 7,50,000 625 (i.e., ` 7,50,000 x 1% x 1/12)
March 31, 2020 7,25,000 604.16 (i.e. ` 7,25,000 x 1% x 1/12)
Total 7,875
Taxable value of concessional loan is ` 7,875 for the previous year 2019-20.
CA Suraj Agrawal
SALARY 4B.18
Answer 52:
1. X s provided use of laptop by the employer. The perquisite is not chargeable to tax.
2. Y is provided a music system by the employer. The taxable value of the perquisite is determined @ 100
per annum of cost. Accordingly ` 690 (being ` 15,000 × 10/100 × 169 days ÷ 366 days) is chargeable to
tax.
3. The taxable value of the perquisite in the hands of Z, A and B shall be determined as follows -
Car Computer Fridge
` ` `
Cost of the asset on May 15, 2017 6,96,000 1,17,000 40,000
Less : Normal wear and tear for the first year ending May 14, 2018 (20% of 1,39,200 58,500 4,000
Rs. 6,96,000, 50% of Rs. 1,17,000, 10% of Rs. 40,000)
Balance on May 15, 2018 5,56,800 58,500 36,000
Less : Normal wear and tear for the second year ending May 14, 2019 (20% 1,11,360 29,250 4,000
of Rs. 5,56,800, 50% of Rs. 58,500, 10% of Rs. 40,000) Balance on May 16,
2019
4,45,440 29,250 32,000
Less : Sale consideration 2,10,000 24,270 1,000
Taxable Value of the perquisite 2,35,440 4,980 31,000
Note: In the case of car and computer/electronic items, normal wear and tear is calculated @ 20% and 50%
per annum respectively on the basis of written down value. In the case of any other asset, normal wear and is
calculated at the rate of 10% per annum of cost of the asset to the employer. Normal wear and tear tax part of
the year is not taken into consideration.
Answer 53: `
Computation of perquisite value of Furniture
Cost of the furniture 2,00,000
Less: Depreciation on straight line method @ 10% from 31.03.2016 to 30.03.2017 20,000
Written down value 1,40,000
Less: Amount paid by the assessee 40,000
Perquisite value of Furniture 1,00,000
Computation of perquisite value Air-conditioner

Cost of the Air-conditioner 75,000
Written down value 67,500
Perquisite value of Air-conditioner 52,500
Computation of perquisite value Video Camera

Cost of the Video Camera 60,000
Perquisite value of Video Camera 28,000
Computation of perquisite value Motor car

Cost of the motor 5,40,000
Less: Depreciation on reducing balance method @ 20% from 01.10.2015 to 30.09.2016 1,08,000
Less: Depreciation on reducing balance method @ 20% from 01.10.2016 to 30.09.2017 86,400
Less: Depreciation on reducing balance method @ 20% from 01.10.2018 to 30.09.2019 55296
Less: Amount paid by the assessee 1,50,000
CA Suraj Agrawal
SALARY 4B.19
Perquisite value of motor car 71,184
Computation of perquisite value Computer

Cost of the Computer 1,20,000
Perquisite value of computer Nil
Answer 54:
Chargeable perquisite in the hands of Mr. Badri for Assessment Year 2020-21
Housing Loan @ 6% p.a. is taken
SBI home loan @ 10% p.a.
Difference rate 4% p.a.
(i) Housing Loans
Month Maximum outstanding Balance Interest
30 April 19 5,88,000 1960 (5,88,000 x 4% x 1/12)
31 May 19 5,76,000 1920 (5,76,000 x 4% x 1/12)
30 June 19 5,64,000 1880 (5,64,000 x 4% x 1/12)
31 July 19 5,52,000 1840 (5,52,000 x 4% x 1/12)
31 August 19 5,40,000 1800 (5,40,000 x 4% x 1/12)
30 September 19 5,28,000 1760 (5,28,000 x 4% x 1/12)
31 October 19 5,16,000 1720 (5,16,000 x 4% x 1/12)
30 November 19 5,04,000 1680 (5,04,000 x 4% x 1/12)
31 December 19 4,92,000 1640 (4,92,000 x 4% x 1/12)
31 Jan 20 4,80,000 1600 (4,80,000 x 4% x 1/12)
28 February 20 4,68,000 1560 (4,68,000 x 4% x 1/12)
31 March 20 4,56,000 1520 (4,56,000 x 4% x 1/12)
Total interest as a perquisite 20880
Taxable value of concessional loan is ` 20,880 for the PY 2019-20.
(ii) Air Conditioner
Cost of air conditioners 2,00,000
Less: Depreciation for 4 yrs. @ 10% p.a. 80,000
1,20,000
Less: Amount charged from Badri 90,000
Value of perquisite 30,000
Chargeable perquisite in the hands of Mr. Badri for the Assessment Year 2020-21 `
Housing loan 20,880
Air conditioner 30,000
Total 50,880
Answer 55
Computation of taxable salary of Mr. Raghu Raj
Particulars `
Salary (26,000 x 12) 3,12,000
Perquisite value in respect of accommodation (3,12,000 x 15%) 46,800
Value of housing loan - 4,00,000 x 7.5% (i.e. 10.5% - 3%) 30,000
Perquisite in respect of sale of car (1,60,000 - 1,20,000) 40,000
Credit card expenses reimbursed (Not a perquisite) Nil
Perquisite value of Video camera (40,000 x 10%) 4,000
Perquisite value of laptop Nil
Taxable Salary 3,82,800
CA Suraj Agrawal
SALARY 4B.20
Answer 56: Computation of taxable salary of Mr. Syed Zaki
Particulars `
Basic salary (10,000 x 12) 1,20,000
D.A. (1000 x 12) 12,000
Perquisite value of concession in the matter of rent (15% of 132000 – 750x12) 10,800
Perquisite value in respect of services of gardener and sweeper (1000x2 x 12) 24,000
Shares offered under approved scheme (1000 shares X ` 20 each) 20,000
Taxable salary 1,36,800
Answer 57:
Option I Option II
` `
Salary 1,38,000 1,38,000
Rent Free Accommodation __ 20,700
HRA (` 54,000 - 40,200) 13,800 —
Education facilities — 3,600
Education allowance (` 3,600 - 1,200) 2,400 —
Telephone facility — —
Telephone Allowance 12,000 —
Medical Allowance / Reimbursement 18,000 18,000
Motor Car facility — 18,000
Conveyance Allowance 18,000 —
Lunch Allowance 18,000 —
Free Lunch (Free Lunch exempt upto ` 50 per male)
then taxable amount = (60 - 50) x 300 days 3000
Sweeper's Salary 6,000 6,000
Gardner's Salary 6,000 6,000
Watchman's Salary 6,000 6,000
2,38,200 2,19,300
Less : Deduction under section 16 50,000 50,000
Net Salary 1,88,200 1,69,300
Working Notes :-
(1) RFA
15% of salary 20,700
(2) HRA
(i) Actual Received ` 54,000
(ii) (50% of 1,38,000) 69,000
(iii) 54,000 - 13,800 40,200
Option - Package II should be opted.
Answer 58: 360000 + 54000 + 60000 + 180000 (20% WDV) + 5000 + 7500 = ` 6,66,500
Answer 59: `
Computation of Gross Salary of Mr. Anil
Salary (46,000 x 12) 5,52,000.00
Medical Facility {Proviso Sec 17(2)} Nil
{In the hospital maintained by the company is exempt}
Perquisite of interest on loan {Sec 17(2)(viii) Rule 3(7)(i)} (W. Note 1) 33,000.00
Gift given on the occasion of wedding anniversary Nil
Rent Free Accommodation {Sec 17(2)(i) Rule 3(1)} (W. Note 2) 84,800.00
Sale of Table and Chairs {Sec 17(2)(viii) Rule 3(7)(viii)} (W. Note 3) 12,000.00
Credit Card Facility 30,000.00
Sale of Ambassador Car {Sec 17(2)(viii) Rule 3(7)(viii)} (W. Note 4) 60,000.00
CA Suraj Agrawal
SALARY 4B.21
Working Note: `
1. Perquisite on sale of table and chairs
Cost 60,000
Less: Dep. on straight line method @ 10% for 3 years 18,000
Perquisite value of Table and chairs 12,000
15% of rent free accommodation salary
Rent Free Accommodation salary = ` 5,52,000
Value of unfurnished house 82,800
Add: 10% of cost of furniture (60,000 x 10% x 4/12) 2,000
Perquisite value of furnished house 84,800
3. Perquisite of interest on loan – SBI Rate is taken as 10.5%
10.5% is taxable which is to be reduced by actual rate of interest charged i.e.
[l0.5%-5% = 5.5%] (6,00,000 x 5.5%) - ` 33.000
4. Perquisite value of car
Original cost of Car 2,50,000
Less: Dep. from 16.07.2016 to 15.07.2017 50,000
Less: Dep. from 16.07.2017 to 15.07.2018 40,000
Less: amount received from the assessee 1,00,000
Perquisite value of Ambassador car 60,000
Answer 60:
Computation of income under the head Salary ` `
From 01.04.2019 to 31.12.2019
Basic Pay (15,000 x 9) 1,35,000
Dearness Allowance (1,500 x 9) 13,500
Pension {17(i)(ii)} (4,000 x 3) 12,000
House Rent Allowance {Sec 10(13A), Rule 2A}(W. Note1) 5,175
Gratuity {Sec 10(10))} (W. Note2) 3,72,500
Leave Salary {Sec 10(10AA)} (W. Note3) _ Nil
Car Facility {Sec 17(2)(iii) Rule 3(2)}(2,700 x 9) 24,300
Employer's contribution to recognised provident fund Nil
Gas Facility {Sec. 17(2)(iii), Rule 3(4)} 8,000
Less: Deduction u/s 16(ia) - 50,000
National Saving Certificate 13,000
Public Provident Fund 14,000
Insurance premium on the life of married son 12,000
Own contribution in recognised provident fund 28,350 67,350
Total Income (Rounded off 288A) 4,53,130
Working Note:
1. HRA
1. ` 27,000
2. ` 36,000 - ` 14,175 = ` 21,825
3. 40% of retirement benefit salary = ` 56,700 {Since place of posting is not given}
{Retirement benefit salary = 1.35,000 + 6,750 = ` 1,41,750} Received = ` 27.000
Exempt = ` 21,825
Taxable = ` 5,175
2. Gratuity (not covered)
1. ` 5,30,000
2. ` 20,00,000
3. ½ x 20 x 15,750 = ` 1,57,500
Received = ` 5,30,000
Exempt = ` 1,57,500
CA Suraj Agrawal
SALARY 4B.22
Taxable = ` 3,72,500
3. Leave salary
1. ` 1,57,500
2. ` 3,00,000
3. 10 x 15,750 x 10/ 10 = ` 1,57,500
4. 15,750 x 10 = ` 1,57,500
Received = ` 1,57,500
Exempt = ` 1,57,500
Taxable = Nil
Answer 61: `
Basic Salary 2,90,400
Employer’s contribution to recognized provident fund in excess of 12% of salary 152
Motor Car {Sec 17(2)(iii) Rule 3(2)} { (2,400+900)×3} 9,900
Sweeper [(600×3)+(600×25/31)] 2,284
Income under the head Other Source (1,25,000-10,000) 1,15,000
Less: Deduction u/s 80C 40,000
{Employee’s contribution to recognized provident fund}
Or, 3,27,740
Note:
1. Watchmen has been provided from the next year, hence not taxable.
2. Actual expenditure shall be taken in case of sweeper.
3. Income tax refund or any other refund is not considered to be income. Hence ` 10,000 included in the
income has been deducted (`1,25,000 - `10,000= `1,15,000)
4. Any interest received is always income.
Working Note:
Basic Salary
Salary 2,25,000
Add: Income Tax 25,400
Own contribution to recognized provident fund 40,000
Solution 62: Computation of Gross Salary (amounts in `)
Basic Salary (25,000 × 10 months) 250000

Dearness allowance (10,000 × 10 months) (assumed that it does not forms part of salary for 100000
retirement benefits as question is silent)
Bonus (50,000 × 10 months) 500000
Value of Accommodation (assumed that place of accommodation has population exceeding 25
lakhs) [DA will not be considered] 137500
[15% of (basic salary + Bonus) + 10% of cost of furniture of ` 3 lakhs × 10 months ÷ 12]
Sweeper Salary paid by employer (` 1,500 × 10 months) 15000
Watchman Salary paid by employer (` 1,500 × 10 months) 15000
Car facility (partly for personal and partly for official use, assuming that the maintenance and 27000
running expenses are met by the owner-company] [(1,800 + 900) × 10]
Club facility (Initial fee for corporate membership is exempt. Further, since no further expenses NIL
have been incurred by the employer, no taxability arises.]
Education facility to children (assuming the cost of education per child does not exceed ` 1,000 NIL
p.m.)
Interest free housing Loan (` 5,00,000 × 13.25% × 6/12) 30625
Interest free Computer Loan (` 50,000 × 15.25% p.a. × 3/12 months) 1906
Gross Salary 1077031
CA Suraj Agrawal
SALARY 4B.23
Solution 63: Computation of Gross Salary of Naresh under two Alternatives (amounts in `)
Alt. I Alt. II
Basic pay 92000 92000
Bonus 9000 9000
Education allowance for 2 children [30200 - 100 x 12 x 2]/ Education facility for 2 27800 30200
children, fully taxable as the value exceeds ` 1,000 p.m. per child
Sweeper allowance/Sweeper facility 10000 10000
Entertainment Allowance/Club facility 6000 6000
Transport allowance (now fully taxable) / Free car (1200 cc) facility for 21600 21600
personal use
(assumed that ` 21600 includes all expenses incurred including normal wear &
tear)
Medical allowance/ Medical facility for Naresh and his family members in a 18000 Exempt
hospital maintained by employer
Allowance for gas, electricity and water supply/ Free gas, electricity and water 4500 4500
supply (bills will be in the name of the employer)
Holiday home allowance/Holiday home facility 8000 8000
Lunch allowance/ Free lunch [free lunch exempt upto Rs. 50 per meal, hence, 18000 5500
taxable amount = (`80 - `50) × 50 days + (`70 - `50) x 200 days]
Diwali gift allowance/ Gift on Diwali (Gift Taxable if exceeds `5,000) 7500 7500
Rent-free unfurnished home (See Note) 14000 14000
Gross Salary 236400 208300
Hence, Naresh should opt for Alternative II, as taxable income is less in that case.
Note: Value of rent free house shall be lower of the following - Alt. I Alt II
(a) 15% of Monetary Salary (15% of `2,22,400 and 15% of `101,000) 33360 15150
(b) Lease rent paid 14000 14000
Solution 64: Computation of taxable value of perquisite in the hands of Mr. G

Particulars ` `
Treatment of Mrs. G in a Government hospital NIL
Treatment of Mr. G’s father (75 years and dependant) abroad 50,000
Expenses of staying abroad of the patient and attendant 30,000
80,000
Less : Exempt up to limit specified by RBI 75,000 5,000
Medical premium paid for insuring health of Mr. G NIL
Treatment of Mr. G by his family doctor 5,000
Treatment of Mr. G’s mother (dependant) by family doctor 8,000
Treatment of Mr. G’s sister (dependant) in a nursing home 3,000
Treatment of Mr. G’s grandfather in a private clinic 12,000
Treatment of Mr. G’s brother (independent) 6,000
Taxable value of perquisite 39,000
Note: Grandfather and independent brother are not included within the meaning of family of Mr. G.
Answer 65:
Basic Pay (9,000 x 12) 108,000.00
Medical Facilities {Proviso to Sec 17(2)}(W Note 1) 62,000.00
Medical Allowance 10,000.00
Motor Car {Sec 17(2) (iii), Rule 3(2)} (W Note 1) 21,600.00
Note: Since Gross total income before taking into consideration travelling expenses is not exceeding ` 2
lakhs. Hence travelling is exempt.
CA Suraj Agrawal
SALARY 4B.24
Working Note: `
1. Medical Facilities
Expenses on treatment = 3,60,000
Exempt = Permitted by RBI = 3,50,000
(A)Taxable = 10,000
Expenses on Stay = 1,50,000
Exempt = Permitted by RBI = 1,05,000
(B)Taxable = 45,000
Treatment of father in law = 7,000
Total = 10,000 + 45,000 +7,000 = 62,000
2. Motor Car
Since basic pay is ` 106,000 so monetary income is more than ` 50,000 hence, he is a specified employee
(1,800x12 – 50,000)
Solution 66: Computation of taxable income of Mr. Satish
Salary (10,000 × 12) 120000

Dearness Allowance (40% of 1,20,000) 48000
Entertainment Allowance 8000
Reimbursement of Medical Expenses (fully taxable now) 25000
Professional Tax paid by employer 4000
Free Car facility (3,300 x 12) (See Note 2) 39600
Gross Salary 244600
Less : Deductions u/s 16 –
(ia) Statutory Deduction 50000
(ii) Entertainment allowance (see note 1) 5000
(iii) Professional Tax Income from salary/Gross Total Income 5000
184600
Less : Deduction u/s 80C - Contribution to PF 12000
Total Income 172600
Notes:
1) Entertainment allowance will be deductible to the extent of least of the following -
(i) Actual amount 8000
(ii) Fixed amount 5000
(iii) 20% of basic salary 24000
2) In absence of details as to cubic capacity of car, it is assumed that it exceeds 1.6 litres and chauffeur has
also been provided. Since only one car has been provided, the same will be treated as partly for business
use and party for personal use of the employee. Hence, amount taxable will be 2,400 + 900 = ` 3,300
p.m.
3) Professional tax paid by employee as well as employer is allowed as deduction. Though the amount of
tax cannot exceed ` 2,500 p.a., but since the question gives the amount of ` 5,000 as tax paid,
therefore, the whole of the amount of will be deducted assuming that the same relates to more than one
year.
Answer 67:
Basic Salary (15,000 x 12) 1,80,000.00
Dearness Allowance (5,600 × 12) 67,200.00
Education Allowance (W Note 1) 4,800.00
Transport Allowance 21,600.00
Rent free Accommodation (W Note 3) 36,000.00
Mobile phone and fixed line telephone Nil
Gift 12,000.00
Use of video Camera 7,500.00
Motor Car (1,800 + 900 x 12) 32,400.00
Reimbursement of medical treatment 20,000.00
Employer's contribution in recognised provident fund in excess of 12% of Salary 4,368.00
(30,000 - 25,632)
CA Suraj Agrawal
SALARY 4B.25
Life insurance premium 12,000
Contribution in recognised provident fund 30,000 42,000.00
Total Income (rounded off u/s 288A} 2,93,870.00
Working Note:
1. Education Allowances `
Received = 300 x 2 x 12 = 7,200
Exempt = 100 x 2 x 12 = 2,400
Taxable 4,800
2. Rent Free Accommodation `

15% of rent free accommodation salary or rent paid whichever is less
Rent free accommodation salary
= Basic Salary + Dearness Allowance (R) + Education Allowance + Transport Allowance
= 1,80,000 + 33,600 + 4,800 + 21,600 = 2,40,000
15% of rent free accommodation Salary 36,000
Rent paid 60,000
Perquisite value of rent free accommodation 36,000
Solution 68: Computation of Gross salary of Mr. Y.R. Meena

UNO April- Govt. Service Pvt. Ltd. Co. (Note 4)
July Aug-Nov Sri lanka India office
branch
(Note 2) (Note 3) Dec-Feb March

Basic Salary — 20000 — 4000
Dearness Allowance — — — 2500
Project Allowance - — — — 1000
Entertainment Allowance — — — 2000
Servant & Sweeper facility (Note 5) — — — —
Education facility (Note 5) — — — —
Rent-free accommodation (Note 6) — — — 1425
Gross Salary NIL 20000 NIL 10925
Notes:
1) Mr. Meena was in India for the month of March i.e. for 31 days only during the previous year. Hence, he is
non-resident in India.
2) Since, Mr. Meena is non-resident in India and services for which salary is received from UNO were not
rendered in India, therefore, the salary from UNO cannot be taxed in India. Further, even if salaries were
income accrued/arisen or received in India, then also it would not be liable to be taxed in India, as it is
exempt from tax.
3) Salary received by a citizen of India from Government of India for services rendered outside India is
deemed to accrue or arise in India under section 9(1)(iii). So, it is taxable in India. However, allowances
and perquisites are exempt under section 10(7).
4) Salaries received from Pvt. Ltd. co. for services rendered outside India is not taxable in India. However,
services rendered in the month of March in India is taxable in India.
5) Servant and sweeper facility and education facility is taxable only in case of specified employees. Since
Mr. Meena is not a specified employee, they will not be taxable in his case.
6) The perquisite in respect of rent-free accommodation has been valued as follows -
15% of Salary = 15% of (4,000 + 2,500 + 1,000 + 2,000) = ` 1,425. (It has been assumed that population
of the place where he was posted in India, exceeds 25 lacs).
CA Suraj Agrawal
SALARY 4B.26
Class Notes
CA Suraj Agrawal
IOS 5.1
INCOME FROM OTHER SOURCES

[Section 56 to 59]
Any income includible in the total income of an assessee, which cannot be included under any of the
first four heads of income, is chargeable under the head ‘IOS’.
Following conditions must be satisfied before an income can be taxed under the head “Other
Sources”:
a) There must be an income
b) Such income must not be exempted income
c) Such income must not be income falling under first four heads.
IOS Income may include:
a) Dividend Income
b) Casual Income
c) Gift
d) Income from Sub-Letting of a House Property
e) Family Pension
f) Director’s Sitting Fee
g) Remuneration received by MP/MLA
h) Interest on bank deposit / deposits with companies or on loan
i) Income from undisclosed sources
j) Examiner-ship fee from non-employer
k) Rent from a vacant piece of plot of land
l) Agricultural Income from land situated outside India
m) Interest on Income Tax Refunds
n) Sum received from Keyman Insurance Policy
o) Dividend income from foreign company
p) Premium amount (shares issued on premium)
q) Advance money forfeited in the course of negotiation for transfer of a capital asset.
r) Compensation in connection with termination/modification of employment
The following income is chargeable under the head “Income from other sources” only if such
income is not chargeable under the head “Profits and gains of business or profession”:
a) Income from letting out of plant, machinery or furniture.

b) Where letting out of buildings is inseparable from the letting out of plant, machinery or furniture,
the income from such letting.
c) Insurance Commission
d) Income from Royalty
e) Interest on Securities
CA Suraj Agrawal
IOS 5.2
CASUAL INCOME
1) Casual income includes income in the nature of winning from lotteries, crossword puzzles,
horse races (including camel race), card games and other games of any sort, gambling, betting
etc.
2) Such winnings are chargeable to tax as per section 115BB. Section 115BB provides that above
casual income would be taxed at a flat rate of 30% [plus surcharge, if applicable, plus H&EC].
3) No expenditure or allowance can be allowed from such income.

4) Loss under other head or under the head of IOS is not allowed to be set off with casual income.
5) No Deduction under Chapter VI-A [Section 80C to 80U]
6) Adjustment of unexhausted basic exemption limit is also not permitted against such income.
7) Grossing up where earning given after TDS:
Income by way of winnings from lotteries / crossword puzzles / card game or other game of any
short exceeding ` 10,000/- and from Horse Races [Not a camel Races] exceeding ` 10,000 is
subject to TDS u/s 194B or 194BB. [TDS Rate is 30%]
Thus, it is included in total income of the assessee after being grossed up as follows:
Gross Winnings= [Net winnings × 100 / (100 - Rate of TDS)]
8) Income derived from owning & maintaining racehorses is not a casual income and normal
slab rate will be applicable on such income.
SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY

Any sum received under a Keyman insurance policy (including any bonus) is chargeable under the
head “IOS” if such income is not chargeable under the head “PGBP” or under the head “Salaries” i.e. if
such sum is received by any person [Family Members] other than the employer who took the policy
(PGBP Income) and the employee in whose name the policy was taken (Salary Income).
Note:
(i) If it is received by Employer: PGBP
(ii) If it is received by Employee: Salary
INTEREST ON COMPENSATION OR ENHANCED COMPENSATION

Interest received on compensation/enhanced compensation deemed to be income in the year of
receipt and taxable under the head “Income from Other Sources”.
Note: A fixed deduction of 50% of interest received will be allowed u/s 57 irrespective of actual
expenses.
CA Suraj Agrawal
IOS 5.3
Taxability of Family Pension
1) Family pension means pension received by the family members of the deceased employee. It is
chargeable to tax under the head ‘Income from Other Sources’.
2) Deduction u/s 57: Least of the following is allowed as a deduction:
(a) 1/3rd of such income

(b) ` 15,000
3) Exemptions:
(a) Pension received by Army personnel who are recipient of gallantry awards or Family pension
received by his family members is exempt in full. [Section 10(18)].
(b) Family pension received by the widow or children or nominated heirs of a member of the armed
forces (including para-military forces) whose death has occurred in the course of operational
duties is exempt in full [Section 10(19)].
Lump sum payment made gratuitously or by way of compensation or otherwise to widow / legal heirs of an
employee, who dies while in service, will not be taxable under the Act. [CBDT Circular]
Ex-gratia payment received, by a person or his legal heir, from the Central / State Govt. / Local Authority /
Public Sector Undertaking, consequent upon injury to the person / death of a family member, while on duty,
will not be taxable under the Act. [CBDT Circular]
Taxability of Allowances to MLA/MP
Daily Allowances & Constituency Allowances to MLA & MP are exempt from tax u/s 10(17).
CA Suraj Agrawal
IOS 5.4
PROVISION RELATING TO TAXABILITY OF INTEREST ON SECURITIES
Interest on securities may be taxed on Receipt basis or on Due basis, depending on the system of
accounting adopted by the assessee. If no system of accounting is followed, it will be taxable on
‘DUE’ basis.
LIABILITY FOR TAX: The person who owns the security on the due date of payment of interest is
liable for the entire interest even if he is not the owner for the entire period to which the interest
relates.
INTEREST AFTER TDS: If interest is received after TDS, then such amount is required to be grossed
up to include in the total income. The interest is grossed up as follows:-
Gross Interest = [Net Interest × 100 / (100 – Rate of TDS)]
Note:
1. Rate of TDS is 10%.
2. In case of Govt. Securities – Rate of TDS is NIL (refer TDS chapter also – Section 193)
a. FA 18 - No TDS upto ` 10,000 in case of interest from investment in 7.75 % GOI Saving
(taxable bonds) 2018
b. No TDS upto ` 10,000 in case of interest from investment in 8% Taxable Saving Bonds
2003
3. No TDS is deductible if debentures is issued by a widely held company if interest is paid
/payable to a Resident Individual/HUF by an account payee cheque & the aggregate amount of
such interest during the FY does not exceeds ` 5,000.
Section 10(15) – EXEMPTED INTEREST INCOME
Interest on Notified Relief Bonds (Only to Individual or HUF)

Interest on Gold Deposit Bonds
Interest from Deposit Certificates issued under the Gold Monetisation Scheme, 2015
Interest on notified bonds issued by a local authority
Interest on 7% Capital Investment Bond
Interest on PPF
Interest on notified bond/debentures of Public Sector Company
Interest from Post Office Saving Bank Accounts:
Interest from Post Office Saving Bank Accounts is exempt to the extent of ` 3,500 in case of an Individual
Account and ` 7,000 in the case of Joint Account.
Note: However following Interest Income are taxable:

Interest from Tax Saving Bonds
Interest from Monthly Income Scheme of Post office
Interest from NSC
Interest from Bank FD
Interest from Saving Bank Interest (any Bank)
Section 10(4) – Interest Income from Non Resident External Account is exempt.
Section 10(11A) – Interest Income from account opened as per Sukanya Samriddhi Account
Rules 2014 is exempt from tax. [Amount deposited will qualify for deduction
u/s 80C]
CA Suraj Agrawal
IOS 5.5
DEDUCTIONS ALLOWABLE [SECTION 57]
i) Dividend (other than dividends referred to in section 115-O) or Interest on Securities:

Any reasonable sum paid by way of commission or remuneration to a banker or any other
person for the purpose of realising such dividend or interest on behalf of the assessee.
ii) Income consists of recovery from employees as contribution to any provident fund etc.:
A deduction will be allowed in accordance with the provisions of Section 36(1)(va) i.e. to the
extent the contribution is remitted before the due date under the respective acts.
iii) Income from letting on hire of machinery, plant and furniture, with or without building:
Deduction allowable are:
• any current repairs
• any insurance premium
• the normal depreciation allowance
iv) Interest Received on Compensation / Enhanced Compensation:

Deduction allowed is 50% of income by way of interest received on
compensation/enhanced compensation received chargeable to tax. No further deduction of any
expenses will be allowed.
v) 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 will be allowed.
vi) Deduction against Family Pension
DEDUCTIONS NOT ALLOWABLE [SECTION 58]
i) Personal Expenses of the assessee

ii) Any Interest / Salary payable outside India where TDS has not been paid or deducted.
iii) Payment in the nature specified in Section 40(a)(ia)
iv) Payments of expenses in the nature specified in Section 40A(2) & Section 40A(3)
v) Income - Tax Paid.
vi) No deduction in respect of any expenditure incurred for earning Casual Income
CA Suraj Agrawal
IOS 5.6
TAXABILITY OF GIFTS
Section 56(2)(vii) - Taxability from 01.10.2009 to 31.03.2017: - INDIVIDUAL/HUF
Section 56(2)(x) - Taxability from 01.04.2017: - ANY PERSON

Gift of any sum of money or property or transfer of property for inadequate consideration on or
after 1st April, 2017 to be subject to tax in the hands of Any Person as IOS subject to the following:
Nature of asset Particulars Taxable value
Money Without consideration The whole of aggregate amount if the same
exceeds ` 50,000.
Movable property Without consideration The aggregate Fair Market Value (FMV) of the
property, if it exceeds ` 50,000.
Movable property Inadequate consideration The difference between the aggregate FMV
and the consideration, if such difference
exceeds ` 50,000.
Immovable property Without consideration The Stamp Duty Value [SDV] of the property,
if it exceeds ` 50,000.
[Each Property Separately]
Immovable property Inadequate consideration The difference between the SDV and the
consideration, if such difference exceeds
(amended by FA 18)
higher of the following amount:
a) ` 50,000 or
b) 5% of the consideration
[Each Property Separately]
Note:
1) Gift provisions will not be applicable if property is received as stock in trade, consumable
stores and raw materials.
2) Sum of money includes not only cash but also cheque, drafts, fixed deposits receipts or a NSC
since it represents a sum of money though not in cash.
3) For this purpose, “property” means the capital Asset of the assessee namely immovable
property being land or building or both, shares and securities, jewellery, archaeological collections,
drawings, paintings, sculptures or any work of art or bullion.
4) Stamp Duty Value means the value adopted by any authority for the purpose of payment of stamp
duty in respect of an immovable property.
5) If the Stamp Duty Value of immovable property is disputed by the assessee, the AO may refer
the valuation of such property to a Valuation Officer. In such a case, the provisions of section
50C shall, as far as may be, apply for determining the value of such property. – CG Class
6) When date of agreement and date of registration are not same - Where the date of an
agreement fixing the value of consideration for the transfer of the asset and the date of registration
of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the
agreement for transfer and not as on the date of registration for such transfer. However, this
exception shall apply only in those cases where amount of consideration (or a part thereof) for the
transfer has been paid by way of an account payee cheque or an account payee draft or by
use of electronic clearing system through a bank account or through such other electronic
modes as may be prescribed on or before the date of the agreement.
CA Suraj Agrawal
IOS 5.7
1) Exceptions: However, any gift received from following ways would be outside the ambit of
Section 56(2)(x):
(1) from any relative; or

(2) on the occasion of the marriage of the individual; or
(3) under a will or by way of inheritance; or
(4) in contemplation of death of the payer or donor, as the case may be; or
(5) from any local authority; or
(6) from any fund or foundation or university or other educational institution or hospital or
other medical institution or any trust or institution referred to in section 10(23C); or
(7) by any fund or trust or institution or university or other educational institution or
hospital or other medical institution referred to in section 10(23C)(iv)/(v)/(vi)/(via);
(8) from or by any trust or institution registered under section 12AA [Charitable or
Religious Trust]
(9) from an Individual by a Trust created or established solely for the benefit of relative of
the Individual.
(10) From HUF on Total/Partial Partition of HUF to members
(11) Asset received by Amalgamated Indian company from Amalgamating company
(12) From Holding Company to 100% Subsidiary Company or vice versa where transferee
is an Indian Company.
(13) Asset received by Indian Resulting Company from Demerged company in a demerger
(14) Any shares received by shareholders under Amalgamation/Demerger which is not

regarded as Transfer u/s 47.
(15) NEW - from such class of persons and subject to such conditions, as may be
prescribed. [Added by Finance (No. 2) Act 2019] – similar amendment is inserted in
Section 50CA.
For the purpose of this clause, the expression “RELATIVE” means

In Case of Individual:
(i) spouse of the individual,
(ii) brother or sister of the individual,
(iii) brother or sister of the spouse of the individual,
(iv) brother or sister of either of the parents of the individual,
(v) any lineal ascendant or descendant of the individual,
(vi) any lineal ascendant or descendant of the spouse of the individual, and
(vii) spouse of a person referred to in items (ii) to (vi) mentioned above.
In Case of HUF: Any Member

Clubbing Provisions: As per Section 64(2), if a member of the HUF converts his separate
property into the property belonging to the family otherwise than for adequate consideration, the
income derived from the converted property shall be deemed to arise to the individual and
not the family.
CA Suraj Agrawal
IOS 5.8
Question: X receives the following gifts during the PY 2019-20:
1. On the occasion of marriage of X, he gets ` 2,90,000 as gift on April 2, 2019 (out of which ` 2,00,000 is
received from friends of X and Mrs. X and remaining amount is received from close relatives of X and
Mrs. X).
2. On June 22, 2019, he gets a gift of ` 23,000 from C, who is cousin of his father.
3. On August 18, 2019, he gets a gift of ` 15,000 from D, who is elder brother of his grandfather.
4. On September 20, 2019, he gets a gift of ` 7,00,000 from his grandmother.
5. A computer received from his employer (it was purchased for ` 65,000 by the employer on May 1, 2019
and given as gift to X on October 20, 2019).
6. On November 30, 2019, X gets a gift of a plot of land from his grandfather (stamp duty value is `
15,00,000.
7. On December 30, 2019, X gets by gift a commercial flat from the elder brother of his father-in-law (stamp
duty value is ` 25,00,000).
8. On January 6, 2020, he gets a gift of ` 2,00,000 (cash gift of ` 25,000 and gift of a work of art whose
market value is ` 1,75,000) from a notified public charitable institution.
9. X receives on January 11, 2020 a house property under will of a person known to him. The stamp duty
value is ` 15,40,000.
10. On January 20, 2020, he gets a wrist watch by gift (fair market value : ` 40,000) from his friend B.
11. On January 25, 2020, he purchases a work of art for ` 16,00,000 from an exhibition in New York (the fair
market value of the work of art on the date of purchase is ` 17,00,000).
12. On February 5, 2020, he gets a birthday gift of a gold chain (fair market value : ` 11,000) from his friend.
13. On February 10, 2020, X gets by way of gift a plot of land in Pune from a partnership firm. The partnership
firm has only two partners- father of X and Mrs. X. The stamp duty value of the plot of land is ` 19,00,000.
14. On February 16, 2020, X purchases 500 shares in Tata Chemicals from his friend D at ` 90 per share
(outside stock exchange). The lowest market quotation in the Bombay Stock Exchange and the National
Stock Exchange on the date of purchase is ` 300 and ` 310 respectively.
15. On March 1, 2020, X gets a gift of gold ring from a cousin of his mother-in-law. The fair market value is `
20,000.
16. On March 20, 2020, X gets a painting by way of gift from C Ltd. Mrs. X holds 70 per cent shares in C Ltd.
The fair market value of painting is ` 19,000.
17. On March 25, 2020, X gets a small plot of land by way of gift from a cousin of Mrs. X (stamp duty value is
` 44,000).
18. On March 31, 2020, X receives a shop (situated in Jammu) by way of gift from a friend (stamp duty value
is ` 50,000).
Compute the amount chargeable to tax in the hands of X under the head "Income from other sources"
from the AY 2020-21.
Solution:
Cash Gift of Gift of Purchase
gift immovable movable movable
property property properly for
Inadequate
consideration
` ` ` `
1. Gift on occasion of marriage of X Nil - - -
(not taxable)
2. Cash gift from C 23,000 - - -
(C is not "relative")
3. Cash gift from D 15,000 - - -
(elder brother of grandfather is not "relative")
4. Cash gift from grandmother Nil - - -
(gift from a "relative" is not taxable)
CA Suraj Agrawal
IOS 5.9
5. Gift from employer - - - -
(it is taxable under the head Salary)
6. Gift of immovable property from grandfather [gift Nil . -
from” relative" is not taxable]
7. Gift of commercial property - 25,00,000 - -
(elder brother of 'other for is not "relative")
8. Gift from notified public charitable institute [Not Nil - Nil -
Taxable]
9. Gift under a will - Nil - -
[not taxable even if received from on-emotive]
10. Gift of a wrist watch - - - -
[wrist watch is not "property" for the purpose
of section 56(2)(x) and not taxable]
11. Purchase of a work of art for inadequate - - - 1,00,000
consideration
12. Gift of gold chain 11,000 -
13. Gift from a partnership firm - 19,00,000 - -
[partnership firm is not "relative" even if relatives
of X are partners]
14. Purchase of shares for inadequate consideration - - - 1,05,000
[(`
` 300 - ` 90) x 500)]
15. Gift of gold ring - - 20,000 -
(cousin of mother-in-low is not "relative" of X)
16. Gift from a company - - 19,000 -
(company is not a "relative" even if Mrs. X is a
major shareholder)
17. Gift of plot of land - Nil - -
(not taxable as stamp duty value does not
exceed ` 50,000)
18. Gift of shop - Nil - -
(not taxable as stamp duty value does not
exceed ` 50,000)
Total 38,000 44,00,000 50,000 2,05,000
Amount taxable under section 56(2)(x) under the head "Income from other sources" will be calculated as
follows—
`
Cash gift (not 'taxable as the aggregate amount of cash gift does not exceed ` 50,000) Nil
Gift of immovable properties 44,00,000
Gift of movable properties (not taxable as the aggregate amount does not exceed ` 50,000) Nil
Purchase of movable properties for inadequate consideration 2,05,000
Amount taxable 46,05,000
CA Suraj Agrawal
IOS 5.10
Share premium in excess of the FMV to be treated as income [Section 56(2)(viib)]
1. Section 56(2)(viib) provides that where a company, not being a company in which the public
are substantially interested (i.e. Closely held Company), receives any consideration from issue
of shares in excess of the face value of such shares from any person being a resident, then
consideration as exceeds from FMV of the shares shall be chargeable to income tax under the
head “IOS”
2. However, the above provision shall not apply where the consideration is received F
a) by a Venture Capital Undertaking from a Venture Capital Company or a Venture Capital I
Fund or a specified fund, or N
b) by a company from a class or classes of persons as may be notified by the Central A
Government in this behalf. L
Note: This section is further amended by Finance (No. 2) Act 2019, but the same is applicable in
Final Syllabus. Hence, those amendments are not updated here.
CA Suraj Agrawal
IOS 5.11
DIVIDEND INCOME
SECTION 10(34) – DIVIDEND INCOME EXEMPT FROM TAX
Any income by way of dividends referred to in Section 115-O shall be exempt from income tax in the
hand of shareholders. [Dividend excludes dividend chargeable to tax under section 115BBDA]
SECTION 115-O - TAX ON DISTRIBUTED PROFITS OF DOMESTIC COMPANIES

Every Domestic Company, which has declared, distributed or paid any amount by way of dividends
(whether interim / otherwise), whether out of current or accumulated profits shall be charged to tax on
Distributed Profits @ 20.56% [i.e. 15% (net of tax basis) + SC @ 12% + 4% Cess], in addition to the
income-tax chargeable in respect of the Total Income of such a domestic company.
FA 18 - In case of deemed divided u/s 2(22)(e), Tax Rate (DDT) is 30% (without grossing up) +
SC@12% + 4% cess.
Notes
1) Dividend shall include any dividend u/s. 2(22)(a) to 2(22)(e) and such dividends shall be exempt in
the hands of shareholders u/s 10(34) subject to section 115BBDA.
Dividend u/s 2(22)(e) is now covered u/s. 115-O and the same shall be exempt in hands of the
shareholder and the company is now required to pay tax on such dividend (DDT). There will be no
TDS u/s 194 now.
2) Dividend received from a FOREIGN COMAPNAY is not covered u/s. 115-O and shall not be
exempt in the hands of shareholder u/s 10(34). Such dividend is taxable in hands of shareholder
at the normal tax rates.
3) Any dividend paid to NPS Trust [New Pension Scheme Trust] shall be exempt from DDT.
4) Dividend Income from Units of UTI & Other Mutual Fund is Exempt u/s Section 10(35)
5) Dividends from cooperative society are Taxable in the hands of members.
TAXATION OF CERTAIN FOREIGN DIVIDEND @ 15% [Section 115BBD]

1. Section 115BBD provides that where Total Income of an Indian Company includes any dividend
income received from a foreign specified company, then such dividends shall be taxable at the
rate of 15% (plus applicable surcharge and cess) on the gross amount of dividends.
2. No expenditure in respect of such dividends shall be allowable under the Act.
3. Income other than foreign dividend as specified above shall be taxable at Normal Rate of Tax.
4. Specified Foreign Company means a foreign company in which the Indian Company holds 26%
or more in nominal value of the equity share capital of the company.
Tax on Certain Dividends received from Domestic Com. [Sec 115BBDA]

1. Notwithstanding anything contained in this Act, where the total income of a Specified Assessee,
resident in India includes any income in aggregate exceeding ten lakh rupees, by way of
dividends [except 2(22)(e)] declared, distributed or paid by a domestic company or companies,
then dividend in excess of ` 10,00,000 shall be taxable at the rate of 10% (plus applicable
surcharge & cess).
2. No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to
the assessee under any provision of this Act in computing the income by way of dividends as
referred above.
3. Specified Assessee means a person other than
(a) A Domestic Company
(b) A Trust/Institution registered under Section 12A or Section 12AA
(c) A Fund/Institute/Trust/Any University/Other Educational Institution/Any Hospital/other
Medical Institution/Hospital/Medical Institution as referred in Section 10(23C)(iv)/(v)/(vi)/(via).
CA Suraj Agrawal
IOS 5.12
DEEMED DIVIDEND
a) Any distribution of assets by a company to its shareholders shall be deemed to be the dividend
[FMV of Assets] to the extent the company possesses accumulated profits whether capitalized
or not Sec. 2(22)(a)
b) Any distribution of debentures / debenture-stock / deposit certificates etc. by a company to its

shareholders
OR
Any distribution of shares by way of bonus by a company to its preference shareholders shall be
deemed to be the dividend to the extent the company possesses accumulated profits whether
capitalized or not Sec. 2(22)(b)
(i) For the purpose of CG, the COA of above debenture in the hands of the shareholders shall be
taken to be NIL
(ii) Bonus shares given to equity shareholders are not treated as dividend.
c) Distribution on Liquidation:
Any distribution of assets is made by a company to the shareholders on its liquidation shall be
deemed to be the dividend to the extent of accumulated profits of the company standing
immediately before its liquidation whether capitalized or not. Sec. 2(22)(c)
d) Distribution on Reduction of Capital :
Any Distribution of assets by company to its shareholders on reduction of its capital shall be
deemed to be the dividend to the extent to which company possesses accumulated profits whether
capitalized or not. Sec. 2(22)(d)
Example: A Ltd. Has issued bonus shares to its equity shareholders. Subsequently company has reduced its
share capital and refunded the amount so reduced to the shareholders. The amount so received by the
shareholders to the extent of accumulated profit (whether capitalized or not) will be considered as dividend.
e) Advance or loan by a Closely Held Company to its Shareholder [Sec. 2(22)(e)]

Any payment, by a closely held company, of any sum by way of loan or advance:
to a shareholder, being the beneficial owner of shares holding not less than 10% of voting
power, OR
to any concern, in which such a shareholder is a member/partner and in which he has a
substantial interest, OR
to any persons on behalf of or for the individual benefit of such a shareholder,
shall be deemed to be the dividend to the extent to which the company possesses accumulated
profits.
Notes
1) Following conditions must be satisfied on the date on which loan/advance is given to the
shareholder/concern/any other person by a closely held company in order to attract section 2(22)(e):
(a) Beneficial owner of shares (b) Holding 10% or more voting power (c) Member/ Partner in concern
2) Where loan is given and accumulated profits exceeds the loan, then the entire loan will be deemed as
dividend. No consideration is to be given to the proportionate share of the assessee in the accumulated
profits.
3) If any such loan was given to more than such shareholders, accumulated profits shall be reduced by the
amount of the loan given to the earlier shareholders.
4) Dividend shall not include any advance or loan made to a shareholder or a concern by a company in the
ordinary course of its business where the money lending is substantial part of the business of the company.
5) Buy Back of Own Shares: Any payment made by a company on purchase of its own shares from a
shareholder is not a deemed dividend.
CA Suraj Agrawal
IOS 5.13
PREVIOUS YEAR FOR UNDISCLOSED SOURCES OF INCOME
Unexplained Cash Credits [Sec. 68]
The sum is found credited in the books of assessee.
He offers no explanation about its nature and source OR the explanation offered is not satisfactory
in the opinion of AO
The amount so credited is treated as the income (under the head IOS) of the Previous Year in
which the same is found credited.
Note:
Section 68 further provides that the nature and source of any sum credited, as share application
money, share capital, share premium etc., in the books of a closely held company shall be treated
as explained only if the source of funds is also explained by the assessee company in the hands
of the resident shareholder (other than SEBI regulated entity) and such explanation in the
opinion of the AO is found to be satisfactory.
Unexplained Investment [Sec. 69]

The assessee made investments which are not recorded in the books of accounts
He offers no explanation about its nature and source OR the explanation offered is not satisfactory
in the opinion of AO
The value of investment so made is treated as the income (under the head IOS) of the Previous
Year in which the investment is made.
Unexplained Money etc. [Sec. 69A]

In search, the assessee was found to be owner of any money, bullion or jewellery or other valuable
article etc,
Such money, bullion etc are not recorded in the books of accounts of the assessee
He offers no explanation about its nature and source of acquisition or the explanation offered is not
satisfactory.
The value of such items shall be treated as the income (under the head IOS) of that previous
year in which it is found .
Investment not fully disclosed [Sec. 69B]

The assessee made investments or found to be owner of bullion, jewellery or other valuable article,
but has not fully recorded in his books of accounts.
He offers no explanation about such excess amount or the explanation offered is not satisfactory.
The excess value of the investment made shall be treated as the income (under the head IOS)
of the Previous Year in which the investment is made.
Unexplained Expenditure [Sec. 69C]

The assessee has incurred expenditure during the financial year
He offers no explanation about such expenditure or the explanation offered is not satisfactory.
The amount of such expenditure shall be treated as income (under the head IOS) of the
Previous Year in which it was incurred.
Amount borrowed or repaid on Hundi other than by way of account payee cheque [Sec. 69D]
Where any amount is borrowed on a hundi or any amount due thereon is repaid other than through
an account-payee cheque drawn on a bank,
the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or
repaying for the PY in which the amount was borrowed or repaid, as the case may be.
However, where any amount borrowed on a hundi has been deemed to be the income of any
person, he will not be again liable to be assessed in respect of such amount on repayment of such
amount.
CA Suraj Agrawal
IOS 5.14
Taxation of Cash Credit, Unexplained Money, Unexplained Investment etc. covered u/s
68, 69, 69A, 69B, 69C & 69D [Section 115BBE]
A. Section 115BBE has been inserted to tax the unexplained credits, money, investment,
expenditure, etc., which has been deemed as income under section 68, 69, 69A, 69B, 69C & 69D
Total Income of an assessee

a) includes any income referred to in Section 68, Section 69, Section 69A, Section
69B, Section 69C or Section 69D and reflected in the return of income furnished
under section 139; or
b) determined by the Assessing Officer includes any income referred to in Section

68, Section 69, Section 69A, Section 69B, Section 69C or Section 69D, if such income is
not covered under clause (a),
B. Tax Rate: 60% [plus surcharge (25%) and cess (4%) as applicable]
C. No deduction in respect of any expenditure or allowances or Set off of any loss shall be
allowed in computing above deemed income (point ‘a’ or ‘b’ above).
D. Benefit of Basic Exemption Limit is also not available while computing tax liability.
Compensation or any other payment received in connection with termination of his

employment [Section 56(2)(xi)] – FINANCE ACT 2018
Any compensation or any other payment, due to or received by any person, by whatever name
called, in connection with the termination of his employment or the modification of the terms
and conditions relating thereto shall be chargeable to tax under this head.
BOND WASHING TRANSACTIONS [Section 94]

A bond-washing transaction is a transaction where securities are sold some time before the due date
of interest and reacquired after the due date is over. This practice is adopted by persons in the higher
income group to avoid tax by transferring the securities to their relatives/friends in the lower income
group just before the due date of payment of interest.
In such a case, interest would be taxable in the hands of the transferee, who is the legal owner of
securities. In order to discourage such practice, section 94(1) provides that where the owner of a
security transfers the security just before the due date of interest and buys back the same immediately
after the due date and interest is received by the transferee, such interest income will be deemed
to be the income of the transferor and would be taxable in his hands.
NOTE: CONCEPT OF DIVIDEND STRIPPING & BONUS STRIPPING ARE COVERED IN CAPITAL
GAIN CHAPTER.
CA Suraj Agrawal
IOS 5A. 1
PRACTICAL QUESTIONS – “IOS”

1. From the following particulars of Pankaj for the previous year ended 31st March 2020, Compute the
Income under the head "Income from other Sources":
`
(i) Directors Fee from a Company 10,000
(ii) Interest on Bank Deposits 3,000
(iii) Income from undisclosed source 12,000
(iv) Winnings from Lotteries (Net) 35,000
(v) Royalty on a book written by him 9,000
(vi) Lectures in Seminars 5,000
(vii) Interest on loan given to a relative 7,000
(viii) Interest on Debentures of a Company (listed in a
Recognised Stock Exchange) Net of Taxes 6,300
(ix) Interest on Post Office Savings Bank Account 500
(x) Interest on Government Securities 2,200
(xi) Interest on Monthly Income Scheme of Post office 33,000
He paid ` 1,000 for typing the manuscript of book written by him.
2. Check the taxability of the following gifts received by Mrs. Rashmi during the previous year 2019-20
and compute the taxable income from gifts for AY 2020-21:
i) On the occasion of her marriage on 14.8.19, she has received ` 90,000 as gift out of which ` 70,000
are from relatives and balance from friends.
ii) On 12.9.19, she has received gift of ` 18,000 from cousin of her mother.
iii) A cell phone of ` 21,000 is gifted by her employer on 15.8.2019.
iv) She gets a gift of ` 25,000 from the elder brother of her husband's grandfather on 25.10.2019.
v) She has received a gift of ` 2,000 from her friend on 14.4.2019.
3. A perusal of R's bank account revealed following deposits during financial year 2019-20:
Particulars Amount
Gift from his friend on his birthday 12,000
Dividends from shares of various Indian companies 13,200
Gift from his fiancée 85,000
Gift from his mother's friend on his engagement 28,000
Gift from his sister in Netherlands 220,000
Interest on bank deposits 30,000
Compute his total income for the AY 2020-21 assuming that his income from house property
(computed) is ` 72,000.
4. Mr. Sandeep received a sum of ` 20,000/ – each from Mr. Lalith and Mr. Santosh and ` 10,000/ – from Mr.
Koti, who are all non – relatives, on the occasion of New Year. Discuss the tax liability of the sum
received.
5. Mr. Ashok received a sum of ` 5,00,000, as gift during the FY 2019-20, the details of which are as
follows. Discuss the tax liability of the sum received.
(i) from relatives on the occasion of birthday – ` 1,00,000;
(ii) from an unregistered charitable institution in connection with compensation for floods – ` 50,000;
(iii) ` 1,50,000 received from friends on the occasion of birthday;
(iv) ` 2,00,000 received from a neighbor, who is in death bed.
CA Suraj Agrawal
IOS 5A. 2
6. Raman received ` 5 lakhs from his relatives and the parents of his wife on the occasion of their marriage on
21/09/2019. He also receives a car, some jewellery whose fair market values are ` 2,50,000 and ` 50,000
respectively and a sum of ` 1,50,000 from persons, other than relatives on the said occasion. His grandfather
registers in his favour, land worth ` 10 lakhs after a month, as his gift. Discuss the tax for AY 2020-21.
7. Mr. Ketan acquired a land at Mumbai from Mr. Agarwal for a purchase consideration of ` 1 Crore on
01.01.2020. The assessable value of the property for stamp duty purposes is ` 1.30 crore. Subsequently, in a
different transaction he was gifted with a land near Indore by his friend, the assessable value of which for
stamp duty purpose is ` 49,000. Advise on the taxability of these transactions.
8. Mrs. Rajni who draws a salary of ` 30,000 p.m. received the following gifts during the previous year:
i) Gift of ` 5,00,000 on 16.1.2020 from a friend,
ii) Gift of jewellery worth ` 4,00,000 on 17.10.2019 from her fiancée,
iii) Gift of ` 41,000 each received from her 4 friends on the occasion of her marriage on 21.10.2019.
iv) Gift of ` 1,10,000 on 22.10.2019 from her mother's sister,
v) Gift of ` 70,000 on 25.10.2019 from her father's brother,
vi) Gift of ` 40,000 from her husband's friend on 01.11.2019,
vii) Gift of ` 31,000 on 15.11.2019 from her mother's friend.
viii) Gift of ` 27,000 on 25.11.2019 from her brother's father in law.
ix) Gift of ` 1,21,000 from her husband's brother,
x) Gift of ` 23,000 from her employer.
xi) Scholarship of ` 2,20,000 from, a charitable institution registered u/s 12AA
xii) She has purchased an immovable property whose stamp duty value is ` 22,80,000 from Gita who is
not her relative for a sum of ` 22,60,000.
Compute her total income for the assessment year 2020-21.
9. Mr. V asks you to compute his taxable income from the following transactions which took place with
his friends during January 2020:
i) Cash gifts received during the year from Mr. X and Mr. Y: ` 30,000 each;
ii) Two flats gifted to him by Mr. S and Mr. T: Stamp Value ` 4,00,000 and ` 50,000 respectively;
iii) He purchased a plot of land at ` 6,10,000 from Mr. A, which was not registered, but the prevalent
stamp value of which was ` 6.6 lakh;
iv) A gold ring and a painting worth ` 30,000 and ` 35,000 respectively gifted by Mr. M and Mr. N;
v) A gold biscuit purchased by him at ` 10 lakh from Mr. P, when prevalent market value is ` 10.3 lakh
and shares and securities purchased by him at ` 2.5 lakh from Mr. L, when fair market value thereof
was ` 2.8 lakhs.
10. X receives the following gifts during the PY 2019-20:
a) On April 10, 2019, he gets a gift of ` 25,000 from his friend A.
b) On May 1, 2019, he gets another gift of ` 500 from his friend A.
c) On June 1, 2019, he gets a gift of ` 26,000 from C, who is cousin of his father.
d) On July 8, 2019, he gets a gift of ` 5,000 from D, who is elder brother of his grandfather.
e) On July 20, 2019, he gets a gift of ` 41,000 from his grandmother.
f) On the occasion of marriage of X, he gets `1,90,000 as gift on July 31, 2019 (out of which ` 1,00,000 is
received from different relatives of X and Mrs. X and remaining amount is received from friends of X and
Mrs. X).
g) A computer received from his employer (it was purchased for ` 40,000 by the employer on May 1, 2019
and given as gift on August 20, 2019).
h) On September 6, 2019, he gets ` 80,000 from a notified public charitable institution.
i) X receives ` 5,40,000 on September 30, 2019 under will of a person known to him.
j) On October 10, 2019, he gets a gift of ` 40,000 from his friend.
k) On December 12, 2019, he purchases a work of art for ` 72,000 from an exhibition in Chennai (the fair
market value of the work of art on the date of purchase is ` 2,00,000).
l) On March 31, 2020, he gets a birthday gift by cheque of ` 11,000 from his friend.
Compute the amount chargeable to tax in the hands of X under the head "Income from other
sources" for the AY 2020-21.
CA Suraj Agrawal
IOS 5A. 3
11. X holds the following securities on April 1, 2019:
` 1,48,000 10% securities of the Tamil Nadu Government and ` 40,000 5% non – listed debentures of
ABC Ltd. Interest in both the cases is payable on December every year. On August 1, 2019, X borrows `
20,000 at 7 per cent per annum and invests it in purchasing ` 20,000, 7.5 per cent securities of the Central
Government [due date of interest; March 15 every year; interest due on March 15, 2020 is received on April
2, 2020]. Interest on borrowing for the period ending March 31, 2020 is, however, paid by X on April 15,
2020. His business income is ` 7,86,000.
Determine the taxable income of ‘X’ for the AY 2020-21 under the following situations:
a) X maintains books of account on "mercantile" system, and
b) X maintains books of account on "cash" basis.
12. Shri Kishan is a businessmen dealing in cloth. On 1.4.2019, his investments was as under:
(i) ` 44,000 7.% Government of India Loan 2004.
(ii) ` 86,000; 9% (Tax – free) Debentures of Birla Jute Mills Ltd.
(iii) ` 20,300, 12% Debentures of G Ltd.
(iv) Interest on National Savings Certificate (VIII issue) due ` 3,860.
(v) ` 35,000; 7% Rajasthan Government Loan
(vi) ` 20,000; 7% Capital Investment Bonds.
The due dates of interest of all the above securities are 1st May and 1st November. Calculate income
from other sources for the AY 2020-21.
13. X holds the following securities on April 1, 2019:
` 10,00,000 5% UP Government loan (date of payment of interest : January 1),
` 40,000 6% Non-listed debentures of ABC Ltd. (dates of payment of interest: 11 June and
11 December every year).
` 25,000 8% debentures of PQR Ltd. (dates of payment of interest: 15 Jun and 15 December
every year).
On December 1, 2019, X sells ` 25,000 8% debentures of PQR Ltd. Calculate the taxable income of X for
the AY 2020-21 on the assumption that his business income is ` 5,64,000 and he has received a gift of ` 1
lakh in foreign currency from a friend on December 1, 2019 on his marriage anniversary.
14. R, a resident individual, submits the following particulars of his income for the year ended 31.3.2020:
(i) Royalty from a Diamond mine ` 20,000.
(ii) Agricultural income in Sri Lanka ` 15,000.
(iii) Salary as a MP ` 36,000
(iv) Daily allowance as M.P. ` 5,000
(v) He has taken a residential house has been taken on a rent of ` 10,000 p.a., half of which is sublet at
` 1,200 p.m.
(vi) Dividend received from a cooperative society ` 6,000.
(vii) He has incurred the following expenses —
i) Paid collection charges ` 200 for collecting dividends
ii) ` 2000 spent for earning and collecting royalty income
Compute R's income from other sources for the assessment year 2020-21
15. J furnishes the following particulars relating to his house properties and other incomes and
expenditure for the year 2019-20 (after HP Chapter):
A. First House: This house is taken by him on lease for 10 years which is let to a tenant, for his residence,
at a monthly rent of ` 2,400. He has incurred the following expenses during this year :
Lease rent ` 1,000 per month
Salary of Durban ` 200 per month
Interest on loan taken to pay for the acquisition of the lease ` 200 per month
B. Second House: This house was constructed by him in 1989, but was transferred to his wife in 1993 out
of love and affection. He, however, continues to stay in this house with his wife till date. He has taken a
loan for the construction of this house for which interest of ` 6,000 becomes due for the year, but had
not been paid by him. He has paid repair expenses of ` 1,000 during the year.
C. Taxable income from business for this year amounts to ` 64,000.
Compute gross total income of J for the AY 2020-21
CA Suraj Agrawal
IOS 5A. 4
16. Ms. Rupali furnishes the following details for the AY 2020-21:
Particulars Amount (`
`)
Net Agricultural Income in India 4,800
Net agricultural income from land in Sri Lanka 10,000
Profit on sale of agricultural land situated in Mangalore City 25,00,000
Vacant land – ground rent received 12,000
Rent received on sub – letting house 37,500
Rent payable for house sub let 15,000
Maintenance expenses on house sublet 1,200
Directors sitting fees 3,600
Interest on Deposits with nationalized bank 1,000
Interest on Postal savings – bank account 1,200
Interest credited to PPF account 6,000
Interest accrued but not received on NSC VIII Issue 1,050
Interest received under Post Office Monthly Income Scheme 12,000
Interest on deposits with HDFC 900
Interest on securities (gross) 5,000
Dividends received from Indian Companies 12,000
Bank Charges for collection of above dividend 100
Dividend received from foreign companies 1,100
Interest paid on amount borrowed to invest in shares of foreign co. 8,600
Gift received from a Charitable Institution registered u/s 12AA 55,000
Gift from a friend in foreign currency 50,001
Gift from another friend in Indian currency 500
Winnings from Lottery (Net of Tax of ` 30,000) 70,000
Cost of Lottery Tickets purchased during the year 5,300
Debenture Interest on 10% debentures of ABC Ltd. of Face Value of ` 1,00,000 (due half yearly on 30.9 and
31.3.) but received on 15.4.2020. Compute the taxable income from other sources of Ms. Rupali, who is
following mercantile system of accounting.
17. From the following particulars, compute Gross Total Income of Radha for AY 2020-21:
(i) She is employed on a part time basis in a fashion – designing firm on a monthly salary of ` 15,000.
(ii) She has a house property situated in Delhi which has been let out at a rent of ` 3,000 p.m.
(iii) She holds the following shares and securities:
a. 1,000 Equity shares in X Ltd. of ` 10 each, bought @ ` 40 per share.
b. ` 20,000, 8% ICICI Bonds.
c. 1,000,12% Preference shares of ` 100 each in Rosa Ltd. Dividend received on 25th March,
2020.
d. X Ltd. declared 18% equity dividend on 25th March, 2020, but the cheque was received
subsequent to 31st March, 2020. Other interest and dividends were, however, duly received.
(iv) She had set up a factory with building, plant, machinery, furniture, etc. However, she decided to give it
on hire at a composite rent of ` 12,000 p.m.
During the year, she spent ` 15,000 for repairs and ` 5,000 for insurance of the factory. The depreciation
allowable is ` 50,000. She had borrowed ` 5,00,000 against mortgage of these assets and paid ` 60,000
interest thereon. The amount was spent for marriage of her brother.
CA Suraj Agrawal
IOS 5A. 5
18. X, a resident ind., submits the following particulars of his income for the previous year ending March 31, 2020:
Name of payer company It is Date of Amount of tax Net 'Interest paid by
dividend declaration of Deducted under amount X on capital
under dividend section 194 paid to X borrowed to
section ` ` invest in shares
2(22)(e) `
A Ltd., a foreign company No July 15, 2019 Nil 70,000 3,000
B Ltd., a foreign company No April 1, 2019 Nil 43,000 50,000
C Ltd., an Indian company No October 31,2019 Nil 2,500 2,000
D Ltd., an Indian company Yes May 1, 2019 Nil 18,000 11,000
Rent from letting a factory along with plant and machinery (letting out of factory cannot be separated from
letting out of plant and machinery): ` 30,600. Collection charges in respect of rent: ` 400. Fire insurance
premium in respect of building: ` 600. Fire insurance premium in respect of plant and machinery: ` 750.
Repairs in respect of building: ` 4,600. Depreciation of building, plant and machinery: ` 18,600. Winnings
from lottery on December 1, 2019: net amount: ` 70,000; tax deducted at source: ` 30,000. Winnings from
card games: ` 13,500 (gross). Interest on securities issued by the Government of Japan: ` 30,670. During
the previous year, X has received the following gifts—
Gift from whom Date of gift Amount `
Gift from a friend August 20, 2019 1,00,000
Gift from a friend September 10, 2019 60,000
Gift from brother December 30, 2019 90,000
Gift from grandfather received by will October 1, 2019 1,40,000
Gift from friends at the time of marriage of X October 10, 2019 1,35,000
Gift from a friend September 20, 2019 20,000
Determine the income chargeable under the head "Income from other sources" for the AY 2020-21.
19. Sunder died on 23rd July, 2007 while being in Central Government service. In terms of rules governing his
service, his widow Mrs. Sunder is paid a family pension of ` 10,000 per month and dearness allowance of
40% thereof. State whether the amount of family pension is assessable in her hands, and if so, under what
head of income. Can she claim any relief/deduction on such receipt? Compute taxable income for the AY
2020-21 and tax thereon.
20. Mr. ‘M’ a Government Servant, died on 11.5.2007 whilst still being in service. In terms of the rules governing
his service, his widow Mrs. M, is paid, a Family Pension of ` 2,950 p.m. and Dearness Allowance of 30%
thereof. For the AY 2020-21, is Mrs. M assessable on the receipt and if so, under what head of income?
Is she entitled to any relief or deduction on the above sum? Discuss.
21. Mr. B, a defence personnel, was killed in a war. His wife was paid an ex-gratia payment of ` 1,00,000 in
February, 2020. She also received the family pension of ` 7,500 per month during the year 2019-20. Advise
her on the taxability of receipts.
22. Interest on enhanced compensation received by Mr. G during the previous year 2019-20 is ` 5,00,000. Out of
this interest, ` 1,50,000 relates to the previous year 2016-17, ` 1,65,000 relates to previous year 2017-18 and
` 1,85,000 relates to previous year 2018-19. Discuss the tax implication, if any, of such interest income
for AY 2020-21.
23. M/s. Rama InfoTech Ltd. has taken a Keyman insurance policy for a sum of ` 25 lakhs in the name of Mr.
Rakesh, who is heading the software division of the company. The annual premium paid by the company
towards the policy is ` 2 lakhs. Examine the tax consequence assuming that the maturity proceeds are
received by:
i) Mr. Rakesh;
ii) company;
iii) assigned to Mrs. Rakesh.
CA Suraj Agrawal
IOS 5A. 6
24. [Section 2(22)(e)] - Salt is the Managing Director of Salt & Sons (Private) Ltd. The Company has
accumulated profits to the extent of ` 5 Lakhs as on 31.3.2019. it grants a loan of ` 3 Lakhs to his wife on
1.6.2019 for the purchase of a house, which was repaid on 31.12.2019. No interest was charged on the said
loan by the Company. Examine the consequence of these transactions. Make assumptions as required.
25. [Section 2(22)(e)] - Tanmay ice-cream Pvt. Ltd. gives you the following details for the PY ended 31st
March 2020.
i) Paid up equity share capital is divided into shares of ` 10 each.
ii) Sarvashri Ray Gandhi, Dinesh Banka, Prasant Shroff and Tanmay Shah are registered shareholders,
each holding 10,000 equity shares fully paid up.
iii) Reserves of accumulated profits on 1st April, 2019 were ` 40 lacs.
iv) Current year's surplus was ` 10 lacs.
v) Current liabilities and provisions at year end amounted to `1 lac.
vi) Fixed assets consisted of only one item, viz., office buildings (at cost) of `11 lacs.
vii) Preliminary expenses not written off (at year end) ` 40,000.
viii) Loans and advances granted in the year and outstanding at year end were `13,60,000. These
included:
(a) Trade deposit of ` 1 lac given to Ray Gandhi. He supplied a 'softy' ice machine in April, 2019 and
the advance was adjusted against the cost of machinery supplied;
(b) Loan of ` 3 lacs given to Dinesh Banka on 10th January 2020, out of which ` 1 lac was repaid
by him on 30th March 2020.
(c) Loan of ` 3 lacs given to Smt. Kanta Prasant Shroff at the specific request of Shri Prasant Shroff;
Discuss the tax implications of the above transactions in the hands of:
(i) Shareholders and
(ii) Tanmay Ice – cream Private Ltd.
CA Suraj Agrawal
IOS 5B.1
SOLUTION – OTHER SOURCE

1. Computation of income under the head 'Income from other sources'
` `
General incomes [Section 56(1)]
Directors Fee from a Company 10,000
Interest on bank Deposits 3,000
Income from undisclosed source 12,000
Royalty on a book written by him 9,000
Less: Expenses 1,000 8,000
Lectures in Seminars 5,000
Interest on loan given to a relative 7,000
Interest on Debentures of a Company (listed in a
Recognized Stock Exchange) Net of Taxes (as per W.N. 1) 7,000
Interest on Post Office Savings Bank Account 500
Less: Exempt u/s 10 500 Nil
Interest on Government Securities 2,200
Interest on Monthly Income Scheme of Post office 33,000
Specific incomes [Section 56(2)]
Winnings from Lotteries (Net) 50,000
Income from other sources 1,37,200
Working Notes:
1. Interest on Debentures of a Company
(Listed in a Recognized Stock Exchange)
Net of Taxes ` 6,300
Add: TDS
` 6,300 x 10/(100 - 10) ` 700
Gross Amount ` 7,000
2. Computation of taxable income of Mrs. Rashmi from gifts for A.Y. 2020-21
Relationship Taxability Reason for taxability or otherwise of each gift
amount
`
Relatives and friends Exempt Gifts received on the occasion of marriage are not taxable.
Cousin of Mrs. Rashmi's mother 18,000 Cousin of Mrs. Rashmi's mother is not a relative. Hence, the
gift is taxable.
Employer Nil Taxable Under the head Salary
Elder brother of husband's 25,000 Brother of husband's grandfather is not a relative. Hence, the
grandfather gift is taxable.
Friend 2,000 Gift from friend is taxable.
Aggregate value of gifts 45,000
Since the aggregate value of gifts received by Mrs. Rashmi during the previous year 2019-20 does not
exceed ` 50,000, the same is not chargeable to tax under section 56(2)(x) of the Income-tax Act, 1961.
3. Computation of total income of Ram Mohan (All Amount in `)

Gift from his friend on his birthday 12,000
Gift from his fiancée 85,000
Gift from Ms mother's friend on his engagement 28,000
Gift from his sister Exempt
Dividends from shares of various companies (Exempt u/s 10(34)) Exempt 155,000
Total income 227,000
4. NIL [Does not exceed ` 50,000]
CA Suraj Agrawal
IOS 5B.2
5.
1. any sum of money received from relatives is fully exempt from tax and therefore, ` 1,00,000/- is fully
exempt.
2. exemption for any sum received from trust, institution is applicable only where such trust or institution is
covered by sections 10(23C) or 12AA. In the given case, entire sum of ` 50,000/- is chargeable to tax as
it is an unregistered charitable institution.
3. ` 1,50,000/- is chargeable to tax.
4. Any sum received in contemplation of death of the payer shall be exempt from
tax. Accordingly, ` 2,00,000/- shall be exempt.
5. To sum up, Mr. Ashok is chargeable to tax for a sum of ` 2,00,000/- under the head income from other
sources. The entire sum of ` 2,00,000/- is chargeable as the aggregate of the sum received during the
year exceeded ` 50,000/-.
6. Gifts' received on the occasion of marriage of an individual is fully exempt irrespective of whether the donors
are relatives or not. Therefore, Raman cannot be taxed in respect of the gifts received on the occasion of the
marriage. As regards land registered one month after marriage is not taxable because the gift has been
received from a relative.
7. Where an immovable property is acquired for a inadequate consideration, the same is covered in the scope of
taxability u/s 56. In the given case, difference of ` 30,00,000 will be taxable as a gift.
Whereas in the second transaction, the taxability does not arise as the assessable value of land is less than `
50,000 though the land is received without Consideration.
8.
` `
Income under the head salary
Salary ` 30,000 x 12 3,60,000
Add : Cash gift from employer 23,000
3,83,000
Less : Standard deduction u/s 16(ia) 50,000 3,33,000
(i) Gift from a friend is taxable 5,00,000
(ii) Gift of jewellery is taxable 4,00,000
(iii) Gifts received from her 4 friends are exempt as they
have been received on the occasion of her marriage —
(iv) Gift from her mother's sister is exempt as the donor is
covered in the definition of relative —
(v) Gift from her father's brother is exempt as the donor is
covered in the definition of relative —
(vi) Gift of ` 40,000 from her husband's friend on 1.11.2019
is taxable. 40,000
(vii) Gift of ` 21,000 from her mother's friend is includible 31,000
(viii) Gift from her brother's father in law is taxable as the donor
is not covered in the definition of relative 27,000
(ix) Gift from her husband's brother is exempt as the donor
is covered in the definition of relative —
(x) Gift from her employer is taxable as income from salary —
(xi) Gift in the form of scholarship from charitable
institution registered u/s 12AA Exempt
(xii) Purchase of immovable property – Not taxable -
9,98,000
CA Suraj Agrawal
IOS 5B.3
9. Mr. V has received cash and various items of property which are covered by section 56(2)(x). Hence, the
taxability of these amounts in view of said section is as follows -
Aggregate cash gifts exceeding ` 50,000 from Mr. X and Mr. Y (fully taxable, 30000 x 2) 60,000
Gift of Flat from Mr. B (fully taxable, as stamp value exceeds ` 50,000) 400,000
Gift of Flat from Mr. C (not taxable, as stamp value doesn't exceed ` 50,000) NIL
Plot of land acquired for inadequate consideration NIL
Aggregate value of gift of movable properties: Total value of gift of movable properties exceeds 65,000
` 50,000, hence, fully taxable. (30000 + 35000)
Aggregate value of inadequate consideration of movable properties: Total price paid for all 60,000
movable properties ` 12,50,000 (10 lakh + 2.5 lakh). Total Fair market value of such movable
properties ` 13,10,000 (10.3 lakh + 2.8 lakh). Since the difference between the two exceeds `
50,000, hence, whole of the difference will be included in income.
Total Income 585,000
10.
Date Transaction Amount Reason
`
April 10, 2019 Gift from A 25,000 As aggregate gift in cash or by cheque/draft during
FY 19-20 exceeds ` 50,000, it is chargeable to tax
May 1, 2019 Gift from A 500 As aggregate gift in cash or by cheque/draft during
FY 19-20 exceeds ` 50,000, it is chargeable to tax
June 1, 2019 Gift from cousin of X's father 26,000 Cousin of X's father is not a "relative" of X. As
aggregate gift in cash or by cheque/draft during FY
19-20 exceeds ` 50,000, it is chargeable to tax
July 18,2019 Gift from elder brother of X's 5,000 Brother of X's grandfather is not a "relative" of X. As
grandfather aggregate gift in cash or by cheque/draft during FY
19-20 exceeds ` 50,000, it is chargeable to tax
July 20, 2019 Gift from grandmother Nil Gift from a "relative" is not taxable
July 31, 2019 Gift on the occasion of Nil Gift from any person on the occasion of marriage of
marriage of X the taxpayer is not taxable
August 20, 2019 Gift from employer Nil Gift from employer is taxable under the head
"Salaries"
September 6, Gift from a charitable Nil Gift from a charitable institute is not taxable
2019 institute
September 30, Gift under a will Nil Gift received by taxpayer under a will of any person
2019 is not taxable
October 10, 2019 Gift in cash - ` 40,000 40,000 As aggregate gift in cash or by cheque/draft during
and March 31, FY 19-20 exceeds ` 50,000, it is chargeable to tax.
2020
December 13, Purchase of a work of art for 1,28,000 As a work of art (fair market value: ` 2,00,000) is
2019 ` 72,000 purchased for ` 72,000 and the difference is more
than ` 50,000, it is chargeable to tax
March 31, 2020 Gift by cheque ` 11,000 11,000 As aggregate gift in cash or by cheque/draft during
FY 19-20 exceeds ` 50,000, it is chargeable to tax.
11.
In situation (a) interest on securities is taxable on "due" basis. In situation (b), however, it is taxable on
"receipt" basis, as follows:
Situation Situation
(a) (b)
` `
Securities of Tamil Nadu Government (i.e., ` 1,48,000 x 10/100) 14,800 14,800
Non-listed debentures of ABC Ltd. [i.e., ` 40,000 x 5/100) 2,000 2,000
Central Government securities (i.e., instalment of interest due on
March 15, 2020, **not taxable in situation (b) as interest is not actually received) 1,500* —**
Gross interest 18,300 16,800
Less: Interest due* on ` 20,000 @ 7% per annum from August 1, 2019 to
March 31, 2020, **not deductible as it is not paid in the previous year 2019-20 933* —**
Interest 17,367 16,800
Business income 7,86,000 7,86,000
CA Suraj Agrawal
IOS 5B.4
Less : Deductions under sections 80C to 80U Nil Nil
Net income (rounded off) 8,03,370 8,02,800
12. Computation of income under the head other sources

`
(1) Interest on Government of India Loan 3,080
(2) Interest on 9% Tax free debentures (`
` 86000 * 9% i.e. ` 7,740 x 100/90) 8,600
(3) Interest on 12% Debentures 2,436
(4) Interest on NSC 3,860
(5) Interest on 7% Rajasthan Government Loan 2,450
(6) Interest on Capital Investment Bond NIL
20,426
13. UP Government loan (` ` 10,00,000 x 5/100) 50,000

Debentures of ABC Ltd. 2,400
Debentures of PQR Ltd. [interest accrued on June 15, 2019 (` `25,000 x 8/100 X 1/2] 1,000
Gift 1,00,000
Interest on securities taxable under the head "Income from other sources" 1,53,400
Business income 5,64,000
Less : Deduction Nil
Net income 7,17,400
14.
Income from other sources of Mr. R
1. Royalty from coal mine 20,000
Less : Collection charges 2,000 18,000
2. Agricultural Income in Sri Lanka 15,000
3. Salary as MP 36,000
4. Daily allowance 5,000
Less : Exempt 5,000 Nil
5. Dividend from a Co-operative Society 6,000
Less : Collection charge 200 5,800
6. Income from sub-letting 14,400
Less : Rent paid (50%) . 5,000 9,400
84,200
15.
Computation of Gross Total Income of J (amounts in `)
Income from House Property :
Net Annual Value of Self-occupied House II Nil
Less: Interest on accrual basis 6,000 (6,000)
Profits and Gains from Business or Profession 64,000
Income from other sources :
Rent of House I (2,400 x 12) 28,800
Less : Lease rent (1,000 x 12) (12,000)
Salary of Durban (200 x 12) (2,400)
Interest on loan taken to pay for the acquisition of the lease (200 x 12) (2,400) 12,000
Notes:
1. House II: J is deemed to be the owner of Hours II, as the same had been transferred to his wife without
adequate consideration. Hence the same is taxable in his hands.
2. House I: Since House I has been taken on lease for 10 year, therefore J is not deemed to be owner of
this house. Deemed ownership arises when the lease is taken for 12 years or more. Therefore, income for
House I is other sources income.
CA Suraj Agrawal
IOS 5B.5
16. Computation of income from other sources of Ms. Rupali
Particulars Refer ` `
Note
Net Agricultural Income in India 1 Nil
Net agricultural income from land in Sri Lanka 2 10,000
Profit from sale of agricultural land situated in Mangalore City 3 N.A.
Vacant land -ground rent received 4 12,000
Rent received on sub-letting house 37,500
Less: Rent payable for house sub let (15,000)
Maintenance expenses on house sublet (1,200) 21,300
Directors sitting fees 3,600
Interest on Deposits with nationalized bank 1,000
Interest on Postal savings bank account 5 Nil
Interest credited to PPF account 6 Nil
Interest accrued but not received on NSC VIII Issue 12 1,050
Interest received under Post Office Monthly Income Scheme 12,000
Interest on deposits with HDFC 900
Dividends received from Indian Companies 7 Nil
Dividend received from foreign companies 8 1,100
Less: Interest paid on amount borrowed (8,600) (7,500)
Gift received from a Charitable Institution registered under section 12AA – 9 Nil
Exempt Sec. 56(2)(x)
Gift from a friend in foreign currency 50,001
Gift in Indian currency 500 50,501
Winnings from Lottery (gross) 10 1,00,000

Debenture Interest on 10% debentures of ABC Ltd. of Face Value of ` 1 11
lakh. 10,000
Taxable income from other sources 2,19,851
Notes:
1. Agricultural income derived from land situated in India is exempt from income tax u/s. 10(1).
2. Agricultural income from land situated outside India is not covered by exemption u/s. 10(1) and therefore,
` 10,000 agricultural income from Sri Lanka is taxable.
3. Agricultural income derived in India is exempt. However, sale of agricultural land in a specified area is
covered by definition of capital asset u/s. 2(14). Therefore, such gains shall be subject to tax under the
head "Capital gains". As it is not taxable under the head "Income from other sources" it is not included in
the computation.
4. Rent received from letting out of land and sub-lease is not chargeable to tax under the head "Income from
House Property". However, it is taxable under income from other sources. Accordingly, expenses in
connection with earning this income have been claimed as deduction u/s. 57.
5. Interest on postal saving bank account is exempt u/s. 10(15)(i)
6. Interest of ` 6,000 is claimed as exemption u/s 10(15).
7. Dividend received from companies which are subject to dividend distribution tax are exempt u/s. 10(34).
Therefore, ` 12,000 claimed as exemption. However, expenses incurred in connection with any income,
which are exempt from tax, are not deductible by virtue of Sec. 14A. Hence, ` 100, relating to collection
charges cannot be claimed as deduction.
8. Dividend from foreign companies is subject to tax as these are not liable to dividend distribution tax
u/s.115-0. The related expenditure is allowable as deduction u/s. 57.
9. Gift received from charitable institutions/associations which are covered by exemption u/s. 10(23C) or
Sec.11, are exempt- Sec. 56(2)(x).
10. Gift received from non-relatives aggregate of which does not exceed ` 50,000 are not chargeable to tax.
In the given case, the amount of gift received is ` 50,501. Therefore, the whole of such gift is chargeable
without any exemption.
11. Any expenditure incurred in relation to lottery winnings are not allowable as deduction u/s. 58. Therefore,
` 5,300 is not allowable as a deduction.
12. Interest accrued and due on NSC and debentures are taxable even though assessee has not received
such interest, since she is following mercantile system of accounting.
CA Suraj Agrawal
IOS 5B.6
17.
Computation of Gross Total Income of Radha (amounts in `)
Income from Salaries (15,000 x 12 – 50,000) 130,000
Income from House Property (Rent of 3,000 x 12 - 30% Standard deduction) 25,200
Interest on 8% ICICI Bonds (20,000 x 8%) 1,600
Dividend on 12% Preference shares of Rosa Ltd. Exempt
Dividend on 18% equity shares of X Ltd. Exempt
Composite rent of Building, Plant and Machinery etc. (12,000 x 12) 144,000
Less : Expenses on repairs and insurance of the factory (20,000)
Less: Depreciation allowable (50,000) 74,000
18. Dividend ` `
A Ltd. 70,000
B Ltd. 43,000
C Ltd. (exempt) Nil
D Ltd. (exempt) NIL
Total 1,13,000
Less : Interest on borrowed capital (` `3,000 + `50,000 + Nil + Nil) 53,000 60,000
Rent received 30,600
Less : Expenses
Collection charges 400
Insurance (i.e., `600 + `750) 1,350
Repairs 4,600
Depreciation 18,600 5,650
Winnings from lottery
Net amount 70,000
Add : Tax deducted at source 30,000 1,00,000
Winnings from card games 13,500 1,13,500
Interest on securities of a foreign Government 30,670
Gift
Gift received on August 20, 2019 1,00,000
Gift received from a friend on September 10, 2019 60,000
Gift from brother (gift from a relative is not taxable) Nil
Gift by will (gift received by will is not taxable) Nil
Gift received at the time of marriage (it is not taxable) Nil
Gift from a friend 20,000
Total 1,80,000
As the amount exceeds ` 50,000, it is chargeable to tax 1,80,000
19. Family pension is chargeable to tax under the head 'Income from other sources'. It is chargeable to tax as
follows -
Family pension (10,000 x 12 + 40% of 10,000 x 12) 168000
Less: Deduction being lower of - (a) 1/3rd of family pension or (b) 15,000 15000
Income from other sources/Total Income 153000
Tax liability NIL
20. ` 46,020 – ` 15,000 = ` 31,020.
21. The family pension of ` 90,000 (`` 7,500*12) received by the widow is exempt by virtue of section 10(19) as
the death has occurred in course of operational duties and assuming that he died in prescribed
circumstances. If he does not died in prescribed circumstances, family pension shall be chargeable to tax to
the extent of ` 75,000 (`
` 90,000- `15,000, by virtue of section 57(iia)).
According to CBDT Circular, any lump sum ex-gratia payment by the Central or state Government or local
authority or public sector undertaking, to the widow or other legal heirs of an employee, who dies while in
active service will not be taxable as income. Hence, ` 1,00,000 is not taxable.
22. IOS – ` 500,000 less 50% of ` 250,000 = ` 250,000
CA Suraj Agrawal
IOS 5B.7
23. Section 2(24) treats the maturity proceeds of the Keyman insurance policy as income in the hands of the
recipient. Exemption provided u/s.10(10D) for life insurance policy maturity proceeds is not available to
Keyman insurance policy proceeds. The tax consequence in all the 3 cases shall be as under:
i) If the maturity proceeds are received by Mr. Rakesh, the same will be treated as profits in lieu of salary
U/S. 17(3) and chargeable to tax under the head "Salaries".
ii) If the maturity proceeds are realized by the company it is treated as business income and chargeable to
tax u/s. 28.
It requires mention that, the company is entitled to deduction in respect of premium paid every year as
business expenditure in the respective year.
iii) If the maturity proceeds are received by Mrs. Rakesh, the same will be treated as her income and
charged to tax under the head 'Income from other sources' by virtue of Sec. 56.
24.
1. U/s 2(22)(e), payment of any sum by a Company in which the public are not substantially interested, by
way of Advance or Loan, to the extent the Company possesses accumulated profits, to a Shareholder,
who is the beneficial owner of Shares with not less than 10% voting power, shall be deemed to be
dividend.
2. In view of the above, if Mrs. Salt is a beneficial owner of not less than 10% of voting power, then the
amount of ` 3 Lakhs so paid to her shall be treated as Deemed Dividend u/s 2(22)(e).
3. If Mr. Salt holds 10% or more of the voting power, then the amount received shall be treated as Deemed
Dividend in his hands.
25. (i) Tax implications of the transactions in the hands of Shareholders -

(a) Trade deposit for supply of machinery cannot be deemed as dividend u/s 2(22)(e), as the same is
not loan or advance to shareholder as ordinarily understood. Therefore, it is not a deemed
dividend.
(b) ` 3 lakhs loan to Dinesh is deemed dividend u/s 2(22)(e) in his hands and is, therefore, exempt in
his hands. The fact that some part of the loan has been repaid would not change the taxability.
(c) ` 3 lakhs loan to Kanta at the request of shareholder Prasant is deemed to be dividend in case of
Prasant and, therefore, it is Exempt in the hands of Prasant
(ii) W.e.f. AY 19-20, the dividends referred to in section 2(22)(e) are exempt in the hands of the
shareholders.
From AY 19-20, they are now liable to dividend distribution tax in the hands of the company. In case of
deemed divided u/s 2(22)(e), Tax Rate (DDT) is 30% (without grossing up) + SC@12% + 4% cess.
CA Suraj Agrawal
IOS 5B.8
Class Notes
CA Suraj Agrawal
Capital Gain 6.1
INCOME UNDER THE HEAD OF “CAPITAL GAINS”

[Sections: 45 to 55A]
SEC. 45(1) – CHARGING SECTION
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 Gain” and Shall be deemed to be the income of
Previous Year in which the transfer took place.
DEFINITION OF CAPITAL ASSET [Section 2(14)]

Capital asset includes
(a) property of any kind held by an assessee, whether or not connected with his business or profession,
(b) any securities held by a Foreign Institutional Investor (FII) which has invested in such securities as
per SEBI Regulations
but excludes
any stock-in-trade (other than securities referred in (b) above), consumable stores or raw materials held
for the purpose of the business or profession of the assessee;
PERSONAL EFFECTS, that is to say, movable property (including wearing apparel and furniture) held for
personal use by the assessee or any member of his family dependent on him,
Excluding (i.e. these are capital Assets):
a) Jewellery b) Drawings c) Sculptures
d) Archaeological Collections e) Paintings f) Any work of art
Agricultural land situated in Rural Area
Specified Gold Bonds, Special Bearer Bonds 1991, Gold Deposit Bonds 1999 or Deposit Certificates
issued under the Gold Monetisation Scheme 2015 notified by the CG
Definition of Rural Area:

Rural area means any area which is outside the jurisdiction of a municipality or cantonment board having a
population of 10,000 or more and also which does not fall within distance given below –
Population according to the last preceding census of which
Shortest aerial distance from the local limits of the relevant-figures have been published before the first
municipality/ cantonment board day of the previous year
2 km If the population is more than 10,000 but not more than 1 lakh
If the population is more than 1 lakh but not more than 10 lakh
6 km
If the population is more than 10 lakh
8 km
CA Suraj Agrawal
Capital Gain 6.2
Examine the taxability under the head CG in following independent cases for AY 2020-21:
(a) Mr. A sells gold deposit bonds on 1-7-2019 for ` 11 lakh. The bonds were acquired on 1-3-2007 for
` 7,50,000.
(b) Mrs. B, a painter, sells the paintings made by him for ` 45 lakhs on 1-10-2019.
(c) Mr. X, a jewellery dealer, sells jewellery on 1-7-2019 for ` 15,30,000, which was acquired on 1-5-2011 for
` 9,35,000.
(d) Mr. Y sells his personal furniture on 1-6-2019 for ` 40,000, which was acquired on 1-7-2010 for ` 90,000. The
expenses on transfer are 2% of selling price.
(e) Mr. Z sells his personal residential house on 01-04-2020 for ` 12,50,000, which was acquired by him on 1-4-
2007 for ` 7,50,000.
Treatment of Agricultural Land

The Explanation to Section 2(1A) clarifies that Capital Gains arising from transfer of any agricultural land situated
in any non-rural area (Urban Area) will not constitute agricultural revenue within the meaning of Section 2(1A) for
the purpose of exemption under section 10(1). Hence, such gains would be liable to tax under Section 45.
DEFINITION OF TRANSFER [SECTION 2(47)]

“TRANSFER”, IN RELATION TO A CAPITAL ASSET, INCLUDES:
i) Sale, Exchange or Relinquishment of the asset or Extinguishment of any rights therein; or
ii) Reduction of Share Capital; or
iii) Compulsory Acquisition thereof under any law; or
iv) Conversion of Capital Asset into Stock In Trade [SIT] of a business; or
v) Maturity or Redemption of a Zero Coupon Bond; or
vi) Allowing of the possession of any immovable property in part performance of a contract u/s. Also Refer
53A of the Transfer of property Act; 1882 [Part-performance of the contract]; or Section 27
vii) Any transaction (whether by way of becoming a member of, or acquiring shares in, a co- of the HP
operative society, company or other AOPs or by way of any agreement or any arrangement
or in any other manner whatsoever) which has the effect of transferring or enabling the
enjoyment of any immovable property.
[POH will be counted from date of allotment of shares/membership and not from the date of
allotment of immovable property]
TAX POINTS:
Redemption of Preference Shares:

a) Redemption of Preference Shares by the Company is a relinquishment of ownership by the Shareholder
and the same is regarded as Transfer u/s 2(47).
b) The nature of Capital Gain on such redemption depends upon the holding period of the Shareholder.
CA Suraj Agrawal
Capital Gain 6.3
NATURE OF CAPITAL ASSETS
Section 2(42A) defines Short-Term Capital Asset as a capital asset held by an assessee for not more
than 36 months (Period of Holding) immediately preceding the date of its transfer.
However, in case of following financial assets the above period of 36 months is replaced by 12 months:
a) A Securities (other than Unit) listed in a recognized stock exchange in India;
b) Units of an Equity Oriented Fund;
c) Units of UTI / Zero Coupon Bond;
In case of Unlisted equity shares; Land or Building or Both, period of 36 months is replaced by 24
Months.
Section 2(29A) defines Long Term Capital Asset as a capital asset which is not Short Term Capital Asset.
Therefore, a capital asset held by an assessee for more than 36 months (or 24 months/12 months as the
case may be) immediately preceding the date of its transfer is a long-term capital asset.
Tax Points:
a) An asset held exactly for 36/24/12 months will be a STCA.
b) For computing the period of 36/24/12 months, the date on which the asset was acquired is to be included
while the date on which the asset is transferred is to be excluded.
c) In the case of transfer of a depreciable asset (WDV Method), Capital Gain (if any) is taken as STCG,
irrespective of period of holding.
TYPE OF CAPITAL GAINS

Short-Term Capital Gains: Gain arising on transfer of STCA [Section 2(42B)]
Long-Term Capital Gains: Gain arising on transfer of LTCA [Section 2(29B)]
Cost Of Acquisition:
Cost of Acquisition of assets is the value for which it was acquired by the assessee. Expenses of capital nature for
completing or acquiring the capital assets are includible in the COA. COA will include the followings:
(a) Purchase Price (b) Registration charges
(c) Brokerage/Commission paid on acquisition of assets (d) any other expenses of similar nature
Cost of Improvement:
COI is capital expenditure incurred by an assessee in making any additions/improvement to the capital assets. It
also includes any expenditure to protect or complete the title to the capital assets or to cure such title. In other
words, any expenditure incurred to increase the value of the capital asset is treated as COI.
CA Suraj Agrawal
Capital Gain 6.4
Class notes
COST INFLATION INDEX
F/Y CII F/Y CII
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
2019-20 289
CA Suraj Agrawal
Capital Gain 6.5
SECTION 48 - MODE OF COMPUTATION OF CAPITAL GAINS
Computation of Short Term Capital Gains
Full value of Consideration xxxx
Less: Expenditure incurred wholly and exclusively in connection with such a xxxx
transfer [Cost of Transfer - COT]
Net Sales Consideration xxxx
Less: Cost of Acquisition (as defined in Section 49, 51 and 55) [COA] xxxx
Less: Cost of Improvement [COI] xxxx xxxx
Gross Short Term Capital Gain xxxx
Less: Exemption u/s 54B Xxxx
Taxable STCG Xxxx
Computation of Long Term Capital Gains [Indexation]

Full value of Consideration Xxxx
Less: Expenditure incurred wholly and exclusively in connection with such a Xxxx
transfer [COT]
Net Sales Consideration Xxxx
Less: Indexed Cost of Acquisition [ICOA] xxxx
Less: Indexed Cost of Improvement [ICOI] xxxx Xxxx
Gross Long Term Capital Gain Xxxx
Less: Exemption U/s 54 / 54B / 54EC /54EE / 54F / 54GB Xxxx
Taxable LTCG Xxxx
Note: Benefit of Indexation is available only in case of Long-Term Capital Assets.
CII for the year in which asset is transferred

ICOA means = COA × ------------------------------------------------------------------------------
CII for the P.Y. in which the asset was first held by the assessee
or
CII for the year of 2001-02, whichever is later.
However as per the view expressed by Bombay High Court in CIT v. Manjula J. Shah, in case the cost
of acquisition of the capital asset in the hands of the assessee is taken to be cost of such asset in the
hands of the previous owner, the indexation benefit would be available from the year in which the
capital asset is acquired by the previous owner.
CII for the year in which asset is transferred

ICOI means = COI × -------------------------------------------------------------------------------------
CII for the year in which the improvement to the asset took place
Cases where Benefit of Indexation is Not Available even in case of Long-Term Capital Assets:
a) Transfer of a bond or a debenture other than Capital Indexed Bonds issued by the Government OR
Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond Scheme 2015. (Index benefit is
available on transfer on sovereign gold bond)
b) Transfer of undertaking or division in a Slump Sale under Section 50B.
c) Transfer of shares/debentures of an Indian company purchased by a Non-Resident in foreign currency.
d) Transfer of Depreciation Assets (other than an asset used by a power generating unit eligible for
depreciation on SLM basis),
CA Suraj Agrawal
Capital Gain 6.6
Class notes
CA Suraj Agrawal
Capital Gain 6.7
COA IN CASE OF FOLLOWING INTANGIBLE ASSETS [SECTION 55(2)(a)]:
a) Goodwill of a business d) Tenancy rights
b) Right to carry on any business e) Trade mark or brand name associated with a
business
c) Right to manufacture, produce / process f) Stage carriage permits (Route Permits)
any article or thing
g) Loom Hours
If above assets are Self Generated: COA shall be NIL

IMPORTANT
If any other case: COA shall be purchase price.
In case of any other intangible assets:

If the assets are Self Generated COA of self generated assets will be INDERMINATE.
Therefore, no capital gains will arise.
Example: On sale of Goodwill of Profession

[Supreme Court - B. C. Srinavasa Setty]
If any other case COA shall be purchase price.
Example:
On January 31, 2020, Mr. A has transferred self-generated goodwill of his profession for a sale
consideration of ` 70,000 and incurred expenses of ` 5,000 for such transfer. You are required to
compute the capital gains chargeable to tax in the hands of Mr. A for the A.Y. 2020-21.
Solution
The transfer of self-generated goodwill of profession is not chargeable to tax. It is based upon the Supreme
Court’s ruling in CIT vs. B.C. Srinivasa Shetty.
COA WHEN THE ASSET IS ACQUIRED BEFORE 01/04/2001 [SECTION 55(2)(b)]
When an asset has been acquired by the

(a) assessee or
(b) by the previous owner from whom the asset was acquired by the assessee u/s 49(1),
before 01/04/2001, the assessee has an option to take either the actual COA or FMV of the asset as on
01/04/2001 to be the COA for computation of CG. [Higher will be preferred]
The option is however not available in respect of the following items:

(a) Goodwill of a Business or Trade Mark/Brand name associated with a business or Right to Manufacture,
produce or process any article or thing or Right to carry on any Business, Tenancy Rights, Stage
Carriage Permits or Loom Hours (Hours granted by govt. to weave yarn or thread) &
(b) Depreciable Assets
COST OF IMPROVEMENT [COI] - [SECTION 55(1)]

a) Any COI incurred by the Assessee/Previous Owner is to be considered.
b) Any COI incurred before 01-04-2001 is to be completely ignored.
c) COI in respect of following assets is taken at NIL: IMPORTANT
Goodwill of Business;
Right to manufacture, produce or process any article or thing;
Right to carry on any business.
CA Suraj Agrawal
Capital Gain 6.8
Class notes
CA Suraj Agrawal
Capital Gain 6.9
SECTION 51 - ADVANCE MONEY RECEIVED & FORFEITED
Where any capital asset was, on any previous occasion, the subject matter of negotiations for its transfer and any
advance or other money received is forfeited (retained) by the Assessee, then the amount so forfeited shall be
deducted from,
The cost for which the asset was acquired, or
The FMV as on 1.4.2001 where FMV as on 1.4.2001 has been taken as COA, or
The WDV in case of depreciable assets
as the case may be, in computing the COA.
NOTES:
• Amount forfeited either before or on/after 1.4.2001 is to be deducted as per section 51
• Amount forfeited on or after 01/04/2014, will not be deducted under this Section, but it will be taxable
as IOS as per New Section 56(2)(ix)
• Amount forfeited by previous owner is not to be deducted as per 51
• Travancore Rubber & tea Co. ltd (SC): if the money forfeited exceeds the cost, the cost shall be reduced to
the extent it becomes NIL, the excess shall be a Capital Receipt not taxable.
Advance forfeited due to failure of negotiations for transfer of a capital asset to be

taxable as “Income from other sources” [Section 56(2)(ix)]
(i) With effect from A.Y. 2015-16, new clause (ix) has been inserted in section 56(2) to provide for the taxability
of any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a
capital asset. Such sum shall be chargeable to income-tax under the head ‘Income from other
sources’, if such sum is forfeited and the negotiations do not result in transfer of such capital asset.
(ii) Section 51 has been amended to provide that where any sum of money received as an advance or otherwise
in the course of negotiations for transfer of a capital asset, has been included in the total income of the
assessee for any previous year, in accordance with section 56(2)(ix), such amount shall not be deducted
from the cost for which the asset was acquired or the written down value or the fair market value, as the
case may be, in computing the cost of acquisition.
Question:
Mr. K purchases a house property on April 10, 1998 for ` 35,000. The FMV of the house property on April 1, 2001
was ` 70,000. On August 31, 2004, Mr. K enters into an agreement with Mr. J for sale of such property for
` 1,20,000 and received an amount of ` 10,000 as advance. However, as Mr. J did not pay the balance amount,
Mr. K forfeited the advance. In May 2007, Mr. K constructed the first floor by incurring a cost of ` 50,000.
Subsequently, in September 2007, Mr. K gifted the house to his friend Mr. D. On February 10, 2020, Mr. D sold
the house for ` 30,00,000.
You are required to compute the capital gains taxable in the hands of Mr. D for the AY 2020-21.
Question:
Mr. X purchases a house property in December 1995 for ` 1,25,000 and an amount of ` 75,000 was spent on the
improvement and repairs of the property in March 2001. The property was proposed to be sold to Mr. Z in the
month of May 2003 and an advance of ` 40,000 was taken from him. As the entire money was not paid in time,
Mr. X forfeited the advance and subsequently sold the property to Mr. Y in the month of October 2019 for
` 54,00,000. The fair value of the property on April 1, 2001 was ` 3,90,000.
What is the capital gain chargeable in the hands of Mr. X for the AY 2020-21?
Section 50D – FMV as a Full Value of Consideration

Fair market value of the capital asset on the date of transfer to be taken as sale consideration, in cases where
the consideration is not determinable.
CA Suraj Agrawal
Capital Gain 6.10
SECTION 50C – SALE CONSIDERATION IN SPECIAL CASES
Where the consideration received (as declared) for LAND OR BUILDING OR BOTH is LESS THAN the value
adopted or assessed or assessable by Stamp Valuation Authority (SVA) then, sales consideration shall be
taken to be the value so adopted or assessed or assessable by SVA.
Where the date of the agreement fixing the amount of consideration and the date of registration for the transfer of
the capital asset are not the same, the value adopted or assessed or assessable by the stamp valuation authority
on the date of agreement may be taken for the purposes of computing full value of consideration for such
transfer if amount of consideration, or a part thereof, has been received by way of an account payee cheque or
account payee bank draft or by use of electronic clearing system through a bank account or through such other
electronic modes as may be prescribed, on or before the date of the agreement for transfer.
FA 18 - Where the value adopted or assessed or assessable by the stamp valuation authority does not
exceed 105% of the consideration received or accruing as a result of the transfer, the consideration so
received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be
the full value of the consideration.
REFERENCE TO VALUATION OFFICER:

Where the assessee can claim that the value adopted or assessed or assessable by stamp valuation
authority is greater than the FMV of the property as on the date of transfer;
and value so adopted / assessed or assessable by the Stamp Valuation Authority is not disputed (i.e.
challenged) in any appeal / revision before any authority or Court.,
then A.O. may refer the case to a Valuation Officer for valuation of the capital asset.
Different situation Consideration
Value adopted / assessed or assessable
Value adopted / assessed or assessable
> by the SVA
by the SVA
Value adopted or assessed or

Where value Value ascertained by a valuation officer
assessable by the SVA but more than
ascertained
by a valuation
< 105% of declared value
Under Section 55A
officer
Section 50C is not attracted. Therefore,
Declared value in the ROI or 105% of declared value in the ROI will be sales
< declared value consideration.
SECTION 50CA – SALE CONSIDERATION IN CASE OF TRANSFER OF UNLISTED SHARES

Where the consideration received or accruing as a result of the transfer by an assessee of a capital
asset, being share of a company other than a quoted share, is less than the fair market value of
such share determined in such manner as may be prescribed, the value so determined shall, for the
purposes of section 48, be deemed to be the full value of consideration received or accruing as a
result of such transfer.
Explanation-
For the purposes of this section, "quoted share" means the share quoted on any recognised stock
exchange with regularity from time to time, where the quotation of such share is based on current
transaction made in the ordinary course of business.
The provisions of this section would, however, not be applicable to any consideration received
or accruing as a result of transfer by such class of persons and subject to such conditions as
may be prescribed. [Added by Finance (No. 2) Act 2019] – similar amendment is inserted in
Section 56(2)(x)
CA Suraj Agrawal
Capital Gain 6.11
EXEMPTED TRANSFER [Section 47] – SOME SPECIAL CASES
HUF - Taxability of Distribution of Capital Assets on the Total / Partial Partition of HUF
1. Distribution of Capital Asset in total or partial partition of HUF is not considered as transfer and not chargeable
to capital gain tax. [Section 47(i)]
2. Holding Period in the hands of the Transferee for the purpose of subsequent transfer [Sec 2(42A)]:
Previous owner’s holding period shall be included.
3. Cost in the hands of Transferee [Sec 49]: Cost to Previous owner
Example: Mr. X & sons, HUF, purchased a land for ` 40,000 in 2004-05. In 2009-10, a partition takes place
when Mr. A, a coparcener, is allotted this plot valued at ` 80,000. In 2012-13, he had incurred expenses of
` 1,85,000 towards fencing of the plot. Mr. A sells this plot of land for ` 15,00,000 in PY 2019-20 after
incurring expenses to the extent of ` 20,000. You are required to compute the capital gain for the A.Y.
2020-21.
Financial year Cost Inflation Index
2004-05 113
2009-10 148
2012-13 200
2019-20 289
Solution: Computation of taxable capital gains for the A.Y. 2020-21

Particulars ` `
Sale consideration 15,00,000
Less: Expenses incurred for transfer 20,000
Less: 14,80,000
(i) Indexed cost of acquisition (` 40,000 × 289/148) 78,108
(ii) Indexed cost of improvement (` 1,85,000 × 289/200) 2,67,325 3,45,433
Long term capital gains 11,34,567

Note - As per the view expressed by Bombay High Court in CIT v. Manjula J. Shah, in case the cost of acquisition
of the capital asset in the hands of the assessee is taken to be cost of such asset in the hands of the previous
owner, the indexation benefit would be available from the year in which the capital asset is acquired by the
previous owner. If this view is considered, the indexed cost of acquisition would have to be calculated by
considering the Cost Inflation Index of F.Y.2004-05.
GIFT - Taxability of Transfer of Capital Assets under Gift / Will/ Irrevocable Trust
(A) Transfer of Capital Asset under Gift / Will/ Irrevocable Trust is not considered as transfer and not
chargeable to capital gain tax Under Section 47(iii) in the hands of Transferor.
a) Conditions to be fulfilled: Capital Assets other than Shares, Debentures or Warrants allotted directly
or indirectly under ESOP shall be transferred.
b) Holding Periods in hands of the Transferee in case of subsequent transfer [Sec 2(42A)]: Previous
owner’s holding period shall be included.
c) Cost in the hands of Transferee [Sec. 49]: Cost to Previous Owner.
(B) COA/POH for Transferee where GIFT is taxable u/h IOS:

COA [Section 49(4)]: However where the capital gain arises from the transfer of a property, the value
which has been subject to Income-Tax under section 56(2)(x) in the hands of recipient, the COA of such
property shall be deemed to be the value [FMV/SDV] which has been taken into account for the purpose of
the said Section 56(2)(x). [Previous owner cost has to be ignored]
POH: Further, POH in the hands of transferee will be started from the date of Gift in the hands of
transferee.
CA Suraj Agrawal
Capital Gain 6.12
Class notes
CA Suraj Agrawal
Capital Gain 6.13
TAXABILITY OF TRANSFER BY WAY OF CONVERSION OF BONDS/DEBENTURES ETC. OF A
COMPANY INTO SHARES/DEBENTURES OF THAT COMPANY:
1. Such transfer is exempted transfer u/s 47(x).

