2.

3: Direct Taxes and Planning

Objective :

To give an integrated view of direct tax laws to assess and apply the laws
to business decisions.

Module - 1:

Basic framework of direct taxation - principles of direct taxation -

appraisal of annual Finance Act, tax planning and its methods, advance
tax rulings.

Module - 2 :

Salient features of company taxation, scheme of taxing business income

of companies, deductions / allowances, disallowances and depreciation.

Module - 3:

Computation of taxable income of companies - set - off and carry

forward of losses – deductions under Section 80.

Module - 4 :

Tax planning with respect to amalgamation and mergers, multinational

companies, double taxation treaties, ventures and foreign collaborations
- tax consideration in making or buy, own or lease, retain or replace.

Module - 5:

Procedure for assessment - deduction of tax at source, advance payment

of tax - refunds -appeals and revision.

1|Page
 Module I
BASIC FRAMEWORK OF DIRECT TAXATION

Tax: Tax is a compulsory payment made by every citizen of the country

to the government without expecting anything in return. In turn the
government will provide necessary infrastructural activities i.e.,
Construction of Dams, Roads, Providing Education facilities, Health care
facilities etc.

Types of Taxes:

Direct taxes: Direct tax is a tax where incidence and impact will be on
same person. In India direct taxes are controlled and monitored by
CBDT – Central Board of Direct Taxes.
Ex: Income tax.

Indirect taxes: Indirect tax is a tax where incidence and impact will be
on two different parties. In India indirect taxes are controlled and
monitored by CB&EC – Central Board of Excise and Customs.
Ex: GST and Customs duty.

History of taxation in India:

Tax was first Introduced In India in the year : 31-7-1860

By : Sir James Wilson

On Types of Incomes :
i. Income from landed property
ii. Income from trade and profession
iii. Income from securities
iv. Income from pay and pensions

2|Page
Basic Exemption

In the year 1860 : ₹200

Later it has been increased to : ₹ 500
Experiments : 1860 to 1886
1865 : Income tax was abolished
1869 : Again it was re-introduced.
1870 : Basic exemption : ₹750
1872 : Basic exemption : ₹1000
1873 : Again it was abolished
For next 5 years No Income tax was levied.
1886 : Income tax act passed by British

Tax imposed on:

(a) Income from salary and pensions
(b) Income from company’s
(c) Income from interest on securities
(d) Income from other incomes

1916 : Progressive rates of taxes were introduced.

1917 : Filing of returns made compulsory
For Company Assessee’s : ₹50, 000 was given as exemption limit
1918 : Current year was determined

1922 : Income tax act was passed –

(All India Committee recommendations- Direct Taxes Empowered
Committee)
1952 : For the first time Annual Finance act was done by Passing of
budget.

3|Page
1961 : Income tax act was passed
Invited: Prof. Nicolas Calder from Cambridge University to make
suggestions to Restructure the Indian taxation.
Sept. 1961 : Bill was formed
Applicable from : 1st April 1962
This enactment with 298 sections and 11 schedules and also large no. of
sub-sections and clauses is applicable to the whole India. Income tax
act of 1961 extended to whole India from 1st April 1962 including Jammu
and Kashmir and for the state of Sikkim from 1st April 1990 onwards.

BASIC FRAME WORK OF TAXATION

Study of taxation involves the application of the following:

1. INCOME TAX ACT 1961:

 Basic enactment
 Principles of taxation
 Basic concepts of income taxation
 Base of taxation
 298 sections , 11 schedules & large no. of sub-sections
 The rules has been amended on several occasions and almost every
year through the annual finance act.

2. INCOME TAX RULES 1962:

The Central Board of direct taxes (CBDT), which takes care of the
administration of the income taxes in India, has provided the rules of
computation of income and income tax. These rules are called as income
tax rules 1962.
3. FINANCE ACT: The Union Finance Minister of India presents a bill
called finance bill before the parliament along with his budget proposals.

4|Page
New rates of taxes

Proposed amendments to IT act 1961

Bill is passed in the parliament – signed by the president – becomes

finance act

4. CASE LAWS: Various judgments given in different high courts and

supreme courts of India to the application of a particular provision in the
income tax act 1961.
This happens when there is a dispute between an assessee and the
income tax department for the application of a particular provision in
the act. The court decision will be considered as long as the new
amended comes into effect.
PRICIPLES / CANNONS OF TAXATION: SUGGESTED BY
ADAM SMITH:

1. Cannon of equity
2. Cannon of certainty
3. Cannon of convenience
4. Cannon of economy
5. Cannon of productivity
6. Cannon of flexibility
7. Cannon of simplicity
8. Cannon of diversity

1. Cannon of equity: this emphasizes equality of wealth and income

distribution among the citizens of a nation. Taxes according to which
should be collected only from those who have the ability to pay the taxes.

5|Page
2. Cannon of certainty: the tax which each individual is bound to pay
ought to be certain and not arbitrary. The time of payment, the manner
of payment, the amount to be paid, etc.., to be clear and plain and it
should be as per the rules and regulations.

3. Cannon of convenience: it suggests that the mode and timing of

tax payment should be convenient to the tax payer and unnecessary
trouble should be avoided.

4. Cannon of economy: it recommends that the amount of tax to be

levied should be minimum possible. It is considered useless to impose
taxes, which are too widespread and difficult to administer.

5. Cannon of productivity: this advocates that the tax system should

be able to yield enough revenue to the government.

6. Cannon of flexibility: it presents that it should be possible for the

authorities, without delay, to revise the tax structure, both with respect
to its coverage and rates, to suit the changing requirements of the
economy and the govt.

7. Cannon of simplicity: it suggests that the system should be simple

to understand and implement.

8. Cannon of diversity: this principle recommends tax revenue should

come from diversified sources. A caution here is that too much
multiplicity of taxes is not good for the economy.

6|Page
Tax Planning
Tax planning can be defined as arrangement of one’s financial and
economic affairs by taking complete legitimate benefit of all deductions,
exemptions, allowances and rebates so that, tax liability reduces to
minimum.
Example:
X-individual
AY 2015-16 – GTI-3, 40,000 ₹.
Tax on GTI- 16,480₹
To reduce his liability, he deposit ₹ 50,000 in public provident fund
account. Consequently, his taxable income and tax liability thereof will
be reduced to ₹2, 90,000 and ₹11, 330 respectively.
Features of tax planning:
It comprises arrangement by which tax laws are fully complied

All legal obligations and transactions are met

Transactions do not take the form of colorable devises there is no

intention to deceit the legal spirit the tax law.

7|Page
 MODULE II
COMPANY TAXATION

Basic Concepts under Income Tax Act, 1961: Assessment:

It is a process of determining the total income and tax liability of an
assessee.

Types of Assessment:
 Self-Assessment
 Summary Assessment.
 Regular Assessment.
 Scrutiny Assessment.
 Best Judgment Assessment.
 Re- assessment
 Precautionary Assessment.

Assessment year U/s 2(9):

Assessment year refers to period of 12 months commencing from 1st
April of every year and ending on 31 march of subsequent year. It is the
year in which the income earned in the previous year will be put into tax.
For instance the current assessment year is 2018-19 i.e., 01/04/2018 –
31/3/2019.
Previous year U/s 3:
Previous year refers to period of 12 months commencing immediately
preceding the assessment year. It is the year in which income earned in
this year will be put to tax in the relevant assessment year.
For instance the current previous year is 2017-18. i.e., 01/04/2017 to
31/03/2018.

8|Page
Exceptions to the general rule of previous year:
 Income of non-resident shipping business.
 Income of persons leaving India for permanently or for a long
period of time.
 Income of bodies formed for short duration.
 Income of persons trying to transfer his/ her assets to avoid
payment of tax.
 Income of a discontinued business.

9|Page
Assessee u/s 2(7):
An assessee means a person from whom any tax or any other sum is
payable under the income tax act, 1961 and it includes:
 Every person in respect of whom any proceedings of loss is carried
on.
 A person who is entitled for refund of taxes.
 Deemed assessee.
 Assessee in default.

Person u/s 2(31)

Person includes:
 An Individual.
 A Hindu undivided family
 A Company
 A Firm
 An association of persons or body of individuals, whether
incorporated or not
 A Local authority
 Every artificial juridical person not falling with in any of the above
category.

INCOME:
Income includes:
 Profits and gains from business
 Dividend
 Voluntary contribution to any trust created wholly or partially for
charitable purpose.
 Any allowances given to the assessee.
 Any special allowances

10 | P a g e
  Any capital gain chargeable u/s 45.
 Any winnings from lotteries, crossword puzzles etc.

GROSS TOTAL INCOME

Gross total income is dealt u/s 14 of Income tax act, 1961. Gross Total
Income refers to the sum of total of various heads of incomes such as
 Income from Salaries.
 Income from House Property.
 Profit or gains from Business or Profession.
 Income from capital gains
 Income from other sources.

After allowing set off of losses and before giving deductions

u/s 80C to 80U.
TOTAL INCOME
The excess of gross total income after allowing deductions under section
80c to 80u of Income Tax Act, 1961.

Agricultural Income: u/s 2(1A)

Partly Agricultural Income and Partly Business
Income
Type of Income Agricultural Non -
Income Agricultural
Income
Growing and manufacturing of Tea 60% of income 40% of income

Growing and manufacturing of Rubber 65% of income 35% of income

Coffee grown & cured by the seller 75% of income 25% of income

Coffee grown, cured roasted and

grounded by 60% of income 40% of income
the seller with or without mixing chicory

11 | P a g e
Indian company U/s 2(26)
An Indian company means a company formed and registered under the
company’s act of 1956/2013 is called as on Indian company. Besides it includes
the following:
A company formed and registered under any law.
A corporation established by or under central, state or provisional act.
Any institution, association or body which is declared by board to be a co.
U/s 2(17)
A company formed and registered under any law in force in the state of
Jammu & Kashmir.
A company formed and registered under any law for the time being in force
in the union territories of Dadra and Nagar Haveli, Goa, Daman and Diu and
Pondicherry.
Domestic company: U/s 2(22A)
Domestic Company means an Indian company or any other company which in
respect of its liable to tax under the act, has made prescribed arrangements for
the declaration and payment of dividends within India in accordance with
section 194.
Foreign company U/s 2(23A):
It means a company which is not a domestic company, where the control &
management is fully situated outside India.
Closely held Company:
A company in which public are not substantially interested are known as
Closely held company.
Widely held Company:
A company in which public are substantially interested are known as widely
held company. Ex: Company owned by Government / RBI.

12 | P a g e
Section 25 Companies:
The companies which are formed only for praising art, culture, science and not
for profit making purpose.
A Company without Share capital:
Ex: BESCOM, KPTCL, Mysore Mudranalaya - RBI
Nidhi or Mutual benefit society:
A company owned by Co-operative society
Listed company.

General principles governing assessment of business income:

Business carried on by the assessee.
Business should be carried on during the previous year.
Income of previous year is taxable during the following AY.
Tax incidence arises in respect of all businesses.
Legal ownership vs. beneficial ownership.
Profits in case of winding up.
Real profit vs. anticipated profit.
Real profit vs. notional profit.
Income from exploiting a commercial asset is business income.
Recovery of sum already allowed as deduction.
Mode of book entries generally not relevant.
Illegal business.
Insurance receipts.
Losses incidental to trade.

13 | P a g e
 Tax Rates applicable for the AY 2017-18.

For Domestic Company

Type of Income Rate of Tax

1. Long term Capital Gain (LTCG) other than LTCG
liable for STT
 With Indexation 20%
 Without Indexation 10%

2. Long term Capital Gain (LTCG) liable for STT u/s

Exempted u/s
111A.
10(38)

3. Short term capital gain (STCG) other than liable for Flat rate of
STT 30%

4. Short term capital gain (STCG) liable for STT u/s

15%
111A.

5. Other incomes Flat rate of

 Turnover/ Gross receipts does not exceed Rs.5 29%
Crores in Financial Year 2014-15
Flat rate of
 Turnover/ Gross receipts exceed Rs.5 Crores in 30%
Financial Year 2014-15

14 | P a g e
 For Other than Domestic Company / Foreign Company

Type of Income Rate of Tax

1. Royalty received from Government or an Indian

concern in pursuance of an agreement made by it
with the Indian concern after March 31, 1961, but
before April 1, 1976, or fees for rendering technical 50%
services in pursuance of an agreement made by it
after February 29, 1964 but before April 1, 1976 and
where such agreement has, in either case, been
approved by the Central Government

2. Any Other incomes 40%

Rate of Surcharge
Company If Total income If Total income If Total income
does not exceeds exceeds Rs 1 exceeds Rs 10
Rs 1 Crore Crore but less Crore
than 10 Crores

Domestic Company Nil 7% of Income tax 12% of Income tax

Foreign Company Nil 2% of Income tax 5% of Income tax

Marginal Relief can be claimed if surcharge is applicable.

Rate of Cess:
 Education cess (EC) @ 2%.
 Secondary and Higher Education Cess (SHEC) @ 1%.
Note: In order to provide relief to newly setup domestic companies
engaged solely in the business of manufacture or production of article or
thing, it is proposed to amend the Act by way of insertion of new section
115BA, to provide that the income-tax payable in respect of the total
income of a domestic company for any previous year relevant to the

15 | P a g e
assessment year beginning on or after the 1st day of April,
2017 shall be computed at 25% at the option of the company, if, –
 The company has been setup and registered on or after 1st day of
March, 2016.
 The company is engaged in the business of manufacture or
production of any article or thing and is not engaged in any other
business
 The company while computing its total income has not claimed
any benefit under section 10AA, benefit of accelerated
depreciation, benefit of additional depreciation, investment
allowance, expenditure on scientific research and any deduction in
respect of certain income under Part-C of Chapter-VI-A other than
the provisions of section 80JJAA
 The option is furnished in the prescribed manner before the due
date of furnishing of income
Rate of Minimum Alternate Tax (MAT): (On Book Profit) u/s
115JB
For Domestic Company and Foreign Company = 18.5%
Note: Same as above Rate of Surcharge and Rate of Cess’s are applicable.

STEPS IN COMPUTATION OF TAX LIABILITY OF COMPANY

ASSESSEE
STEP 1 – Computation of Total income and tax liability as per
normal provisions of Income Tax act, 1961.
STEP 2 – Computation of Book Profit u/s 115JB and tax liability
on book profit as per section 115JB.
STEP 3 - Compare Step No 1 and Step No 2, WHICH EVER IS
HIGHER IS Tax Liability of the Company.
STEP 4- If Step 2 is greater than step 1, the difference between step
2 and step 1 is called as Tax Credit u/s 115JAA.

