Professional Documents
Culture Documents
Tax
GST
Income Tax
Customs
Miscellaneous
other Taxes
Income Tax Law
Comprises of the following:
Income Tax Act, The Income-Tax Act, 1961 is the charging Statute of Income Tax in
1961 India. It provides for levy, administration, collection and recovery of
Income Tax. The Income Tax Act is the most complex statute in
India. But this is soon to change.
Income Tax CBDT is empowered to frame rules from time to time to carry out
Rules, 1962 the purpose and proper administration of the Act. All forms,
procedures and principles of valuation of perquisites prescribed
under the Act are provided in the Rules framed by CBDT.
Government Notification issued by Central/ State Government from time to time
Notifications to deal with provisions of Income Tax.
Finance The Finance Minister presents the Finance Bill in both houses of
Act(Annual) Parliament. Part A of the Budget contains proposed policies of the
Government in fiscal areas and Part B contains the detailed tax
proposals. Once the Finance Bill is approved by the parliament and
gets the assent of the President, it becomes the Finance Act.
Circulars & CBDT issues Circulars and Notifications from time to time, these
Clarification of Circulars clarify doubts regarding the scope and meaning of the
CBDT various provisions of the Act. These Circulars are binding on
Assessing Officers but not on assesses and Courts and are issued by
the CBDT which shall not be contrary to the provisions of the Act.
Judicial Decision The decision of High Court is applicable to respective state while
decisions of Supreme Court becomes law and applies to all state
except Jammu and Kashmir.
Example:
1. A is running a business from 2016 onwards. Determine the previous year for the
Assessment Year 2021-22.
- The previous year will be 1.4.2020 to 31.3.2021.
BASIC CONCEPTS 3
2. A Chartered Accountant sets up his profession on 1st July, 2020. Determine the
previous year for the assessment year 2021-22
- The previous year will be from 1.7.2020 to 31.3.2021.
Deemed Assessee
Deemed Assessee means a person who is treated as an assessee under the Income Tax Act.
This would include –
1. Trustee of a trust,
2. Legal representative of a deceased person u/s 159,
4 INCOME TAX
2. Disputed Income: Any dispute regarding the title of the income cannot hold up the
assessment of the income in the hands of the recipient. The recipient is, therefore,
chargeable to tax though there may be rival claims to the source of the income.
3. Pin Money: Pin money received by a woman for her dress or private expenditure as
also small savings effected by a housewife out of moneys given to her by her husband
for running the expenses of the kitchen would not be income in the eyes of the law. Any
property acquired with the aid of such money or savings would form a capital asset
belonging to the lady.
4. Income must come from outside: A person cannot earn income from himself. In case
of mutual activities, where some people contribute to the common fund and are
entitled to participate in the fund and a surplus arises which is distributed to the
contributors of the fund, such surplus cannot be called income.
5. The income, which has in any preceding year been included in the total income of a
person on accrual basis, shall not again be included on its receipt by him in India during
the previous year.
6. Any income is to be included in the total income only if it is taxable as per the
provisions of the Income-Tax Act and shall be computed as per the provisions of the
Act. Exempt income shall not form part of total income.
BASIC CONCEPTS 5
Hindu Co-parceners
Some members of the HUF are called co-parceners. They are related to each other and to the
head of the family. HUF may contain many members, but members within four degrees
including the head of the family (karta) are called co-parceners. It may be noted that only
the coparceners have a right to partition.
A daughter of coparcener by birth shall become a coparcener in her own right in the same
manner as the son. However, other female members of the family, for example, wife or
daughter-in-law of a coparcener are not eligible for such coparcenary rights.
Aggregation of income
Total Income
Capital Gains Taxable during the previous year in which the Capital Asset is
transferred (i.e.) year of accrual.
Other Sources Cash or Mercantile system of accounting, regularly employed
by the assessee.
2. For Resident Senior Citizen i.e. 60 years or more but less than 80 years at any
time during P.Y. [Born during April 2, 1941 and April 1, 1961]
Income Tax Rate
0 - ` 3,00,000 Nil
` 3,00,001 - ` 5,00,000 5%
` 5,00,001 - ` 10,00,000 20%
More than ` 10,00,000 30%
3. For Other Individual, HUF, AOP, BOI & AJP (Resident or Non-Resident) [Born on
or after April 2, 1961]
Income Tax Rate
0 - ` 2,50,000 Nil
` 2,50,001 - ` 5,00,000 5%
` 5,00,001 - ` 10,00,000 20%
More than ` 10,00,000 30%
CBDT Clarification
CBDT clarifies that a person born on 1st April would be considered to have attained a
particular age on 31st March, the day preceding the anniversary of his birthday.
Alternative Tax Rates Slab for Individuals and HUF (Resident or Non-Resident) [Sec.
115 BAC]
The tax rate applicable, shall be as under, if an individual and HUF exercises an option to not
to claim various exemptions or deductions provided otherwise under the Act:-
Any individual or HUF who exercises such option shall not be eligible to claim various
exemptions or deductions available under the Act including the following:-
(i) Standard deduction of ` 50,000
(ii) Leave Travel Allowance under Section 10(5)
(iii) House Rent Allowance under Section 10(13A)
(iv) Certain allowances under Section 10(14) as will be prescribed
(v) Deduction of interest up to ` 2,00,000 allowable under Section 24(b) in respect of self-
occupied property.
(vi) Deduction of 1/3rd of family pension allowable under Section 57(iia)
(vii) All deductions allowed under Chapter VI-A (except the deduction under Section 80
CCD (2) and Section 80 JJAA) including of ` 1,50,000 under Section 80C in respect of
contribution to provident fund, life insurance premium and deduction of ` 50,000 as
contribution to NPS under Section 80CCD (1B).
(viii) Allowance for Minor Child Income allowable under Section 10(32) on clubbing of
minor income
In addition to the above, the following deductions/ exemptions allowed while computing
income of business or profession shall also not be available.
(ix) Exemption for SEZ Unit under Section 10AA
(x) Additional initial depreciation in respect of plant and machinery under Section
32(1)(iia)
(xi) Investment allowance in respect of new plant and machinery in notified backward
areas under Section 32AD
(xii) Tea/Coffee/Rubber development benefit under Section 33AB
(xiii) Site restoration benefit under Section 33ABA
BASIC CONCEPTS 9
(xiv) Various deductions for donation for expenditure on scientific research or social
sciences research under section 35(1)(ii), section 35(1)(iia), section 35(1)(iiia) or
under section 34(2AA)
(xv) Accelerated capital deduction for specified businesses under Section 35AD.
(xvi) Expenditure on agricultural extension project under Section 35CCC
5. Domestic Company
Indian Company and a foreign company which has made prescribed arrangements for
declaration and payment of dividends in India.
10 INCOME TAX
6. Foreign Company
Flat tax rate of 40%
BASIC CONCEPTS 11
Surcharge
Assessee Threshold Limit Rate of Surcharge
(If Total Income
Exceeds)
Including Excluding
income u/s income u/s
111A & 112A 111A & 112A
Individual/HUF/AOP/BOI/AJP 50 lakh 10% 10%
Individual/HUF/AOP/BOI/AJP 1 Crore 15% 15%
Individual/HUF/AOP/BOI/AJP 2 Crore 15% 25%
Individual/HUF/AOP/BOI/AJP 5 Crore 15% 37%
Firm/LLP 1 Crore 12%
Domestic Company 1 Crore 7%
Domestic Company 10 Crore 12%
Domestic Company (income
chargeable to tax u/s 115BAA -- 10%
or 115BAB)
Foreign Company 1 Crore 2%
Foreign Company 10 Crore 5%
Health & Education Cess: For all the above assessees @ 4% of Total Tax Payable.
Illustration 1: Mrs. X is non-resident in India for the Assessment Year 2021-22. For the
previous year 2020-21, her income chargeable to tax in India is ` 8,30,000. Find out tax
liability.
(i) If she doesn’t opt for Sec. 115BAC.
(ii) If she opts for Sec. 115BAC
(ii)
Taxable Income 8,30,000
Calculation of Tax on it
On first ` 2,50,000 Nil
` 2,50,001 - ` 5,00,000 @ 5% 12,500
` 5,00,001 - ` 7,50,000 @ 10% 25,000
` 7,50,001 - ` 8,30,000 15% 12,000
49,500
Health & Education Cess @ 4% 1,980
Tax Payable 51,480
Illustration 2: Mr. X is resident in India for the Assessment Year 2021-22. For the previous
year 2020-21, his income chargeable to tax in India is ` 4,30,000. Find out tax liability.
Solution: In the case of a resident individual exemption limit is ` 2,50,000.
Taxable Income 4,30,000
Calculation of Tax on it
On first ` 2,50,000 Nil
` 2,50,001 - ` 4,30,000 @ 5% 9,000
9,000
(-) Rebate u/s 87A (` 12,500, subject to maximum of tax payable) 9,000
Tax Payable Nil
BASIC CONCEPTS 13
Illustration 3: Mr. Y is resident in India for the Assessment Year 2021-22. For the previous
year 2020-21, his income chargeable to tax in India is ` 2,65,000. Find out tax liability.
Solution: In the case of a resident individual exemption limit is ` 2,50,000.
Taxable Income 2,65,000
Calculation of Tax on it
On first ` 2,50,000 Nil
`2,50,001 - `2,65,000 @ 5% 750
750
(-) Rebate u/s 87A (`12,500, subject to maximum of tax payable) 750
Tax Payable Nil
Illustration 4: Calculate tax payable when Mr. X having income of ` 10,56,240 was born on
(i) 15th Jan, 1941 (ii) 15th Jan, 1942. (iii) If she opts for Sec. 115BAC.
Solution: (i)
Taxable Income 10,56,240
Calculation of Tax on it
On first ` 5,00,000 Nil
` 5,00,001 - ` 10,00,000 @ 20% 1,00,000
` 10,00,001 - ` 10,56,240 @ 30% 16,872
1,16,872
Health & Education Cess @ 4% 4,675
Tax Payable 1,21,547
Tax Payable (rounded off u/s 288B) 1,21,550
(ii)
Taxable Income 10,56,240
Calculation of Tax on it
On first `3,00,000 Nil
`3,00,001 - ` 5,00,000 @ 5% 10,000
`5,00,001 - ` 10,00,000 @ 20% 1,00,000
` 10,00,000 - ` 10,56,240 @ 30% 16,872
1,26,872
Health & Education Cess @ 4% 5,075
Tax Payable 1,31,947
Tax Payable (rounded off u/s 288B) 1,31,950
(iii)
Taxable Income 10,56,240
Calculation of Tax on it
On first ` 2,50,000 Nil
` 2,50,001 - ` 5,00,000 @ 5% 12,500
14 INCOME TAX
Illustration 5: Mrs. X is resident in India for the Assessment Year 2021-22. For the previous
year 2020-21, her income chargeable to tax in India is ` 15,54,810. Find out tax liability if
date of birth of Mrs. X is (a) April 1, 1961, or (b) April 2, 1961. She didn’t opt for Sec.
115BAC.
Solution: In case resident taxpayer is 60 years or more at any time during the previous
year, the exemption limit is ` 3,00,000.
Situation (a) Mrs. X is 60 years on March 31, 2021. Consequently, she becomes a senior
citizen for the assessment year 2021-22 and the exemption limit would be ` 3,00,000.
In Situation (b) However, when she is below 60 years on March 31, 2021, the exemption
limit is ` 2,50,000. Tax liability will be calculated as follows-
Illustration 6: Taxable income is `5,78,668, calculate tax payable if they didn’t opt for Sec.
115BAC-
(i) Income earned by Mrs. Y, born on Aug 15, 1991.
(ii) Income earned by Mr. Y (Non-resident), born on Aug 15, 1951.
(iii) Income earned by Mrs. Y, born on Aug 15, 1930.
(iv) Income earned by Mrs. Y, born on Aug 15, 1952.
Solution:
(i)
Taxable Income 5,78,668
Taxable Income (rounded off u/s 288A) 5,78,670
Calculation of Tax on it
On first ` 2,50,000 Nil
` 2,50,001 - ` 5,00,000 @ 5% 12,500
`5,00,001 - ` 5,78,670 @ 20% 15,734
28,234
Health & Education Cess @ 4% 1,129
Tax Payable 29,363
Tax Payable (rounded off u/s 288B) 29,360
(ii)
Taxable Income 5,78,668
Taxable Income (rounded off u/s 288A) 5,78,670
Calculation of Tax on it
On first ` 2,50,000 Nil
`2,50,001 - ` 5,00,000 @ 5% 12,500
` 5,00,001 - `5,78,670 @ 20% 15,734
28,234
Health & Education Cess @ 4% 1,129
Tax Payable 29,363
Tax Payable (rounded off u/s 288B) 29,360
(iii)
Taxable Income 5,78,668
Taxable Income (rounded off u/s 288A) 5,78,670
Calculation of Tax on it
On first ` 5,00,000 Nil
` 5,00,001 - ` 5,78,670 @ 20% 15,734
16 INCOME TAX
15,734
Health & Education Cess @ 4% 629
Tax Payable 16,363
Tax Payable (rounded off u/s 288B) 16,360
(iv)
Taxable Income 5,78,668
Taxable Income (rounded off u/s 288A) 5,78,670
Calculation of Tax on it
On first ` 3,00,000 Nil
` 3,00,001 - ` 5,00,000 @ 5% 10,000
`5,00,001 - ` 5,78,670 @ 20% 15,734
25,734
Health & Education Cess @ 4% 1,029
Tax Payable 26,763
Tax Payable (rounded off u/s 288B) 26,760
Situation [ii]
Taxable Income 2,24,05,725
Taxable Income (Rounded off u/s 288 A) 2,24,05,730
BASIC CONCEPTS 17
Situation [iii]
Taxable Income 2,24,05,725
Taxable Income (Rounded off u/s 288 A) 2,24,05,730
Tax on it @ 30% 67,21,719
+ Surcharge @ 7% 4,70,520
71,92,239
Health & Education Cess @ 4% 2,87,690
Tax payable 74,79,929
Tax payable (rounded off u/s 288 B) 74,79,930
Situation [iv]
Taxable Income 2,24,05,725
Taxable Income (Rounded off u/s 288 A) 2,24,05,730
Tax on it @ 25% 56,01,433
+ Surcharge @ 7% 3,92,100
59,93,533
Health & Education Cess @ 4% 2,39,741
Tax payable 62,33,274
Tax payable (rounded off u/s 288 B) 62,33,270
Marginal Relief
Illustration 9: X has total income of ` 1,00,60,000. Compute his tax liability for Assessment
Year 2021-22.
Solution:
`
Total Income 1,00,60,000
Calculation of Tax on it
On first ` 2,50,000 Nil
` 2,50,001 - ` 5,00,000 @ 5% 12,500
` 5,00,001 - ` 10,00,000 @ 20% 1,00,000
` 10,00,001 - ` 1,00,60,000 @ 30% 27,18,000
28,30,500
Add: Surcharge @ 15% 4,24,575
32,55,075
Less: Marginal Relief = (Increase in Tax - Increase in Income)
= (`32,55,075–`30,93,750) – (` 1,00,60,000-`1,00,00,000)
= (`1,61,325 – ` 60,000) 1,01,325
Tax before Cess 31,53,750
Add: Health &Education Cess @ 4% 1,26,150
Tax Liability 32,79,900
Illustration 10: XY Traders, a firm, has total income of `1,00,60,000. Compute its tax
liability for Assessment Year 2021-22.
Solution:
`
Total Income 1,00,60,000
Tax on `1,00,60,000 at flat rate @ 30% 30,18,000
Add: Surcharge @ 12% 3,62,160
33,80,160
Less: Marginal Relief= (Increase in Tax - Increase in Income)
= (`33,80,160–`30,00,000) – (`1,00,60,000 - `1,00,00,000)
=(`3,80,160 – ` 60,000) 3,20,160
Tax before Cess 30,60,000
Add: Health &Education Cess @ 4% 1,22,400
Tax Liability 31,82,400
Illustration 11: X Ltd., a domestic company, has gross total income of ` 1,01,25,000 and
deduction allowed u/c. VI A are ` 65,000.
Compute tax liability for assessment year 2021-22.
20 INCOME TAX
Solution:
`
Gross Total Income 1,01,25,000
Less: Deductions u/s. 80C to 80U 65,000
Total Income 1,00,60,000
Tax on ` 1,00,60,000 at flat rate @ 30% 30,18,000
Add: Surcharge @ 7% 2,11,260
32,29,260
Less: Marginal Relief= (Increase in Tax - Increase in Income)
= (`32,29,260–`30,00,000) – (`1,00,60,000 -` 1,00,00,000)
= (`2,29,260 – ` 60,000) 1,69,260
Tax before Cess 30,60,000
Add: Health &Education Cess @ 4% 1,22,400
Tax Liability 31,82,400
In these cases, income of a previous year may be taxed as the income of the Assessment
Year immediately preceding the normal Assessment Year.These exceptions have been
incorporated in order to ensure smooth collection of income-tax from the aforesaid
taxpayers who may not be traceable if tax assessment procedure is postponed till the
commencement of the normal assessment.
satisfactory, unless the person (being a resident) in whose name the amount is credited
also offers explanation about the source and nature of the amount credited. Further,
such explanation should be found to be satisfactory by the assessing officer. In the
event of failure to do so, the entire amount credited will be taxed. The provision does
not apply to amount received from a venture capital fund or a venture capital company.
4. Amount of investment, etc., not fully disclosed in books of account [Sec. 69B]
Where in any financial year the assessee has made investments or is found to be the
owner of any bullion, jewellery or other valuable article, and the Assessing Officer find
that the amount expended on making such investments or in acquiring such bullion,
jewellery or other valuable article exceeds the amount recorded in this behalf in the
books of account maintained by the assessee for any source of income, and the assessee
offers no explanation about such excess amount or the explanation offered by him is
not, in the opinion of the Assessing Officer, satisfactory, the excess amount may be
deemed to be the income of the assessee, for such financial year.
The proviso to section 69C provides that notwithstanding anything contained in any
other provision of the Act, such unexplained expenditure which is deemed to be the
income of the assessee shall not be allowed as a deduction under any head of income.
Under each head there may be several sources of income.Thus, an assessee may be carrying
3 business say, that of Chemical, Paper and Tea. In that case 3 businesses will constitute 3
sources of income all chargeable under the head Profits and Gains from Business or
Profession.
MCQ
5. In respect of a non-resident assessee, who is of the age of 60 years or more but less
than 80 years at any time during the previous year 2020-21.
(a) Basic exemption of ` 2,50,000 is available
(b) Basic exemption of ` 3,00,000 is available
(c) Basic exemption of ` 3,50, 000 is available
(d) Basic exemption of ` 5,00,000 is available.
26 INCOME TAX
6. The rate of tax applicable to a domestic company for A.Y. 2021-22, where
turnover/gross receipts do not exceed ` 400 crore during the P.Y. 2018-19, is –
(a) 29%
(b) 25%
(c) 30%
(d) None of the above
10. Where the total income of an artificial juridical person is ` 3,10,000, the income-tax
payable is ` ……………. and surcharge payable is ` ……………
(a) ` 3,000; surcharge - nil.
(b) ` 6,000; surcharge - nil.
(c) ` 11,000; surcharge - ` 1100
(d) ` 93,000; surcharge - ` 4650
BASIC CONCEPTS 27
Unsolved Exercise
Q1: A resident individual Mr. A age 35 years has gross total income of ` 9,65,000. Calculate
tax on it. Individual opted for Sec. 115BAC. [Ans. ` 72,540]
Q2: Calculate tax payable when Mr. X was born in 1985 having income of ` 5,56,240. Mr. X
opted for Sec. 115BAC. [Ans. ` 18,850]
Q3: Mrs. X (Resident woman) born in 1942 has taxable income of ` 5,42,357. Calculate tax
payable by Mrs. X. She did not opted for Sec. 115BAC [Ans. ` 19,210]
Q5: Mr. Ramesh is resident in India for the assessment year 2021-22. For the previous year
2020-21, his income chargeable to tax in India is ` 2,68,000. Find out tax liability.
[Ans. Nil]
Q6: Calculate tax payable by a Indian company having taxable income of ` 1,39,05,624.
Turnover of Company in PY 2018-19 is less than ` 400 Crore.
[Ans. ` 38,68,540]
Q7: Taxable income is ` 6,32,156, calculate tax payable if not opted for Sec. 115BAC -
(i) Income earned by Mr. X, born on Oct 26, 1988.
(ii) Income earned by Mr. X, born on Oct 26, 1943.
(iii) Income earned by Mrs. X, born on Oct 26, 1932.
(iv) Income earned by Mrs. X (Non-resident), born on Oct 26, 1940.
[Ans. ` 40,490; ` 37,890; ` 27,490; ` 40,490]
2 RESIDENTIAL STATUS
Different Taxable Entities
All taxable entities are divided in the following categories for the purpose of determining
residential status:
1. Individual
2. Hindu Undivided Family
3. Company
4. Firm or any other Person
Residential Status
An individual and a Hindu undivided family can either be:
1. Resident and ordinarily resident in India; or
2. Resident but not ordinarily resident in India; or
3. Non-resident in India
Types of Residents
Resident Non-Resident
All other assessees (viz., a firm, a company and every other person) can either be:
a. Resident in India; or
b. Non-resident in India.
26 RESIDENTIAL STATUS
Types of Residents
Resident Non-Resident
Exceptions
The period of “60 days” referred to in Basic Condition (b) above has been extended to 120
days in case of:
1. An Indian citizen who leaves India during the previous year for the purpose of
employment outside India or an Indian citizen who leaves India during the previous
year as a member of the crew of an Indian ship.
2. Indian citizen or a person of Indian origin who comes on a visit to India during the
previous year.
However, the period of “60 days” referred to in Basic Condition (b) above has been
extended to 182 days in respect of citizen of India in the first year when they become non-
resident on leaving India as a member of the crew of the ship or for the purposes of
employment outside India.
Note
1. Purpose of employment does not mean leaving India for taking employment outside
India but leaving India for the purposes of employment (the employment may be in
India or may be outside India). Thus, the individual need not be an unemployed person
who leaves India for taking employment outside India.
2. A person is deemed to be of Indian origin if he, or either of his parents or any of his
grand-parents, was born in undivided India. It may be noted that grand-parents include
both maternal and paternal grand-parents.
3. It is not essential that the stay should be at the same place or continuous.
INCOME TAX 27
6. If, information is not available to calculate the period of stay of an individual in India in
terms of hours, then both the days (i.e. the day of entry and departure) shall be taken as
stay of the individual in India.
7. According to Rule 126, for the purposes of section 6(1), in case of an individual, being a
citizen of India and a member of the crew of a ship, the period or periods of stay in
India shall, in respect of an eligible voyage, not include the following period:
Period to be excluded
Period commencing from Period ending on
The date entered into the and The date entered into the Continuous
Continuous Discharge Certificate in Discharge Certificate in respect of
respect of joining the ship by the signing off by that individual from the
said individual for the eligible ship in respect of such voyage.
voyage.
If tax has not been paid on any part of the global income, then Income Tax Officer can ask
why the same has not been paid and if such Indian non resident claims that he has not been
paid tax because he has earned income in a country where it is not taxable and if he is not
resident of that country, then this clause may get invoked. The clarification issued by CBDT
states that “in case of an Indian citizen who becomes deemed resident of India under this
provision, income earned outside India, shall not be taxed in India unless it is derived from
an Indian business or profession”.
Non-Resident
An individual is a non-resident in India if he satisfies none of the basic conditions [i.e.,
condition (a) or (b)].
28 RESIDENTIAL STATUS
Control and management is situated at a place where the decisions concerning the affairs of
the family are taken. Although, it is karta who normally has control and management of the
affairs of a Hindu Undivided Family yet any other coparcener can control and manage the
affairs.
Note:
1. A company cannot be “ordinarily” or “not ordinarily resident”.
2. Place of Effective management to mean the place where key management and
commercial decisions that are necessary for the conduct of the entity’s business as a
whole, are, in substance made.
Rules to determine residential status of Firm, AOP, BOI [Sec. 6(2)] or any other
person [Sec. 6(4)]
Place of Control Residential Status
Control and management of the affairs of a firm/ other persons
is:
Wholly in India Resident
Wholly outside India Non-resident
Partly in India and partly outside India Resident
Note:
1. A firm/ other persons cannot be “ordinarily” or “not ordinarily resident”.
2. The residential status of the partners/ members of the firm/ association is not relevant
in determining the status of the firm/ association.
3. Control and management is situated at a place where the decisions concerning its
affairs are taken. In the case of a firm, control and management is vested in partners
and in case of an AOP/BOI it is vested in Principal Officer.
Type of Income
Indian Income
If income is received (or deemed to be received) in India during the previous year or
accrues (or arises or is deemed to accrue or arise) in India during the previous year or
received and accrues both in India during the previous year is said to be Indian Income.
Any income chargeable under head salary payable by Government of India to a citizen of
India for his services outside India shall be deemed to accrue or arise in India.
Foreign Income
If income is neither received (or not deemed to be received) in India; nor it accrue or arise
(or not deemed to accrue or arise) in India is said to be foreign income.
30 RESIDENTIAL STATUS
or in India).
Illustration 2: For the previous year 2020-21, X reports the following income.
`
Fees for technical services paid by a non-resident company for a project
situated outside India (Income is received outside India and later on it is 97,000
gifted to Mrs. X)
Income from a profession set up in India, service is rendered from India but 1,24,000
amount is received in USA (later on remitted to India)
Rental income from house property situated in Kenya (amount is received in 80,000
USA which is entirely used for the education of his daughter in USA)
Agricultural income from Bhutan (received in Nepal and agricultural 2,00,000
operations are controlled from India) 70,000
Agricultural income from Kerala
Rental income of property situated in Kenya pertaining to the previous year 75,000
2019-20 is remitted to India in the current year
Technical fees paid by Government of India for a foreign project (amount is 90,000
received outside India)
Find out the income of X chargeable to tax for the Assessment Year 2021-22 if X is (i)
resident and ordinarily resident; (ii) resident but not ordinarily resident and (iii) non-
resident in India.
Solution:
Nature of Resident Not Non
income ` ordinarily resident
resident `
`
Fees for technical services Foreign income 97,000 Nil Nil
Profession set up in India Indian income 1,24,000 1,24,000 1,24,000
House property in Kenya Foreign income 80,000 Nil Nil
Agricultural income from Bhutan Foreign income 2,00,000 2,00,000 Nil
Agricultural income from Kerala Exempt income Nil Nil Nil
Income of earlier year remitted to Net income of
India Current Year Nil Nil Nil
Technical fees by Government of
India Indian income 90,000 90,000 90,000
Net Income 5,91,000 4,14,000 2,14,000
Illustration 3: From the following information given by X, determine his net income for the
Assessment Year 2021-22 assuming that X is (i) resident but not ordinarily resident; or (ii)
non-resident in India:
34 RESIDENTIAL STATUS
Illustration 5: Mr. Peter, a foreigner, came to India from Poland for the first time on 1st
April, 2014. He stayed here continuously for 3 years and went to France on 1st April, 2017.
He, however, returned to India on 1st July, 2017 and went to Poland on 1st Dec., 2018. He
again came back to India on 25th January, 2021 on a service in India. What is his residential
status for the A.Y. 2021-22?
Solution:
Assessment Year 2021-22 (Previous Year 1.4.2020 to 31.3.2021)
(i) He is in India from 25.1.2021 to 31.3.2021, i.e. 7 + 28 + 31 = 66 days.
(ii) In the preceding four years his stay in India is as under:
1.4.2019 to 31.3.2020 – Nil
1.4.2018 to 31.3.2019– 30+31+30+31+31+30+31+30+1=245 days
1.4.2017 to 31.3.2018 – 31+31+30+31+30+31+31+28+31=274 days
1.4.2016 to 31.3.2017 – 365 days.
Thus, in all he remained in India for 245 + 274 + 365 = 884 days during the four years and
in PY for more than 60 days (i.e., 66 days), hence he is resident for the Assessment Year
2021-22, as per basic condition (b).
Now let us see whether he is ordinarily resident or not.
36 RESIDENTIAL STATUS
He was not non-resident in India for seven out of ten previous years preceding the previous
year thus he is ordinarily resident in India for the A.Y. 2021-22.
Illustration 6: Mr. John, a foreign national came to India for the first time on June 15, 2015.
During the financial years 2015-16, 2016-17, 2017-18, 2018-19, 2019-20, & 2020-21 he
stays in India for 120 days, 115 days, 15 days, 191 days, 124 days and 80 days respectively.
Determine his residential status for the Assessment Year 2021-22.
Solution: During the previous year 2020-21 his stay in India was for only for 80 days, so he
does not satisfy the first condition of becoming a resident as he was not in India for at least
182 days during the previous year. He was, however, in India for more than 365 days during
the four years preceding the previous year, i.e., his stay during the previous years 2016-17
to 2019-20 was for 445 days and during the previous year 2020-21 he stayed in India for
more than 60 days (i.e., 80 days), he is resident for the Assessment Year 2021-22 as per
basic condition (b).
Now let us see whether he is ordinarily resident or not.
Mr. John was not resident in India for 4 years during 10 years preceding the previous year;
hence he is not ordinarily resident in India for the Assessment Year 2021-22.
Illustration 7: Mr. Hilton, foreign cricketer comes to India for 100 days every year since the
financial year 2008-2009. Find out his residential status for the assessment year 2021-22.