2. COA of such shares / debenture for subsequent transfer: Cost of that part of the debenture, bond,
debenture stock or deposits certificate, which is so converted.
3. POH of such converted shares or debentures shall include the period for which the bond, debentures etc
was held by the assessee before conversion.
Example: Mr. B purchased convertible debentures for ` 5,00,000 during August 2008. The debentures
were converted into shares in September 2012. These shares were sold for ` 15,00,000 in August, 2019.
The brokerage expenses is ` 50,000. You are required to compute the capital gains in case of Mr. B for the
assessment year 2020-21.
Financial Year Cost Inflation Index
2008-09 137
2012-13 200
2019-20 289
Solution:
Computation of Capital Gains of Mr. B for the A.Y. 2020-21
Particulars `
Less: Expenses on transfer i.e. Brokerage paid 50,000
Net consideration 14,50,000
Less: Indexed cost of acquisition (` 5,00,000 × 289/200) 7,22,500
Long term capital gain 7,27,500
Note : For the purpose of computing capital gains, the holding period is considered from the date of purchase
of convertible debenture.
Taxability of Transfer of artistic work etc to the Government etc [Section 47(ix)]
Any Transfer of artistic work, scientific work or art collection, book, manuscript, drawing, painting photographs
printings etc., to the Govt. or University or National Museums Or National Art Gallery or any other notified
public museum / institution is EXEMPTED TRANSFER.
TAXABILITY OF SUBSEQUENT TRANSFER OF GOLD (received in exchange of Gold Bonds)

Exchange of Gold Bonds for Gold on redemption does not attract Capital Gains. However, in case of
subsequent sale of such gold, Capital Gain is chargeable to tax. For this purpose,
Date of acquisition = Date of Redemption of Gold Bonds.
Cost of acquisition of Gold = Market Value of the Gold on the Date of Redemption.
ESOP: TAXABILITY OF TRANSFER OF SPECIFIED SECURITY/SWEAT SHARES ALLOTED
A. COA: Where the capital gain arises from the transfer of specified security or sweat equity shares allotted
under ESOP Scheme as referred to section 17(2)(vi), the COST OF ACQUSITION of such SECURITY or
SHARES Shall be the FMV which has been taken into account for the purposes of section 17(2)(vi)
[Section 49(2AA)]
B. POH: From the date of allotment or transfer of such specified security or sweat equity shares.
CA Suraj Agrawal
Capital Gain 6.14
ASCERTAINMENT OF COST IN SPECIFIED CIRCUMSTANCES

SECTION 49(1) : DEEMED COST OF ACQUISITION
If the asset was acquired from the previous owner under any of the following mode, then the cost to the previous
owner shall be deemed COA of the asset in the hands of the assessee:
(a) On the total / partial partition of a HUF;

(b) Under Gift / Will
(c) By way of Succession / Inheritance / Devolution;
(d) Under a transfer to a revocable or an irrevocable trust;
(e) On a transfer by a 100% Indian Subsidiary Co. to its Holding Co. or vice versa;
(f) In a scheme of amalgamation of two Indian / foreign companies;
(g) On conversion of self acquired property of a member of a HUF to the joint family property.
(h) On any Transfer in a scheme of conversion of Private / Unlisted Public Co. into LLP which comes u/s 47(xiiib)
……………………………………………………
NOTE:
a) POH: If asset acquired by the Assessee u/s. 49(1), then, include the POH for which the asset was held
by the previous Owner
b) Previous owner means the last previous owner of the capital asset, who acquired it through the mode of
acquisition other than referred above.
COA IN CASE OF FINANCIAL ASSETS

Capital asset Cost Of Acquisition POH Will Start From
Shares/securities originally purchased

from:
Primary Market (Direct from Company) Allotment price Date of Allotment
Secondary Market
• Transaction through brokers Purchase price + Date of Broker’s note
Brokerage
• Transaction between parties directly Purchase price Date of Contract of sale
Right Share / Securities

Offer price by the Co. Date of Allotment
Renouncement of right:
For the person who renounces the right. Nil Date of offer
For the person who purchased the right. Offer price + Amount paid Date of Allotment
for Renouncement
Bonus shares / Securities Nil Date of Allotment
Note:
The option to take FMV as on 01-04-2001 as COA is available if such assets were acquired before 01-04-
2001. [Even in case of Bonus shares]
CA Suraj Agrawal
Capital Gain 6.15
Example:
Ms. Usha purchases 1,000 equity shares in X Ltd. at a cost of ` 15 per share (brokerage 1%) in January
1998. She gets 100 bonus shares in August 2000. She again gets 1100 bonus shares by virtue of her
holding on February 2005. Fair market value of the shares of X Ltd. on April 1, 2001 is ` 25. In January
2020, she transfers all her shares @ ` 150 per share (brokerage 2%). Compute the capital gains taxable in
the hands of Ms. Usha for the A.Y. 2020-21 assuming X Ltd is an unlisted company and securities
transaction tax was not applicable at the time of sale.
Cost Inflation Index for F.Y.2001-02 : 100, F.Y. 2004-05 : 113 & F.Y. 2019-20 : 289
Solution
Computation of capital gains for the A.Y. 2020-21
Particulars `
1000 Original shares
Sale proceeds (1000 × ` 150) 1,50,000
Less : Brokerage paid (2% of ` 1,50,000) 3,000
Net sale consideration 1,47,000
Less : Indexed cost of acquisition [` 25 × 1000 × 289/100] 72,250
Long term capital Gain (A) 74,750
100 Bonus shares

Sale proceeds (100 × ` 150) 15,000
Less : Brokerage paid (2% of ` 15,000) 300
Net sale consideration 14,700
Less : Indexed cost of acquisition [` 25 × 100 ×289/100] [See Note below] 7,225
Long term capital Gain (B) 7,475
1100 Bonus shares

Sale proceeds (1100 × ` 150) 1,65,000
Less: Brokerage paid (2% of ` 1,65,000) 3,300
Less: Cost of acquisition NIL
Long term capital gain (C) 1,61,700
Long term capital gain (A+B+C) 2,43,925
Note: Cost of acquisition of bonus shares acquired before 1.4.2001 is the FMV as on 1.4.2001 (being the
higher of the cost or the FMV as on 1.4.2001).
Example:
Mr. R holds 1000 shares in Star Minus Ltd., an unlisted company, acquired in the year 2001- 02 at a cost of
` 25,000. He has been offered right shares by the company in the month of August, 2019 at ` 140 per
share, in the ratio of 2 for every 5 held. He retains 50% of the rights and renounces the balance right
shares in favour of Mr. Q for ` 25 per share in September 2019. All the shares are sold by Mr. R for ` 300
per share in January 2020 and Mr. Q sells his shares in December 2019 at ` 280 per share. What are the
capital gains taxable in the hands of Mr. R and Mr. Q?
2001-02 100
2019-20 289
Solution
Computation of capital gains in the hands of Mr. R for the A.Y. 2020-21
Particulars `
1000 Original shares
Sale proceeds (1000 × ` 300) 3,00,000
Less : Indexed cost of acquisition [` 25,000 × 289/100] 72,250
Long term capital gain (A) 2,27,750
200 Right shares

Sale proceeds (200 × ` 300) 60,000
Less : Cost of acquisition [` 140 × 200] [Note 1] 28,000
Short term capital gain (B) 32,000
CA Suraj Agrawal
Capital Gain 6.16
Sale of Right Entitlement

Sale proceeds (200 × ` 25) 5,000
Less : Cost of acquisition [Note 2] NIL
Short term capital gain (C) 5,000
Capital Gains (A+B+C) 2,64,750
Note 1: Since the holding period of these shares does not exceed 2 years, they are short term capital assets
and hence cost of acquisition will not be indexed.
Note 2: The cost of the rights renounced in favour of another person for a consideration is taken to be nil. The
consideration so received is taxed as short-term capital gains in full. The period of holding is taken from the
date of the rights offer to the date of the renouncement.
Computation of capital gains in the hands of Mr. Q for the A.Y. 2020-21
Particulars `
200 shares :
Sale proceeds (200 × ` 280) 56,000
Less: Cost of acquisition [200 shares × (` 25 + ` 140)] [See Note below] 33,000
Short term capital gain 23,000
Note: The cost of the rights is the amount paid to Mr. R as well as the amount paid to the company. Since the
holding period of these shares does not exceed 2 years, they are short term capital assets.
CA Suraj Agrawal
Capital Gain 6.17
Taxability on conversion of Inventory into Capital Aseet – Finance Act 2018
Section 28(via)
The fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset
determined in the prescribed manner shall be chargeable to tax as business income.
Explanation 1A to Section 43(1)

Where a capital asset referred to in clause (via) of section 28 is used for the purposes of business or profession,
the actual cost of such asset to the assessee shall be the fair market value which has been taken into account for
the purposes of the said clause.
Section 49(9)
Where the capital gain arises from the transfer of a capital asset referred to in clause (via) of section 28, the cost
of acquisition of such asset shall be deemed to be the fair market value which has been taken into account for the
purposes of the said clause.
Explanation 1 to Section 2(42A)

In the case of a capital asset referred to in clause (via) of section 28, the period shall be reckoned from the date of
its conversion or treatment.
CA Suraj Agrawal
Capital Gain 6.18
SECTION 45 - SCOPE AND YEAR OF CHARGEABILITY OF CAPITAL GAINS
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 Gain” and Shall be deemed to be the income of
Previous Year in which the transfer took place.
• For Immovable Property: The date on which conveyance deed is executed is considered
• For Movable Property: The date of delivery is important.
SECTION 45(1A)–COMPENSATION RECIEVED FROM INSURANCE COMPANY
Where any person receives any money or other assets from an INSURER on account of damage or destruction of
any capital asset, as a result of –
1. Flood, Typhoon, Hurricane, Cyclone, Earthquake or Other convulsion of nature; or
2. Riot or Civil Disturbance; or
3. Accidental Fire or Explosion; or
4. Action by an enemy/action taken in combating an enemy (whether with/without a declaration of war)
Then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax
under the head “Capital gains” and shall be deemed to be the income of the such person for the previous
year in which money or other asset was received.
For the purposes of section 48, the value of any money or the FMV of other assets on the date of such receipt
shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such
capital assets.
Capital Gains = Money received and/or FMV of assets on the date of receipt xxx
Less: [COT + COA/ICOA + COI/ICOI] xxx
Note: if compensation is received for depreciable assets, then provisions of Section 50 shall apply.
SECTION 45(2)–CONVERSION OF A CAPITAL ASSET IN TO STOCK-IN-TRADE

Capital gains arising from the transfer, by way of conversion of a capital asset in to stock in trade of a
business carried on by assessee, Shall be charged to tax as his income of the Previous Year in which
such stock in trade is sold or otherwise transferred by him.
Capital gains = FMV of assets as on the Date of Conversion xxx

Less: [COT + COA/ICOA + COI/ICOI] xxx
PGBP = [Consideration Received on Sale (-) FMV of assets on the date of conversion]
Important Notes:
1. Amount recorded in the books of account of the business as the value of stock-in-trade is not relevant for
computing capital gain as well as PGBP.
2. Capital gain shall be computed as per provision applicable in the Previous Year in which Stock in Trade is
sold.
Example:
ABC Ltd., converts its capital asset acquired for an amount of ` 50,000 in June, 2003 into stock-in-trade in
the month of November, 2012. The fair market value of the asset on the date of conversion is ` 2,50,000.
The stock-in-trade was sold for an amount of ` 3,50,000 in the month of December 2019. What will be the
tax treatment?
2003-04 109
2012-13 200
2019-20 289
CA Suraj Agrawal
Capital Gain 6.19
Solutions
The capital gains on the sale of the capital asset converted to stock-in-trade is taxable in the given case. It arises
in the year of conversion (i.e. P.Y. 2012-13) but will be taxable only in the year in which the stock-in-trade is sold
(i.e. P.Y. 2019-20). Profits from business will also be taxable in the year of sale of the stock-in-trade (P.Y. 2019-
20). The long-term capital gains and business income for the A.Y. 2020-21 are calculated as under:
Particulars ` `
Profits and Gains from Business or Profession
Sale proceeds of the stock-in-trade 3,50,000
Less: Cost of the stock-in-trade (FMV on the date of conversion) 2,50,000 1,00,000
Long Term Capital Gains

Full value of the consideration (FMV on the date of the conversion) 2,50,000
Less: Indexed cost of acquisition (` 50,000 x 200/109) 91,743 1,58,257
Note: For the purpose of indexation, the cost inflation index of the year in which the asset is converted into stock-
in-trade should be considered.
Section 45(2A) – TRANSFER OF BENEFICIAL INTEREST IN SECURITIES
CAPITAL GAIN IS CHARGEABLE IN THE HANDS OF BENEFICIAL OWNER OF SECURITIES HELD IN

DEMAT FORM (and not be regarded as income of the depository who is deemed to be the registered
owner of the securities)
COST OF ACQUISITION & PERIOD OF HOLDING:
For the purposes of computing Capital Gain, the COA and the POH of securities shall be determined on the
basis of the first-in-first-out (FIFO) method. In FIFO Method, the date of entry in “Demat Account” is
important and not the date of purchase of security in physical form.
SECTION 45(3) – INTRODUCTION OF CAPITAL ASSET AS CAPITAL CONTRIBUTION
Where a person transfers a capital asset to a Firm, AOP or BOI in which he is already a
partner/member or is to become a partner/member by way of Capital Contribution or otherwise, the
profits or gains arising from such transfer will be chargeable to tax as income of the previous year in which
such transfer takes place.
For this purpose, the value of the consideration will be the amount recorded in the books of
account of the firm, AOP or BOI as the value of the capital asset.
SECTION 45(4) – Distribution of A Capital Asset By A Firm / AOPs / BOIs
The profits or gains arising from the transfer of capital assets by way of distribution of capital assets on the
dissolution of a Firm / AOPs / BOIs or otherwise shall be chargeable to tax as the income of the
Firm / AOPs / BOIs of the previous year in which such transfer takes place.
For this purpose, the FMV of the asset on the date of such transfer shall be the full value of
consideration.
NOTE:
Amount received by a retiring partner in respect of his share in the partnership including goodwill is not
assessable as Capital Gain in his hands.
Since the tax treatment accorded to a LLP and a general partnership is the same, the conversion from a general
partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the
same after conversion and if there is no transfer of any asset or liability after conversion. However, if there is a
change in rights and obligations of partners or there is a transfer of asset or liability after conversion, then the
provisions of section 45 would get attracted.
CA Suraj Agrawal
Capital Gain 6.20
SECTION 45(5) – COMPULSORY ACQUISITION OF CAPTIAL ASSET
In case of the transfer of capital asset by way of compulsory acquisition OR the transfer is the one for which,
consideration is determined or approved by CG or RBI, then, capital gain shall be computed as under:
IN RESPECT OF ORIGINAL COMPENSATION
• Taxable in the Previous Year in which such compensation is FIRST RECEIVED by the assessee (even part
thereof).
• POH shall be taken up to the date when asset is compulsorily acquired
IN RESPECT OF ENHANCED / ADDITIONAL COMPENSATION
• Taxable in the Previous Year in which such compensations received by the assessee.
• Amount of Capital Gain shall be Compensation Received less Litigation Expenses, if any.
• Nature of capital gain shall be the same as the nature of capital gain w.r.t. the original compensation.
• The COA & COI shall be taken to be NIL.
Tax Note:
1. Where the Original / Enhanced Compensation is received subsequently to the death of assessee then it is
taxable in the hands of his legal heirs.
2. Amount of compensation received in pursuance of an interim order of the court etc shall be deemed to be
income chargeable under the head ‘Capital Gains’ in the PY in which the final order of such courts etc is
made.
3. Any interest received on delayed receipt of compensation or enhanced compensation, as the case may be,
shall be subject to tax under the head ‘Income from Other Sources’ on receipt basis.
[50% deduction is allowed u/s 57]
Question:
Mr. X, who follows the accrual system of accounting, purchased land for ` 25,00,000/ – in June 2002. This asset
was transferred to the Government by way of compulsory acquisition in September 2008 for an immediate
compensation of ` 75,00,000/ – . However, Mr. X disputed the compensation and an enhanced compensation of `
20,00,000 was awarded to him by the court in November 2009. Interest accrued on this compensation as on 31st
March 2019 was ` 4,00,000/ – . The enhanced compensation was received by him in May 2019 along with an
interest of ` 5,00,000, which has accrued till date. Discuss the year of chargeability and appropriate heads of
income under which the above transactions would be taxed.
CA Suraj Agrawal
Capital Gain 6.21
SECTION 45(5A) – Transfer under Specified Agreement
1. Notwithstanding anything contained in Sub-section (1), where the capital gain arises to an assessee,
being an Individual or a HUF, from the transfer of a capital asset, being land or building or both, under
a specified agreement, the capital gains shall be chargeable to income-tax as income of the previous
year in which the certificate of completion for the whole or part of the project is issued by the
competent authority.
2. For the purposes of section 48, the stamp duty value, on the date of issue of the said certificate, of his
share, being land or building or both in the project, as increased by the consideration received in
cash, if any, shall be deemed to be the full value of the consideration received or accruing as a result of
the transfer of the capital asset
3. The provisions of this sub-section shall not apply where the assessee transfers his share in the project
on or before the date of issue of said certificate of completion, and the capital gains shall be deemed
to be the income of the previous year in which such transfer takes place and the provisions of this Act,
other than the provisions of this sub-section, shall apply for the purpose of determination of full value
of consideration received or accruing as a result of such transfer
4. "Competent Authority" means the authority empowered to approve the building plan by or under any
law for the time being in force;
5. "Specified Agreement" means a registered agreement in which a person owning land or building or both,
agrees to allow another person to develop a real estate project on such land or building or both, in
consideration of a share, being land or building or both in such project, whether with or without
payment of part of the consideration in cash;
6. "Stamp Duty Value" means the value adopted or assessed or assessable by any authority of Government
for the purpose of payment of stamp duty in respect of an immovable property being land or building
or both
Consequential amendments due to Section 45(5A):
(A) Cost of acquisition of the share in the project [Section 49(7)]:

COA of the share in the project being land or building or both, in the hands of the Individual or HUF who
was the owner of land or building or both shall be the amount which is deemed as full value of
consideration under section 45(5A) mentioned above
(B) TDS on monetary consideration – Section 194-IC w.e.f. 01/04/2017:

Notwithstanding anything contained in Section 194-IA, any person responsible for paying to a Resident
any sum by way of consideration, not being consideration in kind, under the agreement referred in
Section 45(5A), shall at the time of credit of such sum to the account of the payee or at the time of
payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier,
deduct an amount equal to 10% of such sum as income tax thereon.
CA Suraj Agrawal
Capital Gain 6.22
EXEMPTION OF CAPITAL GAINS
CAPITAL GAINS ON SALE OF RESIDENTIAL HOUSE [SECTION 54]
ELIGIBLE ASSESSEE – INDIVIDUAL & HUF
CONDITIONS
There should be a transfer of Residential House Property (buildings or lands appurtenant thereto)
It must be a Long -Term Capital Asset
Income from such house should be chargeable under the head “Income from house property”
Where the amount of capital gains exceeds ` 2 crore
Where the amount of capital gain exceeds ` 2 crore, one residential house in India should be
purchased within 1 year before or 2 years after the date of transfer (or)
constructed within a period of 3 years after the date of transfer.
Where the amount of capital gains does not exceed ` 2 crore

Where the amount of capital gains does not exceed ` 2 crore, the assessee i.e., individual or HUF,
may at his option,
purchase two residential houses in India within 1 year before or 2 years after the date of
transfer (or)
construct two residential houses in India within a period of 3 years after the date of transfer.
IMP: Where during any assessment year, the assessee has exercised the option to purchase or
construct two residential houses in India, he shall not be subsequently entitled to exercise the
option for the same or any other assessment year.
However, he can continue to claim exemption on purchase or construct of one house.
QUANTUM OF EXEMPTION – LOWER OF THE TWO
Amount invested in Residential House or houses or Capital Gain whichever is lower.
UNUTILISED AMOUNT – CAPITAL GAIN ACCOUNT SCHEME APPLICABLE
a) The amount not utilized before the due date of filing ROI shall be deposited before the due date of filing ROI
in Capital gain Accounts Scheme.
b) The amount should be utilized within the prescribed period.
c) Amount not utilized within the prescribed period (3 years from the date of transfer of the original asset) shall
be treated as LTCG of the P/Y in which the prescribed period expiries.
POH OF NEW ASSET - 3 YEARS
3 years from the date of acquisition or construction
CONSEQUENCES OF TRANSFER OF NEW ASSET BEFORE 3 YEARS
If the new asset is transferred before 3 years from the date of its acquisition/Construction, then cost of the
asset will be reduced by capital gains exempted earlier for computing capital gains.
CA Suraj Agrawal
Capital Gain 6.23
Class notes
CA Suraj Agrawal
Capital Gain 6.24
CAPITAL GAINS ON TRANSFER OF AGRICULTURE LAND [SECTION 54B]
ELIGIBLE ASSESSEE – INDIVIDUAL & HUF
CONDITIONS
There should be a transfer of URBAN Agricultural Land.
Such land must have been used for agricultural purposes either by the assessee himself or his parents
or by HUF in the 2 immediately preceding years.
Another agricultural land (urban or rural) should be purchased within 2 years from the date of transfer.
Cost of the new agricultural land or Capital Gain whichever is lower.
a) The amount not utilized before the due date of filing ROI shall be deposited before the due date of filing
ROI in Capital gain Accounts Scheme.
c) Amount not utilized within the prescribed period (2 years from the date of transfer of the original asset)
shall be treated as CG of the P/Y in which the prescribed period expiries.
POH of NEW ASSET - 3 YEARS
3 years from the date of acquisition.
CONSEQUENCES ON TRANSFER OF NEW AGRICULTURE LAND BEFORE 3 YEARS
If the new agricultural land is transferred before 3 years from the date of its acquisition, then cost of the land
will be reduced by capital gains exempted earlier for computing capital gains.
However, if the new agricultural land is a rural agricultural land, there would be no capital gains on transfer
of such land.
Example:
Mr. Z had purchased certain urban agricultural land on 26.12.2006 for ` 7,50,000. The land was being used for
agricultural purpose by him. This land is sold by him on 15.09.2019 for ` 78,50,000. He has spent ` 5,00,000 for
acquiring an urban agricultural land on 15.10.2019 and has deposited ` 3,00,000 under the capital gains account
scheme on 03.05.2020. Out of the spent amount deposited in Capital Gains Account Scheme, he withdrew `
1,00,000 for purchasing agricultural land on 30.03.2021. The remaining amount could not be utilized by him for
purchase of agricultural land upto 14.09.2021. Compute the taxable capital gain for the AY 2020-21, AY 2021-22
& AY 22-23
SEC. 10(37)– Exemption on CG from Agricultural Land

Eligible Assessee: Individual & HUF
Eligible Asset: Agricultural Land Situated in Urban Area
Conditions:
1. If such land, during the period of 2 years immediately preceding the date of transfer, was being used for
agricultural purposes by such HUF or individual or a parent of individual,
2. The transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is
determined or approved by the CG or the RBI.
3. Compensation must have been received on or after 01/04/2004.
4. Compensation as well as Enhanced Compensation both will be exempt.
CA Suraj Agrawal
Capital Gain 6.25
CAPITAL GAINS NOT CHARGEABLE ON INVESTMENT IN CAPITAL BONDS
[Section 54EC]
ELIGIBLE ASSESSEE – ANY ASSESSEE
CONDITIONS
There should be transfer of a LTCA being Land or building or both.

Such asset can also be a depreciable asset held for more than 36 months or 24 months as the case
may be.
The capital gains arising from such transfer should be invested in a long-term specified asset within 6
months from the date of transfer.
LONG-TERM SPECIFIED ASSET means specified bonds, redeemable after 5 years, issued by the
National Highways Authority of India (NHAI) or the Rural Electrification Corporation Limited
(RECL)
OR any bond redeemable 5 years which is to be notified by the CG in this behalf (Added by FA 17).
For this purpose, bond issued by Power Finance Corporation Limited & bond issued by Indian
Railway Finance Corporation Limited is considered as long term specified asset. Further, there is
no TDS on interest payable from these 2 bonds.
The assessee should not transfer or convert or avail loan or advance on the security of such bonds for
a period of 5 years from the date of acquisition of such bonds.
NOTE: In case of conversion of capital asset into stock in trade and subsequent sale of stock in trade -
period of 6 months to be reckoned from the date of sale of stock in trade for the purpose of section 54EC
exemption [CBDT Circular No. 791 dated 2 -6-2000].
Capital gains or amount invested in specified bonds, whichever is lower.
Investment made during the PY in which the original assets are transferred and in the subsequent
financial year does not exceed ` 50,00,000.
ON VIOLATION OF CONDITIONS
In case of transfer or conversion of such bonds or availing loan or advance on security of such bonds
before the expiry of 5 years, the capital gain exempted earlier shall be taxed as LTCG in the year of
violation of condition.
CA Suraj Agrawal
Capital Gain 6.26
CAPITAL GAINS NOT CHARGEABLE ON INVESTMENT IN NOTIFIED UNITS OF
SPECIFIED FUND [Section 54EE]
1. Where the capital gain arises from the transfer of a long-term capital asset (original asset) and the
assessee has, at any time within a period of 6 months after the date of such transfer, invested the whole
or any part of capital gains in the long-term specified asset, the capital gain shall be exempt as follows:
QUANTUM OF EXEMPTION
If Cost of the long-term specified asset > Capital Gains
Entire Capital Gain is exempt.
If Cost of the long-term specified asset < Capital Gains
Capital Gain to the extent of Cost of new Asset
2. Investment made during the PY in which the original assets are transferred and in the subsequent financial
year does not exceed ` 50,00,000.
3. "long-term specified asset" means a unit or units, issued before the 1st day of April, 2019, of such fund as
may be notified by the Central Government in this behalf.
4. POH of NEW ASSET - 3 YEARS

5. ON VIOLATION OF CONDITIONS
In case of transfer or conversion of such notified units or availing loan or advance on security of such Units
before the expiry of 3 years, the capital gain exempted earlier shall be taxed as LTCG in the year of
violation of condition.
CA Suraj Agrawal
Capital Gain 6.27
CAPITAL GAINS IN CASES OF INVESTMENT IN RESIDENTIAL HOUSE [SECTION 54F]
ELIGIBLE ASSESSEE – INDIVIDUAL / HUF
CONDITIONS
1. There must be transfer of a LONG-TERM CAPITAL ASSET, NOT BEING A RESIDENTIAL HOUSE
2. Transfer of plot of land is also eligible for exemption
3. The assessee should -
Purchase a residential house within a period of 1 year before or 2 years after the date of transfer; or
Construct a residential house within 3 years from the date of transfer.
4. Exemption under this section is available if the investment is made in One Residential House and that
too the house is situated in India.
5. The assessee should not own more than one residential house on the date of transfer.
6. The assessee should not –
purchase any other residential house within a period of 2 year or
construct any other residential house within a period of 3 years from the date of transfer of the original
asset.
QUANTUM OF EXEMPTION
If Cost of New Residential House = Net Sale Consideration of Original Asset,
Entire Capital Gain is exempt.
If cost of new residential house < Net sale consideration of original asset, only proportionate
capital gains is exempt i.e.
LTCG X Amount invested in RESIDENTIAL HOUSE / Net consideration
a) The amount not utilized before the due date of filing ROI shall be deposited before the due date of filing
ROI in Capital gain Accounts Scheme.
c) Amount not utilized within the prescribed period shall be treated as LTCG of the P/Y in which the prescribed
period expiries.
LTCG = Unutilized Amount x Amount of LTCG / Net Consideration
POH of NEW ASSET - 3 YEARS
CONSEQUENCES OF TRANSFER OF NEW ASSET BEFORE 3 YEARS
Capital gain on new asset shall be taxed separately.

LTCG exempted u/s. 54F shall be chargeable to tax as LTCG in the year of transfer.
CA Suraj Agrawal
Capital Gain 6.28
CAPITAL GAINS ACCOUNT SCHEME (CGAS)
LEGAL HEIRS: CBDT clarifies that in the event of death of an individual before the stipulated period, the
unutilized amount is not chargeable to tax in the hands of the legal heirs of the deceased individual. Such
unutilized amount is not income but is a part of the estate devolving upon them.
Extension of time for acquiring new asset or depositing or investing amount of Capital
Gain [Section 54H]
In case of compulsory acquisition of the original asset, where the compensation is not received on the date of
transfer, the period available for acquiring a new asset or making investment in CGAS under sections 54,
54B, 54EC and 54F would be considered from the date of receipt of such compensation and not from the
date of the transfer.
CA Suraj Agrawal
Capital Gain 6.29
Surcharge on Individual / HUF / AOP / BOI / Artificial Juridical Person
The Finance (No. 2) Act, 2019 has levied an enhanced surcharge of 25% and 37%, where the
total income of individuals/HUF/AOPs/BOIs exceeds ` 2 crores and ` 5 crores, respectively.
However, the enhanced surcharge has been withdrawn on tax payable at special rates under
section 111A and 112A on short-term and long-term capital gains arising from the transfer of
equity share in a company or unit of an equity-oriented fund/ business trust, which has been
subject to securities transaction tax. [Press Release dated 24-8-2019]
Total Income Surcharge Rate
111A & 112A)** exceeds ` 50 Lakhs but not exceeding ` 1 crores
111A & 112A) exceeds ` 1 crores but not exceeding ` 2 crores
Or Total Income (including the income under the provisions of

Section 111A & 112A) exceeds ` 2 crores but not covered below
111A & 112A)** exceeds ` 2 crores but not exceeding `5 crores
***(15% of income
tax related to
Income covered
u/s 111A & 112A)
111A & 112A)** exceeds ` 5 crores
***above applicable
* Inserted by Finance (No. 2) Act 2019 for FY 2019-20

** Inserted by the Taxation Laws (Amendment) Act, 2019, w.r.e.f 01/04/2019
CA Suraj Agrawal
Capital Gain 6.30
TAX ON STCG ON SHARES/UNITS [SECTION 111A]
• This Section provides for a concessional rate of tax (i.e. 15%) on the STCG on transfer of
Equity Share of a company or
Unit of an Equity Oriented Mutual Fund or
Unit of Business Trust
on or after 1.10.2004 where transaction is subjected to STT.
• Concessional Tax rate is also applicable in the case of STCG which arises from a transaction undertaken
in foreign currency on a recognized stock exchange located in an International Financial Services
Centre located in SEZ (evenif STT is not applicable).
• RESIDENT IND/HUF: STCG will be reduced by the unexhausted basic exemption limit.
• No Deductions under Chapter VI-A.
TAX ON LONG TERM CAPITAL GAINS OTHER THAN THOSE COVERED UNDER
SECTION 112A [SECTION 112]
Where the Total Income of an assessee includes LTCG, tax is payable by the assessee @20% on such
LTCG.
RESIDENT IND/HUF: LTCG will be reduced by the unexhausted basic exemption limit.
Deductions under Chapter VI-A cannot be availed in respect of such LTCG
PROVISO TO SECTION 112:

The tax on LTCG from transfer of Listed Securities (other than Units) / Zero Coupon Bond shall be the
lower of the following:
Tax on LTCG (computed normally with Indexation & Basic Exemption, if applicable), @20% OR
Tax on LTCG (computed normally without indexation & without Basic Exemption), @ 10%
EXEMPTION u/s SEC 10(38) - LTCG ON TRANSFER OF SECURITIES FULLY EXEMPT:
Conditions:
The asset transferred is a LTCA
Such asset is Equity Share of a company or Units of a Equity Oriented Mutual Fund or a Unit of
Business Trust
Such transaction takes place on or after 1.10.2004
at the time of transfer, the transaction is chargeable to STT.
• Exemption is also applicable in the case of LTCG which arises from a transaction undertaken in foreign
currency on a recognized stock exchange located in an International Financial Services Centre located
in SEZ (evenif STT is not applicable).
• Exemption u/s 10(38) may not be available if the following conditions are satisfied:
(a) Transfer of equity shares
(b) Shares were acquired on or after 01/10/2004
(c) STT was not chargeable at the time of Purchase
(d) The transaction is not covered by a negative list notified by CG (list of acquisitions)
[In other words, exemption shall be available only if Acquisition & transfer both is subjected to
STT in case equity shares are acquired on or after 01/10/2004]
Benefit of Exemption under Section 10(38) is now not available from AY 2019-20 as amended by FA 2018
CA Suraj Agrawal
Capital Gain 6.31
Section 112A – Finance Act 2018
New provisions for Taxation of long-term Capital Gain on sale of listed equity shares etc.
1. Notwithstanding anything contained in Section 112, the tax payable by an assessee on his total
income shall be determined in accordance with the provisions of sub-section (2), if—
i. the total income includes capital gains arise from the transfer of a long-term capital asset
being an equity share in a company or a unit of an equity oriented fund or a unit of a business
trust;
ii. securities transaction tax has
a. in a case where the long-term capital asset is in the nature of an equity share in a
company, been paid on acquisition and transfer of such capital asset; or
b. in a case where the long-term capital asset is in the nature of a unit of an equity oriented
fund or a unit of a business trust, been paid on transfer of such capital asset.
2. The tax payable by the assessee on the total income referred to in sub-section (1) shall be the
aggregate of—
i. the amount of income-tax calculated on such long-term capital gains exceeding one lakh
rupees at the rate of 10%; and
ii. the amount of income-tax payable on the total income as reduced by the amount of long-term
capital gains referred to in sub-section (1) as if the total income so reduced were the total
income of the assessee:
3. RESIDENT IND/HUF: Such LTCG will be reduced by the unexhausted basic exemption limit.
4. Requirement of STT payment shall not apply to a transfer undertaken on a recognised stock
exchange located in any International Financial Services Centre and where the consideration for
such transfer is received or receivable in foreign currency.
5. The Central Government may notify the nature of acquisition where STT is not required to be paid.
6. Deductions under Chapter VI-A cannot be availed in respect of such LTCG.
7. Indexation is not permitted to compute LTCG chargeable to tax under Section 112A
8. Rebate under Section 87A is not available against tax computed under Section 112A.
Section 55(2)(ac) – Finance Act 2018 : COA

Cost of Acquisition, In relation to a long-term capital asset, being an equity share in a company or a
unit of an equity oriented fund or a unit of a business trust referred to in section 112A, acquired before
the 1st day of February, 2018 shall be higher of-
i. the cost of acquisition of such asset; and
ii. lower of –
a. the fair market value of such asset as on 31.01.2018; and
b. the full value of consideration received or accruing as a result of the transfer of the capital
asset.
CA Suraj Agrawal
Capital Gain 6.32
Meaning of Fair Market value (IMP):
S.No. Circumstance Fair Market Value
(i) In a case where the capital asset is If there is trading in such asset on
listed on any recognized stock such exchange on 31.01.2018
exchange as on 31.01.2018 The highest price of the capital
asset quoted on such exchange on
the said date
If there is no trading in such asset

on such exchange on 31.01.2018
The highest price of such asset
on such exchange on a date
immediately preceding 31.01.2018
when such asset was traded on
such exchange.
(ii) In a case where the capital asset is a unit The net asset value of such unit as
which is not listed on any recognized on the said date
stock exchange as on 31.01.2018
(iii) In a case where the capital asset is an An amount which bears to the cost of
equity share in a company which is acquisition the same proportion as CII
- not listed on a recognized stock for the financial year 2017-18 bears to
exchange as on 31.01.2018 but listed on the CII for the first year in which the
such exchange on the date of transfer asset was held by the assessee or on
01.04.2001, whichever is later.
- listed on a recognized stock exchange on
the date of transfer and which became the
property of the assessee in consideration
of share which is not listed on such
exchange as on 31.01.2018 by way of
transaction not regarded as transfer under
section 47
TREATMENT OF SECURITIES TRANSACTION TAX

If Shares/Units are treated as Investment:
The securities transaction tax (STT) paid on sale of shares / units shall not be reduced from the sale
consideration and the STT paid on purchase of shares / units shall not be added to the COA.
If Shares/Units are treated as Stock-In-Trade:

If Shares/units are held as stock-in-trade then LTCG/STCG shall not arise. The profits/loss on sale of such
shares/units shall be assessable as business income/business loss taxable normally. In such a case the STT
paid on purchase and sale of securities shall be allowed as deduction under section 36(xv) of the Income
Tax Act while computing PGBP.
CA Suraj Agrawal
Capital Gain 6.33
DIVIDEND STRIPPING
Section 94(7) provides that where any person buys or acquires any securities or unit within a period of 3
months prior to the record date and such person sells or transfers –
(a) such securities within a period of 3 months after such date, OR

(b) such unit within a period of 9 months after such date
and the dividend or income on such securities or unit received or receivable by such person is exempted, then,
the loss, if any, arising therefrom shall be ignored to the extent of exempted income for the purposes of computing
his income chargeable to tax.
BONUS STRIPPING – APPLICABLE ONLY ON UNITS

Sec. 94(8) provides that Where-
a) any person acquires any units (i.e., original units) within a period of 3 months prior to the record date;
b) such person is allotted additional units without any payment on the basis of holding of such units on such
date;
c) such person transfers
all or any of the original units within a period of 9 months after such date,
while continuing to hold all or any of the additional units,
then,
the loss, if any, arising to him on account of such purchase and sale of all or any such units shall be
ignored for the purposes of computing his income chargeable to tax AND
the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such
additional units as are held by him on the date of such sale or transfer.
Question:
Mr. A buys 2000 shares of RIL @ ` 600 per share on 30.05.2019. RIL declares a dividend of 200% and fix the
record data for dividend as 01.07.2019. Mr. A receives dividend of ` 40,000, which is exempt u/s 10(34). Mr. A
sells the shares of RIL on 30.08.2019.
Case–I: @ ` 620 per share; Case–II @ ` 540 per share; Case-III @ `580 per share
Discuss tax implications.
Question:
Reliance Mutual Fund declares 1:1 bonus units on its units on 30.5.2019. The Fund fixed the record date for
bonus entitlement to be 30.6.2019 Mr. A purchases 1,000 units of Fund on 20.6.2019 @ `20 per unit. A sells 1000
original units on 11.12.2019 for ` 9 per unit. Discuss the tax implications.
CA Suraj Agrawal
Capital Gain 6.34
Class notes
CA Suraj Agrawal
Capital Gain 6.35
SECTION 46 - CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY COMPANIES IN
LIQUIDATION
TAXABILITY IN THE HANDS OF COMPANY: [EXEMPT]
1) Where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall
not be regarded as a transfer by the company for the purposes of section 45 [Section 46(1)].
2) If, however, the liquidator sells the assets of the company resulting in a capital gain and
distributes the funds so collected, the company will be liable to pay tax on such gains.
TAXABILITY IN THE HANDS OF SHAREHOLDERS: [CG + DIVIDEND]
1) Shareholders receive money or other assets from the company on its liquidation against its shares. They
will be chargeable to tax under the head ‘capital gains’ in respect of the MARKET VALUE of the assets
received on the date of distribution, or the moneys so received by them.
2) The portion of the distribution which is attributable to the accumulated profits of the company is to be
treated as DIVIDEND INCOME of the shareholder under section 2(22)(c).
The same will be deducted from the amount received/FMV of the assets received for the purpose of
determining the consideration for computation of capital gains.
3) POH: In the case of a share held in a company in liquidation, the period subsequent to the date on
which the company goes into liquidation should be excluded while calculating CG in the hands of
shareholders.
4) Capital Gains Tax on subsequent sale of the Capital Assets by the shareholders:
As per Section 55(2)(b)(iii), if the asset other than cash acquired by the shareholder, then for the
purpose of computation of Capital Gain of transfer of such Asset, the COA shall be the market value
of the asset on the date of acquisition. POH will start from the date on which such assets are
received by the shareholder.
Note: In case where an assessee, who is a shareholder, receives assets from company under liquidation, it is
always subject matter of Tax u/s 46(2). It is irrelevant at this point of time to ascertain the nature of asset
distributed to the shareholder. Even in a case where the asset distributed is an agricultural land outside the
specified Area, which is not a capital asset, the shareholder shall be subject to tax by virtue of Section 46(2)
as distribution in Kind.
TAXABILITY ON PURCHASE OF OWN SECURITIES [SECTION 46A] – BUY BACK

1. Any consideration received by a holder of other specified securities (Other than shares) from any company
on purchase of its specified securities shall be chargeable to tax on the difference between the cost of
acquisition and the value of consideration received by the holder of securities, as the case may be, as capital
gains.
2. The computation of capital gains shall be made in accordance with the provisions of section 48. Such capital
gains shall be chargeable in the year in which such securities were purchased by the company.
3. However, in case of buyback of unlisted shares by domestic companies, additional income tax@ 20% (plus
surcharge@12% and cess@4%) is leviable in the hands of the company u/s 115QA.
Consequently, the income arising to the shareholders in respect of such buyback of unlisted shares by the
domestic company would be exempt under section 10(34A), where the company is liable to pay additional
income-tax on the buyback of shares.
W.e.f. 05/07/2019, Exemption is available in case of buy back of unlisted as well as listed shares.
[Amended is brought by Finance (No. 2) Act 2019]
CA Suraj Agrawal
Capital Gain 6.36
Class notes
CA Suraj Agrawal
Capital Gain 6.37
SECTION 50B – SPECIAL PROVISIONS FOR COMPUTATION OF GAINS IN CASE OF
SLUMP SALE
SECTION 2(42C) – SLUMP SALE means The transfer of one or more undertakings as a result of the sale for a
lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
However, the values can be assigned to the assets for the limited purpose of payment of stamp duty, registration
fees etc. This must clarified in the agreement of slump sale.
Charge of Capital Gains: Profit or gains arising from slump sale shall be taxable as Capital Gains in the previous
year in which slump sale is effected.
NATURE OF CAPITAL GAINS: If the capital asset, being one or more undertakings, was owned and held by the
assessee for not more than 36 months, the capital gains will be 'Short Term Capital Gains. In any other
case, it shall result into Long-Term Capital Gains.
Mode of computation of capital gains: The capital Gains shall be computed in the following manner -
Full Value of consideration XXXX
Less: Expenses wholly and exclusively in connection with such transfer XXXX
Less: Cost of acquisition and cost of improvement being net worth of the XXXX
undertaking (no indexation benefit even in case of long-term capital asset)
Short Term/Long Term Capital gains XXXX
For calculating the Net Worth, the Aggregate VALUE of total assets, ignoring revaluation effect, shall be-
(a) In case of depreciable assets: the WDV of block of assets as per IT Act.
(b) In case of capital Assets for which the whole of the expenditure has been allowed or is allowable
as a deduction u/s. 35AD: NIL; AND
(c) In the case of any other assets: The book value of such assets
Less: Value of liability (as appearing in the books of a/c on the date of transfer of undertaking)
Certificate of a Chartered Accountant: A report of an accountant indicating the computation of net worth
and certifying that the net worth of the undertaking or division has been correctly arrived at.
Question:
Axel Ltd. has two industrial undertakings. Unit-I is engaged in the production of refrigerators. The company has as
part of its restructuring program, decided to sell Unit-II as a going concern by way of slump sale for ` 260 lakhs to
a new company called Gamma Ltd., in which it holds 85% equity shares. The following is the extract of the
balance sheet of Axel Ltd. as on 31st March 2019:
(` In lakhs)
Unit-I Unit-II
Fixed Assets 112 158
Debtors 88 67
Inventories 60 23
Liabilities 33 45
Paid-up share capital 231
General Reserve 160
Share premium 39
Revaluation Reserve 105
st
The company set up Unit-II on 1 April, 2007. The written down value of blocks of assets for the tax purpose as
st
on 31 March, 2019 is ` 150 lakhs of which ` 60 lakhs are attributable to Unit-II. Determine what would be the tax
liability of Axel Ltd. on account of slump sale.
CA Suraj Agrawal
Capital Gain 6.38
Answer:
Capital Gains = “Slump sale consideration” minus “Net worth of the Undertaking or division”
“Net worth” = Aggregate value of total assets of the undertaking or division transferred minus Value of
liabilities of the undertaking or division transferred as appearing in its books of accounts.
Revaluation of assets shall not be considered while computing the “net worth”, i.e., revaluation of
assets shall be ignored for computing the “net worth”, irrespective of the fact that revaluation is done
in the current year or in past years. For computing the “net worth”, non depreciable assets are to be taken
at their books values.
For computing the “net worth”, in case of depreciable assets, the written down value of such assets shall be
WDV.
Period of holding: 1-4-2007 to 2019 (Long Term)

Sale price: ` 260 lakhs
Net worth shall be computed as under:

Particulars Amount
(i) Fixed Assets WV for Unit-II 60 Lakhs
(ii) Debtors 67 Lakhs
(iii) Investments 23 Lakhs
Total assets 150 Lakhs
Less: Liability 45 lakhs
Net Worth 105 lakhs
LONG Term Capital Gains = Sale Price – Net Worth

= ` 260 Lakhs – ` 105 lakhs
= ` 155 Lakhs
Note: It is assumed that Fixed Assets of ` 158 Lakhs are all depreciable assets whose WDV as per the
Income Tax Act in 60 lakhs. It is further assumed that WDV is as per Income Tax Act after excluding the
impact of revaluation.
CA Suraj Agrawal
Capital Gain 6.39
Concept of Reverse Mortgage
Applicability:
(a) Reverse Mortgage is as scheme for the benefit of senior citizens who own a residential house
property.
(b) The Senior Citizens can mortgage their house property with a scheduled bank or housing finance
company, in return for a lump-sum amount or for a regular monthly/quarterly/annual income.
Tax implication:
1. Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by
the Central Government would not amount to a transfer for the purpose of capital gains. [Section
47(xvi)]
2. Further, the amount received by the senior citizen as a loan, either in lump sum or in installments, in a
transaction of reverse mortgage would be exempt from income-tax. [Section 10(43)]
Amendment to Section 47 – Transaction not regarded as a transfer

1. Any transfer of Capital asset, being government securities carrying a periodic payment of interest, made
outside India through an intermediary dealing in settlement of securities, by a NR to another NR shall not
be considered as transfer.
2. Any transfer of a Capital asset, being share of a Special Purpose Vehicle (Company), to a Business
Trust in exchange of units allotted by that Trust to the transferor shall not be regarded as transfer.
3. Any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating
scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or
units, in the consolidated scheme of the mutual fund:
4. Any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating plan
of a mutual fund scheme, made in consideration of the allotment to him of a capital asset, being a unit or
units, in the consolidated plan of that scheme of the mutual fund.
5. Any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond
Scheme, 2015, by way of redemption, by an assessee being an individual [Indexation benefit is
available in case of LTCG arising from transfer of such bond]
6. Transfer of Rupee Denominated Bond outside India by a Non-Resident to another Non-Resident: Any
transfer, made outside India, of a Capital Asset being rupee denominated bond of an Indian Company
issued outside India, by a non-resident to another non-resident.
7. Conversion of Preference Shares into Shares:

Section 47(xb) - Any Transfer by way of conversion of preference shares of a company into equity shares of
that company shall not be regarded as a Transfer.
ZERO COUPON BOND [ZCB]

1. ZCB means a Bond Issued By: (i) Any Infrastructure Capital Company, or (ii) Infrastructure Capital Fund, or
(iii) Public Sector Company, (iv) Scheduled Banks.
2. Payment only on redemption: No payment and benefit is received or receivable before maturity or
redemption.
3. The income on transfer of a ZCB (not being held as stock-in-trade) is to be treated as capital gains.
4. Section 2(47)(iva) provides that maturity or redemption of a ZCB shall be treated as a transfer for the
purposes of capital gains tax. ZCBs held for not more than 12 months would be treated as short term capital
assets.
CA Suraj Agrawal
Capital Gain 6.40
SECTION 55A - REFERENCE TO VALUATION OFFICER - NEW
The AO may refer the valuation of a capital asset to a Valuation Officer in the following circumstances
with a view to ascertaining the FMV of the capital asset for the purposes of capital gains –
1) In a case where the value of the asset as claimed by the assessee is in accordance with the estimate
made by a registered valuer:
“if the AO is of the opinion that the value so claimed is at variance with its Fair Market Value.”
2) In other case, If the AO is of the opinion that the FMV of the asset exceeds the value of the asset as claimed
by the assessee by more than 15% of the value of asset as claimed or by more than ` 25,000 of the
value of the asset as claimed by the assessee.
3) Further, if the AO is of the opinion that, having regard to the nature of asset and other relevant circumstances,
it is necessary to make the reference.
CA Suraj Agrawal
Capital Gain 6.41
Class notes
CA Suraj Agrawal
Capital Gain 6.42
AMALGAMATION – SECTION 2 (1B)
Amalgamation in relation to companies, means the merger of one or more companies with another company or
the merger of two or more companies to form one company in such a manner that-
(a) All the property of the amalgamating company or companies immediately before the amalgamation
becomes the property of the amalgamated company by the virtue of amalgamation.
(b) All the liabilities of the amalgamating company or companies immediately before the amalgamation
become the liabilities of the amalgamated company by virtue of amalgamation.
(c) Shareholders holding not less than 75% in the value of shares in amalgamating company or
companies become shareholders of the amalgamated company by virtue of the amalgamation.
DEMERGER [SECTION 2 (19AA)]

“Demerger” in relation to company’s means
the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956
by a demerged company
Of its one or more undertakings to any resulting company.
and all the following conditions are fulfilled :-
(i) All the property of the undertaking, being transferred by the demerged company immediately
before the demerger, becomes the property of the resulting company by virtue of the demerger.
(ii) All the liabilities relating to the undertaking, being transferred by the Demerged Co., immediately
before the demerger , becomes the liabilities of the resulting company by virtue of the demerger.
(iii) The property and the liabilities of the undertaking or undertakings being transferred by the
demerged company are transferred at the values [ignoring revaluation] appearing in the
books of account immediately before demerger.
However, this provision does not apply where, in compliance to the Indian Accounting
Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules,
2015, the resulting company records the value of the property and the liabilities of the
undertaking or undertakings at a value different from the value appearing in the books of
account of the demerged company, immediately before the demerger.
[Added by Finance (No. 2) Act 2019]
(iv) The resulting company issues, in consideration of the demerger, its shares to the shareholders
of the demerged company on a proportionate basis.
(v) The shareholders holding not less than 75% in value of the shares in the demerged company
becomes the shareholders of resulting company or companies by virtue of demerger.
(vi) The transfer of undertaking is on a going concern basis.
CA Suraj Agrawal
Capital Gain 6.43
SECTION 47 – OTHER TRANSACTIONS NOT REGARDED AS TRANSFER
1. Taxability of Transfer of Capital Assets under Scheme of Amalgamation of
Companies
Transfer of Capital Asset, in a scheme of amalgamation, by the Amalgamating Company to the Indian
Amalgamated Company is not considered as transfer and not chargeable to capital gain tax.
[Sec 47(vi)]
a) Condition to be fulfilled: Scheme approved by CG.
b) Holding Period in the hands of the transferee in case of subsequent transfer: Previous Owner’s
holding period shall be included.
c) Cost in the hands of Transferee [Sec 49]: Cost to the Amalgamating Company.
Transfer of shares by Shareholder in a scheme of Amalgamation is not considered as transfer and
not chargeable to capital gain tax. [Sec 47(vii)]
a) Condition to be fulfilled:
• Asset Transferred: Shares held in Amalgamating Company.
• Consideration received: Only Shares of Amalgamated Company.
• The amalgamated company is an Indian Company
b) Holding Period in the hands of the transferee in case of subsequent transfer: Period of holding of
Amalgamating Company’s Shares shall be included.
c) Cost in the hands of Transferee [Sec 49]: Cost to original shares in Amalgamating Company.
2. Taxability of Transfer of Capital Assets under Scheme of Demerger of Companies
1. Transfer of capital asset, by a demerged company to the resulting company is not considered as
transfer and not chargeable to capital gain tax. [sec. 47(vib)]
a) Condition: Resulting company shall be an Indian company.
b) Holding Period in the hands of the transferee in case of subsequent transfer: Previous Owner’s
holding period shall be included.
c) Cost in the hands of transferee [Sec. 49]: Cost to the demerged company.
2. Transfer of shares, by the Resulting Company to the shareholders of the demerged company if the
transfer is made in consideration of Demerger [Sec 47(vid)]
a) Holding Period in the hands of the transferee for subsequent transfer: Period of holding of Demerged
Company’s Shares shall be included.
b) Cost of acquisition of Resulting Company’s Shares on demerger [Sec. 49(2C)]
[Net Worth of demerged Company = Paid up share Capital and General reserve before demerger.]
c) Cost of Acquisition of Demerged Company’s Shares after demerger [Sec. 49(2D)]

Original Cost of Acquisition of shares in Demerged Company XXX
Less: Cost of acquisition of resulting company shares as per Section 49(2C) (XXX)
CA Suraj Agrawal
Capital Gain 6.44
Taxability of Transfer of Capital Assets between Holding and 100% Subsidiary Companies
1. Transfer of Capital Asset (not by way of Stock in Trade) by Holding Company to its subsidiary is not
considered as transfer and not chargeable to capital gain tax [Sec 47(iv)]
a) Conditions to be fulfilled:
• Holding Company or its Nominees shall hold 100% Shares in Subsidiary Company.
• Subsidiary Company should be an Indian Company.
b) Holding period in the hands of the Transferee in case of subsequent transfer Sec. 2(42A): Previous
owner’s holding periods shall be included.
c) Cost in the hands of Transferee [Sec 49]: Cost to Previous Owner.
2. Transfer of Capital Asset (not by way of SIT) by Subsidiary Company to its Holding Company is not
considered as transfer and not chargeable to capital gain tax [Sec. 47(v)]
a) Conditions to be fulfilled:
• Whole of the Share Capital of the subsidiary Company shall be held by Holding Company
• Holding Company should be an Indian Company.
b) Holding period in the hands of the Transferee in case of subsequent transfer Sec. 2(42A): Previous
owner’s holding periods shall be included.
c) Cost in the hands of Transferee [Sec 49]: Cost to Previous Owner.
CA Suraj Agrawal
Capital Gain 6.45
Cost with reference to certain modes of acquisition.[Section 49]
1. Section 49(1): Refer Page No. 6.14

2. Section 49(2):
Where the capital asset being a share or shares in an amalgamated company which is an Indian company
became the property of the assessee in consideration of a transfer referred to in Section 47(vii), the cost of
acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the
amalgamating company.
3. Section 49(2A):
Where the capital asset, being a share or debenture of a company, became the property of the assessee in
consideration of a transfer referred to in Section 47(x), the cost of acquisition of the asset to the assessee
shall be deemed to be that part of the cost of debenture, debenture-stock, bond or deposit certificate in
relation to which such asset is acquired by the assessee.
4. Section 49(2AA):
Where the capital gain arises from the transfer of specified security or sweat equity shares referred to
Section 17(2)(vi), the cost of acquisition of such security or shares shall be the FMV which has been taken
into account for the purposes of the said sub-clause.
5. Section 49(2AE):
Where the capital asset, being equity share of a company, became the property of the assessee in
consideration of a transfer referred to in Section 47(xb), the cost of acquisition of the asset shall be
deemed to be that part of the cost of the preference share in relation to which such asset is acquired by the
assessee
6. Section 49(2C):
The cost of acquisition of the shares in the resulting company shall be the amount which bears to the cost of
acquisition of shares held by the assessee in the demerged company the same proportion as the net book
value of the assets transferred in a demerger bears to the net worth of the demerged company immediately
before such demerger.
7. Section 49(2D):
The cost of acquisition of the original shares held by the shareholder in the demerged company shall be
deemed to have been reduced by the amount as so arrived at under sub-section (2C).
8. Section 49(4):
Where the capital gain arises from the transfer of a property, the value of which has been subject to income-
tax under Section 56(2)(x), the cost of acquisition of such property shall be deemed to be the value which
has been taken into account for the purposes of the said clause (x).
CA Suraj Agrawal
Capital Gain 6.46
COST INFLATION INDEX
F/Y CII F/Y CII

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
2019-20 289
CA Suraj Agrawal
Capital Gain 6A.1
PRACTICAL QUESTIONS – CAPITAL GAIN

1. Kaif purchased a commercial building in Udaipur for ` 3,31,000 on 27.11.2004. She gifted the property to her
friend Salman on 18.12.2007. On 15.1.2020 salman sold this house for ` 18,50,000. The expenses on
transfer were ` 48,000. Compute capital gains in hands of Salman and state in which year it shall be
chargeable to tax.
2. Rekha purchases a house property for ` 6,50,000 on 28.12.1998. She paid registration fees of ` 65,000. The
fair market value of the property as on 1st April, 2001 was ` 7,25,000. She constructed first floor on
10.12.2009 and spent ` 3,89,000 on the said construction. On 15.12.2019, She sold this house for
` 96,00,000. The expenses on transfer were ` 96,000. Compute his capital gain.
3. Mr. F sells a plot of land on 1-8-2019 for ` 30,00,000. He inherited the plot from his father on 1-4-2004. His
father had acquired the plot on 1-3-2001 for ` 30,000. His father had incurred land development charges `
10,000 on 31-3-2001 and ` 20,000 on 1-5-2003. Mr. F had incurred land development charges ` 50,000 on 1-
9-2007. The sale stamp deed expenses were 1% of the selling price. The FMV of the plot as on 1-4-2001 was
` 29,000. Compute the capital gains.
4. Mr. I, a manufacturer of bricks since 2005, sells the following assets on 12-3-2020 - [Intangible Assets]
Name of asset Goodwill Trademark Tenancy rights in Manufacturing
respect of business licence
premises
Mode of acquiring Self-generated Purchased Self-generated Purchased
Purchase price & date N.A. ` 1,00,000 N.A. ` 30,000 12-3-

thereof 11-3-2007 2017
Cost of improvement and ` 2,00,000 1- ` 10,000 1- ` 20,000 31-3-2010 NIL

date thereof 4-2009 5-2009
Sale price 18,00,000 500,000 500,000 200,000
Compute the capital gains for AY 2020-21.
5. What is the cost of acquisition of self-generated assets, for the purpose of computation of capital gains?
6. Mr. Rakesh purchased a house property on 14th April, 1999 for ` 1,05,000. He entered into an agreement
with Mr. B for the sale of house on 15th September, 2004 and received an advance of ` 25,000. However,
since Mr. B did not remit the balance amount, Mr. Rakesh forfeited the advance. Later on, he gifted the house
property to his friend Mr. A on 15th June, 2006. Following renovations were carried out by Mr. Rakesh and
Mr. A to the house property:
Particulars `
By Mr. Rakesh during FY 2000-01 10,000
By Mr. Rakesh during FY 2005-06 50,000
By Mr. A during FY 2008-09 1,90,000
The fair market value of the property as on 1.4.2001 is ` 1,50,000. Mr. A entered into an agreement with Mr.
C for sale of the house on 1st June, 2009 and received an advance of ` 80,000. The said amount was
forfeited by Mr. A, since Mr. C could not fulfil the terms of the agreement. Finally, the house was sold by Mr.
A to Mr. Sanjay on 2nd January, 2020 for a consideration of ` 12,00,000.
Compute the capital gains chargeable to tax in the hands of Mr. A for the assessment year 2020-21.
Cost inflation indices are as under:
Financial Year Cost inflation index
2001-02 100
2005-06 117
2006-07 122
2008-09 137
2019-20 289
CA Suraj Agrawal
Capital Gain 6A.2
7. How will you calculate the period of holding in case of the following assets?
(a) Shares held in a company in liquidation
(b) Bonus shares
(c) Flat in a co-operative society
(d) Transfer of a security by a depository (i.e., demat account)
8. Ms. Vasudha contends that sale of a work of art held by her is not exigible to capital gains tax. Is she
correct?
9. Mrs. X, an individual resident woman, wanted to know whether income-tax is attracted on sale of gold and
jewellery gifted to her by her parents on the occasion of her marriage in the year 1979 which was purchased
at a total cost of ` 2,00,000?
10. Ms. Chhaya transferred a vacant site to Ms. Dayama for ` 4,25,000. The stamp valuation authority fixed the
value of vacant site for stamp duty purpose at 6,00,000. The total income of Chhaya and Dayama before
considering the transfer of vacant site are ` 50,000 and ` 2,05,000, respectively. The indexed cost of
acquisition for Ms. Chhaya in respect of vacant site is ` 4,00,000 (computed). Determine the total income of
both Ms. Chhaya and Ms. Dayama taking into account the above said transaction.
11. Mr. Raj Kumar sold a house to his friend Mr. Dhuruv on 1st November, 2019 for a consideration of `
25,00,000. The Sub-Registrar refused to register the document for the said value, as according to him, stamp
duty had to be paid on ` 45,00,000, which was the Government guideline value. Mr. Raj Kumar preferred an
appeal to the Revenue Divisional Officer, who fixed the value of the house as ` 32,00,000 (` 22,00,000 for
land and the balance for building portion). The differential stamp duty was paid, accepting the said value
determined. Assuming that the fair market value is ` 32,00,000, what are the tax implications in the
hands of Mr. Raj Kumar and Mr. Dhuruv for the assessment year 2020-21? Mr. Raj Kumar had
purchased the land on 1st June, 2011 for ` 5,19,000 and completed the construction of house on 1st
October, 2018 for ` 14,00,000.
12. Mr. Y submits the following information pertaining to the year ended 31st March, 2020:
(i) On 30.11.2019, when he attained the age of 60, his friends in India gave a flat at Surat as a gift, each
contributing a sum of ` 20,000 in cash. The cost of the flat purchased using the various gifts was ` 3.40
lacs.
(ii) His close friend abroad sent him a cash gift of ` 75,000 through his relative for the above occasion.
(iii) Mr. Y sold the above flat on 30.1.2020 for ` 3.5 lacs. The Registrar’s valuation for stamp duty purposes
was ` 3.7 lacs. Neither Mr. Y nor the buyer, questioned the value fixed by the Registrar.
(iv) He had purchased some equity shares in X Pvt. Ltd., on 5.2.2007 for ` 3.5 lacs. These shares were sold
on 15.3.2020 for ` 2.8 lacs.
You are requested to calculate the total income of Mr. Y for the assessment year 2020-21.
[Cost Inflation Index for F.Y. 2006-07 – 122, F.Y. 2011-12 – 184, 2019-20: 289]
13. Dinesh received a vacant site as gift from his friend in November 2007. The site was acquired by his friend for
` 3,00,000 in April 2002. Dinesh constructed a residential building during the year 2008-09 in the said site for
` 15,00,000. He carried out some further extension of the construction in the year 2011-12 for ` 5,00,000.
Dinesh sold the residential building for ` 55,00,000 in January 2020 but the State stamp valuation authority
adopted ` 65,00,000 as value for the purpose of stamp duty.
Compute his long term capital gain, for the assessment year 2020-21 based on the above information.
The cost inflation indices are as follows:
Financial Year Cost inflation index
2002-03 105
2007-08 129
2008-09 137
2011-12 184
2019-20 289
14. Mr. Thomas inherited a house in Jaipur under will of his father in May, 2005. The house was purchased by his
father in January, 2000 for ` 2,50,000. He invested an amount of ` 7,00,000 in construction of one more floor
in this house in June, 2007. The house was sold by him in November, 2019 for ` 37,50,000. The valuation
adopted by the registration authorities for charge of stamp duty was ` 47,25,000 which was not contested by
the buyer, but as per assessee’s request, the Assessing Officer made a reference to Valuation officer. The
value determined by the Valuation officer was ` 47,50,000. Brokerage @ 1% of sale consideration was paid
by Mr. Thomas to Mr. Sunil. The fair market value of house as on 01.04.2001 was ` 2,70,000.
CA Suraj Agrawal
Capital Gain 6A.3
You are required to compute the amount of capital gain chargeable to tax for A.Y. 2020-21 with the
help of given information and by taking CII for the F.Y. 2005-06 : 117, F.Y. 2007-08: 129 and for F.Y.
2019-20: 289.
15. X owns a piece of land situated in Noida (date of acquisition: March 1, 2003, cost of acquisition: `
70,503, value adopted by Stamp duty authority at the time of purchase: ` 80,000). On March 30, 2020,
the piece of land is transferred for ` 4 lakh. Find out the capital gains chargeable to tax in the
following situations:
1. The value adopted by Stamp duty authority is ` 5.5 lakh. X does not dispute it.
2. The value adopted by the Stamp duty authority is ` 5.75 lakh. X files on appeal under the Stamp Act and
Stamp duty valuation has been reduced to ` 4.90 lakh by the Allahabad High Court.
3. The value adopted by the Stamp duty authority is ` 5.60 lakh. X does not challenge it under the Stamp
Act. However, he claims before the Assessing Officer that ` 5.60 lakh is more than the fair market value of
the land. The Assessing Officer refers it to the Valuation Officer who determines ` 5.25 lakh as fair market
value.
4. In Situation (3), suppose the value adopted by the Valuation Officer is ` 6.10 lakh.
16. Amin is the holder of 1,000 debentures of Amin Ltd. having a face value of ` 1,000 each. The company has
offered an option to the debenture - holder either to redeem the debenture at ` 1,200 each or to convert the
debentures into equity shares of equivalent value. The market value of the shares on the date of exercising
the option is ` 1,200 per share [face value ` 1,000]. What will be the tax consequences of the two options
in the hands of the debenture-holder Amin?
17. X holds 1,000 equity shares (unlisted) in A Ltd. since 1998 (cost of acquisition: ` 10,000, fair market value on
April 1, 2001: ` 14,000). A Ltd. offers 2,000 rights shares of ` 10 each to X on May 1, 2019 at a premium of `
50. X subscribes for 800 rights shares and renounces 1,200 shares in favour of C by transferring the right
entitlement for a consideration of ` 4,800. X sells 1,800 shares in A Ltd. on March 30, 2020 @ ` 90 per share.
Compute CG
18. In April, 2004, S subscribed to the first issue to Convertible Debentures of a listed public limited company
(face value of each Debentures was ` 100) to the extent of ` 25,000. In May 2008, the company converted
the same into Shares with face value of ` 10 each. Half of the holdings of the shares held by S was sold by
him in September 2019 for ` 50,000. S had to pay a brokerage of 2% on sale. What is the nature of gains-
realised and compute the same?
19. Ms. Paulomi has transferred 1,000 shares (unlisted) of Hetal Ltd., (which she acquired at a cost of ` 10,000 in
the financial year 2002-03) to Dhaval, her brother, at a consideration of ` 3,12,934 on 15.5.2018 privately.
During the financial year 2019-20, she has paid through e-banking ` 15,000 towards medical premium, `
50,000 towards life insurance premium and ` 25,000 towards PPF. Assuming she has no other source of
income, compute her total income and tax payable for the Assessment Year 2020-21.
20. Mr. C inherited from his father 8 plots of land in 2000. His father had purchased the plots in 1980 for ` 5 lakhs.
The fair market value of the plots as on 1-4-2001 was ` 8 lakhs. (` 1 lakh for each plot) On 1st June 2006, C
started a business of dealer in plots and converted the 8 plots as stock-in-trade of his business. He recorded
the plots in his books at ` 45 lakhs being the fair market value on that date. In June 2010, C sold the 8 plots
for ` 50 lakhs. In the same year, he acquired a residential house property for ` 35 lakhs. He invested an
amount of ` 5 lakhs in construction of one more floor in his house in June 2012. The house was sold
by him in June 2019 for ` 68,50,000.
The valuation adopted by the registration authorities for charge of stamp duty was ` 94,50,000. As per the
assessee's request, the Assessing Officer made a reference to a Valuation Officer. The value determined by
the Valuation Officer was ` 95,20,000. Brokerage of 1 % of sale consideration was paid by C.
The relevant Cost Inflation Indices are :
F.Y. 2001-02 100
F.Y. 2006-07 122
F.Y. 2010-11 167
F.Y. 2012-13 200
F.Y. 2019-20 289
Give the tax computation for the Assessment Year 2020-21.
CA Suraj Agrawal
Capital Gain 6A.4
21. For the AY 2020-21, Mrs. X (29 years), a resident individual, gives the following information. Compute
the tax liability-
`
Short-term capital gain which satisfies conditions given in 1,27,000
Section 111A
Other income 2,53,000
Amount deductible under section 80G 1,000
PPF contribution 6,000
Net income 3,73,000
22. X a resident HUF, has the following income for the PY 2019-20: `
Business income (-) 15,000
Short-term capital gain 63,000
Long-term capital gain on sale of land 8,41,000
Find out the tax liability for the AY 2020-21 assuming that the family pays life insurance premium of `
65,000 (sum assured: ` 8,00,000)
23. Discuss the tax implications arising consequent to conversion of a capital asset into stock-in trade of business
and its subsequent sale.
24. Mr. X purchased gold and diamond jewellery on 1.11.1998 for ` 1,33,000. The FMV of jewellery on 1.4.2001
was ` 2,00,000. Mr. X commence the business of trading in gold and diamond jewellery w.e.f. 1.4.2005. The
above said jewellery was brought into the business and the amount recorded in the books was ` 15,00,000
whereas its FMV on the date of conversion i.e. 31.10.2019 was ` 25,00,000. The said stock was sold in the
business on 31.3.2020 for ` 40,00,000. Compute the amount chargeable to capital gains tax.
25. Sri Rishi and Manish formed a partnership firm. Just after formation of the partnership, Shri Rishi brought the
following assets into the firm on 15th July 2019 as his capital contribution –
House property (`) Ornaments of gold (`)
Market value of the property on the date of 1,080,000 25,000
transfer
Amount recorded in the books of firm 900,000 36,000
Actual cost 60,000 15,000
Year of acquisition 2004-05 2017-18
What tax consequences will Mr. Rishi have to face in respect of the above transaction? What will be your
answer if Mr. Rishi brings the above assets otherwise than by way of his capital contribution?
26. Shri Suresh and X Ltd. are member 'SM Associates', an association of persons. SM Associates was dissolved
on 16th August 2019 and following assets were distributed to the members (all amounts in `)
House property Listed Govt. securities
(given to Suresh) (given to X Ltd.)
FMV as an 16th August 2019 1,200,000 600,000
Amount recorded in agreement of sale 600,000 700,000
Cost of acquisition 40,000 500,000
Date of acquisition 1-4-1997 16-8-2018
FMV of the asset as on 1-4-2001 100,000
What are the tax implications of these transactions? What will be your answer if 'SM Associates' is a
cooperative society?
27. In May 2012 a partnership firm has been formed in which Mr. Vimal became a partner by introducing land as
his capital contribution. In the books of account of the firm the value of the asset was adopted at ` 3,98,000.
The fair market value of the land as on that date was ` 5 lakhs. Mr. Vimal bought that land for ` 1,25,000 in
May 2002. Subsequently the firm was dissolved in May 2019 when the land was transferred to Mr. Mihir,
another partner, towards settlement of his capital account which had a credit balance of ` 7,50,000. The fair
market value as on the date of such transfer was ` 9,50,000. Compute the capital gains in the hands of
Partner as well as firm.
CA Suraj Agrawal
Capital Gain 6A.5
28. The house property of Abhinav is compulsorily acquired by the Government for ` 10,00,000 vide Notification
issued on 12th March 2008. Abhinav has purchased the house in 2002-03 for ` 2,00,000. The compensation
is received on 15th April 2019. The compensation is further enhanced by an order of the court on 5th April
2020 and a sum of ` 2,00,000 is received as enhanced compensation on 25th May 2020. Compute the
capital gains and determine the year in which it is taxable.
29. S, an owner of 3 houses, sells a residential house property in Chennai for ` 12,40,000 on 23-5-2019. This
house was purchased by him in April 2004 for ` 2,80,000. On 30-5-2019, he purchased a flat in Mumbai of
` 8,70,000 for the purpose of the residence of his son-in-law. On 1-3-2020, S sells the flat in Mumbai for `
12,10,000. Compute the capital gains arising on the two transactions. Is S eligible for exemption under
section 54 in respect of the second sale? S, has an other income of ` 10,00,000.
30. ‘X’ give the following information

Residential house property situated of Kolkata X
`
Date of transfer December 30, 2019
Date of purchase June 30, 2002
Cost of acquisition 2,00,000
Expenses on transfer 40,000
Amount deposited in capital gains deposit account scheme on July 20, 2020 21,00,000
To get the exemption under section 54, the following residential house
properties are purchased in Chennai by X by withdrawing from the
deposit account
Date of purchase June 20, 2021
Find out the following In the case of X—

a. capital gain chargeable to tax for different assessment years;
b. X does not want to purchase or construct another property, what is the earliest date when he can
withdraw the unutilised amount from the deposit account; and
c. is it possible to take back the exemption given under section 54 in a subsequent year.
31. Mr. Pranav, a resident individual had purchased a plot of land at a cost of ` 75,000 in June, 2003. He
constructed a house for his residence on that land at a cost of ` 1,25,000 in August, 2007. He sold that house
in May, 2019 at ` 15,50,000 and purchased another residential house in June, 2019 for ` 8,00,000. He
furnishes other income and investment as follows :
Particulars `
Interest on fixed deposit with a bank (Net of TDS ` 5,000) 45,000
Investment in PPF 20,000
Cost inflation index for financial year 2003-2004, 2007-08 and 2019-20 are 109, 129 and 289 respectively.
You are required to compute taxable income and tax payable by Mr. Pranav for the AY 2020-21.
32. X Sells agricultural land situated within the municipal limits of Calcutta for ` 50,00,000 on July 1, 2019, which
was purchased by him on March 1, 2003 for ` 4,00,000. On July 15, 2020, he purchases agricultural land in
rural area for ` 4,30,000 and deposits ` 10,80,000 in a deposit account for availing exemption under section
54B. He purchases another agricultural land (situated within the limit of Delhi Municipal Corporation) on June
30, 2021 for ` 8,47,000 by withdrawing from the deposit account. Amount left in the deposit account is
withdrawn on July 10, 2021. The agricultural land in rural area is transferred on April 1, 2022 for ` 4,90,000
and the land in Delhi is transferred on July 17, 2022 for ` 8,70,000. Determine the amount of capital gains.
CA Suraj Agrawal
Capital Gain 6A.6
33. During the previous year ending on March 31, 2020, X sells the following:
Assets Dale of sale Sale Cost of Year of Fair Market
proceeds acquisition purchase value on April
` ` 1, 2001 `
Shares (non-listed) April 10, 2019 4,50,000 1,70,000 2004-05 1,80,000
Agricultural land
in rural area (outside May 25, 2019 17,00,000 2,30,000 1993-94 3,40,000
the municipal limits)
Agricultural land in June 10, 2019 8,00,000 2,50,000 1999-00 2,00,000
urban area
Debentures (non-listed) April 10, 2019 2,90,000 1,70,000 2005-06 1,80,000
Personal car July 1, 2019 1,25,000 70,000 2006-07 NA
On July 31, 2020 (being the due dale of furnishing return of income), X deposits ` 1,00,000 under section 54B
for claiming exemption in future by purchasing agricultural land. By withdrawing from the deposit account, he
purchases agricultural land for ` 40,000 till June 9, 2021. Assuming that the income of X from the other
sources for the previous years 2019-20 and 2021-22 is ` 5,86,000 and ` 2,92,000, respectively. Find out the
taxable income of X for the AYs 2020-21 and 2022-23.
34. Mr. Roy, aged 55 years owned a Residential House in Ghaziabad. It was acquired by Mr. Roy on 10-10-2006
for ` 6,00,000. He sold it for ` 30,00,000 on 4-11-2019. The stamp valuation authority of the State fixed value
of the property at ` 35,00,000. The assessee paid 2% of the sale consideration as brokerage on the sale of
the said property.
Mr. Roy acquired a residential house property at Kolkata on 10-12-2019 for ` 10,00,000 and deposited `
3,00,000 on 10-4-2020 and ` 5,00,000 on 15-6-2020 in the capital gains bonds of Rural Electrification
Corporation Ltd. He deposited ` 4,00,000 on 6-7-2020 and ` 5,00,000 on 1-11-2020 in the capital gain deposit
scheme in a Nationalized Bank for construction of an additional floor on the residential house property in
Kolkata.
Compute the Capital Gain chargeable to tax for the Assessment Year 2020-21 and income-tax
chargeable thereon assuming Mr. Roy has no other income. Cost Inflation Index for Financial Year
2006-07: 122 and Financial Year 2019-20: 289
35. Ms. Anshu transfers land and building on 02-01-2020 and furnishes the following information:
Particulars (`)
(a) Net consideration received 23,00,000
(b) Value adopted by Stamp Valuation Authority 25,00,000
(c) Value ascertained by Valuation Officer on reference by the Assessing Officer 27,00,000
(d) This land was acquired by Anshu on 1-04-2001. Fair Market Value of the land as
1,10,000
on 01-04-2001 was
(e) Anshu constructed a residential building on the land at a cost of ` 3,20,000
(construction completed on 01-12-2008 during the financial year 2008-09)
(f) Brought forward short term capital loss incurred on sale of shares during financial
year 2011-12 ` 1,50,000,
Anshu seeks your advice regarding the amount to be invested in NHAI bonds so as to be exempt from
capital gain tax under the Income-tax Act, 1961.
Cost inflation index for FY 2001-2002 : 100
36. Mr. Selvan, acquired a residential house in April, 2005 for ` 10,00,000 and made some improvements by way
of additional construction to the house, incurring expenditure of ` 2,00,000 in October, 2009. He sold the
house property in October, 2019 for ` 75,00,000. The value of property was adopted as ` 80,00,000 by the
State stamp valuation authority for registration purpose.
He acquired a residential house in January, 2020 for ` 25,00,000. He deposited ` 20,00,000 in capital gains
bonds issued by National Highways Authority of India (NHAI) in June, 2020.
CA Suraj Agrawal
Capital Gain 6A.7
Compute the capital gain chargeable to tax for the assessment year 2020-21. What would be the tax
consequence and in which assessment year it would be taxable, if the house property acquired in
January, 2020 is sold for ` 40,00,000 in March, 2021?
Cost inflation index : F.Y. 2005-2006 = 117
F.Y. 2009-2010 = 148
F.Y. 2019-2020 = 289
37. Mr. Chandru transferred a vacant site on 28.10.2019 for ` 100 lakhs. The site was acquired for ` 9,99,300 on
30.6.2005. He invested ` 50 lakhs in eligible bonds issued by Rural Electrification Corporation Ltd. (RECL) on
20.3.2020.
Again, he invested ` 20 lakhs in eligible bonds issued by National Highways Authority of India (NHAI) on
16.4.2020.
Compute the chargeable capital gain in the hands of Chandru for the A.Y. 2020-21.
2005-06 117
2019-20 289
38. X Ltd. sells the following assets -

Agricultural land Bonus shares House prp
(unlisted) (let out)
Date of sale January 31, 2020 November 7, 2019 March 25, 2020
Date of acquisition May 9, 2003 April 4, 2004 June 6, 2002
` ` `
Sale consideration 9,00,000 3,50,000 10,40,000
Purchase consideration 70,000 Nil 1,00,000
The agricultural land is situated in on urban area and used for agricultural purpose since 2003
X Ltd. invests in the following assets on April 2, 2020
1. Bonds of the National Highways Authority of India (redeemable on June 1, 2025): ` 4,00,000.
2. Bonds (redeemable on May 10, 2025) of the Rural Electrification Corporation : ` 5,00,000
3. Agricultural land: ` 75,000.
Find out the capital gain chargeable to tax.
39. X, sells the following long-term capital assets on January 11, 2020:
Residential Gold Silver Diamonds
house property
` ` ` `
Sale consideration 3,90,000 8,10,000 2,96,000 6,40,200
Indexed cost of acquisition 70,000 1,15,000 1,78,000 4,30,000

Expenses on Transfer 10,000 81,000 6,000 32,000
The due date of filing return of income for the AY 2020-21 is July 31, 2020. For claiming exemption
under sections 54 and 54EC, X purchases the following assets —
Assets Date of Amount
acquisition `
Land (for constructing a residential house) April 2, 2020 1,00,000
Bank deposit (for constructing house) August 5, 2020 60,000
Bonds of Rural Electrification Corporation
(redeemable on July 6, 2025) July 5, 2020 7,50,000
Bonds of National Highways Authority of India
(redeemable on August 10, 2028) July 10, 2020 3,05,000
Find out the amount of capital gain chargeable to tax for the AY 2020-201.
CA Suraj Agrawal
Capital Gain 6A.8
40. Arjun furnishes the following particulars and requests your advice as to liability to capital gains for
the assessment year 2020-21:
i. Jewellery purchased by him on 10.3.2003, for ` 1,05,000 was sold by him for a consideration of `
3,85,000 on 2.11.2019.
ii. He incurred expenses:
a. at the time of purchase ` 2,000
b. at the time of sale (for brokerage) ` 4,000
iii. He invested ` 70,000 in bonds with National Highway Authority of India out of sale consideration.
On these facts:
a. Compute the capital gains chargeable to tax.
b. Whether Arjun would be entitled to any exemption?
41. Compute the net taxable capital gains of Smt. Megha on the basis of the following information- A
house was purchased on 1.5.2007 for ` 4,50,000 and was used as a residence by the owner. The owner had
contracted to sell this property in June, 2011 for ` 10 lacs and had received an advance of ` 70,000 towards
sale. The intending purchaser did not proceed with the transaction and the advance was forfeited by the
owner. The property was sold in April, 2019 for ` 17,00,000. The owner, from out of sale proceeds, invested `
4 lacs in a new residential house in January, 2020.
Cost inflation index :- 2007-08 - 129
2019-20 – 289
42. State, with reasons, whether the following statements are True or False.
(i) Alienation of a residential house in a transaction of reverse mortgage under a scheme made and notified
by the Central Government is treated as "transfer" for the purpose of capital gains.
(ii) Zero coupon bonds of eligible corporation, held for more than 12 months, will be long-term capital assets.
(iii) In the case of a dealer in shares, income by way of dividend is taxable under the head "Profits and gains
of business or profession".
(iv) Where an urban agricultural land owned by an individual, continuously used by him for agricultural
purposes for a period of two years prior to the date of transfer, is compulsorily acquired under law and the
compensation is fixed by the State Government, resultant capital gain is exempt.
(v) Zero Coupon Bond means a bond on which no payment and benefits are received or receivable before
maturity or redemption.
43. Mr. Malik owns a factory building on which he had been claiming depreciation for the past few years.
It is the only asset in the block. The factory building and land appurtenant thereto were sold during
the year. The following details are available:
Particulars `
Building completed in September, 2008 for 10,00,000
Land appurtenant thereto purchased in April, 2002 for 12,00,000
Advance received from a prospective buyer for land in May, 2003, forfeited in favour 50,000
of assessee, as negotiations failed
WDV of the building block as on 1.4.2019 8,74,800
Sale value of factory building in November, 2019 8,00,000
Sale value of appurtenant land in November, 2019 40,00,000
The assessee is ready to invest in long-term specified assets under section 54EC, within specified time.
Compute the amount of taxable capital gain for the assessment year 2020-21 and the amount to be
invested under section 54EC for availing the maximum exemption. Cost inflation indices are as under
: Financial Year Cost inflation index
2002-03 105
2003-04 109
2019-20 289
44. Mr. A who transfers land and building on 02.01.2020, furnishes the following information:
(i) Net consideration received ` 12 lakhs.
(ii) Value adopted by stamp valuation authority, which was not contested by Mr. A ` 21.5 lakhs.
(iii) Value ascertained by Valuation Officer on reference by the Assessing Officer ` 22 lakhs.
(iv) This land was distributed to Mr. A on the partial partition of his HUF on 1.4.2001. Fair market value of the
land as on 1.4.2001 was ` 1,10,000.
(v) A residential building was constructed on the above land by Mr. A at a cost of ` 3,20,000 (construction
completed on 1.12.2003) during the financial year 2003-04.
(vi) Brought forward unabsorbed short-term capital loss (incurred on sale of shares during the financial year
2012-13) ` 75,000.
CA Suraj Agrawal
Capital Gain 6A.9
Mr. A seeks your advice as to the amount to be invested in NHAI/RECL bonds so as to be exempt
from clutches of capital gain tax. Cost inflation indices for the financial years 2001-02, 2003-04 &
2019-20 are 100, 109 and 289, respectively.
45. Mr. X is in possession of agricultural land situated within urban limits, which is used for agricultural purposes
during the preceding 3 years by his father. On 4.4.2019, this land is compulsorily acquired by the Central
Government of India on a compensation fixed and paid by it for ` 10 lakhs. Advise X as to the tax
consequences, assuming that the entire amount is invested in purchase of shares.
46. Mr. Sagar, a resident individual acquired a plot of land at a cost of ` 75,000 in June, 2009. He constructed a
house for his residence on that land at a cost of ` 1,25,000 in the financial year 2011-12. He transferred the
house for ` 15,00,000 in May, 2019 and acquired another residential house in June, 2019 for ` 8,00,000.
He furnishes other particulars as under
Insurance agency commission earned 45,000
(Net of TDS of ` 5,000)
Investment in NSC 20,000
(i.e. on 20-3-2020)
Cost inflation index details are given below:
2009 – 2010 148
2011 – 2012 184
2019 – 2020 289
Compute the total income of Mr. Sagar for the assessment year 2020-21.
47. Mr. A owns a residential house, which is self-occupied, and also a plot of land (He has no other house). He
sells the house on January 31, 2020 and the plot on February 15, 2020 for ` 11,00,000 and ` 7,00,000
respectively. The house was purchased on January 30, 2004 for ` 4,00,000 and the plot on March 30, 2004
for ` 2,00,000. A has purchased a new residential house on April 25, 2020 for ` 5,00,000 and claims
exemption in respect of such house. On 31-1-2021, he transfers the said residential house for ` 8,00,000 and
purchases a new house on 31-3-2022 for ` 11,00,000. Compute the capital gains for relevant years.
48. Mr. A sold share of a public limited company for ` 5,00,000 on 1.9.2019, which had been acquired by him in
October, 2004 for ` 50,000, He wants to utilize the said amount of sale consideration for purchase or
construction of a new residential house. He already owns one residential house at the time of sale of shares
i.e., on 1.9.2019. He had deposited ` 4,00,000 under the Capital Gains Deposit Account Scheme with a
specified Bank on 30.4.2020. Ascertain the capital gain taxable in A's hands for AY 2020-21 and advice
him as to what further action he has to take to avail the exemption.
49. X sells (non-listed) shares in a private sector company on July 10, 2019 for ` 8,05,000 (cost of acquisition on
June 16, 2004 : ` 60,000, expenses on sale : ` 5,000). On July 10, 2019, he owns one residential house
property. To get the benefit of exemption under section 54F, X deposits on May 30, 2020 ` 6,00,000 in Capital
Gains Deposit Account Scheme. By withdrawing from the Deposit Account, he purchases a residential house
properly at Delhi on July 6, 2021 for ` 4,80,000. Ascertain -
a. The amount of CG chargeable to tax for the AY 2020-21
b. Tax treatment of the unutilized amount,
c. When can be withdraw the unutilized amount and
d. What X has to do to ensure that the exemption under section 54F is never taken back.
50. X sells agricultural land situated in an urban area for ` 10,31,000 (brokerage paid @ 2 percent) on March 31,
2020 (cost of acquisition : ` 1,05,000 on March 1, 2003; it was used for agricultural purposes since 2006). On
March 31, 2020, he owns one residential house property. On April 6, 2020, he purchases the following assets
a. agricultural land : ` 1,50,000 ; and
b. a residential house property : ` 5,00,000.
Find out the capital gains chargeable to tax for the AY 2020-21.
51. Mr. ‘ X’ furnishes the following data for the previous year ending 31.3.2020:
(a) Unlisted Equity Shares of AB Ltd., 10,000 in number were sold on 31.5.2019, at ` 200 for each share.
(b) The above shares of 10,000 were acquired by ‘X’ in the following manner:
(i) Received as gift from his father on 1.6.2000 (5,000 shares) the fair market value on 1.4.2001 ` 50 per
share.
(ii) Bonus shares received from AB Ltd. on 21.7.2005 (2,000 shares).
(iii) Purchased on 1.2.2007 at the price of ` 125 per share (3,000 shares).
CA Suraj Agrawal
Capital Gain 6A.10
(c) Purchased one residential house at ` 10 lakhs, on 1.5.2020 from the sale proceeds of shares.
(d) ‘X’ is already owning a residential house, even before the purchase of above house.
You are required to compute the taxable capital gain. He has no other source of income
chargeable to tax.
(Cost Inflation Index – Financial year 2005-06: 117; 2006-07: 122; Financial year 2019-20: 289)
52. State with reasons whether the following statements are true or false having regard to the provisions
of the Income-tax Act, 1961:
Capital gain of ` 75 lakh arising from transfer of long term capital assets on 1.5.2019 will be exempt from
tax if such capital gain is invested in the bonds redeemable after 5 years, issued by NHAI under section
54EC.
53. Mr. A is a proprietor of Akash Enterprises having 2 units. He transferred on 1.4.2019 his Unit 1 by way of
slump sale for a total consideration of ` 25 lacs. Unit 1 was started in the year 2003-04. The expenses
incurred for this transfer were ` 28,000. His Balance Sheet as on 31.3.2019 is as under:
Liabilities Total (`) Assets Unit 1 (`) Unit 2 (`) Total (`)
Own Capital 15,00,000 Building 12,00,000 2,00,000 14,00,000
Revaluation Reserve (for 3,00,000 Machinery 3,00,000 1,00,000 4,00,000
building of unit 1)
Bank loan (70% for unit 1) 2,00,000 Debtors 1,00,000 40,000 1,40,000
Trade creditors (25%for unit1) 1,50,000 Other assets 1,50,000 60,000 2,10,000
Total 21,50,000 Total 17,50,000 4,00,000 21,50,000
Other information:
(i) Revaluation reserve is created by revising upward the value of the building of Unit 1.
(ii) No individual value of any asset is considered in the transfer deed.
(iii) Other assets of Unit 1 include patents acquired on 1.7.2016 for ` 50,000 on which no depreciation has
been charged.
Compute the capital gain for the assessment year 2020-21.
54. Shri Aniket purchased 1,00,000 shares of Nahar Spinning mills Limited (50% of total shares of the company)
in 2002-03 for ` 8,00,000. The company was liquidated on 17.12.2019 and on liquidation he received ` 20 per
share and immovable property whose market value worth ` 25,50,000. On liquidation the company possessed
accumulated profits of ` 8,00,000 (after making necessary provision for corporate dividend tax). Find out the
capital gains in hands of Aniket for the assessment year 2020-21.
55. Ms. Vasumathi purchased 10,000 equity shares of ABC Co. Pvt. Ltd. on 28.2.2005 for ` 1,20,000. The
company was wound up on 31.7.2019. The following is the summarized financial position of the
company as on 31.7.2019:
Liabilities ` Assets `
60,000 Equity shares 6,00,000 Agricultural lands 42,00,000
General reserve 40,00,000 Cash at bank 6,50,000
Provision for taxation 2,50,000
48,50,000 48,50,000
The tax liability was ascertained at ` 3,00,000. The remaining assets were distributed to the shareholders in
the proportion of their shareholding. The market value of 6 acres of agricultural land (in an urban area) as on
31.7.2019 is ` 10,00,000 per acre. The agricultural land received above was sold by Ms. Vasumathi on
28.2.2020 for ` 15,00,000.
Discuss the tax consequences in the hands of the company and Ms. Vasumathi. The cost inflation
indices are: F.Y.2004-05: 113; F.Y.2019-20: 289
56. Mr. Abhishek a senior citizen, pledged his residential house with a bank, under a notified reverse mortgage
scheme. He was getting loan from bank in monthly installments. Mr. Abhishek did not repay the loan on
maturity and hence gave possession of the house to the bank, to discharge his loan. How will the treatment
of long-term capital gain be on such reverse mortgage transaction?
CA Suraj Agrawal
Capital Gain 6A.11
57. Sachin received ` 15,00,000 on 23.01.2020 on transfer of his residential building in a transaction of reverse
mortgage under a scheme notified by the Central Government. The building was acquired in March 2003 for `
8,00,000.
Is the amount received on reverse mortgage chargeable to tax in the hands of Sachin under the head ‘Capital
gains’?
Cost inflation index for the Financial year 2002-03 - 105
Financial year 2019-20 - 289
58. Mr. Kumar, aged 50 years, is the owner of a residential house which was purchased in September, 2003 for `
5,00,000. He sold the said house on 5th August, 2019 for ` 24,00,000. Valuation as per stamp valuation
authority of the said residential house was ` 30,50,000. He invested ` 5,00,000 in NHAI Bonds on 12th
January, 2020. He purchased a residential house on 5th July, 2020 for ` 10,00,000. He gives other particulars
as follows:
Interest on Bank Fixed Deposit ` 32,000
Investment in public provident fund ` 50,000
You are requested to calculate the taxable income for the assessment year 2020-21 and the tax
liability, if any. Cost inflation index for F.Y. 2003-04 and 2019-20 are 109 and 289, respectively.
CA Suraj Agrawal
Capital Gain 6A.12
Class Notes
CA Suraj Agrawal
Capital Gain 6B.1
SOLUTION – CAPITAL GAIN

1. Computation of capital gain of Salman for the Assessment Year 2020-21 (amounts in `)
Full value of consideration 18,50,000
Less: Expenses in connection with transfer 48,000
Less: Indexed cost of acquisition (3,31,000 x 289 ÷ 129) 7,41,543 7,89,543
Long term Capital Gains 10,60,457
[If HC Ruling is followed: CII of PY 2007-08 will be used]
2. Computation of Taxable Capital Gains of Ms. Rekha for A.Y. 2020-21 (amounts in `) :
Less: Expenses in connection with transfer 96,000
Less: Indexed cost of acquisition (725,000 x 289 ÷100) 20,95,250
Less: Indexed cost of improvement (3,89,000 x 289 ÷ 148) 7,59,601 29,50,851
Long term Capital Gains 66,49,149
3. In case of property acquired in modes specified under section 49(1) (here, inheritance), the cost to the
previous owner or FMV as on 1-4-2001 will be taken. Cost of improvement incurred after 1-4-2001 by
previous owner or the assessee, is deductible.
For determining long-term or short-term nature of land, the period of holding of Mr. F's father will be included,
as a result of which, the plot of land becomes long-term capital asset for Mr. F.
For indexation purposes, CII of the year in which property was held by the assessee i.e. year of inheritance
being 2004-05 will be taken as denominator.
Less; Expenses on transfer being sale stamp deed expenses @ 1% of 30,00,000 30,000
Net consideration 29,70,000
Less: Indexed cost of acquisition (30,000 x 289 ÷ 113) 76,726
Less: Cost of improvement incurred after 1-4-2001
Mr. F's father (20,000 × 289 ÷ 109 = 53,028) + Mr. F (50,000 x 289 ÷ 129 = 112,016) 1,65,044 2,41,770
Long-term capital gains 27,28,230
4.
Name of asset Goodwill Trademark Tenancy rights Mfg. licence
Full value of consideration 18,00,000 5,00,000 5,00,000 2,00,000
Less: Cost of Acquisition 0 2,36,885* 0 30,000
Less: Cost of Improvement 0 19,527** 39,054*** 0
Long-term capital gains 18,00,000 2,43,588 4,60,946
Short-term capital gains 1,70,000
* 100000 x 289 / 122
** 10000 x 289 / 148
*** 20000 x 289 / 148
Notes:
1. Trademark is a long-term capital asset as it was held for more than 36 months before date of transfer.
However, manufacturing license was held for exactly 36 months (i.e. not more than 36 months) before
date of transfer, hence, it is short-term capital asset. Goodwill and tenancy rights are long-term capital
assets as they were held since 2005.
2. In case of goodwill of a business, cost of improvement is always NIL.
5.
1. Cost of acquisition of a capital asset, being goodwill of a business or a trade mark or brand name
associated with a business or a right to manufacture, produce or process any article or thing, or
right to carry on any business, tenancy rights, stage carriage permits and loom hours [Section
55(2)(a)]
(i) If the above capital assets have been purchased by the assessee, the cost of acquisition is the
amount of the purchase price. For example, if Mr. A purchases a stage carriage permit from Mr. B for
` 2 lacs, that will be the cost of acquisition for Mr. A.
(ii) If the above capital assets are self-generated, the cost of acquisition shall be taken as nil.
(iii) In case the capital asset is acquired by any mode given under clauses (i) to (iv) of section 49(1), the
cost of acquisition will be the cost to the previous owner if the previous owner paid for it. However, if it
was self-generated by the previous owner, the cost of acquisition will be taken as nil.
2. Cost of acquisition of other self-generated assets not covered under section 55(2)(a): In respect of
self-generated goodwill of a profession and other self-generated assets not specifically covered under
section 55(2)(a), the decision of the Supreme Court in CIT v. B.C. Srinivasa Setty will apply. In that case,
the Supreme Court held that if the cost of acquisition of a self-generated asset is incapable of
determination, then transfer of such asset is not taxable and consequently the gains thereon cannot be
brought to charge.
CA Suraj Agrawal WAY TO PINNACLE

Capital Gain 6B.2
6.
Computation of capital gains chargeable to tax in the hands of Mr. A
Particulars `
Less: Indexed cost of acquisition (Note 1) 1,65,820
Indexed cost of improvement (Note 2) 5,24,307
Long term capital Gain 5,09,873
Note 1
Indexed cost of acquisition is determined as under:
Cost to the previous owner i.e. Mr. Rakesh is ` 1,05,000
Fair Market Value on 1st April, 2001 is ` 1,50,000
Cost to the previous owner or FMV on 1st April, 2001,
whichever is more, is to be taken as cost of acquisition of Mr. A ` 1,50,000
Less: Advance money forfeited by Mr. A (as per section 51)
(Note : Advance forfeited by Mr. Rakesh, the previous owner,
should, however, not be deducted) ` 80,000
Cost of acquisition ` 70,000
Indexed cost of acquisition (`

` 70,000 × 289/122) ` 1,65,820
122 is the Cost Inflation Index for F.Y. 2006-07, being the first year in which property is held by Mr. A and 289
is the Cost Inflation Index for F.Y. 209-20, being the year in which the property is sold.
Alternative view: In the case of CIT v. Manjula J. Shah, the Bombay High Court held that the indexed cost of
acquisition in case of gifted asset can be computed with reference to the year in which the previous owner
first held the asset. As per this view, the indexation cost of acquisition of house would be ` 2,02,300 taking
Cost Inflation Index of 100 for the F.Y. 2001-02 since F.M.V. as on 1st April, 2001 is taken as cost of
acquisition of Mr. A.
Note: Clause (ix) of Section 56(2), inserted by the Finance (No.2) Act, 2014, provides that the advance which
is forfeited on or after 01/04/2014 would be chargeable to tax under the head “Income from Other sources”
and hence, such forfeited amount shall not be reduced from the cost of acquisition of the transferred capital
asset. In the present case, the advance was forfeited in a previous year prior to P.Y. 2014-15.
Therefore, such amount would be deductible from the cost of acquisition while determining the
Capital gains on transfer of such asset.
Note 2
Indexed cost of Improvement is determined as under:
Expenditure incurred before 1st April, 2001 should not be considered NIL
Expenditure incurred on or after 1st April, 2001
- During 2005-06 Indexed cost of Improvement [`` 50,000 × 289/117] ` 1,23,504
- During 2008-09 Indexed cost of Improvement [`` 1,90,000 × 289/137] ` 4,00,803
Total indexed cost of improvement ` 5,24,307
7.
(a) Shares held in a company in liquidation - The period after the date on which the company goes into
liquidation shall be excluded while calculating the period of holding. Therefore, the period of holding shall
commence from the date of acquisition and end with the date on which the company goes into liquidation.
(b) Bonus shares - The period of holding shall be reckoned from the date of allotment of bonus shares and
will end with the date of transfer.
(c) Flat in a co-operative society - The period of holding shall be reckoned from the date of allotment of
membership in the society and will end with the date of transfer.
(d) Transfer of security by a depository - The period of holding shall be computed from the date on which
the securities were credited to the demat account and will end with the date of transfer (sale). The first-in-
first-out (FIFO) method will be adopted for determining the period of holding

Capital Gain 6B.3
8. As per section 2(14)(ii), the term “personal effects” excludes any work of art. As a result, any work of art will
be considered as a capital asset and sale of the same will attract capital gains tax. Thus, the contention of Ms.
Vasudha is not correct.
9. The definition of capital asset under section 2(14) includes jewellery. Therefore, capital gains is attracted on
sale of jewellery, since jewellery is excluded from personal effects. The cost to the previous owner or the fair
market value as on 1.4.2001, whichever is more beneficial to the assessee, would be treated as the cost of
acquisition. Accordingly, in this case, long term capital gain @ 20% will be attracted in the year in which the
gold and jewellery is sold by Mrs. X.
10. Transfer of immovable property for inadequate consideration will have any tax implication in the hands of
transferee under section 56(2)(x) as difference exceeds ` 50,000. Therefore, in the hands of transferee, i.e.,
Ms. Dayama, Income under the head IOS will be ` 1,75,000. Further, for the transferor, Ms. Chhaya, the
value adopted for stamp duty purpose will be taken as the deemed sale consideration under section 50C for
computation of capital gains.
Particulars Chhaya Dayama

(Transferor) ` (Transferee) `
Capital gains
Deemed sale consideration under section 50C 6,00,000
Less: Indexed cost of acquisition 4,00,000
LTCG 2,00,000
Difference between stamp duty value and sale consideration of 1,75,000
immovable property, taxable under section 56(2)(x)
Other income (computed) 50,000 2,05,000
Total income 2,50,000 3,80,000
11. In the hands of the seller, Mr. Raj Kumar

As per section 50C(1), where the consideration received or accruing as a result of transfer of land or building
or both, is less than the value adopted or assessed or assessable by the stamp valuation authority, the value
adopted or assessed or assessable by the stamp valuation authority shall be deemed to be the full value of
consideration received or accruing as a result of transfer.
Where the assessee appeals against the stamp valuation and the value is reduced in appeal by the appellate
authority (Revenue Divisional Officer, in this case), such value will be regarded as the consideration received
or accruing as a result of transfer.
In the given problem, land has been held for a period exceeding 24 months and building for a period less than
24 months immediately preceding the date of transfer. So land is a long-term capital asset, while building is a
short-term capital asset.
Particulars `
Long term capital gain on sale of land
Consideration received or accruing as a result of transfer of land 22,00,000
Less: Indexed cost of acquisition ` 5,19,000 x 289/184 8,15,168
Long-term capital gain (A) 13,84,832
Short-term capital loss on sale of building

Consideration received or accruing from transfer of building 10,00,000
Less: Cost of acquisition 14,00,000
Short term capital loss (B) 4,00,000
As per section 70, short-term capital loss can be set-off against long-term capital gains. Therefore, the net
taxable long-term capital gains would be ` 9,84,832 (i.e., ` 13,84,832 – ` 4,00,000).
In the hands of the buyer Mr. Dhuruv

As per section 56(2)(x), where an individual or HUF receives from a non-relative, any immovable property for
a consideration which is less than the stamp value (or the value reduced by the appellate authority, as in this
case) by an amount exceeding ` 50,000, then the difference between such value and actual consideration of
such property is chargeable to tax as income from other sources. Therefore, ` 7,00,000 ( i.e. ` 32,00,000 - `
25,00,000) would be charged to tax as income from other sources under section 56(2)(x) in the hands of Mr.
Dhuruv.

Capital Gain 6B.4
12.
Computation of total income of Mr. Y for A.Y. 2020-21
Particulars ` ` `
Capital Gains
Short term capital gains (on sale of flat)
(i) Sale consideration 3,50,000
(ii) Stamp duty valuation 3,70,000
Consideration for the purpose of capital gains as per section 50C 3,70,000
(stamp duty value, since it is higher than sale consideration)
Less: Cost of acquisition [As per section 49(4), cost to be taken into
consideration for 56(2)(x) will be the cost of acquisition] 3,40,000 30,000
Long term capital loss on sale of equity shares of X Pvt. Ltd

Less: Indexed cost of acquisition(`
` 3,50,000 × 289/122) 8,29,098
Long term capital loss to be carried forward (See Note 1 below) 5,49,098
Income from other sources:
Gift from friends by way of immovable property on 30.11.2018

[See Note 3 below]. 3,40,000
Gift received from a close friend (unrelated person)
[See Note 2 below ] 75,000
Total income 4,45,000
Notes:
1. In the given problem, unlisted shares of X Pvt. Ltd. have been held for more than 24 months and hence,
constitute a long term capital asset. The loss arising from sale of such shares is, therefore, a long-term
capital loss. As per section 70(3), long term capital loss can be set-off only against long-term capital
gains. Therefore, long-term capital loss cannot be set-off against short-term capital gains. However, such
long-term capital loss can be carried forward to the next year for set-off against long-term capital gains
arising in that year.
2. Any sum received from an unrelated person will be deemed as income and taxed as income from other
sources if the aggregate sum received exceeds ` 50,000 in a year [Section 56(2)(x)].
3. Receipt of immovable property without consideration would attract the provisions of section 56(2)(x).
13.
Computation of long term capital gain of Dinesh for the A.Y. 2020-21
Particulars ` `
Full value of consideration (Note 1) 65,00,000
Less: Indexed cost of acquisition-land (`
` 3,00,000 × 289/129) (Note 2 & 3) 6,72,093
Indexed Cost of acquisition-building (`
` 15,00,000 × 289/137) (Note 3) 31,64,234
Indexed Cost of improvement-building (` ` 5,00,000 x 289/184) 7,85,326 46,21,653
Long-term capital gain 18,78,347
Notes:
1. As per section 50C, where the consideration received or accruing as a result of transfer of a capital asset,
being land or building or both, is less than the value adopted by the Stamp Valuation Authority, such value
adopted by the Stamp Valuation Authority shall be deemed to be the full value of the consideration
received or accruing as a result of such transfer. Accordingly, full value of consideration will be ` 65 lakhs
in this case.
2. Since Dinesh has acquired the asset by way of gift, therefore, as per section 49(1), cost of the asset to
Dinesh shall be deemed to be cost for which the previous owner acquired the asset i.e., ` 3,00,000, in this
case.
3. Indexation benefit is available since both land and building are long-term capital assets. However, as per
the definition of indexation cost of acquisition, indexation benefit for land will be available only from the
previous year in which Mr. Dinesh first held the asset i.e., P.Y. 2007-08.
Alternative view: In the case of CIT v. Manjula J. Shah 16 Taxmann 42 (Bom.), the Bombay High court
held that indexation cost of acquisition in case of gifted asset can be computed with reference to the year
in which the previous owner first held the asset. As per this view, the indexation cost of acquisition of land
would be ` 8,25,714 (Based on PY 2002-03).

