INDEX

Sr No. Topic Page No.

Course Outline 2

Session Plan 4
1 Profits and Gains from Business and Profession 7
2 Clubbing of Income 29

3 Set Off and Carry Forward of Losses 38

4 Deductions from Gross Total Income 49
5 Advance Tax 58
6 Computation of Total Income 63

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 COURSE OUTLINE
Business Taxation (FAC125)
Faculty Course Owner : Poonam Dugar Sections 2
Name Course Instructor: Heli Shah
Contact and poonam.dugar@ahduni.edu.in
Office Hours heli.shah@ahduni.edu.in
School Amrut Mody School of Management
Semester Winter Credits 1.5
Lecture time Location
& Weekdays
Pre- Direct Taxes
requisites
Course This course is an extension of the course FAC121Direct Taxes. Having studied
Description the fundamental concepts under Direct Taxes, including the taxation of an
individual earning incomes from employment, owning properties, sale of capital
assets and other sources, this course aims to focus on the income of an individual
from Business or Profession. It specifically includes the understanding of tax
laws relating to determination of business or professional income of an
individual and the deductions and disallowances applicable in determining the
taxable business income of an individual.
The course also aims to create an awareness of the tax benefits provided under
the Income Tax Act through the deductions available to an individual based on
various investments and payments made through the incomes earned, as well as
through the application of the principles and rules of set off and carry forward of
losses occurred under various heads of income. Another interesting aspect of
this course would be to explore the situations under which the income of other
persons is included in the total income of an individual commonly known as the
‗Clubbing Provisions‘ of the Act.
Lastly, the course also aims at understanding the income structure of an
individual involving various sources of income and computing his total income
liable for tax under the Act.
Course
Abstract *
Course  To enable the students to understand the provisions of the Act with respect to
Objectives computation of Business or Professional Income
 To acquaint the students with the benefits provided through Deductions
from Total Income provided under the Income Tax Act
 To create an awareness regarding when Clubbing Provisions will be
attracted and about the basic rules of Set off and Carry forward of losses
incurred by a person under the Act
 To acquire the ability to apply the knowledge of the tax laws to compute
the total income of an individual from various sources

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Learning At the end of this course-
Outcomes  Students will have an overall understanding of the Taxation of Business
Income of an Individual
 They will be well conversed with the Deductions available to an individual
from his total income and the applicability of rules relating to set off and
carry forward of losses
 They will be able to develop a working knowledge about the applicability of
various provisions of the Act in the computation of income of an individual
 An overview of some aspects of tax planning will be gained through
discussions on various provisions covered under different heads of income
Pedagogy * Lecture Method- This facilitates better delivery of information, concepts and
theory to build the foundation of the subject.
Discussion– Discussion on cases and articles to build general awareness and
develop understanding on the recent updates in specific areas of the subject.
Expectations Students are expected to be regular
from Students are expected to participate in the class discussion
Students Students are expected to refer and re-visit the discussions done in previous
sessions
Assessment / Quizzes - 30% (3 Quizzes)
Evaluation Assignments – 30% (2 Assignment)
End Semester – 40%
Attendance Attendance is a determining factor for your classroom participation.
Policy Desirable attendance is 100%.
All students have 80% criterion for attendance.
The grade drop policy will apply to those having less than 80% attendance as
per the standard university policy if a student fails to meet attendance criteria.
Below 50% attendance will result in an F grade.
Project / Assignments will be given as per the schedule given in the Session Plan
Assignment
Details
Course Course Pack : Comprehensive study material with practice illustrations on the
Material topics listed in the session plan

Reference Book
Dr. Singhania Vinod K. and Dr. Monica Singhania, Students Guide to Income
Tax, Taxmann Publications for AY 2020-21

Ahuja Girish and Gupta Ravi, Systematic Approach to Income Tax, Bharat
Publication for AY 2020-21

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 Session Plan
Topic Title Session Topic & Subtopic Details Activities Reading / Cases
No. etc.
1. Profits and 1 Income from Business & Small Case lets to Chapter 6, Page 192
Gains from Profession understand the - 196 from
Business and  Basis of Charge concept of Income ―Students Guide to
Profession  Difference between form Business & Income Tax‖, V.K.
business, profession Profession Singhania, Taxmann
and vocation Publications
 Concept of Business
Income and Business
Losses

2 Method of Computation Case lets and Class Chapter 6, Page 197

of Business Income Discussion - 205 from
 Deductions u/s 30 ―Students Guide to
 Deductions u/s 31 Income Tax‖, V.K.
 Depreciation u/s 32 Singhania, Taxmann
 Concept of Publications
Depreciation Under
Income Tax Act
 Concept of Block of
Assets
3 Depreciation Illustrations on Chapter 6, Page 197
 Computation of Depreciation - 211 from
Depreciation under ―Students Guide to
Income Tax Act Income Tax‖, V.K.
Singhania, Taxmann
Publications
4 Deductions & Class Discussion Chapter 6, Page 225
Disallowances and Illustrations – 228,243-245,248-
 Section 36- Specific 250 from ―Students
Deductions Guide to Income
 Section 37 – General ANNOUNCEME Tax‖, V.K.
Deductions NT OF Singhania,
 Disallowances u/s 40 ASSIGNMENT 1 Taxmann
 Disallowances u/s Publications
40A
 Disallowance u/s 43B
5 Computation of Business QUIZ 1 IN Course Pack
Income SESSION 5

4
Clubbing 6 Clubbing Provisions Understanding Chapter 9 , Page
of Income  Concept of the need of 391- 398 from
Clubbing of Clubbing ―Students Guide to
Income provisions under Income Tax‖, V.K.
 Clubbing the Act through Singhania, Taxmann
Provisions u/s 60 illustrations and Publications
 Clubbing in case case lets
of income of Illustrations
spouse from Course
7 Clubbing Provisions Pack
 Clubbing provisions
in case of transfer
of assets to the
spouse or daughter
in law
 Clubbing provisions
in case of income of
minor child
Set Off and 8 Aggregation of Income Discussion on Chapter 10 Page
Carry  Concept of Set off Rationale and 406- 414 from
Forward of and carry forward Benefit of Set off ―Students Guide to
Losses of losses and Carry Forward Income Tax‖, V.K.
 Inter Source of Losses under Singhania, Taxmann
Adjustment various provisions Publications
 Inter Head of the Act through Illustrations from
Adjustment illustrations and Course Pack
Carry Forward of case lets
Losses SUBMISSION
 House Property OF
Losses ASSIGNMENT 1
 Business Losses
 Speculation Business
Losses
 Capital Losses
 Losses from Owning
and Maintaining
Horse Races
 Order of Set Off of
Losses
Deductions 9 General Deductions Understanding Chapter 11, Page
from Gross u/s 80 of the Income the provisions of 432 -438, 439-444
Total Income Tax Act the Act with from ―Students
 Section 80CCC respect to Guide to Income
 Section 80D deductions based Tax‖, V.K.
 Section 80DD on payments Singhania,
 Section 80DDB made, incomes Taxmann

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 10 General Deductions earned and Publications
u/s 80 of the Income contributions
Tax Act made by an Illustrations
 Section 80E individual from Course
 Section 80G QUIZ 2 IN Pack
 Section 80TTA SESSION 10
ANNOUNCEM
ENT OF
ASSIGNMENT
2
Advance Tax 11 Pre- Paid Taxes Discussion of the Chapter 17 Page 1 -
 Concept of Tax concept of Pre- 12 from ―Students
Deducted at paid taxes as Guide to Income
Source deducted Tax‖, V.K.
 Concept of from the total tax Singhania,
Advance Tax liability Taxmann
 Computation Publications
of Advance
Tax

Computation of 12 Comprehensive Case Lets on Course Pack

Total Income 13 Illustrations on Computation of
Computation of Total Total Income of an
Income under all Heads Individual
of Income QUIZ 3 IN
SESSION 13
SUBMISSION
OF
ASSIGNMENT 2

6
Income from
Business &
Profession

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 Introduction
Income from Profits and Gains of Business or Profession is the third head of income. It is
considered to be one of the most important parts of the study of income tax and the most litigated
head as well. This head of income is covered by Sec. 28 to Sec. 44D of the Income Tax Act. These
sections provide framework of how to compute the taxable income from Business and Profession.
Sections relating to Income from Business and Profession
Sec. 28 The charging section for this head of income. It defines the scope of income
which can be taxed under this head.
Sec. 29 to 37 Lists down the expenses that can be claimed as deduction from the
Business income. The taxable income will be arrived once the deductions
allowed under these sections are reduced from the Total Income under this
head.
Sec. 40, 40A & 43B Enumerate those expenses which are expressly disallowed while
computing the taxable income. In simple words, certain expenses will not
be allowed as deduction from the total income even though they may have
been incurred by the assessee. These sections do not deal with whether the
expenses have been incurred or not, but they deal with the manner in
which it is incurred. Where the manner of incurring the expenses is
consistent with the provision the expenses will be allowed as deduction.
However if the manner is inconsistent with the provisions, no deduction
would be allowed.
Sec 41 to 44D These sections deal with the residuary issues pertaining to taxation of
income arising from Business and Profession. By and large these
provisions relate to special cases, maintenance of books of accounts and
requirement for audit.

Meaning of Business and Profession

The tax payable by an assessee on his income under this head is in respect of the profits and
gains of any business or profession, carried on by him or on his behalf during Previous
Year.

Business Profession
The term “business” has been defined in The term “profession” has not been defined
section 2(13) to ―include any trade, in the Act. It means an occupation requiring
commerce or manufacture or any some degree of learning. The term
adventure or concern in the nature of trade, ‗profession‘ includes vocation as well
commerce or manufacture‖. [Section 2(36)]
 Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect and
even an astrologer are persons who can be said to be carrying on a profession but not
business.
 However, it is not material whether a person is carrying on a ‗business‘ or ‗profession‘
or ‗vocation‘ since for purposes of assessment, profits from all these sources are
treated and taxed alike.
 Business necessarily means a continuous exercise of an activity; nevertheless, profit
from a single venture in the nature of trade may also be treated as business.

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 Meaning of „Profits‟
(1) Profits in cash or in kind: Profits may be realised in money or in money‘s worth, i.e., in cash or in
kind. Where profit is realised in any form other than cash, the cash equivalent of the receipt on the
date of receipt must be taken as the value of the income received in kind.
(2) Capital receipts: Capital receipts are not generally to be taken into account while computing
profits under this head.
(3) Voluntary Receipts: Payment voluntarily made by persons who were under no obligation to pay
anything at all would be income in the hands of the recipient, if they were received in the course of a
business or by the exercise of a profession or vocation. Thus, any amount paid to a lawyer by a
person who was not a client, but who has been benefited by the lawyer‘s professional service to
another would be assessable as the lawyer‘s income.
(4) Application of the gains of trade is immaterial: Gains made even for the benefit of the community
by a public body would be liable to tax. To attract the provisions of section 28, it is necessary that
the business, profession or vocation should be carried on at least for some time during the
accounting year but not necessarily throughout that year and not necessarily by the assessee-owner
personally, but it should be under his direction and control.
(5) Legality of income: The illegality of a business, profession or vocation does not exempt its profits
from tax: the revenue is not concerned with the taint of illegality in the income or its source.
(6) Income from distinct businesses: The profits of each distinct business must be computed
separately but the tax chargeable under this section is not on the separate income of every distinct
business but on the aggregate profits of all the business carried on by the assessee.
(7) Computation of profits: Profits should be computed after deducting the losses and expenses
incurred for earning the income in the regular course of the business, profession, or vocation unless
the loss or expenses is expressly or by necessary implication, disallowed by the Act. The charge is
not on the gross receipts but on the profits and gains.
Under section 145(2), the Central Government is empowered to notify in the Official Gazette from
time to time, income computation and disclosure standards (ICDSs) to be followed by any class
of assessees or in respect of any class of income.
Accordingly, the Central Government has, vide Notification No. S.O.3079(E) dated 29.9.2016,
notified ten ICDSs to be applicable from A.Y.2019-20.
The notified ICDSs have to be followed by all assessees (other than an individual or a Hindu
undivided family who is not required to get his accounts of the Previous Year audited in
accordance with the provisions of section 44AB) following the mercantile system of accounting,
for the purposes of computation of income chargeable to income-tax under the head ―Profits and
gains of business or profession‖ or ―Income from other sources‖, from A.Y.2019-20.

Basis of Charge
Sec. 28 of Income Tax Act, 1961 is the charging section for this head. In other words, this section
provides for the tax on income arising from a business or profession. Thus all those incomes which
are mentioned u/s 28 would be considered as business income. However it must be noted that Sec.
28 is not exhaustive in nature. It means any other receipt which may not be specified in Sec. 28 but
is in the nature of a business receipt, would also be considered as a business income. Sec. 28 of
Income Tax Act, 1961 provides that the following income is chargeable to tax under the head

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‗Profits and gains of Business or Profession‘:-
i. Any compensation or other payments due to or received by any person specified in Sec.
28(ii)
ii. Income derived by a trade, professional or similar association from specific services
performed for its members
iii. The value of any benefit or perquisite, whether convertible into money or not, arising from
business or the exercise of the profession.
iv. Any profit on transfer of the Duty Entitlement Pass Book Scheme
v. Any profit on the transfer of duty free replenishment certificate
vi. Export incentive available to exporters
vii. Any interest, salary, bonus, commission or remuneration received by a partner from a firm
viii. Any sum received for not carrying out any activity in relation to any business or profession
or not to share any know-how, patent, copyright, trademark etc.
ix. Any sum received under a Keyman Insurance Policy including bonus thereon
x. Any sum received or receivable in cash or kind, on account of any capital asset being
demolished, destroyed, discarded or transferred, if the whole of the expenditure on such
capital asset is allowed as a deduction under Sec. 35D and
xi. Income from speculative business.

It must be noted that Sec. 28 only provides for the incomes which are chargeable to tax under this
head. The manner of calculating the taxability is not prescribed in this section. Hence the tax
liability of the incomes mentioned in Sec. 28 will have to be determined in accordance with the
provisions of Sec. 29 to Sec. 44D.

Incomes not covered under Sec. 28: Certain receipts/incomes have specifically been excluded
from the purview of Sec. 28. In simple terms, those incomes though received by a person would not
be considered as a Business Income but will be taxed under some other head. These incomes are the
ones where an overlap prevails with reference to head of income under which it is classified. In order
to clarify this overlap, certain incomes are excluded from Sec. 28.
Head of Income Explanation about its chargeability to tax
Rental income in the Rent received from a House Property is taxable u/s 22 under the head of
case of dealer in ‗Income from House Property‘ even if such house property is owned by a
Property dealer who is in the business of letting properties on rent. Similarly in case
of a construction business, where the property is temporarily let out before
it is being sold, the income would be treated as an income from house
property and not as business income.
Dividend received by Dividend received is taxable under the head ‗Income from other sources‘,
a dealer in shares even when the said dividend is received by a person who is a trader in
stocks and shares. It must also be noted that in case dividend is received
from an Indian company, the same is not taxable to the recipient, except in
case of a few exceptions as provided under the law.
Winnings from Winnings from races, lotteries etc. are taxable under the head ‗Income
Lotteries etc. from other sources‘ even if the person receiving such income is engaged in
the business of races, lotteries etc.

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 Interest received on Any interest received on any form of compensation or enhanced
compensation or compensation would always be charged under the head of income from
enhanced other sources, even such compensation pertains to a regular business
compensation activity or endeavour.