Solution: During the previous year 2020-21 he did not stay in India for 182 days; but
during the four years preceding the previous year he remained in India for (100 x 4) = 400
days (i.e., more than 365 days) and during the previous year 2019-20 he has been in India
for more than 60 days. Hence, basic condition (b) is fulfilled and he is resident in India for
the Assessment Year 2021-22.
He has been resident in India for more than 4 years during 10 years preceding the previous
year. He will be ordinarily resident in India for the A.Y. 2021-22.
Illustration 8: A Hindu Undivided Family carries on the business of export of dry fruits
from Afghanistan, and for this purpose it has a permanent office there which is controlled
by the younger brother of the karta of the family who resides there permanently. The karta
permanently resides in India but sometimes visits his office in Afghanistan for a few days.
The Policy decisions are taken by the karta but in emergency his younger brother can also
take decision himself. Day to day affairs are, however, controlled by the younger brother.
What is the residential status of the family?
Solution: As the control and management of the family business is, at least, partially
situated in India and as the karta permanently resides in India but only sometimes visits
Afghanistan for a few days, he becomes resident and ordinarily resident in India. Hence, the
family is ordinarily resident in India.
INCOME TAX 37
Illustration 9: X, a German tourist, comes to India for the first time on June 20, 2020. He
leaves India on August 10, 2020. Determine his residential status for the Assessment Year
2021-22. Does it make any difference if he comes to India on a business trip or if he is an
Indian citizen?
Solution: X is a foreign citizen. He is not a person of Indian origin. During the previous year
2020-21, he is in India from June 20, 2020 to August 10, 2020 (i.e., June 2020: 11 days + July
2020: 31 days + August 2020: 10 days = 52 days). He is unable to satisfy any of the basic
conditions. Consequently, he is non-resident in India. The answer will remain the same even
if X comes to India on a business trip or X is an Indian citizen.
Illustration 10: X, an Italian citizen, comes to India for the first time (after 30 years) on
April 2, 2020 and stays up to November 26, 2020*. Determine his residential status for the
Assessment Year 2021-22.
Solution: During the previous year 2020-21, X is in India for a period of 239 days as
follows:
April 2020 29 days August 2020 31 days
May 2020 31 days September 2020 30 days
June 2020 30 days October 2020 31 days
July 2020 31 days November 2020 26 days
By satisfying the first basic condition, X becomes resident in India. However, he is unable to
satisfy any of the additional condition, as he comes to India for the first time in last 30 years
on April 2, 2020. He satisfies one of the basic conditions and none of the additional
conditions. He is, therefore, resident but not ordinarily resident in India for the previous
year 2020-21.
Illustration 11: X, a foreign citizen, comes to India for the first time on July 27, 2020. On
November 10, 2020, he leaves India for Burma on a business trip. He comes back on
February 15, 2021. He maintains a dwelling place in India from the date of his arrival in
India (i.e., July 27, 2020 till February 27, 2021 when he leaves for Kuwait). Determine his
residential status for the Assessment Year 2021-22. Does it make any difference if X is a
person of Indian origin?
Solution: During the previous year 2021-22, X is in India for a period of 120 days as
follows:
July 2020 5 days October 2020 31 days
August 2020 31 days November 2020 10 days
September 2020 30 days February 2021 13 days
He satisfies none of the basic conditions and consequently he is non-resident in India for the
Assessment Year 2021-22.
As X is in India for only 120 days in A.Y. 2021-22, so he is non-resident even if he is a person
of Indian origin.
38 RESIDENTIAL STATUS
Illustration 12: X, a foreign citizen (not being a person of Indian origin), comes to India for
the first time on May 2, 2015. From May 2, 2015 to March 31, 2022, he is present in India
for 962 days (2015-16: 190 days; 2016-17: 300 days; 2017-18: 90 days; 2018-19: 10 days;
2019-20: 200 days; 2020-21: 72 days and 2021-22: 100 days. Determine the residential
status of X for the Assessment Year 2021-22.
Solution: During the previous year 2020-21, X is in India for 72 days and during earlier 4
years he is in India for 600 days. He satisfies one of the basic conditions and consequently
he is resident in India. A resident individual is either ordinarily resident or not ordinarily
resident.
Previous years Presence in India (number of Resident (R) or non-
days) resident (NR)
2019-20 200 R
2018-19 10 NR
2017-18 90 R
2016-17 300 R
2015-16 190 R
Additional Condition: This condition requires that an individual should be resident in
India for at least 4 out of 10 years preceding the relevant previous year. X, in the present
case, is resident in India for 4 years out of 10 years. He, thus, satisfies this condition.
Illustration 13: Mr. X came to India for the first time on 1st November, 2019. During his
stay in India upto 30th October, 2020 he stayed at Mumbai upto 10th May, 2020, and
thereafter remained in Bangalore till his departure from India. Determine his residential
status for the Assessment Year 2021-22.
Solution: During the previous year 1st April, 2020 to 31st March, 2021, Mr. X stayed in India
for 213 days.
April, 2020 30 days
May, 2020 31 days
June, 2020 30 days
July, 2020 31 days
August, 2020 31 days
September, 2020 30 days
October, 2020 30 days
213 days
Mr. X satisfies the first basic condition of being present in India for more than 182 days
during the previous year. Hence he is resident. However, he has not been resident in India
during the 10 previous years preceding 2020-21, thus he is resident but not ordinarily
resident in India.
INCOME TAX 39
MCQ
1. If Anirudh has stayed in India in the P.Y. 2020-21 for 181 days, and he is non-
resident in 9 out of 10 years immediately preceding the current previous year and
he has stayed in India for 365 days in all in the 4 years immediately preceding the
current previous year. His residential status for the A.Y. 2021-22 would be-
(a) Resident and ordinarily resident
(b) Resident but not ordinarily resident
(c) Non-resident
(d) Cannot be ascertained with the given information
2. Raman was employed in Hindustan Lever Ltd. He received a salary at ` 40,000 p.m.
from 1.4.2020 to 27.9.2020. He resigned and left for Dubai for the first time on
1.10.2020 and got salary of rupee equivalent of ` 80,000 p.m. from 1.10.2020 to
31.3.2021. His salary for October to December 2020 was credited in his Dubai bank
account and the salary for January to March 2021 was credited in his Bombay
account directly. He is liable to tax in respect of –
(a) Income received in India from Hindustan Lever Ltd;
(b) Income received in India and in Dubai;
(c) Income received in India from Hindustan Lever Ltd. and income directly credited
in India;
(d) Income received in Dubai
3. A company, other than an Indian company, would be a resident in India for the P.Y.
2020-21 if, during that year,
(a) Its Place of Effective Management is in India.
(b) Its control and management is wholly in India.
(c) Its control and management is partly in India.
(d) Majority of its directors are resident in India.
4. Income accruing in London and received there is taxable in India in the case of –
(a) Resident and ordinarily resident only
(b) Both resident and ordinarily resident and resident but not ordinarily resident
(c) Both resident and non-resident
(d) Non-resident
5. Incomes which accrue or arise outside India but received directly in India are
taxable in case of-
(a) Resident and ordinarily resident only
40 RESIDENTIAL STATUS
7. Fees for technical services paid by the Central Government will be taxable in case of-
(a) Resident and ordinarily resident only
(b) Resident but not ordinarily resident
(c) Non-resident
(d) All the above
9. Income from a business in Canada, controlled from Canada is taxable in case of-
(a) Resident and ordinarily resident only
(b) Resident but not ordinarily resident
(c) Non-resident
(d) All the above
10. Dividend Income from Australian company received in Australia in the year 2017,
brought to India during the previous year 2020-21 is taxable in case of-
(a) Resident and ordinarily resident only
(b) Resident but not ordinarily resident
(c) Non-resident
(d) None of the above
INCOME TAX 41
Unsolved Exercise
Q1. Mr. A, who was born in Uganda, is currently residing in London. His grandmother was
born in India in 1948 and his grandfather was born in India in 1945. He visits India
during the previous year 2013-2014, 2016-2017 and 2019-20 – 135 days, 190 days and
200 days respectively. He didn’t visit India in any of the other previous year for the past
10 years.
Determine his residential status, if for the previous year 2020-21, he was in India for
175 days.
[Ans. RNOR]
Q2. Mr. X was born in Pakistan in 1945. His son Y was born in India in 1970. He left India on
1.6.20 for employment in UK. His stay in India during 19-20 was 70 days, in 18-19 80
days, in 17-18 90 days & in 16-17 130 days. Determine his status during P/Y 2020-21.
[Ans. RNOR]
Q3. X a foreign citizen, comes to India for the first time on June 20, 2020. On September 6,
2020, he leaves India for Burma on a business trip. He comes back on January 1, 2021.
He maintains a dwelling place in India from the date of his arrival in India (i.e., June 20,
2020) till January 15, 2021 when he leaves for Kuwait. Determine his residential status
for the A/Y 2021-22. Does it make any difference if X is a person of Indian origin?
[Ans. NR, No]
Q4. X, a foreign citizen (not being a person of Indian origin) leaves India for the first time in
the last 12 years, on June 15, 2018. During the calendar year 2019, he comes to India on
November 20 for a period of 46 days. During the calendar year 2020, he does not come
to India at all. He finally comes back on January 30, 2021 at 10.30 p.m.
Determine his residential status for the A/Y 2021-22.
[Ans. ROR]
Q5. X is a foreign citizen. Since 1981, he comes to India every year in the month of April for
105 days. Find out the residential status of X for the A/Y 2021-22 if:
(i) X is not a person of Indian origin;
(ii) X was born in Lahore on March 8, 1940;
(iii) Grand mother of X was born in Dhaka in 1870; or
(iv) X was born in Poona in 1941.
[Ans. ROR, NR, NR, NR]
42 RESIDENTIAL STATUS
Q6. The Head Office of XY, a Hindu Undivided Family, is situated in Hong Kong. The family
is managed by Y (Since 1980) who is resident in India in 4 out of 10 years immediately
preceding the previous year 2020-21. Determine the status of the family for the A/Y
2021-22 if affairs of family business are
(i) Wholly controlled from Hong Kong;
(ii) Partly controlled from India.
[Ans. NR, ROR]
Q7. Determine residential status in the following cases for the Assessment Year 2021-22:
(i) The control and management of a HUF is situated in India. The manager of the
HUF visited England with his wife from 14-8-20 to 30-6-21. Earlier to that he was
always in India.
(ii) A company, whose registered office is in America, had place of effective
management for sometime in India.
(iii) In a partnership firm, there are three partners namely A, B and C. A and B reside in
India while C lives in Germany. The firm is fully controlled by C. During the
previous year Mr. C stayed for 6 months in India.
(iv) A V.I.P. Club is in India, whose director Mr. X belongs to China. The Club is
controlled fully by Mr. X. In the previous year, Mr. X did not come for a single day
to India.
[Ans. ROR, R, NR, NR]
Q8. X is a citizen of Bangladesh. His grandmother was born in a village near Dhaka in 1940.
He came to India for the first time since 1981 on 3-10-2020 for a visit of 190 days.
Determine the residential status of X for the A/Y 2021-22. Assuming that wife of X is a
resident but “not ordinarily resident in India” for the same year.
[Ans. NR, NR]
Q9. U was born in 1975 in India. His parents were also born in India in 1948. His grand
parents were, however, born in England. ‘U’ was residing in India till 15-3-2018.
Thereafter he migrated to England and took the citizenship of that country on
15-3-2020. He visits India during 2020-21 for 90 days. Determine the residential status
of ‘U’ for A/Y 2021-22.
[Ans. ROR]
Q10. M an Indian citizen left India for the first time on 24-9-2019 for employment in USA.
During the previous year 2020-21, he comes to India on 5-6-2020 for 115 days.
Determine the residential status of ‘M’ for A/Y 2020-21 and 2021-22.
[Ans. NR, NR]
INCOME TAX 43
Q11. Mr. Kohli, a citizen of India, is an export manager of Arjun Overseas Limited, an Indian
company, since 1-5-2016. He has been regularly going to USA for export promotion. He
spent the following days in USA for the last five years.
Previous Year ended No. of days spent in USA
31.3.2017 319 days
31.3.2018 150 days
31.3.2019 270 days
31.3.2020 310 days
31.3.2021 295 days
Determine his residential status for A/Y 2021-22. Assuming that prior to 1-5-2016 he
had never travelled abroad.
[Ans. ROR]
Q12. R Ltd. and S Ltd. companies are registered in Nepal and India respectively. All
meetings of Board of Directors of R Ltd. were held in India, whereas all board meetings
of S Ltd. were held in Nepal during the previous year 2020-21. Determine the
residential status of both the companies for the A/Y 2021-22.
[Ans. Both are Resident]
Q13. During the P/Y 2020-21, R and sons HUF was partly controlled from India by its Karta
R who is citizen of India but stays outside India. For the purpose of managing the
affairs of the HUF, R has been regularly visiting India. Determine the residential status
of the HUF for the A/Y 2021-22 if R has been visiting India for 100 days every year for
the last 12 years.
[Ans. ROR]
Q14. X, a German national, came to India for the first time on 1-7-2014. During the period
from 1-7-2014 to 31-3-2021, he stayed in India as follows– from 1-7-2014 to
31-10-2014, from 1-5-2015 to 31-10-2015, from 1-11-2016 to 31-12-2016 and from
1-7-2019 to 31-8-2020. During the P/Y ended on 31-3-2021, X’s income consisted of:
(i) Business in India: ` 40,000
(ii) Interest from an Indian company: ` 2,000
(iii) Dividend from non-Indian co received in Germany but remitted to India: ` 5,000
(iv) Business in Germany (controlled from India): ` 25,000
(v) Income from house property in Germany: ` 8,000
Determine, giving full reasons, the gross total income of X for the A/Y 2021-22 after
ascertaining his residence for the purpose of Income Tax.
[Ans. NR; ` 42,000]
3 EXEMPT INCOME
All receipts, which give rise to income, are taxable under the Income-Tax Act unless it is
specifically provided that it does not form part of total income. Such incomes which do not
form part of total income are called exempt income. As per section 10 to 13B, certain
incomes are either totally exempt from tax or exempt up to a certain amount.
Incomes which do not form part of Total Income
1. Incomes not to be included in total income of any person (Sec. 10)
2. Income of newly established units in Special Economic Zones (Sec. 10AA)
3. Income from property held for charitable or religious purposes (Sec. 11-13)
4. Income of Political Parties (Sec. 13A)
5. Income of a Electoral Trust (Sec. 13B)
Incomes not to be included in Total Income of any person [Sec. 10]
Agricultural Income [Sec. 10(1)]
Agricultural Income is totally exempt. Agricultural income, though exempt, is to be
aggregated in case of certain assesses for the purpose of determining the rate of tax on non-
agricultural income.
Agricultural Income u/s 2(1A) means:
(a) Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes.
(b) Any income derived from such land by way of agricultural operations including the
processing of agricultural produce, raised or received as rent in kind so as to render it
fit for the market or sale of such produce.
(c) Any income derived from any building, farmhouse or land utilized in connection with
cultivation of agricultural produce.
As per Explanation 3 to Section 2 (1A) Income derived from saplings or seedlings grown in
a nursery shall be deemed to be agricultural income.
7. Income from lease of land for grazing of cattle required for agricultural Yes
purpose
8. Salary to an active partner from a firm whose entire income is derived Yes
from agricultural operations
9. Interest on Capital to any partner from a firm whose entire income is Yes
derived from agricultural operations
10. Sale of trees replanted in forest and subsequent operations Yes
11. Compensation received from insurance Company for damage of any Yes
agricultural crop
Computation of Tax
Step 1 Tax on Total Income including Agricultural Income
Step 2 Tax on (Agricultural Income + Minimum Slab)
Step 3 Tax = Step 1 – Step 2.
Illustration 1: Miss Sonam, a resident and ordinarily resident in India, has derived the
following income from various operations (relating to plantations and estates owned by
her) during the year ended 31-3-2021:
`
(i) Income from sale of centrifuged latex processed plants grown in Darjeeling 3,00,000
(ii) Income from sale of coffee grown and cured in Yercaud, Tamil Nadu 1,00,000
(iii) Income from sale of coffee grown cured, roasted and grounded, in
Colombo. Sale consideration was received at Chennai 2,30,000
(iv) Income from sale of tea grown and manufactured in Shimla 4,00,000
(v) Income from sapling and seedling grown in a nursery at Cochin. Basic
operations were not carried out by her own land 1,05,000
Solution:
Computation of business income and agricultural income of Ms. Sonam for the A.Y.
2021-22
SI. Source of income Gross Business Agricultural
No. income income
% Amount Amount
(`) (`) (`)
(i) Sale of centrifuged latex from 3,00,000 35% 1,05,000 1,95,000
rubber plants grown in India
(ii) Sale of coffee grown and cured in 1,00,000 25% 25,000 75,000
India.
(iii) Sale of coffee grown, cured, 2,30,000 100% 2,30,000 --
roasted and grounded outside
India. (See Note 1 below)
(iv) Sale of tea grown and 4,00,000 40% 1,60,000 2,40,000
manufactured in India
(v) Saplings and seedlings grown in 1,05,000 -- 1,05,000
nursery in India (See Note 2
below)
Total 5,20,000 6,15,000
Note:
1. Where income is derived from sale of coffee grown, cured, roasted and grounded by the
seller in India, 40% of such income is taken as business income and the balance as
agricultural income. However, in this question, these operations are done in Colombo,
EXEMPT INCOME 47
Srilanka. Hence, there is no question of such apportionment and the whole income is
taxable as business income. Receipt of sale proceeds in India does not make this
agricultural income. In the case of an assessee, being a resident and ordinarily resident,
the income arising outside India is also chargeable to tax.
2. Explanation 3 to section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery would be deemed to be agricultural income whether or
not the basic operations were carried out by her on land.
Illustration 2: For the Assessment Year 2021-22 net agricultural income of Mrs. X (age: 37
years) is ` 8,20,000 and non-agricultural income is ` 3,00,000. Mrs. X pays ` 25,000 as life
insurance premium. Determine her tax liability if she does not opt for sec. 115 BAC.
Solution:
`
Gross total income 3,00,000
Less: Deduction under section 80C 25,000
Net Income 2,75,000
Income-Tax will be computed as under:
Income-Tax on ` 10,95,000 (i.e., agricultural income ` 8,20,000 + non-
agricultural income ` 2,75,000) 1,41,000
Income-Tax on ` 10,70,000 (i.e., agricultural income ` 8,20,000 + exempted
slab of income ` 2,50,000) 1,33,500
Income-Tax computed at (1) minus Income-Tax computed at (2) 7,500
(-) Rebate u/s 87A 7,500
Tax liability Nil
Illustration 3: For the Assessment Year 2021-22, Z, an individual (age 70 years), submits
the following information:
`
House Property Income 2,35,000
Revenue from the business of growing and manufacturing roasted coffee in India
(gross) 7,00,000
Expenditure on earning coffee income 3,20,000
Determine the tax liability of Z for the Assessment Year 2021-22 on the assumption that he
purchases NSC of ` 40,000.
48 INCOME TAX
Solution:
Computation of Income Agricultural Non-
Income agricultural
` income
`
House Property Income -- 2,35,000
Income from growing and manufacturing coffee (i.e.,
` 7,00,000 - ` 3,20,000) [60% of ` 3,80,000 is agricultural
income and balance is treated as non-agricultural income] 2,28,000 1,52,000
Total 2,28,000
Gross Total Income 3,87,000
Less: Deduction under section 80C 40,000
Net Income 3,47,000
Computation of tax Liability on Non-Agricultural
Income
Income-Tax on ` 5,75,000 (` 2,28,000 + ` 3,47,000) 25,000
Income-Tax on ` 5,28,000 (i.e., agricultural income `
2,28,000 + exempted slab of income ` 3,00,000) 15,600
Balance [i.e., (1) – (2)] 9,400
Less: Rebate u/s 87A 9,400
Nil
deduction under the Income-Tax Act on account of any loss or damage caused by such
disaster.
Interest payable by any public sector company in respect of such bonds or debentures
specified by the Central Government is exempt in the hands of investor. The Central
Government has specified the issue of following tax free, secured, redeemable, non-
convertible bonds of –
National Highways Authority of India (NHAI)
India Railways Finance Corporation Ltd. (IRFCL)
Housing and Urban Development Corporation Ltd. (HUDCL)
Power Finance Corporation (PFC)
Rural Electrification Corporation Ltd. (RECL)
The tenure of the bonds shall be 10 or 15 years.
• Interest on securities held by the Welfare Commissioner, or interest on deposits for the
benefit of the victims of the Bhopal gas leak disaster
• Notified bonds issued by local authority or by State Pooled Finance Entity
• Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by
the Central government
• Interest on Gold Deposit Certificate issued under Gold Monetization Scheme, 2015
• Interest on Public Provident Fund
• Interest on Sukanya Samriddhi Account Scheme
• Interest on Post Office Saving Bank Account. Interest beyond ` 3,500 & ` 7,000 (in Case
of Joint Post office saving bank A/c) shall be taxable.
Note: Interest on NSC is taxable. But accrued interest of initial 5 year is eligible for
deduction u/s 80C.
Daily and Constituency allowance, etc. received by MPs and MLAs [Sec. 10(17)]
Daily and Constituency allowance received by any person by reason of his membership of
Parliament or of any State Legislature shall be exempt.
Income of Swachh Bharat Kosh & Clean Ganga Fund [Sec. 10(23C)]
Income of Swachh Bharat Kosh & Clean Ganga fund is exempted.
Any income of Venture Capital Company or Venture Capital Fund from investment in
a Venture Capital undertaking [Sec. 10(23FB)]
Any income of a venture capital company or a venture capital fund from investment in a
venture capital undertaking shall be exempt. VCC will be exempt from tax irrespective of the
nature of business carried out by the VCU, as long as it satisfies the conditions imposed by
SEBI.
Any income accruing or arising or received by a person out of investments made in a VCC or
VCF shall be taxable in the same manner, or current year basis, as if the person had made
direct investment in the VCU.
domestic market. It is not qualified for any tax holiday. Unit C owns retail outlets in different
parts of the country.
From the information given below find out net income of X Ltd. for the assessment year
2021-22.
Unit Unit Unit
A B C
Net profit as per profit and loss account 90 (-)40 100
Turnover 1,200 400 1,500
Out of above, export turnover is 1,180 10 --
Amount remitted in convertible foreign exchange up to
1,002 2 --
September 30, 2021
Freight and insurance (charged over and above sale price from
importers and included in amount remitted in convertible 10 -- --
foreign exchange as well as turnover given above)
MCQ
4. The proportion of agricultural and business income in case of income derived from
the sale of coffee grown and cured by the seller in India is-
(a) 65% and 35%, respectively
(b) 75% and 25%, respectively
(c) 60% and 40%, respectively
(d) 70% and 30%, respectively
5. The proportion of agricultural and business income in case of income derived by the
assessee from growing of tea leaves in India and manufacturing of tea is –
(a) 65% and 35%, respectively
(b) 75% and 25%, respectively
(c) 60% and 40%, respectively
(d) 70% and 30%, respectively
56 INCOME TAX
8. The quantum of deduction available under section 10AA in respect of profit and
gains derived by a SEZ unit from export of articles is –
(a) 100% of export profits for first 10 consecutive AYs and 50% for next 5
consecutive AYs.
(b) 100% of export profits for first 5 consecutive AYs and 50% for next 10
consecutive AYs.
(c) 100% of export profits for first 15 consecutive AYs.
(d) 100% of export profits for first 5 consecutive AYs, 50% for export profits for
next 5 consecutive AYs and 50% of export profits for next 5 consecutive AYs, as
is credited to Special Reserve Account.
Employer includes
• Former
• Present
• Prospective Employer
Illustration 1: Until August 31, 2020, X is in the employment of Nokia Ltd. on the fixed
salary of ` 35,000 per month which becomes “due” on the first day of the next month. On
September 1, 2020, X joins LG Ltd. (salary being ` 40,000 per month which becomes “due”
on the last day of each month). Salary is actually paid on the seventh day of the next month
in both cases. Find out the amount of salary chargeable to tax for the Assessment Year
2021-22.
Solution: Computation of Salary for the Previous Year 2020-21:
Different months “Due date or “receipt” date, whichever is earlier Amount
`
1. March 2020 April 1, 2020 35,000
2. April 2020 May 1, 2020 35,000
3. May 2020 June 1, 2020 35,000
4. June 2020 July 1, 2020 35,000
5. July 2020 August 1, 2020 35,000
6. August 2020 September 1, 2020 35,000
7. September 2020 September 30, 2020 40,000
SALARY 59
Salary
Leave Salary
Fully Taxable
Non-Govt. Employee Govt. Employee
Note: Leave Encashment received by the legal heirs of a deceased employee is not taxable.
Illustration 2: Mr. H was employed by Elite Ltd. up to March 15, 2001. At the time of
leaving Elite Ltd., he was paid ` 3,50,000 as leave salary out of which ` 72,000 was exempt
from tax under section 10(10AA)(ii). Thereafter he joined XYZ (P) Ltd. and received
` 5,00,250 as leave salary at the time of his retirement on December 31, 2000. Determine
the amount of taxable leave salary from the following information.
Solution: The amount of exemption under section 10 (10AA) will be computed as under:
Step (a) – Length of service [14 years & 8 month, rounded off] 14 years
Step (b) – Rate of leave entitlement [actual rate is 44 days for each year of
service, it cannot exceed 30 days leave for each year of service] for each year 30days
Step (c) – Leave availed while in service 80 days
Leave to the credit of the employee at the time of retirement
[(14 X 30 – 80) ÷ 30] 11.333 months
`
Average monthly salary (for 10 months ending on December 31, 2020)
[i.e., (` 27,000 X 5 + ` 27,500 X 5) ÷ 10] 27,250
a. Unavailed leave X Average monthly salary (i.e., 11.333 months X ` 27,250
per month) 3,08,833
b. 10 months X average monthly salary (i.e.,` 27,250 X 10) 2,72,500
c. Maximum amount not taxable [` 3,00,000 less amount exempted earlier] 2,28,000
62 INCOME TAX
Foregoing of Salary
Waiver by an employee of his salary is forgoing of salary. Once salary accrues, subsequent
waiver does not absolve him from liability to income-tax.
Surrender of Salary
If any employee surrenders his salary to the Central Government under the Voluntary
Surrender of Salaries (Exemption from Taxation) Act, 1961, the surrendered salary would
not be included in computing his taxable income, whether he is a Private/Public Sector or
Government Employee.
Gratuity
Gratuity
Illustration 4: Mr. D, who is not covered by the Payment of Gratuity Act, 1972, retires on
November 20, 2020 from Divya Ltd. and receives ` 2,50,000 as gratuity after service of 35
years and 11 months. His salary is ` 10,000 per month up to July 31, 2020 and ` 12,000 per
month from August 1, 2020. Besides, he gets ` 1,000 per month as dearness allowance
(60% of which is part of salary for computing retirement benefits). What amount of gratuity
will be exempt from tax?
Solution: Computation of average monthly salary `
Basic salary from Jan 1, 2020 to Oct 31, 2020 (i.e., ` 10,000 X 7 + ` 12,000 X 3) 1,06,000
60% of dearness allowance (i.e., 60% of ` 1,000 X 10) 6,000
Total 1,12,000
64 INCOME TAX
Out of ` 2,50,000 received as gratuity, the least of the following three is exempt from tax:
a. ` 20,00,000
b. ` 1,96,000 (being half month’s average salary for each year of completed service, i.e.,
` 11,200 X ½ X 35);
c. ` 2,50,000 (being amount received as gratuity).
` 1,96,000, being the least, is exempt from tax and the balance of ` 54,000, is taxable for the
assessment year 2021-22.
Pension
Pension
Illustration 5: Determine the amount of pension taxable for the assessment year 2021-22
in the following cases on the assumption that it becomes due on the last day of each month:
1. X receives ` 825 per month as pension from the Central Government during the P/Y
2020-21
2. X receives ` 1,200 p.m. as pension from the Government of Punjab during the P/Y
2020-21.
3. X receives ` 1,000 per month as pension from ABC Ltd., a public limited company
during the previous year 2020-21.
4. X retires from the Central Government Service on May, 2020 he gets pension of ` 900
per month up to November 30, 2020 (i.e. ` 900 x 6). With effect from December 1,
2020. He gets one-third of his pension commuted for ` 46,000.
5. X retires from ABC Co. on June 30, 2020. He gets pension of ` 2,000 per month up to
January 31, 2021. With effect from February 1, 2021, he gets 60% of pension commuted
for ` 40,800. Does it make any difference if he also gets gratuity of ` 4,000 at the time of
retirement?
Solution:
1. Fully Taxable (825 x 12) = ` 9,900
2. Fully Taxable (1,200 x 12) = ` 14,400
3. Fully Taxable (1,000 x 12) = ` 12,000
4. Commuted Pension of ` 46,000 is exempt whereas uncommuted pension of ` 7,800 is
taxable (900 x 6 + 600 x 4)
5. Uncommuted Pension of ` 15,600 is taxable (2,000 x 7 + 800 x 2)
(i) Commuted Pension 40,800
- Exempt ½ × 40,800/60% 34,000
Taxable 6,800
(ii) If Gratuity is also received
Commuted Pension 40,800
-Exempt 1/3 x 40,800/60% 22,667
Taxable 18,133
Illustration 6: Mr. Ashok, who retired from the services of Hotel Taj Ltd., on 31.1.2021 after
putting on service for 5 years, received the following amounts from the employerfor the
year ending on 31.3.2021:
• Salary @ ` 16,000 p.m. comprising of basic salary of ` 10,000. Dearness allowance of
` 3,000, City compensatory allowance of ` 2,000 and Night duty allowance of ` 1,000.
