University Roll No.

: L13/LLB/193064
Name of Exam: 3 year L.L.B Page | 1

Semester: 6th
Subject: Law of Taxation
Paper: 4th
Date of Exam: 16.06.22

Hypothetically explain the six steps for assessing Gross Total Income of an Assesse and how
Taxable Income is computed thereafter.

Introduction 
Section 14 of the income tax lays down that there can be various modes of income for a person. These
modes are classified into 5 broadheads for the purposes of computation and determination of total
income and tax rates apply thereafter. 
The 5 main heads of incomes are- 
1. Income from salary
2. Income from house property
3. Capital gains
4. Profit and gains from business and profession 
5. Income from other sources

Income from salary  

Section 15 of the act lays down the conditions under which an income falls under the head of ‘salaries.’ 
1. Any remuneration is due from the employer to any former employee(assessee) for the due course
of his employment in the previous year, whether paid or not.
2. Salary paid to an employee by the employer or former employer in the previous year even
though it was not due to him.
3. Salary paid to an employee by the employer or former employer in the previous year which was
not charged under income tax in any other previous years.
The key element of this head is that it mandates a relationship between employer and employee. If an
employer-employee relationship is not there, the income will not be accessible under the head of
salaries.

Section 17 of the Act has mentioned the term ‘salary’, which included-
1. Wages;
2. Any annuity or pension;
3. Any gratuity;
4. Any charges, commissions, perquisites or benefits in lieu of or notwithstanding any
compensation or wages;
5. any advance of salary;
6. Any payment received by a worker in regard to any time of leave not benefited by him;
7. The yearly accumulation to the balance at the employee partaking in a perceived Provident Fund,
to the degree to which it is chargeable to assess under Rule 6 of Part A of the fourth schedule;
8. The total of all wholes that are included in the transferred parity as alluded to in sub-rule 2 of
Rule 11 of PartA of the Fourth schedule of an employee partaking in a perceived Provident
Fund, to the degree to which it is chargeable to assess under sub-rule 4 thereof; and
9. The contribution made by the Central Government or any other employer in the previous year, to
the account of an employee under a pension scheme, referred to in Section 80CCD
Allowances 
The employer pays allowances to his employees in order to fulfill his personal expenses. Allowances
can be fully taxable or partly taxable.  Partly taxable allowances include house rent allowance and
special allowances under section 10(14) (i)&(ii).
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Fully taxable allowances are:
 Dearness Allowance
 Overtime allowance
 Fixed Medical Allowance
 Tiffin Allowance
 Servant Allowance
 Non-practicing Allowance
 Hill Allowance
 Warden and Proctor Allowance
 Deputation Allowance

Perquisites 
In addition to their salary, the employees are often given some other benefits which may or may not be
in cash form. For example, rent-free accommodation or car given by the employer to the employee.
Reimbursement of bills is not a perquisite. Perquisites are only given during the continuance of
employment.

Taxable perquisites include

 Rent free accommodation
 Interest free loans
 Movable assets
 Educational expenses
 Insurance premium paid on behalf of employees

Exempted perquisites include:

 Medical benefits
 Leave travel concession
 Health Insurance Premium
 Car, laptop etc. for personal use.
 Staff Welfare Scheme

Profits in Lieu of Salary

Section 17(3) gives a comprehensive meaning of profits in lieu of salary. Any payment due or accrued
to be paid to the employee by the employer. Payment to be valid under section 17(3), there are two
essential features- 
 There must be compensation received by an assessee from his employer or former employer;
 It is received at or in connection with the termination of his employment or adjustment of terms
and conditions.
‘Profit in lieu of Salary’ is taxable on ‘due’ or ‘receipt’ basis. Payment from unrecognized provident or
superannuation fund is taxable as “profit in lieu of salary” if that balance consists employer’s
contribution or interest on an employer’s contribution.
Exceptions to section 17(3) (exempted under section 10)
 Death cum retirement gratuity;
 House rent allowances;
 Commuted value of pension;
 Retrenchment pay received by an employee;
 Payment received from a statutory provident fund or recognized provident fund;
 Any payment from an approved superannuation fund;
 Payment from the recognized provident fund.