Basic principles of Business Income

The determination of taxable income from Business and Profession needs to be carried out on basis
of certain principles. These principles are the outcome of various clarifications issued by the CBDT as
well as the legal interpretations made by various courts in India. Though these principles laid down
are not included in the Income Tax Act, 1961, their usage is well accepted by all concerned.
(a) Income from Previous Year will be taxed in the Assessment Year: The Income for a
particular Previous Year will be assessed in the following Assessment Year. This general rule
applies even to the Business Income. Generally for determining the income of the Previous
Year, a reference may be made to the Profit and Loss Account or any other income statement
of the assessee, provided the assessee has maintained books of accounts.
(b) Business cannot be carried with one‟s own self: The income that gets generated should be
from transactions that are carried out by one person with another. A person cannot earn profit
by undertaking a trading activity with one‘s own self.
(c) Business or Profession is carried out during the year: The income from business or
profession charged to income tax should arise from a business which has operated during the
year. In simple terms, the business should have been carried out during the Previous Year,
either the entire period or some part of.
(d) Multiple Business and Professions during the year: In case if the Assessee has business
income arising from multiple businesses or Professions, the income from all such businesses
and professions would be subjected to tax under this head.
(e) Tax on Real profit: The profits charged to tax should be real and not notional. It is important
that the Assessee has earned the profits taxed under this head. Hence any imaginary profits or
profits based on revaluation of assets etc. cannot be charged to income tax. However one
must note that the profits which are due but have not been realized would be covered under
this head. Such accrued profits are considered as real profits only. For instance when a trader
sells goods worth ₹ 1,25,000 on credit and if the trader earns ₹ 25,000 as profit, such a profit
will be charged to tax even if at the end of the Previous Year, the payment is outstanding.
(f) Revenue vis-à-vis Capital Transactions: The income to be charged under this head of
income must be revenue in nature. Capital profits are generally not charged under this head of
income. Thus only revenue profits will be charged to tax under this head.
(g) Income from Illegal Business: Taxation is not necessarily based on legality of business.
Thus income from an illegal business can also be charged to tax. However in general
scenarios the income would not be brought to tax since no assessee would declare income
from an illegal business. As and when the illegal business is being detected and the legal
action initiated against such person, income from such business may be brought to taxation.
(h) Losses arising in the course of trade and business: Where certain losses arise during the
course of the business, such losses would be allowed as deduction as long as the losses relate to
the business. For Example: a loss arising due to an accident in the factory, a loss due to
embezzlement by the employee or a loss arising due to breach of contract. However any loss
that is not connected or incidental to the business would not be allowed as deduction.

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 (i) Legal ownership vis-à-vis beneficial ownership: Taxability of income mentioned u/s 28 is
not restricted only to the legal ownership but also covers the beneficial ownership. The courts
may inquire into the beneficial ownership and decide upon the assessee who is liable to pay
tax after taking necessary facts into consideration.
(j) Method of accounting: The Assessee may either follow the mercantile system of accounting
or the cash system of accounting. Under the mercantile system of accounting, the incomes
that have accrued during the Previous Year are charged to tax, irrespective of whether the
same are received or not. Similarly all expenses are allowed as deduction, irrespective of
whether they are paid or not. As compared to this, under the Cash system of accounting,
incomes and expenses are recorded only when received or incurred, as the case may be.
Income Tax does not prescribe any particular method of accounting and the choice is left
open to the assessee. However, the assessee is supposed to follow a particular method
consistently.

Structure of Incomes and Expenses while computing Income from Business and Profession
The taxable income from Business and Profession refers to the Net Income that the assessee derives
from the Business or Profession. In simple words, the tax is charged on the profits earned by the
assessee. However the ‗Profit‘ needs to be determined by claiming the deduction allowed under the
Income Tax Act, in the manner prescribed. Sec. 29 allows for expenses listed in Sec. 30 to Sec.
43D. While some of these deductions are general in nature, some are specific. Further in some
sections the deduction is allowed subject to certain conditions. Hence it is important to understand
as to which incomes are to be considered as Business incomes and what expenses can be claimed
from it as deductions. In connection to this, some basic features are discussed as under:-

1. The deductions are simultaneous: The deduction of expenses as given in Sec. 30 to Sec. 43D is
simultaneous. This means that all deductions allowed under those section may be claimed
together, subject to the conditions mentioned in those sections
2. Burden of Proof: Once the assessee claims a deduction, the burden to prove the genuineness of
the claim rests on the Assessee. In other words, the Income Tax Department may disallow a
claim and it would be the responsibility of the assessee to prove that the claim was valid and
should thus be allowed.
3. Computation of Gross Income: All Revenue receipts of the business would have to be
aggregated to arrive at the gross income. Generally the major part of the gross income would
arise from the main business activity. For example in case of a wholesaler, the major part of the
gross income would be sales. However all incidental and ancillary receipts of the business
should also be added. For example if the business entity charges rent from its employees against
the staff quarter, the said rent will be treated as business income and should be added to the
Gross Income from business.
4. Deduction of Revenue expenses: The deductions allowed at the time of computing the income
from Business and Profession would generally be revenue in nature. Capital expenses are
generally not deductible from the business income except as provided in the law.
5. Expenses should relate to assessee business: The assessee can claim the deduction when the
expenses relate to his or her business. This means that any expenses which are personal in
nature or not benefitting the business could not be claimed as business expenses. However it is

12
 possible that the benefit of the expenses may extend not only to the business but also to
someone else. For instance, when the company pays premium for its employees and their family
members, the benefit also extends to the family members of the employees. However such
expenses may be claimed as business expenses by the company.
6. Real Expenses vis-à-vis notional expenses: The expenses claimed as a deduction must be real
in nature and not notional loss. The expenses may or may not be paid but it must have been
incurred or the liability to pay must have arisen. Any notional loss is not considered as a
business expense.
7. Expenses to relate to Previous Year: The expenses which the assessee claims as business
expenses should relate to the Previous Year. In order to verify whether the expenses relate to
Previous Year, one needs to examine the accounting method adopted by the assessee. Where the
assessee maintains the books of accounts using mercantile system of accounting, expenses
would be deducted irrespective of whether the expenses have been paid or not. However in case
if the assessee follows the cash system of accounting, only those expenses which have been paid
during the Previous Year would be allowed as deduction.

Methods of calculating the Income from Business and Profession

Every person carrying out a business or profession is expected to maintain its books of accounts
(subject to certain exceptions). Thus an assessee would prepare some form of Income statement
(like Profit and Loss Account or Income and Expenditure Account) at the end of the year. For the
purpose of calculating the taxable income from Business and Profession, there are two methods
which are commonly used; Indirect Method and Direct Method.

Indirect Method of computation: The indirect method is the most commonly used method for
determining the taxable income from Business and Profession. Under this method, the Net Profit as
per the Income Statement (Profit and Loss Account) is considered as the initiation point. All
disallowable expenses or incomes not recorded by the assessee are added to the Net Profit.
Similarly all allowable expenses or incomes considered under separate heads will be deducted. The
resultant figure is known as the Income from Business and Profession.

The indirect method works on the principle of exception. In simple words only those items which
are not in accordance with the law should be considered. The regular items, the ones which are
consistent with the provisions of law should not be disturbed. Since the assessee has already
prepared the Profit and Loss Account, those items which are consistent with the law be
automatically considered in the Profit. Hence only those items which are inconsistent with the
provisions of law must be considered. The same logic applies to incomes as well.

Format of determining taxable income under the Indirect Method

Particulars Amount
Net Profit as per the Profit and Loss Account (For the Previous Year) *****
Add: All disallowable expenses as provided under Income Tax Act *****
Add: All Unrecorded incomes relating to business *****

Less: All allowable expenses if not recorded *****

Less: All Incomes considered Separately *****
Taxable Income from Business and Profession *****

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For the purpose of better understanding of the indirect method, we need to understand some of the
terms used in this method:
(a) Net Profit as per Profit and Loss Account: This is the Net Profit as can be seen from the
Profit and Loss Account. However it is necessary that the Profit and loss statement is for the
Previous Year. This figure is the initial point in the Indirect Method. For the purpose of
calculation we simply take the figure as reflected in the Profit and Loss account without making
any modifications to it.
(b) Disallowable Expenses: The disallowable expenses refer to two kinds of expenses, those
which are not related to the business and those that relate to the business but are not incurred in
the manner prescribed under the Income Tax Act. Those expenses that do not result in some
benefit to the business are the ones treated as not related to business and hence not allowed as
deduction. As compared to these, certain expenses though related to the business, need to be
incurred in a manner given under the Income Tax Act. Where a business fails to incur the
expenses in the prescribed manner, the Income Tax would not allow these expenses as
deduction. Consider the following examples:

No. Examples of Expenses not related to business

1. Personal expenses of the owner like LIC premium of owner, expenses on personal clothing,
expenses for family guests and family trips, interest paid on personal borrowing etc.
2. Personal expenses of the family members of the owner like Insurance premium of family
members, education cost of children, clothing for family members, personal expenses of
family members
3. Expenses incurred for earning any income covered under other heads of income like bank
charges for collection of dividend income, cost incurred in acquisition of shares and
securities, repairs and maintenance to house property, municipal taxes of house property
4. Expenses which are specifically disallowed under the Act like payment of Income Tax,
Donation, CSR expenses etc.

Sr. No Examples of Prescribed Expenses

1. Payments made in cash in excess of ₹ 20,000
2. Payments made to sister concerns and relatives
3. Payments which are deductible only on payment basis
4. Payments subject provisions which to are TDS
(c) Incomes not recorded in books: These incomes refer to any income which pertains to the
business but are not recorded in the books of accounts or are recorded in an incorrect manner.
For instance, where an income is omitted at the time of preparing the books of accounts, the
same must be added while computing the taxable income. Similarly in case of partially
recorded incomes, the unrecorded part must know be recorded in the Profits.
(d) Allowable expenses which are not recorded: As unrecorded incomes are added to the profits,
any unrecorded expenses, either partly or fully, should be claimed as a deduction at the time of
computing the taxable income. For instance an expense which was omitted to be recorded or an
expense which was disallowed in the earlier year but is to be allowed in the Previous Year will
have to be deducted at the time of computing the income from business and profession.

14
(e) Incomes considered separately: The incomes considered separately refer to those incomes
which are not business income but have been recorded in the Profit and Loss Account. For
instance, in case of a Proprietorship unit, the saving bank account interest is the income
considered under Income from other source. However if such interest is credited to the Profit
and Loss account, it should be deducted from the business income. The same logic can also be
applied to rent arising from the personal property of the owner.

DEDUCTIONS FROM BUSINESS INCOME

Rent, Rates, Taxes, Repairs and Insurance for Building [sec 30]
Under section 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:
a) The rent of premises ,the amount of repairs(not being capital expenditure ), if he has
undertaken to bear the cost of repairs(this is applicable if the assesse has occupied the
property as a tenant);
b) The amount of current repairs (not being capital expenditure ) (if the assesse has occupied
the premises otherwise than as a tenant );
c) Any sum on account of land revenue, local rates or municipal taxes ; and
d) Amount of any premium in respect of insurance against risk of damage or destruction of
the premises.
Application of section 43B – Land revenue, local rates or municipal taxes is deductible subject to
the conditions as specified by section 43B

Repairs and insurance of machinery, plant and furniture [sec 31]

The expenditure incurred on current repairs (not being capital expenditure) and insurance in respect
of plant, machinery and furniture used for business purposes is allowable as deduction under
section 31.

Concept of Depreciation and its deduction from Taxable Income

Depreciation refers to the charge on assets arising due to the normal wear and tear. In simple terms,
depreciation refers to diminishment in value of assets, arising due to its usage by the assessee. Such
a charge or diminishment is treated as an expense for the business as the value of the asset comes
down. From an accounting point of view, the depreciation is the amount that the business should set
aside every year so as to facilitate the replacement of the existing assets when they wear out
completely and become unusable.

Under the Income Tax Act, 1961 Depreciation is a major expenditure that is allowed as a deduction
while computing taxable income from Business and Profession. Sec. 32 of the Income Tax Act
makes detailed provisions about admissibility of depreciation and the necessary conditions for this
purpose. However the rates at which the depreciation is charged and the mechanism in which the
expense is claimed is very different from what it is in the books of accounts. These differences have
been discussed in the succeeding paragraphs.

15
Conditions for claiming depreciation: Sec. 32 of Income Tax Act, 1961 provides that an assessee
would be entitled to claim depreciation subject to fulfilment of the following conditions:-

1. The Assessee must be the owner of the business

2. The assets may be tangible or intangible.
3. The asset must be used for the purpose of assessee‘s business or profession carried out in
the relevant Previous Year
4. The asset must have been used during the relevant Previous Year.

The conditions as mentioned in Sec. 32 are absolute and cumulative. This means that all conditions
need to be complied with simultaneously. The conditions given in Sec. 32 have been given in the
following table:-

Conditions Explanation of the conditions

Asset should be In order to claim the deprecation, the assessee must be the owner of the
owned by the Assessee asset. The ownership referred to in Sec. 32 is beneficial ownership and
not just legal ownership.
Assets owned may be The Income Tax Act, 1961 provides for depreciation on both, tangible as
tangible or intangible well as intangible assets. While the tangible assets would include assets
like Machinery, Plants, Buildings, Computers, Vehicles etc. the
intangible assets would include assets like Trademarks, patents,
copyrights, know-how, licenses, franchises etc.
Assets must be used for Depreciation on a particular asset is available only when the asset is used
the purpose of business during the Previous Year. Even in case where the usage is only for a part
during the Previous of the Previous Year, depreciation would be allowed.
Year However in case of newly purchased assets, a minimum of 180 days of
usage is must to claim the entire year‘s depreciation. If the newly
purchased asset is used for less than 180 days, half year‘s depreciation
will be allowed.
The asset should be The asset, in respect of which depreciation is claimed, must have been
used for the purpose used for the purpose of business or profession. Even if an asset is put to
of assessee‘s business use for a trail run, the usage is constituted. The concept of ‗usage‘
or profession during should be construed in a wide sense and would include the active as well
the Previous Year as the passive usage. If an asset is ready to be used, it will be considered
as use during the year. Similarly any forced discontinuation of the usage
would not limit the availability of depreciation.

Manner of calculating the depreciation

Sec. 32 of the Income Tax provides for a specific manner in which the depreciation on assets can
be calculated. The prescribed method is significantly different from the way in which depreciation is
calculated under the accounting system. The manner of charging depreciation under the Income Tax
is discussed here under:-

16
(a) Method of depreciation and rates thereof: Under the Income Tax Act, depreciation can be
claimed only on the Written down value i.e. using the Reducing balance method. Any other
method of depreciation, including the Straight Line Method of depreciation is not permitted.
Likewise, the depreciation on assets should be claimed only as per the rates prescribed under
the Income Tax act. An assessee may provide depreciation in the books of accounts at whatever
rate that suits his or her requirement. Similarly in case of a company assessee, the company
would have to compulsorily follow the rates prescribed under the Companies Act, 2013.
However for the purpose of computing the income from Business and Profession, the Income
Tax Act, would disregard all such rates and methods but would provide depreciation at the rates
prescribed by it on the Reducing Balance Method.

(b) Block of Assets: The Income Tax Act introduces the concept of Block of Assets wherein assets
falling within the same class of assets and having the same prescribed rate of deprecation are
clubbed into one block. In this method, the depreciation would be charged on the whole block
of assets and not on individual assets. An assessee may have multiple blocks of assets, each for
a group of assets. For example let‘s consider the following table:-
For Example:
Name of the Asset Rate of Op. WDV as on
Depreciation 01/04/19
Plant A, B & C 15% 12,25,600
Plant D & E 20% 2,56,300
Plant X & Z 15% 8,94,100
Office Buildings 10% 48,36,400
Residential Building 05% 36,50,700
Furniture & Fixtures 10% 2,41,600
Televisions & Refrigerators 10% 6,98,900
Computer 40% 2,15,200
Trademarks & Patents 25% 6,04,500
From the information given in the table, the following blocks can be formed:-
Block of Assets Explanation for creating the Rate of Op. WDV as
block Depreciation on 01/04/19
Plant- I (Includes Both the categories of assets are similar 15% 21,19,700
Plant A, B, C , X & in nature i.e. Plant and also have the
Z same rate of depreciation
Plant – II (Includes Though the nature of asset is similar to 20% 2,56,300
Plant D & E) Plant – I the rate of depreciation is
different and thus the two blocks will be
different
Office Buildings The office buildings cannot be merged 10% 48,36,400
into one block with factory building.
Neither is the nature of assets similar for
the two not is the rate of depreciation
Residential Office building cannot be merged with 05% 36,50,700
Buildings Residential Buildings

17
 Furniture, Fixtures The furniture, fixtures and the 10% 9,40,500
and Electronics Electronics fall under the same class of
assets, an asset used in buildings and
have the same rate of depreciation as
well.
Computer Computers are categorized under Plant 40% 2,15,200
carrying separate rate of depreciation
Intangible Assets Trademarks and patents are also 25% 8,19,700
intangible assets which fall in the same
class with the same rate of depreciation

Depreciation on all these blocks will be available on the consolidated value of the block at the
rates prescribed. There will be no depreciation on the individual assets under Income Tax Act.