• Pension @ 30% of basic salary from 1.2.2021.
• Leave salary of ` 75,000 for 225 days of leave accumulated during 5 year @ 45 days
leave in each year. He has not availed any earned leave during his tenure of 5 years and
utilized only his casual leave.
• Gratuity of ` 50,000.
Compute the total income of Mr. Ashok for the assessment year 2021-22.
66 INCOME TAX
Illustration 8: Mr. Gurvindar who is posted in Delhi but resides in Noida, gets ` 90,000 per
annum as basis pay. He gets ` 13,500 per annum as house rent allowance, though he pays
` 18,000 per annum as rent. During the previous year 2020-21, he receives ` 7,500 as
advance salary of April 2021. Can he claim the entire amount of house rent allowance as
exempt from tax for the assessment year 2021-22?
Solution: Out of ` 13,500 received as house rent allowance, the least of the following is
exempt from tax:
a. ` 36,000 (being 40% of salary);
b. ` 13,500 (being the amount of house rent allowance); and
c. ` 9,000 (being the excess of rent paid over 10% of salary, i.e., ` 18,000 – ` 9,000).
` 9,000 (Being the least of the three) is exempt from tax. The balance of ` 4,500 (i.e.,
` 13,500 – ` 9,000) is chargeable to tax for the assessment year 2021-22.
Note: Salary of a period other than the relevant previous year is not taken into account
while computing the amount of house rent allowance exempt from tax. Therefore, the
advance salary of April 2021 is ignored.
Entertainment Allowance
Entertainment allowance is first included in salary income under the head “Salaries” and
thereafter a deduction is given from total salary. Deduction can be availed only in the case of
a Government Employee (i.e., a Central Government or a State Government Employee). The
least of the following amount is deductible:
a. ` 5,000;
b. 20% of basic salary; or
c. Amount of entertainment allowance received during the previous year.
Note:
1. Amount actually expended towards entertainment (out of entertainment allowance
received) is not taken into consideration.
2. In the case of a non-Government employee (including employees of statutory
corporation and local authority), entertainment allowance is not deductible.
Illustration 9: Mr. Rishi, a government employee, gets ` 2,40,000 p.a. annum as basic pay.
In addition, he receives ` 15,000 as entertainment allowance. His actual expenditure on
entertainment for official purposes, however, is ` 30,000. Can he claim deduction of actual
amount spent by him on entertainment?
Solution: Expenditure on entertainment is not taken into account while computing
deductible entertainment allowance. The least of the following is deductible from salary
income:
(a) ` 5,000;
(b) ` 48,000, being 20% of salary; or
(c) ` 15,000, being the entertainment allowance granted during the previous year.
Therefore, in this case, ` 5,000 (being the least of the three sums) is deductible from salary
income.
SALARY 69
Illustration 10:
Amount actually
spent for the Amount
Amount of
purpose for chargeable
Nature of allowance allowance
which allowance to tax*
`
is received `
`
1. Conveyance allowance for official
purposes 25,000 23,000 2,000
2. Travelling allowance for official
purposes 15,000 18,000 Nil
70 INCOME TAX
Illustration 11:
Amount of
Nature of allowance allowance
`
Tribal area allowance for X’s posting in Assam for two months 900
Child education allowance for X’s elder son 2,000
Child education allowance for X’s younger son 750
Child education allowance for X’s daughter 1,000
Hostel expenditure allowance for X’s elder son 7,500
Transport allowance for commuting between office and residence 15,000
Solution:
Amount
Amount of
Amount of exemption chargeable
Nature of allowance allowance
` to tax
`
`
Tribal area allowance for X’s
posting in Assam for two months 900 200 p.m. x 12 = 400 500
Child education allowance for X’s
elder son 2,000 100 p.m. x 12 = 1,200 800
Child education allowance for X’s
younger son 750 -- 750
Child education allowance for X’s 100 p.m. x 12 = 1,200 or
daughter 1,000 1,000 whichever is lower Nil
Hostel expenditure allowance for 300 p.m. x 12 month =
X’s elder son 7,500 3,600 3,900
Other Allowances
Allowances Taxability
Dearness Allowance (DA)
This allowance is paid to compensate the employee against the rise in
price level in the economy. Although it is a compensatory allowance
against high prices, the whole of it is taxable. When a part of Dearness Fully Taxable
allowance is converted into Dearness pay, it becomes part of basic
salary for the grant of retirement benefits and is assumed to be given
under the terms of employment.
City Compensatory Allowance (CCA)
This allowance is paid to employees who are posted in big cities. The
purpose is to compensate the high cost of living in cities like Delhi, Fully Taxable
Mumbai etc.
Medical Allowance
Medical allowance is fully taxable even if some expenditure has actually Fully Taxable
been incurred for medical treatment of employee or family.
Tiffin / Lunch / Dinner Allowance
Fully Taxable
It is given for lunch to the employees.
Overtime Allowance Fully Taxable
Servant Allowance
It is fully taxable whether or not servants have been employed by the Fully Taxable
employee.
Warden or Proctor Allowance
These allowances are given in educational institutions for working as a Fully Taxable
Warden of the hostel or as a Proctor in the institution.
Non-Practicing Allowance
This is normally given to those professionals (like medical doctors,
chartered accountants etc.) who are in government service and are Fully Taxable
banned from doing private practice. It is to compensate them for this
ban.
Family Allowances Fully Taxable
Special Allowances Fully Taxable
Gift Allowances Fully Taxable
Deputation Allowance
When an employee is sent from his permanent place of service to some
Fully Taxable
place or institute on deputation for a temporary period, he is given this
allowance.
Allowances to Government Employees outside India Fully Exempt
Allowances to High Court Judges & Supreme Court Judges Fully Exempt
Salary & Allowances paid by UNO to its employees Fully Exempt
SALARY 73
Illustration 12: Mr. Chonga is an area manager of M/s Bokaro. Steels Co. Ltd. During the
financial year 2020-21, he gets the following emoluments from his employer:
Basic salary
Up to 31.8.2020 ` 20,000 p.m.
From 1.9.2020 ` 25,000 p.m.
Transport allowance ` 2,800 p.m.
Contribution to recognized provident fund 15% of basic salary
Children education allowance ` 500 p.m. for two children
City compensatory allowance ` 300 p.m.
Hostel expenses allowance ` 380 p.m. for two children
Tiffin allowance (actual expenses ` 3,700) ` 5,000 p.a.
Tax paid on employment ` 2,500
Compute taxable salary of Mr. M for the Assessment Year 2021-22.
Solution:
Computation of taxable salary of Mr. Chonga for the Assessment Year 2021-22
Particulars Amount Amount
(`) (`)
Basic Salary (` 20,000 x 5) + (` 25,000 x 7) 2,75,000
Transport allowance (` 2,800 x 12) 33,600
Children education allowance (` 500 x 12) 6,000
Less: Exempt under section 10(14) (` 100 x 2 x12) 2,400 3,600
City Compensatory Allowance (` 300 x 12) 3,600
Hostel Expenses Allowance (` 380 x 12) 4,560
Less: Exempt under section 10(14) (` 300 x 2 x 12 i.e. ` 7,200) but
restricted to the actual allowance of ` 4,560) 4,560 Nil
Tiffin allowance (fully taxable) 5,000
Tax paid on employment [See Note Below] 2,500
Employer’s contribution to R.P.F in excess of 12% of salary (i.e. 3% of
` 2,75,000) 8,250
Gross salary 3,31,550
Less: Standard Deduction 50,000
Less: Tax on employment 2,500
Taxable salary 2,79,050
74 INCOME TAX
Note:
Professional tax paid by employer should be included in the salary of Mr. M as perquisite
since it is discharge of monetary obligation of the employee by the employer. Thereafter,
deduction of professional tax paid is allowed to the employee from his gross salary.
Illustration 13: Mr Raj, an IAS officer was posted to USA by the government of India on
11.7.20 for a period of 3 years. He was paid salary of ` 3 lac for the period 1.4.20 to 10.7.20
and ` 12 lac for the period upto 31.3.21. He left, India for USA in the night of 10.7.20 and did
not come even for a day up till 31.3.21. Determine Income to be subject to tax in AY 2021-22
in India.
Solution: Any income chargeable under head salary payable by the Government to a citizen
of India for his services outside India shall be deemed to accrue or arise in India. Therefore,
total salary of ` 15 lac shall be subject to tax in India in AY 2021-22.
Perquisite
Perquisite may be defined as any emolument in addition to salary or wages. It is not
necessary that a recurring and regular receipt alone is a perquisite. Even a casual and non-
recurring receipt can be perquisite if the aforesaid conditions are satisfied. Perquisites,
received from a person other than employer, are taxable under the head “Profits and gains
of business or profession” or “Income from other sources”. A benefit or advantage would be
taxable as perquisites only if it has a legal origin. An unauthorized advantage taken by an
employee without his employer’s authority would not amount to “perquisite” taxable under
the Act. On the other hand, if the benefit has been conferred unilaterally without the aid of
agreement between the parties, the employee can be taxed on the perquisites. It is not
necessary that the benefit should have been received under an enforceable right.
Valuation of Perquisites
Rent free accommodation or accommodation provided at concessional rate
*Salary means
Basic Salary
+ DA (under retirement benefit)
+ Bonus
+ Fee
+ Commission (also includes fixed commission)
+ Taxable allowances
+ Monetary payment not being perquisites (e.g. Leave encashment)
Illustration 14: Ritika submits following information regarding her salary income for the
previous year 2020-21.
Illustration 15: In the above illustration, assume the house was not owned by the employer
but was taken on rent @ 24,000 p.a. Compute the value of rent free accommodation.
Solution: Since the house has been taken on rent by the employer, the value in all the three
cases shall be:
(a) 15% of salary, i.e. 15% of `2,96,400 = 44,460, or
(b) The actual rent paid/payable by the employer i.e. ` 24,000
Whichever is less
Therefore value in all the three cases will be ` 24,000
78 INCOME TAX
Owned or hired by employer and used Owned by employee and used but running
& maintenance incurred by employer
Note:
1. Specified document
(i) The employee has maintained complete details of journey undertaken for official
purpose which may include date of journey, destination, mileage and the amount
of expenditure incurred thereon
(ii) The employer gives a certificate that expenditure was incurred wholly and
exclusively for official purposes
2. If employee has been provided with more than one car, which are not used exclusively
for official purposes then
(i) Value of one car shall be ` 1,800 or 2,400 + ` 900 p.m. for driver (if any) as the case
may be and
SALARY 79
(ii) The value of other cars shall be as if they are used exclusively for personal
purposes
3. Month denotes completed month and part of the month is left out of consideration.
4. Motor Car facility (or any other conveyance facility) for covering the distance between
the office and residence is not taken as perquisite chargeable to tax.
Illustration 16: X has been provided with the benefit of a car by his employer, a sole
proprietary concern. Compute the perquisite value of the car for the assessment year
2021-22. In the following situation if the taxable monetary emoluments of X are ` 1,50,000:
(i) The car is owned by X but the running and maintenance expenses amounting to
` 40,000 during the previous year are met by the employer. The car is used
(a) For personal benefit of X
(b) Only for official duties
(c) 30% for personal benefit and 70% for official use
(ii) The employer provides a car of 1.5 ltr. engine cubic capacity costing ` 5,00,000
exclusively for the personal benefit of X. The expenses incurred on the car are
` 52,000
(iii) The employer provides a car (below 1.6 lt.) alongwith a driver to X partly for official
and partly for personal purpose. The expenses incurred by the company are:
`
(a) Running and maintenance expenses 32,000
(b) Driver’s salary 36,000
(iv) In case (iii) the employer maintains a log book and it is established than 30% of the
total coverage of the car is for personal use of X and 70% for official duties.
(v) The employer provides a car (above 1.6. lt.) to X which is used for official work and is
also used by X for commuting from his residence to office and back.
(vi) X is provided with 2 cars to be used for official and personal work and the following
information is available from the company’s records:
Car 1 Car 2
Exceeding 1.6 lt. Below 1.6 lt.
` `
Cost of the car 6,00,000 4,00,000
Running and maintenance 60,800 48,000
Salary of driver 44,000 44,000
Solution: The solution in each case shall be as under:
(i) (a) The entire amount of expenditure of ` 40,000 met by the employer shall be a
taxable perquisite. This is an obligation of the employee being discharged by
the employer and is therefore, a perquisite taxable in the hands of all
employees.
(b) Not a perquisite, if the specified documents are maintained.
80 INCOME TAX
(c) In this case, the proportion of official and private use is not known. The
perquisite value shall be the amount of expenditure incurred by the employer
as reduced by ` 1,800/2,400 as the case may be, unless the specified
documents are maintained to claim deduction higher than ` 1,800/2,400 p.m.
Therefore, ` 40,000 – 21,600 = 18,400 will be a perquisite.
(ii) The entire running and maintenance expenses and 10% of being the normal wear
and tear of car will be a perquisite i.e. ` 52,000 + ` 50,000 = ` 1,02,000 will be
taxable.
(iii) The perquisite value shall be:
`
For Car: (` 1,800 x 12) 21,600
For Driver: (` 900 x 12) 10,800
32,400
(iv) Same as calculated under (iii) above.
(v) In this case there is no perquisite because the car is not used for the personal
benefit of X. Conveyance facility for commuting from residence to office and back is
not considered as a perquisite. However, the specified documents shall have to be
maintained.
(vi) In this case, for one car the perquisite value shall be as if it is used for official and
personal benefit. The other car will be valued as if it is used exclusively for the
personal purposes of X.
The perquisite value shall be calculated as under:
Step 1: Assume car 1 is used for personal and official use and car 2 is exclusively for X.
The value shall be as under:
`
Car 1 (2,400 X 12) + (900 X 12) 39,600
Car 2
Running and maintenance expenses 48,000
10% of the cost normal wear and tear 40,000
Salary of driver 44,000
1,32,000
Step 2: Assume car 2 is used for personal and official use and car 1 is exclusively for X.
The value shall be as under:
`
Car 2 (1800 X 12) + (900 X 12) 32,400
Car 1
Running and maintenance expenses 60,800
10% of the cost for wear and tear 60,000
Salary of driver 44,000
1,64,800
Therefore, total value of perquisite = ` 32,400 + ` 1,64,800 = 1,97,200
SALARY 81
In this case, he should treat car 1 to be used partly for performance of duties and partly
for personal use. Thus the perquisite value of the cars shall be ` 1,71,600.
2. Only two journeys in a block of 4 years is exempt- Exemption on the aforesaid basis
is available in respect of two journeys performed in a block of four calendar years. The
different blocks are-
(a) 2010-2013 (i.e., January 1, 2010 to December 31, 2013);
(b) 2014-2017 (i.e., January 1, 2014 to December 31, 2017)
(c) 2018–2021 (i.e., January 1, 2018 to December 31, 2021)
3. “Carry-over” concession- If an assessee has not availed one or both the travel
concession during any of the specified four-year block exemption can be claimed in the
first calendar year of the next block (but in respect of only one journey).
4. Exemption is based upon actual expenditure- The quantum of exemption is limited
to the actual fare incurred on the journey. In other words, without performing any
82 INCOME TAX
journey and incurring fare thereon, no exemption can be claimed. Also, no other
expenses, like scooter or taxi charges at both ends, porterage expenses during the
journey and lodging/boarding expenses are qualified for exemption.
5. Fare of more than 2 children not eligible for exemption- The exemption shall not be
available to more than 2 surviving children of an individual after October 1, 1998.
However, this restriction does not apply in respect of children born before October 1,
1998 and also in respect of multiple births after one child. In other words, the
exemption will be admissible to all surviving children born before October 1, 1998; and
only two surviving children born on or after October 1, 1998 (in reckoning this limit of
two children, children born out of multiple birth after the first child will be treated as
‘one child only’).
Illustration 17: Compute the taxable value of the perquisite in respect of medical facilities
availed of by X from his employer in the following situations:
(a) The employer pays an insurance premium of ` 8,000 under a health insurance scheme
on the health of X.
(b) The employer maintains a hospital for the employees where they and their family
members are provided free treatment. The expenses on treatment of X and his family
members during the previous year 2020-21 were as under:
`
(i) Treatment of X’s major son (dependent upon him) 4,500
(ii) Treatment of X 5,600
(iii) Treatment of X’s uncle 2,200
(iv) Treatment of Mrs. X 18,000
(v) Treatment of X’s widowed sister (dependent upon him) 7,000
(vi) Treatment of X’s handicapped nephew 3,000
(c) Expenses on cancer treatment of married daughter of X at Tata Memorial Hospital,
Bombay paid by the employer ` 50,000 and reimbursement of expenses for medical
84 INCOME TAX
Solution:
(a) Payment of insurance premium on the health of the employee is a tax-free perquisite.
Hence nothing is taxable.
(b) The expenses of medical treatment of the employee and his family members in a
hospital maintained by the employer are tax-free. Therefore, expenses on treatment of
X, X’s major son, X’s widowed sister and Mrs. X are not taxable.
Only the following expenses are taxable:
`
(i) Treatment of X’s uncle 2,200
(ii) Treatment of X’s handicapped nephew 3,000
Taxable perquisite 5,200
(c) Expenses on medical treatment of the employee/family members in respect of
prescribed diseases, in any hospital approved by the Chief Commissioner of Income-tax,
are tax-free. In this case as cancer is a prescribed disease and Tata Memorial Hospital,
Bombay is approved by Chief Commissioner of Income-tax, there is no taxable
Perquisite. Further, reimbursement of expenses ` 20,000 towards his medical
treatment shall be taxable perquisite.
(d) In respect of medical treatment outside India, the expenses on actual treatment and on
stay abroad (of the patient and one attendant) are exempt from tax to the extent
permitted by R.B.I. i.e. upto ` 60,000 and ` 45,000, respectively. Therefore, balance
` 15,000 and ` 20,000 shall be taxable perquisites. Expenses of travel are exempt only if
the gross total income of the employee is upto ` 2,00,000. In case (a) Gross total income
shall be ` 1,85,000 (1,50,000 + 15,000 + 20,000) hence the entire expenditure on travel
is tax free perquisite. In case (b) Gross total income shall be ` 2,15,000 (1,80,000 +
15,000 + 20,000), hence the entire expenditure on travel amounting to ` 1,20,000 shall
be taxable perquisite. ` 15,000 + ` 20,000 included above are on account of taxable
amount of medical perquisites as these are in excess of amount permitted by RBI.
SALARY 85
Other Perquisite
Illustration 18: Following benefits have been granted by Vista Company Ltd. to one of its
employees Mr. Jovan:
(i) Housing loan @ 6% per annum. Amount outstanding on 1.4.2020 is ` 6,00,000. Mr.
Jovan pays ` 12,000 per month, on 5th of each month.
(ii) Air-conditioners purchased 4 years back for ` 2,00,000 have been given to Mr. Jovan
for ` 90,000.
Compute the chargeable perquisite in the hands of Mr. Jovan for the A.Y. 2021-22.
The lending rate of State Bank of India as on 1.4.2020 for housing loan may be taken as 8%.
Solution: Perquisite value for housing loan
The value of the benefit to the assessee resulting from the provision of interest-free or
concessional loan made available to the employee or any member of his household during
the relevant previous year by the employer or any person on his behalf shall be determined
as the sum equal to the interest computed at the rate charged per annum by the State Bank
of India (SBI) as on the 1st day of the relevant previous year in respect of loans for the same
purpose advanced by it. This rate should be applied on the maximum outstanding monthly
balance and the resulting amount should be reduced by the interest, if any, actually paid by
him.
90 INCOME TAX
“Maximum outstanding monthly balance” means the aggregate outstanding balance for loan
as on the last day of each month.
The perquisite value for computation is 8% - 6% = 2 %
Month Maximum outstanding balance as Perquisite value at 2%
on last date of month for the month
April, 2020 5,88,000 980
May, 2020 5,76,000 960
June, 2020 5,64,000 940
July, 2020 5,52,000 920
August, 2020 5,40,000 900
September, 2020 5,28,000 880
October, 2020 5,16,000 860
November, 2020 5,04,000 840
December, 2020 4,92,000 820
January, 2021 4,80,000 800
February, 2021 4,68,000 780
March, 2021 4,56,000 760
10,540
Illustration 19: X is employed by A Ltd. on June 1, 2020 the company gives an interest free
loan of ` 18,00,000. Loan is repayable within 5 years. SBI lending rate 8.75%.
Solution: ` 1,31,250 (being interest @ 8.75% on ` 18,00,000 from June 1, 2020 to March
31, 2021) is taxable in the hands of X.
Illustration 20: D Ltd. gives the following interest free loan to Dishu, an employee of the
company: ` 15,000 for child’s education and ` 5,000 for refrigerator. No other loan is given
by D ltd.
Solution: Nothing is taxable in the hands of Dishu as the amount of loan does not exceed
` 20,000.
SALARY 91
Illustration 21: Yash is working as a General Manager of Zerox Ltd. on a monthly salary of
` 20,000. In the previous year ending 31.3.2021, the Company provided him the following
interest free loan (on 1.10.2020)
(i) For residential flat purchase (repayable in 8 years) (SBI Rate 12.25%) ` 5,00,000
(ii) Education loan (for son) (SBI Rate 11.5%) ` 15,000
(iii) Loan for purchase of computer on 1.10.2020 (8% interest p.a.) ` 30,000 (SBI Rate
15.25%)
You are required to state the basis for calculation and compute the taxable perquisite.
Solution: Computation of taxable perquisite in respect of interest-free or concessional
loans
Interest on Housing Loan (` 5,00,000 X 12.25% X 6/12) 30,625
Education Loan for Son (` 15,000 X 11.50% X 6/12) 863
Loan for purchase of Computer [` 30,000 X (15.25% - 8%) X 6/12] 1,088
Taxable value Perquisite 32,576
Illustration 22:
Exercise
Vesting Period Period
Solution:
Perquisite = MV on the date of Exercise – Amount recovered from employee
= 100 Shares X ` 175 — 100 Shares X ` 20
= ` 17,500 —` 2,000
= ` 15,500
But taxable in the year of allotment (i.e. 5 year).
Advance Salary
Advance salary is taxable on receipt basis in the assessment year relevant to the previous
year in which it is received, irrespective of incidence of tax in the hands of the employee.
SALARY 93
Arrear Salary
It is taxable on receipt basis, if the same has not been subjected to tax earlier on due basis.
Step 2: Calculate the tax payable of every P/Y to which the additional salary relates
(a) on total income including additional salary of that particular P/Y
(b) on total income excluding additional salary
Calculate the difference between (a) and (b) for every P/Y to which the additional salary
relates and aggregate the same.
Step 3: The excess between the tax on additional salary as calculated under step 1 and step
2 shall be the relief admissible u/s 89(1).
If the tax calculated in step 1 is less than tax calculated in step 2, the assessee need not
apply for relief.
Illustration 23: Mr. Ashok Kumar, an employee of a PSU, furnishes the following
particulars for the previous year ending 31.3.2021:
`
(i) Net Salary income for the year 5,25,000
(ii) Salary for Financial year 2006-07 received during the year 40,000
(iii) Assessed Income for the Financial Year 2006-07 1,40,000
You are requested by the assessee to compute relief under section 89 of the Income-tax Act,
1961, in terms of tax payable for assessment year 2021-22. Assessee does not opt for Sec.
115 BAC.
The rates of Income-tax for the assessment year 2007-08 are:
Tax Rate (%)
On first ` 1,00,000 Nil
On ` 1,00,000 - ` 1,50,000 10
On ` 1,50,000 - ` 2,50,000 20
Above ` 2,50,000 30
Education Cess 2
94 INCOME TAX
Solution:
Computation of Relief under section 89 for the Assessment Year 2021-22
Particulars Amount Amount
(`) (`)
Assessment Year 2021-22
Net Salary Income for the year excluding the arrears 5,25,000
Add: Arrears relating to Financial Year 2006-07 40,000
Total income 5,65,000
Tax on total income including arrears (i.e. `
5,65,000) (A) 26,520
Tax on total income excluding arrears (i.e. `
5,25,000) (B) 18,200
Difference between A & B I 8,320
Provident Fund
Statutory Public
Recognized Unrecognized
provident provident
provident fund provident fund
fund fund
Employer’s Employer
Exempt Exempt up to 12%
contribution to Exemption from tax does not
from tax of salary.
provident fund contribute
Deduction
under section
80C on Available Available Not Available Available
employee’s
contribution
SALARY 95
Interest on
Employee
Contribution exempt
from tax if rate of
interest does not
Interest exceed 9.5%;
Exempt Exempt
credited to excess of interest Exempt from tax
from tax from tax
provident fund over 9.5% is taxable.
Interest on
Employer
Contribution is
taxable as
perquisite.
Payment received in
respect of:
1. Employee’s own
Contribution –
Exempt
2. Interest on
Lump sum
employee’s
payment at the
contribution –
time of Exempt Exempt
Exempt from tax taxable u/h
retirement or from tax from tax
Income from
termination of
Other Sources
service
3. Employer’s
Contribution
and interest
thereon –
Taxable u/h
Salary
# Salary means Basic + DA (under retirement benefit) + Commission (fixed percentage of
turnover)
Illustration 25: Interest @ 11% amounting to ` 17,952 is credited to the RPF account of
the employee. Calculate the amount exempt.
Solution:
Interest Credited 17,952
Less: Exempt 17,952 x 9.5/11 = 15,504
Taxable 2,448
Illustration 26: For the previous year 2020-21, Udai submits the following information –
Basic salary: ` 1,80,000; dearness allowance: ` 60,000 (46% of which is part of salary for
retirement benefits);commission: ` 6,000 (i.e., 1% of ` 6,00,000, being turnover achieved by
Udai) and children education allowance for his 2 children: ` 7,200. The employer
contributes `20,000 towards provident fund to which a matching contribution is made by
Udai. Interest credited in the provident fund account on March 15, 2021 @ 11% comes to
` 93,500. Find out the net salary income of Udai for the assessment year 2021-22 if the
provident fund is (a) statutory provident fund, (b) recognized provident fund, (c)
unrecognized provident fund.
Solution:
Statutory Recognized Unrecognized
PF PF PF
Basic Salary 1,80,000 1,80,000 1,80,000
Dearness Allowance 60,000 60,000 60,000
Commission [1% of `6,00,000] 6,000 6,000 6,000
Education allowance [` 7,200- ` 100 X 2 X 12] 4,800 4,800 4,800
Employer’s contribution towards recognized
PF in excess of 12% of salary (salary for this
purpose is `1,80,000 + 46% of ` 60,000 + -- -- --
` 6,000)
Interest credited to recognized provident
fund account in excess (i.e.` 93,500x1.5/11) -- 12,750 --
Gross Salary 2,50,800 2,63,550 2,50,800
Less: Standard Deduction 50,000 50,000 50,000
Net Salary 2,00,800 2,13,550 2,00,800
SALARY 97
Note: Udai can claim deduction under section 80C in respect of his contribution towards
statutory/ recognized provident fund.
Illustration 27: Mr. Bharat who joined the ABC (P.) Ltd. in 1955, he receives ` 9,000 as
basic salary and ` 400 per month as entertainment allowance during the previous year
2020-21. Determine the amount of income chargeable under the head “Salaries”.
Solution:
`
Basic salary (` 9,000 X 12) 1,08,000
Entertainment allowance (`400 X 12) 4,800
Gross salary 1,12,800
Less: Deductions
Standard Deduction 50,000
Entertainment allowance [not deductible in the case of non-Government
employees] ----------
Income under the head “Salaries” 62,800
Illustration 28: Satish is employed by Viva (P) Ltd. (basic salary being ` 40,000 per
month). Besides, he gets `3,000 per month as entertainment allowance. He pays
professional tax of ` 2,000. Find out the salary chargeable to tax for the assessment year
2021-22. Does it make any difference if the professional tax is paid by Viva (P) Ltd.
98 INCOME TAX
Solution:
If professional tax If professional tax is
is paid by Satish paid by the employer
` i.e., Viva Ltd.
`
Basic Salary (` 40,000 X 12) 4,80,000 4,80,000
Entertainment Allowance 36,000 36,000
Professional tax paid by the employer -- 2,000
Gross Salary 5,16,000 5,18,000
Less: Deduction under section 16
Standard Deduction 50,000 50,000
Entertainment allowance [not allowed] -- --
Professional Tax 2,000 2,000
Income under the head “Salaries” 4,64,000 4,66,000
Illustration 29: Mr. Dev is the General Manager of a transport company drawing a salary of
` 15,000 per month. The company has provided him with accommodation in Meerut for
which 10% of his basic salary is deducted. Actual rent paid by the company for the
accommodation is ` 1,20,000 per annum. He is also receiving entertainment allowance of
` 500 per month. He is provided by the company with a car having engine cubic capacity of
1.8 lts. for his personal and official use but running and maintenance expenses for the same
are borne by the assessee himself. He is in receipt of bonus equivalent to 2 month’s salary.
Compute his taxable income under the head “Salary” for the assessment year 2021-22.
Assume the population of Meerut is 20 lakhs.