Computation of income tax on salary

Let’s take an example –
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An individual, let’s say, Mr. A, receives the following pay –
           Basic salary – Rs. 2,50,000 per annum;
           Dearness Allowance – Rs. 10,000 per annum;
           Entertainment Allowance – Rs. 3,000 per annum;
           Professional Tax – Rs. 1,500 per annum; 
          then how much amount will be taxable from his salary?
  Ans. Find out total gross salary = basic salary + Dearness Allowance + Entertainment Allowance, i.e.,
2,50,000 + 10,000 + 3,000 = 2,63,000.
           As per deduction under section 16(iii) = 2,63,000 – 1500 = Rs. 2,61,500
         Income tax rate on income Rs. 2,61,500 is 5%, which will be equal to Rs. 13,075 and this much
amount will be taxable. 

Income from house property

The total net assessable estimation of property, comprising of any buildings/lands/flats belonging to the
assessee, when assessee is the owner apart from the property which is under the use for any business or
profession undertaken by him, the proceeds of which are taxable under the income tax act, falls under
the ambit of income from house property. (section 22)
The income from house property includes lease-hold and deemed ownership.
The income from house property is taxable after considering the deductions under Section 24 of the act.
In the case of repairing and maintenance of the property, thirty percent of the Net Annual Value is
deductible. This deduction is not allowed on a self-occupied property.
For the purpose of computation of income from house property, house properties are divided into three
categories. House property which :
1. Were let out during the whole previous year
2. Were partly vacant but partly let out.
3. Let out for some time and then used for personal residence.

Deemed ownership- 
Section 27  provides that certain persons are not legal owners of a property but are still considered to be
deemed owners under certain conditions.
Condition 1 – Transfer of property to a child or spouse, without consideration.
Condition 2 – Holder of an impartible estate is deemed to be the owner of the entire estate.
Condition 3 – Members of a co-operative society or company or association of person
Condition 4 – Person in possession of a property on lease for more than 12 years as per Section
269UA(f).

Co-owners of a property – Section 26

If there are two or more owners of a property and if the share of co-owners is determinate, the income
generated from such property is calculated as income from one property and it is divided amongst co-
owners. They are entitled to relief under section 23.

Unrealized rent (rent not paid by the tenant for some reason)
The unrealized rent is not included while calculation of net annual value. If the rent is received in the
subsequent years, then the amount will be added to the income from house property of that particular
year. 

Set-off and carry forward of losses

Under Section 70 of the Income Tax Act, if a person has incurred losses from house property, he is
allowed to set them off from the income of any other house property. 
Section 71 of the Act lays down the provision of setting off the losses from house property from any
other heads of Incomes but not casual income (income which might not arise again)
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The unadjusted losses are allowed to be carried forward for a maximum period of 8 years starting from
the year succeeding to the year in which loss has occurred. In the subsequent years, the set-off is
allowed only from the head ‘Income from House Property’. 
The amount of losses that can be set-off on the house property from other income heads is restricted to
Rs 2 lakh either house is a self-occupied or let out property.

Computation of Income from House Property

Step 1 – deduct the municipal taxes paid during the year from the Gross Annual Value, which will be
Net Annual Value.
Step 2 – deduct the amount under section 24(a) and under section 24(b) for which deduction is
provided. 
Example – 
An individual, let’s say Mr. X owned three properties and give it on rent. What will the Gross Annual
Value of all the Properties? Details of the properties provided below-

Particulars     Property 1     Property 2       Property 3

Municipal Rent 7,50,000 7,50,000 2,00,000
Fair Rent 2,00,000 2,00,000 7,50,000
Standard Rent – 80,000 9,00,000
Amount at Step 1 8,00,000 50,000 8,50,000
Unrealised Rent 1,00,000 NIL 50,000
 
Ans : Step 1: reasonable expected rent, higher values of municipal rent or fair rent.
 
Particulars     Property 1     Property 2       Property 3
Municipal Rent 7,50,000 7,50,000 2,00,000
Fair Rent 2,00,000 2,00,000 7,50,000
Standard Rent 80,000 9,00,000
Amount at Step 1 7,50,000 80,000 7,50,000
 
Step 2: deduct unrealised rent (e.g. 8,00,000-1,00,000)

Particulars     Property 1     Property 2       Property 3

Amount at step 2 7,00,000 50,000 8,00,000
 
Step 3: higher values computed from step 1 and step 2 will be Gross Annual Income.