(c) Time period for calculating the depreciation: Under the Income Tax Act, there is no
provision for pro-rata depreciation as is the case in accounts. Instead the Act provides for two
things:-
i. If the assets was owned by the assessee on the 1st day of the Previous Year and if such
asset was used during the Previous Year, full depreciation will be allowed to the
assessee at the rates prescribed under the Income tax Act.
ii. If the assessee has acquired a new asset during the Previous Year and if the said has been
used for atleast 180 days or more during the year, the assessee will be allowed to claim
full depreciation. In case if the asset was used for less than 180 days during the Previous
Year, the assessee would be entitled to half the deprecation.

(d) Written Down Value: According to Sec. 43(6), the Written Down Value would be calculated
as per the following format
Particulars Amount
Opening WDV of the block as on the 1st day of the Previous Year *****
Add: Actual cost of the assets acquired during the Previous Year *****
Less: Deduct the amount received or receivable in respect of the assets sold or *****
discarded during the Previous Year
Less: Amount of depreciation for the year (as calculated in accordance with the ****
process mentioned above)
Written Down Value at the end of the Previous Year *****

(e) Treatment of Sale of Assets during the Previous Year: If any part of the asset is sold during the
year, the entire amount received or receivable as sales value would be deducted from the block
of assets. The depreciation upto the date of the sale and the Profit or loss arising on the sale are
completely ignored.
Is it compulsory to claim the depreciation? The IT Act provides that it is mandatory for all the
assessee to claim depreciation pertaining to the relevant Previous Year. Thus the assessee cannot
decide against claiming the depreciation and the deduction in respect of the depreciation is
compulsory. In fact the IT Act further states that if in case the Assessee, whether intentionally or
unintentionally, does not claim the depreciation, it would be the duty of the IT Officers to compute
the taxable income from Business and Profession after giving effect to the PY‘s depreciation.

18
 Problem 1- Compute the written down value from the following information for the Assessment
Year 2020-21
Blocks of asset Rate of depreciation (%) Depreciated value on 1.4.2019
1. Plant A, B and C 15 10,40,000
2. Plant D and E 40 2,60,000
3. Plant F 30 70,000
4. Building A, B, C and D 10 10,90,600
5. Building E, F and G 5 7,10,200
6. Building H, I, J and K 40 16,90,000

After April 1, 2019 the company purchases the following assets:-

Assets Date of purchase Rate of depreciation (%) Actual cost Rs.
Plant G April 6, 2019 30 6,000
Plant H May 11, 2019 15 18,000
Furniture June 6, 2019 10 56,000
Car July 7, 2019 15 2,56,000
Building L September 26, 2019 5 7,28,700
Computer September 27, 2019 40 90,000
Copyright September 30, 2019 25 17,50,000

The following assets are transferred —

Assets Date of sale Sale consideration Rs
Plant B December 20, 2019 25,10,900
Plant D January 31, 2020 12,000
Building L March 6, 2020 6,00,000

EXCEPTIONS TO THE RULE

In the cases given below, the above-mentioned rule is not applicable:
Exception If written down value of the block of asset is reduced to zero, though the block is
one not empty
Exception If the block of assets is empty or ceases to exist on the last day of the Previous
two Year (though the written down value is not zero)
Exception If in the first year in which an asset is acquired, it is put to use for less than
three 180days

When the written down value of a block of asset is reduced to zero - No depreciation is
admissible where written down value has been reduced to zero, though the block of assets does not
cease to exist on the last day of the Previous Year.

Problem 2 (Exception 1) - On April 1, 2019, depreciated value of a block of assets (rate of

depreciation: 15 per cent) is Rs. 80,000. It consists of Plants A and B. The assessee purchases Plant C
(rate of depreciation: 15 per cent) during the Previous Year 2019-20 for Rs. 30,000 and sells Plant A
on May 3, 2019 for Rs. 1,80,000. In this case on March 31, 2020, the assessee has Plant B and Plant
C in the block of the assets, though the written down value of the block is zero. No depreciation will
be admissible for the Previous Year 2019-20.

19
Problem 3 (Exception 2) - X Ltd. owns two plants—Plant A and Plant B—on April 1, 2019 (rate of
depreciation: 15 per cent, depreciated value on April 1, 2019: Rs. 2,37,000). The company purchases
Plant C on May 31, 2019 for Rs. 20,000 and sells Plant A (on April 10, 2019), Plant B (on December
12, 2019) and Plant C (on March 1, 2020) for Rs. 10,000, Rs. 15,000 and Rs. 24,000. What if plant A,
B, C are sold at Rs.3,57,000.

Problem 4 (Exception 3) - X Ltd. Purchases an old plant (rate of depreciation: 15%) on May 10,
2019 and put to use on 10.01.2020. In this case, the plant is acquired during 2019-20 and it is put to
use for less than 180 days during the year. It is, therefore, qualified for half of the usual depreciation.

X Ltd. Owns two building A and B on April 1, 2019 (rate of deprecation : 10 %, depreciated value:
Rs. 14,15,700.) it purchases on December 1, 2019 building C for Rs. 3,10,000 (Rate of deprecation:
10%) and sells building A during the Previous Year 2019-20 (say on January 10, 2020) for Rs.
8,70,000. What if plant A is sold for Rs 15,87,000?

Practice Exercises on Depreciation

1. Calculate the depreciation that can be charged as per the Income Tax Act on the following
assets: -
Particulars Op. WDV Additions Sales Rate of Dep.
Factory Building 3,50,000 1,00,000 60,000 10%
Residential House for Staff Members 10,00,000 5,00,000 Nil 5%
Furniture and Fixture
Air Cooler 15,000 5,000 Nil 10%
TV Set 35,000 Nil Nil
Furniture 1,26,000 Nil Nil
Plant and Machinery 20,40,000 6,50,000 2,70,000 15%
Computers Nil 80,000 Nil 40%
Note: -
th
A. Plant and machinery and Air Cooler were acquired on 5 Nov. 2019
B. New constructions to both buildings were carried out in May 2019.
th
C. Computers were purchased on 4 Oct. 2019.

2. Mr. Puneet Kansal, an advocate, acquired the following assets during the P.Y. 19-20:
Particulars Cost Date of Pur Rate of Dep.
Computer & Printer 60,000 01/11/2019 40%
Office Furniture 42,000 01/04/2019 10%
Office Building 12,50,000 01/07/2019 10%
Office Table & Stand 20,000 01/04/2019 10%
Books 70,000 01/06/2019 40%
Calculate the amount of depreciation for the Previous Year 2019-20.
3. A new industrial undertaking has been set up during the Previous Year 2019-20 and it submits
the following details about its assets. Compute the amount of depreciation available.
Particulars Date of Date of Put to use Amount Rate of Dep.
Acquisition
Plant & Machinery
Plant A 10/04/2019 15/09/2019 12,00,000 15%
Plant B 15/07/2019 15/09/2019 18,00,000 15%

20
 Plant C 22/08/2019 15/10/2019 10,00,000 15%
Plant D 01/09/2019 10/10/2019 6,00,000 40%
Plant E 01/10/2019 10/02/2020 4,00,000 40%
Buildings 04/04/2019 15/09/2019 15,00,000 10%
Imported Car 10/04/2019 10/04/2019 6,00,000 15%
Air Conditioners 10/06/2019 10/10/2019 1,00,000 15%

Deductions available under Sec. 36 of Income Tax Act

Sec. 36 of the Income Tax Act, 1961 provides for deduction of various expenses that would be
incurred by a business entity. These expenses will be deducted from the gross income at the time of
determining the taxable income from Business and Profession. The expenses allowed under Sec. 36
are discussed as under:-

(a) Insurance Premium: Sec. 36(1) provides that any premium paid for an insurance policy to
cover the risk of damage or destruction of goods, stocks or stores used for purpose of business
and profession is allowed as a deduction. Similarly any premium paid to insure the assets of the
business and profession is also allowable. Further if an employer pays any premium to insure
the health of the employees and their family members the same would also be allowed as
deduction provided it is not paid in cash.
(b) Bonus or Commission to employees: Any bonus or commission paid or payable to the
employee is allowed as deduction. Such a bonus or commission may be paid either under some
legal obligation or under contractual obligations. Generally the bonus or commission is
considered as an additional remuneration paid to the employees and will be treated as business
expenditure.
The deduction of Bonus and commission as a business expense is however subject to two
conditions;
 first of all, no bonus or commission can be paid if such payment is in lieu of dividend or
profit. This provision is aimed to ensure that the employer does not evade the tax on
distribution of profit by masquerading the distribution as bonus to employees or members.
 The second condition is that as per Sec. 43B (discussed later), bonus or commission is
allowed as a deduction only when the payment is made during the Previous Year or on or
before the due date of filing the Return of Income for the relevant Previous Year.
(c) Interest on Borrowed Capital: Interest on borrowed capital i.e. loan is allowed as a business
expenditure. However the necessary condition is that the assessee should have borrowed the
money from a third person and used the said amount for the purpose of business. Such interest
may be paid on any business related borrowing, either for acquiring a long term asset or even
for working capital requirements. Any assessee who borrows money and is liable to pay interest
on such borrowing can claim the interest as an expense. However if the borrowing is made to
generate an exempt income, the interest is not allowed as an expense.
The borrowing should come from a third person; one cannot borrow from own self. Thus if a
Proprietor wants to charge interest on capital as an expense, it would not be allowed, but if the
Proprietor borrows money from a relative and pays interest on such borrowing, the said interest
will be allowed as an expenditure. A person may borrow some money from the family members

21
 like spouse or children and claim the expenditure as a deduction. However the money lent
should belong to the family members and not to the borrower who routes the money through
the family members only to claim an interest expense.
(d) Employer‟s contribution towards retirement benefits: Where the employer contributes
towards any retirement benefits of the employee like Provident Fund, Notified pension scheme
or gratuity fund, all such contributions are allowed as deduction as business expenditure,
subject to the limits laid down for this purpose. The deduction is allowed subject to two
conditions:-
i. The Provident fund, Pension scheme or the gratuity fund should be recognized and approved
by the competent authority. If the fund is not recognized or approved the contribution made
would not be allowed as a deduction
ii. The contribution to Provident Fund will be allowed only if the said amount is paid into the
account on or before the due date as per the provisions of the law.
(e) Bad Debts: If the assessee writes off any debt, either fully or partially, the amount so written
off will be allowed as a business deduction provided the debt was considered as income of the
assessee of that Previous Year or of an earlier Previous Year, or represents the money lent in
the ordinary course of business of banking or money lending, as the case may be. The debt is
allowed as a deduction only if the amount has been written off as irrecoverable from the books
of account of the assessee.
Before claiming an amount as a debt, it must be shown that it is a proper debt. In other words, a
bad debt pre-supposes the existence of a debt. Thus it is important to prove that there existed a
debtor-creditor relationship. If the debt cannot be established, bad debt would not be allowed.
Secondly the debt should have been created in the normal course of business and such debt
should have generated income for the assessee. If the debt is not in the normal course of
business or if the debt does not generate any income, such debt will not be allowed as business
expenditure when written off.
Deduction for bad debts is limited to the amount by which bad debts exceed credit balance in
the provision for doubtful debts account.
General Deduction allowed under Sec. 37
Sec. 37 (Residuary Expenses) of the Income Tax Act is the residuary section for allowance of
business expenses. In order to claim a deduction, the following conditions should be satisfied:-
(a) The expenditure should not be covered in sec. 30 to 36
(b) The expenditure should not be a capital expenditure
(c) It is not a personal expenditure
(d) The expenditure is incurred during the Previous Year
(e) The expenditure should be incurred in connection with the Business or Profession carried
out by the assessee
(f) The Business or Profession must be carried during the Previous Year
(g) The expenditure is not incurred for any purpose which is an offence or violation of law.

It must be noted that Sec. 37 is a residuary section and allows the deduction of all such expenses
which are not otherwise covered in Sec. 30 to 36. However such expense is allowed only if it is
connected with the business or profession and revenue in nature.

22
 Specific Disallowances under the Act
There are certain expenses which are specifically disallowed under the Act. In simple words, the
expenses though incurred would not be allowed as a deduction if the expenses are not incurred in
the manner as prescribed under the Income Tax Act. These expenses are discussed as under:

In case of payment to Non Resident

With Reference to Section 40(a) (i) given in table on Next Page

Payment being Interest, Royalty,
fees, rent, commission
Payment being Interest, Royalty,
fees, rent, commission
Payment being salary
Default to deduct TDS 100% of the amount will be
disallowed.
Default to deposit TDS with 100% of the amount will be
government before due date disallowed.
Default to deduct or deposit 100% of the amount Disallowed
TDS under section 40(a)(iii)

In case of payment to Resident

With Reference to Section 40(a) (ia) given in table given Below:
Payment being Interest, salary, Default to deduct TDS or deposit TDS 30% of amount will be
fees, rent, commission deducted with government disallowed.

Expenses Section Explanation

Expenses liable Sec. These sections of the Income Tax provide that any payment,
to Tax deduction 40(a)(i), made either to the Resident or non-resident, which is liable for
at source (ia), (iii) tax deduction at source, would not be allowed as a deduction as
business expenditure, if such TDS is not deducted at the time of
incurring the expenditure. Thus the disallowance applies in a
case where the expenditure is liable for TDS and such TDS has
not been deducted at the time of making the expenditure.
Similarly if the TDS has been deducted but the amount is not
deposited with the Central Government, the disallowance would
apply. Some of the expenses which are liable for TDS at the
time of payment are Salary, Rent, Professional Fees,
Commission, Royalty, Contractual Payment, and Interest.
Expenses paid in Sec. If the assessee incurs any expenditure exceeding ₹ 10000 and if
Cash 40A(3) such expense is paid in cash or by a bearer cheque, the entire
amount will be disallowed as an expense. This limit of ₹ 10000
is however applied on per person, per day basis. Thus if the
assessee pays cash of more than ₹ 10000 in a single day to a
person, the entire payment will be disallowed and not be
deducted as business expenditure. However the Provision is
subject to certain exceptions as given under the Income Tax Act.

23
 Payments made Sec. 40A Where the assessee makes any payment to the relatives or a
to Relatives or (2) sister concern, such payment will not be allowed as an expense if
associated the said payment is considered as excessive or unreasonable
concerns having regard to the fair market value of the commodity or
transaction or the legitimate needs of the business carried out by
the assessee. Any part of the payment which is unreasonable in
nature would not be allowed as business expenditure
Expenses Sec. 43B Where the assessee is maintaining books of accounts on the
deducted on basis of mercantile system of accounting, the following
payment basis payments will be allowed as deduction only if they are paid
during the Previous Year or on or before the due date for filing
the Return of Income:-
 Any sum payable by way of tax, duty, cess or fee
 Any sum payable by an employer by way of contribution of
PF or superannuation fund or any other fund for the welfare
of employees
 Any sum payable as bonus or commission to employees for
services rendered
 Any sum payable as interest on any loan or borrowing from
a Public Financial Institution or a State Financial
Corporation or a State Industrial Investment Corporation

Practical Exercises- Income from Business and Profession

1. Following is the Profit and Loss Account of Kesari Malya for the A. Y. 2020-21:
Particulars Amount Particulars Amount
To, By,
Salaries 2,56,500 Gross Profit 8,00,000
Rent 10,000 Bank Interest 4,500
Commission on Sales 1,000 Bad Debts (Last year allowed) 20,000
GST paid 26,000 Rent from House Property 48,000
Entertainment Expenses 6,000 Interest on Investments 20,000
Interest Collection charges 2,500
Embezzlement of Cash 10,000
Municipal Tax of H. P. 6,000
Bad Debts 4,500
Repairs to House 16,250
Office Expenses 91,800
Depreciation 50,000
LIC Premium- Proprietor 13,200
Net Profit 4,01,000
8,92,500 8,92,500
Depreciation allowable as per income Tax is ₹ 46800. Salary includes ₹ 58000 paid during the
year to a relative of the Proprietor. The reasonable salary for the said job profile is ₹ 50000 p.a.