Solution:
` `
Salary (15,000 X 12) 1,80,000
Bonus 30,000
Entertainment allowance 6,000
Car facility (900 X 12) 10,800
Value of accommodation at concessional rate
15% of salary i.e. 2,16,000 or ` 1,20,000 whichever is less 32,400
Less: Received from the employee 18,000 14,400
Gross Salary 2,41,200
Less: Standard Deduction 50,000
Income from Salaries 1,91,200
SALARY 99
Illustration 30: On the basis of the following information compute the taxable income of
Om Prakash under the head “Salaries” for the assessment year 2021-22
`
(i) Basic pay 8,400 p.m.
(ii) Dearness allowance 1,200 p.m.
(iii) Entertainment allowance 750 p.m.
(iv) Tribal area allowance 350 p.m.
(v) His own contribution towards statutory provident fund 1,000 p.m.
(vi) Employer’s contribution 1,000 p.m.
(vii) Interest credited to SPF @ 10% p.a. 13,000
(viii) House rent allowance 1,600 p.m.
Om Prakash is an employee of the Government of UP. He is paying ` 2,400 p.m. as house
rent.
Solution:
`
(i) Basic Pay (8,400 X 12) 1,00,800
(ii) Dearness Allowance (1,200 X 12) 14,400
(iii) Entertainment Allowance (750 X 12) 9,000
(iv) Tribal Area Allowance 4,200
Less: Exempt @ 200 p.m 2,400 1,800
(v) House Rent Allowance (19,200 – 18,720) 480
Gross Salary 1,26,480
Standard Deduction 50,000
Less: Entertainment allowance 5,000
Income from Salaries 71,480
Note:
1. Taxable portion of House rent allowance is calculated as under:
`
(i) Actual HRA received 19,200
(ii) 40% of Salary (1,00,800) 40,320
(iii) Excess of rent paid over 10% of Salary (28,800 – 10,080) 18,720
The minimum of the above amounts i.e. 18,720 is exempt and the balance (19,200 –
18,720) ` 480 is taxable.
2. Entertainment allowance is deductible to the following extent, as he is a Government
employee.
`
(i) Actual allowance 9,000
(ii) 20% of Basic Pay 20,160
(iii) Specified amount 5,000
The minimum of the above amounts i.e. 5,000 is allowed as allowed as deduction.
100 INCOME TAX
3. In the case of a statutory provident fund interest is exempt without any limit. Similarly
employer’s contribution is also totally exempt.
Illustration 31: Mr. Alok was employed on a salary of ` 18,000 p.m. On 1-8-2020 he was
retrenched and his services were terminated. On 1-12-2020, he got another employment at
` 19,000 p.m. He took from his employer an advance equal to 4 month’s salary on 1-2-2021.
The salary of each month becomes due on 1st of subsequent month. Compute his taxable
salary for the assessment year 2021-22.
Solution:
`
(i) Salary @ 18,000 p.m. for 5 months 90,000
(ii) Salary @ 19,000 p.m. for 3 months 57,000
(iii) Advance salary for 3 months 57,000
Grass Salary 2,04,000
Less: Standard Deduction 50,000
Net Salary 1,54,000
Note:
1. As the salary becomes due on the 1st of the next month. Salary from the former
employer from 1st of April to 1st of Aug. i.e. for 5 months and from the present employer
from 1-1-2021 to 1-3-2021 will included in his taxable income.
2. 4 month’s advance salary was taken on 1st February. Salary due on 1st March will be
adjusted against the advance. Hence 3 month’s advance salary will be included in the
income of the previous year.
Illustration 32: Mr. K. Sonu is Asstt. Manager of a Textile Company of Jaipur, since 1987. He
has submitted the following particulars of his income for the financial year 2020-21:
(i) Basic salary ` 46,000.
(ii) Dearness Allowance ` 5,000 per month (` 200 p.m. enters into retirement
benefits).
(iii) Education allowance for two children at ` 150 p.m. per child.
(iv) Commission on sales 1% of turnover of `10,00,000.
(v) Entertainment allowance ` 700 p.m.
(vi) Travelling Allowance for his official tours `30,000. The entire amount is spent on
the official tour.
(vii) He was given cloth worth `1,000 by his employer free of cost.
(viii) He resides in the flat of the company. Its market rent is ` 2,000 p.m. A watchman
and a cook have been provided by the company at the flat who are paid ` 400 per
month each.
SALARY 101
(ix) He has been provided with a motor car of 1.8 ltr. Engine capacity for his official as
well as personal use. The running and maintenance costs are borne by the
Company.
(x) Rent of house recovered from Sonu`4,600.
Compute income from salaries for the assessment year 2021-22. Assume the population of
Jaipur is 26 lakhs as per 2011 census.
Solution:
` `
Basic Salary 46,000
Dearness Allowance @ `5,000 p.m. 60,000
Education Allowance 3,600
Less: Exempt 2,400 1,200
Commission on Sales 10,000
Entertainment Allowance @ 700 p.m. 8,400
Travelling Allowance 30,000
Less: Amount actually spent 30,000 Nil
Cloth given free of cost (tax free perquisite) --
Value of accommodation at concessional rate:
15% of salary of ` 68,000 10,200
Less: Rent deducted 4,600 5,600
Value of facility of cook @ ` 400 p.m. 4,800
Value of facility of watchman @ ` 400 p.m. 4,800
Value of car facility (2,400 X 12) 28,800
Gross Salary 1,69,600
Less: Standard Deduction 50,000
Income under head Salary 1,19,600
Note:
1. Commission on sales has been taken to be a part of salary as it is a fixed percentage on
turnover.
2. Salary for purpose of accommodation will include Basic 46,000, DA 2,400, Education
Allowance 1,200, Commission 10,000, Entertainment Allowance 8,400.
(vi) He lived in a bungalow belonging to the company. Its fair rent is ` 2,500 per month.
The company has provided on this bungalow, the facility of a watchman and a cook
each of whom is being paid a salary of ` 250 per month. The company paid in
respect of this bungalow ` 5,000 for electric bills and ` 3,000 for water bills.
(vii) He has been provided with 1.5 ltr. Engine capacity car for official and personal use.
The maintenance and running expenses of the car (including driver) are borne by
the company.
(viii) The following amounts were deposited in his provident fund account;
(a) Own contribution ` 8,400,
(b) Company’s contribution ` 12,000, and
(c) Interest @ 12% p.a. ` 12,600.
(ix) Rent of house recovered from Bharat ` 3,600.
Compute his taxable income from salary for the assessment year 2021-22. Assume the
population of Jaipur is 26 lakhs as per 2011 census.
Solution:
` `
Basic salary 84,000
Bonus 5,000
Dearness Allowance 36,000
Travelling Allowance (45,000 – 30,000) 15,000
Electricity Bills paid by employer 5,000
Water Bills paid by employer 3,000
Value of accommodation at concessional rate
(being 15% of salary i.e. of ` 1,04,000) (84,000 + 5,000 + 15,000) 15,600
Less: Rent paid 3,600 12,000
Benefit of cook 3,000
Benefit of watchman 3,000
Benefit of car (1,800 + 900) = 2,700 X 12 32,400
Employer’s contribution to RPF in excess of 12% of salary (12,000 –
10,080) 1,920
Interest on PF @ 12% 12,600
Less: Exempt (12,600 x 9.5/12) 9,975 2,625
Gross Salary 2,02,945
Less: Standard Deduction 50,000
Income from Salary 1,52,945
Illustration 34: Mr. Abhi, a Director of ABC Pvt. Ltd. Pune is offered an employment with
the following two alternative packages:
I II
Basic Pay per annum 1,98,000 1,98,000
Conveyance allowance for private use 9,000 --
Motor car facility for private use of Abhi and his family members -- 9,000
(Valued)
Entertainment Allowance 18,000 --
Club facility (Valued) -- 18,000
Children Education Allowance (for 2 children) 9,700 --
Free Education Facility in institution run by employer for Children
(Valued) -- 9,700
Rent free unfurnished house with fair rental value 30,000 30,000
Which of the two packages should Abhi opt for on the assumption that both employer and
employee will contribute 20% of the basic pay towards an unrecognized provident fund.
Assume the population of Pune is more than 25 lakhs as per 2011 census.
Solution: Taxable Income of Abhi under the two options will be as under:
I II
Basic pay per annum 1,98,000 1,98,000
Conveyance allowance for private use 9,000 --
Motor car facility for private use of Abhi and his family members -- 9,000
Entertainment allowance 18,000 --
Club facility -- 18,000
Children education allowance (9,700 – 2,400) 7,300 --
Free education facility for children -- --
Rent free unfurnished house 34,845 29,700
Gross Salary 2,67,145 2,54,700
Less: Standard Deduction 50,000 50,000
Income from Salary 2,17,145 2,04,700
Note: As the taxable income under the second package is less therefore, Abhi should opt for
the second package.
Illustration 35: Mr. Vignesh, Finance Manager of KLM Ltd., Mumbai, furnishes the following
particulars for the financial year 2020-21.
(i) Salary ` 46,000 per month
(ii) Value of medical facility in a hospital maintained by the company ` 7,000
(iii) Rent free accommodation owned by the company
(iv) Housing loan of ` 6,00,000 at the interest rate of 6% p.a. (No repayment made during
the year, SBI Rate 10% p.a.)
(v) Gifts in kind made by the company on the occasion of wedding anniversary of Mr.
Vignesh ` 4,750.
104 INCOME TAX
(vi) A wooden table and 4 chairs were provided to Mr. Vignesh at his residence (dining
table). This was purchased on 1.5.17 for ` 60,000 and sold to Mr. Vignesh on 1.8.2020
for ` 30,000. This was given for use from the date of purchase by employer to Mr.
Vignesh.
(vii) Personal purchases through credit card provided by the company amounting to
` 10,000 was paid by the company. No part of the amount was recovered from Mr.
Vignesh.
(viii) An ambassador car which was purchased by the company on 16.7.17 for ` 2,50,000
was sold to the assessee on 14.7.20 for ` 80,000.
Compute Income from Salary of Mr. Vignesh for the Assessment year 2021-22.
Solution:
Computation of Gross Total Income of Mr. Vignesh for the Assessment Year 2021-22
`
Income under the head “salaries”
Salary [` 46,000 x 12] 5,52,000
Medical facility [in the hospital maintained by the company exempt] --
Rent free accommodation
[Rule 3(1)]- 15% of salary] 82,800
Use of dining table for 4 months
[` 60,000 x 10/100 x 4/12] 2,000
Valuation of perquisite of interest on loan
[Rule 3(7)(i)]- 10% is taxable which is to be reduced by actual rate of 24,000
interest charged i.e. [10% - 6% = 4%] [See Note below]
Gift given on the occasion of wedding anniversary ` 4,750 is exempt, --
since its value is less than ` 5,000
Perquisite on sale of dining table
Cost 60,000
Less: Depreciation on straight line method @ 10% for 3 years 18,000
W.D.V 42,000
Less: Amount paid by the assessee 30,000 12,000
Purchase through credit card 10,000
Original cost of car 2,50,000
Less: Depreciation from 16.7.2017 to 15.7.2018 @ 20% 50,000
2,00,000
Less: Depreciation from 16.7.2018 to 15.7.2019 @ 20% 40,000
WDV Value as on 14.07.2020 – being the date of sale to employee 1,60,000
Less: Amount received from the assessee on 14.7.2020 80,000 80,000
Gross Salary 7,62,800
Less: Standard Deduction 50,000
Income from salaries 7,12,800
SALARY 105
Note:
(i) It is presumed that the housing loan was availed on 1.4.2020 The rate of interest
charged by SBI as on 1.4.2020 in respect of housing loan is 10% for determining the
perquisite value for A.Y. 2021-22.
(ii) Under Rule 3(7)(viii), while calculating the perquisite value of benefit to the
employee arising from the transfer of any movable asset, the normal wear and tear is
to be calculated in respect of each completed year during which the asset was put to
use by the employer. In the given case the third year of use of ambassador car is
completed on 15.7.2020 where as the car was sold to the employee on 14.7.2020. The
solution worked out above provides for wear and tear for only two years.
Illustration 36: Raghu submits the following particulars of his medical treatment
expenditure, for the previous year 2020-21:
`
1. Gross annual salary 1,80,000
2. Medical expenditure directly paid by the employer to private
practitioner 30,000
3. Medical expenditure directly to hospital approved by Chief
Commissioner of income-tax 50,000
4. Reimbursement of medical expenses incurred by the employee in a
hospital approved by Chief Commissioner 10,000
5. Expenditure on travelling abroad (including that of attendant) 1,00,000
6. Expenditure incurred on stay and treatment abroad 1,50,000
7. Out of (6) amount permitted by Reserve Bank of India 1,00,000
Compute his Gross Salary Income.
Solution:
`
Gross Salary 1,80,000
Add:
Medical expenditure directly paid by employer to a private practitioner is
taxable. 30,000
Medical expenditure directly paid by employer to a hospital approved by
Chief Commissioner and reimbursement of such expenditure in respect of
any of ailments, is exempt under Section 17(2)(v)(ii). Hence, there will be
no perquisite in respect of amounts of ` 50,000 and ` 10,000 as mentioned
in item No. 3 and item No. 4 respectively of the problem. Exempt
Illustration 37: Mrs. Lakshmi aged about 66 years is a Finance Manager of M/s. Lakshmi &
Co. Pvt. Ltd., based at Calcutta. She is in continuous service since 1965 and receives the
following salary and perks from the company during the year ending 31.03.2021.
(i) Basic Salary (50,000 x 12) = ` 6,00,000
(ii) D.A. (20,000 x 12) = ` 2,40,000 (forms part of pay for retirement benefits)
(iii) Bonus – 2 months basic pay.
(iv) Commission – 0.1% of the turnover of the company. The turnover for the F.Y.
2020-21 was ` 15.00 crores.
(v) Contribution of the employer and employee to the PF Account ` 3,00,000 each.
(vi) Interest credited to P.F. Account at 8.5% - ` 60,000.
(vii) Rent free unfurnished accommodation provided by the company for which the
company pays a rent of ` 70,000 per annum.
(viii) Entertainment Allowance - ` 30,000.
(ix) Hostel allowance for three children - ` 5,000 each.
Compute income from Salary for the Assessment Year 2021-22.
Solution: Computation of Income from Salary of Mrs. Lakshmi for A.Y. 2021-22
`
Income from salary
Basic salary 6,00,000
Dearness allowance 2,40,000
Bonus 1,00,000
Commission (calculated as percentage of turnover) 1,50,000
Entertainment allowance 30,000
Children’s hostel allowance 15,000
Less: Exemption (300 x 12 x 2) 7,200 7,800
Interest credited to PF account (exempt) --
Rent free unfurnished accommodation
(Refer working Note 1) 70,000
Excess contribution to PF by employer
(Refer working Note 2) 1,81,200
Gross salary 13,79,000
SALARY 107
Working Notes:
1. Value of rent free unfurnished accommodation
Basic salary 6,00,000
Dearness allowance 2,40,000
Bonus 1,00,000
Commission @ 1% of turnover 1,50,000
Entertainment allowance 30,000
Children’s hostel allowance 7,800
Gross Salary 11,27,800
15% of salary 1,69,170
Actual rent paid by the company 70,000
The least of the above is chargeable perquisite.
Illustration 38: Ram retired as Manager of YZ Co. Ltd. on 30.11.2020 after rendering
service for 20 years and 10 months. He received ` 3,00,000 as gratuity from the employer.
(He is not covered by Gratuity Act, 1972). His salary particulars are given below:
Basic pay ` 10,000 per month up to 30.6.2020
Basic pay ` 12,000 per month from 1.7.2020
Dearness allowance (Eligible for retirement benefits) 50% of basic pay
Transport allowance ` 2,300 per month
Compute income from salary of Ram for the year ended 31.03.2021
Illustration 39: Mr. Narendra, who retired from the services of Hotel Samode Ltd.,
31.1.2021 after putting on service for 5 years, received the following amounts from the
employer for the year ending on 31.3.2021:
- Salary @ ` 16,000 p.m. comprising of basic salary of ` 10,000, Dearness allowance of
` 3,000, City compensatory allowance of ` 2,000 and Night duty allowance of ` 1,000.
- Pension @ 30% of basic salary from 1.2.2021.
- Leave salary of ` 75,000 for 225 days of leave accumulated during 5 years @ 45 days
leave in each year.
- Gratuity of ` 50,000. Employee not covered by Payment of Gratuity Act.
Compute the Gross Salary of Mr. Narendra for the Assessment Year 2021-22.
Note:
1. Leave encashment is exempt to the extent of least of the following:
Particulars Amount
(i) Statutory limit 3,00,000
(ii) Cash equivalent of leave for 30 days (30/45 x ` 75,000) 50,000
(iii) 10 months average salary (10 x ` 10,000) 1,00,000
(iv) Actual amount received 75,000
Therefore, ` 50,000 is exempt under section 10(10AA)
2. Gratuity is exempt to the extent of least of the following:
Particulars Amount
(i) Statutory limit 20,00,000
(ii) Half month’s salary for 5 years of service (5 x ` 5,000) 25,000
(iii) Actual gratuity received 50,000
Therefore, ` 25,000 is exempt under section 10(10).
Illustration 40: From the following particulars furnished by Mr. X for the year ended
31.3.2021, you are requested to compute his Gross Salary for the assessment year 2021-22.
(a) Mr. X retired on 31.12.2020 at the age of 58, after putting in 25 years and 9 months of
service, from a private company at Mumbai.
(b) He was paid a salary of ` 25,000 p.m. and house rent allowance of ` 6,000 p.m. He paid
rent of ` 6,500 p.m. during his tenure of service.
(c) On retirement, he was paid a gratuity of ` 3,50,000. He was not covered by the payment
of gratuity Act. His average salary in this regard may be taken as ` 24,500. Mr. X has not
received any other gratuity at any point of time earlier, other than this gratuity.
(d) He had accumulated leave of 15 days per annum during the period of his service; this
was encased by Mr. X at the time of his retirement. A sum of ` 3,15,000 was received by
him in this regard. His average salary may be taken as ` 24,500.
Note: The leave entitlement of Mr. X as per his service rules is not given in the problem. It is
assumed that the leave entitlement of Mr. X as per his service rules is 30 days credit for each
year of service. Since Mr. X had accumulated 15 days per annum during the period of his
service, he would have availed/taken the balance 15 days leave every year.
Leave entitlement of Mr. X on the basis of 30 days for every = 30 days/ year x 25
year of actual service rendered by him to the employer = 750 days
Less: Actual leave taken during the period of his service = 15 days/year x 25
= 375 days
Earned leave to the credit of Mr. X at the time of his = 375 days
retirement
Cash equivalent of earned leave to the credit of Mr. X at the = 375 X 24,500/30
time of his retirement = ` 3,06,250
Illustration 41:
(i) Smt. Savita Rani was born on 01.07.1940. She is a Deputy Manager in a Company in
Mumbai. She is getting a monthly salary and D.A. of ` 45,000 and ` 12,000
respectively. She also gets a House Rent Allowance of ` 6,000 per month. She is a
member of Recognized P.F. wherein she contributes 15% of her salary and half D.A.
Her employer also contributes an equal amount.
(ii) She is living in the house of her minor son in Mumbai.
SALARY 111
(iii) Her employer gave her an interest free loan of ` 1,50,000 on 01.10.2020 to one of her
son’s wife for the purchase of an Maruti Car. Nothing has been repaid to the company
towards the loan.
Compute the taxable Salary income of Mrs. Savita Rani for the A.Y. 2021-2022. SBI rate as on
1.4.2020 in respect of car loan is 8%.
Solution: Computation of taxable salary income of Smt. Savita Rani for A.Y. 2021-22.
`
Income from Salary
Basic salary (45,000 x 12) 5,40,000
DA (12,000 x 12) 1,44,000
House Rent allowance (fully taxable) 72,000
Employer’s contribution to RPF in excess of 12%.
12% of salary is ` 82,080.
Employer’s contribution is 15% of salary = ` 91,800.
Taxable Amount is (` 91,800 - ` 82,080) 9,720
Perquisite in respect of interest free loan (` 1,50,000 x 8% x ½) 6,000
Gross Salary 7,71,720
Less: Standard Deduction 50,000
Income from Salary 7,21,720
Assuming entire DA forms part of Salary for Retirement Benefit.
112 INCOME TAX
MCQ
1. The maximum ceiling limit for exemption under section 10(10) in respect of gratuity
for employees covered by the Payment of Gratuity Act, 1972 is -
(a) ` 20,00,000
(b) ` 10,00,000
(c) ` 3,50,000
(d) ` 3,00,000
2. The maximum ceiling limit for exemption under section 10(10C) with respect to
compensation received on voluntary retirement is –
(a) ` 2,50,000
(b) ` 3,00,000
(c) ` 3,50,000
(d) ` 5,00,000
3. The HRA paid to an employee residing in Patna is exempt up to the lower of actual
HRA, excess of rent paid over 10% of salary and –
(a) 30% of salary
(b) 40% of salary
(c) 50% of salary
(d) 60% of salary
4. Anirudh stays in New Delhi. His basic salary is ` 10,000 p.m., D.A. (60% of which
forms part of pay) is ` 6,000 p.m., HRA is ` 5,000 p.m. and he is entitled to a
commission of 1% on the turnover achieved by him. Anirudh pays a rent of ` 5,500
p.m. The turnover achieved by him during the current year is ` 12 lakhs. The amount
of HRA exempt under section 10(13A) is –
(a) ` 48,480
(b) ` 45,600
(c) ` 49,600
(d) ` 46,800
5. Where there is a decision to increase the D.A. in March, 2021 with retrospective
effect from 1.4.2019, and the increased D.A. is received in April, 2021, the increase is
taxable –
(a) In the previous year 2019-20
(b) In the previous year 2020-21
SALARY 113
7. Anand is provided with furniture to the value of ` 70,000 along with house from
February, 2020. The actual hire charges paid by his employer for hire of furniture is
` 5,000 p.a. The value of furniture to be included along with value of unfurnished
house for A.Y. 2021-22 is-
(a) ` 5,000
(b) ` 7,000
(c) ` 10,500
(d) ` 14,000
8. For the purpose of determining the perquisite value of loan at concessional rate
given to the employee, the lending rate of state Bank of India as on _____________ is
required;
(a) 1st day of the relevant previous year
(b) Last day of the relevant previous year
(c) The day the loan is given
(d) 1st day of the relevant assessment year
Unsolved Exercise
Q1. Chandan was the General Manager of P Ltd. He retired from service on 31-12-2020
after 30 years of service. The following information has been provided by him:
(i) Salary ` 15,000 p.m. from 1-1-2020. House rent allowance ` 5,000 p.m. from 1-1-
2020.
(ii) Medical allowance ` 1,200 pm.
(iii) ` 5,600 being the cost of 1st class rail-ticket for Chandan and his family for their
visit to home-town was reimbursed by the employer.
(iv) A car of 1.4 ltrs. Engine cubic capacity is provided by the company for official and
personal use and all expenses of running and maintenance of car and salary of
the driver are borne by the company.
(v) Employer contributes 10% of his salary to a recognized provident fund.
(vi) He received ` 2,10,000 as gratuity. His salary for the preceding year was as
under:
`
(a) Year ending 31-12-2017 84,000
(b) Year ending 31-12-2018 90,000
(c) Year ending 31-12-2019 94,000
(vii) He received ` 1,90,000 for encashment of leave being twelve months unavailed
leave of Chandan. He was entitled to one month’s leave for every year of service.
(viii) He lives in his own house.
Compute the income under head salary of Chandan for the assessment year 2021-22.
[Ans. ` 2,05,100]
Q2. Mr. Titu Singh is employed with a transport firm. He is member of an unrecognized
provident fund. He has been drawing salary @ `8,000 p.m. since 1-1-2020. Dearness
allowance, forming part of pay for superannuation benefits, is paid @ 10% of his salary.
He gets house rent allowance of ` 1,200 per month. He pays rent of ` 2,000 p.m. He
contributes @ 10% of his salary to the fund and the employer contributes @ 20%. The
employer also reimburses his personal club bills amounting to ` 19,000. Besides, he is
paid ` 400 p.m. as running allowance.
He retires on 1-1-2021 after 28 years and 9 months of service. He gets ` 80,000 as
accumulated balance from the provident fund. It consists of ` 15,000 as his
contribution and ` 11,000 interests thereon. The employer’s contribution is ` 30,000
and interest thereon is ` 24,000. He also gets gratuity of ` 1,60,000.
SALARY 115
Q3. Mrs. Nanda has the following income during the previous year 2021-22:
`
(i) Salary 1,10,000
(ii) Dearness Allowance (forming part of salary for retirement benefits) 12,000
(iii) Medical Allowance (Actual expenditure `4,000) 6,000
(iv) Education Allowance (for three children) 5,200
(v) Rent free house in Delhi for which X Ltd., the employer, paid ` 5,000 per
month as rent. The house is equipped with rented furniture. The rent of
the furniture is ` 300 per month.
(vi) The employer had provided her a domestic servant, a sweeper and a
watchman. The employer paid ` 300 per month to each.
(vii) The employer spent ` 2,500 on her refresher course.
(viii) The employer paid her telephone bills ` 2,200
(ix) Profession tax paid by Mrs. Nanda ` 1,500
Compute her taxable income for the assessment year 2021-22 assuming that she has no
other income.
[Ans. ` 1,13,320]
Q4. Shri Hari is the General Manager of ABC Ltd. From the following details, compute
income under head salary for the Assessment year 2021-22:
Basic salary ` 20,000 per month
Dearness allowance 30% of basic salary
Transport allowance ` 2,000 per month
Motor car running and maintenance charges fully paid by employer ` 36,000
(The motor car is owned and driven by employee Hari. The engine cubic capacity is
below 1.60 litres. The motor car is used for both official and personal purpose by the
employee)
Expenditure on accommodation in hotels while touring on official duties met by
the employer. ` 30,000
Loan from recognized provident fund (maintained by the employer) ` 40,000
Value of lunch provided by the employer during office hours. Cost to the
employer ` 12,000
Computer (cost ` 50,000) kept by the employer in the residence of Hari
from1.10.20
[Ans. ` 3,00,400]
116 INCOME TAX
Q5. Compute income under the head salary of Naveen for the assessment year 2021-22
from the following information submitted to you:
`
1. Basic salary 20,000 p.m.
2. D.A. (60% of which is part of retirement benefits) 10,000 p.m.
3. Children education allowance (for two children) 200 p.m. per child
4. Free lunch for 300 days in the office during office hours 120 per meal
5. Reimbursement of expenses incurred on credit card provided 12,000
by the employer
6. Gift of Mobile 15,000
7. Rent free unfurnished accommodation at Delhi, the fair rent value of
which is ` 84,000 p.a.
8. Motor car of 1.8 litre with driver both for official and private purposes
9. Watchman facility by the employer. Wages of watchman paid by employer 1,200
p.m.
10. Telephone facility at his residence. The employer has incurred expenses of
` 25,000 for the same.
[Ans. ` 4,56,560]
Q6. Mrs. Pandey is an employee of a private college in Moradabad (whose population is 10
lakhs) which is not registered as a charitable trust with the Income-tax Department.
She is in the grade of `14,500-400-16,500-600-19,500 since 1-1-2018. She gets `2,000
per month as dearness allowance and CCA is ` 100 p.m. She has been provided with a
furnished accommodation by the college. The college is not the owner of this house.
The rental value of the house is ` 2,500 p.m. and the furniture costing ` 4,000 has been
provided by the college. She has been given car of engine capacity of 1.4 ltrs. Which in
addition to college work, is used by her for private purposes. The driver’s remuneration
and all the expenses relating to the use of the car are borne by the college.
She has been provided with the facility of a gardener, a watchman and a servant who
are paid by the college ` 300 per month each. She contributes 10% of her pay to the
statutory provident fund to which the college also contributes 10%. She purchased
books of her subject for ` 1,000 and paid employment tax of ` 500 during the financial
year 2020-21.
Her salary becomes due on the first day of the next month. Determine her income
under the head “Salaries” for the assessment year 2021-22.
[Ans. ` 2,25,020]
Q7. Rahul has been in service of Yes & Co (P) Ltd., since 1st February 1987, in Delhi. During
the financial year ending 31-3-2021, Rahul received from the company salary @
` 9,000 p.m., dearness allowance @ ` 1,500 p.m., city compensatory allowance @ ` 200
SALARY 117
p.m., entertainment allowances @ `500 per month and house rent allowance @ ` 2,500
p.m. Rahul resides in the house property owned by his HUF for which he pays a rent of
` 3,000 p.m.
Rahul contributes `1,000 p.m. to the recognized provident fund. The company is also
contributing an equal amount. Rahul retires from the service of the company on 31-12-
2020 when he was allowed a gratuity (not covered by Gratuity Act) of ` 1,20,000 and
pension of ` 4,000 p.m. On 1-2-2021 he got one half of the pension commuted and
received `1,50,000 as commuted pension. He also received ` 2,00,000 as the
accumulated balance of the recognized provident fund.
Compute his income under the head salary for the assessment year 2021-22
[Ans. ` 1,12,400]
5 HOUSE PROPERTY
Charging Section [Sec. 22]
Income is taxable under the head “Income from house property” if the following 3
conditions are satisfied:
1. The property should consist of any buildings or lands appurtenant thereto.
2. The assessee should be owner of the property.
3. The property should not be used by the owner for the purpose of any business or
profession carried on by him, the profits of which are chargeable to income-tax.