16 | P a g e
 Step 1 - Computation of Total income and tax liability
as per normal provisions of Income Tax act, 1961.
FORMAT FOR COMPUTATION OF TOTAL INCOME
AND TAX LIABILITY
Assessee: Assessment Year:
Residential Status: Previous Year:
PARTICULARS AMOUNT AMOUNT IN
IN ₹ ₹
Taxable income from House Property XXX
Taxable income from Business / Profession (W.N– 1) XXX
Taxable income from Capital Gain XXX
Taxable income from Other Sources XXX
Less: Set off of losses (inter head set off) (XXX)

GROSS TOTAL INCOME XXX

Less: Deductions u/s 80C to 80U (XXX)

TOTAL INCOME XXX

Tax liability on Total income as per rates
applicable XXX
Add: Surcharge (if any) XXX
Add: Education cess @ 2% of Income tax & surcharge XXX
Add: Secondary & Higher Education cess @ 1% of XXX
Income tax & surcharge
Total Tax Liability XXX
Less: Advance tax paid XXX
Less: Tax deducted at source (TDS) XXX
Less: Self-assessment tax paid XXX
(XXX)

BALANCE TAX PAYABLE OR (REFUNDABLE) XXX / (XXX)

Details Of Carry Forward Of Losses (If any)

17 | P a g e
 Calculation of Taxable income from Business /
Profession
1. If the Books of accounts are prepared under Mercantile or
Accrual system of accounting
PARTICULARS AMOUNT AMOUNT IN
IN ₹ ₹
Net profit or loss as per profit and loss account XXX
ADD:
1. Disallowed / inadmissible/ not allowable XXX
expenses and losses already debited to profit and
loss account
2. Business incomes not credited to profit and loss XXX
account
3. Overvaluation of Opening stock XXX
4. Undervaluation of Closing stock XXX XXX

SUB TOTAL XXX

LESS:
1. Allowed / Allowable/ Admissible Expenses and XXX
losses Which are not debited to profit and loss
account
2. Incomes credited to profit and loss account but XXX
chargeable to tax under other heads of income
3. Exempted incomes credited to P&L account XXX
4. Undervaluation of Opening stock XXX (XXX)
5. Overvaluation of Closing stock XXX

INCOME FROM BUSINESS / LOSS FROM XXX / (XXX)

BUSINESS
LESS: Brought forward Business Loss (only 8 AY’s
preceding PY) XXX
LESS: Brought forward Unabsorbed depreciation (XXX)
XXX
TAXABLE INCOME FROM BUSINESS XXX / (XXX)

18 | P a g e
 If the Books of accounts are prepared under Cash
system of accounting
PARTICULARS AMOUNT AMOUNT IN
IN ₹ ₹
Gross receipts from business activities XXX
ADD: Any other incomes XXX
SUB TOTAL XXX

LESS:
Expenses incurred in carrying out business activities
Any other expenses XXX (XXX)

INCOME FROM BUSINESS / LOSS FROM XXX / (XXX)

BUSINESS
LESS: Brought forward Business Loss (only 8 AY’s
preceding PY)
LESS: Brought forward Unabsorbed depreciation (XXX)

TAXABLE INCOME FROM BUSINESS XXX / (XXX)

STEP 2 – Computation of Book Profit u/s 115JB and

tax liability on book profit as per section 115JB
MINIMUM ALTERNATE TAX U/S 115JB

Normally a company is liable to pay tax on the total income computed in

accordance with the provisions of the Income Tax Act, 1961 but the Profit and loss
account of the company is prepared as per the provisions of the Company’s act.
There were large number of companies who had book profits as per their profits
and loss account but were not paying any tax because income computed as per
provisions of the income tax act was either Nil or negative or insignificant. In such
cases although the companies were showing book profits & declaring dividends to the
shareholders they were not paying any income tax. These companies are popularly
known as “Zero Tax Companies”.
In order to bring such companies under the income tax act net, section 115JA was
introduced with effect from Assessment year 1997-98.
From the Assessment year 2001-02 section 115JB regulates the provisions of
Minimum Alternate tax.

19 | P a g e
 Determination of Book Profits u/s 115JB
Adjustments to Net Profit to Convert Net profit into
Book profit
Particulars Amount Amount In
In ₹ ₹

Net Profit as per Profit & loss account XXX

ADD:
1. Income tax paid payable & the provisions there off. XXX
2. Amount transferred to any reserve, by whatever name called XXX
3. Provision for Unascertained liability XXX
4. Provision for losses of Subsidiary company XXX
5. Dividends paid or payable XXX
6. Expenses related to exempted incomes U/s 10,11 & 12 XXX
7. Amount of depreciation XXX
8. Amount of deferred tax or provision there off XXX
9. Provision for diminution in the value of any asset XXX XXX
Sub Total XXX
LESS:
1. Withdrawn from Reserves / Provisions created to Profit & loss XXX
account
2. Exempted incomes credited to Profit & loss account u/s 10, 11 & XXX
12.
3. Depreciation debited to Profit & loss account ( other than XXX
depreciation on revalued assets)
4. Amount withdrawn from Revaluation reserves to the extent of XXX
it does not exceed the amount of depreciation on account of
revaluation of assets with effect from 2007-08
5. Brought forward business loss
(accounting purpose) XXX
OR
6. Unabsorbed depreciation
(accounting purpose) XXX
XXXX
Whichever is Less
7. Income from business unit in Special economic zone XXX

8. Profit of Sick Industrial Unit XXX

9. Amount of deferred tax, if any such amount is credited to profit XXX (XXX)
& loss account
XXX /
BOOK PROFIT / (BOOK LOSS) (XXX)

20 | P a g e
STEP 3 - Compare Step No 1 and Step No 2,
WHICH EVER IS HIGHER IS Tax Liability of the
Company
Tax liability of Company Assessee:
Particulars Amount in
₹
Tax liability Computed as per normal provisions of Income Tax Act, XXX
1961
OR
Tax liability Computed under section 115JB i.e.,
(MINIMUM ALTERNATIVE TAX) XXX

WHICH EVER IS HIGHER - Tax Liability XXX

STEP 4- If Step 2 is greater than step 1, the difference between step

2 and step 1 is called as Tax Credit u/s 115JAA.
Tax Credit u/s 115JAA:
Excess of book profit tax over tax computed as per normal provisions of
income tax is called Tax credit. It can be carried forward for
subsequent 10 Assessment years and can be utilized to pay the tax
when the tax liability exceeds the tax on book profit.
Tax credit = Tax computed as per book profit Less Tax computed as
per normal provisions of income tax.

21 | P a g e
DEDUCTIONS / ALLOWANCES UNDER SECTION 30 TO 44
OF INCOME TAX ACT OF 1961.
1. Rent, rates, taxes, repairs and insurance paid on Building.
Sec 30:
Under section 30 the following deductions (except capital expenditure)
are allowed in respect of rent, rates, taxes, repairs and insurance for
premises used for the purpose of business or profession.
2. Repairs and insurance of Machinery, Plant and Furniture.
Sec 31:
The expenditure incurred on current repairs and insurance (other than
capital expenditure) in respect of plane, machinery and furniture used
for business purpose is allowed as deduction under this section.

UNABSORBED DEPRECIATION u/s 32(2):

Step 1: Depreciation allowances of the Previous year is first deductible
for the income chargeable under the head “profit and gains of business
or profession”
Step 2: If depreciation allowances is not fully deductible because of
absence or inadequacy of profits, it is deductible from income under
other heads except the head “salaries” for the same A.Y.
Step 3: If depreciation allowances is still unabsorbed, it can be carried
forward to the subsequent A.Y. by the same assessee. [No time limit –
any number of years].
4. Tea / Coffee / Rubber Development Account. Sec 33AB:
An assessee can claim deduction u/s 33AB if certain conditions are
satisfied the conditions are as follows:
a) It must be engaged in business of the growing and manufacturing tea
or coffee or rubber in India.

22 | P a g e
b) It must make the Deposit with NABARD ( National Bank for
Agricultural and Rural Development) any amount in an account
maintained by the assessee with that bank in accordance with, and for
the purpose specified in, a scheme approved by Tea/ Coffee/ Rubber
Board.
c) The aforesaid amount shall be deposited within 6 months from the
end of the previous year or before the due date of furnishing the return
of income whichever is earlier.
Amount of deduction:
a. a sum equal to amounts deposited
OR
b. 40 percent of the profits of such business.
Whichever is less.
d) The deduction allowed under this provision will be Withdrawn if the
asset acquires in accordance with the scheme is sold or otherwise
transferred within 8 years of the end of the previous year in which it is
acquired.
e) This earlier allowed deduction will not be withdrawn in cases where
the asset is transferred within 8 years period to Government, Local
authority, Statutory Corporation or Government Company.

5. Site restoration fund. Sec 33ABA:

The assessee must satisfy the following conditions:
1. The taxpayer is engaged in the business of the prospecting for, or
extraction or production of, petroleum or natural gas or both in India.
2. The central government has entered into an agreement with the
taxpayer for such business.

23 | P a g e
3. It must deposit with SBI any amount in an account maintained by the
assessee with that bank in accordance with scheme approved by the
Government of India in the Ministry of Petroleum and Natural Gas.
4. The aforesaid amount shall be deposited before the end of the
previous year.
5. The assessee should submit the audit report in form no 3AD along
with the return of income.
Amount of deduction:
a. A sum equal to amount deposited
OR
b. 20 percent of the profit of such business.
Whichever is less.
 The deduction allowed under this provision will be Withdrawn if
the asset acquires in accordance with the scheme is sold or
otherwise transferred within 8 years of the end of the previous year
in which it is acquired.

6. Expenditure on Scientific Research. Sec 35:

The term “scientific research” means “any activity for the extension of
knowledge in the field of natural or applied sciences including
agriculture, animal husbandry or fisheries”. Under this section deduction
in respect of scientific research may be classified as under.

I. Expenditure on research carried on by the assessee:

a. Revenue expenses incurred by the assessee himself:
Where the assessee himself carried on scientific research and incurs
revenue expenditure, deduction is allowed for such expenditure only if
such research relates to the business.

24 | P a g e
Revenue expenditure incurred within three years immediately preceding
the commencement of business can also be claim by the assessee.

b. Capital expenditure incurred by the assessee

himself:
 Where the assessee incurs any expenditure of capital in nature on
scientific research related to his business, the whole of such
expenditure incurred in any previous year is allowable as
deduction for that previous year.
 Such expenses may be on plant or equipment for research or
constructing building (EXCLUDING COST OF LAND) for research
of expenses of capital nature connected with research.
 Capital expenditure incurred within three years immediately
preceding the commencement of business can also be claim by the
assessee.
 No deduction by way of depreciation is admissible in respect of an
asset used in scientific research.
 The capital expenditure on scientific research related to his
business, and then deduction is available even if the asset is not
put into use for research and development purpose during the
previous year.

c. Expenditure in in-house research and development

expenses. Sec 35(2AB):
This section provides a weighted deduction in respect if
expenditure on in-house research and development expenses
subject to the following conditions.

25 | P a g e
1. The taxpayer is a company.

2. It is engaged in the business of manufacture or production of

any article of thing except those specified in the 7th schedule.

3. It incurs expenditure on scientific research and such

expenditure is of capital nature (except cost of Land) or revenue
nature.

4. The above expenditure is incurred on in-house research and

development facility up to 31st March, 2012.

5. The prescribed authority approves the research and

development facility.

6. The taxpayer has entered into an agreement with the

prescribed authority for co-operation in such research and
development facility and for audit of the accounts maintained
for that facility.

Amount of deduction:

For Specified Business:

a) A sum equal to 200% of the expenditure so incurred shall be

allowed as deduction.

b) A sum equal to 100% of the expenditure so incurred shall be

allowed as deduction on Building.

c) No deduction is allowed on the Land.

26 | P a g e
Normal Business: A sum equal to 100% of the expenditure
so incurred shall be allowed as deduction.

II. Contribution to Others:

a. Contribution to Outsiders, approved research association or
University, college or other institution:

Where the assessee does not himself carry on scientific research but
makes contribution to other institutions for this purpose, a weighted
deduction is allowed of 175% of any sum paid to a scientific research
association or to a university, college or other institution.

b. Contribution to National Laboratory:

Any sum paid by an assessee to a “ National Laboratory” or a recognized

University or an Indian Institute of Technology or a company indulged
in in-house research or a specified person for carrying out programs of
scientific research, approved by the prescribed authority, is eligible for
weighted deduction is allowed of 200% of the sum paid.

c. Contribution to Statistical and Social science research or to

Company:

Any sum paid by an assessee to a scientific research association or to a

university, college or other institution carrying out Statistical and Social
science research, weather relates to business or not, a weighted
deduction is allowed of 125% of any sum paid.

7. Expenditure on acquisition of patent rights and copy rights.

Sec 35A:

27 | P a g e
Any capital expenditure incurred prior to 1st April, 1998 in acquiring
patent rights or copyrights used for the purpose of business, is allowed as
business expenditure in equal instalments over a period of 14 years.

Any capital expenditure incurred on or after 1st April, 1998 in acquiring

patent rights or copyrights used for the purpose of business,
Depreciation can be claimed @ 25% under section 32 of the income tax
act of 1961.

8. Expenditure on acquisition of Know-How. Sec 35AB:

 Any capital expenditure incurred prior to 1st April, 1998 in
acquiring patent rights or copyrights used for the purpose of
business, is allowed as business expenditure in equal instalments
over a period of 3 years.
 Any capital expenditure incurred on or after 1st April, 1998 in
acquiring patent rights or copyrights used for the purpose of
business, Depreciation can be claimed @ 25% under section 32 of
the income tax act of 1961.

9. Amortisation of Telecom licence fees. Sec 35ABB:

Conditions to be satisfied to claim deductions under this section they

are:

 The expenditure is capital in nature.

 It is incurred for acquiring any right to operate telecommunication
services.
 The expenditure is incurred either before the commencement of
business of thereafter at anytime during any previous year.
 The payment for which has actually been made to obtain licence.

Amount of deduction:
Deduction would be allowed in Equal instalments in the period

28 | P a g e
Starting from: year of payment of license fees or year of
commencement of business whichever is later.
Ending on: year in which the license comes to an end.

10. Expenditure on eligible projects or scheme. Sec35AC:

Any taxpayer can claim deduction u/s 35AC if the payment is made to a
public sector company or local authority or to an association or
institution approved by National Committee for carrying out any eligible
projects or schemes. The total of such expenditure is allowed under this
section @100%.

11. Deduction in respect of expenditure on specified business.

Sec 35AD:
Deduction under this section shall be allowed to the assessee who is
carrying on any of the following specified business:
i. Setting up and operating of cold chain facility.
ii. Setting up and operating a warehousing facility for storage of
agricultural 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.

Amount of deduction:
 If the specified business is commenced operation before 31 March,
2012- 100% deduction of the expenses incurred.
 If the specified business is commenced operation on or after April
1,, 2012- 150% deduction of the expenses incurred.

29 | P a g e
12. Payment to association and institutions for carrying out
rural development programmes. Sec35CCA:
This section provides deduction of sums paid by an assessee to:
a. Any association or institution to be used for carrying out any
programme of rural development approved before March 1, 1983.
b. An association or institution which has its object the training of
persons for implementation of a rural development program approved
before March 1, 1983.
c. The National fund or rural development set up by the government.
d. The National Urban Poverty Eradication Fund set up and notified by
the Central Government.

13. Payment for carrying out programmes of Conservation of

Natural resources (Afforestation). Sec 35CCA:

Any expenditure incurred for carrying out any programs of conservation

of natural resources full amount of expenditure will be allowed as
expenditure under this section.

14. Expenditure on Agricultural extension project u/s 35CCC:

150% of amount of expenditure incurred shall be allowed as deduction.

(From AY 2013-14)

15. Expenditure for notified skill development project u/s

35CCD:

150% of amount of expenditure incurred (excluding cost of any land or

building) shall be allowed as deduction. (From AY 2013-14).

30 | P a g e
 16. Amortisation of Preliminary expenses. Sec 35D:

Deduction under this section available only to Resident assessee,

whether corporate or non-corporate.

When expenses incurred

Before commencement of After commencement of business
business
For setting up any undertaking
or business
The aggregate amount of the
qualifying expenditure should
not exceed
Corporate Assessee
5% of Cost of project
OR
5% of Capital employed
Whichever is Higher
Non- Corporate Assessee
Only 5% of Capital employed
In connection with extension
 If the expenses incurred before April 1,
1998- One-tenth of the qualifying
expenditure is allowed as deduction.
 If the expenses incurred on or after April
1, 1998- One-fifth of the qualifying
expenditure is allowed as deduction in
each of the 5 successive years beginning
with the year in which the business
commences.

17. Amortisation of expenditure in case if Amalgamation /

Demerger. Sec 35DD:
 The taxpayer is an Indian company.
 It incurs expenditure is allowed as deduction in 5 successive
years in 5 equal instalments.
 The first instalment is deductible in the previous year, in which
amalgamation/ demerger take place.

31 | P a g e
  No deduction shall be allowed in respect of the above
expenditure under any other provision of the Act.

18. Amortisation of expenditure under voluntary retirement

scheme. Sec 35DDA:
 Expenditure is incurred in any previous year by way payment of
any sum to an employee in connection with his voluntary
retirement under any scheme of voluntary retirement.
 One Fifth (1/5) of the amount so paid shall be deducted for that
previous year, and the balance shall be deducted in equal
instalment for each of the 4 immediately succeeding previous year.
 This above rule is applicable even if the scheme if voluntary
retirement has not been framed in accordance with guidelines
prescribed u/s 10(10C).

19. Amortisation of expenditure on prospecting, etc., for

development of certain minerals. Sec 35E read with Seventh
Schedule:
 Deduction under this section is available only to Resident Assessee.
 The qualifying expenditure should be incurred during the “Year of
Commercial production” and four years immediately preceding
that year.
 Expenditure incurred wholly and exclusively on any operations
relating to prospecting for any minerals specified in the Seventh
Schedule or on the development of a mine or other natural deposit
of any such mineral.

32 | P a g e
Qualifying expenditure:
 Expenditure on the acquisition of the site of the source or deposits
of any specified minerals or group of associated minerals or of any
rights in or over such site or deposit.
 Expenditure of a capital nature in respect of any building,
machinery, plant or furniture for which depreciation is admissible
u/s 32.
Amount of deduction:
One-tenth of “qualifying amount”
Or
Income arising from commercial exploitation of any mine
Whichever is less.

20. Deductions under section 36:

The following are permissible while computing income from Business/
Profession.
1. Insurance premium paid.
2. Insurance premium on health of employees.
3. Bonus or Commission paid.
4. Interest borrowed on capital.
5. Discount on Zero coupon bonds.

6. Employer’s contribution to recognized provident fund and

approved superannuation fund.
7. Contribution towards approved gratuity fund.
8. Write off of allowance for animals.

33 | P a g e
9. Bad debts.
 Bad debts recovered allowed earlier = in earlier previous
year is allowed as deduction hence, it should be Considered for tax
purpose.
a. If it is NOT considered in P & L account add it to the net
profit.
b. If it is considered in P & L account IGNORE IT.
 Bad debts recovered Disallowed earlier = as it is already
considered for tax purpose hence, it is not taxable.
a. If it is credited to P & L account it should be Deducted.
b. If it is NOT credited to P & L account IGNORE IT.

10. Family planning:

Any bonafied expenditure incurred by a company for the purpose of

promoting family planning among its employees, is allowable as
deduction.

Revenue Expenditure: Fully allowed as deduction.

Capital expenditure: Such expenditure is allowable as deduction in 5

equal instalments from the previous year and 4 years succeeding the
previous year.

11. Advertisement expenses:

Deduction shall be allowed for advertisement except expenditure
incurred by an assessee on advertisement in any souvenir, brochure,
pamphlet etc published by political party.

12. Security transaction tax (STT) provided incomes considered

under income from Business allowed as deduction.

13. Banking cash transaction tax (BCTT) - allowed as deduction.

34 | P a g e
14. Commodity transaction tax (CTT) – allowed as deduction.

15. Entertainment expenditure, travelling expenditure, guest

house expenses- Fully allowed as deduction.

16. The following are NOT allowed expenditures.

a. Provision / Reserve for bad debts.

b. Provision for taxation.

c. Provision for Gratuity,

d. Provision for superannuation fund.

e. Employee’s contribution towards staff welfare scheme.

f. Donation, gift and charity.

g. Past losses charged to profit and loss account.

h. All expenses of capital nature (except scientific research).

i. All expenses relating to other heads of incomes.

j. Fines and Penalties.

k. Personal expenses of owners

17. General deductions under section 37:

In order to claim deduction under this section, the following conditions

should be

Satisfied:

1. The expenditure should not be of a nature described u/s 30 to 36.

2. It should not be in the nature of capital expenditure.

3. It should not be personal expenditure of the assessee.

35 | P a g e
4. It should have been incurred in the previous year,

5. It should be in respect of business carried on by the assessee.

6. It should have been expended wholly and exclusively for the purpose
of such business.

Specific Disallowances under the Act:

1. Amount not deductible under section 40(a)

In case of any assessee, the following expenses are expressly disallowed

u/c 40(a):

i. Any interest, royalty, fees for technical services or similar sum payable
outside India (to any person) or to a non-resident or foreign company in
India on which tax has not been deducted at source.

ii. Any sum paid on account of Income tax.

iii. Any sum paid on account of wealth tax under the Wealth- tax Act,
1957

iv. Any tax of the similar nature chargeable under any law in force in any
foreign country.

v. Salary payable out of India if tax has not been paid or deducted at
source.

vi. Fringe benefit tax.

36 | P a g e
2. Payment to Relative or a person having Substantial Interest.
Sec 40A(2):

Any expenditure incurred by an assessee in respect of payment of which

has been made to the persons who are relative or having substantial
interest is liable to be disallowed.

The amount of deduction

The expenditure to be excessive or unreasonable having regard to Fair

Market Value (FMV) of goods or services of facilities etc.

Substantial interest: a person is deemed to have substantial interest

in the business if such person is the beneficial owner of at least 20% of
equity capital at any time during the previous year.

3. Amount not deductible in respect of expenditure exceeding

Rs. 20000. Sec 40A(3):

If an assessee incurs any expenditure in respect of which payment in

excess of Rs. 20000 is made otherwise than by an Account payee cheque
or Account payee demand draft, 100 percent of such expenditure will be
disallowed.

However, In case of assessee being transporters i.e., hiring, plying or

leasing of goods carriage shall have a limit of Rs. 35000.

In the following cases the above provision does not apply:

 Payment made to banking and other credit institution- RBI,

Commercial banks, LIC, IFCI, IDBI, and SFC’s.
 Payment made to Government- Central and State Government.
 Payment through banking system- Letter of credit, bill of
exchange.

37 | P a g e
  Payment to a cultivator, grower, and producer in respect of
purchase of agricultural or forest produce or animal husbandry or
dairy or poultry or fish or fish products.
 Payment made to a producer in respect of the purchases of
products manufactured processed without the aid of power in a
cottage industry.

4. Provision for Gratuity – inadmissible and any Amount in respect

of provision for unapproved gratuity fund is inadmissible. Sec
40A(7):

5. Contribution to unapproved fund – inadmissible.

6. Disallowance of Unpaid Liability. Sec 43B:

Deduction in respect of the following is allowed only if the payment is

made on or before the due date u/s 139(1) of submission of return of
income.

 Any sum payable by way of tax or duty or fee.

 Any sum payable by an employer by way of contribution to any
provident fund or superannuation fund or any other fund for the
welfare of the employees.
 Any sum payable as bonus or commission to employees for service
rendered.
 Any sum payable as interest on any loan or borrowing from a
public finance institution i.e., ICICI, IFCI, IDBI, LIC and UTI.
 Interest on any loan or advance taken from a scheduled bank
including co-operative bank.
 Any sum payable by an employer in lieu of leave at the credit of his
employees.

38 | P a g e
However, if the payment is made after the due date of filing
the return of income, then the deduction would be allowed in
the “Year of Payment”.

Compulsory maintenance of books of accounts u/s 44AA.

In case of Specified Professionals:
Every person carrying on legal, medical engineering or architectural
profession or the profession of accountancy or technical consultancy or
interior decoration or any other profession as is notified by the Board in
the official gazette.

If their gross receipts from profession exceeds Rs. 1, 50,000 in any one
of the 3 years immediately preceding the previous year. Such persons are
required to maintain books of accounts and other documents.

In case of Non - Specified Businesses / Professionals:

If income from business or profession exceeds Rs. 1, 20,000 as total

sales or turnover or gross receipts and exceeds Rs.10,00,000 in any one
of the 3 years immediately preceding the previous year. Such persons are
required to maintain books of accounts and other documents.

Compulsion of audit of accounts u/s 44AB.

The following persons are required to get their accounts compulsorily

audited by a chartered accountant:

 A person carrying on business, if the total sales, turnover or gross

receipts in business for the accounting year relevant to assessment
year exceed or exceeds Rs. 1 Crore.

39 | P a g e
  A person carrying on profession, if his gross receipts in profession
for an accounting year or years relevant to any of the assessment
year exceeds Rs. 25 Lakhs.
 Persons who are covered under section 44AD, 44AE, 44AF.

Computation of income on estimated basis in case of taxpayers

engaged in the business of plying, leasing or hiring trucks. Sec
44AE:

 The scheme applies to any person owning not more than 10 goods
carriages.
 Income from goods carriage being Heavy or Other than Heavy
goods vehicle is estimated @ Rs. 7,500 for every month or part
of a month during which the goods carriage is owned by the
assessee.

40 | P a g e
 DEDUCTIONS FROM GROSS TOTAL INCOME
UNDER SECTION 80 C TO 80U

Section 80G: Deduction in respect of Donation

Amount of Deduction

Deduction without any ceiling limit Deduction with ceiling limit

1. Without any ceiling limit

Amount of deduction = Amount donated to institutions X
percentage (%) specified
Donation given to / Donee Maximum Limit Percentage specified
as deduction
a. National Defense Fund set up by the Central Not Applicable
Government
b. Prime Minister's National Relief Fund Not Applicable
c. Prime Minister's Armenia Earthquake Relief
Fund Not Applicable
d. Africa (Public Contributions — India) Fund Not Applicable
e. National Foundation for Communal Harmony Not Applicable
f. An approved university/educational Not Applicable
institution
g. The Maharashtra Chief Minister's Relief fund Not Applicable
and the Chief Minister's Earthquake Relief 100 Percent
Fund
h. Any fund set up by the government of Gujarat Not Applicable
for providing relief to victims of earthquake
in Gujarat
i. Zila Saksharta Samiti Not Applicable
j. National Blood Transfusion Council and
State council for Blood Transfusion Not Applicable
k. Fund set up by a state Government for the
medical relief to the poor Not Applicable

41 | P a g e
l. National Blood Transfusion Council and
State Council for Blood Transfusion Not Applicable
m. Fund set up by a state Government for the
medical relief to the poor Not Applicable
n. Central Welfare Fund of the Army and Air
Force and the Indian Naval Benevolent Fund Not Applicable
o. Andhra Pradesh Chief Minister's Cyclone
Relief Fund Not Applicable
p. National Illness Assistance Fund Not Applicable
q. Chief Minister's Relief Fund or Lieutenant
Government’s Relief Fund. Not Applicable
r. National Sports Fund or National Cultural Not Applicable
Fund or Fund for Technology Development
and Application. 100 Percent
s. Any trust, institution or fund to which section
80G (5C) applies for providing relief for Not Applicable
victims of earthquake in Gujarat (contribution
can be made during January 26, 2001 and
September 30, 2001).
t. National Trust for Welfare of Persons with
Autism, Cerebral Palsy, Mental Retardation Not Applicable
and Multiple Disabilities
u. Swachh Bharath Kosh Not Applicable
v. Clean Ganga Fund (amount donated by
residents only) Not Applicable
w. National fund fir Control of Drug Abuse (AY
2016-17) Not Applicable
x. National Children's fund Not Applicable

y. Government or any approved local authority,

institution or association to be utilized for the With Limit
purpose of promoting family planning.
z. The Indian Olympic Association or to an
institute notified by the Central Government
for the development of infrastructure for With Limit
sports and games in India ; or the sponsorship
of sports and games in India (only donation
by a company)
a. Jawaharlal Nehru Memorial Fund Not Applicable
b. Prime Minister's Drought Relief Fund Not Applicable

42 | P a g e
 c. Indira Gandhi Memorial Trust Not Applicable
d. Rajiv Gandhi Foundation Not Applicable
e. Any other fund or any institution which
satisfies conditions mentioned in section With Limit
80G(5)
f. Government or any local authority to be
utilized for any charitable purpose other than 50 Percent
the purpose of promoting family planning With Limit

g. Any corporation constituted in India by (or

under) any law enacted either for the purpose
of dealing with and satisfying the need for
housing accommodation or for the purpose of
planning, development or improvement of
cities, towns and villages, or for both.
With Limit
h. Any corporation specified in section
10(26BB) for promoting interest of minority
community
i. Any notified temple, mosque Gurudwara,
church or other place

2. With ceiling limit

Step 1: Gross Qualifying amount = Total amount of donation given.
Step 2: Net Qualifying amount:
Net Qualifying amount = Amount of donation given to institution
(Gross Qualifying amount)
OR
10% of Adjusted Gross Total Income (AGTI)
Whichever is Less
Amount of deduction = Net Qualifying amount X percentage (%)
specified

43 | P a g e
 ADJUSTED GROSS TOTAL INCOME (AGTI)
Gross Total Income XXX
Less: Long term capital gain (XXX)
Less: Special. Short Term Capital Gain U/s 111A (XXX)
Less: Deduction under section 80C — 80U (Except U/S80G) (XXX)
Less: Exempted incomes included in GTI (XXX)
Add: Casual incomes XXX
ADJUSTED GROSS TOTAL INCOME (AGTI) XXX

100 % Category:
 Government or any approved local authority, institution or
association to be utilized for the purpose of promoting family
planning.
 The Indian Olympic Association or to an institute notified by the
Central Government for the development of infrastructure for
sports and games in India ; or the sponsorship of sports and games
in India (only donation by a company).

50% Category:
 Any other fund or any institution which satisfies conditions
mentioned in section 80G(5)
 Government or any local authority to be utilized for any charitable
purpose other than the purpose of promoting family planning
Note:
 Donation can be given only in cash or cheque or draft.
 Donation given in the form of kind is not eligible for deduction.
 No deduction will be allowed as deduction u/s 80G in respect of
donation in cash of an amount exceeding Rs.10, 000 from the AY
2013-14.

44 | P a g e
Section 80 GGB: Deduction in respect of contribution given by
companies to political parties or electoral trust.
Any sum contributed by the assessee during the previous year to any
political party or an electoral trust shall qualify for deduction under this
section. The contribution may be in the form of advertisement
expenditure in the souvenir / brochure owned by a political party.
From the Assessment year 2014-15, no deduction shall be allowed in
respect of any sum contributed by way of cash.

Sec 80IA: Deduction in respect of profits and gains from

Industrial undertaking or enterprise engaged in
infrastructure development
This section is available to the following business carried by an
undertaking:
Case 1: Provision of infrastructure facility.
Case 2: Telecommunication services.
Case 3: Industrial parks.
Case 4: Power generation, transmission & distribution or substantial
renovation and Modernizations of existing distance lines.
Case 5: Undertaking setup for reconstruction of power Unit
Case 6: A Cross Country natural gas distribution network.

Case 1: Infrastructure facility:-

The following conditions needs to be satisfied,
(a) The undertaking should be engaged in providing infrastructure
facility.
(b) The undertaking should be owned by Indian company.
(c) There should be agreement with central government.

45 | P a g e
If the above conditions are satisfied, then
Deduction = 100% of the profit for 10 years commencing from the
initial Assessment year.
Infrastructure facility means:-
 A road including a bridge or a rail system.
 A highway project including housing or other activities being an
integral part of the highway project.
 A water supply project, water treatment system, irrigation project,
sanitation, and sewerage system or solid waste management
system.
 A port, airport, inland waterway or inland port.

Initial assessment year means, the Assessment year specified by the

assessment at his option to be the initial year not following beyond the
15th Assessment year starting from the previous year in which the
enterprise beings operating and maintaining the infrastructure facility.
However the benefit of Deduction is available only for 10 consecutive
A.Y. following within a period of 15th A.Y. starting from the P.Y. in which
the assessee begins operating & maintaining such infrastructure
facility.(10 / 15)
In case of the assessee is involved in providing infrastructure facilities
such as a road including a bridge or a rail system.
 A highway project including housing or other activities being an
integral part of the highway project.
 A water supply project, water treatment system, irrigation project,
sanitation, and sewerage system or solid waste management
system. The deduction will be allowed in 10 years out of 20
consecutive assessment years. ( 10 / 20)

46 | P a g e
Power of Assessing officer to re-compute profit:-
The assessing officer has power to re-compute profit in the following two
situations:-
(i) Transfer between two units owned by the taxpayers:-
The following conditions should be satisfied:
 The taxpayer carries on two or more businesses.
 The business which is eligible for deduction under Sec.80IA,
transfer goods to such business which is not eligible for deduction
U/s 801A.
 The consideration for such transfer which is recorded in the books
of accounts is not equal to market value of such goods.

(ii) Transfer by Assessee to any other person:-

 The taxpayer has some business transaction with any other person.
 The business transaction is such that it produces more than the
ordinary profits.
 This is due to close connection between the taxpayer and the other
person.

If the above conditions are satisfied in the two cases mentioned above,
the Assessing Officer (AO) will re-compute the profits as if the transfer
has been made at the normal market price.
Consequences of merger/Amalgamation:-
Where any undertaking of an Indian company eligible for sec. 80IA
deduction is transferred before the expiry of 10 years of tax holiday to
any other Indian company in a scheme of amalgamation or demerger,
then the deduction will be available as follows:-
(i) Before the P.Y. in which the amalgamation / demerger takes place,
deduction is available to amalgamating/demerged company.

47 | P a g e
(ii) From the year in which the amalgamation/Demerger takes place
(including that year) the amalgamated company or the resulting
company will be entitled to claim deduction U/s 80IA for the unexpired
period of tax holiday.

Case 2: Telecommunication services: -

The following condition should be satisfied.
(i) It should be a new undertaking.
(ii) It should not be form by transfer of old plant & machinery.
(iii) The undertaking should be engaged in providing telecommunication
services.
If the above conditions are satisfied, then

Deduction = 100%of the profit of such business for 1st five years starting
from the initial A.Y. and 30% of the profits of such business for the next
five years.

*** Audit report, re-computation of profit by assessing officer

consequence of merger/amalgamation [same as case 1]

Case 3: Industrial park or special economic zone:-

The following condition should be satisfied

The industrial undertaking should develop, develop and operate or

maintain & operate an industrial park and special economic zone
notified for this purpose in a scheme formed by central government.

If the above condition is satisfied,

Deduction = 100% of profit for first 10 years starting from initial A.Y.

The assessee has the option to claim deduction for 10 consecutive

assessment years out of 15 years beginning from the year in which the

48 | P a g e
undertaking develops an industrial park or develops a special economic
zone.

*** Audit report, re-computation of profit by assessing officer

consequence of merger/amalgamation [same as case 1]

Case 4: Power distribution or generation:-

The following condition should be satisfied:-

 It should be a new undertaking or an existing undertaking having

substantial expansion.
 It should not be formed by splitting up of an existing undertaking.
 It should not be formed by transfer of old plant & machinery [20%
old is allowed]. Second hand machinery imported from abroad
which has not been used in India in any time at past would be
considered as new machinery.
 It should be engaged in generation or generation and distribution
of power.

If the above condition are satisfied,

Deduction = 100% of the profits of such business for 10 years starting

from initial A.Y.

The assessee has the option to claim deduction for 10 consecutive

assessment years out of 15 years beginning from the year in which the
undertaking generates power, commences transmission or distribution
lines.

*** Audit report, re-computation of profit by assessing officer

consequence of merger/amalgamation [same as case 1]

49 | P a g e
Case 5: Reconstruction of power unit:-
The following condition should be satisfied,
 It should be owned by an Indian company.
 It should be set-up for reconstruction or revival of power-
generating unit before 30th Nov, 2005.
 Such undertaking begins to generate or transmit or distributing
power before 31' March, 2007.

If the above condition are satisfied, then

Deduction = 100% of profit of such business for first 10 years starting
from initial A.Y.
The assessee has the option to claim deduction for 10 consecutive
assessment years out of 15 years beginning from the year in which the
undertaking generates power, commences transmission or distribution
lines.

*** Audit report, re-computation of profit by assessing officer

consequence of merger/amalgamation [same as case 1]

Section 80IAB: Deductions in respect of profits and gains from an

undertaking or enterprise engaged in development of Special Economic
Zone (SEZ)

Section 80-IAB provides deduction to the developers of special

zone.

Conditions - The following conditions should be satisfied-

 The taxpayer is a developer of a special economic zone.

 The gross total income of the taxpayer includes profit and gains
derived by an undertaking from any business of developing a
special economic zone. Such special economic zone is notified on
or after April 1, 2005.
50 | P a g e
  The books accounts of the taxpayer are audited.
 Return of income should be submitted on or before the due date of
submission of return of income given by section 139(1)

Amount of deduction -If the above conditions are satisfied, the

taxpayer can claim 100 percent deduction in respect of the aforesaid
profit.

PERIOD OF DEDUCTION - The aforesaid deduction is available for

10 consecutive assessment years. The deduction may be claimed, at the
option of the taxpayer, for any 10 consecutive assessment years out of 15
years beginning from the year in which the special economic zone has
been notified by Central Government.

TRANSFER OF UNDERTAKING:
If the taxpayer who develops a special economic zone on or after April 1,
2005 ('transferor") transfers the operation / maintenance of such zone to
another developer ("transferor"), then deduction shall be allowed to the
transferee for the remaining period of 10 years as if the operation and
maintenance were not so transferred. Similar rule will be applicable in
the case of amalgamation of an Indian company which has developed a
special economic zone with another Indian Company.
Other Points — one should also keep in view the following points:
1. The profits and gains from the eligible business shall be computed as if
eligible business were the only source of income of the assessee during
the relevant assessment year.
2. The Assessing Officer has power to re-compute profit in some cases.
These cases are given by section 80-IA.
3. Where any amount of profits and gains is claimed and allowed as
deduction under section 80-IAB for any assessment year, deduction to
the extent of such profits and gains shall not be allowed under sections

51 | P a g e
80HH to 8ORRB and shall in no case exceeds profits and gains of such
eligible business.

Sec. 80IAC: Deduction in respect of eligible Start-up

(Applicable w.e.f AY 2017-18)
Conditions:
1. The assessee is a company or limited liability company (LLP) and
engaged in eligible business.
Eligible business means a business which involved innovation,
development, deployment or commercialization of new products,
processes or services driven by technology or intellectual property.
2. The above company or LLP is incorporated after 31st March, 2016 but
before 1st April, 2019.
3. Annual business turnover of the company or LLP does not exceed Rs.
25 Crore in any of the Five previous years beginning 1st April, 2016
(during 2016-17 to 2020-21)
4. It holds certificate of eligible business from Inter-Ministerial Board of
Certification as notified in the Official Gazette by the Central
Government.
5. The above company or LLP is not formed by splitting up, or the
reconstruction, of a business already in existence.
6. It is not formed by the transfer to a new business of machinery or
plant previously used for any purpose.

52 | P a g e
Amount of Deduction:
If the above conditions satisfied 100 percent of the profits and
gains derived from such business is deductible for 3 consecutive
assessment years out of 5 consecutive assessment years
beginning from the year in which the eligible start-up is incorporated.
Sec. 80IB: Deduction in respect of profits and gains from
certain undertakings other than infrastructure development
undertakings.
Under this section is available in the following cases:-
(i) Business of industrial undertaking.
(ii) Operation of ship.
(iii) Hotels
(iv) Industrial research.
(v) Production of Mineral oil.
(vi) Developing and Building housing projects.
(vii) Business of processing, preservation & packaging of fruit or
vegetables or integrated, handling, storage and transportation of food
grain units.
(viii) Multiplex theater.
(ix) Convention center.
(x) Operating & maintaining a hospital in a rural area.

Case 1. Small Scale Industrial undertaking:-

The following conditions should be satisfied by an industrial undertaking
which is mainly engaged in the business of construction of ship or in a
manufacture or processing of goods. –
 It should be a new undertaking.

53 | P a g e
  It should not be formed by transfer of old plant & machinery. (20%
old machinery is allowed) and second hand imported machine
would be treated as a new machine if it had not being used in India
anytime in the past.
 It should manufacture or produce any article except articles
mentioned as non-priority items in 11th schedule.
 The manufacture or production should start within specified time
limit. — It should employ minimum 10 workers [if the
manufacturing done with the Aid of power] and minimum 20
workers [if the manufacturing is done without aid of power]

If the above conditions are satisfied, then

Deduction = 30% of profit for first 10 years.

54 | P a g e
In case of other than company assessee: 25% of its profit for 10
consecutive years.
Case 2: Operation of a ship:-
The following condition should be satisfied,
 It should be owned by an Indian company & should be used only
for the purpose of business of the assessee.
 Before acquisition by an Indian company.
 It should not have been used and owned in Indian territorial water
by any person resident in India.
If the above conditions are satisfied,
Deduction = 30% of the profits for first 10 years.
Now a days no deduction is available for such type of business.
Case 3: Hotel Industry:-
No deduction is available from the assessment year 2011-12 onwards.
Case 4: Industrial research:-
Conditions:-
(I) The taxpayer is a company registered in India.
(II) The main object is scientific & industrial research and development.
(III) It should be approved by prescribed authority.
(IV) Prescribed authority = Secretary, Dept of Scientific and Industrial
Research.

Deduction = 100% of the profits for first five years if the approval is
received before 1.4.1999
And deduction = 100% of profits for first 10 years if the approval is
received after 31/3/2000 but before 01/04/2007.

55 | P a g e
Case 5: Mineral Oil / Natural Gas:-
Condition:-
 It should be a new undertaking.
 It should not be formed by transfer of old plant & machinery.
 It should commence production before 1/4/1997 is it is located in
north eastern region. And it should commence production after
31/3/1997 if it is situated anywhere in India.
 It should employ 10 or 20 workers (depending upon whether using
power or not).
Deduction = 100% of profits for 1st 7 years commencing with the
year in which the undertaking commences commercial
production of minerals oil or refining of mineral oil.

Case 6: Developing & Building housing projects:-

Conditions:-
The project should be approved by local authority.
 The size of plot of land is minimum 1 Acre.
 It starts the construction after 30/9/98 and the construction
should be completed within 4 years from the end of P.Y. in which
approval was received.
Deduction = 100% of profits derived in any previous year relevant to
any assessment year from such housing project is deductible.

Case 7: Undertaking engaged in Business of processing,

preservation & packaging of fruit or vegetables or integrated,
handling, storage and transportation of food grain units.
Deduction = 100% for 1st five years & 30% for next five years if it
is owned by a company. Deduction = 100% of profits for 1st 5 years
& 25%for next five years if it is owned by any other person.

56 | P a g e
Case 8: Multiplex Theaters: -Now a days no deduction is available.
Case 9: Convention Centre: -Now a days no deduction is available.
Case 10:- Operating & maintaining hospital in rural area:-
 The hospital should be constructed between 1/10/2004 &
31/3/2008.
 Completion certificate from concerned local authority is issued.
 The hospital should have at least 100 beds for patients.
Deduction = 100% of profits for 5 consecutive five years.
Some common points applicable to case l to case 10:-
(i) Audit report,
(ii) Re-computation of profits by assessing officers,
(iii) Double deduction not available.
(iv) Return of Income to be furnished.
(v) Mergers & amalgamation are same as case 1 of Sec. 80IA.

57 | P a g e
Section 80 – IC: Deduction in respect of profits and gains of
certain undertakings in certain special category of states.
Conditions:-
 The undertaking should be a new undertaking that is it should not
be formed by splitting up or re-construction of business.
 It should not be formed by transfer of old plant & Machinery.
 The industrial undertaking should manufacture or produce
specified goods i.e. any article given le schedule and any article but
other than those given in the 13th schedule.
 The industrial undertaking must begin the production or
manufacture within the time-limit prescribed.
 If there is a substantial expansion (i.e. more than 50%), then the
substantial expansion should take place within the specified
period.
 The industrial undertaking should be set up in Sikkim, Himachal
Pradesh or Uttaranchal or North Eastern state.

If the above condition are satisfied, then Deduction

Himachal Pradesh & Uttaranchal: 100% of profits for first 5
years &30% for next 5 years (25% in case of other persons other
than company).
In Sikkim & North Eastern states 100% of profits for first 10 years

58 | P a g e
Section 80 –ID: Deduction in case of hotels and convention
centre in NCR (National Capital Territory)
Condition — Section 80-ID is applicable if the following conditions are
satisfied,
 The taxpayer is engaged in the business of hotel located in the
specified area.
 Alternatively, the taxpayer is engaged in the business of building,
owing and operating a convention centre, located in the specified
area. The specified area for this purpose means the National
Capital Territory of Delhi and the districts of Faridabad, Gurgaon,'
Gautam Budh Nagar and Ghaziabad.
 Hotel for this purpose means a hotel of two-star, three-star or four
star category as classified by the Central Government.
 Convention centre means a building of a prescribes area
comprising of convention halls to be used for the purpose of
holding conferences and seminars, being of such size and number
and having such other facilities and amentias, as may be
prescribed.
 The hotel is constructed and has started or starts functioning at
any time during. April; 1, 2007 and March 31, 2010. Likewise, the
convention centre is constructed at any time during April 1, 2007
and March 31, 2010.
 The aforesaid business is not formed by the splitting up, or the
reconstruction, of a business already in existence [subject to a few
exceptions].
 The aforesaid business is not formed by the transfer to a new
business of machinery or plant previously used for any purpose
[subject to a few exceptions.]

59 | P a g e
  Audit report should be submitted along with return of income. 6.
Return of income is submitted on or before the due date of
submission of return of income given under section 139(1).
Amount of deduction: If the above conditions are satisfied, 100 per
cent of the profit and gains derived from the aforesaid business is
deductible for five consecutive assessment years beginning from the
initial assessment year.
Initial assessment year for this purpose means. the assessment year
relevant to the previous year in which the business of the hotel starts
functioning or the previous year in which the convention centre starts
operating on a commercial basis

60 | P a g e
Section 80 – IE: Deduction in respect of certain undertakings
in North-Eastern States.
Condition — the following conditions should be satisfied.
 The taxpayer begins manufacture or production of goods or
undertakes substantial expansion during April 1, 2007 and March
31, 2017.
 Alternatively, the taxpayer has begun to provide eligible services
during April 1, 2007 and March 31, 2017.
 However, deduction under this section id not available in respect
of manufacture or production of tobacco, pan masala, plastic carry
bags or less than 20 microns or goods produced by petroleum oil
and gas refineries.
 Eligible services for this pose are hotel (3 star or above), nursing
home (25 beds or more), old age homes, vocational training
institutes (such as hotel management, catering, entrepreneurship
development, nursing and paramedical, civil aviation related
training, fashion designing and industrial training), IT related
training centres, IT hardware units and bio-technology.
 The aforesaid activity takes place in any north-Eastern States (i.e.,
Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram,
Nagaland, Sikkim and Tripura.)
 The aforesaid business is not formed by the splitting up, or the
reconstruction, of a business already in existence [subject to a few
exceptions.
 The aforesaid business is not formed by the transfer to a new
business of machinery or plant previously used for purpose
[subject to a few exceptions.]
 Audit report should be submitted along with the return of income.

61 | P a g e
  Return of income is submitted on or before the due date of
submission of return of income given under section 139(1).

Amount of deduction - If the aforesaid conditions are satisfied 100

per cent of profit from the aforesaid business / services shall be
deductible for 10 years beginning with the assessment year relevant to
the previous year in which the undertaking begins to manufacture /
produce article or \ things or complete substantial expansion.
Substantial expansion for this purpose means increase in the investment
in the plant and machinery by at least 25 per cent of the book value of
plant and machinery (before taking depreciation in any year), as on the
first day of the previous year in which the substantial expansion is
undertaking.

62 | P a g e
Section 80JJA: Deduction in respect of profits from the
business of processing of bio-degradable waste–
Section 80JJA is applicable where gross total income of an assessee
includes any profits and gains derived from the business of collecting
processing or treating of bio-degradable waste for generating power or
producing bio-fertilizers, bio-patricides or other biological agents or
producing bio-gas or making pellets or briquettes for fuel or organic
manure.
Amount of deduction: The whole of the profits and gains of the above
activities shall be deductible for a period of five consecutive
assessment years beginning with the assessment year relevant to the
previous year in which such business commences.
Section 80JJAA: Deduction in respect of employment of new
workmen
Conditions:- The following conditions should be satisfied:
 The taxpayer is an Indian company
 Income of the taxpayer includes any profits and gains derived from
any industrial undertaking engaged in the manufacture or
production of article or production of article or thing.
 The industrial undertaking is not formed by splitting up or
reconstruction of an existing undertaking or amalgamation with
another industrial undertaking.
 The assessee furnishes along with the return of income the report
of a Chartered Accountant in Form No. 10DA.
Amount of deduction - The amount of deduction is equal to 30 per
cent of 'additional wages' paid to the new 'Regular workmen'
employed by the assessee in the previous year. The deduction is available
for three assessment year relevant for the previous year in which such
employment is provided.

63 | P a g e
Meaning of workman - For the aforesaid purpose, "workman" means
any person employed in any industry to do any manual, unskilled,
technical, clerical or supervisory work but does not include the
following-
(a) A person who is in Air-force, Military or Navy, or who is in Police
service; or
(b) A person who is employed in managerial or administrative capacity;
or
(c) A person who is employed in a supervisory capacity and draws wages
exceeding Rs.1, 600
Per month.
Meaning of regular workman - For the aforesaid purpose, "regular
workman" does not include the following-
(a) A casual workman; or
(b) A workman employed for contract labor; or
(c) Any other workman employed for a period of less than 300 days
during previous year.

Meaning of additional wages - For the aforesaid purpose, "additional wages" has
been defined as follows:

In the case of a new In the case of an existing

understanding understanding
It means the wages paid to new "regular It means the wages paid to new "regular
workman" in excess of 100 "workmen" workmen" in excess of 100 "workmen" employed
employed during the year. during the year.

Additional wages shall be nil if the increase in

number of "regular workmen" employed during
the year is less than 10 per cent of the existing
number of "workmen" employed in the
undertaking as on the last day of the preceding
year.

64 | P a g e
Note: Deduction under section 80JJAA is available for three assessment
years only.

For the first time it is available in the year in which new "regular
workmen" are employed and then it is available in the next two
assessment years. Deduction is, however, available only if the relevant
conditions are satisfied.

65 | P a g e
 Aggregate of Incomes, Set off and Carry
Forward of Losses
Income tax is charged on the total income of an assessee. Total income
will be calculated on the following lines:-

1) Determination of Residential Status

 Resident, Ordinary Resident (ROR):- Incomes from India &

outside are chargeable to tax.
 Resident, not Ordinary Resident (NOR):- Incomes earned only in
India is taxable.
 Non-Resident (NR):- Incomes earned only in India.
 A Company is Resident from the date of its incorporation.

2) Incomes exempted from tax:-

Incomes exempted from tax not to be included in total income.

3) Computation of Income under different heads:-

a) Income from House Property.

b) Income from Business or Profession.

c) Income from Capital Gain

d) Income from other sources.

4) Inclusions in the total income:-

(a) Incomes belonging in general law to person other than the assessee
but it should be included in assessee income. Ex: - Minor (Guardian)

(b) Deemed assessee

66 | P a g e
(c) Rebatable incomes: - If the assessee is a member of AOP (association
of persons) - Profit of his share must be included in his Total Income for
Tax purpose.

5) Aggregate of incomes: -

All current year income from different heads is included in total income.

6) Gross Total Income: -

After setting off of losses & allowances, carry forward from preceding
years you will get the Gross total income.

7) Deductions from GTI u/s 80G to 80U; -

Permissible deductions from section 80G to 80U to arrive at total

income.

8) Rounding off of Total income u/s 288A; - The total taxable

income must be rounded off to the multiple of ten (rs.10) SET OFF OF
LOSSES

 Income Tax is only tax; even there may be different heads of

income.
 Hence loss from one head of income may be set off against the
income from another head of income in the same previous year so
that true income of current year may be computed for paying tax.

There are three types of setting off of losses Or Modes of set

off)

1. Intra head Adjustment or Intra head Setoff.

2. Inter head Adjustment or Inter head Setoff.

3. Carry forward of losses.

67 | P a g e
1. Intra head adjustment u/s 70 : -

Any loss from one head of income can be set off under the same head of
income u/s 70 (within the same head). Loss from one business can be set
off against the income from another business under the same head of
income. Ex. Loss from cloth business to profit from sugar business etc.
Exceptions: -

1) Loss from speculation business u/s 73(1)

2) Loss from the activity of owning and maintaining of race horses.

Set Off and Carry Forward of Losses

3) Loss from winnings from lotteries / card games etc.

4) Long term capital loss from the assessment year 2003-04.

5) Loss from exempted source of income not set off against taxable
income.

Bearing the above: -

1) Loss from one House property can be set off against any other income
within House property income.

2) Non-speculation business loss can be set off against speculation

business and non-speculation business.

3) Short term capital loss can be against both LTCG & STCG.

4) Other sources: - loss from one activity (except the above) may be set
off against other income within the head.

5) Loss from an exempted source cannot be set off against taxable

source.

68 | P a g e
2. Inter head Adjustments u/s 71: -

If net results after intra adjustments is still a loss the same current year
loss can be set off against the income from other heads of income. In
other words, loss from one head can be adjusted against another income
head except salaries only for the current year. Brought forward losses or
Carry forward losses cannot be allowed under this adjustment. Ex:
Business loss can be set off against income from house property, of the
current year.

Exceptions: -

1) Speculation loss- only against speculation income.

2) Loss from capital loss- cannot be set off against other heads of income
(both LTCG & STCG).

3) Loss from the activities of owning & maintaining of race horses – not
adjusted against any head of income.

4) Loss from winnings from lotteries – against such incomes. (Lottery,

crossword puzzle, betting, races, card games and other gambling)

69 | P a g e
3. Carry forward of losses: -

If a loss cannot be set off either under the intra head adjustment and
inter head adjustment because of shortage of income of the same year, it
may be carry forward u/s 71B.

1. Income from house property: -

From the assessment year 1999-2000, loss from house property if it is

not adjusted in the intra head adjustments it can be carry forward for
next 8 assessment years.

2. Business Loss: -

Once the loss is carry forward, the carry forward loss can be set off
against business income only. It can be carry forward and set off for next
8 assessment years.

3. Capital gain head loss: -

 STC Loss – Against Long term capital gain / Short term capital
gain– Carried forward for next 8 assessment years
 LTC loss – Against Long term capital gain only – C/F for next 8
assessment years

4. Other Sources: - U/S 74A(3)

Loss from owning and maintaining of race horses can be set off only
against such income and Carried forward up to 4 assessment years.

5. Speculation loss: - U/S 73

Speculation loss can be set off against speculation income only. It can be
carry forward for next 4 assessment years. Speculation Business: - It
refers to speculative transactions. Speculative transaction means a

70 | P a g e
transaction which is settled in all respect other than the actual delivery
(OR) transfer of commodity.

Very important note: - To claim the carry forward of loss, the assessee
must have to file return of loss before the due date in the relevant
assessment year. If the loss of return filed after due date, such losses
cannot be set off against any head of income (OR) within the same head
of income.

ORDER of SET OFF U/S 72(2)

1) Current year capital expenditure in Scientific Research including

current year loss.

2) Current year depreciation.

3) Carry forward business losses.

4) Unabsorbed expenses on family planning.

5) Unabsorbed depreciation.

6) Unabsorbed capital expenditure on scientific research.

71 | P a g e
Unabsorbed Depreciation: - Unabsorbed Depreciation refers to the
amount of depreciation, which is still not absorbed from the profit of
business (OR) from other heads of income (except salary) in a particular
financial year.

1) Depreciation allowance should first be deducted from the income

chargeable to profit and gains of business.

2) If profit and gains of business is not sufficient then the same should be
adjusted with other heads of income except salary head of income.

3) Any amount which is still unabsorbed should be carried forward to

next assessment years for set off.

4) There is no time limit regarding the period for which unabsorbed

depreciation should be carried forward. It can be carried forward till it is
fully written off.

5) The order of set off should be: -

a) Current year depreciation

b) Brought forward business loss

c) Unabsorbed depreciation.

72 | P a g e
3. Depreciation. Sec 32:
Depreciation usually means loss or decline in the value which occurs
gradually over useful life of a material thing, due to physical wear, tear
and is generally limited to losses or decline in value which cannot be
restored by current repairs and maintenance.
CONDITIONS OF CLAIMING DEPRECIATION:
1: Asset must be owned by assessee
2: It must be used for the purpose of business or profession
3: It should be used during the relevant previous year.
4: The asset must fall under eligible class of assets
5: Depreciation is available on tangible as well as intangible assets
ASSETS WHICH ARE QUALIFIED FOR DEPRECIATION:
 Tangible assets - Building, Machinery, Plant or Furniture
 Intangible assets - acquired after March 31, 1998 Know-how,
Patents, Copyrights, Trademarks, Licenses, Franchises or any
other business or Commercial rights of similar nature.

73 | P a g e
BLOCK OF ASSETS AND THEIR RATES OF DEPRECIATION

Block Nature of asset Rate

1. Building-residential building other than hotels 5%
2. Building-office, factory, godown 10%
3. Building-acquired for installation P&M 100%
4. Furniture-any furniture and fittings including electrical 10%
fittings
5. Plant and machinery – not covered by block 6-12 and 15%
motor cars acquire after April 1 1990
6. Ocean – going ships, vessels ordinary operating on 20%
inland waters including speed boats
7. P & M – busses, lorries and taxies used in the business 30%
of running them on hire
8. P & M – aero planes including commercial vehicle 40%
which acquired after sep.30 1998 before April 99
9. P & M – containers made of glass or plastic used as 50%
refills and P & M which satisfy conditions of rule 5(2)
10. P & M – computers including computer software 60%
11. P & M – energy saving devices, renewal energy devices, 80%
flour mills, sugar works
12. P & M – air pollution control equipment’s water 100%
pollution control equipment’s, solid waste control
equipment’s
13. Know-how, copy rights, trade marks, etc. 25%

74 | P a g e
 Format for Computation of Depreciation
COMPUTATION OF DEPRECIATION (W.D.V)
Particulars Amount
(in ₹)
W.D.V at the beginning of the previous year XXX
Add: Purchases made during the year XXX
Less: Sales made during the year (XXX)
Depreciable balance XXX
Less: Depreciation
1.Normal Depreciation (XXX)
2.Additional Depreciation (New P&M) (XXX)
W.D.V. at the end of the previous year XXX

COMPUTATION OF ADDITIONAL DEPRECIATION

1: The assessee must be engaged in manufacture / production of any article or
thing.
2: New plant and machinery should be acquired and installed after March 31,
2005.
3: It should be an eligible plant and machinery.
The following plant & machinery assets are not eligible for additional
depreciation:
Road transport vehicles.
Ships and Aircrafts
Any plant or machinery which is installed in any office or premises or any
residential accommodation or accommodation in the nature of guest house.
Any plant or machinery which, before its installation by the assessee, was
used either within or outside India by any other person.

75 | P a g e
Any plant or machinery, the entire cost of which is allowed as a deduction
(by way of depreciation or otherwise) during the previous year.

Assessee engaged in the following activities is not eligible for additional

depreciation:
Cooking food in a hotel.
Construction of dam, building or contract for civil engineering.
Cutting and polishing raw diamonds.
Hatching of eggs.
Pressure pilling for building.
Mining of stones.
Rate of additional depreciation:
Additional depreciation shall be available @20% of the actual cost in
the year of acquisition of Plant and Machinery. If the asset is put
into use for less than 180 days in the year in which it is acquired, the rate
of additional depreciation will be 10%.

Capital Gain / Loss:

 If the amount in “Depreciable balance” is negative it represents
Short term capital gain (STCG).
 If the amount in “Depreciable balance” is positive,
1. It represents Short term capital loss (STCL) when all
assets in the block are sold.
2. It represents Depreciable balance if all assets in the block are not sold.

76 | P a g e
Important notes:

 If the asset is purchased and put to use for more than 180 days
during the previous year – (100% ) Full rate depreciation
 If the asset is purchased and put to use for less than 180 days
during the previous year – 50% of Rate of Normal
depreciation
 Asset purchased during the previous year but not put to use – No
Depreciation
 No depreciation is admissible on imported cars.

However, if the following conditions are satisfied, additional

depreciation @ 35% shall be allowed.
 Any assessee newly setting up an undertaking or enterprise for
manufacture or production of any article or thing on or after
01.04.2015.
 Such undertaking shall be set up in any notified backward areas in
the States of Andhra Pradesh, Bihar, Telangana and West
Bengal.
 Acquisition and installation of new plant and machinery shall be
made between 01.04.2015 and 31.03.2020.

77 | P a g e
Problems on Depreciation

1. From the following, you are required to ascertain the depreciation

admissible and other liabilities, if any, in respect of the previous
year relevant to the A.Y 2017-18

Plant &
Machinery Building
₹ ₹
WDV at the beginning of the year 2,50,000 10,00,000
Additions during the year 3,00,000 Nil
Sales during the year 6,00,000 2,00,000

2. From the following information compute depreciation allowance

allowable to XY& Co., a CA firm, for the AY 2017-18:
Assets W.D.V.on
1.4.2016
₹
1 Computers 1,40,000
2 Typewriters 30,000
3 Furniture & Fittings 1,00,000
4 Office Building 5,00,000
5 Staff quarters-Area not exceeding 80 15,00,000
sq.metre
6 Purchased a new computer during the P.Y. 60,000
7 Sold old office building for ₹15,00,000 and purchased a new office
building for ₹40,00,000 in Dec, 2016
8 Purchased books (annual publications) for professional purposes
₹40,000

78 | P a g e
 3. The following are the particulars of the assets of a limited company
as on 1st April, 2016:
Actual Cost ₹ W.D.V on Rate of
1.4.2016 ₹ Dep.
Buildings:
A 10,00,000 8,10,000 10%
B 16,00,000 15,04,800 5%
Plant& Machinery
:
P 4,00,000 3,00,000 15%
Q 8,00,000 2,88,000 40%
R 8,00,000 3,37,500 15%
The company acquired the following assets during the Financial Year 2016-17

Cost Date of Rate of

Purchase Dep.
Buildings:
C 3,00,000 1.5.2016 5%
D 7,00,000 1.3.2017 10%
Plant& Machinery
:
S 3,00,000 1.12.2016 15%
T 2,00,000 1.8.2016 40%
The company sold the following assets during the financial year 2016-17
Buildings: Sale Date of Sale
consideration ₹

A 9,00,000 15.3.2017
B 19,00,000 1.7.2016
Plant& Machinery
:
R 4,50,000 1.9.2016
Q 5,00,000 1.2.2017

Compute the WDV and the amount of depreciation for the AY 2017-
18. Assessee is entitled to additional depreciation on machinery on
which depreciation is allowable @ 15%.

79 | P a g e
4. From the following details, compute the depreciation allowance
allowable to Mr. A Under the IT Act, 1961.
₹
a) WDV of Pant and Machinery on 1.4.2016 3,60,000
b) Additions to Plant made on 1.8.2016 85,000
c) Cost of machinery purchased on 1.1.2017 60,000
but not installed during the year
d) Sale proceeds of machinery which was 1,00,000
originally bought on 1.4.2014 for ₹84,000
e) Machinery lost in fire accident on 15,000
30.3.2017. Original cost ₹ 25,000 when
purchased on 1.4.2015. Amount received
from the insurance company
Rate of Depreciation is 15%

5. You are given the following details, compute the depreciation

allowance allowable to Mr. X Under the IT Act, 1961
₹
a) WDV of Pant and Machinery on 1.4.2016 3,24,000
b) Additions to Plant made on 1.12.2016 1,00,000
c) Machinery purchased on 31.12.2016 which 1,20,000
could not be installed during the previous
year
d) Sale proceeds of machinery which was 1,30,000
originally purchased on 1.4.2014 for
₹1,00,000
e) Machinery lost in fire happening on 30,000
30.3.2017. Its original cost on the date of
purchase on 1.4.2015 was
₹50,000. The amount received from the
insurance company
Rate of Depreciation is 15%

80 | P a g e
 6. From the following information determine the depreciation
allowance for AY17-18
₹
1 WDV of Plant and Machinery on 12,00,000
1.4.2016
2 P&M purchased on 15.5.2016 for 10,00,000
production dept.
3 In June, 2016 the assessee purchased
the following assets:
i) Office appliances 1,00,000
ii) Air-conditioners for guest house 60,000
iii) Car 4,00,000
iv) P&M purchased on 10.11.2016 for 3,00,000
Production Dept.

7. MRF Ltd. Is engaged in the business of manufacture of tyres. It acquired and

sold the following plant and machinery during the P.Y 2016-17
Factory P&M P&M Motor Furniture
Building Car
Rate of Depreciation 10% 50% 100% 15% 10%

WDV on 1.4.2016 ₹15,20,000 ₹25,40,000 Nil ₹8,60,000 ₹4,60,000

Additions Made:

Nov-16 ₹6,00,000 Nil Nil ₹4,00,000 ₹1,20,000

Jul-16 Nil ₹10,00,000 ₹8,00,000 Nil Nil

Assets(Included in Nil ₹5,40,000 Nil ₹1,60,000 ₹80,000
opening WDV) sold
in Jan 2017
Compute: i) Normal Depreciation
ii) Additional Depreciation for A.Y. 2017-18.

81 | P a g e
 8. Plam Industries Ltd. Is engaged in the business of manufacturing
chemical since April 2014. The following assets are purchased by the
company:
Asset Cost Date of Rate of When the
(₹) Purchase Deprec Asset is put
iation to use
Buildings 10,00,000 6.4.2015 10% 10.4.2015
Computer for office 35,000 16.5.2015 60% 18.5.2015
Car 3,00,000 10.6.2015 20% 10.6.2015
Plant 'X'(New) 20,00,000 20.4.2015 25% 30.4.2015
Plant 'Y'(New) 15,00,000 10.9.2015 25% 10.10.2015
Air-conditioner for 30,000 30.6.2015 25% 30.4.2015
office
Air-conditioner for 35,000 25.6.2015 25% 26.6.2015
factory (New)
Plant Z 15,000 20.7.2015 100% 6.9.2015

Office air-conditioner is sold on March 31, 2016 for 20,000 and a new
air-conditioner is purchased on 1.4.2016 for ₹32,500.
9. XYZ Ltd’s Profit and Loss account for the year ended 31-03-2017
shows a net profit of ₹75 Lakhs.
after debiting/crediting the following items”
1. Depreciation ₹24 Lakhs (including ₹4 Lakhs on revaluation)
2. Interest to financial institution not paid before due date for
filing returns of income ₹6 Lakh
3. Provision for doubtful debts ₹1 Lakh
4. Transfer to General Reserve ₹5 Lakhs
5. Net Agricultural Income ₹16 Lakhs
6. Provision for unascertained liabilities ₹2 Lakhs
7. Amount withdrawn from Reserve created during 2010-11 ₹ 3
lakhs
Other Information:
Brought Forward loss and unabsorbed depreciation as per books are ₹12
Lakh and ₹10 Lakhs respectively. Compute MAT under section 115JB for
AY 2017-18

82 | P a g e
 10. From the following particulars of ABC Ltd, Compute tax Liability for A.Y 2018-19

P&L STATEMENT
Particulars Amount(₹) Particulars Amount(₹)
To Purchases 4,35,000 By Sales of Processed Goods 25,75,000
To Entertainment
expenses 25,000 By Sale of Other Goods 12,15,000
To Travelling By amount withdrawn from
Expenses 71,000 General Reserve 2,00,000
To Depreciation 6,75,000
To Income tax 4,01,000
To Wealth Tax 12,000
To Customs Duty
due 21,000
To Provisions for
Unascertained
Liabilities 80,000
To Proposed
Dividend 75,000
To Audit Fees 25,000
To Provisions for
Loss from Subsidiary
Company 37,000
To Salary to M.D 1,95,000
To Net Profit 19,38,000
39,90,000 39,90,000
Additional Information:

1. Excise Duty of 2009-10 paid during the year is ₹95,600

2. Depreciation U/S 32 is ₹7,35,000.
3. Unabsorbed business Loss is ₹12,20,000 for I.T purpose and for
accounting purpose ₹10,10,000 Business Loss is brought forward
from A.Y 2012-13.
4. Unabsorbed Depreciation for accounting purpose is ₹3,45,000
5. Unabsorbed Depreciation for I.T Purpose ₹18,00,000
6. Out of Custom duty due of ₹21,000, ₹10,000 remained unpaid till
30/9/2016
7. The purchase includes one item where in ₹25,000 was paid in
Cash under one payment (purchase of Chemicals).

83 | P a g e
 11. Prajwal Ltd is a Domestic Company, it showed a net profit of
₹50,00,000 for the year 2007-08.
The following are the other particulars-
Particulars Amount (₹)
1 Depreciation on P&M 7,50,000
2 Brought forward Business Loss from 2004 5,00,000
3 Net Profit includes the following
a) Dividend from X Ltd –Culcutta 25,000
b) Dividend form Z Ltd- Bombay 50,000
c) Dividend form Y Ltd- Chennai 50,000
d) STCG on sale of Shares 25,000
e) LTCG on sale of Building 60,000
Various Items debited to P&L A/c includes the
4 following:
i) Expenses on maintenance of Guest house 10,000
ii) Penalty levied for infraction of excise law 5,000
iii) Donation to Prime Minister National Relief Fund 10,000
iv) Donation to approved family planning institution to
be utilised for promoting family planning 10,000
v) Remuneration to M.D 1,14,000
vi) The Company paid rent for the flat occupied by M.D 36,000
vii) General Expenses 5,000

Compute Total Income of the Company for the A.Y-2008-09

84 | P a g e
12. XMV Ltd is an Indian Company engaged in the business of manufacture discloses
a profit of ₹40,00,000 further for the year 2004-05

The following further particulars are also made available:

i) The closing stock of the finished goods has uniformly been valued at
10% under cost.
ii) The opening and closing stocks for the year were shown in the books at
₹56,00,000 and ₹83,00,000 respectively.
iii) The book depreciation amount to ₹15,00,000 for tax purpose.
Depreciated value of block of assets for tax purpose on April 1st 2004 is
₹75,00,000 (Depreciation rate at 25%)
iv) The Undernoted debits appear in the P&L A/c
a) Loss on sale of fixed assets- ₹1,25,000(Capital Loss)
b) Transfer to Investment allowance reserve A/c- ₹3,00,000
c) New machine was acquired during the year at a cost of ₹16,00,000
and put into use during the year (rate of Depreciation at 25%)
d) The salaries including Gratuity of ₹80,000 paid to a retired
employee in accordance with the rules and payments of ₹1,35,000
to M.D by way of salary and commission as permitted by the
Company law board.
M.D was provided with a house owned by the company for which
depreciation of ₹35,000 and repair expenses of ₹20,000 were
claimed.
The M.D also reimbursed the salary of ₹2,400 paid for a gardener
and ₹3,600 paid for a domestic servant. This expenses are charged
to miscellaneous expenses.
v) During the year P&M of book WDV of ₹2,00,000 was sold for ₹75,000.
The WDV of it was ₹1,20,000
vi) Interest A/c includes a sum of ₹35,000 charged by PF Commissioner
for delaying depositing the members as well as the companies
contribution.
Compute total Income of the Company for A.Y 2005-06.

85 | P a g e
13. XYZ Ltd is a Domestic Company into manufacturing of textiles. The P&L A/c
showed Net profit of ₹10,00,000 on a turnover of ₹1 crore.

This included debits and credits to P&L A/c.

1. Dividends amounting to ₹2,00,000 paid to share holders for the
current year.
2. Interest amounting to ₹10,000 paid on the loan taken for the payment
of Companies Income Tax Liability.
3. Interest amounting to ₹15,000 paid on the loan taken to make
donation to an approved Charities.
4. ₹20,000 spent by M.D on his visit to,
A) Canada to buy a machine and finalise a collaborative agreement for
a new independent undertaking proposed to be set up ₹10,000.
B) USA to study export markets for textile ₹10,000

MD’s wife accompanied her husband ₹10,000 was contributed by the

company towards her foreign trip expenses and the Canadian collaborator
paid ₹15,000 to her towards expenses.

5. Company incurred ₹25,000 as entertainment expenses.

6. Company incurred expenditure ₹1,00,000 as follows:
A. Advertisement in newspaper- ₹50,000
B. Advertisement in Sovereign of political party -₹25,000.Paid in
cheque.
C. Guest house at factory-₹25,000
7. ₹10,000 paid to legal advisor in respect of proceedings before tax
authorities.
8. Penalties for ₹24,000 for importing yarn in contraventions of import
regulations.
9. The company earned LTCG on sale of investments (duely indexed an
amount of ₹2,00,000 and ₹1,00,000 as STCG)
10. The company was maintaining a race horse and earned a net income of
₹2,00,000 for that activity.

Compute taxable Income of the company and Calculate Tax liability.

86 | P a g e
14. X Pvt. Ltd. a Indian company is engaged in the business of
manufacture of chemical goods (value of P&M owned by the company is
₹55 Lakhs). The following information for the financial year 2016-17.
Particulars ₹
Sale proceeds of goods(domestic sale) 22,23,900
Sale proceeds of goods(export sale) 5,76,100
Amount withdrawn from general reserve (reserve was
created in 1996-97 by debiting P&L A/C 2,00,000
Amount withdrawn from Revaluation Reserve 1,50,000
Total 31,50,000
Less: Expenses
Depreciation (Normal) 6,16,000
Depreciation (extra depreciation because of Revaluation) 2,70,000
Salary and wages 2,10,000
Wealth Tax 10,000
Income-tax 3,50,000
Outstanding Custom Duty(not paid as yet) 17,500
Proposed Dividend 60,000
Consultation fees paid to a tax expert 21,000
Other Expenses 1,39,000
Net Proft 14,56,500
For tax purposes the company wants to claim the following:
 Deduction U/S 80-IB(30% of ₹14,56,500)
 Depreciation under section 32 is ₹5,36,000

The company wants to set-off the following losses/allowances:

For
For Tax
Accounting
Purposes (₹)
Purpose (₹)
Brought forward Loss of 2013-14 14,80,000 4,00,000
Unabsorbed Depreciation ----- 70,000
Compute the tax liability of the company for the assessment year 2017-
18 assuming that X Ltd gets a LTCG of ₹60,000 which is not credited to
P&L A/c

87 | P a g e
15. A Ltd. engaged the diversified activities, earned a net profit of
₹14,25,000 after debit/credit of the following items to its P&L A/c for
the year ended 31-3-2017.
₹
Items debited to P&L A/c
Expenses relating to exempted income 2,10,000
Provision for loss of subsidiary 70,000
sales tax paid before due date 75,000
Provision for Wealth tax 90,000
Provision for Income tax 1,05,000
Expenses on purchase of sale of equity shares 15,000
Depreciation 3,60,000
Interest on Bank Loan 90,000
Items Credited to P&L A/c
Exempted income 2,70,000
Profits from speculation 60,000
LTCG on sale of equity share liable for STT 3,60,000
Income from Units of UTI 75,000

The company provides the following information:

a) Interest on Bank loan is Inadmissible.
b) Depreciation includes ₹1,50,000 on account of revaluation of fixed
assets.
c) Brought forward loss and unabsorbed depreciation.

Amount as per books Amount as per Income-Tax

Loss
(₹) Depreciation(₹) Loss (₹) Depreciation(₹)
2011-12 2,50,000 3,00,000 2,00,000 2,50,000
2013-14 Nil 2,70,000 1,00,000 1,80,000
2014-15 3,50,000 3,15,000 1,20,000 2,10,000
You are required for:
i) Compute the total income of the company for the A.Y- 2017-18
ii) Compute the Book profit and the tax payable by the company.

88 | P a g e
16.X ltd an Indian company gives the following particulars of his income
and expenditure for the previous year 2017-18
₹

Business Income(which includes ₹40,000 profits from the 3,00,000

business of collecting and processing bio-degradable
waste, which was started during the previous year 2014-15,
and ₹20,000 profits from a business located in Himachal
Pradesh which was started during 2011-12)
Long-term capital gain on transfer of gold 1,30,000
Short-term capital gain liable for STT 30,000
Other Short term capital gain 30,000
Income from other sources(including casual income of 28,700
₹16,000)
Donation to a political party 8,000
Donation to a National Defence Fund 24,000
Donation to Government of India for promotion of family 20,700
planning
Donation to Prime Minister’s Drought Relief Fund 18,000
Donation to Africa (Public Contributions-India) Fund 5,000
Donation to National Trust for welfare of persons with 7,000
Autism
Donation to an approved charitable trust 22,000
Donation in kind to an approved charitable trust 3,000
Donation to an approved university 7,500
Determine the net income of X Ltd., for A.Y 2018-19.

89 | P a g e
 Module - 4 : TAX PLANNING
TAX CONSIDERATION IN :

 MAKE OR BUY
 OWN OR LEASE
 RETAIN OR REPLACE

TAX CONSIDERATION IN MAKE OR BUY DECISION

1. XYZ Ltd needs a component in an assembly operation. It is

contemplating the proposal to either make or buy the foresaid
component:
I. If the company decides to make the product by itself, then it
would need to buy a machine for ₹8,00,000 which would be
used for 5 yea₹ Manufacturing cost in each of the 5 years
would be ₹12,00,000, ₹14,00,000, ₹16,00,000, ₹20,00,000
and ₹25,00,000 respectively.

The relevant depreciation is 15%. The machine will be sold

for ₹1,00,000 at the end of the 5th year.
II. If the company decides to buy the component from a supplier
the component would cost ₹18,00,000, ₹20,00,000,
₹22,00,000, ₹28,00,000 and ₹34,00,000 respectively in
each of the 5 year.
The relevant discounting rate and tax rate are 14% and
33.66% respectively.
Use WDV Method of Depreciation.

Should XYZ Ltd Make the component or Buy from outside?

90 | P a g e
2. ABR Company limited needs a component in an assembly operation.
It is contemplating the proposal to either make or buy the foresaid
component:

I. If the company decides to make the product by itself, then it would

need to buy a machine for ₹24,00,000 which would be used for 5 yea₹
Manufacturing cost in each of the 5 years would be ₹36,00,000,
₹42,00,000, ₹48,00,000, ₹60,00,000 and ₹75,00,000 respectively.

The relevant depreciation is 15%. The machine will be sold for

₹3,00,000 at the end of the 5th year.

II. If the company decides to buy the component from a supplier the
component would cost ₹54,00,000, ₹60,00,000, ₹66,00,000,
₹84,00,000 and ₹1,02,00,000 respectively in each of the 5 yea₹

The relevant discounting rate and tax rate are 10% and 35% respectively.

Use WDV Method of Depreciation.

Should ABR Ltd Company Make the component or Buy the component
from outside?

[Discount rates at 10% for 5 years respectively – 0.909, 0.826, 0.751,

0.683, 0.621]

91 | P a g e
 TAX CONSIDERATION IN LEASE OR BUY DECISION

1. From the following information determine whether the assesse

should Buy an asset or take on lease.
i. Cost of assets – ₹1,00,000
ii. Rate of Depreciation (WDV)– ₹15%
iii. Rate of Interest – 10%
iv. Repayment of loan by the assesse for ₹20,000 p.a.
v. Rate of tax – 30.9%
vi. Residual value – ₹20,000 after 5 yea₹
vii. Profits of the assesse – ₹1,00,000 before depreciation,
interest and tax and before lease rent and tax.
viii. Lease rent – ₹30,000 paid.

Make suitable assumption on your own if necessary.

2. An asset costing ₹10,00,000 is to be acquired. There are 2

alternatives available to the entrepreneur.
a) Buying the asset by taking a loan of ₹10,00,000 repayable in 5
equal instalments of ₹2,00,000 each along with interest at 14%
p.a. Assuming that lease rentals, processing fees, interest as well as
the principal amount are payable at the year end.
b) Leasing of the asset for which annual lease rental is ₹3,00,000
upto 5 yea₹ The lessor charges 1% as processing fees in the 1st year.
Assume the internal rate of return to be 10% and Present value
factor at 10% for 5 years is 0.909, 0.826, 0.751, 0.683 and 0.621
Suggest which alternative is better in the above case, assume tax
rate to be 33.66%

92 | P a g e
3. An asset costing ₹1,00,000 is to be acquired. There are 2
alternatives available to the entrepreneur.
a) Buying the asset by taking a loan of ₹1,00,000 repayable in 5
equal instalments of ₹20,000 each along with interest at 14%
p.a.
b) Leasing the asset for which annual lease rental is ₹30,000 upto
5 yea₹ The lessor charges 1% as processing fees in the 1st year.
Assume the internal rate of return to be 10% and Present value
factor at 10% for 5 years is 0.909, 0.826, 0.751, 0.683 and 0.621
Assume lease rentals processing fees loan as well as interest
amount are payable at the year end. Suggest which alternative is
better for the company. Rate of Depreciation at 15% and tax rate
– 33.99%.

93 | P a g e
 Tax Management
Tax management includes:
1. Compiling and preserving data and supporting documents evidencing
transactions, claims, etc.
2. Making timely payment of taxes e.g. advance tax, self assessment tax,
etc.
3. TDS and TCS compliance
4. Following procedural requirements e.g. payment of expenses or
acceptance of loans or repayment thereof, over ` 20,000 by account
payee bank cheque or bank draft, etc.
5. Compliance with the prescribed requirements like tax audit,
certification of international transactions, etc.
6. Timely filing of returns, statements, etc.
7. Responding to notices received from the authorities.
8. Preserving record for the prescribed number of yea₹
9. Mentioning PAN, TAN, etc. at appropriate places.
10. Responding to requests for balance confirmation from the other
assessees.
Tax Implications in Planning
The main objectives in any exercise on tax planning are to :—
1. Avail all concessions and relief ’s and rebates permissible under the
Act.
2. Arrange the affairs in a commercial way to minimize the incidence of
tax.
3. Claim maximum relief where taxes are paid in more than one country.
4. Become tax compliant and avoid penalties, prosecutions and interest
payments.
5. Fruitful investment of savings.
6. Timely compliance of procedural requirements like tax audit, TDS,
TCS, etc.
7. Appropriate record keeping

94 | P a g e
8. Avoidance of litigation.
9. Growth of economy and its stability.
10. Pay taxes – not a penny more, not a penny less.

Tax Management with reference to

‘Make Or Buy’ Decisions

‘MAKE OR BUY’ DECISIONS

This applies to industries where assembly of products takes place to

make a finished product. Like a manufacturing of car, where thousands
of different parts or components are assembled to make a car.

It is quite natural every components or part of a car cannot be

manufactured by one company. Since part manufacture involves cost,
time, energy, and different kinds of technology and expertise. Therefore,
in such cases company purchases parts from outside agencies. But where
the cost involved in purchasing from outside market is high, then the
company might go in for in house production.

Apart from costing consideration following factors also go in

decision-making process :

 Utilizations of Capacity
 Inadequacy Fund
 Latest Technology
 Dependence of supplier
 Labor problem in the factory
 What are the cost involved in making of a Pat.
 Fixed Cost : Purchased of Plant etc.
 Variable Cost : Raw Materials, Labour, Electricity etc.
 What are the cost involved in buying of a part from outside agency

95 | P a g e
  Buying Cost
 Inventory Cost

Comparison of the above tow cost shall determine which decisions the
company shall follow. But, however it should be kept in mind that while
comparing Cost, common cost should not be taken into account.

It should also be noted that the cost incurred in making a product and
buying a product, both involves incurring of revenue expenditure.
Therefore, tax saved in both the cases are same. It comes into picture
only when there is a need for extension or establishment of new unit to
manufacture that new components.

Tax Consideration :

1. Establishing a new Unit :

If the decision to manufacture a part or component involves a
setting up a separate industrial unit than tax incentives available
u/s 10A, 10B, 32, 80IA and 80IB should be considered.
2. Export :
If ‘Make or Buy’ decision is taken for exporting goods then tax
incentives available u/s 80HHC depends upon whether goods
manufactured by taxpayer himself are exported or goods
manufactured by others are exported by the taxpaye₹
3. Sale of Plant & Machinery :
If buying is cheaper than manufacturing and the assessee decides
to buy parts or components for along period of time, he may like to
sell the existing plant and machinery. Tax implication as specified
by Sec. 50 has to considered.

96 | P a g e
 Corporate Tax Planning:
Definition: Tax Planning can be understood as the activity undertaken by
the assessee to reduce the tax liability by making optimum use of all
permissible allowances, deductions, concessions, exemptions, rebates,
exclusions and so forth, available under the statute.

Put simply, it is an arrangement of an assessee’s business or financial

dealings, in such a way that complete tax benefit can be availed by
legitimate means, i.e. making use of all beneficial provisions and
relaxations provided in the tax law, so that the incidence of the tax is
minimum. This ensures savings of taxes along with conformity to the
legal obligations and requirements. Therefore, it is permitted by law

Objectives of Tax Planning:

97 | P a g e
Reduction of Tax Liability: An assessee can save the maximum
amount of tax, by properly arranging his/her operations as per the
requirements of the law, within the framework of the statute.

Minimization of Litigation: There is a war-like situation between the

taxpayers and tax collectors as the former wants the tax liability to be
minimum while the latter attempts to extract the maximum. So, a proper
tax planning aims at conforming to the provisions of the tax law, in such
a way that incidence of litigation is minimized.

Productive Investment: One of the major objective of tax planning is

channelisation of taxable income to different investment plans. It aims at
the optimum utilization of resources for productive causes and relieving
the assessee from tax liability.

Healthy Growth of Economy: The growth and development of the

economy greatly depend on the growth of its citizens. Tax planning
measures involve generating white money that flows freely and results in
the sound progress of the economy.

Economic Stability: Proper tax planning brings economic stability by

various techniques such as mobilizing resources for national projects or
availing ways for investments which are productive in nature.

Tax Planning follows an honest approach, to achieve maximum

benefits of tax laws, by applying the script and moral of law. Therefore
the objectives do not in any way contradict the concept of tax laws

98 | P a g e
Objectives of Tax Planning

 Claim Deductions under sections 80C to 80U,

 It will reduce your tax liability and you have to pay less tax,
 Minimize the war between Tax Payer and Tax Administrator,
 Tax payer wants to pay less tax and Tax Administrator wants to
extract most of the tax, by using Tax Planning this war is
minimized as tax payer is using all legal ways to reduce tax liability,
 Makes Investments :- By tax planning, a Tax payer will invest his
money in some good funds which will result in productive returns
for tax payer and transfer money to government for investment
too.
 Helps in growth of economy
 Makes society grow

Types of Tax Planning

99 | P a g e
Short-range and long-range Tax Planning: The tax planning which
is made every year to arrive at specific or limited objectives, is called
short-range tax planning. Conversely, long-range tax planning alludes to
such practices undertaken by the assessee which are not paid off
immediately.

Permissive Tax Planning: Tax planning, wherein the planning is

made as per expressed provision of the taxation laws is termed as
permissive tax planning.

Purposive Tax Planning: Purposive tax planning refers to the tax

planning method which misleads the law. Under this type, there is no
expressed provision of the statute.

Conclusion:

Tax planning means intelligently applying tax provisions to manage an

individual’s affairs, in order to avail the tax benefits based on the
national priorities, in accordance with the interest of general public and
government.

100 | P a g e
 MODULE - 05
PROCEDURE OF ASSESSMENT

Voluntary Return u/s 139(1)

An individual is under a statutory obligation to file a return of income, if

the total income without giving effect to the provisions of sec. 10A, 10AA,
10B or 10BA exceeds the minimum limit.

After the end of financial year i.e., the previous year (the year in which
an assessee earns income), an assessee is required to compute his exact
amount of income and tax thereon.

The income so computed and tax on it has to be filled in a form

(generally form No. 2D “SARAL” ITR 1 , 2, 3, 4, 5, 6), and tax is
deposited in bank, a copy of the income tax form and the proof of the
income tax deposited in the bank is prepared in duplicate. A copy is
submitted with income tax office and the assessee himself retains the
other copy.

Last Date of Filing Income Tax Return

The last date to submit the income tax return is 30th September of the
Assessment Year for assessee whose accounts are to be audited, thus it
includes a company assessee, a society, a cooperative society, a
businessmen having turnover more than 1 Crore and professional having
gross receipt of more than Rs.25 lakhs.

The last date in all other cases is 31st July of the Assessment Year, that is
in all those cases where no audit of accounts is required such as
individuals, a businessmen having turnover not exceeding 1 Crore and
professional having gross receipt not exceeding Rs. 25 lakhs.

What If the Assessee Does Not File His Return of Income?

101 | P a g e
If Assessee does not file his return of income even after the due date then
the Assessing Officer (AO) can issue a notice to the assessee asking for
filing his return of income. This notice is issued under section 142(1) of
the income tax Act. If the Assessee does not comply with this notice also
then the AO can complete the assessment i.e., Compute his income and
the tax liability under section 144 called “Best Judgment Assessment”.

TYPES OF INCOME TAX RETURN:

1. Regular Return u/s 139(1):

Regular return is the income tax return filed by assessee on or before the
due date it is covered u/s 139(1) of the income tax Act. Thus, if an
assessee submits his return of income before due date of filing of return
of income, then the return of income is called Regular return.

2. Loss Return u/s 139(3):

A return filed by an assessee indicating the amount of loss incurred is

called Loss return. It is covered u/s 139(3) of the income Tax Act. Thus,
if the loss return is submitted before the before due date of filing of
return of income, then only the loss can be carried forward.

3. Belated Return u/s 139(4)::

Belated return is the return filed by the assessee after the due date; it is
covered u/s 139(4) of the income tax Act. Thus, if an assessee submits his
return of income after the due date of filing of return of income, then the
return of income is called Belated return.

102 | P a g e
4. Revised Return u/s 139(5)::

Revised return is a new return filed by income tax assessee which

corrects the information filed earlier in the regular return is called
Revised return. It is covered u/s 139(5). A return can be revised any
number of times by an assessee. A belated return however, cannot be
revised.

PERMANENT ACCOUNT NUMBER (PAN) SEC 139A

Income tax department issues Permanent Account Number called PAN

to all those persons who apply for it. The application is made in from no.
49A along with a prescribed fee and documents.

PAN is a 10 digit alphanumeric code the first 5 digits are the alphabets,
next 4 digits are the numbers and the last one digits also an alphabet,
e.g., ADMPM7588C is an example of PAN. It is mandatory to mention
the PAN on income tax return. Wrong quoting of PAN is an offence,
which is punishable with a fine of Rs. 10,000.

PAN is actually used by income tax department as our account number

on which all the details relating to persons income are stored. It helps
income tax department in keeping track of incomes of a person.

103 | P a g e
TYPES OF ASSESSMENT

1. SELF ASSESSMENT U/S 140A

At the end of the financial year every person who is required to file
income tax return, should file his return of income. Thus, an assessee
himself files his return of income, pay tax as per the return of income
filed. This process of self-calculation of income and tax is called self-
assessment.

2. SCRUTINY ASSESSMENT U/S 143(3)

On the basis of return of income filed, AO may undertake deep

examination. In scrutiny assessment the AO calls the assessee to furnish
the explanations and books of accounts. For undertaking the scrutiny
assessment the AO has to issue a notice tithe assessee under section
143(2).

3. BEST JUDGEMENT ASSESSMENT U/S 144

Best Judgment Assessment means the computation of income and tax is

undertaken by the AO himself, on the basis of the best of his judgment.
The Best judgment Assessment can be made by an AO under the
following cases: -

1. Assessee does not file his regular return of income u/s 139.

2. Assessee does not comply with instructions u/s 142 (1), i.e., notice
requiring filing his return of income or 142 (2A), i.e., notices requiring
assessee to conduct audit of his accounts.

3. Assessee does not comply with instructions u/s 143(2), i.e., notice of
scrutiny assessment.

4. AO is not satisfied regarding completeness of accounts.

104 | P a g e
4. INCOME ESCAPING ASSESSMENT U/S 147

If AO believes that the income of assessee of any PY has escaped

assessment, he can reopen the assessment and complete it as per new
information about income or tax. Assessment up to last 6 years can be
opened. In order to open an income escaping assessment AO has to issue
notice u/s 148 to the assessee.

DEDUCTION OF TAX AT SOURCE (TDS):

In certain specified cases of income, tax at source should be deducted by

the person responsible for making payment of such income. Income tax
Act provides that such tax must be deducted from the amounts of both
residents and non-residents according to the rates prescribed in the
Finance Act of that year. Sections 192 to 206 deal with the deduction of
tax at source.

The specified cases where tax is deducted at source are: salaries, interest
on securities, and interest other than interest on securities, dividends,
winning from lotteries and crossword puzzles, payment to contractors,
insurance commission, and winning from horse races and also on other
sums chargeable under the Act, which are paid to non-residents.

105 | P a g e
 ADVANCE PAYMENT OF TAX (Sec. 210)

ADVANCE TAX PAYMENT

Advance tax means income tax should be paid in advance instead of
lump sum payment at year end. It is also known as pay as you earn tax.
These payments have to be made in installments as per due dates
provided by the income tax department.

Assessee liable to pay advance tax

All assesse, if the total tax liability is Rs 10,000 or more in a financial

year have to pay advance tax. Advance tax applies to all tax payers,
salaried, freelancers, and businesses.

Assessee not liable to pay advance tax

Senior citizens, who are 60 years or older, and do not run a business, are
exempt from paying advance tax.

Dates for payment of Advance Tax

FY 2017-18 & FY 2016-17

For both individual and corporate taxpayers

Due Date Advance Tax Payable

On or before 15th June 15% of advance tax

On or before 15th September 45% of advance tax (i.e.45-15=30%)

On or before 15th December 75% of advance tax (i.e.75-45=30%)

On or before 15th March 100% of advance tax (i.e.100-75=25%)

106 | P a g e
Advance Tax Payable
Total = 15%+30%+30%+25%=100%
Note- Interest under section 234A, 234B and 234C will be applicable as the case may
be

1. Voluntary payment of advance tax u/s 210(1):

It is the duty of every assessee whether or not assessed previously to tax,

to deposit the amount of advance on or before each of the due dates
specified in section 211, in equal installments.

2. Increase or decrease in advance tax u/s 210(2):

Assessee is authorized to increase or decrease the amount of each

installment of advance tax in accordance with his estimate of his current
income.

3. Power of Assessing Officer u/s 210(3):

He may order such assessee in writing, at any time during the relevant
previous year but not later than 1st February, to deposit the advance tax
calculated in the manner specified in section 209(2).

4. Amendment of order issued u/s 210(4):

He may make an amended order asking the assessee to deposit the

amount of advance tax calculated on the basis of total income returned
in such return or assessed on regular assessment.

5. Assessee to intimate for reduction/increase in advance tax u/s 210(5):

He may intimate to the Assessing Officer to that effect and deposit that
percentage of advance tax based on his own estimates

107 | P a g e
REFUND OF TAX
If any person satisfies the Assessing Officer that the amount of tax paid
by him or on his behalf for any assessment year exceeds the amount with
which he is properly chargeable under the IT Act for that year he shall be
entitled to a refund of the excess.
Ordinarily the case of refund arises on account of following:
 The total tax deducted at source is higher than the amount of tax
liability as determined on regular assessment.
 The amount of advance tax paid or the tax paid the basis of self-
assessment exceeds the tax liability as determined on regular
assessment.
 By the rectification of a mistake.
 By the order of judgment in an appeal.
 Where relief for double taxation is granted.

Procedure for claiming refund:

The assessee has to apply for a refund and the application shall be in the
prescribed form (Form No 30) and shall be verified in the prescribed
manner.
The application for refund shall be accompanied by;
 A return unless the claimant has already made such a return to the
A.O.
 The certificate of the tax deduction at source.

No such claim shall be allowed, unless it is made within one year from
the end of the assessment year to which the claim is related.

108 | P a g e
APPEALS
 A tax payer can make a first appeal to the commission of income
tax (appeals) against the order of the assessing officer.
 A second appeal can be made by the tax payer or commissioner of
income tax to the income tax appellate tribunal against the order of
commissioner of income tax (appeals).
 An appeal to the high court can be made by the tax payer to
commissioner of income tax against the orders of income tax
appellate tribunal.
 An appeal to the Supreme Court can be made by the tax payer or
commissioner of income tax against the orders of high court.
REVISIONS
Under section 263
 The commissioner of Income tax himself can prefer a revision
order against the order made by the assessing officer if it is
prejudicial to the interest of revenue.
Under section 264
 The tax payer or the commissioner himself can apply for the
revision of the order made by the assessing officer

109 | P a g e
PROBLEMS

1.Sri Bose has estimated the following incomes for the financial year
2017-18

Income from H.P (Taxable)- ₹75,000

Income from Profession (Taxable)- ₹6,45,000

Dividend from X & Co- ₹10,000

Determine the amount of instalments payable as advance tax during the

financial year 2016-17.

Computation of Total Income

(For the financial Year 2017-18)
Income from H.P (Taxable) 75,000
Income from Profession (Taxable) 645,000
Dividend from X & Co Exempt
GTI 720,000
Less: Deduction Nil
Total Income 720,000

Tax Slabs 2016-17

Upto 2,50,000 NIL
Above 2,50,000 Upto 5,00,000 10%
Total
Above 5,00,000 Upto 10,00,000
20% Income 720,000
Above 10,00,000 30%

Step 1 2,50,000X10% 25,000

Step 2 Deduct 5,00,000 from 7,20,000 =2,20,000X20% 44000
Tax Liability 69,000
Add: Surcharge (if any) Nil
Add: Cess @ 3% 2070
Less: TDS Nil
Total Tax Liability 71,070

110 | P a g e
Amount payable on each Instalment:

Upto 15.6.2016 15% of ₹71,070 10,661

Upto 15.9.2016 30% of ₹71,070 21,321
Upto 15.6.2016 30% of ₹71,070 21,321
Upto 15.6.2016 25% of ₹71,070 17,767

2. A HUF has estimated the following taxable income for the financial
year 2016-17.
Income from H.P (Taxable)- ₹70,000
Income from Profession (Taxable)- ₹5,40,000
Interest from Fixed Deposit- ₹10,000
A member of the family is disabled. The family has spent ₹12,000
on his training and deposited ₹35,000 for his maintenance in an
approved scheme of LIC of India.
Determine the amount of instalments payable as advance tax
during the financial year 2016-17.

Computation of Total Income

(For the financial Year 2016-17)

Income from H.P (Taxable) 70,000

Income from Profession (Taxable) 5,40,000
Income from other Source
Interest from Fixed Deposit 10,000
GTI 6,20,000
Less: Deduction: u/s 80DD 75,000
Total Income 5,45,000

Note: Deduction U/S 80DD

1. Any expenses incurred for medical treatment which includes
nursing, training as well as rehabilitation of dependent that is
disabled.

111 | P a g e
 2. The amount paid towards LIC, unit trust of India or any of the
other insurers for the sole purpose of buying specified schemes
to help in maintenance of a dependent with disabilities.
3. Eligible amount u/s 80 DD is ₹75,000, entire amount of
₹75,000 can be claimed even if the expenses incurred is less
than ₹75,000.

Tax Slabs 2016-17

Upto 2,50,000 NIL
Above 2,50,000 Upto 5,00,000 10%
Total
Above 5,00,000 Upto 10,00,000
20% Income 5,45,000
Above 10,00,000 30%

Step 1 2,50,000X10% 25,000

Step 2 Deduct 5,00,000 from 5,45,000 =45,000X20% 9,000
Tax Liability 34,000
Add: Surcharge (if any) Nil
Add: Cess @ 3% 1020
Less: TDS Nil
Advance Tax Liability 35,020

Upto 15.6.2016 15% of ₹35,020 5,253

Upto 15.9.2016 30% of ₹35,020 10,506
Upto 15.6.2016 30% of ₹35,020 10,506
Upto 15.6.2016 25% of ₹35,020 8,755

112 | P a g e
 4. Estimated GTI of H Co. is ₹3,00,000 which includes ₹1,00,000
on account of LTCG earned on 1th Sept. 2016. Compute Advance
tax payable by the company assuming ₹6,800 shall be deducted
at source during the financial year 2016-17.

Computation of Advance Tax Payment

Total Income 3,00,000

Tax on LTCG @ 20% 20000
Tax on Other Total Income @ 30% 60000
Tax Liability 80000
Add: Surcharge(if any) Nil
Add: Cess @ 3% 2400
82400
Less: TDS 6800
Advance tax payble 75600

Upto 15.6.2016 15% of ₹75,600 11,340

Upto 15.9.2016 30% of ₹75,600 22,680
Upto 15.6.2016 30% of ₹75,600 22,680
Upto 15.6.2016 25% of ₹75,600 18,900

113 | P a g e
 REFERENCES
1. Dr.Vinod K. Singhania, Dr.Kapil Singhania, Direct Taxes Law & Practice,
57th edition, TAXMANN’S Publication Pvt.Ltd.
2. Dr.H.C. Mehrotra, Dr.S.P. Goyal, Income Tax, Tax planning and
Management, 37th Edition, Sahitya Bhawan Publications.
3. T.N. Manoharan & G.R. Hari, Direct Tax Laws, ISBN 978-93-5039-037-5,
Snow White Publication Pvt. Ltd.
4. www.icai.org

114 | P a g e