Particulars     Property 1     Property 2       Property 3

Amount at step 1 7,50,000 80,000 7,50,000
Amount at step 2 7,00,000 50,000 8,00,000
Amount at step 3 7,50,000 80,000 8,00,000
 
Income from capital gains
Any profit or gain emerging from the exchange of capital assets held as investments are chargeable
under the head capital gains. The gain can be because of short-and long term gains. A capital gain
emerges just when a capital asset is transferred. This implies if the asset moved is certainly not a capital
asset; it won’t fall under the head of capital gains. Profits or gains emerging in the previous year in
which the transfer occurred will be considered as income of the previous year and chargeable to IT
under the head Capital Gains and indexation will apply, if applicable.
To fall under the ambit of income from capital gains, there must be –
1. A capital asset
2. Which is transferred by the assessee
3. The transfer has taken place during the final year
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4. Gain or loss has arisen from it
Capital assets include all kinds of properties whether tangible or intangible, movable or unmovable,
which are owned by the assessee, may or may not be for business and professional purposes.
Capital assets do not include assets like stock in trade, goods of used personal effects, agricultural land,
etc.

Capital gains are of two types 

A. Short term capital assets – those assets held by an assessee for at most 36 months, immediately
prior to its date of transfer.  
ITO v. Narayana K Shah 2000 74 ITD 419 Mum. 
In this case Court held that where the assessee held certain shares in a company by virtue of which a
right of occupancy in a flat is conferred on him, these shares cannot be treated as a ‘share’ mentioned in
proviso to section 2(42A) and as such where such shares are sold after being held  for a period of fewer
than 36 months, gain arising therefrom is to be treated as short-term capital gain.

B. Long term capital assets – those assets held by an assessee for more than 36 months. Long-term
capital gains are generally taxable at a lower rate.  
There are some cases where long term capital assets do not require a term of 36 months, assets held for
more than 12 months is valid for long term capital assets. Those conditions are –
1. Listed Equity or preference shares;
2. Securities listed in a recognized stock exchange, like debentures, security exchange;
3. Units of UTI;
4. Units of Mutual Funds;
5. Zero coupon bond;
6. Unlisted equity or preferential shares;
7. Units of equity oriented fund.
Tax on long-term capital assets is 20 percent. 

Exemptions under section 54 :

Exemptions in regards to the transfer of a long-term capital asset, only when the assessee is an
individual or a Hindu Undivided Family. A capital gain arises from the transfer of residential property,
where the assessee has purchased another house property within a period of one year before or two years
after the date of transfer or transfer took place within a period of three years after the date of
construction.
The amount of exemption available will be whichever is lesser of capital gains and the cost of the new
house.

Computation of Capital Gains

Long-term Capital Gain-
Problem – Mr. Shah has a gross total income of Rs. 4,00,000 and has invested Rs. 1,50,000 in tax-saving
instruments. After applying all the deductions total taxable income would be Rs. 2,00,000. And
exemption tax limit as per the income tax slab is Rs.2,50,000. By the sale of gold, he has a long-term
capital gain of Rs. 5,00,000.
Solution- total taxable income = 2,00,000, which is less than 2,50,000;

Long-term capital gain @ 20%  = 4,50,000 (difference between exemption tax limit and actual taxable
income) = 10,000 
This much mount can be save from tax.
Tax rates are the same for short-term capital gain.

Income from Profit and Gain from business and profession

Business and Profession has been defined under Section 2(13) and Section 2(36) respectively.
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Business: It includes any trade, commerce or manufacture or any adventure or concern in the nature of
trade, commerce, or manufacture.
Profession: “Profession” includes vocation.
Section 28 of the Income Tax Act covers the “Profits and gains of Business or Profession”, and there is
following income which shall be chargeable under the head “Profits and Gains of Business or
Profession” :
1. Profits and Gains of any business or profession;
2. Any compensation or other payments due to or received by any person specified in section
28(ii), who is managing the whole affairs of an Indian Company or other than an Indian
company at the termination of his management; 
3. Pay determined by a trade, professional or comparable association from explicit services
performed for its members;
4. Benefit on sale of import entitlement license, incentive by way of cash  compensatory support
and drawback of duty;
5. Any benefit on an exchange of the Duty Entitlement Pass Book Scheme;
6. Any benefit on the exchange of the Duty-Free Replenishment Certificate;
7. The estimation of any benefit or perquisite, regardless of whether convertible into money or not,
emerging from business or the activity of a profession;
8. Any interest, pay, reward, commission or compensation received by a partner of a firm from
such firm;
9. Any amount received under a Keyman insurance policy including Bonus;
10. Income from speculative transactions;
11. Any total received in real money or kind, by virtue of any capital asset being devasted,
destroyed, discarded or transferred, if the exhaustive expenditure on such capital asset has been
permitted as a deduction under section 35AD.
 