Capital Gain 6B.5
14.
Computation of Long term Capital Gain for A.Y. 2020-21
Particulars ` `
Sale consideration as per section 50C (Note-1) 47,25,000
Less: Expenses incurred on transfer being brokerage @ 1% of sale 37,500
consideration of ` 37.50 lacs 46,87,500
Less: Indexed cost of acquisition (Note-2) (`

` 2,70,000 × 289/117) 6,66,923
Indexed cost of improvement (` ` 7,00,000 × 289/129) 15,68,217 22,35,140
Notes:
1. As per section 50C, where the consideration received or accruing as a result of transfer of a capital asset,
being land or building or both, is less than the valuation by the stamp valuation authority, such value
adopted or assessed by the stamp valuation authority shall be deemed to be the full value of
consideration. Where a reference is made to the valuation officer, and the value ascertained by the
valuation officer exceeds the value adopted by the stamp valuation authority, the value adopted by the
stamp valuation authority shall be taken as the full value of consideration.
Sale consideration ` 37,50,000

Valuation made by registration authority for stamp duty ` 47,25,000
Valuation made by the valuation officer on a reference ` 47,50,000
Applying the provisions of section 50C to the present case, ` 47,25,000, being, the value adopted by the
registration authority for stamp duty, shall be taken as the sale consideration for the purpose of charge of
capital gain.
2. The house was inherited by Mr. Thomas under the will of his father and therefore, the cost incurred by the
previous owner shall be taken as the cost. Fair market value as on 01.04.01, accordingly, shall be
adopted as the cost of acquisition of the house property. However, indexation benefit will be given from
the year in which Mr. Thomas first held the asset i.e.P.Y. 2005-06
Alternative view: In the case of CIT v. Manjula J. Shah 16 Taxmann 42 (Bom.), the Bombay High Court
held that the indexed cost of acquisition in case of gifted asset can be computed with reference to the
year in which the previous owner first held the asset. As per this view, the indexation cost of acquisition of
house would be ` 7,80,300
15.
Situations
(1) (2) (3) (4)
` ` ` `
Full.value of consideration 5,50,000 4,90,000 5,25,000 5,60,000
Less: Indexed cost of acquisition [`
` 70,503 x 289 ÷ 105] 1,94,051 1,94,051 1,94,051 1,94,051
Long-term capital gains 3,55,949 2,95,949 3,30,949 3,65,949

Note : Value adopted by the Stamp duty authority at the time of acquisition cannot be taken as cost off
acquisition.
16.
(1) Redemption: The first option of redemption of debentures will result in the levy of capital gains tax.
Capital gains = (1200 - 1000) x 1000 debentures = ` 2 lakh. Indexation benefit is not allowed.
(2) Conversion : There will be no capital gain on conversion of debentures into equity shares, as thel
conversion of debenture into shares is not 'transfer' as per section 47(x).
17.
Assessment of X for the assessment year 2020-21 `
Sale proceeds of 1,000 original shares 90,000
Less : Indexed cost of acquisition [`
` 14,000 x 289/100) 40,460
Long-term capital gain 49,540
Sale proceeds of 800 rights shares [` ` 90 x 800| 72,000

Less : Cost of acquisition [i.e., ` 60 x 800] 48,000

Capital Gain 6B.6
Sale proceeds of right entitlement of 1,200 shares 4,800
Less: Cost of acquisition Nil
18.
Computation of Capital gain : `
Sale proceeds of half holding 50,000
Less: Brokerage (2% of 50,000) (1,000)
` 12,500 x 289/137] (26,369)
Long term Capital gain 22,631
19.
Computation of total income and tax liability of Ms. Paulomi for A.Y. 2020-21
Particulars `
Less: Indexed cost of acquisition (`
` 10,000 × 289/105) 27,524
Tax liability
Income-tax @ 20% on ` 35,410 (` ` 2,85,410 – ` 2,50,000) 7,082
Less: Rebate under section 87A 7,082
Tax after Rebate NIL
Notes :
1. As per section 112, deductions under Chapter VI-A are not allowable against long term capital gain.
Therefore, Paulomi is not entitled to deduction under section 80C in respect of payment of life insurance
premium and contribution to PPF. She is also not entitled to deduction under section 80D in respect of
medical insurance premium paid by her.
2. She is, however, entitled to reduce the long-term capital gain by the unexhausted basic exemption limit
and pay tax on the balance @20% as per section 112. In this case, since she has no other source of
income, the entire basic exemption limit of ` 2,50,000 to the extent of long-term capital gain can be
reduced from the long-term capital gain.
20. Computation of total income and tax liability of Mr. C for A.Y. 2020-21
Particulars ` `
Capital Gains on sale of residential house property Value declared by Mr. C ` 68,50,000
Value adopted by Stamp Valuation Authority ` 94,50,000
Valuation as per Valuation Officer ` 95,20,000
Gross Sale consideration (See Note 1) 94,50,000
Less: Brokerage@1% of sale consideration 68,500
Net Sale consideration 93,81,500

` 35,00,000 × 289/167) 60,56,886
Indexed cost of improvement (` ` 5,00,000 × 289/200) 7,22,500 67,79,386
Long-term capital gains (Total Income) 26,02,114
Tax on total income (See Note 2)

Long-term capital gain taxable@20% (`
` 26,02,110 – ` 2,50,000) 4,70,422
Less: Rebate u/s 87A NIL
Tax before cess 4,70,422
Add: Health & Education cess @ 4% 18,817
Total tax liability 4,89,239
Tax liability (rounded off) 4,89,240
Notes:
1. As per section 50C, in case the value of sale consideration declared by the assessee is less than the
value adopted by the Stamp Valuation Authority for the purpose of charging stamp duty, then, the value
adopted by the Stamp Valuation Authority shall be taken to be the full value of consideration. In case the
valuation is referred to the Valuation Officer and the value determined is more than the value adopted by
the Stamp Valuation Authority, the value determined by the Valuation Officer shall be ignored. Therefore,
in the present case, the sale consideration would be the stamp valuation of ` 94,50,000, since the same

Capital Gain 6B.7
is more than the sale value declared by Mr. C and less than the value determined by the Valuation
Officer.
2. As per section 112, the unexhausted basic exemption limit can be exhausted against the long-term capital
gains. Since Mr. C does not have any other income in the current year, the whole of the basic exemption
limit of ` 2,50,000 is exhausted against the long-term capital gains and the balance long-term capital
gains shall be taxable@20%. It is assumed that Mr. C is a resident individual below the age of 60 years.
21. In this case, the two conditions of section 111A are satisfied [i.e., the taxpayer is a resident individual and NI--
ST is ` 2,46,000 (which is lower than the exemption limit of ` 2,50,000).
Consequently, from the short-term capital gain the following shall be deducted—
Compilation of net income and tax
Short-term capital gain Other
under section 111A incomes
` `
Income 1,27,000 2,53,000
Less: Deduction under section 80C 6,000
Under section 80G 1,000
Net income 1,27,000 2,46,000
Income-tax on net income [15% of ` 1,23,000 (i.e., 18,450 Nil
` 1,27,000 — ` 4,000 (Unexhausted Limit)]
Less: Rebate NIL Nil
Tax after Rebate 18,450
Add: H&EC – 4% 738 Nil
Tax liability 19,190 Nil
22.
Long-term Capital gain Short-term Capital gain
` `
Capital gain 8,41,000 63,000
Less: Business loss (-) 15,000
Gross total income 8,26,000 63,000
Less: Deduction under section 80C — 65,000
Net income 8,26,000 Nil
Tax [i.e., 20% of (`

` 8,26,000 - ` 2,50,000)] 1,15,200
Add: Health & Education Cess – 4% 4,608
Tax liability 1,19,808
Note : If the net income (other thon long-term capital gain) is below the amount of first slab which is not
taxable (i.e., ` 2,50,000), then the long-term capital gain shall be reduced by the amount by which the total
income (other than long-term capital gain) falls short of the maximum amount which is net chargeable to tax.
In this case, net income (other than long-term capital gain) is nil. Therefore, long-term capital gain shall be
reduced by ` 2,50,000.
23. The conversion of a capital asset into stock-in-trade is treated as a transfer under section 2(47). It would be
treated as a transfer in the year in which the capital asset is converted into stock-in-trade. However, as per
section 45(2), the profits or gains arising from the transfer by way of conversion of capital assets into stock-in-
trade will be chargeable to tax only in the year in which the stock-in-trade is sold.
For the purpose of computing capital gains in such cases, the fair market value of the capital asset on the
date on which it was converted into stock-in-trade shall be deemed to be the full value of consideration
received or accruing as a result of the transfer of the capital asset. Indexation benefit is available upto the
year of conversion of capital asset in stock-in-trade.
On subsequent sale of such stock-in-trade, business profits would arise. The business income chargeable to
tax would be the difference between the price at which the stock-in-trade is sold and the fair market value on
the date of conversion of the capital asset into stock-in-trade.

Capital Gain 6B.8
24. Computation of taxable capital gain
Period of holding: 1.11.1998 to 31.10.2019 = More than 36 months. Therefore, long term `
Less: Expenses on transfer Nil
Less : Indexed cost of acquisition ` 2,00,000 × 289 / 100 5,78,000

Business income:
Actual selling price 40,00,000
Less : FMV as on the date of conversion 25,00,000
25. Transfer of capital asset by a partner to his firm, by way of his capital contribution or otherwise, is eligible to
capital gains tax u/s 45(3) in the hands of the partner in the year in which transfer takes place.
Computation of capital gains of Mr. Rishi
House property Gold ornaments
Full value of consideration (amount recorded in books of the firm) 9,00,000 36,000
Less: Cost of acquisition (Indexed cost of house = 60,000 × 289 ÷ 113) 1,53,451 15,000
Short-term capital gains 21,000
Note: If Mr. Rishi brings the above assets otherwise than by way of capital contribution, then also, he will be
liable to capital gains tax as above.
26. Any distribution of capital asset by a firm/AOP/BOI (other than company or co-operative society) on
dissolution or otherwise is eligible to capital gains in the hands of such firm/AOP/BOI.
Computation of capital gains of SM Associates (amounts in `)
House property Listed Govt. securities
Full value of consideration (FMV as on the date of transfer) 12,00,000 6,00,000
Less: Cost of acquisition (1,00,000 x 289 ÷ 100) 2,89,000 5,00,000
Short-term capital gains 1,00,000
Note: If SM Associates were a co-operative society, then section 45(4) would not have applied to it.
27. Computation of Capital Gains

Capital gains for the Partner Mr. Vimal for the AY 2013-14 `
Sale consideration-value of the asset recorded in the books of the firm [Sec 45(3)] 3,98,000
Less : Indexed cost of acquisition (1,25,000 x 200/105) 2,38,095
Capital gains for the firm for the AY 2020-21

Sale consideration - Fair Market Value on the date of distribution 9,50,000
Less : Indexed cost of acquisition (3,98,000 x 289/ 200) 5,75,110
28. The compulsory acquisition of Mr. Abhinav's house property took place in the financial year 2007-08.
Accordingly, the year of transfer is the financial year 2007-08. However, by virtue of specific provisions of
section 45(5), the capital gains so computed shall be charged to tax in the year in which the compensation or
part thereof is first received i.e. in the financial year 2019-20 or assessment year 2020-21.
Computation of long term capital gain for the assessment year 2020-21
Less: Indexed cost of acquisition (2,00,000 x 129 ÷ 105) 2,45,714
Taxability of enhanced compensation : LTCG due to enhanced compensation = ` 2,00,000, which will be
chargeable to tax in the previous year 2020-21 (Assessment year 2021-22).

Capital Gain 6B.9
29. Computation of capital gains of Mr. S for the AY 2020-21 (amounts in `)
Sale proceeds of the property located in Chennai 12,40,000
Less : Indexed Cost of Acquisition (`
` 2,80,000 x 289 ÷ 113) 7,16,106
Long Term Capital Gain (1) 5,23,894
Sales Consideration from the flat 12,10,000

Less : Cost of Acquisition 8,70,000
Short Term Capital Gain (2) 3,40,000
Total Capital Gains (1 + 2) 8,63,894
Note : In this case, after transfer of residential house, Mr. S has purchased a new flat during the previous
year 2019-20 and sold the same in the previous year 2019-20 itself. If Mr. S claims exemption in respect of
the flat while computing long-term capital gains, then, on sale of the flat, the cost of the flat will be reduced by
the amount of exemption claimed. This will have the effect of decreasing the amount of long-term capital
gains and increasing the amount of short-term capital gains. While long-term capital gains are taxable @
20%; short-term capital gains are taxable as per normal rates (highest slab being 30% due to other income of
` 10,00,000).
Therefore, in order to avoid higher tax liability, Mr. S should not claim exemption in respect of the flat. It is
assumed that Mr. S has other incomes also, so as to take his tax rate at highest slab of 30%.
Further, no exemption is available in respect of sale of new house, as the same is a short-term capital asset.
30.
Assessment year 2020-21 `
Sale consideration (being stamp duty value) 35,00,000
` 2,00,000 x 289 ÷ 105] 5,50,476
Expenses on transfer 40,000
Balance 29,09,524
Less: Exemption under section 54 [amount deposited in capital gain deposit account scheme, i.e., 21,00,000
` 21,00,000 or amount of capital gain, i.e., ` 29,09,524, whichever is lower]
Long -term capital gains chargeable to tax for the assessment year 2020-21 8,09,524
Assessment Year 2022-23

Amount deposited in capital gains deposit account scheme 21,00,000
Less: Amount utilized by purchasing a new residential property at Chennai 15,00,000
Unutilized amount 6,00,000
Notes:
1. In this case, X can purchase a new residential property, by withdrawing from the deposit account, up to
December 29, 2021 or he can complete construction of a residential property up to December 29, 2022. if
he does not want to purchase or complete construction of another property, he can withdraw the
unutilized amount of ` 6,00,000 in the deposit account at any time after December 29, 2022.
2. ` 6,00,000 would be taxable as long-term capital gains of the previous year 2022-23, i.e., assessment
year 2023-24.
3. The new residential property purchased at Chennai should not be transferred before 3 years from the
date of its purchase (in other words, the new residential property should not be transferred up to June 19,
2024). If the new residential property is transferred before June 20, 2024, then the exemption given
under section 54 (i.e., ` 21,00,000 minus ` 6,00,000) would be taken back.
31.
Computation of taxable income and tax payable by Mr. Pranav for the A.Y. 2020-21
Particulars ` `
1. Income from Capital Gains
Less : Indexed cost of acquisition of land (`
` 75,000 × 289/109) 1,98,853
13,51,147
Less : Indexed cost of construction of house (`` 1,25,000 × 289/129) 2,80,039
10,71,108
Less : Deduction under section 54 - Cost of new residential house 8,00,000
2. Income from other sources

Interest on Bank deposit (Net) 45,000
Add : Tax deducted at source 5,000 50,000

Capital Gain 6B.10
Less: Deduction under section 80C :
Investment in PPF 20,000
Taxable income 3,01,108
3,01,110
Components of Total income
Special income - Long-term Capital gains 2,71,110
Normal Income (`` 50,000 – ` 20,000) 30,000
3,01,110
Tax on normal income of ` 30,000

Tax on LTCG Nil
[LTCG (Maximum amount not chargeable to tax - Normal Income) @ 20%]
under section 112 = {`
` 2,71,110 – (2,50,000 – 30,000)} x 20% 10,222
Tax Payable NIL
32. Assessment Year 2020-21

Sale proceeds 50,00,000
Less : Indexed cost acquisition [` ` 4,00,000 × 289 ÷ 105] 11,00,952
Balance 38,99,048
Less : Exemption under section 54B
Cost of agricultural land purchased on July 15, 2020 4,30,000
Amount deposited in the deposit account 10,80,000
Assessment year 2022-23 (i.e., relevant \o the previous year in which 2 years from the date e of sale of
agricultural land expires)
`
Amount deposited in the deposit account 10,80,000
Less : Amount utilized in purchasing agricultural land up to June 30, 2021 8,47,000
Assessment year 2023-24 (i.e., relevant to the previous year 2022-23 in which the new assets are transferred
before the expiry of 3 years)
Agricultural Agricultural
land in rural land in urban
area area
` `
Sale proceeds 4,90,000 8,70,000
Less : Cost of acquisition offer deduction of the amount of exemption Nil Nil
under section 54B as the new assets are transferred within 3 years
[i.e., ` 4,30,000-`
` 4,30,000, ` 8,47,000 - ` 8,47,000]
Short-term capital gain Not taxable* 8,70,000
*As the agricultural land is situated in rural area, it is not a "capital asset" and, consequently, capital gain
arising on its transfer is not chargeable to tax.
33. Previous year 2019-20 (assessment year 2020-21)

Urban Shares Debentures
agricultural
land
Capital gains ` ` `
Sale proceeds 8,00,000 4,50,000 2,90,000
Less : Cost of acquisition — — 1,70,000
Indexed cost of acquisition [`
` 1,70,000 x 289 ÷ 113
` 2,50,000 x 289 ÷ 100] 7,22,500 4,34,779
Capital gain
- Short-term — — —
- Long-term 77,500 15,221 1,20,000
Less: Exemption under section 54B 77,500 — —
Balance NIL 15,221 1,20,000
Capital gains 1,35,221
Net income (rounded off) 7,21,221

Capital Gain 6B.11
Previous year 2021-22 (assessment year 2022-23)
Amount deposited in bank account on July 31, 2020
(to extent of exemption claimed) 1,00,000
Less : Amount utilised for purchase of agricultural land within 2 years
from sale of agricultural land (i.e., up to June 9, 2021) 40,000
Net income 3,52,000
Note : Agricultural land in rural area is not a capital asset. Surplus arising on sale of such land is not taxable
at all. Likewise, personal car is not a capital asset and, consequently, nothing is taxable in respect of sale of
car.
34. Computation of Capital Gains chargeable to tax in the hands of Mr. Roy for the A.Y. 2020-21
Particulars ` `
Gross Sale Consideration on transfer of residential house 35,00,000
[As per section 50C, in case the actual sale consideration is lower than the
stamp duty value fixed by the stamp valuation authority, the stamp duty value
shall be deemed as the full value of consideration]
Less: Brokerage@2% of actual sale consideration of ` 30,00,000 60,000

Net Sale Consideration 34,40,000
Less: Indexed cost of acquisition [`` 6,00,000 x 289/122] 14,21,311
Less: Exemption under section 54
Acquisition of residential house property at Kolkata on 10.12.2019 (i.e.,
within the prescribed time of two years from 4.11.2019, being the date of
transfer of residential house at Ghaziabad). 10,00,000
Amount deposited in Capital Gains Accounts Scheme on or before the due
date of filing return of income for construction of additional floor on the
residential house property at Kolkata. Since Mr. Roy has no other source of
income, his due date for filing return of income is 31st July, 2020
[Therefore, ` 4,00,000 deposited on 6.7.2020 will be eligible for exemption

whereas ` 5,00,000 deposited on 1.11.2020 will not be eligible for 4,00,000 14,00,000
exemption under section 54]
Exemption under section 54EC

Amount deposited in capital gains bonds of RECL within six months from
the date of transfer (i.e., on or before 3.5.2020) would qualify for exemption.
[Therefore, in this case, ` 3,00,000 deposited in capital gains bonds of
RECL on 10.4.2020 would be eligible for exemption under section 54EC,
whereas ` 5,00,000 deposited on 15.6.2020 would not qualify for
exemption] 3,00,000

Computation of tax liability of Mr. Roy for A.Y. 2020-21
Particulars `
Tax on ` 1,12,951 (i.e Long term capital gain ` 3,18,689 less basic exemption limit of ` 13,738
2,50,000) is charged @ 20% [Section 112]
(Since long-term capital gains is the only source of income, the entire basic exemption limit
can be exhausted against this income)
Tax before Cess 1,238
Add: Health & Education cess@4% 50
Total tax liability 1,288
Total tax liability (rounded off) 1,290

Capital Gain 6B.12
Note: As per the decision of Gauhati High Court in CIT vs Rajesh Kumar Jalan 286 ITR 274 and Haryana
High Court in CIT vs Jagriti Agarwal 245 CTR 629, exemption under section 54 is allowable even if the
amount of capital gain is deposited in Capital Gains Accounts Scheme within the period specified for filing a
belated return under section 139(4) [i.e., on or before 31.3.2021, being the end of A.Y. 20-21].
If we apply the above interpretation in this case, Mr. Roy would be eligible for exemption under section 54 in
respect of ` 5,00,000 deposited in Capital Gains Accounts Scheme on 01.11.2020 also, since the said date
falls within the time specified under section 139(4). On the basis of this interpretation, the long term capital
gain chargeable to tax in the hands of Mr. Roy would be Nil and the consequent tax liability would also be Nil.
35. Computation of Capital Gains of Ms. Anshu for the A.Y. 2020-21
Particulars ` `
Full value of consideration [See Notes (i) & (ii) below] 25,00,000
Less: Indexed Cost of acquisition [See Note (iii) below]
Indexed cost of land (`
` 1,10,000 × 289/100) 3,17,900
Indexed cost of building (`
` 3,20,000 × 289/137) 6,75,037 9,92,937
Less: Brought forward short-term capital loss set off [See Note (iv) below] 1,50,000
Taxable capital gains (Amount to be invested in NHAI bonds to get full
exemption from tax on capital gains) [See Note (v) below] 13,57,063
Notes:
(a) As per section 50C(1), where the consideration received or accruing as a result of transfer of a capital
asset, being land or building or both, is less than the value adopted by the Stamp Valuation Authority for
the purpose of payment of stamp duty, such value adopted by the Stamp Valuation Authority shall be
deemed to be the full value of the consideration received or accruing as a result of such transfer.
Accordingly, full value of consideration would be ` 25 lacs in this case.
(b) As per section 50C(3), where the valuation is referred by the Assessing Officer to Valuation Officer and
the value ascertained by such Valuation Officer exceeds the value adopted by the Stamp Valuation
Authority for the purpose of payment of stamp duty, the value adopted by the Stamp Valuation Authority
shall be taken as the full value of the consideration received or accruing as a result of the transfer. Since
the value ascertained by the Valuation Officer (i.e. ` 27 lakhs), is higher than the value adopted by the
Stamp Valuation Authority (i.e. ` 25 lakhs), the full value of consideration in this case would be ` 25 lakhs.
(c) Since the cost of land acquired by Anshu on 1.4.2001 is not given in the question, the fair market value as
on 1.4.2001 is taken as the cost of acquisition. Indexation benefit is available since land and building are
both long-term capital assets, as they are held by Anshu for more than 24 months.
(d) As per section 74, brought forward unabsorbed short term capital loss can be set off against any capital
gains, short term or long term, for 8 assessment years immediately succeeding the assessment year for
which the loss was first computed. Therefore, short term capital loss on sale of shares during the F.Y.
2011-12 can be set-off against the current year long-term capital gains on sale of land and building.
(e) As per section 54EC, an assessee can avail exemption in respect of long-term capital gains, if such
capital gains are invested in the bonds issued by the NHAI redeemable after 5 years. Such investment is
required to be made within a period of 6 months from the date of transfer of the asset. The exemption
shall be the amount of capital gains or the amount of such investment made, whichever is less. Therefore,
in this case, if Anshu invests the entire capital gains in bonds of NHAI, she can get full exemption from tax
on capital gains.
36.
Computation of Capital Gains Chargeable to tax for A.Y. 2020-21
Particulars ` `
Sale consideration (i.e. Stamp Duty Value) (Note-1) 80,00,000
Less: Indexed Cost of Acquisition (`
` 10,00,000 × 289/117) 24,70,085
Indexed Cost of Improvement (` ` 2,00,000 × 289/148) 3,90,540 28,60,625
51,39,375
Less: Capital Gains exemption under section 54 (Note-2) 25,00,000
Taxable Capital Gains 26,39,375

Capital Gain 6B.13
Notes -
1. As per the provisions of section 50C, in case the stamp duty value adopted by the stamp valuation
authority is higher than the actual sale consideration, the stamp duty value shall be deemed as the full
value of consideration.
2. Exemption under section 54 is available if a new residential house is purchased within one year before or
two years after the date of transfer. Since the cost of new residential house is less than the capital gain,
capital gain to the extent of cost of new asset is exempt under section 54.
3. Exemption under section 54EC is available in respect of investment in bonds of National Highways
Authority of India only if the investment is made within a period of six months after the date of such
transfer. In this case, since the investment is made after six months, exemption under section 54EC
would not be available.
4. If the new asset purchased by the assessee on the basis of which exemption under section 54 is claimed,
is transferred within 3 years from the date of its acquisition, then for computing the taxable short-term
capital gain on such transfer, the cost of acquisition of such asset shall be reduced by the amount of
exemption taken in section 54 i.e. cost will be Nil. Such CG will be taxable in the PY in which such new
asset is transferred i.e. AY 21-22
Particulars `
Less: Cost of acquisition NIL
Short-term Capital Gains 40,00,000
37.
Computation of chargeable capital gain of Mr. Chandru for the A.Y. 2020-21
Particulars `
Sale consideration 1,00,00,000
` 9,99,300 × 289/117) 24,68,356
Less: Deduction under section 54EC 75,31,644
20.03.2020 RECL bonds 50,00,000
Note:
(1) Since the site was held for more than 24 months prior to the date of transfer, it is a long-term capital asset
and the capital gain arising upon its transfer is long-term capital gain.
(2) In order to claim exemption under section 54EC, Mr. Chandru has to invest in specified bonds of RECL or
NHAI or PFCL or IRFCL within a period of 6 months from the date of transfer of the asset.
(3) As per second proviso to section 54EC(1), out of capital gains arising from transfer of one or more capital
assets in a financial year, the investment eligible for exemption, cannot exceed ` 50 lakhs, whether such
investment is made in the same financial year or in the subsequent financial year or in both the years.
In this case, Mr. Chandru has invested ` 50 lakhs in RECL bonds in the F.Y.2019-20 and ` 20 lakhs in
NHAI bonds in the F.Y.2020-21, both within six months from the date of transfer. However, he would be
eligible for exemption of only ` 50 lakhs for investment made in such bonds.
38.
Land Bonus shares House property
` ` `
Sale consideration (a) 9,00,000 3,50,000 10,40,000
Indexed cost of acquisition (b) 1,85,597 Nil 2,75,238
Long-term capital gain [before any exemption] (c) 7,14,403 3,50,000 7,64,762
Less : Exemption under section 54EC [Note] 7,14,403 NIL 1,85,597
Income under the head "Capital gains" Nil 3,50,000 5,79,165
39.
House Gold Silver Diamonds
property
` ` ` `
Sale consideration 3,90,000 8,10,000 2,96,000 6,40,200
Less : Expenses on transfer 10,000 81,000 6,000 32,000
Net sale consideration (a) 3,80,000 7,29,000 2,90,000 6,08,200
Less : Indexed cost of acquisition 70,000 1,15,000 1,78,000 4,30,000
Long-term capital gain (b) 3,10,000 6,14,000 1,12,000 1,78,200
Exemption under section 54 [Note 1) (c) 1,00,000 — — —
Exemption under section 54EC [Note 2] (d) 2,10,000 NIL NIL NIL
Capital gain chargeable to tax [(b) —(c)—(d)] Nil 6,14,000 1,12,000 1,78,200,

Capital Gain 6B.14
Notes :
1. Exemption under section 54 - Since the due date of filing return of income is July 31, 2019, the deposit
made on August 5, 2019 is not considered. Exemption under section 54 is limited to amount utilised for
constructing residential house up to July 31, 2019 [i.e., ` 1,00,000).
2. Exemption under section 54EC - The amount of exemption available under section 54EC is ` 10,55,000
[i.e., ` 7,50,000 + ` 3,05,000) but it cannot be claimed against transfer of Capital asset other then
land or building.
40. Computation of capital gain for the AY 2020-21 (amounts in `)

Less: Expenses on Transfer 4,000
Net Sale Consideration 3,81,000
` 1,07,000 x 289/105) 2,94,505
Less: Exemption u/s 54EC (not available now against transfer of jewellery) NIL
Taxable long-term capital gain 86,495
Note : It is assumed that the expense of ` 2,000 at the time of purchase is of capital nature.
41.
Computation of net taxable capital gains of Smt. Megha for the A.Y. 2020-21
Particulars `
Less: Expenses on transfer Nil
Less: Indexed cost of acquisition (See Working note below) 8,51,318
Long term capital gain (since the period of holding is more than 3 years) 8,48,682
Less: Exemption under section 54 (See Note 1 below) 4,00,000
Taxable long term capital gain 4,48,682
Working Note:
Indexed cost of acquisition `
Purchase price 4,50,000
Less: Amount forfeited (See Note 2 below) 70,000
Indexed cost of acquisition
3,80,000×289
129 8,51,318
Notes:
(1) Exemption under section 54 is available if a new residential house is purchased within two years from the
date of transfer of existing residential house, which is a long-term capital asset. Since the cost of new
residential house is less than the long-term capital gains, capital gains to the extent of cost of new house,
i.e., ` 4 lakh, is exempt under section 54.
(2) As per section 51, any advance received and retained by the assessee, as a result of earlier negotiations
for sale of the asset, shall be deducted from the purchase price for computing the cost of acquisition of
the asset.
42.
(i) False: As per section 47(xvi), such alienation in a transaction of reverse mortgage under a scheme made
and notified by the Central Government is not regarded as "transfer" for the purpose of capital gains.
(ii) True: Section 2(42A) defines the term 'short-term capital asset'. Under the proviso to section 2(42A), zero
coupon bond held for not more than 12 months will be treated as a short-term capital asset.
Consequently, such bond held for more than 12 months will be a long-term capital asset.
(iii) False: In view of the provisions of section 56(2)(i), dividend income is taxable under the head "Income
from other sources" in the case of all assessees. However, the dividend referred in to in section 115-O is
exempt under section 10(34).
(iv) False: As per section 10(37), where an individual owns urban agricultural land which has been used for
agricultural purposes for a period of two years immediately preceding the date of transfer, and the same is
compulsorily acquired under any law and the compensation is determined or approved by the Central
Government or the Reserve Bank of India, resultant capital gain will be exempt. In this case, the

Capital Gain 6B.15
compensation has been fixed by the State Government and hence the exemption will not be
available.
(v) True: As per section 2(48), ‘Zero Coupon Bond’ means a bond issued by any infrastructure capital
company or infrastructure capital fund or a public sector company on or after 1st June 2005, in respect of
which no payment and benefit is received or receivable before maturity or redemption from such issuing
entity and which the Central Government may notify in this behalf.
43.
Computation of taxable capital gain of Mr. Malik for AY 2020-21
Particulars ` `
Factory building
Sale price of building 8,00,000
Less: WDV as on 1.4.2019 8,74,800
Short-term capital loss on sale of building (-) 74,800
Land appurtenant to the above building
Sale value of land 40,00,000
` 11,50,000 × 289/105) 31,65,238
Long-term capital gains on sale of land 8,34,762
Chargeable long term capital gain 7,59,962
Investment under section 54EC: In this case, both land and building have been held for more than 24
months and hence, are long-term capital assets. Exemption under section 54EC is available if the capital
gains arising from transfer of a long-term capital asset are invested in specified long-term specified assets
within 6 months from the date of transfer. As per section 54EC, the amount to be invested for availing the
maximum exemption is the net amount of capital gain arising from transfer of long-term capital asset, which
is ` 7,59,962 in this case.
Notes:-
1. Where advance money has been received by the assessee, and retained by him, as a result of failure of
the negotiations, section 51 will apply. The advance retained by the assessee will go to reduce the cost of
acquisition. Indexation is to be done on the cost of acquisition so arrived at after reducing the advance
money forfeited i.e. ` 12,00,000 – ` 50,000 = ` 11,50,000. It may be noted that in cases where the
advance money is forfeited during the previous year 2014-15 or thereafter, the amount forfeited would be
taxable under the head “Income from Other Sources” and such amount will not be deducted from the cost
of acquisition of such asset while calculating capital gains.
2. Factory building on which depreciation has been claimed, is a depreciable asset. Profit / loss arising on
sale is deemed to be short-term capital gain/loss as per section 50, and no indexation benefit is available.
3. Land is not a depreciable asset, hence section 50 will not apply. Being a long-term capital asset (held for
more than 24 months), indexation benefit is available.
4. As per section 74, short term capital loss can be set-off against any income under the head “Capital
gains”, long term or short-term. Therefore, in this case, short-term capital loss of ` 74,800 can be set-off
against long-term capital gain
44.
Computation of Capital Gains of Mr. A for the Assessment Year 2020-21
Particulars ` `
Full value of consideration (deemed) (See Note-1&2) 21,50,000
(Indexation benefit is available since land and buildings are long-term capital
assets)
Less: Indexed cost of land (` ` 1,10,000 × 289/100) 3,17,900
Indexed cost of building (``3,20,000 × 289/ 109) 8,48,440 11,66,340
Less: Brought forward short-term capital loss set off(See Note-4) 75,000
Amount to be invested in NHAI / RECL / PFCL / IRFCL bonds 9,08,660
Notes :
(1) Where the consideration received or accruing as a result of transfer of a capital asset, being land or
building or both, is less than the value adopted or assessed by any authority of a State Government
(Stamp Valuation Authority) for the purpose of payment of stamp duty in respect of such asset and
the same is not contested by the assessee, such value adopted or assessed shall be deemed to be
the full value of the consideration received or accruing as a result of such transfer [Section 50C(1)].
Accordingly, the full value of consideration will be ` 21.5 lakhs in this case.
(2) It is further provided in section 50C(3) that where the valuation is referred by the Assessing Officer to
Valuation Officer and the value ascertained by such Valuation Officer exceeds the value adopted or
assessed by the Stamp Valuation Authority, the value adopted or assessed by the Stamp Valuation

Capital Gain 6B.16
Authority shall be taken as the full value of the consideration received or accruing as a result of the
transfer. Since the value ascertained by the valuation officer (i.e. ` 22 lakhs) is higher than the value
adopted by the stamp valuation authority (i.e. ` 21.5 lakhs), the full value of consideration in this case
is ` 21.5 lakhs.
(3) Cost of land which is acquired on partition of HUF is the cost to the previous owner. Since date and
cost of acquisition to the previous owner are not given, fair market value as on 1.4.2001 is taken as
the cost and indexed.
(4) Brought forward unabsorbed short term capital loss can be set off against any capital gains, short
term or long term, for 8 assessment years immediately succeeding the assessment year for which the
loss was first computed.
(5) As per section 54EC, an assessee can avail exemption in respect of long-term capital gains, if such
capital gains are invested in the bonds issued by the NHAI / RECL / PFCL / IRFCL redeemable
after 5 years. Such investment is required to be made within a period of 6 months from the date of
transfer of the asset. The exemption shall be the amount of capital gain or the amount of such
investment made, whichever is less.
45. Section 10(37) exempts the capital gains arising to an individual or a Hindu Undivided Family from transfer of
agricultural land by way of compulsory acquisition, or a transfer, the consideration for which is determined or
approved by the RBI or the Central Government. Such exemption is available where the compensation or the
enhanced compensation or consideration, as the case may be, is received on or after 1st April, 2004 and the
land has been used for agricultural purposes during the preceding two years by such individual or a parent of
his or by such Hindu undivided family. Since all the above conditions are fulfilled in this case, X is entitled to
exemption under section 10(37) of the entire capital gains arising on sale of agricultural land.
46. Computation of total income of Mr. Sagar for the A.Y. 2020-21
Particulars ` `
Capital Gains: 15,00,000
Sale consideration
Less: Indexed cost of land (`` 75,000 X 289/148) 1,46,453
Indexed cost of building (`
` 1,25,000 X 289/184) 1,96,331 3,42,784
11,57,216
Less: Exemption under section 54 (See Note 2 below) 8,00,000
Profit and gains from business or profession/Income from other sources

Insurance agency commission earned (Gross) (`
` 45,000 + ` 5,000) 50,000
Less: Deduction under Chapter VI-A
Section 80C - Investment in NSC VIII 20,000
3,87,220
Notes:
(1) Since the building and the land are held for more than 24 months, the same are long-term capital assets
and the capital gain arising on sale of such assets is a long-term capital gain.
(2) As per the provisions of section 54, the capital gain arising on transfer of a long-term residential property
shall not be chargeable to tax to the extent such capital gain is invested in the purchase of a residential
house property one year before or two years after the date of transfer of original asset or constructed a
residential house property within three years after such date. Since Mr. Sagar has purchased another
residential house in June, 2019 for ` 8,00,000, the capital gain arising on transfer of residential house
property in May, 2019 is exempt under section 54 to that extent.
47. A can claim exemption u/s 54 in respect of capital gains on sale of residential house and exemption u/s 54F in
respect of capital gains on sale of plot. Since the exemption u/s 54 is available in on investment of capital
gains, therefore, first of all, exemption u/s 54 will be claimed. Thereafter, exemption u/s 54F, which is
available on investment of net consideration, shall be claimed. The exemption u/s 54F will be available only in
respect of balance cost of new house i.e. Original cost of new house - Exemption u/s 54.

Capital Gain 6B.17
Computation of Capital Gains for AY 2020-21 (amounts in `)
Residential house Plot
Full Value of consideration 11,00,000 7,00,000
Less: Indexed cost [(4,00,000 × 289 ÷ 109); (2,00,000 x 289 ÷ 109)] 10,60,550 5,30,275
Long term capital gains 39,450 1,69,725
Less: Exemption u/s 54 39,450
Exemption u/s 54F i.e.
Capital gain – ` 1,69,725 x (Cost of new house–Exemption u/s 54) i.e.{500000 – 39,450}
Net consideration of plot = 700000 1,11,667
Taxable capital gains NIL 58,058
Computation of capital gains on sale of residential house for assessment year 2021-22 (amounts in `)
Sale price of the residential house (acquired on 25-4-2020) 8,00,000
Less: Cost of Acquisition (5,00,000 - exemption claimed u/s 54 ` 39,450) 4,60,550
Short-term capital gains for assessment year 2021-22 3,39,450
Long-term capital gains (Exemption claimed u/s 54F shall be chargeable as long-term
capital gains of the year in which the house is transferred i.e. assessment year 2021-22) 1,11,667
Note: No exemption will be available in respect of second new house acquired on 31-3-2022. Exemption u/s
54 or 54F cannot be claimed because the house transferred on 31-1-2021 is a short-term capital asset.
48. If A has transferred these share in a recognized stock exchange in India he will be subject to securities
transaction tax and consequently, the long term capital gain will be exempt from tax. Otherwise if these
shares are transferred outside a recognized stock exchange the manner of income computation will be as
under:- `
Sales Consideration 5,00,000
Less: Indexed cost of acquisition (` ` 50,000 x 289/113) 1,27,876
Long Term Capital Gain 3,72,124
Less: Exemption under Section 54F
(`
` 4,00,000 x 3,72,124 / ` 5,00,000) 2,97,699
Long term capital gain 74,425
49.
Assessment year 2020-21 `
Less :
Expenses 5,000
Indexed cost of acquisition [` ` 60,000 x 289/113] 1,53,451
Balance 6,46,549
Less : Exemption under section 54F [` ` 6,00,000, being the amount deposited in Deposit
Account x ` 6,46,549 being the amount of capital gain /` ` 8,00,000 being net sale consideration) 4,84,912
Notes:
1. In this case, X has not fully utilised the deposit account for acquiring the residential house property. Out of
` 6 lakh deposited in the deposit account, ` 4.80 lakh is utilised for purchasing the house. Tax treatment
of ` 1.20 lakh (being the unutilised amount) will be as follows —
`
Unutilised amount (a) 1,20,000,
Net sale consideration (b) 8,00,000
Original capital gain (c) 6,46,549
Notional long-term capital gain [i.e., (a)/(b) x (c)] 96,982
Effective exemption under section 54F [i.e., ` 4,84,912 — ` 96,982] 3,87,930
` 96,982 will be chargeable to tax as long-term capital gain after the expiry of 3 years from date of transfer
of shares (i.e., July 9, 2022). Consequently, it will be taxable for the assessment year 2023-24.
2. The unutilised amount of ` 1.20 lakh can be withdrawn by X at any time after July 9, 2022.
3. If X sells the new house at Delhi before July 6, 2024, then ` 3,87,930 (exemption under section 54F) will
be taken as long-term capital gains of the year in which the house is sold.
4. If X purchases any other residential house before July 10, 2021 or constructs any other residential house
before July 10, 2022, then ` 3,87,930 (exemption under section 54F) will be deemed as long-term capital
gains of the year in which another house is purchased or constructed.

Capital Gain 6B.18
50. `
Less: Brokerage (2% of ` 10,31,000) (20,620)
Indexed cost of acquisition (i.e., ` 1,05,000 x 289/105) (2,89,000)
Less : Exemptions
Under section 54B 1,50,000
Under section 54F [i.e., ` 7,21,380 x ` 5,00,000/(`` 10,31,000- ` 20,620)] 3,56,984
51.
Computation of taxable capital gain of Mr. ‘X’ for A.Y. 2020-21
Particulars ` `
Sale consideration received on sale of 10,000 shares @ ` 200 each 20,00,000
Less: Indexed cost of acquisition
(a) 5,000 shares received as gift from father on 1.6.2000
Indexed cost 5,000 x ` 50 x 289/100 7,22,500
(b) 2,000 bonus shares received from AB Ltd
Bonus shares are acquired on 21.7.2005 i..e after 01.04.2001. Nil
Hence, the cost is Nil.
(c) 3000 shares purchased on 1.2.2007 @ ` 125 per share. The indexed 8,88,320 16,10,820
cost is 3000 x 125 x 289/122 3,89,180
Long term capital gain
Less : Exemption under section 54F (See Note below)
` 3,89,180 x ` 10,00,000 / ` 20,00,000 1,94,590
Taxable long term capital gain 1,94,590
Note: Exemption under section 54F can be availed by the assessee subject to fulfillment of the
following conditions :
(a) The assessee should not own more than one residential house on the date of transfer of the long-term
capital asset;
(b) The assessee should purchase a residential house within a period of 1 year before or 2 years after the
date of transfer or construct a residential house within a period of 3 years from the date of transfer of the
long-term capital asset.
In this case, the assessee has fulfilled the two conditions mentioned above. Therefore, he is entitled to
exemption under section 54F.
52.
False: The exemption under section 54EC has been restricted, by limiting the maximum investment in
long term specified assets (i.e. bonds of NHAI or RECL or PFCL or IRFCL, redeemable after 5 years) to
` 50 lakh, whether such investment is made during the relevant previous year or the subsequent previous
year, or both. Therefore, in this case, the exemption under section 54EC can be availed only to the extent
of ` 50 lakh, provided the investment is made before 1.11.2019 (i.e., within six months from the date of
transfer).
53. Computation of capital gains on slump sale of Unit 1

Particulars `
Sale value 25,00,000
Less: Expenses on sale 28,000
Less: Net worth (See Note 1 below) 12,43,594
Notes:
1. Computation of net worth of Unit 1 of Akash Enterprises
Particulars ` `
Building (excluding ` 3 lakhs on account of revaluation) 9,00,000
Machinery 3,00,000
Debtors 1,00,000
Patents (See Note 2 below) 21,094
Other assets (``1,50,000 – ` 50,000) 1,00,000
Total assets 14,21,094
Less: Creditors 37,500
Bank Loan 1,40,000 1,77,500
Net worth 12,43,594

Capital Gain 6B.19
2. Written down value of patents as on 1.4.2019
Value of patents: `
Cost as on 1.7.2016 50,000
Less: Depreciation @ 25% for Financial Year 2016-17 12,500
WDV as on 1.4.2017 37,500
Less: Depreciation for Financial Year 2017-18 9,375
WDV as on 1.4.2018 28,125
Less: Depreciaton for financial Year 2018-19 7,031
WDV as on 1.4.2019 21,094
For the purposes of computation of net worth, the written down value determined as per section 43(6) has
to be considered in the case of depreciable assets. The problem has been solved assuming that the
Balance Sheet values of ` 3 lakh and ` 9 lakh (` ` 12 lakh – ` 3 lakh) represent the written down
value of machinery and building, respectively, of Unit 1.
3. Since the Unit is held for more than 36 months, capital gain arising would be long term capital gain.
However, indexation benefit is not available in case of slump sale.
54. Computation of capital gains in case of Shri Aniket for the Assessment Year 2020-21
`
Amount received on liquidation (`` 20 x 1,00,000 + ` 25,50,000) 45,50,000
Less: Amount taxable as deemed dividend i.e. share in accumulated profits (50% of 8,00,000) 4,00,000
` 8,00,000 x 289 ÷ 105) 22,01,905
Long term capital Gain 19,48,095
55. In the hands of the company

As per section 46(1), distribution of capital assets amongst the shareholders on liquidation of the company is
not regarded as “transfer” in the hands of the company. Consequently, there will be no capital gains in the
hands of the company.
In the hands of Ms. Vasumathi (shareholder) Section 46(2) provides that such capital gains would be
chargeable in the hands of the shareholder.
Particulars `
Ms. Vasumathi holds 1/6th of the shareholding of the company 10,00,000
Market value of agricultural land received (1 acre @ ` 10 Lakhs) Cash at bank [1/6th of (`
` 58,333
6,50,000 – ` 3,00,000)] 10,58,333
Less: Deemed dividend under section 2(22)(c) - 1/6th of (` ` 40,00,000- ` 50,000) 6,58,333
Consideration for computing Capital Gain 4,00,000
Less: Indexed cost of acquisition of Shares (`` 1,20,000 x 289/ 113) 3,06,903
Long term capital gains 93,097
Notes:
1. Where the capital asset became the property of the assessee on the distribution of the capital assets of a
company on its liquidation and the assessee has been assessed to capital gains in respect of that asset
under section 46, the cost of acquisition means the fair market value of the asset on the date of
distribution. Hence, the short-term capital gains in the hands of Ms. Vasumathi (shareholder) at the time
of sale of urban agricultural land should be computed as follows:
Particulars `
Less: Fair market value of the agricultural land on the date of distribution 10,00,000
Short term capital gain 5,00,000
2. Dividend under section 2(22)(c) amounting to ` 6,58,333 will be exempt under section 10(34).
3. The tax liability ascertained at ` 3,00,000 has to be reduced from bank balance while computing full value
of consideration under section 46(2). ` 50,000, being the difference between ` 3,00,000 and ` 2,50,000,
has to be reduced from General Reserve for calculating deemed dividend under section 2(22)(c).

Capital Gain 6B.20
56. Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse mortgage under a
scheme made and notified by the Central Government shall not be considered as a transfer for the purpose of
capital gain.
Accordingly, the pledging of residential house with bank by Mr. Abhishek will not be regarded as a transfer.
Therefore, no capital gain will be charged on such transaction.
Further, section 10(43) provides that the amount received by the senior citizen as a loan, either in lump sum
or in installment, in a transaction of reverse mortgage would be exempt from income-tax. Therefore, the
monthly installment amounts received by Mr. Abhishek would not be taxable.
However, capital gains tax liability would be attracted at the stage of alienation of the mortgaged property by
the bank for the purposes of recovering the loan.
57. As per section 47(xvi), any transfer of a capital asset in a transaction of Reverse Mortgage under a scheme
made and notified by the Central Government will not be regarded as a transfer. Therefore, capital gains tax
liability is not attracted.
Section 10(43) provides that the amount received by a senior citizen as a loan, either in lump sum or in
installments, in a transaction of Reverse Mortgage would be exempt from income tax. Therefore, the amount
received by Sachin in a transaction of Reverse Mortgage of his residential building is exempt under section
10(43).

Deduction 7.1
DEDUCTIONS FROM GROSS TOTAL INCOME

[Section 80C to 80U]
GENERAL FEATURES RELATING TO DEDUCTIONS UNDER CHAPTER VI-A:
1. Deductions to be made [Section 80A]
The Total Income of an assessee is to be computed after making deductions permissible under
sections 80C to 80U. But,
Aggregate Amount of Deductions ≤ Gross Total Income
2. No Double Deduction
Where any deduction is allowed to AOPs/BOIs (at Entity level), the same will not be allowed as
deduction while computing the income of the members of the AOPs/BOIs(in their Individual
Capacity).
3. No deduction u/s 10AA& u/s 80-IA to 80-RRB, if not claimed in the return of income
Where the assessee fails to make a claim in his return of income for any deduction u/s 10AA
or under any provision of sections 80-IA to 80-RRB, no deduction shall be allowed to him
thereunder.
As amended by Finance Act 2018, w.e.f. AY 2018-19, Benefit of deduction from 80-IA to
80RRB will not be available if return is not files within due date of Section 139(1).
4. No deduction from certain Incomes: No deduction is allowed in respect of the following

incomes:
(a) Long Term Capital Gains referred u/s 112 [20% or 10%(in specified cases)] or u/s
112A, and Short Term Capital gains referred u/s 111A [15%].
(b) Winnings from lotteries, races, etc. as referred to in Section 115BB [30%].
CA Suraj Agrawal
Deduction 7.2
Class Notes
CA Suraj Agrawal
Deduction 7.3
Deduction in respect of investment in specified assets
[Section 80C]
Applicability: Individual or HUF
Maximum Qualifying Amount: ` 150,000
The following are the investments/contributions eligible for deduction –
Name of the investment / payment Payment made by the

Individual HUF
Subscription to NSC Self Any member

(including Interest Accrued thereon)
Note: Interest will first added as Income u/h IOS)
Tuition Fees (only) paid at the time of Admission or otherwise to any Maximum
university/college/educational institution in India for full time up to two
education. children NA
Contribution to Unit-Linked Insurance Plan (ULIP) of UTI Self, Spouse Any member
& Child
Contribution to Unit-Linked Insurance Plan (ULIP) of LIC-Mutual Fund
Contribution to Units of Mutual Funds or UTI Self Any member
Contribution to Notified Annuity Plan of LIC or other approved Self Any member
insurer.
Life Insurance Premium on Life Policy or Endowment Policy Self, Spouse Any member
& child
Maximum Amount of Deduction:
• 10% of Sum Assured in case of policy issued on or after April

1, 2012
[15% of sum assured in case of policy issued on or after April

1, 2013 on life of any person with disability (u/s 80U) or any
person suffering from specified disease (u/s 80DDB)]
• 20% of Sum Assured in case of policies issued before April 1,

2012.
Contribution towards
Statutory Provident Fund/Recognized Provident Fund Self NA
PPF – Minimum: ` 500 & Maximum: ` 150,000 Self, Spouse Any member
& Child
Approved Superannuation Fund (ASF) Self NA

Contribution to Notified Pension Fund of Mutual fund or UTI Self NA
CA Suraj Agrawal
Deduction 7.4
Term Deposit of 5 year or more with a scheduled bank; Self NA
Subscription to 5 year Time Deposit in an a/c under the Post Office; Self Any member
Subscription to an account under the Senior Citizens Saving Self Any member
Scheme;
Subscription to notified NABARD Bonds Self Any member
Any sum paid to any scheme of-
PSU/PSC engaged in providing Long Term finance for Self Any member
construction of residential houses in India
Housing board for the purpose of planning, development or

improvement Self Any Member
Any payment towards the cost of purchase/construction of a

residential property where loan is taken from Self Any Member
Govt., bank, co-operative bank, LIC, NHB
Assessee’s employer where such employer is public Co./public

sector Co./university/co-operative society
Note:
1. Income from such property should be chargeable to tax

under the head House Property.
2. Payment through installment under Self financing scheme is also

covered.
3. STAMP DUTY & REGISTRATION FEE PAID IS ALSO ELIGIBLE
Amount invested in
Approved debentures/ equity shares in a public Co. engaged in Self Any Member
infrastructure facility; or
Units of MF proceeds of which are utilized for the developing,

maintaining, etc., of a new infrastructure facility. Self Any Member
Amount deposited in Sukanya Samriddhi Account Scheme Self, Girl Child or Girl Child
for whom Individual is a
Legal Guardian.
CA Suraj Agrawal
Deduction 7.5
NEW: Contribution to additional account under NPS

Inserted by Finance (No. 2) Act 2019 – W.e.f. AY 20-21 Contribution by a Central
Government employee to
There are two types of NPS account i.e., Tier I and Tier II, to which additional account under
an individual can contribute. NPS (specified account)
referred to in section
Section 80CCD provides deduction in respect of contribution to 80CCD for a fixed period of
individual pension account [Tier I account] under the NPS not less than 3 years and
[referred to in section 20(2)(a) of the Pension Fund Regulatory and which is in accordance
Development Authority Act, 2013 (PFRDA)] whereas deduction with the scheme notified by
under section 80C is allowable in respect of contribution by the Central Government for
Central Government employee to additional account [Tier II this purpose qualifies for
account] of NPS [referred to in section 20(3) of the PFRDA], which deduction under section
does not qualify for deduction under section 80CCD. 80C.
Thus, Tier II account is the additional account under NPS, It may be noted that only
contribution to which would qualify for deduction under section the contribution to the
80C only in the hands of a Central Government employee. additional account under
NPS will qualify for
deduction under section
80C.
Note: Child may be Dependent/Independent/Male/Female/Minor/Major/Married/Unmarried.
CA Suraj Agrawal
Deduction 7.6
Amount paid on Life Insurance Policies – Exempt [Section 10(10D)]
1) As per section 10(10D), any sum received on maturity of life insurance policy (including bonus) is not
chargeable to tax.
2) Exemption is not available in respect of:
a) Any Sum received under Section 80DD
b) Any Sum received under a Keyman Insurance Policy
3) Exemption u/s 10(10D) for insurance policies issued on or after 1.4.2012 would only be available for policies
where the premium payable for any of the years during the term of the policy does not exceed 10% of the
actual capital sum assured (as against 20% upto 31.03.2012)
[If the premium payable during any PY for a policy issued on or after 1.4.2012 exceeds 10% of the
actual capital sum assured, the entire amount received under such policy shall be taxable.]
However, the above provision shall not apply to any sum received on the death of a person.
4) From AY 2014-15: The limit of 10% has been increased to 15 per cent for insurance (if policy is issued
on or after 1.4.2013) on the life of any person who is
a. a person with disability or a person with severe disability as referred to in section 80U; or
b. suffering from disease or ailment as specified in the rules made under section 80DDB.
CA Suraj Agrawal
Deduction 7.7
Contribution to certain pension funds [Section 80CCC]
1) Applicability: ANY INDIVIDUAL Maximum Limit: ` 150,000
2) Amount paid or deposited for any annuity plan of LIC/ Any other Insurer for receiving Pension
from the Pension Fund,
3) Taxable as Income on Withdrawal:
Where any amount standing to the credit of the assessee in a PENSION FUND in respect
of which a deduction has been allowed,
together with interest or bonus accrued or credited to the assessee’s account is received
by the assessee or his nominee
on account of the surrender of the annuity plan in any previous year or as pension
received from the annuity plan,
such amount will be deemed to be the income of the assessee or the nominee in that
previous year in which such withdrawal is made or pension is received.
Deduction in respect of contribution to NPS of CG [Sec 80CCD]

(ATAL PENSION YOJNA IS ELIGIBLE FOR DEDUCTION U/S 80CCD)
1) Applicability: ANY INDIVIDUAL [Employed (CG or any other employer) or Self Employed]
2) Nature of Payment: Employee’s Contribution (including Self employed) as well as Employer
Contributions to New Pension Scheme [NPS]
3) Quantum of Deduction:
(A) In Case of Employment:
a. Contribution made by the employee or 10% of Salary whichever is lower [80CCD(1)] &
b. Contribution made by the employer or 10% of Salary (14% of salary, in case of
contribution made by the Central Government - NEW) whichever is lower [80CCD(2)]
(B) In Case of Self Employment: Contribution made or 20% of GTI, whichever is less [80CCD(1)]
4) The entire employer’s contribution would be included in the Salary of the employee. However,
deduction under section 80CCD would be restricted to 10% of salary.
5) “Salary” includes Dearness Allowance, if the terms of employment so provide, but excludes all
other allowances and perquisites. [Basic Salary + DA (R)]
6) 80CCD(1B) – An Individual is eligible for additional deduction of upto ` 50,000 in respect of the
whole of the amount paid or deposited under NPS, whether or not any deduction is allowed
under section 80CCD(1).
7) Any amount received from Pension account shall be taxed as income in the year of receipt in the
hands of the assessee. However, amount received by nominee on the death of the assessee
shall not be taxable.
8) However, amount received on maturity will not be taxable if the same is used for purchasing
an annuity plan in the same previous year. Pension received from such annuity plan will be
taxable to assessee/nominee
9) FA 19: NEW Any payment from NPS to assessee on closure of account/scheme as referred
in Section 80CCD, to the extent of 60% 40% amount payable is Exempt. [Sec 10(12A)]
10) Any payment from NPS to an Employee on partial withdrawal made out of his account, to
the extent it does not exceed 25% of the amount of contributions made by him is Exempt.
[Section 10(12B)]
CA Suraj Agrawal
Deduction 7.8
Limit on deductions under sections 80C, 80CCC & 80CCD
[Section 80CCE]
This section restricts the aggregate amount of deduction under section 80C, 80CCC and 80CCD
(1) to ` 1,50,000 lakh.
Consequently, deduction to assessee in relation to employer’s contribution to pension scheme

shall be available over and above ` 1,50,000 lakh limit.
Further, Assessee’s contribution to CG Pension fund as per section 80CCD(1B) is also not
covered in limit specified in Section 80CCE.
CA Suraj Agrawal
Deduction 7.9
Deduction in respect of Health insurance premium [Section 80D]
1. Applicability: INDIVIDUAL or HUF
2. Nature of payment:
(a) Premium towards Mediclaim Health Insurance Policy taken
a. In case of an Individual: In the name of Individual, Spouse, Parents and dependent

children
b. In case of HUF: In the name of any Member
(b) In case of Senior Citizen, Medical expenditure incurred if no payment is made for health
insurance premium. (HUF – Any Member being Senior Citizen)
(c) Contribution to Central Government Health Scheme [CGHS] or other health scheme as
notified by CG is also eligible for deduction if it is taken in the name of Individual, Spouse
or Dependent Children.
(d) Any payment made by an individual on account of preventive health check up of self, spouse,
dependent children or parent(s) during the PY [maximum amount – 5,000 within overall limit]
3. Maximum Amount of Deduction:
Particulars Individual HUF
Premium/Contribution Individual, Spouse & Parents (Whether Any Member

for Dependent Children dependent or not)
Deduction being a. Premium Paid, or a. Premium Paid, or a. Premium Paid, or

lower of
b. ` 25,000 p.a. b. ` 25,000 p.a. b. ` 25,000 p.a.
Additional Deduction
for Senior Citizen
` 25,000 ` 25,000 ` 25,000
[The person who is
insured]
4. Senior Citizen means an Individual + Resident in India +the age of 60 years or more
5. Payment shall be made
a. by any mode, including cash, in respect of any sum paid on account of preventive health
check up (maximum limit – ` 5,000);
b. by any mode, other than cash, in all other cases.
6. In case of single premium health insurance policies having cover of more than one year,
Deduction under section 80D shall be allowed on proportionate basis for the number of
years for which health insurance cover is provided, subject to the specified monetary limit.
CA Suraj Agrawal
Deduction 7.10
Example:
Mr. Arjun (42 years old) furnishes the following particulars in respect of the following payments:
S. No. Particulars Amount (`)
1. Premium paid for insuring the health of -
Self 10,000
spouse 8,000
dependant son 4,000
mother 18,000
2. Paid for Preventive Health Check up of
himself 2,000
spouse 1,500
mother 4,000
3. Incurred medical expenditure of ` 25,000 and ` 15,000 for his mother,
aged 61 years and father, aged 65 years. Both mother and father are
resident in India.
Compute the deduction available to Mr. Arjun under section 80D for the A.Y. 2020-21
Solution
Computation of deduction under section 80D for the A.Y. 2020-21
S. Particulars Amount (`) Amount (`)
No.
1. In respect of premium paid for insuring the health of -
Self 10,000
spouse 8,000
dependant son 4,000
22,000
Paid for Preventive Health Check up of
self 2,000
spouse 1,500
3,500
Restricted to [` 25,000 – ` 22,000, since maximum deduction 3,000
is ` 25,000]
Aggregate of deduction (I+II) under (1) restricted to 25,000
2. (i) In respect of payment towards health insurance premium 18,000

for his mother
(ii) In respect of preventive health check up of his mother 2,000
[` 4,000, restricted to ` 2,000, (` 5,000 – ` 3,000), since
maximum deduction for preventive health check up under
section 80D is ` 5,000]
(iii) Medical expenditure for father would only be eligible for 15,000
deduction [See Note below] 35,000
Amount of deduction under (2) restricted to 35,000
Total deduction under section 80D [(1) + (2)] 60,000
Note: Irrespective of the fact that the mother of Arjun is a senior citizen the deduction under section
80D would not available to him in respect of the medical expenditure incurred for his mother, since
Mr. Arjun has taken a health insurance policy for his mother.
CA Suraj Agrawal
Deduction 7.11
Deduction in respect of maintenance including medical treatment
of a dependent disabled [Section 80DD]
1) Applicability: Resident INDIVIDUAL OR RESIDENT HUF.
2) Assessee must have a Dependent Disabled Relative:

Situation Relative Includes
In case of Individual Spouse, Children, Parents, Brothers & Sisters of the Individual
In case of HUF Any Member
1. Dependents means who is wholly or mainly dependent on the assessee and has not
claimed any deduction under section 80U in the computation of his income.
2. Disability includes Blindness, Low Vision, Hearing impairment, mental illness etc.
3) Nature of Expenditure on Such Relative: Assessee has

paid any amount for the medical treatment (including nursing), training and rehabilitation of
a dependant, being a person with disability, or
any amount paid or deposited under a scheme of LIC or any other insurer for the
maintenance of a dependant, being a person with disability, qualifies for deduction.
4) Quantum of Deduction:
Relative suffering with Disability ` 75,000
Relative suffering with Severe Disability [80% or more] ` 125,000
Tax Point: Deduction shall be irrespective of actual expenditure incurred.
5) CERTIFICATE: The assessee shall have to furnish a copy of the certificate issued by the
medical authority in respect of the assessment year for which the deduction is claimed. Where the
condition of disability requires reassessment, a fresh certificate is required.
6) Where the Assessee has deposited any amount in annuity plan of LIC or UTI etc for the
benefit of disabled person and such person predeceases – than any amount received from
such annuity plan shall be deemed to be income of the assessee of the previous year in which
such amount is received by the assessee.
Deduction in the case of a Person with Disability [Section 80U]

1) ELIGIBLE ASSESSEE: Applicable to a RESIDENT INDIVIDUAL, who, at any time during the
previous year, is certified by the medical authority to be a person with disability (Blindness,
Low Vision, Hearing impairment etc.).
2) FIXED DEDUCTION: In case of

Person with Disability - ` 75,000
Person with severe disability - ` 1,25,000
[Irrespective of any expenditure]
3) Individuals also include persons suffering from autism, cerebral palsy and multiple
disabilities.
4) CERTIFICATE: The assessee shall have to furnish a copy of the certificate issued by the
medical authority in respect of the assessment year for which the deduction is claimed. Where
the condition of disability requires reassessment, a fresh certificate is required.
CA Suraj Agrawal
Deduction 7.12
Deduction in respect of medical treatment etc. [Section 80DDB]
1) Applicability: RESIDENT INDIVIDUAL & RESIDENT HUF
2) Nature of Expenditure:
The assessee has actually paid any amount for the medical treatment of such disease or
ailment as may be specified in the rules made in this behalf by the Board [Specified Disease] for
Situation Relative Includes
In case of Individual Himself/Herself or for dependent relative being Spouse,
Children, Parents, Brothers & Sisters of that Individual
In case of HUF Any Member
Dependents means who is wholly or mainly dependent on the assessee for his support and
maintenance
3) Quantum of Deduction: Lower of the Two:

(a) Amount actually paid or
(b) ` 40,000 / In case of Senior Citizen – ` 100,000
4) Senior Citizen means an Individual + Resident in India +the age of 60 years or more
5) Certificate: No such deduction shall be allowed unless the assessee furnishes a certificate
from specialist working in a Government hospital
6) The final deduction under this section shall be reduced by the amount received, if any,
under insurance from an insurer, or reimbursed by an employer, for the medical treatment
of the assessee or the dependent. [Amount derived as above Less Insurance claim received]
Question Find the amount of deduction u/s 80DDB for the following cases:
Name of the Assessee P Q R S T
Residential status of the assessee Ordinarily Not Non Resident but Resident
resident ordinarily Resident not Indian
resident Citizen
Expenditure incurred for medical ` 6000 ` 80000 ` 100000 ` 72000 ` 80000
treatment (specified disease) of
dependent brother
Age of Brother 28 62 62 64 52
Residential status of dependent Resident Non resident Resident Resident Resident
Medical Insurance claim received. - - - - ` 8000
Solution:
Amount of deduction available u/s 80DDB shall be as under:
Particulars P Q R s T
1 2 3 4
Deduction u/s 80DDB 6000 40000 -- 72000 32000
Notes
1. As the brother is non-resident, therefore, senior citizen benefit is not available.
2. As the assessee himself is a non-resident, hence no deduction u/s 80DDB is available.
3. As the brother is resident having age of 64 years, hence he is a senior citizen. However, actual expenditure
incurred by the assessee is less than ` 100,000, therefore deduction shall be restricted to actual expenditure
incurred.
4. As the medical insurance claim is received, hence the amount of deduction (i.e. ` 40,000) shall be reduced
by the amount of claim received.
CA Suraj Agrawal
Deduction 7.13
Interest on loan taken for higher education [Section 80E]
1) Applicability: Individual
2) Nature of Payment:
He has paid any interest on loan taken by him from any Financial Institution or Approved
Charitable Institution.
3) Purpose of Loan:
The loan must have been taken for the purpose of pursuing his/her own higher education or for
higher education of his or her relative. Relative means:
(a) Spouse or
(b) Children (Dependent or Independent) or
(c) the student for whom the individual is the legal guardian.
4) Quantum of Deduction: Amount of Interest paid during the PY
5) Maximum Permissible Period: 8 Assessment Years

Deduction is available for 8 Assessment years starting from the AY in which the assessee starts
paying the interest on loan OR until the interest is paid by the assessee in full, whichever is
earlier.
6) “Higher Education” means any course of study (including vocational studies) pursued after
passing the Senior Secondary Examination or its equivalent.
Deduction in respect of interest on loan taken for residential

house property [Sec. 80EE] w.e.f. AY 2017-18
• Conditions - The following conditions should be satisfied in order to claim deduction
under section 80EE -
1. The assessee is an Individual. He may be resident or non-resident.
2. He has taken a loan.
3. Loan is taken for acquisition of residential house property.
4. Loan is taken from Financial Institution (includes Banks/Housing finance Companies).
5. Loan has been sanctioned during April 1, 2016 and March 31, 2017.
6. The amount of loan sanctioned for residential house property does not exceed ` 35 lakh.
7. The value of residential house property does not exceed ` 50 lakh.
8. The assessee does not own any residential house property on the date of sanction of
loan.
• Amount of Deduction:
Deduction will be available in respect of interest payable on the above loan or ` 50,000,
whichever is less.
• Double deduction not possible - If deduction is claimed under section 80EE, no deduction will be
allowed in respect of such income under any other provision of the Act for the same or any other
assessment year.
NO DEDUCTION FROM AY 18-19 IN RESPECT ON NEW LOAN.

[If loan is sanctioned in PY 16-17 & above conditions are satisfied then assessee is eligible for
deduction in PY 17-18 or other succeeding years.]
CA Suraj Agrawal
Deduction 7.14
Deduction in respect of interest payable on loan taken for
acquisition of residential house property [Section 80EEA] - NEW
Inserted by Finance (No. 2) Act 2019 – W.e.f. AY 20-21
Eligible assessee: An individual who has taken a loan for acquisition of residential house property
from any financial institution. Interest payable on such loan would qualify for deduction under this
section.
Conditions: The conditions to be satisfied for availing this deduction are as follows –
1) the loan has been sanctioned by the financial institution during the
period beginning on the 1st day of April, 2019 and ending on the 31st
day of March, 2020;
2) the stamp duty value of residential house property does not exceed 45 lakh rupees;
3) the assessee does not own any residential house property on the date of sanction of loan.
4) The individual is not eligible to claim deduction under section 80EE,
Period of benefit: The benefit of deduction under this section would be available from A.Y. 2020-21
and subsequent assessment years till the repayment of loan continues.
Quantum of deduction: The maximum deduction allowable is ` 1,50,000.
The deduction of upto ` 1,50,000 under section 80EEA is over and above the deduction available
under section 24(b) in respect of interest payable on loan borrowed for acquisition of a residential
house property.
In respect of self-occupied house property, interest deduction under section 24(b) is restricted to
` 2,00,000. In case of let out or deemed to be let out property, even though there is no limit under
section 24(b), section 71(3A) restricts the amount of loss from house property to be set-off against
any other head of income to ` 2,00,000.
Accordingly, if interest payable in respect of acquisition of eligible house property is more than `
2,00,000, the excess can be claimed as deduction under section 80EEA, subject to fulfilment of
conditions.
No deduction under any other provision:

The interest allowed as deduction under section 80EEA will not be allowed as deduction under any
other provision of the Act for the same or any other assessment year.
Meaning of “Financial Institution”

A banking company to which the Banking Regulation Act, 1949 applies; or
Any bank or banking institution referred to in section 51 of the Banking Regulation Act, 1949; or
A housing finance company. It means

A public company formed or registered in India with the main object of carrying on the business
of providing long-term finance for construction or purchase of houses in India for residential
purposes.
CA Suraj Agrawal
Deduction 7.15
Deduction in respect of interest payable on loan taken for
purchase of electric vehicle [Section 80EEB] - NEW
Inserted by Finance (No. 2) Act 2019 – W.e.f. AY 20-21
Eligible Assessee:
An Individual who has taken a loan for purchase of an electric vehicle from any financial institution,
Interest payable on such loan would qualify for deduction under this section.
Conditions:
The assessee should be an individual.
Loan should be taken for purchase of an electric vehicle
loan has been sanctioned by the financial institution during the period
beginning on the 1st day of April, 2019 and ending on the 31st day of
March, 2023.
Period of benefit: The benefit of deduction under this section would be available from A.Y.2020-21
and subsequent assessment years till the repayment of loan continues.
Quantum of deduction: Interest payable, subject to a maximum of ` 1,50,000.
No deduction under any other provision:

The interest allowed as deduction under section 80EEB will not be allowed as deduction under any
other provision of the Act for the same or any other assessment year.
Financial institution
- A banking company to which the Banking Regulation Act, 1949 applies; or
- Any bank or banking institution referred to in section 51 of the Banking Regulation Act, 1949; or
- Any deposit taking NBFC
- A systemically important non-deposit taking NBFC i.e., a NBFC which is not accepting or
holding public deposits and having total assets of not less than ` 500 crore as per the last
audited balance sheet and is registered with the RBI.
Electric Vehicle
A vehicle which is powered exclusively by an electric motor whose traction energy is supplied
exclusively by traction battery installed in the vehicle. The vehicle should have electric regenerative
braking system, which during braking provides for the conversion of vehicle kinetic energy into electrical
energy.
CA Suraj Agrawal
Deduction 7.16
Example:
The following are the particulars relating to Mr. A, Mr. B, Mr. C and Mr. D, salaried individuals,
for A.Y. 2020-21:
Particulars Mr. A Mr. B Mr. C Mr. D
Amount of loan taken 43 lakhs 45 lakhs 20 lakhs 15 lakhs
Loan taken from HFC Deposit Deposit Public

taking NBFC taking sector
NBFC bank
Date of sanction of 1.4.2019 1.4.2019 1.4.2019 30.3.2019
Loan
Date of disbursement 1.5.2019 1.5.2019 1.5.2019 1.5.2019

of loan
Purpose of loan Acquisition Acquisition Purchase of Purchase of

of residential of residential electric electric
house house vehicle for vehicle for
property for self property for self personal use personal
occupation occupation use
Stamp duty value of 45 lakhs 48 lakhs

house property
Cost of electric 22 lakhs 18 lakhs

Vehicle
Rate of interest 9% p.a. 9% p.a. 10% p.a. 10% p.a.
Compute the amount of deduction, if any, allowable under the provisions of the Income-tax Act,
1961 for A.Y. 2020-21 in the hands of Mr. A, Mr. B, Mr. C and Mr. D. Assume that there has been
no principal repayment during the P.Y. 2019-20.
SOLUTION:
Mr. A
Interest deduction for A.Y. 2020-21
Deduction allowable while computing income under the head “Income from house property”
Deduction u/s 24(b) ` 3,54,750
[` 43,00,000 × 9% x 11/12]
Restricted to ` 2,00,000
Deduction under Chapter VI-A from Gross Total Income

Deduction u/s 80EEA ` 1,54,750
(` 3,54,750 – ` 2,00,000)
Restricted to ` 1,50,000
Mr. B
Interest deduction for A.Y. 2020-21
Deduction allowable while computing income under the head “Income from house property”
Deduction u/s 24(b) ` 3,71,250 Restricted to ` 2,00,000
[` 45,00,000 × 9% x 11/12]
CA Suraj Agrawal
Deduction 7.17
Deduction under Chapter VI-A
Deduction u/s 80EEA is not permissible since:
i. loan is taken from NBFC
ii. stamp duty value exceeds ` 45 lakh.
Deduction under section 80EEA would not be permissible due to either violation listed above.
Mr. C
Deduction u/s 80EEB for interest payable on loan taken for purchase of electric vehicle ` 20 lakhs x
10% x 11/12 = ` 1,83,333, restricted to ` 1,50,000, being the maximum permissible deduction.
Mr. D
Deduction u/s 80EEB is not permissible since loan was not sanctioned in the P.Y. 2019-20.
CA Suraj Agrawal
Deduction 7.18
Donation [Section 80G] - Applicability: All assessee
Nature: Donation in Kind is not eligible.
No deduction shall be allowed u/s 80G in respect of donation exceeding ` 2,000 ` 10,000 if paid in cash.
A. No ceiling limit for amount of donation and deduction of such donation

(1) Deduction = 100% of donation (2) Deduction = 50% of donation
1. The National Defence Fund 1. The Jawaharlal Nehru
2. Prime Minister’s National Relief Fund Memorial Fund
3. The National Foundation for Communal Harmony
2. Prime Minister’s Drought Relief
4. Approved University or educational institution of national
eminence Fund
5. Maharashtra Chief Minister’s Earthquake Relief Fund 3. Indira Gandhi Memorial Trust
6. Gujarat Relief Fund for earthquake victims
4. Rajiv Gandhi Foundation
7. Zila Saksharta Samiti
8. National Blood Transfusion Council
9. Any State Government Fund set up to provide medical relief
to the poor
10. The National illness Assistance Fund
11. The Chief Minister’s Relief Fund or Lieutenant Governor’s
Relief Fund
12. National Sports Fund
13. National Cultural Fund
14. Fund for Technology Development and Application
15. National Trust for welfare of persons with Autism, Cerebral
Palsy, Mental Retardation and Multiple Disabilities
16. The National Children’s Fund
17. National Fund for Control of Drug Abuse
18. Swachh Bharat Kosh
19. Clean Ganga Fund
[Point 18 & 19: Donation does not qualify for deduction if
it is a Part of CSR Expenses]
B. Deduction of some donation is subject to QUALIFYING AMOUNT [In aggregate]
3) 100% deduction shall be allowed 4) 50% deduction shall be allowed subject to the
subject to the qualifying amount if qualifying amount if the donation are made-
the donation are made – • To Govt., or local authority, for charitable purpose
• To Govt., or any approved except for promoting family planning;
association / institution for • To Approved Charitable Institution u/s. 80G.
promoting family planning;
• To any authority or corporation for the benefit of
• By company to the Indian
minority community.
Olympic Association or Notified
association / institution in India • For renovation or for repair of any temple, mosque,
for the development of Gurudwara, church, or other place notified to be of
Infrastructure for sports & games historic / archeological / artistic importance or as a
or the sponsorship for sports & place of public worship of renown;
games in India.
• To housing development authority constituted in
India.
CA Suraj Agrawal
Deduction 7.19
QUALIFYING AMOUNT: It means 10% of Adjusted GTI or the Donations given [in Aggregate]
whichever is less.
[Adjusted GTI means: GTI – LTCG – STCG u/s 111A – All deduction of Chapter VIA except 80G]
WORKING FORMAT:
Donation to - Qualifying Sum % Eligible Deduction

Rs.
(A) Donation without any qualifying limit:
1. PMNRF 100%
2. Zila Saksharta Samiti 100%
3. Indra Gandhi Memorial Trust 50%
(B) Donation subject to qualifying limit of total donation of 10% of Adjusted GTI:
1. Government for the promotion of family planning. 100%
2. An approved charitable institution (the qualifying 50%
amount = 10% of Adj. GTI - Donation for family
planning, which is eligible for 100% deduction)
Qualifying amount under (B) = 10% of Adj. GTI
Total Deduction u/s 80G
**Adjusted GTI = GTI - Deduction u/s 80C to 80G – STCG referred u/s 111A -
LTCG (Section 112 or 112A)
Deduction in respect of Rent paid [Section 80GG]

1) Applicability: In respect of RENT paid by an Individual.
2) The following conditions have to be satisfied for claiming deduction under section 80GG:
a) No House Rent Allowances [HRA] or No Rent Free Accommodation [RFA]: The assessee
should not be receiving any HRA exempt u/s 10(13A) and also should not be provided with
RFA.
b) No House at Place of Employment:
The Individual or his spouse or his minor child or an HUF of which he is a member
should not own any accommodation at the place where he ordinarily resides or perform duties
of his office or employment or carries on his business or profession.
c) No Claim for the benefit of Self-occupied House Property:
Assessee should not treat any residential house situated at other places as Self-occupied
Property u/s 23 i.e. Annual Value = NIL.
d) Rent: The assessee must be paying rent for the Residential Accommodation occupied by him
for the purposes of his own residence.
e) Proof of Rent Payment is required to file.
3) Quantum of deduction: Least of the following DON’T

a) Actual rent paid minus 10% of the Adjusted GTI, or FORGET ME
b) 25% of the Adjusted GTI, or
c) ` 5,000 p.m. Rs. 2,000
Adjusted GTI means Gross Total Income XXX

Less: LTCG u/s 112 or 112A (XXX)
Less: STCG u/s 111A (XXX)
Less: Deduction u/s 80C to 80U except 80GG (XXX)
CA Suraj Agrawal
Deduction 7.20
Question:
Rohit, a Doctor in Delhi, furnishes following particulars relevant to PY 2019-20
(a) Income from Profession 1,26,000
(b) Short-Term Capital Gains on sale of Shares (listed & STT Paid) 20,000
(c) Long-Term Capital Gains on sale of Land 25,000
(d) Interest on Government securities (Gross) 14,000
(e) Repayment of loan (Principal Only) taken from a Bank for higher studies 15,000
(f) Payment made for Mediclaim Policy on his health and the health of his wife 6,000
(g) Rent paid for a house in Delhi 25,000
Determine his Total Income for the AY 2020-21
Assessee: Rohit . Previous Year: 2019-20 Assessment Year: 2020-21

Computation of Total Income
Particulars ` `
Profits and Gains of Business or Profession: Profession of Medicine 1,26,000
Capital Gains: Short-term 20,000
Long-term 25,000 45,000
Income from Other Sources: Interest on Government Securities 14,000
Less: Deduction under Chapter VI-A
80D Medical Insurance Premium 6,000
80E Repayment of Education Loan (Repayment of Principal not eligible) Nil
80GG Deduction for Rent Paid (See W.N. 2) 11,600 (17,600)
Computation of Deduction u/s 80GG:

1. Computation of Adjusted Total Income:
Particulars ` `
Less: Long-Term Capital Gain 25,000
Short-Term Capital Gain on Sale of Shares 20,000
Deduction u/s 80CCC to 80U 6,000 (51,000)
Adjusted Total Income 1,34,000
2. Deduction u/s 80GG

Particulars `
(a) Rent paid Less 10% Adjusted Total Income = ` 25,000 Less 10% of ` 1,34,000 11,600
(b) 25% of Adjusted Total Income = ` 1,34,000 x 25% 33,500
(c) ` 5,000 p.m. x 12 Months 60,000
Permissible Deduction = Least of the above 11,600
Note: STCG on sale of shares assumed to be covered u/s 111A.
CA Suraj Agrawal
Deduction 7.21
DEDUCTION IN RESPECT OF ROYALTY INCOME ON BOOKS [Sec 80QQB]
1. ELIGIBLE ASSESSEE:
Resident individual being an author who’s GTI includes INCOME in the nature of
(a) Lump sum consideration for his interests in the copyright of any book being a work of
literary, artistic, scientific nature or
(b) Royalty or copyright fees in respect of such book.
2. Books shall not include brochures, guides, journal, diaries, commentaries, magazines,
newspapers, pamphlets, textbooks for schools / tracts & other publications of similar nature.
3. DEDUCTION: LOWER OF
a) 100% of such lump sum income [15% of the value of books in case of Royalty]
(Less: Related Expenses)
OR
RESIDENT INDIVIDUAL BEING AUTHORS (Royalty Income)
b) ` 3,00,000
DEDUCTION IN RESPECT OF ROYALTY INCOME ON PATENTS

[Sec 80RRB]
1. ELIGIBLE ASSESSEE:
RESIDENT Individual whose GTI includes Royalty Income from Patent.
2. The deduction shall not be available on

a. any capital sum received for sale of patent, which is chargeable u/h Capital Gains
b. any consideration for sale of product manufactured with the use of the patented article
3. DEDUCTION: lower of
a. 100% of such income; or RESIDENT INDIVIDUAL BEING PATENTEE (Royalty Income)
b. ` 3,00,000
COMMON FOR 80QQB/80RRB BOTH

If income earned from foreign sources: Deduction is allowed to the extent the income is brought into
India in Convertible Foreign Exchange within 6 months from end of Previous Year or such extended
period as allowed by RBI / competent authority.
Claim in Return of Income: Mandatory for deduction
Deduction in respect of interest on deposits in saving accounts to the

extent of Rs. 10,000 [Section 80TTA]
1. Applicability: Individual or HUF
(Other than senior citizen covered u/s 80TTB)
2. Maximum Qualifying Amount of deduction under section 80TTA: ` 10,000
3. GTI includes interest on deposits (not being time deposit) in a Saving Bank Account with
a) Banks,
b) Co-operative society into Banking Business or
c) Post Office.
4. However, where such income is derived by Firm/AOPs/BOIs, no deduction shall be allowed to
any partner/member as the case may be.
CA Suraj Agrawal
Deduction 7.22
Deduction in respect of interest on deposits to the extent of ` 50,000
[Section 80TTB]
1. Applicability: Senior Citizen
2. Maximum Qualifying Amount of deduction under section 80TTB: ` 50,000
3. GTI includes interest on deposits with

a) Banks,
b) Co-operative society into Banking Business or
c) Post Office.
4. However, where such income is derived by Firm/AOPs/BOIs, no deduction shall be allowed to

any partner/member as the case may be.
Note: Senior citizen who is eligible for deduction u/s 80TTB will not be able to claim deduction u/s
80TTA.
CA Suraj Agrawal
Deduction 7.23
Deduction in respect of employment of new Workmen/Employees
[Section 80JJAA]
1. Where the GTI of an assessee (any person) to whom section 44AB applies, includes any profits
and gains derived from business, a deduction of an amount equal to 30% of additional employee
cost incurred in the course of such business in the previous year shall be allowed, for 3
assessment years including the assessment year relevant to the previous year in which such
employment is provided.
2. No deduction under sub-section (1) shall be allowed:

(a) if the business is formed by splitting up, or the reconstruction, of an existing
business:
Provided that nothing contained in this clause shall apply in respect of a business which is
formed as a result of re-establishment, reconstruction or revival by the assessee of the
business in the circumstances and within the period specified in Section 33B;
(b) if the business is acquired by the assessee by way of transfer from any other person
or as a result of any business reorganisation;
(c) unless the assessee furnishes alongwith the return of income the report of the accountant, as
defined in the Explanation to section 288 giving such particulars in the report as may be
prescribed.
NOTE:
A. "Additional Employee Cost" means total emoluments paid or payable to additional employees
employed during the previous year:
Provided that in the case of an existing business, the additional employee cost shall be NIL, if-
(a) there is no increase in the number of employees from the total number of employees
employed as on the last day of the preceding year;
(b) emoluments are paid otherwise than by an account payee cheque or account payee
bank draft or by use of electronic clearing system through a bank account or through
any other prescribed electronic mode.:
Provided further that in the first year of a new business, emoluments paid or payable to
employees employed during that previous year shall be deemed to be the additional employee
cost;
B. "Additional Employee" means an employee who has been employed during the previous year
and whose employment has the effect of increasing the total number of employees employed by
the employer as on the last day of the preceding year, but does not include,-
(a) an employee whose total emoluments are more than ` 25,000 per month; or
(b) an employee for whom the entire contribution is paid by the Government under the
Employees' Pension Scheme; or
(c) an employee employed for a period of less than 240 days during the previous year (150
days in case of Apparel, footwear or leather products); or
(d) an employee who does not participate in the recognised provident fund;
where an employee is employed during the previous year for a period of less than two hundred and
forty days or one hundred and fifty days, as the case may be, but is employed for a period of two
hundred and forty days or one hundred and fifty days, as the case may be, in the immediately
succeeding year, he shall be deemed to have been employed in the succeeding year and the
provisions of this section shall apply accordingly
CA Suraj Agrawal
Deduction 7.24
C. "emoluments" means any sum paid or payable to an employee in lieu of his employment by
whatever name called, but does not include-
(a) any contribution paid or payable by the employer to any pension fund or provident fund or
any other fund for the benefit of the employee under any law for the time being in force; and
(b) any lump-sum payment paid or payable to an employee at the time of termination of his
service or superannuation or voluntary retirement, such as gratuity, severance pay, leave
encashment, voluntary retrenchment benefits, commutation of pension and the like.
D. From A.Y. 2017-18, it is not necessary that the employee should qualify as a “workman”
under the Industrial Disputes Act, 1947 for the employer to avail benefit under section
80JJAA.
CA Suraj Agrawal
Deduction 7A.1
“PRACTICAL QUESTIONS – DEDUCTIONS”

1) From the following particulars in respect of Adarsh, an author of books, find out the deduction
allowable to him under section 80C for the AY 2020-21 (amounts in `):
Life insurance premium (on his own life) 22000
Sum assured on the above policy 300000
Contribution to unrecognised provident fund 1000
Contribution to public provident fund 25000
Subscription to National Savings Certificates VIII issue 8000
Accrued interest for one year completed National Savings Certificates VIII issue 8000
Life insurance premium on his mother's life policy 5000
Repayment of bank loan borrowed for the construction of the house 21000
2) Mr. A, aged about 66 years, has earned a lottery income of ` 1,20,000 (gross) during the PY 2019-20. He
also has a business income of ` 30,000. He invested an amount of ` 10,000 in Public Provident Fund
account and ` 24,000 in National Saving Certificates. What is the total taxable income of Mr. A for the AY
2020-21?
3) X (age : 26 years), a resident individual, has income of ` 6,95,000 [i.e., ` 4,10,000 from a business in Delhi
and ` 2,85,000 from a property in Bombay) during the previous year 2019-20. Find out his net income for
the assessment year 2020-21 taking into consideration the following payments —
`
1. Life insurance premium on own-life paid by X in cash on March 31, 2020 33,334
(sum assured ` 4,00,000)
2. Contribution towards pension fund of LIC 11,000
3. Mediclaim insurance premium on the life of dependent father (age : 67 years and last
foreign travel : during 1994-95) paid by cheque on April 20, 2019 19,000
4. Medical treatment of dependent brother (being a person with disability) 5,000
5. Deposit with LIC for the maintenance of the dependent brother (being a person with
disability) 20,000
4) Discuss the allowability of the following:

i) Rajan has to pay to a Hospital for treatment ` 42,000 and spent nothing for Life Insurance or for
maintenance of dependant (being a person with disability).
ii) Rajan has incurred for treatment Rs. Nil in the previous year and deposited ` 25,000 with LIC for
maintenance of dependants (being persons with severe disability).
iii) Rajan has incurred ` 20,000 for treatment and ` 25,000 was deposited with LIC for maintenance of
dependants, (being person with disability)
5) A submits the following information regarding his income for the previous year 2019-20.
`
1. Salary Income (computed) 1,90,000
2. Rent received from property in Delhi (per month) 4,000
3. Winning from lottery (Gross) 15,000
He makes the following deposits / payments during the year

1. Contribution towards PPF 10,000
2. Premium paid in cash on Mediclaim policy of his dependant father 8,000
He has a son being a person with disability, dependent on him, for whom he incurs expenses of his
medical treatment and rehabilitation. He also deposits a sum of ` 25,000 for the benefit of his son under a
scheme framed by the UTI for such a purpose.
Compute his total income for the assessment year 2020-21.
6) Mr. X is a resident individual. He deposits a sum of ` 25,000 with Life Insurance Corporation every year for
the maintenance of his handicapped grandfather who is wholly dependent upon him. The disability is one
which comes under the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full
Participation) Act, 1995. A copy of the certificate from the medical authority is submitted. Compute the
amount of deduction available under section 80DD for the A.Y. 2020-21. What will be the deduction if
Mr. X had made this deposit for his dependant father?
CA Suraj Agrawal
Deduction 7A.2
7) The Gross Total Income of A for the Previous Year 2019-20 as computed is ` 2,50,000 which includes
` 1,65,000 Long-Term Capital Gain and ` 10,000 on account of Short-Term Capital Gain. Besides the
above he provides you the following information –
(a) He has deposited ` 12,000 to effect a contract for annuity plan of LI.C.
(b) He paid the following premium to the New India Assurance Co. Ltd for Mediclaim scheme for himself &
his relatives. `.
(i) his own health 1,000
(ii) for health of spouse 600
(iii) Major son not dependent on him 800
(iv) Mother dependent on him 1,200
(v) Brother dependent on him 1,100
(c) One of his brothers is totally blind and dependent on him for medical treatment and ` 10,000
rehabilitation. A spends on his blind brother.
(d) He has also deposited ` 25,000 in a Scheme framed by UTI for maintenance of his handicapped
dependent brother.
Compute his Total Income for the Assessment Year 2020-21
8) X, suffers from disability duly certified by a specialist. X is employed as personal assistant to the Managing
Director in a private company on a monthly salary of ` 12,000. Besides, X submits the following particulars of
income for the year ending 31.3.2020:
Interest from Indian companies ` 5,000
Dividend from UTI ` 3,000
Interest from bank FD ` 5,000
Determine the taxable income for the assessment year 2020-21
9) X is a Personal Secretary of a Managing director in a Public sector undertaking. X suffers from severe
physical disability, Monthly salary drawn is ` 12,000/-. Further, interest is earned on Fixed deposits with
banks ` 15,000/-, from private companies ` 7,000/- income from UTI ` 2,000. You are required to compute
the taxable income of X for A.Y. 2020-21
10) Compute the total income of Mr. Sonu (blind from birth) for the AY 2020-21, after taking into account
the following information:
(1) Salary from a publishing house for working as an artist (no allowances received) 1,36,000p.a.
(2) Income from sale of paintings made by self 3,25,000
(3) Winnings from lottery 60,000
(4) Dividend from a foreign company 10,000
(5) Fixed deposit with scheduled Bank in accordance with notified scheme 10,000
(6) Payment of rent of self-occupied house 50,000
(7) Donation to PM's National Relief Fund 4,000
It was found during the year that he is suffering from cancer. Sonu spent ` 30,000 for treatment of
cancer, out of which ` 10,000 were reimbursed by his employer.
11) X (35 years) is a resident individual. During the PY 2019-20, he incurs the following expenditure—
Actual reimbursed by Amount re-
Amount insurance imbursed by
expenditure company ` employer of
X`
`
Medical treatment (specified disease) of X in a 30,000 Nil 28,000
Government hospital
Medical treatment (specified disease) of Mrs. X in a 14,000 3,000 6,000
hospital recognised by Chief Commissioner
Salary of X is ` 4,50,000 p.a. In the two cases, disease is specified in the rules made by the Board. Find out
the net income of X for the AY 2020-21.
CA Suraj Agrawal
Deduction 7A.3
12) Mr. B has taken three education loans on April 1, 2019, the details of which are given below:
Loan 1 Loan 2 Loan 3
For whose education loan was taken B Son of B Daughter of B
Purpose of loan MBA B. Sc. B.A.
Amount of loan (`) 5,00,000 2,00,000 4,00,000
Annual repayment of loan (`) 1,00,000 40,000 80,000
Annual repayment of interest (`) 20,000 10,000 18,000
Compute the amount deductible under section 80E for the AY 2020-21
13) X (34 years), a resident ind, submits the following particulars of his income for the PY 2019-20:
Business income 83,000
Interest on debentures 49,000
Long-term capital gains on transfer of gold 4,10,000
Short-term capital gain on sale of shares taxable under section 111A 20,000
Other short-term capital gain 10,000
Contribution towards public provident fund 40,000
Payment of medical insurance premium on own life 3,000
Donation to the National Trust for welfare of persons with Autism 4,000
Donation to the fund set up by the Gujarat Government for providing relief to victims of 3,000
earthquake in Gujarat
Donation to Rajiv Gandhi Foundation 1,000

Donation to the Prime Minister's Drought Relief Fund 5,000
Donation to approved public charitable institution 11,000
Donation to a poor boy for higher education 5,000
Donation of clothes to an approved institution 12,000
Donation to a charitable institution for construction of a rest house only for a particular
religious community 8,000
Determine the net income of X for the AY 2020-21
14) X, an Indian citizen, gives the following particulars of his income and expenditure of the previous
year-2019-20:
Winnings from lottery 1,04,500
Contribution towards public provident fund 70,000
Donation to the Prime Minister's National Relief Fund 51,000
Donation to the Government of India for promotion of family planning 33,000
Donation to a public charitable institute (being an approved institution for section 80G) 1,12,000
Determine the net income of X for the AY 2020-21.
15) Mr. Brown supplies you the following information for the year ended 31.3.2020.
`
Interest on bank deposits (Time) 59,000
Dividend on shares of foreign companies received abroad 50,000
Interest from deposits in Indian Companies (gross) 30,000
Income from horse races in India 17,500
Mr. Brown is a non-resident. He has donated a sum of ` 15,000 to Municipal Corporation of Delhi for family
planning. He has paid ` 2,000 by cheque to New India Assurance Company for mediclaim for himself. He has
also spent ` 6,000 on medical treatment of his minor son who is physically handicapped.
Compute total income of Mr. Brown for the assessment year 2020-21.
16) A has computed his income under various heads for the previous year 2019-20 as under:
`
(a) Income under the head salary (computed) 2,51,000
(b) Income under the head house property (-) 10,000
(c) Profits and Gains of business or profession 40,000
(d) Capital Gains - Short-term 20,000
- Long-term 30,000 50,000
CA Suraj Agrawal
Deduction 7A.4
(e) Income from other sources
- Winnings of lotteries 10,000
- Interest on Government Securities 12,000 22,000
A also submits the following information :

(1) Payment made by cheque for Mediclaim policy 6,000
(2) Expenses on Medical treatment of dependent son being a person 15,000
with disability
(3) Payment of interest to Canara Bank, which was taken for pursuing
approved higher education 25,000
(4) Donations to :
Prime Minister's Drought Relief Fund 1,000
National Fund for Communal Harmony 2,000
Jawaharlal Nehru Memorial Fund . 2,000
Prime Minister's National Relief Fund 1,200
Government for Family Planning 27,000
Approved Charitable Institution 3,000
Compute the Total Income for assessment year 2020-21 if he deposits ` 20,000 in his PPF Account
during the previous year.
17) Compute the total income of Mr. Kamal for the assessment year 2020-21 (All Amounts in `) :
Salary received 2,55,000

Rent received from let out property 1,20,000
Short term capital loss 80,000
Agricultural income from Nepal 1,00000
He has made the following payments :

Donation to Scientific research association 50,000
Repayment of loan taken for his higher education (Interest included ` 80,000) 1,24000
Donation to National Children's Fund 5,000
Donation to approved charitable institution 16000
Donation Prime Minister's National Relief Fund 8,000
Payment by cheque to General Insurance Corporation for insuring health of his 15,000
dependant father, being a senior citizen
Expenses on medical treatment of his dependant disabled mother (severe 3,000
disability)
18) X, a professional tax consultant, based at New Delhi furnishes the following particulars of his income/
expenditure relevant for the AY 2020-21:
`
Short-term capital gain (covered by section 111A) 4,000
Winning from a camel race 1,700
Winning from a horse race 2,000
Winning from lottery 1,600
Income from other sources (except above) 10,000
`
Payment of medical insurance premium on own life 13,000
Payment of rent 80,000
Contributions towards public provident fund 70,000
Determine the amount deductible under section 80GG and the net income for the AY 2020-21
19) X, a Chartered Accountant, derives ` 1,63,000 as taxable professional income. Income of X from other
sources is ` 32,000. He pays Mediclaim insurance premium ` 2,000 for insuring-the health of his non -
dependant parents; ` 3,000 for self and spouse and ` 2,000 for his brother. He incurs ` 12,000 expenditure
on medical treatment of his dependant mentally retarded (severe disability) sister in approved hospital duly
certified. He pays rent of ` 2,500 per month. Calculate his TI for AY 2020-21 after claiming deductions u/c
VI-A
CA Suraj Agrawal
Deduction 7A.5
20) Anand is a retired Government Officer aged 65 years, who derived the following income in respect of
FY 2019-20. He resides in Cochin:
`
Pension p.a. 130,000
Interest from bank deposits (time) 102,000
He has paid ` 20,000 as premium to effect insurance on his health. He pays a rent of ` 3,000 per month in
respect of furnished accommodation. What is his eligibility for deduction under section 80GG? What are
the conditions to be satisfied by him to qualify for the deduction?
21) For the previous year 2019-20, the business income of X (age : 29 years) is ` 10,23,000. During the
year, he pays the following by cheque to get tax benefit—
Insured person Mediclaim Life insurance
insurance premium `
premium `
Taxpayer, spouse and children—
X 22,000 15,000*
Mrs. X (not dependent upon X) [sum assured is ` 160,000] 4,500 20,000
Son (not dependent upon X) 800 2,000*
Daughter (dependent upon X) 2,500 700*
Parents of the taxpayer—

Father (age: 67 years, resident in India, not dependent upon X) 1,000 1,200*
Mother (age: 59 years, dependent upon X) 36,000 6,000*
Others—
Grand parents (dependent upon X) 500 2,000*
Father of Mrs. X (dependent upon X) 800 7,000*
Brother (dependent upon X) 900 4,500*
*Less than 10 per cent of sum assured.
Besides, X pays ` 16,000 towards pension fund of LIC. Find out the net income of ‘X’ for AY 2020-21
22) A, an individual has made the following payments in the previous year 2019-20:
• ` 17,000 paid by cheque to GIC for insuring A’s own health.