Deemed Owner: Besides the legal owner, Section 27 provides that the following persons
are to be treated as deemed owner of house property for the purpose of charging tax on
annual value under the head “Income from house property”.
(i) Transfer to Spouse or Minor Child: If the property is transferred without
adequate monetary consideration by the assessee to his/her spouse (not being a
transfer in connection with an arrangement to live apart) or to his/her minor child
(not being a married daughter), then the individual who has transferred the property
would be deemed as “owner” of the property.
(ii) Holder of Impartible Estate: The holder of impartible estate is deemed as owner of
the property.
(iii) Property held by a Member of Co-operative Society/Company/AOP: A member
of co-operative society, company or other association of persons to whom a building
(or a part thereof) is allotted or leased under the house building scheme of the
society, company or association, is treated as deemed owner of such property.
(iv) A Person who has acquired a right in a Building under Lease: Acquiring a
property on lease for a term of not less than 12 years (whether fixed originally or
there is a provision for extension of term and the aggregate period is not less than 12
years where each renewal should also be of one year or more.) Lessee is deemed
owner.
HOUSE PROPERTY 119
3. Property should not be occupied by the owner for his own business or profession
Annual value of a house property is not chargeable to tax under the head “Income from
house property”, if the owner of the property utilizes the property for the purposes of
carrying on his business or profession, income of which is chargeable to tax. This rule is
applicable even if in a particular year income from business or profession is nil or there
is loss.
Exceptions: The rule that income from ownership of house property is taxable under the
head “Income from house property” has the following exceptions:
1. If letting is only incidental and subservient to the main business of the assessee, rental
income is not taxable under the head “Income from house property” but is chargeable
as business income. For e.g. Renting of servant quarters.
2. If income is received not only for letting out of property but also for incidental services
or facilities (e.g., a furnished paying guest accommodation, a well equipped theatre, a
safe deposit vault), then it cannot be said to be derived from mere ownership of house
property but because of facilities and services rendered. Income in such case may be
assessable as income from business.
(d) Self-occupied house: Annual value of any two self-occupied house or unoccupied
house shall be taken as Nil
(e) House property of registered trade union/local authority: The income from
property held by a registered trade union/local authority is not taxable.
(f) Palace of ex-ruler: The annual value of any one palace in the occupation of an ex-ruler
shall be exempted from tax.
(g) Property held by Political Party.
Steps to Compute Gross Annual Value (if there is no vacancy i.e. let out throughout the
previous year or self occupied for sometime during the previous year)
Step 1: Expected Rent = Municipal Value or Fair rent whichever is higher subject to
Standard Rent.
Step 2: Actual Rent = Annual Rent - Unrealised rent.
Step 3: GAV = Step 1 or Step 2 whichever is higher.
HOUSE PROPERTY 121
Notes:
1. Unrealised rent is rent for the period when tenant doesn’t pay rent & also doesn’t
vacant property.
2. Unrealised rent will be allowed to be deducted from actual rent only if following
conditions are satisfied [Rule 4]:
(a) The tenancy is bona fide.
(b) The defaulting tenant has vacated, or steps have been taken to compel him to
vacate the property.
(c) The defaulting tenant is not in occupation of any other property of the assessee.
(d) The assessee has taken all reasonable steps to institute legal proceedings for the
recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings
would be useless.
3. Deduction on account of unrealized rent of earlier years is not permitted.
Illustration 1: Mr. X owns 5 houses in Chennai, all of which are let-out. Compute the GAV of
each house from the information given below:
Particulars I II III IV V
Municipal Value 80,000 55,000 65,000 24,000 75,000
Fair Rent 90,000 60,000 65,000 25,000 80,000
Standard Rent N.A. 75,000 58,000 N.A. 78,000
Annual Rent 72,000 72,000 60,000 30,000 72,000
Solution:
Particulars I II III IV V
Step 1: MV or FR 90,000 60,000 58,000 25,000 78,000
Subject to SR
Step 2: AR 72,000 72,000 60,000 30,000 72,000
Step 3: GAV = Higher of 90,000 72,000 60,000 30,000 78,000
Step 1 or Step 2
Illustration 2: Find out the gross annual value in respect of following let out properties for
the AY 2021-22.
(` in lakhs)
A B
Municipal Value (MV) 50 50
Fair Rent (FR) 52 52
Standard Rent (SR) -- 51
Annual Rent 48 48
Unrealized rent of the previous year 2019-20 2 2
Unrealized rent of the previous year 2018-19 -- 1
122 INCOME TAX
Solution:
A B
Computation of gross annual value
Step I –Expected rent of the property [MV or FR, whichever is higher,
but subject to maximum of SR] 52 51
Step II – Rent received/receivable after deducting unrealized rent of
the current previous year (unrealized of earlier year is not 46 46
considered)
Step III – GAV = Amount computed in Step I or Step II, whichever is 52 51
higher
ER > AR AR > ER AR = ER
Solution:
Particular A B C D E F
Step 1: Expected Rent 100 100 100 120 100 100
Step 2: Actual Rent = Annual Rent – Unrealized Rent 108 48 120 120 98 104
Step 3: Higher of Both AR ER AR Equal ER AR
Step 4: GAV 99 100 110 110 100 95
HOUSE PROPERTY 123
Illustration 4: Municipal value of a house is ` 90,000, Fair Rent ` 1,40,000, Standard Rent
` 1,20,000. The House property has been let for ` 12,000 p.m. and was vacant for one
month during the previous year 2020-21. Municipal taxes paid during the year were
` 40,000.
Compute the annual value for AY 2021-22.
Solution:
Compute Gross Annual Value (which shall be higher of the following two)
Step 1: Expected rent which shall be municipal value (` 90,000) or fair rent
(`1,40,000) but limited to standard rent (` 1,20,000) 1,20,000
Step 2: Actual rent = Annual Rent – Unrealized Rent 1,44,000
Step 3: Gross annual value shall be Actual Rent – Loss due to Vacancy
(1,44,000 – 12,000 x1) 1,32,000
Less: Municipal Taxes paid 40,000
Net annual value 92,000
Illustration 5: Assume in above question, the property was vacant for 3 months. Determine
the net annual value for the AY 2021-22.
Solution:
(a) Expected rent (as determined above) ` 1,20,000
(b) Actual rent received/receivable (12,000 x 12) `1,44,000
`
GAV (1,44,000 – 12,000 x 3) 1,08,000
Less: Municipal Taxes paid 40,000
Net annual value 68,000
Illustration 6: R has a house property in Delhi whose Municipal Value is ` 1,00,000 and the
Fair Rental Value is ` 1,20,000. It was self-occupied by R from 1-4-2020 to 31-7-2020. W.e.f.
1-8-2020 it was let out at ` 9,000 p.m. Compute the annual value of the house property for
the AY 2021-22 if the municipal taxes paid during the year were ` 20,000.
Solution:
The gross annual value shall be higher of the following two:
(a) Expected rent (Municipal value ` 1,00,000 or 1,20,000
FRV ` 1,20,000 whichever is higher)
(b) Actual rent received/receivable for let out period i.e. (9,000 x 8) 72,000
Gross annual value 1,20,000
Less: Municipal taxes 20,000
Net annual value 1,00,000
The other properties shall be treated as deemed let out properties whose GAV is equal to
Expected Rent.
Illustration 7: R owns 3 house Properties situated in Delhi. The particulars of these let out
houses are as under:
House 1 House 2 House 3
(1) Municipal Value 1,00,000 1,50,000 2,00,000
(2) Fair Rent 1,40,000 1,80,000 2,40,000
(3) Standard Rent 1,20,000 2,00,000 --
(4) Actual Rent p.m. 12,000 17,500 21,000
(5) Period of vacancy Nil 1 month 6 months
(6) Municipal taxes of the year 20% of municipal 40,000 50,000
value
(7) Municipal taxes paid during the year 20,000 80,000 30,000
Compute the income under the head House Property of all the 3 properties.
Solution:
Particular House 1 House 2 House 3
Step 1: MV or FR whichever is higher subject to SR 1,20,000 1,80,000 2,40,000
Step 2: Actual Rent 1,44,000 2,10,000 2,52,000
Step 3:GAV 1,44,000 1,92,500 1,26,000
(2,10,000 - (2,52,000 –
17,500) 21,000 x 6)
(-) Municipal Taxes (Paid during the year) 20,000 80,000 30,000
NAV 1,24,000 1,12,500 96,000
Less: Deduction u/s 24
24(a) Standard deduction @ 30% 37,200 33,750 28,800
Income from House Property 86,800 78,750 67,200
0 1 2 3 4 5
Case II: When Capital borrowed is repaid in a year before the year of completion of
house property
0 1 2 3 4 5
Loan Loan
Taken Property
Repaid Completed
Case III: When Capital borrowed is repaid in the year of completion of house property
0 1 2 3 4 5
Note:
1. If capital is borrowed for the purpose of purchasing a plot of land, interest liability is
deductible even if construction is financed out of own funds.
2. Interest on borrowed capital is deductible on “accrual” basis. It can be claimed as
deduction on yearly basis, even if the interest is not actually paid during the year.
3. Interest on unpaid interest is not deductible.
4. No deduction is allowed for any brokerage or commission for arranging the loan.
126 INCOME TAX
5. Interest on a fresh loan, taken to repay the original loan raised for the aforesaid
purposes, is allowable as deduction.
6. Interest is charged for the day of borrowing but not for the day of repayment.
7. Interest payable outside India shall not be deducted if tax has not been paid nor
deducted from such interest.
Illustration 8: Mr. X took a loan of ` 20,00,000 for construction of a house on 1-5-17, the
property was completed on 31-12-20.
Case A: Loan to be repaid on 31-3-2026.
Case B: Loan to be repaid on 31-3-2023.
Case C: Loan was repaid on 31-3-2019.
Case D: Loan was repaid on 31-1-2021.
Case E: Loan was repaid on 31-10-2020.
Rate of interest charged by bank is 10% pa. Compute interest to be allowed as deduction for
AY 2021-22 in each of above 5 cases:
Solution:
Case A: Loan to be repaid on 31-3-2026
For FY 2020-21 Current year interest = 2,00,000
It will continue till 2024-25
Period Current year
Interest
2020-21 2,00,000
2021-22 2,00,000
2022-23 2,00,000
2023-24 2,00,000
2024-25 2,00,000
2025-26 2,00,000
Pre-Construction Period = 1-5-17 to 31-3-20
= 2 Year 11 Month
11
Pre-Construction Interest = ` 20,00,000 X 10% X 2 + ` 20,00,000 X 10% X
12
= ` 5,83,333
Current Year Interest = ` 20,00,000 X 10%
= ` 2,00,000
Interest on borrowed capital allowed u/s 24(b)
1
Pre-Construction interest ` 5,83,333 X 1,16,667
5
Add: Current Year Interest 2,00,000
3,16,667
Case B: Loan was repaid on 31-3-2023
Same as Case A
HOUSE PROPERTY 127
Note:1. When more than 1 loan has been taken, one for construction & other for renewal, total
deduction for interest on all loan cannot exceed ` 2,00,000 in case of self-occupied
property.
2. Deduction u/s 24(b) is available only if the interest is payable on borrowed fund. If the
assessee has taken interest free loan from employer taxable as perquisite, deduction
can’t be availed.
3. Where a buyer enters into an arrangement with a seller to pay the sale price in
installments along with interest due thereon, the seller becomes the lender in relation
to the unpaid purchase price and the buyer becomes the borrower. In such a case
unpaid purchase price can be treated as capital borrowed for acquiring property and
interest paid there on can be allowed as deduction u/s 24(b).
Illustration 9: Ganesh has three houses, all of which are self – occupied. The particulars of
the houses for the P.Y. 2020-21 are as under:
Particulars House I House II House III
Municipal valuation p.a. ` 3,00,000 ` 3,60,000 ` 3,30,000
Fair rent p.a. ` 3,75,000 ` 2,75,000 ` 3,80,000
Standard rent p.a. ` 3,50,000 ` 3,70,000 ` 3,75,000
Date of completion/ purchase 31.3.1999 31.3.2001 01.4.2014
Municipal taxes paid during the year 12% 8% 6%
Interest on money borrowed for repair of -- 55,000
property during the current year
Interest for current year on money borrowed 1,75,000
in July 2014 for purchase of property
Solution: Let us first calculate the income from each house property assuming that they are
deemed to be let out.
HOUSE PROPERTY 129
Computation of income from house property of Ganesh for the A.Y. 2021-22
Particulars Amount in `
House I House II House III
Gross Annual Value (GAV)
ER is the GAV of house property
ER = Higher of MV and FR, but restricted to SR 3,50,000 3,60,000 3,75,000
Less: Municipal taxes (paid by the owner
during the previous year) 36,000 28,800 19,800
Net Annual Value (NAV) 3,14,000 3,31,200 3,55,200
Less: Deductions under section 24
(a) 30% of NAV 94,200 99,360 1,06,560
(b) Interest on borrowed capital -- 55,000 1,75,000
Income from house property 2,19,800 1,76,840 73,640
Ganesh can opt to treat any two of the above house properties as self-occupied.
Option 1 (House I and II – self occupied and House III – deemed to be let out)
If House I and II are opted to be self-occupied, the income from house property shall be-
Particulars Amount in `
House I (Self –occupied) Nil
House II (Self – occupied) (Interest deduction restricted to ` 30,000) (30,000)
House III (Deemed to be let-out) 73,640
Income from house property 43,640
Option 2 (House I and III – self-occupied and House II – deemed to be let out)
If House I and III are opted to be self-occupied, the income from house property shall be-
Particulars Amount in `
House I (Self –occupied) Nil
House II (Deemed to be let-out) 1,76,840
House III (Self-occupied) (1,75,000)
Income from house property 1,840
Option 3 (House II and III – Self – occupied and House I – deemed to be let out)
If House II and III are opted to be self-occupied, the income from house property shall be-
Particulars Amount in `
House I (Deemed to be let-out) 2,19,800
House II (self-occupied) (Interest deduction restricted to ` (30,000)
30,000)
(1,75,000)
House III (Self-occupied)
(Total Interest deduction restricted to ` 2,00,000) (2,00,000)
Income from house property 19,800
130 INCOME TAX
Since Option 2 is most beneficial, Ganesh should opt to treat House I and III as self-occupied
and House II as deemed to be let out. His income from house property would be ` 1,840 for
the A.Y. 2021-22.
Illustration 10: Prem owns a house in Madras. During the previous year 2020-21, 2/3rd
portion of the house was self-occupied and 1/3rd portion was let out for residential
purposes at a rent of ` 8000 p.m. Municipal value of the property is ` 3,00,000 p.a., fair rent
is ` 2,70,000 p.a. and standard rent is ` 3,30,000 p.a. He paid municipal taxes @ 10% of
Municipal value during the year. A Loan of ` 25,00,000 was taken by him during the year
2016 for acquiring the property. Interest on loan paid during the previous year 2020-21
was ` 1,20,000. Compute Prem’s income from house property for the A.Y. 2021-22.
Solution: There are two units of the house. Unit I with 2/3rd area is used by Prem for self-
occupation throughout the year and no other benefit is derived from that unit, hence it will
be treated as self-occupied and its annual value will be Nil. Unit 2 with 1/3rd area is let – out
throughout the previous year and its annual value has to be determined as per section
23(1).
Computation of income from house property of Mr. Prem for A.Y. 2021-22
Particulars Amount in `
Unit I (2/3 area – self – occupied)
rd
Computation of GAV
Step I Compute ER
ER = Higher of MV and FR, restricted to SR
However, in this case, SR of `1,10,000 (1/3rd of `
3,30,000) is more than the higher of MV of ` 1,00,000
(1/3rd of ` 3,00,000) and FR of ` 90,000 (1/3rd of `
2,70,000). Hence the higher of MV and FR is the ER. In
this case, it is the MV. 1,00,000
132 INCOME TAX
Taxability of Unrealized Rent Subsequently Realized and Arrears of Rent [Sec. 25A]
1. Provisions for taxability of Unrealized Rent and Arrears of Rent made uniform.
2. Unrealized Rent means the rent which has been deducted from actual rent in any
previous year for determining annual value.
3. Arrears of rent is in respect of rent not charged to income tax for any previous year.
4. Taxable in the hands of the assessee whether he is now owner of that property or not.
5. Taxable as income of the previous year in which he recovers the unrealized rent or
arrears of rent.
6. An amount equivalent to 30% of such unrealized rent/arrears of rent will be allowed as
deduction therefrom.
7. No claim will be allowed for expenses incurred for realizing unrealized rent.
Illustration 11: X owns a house property which is given on rent. For the previous year
2013-14, he claims a deduction of ` 90,000 on account of unrealized rent, out of which the
Assessing Officer allows only ` 75,000 as deduction. What are the tax consequences if X
recovers on October 15, 2020 from the defaulting tenant (a) ` 10,000, (b) ` 15,000 or (c)
` 40,000 as full and final payment?
HOUSE PROPERTY 133
Solution:
Amount Rent outstanding Realization of
recovered during ` (90,000 - 75,000) unrealized rent Taxable
2020-21 `
(a) 10,000 15,000 - Nil
(b) 15,000 15,000 - Nil
(c) 40,000 15,000 25,000 25,000-30% x
25,000 = 17,500
Illustration 12: Three brothers A, B and C having equal share are co-owners of a house
property consisting of six identical units, the property was constructed on 31-5-1997. Each
of them occupies one unit for his residence and the other three units are let out at a rent of
` 12,000 per month per unit. The Municipal Value of the house property is ` 6,00,000 and
the Municipal Taxes are 40% of such Municipal Value, which were paid during the year. The
other expenses were as follows:
(i) Repairs 25,000
(ii) Collection charge 15,000
(iii) Insurance Premium (paid) 18,000
(iv) Interest payable on loan taken for construction of house 2,52,000
134 INCOME TAX
One of the let out units remained vacant for three months during the year. A could not
occupy his unit for six months as he was transferred to Mumbai. He does not own any other
house. Compute the income under the head “Income from House Property” of the three
brothers for AY 2021-22.
Solution:
` `
Let out Property (50% i.e. 3 units)
Gross annual value
(a) Municipal value (50% of `6,00,000) 3,00,000
(b) Actual rent (12,000 x 12 x 3) 4,32,000
Less: Vacancy of one unit for 3 months 36,000 3,96,000
Less: Municipal taxes paid (50% of `2,40,000) 1,20,000
Net annual value 2,76,000
Less: Deductions u/s 24
(a) Standard deduction @ 30% 82,800
(b) Interest on loan (50%) 1,26,000 2,08,800
Income from let out property 67,200
Therefore, share of each co-owner is 1/3rd of 67,200 22,400
A B C
Self-occupied Property
` ` `
Annual value Nil Nil Nil
Less: Deduction u/s 24(b)
Interest on loan (` 1,26,000 ÷ 3 = 42,000)
restricted to maximum ` 30,000 for each co-owner 30,000 30,000 30,000
Income from self-occupied property (-) 30,000 (-) 30,000 (-) 30,000
Computation of the total income of the three A B C
brothers ` ` `
Income from House Property
Let out portion 22,400 22,400 22,400
Self-occupied portion (-) 30,000 (-) 30,000 (-) 30,000
Net income from house property (-) 7,600 (-) 7,600 (-) 7,600
Composite Rent
Letting
Illustration 13: X (age: 36 years) owns a house property at Calicut which is let out for
residential purposes, particulars of which are as follows:
`
Rent of house and amount charged for different amenities (` 1,92,000 includes
charges for the following amenities – water charges : ` 16,000, electricity
charges: ` 48,400, lift charges : ` 24,000 and security charges : ` 22,000) 1,92,000
Rent of 1 month could not be collected (1/12 of ` 1,92,000) 16,000
Municipal taxes paid by the tenant 6,000
Municipal valuation (MV) 72,000
Fair rent (FR) 76,000
Standard rent (SR) 78,000
Expenditure:
Repairs (met by the tenant) 4,000
Insurance 2,000
Collection charges and litigation expenses for collection of rent 14,000
The construction of the property was completed on October 31, 2008.
During the previous year 2000-2001, X had claimed deduction of unrealized rent of
` 30,000 out of which ` 22,000 was allowed as deduction for that year. On August 10, 2020,
X, however, recovers ` 14,000 from the defaulting tenant (expenditure on recovery of rent:
` 1,200).
For providing the different amenities, the following expenses are incurred by X:
136 INCOME TAX
`
Expenses/depreciation
Water bills 600
Electricity bills 38,800
Lift maintenance 9,200
Salary of liftman 12,000
Depreciation on lift (as per section 32) 5,600
Salary of guard 36,000
Assuming that income of X from business is ` 4,00,000, find out Gross Total income of X for
the assessment year 2021-22.
Solution:
`
Income from House Property at Mumbai
Gross annual value (F.R.V = 4,000 x 12) 48,000
Less: Municipal Taxes 7,000
Net annual value 41,000
Less: Deductions u/s 24
138 INCOME TAX
Note:
(i) Electricity charges and building maintenance charges are deductible from actual
rent for the computation of GAV.
(ii) Computation of GAV of the house property at Mumbai. Higher of
FR = 4,000 x 12 = 48,000
AR = 48,000 – 2,000 = 46,000
(iii) Computation of GAV of the house property at Calcutta.
FR = 8,000 x 12 = 96,000.
AR = 96,000 – 6,800 = 89,200. Whichever is higher.
HOUSE PROPERTY 139
Illustration 15: Mr. X owns one residential house in Mumbai. The house is having two
units. First unit of the house is self occupied by Mr. X and another unit is rented for ` 8,000
p.m. The rented unit was vacant for 2 months during the year. The particulars of the house
for the previous year 2020-21 are as under:
Standard rent ` 1,62,000 p.a.
Municipal valuation ` 1,90,000 p.a.
Fair rent ` 1,85,000 p.a.
Municipal tax paid 15% of municipal valuation
Light and water charges ` 500 p.m.
Interest on borrowed capital ` 1,500 p.m.
Lease money ` 1,200 p.a.
Insurance charges ` 3,000 p.a.
Repairs ` 12,000 p.a.
Compute income from house property of Mr. X for the A.Y. 2021-22.
Solution:
Computation of Income from house property for A.Y. 2021-22
(a) Rented unit (50% of total area – See Note 1 below)
Step I – Computation of Annual Letting Value ` `
Municipal valuation (` 1,90,000 x ½) 95,000
Fair rent (` 1,85,000 x ½) 92,500
Standard rent (` 1,62,000 x ½) 81,000
Annual letting value is higher of municipal valuation and fair rent, but
restricted to standard rent 81,000
Notes:
(1) It is assumed that both the units are of identical size. Therefore, the rented unit would
represent 50% of total area and the self-occupied unit would represent 50% of total
area.
(2) It is assumed that the municipal taxes have been paid by the owner during the year.
(3) No deduction will be allowed separately for light and water charges, lease money paid,
insurance charges and repairs.
Illustration 16: The following particulars of Mr. X are given for the AY 2021-22.
House 1 House 2
Property Income ` `
Fair Rent 75,000 85,000
Rent 78,000 78,000
Municipal Valuation 76,000 75,000
Municipal tax (due) 3,000 14,000
Repairs 3,500 4,700
Insurance 2,000 3,000
Land revenue (paid) 2,500 4,000
Ground rent (due) 1,600 6,000
Interest on capital borrowed by mortgaging House 1 14,000
(funds are used for construction of House 2)
Nature of Occupation Let out for let out for
residence Business
Date of Completion of Construction 30-4-1996 7-4-1998
Determine the House Property income of Mr. X for AY 2021-22
Solution:
House I House II
` ` ` `
Higher of the following two:
(a) Expected rent 76,000 85,000
(b) Actual rent received or receivable 78,000 78,000
Gross annual value 78,000 85,000
Less: Municipal tax (Due not allowed) ________ ________
Net annual value 78,000 85,000
Less: Deduction u/s 24
(a) Standard deduction @ 30% 23,400 25,500
(b) Interest on borrowed capital --------- 23,400 14,000 39,500
Income from House Property 54,600 45,500
Total Income from HP = 54,600+45,500= ` 1,00,100
HOUSE PROPERTY 141
Illustration 17: R, S and G are the three equal co-owners of the property situated in Delhi,
which has 6 units of identical size. R and S have occupied one unit each for their residence.
Other four units are let out to one tenant at a rent of ` 25,000 p.m. The Municipal Valuation
of the house is ` 3,00,000.
The other particulars of the House Property are as under: `
Municipal taxes paid 30,000
Insurance premium paid 6,000
Interest on money borrowed (for construction of the house) 2,10,000
Compute the income u/h house property and the income of each co-owner for the let out
portion.
Illustration 18: X, a chartered accountant, has a house property situated at Delhi, which
has 4 identical units, Unit I was used by him for his professional purposes, Unit II was let out
for residential purpose at ` 5,000 p.m., Unit III and IV were self occupied.
Other particulars of the property are as under:-
Date of completion 31-1-1997
Municipal Taxes Paid 20,000
Interest on money borrowed for construction of house property 60,000
Compute his income under the head house property for the AY 2021-22.
Solution:
Unit II Unit III + IV
Let out Self occupied
Gross Annual Value 60,000 Nil
Municipal Taxes paid 5,000 Nil
Net annual value 55,000 Nil
Less: Deductions u/s 24
Standard deduction @ 30% 16,500
Interest on borrowed capital 15,000 30,000
Income from House Property 23,500 (-) 30,000
Total Loss =` 23,500 – 30,000 = (-) 6,500
Illustration 19: Mr. X owns a house in Delhi. During the PY 2020-21, 3/4th portion of the
house was self-occupied for full year and 1/4th portion was let out for residential purpose
from 1-4-2020 to 31-12-2021 on a rent of ` 700 p.m. From 1-1-2021, this portion was also
used for own residence. M.V. of the house is ` 20,000.
He incurred the following expenditure in respect of the house property:
Municipal taxes due ` 6,000; Repairs ` 2,000; Fire Insurance Premium ` 3,500; Land
Revenue ` 4,000; Ground Rent ` 200 were paid during the year.
A loan of ` 1,00,000 was taken on 1-4-2016 @ 9% p.a. for the construction of the house
which was completed on 28-3-2017. Nothing was repaid on loan account so far.
Find out his income from house property for the AY 2021-22.
Solution: There are two units of the house. Unit 1 with 3/4th floor area is self-occupied
throughout the year and no benefit is derived from that unit, hence it is self-occupied and its
annual value shall be nil. Unit 2 with floor area of 1/4th is though self-occupied but part of
the year let out. Hence the annual value of unit 2 shall be determined as per section 23 (1).
` `
Unit 1: Annual Nil
Less: Deduction u/s 24 (b)
Interest 75% of ` 9,000 6,750
Income from self-occupied (-) 6,750
Unit 2: (1/4 floor area)
th
HOUSE PROPERTY 143
Illustration 20: Mrs. R. is the owner of a two storied house in Madras. She gets a monthly
rent ` 7,000 from her tenant in the ground floor. The first floor, identical in all respect with
the ground floor used to be occupied by a friend of Mrs. R from whom she charged a rent of
` 5,000 p.m. during the year ended 31-3-2021, the friend stayed in Mrs. R house up to 31-
12-2020. On 1-1-2021, it was again let out to tenant at rent of ` 7,000 p.m. Details of
expenses incurred by Mrs. R during the year ending 31-3-2021 in respect of the house were
as under:
(1) Cost of repairing ground floor 7,500
(2) Cost of repairing first floor 50,000
(3) Interest on Loan taken for construction of first floor 20,000
(4) Municipal, tax paid by owner 6,000
(5) Monthly salary of an employee for collecting rent 1,000
Compute Mrs. R’s income from house property for the AY 2021-22 on the basis of the above
noted data.
Solution: Computation of income from house property of Mrs. R
(For the assessment year 2021-22)
` `
Ground Floor
Gross annual value 84,000
Less: Municipal Taxes paid 3,000
Net annual value 81,000
Less:Deduction under section 24
Statutory deduction @ 30% 24,300
Income from ground floor 56,700
First Floor
Gross annual value, higher of the following two:
Expected rent (7,000 x 12) 84,000
144 INCOME TAX
Illustration 21: Mrs. X (57 years) owns a commercial property in Chennai. Municipal value
of the property is ` 9,00,000. Market rent of a similar property in the same locality is
` 10,00,000. However, market rent of a similar property in a different locality in Chennai is
` 12,00,000. Standard rent of the property owned by Mrs. X is ` 12,50,000. This property is
let out to a departmental store with effect from May 15, 2020 on monthly rent of ` 70,000.
During March 10, 2020 and May 14, 2020, the property remains vacant as suitable tenant is
not available. Mrs. X could not realize 3 months’ rent from the tenant during the previous
year 2020-21. Most probably the tenant will pay rent before September 2021.
Mrs. X makes the following expenditure in respect of the house property: Municipal tax at
the rate of 15% (amount actually paid by the tenant during the previous year 2020-21 is
` 80,000); Repairs (incurred by the tenant): ` 75,000; Fire insurance premium (paid by Mrs.
X): ` 30,000. A loan of ` 40,00,000 was taken on April 1, 2011 at the rate of 9% p.a. from
PNB for construction of the commercial property which was completed on March 1, 2016.
Nothing is repaid up to March 31, 2019. During the previous year 2019-20, Mrs. X has
repaid ` 10,00,000. Further, on March 31, 2021, she pays a sum of ` 5,00,000 to PNB on
account of housing loan. Compute Income under head House Property of Mrs. X for the
assessment year 2021-22.