Deduction under the heads of “Profits and Gains from Business or Profession” has been mentioned
under Section 30 to 37. 
 
 Section 30:  A deduction shall be permitted if the lease, rates, taxes, fixes, and insurance for
premises used for the purpose of business or profession.
 Section 31:  A deduction shall be permitted on the repairs and insurance of apparatus, plant or
furniture used for the purposes of business or profession and the sum paid on the present repairs
shall not include any expenditure in the nature of capital expenditure.
 Section 32:  Deterioration of buildings, hardware, plants or furniture, being tangible assets,
know-how, licenses, copyrights, trademarks, patents, establishment or some other business or
business privileges of comparative nature, being intangible assets owned, completely or
somewhat, by the assessee for the purposes of the business or professions.
 Section 32AC: Deduction in respect of investment in new plant or hardware where the
organization being an assessee occupied in business assembling or production of any article or
thing after 31st March 2013 or if any new asset procured or installed by the assessee is sold
within five years of its establishment etc.
 Section 33AB: where an assessee carrying on business of developing and assembling tea or
coffee or rubber in India has, before the expiry of six months from the end of the previous year
or before the due date of furnishing the return of his income, kept in a record affirmed by the Tea
Board or Coffee Board or rubber Board or Central Government and should be audited by an
accountant. 
 Section 33ABA:  Any amount or amounts in an account deposited with the State Bank of India
by an assessee who is carrying on business consisting of the prospecting for, or extraction or
generation of petroleum or natural gas or both in India and consented to an arrangement with the
Central Government for such business and that account must be audited by an accountant.
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 Section 33AC: Carrying on the business of the ship by the government organization or public
company, deduction shall be permitted not surpassing 50% of benefits derived from the business
of operation of a ship.
 Section 35: If any expenditure laid out or expanded on scientific research related to the business,
deduction shall be permitted but the organization has to enter in concurrence with the prescribed
authority for co-operation in such a research and development facility and satisfies such
conditions as to support the maintenance of accounts and audit.
 Section 35ABB: Expenditure for obtaining the license for media transmission services before
the commencement of the business or thereafter at any time during the previous year and for
which installment has really been made for acquiring the license.
 Section 35AC: Where an assessee incurs any expenditure by method for an installment of any
amount to public sector company or a local authority or to an affiliation or establishment
endorsed by the National Committee for carrying out any qualified venture or plan.
 Section 35AD: A deduction shall be allowed in the case of capital expenditure incurred, wholly
or exclusively, for the purpose of specified business.
 Section 35CCA: Expenditure by method for installment to affiliations and establishment for
carrying out rural development Programmes.
 Section 35CCC: Expenditure incurred on any agricultural extension project notified by the
Board then deduction shall be allowed on the sum equal to one and one-half times of
expenditure.
 Section 35CCD: When an organization causes expenditure on any ability advancement program
advised by the Board then the sum shall be allowed for the deduction of a total equivalent to one
and one-half times of expenditure.
 Section 35D: Amortisation of certain preliminary expenses.
 Section 35E: Deduction for expenditure on prospecting for, or extraction or production of
certain minerals, for which deduction shall be allowed to the one-tenth of the amount of such
expenditure.
 Section 36: Other deductions are-
 under section 36 (1)(i), the amount of any premium paid in regard to insurance against the
danger of harm or annihilation of stocks or stores utilized for the purposes of the business or
profession.
 under section 36 (1)(ib), the amount of any premium paid by any mode of payment other than
cash by an assessee as an employer towards the health of the employee.
 under section 36 (1)(ii), any sum paid to an employee as bonus or commission for the services
he rendered
 under section 36 (1)(iii), the amount of the interest paid in respect of capital borrowed for the
purpose of business or profession.
 under section 36 (1)(iiia) the pro rata amount of discount on a zero coupon bond having regard
to the period of life of such bond calculated in the manner as may be prescribed.
 under section 36 (1)(iv) employer’s contribution to recognized provident fund an approved
superannuation fund.
 under section 36 (1)(iva) employer’s contribution to the notified pension scheme.
 under section 36 (1)(v) contribution towards approved gratuity fund.
 under section 36 (1)(va) employee’s contribution towards staff welfare scheme.
 under section 36 (1)(vi) write off allowance for animals which are used for the purpose of
business or profession and have died or turned out to be for all time futile.
 under section 36 (1)(vii) bad debt amount incidental to the business or profession of the
assessee must have been written off in the books of account of the assessee.
 under section 36 (1)(viia) provisions for bad and doubtful debts relating to rural branches of
commercial banks.
 under section 36 (1)(viii) transfer to the special reserve.
 under section 36 (1)(ix) family planning expenditure.
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 under section 36 (1)(x) contribution towards exchange risk administration fund.
 under section 36 (1)(xii) revenue expenditure incurred by entities established under any Central,
State or Provincial Act.
 under section 36 (1)(xiv) contribution to credit guarantee trust fund.
 under section 36 (1)(xvi) Commodities Transaction Tax.
 Section 37 (2B): The expenditure acquired by an assessee on a commercial in any gift, leaflet,
tract, handout or something like that, published by a political party, is not deductible.