• ` 6,000 paid by credit card to GIC for insuring health of A’s wife, not dependant on him.
• ` 6,000 paid by credit card to GIC for insuring health of A’s dependant major child.
• ` 1,000 paid in cash to GIC for insuring the health of A’S dependant minor daughter.
• ` 1,000 paid in cheque to GIC for insuring the health of A’S dependant brother.
• ` 42,000 paid by credit card to GIC for insuring health of A’s father (aged 66 years & resident), not
dependent upon him.
• ` 9,000 paid by cheque to GIC for insuring health of A’s mother (59 Yr), dependent upon A.
• ` 1,000 paid by debit card to GIC for insuring health of A’s grandfather dependent upon A.
• ` 1,000 paid by cheque to GIC for insuring health of A’s minor son, not dependent upon him.
• ` 100 p.m. paid by cheque to LIC for group insurance of which he is a member
a) Compute the deduction allowable u/s. 80D.

b) What will be the deduction if A’s father is a non-resident in India.
CA Suraj Agrawal
Deduction 7A.6
Class Notes
CA Suraj Agrawal
Deduction 7B.1
SOLUTION - DEDUCTION
Solution 1:
Computation of deduction allowable to Adarsh under section 80C
Life insurance premium on his own life (fully allowed as premium is less than 10% of sum 22000
assured)
Contribution to PPF 25000
Subscription to National Savings Certificates VIII issue 8000
Accrued interest for one year completed NSC VIII issue - It is reinvested, hence, eligible 8000
Repayment of bank loan borrowed for the construction of the house 21000
Total 84000
Note: Life insurance premium on mother's life policy is not eligible for deduction u/s 80C.
Solution 2:
Computation of total taxable income of Mr. A for AY 2020-21
Particulars ` `
Profits and gains from business or profession 30,000
Income from other sources - lottery income 1,20,000
Less: Deductions under Chapter VIA [See Note below ]
Under section 80C - Deposit in Public Provident Fund 10,000
- Investment in National Saving Certificate 24,000
34,000
Restricted to 30,000
Note: Though the value of eligible investments is ` 34,000, however, deductions under chapter
VIA cannot exceed the Gross Total Income exclusive of Long Term Capital Gain, Short Term Capital Gain
covered under section 111A, winnings of lotteries etc of the assessee. Therefore maximum permissible deduction
under section 80C = ` 1,50,000 – ` 1,20,000 = ` 30,000.
Solution 3:
`
Property income 2,85,000
Less : Deductions under sections 80C to 80U
Under section 80C [payment of life insurance] 33,334
Under section 80CCC [contribution towards pension fund of LIC] 11,000
Under section 80D [mediclaim insurance premium on the health of dependent father ] 19,000
Under section 80DD [the amount of deduction is ` 75,000 irrespective of the amount
incurred or deposited under Option 1 and/or Option 2] 75,000
Net Income (Rounded off) 5,56,670
Solution 4:
i) The deduction of ` 75,000 under section 80DD is allowed in full irrespective of the expenditure actually
incurred/paid by the assessee.
ii) The assessee Rajan (assumed to be resident in India) has deposited ` 25,000 for maintenance of
handicapped dependent. The assessee is, however, eligible to claim ` 125,000, since the deduction of
` 125,000 allowed in full irrespective of the amount deposited with LIC in case of severe disability.
iii) Section 80DD allows a deduction of ` 75,000 irrespective of the actual amount spent on maintenance of
handicapped dependent and/or actual amount deposited with LIC. Therefore, the deduction will be ` 75,000
even though the total amount incurred/deposited is ` 45,000.
Solution 5:
Income from salary 1,90,000

Rent received ` 4,000 x 12 48,000
Less: 30% as standard deduction 14,400 33,600
Income from Other sources
Winnings from lotteries 15,000
CA Suraj Agrawal
Deduction 7B.2
Less deductions u/s 80C to 80U
i. 80C 10,000
ii. 80D(as payment is made in cash) Nil
iii. 80DD 75,000 85,000
Solution 6:
Since the amount deposited by Mr. X was for his grandfather, he will not be allowed any deduction under
section 80DD. The deduction is available if the individual assessee incurs any expense for a dependant
disabled relative. Grandfather does not come within the definition of dependant relative.
What will be the deduction if Mr. X had made this deposit for his dependant father?- Since the
expense was incurred for a dependant disabled relative, Mr. X will be entitled to claim a deduction of
` 75,000 under section 80DD, irrespective of the amount deposited. In case his father has severe
disability, the deduction would be ` 1,25,000.
Solution 7:
Computation of Total Income and Tax Payable
Particulars ` `
Gross Total Income (including LTCG of ` 1,65,000) 2,50,000
Less: Deduction Under Chapter VIA
U/s 80C – Annuity Plan of LIC 12,000
U/s 80D - Medical Insurance Premium paid (` ` 1,000 + ` 600 + ` 1,200) 2,800
U/s 80DD - Medical Expenditure on Dependent 1,25,000
Total 1,39,800
Deduction restricted to ` 85,000 [Gross Total Income of ` 2,50,000 Less (85,000)
LTCG of ` 1,65,000] since (a) LTCG is not eligible for Chapter VI-A
deduction, and (b) Deductions cannot exceed Gross Total Income
exclusive of LTCG]
Notes:
1. Mediclaim Premium:
(a) Premium paid on Major Son not dependent on the assessee is not eligible for deduction.
(b) Premium paid on dependent brother is not eligible for deduction.
(c) It is assumed that the premium is not paid in cash.
2. Certificate: It is assumed that Mr. A has obtained the certificate from the Medical Authority and the same is
furnished/ along with the Return of Income.
CA Suraj Agrawal
Deduction 7B.3
Solution 8: Computation of taxable income for the AY 2020-21
` `
I. Income from Salary: (12000 x 12 – 50,000) 94,000
II. Income from other sources:
- Interest from Companies 5,000
- UTI Income [Exempt u/s. 10(35)] Nil
- Interest from Bank FD 5.000 10,000
Less : Deduction under Chapter VI-A:
- Sec. 80U 75,000
Taxable Income 29,000
Solution 9:
GTI = (12,000 x 12 - 50,000) + 15,000 + 7,000 + NIL = ` 1,16,000
Deduction = 80U = ` 125000 maximum 116000.
Solution 10:
Computation of Net Income of Sonu for the Assessment Year 2020-21 (amounts in `)
Income from Salary (1,36,000 - 50,000) 86,000
Business Income (sale of paintings made by self) 3,25,000
Income from Other Sources:
Winnings from lottery 60,000
Dividend from a foreign company 10,000 70,000
Less: Deductions under Chapter VIA
Under section 80C (FD with Bank in accordance with notified scheme) 10,000
Under section 80DDB (Medical treatment of cancer) (`
` 30,000 - ` 10,000) 20,000
Under section 80G (100% of ` 4,000) 4,000
Under section 80GG (See Note) 17,800
Under section 80U 1,25,000 1,85,800
Note: Deduction under section 80GG shall be the least of the following -
a) 5,000 x 12 60,000
b) Rent paid - 10% of Adj. GTI = 50,000 - 10% of (4,81,000 - 10,000 - 20,000 –
4,000 -1,25,000) = 50,000 -10% of 322000= 17,800
c) 25% of Adj. GTI i.e. 3,22,000 80,500
Solution 11:
`
Salary 4,50,000
Perquisite in respect of medical treatment of X and his spouse Nil
Gross salary 4,50,000
Less : Standard deduction u/s 16(ia) 50,000
Salary 4,00,000
Any other income Nil
Less : Deduction under section 80DDB 3,000
Net income 3,97,000
Note - The amount deductible is as follows—
1. actual expenditure (i.e., ` 30,000 + ` 14,000); or
2. ` 40,000 (` ` 100,000 in the case of senior citizen), whichever is less.
` 40,000 is deductible if nothing is recovered from the insurance company or employer. From the amount
deductible (i.e., ` 40,000 in this case), the amount received from insurance company as well as employer shall be
deducted. Therefore, ` 40,000 - ` 3,000 - ` 28,000 - ` 6,000, i.e., ` 3,000 is deductible.
Solution 12:
Deduction under section 80E is available to an individual assessee in respect of any interest paid by him
in the previous year in respect of loan taken for pursuing his higher education or higher education of his
spouse or children. Higher education means any course of study pursued after senior secondary
examination. Therefore, interest repayment in respect of all the above loans would be eligible for
deduction.
Deduction under section 80E = ` 20,000 + ` 10,000 + ` 18,000 = ` 48,000
CA Suraj Agrawal
Deduction 7B.4
Solution 13:
Business Income 83,000
Short-term capital gain under section 111A 20,000
Other short-term capital gain 10,000
Under section 80C in respect of public provident fund 40,000
Under section 80D in respect of medical insurance premium 3,000
Under section 80G in respect of donations [see Note 1] 14,950
Net income 5,14,050
Note 1 - computation of deduction under section 80G in respect of donations

Step 1 - Gross qualifying amount:
Donation to the National Trust for welfare of persons with Autism 4,000
Donation to the fund set up by the Gujarat Government for providing relief to victims of
earthquake in Gujarat 3,000
Donation to Rajiv Gandhi Foundation 1,000
Donation to the Prime Minister's Drought Relief Fund 5,000
Donation to public charitable institutions 11,000
Amount given to a poor student (*not eligible as the donee is not a public charitable institution) —*
Clothes to an institution (*donation in kind is not eligible) —*
Amount for construction of rest house (*not eligible as amount will be utilised for the
benefit of a particular community) —*
Gross qualifying amount 24,000
Step 2 - Net qualifying amount
Donation to the National Trust for welfare of persons with Autism (*without any maximum limit) 4,000*
Donation to the fund set up by the Gujarat Government for providing relief to victims of
earthquake in Gujarat (*without any maximum limit) 3,000*
Donation to Rajiv Gandhi Foundation (*without any maximum limit) 1,000*
Donation to the Prime Minister's Drought Relief Fund (*without any maximum limit) 5,000*
Donation to the public charitable institutions:
It is :
a. ` 11,000 (being amount of donation) ; or
b. ` 9,900 (being 10% of adjusted gross total income calculated under Note 2), whichever is lower.
` 9,900 is, therefore, eligible for net qualifying amount 9,900
Net qualifying amount 22,900
Step 3 - Amount deductible:
50% of ` 15,900 (1,000+5,000+9,900) + 100% of ` 7,000 14,950
Note 2 - adjusted gross total income is calculated as under:

Less : Long-term capital gains 4,10,000
Less: Short-term capital gain under section 111A 20,000
Less : Amount of deduction under sections 80C to 80U except section 80G 43,000
Adjusted gross total income 99,000
Solution 14:
Less : Deductions
Under section 80C 70,000
Under section 80G [see Note 1] 1,24,500
Net income 10,15,500
Notes :
Computation of Deduction Under Section 80G
Step 1 - Gross qualifying amount
Donation to the Prime Minister's National Relief Fund 51,000
Donation for family planning 33,000
Donation to the public charitable institute 1,12,000
Gross qualifying amount 1,96,000
CA Suraj Agrawal
Deduction 7B.5
Step 2 - Net qualifying amount
Donation to the Prime Minister's National Relief Fund (*no maximum limit is prescribed) 51,000*
Donation for family planning and to public charitable institute, amount to be included in
net qualifying amount, is the lower of :
a) ` 1,45,000 (being amount of donation) ; or
b) ` 1,14,000 (being 10% of adjusted gross total income computed under Note 2),
` 1,14,000, being the least, is to be included.
As amount of ` 1,14,000 represents aggregate amount of net qualifying donation in respect
of donation for family planning and to public charitable institute, separate amount in respect
of these will be as follows :
Donation to the Government for promoting family planning 33,000
Donation to the public charitable institute (i.e., `1,14,000 - ` 33,000) 81,000
Net qualifying amount 1,65,000
Step 3 -Amount deductible
100% of amount qualified in respect of donation to the Prime Minister's National Relief
Fund and the Government for family planning 33,000
50% of remaining portion 40,500
Amount deductible under section 80G 1,24,500
2. Adjusted Gross Total Income is calculated as under:

Less: Amount of deductions under sections 80C to 80U (except section 80G) 70,000
Adjusted gross total income 11,40,000
Solution 15:-
Interest on deposits 30,000
Horse race 17,500
Gross Total income 1,06,500
Less : Deduction
U/s. 80D 2,000
U/s. 80DD Nil (as non resident)
U/s. 80G 100% of 10,450 [10% of (1,06,500- 2,000)] 12,450
Total Income 94,050
Solution 16:-
` `
Loss from house property (-) 10,000
Business income 40,000
Capital gain short-term 20,000
long-term 30,000 50,000
Income from other sources (10,000 + 12,000) 22,000
Less : Deduction u/s 80C to 80U
(i) U/s 80C 20,000
(ii) U/s. 80D 6,000
(iii) U/s. 80DD 75,000
(iv) U/s. 80E 25,000
(v) U/s. 80G (calculated as under) 25,400 1,51,400
(1) Donation to which qualifying limit is not applicable :

(a) Allowed® 100%
(i) National Fund for Communal Harmony 2,000
(ii) Prime Minister's National Relief Fund 1,200 3,200
(b) Allowed @ 50%
(i) Prime Minister's Drought Relief Fund (` ` 1,000) 500
(ii) Jawaharlal Nehru Memorial Fund (` ` 2,000) 1,000 1,500
(2) Donations to which qualifying limit is applicable :
(i) Government for family planning 27,000
(ii) Approved charitable institutions 3,000
CA Suraj Agrawal
Deduction 7B.6
30,000
Limited to 10% of Adjusted
Gross Total Income i.e., ` 2,07,000 and it shall be ` 20,700. Since 20,700 20,700
donations to Family Planning are more than the maximum allowable,
hence 100% of the qualifying amount will be allowable
Total deduction for donations u/s 80G. 25,400
Adjusted Gross Total Income is computed as under:

` `
(A) Gross Total Income 3,53,000
Less : (i) Long-term Capital Gain [`
` 30,000 – ` 10,000 {HP Loss Setoff}] 20,000
(ii) Deductions u/s 80C to 80U
(20,000 + 6,000 + 75,000 + 25,000) 1,26,000 1,46,000
2,07,000
Solution 17:
Computation of Total Income of Shri Kamal for the Assessment Year 2020-21
` `
Salary received (2,55,000 – 50,000) 205000
Income from House Property (` ` 1,20,000 - 30% of ` 1,20,000) 84000
Capital Gains:
Long term capital gains 240000
Short term capital loss 80000 160000
Income from Other Sources (Agricultural income from Nepal) 100000
Gross Total Income 549000
Less : Deductions under Chapter VIA
(a) 80D for payment to GIC 15000
(b) 80DD (medical treatment of disabled mother) 125000
(c) 80E (interest on loan taken for higher education) 80000
(d) 80GGA (Donation to scientific research association) 50000
(e) 80G (See Note) 18950 288950
Total Income 260050
Note: Deduction u/s 80G = 100% of 5,000 + 100% of 8,000 + {50% of lower of - (a) 16,000 or (b) 10% of
(5,49,000 -1,60,000 -15,000 -1,25,000 - 80,000.- 50,000)} = 5,000 + 8,000 + 50% of 11,900 = ` 18,950.
Solution 18:
` `
Professional income 6,80,000
Capital gains 14,000
Winnings from races including horse races 3,700
Winning from lottery 1,600
Other income 10,000 15,300
Under section 80C in respect of public provident fund 70,000
Under section 80D in respect of medical insurance premium 13,000
Under section 80GG in respect of rent paid being the least of the following :
a. ` 60,000 (being ` 5,000 x 12);
b. ` 1,53,075 (being 25% of ` 6,12,300);
c. ` 18,770 (being excess of rent paid over 10% of total income, i.e.,
` 80,000 - 10% of ` 6,12,300)
` 18,770, being the least, is, therefore, deductible 18,770
Net income 6,07,530
Note - "Total income" for the purpose of section 80GG is, ` 6,12,300, i.e., ` 7,09,300 - ` 4,000 -`
` 10,000 - `
70,000 - ` 13,000.
CA Suraj Agrawal
Deduction 7B.7
Solution 19: Computation of Total Income
Particulars ` `
Professional income 1,63,000
Income from other sources 32,000
Less : Deductions under Chapter VI-A
1. Mediclaim Insurance - 80D - (` ` 3,000 + ` 2,000) 5,000
2. Expenditure for dependant mentally retarded sister 1,25,000
-80DD
3. Rent paid - 80GG - least of the following is eligible
for deduction
i. Excess of Rent paid over 10% of Adjusted GTI
(`
` 30,000- ` 6,500) = ` 23,500
ii. 25% of Adjusted GTI = 16,250
iii. Ceiling limit ` 5,000 p.m. = ` 60,000 16,250 1,46,250
Total income ` 48,750
Note:
i) Mediclaim insurance for insuring health of X's brother does not qualify for deduction u/s 80D.
ii) Mediclaim insurance for non - dependant parents shall qualify for deduction U/s. 80D
iii) Deduction u/s. 80DD is a flat amount of ` 1,25,000 irrespective of the actual expenditure incurred (for
persons with severe disability).
iv) Total income for the purpose of Sec 80GG
Less: Deduction u/s 80D & 80DD 1,30,000
Adjusted GTI 65,000
Solution 20: Deduction u/s 16(ia) – 50,000; 80D – 20,000, 80TTB – 50,000, 80GG – ` 23,800.
Solution 21:
`
Any other income Nil
Less: Deductions under sections 80C to 80U
Under section 80C [see Note] 33,700
Under section 80CCC (being payment towards pension fund of LIC) 16,000
Under section 80D [see Note] 51,000
Net income 9,22,300
Note - Computation of deduction under sections 80C and 80D—
Life insurance for Mediclaim insurance
the purpose of for the purpose of
Insured person
section 80C section 80D
` `
Taxpayer, spouse and dependent children - X 15,000 22,000
Mrs. X [limited to 10% sum assured] 16,000* 4,500
Son (not dependent upon X) 2,000 —
Dependent daughter 700 2,500
Total 29,000
Amount deductible under section 80D (maximum: 25,000
` 25,000, extra deduction of ` 5,000 is not available as
X, Mrs. X and dependent children are not senior
citizens) (a)
Parents of X -
Father (not dependent) — 1,000
Dependent mother — 36,000
Grand parent, father-in-law, dependent brother — —
Total 37,000
Amount deductible under section 80D (maximum: ` 26,000
25,000, extra deduction of ` 1,000 is available as father
of X is resident in India and senior citizen) (b)
Amount deductible under sections 80C and 80D 33,700 51,000*
[*(a) + (b)]
CA Suraj Agrawal
Deduction 7B.8
Solution 22:
Payments eligible for deduction u/s 80D: Amount paid for himself spouse and Amount paid
dependent children for parents
(`
` (`
`)
Amount paid on own health 17,000

Amount paid on health of wife (ever though not dependant on A) 6,000
Amount paid on health of dependant major child 6,000
Amount paid on health of minor daughter (not allowed as paid in cash) Nil
Amount paid on health of brother (not allowed irrespective of whether he Nil
is dependent on A or not)
Amount paid on health of A’s father (senior citizen) allowed even if father 42,000
is not dependant on A
Amount paid on health of mother 9,000
Amount paid on health of grandfather(not allowed as grandparents are Nil
not covered)
Amount paid on health of A’s minor son (not allowed as he is not Nil
dependent on A)
Amount paid to LIC is not allowable u/s. 80D Nil
Total eligible amount 29,000 51,000
However, deduction will be restricted to a maximum of ` 25,000 in case of his family and ` 50,000 (including `
25,000 for senior citizen) for parents. Hence the deduction will be restricted to maximum of ` 50,000 for both
parents. The total deduction shall be ` 75,000.
CA Suraj Agrawal
Depreciation 8.1
Depreciation [Section 32]

The assets in respect of which depreciation is claimed must belong to either of the following categories,
namely:
(a) buildings, machinery, plant or furniture, being tangible assets;
(b) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights
of similar nature, being intangible assets.
No depreciation is allowable on the cost of the land. Goodwill is now eligible for Depreciation as
Intangible Assets.
Some Important Points:
1) Beneficial owner: Assessee need not be a 2) Passive use vs. Active use: Use includes
registered owner, even a beneficial owner can active use as well as passive use. Active use
claim depreciation means actual use of the property for the purpose
of business or profession. Whereas passive use
3) Co-owner: In case of joint ownership, includes “ready to use”. It means, if a property
depreciation is allowed on proportionate basis. was not actually used for business or profession
but was ready to use in the PY, in such case,
assessee can claim depreciation to such assets
4) Property acquired on hire purchase: in case 5) Partly used for business or profession: As per
of hire purchase, the buyer can claim Sec. 38, if an asset is partly used for business or
depreciation even though he does not get legal profession and partly used for personal purpose,
title of the asset till he pays the last installment. then proportionate depreciation (as determined
a. Depreciation can be claimed on cash price by the Assessing Officer) shall be allowed.
of such asset on the date of agreement
b. Hire charges will be allowed as deduction
under section 37(1).
6) Capital expenditure on a property by the 7) House property let out to tenant for smooth
lessee: Where an assessee being a lessee of a running of the business: If an assessee lets
property incurs any capital expenditure by way out a property to his employee/others and where
of improvement, extension, super construction, such letting out supports smooth flow of his
etc. on building being used for his business or business, then rent received from
profession, he is entitled to depreciation in employees/others shall be chargeable under the
respect of such capital expenditure. head “PGBP” and such property shall be eligible
for depreciation u/s 32.
8) Sec. 53A of Transfer Of Property Act: 9) Deduction on account of depreciation shall

Possessor of an Immovable Property u/s 53A Of be made compulsorily, whether or not the
Transfer of Property Act can claim depreciation assessee has claimed the deduction in
even though he is not the registered owner of computing his total income.
the property.
SIGNIFICANCE OF DATE OF PURCHASE (EFFECT OF TIME ON DEPRECIATION)

Where-
(a) an asset is acquired by the assessee during the previous year, and
(b) is put to use in the same previous year for less than 180 days,
- the depreciation in respect of such asset is restricted to 50% of the normal depreciation. [Both
th
conditions should be satisfied together] - 5 October onwards
[There is no significance of date of sale for computation of depreciation]
CA Suraj Agrawal
Depreciation 8.2
DEPRECIATION FOR UNDERTAKINGS OTHER THAN POWER GENERATING UNITS
In respect of –
(a) buildings, machinery, plant or furniture, being tangible assets;
(b) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial
rights of similar nature, being intangible assets,
owned, wholly or partly, by the assessee and used for the purpose of the business or profession,
depreciation shall be allowed on the Written Down Value of the block of assets at such percentage as may be
prescribed.
Block of Assets [Section 2(11)]:
A “block of assets” is defined as a group of assets falling within a class of assets comprising:
(a) tangible assets being buildings, machinery, plant or furniture;
(b) intangible assets being know-how, patents, copyrights, trademarks, licenses, franchises or any other
business or commercial rights of similar nature,
in respect of which the same percentage of depreciation is prescribed.
[Note: Each class of Assets has been further divided into blocks with a particular rate of depreciation for each
block. However, Intangible assets, have been granted into one block only with a depreciation rate of 25%.]
WRITTEN DOWN VALUE [Section 43(6)]
In the case of assets acquired by the assessee during the previous year, the WDV means the actual cost
to the assessee.
In the case of assets acquired before the previous year, the WDV shall be worked out as follows:
WRITTEN DOWN VALUE OF BLOCK OF ASSETS
Opening value of the block at the beginning of the Previous Year xxx
Add: ACTUAL COST of assets acquired during the Previous Year & falling
within this block xxx
Less: MONEYS PAYABLE (i.e. sale price & insurance compensation) in respect
of asset, which is sold, discarded, demolished or destroyed, together
with the scrap value, if any. xxx
WDV for the purpose of depreciation xxx

Depreciation at prescribed percentage xxx
Closing value of the block xxx
Notes:
1) The deduction of moneys payable shall only be to the extent that WDV becomes NIL
2) MONEYS PAYABLE means the sale price of the asset and includes any insurance, salvage or compensation
payable in respect of the asset.
3) Depreciation will not be charged in the following two cases:
a. When Money payable exceeds the amount of “Opening WDV + Assets acquired”
b. When block cease to exist (means when all the assets is sold).
CA Suraj Agrawal
Depreciation 8.3
RATES OF DEPRECIATION
PART A - TANGIBLE ASSETS
I Buildings
Block 1. Residential 5%
Block 2. Non Residential 10%
Block 3. Temporary Erections (Wooden Structure) 40%
II Furniture and Fittings

Furniture and fittings including electrical fittings 10%
III Plant & Machinery
Block 1. (a) Plant & machinery (General rate) 15%

(b) Motor cars not used for hiring purpose (new rate – Refer Page 12)
Block 2. Motors buses, motor lorries, motor taxis used in a business

of running them on hire (new rate – Refer Page 12) 30%
Block 3. Energy Saving Devices (as specified)
Air, Water Pollution control equipments, Solid waste

control equipment (Specified)
40%
All Kind of Books
Computers (Laptops) including computer printer & software
Aeroplanes, aeroengines
Block 4. Ships or Vessels 20%
PART B INTANGIBLE ASSETS

Know-how, patents, copyrights, trademarks, licences, franchises
or any other business or commercial rights of similar nature 25%
Goodwill (as decided by the Supreme Court in case of Smifs Securities Ltd. v CIT) 25%
[‘Goodwill’ is treated as Intangible Asset & eligible for Deprecation]
Now, there is no block with depreciation rate higher than 40%.
DIFFERENT SITUATION FOR DEPRECIATION CALCULATION:

1. Assets purchased and put to use for 180 days or more
2. Asset purchased and put to use for less than 180 days
3. Asset put to use for less than 180 days and the WDV is less than the actual cost of the asset purchased
4. Where any asset is sold at a price more than the WDV of the block of assets
5. When all the assets of block are sold at a price less than the WDV of the block of assets
Section 43(1)
Where an assessee incurs any expenditure for acquisition of any asset in respect which a payment (or
aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft/use
of electronic clearing system through a bank account or through such other electronic modes as may be
prescribed, exceeds ` 10,000, such payment shall be ignored for the purposes of determination of “Actual
Cost” of such asset.
Consequently, Depreciation/Additional Depreciation under Section 32 and Deduction u/s 32AD pertaining
to such payment is not available. Moreover, such expenditure will not be considered for the purpose of
Section 50.
CA Suraj Agrawal
Depreciation 8.4
COMPUTATION OF CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS

In the following 2 cases, the capital gains shall be calculated:
(1) When value of block ceases to exist; or
(2) Block ceases to exist.
SECTION 50: SHORT-TERM CAPITAL GAINS SHALL BE COMPUTED AS UNDER:
Full value of consideration received /receivable xxx
Less: Aggregate of following amounts:

Expenditure incurred wholly & exclusively for transfer xxx
WDV of the block of assets at the Beginning of the Previous Year xxx
Actual Cost of any asset falling within the block of assets
acquired during the Previous Year xxx
Short-term capital gains (if positive)/Short-term capital loss (if negative) xxx
Notes:
1) If Sec. 50 is not attracted than expenditure on transfer of assets from block of assets is allowable as business
expenditure u/s 37(1).
2) Short term Capital Loss arises when relevant Block of Asset ceases to exist (i.e. all assets in a block are
transferred).
3) Insurance compensation in respect of asset destroyed shall be deducted from WDV of Block under section
43(6) even if the same has not been actually received. (Mercantile Basis)
4) However, if STCG arises under section 50 because of insurance compensation then such STCG shall be
taxable in the previous year in which insurance compensation is actually received as per section 45(1A).
Example:
a. Opening WDV of block as on 1-4-2019 5,00,000
(15%)(Assets A,B,C,D & E)
b. Asset F acquired 30-6-2019 2,00,000
c. Asset A destroyed in fire on 31.12.2019
d. Insurance Compensation payable 10,00,000
Compensation is determined on 28.02.2020 and received on 31.12.2020.
Answer:
Opening WDV as on 01.04.2019 5,00,000
Add: Actual cost of assets acquired during the P/Y 2,00,000
Less: Moneys payable in respect of insurance compensation
receivable during the P/Y (Restricted to ` 7,00,000) 7,00,000
WDV Nil

Short Term Capital Gain under section 50
Insurance compensation Received 10,00,000
Less: Opening WDV as on 01.04.2019 5,00,000
Less: Assets acquired 2,00,000
Short Term Capital Gain 3,00,000
Note: Short Term Capital Gain u/s 50 shall be taxable in AY 2021-22, as per section 45(1A). As per Section
45(1A) the Capital gains shall be taxable in the year in which insurance compensation is received.
CA Suraj Agrawal
Depreciation 8.5
Example:
SATC Enterprises has WDV in building block (depreciation rate 10%) as on 1/4/19 ` 80,000. The block
consists of two building X and Y. Compute depreciation u/s 32 for the AY 2020-21 in the following cases:
Case A Building X sold for ` 20,000 on 1/5/19

Case B Building X sold for ` 100,000 on 1/1/20
Case C Building X sold for ` 100,000 and building S purchased for ` 35,000 as on 1/7/19
Case D Building X sold for ` 10,000 and building S purchased for ` 40,000 as on 1/7/19
Case E Building X sold for ` 10,000 and building S purchased for ` 40,000 as on 1/11/19
Case F Building X sold for ` 200,000 and building S purchased for ` 40,000 as on 1/11/19
Case G Building X and building Y both sold for ` 10,000 and ` 35,000 respectively.
Case H Building X and building Y both sold for ` 10,000 and ` 35,000 respectively as on 1/11/19. New
building T purchased for ` 5,000 as on 1/7/19.
Case I Building Z purchased for ` 40,000 on 1/7/19 and the same being put to use on 1/12/19.
Case J Building Q purchased for ` 50,000 on 1/7/19 but put to use on 1/11/20.
Case K Building S purchased for ` 10,000 on 1/7/19 but put to use on 1/11/19 and building X and Y sold
for ` 10,000 and ` 6,000 respectively.
Case L Building R purchased for ` 30,000 on 1/7/19 and sold the same for ` 40,000 on 11/11/19.
Case M Sold building X and Y for ` 95,000 on 11/7/19 and purchased Building R for ` 30,000 on 11/11/19.
Assume in all cases new building is charged to depreciation @ 10%.
Solution:
Computation of depreciation for the AY 2020-21
Particulars Case A Case B Case C Case D Case E Case F Case G Case H
Block: Building (Rate 10%)
WDV as on 1/4/19 80000 80000 80000 80000 80000 80000 80000 80000
Add: Purchase Nil Nil 35000 40000 40000 40000 Nil 5000
80000 80000 115000 120000 120000 120000 80000 85000
Less: Sale proceeds 20000 80000# 100000 10000 10000 120000# 45000 45000
WDV as on 31/3/2020 60000 Nil 15000 110000 110000 Nil Nil 40000
Depreciation 6000 Nil 1500 11000 90001 Nil Nil 4000
Short term capital gain 20000 80000
Short term capital loss (35000)
#
Sale proceeds cannot exceeds opening WDV as increased by actual cost of asset acquired during the previous
year. Excess, if any, shall be considered as Short Term capital gain.
Computation of depreciation for the AY 2020-21

Particulars Case I Case J Case K Case L Case M
Block: Building (Rate 10%)
WDV as on 1/4/19 80000 80000 80000 80000 80000
Add: Purchase 40000 50000 10000 30000 30000
120000 130000 90000 110000 110000
Less: Sale proceeds Nil Nil 16000 40000 95000
120000 130000 74000 70000 15000
Depreciation 100002 80003 69004 7000 7505
Short term capital gain
Short term capital loss
1 2
(` 70000 * 10%) + (` 40000 * 10% * ½) (` 80000 * 10%) + (` 40000 * 10% * ½)
3
Though the asset is acquired in the current year but put to use in next year hence no depreciation on the same.
(` 80,000 * 10%)
4
(` 10000 * 10% * ½) + (64000 * 10%) 5 (` 15000 *10% * ½)
DEPRECIATION FOR POWER GENERATING UNDERTAKINGS
CA Suraj Agrawal
Depreciation 8.6
Assessee is in the business of generation or generation & distribution of power have the option to claim
depreciation on Straight Line Method on each asset or WDV method on Block of Assets.
Depreciation under Straight Line Method (SLM) [Section 32(1)(i)]
An assesses in the business of generation or generation & distribution of power will be allowed Depreciation in
respect of
• building, machinery, plant or furniture being tangible assets;
• Know-how, patents, copyrights, trademarks etc. being intangible assets
owned wholly or partly by the assesses and used for the purposes of business at the prescribed rates on actual
cost of each assets on the basis of Straight Line Method of depreciation.
Note:
1. Assesses have to exercise such option before the due date of furnishing the ROI relevant to the
Previous Year in which they begin to generate power.
2. The option once exercised shall be FINAL for all subsequent assessment years.
3. The aggregate depreciation u/s. 32(1)(i) shall not exceed the actual cost of the assets.
4. Restriction of 50% of Depreciation shall apply if the asset is put to use for less than 180 days in the year
of acquisition.
5. Additional depreciation under section 32(1)(iia) is also available to power generating undertakings
following WDV methods.
Terminal Depreciation [Section 32(1)(iii)]
In the case of any building, machinery, plant or furniture or intangible assets

on which depreciation has been claimed and allowed u/s. 32(1)(i) i.e. under SLM and
which is sold, discarded etc. in the Previous Year, and moneys payable for such assets is less than the
WDV, then
TERMINAL DEPRECIATION i.e. WDV of such asset (-) Moneys Payable for such assets,
shall be allowed as deduction only if such loss is actually written off in the books.
However, If asset is sold in the same Previous Year in which it was acquired, then there will be
STCL under section 45(1)
Balancing Charge [Section 41(2)]
In the case of any building, machinery, plant or furniture or intangible assets

in respect of which depreciation is claimed and allowed under section 32(1)(i) i.e. under SLM and
which is sold, discarded etc. in the Previous Year and moneys payable for such assets is more than the
WDV, then
BALANCE AMOUNT shall be chargeable to tax as PGBP to the extent it does not exceeds the amount
of depreciation already allowed.
Even if business is no longer in existence, the above provisions shall apply.
If assets is sold in the same Previous Year in which it was acquired, then there will be STCG under section
45(1)
Special provision for COA in case of Depreciable Assets under SLM [Section 50A]
If an asset on which depreciation is allowed under SLM u/s. 32(1)(i) is sold during the Previous Year,
then for computing Capital Gain, the WDV as adjustment is taken as COA.
WDV as adjusted should mean:
WDV of asset xxx
Add: Income assessed under section 41(2) xxx
CA Suraj Agrawal
Depreciation 8.7
ADDITIONAL DEPRECIATION [ON PLANT & MACHINERY ACQUIRED BY AN

INDUSTRIAL UNDERTAKING]: - Section 32(1)(iia)
Additional depreciation is allowed on any new machinery or plant (other than ships and aircraft) acquired and
installed after 31.3.2005 by an assessee engaged in the business of manufacture or production of any
article or thing at the rate of 20% of the actual cost of such machinery or plant.
Additional Depreciation will be restricted to 50% in case the asset is put to use for less than 180 days during the
previous year.
Further, the balance 50% of the additional depreciation on new plant or machinery acquired and used for less than
180 days, shall be allowed in the immediately succeeding previous year.
Such additional depreciation will not be available in respect of:

(a) any machinery or plant which, before its installation by the assessee, was used within or outside India by
any other person; or
(b) any machinery or plant installed in office premises, residential accommodation, or in any guest house;
or
(c) office appliances or road transport vehicles; or
(d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way
of depreciation or otherwise)
(e) Ships and Aircrafts.
Note:
1. Additional depreciation is allowed even if the block has NIL value.
2. Additional depreciation is not available if the new plant and machinery is sold in the year of acquisition
3. Additional depreciation shall be subtracted while computing next year opening WDV.
4. An assessee engaged in the business of Generation, Transmission or Distribution of power shall also be
allowed additional depreciation at the rate of 20% of actual cost of eligible new machinery or plant (other than
ships and aircrafts) acquired and installed in a previous year. [Only in WDV Method]
5. An assessee engaged in the business of printing or printing & publishing is also eligible for AD.
Example: Gamma Ltd. was incorporated on 1.1.2019 for manufacture of tyres and tubes for motor
vehicles. The manufacturing unit was set up on 1.5.2019. The company commenced its manufacturing
operations on 1.6.2019. The total cost of the plant and machinery installed in the unit is ` 120 crore. The
said plant and machinery included second hand plant and machinery bought for ` 20 crore and new plant
and machinery for scientific research relating to the business of the assessee acquired at a cost of ` 15
crore.
Compute the amount of depreciation allowable under section 32 of the Income-tax Act, 1961 in respect of
the AY 2020-21.
Solution
Computation of depreciation allowable for the A.Y. 2020-21 in the hands of Gamma Ltd.
Particulars ` in crore
Total cost of plant and machinery 120.00
Less: Used for Scientific Research (Note 1) 15.00
105.00
Normal Depreciation at 15% on ` 105 crore 15.75
Additional Depreciation:
Cost of plant and machinery 120.00
Less:
(a) Second hand plant and machinery (Note 2) 20.00
(b) Plant and machinery used for scientific research, the
whole of the actual cost of which is allowable as
deduction under section 35 (Note 2) 15.00 35.00
85.00
Additional Depreciation at 20% 17.00
Total Depreciation allowable for A.Y. 2020-21 (15.75 + 17) 32.75
CA Suraj Agrawal
Depreciation 8.8
Notes:
1) As per section 35, no depreciation shall be allowed in respect of plant and machinery purchased for
scientific research relating to assessee’s business, since deduction is allowable under section 35 in respect
of such capital expenditure.
2) As per section 32(1)(iia), additional depreciation is allowable in the case of any new machinery or plant
acquired and installed by an assessee engaged in the business of manufacture or production of any article
or thing, at the rate of 20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of:

(1) any machinery or plant which, before its installation by the assessee, was used either within or outside
India by any other person;
(2) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by
way of depreciation or otherwise)
Additional depreciation @35% to be allowed to assessees setting up manufacturing

units in notified backward areas of specified States and acquiring and installing of new
plant & machinery [Proviso to section 32(1)(iia)]
a) Under section 32(1)(iia), to encourage investment in new plant or machinery, additional depreciation of 20%
of the actual cost of plant or machinery acquired and installed is allowed. Such additional depreciation under
section 32(1)(iia) is allowed over and above the normal depreciation under section 32(1)(ii).
b) In order to encourage acquisition and installation of plant and machinery for setting up of manufacturing units
in the notified backward areas of the States of Andhra Pradesh, Bihar, Telangana and West Bengal, a
proviso has been inserted to section 32(1)(iia) to allow higher additional depreciation at the rate of 35%
(instead of 20%) in respect of the actual cost of new machinery or plant (other than a ship and aircraft)
acquired and installed during the period between 1st April, 2015 and 31st March, 2020 by a manufacturing
undertaking or enterprise which is set up in the notified backward areas of these specified States on or after
1st April, 2015.
c) Such additional depreciation shall be restricted to 17.5% (i.e., 50% of 35%), if the new plant and machinery
acquired is put to use for the purpose of business for less than 180 days in the year of acquisition and
installation.
d) The balance 50% of additional depreciation (i.e., 50% of 35%) would, however, be allowed in the
immediately succeeding financial year.
Eligibility for grant of additional depreciation under section 32(1)(iia) in the case of an assessee engaged in
printing or printing and publishing [Circular No. 15/2016, dated 19-05-2016]
An assessee, engaged in the business of manufacture or production of an article or thing, is eligible to claim
additional depreciation under section 32(1)(iia) in addition to the normal depreciation under section 32(1).
The CBDT has, vide this Circular, clarified that the business of printing or printing and publishing amounts to
manufacture or production of an article or thing and is, therefore, eligible for additional depreciation under
section 32(1)(iia).
CA Suraj Agrawal
Depreciation 8.9
Manufacturing industries set up in the notified backward areas of specified States to be

eligible for a deduction @15% of the actual cost of new plant & machinery acquired and
installed during the previous year [Section 32AD]
1. Section 32AD has been inserted to provide for a deduction of an amount equal to 15% of the actual cost of
new plant and machinery acquired and installed, if the following conditions are satisfied by the assessee –
a) The assessee sets up an undertaking or enterprise for manufacture or production of any article or thing
on or after 1st April, 2015 in any backward area notified by the Central Government in the State of
Andhra Pradesh or Bihar or Telangana or West Bengal; and
b) the assessee acquires and installs new plant and machinery for the purposes of the said undertaking or
enterprise during the period between 1st April, 2015 and 31st March, 2020 in the said backward areas.
2. For the purposes of this section, “New plant and machinery” does not include—
a) any ship or aircraft;
b) any plant or machinery, which before its installation by the assessee, was used either within or outside
India by any other person;
c) any plant or machinery installed in any office premises or any residential accommodation, including
accommodation in the nature of a guest house;
d) any office appliances including computers or computer software;
e) any vehicle;
f) any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of
depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of
business or profession” of any previous year.
3. Further, if any new plant and machinery acquired and installed by the assessee is sold or otherwise
transferred except in connection with the amalgamation or demerger or re-organisation of business, within a
period of 5 years from the date of its installation, the amount allowed as deduction in respect of such new
plant and machinery shall be deemed to be the income chargeable under the head “Profits and gains from
business or profession” of the previous year in which such new plant and machinery is sold or transferred, in
addition to taxability of gains, arising on account of transfer of such new plant and machinery.
4. However, this restriction shall not apply to the amalgamating or demerged company or the predecessor in a
case of amalgamation or demerger or business reorganization referred to in section 47(xiii), 47(xiiib) and
47(xiv), within a period of five years from the date of its installation, but shall continue to apply to the
amalgamated company or resulting company or successor, as the case may be.
CA Suraj Agrawal
Depreciation 8.10
Example
X Ltd. set up a manufacturing unit in notified backward area in the state of Telangana on 01.06.2019. It
invested ` 30 crore in new plant and machinery on 1.6.2019. Further, it invested ` 25 crore in the plant and
machinery on 01.11.2019, out of which ` 5 crore was second hand plant and machinery. Compute the
depreciation allowable under section 32. Is X Ltd. entitled for any other benefit in respect of such
investment? If so, what is the benefit available?
Solution
Computation of depreciation under section 32 for X Ltd. for A.Y. 2020-21
Particulars ` (in crores)

Plant and machinery acquired on 01.06.2019 30.000
Plant and machinery acquired on 01.11.2019 25.000
WDV as on 31.03.2020
Less: Depreciation @ 15% on ` 30 crore 4.500
Depreciation @ 7.5% (50% of 15%) on ` 25 crore 1.875
Additional Depreciation@35% on ` 30 crore 10.500
Additional Depreciation@17.5% (50% of 35%) on ` 20 crore 3.500 20.375
WDV as on 01.04.2020 34.625
Computation of deduction under section 32AD for X Ltd. for A.Y. 2020-21
Particulars ` (in crores)
Deduction under section 32AD @ 15% on ` 50 crore 7.50
Notes:
(1) As per the second proviso to section 32(1)(ii), where an asset acquired during the previous year is put to use
for less than 180 days in that previous year, the amount deduction allowable as normal depreciation and
additional depreciation would be restricted to 50% of amount computed in accordance with the prescribed
percentage. Therefore, normal depreciation on plant and machinery acquired and put to use on 1.11.2019 is
restricted to 7.5% (being 50% of 15%) and additional depreciation is restricted to 17.5% (being 50% of 35%).
(2) As per third proviso to section 32(1)(ii), the balance additional depreciation of ` 3.5 crore, being 50% of ` 7
crore (35% of ` 20 crore) would be allowed as deduction in the A.Y.2021-22.
(3) As per section 32(1)(iia), additional depreciation is allowable in the case of any new machinery or plant
acquired and installed after 31.3.2005 by an assessee engaged, inter alia, in the business of manufacture or
production of any article or thing. In this case, since new plant and machinery acquired was installed by a
manufacturing unit set up in a notified backward area in the State of Telengana, the rate of additional
depreciation is 35% of actual cost of new plant and machinery. Since plant and machinery of ` 20 crore was
put to use for less than 180 days, additional depreciation@17.5% (50% of 35%) is allowable as deduction.
However, additional depreciation shall not be allowed in respect of second hand plant and machinery
of ` 5 crore.
Likewise, the benefit available under sections 32AD would not be allowed in respect of second hand
plant and machinery. Accordingly, additional depreciation and investment allowance under sections 32AD
have not been provided on ` 5 crore, being the actual cost of second hand plant and machinery acquired and
installed in the previous year.
CA Suraj Agrawal
Depreciation 8.11
DEPRECIATION IN CASE OF SUCCESSION, AMALGAMATION, BUSINESS RE -

ORGANISATION OR DEMERGER –[FIFTH PROVISO TO SEC. 32(1) AND SEC. 44DB]:
These provisions are applicable while determining depreciation if there is a change of ownership of
assets because of the following:
a) Conversion of firm or sole proprietary concern into company [by satisfying conditions of section
47(xiii)/(xiv)];
b) Conversion of private company/unlisted public company into LLP by satisfying condition of section 47(xiiib);
and
c) Succession to business other than on death – business of HUF taken over by a member, business of a firm
taken over by a partner, conversion of HUF concern into company;
d) Amalgamation of a company;
e) Demerger of a company etc
In the year in which change of ownership takes place because of the aforesaid reasons, deprecation shall
be calculated as under:
1. Compute depreciation of the previous year in which ownership of assets changes (because of the aforesaid
reasons) on the assumption that the succession, amalgamation or demerger has not taken place.
2. The amount of deprecation so determined shall be appropriated between the (a) predecessor and
(b) successor, as the case may be, in ratio of number of days for which the assets are used by them
during the previous year in which ownership changes.
CA Suraj Agrawal
Depreciation 8.12
Income-tax (9th Amendment) Rules, 2019

Effective from 23-08-2019
New depreciation rates on vehicles purchased between 23-08-2019 to 31-03-2020

Notification No. 69/2019 dated 20.09.2019
Depreciation Rate
S. No. Block of Asset (Machinery & Plant) – Motor Cars
(WDV Method)
(i) Motor cars, other than those used in a business of running them on hire,
acquired or put to use on or after the 1st day of April, 1990 except those
15
covered under entry (ii);
(ii) Motor cars, other than those used in a business of running them on hire,
acquired on or after the 23rd day of August, 2019 but before the 1st day of
30
April, 2020 and is put to use before the 1st day of April, 2020.
(iii) Motor buses, motor lorries and motor taxis used in a business of running them
on hire other than those covered under entry (iv). 30
(iv) Motor buses, motor lorries and motor taxis used in a business of running them
on hire, acquired on or after the 23rd day of August, 2019 but before the
45
1st day of April, 2020 and is put to use before the 1st day of April, 2020.
CA Suraj Agrawal
Depreciation 8A.1
PRACTICAL QUESTIONS
1. M/s. Dollar Ltd., a manufacturing concern, furnishes the following particulars:
`)
(`
(i) Opening Writing Down Value of plant and machinery (15% block) 5,00,000
(ii) Purchase of plant and machinery (put to use before 01.10.2019) 2,00,000
(iii) Sale proceeds of plant and machinery which became obsolete- the plant and
machinery was purchased on 01-04-2017 for ` 5,00,000. 5,000
Further, out of purchase of plant and machinery:
(a) Plant and machinery of ` 20,000 has been installed in office.
(b) Plant and machinery of ` 20,000 was used previously for the purpose of business by the seller.
Compute depreciation and additional depreciation as per Income-tax Act, 1961 for the AY 2020-21.
2. Mr. Abhimanyu is engaged in the business of generation and distribution of electric power. He always opts to
claim depreciation on written down value for income-tax purposes. From the following details, compute the
depreciation allowable as per the provisions of the Income-tax Act, 1961 for the assessment year
2020-21:
` in lacs)
(`
(i) Opening WDV of block (15% rate) 42
(ii) New machinery purchased on 12-10-2019 10
(iii) Machinery imported from Colombo on 12-4-2019 9
This machine had been used only in Colombo earlier and
the assessee is the first user in India.
(iv) New computer installed in generation wing of the unit on 15-7-2019 2
3. Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down value on 01.04.2019
was ` 40 lacs. It purchased another asset (second-hand plant and machinery) of the same block on
01.11.2019 for ` 14.40 lacs and put to use on the same day. Sai Ltd. was amalgamated with Shirdi Ltd. with
effect from 01.01.2020.
You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the previous year
ended on 31.03.2020 assuming that the assets were transferred to Shirdi Ltd. at ` 60 lacs.
4. M/s Sidhant & Co., a sole proprietary concern is converted into a company, Sidhant Co. Ltd. with
effect from November 29, 2019. The written down value of assets as on April 1, 2019 is as follows:
Items Rate of Depreciation WDV as on 1st April, 2019
Building 10% ` 3,50,000
Furniture 10% ` 50,000
Plant and Machinery 15% ` 2,00,000
Further, on October 15, 2019, M/s Sidhant & Co. purchased a plant for ` 1,00,000 (rate of depreciation 15%).
After conversion, the company added another plant worth ` 50,000 (rate of depreciation 15%).
Compute the depreciation available to (i) M/s Sidhant & Co. and (ii) Sidhant Co. Ltd. for Assessment
Year 2020-21
5. What are intangible assets? Give four examples. What is the rate of depreciation on a block of
intangible assets?
6. Gopichand Industries furnishes you the following information:

`)
(`
Block I WDV of Plant and machinery (consisting of 10 looms) 5,00,000
Rate of depreciation 15%
Block II WDV of Buildings (consisting of 3 buildings) 12,50,000
Rate of depreciation 10%
Acquired on 5-07-2019 – 5 looms for 4,00,000
Sold on 7-12-2019 – 15 looms for 10,00,000
Acquired on 10-01-2020 – 2 looms for 3,00,000
Compute depreciation claim for the Assessment year 2020-21.
CA Suraj Agrawal
Depreciation 8A.2
7. M/s. QQ & Co., a sole proprietary concern, was converted into a company on 1.9.2019. Before the
conversion, the sole proprietary concern had a Block of Plant and Machinery (Rate of depreciation 15%),
whose WDV as on 1.4.2019 was ` 3,00,000. On 1st April itself, a new plant of the same block was purchased
for ` 1,20,000. After the conversion, the company has purchased the same type of Plant on 1.1.2020 for
` 1,60,000.
Compute the depreciation that would be allocated between the sole proprietary concern and the
successor company.
8. Honest Industry furnishes you the following details pertaining to the financial year 2019-20:
Description Plant & Building Intangible
Machinery Assets
(patents)
Rate of depreciation 15% 10% 25%
Opening balance as on 01-04-2019 14,50,000 25,00,000 15,00,000
Acquired before 30-09-2019 12,00,000 Nil 5,00,000
Acquired after 01-12-2019 4,00,000 18,00,000 Nil
Transferred in March 2020, one of the
patents held for the past 2 years - - 3,00,000
A machinery acquired in July 2019 original cost ` 1,50,000 was destroyed by fire and the assessee received
compensation of ` 50,000 from the insurance company. Newly acquired building given above includes value
of land of ` 3,00,000.
Calculate the eligible depreciation claim for the assessment year 2020-21. Note: Ignore
additional/accelerated depreciation.
9. Determine the tax consequences in following cases for AY 2020-21:

(a) X Co., an undertaking established in 2006 for generation and distribution of power, has opted for SLM
method of depreciation. The written down value of its machinery as on 1.4.2019 was ` 5,10,000. The
machinery is sold for ` 4,60,000 on 1.5.2019.
(b) A Co. a power-generating unit (opted for SLM) has purchased machinery on 1-5-2019 for ` 5,10,000
which is destroyed by fire on 15-09-2019 and an insurance claim of ` 3,00,000 is received on 31-1-2020.
(c) X Co., an undertaking established in 2008 for generation of power, has opted for SLM method of
depreciation. The company had purchased machinery for ` 4,50,000. The written down value of its
machinery as on 1.4.2019 is ` 3,00,000. The machinery is sold for ` 4,60,000 on 1-10-2019.
10. An industrial undertaking which commenced the manufacturing activity with effect from 1st
September, 2019 has acquired the following assets during the previous year 2019-20:
Assets Date of Date when put to Cost of
acquisition use acquisition
`)
(`
Factory buildings 04.04.2019 01.09.2019 50,00,000
Plant and Machinery:
Air pollution control equipment 04.05.2019 01.09.2019 400,000
Machinery A 05.05.2019 01.09.2019 200,000
Machinery B 07.06.2019 01.09.2019 500,000
Machinery C 30.08.2019 01.09.2019 10,00,000
Machinery D 01.09.2019 31.10.2019 400,000
Machinery E 01.01.2020 28.02.2020 300,000
Machinery F (second hand) 11.01.2020 13.01.2020 200,000
Motor car 01.07.2019 01.02.2020 500,000
Air conditioner (installed in the 01.02.2020 02.02.2020 100,000
office)
Compute depreciation allowable for AY 2020-21 and the WDV as on 1-4-2020.
CA Suraj Agrawal
Depreciation 8A.3
11. A newly qualified Chartered Accountant Mr. Dhaval commenced practice and has acquired the following
assets in his office during FY 2019-20 at the cost shown against each item. Calculate the amount of
depreciation that can be claimed from his professional income for A.Y 2020-21:
SI. No. Description Date of acquisition Date when put to use Amount (` `)
1. Computer 27 Sept., 19 2 Oct., 19 35,000
2. Computer printer 2 Oct, 19 3 Oct, 19 12,500
3. Books
(of which books being annual 1 Apr, 19 1 Apr, 19 13,000
publications are of ` 12,000)
4. Office furniture 1 Apr, 19 1 Apr, 19 3,00,000
(Acquired from practising C.A.)
5. Laptop 26 Sep.,19 5 Oct., 19 43,000
6. Fire extinguisher 1 Apr, 19 No instance arose to
use during FY 2019-20 2,500
7. Purchased practising CA's office in April '19 who had run it for 4 years, for ` 5 lacs which includes ` 2 lacs
for land and ` 3 lacs for cost of furniture (included in 4 above)
Note: Depreciation is to be provided at the applicable rates.
12. X starts a new business on April 10, 2019 and he purchases the following assets.
` in lakh)
Cost (`
Building A - Office building 60.70
Building B - Residential building for manager 40.10
Building C - Factory building 70.40
Plant and machinery A - Office computer 1.20
Plant and machinery B - Fax machine 0.60
Plant and machinery C – Cars 6.10
Plant and machinery D - Air pollution control equipment 2.40
Plant and machinery E - PABX telephone system 1.10
Plant and machinery F - Air-conditioners 6.80
Plant and machinery G - Scooters for employees 1.90
Furniture - Office furniture 2.85
Furniture - Furniture for welfare centre of employees 4.10
Know-how - Know-how to manufacture goods 18.70
Categorise these asset in different blocks of assets.
13. Singhania & Co. own six machines, put in use for business in March, 2019. The depreciation on these
machines is charged @ 15%. The written down value of these machines as on 1st April, 2019 was `
8,50,000. Three of the old machines were sold on 10th June, 2019 for ` 11,00,000. A new plant was bought
for ` 8,50,000 on 30th November, 2019.
You are required to:
(a) determine the claim of depreciation for Assessment Year 2020-21.
(b) compute the capital gains liable to tax for Assessment Year 2020-21.
(c) If Singhania & Co. had sold the three machines in June, 2019 for ` 21,00,000, will there be any difference
in your above workings? Explain.
st
14. The written down value of the block of assets of Rosy Ltd. as on 1 April, 2019 was ` 5 lakh. An asset
th
of the same block was acquired on 11 May, 2019 for ` 3 lakh. There was a fire on 18th September,
2019 and the assets were destroyed by fire and the assessee received a sum of ` 11 lakh from the
insurance company.
Compute the capital gain assuming

(a) All the assets were destroyed by fire; and
(b) Part of the block of assets was destroyed by fire.
What will be the answer if assessee received ` 6 lakh from insurance company instead of ` 11 lakhs?
Ignore Additional Depreciation!
CA Suraj Agrawal
Depreciation 8A.4
15. X owns the following assets on April 1, 2019 (rate of depreciation: 15 per cent)
Assets Written down value on Date of acquisition
April 1, 2019
`
Plant A 3.00,000 April 1, 1976
Plant B 2,00,000 May 10, 1975
Plant C 5,00,000 March 13, 1988
During the previous year 2019-20, the following plants ore purchased/sold by X:
Assets Rate of Date of Selling price Cost price Date when the
Depreciatio purchase/sale ` ` asset is put to use
n
Plant D (office
air conditioner) 15% March 10, 2020 4,08,000 March 30, 2020
Plant E (old) 15% March 1, 2020 20,000 March 31, 2020
Plant A 15% April 1, 2019 6,00,000
Building A 10% June 10, 2019 2,00,000 July 5, 2019
Plant C 15% May 10, 2019 12,50,000 -
Plant F (second-hand) 40% June 10,2019 15,00,000 December 31, 2019
Determine the amount of depreciation and capital gain/loss for the assessment year 2020-21
(expenditure incurred on sale of plants A and C is ` 10,000). Assume that additional depreciation is
not available.
16. Mr. A, is an individual carrying on business. His stock and machinery were damaged and destroyed in a fire
accident. The value of stock lost (totally damaged) was ` 6,50,000. The opening WDV of the block as on 1-4-
2019 was ` 10,80,000.
During the process of safeguarding machinery and in the fire fighting operations, Mr. A lost his gold chain and
a diamond ring, which he had purchased in April, 2008 for ` 1,20,000. The market value of these two items as
on the date of fire accident was ` 1,80,000.
Mr. A received the following amounts from the insurance company:

i) Towards loss of stock ` 4,80,000
ii) Towards damage of Machinery. ` 6,00,000
iii) Towards gold chain and diamond ring. ` 2,30,000
You are requested to briefly comment on the tax treatment of the above three items under the
provisions of the Income-tax Act, 1961.
CA Suraj Agrawal
Depreciation 8B.1
SOLUTION TO PRACTICAL QUESTIONS

1. Computation of written down value of Plant and Machinery of M/s. Dollar Ltd. for the A.Y. 2020-21
Particulars `
Opening written down value (as on 01.04.2019) 5,00,000
Add: Purchase of plant and machinery during the previous year 2,00,000
7,00,000
Less: Sale proceeds of obsolete plant and machinery sold during the year 5,000
Closing Written Down Value (as on 31.03.2020) 6,95,000
Computation of Depreciation and Additional Depreciation for A.Y. 2020-21 as per section 32 of the
Income-tax Act, 1961
Particulars `
Normal Depreciation (` 6,95,000 x 15%) 1,04,250
Additional Depreciation(Refer Note 2)(` 2,00,000 – ` 20,000 - ` 20,000) x 20% 32,000
Depreciation on Plant and Machinery 1,36,250
Notes:-
(1) Since the new plant and machinery was purchased and put to use before 1.10.2019, it was put to use for
more than 180 days in the year. Hence, full depreciation is allowable for A.Y. 2020-21.
(2) As per section 32(1)(iia), additional depreciation is allowable in the case of any new machinery or plant
acquired by an assessee engaged, inter alia, in the business of manufacture or production of any article
or thing, at the rate of 20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia, –
(i) any machinery or plant which, before its installation by the assessee, was used either within or
outside India by any other person;
(ii) any machinery or plant installed in office premises, residential accommodation or in any guest house.
In view of the above provisions, additional depreciation cannot be claimed in respect of -

(i) Plant and machinery of ` 20,000 used previously for the purpose of business by the seller.
(ii) Plant and machinery of ` 20,000, installed in office.
Therefore, in the given case additional depreciation has to be provided only on ` 1,60,000 (i.e., `2,00,000
- ` 40,000).
2.
Computation of depreciation under section 32 for A.Y. 2020-21
Particulars ` `
Normal Depreciation
Depreciation@15% on ` 51,00,000, being machinery (put to use for more 7,65,000
than 180 days) [Opening WDV of ` 42,00,000 + Purchase cost of imported
machinery of ` 9,00,000]
Depreciation@7.5% on `10,00,000, being new machinery put to use for less 75,000
than 180 days
8,40,000
Depreciation@40% on computers purchased ` 2,00,000 80,000 9,20,000
Additional Depreciation (Refer Note below)

Additional Depreciation@10% of `10,00,000 [being actual cost of new 1,00,000
machinery purchased on 12-10-2019]
Additional Depreciation@20% on new computer installed in generation 40,000 1,40,000
wing of the unit [20% of ` 2,00,000]
Depreciation on Plant and Machinery 10,60,000
Note:-
The Finance Act, 2012 has extended the benefit of additional depreciation to new plant and machinery
acquired and installed in power sector undertakings. Accordingly, additional depreciation is allowable in the
case of any new machinery or plant acquired and installed by an assessee engaged, inter alia, in the
business of generation or generation and distribution of power, at the rate of 20% of the actual cost of such
machinery or plant.
CA Suraj Agrawal
Depreciation 8B.2
Therefore, new computer installed in generation wing of the unit is eligible for additional depreciation@20%.
Since the new machinery was purchased only on 12.10.2019, it was put to use for less than 180 days during
the previous year, and hence, only 10% (i.e., 50% of 20%) is allowable as additional depreciation.
However, additional depreciation shall not be allowed in respect of, inter alia, any machinery or plant which,
before its installation by the assessee, was used either within or outside India by any other person. Therefore,
additional depreciation is not allowable in respect of imported machinery, since it was used in Colombo,
before its installation by the assessee.
3.
Statement showing computation of depreciation allowable to Sai Ltd. & Shirdi Ltd. for A.Y. 2020-21
Particulars `
Written down value (WDV) as on 1.4.2019 40,00,000
Addition during the year (used for less than 180 days) 14,40,000
Total 54,40,000
Depreciation on ` 40,00,000 @ 15% 6,00,000
Depreciation on ` 14,40,000 @ 7.5% 1,08,000
Total depreciation for the year 7,08,000
Apportionment between two companies:

(a) Amalgamating company, Sai Ltd. 4,50,820
` 6,00,000 × 275/366 43,342
` 1,08,000 × 61/152 4,94,162
(b) Amalgamated company, Shirdi Ltd.

` 6,00,000 × 91/366 1,49,180
` 1,08,000 × 91/152 64,658
2,13,838
Notes:
(1) The aggregate deduction, in respect of depreciation allowable to the amalgamating company and
amalgamated company in the case of amalgamation shall not exceed in any case, the deduction
calculated at the prescribed rates as if the amalgamation had not taken place. Such deduction shall be
apportioned between the amalgamating company and the amalgamated company in the ratio of the
number of days for which the assets were used by them.
(2) The price at which the assets were transferred, i.e., ` 60 lacs, has no implication in computing eligible
depreciation.
4. In the case of conversion of sole proprietary concern into a company as per section 47(xiv), the depreciation
should be first calculated for the whole year assuming that no succession had taken place. Thereafter, the
depreciation should be apportioned between the sole proprietary concern and the company in the ratio of the
number of days for which the assets were used by them. It is assumed that in this case, the conditions
specified in section 47(xiv) are satisfied.
Computation of depreciation allowable to Sidhant & Co. for A.Y. 2020-21

Particulars ` `
Building
WDV as on 1.4.2019 3,50,000
Depreciation@10% 35,000
Furniture 50,000
WDV as on 1.4.2019 5,000
Depreciation@10%
Plant and Machinery

WDV as on 1.4.2019 2,00,000
Add: Additions during the year (purchased on 15.10.2019) 1,00,000
3,00,000
Depreciation for the year
(15% of ` 2,00,000 + 50% of 15% of ` 1,00,000) 37,500
(` 30,000 + ` 7,500)
(Depreciation on new machinery is restricted to 50% of eligible
CA Suraj Agrawal
Depreciation 8B.3
depreciation, since the asset is put to use for less than 180 days in that
year)
Total depreciation for the year 77,500
Proportionate depreciation allowable to Sidhant & Co. for 242 days

On existing assets (i.e. 1.4.2019 to 28.11.2019)
(i.e. 242/366 x ` 70,000) 46,284
On new machine for 45 days i.e., 45/169 × ` 7,500 1,997 48,281
Computation of depreciation allowable to Sidhant Co. Ltd. for A.Y. 2020-21

Particulars `
(i) Depreciation on the assets on conversion Proportionately for 123 days i.e. after 29,219
conversion period (124/366 x ` 70,000)+ (124/169 × ` 7,500) = ` 23,716 + ` 5,503
(ii) Depreciation @ 50% of normal rate of 15% on ` 50,000, being the value of plant 3,750
purchased after conversion, which was put to use for less than 180 days
Depreciation allowable to Sidhant Co. Ltd. 32,969
Note: Since it has not been specifically mentioned that M/s Sidhant & Co. and Sidhant Co. Ltd. are
manufacturing concerns or companies engaged in the business of generation or generation and distribution of
power, additional depreciation is not provided for.
5. Intangible assets are assets which are not corporeal i.e., not capable of being touched. Such assets are
represented by rights of the persons through them. According Section 32(1), the following are intangible
assets :
(i) Know-how
(ii) Patents
(iii) Copyrights
(iv) Trade Marks
(v) Licences
(vi) Franchises
(vii) Any other business or commercial rights of similar nature.
They are to be depreciated at the rate of 25%.
6.
Computation of depreciation for Gopichand Industries for A.Y. 2020-21
Particulars ` `
Block 1 : Plant & machinery (Rate of depreciation – 15%)
WDV as on 1st April (10 looms) 5,00,000
Add: Additions during the year
- 5 looms acquired on 5th July 4,00,000
- 2 looms acquired on 10th January 3,00,000
12,00,000
Less : Assets sold during the year
- 15 looms sold on 7th December 10,00,000
W.D.V. as on 31st March (2 looms) 2,00,000
Depreciation on ` 2 lakhs @ 15% (limited to 50%) 15,000

Block II: Buildings (Rate of depreciation – 10%)
WDV as on 1st April (3 buildings) 12,50,000
Depreciation on ` 12,50,000 @ 10% 1,25,000
Total depreciation for the year 1,40,000
Notes:
(i) Closing balance of Block 1 : Plant and machinery represents the looms acquired on 10th January. These
looms have been put to use or less than 180 days during the previous year, and therefore, only 50% of
normal depreciation is permissible.
(ii) No additional depreciation @ 20% of the cost of new plant and machinery is provided for assuming that
all conditions contained in the section 32(1)(iia) have not been fulfilled [Students may choose to
claim AD]
CA Suraj Agrawal
Depreciation 8B.4
7.
Computation of depreciation in the case of transfer of business:
Depreciation is to be calculated as if there is no succession. (` )
WDV as on 1st April 3,00,000
Add : Additions made before succession 1,20,000
4,20,000
Less : Sale consideration of the asset sold Nil
4,20,000
Depreciation @ 15% 63,000
Allocation of depreciation between sole proprietary concern and the successor company:
The depreciation of ` 63,000 is to be allocated in the ratio of number of days the assets were used by the sole
proprietary concern and the company.
Proprietary concern
1st April to 31st August = 153 days ` 63,000 x 153 / 366 = ` 26,336
Successor company
` 63,000 - ` 26,336 = ` 36,664 (i.e. ` 63,000 x 213 /366)
The depreciation of ` 12,000 [50% of 15% on ` 1,60,000] in respect of asset purchased by the successor
company on 1st January is fully allowable in the hands of the successor company.
Note: Since it has not been specified that the company is a manufacturing company or a company engaged
in the generation or generation and distribution of power, additional depreciation has not been provided for.
8.
Computation of depreciation allowable to Honest Industry for the A.Y. 2020-21
Particulars Plant & Building Intangible Total (` )
Machinery assets
(patents)
Rate of depreciation 15% 10% 25%
Opening Balance as on 1.04.2019 14,50,000 25,00,000 15,00,000
Add: Assets acquired during the year 16,00,000 15,00,000 5,00,000
30,50,000 40,00,000 20,00,000
Less: Moneys payable in respect of 50,000 - 3,00,000
asset sold or destroyed
W.D.V as on 31.03.2020 30,00,000 40,00,000 17,00,000
Asset held for less than 180 days 4,00,000 15,00,000 -
Depreciation@50% of applicable rate 30,000 75,000 - 1,05,000
Asset held for more than 180 days 26,00,000 25,00,000 17,00,000
Depreciation at the applicable rates 3,90,000 2,50,000 4,25,000 10,65,000
Total Depreciation allowable 11,70,000
Note - Land is not a depreciable asset. Therefore, ` 3 lacs, being the value of land, has been reduced from `
18 lacs, being the value of building acquired during the year, for the purpose of computing depreciation.
9. The tax consequences in aforesaid cases shall be as follows -

(a) In this case, moneys payable is less man written down value of the asset. So, deduction for terminal
depreciation shall be allowed. Terminal Depreciation u/s 32(1)(iii) = 5,10,000 - 4,60,000 = ` 50000.
(b) In this case, machine is destroyed in the same previous year in which it is first brought into use. So, no
terminal depreciation will be allowed. The deficiency of ` 2,10,000 [` 5,10,000 - ` 3,00,000] shall be
treated as Short-Term Capital Loss
(c) In this case moneys payable exceed actual cost.

So, Balancing Charge u/s 41(2) = [(Lower of 4,50,000 or 4,60,000) - 3,00,000] = ` 1,50,000; and Capital
Gains = 4,60,000 - 4,50,000 = ` 10,000 ignoring indexation.
CA Suraj Agrawal
Depreciation 8B.5
10. Computation of the depreciation allowable for the Assessment Year 2020-21 and the written down
value as on 1st April, 2020-
Nature of Asset Actual Rate of Normal Additional WDV as on

Cost dep. Depreciation Depreciation 1-4-2020
Factory buildings 50,00,000 10% 500,000 0 4500000
Plant & machinery:
Air pollution control equipment 400,000 40% 160,000 80,000 160,000
Machinery A, B & C 17,00,000 15% 255,000 340,000 1105000
Machinery D & E (used for less than 700,000 15% 52,500 70,000 577500
180 days)
Machinery F, motor car & AC (used 800,000 15% 60,000 Not Eligible 740000
for less than 180 days)
11. Computation of depreciation allowable for A.Y. 2020-21

Asset Rate Depreciation
Block 1 Furniture 10% 30,000
Block 2 Plant (Computer, laptop, Printer & books) 40% 32,800
Block 3 Plant (Fire Extinguisher) 15% 375
Total depreciation allowable 63,175
Notes :
a) Computation of depreciation
Block of Assets `
Block 1: Furniture-Rate 10%

Put to use for more than 180 days [` 3,00,000@10%] 30,000
Block 2: Plant-Rate 40%

(a) Computer : (put to use for more than 180 days)
[` 35,000 @ 40%] 14,000
(b) Laptop (put to use for less than 180 days)
[` 43,000 @ 20%] 8,600
(c) Books : (all kinds) (Put to use for more than 180 days) 5,200
[` 13,000 @ 40%]
Computer printer (put to use for 180 days) [` 12,500 @40%] 5,000
32,800
Block 3 : Plant - Rate 15%
Fire extinguisher [` 2,500 @ 15%] 375
b) Where an asset is acquired by the assessee during the previous year and is put to use for the purposes
of business or profession for a period of less than 180 days, the deduction on account of depreciation
would be restricted to 50% of the prescribed rate. In this case, since Mr. Dhaval commenced his practice
in the previous year 2019-20 and acquired the assets during the same year, the restriction of depreciation
to 50% of the prescribed rate would apply to those assets which have been put to use for less than 180
days in that year, namely, laptop.
c) In case of fire extinguishers, it is sufficient if they are kept ready for use. Actual use is not essential.
CA Suraj Agrawal
Depreciation 8B.6
12.
Block 1- Building (rate of depreciation: 5%)
Building B- Residential building 40.10
Block 2- Building (rate of depreciation: 10%)

Building A- Office building 60.70
Building C- Factory building 70.40
Total 131.10
Block 3- Plant and machinery (rate of depreciation 15%)

Plant B- Fax machine 0.60
Plant E- PBAX telephone 1.10
Plant F- Air-conditioner 6.80
Plant G- Scooters 1.90
Plant C- Cars 6.10
Total 16.50
Block 4- Plant and machinery (rate of depreciation 40%)

Plant A- Office Computer 1.20
Plant D- Air Pollution control equipment 2.40
Block 5- Furniture (rate of depreciation: 10%)

Office furniture 2.85
Furniture for welfare centre 4.10
Total 6.95
Block 6- Know-how (rate of depreciation: 25%)

Know-how to manufacture goods 18.70
13.
(i) Computation of depreciation for A.Y. 2020-21
Particulars `
W.D.V. of the block as on 1.4.2019 8,50,000
Add: Purchase of new plant during the year 8,50,000
17,00,000
Less: Sale consideration of old machinery during the year
W.D.V of the block as on 31.03.2020 11,00,000
6,00,000
Since the value of the block as on 31.3.2020 comprises of a new asset which has been put to use for less
than 180 days, depreciation is restricted to 50% of the prescribed percentage of 15% i.e. depreciation is
restricted to 7½%. Therefore, the depreciation allowable for the year is ` 45,000, being 7½% of `
6,00,000.
Note: It is assumed that the firm is not eligible for additional depreciation under section 32(1)(iia).
(ii) The provisions under section 50 for computation of capital gains in the case of depreciable assets can be
invoked only under the following circumstances:
(a) When one or some of the assets in the block are sold for consideration more than the value of the
block.
(b) When all the assets are transferred for a consideration more than the value of the block.
(c) When all the assets are transferred for a consideration less than the value of the block.
Since in the first two cases, the sale consideration is more than the written down value of the block, the
computation would result in short term capital gains.
In the third case, since the written down value exceeds the sale consideration, the resultant figure would
be a short term capital loss.
In the given case, capital gains will not arise as the block of asset continues to exist, and some of the
assets are sold for a price which is lesser than the written down value of the block.
CA Suraj Agrawal
Depreciation 8B.7
(iii) If the three machines are sold in June, 2019 for ` 21,00,000, then short term capital gains would arise,
since the sale consideration is more than the aggregate of the written down value of the block at the
beginning of the year and the additions made during the year.
Particulars ` `
Less:
W.D.V. of the machines as on 1.4.2019 8,50,000
Purchase of new plant during the year 8,50,000 17,00,000
Short term capital gains 4,00,000
14.
(1) Compensation received is ` 11 lakh: Computation of Capital gains
Written down value of the block on 1/4/19 5,00,000
Add: Asset acquired during the year 3,00,000
8,00,000
Less: Sum received from the insurance company - ` 11 Lakh Maximum 8,00,000
WDV for Depreciation NIL
Note : In case (i) and (ii), both, i.e. whether the block is fully destroyed or partly destroyed by fire, there will ,
be STCG of ` 3,00,000, since the sum received is more than the WDV of the block.
If compensation received is ` 6 lakh:

(i) If the block is fully destroyed: The difference between WDV of ` 8 lakh and insurance money of ` 6
lakh will be short-term capital loss.
(ii) If the block is partly destroyed: There will be no capital gains. Since the block and WDV both exist
therefore, the balance WDV of ` 2 lakh will be eligible for depreciation.
15.
First block: Plant (rate of depreciation : 15%) `
Depreciated value of the block on April 1, 2019 (` 3,00,000 + ` 2,00,000 + ` 5,00,000) 10,00,000
Add : Cost of plant (falling in this block) acquired during the previous year 2019-20 (i.e., Plant D 4,28,000
: ` 4,08,000 + Plant E : ` 20,000)
14,28,000
Less : Sale consideration of plants A and C sold curing the previous year 2019 -20 (i.e., ` 14,28,000
6,00,000 +12,50,000 ; subject to a maximum of ` 14,28,000)
Written down value Nil

Depreciation on first block Nil
Capital gain on sale of plants A and C

Less : Cost of acquisition `
• Depreciated value of the block on April 1, 2019 10,00,000
• Cost of assets falling in the block acquired during the previous year 4,28,000
• Expenses on transfer 10,000 14,38,000
Depreciation on other assets will be determined as under :

Second Third
block block
Name of assets Plant Building
Rate of depreciation 40% 10%
` `
Nil Nil
Add : Cost of assets purchased during 2019-20 15,00,000 2,00,000
Less : Sale consideration of assets transferred during the year — —
Written down value 15,00,000 2,00,000
Depreciation (*50% of 40% of ` 15,00,000, as Plant F is purchased during the
previous year and put to use for less than 180 days] 3,00,000 20,000
CA Suraj Agrawal
Depreciation 8B.8
16.
(i) Compensation towards loss of stock: Any compensation received from the insurance company
towards loss/damage to stock in trade is to be construed as a trading receipt. Hence, ` 4,80,000 received
as insurance claim for loss of stock has to be assessed under the head “Profit and gains of business or
profession”.
Note - The assessee can claim the value of stock destroyed by fire as revenue loss, eligible for deduction
while computing income under the head “Profits and gains of business or profession”.
(ii) Compensation towards damage to machinery: The question does not mention whether the salvaged
machinery is taken over by the Insurance company or whether there was any replacement of machinery
during the year. Assuming that the salvaged machinery is taken over by the Insurance company, and
there was no fresh addition of machinery during the year, the block of machinery will cease to exist.
Therefore, ` 4,80,000 being the excess of written down value (i.e ` 10,80,000) over the insurance
compensation (i.e. ` 6,00,000) will be assessable as a short-term capital loss.
Note – If new machinery is purchased in the next year, it will constitute the new block of machinery, on
which depreciation can be claimed for that year.
(iii) Compensation towards loss of gold chain and diamond ring: Gold chain and diamond ring are capital
assets as envisaged by section 2(14). They are not “personal effects”, which alone are to be excluded. As
per section 45(1A), if any profit or gain arises in a previous year owing to receipt of insurance claim, the
same shall be chargeable to tax as capital gains. The capital gains has to be computed by reducing the
indexed cost of acquisition of jewellery from the insurance compensation of ` 2,30,000.
CA Suraj Agrawal
PGBP 9.1
INCOME UNDER THE HEAD “PGBP”

Section 28 – CHARGING SECTION
1. Income arising to any person by way of profits and gains from the business or profession carried on by him at
any time during the previous year.
2. ANY COMPENSATION OR OTHER PAYMENT FOR:

a) Termination or modification of any agreement entered for managing the affairs of an Indian
company or the affairs in India of any other company.
b) Termination or modification of any agreement holding an agency in India relating to the business of
any other person.
c) Vesting of the management of any property or business with the Government under any law.
d) Termination or the modification of the terms and conditions, of any contract relating to his
business
3. INCOME OF TRADE OR PROFESSIONAL ASSOCIATION:

Income derived by any trade, professional or similar associations from specific services rendered by them
to their members.
4. EXPORT INCENTIVES: In case of an assessee engaged in the business of export/import:

Profits on sale of a Import Entitlement licence granted
Cash assistance received or receivable by any person against exports under any scheme of the
Government of India.
Any Customs duty or Excise duty drawback repaid or repayable against export.
5. GIFTS OR PERQUISITES FROM CLIENTS:

The value of any benefit or perquisite whether convertible into money or not, arising from business or the
exercise of any profession
6. PAYMENTS RECEIVED BY A PARTNER FROM A PARTNERSHIP FIRM:

Any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by a
partner of a firm from such firm.
7. SUMS RECEIVED UNDER A KEYMAN INSURANCE POLICY:

Any sum received by employer under a Keyman insurance policy including the sum allocated by way of bonus
on such policy.
8. Conversion of Stock in Trade into Capital Asset: [Also refer CG Notes]

Fair Market Value of inventory as on the date on which it is converted into, or treated as, a capital asset
determined in the prescribed manner;
9. Any sum received or receivable, in cash or kind, on account of any capital asset (other than land or
goodwill or financial instrument) being demolished, destroyed, discarded or transferred if the whole of the
expenditure on such capital asset has been allowed as a deduction under Section 35AD.
10. Any sum whether received or receivable, in cash or kind, under an agreement
a) for not carrying out any activity in relation to any Business or Profession; or
b) not to share any know-how, patent, copyright, trade mark, licence, franchise or any other business or
commercial right of similar nature or information or technique likely to assist in the manufacture or
processing of goods or provision for services.
CA Suraj Agrawal
PGBP 9.2
However, the above sub-clause (a) shall not apply to any sum receivable on account of transfer of the
right to manufacture, produce or process any article or thing or right to carry on any business or Profession,
which is chargeable under the head “Capital gains”;
COMPUTATION OF INCOME FROM BUSINESS [SECTION 29]

Income under the head PGBP shall be computed in accordance with provisions contained in Sec. 30 to 43D
Net profit as per Profit & Loss Account xxx
Add: Non-allowable expenses debited to Profit & Loss Account (P&L) xxx
Add: Expenses allowable under any other head or Capital Exp./Personal Exp. xxx
Add: Income chargeable under this head but not credited to P/L xxx
Less: Expenses allowable under this head but not debited to P&L xxx
Less: Income credited to P & L A/c but not chargeable under this head xxx
Profits & Gains from Business or Profession xxx
Expenditures allowed on Cash Basis [SECTION 43B]

Deduction in respect of following expenses are allowed only if payment is made on or before the due date for
furnishing return of income u/s 139(1) of the previous year in which such liability is incurred [i.e. before
31st July/ 30th Sep/ 30th Nov]:
a) Any sum payable by way of Tax, Duty, Cess or Fee, by whatever name called, under any law for the
time being in force.
b) Interest on any loan or advances from a scheduled bank or a cooperative bank on actual payment
basis.
c) Any sum payable by the assessee as interest on any loan or borrowing from
- any public financial institution or
- a State Financial Corporation or
- a State Industrial Investment Corporation.
d) Any sum payable by the assessee as interest on any loan or borrowing from a deposit
taking non-banking financial company or systemically important non-deposit taking non-
banking financial company, in accordance with the terms and conditions of the
agreement governing such loan or borrowing,
e) Bonus or Commission (for services rendered) payable to employees.
f) Leave encashment payable to employees.
g) Any sum payable by the assessee as an employer by way of contribution to any Provident Fund or
Superannuation Fund or Gratuity Fund or any other fund for the welfare of employees.
h) Any sum payable to the Indian Railways for the use of railway assets
Note:
1. If the payment is not made before the date mentioned above, then no allowance shall be allowed in respect
of the outstanding liability. Deduction can, however, be claimed in the year of payment.
2. Section 43B is applicable only if the assessee is following mercantile system of accounting.
3. The above provisions are applicable on Employers contribution to PF, ESI etc and not employee
contributions recovered by the employer which is being paid subsequently as per respective Acts.
4. Cooperative banks excludes Primary Agriculture Credit Society or a primary co-operative agriculture
& rural development Bank
5. No deduction for interest converted into loan/advance: Any interest falling under (b), (c) & (d), which has
been converted into a loan or borrowing or advance, shall not be regarded as “actually paid” and shall
not be allowed as deductions.
CA Suraj Agrawal
PGBP 9.3
Example:
Debit side of the profit and loss account of Mayank Ltd. shows the following expenses, which have been
due but are outstanding as on 31-3-20
Payment outstanding on 31-3-20 First payment Second payment
Particulars Amount Date Amount Date Amount
paid paid
Leave encashment expenses 65000 1-6-20 15000 25-12-20 50000
Excise duty payable 14000 10-6-20 3000 13-12-20 11000
Sales tax payable 48000 5-09-20 48000 - -
Bonus payable to employees 87000 2-5-20 30000 30-09-20 57000
Interest payable to LIC loan 75000 13-5-20 50000 10-01-21 25000
Due date for filing of return of income is 30-09-2020
Find out the previous years in which the aforesaid payments are deductible. The company maintains
books of accounts on the basis of mercantile system of accounting.
Solution
As per provision of sec. 43B following payment if made before due date of filing of return (i.e. 30/9/2020) then only
it shall be allowed.
Particulars Amount paid Deduction allowed in the previous year
2019-20 2020-21
Leave encashment expense 65,000 15,000 50,000
Excise duty payable 14,000 3,000 11,000
Sales tax payable 48,000 48,000 -
Bonus payable to employees 87,000 87,000 -
Interest payable to LIC loan 75,000 50,000 25,000
Example:
An analysis of the profit and Loss Account and the Balance Sheet of Kapil as at March 31, 2020 reveals
that the following expenses which were due, were though debited to Profit and Loss account, but have
been paid after 31-3-2020:
- Sales tax ` 50000 (` 20000 paid on 14-09-2020; and ` 30000 paid on 15-12-2020)
- Excise duty ` 120000 (` 40000 paid on 14-09-2020; ` 40000 paid on 15-12-2020; and ` 40000 paid on
24-12-2020)
- Bonus to staff ` 60000 (` 58000 paid on 10-09-2020; and ` 2000 paid on 15-12-2020)
- Employers contribution to provident fund ` 55,000 (` 25000 paid on 15-7-2020; ` 10000 paid on 30-09-
2020; and ` 20000 paid on 15-12-2020)
The due date for filing of return is 30-09-2020. In which previous years can the above payments be
claimed as a deduction?
Solution
As per Sec. 43B certain expenditure (like sales tax, excise duty, bonus to staff, etc.) are not allowed if payment is
not made before the due date of furnishing return of income. Deduction can, however, be claimed in the year of
payment.
Statement showing previous year in which deduction can be claimed.
Particulars Amount Previous year in which
deduction can be claimed
Sales tax
• Paid on 14-09-2020 20000 2019-20
• Paid on 15-12-2020 30000 2020-21
Excise duty
• Paid on 14-09-2020 40000 2019-20
• Paid on 15-12-2020 40000 2020-21
• Paid on 24-12-2020 40000 2020-21
Bonus to staff
• Paid on 10-09-2020 58000 2019-20
• Paid on 15-12-2020 2000 2020-21
Employers contribution to provident fund
• Paid on 15-07-2020 25000 2019-20
• Paid on 30-09-2020 10000 2019-20
• Paid on 15-12-2020 20000 2020-21
CA Suraj Agrawal
PGBP 9.4
Cash payments in excess of ` 10,000 / ` 35,000 – Section 40A(3) &
40A(3A) read with Rule 6DD
1) Where the assessee incurs any expenditure, in respect of which payment or aggregate of payments made
to a person in a day otherwise than by an account payee cheque or by an account payee bank draft or
use of electronic system through bank account or through such other prescribed electronic modes
exceeds ` 10,000, such expenditure [100%] shall not be allowed as a deduction. [Section 40A(3)]
2) Further, In case of an assessee following mercantile system of accounting, if an expenditure has been
allowed as deduction in any previous year on due basis, and payment has been made in a subsequent
year otherwise than by account payee cheque or account payee bank draft or use of electronic system
through bank account or through such other prescribed electronic modes, then the payment so
made shall be deemed to be the income of the subsequent year if such payment or aggregate of
payments made to a person in a day exceeds ` 10,000.Section 40A(3A)
3) This limit of ` 10,000 has been raised to ` 35,000 in case of payment made to transport operators for
plying, hiring or leasing goods carriages.
4) Section 40A(3) & Section 40A(3A) is applicable only for computing income under PGBP and IOS.
5) The provisions regarding payments by account payee cheque or draft apply equally to payments
made for goods purchased on credit.
6) If aggregate payment in a day (otherwise than by an account payee cheque/draft) to the same person in
respect of an expenditure exceeds ` 10,000, it will be disallowed under section 40A(3), even if none of each
payment in the day exceeds ` 10,000.
7) If an assessee makes payment of two different bills (none of them exceeds ` 10,000) at the same time in
cash or by bearer cheque, section 40A(3) is not applicable even if the aggregate payment is more than `
10,000. In other words unless the amount of the bill and the amount of payment exceed ` 10,000,
section 40A(3) is not applicable.
8) Where the assessee makes payment over ` 10,000 at a time, partly by an account payee cheque and partly
in cash or bearer cheque or crossed cheque to some parties but the payment in cash (or by bearer
cheque or crossed cheque) alone at one time does not exceed ` 10,000, section 40A(3) is not attracted.
9) Provision of section 40A(3) does not apply in respect of an expenditure which is not to be claimed as
deduction u/s 30 to 37.
10) Rule 6DD: Cases where above restriction of payment mode is not applicable:
a) where the payment is made to RBI, SBI and any banking company, any co-operative bank, Land
mortgage bank, LIC, etc.
b) where the payment is made to the Government in legal tender;
c) where the payment is made by
- a credit card / a debit card.
- a bill of exchange made payable only to a bank;
- the use of electronic clearing system through a bank account;
- any letter of credit arrangements through a bank;
- a mail or telegraphic transfer through a bank;
- a book adjustment from any account in a bank to any other account in that or any other bank;
d) where the payment is made for the purchase of agricultural or forest produce;the produce of animal
husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; fish or fish products;
orthe products of horticulture or apiculture, to the cultivator, grower or producer of such articles,
produce or products;
e) where the payment is made, for the purchase of the products manufactured or processed without the
aid of power in a cottage industry, to the producer of such products;
CA Suraj Agrawal
PGBP 9.5
f) where the payment is made in a village or town, which on the date of such payment is not served by
any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation,
in any such village or town;
g) where any payment is made to an employee of the assessee or legal heirs, on or in connection with the
retirement, retrenchment, resignation, discharge or death, on account of gratuity, retrenchment
compensation or similar terminal benefit and the aggregate of such sums payable to the employee
or his heir does not exceed ` 50,000;
h) where the payment is made by an assessee by way of salary to his employee after deducting TDS and
when such employee -
- is temporarily posted for a continuous period of fifteen days or more in a place other than his
normal place of duty or on a ship; and
- does not maintain any account in any bank at such place or ship;
i) where the payment was required to be made on a day on which the banks were closed either on
account of holiday or strike;
j) where the payment is made by any person to his agent who is required to make payment in cash for
goods or services on behalf of such person;
k) where the payment is made by an authorised dealer or a money changer against purchase of foreign
currency or travellers cheques in the normal course of his business.
l) where the payment is made by way of adjustment against the amount of any liability incurred by
the payee for any goods supplied or services rendered by the assessee to such payee;
Question: Determine the amount of disallowances in the cases given below –
1. Generally X pays salary to his employees by account payee cheques. Salary of December 2019 is,
however, paid to three employees A, B and C by bearer cheques (payment being ` 6,000, ` 10,000
and ` 10,500 respectively).
2. X Ltd. purchases goods on credit from Y Ltd. on May 6, 2019 for ` 86,000 which is paid as follows –
a) ` 5,000 in cash on May 11, 2019;
b) ` 40,000 by a bearer cheque on May 31, 2019;
c) ` 41,000 by an account payee cheque on May 16, 2019.
3. Z Ltd. purchases goods on credit from A Ltd. on May 10, 2019 for ` 6,000 and on May 30, 2019 for `
5,000. The total payment of ` 11,000 is made by a crossed cheque on June 1, 2019.
4. A Ltd. purchases goods on credit from a relative of a director on June 20, 2019 for ` 50,000 (market
value: ` 42,000). The amount is paid in cash on June 25, 2019.
5. B Ltd. purchases raw material on credit from A who holds 20% equity share capital in B Ltd. (the
amount of bill being ` 36,000, market price being ` 9,000). It is paid in cash on July 26, 2019.
Solution:
1. ` 10,500, being 100% of salary paid by bearer cheque to C, will be disallowed.
2. Nothing will be disallowed out of the payment of ` 5,000 in cash on May 11, 2019, as the payment does not
exceed ` 10,000. 100% of ` 40,000 will be disallowed. Nothing will be disallowed out of ` 41,000.
3. Though the amount of payment exceeds ` 10,000, nothing shall be disallowed. To attract disallowances,
the amount of bill as well as the amount of payment should be more than ` 10,000.
4. Out of the payment of ` 50,000, ` 8,000 (being the excess payment to a relative) shall be disallowed u/s
40A(2). As the payment is made in cash and the remaining amount exceeds ` 10,000, 100% of the balance
(i.e., ` 42,000) shall be disallowed u/s 40A(3).
5. Out of the payment of ` 36,000, ` 27,000 (being the excess payment to a person holding a substantial
interest) shall be disallowed u/s 40A(2). The remaining amount (i.e., ` 9,000) does not exceed ` 10,000.
Nothing shall be disallowed u/s 40A(3) even if the payment is made in cash.
CA Suraj Agrawal
PGBP 9.6
ADMISSABLE DEDUCTIONS
RENT, RATES, REPAIRS AND INSURANCE FOR BUILDINGS [Section 30]
Business Use: Section 30 allows deduction in respect of the rent, rates, taxes, repairs and insurance of
buildings used by the assessee for the purpose of his business or profession.
However, where the premises are used partly for business and partly for other purposes, only a
proportionate part of the expenses attributable to that part of the premises used for purposes of business will
be allowed as a deduction.
Notional Rent: Rent paid to proprietor is disallowed but rent paid by firm to its partner for using his
premises is an allowed expenditure.
Current Repairs Vs Capital Repair: This section allows deductions in respect of expenses incurred on
account of current repairs [Revenue in Nature] to building in case where (i) the assessee is the owner of
the building or (ii) the assessee is a tenant who has undertaken to bear the cost of repairs to the premises.
But if capital Expenditure is incurred on repair:
By the owner: then, it shall be added to the cost of building & Depn. shall be allowed u/s. 32(1)(ii)
By the tenant: then, the depreciation shall be allowed as per Expln. 1 to Section 32(1).
Municipal Taxes: By virtue of section 43B, rates and taxes are deductible on cash basis.
REPAIRS AND INSURANCE OF MACHINERY, PLANT AND FURNITURE [Section 31]
Business Use of Asset: Section 31 allows deduction in respect of the expenses on current repairs (not
being capital expenditure) and insurance of machinery, plant and furniture used for the purposes of
business or profession carried on by the assessee.
Capital Expenditure incurred on repair shall be added to the cost of plant & machinery or furniture and
depreciation shall be allowed under Section 32.
Rent payable for use of above assets is not covered by section 31, but shall be allowed as deduction
under section 37(1).
Replacement of old frames for efficient functioning of machines without breakdowns, is allowable as
deduction u/s 37 and not u/s 31 because it is not current repairs, but accumulated repairs
ACTUAL COST [SECTION 43(1)]

The expression “actual cost” means the actual cost of the asset to the assessee as reduced by that portion of the
cost thereof, if any, as has been met directly or indirectly by any other person or authority.
PURCHASE PRICE xxx

Add: Interest on loan borrowed for period up to the date of put to use [Sec. 36(1)(iii)] xxx
Add: Expenses incurred for freight/insurance/loading/Unloading xxx
Add: Trial Run Expenses, if any xxx
Less: Amount met by any authority or other person by way of subsidy etc.
Section 43(1) xxx
Less: Adjustment as per explanation 1 to 13 to Sec. 43(1), if applicable xxx
ACTUAL COST TO BE ADDED IN THE RELEVANT BLOCK OF ASSETS XXX
Where an assessee incurs any expenditure for acquisition of any asset in respect which a payment (or
aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft/use
of electronic clearing system through a bank account or through such other prescribed electronic
mode, exceeds ` 10,000, such payment shall be ignored for the purposes of determination of “Actual
Cost” of such asset.
Consequently, Depreciation/Additional Depreciation under Section 32 and Deduction u/s 32AD pertaining
to such payment is not available. Moreover, such expenditure will not be considered for the purpose of
Section 50.
CA Suraj Agrawal
PGBP 9.7
ACTUAL COST IN CERTAIN SPECIAL SITUATIONS [EXPLANATIONS TO
SECTION 43(1)]
S.No Mode of Acquisition Actual Cost
(1) Asset acquired by way of gift or inheritance. WDV to the previous owner.
(2) Building previously used for private purposes, now Actual cost of building less notional
brought into use for the business of the assessee. depreciation upto year of bringing it to
[Note: Rate of depreciation applicable in previous business use.
year of bringing the asset into business use is
applied.]
Example: Compute the amount of depreciation allowable in the following cases - Dr. Jolly purchased a
house property on 1-12-2017 for ` 10,00,000. Till 1-6-2019, the same was self -occupied as a residence. On
this date, the building was brought into use for his medical profession. Rate of depreciation on buildings
at the time of purchase of house property was 15 %.
Solution : Explanation 5 to section 43(1) provides mode of computation of actual cost when a building initially
used for personal purposes is brought into business use. The rate of depreciation to be applied is the rate in force
in the year in which building is brought into business use i.e. 10%.
Computation of the amount of depreciation allowable (amounts in `)

WDV as on 31.3.2018 10,00,000
Less: Depreciation @ (10% x 50%) of ` 10,00,000 (use for less than 180 days) 50,000
WDV as on 1.04.2018 9,50,000
Less: Depreciation (10% of ` 9,50,000) 95,000
WDV as on 1.4.2019 (Actual cost of building) 855,000
Depreciation for the current year (10% of ` 8,55,000) . 85,500
Example: A Car purchased by S on 10.08.2015 for ` 3,25,000 for personal use is brought into the business
of the assessee on 1.12.2019, when its market value is ` 1,50,000. Compute the actual cost of the car and
the amount of depreciation for the AY 2020-21 assuming the rate of depreciation to be 15%.
Answer: Computation of actual cost and depreciation [for the AY 2020-21]
Actual cost as on 1.12.2019 (in the business)

(see note) 3,25,000
Less: Depreciation
[as the asset is acquired and put to use in the business for less than
180 days, 50% of the normal depreciation is allowable]
50% x [15%x ` 3,25,000] 24,375
WDV as on 31.3.2020 (after Depreciation) 3,00,625
Note: In this case, car was purchased for personal use on 10.8.2015 for ` 3,25,000 and subsequently brought
into the business of the assessee on 1.12.2019. The 'actual cost' of car is ` 3,25,000.
TREATMENT OF EXCHANGE RATE FLUCTUATIONS IN CASE OF

PURCHASE OF AN ASSET FROM OUTSIDE INDIA [SECTION 43A]
The assessee has acquired any capital asset from abroad on credit or on deferred payment or from money
representing in foreign currency
subsequently, after the date of acquisition, there is a change in increase or reduction in the liability at
the time of making the payment towards the cost of the asset or repayment of money borrowed in any
foreign currency along with interest due to foreign exchange rate fluctuation
Such increase or reduction shall be added to or reduced from the cost of the assets.
CA Suraj Agrawal
PGBP 9.8
EXPENDITURE ON SCIENTIFIC RESEARCH [Section 35]
Sec 35 Expenditure incurred Deduction Conditions / Remarks
(1)(i) 1. Revenue expenditure on scientific Amount of Expenditure incurred within 3 years
research incurred after commencement expenditure immediately preceding the date of
of business. incurred commencement of business is
2. Subject to conditions, Expenditure on [100%] allowed as deduction in the year of
scientific research before commencement of business to the
commencement of business by way of extent certified by the prescribed
a. Purchase of materials; or authority.
b. Salary (except perquisite) of
employees
(1)(ii) Sum paid to a Research Association, 1.50 × Sum Such association, university college
University, College or Institution whose object paid [150%] or institution must be approved and
is undertaking of scientific research notified by the CG.
150% from AY 18-19 to AY 20-21
100% from AY 21-22 Deduction is allowed even if
research is not related to business.
(1) (iia) Sum paid to a company to be used by it for 100% x Sum Such company is registered in India, is
scientific research paid approved by prescribed authority and
has the main object of 'scientific
research and development'
(1)(iii) Sum paid for Social Science or Statistical 100% x Sum Such association, university college
Research to a Research Association which paid or institution must be approved and
has as its object the undertaking of research notified by the CG.
in social science or statistical science or to a Deduction is allowed even if
University, College or Institution research is not related to business.
(2) Capital expenditure (except expenditure Amount of Pre-commencement expenditure is

on the purchase of land) on scientific expenditure allowed in the year of the
research related to business. incurred commencement of the business.
No depreciation is allowable.
Capital expenditure (except expenditure
on the purchase of land) incurred within
3 years immediately preceding the
date of commencement of business.
(2AA) Sum paid to - 1.50 x Sum Sum is paid with a specific

a. a National Laboratory; or paid [150%] direction that it shall be used for
b. a University; or scientific research undertaken
under a programme approved in
c. an Indian Institute of technology; or
this behalf by prescribed authority.
d. a specified person
150% from AY 18-19 to AY 20-21

100% from AY 21-22
CA Suraj Agrawal
PGBP 9.9
(2AB) Expenditure (not being in nature of cost of 1.50 x expen- Such Research and development
any land or buildings) incurred on scientific diture facility is approved by prescribed
research on in-house research and incurred authority.
development facility incurred by a company [150%] Such assessee should enter into an
engaged in the business of bio- agreement with prescribed authority
technology, or, any business of for co-operation in such Research
manufacture or production of any article and development facility and audit
or thing, not being an article or thing of accounts maintained for that
specified in the list of the Eleventh facility.
Schedule No deduction shall be allowed in
[Cost of building shall be allowed u/s 35(1)(iv) respect of such sum under any
@100%] other provision of the Act.
No deduction shall be allowed in
150% from AY 18-19 to AY 20-21 this sub-section to a company app-
100% from AY 21-22 roved u/s 35(1)(iia).
Other points:
1. Deduction not to be denied even if approval withdrawn subsequently : The deduction allowable under
this section shall not be denied merely on the ground that subsequent to the payment of such sum by the
assessee-
(a) the approval granted to association, university, college, other institution referred to u/s 35(1)(ii)/ (iii), or,
the Laboratory or specified person referred to u/s 35(2AA) has been withdrawn; or
(b) the approval granted to the programme undertaken by the National Laboratory, University, Indian
Institute of Technology or specified person, has been withdrawn.
2. Actual use for scientific research during the previous year - not necessary:
Deduction under section 35(1)(iv) is available only if the asset was acquired during the previous year for the
purposes of scientific research. There is no further requirement that asset must be put to use in the relevant
previous year.
3. In case of sale of assets used for research purpose & on which deduction is allowed u/s 35, money
payable on sale will be considered as deemed income u/s 41(3) u/h PGBP to the extent deduction is
allowed. Amount in excess of Cost of such asset will be liable for Capital Gain.
4. SET OFF OF UNABSORBED CAPITAL EXPENDITURE:

The treatment for Set off and carry forward of unabsorbed scientific research capital expenditure shall be
done in the same manner as that of unabsorbed depreciation.
Question: K Bio-medicals Ltd. is engaged in the business of manufacture of bio-medical items. The
following expenses were incurred in respect of activities connected with scientific research:
Year ended Item Amount (` )

31.03.2017 Land 12,00,000
(Incurred after 01.09.2016) Building 28,00,000
31.03.2018 Plant & Machinery 7,00,000
31.03.2019 Raw materials (allowed by prescribed authority) 3,20,000
31.03.2020 Raw materials and salaries (After commencement) 2,80,000
The business was commenced on 01.09.2019. In view of availability of better model plant and machinery,
the existing plant and machinery were sold for ` 10,00,000 on 01.03.2020.
Discuss the implication of the above for the AY 2020-21 alongwith brief computation of deduction
permissible under section 35 at 150% on eligible items.
CA Suraj Agrawal
PGBP 9.10
SOLUTION: `
Expenditure allowed
Land Not Allowed
Building 28,00,000
Plant and machinery 7,00,000
Raw materials 3,20,000
Raw materials and salaries (2,80,000 × 1.5 times) 4,20,000
[Pre-commencement expenditure is not eligible for weighted deduction of 150%]
On sale of existing P&M, ` 7,00,000 will be deemed to be business profits under section 41(3)
Short term capital gains on sale of plant and machinery
Less: cost of acquisition 7,00,000
Short term capital gains 3,00,000
Question: A Ltd. furnishes the following particulars for the PY 2019-20. Compute the deduction allowable
under section 35 for AY 2020-21, while computing its income under the head "PGBP":
Particulars `
1. Amount paid to Indian Institute of Science, Bangalore, for scientific research 2,00,000
2. Amount paid to IlT, Delhi for an approved scientific research programme 3,00,000
3. Amount paid to X Ltd., a company registered in India which has as its main object 6,00,000
scientific research and development, as is approved by the prescribed authority
4. Expenditure incurred on in-house research and development facility as approved
by the prescribed authority
(a) Revenue expenditure on scientific research 4,00,000
(b) Capital expenditure (including cost of acquisition of land ` 5,00,000) on scientific 8,00,000
research
Solution: Computation of deduction under section 35 for the AY 2020-21

Particulars ` Section % of weighted Amount of
deduction deduction (` )
Payment for scientific research
Indian Institute of Science 2,00,000 35(1)(ii) 150% 3,00,000
IIT, Delhi 3,00,000 35(2AA) 150% 4,50,000
X Ltd. 6,00,000 35(1)(iia) 100% 6,00,000
Expenditure incurred on in- house
research and development facility
Revenue expenditure 4,00,000 35(2AB) 150% 6,00,000
Capital expenditure 3,00,000 35(2AB) 150% 4,50,000
(excluding cost of acquisition
of land ` 5,00,000)
Deduction allowable u/s 35 24,00,000
CA Suraj Agrawal
PGBP 9.11
Deduction in respect of donations for scientific research and rural
development [Section 80GGA]
1) Any assessee not having income u/h “PGBP”.
2) No Deduction for cash donations/contributions exceeding ` 10,000:
No deduction shall be allowed under this section in respect of donation of any sum exceeding ` 10,000 unless
such sum is paid by any mode other than cash.
3) 100% deduction of contribution made to:
a) Research association/University/College/Other Institution approved u/s 35(1)(ii) for scientific
research;
b) Research association/University/College/Other Institution approved u/s 35(1)(iii) for research in
social science or statistical research
c) Public Sector Company/Local Authority/Association or institution (approved by the National
Committee) for carrying out any eligible project or scheme approved under section 35AC
d) Association/Institution which undertaking any programme of rural development u/s 35CCA or
which has undertaking training of persons for implementation of such programmes.
e) National Rural Development Fund or National Urban Poverty Eradication Fund (NUPEF) set up and
notified under section 35CCA.
CA Suraj Agrawal
PGBP 9.12
Section 35AD - DEDUCTION IN RESPECT OF EXPENDITURE ON SPECIFIED
BUSINESS
A. Specified business – Deduction u/s 35AD is available only in the case of a “specified business”:
W.e.f 01/04/2009
(1) Setting up and operating a cold chain facility
(2) setting up and operating a warehousing facility for storage of agriculture produce;
(3) laying and operating a cross-country natural gas (w.e.f.01/04/2007) or crude or petroleum oil pipeline
network for distribution, including storage facilities being an integral part of such network (only
Company)
W.e.f 01/04/2010
(4) building and operating, anywhere in India, a hotel of two-star or above category;
[Owner of Hotel is eligible for deduction even if owner transfers the operation of the hotel to
another person]
(5) building and operating, anywhere in India, a hospital with atleast 100 beds for patients;
(6) developing and building a housing project under a scheme for slum redevelopment or rehabilitation;
W.e.f 01/04/2011
(7) developing and building a housing project under a scheme for affordable housing
(8) Production of fertilizer in India
W.e.f 01/04/2012
(9) Setting up and operating an inland container depot or a container freight station notified or approved
under the Customs Act, 1962
(10) Bee-keeping and production and production of honey and beeswax; and
(11) Setting up and operating a warehousing facility for storage of sugar
W.e.f 01/04/2014
(12) Laying & Operating a slurry pipeline for the transportation of iron ore
(13) Setting up and operating a semiconductor wafer fabrication manufacturing unit, if notified
W.e.f 01/04/2017 [AY 18-19]
(14) Developing or Operating & Maintaining or Developing, Operating & Maintaining any Infrastructure
facility (Port, Airport, Rail system, Road, Highway Projects, Water Supply, Sewerage system,
Solid waste management system etc) [Approved company assessee or Govt bodies]
B. Specified business should be new business:
(1) The specified business should not be set up by splitting up, or the reconstruction, of a business already in
existence.
(2) It should not be set up by the transfer of old plant and machinery.
(a) 20% old machinery is permitted:

If the value of the transferred assets does not exceed 20% of the total value of the machinery or plant
used in the business, this condition is deemed to have been satisfied.
(b) Second-hand imported machinery is treated as new:

Any machinery or plant which was used outside India by any person (other than the assessee) shall
not be regarded as machinery or plant previously used for any purpose, if the following conditions
are fulfilled-
(i) Such machinery or plant was never used in India.
(ii) Such machinery or plant is imported into India from any other Country.
(iii) No deduction on account of depreciation in respect of such machinery or plant has been allowed
to any assessee previously.
CA Suraj Agrawal
PGBP 9.13
C. Audit of the books of account – Books of account of the assessee should be audited.
D. AMOUNT OF DEDUCTION:
1. 100% of capital expenditure is deductible.
2. Any expenditure in respect which payment (or aggregate of payments made to a person in a
day), otherwise than by an account payee cheque/draft/use of electronic clearing system through
a bank account or through such other prescribed electronic mode, exceeds ` 10,000, no
deduction shall be allowed in respect of such payment under section 35AD.
3. Expenditure incurred on the acquisition of any land or goodwill or financial instrument is not
eligible for any deduction u/s 35AD.
4. Expenditure incurred prior to the commencement of operation, wholly and exclusively, for the purpose of
any specified business, shall be allowed as deduction during the previous year in which the assessee
commences the operation of his specified business, if the amount is capitalized in the books of
account of the assessee on the date of commencement of operation.
CONSEQUENCES OF CLAIMING DEDUCTION U/S 35AD :

(i) If deduction is claimed and allowed u/s 35AD, the assessee shall not be allowed any deduction in respect
of the specified business under Section 10AA or under the provisions of Chapter VIA [u/s 80IA to
80RRB] for the same or any other assessment year.
(ii) Any loss computed in respect of the specified business u/s 35AD shall not to be set off except
against profits and gains, if any, of other specified business u/s 73A (whether or not eligible for deduction
u/s 35AD). To the extent the loss is unabsorbed, the same will be carried forward for set off against
profits and gains from any specified business in the following assessment year and so on (no time-limit
for carry forward such loss).
(iii) Any sum received or receivable on account of any capital asset, in respect of which deduction has
been allowed u/s 35AD, being demolished, destroyed, discarded, or transferred shall be treated as
income of the assessee and chargeable to income tax under the head “Profits and gains of business or
profession”.
(iv) Section 35AD(7A) provides that any asset in respect of which a deduction is claimed and allowed under
section 35AD shall be used only for the specified business for a period of 8 years beginning with the
previous year in which such asset is acquired or constructed.
(v) Sub-section (7B) has been inserted to provide that if such asset is used for any purpose other than the
specified business, the total amount of deduction so claimed and allowed in any previous year in respect
of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions
of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be income
of the assessee chargeable under the head “Profits and gains of business or profession” of the previous
year in which the asset is so used.
(vi) However, the deeming provision under sub-section (7B) shall not be applicable to a Sick
company.
CA Suraj Agrawal
PGBP 9.14
Example:
ABC Ltd. is a company having two units – Unit A carries on specified business of setting up and
operating a warehousing facility for storage of sugar; Unit B carries on non-specified business of
operating a warehousing facility for storage of edible oil. Unit A commenced operations on 1.4.2018 and it
claimed deduction of ` 100 lacs incurred on purchase of two buildings for ` 50 lacs each (for operating a
warehousing facility for storage of sugar) under section 35AD for A.Y. 2019-20. However, in February,
2020, Unit A transferred one of its buildings to Unit B. Examine the tax implications of such transfer in the
hands of ABC Ltd.
Solution:
Since the capital asset, in respect of which deduction of ` 50 lacs was claimed under section 35AD, has been
transferred by Unit A carrying on specified business to Unit B carrying on non-specified business in the P.Y. 2019-
20, the deeming provision under section 35AD(7B) is attracted during the A.Y. 2020-21.
Particulars `
Deduction allowed under section 35AD for A.Y. 2019-20 50,00,000
Less: Depreciation allowable u/s 32 for A.Y. 2019-20 [10% of ` 50 lacs] 5,00,000
Deemed income under section 35AD(7B) 45,00,000
# Actual Cost of the Building for Depreciation purpose shall be 45 Lakhs now in AY 20-21
Example: On April 1, 2019, X Ltd. commences the operation of a warehousing facility in Andhra Pradesh
for storage of Sugar. The following information is available from the records of company –
Expenses incurred prior to April 1, 2019 `
Purchase of land for warehouse 50,00,000
Construction cost of warehouse 8,00,000
Purchase of know-how for warehouse 10,00,000
Salary to staff 78,000
These expenses are capitalized on March 31, 2019.
Expenses incurred during PY 2019-20.
Purchase of old plant and machinery (from domestic market) 2,00,000
Purchase of old plant and machinery (from Germany) 4,00,000
Purchase of new plant and machinery 9,00,000
Purchase of goodwill 3,50,000
Profit and loss account for the year PY 2019-20
` `
Depreciation of building (@ 5%) 3,40,000 Amount collected from persons
Depreciation of machinery (@ 23.333%) 3,50,000 using warehouse 78,00,000
Cost of know-how (amount written off) 10,00,000
Other operating expenses 7,51,000
Donation to a political party 10,000
Net Profit 53,49,000
78,00,000 78,00,000
Out of other operating expenses, a payment of ` 40,000 is made in cash. Other operating expenses are
deductible u/s 37. Find out the taxable income of X Ltd. for the AY 2020-21 on the assumption that X Ltd.
has the following income from other sources – income from the business of commission agency: `
20,15,000 (computed under the provision of the Income-tax Act) and dividend from a foreign company
(Holding – 15%): ` 50,000
Solution: Amount deductible u/s 35AD.