Solution :
`
Computation of gross annual value
Municipal value (MV) 9,00,000
Fair rent (FR) 10,00,000
Standard rent (SR) 12,50,000
Annual rent (` 70,000 x 12) 8,40,000
Unrealized rent (unrealized rent is not deductible, as there is a possibility of
recovering the amount) Nil
Loss due to vacancy (` 70,000 x 1.5) 1,05,000
Step I – Reasonable expected rent of the property [MV or FR, whichever is
higher, but subject to maximum of SR] 10,00,000
Step II – Rent received/receivable after deducting unrealized rent but before 8,40,000
HOUSE PROPERTY 145
adjusting
Step III – Gross annual value (∵ ER > AR, ∴GAV = ER) 10,00,000
Less: Municipal tax Nil
Net annual value 10,00,000
Less: Deductions under section 24
Standard deduction @ 30% 3,00,000
Interest from borrowed capital (9% of ` 30,00,000) 2,70,000
Income from HP 4,30,000
Note: Interest of pre-construction period is deductible in 5 years in 5 equal installments.
First installment is deductible in the year in which construction is completed. In this case,
first installment is deductible in the previous year 2015-16. The fifth installment is
deductible in the previous year 2019-20. Nothing is, therefore, deductible on account of pre-
construction period’s interest in the previous year 2020-21.
Illustration 22: R is the owner of a residential house whose construction was completed on
31-8-2016. It has been let out from 1-1-2017 for residential purposes. Its particulars for the
FY 2020-21 are given below:
`
(i) Municipal valuation 65,000
(ii) Expected fair rent (p.a.) 72,000
(iii) Standard rent under the Rent Control Act (p.m.) 7,000
(iv) Actual rent p.m. 7,000
(v) Municipal taxes paid (including ` 5,000 paid by tenant) 20,000
(vi) Water / sewerage benefit tax, levied by State Government paid under
protest 5,000
(vii) Interest on loan taken for the construction of the house. The interest has
been paid outside India to a non-resident without deduction of tax at
source (non-resident had agreed to pay income-tax on such interest
direct to the Government) 15,000
(viii) Legal charges for the recovery of rent 4,000
(ix) Stamp duty and registration charges in respect of the lease agreement of
the house 2,000
Compute Taxable income under head House Property for the AY 2021-22.
Solution:
Income from House Property
Annual rent 84,000
Less: Municipal taxes paid by owner 15,000
Annual value 69,000
Less: Deduction u/s 24
146 INCOME TAX
Illustration 23: Gopal is owner of 3 houses in Bangalore, particulars of which for year
ended 31-3-2021 are as follows.
1 House 2 House 3 House
Construction started on 01-04-95 01-08-96 01-07-83
Construction completed on 31-12-98 31-01-98 31-12-83
Vacancy / Unoccupied period -- -- 3 months
Cost of Repairs borne by Owner Owner Owner
Actual rent received (Let out for residential ` 40,000 ` 9,000 Own residence
purposes)
Fair Rent 45,000 9,000 17,800
Total Municipal tax 4,200 900 1,600
Municipal tax paid by Gopal 4,200 450 1,600
Municipal tax paid by tenant -- 450 --
Collection charges 500 300 --
Insurance premium 1,000 100 260
Interest on loan taken for house construction 15,000 3,000 16,000
Unrealized rent allowed in AY 2016-2017 20,000 -- --
recovered during the year
Gopal resided in Mysore for 3 months during the PY in connection with his business and
during this period, his dwelling house at Bangalore remained vacant. During his stay at
Mysore, he paid a rent of ` 300 p.m. for a house. Compute income under the head house
property for the AY 2021-22.
Solution:
I (`) II (`) III (`)
Gross Annual value 45,000 9,000 Nil
Less: Municipal taxes 4,200 450 --
Net Annual value 40,800 8,550 Nil
Less: Deduction u/s 24 12,240 2,565 --
(a)Standard deduction @ 30% 15,000 3,000 16,000
(b) Interest 13,560 2,985 (-) 16,000
Income from:
House I 13,560
House II 2,985
House III (-) 16,000
HOUSE PROPERTY 147
545
Unrealized Rent Recovered (20,000-30% x 20,000) 14,000
Income from House property 14,545
Illustration 24: Mr. A and B constructed their houses on a piece of land purchased by them
at New Delhi. The built up area of each house was 1,000 sq. ft. ground floor and an equal
area in the first floor. Mr. A started construction on 1.04.18 and completed it on 31.03.20.
Mr. B started the construction on 1.04.20 and completed the construction on 30.06.20. A
occupied the entire house on 01.04.20. B occupied the ground floor on 01.07.20 and let out
the first floor for a rent of ` 15,000 per month. However, the tenant vacated the house on
31.12.20 and B occupied the entire house during the period 01.01.21 to 31.03.21.
Following are the other information
(i) For rental value of each unit ` 1,00,000 per annum
(ground floor/first floor)
(ii) Municipal value of each unit ` 72,000 per annum
(ground floor/first floor)
(iii) Municipal taxes paid by A – 8,000
B – 8,000
(iv) Repair and maintenance charges paid by A – 28,000
B – 30,000
A has availed a housing loan of ` 20 lakhs @ 12% p.a. on 01.04.18. B has availed a housing
loan of ` 12 lakhs @ 10% p.a. on 01.07.19. No repayment was made by either of them till
31.03.21. Compute income from house property for A and B.
Solution: Computation of income from house property of Mr. A for A.Y. 2021-22
Particulars ` `
Annual value (since house is self occupied) Nil
Less: Deduction u/s 24(b)
Interest paid on borrowed capital ` 20,00,000 @ 12% 2,40,000
Pre-construction interest ` 2,40,000/ 5 48,000
2,88,000
Section 24(b), Interest deduction restricted to 2,00,000
“Income from House Property” of Mr. A (2,00,000)
Illustration 25: R is a Cost Accountant in HIFI Ltd., Mumbai, and he gets ` 18,000 per
month as salary. He owns two houses, one of which has been let out to the employer
company which in turn was provided to him as rent-free accommodation. Determine the
taxable income of R for the AY 2021-22 after taking into account the following information
relating property income:
Note:
Free accommodation: R has let out House 1 to his employer company HIFI Ltd, which
provides the same to him as rent free accommodation. Rental income received by R as
owner will be taxable as “income from house property”. As he uses the house only as an
employee of the tenant, value of perquisite for rent free house is taxable under the head
“Salaries”. He is not entitled to the benefits permissible under section 23(2), as he occupies
the house not as owner as a sub-tenant of the employer company. Value of perquisites in
respect of rent free house: 15% Salary of ` 2,16,000 i.e. ` 32,400 or actual rent i.e. 63,000
whichever is lower.
Illustration 26: Mrs. Rohini Thomas, a citizen of the U.S.A., is a resident and ordinarily
resident in India during the financial year 2020-21. She owns a house property at Los
Angeles, U.S.A., which is used as her residence. The annual value of the house is $ 20,000.
The value of one USD ($) may be taken as ` 45.
She took ownership and possession of a flat in Chennai on 1.7.2020, which is used for self-
occupation, while she is in India. The flat was used by her for 7 months only during the year
ended 31.3.2021. Whilst the municipal valuation is ` 32,000 p.m., the fair rent is ` 4,20,000
p.a. She paid the following to Corporation of Chennai:
Property Tax ` 16,200
Sewerage Tax ` 1,800
She had taken a loan from Standard Chartered Bank for purchasing this flat. Interest on loan
was as under:
`
Period prior to 1.4.2020 49,200
1.4.2020 to 30.6.2020 50,800
1.7.2020 to 31.3.2021 1,31,300
She had a house property in Bangalore, which was sold in March, 2018. In respect of this
house, she received arrears of rent of ` 60,000 in March, 2021. This amount has not been
charged to tax earlier.
Compute the income chargeable from house property of Mrs. Rohini Thomas for the
assessment year 2021-22, exercising the most beneficial option available.
Solution: Since the assessee is a resident and ordinarily resident in India, her global income
would from part of her total income i.e., income earned in India as well as outside India will
form part of her total income. She possesses a self-occupied house at Los Angeles as well as
at Chennai. At her option, one house shall be treated as self-occupied, whose annual value
will be nil. The other self-occupied house property will be treated as “deemed let out
property”.
The annual value of the Los Angeles house is ` 9,00,000 and the Chennai flat is ` 3,15,000.
Since the annual value of Los Angeles house is obviously more, it will be beneficial for her to
opt for choosing the same as self-occupied. The Chennai house will therefore, be treated as
“deemed let out property”.
HOUSE PROPERTY 151
As regard the Bangalore house, arrears of rent will be chargeable to tax as income from
house property in the year of receipt under section 25B. it is not essential that the assessee
should continue to be the owner. 30% of the arrears of rent shall be allowed as deduction.
Accordingly, the income from house property of Mrs. Rohini Thomas will be calculated as
under:
Particulars ` `
1. Self-occupied house at Los Angeles
Annual Value Nil
Less: Deduction u/s 24 Nil
Chargeable income from this house property Nil
2. Deemed let out house property at Chennai
Annual value (Higher of municipal value and fair rent)
[35,000 x 9] 3,15,000
Less: Municipal Taxes (Property Tax + Sewerage tax) 18,000
Net Annual Value (NAV) 2,97,000
Less: Deductions u/s 24
30% of NAV 89,100
Interest on borrowed capital (See Note below) 1,91,940 2,81,040
15,960
3. Arrears in respect of Bangalore property
Arrears of rent received
60,000
Less: Standard Deduction @ 30% 42,000
18,000
Income chargeable under the head “Income from house property" 57,960
Note: Interest on borrowed capital
`
Interest for the current year (` 50,800 + ` 1,31,300) 1,82,100
Add: 1/5th of pre-construction interest (` 49,200 x 1/5) 9,840
Interest deduction allowable under section 24 1,91,940
Illustration 27: Discuss the following issues relating to Income from house property.
(i) Income earned by residents from house properties situated in foreign countries.
(ii) Properties which are used for agricultural purposes.
Solution:
(i) In case of resident individual, his global income is taxable in India. Therefore, income
earned by residents from house properties situated in foreign countries is taxable in
India.
If the income from house properties situated outside India is chargeable to tax in
India the annual value of such property would be computed as if the property is
situated in India. Further, municipal taxes paid under the laws of that country can
also be deducted while arriving at the Annual Value of the property. No distinction
152 INCOME TAX
should be made between a house property situated in India and a house property
situated abroad, while computing taxable income.
(ii) If the property is used for agricultural purposes, the annual value of such property
would be treated as “Agricultural Income” and it is exempt under section 10(1) of
Act. However, if the house property is used for purpose other than agriculture the
annual value of such property cannot be treated as agricultural income.
Illustration 28: Mr. Kalpesh borrowed a sum of ` 30 lakhs from the National Housing Bank
towards purchase of a residential flat. The loan amount was disbursed directly to the flat
promoter by the bank. Though the construction was completed in May, 2020, repayments
towards principal and interest had been made during the year ended 31.3.2020.
In the light of the above facts, state:
(i) Whether Mr. Kalpesh can claim deduction under Section 24 in respect of interest for
the assessment year 2020-21.
(ii) Whether deduction under Section 80C can be claimed for the above assessment year,
even though the construction was completed only after the closure of the year?
Solution:
(a) Interest on borrowed capital is allowed as deduction under section 24(b)
Interest payable on loans borrowed for the purpose of acquisition, construction,
repairs, renewal or reconstruction of house property can be claimed as deduction
under section 24(b). Interest payable on borrowed capital for the period prior to the
previous year in which the property has been acquired or constructed, can be claimed
as deduction over a period of 5 years in equal annual installments commencing from
the year of acquisition or completion of construction.
It is stated that the construction is completed only in May, 2020. Hence, deduction in
respect of interest on housing loan cannot be claimed in the assessment year 2020-21.
(b) Section 80C is attracted where there is any payment for the purpose of purchase or
construction of a residential house property, the income from which is chargeable to
tax under the head ‘income from house property’. Such payment covers repayment of
any amount borrowed from the National Housing Bank.
However, deduction is prima facie eligible only if the income from such property is
chargeable to tax under the head “Income from House Property”. During the
assessment year 2020-21, there is no such income chargeable under this head. Hence,
deduction under section 80C cannot be claimed for A.Y. 2020-21.
Illustration 29: Mrs. Indu, a resident individual, owns a house in U.S.A. She receives rent @
$ 2,000 per month. She paid municipal taxes of $ 1,500 during the financial year 2020-21.
She also owns a two storied house in Mumbai, ground floor is used for her residence and
first floor is let out at a monthly rent of ` 10,000. Standard rent for each floor is ` 11,000 per
month and fair rent is ` 10,000 per month. Municipal taxes paid for the house amounts to
`7,500. Mrs. Indu had constructed the house by taking a loan from a nationalized bank on
HOUSE PROPERTY 153
20.6.2016. She repaid the loan of ` 54,000 including interest of ` 24,000. The value of one
dollar is to be taken as ` 45. Compute total income from house property of Mrs. Indu.
Solution: Computation of Income from House Property of Mrs. Indu for AY 2021-22.
Particulars ` `
House property in USA
GAV – Rent received {treated as fair rent}($ 2,000 p.m. 10,80,000
x ` 45 per USD x 12 months)
Less: Municipal taxes paid ($ 1,500 x`45 per USD) 67,500
Net Annual Value (NAV) 10,12,500
Less: Deduction under section 24
30% of NAV 3,03,750 7,08,750
House property in Mumbai (Let out portion – First
Floor)
Annual Letting Value (lower of std rent and fair rent)
Standard Rent (`11,000 x 12) 1,32,000
Fair rent (` 10,000 x 12) 1,20,000
Actual rent received (10,000 x 12) 1,20,000
Gross Annual Value (higher of ALV and actual rent) 1,20,000
Less: Municipal taxes paid (50% of ` 7,500) 3,750
Net Annual Value (NAV) 1,16,250
Less: Deduction under section 24
30% of NAV 34,875
Interest on housing loan (50% of ` 24,000) 12,000 46,875 69,375
Income from House property in Mumbai (Self-
occupied portion – Ground Floor)
Net Annual Value (NAV) Nil
Less: Deduction under section 24
30% of NAV Nil
Interest on housing loan (50% of ` 24,000) 12,000 (-)12,000
Income from house property 7,66,125
Illustration 30: X (44 years) owns a residential property in Ranchi. Municipal valuation of
the property is ` 8,00,000. Rent of similar property in the same locality of Ranchi is
` 12,00,000. Standard rent of the property under the relevant Rent Control Act is
` 10,00,000. It is let out to A Inc. (a foreign company) on monthly rent of US $ 3,100
(amount is deposited in New York branch of Citibank, with prior permission of RBI). There
is no unrealized rent. However, property remains vacant for one month commencing from
March 16, 2021 when A Inc. has vacated the property. With effect from April 15, 2021, the
same property is let out to B Ltd., an Indian company.
The following expenses are incurred by X during the previous year 2020-21.
Municipal tax : ` 1,70,000 (actually paid).
154 INCOME TAX
Solution: For converting rental income received in foreign currency into Indian currency,
the telegraphic transfer buying rate offered by SBI on the last date of the previous year shall
be adopted. This rule is applicable if rent is not remitted up to March 31 of the previous
year.
`
Computation of gross annual value
Municipal value (MV) 8,00,000
Fair rent (FR) 12,00,000
Standard rent (SR) 10,00,000
Annual rent (US $ 3,100 x 12 x ` 45) 16,74,000
Unrealized rent Nil
Loss due to vacancy (US $ 3,100 x ` 45 x ½) 69,750
Step I – Reasonable expected rent of the property [MV or FR, whichever is
higher, but subject to maximum of SR] 10,00,000
Step II – Rent received/receivable after deducting unrealized rent but before
adjusting loss due to vacancy 16,74,000
Step III – Amount computed in Step I or Step II, whichever is higher 16,74,000
Step IV – Loss due to vacancy 69,750
Step V – Gross annual value is Step III minus Step IV 16,04,250
Less: Municipal tax 1,70,000
Net annual value 14,34,250
Less: Deductions under section 24
Standard deduction @ 30%
Interest from borrowed capital 4,30,275
Income from House Property 3,00,000
7,03,975
Illustration 31: X (40 years) owns a commercial property in Bangalore. It is let out to
different tenants. Municipal valuation of the property is ` 25,00,000. Market rent of a
similar property is ` 32,00,000. Annual rent (if there is no vacancy and no unrealized rent)
is ` 40,00,000. Standard rent is not applicable. Unrealized rent is ` 3,20,000 [there are two
HOUSE PROPERTY 155
tenants who have defaulted – A : ` 1,20,000 and B : ` 2,00,000]. It is not possible to realize
anything from A and B. B have also occupied a property owned by Mrs. X. One flat in the
property (annual rent being ` 60,000) remains vacant for 4 months during the previous
year. Another flat (annual rent being ` 90,000) remains vacant for 8 months during the
previous year.
Annual rent of ` 40,00,000 includes ` 10,00,000 pertaining to different amenities provided
in the building. ` 30,00,000 is rent of building and ` 10,00,000 is for different amenities
which is calculated as follows-
1. Lift maintenance charges: ` 3,50,000.
2. Electricity charges: ` 2,00,000.
3. Air-conditioning charges: ` 3,50,000.
4. Security guard charges: ` 1,00,000.
X has incurred following expenses in respect of the aforesaid property:
1. Advocate fees and court charges for drafting lease agreements with tenants: ` 75,000.
2. Municipal tax of 2020-21: ` 4,70,000 (however, 10% rebate is obtained for payment
before due date).
3. Arrears of municipal tax of 2019-20 paid during the current year: ` 1,20,000 (it
includes interest on arrears of ` 15,000).
4. Expenditure on lift maintenance: ` 2,10,000 (a payment of ` 30,000 is made in cash).
5. Electricity bill: ` 2,40,000.
6. Air-conditioner maintenance: ` 80,000 (an amount of ` 40,000 paid to B Ltd. in which X
is director holding 15% share capital, similar services can be obtained from any other
person for ` 18,000).
7. Salary to security guard : ` 1,25,000.
8. Salary of staff for supervising lift maintenance and air-conditioner services: ` 2,40,000.
9. Salary of staff for collecting rent and other charges : ` 90,000.
10. Insurance of building : ` 1,17,000.
11. General repair of building : ` 80,000.
12. Interest on loan taken from a foreign company payable outside India for construction of
the property: ` 7,50,000 (Tax is not deducted by X under section 195).
13. Interest on the same loan for the previous year 2019-20: ` 2,00,000 (paid during the
current year after deducting tax at source).
Besides, the above expenses, X can claim depreciation on lift and air-conditioning system
which comes to ` 5,07,500. Assuming that income of X from business is ` 9,20,000, find out
Gross Total Income of X for the AY 2021-22.
Solution:
Annual rent is ` 40,00,000. Out of which annual rent of the property is ` 30,00,000 and
charges for different amenities (like lift, air-conditioning, electricity, security guard) are
` 10,00,000. In other words, 75% of the annual rent pertains to rent of building and 25% of
rent pertains to charges for different amenities. From the data given in the problem, the
following calculation can be made:
156 INCOME TAX
Total Rent of
Charges for
building
different
` (75% of
amenities
total)
(25% of
` total)
`
Annual rent if there is no vacancy and no unrealized 40,00,000 30,00,000 10,00,000
rent
Less: Unrealised rent (` 1,20,000 + ` 2,00,000) 3,20,000 2,40,000 80,000
Rent after deducting unrealized rent 36,80,000 27,60,000 9,20,000
Less: Loss due to vacancy [(` 60,000 x 4 ÷ 12) +
(`90,000 x 8 ÷12)] 80,000 60,000 20,000
Balance 36,00,000 27,00,000 9,00,000
`
Computation of gross annual value
Municipal value (MV) 25,00,000
Fair rent (FR) 32,00,000
Standard rent (SR) NA
Annual rent 30,00,000
Unrealized rent 2,40,000
Loss due to vacancy 60,000
Step I – Reasonable expected rent of the property [MV or FR, whichever is
higher, but subject to maximum of SR] 32,00,000
Step II – Rent received/receivable after deducting unrealized rent but before
adjusting loss due to vacancy 27,60,000
Step III – GAV (∵ ER is higher, GAV = ER) 32,00,000
Less: Municipal tax [(90% of ` 4,70,000) + (` 1,20,000 - ` 15,000)] 5,28,000
Net annual value 26,72,000
Less: Deductions under section 24
Standard deduction @ 30% 8,01,600
Interest from borrowed capital Nil
Income 18,70,400
Note: Interest payable outside India is not deductible if proper tax has not been deducted
by the taxpayer. Interest of last year (in respect of which tax is deducted during the current
year) is not deductible during the current year.
HOUSE PROPERTY 157
MCQ
5. Interest on borrowed capital accrued up to the end of the previous year prior to the
year of completion of construction is
(a) Allowed as a deduction in the year of completion of construction
(b) Allowed in 5 equal annual installments from the year of completion of
construction
(c) Allowed in the respective year in which the interest accrues
(d) Not allowed
6. The ceiling limit of deduction under section 24(b) in respect of interest on loan
taken on 1.4.2019 for repairs of a self-occupied house is
(a) ` 30,000 p.a.
(b) ` 1,50,000 p.a.
HOUSE PROPERTY 159
7. Where an assessee has two house properties for self-occupation, the benefit of nil
annual value will be available in respect of –
(a) Both the properties
(b) The property which has been acquired/constructed first
(c) Any one of the properties, at the option of the assessee
(d) Any one of the properties and once option adopted cannot be changed in
subsequent years
8. Leena received ` 30,000 as arrears of rent during the P.Y. 2020-21. The amount
taxable under section 25A would be –
(a) ` 30,000
(b) ` 21,000
(c) ` 20,000
(d) ` 15,000
9. Vidya received ` 90,000 in May, 2020 towards recovery of unrealized rent, which
was deducted from actual rent during the P.Y. 2018-19 for determining annual
value. Legal expense incurred in relation to unrealized rent is ` 20,000. The amount
taxable under section 25A for A.Y. 2021-22 would be –
(a) ` 90,000
(b) ` 63,000
(c) ` 60,000
(d) ` 49,000
10. Ganesh and Rajesh are co-owners of a self-occupied property. They own 50% share
each. The interest paid by each co-owner during the previous year on loan (taken for
acquisition of property during the year 2004) is ` 2,05,000. The amount of allowable
deduction in respect of each co-owner is –
(a) ` 2,05,000
(b) ` 1,02,500
(c) ` 2,00,000
(d) ` 1,00,000
PROFITS & GAINS
6 FROM BUSINESS
OR PROFESSION
Basis of Charge [Sec. 28]
The following incomes are chargeable to tax under the head “Profits and gains of business
or profession”:
1. Profits and gains of any business or profession.
2. Any compensation received by a person holding an agency, in connection with
termination of agency or the modification of any terms and conditions relating thereto.
3. Any compensation received or receivable, whether revenue or capital, in connection
with the termination or the modification of the terms and conditions of any contract
relating to its business shall be taxable as business income.
4. Income derived by a trade, professional or similar association from specific services
performed for its members.
5. The value of any benefit or perquisite, whether convertible into money or not, arising
from business or the exercise of a profession.
6. Export incentive available to exporters.
• Profit on sale of Import Entitlement License
• Cash Assistance received by any person against exports
• Duty Drawback
• Profit on transfer of Duty Entitlement Pass Book Scheme
• Profit on transfer of Duty free Replenishment Certificate
7. Any interest, salary, bonus, commission or remuneration received by a partner from
firm (to the extent allowed u/s 40(b) to the firm).
8. Any sum received for :
• not carrying out any activity in relation to any business or profession
• not to share any know-how, patent, copyright, trademark, etc.
9. Any sum received under a Keyman insurance policy including bonus.
10. Any sum received (or receivable) in cash or kind, on account of any capital asset (other
than land or goodwill or financial instrument) being demolished, destroyed, discarded
or transferred, if the whole of the expenditure on such capital asset has been allowed as
a deduction under section 35AD.
11. Any profit or gains arising from conversion of inventory into capital asset or its
treatment as capital asset shall be charged as business income. For this purpose FMV
on the date of conversion of the asset shall be deemed to be income.
158 INCOME TAX
12. Income from speculative transaction. (However, such speculative business shall be
deemed to be distinct and separate from other business). The term speculative
transaction means a transaction in which a contract for purchase or sale of shares, is
settled otherwise than by way of actual delivery. However, it does not cover transaction
in respect of trading in derivatives or commodity derivatives.Also, it does not cover
transaction by a company, the principal business of which is the business of trading in
shares or banking. For such companies, the income is chargeable to tax as PGBP.
Illegal Business
The income-tax law is not concerned with the legality or illegality of a business or
profession. It can, therefore, be said that income of illegal business or profession is also
taxable.
Rent, Rates, Taxes, Repairs and Insurance for Building [Sec. 30]
The following deductions are allowed in respect of rent, rates, taxes, repairs and insurance
for premises used for the purpose of business or profession:
1. Where the premises are occupied by the assessee:
• As a tenant, rent paid for such premises; and further if he has undertaken to bear
the cost of repairs to the premises, the amount paid on account of such repairs;
• As a landlord, the amount paid by him on account of current repairs to the
premises. Current repairs are those repairs which are done to maintain the
building.
2. Any sum on account of land revenue, local rates or municipal taxes subject to the
conditions as specified by section 43B; and
3. Amount of any premium in respect of insurance against risk of damage or destruction
of the premises.
Explanation
If the business premise belongs to the assessee no deduction in respect of rent will be
allowed to him. If the assessee is a partnership firm and the business premises belongs to a
PROFITS & GAINS FROM BUSINESS OR PROFESSION 159
partner of the firm, the rent payable to the partner will be an allowable deduction and, on
the other hand, the rent from such a building will be income under the head ‘Income from
House Property’ in the hands of the partner.
If the assessee is a tenant in that premises and a part of the premises is used by him as
dwelling-house and the other part is used for his business, the amount of deduction in
respect of rent shall be allowed proportionately. Similarly, land revenue, local taxes,
insurance premium, etc., shall be proportionate to that part of the premises which is used
for business.
Rate of
Nature of Assets Depreciation
(WDV)
Buildings
Residential 5%
General 10%
Temporary Structure 40%
Furniture & Fittings 10%
Plant & Machinery
General 15%
Motors cars other than those used in a business of running them on hire 15%
Motor buses, lorries, vans and taxis used in a business of running them
on hire 30%
Books owned by assesses carrying on a profession 40%
Books owned by assesses carrying on a business 15%
Books owned by assesses carrying business of running libraries 40%
Ships 20%
Airplanes 40%
Air Pollution Control Equipments, Water Pollution Control Equipments 40%
Computers including Computer Software (Operating System only) 40%
Intangible Assets
Software, Knowhow, patents, copy-rights, trade marks, licences, 25%
franchises or any other business or commercial rights of similar nature
Note:
(i) “Building” means the superstructure only and does not include site.
(ii) Buildings include roads, bridges, wells and tube wells.
PROFITS & GAINS FROM BUSINESS OR PROFESSION 161
(iii) A building shall be deemed to be used mainly for residential purposes if the built up
floor area used for residential purposes is not less than 2/3rd of the total built up
floor area.
(iv) No Depreciation will be allowed on the land. If land is purchased and then house is
built up, depreciation will be allowed only on the construction cost. If house is
purchased and land cost is not decided separately then also depreciation will be
allowed on the cost of house only excluding the land cost on the basis of market
value.
(v) The cost of wooden doors and windows in the house is a part of building and it is not
a part of furniture and fitting.
(vi) “Plant” includes ships, vehicle, books, scientific apparatus and surgical equipments
used for the purpose of business or profession. It does not include tea bushes or
livestock.
(vii) One block for P&M eligible for 15% depreciation & Motor Car other than used for
running on hire.
(viii) No specific rate of depreciation prescribed for Scooter, Motor Cycle, Tractor, Road-
roller, so depreciation on such vehicle will allowed @ 15%.
(ix) “Computer Software” means any computer programme recorded on any disc, tape,
perforated media or other information storage device.
(x) Depreciation is mandatorily available (it is a must, it is not at the option of the
assessee to claim, or not to claim, depreciation).
Illustration 1: Guru starts a new business on April 10, 2020 and he purchases the following
assets. Categorise these assets in different block of assets.
Cost (`‘000)
Building A – Office building 600
Building B – Residential building for manager 420
Building C – Factory building 750
Plant and machinery A – Office computer 15
Plant and machinery B – Fax machine 10
Plant and machinery C – Cars 70
Plant and machinery D – Air pollution control equipment 25
Plant and machinery E – Telephone system 20
Plant and machinery F – Air – conditioners 70
Plant and machinery G – Scooters for employees 20
Furniture – Office furniture 30
Furniture – Furniture for welfare centre of employees 45
Know-how – know-how to manufacture goods 30
Solution:
Block 1- Buildings (rate of depreciation: 5%)
Building B – Residential building 420
162 INCOME TAX
Provided that any expenditure on acquisition of any asset shall be ignored if such
expenditure is made in cash exceeding ` 10,000 per day. For e.g. If a machine has been
purchased by paying ` 15,000 in cash & balance ` 30,000 in account payee cheque,
depreciation eligibility will be only on ` 30,000.
Note:
1. The amount of reduction for Asset sold cannot exceed the sum of Opening WDV and
asset acquired.
2. Consideration received in kind for asset sold cannot be deducted.
Explanation to Section 32 states that the provisions relating to Depreciation shall apply
whether the assessee claims depreciation in computing the total income or not. This means
that even if the assessee does not claim depreciation while computing the total income the
provisions of Section 32 shall apply and next year he can claim depreciation only on the
reduced amount of WDV.
2. If the block of assets is empty or ceases to exist on the last day of the PY (though
the WDV is not zero)
When all the assets in the block are sold. Resulting figure is short term capital gain or
short term capital loss.
164 INCOME TAX
Suppose opening WDV is ` 1,00,000 additions during the year is ` 50,000 and all asset
in the block is sold for ` 1,75,000 then the block of asset will be shown in the following
manner:
Opening WDV on 1/4/2020 ` 1,00,000
Add: Additions during the year ` 50,000
` 1,50,000
Less: Sale value of all asset ` 1,75,000 restricted to ` 1,50,000
Nil
Balance ` 25,000 is Short term Capital Gain.
Suppose opening WDV is ` 1,00,000 additions during the year is ` 50,000 and all asset
in the block is sold for ` 1,25,000 then the block of asset will be shown in the following
manner:
Opening WDV on 1/4/2020 ` 1,00,000
Add: Additions during the year ` 50,000
` 1,50,000
Less: Sale value of all asset ` 1,25,000
Nil
Balance ` 25,000 is Short term Capital Loss.
Rate of
When it is put to
Asset depreciation Date of purchase Actual cost `
use
(%)
Plant C 30 March 10, 2020 April 10, 2020 20,000
Plant D 30 March 1, 2020 December 3, 2020 30,000
Plant E 30 May 6, 2020 May 6, 2020 50,000
Plant F 30 May 15, 2020 January 2, 2021 60,000
Plant G 30 July 8, 2020 April 15, 2021 75,000
Plant A is sold on August 16, 2020 for ` 86,000. Determination of Depreciation for the
previous year 2020-21.
PROFITS & GAINS FROM BUSINESS OR PROFESSION 165
Solution:
Depreciated value of the block on April 1, 2020
Plant A: ` 1,00,000 `
Plant B: `27,000
Plant C: (Purchased in FY 2019-20) `20,000
Plant D: (Purchased in FY 2019-20) `30,000 1,77,000
Add: Cost of Plant E acquired during the year 2020-21 and put to use for more than
180 days [usual depreciation will be available] (+)50,000
Add: Cost of Plant F which is acquired during 2020-21 and it is put to use for less than
180 days [it will be qualified for half-depreciation] (+)60,000
Total 2,67,000
Less: Sale proceeds of Plant A (-) 86,000
Written down value of the block consisting of Plants B, C, D, E and F 2,01,000
Amount of depreciation [i.e., 15% of ` 60,000 + 30% of ` 1,41,000] 51,300
If, however, in this case Plant A is sold for ` 2,40,000, then depreciation shall be determined
as under:
Total [as determined above] 2,87,000
Less: Sale proceeds of Plant A (-)2,40,000
Written down value 47,000
Since the written down value is less than the cost of Plant F which is eligible for half-
depreciation, depreciation shall be 15% of ` 47,000. i.e. ` 7,050.
Note: Plant D is put to use for less than 180 days, during the previous year 2018-19. Since it
was purchased last year, usual depreciation will be available during the previous year 2019-
20.
Illustration 3: A car purchased by Amar on 10.8.2016 for ` 3,25,000 for personal use is
brought into the business of the assessee on 1.12.2020, when its market value is ` 1,50,000.
Compute the actual cost of the car and the amount of depreciation for the Assessment Year
2021-22 assuming the rate of depreciation to be 15%.
Solution: In this case, the car was purchased for personal use on 10.8.2016 for ` 3,25,000
and subsequently brought into the business of the assessee on 1.12.2020. The “actual cost”
of car is ` 3,25,000. The admissible depreciation for A.Y. 2021-22 is ` 48,750 (i.e., 15% of
` 3,25,000). As the car was not acquired during the previous year 2020-21, full depreciation
is available for the year even if it is put to use for less than 180 days during the previous
year. The condition of restricting depreciation to 50% of the prescribed percentage would
apply only where the asset was acquired by the assessee in the previous year.
166 INCOME TAX
Treatment of Trial Run Expenses and Income earned during Trial Run Period
Illustration 4: X Ltd. acquired a printing machine for ` 25,00,000. Transport Cost, including
loading and unloading charges ` 35,000. Expenses incurred during the trial run period
` 2,00,000. Output generated during trial run period was sold for ` 90,000. Depreciation @
15%. Compute WDV. Would your answer differ if the output generated during trial run
period was ` 3,00,000?
Solution: Computation of Depreciation
Particulars Amount (`) Amount (`)
Expenses incurred during trial run period 2,00,000 2,00,000
Less: Income from sale of output generated during trial run (90,000) (3,00,000)
period
Net Cost / Gain 1,10,000 (1,00,000)
Actual Cost of the Machine 25,35,000 25,35,000
Add : Net Cost during trial run 1,10,000 —
Less : Net Gain during trial run — (1,00,000)
Actual Cost of Machine for charging depreciation 26,45,000 24,35,000
Less : Depreciation @ 15% 3,96,750 3,65,250
Written Down Value (W.D.V.) 22,48,250 20,69,750
Illustration 7: `
Depreciated value of the block of assets (consisting of Plants A, B and C) on
1.4.2020 14,80,000
Addition of eligible Plant D made on 1.9.2020 (it is put use on 8.9.2020) 1,60,000
Cost of eligible Plant E purchased on 24.12.2020 3,10,000
Sale proceeds of Plant A (sold on 3.3.2021) which was originally purchased
on 1.4.2010 for ` 1,20,000 16,30,000
Assuming that the assessee is an industrial undertaking and rate of depreciation is 15%,
find out the admissible depreciation and income under the head ‘Capital gains’ for the
assessment year 2021-22.
Solution:
` `
Block: Plant 15% 14,80,000
Written down value of block as on 1.4.2020
Add: Additions during the previous year
Plant D (for 180 days or more) 1,60,000
Plant E (for less than 180 days) 3,10,000 4,70,000
19,50,000
Less: Assets sold during the previous year Plant A 16,30,000
Written down value as on 31.3.2020 3,20,000
Less: Normal depreciation
PROFITS & GAINS FROM BUSINESS OR PROFESSION 169
Residential Quarters
When occupation of residential quarters by the assessee’s employees is subservient to and
necessary for the business, the property is considered as occupied by owner for the purpose
of his business. Depreciation is, therefore, allowable on such buildings. Similarly, fans, air-
conditioners, refrigerators, furniture, etc., provided by the assessee-employer at the
quarters of employees is considered to have been used wholly for the purpose of employer’s
business and depreciation is admissible.
Illustration 9: M/s Sidhant & Co., a sole proprietary trading concern is converted into a
company, Sidhant Co. Ltd. with effect from November 29, 2020. The written down value of
assets as on April 1, 2020 is as follows:
Items Rate of Depreciation WDV as on 1st April, 20
Building 10% ` 3,50,000
Furniture 10% ` 50,000
PROFITS & GAINS FROM BUSINESS OR PROFESSION 171
Solution: In the case of conversion of sole proprietary concern into a company as per
section 47(xiv), the depreciation should be first calculated for the whole year assuming that
no succession had taken place. Thereafter, the depreciation should be apportioned between
the sole proprietary concern and the company in the ratio of the number of days for which
the assets were used by them. It is assumed that in this case, the conditions specified in
section 47(xiv) are satisfied.
Computation of depreciation allowable to Sidhant & Co. for A.Y. 2021-22
Particulars ` `
Building
WDV as on 1.4.2020 3,50,000
Depreciation @ 10% 35,000
Furniture
WDV as on 1.4.2020 50,000
Depreciation @ 10% 5,000
Plant and Machinery
WDV as on 1.4.2020 2,00,000
Add: Additions during the year (purchased on 15.10.20) 1,00,000
3,00,000
Less: Depreciation for the year
(15% of ` 2,00,000 + 50% of 15% of ` 1,00,000) 37,500
(30,000 + 7,500)(Depreciation on new machinery is restricted to
50% of eligible depreciation, since the asset is put to use for less than
180 days in that year) _ ____
Total depreciation for the year 77,500
Proportionate depreciation allowable to Sidhant & Co. for 242 days
On existing assets (i.e. 1.4.20 to 28.11.20) (i.e. 242/365 × ` 70,000) 46,411
45 48,420
On new machine for 45 days i.e., x 7,500 2,009
168
Unabsorbed Depreciation
If the whole amount of current depreciation allowance is not deductible on account of the
insufficiency of income (under various heads of income), the remaining unabsorbed amount
is called ‘Unabsorbed Depreciation’.
2. Continuity of business is not relevant for the purpose of above set off and carry
forward.
3. Unabsorbed Depreciation can be carry forward by the same assessee. This rule is,
however, not applicable in case of business reorganization (amalgamation, demerger
etc).
2020-21 2021-22
` `
Income from salary 1,00,000 2,00,000
Business profits (before depreciation) 16,000 18,000
Current depreciation 1,40,000 1,31,000
Income from other sources 15,000 2,80,000
Determine the taxable income of Vikash for the assessment years 2021-22 and 2022-23.
Solution:
Assessment Year 2021-22 (Previous Year 2020-21) ` `
Profit and Gains of Business or Profession:
Business Profits 16,000
Less: Depreciation 1,40,000 Nil
Depreciation not deductible against business profits 1,24,000
Income from salary
Salary 1,00,000 1,00,000
Income from other sources
Other Income 15,000
Less: Depreciation 15,000 Nil
Net Income 1,00,000
Note: Unabsorbed depreciation of ` 1,09,000 will be carried
forward.
Illustration 11: Assessee purchased a car on 01.07.20 for ` 4,00,000 (depreciation rate
15%). He submitted with you the following statement for consideration:
Income u/h PGBP (before car depreciation) 2,00,000
Less: Depreciation on car (as per books) 45,000
Income u/h PGBP 1,55,000
He further submitted that he used car 60% for business purposes and 40% for personal
purposes. Compute his income u/h PGBP for AY 2021-22. Assume no other car is owned by
assessee. Also, calculate opening WDV for next year.
Solution:
Profit before depreciation 2,00,000
Less: Depreciation 60,000
(-) Disallowed 40% 24,000 36,000
Income u/h PGBP 1,64,000
WDV of Asset For Next Year would be 4,00,000 – 36,000 = ` 3,64,000.
Assets used partly for Business & partly for Agricultural purposes
Where the income of an Assessee is derived both from agriculture and business of the
Assessee chargeable to tax, then for computing the WDV of the assets, the depreciation will
be computed and allowed as if the whole income is derived from the business chargeable to
the income tax under the head “Profits and Gains from Business and Profession.
Note: This provision shall be applicable only in case of business activities vs. agricultural
activities. In case asset used for business as well as for personal use, section 38 shall prevail.
Terminal Depreciation (i.e., Loss on Transfer) or Balancing Charge (in the Case of
Gain) in the Case of Power Units
When a depreciable asset (on which depreciation is claimed on straight line basis) of a
power generating unit is sold, discarded, demolished or destroyed in a previous year, then
terminal depreciation (in case of loss) is deductible or balancing charge (in case of gain) is
taxable.
Terminal depreciation
If the amount calculated under Step two is less than the amount of Step one, then the
deficiency is deductible as terminal depreciation. The following points should be noted:
1. When the asset is sold, discarded, etc., in the previous year in which it is first put to use,
any loss arising thereform is not be allowed as terminal depreciation but is treated as
capital loss.
176 INCOME TAX
2. Terminal depreciation allowance cannot be claimed if the asset is not used for the
purpose of business or profession of the assessee at least for sometime during the
previous year in which the sale takes place.
Balancing charge under section 41(2) and capital gain under section 50A
If the amount calculated under Step two is more than the amount of Step one then tax
treatment of such surplus is as follows:
1. So much of the surplus which is equal to the amount of depreciation already claimed, is
taxable as balancing charge under section 41(2) as business income.
2. The remaining surplus (if any) is taxable according to the provisions of section 45
under the head “Capital gains”.
Summary
Sale Consideration (of asset on which depreciation was charged on SLM) xx
(-) WDV of Asset on 1st day of PY xx
Balance Xx
Balance
Sec. 41(3) Where the scientific research asset is sold without having used for other
purposes, then:
• Sale Proceed upto the Actual Cost of Asset PGBP
• Sale Proceed over and above Actual Cost of Asset CG (STCG/ LTCG)
Indexed Cost
Where the scientific research asset is used in the business after it ceases to be used for
scientific research, then asset shall be shown at Nil value.
Note:
• The set off and carry forward of unabsorbed scientific research capital expenditure is
in the same manner as that of depreciation.
• If land and building is purchased through a composite agreement, then the cost of land
& building shall be bifurcated on the basis of their fair market value. Cost of land is not
allowable as deduction and cost of building shall be allowed as deduction u/s 35(1)(iv).
Illustration 13: X Ltd. furnishes the following particulars for the P.Y. 2020-21. Compute the
deduction allowable under section 35 for A.Y. 2021-22, while computing its income under
the head “Profits and gains of business of profession”.
Particulars `
1. Amount paid to Indian Institute of Science, Bangalore for scientific 1,00,000
research
2. Amount paid to IIT, Delhi for an approved scientific research 2,50,000
programme
3. Amount paid to X Ltd., a company registered in India which has as its 4,00,000
main object scientific research and development, as is approved by the
prescribed authority
4. Expenditure incurred on in-house research and development facility as
approved by the prescribed authority
(a) Revenue expenditure on scientific research 3,00,000
(b) Capital expenditure (including cost of acquisition of land ` 5,00,000) on 7,50,000
scientific research
Solution:
Computation of deduction under section 35 for the A.Y. 2021-22
Particulars ` Section % of Amount of
weighted deduction
deduction (`)
Payment of scientific research
Indian Institute of Science 1,00,000 35(1)(ii) 100% 1,00,000
IIT, Delhi 2,50,000 35(2AA) 100% 2,50,000
PROFITS & GAINS FROM BUSINESS OR PROFESSION 179
Illustration 14: Vivitha Bio-medicals Ltd. is a manufacturer. The following expenses were
incurred in respect of activities connected with scientific research:
Year ended Item Amount (`)
31.03.2018 Land 10,00,000
(Incurred after 1.9.2017) Building 25,00,000
31.03.2019 Plant and machinery 5,00,000
31.03.2020 Raw materials 2,20,000
31.03.2021 Raw materials and salaries 1,80,000
The business was commenced on 01.09.2020.
In view of availability of better model of plant and machinery, the existing plant and
machinery were sold for ` 8,00,000 on 1.3.2021.
Discuss the implications of the above for the assessment year 2021-22 along with brief
computation of deduction permissible under section 35 assuming that necessary conditions
have been fulfilled.
Solution:
1. As per section 35 where a company engaged in the business of biotechnology incurs
any expenditure on scientific research during the current year, it is eligible for claiming
weighted deduction of a sum equal to 150% of the eligible expenditure.
The eligible expenditure and quantum of deduction will be:
(a) Current year capital or revenue expenditure incurred for scientific research
(weighted deduction @ 150%).
(b) Any expenditure incurred during earlier 3 years immediately preceding the date of
commencement of business on payment of salary or purchase of materials, or
capital expenditure incurred other than expenditure on acquisition of land [actual
expenditure qualifies for deduction under section 35(1)].
The deduction available under section 35 for scientific research will, therefore, be:
Particulars `
(a) Land Nil
(b) Building 25,00,000
180 INCOME TAX
2. Section 43(3) provides that where a capital asset used for scientific research is sold,
without having been used for other purposes, the lower of sale proceeds or the total
amount of deduction earlier allowed under section 35 will be considered as income
from business of the previous year in which the sale took place.
Therefore, income chargeable to tax u/s 41(3) should be lower of the following:
(1) Sale proceeds i.e. ` 8,00,000
(2) Total amount of deduction earlier allowed under section 35 i.e. ` 5,00,000
` 5,00,000 will be deemed to be the income chargeable to tax under section 41(3).
3. The difference between sale proceeds and business income under section 41(3) will be
treated as short-term capital gain.
Sale proceeds of plant and machinery 8,00,000
Less: Business Income as per section 41(3) 5,00,000
Short-term capital gain 3,00,000
Deduction
• 100% deduction of capital expenditure incurred during the previous year.
• 100% of capital expenditure incurred prior to commencement of business shall be
allowed in year of commencement of business only if same has been capitalized on the
date of commencement of business.
• Capital expenditure shall not include land, goodwill & financial instrument.
• 150% Deduction of capital expenditure incurred on or after April 1, 2012 in respect of
certain specified businesses commencing operations on or after April 1, 2012 viz. Cold
Chain facility, warehousing for of agricultural produce, hospital with at least 100 Beds,
notified affordable housing project and production of Fertilizer.
• No deduction if expenditure exceeding ` 10,000 is incurred by any mode other than
account payee cheque drawn on a bank or an account payee demand draft or use of
electronic clearing system through a bank account.
Other Provisions
• Business should be new business i.e. should not be formed by splitting/reconstruction
of old business.
• Business should not be set up by transfer of old plant & machinery. Old plant &
machinery should not be more than 20% of total plant & machinery used for the
business.
• Deduction u/c VI A shall not be allowed in respect of such business for any assessment
year.
182 INCOME TAX
• Actual cost of asset for which deduction has been allowed under section 35AD shall be
taken as Nil.
• Capital asset to be used for specified business shall be held for atleast 8 years.
• If such asset is used for any purpose other than the specified business, the total amount
of deduction so claimed and allowed in any previous year in respect of such asset, shall
be deemed to be income of the assessee chargeable under the head “Profits and gains of
business or profession” of the previous year in which the asset is so used.
Illustration 15: XYZ Ltd. commenced operations of the business of a new three-star hotel in
Madurai, Tamil Nadu on 1.4.2020. The company incurred capital expenditure of ` 50 lakhs
during the period January, 2020 to March, 2020 exclusively for the above business, and
capitalized the same in its books of account as on 1st April, 2020. Further, during the P.Y.
2020-21, it incurred capital expenditure of ` 2 crores (out of which ` 1.50 crores was for
acquisition of land) exclusively for the above business. Compute the deduction under
section 35AD for the A.Y. 2021-22, assuming that XYZ Ltd. has fulfilled all the conditions
specified in section 35AD and has not claimed any deduction under Chapter VI A.
Solution: The amount of deduction allowable under section 35AD for A.Y. 2021-22 would
be:
Particulars `
Capital expenditure incurred during the P.Y. 2020-21 (excluding the
expenditure incurred on acquisition of land) = ` 200 lakhs - ` 150 lakhs 50 lakhs
Capital expenditure incurred prior to 1.4.2020 (i.e., prior to commencement
of business) and capitalized in the book of account as on 1.4.2019 50 lakhs
Total deduction under Section 35AD for AY 2021-22 100 lakhs
Qualifying Expenditure
• Legal charges for drafting any agreement between the assessee and any other person
relating to the setting up of the business of the assessee.
• Legal charges for drafting the memorandum and articles of association if the taxpayer
is a company.
• Printing expenses of the memorandum and articles of association if the taxpayer is a
company.
• Registration fee of a company under the provisions of the Companies Act.
• Expenses in connection with the public issue of shares or debentures of a company,
underwriting commission, brokerage and charges for drafting, typing, printing and
advertisement of the prospectus.
• Any other expenditure which is prescribed.
The following shall be qualifying expenditure only if the work is carried on by the assessee
itself or by a concern approved by the Board:
• Preparation of feasibility report.
• Preparation of project report.
• Conducting market survey (or any other survey necessary for the business of the
assessee).
• Engineering services relating to the business of the assessee.
Cost of Project: It means the actual cost of fixed assets which are shown in the books of the
assessee as on the last day of the PY in which the business of the assessee commences.
Amount of Deduction
1/5th of the qualifying expenditure is allowable as deduction in each of the five successive
years beginning with the year in which the business commences.
184 INCOME TAX
`in Lakh
Cost of fixed asset 60
Share capital 45
Debentures 16
Long-term borrowing from a financial institution (repayable for not less 9
than 7 years)
Solution:
`
Cost of project 60,00,000
Capital employed (i.e., ` 45 lakhs + ` 16 lakhs + ` 9 lakhs) 70,00,000
Maximum qualifying expenditure [i.e., 5% of ` 60 lakhs or ` 70 lakhs,
whichever is higher] (a) 3,50,000
Qualifying expenditure
Expenses on incorporation (these are included even if the work undertaken
by a person not approved by the Board) 1,05,000
Preparation of feasibility report, project report and conducting market survey
(these are included only if the work is done by the taxpayer or it is
undertaken by a concern approved. 1,45,000
Engineering services (the expenditure is included only if the work is done by
the taxpayer or it is undertaken by a concern approved by the Board; since it
is completed by a concern not approved by the Board, it is not included) --
Total (b) 2,50,000
Amount eligible for amortization [(a) or (b), whichever is lower] 2,50,000
Amount deductible in 5 years for the assessment year 2021-22 to 2025-26 50,000
Note: Expenditure on engineering services in this case is not qualified for deduction under
section 35D. These expenses may be capitalized by the taxpayer to claim depreciation.
PROFITS & GAINS FROM BUSINESS OR PROFESSION 185
Illustration 17: According to voluntary retirement scheme of X Ltd., each employee will get
voluntary retirement compensation in three instalments (35% at the time of voluntary
retirement, 10% on November 1 of the first financial year immediately after retirement and
remaining 55% on December 1 of the second financial year immediately after retirement).
The scheme is opened for the financial year 2020-21 only. During the financial year, 17
employees take voluntary retirement (total compensation of ` 80 lakh payable by way of 3
instalments as stated above).
1st instalment of ` 2nd instalment of 3rd instalment of
28 lakh (being ` 8 lakh (being ` 44 lakh (being
PY in which
35% payable 10% payable on 55% payable on Total
the payment
during PY 2020- November 1, December 1, `
is deductible
21) 2021) 2022)
` ` `
2020-21 5,60,000 -- -- 5,60,000
2021-22 5,60,000 1,60,000 -- 7,20,000
2022-23 5,60,000 1,60,000 8,80,000 16,00,000
2023-24 5,60,000 1,60,000 8,80,000 16,00,000
2024-25 5,60,000 1,60,000 8,80,000 16,00,000
2025-26 -- 1,60,000 8,80,000 10,40,000
2026-27 -- -- 8,80,000 8,80,000
Illustration 18: Zero coupon bonds are issued by Elite Ltd. (infrastructure capital
company) on October 4, 2020 (issue price: ` 85, face value as well as amount payable at the
time of redemption: ` 100, redemption date: July 10, 2030, number of bonds subscribed by
public: 1,00,000). These bonds are notified by the Government as zero coupon bonds.
Solution:
Pro rata deduction available to Elite Ltd.
Date of issue: October 4, 2020
Date of issue (rounded off): October 1, 2020 (if fraction is 15 days or more, it is taken as one
month)
Date of redemption: July 10, 2031
Date of redemption (rounded off): June 30, 2031 (if fraction is less than 15, days, it shall as
one ignored)
Amount of discount offered by X Ltd. [(`100 – `85) X 1,00,000]: ` 15,00,000 (a)
Period of life of the bond (June 30, 2031 minus October 1, 2020): 129 months (b)
Pro rata deduction for 1 month: ` 11,628 [(a) ÷ (b)] (c)
Amount deductible for the previous year 2020-21: ` 69,767 [(c) x 6]
Amount deductible for the previous years 2021-22 to 2030-31 : ` 1,39,535 [(c) x 12]
Amount deductible for the previous year 2031-32: ` 34,884 [(c) X 3]
Employer’s contribution towards Statutory Fund [Sec. 36(1)(iv)] & [Sec. 36(1)(v)]
Employer’s contribution towards as recognized provident fund, an approved
superannuation fund and approved gratuity fund is allowable as deduction subject to Sec.
43B.
Explanation:
The assessee gives an advance of ` 10,000 for purchase of raw material to Mr. X. Mr. X could
not supply the goods as he had become bankrupt and the advance of ` 10,000 cannot be
recovered from him. The assessee writes off the debt as bad debt.
Here, the condition that the debt should have been taken into account in computing the
income of the previous years in which deduction is claimed or any earlier previous year, is
not satisfied and therefore, the debt cannot be allowed under section 36(1)(vii). However,
the same can be claimed under section 37(1) as a trading loss.
Note:
1. No deduction is available under section 36(1)(ix) in the case of a non-corporate
assessee.
2. Any family planning capital expenditure which is not allowed as deduction due to
inadequacy of profit, shall be set off and carry forward as if it is unabsorbed
depreciation.
190 INCOME TAX
As the CSR expenditure (being an application of income) is not incurred for the purposes of
carrying on business, such expenditures cannot be allowed under section 37 of the Income-
Tax Act.
Therefore, in order to provide certainty on this issue, it is clarified that for the purposes of
section 37(1) any expenditure incurred by an assessee on the activities relating to
corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall
not be deemed to have been incurred for the purpose of business and hence shall not be
allowed as deduction under section 37.
Interest, Royalty, Fees for Technical Services etc. payable Outside India or Payable to
a Non-Resident [Sec. 40(a)(i)]
If the following three conditions are satisfied the assessee (i.e., the payer) is supposed to
deduct tax at source (TDS) under section 195:
1. The amount paid is interest, royalty, fees for technical services or any other sum (other
than Salary).
2. The aforesaid amount is chargeable to tax under the Act in the hands of the recipient.
3. The aforesaid amount is paid/ payable (a) outside India to any person; or (b) in India to a
non-resident.
192 INCOME TAX
If the above three conditions are satisfied, the assessee (the payer) is supposed to deduct
tax at source and deposit the same with the Government within the time-limit specified by
section 200(1).
TDS defaults- TDS defaults may be broadly grouped in the following categories
1. Tax is deductible at source but the assessee has not deducted it, on the date it was
supposed to be deducted.
2. Tax is deducted during the current year but is not deposited on or before due date of
submission of return of income u/s 139(1).
Illustration 19: Consider the following cases pertaining to payment of interest, royalty,
technical fees or any other sum to a non-resident which is subject to the provisions of tax
deduction at source under section 195 (in all cases liability is incurred during the previous
year 2020-21). Assume due date of filing return of income is 30th Sep 2021.
When tax
Date on Actual should be Previous
which tax is date of deposited year in
Date of deposit of TDS
supposed to tax under which it is
be deducted deduction section deductible
200(1)
September 1, 2020 (i.e.,
June 26,
June 26, 2020 July 7, 2020 deposited during the current 2020-21
2020
financial year 2020-21)
July 26, August 7, April 1, 2021 [i.e., deposited in
July 26, 2020 2020-21
2020 2020 the next financial year before the
PROFITS & GAINS FROM BUSINESS OR PROFESSION 193
Consequences if the above Conditions are Satisfied - If the aforesaid conditions are
satisfied, 30% of the expenditure is not deductible in the following cases:
Is such expenditure deductible in any
Cases
subsequent previous year
Case 1 – Tax is deductible but not If tax is deducted in any subsequent year, the
deducted before the end of PY. expenditure will be deducted in the year in which
TDS will be deposited by the assessee with the
Government.
Case 2 – Tax is deductible (and is so If tax is deposited with the Government after the
deducted) before the end of PY but it is due date of submission of return of income, the
not deposited on or before the due date expenditure will be deductible in that year in
of submission of return of income which tax will be deposited.
under section 139(1).
However no disallowance u/s 40(a)(ia) shall be made, if the deductee furnishes his return
of Income by including the said income in his return and pays tax due on income declared
by him in such return of income.
194 INCOME TAX
Illustration 20:Assuming due date of filing return is 30th September in all the cases.
PY in Refer
which Note
Date of Date of
S. Nature of Date of Date of deduction
Deduction Deposit of
No. Expense Payment Credit of
of TDS TDS
expense
is allowed
Interest on
1 -- 31-3-2021 31-3-2021 16-8-2021 2020-21 --
loan
Interest on
2 -- 31-3-2021 31-5-2021 30-9-2021 2021-22 1
loan
Payment to
3 16-9-2020 -- 31-3-2021 30-9-2021 2020-21 --
Contractor
Payment to
4 16-9-2020 -- 15-4-2021 30-9-2021 2021-22 2
Contractor
5 Audit Fee 15-3-2021 31-3-2021 10-10-2021 2021-22 3
6 Rent -- 30-6-2020 31-3-2021 30-9-2021 2020-21 --
7 Rent -- 30-6-2020 31-5-2021 30-9-2021 2021-22 4
Notes:
1. The tax should have been deducted on 31-3-2021. As tax has been deducted after 31-3-
2021, deduction of expense will be allowed in the year in which such tax has been paid
i.e. Previous Year 2021-22.
2. As tax has been deducted after 31-3-2021, deducted of expense will be allowed in the
year in which such tax has been paid i.e. Previous Year 2021-22.
3. As tax has been deposited after the due date of filing of the return of income, the
deduction of expense will be allowed in the year in which such tax has been paid i.e.
Previous Year 2021-22.
4. As tax has been deducted after 31-3-2021, deducted of expense will be allowed in the
year in which such tax has been paid i.e. Previous Year 2021-22.
2. It is payable:
(a) Outside India (to any person resident or non-resident); or
(b) In India to a non-resident.
3. Tax has not been paid to the Government nor deducted at source before the due date
of filing of return of income.
If the aforesaid conditions are satisfied, then the payment is not allowed as deduction.
Illustration 21: The following illustration is given in respect of salary payable for the
Previous Year 2020-21 by a company to (a) any person outside India or (b) a non-resident
in India:
Date on which Previous
When tax
tax is supposed year in
should be
Amount to be deducted Actual date of Actual date of which
deposited
` (i.e, the date of tax deduction tax deposit salary
under section
salary payment is
200(1)
payment) deductible
40,000 July 31, 2020 July 31, 2020 August 7, 2020 Nov 10, 2020 2020-21
90,000 March 31, 2021 March 31, 2021 April 30, 2021 April 7, 2021 2020-21
1,60,000 March 31, 2021 March 31, 2021 April 30, 2021 April 12, 2021 2020-21
70,000 March 31, 2021 Not deducted April 30, 2021 April 12, 2021 2020-21
75,000 March 31, 2021 March 31, 2021 April 30, 2021 Not deposited 2020-21
95,000 March 31, 2021 Not deducted April 30, 2021 Not deposited Not
deductible
Any remuneration above this limit is not allowed as deduction in the hands of firm and also
not taxable in the hands of partner.
Illustration 22: Profit and loss account of X Co. for the year ending March 31, 2021 is as
follows:
` `
Cost of goods sold 7,90,000 Sales 26,00,000
Remuneration to partners Rent of house property (1/2
X 6,00,000 portion) 50,000
Y 9,00,000 Interest on debentures (non-trade
Z 55,000 investment) 60,000
Income-tax 8,000
Interest to partners @ 13.5%
X 40,000
Y 10,000
Z 60,000
Municipal tax of house
property (entire property) 5,000
Other expenses 2,10,000
Net profit 32,000
27,10,000 27,10,000
PROFITS & GAINS FROM BUSINESS OR PROFESSION 197
Other information:
1. Out of other expenses, ` 48,500 is not deductible under sections 36, 37(1) and 43B.
2. On January 15, 2021, the firm pays on outstanding GST liability of ` 2,922 of the
previous year 2019-20. As this amount pertains to the previous year 2019-20, it has not
been debited to the aforesaid profit and loss account.
3. Z is not a working partner.
4. The firm owns a house, the ground floor is used for business purposes, the first floor is
given on rent. Municipal tax is paid on May 10, 2021.
Find out the net income of the firm (and tax treatment of the payments to partners in their
hand) for the assessment year 2021-22.
Solution:
`
Computation of remuneration deductible under section 40(b):
Net profit as per profit and loss account 32,000
Less: Income not chargeable to tax under section 28
Rent (-) 50,000
Interest (-) 60,000
Balance (-) 78,000
Add: Expenses debited to profit and loss account but which are not
deductible
Remuneration (taken separately) (+)15,55,000
Interest to partners [amount in excess of 12% which is not allowable as
deduction] (+) 12,222
Income-tax (+) 8,000
Municipal taxes of house property half portion given on rent (+) 2,500
Other expenses (+) 48,500
Balance 15,48,222
Less: Outstanding GST paid during 2020-21 (deductible by virtue of
section 43B) 2,922
Book profit 15,45,300
Note: A Person shall be deemed to have substantial interest in a business or profession if:
(a) In a case where the business or profession is carried on by a company, such person is,
at any time during the previous year, the beneficial owner of shares carrying not less
than 20% of the voting power.
(b) In any other case, such person is, at any time during the previous year, beneficially
entitled to not less than 20% of the profits of such business or profession.
Illustration 23: Assessee company sells goods manufactured by it to its directors for
` 3,00,000. The market price of such goods is ` 4,00,000. Assessing officer wants to invoke
section 40A(2). Advise.
Solution: Section 40A(2) can be invoked where expenditure has been incurred by the
assesse for which payment has been or is required to be made to certain specified persons.
Since in the present case no expenditure has been incurred by the company for which
payment has to be made, section 40A(2) cannot be invoked.
Illustration 24: Apex company pays salary of ` 40,000 p.m. to its director. The company
decides to pay further 1% of its net profits to the director in addition to the salary payment.
Advise.
Solution: If the assessee company proves that the salary and commission are reasonable
having regard to the services rendered by the director, then section 40A(2) cannot be
invoked. If, however, the A.O. proves that the salary and commission paid is unreasonable
having regard to the services rendered by the director, then the A.O. can disallow the
unreasonable portion under section 40A(2).
Note: It may be noted that the salary or the commission disallowed under section 40A(2)
shall be taxable in the hands of the director.
Amounts not deductible in respect of expenditure exceeding ` 10,000* [Sec. 40A (3)]
1. The assessee incurs any expenditure exceeding ` 10,000* which is otherwise
deductible under the other provisions of the Act for computing business/profession
income.
2. A payment (or aggregate of payment made to a person in a day) in respect of the above
expenditure exceeds ` 10,000*
3. The payment is made otherwise than by an account payee cheque or an account payee
demand draft or use of electronic clearing system through a bank account. (It is made in
cash or by a bearer cheque or by a crossed cheque or by a crossed demand draft)
If all the above conditions are satisfied, then 100% of such payment will be disallowed.
200 INCOME TAX
Note:
1. *The monetary limit of ` 10,000 raised to ` 35,000 in case of payment made to
transporter for plying, hiring or leasing goods carriage.
2. Sec. 40A(3) applies to expenses which are otherwise deductible under head PGBP,
hence not applicable for donation.
3. The payment so made shall be deemed to be PGBP chargeable to Income Tax as income
of the subsequent year (i.e year of payment).
(a) Is temporarily posted for a continuous period of 15 days or more in a place other
than his normal place of duty or on a ship and
(b) Does not maintain any bank account in any bank at such place or ship.
(j) Where the payment was required to be made on a day on which the banks were closed
either on account of holiday or strike. Note: It has to be proved that payment was
required to be made on the day on which bank was closed and the payment could not
have been made on a working day.
(k) Where the payment is made by any person to his agent who is required to make
payment in cash for goods or services on behalf of such person.
(l) Where payment is made by an authorized dealer or money changer against purchase of
foreign currency or travelers cheques in the normal course of his business.
Illustration 25: Determine the amount of disallowance in the cases given below:
1. Generally, Hemant pays salary to his employees by account payee cheques. Salary of
December 2020 is, however, paid to three employees Anil, Bhavesh and Charan by
bearer cheques (Payment being ` 6,000, ` 10,000 and ` 10,500, respectively).
2. Sanjay Ltd. purchases goods on credit from Uttam Ltd. on May 6, 2020 for ` 46,000
which is paid as follows:
a. ` 8,000 in cash on May 11, 2020
b. ` 17,000 by a bearer cheque on May 31, 2020;
c. ` 21,000 by an account payee cheque on May 16, 2020.
3. Kamal Ltd. purchases goods on credit from Atul Ltd. on May 10, 2020 for ` 8,000 and on
May 30, 2020 for ` 7,000. The total payment of ` 15,000 is made by a crossed cheque
on June 1, 2020.
4. Ansul Ltd. purchases goods on credit from a relative of one of its director on June 20,
2020 for ` 50,000 (Market value : ` 42,000). The amount is paid in cash on June 25,
2020.
5. B Ltd. purchases raw material on credit from A who holds 20% equity share Capital in
B Ltd. (the amount of bill being ` 26,000, market price being ` 9,000). It is paid in cash
on July 26, 2020.
6. Payment in respect of a business expenditure for ` 15,000 through a cheque duly
crossed as “& Co.”
Solution:
1. ` 10,500, being 100% of salary paid by bearer cheque to Charan will be disallowed.
2. Nothing will be disallowed out of the payment of ` 8,000 in cash on May 11, 2020, as
the payment does not exceed ` 10,000. 100% of ` 17,000 will be disallowed. Nothing
will be disallowed out of ` 21,000.
3. Though the amount of payment exceeds ` 10,000, nothing shall be disallowed. To
attract disallowance, the amount of bill as well as the amount of payment should be
more than ` 10,000.
202 INCOME TAX
4. Out of the payment of ` 50,000, ` 8,000 (being the excess payment to a relative) shall
be disallowed under section 40A(2). As the payment is made in cash and the remaining
amount exceeds ` 10,000, 100% of the balance (i.e., ` 42,000) shall be disallowed
under section 40A(3).
5. Out of the payment of ` 26,000, ` 17,000 (being the excess payment to a person holding
a substantial interest) shall be disallowed under section 40A(2). The remaining amount
(i.e., ` 9,000) does not exceed ` 10,000. Nothing shall be disallowed under section
40A(3) even if the payment is made in cash.
6. Payment through a cheque crossed as “& Co.” will attract 100% disallowance u/s
40A(3).
Illustration 26: After negotiations with the bank, interest outstanding of ` 3 lac has been
converted into loan. X Ltd follows mercantile system of accounting. Can the interest of ` 3
lac be claimed as business expenditure?
Solution: Any amount of interest converted into a loan, cannot be taken as paid during the
year. Hence, interest of ` 3 lac shall not be allowed as deduction.
It is also provided that if there is a time gap between the date of agreement and the date of
registration, the value for the purpose of the aforesaid comparison can be taken as the value
assessable for stamp duty on the date of the agreement, provided some part of the
consideration has been paid on or before the date of agreement, otherwise than in cash.
Books of Account
Yes No
Not required to
Maintain books of
maintain books of
accounts
accounts.
Due date for getting books audited and form no. of Audit Report
Due Date for
Different taxpayers Audit Form No. e-filing Tax
Audit Report
In the case of a person who carries on business or
profession and who is required by or under any law 3CA & 3CD Due Date of
to get his accounts audited furnishing ROI
In the case of a person who carries on business or u/s 139(1)
3CB & 3CD
profession but not being a person referred to above
Presumptive Taxation
Computation of income on estimated basis in the case of taxpayers engaged in any
business except the business of plying, hiring or leasing goods carriage [Sec. 44AD]
Conditions - The provisions of section 44AD will be applicable only if the following
conditions are satisfied:
1. The assessee should be resident individual, HUF, a partnership firm (not being a limited
liability firm).
2. The assessee should be engaged in any business except the business of plying, hiring
or leasing goods carriages referred to in section 44AE.
3. Total turnover/ gross receipt in the previous year should not exceed ` 2 Crore.
Sec 44AD is not applicable to:
(i) a person carrying on profession as referred to in sub-section (1) of section 44AA;
206 INCOME TAX
Consequences if the Above Conditions are Satisfied :If the above conditions are satisfied,
the income from the eligible business is estimated at 8% of the gross receipt or total
turnover and 6% in respect of turnover received through digital modes. The following
points should be noted:
1. The assessee can voluntarily declare a higher income in his return.
2. All deductions under sections 30 to 38, including depreciation and unabsorbed
depreciation, are deemed to have been already allowed and no further deduction is
allowed under these sections. Also, in the case of a firm, no deduction in respect of
salary and interest to partners under section 40(b) shall be allowed.
3. The written down value is calculated, where necessary, as if depreciation as applicable
has been allowed.
4. It will be assumed that disallowance, if any, under sections 40, 40A and 43B has been
considered while calculating the estimated income @ 8%/6%.
5. An assessee opting for the above scheme shall pay advance tax related to such business
through 1 installment only i.e. by 15th March instead of 4 installments.
6. An assessee opting for the above scheme shall be exempted from maintenance of books
of account related to such business as required under section 44AA.
7. A tax payer whose turnover does not exceeds ` 5 crore may declare an income of less
than 8% or 6% of its total sales or gross receipts and yet will not be required to get the
accounts audited if his cash receipts and payments were upto 5% of total receipts and
payments, respectively.
Is it Possible to Declare Lower Income- A taxpayer can declare his income to be lower
than the deemed profits and gains as stated above. The following consequences are
applicable if the taxpayer declares his income which is lower than the deemed profits and
gains as stated above-
1. The taxpayer will have to maintain the books of account as per section 44AA
(irrespective of income or turnover) if his total income exceeds the exemption limit.
2. The taxpayer will have to get his books of account audited under section 44AB
(irrespective of turnover) if his total income exceeds the exemption limit.
(ii) Medical
(iii) Engineering or architectural
(iv) Accountancy
(v) Technical Consultancy
(vi) Interior Decoration
(vii) Any other profession as notified by CBDT
3. Total turnover/ gross receipt in the previous year should not exceed `50 lakh.
4. Benefit of Sec. 44ADA will not be available for next 5 years if the assessee does not claim
the same during any previous year (w.e.f. PY 2016-17).
5. Advance tax liability to be paid through one installment only i.e. by 15th March instead of
four installments.
Consequences if the Above Conditions are Satisfied: If the above conditions are satisfied,
the income from profession is estimated at 50% of the gross receipt or total turnover. The
following points should be noted:
1. The assessee can voluntarily declare a higher income in his return.
2. All deductions under sections 30 to 38, including depreciation and unabsorbed
depreciation, are deemed to have been already allowed and no further deduction is
allowed under these sections. Also, in the case of a firm, no deduction in respect of
salary and interest to partners under section 40(b) shall be allowed.
3. The written down value is calculated, where necessary, as if depreciation as applicable
has been allowed.
4. It will be assumed that disallowance, if any, under sections 40, 40A and 43B has been
considered while calculating the estimated income @ 50%.
5. Liable for payment of advance tax related to such profession.
6. An assessee opting for the above scheme shall be exempted from maintenance of books
of account related to such business as required under section 44AA.
7. All other provisions similar to Sec. 44AD.
Consequences if Section 44AE is Applicable - If the aforesaid conditions are satisfied then
section 44AE is applicable.
Vehicle Presumptive Income
Gross Vehicle weight not more than 12MT ` 7,500 p.m. per vehicle
Gross Vehicle weight more than 12MT ` 1,000 per ton of gross vehicle weight e.g.
18 ton GVW ` 18,000 p.m.
Income from the aforesaid business shall be calculated for every month (or part of a month)
during which the goods carriage is owned by the taxpayer. Liable for payment of advance
tax related to such business. All other provisions similar to Sec. 44AD.
Illustration 27: In the following case, ` 68,300 is the stock valuation on the basis of
individual method, while ` 70,800 is the valuation of stock on the basis of global method. In
both cases the method adopted is cost or market price, whichever is less.
Cost or market price,
Stock Cost price Market price
whichever is less
items ` `
`
A 1,000 800 800
B 2,500 3,000 2,500
C 30,000 32,000 30,000
D 60,000 35,000 35,000
Total 93,500 70,800 68,300
Though in the above case, value of stock is higher under the global method, as compared to
the individual method, but both are acceptable under Income Tax Act.
Illustration 28: Mr. Vasudeva furnishes the following manufacturing, profit and loss
account for the previous year ending 31.3.2021:
Amount Amount
Particulars Particulars
(`) (`)
To Stock 11,000 By Sales 2,84,500
To Purchases 80,000 By Stocks 26,400
To Manufacturing wages 65,900
To Factory Rent Rates and Taxes 30,000
To Depreciation on machinery and
building 15,000
To Gross profit c/d 1,09,000
3,10,900 3,10,900
Solution: Computation of Income from Business of Mr. Vasudeva for the AY 2021-22
` `
Net profit as per P & L A/c 10,400
Add: Items to be added back
Opening stock over valued Nil
Purchases not through an account payee cheque 21,000
Depreciation shown in P & L A/c 15,000
Salary paid to self 10,400
Interest on capital 3,300
Income-tax 6,000
Diwali expenses (gift to relatives) 1,000
Medical expenses of proprietor 3,000
Bonus not paid to staff 20,000
Provision for GST
(not paid upto last date of filing of I.T. return) 5,000
Transfer to General Reserve 26,000 1,10,700
1,21,100
PROFITS & GAINS FROM BUSINESS OR PROFESSION 211
Note:
1. Cash/ crossed cheque or draft payment for any expenses (including those for
purchases) in excess of ` 20,000 shall be disallowed in full.
2. Depreciation @ 15% of (WDV ` 59,000 – sale price ` 25,000) i.e. ` 34,000 is ` 5,100.
Illustration 29: Following is the Profit and loss account Mr. A for the year ended 31.3.2021:
` `
To Repairs on building 1,30,000 By Gross profit 6,01,000
To Advertisement 51,000 By Income Tax Refund 4,500
To Amount paid to Scientific 1,00,000 By Interest from company
Research Association approved deposits 6,400
u/s 35 By Dividends 3,600
To Interest 1,10,000
To Traveling 1,30,000
To Net Profit 94,500 _
6,15,500 6,15,500
Following additional information is furnished:
(1) Repairs on building includes ` 95,000 being cost of raising a compound wall for the
own business premises.
(2) Interest payments include interest of ` 12,000 payable outside India to a resident
Indian on which tax has not been deducted and penalty of ` 24,000 for contravention of
GST Act.
Compute the income chargeable under the head ‘Profits and gains of business or profession’
of Mr. A for the year ended 31.3.2021 ignoring depreciation.
Solution:
Profit and gains of business or profession of Mr. A for the year ended 31.3.2021
Particulars ` `
Net profit as profit and loss account 94,500
Add: Expenses not allowable
(i) Expenses on raising compound wall–capital expenditure,
hence disallowed 95,000
212 INCOME TAX
(ii) Interest payable outside India to a resident, as tax has not been
deducted at source [Section 40(a)] 12,000
(iii) Penalty for contravention of GST Act [Penalty paid for violation
or infringement of any law is not allowable as deduction under
section 37(1)] 24,000
(iv) Contribution for scientific research (to be treated separately) 1,00,000 2,31,000
3,25,500
Less: Income not forming part of business income
Interest from company deposits 6,400
Dividend 3,600
Income Tax refund 4,500 14,500
3,11,000
Less: Deduction under section 35 for scientific research (See Note
below) 1,50,000
Profit and gains of business or profession 1,61,000
Illustration 30: State with reasons whether the following expenses are admissible as
deduction while computing income from business or profession:
(i) Stock –in-trade was lost in fire, amounting to ` 12,000 and was debited to Profit and
Loss Account.
(ii) Amount spent on a successful suit filed against a person for infringing trade mark of
the assessee ` 10,000
(iii) Interest paid to bank ` 15,000 in connection with overdraft obtained for paying
dividend.
(iv) Entertainment expenses of ` 28,000 incurred during the previous year.
(v) Capital expenditure of ` 1,00,000 has been incurred towards promotion of family
planning amongst employees of ABC Ltd.
(vi) ` 20,000 were spent in the previous year in connection with statutory income tax
proceedings.
(vii) ` 3,000 spent in connection with installation of a new telephone connection.
(viii) Travelling expenses of a Director of ABC Ltd. ` 20,000 incurred on a tour to U.S.A. In
connection with the negotiation of purchase of a new machinery.
(ix) Compensation paid to the widow and children of deceased employee of the factory
on the orders of Labour Court.
PROFITS & GAINS FROM BUSINESS OR PROFESSION 213
Solution:
(i) Loss of stock-in-trade by fire is deductible from ‘Profit and gains of business or
profession’.
(ii) Amount spent on a suit filed for infringing the trade mark of ` 10,000 is fully
admissible because it is a commercial expediency for security or registration of
trade mark.
(iii) Interest of ` 15,000 paid to bank for overdraft for payment of dividend is allowed.
(iv) Entertainment expenditure is covered under section 37(1) hence fully allowed.
(v) Expenditure on promotion of family planning incurred by a company amongst its
employee is allowed but if it is of capital nature then 1/5th of the amount spent is
allowed in the previous year is which it is incurred and balance in four equal
instalments in next four previous years. In this case ` 20,000 is allowed in the current
previous year and balance in next four previous years (` 20,000 each year).
(vi) Amount spent on income-tax is allowed as legal charges, hence ` 20,000 is
deductible.
(vii) ` 3,000 is allowed as deduction which are incurred for installation of a new
telephone connection.
(viii) Travelling expenses of a Director to be treated as part of the cost of new machine, i.e.
capitalized.
(ix) Compensation paid to the widow and children of the deceased employee as per the
order of court are fully allowed.
214 INCOME TAX
MCQ
1. An assessee uses plant and machinery for the purpose of carrying on his business
Under section 31, he shall be eligible for deduction on account of-
(a) Both capital and revenue expenditure on repairs
(b) Current repairs
(c) Current repairs plus 1/5th of capital expenditure on repairs.
(d) Both (a) & (b)
3. Mr. X, acquires an asset which was previously used for scientific research for
` 2,75,000. Deduction under section 35(1)(iv) was claimed in the previous year
2017-18. The asset was brought into use for the business of Mr. X, after the research
was completed. The actual cost of the asset to be included in the block of assets is –
(a) Nil
(b) Market value of the asset on the date of transfer to business
(c) ` 2,75,000 less national depreciation under section 32 upto the date of transfer.
(d) Actual cost of the asset i.e., ` 2,75,000
4. A Ltd. has unabsorbed depreciation of ` 4,50,000 for the P.Y. 2020-21. This can be
carried forward –
(a) For a maximum period of 8 years and set-off against business income.
(b) Indefinitely and set-off against business income.
(c) Indefinitely and set-off against any head of income
(d) Indefinitely and set-off against any head of income except salary.
5. Mr. X, a retailer acquired furniture on 10th May 2020 for ` 10,000 in cash and on 15th
May 2020, for ` 15,000 and ` 20,000 by a bearer cheque and account payee cheque,
respectively. Depreciation allowable for A.Y. 2021-22 would be –
(a) ` 2,000
PROFITS & GAINS FROM BUSINESS OR PROFESSION 215
(b) ` 3,000
(c) ` 3,500
(d) ` 4,500
8. Where the total turnover of an assessee, eligible for presumptive taxation u/s 44AD,
is received entirely by account payee cheque during the previous year 2020-21, the
specified rate of presumptive business income is –
(a) 5% of total turnover
(b) 6% of total turnover
(c) 7% of total turnover
(d) 8% of total turnover
Unsolved Exercise
Q1. Shri Kapoor is the owner of a small manufacturing unit. He gives you the following
details drawn from his books of accounts for year 2020-21:
1. Computed net profit, after charging the following items. ` 27,500
2. Provisions and reserves debited to profit and loss account:
(i) Provision for doubtful debts ` 15,000
(ii) Depreciation reserve ` 20,000
3. House hold expenses ` 46,000
4. Donation to PM National Relief fund ` 10,000; other charitable donations ` 20,000
5. Cheques issued for purchases ` 60,000
6. Advertisement expenses ` 5,000 spent on neon sign given to a customer;
Advertisement gifts to 50 customers at a cost of ` 100 each.
7. Audit fee charged ` 20,000, including expenses on income- tax assessment ` 15,000
8. Patents purchased for ` 70,000 during the previous year.
9. Incomes credited to profit and loss account were:
(i) Bank interest on F.D. ` 5,000.
(ii) Interest on Post-Office saving bank account ` 3,000.
(iii) Dividend on UTI units ` 2,000.
10. Opening stock is valued to cost plus 10% basis, whereas closing stock was valued
at cost minus 10% basis. Opening stock valued was ` 66,000; Closing stock valued
was ` 72,000.
Compute the net business income for the assessment year 2021-22.
(Ans. ` 1,99,250)
Q2. Mr. Abhinav (resident) furnishes the following particular of his income for the A/Y
2021-22.
Profit and Loss Account (For the year ending 31-3-2021)
Amount Amount
Particulars Particulars
` `
To Office expenses 12,400 By Gross Profit 2,98,000
To General expenses 12,000 By Sundry Receipts 19,000
To Legal expenses 8,000 By Customs duties recovered
To Depreciation on Machinery 11,000 back from Govt. (earlier not
To Staff Salary 21,000 allowed as deduction) 15,300
To Bonus to Staff 15,000 By Bad Debts recovered
To Contribution to Approved (earlier allowed as 3,000
deduction)
218 INCOME TAX
Q3. Jakab Ltd has computed his income to be ` 20,00,000 and some of the entries noted
from Profit & Loss account are as given below:
(i) Company has debited the amount of opening stock ` 33,00,000 which is
overvalued by 10%.
(ii) Company has received duty drawback of ` 7,00,000 but the amount has not been
credited to the profit & loss account.
(iii) The company has received import license from the government and it was sold
at a profit of ` 3,00,000. The amount has not been credited to the profit and loss
account.
Compute income under the head PGBP of the company for the A/Y 2020-21.
[Ans. ` 33,00,000]
Q4. Calculate the taxable profit of the assessee for the A/Y 2021-22 from the particulars
given below:
`
Profit for the Previous year 2020-21 13,70,000
(Before allowing the following amounts)
PROFITS & GAINS FROM BUSINESS OR PROFESSION 219
Q5. Rohit gives you the following particulars for the year ended 31.3.2021.
`
Net profit as per P & L Account (without allowing the following items) 5,20,000
Capital expenditure on Family planning 70,000
Lump sum consideration for purchase of tech. Know-how developed in govt.
laboratory 1,20,000
Entertainment Expenditure 40,000
Expenditure on acquisition of patent right 80,000
Expenditure on advertisement paid in cash 25,000
Amount paid to Delhi University for an approved Research Program in the field of 60,000
social sciences not connected with his business
Computer his business income for the assessment year 2021-22.
(Ans. ` 3,70,000)
Q6. State with reason whether the following statement are True or False.
1. Insurance premium paid in cash on the life of livestocks by Milk Coperative Society
is not allowed as deduction.
2. Family planning capital expenditure on the employee by a firm shall be allowed as
deduction in 5 installments.
3. In any P/Y if an asset is put to use for less than 180 days, than deprecation is
restricted to 50%.
4. Unabsorbed depreciation can be carried forward for 8 A/Y.
5. Assistance of additional depreciation is available on new furniture to manufacturer
assessee only.
6. Expenditure on advertisement in magazine, brochure, pamphlet etc. published by a
political party shall also be allowed as deduction if the political party does not
contest for election.
7. Father of spouse is relative to an individual assessee u/s 40A (2).
220 INCOME TAX
Q7. Mr. Govind retired from govt. service in March 2020. He got ` 20,00,000 on account of
retirement benefits. Out of the aforesaid sum, he purchased on 23rd April 2020 a few
motor vehicles and got their delivery on that date. The particular of the vehicles are
given below:
Vehicle Gross Vehicle Number Cost of the vehicle (`)
Weight
Heavy goods vehicle 15 MT 2 9,00,000
Medium goods vehicle 10 MT 3 4,50,000
Light goods vehicle 8 MT 4 3,20,000
You are required to compute the total income of GM and Associates from the business
of goods carriage for the P/Y 2020-21.
(Ans. ` 9,90,000)
Q8. Raunit purchased a car on 15-5-2019 for ` 5,00,000. Calculate the depreciation for the
assessment year 2020-21 to 2021-22, assuming:
1. The car is the only item in the block; and
2. 30% of the use is for personal purposes.
(Ans. ` 52,500 ; ` 46,987)
Q9. An electricity company which was charging depreciation on straight line method and
whose actual cost of the asset was ` 5,00,000 and written down value ` 4,50,000 sold
the said asset during 2020-21 after 2 years. What will be the tax treatment if the asset
is sold for:
(i) ` 3,50,000;
PROFITS & GAINS FROM BUSINESS OR PROFESSION 221
(ii) ` 4,80,000;
(iii) ` 6,00,000;
(Ans. ` 1,00,000 terminal dep; ` 30,000 bal charge; ` 50,000 bal ch &` 1,00,000 STCG)
Q10. Laxman Ltd., a manufacturing company, which maintains accounts under mercantile
system, has disclosed a net profit of ` 12.50 lakh for the year ending March 31, 2021.
You are required to compute the taxable income of the company for the assessment
year 2021-22 after considering the following information, duly explaining the reasons
for each item of adjustment:
1. Advertisement expenditure includes the sum of ` 60,000 paid in cash to the sister
concern of a director, the market value of which is `52,000.
2. Legal charges includes a sum of ` 45,000 paid to a consultant for framing a scheme
of amalgamation duly approved by the Central Government.
3. Repairs of plant and machinery include ` 1.80 lakh towards replacement of worn
out parts of machineries.
4. A sum of ` 6,000 on account of liability foregone by a creditor has been taken to
general reserve.
5. Sale proceeds of import entitlements amounting to ` 1 lakh has been credited to
profit & loss account, which the company claims as capital receipt not chargeable
to income tax.
6. The company incurred the following expenditure on in house research and
development as approved by the prescribed authority: (a) research equipments
purchased: ` 1,50,000;(b)remuneration paid to scientists: ` 50,000. The total
amount of ` 2,00,000 is debited to the profit & loss account.
7. The company has purchased scrap material amounting to ` 0.60 lakh. The payment
for which was made in cash on 15th August, 2020.
8. General expenses includes gift on Diwali of ` 1,50,000 of which ` 45,000 was to
customer, ` 75,000 to employees and remaining to wife.
9. General expenses includes ` 5,000 for income tax paid and ` 5,000 to Mr. A for
filing of return of income.
10. Interest and penalty paid under GST of ` 2,000 and ` 3,000 respectively.
11. Purchase of ` 35,000 made in FY 2019-20 was paid in cash in FY 2020-21.
12. Expenses on issue of shares for setting up a new unit at Mumbai ` 40,000.
13. Family Planning Capital expenditure and revenue expenditure of ` 25,000 and
` 5,000 respectively.
14. Life Insurance Premium and Mediclaim Insurance Premium in respect of employee
of ` 20,000 each paid in cash.
(Ans.` 13,97,000)