24
2. The following Profit and Loss Account of Mr X for the A. Y. 2020-21
Particulars Amount Particulars Amount
Opening Stock 15,000 Sales 80,000
Purchases 40,000 Closing Stock 20,000
Wages 20,000 Gift From Father 18,000
Rent 6,000 Sale of Motor Car 9,000
Repair to Motor Car 3,000 Income Tax Refund 3,000
Electricity Expenses 3,000
Medical Expenses 3,000
General Expenses 10,000
Depreciation on car 3,000
Advance Income Tax 1,000
Audit Fees 6,000
Net Profit 20,000
1,30,000 1,30,000
Adjustments: -
A. Mr X Carries on his business from rented premises at Delhi. Half of the said premises is
used for residential purpose
B. Mr X bought a car during the year for Rs. 90000/- on 5th September. The use of the car was
75% for business purpose.
C. Medical expenses include Rs. 600/- paid for sickness of Mrs. X
D. Wages include Rs, 250 per month on account of personal servant of Mr. X

3. The following Profit and Loss Account of Mr Merchant for the A. Y. 2020-21
Particulars Amount Particulars Amount
To, By,
Rent 6,000 Gross Profit 52,300
Rates 600 Interest from Debtors 2,800
Salary to Staff 5,400 Rent from Property 2,400
Diwali Puja Expenses 200 Sundry Income 1,600
Interest on Loan 12,500 Commission 3,700
Interest on Capital 5,500
Bad Debts 600
Charity 100
Reserve for Doubtful Debts 200
Entertainment 850
Loss by Theft 1,400
Net Profit 29,450
62,800 62,800
Adjustments:-
A. Rent includes Rs. 1,200 for a shop belonging to himself
B. Salary to staff includes salary of Rs. 2,400 of a son who is a B. Com and does not work for
the business.
C. A loan of Rs. 6,000/- @ 15% p.a. was taken from his wife out of the funds advanced by him

25
 and the interest on this loan is included in the interest amount above.
D. Entertainment includes Rs. 150/- spent on tea of some guest of Wife
E. Loss of theft includes Rs. 800 which were stolen from his house
F. Rates include Rs. 400 in respect of the property let out.

4. The Profit and Loss account of a manufacturing concern for the A. Y. 2020-21
Particulars Amount Particulars Amount
Opening Stock 3,38,000 Sales 8,70,000
Purchases 3,29,900 Closing Stock 2,490
Stores Consumed 21,800 Misc. Income 1,29,000
Power and Fuel 7,680
Rates and Taxes 430
Repairs to machinery 9,070
Repairs to Building 1,680
Misc. expenses 15,860
Salaries and Wages 95,500
Contribution to RPF 6,200
Staff Welfare Expenses 1,020
Bonus 4,400
Insurance premium 2,500
Commission to agents 43,500
Selling Expenses 780
Audit Fees 980
Bad Debts 2,100
Licence Fees 1,090
Interest 26,500
Provision for Tax 22,000
Depreciation 40,000
Net Profit 30,500
10,01,490 10,01,490
Adjustments: -
A. Miscellaneous expense includes
a. Penalty for violation of FEMA for Rs. 1,200/-
b. Expenses for defending an criminal case against MD Rs. 3,000/-
c. Donations to PM National Relief Fund Rs. 2,000/-
d. Wealth Tax Rs. 3,000/-
B. Bad debts include a sum of Rs. 500 for advance to suppliers of raw material with whom the
assessee has entered into a contract
C. Miscellaneous Income includes income tax refund of Rs. 5,000/-
D. Allowable Depreciation is Rs. 36,000/-

26
5. The following Profit and Loss Account of Mr Ramanathan for the A. Y. 2019-20
Particulars Amount Particulars Amount
General Expenses 63,400 Gross Profit 2,65,500
Bad Debts 22,000 Commission 18,600
Provision for Bad Debts 21,000 Brokerage 27,000
Insurance (House) 600 Sundry Receipts 22,500
Salary to staff 36,000 Rent Income 12,000
Salary to Ramanathan 22,000 Interest on Deposit with Trust 15,000
Interest on Bank Loan 62,000 Interest on Units of UTI 13,000
Interest on Loan from Mrs. 4,000 Bad Debts Recovered (30% 1,000
Ramanathan not allowed in earlier years)
Interest on capital 13,000
Depreciation 60,000
Advertisement expenses 8,000
Sales Tax 12,000
Net Profit 50,600
3,74,600 3,74,600
Adjustments:-
A. The amount of depreciation allowable on building as per Income Tax is Rs. 40,200.
B. Advertisement expenditure includes Rs. 5,000 cost of advertisements in News papers
C. Income of Rs. 10,000 which accrued during the year is not recorded in the Profit and Loss
A/c. A liability of Rs. 6,500 pertaining to last year was paid during the year but remains
unrecorded.
D. General expenses include Rs. 6,400 being car expenses. 30% of the car is being used for
personal use.
E. Rent includes Rs. 4,800 received as rent from staff against providing them staff quarters.
F. Following transactions were not recorded in the Profit and Loss Account: -
a. Income Tax Refund Rs. 5,000
b. Audit Fees Rs. 3,500
c. Discount Allowed Rs. 2,650
d. Interest received from Debtors Rs. 3,600.

6. The following is the Profit and Loss Account of Mr Sharma for the A. Y. 2019-20
Particulars Amount Particulars Amount
Opening Stock 72,000 Sales 12,00,000
Purchases 8,00,000 Closing Stock 81,000
Wages 30,000 Life Policy Amount 5,000
Carriage and Freight 40,000 Sale of Old Machinery 2,000
Staff Salaries 90,000 Interest & Dividends 4,000
Rent and Taxes 20,000
Advertisements 20,000
Audit Fees 20,000
Donations 10,000
Income Tax 10,000

27
Reserve for Bad Debts 10,000
Depreciation Reserve 10,000
Sales Tax 10,000
Printing and Stationary 20,000
Contribution to RPF 10,000
Patents Purchased 90,000
Interest on Capital 10,000
Net Profit 20,000
12,92,000 12,92,000
A. The opening stock and closing stock has been valued at cost minus 10%
B. Purchase includes a payment of Rs. 30,000/- paid by a bearer cheque to a supplier
C. Depreciation allowable as per IT Rules is Rs. 8,000/-
D. Freight includes Railway Demurrage Rs. 2,000 and Railway Penalty of Rs. 5,000/-
E. Advertisement includes expenses on gifts given to select customers for Rs. 13,000/-
F. Entertainment expenses of Rs. 8,000/- have been paid but not recorded above.
G. He has earned a profit of Rs. 6,000 from Purchasing a Lottery.

28
Clubbing of
Income

29
 INTRODUCTION

Generally an assessee is taxed on income accruing to him only and he is not liable to tax for income of
other person. In some cases, however, the Income-Tax Act deviates from this principle and the
assessee may be taxed, under sections 60 to 64, in respect of income which really belongs to some
other person.

Provisions incorporated in these sections deals with cases where taxpayers make an attempt to reduce
their tax liability by transferring their assets in favour of their family members or by arranging their
sources of income in such a manner that incidence falls on others, whereas benefit of income, directly
or indirectly, is derived by them.

In order to counteract these practices of tax avoidance, provisions have been made under section 60
to 64 to tax the income in the hands of an individual, even though such income belongs to other
person.

Eg: include certain income of minor child to be clubbed in the hands of his parents, income from
asset transferred to spouse for inadequate consideration to be clubbed in hands of transferor, etc.

COMPUTATION OF INCOME TO BE CLUBBED:

 Income to be clubbed to be first computed in the hands of recipient
 All expenses allowed as per respective provisions be deducted
 Net income be clubbed

CLUBBING HEAD:
Income shall be, first, computed in the hands of the recipient and clubbing shall be made head wise.

DEDUCTIONS ALLOWED:
If the clubbed income is eligible for deduction u/s 80C to 80U, then such deduction shall be allowed
to the assessee in whose hands such income is clubbed.
Example: If interest on NSC of the minor is clubbed in the hands of parent then the parent can claim
deduction u/s 80C.

CLUBBING OF NEGATIVE INCOME:

 Clubbing of income also includes clubbing of negative income.
 Where an income is liable to be clubbed, then loss from the same source also be clubbed
 Clubbing provisions be applied even when they cause loss of revenue to the Income Tax
Department.

TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET [SECTION 60]:

When an income is transferred without transferring the asset yielding such income, then income so
transferred shall be clubbed in the hands of the transferor. The above provisions holds good when:
 The taxpayer owns an asset
 The ownership of such asset is not transferred by him, i.e., he has retained the ownership.
 The income from the asset is transferred under a settlement, trust, covenant, agreement or
arrangement
 The said transfer may or may not be revocable

30
ILLUSTRATION

 X owns 4,000 14% debentures of A Ltd. Of Rs.100 each (annual interest being Rs.56,000). On
April 1, 2019, he transfers interest income to Y, his friend, without transferring the ownership of
these debentures. Although, during 2019-20, interest of Rs.56,000 is received by Y, it is taxable
in the hands if X, as he has transferred income without transferring the ownership of the asset.

REMUNERATION TO SPOUSE [SECTION 64(1) (ii)]:

The total income of an individual shall include income arising (directly or indirectly) to the spouse
by way of salary, commission, fees or any other remuneration (whether in cash or kind) from a
concern in which such individual has substantial interest.
Any other income, which is not specified above, even if it accrues to spouse from the concern in
which the assessee has substantial interest, shall not be clubbed.

SUBSTANTIAL INETREST:
 In case of a company:
If an individual beneficially holds (individually or along with relatives) 20% or more of equity in
the company at any time during the Previous Year he is said to have substantial interest in the
company
 In case of a concern other than company:
If an individual is entitled to 20% or more share in the profit in the concern (individually or along
with relatives) at any time during the Previous Year he is said to have substantial interest in the
concern.
 Definition of relative:
Relative includes husband, wife, brother, sister, any lineal ascendant or descendant.
EXCEPTION:
Income generated through technical or professional qualification of the spouse is not to be clubbed in
the total income of the individual.

TECHNICAL OR PROFESSIONAL QUALIFICATION MEANS:

 Fitness to do a job or to undertake an occupation requiring intellectual skills; includes technical
competence generated through experience, skills etc.
 Technical qualification includes specialization in a particular subject
 Does not necessarily relate to technical or professional qualification acquired by obtaining a
certificate, diploma or degree from a University or Institute.

WHEN BOTH HUSBAND AND WIFE BOTH HAVE SUBSTANTIAL INTEREST:

 Both husband and wife have a substantial interest in the concern
 Both are in receipt of remuneration of such concern
 Remuneration is received without any technical and professional qualification
 Remuneration will be included in the total income of husband or wife, whose total income,
excluding such remuneration, is greater

31
ILLUSTRATION:
1) X holds 20% equity share capital in Y Ltd. Mrs. X is employed by Y Ltd. (salary being
Rs.1,40,000 per month) as general manager (finance). She doesn‘t have any qualification to
justify the remuneration. Ascertain in whose hands salary income is chargeable to tax. Does it
make any difference if Mrs. X was employed by Y Ltd. even prior to her marriage?

Solution: In this case, X has substantial interest in Y Ltd. where Mrs. X is employed. Mrs X
doesn‘t have any professional qualification to justify the remuneration of Rs 1,40,000 per
month. Her salary income of Rs 16,80,000 (1,40,000*12) will be taxable in the hands of Mr X.
It doesn‘t make any difference even if Mrs. X was employed by Y Ltd. prior to her marriage.

2) Income of X (age : 31 years) and Mrs. X (age : 30 years) for the Previous Year 2019-20 is as
follows –
X Rs Mrs X Rs.
Salary from B Ltd. 5,20,000 Nil
Business Income 10,00,000 1,60,000
Bank interest (fixed deposit) 3,70,000 90,000
Total Income 18,90,000 2,50,000
Tax 3,90,890 Nil
X is employed by B Ltd. (salary being Rs 40,000 per month and one month‘s salary as bonus)
without any technical or professional or educational qualification. Mrs X holds 20% equity
share capital in B Ltd from March 20, 2020. Find out the net income of X and Mrs. X for the
Assessment Year 2020-21.

Solution :
In this case, Mrs X has substantial interest in B Ltd for some time during the Previous Year
2019-20. During P.Y. 2019-20, her husband X is employed by B Ltd. on Rs 40,000 per month
without any professional qualification. Rs 5,20,000 shall be included in income of Mrs X.
NOTE: It may be noted that this rule of clubbing is applicable even if it is beneficial to
taxpayer. Before clubbing, the tax liability of X and Mrs. X is Rs. 3,90,890. After applying the
aforesaid rule of the clubbing , the tax liability of X and Mrs X will be Rs 3,01,600 as shown
below –

X Rs Mrs X Rs.
Salary of X from B Ltd - 5,20,000
Business income 10,00,000 1,60,000
Bank interest 3,70,000 90,000
Gross total income 13,70,000 7,70,000
Less : Deduction Nil Nil
Net income 13,70,000 7,70,000
Tax 2,23,500 66,500
Add : education cess 8,940 2,660
Tax liability (total: Rs 3,01,600) 2,32,440 69,160

32
3) X and Mrs. X hold 20% and 30% of equity shares in C Ltd respectively .They are also
employed from April 1, 2019 in Bombay branch of C Ltd (monthly salary being Rs 80,000 and
Rs 40,000 respectively) without any technical / professional qualification. Other income of X
and Mrs X are Rs 1,60,000 and Rs 1,90,000 respectively . Find out the net income of X and
Mrs X for the Assessment Year 2020-21.

Solution: X and Mrs X have substantial interest in C Ltd. which employs them without any
technical / professional qualification. In this case, salary of husband and wife shall be included in
the income of Mrs X whose other income is higher as explained under:
X Mrs X
Salary of X ( Rs 80,000 *12) - 9,60,000
Salary of Mrs X ( Rs 40,000 *12) - 4,80,000
Other income 1,60,000 1,90,000
Net income 1,60,000 16,30,000

INCOME FROM ASSET TRANSFERRED TO SPOUSE [SECTION 64 (1) (iv)]

(i) Transfer of Asset other the House Property: Where there is transfer of an asset (other than
house property ), directly or indirectly, from one spouse to the other, otherwise than for
adequate consideration or in connection with an agreement to live apart, any income arising to
the transferee from the transferred asset, either directly or indirectly, shall be included in the
total income of the transferor.
(ii) In the case of transfer of house property, the provisions are contained in section 27. If an
individual transfers a house property to his spouse, without adequate consideration or otherwise
than in connection with an agreement to live apart, the transferor shall be deemed to be the
owner of the house property and its annual value will be taxed in his hands.
(iii) It may be noted that any income from the accretion of the transferred asset is not to be clubbed
with the income of the transferor.
(iv) The income arising on transferred assets alone have to be clubbed. However. Income earned
by investing such income (arising from transferred asset) cannot be clubbed.
(v) It is also to be noted that natural love and affection do not constitute adequate consideration.
Therefore, where an asset is transferred without adequate consideration, the income from such
asset will be clubbed in the hands of the transferor.
(vi) Where the assets transferred, directly or indirectly, by an individual to his spouse are invested
by the transferee in the business, proportionate income arising from such investment is to be
included in the total income of the transferor. If the investment is in the nature of contribution of
capital, proportionate interest on capital will be clubbed with the income of the transferor.
Such proportion has to be computed by taking into account the value of the aforesaid
investment as on the first day of the Previous Year to the total investment in the business by the
transferee as on that day.
In the following cases, clubbing provisions shall not be attracted on transfer of property to spouse:
 When such transfer is for adequate consideration
 The transfer is under an agreement to live apart
 When asset transferred is a house property.
 When assets are transferred before marriage.
 When property is acquired by wife from pin money.
 If on the date of accrual of income transferee is not spouse of transferor.

33
ILLUSTARTION:
 X transfers 100 debentures of IFCI to his wife without adequate consideration. Interest income
on these debentures will be included in the income of X.