Expenditure incurred prior to the commencement of operation of operation (to the extent these are
capitalized)
Purchase of land (not qualified for deduction) Nil
Purchase of know-how 10,00,000
Salary to staff 78,000
Expenditure incurred during the previous year

Construction cost or warehouse 60,00,000
Purchase of machinery (` 2,00,000 + ` 4,00,000 + ` 9,00,000) 15,00,000
Amount deductible u/s 35AD 93,78,000
CA Suraj Agrawal
PGBP 9.15
Computation of income from warehouse
Net profit as per profit and loss account 53,49,000
Add: Depreciation of building (not deductible as cost of building is eligible for deduction u/s 35AD) 3,40,000
Add: Depreciation of machinery (not deductible as cost of machinery is qualified for deduction u/s 35AD) 3,50,000
Add: Cost of Know-how (not deductible as deduction is available u/s 35AD) 10,00,000
Add: Amount paid in cash (operating expenses) 40,000
Add: Donation to political party 10,000
Less: Deduction u/s 35AD (-)93,78,000
Loss from warehouse (-)22,89,000
Computation of Income ` `
Commission agency business 20,15,000
Warehouse Business (-)22,89,000
Business income (Set off not permissible) 20,15,000
Income from other sources (dividend from foreign company) 50,000

Less: Deduction u/s 80GGB (donation to a political party) 10,000

Notes:
1. Second hand imported machinery is taken as new machinery. The business of operating warehouse is
formed by using new machinery of ` 13,00,000 and old machinery of ` 2,00,000. Value of old plant and
machinery does not exceed 20% of the total value of plant & machinery. Other conditions of section
35AD are satisfied X Ltd. is, therefore, eligible for deduction u/s 35AD.
2. Loss from operating warehouse (by virtue section 73A) can be set off only against profit and gains, if any, of
any other business specified u/s 35AD. In this case, X Ltd. does not have any other specified business.
Loss will be carried forward (without any time-limit) for being set off against income from operating
warehouse or any other specified business u/s 35AD.
Example: XYZ Ltd. commenced operations of the business of laying and operating a cross-country
natural gas pipeline network for distribution on 1st April, 2019. The company incurred capital expenditure
of ` 32 lakh during the period January to March, 2019 exclusively for the above business, and capitalized
the same in its books of account as on 1st April, 2019.
Further, during the financial year 2019-20, it incurred capital expenditure of ` 95 lakh (out of which ` 60
lakh was for acquisition of land) exclusively for the above business. Compute the deduction under
section 35AD for the AY 2020-21, assuming that XYZ Ltd. has fulfilled all the conditions specified in
section 35AD.
Answer:
The amount of deduction allowable under section 35AD for AY 2020-21 would be:
Particulars `
Capital expenditure incurred during the PY 2019-20 (excluding the

expenditure incurred on acquisition of land) = ` 95 lakh – ` 60 lakh 35 lakh
Capital expenditure incurred prior to 1.4.2019 (i.e., prior to commencement

of business) and capitalized in the books of account as on 1.4.2019 32 lakh
Total deduction under section 35AD for AY 2020-21 67 lakh
CA Suraj Agrawal
PGBP 9.16
Contributions for Rural Development Program[Section 35CCA]
1. This section allows a deduction of the following expenditure incurred by the assessee during the
previous year:
a) Payment to an association or institution, having the objective of undertaking programmes of rural

development. Such payment must be used for carrying out any programme of rural development
approved by the prescribed authority.
b) Payment to an association or institution having as its object the training of persons for implementing
rural development programme.
c) Payment to a National Rural Development Fund set up and notified by the Central Government.
d) Payments made to “National Urban Poverty Eradication Fund” (NUPEF) set up and notified by the
Central Government.
2. Certificate: The deduction shall not be allowed in respect of expenditure by way of payment of any sum to
any association or institution as referred in (a) & (b) above, unless the assessee furnishes a certificate from
such association or institution in the prescribed manner.
3. Deduction for the sum paid shall not be denied if the approval granted to above
programme/association/institution has been withdrawn subsequent to the payment by the assessee.
Weighted deduction for exp. on notified Agriculture Extension Project [Sec 35CCC]
Where an assessee incurs any expenditure (not being expenditure in the nature of cost of any land or
building)on any notified agriculture extension project in accordance with the prescribed guidelines, then, such
assessee can claim a weighted deduction of 150% of such expenditure.
Deduction will be restricted to 100% w.e.f. AY 21-22
Weighted deduction for expenditure on notified Skill Development Project [Sec 35CCD]
Wherea company incurs any expenditure (not being expenditure in the nature of cost of any land or
building) on any notified skill development project, then such company can claim a weighted deduction of
150% of such expenditure.
Deduction will be restricted to 100% w.e.f. AY 21-22
Question:bABC Limited is a company engaged in the business of biotechnology. The net profit of the
company for the financial year ended 31-03-2020 is ` 15,25,890 after debiting the following items:
S. No. Particulars `
(1) Purchase price of the raw material used for the purpose of in-house research and
development 1,80,000
(2) Purchase price of assets used for in-house research and development wrongly debited
to profit and loss account:
(a) Land 5,00,000
(b) Building 3,00,000
(3) Expenditure incurred on notified agricultural extension project 1,50,000
(4) Expenditure on notified skill development project:
(a) Purchase of land 2,00,000
(b) Expenditure on training for skill development 2,50,000
(5) Expenditure incurred on advertisement in the souvenir published by a political party 75,000
Compute the income under the head “Profit and gains of business or profession” for the A.Y. 2020-21 of
ABC Ltd.
CA Suraj Agrawal
PGBP 9.17
Solution: Computation of income under the head “Profits and business or profession” for the A.Y. 2020-21:
Particulars ` `
Net profit as per Profit and Loss A/c 15,25,890
Add: Item debited to P&L A/c, but to be disallowed –
Purchase price of land used in in-house research and development [WN-1] 5,00,000
Purchase price of building used in in-house research and development [WN -2] -
Expenditure incurred on notified agricultural extension project [WN -3] 1,50,000
Expenditure incurred on purchase of land for notified skill development project
[WN-4] 2,00,000
Expenditure incurred on training for skill development for notified skill [WN-5] 2,50,000
Expenditure incurred on advertisement in the souvenir publication by a political
party [WN-6] 75,000 11,75,000
27,00,890
Less: Raw material used for in-house research and development [WN-7] 90,000
Expenditure incurred on notified agricultural extension project [WN-3] 2,25,000
Expenditure incurred on training for skill development in a notified skill
development project [WN-5] 3,75,000 6,90,000
Profit and gains from business 20,10,890
Working Notes:
(1) Purchase price of land is not allowed as deduction under section 35(2AB).
(2) Cost of building, being capital expenditure, 100% deduction shall be allowed under section 35(1)(iv) read
with section 35(2).
(3) This expenditure qualifies for 150% deduction under section 35CCC.
(4) Purchase of land does not qualify for deduction under section 35CCD.
(5) This expenditure qualifies for 150% deduction under section 35CCD.
(6) The expenditure incurred on advertisement in the souvenir published by a political party is disallowed as
per section 37(2B) while computing income under the head “Profit and Gains of Business or Profession”
but the same would be allowed as deduction under sections 80GGB from the gross total income of the
company.
(7) The expenditure incurred on raw material qualifies for 150% deduction under section 35(2AB). Since, it is
already debited to P&L A/c, hence balance 50% is allowed.
CA Suraj Agrawal
PGBP 9.18
AMORTISATION OF PRELIMINARY EXPENSES [Section 35D]
(a) Section 35D provides for the amortisation of preliminary expenses incurred by Indian companies and other
resident non-corporate taxpayers for the establishment of business concerns or the expansion of the
business of existing concerns.
(b) This section applies in the case of new companies, to expenses incurred before the commencement of the
business or in the case of extension of an existing undertaking, to expenses incurred till the extension is
completed or till the setting up a new unit.
(c) Such preliminary expenditure incurred shall be amortised over a period of 5 successive PYs beginning
with the PY in which the business commences or, the PY in which the extension of the undertaking is
completed or new unit commences production.
(d) Eligible expenses - The following expenditure are eligible for amortisation:
(1) Expenditure in connection with–

(a) the preparation of feasibility report / project report;
(b) conducting market survey or any other business survey;
(c) engineering services relating to the business;
(d) legal charges for drafting any agreement between the assessee and any other person for any
purpose relating to the setting up to conduct the business of assessee.
Provided the above work must be carried out by the assessee himself or by a concern which is
for the time being approved in this behalf by the Board.
(2) Where the assessee is a company, in addition to the above, expenditure incurred:
(a) by way of legal charges for drafting the MOA/AOA of the company and on its printing;
(b) by way of fees for registering the company under the Companies Act;
(c) in connection with the issue, for public subscription, of the shares in or debentures of the company,
being underwriting commission, brokerage and charges for drafting, printing and advertisement of
the prospectus;
(e) Maximum Expenditure allowed to be amortized:
In case of Indian Company Higher of the following:

(a) 5% of the Capital Employed, or
(b) 5% of the Cost of project.
Other Assessee 5% of the cost of the project
(f) ‘Cost of the project’ means: Actual cost of the fixed assets shown in the books as on the last day of the
previous year.
(g) “Capital Employed” means: Issued share capital + Debentures + Long-term borrowings (7 years or
more) as on the last day of the previous year
(h) AUDIT: Audit of accounts by a Chartered Accountant is necessary for claiming deduction u/s 35D.
Important Note:
Expenditure on issue of shares which is not covered by section 35D is not allowable as revenue expenditure.
Therefore expenses incurred on –
- Issue of Right shares
- Fees paid to ROC for enhancement of authorized share capital
- Issue of shares to public
Will not be ALLOWED IF IT IS NOT COVERED BY SECTION 35D.
HOWEVER EXPENDITURE INCURRED ON ISSUE OF BONUS SHARES IS ALLOWABLE AS REVENUE

EXPENDITURE.
Discount on issue of debentures & premium on redemption of debentures can be claimed as deduction
proportionately during the period of life of debentures.
CA Suraj Agrawal
PGBP 9.19
Example: X Ltd. is incorporated in Bangalore on September 6, 2019. It commences production on March
15, 2020. The following expenses are incurred by the company before commencement of business:
a. Expenses on incorporation, issue of shares, etc. : ` 82,000
b. Preparation of feasibility report, project report and conducting market survey (the work is completed by the
taxpayer itself): ` 1,50,000.
c. Engineering services (work is carried on by a concern which is not approved by the Board): ` 1,50,000.
Determine the amount of deduction u/s 35D assuming the following figures of fixed assets and capital on
March 31, 2020 (i.e., the last day of the year in which the taxpayer starts production) –
` In lakhs
Cost of fixed asset 45
Share capital 50
Debentures 12
Long-term borrowing from a financial institution (repayable for not less than 7 years) 8
Solution:
`
Cost of project 45,00,000
Capital employed (i.e., ` 50lakhs + ` 12 lakhs + ` 8 lakhs) 70,00,000
Maximum qualifying expenditure [i.e., 5% of ` 45 lakhs or ` 70 lakhs, whichever is higher] (a) 3,50,000
Qualifying expenditure
Expenditure on incorporation 82,000
Preparation of feasibility report, project report and conducting market survey 1,50,000
Total (b) 2,32,000
Amount eligible for amortisation [(a) or (b), whichever is lower] 2,32,000
Amount deductible in 5 years for the assessment years 2020-21 to 2024-25 46,400
Note: Expenditure on engineering services in this case is not qualified for deduction u/s 35D. These
expenses may be capitalized by the tax payer to claim depreciation.
AMORTISATION OF EXPENSES FOR AMALGAMATION/DEMERGER [Section 35DD]

An Indian company, incurred expenditure wholly and exclusively for the purpose of amalgamation or demerger,
shall be allowed a deduction equal to one-fifth of such expenditure for 5 successive previous years beginning
with the previous year in which amalgamation or demerger takes place.
AMORTISATION OF EXPENDITURE INCURRED UNDER VOLUNTARY RETIREMENT

SCHEME [Section 35DDA]
a) This Section applies to an assessee who has incurred expenditure in any previous year in the form of
payment to any employee in connection with his voluntary retirement [VRS Payment]
b) The amount of deduction allowable is one-fifth of the amount paid for that previous year, and the
balance in four equal installments in the four immediately succeeding previous years.
c) In case of Amalgamation/Demerger (Transferee must be Indian Company) or Business Reorganisation being
succession of business [Section 47(xiii)/47(xiiib)/47(xiv)] during the intervening period of the said 5 years, the
benefit of deduction will be available to the “New Company/LLP” for the balance period including the
year in which such amalgamation/demerger/reorganisation or succession takes place.
CA Suraj Agrawal
PGBP 9.20
ALLOWABLE DEDUCTION IN COMPUTING PGBP

PREMIUM PAID FOR INSURANCE OF STOCK IN TRADE [Section 36(1)(i)]
If insurance policy has been taken out against risk, damage or destruction of the stock of the business or
profession, the premium paid is deductible.
PREMIUM PAID BY EMPLOYER FOR HEALTH INSURANCE OF EMPLOYEES [SECTION 36(1)(ib)] -

A deduction is allowed to an employer in respect of premium paid by him by any mode of payment other than
cash to effect or to keep in force an insurance on the health of his employees in accordance with a scheme
framed by (i) the GIC and approved by the CG; or (ii) any other insurer and approved by the IRDA.
BONUS & COMMISSION [Section 36(1)(ii)]

Deduction is allowed in respect of the sum paid to the employees as bonus or commission (Other than in lieu of
profit or dividend).
Note:
1. Deduction is subject to the provisions of Section 43B & 40A(2).
2. Voluntary payments are deductible if it is for service rendered.
3. Any bonus exceeding the statutory amount is allowed if such excess payment has been made on account of
commercial expediency.
INTEREST ON BORROWED CAPITAL [Section 36(1)(iii)]

Amount of interest paid in respect of capital borrowed for the purposes of business or profession shall be allowed
as deduction.
Conditions:
1. The assessee must have borrowed money
2. The money so borrowed must have been used for business or profession
3. The assessee must have incurred interest on borrowed amount.
Other Points:
1. Capital may be borrowed either to incur revenue expenditure or to incur capital expenditure.
2. Interest in respect of capital borrowed for acquisition of new asset for extension of existing business or
profession (whether capitalised in the books of account or not) for any period beginning from the date on
which the capital was borrowed for acquisition of the asset till the date on which such asset was first put
to use, shall not be allowed as deduction. The same is however eligible for capitalization and shall
be added to the Actual Cost.
3. Interest on own capital is not deductible. Interest to member in case of AOP is not deductible.
However, Interest to partner’s are deductible.
4. Deduction of interest is subject to Section 43B & Section 40(a)(i)& 40(a)(ia)
5. Interest on money borrowed for payment of Income tax or interest on late payment of advance tax or for
late filling of return is not deductible.
6. Interest paid by the assessee on money borrowed for payment of dividends is an allowable deduction.
DEDUCTIBILITY OF DISCOUNT ON ZERO COUPON BONDs [Sec 36(1)(iiia)]

Section 36(1)(iiia) provides deduction for the discount on ZCB on pro rata basis having regard to the
period of life of the bond.
Example: C ltd. (an infrastructure company) issued ZCB on 1/8/19 @ ` 45 (face value ` 100) redeemable at
par after 125 months. Public subscribed for 50,000 bonds, find amount allowed as deduction u/s
36(1)(iiia).
Solution Deduction allowed u/s 36(1)(iiia)

Total amount of discount 50000*(` 100 - ` 45) ` 2750000
Period of life of the bond 125 months
Cost per month ` 2750000/125 months ` 22000
No. of months in the PY 2019-20 for which the bonds remains Period from 01/08/2019 to 8 months
outstanding 31/03/2020
Amount allowed as deduction in the PY 2019-20 ` 22000 * 8 months ` 176000
CA Suraj Agrawal
PGBP 9.21
Section 36(1)(iva) – Deduction of expenses in the nature of Employer’s contribution
towards a pension scheme as referred in Section 80CCD
Section 36(1)(iva) provides that any sum paid by the assessee as an employer by way of contribution towards a
pension scheme, as referred to in section 80CCD on account of an employee to the extent it does not exceed
10% of the salary of the employee in the previous year, shall be allowed as deduction.
[“Salary” means Basic Salary + DA (forming part of retirement benefits)].
Example: X Ltd. contributes 20% of basic salary to the account of each employee under a pension scheme
referred to in section 80CCD. Dearness Allowance is 40% of basic salary and it forms part of pay of the
employees. Compute the amount of deduction allowable under section 36(1)(iva), if the basic salary of the
employees aggregate to ` 10 lakh. Would disallowance under section 40A(9) be attracted, and if so, to what
extent?
Computation of deduction allowable under section 36(1)(iva) and disallowance under section 40A(9)
Dearness Allowance@40% of basic salary [DA forms part of pay] 4,00,000
Salary for the purpose of section 36(1)(iva) (Basic Salary + DA) 14,00,000
Actual contribution (20% of basic salary i.e. 20% of ` 10 lakh) 2,00,000

Less: Permissible deduction under Section 36(1)(iva)
(10% of basic salary plus dearness pay = 10% of ` 14,00,000 = ` 1,40,000) 1,40,000
Excess contribution disallowed under Section 40A(9) 60,000
Allowance for Animals [Section 36(1)(vi)]

This clause grants an allowance in respect of animals which have died or become permanently useless.
The amount of the allowance is the difference between the actual cost of the animals and the price
realized on the sale of the animals themselves or their carcasses.
The allowance under the clause would thus recoup to the assessee the entire capital expenditure in
respect of animal.
DEDUCTIONS IN RESPECT OF BAD DEBTS [Section 36(1)(vii) and sub-section (2)]

1) If the amount of any bad debt or part thereof is written off as irrecoverable in the accounts of the assessee
for the previous year, the same will be allowed as deduction
2) Provisions for bad debt are not allowed as deduction.
3) There must be a debt and the debt must be incidental to the Business or profession of the assessee.
4) No such deduction shall be allowed unless

a) such debt or part thereof has been taken into account in computing the income of the assessee
of the previous year in which the amount of such debt or part thereof is written off or of an earlier
previous year, or
b) represents money lent in the ordinary course of the business of banking or money-lending which is
carried on by the assessee.
5) Bad debt is not allowed as deduction to the assessee who maintains accounts on cash basis.
6) Successor of Business:
The Successor to the business is entitled to deduction in respect of the debt incurred by the predecessor if
the business is not dissolved and the identity of business after succession remains the same. Deduction for
bad debt is allowed business wise and not the assessee-wise.
CA Suraj Agrawal
PGBP 9.22
7) Recovery of a bad debt subsequently [Section 41(4)]
If a deduction has been allowed in respect of a bad debt under section 36, and subsequently the amount
recovered in respect of such debt is more than the amount due after the allowance had been made, the
excess shall be deemed to be the profits and gains of business or profession and will be chargeable as
income of the previous year in which it is recovered, whether or not the business or profession in respect
of which the deduction has been allowed is in existence at the time.
Example:
X, a trader, sells goods on credit to Y (outstanding balance on April 1, 2019: ` 40,000 and total bills issued
during 2019-20: ` 60,000. Out of ` 1,00,000, he recovers only ` 10,000 from Y during 2019-20. On March 31,
2020, he writes off ` 32,000 as bed debt. However, on December 19, 2020, X receives from Y as full and
final payment (a) ` 15,000, or (b) ` 55,000, or (c) ` 70,000. Find out the tax consequences for different
assessment years.
Solution:
AY 2020-21 During the previous year 2019-20, X writes off ` 32,000 as bad debt. It is, therefore, deductible for
the AY 2020-21.
AY 2021-22: Tax treatment, when recovery is made during the previous year 2020-21, will be as follows:
Amount of debt as on April 1, 2020 Amount recovered as full and Deduction/Income

(i.e., ` 1 lakhs – ` 10,000 – ` 32,000 final payment
being the amount written off)
(1) (2) (2) – (1)
` ` `
a) 58,000 15,000 (-) 43,000
b) 58,000 55,000 (-) 3,000
c) 58,000 70,000 12,000 [Sec 41(4)]
In situation (a) ` 43,000 is deductible as bad debts if he writes off ` 43,000 in his books of account as bad debt
during the previous year 2020-21. Likewise, in situation (b) ` 3,000 is deductible as bad debts if X writes off `
3,000 in his books of account for the year ending March 31, 2021. In situation (c), however, ` 12,000, being the
excess recovery, is taxable as business income by virtue of section 41(4) for the previous year 2020-21
[irrespective of the fact whether the business is in existence during the previous year 2020-21 or not].
EXPENSES ON FAMILY PLANNING [Section 36(1)(ix)] – ADMISSABLE ONLY TO COMPANIES
• Revenue Expenditure: Expenditure of revenue in nature incurred by a company for the purpose of
promoting family planning amongst its employees will be fully allowed as a deduction.
• Capital Expenditure: Capital Expenditure will be allowed in 5 years in equal installments commencing
from the PY in which it is incurred.
DEDUCTION OF BANKING CASH TRANSACTION TAX PAID [Section 36(1)(xiii)]
Any amount of Banking Cash Transaction Tax paid by assessee during the previous year on the taxable baking
transactions entered shall be allowed as deduction.
DEDUCTION OF SECURITIES TRANSACTION TAX PAID [Section 36(1)(xv)]
The amount of STT paid by the assessee during the year in respect of taxable securities transactions entered into
in the course of business shall be allowed as deduction.[In CG, benefit of STT is not available to investor]
DEDUCTION OF COMMODITIES TRANSACTION TAX PAID [Section 36(1)(xvi)]
The amount of CTT paid by the assessee during the year in respect of taxable commodities transactions entered
into in the course of business shall be allowed as deduction , if the income arising from such taxable commodities
transactions is included in the income computed under the head “Profits and gains of business or profession”.
CA Suraj Agrawal
PGBP 9.23
Residuary Expenses [Section 37]

Revenue expenditure incurred for purposes of carrying on the business, profession or vocation:
• This is a residuary section under which only business expenditure is allowable but not the business
losses, e.g., those arising out of embezzlement, theft, destruction of assets, misappropriation by
employees etc. (Business Losses are allowable under section 29 as losses incidental to the business).
• The deduction is limited only to the amount actually expended and does not extend to a reserve created
against a contingent liability.
Conditions for allowance:

a) The expenditure should not be of the nature described in sections 30 to 36.
b) It should have been incurred by the assessee in the accounting year.
c) It should be in respect of a business carried on by the assessee the profits of which are being computed
and assessed.
d) It must have been incurred after the business was set up.
e) It should not be in the nature of any personal expenses of the assessee.
f) It should have been laid out or expended wholly and exclusively for the purposes of such business.
g) It should not be in the nature of capital expenditure.
h) The expenditure should not have been incurred by the assessee for any purpose which is an offence or is
prohibited by law.
Allowable Expenditure u/s 37 under specific instructions of CBDT:

a) Diwali and Muharat Expenses.
b) Telephone Deposit paid under Tatkal Telephone Deposit Scheme
c) Expenditure on Fluorescent Tubes including wiring and fitting expenditure - Initial expenditure is of capital
nature but all replacement expenditure should be treated as revenue nature.
d) Insurance Premium paid on account of loss of profits.
e) Lagan or mahamai contribution collection by the Trade Association from their Members, on the business
transactions.
f) Annual Listing Fees paid to Stock Exchange.
g) Commitment Charges paid by Borrower to Lender.
h) Training Expenditure.
i) Expenditure incurred by business concern on civil defence measures.
j) Professional Tax paid.
LOSSES ALLOWABLE AS DEDUCTION:

a) Loss on account of embezzlement, in the previous year in which embezzlement is discovered.
b) Loss caused by forfeiture of Security Deposits given at the time of submission of tenders for supply of
goods.
c) Loss of Stock-in-Trade by fire and other natural calamities, or due to negligence of the employees or due to
enemy action, or in transit.
d) Loss on account of robbery or theft, provided it is in the course of business and incidental to the trade
whichever trade it is.
e) Loss caused by non-recovery of advances made in course of business, provided it is a Trading Loss
f) Loss caused on account of fluctuations in exchange rate, at the time of remitting the money for purchase of
raw material,
g) Loss caused due to breach of contract for delivery of goods by either party.
CA Suraj Agrawal
PGBP 9.24
LOSSES NOT ALLOWABLE AS DEDUCTION:
1) Loss relating to any business or profession discontinued before the commencement of the previous year.
2) Violation of law is not a normal incident of trade and an expense incurred by way of penalty for infraction of
laws is not deductible.
3) Loss incurred due to damage, destruction, etc. of capital assets.
4) Loss which is not incidental to the carrying on of the business of the assessee
5) Loss due to sale of securities held as Investments.
6) Loss caused by forfeiture of advances given for purchase of Capital Assets.
7) Anticipated losses of subsequent years cannot be allowed as a deduction in the current year.
DEDUCTIBILITY OF PENALTIES & INTEREST UNDER VARIOUS LAWS

1. Penalty for infraction of any law: Not deductible
Exception:
a) If penalty is in nature of compensation – Allowable as deduction
b) Penalty for breach of Contract – Allowable as deduction since there is no infraction of any law.
2. Interest paid under any other law – Allowable as a deduction if interest is compensatory in nature
– If interest is in nature of penalty then no deduction is allowable.
Note: Penal interest paid to bank is allowable as deduction since penal interest is payable as per the
agreement between banker and borrower. There is no infraction of law.
3. Interest paid under Income-tax Act – Not allowable as deduction
4. Interest on loan taken to pay the income-tax is not allowable as deduction.
ALLOWABILITY OF CERTAIN EXPENSES

1. Dividend and Dividend distribution tax u/s 115O is not allowed as deduction.
2. Income tax, surcharge & education cess is not allowable as deduction.
3. Provision for unascertained liability is not allowable as deduction.
4. Prior period expenses are not allowable as deduction, but they are allowable if liability to pay crystallized
during the previous year. (Ex: Increased salary is paid in current year under increased pay commission
policy).
Advertisements in Publication of political parties – SECTION 37(2B)

Section 37(2B) disallows any deduction on account of expenditure incurred on advertisement in any souvenir,
brochure, tract or the like published by any political party, whether it is registered with the Election Commission of
India or not, made by any person carrying on business or profession in computing the profits and gains of the
business or profession.
However, a deduction for the same or/and similar expenditure is allowed under Section 80GGB and
80GGC.
Deduction to Indian Companies for Donation to Political Parties etc [Section 80GGB]
Indian Company is allowed to claim 100% deduction for any sum contributed in the previous year to any political
party or to Electoral Trust.
Deduction to Any Person for Donation to Political Parties etc [Section 80GGC]
100% Deduction from GTI is allowed to any person(Except Indian Company, Local Authority and any
Artificial Judicial Authority wholly or partially funded by government) for any sum contributed in the previous
year to any Political Party or Electoral Trust.
[Contribution u/s 80GGB & 80GGC must be made in mode other than cash]
CA Suraj Agrawal
PGBP 9.25
Example:
During the P.Y. 2019-20, ABC Ltd., an Indian company,
(1) contributed a sum of ` 2 lakh to an electoral trust; and
(2) incurred expenditure of ` 25,000 on advertisement in a brochure of a political party.
Is the company eligible for deduction in respect of such contribution/expenditure, assuming that the
contribution was made by cheque? If so, what is the quantum of deduction?
Solution
An Indian company is eligible for deduction under section 80GGB in respect of any sum contributed by it in the
previous year to any political party or an electoral trust. Further, the word “contribute” in section 80GGB has the
meaning assigned to it in Companies Act, and accordingly, it includes the amount of expenditure incurred on
advertisement in a brochure of a political party.
Therefore, ABC Ltd. is eligible for a deduction of ` 2,25,000 under section 80GGB in respect of sum of ` 2 lakh
contributed to an electoral trust and ` 25,000 incurred by it on advertisement in a brochure of a political party.
It may be noted that there is a specific disallowance under section 37(2B) in respect of expenditure incurred on
advertisement in a brochure of a political party. Therefore, the expenditure of ` 25,000 would be disallowed while
computing business income/gross total income. However, the said expenditure incurred by an Indian company is
allowable as a deduction from gross total income under section 80GGB.
Disallowance of CSR expenditure
(i) For the purposes of Section 37(1), any expenditure incurred by an assessee on the activities relating
to Corporate Social Responsibility referred to in Section 135 of the Companies Act, 2013 shall not be
deemed to have been incurred for the purpose of business and hence, shall not be allowed as
deduction under section 37.
(ii) The rationale behind the disallowance is that CSR expenditure, being an application of income, is not incurred
wholly and exclusively for the purposes of carrying on business.
(iii) However, CSR expenditure, which is of the nature described in sections 30 to 36, shall be allowed as
deduction under those sections subject to fulfillment of conditions, if any, specified therein.
CA Suraj Agrawal
PGBP 9.26
INADMISSIBLE DEDUCTIONS [SECTION 40]
Section 40(a)(i)–Non-compliance of provisions of TDS where payment is made to Non-
Resident or to any person outside India
No Deduction will be allowed where any Interest, Royalty, Fees for technical services or other sum
chargeable under this Act, which is payable, -
(i) outside India;
(ii) in India to a Non-Resident, not being a Company or to a Foreign Company,
on which tax is deductible at source and such tax has not been deducted or, after deduction, has not
been paid on or before the due date specified in section 139(1).
However, it is provided that where in respect of any such sum, tax has been deducted in any subsequent
year, or has been deducted during the previous year but paid after the due date specified in Section 139(1),
such sum shall be allowed as a deduction in computing the income of the previous year in which such tax
has been paid.
In case, assessee fails to deduct the whole or any part of tax on any such sum but is not
deemed as assessee in default under the first proviso to section 201(1) by reason that such
payee –
i. has furnished his return of income under section 139;
ii. has taken into account such sum for computing income in such return of income; and
iii. has paid the tax due on the income declared by him in such return of income, and the
payer furnishes a certificate to this effect from an accountant in such form as may be
prescribed,
it would be deemed that the assessee has deducted and paid the tax on such sum on the
date on which return of income has been furnished by the payee.
Note: Since the date of furnishing the return of income by the payee is taken to be the date
on which the payer has deducted tax at source and paid the same, such
expenditure/payment in respect of which the payer has failed to deduct tax at source shall
be disallowed under section 40(a)(i) in the year in which the said expenditure is incurred.
However, such expenditure will be allowed as deduction in the subsequent year in which
the return of income is furnished by the payee, since tax is deemed to have been deducted
and paid by the payer in that year.
Example:
Date on which TDS Actual Date of Time limit as per Date of Payment Previous year
should have been Deduction section 200(1) of TDS in which
deducted deductible
26.06.2019 26.06.2019 07.07.2019 07.07.2019 2019-2020
26.07.2019 26.07.2019 07.08.2019 02.09.2019 2019-2020
31.03.2020 31.03.2020 30.04.2020 30.04.2020 2019-2020
31.03.2020 31.03.2020 30.04.2020 30.12.2020 2020-2021
16.05.2019 16.05.2019 07.06.2019 Not Deposited Not Deductible
10.06.2019 20.04.2020 07.07.2019 20.07.2022 2022-2023
CA Suraj Agrawal
PGBP 9.27
Section 40(a)(ia) – Non-compliance of provisions of TDS where payment is
made to Resident in India
30% of any sum payable (paid or payable during the PY) to a Resident on which tax is deductible at
source, shall be disallowed if-
(i) such tax has not been deducted; or
(ii) such tax, after deduction, has not been paid on or before the due date specified in section 139(1).
Tax Points:
1) However, it is provided that where in respect of any such sum, tax has been deducted in any subsequent
year, or has been deducted during the previous year but paid after the due date specified in Section 139(1),
30% of such sum shall be allowed as a deduction in computing the income of the previous year in which
such tax has been paid.
2) If tax has not been deducted & the deductor is able to establish that the payee has furnished the return of
income by including such income in his return and paid tax due on income declared by him in such return of
income, it shall be deemed that the assessee has deducted and paid tax on such income on the date of
furnishing return of income by the resident payee
Example:
XYZ Ltd. made the following payments in the month of March 2020 to residents without deduction of tax
at source. What would be the tax consequence for A.Y. 2020-21, assuming that the resident payees in all
the cases mentioned below, have not paid the tax, if any, which was required to be deducted by XYZ Ltd.?
Salary to its employees 15,00,000
Non-compete fees to Mr. X 70,000
Directors’ remuneration 25,000
Would your answer change if XYZ Ltd. has deducted tax on the above in April, 2020 from subsequent
payments made to these persons and remitted the same in July, 2020?
Answer
Non-deduction of tax at source on any payment on which tax is deductible as per the provisions of Chapter
XVII-B would attract disallowance under section 40(a)(ia). Therefore, non-deduction of tax at source on salary
payment on which tax is deductible under section 192 and non-compete fees and directors’ remuneration on
which tax is deductible under section 194J, would attract disallowance@30% of sum paid under section
40(a)(ia). Therefore, the amount to be disallowed under section 40(a)(ia) while computing business income for
A.Y.2020-21 is as follows –
Particulars Amount Disallowance
paid u/s 40(a)(ia) @
30% of sum paid
(1) Salary [tax is deductible under section 192] 15,00,000 4,50,000
(2) Non-compete fees to Mr. X [tax is deductible under section 194J] 70,000 21,000
(3) Directors’ remuneration
[tax is deductible under section 194J without any threshold limit] 25,000 7,500
Disallowance under section 40(a)(ia) 4,78,500

If the tax is deducted and paid in the next year i.e., P.Y.2020-21, the amount of ` 4,78,500 would be allowed
as deduction while computing the business income of A.Y. 2021-22.
Section 40(a)(iii)
Any sum which is chargeable under the head ‘Salaries’ shall be disallowed if it is payable outside India or
to a non-resident in India and if the tax has not been paid thereon nor deducted there from within the time
prescribed under the Act.
[Once paid without deduction of TDS, deduction can never be claimed even if tax is later deducted and
paid]
Section 40(a)(v)– Any Tax on the value of perquisite provided to the employee paid by the employer u/s
10(10CC), shall not be allowed as deduction.
CA Suraj Agrawal
PGBP 9.28
EXPENSES OR PAYMENTS NOT DEDUCTIBLE IN

CERTAIN CIRCUMSTANCES [SECTION 40A]
Excess Payments to Relatives and Associates – Section 40A(2)
A. Where the assessee incurs any expenditure in respect of which a payment has been or is to be made to
Specified Person, so much of the expenditure as is considered to be excessive or unreasonable (having
regard to FMV of goods, services / Legitimate needs of business) shall be disallowed by the Assessing
Officer.
B. Specified person means:
For the Assessee Specified Person means

An Individual Relative
A person in whose business/profession the individual has substantial interest
A Company Any director of the company, partner of the firm, or member of the association or
/Firm/AOPs/HUF family, or any relative of such director, partner or member
A person in whose business/profession the assessee or above individuals have
substantial interest
Any Assessee - An individual who has a substantial interest in the business or profession
or any relative of such individual
- a Company, Firm, AOPs or HUF having a substantial interest in the
business or profession of the assessee or any director, partner or
member of such Company, Firm, AOPs or HUF, or any relative of such
director, partner or member, or any other company carrying on business
or profession in which the first mentioned company has substantial
interest
- a Company, Firm, AOPs or HUF of which a director, partner or member,
as the case may be, has a substantial interest in the business or
profession of the assessee; or any director, partner or member of such
company, firm, association or family or any relative of such director, partner
or member;
C. The word “relative” as defined in the section 2(41) of the Act, means, in relation to individual, the spouse,
brother or sister or any lineal ascendant or descendant of that individual.
D. A person shall be deemed to have a substantial interest in a business or profession if:

- in a case where the business or profession is carried on by a company, such person is, at any
time during the previous year, the beneficial owner of equity shares carrying not less than 20% of
the voting power and
- in any other case such person is, at any time during the previous year, beneficially entitled to not
less than 20% the profits of such business or profession.
E. Amount disallowed under section 40A(2) is however taxable as income in the hands of recipient.
CA Suraj Agrawal
PGBP 9.29
SECTION 41 – DEEMED INCOME/PROFITS CHARGEABLE TO TAX
EXCEPTION TO THE RULE THAT INCOME FROM BUSINESS CAN BE ASSESSED ONLY IF THE
BUSINESS IS CARRIED ON DURING THE PREVIOUS YEAR:
Section 41(1): Recovery against any deduction
A. Conditions:
1. Where an allowance or deduction is allowed in any assessment year in respect of loss,
expenditure or trading liability incurred by the assessee and
2. subsequently during any previous year such assessee has obtained, whether in cash or in any
other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in
respect of such trading liability by way of remission or cessation thereof,
B. Treatment: the amount obtained or benefit accrued shall be deemed to be profits and gains of business
or profession and accordingly chargeable to income-tax as the income of that previous year.
C. Tax Points: Where such benefit has been obtained by the successor in business, such benefit shall be
taxable in the hands of successor.
Section 41(2) – Balancing Charges
Section 41(3) –Any amount realised on transfer of an asset used for scientific research is taxable as business
income to the extent of deduction allowed u/s 35 in the year in which the transfer takes place.
Section 41(4) –Any amount recovered by the assessee against bad debt earlier allowed as deduction shall be
taxed as income in the year in which it is received.
Section 41(4A) - The withdrawal from special reserve created and maintained under section 36(1)(viii) will be
deemed to be profits and gains of business and charged accordingly in the year of withdrawal. Even if the
business is closed, it will be deemed to be in existence for this purpose.
Section 41(5)- Adjustment of loss - Generally, loss of a business cannot be carried forward after 8 years.
An exception is, however, provided by section 41(5), This exception is applicable if the following
condition are satisfied:
Condition 1 The business or profession is discontinued.

Condition 2 Loss of such business or profession pertaining to the year in which it is discontinued could
not be set-off against any other income.
Condition 3 Such business is not speculation business.
Condition 4 After discontinued of such business or profession, there is a receipt which is deemed as
business income under section 41(1), (3), (4) or (4A).
The unabsorbed loss pertaining to the year in which business/profession was discontinued is permitted
to be set off against notional business income under section 41(1), (3), (4) or (4A) even after 8 years. It can
be set off even if the return of the loss is not submitted in time.
Ques: A business (not being a speculation business) is discontinued on December 10, 1988. At the time
there is unadjusted business loss of ` 35,000 (i.e., ` 10,000 of the previous year 1987-88 and ` 25,000
pertaining to the period commencing on April 1, 1988 and ending on December 10, 1988). On May 20,
2019, the assessee recovers a debt of ` 48,000 from a debtor which was allowed as bad debt in 1987-88.
Find out the notional profit chargeable to tax for the previous year 2019-20 under section 41.
Solution:
Recovery of bad debt earlier allowed as bad debt [chargeable to tax under Section 41(4)
In spite of the fact that the business was discontinued on December 10, 1987] 48,000
Less: Unabsorbed business loss of the previous year in which the business was discontinued
(i.e., April 1, 1988 to December 10, 1988) by virtue of section 41(5) 25,000
Business income chargeable to tax for the assessment year 2020-21 23,000
CA Suraj Agrawal
PGBP 9.30
Recovery after discontinuance of Business or Profession [Sec. 176]:
Any sum received after the discontinuance of the business or profession is deemed to be business or
profession income of the recipient and charged to tax in the year of receipt.
CONTRIBUTIONS TO PROVIDENT AND OTHER FUNDS

CONTRIBUTION TO THE EMPLOYEES’ PROVIDENT AND OTHER FUNDS ARE ALLOWABLE SUBJECT TO
THE FOLLOWING CONDITIONS: [36(1)(iv) & (v)]
(i) In case of Provident or a superannuation or a Gratuity Fund, it should be one recognised or approved under
the Income-tax Act.
(ii) The amount contributed should be periodic payment and not an adhoc payment to start the fund.
(iii) The fund should be for exclusive benefit of the employees.
The nature of the benefit available to the employees from the fund is not material; it may be pension, gratuity or
provident fund.
Provisions of Section 43B will be applicable while allowing deduction.
AMOUNT RECEIVED BY ASSESSEE AS CONTRIBUTION FROM HIS EMPLOYEES TOWARDS THEIR

WELFARE FUND TO BE ALLOWED ONLY IF SUCH AMOUNT IS CREDITED ON OR BEFORE DUE DATE:
Section 36(1)(va) and Section 57 provide that deduction in respect of any sum received by the taxpayer as
contribution from his employees towards any welfare fund of such employees [Such sum is income u/s 2(24)] will
be allowed
“only if such sum is credited by the taxpayer to the employee’s account in the relevant fund
on or before the due date. [Within 15 days of the close of every month. No Grace Period]”
DISALLOWANCE OF PROVISION FOR GRATUITY – SECTION 40A(7)
Section 40A(7) provides any provision for Gratuity made by the assessee is not allowed deduction.
However, no such disallowance would be made if

(a) it is made towards contribution to an approved gratuity fund or,
(b) for the purpose of making payment of any gratuity that has become payable
[However, the deduction allowed shall be subject to the provisions of Section 43B]
CONTRIBUTIONS BY EMPLOYERS TO FUNDS, TRUST ETC. [SECTIONS 40A (9) TO (11)]
No deduction will be allowed where the assessee pays in his capacity as an employer, any sum towards setting
up or formation of or as contribution to any fund, trust, company, association of persons, body of individuals,
society etc. other than funds covered by sections 36(1)(iv), 36(1)(iva) and 36(1)(v), then the deduction will
not be denied.
CA Suraj Agrawal
PGBP 9.31
MAINTENANCE OF BOOKS OF ACCOUNTS [SECTION 44AA&
Rule 6F]
A. In case of Specified Professionals: [Subject to Section 44ADA]
(i) Every person carrying on the specified profession shall keep and maintain the specified books of
account:
a) if his gross receipts exceed ` 1,50,000 in each of the 3 years immediately preceding the previous
year; or
b) if, where the profession has been newly set up in the previous year, his gross receipts are likely to
exceed ` 1,50,000 in that year.
(ii) Specified Professions are:
(a) Legal (b) Accountancy (c) Company Secretary

(d) Medical (e) Engineering (f) Architectural
(g) Information Technology (h) Interior Decorator (i) Film Artist
(j) Technical Consultancy (k) Authorised Representative
(iii) Specified Books of Accounts:
a) a Cash Book;
b) a journal, if mercantile basis is being followed.
c) a ledger;
d) Carbon copies of bills and receipts issued where sums exceeds ` 25;
e) Original bills for expenditure exceeding ` 50.
f) In case of a person carrying on medical profession, he will be required to maintain the
following in addition to the list given above:
I. a Daily Cash Register in Form 3C.

II. Inventory records of drugs, medicines and other consumable accessories used for his
profession.
B. In case of Other Profession or Business:
Every taxpayer carrying on any business or profession (other than the professions specified above) must
maintain the books of account prescribed by the CBDT in the following circumstances:
I. in cases where the income from the business or profession exceeds ` 1,20,000 or the total sales
turnover or gross receipts, as the case may be, in the business or profession exceed ` 10,00,000 in any
one of three years immediately preceding the accounting year; or
For an Individual/HUF assessee, the above limit is ` 250,000 & ` 25,00,000.
II. in cases where the business or profession is newly set up in any previous year, if his income from
business or profession is likely to exceed ` 1,20,000 or his total sales turnover or gross receipts, as the
case may be, in the business or profession are likely to exceed ` 10,00,000 during the previous year
For an Individual/HUF assessee, the above limit is ` 250,000 & ` 25,00,000.
III. in cases deemed profit u/s 44AE or 44BB or 44BBB and the assessee has claimed that his income is
lower than the profits or gains so deemed to be the profits and gains of his business.
IV. Where the provisions of Section 44AD(4) are applicable & Income exceeds the maximum amount
which is not chargeable to income-tax in any PY
CA Suraj Agrawal
PGBP 9.32
COMPULSORY AUDIT OF ACCOUNTS [SECTION 44AB]
1. Applicability: It is obligatory in the following cases for a person carrying on business or profession to get his
accounts audited:
a) Business: if the total sales, turnover or gross receipts in business exceeds ` 1 Crores in any
previous year; or
Section 44AB is amended to exclude the eligible person covered in Section 44AD
b) Profession: if the gross receipts in profession exceeds ` 50 lakh in any previous year; or
c) Business covered u/s 44AE/44BB/44BBB: if the assessee claims that his income is lower than the
profits and gains computed on a presumptive basis.
d) Profession covered u/s 44ADA: If he claims that his income is lower than the profits and gains
computed on a presumptive basis and his income exceeds the basic exemption limit.
e) Business where Section 44AD(4) is applicable:
Where the provisions of Section 44AD(4) are applicable & Income exceeds the maximum
amount which is not chargeable to income-tax in any PY
2. Report & Form: The Assessee is required to get his accounts of such previous year audited by a Chartered
Accountant before the specified date and report thereof is furnished in prescribed forms.
Specified Date:
(a) Where the assessee has under taken any international transaction as per Section 92B or specified
th
domestic transaction as per section 92BA: 30 November of the relevant AY
th
(b) In any other case: 30 September of the relevant AY
3. Consequence for non-compliance:

Section 271B provides for penal action for not getting the accounts audited and for not filing the audit report
by the specified date. Penalty being lower of the following:
(a) ½ percent of turnover or gross receipt; or
(b) ` 150,000.
4. This Section does not apply to a person who derives income of the nature referred to in sections 44B and
44BBA
Section 44AB makes it obligatory for every person carrying on business to get his accounts of any
previous year audited if his total sales, turnover or gross receipts exceed ` 1 Cr. However, if an
eligible person opts for presumptive taxation scheme as per section 44AD(1), he shall not be
required to get his accounts audited if the total turnover or gross receipts of the relevant previous
year does not exceed ` 2 Cr.
The CBDT has clarified that the higher threshold for non-audit of accounts has been given
only to assessees opting for presumptive taxation scheme under section 44AD.
CA Suraj Agrawal
PGBP 9.33
PRESUMPTIVE INCOME IN CASE OF SPECIFIC BUSINESS OR
PROFESSION [Section 44AD/Section 44AE]
44AD 44AE
Eligible Assessee Resident Individual/HUF/Firm, but not Any Assessee
a LLP&
has not claimed deduction u/s 10AA or
other Income Based Deduction under
chapter VIA
Eligible Business Any business except the business of Business of Plying, hiring or leasing of
Section 44AE; & Good carriage where the Assessee is
owning not more than 10 Goods
whose turnover/gross receipts does not Carriage at any time during the previous
exceed ` 2 Crores year.
Amount of 8% of total turnover or gross receipts In case of HEAVY GOODS VEHICLE
Presumptive Income or higher sum (Gross Vehicle Weight exceeds 12000
kilograms)
[6% in case payment is received by
account payee cheque/draft/use of
` 1,000 per ton of gross vehicle weight
electronic clearing system through a
or unladen weight, as the case may be,
bank account or through such other for every month or part of a month
prescribed electronic modes AND during which the heavy goods vehicle is
payment is received during the year or owned by the assessee in the previous
before the due date of ROI] year
OTHER THAN HEAVY GOODS VEHICLE:
` 7,500 for every month or part of a month
[For each vehicle owned by Assessee-

Hire Purchase/installment]
“A higher income can also be declared

as per books”
Provisions of Advance Advance tax is required to be paid by Applicable

th
Tax 15 March – 100% in 1 installment)
Effect if the assessee If Section 44AD(4) is applicable, he An assessee can declare his income lower
declares lower will have to: than the prescribed, he will have to:
Income:
a. Maintain books of account and other
a. Maintain books of account and other
documents as required u/s 44AA if
documents as required u/s 44AA and
his total income exceeds the
maximum exemption limit; and
b. Get his accounts audited and furnish a
report of such audit as prescribed u/s
b. Get his accounts audited and furnish
44AB
a report of such audit as prescribed
u/s 44AB if his total income
exceeds the maximum exemption
limit. [Section 44AD(5)]
Common Note:
1. Deduction u/s 30 to 38: The assessee will be deemed to have been allowed the deductions under
sections 30 to 38. No further Deduction is allowed.
2. Deduction u/s 40(b) for assessee covered u/s 44AE: Where the assessee is a firm, the salary and
interest paid to its partners shall be deducted from the income computed above subject to the conditions
and limits specified in clause (b) of section 40. [No Such Deduction from AY 17-18 for assessee
covered u/s 44AD & 44ADA]
CA Suraj Agrawal
PGBP 9.34
3. Depreciation: Depreciation is deemed to have been allowed. The WDV of asset will be calculated, as if
depreciation has been allowed.
4. Section 44AD & 44AEoverrides Section 28 to 43C but does not override Chapter VI & Chapter VIA:
Therefore, the set off of current year losses & brought forward losses and deductions under chapter VIA are
available against the income deemed under this section. However, current year and brought forward
depreciation cannot be set off against the deemed income since that is governed by section 32.
5. The provisions of Section 44AD is not applicable in following cases:
a. A person carrying on specified profession as referred to in Section 44AA;
b. A person earning income in the nature of commission or brokerage; or
c. A person carrying on any Agency Business.
6. Where an eligible assessee declares profit for any PY as per this section and he declares profit for any of
the 5 consecutive AYs relevant to the PY succeeding such PY not as per Section 44AD, he shall not
be eligible to claim the benefit of the provisions of this section for 5 AYs subsequent to the AY
relevant to the PY in which the profit has not been declared as per the Sec 44AD [Sec 44AD (4)]
7. An eligible assessee to whom the provisions of Section 44AD(4) are applicable and whose total income
exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and
maintain such books of account and other documents as required under section 44AA and get them
audited and furnish a report of such audit as required under section 44AB. [Sec 44AD (5)]
Example:
Let us consider the following particulars relating to a resident individual, Mr. A, being an eligible assessee
whose gross receipts do not exceed ` 2 crore in any of the assessment years between AY 2020-21 to AY
2022-23
Particulars AY 2020-21 AY 2021-22 AY 2022-23
Gross receipts (Cash Sales) 1,80,00,000 1,90,00,000 2,00,00,000
Income offered for taxation 14,40,000 15,20,000 12,00,000
% of gross receipts 8% 8% 6%
Offered income as per presumptive Yes Yes No

taxation scheme u/s 44AD
In the above case, Mr. A, an eligible assessee, opts for presumptive taxation under section 44AD for AY 2020-
21 and AY 2021-22 and offers income of ` 14.40 lakh and ` 15.20 lakh on gross receipts of ` 1.80 crore and `
1.90 crore, respectively. However, for AY 22-23, he offers income of only ` 12 lakh on turnover of ` 2 crore,
which amounts to 6% of his gross receipts. He maintains books of account under section 44AA and gets the
same audited under section 44AB.
Since he has not offered income in accordance with the provisions of section 44AD(1) for five consecutive
assessment years, after AY 2020-21, he will not be eligible to claim the benefit of section 44AD for next five
assessment years succeeding AY 2022-23 i.e., from AY 2023-24 to 2027-28.
CA Suraj Agrawal
PGBP 9.35
Example:
Mr. Praveen engaged in retail trade, reports a turnover of ` 1,98,50,000 for the financial year 2019-20. His
income from the said business as per books of account is ` 13,20,000 computed as per the provisions of
Chapter IV-D “Profits and gains from business or Profession” of the Income-tax Act, 1961. Retail trade is
the only source of income for Mr. Praveen. A.Y. 2019-20 was the first year for which he declared his
business income in accordance with the provisions of presumptive taxation under section 44AD.
i. Is Mr. Praveen also eligible to opt for presumptive determination of his income chargeable to tax for
the assessment year 2020-21?
ii. If so, determine his income from retail trade as per the applicable presumptive provision assuming
that whole of the turnover represents cash receipts.
iii. In case Mr. Praveen does not opt for presumptive taxation of income from retail trade, what are his
obligations under the Income-tax Act, 1961?
iv. What is the due date for filing his return of income under both the options?
Solution:
i. Yes. Since his total turnover for the F.Y. 2019-20 is below ` 200 lakhs, he is eligible to opt for presumptive
taxation scheme under section 44AD in respect of his retail trade business.
ii. His income from retail trade, applying the presumptive tax provisions under section 44AD, would be
` 15,88,000, being 8% of ` 1,98,50,000.
iii. Mr. Praveen had declared profit for the previous year 2018-19 in accordance with the presumptive
provisions and if he does not opt for presumptive provisions for any of the five consecutive assessment
years i.e., A.Y. 2020-21 to A.Y. 2024-25, he would not be eligible to claim the benefit of presumptive
taxation for five assessment years subsequent to the assessment year relevant to the previous year in
which the profit has not been declared in accordance the presumptive provisions i.e. if he does not opt for
presumptive taxation in say P.Y. 2019-20, then he would not be eligible to claim the benefit of presumptive
taxation for A.Y. 2021-22 to A.Y. 2025-26.
Consequently, Mr. Praveen is required to maintain the books of accounts and get them audited under
section 44AB, since his income exceeds the basic exemption limit.
st
iv. In case he opts for the presumptive taxation scheme under section 44AD, the due date would be 31 July,
2020. In case he does not opt for presumptive taxation scheme, he is required to get his books of account
audited, in which case the due date for filing of return of income would be 30th September, 2020.
PRESUMPTIVE INCOME IN CASE OF NOTIFIED PROFESSIONALS

SECTION 44ADA
Eligible Assessee Resident Assessee engaged in Notified Profession as per Section 44AA
Eligible profession Total Gross receipts does not exceed ` 50 Lakhs
Amount of Presumptive 50% of gross receipts or higher sum

Income
Effect if the assessee a. Maintain books of account and other documents as required u/s 44AA if his
declares lower Income: total income exceeds the maximum exemption limit; and
b. Get his accounts audited and furnish a report of such audit as prescribed u/s
44AB if his total income exceeds the maximum exemption limit.
Common Note:
1. Deduction u/s 30 to 38: The assessee will be deemed to have been allowed the deductions under
sections 30 to 38. No further Deduction is allowed.
2. Depreciation: Depreciation is deemed to have been allowed. The WDV of asset will be calculated, as if
depreciation has been allowed.
CA Suraj Agrawal
PGBP 9.36
3. Section 44ADA overrides Section 28 to 43C but does not override Chapter VI & Chapter VIA:
Therefore, the set off of current year losses & brought forward losses and deductions under chapter VIA are
available against the income deemed under this section. However, current year and brought forward
depreciation cannot be set off against the deemed income since that is governed by section 32.
Note: Advance Tax provisions are applicable (similar to Section 44AD)

Advance tax is payable to the extent of the whole amount of such advance tax during each financial year
on or before the 15th March (only 1 installment of 100%)
Computation of income under the head "Profits and gains of business or profession" for
transfer of immovable property in certain cases [Sec. 43CA]
1. Section 43CA provides that where the consideration for the transfer of an asset (other than capital asset),
being land or building or both, is less than the stamp duty value, the SDV shall be deemed to be the full value
of the consideration for the purposes of computing income under the head "Profits and gains of business or
profession".
Following proviso shall be inserted in sub-section (1) of section 43CA by the Finance Act, 2018, w.e.f.
1-4-2018:
Provided that where the value adopted or assessed or assessable by the authority for the purpose of
payment of stamp duty does not exceed 105% of the consideration received or accruing as a result of
the transfer, the consideration so received or accruing as a result of the transfer shall, for the
purposes of computing profits and gains from transfer of such asset, be deemed to be the full value
of the consideration.
2. When date of agreement and date of registration are not same:

SDV may be taken as on the date of the agreement for transfer and not as on the date of registration for such
transfer if amount of consideration (or a part thereof) for the transfer has been received by way of an
account payee cheque or an account payee bank draft or by use of electronic clearing system through
a bank account or through such other prescribed electronic modes on or before the date of the
agreement.
3. Can an assessee challenge stamp duty valuation – Yes. In that case, VO will be appointed.
Example:
Mr. Hari, a property dealer, sold a building in the course of his business to his friend Rajesh, who is a
dealer in automobile spare parts, for ` 90 lakh on 1.1.2020, when the stamp duty value was ` 150 lakh.
The agreement was, however, entered into on 1.7.2019 when the stamp duty value was ` 140 lakh. Mr.
Hari had received a down payment of ` 15 lakh by cheque from Rajesh on the date of agreement. Discuss
the tax implications in the hands of Hari and Rajesh, assuming that Mr. Hari has purchased the building
for ` 75 lakh on 12th July 2018.
Would your answer be different if Hari was a share broker instead of a property dealer.
Answer
Case 1: Tax implications if Mr. Hari is a property dealer
In the hands of Mr, Hari In the hands of Mr. Rajesh

In the hands of Hari, the provisions of section 43CA Since Mr. Rajesh is a dealer in automobile
would be attracted. Therefore, ` 65 lakh, being the spare parts, the building purchased would be a
difference between the stamp duty value on the date capital asset in his hands. The provisions of
of agreement (i.e., ` 140 lakh) and the purchase section 56(2)(x) would be attracted in the hands
price (i.e., ` 75 lakh), would be chargeable as of Mr. Rajesh who has received immovable
business income in the hands of Mr. Hari. property, being a capital asset, for inadequate
consideration. Therefore, ` 50 lakh, being the
difference between the stamp duty value of the
property (i.e. `140 lakh) and the actual
consideration (i.e. ` 90 lakh) would be taxable
under section 56(2)(x) in the hands of Mr.
Rajesh.
CA Suraj Agrawal
PGBP 9.37
Case 2: Tax implications if Mr. Hari is a stock broker
In the hands of Mr, Hari In the hands of Mr. Rajesh

In case Mr. Hari is a stock broker and not a property There would be no difference in the taxability in
dealer, the building would represent his capital asset the hands of Mr. Rajesh, whether Mr. Hari is a
and not stock-in-trade. In such a case, the provisions property dealer or a stock broker.
of section 50C would be attracted in the hands of Mr.
Hariand ` 65 lakh, being the difference between the Therefore, the provisions of section 56(2)(x)
stamp duty value on the date of registration (i.e., ` would be attracted in the hands of Mr. Rajesh
140 lakh) and the purchase price (i.e., ` 75 lakh) who has received immovable property, being a
would be chargeable as short-term capital gains. capital asset, for inadequate consideration.
It may be noted that under section 50C, there is an Therefore, ` 50 lakh, being the difference
option to adopt the stamp duty value on the date between the stamp duty value of the property
of agreement, if the date of agreement is different (i.e. ` 140 lakh) and the actual consideration (i.e.
from the date of registration and part of the ` 90 lakh) would be taxable under section
consideration has been received on or before the 56(2)(x) in the hands of Mr. Rajesh.
date of agreement otherwise than by way of cash.
Method of Accounting [Section 145]

1. Income chargeable under the head "Profits and gains of business or profession" or "Income from other
sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or
mercantile system of accounting regularly employed by the assessee.
2. The Central Government may notify in the Official Gazette from time to time Income Computation and
Disclosure Standards (ICDSs) to be followed by any class of assessees or in respect of any class of
income.
3. Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the
assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by
the assessee, or income has not been computed in accordance with the standards notified under sub-section
(2), the Assessing Officer may make an assessment in the manner provided in section 144.
Taxability of certain income [Section 145B] – New Section w.r.e.f. AY 17-18 (FA 2018)
1. Notwithstanding anything to the contrary contained in Section 145, the interest received by an assessee
on any compensation or on enhanced compensation, as the case may be, shall be deemed to be the
income of the previous year in which it is received.
2. Any claim for escalation of price in a contract or export incentives shall be deemed to be the income of
the previous year in which reasonable certainty of its realisation is achieved.
3. The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income
of the previous year in which it is received, if not charged to income-tax in any earlier previous year.
Income as referred in Section 2(24)(xviii)

Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement (by whatever name called) by the Central Government or a State
Government or any authority or body or agency in cash or kind to the assessee other than-
a. the subsidy or grant or reimbursement which is taken into account for determination of the actual
cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or
b. the subsidy or grant by the Central Government for the purpose of the corpus of a trust or
institution established by the Central Government or a State Government, as the case may be;
CA Suraj Agrawal
PGBP 9.38
Class Notes
CA Suraj Agrawal
PGBP Income 9A.1
Problems under the head “PGBP”

1. A car purchased by Dr. Suman on 10.08.2017 for ` 5,25,000 for personal use is brought into professional use
on 1.07.2019 by him, when its market value was ` 2,50,000. Compute the actual cost of the car and the
amount of depreciation for the assessment year 2020-21 assuming the rate of depreciation to be 15%.
2. Mr. Praveen Kumar has furnished the following particulars relating to payments made towards
scientific research for the year ended 31.3.2020:
Particulars ` (in lacs)
(i) Payments made to K Research Ltd. 20
(ii) Payment made to LMN College 15
(iii) Payment made to OPQ College 10
(iv) Payment made to National Laboratory 8
(v) Machinery purchased for in-house scientific research 25
(vi) Salaries to research staff engaged in in-house scientific research 12
Note: K Research Ltd. and LMN College are approved research institutions and these payments are to be
used for the purposes of scientific research.
Compute the amount of deduction available under section 35 of the Income-tax Act, 1961 while
arriving at the business income of the assessee.
3. Win Limited commenced the business of operating a three star hotel in Tirupati on 1-4-2019. It
furnishes you the following information:
(a) Cost of land (acquired in June 2017) ` 60 lakhs
(b) Cost of construction of hotel building
Financial year 2017-18 ` 30 lakhs
Financial year 2018-19 ` 150 lakhs
(c) Plant and Machineries (all new) acquired during financial year 2018-19 ` 30 lakhs [All the above
expenditures were capitalized in the books of the company]. Net profit before depreciation for the financial
year 2019-20 ` 80 lakhs
Determine the amount eligible for deduction under section 35AD of the Income-tax Act, 1961, for the
4. MNP Ltd. commenced operations of the business of a new four-star hotel in Chennai on 1.4.2019. The
company incurred capital expenditure of ` 40 lakh during the period January, 2019 to March, 2019 exclusively
for the above business, and capitalized the same in its books of account as on 1st April, 2019. Further, during
the previous year 2019-20, it incurred capital expenditure of ` 2.5 crore (out of which `1 crore was for
acquisition of land) exclusively for the above business. Compute the income under the head “Profits and
gains of business or profession” for the assessment year 2020-21, assuming that MNP Ltd. has fulfilled
all the conditions specified for claim of deduction under section 35AD and has not claimed any deduction
under Chapter VI-A under the heading “C. – Deductions in respect of certain incomes”.
The profits from the business of running this hotel (before claiming deducting under section 35AD) for the
assessment year 2020-21 is ` 80 lakhs. Assume that the company also has another existing business of
running a four-star hotel in Kanpur, which commenced operations 10 years back, the profits from which was `
130 lakhs for assessment year 2020-21. Would MNO Ltd. be entitled to deduction under section 35AD if
it transfers the operation of the hotel in Chennai to PQR Ltd, while continuing to own the said hotel?
5. Briefly discuss about the provisions relating to deductibility of interest on capital borrowed for the purpose of
business or profession.
6. Comment on the allowability of the following claim made by the assessee: Mr. Achal, a hotelier, claimed
expenditure on replacement of Linen and carpets in his hotel as revenue expenditure.
7. What are the conditions to be satisfied for the allowability of expenditure under section 37 of the Income-tax
Act, 1961?
CA Suraj Agrawal
PGBP Income 9A.2
8. State with reasons, for the following sub-divisions, whether the following statements are true or false
having regard to the provisions of the Income-tax Act, 1961:
(i) For a dealer in shares and securities, securities transaction tax paid in a recognized stock exchange is
permissible business expenditure.
(ii) Where a person follows mercantile system of accounting, an expenditure of ` 25,000 has been allowed
on accrual basis and in a later year, in respect of the said expenditure, assessee makes the payment of `
25,000 through a cheque crossed "& Co.”, disallowance of ` 25,000 under section 40A(3) can be made in
the year of payment.
(iii) It is mandatory for an assessee to claim depreciation under section 32 of the Income-tax Act, 1961.
(iv) The medi-claim premium paid to GIC by Mr. Lomesh for his employees, by a draft, on 27.12.2019 is a
deductible expenditure under section 36.
(v) Under section 35DDA, amortization of expenditure incurred under eligible Voluntary Retirement Scheme
at the time of retirement alone, can be done.
(vi) An existing assessee engaged in trading activities, can claim additional depreciation under Section
32(1)(iia) in respect of new plant acquired and installed in the trading concern, where the increase in
value of such plant as compared to the approved base year is more than 10%.
9. State with reasons the allowability of the following expenses under the Income-tax Act, 1961 while
computing income from business or profession for the Assessment Year 2020-21:
(i) Provision made on the basis of actuarial valuation for payment of gratuity ` 5,00,000. However, no
payment on account of gratuity was made before due date of filing return.
(ii) Purchase of oil seeds of ` 50,000 in cash from a farmer on a banking day.
(iii) Tax on non-monetary perquisite provided to an employee ` 20,000.
(iv) Payment of ` 50,000 by using credit card for fire insurance.
(v) Salary payment of ` 3,00,000 outside India by a company without deduction of tax.
(vi) Custom Duty deposited in cash ` 50,000 with State Bank of India.
(vii) Payment made in cash ` 30,000 to a transporter in a day for carriage of goods
10. Ramji Ltd., engaged in manufacture of medicines (pharmaceuticals), furnishes the following
information for the year ended 31.03.2020:
(i) Municipal tax relating to office building ` 51,000 not paid till 30.09.2020.
(ii) Patent acquired for ` 20,00,000 on 01.09.2019 and used from the same month.
(iii) Capital expenditure on scientific research ` 10,00,000, which includes cost of, land ` 2,00,000.
(iv) Amount due from customer X outstanding for more than 3 years written off as bad debt in the books `
5,00,000.
(v) Income tax paid ` 90,000 by the company in respect of non-monetary perquisites provided to its
employees.
(vi) Provident fund contribution of employees ` 5,50,000 remitted in July 2020.
(vii) Expenditure towards advertisement in souvenir of a political party ` 1,50,000.
(viii) Refund of GST ` 75,000 received during the year, which was claimed as expenditure in an earlier year.
State with reasons the taxability or deductibility of the items given above under the Income-tax Act,
1961.
Note: Computation of total income is not required.
11. Answer the following with reference to the provisions of the Income-tax Act, 1961:
(a) Bad debt claim disallowed in an earlier assessment year, recovered subsequently. Is the sum recovered
chargeable to tax?
(b) Tax deducted at source on salary paid to employees not remitted till the ‘due date’ for filing the return
prescribed in section 139. Is the expenditure to be disallowed under section 40(a)(ia)?
(c) X Co. Ltd. paid ` 120 lakhs as compensation as per approved Voluntary Retirement Scheme (VRS)
during the financial year 2019-20. How much is deductible under section 35DDA for the assessment year
2020-21?
(d) Bad debt of ` 50,000 written off and allowed in the financial year 2017-18 recovered in the financial year
2019-20.
CA Suraj Agrawal
PGBP Income 9A.3
12. State with reasons, whether the following statements are true or false, with regard to the provisions of
the Income-tax Act, 1961:
(a) Payment made in respect of a business expenditure incurred on 16th February, 2020 for ` 25,000 through
a cheque duly crossed as "& Co." is hit by the provisions of section 40A(3).
(b)
(i) It is a condition precedent to write off in the books of account, the amount due from debtor to claim
deduction for bad debt.
(ii) Failure to deduct tax at source in accordance with the provisions of Chapter XVII-B, inter alia, from
the amounts payable to a resident as rent or royalty, will result in disallowance while computing the
business income where the resident payee has not paid the tax due on such income.
13. Write short notes on:
(i) [Taxation of Firm Chapter] - Restrictions on deductions allowable to the partnership firm in respect of
salary and interest to its partners under section 40(b) of the Income-tax Act, 1961.
(ii) [Setoff of losses Chapter] - Carry forward and set off of unabsorbed depreciation.
(iii) Additional depreciation.
14. During the financial year 2019-20, the following payments/expenditure were made/incurred by Mr.
Yuvan Raja, a resident individual (whose turnover during the year ended 31.3.2019 was ` 99 lacs) :
(i) Interest of ` 12,000 was paid to Rehman & Co., a resident partnership firm, without deduction of tax at
source;
(ii) Interest of ` 4,000 was paid as interest to Mr. R.D. Burman, a non-resident, without deduction of tax at
source;
(iii) ` 6,00,000 was paid as salary to a resident individual without deduction of tax at source;
(iv) Commission of ` 25,000 was paid to Mr. Vidyasagar on 2.7.2019. Without deduction of tax at source.
Briefly discuss whether any disallowance arises under the provisions of section 40(a)(i)/40(a)(ia) of
the Income-tax Act, 1961. [After TDS Chapter]
15. M/s. Arora Ltd., submits the following details of expenditure pertaining to the financial year 2019-20:
(i) Payment of professional fees to Mr. Mani ` 50,000. Tax was not deducted at source.
(ii) Interior works done by Mr. Hari for ` 2,00,000 on a contract basis. Payment made in the month of March
2020. Tax deducted in March 2020 was paid on 30.06.2020.
(iii) Factory Rent paid to Mr. Rao ` 15,00,000. Tax deducted at source and paid on 01.10.2020.
(iv) Interest paid on Fixed Deposits ` 2,00,000. Tax deducted on 31.12.2019 and paid on 28.09.2020.
Examine the above with reference to allowability of the same in the assessment year 2020-21 under
the Income-tax Act, 1961. You answer must be with reference to section 40(a) read with relevant tax
deduction at source provisions. Assume that the due date of filing the return of income is 30.09.2020.
[After TDS Chapter]
16. Vinod is a person carrying on profession as film artist. His gross receipts from profession are as
under: `
Financial year 2017-18 1,15,000
What is his obligation regarding maintenance of books of accounts for each Assessment Year under
section 44AA of Income-tax Act, 1961?
17. Ramamurthy had 4 non heavy goods vehicles as on 1.4.2019. He acquired 7 non-heavy goods vehicles on
27.6.2019. He sold 2 non-heavy goods vehicles on 31.5.2019. He has brought forward business loss of `
50,000 relating to assessment year 2016-17 of a discontinued business. Assuming that he opts for
presumptive taxation of income as per section 44AE, compute his total income chargeable to tax for
the assessment year 2020-21.
CA Suraj Agrawal
PGBP Income 9A.4
18. Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April, 2019, he owns 10 trucks
(all non heavy goods vehicles). On 2nd May, 2019, he sold one of the non-heavy goods vehicles and
purchased an another non heavy goods vehicle on 6th May, 2019. This new vehicle could however be put to
use only on 15th June, 2019.
Compute the total income of Mr. Sukhvinder for the AY 2020-21, taking note of the following data
Particulars ` `
Freight charges collected 8,70,000
Less : Operational expenses 6,25,000
Depreciation as per section 32 1,85,000
Other office expenses 15,000 8,25,000
Net Profit 45,000
Other business and non- business income 70,000
19. X Ltd. follows mercantile system of accounting. After negotiations with the bank, interest of ` 4 lakhs
(including interest of ` 1.2 lakhs pertaining to year ended 31.03.2020 has been converted into loan. Can the
interest of ` 1.2 lakhs so capitalized be claimed as business expenditure?
20. List Eight items of expenses which otherwise are deductible shall be disallowed, unless payments are
actually made within the due date for furnishing the return of income under Section 139(1). When can the
deduction be claimed, if paid after the said date?
21. Mr. Gupta is having a trading business and his Trading and Profit & Loss Account for the financial
year 2019-20 is as under:
Particulars Amount (` ) Particulars Amount (` )
To Opening stock 1,00,000 By Sales 70,00,000
To Purchase 49,00,000 By Closing stock 50,000
To Gross profit 20,50,000
Total 70,50,000 Total 70,50,000
Salary to employees (Including 5,00,000 By Gross Profit b/d 20,50,000
Contribution to PF)
Donation to Prime Minister Relief Fund 1,00,000
Provision for bad debts 50,000
Bonus to employees 50,000
Interest on bank loan 50,000
Family planning expenditure incurred on 20,000
employees
Depreciation 30,000
Income-tax 1,00,000
To Net profit 11,50,000
20,50,000 Total 20,50,000
Other information:
(a) Depreciation allowable ` 40,000 as per Income-tax Rules, 1962.
(b) No deduction of tax at source on payment of interest on bank loan has been made.
(c) Payment of bonus to workers made in the month of October, 2019 on the occasion of Diwali festival.
(d) Out of salary, ` 25,000 pertains to his contributions to recognized provident fund which was deposited
after the due date of filing return of income. Further, employees contribution of ` 25,000 was also
deposited after the due date of filing return of income.
Calculate gross total income of Mr. Gupta for the Assessment Year 2020-21.
CA Suraj Agrawal
PGBP Income 9A.5
22. Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit & Loss
Account for the year ended 31.03.2020.
Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2020
Particulars ` Particulars `
To Opening Stock 71,000 By Sales 32,00,000
To Purchase of Raw Materials 16,99,000 By Closing stock 2,00,000
To Manufacturing Wages & Expenses 5,70,000
To Gross Profit 10,60,000
34,00,000 34,00,000
To Administrative charges 3,26,000 By Gross Profit 10,60,000
To State VAT penalty 5,000 By Dividend from
To State VAT paid 1,10,000 domestic companies 15,000
To General Expenses 54,000 By Income from agriculture (net) 1,80,000
To Interest to Bank 60,000
(On machinery term loan)
To Depreciation 2,00,000
To Net Profit 5,00,000
12,55,000 12,55,000
Following are the further information relating to the financial year 2019-20:
(i) Administrative charges include ` 46,000 paid as commission to brother of the assessee. The
commission amount at the market rate is ` 36,000.
(ii) The assessee paid ` 33,000 in cash to a transport carrier on 29.12.2019. This amount is included in
manufacturing expenses (Assume that the provisions relating to TDS are not applicable to this
payment.)
(iii) A sum of ` 4,000 per month was paid as salary to a staff throughout the year and this has not been
recorded in the books of account. [Use alternative view in exam] – Also refer IOS Chapter
(iv) Bank term loan interest actually paid upto 31.03.2020 was ` 20,000 and the balance was paid in
October 2020.
(v) Housing loan principal repaid during the year was ` 50,000 and it relates to residential property
occupied by him. Interest on housing loan was ` 23,000. Housing loan was taken from Canara Bank.
These amounts were not dealt with in the profit and loss account given above.
(vi) Depreciation allowable under the Act is to be computed on the basis of following information:
Plant & Machinery (Depreciation rate @ 15%) `
Opening WDV (as on 01.04.2019) 12,00,000
Additions during the year (used for more than 180 days) 2,00,000
Total additions during the year 4,00,000
Note: Ignore additional depreciation under section 32(1)(iia)
Compute the total income of Mr. Raju for the assessment year 2020-21.
Note: Ignore application of section 14A for disallowance of expenditures in respect of any exempt
income.
23. Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss Account for the
year ended 31st March, 2020: Trading and Profit and Loss Account for the year ended 31.03.2020
To Opening stock 90,000 By Sales 12,11,500
To Purchases 10,04,000 By Income from UTI 2,400
To Gross Profit 3,06,000 By Closing stock 1,86,100
14,00,000 14,00,000
To Salary 60,000 By Gross profit b/d 3,06,000
To Rent and rates 36,000
To Interest on loan 15,000
To Depreciation 1,05,000
To Printing & stationery 23,200
To Postage & telegram 1,640
To Loss on sale of shares 8,100
(Short term)
To Other general expenses 7,060
To Net Profit 50,000
3,06,000 3,06,000
CA Suraj Agrawal
PGBP Income 9A.6
Additional Information:
(i) It was found that some stocks were omitted to be included in both the Opening and Closing Stock, the
values of which were:
Opening stock ` 9,000
Closing stock ` 18,000
(ii) Salary includes ` 10,000 paid to his brother, which is unreasonable to the extent of ` 2,000.
(iii) The whole amount of printing and stationery was paid in cash by way of one-time payment.
(iv) The depreciation provided in the Profit and Loss Account ` 1,05,000 was based on the following
information :The written down value of plant and machinery is ` 4,20,000 as on 01.04.2019. A new plant
falling under the same block of depreciation was bought on 1.7.2019 for ` 70,000. Two old plants were
sold on 1.10.2019 for ` 50,000.
(v) Rent and rates includes GST liability of ` 3,400 paid on 7.4.2020.
(vi) Other general expenses include ` 2,000 paid as donation to a Public Charitable Trust.
You are required to advise Mr. Sivam whether he can offer his business income under section 44AD
i.e. presumptive taxation.
24. Following is the profit and loss account of Mr. Q for the year ended 31-03-2020:
To Repairs on Building 1,81,000 By Gross Profit 6,01,000
To Amount paid to IIT, Mumbai for an By I.T. Refund 8,100
approved scientific research 1,00,000 By Interest on Company Deposits 6,400
programme
To Interest 1,10,000
To Travelling 1,30,550
6,15,500 6,15,500
Following additional information is furnished:
(1) Repairs on building includes ` 1,00,000 being cost of building a new toilet.
(2) Interest payments include ` 50,000 on which tax has not been deducted and penalty for contravention of
Central GST Act of ` 24,000.
Compute the income chargeable under the head "Profits and gains of Business or Profession" of Mr.
Q for the year ended 31-03-2020 ignoring depreciation.
25. Following is the profit and loss account of Mr. A for the year ended 31.3.2020:
To Repairs on building 1,30,000 By Gross profit 6,01,000
To Advertisement 51,000 By Income Tax Refund 4,500
To Amount paid to Scientific By Interest from company deposits 6,400
Research Association 1,00,000 By Dividends 3,600
approved u/s 35
To Interest 1,10,000
To Traveling 1,30,000
6,15,500 6,15,500
Following additional information is furnished:
(1) Repairs on building includes ` 95,000 being cost of raising a compound wall for the own business
premises.
(2) Interest payments include interest of ` 12,000 payable outside India to a non-resident Indian on which tax
has not been deducted and penalty of ` 24,000 for contravention of Central GST Act.
Compute the income chargeable under the head ‘Profits and gains of business or profession’ of
Mr. A for the year ended 31.3.2020 ignoring depreciation.
26. Briefly explain the term "substantial interest". State three situations in which the same assumes importance.
CA Suraj Agrawal
PGBP Income 9A.7
27. Raghav Industries Ltd. furnishes you the following information for the year ended 31-03-2020:
(a) Scientific research expenditure related to its business ` 2,40,000 fully revenue in nature.
(b) Building acquired for scientific research (including cost of land ` 5,00,000) in June 2019 for ` 12,00,000.
(c) Amount paid to Indian Institute of Science, Bangalore for scientific research ` 50,000.
(d) Demerger expenses incurred in financial year 2019-20 ` 5,00,000.
(e) Contribution to the account of employees as per pension scheme referred to in section 80CCD amounted
to ` 30,00,000. Amount above 10% of the salary of employees is ` 7,00,000.
(f) Amount recovered from employees towards provident fund contribution ` 12,00,000 of which amount
remitted upto the end of the year was ` 7,00,000 and the balance was remitted before the 'due date' for
filing the return prescribed in Section 139(1).
(g) Tax on non-monetary perquisites provided to the employees, borne by the employer ` 4,50,000.
(h) Gain due to change in the rate of exchange of foreign currency ` 1,00,000 related to import of machinery.
The machinery was acquired two years ago and put to regular use since then.
Explain in brief how the above said items would be dealt with for the A.Y. 2020-21.
Note: Computation of total income not required.
28. Advise an assessee on the admissibility or otherwise on the following aspects giving reasons in
respect of its business income :
(i) Brokerage paid for raising loan for the business.
(ii) Cost of erecting medical unit annexed to the factory for emergency treatment of the employees.
(iii) Compensation paid to an employee for the premature termination of his services.
(iv) Travelling expenses of a director, who went to Japan for negotiating the purchase of a new heavy
machinery, which was to be installed during next year.
(v) Lump sum consideration of ` 5 lakh paid for acquiring know-how.
29. State, with reasons in brief, whether following receipts/expenses are capital or revenue in nature -
(i) Ankit Ltd. received ` 3 lakh as compensation from Bhushan Ltd. for premature termination of a contract of
agency;
(ii) GST collected from the buyer of goods;
(iii) Pretty Ltd., instead of receiving royalty year by year, received it in advance in lumpsum;
(iv) Payment of ` 60,000 as compensation for cancellation of a contract for the purchase of machinery with a
view to avoid an unnecessary expenditure;
(v) An employee director of a company was paid ` 1.5 lakh as a lumpsum consideration for not resigning
from the directorship.
30. Jardine Ltd. is an existing Indian Company, engaged in developing and providing computer software
services which sets up a new industrial unit. It incurs the following expenditure in connection with the
new unit:
`
Preparation of project report 4,00,000
Market Survey 5,00,000
Legal and other charges for issue of additional capital
required for the new unit 2,00,000
Total 11,00,000
The following further data is given :
Cost of project 30,00,000
Capital employed in the new unit 40,00,000
What is the deduction admissible to the company under section 35D for AY 2020-21?
31. In the financial year 2017-18, RK Ltd. had prepared a Voluntary Retirement Scheme for its employees in
accordance with which it paid ` 10 lakhs, ` 15 lakhs and ` 5 lakhs to its employees in the financial years
2017-18, 2018-19 and 2019-20 respectively. Compute the amount of deduction admissible u/s 35DDA to
RK Ltd. in AY 2020-21.
CA Suraj Agrawal
PGBP Income 9A.8
32. Following is the Profit & Loss account of Mr. A a dealer in shares and securities for the year ended on
31.3.2020 (amounts in ` )
To Trading Expenses 62,60,000 By Sales 72,54,000

To Administrative Exp. 1,05,000 By Interest on FD with bank 16,500
To Financial Expenses 48,265 By Dividend from Indian Co 64,360
To Demat & delivery charges 4,350 By Interest on I.T. Refund (A.Y.2008-09) 230
To Securities transaction tax 5,500
To Net Profit before depreciation 9,11,975
73,35,090 73,35,090
Compute total income.
33. Computation of taxable income: Ram, who is 28 years of age, is a businessman in Delhi. On the basis
of the following profit and loss account for the financial year 2019-20, compute his taxable income :
Opening stock 20,700 Sales 1,500,000

Purchases 1,000,000 Closing stock 25,200
Household expenses 10,000
Income-tax for the financial year 2010-11 30,000
Interest on capital 8,400
Depreciation on furniture 12,000
Reserve for bad debts 1,200
Salaries and wages 60,000
Rent and rates 25,000
Net profit 357,900
1,525,200 1,525,200
Other relevant particulars are as follows:

(i) Opening stock and closing stock have consistently been valued at 10% below cost price.
(ii) Household expenses include a contribution of ` 1,500 towards public provident fund.
(iii) Amount of depreciation on furniture as per income-tax provisions is ` 10,000.
34. Mrs. Thakur carries on a textile manufacturing business. Her Profit and Loss Account for the year
ending 31st March 2020 is as follows (amounts in ` ) :
To Office Expenses 8,500 By Gross Profit 106,000
To Sundry Expenses 7,500 By Misc. Receipts 6,000
To Staff Welfare Expenses 750 By Income tax Refund 20,000
To Legal Expenses 5,000 By Bad debts recovered 4,500
To Salaries 17,000 By Gift from Mr. Thakur 10,000
To Outstanding liability for Excise duty 7,500
To Bonus to staff 6,000
To Depreciation 4,000
To Contribution to Approved provident fund 7,000
To Audit fees 32,500
To Net profit 50,750
Total 146,500 Total 146,500
Notes:
(1) Depreciation as per Income-tax Act comes to ` 2,700.
(2) Bonus payable under the Payment of Bonus Act, 1965 amounts to ` 2,500.
(3) Sundry expenses include ` 1,500 paid as donation to her son's school for their annual function.
(4) Office expenses include a capital expenditure of ` 5,000 on additional furniture purchased on 1.12.2019.
No depreciation has been provided for in the books.
(5) Liability for excise duty was paid as follows :
On 13.4.2020 ` 3,500 On 2.5.2020 ` 1,000 On 30.7.2020 ` 1,800; The return was filed on 31.7.2020
(last date for filing).
(6) No tax has been deducted at source on the audit fees of ` 32,500.
(7) Bad debts recovered were allowed as deduction in an earlier assessment.
You are required to compute Mrs. Thakur's business income.
CA Suraj Agrawal
PGBP Income 9A.9
35. Shri Nagesh's Profit and loss A/c for the year ended 31st March 2020 is as under (Amount in ` ) :
Opening Stock 40,000 Sales 540,000

Purchases 205,000 Closing Stock 60,000
Royalty 26,000 Commission 8,000
Wages 95,000 Interest from customers 2,000
Factory expense 45,000 Dividends 5,000
Rent rates and taxes 3,000 Contribution by employees towards RPF 2,100
Sundry expenses 5,300 Profit on sale of building 16,500
Salaries and bonus 9,500
Contribution to RPF 2,100
Legal expenses 1,800
Provision for depreciation 1,500
Travelling expenses 4,000
Repairs 5,800
Entertainment expenses 14,400
Rural development expenses 1,000
Advertisement expenses 4,900
Miscellaneous expenses 2,800
Net profits 166,500
633600 633600
Other information:
(1) Opening and closing stock valued at 20% below cost price. Market price was higher than cost price.
(2) A sum of ` 1,500 paid on the accident of an employee is included in the factory expenses.
(3) Allowable depreciation is ` 1,800
(4) Advertisement expenses include ` 3,000 for advertisement in souvenir published by political party.
(5) Rural development expenses include `1,000 paid to an approved institution for carrying out an
approved rural development programme. The approval was withdrawn after payment of such sum.
(6) Sundry expenses ` 1,000 and contribution to recognised provident fund are unpaid.
Determine his taxable profits of business.
36. Mr. Rameshwar is registered Medical practitioner. He keeps his book on cash basis and his
summarised cash account for year ended 31 March 2020 is as under (amounts in `)
To Balance b/d 2,700 By costs of medicines 20,000

To loan from Bank 6,000 By surgical equipments 6,000
To sale of medicines 30,500 By motor car purchased 12000
To consultation fees 10,000 By car expenses 1,800
To visiting fees 8,000 By salaries 1,200
To interest on investments 9,000 By rent on dispensary 1,200
To dividend on shares 7,200 By General expenses 600
To sale of building 15,000 By personal expenses 3,600
To sale of furniture 5,000 By Life insurance premium 2,000
By Interest on bank loan for 360
investment
By insurance of property 400
By Fixed Deposit in Bank 30,000
By balance c/d 14,240
93,400 93,400
Compute his Income from profession taking into account the following further information:
(1) 1/3rd of the motorcar expenses is in respect of his personal use.
(2) The original cost of the building was ` 20,000 and written down value of furniture as on 1st April 2019
was ` 4,000. There was no other asset in this block.
(3) The rate of depreciation on motorcar and on surgical equipments is 15%. An old car was purchased in
May 2019 while the surgical equipments were purchased in Dec. 2019.
(4) Outstanding consultancy fees and outstanding salaries are ` 20,000 and ` 1,000 respectively. Further,
medicines valuing ` 5,000 were sold to Mr. Babu on credit.
CA Suraj Agrawal
PGBP Income 9A.10
37. Shri Mohit Jain, a resident assessee, has given the following Profit and Loss Account for the year
ended 31st March 2020: (All amount in ` )
To Office Salaries 26,000 By Gross profit 299,400

To Staff welfare Expenses 12,000 By Sundry receipts 8,800
To General expenses 13,000
To Bad debts 6,000
To Advance tax 800
To Fire insurance 8,000
To Advertisement expenses 22,000
To Interest on Mohit's capital and loan 7,200
To Expenditure incurred on acquisition of copyright 5,600
on 1-2-2020 (it is put to use on the same day).
To Lump sum consideration for acquiring know- 24,000
how incurred on 5-3-2020 (it is put to use on April
1, 2020)
To Depreciation on other business assets 12,000
To Provision for income-tax 4,000
To Contribution to a political party 2,000
To Net profit 165,600
308,200 308,200
Other information:
(1) Salary to staff includes salary paid to a relative, which is unreasonable to the extent of ` 4,800.
(2) Depreciation on other assets according to income-tax provision comes to ` 19,200.
(3) Provision for income tax is excessive to the extent of ` 1,200.
(4) General expenses include an expenditure of ` 3,560 for arranging a long-term loan.
(5) During the previous year 2019-20, the following payments are made:
(a) ` 14,000 paid on 5-5-2019 on account of outstanding customs duty of previous year 2018-19; and
(b) ` 10,000 paid on 3-1-2020 on account of outstanding CGST of the previous year 2018-19.
Find out the business income of Mr. Mohit Jain for the AY 2020-21. Due date of filing return of income
is July 31, 2019 for AY 2019-20 and July 31, 2020 for AY 2020-21.
38. Alpha Ltd. a manufacturing company, which maintains accounts under mercantile system, has disclosed a net
profit of ` 12.50 lakhs for the year ending 31st March 2020. You are required to compute the taxable
income of the company for the assessment year 2019-20 after considering the following information,
duly explaining the reasons for each item of adjustment:
(a) Advertisement expenditure includes the sum of ` 60,000/- paid in cash to the sister concern of a
director, the market value of which is ` 52,000/-.
(b) Legal charges include a sum of ` 45,000/- paid to a consultant for framing a scheme of amalgamation
duly approved by the Central Government.
(c) Repairs of plant and machinery include ` 1.80 lakhs towards replacement of worn out parts.
(d) A sum of ` 6,000/- on account of liability foregone by a creditor has been taken to general reserve. The
same was charged to the Revenue Account in the assessment year 2006-07.
(e) Sale proceeds of import entitlements amounting to ` 1 lakh has been credited to Profit and Loss A/c,
which company claims as capital receipt not chargeable to Income tax.
(f) Being also engaged in the biotechnology business, the company incurred the following expenditure on
in-house research and development as approved by prescribed authority: -
a) Research equipments purchased ` 1,50,000/-
b) Remuneration paid to scientists ` 50,000/-
The Total amount of ` 2,00,000/- is debited to Profit and Loss A/c.
CA Suraj Agrawal
PGBP Income 9A.11
39. [Also refer Agriculture Chapter] - The following is the profit and loss account for year ended 31st
March, 2020 of Western Sugar Mills of which Shri Daga is the owner:
` `
To Manufacturing expenses 7,01,000 By Sale of Sugar and molasses 11,62,300
To Excise duty 92,795 By Rent from agricultural land 950
To Establishment charges 49,200 By Revenue from fisheries 4,000
To Fine paid to excise dept 2,000 By Sale proceeds from Sugar canes 6,05,055
To Salary and wages 1,21,445 By Profit on sale of motor truck 3,230
To General charges 16,750
To Interest on bank loan 21,000
To Daga's remuneration 38,750
To Depreciation 91,000
To Income-tax 25,000
To Cultivation expenses 4,37,500
To Net profit 1,79,095
17,75,535 17,75,535
Compute the income from business of Shri Daga from the Sugar Mill for the AY 2020-21 after taking
the following information into consideration:
a) Sale proceeds of cane include ` 5,32,000 on account of cane produced and consumed in the factory and
debited to manufacturing expenses, the average market price of such cane being ` 6,00,000.
b) The motor truck sold during the year for ` 7,230 was purchased in the past for ` 19,000. Depreciation
claimed in respect thereof in past assessment was ` 15,000.
c) General charges include —
i) ` 2,000 being the legal expenses incurred in defending a suit regarding the company's title to certain
agricultural lands and
ii) ` 10,000 paid to Shri Daga's son who is an employee in the Sugar Mill for a trip to Hawai to study
modern methods of manufacture.
d) Depreciation in respect of all assets has been ascertained at ` 50,000 as per Income-tax Rules.
40. [Also refer Agriculture Chapter] - Mr. Tenzingh is engaged in composite business of growing and curing
(further processing) coffee in Coorg, Karnataka. The whole of coffee grown in his plantation is cured.
Relevant information pertaining to the year ended 31.3.2020 are given below:
Particulars `
WDV of car as on 1.4.2019 3,00,000
WDV of machinery as on 1.4.2019 (15% rate) 15,00,000
Expenses incurred for growing coffee 3,10,000
Expenditure for curing coffee 3,00,000
Sale value of cured coffee 22,00,000
Besides being used for agricultural operations, the car is also used for personal use; disallowance for
personal use may be taken at 20%. The expenses incurred for car running and maintenance are ` 50,000.
The machines were used in coffee curing business operations.
Compute the income arising from the above activities for the assessment year 2020-21. Show the
WDV of the assets as on 31.3.2020.
CA Suraj Agrawal
PGBP Income 9A.12
Class Notes
CA Suraj Agrawal
PGBP 9B.1
PGBP - SOLUTION
1. As per section 43(1), the expression “actual cost” would mean the actual cost of asset to the assessee.
The purchase price of ` 5,25,000 is, therefore, the actual cost of the car to Dr. Suman. Market value (i.e. `
2,50,000) on the date when the asset is brought into professional use is not relevant.
Therefore, amount of depreciation on car as per section 32 for the A.Y. 2020-21 would be ` 78,750, being `
5,25,000 x 15%.
Note: Explanation 5 to section 43(1) providing for reduction of notional depreciation from the date of
acquisition of asset for personal use to determine actual cost of the asset is applicable only in case of building
which is initially acquired for personal use and later brought into professional use. It is not applicable in
respect of other assets.
2.
Computation of deduction allowable under section 35
Particulars Amount Section % of weighted Amount of
(` In lacs) deduction deduction
(` in lacs)
Payment for scientific research
K Research Ltd. [See Note 3] 20 35(1)(ii) 150% 30.00
LMN College 15 35(1)(ii) 150% 22.50
OPQ College [See Note 1] 10 - Nil Nil
National Laboratory [See Note 4] 8 35(2AA) 150% 12.00
In-house research [See Note 2]
Capital expenditure 25 35(1)(iv) 100% 25.00
r.w. 35(2)
Revenue expenditure 12 35(1)(i) 100% 12.00
Deduction allowable under section 35 101.50
Notes :-
1. Payment to OPQ College: Since the note in the question below item (iii) clearly mentions that only K
Research Ltd. and LMN College (mentioned in item (i) and (ii), respectively) are approved research
institutions, it is a logical conclusion that OPQ College mentioned in item (iii) is not an approved research
institution. Therefore, payment to OPQ College would not qualify for deduction under section 35.
2. Deduction for in-house research and development: Only company assessees are entitled to weighted
deduction@150% under section 35(2AB) in respect of in-house research and development expenditure
incurred. However, in this case, the assessee is an individual. Therefore, he would be entitled to
deduction@100% of the revenue expenditure incurred under section 35(1)(i) and 100% of the capital
expenditure incurred under section 35(1)(iv) read with section 35(2), assuming that such expenditure is
laid out or expended on scientific research related to his business.
3. Payment to K Research Ltd. (Alternative Answer) : Any sum paid to a company registered in India
which has as its main object scientific research, as is approved by the prescribed authority, qualifies for a
deduction of 100% under section 35(1)(iia). Therefore, it is also possible to take a view that payment of `
20 lakhs to K Research Ltd. qualifies for a deduction of 100% under section 35(1)(iia) since K Research
Ltd. is a company. The weighted deduction under section 35(1)(iia) would be ` 20 lacs (i.e., 100% of `
20 lacs), in which case, the total deduction under section 35 would be ` 96.50 lacs.
4. Payment to National Laboratory: The percentage of weighted deduction under section 35(2AA) in
respect of amount paid to National Laboratory is 150%.
3. Under section 35AD, 100% of the capital expenditure incurred during the previous year, wholly and
exclusively for the specified business, which includes the business of building and operating a hotel of two-
star or above category anywhere in India which commences its operations on or after 1.4.2011, would be
allowed as deduction from the business income.
However, expenditure incurred on acquisition of any land, goodwill or financial instrument would not be
eligible for deduction.
Further, the expenditure incurred, wholly and exclusively, for the purpose of specified business prior to
commencement of operation would be allowed as deduction during the previous year in which the assessee
commences operation of his specified business. A condition has been inserted that such amount incurred
CA Suraj Agrawal
PGBP 9B.2
prior to commencement should be capitalized in the books of account of the assessee on the date of
commencement of its operations.
Accordingly, the deduction under section 35AD for the A.Y. 2020-21 in the case of Win Ltd. would be
calculated as follows, assuming that the expenditures were capitalised in the books of the company on
1.4.2019, being the date of commencement of operations-
Particulars `
Cost of land (not eligible for deduction under section 35AD) Nil
Cost of construction of hotel building (` 30 lakhs + ` 150 lakhs) 180
Cost of plant and machinery 30
Deduction under section 35AD 210
Note:-
(1) For A.Y.2020-21, the loss from specified business of operating a three star hotel would be ` 130 lakhs
(i.e. ` 210 lakhs – ` 80 lakhs). As per section 73A, any loss computed in respect of the specified business
referred to in section 35AD shall be set off only against profits and gains, if any, of any other specified
business. The unabsorbed loss, if any, will be carried forward for set off against profits and gains of any
specified business in the following assessment year.
(2) Since the entire cost of plant and machinery and building qualifies for deduction under section 35AD, the
same does not qualify for deduction under section 32.
4. Computation of income under the head “Profit and gains of business or profession” of
MNP Ltd. for A.Y. 2020-21
Particulars ` (in lakh) ` (in lakh)
Profits from the specified business of new four-star hotel in Chennai 80
(before providing deduction under section 35AD)
Less: Deduction under section 35AD

Capital expenditure incurred during the P.Y. 2019-20 (excluding the 150
expenditure incurred on acquisition of land) = ` 250 lakh – ` 100 lakh
(See Notes 1 & 2 below)
Capital expenditure incurred during January 2019 to March 2019 (i.e.,

prior to commencement of business) and capitalized in the books of
account as on 1.4.2019 (See Note 3 below) 40
Total deduction under section 35AD for A.Y. 2020-21 190
Income from the specified business of new hotel in Chennai (110)
Profit from the existing business of running a four-star hotel in
Kanpur (See Note 4 below) 130
Net profit from business after set-off of loss of specified business against 20
profits of another specified business under section 73
Notes:
(1) According to the provisions of section 35AD, an assessee shall be allowed a deduction in respect of
100% of the capital expenditure incurred wholly and exclusively for the purpose of the specified business
which, inter alia, includes the business in the nature of building and operating a new hotel of two-star or
above category, anywhere in India.
Therefore, the newly commenced four-star hotel business of MNP Ltd qualifies for deduction under
section 35AD, since It has fulfilled all the conditions for claim of deduction under that section.
(2) The expenditure on acquisition of land, however, does not qualify for deduction under section 35AD.
(3) The capital expenditure incurred prior to commencement of specified business shall be allowed as
deduction under section 35AD(1) in the year of commencement of specified business, if the same is
capitalized in the books of accounts of the assessee on the date of commencement of its operations.
Therefore, the expenditure of ` 40 lakh is allowable as deduction in A.Y. 2020-21, since it has been
capitalized in the books of accounts of MNP Ltd. as on 1.4.2019.
(4) As per section 73A, the loss computed under section 35AD in respect of a specified business can be set
off against the profit of another specified business. Building and operating a hotel of two-star and above
category, anywhere in India, is a specified business, therefore, the loss from the business of new four-star
hotel in Chennai can be set-off against the income of the existing four-star hotel in Kanpur.
CA Suraj Agrawal
PGBP 9B.3
(5) Section 35AD(6A) provides that where the assessee, MNO Ltd., builds a hotel of two-star or above
category as classified by the Central Government and subsequently, while continuing to own the hotel,
transfers the operation of the said hotel to another person, the assessee shall be deemed to be carrying
on the specified business of building and operating a hotel. Therefore, in this case, MNO Ltd. would be
eligible to claim investment linked deduction under section 35AD even if it transfers the operation of the
Chennai hotel to PQR Ltd.
5. Under section 36(1)(iii), deduction is allowed in respect of interest on capital borrowed for the purposes of
business or profession while computing income under the head “Profits and gains of business or profession”.
Further, Explanation 8 to section 43(1) clarifies that interest relatable to a period after the asset is first put to
use cannot be capitalized. Interest in respect of capital borrowed for any period from the date of borrowing to
the date on which the asset was first put to use should, however, be capitalized in the case of extension of
existing business or profession. The proviso to section 36(1)(iii) provides that no deduction shall be allowed in
respect of any amount of interest paid, in respect of capital borrowed for acquisition of a new asset or for
extension of existing business or profession (whether capitalized in the books of account or not) for any period
beginning from the date on which the capital was borrowed for acquisition of the asset, till the date on which
such asset was first put to use.
6. The expenditure on replacement of linen and carpets in a hotel are in the nature of expenses incurred for the
business and are allowable as revenue expenses under section 37(1).
7.
(a) The following conditions are to be fulfilled for the allowability of expenditure under section 37 -
(1) The expenditure should not be of the nature described in section 30 to 36;
(2) It should not be in the nature of personal expenditure of the assessee;
(3) It should have been incurred by the assessee during the previous year;
(4) The expenditure should have been laid out or expended wholly or exclusively for the purposes of the
business or profession;
(5) It should not be in the nature of a capital expenditure; It should not have been incurred for any
propose which is an offence or which is prohibited by law.
(b) No deduction is allowable for expenditure incurred by the assessee on advertisement in any souvenir,
brochure, tract pamphlet or the like published by a political party [Section 37(2B)]
(c) As per Explanation 2 to Section 37(1), any expenditure incurred by the assessee on the activities relating
to Corporate Social Responsibility referred to in Section 135 of the Companies Act, 2013 shall not be
deemed to be an expenditure incurred for the purpose of business or profession. Hence, such
expenditure shall be disallowed while computing total income.
8.
(i) True : Section 36(1)(xv) allows a deduction of the amount of securities transaction tax paid by the
assessee in respect of taxable securities transactions entered into in the course of business during the
previous year as deduction from the business income of a dealer in shares and securities.
(ii) True : As per section 40A(3), in the case of an assessee following mercantile system of accounting, if an
expenditure has been allowed as deduction in any previous year on due basis, and payment exceeding `
10,000 has been made in the subsequent year otherwise than by account payee cheque or account
payee bank draft, then the payment so made shall be deemed to be the income of the subsequent year in
which such payment has been made.
(iii) True : According to the Explanation 5 to section 32(1), allowance of depreciation is mandatory. Therefore,
depreciation has to be provided mandatorily while calculating income from business / profession whether
or not the assessee has claimed the same while computing his total income.
(iv) True : Section 36(1)(ib) provides deduction in respect of premium paid by an employer to keep in force an
insurance on the health of his employees under a scheme framed in this behalf by GIC or any other
insurer. The medical insurance premium can be paid by any mode other than cash, to be eligible for
deduction under section 36(1)(ib).
(v) False : Expenditure incurred in making payment to the employee in connection with his voluntary
retirement either in the year of retirement or in any subsequent year, will be entitled to deduction in 5
equal annual installments beginning from the year in which each payment is made to the employee.
CA Suraj Agrawal
PGBP 9B.4
(vi) False : Additional depreciation can be claimed only in respect of eligible plant and machinery acquired
and installed by an assessee engaged in the business of manufacture or production of any article or thing
or in the business of generation or generation and distribution of power. In this case, the assessee is
engaged in trading activities and the new plant has been acquired and installed in a trading concern.
Hence, the assessee will not be entitled to claim additional depreciation under section 32(1)(iia).
9.
(i) Not allowable as deduction
As per section 40A(7), no deduction is allowed in computing business income in respect of any provision
made by the assessee in his books of account for the payment of gratuity to his employees except in the
following two cases:
(1) where any provision is made for the purpose of payment of sum by way of contribution towards an
approved gratuity fund or;
(2) where any provision is made for the purpose of making any payment on account of gratuity that has
become payable during the previous year.
Therefore, in the present case, the provision made on the basis of actuarial valuation for payment of
gratuity has to be disallowed under section 40A(7), since, no payment has been actually made on
account of gratuity.
Note: It is assumed that such provision is not for the purpose of contribution towards an approved
gratuity fund.
(ii) Allowable as deduction
As per Rule 6DD, in case the payment is made for purchase of agricultural produce directly to the
cultivator, grower or producer of such agricultural produce, no disallowance under section 40A(3) is
attracted even though the cash payment for the expense exceeds ` 10,000.
Therefore, in the given case, disallowance under section 40A(3) is not attracted since, cash payment for
purchase of oil seeds is made directly to the farmer.
(iii) Not allowable as deduction
As per section 40(a)(v), income-tax of ` 20,000 paid by the employer in respect of non monetary
perquisites provided to its employees, which is exempt in the hands of the employee under section
10(10CC), is not deductible while computing business income.
(iv) Allowable as deduction
Payment for fire insurance is allowable as deduction under section 36(1). Since payment by credit card is
covered under Rule 6DD, which contains the exceptions to section 40A(3), disallowance under section
40A(3) is not attracted in this case.
(v) Not allowable as deduction

Disallowance under section 40(a)(iii) is attracted in respect of salary payment of ` 2,00,000 outside India
by a company without deduction of tax at source.
(vi) Allowable as deduction As per Rule 6DD, if the payment is made to the Government and, under the
rules framed by it, such payment is required to be made in legal tender, no disallowance under section
40A(3) is attracted even though the cash payment for the expense exceeds ` 10,000.
Therefore, in the given case, no disallowance under section 40A(3) is attracted since payment of Custom
Duty is covered by the above mentioned exception contained in Rule 6DD.
(vii) Allowable as deduction

The limit for attracting disallowance under section 40A(3) for payment otherwise than by way of account
payee cheque or account payee bank draft is ` 35,000 in case of payment made for plying, hiring or
leasing goods carriage. Therefore, in the present case, disallowance under section 40A(3) is not attracted
for payment of ` 30,000 made in cash to a transporter for carriage of goods.
10.
(i) As per section 43B, municipal tax is not deductible for A.Y. 2020-21 since it is not paid on or before
30.09.2020, being the due date of filing the return for A.Y. 2020-21.
Note – It is assumed that the company has not undertaken any international transaction during the year,
and therefore does not have to file a transfer pricing report under section 92E. Therefore, the due date of
filing of return of the company would be 30th September, 2020.
(ii) Patent is an intangible asset eligible for depreciation@25%. Since it has been acquired and put to use for
more than 180 days during the previous year 2019-20, full depreciation of ` 5,00,000 (i.e. 25% of `
20,00,000) is allowable as deduction under section 32.
CA Suraj Agrawal
PGBP 9B.5
(iii) Weighted deduction@150% is available under section 35(2AB) in respect of expenditure incurred by a
company on scientific research on in-house research and development facility as approved by the
prescribed authority. However, cost of land is not eligible for deduction. Deduction under section 35(2AB)
= 150% of ` 8 lakhs = ` 12,00,000.
Note: It is presumed that the in-house research and development facility is approved by the prescribed
authority and is hence, eligible for the weighted deducted@150% under section 35(2AB).
(iv) Bad debts i.e. ` 5,00,000 written off in the books of account as irrecoverable is deductible under section
36(1)(vii), provided the debt has been taken into account in computing the income of the company in the
current previous year or any of the earlier previous years.
(v) As per section 40(a)(v), income-tax of ` 90,000 paid by the company in respect of nonmonetary
perquisites provided to its employees, exempt in the employee’s hands under section 10(10CC), is not
deductible while computing business income of the employer– company.
(vi) The employees’ contribution to provident fund is taxable in the hands of the company since it is included
in the definition of income under section 2(24)(x). As per section 36(1)(va), provident fund contribution of
employees is deductible only if such sum is credited to the employee’s provident fund account on or
before the due date under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952. In this
case, since it is remitted after the due date under the said Act, it is not deductible.
Note: There is an alternate view that remittance of provident fund contribution of employees is deductible
even though it is remitted beyond the due date under the Employees’ Provident Fund and Miscellaneous
Provisions Act, 1952, in case the same is remitted before the due date of filing return of income in view of
the Delhi High Court decision in CIT vs. Aimil Ltd
(vii) Expenditure towards advertisement in souvenir of a political party is disallowed under section 37(2B)
while computing business income. However, the same is deductible under section 80GGB from gross
total income.
(viii) Refund of a trading liability is taxable under section 41(1), if a deduction was allowed in respect of the
same to the taxpayer in an earlier year. Since GST was claimed as expenditure in an earlier year, refund
of the same during the year would attract the provisions of section 41(1).
11.
(a) Recovery of a bad debt claim disallowed in the earlier year cannot be brought to tax under section 41(4).
Section 41(4) can be invoked only in a case where bad debts or part thereof has been allowed as
deduction earlier under section 36(1)(vii).
(b) The scope of section 40(a)(ia) has been expanded w.e.f. A.Y. 2020-21 to cover all sums in respect of
which tax is deductible under Chapter VII-B. Section 192, which requires deduction of tax at source from
salary income, forms part of Chapter VII-B. Therefore, salary payment without deduction of tax at source
would attract disallowance under section 40(a)(ia). However, only 30% of salary paid without deduction
tax at source would be disallowed under section 40(a)(ia).
(c) It is deductible in 5 equal annual instalments commencing from the previous year of payment. ` 24 lakhs,
being 1/5th of ` 120 lakhs, is deductible under section 35DDA for the A.Y.2020-21.
(d) As per section 41(4), any amount recovered by the assessee against bad debt earlier allowed as
deduction shall be taxed as income in the year in which it is received. Therefore, in this case, ` 50,000
would be taxable in the F.Y.2019-20 (A.Y.2020-21).
12.
(a) True : In order to escape the disallowance specified in section 40A(3), payment in respect of the business
expenditure ought to have been made through an account payee cheque. Payment through a cheque
crossed as “& Co.” will attract disallowance under section 40A(3).
(b)
(i) True : It is mandatory to write off the amount due from a debtor as not receivable, in order to claim
the same as bad debt under section 36(1)(vii).
(ii) True : Section 40(a)(ia) provides that failure to deduct tax at source from rent or royalty payable to a
resident, in accordance with the provisions of Chapter XVII-B, will result in disallowance of 30% of
such expenditure, where the resident payee has not paid the tax due on such income.
CA Suraj Agrawal
PGBP 9B.6
13.
(i) In the case of a partnership firm, the deduction on account of interest and salary paid to its
partners are as subject to the following restrictions contained in section 40(b) -
(a) It should be authorised by and in accordance with the terms of the partnership deed.
(b) It should not relate to a period before the date of such deed.
(c) Remuneration should be paid to a working partner.
(d) The amounts allowable are subject to the following limits -
(1) In the case of interest

Simple interest up to 12% p.a. is allowable. This restriction is not applicable if a person is a partner in
his representative capacity in the firm and he receives interest from the firm in his individual capacity.
Similarly, the restriction is also not applicable if a person who is a partner in his individual capacity
receives interest for and on behalf of someone else from the firm in which he is a partner.
(2) In the case of salary, bonus, commission or remuneration paid by a firm to its working
partners – It should not exceed the amount specified in the table below –
For all firms
(a) On the first ` 3,00,000 of the book profit ` 1,50,000 or 90% of book
or in case of loss profit, whichever is more
(b) On the balance of the book profit @ 60%
(ii) Section 32(2) provides for carry forward of unabsorbed depreciation.