Computation of income under the heads of “Profits & Gains of Business or Profession”
The amount of net profit is Rs. 4,00,000 of M/s D Ltd. and other information provided are:
Advance income tax debited to profit and loss account = Rs. 30000
Printing of brochures of a political party = Rs. 5000
The amount that has not to deposit till the date of filing of return = Rs. 50,000
What can be the taxable income of M/s D Ltd.?
Particulars Amount

Net Profit 4,00,000

Amount of advance income tax 30000

Expenses incurred for political parties 5000

An amount that has not to deposit 50000

Net taxable income 4,85,000

 
Income from other sources
All sorts of incomes that are not covered in the above-mentioned heads are covered and chargeable
under this head. Income from other sources is laid down in section 56 of the act.
A few of these are :
1. Dividend under section 2(22);
2. Winning from lotteries, horse races, crossword puzzles, and other games;
3. Contribution received by the employer as an assessee from his work towards the Staff Welfare
Scheme;
4. Interest on debentures, government securities/bonds;
5. Where the assessee let on contract apparatus, plant or furniture belonging to him and furthermore
buildings, pay from this is assessable as salary from other sources if it is not taxable under the
head of “profits & gains of business or profession”;
6. Sum received under Keyman insurance policy including reward;
7. Salary from hardware, plant or furniture belonging to the assessee.

Gifts that cannot be charged:

1. Gifts received from any relative
2. Gifts received on the occasion of marriage
3. Gifts are given by the local authority
4. Gifts received in the form of inheritance
5. Gifts received from any funds, institutions, hospitals, etc.
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Deductions applicable on income from other sources – section 56 and 57
 
S.No. Section Nature of Income Deductions Allowed
s
1 57(i) Dividend or interest on securities Any reasonable amount paid by method for
commission or compensation to a banker or some
other individual for the purpose of realizing
dividend (other than dividends referred to in
section 115-O) or interest on securities
2 57(ia) Employees contribution to PF. If employees’ contribution is credited to their
superannuation fund, ESI fund or account in the relevant fund on or before the due
any other fund set up for the date
welfare of such employees
3 57(ii) Rental income letting of plant, Lease, rates, charges, repairs, insurance, and
machinery, furniture or building devaluation, and so on.
4 57(iia) Family pension 1/3rd of family pension subject to a maximum of
Rs. 15,000.
5 57(iii) Any other income Any other expenditure (not being capital
expenditure) expended completely and solely for
earning such income
6 57(iv) Interest on compensation or 50% of such interest (subject to certain conditions)
enhanced compensation
7 58(4) Income from the activity of All expenditure relating to such activity.
owning and maintaining race
horses
 
Computation of Income from Other Sources
Computation of income from other sources can be done in two ways;
1. If income is one-time income or casual income then 30% tax is imposed on the total income.
2. If income is from any other method, then the tax shall be applicable in accordance with the tax
slab.
Example- 
A person gets Family pension = Rs. 30,000 (exemption on this is 33.33% or 1500);33.33% of Rs.
30,000 = Rs. 9,999, this amount is less than 1500. So the taxable income is 30,000 – 9,999 = 20,001.Rs.
20,001 is taxable as income from other sources.

Conclusion
These five heads of income that we have discussed, provide a method to different categories of people to
compute their income as per their applicability as a taxpayer and they can get to know by computation
method that how much income is taxable after investing in different heads of income. So it will make
easy for them to plan their capital in the right direction.