 For instance, X transfers 1,000 debentures of IFCI without adequate consideration to his would
be wife Miss Y on April 10, 2019. Interest income from these debentures will not be taxable in the
hands of X even after their marriage.

 Mr. Vaibhav started a proprietary business on 01.04.2017 with a capital of ₹ 5,00,000. He

incurred a loss of ₹ 2,00,000 during the year 2017-18. To overcome the financial position, his
wife Mrs. Vaishaly, a software Engineer, gave a gift of ₹5,00,000 on 01.04.2019, which was
immediately invested in the business by Mr. Vaibhav . He earned a profit of ₹4,00,000 during
the year 2019-20. Compute the amount to be clubbed in the hands of Mrs. Vaishaly for the
Assessment Year 2020-21. If Mrs Vaishaly gave the said amount as loan, what would be the
amount to be clubbed?

Solution :
Section 64 (1)(iv) of the income-tax Act 1961 provides for the clubbing of income in the hands of
the individual , if the income earned is from the assets (other than house property) transferred
directly or indirectly to the spouse of the individual , otherwise than for adequate consideration or in
connection with an agreement to live apart .
In this case Mr Vaibhav received a gift of ₹ 5,00,000 on 1.4.2019 from his wife Mrs Vaishaly
which he invested in his business immediately . The income to be clubbed in the hands of Mrs
Vaishaly for the A.Y. 2020-21 is computed as under:
Particulars Mr Vaibhav‟s Capital contribution Total (₹)
capital out of gift from Mrs.
contribution (₹) Vaishaly (₹)
Capital as on 1.4.2019 3,00,000 5,00,000 8,00,000
(5,00,000-2,00,000)
Profit for P.Y 2019-20 to be appointed 1,50,000 2,50,000 4,00,000
on the basis of capital employed on the (4,00,000*3/8) (4,00,000*5/8)
first day of the Previous Year i.e., as on
1.4.2019 (3:5)
Therefore the income to be clubbed in the hands of Mrs Vaishaly for the A.Y 2020-21 is ₹ 2,50,000
In case Mrs Vaishaly gave the said amount of ₹5,00,000 as a bona fide loan, then, clubbing
provisions would not be attracted.

INCOME FROM ASSET TRANSFERRED TO SON‟S WIFE [SECTION 64(1) (vi)]:

In computing the total income of an individual, income arising (directly or indirectly) from assets
transferred to son‘s wife (after 31-5-1973) without adequate consideration, shall be clubbed in the
hands of that individual. Aforesaid relationship must subsist on the date of transfer of assets as well
as on the date of accrual of income.

ILLUSTRATION:
 X transfers a bank deposit of Rs.20,000 in favour of his daughter-in-law, without adequate
consideration. Income accrued to son‘s wife shall be clubbed in the hands of X.

34
INCOME OF MINOR CHILD [SECTION 64(1A)]:
Income of a minor child shall be clubbed with the income of the parent whose total income,
excluding this income, is higher.

EXCEPTIONS:
The above clubbing provision shall not apply in the following cases:
 The income arises or accrues due to any manual work done by the child
 The income arises or accrues due to his skills, talent, knowledge, experience
 The minor child is suffering from any disability of specified nature

EXEMPTIONS:
In case income of minor child is clubbed in the hands of parents as per provisions, the assessee can
claim exemption of an amount being minimum of the following:
 Rs. 1500
OR
 Income so clubbed
Such exemption shall be available for each child whose income is so clubbed, irrespective of the
number of children.

INCOME OF THE MINOR CHILD SHALL BE CLUBBED IN THE FOLLOWING

MANNER
Relation between parents Tax treatment
When marriage subsist With the income of the parent whose total income,
excluding this income, is higher
When marriage does not subsist With the income of the parent who maintains the minor
child during the Previous Year

EXAMPLE:
1. A and B are minor sons of X and Mrs. X. Business income of Mr. X is of ₹ 3,40,000. Income
from house property of Mrs. X is Rs 1,90,000. Income of A and B from stage acting is Rs
60,000 and Rs 70,000 respectively. Besides interest on company deposits of A and B (deposit
was made out of income from acting) is Rs 30,000 and Rs 1,000 respectively. A and B have
received the following birthday gifts – on May 20, 2019, gift received by B from his grandfather:
Rs 80,000; on September 14, 2019, gift received by A- Rs 60,000 from X‘s friend and
Rs.35,000 from a relative. Find out the income of X, A and B for the Assessment Year 2020-21.
Particulars X (₹) Mrs X A(₹) B(₹)
(₹)
Income from house property - 1,90,000 - -
Business income 3,40,000 - - -
Income from stage acting - - 60,000 70,000
Income from other sources:

35
 1. Gift received by B on May 20, 2019 from - - - -
grandfather (gift from a relative is not taxable )
2. Gift received by A on September 14, 2019 from 58,500
X‘s friend (to be clubbed in the hands of X after
giving exemption of Rs 1,500)
3. Gift received by A on September 14, 2019 from - - - -
relatives ( gift from relative is not taxable )
4. Interest from company deposit received by A (to 30,000
be clubbed in the hands of X )
5. Interest from company deposit received by B (to Nil
be clubbed in the hands of X after giving
exemption of Rs 1,500, amount to be clubbed is Rs
1,000- Rs 1,000 )
NET INCOME 4,28,500 1,90,000 60,000 70,000

2. Compute the gross total income of Mr & Mrs A from the following information:
Particulars (₹)
1. Salary income (computed ) of Mrs A 2,30,000
2. Income from profession of Mr A 3,90,000
3. Income of minor son B from company deposit 15,000
4. Income of minor daughter C from special talent 32,000
5. Interest from bank received by C on deposit made out of her special talent 3,000
6. Gift received by C from friend of Mrs. A 2,500
Solution:
As per the provisions of section 64(1A) of the income-tax Act, 1961 all the income of a minor
child has to be clubbed in the hands of that parent whose total income (excluding the income of
the minor) is greater. The income of Mr. A is ₹ 3.90.000 and income of Mrs. A is ₹ 2,30,000.
Since the income of Mr. A is greater than that of Mrs. A, the income of the minor children
have to be clubbed in the hands of Mr. A. It is assumed that this is the first year when clubbing
provisions are attracted.

Income derived by a minor child from any activity involving application of his/her skill, talent,
specialized knowledge and experience is not to be clubbed. Hence, the income at minor child C
from exercise of special talent will not be clubbed.

However interest from bank deposit has to be clubbed even when deposit is made out of
income arising from application of special talent.

The Gross Total Income of Mrs. A is ₹ 2,30,000. The total income of Mr. A giving effect to the
provisions of section 64(1A) is as follows:
Particulars ₹ ₹
Income from profession 3,90,000
Income of minor son B from company deposit 15,000
Less: exemption under section 10 (32) 1,500 13,500
Income of minor daughter C

36
 From special talent – not to be clubbed -
Interest from bank 3,000
Gift of ₹ 2,500 received from a non-relative in not taxable under
section 56(2)(x) being less than the aggregate limit of ₹50,000 Nil
Total 3,000
Less : exemption under section 10 (32) 1,500 1,500
Gross Total Income 4,05,000

Practical Exercise
1. Mr. Sharma has four minor children consisting 2 daughters and 2 sons. The annual income of 2
daughters were Rs 9,000 and Rs 4,500 and of sons were Rs 6,200 and Rs 4,300 respectively
The daughter who has income of Rs 4,500 was suffering from a disability specified under
section 80U .
Compute the amount of income earned by minor children to be clubbed in hands of Mr Sharma.

2. During the Previous Year 2019-20, the following transactions occurred in respect of Mr. A:
 Mr. A had a fixed deposit of ₹500,000 in Bank of India. He instructed the bank to credit the
interest on the deposit @ 9% from 1-4-2019 to 31-3-2020 to the savings bank account of
Mr. B, son of his brother, to help him in his education.
 Mr. A holds 75% share in a partnership firm Mrs. A received a commission of ₹25,000
from the firm for promoting the sales of the firm. Mrs. A possesses no technical or
professional qualification
 Mr A gifted ₹2,00,000 to his minor son who invested the same in a business and he derived
income of ₹20,000 from the investment.
 Mr. A‘s minor son derived an income of ₹20,000 through a business activity involving
application of his skill and talent.
 During the year, Mr A got a monthly pension of ₹10,000. He had no other income. Mrs. A
received salary of ₹20,000 per month from a part time job.
Discuss the tax implications of each transaction and compute the total income of Mr. A, Mrs. A
and their minor child.

3. Mr. A has gifted a house property valued at ₹50 lakhs to his wife, Mrs. B, who in turn has
gifted the same to Mrs. C, their daughter-in-law. The house was let out at ₹25,000 per month
throughout the year. Compute the total income of Mr. A and Mrs. C.
Will your answer be different if the said property was gifted to son, husband of Mrs. C?

4. Mr. B is the Karta of a HUF, whose members derive income as given below:
Particulars ₹
1. Income from B‘s Profession 45,000
2. Mrs B‘s Salary as fashion designer 76,000
3. Minor son D (interest on fixed deposits with a bank which were gifted to 10,000
him by his uncle)
4. Minor daughter P‘s earnings from sports 95,000
5. D‘s winnings from lottery (gross) 1,95,000
Discuss the tax implications in the hands of Mr. and Mrs. B

37
 Set Off and
Carry Forward
of Losses

38
INTRODUCTION

Income is computed under five different heads of income. One can easily find out the gross total
income if income, under each head from each source is positive. Problems, however, arises if there is a
loss from one or more sources under one or more heads of income.

Income-tax is a composite tax on the total income of a person earned during a period of one Previous
Year. There might be cases where an assessee has different sources of income under the same head
of income. Similarly, he may have income under different heads of income. It might also happen that
the net result from a particular source/head may be a loss. This loss can be set off against other
sources/head in a particular manner. For example, where a person carries on two businesses and one
business gives him a loss and the other a profit, then the income under the head ‗Profits and gains of
business or profession‘ will be the net income i.e. after an adjustment of the loss. Similarly, if there is
a loss under one head of income, ―it should normally be adjusted against the income from another
head of income while computing the Gross Total income.‖

MODE OF SET OFF AND CARRY FORWARD:

The process of set off of losses and their carry forward may be covered in the following steps:

• Inter-source adjustment under the same

Step 1 head of income
• Inter-head adjustment in the same
assessment year; is applied only if a loss
Step 2 cannot be set off under Step 1

• Carry forward of a loss; is applied only if loss

Step 3 cannot be set off under Step 1 and 2.

INTER-SOURCE ADJUSTMENT- HOW MADE [SECTION 70]

If the net result for any Assessment Year, in respect of any source under any head of income is a
loss, the assessee is entitled to have the amount of such loss set off against his income from any other
source under the same head of income for the same Assessment Year.

Example 1
X has two business- Business A and Business B. While Business A returns an income of Rs.3.5 lakh,
Business B results in a loss of Rs. 1 lakh. In this case, loss of Rs. 1 lakh from Business B can be set
off against income of Rs. 3.5 lakh from Business A. It may be noted that X does not have any option
to set off (or not to set off) the loss of Business B.

39
 EXCEPTIONS: The following are the exceptions to the aforesaid rule-
 Loss from speculation business- Loss in a speculation business can be set off only against the
profit in a speculation business.
 Long-term capital loss- Long term capital loss can be set off only against long term capital gain.
 Loss from the activity of owning and maintaining race horses- Loss incurred in the business of
owning and maintaining race horses cannot be set off against income, except income from the
same business.
 Loss cannot be set off against winning of lotteries, crosswords and puzzles, etc. - A loss
cannot be set off against winning of lotteries, crosswords and puzzles, races including horse race,
card games and other games of any sort or from gambling or betting of any form or nature.

POINTS TO CONSIDER:
 Loss from a non-speculative business can be set off against income from speculative or non-
speculative business.
 Loss from a House property can be set off against income from any other house property.
 Any other loss can be set off against any other income within the same head of income. Short
term capital loss can be set off against any capital gain (whether long term or short term).
 Under the head ―Income from other sources‖ loss from an activity (other than business of owing
and maintaining race horses) can be set off against any income but other than winning from
lotteries, crosswords and puzzles, etc.
 If income from a particular source is exempt from tax, loss from such source cannot be set off
against income chargeable to tax.
 If there is income from one source and loss from another source within the same head of
income, one has to set off the loss against the income.

ILLUSTRATION:
Compute gross total income of Mr. X in the following cases:
Source of Income Case I Case II
Income from house property (A) 30,000 40,000
Income from house property(B) (10,000) (25,000)
Speculation income 80,000 (70,000)
Business income (30,000) 50,000
Income from activity of owning and maintaining race horses business (A) (50,000) 10,000
Income from activity of owning and maintaining race horses business (B) 20,000 (6,000)
Income from agriculture business (25,000) 10,000
Short term capital gain (transaction A) 30,000 (20,000)
Short term capital gain (transaction B) (10,000) 5,000
Long term capital gain (transaction A) (30,000) 45,000
Long term capital gain (transaction B) 10,000 (2,000)
Income from lottery 40,000 -
Income from horse races 10,000 25,000
Income on card games (5,000) (3,000)
Income on securities 20,000 10,000

40
INTER-HEAD ADJUSTMENT [SECTION 71]:

The provisions of the section are:

When the net result of computation made for any Assessment Year in respect of any head income is
a loss, the same can be set off against other heads.

Example
X has two non-speculative business-Businesses A and Business B. Besides he has income from
house property. The result of the three sources of income is given below-
Particulars Business income Property income
Business A (2,90,000)
Business B 70,000
Income from house property 5,10,000
TOTAL (2,20,000) 5,10,000
In case, business loss of Rs. 2,20,000 can be adjusted against property income of Rs. 5,10,000.
Consequently, the property income is reduced to Rs. 2,90,000. It may be noted that X does not have
any option to set off (or not to set off) the business loss against property income.

EXCEPTIONS:
 Loss in a speculation business- Loss in a speculation business cannot be set off against any
other income.
 Loss under the head “Capital Gains”- Loss under the head ―Capital Gains‖ cannot be set off
against any income except under the head ―Capital Gains‖.
 Loss from the activity of owning and maintaining race horses- Loss incurred in the business of
owning and maintaining race horses cannot be set off against any other income.
 Business loss cannot be set off against salary income- Loss from business or profession
(including depreciation) cannot be set off against income under the head ―Salaries‖.
 Loss cannot be set off against winning of lotteries, crosswords and puzzles, etc. - A loss
cannot be set off against winning of lotteries, crosswords and puzzles, races including horse
race, card games and other games of any sort or from gambling or betting of any form or nature.
 House property loss in excess of Rs.2 lakhs cannot be set-off against income under other heads
of income.

POINTS TO CONSIDER:
 While adjusting losses, first inter source adjustments should be done and then inter head.
 Bearing the aforesaid cases, any loss can be set off against income under other heads of income
for the same year. For instance:
 Loss under the head ―Income from house property‖ can be set off against business income,
capital gains, salary income or income from other sources.
 Business loss can be set off against property income, capital gains or other income.
 A loss under the head ―Income from other sources‖ can be set off against salary income,
property income, business income or capital gains.
 No order of priority is given in the Act. One should try to first set off those losses which cannot be
carried forward to the next year.
 Barring the above cases, in all other cases, a loss has to be first adjusted against available
income under the heads of income. No option is available to set off a loss or not to set off a loss.

41
ILLUSTRATION:
1. Compute the total income of Mr. Jacky from the following data:
SOURCE OF INCOME AMOUNT
Income under the head ―Salaries‖ 70,000
Income from house property (A) 60,000
Income from house property (B) (70,000)
Speculation income 20,000
Business income (1,30,000)
Income from activity of owning and maintaining horses (1,50,000)
Income from agricultural business (1,25,000)
Short term capital gain 30,000
Long term capital gain (1,00,000)
Income from lottery 10,000
Income from horse races 1,70,000
Dividend income from non-domestic company 90,000
Interest on securities 20,000

2. Mr. A submits the following particulars pertaining to the A.Y. 2020-21:

Particulars Amount
Income from salary 4,00,000
Loss from self-occupied property (70,000)
Loss from let-out property (1,50,000)
Business loss (1,00,000)
Bank interest (FD) received 80,0000
Compute the total income of Mr. A for the A.Y.2020-21.

CARRY FORWARD OF LOSSES

If a loss cannot be set off either under the same head or under the different heads, because of the
absence or inadequacy of the income of the same year, it may be carried forward and set off against
the income of the subsequent year. Under the Act, the following losses can be carried forward:

 Loss under the head ―Income from House Property‖

 Loss under the head ―Profits and gains from business or professions‖
 Loss under the head ―Capital gains‖
 Loss from the activity of owning and maintaining race horses

“OTHER REMAINING LOSSES CANNOT BE CARRIED FORWARD”

CARRY FORWARD AND SET OFF OF BUSINESS LOSS OTHER THAN SPECULATION
LOSS [SECTION 72]:

 BUSINESS LOSSES CAN BE SET OFF ONLY AGAINST BUSINESS INCOME-

 Can be set off only against business income- A loss under the head, ―Profits and gains of
business and profession‖ can be set off only against profits of any business in the subsequent
year.
For instance, when shares are held by an assessee as a part of his trading assets, dividend on
such shares would form part of business income and consequently, he will be entitle to claim set

42
 off of business loss brought forward from earlier years against deemed dividend of the current
year.
 Not necessarily the same business- It is not necessary that business loss of year 1 should be set
off against income from the same business in year 2.

 LOSSES CAN BE CARRIED FORWARD BY THE PERSON WHO INCURRED THE

LOSS-
The loss can be carried forward and set off against the profits of assessee who incurred the loss.

 LOSS CAN BE CARRIED FORWARD FOR 8 YEARS

The loss cannot be carried forward for more than 8 Assessment Years.

 RETURN OF LOSS SHOULD BE SUBMITTED IN TIME [SECTION 80]

The following losses cannot be carried forward unless return of income (for the year in which
loss is incurred) is submitted within due date:
 Loss of a speculative or non-speculative business (not being absorbed depreciation)
 Short or long-term capital loss
 From the activity of owing and maintaining horse races

 CONTINUITY OF BUSINESS NOT NECESSARY

The business or profession in which the loss was originally occurred may or may not continue to
be carried on by the assessee during the year in which brought forward to be set off.

 CARRY FORWARD OF UNABSORBED DEPRECIATION

The above rules are not applicable in the case of carry forward of depreciation which is not
absorbed during the current year.
Unabsorbed depreciation shall be allowed to be carried forward for any number of years
and such carried forward unabsorbed depreciation may be set off against any income
other than Salary income and Winnings from lottery, crossword puzzles etc.
Order of set off:
1. Current years depreciation,
2. Brought forward business or profession loss
3. Unabsorbed depreciation

ILLUSTRATION:
 Mr. B ,a resident individual , furnishes the following particulars for the P.Y. 2019-20:
Particulars Amount
Income from salary (net ) 45,000
Income from house property (24,000)
Income from business-non-speculative (22,000)
Income from speculative business (4,000)
Short-term capital losses (25,000)
Long term capital gains 19,000
What is the total income chargeable to Tax for the A.Y. 2020-21?

43
CARRY FORWARD AND SET OFF OF SPECULATION LOSS [SECTION 73]:

WHAT IS SPECULATION BUSINESS?

If a contract for purchase or sale of any commodity or stock or shares is periodically (or ultimately)
settled, otherwise than by actual delivery, it is known as speculative transaction. A contract for
purchase or sale of any other article (not being shares or stock or commodities) can never be a
speculative transaction.

If a contract for purchase/sale of stock, share or commodity is ultimately settled otherwise than by
actual delivery or transfer of commodity, it would be a speculative transaction even if at the time of
entering into contract there was no intention of gamble. On the other hand, if the actual delivery of a
commodity takes place, transaction would be non-speculative even if it is highly speculative
otherwise.

Speculative business in the case of a company [explanation to sec 73] - This provision is applicable
if the following conditions are satisfied –
1. Taxpayer is a company.
2. It is not a company whose gross total income consists mainly of income which is chargeable
under the heads ―Interest in securities‖, ―Income from house property‖, ―capital gains‖ and
―income from other sources‖. Alternatively, it is a company whose principal business is other
than that of trading in shares or banking or the granting of loans and advances.
3. The business of the company consists of the purchase and sale of shares of other companies.

If the above conditions are satisfied, such company shall be deemed to be carrying on a speculation
business to the extent to which the business consists of purchase /sale of such shares. This rule is
applicable even if there is no avoidance of tax by the assesse.

SPECULATIVE LOSS CAN BE SET OFF ONLY AGAINST SPECULATIVE INCOME

[SECTION 73]:
Loss in a speculation business can be carried forward to the subsequent year and set off only against
the profit of the speculation business carried on in that year.

 CAN BE CARRIED FORWARD FOR 4 YEARS:

Such loss can be carried forward for 4 Assessment Years immediately succeeding the Assessment
Year for which the loss was first computed.

 CONTINUITY OF BUSINESS IS NOT NECESSARY:

It is not necessary that the speculation business in which the loss was incurred should continue to be
carried on in the subsequent year in which the assessee wants to set off the loss, but the assessee
should be the same.

 RETURN OF LOSS SHOULD BE SUBMITTED IN TIME:

The following losses cannot be carried forward unless return of income (for the year in which loss is
incurred) is submitted within due date:
 Loss of a speculative or non-speculative business (not being absorbed depreciation)
 Short or long-term capital loss
 From the activity of owing and maintaining horse races

44
 DIFFERENT RULES FOR UNABSORBED DEPRECIATION:

The above rules are not applicable in the case of carry forward of depreciation which is not
absorbed during the current year.

ILLUSTRATION
Compute total income of Mr. X under following cases:

Business A: Business of ice cream

Business B: Business consists of purchase and sale of other companies shares (being treated as
speculative business as per explanation of sec. 73)
Case 1 Case 2 Case 3 Case 4
Particulars A B A B A B A B
Income of P.Y. 2019-20 80,000 20,000 75,000 85,000 (56,000) 1,50,000 3,00,000 (50,000)
B/f loss of P.Y. 2017-18 70,000 65,000 85,000 50,000 90,000 65,000 30,000 90,000
Unabsorbed Depreciation - - - - - - - 20,000

CARRY FORWARD AND SET OFF OF CAPITAL LOSS:

If the net result of the computation under the head ―Capital gains‖ is a loss, the whole of the loss
shall be carried forward to the following Assessment Year as follows:

 Long term capital loss can be set off only against long term capital gain.
 Short term capital loss can be set off against short-term or long-term capital gain.
 Such loss can be carried forward for 8 years immediately succeeding the Assessment Year
in which the loss was first computed.
 Such loss cannot be carried forward unless return is filed within the time limit

ILLUSTRATION
 During the P.Y.2018-19, Mr. C has the following income and the brought forward losses:
Particulars Amount
Short term capital gains on sale of shares 1,50,000
Long term capital loss of A.Y 2018-19 (96,000)
Short term capital loss of A.Y 2020-21 (37,000)
Long term capital gain 75,000
What is the capital gain taxable in the hands of Mr. C for the A.Y. 2020-21?
 Compute the taxable income under the following cases for the A.Y. 2020-21:
Particulars Case 1 Case 2 Case 3 Case 4
STCG LTCG STCG LTCG STCG LTCG STCG LTCG
Income of 1,00,000 (30,000) (30,000) 1,00,000 1,00,000 (20,000) (30,000) 1,00,000
the P.Y.
2019-20
B/f loss of 50,000 - - 50,000 60,000 50,000 10,000 20,000
P.Y.
2018- 19

45
CARRY FORWARD AND SET OFF OF LOSS FROM ACTIVITY OF OWNING AND
MAINTAINING OF RACE HORSES [SECTION 74A]:

Loss from the activity of owning and maintaining of race horses can be carried forward to a
subsequent year and can be set off only against income from the business of owning and
maintaining of race horses.

The following points should be kept in mind:

 Such loss can be carried forward only if the activity owning and maintaining of race horses is
carried on by the assessee in the Previous Year in which the brought forward loss is sought to be
set off.
 Loss can be carried forward for 4 Assessment Years immediately succeeding the Assessment
Year in which the loss was first computed.
 Such loss cannot be carried forward unless return is filed within the time limit For this purpose,
loss shall be calculated as follows:
Amount of stake money XXXX
Less: revenue expenditure incurred by the tax payer wholly and exclusively for the XXXX
purpose of maintaining of such horses
Balance (if it is negative, it is taken as loss from the activity of owning and XXXX
maintaining race horses)
The aforesaid provisions of section 74A are applicable only in the case of loss from the activity of
owning and maintaining racing horses.
ILLUSTRATION:
 Compute the taxable income of Mr. X under the following cases:
 Business A: Business of manufacturing leather bags
 Business B: Activity of owning and maintaining race horses
 Business C: Speculation business
Particulars Case 1 Case 2 Case 3
A B C A B C A B C
Profit for the 50,000 30,000 (9,000) 30,000 (8,000) 60,000 (9,000) 80,000 (6,000)
P.Y. 2019- 20
Brought 30,000 25,000 - 20,000 10,000 30,000 20,000 20,000 20,000
forward loss
of P.Y.
2018-19
Unabsorbed - - - - - - 10,000 4,000 6,000
depreciation

 Mr. D has the following income for the P.Y. 2019-20 –

Particulars Amount
Income from the activity of owning and maintaining the race horses 75,000
Income from textile business 85,000
Brought forward textile business loss 50,000
Brought forward loss from the activity of owning and maintaining the race horses 96,000
(relating to A.Y 2017-18)
What is the total income in the hands of Mr. D for the A.Y 2020-21?

46
 CARRY FORWARD & SET OFF OF LOSS FROM HOUSE PROPERTY [SECTION 71 B]:

If the assessee incurs any loss under head ―Income from house property‖ and such loss is not fully
adjusted under other heads of income in the previous Assessment Year, then (from Assessment Year
1999-2000) the balance loss shall be allowed to be carried forward and set off in the subsequent
year subject to a limit of 8 Assessment Years against income from house property.
ILLUSTRATION:

 Compute the Gross total income of Mrs. Shikha from the following details for the A.Y. 2020-21
1. Income from house property A 60,000
2. Income from house property B (1,50,000)
3. Income from house property C 1,00,000
4. Income from other sources 1,00,000
5. House Property losses for the A.Y. 2020-21 (30,000)
6. House Property Losses u/s 22 for the A.Y. 1919-20 (15,000)
7. Losses from other sources for the A.Y. 2020-21 (45,000)

 Mr. E has furnished his details for the A.Y. 2020-21 as under :
Particulars Amount
Income from salaries 1,50,000
Income from speculation business 60,000
Loss from non-speculation business (40,000)
Short term capital gain 80,000
Long term capital loss of A.Y. 2016-17 (30,000)
Winning from lotteries 20,000
What is the taxable income of Mr. E for the A.Y. 2020-21?

Practical Exercise:
1. Mr. Sohan submits the following details of his income for the Assessment Year 2020-21:
Particulars Amount
Income from salary 3,00,000
Loss from let out house property (40,000)
Income from sugar business 50,000
Loss from iron ore business b/f (discontinued in P.Y. 2014-15) (1,20,000)
Short term capital loss (60,000)
Long term capital gains 40,000
Dividend from domestic company 5,000
Income received from lottery winning (gross) 50,000
Winnings from card games 6,000
Agricultural income in India 20,000
Long term capital gains from shares (STT paid at the time of both acquisition and 10,000
sale of shares )
Short term capital loss under section 111A (10,000)
Bank interest 5,000
Compute gross total income and losses to be carried forward.

47
2. Mr. Batra furnishes the following details for the year ended 31.03.2020:
Particulars Amount
Short term capital gain 1,40,000
Loss from speculative business 60,000
Long term capital gain on sale of land 30,000
Long term capital loss on sale of shares (securities transaction tax not paid ) 1,00,000
Income from business of textile 50,000
Income from activity of owning and maintaining race horses 15,000
Income from salary 1,00,000
Loss from house property 40,000
Following are the brought forward losses:
(a) Losses from activity of owning and maintaining race horses-pertaining to A.Y.2016-17
Rs.25,000 .
(b) Brought forward loss from business of textile ₹60,000-loss pertains to A.Y.2011-12.
Compute gross total income of Mr. Batra for the Assessment Year 2020-21. Also state the eligible
carry forward losses for the Assessment Year 2020-21.

3. Mr. Aditya furnishes the following details for the year ended 31-03-2020:
Particulars Amount
Loss from speculative business A 25,000
Income from speculative business B 5,000
Income from salary 3,00,000
Loss from house property 2,50,000
Income from trading business 45,000
Long-term capital gain from sale of urban land 2,00,000
Long-term capital loss on sale of shares (STT not paid ) 75,000
Long-term capital loss on sale of listed shares in recognized stock exchange 82,000
(STT paid at the time of acquisition and sale of shares )
Following are the brought forward losses:
(a) Losses from owning and maintaining of race horses pertaining to A.Y. 2018-19 ₹2,000.
(b) Brought forward loss from trading business ₹5,000 relating to A.Y. 2014-15.
Compute the total income of Mr. Aditya and show the items eligible for carry forward.

48
Deductions
from Gross
Total
Income

49
INTRODUCTION
The aggregate income computed under each head, after giving effect to the provision for clubbing of
income and set off of losses, is known as ―Gross Total Income‖. In computing the total income of an
assessee, certain deductions are permissible under section 80C to 80U from Gross Total Income.
These deductions are however not allowed from the following incomes although these incomes are
part of Gross Total Income:
1. Long term capital gains
2. Short term capital gain on transfer of equity shares and units of equity oriented fund through a
recognized stock exchange i,e short term capital gain covered under section 111A.
3. Winnings of lotteries, races, etc.

These deductions are of two types –

(a) Deductions on account of certain payments and investments covered under section 80C to
80GGC.
(b) Deductions on account of certain incomes which are already included under Gross Total Income
covered under section 80-IA to 80 U.

The income arrived at, after claiming the above deductions from Gross Total Income, is known as
Total Income. It may also be called Taxable Income. The total income, thus calculated, should be
rounded off to the nearest Rs. 10.

Deduction cannot exceed Gross Total Income – The aggregate amount of deduction under sections
80C to 80U. i.e., under chapter VI-A shall not, in any case, exceed the ―Gross Total Income‖
(exclusive of long term capital gains , short term capital gains covered under section 111A , winnings
from lotteries , crosswords, puzzles etc.) of the assesse. Therefore, the total income after deductions
will either be positive or nil. It cannot be negative due to deductions. If the ―Gross Total Income‖ is
negative or nil, no deduction can be permitted under this chapter.

DEDUCTION IN RESPECT OF PENSION FUND-WHEN AVAILABLE [SEC 80 CCC]

 Who can claim deduction under section 80CCC- An individual.
 What is the qualifying payment to avail deduction – Amount should be paid or deposited under
an annuity plan of the LIC of India or any other insurer for receiving pension. Amount should be
paid or deposited out of income chargeable to tax.
 How much deduction available under section 80CCC- The maximum amount deductible under
section 80 CCC is Rs.1, 50,000.
 Is there any combined maximum ceiling – The aggregate amount of deduction under sections
80C, 80CCC and 80CCD (1) [i.e., contribution by an employee (or any other individual) towards
National Pension Scheme (NPS)] cannot exceed Rs.1,50,000. However, employer‘s contribution
towards NPS(to the extent of 10 percent of employee‘s salary) shall not be considered for the
ceiling of Rs. 1,50,000
 What is the tax treatment of pension – If deduction is claimed under section 80CCC and later on
Pension is received by the assesse (or his nominee), such pension will be taxable in the hands of
recipients in the year of receipt. Likewise, Where (after claiming ,deduction under section
80CCC) the assesse or his nominee surrenders the annuity before maturity date of such annuity,
the surrender value shall be taxable in the hands of the assesse or his nominee, as the case may
be, in the year of the receipt.

50
ILLUSTRATIONS:

The gross total income of Mr. X for the A.Y. 2020-21 is ₹ 6,00,000. He has made the following
investments/payments during the F.Y. 2019-20:
Particulars ₹
Contribution to PPF 1,10,000
Payment of tuition fees to Apeejay School, New Delhi, for education of his son 45,000
studying in class XI
Repayment of housing loan taken from Standard Chartered Bank 25,000
Contribution to approved pension fund of LIC 1,05,000
Compute the eligible deduction under Chapter VI-A for the A.Y.2020-21.

DEDCUTION IN RESPECT OF MEDICAL INSURANCE PREMIA-WHEN AND TO WHAT

EXTENT AVAILABLE [SEC 80D]

Deduction under section 80 D is available if the following conditions are satisfied –

1. The taxpayer is an individual (maybe resident/non-resident or Indian citizen/foreign citizen) or a
Hindu Undivided family (maybe resident or non-resident).
2. Payment should be made out of income chargeable to tax.
3. Payment should be made by any mode other than cash. However, payment on account of
preventive health check-up can be made by any mode (including cash).

Maximum deductible amount – The maximum deductible amount and other relevant points are
given below-
Deduction in the case Deduction in the
of an Individual case of HUF
For whose benefit payment can be made Family Parents Any member of
HUF
A. a. Medi-claim insurance premium Eligible Eligible Eligible
b. Contribution to CGHS/notified scheme Eligible - -
c. Preventive health check-up payment Eligible Eligible -
Maximum deduction-
 General deduction [applicable in respect of Rs.25,000 Rs.25,000 Rs.25,000
(a), (b) and (c).]
 Additional deduction [applicable only in Rs.25,000 Rs.25,000 Rs.25,000
case of (a) when medi-claim policy is taken
on the life of a senior citizen]
B. Medical expenditure on the health of a person Eligible Eligible Eligible
who is a senior citizen if medi- claim insurance
is not paid on the health of such person
Maximum deduction in respect of (B) Rs.50,000 Rs.50,000 Rs.50,000
C. Maximum deduction in respect of (A) and (B) Rs.50,000 Rs.50,000 Rs.50,000

51
Notes-
1. Family includes individual, spouse of the individual and dependent children of the individual.
2. Parents include father and mother (dependent or otherwise). Father-in-law and mother-in- law are
not included in this.
3. The aggregate payment on account of preventive health check-up for self, spouse, dependent
children, father and mother cannot exceed Rs. 5,000. (included in the above limit of Rs. 50,000)
4. ―Senior citizen‖ is a resident individual who is at least 60 years of age at any time during the
Previous Year.
5. ―Super senior citizen‖ is a resident individual who is at least 80 years of age at any time during
the Previous Year.

ILLUSRATION:

1. Mr. A, aged 40 years, paid medical insurance premium of Rs. 20,000 during the P.Y. 2019-20 to
insure his health as well as the health of his spouse. He also paid medical Insurance premium of
Rs. 27,000 during the year to insure the health of his father, aged 63 years, who is not dependent
on him. He contributed Rs 3,600 to Central Government Health Scheme during the year. He has
incurred Rs 3,000 in cash on preventive health check-up of himself and his spouse and Rs 4,000
by cheque on preventive health check-up of his father. Compute the deduction allowable under
section 80D for the A. Y. 2020-21.

2. For the Previous Year 2019-20, the business income of X (age: 29 years) is Rs.11,47,000. During
the year, he pays the following by cheque to get tax benefit –
Insured person Mediclaim Insurance
Premium
Taxpayer, spouse and children –
X 22,000
Mrs. X (not dependent upon X) 4,500
Son (not dependent upon X) 800
Daughter (not dependent upon X) 2,500
Parents of the Tax payer –
Father (age:62 years, resident in India, not dependent upon X) 11,000
Mother (age:59 years, dependent upon X ) 36,000
Others –
Grandparents ( dependent upon X ) 500
Father of Mrs. X ( dependent upon X ) 800
Brother ( dependent upon X ) 900
Besides, X pays Rs. 1,16,000 towards pension fund of LIC.
Find out the net income and tax liability of X for the Assessment Year 2020-21.

52
DEDUCTION IN RESPECT OF MAINTENANCE INCLUDING MEDICAL
TREATMENT OF A DEPENDENT BEING A PERSON WITH DISABILITY [SEC.80DD]

 Who can claim deduction – A resident individual or a resident HUF

 Who is the qualifying expenditure – A resident individual/HUF can claim deduction under
section 80DD,if he /it has incurred an expenditure for the medical treatment (including
nursing),training and rehabilitation of a dependent relative (being a person with a disability ).
 Who is dependent relative suffering from disability - In case of an individual ,‖dependent‖
means spouse ,children ,parents, brothers and sisters , who is wholly and mainly dependent upon
the individual. In the case of Hindu Undivided Family, ―dependent‖ means any member (of the
family ) who is wholly and mainly dependent upon the family .‖Person with disability ―means a
person who suffers 40 % or more of any of the following blindness, low vision, leprosy-cured,
hearing impairment, loco motor disability, mental retardation and mental illness.
 How much is deductible under section 80DD-A fixed deduction of Rs.75,000 is available. A
higher deduction of Rs.1,25,000 is available if such dependent relative is suffering from severe
disability (i.e., having disability of 80% or above). Deduction under this section is available
regardless of actual expenditure.

Illustration:
X (age : 36 years), a resident individual, has income of Rs. 7,30,000 (i.e., Rs. 4,45,000 from a
business in Delhi and Rs. 2,85,000 from a property in Bombay) during the Previous Year 2019-20.
Find out his net income and tax liability for the Assessment Year 2020-21 taking into consideration
the following payments-
1. Life insurance premium on own life (policy since 2011) paid by X in cash on March 33,334
31, 2020 (sum assured Rs. 2,00,000)
2. Contribution towards pension fund of LIC 11,000
3. Mediclaim insurance premium on the life of dependent father (age : 64 years paid by 29,000
cheque on April 20, 2019
4. Mediclaim insurance premium on the life of dependent handicapped brother paid by 7,000
cheque on April 26, 2019
5. Medical treatment of dependent brother (being a person with disability ) 50,000

DEDUCTION IN RESPECT OF MEDICAL TREATMENT, ETC. -TO WHAT EXTENT

AVAILABLE [SEC.80DDB]
 Who can claim deduction – A resident individual or a resident HUF
 What is the qualifying expenditure – A resident individual/HUF can claim a deduction under
section 80DDB, if he/it has actually incurred expenditure for a medical treatment of specified
disease or ailment as prescribed by the board (Rule 11DD). Expenditure should be incurred for a
medical treatment of the assessee himself or wholly/mainly dependent husband /wife, children,
parents, brothers and sisters of the individual (any member of the family in the case of HUF)
 How much is deductible under section 80DDB- Actual expenditure on medical treatment or Rs.
40,000 (Rs. 1,00,000 in case of a senior citizen), whichever is lower, is deductible. Deduction
under this section shall be reduced by the amount received, if any, under insurance from an
insurer, or reimbursed by an employer, for the medical treatment of the person referred to above.

53
Illustration: X (35 years ) is a resident individual. During the Previous Year 2019-20, he incurs the
following expenditure –
Actual Amount reimbursed Amount
expenditure by insurance company reimbursed by
employer of X
Medical treatment (specified disease) of 30,000 Nil 28,000
X in a Government hospital
Medical treatment (specified disease) of 14,000 3,000 6,000
Mrs. X in a hospital recognized by
Chief Commissioner
Salary of X is Rs. 4,00,000. In the two cases disease is specified in the rules made by the Board.
Find out the net income of X for the Assessment Year 2020-21.

DEDUCTION IN RESEPECT OF PAYMENT OF INTEREST ON LOAN TAKEN FOR

HIGHER EDUCATION -WHEN AND TO WHAT EXTENT AVAILABLE [SEC.80E]

 Who can claim deduction – Only individual.

 What is the qualifying expenditure – If loan is taken by an individual for any study in India or
outside India (i.e., any study after passing senior secondary examination or its equivalent) from a
bank, financial institution or an approved charitable institution, interest is deductible in the year
in which interest is paid.
 For whose education loan should be taken – Interest is deductible if loan is taken for pursuing
assessee‘s own education or for the education of his relatives (i.e., Spouse, children or any
student for whom the individual is the legal guardian).
 Maximum monetary ceiling - Entire interest is deductible in the year in which the assessee starts
paying interest on loan and subsequent 7 years or until interest is paid in full. However, interest
should be paid out of income chargeable to tax.
Illustration:
X has taken three education loans on March 1, 2019. The details of which are given below –
Loan 1 Loan 2 Loan 3
For whose education loan was taken X X Daughter of X
Purpose of loan Full time MBA Part time MCA Full time MBA
Amount of loan 6,00,000 3,00,000 5,00,000
Annual repayment of loan during the
Previous Year 2019-20 1,00,000 50,000 1,00,000
Annual payment of interest during the
Previous Year 2019-20 60,000 40,000 55,000
Find out the amount deductible under section 80E for the Assessment Year 2020-21.

DEDUCTION IN RESPECT OF INTEREST PAYABLE ON LOAN TAKEN FOR

ACQUISITION OF RESIDENTIAL HOUSE PROPERTY [SECTION 80EEA]
 Eligible assessee: An individual who has taken a loan for acquisition of residential house
property from any financial institution. Interest payable on such loan would qualify for
deduction under this section.
 Conditions: The conditions to be satisfied for availing this deduction are as follows –

54
 The individual should not own any
residential house on the date of
sanction of loan

The individual should

not be eligible to Stamp Duty
claim deduction u/s Conditions Value of house
80EE ≤ Rs. 45 lakhs

Loan should be sanctioned by a

Financial Institution during the
P.Y.2019-20

 Period of benefit: The benefit of deduction under this section would be available from
A.Y.2020-21 and subsequent Assessment Years till the repayment of loan continues.
 Quantum of deduction: The maximum deduction allowable is Rs. 1,50,000. The deduction of
upto Rs. 1,50,000 under section 80EEA is over and above the deduction available under section
24(b) in respect of interest payable on loan borrowed for acquisition of a residential house
property.
 Accordingly, if interest payable in respect of acquisition of eligible house property is more than
Rs. 2,00,000, the excess can be claimed as deduction under section 80EEA, subject to fulfilment
of conditions.

DEDUCTION IN RESPECT OF INTEREST PAYABLE ON LOAN TAKEN FOR

PURCHASE OF ELECTRIC VEHICLE [SECTION 80EEB]
 Eligible Assessee: An individual who has taken a loan for purchase of an electric vehicle from
any financial institution. Interest payable on such loan would qualify for deduction under this
section.
 Period of benefit: The benefit of deduction under this section would be available from
A.Y.2020-21 and subsequent Assessment Years till the repayment of loan continues.
 Quantum of deduction: Interest payable, subject to a maximum of Rs. 1,50,000.
 Conditions: The conditions to be satisfied for availing this deduction are as follows –

The assessee should

be an individual.

Loan should be Loan should be

sanctioned by a FI taken for
(bank or specified Conditions
purchase of an
NBFCs) electric vehicle

Loan should be
sanctioned during the
period between 1.4.2019
and 31.3.2023

55
DEDUCTION IN RESPECT OF INTEREST ON DEPOSITS AND SAVINGS ACCOUNTS-
WHEN AVAILABLE [SEC 80TTA]

Section 80TTA provides a deduction up to Rs. 10,000 in aggregate to an assessee (being an

individual or HUF) in respect of any income by way of interest on deposits (not being time deposits)
in a saving account with –

a. a banking company
b. a co-operative society engaged in carrying of the business of banking .
c. a post office .

 From the A.Y. 2019-20, the above deduction is not available in the case of a senior citizen who
is eligible to claim deduction under section 80TTB

DEDUCTION IN RESPECT OF INTEREST ON DEPOSITS IN CASE OF SENIOR

CITIZENS [SECTION 80TTB]
Eligible assessee: A senior citizen (a resident individual who is of the age of 60 years or more at
any time during the relevant Previous Year), whose gross total income includes income by way of
interest on deposits with –

a. a banking company
b. a co-operative society engaged in carrying of the business of banking .
c. a post office .
Quantum of deduction: Actual amount of interest on deposits or Rs. 50,000, whichever is lower.

DEDUCTION IN RESPECT OF DONATIONS TO CERTAIN FUNDS, CHARITABLE

INSTITUTION, ETC.- HOW ARRIVED AT [SEC.80G]

Deduction under this section is available to any taxpayer.

Gross qualifying amount – Gross qualifying amount is the aggregate of the donations made to any
of the institution /fund.

Donation can be given in cash or by cheque or draft. However, no deduction shall be allowed
under Section 80G in respect of donation in cash of an amount exceeding Rs. 2,000. Donation in
kind is not included.

Illustration
X (34 years), a resident individual, submits the following particulars of his income for the Previous
Year 2019-20
Business income 83,000
Interest on debentures 49,000
Long term capital gains on transfer of gold 4,10,000
Short term capital gain on sale of shares taxable under section 111A 20,000
Other short term capital gain 10,000
Contribution towards public provident fund 40,000

56
 Payment of medical insurance premium on own life 3,000
Donation by cheque to Clean Ganga Fund (N.A. -100%) 4,000
Donation by cheque to Swachh Bharat Kosh (N.A. -100%) 3,000
Donation by cheque to Rajiv Gandhi Foundation (N.A. -50%) 1,000
Donation by cheque to Prime Minister‘s Draught Relief Fund (N.A. -50%) 5,000
Donation by cheque to poor boy for higher education 5,000
Donation of clothes to an approved institution 12,000
Donation by cheque to a charitable institution for construction of a rest house 8,000
only for a particular religious community
Donation by cash to National children fund 40,000
Determine the net income of X for the Assessment Year 2020-21

ILLUSTRATION:
Mr. Gurnam, aged 42 years, has salary income (computed) of Rs. 5,50,000 for the Previous Year
ended 31.03.2020. He has earned interest of Rs. 14,500 on the saving bank account with State Bank
of India during the year.
Compute the total income of Mr. Gurnam for the Assessment Year 2020-21 from the following
particulars:
1. Life insurance premium paid to Birla Sunlife Insurance in cash amounting to Rs. 25,000 for
insurance of life of his dependent parents. The insurance policy was taken on 15.07.2014 and the
sum assured on life of his dependent parents is Rs. 1,25,000.
2. Life insurance premium of Rs. 25,000 paid for the insurance of life of his major son who is not
dependent on him. The sum assured on life of his son is Rs. 1,75,000 and the life insurance
policy was taken on 30.3.2012.
3. Life insurance premium paid by cheque of Rs. 22,500 for insurance of his life. The insurance
policy was taken on 08.09.2014 and the sum assured is Rs. 2,00,000.
4. Premium of Rs. 22,000 paid by cheque for health insurance of self and his wife.
5. Rs. 1,500 paid in cash for his health check-up and Rs. 3,500 paid in cheque for health check- up
for his parents, who are senior citizens.
6. Paid interest of Rs. 6,500 on loan taken from bank for MBA course pursued by his daughter.
7. A sum of Rs. 15,000 donated in cash to an institution approved for purpose of section 80G for
promoting family planning.

57
Advance
Tax

58
Under the scheme of advance payment of tax (pay as you earn) an assessee is required to pay tax
in a particular financial year, preceding the Assessment Year, on the basis of his estimated
income. This would mean that though the income earned during the Previous Year 2019-20 is
taxable in the Assessment Year 2020-21, tax on such income is payable during the financial year
2018-19 under the scheme of advance payment of tax.

WHEN A PERSON BECOMES LIABLE TO PAY ADVANCE TAX

1. Every person is liable to pay advance tax if advance tax payable is Rs. 10,000 or more. All items
of income are liable for payment of advance tax.
2. A senior citizen not having any income from business/profession is not liable to pay advance tax.

Provision illustrated:
The following illustration is given to have a better understanding:
X (26 years) is employed by a manufacturing company. For the Previous Year 2019-20, his
estimated income is as follows-
Rs. Rs.
Estimated gross salary 12,90,000
Less: X‘s contribution towards recognized provident fund (1,28,800)
Tax deduction at source by employer (1,55,385)
Take home pay 10,05,815
Estimated bank interest: 1,00,000
(FD interest : Rs. 78,000 + savings bank interest :Rs. 22,000)
Less : Tax deduction at source by the bank (7,800)
Net interest likely to be received by X from bank 92,200
PPF Contribution 1,00,000
If advance tax payable is Rs. 10,000 or more, then X is liable to pay advance tax during the financial
year 2019-20. For this purpose, the calculation shall be made as follows-
Rs. Rs.
Gross salary 12,90,000
Less : standard deduction -
Income from salary 12,90,000
Bank interest (Rs. 92,200+ Rs. 7,800) 1,00,000
Gross Total Income 13,90,000
Less: Deduction under section 80 C 1,50,000
Less: Deduction under section 80TTA 10,000
Net Income 12,30,000
Tax on net income 1,81,500
Add : Health and Education cess (4% of Rs. 1,81,500) 7,260
Tax liability 1,88,760
Less: tax deduction at source
By employer (1,55,385)
By bank (7,800) 1,63,185
Advance tax payable during the financial year 2019-20 25,575
In this case , tax computed under (a)(supra) is Rs. 10,000 or more. Therefore, X will have to pay
advance tax during the financial year 2019-20 (the detailed provisions are given below). It may be
noted that if tax computed under (a) above is less than Rs.10,000, then no advance tax is payable.

59
WHEN ADVANCE TAX PAYMENT BECOMES DUE:
Advance tax due dates applicable from the Assessment Year 2020-21 are given below –
Due date of payment of advance tax For any assessee
On or before June 15 of the Previous Year Up to 15 % of advance tax payable
On or before September 15 of the Previous Year Up to 45 % of advance tax payable
On or before December 15 of the Previous Year Up to 75 % of advance tax payable
On or before March 15 of the Previous Year Up to 100 % of advance tax payable

One should also keep in view the following points-

 Where advance tax is payable by virtue of the notice of demand issued by the Assessing officer,
the whole or the appropriate part of to advance tax shall be payable in the remaining
instalments.
 Any payment of advance tax made on or before March 31 shall be treated as advance tax paid
during the financial year.
 If the last day for payment of any installment of advance tax is a day on which the receiving
bank is closed, the assesse can make the payment on the next immediately following working
day , and in such case , the mandatory interest leviable under sections 234B and 234C would
not be charged .

HOW ADVANCE TAX IS COMPUTED

Payment of the advance tax by the assesse on his own account - An assessee who is liable to pay
advance tax is required to estimate his current income and pay advance tax thereon without having to
submit any estimate or statement of income to the assessing authorities .

Revisions of second and subsequent instalments - After making payment of first or second instalment
of advance tax, an assessee can revise the remaining instalments of advance tax in accordance with
his revised estimate of current income and pay tax accordingly without any requirement of filing the
revised estimate of advance tax.

Computation of tax

Tax can be computed on the current income (estimated by the taxpayer) at the rates in force during the
financial year. From the tax so computes, tax deducted at source will be deducted. Calculation can be
made on similar lines in the case of upward/downward revision of current income.

60
Problems:
1. The following are the particulars submitted by different taxpayers for the A.Y. 2020-21:
Mrs. X (an Y Z
individual ) (A HUF) (A firm)
(30 years ) Rs. Rs.
Rs.
Salaries 1,10,000 - -
Income from house property 62,000 7,97,000 6,000
Profit and gain from business and 10,00,000 (3,000) 5,98,840
profession
Capital gains (short term ) 6,000 - 18,380
Income from other sources 13,000 38,000 23,000
Gross total income 11,91,000 8,32,000 6,46,220
Less : Deductions under sections 80C to 80U
Under section 80C 50,000 61,000 -
Under section 80D 20,000 14,500 -
Under section 80G - 13,000 1,02,000
Net income 11,21,000 7,43,500 5,44,220
Tax 1,48,800 61,200 1,63,266
Add : Surcharge Nil Nil Nil
Tax and surcharge 1,48,800 61,200 1,63,266
Add: Education cess (2% of tax and surcharge ) 2,976 1,224 3,265
Add: Secondary and higher education cess 1,488 612 1,633
(1% of tax and surcharge )
TOTAL 1,53,264 63,036 1,68,164
LESS: Tax deducted or collected at source 1,43,265 19,026 61,886
BALANCE (A) 9,999 44,010 1,06,278
Determine the amount of advance tax payable during the financial year 2019-20.
2. From the following particulars submitted by X (25 years), ascertain the advance tax payable
during the financial year 2019-20-
Income Tax deduction
by payer
Rs. Rs.
Salary 1,60,000 6,000
Rent @ Rs. 20,000 per month 2,40,000 24,000
Long term capital gain on sale of shares on June 1,2018 1,25,000 -
Winning from a TV game show 10,000 3,000
Winning from lottery 5,00,000 1,50,000
Winning from races 50,000 15,000
Bank interest (fixed deposit ) 80,000 8,000
Dividend from foreign companies 70,000 -
X has contributed Rs. 13,600 towards recognized provident fund. All winnings are received prior to
June 15, 2019.

61
PAYMENT OF ADVANCE TAX IN PURSUANCE OF ORDER OF ASSESSING OFFICER –

The assessing officer may pass an order under section 210(3) requiring an assessee to pay advance
tax on his current year‘s income. The order must specify the different instalments in which the advance
tax should be paid. Such order must be passed during the Previous Year but not later than last day of
February. Such order must be passed during the Previous Year but not later than last day of
February. Such order passed by the Assessing officer can be revised by him.

On receipt of such order, the assesee has the following options –

 Payment of advance tax- The assesee may pay advance tax as demanded by the Assessing
Officer.
 Lower estimate by the assessee- On receipt of the notice from the Assessing Officer to pay
advance tax, the assessee can submit his own estimate on lower current income /advance tax
and pay tax accordingly. In such a case he has to send an intimation in Form No. 28A to the
Assessing officer.
 Higher estimate by the assessee – Alternatively, if the advance tax on current income, as per
own estimate of the assessee, is likely to be higher than the amount estimated by the Assessing
Officer, the assessee shall pay higher tax in accordance with his own calculation. In such case,
no intimation to the Assessing Officer is required.

62
Computation
of Total
Income

63
Computation of Total Income and Tax liability of Individuals: Income-tax is
levied on an assessee's total income. Total income has to be computed as per the provisions
contained in the Income-tax Act, 1961. The following steps have to be followed for computing the
total income of an assessee:

Step 1 Determination of residential status

1. Resident
1.1 Resident and ordinarily resident
1.2 Resident but not ordinarily resident
2. Non-resident

Step 2 Classification of income under different heads

1. Salaries,
2. Income from house property,
3. Profits and gains of business or profession
4. Capital Gains
5. Income from other sources

Step 3 Computation of income under each head

Income under each head exemptions deductions

Step 4 Clubbing of income of spouse, minor child etc. Step 5 Set-off or carry forward and set-
off of losses

1. Inter-source set-off of losses

2. Inter-head set-off of losses
3. Carry forward for set-off of losses

Step 6 Computation of Gross Total Income

Gross Total Income = Add income computed under each head Apply clubbing
provisions Apply the provisions for set-off and carry forward of losses.

Step 7 Deductions from Gross Total Income

1. Deductions in respect of expenditure

2. Deductions in respect of income
3. Deduction in respect of other income
4. Other deduction
Step 8 Computation of Total income

1. Gross Total Income Deduction under chapter VI-A

2. Rounded off to the nearest multiple of ₹ 10

64
Step 9 Application of rates of tax on total income in case of an individual

Total income (in ₹ ) Rate of Tax

Up to 2,50,000 (below 60 years) Nil
Up to ₹ 3,00,000 (60 years or above but less than 80 years and resident in India) Nil
Up to ₹ 500,000 (above 80 years and resident in India) Nil
₹ 2,50,001/ 3,00,001, as the case may be, to ₹ 500,000 5%
₹5,00,000 to ₹10,00,000 20%
Above ₹10,00,000 30%

Special Rates of Tax on specified incomes

Total income (in ₹ ) Rate of Tax
Winnings from Lotteries, crossword puzzles, etc 30%
Short term capital gain on the equity shares of the company chargeable to 15%
Securities Transaction Tax
Long Term Capital Gains 20%

Step 10 Surcharge and Rebate

Rebate under section 87A: In order to provide tax relief to the individual tax payers who are in the
5% tax slab, section 87A provides a rebate from the tax payable by an assessee, being an individual
resident in India, whose total income does not exceed Rs. 5,00,000. The rebate shall be equal to the
amount of income-tax payable on the total income for any assessment year or an amount of Rs.
12,500, whichever is less.
However, rebate under section 87A is not available in respect of tax payable @10% on long-
term capital gains taxable under section 112A.

Surcharge: Surcharge is an additional tax payable over and above the income-tax. Surcharge is
levied as a percentage of income-tax. In case where the total income of an
individual/HUF/AOPs/BOIs/Artificial Juridical Person is above Rs. 50 lakhs, the rate of surcharge
applicable would be as indicated in under

Total Income (1) Surcharge (2)

>Rs. 50 lakhs ≤ Rs. 1 crore 10% of income-tax
>Rs. 1 crore ≤ Rs. 2 crore 15% of income-tax
>Rs. 2 crore ≤ Rs. 5 crore 25% of income-tax
> Rs. 5 crore 37% of income-tax

Step 11 Education Cess" and "Secondary and Higher Education Cess" on Income-Tax: The
income-tax is to be increased by health and education cess @4% on income- tax plus surcharge/
minus rebate under section 87A, wherever applicable. This cess is payable by all assessees who are
liable to pay income-tax irrespective of their level of total income.

65
 Total Tax = Tax on total income at + Surcharge, at applicable rates , if + HEC@
liability applicable rates total income >₹50 lakhs 4%
- Rebate u/s 87A,
if total income ≤ ₹ 5 Lakh
Step 12 Credit for advance tax, TDS and TCS
Net Tax liability = Total tax liability - TDS - TCS - Advance tax paid

Step 13 Tax payable/Tax refundable

1. Net tax liability should be rounded off to the nearest multiple of ₹10.
2. The assessee has to pay the amount of tax payable (called seIf-assessment tax) at the time of
filing of the return
3. If any refund is due, assessee will get the same after filing the return of income.

PRACTICAL EXERCISE

1. Ms. Purvi, aged 55 years , is a Charted Accountant in practice. She maintains her accounts on
cash basis. Her Income and Expenditure account for the year ended March 31, 2019 reads as
follows:

Expenditure ₹ Income ₹
Salary to staff 15,50,000 Fees earned :
Stipend to articled Audit 27,88,000
Assistants 1,37,000 Taxation services 15,40,300
Incentive to articled Consultancy 12,70,000 55,98,300
Assistants 13,000 Dividend on shares of Indian 10,524
companies (gross )
Office rent 12,24,000 Dividend from UTI 7,600
Printing and stationery 12,22,000 Honorarium received from 15,800
various institutions for
valuation of answer papers
Meeting , seminar and 31,600 Rent received from 85,600
Conference residential flat let out
Purchase of car 80,000
Repair, maintenance and 4,000
petrol of car
Travelling expenses 5,25,000
Municipal tax paid in respect 3,000
of house property
Net profit 9,28,224
57,17,824 57,17,824
Other Information:
A. Allowable rate of depreciation on motor car is 15 %.
B. Value of benefits received from clients during the course of profession is ₹10,500.

66
 C. Incentives to articled assistants represent amount paid to two articled assistants for passing
IPCC examination at first attempt.
D. Repairs and maintenance of car include ₹2,000 for the period from 1-10-2018 to 30-09-2019.
E. Salaries include ₹30,000 to a computer specialist in cash for assisting Ms. Purvi in one
professional assignment.
F. The travelling expenses include expenditure incurred on official foreign tour of
G. ₹32,000 which was within the RBI norms.
H. Medical Insurance Premium on the health of dependent brother and major son dependent on her
amounts to ₹5,000 and ₹10,000, respectively , paid in cash
I. She invested an amount of ₹10,000 in National Saving Certificate.

Compute the total income and tax payable of Ms. Purvi for the Assessment Year 2019-20.

2. Mr. Y carries on his own business. An analysis of his trading and profit & loss for the year ended
31-3-2019 revealed the following information:
A. The net profit was ₹11,20,000.
B. The following incomes were credited in the profit and loss account :
i. Dividend from UTI ₹22,000.
ii. Interest on debentures ₹17,500.
iii. Winnings from races ₹15,000.
C. It was found that some stocks were omitted to be included in both the opening and closing
stocks, the value of which were :
i. Opening stock ₹8,000
ii. Closing stock ₹12,000.
D. Salary includes ₹20,000 paid to his brother which is unreasonable to the extent of ₹2,500.
E. Advertisement expenses include 15 gift packets of dry fruits costing ₹1,000 per packet
presented to important customers.
F. Total expenses on car were ₹78,000.The car was used both for business and personal purposes
th
3/4 is for business purposes.
G. Depreciation debited in the books was ₹55,000. Depreciation allowed as per Income-tax
Rules, 1962 was ₹50,000.
H. Drawings ₹10,000.
I. Investment in NSC ₹15,000.

3. From the following details , compute the total income of Siddhant of Delhi and tax payable for
the A.Y. 2019-20:
Particulars ₹
Salary including dearness allowance 3,35,000
Bonus 11,000
Salary of servant provided by the employer 12,000
Bills paid by the employer for gas, electricity and water provided free of 11,000
Cost at the above flat
Siddhant purchased a flat in a co-operative housing society in Delhi for ₹4,75,000 in April, 2011,
which was financed by a loan from Life Insurance Corporation on India of ₹1,60,000 @15%

67
 interest, his own savings of ₹65,000 and a deposit from a nationalized bank for ₹2,50,000 to
whom this flat was given on lease for ten years. The rent payable by the bank was ₹3,500 per
month. The following particulars are relevant:

A. Municipal taxes paid by Mr. Siddhant ₹4,300 (per annum)

B. House Insurance ₹860
C. He earned ₹2,700 in share speculation business and lost ₹4200 in cotton speculation business.
D. In the year 2012-13, he had gifted ₹30,000 to his wife and ₹20,000 to his son who was aged
11. The gifted amounts were advanced to Mr. Rajesh, who was paying interest @19% per annum.
E. Siddhant received a gift of ₹25,000 each from four friends.
F. He contributed ₹50,000 to Public Provident Fund.

4. Mr. Rajiv, aged 50 years, a resident individual and practicing Charted Accountant, furnishes you
the receipts and payments account for the financial year 2019-20.
Receipts and Payments Account
Receipts ₹ Payments ₹
Opening balance (1.4.2018) 12,000 Staff salary, bonus and stipend to 21,50,000
Cash on hand and at bank articled clerks
Fee from professional services 59,38,000 Office rent 30,000
Rent 50,000 Other administrative expenses 11,48,000
Motor car loan from Canara 2,50,000 Housing loan repaid to SBI (includes 1,88,000
Bank (@9%p.a.) interest of ₹88,000)
Life insurance premium 24,000
Motor car (acquired in Jan. 2019 by 4,25,000
cheque )
Medical insurance premium 18,000
(for self and wife )
Books bought 20,000
(annual publications by cheque )
Computer acquired on 1.11.2018 (for 30,000
professional use )
Domestic drawings 2,72,000
Public provident fund subscription 20,000
Motor car maintenance 10,000
Closing balance (31.3.2019) 19,15,000
Cash on hand and at bank
62,50,000 62,50,000

Following further information is given to you :

A. He occupies 50% of the building for own residence and let out the balance for residential use at
a monthly rent of ₹5,000. The building was constructed during the year 1997-98, when the
housing loan was taken.
B. Motor car was put to use both for official and personal purposes. One-fifth of the motor car use

68
 is for personal purpose. No car loan interest was paid during the year.
C. The written down value of assets as on 1-4-2018 are given below:
 Furniture & fittings ₹60,000 (Depreciation- 10%)
 Plant & Machinery ₹80,000 (Depreciation- 15%) (Air –conditioners, photocopiers, etc )
 Computers ₹50,000 (Depreciation- 40%)
 Books - (Depreciation- 40%)
Note: Mr. Rajiv follows regularly the cash system of accounting.

Compute the total income of Mr. Rajiv for the Assessment Year 2019-20.

69
NOTES

70
NOTES

71