Where, in any previous year, the profits or gains chargeable are not sufficient to give full effect to the
depreciation allowance, such unabsorbed depreciation shall be added to the depreciation allowance for
the following previous year and shall be deemed to be part of that allowance.
If there is no depreciation allowance for that previous year, the unabsorbed depreciation of the earlier
previous year shall become the depreciation allowance of that year. The effect of the provisions of section
32(2) is that unabsorbed depreciation brought forward shall be deemed as the current year depreciation.
Consequently, such unabsorbed depreciation can be set-off not only against income under the head
“Profits and gains of business or profession” but also against income under any other head. Further, the
unabsorbed depreciation can be carried forward indefinitely till it is fully set off.
However, in the order of set-off losses under different heads of income, effect shall first be given to
current year depreciation, then to brought forward business losses and finally to unabsorbed depreciation.
(iii) Section 32(1)(iia) provides that in the case of any new machinery or plant (other than ships and aircraft)
acquired and installed after 31.3.2005 by an assessee engaged in the business of manufacture or
production of any article or thing or in the business of generation or generation and distribution of power,
a further sum equal to 20% of the actual cost of such machinery or plant shall be allowable as a
deduction.
The additional depreciation is available to a new machinery or plant used in the manufacture or
production of any article or thing or generation or generation and distribution of power. Additional
depreciation will be taken into consideration for computing the WDV of the relevant block of assets.
Additional depreciation is not available in respect of the following assets:

(A) any machinery or plant
(i) which has been used in India or outside India by any other person before its installation by the
assessee; or
(ii) installed in any office premises, residential accommodation including accommodation used in the
nature of guest house ; or
(iii) the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or
otherwise) in computing the income under the head “Profits and gains of business or profession”
of any one previous year.
(B) any office appliances or road transport vehicles.
CA Suraj Agrawal
PGBP 9B.7
14. Disallowance under section 40(a)(i)/40(a)(ia) of the Income-tax Act, 1961 is attracted where the assessee fails
to deduct tax at source as is required under the Act, or having deducted tax at source, fails to remit the same
to the credit of the Central Government within the stipulated time limit.
The assessee is a resident individual, who was not subjected to tax audit during the immediately preceding
previous year i.e., P.Y.2018-19 (as his turnover was less than ` 100 lakh in that year) and the TDS obligations
have to be considered bearing this in mind.
(i) The obligation to deduct tax at source from interest paid to a resident arises under section 194A in the
case of an individual, only where he was subject to tax audit under section 44AB in the immediately
preceding previous year, i.e., P.Y.2018-19. From the data given, it is clear that he was not subject to tax
audit under section 44AB in the P.Y.2018-19. Hence, disallowance under section 40(a)(ia) is not attracted
in this case.
(ii) In the case of interest paid to a non-resident, there is obligation to deduct tax at source under section 195,
hence non-deduction of tax at source will attract disallowance under section 40(a)(i).
(iii) The scope of section 40(a)(ia) has been expanded w.e.f. A.Y. 2019-20 to cover all sums in respect of
which tax is deductible under Chapter VII-B. Section 192, which requires deduction of tax at source from
salary paid, is covered under Chapter VII-B. Therefore, disallowance under section 40(a)(ia) is attracted
for failure to deduct tax at source under section 192 from salary payment. However, only 30% of the
amount of salary paid without deduction of tax at source would be disallowed.
(iv) The obligation to deduct tax at source under section 194-H from commission paid in excess of ` 15,000
to a resident arises in the case of an individual, only where he was subject to tax audit under section
44AB in the immediately preceding previous year. From the data given, it is clear that he was not subject
to tax audit under section 44AB in the P.Y.2018-19. Hence, there is no obligation to deduct tax at source
under section 194H during the P.Y. 2019-20. Therefore, disallowance under section 40(a)(ia) is not
attracted in this case.
15. Allowability of expenses of M/s. Arora Ltd. for the A.Y. 2020-21
(i) Payment of professional fees is subject to TDS under section 194J. Since no tax is deducted at source, `
15,000, being 30% of the expenditure of ` 50,000 is disallowed under section 40(a)(ia).
(ii) Since the tax was deducted in March, 2020 and paid on or before the due date of filing the return (i.e., on
or before September 30th, 2020), the expenditure on interior works will be allowed as deduction. Hence,
disallowance under section 40(a)(ia) is not attracted.
(iii) The maximum time allowable for deposit of tax deducted at source is upto the due date of filing of return
i.e., 30th September, 2020. In this case, since tax deducted under section 194-I was paid after the due
date of filing the return, ` 4,50,000 being 30% of ` 15,00,000 is disallowed under section 40(a)(ia) for the
previous year 2019-20.
(iv) The tax deducted at source can be deposited on or before the due date of filing of return to avoid
disallowance under section 40(a)(ia). In this case, disallowance would not be attracted since tax deducted
during December 2019 was deposited before 30th September 2020 i.e. on 28.09.2020.
16. Section 44AA(1) requires every person carrying on any profession, notified by the Board in the Official
Gazette (in addition to the professions already specified therein), to maintain such books of account and other
documents as may enable the Assessing Officer to compute his total income in accordance with the
provisions of the Income-tax Act, 1961.
Thus, a person carrying on a notified profession shall be required to maintain specified books of
accounts:
(i) if his gross receipts in all the three years immediately preceding the relevant previous year has exceeded
` 1,50,000; or
(ii) if it is a new profession which is setup in the relevant previous year, it is likely to exceed ` 1,50,000 in
that previous year.
In the present case, Vinod is a person carrying on profession as film artist, which is a notified profession.
Since his gross receipts have not exceeded ` 1,50,000 in financial year 2017-18, the requirement under
section 44AA to compulsorily maintain the prescribed books of account is not applicable to him.
17.
Computation of total income of Mr. Ramamurthy for A.Y. 2020-21
Particulars `
Presumptive business income under section 44AE
4 non heavy goods vehicles for 2 months (4 x ` 7,500 x 2) 60,000
Balance 2 non-heavy goods vehicles for 10 months (2 x ` 7,500 x 10) 1,50,000
7 non- heavy goods vehicles for 10 months (7 x ` 7,500 x10) 5,25,000
Business Income 7,35,000
Less: Brought forward business loss of discontinued business 50,000
CA Suraj Agrawal
PGBP 9B.8
Note: The assessee is eligible for computing the income from goods carriages applying the presumptive
provisions of section 44AE, since he does not own more than 10 goods carriages at any time during the
previous year.
18. Section 44AE would apply in the case of Mr. Sukhvinder since he is engaged in the business of plying goods
carriages and owns not more than ten goods carriages at any time during the previous year.
Section 44AE provides for computation of business income of such assessees on a presumptive basis. The
income shall be deemed to be ` 7,500 from each goods carriage (as it is non-heavy goods vehicle) - for
every month or part the month during which such carriage vehicle is owned by the assessee in the previous
year or such higher sum as declared by the assessee in his return of income.
Mr. Sukhvinder’s business income calculated applying the provisions of section 44AE is ` 9,07,500 (See
Notes 1 & 2 below) and his total income would be ` 9,77,500.
However, as per section 44AE(7), Mr. Sukhvinder may claim lower profits and gains if he keeps and maintains
proper books of account as per section 44AA and gets the same audited and furnishes a report of such audit
as required under section 44AB. If he does so, then his his total income would be ` 1,15,000.
Notes :
1. Computation of total income of Mr. Sukhvinder for A.Y. 2020-21
Particulars Presumptive Where books
Income Are maintained
Income from business of plying goods carriages 9,07,500 45,000
[See Note 2 Below] 70,000 70,000
Other business and non-business income
Total Income 9,77,500 1,15,000
2. Calculation of presumptive income as per section 44AE

Type of carriage No. of Rate per Amount
Months month
9 goods carriage – held throughout the year 12 7,500 8,10,000

1 goods carriage – held upto 2nd May 2 7,500 15,000
1 goods carriage – held from 6th May 11 7,500 82,500
Total 9,07,500
19. Under section 43B, interest on term loans and advances to scheduled banks shall be allowed only in the year
of payment of such interest irrespective of the method of accounting followed by the assessee.
Explanation 3D to section 43B provides that if any interest payable by the assessee is converted into a loan,
the interest so converted and not “actually paid” shall not be deemed as actual payment, and hence would not
be allowed as deduction. Therefore, the interest of ` 1.2 lakhs converted into loan cannot be claimed as
business expenditure.
20. Section 43B provides that the following expenses shall not be allowed as deduction unless the
payments are actually made within the due date for furnishing the return of income under section
139(1):
(i) Any tax, duty, cess or fees under any law in force.
(ii) Any sum payable by the assessee as an employer by way of contribution to provident fund or
superannuation fund or gratuity fund or any other fund for the welfare of the employees;
(iii) Any bonus or commission for services rendered payable to employees;
(iv) Any interest on any loan or borrowings from any public financial institution or State financial corporation
or State industrial investment corporation;
(v) Interest on loans and advances from a scheduled bank;
(vi) Any sum payable by the assessee as interest on any loan or borrowing from a deposit taking
non-banking financial company or systemically important non-deposit taking non-banking
financial company, in accordance with the terms and conditions of the agreement governing
such loan or borrowing,
(vii) Any sum paid as an employer in lieu of earned leave at the credit of his employee.
(viii) Any sum payable to the Indian Railways for the use of railway assets
In case the payment is made after the due date of filing of return of income, deduction can be claimed only in
the year of actual payment.
CA Suraj Agrawal
PGBP 9B.9
21.
Computation of Gross Total Income of Mr. Gupta for the A.Y. 2020-21
Particulars ` `
Income from Business or profession
Net profit as per Profit and Loss Account 11,50,000
Add : Expenses not deductible

Donation to Prime Minister Relief Fund (Refer Note -1) 1,00,000
Provision for bad debts (Refer Note-2) 50,000
Family planning expenditure incurred on employees (Refer Note -3) 20,000
Depreciation as per Profit and Loss Account 30,000
Income-tax (Refer Note -4) 1,00,000
Employer’s contribution to recognized provident fund (Note-5) 25,000 3,25,000
Less : Expense allowed 14,75,000

Depreciation as per Income- tax Rules, 1962 40,000
14,35,000
Add : Employee’s contribution included in income as per Section 2(24)(x) 25,000
(Refer Note-6)
Business Income / Gross Total Income 14,60,000
Notes:-
(1) Donation to Prime Minister Relief Fund is not allowed as deduction from the business income. It is
allowed as deduction under section 80G from the gross total income.
(2) Provisions for bad debts is allowable as deduction under section 36(1)(viia) (subject to the limits
specified therein) only in case of banks, public financial institutions, State Financial Corporation and
State Industrial Investment Corporation. Therefore, it is not allowable as deduction in the case of Mr.
Gupta.
(3) Expenditure on family planning is allowed as deduction under section 36(1)(ix) only to a company
assessee. Therefore, such expenditure is not allowable as deduction in the hands of Mr. Gupta.
(4) Income-tax paid is not allowed as deduction as per the provisions of section 40(a)(ii).
(5) Since, Mr. Gupta’s contribution to recognized provident fund is deposited after the due date of filing
return of income, the same is disallowed as per provisions of section 43B.
(6) Employee’s contribution is includible in the income of the employer by virtue of Section 2(24)(x). The
deduction for the same is not provided for as it was deposited after the due date. It has been assumed
that it has not been already debited in the given profit and loss account.
(7) TDS provisions under section 194A are not attracted in respect of payment of interest on bank loan.
Therefore, disallowance under section 40(a)(ia) is not attracted in this case.
(8) Since, the payment of bonus is made in October 2018, hence, no disallowance is attracted.
22.
Computation of total income of Mr. Raju for the A.Y. 2020-21
Particulars ` `
Profits and gains of business or profession
Net profit as per profit and loss account 5,00,000
Add: Excess commission paid to brother disallowed under section 10,000
40A(2)
Disallowance under section 40A(3) is not attracted since the limit for Nil
one time cash payment is ` 35,000 in respect of payment to
transport operators. Therefore, amount of ` 33,000 paid in cash to a
transport carrier is allowable as deduction.
Salary paid to staff not recorded in the books (Assuming that the 48,000
expenditure is in the nature of unexplained expenditure and hence,
is deemed to be income as per section 69C and would be taxable @
30% under section 115BBE – no deduction allowable in respect of
such expenditure) [See Note 1 below]
Bank term loan interest paid after the due date of filing of return 40,000
under section 139(1) – disallowed as per section 43B
State VAT penalty paid disallowed [See Note 2 below] 5,000

Depreciation debited to profit and loss account 2,00,000
CA Suraj Agrawal
PGBP 9B.10
3,03,000
8,03,000
Less: Dividend from domestic companies [Exempt under section 15,000
10(34)]
Income from agriculture [Exempt under section 10(1)] 1,80,000
Depreciation under the Income-tax Act, 1961 (As per working note) 2,25,000 4,20,000
3,83,000
Annual value of self-occupied property Nil
Less: Deduction under section 24(b) – interest on housing loan 23,000 (23,000)
Less: Deduction under section 80C in respect of Principal
repayment of housing loan 50,000
Working Note:
Computation of depreciation under the Income-tax Act, 1961
Particulars `
Depreciation@15% on ` 14 lakh (Opening WDV of ` 12 lakh plus assets purchased 2,10,000

during the year and used for more than 180 days ` 2 lakh) 15,000
Depreciation @7.5% on ` 2 lakh (Cost of assets used for less than 180 days) 2,25,000
Notes (Alternate views):

1. It is also possible to take a view that the salary not recorded in the books of account was an erroneous
omission and that the assessee has offered satisfactory explanation for the same. In such a case, the
same should not be added back as unexplained expenditure, but would be allowable as deduction while
computing profits and gains of business and profession.
2. Where the imposition of penalty is not for delay in payment of sales tax or VAT but for contravention of
provisions of the Sales Tax Act (or VAT Act), the levy is not compensatory and therefore, not deductible.
However, if the levy is compensatory in nature, it would be fully allowable. Where it is a composite levy,
the portion which is compensatory is allowable and that portion which is penal is to be disallowed. Since
the question only mentions “State VAT penalty paid” and the reason for levy of penalty is not given, it has
been assumed that the levy is not compensatory and therefore, not deductible. It is also possible to
assume that such levy is compensatory in nature and hence, allowable as deduction. In such a case, the
total income would be ` 3,05,000.
23.
Computation of business income of Mr. Sivam for the A.Y. 2020-21
Particulars ` `
Net Profit as per profit and loss account 50,000
Add: Inadmissible expenses / losses
Under valuation of closing stock 18,000
Salary paid to brother – unreasonable [Section 40A(2)] 2,000
Printing and stationery paid in cash [Section 40A(3)] 23,200
Depreciation (considered separately) 1,05,000
Short term capital loss on shares 8,100
Donation to public charitable trust 2,000 1,58,300
2,08,300
Less: Deductions items:
Under valuation of opening stock 9,000
Income from UTI [Exempt under section 10(35)] 2,400 11,400
Business income before depreciation 1,96,900
Less: Depreciation (See Note 1) 66,000
1,30,900
Computation of business income as per section 44AD -

As per section 44AD, the business income would be 8% of turnover i.e. 12,11,500 x 8 /100= ` 96,920
The business income under section 44AD is ` 96,920.
As the business income under section 44AD is lower than the business income as per the normal provisions
of the Act, it is advisable for Mr. Sivam to offer his business income under section 44AD.
CA Suraj Agrawal
PGBP 9B.11
Notes:
1. Calculation of depreciation
Particulars `
WDV of the block of plant & machinery as on 1.4.2019 4,20,000
Add : Cost of new plant & machinery 70,000
4,90,000
Less : Sale proceeds of assets sold 50,000
4,40,000
WDV of the block of plant & machinery as on 31.3.2020 Depreciation @ 15% 66,000
(No additional depreciation is allowable as the assessee is not engaged in
manufacture or production of any article.)
2. Since GST liability has been paid before the due date of filing return of income under section 139(1), the
same is deductible.
24.
Computation of income under the head “Profits and gains of business or profession” of
Mr. Q for the A.Y. 2020-21
Particulars ` `
Net profit as per profit and loss account 93,950
Add: Expenses not allowable
Expenses on building a new toilet – Capital expenditure, hence 1,00,000
not allowable as per section 37(1).
Interest payable on which tax has not been deducted at source 15,000
[disallowed under section 40(a)] [See Note 1]
Penalty for contravention of Central GST Act [Penalty paid for 24,000
violation or infringement of any law is not allowable as deduction
under section 37(1)]
Payment to IIT, Mumbai for scientific research programme (to be 1,00,000 2,39,000
treated separately) 3,32,950
Less: Income not forming part of business income

Interest from company deposits (chargeable under the head 6,400
“Income from other sources”)(See Note 2 below)
Income-tax refund (not an income chargeable to tax) 8,100 14,500
Less: Weighted deduction@150% under section 35(2AA) for payment to 3,18,450
IIT for an approved scientific research program. 1,50,000
Profit and gains of business or profession 1,68,450
Note –
1. Section 40(a)(ia) provides for disallowance of 30% of any sum paid, on which tax is deductible under
Chapter XVII-B, but the same has not been deducted. Hence, ` 15,000 being 30% of ` 50,000 has to be
added back while computing business income.
2. Interest on company deposits may also be treated as business income presuming that the interest has
been earned by Mr. Q out of available temporary surplus funds which are not immediately required for his
business purposes but nevertheless meant only for Mr. Q’s business activities. In such a case, income
under the head “Profit and gains of business or profession” would be ` 1,24,850.
25.
Profits and gains of business or profession of Mr. A for the year ended 31.3.2020
Particulars ` `
Net profit as per profit and loss account 94,500
(a) Expenses on raising compound wall – capital expenditure, 95,000
hence disallowed
12,000
(b) Interest payable outside India to a non-resident, as tax has not
been deducted at source [Section 40(a)(i)]
24,000
(c) Penalty for contravention of CGST Act [Penalty paid for violation
or infringement of any law is not allowable as deduction under
section 37(1)]
1,00,000 2,31,000
(d) Contribution for scientific research (to be treated separately)
3,25,500
CA Suraj Agrawal
PGBP 9B.12
Less: Income not forming part of business income 6,400
(a) Interest from company deposits 3,600
(b) Dividend 4,500 14,500
(c) Income-tax refund 3,11,000
Less: Deduction under section 35 for scientific research
[See Note below] 1,50,000
Profit and gains of business or profession 1,61,000
Note: Contribution to approved scientific research association qualifies for deduction @ 150% under section
35(1)(ii).
26. As per Explanation to section 40A(2), a person shall be deemed to have a substantial interest in a business or
profession, if, -
(1) in case where the business or profession is carried on by a company, such person who, at any time
during the previous year, is the beneficial owner of shares (not being shares entitled to a fixed rate of
dividend, whether with or without a right to participate in profits), carrying not less than 20% of the voting
power.
(2) In any other case, such person who, at any time during the previous year, is beneficially entitled to not
less than 20% of the profits of such business or profession.
Following are the situations under which the substantial interest assumes importance -
(a) Taxability of deemed dividend under section 2(22)(e);
(b) Disallowance of excessive or unreasonable expenditure under section 40A(2) to an individual who has a
substantial interest in the business or profession of the assessee, and
(c) Clubbing of salary income of spouse, under section 64(1)(ii) in respect of remuneration received by the
spouse from a concern in which the individual has a substantial interest.
27.
(a) The entire revenue expenditure of ` 2,40,000 on scientific research related to the business of the
company qualifies for deduction under section 35(1)(i).
Note – If Raghav Industries Ltd. is a company engaged in the business of biotechnology 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, it would be entitled to a weighted deduction of ` 3,60,000 (150% of `
2,40,000, being the revenue expenditure on scientific research related to its business) under section
35(2AB), if the in-house research and development facility is approved by the prescribed authority and the
company has entered into an agreement with the prescribed authority for cooperation in such research
and development facility and for audit of accounts maintained for that facility.
(b) As per section 35(1)(iv) read with section 35(2), if any capital expenditure (other than expenditure on
acquisition of land) is incurred on scientific research related to the business carried on by the assessee,
the whole of such capital expenditure is allowable as deduction in the previous year in which it is incurred.
Therefore, ` 7,00,000 (i.e. ` 12,00,000 – ` 5,00,000, being the cost of land) is allowable as deduction for
the A.Y.2020-21. It is assumed that the scientific research is related to the business of Raghav Industries
Ltd.
(c) The amount of ` 50,000 paid to Indian Institute of Science, Bangalore, for scientific research qualifies for
a weighted deduction@150% of the sum paid as per section 35(1)(ii). Therefore, Raghav Industries Ltd.
would be entitled to a deduction of ` 75,000 (i.e., 150% of ` 50,000) for the A.Y.2020-21.
(d) As per section 35DD, one-fifth of the expenditure incurred on demerger would be allowable as deduction
for five successive previous years beginning from previous year 2018-19. Therefore, in the previous year
2019-20, ` 1,00,000, being one-fifth of ` 5,00,000 would be allowable as deduction.
(e) The employer’s contribution to the account of an employee under a pension scheme referred to in section
80CCD, upto 10% of salary of the employee in the previous year, is allowable as deduction under section
36(1)(iva) while computing business income. Disallowance under section 40A(9) would be attracted only
in respect of the amount in excess of 10% of salary. Accordingly, ` 23 lakhs would be allowed as
deduction and ` 7 lakhs would be disallowed.
(f) As per section 2(24)(x), the amount of provident fund contribution recovered from employees i.e. ` 12
lakhs would be taxable as income of Raghav Industries Ltd.
However, the company can claim deduction under section 36(1)(va) of amount credited to the account of
the employee in the provident fund before the due date under the relevant Act.
CA Suraj Agrawal
PGBP 9B.13
If ` 7 lakhs has been remitted before the said due date, the same is allowable as deduction. If it has not
been so remitted, then the same is not allowable as deduction. The deduction would be restricted to the
amount remitted before the due date. The balance ` 5 lakhs remitted after the due date under the said
Act but before the due date of filing the return is not allowable as deduction.
(g) The tax of ` 4,50,000 borne by the employer on non-monetary perquisites provided to the employees is
disallowed under section 40(a)(v).
(h) As per section 43A, the gain of ` 1,00,000, arising at the time of making payment in respect of an
imported machinery, due to change in rate of exchange of foreign currency, has to be reduced from the
actual cost of machinery, and depreciation would be computed on such reduced cost.
28. Answer:
(i) Allowable, being business expenditure,
(ii) Capital expenditure eligible for depreciation
(iii) Allowable, if it is incurred on account of commercial expediency,
(iv) Capital expenditure. It will form part of actual cost of machinery
(v) Capital expenditure eligible for depreciation @ 25%.
29. Answer:
(i) Capital receipt but chargeable to tax as business income, specifically covered by section 28;
(ii) Revenue receipt, as the same is received in the course of business;
(iii) Revenue receipt, though chargeable to tax as per system of accounting (mercantile or cash) followed by
the assessee;
(iv) Capital expenditure, as the same is incurred on capital account;
(v) Revenue expenditure for the company; Taxable as 'Salaries' in the hands of the employee-director.
30. Answer: Computation of Deduction u/s 35D for AY 2020-21 [ Discuss the provisions of 35D]
Amount qualifying for deduction is
5% of the cost of the project [5% × 30,00,000] = ` 1,50,000, or
5% of the capital employed in the new unit i.e. 5% ` 40,00,000 = ` 2,00,000.
Whichever is beneficial to the company.
Therefore, the higher of the above two is ` 2,00,000 which is the qualifying amount.
Net qualifying amount - It is the lower of the following two.
a) Gross qualifying amount ` 2,00,000 or.
b) Actual amount of preliminary expenses i.e. ` 11,00,000.
The lower of these two being ` 2,00,000 is the net qualifying amount.
Amount deductible for AY 20-21: - 1/5th of the net qualifying amount i.e. 1/5 ` 2,00,000 = ` 40,000.
31. Answer: Each part payment made to employees in connection their voluntary retirement is deductible in five
equal installments beginning from the year in which such part payment is made to the employees. The
following table shows the deduction available u/s 35DDA to RK Ltd. in various financial years –
Financial Year 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24
Payment of ` 10 lakhs in 2017-18 2 2 2 2 2
Payment of ` 15 lakhs in 2018-19 3 3 3 3 3
Payment of ` 5 lakhs in 2019-20 1 1 1, 1 1
Total (`
` lakhs) 2 5 6 6 6 4 1
Thus, the amount of deduction allowable u/s 35DDA to RK Ltd. in assessment year 2020-21 is ` 6 lakhs.
32. Answer:
Net profit as per profit and loss account 911975
Less : (i) Interest on FD with bank - Taxable as Income from other sources 16500
(ii) Dividend from Indian Co. - Exempt 64360
(iii) Interest on I.T. Refund - Taxable as Income from other sources 230
Profits and gains of business or profession 830885
Add: Income from other sources (Interest on FD and IT Refund) 16730
Total Income 847615
Rounded off- 847620
Note: Securities transaction tax is an allowable expenditure.
CA Suraj Agrawal
PGBP 9B.14
33. Answer: Computation of taxable income of Mr. Ram
Net profit as per Profit and Loss A/c 357,900
Add: Not allowable (Household Exp. + Income-tax + Interest on capital + Reserve 49,600
for Bad debts) – 10000 + 30000 + 8400 + 1200
Add : Excess Depreciation debited to P&L A/c (12000 - 10000) 2,000
Add: Undervaluation of closing stock (25,200 x 1/9) (assuming that NRV exceeds cost) 2,800
Less : Undervaluation of opening stock (20,700 x 1/9) (assuming that NRV exceeds cost) -2,300
Less : Deduction u/s 80C for contribution to PPF 1,500
34. Answer: Computation of business income of Mrs. Thakur for A.Y. 2020-21 (Amounts in ` )
Net Profit as per Profit & Loss Account for the year ended 31.3.2020 50,750
Add: Expenses not admissible under the Income-tax Act:
Donation paid to son's school 1,500
Capital expenditure (Furniture) 5,000
Depreciation as per books of account (considered separately) 4,000
Excise duty unpaid after 31-7-2020 1,200
(7,500 - 3,500 - 1,000 - 1,800)
30% of Audit fees (being fees for professional services, on which TDS not made) 9,750 21,450
72,200
Less: Amounts not taxable under the Income-tax Act:
Gift from husband 10,000
Income-tax refund 20,000 30,000
42,200
Less: Depreciation under Income-tax Act:
On items already included 2,700
On new furniture (5,000 × 10% ×1/2) (used for less than 180 days) 250 2,950
Profits and gains from business 39,250
35. Answer: Computation of Income from Business (amounts in `)

Net profit as per Profit and Loss Account 1,66,500
Add: (1) Advertisement in a souvenir of political party 3,000
(2) Contribution to RPF (outstanding) 2,100
(3) Under valuation of closing stock [{(60000 x 100) / 80} - 60000] 15,000 20,100
Less : (1) Dividend (Exempt) 5,000
(2) Profit on sale of building (not taxable under this head) 16,500
(3) Under valuation of opening stock [{(40000 x 100) / 80} - 40000] 10,000
(4) Extra Depreciation allowable (1,800 -1,500) 300 31,800
Taxable Profits 1,54,800
36. Answer: Computation of taxable income from Business (amounts in ` )

Gross earnings: Sale of medicines 30,500
Consultation fees 10,000
Visiting fees 8,000 48,500
Less: Allowable expenses viz. Cost of medicines 20,000
Car expenses (1800 × 2 ÷ 3) 1,200
Salaries 1,200
Rent of dispensary 1,200
General Expenses 600
Depreciation allowed Motor car (12000 x 15%) x 2/3 1,200
Surgical equipment (15% × 50% x 6000) 450 25,850
22,650
Note : Since the assessee maintains accounts as per cash basis, therefore, outstanding consultancy fees,
outstanding salaries and sale of medicines on credit will not be considered.
CA Suraj Agrawal
PGBP 9B.15
37. Answer: Computation of Income from Business for the Assessment Year 2020-21 (all amounts in ` )
Profit as per Profit and Loss Account 165,600
Add: Advance tax 800
Salary to staff (salary paid to relative to the extent it is treated as excessive) 4,800
Interest on Mohit's capital and loan 7,200
Expenditure on acquisition of copy right (being capital expenditure) 5,600
Expenditure for acquiring know how (capital expenditure, no depreciation will be 24,000
allowed thereon as the same was not put to use during the previous year)
Depreciation 12,000
Provision for Income tax 4,000
Contribution to political party 2,000 60,400
Less: Depreciation as per Income tax 19,200

Depreciation on copyright (5600 x 25% x 1/2) (used for less than 180 days) 700
Outstanding CGST paid during the previous year 10,000 29900
Income from Business 1,96,100
Note : Expenses for arranging a long-term loan are covered by the term 'interest' and are, therefore,
allowable as deduction. Further, since outstanding customs duty of previous year 2018-19 was paid before
due date of furnishing return of income for that year, therefore, the same had been allowed in that year.
However, outstanding sales tax of previous year 2018-19 paid after such due date but during the previous
year 2019-20 will be allowed during the previous year 2019-20.
38. Assessee: Alpha Ltd. Assessment Year 2020-21 (amounts in `)

Net Profit as per Profit and Loss Account 1,250,000
Add: Expenses disallowed or considered separately: -
Excessive payment to relatives u/s 40A(2) [60,000 - 52,000] 8,000
Cash payment in excess of ` 10,000 (whole of ` 52,000) 52,000
Legal expenses 45,000
Scientific research expenses 200,000 305,000
15,55,000
Add: Amount foregone by the creditor is taxable u/s 41(1) 6,000
15,61,000
Less: Admissible expenditure: -
1/5th of amalgamation expenditure of ` 45,000 u/s 35DD 9,000
In-house Research expenses u/s 35(2AB) (150% of 2,00,000) 3,00,000 3,09,000
Taxable Income 12,52,000
Notes:
(a) Cost of replacement of worn out part of machineries is revenue expenses. Since cost of replacement is
included in Repairs, no adjustment is required.
(b) Sale of import entitlements is chargeable as business income under section 28(iiia). Since it is already
credited to profit and loss account, no adjustment is required.
Computation of Income from business of Shri Daga
[for the assessment year 2020-21]
` `
Net profit as per profit & loss account 1,79,095
Less: Items of income credited to Profit & Loss account but are
not taxable under the head "Profit & gains of business of profession"
Rent from agricultural land 950
Revenue from fisheries 4,000
Sale proceeds from canes 6,05,055
Profit on sale of Motor Truck 3,230 (-) 6,13,235
(-) 4,34,140
Fine paid to excise department (see working note 1) 2000
Legal Expenses incurred on defending suit [Capitalised] 2000
Daga's Remuneration (see working note 2) 38,750
Depreciation (considered separately) 91,000
Income tax 25,000
CA Suraj Agrawal
PGBP 9B.16
Cultivate on expenses (see working note 3) 4,37,500 (+) 5,96,250
1,62,110
Less: Expenses allowable u/s 28 to 44D but not debited to p&l
Depreciation's per Income-tax Rules 50,000
Manufacturing expenses on cane produced and consumed
in the factory (see working note 4) 68,000 1,18,000
Income from business 44,110
Working Notes:
1. Fine paid to excise department. It is presumed that fine is paid for infringement of central excise law.
2. Salary paid to the proprietor of the firm is not allowable.
3. Cultivate on expenses: Since the agricultural income on account of sale proceeds of cane has been
taken out from the normal business receipts, any expenditure incurred towards this account (i.e. to earn
agricultural income) is also not allowable.
4. Manufacturing expenses: If any item is produced in the factory, the income from which is considered
separately, and the same item is used in normal business, the fair market value of the item produced has
to be charged as expenditure in the normal business. Therefore, the average market price of the cane
produced and consumed in the factory is allowable as business expenditure. The expenses is under
charged by ` 68,000 [i.e. ` 6,00,000 -` ` 5,32,000].
39. Where an assessee is engaged in the composite business of growing and curing of coffee, the income will be
segregated between agricultural income and business income, as per Rule 7B of the Income-tax Rules, 1962.
As per the above Rule, income derived from sale of coffee grown and cured by the seller in India shall be
computed as if it were income derived from business, and 25% of such income shall be deemed to be income
liable to tax. The balance 75% will be treated as agricultural income.
Particulars ` ` `
Sale value of cured coffee 22,00,000
Less: Expenses for growing coffee 3,10,000
Car expenses (80% of ` 50,000) 40,000
Depreciation on car (80% of 15% of ` 3,00,000) 36,000
Total costs of agricultural operations 3,86,000
Expenditure for coffee curing operations 3,00,000

Add: Depreciation on machinery (15% of 15,00,000) (See Note 2,25,000
below) 5,25,000
Total cost of the curing operations
9,11,000
Total cost of composite operations 12,89,000
Total profits from composite activities 3,22,250
Amount regarded as business income (25% of above) 9,66,750
Amount treated as agricultural income (75% of above)
Computation of value of depreciable assets as on 31.3.2020
Particulars ` ` `
Car Opening value as on 1.4.2019 3,00,000
Depreciation thereon at 15% 45,000
Less: Disallowance @20% for personal use 9,000
Depreciation actually allowed 36,000
Closing value as on 31.3.2020 2,64,000
Machinery Opening value as on 1.4.2019 15,00,000

Less: Depreciation @ 15% 2,25,000
Closing value as on 31.3.2020 12,75,000
Explanation 7 to section 43(6) provides that in cases of ‘composite income’, for the purpose of computing
written down value of assets acquired before the previous year, the total amount of depreciation shall be
computed as if the entire composite income of the assessee (and not just 25%) is chargeable under the head
“Profits and gains of business or profession”. The depreciation so computed shall be deemed to have been
“actually allowed” to the assessee.
CA Suraj Agrawal
Taxation of AOP & Firm 10.1
AOPs AND BOIs – Section 40(ba)

Point AOP BOI
1. Creation Created by two or more persons Created by operation of law.
voluntarily.
2. Members Companies, firms, HUFs or individuals. Only Individuals.
3. Features Persons join in a common purpose or It merely receives the income jointly
action. Mere joint receipt of income not and is assessable in the like manner
enough. Different from partnership. and to the same extent as the
beneficiaries.
4. Assessee Not a representative assessee A representative assessee
Section 40(ba) – Disallowances in case of AOPs or BOIs
1. Any payment of interest, salary, commission, bonus or remuneration made by an AOPs or BOIs to
its members shall be disallowed.
2. Where interest is paid by an AOP or BOI to a member who has also paid interest to the AOP/BOI,
the amount of interest to be disallowed under clause (ba) shall be limited to the net amount of
interest paid by AOP/BOI to the members.
3. Where an individual is a member in his individual capacity, interest paid to him in his
representative capacity shall not be taken into account.
4. Where an individual is a member in representative capacity, interest paid to him in his individual
capacity shall not be taken into account.
CA Suraj Agrawal
Example: Computation of total income of AOP: Mr. T and Mr. Q are individuals, who constitute an Association of
persons, sharing profit and losses in the ratio of 2 : 1. For the accounting year ended 31st March, 2020, the Profit
and Loss account of the business was as under:
Cost of goods sold 42,50,000 Sales 49,00,000

Remuneration to: T 1,30,000 Dividend from companies 25,000
Q 1,70,000 Capital gains (long term) 6,40,000
Employees 2,56,000
Interest to: T 48,300
Q 35,700
Other expenses • 1,11,700
Sales tax penalty due 39,000
Net Profit 5,24,000
55,65,000 55,65,000
Additional information furnished -

1) Other expenses included -
a) Entertainment expenses of ` 35,000;
b) Wristwatches costing ` 2,500 each were given to 12 dealers, who had exceeded the sales quota
prescribed under a sales promotion scheme;
c) Employer's contribution of ` 6,000 to the Provident Fund was paid on 14th January 2021.
d) ` 30,000 was paid in cash to an advertising agency for publicity.
2) Outstanding sales tax penalty was paid on 15th October 2019. The penalty was imposed by the Sales-
tax Officer for non-filing of returns and statements by the due dates.
3) T and Q had, for this year, income from other sources of ` 1,88,000 and ` 64,000 respectively.
Required to compute the total income of the AOP for the Assessment Year 2020-21
Solution: Computation of total income and tax liability of AOP (amounts in `)

Net profit an per Profit and Loss Account 524000
Add: Remuneration to members T and Q 300000
Interest to members T and Q 84000
Employer's contribution to PF not paid within due date 6000
Advertising expenses paid in cash (100% of 30,000) 30000
Sales tax penalty for non-filing of returns by due date (Not
allowable as it is incurred for a purpose, which is prohibited by law
- Explanation to Section 37(1)) 39000 459000
983000
Less: Incomes taxable under other heads :
Dividends [Exempt u/s 10(34)] 25000
Long-term capital gains 640000 665000
Profits and gains of business 318000
LTCG 640000
Total income of the AOP 958000
CA Suraj Agrawal
FIRMs – Section 40(b)

1) "Firm", "Partners" and "Partnership" to include "Limited Liability Partnership (LLP)":
a) "Firm" shall have the meaning assigned to it in the Indian Partnership Act, 1932, and shall
include a LLP as defined in the LLP Act, 2008.
b) "Partner" shall have meaning assigned to it in Indian Partnership Act, 1932, and shall include:
i) any person who, being a minor, has been admitted to the benefits of partnership; and
ii) a partner of a LLP as defined in LLP Act, 2008;
c) "Partnership" shall have the meaning assigned to it in the Indian Partnership Act, 1932, and
shall include a LLP as defined in the LLP Act, 2008.
Provisions of the Indian Partnership Act, 1932: Partnership is the relation between persons who
have agreed to share profits of business carried on by all or any of them acting for all. Persons who
have entered into partnership with one another are called individually "partners" and collectively "a
firm".
2) Exemption in respect of partner's share - Section 10(2A): The partners' share in the total
income of the firm shall be exempt from tax in the hands of partner.
3) Under Income Tax Act, a partnership firm has a separate identity apart from its partner. It is
taxed as a separate entity at a flat rate of 30% + surcharge + Health & Education Cess @ 4%.
4) Interest and remuneration received by partner - business income [Sec. 28 (v)]: Interest,
salary, bonus, commission or other remuneration received by a partner from a firm shall be
chargeable to tax under the head PGBP. However, any payment of remuneration etc to
partners, not allowed as deduction to the firm, shall not be taxed in the hands of partners.
5) Carry forward & set-off of loss of Firm on change in constitution of firm [Sec. 78]: where a
change occurs in the constitution of firm, on account of retirement or death of a partner, the
proportionate loss of the retired or deceased partner shall not be carried forward. However,
this section shall not apply in case of unabsorbed depreciation.
6) Disallowance of interest & remuneration to partners in excess of specified limits [Sec 40(b)]
In the case of any firm assessable as such or a Limited Liability Partnership (LLP) the
following amounts shall not be deducted in computing the income from business of any
firm/LLP:
a) Any salary, bonus, commission or remuneration, by whatever name called (hereinafter
referred to as “remuneration”), to any partner who is not a working partner.
b) Any remuneration paid to the working partner or interest to any partner which is not
authorised by or which is inconsistent with the terms of the partnership deed.
c) Any interest payment in excess of 12% simple interest p.a. as authorised by the
partnership deed falling after the date of such deed.
d) Any remuneration paid to a partner, authorised by a partnership deed and falling after the
date of the deed in excess of the following limits:
On the First ` 3 lakh of book profit or in Higher of ` 1,50,000 or 90% of book profit
case of “Loss”
On the balance 60% of Book Profit.
CA Suraj Agrawal
7) Computation of Book Profits for determining remuneration:
Profits and Gains of Business or Profession of Firm computed as per Sec. 28 to 44D XXX
Add: Interest to partners disallowed as per above provisions (if not already considered) XXX
Add: Remuneration to partners, if debited to P&L A/c XXX
Book Profits XXX
8) Circular No 8/2014: CBDT has clarified that income of a firm is to be taxed in the hands of the firm
only & the same can under no circumstances be taxed in the hands of its partners.
It is exempt in the hands of partners even if the income chargeable to tax become NIL in the hands
of Firm on account of any exemption or deduction.
9) Important Points for section 40(b) :
(A) If an individual is a partner in firm on behalf of other person (i.e. in representative
capacity),then —
• Interest paid to such individual in his individual capacity shall not be disallowed.
• Interest paid to such individual as partner in representative capacity and interest paid to the
person so represented shall be taken into account for disallowance as given above.
E.g.: If Mr. Ram is a partner in the firm on behalf of his wife, interest paid to Ram in his
individual capacity will be allowed while interest paid to Ram on behalf of his wife as well as
interest paid to his wife directly, both will be taken into account for the purposes of disallowance.
(B) If an individual is a partner in a firm in his individual capacity -

• Interest paid to him on behalf, or for the benefit, of any other person is not disallowed; and
• Interest paid to him in his personal capacity is taken into account for disallowance.
E.g.: If Mr. Sohan is a partner in the firm in his individual capacity, then interest paid to him on
behalf of any other person will not be disallowed, while interest paid to him in his individual
capacity will be taken into account for the purposes of disallowance.
CA Suraj Agrawal
Question No. 1:
Nikihil, Gagan and Suman are partners in a firm with equal shares. The profit and loss account for the year ending
31st March, 2020 shows a net profit of ` 42,300 after debiting the following items:
(i) Salary of ` 24,000 each to Nikhil and Gagan.
(ii) Bonus to Suman ` 18,000.
(iii) Commission of ` 9,000, ` 10,000 and ` 15,000 to Nikhil, Gagan and Suman respectively.
(iv) Interest on capital @ 15% amounting to ` 4,500, ` 6,000 and ` 15,000 paid to Nikhil, Gagan and
Suman respectively.
Assuming that all partners are working partners and the firm fulfils the conditions of Section 184, compute the total
income of the firm and taxable income of the partners in the firm.
Solution: Computation of total income of the firm

Net profit as per Profit and Loss A/c 42,300
Add :
Remuneration i.e. Salary, bonus and commission to partners 100,000
Interest to partners in excess of 12% p.a. [(4500 + 6000 + 15000) × 3 ÷ 5100
15]
Book profits 147,400
Less : Remuneration allowable as per section 40(b), being the
lower of the following -
(a) Actual remuneration 100,000
(b) Limit as per section 40(b) 150,000 100,000
Total income 47,400
Computation of total income of each partner of the firm
Nikhil Gagan Suman
Interest on capital @ 12% (to the extent allowed in hands of 3,600 4,800 12,000
the firm)
Salary, Bonus & Commission (fully taxable; as fully allowed in 33,000 34,000 33,000
the hands of firm)
Total income 36,600 38,800 45,000
Question No. 2:
Profit and loss account of a partnership firm for the year ended 31st March, 2020 is as follows (amounts in
`):-
Cost of goods sold 10,00,000 Sales 15,00,000
Remuneration to Partners 1,45,000 Rent of House Property 60,000
Interest to Partners @ 20% p.a. 40,000 Dividend 1,70,000
Municipal Taxes of house property 25,000
Other expenses 2,40,000
Net Profit 2,80,000
17,30,000 17,30,000
Other information:
(i) Out of other expenses, ` 18,400 is not deductible under sections 36, 37(1) and 43B.
(ii) On 15th January 2020, the firm pays an outstanding GST liability of ` 54,700 for the previous year 2018-
19. As this amount pertains to the previous year 2018-19, it has not been debited to the aforesaid profit
and loss account
Calculate remuneration deductible under section 40(b).
Question No. 3:
The net profits of Jolly Brothers, a partnership firm, consisting of three partners carrying on business for the
accounting year ended 31st March, 2020 was ` 5,40,000. The said net profits after charging salary payable to all
the partners were amounting to ` 1,08,000, but before crediting interest to partners' accounts on their fixed
capitals amounting to ` 10 lakh totally. The partnership deed provided for payment of interest on fixed capital at
18% per annum. The partnership deed does not, however, specify any salary entitlement to partners.
On this information, you are required to —

(i) Compute the taxable income of the firm; and
(ii) Calculate the remuneration allowable under provisions of the Income-tax Act, 1961 to all the partners, if
the partnership deed had provided for the payment of remuneration to them.
CA Suraj Agrawal
Question No. 4:
A firm of Company Secretaries consisting of 3 partners earned a net surplus of ` 2,08,000 during the accounting
year ended 31st March, 2020 after charging interest on capitals amounting to ` 36,000 calculated @ 18% per
annum on the capitals of partners but before charging remuneration to partners. You are required to calculate the
taxable income of the firm and tax thereon after allowing the maximum allowable remuneration to partners under
the provisions of the Income-tax Act, 1961.
Question No. 5:
X & Co., a partnership firm as such, furnishes the following Profit and Loss Account for the previous year ending
31-3-2020 (amounts in ` ):
To cost of Goods 280000 By Sales 292000
To other Expenses 91,000 By Net Loss 172000
To Interest to Partners 25000
To Remuneration to Partners 68000
464000 464000
The other expenses debited include ` 13,600 not allowable under section 37(1) of the Act. Interest to partners is
in Excess by ` 7,100 (not statutory allowable)
You are required to compute for the AY 2020-21:

(1) Book profits of the firm,
(2) Permissible remuneration to partners under section 40(b)
(3) The income of the firm.
Question No. 6:
Chatterjee and Co., a firm of Company Secretaries at Kolkata, has furnished the profit and loss account for the
year ended 31st March, 2020 as under (Amounts in ` ):
Expenses 165000 Gross receipts from profession 220000
Depreciation on assets 45,000 Net loss 131000
Remuneration to partners 141000
351000 351000
Additional information:
(a) Expenses include an amount of ` 22,500 being interest on capital to partners credited @ 12% per
annum on the balances and ` 22,500 being the expenditure not allowable under section 37.
(b) Depreciation as per the income-tax rules is ` 48,000.
Compute the taxable income of the firm indicating the maximum permissible remuneration and interest
allowable to partners under the provisions of the Income-tax Act, 1961.
Solution: Computation of remuneration allowed to the partner (amounts in ` )

Net loss as per Profit & Loss account -131000
Add: (a) Remuneration to partners 141000
(b) Expenses disallowed u/s 37 22500 163500
32500
Less: Depreciation not debited to P & L A/c (` 48000 - ` 45000) . 3000
Book profit 29500
Less: Remuneration allowable u/s 40(b), being the lower of
(a) Higher of - (i) 90% of 29,500 26550
(ii) Minimum statutory limit 150000 150000
(b) Actual Remuneration 141000 141000
Total Income (Business loss to be carried forward) -111500
Note : Interest on capital ` 22,500 paid to partner is allowable, as interstate doesn't exceed 12% p.a.
CA Suraj Agrawal
Question No. 7:
ABC is a partnership firm carrying on business, in which A, B and C are partners sharing profits and losses
equally. In respect of Assessment Year 2020-21, it furnishes the following particulars (amounts in `):
1. Loss as per Profit and Loss A/c after debiting remuneration to partners and interest on their capital -
` 250,000
2. Remuneration to Partners:
A 90,000
B 60,000
C 30,000
3. Interest paid on Capital: as on 1-4-2019 Capital Interest
A 100000 20,000
B 100000 20,000
C 100000 20,000
You are required to work out the income of the firm and of the partners A, B and C assuming that the
partners have no other income.
Question No. 8:
Rao & Jain, a partnership firm consisting of two partners, reports a net profit of ` 7,00,000 before
deduction of the following items:
(1) Salary of ` 20,000 each per month payable to two working partners of the firm (as authorized by the deed
of partnership).
(2) Depreciation on plant and machinery under section 32 (computed) ` 1,50,000.
(3) Interest on capital at 15% per annum (as per the deed of partnership). The amount of capital eligible for
interest ` 5,00,000.
Compute:
(i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
(ii) Allowable working partner salary for the assessment year 2020-21 as per section 40(b) of the
Income-tax Act,
Solution:
(i) As per the provisions of Explanation 3 to section 40(b), book profit shall mean the net profit as per the
profit and loss account for the relevant previous year computed in the manner laid down in Chapter IV-D
as increased by the aggregate amount of the remuneration paid or payable to the partners of the firm if
the same has been already deducted while computing the net profit
In the present case, the net profit given is before deduction of depreciation on plant and machinery,
interest on capital of partners and salary to the working partners. Therefore, the book profits shall be as
follows:
Computation of Book Profit of the firm under section 40(b) of the Income-tax Act, 1961.
Particulars ` `
Net Profit (before deduction of depreciation, salary and interest) 7,00,000
Less: Depreciation under section 32 1,50,000
Interest @ 12% p.a. [being the maximum allowable as per
section 40(b)] (5,00,000 × 12%) 60,000 2,10,000
Book Profit
4,90,000
(ii) Salary actually paid to working partners = ` 20,000 × 2 × 12 = ` 4,80,000. As per the provisions of section
40(b)(v), the salary paid to the working partners is allowed subject to the following limits –
On the first ` 3,00,000 of book profit ` 1,50,000 or 90% of book profit, whichever is more
On the balance of book profit 60% of the balance book profit
Therefore, the maximum allowable working partners’ salary for the A.Y. 2020-21 in this case would be:
Particulars `
On the first ` 3,00,000 of book profit [(` 1,50,000 or 90% of ` 3,00,000) whichever is 2,70,000
more]
On the balance of book profit [60% of (` 4,90,000 - ` 3,00,000)] 1,14,000
Maximum allowable partners’ salary 3,84,000
Hence, allowable working partners’ salary for the A.Y. 2020-21 as per the provisions of section 40(b)(v) is
` 3,84,000.
CA Suraj Agrawal
Important Note:
Salary & Interest received by a partner from a firm engaged in growing & manufacturing TEA is taxable
under the head PGBP only to the extent of 40%.
Question: Following are the details of AB & Co., being engaged in manufacturing and growing tea in India
–
Particulars ` `
Income from tea business before partner’s remuneration and interest 600000
Less: Interest on capital @ 10%
A 10000
B 20000
Less: Remuneration to partner
A 90000
B 180000 300000
Distributed between partners (in 1:2 ratio) 300000
Additional information for computation of tax liability of partners
A B
Long term capital gain on sale of agricultural land 4000 50000
Winning from lotteries 5000 -
Winning from horse races - 2500
Other agricultural income 50000 10000
Rent from agro land situated in Nepal 1000 200000
Compute tax liability of firm and partners for the AY 2020-21
Solution:
Computation of total income and tax liability of M/s AB & Co. for AY 2020-21
Particulars Amount
Profits & gains of business or profession (40% of ` 300000 as per Rule 8) 1,20,000
Tax on above @ 30% 36,000
Add: Health & Education cess@ 4% 1,440
Tax and cess payable 37,440
Note: Remuneration to partners is below maximum limits provided in Section 40(b).
Computation of total income of partners for AY 2020-21

A B
Particulars
Details Amount Details Amount
Profits & gains of business or profession
Share of profit from Ab & Co. [exempted u/s 10(2A)] - -
Interest from AB & Co. (40% as per Rule 8) 4,000 8,000
Remuneration from AB & Co. (40% as per Rule 8) 36,000 40,000 72,000 80,000
Capital gains
Long term capital gain on sale of agro-land 4,000 50,000
Winning from lotteries 5,000 -
Winning from horse race - 2,500
Rent from agro land situated in Nepal 1,000 6,000 2,00,000 2,02,500
Total Income 50,000 3,32,500
Computation of agricultural income of partners for the AY 2020-21

Particulars A B
Share of profit from AB & Co. [exempted u/s 10(2A)] - -
Interest from AB & Co. (60% as per Rule 8) 6,000 12,000
Remuneration from AB & Co. (60% as per Rule 8) 54,000 1,08,000
Other agricultural income 50,000 10,000
Total 1,10,000 1,30,000
CA Suraj Agrawal
Computation of tax liability of Mr. A for the AY 2020-21
Particulars `
Tax on income from lotteries (` 5000*30%)(Note 1) 1,500
Tax on long term capital gain (as other income does not exceed ` 250000) Nil
Tax on other income Nil
Total tax 1,500
Less: Rebate 1,500
Tax and cess payable (Rounded off u/s 288B) NIL
Note: Total income of Mr. A does not exceed ` 250,000, hence integration method of taxation is not
applicable.
Computation of Tax Liability of Mr. B for the AY 2020-21

Particulars Amount
Tax on income from horse race (` 2,500*30%) 750
Add: Tax on long term capital gain (` 50,000*20%) 10,000
Add: Tax on remaining income 8,000
Tax on ` 410000 (i.e. agro income ` 1,30,000 + non-agro income other than capital gain
and winning from horse race ` 2,80,000)
Total (i.e. Tax on agro as well as non-agro income) 18,750
Less: Tax on ` 3,80,000 (i.e. agro income ` 1,30,000 + maximum exempted limit ` 2,50,000) 6,500
Tax liability 12,250
Less: Rebate (Maximum ` 12,500) 12,250
Tax after Rebate NIL
Add: Health & Education Cess @ 4% NIL
Tax and Cess payable (Rounded off u/s 288B) NIL
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
HUF Taxation 11. 1
HINDU UNDIVIDED FAMILY

1) Definition: HUF is not defined under the Income-tax law. However, as per Hindu law it means “a family,
which consists of all males lineally descended from a common ancestor and includes their wives and
unmarried daughters”. The head of a HUF is termed as 'Karta'.
2) Origin: The relation of a HUF does not arise from a contract but arises from status. A person becomes a
member of the HUF not by virtue of contract but by his birth.
3) Cessation of membership:
A male member continues to be a member of the HUF until partition of the HUF. On partition, he ceases
to be a member of the earlier larger HUF and becomes member of another smaller HUF.
A female member ceases to be a member of the HUF in which she was born, when she gets married; in
that case, she becomes a member of the HUF of her husband.
4) Conditions for HUF: In order to be assessed as a HUF the following conditions are to be fulfilled –
a) there should be coparcenership; and
b) there should be a Joint Family Property.
5) Co-parcenership: Co-parcener refers to those members of an HUF who acquire by birth an interest in the
joint family property. Only the coparceners have a right to partition. Now, the female members have been
brought at par with the male members. Hence, now
a) daughter of a coparcener becomes a coparcener by birth in her own right in the same manner as son.
She will have the same rights and liabilities in respect of coparcenary property as of a son.
b) daughter shall be entitled to same share on partition of coparcenary property as that of the son.
c) female heir can demand the partition of a coparcenary property in the same manner as the son.
6) HUF v. Hindu Coparcenery: While-an HUF covers all members; the Hindu coparcenery is limited to male
members (viz. the common ancestor, sons, grandsons and great grandsons) and the daughters of such
coparceners. Hence, HUF is a wider body than coparcenery.
7) Exemption to the members of HUF in relation to income of HUF [Section 10(2)]: Any sum received by a
member of a Hindu Undivided Family out of the income of the family or, in the case of any impartible estate,
out of the income of the estate belonging to the family shall be exempt from tax.
8) Partition: Partition means physical or other division of property. However, physical division of income
without physical division of property producing the income is not partition. Partial partition means a
partition, which is partial as regards members or properties of HUF or both.
9) Assessment after partition [Section 171]: The law doesn't recognise any partial partition of HUF. Hence in
case of partial partition, HUF shall be assessed as if no partition had taken place. However, in case of total
partition, the assessment will be made as follows -
a) the Assessing Officer shall, after making inquiry, record the date of effect of such partition; and
b) the total income of HUF shall be assessed as that of HUF only upto the date of such partition.
10) Schools of Hindu Law: There are two schools of Hindu law. They are –
(1) Mithakshara school of Hindu law
(2) Dayabhaga school of Hindu law
Mithakshara law is followed by entire India except West Bengal and Assam. There is a basic difference
between the two schools of thought with regard to succession.
Under the Mithakshara law, the inheritance is by birth. One acquires the right to the family property by his
birth and not by succession irrespective of the fact that his elders are living. Thus every child born in the
family acquires a right/share in the family property.
Dayabagha law prevails in West Bengal and Assam. In Dayabagha law, nobody acquires the right, share
in the property by birth as long as the head of family is living, that is, the children do not acquire any
right, share in the family property, as long as his father is alive and only on death of the father, the children
will acquire right/share in the property. Thus, the father and his brothers would be the coparceners of the
HUF
CA Suraj Agrawal
HUF Taxation 11. 2
11) ASSESSMENT OF HUF:
The income of a HUF is to be assessed in the hands of the HUF and not in the hands of any of its members.
This is because HUF is a separate and a distinct tax entity.
12) FOLLOWING POINTS SHALL BE CONSIDERED:
1. Remuneration to member of HUF due to investment of HUF fund: Where joint fund is invested in a
company or a firm, fees or remuneration received by any member of HUF as a director or partner from
such company or firm by virtue of such investment shall be treated as income of the HUF. On the other
hand., where such remuneration or fees is received by virtue of service rendered by such member (in
his personal capacity) then such amount shall be taxable in hands of such member
2. Remuneration to Karta: Any genuine (not excessive) remuneration paid to the Karta for conducting
business of the HUF is allowed expenditure in the hands of the HUF provided such remuneration is paid
under a bonafide agreement and is in the interest of the family business.
3. Personal income of the members: income of the member of HUF acquired in his personal capacity
shall not be taxable in the hands of HUF.
4. Income from impartible estate: Though the impartible estate belongs to the family, income arising
there from is taxable in the hands of the holder of the ‘estate’ and not in the hands of the HUF.
13) STEPS FOR COMPUTATION OF INCOME TAX OF HUF
Step 1 The Gross Total Income of HUF, like any other person, shall be computed under four heads of
income, on the basis of their residential status. There can be no income under the head income from
salaries in the case of HUF.
Step 2 Sections 60 to 63 relating to income of other person included in the assessee’s total income are
applicable in case of HUF but section 64 is not applicable to HUF as it is applicable in case of
individual assessee only.
Step 3 Set off of losses is permissible while aggregating the income under different heads of income.
Step 4 Carry forward and set off of losses of past years, if permissible, is allowed.
Step 5 The income computed in steps 1 to 4 is known as gross total income from which the following
deductions u/s 80C to 80U will be allowed:
Sl. No. Section Nature of Deductions

1 80C Deduction in respect of Life Insurance Premium, deferred annuity,
contribution to PF, subscription to certain equity shares or debentures, etc.
2 80D Payment of medical insurance premium
3 80DD Medical treatment of handicapped dependents and deposits made for
maintenance of handicapped dependents
4 80DDB Deduction in respect of medical treatment, etc.
5 80G Donations to certain funds/charitable institutions etc.
6 80GGA Certain donations for scientific research or rural development
7 80GGC Deduction in respect of contribution given by any person to political parties
8 80JJA Deduction in respect of profits and gains from business of collecting and
processing of bio-degradable waste
9 80TTA Deduction is respect of Saving Bank Account Interest
Step 6 The balance income after allowing the deductions is known as Total Income which will be rounded off
to the nearest ` 10.
Step 7 Compute the tax on such total income at the prescribed rates of tax.
Step 8 Add Health & Education Cess @ 4% on the tax shall be levied.
Step 9 Deduct TDS and advance tax paid for the relevant assessment year. The balance is the net tax
payable which must be rounded off to the nearest ten rupees. This tax has to be paid as self-
assessment tax before submitting the return of income.
CA Suraj Agrawal
HUF Taxation 11. 3
Question 1:
X is the coparcener of a Hindu Undivided Family consisting of himself, his father and two elder brothers.
The assets of the family have not yet been partitioned. From out of the rental income of the family, X's
father sends X ` 16,000 to enable him to maintain his family. Besides the above receipt, X has received a
salary of ` 60,000 from his employer. Discuss the tax liability/ exemptions that Mr. X gets.
Solution: As per section 10(2), any sum received by a member of a HUF out of the income of the family is
exempt from tax. Hence, share in HUF income received by X is exempt from tax. However, salary of
` 60,000 is taxable. The tax liability in respect thereof shall be NIL.
Question 2:
Mr. Prasad is a karta of a HUF. The family declares GTI of ` 4,00,000 for the assessment year 2020-21. The
gross total income includes taxable long-term capital gains of ` 65,000 (taxable u/s Section 112) and
short-term capital gains of ` 35,000 which is taxable under section 111A. The details of HUF funds
investment made during the previous year 2019-20 are as follows (amounts in `):
Amount deposited in PPF in the name of members of HUF 10,000

Medical insurance premium paid by cheque:
(a) in the name of the karta 4,000
(b) in the personal name of Mr. Prasad 5,000
Contributions made to:

(a) Indra Gandhi Memorial Trust 7,000
(b) Delhi university (declared as an institution of national eminence) 3,000
(c) Zila saksharta samiti 5,000
(d) An approved charitable institution 30,000
(e) Government for the promotion of family planning 10,000
(f) Hanuman temple in the local mohalla 20,000
Compute the total income of HUF which is chargeable to tax for the AY 2020-21.
Solution: Computation of the Total Income of HUF

LTCG income (112) 65,000
STCG income (111A) 35,000
Other income 300,000
Less : Deduction u/s 80C (PPF deposit in the name of member of HUF) 10,000
Less : Deduction u/s 80D (Medical insurance premium paid to effect/keep in force insurance 9,000
on the health of a member viz. Karta - whether in his personal name or in his name as Karta.
Since payment is out of funds of the HUF, hence, deductible in computing total income of the
HUF)
Less: Deduction under section 80G (See Note) 30,550
Note: Computation of deduction under section 80G

Donation to - Qualifying Sum Rs. % Eligible Deduction
(A) Donation without any qualifying limit:
1. Delhi university 3,000 100% 3000
2. Zila Saksharta Samiti 5,000 100% 5000
3. Indra Gandhi Memorial Trust 7,000 50% 3500
(B) Donation subject to qualifying limit of total donation of 10% of Adjusted GTI:
1. Government for the promotion of family planning. 10,000 100% 10,000
2. An approved charitable institution (While total donation is 18,100 50% 9,050
` 30,000; the qualifying amount = 10% of Adj. GTI -
Donation for family planning, which is eligible for 100%
deduction)
Qualifying amount under (B) = 10% of Adj. GTI 28,100
Total Deduction u/s 80G 30,550
**Adjusted GTI = GTI - Deduction u/s 80C & 80C - LTCG - STCG referred u/s 111A 281,000
CA Suraj Agrawal
HUF Taxation 11. 4
Question 3:
The following details of income for FY 2019-20 have been supplied by R who is Karta of HUF:
a. Profit from family business 1,44,000
b. Salary received by a member of family for looking after the family business 20,000
c. Remuneration received by Karta for working as secretary in a company 30,000
d. Municipal value of ancestral house let out 24,000
e. Local taxes of house 1,200
f. Dividend (Gross) 12,800
g. Long term capital gain 19,000
h. Long term capital gain from transfer of Investment 20,000
i. Profit from a firm in which Karta is a partner on behalf of HUF 28,000
j. Donation to recognized education institution 15,000
k. Life Insurance Premium paid 26,000
Compute the TI of the family for the AY 2020-21.
Solution: Gross Total Income of HUF for the AY 2020-21

Income from house property:-
Annual value 24,000
Less: Local taxes of house (1,200)
Less: Standard deduction @ 30 % 6,840 15,960
Profit gain of business or profession -
Profit from business 1,44,000
Capital Gain –
Long term capital gain from transfer of Investment 20,000 39,000
Dividends Exempt
Gross Total income 1,98,960
Less: Deduction
U/s 80C 26,000
U/s 80G 50% - (Donation to a recognized education institution)
` 15,000 but limited to 10% of Adj GTI = ` 13,396
50% of ` 13,396 6,698 32,698
Notes: -
1. Income from long-term capital gain is assumed to be the income of HUF though specifically not mentioned in
question.
2. Profit from a firm in exempt
3. Adjusted Gross Total Income ` 1,98,960 – ` 39,000 (LTCG) – ` 26,000 (80C) = ` 1,33,960.
4. Salary to member is allowable expenses hence not added back.
Question 4:
The Karta of an HUF furnished the following particulars of the income of the HUF for the AY 2020-21:
Interest on Debentures 45,000
Interest on Govt. Securities 10,000
Dividend from UTI 6,000
Rent of House Property 20,000
Profit from an industrial undertaking 90,000
Long term Capital Gain 50,000
Agricultural income 60,000
The family paid ` 12,000 by way of insurance premium of its members and donated ` 16,000 to a recognized
charitable institution. Compute the amount of tax payable by the HUF.
Solution
Computation of income of HUF
(For the assessment year 2020-21)
Non-agricultural income
Annual value 20,000
Less: Standard deduction @ 30% u/s 24(a) 6,000 14,000
CA Suraj Agrawal
HUF Taxation 11. 5
Income from business & profession
Profit from newly established industrial undertaking 90,000
Income from long term capital gain 50,000

Interest on Govt. securities 10,000
Dividend from UTI Exempt 55,000

Less: Deductions
U/s 80C 12,000
U/s 80G – ` 16,000 donated to a charitable institution 50% of [10% of ` 1,47,000] 7,350 19,350
Tax on Total income excluding of LTCG (` 1,89,650 – ` 50,000) 1,39,650 NIL

Tax on long term capital gain of ` 50,000 (as unexhausted basic exemption limit is ` 110,350) NIL
1. No partial integrate of agricultural income with non-agricultural income as agricultural income exclusive of
LTCG is less than the exemption limit
2. Adjusted GTI is ` 209,000 (GTI) – ` 50,000 (LTCG) – ` 12,000 (80C) = ` 147,000
Question 5:
A HUF has three coparceners: X (Karta), Y and Z. The family has the following incomes for the year
ending March 31, 2020:
`
Interest on securities 5,00,000
Rent (House 1) 6,00,000
Rent of a House 2 (purchased in 1946 in the name of Mrs. X out of funds of the family) 3,50,000
Income from family business 9,70,000
Bank interest [Term Deposits] 3,12,000
Salary of Y from a company 6,00,000
One-third share from a partnership firm in which Y is a partner, representing the family 8,00,000
Determine the total income of the family for the AY 2020-21, assuming that the family pays life
insurance premium of ` 14,000 (sum assured: ` 1,40,000) on the life of X and medical insurance
premium of ` 36,000 for Mr. X.
Solution:
Interest on securities 5,00,000
Income from house property [(` 6,00,000 + ` 3,50,000) Less: Deduction u/s 24(a) - 30%] 6,65,000
Less: Deductions
U/s 80C 14,000
U/s 80D (subject to a maximum of ` 50,000) 36,000
Note – age of X is not given in the problem. However, the family purchased house in the name of Mrs. X in the
year 1946. Since X was married in 1946, his age on March 31, 2020 should be at least of 60 years. Consequently,
deduction up to ` 50,000 is available u/s 80D.
CA Suraj Agrawal
HUF Taxation 11. 6
Class Notes
CA Suraj Agrawal
Clubbing of Income 12.1
CLUBBING OF INCOME
TRANSFER OF INCOME WITHOUT TRANSFER OF THE ASSET [SEC 60]
If any person transfers the income from any asset without transferring the asset itself, such income is to
be included in the total income of the transferor.
Example:
Mr. A confers the right to receive rent in respect of his house property on his wife, Mrs. A, without
transferring the house itself to her. In this case, rent received by Mrs. A will be clubbed with the income of
Mr. A.
INCOME ARISING FROM REVOCABLE TRANSFER OF ASSETS[SECTION

61]
(i) All income arising to any person by virtue of a revocable transfer of assets is to be included in the total
income of the transferor.
(ii) As per section 63, the transfer is deemed to be revocable if whole or any part of income or assets is re-
transferred to the transferor or transferor gets the right over such income or assets.
Note: This clubbing provision will operate even if only part of income of the transferred asset had been applied
for the benefit of the transferor. Once the transfer is revocable, the entire income from the transferred asset is
includible in the total income of the transferor.
EXCEPTIONS WHERE CLUBBING PROVISIONS ARE NOT ATTRACTED EVEN IN CASE

OF REVOCABLE TRANSFER [SECTION 62]: Section 61 will not apply in the following 2 cases -
1. Transfer not revocable during the life time of the beneficiary or the transferee:
If there is a transfer of asset which is not revocable during the life time of the transferee, the income from the
transferred asset is not includible in the total income of the transferor provided the transferor derives no
direct or indirect benefit from such income.
Note: In the above case, as and when the power to revoke the transfer arises, the income arising by virtue of
such transfer will be included in the total income of the transferor.
2. Transfer is made before 01.04.1961 & transfer is not revocable for a period exceeding 6 years.
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
CLUBBING OF INCOME ARISING TO SPOUSE [SECTION 64(1)(ii)]
Income by way of remuneration from a concern in which the individual has substantial
interest
Any remuneration derived by a spouse from a concern in which the other spouse has a substantial interest,
shall be clubbed in the hands of the spouse who has a substantial interest in that concern.
No clubbing if remuneration is due to technical or professional qualifications of spouse.
If the husband and wife both have substantial interest in the concern and
- both are in receipt of remuneration from the concern,
- then the remuneration of both shall be clubbed in the hands of that spouse
- whose total income, before including such remuneration, is greater.

Where any such income is once included in the total income of either spouse, income arising in the
succeeding year shall not be included in the total income of the other spouse unless the Assessing
Officer is satisfied, after giving that spouse an opportunity of being heard, that it is necessary to do so.
Meaning of substantial interest:

An individual shall be deemed to have a substantial interest in the concern:
(i) For company - at least 20% equity shares of such company at any time during the PY are held
by individual along with his relatives.
(ii) For any other case- at least 20% of the profits of such concern at any time during the PY is
held by individual along with his relatives.
“Relative” means the spouse, brother or sister or any lineal ascendant or descendant of the individual.
Class Notes
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
Question 1: Mr. A is an employee of X Ltd. and he has 25% shares of that company. His salary is ` 50,000
p.m. Mrs. A is working as a computer software programmer in X Ltd. at a salary of ` 30,000 p.m. She is,
however, not qualified for the job. Compute the gross total income of Mr. A and Mrs. A for the AY 2020-21,
assuming that they do not have any other income.
Solution: Mr. A is an employee of X Ltd and has 25% shares of X Ltd i.e. a substantial interest in the company.
His wife is working in the same company without any professional qualifications for the same. Thus, by virtue of
the clubbing provisions of the Act, the salary received by Mrs. A from X Ltd. will be clubbed in the hands of Mr. A.
Computation of GTI of Mr. A
Salary Income of Mr. A [` 50,000 × 12 – ` 50,000] ` 5,50,000

Salary Income of Mrs. A clubbed here [` 30,000 × 12 – ` 50,000] ` 3,10,000
Gross total income ` 8,60,000
The GTI of Mrs. A is NIL.
Question 2: Mr. B is an employee of Y Ltd. and has substantial interest in the company. His salary is `
20,000 p.m. Mrs. B is also working in Y Ltd. at a salary of ` 12,000 p.m. without any qualifications. Mr. B
also receives ` 30,000 as interest on securities. Mrs. B owns a house property which she has let out. Rent
received from tenants is ` 6,000 p.m. Compute the gross total income of Mr. B and Mrs. B
Solution: Refer Class Notes
Question 3: Mr. Raman is a Chartered Accountant in practice. He engages his wife Mrs. Seetha as an
employee for audit works and pays a sum of ` 20,000/ – p.m. towards salary. Mrs. Seetha before marriage
has completed her C.A. articleship training and is presently awaiting result of the final examination.
Examine the tax implication in respect of the above transaction.
Ans: Where the spouse of the assessee has qualification and experience, the remuneration obtained by virtue of
the exercise or application of such qualification, experience and skill will not be subjected to clubbing because of
the proviso to Sec. 64(1). Therefore, the income of Mrs. Seetha should not be clubbed with that of Mr. Raman.
However, the Assessing Officer has power under section 40A(2) (refer PGBP Class) to examine the
reasonableness of the salary paid to a relative and disallow to the extent it is excessive or unreasonable.
Question 4: Mr B holds 5% shares in A Ltd., where his brother and nephew hold 11% and 6% shares,
respectively. Mrs B gets commission of ` 1,00,000 from A Ltd. for canvassing orders. She holds no
technical/professional qualification. Mr B earns income of ` 5,00,000 from sugar business. Compute their
total income
Solution : Computation of Total Income

Particulars of income Mr. B Mrs. B
` `
Income from sugar business 5,00,000
Commission for canvassing orders from Z Ltd. . 100,000
Total Income 5,00,000 100,000
Note: In the instant case, Mr B holds 5% and his brother holds only 11% shares in A Ltd. The total of their
shareholding is less than 20%. They have no substantial interest. Therefore, commission income is assessable as
income of Mrs B. [Nephew is not a relative for clubbing purpose]
CA Suraj Agrawal
Question 5: Mr. & Mrs. Om both are working in A Ltd. without possessing any technical or professional
qualification. From the following details compute their income:
Particulars Mr. Om Mrs. Om
Salary from A Ltd. (computed) ` 2,20,000 ` 70,000
Other income ` 50,000 ` 80,000
Share of holdings: Case 1 15% 6%

Case 2 3% 17%
Case 3 18% 1%
Solution:
Computation of gross total income of Mr. Om and Mrs. Om for the AY
Case 1 Case 2 Case 3
Particulars
Mr. Om Mrs. Om Mr. Om Mrs. Om Mr. Om Mrs. Om
Salary of Mr. Om 220000 220000 220000
Salary of Mrs. Om 70000 70000 70000
Other income 50000 80000 50000 80000 50000 80000
Gross total income 50000 370000 50000 370000 270000 150000
Notes:
1. Substantial interest means assessee beneficially holds (whether individually or partly by assessee and partly
by one or more of his relative) not less than 20% of equity shares of company.
When both, husband and wife, have substantial interest in a concern and both are drawing remuneration from
that concern without possessing any specific qualification, remuneration from such concern will be included in
the total income of husband or wife, whose total income excluding such remuneration, is higher.
In case 1 & 2, both has a substantial interest & total income of Mrs. Om is higher, therefore remuneration from
A Ltd. will be clubbed in the hands of Mrs. Om.
2. In case 3, since none of the spouse has substantial interest in the concern hence provision of sec. 64(1)(ii)
shall not be attracted.
Question 6:
Mr. Rolly is holding 6% shares in A Ltd. As on 1/7/18, Miss Jolly joined the concern at a salary of ` 30,000
pm. However, Miss Jolly does not possess any professional qualification nor she has any experience in
this regard.
On 1/4/19, Mr. Rolly married with Miss Jolly.
On 1/12/19, Mr. Rolly acquired further 21% shares in A Ltd.
Show the tax treatment of such salary income.
Solution:
An individual is deemed to have substantial interest if he holds 20% or more voting power at any time during the
PY. Since Mr. Rolly is holding substantial interest (even for a day) in A Ltd. then salary income earned by his
spouse Jolly ` 3,10,000 [` 360,000 – ` 50,000] shall be clubbed in his hand.
Question 7:
Mr. J and Mrs. J holds 15% and 10% shares in A Ltd. and both are employed by A Ltd. getting the monthly
salary of ` 20,000 respectively. Their remuneration does not match their technical or professional
knowledge or experience. Apart from the salary income Mr. J has business income of ` 300,000 & Mrs. J
has earned ` 3,00,000 as rent of the house property. Mr. J has invested ` 120,000 in PPF account and
another ` 60,000 in NSC. While Mrs. J has invested ` 1,10,000 in NSC and has donated ` 10,000 to PMNRF.
Calculate the Total Income of Mr. J and Mrs. J.
Solution:
When both, husband and wife, have substantial interest in a concern and both are drawing remuneration from that
concern without possessing any specific qualification, remuneration from such concern will be included in the total
income of husband or wife, whose total income excluding such remuneration, is higher.
In given case, both has a substantial interest [shareholding with relative is 25%] & therefore remuneration will be
clubbed in the hands of spouse whose total income [Excluding salary from A Ltd.] is higher.
Calculation to check higher total income (ignoring salary income)
CA Suraj Agrawal
Mr. J Mrs. J
Income under the head Salary Ignore Ignore
Income under the head house NIL
property
GAV 3,00,000
Less: Municipal Taxes NIL
NAV 3,00,000
Less: Statutory deduction 90,000 2,10,000
Income under the head PGBP 3,00,000 NIL
Gross Total Income 3,00,000 2,10,000
Less: Deduction u/s 80C 1,50,000 1,10,000
Deduction u/s 80G NIL 10,000
Taxable Income 1,50,000 90,000
Calculation of total income

Mr. J Mrs. J
Income under the head Salary 3,80,000 NIL
Mr. J’s own 2,40,000 – 50,000 [u/s 16(ia)]
Mrs. J’s 2,40,000 – 50,000 clubbed u/s 64(1)(ii)
Income under the head house property NIL 2,10,000
Income under the head PGBP 3,00,000 NIL
Less: Deduction u/s 80C 1,50,000 1,10,000
Less: Deduction u/s 80G 10,000
Taxable Income 5,30,000 90,000
CASE STUDY: When other spouse is not beneficially holding Substantial Interest in the Concern
The HUF is a partner in the firm ABC through its Karta “Mr. X” and has 25% shares in the profits of the firm. Wife
of Mr. X is employed by firm ABC. In this case, clubbing shall not apply because Mr. X is partner in representative
capacity and not in individual capacity. Clubbing applies where an individual is a partner in his individual capacity
and has substantial interest in the firm and his spouse get remuneration from the firm.
Question No. 8:
Mr. Siddharth was a partner in a firm, representing his HUF, holding 25% of the share in the firm. His wife
Vineeta, a house lady, has joined the firm for salary of ` 20,000 per month which has been proposed by
the Assessing Officer to be clubbed in the hands of Siddharth-HUF by invoking section 64 of the Act.
Whether AO is correct?
Answer
As per section 64(1)(ii) of the Income-tax Act, in computing the total income of any "individual", the remuneration
paid to spouse by a firm in which the individual has substantial interest shall be liable for clubbing. In the present
case, Mr. Siddharth is not a partner in his individual capacity, but a partner in representative capacity. The action
of the Assessing Officer in this case is, therefore, not correct.
CA Suraj Agrawal
INCOME ARISING TO THE SPOUSE FROM AN ASSET TRANSFERRED
WITHOUT ADEQUATE CONSIDERATION [SECTION 64(1)(iv)]
If an individual transfers directly or indirectly any asset other than house property to his/her spouse, the income
from such an asset shall be included in the total income of the transferor.
The income from the transferred assets shall not be clubbed in the following cases:
(i) if the transfer is for adequate consideration;
(ii) the transfer is under an agreement to live apart;
Note:
1. If an individual transfers a house property to his spouse, without adequate consideration or otherwise
than in connection with an agreement to live apart, the transferor shall be deemed to be the owner of the
house property and its annual value will be taxed in his hands. [Section 27]
2. It is also to be noted that natural love and affection do not constitute adequate consideration.
Sec. 27(i) vs Sec. 64(1)(iv) in case of transfer of house property:
Where such transferred asset is a house property then the same will not be covered by Sec. 64(1)(iv) but
governed by sec. 27(i) [Deemed owner in case of Income from house property].
• Mr. X transferred his house property (worth ` 1500000) in favour of Mrs. X out of love and affection without
any consideration. Income generated from such property is ` 100000 shall be taxable in the hands of Mr. X
by virtue of Sec. 27(i) without attracting provision of Sec. 64(1)(iv)
• Mr. X gifted Mrs. X ` 1500000 out of love and affection. Mrs. X purchased a house property from such gifted
money. Income generated from such house property is ` 100000. Such income shall be first computed in
hands of Mrs. X and then shall be clubbed in the hands of Mr. X by virtue of Sec. 64(1)(iv)
Class Notes:
CA Suraj Agrawal
INCOME ARISING TO SON’S WIFE FROM THE ASSETS TRANSFERRED WITHOUT
ADEQUATE CONSIDERATION BY THE FATHER-IN-LAW OR MOTHER-IN-LAW
[SECTION 64(1)(vi)]
Where an asset is transferred, directly or indirectly, by an individual to his or her son’s wife without adequate
consideration, the income from such asset is to be included in the total income of the transferor.
For the purpose of Clause (iv) & (vi) [Asset transferred to Spouse or Son’s wife] above,
following points must be noted:
1) The relationship must exist on the date of transfer as well as at the time of accrual of income during the
P.Y.
2) Clubbing is not applicable on any income which arises on accretion of the transferred asset.
3) Section 64(1)(iv) will not be applicable if the property is acquired by the spouse out of Pin Money.
4) Where the transferred assets is invested by the transferee in any business by way of capital
contribution then, the following proportionate income shall be clubbed with the income of the
individual:
Investment made by transferee out of transferred asset

As on the first day of Previous Year X Total income from such business
Total Investment in the business as on the

first day of Previous Year
Class Notes:
CA Suraj Agrawal
Question No. 9 :
Mr A gifts ` 4,00,000 to Mrs A 1st February 2020. Mrs A starts crockery business and invests ` 1,00,000
from her account also. She earns profit of ` 60,000 during the period ending on 31 March 2020. How would
you tax the business profits?
Answer:
Proportionate profits, in proportion the gifted amount from the spouse on the first day of the previous year bears to
the total investment in the business on the first day of the previous year, will be taxable in the income of the
transferor spouse.
As Mrs A has started the new business, the first previous year will begin on the date of setting up and will end on
31 March, immediately following. Thus, the first previous year will consist a period of 2 months from 1 February
2020, to 31 March 2020.
Therefore, proportionate profit of ` 50,000, computed as below, will be included in the income of Mr. A:
Question No. 10 :
Mr A gifts ` 3,00,000 to Mrs A on 1st February 2020. Mrs A invests the same in the existing crockery
business where she has already invested ` 5,00,000. Mrs A earns ` 3,00,000 from the business during the
year 2019-20 ending on 31 March 2020 How would you assess the profits?
Answer: The previous year of the existing business is April to March. On the first day of the previous year (i.e. 1
April 2019), total investment has come from Mrs A account. As the proportion of the gifted amount from spouse on
1 April 2019 to the total investment in business on the same day is NIL, the whole of the profits of ` 3,00,000 for
the year 2019-20 will be included in the total income of Mrs A.
Question No. 11 : [INCOME ARISING FROM INCOME EARNED IS NOT TO BE CLUBBED]

Mr Goutam, out of his own funds, had taken a FDR for ` 1,00,000 bearing interest @ 10% p.a. payable half-
yearly in the name of his wife Latika. The interest earned for the year 2019-20 of ` 10,000, was invested by
Mrs Latika in the business of packed spices which resulted in a net profit of ` 55,000 for the year ended
31st March 2020. How shall the interest on FDR and income from business be taxed for the AY 2020-21?
Answer: Where an individual transfers an asset (excluding house property), directly or indirectly to his/her
spouse, otherwise than for adequate consideration, or in connection with an agreement to live apart, income from
such asset is included in the total income of such individual [Sec. 64(1)(iv)]. Accordingly, interest on FDR,
accruing to wife, is included in the total income of her husband.
However, business profits cannot be clubbed with total income of husband. Clubbing applies only to the income
from assets transferred without adequate consideration. It does not apply to the income from accretion of the
transferred assets. Hence, business profit is taxable as the income of wife.
TRANSFER OF ASSETS FOR THE BENEFIT OF THE SPOUSE

[SECTION 64(1)(vii)]
Where any asset is transferred by an individual, without adequate consideration, to any person for the benefit of
Spouse, then any income arising from such transferred asset, is liable to be taxed in the hands of the transferor,
to the extent such income is used for the immediate / deferred benefit of such spouse.
IMP: Where any asset is transferred by any person to any person without consideration or for inadequate
consideration, the provisions of 56(2)(x) would get attracted in the hands of transferee, if conditions specified
thereunder are satisfied.
CA Suraj Agrawal
TRANSFER OF ASSETS FOR THE BENEFIT OF SON’S WIFE
[SECTION 64(1)(viii)]
Where any asset is transferred by an individual, without adequate consideration, to any person for the benefit of
Son’s wife, then any income arising from such transferred asset, is liable to be taxed in the hands of the
transferor, to the extent such income is used for the immediate / deferred benefit of the Son’s wife
IMP: Where any asset is transferred by any person to any person without consideration or for inadequate
consideration, the provisions of 56(2)(x) would get attracted in the hands of transferee, if conditions specified
Question No. 12 :
Mrs. Kasturi transferred her immovable property to ABC Co. Ltd. subject to a condition that out of the
rental income, a sum of ` 36,000 per annum shall be utilized for the benefit of her son’s wife.
Mrs. Kasturi claims that the amount of `36,000 (utilized by her son’s wife) should not be included in her
total income as she no longer owned the property. Examine with reasons whether the contention of Mrs.
Kasturi is valid in law.
Answer:
The clubbing provisions under section 64(1)(viii) are attracted in case of transfer of any asset, directly or indirectly,
otherwise than for adequate consideration, to any person to the extent to which the income from such asset is for
the immediate or deferred benefit of son’s wife. Such income shall be included in computing the total income of
the transferor-individual.
Therefore, income of ` 36,000 meant for the benefit of daughter-in-law is chargeable to tax in the hands of
transferor i.e., Mrs. Kasturi in this case. The contention of Mrs. Kasturi is, hence, not valid in law.
Note - In order to attract the clubbing provisions under section 64(1)(viii), the transfer should be otherwise than for
adequate consideration. In this case, it is presumed that the transfer is otherwise than for adequate consideration
and therefore, the clubbing provisions are attracted. Moreover, the provisions of section 56(2)(x) will also get
attract in the hands of ABC Co Ltd. if stamp duty value exceeds ` 50,000. and if the conditions specified
If it is presumed that the transfer was for adequate consideration, the provisions of section 64(1)(viii) would not be
attracted.
CLUBBING OF MINOR’S INCOME [SECTION 64(1A)]

The income of the minor child [including minor married daughter] is liable to be taxed in the hands of that parent,
whose total income, excluding income of minor child, is Greater.
Exception: No clubbing shall apply in case of following incomes:

1) Where a minor child is suffering from disability of the nature specified in Sec. 80U.
2) Where such income as arises / accrues to the minor child on account of any manual work done by him or
activity involving application of his skill, talent or specialized knowledge and experience.
Notes:
1. Section 10(32) provides that where the income of an individual includes the income of his minor child due to
the operation of Section 64(1A), the individual shall be entitled to exemption of such income subject to a
maximum of ` 1,500 per child. [Not applicable in case of Section 27 – Deemed Owner]
2. Once clubbing of minor’s income is done with that of one parent, it will continue to be clubbed with that
parent only, in subsequent years. The Assessing Officer, may, however, club the minor’s income with that of
the other parent, if, after giving the other parent an opportunity to be heard, he is satisfied that it is necessary
to do so.
3. Where the marriage of his parents does not subsist, income of the minor shall be clubbed in the income
of that parent who maintains the minor child in the relevant previous year.
CA Suraj Agrawal
4. If the income by way of manual work or activity involving application or skill, etc. which was not clubbed, in
invested, and income is earned thereon, such investment income shall be clubbed.
5. If the minor child becomes major during the P.Y., then the incomes till the date he remained minor in that
P.Y. shall be clubbed with the parent.
6. Minor Child includes step or adopted child.
Question 13: Mr. A has three minor children – two twin daughters and one son. Income of the twin daughters is `
2,000 p.a. each and that of the son is ` 1,200 p.a. Compute the income, in respect of minor children, to be
clubbed in the hands of Mr. A.
Solution
Taxable income, in respect of minor children, in the hands of Mr. A is
Twin minor daughters [` 2,000 × 2] ` 4,000

Less: Exempt u/s 10(32) [` 1,500 × 2] ` 3,000 ` 1,000
Minor son ` 1,200

Less: Exempt u/s 10(32) ` 1,200 Nil
Income to be clubbed in the hands of Mr. A ` 1,000
Cross Transfers
In the case of cross transfers also (e.g., A making gift of ` 50,000 to the wife of his brother B for the purchase of a
house by her and a simultaneous gift by B to A’s minor son of shares in a foreign company worth `50,000 owned
by him), the income from the assets transferred would be assessed in the hands of the deemed transferor if the
transfers are so intimately connected as to form part of a single transaction, and each transfer constitutes
consideration for the other by being mutual or otherwise. Thus, in the instant case, the transfers have been made
by A and B to persons who are not their spouse or minor child so as to circumvent the provisions of this section,
showing that such transfers constituted consideration for each other.
The Supreme Court, in case of CIT v. Keshavji Morarji, observed that if two transactions are inter-connected and
are parts of the same transaction in such a way that it can be said that the circuitous method
was adopted as a device to evade tax, the implication of clubbing provisions would be attracted. Accordingly, the
income arising to Mrs. B from the house property should be included in the total income of B and the dividend
from shares transferred to A’s minor son would be taxable in the hands of A. This is because A and B are the
indirect transferors to their minor child and spouse, respectively, of income-yielding assets, so as to reduce their
burden of taxation.
Question 14: Mr. Vasudevan gifted a sum of ` 6 lakhs to his brother's wife on 14-6-2019. On 12-7-2019, his
brother gifted a sum of ` 5 lakhs to Mr. Vasudevan's wife. The gifted amounts were invested as fixed
deposits in banks by Mrs. Vasudevan and wife of Mr. Vasudevan's brother on 01-8-2019 at 9% interest.
Examine the consequences of the above under the provisions of the Income-tax Act, 1961 in the hands of
Mr. Vasudevan and his brother.
Answer:
In the given case, Mr. Vasudevan gifted a sum of ` 6 lakhs to his brother’s wife on 14.06.2019 and
simultaneously, his brother gifted a sum of ` 5 lakhs to Mr. Vasudevan’s wife on 12.07.2019. The gifted amounts
were invested as fixed deposits in banks by Mrs. Vasudevan and his brother’s wife. These transfers are in the
nature of cross transfers. Accordingly, the income from the assets transferred would be assessed in the hands of
the deemed transferor because the transfers are so intimately connected to form part of a single transaction and
each transfer constitutes consideration for the other by being mutual or otherwise.
If two transactions are inter-connected and are part of the same transaction in such a way that it can be said that
the circuitous method was adopted as a device to evade tax, the implication of clubbing provisions would be
attracted. It was so held by the Apex Court in CIT vs. Keshavji Morarji.
Accordingly, the interest income arising to Mrs. Vasudevan in the form of interest on fixed deposits would be
included in the total income of Mr. Vasudevan and interest income arising in the hands of his brother’s wife would
CA Suraj Agrawal
be taxable in the hands of Mr. Vasudevan’s brother as per section 64(1), to the extent of amount of cross transfers
i.e., ` 5 lakhs.
This is because both Mr. Vasudevan and his brother are the indirect transferors of the income to their respective
spouses with an intention to reduce their burden of taxation.
However, the interest income earned by his spouse on fixed deposit of ` 5 lakhs alone would be included in the
hands of Mr. Vasudevan’s brother and not the interest income on the entire fixed deposit of ` 6 lakhs, since the
cross transfer is only to the extent of ` 5 lakhs.
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
CONVERSION OF SELF-ACQUIRED PROPERTY INTO THE PROPERTY OF
A HUF [SECTION 64(2)]
Where an individual, who is a member of the Hindu Undivided Family transfers his individual property to the
family, otherwise than for adequate consideration, then the income from such property shall continue to be
included in the total income of the individual.
Implication in the case of subsequent partition:

Where the converted property has been the subject matter of partition (whether partial or total) amongst the
members of the family, the income derived from such, converted property as is received by the spouse, on
partition, shall be deemed to arise to the spouse from assets transferred indirectly by the individual to the
spouse and the income from the portion, received by the spouse, shall be clubbed in the hands
of the transferor.
DISTINCTION BETWEEN SECTION 61 AND SECTION 64

It may be noted that the main distinction between the two sections is that Section 61 applies only to a revocable
transfer made by any person while Section 64 applies to revocable as well as irrevocable transfers made
only by individuals.
LIABILITY OF THE TRANSFREE IN RESPECT OF CLUBBED INCOME

[SECTION 65]
Sections 61 to 64 provide for clubbing of income of one person in the hands of the other in circumstances
specified therein. However, service of notice of demand (in respect of tax on such income) may be made upon the
person to whom such asset is transferred (i.e. the transferee). In such a case, the transferee is liable to pay that
portion of tax levied on the transferor which is attributable to the income so clubbed.
INCOME INCLUDES LOSS [CLUBBING OF NEGATIVE INCOME]

‘Income’ would include ‘loss’. Accordingly, where the specified income to be included in the total income of the
individual is a loss, such loss will be taken into account while computing the total income of the individual.
Example: Consider the following cases:

a) X transfers ` 1,00,000 to Mrs. X. By investing ` 1,00,000, Mrs. X sets up a business (total investment only
` 1,00,000). For the previous year, income from business is ( – ) ` 40,000. The loss of ` 40,000 will be
included in the income of X.
b) Minor son of Y has a business. For the previous year 2019-20, loss from business is ` 20,000. The loss of
` 20,000 will be included in the income of Y or Mrs. Y whosoever has higher income.
CA Suraj Agrawal
IMPORTANT POINTS
1) LOAN Vs TRANSFER: Giving a loan / Interest free Loan is not a transfer of assets. Therefore, if interest
free loan is given by husband to wife/individual to son’s wife/individual to his HUF, and the person to whom
the loan is given purchases an asset out of the loan, then income from such asset shall not be clubbed in the
hands of the person who has given the loan.
2) CONVERSION OF TRANSFERRED PROPERTY: The clubbing shall continue to apply even if the transferee
has converted the transferred assets to some other form. For example, a house property is transferred to
son's wife and she sells the house property and buys debentures, then income from debentures shall be
clubbed with the income of transferor.
3) CLUBBING OF CAPITAL GAIN INCOME: If the transferee sells the transferred assets, then capital gains
shall also be clubbed with the income of the transferor.
4) INCOME ON INCOME/ACCRETIONS TO THE ASSETS TRANSFERRED: Income arising out of income

earned on transferred assets has not to be clubbed. Therefore, if debentures are transferred to son's wife
without consideration and she receives debenture interest which is invested in bank FDR, then debenture
interest shall be clubbed with the income of the transferor but interest on shall bank FDRs shall not be
clubbed.
Similarly income arising from accretions to assets transferred has not to be clubbed. Therefore, capital
gains on bonus shares will not be clubbed with income of transferor where shares have been transferred and
the transferee receives bonus shares
5) INADEQUATE TRANSFER: If property has been transferred to spouse or son’s wife directly or indirectly for a
consideration which is inadequate, then only the part of income which is related to transfer of inadequate,
shall be clubbed.
6) The clubbing provisions of section 64(1)(iv) is not applicable if the property is transferred by a Karta of HUF,
gifting the coparcenary property to his wife.
CA Suraj Agrawal
SUMMARY OF CLUBBING CHAPTER
Section Important Provisions
60 If any person transfers the income from any asset without transferring the asset itself, such income is
to be included in the total income of the transferor.
61 1. All income arising to any person by virtue of a revocable transfer of assets is to be included in the
total income of the transferor.
2. The transfer is deemed to be revocable if whole or any part of income or assets is re-transferred to
the transferor or transferor gets the right over such income or assets.
3. Exception: If there is a transfer of asset which is not revocable during the life time of the
transferee, the income from the transferred asset is not includible in the total income of the
transferor
64(1)(ii) Remuneration of spouse from a concern in which another spouse has substantial interest
1. Any remuneration derived by a spouse from a concern in which the other spouse has a substantial
interest, shall be clubbed in the hands of the spouse who has a substantial interest in that concern.
2. No clubbing if remuneration is due to technical or professional qualifications of spouse.
3. If the husband and wife both have substantial interest in the concern and both are in receipt of
remuneration from the concern, then the remuneration of both shall be clubbed in the hands of that
spouse whose total income, before including such remuneration, is greater.
4. Meaning of substantial interest:
Ownership of atleast 20% equity shares / 20% of the profits of such concern at any time during the
PY is held by individual along with his relatives.
[“Relative” means the spouse, brother or sister or any lineal ascendant or descendant of the
individual]
64(1)(iv) Income from assets transferred to the spouse for without adequate consideration
If an individual transfers (otherwise than as a consideration to live apart) directly or indirectly any asset
other than house property to his/her spouse, the income from such an asset shall be included in the
total income of the transferor.
64(1)(vi) Income from assets transferred to son's wife for without adequate consideration
Where an asset is transferred, directly or indirectly, by an individual to his or her son’s wife without
adequate consideration, the income from such asset is to be included in the total income of the
transferor.
Common points:
1) The relationship must exist on the date of transfer as well as at the time of accrual of income
during the P.Y.
2) Clubbing is not applicable on any income which arises on accretion of the transferred asset. [Say
bonus shares allotted after transfer of shares]
3) Where the transferred assets is invested by the transferee in any business by way of capital
contribution then, the following proportionate income shall be clubbed with the income of the
individual:
Investment made by transferee out of transferred asset
as on the first day of Previous Year X Total income from such business
Total Investment in the business as on the

first day of Previous Year
CA Suraj Agrawal
64(1)(vii) Where any asset is transferred by an individual, without adequate consideration, to any person for the
benefit of Spouse, then any income arising from such transferred asset, is liable to be taxed in the hands
of the transferor, to the extent such income is used for the immediate / deferred benefit of such
spouse.
64(1)(viii) Where any asset is transferred by an individual, without adequate consideration, to any person for the
benefit of Son’s wife, then any income arising from such transferred asset, is liable to be taxed in the
hands of the transferor, to the extent such income is used for the immediate / deferred benefit of the
Son’s wife
64(1A) Clubbing of income of a minor child The income of the minor child [including minor married
daughter] is liable to be taxed in the hands of that parent,
whose Total Income, excluding income of minor child, is
Greater.
Exception: No clubbing shall apply in case of following incomes:
1. Where a minor child is suffering from disability of the nature specified in Sec. 80U.
2. Where such income as arises / accrues to the minor child on account of any manual work done by
him or activity invoking application or his skill, talent or specialized knowledge and experience.
1. Exemption u/s Section 10(32): Maximum exemption of ` 1,500 per annum per child.
2. Marriage of his parents does not subsist : Clubbing to that parent who maintains the minor child
3. If the income by way of manual work or activity involving application or skill, etc. which was not
clubbed, in invested, and income is earned thereon, such investment income shall be clubbed.
4. If the minor child becomes major during the P.Y., then the incomes till the date he remained minor
in that P.Y. shall be clubbed with the parent.
64(2) Income from self acquired property converted to joint family property for inadequate consideration
1. Where an individual, who is a member of the HUF converts, his separate property as the property
of the HUF otherwise than for adequate consideration, then the income from such property shall
continue to be included in the total income of the individual.
2. Implication in the case of subsequent partition:
Where the above converted property has been distributed on partition among members of the family,
the income derived from such, converted property as is received by the spouse, after partition, shall
be deemed to arise to the spouse from assets transferred indirectly by the individual to the
spouse and the income from the portion, received by the spouse, shall be clubbed in the
hands of the transferor.
65 Liability of transferee: The transferee is always liable to pay that portion of tax levied on the transferor
which is attributable to the income so clubbed.
Other 1. Loan is not a transfer, so clubbing will not apply on Loan amount (even if it given interest free to
Common spouse, son’s wife etc.)
Points 2. The clubbing provisions of section 64(1)(iv) is not applicable if the property is transferred by a Karta
of HUF, gifting the coparcenary property to his wife.
3. Income accruing or arising from transferred assets only will be clubbed. Any income earned out of
such income [accreted assets] should not be clubbed [Dividend/CG from Bonus Shares allotted to
transferee]
4. The clubbing shall continue to apply even if the transferee has converted the transferred assets to
some other form.
5. If property has been transferred to spouse or son’s wife directly or indirectly for a consideration
which is inadequate, then only the part of income which is related to transfer of inadequate, shall
be clubbed
CA Suraj Agrawal
Clubbing of Income 12A.1
PRACTICAL QUESTION - CLUBBING

1) Mr. Vatsan has transferred through a duly registered document the income arising from a godown to his son,
without transferring the godown. In whose hands will, the rental income from godown be charged?
2) X holds 20 per cent equity share capital in Y Ltd. Mrs. X is employed by Y Ltd. (salary being ` 40,000 per
month) as general manager (finance). She does not have any professional qualification to justify
remuneration. Ascertain in whose hands salary income is chargeable to tax. Does it make any
difference if Mrs. X was employed by Y Ltd. even prior to her marriage?
3) Shankar has transferred a house property to Uma on 1st April 2012. Uma married Shekar, who is the son of
Shankar on 1st April 2019. The income from the property received by Uma during the previous year 2019-20
is ` 1,20,000. The assessing officer has clubbed the above income in the hands of Shankar. Is the action of
assessing officer tenable under the law?
4) A proprietary business was started by Smt. Rani in the year 2017. As on 1.4.2018 her capital in business was
` 3,00,000. Her husband gifted ` 2,00,000 on 10.4.2018, which amount Smt. Rani invested in her business
on the same date. Smt. Rani earned profits from her proprietory business for the Financial year 2018-19,
` 1,50,000 and Financial year 2019-20 ` 3,90,000. Compute the income, to be clubbed in the hands of
Rani’s husband for the Assessment year 2020-21 with reasons.
5) Mr. Vaibhav started a proprietary business on 01.04.2018 with a capital of ` 5,00,000. He incurred a loss of
` 2,00,000 during the year 2018-19. To overcome the financial position, his wife Mrs. Vaishaly, a software
Engineer, gave a gift of ` 5,00,000 on 01.04.2019, which was immediately invested in the business by Mr.
Vaibhav. He earned a profit of ` 4,00,000 during the year 2019-20. Compute the amount to be clubbed in
the hands of Mrs. Vaishaly for the Assessment Year 2020-21.
If Mrs. Vaishaly gave the said amount as loan, what would be the amount to be clubbed?
6) X and Y form a partnership firm on April 1, 2019 (profit sharing ratio - 2: 3) by investing ` 10 lakhs and
` 15 lakhs respectively. The investment has been financed from the following sources—
X Y
` `
Gift from Mrs. X 6,60,000 —
Gift from Mrs. Y — 8,00,000
Past savings of X and Y 3,40,000 7,00,000
For the year ending March 31, 2020, share of profit from the firm is as follows—
X Y
` `
Interest on capital @ 12 per cent 1,20,000 1,80,000
Salary as working partner 24,000 24,000
Share of profit 1,08,000 1,62,000
Find out the income chargeable to tax in the hands of X and Mrs. X.
7) Raja gifts ` 2 lakh to his wife on 1-4-2019 which she invests in a firm on interest @ 18% p.a. On 1-1- 2020,
Mrs. Raja withdraws the money and gifts it to their son's wife. She claims that the interest which has accrued
to the daughter – in – law from 1-1-2020 to 31-3-2020 on the investment made by the daughter – in – law is
not assessable in her hands but in the hands of Raja. Is this correct? What would be the position, if Mrs.
Raja had gifted the money to their minor son, instead of the daughter – in – law?
CA Suraj Agrawal
8) Divya was born on 7.6.2001. Her engagement took place on 5.3.2019. On the said day she received cash
gifts of ` 25,000 each from her father, father's mother, father's father, mother, father's brother and father's
sister. All six relatives made similar gifts on the day of marriage i.e. on 1.4.2019. The amount so received is
deposited in a Private Limited Company in which her husband has substantial interest. For the year ending
31.3.2020, the company has paid her interest @ 14% i.e., ` 42,000. Discuss how this income will be
assessed to income tax.
9) A and B are minor sons of X and Mrs. X. Business income of X is ` 3,40,000. Income from house property of
Mrs. X is ` 1,90,000. Income of A and B from stage acting is ` 60 000 and ` 70,000 respectively. Besides
interest on company deposits of A and B (deposit was made out of income from acting) is ` 30,000 and
` 1,000, respectively. A and B have received following birthday gifts: on May 20, 2019, gift received by B from
his grandfather: ` 80 000; On September 14, 2019, gift received by A ` 60,000 from X's friend and ` 35,000
from a relative. Find out the income of X, Mrs. X, A and B for the AY 2020-21
10) Balu is the Karta of a HUF, whose members derive income as given below:
(a) Income from Balu's own business ` 50,000
(b) Mrs. Balu a dermatologist earn salary income (computed) of ` 81,000
(c) Minor Son Deepak (earning interest on Fixed Deposits with ABC Ltd which were gifted to ` 15,000
him by his Grandfather)
(d) Minor Daughter Priya gave a dance performance & received remuneration ` 1,00,000
(e) Deepak got winnings from Lottery (Gross) ` 2,00,000
Explain how above will be taxed. .
11) Mr. Singh is a trader. Particulars of his income and those of the members of his family are given
below. These incomes relate to the previous year ended 31st March, 2020.
`
(i) Income from business— Mr. Singh's 90,000
(ii) Salary income (computed) from an educational institution by Mrs. Singh, she is the
Principal of the institution 50,000
(iii) Interest on company deposits derived by Master Deep Singh (minor son).
These deposits were made in the name of Deep Singh by his father's father
about 6 years ago. 12,000
(iv) Receipts from sale of paintings and drawings made by Minor Dipali Singh
(minor daughter of Mr. and Mrs. Singh and a noted child artist) 60,000
(v) Income by way of lottery earnings by Master Dipender Singh (minor – son of
Mr. Singh) 6,000
Discuss whether the above will form part of the assessable income of any individual and also
compute the assessable income of Mr. Singh.
12) Mr. Sharma has four minor children consisting 2 daughters and 2 sons. The annual income of 2 daughters
were ` 9,000 and ` 4,500 and of sons were ` 6,200 and ` 4,300, respectively. The daughter who has income
of ` 4,500 was suffering from a disability specified under section 80U. Compute the amount of income earned
by minor children to be clubbed in hands of Mr. Sharma.
13) Mr. Dhaval and his wife Mrs. Hetal furnish the following information:
Particulars `
(i) Salary income (computed) of Mrs. Hetal 4,60,000

(ii) Income of minor son ‘B’ who suffers from disability specified in Section 80U 1,08,000
(iii) Income of minor daughter ‘C' from singing 86,000
(iv) Income from profession of Mr. Dhaval 7,50,000
(v) Cash gift received by 'C' on 2.10.2019 from friend of Mrs. Hetal on winning of singing 48,000
competition
(vi) Income of minor married daughter ‘A’ from company deposit 30,000
Compute the total Income of Mr. Dhaval and Mrs. Hetal for the AY 2020-21
CA Suraj Agrawal
14) Compute the gross total income of Mr. & Mrs. A from the following information:
Particulars `
(a) Salary income (computed) of Mrs. A 2,30,000

(b) Income from profession of Mr. A 3,90,000
(c) Income of minor son B from company deposit 15,000
(d) Income of minor daughter C from special talent 32,000
(e) Interest from bank received by C on deposit made out of her special talent 3,000
(f) Gift received by C on 30.09.2018 from friend of Mrs. A 2,500
Brief working is sufficient. Detailed computation under various heads of income is NOT required.
15) Mr. A, a widower, has 3 children of 19 yrs, 15 yrs and 5 yrs respectively. The first child derives ` 1,00,000
income every year. The income details of Mr. A, his second and third child are as follows:
Particulars Mr. A Second Third
` Child child
` `
Business income 50,000 — —

Interest on FD invested out of gifts — 15,000 —
Bank interest 7,000 8,000 1,000
Salary income (computed) earned on application of 48,000 24,000 —
skills
Interest on salary income saved and invested 8,000 2,000 —
Compute GTI in the hands of various persons.
16) Mr. A is an employee of Larsen Limited and has substantial interest in the company. His salary is ` 25,000
p.m. Mrs. A also is working in that company at a salary of ` 10,000 p.m. without any professional qualification.
Mr. A also receives ` 30,000 as income from securities, Mrs. A owns a house property which she has let out.
Rent received from such house property is ` 12,000 p.m.
Mr. & Mrs. A have three minor children-two twin daughters and one son. Income of the twin daughters is
` 2,000 p.a. and that of his son is ` 1,200 p.a. Compute the income of Mr. A and Mrs. A.
17) Mr. Dhaval has an income from salary (computed) of ` 3,50,000 and his minor children’s income are as
under:
Particulars `
Minor daughter has earned the following income:
From a TV show 50,000
From interest on FD with a bank (deposited by Mr. Dhaval from his income) 5,000
Minor son has earned the following income:
From the sale of a own painting 10,000
From interest on FD with a bank (deposited by Mr. Dhaval from his income) 1,000
Compute the gross total income of Mr. Dhaval.
18) Mr. B is the Karta of a HUF, whose members derive income as given below:
Particulars `
(a) Income from B' s profession 45,000
(b) Mrs. B' s salary income (computed) as fashion designer 76,000
(c) Minor son D (interest on fixed deposits with a bank which were gifted to him 10,000
by his uncle)
(d) Minor daughter P's earnings from sports 95,000
(e) D's winnings from lottery (gross) 1,95,000
Discuss the tax implications in the hands of Mr. and Mrs. B.
CA Suraj Agrawal
19) The following details are furnished in respect of Mr. X and his family members. Determine the gross
total income:
Particulars Mr. X Mrs. X Minor Child
` ` `
Income as a child artist in films — — 60,000
Business Income (Own) (40,000)
Salary income from X Ltd. In
which Mr. X holds 25% voting power @ — 78,000 —
` 6,500 p.m.
Share of profit from Firm AB & Co. (40%) 80,000 — (10%) 20,000
Commission from AB & Co. — 20,000 —
Interest income 8,000 5,000 4,000
Note:
a) Mrs. X possesses B.Com degree and works as accountant of X Ltd.,
b) Mrs. X does not render any services to M/s. AB & Co.,
c) Interest income received by Mrs. X is from an investment of ` 40,000 gifted by Mr. X and ` 40,000
invested from her own resource.
20) X (Age: 35 years) gifts ` 10 lakh to Mrs. X (age : 31 years). She deposits the same in a bank @ 8 percent per
annum. Y is minor child of X and Mrs. X. Y has a bank deposit of ` 70,000 (rate of interest 8.25 per cent)
which was gifted to him by his grandfather. Other income of X and Mrs. X is as follows – X: ` 3,00,000 [salary
(computed): ` 2,10,000, bank interest: ` 90,000], Mrs. X: ` 2,00,000 (interest as company deposits). Out of
interest income, Mrs. X deposits ` 1,000 in Public Provident Fund. Mr. X deposits ` 40,000 in Public provident
fund. Find out the income chargeable to tax and tax thereon for the AY 2020-21.
21) Determine the GTI of R and his wife from the following particulars for the year ending 31.3.2020:
i) R and his wife are partners in a firm carrying on garments business, their respective shares of profit
being ` 35,000 and ` 40,000.
ii) Their 17 year old son has been admitted to the benefits of another firm, from which he received
` 25,000 as his share of profit in the firm and ` 24,000 as interest on capital. The capital, was invested
out of the minor's own funds amounting to ` 1,50,000.
iii) A house property in the name of R was transferred to his wife on 1.12.2019 for adequate
consideration. The property has been let at a rent of ` 5,000 p.m.
iv) Debentures of a company of ` 2,00,000 and ` 1,00,000 purchased two years ago are in the names of
R and his wife respectively, on which interest is receivable at 14% p.a. His wife had in the past
transferred ` 1,00,000 out of her income to R for the purchase of the debentures in R's name.
v) R had transferred ` 60,000 to his wife in the year 1990 without any consideration which was given as a
loan by her to G. She earned ` 15,000 as interest during the earlier previous years which was also
given on loan to G. During the financial year 2019-20, she received interest at 10% p.a. on ` 75,000.
vi) R transferred ` 60,000 to a trust, the income accruing from its investment as interest amounted to
` 9,000, out of which ` 6,000 shall be utilised for the benefit of his son's wife and ` 3,000 for the benefit
of his son's minor child.
CA Suraj Agrawal
22) During the previous year 2019-20, the following transactions occurred in respect of Mr. A.
(a) Mr. A had a fixed deposit of ` 5,00,000 in Bank of India. He instructed the bank to credit the interest on
the deposit @ 9% from 1-4-2019 to 31-3-2020 to the savings bank account of Mr. B, son of his brother, to
help him in his education.
(b) Mr. A holds 75% share in a partnership firm. Mrs. A received a commission of ` 25,000 from the firm for
promoting the sales of the firm. Mrs. A possesses no technical or professional qualification.
(c) Mr. A gifted a flat to Mrs. A on April 1, 2019. During the previous year 2019-20, Mrs. A’s “Income from
house property” (computed) was ` 52,000.
(d) Mr. A gifted ` 2,00,000 to his minor son who invested the same in a business and he derived income of
` 20,000 from the investment.
(e) Mr. A’s minor son derived an income of ` 20,000 through a business activity involving application of his
skill and talent.
During the year, Mr. A got a monthly pension of ` 10,000. He had no other income. Mrs. A received salary of
` 20,000 per month from a part time job.
Discuss the tax implications of each transaction and compute the total income of Mr. A, Mrs. A and
their minor child.
23) Discuss the tax implications of income arising from revocable transfer of assets. When will the clubbing
provisions not apply at present, even where there is revocable transfer of assets?
24) Explain the provisions of the Income-tax Act, 1961, with regard to clubbing of income of spouse u/s 64.
25) State True or False, with reasons:

Mr. Y, who is a physically handicapped minor (suffering from a disability of the nature specified in section
80U), earns bank interest of ` 50,000 and ` 60,000 from marking bags manually by himself. The total income
of Mr. Y shall be computed in his hands separately.
26) Mrs. Kasturi transferred her immovable property to ABC Co. Ltd. subject to a condition that out of the rental
income, a sum of ` 36,000 per annum shall be utilized for the benefit of her son’s wife. Mrs. Kasturi claims
that the amount of ` 36,000 (utilized by her son’s wife) should not be included in her total income as she no
longer owned the property.
State with reasons whether the contention of Mrs. Kasturi is valid in law.
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
Clubbing of Income 12B.1
SOLUTION - CLUBBING
Solution 1:
Section 60 expressly states that where there is transfer of income from an asset without transfer of the asset
itself, such income shall be included in the total income of the transferor. Hence, the rental income derived from
the godown shall be clubbed in the hands of Mr. Vatsan.
Solution 2: In this case, X has substantial interest in Y Ltd. where Mrs. X is employed. Mrs. X does not have any
professional qualification to justify the remuneration of ` 40,000 per month. Her salary income of ` 4,30,000 (i.e.,
` 40,000 X 12 – deduction u/s 16(ia) 50,000) will be taxable in the hands of X. It does not make any difference
even if Mrs. X was employed by Y Ltd. prior to her marriage.
Solution 3:
Income arising out of asset transferred without adequate consideration to son's wife is liable to clubbed in the
hands of the assessee, if the said relationship exists both at the time of transfer of property and at the time of
accrual of income. Since, in this case, the said relationship didn't exist between Uma and Shankar at the time of
transfer of house property, the income of ` 1,20,000 arising to Uma cannot be clubbed with the income of
Shankar. Hence, the action of the assessing officer is untenable in law.
Solution 4:
In the assessment year 209-20, Smt. Rani had earned income of ` 1,50,000. There was no clubbing of income
in assessment year 2019-20, because there was no investment out of her Husband's funds as on the first day of
the previous year i.e. 1-4-2018. So, the profit of ` 1,50,000 was fully taxed in the hands of Smt. Rani for the
st
In case of assessment year 2020-21: The total capital invested as on 1 day of the previous year i.e. 1-4-2019
was ` 3,00,000 + ` 2,00,000 + ` 1,50,000 (profits of 2018-19) i.e. ` 6,50,000. Out of this investment ` 2,00,000
represents investment of her Husband's funds.
Therefore, the amount liable to be clubbed in the assessment year 2020-21 with the income of her Husband is
[2,00,000 ÷ 6,50,000] × 3,90,000 = ` 1,20,000.
Solution 5:
Section 64(1)(iv) of the Income-tax Act, 1961 provides for the clubbing of income in the hands of the
individual, if the income earned is from the assets (other than house property) transferred directly or indirectly
to the spouse of the individual, otherwise than for adequate consideration or in connection with an agreement
to live apart.
In this case, Mr. Vaibhav received a gift of ` 5,00,000 on 1.4.2019 from his wife Mrs. Vaishaly, which he
invested in his business immediately. The income to be clubbed in the hands of Mrs. Vaishaly for the A.Y.
2020-21 is computed as under:
Particulars Mr. Vaibhav’s capital Capital contribution Total (`)
contribution (`) out of gift from Mrs.
Vaishaly (`)
Capital as on 1.4.2019 3,00,000 5,00,000 8,00,000
(5,00,000 - 2,00,000)
Profit for F.Y. 2019-20 to be apportioned 1,50,000 2,50,000 4,00,000

on the basis of capital employed on the
first day of the previous year i.e. as on 4,00,000×3 4,00,000x5
1.4.2019 (3:5) 8 8
Therefore, the income to be clubbed in the hands of Mrs. Vaishaly for the A.Y. 2020-21 is ` 2,50,000.
In case Mrs. Vaishaly gave the said amount of ` 5,00,000 as a bona fide loan, then, clubbing provisions would
not be attracted.
Solution 6: X Mrs. X
` `
Share of profit [exempt under section 10(2A)] Nil —
Salary from the firm 24,000 —
Interest on capital [*` 1,20,000 x ` 6.6 lakh / `10 lakh) 40,800** 79,200*
Business income 64,800 79,200
** 120,000 – 79,200 = 40,800.
CA Suraj Agrawal
Solution 7:
This case is analyses as under -
1) In this case, interest from the firm received by Mrs. Raja for the period 1.4.2019 to 31.12.2019 shall be
clubbed in the hands of Mr. R under section 64(1)(iv) as the said interest accrues to Mrs. Raja.
2) Thereafter, Mrs. Raja has gifted ` 2 lakh to their son's wife on 1.1.2020. Now, no income accrues to Mrs. Raja
on the money gifted and the income is derived only by the son's wife.
3) In this case, it is an indirect transfer of assets by Mr. Raja to their son's wife. This case will clearly fall under
section 64(1)(vi) and the income accruing to son's wife will be included in Mr. Raja's total income. Thus, Mrs.
Raja's contention is correct.
4) However, if Mrs. Raja had gifted the money to minor son, then by virtue of sec. 64(1A), the income accruing to
the minor son would have been clubbed with the total income of Mr. Raja or Mrs. Raja whose total income,
before such clubbing, had been greater.
Solution 8:
The income will be assessed to tax as follows-
(1) Taxability of gifts: All of the six relatives who have gifted the said sum fall within the meaning of ‘relative’ as
defined u/s 56(2)(x). Therefore, the cash gifts received from them are not taxable.
(2) Taxability of interest: Divya is a minor. Sec. 64(1A) applies even in respect of income earned by minor
married daughter. Therefore, the income earned by her i.e. ` 42,000 less Exemption of ` 1,500 u/s 10(32)
shall be liable to be clubbed in the hands of that parent whose income before inclusion of minor’s income is
higher.
Solution 9:
X Mrs. X A B
` ` ` `
Income from house property - 1,90,000 - -
Business income 3,40,000 - - -
Income from stage acting - - 60,000 70,000
Gift received by B on May 20, 2019 from grandfather (gift from a
relative is not taxable) - - - -
Gift received by A on September 14, 2019 from X's friend (to be clubbed
in the hands of X after giving exemption of ` 1,500) 58,500
Gift received by A on September 14, 2019 from relatives
(gift from a relative is not taxable) -
Interest from company deposit received by A (to be clubbed in the
hands of X) 30,000
Interest from company deposit received by B (to be clubbed in the
hands of X after giving exemption of ` 1,500, amount to be
clubbed is ` 1,000 - ` 1,000) Nil
Net income 4,28,500 1,90,000 60,000 70,000
Solution 10:
Notes:
1) U/s 64(1A), Income of a Minor Child shall be clubbed in the hands of the Parent whose total income is greater
before such clubbing. Exemption of ` 1,500 per child shall be allowed in respect of such income.
2) If the minor receives income by exercise of labour, hard work, skill, knowledge or experience, then such
income shall not be clubbed. In the given case, the income of the Minor Daughter shall not be clubbed in the
hands of her Parents.
Particulars Mr. Balu Mrs. Balu
Income from Salaries (computed): NIL 81,000
Profits and Gains of Business or Profession: 50,000 Nil
Total Income before Clubbing of Minor Son's income 50,000 81,000
Add: Income of Minor Son Deepak (Note 1)
(a) Interest on Fixed Deposit 15,000
(b) Lottery Winnings 2,00,000
2,15,000
Less: Exemption u/s 10(32) for minor's income (1,500) 2,13,500
Total Income 50,000 2,94,500
CA Suraj Agrawal
Solution 11:
Assessee: Mr. Singh Previous Year: 2019-20 Assessment Year: 2020-21
Computation of Total Income
Particulars ` `
Profits and Gains of Business or Profession 90,000
Add: Income of Minor Children: (Note 1)
(a) Interest on Company Deposits of Master Deep Singh 12,000
Less: Exemption u/s 10(32) (1,500) 10,500
(b) Lottery winnings of Master Dipender Singh 6,000
Less: Exemption u/s 10(32) (1,500) 4,500
Notes:
1) U/s 64(1A), income of a Minor Child shall be clubbed in the hands of the Parent whose total income is
greater before such clubbing. Exemption of ` 1,500 per child shall be allowed in respect of such income.
2) If the Minor receives income by exercise of labour, hard work, skill, knowledge or experience, then such
income shall not be clubbed. Hence, Income of Dipali Singh, Minor Daughter of Mr. Singh is not clubbed
in his hands.
3) Since Mr. Singh does not have substantial interest in the educational institution employing Mrs. Singh,
provisions of Sec. 64(1)(ii) is not attracted.
Solution 12:
As per section 64(1A), in computing the total income of an individual, all such income accruing or arising to a
minor child shall be included. However, income of a minor child suffering from disability specified under
section 80U would not be included in the income of the parent but would be taxable in the hands of the minor
child. Therefore, in this case, the income of daughter suffering from disability specified under section 80U
should not be clubbed with the income of Mr. Sharma.
Under section 10(32), income of each minor child includible in the hands of the parent under section 64(1A)
would be exempt to the extent of the actual income or ` 1,500, whichever is lower. The remaining income
would be included in the hands of the parent.
Computation of income earned by minor children to be clubbed with the income of Mr. Sharma:
Particulars `
(i) Income of one daughter 9,000
Less: Income exempt under section 10(32) 1,500
Total (A) 7,500
(ii) Income of two sons (` 6,200 + ` 4,300) 10,500
Less: Income exempt under section 10(32) (` 1,500 + ` 1,500) 3,000
Total (B) 7,500
Total Income to be clubbed as per section 64(1A) (A+B) 15,000
Note: It has been assumed that:

(1) All the four children are minor children;
(2) The income does not accrue or arise to the minor children on account of any manual work done by them
or activity involving application of their skill, talent or specialized knowledge and experience;
(3) The income of Mr. Sharma, before including the minor children’s income, is greater than the income of
Mrs. Sharma, due to which the income of the minor children would be included in his hands; and
(4) This is the first year in which clubbing provisions are attracted.
Solution 13:
Computation of Total Income of Mr. Dhaval and Mrs. Hetal for the AY 2020-21
Particulars Mr. Dhaval Mrs. Hetal

` `
Salaries (Computed) — 4,60,000
Profits and gains of business or profession 7,50,000 —
Income by way of interest from company deposit earned by minor daughter A
[See Note (4)] 30,000
Less: Exemption under section 10(32) 1,500 28,500
Total Income 7,78,500 4,60,000
CA Suraj Agrawal
Notes:
1) The income of a minor child suffering from any disability of the nature specified in section 80U shall not be
included in the hands of the parents. Hence, ` 1,08,000 being the income of minor son 'B' who suffers from
disability specified under section 80U shall not be included in the hands of either of his parents.
2) The income derived by the minor from manual work or from any activity involving exercise of his skill, talent or
specialized knowledge or experience will not be included in the income of his parent. Hence, in the given case
` 86,000 being the income off the minor daughter C shall not be clubbed in the hands of the parents.
3) Under section 56(2)(x), cash gifts received from any person/persons exceeding ` 50,000 during the year in
aggregate is taxable. Since the case gift in this case does not exceed ` 50,000 the same is not taxable.
4) The clubbing provisions are attracted even in respect of income of minor married daughter. The income of the
minor will be included in the income of that parent whose total income is greater. Hence, income of minor
married daughter 'A' from company deposit shall be clubbed in the hands of the Mr. Dhaval and exemption
under section 10(32) of ` 1,500 per child shall be allowed in respect of such income.
Solution 14:
1. As per the provisions of section 64(1A) of the Income-tax Act, 1961, all the income of a minor child has to be
clubbed in the hands of that parent whose total income (excluding the income of the minor) is greater. The
income of Mr. A is ` 3,90,000 and income of Mrs. A is ` 2,30,000. Since the income of Mr. A is greater than
that of Mrs. A, the income of the minor children have to be clubbed in the hands of Mr. A. It is assumed that
this is the first year when clubbing provisions are attracted.
Income derived by a minor child from any activity involving application of his/her skill, talent, specialised
knowledge and experience is not to be clubbed. Hence, the income of minor child C from exercise of special
talent will not be clubbed.
However, interest from bank deposit has to be clubbed even when deposit is made out of income arising from
application of special talent. The Gross Total Income of Mrs. A is ` 2,30,000. The total income of Mr. A giving
effect to the provisions of section 64(1A) is as follows:
Computation of gross total income of Mr. A for the A.Y. 2020-21
Particulars ` `
Income of minor son B from company deposit 15,000
Less: Exemption under section 10(32) 1,500 13,500
Income of minor daughter C

From special talent – not to be clubbed -
Interest from bank 3,000
Gift of ` 2,500 received from a non-relative is not taxable under section
56(2)(x) being less than the aggregate limit of ` 50,000 Nil
3,000
Less : Exemption under section 10(32) 1,500 1,500
Solution 15: Computation of Gross Total Income

Particulars Mr. A Second
` Child `
1. Salary Income (Computed) 48,000 24,000
2. Income from business 50,000
3. Income from other sources :
Bank interest 7,000
Interest on investment 8,000
4. Income to be clubbed :
a) Second child's income :
Interest on FD 15,000
Bank interest 8,000
Interest on investment 2,000
25,000
Less : Exempt U/S.10(32) (1,500) 23,500
b) Third child's income : Bank interest 1,000
Less : Exempt u/s. 10(32) (1,000) Nil
Gross Total income 1,36,500 24,000
Note: Income of minor child is clubbed even if it is earned on investment made out of salary. First child's income
is not clubbed as age of majority had been attained.
CA Suraj Agrawal
Solution 16:
Computation of Total Income of Mr. A and Mrs. A for the A.Y. 2020-21
Particulars Mr. A Mrs. A
(`) (`)
Income from Salaries
Salary income of Mr. A (` 25,000 × 12 – (u/s 16) 50,000) 2,50,000
Salary income of Mrs. A (` 10,000 × 12 – (u/s 16) 50,000) (See Note 1) 70,000
Income from House Property
Rent received (` 12,000×12) 1,44,000
Less: Deduction under section 24@30% 43,200 1,00,800

Income from securities 30,000
Income before including income of minor children under section 64(1A) 3,50,000 1,00,800
(See Note 2)
Income of twin daughters ` 4,000
(` 2,000 per child x 2)
Less: Exempt u/s 10(32) (` 1,500 x 2) ` 3,000 1,000 -
-
Income of the minor son ` 1,200
Less: Exempt u/s 10(32) ` 1,200 -
Total Income 3,51,000 1,00,800
Notes:
(1) As per section 64(1), in case the spouse of the individual receives any amount by way of income from any
concern in which the individual has substantial interest, then, such income shall be included in the total
income of the individual. The only exception is in a case where the spouse possesses any technical or
professional qualifications and the income earned is solely attributable to the application of her technical
or professional knowledge and experience, in which case, the clubbing provisions would not apply.
In this case, the salary of ` 10,000 p.m. received by Mrs. A from the company has to be included in the
total income of Mr. A, as Mrs. A does not possess any technical or professional qualification for earning
such income and Mr. A has substantial interest in the company.
(2) As per section 64(1A), the income of a minor child is to be included in the total income of the parent
whose total income (excluding the income of minor child to be so clubbed) is greater. Further, as per
section 10(32), income of a minor child which is includible in the income of the parent shall be exempt to
the extent of ` 1,500 per child.
Therefore, the income of minor children shall be included in the income of Mr. A, since Mr. A’s income of `
3,50,000 (before including the income of the minor child) is greater than Mrs. A’s income of ` 1,00,800.
Solution 17:
Computation of Gross Total Income of Mr. Dhaval
Particulars ` `
Income from Salary (computed) 3,50,000
Income from other sources:

Minor Daughter’s income
Income from T.V. show (See Note below) Nil
Interest income from FD with a Bank 5,000
Less : Exempt under section 10(32) 1,500 3,500
Minor son’s income

Income from sale of self made painting (See Note below) Nil
Interest income from FD with a Bank 1,000
Less : Exempt under section 10(32) 1,000 Nil
Note: The income derived by the minor from manual work or from any activity involving exercise of his skill,
talent or specialised knowledge or experience will not be included in the income of his parent. Hence, in the
given case ` 50,000 being the income of the minor daughter from TV show and ` 10,000 being the income of
minor son from sale of own painting, shall not be clubbed in the hands of Mr. Dhaval.
CA Suraj Agrawal
Solution 18:
Clubbing of income and other tax implications
As per the provisions of section 64(1A), in case the marriage of the parents subsist, the income of a minor
child shall be clubbed in the hands of the parent whose total income, excluding the income of the minor child
to be clubbed, is greater. In this problem, it has been assumed that the marriage of Mr. B and Mrs. B subsists.
Further, in case the income arises to the minor child on account of any manual work done by the child or as a
result of any activity involving application of skill, talent, specialized knowledge or experience of the child,
then, the same shall not be clubbed in the hands of the parent.
Tax implications:
(i) Income of ` 45,000 from Mr. B’s profession shall be taxable in the hands of Mr. B under the head “Profits
and gains of business or profession”.
(ii) Salary income (computed) of ` 76,000 of Mrs. B as a fashion designer shall be taxable as “Salaries” in the
hands of Mrs. B.
(iii) Income from fixed deposit of ` 10,000 arising to the minor son D, shall be clubbed in the hands of the
mother, Mrs. B as “Income from other sources”, since her income is greater than income of Mr. B before
including the income of the minor child.
As per section 10(32), income of a minor child which is includible in the income of the parent shall be
exempt to the extent of ` 1,500 per child. The balance income would be clubbed in the hands of the
parent as “Income from other sources”.
(iv) Income of ` 95,000 arising to the minor daughter P from sports shall not be included in the hands of the
parent, since such income has arisen to the minor daughter on account of an activity involving application
of her skill.
(v) Income of ` 1,95,000 arising to minor son D from lottery shall be included in the hands of Mrs. B as
“Income from other sources”, since her income is greater than the income of Mr. B before including the
income of minor child.
Note – Mrs. B can reduce the tax deducted at source from such lottery income while computing her net
tax liability.
Solution 19: Computation of gross total income

Particulars Mr. X Mrs. X Minor
` ` Child
`
I. Salaries :
Salary from X Ltd 28,000
[6,500 p.m less deduction u/s 16 - 50,000]
II. Profits and gains from business/profession :
Income / (Loss) (40,000) — 60,000
III. Income from other sources :
Interest income Own (Mr. X) 8,000
Add : Spouse -Sec. 64(1) 2,500 10,500 — ----
Interest income own (Mrs. X) 2,500

Interest income of minor child 4,000
Less : Exempt u/s. 10(32) (1500) — 5,000 —
Commission income of spouse u/s.64(1) 20,000
Gross Total Income (9,500) 33,000 60,000
Note: Share of profit from firm is exempt from tax u/s. 10(2A). It is assumed that the expenditure attributable to
exempt income have not been claimed as deduction.
Solution 20:
X Mrs. X
Salary (computed) 2,10,000 -
- Bank interest of Mrs. X 80,000 -
- Bank interest of Y (8.25% of ` 70,000 - ` 1,500) 4,275 -
- Bank interest of X 90,000 -
- Interest of company deposit 2,00,000
Less: Deduction under section 80C 40,000 1,000
Net income (rounded off) 3,44,280 1,99,000
CA Suraj Agrawal
Solution 21:
Computation of Gross Total Income of R
` `
1. Income from House Property:
Rental value for 8 months (i.e., before transfer) (8 x 5,000) 40,000
Less: Statutory deduction @ 30% 12,000 28,000
2. Profit from Business:
(i) Share from firm (Exempt) Nil
(ii) Minor Son's share in another firm (Exempt) Nil
(iii) Interest on minor's capital with firm
(` 24,000 - Exemption u/s 10(32) ` 1,500) 22,500 22,500
3. Income from other Sources:
(i) Interest @ 14% on ` 1,00,000 Debentures (only one-half of ` 2,00,000
were bought by own funds) 14,000
(ii) Interest received by his wife @ 10% on ` 60,000
(being transferred without any consideration) 6,000
(iii) Interest on ` 6,000 from his trust
(Interest income utilised for the benefit of son's wife)
Computation of Gross Total Income of Mrs. R
Income from House Property :
Rental value for 4 months (i.e., after transfer) (` 5,000 x 4) 20,000
Less : Statutory deduction @ 30% 6,000 14,000
Income from business :
Share from firm (Exempt) Nil
Income from Other Sources :
(i) Interest on ` 1,00,000 14% Debentures 14,000
(ii) interest on ` 1,00,000 14% Debentures in husband's name but funds invested by her 14,000
(iii) Interest on ` 15,000 @10% 1,500 29,500
(This interest is on accrued income of ` 60,000, which have been transferred
to her by the husband and interest on such accrued income is treated as the
income of the transferee, although the income on the transferred amounts is
treated as the income of the transferor as it was transferred without any consideration.)
Solution 22:
Computation of total income of Mr. A, Mrs. A and their minor son for the A.Y. 2020-21
Particulars Mr. A Mrs. A Minor
(`) (`) Son (`)
Salary income (of Mrs. A) [2,40,000 - 40,000] - 2,00,000 -
Pension income (of Mr. A) (` 10,000×12 - 40,000) 80,000
Income from House Property [See Note (3) below) 52,000 - -
-
Income from other sources - -
Interest on Mr. A’s fixed deposit with Bank of India
(` 5,00,000 × 9%) [See Note (1) below] 45,000 -
Commission received by Mrs. A from a partnership firm,

in which Mr. A has substantial interest
[See Note (2) below] 25,000 70,000
Income before including income of minor son under 2,02,000 2,00,000

section 64(1A)
Income of the minor son from the investment made in the 18,500 - -
business out of the amount gifted by Mr. A
[See Note (4) below]
Income of the minor son through a business activity
involving application of his skill and talent - - 20,000
[See Note (5) below]
Total Income 2,20,500 2,00,000 20,000
CA Suraj Agrawal
Notes:
(1) As per section 60, in case there is a transfer of income without transfer of asset from which such income
is derived, such income shall be treated as income of the transferor.
Therefore, the fixed deposit interest of ` 45,000 transferred by Mr. A to Mr. B shall be included in the total
income of Mr. A.
(2) As per section 64(1)(ii), in case the spouse of the individual receives any amount by way of income from
any concern in which the individual has substantial interest (i.e. holding shares carrying at least 20%
voting power or entitled to at least 20% of the profits of the concern), then, such income shall be included
in the total income of the individual. The only exception is in a case where the spouse possesses any
technical or professional qualifications and the income earned is solely attributable to the application of
her technical or professional knowledge and experience, in which case, the clubbing provisions would not
apply.
In this case, the commission income of ` 25,000 received by Mrs. A from the partnership firm has to be
included in the total income of Mr. A, as Mrs. A does not possess any technical or professional
qualification for earning such commission and Mr. A has substantial interest in the partnership firm as he
holds 75% share in the firm.
(3) According to section 27(i), an individual who transfers any house property to his or her spouse otherwise
than for adequate consideration or in connection with an agreement to live apart, shall be deemed to be
the owner of the house property so transferred. Hence, Mr. A shall be deemed to be the owner of the flat
gifted to Mrs. A and hence, the income arising from the same shall be computed in the hands of Mr. A.
Note: The provisions of section 56(2)(x) would not be attracted in the hands of Mrs. A, since she has
received immovable property without consideration from a relative i.e., her husband.
(4) As per section 64(1A), the income of the minor child is to be included in the total income of the parent
whose total income (excluding the income of minor child to be so clubbed) is greater. Further, as per
section 10(32), income of a minor child which is includible in the income of the parent shall be exempt to
the extent of ` 1,500 per child.
Therefore, the income of ` 20,000 received by minor son from the investment made out of the sum gifted
by Mr. A shall, after providing for exemption of ` 1,500 under section 10(32), be included in the income of
Mr. A, since Mr. A’s income of ` 2,02,000 (before including the income of the minor child) is greater than
Mrs. A’s income of ` 2,00,000. Therefore, ` 18,500 (i.e., ` 20,000 – ` 1,500) shall be included in Mr. A’s
income. It is assumed that this is the first year in which clubbing provisions are attracted.
Note – The provisions of section 56(2)(x) would not be attracted in the hands of the minor son, since he
has received a sum of money exceeding ` 50,000 without consideration from a relative i.e., his father.
(5) In case the income earned by the minor child is on account of any activity involving application of any skill
or talent, then, such income of the minor child shall not be included in the income of the parent, but shall
be taxable in the hands of the minor child.
Therefore, the income of ` 20,000 derived by Mr. A’s minor son through a business activity involving
application of his skill and talent shall not be clubbed in the hands of the parent. Such income shall be
taxable in the hands of the minor son.
Solution 23:
Income arising from revocable transfer of assets [Sections 61 & 63]
(i) All income arising to any person by virtue of a revocable transfer of assets is to be included in the total
income of the transferor.
(ii) A transfer is deemed to be revocable if:
(a) it contains any provision for the re-transfer, directly or indirectly, of the whole or any part of the
income or assets to the transferor, or
(b) it gives, in any way, the transferor, a right to re-assume power, directly or indirectly, over the whole or
any part of the income or the assets.
Transfer not revocable during the life time of the beneficiary or the transferee [Section 62] If there is a
transfer of asset which is not revocable during the life time of the beneficiary or transferee, the income from
the transferred asset is not includible in the total income of the transferor provided the transferor derives no
direct or indirect benefit from such income. If the transferor receives direct or indirect benefit from such
income, such income is to be included in his total income even though the transfer may not be revocable
during the life time of the beneficiary or transferee.
CA Suraj Agrawal
Solution 24:
As per section 64(1)(ii), any income arising directly or indirectly to the spouse of an individual by way of
salary, commission, fees or any other form of remuneration, whether in cash or in kind, from a concern in
which such individual has a substantial interest, would be clubbed. However, such rule does not apply where
the spouse possesses technical or professional qualification and the income of the spouse is solely
attributable to the application of his or her technical or professional knowledge and experience.
Where both husband and wife have substantial interest in a concern and both are in receipt of salary etc. from
the said concern, such income will be clubbed with the income of the spouse whose total income, excluding
such income, is greater.
An individual shall be deemed to have substantial interest in a concern under the following
circumstances :
(a) If the concern is a company, equity shares carrying not less than 20% of the voting power are, at any time
during the previous year, owned beneficially by such person or partly by such person and partly by one or
more of his relatives.
(b) In any other case, if such person is entitled, or such person and one or more of his relatives are entitled in
the aggregate, at any time during the previous year, to not less than 20% of the profits of such concern.
As per section 64(1)(iv), where there is a transfer of an asset other than house property, directly or indirectly
from one spouse to another, otherwise than for adequate consideration or in connection with an agreement to
live apart, any income that arises either directly or indirectly to the transferee from the transfer of the asset
shall be included in the total income of the transferor.
However, any income from the accretion of transferred asset is not liable to be clubbed. It may be noted that
natural love and affection will not constitute adequate consideration for the purpose of section 64(1).
Solution 25:
True. The clubbing provisions of section 64(1A) are not applicable in a case where the minor child is suffering
from any disability of the nature specified in section 80U. The income of such minor child will not be clubbed
in the hands of either of the parents. Consequently, the total income of Mr. Y will be assessed in his hands.
Solution 26:
The clubbing provisions under section 64(1)(viii) are attracted in case of transfer of any asset, directly or
indirectly, otherwise than for adequate consideration, to any person to the extent to which the income from
such asset is for the immediate or deferred benefit of son’s wife. Such income shall be included in computing
the total income of the transferor-individual.
Therefore, income of ` 36,000 meant for the benefit of daughter-in-law is chargeable to tax in the hands of
transferor i.e., Mrs. Kasturi in this case. The contention of Mrs. Kasturi is, hence, not valid in law.
Note - In order to attract the clubbing provisions under section 64(1)(viii), the transfer should be otherwise
than for adequate consideration. In this case, it is presumed that the transfer is otherwise than for adequate
consideration and therefore, the clubbing provisions are attracted.
If it is presumed that the transfer was for adequate consideration, the provisions of section 64(1)(viii) would
not be attracted.
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
Set Off & Carry Forward 13.1
SET OFF & CARRY FORWARD OF LOSSES

[Sections 70 to 80]
Section Particulars
Inter Source - Set off of loss from one source against income from another source under the
70 same head of income
Inter Head - Set off of loss from one head against income from another Head
71
Carry forward and set off of loss from house property
71B
Carry forward and set off of Business Losses [Non-Speculative]
72
Losses in Speculation Business
73
Carry forward and set off of Losses by Specified Business [u/s 35AD]
73A
Losses under the head “Capital gains”
74
Losses from certain specified sources falling under the head "income from other sources"
74A [Owning & Maintaining Race Horses]
Carry forward and set off of losses in case of change in constitution of firm or on succession
78
Carry forward and set off of losses in the case of certain companies [Closely Held Companies]
79
Submission of Return for Losses [Read with Section 139(3)]
80
“Set-off” means adjustment of losses against the profits from another source/head of income in the same
assessment year. If losses cannot be set-off in the same year due to inadequacy of eligible profits, then such
losses are carried forward to the next assessment year for adjustment against the eligible profits of that year
subject to the provisions of the Act.
INTER SOURCE ADJUSTMENT / SET OFF [INTRA HEAD or WITHIN HEAD]

[SECTION 70]
The LOSS in respect of any source of income under any head of income shall be set off against INCOME from
any other source under the same head.
However, Long term Capital Loss can only be set off against Long term Capital Gains. Short-term capital loss
is allowed to be set off against both short-term capital gain and long-term capital gain
Inter-source set-off, however, is not permissible in the following cases [Due to restrictions
provided in other part of the Act]
I. Loss from a source, the income from which is exempt, cannot be set off against any income.
II. A loss cannot be set off against winnings from lotteries, crossword puzzles, races including horse races,
card games and other games of any sort or from gambling or betting of any form or nature.
III. Loss from lottery, card games etc. cannot be set off against any income.
IV. Loss from activity of owning and maintaining race-horses can be set off only against income from
owning and maintaining race- horses.
V. Speculation business loss can be set off only against speculation business income. However, losses from
other business can be adjusted against profits from speculation business.
VI. Loss from a Specified Business [Referred to in Section 35AD] shall be set off only against profits and
gains, if any, of any other specified business.
CA Suraj Agrawal
INTER HEAD ADJUSTMENT [SECTION 71]

Loss under one head of income can be adjusted or set of against income under another head. However,
i) Loss under the head “PGBP” cannot be set off against income under the head “Salaries”.
ii) Loss under the head ‘Capital Gains’ cannot be set-off against income under any other head.
iii) New: Added by FA 2017
Loss under the head House Property will be setoff with other head’s income to the extent of Only
` 200,000. Excess shall be allowed to carry forward under Section 71B.
Following points should be considered due to restrictions in other relevant Sections:
i) Speculation loss and Loss from the activity of owning and maintaining race horses cannot be set off
against income under any other head.
ii) Loss from a Specified Business [Referred to in Section 35AD] cannot be set off against any other
income.
iii) A loss cannot be set off against winnings from lotteries, crossword puzzles, races including horse races,
card games and other games of any sort or from gambling or betting of any form or nature.
Other Points:
1. Before adjusting the loss under section 71, one has to set off the loss under section 70.
2. No option is available to set off a loss or not to set off a loss
3. No order of priority is given to set off.
4. Carry forward of Loss under the head “Income from Other Sources” is not permissible in the Act:
Carry forward of Loss under the head “Income from Other Sources” is not
permissible in the Act:
Example:
A taxpayer has the following income pertaining to the previous year 2019-20: `
Profits and gains of business or profession ( – ) 1 ,50,000
Income from other sources (being interest on debentures which were purchased
out of borrowed money) ( – ) 1 ,47,000
As the loss under the head "Income from other sources" cannot be carry forward to the next year, one
should first set it off against other income.]
Question 1: Mr. A submits the following particulars pertaining to the AY 2020-21
Particulars `
Income from salary (computed) 4,00,000
Loss from self-occupied property (-)70,000
Business loss (-)1,00,000
Bank interest received 80,000
Compute the taxable income of Mr. A for the AY 2020-21
CA Suraj Agrawal
Question 2: From the following information submitted to you, compute the total income of Arun for the
AY 2020-21 and calculate his tax liability assuming he is not allowed any deduction under sections 80C to 80U.
`
Income from salary (computed) 1, 40,000
Business loss (-) 1, 60,000
Short-term capital loss (-) 40,000
Long-term capital loss (-) 1, 60,000
Question 3: Mr. E has furnished his details for the AY 2020-21 as under:
Particulars `
Income from salaries (computed) 1,50,000
Income from speculation business 60,000
Loss from non-speculation business (40,000)
Long term capital loss of A.Y. 2018-19 (30,000)
Winning from lotteries 20,000
What is the taxable income of Mr. E for the AY 2020-21?
Class Notes
CA Suraj Agrawal
MANDATORY FILLING OF RETURN [ITR] TO CARRY FORWARD
LOSSES: [Section 80]
As per section 80, the assessee must have filed a RETURN OF LOSS under section 139(3) in order to carry
forward and set off a loss. Such a return should be filed within the time allowed under section 139(1).
st th th
[31 July/30 September/30 November]
Following losses cannot be carried forward if Return of Loss is not filled within due date:
1. Loss from Non-Speculative Business under Section 72
2. Loss from Speculative Business under Section 73
3. Loss from the Specified Business (as referred in Sec 35AD) under Sec 73A (Added by FA 16)
4. Capital Loss under Section 74
5. Loss from the activity of owning and maintaining race horses under Section 74A.
However, this condition does not apply to carry forward of following losses: [means these losses can be c/f
even if no ROI has been filled on time]:
1. Loss from House Property carried forward under section 71B

2. Unabsorbed Depreciation
3. Capital Expenditure on Scientific Research
4. Capital Expenditure on Family Planning
Note:
1. Non-Filling of Return of Loss will not affect the Inter Source Adjustment u/s 70 or Inter-head
Adjustment u/s 71 or adjustment of brought forward losses of previous year with current year
Income.
2. Also, Loss of the earlier year can be carried forward to next year(s) if the return of loss of that year(s)
was submitted within due date.
SET -OFF AND CARRY FORWARD OF LOSS FROM HOUSE PROPERTY

[SECTION 71B]
A Loss under the head house property, to the extent not set off u/s 70 & 71, shall be carried forward to the next 8
AYs to be set-off against income under the head ‘Income from house property’.
[Note: In any assessment year, if there is a loss under the head ‘Income from house property’ after Inter source
adjustment under section 70, such loss will first be set-off against income from any other head during the same
year as per Section 71]
NOTE:
1. Loss under this head can be carried forward even if ROI is filed after the due date of filing ROI u/s 139(1).
2. There is no condition that assessee should own the house for which the loss is to be carried forwarded.
3. Once a particular loss is carried forward, it can be set off only against the income from the same head in
the forthcoming assessment years.
CA Suraj Agrawal
CARRY FORWARD AND SET-OFF OF BUSINESS LOSSES [SECTION 72]
1. Business loss to the extent not set-off under section 70 & 71 shall be carried forward to the next
assessment year and set-off against the income under head PGBP of the next assessment year(s) up to
maximum for EIGHT ASSESSMENT YEARS [8 A.Y.’s] immediately succeeding the assessment
year in which loss was first computed.
2. The term Business Loss will not include:
a) Unabsorbed Depreciation
b) Capital Expenditure on Scientific Research
c) Capital Expenditure on Family Planning
d) Speculative Business Loss
e) Loss from Specified Business u/s 35AD
3. Business may or may not be continued for which the carry forward and set off is desired.
4. Loss from normal business can be set off from the speculation incomes or income from specified
business u/s 35AD in subsequent AYs but opposite is not permissible.
5. Loss of business shall be allowed to be carry forward only if ITR has been filed as per the time period
mentioned in section 139(1).
6. Loss of business can be carry forward and set off against income from professions being carried on by
the assessee.
CARRY FORWARD AND SET-OFF OF SPECULATION BUSINESS LOSSES

[Section 73]
SPECULATIVE TRANSACTIONS to mean a transaction in which a contract for purchase or sale of any
commodity, including stocks & shares is periodically or ultimately settled Otherwise than by actual delivery or
transfer of the commodity.
SPECULATION BUSINESS - Where the speculative transactions carried on by assessee are of such a nature as
to constitute a business, the business shall be deemed to be distinct and separate from any other business.
Note: If the assessee is maintaining same books of account for speculative and non- speculative transactions,
then the speculative transactions shall be segregated and treated as a separate business.
Deemed Speculative Business:

Where any part of the business of a company consists of sale and purchase of shares, such company for the
purposes of section 73, be deemed to be carrying on a speculation business to the extent to which the business
consists of sale and purchase of shares.
This shall not apply to the following companies:
a) Investment Company i.e., the company whose total income mainly consists of income from house property,
capital gains and income from other sources.
b) Company whose principal business is Business of Trading in Shares OR Banking or Granting loans
and advances.
THE FOLLOWING SHALL NOT BE DEEMED TO SPECULATIVE TRANSACTIONS:

a) a contact in respect of raw materials entered in the normal course of business to guard against loss
due to future price fluctuations or
b) An eligible transaction in respect of Trading in Derivatives carried out in a recognized stock exchange.
An eligible transaction in respect of Trading in Commodity Derivatives, carried out in a recognized

association, which is chargeable to Commodities Transaction Tax.
Provided in respect of trading in agricultural commodity derivatives, the requirement of chargeability
of commodity transaction tax shall not apply (Added by Finance Act 2018).
CA Suraj Agrawal
IMPORTANT POINTS
1. The loss of a speculation business shall be set off only against the profits and gains of another speculation
business.
2. The loss to the extent not set –off shall be carried forward to the next assessment year and set-off against
the profits from speculation business of the next assessment year.
3. The loss from speculation business can be carried forward for FOUR ASSESSMENT YEARS.
4. Loss in a speculative transaction entered into on behalf of principle, is non-speculative loss of agent.
SET OFF AND CARRY FORWARD OF UNABSORBED DEPRECIATION

Set off and carry forward of unabsorbed depreciation shall be governed by Sec. 32(2) and not be Sec. 72
Meaning: Depreciation, which could not be fully absorbed in any previous year, owing to –
• There being no profits or gains chargeable for that previous year; or
• The profits or gains chargeable being less than the amount of depreciation.
Tax treatment:
Allowances or the part of the allowances of depreciation which remains unabsorbed shall be (Subject to Sec. 72
and Sec. 73) added to the amount of the depreciation for the following previous year and deemed to be the
depreciation allowances for that previous year, and so on for the succeeding previous years.
Tax point:
Unabsorbed depreciation shall be allowed to be carried forward for any number of years and such carried forward
unabsorbed depreciation may be set off against any income, other than –
- Income under the head “Salaries”
- Winning from lotteries, cross word puzzles, etc.
Note:
1. Continuation of business is not important: Unabsorbed depreciation can be carried forward even if the
business, in respect of which the loss was originally computed, is not carried on during the previous year.
2. Filling of return within due date is not mandatory: Unabsorbed depreciation can be carried forward even if
the return of income has not been filed within time.
ORDER OF SET-OFF OF LOSSES

As per the provisions of section 72(2), brought forward business loss is to be set-off before setting off
unabsorbed depreciation. Therefore, the order in which set-off will be effected is as follows –
a) Current year depreciation / Current year capital expenditure on scientific research and current year
expenditure on family planning, to the extent allowed.
b) Inter Source & Inter Head Adjustments [Section 70 & Section 71]
c) Brought forward loss from business/profession [Section 72(1)]
d) Unabsorbed depreciation [Section 32(2)]
e) Unabsorbed capital expenditure on scientific research [Section 35(4)].
f) Unabsorbed Capital expenditure on family planning [Section 36(1)(ix)]
CA Suraj Agrawal
CARRY FORWARD & SET OFF OF LOSSES BY SPECIFIED BUSINESS
[SECTION 73A]
i) Any loss computed in respect of the eligible specified business referred to in Section 35AD shall be set
off only against profits and gains, if any, of any other specified business whether eligible or not.
ii) No Inter Head Set off: The unabsorbed loss, if any, will be carried forward for set off against profits and
gains of any specified business in the following assessment year and so on.
iii) No Time Limit: There is no time limit specified for carry forward and set-off and therefore, such loss can
be carried forward indefinitely for set-off against income from specified business.
Specified Business u/s 35AD are:

(i) Setting up and operating a cold chain facility
(ii) Setting up and operating a warehousing facility for storage of agriculture produce;
(iii) Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for
distribution, including storage facilities being an integral part of such network
(iv) Building and operating, anywhere in India, a hotel of two-star or above category;
(v) Building and operating, anywhere in India, a hospital with atleast 100 beds for patients;
(vi) Developing and building a housing project under a scheme for slum redevelopment or rehabilitation;
(vii) Developing and building a housing project under a scheme for affordable housing [AY 12-13]
(viii) Production of fertilizer in India [AY 12-13]
(ix) Setting up and operating an inland container depot or a container freight station notified or approved
under the Customs Act, 1962 [AY 13-14]
(x) Bee-keeping and production of honey and beeswax; [AY 13-14]
(xi) Setting up and operating a warehousing facility for storage of sugar. [AY 13-14]
(xii) Laying & Operating a slurry pipeline for the transportation of iron ore [AY 15-16]
(xiii) Setting up and operating a semiconductor wafer fabrication manufacturing unit, if notified [AY
15-16]
(xiv) Developing or operating and maintaining or developing, operating and maintaining, any
infrastructure facility (AY 18-19)
CA Suraj Agrawal
LOSSES UNDER THE HEAD ‘CAPITAL GAINS’ [SECTION 74]
The loss under the head Capital Gain shall be carried forward to the following assessment year to be set
off in the following manner:
1. Net loss under the head capital gains cannot be set off against income under any other head during
the previous year.
2. Where the loss so carried forward is a STCL, it shall be set off against any capital gains, short term or
long term, arising in that year.
3. Where the loss so carried forward is a LTCL, it shall be set off only against long term capital gain arising
in that year.
4. Any unabsorbed loss shall be carried forward to the following assessment year up to a maximum of 8
assessment years immediately succeeding the assessment year for which the loss was first computed.
5. Here also, it is necessary that a return of loss is furnished before the due date.
Question 4: Compute the Gross total income of Mr. F for the AY 2020-21 from the information given
below:
Particulars `
Net income from house property 1,25,000
Income from business (before providing for depreciation) 1,35,000
Short term capital gains on sale of shares 56,000
Long term capital loss from sale of property (brought forward from
AY 2019-20) (90,000)
Income from tea business 1,20,000
Dividends from Indian companies carrying on agricultural operations 80,000
Current year depreciation 26,000
Brought forward business loss (loss incurred six years ago) (45,000)
Solution
The gross total income of Mr. F for the AY 2020-21 is calculated as under:
Particulars ` `
Income from business
Profits before depreciation 1,35,000
Less: current year depreciation 26,000
Less: brought forward business loss 45,000
64,000
Income from tea business (40% is business income) 48,000 1,12,000
Income from the capital gains
Short term capital gains 56,000
Long term capital loss from property (cannot be set off) Nil 56,000
Note: Dividend from Indian companies is exempt from tax. 60% of the income from tea business is treated as
agricultural income and therefore, exempt from tax.
Question 5: During the PY 2019-20, Mr. C has the following income and the brought forward losses:
Particulars `
Short term capital gains on sale of shares 1,50,000
Long term capital loss of AY 2018-19 (96,000)
Short term capital loss of AY 2019-20 (37,000)
What is the capital gain taxable in the hands of Mr. C for the AY 2020-21?
CA Suraj Agrawal
Question 6: Mr. B, a resident individual, furnishes the following particulars for the PY 2019-20:
Particulars `
Income from salary (computed) 45,000
Income from house property (24,000)
Income from business – non-speculative (22,000)
Income from speculative business (4,000)
Short-term capital gains (25,000)
Long-term capital gains 19,000
What is the total income chargeable to tax for the AY 2020-21?
Class Notes
CA Suraj Agrawal
LOSSES FROM THE ACTIVITY OF OWNING AND MAINTAINING RACE
HORSES [SECTION 74A]
1. The losses incurred by an assessee from the activity of owning and maintaining race horses can only be
set-off against the income from the activity of owning and maintaining race horses.
2. Such loss can be carried forward for a maximum period of 4 assessment years immediately
succeeding the assessment year for which the loss was first computed for being set-off against the
income from the activity of owning and maintaining race horses.
3. The carry forward and set-off is permissible only if the activity of owning & maintaining race-horses is
carried on by Assessee in the previous year relevant to the assessment year in which such loss is carried
forward and set-off.
4. Filing of returns before the due date prescribed u/s 139(1) is necessary to carry forward the loss.
Question 7: Mr. D has the following income for the PY 2019-20:
Particulars `
Income from the activity of owning and maintaining the race horses 75,000
Income from textile business 85,000
Brought forward textile business loss 50,000
Brought forward loss from the activity of owning and maintaining the
race horses (relating to AY 2017-18) 96,000
What is the taxable income in the hands of Mr. D for the AY 2020-21?
Solution
The taxable income is calculated as under:
Particulars ` `
Income from the activity of owning and maintaining race horses 75,000
Less: Brought forward loss from the activity of owning and

maintaining race horses 96,000
Loss from the activity of owning and maintaining race horses to be

carried forward to AY 2020-21 (21,000)

Less: Brought forward business loss from textile business. 50,000 35,000
Taxable business income 35,000
Note: Loss from the activity of owning and maintaining race horses cannot be set-off against any other
source/head of income.
CA Suraj Agrawal
SUMMARY
Set – Off Carry Forward Set – Off
Same Inter – Inter – For Assessment From

Nature of income Source Source Head Year
under under
same same
head head
Salary N.A

House property (max 2 8 Years Same Head
lakhs)

Non – Speculation Except 8 Years Same Head

from
Salary
Speculation × × 4 Years Same Source
PGBP Specified Business u/s

× × Indefinite Same Source
35AD
Unabsorbed
Depreciation

Any Income
Cap Exp on Sci. Except
Indefinite Except from
Research from
Salary
Salary
Cap Exp on F. Plan by
Co
Short Term × 8 Years LTCG/STCG

CGs
Long Term × × 8 Years Only LTCG
Owing & Maintenance

× × 4 Years Same Source
race horses
Winning from Lottery

× × ×
IOS etc.
Carry forward of loss under the
head IOS is not permissible.
Interest etc.
CA Suraj Agrawal
NOTE:
i) Speculation business loss can be set off only against speculation business income. However,
losses from other business can be adjusted against profits from speculation business.
ii) Loss from the activity of trading in derivatives, however, is not to be treated as speculative
loss.
iii) Loss under the head “PGBP” cannot be set off against income under the head “Salaries”.
iv) Long term Capital Loss can be set off against Long term Capital Gains. Thus, short-term capital loss
is allowed to be set off against both short-term capital gain and long-term capital gain.
v) Loss under the head ‘Capital Gains’ cannot be set-off against income under any other head.
vi) Loss from activity of owning and maintaining race-horses can be set off only against income from
owning and maintaining race- horses.
vii) Loss from a Specified Business [Referred to in Section 35AD] can be set off against profits and
gains, if any, of any other specified business whether eligible or not. [14 Business]
viii) Loss from a source, the income from which is exempt, cannot be set off against any income.
ix) Loss from lottery, card games etc. cannot be set off against any income.
x) A loss cannot be set off against winnings from lotteries, crossword puzzles, races including horse
races, card games and other games of any sort or from gambling or betting of any form or nature.
xi) In case the assessee is lower income group, It’s prefer to set off losses with LTCG u/s 112 first
as the same is taxed @ 20% and also deductions under chapter VIA against such loss is not
available.
.
A. Where the losses incurred are not set – off against the income of the immediately succeeding year, such
losses cannot be set – off at a later date. However, the benefit to be denied is limited to the loss which could
be set – off and not the entire loss which is being carried forward.
B. Order of Set-off:
Section 70 [Inter Source]; Section 71[Inter Head]; Adjustment of B/f Losses and then finally Carry forward of
losses
C. Section 80:
Following losses cannot be carried forward if Return of Loss is not filled within Due Date u/s
139(1):
1. Loss from Non-Speculative Business under Section 72
2. Loss from Speculative Business under Section 73
3. Loss from Specified Business under Section 73A
4. Capital Loss under Section 74
5. Loss from the activity of owning and maintaining race horses under Section 74A.
[Note: Non-Filling of Return of Loss will not affect the Inter Source Adjustment u/s 70 or Inter-head
Adjustment u/s 71 or adjustment of brought forward losses of previous year with current year
Income]
CA Suraj Agrawal
Set Off & Carry Forward 13A.1
Problems on set off and carry forward of losses

1) X, an individual, submits the following information relevant for the AY 2020-21
Profit - ` Loss - `
Salary income 1,42,000
Income from house property:
House A 1,15,000
House B 1,17,000
House C 1,21,000
Profits and gains of business or profession :
Business A 1,08,000
Business B 1,18,000
Business C (speculative) 1,11,000
Business D (speculative) 1,23,000
Capital gains :
Short – term capital gains 1,06,000
Short – term capital loss 1,28,000
Long – term capital gains on sale of building 12,500
Income from card games 1,08,000
Loss from card games 1,07,010
Loss on maintenance of race horses 1,06,000
Interest on securities 1,04,000 —
Determine the net income of X for the AY 200-21
2) Imp: Rajesh submits the following information for previous year 2019-20 relevant to the AY 2020-21:
`
1. Profit from Business X situated in Bangalore 2,80,000
2. Profit from Business Y situated in Hyderabad 1,25,000
3. Loss from Business Z carried in Germany (the business is controlled
from India but profits are not received in India) 85,000
4. Unabsorbed depreciation of business Z 45,000
5. Income from house property situated in India 30,000
6. Income from house property situated in London
(rent received in London) 50,000
Find out the Gross Total Income of Rajesh for the AY 2020-21 if he is (a) ROR in India (b) Not ordinarily
resident in India and (c) Non – resident in India. [After Residential Status]
3) Imp: Compute GTI of Mr. X in following cases –
Source of income Case – I Case – II
Income from house property (A) 40000 50000
Income from house property (B) (20000) (35000)
Speculation income 80000 (60000)
Business income (30000) 50000
Income from activity of owning and maintaining race – horses business (A) (60000) 20000
Income from activity of owning and maintaining race – horses business (B) 30000 (16000)
Income from agricultural business (35000) 20000
Short term capital gain (transaction A) 40000 (30000)
Short term capital gain (transaction B) (20000) 15000
Long term capital gain (transaction A) (40000) 47000
Long term capital gain (transaction B) 20000 (4000)
Income from lottery 40000 —
Income from horse races 10000 25000
Income on card games (15000) (30000)
Interest on securities 20000 10000
CA Suraj Agrawal
4) Compute GTI of Mr. J from following data –
Source of income Amount `
Income under the head 'Salaries' 70000
Income from house property (A) 60000
Income from house property (B) (70000)
Speculation income 20000
Business income (130000)
Income from activity of owning and maintaining race – horses (150000)
Income from agricultural business (125000)
Short term capital gain 30000
Long term capital gain (100000)
Income from lottery 10000
Income from horse races 170000
Dividend income from non – domestic company (shares purchased out of borrowed (90000)
money)
Interest on securities 20000
5) Mr. B has furnished you the following data – `

Income from house property ( – ) 130000
Salaries (computed) 80000
Income from other sources ( – ) 90000
Income from lotteries 350000
Mr. B is seeking your advice relating to set off and carry – forward.
6) Mr. S has furnished following details to compute his gross total income: (After Clubbing)
Income from house property (- ) 20000
Profits and gains of business or profession 15000
Taxable income of minor son from investment 175000
7) Mr. X submits the following particulars pertaining to the A.Y. 2020-21:

Particulars `
Loss from self – occupied property ( – ) 70,000
Business loss ( – ) 1,00,000
Bank interest (FD) received (gross) 90,000
Compute the taxable income of Mr. X for the A.Y. 2020-21.
8) Mr. X furnishes the following particulars for the P.Y. 2019-20:

Particulars `
Income from salary (computed)) 55,000
Income from house property (34,000)
Income from business – non – speculative (22,000)
Income from speculative business (4,000)
Short – term capital gains (35,000)
Long – term capital gains 29,000
What is the total income chargeable to tax for the A.Y. 2020-21?
CA Suraj Agrawal
9) Imp: Mrs. Amutha submits the following information for the year ending 31.3.2020:
Particulars `
Income from salaries (computed)) 60,000
House 1 16,000
House 2 ( – )20,000
House 3 (self – occupied property] ( – )12,000
Profits and gains of business/profession
Business A ( – )25,000
Business B (Speculative) 35,000
Capital gains
Short term capital loss ( – )18,000
Income from betting 9,000
Loss on maintenance of race horses ( – )12,000
Interest on loan borrowed to invest in securities 20,000
Determine the gross total income for the AY 2020-21.
10) R, a resident individual – submits the following information relevant for the previous year ending on
31.3.2020: `
(a) Income from salary (computed) + 72,000
(b) Interest on securities + 12,000
(c) Income from House Property
House No. 1 + 22,000
House No. 2 – 60,000
House No. 3 – 10,000
(d) Profit and Gains from Business :
Business No. 1 + 26,000
Business No. 2 – 22,000
Business No. 3 (speculative) – 74,000
Business No. 4 (speculative) + 46,000
(e) Capital gains :
Short – term capital gain (computed) – 70,000
Long – term capital gain (computed) + 64,000
(f) Income from card games and betting (gross) + 70,000
Loss from maintenance of horse races – 56,000
Income from owning & maintaining horse races + 30,000
Determine the total income of R for the AY 2020-21.
11) Imp: X, a resident individual submits the following information for the AY 2020-21:
BUSINESS A `
Loss of the previous year 2019-20 ( – ) 1,20,000
Brought forward loss of the previous year 2018 – 19 ( – ) 1,45,000
BUSINESS B
Profit of previous year 2019-20 1,35,000
BUSINESS C (previous year ends on March 31, business discontinued on April
10, 2019)
Profits of the period April 1, 2019 to April 10, 2019 Nil
Brought forward loss of previous year 2018-19 ( – ) 1,16,000
BUSINESS D (PY ends on March 31, business discontinued on Mar 31, 2019)
Brought forward loss of previous year 2017-18 ( – ) 1,04,000
OTHER INCOME
Interest on debentures held as stock – in – trade 1,48,000
CA Suraj Agrawal
Interest on bonds held as investments 1,60,000
Long – term capital loss on sale of shares (STT not paid) ( – ) 1,46,400
Dividend [deemed dividend under section 2(22)(e)] on September 3, 2019 held as investment
1,80,000.
Determine the net income of X for the AY 2020-21. Also calculate the amount of loss which can be
carried forward for being set off to the next assessment year.
12) Mr. X informs you the following for AY 2020-21:
a) Taxable salary ` 5,20,000/ –
b) Loss from House property A ` 60,000/ –
c) Income from House property B ` 40,000/ –
d) Brought forward business loss – AY 2012-13 - ` 1,00,000/ –
e) Current year business income – ` 80,000/ –
f) Bank interest – ` 20,000/ – Determine total income and carry forward loss, if any.
13) From the following particulars of Mr. Naresh for the previous year ending 31.03.2020 compute the
income under each head and the taxable income with reasons and also explain the provisions of carry
forward of such loss, that could not be absorbed:
(i) Income from business (Proprietary concern)
(a) Net adjusted profit from Textile Trade 20,000
(b) Net adjusted loss from Automotive Trade 30,000
(c) Loss in shares trade (Shares were never taken delivery) 40,000
(ii) Negative income from House Property ( – ) 25,000
(iii) Capital Gain:
(a) Short – term Loss ( – ) 20,000
(b) Long – term gain 30,000
14) Simran, engaged in various types of activities, gives the following particulars of her income for the
year ended 31.3.2020:
`
(a) Profit of business of consumer and household products 50,000
(b) Loss of business of readymade garments 10,000
(c) Brought forward loss of catering business which was closed in Asst. Year 2018-19 15,000
(d) Short – term loss on sale of securities and shares 15,000
(e) Profit of speculative transactions entered into during the year 12,500
(f) Loss of speculative transactions of Asst. Year 2015-16 not set off till Asst Year 2019-20 15,000
Compute the total income of Simran for the AY 2020-21.
15) Imp: Mr. Yashwant submits the following information for the financial year ending 31st March, 2020. He
desires that you should (a) compute the gross total income and (b) ascertain the amount of losses that can be
carried forward:
(i) He has two houses:
(a) House No. I – After all statutory deductions 36,000
(b) House No. II – current year loss (10,000)
(ii) He has three proprietary businesses:
(a) Textile business:
(i) Discontinued from 31st October 2019 – current year loss 25,000
(ii) Brought forward business loss of the previous year 2016-17 80,000
(b) Chemical business:
(i) Discontinued from 1st March, 2018 – hence no profit/loss Nil
(ii) Bad debts allowed in earlier years recovered during this year 30,000
(iii) Brought forward business loss for the assessment year 2018-19 20,000
(c) Leather business: profit for the current year 70,000
(III) (i) Short – term capital gains 20,000
(ii) Long – term capital loss 15,000
CA Suraj Agrawal
16) Imp: The summarized p & l a/c of Y (from his grocery stores) for the PY ended 31/3/20 is as under:
Particulars Amount Particulars Amount
Expenses 420000 Gross profit 600000
Net profit 280000 Dividends (from Indian listed 100000
companies)
700000 700000
The following further information was provided for the same previous year: Y had other business
(proprietary)
Cloth trade (loss) ` 42000
Speculation (profit) ` 30000
Loss in proprietary business carried on in the name of his minor son ` 45000
He had carried forward loss in electrical spares for assessment year 2018-19, which business
was closed down (return filed in time) ` 39000
Income of Mrs. Y ` 55000
Compute the assessable income of Y for the assessment year 2020-21 under the head "PGBP”.
17) Imp Mr. Garg, a resident individual, furnishes the following particulars of his income and other details
for the previous year 2019-20.
Particular `
(1) Income from Salary (computed) 15,000
(2) Income from business (before providing depreciation) 66,000
(3) Long term capital gain on sale of land 10,800
(4) Loss on maintenance of race horses 15,000
(5) Loss from gambling 9,100
The other details of unabsorbed depreciation and brought forward losses pertaining to Assessment
Year 2019-20 are as follows:
Particular `
(1) Unabsorbed depreciation 11,000
(2) Loss from Speculative business 22,000
(3) Short term capital loss 9,800
Compute the Gross total income of Mr. Garg for the Assessment Year 2020-21 and the amount of loss,
if any that can be carried forward or not.
18) Mr. Batra furnishes the following details for year ended 31.03.2020:
Particulars `
Loss from speculative business 60,000
Long term capital gain on sale of land 30,000
Long term capital loss on sale of shares (securities transaction tax not paid) 1,00,000
Income from business of textile (after allowing current year depreciation) 50,000
Income from activity of owning and maintaining race horses 15,000
Loss from house property 40,000
Following are the brought forward losses:

(i) Losses from activity of owning and maintaining race horses-pertaining to A.Y. 2017-18 - ` 25,000.
(ii) Brought forward loss from business of textile ` 60,000 - Loss pertains to A.Y. 2012-13.
Compute gross total income of Mr. Batra for the Assessment Year 2020-21. Also state the eligible
carry forward losses for the Assessment Year 2020-21.
CA Suraj Agrawal
19) Mr. Sohan submits the following details of his income for the assessment year 2020-21:
Particulars `
Income from salary 3,00,000.00
Loss from let out house property 40,000.00
Income from sugar business 50,000.00
Loss from iron ore business b/f (discontinued in 2012-13) 1,20,000.00
Short term capital loss 60,000.00
Long term capital gain 40,000.00
Dividend 5,000.00
Income received from lottery winning (Gross) 50,000.00
Winnings in card games 6,000.00
Agricultural income 20,000.00
Short term capital loss under section 111A 10,000.00
Bank interest 5,000.00
Calculate gross total income and losses to be carried forward.
20) [Imp] Mr. Rajat submits the following information for the financial year ending 31st March, 2020. He
desires that you should:
(a) Compute the total income and
(b) Ascertain the amount of losses that can be carried forward.
Particulars `
(i) He has two houses :
(a) House No. I – Income after all statutory deductions 72,000
(b) House No. II – Current year loss (30,000)
(ii) He has three proprietary businesses :
(a) Textile Business :
(i) Discontinued from 31st October, 2019 – Current year loss 40,000
(ii) Brought forward business loss of A.Y.2016-17 95,000
(b) Chemical Business :
(i) Discontinued from 1st March, 2018 – hence no profit/loss Nil
(ii) Bad debts allowed in earlier years recovered during this year* 35,000
(iii) Brought forward business loss of A.Y. 2018-19 50,000
(c) Leather Business : Profit for the current year 1,00,000
(d) Share of profit in a firm in which he is partner since 2007* 16,550
(iii) (a) Short-term capital gain 60,000
(b) Long-term capital loss 35,000
(iv) Contribution to LIC towards premium 10,000
21) [Imp] Compute the total income of Mr. Krishna for the assessment year 2020-21 from the following
particulars:
`)
Income from business before adjusting the following items: 1,75,000
(a) Business loss brought forward from assessment year 2017-18 70,000
(b) Current depreciation 40,000
(c) Unabsorbed depreciation of earlier year 1,55,000
Income from house property (Gross Annual Value) 4,32,000
Municipal taxes paid 32,000
Mr. Krishna sold a plot at Noida on 12th September, 2019 for a consideration of `
6,40,000, which had been purchased by him on 20th December, 2017 at a cost of `
4,10,000
Long-term capital gain on sale of debentures 60,000
Dividend on shares held as stock in trade 22,000
Dividend from a company carrying on agri business 10,000
CA Suraj Agrawal
During the previous year 2019-20, Mr. Krishna has repaid ` 1,67,000 towards housing loan from a
scheduled bank. Out of ` 1,67,000, ` 97,000 was towards payment of interest and rest towards
principal payments.
22) Mr. P, a resident individual, furnishes the following particulars of his income and other details for the
previous year 2019-20:
Particulars `
(i) Income from salary (computed) 18,000
(ii) Net annual value of house property 70,000
(iii) Income from business 80,000
(iv) Income from speculative business 12,000
(v) Long term capital gain on sale of land 15,800
(vi) Loss on maintenance of race horse 9,000
(vii) Loss on gambling 8,000
Depreciation allowable under the Income-tax Act, 1961, comes to ` 8,000, for which no treatment is
given above. The other details of unabsorbed depreciation and brought forward losses (pertaining to
A.Y. 2019-20) are:
Particulars `
i. Unabsorbed depreciation 9,000
ii. Loss from speculative business 16,000
iii. Short term capital loss 7,800
Compute the gross total income of Mr. P for the Assessment year 2020-21, and the amount of loss
that can or cannot be carried forward.
23) Ms. Geeta, a resident individual, provides the following details of her income / losses for the year
ended 31.3.2020:
(i) Salary received as a partner from a partnership firm ` 7,50,000. The same was allowed to the firm.
(ii) Long-term capital gain on sale of land ` 5,00,000.
(iii) ` 51,000 received in cash from friends in party.
(iv) ` 55,000, received towards dividend on listed equity shares of domestic companies.
(v) Brought forward business loss of AY 2019-20 ` 12,50,000.
The return for AY 2019-20 was filed in time. Compute gross total income of Ms. Geeta for the
Assessment Year 2020-21 and ascertain the amount of loss that can be carried forward.
CA Suraj Agrawal
Class Notes
CA Suraj Agrawal
Set Off & Carry Forward 13B.1
SOLUTION – SET OFF

Solution 1:
Net income 2,21,000
Loss to be carried forward

Speculative business loss 12,000
Short-term capital loss 9,500
Loss from the activity of owning and maintaining race horses 1,06,000
Solution 2:
Business Income `)
Resident (` NOR (``) NR (``)
Business X (Profit) 2,80,000 2,80,000 2,80,000
Business Y (Profit) 1,25,000 1,25,000 1,25,000
4,05,000 4,05,000 4,05,000
Business Z (Loss); (controlled from
India but received out of India) (-) 85,000 (-) 85,000 Nil
3,20,000 3,20,000 4,05,000
Unabsorbed depreciation of business Z (-) 45,000 (-) 45,000 Nil
2,75,000 2,75,000 4,05,000
Income from house property ---
Property in India 30,000 30,000 30,000
Property in London 50,000 --- ---
Gross Total Income 3,55,000 3,05,000 4,35,000
Solution 3: Computation of Gross Total Income of Mr. X for the AY 2020-21

Particulars `)
Case -I (` `)
Case-II (`
Income from House Property
House property A 40000 50000
House Property B (-)20000 20000 (-) 35000 15000
Profits & Gains of Business or Profession
Speculation income 80000 (-) 60000 Nil
Other business (-) 30000 50000 50000
Income from agricultural business (Exempted) Nil Nil
Capital Gains
Short term capital Gain
Transaction A 40000 -. (-) 30000
Transaction B (-) 20000 20000 15000
Long term capital gain
Transaction A (-) 30000 47000
Transaction B 10000 Nil (-) 4000 28000
Casual income
Income from lottery 40000 —
Income on card games (losses not to be considered) Nil 50000 Nil 25000
Income from activity of owning & maintaining race-horses
Business (A) (-) 60000 20000
Business (B) 30000 Nil (-) 16000 4000
Other income
Interest on securities 20000 10000
Gross Total Income 160000 132000
Losses to be carried forward
Loss from activity of owning & maintaining race horse (-) 30000 —
Long term capital loss (20000) -
Speculation loss - (60000)
CA Suraj Agrawal
Solution 4:
Computation of GTI of Mr. Jacky for the A.Y. 2020-21
Particulars Details Amount Amount
Salaries 70000
House property A 60000
House Property B (70000) (10000)
Profits & Gains of Business or Profession
Speculation income 20000
Other business income (130000)
Income from agricultural business [exempted u/s 10(1)] Nil (110000)
Capital Gains
Short term capital gain 30000
Long term capital gain (100000) Nil
Long term capital loss cannot be set off against any income & shall
be carried forward
Income from Other Sources
Casual income
Income from lottery 10000
As no loss can be set off against such income.
Income from activity of owning and maintaining race-horses
Loss from activity of owning and maintaining race-horses cannot be
set off against any income & shall be carried forward (150000) Nil
Other income
Dividend from non-domestic company (90000)
Interest on securities 20000 (70000)
Gross Total Income (90000) 180000
Conclusion: From salary income, losses under the head income from other sources ` 70,000 is adjusted as
because loss under the head 'PGBP' cannot be set off against salary income and loss under the head income
from other sources cannot be carried forward. Thereafter loss under the head 'HP' of ` 10,000 and losses under
the head 'PGBP' up to ` 20,000 is a adjusted against Short term capital gain of ` 30,000 and remaining losses
under the head Profits and gains of business or profession ` 90,000 is carried forward. Alternatively, loss under
the head Income from house property of ` 10,000 and loss under the head Profits & gains of business or
profession of ` 80,000 can be carried forward.
Solution 5:
Statement showing application of sec. 71
Particulars Amount
Salaries 80,000
Winning from lotteries 350,000
Other income (90,000)
Gross total income 350,000
Conclusion
Casual income shall be fully taxable as no loss can be set off against such 350000
income.
Losses to be carried forward

(a) Loss under the head "Income from house property" (130000)
(b) Loss under the head "Income from other sources", as such loss cannot be Nil
carried forward.
Income under the head 'Salaries' is first adjusted with the loss under the head 'IOS' as the same cannot be carried
forward. Though loss under the head 'IOS' is ` 90,000 and such loss could be adjusted with income under the
head "Salaries' only to the extent of ` 80,000 still the remaining loss of ` 10,000 cannot be carried forward.
CA Suraj Agrawal
Solution 6:
Computation of gross total income of Mr. S for the A.Y. 2020-21
Particulars Details Amount

Income from house property (-) 20000
Profits & gains of business or profession 15000
Taxable income of minor son from investment u/s 64(1A) 175000
Less: Exemption u/s 10(32) (-)1500 173500
Gross Total Income 168500
Solution 7:
Computation of taxable income of Mr. X for the A. Y. 2020-21
`)
(` `)
(`
Income from house property (-)70,000 4,30,000
Business income (-) 1,00,000
Income from other sources (bank interest) 90,000
Business loss to be carried forward (-) 10,000 -
Gross total income [See Note below] 4,30,000
Note: Business loss of ` 1,00,000 is set off against bank interest of ` 90,000 and remaining business loss of
` 10,000 shall be carried forward as it cannot be set off against salary income.
Solution 8:
The total income chargeable to tax for the A.Y. 2020-21 is calculated as under:
`)
(` `)
(`
Income from salaries 55,000
Income from house property (34,000) 21,000
Profits and gains of business and profession
Business loss to be carried forward [Note 1] (22,000)
Speculative loss to be carried forward [Note 2] (4,000)
Capital Gains
Short term capital loss (35,000)
Short term capital loss to be carried forward [Note 3] (6,000)
Taxable income 21,000
Note 1: Business loss cannot be set-off against salary income. Therefore, loss of ` 22,000 from the non-
speculative shall be carried forward.
Note 2: Short term capital loss can be set off against both short term capital gain and long term capital gain.
Therefore, short term capital loss of ` 35,000 can be set-off against long-term capital gains to the extent of
` 29,000. The balance short term capital loss of ` 6,000 cannot be set-off against any other income and has to be
carried forward to the next year for set-off against capital gains, if any.
Solution 9:
Computation of gross total income of Mrs. Amutha for A.Y. 2020-21
Particulars ` `
I. Salaries:
Salary 60,000
II. Income from house property :
House 1 16,000
House 2 (20,000)
House 3 (12,000) (16,000)
III. Profits and gains of business :
Business A (25,000)
Business B (Speculation) 35,000 10,000
IV. Capital gains :
Short term capital loss (18,000)
Long term capital gains 10,000
CA Suraj Agrawal
To be carried forward to A.Y 2021-22 (8,000) Nil
V. Income from other sources :
i) Interest on Securities (Gross) 18,000
Less: Interest on loan 20,000 (2,000)
ii) Loss on maintenance of race horses carried
forward to A.Y 2021-22 (12,000)
iii) Income from betting 9,000
Note: Net loss of ` 2,000 on account of interest on securities cannot be set off against income from betting.
However, this loss can be adjusted against any other head of income available to the assessee.
Solution 10
Total Income of R
Income from salary 72,000
Income from House Property (22,000 - 60,000 - 10,000) (-) 48,000
Income from Profits and Gains from business
Non-Speculative Business [26,000- 22,000] 4,000
Speculative Business- 3 - 74,000
Speculative Business- 4 + 46,000
Carried forward - 28,000
Income from capital gain
Short-term capital loss - 60,000
Carried forward capital loss - 6,000
Interest on securities
12,000
Income from card game and betting 70,000 82,000
Income from maintaining horses 30,000
Loss from maintenance of race horses (-) 56,000
To be carried forward (-) 26,000
Solution 11:
`
Loss of Business A for the previous year 2019-20 (-) 1,20,000
Profit of Business B for the previous year 2019-20 1,35,000
Profit of Business C for the period April 1, 2019 to April 10, 2019 Nil
Interest on debentures held as stock-in-trade 1,48,000
Current business profit 1,63,000
Less : Brought forward loss of Business A, Business C and Business D
[i.e., (1,45,000 + 1,16,000 + 1,04,000) subject to the maximum of ` 1,63,000] 1,63,000
Income under the head "Profits and gains of business or profession" Nil
Computation of Net Income

Profits and gains of business or profession Nil
Capital gains Nil
(Loss of ` 1,46,400 will be carried forward for next 8 years for set off against long-term capital gain)
Interest on bonds held as investment 1,60,000
Deemed dividend on shares (exempt) NIL
Less : Deduction under sections 80C to 80U Nil
Net income 2,77,000
Notes :
1. As debentures are held by X as stock-in-trade, interest income is a part of business profits. Interest income
can, therefore, be utilised for claiming set off of brought forward business losses. This rule is, however, not
applicable in the case of interest on bonds as bonds are held by X as investment.
2. Though Business D was not in existence during the previous year 2019-20, yet the brought forward business
loss of the year 2018-19 can be set off against the income of the assessment year 2020-21
CA Suraj Agrawal
Solution 12:
Computation of Total Income of Mr. X:
Particulars `
Salary Income 5,20,000
Income from House Property - as given (20,000)
Profits & Gains of Business or Profession 80,000
Income from Other Sources - Bank interest 20,000
6,00,000
Brought forward loss - Business loss (A.Y. 2012-13) - restricted to (80,000)
Gross Total Income ` 5,20,000
Note: The assessee is not eligible to carry forward unabsorbed business loss of ` 20,000/- (`
` 1 lakh less ` 80,000
set off) to assessment year 2021-22 since the period of eight assessment years eligible for carry forward has
expired.
Solution 13:
Computation of Income under the head 'Profits and gains of business or profession'
` `
Profit and gains of business or profession
Net adjusted profit of textile trade 20,000
Net loss of automotive trade (-) 30,000 (-) 10,000
Speculative loss in shares business
[Not allowed to be set off against any income except profit of speculative shares business](-) 40,000
Capital gains
Less : Short term capital loss (-) 20,000 10,000
Taxable income (-) 25,000/NIL
Statement of losses to be carried forward to assessment year 2021-22

If LTCG is adjusted against business loss
Speculative loss from shares 40,000
If LTCG is adjusted against loss from house property

Income from business 10,000
Income from speculative business 40,000
15,000
Solution 14:
Computation of total income of Simran for the A.Y. 2020-21
` `
Profit of business of consumer and house-hold products 50,000
Less: Loss of business of readymade garments for the
year adjusted under section 70(1) 10,000
Less: Brought forward loss of catering business closed
in assessment year 2018-19 set off against business
income for the year as per section 72(1) 15,000 25,000
Profit of speculative transaction 12,500
Total Income 37,500
Notes:
1. Loss of speculative transaction of assessment year 2015-16 is not allowed to be set off against the profit of
speculative transaction of the assessment year 2020-21, since, as per the provisions of section 73(4), such
loss can be carried forward for set-off for a maximum period of 4 years. This time limit of 4 years expired in
assessment year 2019-20
2. Short term capital loss of ` 15,000 on sale of securities and shares has to be carried forward as per section
74 since there is no income under the head Capital Gains for the assessment year 2020-21. The loss is to be
carried forward for set off in future years against income chargeable under the head Capital Gains. Such loss
can be carried forward for a maximum period of 8 assessment years.
CA Suraj Agrawal
Solution 15: Computation of gross total income
` `
House No. I 36,000
House No. II (-) 10,000 26,000
Profit of the leather business 70,000
Losses : Textile business - current year loss (-) 25,000
45,000
Bad debts recovered taxable u/s 41 (4) 30,000 75,000
Income from capital gains
Long term capital loss, can be set off only against LTCG Nil 20,000
1,21,000
Set off of b/f losses
b/f business loss of assessment year 2016-17 80,000
b/f business loss of assessment year 2018-19 20,000
1,00,000
Maximum allowed to be set off (to the extent of income under the
head 'Profits and gains of business or profession') (-) 75,000
Statement of losses to be carried forward to assessment year 2021-22
business loss of assessment year 2016-17 (80,000-75,000) 5,000
business loss of assessment year 2018-19 20,000
Total 25,000
Long term capital loss of assessment year 2020-21 15,000
Solution 16:
Computation of Profits & gains of business or profession of Mr. Y for the PY: 2019-20
Particulars Amount
Net profit as per Profit and Loss account 280000
Less: Income not taxable credited to P/L A/c
Dividends 100000
Profits and gains of business of grocery shop 180000
Add: Income from speculation business 30000
Less: Loss from cloth trade (42000)
Less: Loss from business of minor clubbed u/s 64(1A) (45000)
Profits and gains of business after application of sec. 70 but before application of sec. 72 123000
Less: Brought forward loss of electric spare business (39000)
Profits & gains of business or profession 84000
Solution 17:
Computation of Gross Total Income of Mr. Garg for the A.Y. 2020-21
Particulars ` `
(i) Income from salary 15,000
(ii) Profits and gains of business or profession 66,000
Less : Unabsorbed depreciation brought forward from A.Y. 2019-20
(Unabsorbed depreciation can be set-off against any head of income) 11,000 55,000
(iii) Capital gains

Less : Brought forward short term capital loss
[Short-term capital loss can be set-off against both short-term
capital gains and long-term capital gains as per section 74(1)] 9,800 1,000
Amount of loss to be carried forward to AY 2021-22
Particulars `
(1) Loss from speculative business [to be carried forward as per Section 73] 22,000
[Loss from a speculative business can be set off only against income from another
speculative business. Since there is no income from speculative business in the
current year, the entire loss of ` 22,000 brought forward from A.Y.2019-20 has to be
CA Suraj Agrawal
carried forward to A.Y. 2021-22 for set-off against speculative business income of that
year. It may be noted that speculative business loss can be carried forward for a
maximum of four years as per section 73(4), i.e., upto AY 2023-24]
(2) Loss on maintenance of race horses [to be carried forward as per Section 74A] 15,000
[As per section 74A(3), the loss incurred in the activity of owning and maintaining race
horses in any assessment year cannot be set-off against income from any other
source other than the activity of owning and maintaining race horses. Such loss can
be carried forward for a maximum of four assessment years i.e., upto AY 2024-25]
(3) Loss from gambling can neither be set-off nor be carried forward
Solution 18:
Computation of Gross Total Income of Mr. Batra for the A.Y. 2020-21
Particulars ` `
Salaries 1,00,000
Less: Current year loss from house property (40,000) 60,000
Profit and gains of business or profession 50,000

Less: Loss from textile business brought forward from A.Y. 2012-13 (10,000) NIL
Balance business loss of A.Y. 2012-13 [See Note 1]
Income from the activity of owning and maintaining race horses 15,000
Less: Loss from activity of owning and maintaining race horses brought 25,000
forward from A.Y. 2017-18 (10,000) NIL
Loss to be carried forward to A.Y. 2021-22 [See Note 2]
Capital Gain
Less: Long term capital loss on sale of shares 1,00,000
Loss to be carried forward to A.Y. 2021-22 [See Note 3] (70,000) NIL
Losses to be carried forward to A.Y. 2021-22
Particulars `
Current year loss from speculative business [See Note-4] 60,000
Current year long term capital loss on sale of shares 70,000
Loss from activity of owning and maintaining of race horse pertaining to AY 2017-18 10,000
Notes:-
(1) As per section 72(3), business loss can be carried forward for a maximum of eight assessment years
immediately succeeding the assessment year for which the loss was first computed. Since the eight year
period for carry forward of business loss of A.Y. 2012-13 expired with the A.Y. 2020-21, the balance
unabsorbed business loss of ` 10,000 cannot be carried forward to A.Y. 2021-22.
(2) As per section 74A(3), the loss incurred on maintenance of race horses cannot be set-off against income
from any source other than the activity of owning and maintaining race horses. Such loss can be carried
forward for a maximum period of 4 assessment years.
(3) long-term capital loss on sale of such shares can be set-off against long-term capital gain on sale of land.
The balance loss of ` 70,000 cannot be set-off against short term capital gain or against any other head
of income. The same has to be carried forward for set-off against long-term capital gain of the subsequent
assessment year. Such long-term capital loss can be carried forward for a maximum of eight assessment
years.
(4) Loss from speculation business cannot be set-off against any income other than profit and gains of
another speculation business. Such loss can, however, be carried forward for a maximum of four years as
per section 73(4) to be set-off against income from speculation business.
CA Suraj Agrawal
Solution 19:
Computation of gross total income of Mr. Sohan for the A.Y. 2020-21
Particulars ` `
Salaries
Less: Loss from house property set-off against salary income as per section 71 (40,000)
2,60,000
Income from sugar business 50,000
Less: Brought forward loss from iron-ore business set-off as per section 72(1) (50,000) Nil
Balance business loss of ` 70,000 of P.Y. 2012-13 carried forward to A.Y.
2020-21
Capital gains
Less: Short term capital loss set-off (40,000) Nil
Balance short-term capital loss of ` 20,000 to be carried forward Short-term
capital loss of ` 10,000 under section 111A to be carried forward

Winnings from lottery 50,000
Winnings from card games 6,000
Bank interest 5,000 61,000
Losses to be carried forward to A.Y. 2021-22
Loss of iron-ore business 70,000
Short term capital loss 30,000
Notes:
1. The following income are exempt under section 10 –
(i) Dividend income [Exempt under section 10(34)], assuming that dividend is received from a domestic
company.
(ii) Agricultural income [Exempt under section 10(1)].
2. It is presumed that loss from iron-ore business relates to P.Y. 2012-13, the year in which the business
was discontinued.
Solution 20: Computation of total income of Mr. Rajat for the AY 2020-21
Particulars ` `
1. Income from house property
House No. 1 72,000
House No. 2 30,000 (-) 42,000
2. Profits and gains of business or profession

Profit from leather business 1,00,000
Bad debts recovered taxable under section 41(4) 35,000
1,35,000
Less: Current year loss of textile business (-) 40,000
95,000
Less: Brought forward business loss of textile business for A.Y. 2016- 95,000 Nil
17 set off against the business income of current year
3. Capital Gains
Less: Deduction under Chapter VI-A 10,000
Under section 80C – LIC premium paid
Total Income 92,000
Statement of losses to be carried forward to A.Y. 2021-22
Particulars `
Business loss of A.Y. 2018-19 to be carried forward under section 72 50,000
Long term capital loss of A.Y. 2020-21 to be carried forward under section 74 35,000
CA Suraj Agrawal
Notes:
(1) Share of profit from firm of ` 16,550 is exempt under section 10(2A).
(2) Long-term capital loss cannot be set-off against short-term capital gains. Therefore, it has to be
carried forward to the next year to be set-off against long-term capital gains of that year.
Solution 21:
Computation of Total Income of Mr. Krishna for the AY 2020-21
Particulars ` `
(1) Income from house property
Gross Annual Value 4,32,000
Less: Municipal taxes paid 32,000
(a) 30% of NAV 1,20,000
(b) Interest on housing loan 97,000 1,83,000
(2) Income from business

Income from business 1,75,000
Less : Current year depreciation under section 32(1) 40,000
1,35,000
Less: Set-off of brought forward business loss of AY 2017-18 under 70,000
section 72 65,000
Less: Unabsorbed depreciation set-off [See Note 2] 65,000 Nil
(3) Capital gains

Long term capital gain on sale of debentures 60,000
Less: Unabsorbed depreciation set-off [See Note 2] 60,000 Nil
Short term capital gain on sale of land [See Note 1] 2,30,000

Less: Unabsorbed depreciation set-off [See Note 2] 30,000 2,00,000
(4) Income from other sources
Dividend on shares (whether held as stock-in-trade or from a

company carrying on agricultural operations)
exempt under section 10(34) - Nil
Less : Chapter VI-A deduction
Section 80C [Principal repayment of housing loan] 70,000
Notes:
(1) Since land is held for a period of less than 24 months, the gain of ` 2,30,000 arising from sale of such
land is a short-term capital gain.
(2) Brought forward unabsorbed depreciation can be adjusted against any head of income.
However, it is most beneficial to set-off unabsorbed depreciation first against long-term capital gains,
since it is taxable at a higher rate of 20% (the other income of the assessee falling in the 10% slab rate).
CA Suraj Agrawal
Solution 22
Computation of Gross Total Income of Mr. P for the A.Y. 2020-21
Particulars ` `
(i) Income from salary 18,000
(ii) Income from House Property
Net Annual Value 70,000
Less : Deduction under section 24 (30% of ` 70,000) 21,000 49,000
(iii) Income from business and profession

(a) Income from business 80,000
Less : Current year depreciation 8,000
72,000
Less : Unabsorbed depreciation 9,000 63,000
(b) Income from speculative business 12,000
Less : Brought forward loss from speculative business 12,000 Nil
(Balance loss of ` 4,000 (i.e. ` 16,000 – ` 12,000) can
be carried forward to the next year)
(iv) Income from capital gain
Less : Brought forward short term capital loss 7,800 8,000
Amount of loss to be carried forward to the next year

Particulars `
Loss from speculative business (to be carried forward as per section 73) 4,000
Loss on maintenance of race horses (to be carried forward as per section 74A) 9,000
Notes:
(i) Loss on gambling can neither be set-off nor be carried forward.
(ii) As per section 74A(3), the loss incurred on maintenance of race horses cannot be set-off against income
from any other source other than the activity of owning and maintaining race horses. Such loss can be
carried forward for a maximum period of 4 assessment years.
(iii) Speculative business loss can set off only against income from speculative business of the current year
and the balance loss can be carried forward to A.Y. 2021-22. It may be noted that speculative business-
loss can be carried forward for a maximum of four years as per section 73(4).
Solution 23:
Computation of Gross Total Income of Ms. Geeta for the Assessment Year 2020-21
Particulars `
Profits and gains of business and profession
Salary received as a partner from a partnership firm is taxable under the head “Profits 7,50,000
and gains of business and profession”
Less: Brought forward business loss of Assessment Year 2019-20 to be set-off against 7,50,000
business income (Maximum) Nil
Capital Gains
Long term capital gain on sale of land 5,00,000

Cash gift received from friends - since the value of cash gift exceeds 51,000
` 50,000, the entire sum is taxable
Dividend received from a domestic company is exempt under section 10(34) Nil 51,000
Notes :
1. Balance brought forward business loss of assessment year 2019-20 of ` 5,00,000 has to be carried
forward to the next year.
CA Suraj Agrawal
ROI 14.1
RETURN OF INCOME
COMPULSORY FILING OF RETURN OF INCOME [SECTION 139(1)]
1. It is mandatory for COMPANIES AND FIRMS to file a return of income or loss for every previous year on or
before the due date.
2. Further, every person, being an Individual / HUF / AOP / BOI / AJP:

whose TOTAL INCOME during the previous year
without giving effect to the provisions of Chapter VI-A or Section
54/54B/54D/54EC/54F/54G/54GA/54GB exceeded the basic exemption limit [`` 250,000 / `
300,000 / ` 500,000 as the case may be]
is required to file a return of income on or before the due date.
3. In case of person other than above, filing of return on or before the due date is mandatory, if Total Income
exceeds Basic Exemption Limits.
Compulsory filing of income tax return in relation to assets located outside India
Any Resident person (other than RNOR) who is not required to furnish a return under section 139(1) and who
during the PY:
a) holds (beneficial Owner) any asset (including any financial interest in any entity) located outside
India or
b) has a signing authority in any account located outside India or
c) is a beneficiary of any asset (including financial interest in any entity) located outside
India
Shall furnish, on or before the due date, a return in respect of his Income or loss for the PY in prescribed manner.
However, an individual being a beneficiary of any asset (including any financial interest in any entity) located
outside India would not be required to file return of income under this clause, where, income, if any, arising from
such asset is includible in the income of the person referred to in (a) above in accordance with the provisions of
the Income-tax Act, 1961.
Added by Finance (No. 2) Act 2019

Any person other than a company or a firm, who is not required to furnish a return under
section 139(1), is required to file income-tax return in the prescribed form and manner on or
before the due date if, during the previous year, such person –
a) has deposited an amount or aggregate of the amounts exceeding ` 1 crore in one or
more current accounts maintained with a banking company or a co-operative bank; or
b) has incurred expenditure of an amount or aggregate of the amounts exceeding ` 2 lakh
for himself or any other person for travel to a foreign country; or
c) has incurred expenditure of an amount or aggregate of the amounts exceeding ` 1 lakh
towards consumption of electricity; or
d) fulfils such other prescribed conditions.
CA Suraj Agrawal
ROI 14.2
‘DUE DATE’
a) 30th November of the AY, where the assessee is required to furnish a report u/s 92E
– Transfer Pricing Report for International & Specified Domestic Transactions
b) 30th September of the AY, where the assessee is:

(i) A company [Other than a company covered above]; or
(ii) A person (excluding person covered above) whose accounts are required to be audited under
the Income-tax Act, 1961 or any other law in force; or
(iii) A working partner of a firm whose accounts are required to be audited under the Income-tax Act,
1961 or any other law for the time being in force.
c) 31st July of the AY, in the case of any other assessee.

Note: If on the last date on which Income tax Return ought to be filed is a holiday then it can be filed on the next
working day and it will be assumed as if return was filed on the due date.
Consequences for default in Furnishing Income tax Return:
i) Interest u/s 234A & late fee u/s 234F

ii) Losses (Selected) can not be carried forwarded.
iii) Income based deduction [80-IA to 80RRB] will not be available.
Fee for Default in furnishing Return of Income [SECTION 234F] -

Where a person, who is required to furnish a return of income under section 139, fails to do so within the
prescribed time limit under section 139(1), he shall pay, by way of fee, a sum of-
st
a. ` 5,000 if the return is furnished on or before the 31 December of AY;
b. ` 10,000 in any other case
However, if the total income of the person does not exceed ` 500,000, the fees payable shall not exceed
` 1,000
RETURN OF LOSS [SECTION 139(3)]

Refer Notes of Set-off Chapter
CA Suraj Agrawal
ROI 14.3
BELATED RETURN [SECTION 139(4)]
Any person who has not furnished a return within the time allowed to him under section 139(1) may furnish the
return for any previous year at any time –
(i) before the end of the relevant assessment year; or
(ii) before the completion of the assessment,
whichever is earlier.
REVISED RETURN [SECTION 139(5)]

(1) If any person having furnished a return under section 139(1) or 139(4), discovers any omission or any
wrong statement therein, he may furnish a revised return at any time before the end of the relevant
assessment year OR before completion of assessment, whichever is earlier.
(2) It may be noted that a belated return can be revised now.
(3) Once a revised return is filed, the original filed return must be taken to have been withdrawn & substituted
by the revised return.
(4) CAN A LOSS RETURN BE REVISED:
Assessee files a loss return u/s. 139(3). Later it revises the return u/s. 139(5) and claims enhanced amount
of loss. According to section 139(3), once a return is filed, all the provisions of the Income-tax Act shall
apply as if such return has been filed u/s.139(1). Consequently, the filing of revised loss return is valid and
section 80 does not come in the way of disallowing the carry forward of such increased amount of
loss.
DEFECTIVE RETURN [SECTION 139(9)]

1. Where the Assessing Officer considers that the return of income furnished by the assessee is defective, he
may intimate the defect to the assessee and give him an opportunity to rectify the defect within a
period of 15 days from the date of such intimation.
2. The Assessing Officer has the discretion to extend the time period beyond 15 days, on an application made
by the assessee.
3. If the defect is not rectified within the period of 15 days or such further extended period, then the return would
be treated as an invalid return.
4. The consequential effect would be the same as if the assessee had failed to furnish the return.
However, the Assessing Officer can condone the delay and treat the return as a valid return.
5. A return of income shall be regarded as defective unless the annexures, statements and columns in the
return of income relating to computation of income chargeable under each head of income, computations of
gross total income and total income have been duly filled in.
6. Return shall not be regarded as defective if tax together with interest, if any, payable in accordance with
the provisions of Section 140A has not been paid on or before the date of furnishing of the return.
CA Suraj Agrawal
ROI 14.4
PERMANENT ACCOUNT NUMBER (PAN) [SECTION 139A]
1. Following persons, who have not been allotted a permanent account number (PAN), are liable to
apply to the AO within the prescribed time for the allotment of a PAN:
a. Every person whose total income or the total income of any other person in respect of which he is
assessable under this Act during any previous year exceeded the basic exemption limit; or
b. Every person carrying on any business or profession whose total sales, turnover or gross receipts
exceeds or is likely to exceed ` 5 lakh in any previous year; or
c. Every person, being a resident, other than an individual, which enters into a financial transaction
of an amount aggregating to ` 2,50,000 or more in a financial year.
d. Every person who is the managing director, director, partner, trustee, author, founder, karta,
chief executive officer, principal officer or office bearer of the person mentioned in (c) above or
any person competent to act on behalf of such person.
2. The AO, having regard to the nature of transactions as may be prescribed, may also allot a PAN to any other
person.
3. Such PAN comprises of 10 alphanumeric characters and is issued in the form of a laminated card.
4. Quoting of PAN is mandatory in all documents pertaining to the following prescribed transactions:
a. in all returns to, or correspondence with, any income-tax authority;
b. in all challans for the payment of any sum due under the Act;
c. in all documents pertaining to such transactions entered into by him, as may be prescribed by the CBDT
in the interests of revenue.
5. If there is a change in the address or in the name and nature of the business of a person, on the basis of
which PAN was allotted to him, he should intimate such change to the Assessing Officer.
6. Persons, who have agricultural income and are not in receipt of any other taxable income, are exempt from
the provisions of section 139A.
PENALTY FOR FAILURE TO COMPLY WITH THE PROVISIONS OF SECTION 139A or for quoting or
intimating wrong PAN or possessing more than one PAN (Section 272B):
` 10,000. [No Penalty, if defaulter has reasonable cause of such failure.]

Monetary limits of specified transactions which require quoting of PAN:
S.No. Nature of transaction Value of transaction
Sale or purchase of motor vehicle (other than two All such transactions
1. wheeled motor vehicle) which requires registration
Opening an account [other than a time-deposit All such transactions
2. referred to at Sl. No.12 and a Basic Savings Bank
Deposit Account] with a bank etc
Making an application to any bank etc for issue of a All such transactions
3. credit or debit card.
Opening of a Demat account All such transactions
4.
Payment to a hotel or restaurant against a bill or Payment in cash of an amount
5.
bills at any one time exceeding ` 50,000.
Payment in connection with travel to any foreign Payment in cash of an amount
6. country or payment for purchase of any foreign exceeding ` 50,000.
currency at any one time
Payment to a Mutual Fund for purchase of its units Amount exceeding ` 50,000.
7.
Payment to a company or an institution for acquiring Amount exceeding ` 50,000.
8.
debentures or bonds
CA Suraj Agrawal
ROI 14.5
Payment to the Reserve Bank of India for Amount exceeding ` 50,000.
9. acquiring bonds
Cash Deposit with a banking company or a Deposits in cash exceeding ` 50,000
10. cooperative bank during any one day.
Purchase of bank drafts or pay orders or banker’s Payment in cash of an amount
cheques exceeding ` 50,000 during any one
11.
day.
A Time Deposit with, - Amount exceeding ` 50,000 or

(i) a banking company or a co-operative bank aggregating to more than ` 5 lakh
12. (ii) a Post Office; during a financial year
(iii) a Nidhi referred in Companies Act, 2013; or
(iv) a NBFC
Payment in cash or by way of a bank
draft or pay order or banker’s cheque
13. Payment for one or more pre-paid payment of an amount aggregating to more
instruments than ` 50,000 in a financial year.
Payment as life insurance premium Amount aggregating to more than `

14. 50,000 in a financial year.
A contract for sale or purchase of securities (other Amount exceeding ` 1 lakh per
15. than shares) transaction
Sale or purchase, by any person, of shares of a Amount exceeding ` 1 lakh per

16.
company not listed in a recognised stock exchange. transaction.
Sale or purchase of any immovable property Amount exceeding ` 10 lakh or
valued by stamp valuation authority
17. referred to in section 50C of the Act at
an amount exceeding ` 10 lakh
Sale or purchase, by any person, of goods or Amount exceeding ` 2 lakh per
18. services of any nature other than above. transaction
Note:
a. In case of minor who does not have any income chargeable to income-tax, PAN of his father or mother or
guardian is required.
b. Further, any person who does not have a PAN and who enters into any transaction specified in this rule,
shall make a declaration in Form No. 60 giving therein the particulars of such transaction.
c. Also, the provisions of this rule shall not apply to the Central Government, the State Governments and the
Consular Offices
Inter-changeability of PAN with the Aadhaar number

Every person who is required to furnish or intimate or quote his PAN may furnish or intimate or
quote his Aadhar Number in lieu of the PAN w.e.f. 1.9.2019 if he
 has not been allotted a PAN but possesses the Aadhar number
 has been allotted a PAN and has intimated his Aadhar number to
prescribed authority in accordance with the requirement contained in section 139AA(2).
PAN would be allotted in prescribed manner to a person who has not been allotted a PAN but
possesses Aadhar number.
CA Suraj Agrawal
ROI 14.6
Section 139AA - Quoting of Aadhaar number
1. Every person who is eligible to obtain Aadhaar number shall, on or after the 1st day of July, 2017,
quote Aadhaar number—
(i) in the application form for allotment of permanent account number;

(ii) in the return of income:
2. Where the person does not possess the Aadhaar Number, the Enrolment ID of Aadhaar
application form issued to him at the time of enrolment shall be quoted in the application for
permanent account number or, as the case may be, in the return of income furnished by him.
3. Every person who has been allotted permanent account number as on the 1st day of July, 2017,
and who is eligible to obtain Aadhaar number, shall intimate his Aadhaar number to such authority
in such form and manner as may be prescribed, on or before a date to be notified by the Central
Government in the Official Gazette:
Provided that in case of failure to intimate the Aadhaar number, the permanent account number
allotted to the person shall be deemed to be invalid and the other provisions of this Act shall apply,
as if the person had not applied for allotment of permanent account number.
4. The provisions of this section shall not apply to such person or class or classes of persons or any
State or part of any State, as may be notified by the Central Government in this behalf, in the
Official Gazette.
Accordingly, the Central Government has, vide Notification No. 37/2017 dated 11.05.2017
effective from 01.07.2017, notified that the provisions of section 139AA relating to quoting of
Aadhar Number would not apply to an individual who does not possess the Aadhar number
or Enrolment ID and is:
a. residing in the States of Assam, Jammu & Kashmir and Meghalaya;
b. a non-resident as per Income-tax Act, 1961;
c. of the age of 80 years or more at any time during the previous year;
d. not a citizen of India
CA Suraj Agrawal
ROI 14.7
TAX RETURN PREPARERS SCHEME [SECTION 139B]
Section 139B provides that for the purpose of enabling any specified class or classes of persons in
preparing and furnishing returns of income, the CBDT may, without prejudice to the provisions of
section 139, frame a Scheme, by notification in the Official Gazette, providing that such persons may
furnish their returns of income through a Tax Return Preparer (TRP) authorised to act as such under
the Scheme.
CBDT had notified the “Tax Return Preparer Scheme, 2006”. Content of amended scheme are:
Particulars Contents
Applicability of The scheme is applicable to all eligible persons.

the scheme
Eligible person Any person being an individual or a Hindu undivided family.
Tax Return Any individual who has been issued a "Tax Return Preparer Certificate"
Preparer and a "unique identification number" under this Scheme by the Partner
Organisation to carry on the profession of preparing the returns of income in
accordance with the Scheme.
However, the following person are not entitled to act as TRP:
(i) any officer of a scheduled bank with which the assesse maintains a
current account or has other regular dealings.
(ii) any legal practitioner who is entitled to practice in any civil court in India.
(iii) A chartered accountant.
Educational An individual, who holds a bachelor degree from a recognised Indian

qualification for University or institution, or has passed the intermediate level examination
Tax conducted by the Institute of Chartered Accountants of India or the Institute
Return Preparers of Company Secretaries of India or the Institute of Cost Accountants of
India, shall be eligible to act as TRP.
An eligible person may, at his option, furnish his return of income u/s 139 for
Preparation of
any assessment year after getting it prepared through a TRP:
and
Furnishing the However, the following eligible persons (an individual or a HUF) cannot
Return of Income furnish a return of income for an assessment year through a TRP:
by
the TRP (i) who is carrying out business or profession during the previous year and
accounts of the business or profession for that previous year are
required to be audited under section 44AB or under any other law for
the time being in force; or
(ii) who is not a resident in India during the previous year.
An eligible person cannot furnish a revised return of income for any

assessment year through a TRP unless he has furnished the original
return of income for that assessment year through such or any other
TRP.
Further, a return of income which is required to be furnished in response to a

notice under section 142(1)(i) or under section 148 or under section 153A
cannot be prepared or furnished through a TRP.
CA Suraj Agrawal
ROI 14.8
RETURN BY WHOM TO BE VERIFIED [Section 140]:
Assessee Case Verified by
In General Individual himself

Where the individual concerned is absent from Individual himself or by the duly
India authorized person of such individual
Where the individual is mentally incapacitated Guardian of such individual or any other
person competent to act on his behalf
Individual Where by any other reason it is not possible to Any person duly authorized by him
verify the return.
Note: when return is verified by any authorized person in that case the return should be
accompanied with power of attorney.
In General Karta
Where the ‘Karta’ is absent from India or is Any adult member of the family
HUF
mentally incapacitated
In General Managing Partner

If due to any reason it is not possible for Any adult partner
Firm managing partner to verify or where there is
no managing partner
In General Designated partner

If due to any unavoidable reason such Any partner
Limited liability designated partner is not able to verify and
partnership verify the return, or where there is not
designated partner
Principal Officer
Local authority
Chief Executive Officer

Political party
In General Managing Director (MD)
If due to any reason it is not possible for MD to Any director

verify or where there is no MD
Non-Resident company A person holding a valid power of

attorney.
Copy of such power of attorney must
be attached with the return.
Company Where the company is being wound up Liquidator
(whether under the orders of a court or
otherwise); or
where any person has been appointed as the

receiver of any assets of the company
Where an application for corporate insolvency insolvency professional appointed by

resolution process has been admitted by the such Adjudicating Authority
Adjudicating Authority under the Insolvency
and Bankruptcy Code, 2016.
CA Suraj Agrawal
ROI 14.9
SELF-ASSESSMENT [SECTION 140A]

Payment of tax, interest and fee before furnishing return of income
Where any tax is payable on the basis of any return required to be furnished under, inter alia, section
139, after taking into account -
a. the amount of tax, already paid, under any provision of the Income-tax Act, 1961
b. the tax deducted or collected at source
c. any relief of tax claimed under section 89
the assessee shall be liable to pay such tax together with interest and fees payable under any
provision of this Act for any delay in furnishing the return or any default or delay in payment of advance
tax before furnishing the return. The return shall be accompanied by the proof of payment of such
tax, interest and fee.
Order of adjustment of amount paid by the assessee

Where the amount paid by the assessee under section 140A(1) falls short of the aggregate of the tax,
interest and fees as aforesaid, the amount so paid shall first be adjusted towards the fees payable
and thereafter towards interest and the balance, if any, shall be adjusted towards the tax
payable.
Interest under section 234A

For the above purpose, interest payable under section 234A shall be computed on the amount of tax
on the total income as declared in the return, as reduced by the amount of-
a. advance tax paid, if any;
b. any tax deducted or collected at source;
c. any relief of tax claimed under section 89
Interest under section 234B
Interest payable under section 234B shall be computed on the assessed tax or on the amount by which
the advance tax paid falls short of the assessed tax.
For this purpose “assessed tax” means the tax on total income declared in the return as reduced by
the amount of TDS/TCS/Relief u/s 89 on any income which forms part of the total income;
Consequence of failure to pay tax, interest or fee

If any assessee fails to pay the whole or any part of such of tax or interest or fees, he shall be
deemed to be an assessee in default in respect of such tax or interest or fees remaining unpaid and
all the provisions of this Act shall apply accordingly.
CA Suraj Agrawal
ROI 14.10
Provision of credit of relief provide under section 89 [Sec. 140A,
143, 234A, 234B & 234C) - NEW
Section 89 contains provisions for providing relief where salary is paid in arrears or in advance. The
existing provisions of Section 140A, 143, 234A, 234B & 234C contain provisions pertaining to tax
computation after allowing credit for prepaid taxes and certain admissible reliefs, credits etc. However,
the relief under section 89 is not specifically mentioned in these sections.
Amendment by Finance (No. 2) Act 2019: With a view to avoiding genuine hardship in the case of a
person who is eligible for relief under section 89, the provisions of Sections 140A, 143, 234A, 234B &
234C have been amended (with retrospective effect from the assessment year 2007-08) to provide that
computation of tax liability shall be made under these sections after allowing relief under section 89.
CA Suraj Agrawal
ROI 14A.1
Problems - Return of Income

1. Paras is resident of India. During the FY 2019-20, interest of ` 2,88,000 was credited to his Non Resident
(External) Account with SBI. ` 30,000, being interest on fixed deposit with SBI, was credited to his saving
bank account during this period. He also earned ` 3,000 as interest on this saving account. Is Paras required
to file return of income?
What will be your answer, if he owns one shop in Kerala having area of 150 sq. ft.?
2. State with reasons whether you agree or disagree with the following statements:
(a) Return of income of Limited Liability Partnership (LLP) could be verified by any partner.
(b) Time limit for filing return under section 139(1) in the case of Mr. A having total turnover of ` 160 lakhs for
the year ended 31.03.2020, whether or not opting to offer presumptive income under section 44AD is 30th
September 2020.
3. Specify the persons who are authorized to verify under section 140, the return of income filed under
section 139 of the Income-tax Act, 1961 in the case of:
i. Political party;
ii. Local authority;
iii. Association of persons, and
iv. Limited Liability Partnership (LLP).
4. Mr. Vineet submits his return of income on 12-09-2020 for A.Y 2020-21 consisting of income under the head
“Income from house property” and “Income from other sources”. On 21-01-2021, he realized that he had not
claimed deduction under section 80TTA in respect of his interest income on the Savings Bank Account. He
wants to revise his return of income by the end of the relevant assessment year. Discuss.
5. State whether filing of income-tax return is mandatory for the AY 2020-21 in respect of the following
cases:
A Limited Liability Partnership (LLP) with business loss of ` 1,30,000.
6. State with reasons, whether the following statements are true or false, with regard to the provisions of
the Income-tax Act, 1961:
(i) The Assessing Officer has the power, inter alia, to allot PAN to any person by whom no tax is payable.
(ii) Where the Karta of a HUF is absent from India, the return of income can be signed by any male member
of the family.
7. Mrs. Hetal, an individual engaged in the business of Beauty Parlour, has got her books of account for the
Financial year ended on 31st March, 2020 audited under section 44AB. Her total income for the assessment
year 2020-21 is ` 3,35,000. She wants to furnish her return of income for assessment year 2020-21 through a
tax return preparer. Can she do so?
8. Can an individual, who is not in India, sign the return of income from outside India? Is there any other
option?
9. Explain with brief reasons whether the return of income can be revised under section 139(5) of the
Income-tax Act, 1961 in the following cases:
(i) Belated return filed under section 139(4)
(ii) Return already revised once under section 139(5)
(iii) Return of loss filed under section 139(3)
10. Enumerate the circumstances in which an individual assessee is empowered to verify his return of income
under section 139 by himself or otherwise by any authorized person.
11. Discuss the correctness or otherwise of the following-

a) Mr. P (NR) having business loss of ` 1,00,000 (after providing for depreciation of ` 75,000) furnishes his
return of income on 5-8-2020 (turnover for FY 2019-20 ` 1 Crore). He wants to carry forward ` 1,00,000.
b) Mr. P has furnished his return of income for the Assessment Year 2020-21 on 31st March 2021.
c) Mr. Q has furnished his return of income for the Assessment Year 2020-21 on 1st April 2021.
d) Mr. R didn't file any return of income for the Assessment Year 2020-21 and his assessment for that year
was completed on 31st December 2020. He furnishes return of income u/s 139(4) on 1-1-2021.
CA Suraj Agrawal
ROI 14A.2
12. Mr. Sharma's sales for year ended 31-3-2020 were ` 10,00,000 and his income for the same year was
` 2,10,000. As his income doesn't exceed maximum amount not chargeable to tax, he is of the opinion that
neither he is required to apply for PAN nor he is required to furnish his return of income.
13. Discuss whether the following persons are required to submit return of income for the AY 2020-21:
Assessee Net income ` Sources of income Turnover/gross receipt `
P Ltd. 10,000 Business 98,00,000
X (Firm) (-) 40,000 Business 1,65,00,000
Mr. Q 2,60,000 House Property income -
Rohan (-) 12,000 Capital gains -
Mr. K (68 years) 2,90,000 Interest
-
Mrs. M 2,50,000 Business 97,00,000
Sohit 2,50,100 Partner in Chartered Firm's receipts
Accountants firm ` 44,00,000
Rohit 2,50,100 Sleeping partner in trading Firm's turnover
firm ` 1.5 crore
Mohan 2,55,000 Salary, Interest, HP
Also state the due date for furnishing the return, wherever applicable.
14. Ms. Priyanka is a partner in a firm but not a working partner, whose turnover for the previous year 2019-20 is
` 275 lacs. The due date of filing the return of income by Mr. Priyanka is 31st July, 2020, if he is getting only
interest on capital from the firm. Whether this statement is correct.
CA Suraj Agrawal
ROI 14B.1
ANSWER – Return of Income

1. An individual is required to furnish a return of income under section 139(1) if his total income, before giving
effect to the deductions under Chapter VI-A, exceeds the maximum amount not chargeable to tax i.e., `
2,50,000 (for A.Y. 2020-21).
Computation of total income of Mr. Paras for A.Y. 2020-21

Particulars `
Interest earned from Non-resident (External) Account ` 2,88,000 [Exempt under section NIL
10(4)(ii), assuming that Mr. Paras has been permitted by RBI to maintain the aforesaid
account]
Interest on fixed deposit with SBI 30,000
Interest on savings bank account 3,000
Less: Deduction under section 80TTA (Interest on saving bank account) 3,000
Total Income 30,000
Since the total income of Mr. Paras for A.Y.2020-21, before giving effect to the deductions under Chapter VI-
A, is less than the basic exemption limit of ` 2,50,000, he is not required to file return of income for A.Y.2019-
20. Owning a shop having area of 150 sq.ft in Kerala would not make any difference to the answer.
Note: In the above solution, interest of ` 2,88,000 earned from Non-resident (External) account has been
taken as exempt on the assumption that Mr. Paras, a resident, has been permitted by RBI to maintain the
aforesaid account. However, in case he has not been so permitted, the said interest would be taxable. In such
a case, his total income, before giving effect to the deductions under Chapter VIA, would be ` 3,21,000 (`
30,000 + ` 2,88,000 + ` 3,000), which is higher than the basic exemption limit of ` 2,50,000. Consequently,
he would be required to file return of income for AY 2020-21. Here again, ownership of shop in Kerala is
immaterial.
2.
(a) Disagree
The return of income of LLP should be signed by a designated partner. Any other partner can sign the
Return of Income of LLP only in the following cases:-
where for any unavoidable reason such designated partner is not able to sign and verify the return, or,
where there is no designated partner.
(b) Disagree
In case Mr. A opts to offer his income as per the presumptive taxation provisions of section 44AD, then,
the due date under section 139(1) for filing of return of income for the year ended 31.03.2020 shall be
31st July, 2020. It is only in case Mr. A does not opt for presumptive taxation provisions under section
44AD and offers income to be lower than 8% of total turnover (or 6% as the case may be) and his total
income exceeds the basic exemption limit, he has to keep books of account as per section 44AA and get
his accounts audited under section 44AB, in which case the due date for filing return would be 30th
September, 2020.
3. The following persons (mentioned in Column III below) are authorised as per section 140, to verify the return
of income filed under section 139:
I II III
(i) Political party Chief Executive Officer of such party (whether known as secretary or
by any other designation).
(ii) Local authority Principal Officer thereof.
(iii) Association of Persons Any member of the association or the principal officer thereof.
(iv) LLP Designated partner, or Any partner,
where the designated partner is not able to verify the return for any
unavoidable reason;
where there is no designated partner.
CA Suraj Agrawal
ROI 14B.2
4. Since Mr. Vineet has income only under the heads “Income from house property” and “Income from other
sources”, he does not fall under the category of a person whose accounts are required to be audited under
the Income-tax Act, 1961 or any other law in force. Therefore, the due date of filing return for A.Y. 2020-21
under section 139(1), in his case, is 31st July, 2020. Since Mr. Vineet had submitted his return only on
12.9.2020, the said return is a belated return under section 139(4).
As per section 139(5), now a return furnished under section 139(4) can be revised. Now, a belated return
under section 139(4) can be revised before the end of AY. Therefore, Mr. Vineet can revise the return of
income filed by him under section 139(4), to claim deduction under section 80TTA.
5. As per third proviso to section 139(1), every company or firm shall furnish on or before the due date the return
in respect of its income or loss in every previous year. Since LLP is included in the definition of “firm” under
the Income-tax Act, 1961, it has to file its return mandatorily, even though it has incurred a loss.
6.
(i) True : Section 139A(2) provides that the Assessing Officer may, having regard to the nature of
transactions as may be prescribed, also allot a PAN to any other person, whether any tax is payable by
him or not, in the manner and in accordance with the procedure as may be prescribed.
(ii) False: Section 140(b) provides that where the Karta of a HUF is absent from India, the return of income
can be signed by any other adult member of the family; such member can be a male or female member.
7. Section 139B provides a scheme for submission of return of income for any assessment year through a tax
return preparer. However, it is not applicable to persons whose books of account are required to be audited
under section 44AB. Therefore, Mrs. Hetal cannot furnish her return of income for A.Y. 2020-21 through a tax
return preparer.
8. As per section 140, return of income can be signed by an individual even if he is absent from India. Hence, an
individual can himself sign the return of income from a place outside India. Alternatively, any person holding a
valid power of attorney and duly authorised by the individual can also sign the return of income.
9. Any person who has furnished a return under section 139(1) or section 139(4) can file a revised return if he
discovers any omission or any wrong statement in the return filed earlier. Accordingly,
(i) A belated return filed under section 139(4) can now be revised.
(ii) A return revised earlier can be revised again as the first revised return replaces the original return.
Therefore, if the assessee discovers any omission or wrong statement in such a revised return, he can
furnish a second revised return within the prescribed time i.e. before the end of the relevant assessment
year or before the completion of assessment, whichever is earlier.
(iii) A return of loss filed under section 139(3) is deemed to be return filed under section 139(1), and
therefore, can be revised under section 139(5).
10. The following table enumerates the specific circumstances and the authorized persons empowered to verify
the return of income of an individual assessee filed under section 139(1) in each such circumstance:
Circumstance Return of income, to be verified by
(i) Where he is absent from India the individual himself;
or any person duly authorised by him in this behalf holding a
valid power of attorney from the individual. (Such power of
attorney should be attached to the return of income)
(ii) Where he is mentally his guardian; or
incapacitated from attending to any other person competent to act on his behalf.
his affairs
(iii) Where, for any other reason, it is any person duly authorised by him in this behalf holding a
not possible for the individual to valid power of attorney from the individual (Such power of
verify the return attorney should be attached to the return of income)
(iv) In circumstances not covered the individual himself
under (i), (ii) & (iii) above
11. The correctness or otherwise of the aforesaid is discussed hereunder-

a) Incorrect: The due date for furnishing return was 31/07/2020. Since return has not been filed within the
due date specified in section 139(1), hence, business loss of ` 25,000 cannot be carried forward.
However, unabsorbed depreciation of ` 75,000 can be carried forward.
b) Correct: Belated return has been filed within time limit i.e. by the end of relevant assessment year.
st
c) Incorrect: Last date for filing belated return for assessment year 2020-21 is 31 march 2021. Since return
has been filed after that date, hence it is invalid.
CA Suraj Agrawal
ROI 14B.3
d) Incorrect: Belated return cannot be filed after the date of completion of assessment. Hence, the return
filed after completion of assessment is invalid.
12. Mr. Sharma is liable to apply for PAN, as his sales exceed ` 5 lakhs, but he is not required to furnish return of
income, as his income doesn’t exceed ` 2,50,000.
13. The following table gives the answer-

Assessee Whether return Due date Remarks
required to be
filed?
P Ltd. Yes 30-09-2020 Company is compulsorily required to file return
or 30-11-2020
X (Firm) Yes 30-09-2020 Firm is compulsorily required to file its return.
Accounts to be audited u/s 44AB.
Q Yes 31-07-2020 -
Rohan No - If Rohan wants to carry forward his loss, he must file
return of income on or before 31-7-2020
Mr. K No - Income doesn’t exceed maximum amount not

chargeable to tax, which is ` 3,00,000
Mrs. M No - Income doesn’t exceed maximum amount not
chargeable to tax, which is ` 2,50,000
Sohit Yes 31-07-2020 Extended time limit is a applicable only in case of
working partner of a firm, whose accounts are
required to be audited u/s 44AB.
Rohit Yes 31-07-2020 Extended time limit is a applicable only in case of
working partner of a firm, whose accounts are
required to be audited u/s 44AB.
Mohan Yes 31-07-2020 -
th
14. True, the due date gets extended to 30 Sep. only in respect of working partner.
CA Suraj Agrawal
ROI 14B.4
Class Notes
CA Suraj Agrawal
Advance Tax 15.1
ADVANCE TAX [SECTIONS 207 TO 219]

LIABILITY FOR PAYMENT OF ADVANCE TAX
(1) Tax shall be payable in advance during any FY in respect of Total Income of the assessee which would be
chargeable to tax for the AY immediately following that financial year.
(2) Under section 208, obligation to pay advance tax arises in every case where the advance tax payable is
` 10,000 or more.
(3) Further, where a person has received any income without deduction of tax, he shall be liable to pay
advance tax in respect of such income also.
(4) However, A Resident Senior Citizen, not having any income chargeable u/h “PGBP”’ shall not be liable to
pay advance tax.
(5) Amount of Advance Tax Payable is:

Tax (including cess) on Total Income XXX
Less: Tax Deducted at Source / Tax collected at source / Relief u/s 89 (XXX)
Amount of Tax Payable XXX
Section – 211 – Advance tax is payable in the following installments
For Assessee who declares profits or gains in accordance with the Sec 44AD or Sec 44ADA
Advance tax is payable to the extent of the whole amount of such advance tax during each financial
year on or before the 15th March
For other Assessee:
Due date of installment Installment Amount

th
On or before 15 June 15% of the advance tax liability
th
On or before 15 Sept 45% of the Advance tax liability as reduced by the amount, of any, paid in
earlier installment.
th
On or before 15 Dec 75% of the advance tax liability as reduced by the amount, if any, paid in
earlier installments.
On or before 15th Mar 100% of the advance tax liability as reduced by the amount, if any, paid in
earlier installments.
Interest for non-payment or short-payment of advance tax [Section 234B]

(1) Interest under section 234B is attracted for non-payment of advance tax or payment of advance tax of an
amount less than 90% of assessed tax.
(2) The interest liability would be 1% per month or part of the month starting from 1st April following the
financial year and ending on the date of payment of Income Tax.
(3) Such interest is calculated on the amount of difference between the assessed tax and the advance tax
paid.
(4) Assessed tax is the tax calculated on total income less TDS/TCS/Relief u/s 89
CA Suraj Agrawal
Advance Tax 15.2
Interest payable for deferment of advance tax [Section 234C]
(1) Interest under section 234C is attracted for deferment of advance tax beyond the due dates.
(2) The interest liability would be 1% per month, for a period of 3 months, for every deferment.
(3) However, for the installment due on 15th March, the interest liability under this section would be 1%
for one month.
(4) In case of Assessee covered in Section 44AD/Section 44ADA, Interest@1% on amount of shortfall
[Installment due on 15th March i.e. 100% less Advance Tax Paid]
(5) The interest is to be calculated on the difference between the amount arrived at by applying the specified
percentage of Tax due on Returned Income [Tax less TDS/TCS/Relief u/s 89] and the actual amount paid
by the due date
(6) If advance tax paid in case of 1st & 2nd installment is 12% or more and 36% or more respectively, then no
interest shall be payable by any assessee.
Additional Points
a) Under the provisions of Section 234A and 234B, interest is chargeable per month or part of a month. This
means that even where the delay is for part of a month, say even for one day, interest shall be charged for
whole month.
b) Rule 119A:
(i) Where interest is to be calculated for every month or part of a month comprised in a period, any
fraction of a month shall be deemed to be a full month.
(ii) Where interest is to be calculated on annual basis, any fraction of a month shall be ignored.
(iii) The amount of tax in respect of which interest is to be calculated is to be rounded off to the nearest
multiple of rupees hundred and any fraction of hundred is to be ignored.
st
c) Any amount paid by way of advance tax on or before 31 March shall also be treated as advance tax paid
during the financial year for all purposes of the Act.
d) Where the assessee does not pay any installment by the due date, he shall be deemed to be an assessee
in default in respect of such installment.
e) if the last day for payment of any installment of advance tax is a day on which bank is closed, then the
assessee can make payment on the next immediately following working day, and in such cases, the
interest under sections 234B and 234C shall be not be charged.
f) Net agricultural income has to be considered for the purpose of computing advance tax.
SECTION 234A - INTEREST (PENAL NATURE) FOR DEFAULT IN FURNISHING OF ROI

Applicability: 1. The ROI is not filed within the due date u/s 139(1) or within the time allowed by
the notice u/s 142(1), or
2. The ROI is not furnished
Rate of Interest 1% for every month or part of the month
Period of Interest 1. When the ROI is filed: From the due date of filling the return, till the date of
furnishing the ROI.
2. Where ROI is not filled: From the due date of filling Return of Income, upto the
date of completion of assessment.
Amount on which Tax Payable XXX

interest is payable Less: TDS/TCS/Advance Tax Paid/Relief u/s 89 XXX
Tax Amount on which interest is payable: XXX
Return filed late, but tax paid before due date: No Interest u/s 234A [CBDT Circular]
CA Suraj Agrawal
Advance Tax 15A.1
Problems on Advance Tax & Interest

1. Who is liable to pay advance tax? What is the procedure to compute the advance tax payable?
Answer:
As per section 207, tax shall be payable in advance during any financial year in accordance with the
provisions of sections 208 to 219, in respect of an assessee’s current income i.e., the total income of the
assessee which would be chargeable to tax for the assessment year immediately following that financial year.
In order to reduce the compliance burden on senior citizens having passive sources of income like interest,
rent etc., Section 207 provides exemption from payment of advance tax to a resident individual-
(1) not having any income chargeable under the head “Profits and gains of business or profession”; and
(2) of the age of 60 years or more at any time during the previous year.
As per section 208, the obligation to pay advance tax arises in every case where such tax payable by the
assessee during that year is ` 10,000 or more.
Procedure for computing advance tax payable [Section 209]

(1) An assessee has to first estimate his current income (under five heads of income after applying the
provisions of aggregation of income and set-off or carry forward of losses and allowing deductions under
Chapter VI-A).
(2) The assessee shall then compute the income-tax payable on his current income at the rates in force in
the financial year.
(3) The tax so calculated shall be reduced by the amount of tax which has been actually deducted at
source.
(4) Net agricultural income is also to be considered for the purpose of computing advance tax in case of
specified classes of assessees.
The specified percentage of advance tax shall be paid by the assessee on his own on or before the due date
of each installment. A person who pays any installment or installments may, increase or reduce the amount
of advance tax payable in subsequent installment(s) in accordance with his estimate of current income and
the advance tax payable thereon.
2. IMP (4 Marks): Briefly discuss the provisions relating to payment of advance tax on income arising
from capital gains, casual income etc.
Answer:
Interest under Section 234C shall not be leviable in respect of any shortfall in payment of tax due on returned
income, where such shortfall is on account of under-estimate or failure to estimate-
(i) The amount of Capital Gain
(ii) Casual Income
(iii) PGBP Income where the income accrues or arises under the said head for the first time
(iv) Income in the nature referred to in Section 115BBDA i.e. dividend in aggregate exceeding of ` 10
Lakhs received during the PY
However, the assessee should have paid the whole of the amount of tax payable in respect of such income
referred to in (i), (ii), (iii), or (iv), as the case may be, had such income been a part of the Total Income, as
part of the remaining installments of advance tax which are due or where no such installments are due, by
st
31 March of the financial year.
3. The following particulars are furnished by Abdul for the FY 2019-20 (AY 2020-21):
Tax on total income (paid on 30.09.2020) ` 1,50,000
Due date for filing the return 30-09-2020
Actual date of filing the return 1-10-2020
Calculate the total interest payable under sections 234A, 234B and 234C.
CA Suraj Agrawal
Advance Tax 15A.2
Answer:
Computation of Interest payable by Abdul (amount in `)
Interest under section 234A (Since the tax has been paid on 30-9-2020 i.e. on or
before the due date of filing of return of income and no tax is due on 1-10-2020 on the
date of filing of the return, therefore, no interest can be charged.) NIL
Interest under section 234B for 6 months i.e. 1-4-20 to 30-09-2020 (1,50,000*1%*6) 9,000
Interest under section 234C as follows- 675

15% of ` 1,50,000 i.e. ` 22,500*1%*3 months
2,025
45% of ` 1,50,000 i.e. ` 67,500 *1%*3 months
75% of ` 1,50,000 i.e. ` 1,12,500*1%*3 months 3,375
100% of ` 1,50,000 i.e. ` 1,50,000*1%*1 months 1,500 7,575
Total interest payable 16,575
4. The following particulars are furnished by Ms. Madhuri for the financial year 2018-19 (assessment
year 2020-21):
Tax on total income (paid on 31.7.2020) - ` 50,000
Date of filing the return 1.8.2020
Due date for filing the return 31.7.2020
Compute the total interest payable under sections 234A, 234B and 234C.
Answer:
The total interest payable by Ms. Madhuri under section 234 is computed as under:
Interest for Calculation Amount
(`)
Delay in filing under section 234A NIL, as tax fully paid on due date NIL
Default in payment of advance tax u/s 234B 50,000*1%*4 months 2,000
Deferment of Advance Tax u/s 234C 15% of ` 50,000*1%*3 months 225

45% of ` 50,000*1%* 3months 675
75% of ` 50,000*1%*3 months 1125
100% of ` 50,000*1%*1 months 500
Total Interest Payable 4525
5. In the case of Ms. Pooja Bhandhari, you are furnished the following details from which you are
expected to calculate interest u/s 234A, 234B and 234C:
Tax on total income ` 10,000; Due date of filing returns: 31.7.2020; Date of filing the return 1.8.2020; Tax and
interest thereon fully paid on 1.8.2020.
6. In the case of an individual, if the information in Question No. 5 is modified as under, what will be the
interest implication:
a) Tax and interest fully paid only on 31.3.2020 and return filed on 31.12.2020.
b) Tax and interest fully paid only on 15.3.2020 and return filed on 1.9.2020.
7. The "tax due on the returned income" for the AY 2020-21 is ` 15,000/- (i.e. tax on returned income less tax
deductible or collectible at source). Advance tax paid is ` 14,000/- (` 1,000 on 15.9.2019, ` 4,000 on
15.12.2019 and ` 9,000 on 19.3.2020). Calculate the interest u/s 234C assuming that the assessee is an
individual.
8. For the AY 2020-21, following details are available:
• Due date of filing ROI 31.07.2020
• Date of filing of ROI 01.12.2020
• Tax as per ROI ` 3,50,000
• Advance tax paid on 19.03.2020 ` 2,40,000
• Tax deducted at source ` 40,000
Compute payment required to be made u/s 140A; assuming payment is made on 01.12.2020.
Determine the interest payable under section 234A, 234B & 234C?
CA Suraj Agrawal
TDS 16.1
TAX DEDUCTED AT SOURCE

DEDUCTION OF TAX AT SOURCE AND ADVANCE PAYMENT [SEC 190]
The total income of an assessee for the previous year is taxable in the relevant assessment year. However, the
income-tax is recovered from the assessee in the previous year itself through –
(1) Tax deduction at Source (TDS) / Tax collection at source (TCS)
(2) Payment of Advance Tax
Another mode of recovery of tax is from the employer through tax paid by him under section 192(1A) on the non-
monetary perquisites provided to the employee [example Rent Free Accommodation].
These taxes are deductible from the total tax due from the assessee. The assessee, while filing his return of
income, has to pay self-assessment tax under section 140A, if tax is due on the total income as per his return of
income after adjusting, inter alia, TDS, TCS, relief of tax claimed under section 89 and advance tax.
DIRECT PAYMENT [SECTION 191]

Section 191 provides that in the following cases, tax is payable by the assessee directly –
1. in the case of income in respect of which tax is not required to be deducted at source; and
2. Income in respect of which tax is liable to be deducted but is not actually deducted.
In view of these provisions of section 191, the proceedings for recovery of tax necessarily had to be taken against
the assessee whose tax was liable to be deducted, but not deducted.
SURCHARGE & CESS

Surcharge (when receipts payable exceeds 1 Crores / 10 Crores / 50 Lakhs etc) or H & EC is
applicable when TDS is deducted either from Salary payment to any person (Res / NR) OR from the
payment to NR / Foreign Company.
NO TDS on GST Component

Circular No. 23/2017 - Tax shall be deducted at source on the amount paid/payable to Resident
without GST component if such GST component is indicated separately.
SALARY [Section 192]
Person Responsible to ANY PERSON responsible for paying any income chargeable to tax under
deduct Tax the head ‘Salaries’ i.e. Employers
Category of Payee Employee [Resident as well as Non-Resident]
Rate of TDS Average rate of income tax computed on the basis of the rates in force for
the relevant financial year in which the payment is made, on the estimated
total income of the assessee.
Time for Deduction of Tax At the time of Payment. [Due date is irrelevant]
Tax on Non-Monetary • U/s 192(1A), the employer may, at his option, pay income-tax on the
Perquisite whole or part of perquisite provided by way of non-monetary payments.
• The tax so payable shall be construed as if it were, a tax deductible at
source, from the income under the head “Salaries”
Other Income A tax payer having salary income in addition to other income chargeable to
tax for that financial year, may send to the employer, the following:
a. particulars of such other income and particulars of any tax deducted
under any other provision;
b. loss, if any, under the head ‘Income from house property’.
The employer shall take the above particulars into account while calculating
tax deductible at source.
CA Suraj Agrawal
TDS 16.2
Requirement to obtain evidence/ proof/ particulars of claims from the employee by the employer
S. No. Nature of Claim Evidence or particulars

1 House Rent Allowance Name, address and PAN of the landlord(s) where the aggregate rent
paid during the previous year exceeds ` 1 lakh.
2 Leave Travel Concession Evidence of expenditure

or Assistance
3 Deduction of interest under Name, address and PAN of the lender

the head “Income from
house property”
4 Deduction under Chapter Evidence of investment or expenditure.

VIA
Taxable Withdrawal from Employee Provident Fund [Sec 192A]

For the purpose of discouraging pre-mature withdrawal and promoting long term savings, if the employee makes
withdrawal before continuous service of five years (other than the cases of termination due to ill health,
contraction or discontinuance of business, cessation of employment etc.) and does not opt for transfer of
accumulated balance to new employer, the withdrawal would be subject to tax.
1. TDS rate is 10% in case of premature taxable withdrawal from EPF (at the time of payment)
2. No TDS if payment is Less than ` 50,000
3. In case PAN is not furnished, TDS rate will be MMR.
Interest on securities [Section 193]

Person Responsible to Every person responsible for paying to a resident any income by way of
deduct Tax & Payee interest on securities.
Rate of TDS 10% [only Resident payee are covered here]
Time for Deduction of Tax At the time of credit to the account of payee or payment, whichever is
earlier.
TDS SHALL NOT BE DEDUCTED IN THE FOLLOWING CASES:

1. On any Security of the CG/SG
2. Interest upto ` 10,000 on 8% Taxable Savings Bonds 2003.
3. Interest upto ` 10,000 on 7.75% GOI Savings (Taxable) Bonds, 2018
4. On interest payable on “Power Finance Corporation Limited 54EC Capital Gains Bond” and “Indian Railway
Finance Corporation Limited 54EC Capital Gains Bond.
5. Interest paid to Resident Individual ‘or’ HUF on listed or unlisted debentures of widely held company
by account payee cheque of an amount not exceeding ` 5,000 during a financial year.
6. on Securities to LIC, GIC, subsidiaries of GIC or any other insurer.
7. Interest payable on securities issued by a company, where such security is in demat form and is listed on a
recognised stock exchange.
CA Suraj Agrawal
TDS 16.3
Dividends [Section 194]
Person Responsible to Domestic Company
deduct Tax
Payee Resident Shareholder.
Rate of Deduction of Tax 10%
[TDS Rate]
Time for Deduction of Tax Before making any payment in cash or cheque or warrant, or any distribution
or payment to a share holder
Non-deduction of TDS • Dividends referred in u/s 115-O.
• Dividend payments to an individual, if it is paid by account payee
cheque and aggregate of dividend distributed / likely to be distributed
does not exceed ` 2500.
• Dividend receivable by LIC, GIC, its subsidiaries or any other insurer.
Interest other than interest on securities [Section 194A]

Person Responsible to All assessee other than individual and HUF whose accounts are not
deduct Tax subject to audit u/s 44AB of the Act during the preceding financial year
- Paying Interest other than Interest on Securities

Payee RESIDENT PERSON

[TDS Rate]
Time for Deduction of Tax At the time of credit to the account of payee or payment, whichever is
earlier.
Non-deduction of TDS NO TDS If aggregate amount of interest [by all branch] credited or paid
does not exceed-
a) Where the payer is (i) a Banking Company, or (ii) A Co-operative

Society engaged in banking business, or (iii) in respect of Deposit with
post office notified by the central Government [Time deposits
including recurring deposits]
- w.e.f 01/04/2019 ` 40,000 ` 10,000 (` ` 50,000 in case of senior
citizen)#
b) In any other case - ` 5,000
# The threshold limit will be reckoned with reference to the total interest credited or paid by the banking company
or the co-operative society or the public company, as the case may be, (and not with reference to each branch),
where such banking company or co-operative society or public company has adopted core banking
solutions.
NO TDS IS DEDUCTED U/S 194A IN THE FOLLOWING CASES:
Interest paid or credited by a firm to any of its partners;
Interest paid or credited by a co-operative society to a member there of or any other cooperative society
[Except interest paid to member by Cooperative bank];
Interest income credited or paid in respect of deposits (other than time deposits or recurring
deposits) with
a bank to which the Banking Regulation Act, 1949 applies; or
a co-operative society engaged in carrying on the business of banking.
Interest income credited or paid by the Central Government under any provisions of the Income-tax Act.
Interest paid or credited to Banking companies, Statutory Corporations, LIC, Insurance Companies, UTI
and other notified institution.
income paid or payable by an infrastructure capital company or infrastructure capital fund or public sector
company in relation to a Zero Coupon Bond issued.
CA Suraj Agrawal
TDS 16.4
QUESTION:
Examine the TDS implications under section 194A in the cases mentioned hereunder–
1. On 1.10.2019, Mr. Harish made a six-month fixed deposit of ` 10 lakh@9% p.a. with ABC Co-
operative Bank. The fixed deposit matures on 31.3.2020.
2. On 1.6.2019, Mr. Ganesh made three nine month fixed deposits of ` 3 lakh each, carrying
interest@9% with Dwarka Branch, Janakpuri Branch and Rohini Branch of XYZ Bank, a bank which
has adopted CBS. The fixed deposits mature on 28.2.2020.
3. On 1.4.2019, Mr. Rajesh started a 1 year recurring deposit of ` 80,000 per month@8% p.a. with PQR
Bank. The recurring deposit matures on 31.3.2020.
SOLUTION
1. ABC Co-operative Bank has to deduct tax at source@10% on the interest of ` 45,000 (9% × ` 10 lakh × ½)
under section 194A. The tax deductible at source under section 194A from such interest is, therefore, `
4,500.
2. XYZ Bank has to deduct tax at source@10% under section 194A, since the aggregate interest on fixed
deposit with the three branches of the bank is ` 60,750 [3,00,000 × 3 × 9% × 9/12], which exceeds the
threshold limit of ` 40,000. Since XYZ Bank has adopted CBS, the aggregate interest credited/paid by all
branches has to be considered. Since the aggregate interest of ` 60,750 exceeds the threshold limit of `
40,000, tax has to be deducted@10% under section 194A.
3. Tax has to be deducted under section 194A by PQR Bank on the interest of ` 41,600 falling due on
recurring deposit on 31.3.2020 to Mr. Rajesh, since
i. “recurring deposit” is included in the definition of “time deposit”; and
ii. such interest exceeds the threshold limit of ` 40,000.
Winnings from lotteries, crossword puzzles, Games etc [Sec 194B &
194BB]
Particulars 194B 194BB
Person Any person paying the sum by way of Any Person being the holder of license
Responsible to winnings from lottery, Crossword Puzzle, paying winning from Horse Races
deduct Tax Card Game or Game of any sort.
Non-deduction If the payment does not exceed ` 10,000 If the payment does not exceed ` 10,000
of TDS during a financial year. during a financial year.
Payee All Assessee [Resident as well as Non-Resident]
Rate of 30%
Deduction of [Benefit of lower or NIL Tax under Section 197 is not applicable]
Tax [TDS Rate]
Time for At the Time of Payment;
Deduction of
Tax [Where prize money is in Kind, before releasing the prize, the payer should ensure that tax
has been paid in respect of the winnings.]
Payments to contractors and sub-contractors [Section 194C]

Person Responsible to Payments made by any person other than Individual/HUF/BOI/AOP, who
deduct Tax are not subject to tax Audit u/s 44AB of the Act during the preceding
financial year.
Payee Any person Resident in India
TDS on Payment for work contract
Time for Deduction of Tax At the time of Credit or Payment, whichever is earlier.
CA Suraj Agrawal
TDS 16.5
Rate of Deduction of Tax For all Contractors and Sub Contractors:
[TDS Rate]
(a) If payee is Ind. & HUF – 1%

(b) for others payee – 2%
[Provision of Section 197 for lower TDS Rate is available]
Non Deduction of TDS:

(1) No deduction will be required to be made if the consideration for the contract (payee-wise) does not
exceed ` 30,000.
Further, tax will be required to be deducted at source where the amount being credited or paid to a
contractor/sub -contractor exceeds ` 30,000 in a single payment or ` 100,000 in the aggregate during a
financial year.
(2) No Individual or HUF shall be liable to deduct tax on sum credited or paid to the account of the contractor
where such sum is credited or paid exclusively for personal purposes of such individual or any member
of HUF.
(3) In case of Contractor in the business of Plying, Hiring or Leasing goods Carriages:
No deduction on payment to a contractor, during the course of the business of plying, hiring or
leasing goods carriages, if he furnishes his PAN to the deductor & owns 10 or Less goods carriage
at any time during the PY
If PAN is not quoted by the Transporter, TDS Rate will be 20% in the absence of PAN as per Section
206AA.
(4) The deduction of income-tax will be made from sums paid for carrying out any work or for supplying labour
for carrying out any work. In other words, the section will apply only in relation to ‘works contracts’ and
‘labour contracts’ and will not cover contracts for sale of goods.
(5) Work includes –

(a) advertising;
(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) carriage of goods or passengers by any mode of transport other than by railways;
(d) catering;
(e) manufacturing or supplying a product according to the requirement or specification of a customer by
using material purchased from such customer.
However, “work” shall not include manufacturing or supplying a product according to the requirement
or specification of a customer by using raw material purchased from a person, other than such
customer, as such a contract is a contract for ‘sale’.
[It may be noted that the term “work” would include manufacturing or supplying a product according to
the requirement or specification of a customer by using material purchased from such customer. In
such a case, tax shall be deducted on the invoice value excluding the value of material
purchased from such customer if such value is mentioned separately in the invoice. Where the
material component has not been separately mentioned in the invoice, tax shall be deducted on
the whole of the invoice value.]
.
CA Suraj Agrawal
TDS 16.6
Applicability of TDS provisions on payments by broadcasters or Television Channels to production
houses for production of content or programme for telecasting [Circular No. 04/2016, dated 29-2-2016]
The issue under consideration is whether payments made by the broadcaster/telecaster to production houses for
production of content/programme are payments under a ‘work contract’ liable for tax deduction at source under
section 194C or a contract for ‘professional or technical services’ liable for tax deduction at source under section
194J.
In this regard, the CBDT has clarified that while applying the relevant provisions of TDS on a contract for
content production, a distinction is required to be made between:
1. a payment for production of content/programme as per the specifications of the broadcaster/telecaster; and
2. a payment for acquisition of broadcasting/ telecasting rights of the content already produced by the
production house.
In the first situation where the content is produced as per the specifications provided by the broadcaster/
telecaster and the copyright of the content/programme also gets transferred to the telecaster/ broadcaster, such
contract is covered by the definition of the term `work’ in section 194C and, therefore, subject to TDS under that
section.
However, in a case where the telecaster/broadcaster acquires only the telecasting/ broadcasting rights of the
content already produced by the production house, there is no contract for ‘’carrying out any work”, as required in
section 194C(1). Therefore, such payments are not liable for TDS under section 194C. However, payments of this
nature may be liable for TDS under other sections of Chapter XVII-B of the Act.
Insurance commission [Section 194D]
Person Responsible to Any Insurance company paying Insurance Commission

deduct Tax
Payee Resident Assessee
Rate of TDS 10% [Provision of Section 197 for lower TDS Rate is available]
Time for Deduction of Tax At the Time of Credit or payment, whichever is earlier.
Non-deduction of TDS If the payment does not exceed ` 15,000 during financial Year
CA Suraj Agrawal
TDS 16.7
Payment in respect of life insurance policy [Section 194DA]
Person Responsible to Insurance Company issuing Life Insurance Policy
deduct Tax
Rate of Deduction of Tax 1% on any sum paid to a Resident under a Life Insurance Policy
[TDS Rate] including the sum allocated by way of bonus which are not exempt u/s
10(10D)
However, from 1.9.2019, tax is to be deducted at source @5% on

the amount of income comprised therein i.e., after deducting
the amount of insurance premium paid by the resident
assessee from the total sum received.
Time for Deduction of Tax At the Time of Payment
Non-deduction of TDS No TDS, If the aggregate payment is less than ` 100,000.
QUESTION:
Examine the applicability of the provisions for TDS under section 194DA in the above cases -
(i) Mr. X, a resident, is due to receive ` 4.50 lakhs on 31.3.2020, towards maturity proceeds of LIC policy
taken on 1.4.2017, for which the sum assured is ` 4 lakhs and the annual premium is ` 1,25,000.
(ii) Mr. Y, a resident, is due to receive ` 2.20 lakhs on 31.3.2020 on LIC policy taken on 1.4.2011, for which
the sum assured is ` 2 lakhs and the annual premium is ` 35,000.
(iii) Mr. Z, a resident, is due to receive ` 95,000 on 1.10.2019 towards maturity proceeds of LIC policy
taken on 1.10.2011 for which the sum assured is ` 90,000 and the annual premium was ` 19,000.
SOLUTION
(i) Since the annual premium exceeds 10% of sum assured in respect of a policy taken on 1.4.2013, the
maturity proceeds of ` 4.50 lakhs are not exempt under section 10(10D) in the hands of Mr. X. Therefore,
tax is required to be deducted@5% under section 194DA on the amount of income comprised
therein i.e., on ` 75,000 (`
` 4,50,000, being maturity proceeds - ` 3,75,000, being the entire amount
of insurance premium paid).
(ii) Since the annual premium is less than 20% of sum assured in respect of a policy taken before 1.4.2012,
the sum of ` 2.20 lakhs due to Mr. Y would be exempt under section 10(10D) in his hands. Hence, no tax
is required to be deducted at source under section 194DA on such sum payable to Mr. Y.
(iii) Even though the annual premium exceeds 20% of sum assured in respect of a policy taken before
1.4.2012, and consequently, the maturity proceeds of ` 95,000 would not be exempt under section
10(10D) in the hands of Mr. Z, the tax deduction provisions under section 194DA are not attracted since
the maturity proceeds are less than ` 1 lakh.
Payments to Non-Resident Sportsmen or Sports Association

[Section 194E]
Person Responsible to deduct Any person making payment in nature of income as referred in Section
Tax 115BBA
Payee Non-Resident Sportsman (including athlete) or Entertainer who is not an

Indian Citizen / Non-Resident Sports Association
Rate of Deduction of Tax 20% + surcharge + cess

[TDS Rate]
CA Suraj Agrawal
TDS 16.8
Income referred to in section 115BBA
1. income received or receivable by a non-resident sportsman (including an athlete) by way of-
a. participation in any game or sport in India (However, games like crossword puzzles, horse races etc.
taxable under section 115BB are not included herein); or
b. advertisement; or
c. contribution of articles relating to any game or sport in India in newspapers, magazines or journals.
2. Guarantee amount paid or payable to a non-resident sports association or institution in relation to
any game or sport played in India. However, games like crossword puzzles, horse races etc. taxable
under section 115BB are not included herein.
3. income received or receivable by a non-resident entertainer (who is not a citizen of India) from his
performance in India.
QUESTION:
Calculate the amount of tax to be deducted at source (TDS) on payment made to Ricky Ponting, an
Australian cricketer non-resident in India, by a newspaper for contribution of articles ` 25,000.
SOLUTION
Under section 194E, the person responsible for payment of any amount to a nonresident sportsman for
contribution of articles relating to any game or sport in India in a newspaper shall deduct tax @20%. Further,
since Ricky Ponting is a non-resident, health and education cess @4% on TDS would also be added.
Therefore, tax to be deducted = ` 25,000 x 20.8% = ` 5,200.
Payments in respect of deposits under National Savings Scheme

[Section 194EE]
1. The person responsible for paying to any person any amount from NSS as mentioned in section
80CCA shall, at the time of payment thereof, deduct income-tax thereon at the rate of 10%.
2. No deduction if payment is less than ` 2,500 during the financial year.
3. No TDS in case of payment on death to legal heirs of the assessee.
Commission etc. on the sale of lottery tickets [Section 194G]

Under Section 194G, the person responsible for paying any income by way of commission, remuneration or prize
(by whatever name called) on lottery tickets in an amount exceeding ` 15,000 shall deduct income-tax thereon
at the rate of 5%. Such deduction should be made at the time of credit or payment, whichever is earlier.
Commission or brokerage [Section 194H]

deduct Tax subject to audit u/s 44AB of the Act during the preceding financial
year –
Responsible for paying any income by way of commission
(other than insurance commission) or brokerage
Payee Resident Person
[TDS Rate] [Provision of Section 197 for lower TDS Rate is available]
Non-deduction of TDS No TDS, If the aggregate payment does not exceed ` 15,000.
“Commission or brokerage” includes any payment received or receivable, directly or indirectly, by a

person acting on behalf of another person for services rendered, or for any services in the course of
buying or selling of goods, or in relation to any transaction relating to any asset, valuable article or thing,
other than securities.
Further, there would be no requirement to deduct tax at source on commission or brokerage payments by
BSNL or MTNL to their public call office (PCO) franchisees.
CA Suraj Agrawal
TDS 16.9
Applicability of TDS provisions on payments by television channels and publishing houses to
advertisement companies for procuring or canvassing for advertisements [Circular No. 05/2016, dated 29
2-2016]
There are two types of payments involved in the advertising business:

1. Payment by client to the advertising agency, and
2. Payment by advertising agency to the television channel/newspaper company
The applicability of TDS on these payments has already been dealt with in Circular No. 715 dated 8-8-1995,
where it has been clarified that while TDS under section 194C (as work contract) will be applicable on the first
type of payment, there will be no TDS under section 194C on the second type of payment e.g. payment by
advertising agency to the media company.
However, another issue has been raised in various cases as to whether the fees/charges taken or retained by
advertising companies from media companies for canvasing/booking advertisements (typically 15% of the billing)
is 'commission' or 'discount' for attracting the provisions of section 194H.
The CBDT has clarified that no TDS is attracted on payments made by television channels/newspaper
companies to the advertising agency for booking or procuring of or canvassing for advertisements.
It is also further clarified that 'commission' referred to in CBDT's Circular No. 715 dated 8-8-1995 does not refer to
payments by media companies to advertising companies for booking of advertisements but to payments for
engagement of models, artists, photographers, sportspersons, etc. and, therefore, is not relevant to the issue of
TDS referred to in this Circular.
QUESTION:
Moon TV, a television channel, made payment of ` 50 lakhs to a production house for production of
programme for telecasting as per the specifications given by the channel. The copyright of the
programme is also transferred to Moon TV. Would such payment be liable for tax deduction at source
under section 194C? Discuss.
Also, examine whether the provisions of tax deduction at source under section 194C would be attracted if
the payment was made by Moon TV for acquisition of telecasting rights of the content already produced
by the production house.
SOLUTION
In this case, since the programme is produced by the production house as per the specifications given by Moon
TV, a television channel, and the copyright is also transferred to the television channel, the same falls within the
scope of definition of the term ‘work’ under section 194C. Therefore, the payment of ` 50 lakhs made by Moon TV
to the production house would be subject to tax deduction at source under section 194C.
If, however, the payment was made by Moon TV for acquisition of telecasting rights of the content already
produced by the production house, there is no contract for ‘’carrying out any work”, as required in section 194C(1).
Therefore, such payment would not be liable for tax deduction at source under section 194C.
CA Suraj Agrawal
TDS 16.10
RENT [SECTION 194-I]
deduct Tax subject to audit u/s 44AB of the Act during the preceding financial
year
– Responsible for paying Rent.
“RENT” means any payment under any lease, sub-lease, tenancy or

any other agreement or arrangement for the use of (either separately or
together) any –
(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings,
whether or not any or all of the above are owned by the payee.
Payee Any person being Resident
TDS Rate Land/Building/ Furniture/Fittings Machinery/Plant/Equipment
10% for all 2%
Non-deduction of TDS • No deduction if amount of rent paid/payable does not exceed

` 2,40,000 (w.e.f 01/04/2019) ` 1,80,000 during any financial year.
• NO TDS if the payee is the Government or a local authority.
Tax Points: – 194I applicable

If a person has taken a particular space on rent and thereafter sub-lets the same fully or in part for putting up
hoarding, he would be liable to TDS u/s 194-I and not u/s 194C.
Payment made for the rent to the co-owner each having a definite and ascertainable share in the property is
exceeds the limit of ` 1,80,000 per annum in the hands of each co-owner separately
Payment made to landlord as deposit if in the nature of advance rent or non-refundable deposit.
Payment made for Warehousing Charges. However, the provisions of 194-I are not applicable to the
cooling charges paid by the customers of the cold storage. However, since the arrangement between
the customers and cold storage owners are basically contractual in nature, the provision of section 194-C
will be applicable to the amounts paid as cooling charges by the customers of the cold storage.
Treatment of tax credit in the hands of the Payee, for TDS on Advance Rent: - pro-rata TDS is allowed
according to the rent offered for taxation.
No requirement to deduct tax at source under section 194-I on remittance of Passenger Service Fees
(PSF) by an Airline to an Airport Operator [Circular No. 21/2017, dated 12.06.2017]
Section 194-I requires deduction of tax at source at specified percentage on any income payable to a resident by
way of rent. Explanation to this section defines the term “rent” as any payment, by whatever name called, under
any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any (a) land; or (b) building;
or (c) land appurtenant to a building; or (d) machinery; (e) plant; (f) equipment (g) furniture; or (h) fitting, whether
or not any or all of them are owned by the payee.
CA Suraj Agrawal
TDS 16.11
The primary requirement of any payment to qualify as rent is that the payment must be for the use of land and
building and mere incidental/minor/ insignificant use of the same while providing other facilities and
service would not make it a payment for use of land and buildings so as to attract section 194-I.
Accordingly, the CBDT has, vide this circular, clarified that the provisions of section 194-I shall not be applicable
on payment of PSF by an airline to Airport Operator.
Clarification on applicability of TDS provisions of section 194-I on lumpsum lease premium paid for
acquisition of long term lease [Circular No. 35/2016, dated 13-10-2016]
The issue of whether or not TDS under section 194-I is applicable on 'lump sum lease premium' or 'one-time
upfront lease charges" paid by an assessee for acquiring long-term leasehold rights for land or any other property
has been examined by the CBDT.
Accordingly, the CBDT has, vide this Circular, clarified that lump sum lease premium or one-time upfront lease
charges, which are not adjustable against periodic rent, paid or payable for acquisition of long-term leasehold
rights over land or any other property are not payments in the nature of rent within the meaning of section 194-
I. Therefore, such payments are not liable for TDS under section 194-I.
TDS ON PURCHASE OF IMMOVABLE PROPERTY [Section 194-IA]

Person Responsible to deduct Any person (being a transferee) responsible for paying (other than
Tax the person referred to in section 194LA)
Payee Resident transferor
Payments Covered Any sum by way of consideration for transfer of any immovable
property (other than agricultural land in rural area in India).
[Situated in or outside India]
Consideration includes Consideration for transfer of immovable property include all

(w.e.f 01/09/2019) charges of the nature of club membership fee, car parking fee,
electricity or water facility fee, maintenance fee, advance fee
or any other charges of similar nature, which are incidental to
transfer of the immovable property.
Non-deduction of TDS No tax is deductible where the consideration paid or payable for
the transfer of an immovable property is less than ` 50,00,000.
NOTE: Provisions of section 203A (pertaining to TAN) shall not apply in respect of tax deducted
TDS ON PAYMENT OF RENT BY CERTAIN IND/HUF [Section 194-IB]

Person Responsible to deduct Any Individual and HUF whose accounts are not subject to audit u/s
Tax 44AB of the Act during the preceding financial year
Payee Resident
Payments Covered Rent Exceeding ` 50,000 p.m.
Rate of Deduction of Tax 5% of aggregate rent
Time for Deduction of Tax At the Time of Credit of Rent for the Last Month or Payment, whichever
is earlier.
CA Suraj Agrawal
TDS 16.12
NOTE:
1. Provisions of Section 203A (pertaining to TAN) shall not apply in respect of tax deducted
2. In case Section 206AA applies, TDS amount shall not exceed the amount of Rent payable for
the last month of the Previous Year/Tenancy Period.
QUESTION:
Mr. X, a salaried individual, pays rent of ` 55,000 per month to Mr. Y from June, 2019. Is he required to
deduct tax at source? If so, when is he required to deduct tax? Also, compute the amount of tax to be
deducted at source. Would your answer change if Mr. X vacated the premises on 31st December, 2019?
Also, what would be your answer if Mr. Y does not provide his PAN to Mr. X?
SOLUTION
Since Mr. X pays rent exceeding ` 50,000 per month in the F.Y. 2019-20, he is liable to deduct tax at source
@5% of such rent for F.Y. 2019-20 under section 194-IB. Thus, ` 27,500 [` 55,000 x 5% x 10] has to be deducted
from rent payable for March, 2020.
If Mr. X vacated the premises in December, 2019, then tax of ` 19,250 [` 55,000 x 5% x 7] has to be deducted
from rent payable for December, 2019. In case Mr. Y does not provide his PAN to Mr. X, tax would be deductible
@20%, instead of 5%.
In case 1 above, this would amount to ` 1,10,000 [` 55,000 x 20% x 10] but the same has to be restricted to `
55,000, being rent for March, 2020.
In case 2 above, this would amount to ` 77,000 [` 55,000 x 20% x 7] but the same has to be restricted to `
55,000, being rent for December, 2019.
1.
2.
3. Section 194-IC : REFER CG NOTES
CA Suraj Agrawal
TDS 16.13
Fees for Professional or Technical Services [Section 194J]
Person Responsible to deduct Any person, other than an individual or a HUF, who is responsible for
Tax paying income of specified nature.
Individual/HUF, subjected to tax audit u/s 44AB in the immediately
preceding year, are liable to deduct TDS on payment in the nature of
fees for professional services & Fees for Technical Services only.
Payments Covered (a) Fees for Professional Services
(b) Fees for Technical Services
(c) Royalty
(d) Payments referred u/s 28(va) - Sum received for not carrying
out any activity in relation to Business/Profession or not
sharing any Know-How, Patent etc. [Non-Compete Fees)
Rate of Deduction of Tax 10% [2% if payee is engaged only in the business of Operation of
[TDS Rate] Call Centre]
Non-deduction of TDS • No tax deduction is required if the amount being credited or paid
during a financial year does not exceed ` 30,000 for
each of four payments separately.
• No TDS on Sum paid by Individual / HUF towards professional
services exclusively for their personal purposes.
TDS on remuneration other than salary to a director [Section 194J]
Section 194J has been amended to provide that tax is required to be deducted on the remuneration or fee
or commission etc paid to a director, which is not in the nature of salary, at the rate of 10% of such
remuneration.
Meaning of “Professional services”

“Professional services” means services rendered by a person in the course of carrying on legal, medical,
engineering or architectural profession or the profession of accountancy or technical consultancy or interior
decoration or advertising or such other profession as is notified by the CBDT for the purposes of section 44AA or
of this section.
Other professions notified for the purposes of section 44AA are as follows:
a. Profession of “authorised representatives”;
b. Profession of “film artist”;
c. Profession of “company secretary”.
The CBDT has notified the services rendered by following persons in relation to the sports activities as
Professional Services for the purpose of the section 194J:
a. Sports Persons,
b. Umpires and Referees,
c. Coaches and Trainers,
d. Team Physicians and Physiotherapists,
e. Event Managers,
f. Commentators,
g. Anchors and
h. Sports Columnists.
Accordingly, the requirement of TDS as per section 194J would apply to all the aforesaid professions. The term
“profession”, as such, is of a very wide import. However, the term has been defined in this section exhaustively.
For the purposes of TDS, therefore, all other professions would be outside the scope of section 194J. For
example, this section will not apply to professions of teaching, sculpture, painting etc. unless they are
notified.
CA Suraj Agrawal
TDS 16.14
Consideration for use or right to use of computer software is royalty within the meaning of
section 9(1)(vi)
As per section 9(1)(vi), any income payable by way of royalty in respect of any right, property or information is
deemed to accrue or arise in India. The term “royalty” means consideration for transfer of all or any right in respect
of certain rights, property or information.
The consideration for use or right to use of computer software is royalty by clarifying that, transfer of all or any
rights in respect of any right, property or information includes and has always included transfer of all or any right
for use or right to use a computer software (including granting of a licence) irrespective of the medium through
which such right is transferred.
Consequently, the provisions of tax deduction at source under section 194J would be attracted in respect
of consideration for use or right to use computer software since the same falls within the definition of
royalty.
Note:
The Central Government has, vide Notification No.21/2012 dated 13.6.2012, effective from 1st July, 2012,
exempted certain software payments from the applicability of tax deduction under section 194J. Accordingly,
where payment is made by the transferee for acquisition of software from a resident transferor, the
provisions of section 194J would not be attracted if -
a. the software is acquired in a subsequent transfer without any modification by the transferor;
b. tax has been deducted under section 194J on payment for any previous transfer of such software; and
c. the transferee obtains a declaration from the transferor that tax has been so deducted along with the PAN of
the transferor.
Payment of compensation on acquisition of certain immovable

property [Section 194LA]
Person Responsible to deduct Any person
Tax
Payments Covered Any payment in the nature of compensation/ enhanced compensation
on account of compulsory acquisition of any immovable property
(other than agricultural land).
Here Agricultural land includes Urban Land also.
TDS Rate 10%
Time for Deduction of Tax At the time of payment
Non-deduction of TDS No tax deduction is required if the aggregate amount during the
financial year does not exceed ` 250,000
CA Suraj Agrawal
TDS 16.15
Payment made by an individual or a HUF for contract work or by way of
fees for professional services or commission or brokerage [Section 194M]
NEW SECTION – effective from 01/09/2019
A. Applicability and rate of TDS
Section 194M, inserted with effect from 1.9.2019, provides for deduction of tax at source @5% by
an individual or a HUF responsible for paying any sum during the financial year to any resident –
i. for carrying out any work (including supply of labour for carrying out any work) in pursuance
of a contract; or
ii. by way of commission (not being insurance commission referred to in section 194D) or
brokerage; or
iii. by way of fees for professional services.
It may be noted that only individuals and HUFs (other than those who are required to deduct
income-tax as per the provisions of section 194C or 194H or 194J) are required to deduct tax in
respect of the above sums payable during the financial year to a resident.
B. Time of deduction
The tax should be deducted at the time of credit of such sum or at the time of payment of such
sum, whichever is earlier.
C. Threshold limit
No tax is required to be deducted where such sum or, as the case may be, aggregate amount of
such sums credited or paid to a resident during the financial year does not exceed ` 50,00,000.
D. Non-applicability of TDS under section 194M

An individual or a Hindu undivided family is not liable to deduct tax at source under section
194M if –
i. they are required to deduct tax at source under section 194C for carrying out any work
(including supply of labour for carrying out any work) in pursuance of a contract i.e., an
individual or a HUF who is subject to tax audit under section 44AB(a)/(b) in the immediately
preceding financial year and such amount is not exclusively credited or paid for personal
purposes of such individual or HUF.
ii. they are required to deduct tax at source under section 194H on commission (not being
insurance commission referred to in section 194D) or brokerage i.e., an individual or a HUF
whose total sales, gross receipts or turnover from the business or profession carried on by
him exceed the monetary limits of ` 1 crore and ` 50 lakhs, respectively, specified under
section 44AB during the immediately preceding financial year.
iii. they are required to deduct tax at source under section 194J on fees for professional services
i.e., an individual or a HUF whose total sales, gross receipts or turnover from the business or
profession carried on by him exceed the monetary limits of ` 1 crore and ` 50 lakhs,
respectively, specified under section 44AB during the immediately preceding financial year
and such amount is not exclusively credited or paid for personal purposes of such individual
or HUF.
CA Suraj Agrawal
TDS 16.16
E. No requirement to obtain TAN
The provisions of section 203A containing the requirement of obtaining Tax deduction account
number (TAN) shall not apply to the person required to deduct tax in accordance with the provisions of
section 194M.
QUESTION:
Examine whether TDS provisions would be attracted in the following cases, and if so, under which
section. Also specify the rate of TDS applicable in each case. Assume that all payments are made to
residents.
S.No. Particulars of the payer Nature of payment Aggregate of

payments made
in the
F.Y. 2019-20
1 Mr. Ganesh, an individual Contract Payment for repair of 5 lakhs
carrying on retail business with residential house
turnover of ` 2.5 crores in the
P.Y. 2018-19 Payment of commission to Mr. Vallish ` 80,000
for business purposes
2 Mr. Rajesh, a wholesale trader Contract Payment for reconstruction of ` 20 lakhs in

who declares profits under residential house (made during the January, 2020,
section 44AD for P.Y. 2018-19 period January- March, 2020) ` 15 lakhs in Feb
and P.Y. 2019-20. 2020 and ` 20
lakhs in March
2020.
3 Mr. Satish, a salaried individual Payment of brokerage for buying a ` 51 lakhs
residential house in March, 2020
4 Mr. Dheeraj, a pensioner Contract payment made during October- ` 48 lakhs

November 2019 for reconstruction of
residential house
SOLUTION
S.No. Particulars of the payer Nature of payment Aggregate Whether TDS provisions are
of attracted?
payments
in the F.Y.
2019-20
1 Mr. Ganesh, an individual Contract Payment ` 5 lakhs No, TDS under section 194C is
carrying on retail for repair of not attracted since the payment is
business with turnover of residential house for personal purpose and TDS
` 2.5 crores in the P.Y. under section 194M is not
2018-19 attracted as aggregate of contract
payment to the payee in the
P.Y.2019-20 does not exceed
` 50 lakh.
2 Mr. Rajesh, a wholesale Contract Payment ` 55 lakhs Yes, under section 194M, since
trader who declares for reconstruction the aggregate of payments
profits under section of residential house (i.e., ` 55 lakhs) exceed ` 50
44AD for P.Y. 2018-19 and lakhs, and the payments are
P.Y. 2019-20. made after 1.9.2019.
Since he declares profits on

presumptive basis under section
44AD, he is not subject to tax
audit in the P.Y. 2018-19. Hence,
TDS provisions under section
194C are not attracted in respect
CA Suraj Agrawal
TDS 16.17
of payments made in the P.Y.
2019-20.
3 Mr. Satish, a salaried Payment of ` 51 lakhs Yes, under section 194M, since
individual brokerage for the payment of ` 51 lakhs made
buying a residential in March 2020 exceeds the
house threshold of ` 50 lakhs. Since Mr.
Satish is a salaried individual, the
provisions of section 194H are
not applicable in this case.
4 Mr. Dheeraj, a pensioner Contract payment ` 48 lakhs TDS provisions under section
for reconstruction 194C are not attracted since Mr.
of residential house Dheeraj is a pensioner and
hence, not subject to tax audit.
TDS provisions under section

194M are also not applicable in
this case, since the payment of
` 48 lakhs, even though made
after 1.9.2019, does not exceed
the threshold of ` 50 lakhs.
CA Suraj Agrawal
TDS 16.18
TDS on cash withdrawal [Section 194N] - NEW
w.e.f 01/09/2019
1. Applicability and rate of TDS

Section 194N, inserted with effect from 1.9.2019, provides that every person, being
 a banking company to which the Banking Regulation Act, 1949 applies (including any bank
or banking institution referred under section 51 of that Act)
 a co-operative society engaged in carrying on the business of banking, or
 a post office
who is responsible for paying, in cash, any sum or aggregate of sums exceeding ` 1 crore during
the previous year to any person from one or more accounts maintained by such recipient-person
with it, shall deduct tax at source @2% of sum exceeding ` 1 crore.
2. Time of deduction
This deduction is to be made at the time of payment of such sum.
3. Non-applicability of TDS under section 194N

Liability to deduct tax at source under section 194N shall not be applicable to any payment
made to-
 the Government
 any banking company or co-operative society engaged in carrying on the business of
banking or a post-office
 any business correspondent of a banking company or co-operative society engaged in
carrying on the business of banking, in accordance with the RBI guidelines
 any white label ATM operator of a banking company or co-operative society engaged in
carrying on the business of banking, in accordance with the authorisation issued by the RBI
under the Payment and Settlement Systems Act, 2007
 such other person or class of persons notified by the Central Government in
consultation with the RBI.
CA Suraj Agrawal
TDS 16.19
AMOUNT PAYABLE TO GOVERNMENT/RBI ETC [SECTION 196]
No Deduction of Tax shall be made by any person from any sums payable to:
(i) CG/SG (ii) RBI
(iii) Statutory Corporation which is exempt from Tax (iv) Mutual Fund [Section 10(23D)].
Tax Deducted is income received [Section 198]

(1) All sums deducted in accordance with the foregoing provisions shall, for the purpose of computing the
income of an assessee, be deemed to be income received.
(2) However, the following tax paid or deducted would not be deemed to be income received by the assessee for
the purpose of computing the total income–
i. the tax paid by an employer under section 192(1A) on non-monetary perquisites provided to the
employees
ii. tax deducted under section 194N
Credit for Tax Deducted At Source [Section 199]

(1) TDS deducted and paid shall be treated as payment of tax on behalf of the deductee.
(2) Any sum referred to in Section 192(1A) and paid to the CG, shall be treated as the tax paid on behalf of the
employee. [Tax on Non-Monetary Perquisite]
Consequences of failure to deduct or pay [Section 201]

(1) The following persons shall be deemed to be an assessee in default if they do not deduct the whole or any
part of the tax or after deducting fails to pay the tax -
(i) any person including the principal officer of a company, who is required to deduct any sum in
accordance with the provisions of the Act; and
(ii) an employer paying tax on non-monetary perquisites under section 192(1A) .
Provided such person shall not be deemed to be an assessee in default in respect of such tax if
Resident payee (resident or non-resident)-
(a) has furnished his ROI u/s 139;
(b) has taken into account such sum for computing income in his ROI; and
(c) has paid the tax due on the income declared by him,
and the person furnishes a certificate from a chartered accountant in prescribed manner.
(2) Such person shall also be liable to pay simple interest:

(i) At one percent [1%] for every month or part of a month on the amount of such tax was deductible to
the date on which such tax is deducted; and
(ii) At one and one-half percent [1.5%] for every month or part of a month on the amount of such tax
was deducted to the date on which such tax is actually paid.
Provided that if Resident payee has furnished his ROI as aforesaid, the interest shall be payable
from date on which tax was deductible to the date of furnishing ROI only.
(3) No order shall be made under this Section deeming a person to be an assessee in default for failure to
deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of
7 years from the end of the financial year in which the payment is made or credit is given OR
2 years from the end of financial year in which the correction statement is delivered under
proviso to Section 200(3),
whichever is later.
CA Suraj Agrawal
TDS 16.20
QUESTION:
An amount of ` 40,000 was paid to Mr. X on 1.7.2019 towards fees for professional services without
deduction of tax at source. Subsequently, another payment of ` 50,000 was due to Mr. X on 28.2.2020,
from which tax@10% (amounting to` ` 9,000) on the entire amount of ` 90,000 was deducted. However, this
tax of ` 9,000 was deposited only on 22.6.2020. Compute the interest chargeable under section 201(1A).
SOLUTION
Interest under section 201(1A) would be computed as follows:
`)
1% on tax deductible but not deducted i.e., 1% on ` 4,000 for 8 months 320
1½% on tax deducted but not deposited i.e. 1½% on ` 9,000 for 4 months 540
Total 860
Common number for TDS [Section 203A]

A. Persons responsible for deducting tax shall apply to the AO for the allotment of a “Tax deduction and
Collection account number” in Form No. 49B. [TAN]
B. The same is to be obtained within 1 month from the end of the month in which the tax was deducted.
C. TDS No. [TAN] has to be compulsorily quoted in challans for payment of any tax deducted; TDS
Certificates; TDS Statements; TDS Returns; and other documents as prescribed.
No Direct Demand on Assessee/Payee [Section 205]

Where tax is deductible at source under the forgoing provisions of this chapter, the assessee shall not be called
upon to pay the tax himself to the extent to which tax has been deducted from that income.
Mandatory requirement of furnishing PAN in all TDS Matters [Sec 206AA]:

A. Any person whose receipts are subject to TDS i.e. the deductee, shall mandatorily furnish his PAN to the
deductor otherwise the deductor shall deduct tax at source at higher of the following rates –
(i) the rate prescribed in the Act;
(ii) at the rate in force i.e., the rate mentioned in the Finance Act; or
(iii) at the rate of 20%.
B. Furnishing of PAN is mandatory also in cases where the taxpayer files a declaration in Form 15G or 15H
(under section 197A) for non deduction of TDS otherwise, abovementioned rates will apply.
C. Further, No certificate u/s 197 (Lower TDS) will be granted by the AO unless the PAN is furnished by the
applicants.
CA Suraj Agrawal
TDS 16.21
TAX COLLECTION AT SOURCE [Section 206C]

1. Every Seller at the time of debiting the buyer with the amount payable or receiving payments from buyers
engaged in business of alcoholic liquor, forest produce, scrap, timber, tendu leaves, etc. shall collect tax at
the followings rates:
Sr. No. Nature of goods TCS
Rate
1 Alcoholic liquor for human consumption (other than Indian made foreign liquor) 1%
2 Tendu Leaves 5%
3 Timber obtained under a forest lease 2.5%
4 Timber obtained by mode other than under a forest lease 2.5%
5 Any other forest produced not being timber or tendu leaves 2.5%
6 Scrap 1%
7 Minerals, being Coal or lignite or iron ore 1%
Such tax is not to be collected if the purchase of above goods is made by buyer (Resident in India) for
the purpose of manufacturing, processing or producing articles or things or for the purposes of
generation of power.
2. Every person, who grants a lease or a licenseor enters into a contract, etc for the purpose mentioned
below shall collect tax at the following rates:
Sl. No. Nature of contract or license or lease, etc. TCS Rate
(i) Parking Lot 2%
(ii) Toll plaza 2%
(iii) Mining and quarrying (excluding mineral oils, petroleum & natural gas) 2%
3. Every Person, being a Seller, who receives any amount as consideration for sale of a motor vehicle (at retail
level) of the value exceeding ten lakh rupees, shall, at the time of receipt of such amount, collect from
the buyer, a sum equal to 1% of the sale consideration (any mode) as income-tax.
4. "Seller" means the Central Government, a State Government or any local authority or corporation or authority
established by or under a Central, State or Provincial Act, or any company or firm or co-operative society
and
also includes an individual or a Hindu undivided family whose total sales, gross receipts or turnover
from the business or profession carried on by him exceed the monetary limits specified under clause
(a) or clause (b) of section 44AB during the financial year immediately preceding the financial year.
5. Buyer for Point 1:

Buyer does not include a Public Sector Company, the CG, SG and an Embassy, a High Commission,
Legation, Commission, Consulate and the trade representation of a foreign state and a club
A buyer in the retail sale of such goods purchased by him for personal consumption.
CA Suraj Agrawal
TDS 16.22
6. Buyer for Point 3:
Buyer doesn’t include
(a) Public Sector company which is engaged in the business of carrying passengers
(b) A Local Authority
(c) CG, SG and an Embassy, High Commission, Legation, Commission, Consulate & the Trade
representation of a foreign State.
Section 206CC - Requirement to furnish Permanent Account number by collectee.
(1) Notwithstanding anything contained in any other provisions of this Act, any person paying any sum or
amount, on which tax is collectible at source under Chapter XVII-BB (herein referred to as collectee) shall
furnish his Permanent Account Number to the person responsible for collecting such tax (herein referred
to as collector), failing which tax shall be collected at the higher of the following rates, namely:—
a. at twice the rate specified in the relevant provision of this Act; or
b. at the rate of 5%.
(2) The provisions of this section shall not apply to a non-resident who does not have permanent
establishment in India.
4.
5.
CA Suraj Agrawal
TDS 16A.1
Problems – TDS
1. Compute the amount of tax deduction at source on the following payments made by M/s. S Ltd. during
the FY 2019-20 as per the provisions of the Income-tax Act, 1961.
S. No. Date Nature of Payment
(i) 1-10-2019 Payment of ` 2,00,000 to Mr. “R” a transporter (owns 9 Truck) who is having
PAN.
(ii) 1-11-2019 Payment of fee for technical services of ` 25,000 and Royalty of ` 20,000 to
Mr. Shyam who is having PAN.
(iii) 30-06-2019 Payment of ` 25,000 to M/s X Ltd. for repair of building.
(iv) 01-01-2020 Payment of ` 2,00,000 made to Mr. A for purchase of diaries made according
to specifications of M/s S Ltd. However, no material was supplied for such
diaries to Mr. A by M/s S Ltd.
(v) 01-01-2020 Payment made ` 1,80,000 to Mr. Bharat for compulsory acquisition of his
house as per law of the State Government.
(vi) 01-02-2020 Payment of commission of ` 16,000 to Mr. Y.
2. State the applicability of TDS provisions and TDS amount in the following cases:
(a) Rent paid for hire of machinery by B Ltd. to Mr. Raman ` 2,50,000.
(b) Fee paid to Dr. Srivatsan by Sundar (HUF) ` 35,000 for surgery performed to a member of the family.
3. What are the provisions relating to tax deduction at source in respect of:
(a) ABC and Co. Ltd. paid ` 19,000 to one of its Directors as sitting fees on 1-01-2020.
(b) Mr. X sold his house to Mr. Y on 01-02-2020 for ` 60 lacs?
4. Ashwin doing manufacture and wholesale trade furnishes you the following information : Total
turnover for the financial year
Particulars `
2018-19 2,05,00,000
2019-20 1,95,00,000
State whether tax deduction at source provisions are attracted for the below said expenses incurred
during the financial year 2019-20:
Particulars `
Interest paid to UCO Bank 41,000
Contract payment to Raj (2 contracts of ` 12,000 each) 24,000
Shop rent paid (one payee) 2,90,000
Commission paid to Balu 17,000
5. State in brief the applicability of tax deduction at source provisions, the rate and amount of tax
deduction in the following cases for the financial year 2019-20:
(i) Winning by way of jackpot in a horse race ` 1,00,000.
(ii) Payment made by a firm to sub-contractor ` 3,00,000 with outstanding balance of ` 1,20,000 shown in the
books as on 31-03-2020.
(iii) Rent paid for plant and machinery ` 1,50,000 by a partnership firm having sales turnover of ` 20,00,000
and net loss of ` 15,000.
(iv) Payment made to Ricky Ponting, an Australian cricketer, by a newspaper for contribution of articles
` 25,000.
6. State the concessions granted to transport operators onwards in the context of cash payments under
section 40A(3) and deduction of tax at source under section 194-C.
7. Mrs. Indira, a landlord, derived income from rent from letting a house property to M/s Vaibhav Corporation Ltd.
of ` 1,00,000 per month. She charged GST @ 15% on lease rent charges. Calculate the deduction of tax at
source (TDS) to be made by M/s Vaibhavi Corporation Ltd. on payment made to Mrs. Indira and
narrate related formalities in relation to TDS.
8. Bharghav doing textiles business furnishes you the following information:
Total turnover for the financial year:
`
2018-19 205,00,000
2019-20 195,00,000
CA Suraj Agrawal
TDS 16A.2
State whether the provisions of tax deduction at source are attracted for the following expenses
incurred during the financial year 2019-20:
`
Interest paid to Indian Bank on Term Loan 92,800
Advertisement expenses to R (two individual payments of
` 24,000 and ` 34,000) 58,000
Factory rent paid to C 2,45,000
Brokerage paid to B, a sub-broker 16,000
9. Examine the obligation of the person responsible for paying the income to deduct tax at source and
indicate the due date for payment of such tax wherever applicable in respect of the following item:
MSP Manufactures Ltd., the employer credited salary due for the financial year 2019-20 amounting to
` 2,80,000 to the account of Q, the employee, in its books of account on 31.3.2020. Q has not furnished any
information about his income/loss from any other head or proof of Investments/payments qualifying for
deduction under Section 80C.
10. Dr. Z is an individual medical practitioner. His gross receipts from the medical practice for the year
ending 31st March, 2019 are ` 60 lakhs. Whereas the gross professional receipts for the year ending
st
31 March, 2020 is ` 82 lakhs. During the financial year 2019-20, he makes the following payments to a
resident contractor for various activities:
Contract No. Name of the Description of Contract Amount paid or
Contractor credited in the books
A Mr. X Medical equipment maintenance contract ` 45,000
B Mr. X Household personal equipment maintenance ` 2,50,000
contract
C Mr. Y Clinic furnishing contract ` 29,500
D Mr. Y Clinic furnishing contract ` 29,000
E Mr. Y Clinic furnishing contract ` 48,000
F Mr. M Personal catering contract in connection with ` 3,00,000
daughter's wedding.
Examine the liability to deduct tax and the amount of TDS under section 194C for the AY 2020-21.
11. X has been running a sole proprietary business whose accounts are audited u/s 44AB. He pays a monthly
rent of ` 15,000 for the office premises to R, the owner of building and an Individual. Besides he also pays
service charges of ` 10,000 per month to R towards the use of furniture, fixtures and vacant land appurtenant
thereto. Discuss the liability for TDS.
12. X Ltd. makes the following payments during the financial year 2019-20–
1. Payment to A, a resident transport contractor (owns 8 truck): ` 11,50,000 (PAN is intimated by A to X
Ltd.).
2. Payment to B, a resident transport contractor (owns 8 truck): ` 1,00,000 (PAN is not intimated by B or B
does not have PAN).
3. Payment to C, a resident catering contractor: ` 21,50,000 (PAN is intimated by C to X Ltd.).
4. Payment to D, a resident catering contractor: ` 2,00,000 (PAN is not intimated by D or D does not have
PAN).
Determine the amount of tax deductible u/s 194C in this case.
13. X Ltd. has taken a building on rent for its office (rent being ` 10,000 per month payable to A). A does not have
PAN. Discuss the liability of TDS u/s 194-I for the financial year 2019-20.
14. X won the first prize in a lottery ticket on September 1, 2019 and the prize money was a Maruti car worth ` 4
lakhs. According to sec. 194B, tax has to be deducted at source from the winnings of lottery at the time of
payment of the prize money. What is the procedure to be adopted before handing over the Maruti car to
X?
15. The Government of Assam pays ` 75,000 as commission to one of its agent on sale of lottery tickets. The
agent is of the view that TDS is not required, as the payer is a State Government. Discuss.
CA Suraj Agrawal
TDS 16A.3
16. X Ltd. pays ` 1,50,000 to Y Ltd. , a resident contractor, who under a contract dated October 15, 2019,
manufactures a product according to specification, of X Ltd. by using materials purchased from X Ltd. What is
the relevant TDS provision on this point?
17. XY Cements Ltd., the assessee, purchases jute bags from PQ & Co. The latter has to supply the jute bags
with the logo and address of the assessee, printed on it. From September 1, 2019 to March 20, 2020, the
value of jute bags supplied is ` 8,00,000, for which the invoice has been raised on March 20, 2020. While
effecting the payment for the same, is the assessee bound to deduct tax at source, assuming that the
value of printing component involved is ` 60,000? You are informed that the assessee has not sold any
material to PQ & Co. and that the latter has to manufacture the jute bags in its plant using raw materials
purchased by it from outsiders.
18. X is a sole proprietor. His annual turnover is more than ` 280,00,000 since last 5 years. During the
financial year 2019-20, he makes the following payments to a non-banking company –
1. Interest on loan taken for the marriage of his daughter (amount of interest paid on March 1, 2020:
` 5,00,000)
2. Interest on loan for business purposes (amount of interest paid on March 21, 2020: ` 6,00,000)
U/s 194A, tax is deductible on interest other than interest on securities. Discuss whether the aforesaid
payments are covered by this provision.
19. X is a sole proprietor. His annual turnover is more than ` 280,00,000 since last 5 years. During the
financial year 2019-20, he makes the following payments –
1. Brokerage paid to a broker for arranging purchase of a residential property for his personal use (amount
of brokerage paid on March 1, 2020: ` 5,00,000)
2. Commission paid to salesman for selling goods manufactured by X (amount of brokerage paid on March
21, 2020: ` 6,00,000)
U/s 194H, tax is deductible on brokerage or commission. Discuss whether the aforesaid payments are
covered by this provision.
20. X is sole proprietor. His annual turnover is more than ` 280,00,000 since last 5 years. During the
financial year 2019-20, he makes the following payments of rent –
1. Rent paid to A Ltd. for a residential property for his personal use (amount of Rent paid on March 1, 2020:
` 5,00,000)
2. Rent paid to B Ltd. for taking a machinery on rent (amount of Rent paid on March 21, 2020): ` 6,00,000).
U/s 194-I, tax is deductible on rent payment. Discuss whether the aforesaid payments are covered by this
provision.
21. X is sole proprietor. His annual turnover is more than ` 280,00,000 since last 5 years. During the
financial year 2019-20, he makes the following payments:
1. Payment of royalty for business purpose: ` 20,00,000 on January 2020.
2. Payment of professional fees to an architect for construction of a residential building for his own use:
` 6,00,000 on January 3, 2020.
3. Payment of professional fees to an advocate for filing an appeal in the Bombay High Court pertaining to a
business transaction: ` 7,00,000 on January 10, 2020.
4. Payment of technical fees to an engineer for preparation of a project report (which will be set up in a
backward area in Jharkhand): ` 8,00,000 during April 2019.
Discuss the TDS Deductibility.
22. M, an individual, had let out his building on a monthly rent of ` 25,000. The tenant deducted tax u/s 194-I from
the Rent paid to M, but did not remit such tax to the credit of the Central Government. M filed his return of
income for the Assessment Year 2020-21 including therein the Rental Income from the said building and paid
the balance tax on his total income after taking credit for tax deducted at source by the Tenant. The AO has
called upon M to pay the tax to the extent of TDS. Is the AO justified
CA Suraj Agrawal
TDS 16A.4
Class Notes
CA Suraj Agrawal
TDS 16B.1
Solution – TDS
1.
(i) No tax is required to be deducted at source under section 194C by M/s S Ltd. On payment to transporter
Mr. R, provided he furnishes his PAN to M/s. S Ltd.
(ii) As per section 194J, liability to deduct tax is attracted only in case the payment made as fees for technical
services and royalty, individually, exceeds ` 30,000 during the financial year. In the given case, since, the
individual payments for fee of technical services i.e. ` 25,000 and royalty ` 20,000 is less than ` 30,000
each, there is no liability to deduct tax at source. It is assumed that no other payment towards fees for
technical services and royalty were made during the year to Mr. Shyam.
(iii) Provisions of section 194C are not attracted in this case, since the payment for repair of building on
30.06.2019 to M/s. X Ltd. is less than the threshold limit of ` 30,000.
(iv) According to section 194C, the definition of “work” does not include the manufacturing or supply of product
according to the specification by customer in case the material is purchased from a person other than the
customer. Therefore, there is no liability to deduct tax at source in respect of payment of ` 2,00,000 to Mr.
A, since the contract is a contract for ‘sale’.
(v) As per section 194LA, any person responsible for payment to a resident, any sum in the nature of
compensation or consideration on account of compulsory acquisition under any law, of any immovable
property, is responsible for deduction of tax at source if such payment or the aggregate amount of such
payments to the resident during the financial year exceeds ` 2,50,000. In the given case, no liability to
deduct tax at source is attracted as the payment made does not exceed ` 2,50,000.
(vi) As per section 194H, any person (other than an individual or HUF) who is responsible for paying
commission or brokerage to a resident shall deduct tax at source if the amount of such income or the
aggregate of the amounts of such income credited or paid during the financial year exceeds ` 15,000. Since
the commission payment made to Mr. Y exceeds ` 15,000, the provisions of section 194H are attracted.
The tax to be deducted at source shall be - ` 16,000 x 5% = ` 800.
2.
(a) Since the rent paid for hire of machinery by B. Ltd. to Mr. Raman exceeds ` 2,40,000, the provisions of
section 194-I for deduction of tax at source are attracted. The rate applicable for deduction of tax at
source under Section 194-I on rent paid for hire of plant and machinery is 2% assuming that Mr. Raman
had furnished his permanent account number to B Ltd.
Therefore, the amount of tax to be deducted at source = ` 2,50,000 x 2% = ` 5,000.
Note: In case Mr. Raman does not furnish his permanent account number to B Ltd., tax shall be deducted
@ 20% on ` 2,50,000, by virtue of provisions of section 206AA.
(b) As per the provisions of section 194J, a Hindu Undivided Family is required to deduct tax at source on
fees paid for professional services only if it is subject to tax audit under section 44AB in the financial year
preceding the current financial year.
However, if such payment made for professional services is exclusively for the personal purpose of any
member of Hindu Undivided Family, then, the liability to deduct tax is not attracted.
Therefore, in the given case, even if Sundar (HUF) is liable to tax audit in the immediately preceding
financial year, the liability to deduct tax at source is not attracted in this case since, the fees for
professional service to Dr. Srivatsan is paid for a personal purpose i.e. the surgery of a member of the
family.
TDS provisions under section 194M are also not applicable in this case, since the payment does
not exceed the threshold of ` 50 lakhs.
CA Suraj Agrawal
TDS 16B.2
3.
(a) Section 194J provides for deduction of tax at source @10% from any sum paid by way of any
remuneration or fees or commission, by whatever name called, to a resident director, which is not in the
nature of salary on which tax is deductible under section 192. The threshold limit of ` 30,000 upto which
the provisions of tax deduction at source are not attracted in respect of every other payment covered
under section 194J is, however, not applicable in respect of sum paid to a director.
Therefore, tax@10% has to be deducted at source under section 194J in respect of the sum of ` 19,000
paid by ABC Ltd. to its director.
(b) Section 194-IA requires every person, being a transferee, responsible for paying any sum as
consideration for transfer of any immovable property (other than agricultural land), to deduct tax@1% of
such sum, at the time of credit of such sum to the account of the resident transferor or at the time of
payment of such sum to a resident transferor, whichever is earlier.
Such tax is required to be deducted at source where the consideration for transfer of immovable property
is ` 50 lakhs or more.
In this case, since the consideration for transfer of house exceeds ` 50 lakhs, Mr.Y is liable to deduct tax
at source@1% under section 194-IA on the consideration of ` 60 lakhs payable for transfer of house to
Mr. X.
4. As the turnover of Ashwin for F.Y. 2018-19, i.e. ` 205 lakh, has exceeded the monetary limit of ` 100 lakh
prescribed under section 44AB, he has to comply with the tax deduction provisions during the financial year
2019-20, subject to, however, the exemptions provided for under the relevant sections for applicability of TDS
provisions.
Interest paid to UCO Bank
TDS under section 194A is not attracted in respect of interest paid to a banking company.
Contract payment of ` 24,000 to Raj for 2 contracts of ` 12,000 each
TDS provisions under section 194C would not be attracted if the amount paid to a contractor does not exceed
` 30,000 in a single payment or ` 100,000 in the aggregate during the financial year. Therefore, TDS
provisions under section 194C are not attracted in this case.
Shop Rent paid to one payee – Tax has to be deducted under section 194-I as the rental payment exceeds
` 2,40,000.
Commission paid to Balu– Tax has to be deducted under section 194-H as the commission exceeds `
15,000.
5.
(i) Provisions for tax deduction at source under section 194BB @ 30% are attracted if the amount exceeds `
10,000 in respect of income arising by way of winning a jackpot in horse races.
Tax to be deducted = ` 1,00,000 x 30% = ` 30,000
(ii) Provisions of tax deduction at source under section 194C are attracted in respect of payment by a firm to
a sub-contractor. Under section 194C, tax is deductible at the time of credit or payment, whichever is
earlier @ 1% if the payment is made to an individual or HUF and 2% for others.
Assuming that sub-contractor to whom payment has been made is an individual and the aggregate
amount credited during the year is ` 4,20,000, tax is deductible @ 1% on ` 4,20,000.
Tax to be deducted = ` 4,20,000 x 1% = ` 4,200
(iii) As per section 194-I, tax is to be deducted @ 2% on payment of rent for plant and machinery, only if the
payment exceeds ` 2,40,000 during the financial year. Since rent of ` 1,50,000 paid by a partnership firm
does not exceed ` 2,40,000, tax is not deductible.
(iv) Under section 194E, the person responsible for payment of any amount to a non-resident sportsman for
contribution of articles relating to any game or sport in India in a newspaper shall deduct tax @ 20%.
Further, since Ricky Ponting is a non-resident, H&EC @ 4% on TDS would also be added.
Therefore, tax to be deducted = ` 25,000 x 20.80% = ` 5,200.
6. Section 40A(3) provides for disallowance of expenditure incurred in respect of which payment or aggregate of
payments made to a person in a day exceeds ` 20,000, and such payment or payments are made otherwise
than by account payee cheque or account payee bank draft or use of electronic system through bank account
or through such other prescribed electronic modes.
CA Suraj Agrawal
TDS 16B.3
However, in case of payment made to transport operators for plying, hiring or leasing goods carriages, the
disallowance will be attracted only if the payments made to a person in a day exceeds ` 35,000.
Therefore, payment or aggregate of payments up to ` 35,000 in a day can be made to a transport operator
otherwise than by way of account payee cheque or account payee bank draft or use of electronic system
through bank account or through such other prescribed electronic modes, without attracting disallowance
under section 40A(3).
Under section 194C, tax had to be deducted in respect of payments made to contractors at the rate of 1% in
case the payment is made to individual or Hindu Undivided Family or at the rate of 2% in any other case.
However, no deduction is required to be made from any sum credited or paid or likely to be credited or paid
during the previous year to the account of a contractor, during the course of the business of plying, hiring or
leasing goods carriages, if the contractor furnishes his permanent account number (PAN) to the person
paying or crediting such sum.
7.
(1) As per Circular No. 23/2017 issued by the CBDT, there will be no TDS on GST components in any
Section. Therefore, tax deducted at source under section 194-I would be required to be made on the
amount of rent paid or payable excluding the amount of service tax, i.e. tax has to be deducted under
section 194-I on ` 12 lakh.
(2) Tax is deductible @ 10% under section 194-I.
(3) Hence, in the given case, TDS under section 194-I would amount to ` 10,000, to be deducted every
month.
(4) Tax deducted should be deposited within prescribed time i,.e. on or before seven days from the end of the
month in which the deduction is made and upto 30th April for the month of March.
8. Since the turnover of Mr. Bharghav for F.Y. 2018-19, i.e., ` 105 lakhs, has exceeded the monetary limit of `
200 lakhs prescribed under section 44AB, he has to comply with the tax deduction provisions during the
financial year 2019-20, subject to, however, the exemptions provided for under the relevant sections for
applicability of TDS provisions.
(i) Interest paid to Indian Bank on term loan

TDS under section 194A is not attracted in respect of interest paid to a banking company.
(ii) Advertisement expenses to R (two individual payments of ` 24,000 and ` 34,000)

Under section 194C, the provisions for tax deduction at source would not be attracted if the amount paid
to a contractor does not exceed ` 30,000 in a single payment or ` 100,000 in the aggregate during the
financial year. Therefore, provisions for deduction of tax at source under section 194C are not attracted in
respect of payment of ` 24,000 to R.
However, payment of ` 34,000 to R would attract TDS@1% under section 194C, since it exceeds
` 30,000.
Note - The tax to be deducted would be ` 340, being 1% of ` 34,000.
(iii) Factory rent of ` 2,45,000 paid to C

Tax has to be deducted under section 194-I as the rental payment exceeds ` 2,40,000.
Note - The tax to be deducted is ` 24,500, being 10% of ` 2,45,000.
(iv) Brokerage of ` 16,000 paid to B, a sub-broker

Tax has to be deducted@5% under section 194-H as the brokerage exceeds ` 15,000 during the F.Y.
2019-20.
Note - The tax to be deducted is ` 800, being 5% of ` 16,000.
9. Sec 192 of the Income Tax Act warrants deduction of tax at source in respect of payment of salary to
employees. The Section is casting responsibility on the employer to deduct tax at source at the time of making
payment of salary to the employee. In case credit entries are passed in the books of the employer for salary
due to employees, the liability to deduct tax u/s.192 does not arise. Accordingly, in the given case, MSP Ltd is
not liable to deduct tax on salaries. Non- furnishing of information relating to investments, deductions etc of
the employee is not relevant to the given situation.
CA Suraj Agrawal
TDS 16B.4
10. In the case of individuals, the liability to deduct tax u/s. 194C arise, only where they are subject to tax audit
u/s. 44AB in the immediately preceding previous year in which such payments or credit entries are made. In
the given case, the individual's account is subject to tax audit for the year ending 31st March, 2019 and
therefore, the provisions of section 194C is applicable in respect of payments covered there under. Gross
receipts for the financial year 2019-20 is not relevant to determine the applicability of Sec. 194C. Accordingly,
the liability to TDS is as follows:
Contract A
Since the amount of individual contract exceeds ` 30,000, the provisions of sec. 194C is applicable and
therefore, tax of ` 450, being 1%, shall be deducted at source at the time of payment or passing credit entries
in the books, whichever is earlier.
Contract B and F
In the case of individual or HUF, where the payment under a contract is made for personal purpose, liability to
deduct tax does not arise. Therefore, in the given case, the contract for maintenance of household personal
equipment and catering contract for daughter's marriage does not attract tax deduction at source.
Contract C, D and E
The liability to deduct tax in respect of payment made in pursuance of a contract arise only where the amount
of individual contract exceeds ` 30,000 or the aggregate amounts of all contracts to a resident contractor
exceeds ` 100,000 during the financial year. In the given case, though the independent contract value of
contracts of C and D does not exceed ` 30,000, the aggregate value of all these contracts to Mr. Y exceeds `
100,000 during the financial year. Therefore, Dr. Z is responsible to deduct tax u/s. 194C. Practically, in
respect of the first 2 contracts, viz, C and D, entire contract amount would have been paid without deduction
of tax. It is the responsibility of the payer to deduct entire amount of tax on all contracts from the contract E.
Accordingly, in the given case the aggregate value of the contract of ` 106,500 is subject to TDS at the rate of
1% amounting to ` 1065.
Therefore, the total amount of tax to be deducted by Dr. Z for the AY 2020-21 under section 194C is
` 1515.
11. U/s 194-I, Rent means any payment by whatever name called, under any lease, sub-lease, tenancy or any
other agreement or arrangement for use of (either separately or together) any - Land, or Building (including
Factory Building), or Land appurtenant to a Building (including Factory Building), or Machinery or Plant or
Equipment or Furniture or Fittings whether or not any or all of the above is owned by the Payee.
In view of the above, the entire monthly payment of ` 25,000 paid by way of Rent and Service Charges
shall be liable to deduction of tax @ 10% under section 194-I.
12. Payment/credit of consideration of a works contract to a resident contractor is covered by section 194C. the
expression “works contract” includes advertising contracts, broadcasting /telecasting contract, carriage of
goods or passengers, catering and manufacturing (if raw material is supplied by the payer). Tax will be
deducted at the rate of 1% (if recipient is an individual/HUF) or 2% (if recipient is any other person). If PAN of
the contractor is not available, tax will be deducted at the rate of 20%. However, in the case payment or credit
to transport contractors (i.e., the business of plying, hiring or leasing goods carriages), no tax is deductible if
the recipient contractor gives his PAN to payer.
`
Payment to A (transport contractor and PAN is intimated, no TDS) Nil
Payment to B (transport contractor and PAN is not intimated, tax will be deducted @ 20%) 20,000
Payment to C (catering contractor and PAN is intimated, tax will deducted @ 1%) 21,500
Payment to D (catering contractor and PAN is not intimated, tax will deducted @ 20%) 40,000
Total 81,500
13. If PAN is not intimated by the recipient to the deductor (or payer), tax will be deducted at source either at the
normal rate or at the rate of 20%, whichever is higher. However, in this case the aggregate payment is `
1,20,000 . the threshold limit in section 194-I is ` 2,40,000. In other words, tax u/s 194-I is not deductible if
payment/credit of rent does not exceeds ` 2,40,000. This rule is applicable even if the recipient does not
intimate PAN. Tax is not deductible in this case.
CA Suraj Agrawal
TDS 16B.5
14. As per Sec. 194B, a person responsible for paying to any person any income by way of winnings from
lotteries or crossword puzzles exceeding ` 10,000 is required, at the time of such payment, to deduct income-
tax thereon at the rate of 30%. Where the winnings are wholly in kind, the person responsible for paying shall,
before realizing the winning in kind, ensure that tax has been paid in respect of the winnings.
Tax liability on the prize in kind, i.e., Maruti car is ` 1,20,000 (i.e., 30% of ` 4,00,000) which may be recovered
by the person responsible for tax deduction, from X and the same can be deposited with the Government on
account of tax deduction.
If, however, the person responsible for tax deduction, does not want to recover ` 1,20,000 from X, then
` 4,00,000 will be grossed up. Grossed amount will be ` 5,71,429 [i.e., ` 4,00,000 ÷ (1 - 0.30)]. TDS liability
will be 30% of ` 5,71,429 (i.e., ` 1,71,429) ` 1,71,429 will be borne by the person responsible for tax
deduction and it will be deposited as TDS.
15. As per Sec. 194G, the payer shall deduct income-tax at the rate of 5% at the time of making payment of any
income by way of commission. ` 3,750 (5% of ` 75,000) shall be tax deduction at source u/s 194G. The view
of the recipient is not legally tenable. Tax has to be deducted at source even if payer is a state government.
16. Payment to Y Ltd. is covered by section 194C. Tax is deductible at the rate of 2%. In the case of work
contract being manufacturing or supplying product according to the specification of customer (by using
material purchased from such customer), TDS shall be deducted on the invoice value excluding the value
of material purchased from such customer if such value is mentioned separately in the invoice. Where
the material component has not been separately mentioned in the invoice, TDS shall be deducted on the
whole of the invoice value.
17. The term ‘work’ does not include manufacturing or supplying a product according to the requirement
or specification of a customer by using material purchased from a person, other than such customer.
The assessee has not sold any material to PQ & Co. and, therefore, the transaction does not fall within the
purview of section 194C. This is not a works contract assigned by XY Cements Ltd. to PQ & Co. It is a
contract of sale of goods by PQ & Co. to XY Cements Ltd. Since contract of sale of goods is not covered by
section 194C, tax is not deductible.
18. X, the payer, is an individual. His books of account are required to be audited u/s 44AB. Consequently, tax is
deductible u/s 194A. Section 194A is applicable in such a case regardless of the fact whether payment
of interest pertains to a personal loan or a business loan. Tax will be deductible on ` 5,00,000 as well as
` 6,00,000 at the rate of 10%.
deductible on commissioner or brokerage u/s 194H. Section 194H is applicable in such a case regardless of
the fact whether payment of commission or brokerage is for personal purpose or business purposes. Tax will
be deductible on ` 5,00,000 as well as ` 6,00,000 at the rate of 5%
deductible on payment/credit of rent u/s 194-I. Section 194-I is applicable in such a case regardless of the fact
whether payment of payment/credit of rent is for personal purpose or business purposes. Tax will be
deductible on ` 5,00,000 as well as ` 6,00,000. TDS rate is 2% of rent for use of machinery, plant or
equipment. It is 10% of rent for use of land, building, furniture or fixture.
21. X, the payer, is an individual. His books of account are required to be audited u/s 44AB. U/s 194J, tax is
deductible by an individual/HUF (whose books of account are required to be audited u/s 44AB in the
preceding year) as follows –
1. Tax is deductible on payment/credit of technical fees (whether it is for business purpose or otherwise).
2. Tax is deductible on payment/credit of professional fees only when it is for business purpose.
3. Tax is not deductible at all on payment/credit of royalty by an individual/HUF.
Consequently, in the given problem tax will be deductible as follows –

Amount of TDS (i.e., @
10% of payment/credit)
`
1. Payment of royalty for business purposes (no TDS by an individual/HUF u/s
194J) Nil
2. Payment of professional fees for personnel purposes (no TDS by an
individual/HUF u/s 194J on professional fees for personal purposes) Nil*
CA Suraj Agrawal
TDS 16B.6
3. Payment of professional fees for business purposes (tax is deductible) 70,000
4. Payment of technical fees (tax is deductible) 80,000
Total 1,50,000
* TDS provisions under section 194M are also not applicable in this case, since the payment of ` 7 lakhs,
even though made after 1.9.2019, does not exceed the threshold of ` 50 lakhs.
22. Section 205 provides that where tax is deductible at source, under the provision of the Act, the assessee shall
not be called upon to pay the tax himself to the extent to which the tax has been deducted from that income.
In view of the above specific provisions, Mr. M cannot be held liable to pay tax to the extent TDS. Hence, the
action of AO is not justifiable.
CA Suraj Agrawal
Income Based Deduction/Exemptions 17.1
INCOME BASED DEDUCTIONS & EXEMPTIONS

Deduction to Newly Established Units in SEZs [SECTION 10AA]
A deduction of profits and gains which are derived by an assessee being an entrepreneur from the export of
articles or things or providing any service, shall be allowed from the TOTAL INCOME of the assessee.
(1) Eligible Assessees: All categories of assessees
(2) Conditions:
i) It has begun or begins to manufacture or produce articles or things or provide any service on or
after 1.4.2005 (PY 05-06) in any SEZ. [No Deduction from AY 21-22]
ii) The sale proceeds from exports should be received in or brought into India, in convertible foreign
exchange, within a period of 6 months from the end of the Previous Year or within extended
period allowed by RBI.
(3) New Business / New Plant & Machinery:
i) It should not be formed by splitting up or reconstruction of a existence business.
ii) It should not be formed by transfer of plant and machinery previously used for any purpose
exceeding 20% of the total value of machinery and plant used in the business. [20% old –
Allowed]
iii) For this purpose, any machinery or plant which was used outside India by any person other than the
assessee shall not be regarded as machinery or plant previously used for any purpose if the following
conditions are fulfilled:
(a) such machinery or plant was not at any time used in India;
(b) such machinery or plant is imported into India from any country outside India; and
(c) no deduction on account of depreciation has been allowed in respect of such machinery or plant
to any person earlier.
(4) Quantum and Period of Deduction:

i) For First 5 AYs : 100% of the profits derived from exports.
ii) For next 5 Consecutive AYs : 50% of such profits
iii) For next 5 Consecutive AYs : Least of the below two:
(a) 50% of Such Profits
(b) Reserve credited to SEZ Re-Investment Allowance
Reserve Account
Explanation to Section 10AA(1):

For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be
allowed from the total income of the assessee computed in accordance with the provisions of this Act,
before giving effect to the provisions of this section and the deduction under this section shall not exceed
such total income of the assessee.
(5) Conditions to be satisfied for claiming deduction for further 5 years (after 10 years):
The amount credited to the Special Economic Zone Re-investment Reserve Account is utilized-
a) for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period
of three years following the previous year in which the reserve was created; and
b) until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the
undertaking. However, it should not be utilized for
i. distribution by way of dividends or profits; or
ii. for remittance outside India as profits; or
iii. for the creation of any asset outside India;
CA Suraj Agrawal
(6) CONSEQUENCES OF MIS-UTILISATION / NON-UTILISATION OF RESERVE:
(a) Mis-Utilised amount shall be deemed to be the profits in the year in which the amount was so
utilised; or
(b) Unutilised amount shall be deemed to be the profits in the year immediately following the said
period of three years.
(7) Computation of Exemption u/s 10AA:

The profits derived from export of articles or things or services (including computer software) shall
be:
Export Turnover
Profits of the Business of the undertaking X ———————————————
Total Turnover
Note:
1. “Export Turnover” means the consideration received in or brought into India by the assessee in
convertible foreign exchange but does not include:
a) Freight, Telecommunication Charges and Insurance attributable to the delivery of the
articles or things outside India; or
b) Expenses incurred in foreign exchange in providing the technical services outside India.
2. Here, profits includes profits derived from on-site development of computer software (including
services for development of software) outside India for the purpose of determining profits derived
from export of computer software outside India
(8) OTHER COMMON POINTS:
a) AUDIT: Accounts of the assessee for the relevant year should be audited.
b) INTER-UNIT TRANSFER: Where any goods or services of eligible business are transferred to
any other business (or vice versa) otherwise than at Market Value on date of transfer, then the
profits and gains of the eligible business shall be computed as if the transfer was made at
market value.
c) NO DOUBLE OR EXCESS DEDUCTION: The deductions claimed and allowed under this section
shall not exceed the profits and gains of the eligible business. Further, profits and gains
allowed as deduction under this section will not be considered for deduction under any other
provisions of the Act.
d) EXCESSIVE PROFITS: Where it appears to the AO that the assessee derives more than
ordinary profits from the eligible business due to close connection between the assessee and any
other person, the AO may consider such profits as may be reasonable for the purpose of computing
deduction under this section.
e) AMALGAMATION/DEMERGER:
INDIAN COMPANY INDIAN COMPANY
In the case of any amalgamation or demerger, by virtue of which the Indian company carrying
on the eligible business is transferred to another Indian company:
(i) No deduction will be available to the amalgamating company/demerged company, in the year
of amalgamation/demerger.
(ii) The deduction will be available to the amalgamated/resulting company for unexpired
period.
f) Where a deduction under this section is claimed and allowed in relation to any specified business
eligible for investment-linked deduction under section 35AD, no deduction shall be allowed under
section 35AD in relation to such specified business for the same or any other assessment
year.
CA Suraj Agrawal
Amendment in Section 10AA – SEZ Units
Before amendment, key issue was whether provision of Section 10AA are deduction provision or exemption
provision & if this is deduction, at what stage one will get the benefit of deduction (under PGBP Head, After
GTI before chapter VIA deduction etc)
To resolve above controversy, following Explanation shall be inserted in sub-section (1) of Section 10AA by the
Finance Act, 2017, w.e.f. AY 2018-19:
For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed
from the total income of the assessee computed in accordance with the provisions of this Act, before
giving effect to the provisions of this section and the deduction under this section shall not exceed such total
income of the assessee.
“It means Deduction u/s 10AA will be available after deduction under chapter VIA”
[As amended by Finance Act 2016, Deduction under Section 10AA will not be available w.e.f. AY 21-22]
Circular 4/2018
CBDT has clarified that freight, telecommunication charges & insurance expenses are to be excluded both
from “Export Turnover” and “Total turnover” while working out deduction admissible under Section 10AA to
the extent they are attributable to the delivery of articles or things outside India.
Similary expenses incurred in foreign exchange for rendering services outside India are to be excluded from
both “Export Turnover” and “Total Turnover” while computing deduction admissible u/s 10AA.
CA Suraj Agrawal
CLASS NOTES
CA Suraj Agrawal
PRACTICAL QUESTIONS – DEDUCTION & EXEMPTIONS

1) PR Industries Ltd., a unit established in Special Economic Zone, for providing various services
furnishes the following particulars of its first year of its operation ended on 31.03.2020 (amounts in
` Lakhs):
Total receipts from provisions of services 50
Receipts from export of services 40
Profits of business 5
Out of the total export, ` 8 lakhs could not be realized on account of death of the Foreign Service
recipient. The plant and machinery used in the business had been depreciated @ 25% on SLM basis
and depreciation of ` 2 lakhs was charged in the P&L A/c. Compute the taxable income of the
company.
Solution:
The assessee is eligible for the deduction u/s 10AA for the AY 2020-21
Thus, its total income shall be calculated as follows –
Computation of taxable income of the company (All amount in `)
Net Profit as per P&L A/c 5,00,000
Add: Depreciation as per books 2,00,000
7,00,000
Less: Depreciation as per IT Rules (15% of 8 lakhs) [Cost of machinery = 2 lakhs / 25%] 1,20,000
Profits and Gains of Business / GTI 5,80,000
Less: Deduction u/s 10AA [100% of {(5,80,000 / 50,00,000) X 32,00,000}] 3,71,200
Taxable Income 2,08,800
2) A company is engaged in the development and sale of computer software applications. It has started a new
undertaking in SEZ. It furnishes the following data and requests you to compute the deduction
allowable to it under Sec. 10AA is respect of AY 2020-21
Particulars (` in lakhs)
Total profit of the company for the previous year 50
Total turnover, i.e. Export sales and Domestic sales for the previous year 550
Consideration received in respect of export of software received in convertible 250
foreign exchange within 6 months of the end of the previous year
Sale proceeds credited to a separate account in a bank outside India with the 50
approval of RBI
Telecom and insurance charges attributable to export of software 10
Staff costs and travel expenses incurred in foreign exchange to provide technical 40
assistance outside India to a client
Solution:
Computation of income of an undertaking in SEZ: AY 2020-21
Particulars ` in lakh)
(`
Total profit / GTI 50
Less: Deduction under Sec. 10AA: = 25
Taxable Income 25
Note :
Export turnover ` in lakhs)
(`
(i) Sale proceeds of software received in convertible foreign exchange within 250
the prescribed period
(ii) Sale proceed in convertible foreign exchange kept outside India with the 50
approval of RBI 300
Less: (i) Telecom and insurance attributable to export turnover (-) 10
(ii) Expenses incurred in foreign exchange outside India to provide (-) 40
technical assistance to a client there
Export turnover 250
CA Suraj Agrawal
3) From the following particulars compute the deduction u/s 10AA and the taxable profit:
A Ltd. B Ltd.
Particulars
` in lakhs
Export Turnover 125 240
Domestic Turnover 68 42
Profits of the business 21 28
Additional information: The export turnover of A Ltd. includes charges received from on site development of
computer software outside India to the extent of ` 30 Lakhs. B Ltd. has realized only 90% of its Export
turnover and the remaining 10% has become irrecoverable.
4) Nathan Aviation Ltd. is running two industrial undertakings, one in a SEZ (Unit S) and another in a
normal area (Unit N). The brief summarized details for the year ended 31-3-2020 are as under:
(` in lakhs)
S N
Domestic turnover 10 100
Export turnover 120 Nil
Gross profit 20 10
Less: Expenses and depreciation 7 6
Profits derived from the unit 13 4
The brought forward business loss pertaining to Unit N is ` 2 lakhs. Briefly compute the business
income of the assessee.
Solution:
Computation of income of Nathan Aviation Ltd.
Unit S (SEZ) Unit N (Outside SEZ)
` `
Profit derived from the unit 13,00,000 4,00,000
Less: Brought forward loss of unit N Nil (2,00,000)
Less: Deduction under section 10AA [` 13 Lakh × ` 120 lakh
÷ ` 130 lakh] 12,00,000 Nil
Total Income 1,00,000 2,00,000
The following assumptions have been made-
a. Unit S satisfies all conditions of Section 10AA and it was set up on or after April 1, 2015 (100% deduction
is available only in first 5 years); and
b. Brought forward loss of unit N pertains to the AY 2012-13 (or any subsequent assessment year) (loss can
be carried forward only for 8 years).
CA Suraj Agrawal
Exemptions 18.1
INCOMES NOT INCLUDED IN TOTAL INCOME [SECTION 10]
Agricultural Income from Land Situated in India[Section 10(1)]
Amounts received by a member from the income of the HUF [Section 10(2)]
Share Profit of a partner from partnership firm [Section 10(2A)]
Circular No 8/2014: The CBDT has clarified that the entire profit credited to the Partner’s accounts
in the firm would be exempt from tax in the hands of such partners, even if the income chargeable
to tax becomes NIL in the hands of the firm on account of any exemption or deduction.
Exemption to non-residents and person resident outside India from Interest credited in Non-
resident (External) Account in India [Sec 10(4)]
Exemption to Individuals who are not citizens of India [Sec 10(6)]
SALARY OF DIPLOMETIC PERSONNEL - Section 10(6)(ii) grants exemption to a person in
respect of the remuneration received by him for services as an official of an embassy, high
commission, legation, consulate or the trade representation of a foreign State or as a member of the
staff of any of these officials.
SALARY OF FOREIGN EMPLYEES - Section 10(6)(vi) provides that remuneration received by a
foreign national as an employee of a foreign enterprise for service rendered by him during his stay
in India is also exempt from tax.
Conditions -
(1) The foreign enterprise is not engaged in a business activity in India;
(2) The employee’s stay in India does not exceed a total of 90 days in the previous year;
(3) The remuneration is not liable to be deducted from the employer’s income chargeable to tax
under the Act.
SALARY RECEIVED BY A SHIP CREW - Section 10(6)(viii) provides that salary income received
by or due to a non-citizen of India who is also non-resident for services rendered in connection with
his employment on a foreign ship where his total stay in India does not exceed a total of 90 days in
the previous year.
REMUNERATION OF A FOREIGN TRAINEE: Section 10(6)(xi) provides that any remuneration

received by employees of foreign Government from their respective Government during their stay in
India in connection with their training in any establishment or office of the Government; or any
company owned by Government or its subsidiary; or any Statutory Corporation; or any Co-operative
Society wholly financed by the CG/SG.
FA 18 - Royalty income or fees for technical services received from National Technical
Research Organisation (NTRO) [Section 10(6D)]
Income arising to non-corporate non-residents and foreign companies, by way of royalty from or
fees from technical services rendered in or outside India to, the National Technical Research
Organisation (NTRO) is exempt
Allowances payable outside India [Section 10(7)]
Payments to Bhopal Gas Victims [Section 10(10BB)]
Exemption of compensation received on account of disaster from CG/SG or local authority

to Individual or legal heirs [Sec 10(10BC)]
Exemption is not available to the extent such amount has been allowed a deduction on account of
any loss or damage caused by such disaster under this Act.
CA Suraj Agrawal
Exemptions 18.2
Receipts from LIC [Section 10(10D)]
[Exemption under section 10(10D) not available in respect of any sum received by any person
under “keyman insurance policy” assigned to Keyman before maturity]
Any Payment from SPF/PPF [Section 10(11)]
Any Payment from Sukanya Samriddhi Account [Section 10(11A)]
Any Payment from RPF [Section 10(12)]
FA 18 - Any payment from NPS to an assessee employee on closure of account/scheme as

referred in Section 80CCD, to the extent of 40% amount payable [Section 10(12A)]
Any payment from NPS to an Employee on partial withdrawal made out of his account, to the
extent it does not exceed 25% of the amount of contributions made by him is Exempt.
[Section 10(12B)]
Any Payment from Approved Superannuation Fund [Section 10(13)]
Interest from Deposit Certificates issued under the Gold Monetisation Scheme, 2015 [Sec
10(15)]
Education Scholarship - Exempt [Section 10(16)]
Daily Allowance & Constituency Allowances to MP/MLA - Exempt [Section 10(17)]
Government Rewards / Awards [Sec. 10(17A)]

The reward or award may be instituted in the public interest, by the Central or State Government or
any other body approved by the Central or State Government.
Exemption of income of a Sikkimese Individual [Section 10(26AAA)]
Income of a Sikkimese individual from any source in the State of Sikkim; or by way of dividend
or interest on securities. However, no exemption will be available to a Sikkimese woman who
(on or after 01.04.2008) marries a non-Sikkimese Individual.
Exemption in respect of clubbed income of Minor [Section 10(32)]
Exemption of capital gain on transfer of a unit of Unit Scheme, 1964 (US 64) [Section 10(33)]
Exclusion of dividends referred to in Section 115-O from total income [Section 10(34)]
[Dividend excludes dividend chargeable to tax under section 115BBDA]
Exemption of income received by an investor on account of buy-back of unlisted shares of a

domestic company [Section 10(34A)]
The income arising to the shareholders in respect of such buy back of unlisted shares by the
domestic company would be exempt under section 10(34A), where the company is liable to pay
the additional income-tax on the buy-back of shares.
Income from units from the Administrator of specified undertaking / specified company /
mutual fund specified in clause (23D) [Section 10(35)]
Income received in a transaction of reverse mortgage [Sec 10(43)]
CA Suraj Agrawal
AMT 19.1
ALTERNATE MINIMUM TAX (AMT)

(Alternate Minimum Tax to any person other than company)
Section 115JC - W.e.f. AY 2012-13
W.e.f AY 2013-14; Section 115JC is applicable to any person other than company. In AY 12-13, it
was only applicable to LLP.
Section115JC(1): Where the regular income-tax payable for a previous year by a person (other than
company) is less than 18.5% of its Adjusted Total Income (AMT), such adjusted total income shall
be deemed to be the total income of such person and it shall be liable to pay income-tax on such total
income at the rate of 18.5%.
Adjusted Total Income shall be the Total Income as increased by
A. Deductions claimed under any section in chapter VIA under the heading "C-Deductions in
respect of certain incomes" (Other than 80P),
B. Deduction claimed u/s 10AA &
C. Deduction claimed u/s 35AD as reduced by the amount of depreciation allowable u/s 32 as
if no deduction u/s 35AD was allowed.
To whom Alternate Minimum Tax shall be applicable [Section 115JEE (1)]

The provisions of Alternate Minimum Tax shall apply to a non-corporate assessee who has claimed any
deduction under:
(a) Sections 80-IA to 80RRB other than section 80P; or
(b) Section 10AA; or
(c) Section 35AD
To whom Alternate Minimum Tax shall not be applicable [Section 115JEE (2)]
However, provisions of AMT is not applicable if, Adjusted TI of
a. Individual
b. HUF
c. AOP/BOI
d. AJP;
doesn’t exceeds ` 20,00,000.
Section 115JEE(3): Notwithstanding anything contained in sub-section (1) or (2), the credit for tax
paid under Section 115JC shall be allowed in accordance with the provisions of Section 115JD.
Steps involving calculation of Tax where Alternate Minimum Tax provisions applies:
Step 1: Calculate the regular Income-tax liability of the non-corporate assessee ignoring the
provisions of Sections 115JC to 115JF.
Step 2: Calculate Adjusted Total Income of the non-corporate assessee.
Step 3: Calculate Alternate Minimum Tax by applying 18.5% + Surcharge (if applicable) + 4%
H & EC on Adjusted Total Income computed under Step 2.
Step 4: Compare tax liability computed under Step 1 and AMT computed under Step 3. If amount
computed under Step 1 is equal to or more than amount computed under Step 3, then the
provisions of Alternate Minimum Tax will not apply.
CA Suraj Agrawal
AMT 19.2
Step 5: If amount computed under Step 1 is less than amount computed under Step 3, then amount
computed under Step 3 will be deemed as tax liability of the non-corporate assessee for
such Previous Years.
Report from an accountant [Section 115JC (3)]:

Every non-corporate assessee to whom this section applies shall obtain a report, in such form as may
prescribed, from an accountant, certifying that the Adjusted Total Income and the Alternate Minimum
Tax have been computed in accordance with the provisions of this Chapter and furnish such report on
or before the due date of furnishing of return of income under section 139(1).
Tax credit for Alternate Minimum Tax [Section 115JD]:

The credit for tax (tax credit) paid shall be allowed to the extent of the excess of the AMT paid over
the regular income-tax.
This tax credit shall be allowed to be carried forward up to the 15th assessment year immediately
succeeding the assessment year for which such credit becomes allowable.
It shall be allowed to be set off for an assessment year in which the regular income-tax exceeds the
AMT to the extent of the excess of the regular income-tax over the AMT.
CA Suraj Agrawal

Income Tax Book by CA Suraj Agrawal - May & Nov 2020 Exam - Compressed

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Assessment

Year 2020-21 CA-INTER 17th Edition

CA SURAJ AGRAWAL SIR

“CA Rank Holder, Quali ied CPA (USA), B.Com (H)”

CA-INTER. BEST FACULTY UNDER ONE ROOF

CA-INTER CA-INTER CA-INTER CA-INTER

LAW & AUDIT ACCOUNTS & ADV. ACCOUNTS TAXTATION

I dedicate this book to my beloved late grandparents & Papa.

Updated as on 29.01.2020 (17th Edition – 3rd Print)

“One more step towards success”

1A. Agriculture Income 1A.01 – 1A.08

2. Residential Status 2.1 – 2.20

3. Income from House Property 3.1 – 3.24

4. Income under the head “Salary” 4.1 – 4.66

5 Income from Other Sources 5.01 – 5.14

6 Capital Gain 6.01 – 6.46

7 Deduction under Chapter VIA [80C to 80U] 7.01 – 7.24

8 Depreciation & Capital Gain on Depreciable Assets 8.01 – 8.12

9 PGBP 9.01 – 9.38

11 HUF 11.1 – 11.6

12 Clubbing of Income 12.1 – 12.18

13 Set-off, Carry Forward & Set-off of Losses 13.1 – 13.12

14 Return of Income 14.1 – 14.10

15 Advance Tax & Interest u/s 234A, B & C 15.1 – 15.2

16 TDS & TCS 16.01 – 16.22

17 Deduction u/s Section 10AA 17.1 – 17.06

18 Various Exemptions u/s 10 18.1 – 18.02

19 Alternate Minimum Tax 19.1 – 19.02

OVERVIEW OF INCOME-TAX LAW IN INDIA

INCOME TAX ACT’ 1961

THE FINANCE ACT

INCOME TAX RULES

CIRCULAR & NOTIFICATIONS

2. Relevance of method of accounting for heads of income:

Section 4 - Charge of income-tax

Previous year [Section 3]

CERTAIN CASES WHEN INCOME OF A PREVIOUS YEAR WILL BE ASSESSED IN THE

(1) Income of a Non resident from Shipping Business;

(3) Income of bodies formed for short duration;

(5) Income of a discontinued Business

Section 2(31) - The definition is inclusive i.e. a person includes,

DOMESTIC COMPANY [Section 2(22A)]

INDIAN COMPANY [Section 2(26)]:

FOREIGN COMPANY [SECTION 2(23A)]:

Foreign company means a company which is not a domestic company.

Definition of “Assessee” – 4 Marks

under the Income-tax Act, 1961. In addition, the term includes –

APPLICABLE RATE OF TAX – AY 2020-21

Surcharge on Individual / HUF / AOP / BOI / Artificial Juridical Person

Or Total Income (including the income under the provisions of

Calculation of Marginal Relief:

Marginal Relief = Tax on Total Income including Surcharge

Tax Payable = Tax on Total Income including Surcharge

Rounding-off of Income [Section 288A]:

Rounding-off of Tax [Section 288B]:

Rebate of ` 12,500 for resident individuals having total income up to

OTHERS AMOUNT OF TAX SURCHARGE

Companies Domestic Co.: @30% @ 7 % of Tax Payable if TOTAL

Foreign Co.: @40% @ 2 % of Tax Payable if TOTAL

@ 5 % of Tax Payable if TOTAL

Section Income Income—tax

CONCEPT OF TAXATION OF THE AGRICULTURE INCOME

Two conditions which need to satisfied for partial integration are: