Direct TAX Part A

FINAL CA
Direct tax
PART A
Dear Student,
Welcome to the World of Knowledge - J.K. Shah Classes !
Direct tax is the most extensive subject of CA Final in terms of volume and
sometimes it seems intimidating as well.
this book comprehensively covers several aspects of this paper and designed
in a student friendly manner.
In order to know the exact scope of subject, the syllabus is divided into
many topics. Each topic has been created to comprehensively cover not only
the concepts but also carefully selected examination question which are a
reflation of the past and a peep into the future.
The coaching is well-planned, systematic, time bound and totally

examination oriented. The coaching coupled with this study material is
needed your vehicle to success.
I wish you a very happy study time.
BEST of LUCK!
Prof. J.K. Shah.

Chartered Accountant
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INDEX
INTRODUCTION TO DIRECT TAXES 01-14
01
15-124
02 Capital Gains
Profits and Gains from Business or

125-319
03 Profession
Income from Other Sources 320-344

04
CLUBBING OF INCOME 345-361

05
Section 14 A 362-365
06
ASSESSMENT OF FIRM 366-385

07
ASSESSMENT OF AOP 386-394

08
ASSESSMENT OF COMPANIES 395-433
09
10 TAXATION OF BUSINESS TRUST 434-445
446-452
11 BUYBACK DISTRIBUTION TAX
INCOME COMPUTATION AND DISCLOSURE 453-486

12 STANDARDS
ASSESSMENT OF START-UPS 487-494

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INTRODUCTION TO
DIRECT TAXES
Question 1
What is Finance Act? How is it passed?
Answer
Any act when first presented is called as a “Bill”. A Finance Bill presents the proposed rev-
enue and expenditure of the Union Government for the coming financial year. The same is
presented by the Hon’ble Finance Minister of India on the floor of Lok Sabha on First Day of
February each year. Being a Money Bill, the same requires a majority only in the Lok Sabha.
The Rajya Sabha can merely deliberate on the provisions of Finance Bill and provide their
recommendations to the Finance Minister. Once the Bill is passed in Lok Sabha and discussed
in Rajya Sabha, the same is sent to the President of India for his assent. Post assent of the
Hon’ble President, the same becomes an Act. The amendments to the Income-tax Act, 1961
are passed through the Finance Act, which are then incorporated in the Income-tax Act.
Note: For May 2022 and Nov 2022 CA Final Attempt, provisions of Income-tax Act as
amended upto Finance Act, 2021 are applicable.
Question 2
What is the job of Income-tax Department? What is the hierarchy in the tax department?
Answer
The Income-tax department is an arm of the Ministry of Finance, Government of India. The
apex body in the Income-tax Department is known as the Central Board of Direct Taxes
[CBDT]. The job of Income-tax Department is to ensure that every tax payer [‘assessee’] dis-
charges his due taxes on time to the credit of Consolidated Fund of India. To ensure this, the
Income-tax Department deploys “field officers” in each city. Each city is divided into various
“wards” for better administration of revenue collection job. The job of these field officers is
not only to collect due taxes but also to guide tax payers with regard to their duties and
obligations and rights. The hierarchy in the tax department, as provided in section 116 of
the Act is as under:
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Central Board of Direct Taxes [Apex Body]

Assessment Wing Investigation Wing Appellate Authority
Pr. Chief Commissioner of Pr. Director General of In-
Income-tax [Pr. CCIT] come-tax [Pr. DGIT]
Chief Commissioner of In- Director General of In-
come-tax [CCIT] come-tax [DGIT]
Pr. Commissioner of In- Pr. Director of Income-tax
come-tax [Pr.CIT] [Pr.DIT]
Commissioner of Income-tax Director of Income-tax Commissioner of Income-tax
[CIT] [DIT] (Appeals) [CIT(A)]
Additional Commissioner Additional / Joint Director of
of Income-tax / Joint Com- Income-tax
missioner of Income-tax [Addl./Jt.CIT]
[Addl./Jt.CIT]
Assistant Commissioner / Assistant / Deputy Director
Deputy Commissioner of of Income-tax
Income-tax [ACIT/DCIT] [ADIT/DDIT]
Income-tax Officer [ITO]
Tax Recovery Officer
Inspector
Question 3
What are the rates of tax applicable to an Individual?
Answer
Every Individual and / or HUF have an option of following existing rates of tax or opting to
be covered under section 115BAC. The rate of tax is as under:
(A) Existing rates of taxes:
(i) Individual (other than those covered in (ii) or (iii) below) or HUF or every association
of persons or body of individuals:
Total Income Tax rate
Upto Rs. 2,50,000 Nil
Rs. 2,50,001 to Rs. 5,00,000 5 per cent
Rs. 5,00,001 to Rs. 10,00,000 20 per cent
Above Rs. 10,00,000 30 per cent
(ii) Individual, being resident in India, who is of the age of 60 years or more but less
than 80 years at any time during the year:

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Rs. 3,00,001 to Rs. 5,00,000 5 per cent
Rs. 5,00,001 to Rs. 10,00,000 20 per cent
(iii) Individual, being resident in India, who is of the age of 80 years or more at any
time during the year:

Rs. 5,00,001 to Rs. 10,00,000 20 per cent
CBDT Circular No. 28 of 27.07.2016:

Clarification regarding attaining prescribed Age of 60 years / 80 years on 31st March itself,
in case of Senior / Very Senior Citizens whose date of birth falls on 1st April, for purposes of
Income-tax Act,1961
1. Higher tax exemption limits have been prescribed under the past Finance Acts for
resident senior citizen taxpayers who have attained the age of sixty years. Even
in such cases, the exemption limit is still higher for very senior citizens who have
attained the age of eighty years. A doubt has been raised about the attainment of
the aforesaid qualifying ages for availing higher exemption in cases of the persons
whose date of birth falls on 1st April of calendar year. In other words, the broader
question under consideration is whether a person born on 1st April of a particular year
can be said to have completed a particular age on 31st March, on the preceding day of
his/her birthday, or on 1st April itself of that year.
2. .....the Hon’ble Supreme Court had an occasion to consider a similar issue in the
case of Prabhu Dayal Sesma vs. State of Rajasthan & another 1986, AIR , 1948
wherein it ........ observed that while counting the age of the person, whole of
the day should be reckoned and it starts from 12 o’clock in the midnight and he
attains the specified age on the preceding, the anniversary of his birthday.......
3. In view of the aforesaid judgment, the Central Board of Direct Taxes , in exercise
of powers under section 119 of the Act, hereby clarifies that a person born on
1st April would be considered to have attained a particular age on 31st March,
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the day preceding the anniversary of his birthday. In particular, the question of
attainment of age of eligibility for being considered a senior / very senior citizen
would therefore be decided on the basis of above criteria.
(B) New rates of taxes: [Section 115BAC]

For every Individual or HUF

From Rs. 2,50,001 to Rs. 5,00,000 5 per cent
Conditions for availing new scheme under section 115BAC:

1. The option shall be exercised for every previous year where the individual or
HUF has no business income and in other cases the option once exercised for a
previous year shall be valid for that previous year and all subsequent years;
2. The option shall become invalid for a previous year or previous years, as the case
may be, if the individual or HUF fails to satisfy the conditions and other provisions
of the Act shall apply;
3. The total income shall be computed without allowing exemption of:
Sr. No Section/ Deductions/Exemptions Head of income

Rule
1. 10(5) Leave Travel Allowance (LTA) Salary
2. 10(13A) House Rent Allowance (HRA)
3. 10(14) Allowances covered (for e.g. allowances
to meet cost of living or to meet
personal expenses etc.)
4. 10(17) Allowances to MPs/MLAs
5. 16(ia) Standard deduction of Rs.50,000
6. 16(ii) Entertainment allowance (to
government employees)
7. 16(iii) Tax on employment (i.e. Professional
Tax – PT)
8. Various Any exemption/deduction for allowances
/ perquisite under any other law
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9. 24(b) Interest on housing loan (Self occupied House Property

/ Vacant Property – Sec. 23(2))
10. 57(iia) Family Pension Other Sources
11. 10(32) Deduction for clubbing of income of
minor Child
12. 10AA Units in SEZ Business Income
(PGBP)
13. 32(1)(iia) Additional Depreciation
14. 32AD Investment in new plant or machinery
in notified backward areas in certain
States
15. 33AB Tea/Coffee/Rubber development
account
16. 33ABA Site Restoration Fund
17. 35(1)(ii) Sum paid to research association or to
a university/college/other institution to
be used for scientific research
18. 35(1)(iia) Sum paid to a company for scientific
research purpose
19. 35(1)(iii) Sum paid to research association or to
a university/college/other institution to
be used for social science or statistical
research
20. 35(2AA) Sum paid to National laboratory/a
university/an Indian Institute of
Technology/specified person for
scientific research part of approved
programme
21. 35AD Capital expenditure on specified
business
22. 35CCC Expenditure on agricultural extension
Project
23. 80C LIC Premium, Children Tuition Fees, PF Chapter – VIA
contribution, Principal component of deductions (from
housing loan etc.., Gross Total
Income)
24. 80CCC Contribution to certain pension funds
25. 80CCD(1) Employee’s contribution to national
pension Scheme
26. 80D Health Insurance Premium/Medical
Expenditure / Preventive Health-check
up
27. 80DD Maintenance/medical treatment of
dependent disabled person
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28. 80DDB Medical treatment of specified diseases

29. 80E Interest on loan taken for higher
education
30. 80EE Interest on loan taken for residential
house Property
31. 80EEA Interest on loan taken for residential
house property (if not eligible to claim
u/s 80EE)
32. 80EEB Interest on loan taken for purchase of
electric vehicle
33. 80G Donation to certain funds / charitable
institutions
34. 80GG Rent paid (if not eligible for deduction
u/s 10(13A) to claim HRA)
35. 80GGA Donations for development or for
scientific research / rural development
36. 80GGC Contributions to political parties
37. 80-IA Deduction in respect of profits and Chapter – VIA
gains from industrial undertakings or deductions
enterprises (Having income
from Business)
38. 80-IAB Deduction in respect of profits and
gains by an undertaking or enterprise
engaged in development of SEZ
39. 80-IAC Eligible Start-up

40. 80-IB Deduction in respect of profits and gains
from certain industrial undertakings
other than infrastructure development
undertakings
41. 80-IBA Deductions in respect of profits and
gains from housing projects
4. However, exemptions in respect of following allowances notified under section

10(14) of the Act shall be allowed to the Individual or HUF exercising option
under the proposed section 115BAC:
A. Transport Allowance granted to a handicapped employee to meet expenditure
for the purpose of commuting between place of residence and place of duty
B. Conveyance Allowance granted to meet the expenditure on conveyance in
performance of duties of an office
C. Any Allowance granted to meet the cost of travel on tour or on transfer
D. Daily Allowance to meet the ordinary daily charges incurred by an employee
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on account of absence from his normal place of duty

E. Eligible to claim deduction u/s 80JJAA in respect of additional employee cost
Note: In respect of scientific research expenses, deduction u/s. 35(1)(i) and 35(1)
(iv) is allowed
5. Income-tax Department has launched a mobile app to help assessees make an

informed decision based on tax savings whether to opt for existing option or to
switch over to section 115BAC;
6. Such assessees opting for S. 115BAC are not required to pay Alternate Minimum
Tax (AMT) and are not eligible to carry forward and set off of AMT credit, if any;
7. The Individual and / or HUF must exercise this option [of whether to be governed
under section 115BAC on or before due date of furnishing return of income under
section 139(1).
8. CBDT Circular C-1 of 2020:
Assessee who is drawing salary chargeable to tax is required to inform his employer
as to whether he intends to opt for provisions of section 115BAC so that the
employer can accordingly, calculate tax to be withheld at source under provisions
of section 192. However, such intimation to the employer shall not be considered
as exercise of option under section 115BAC(5). However, once such intimation is
provided to the employer, within the same year, the assessee employee cannot
change his intimation made to the employer;
Question 4
What are the rates of surcharge for Individuals and HUFs?
Answer
Although Income-tax is calculated on total income, surcharge is calculated on the amount
of tax. Depending on total income, rates of surcharge are as under:
Total Income Rate of Surcharge
Exceeding Rs. 50 lakhs but not exceeding Rs. 1 crores 10 per cent
Exceeding Rs. 1 crores but not exceeding Rs. 2 crores 15 per cent
Exceeding Rs. 2 crores but not exceeding Rs. 5 crores 25 per cent*
Exceeding Rs. 5 crores 37 per cent*
*Maximum rate of surcharge on income from capital gains covered under section 111A and
112A shall be restricted to 15 per cent (More discussion in Capital Gains Chapter)
*Maximum rate of surcharge on income of Foreign Institutional Investor from capital gains
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covered under section 115AD shall be restricted to 15 per cent (More discussion in Non-res-
ident Taxation Chapter)
Note: As per Taxation and Other laws Amendment Act, 2020, even in case of dividend in-
come, maximum rate of surcharge shall be 15 per cent;
Question 5
Rebate u/s. 87A?
Answer
Rebate of income-tax in case of certain individuals: An assessee, being an individual resident
in India, whose net income does not exceed Rs. 500,000, shall be entitled to a deduction,
from the amount of income-tax on his total income with which he is chargeable for any
assessment year, of an amount equal to 100 per cent of such income-tax or an amount of
Rs. 12,500, whichever is less.
Example: Calculate Tax liability in the following cases:
Case 1: Mr. X aged 53 years, a resident, has gross total income of Rs. 76 lakhs. He avails
deduction under chapter VI-A of Rs. 2 lakhs;
Case 2: Mr. Y aged 74 years, a resident, has gross total income of Rs. 3 crores. He has
opted for section 115BAC;
Case 3: Mr. Z, a non-resident aged 83 years, has total income of Rs. 15 lakhs. He has not
opted for section 115BAC;
Case 4: Mr. A, a resident aged 35 years, has total income of Rs. 50,26,000
Answer
Case 1:
Since Mr. X has availed deduction under section 80C, it appears that the assessee does not
intend to avail beneficial provisions of section 115BAC. Accordingly, tax liability is computed
without considering section 115BAC:
Particulars Rs.
0 – 250,000 – Nil 0
250,000 – 500,000 – 5% 12,500
500,000 – 10,00,000 – 20% 1,00,000
10,00,000 – 74,00,000 - 30% 19,20,000
Total Tax 20,32,500
Less: Rebate u/s. 87A 0
Net tax 20,32,500
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Add: Surcharge @ 10% 2,03,250

Tax + Surcharge 22,35,750
Add: Health & Education Cess @ 4% 89,430
Total tax liability 23,25,180
Case 2:
Mr. Y has availed benefit of section 115BAC:
Particulars Rs.
0 – 250,000 – Nil 0
250,000 – 500,000 – 5% 12,500
500,000 – 7,50,000 – 10% 25,000
750,000 – 10,00,000 – 15% 37,500
10,00,000 – 12,50,000 – 20% 50,000
12,50,000 – 15,00,000 - 25% 62,500
15,00,000 – 3,00,00,000 – 30% 85,50,000
Total Tax 87,37,500
Net tax 87,37,500
Add: Surcharge @ 25% 21,84,375
Tax + Surcharge 1,09,21,875
Add: Health & Education Cess @ 4% 4,36,875
Total tax liability 1,13,58,750
Case 3:
Mr. Z has not opted for section 115BAC and therefore, falls in the old scheme. However, it
may be noted that since he is a non-resident, he shall not be considered as Senior / super
Senior Citizen. Accordingly, tax is calculated as under:
Particulars Rs.
0 – 250,000 – Nil 0
250,000 – 500,000 – 5% 12,500
500,000 – 10,00,000 – 20% 1,00,000
10,00,000 – 15,00,000 - 30% 1,50,000
Total Tax 2,62,500
Net tax 2,62,500
Add: Surcharge @ 10% 0
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Add: Health & Education Cess @ 4% 10,500
Case 4:
In absence of information, it is assumed that the assessee has not opted for section 115BAC.
This situation pertains to marginal relief. When income just exceeds the threshold for at-
tracting surcharge, it may so happen that the amount of surcharge may exceed the amount
of income over and above the threshold itself. The same is illustrated in the current exam-
ple. Let us calculate the amount of tax + Surcharge in the normal manner:
Particulars Rs.
0 – 250,000 – Nil 0
250,000 – 500,000 – 5% 12,500
500,000 – 10,00,000 – 20% 1,00,000
10,00,000 – 50,26,000 - 30% 12,07,800
Total Tax 13,20,300
Net tax 13,20,300
Add: Surcharge @ 10% [since income exceeds Rs. 50 lakhs] 1,32,030
It is noticed that although income above Rs. 50,00,000 is merely Rs. 26,000 but the amount
of surcharge is Rs. 1,32,030 which is unfair. Therefore, in such cases, we provide for marginal
relief. i.e. in such cases, tax + surcharge shall be lower of:
(A) Tax + Surcharge in normal manner i.e. Rs. 14,52,330
(B) [Tax + Surcharge on Rs. 50,00,000] + Income above Rs. 50 lakhs itself
The same is calculated as under:
Particulars [tax + surcharge on 50 lakhs] Rs.

0 – 250,000 – Nil 0
250,000 – 500,000 – 5% 12,500
500,000 – 10,00,000 – 20% 1,00,000
10,00,000 – 50,00,000 - 30% 12,00,000
Total Tax 13,12,500
Net tax 13,12,500
Add: Surcharge @ 10% [since income does not exceed Rs. 50 lakhs] 0
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Add: Income above Rs. 50,00,000 26,000
Total 13,38,500
Therefore, lower of (A) or (B) is Rs. 13,38,500.
To this, we add cess @ 4% which amounts to Rs. 53,540
Therefore, final liability is Rs. 13,92,040/-
Question 6
What is the concept of advance tax? How is it paid?
Answer
The concept of advance tax emerged during World War – II when economies across the
world requested their citizens to pay tax in “advance” before the year ended in order to fund
the ongoing war. India, being a British Colony also introduced this provision. The same is
continued post independence also with a minor change i.e. now it is no longer a request. Ev-
ery assessee has to mandatorily pay taxes in advance failing which there is interest charged
under provisions of section 234B and section 234C [computation based questions on this
provision to be dealt with in assessment chapter]. The liability of tax for the entire year has
to be “reasonably estimated” by each assessee at the commencement of the year itself and
discharged as under:
Due date Instalment*
By 15th June 15 % of assessed tax
By 15th September 45 % of assessed tax
By 15 December
th
75 % of assessed tax
By 15th March 100 % of assessed tax
*Cumulative per cent
As per provisions of section 208, if assessed tax liability is below Rs. 10,000 [or] assessee is
a senior citizen who does not have income under the head Business or Profession, then the
said categories of assessee need not pay any advance tax.
Note:
Finance Act 2021 has inserted Section 194P in case of a senior citizen who has attained the
age of 75 years or more at any time during the year, and whose income consists only of
pension and bank interest, such senior citizen need not furnish a return of income provided
the specified withholds tax in accordance with section 194P from his income;
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Question 7
Discuss rates of tax for Firms and local authorities?
Answer
Person Tax rate Surcharge Health &

Education Cess
Firm (including LLP) 30% 12% if total income exceeds 4%
Rs. 1 crore
Local authorities 30% 12% if total income exceeds 4%
Rs. 1 crore
Question 8
Discuss rates of tax for companies?
Answer
Companies can be categorised into two types:
(A) Domestic Companies
(B) Foreign companies
(A) As far as Domestic Companies are concerned, they have been given an option: to follow
existing scheme [as per finance act] or new scheme under provisions of section 115BAA
/ 115BAB. The same is discussed as under:
Existing Scheme New Scheme

If turnover in FY 2019-20 does not exceed If assessee opts for section 115BAA, then
an amount of Rs. 400 crores – rate of tax rate of tax shall be 22 per cent [any
is 25 per cent existing company can opt for this]
If assessee is incorporated on or after
In any other case – 30 per cent 01.10.2019 and is engaged in business
of generation of electricity or the business
of manufacture or production of any article
or thing, then rate of tax under section
115BAB shall be 15 per cent
Surcharge: Surcharge:
• 7 per cent if total income exceeds Rs. 10 per cent on tax [irrespective of income]
1 crore
• 12 per cent if total income exceeds
Rs. 10 crores
Cess @ 4% Cess @ 4%
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Notes:
1. Once a company opts for section 115BAA, it cannot come back to provisions of existing
scheme;
2. Under section 115BAA, BAB, provisions of Minimum Alternate Tax shall not apply;
3. For the purposes of sub-section 115BAA, the total income of the company shall be
computed,—
(i) Without any deduction under the provisions of section 10AA or clause (iia) of
sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA
or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-
section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC
or section 35CCD or under any provisions of Chapter VI-A under the heading
“C.—Deductions in respect of certain incomes” other than the provisions of section
80JJAA or Section 80M;
(ii) Without set off of any loss carried forward or depreciation from any earlier
assessment year, if such loss or depreciation is attributable to any of the deductions
referred to in clause (i);
(iii) Without set off of any loss or allowance for unabsorbed depreciation deemed
so under section 72A, if such loss or depreciation is attributable to any of the
deductions referred to in clause (i); and
(iv) By claiming the depreciation, if any, under any provision of section 32, except
clause (iia) of sub-section (1) of the said section, determined in such manner as
may be prescribed.
(v) The loss and depreciation referred to in clause (ii) and clause (iii) above shall be
deemed to have been given full effect to and no further deduction for such loss
or depreciation shall be allowed for any subsequent year:
(vi) Provided that where there is a depreciation allowance in respect of a block of asset
which has not been given full effect to prior to the assessment year beginning
on the 1st day of April, 2020, corresponding adjustment shall be made to the
written down value of such block of assets as on the 1st day of April, 2019 in the
prescribed manner, if the option under sub-section (5) is exercised for a previous
year relevant to the assessment year beginning on the 1st day of April, 2020.
Note: Such companies [opting for Section 115BAA / 115BAB] can avail benefit u/s.
80JJAA and 80M;
(B) Foreign Company:

Rate of tax = 40 per cent
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Surcharge = 2% if total income exceeds INR 1 crore

5% if total income exceeds INR 10 crores;
Health & Education Cess = 4%
Question 9
Discuss concept of application of income vs. diversion of income?
Answer
In case any income is accrued to any assessee and thereafter, the assessee decides to ap-
propriate the same, then it constitutes application of income. As against the same, in case
of income where there is an overriding title, the same is considered as diverted before ac-
cruing to the assessee. In case of diversion of income by overriding title, income is not tax-
able in the hands of the assessee.
 Where a professional asks his client to deposit his professional fees in a charitable trust
instead of receiving the same in his own account, the same constitutes application of
income;
 Where an assessee took over a running undertaking and as per the sale deed, the
assessee was required to pay overriding charges to the spouse of the seller, which
was calculated as percentage of net profits of the undertaking, the same constituted
diversion of profits [Jit & Pal X – Rays (P) Limited (Allahabad High Court)]
 Where 3 children of a sole proprietor took over business of the sole proprietor on the
condition that they will continue to pay 20 per cent of the profits of the business to
their mother i.e. wife of the sole proprietor, the same constituted diversion of income
[CIT vs. Nariman Bharucha (Bombay High Court)]
Note:In case of application of income, there is voluntary payment by assessee in
discharge of his obligations whereas in case of diversion of income, there is legal
compulsion not created by assessee;
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CAPITAL GAINS
Question 10
When does capital gain arise?
Answer
Provision:
Any profit / gains arising from transfer of capital asset shall save as otherwise provided
from Sec 54 to Sec 54 GB, be chargeable under the head capital gains and shall be deemed
as income chargeable under capital gains in the year in which transfer takes place.
Analysis:
Unless, the charging section is satisfied, a particular head of income is not attracted. The
charging section of capital gains chapter provides for three essential elements in order to
be covered by this chapter:
1. There must be a transfer;
2. The transferred asset must be a capital asset;
3. Resultant capital gain is taxable in the year of transfer i.e. it is immaterial when the
consideration is realised;
Question 11
What is CAPITAL ASSET?
Answer
As per section 2(14) “capital asset” means—
1. Property of any kind held by an assessee, whether or not connected with his business
or profession;
2. Any securities held by a Foreign Institutional Investor which has invested in such
securities in accordance with the regulations made under the Securities and Exchange
Board of India Act, 1992 (15 of 1992),
3. any unit linked insurance policy to which exemption under clause (10D) of section 10
does not apply on account of the applicability of the fourth and fifth proviso thereof;
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[Added by Finance Act 2021] (i.e. where annual premium inrespect of newly issued ULIP
on or after 01.02.2021 exceeds Rs. 2,50,000 and redemption of policy is on account of
reason other than death)
but capital asset does not include—
1. Any stock-in-trade [other than the securities referred to in sub-clause (b)],
consumable stores or raw materials held for the purposes of his business or
profession;
2. Personal effects, that is to say, movable property (including wearing apparel and
furniture) held for personal use by the assessee or any member of his family
dependent on him, but excludes—
(a) Jewellery; (b) Archaeological collections;
(c) Drawings; (d) Paintings;
(e) Sculptures; or (f) Any work of art.
The term “jewellery” includes—
(a) Ornaments made of gold, silver, platinum or any other precious metal or any
alloy containing one or more of such precious metals, whether or not containing
any precious or semi-precious stone, and whether or not worked or sewn into any
wearing apparel;
(b) Precious or semi-precious stones, whether or not set in any furniture, utensil or
other article or worked or sewn into any wearing apparel.
H.H Rana Hemant Singh Ji (Supreme Court): In this case the assessee transferred
a puja thali which was made of pure gold. The question arose whether this
asset is a personal effect / capital asset. It was held by Supreme Court that
predominant nature of the asset was gold, due to which it was deriving a high
value. Therefore, asset was a capital asset and not personal effect.
3. Agricultural land in India, not being land situated —

(a) In any area which is comprised within the jurisdiction of a municipality (whether
known as a municipality, municipal corporation, notified area committee, town
area committee, town committee, or by any other name) or a cantonment board
and which has a population of not less than 10,000; or
(b) In any area within the distance, measured aerially—

(I) Not being more than 2 kilometres, from the local limits of any municipality
or cantonment board referred to in item (a) and which has a population of
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more than 10,000 but not exceeding 1,00,000; or

(II) Not being more than 6 kilometres, from the local limits of any municipality
more than 1,00,000 but not exceeding 10,00,000; or
(III) Not being more than 8 kilometres, from the local limits of any municipality
more than 10,00,000.
Explanation — For the purposes of this sub-clause, “population” means the
population according to the last preceding census of which the relevant figures
have been published before the first day of the previous year;
Rural agricultural land (RAL)
Population of city / Distance of land from nearest municipality

town etc.
> 10,000 ≤ 10,00,000 Any land beyond 2 km from municipal limit = RAL
> 1,00,000 ≤10,00,000 Any land beyond 6 km from municipal limit = RAL
> 10,00,000 Any land beyond 8 km from municipal limit = RAL
Special remarks:
1. Distance between municipal limit and Land has to be measured aerially as a bird
would fly in a linear manner without any deviation.
2. Anjana Sehgal (Punjab and Haryana HC): It is immaterial that land is situated in one
state (Haryana) and NEAREST municipality is situated in another state (Punjab). The
same must be considered for deciding nature of land.
3. Land situated outside India is a Capital Asset;
4. 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence
Gold Bonds, 1980, issued by the Central Government, Special Bearer Bonds, 1991,
issued by the Central Government, Gold Deposit Bonds issued under the Gold Deposit
Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015
notified by the Central Government.
Note: For the removal of doubts, it is hereby clarified that “property” includes and
shall be deemed to have always included any rights in or in relation to an Indian
company, including rights of management or control or any other rights whatsoever;
[To be covered in Vodafone Case Study]
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Analysis of Amendment by Finance Act 2021:

The definition of Capital Asset has been modified to add “...any unit linked insurance policy
to which exemption under clause (10D) of section 10 does not apply on account of the
applicability of the fourth and fifth proviso thereof...”
As per 4th proviso to Section 10(10D), exemption of Section 10 shall not apply to any unit
linked insurance policy, issued on or after the 1st day of February, 2021, if the amount of
premium payable for any of the previous year during the term of such policy exceeds Rs.
2,50,000;
5th proviso to Section 10(10D) provides that if the premium is payable, by a person, for more
than one unit linked insurance policies, issued on or after the 1st day of February, 2021,
the provisions of this clause shall apply only with respect to those unit linked insurance
policies, where the aggregate amount of premium does not exceed Rs. 2,50,000 in any of
the previous year during the term of any of those policies:
However, exemption shall be available in case of units where any sum received on the death
of a person
In short, if the exemption under section 10(10D) does not apply to units of unit linked
insurance policy and the premium payable on such policy exceeds Rs. 2,50,000 for any
previous year, then the units shall be regarded as a capital asset and the gains shall be
computed accordingly.
Correspondingly, new section 45(1B) has been inserted which states that notwithstanding
anything contained in S. 45(1), where any person receives at any time during any previous
year any amount under a unit linked insurance policy, to which exemption under clause
(10D) of section 10 does not apply on account of the applicability of the fourth and fifth
proviso thereof, including the amount allocated by way of bonus on such policy, then, any
profits or gains arising from receipt of such amount by such person shall be chargeable to
income-tax under the head “Capital gains” and shall be deemed to be the income of such
person of the previous year in which such amount was received and the income taxable
shall be calculated in such manner as may be prescribed.
Question 12
Whether shares amounts to capital asset or stock in trade?
Answer
Whether assessee holds shares as a capital asset or as a stock in trade depends on intention
of the assessee. Generally, for stock brokers, we may prima facie conclude that the shares
are held as stock in trade. However, that may not always be true since even a stock broker
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may have two portfolios out of which he may be holding one as long term investment and
not as stock in trade. To elucidate, assume a builder generally holds apartments as stock
in trade. However, the apartment where he resides along with his family will of course be
considered as capital asset and not as stock in trade. Further, in case of shares since tax rate
on capital gains is concessional as compared to normal rates of tax, the issue becomes even
grave. In this connection, the following factors indicate whether shares are held as stock or
as capital asset:
1. Magnitude or volume of transactions may indicate the nature of transactions;
2. The motive to earn profits from sale of shares indicates that the shares are held as stock.
However, where the motive is to hold shares and derive income by way of appreciation
/ dividend, the same is normally considered as Investments;
3. The treatment in books of accounts is also a good indicating factor;
4. It was also clarified that an assessee may have two portfolios – one held as stock
in trade and the other held as capital asset [Refer Motilal Oswal Case law (Supreme
Court)];
In order to avoid controversy and provide greater clarity, Section 2(14) was amended vide
Finance (No.2) Act, 2014 to state that for FII, shares shall always be treated as capital
Asset. Therefore, resultant gains shall be covered under the head “Capital Gains”;
For assessees other than FIIs, CBDT released a Circular No. 6 in the year 2016 which provides
as under:
The following factors shall be considered in holding whether the surplus generated from
sale of listed shares or other securities would be treated as Capital Gain or Business Income:
a) Where the assessee itself, irrespective of the period of holding the listed shares and
securities, opts to treat them as stock-in-trade, the income arising from transfer of
such shares/securities would be treated as its business income,
b) In respect of listed shares and securities held for a period of more than 12 months
immediately preceding the date of its transfer, if the assessee desires to treat the
income arising from the transfer thereof as Capital Gain, the same shall not be put to
dispute by the Assessing Officer. However, this stand, once taken by the assessee in a
particular Assessment Year, shall remain applicable in subsequent Assessment Years
also and the taxpayers shall not be allowed to adopt a different/contrary stand in this
regard in subsequent years;
c) In all other cases, the nature of transaction (i.e. whether the same is in the nature
of capital gain or business income) shall continue to be decided keeping in view the
aforesaid Circulars issued by the CBDT.
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d) It is, however, clarified that the above shall not apply in respect of such transactions in
shares/securities where the genuineness of the transaction itself is questionable, such
as bogus claims of Long Term Capital Gain / Short Term Capital Loss or any other sham
transactions.
Question 13
What will be treatment of surplus arising on sale of securities in respect of FII in case it suo-
motu shows the securities as stock in trade in its books of accounts?
Answer
In case of FIIs, securities held in accordance with guidelines formulated by Securities and
Exchange Board of India is always regarded as Capital Asset. Accordingly, the surplus shall
be treated as capital gains.
Question 14
Discuss salient features of Gold Deposit Certificates under Monetisation Scheme 2015?
Answer
In 2015, the government launched the GMS to mobilise the gold held by households and
institutions in the country. In Indian households, over 20,000 tonnes of gold is lying idle.
The scheme was launched by the Prime Minister of India with an aim to mobilise gold and
facilitate its use for productive purposes, which further will also help in reducing India’s
dependability on gold imports. The scheme would offer interest at 2.50% per year.
In order to make the scheme more lucrative, the IT Act was amended to provide that such
Gold Deposit Certificate shall NOT be considered as Capital Asset. Therefore, there would
be no capital gains arising even if such certificate is transferred. Further, the interest on such
certificate is also EXEMPT from tax under section 10(15) of the Act.
Question 15
The assessee entered into a MOU to purchase a land in future. The prospective seller violated
the contract and refused to sell the property. The buyer filed a suit for specific performance.
For settling the matter, the assessee received compensation of Rs. 15 lacs. Is this receipt
chargeable to tax as capital gains?
Answer
Facts of the case are based on the decision in case of CIT vs. Lakshmidevi Ratani (Madhya
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Pradesh). It was held by high court, that once MOU was executed the prospective buyer
attained a right to buy the land. This “right” is in itself a capital asset (“Property of any
kind”). The compensation is received for extinguishment of this right, which amounts to
transfer, since both elements are satisfied (Capital asset + transfer), the assessee is liable
under the head capital gains.
Question 16
Discuss the concept of Transfer – Sec 2(47)
Answer
As per section 2(47) “Transfer”, in relation to a capital asset, includes:
1. The sale, exchange or relinquishment of the asset;
2. The extinguishment of any rights therein;
3. The compulsory acquisition thereof under any law;
4. In a case where the asset is converted by the owner thereof into, or is treated by him
as, stock-in-trade of a business carried on by him, such conversion or treatment; or
5. The maturity or redemption of a Zero Coupon Bond; or
6. Any transaction involving the allowing of the possession of any immovable property
to be taken or retained in part performance of a contract of the nature referred to in
section 53A of the Transfer of Property Act, 1882; or
7. Any transaction (whether by way of becoming a member of, or acquiring shares in,
a co-operative society, company or other association of persons or by way of any
agreement or any arrangement or in any other manner whatsoever) which has the
effect of transferring, or enabling the enjoyment of, any immovable property.
Important points:
1. It has been clarified that “transfer” includes and shall be deemed to have always
included disposing of or parting with an asset or any interest therein, or creating any
interest in any asset in any manner whatsoever, directly or indirectly, absolutely or
conditionally, voluntarily or involuntarily, by way of an agreement (whether entered
into in India or outside India) or otherwise, notwithstanding that such transfer of
rights has been characterised as being effected or dependent upon or flowing from the
transfer of a share or shares of a company registered or incorporated outside India; [To
be discussed in Vodafone Case Study]
2. There are 2 elements which are essential to constitute a transfer:
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(a) Existence of 2 parties – Transferor and Transferee

(b) Willingness to transfer – Voluntary nature
However, compulsory acquisition is an exception to this principle, since compulsory
acquisition may not be a voluntary sale. Further, conversion of capital asset into stock
in trade is also another exception since the same person continues to held the asset
and still it is regarded as transfer.
3. Relinquishment v/s Extinguishment

“Relinquish” means to voluntarily cease to keep or claim; give up.
“To extinguish” means where asset ceases to exist i.e. asset disappears.
4. Anarkali Sarabhai (Supreme Court):
In this case, it was held that redemption of preference shares amounts to extinguishment,
hence a transfer.

Relevant extract of the judgment:
“....Here, a regular “sale” itself has taken place. That is the ordinary concept of transfer.
The company paid the price for the redemption of the shares out of its fund to the
assessee and the transaction was clearly a purchase. As rightly observed by the Tribunal,
if the company had purchased a valuable right, the assessee had sold a valuable right.
“Relinquishment” and “extinguishment” which are not in the normal concept of transfer
but are included in the definition by the extended meaning attached to the word are
also attracted in the transaction. The shares were assets and they were relinquished by
the assessee and thus relinquishment of assets did take place. The assessee by virtue
of his being a holder of redeemable cumulative preference shares had a right in the
profits of the company, if and when made, at a fixed rate of percentage.
Quite obviously, this was a valuable right and this right had come to an end by
the company’s redemption of shares. Thus, the transaction also amounted to
“extinguishment” of right. Under the circumstances, viewed from any angle, there is
no escape from the conclusion that section 2(47) was attracted and that the amount
of Rs.50,000 received by the assessee was liable to be taxed under the head “Capital
gains”....”
5. Sec 53A of Transfer of Property Act

In order to avoid stamp duty and liability, sellers of immovable property purposely
delayed registration of sale deed.
In order to protect interests of the buyer, Sec 53A was inserted, which states that
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if possession of immovable property is given in part performance of contract, it is

deemed to constitute a transfer.
This section is imported in the definition of transfer. Therefore, if a buyer takes possession
of immoveable property by paying consideration in part performance of contract, then
it is deemed as transfer even if the sale deed is not registered by the seller.
6. In a co-operative housing society land and apartment are owned by the society. The
members by virtue of their shareholding are allowed to occupy the residential flat.
However, when the member transfers his share, for all practical purposes, it is considered
as if he has transferred immovable property.
Question 17
What is Long term capital asset and short term capital asset?
Answer
The nature of asset depends on the “Period of Holding” of the asset:
Nature of asset STCA LTCA

Listed shares and securities [other than unit], Unit of ≤ 12 M > 12M
equity oriented Mutual Fund [EOMF] Zero Coupon Bond
Land and / or Building Unlisted shares ≤ 24 M > 24M
Any other asset ≤ 36 M > 36M
Notes:
1. Period of holding ends on [date of transfer – 1], so if asset is transferred on 1st April
2020, period of holding ends on 31.3.2020
2. Asset Threshold Period

Listed share 12 M
Unlisted shares 24 M
Listed debentures 12 M
Unlisted debentures 36 M
EOMF 12 M
Debt Oriented MF 36 M
3. Rama Rani Kalia (Allahabad high court)

The assessee acquired a land on leasehold basis in the year 1981. This was converted
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into freehold land in the year 2018 and immediately sold within one month. The
question arose whether the asset is LTCA or STCA. It was held that for determination of
nature of asset i.e. LTCA / STCA, what is relevant is period of HOLDING and not period
of OWNERSHIP. Therefore, POH was to be counted from the year 1981 and not 2018.
Question 18
Discuss mode of computing capital gains provided in section 48 of the Income-tax Act,
1961?
Answer
Capital gain is computed as under:
Particulars Amount
Full value of consideration received / accruing as a result of XXX
transfer of capital asset
Less: Expenditure incurred wholly and exclusively in connection with (XXX)
transfer of asset
Net consideration XXX
Less: Cost of acquisition (XXX)
Less: Cost of improvement (XXX)
Capital Gains XXX
Concept of Indexation:
As per second proviso below section 48, where long term capital gain arises from transfer of
long term capital asset (other than situation covered in 1st proviso), then the terms ‘cost of
acquisition’ and ‘cost of improvement’ shall be substituted with “indexed cost of acquisition
and “indexed cost of improvement”.
Indexed Cost inflation index of the year in which

Cost of = Cost of transfer took place
X
acquisition acquisition Cost inflation index of the year in which
asset was first held by the assessee
Indexed Cost inflation index of the year in which

Cost of = Cost of transfer took place
X
improvement improvement Cost inflation index of the year in which
the cost was incurred
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Question 19
How do you determine the “expenditure incurred wholly and exclusively and incurred in
connection with transfer of capital asset”?
Answer
The term wholly refers to “quantum” and exclusively relates to “intent”. When an expenditure
is incurred for the purpose of making a transfer of a capital asset, it is eligible for deduction.
Piroja Patel (Bombay High Court): In this case assessee’s land was encroached (illegal occupancy)
by hutment dwellers. In order to make the land saleable assessee paid compensation to
these hutment dwellers. It was held that such compensation had a direct nexus with transfer
of asset and therefore, was eligible for deduction.
GY Chenoy’case: In this case the assessee sold his land and after the sale, a portion of
consideration was embezzled by assessee’s staff. It was held that there is no direct nexus of
such embezzlement with the transfer of asset i.e. even if the embezzlement did not occur,
sale would have still taken place. Therefore, such loss would not be allowable as incidental
expenses.
Question 20
Discuss first proviso to Section 48 – Exchange Rate Fluctuation
Answer
As per this proviso in case of an assessee, who is a non-resident, capital gains arising from
the transfer of a capital asset being shares in, or debentures of, an Indian company shall be
computed by converting the cost of acquisition, expenditure incurred wholly and exclusively
in connection with such transfer and the full value of the consideration received or accruing
as a result of the transfer of the capital asset into the same foreign currency as was initially
utilised in the purchase of the shares or debentures, and the capital gains so computed
in such foreign currency shall be reconverted into Indian currency, so, however, that the
aforesaid manner of computation of capital gains shall be applicable in respect of capital
gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or
debentures of, an Indian company...”
In nutshell, there are 3 conditions for attracting 1st proviso to section 48:
1. Assessee must be non – resident
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2. The transferred capital asset is shares or debentures of Indian company

3. Capital Asset is purchased in convertible foreign exchange
If the above 3 conditions are satisfied computation of gain will be computed in manner
provided in Rule 115 A.
Computation of Capital gain U/R 115A:
Computation mechanism for capital gains under Rule 115A :
Particulars INR Working USD

Full Value of consid- XXX XXX ÷ average TT* rate on transfer XXX
eration date
Less: Incidental expenses XXX XXX ÷ average TT* rate on transfer XXX
date
Net Consideration XXX XXX
Less Cost of acquistion XXX XXX ÷ average TT* rate on transfer XXX
date
Capital gains in USD XXX
(X) TT Buying rate on transfer date XXX
Capital gains in INR XXX
*Telegraphic Transfer
Question 21
Mr. X, non-resident invested in shares of ABC Ltd. by using USD. His investment details are
provided below. You are required to compute capital gains thereon and his tax liability.
Particulars Rs.
Date of acquisition 1 January 2012
Cost 1,00,000=00
Date of transfer 1 January 2022
Sale proceeds 5,85,000=00
Incidental expenses on transfer 10,000=00
Date of incurring expenses 28 Dec 2021
Date TTBR TTSR Average
01/01/2012 41 43 42
01/01/2022 55 57 56
28/12/2021 53 55 54
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Answer
Computation of Capital Gains under Rule 115A

Full Value of Consideration 5,85,000 5,85,000 ÷ 56 10,446=43
(-) Incidental expenses on transfer 10,000 10,000 ÷ 56 -178=57
10,267=86
(-) Cost of acquisition 1,00,000 1,00,000 ÷ 42 2,380=95
Capital Gains in USD 7,886=91
(X) TTBR on 1 Jan 2022 X 55=00
Capital Gains in INR 4,33,780=00
Whether shares are long term capital asset / short term capital asset depends on whether
shares are listed / unlisted, which fact is missing in the question. However, in either case, the
shares in the question are LTCA, since period of holding is way over 12m / 24m
Long term capital gains

= 4,33,780
If Listed Shares If unlisted shares
Transfer Via Transfer not As per section 112(1)© (iii),

recognised stock through stock tax will be leveled at 10 %
exchange excahnge without benefit of 1st and
2nd proviso to section 48
Capital Gians to Capital Gains is
computed under lower of : Tax = 10% [5,85,000-10,000
3rd proviso (1) 20% of - 1,00,000] = 47,500
to section 48 gains post
indexation
(2) 10% of gains
without
indexation
Tax = 10% of
4,33,780 =
43,378*
*Since in cases covered under first proviso to s. 48, indexation is never allowed
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Notes:
(i) Rule 115A applies in respect of both STCA & LTCA. If the asset is LTCA, then benefit of
indexation is not available.
(ii) The benefit of 1st proviso continues to apply not only on the initial investment in shares
and debentures, but on every re-investment made thereafter in shares / debentures of
an Indian company.
Question 22
Suppose in the above Question, out of the proceeds i.e. Rs. 5,85,000 an amount of Rs.
4,00,000 is re-invested in shares of XYZ Ltd. on Jan 10, 2022. These shares are sold on
31.3.2022 for Rs. 600000. The average TT rates are:
TTBR TTSR
10.01.2022 55 57
31.03.2022 59 61
Answer
The benefit of 1st proviso to Section 48 not only applies to initial investment, but applies to
every reinvestment thereafter.
Computation of gain:

Full Value of Consideration 6,00,000 6,00,000 ÷ 60 10,000=00
(-) Incidental expenses on 0 0=00
transfer
(-) Cost of acquisition 4,00,000 4,00,000 ÷ 56 7,142=86

Capital Gains in USD 2,857=14
(X) TTBR on 31 Mar 2022 x 59=00
Capital Gains in INR 1,68,571=00
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The question is again silent whether the shares are listed / unlisted. However, in either case
shares are Short term capital assets since period of holding is much below 12/24 months.
Short capital gains =

Rs. 1,68,571
If listed shares and transferred via In any other case

recognised stock exchange
STCG to be treated as
STCG to be taxed normal income and taxed
at 15 percent of at slab rates
income u/s.
111A Tax = 10% [5,85,000 - 10,000 -
1,00,000]= 47,500
Question 23
Discuss the 3rd Proviso to section 48?
Answer
Provision:
“...Provided also that nothing contained in the first and second provisos shall apply to the
capital gains arising from the transfer of a long-term capital asset being an equity share
in a company or a unit of an equity oriented fund or a unit of a business trust referred to in
section 112A...”
Analysis:
1. This proviso is attracted when the following conditions are fulfilled:
(i) Asset = Long term capital asset being listed shares, unit of equity oriented Mutual
Fund, unit of business trust.
(ii) Securities transaction tax should be paid on such equity share, at the time of
acquisition & transfer of such share.
2. If the above conditions are fulfilled then capital gain is computed as per 3rd proviso to
sec 48.
3. As per this proviso, capital gain must be computed without giving benefit of indexation.
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The same is computed as under:
Particulars Rs.
Full value of consideration XX
(–) cost of acquisition [Section 55(2)(ac)] XX
Long term capital gains XX
4. How to compute cost u/s 55(2)(ac)

Cost shall be taken as higher of [A] or [B]
A → Actual cost
B → (i) Full value of consideration or

(ii) FMV as on 31.01.2018;
(i) Or (ii) whichever is lower;

Note: This manner of calculating cost of acquisition is called as Grandfathering clause.
The same is applicable provided the shares / mutual fund units / units of business trust
are purchased prior to 31.01.2018 and the resultant gain is long term capital gain.
Question 24
Compute capital gains under 3rd proviso to section 48 in the following 5 cases:
Particulars 1 2 3 4 5
Actual cost (A) 8,00,000 3,00,000 3,00,000 4,00,000 4,00,000
FVOC B1 3,00,000 8,00,000 2,00,000 6,00,000 2,00,000
FMV on 31.1.18 B2 2,00,000 2,00,000 8,00,000 5,00,000 1,00,000
Answer
The capital gains is computed u/s. 112A r.w. third proviso to section 48 as under:
Particulars Case 1 Case 2 Case 3 Case 4 Case 5

FVOC 300,000 800,000 200,000 600,000 200,000
(–) Cost of acquisition (800,000) (300,000) (300,000) (500,000) (400,000)
Long term gains (500,000) 500,000 (100,000) 100,000 (200,000)
Tax @ 10% on gains – 40,000 – – –
exceeding 1,00,000
Note: The capital losses incurred in cases 1, 3, 5 will be carried forward to future years as
per sec 74.
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General Note: As per Notification No. 60/2018, the condition of payment of STT at the time
of acquisition of shares shall apply only if the share is acquired on or after 1.10.2004.
Further, even for acquisition after this date, the condition for payment of STT at the time
of acquisition i.e. applicable only to 3 types of transactions:
(i) Preferential issue of shares which are categorized as less frequently traded.
(ii) Acquisition of shares of a company which is already listed in recognized stock
exchange.
(iii) Acquisition of shares in a company at the time when the share is delisted.
Question 25.
In cases of tax on capital gains covered under section 111A and / or 112A,
Government has vide Taxation Laws (Amendment) Act 2019 provided relief in respect of
surcharge. Please discuss the said relaxation?
Answer
Government of India, vide The Taxation Laws (Amendment) Act 2019, has provided relaxation
in respect of rates of surcharge applicable on tax attributed on the amount of capital gains
under section 111A and 112A:
Rates of Surcharge Applicable to individual/HUF/AOPs/BOIs/ Artificial Juridical Person for A.Y.

2022-23
Rate of Example
surcharge Components of Applicable rate of
Particulars
on income total income surcharge
tax
(i) Where the total Income 10% • STCG u/s. 111A Surcharge would
(including u/s 111A and Rs. 30 lakh; be levied @ 10%
112A) > Rs 50Lakhs but ≤ • LTCG u/s. 112A on income tax
Rs 1 Crore Rs. 25 lakh; computed on total
and of Rs 95 Lakhs
• Other income
Rs. 40 lakhs
(ii) Where total income 15% • STCG u/s. 111A Surcharge would
(including income u/s Rs. 60 lakh; be levied @ 15%
111A and 112A) exceeds • LTCG u/s. 112A on income tax
1 Crore but does not Rs. 65 lakh; computed on total
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exceed 2 Crore and of Rs 1.75 crores

• Other income
Rs. 50 lakhs
(iii) Where total income 25% • STCG u/s. 111A Surcharge would be
(excluding income u/s. Rs. 54 lakh; levied @ 15% on
111A and 112A) exceeds • LTCG u/s. 112A income-tax on:
Rs. 2 crore but does not Rs. 55 lakh; • STCG of Rs.
exceed Rs. 5 crore and 54 lakhs
Not • Other income Chargeable to
The rate of surcharge on exceeding Rs. 3 crores tax u/s. 111A ;
the income-tax payable 15% and
on the portion of income • LTCG of Rs.
chargeable to tax u/s. 55 lakhs
111A and 112A chargeable to
tax u/s. 112A
Surcharge @ 25%
would be leviable
on income-tax
computed on other
income of Rs. 3
crores included in
total income
(iv) Where total income 37% • STCG u/s. 111A Surcharge @ 15% is
(excluding income u/s. Rs. 50 lakh; leviable on income-
111A and 112A exceeds • LTCG u/s. 112A tax on:
Rs. 5 crore Rs. 65 lakh; • STCG of Rs.
Not and 50 lakhs
Rate of surcharge on the exceeding • Other income Chargeable to
income-tax payable on 15% Rs. 6 crores tax u/s. 111A ;
the portion of income and
chargeable to tax u/s. • LTCG of Rs.
111A and 112A 65 lakhs
chargeable to
tax u/s. 112A
Surcharge @ 37% is
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leviable on income-
tax computed on
other income of Rs.
6 crores included in
total income
(v) Where total income 15% • STCG u/s. 111A Surcharge would be
(Including income u/s. Rs. 60 lakhs; levied @ 15% on
111A and 112A) exceeds • LTCG u/s 112A total income of 2.25
Rs. 2 Crore in cases not Rs 55 Lakhs; Crore
covered under (iii) & (iv) and
above • Other income
Rs 1.10 Crore
Question 26
Is Securities Transaction Tax paid at the time of transfer and / or acquisition of shares and
securities allowed as deduction while computing capital gains?
Answer
No, as per 7th proviso to section 48, securities transaction tax is neither allowed as deduction
nor added to cost of acquisition while computing capital gains arising on transfer of shares
or securities.
Question 27
Can benefit of indexation be claimed on transfer of debentures or bonds?
Answer
No, as per 4th proviso to section 48, where long term capital gain arises on transfer of long-
term capital asset being bonds and / or debenture, benefit of indexation is not allowable.
However, if the transferred asset is sovereign gold bond / capital indexed bond then
indexation is available.
Case: CIT v/s Enam Securities Ltd: Preference shares are neither bonds nor debentures and
hence benefit of indexation is available on transfer of preference shares.
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Question 28
Discuss the treatment on transfer of Rupee Denominated Bonds as per 5th proviso to section
48?
Answer
The tax treatment of Rupee Denominated Bonds is as under:
1. As per 5th proviso to section 48, in case of an assessee being a non-resident any gains
arising on account of appreciation of rupee against a foreign currency at the time of
redemption of rupee denominated bond of an Indian company subscribed held by him
shall be ignored for the purpose of computation of FVOC...”
2. Rupee denominated bond (RDB) (popularly known as ‘Masala Bonds’) are denominated
/ expressed in INR although the actual investment & redemption may be in foreign
currency. Redemption of RDB amounts to transfer and since the bonds are redeemable
at par, logically the capital gain should be zero.
3. However, due to appreciation of rupee the following scenarios emerged:
For the purpose of this example, let us assume that at the time of subscription, rate
of exchange was USD 1 = Rs. 70 and at the time of redemption, USD 1 = Rs. 63. The
investor invested USD equivalent to Rs. 70 lakhs and gets his value of investment
redeemed at par

Full Value of Consideration 70,00,000 70,00,000 ÷ 63 1,11,111
Cost of acquisition 70,00,000 70,00,000 ÷ 70 (1,00,000)
11,111
It is noticed above, that although redemption is at par, a gain arises in computation
which can be solely attributed to the appreciation of rupee.
4. To remedy this situation, government inserted 5th proviso which states that such gain
attributed to rupee appreciation needs to be ignored from the full value of consideration.
Subtotal as per above $11,111
(–) ignored as per 5th proviso ($11,111)
Capital Gain Nill
5. The proviso mentions about “gain arising on rupee appreciation”. Therefore, if there is
a loss due to rupee depreciation, the same is allowable i.e. need not be ignored.
6. 5th proviso applies when transfer is way of redemption of RBD. If transfer is before
redemption, then treatment is as under:
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Transfer of RDB before its

redumption
Transferred outside india by one Transfer by non-resident in

non-resident to another non- india within International
resident Finance Service Center
Not regarded as transfer u/s. Not regarded as transfer u/s.

47(viiaa) 47(viiab)
In any other scenario, it will be regarded as transfer and benefit of 5th proviso to section
*48 will not be available
7. The benefit of 5th proviso to section 48 is available not only to the original subscriber,
but any person who held the RDB at the time of redemption.
Test your knowledge
Ms. Aparna and Ms. Dimple, Indian citizens residing in California since the year
2011, visit India for 60 days every year. On 1.3.2022, Ms. Aparna transferred to Ms.
Dimple in California, for consideration of dollar equivalent to Rs. 15 lakhs, rupee
denominated bonds (issued outside India) of X Ltd., a company incorporated in In-
dia, which were acquired by her on 1.3.2020 for a price of dollar equivalent to Rs.
10 lakhs. What are the capital gains tax implications of such transfer in the hands of
Ms. Aparna?
(a) Ms. Aparna is liable to capital gains tax on long-term capital gains arising on
transfer of rupee denominated bonds; indexation benefit is not available
(b) Ms. Aparna is liable to capital gains tax on long-term capital gains arising on
transfer of rupee denominated bonds; indexation benefit is available
(c) Ms. Aparna is liable to capital gains tax on short-term capital gains arising on
transfer of rupee denominated bonds
(d) There is no capital gains tax implication in the hands of Ms. Aparna in respect
of this transaction u/s. 47(viiaa)
Answer: (D)
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Question 29.
Discuss the concept of Cost of Acquisition and Cost of Improvement as provided in Section
55 of the Income-tax Act, 1961?
Answer
(i) Self-generated Asset: [S.55(2)(a)]
It was held in the case of B.C. Srinivasa Setty (Supreme Court) that in case of self-
generated asset, being goodwill of profession, cost cannot be expressed in monetary
terms and therefore it is not possible to compute the tax liability.
As per Section 55, in case of certain self-generated assets, [cost of acquisition + cost
of improvement] shall be taken as NIL. The same is depicted below:
Self-generated Assets
Acquired from a Internally generated

previous owner
Cost: Purchase price Covered u/s 55 Not covered

u/s 55
In case of following assets cost = Nil
 Goodwill of Business BC Srinivasa
 Trademark Setty principle
 Brand name continues to
 Right to manufacture produce / apply
process
 Right to carry on Business / profession e.g. goodwill
 Tenancy rights of profession
 Stage carriage permit
 Loom hours
Note: Amendment by Finance Act 2021:

Provided that where the capital asset, being goodwill of a business or profession, in respect of
which a deduction on account of depreciation under sub-section (1) of section 32 has been obtained
by the assessee in any previous year preceding the previous year relevant to the assessment year
commencing on or after the 1st day of April, 2021, the provisions of sub-clauses (i) and (ii) shall
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apply with the modification that the total amount of depreciation obtained by the assessee under
sub-section (1) of section 32 before the assessment year commencing on the 1st day of April, 2021
shall be reduced from the amount of purchase price;
(ii) Shares & securities: [Section 55(2)(aa)]

The cost of acquisition is computed as under:
(i) Cost of acquisition of original shares = purchase price.
(ii) Cost of acquisition of right shares subscribed by the original shareholder = Amount
actually paid to acquire the share.
(iii) Cost of acquisition for right to renounce the rights issue = zero.
(iv) Cost of acquisition of right shares for 3rd person = Amount paid to company + Amount
paid to original shareholder.
Note:
In case of rights and bonus shares, period of holding starts from the date of allotment
of shares.
(iii) RM Arunachalam (Supreme Court) – Obligation in relation to an asset: It was held in this
case, if any obligation was created on an asset by any person other than the assessee,
then repayment towards such obligation is added to cost of acquisition. However, in
VSMR Jagdish Chandra (Supreme Court) it was held that if an obligation is self-created,
these repayment towards such acquisition is not added to cost.
(iv) CIT vs. Manjula J. Shah (Bombay HC)

When an asset is inherited or acquired by way of gift, then as per sec 49(1), cost of
acquisition = cost at which previous owner acquired the asset.
Further as per sec 2(42A) period of holding is also considered from the date when
previous owner acquired the asset. Also, as per the decision in Manjula J. Shah (Supra),
the indexation benefit is also available from the date when previous owner acquired
the asset.
(v) Shares acquired on demutualization of stock exchange – section 55(2) (ab): To be covered later.
(vi) Section 55(2)(ac) – Grandfathering clause – covered earlier.
(vii) Section 55(2)(b)

If any asset is acquired prior to 1.4.2001, then cost of acquisition shall be actual cost
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/ FMV as on 1.4.2001 at the option of the assessee.
Note 1:
In case of shares and securities covered u/s 55(2)(aa), if the same are acquired prior to
1.4.2001, assessee has the option of substituting FMV as on 1.4.2001.
However, in case of self-generated asset covered u/s 55(2)(a) and depreciable assets, there
is no such option of substituting FMV in place of cost.
Note 2:
Amendment by Finance Act 2020:
FMV of the capital asset being land or building or both as on 01-Apr-2001 shall not exceed
stamp duty value, if available, on that date for the purpose of cost of acquisition – Section
55(2) amended
 Proviso to sub-clause (ii) to clause (b) of sub-section (2) of section 55 inserted and
applicable from AY 2021-22 (FY 2020-21).
 At present, in respect of any capital asset acquired/received by any modes specified
in sec 49(1) (i.e. by way of gift or will etc.,) before 01-Apr-2001, cost of acquisition of
such asset for the purpose of capital gain computation can be taken either actual cost
or Fair Market Value (FMV) as on 01-Apr-2001.
 From AY 2021-22 (FY 2020-21) onwards, if the capital asset transferred is land or
building or both and if assessee choose to opt for FMV as on 01-Apr-2001, such value
shouldn’t exceed stamp duty value, if available, on that date
EXAMPLE:
Calculate the Cost of land as on 01.04.2001 in the following situations:
Sr. No. Particulars Case-1 Case-2 Case-3 Case-4
A Original Cost 10,00,000 10,00,000 10,00,000 10,00,000
B FMV as on 01.04.2001 50,00,000 50,00,000 50,00,000 50,00,000
C SDV as on 01.04.2001 50,00,000 40,00,000 60,00,000 Not
Available
Answer:
Particulars Case-1 Case-2 Case-3 Case-4

Original Cost 10,00,000 10,00,000 10,00,000 10,00,000
FMV as on 01.04.2001 [lower of B & C] 50,00,000 40,00,000 50,00,000 50,00,000
Cost [Higher of the above two] 50,00,000 40,00,000 50,00,000 50,00,000
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Cost of Improvement Section 55(1)

(i) Cost of improvement means any capital expenditure which results in addition or
alteration to the capital asset.
(ii) If the property is acquired prior to 1.4.2001, then cost of improvement incurred prior to
this date, shall be ignored.
(iii) Cost of improvement may be incurred either by the assessee or previous owner – Both
shall be considered.
Section 49(5): Income Disclosure Scheme, 2016

Under IDS, 2016 any person may declare his undeclared income or asset and pay tax @45%
thereon. The tax needs to calculated on FMV of such asset as on 01.06.2016.
As per Section 49(5) such FMV disclosed under IDS shall be deemed as cost of acquisition.
In case of a capital asset, declared under the Income Declaration Scheme, 2016
• being an immovable property, the period for which such property is held shall be reckoned
from the date on which such property is acquired if the date of acquisition is evidenced
by a deed registered with any authority of a State Government.
• in any other case, the period for which such asset is held shall be reckoned from 1st
June, 2016.
RELEVANT CASE LAWS / CIRCULARS:

Extract of CBDT Circular 29 of 2016:
Question No.4: Though the fair market value as on 1st June, 2016 is taxed under IDS, and such
amount will be treated as cost of acquisition at the time of future sale of concerned asset, whether
such treatment shall affect the character of the asset as long term or short term?
Answer: The issue was earlier considered and it was clarified vide Circular No.17 dated 20.05.2016
that in such cases period of holding shall be deemed to begin from 01.06.2016 as the asset has
been revalued on such date. However, considering the representation received from various
stakeholders and the fact that this may lead to complications in calculation of capital gain at the
time of sale of asset which was partly funded from undisclosed income now declared under the
Scheme, the matter has been reconsidered. Accordingly, in supersession to the earlier clarification
as referred above, it is clarified that the period of holding of asset declared under the Scheme
shall be based on the actual date of acquisition of such asset. However, the indexation benefit in
respect of the amount declared under the Scheme shall be available from 01.06.2016 only.
The said situation is illustrated as below:- Suppose Mr. ‘A’ purchased a house on 01.10.2011 for
Rs.10 lakh and declares fair market value of the same as on 01.06.2016 under the Scheme at
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Rs.20 lakh. If the said house is sold on 01.10.2017 for Rs.30 lakh, the holding period for the house
for purposes of computation of capital gain shall be six years i.e. from 01.10.2011 to 01.10.2017.
As the holding period exceeds two years, the gains arising from such transfer shall be treated as
long term capital gain. Further, the indexation benefit in this case shall be available on Rs. 20
lakhs from 01.06.2016 to 01.10.2017.
Question 30
Can the amount incurred by the assessee towards perfecting title of property acquired
through will, for making further sale, be included in the cost of acquisition for computing
capital gains?
Answer
In CIT v. Aditya Kumar Jajodia [2018] 407 ITR 107 (Cal), the assessee obtained a leasehold
property under a will which gave some interest to a trust and, thus, the assessee’s acquisition
of the perpetual lease was subject to rights of the trust as flowing from the will. The testator
of the trust had also entered into an agreement to sell with a third party. The assessee had
to, thus, perfect the ownership title before he transferred the property. For this purpose, he
made payment to the Delhi Development Authority (DDA) for conversion of leasehold rights
to freehold rights. He also made payments to the trust and to the third party to give up his
right under the agreement. The Issue under consideration is whether the amount incurred by
the assessee towards perfecting title of property acquired through will, for making further
sale, can be included in the cost of acquisition for computing capital gains. It was held
that, the assesseee is entitled to deduction of amount incurred towards perfecting title of
property acquired under will and the amount incurred towards making payments to the
trust and the third party in whose favour rights were created, as cost of acquisition under
section 55.
Question 31
Whether indexation benefit in respect of the gifted asset shall apply from the year in which
the asset was first held by the assessee or from the year in which the same was first acquired
by the previous owner?
Answer
CIT v. Manjula J. Shah (2013) 355 ITR 474 (Bom.)
As per Explanation 1 to section 2(42A), in case the capital asset becomes the property of
the assessee in the circumstances mentioned in section 49(1), inter alia, by way of gift by
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the previous owner, then for determining the nature of the capital asset, the aggregate
period for which the capital asset is held by the assessee and the previous owner shall be
considered.
As per the provisions of section 48, the profit and gains arising on transfer of a long-term
capital asset shall be computed by reducing the indexed cost of acquisition from the net
sale consideration. The indexed cost of acquisition meant the amount which bears to the
cost of acquisition the same proportion as Cost Inflation Index (CII) for the year in which
the asset is transferred bears to the CII for the year in which the asset was first held by the
assessee transferring it i.e., the year in which the asset was gifted to the assessee in case of
transfer by the previous owner by way of gift.
Facts of the case: In the present case, the assessee had acquired a capital asset by way of
gift from the previous owner. The said asset when transferred was a long-term capital
asset considering the period of holding by the assessee as well as the previous owner.
The assessee computed the long-term capital gain considering the CII of the year in which
the asset was first held by the previous owner. The Assessing Officer raised an objection
mentioning that as per meaning assigned to the Indexed cost of acquisition, the CII of the
year in which the asset is first held by the assessee need to be considered and not the CII of
the year in which the asset was first held by the previous owner.
High Court’s Observations: In the present case, the Bombay High Court observed that by
way of ‘deemed holding period fiction’ created by the statute, the assessee is deemed to
have held the capital asset from the year the asset was held by the previous owner and
accordingly the asset is a long term capital asset in the hands of the assessee. Therefore,
for determining the indexed cost of acquisition under Section 48, the assessee must be
treated to have held the asset from the year the asset was first held by the previous owner
and accordingly the CII for the year the asset was first held by the previous owner would be
considered for determining the indexed cost of acquisition.
High Court’s Decision: Hence, the indexed cost of acquisition in case of gifted asset has to be
computed with reference to the year in which the previous owner first held the asset and not
the year in which the assessee became the owner of the asset.
Note - The Delhi High Court, in the case of Arun Shungloo Trust v. CIT (2012) 205 Taxman 456
(Delhi) has also given the similar view on the said issue. The Court observed that as per
Explanation (iii) to section 48, the expression ‘asset held by the assessee’ is not defined and
therefore, in the absence of any intention to the contrary, it has to be construed in consonance
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with the meaning given in section 2(42A). However, the Assessing Officer contended that in
cases covered under section 49, the benefit of indexed cost of acquisition will be available
only from the date the capital asset was transferred and not from the date on which the
asset was held by the previous owner.
The High Court observed that this will result in inconsistency because as per the provisions
of Explanation to section 48, the holding of predecessor has to be accounted for the
purpose of computing the cost of acquisition, the cost of improvement and indexed cost of
improvement, but not for the purpose of indexed cost of acquisition.
In the present case, the Bombay High Court held that by way of ‘deemed holding period
fiction’ created by the Statute, the assessee is deemed to have held the capital asset from
the year the asset was held by the previous owner and accordingly, the asset is a long
term capital asset in the hands of the assessee. Therefore, for determining the indexed
cost of acquisition under section 48, the assessee must be treated to have held the asset
from the year in which the asset was first held by the previous owner and accordingly the
cost inflation index for the year the asset was first held by the previous owner would be
considered for determining the indexed cost of acquisition.
Question 32
The proprietary firm of “Mr. Amolak” a practicing Chartered Accountant, was converted into
partnership on 01.09.2021 when his son joined him in the firm for 50% share. All the assets
and liabilities of the erstwhile proprietary firm were transferred into the newly constituted
partnership firm.
“Mr. Amolak” was credited and paid an amount of Rs. 5 lacs in his account from the firm.
Explain as to chargeability of this amount of Rs. 5 lacs in the hands of “Mr. Amolak” when
it stands paid for:
(i) transfer of business into partnership;
(ii) goodwill by the incoming partner.
Answer
(i) If the amount was paid for transfer of business/ profession to partnership
As per section 45(3), the profits and gains arising from the transfer of a capital asset by
a person to the firm in which he becomes a partner shall be chargeable to tax as the
income of the previous year which such transfer takes place. The amount recorded in
the books of account of the firm would be deemed to be the full value of consideration
received or accruing as a result of transfer of the capital asset.
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(ii) If the amount is paid by the incoming partner for Goodwill

The Supreme Court, in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294, observed that the
income chargeable to capital gains tax is to be computed by deducting from the full
value of consideration “the cost of acquisition of the capital asset”. If it is not possible
to ascertain the cost of acquisition, then, transfer of such asset is not chargeable to
tax.
Section 55(2)(a) provides that the cost of acquisition of certain self-generated assets,
including goodwill of a business, is Nil. Therefore, in respect of these self-generated
assets covered under section 55(2)(a), the decision of the Supreme Court in B.C. Srinivasa
Setty’s case would not apply. However, in respect of other self-generated assets,
including goodwill of profession, the decision of the Supreme Court in B.C. Srinivasa
Setty’s case, would continue to be applicable.
In effect, in case of self-generated assets not covered under section 55(2)(a), since the
cost is not ascertainable, there would be no capital gains tax liability.
Therefore, in this case, since the consideration of ` 5 lakhs is paid towards goodwill of
a profession, whose cost is NOT to be taken as ‘Nil’ since it is not covered under section
55(2)(a), the liability to capital gains tax will not arise.
Question 33
Xavier had taken a loan under registered mortgage deed against the house, which was
purchased by him on 26.05.2002 for Rs. 5 lacs. The said property was inherited by his son
Abraham in financial year 2009-10 as per Will.
For obtaining a clear title thereof, Abraham paid the outstanding amount of loan on
12.02.2010 of Rs. 15 lacs. The said house property was sold by Abraham on 16.03.2022 for
Rs. 50 lacs. Examine with reasons the amount chargeable to capital gains for A.Y. 2022-23
(Cost Inflation Index FY 2002-03: 105, 2009-10: 148 and 2021-22: ___).
Answer
The cost of inherited property to Mr. Abraham shall be the cost to the previous owner as per
provisions of section 49(1)(iiia) and therefore, Rs. 5 lacs, being the cost to his father (amount
paid by his father on 26.5.2002 for acquiring the property) shall be the cost to Mr. Abraham,
who is the new owner. Payment of outstanding loan of the predecessor by the successor
for obtaining a clear title of the property by release of Mortgage Deed shall be the cost of
acquisition of the successor under section 48 read with section 55(2) of the Act as held by
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the Apex Court in case of RM. Arunachalam v. CIT [1997] 227 ITR 222.
Computation of Taxable Capital Gain for the A.Y. 2022-23

Period of Holding: ____________________: Nature_______________
Particulars Rs. Rs.

Sale consideration of house property 50,00,000
Indexed cost of acquisition (See Note below)
Cost to previous owner
(______________________________) ________
Loan amount paid by Mr. Abraham _________

(Benefit of CII is available since the loan amount was paid
in the financial year 2009-10)
(_______________________________)
Capital Gains
Note:
Since the property was acquired by Mr. Abraham through inheritance, the cost of acquisition
will be cost to the previous owner.
As per the definition of indexation cost of acquisition under clause (iii) of Explanation below
section 48, indexation benefit will be available only from the previous year in which Abraham
first held the asset i.e. P.Y. 2009-10.
However, as per the view expressed by Bombay High Court, in the case of CIT v. Manjula J.
Shah (2013) 355 ITR 474, in case the cost of acquisition of the capital asset in the hands
of the assessee is taken to be cost of such asset in the hands of the previous owner, the
indexation benefit would be available from the year in which the capital asset is acquired
by the previous owner.
Question 34
What do you mean by segregation of portfolio? How do you determine cost of segregated
portfolio?
Answer
The main objective of segregated portfolio is to handle defaulted bonds in the portfolio
separately so that original scheme is not greatly affected and stop investor from buying
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at low price to take advantage of price appreciation later when default dues are cleared.
It also helps in fair treatment to all investors in case of a credit event and to deal with
liquidity risks.
Relevant provisions:
‘49(2AG) The cost of acquisition of a unit or units in the segregated portfolio shall be the
amount which bears, to the cost of acquisition of a unit or units held by the assessee in the
total portfolio, the same proportion as the net asset value of the asset transferred to the
segregated portfolio bears to the net asset value of the total portfolio immediately before
the segregation of portfolios.
49(2AH) The cost of the acquisition of the original units held by the unit holder in the main
portfolio shall be deemed to have been reduced by the amount as so arrived at under sub-
section (2AG).
Explanation.––For the purposes of sub-section (2AG) and sub-section (2AH), the expressions
“main portfolio”, “segregated portfolio” and “total portfolio” shall have the meanings
respectively assigned to them in the circular No. SEBI/HO/IMD/DF2/CIR/P/2018/160, dated
the 28th December, 2018, issued by the Securities and Exchange Board of India under section
11 of the Securities and Exchange Board of India Act, 1992.’.
Section 2(42A) Explanation 1:

“(hh) in the case of a capital asset, being a unit or units in a segregated portfolio referred to
in sub-section (2AG) of section 49, there shall be included the period for which the original
unit or units in the main portfolio were held by the assessee;”
Example: Mr. Arnab has invested in HSBC Global Fund on 01.04.2016. His total investment is
Rs. 1 crore. On 01.04.2021 he receives a notice for segregation of portfolio owing to liquidity
crisis emerging in the debt fund market on account of COVID – 19 Pandemic. Accordingly, he
gets 10,000 units in the segregated portfolio. You are required to calculate the capital gains
if he sells both the portfolios for Rs. 80 lakhs and Rs. 30 lakhs respectively on 31.03.2022.
Ignore Indexation.
Details of portfolio:
Net asset value of the asset transferred to the segregated portfolio 70 crores
net asset value of the total portfolio immediately before the segregation 100 crores
of portfolios
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Answer:
Cost of acquisition in segregated portfolio = 1,00,00,000 X 70 / 100
= 70,00,000
Balance cost in the main portfolio = 1 Crore – 70 lakhs = 30 lakhs
Computation of capital gains:
Particulars Main Segregated

Period of holding 01.04.2016 – 30.03.2020 01.04.2016 – 30.03.2020
Nature LTCA LTCA
Full Value of consideration 80 30
Less: Cost 70 30
Capital Gains 10 0
Question 35
Is Capital Gains always taxable in the year of transfer?
Answer
As a general principle as per section 45(1), capital gain is chargeable to tax in the year in
which transfer takes place. However, there are 4 exceptions to this:
Exceptions to section 45(1)
Section 45(1A)- Section Section 45 (5) - Section 45(5A) -

Destruction of 45(2)- Compulsory Specified
capital asset conversion of acquisition agrement
capital asset
into
stock in trade
Provision:
“(1A) Notwithstanding anything contained in sub-section (1), where any person receives at
any time during any previous year any money or other assets under an insurance from an
insurer on account of damage to, or destruction of, any capital asset, as a result of—
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
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(ii) riot or civil disturbance; or

(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy (whether with or without
a declaration of war),
then, any profits or gains arising from receipt of such money or other assets shall be
chargeable to income-tax under the head “Capital gains” and shall be deemed to be the
income of such person of the previous year in which such money or other asset was received
and for the purposes of section 48, value of any money or the fair market value of other
assets on the date of such receipt shall be deemed to be the full value of the consideration
received or accruing as a result of the transfer of such capital asset.
Analysis
(a) This provision was inserted to override the decision of CIT v/s Vania Silk Mills (Supreme
Court). It was held in this case that when asset is destroyed by fire it is not a voluntary
event and hence there is so transfer. In absence of transfer the insurance compensation
received cannot be charged to tax.
To override this decision, section 45(1A) states that where insurance compensation is
received on account or damage or destruction of asset as a result of specified events
then profits / gains arising from receipt of such money is chargeable to tax under the
head capital gain in the year in which such money or other asset is received.
(b) Specified events:

(i) Flood, typhoon, hurricane, cyclone, earthquake or other conclusion of nature, or
(ii) riots or civil disturbance or
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy (whether with or
without declaration a war)
(c) Miscellaneous points:

→ Theft is not covered u/s 45(1A)
→ If asset is destroyed due to sinking of ship caused by the ‘specified events’ then
such situation is covered by 45(1A). However, if sinking is caused due to any other
factor, then it is not covered u/s 45(1A).
→ It may be noted that damage / destruction of capital asset by itself is not a transfer.
However, such damage or destruction accompanied by receipt of insurance claim
/ compensation is deemed as transfer. In short, if insurance company rejects
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insurance claim, then there is no transfer.
Section 45(2) → Conversion of Capital Asset into Stock in Trade:

Provision:
(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising
from the transfer by way of conversion by the owner of a capital asset into, or its
treatment by him as stock-in-trade of a business carried on by him shall be chargeable
to income-tax as his income of the previous year in which such stock-in-trade is sold
or otherwise transferred by him and, for the purposes of section 48, the fair market
value of the asset on the date of such conversion or treatment shall be deemed to be
the full value of the consideration received or accruing as a result of the transfer of the
capital asset.
Analysis
(a) This subsection was inserted to overrule decision in the case of Bai Shirin Bai Kooka
(Supreme Court). In that case it was held that when assessee converts capital asset
into stock in trade there is no transfer. This amendment nullifies the decision.
(b) Let us say, the capital asset was acquired in 2001 for 10 lacs. In 2010 the same is
converted to stock in trade as per section 45(2), this event is regarded as a transfer.
FMV of the asset on date of transfer say `100 lacs is regarded as FVOC. However, the
resultant capital gain of `90 lacs [subject to indexation] is chargeable to tax in the year
when stock in trade is finally sold. It may be noted that FMV of the capital asset on the
date of conversion is deemed as cost of stock.
Common mistake which students should avoid: Indexation while computing capital gain
is available till year of transfer (i.e. year of conversion) and not until year of sale of
stock in trade. However, the resultant capital gains is chargeable in the year of sale
of stock;
Test your knowledge:

Mallika purchased a land in Pune at a cost of Rs. 50 lakhs in December 2008 and held
the same as her capital asset till 30th September, 2020. She started her real estate
business on 1st October, 2020 and converted the said land into stock-in-trade of her
business on the said date, when the fair market value of the land was Rs. 300 lakhs.
She constructed 20 apartments of equal size, quality and dimension and the
construction was completed in December, 2021. Cost of construction of each apartment
is Rs. 15 lakhs. She sold 14 apartments at Rs. 40 lakhs per apartment during the
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period from January, 2022 - February, 2022. The remaining 6 apartments were held
in stock as on 31st March, 2022. All the six apartments were sold in April, 2022 at
Rs. 40 lakhs per apartment. She also holds a penthouse in Nagpur, construction of
which was completed in March, 2021, as stock-in-trade. She let out the penthouse to
Mr. Harish, a salaried individual, for Rs. 60,000 per month from April, 2021 to March,
2023, who has furnished his PAN to her. He paid municipal taxes of Rs. 7,200 each for
the years 2021-22 and 2022-23 in March, 2022 and March, 2023, respectively. The
said penthouse was, thereafter, sold in April, 2023 for Rs. 70 lakhs.
She invested Rs. 20 lakhs in bonds issued by National Highway Authority of India on
31st March, 2022; Rs. 20 lakhs in bonds of Rural Electrification Corporation Ltd. on
30th June, 2022, Rs. 10 lakhs in bonds of Rural Electrification Corporation Ltd on
30th September, 2022 and Rs. 10 lakhs in bonds of National Highway Authority of
India on 31st December, 2022. Mallika is subject to tax audit for the P.Y.2021-22.
Cost Inflation Indices:
F.Y.2008-09: 137;
F.Y.2018-19: 280;
F.Y.2019-20: 289;
F.Y.2020-21: 301
F.Y. 2021-22: ____
From the information given above, choose the most appropriate answer to the following
questions –
1. What is the amount of capital gains chargeable to tax in the hands of Mallika
for A.Y.2022-23?
(a) Rs. 86,16,788
(b) Rs. 96,16,788
(c) Rs. 50,00,000
(d) Rs. 60,14,599
2. What is the amount of income chargeable to tax in the hands of Mallika for
A.Y.2022-23 under the head “Profits and gains of business or profession” for the
A.Y.2021-22?
(a) Rs. 350 lakhs
(b) Rs. 50 lakhs
(c) Rs. 100 lakhs
(d) Rs. 140 lakhs
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3. What is the amount of income chargeable to tax under the head “Capital gains”
and “Profits and gains of business or profession” in the hands of Mallika for the
A.Y.2023-24?
(a) Nil and Nil, respectively
(b) Rs. 48,35,766 and Rs. 60,00,000, respectively
(c) Rs. 38,35,766 and Rs. 60,00,000, respectively
(d) Rs. 58,35,766 and Rs. 60,00,000, respectively
4. Is the annual value of penthouse held as stock-in-trade taxable? If so, under

which head and what is the amount taxable for A.Y.2022-23?
(a) No, since annual value of property held as stock-in-trade is exempt for
a period of two years from the end of the financial year of completion of
construction
(b) Yes, Rs. 5,04,000 under the head “Income from house property”
(c) Yes, Rs. 4,98,960 under the head “Income from house property”
(d) The rental income of Rs. 7,20,000 is chargeable under the head “Profits
and gains of business or profession”, since property is held as stock in trade
5. Is Mr. Harish liable to deduct tax at source on rent paid to Mallika in the F.Y.2021-
22? If so, what is the amount of tax to be deducted and when?
(a) No, since Mr. Harish, being a salaried employee, is not subject to tax audit; hence,
there is no obligation to deduct tax at source
(b) Yes, he has to deduct tax at source of Rs. 6,000 from rent payable every month
(c) Yes, he has to deduct tax at source of Rs. 3,000 from rent payable every
month
(d) Yes, he has to deduct tax of Rs. 36,000 from the rent payable for March,
2021
Answer Key
Question No. Answer
1 B Rs. 96,16,788
2 D Rs. 140 lakhs
3 B Rs. 48,35,766 and Rs. 60,00,000, respectively
4 B Yes, Rs. 5,04,000 under the head “Income from house
property”
5 D Yes, he has to deduct tax of Rs. 36,000 from the rent payable
for March, 2022
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(iii) Section 45(5) → Compulsory Acquisition:

Provision:
(5) Notwithstanding anything contained in sub-section (1), where the capital gain arises
from the transfer of a capital asset, being a transfer by way of compulsory acquisition
under any law, or a transfer the consideration for which was determined or approved
by the Central Government or the Reserve Bank of India, and the compensation or the
consideration for such transfer is enhanced or further enhanced by any court, Tribunal
or other authority, the capital gain shall be dealt with in the following manner, namely
:—
(a) the capital gain computed with reference to the compensation awarded in the
first instance or, as the case may be, the consideration determined or approved
in the first instance by the Central Government or the Reserve Bank of India shall
be chargeable as income under the head “Capital gains” of the previous year in
which such compensation or part thereof, or such consideration or part thereof,
was first received; and
(b) the amount by which the compensation or consideration is enhanced or further
enhanced by the court, Tribunal or other authority shall be deemed to be income
chargeable under the head “Capital gains” of the previous year in which such
amount is received by the assessee :
Provided that any amount of compensation received in pursuance of an interim
order of a court, Tribunal or other authority shall be deemed to be income
chargeable under the head “Capital gains” of the previous year in which the final
order of such court, Tribunal or other authority is made;
(c) where in the assessment for any year, the capital gain arising from the transfer of
a capital asset is computed by taking the compensation or consideration referred
to in clause (a) or, as the case may be, enhanced compensation or consideration
referred to in clause (b), and subsequently such compensation or consideration is
reduced by any court, Tribunal or other authority, such assessed capital gain of
that year shall be recomputed by taking the compensation or consideration as
so reduced by such court, Tribunal or other authority to be the full value of the
consideration.
Explanation—For the purposes of this sub-section—
(i) in relation to the amount referred to in clause (b), the cost of acquisition and
the cost of improvement shall be taken to be nil;
(ii) where by reason of the death of the person who made the transfer, or for
any other reason, the enhanced compensation or consideration is received
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by any other person, the amount referred to in clause (b) shall be deemed to
be the income, chargeable to tax under the head “Capital gains”, of such other
person.
Analysis:
(i) Initial compensation:
This is the compensation which is first awarded when Government compulsorily acquires
an asset. Such initial compensation is taxable in the year when the compensation or
part thereof is first received.
e.g.: Let us assume Central Government acquires a capital asset in 2019 and awards
initial compensation of 1 crore. The entire compensation of 1 crore is received in 2023.
In such scenario, the entire capital gain will be chargeable to tax in 2023. Alternatively,
suppose compensation of Rs. 10 lakhs is received in 2023 and balance 90 lakhs in 2030
even then entire capital gain is chargeable to tax in 2023.
(ii) Enhanced compensation:

If the assessee is aggrieved with the amount of initial compensation, he may approach
an appellate forum for enhancing the amount of compensation.
Such enhanced compensation is taxable in the year of receipt.
Cost of acquisition & improvement against such enhanced compensation is Zero. Only
litigation expenses shall be allowed as a deduction.
If the court gives an interim award, then such amount of interim award is taxable in the
year when final order is passed.
Status of capital gains on receipt of enhanced compensation is the same as the status
on receipt of initial compensation.
(iii) Reduction of compensation:

Suppose on further appeal the amount of initial or enhanced compensation is reduced
by an appellate court, then assessee must approach the assessing officer and request
for rectification of order to tax the correct amount of capital gain. As per Section 155(16),
the Assessing Officer can rectify the order within 4 years from end of year in which the
appellate order is passed.
(iv) Interest on enhanced compensation:

As per sec 145B such interest is taxable under the head ‘Income from other sources’ in the
year of receipt. As per sec 57 a standard deduction of 50% is allowed on such interest.
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Relevant case laws:

Balakrishnan v. Union of India & Others (2017) 391 ITR 178 (SC)
Issue: Whether receipt of higher compensation on account of negotiations transforms
the character of compulsory acquisition into a voluntary sale, so as to deny exemption
under section 10(37)(iii)?

Supreme Court’s Decision: The Supreme Court held that when proceedings were initiated
under the Land Acquisition Act, 1894, even if the compensation is negotiated and fixed,
it would continue to remain as compulsory acquisition.
Is interest on enhanced compensation under section 28 of the Land Acquisition Act,
1894 assessable as capital gains or as income from other sources?
Movaliya Bhikhubhai Balabhai v. ITO (TDS) (2016) 388 ITR 343 (Guj)
Facts of the case: The petitioner’s agricultural lands were compulsorily acquired for
undertaking an irrigation project. The petitioner challenged the compensation awarded
by the Collector which led to award of additional compensation of `5,01,846 and
interest amounting to ` 20.74 lakhs under section 28 of the Land Acquisition Act, 1894.
The petitioner filed an application in the prescribed form to the Assessing Officer for
issuance of a certificate with ‘nil’ tax deduction at source. The application was rejected
by the Assessing Officer on the ground that the interest amount is taxable at source as
per section 57(iv) read with sections 56(2)(viii) and 145B(1). Aggrieved with the rejection
of application, the assessee filed a writ before the High Court.
High Court’s Observations: The High Court observed that the assessee has received
interest under section 28 of the Land Acquisition Act, 1894 which represents enhanced
value of land and thus, partakes the character of compensation and not interest.
Hence, the interest under section 28 is liable to be taxed under the head of ‘Capital
Gains’ and not under ‘Income from Other Sources’. On the other hand, interest under
section 34 of the Land Acquisition Act, 1894 is for the delay in making payment after
the compensation amount is determined. Such amount is liable to be taxed under the
head ‘Income from Other Sources’.
High Court’s Decision: The High Court held that the interest awarded under section 28 of
the Land Acquisition Act, 1894 was not liable to tax under the head of ‘Income from other
sources’ and thus, was not deductible at source. The Revenue authority had erred in refusing
to grant a certificate under section 197 to the petitioner for non-deduction of tax at source.
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Note: As per Section 54H, the time limit to avail exemption under section 54 to 54GB
shall commence from date of receipt of the compensation and not from the date of
transfer;
(iv) Sec 45(5A) → Specified Agreement

Provision:
(5A) Notwithstanding anything contained in sub-section (1), where the capital gain arises
to an assessee, being an individual or a Hindu undivided family, from the transfer of a
capital asset, being land or building or both, under a specified agreement, the capital gains
shall be chargeable to income-tax as income of the previous year in which the certificate
of completion for the whole or part of the project is issued by the competent authority; and
for the purposes of section 48, the stamp duty value, on the date of issue of the said
certificate, of his share, being land or building or both in the project, as increased by
the consideration received in cash, if any, shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer of the capital asset :
Provided that the provisions of this sub-section shall not apply where the assessee
transfers his share in the project on or before the date of issue of the said certificate
of completion, and the capital gains shall be deemed to be the income of the previous
year in which such transfer takes place and the provisions of this Act, other than the
provisions of this sub-section, shall apply for the purpose of determination of full value
of consideration received or accruing as a result of such transfer.
Explanation—For the purposes of this sub-section, the expression—
(i) “competent authority” means the authority empowered to approve the building
plan by or under any law for the time being in force;
(ii) “specified agreement” means a registered agreement in which a person owning
land or building or both, agrees to allow another person to develop a real estate
project on such land or building or both, in consideration of a share, being land or
building or both in such project, whether with or without payment of part of the
consideration in cash;
(iii) “stamp duty value” means the value adopted or assessed or assessable by any
authority of the Government for the purpose of payment of stamp duty in respect
of an immovable property being land or building or both.

Analysis:
(i) Specified agreement which is also known as Joint Development Agreement is a
transaction where an assessee gives possession of his immovable property i.e.
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land or building and in consideration receives a new building / unit in such new
building.
In such case a question arose, whether there is any capital gain chargeable to tax
and if yes, then the year of taxability.
(ii) To answer these questions section 45(5A) was inserted which states that in case
of an individual / HUF where the assessee receives a unit in the new building as
part of Joint Development Agreement, capital gain is chargeable to tax when the
developer receives certificate of completion for the new building.
FVOC = Stamp duty value of the new residential unit

(+) cash corpus received from builder
As per Section 49(7) whatever is the FVOC of old house is deemed as cost of
acquisition of the new house.
As per proviso below sec 45(5A), the benefit of this section is available when
assessee receives a new unit after development. If these is an outright sale, then
capital gain arises u/s 45(1).
(iii) The rent or displacement compensation received from the developer is not taxable
in the hands of assessee.
Question 36
Mr. Anirudh acquired house property in Mumbai in FY 2001-2002, for Rs. 10,00,000. He
entered into a Joint Development Agreement on April 12, 2021 and as part of agreement
received a new unit in 15th March 2022. The stamp duty value of new unit is Rs. 30 lacs. He
also received a cash corpus of Rs. 10,00,000/-
(i) Compute taxable capital gain.
(ii) Compute cost of new house.
(iii) State whether there are any TDS obligations
Answer
Computation of capital gain
FVOC
(–) Indexed cost of acquisition
_____________________________ _________
Capital gain __________
(–) Deduction u/s. 54
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Restricted to CG _______ (________)

Taxable capital gain
(ii) Computation of cost of new house u/s 49(7)

Cost of new unit is same as full value of consideration of old house ie. Rs.
_______________/-
(iii) As per Section 194-IC, the developer has to deduct 10% TDS on the cash consideration.
i.e. ________________________________
Question 37
The assessee was a company carrying on business of manufacture and sale of art-silk
cloth. It purchased machinery worth Rs. 4 lacs on 1.5.2008 and insured it with United India
Assurance Ltd against fire, flood, earthquake etc., The written down value of the asset as
on 01.04.2021 was Rs. 2,08,800. The insurance policy contained a reinstatement clause
requiring the insurance company to pay the value of the machinery, as on the date of fire
etc., in case of destruction of loss. A fire broke out in August, 2021 causing extensive damage
to the machinery of the assessee rendering them totally useless. The assessee company
received a sum of Rs. 6 lacs from the insurance company on 15th March, 2022. Discuss the
issues arising on account on the transactions and their tax treatment.
(Cost inflation index for financial year 2008-09 and 2021-22 are 137 and ___ respectively)
Answer
As per section 45(1A), where any person receives any money or other assets under an
insurance from an insurer on account of damage to or destruction of capital asset as a
result of, inter alia, accidental fire then, any profits and gains arising from the receipt of
such money or other assets, shall be chargeable to income tax under the head “Capital
Gains” and shall be deemed to be the income of such person of the previous year in which
such money or asset was received.
For the purpose of section 48, the money received or the market value of the asset shall be
deemed to be the full value of the consideration accruing as a result of the transfer of such
capital asset. Since the asset was destroyed and the money from the insurance company
was received in the previous year, there will be a liability to capital gains in respect of the
insurance moneys received by the assessee.
Under section 45(1A) any profits and gains arising from receipt of insurance moneys is
chargeable under the head “Capital gains”. For the purpose of section 48, the moneys
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received shall be deemed to be the full value of the consideration accruing or arising. Under
section 50 the capital gains in respect of depreciable assets had to be computed in the
following manner (assuming it was the only asset in the block).
The computation of capital gain and tax implication is given below:
Full value of the consideration ` 6,00,000
Less: Written down value as on April 1st, 2021 ` 2,08,800
Short term capital gains ` 3,91,200
Question 38
Tani purchased a land at a cost of ` 35 lakhs in the financial year 2004-05 and held the same
as her capital asset till 31st May, 2018. Tani started her real estate business on 1st June,
2018 and converted the said land into stock-in-trade of her business on the said date, when
the fair market value of the land was ` 210 lakhs.
She constructed 15 flats of equal size, quality and dimension. Cost of construction of each
flat is ` 10 lakhs. Construction was completed in January, 2022. She sold 10 flats at ` 30
lakhs per flat between January, 2022 and March, 2022. The remaining 5 flats were held in
stock as on 31st March, 2022.
She invested ` 50 lakhs in bonds issued by National Highway Authority of India on 31st March,
2022 and another ` 50 lakhs in bonds of Rural Electrification Corporation Ltd. in April, 2022.
Compute the amount of chargeable capital gain and business income in the hands of Tani
arising from the above transactions for Assessment Year 2022-23 indicating clearly the
reasons for treatment for each item.
Cost Inflation Index: FY 2004-05: 113; FY 2018-19: 280; FY 2019-20: 289.
Answer
Computation of capital gains and business income of Tani for A.Y. 2022-23
Particulars Rs
Capital Gains 2,10,00,000
Fair market value of land on the date of conversion deemed as the Full val-
ue of consideration for the purpose of section 45(2)
Less: Indexed cost of acquisition [` 35,00,000 × 280/113] 86,72,566
1,23,27,434
Proportionate capital gains arising during A.Y.2022-23 [`1,23,27,434 × 2/3] 82,18,289
Less: Exemption under section 54EC 50,00,000
Capital gains chargeable to tax for A.Y.2022-23 32,18,289
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Business Income 3,00,00,000

Sale price of flats [10 × ` 30 lakhs]
Less: Cost of flats [210 X 2/3] 1,40,00,000
Cost of construction of flats [10 × ` 10 lakhs] 1,00,00,000
Business income chargeable to tax for A.Y.2022-23 60,00,000
Notes:
(1) The conversion of a capital asset into stock-in-trade is treated as a transfer under
section 2(47). It would be treated as a transfer in the year in which the capital asset is
converted into stock-in-trade.
(2) However, as per section 45(2), the capital gains arising from the transfer by way of
conversion of capital assets into stock-in-trade will be chargeable to tax only in the
year in which the stock-in-trade is sold.
(3) The indexation benefit for computing indexed cost of acquisition would, however, be
available only up to the year of conversion of capital asset to stock-in-trade and not up
to the year of sale of stock-in-trade.
(4) For the purpose of computing capital gains in such cases, the fair market value of the
capital asset on the date on which it was converted into stock-in-trade shall be deemed
to be the full value of consideration received or accruing as a result of the transfer of the
capital asset.
In this case, since only 2/3rd of the stock-in-trade (10 flats out of 15 flats) is sold in the
P.Y.2021-22, only proportionate capital gains (i.e., 2/3rd) would be chargeable in the
A.Y.2022-23.
(5) On sale of such stock-in-trade, business income would arise. The business income
chargeable to tax would be computed after deducting the fair market value on the date
of conversion of the capital asset into stock-in-trade and cost of construction of flats
from the price at which the stock-in-trade is sold.
(6) In case of conversion of capital asset into stock-in-trade and subsequent sale of stock-
in-trade, the period of 6 months is to be reckoned from the date of sale of stock-in-
trade for the purpose of exemption under section 54EC [CBDT Circular No.791 dated
2.6.2000]. In this case, since the investment in bonds of NHAI has been made within
6 months of sale of flats, the same qualifies for exemption under section 54EC. With
respect to long-term capital gains arising in any financial year, the maximum deduction
under section 54EC would be ` 50 lakhs, whether the investment in bonds of NHAI or
RECL are made in the same financial year or next financial year or partly in the same
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financial year and partly in the next financial year.

Therefore, even though investment of ` 50 lakhs has been made in bonds of NHAI during
the P.Y.2021-22 and investment of ` 50 lakhs has been made in bonds of RECL during
the P.Y.2022-23, both within the stipulated six month period, the maximum deduction
allowable for A.Y.2022-23, in respect of long-term capital gain arising on sale of long-
term capital asset(s) during the P.Y.2021-22, is only ` 50 lakhs.
Question 39
Discuss exemptions provided under Section 10(37)?
Answer
Capital gain arising on compulsory acquisition of urban agricultural land is exempt
provided 2 conditions are satisfied:
(i) Assesee is an Individual or HUF;
(ii) The land must have been used for agricultural operations at least for 2 years prior to
the date of transfer.
The Government has newly introduced an Act called as “Right to Fair Compensation and
Transparency in Land Acquisition, Rehabilitation and Resettlement, Act 2013”. As per
Section 96 of this Act, compulsory acquisition made under this Act shall not result in
taxable gain.

Summary
Compulsory acquisition
Agricultural Land Other Asset
Gain is taxable
There is no capital If it is urban land,
asset. So no taxable gain then resultant gain is
exempt u/s. 10(37)
Question 40
Discuss provisions of section 10(37A) [Andhra Pradesh Land Pooling Scheme]
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Answer
After bifurcation of Andhra Pradesh & Telangana, the state of Andhra Pradesh decided to
have a new capital city i.e. Amravati. For development of this city, Andhra Pradesh passed
a new legislation called as Andhra Pradesh Land Pooling Scheme.
Under this scheme, residents of Amravati handed over their land to the state government in
lieu of Land Pooling Ownership Certificate (LPOC) This LPOC would be surrendered after a
certain number of years for a plot / land in the reconstituted city. Since exchange amounts
to transfer, an apprehension was raised that transactions under this scheme would result in
capital gains for the residents of Amravati. Accordingly, to avoid this consequence, Finance
Act 2016 retrospectively amended the Income-tax Act and provided for 3 exemptions:
→ Gain arising on exchange of existing land for LPOC
→ Any gain arising on transfer of LPOC.
→ Transfer of plot / land in the reconstituted city within a period 2 years from end of
year in which possession of new land is received.
For example, if possession of new plot or land in the reconstituted city is received on 10th
October 2019, then capital gains arising on transfer of the said plot or land on or before
31st March 2022 shall be exempt under section 10(37A). However, transfer of such land or
plot shall result in taxable capital gains.
Date 01-May-16 10-Oct-19 31-Mar-22 01-Apr-22
Old land Reconstituted Reconstituted Reconstituted

transferred plot received plot Transferred plot transferred
Event under scheme on or before 31 after 31 march
march 2022 2022
Consequence This income is This income This income u/s. This is taxable
exempt u/s. u/s. 10(37A) transfer
10(37A) 10(37A)
As per sec 49(6), if the reconstituted land is transferred after expiry of two years as stated
above, for the purpose of computing capital gain, the stamp duty value as on last date of
2nd FY shall be deemed as cost of Acquisition (ie. 31.3.2022 in the above example).
(c) It may be noted that exemption under 10(37A) is available only to individual / HUF who
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owns the existing plot / land as on 2nd June, 2014.

(d) One aspect of land pooling scheme requires clarification from CBDT i.e. if the new plot
or land is transferred after expiry of 2 years then whether indexation is available from
date of possession or from last day of second financial year.
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Question 41
Discuss tax rate applicable on short term capital gains?
Short Term Capital Gain
STCG on: STCG on

(a) Equity shares Any other Asset
transferred via
recognised stock Considered as Normal
exchange Income and taxed as
(b) Units of Equity Per normal rates appli-
Oriented Mutual cable
Fund
(c) Units in Business Chapter VI-A Deduction
Trust available
SST should be paid

on transfer*
*Condition not ap-

plication if transfer is
via IFSC
As per section 111A,

rate of tax on STCG is
15 percent
Chapter VI-A not

available
Note: In case of individual and / or HUF resident in India, who earns income covered
under section 111A, 112 or 112A and their other balance normal income is
below maximum amount not chargeable to tax, then the unexhausted Basic
Exemption limit is reduced from this amount of income covered under sections
111A, 112 and 112A and the net income is taxed at respective special rates
i.e. 15%, 10% or 20%
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Example 1: Adjustment of unexhausted basic exemption limit sections
Total STCG Balance (BEL) STCG reduced by Tax @

income (b) income Unexhausted BEL unexhausted BEL 15%
(a) (a – b) = (c) (2,50,000 – c) = (d) (b – d) = e e × 15%
70,00,000 68,00,000 2,00,000 50,000 67,50,000 10,12,500
65,00,000 65,00,000 – 2,50,000 62,50,000 937,500
105,00,000 104,00,000 1,00,000 1,50,000 102,50,000 15,37,500
65,00,000 62,50,000 2,50,000 – 6,250,000 937,500
Question
Suppose assessee provides you following data to compote tax liability for the year ending
31 March 2022:
Short term capital gains covered u/s. 111A Rs. 20,00,000
Long Term capital gains covered u/s. 112 Rs. 20,00,000
Long term capital gains covered u/s. 112A Rs. 20,00,000
Total Rs. 60,00,000
Answer
The assessee does not have any normal income. Accordingly, his entire basic exemption limit
is unexhausted. The assessee has option to set this off either against income covered u/s.
111A (taxable @15%), or section 112 (taxable@20%) or section 112A(taxable @10%)
However, it would be more beneficial to set off the same against income u/s. 112 so as to
have maximum tax savings
Nature of In- Amount After Adjust- Tax rate Tax Liability

come ment
STCG u/s. 111A 20,00,000 20,00,000 15% Rs. 3,00,000
LTCG u/s. 112 20,00,000 17,50,000 20% Rs. 3,50,000
LTCG u/s. 112A* 20,00,000 20,00,000 10% Rs. 1,90,000
Total 60,00,000 57,50,000 Rs 8,40,000
*Rate of 10% is applied on gains exceeding INR 1,00,000
Note: Apart from the incomes covered under section 111A, 112 or 112A, no other income
which is taxable at special rate like 115BB etc. has been provided the benefit of adjusting
unexhausted basic Exemption limit
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S. 112 Long Term Capital gains
S.112 (1) (a) S.112 (1) (b) S. 112 (C) S.112 (1) (d)
Resident Domestic Non-Resident Any other

Individual/HUF Company Resident
Listed Any Other Listed Any Other Listed In case of Any Other Listed Any Other
Securities Asset Securities Asset Securities Unlisted Asset Securities Asset
& ZCB & ZCB & ZCB shares and & ZCB
Tax on LTCG Tax on LTCG securities, Tax on LTCG Tax on LTCG
is @ is @ is @ is @
Tax Liability is Tax Liability is Tax Liability is tax rate Tax Liability is
20 Per cent 20 Per cent shall be 20 Per cent 20 Per cent
Lower of: Lower of: Lower of: Lower of:
A A A 10 per cent A
20% if benefit 20% if benefit 20% if benefit without 20% if benefit
of indexation of indexation of indexation providing of indexation
is claimed is claimed is claimed benefit of is claimed
1st or 2nd
B B B Proviso to B
10% if 10% if 10% if section 48 10% if
Indexation is Indexation is Indexation is Indexation is
not claimed not claimed not claimed not claimed
Note: Tax on income covered u/s. 112A is not eligible for relief u/s. 87A.
Example: Mr. A earns total income of Rs. 4,80,000 for the year ending 31 March 2022 out of
which Rs. 280,000 is earned on account of long-term capital gains covered under
section 112A. Discuss tax liability of Mr. A:
Answer Computation of tax liability of Mr. A
Particulars Rs.
Tax on LTCG u/s. 112A
[2,80,000 – 1,00,000 – 50,000] 10% 13,000
Tax on balance normal income
[4,80,000 – 2,80,000 = 2,00,000] Nil
Total 13,000
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Rebate u/s. 87A Nil

Balance 13,000
Education Cess @ 4% 520
Total 13,520
Question 42
Discuss provisions of section 56(2)(x)
Answer
As per provisions of section 56(2)(x):
56(2)(x) where any person receives from any
other person on or after 1 April 2017
any sum of Any immovable property any property, other than

money,without immovable property:
Consideration, the
aggregate value of Without for a (a) without consideration,
which exceeds Rs. consideration, consideration, the aggregate fair market
50,000, the whole of the stamp duty the stamp duty value of which exceeds
the aggregate value value of which value of such Rs. 50,000, the whole of
of such sum shall be exceeds Rs. property as the aggregate fair market
treated as income 50,000, the exceeds such value of such property;
from other Sources stamp duty consideration, (b) for a consideration
value of such if the amount which is less than the
property shall of such excess is aggregate fair market
be treated as more than the value of the property by
income from following an amount
other sources amounts, exceeding Rs.50,000, the
aggregate fair
Rs. 50,000; and market value of such
property as exceed such
(ii) the amount Consideration;
equal to ten
per cent of the
consideration
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Amendment by Finance Act 2021

Provided also that in case of property being referred to in the second proviso to sub-section
(1) of section 43CA, the provisions of sub-item (ii) of item (B) shall have effect as if for the
words “ten per cent.”, the words “twenty per cent.” had been substituted
Important points:
1. In case of transfer of immoveable property, if date of agreement fixing the amount of
consideration for the transfer of immovable property and the date of registration are
not the same, the stamp duty value on the date of agreement may be considered;
2. However, point number 1 above shall apply only in a case where the amount of
consideration referred to therein, or a part thereof, has been paid by way of an account
payee cheque or an account payee bank draft or by use of electronic clearing system
through a bank account or through such other electronic mode as may be prescribed,
on or before the date of agreement for transfer of such immovable property:
3. Where the stamp duty value of immovable property is disputed by the assessee on
grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer
the valuation of such property to a Valuation Officer, and the provisions of section 50C
and sub-section (15) of section 155 shall, as far as may be, apply in relation to the
stamp duty value of such property for the purpose of this sub-clause as they apply for
valuation of capital asset under those sections;
4. Provisions of section 56(2)(x) shall not apply to any sum of money or any property
received—
a. from any relative; or
b. on the occasion of the marriage of the individual; or
c. under a will or by way of inheritance; or
d. in contemplation of death of the payer or donor, as the case may be; or
e. from any local authority as defined in the Explanation to clause (20) of section
10; or
f. from any fund or foundation or university or other educational institution or
hospital or other medical institution or any trust or institution referred to in
clause (23C) of section 10; or
g. from or by any trust or institution registered under section 12A or section 12AA
or section 12AB or
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h. by any fund or trust or institution or any university or other educational institution

or any hospital or other medical institution referred to in sub-clause (iv) or sub-
clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or
i. by way of transaction not regarded as transfer under clause (i) or clause (iv) or
clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic)
or clause (vica) or clause (vicb) or clause (vid) or clause (vii) or clause (viiae) or
clause (viiaf) of section 47; or
j. from an individual by a trust created or established solely for the benefit of
relative of the individual.
k. from such class of persons and subject to such conditions, as may be prescribed.*
*CBDT has prescribed Rule 11UAC for situations wherein provisions of section 56(2)(x)
shall not apply. These situations are as under:
5. Rule 11UAC: The provisions of clause (x) of sub-section (2) of section 56 shall not
apply to,-
(1) any immovable property, being land or building or both, received by a resident
of an unauthorised colony in the National Capital Territory of Delhi, where the
Central Government by notification in the Official Gazettee, regularised the
transactions of such immovable property based on the latest Power of Attorney,
Agreement to Sale, Will, possession letter and other documents including
documents evidencing payment of consideration for conferring or recognising
right of ownership or transfer or mortgage in regard to such immovable property
in favour of such resident.
Explanation.—For the purposes of this sub-rule,-
(a) “resident” means a person having physical possession of property on the
basis of a registered sale deed or latest set of Power of Attorney, Agreement
to Sale, Will, possession letter and other documents including documents
evidencing payment of consideration in respect of a property in unauthorised
colonies and includes their legal heirs but does not include tenant, licensee
or permissive user;
(b) “unauthorised colony” shall have the same meaning as assigned to it in
clause (b) of section 2 of the National Capital Territory of Delhi (Recognition
of Property Rights of Residents in Unauthorised Colonies) Act, 2019 (45 of
2019).
(2) any movable property, being unquoted shares, of a company and its subsidiary
and the subsidiary of such subsidiary received by a shareholder, where,-
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(i) the Tribunal, on an application moved by the Central Government under

section 241 of the Companies Act, 2013, has suspended the Board of Directors
of such company and has appointed new directors nominated by the Central
Government under section 242 of the said Act; and
(ii) share of company and its subsidiary and the subsidiary of such subsidiary
has been received pursuant to a resolution plan approved by the Tribunal
under section 242 of the Companies Act, 2013 after affording a reasonable
opportunity of being heard to the jurisdictional Principal Commissioner or
Commissioner.
Explanation— For the purposes of this sub-rule,-
(a) a company shall be a subsidiary of another company, if such other
company holds more than half in nominal value of the equity share
capital of the company;
(b) “Tribunal” shall have the meaning assigned to it in clause (90) of section
2 of the Companies Act, 2013 (18 of 2013).
(3) any movable property, being equity shares, of the reconstructed bank, received by
the investor or the investor bank, as the case may be, where the said share has
been allotted by the reconstructed bank under the scheme at a price specified in
sub-paragraph (3) of paragraph 3 of the scheme.
Explanation— For the purposes of this sub-rule-
(a) “investor” shall have the same meaning as assigned to it in sub-clause (b) of
clause (1) of paragraph 2 of the Scheme;
(b) “investor bank” shall have the same meaning as assigned to it in sub-clause
(c) of clause (1) of paragraph 2 of the Scheme;
(c) “reconstructed bank” shall have the same meaning as assigned to it in sub-
clause (d) of clause (1) of paragraph 2 of the Scheme;
(d) “Scheme” means Yes Bank Limited Reconstruction Scheme, 2020
6. The word “property” used in section 56(2)(X) means the following capital asset of the
assessee namely—
(i) immovable property being land or building or both;
(ii) shares and securities;
(iii) jewellery;
(iv) archaeological collections;
(v) drawings;
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(vi) paintings;
(vii) sculptures;
(viii) any work of art; or
(ix) bullion;
Provided these assets do not form part of stock in trade of the recipient;
7. The word “relative” means,—

(i) in case of an individual—
(A) spouse of the individual;
(B) brother or sister of the individual;
(C) brother or sister of the spouse of the individual;
(D) brother or sister of either of the parents of the individual;
(E) any lineal ascendant or descendant of the individual;
(F) any lineal ascendant or descendant of the spouse of the individual;
(G) spouse of the person referred to in items (B) to (F); and
(ii) in case of a Hindu undivided family, any member thereof;
8. As per section 49(4) in case of provisions of section 56(2)(x) getting attracted in a

particular case, then cost of acquisition for person receiving asset shall be the FMV of
the asset considered for the purposes of section 56(2)(x).
Summary of Gift
Covered U/S 56(2)(x) Exempted U/S 56(2)(x)

↓ ↓
Cost for donee Cost for donee
= FMV considered u/s 56(2)(x) = Cost to previous owner
↓ ↓
POH = from Date of Gift POH = from date when previous
owner acquired the asset
Question 43
Discuss provisions of section 45(3) and 45(4)?
Answer
As per section 45(3), the profits or gains arising from the transfer of a capital asset by a
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person to a firm or other association of persons or body of individuals (not being a company
or a co-operative society) in which he is or becomes a partner or member, by way of capital
contribution or otherwise, shall be chargeable to tax as his income of the previous year in
which such transfer takes place and, for the purposes of section 48, the amount recorded in
the books of account of the firm, association or body as the value of the capital asset shall
be deemed to be the full value of the consideration received or accruing as a result of the
transfer of the capital asset.

As per section 45(4), the profits or gains arising from the transfer of a capital asset by way
of distribution of capital assets on the dissolution of a firm or other association of persons
or body of individuals (not being a company or a co-operative society) or otherwise, shall
be chargeable to tax as the income of the firm, association or body, of the previous year
in which the said transfer takes place and, for the purposes of section 48, the fair market
value of the asset on the date of such transfer shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer.
S. 45(4) Notwithstanding anything contained in sub-section (1), where a specified person

receives during the previous year any money or capital asset or both from a specified entity
in connection with the reconstitution of such specified entity, then any profits or gains arising
from receipt of such money by the specified person shall be chargeable to income-tax as
income of such specified entity under the head “Capital gains” and shall be deemed to be
the income of such specified entity of the previous year in which such money or capital
asset or both were received by the specified person, and notwithstanding anything to the
contrary contained in this Act, such profits or gains shall be determined in accordance with
the following formula, namely:—
A = B+C-D
Where,
A = income chargeable to income-tax under this sub-section as income of the specified
entity under the head “Capital gains”;
B = value of any money received by the specified person from the specified entity on the date
of such receipt;
C = the amount of fair market value of the capital asset received by the specified person
from the specified entity on the date of such receipt; and
D = the amount of balance in the capital account (represented in any manner) of the specified
person in the books of account of the specified entity at the time of its reconstitution:
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Provided that if the value of “A” in the above formula is negative, its value shall be deemed
to be zero:
Provided further that the balance in the capital account of the specified person in the books
of account of the specified entity is to be calculated without taking into account the increase
in the capital account of the specified person due to revaluation of any asset or due to self-
generated goodwill or any other self-generated asset.
Explanation 1.––For the purposes of this sub-section,—
(i) the expressions “reconstitution of the specified entity”, “specified entity” and “specified
person” shall have the meanings respectively assigned to them in section 9B;
(ii) “self-generated goodwill” and “self-generated asset” mean goodwill or asset, as the
case may be, which has been acquired without incurring any cost for purchase or which
has been generated during the course of the business or profession.
Explanation 2.—For the removal of doubts, it is clarified that when a capital asseet is
received by a specified person from a specified entity in connection with the reconstitution
of such specified entity, the provisions of this sub-section shall operate in addition to the
provisions of section 9B and the taxation under the said provisions thereof shall be worked
out independently.’.
Question 44
Mr. V. becomes partner by introducing asset in ABC & Co., where FMV = Rs. 1,00,00,000
amount recorded in books of accounts is Rs. 60,00,000. Discuss tax implication for Mr. V &
ABC & co. if asset is introduced as:
(a) Jewellery
(b) Land / Building
(c) Unquoted shares
(d) Machinery
Assume that Cost of acquisition in the hands of Mr. V is Rs. 10,00,000. Also, assume in Case
(b) that Stamp Duty Value is same as FMV of the asset
Answer
In the hands of ABC & Co: As far as the firm ABC & Co is concerned, the firm has received
an asset worth Rs. 100,00,000 for Rs. 60,00,000. So the firm has acquired the asset for
inadequate consideration. Accordingly, for the firm in cases (a), (b) and (c), value of benefit
being Rs. 40,00,000 shall be taxable in the hands of ABC & Co as Income from Other Sources.
However, in case (d) there shall be no implication for ABC&Co under section 56(2)(x) since
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machinery is not regarded as “property” for the purposes of section 56(2)(x) of the Act.

In the hands of Mr. V: As far as Mr. V is concerned, capital gains arises for him as per provisions
of section 45(3) of the Act. In such a scenario, the full value of consideration shall be Rs.
60,00,000 [being amount recorded in books of accounts]. The capital gains shall be Rs.
50,00,000 [subject to indexation benefit].
Note: As far as case (b) and (c) are concerned, there is a controversy as to whether provisions
of section 50C / 50CA override provisions of section 45(3) or not. In case these sections
override section 45(3), then the fair market value / stamp duty value of the asset shall be
regarded as full value of consideration i.e. Rs. 1,00,00,000 and not Rs. 60,00,000. In the
case of Amaratara Private Limited [ITAT Mumbai], it was held that provisions of section 45(3)
is a transaction specific section whereas section 50C is an asset specific section. Accordingly,
transaction specific section shall prevail over asset specific section i.e. Section 45(3) shall
prevail over section 50C of the Act.
Question 45
Does provision of section 45(4) of the Act apply in the hands of the firm at the
time of dissolution of a firm or even otherwise?
Solution
A.N. Naik Associates (Bombay High Court)
Section 45(4) attracts when firm transfers asset to the partner. It is not necessary, that transfer
should be on the occasion of dissolution. Even transfer otherwise it will be considered as a
transfer u/s 45(4) of the Act.
Question 46 –
Discuss new provision of Section 9B inserted by Finance Act 2021?
Answer
Income on receipt of capital asset or stock in trade by specified person from specified entity.
9B. (1) Where a specified person receives during the previous year any capital asset or
stock in trade or both from a specified entity in connection with the dissolution or
reconstitution of such specified entity, then the specified entity shall be deemed to
have transferred such capital asset or stock in trade or both, as the case may be,
to the specified person in the year in which such capital asset or stock in trade or
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both are received by the specified person.

(2) Any profits and gains arising from such deemed transfer of capital asset or stock
in trade or both, as the case may be, by the specified entity shall be—
(i) deemed to be the income of such specified entity of the previous year in which
such capital asset or stock in trade or both were received by the specified
person; and
(ii) chargeable to income-tax as income of such specified entity under the head
“Profits and gains of business or profession” or under the head “Capital
gains”, in accordance with the provisions of this Act.
(3) For the purposes of this section, fair market value of the capital asset or stock in
trade or both on the date of its receipt by the specified person shall be deemed
to be the full value of the consideration received or accruing as a result of such
deemed transfer of the capital asset or stock in trade or both by the specified
entity.
(4) If any difficulty arises in giving effect to the provisions of this section and sub-
section (4) of section 45, the Board may, with the approval of the Central
Government, issue guidelines for the purposes of removing the difficulty.
(5) Every guideline issued by the Board under sub-section (4) shall, as soon as may
be after it is issued, be laid before each House of Parliament, and shall be binding
on the income-tax authorities and on the assessee.
Explanation.–– For the purposes of this section,—
(i) “reconstitution of the specified entity” means, where—
(a) one or more of its partners or members, as the case may be, of such specified
entity ceases to be partners or members; or
(b) one or more new partners or members, as the case may be, are admitted in
such specified entity in such circumstances that one or more of the persons who
were partners or members, as the case may be, of the specified entity, before
the change, continue as partner or partners or member or members after the
change; or
(c) all the partners or members, as the case may be, of such specified entity continue
with a change in their respective share or in the shares of some of them;
(ii) “specified entity” means a firm or other association of persons or body of individuals
(not being a company or a co-operative society);
(iii) “specified person” means a person, who is a partner of a firm or member of other
association of persons or body of individuals (not being a company or a co-operative
society) in any previous year.’
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Further, Section 48 has been amended by inserting the following clause:

“...(iii) in case of value of any money or capital asset received by a specified person from
a specified entity referred to in sub-section (4) of section 45, the amount chargeable
to income-tax as income of such specified entity under that sub-section which is
attributable to the capital asset being transferred by the specified entity, calculated in
the prescribed manner...”
Question 47
When dematerialized shares are transferred which were acquired in different lots on different
dates, how do you compute the cost of acquisition and consequently, the capital gains on
such shares?
Answer
As per section 45(2A) of the Act, where any person has had at any time during previous
year any beneficial interest in any securities, then, any profits or gains arising from transfer
made by the depository or participant of such beneficial interest in respect of securities shall
be chargeable to income-tax as the income of the beneficial owner of the previous year in
which such transfer took place and shall not be regarded as income of the depository who
is deemed to be the registered owner of securities by virtue of sub-section (1) of section 10
of the Depositories Act, 1996, and for the purposes of—
(i) section 48; and
(ii) proviso to clause (42A) of section 2,
the cost of acquisition and the period of holding of any securities shall be determined on the
basis of the first-in-first-out method.
Explanation—For the purposes of this sub-section, the expressions “beneficial owner”,
“depository” and “security” shall have the meanings respectively assigned to them in clauses
(a), (e) and (l) of sub-section (1) of section 2 of the Depositories Act, 1996.
Note:
1. When shares are transferred, capital gains arises for the investor (Beneficial owner)
and not the depository.
2. Dematerialized shares do not have a distinctive numbers, therefore to identify which
shares are transferred, we follow, FIFO (first in first out method).
3. As per circular 768 of 1995, the date mentioned on contract note shall be considered
as the date of acquisition / transfer of shares.
4. Further, if physical shares are dematerialized, then FIFO is applied on the basis of
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dematerializing date.
Question 48
Discuss the circumstances provided under section 47 of the Income-tax Act, 1961 when
transaction is not regarded as transfer?
Answer
The clause-wise analysis of section 47 is provided as under:
Section 47(i) states that any distribution of capital assets on the total or partial partition of a
Hindu undivided family is not regarded as transfer
1) Cost for co-parcener / Karta shall be the cost at which previous owner i.e. HUF acquired
the asset [S. 49(1)]
2) Period of Holding for co-parceners shall include period for which HUF held the asset [S.
2(42A)]
3) Indexation shall be allowed from date of acquisition of asset by previous owner i.e.
HUF (as held by Bombay High Court in the case of Manjula J. Shah)
4) In India after 31.12.1978, partial partition is not recognized. [S. 171(9)]
47(iii) states that any transfer of a capital asset under a gift or will or an irrevocable trust
is not regarded as transfer;
Provided that this clause shall not apply to transfer under a gift or an irrevocable trust of a
capital asset being shares, debentures or warrants allotted by a company directly or indi-
rectly to its employees under any Employees’ Stock Option Plan or Scheme of the company
offered to such employees in accordance with the guidelines issued by the Central Govern-
ment in this behalf;
Gift, Will or Irrevocable Trust
ESOP shares Any other Asset
Gift or Irrevocable Will Gift, will or irrevocable trust of such

Trust asset is not regarded as transfer
Regarded as Not Regarded

Transfer* as Transfer
* As per sixth proviso to section 48, Fair value of shares on date of transfer is regarded as consideration
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When a gift is made by donor, what will be the cost of acquisition for donee and his period
of holding, depends on whether provisions of section 56(2)(x) attracts in his case or not:
In case S. 56(2)(x) is attracted: In such scenario, the donee has paid tax on income arising
under section 56(2)(x) and therefore, for him, the fair value of asset considered under section
56(2)(x) shall be regarded as cost of acquisition. The period of holding shall commence from
the date of gift [Section 49(4)];
In case S. 56(2)(x) is not attracted: In such scenario, the cost of acquisition for donee shall be
same as cost of acquisition in the hands of the donor. The Period of Holding the asset shall
be reckoned from the date when previous owner acquired the asset i.e. the donor [Section
49(1)];
As per Section 47(iv)/(v):

(iv) any transfer of a capital asset by a company to its subsidiary company, if—
(a) the parent company or its nominees hold the whole of the share capital of the
subsidiary company, and
(b) the subsidiary company is an Indian company;
(v) any transfer of a capital asset by a subsidiary company to the holding company, if—
(a) the whole of the share capital of the subsidiary company is held by the holding
company, and
(b) the holding company is an Indian company:
Provided that nothing contained in clause (iv) or clause (v) shall apply to the
transfer of a capital asset made after the 29th day of February, 1988, as stock-
in-trade...”
1) Any transfer of asset by holding company to its subsidiary or vice versa shall not be
regarded as transfer if:
a. It is 100% subsidiary i.e. wholly owned.
b. Transferee company = Indian company
2) As per sec 47A, after claiming the above exemption u/s 47(iv) or 47(v), for a period of
8 years from the date of transfer:
(A) Holding Company cannot dilute its stake.
(B) Transferee company cannot convert capital asset into stock.

3) If within 8 years, any of the above conditions are violated, then in the year of original
transfer exemption u/s 47(iv)/(v) shall be withdrawn and capital gains shall be taxable
for the transferor in the year of original transfer.
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4) Cost for Transferee Company:

Cost = Cost to previous owner [Section 49(1)]
[POH from date of acquisition by previous owner]
[Indexation allowed from date of acquisition by previous owner]
However, if conditions stated above are violated then cost for transferee company shall
be the transaction value [Section 49(3)] [In such case, POH from date of transaction]
[Indexation allowed from date of transaction]
5) Example:
SC Limited was a company in which whole of its share capital was held by HC Limited.
Both companies are Indian companies. SC made investments in land on 01.04.1999 for
Rs. 3,00,000 which it sold to HC on 01.04.2010 for a consideration of Rs. 6,00,000. FMV
as on 01.04.2001 was Rs. 5,00,000 and Stamp duty value of land as on that date was
Rs. 4,00,000. You are required to compute the taxable capital gains if –
(A) HC Limited sold the land on 01.04.2021 for Rs. 70,00,000;
(B) SC Limited diluted its stake by 5 per cent on 01.04.2015 and then HC Limited sold
the land on 01.04.2021 for Rs. 70,00,000;
(C) SC Limited diluted its stake by 5 per cent on 01.04.2020 and HC Limited sold the
land on 01.04.2021 for Rs. 70,00,000;
(D) HC Limited converted capital asset into stock on 01.04.2015 (FMV on 01.04.2015
= Rs. 60,00,000) and HC Limited sold the land on 01.04.2021 for Rs. 70,00,000;
(E) HC Limited converted capital asset into stock on 01.04.2020 (FMV on 01.04.2020
= Rs. 60,00,000) and HC Limited sold the land on 01.04.2021 for Rs. 70,00,000;
[Ignore Indexation for the purposes of computation]
Solution:
Case (A): NO VIOLATION
Treatment for SC [Transferor] Treatment for HC [Transferee]
There is no transfer for SC and hence For HC, Cost = Cost of previous owner. Now as
no capital gains per amended S. 55 FMV as on 01.04.2001 cannot
exceed Stamp duty value as on that date if
available. Therefore, FMV / Cost shall be restricted
to Rs. 4,00,000. Further, the said asset is transferred
for Rs. 70,00,000. Therefore, capital gains arising
in the previous year 2020-21 is Rs. 70,00,000 –
4,00,000 = 66,00,000 [subject to indexation]
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Case (B): VIOLATION

There is violation by virtue on dilution of For HC now, Cost = transaction value
stake within 8 years. In such a case, the i.e. Rs.6,00,000. CG arising in the year
capital gains of Rs. [6,00,000 – 4,00,000] of transferis Rs. 70,00,000 – 6,00,000 =
shall be taxable in the year of original 64,00,000
transfer i.e. FY 2010-11.
Case C: There is no violation since dilution of stake is beyond 8 years. Therefore answer
remains same as in Case A
Case D: VIOLATION

There is violation by virtue of conversion of For HC now, Cost = transaction value i.e.
capital asset into stock within 8 years. In such Rs. 6,00,000. However, capital gains arises
a case, the capital gains of Rs. [6,00,000 – on 01.04.2015 the moment capital asset is
4,00,000] shall be taxable in the year of converted into stock in trade. The CG shall
original transfer i.e. FY 2010-11. be Rs. 60,00,000 – 6,00,000 = 54,00,000
which shall be taxable in the year of sale
of stock. Further, in the previous year 2021-
22, Business Income shall be Rs. 70,00,000
– 60,00,000 = 10,00,000
Case E:
There is no violation since dilution of stake For HC, Cost = cost of previous owner i.e.
is beyond 8 years. Therefore answer remains Rs. 4,00,000. However, capital gain arises
same as in Case A for transferor company on 01.04.2015 the moment capital asset is
converted into stock in trade. The CG shall
be Rs. 60,00,000 – 4,00,000 = 56,00,000
which shall be taxable in the year of sale
of stock. Further, in the previous year 2021-
22, Business Income shall be Rs. 70,00,000
– 60,00,000 = 10,00,000
6) As per sec 155(7B), if violation u/s 47A (within 8 years) then Assessing Officer may
rectify the order, to charge capital gain in the hands of transferee company and such
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rectification shall be conducted within 4 years from end of year, in which violation
occurs.
7) Emami Infrastructure Ltd. v/s ITO (ITAT Kolkata): Transaction between holding company
and its 100% ‘step down’ subsidiary [subsidiary of subsidiary] is eligible for exemption
u/s 47(iv)/(v)
8) Exemption under 47(iv)/(v) is not applicable if a capital asset is transferred by holding

company as a stock in trade to subsidiary company.
9) Provision of Section 56(2)(x) does not apply to transactions covered u/s 47(iv) and
47(v)
Sec 47(vi)/(vii): Amalgamation:
Provision:
(vi) any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating
company to the amalgamated company if the amalgamated company is an Indian
company;
(vii) any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being
a share or shares held by him in the amalgamating company, if—
(a) the transfer is made in consideration of the allotment to him of any share or shares in
the amalgamated company except where the shareholder itself is the amalgamated
company, and
(b) the amalgamated company is an Indian company;
Important points:
1) Conditions for valid amalgamation: As per Section 2(1B), following 3 conditions must be
satisfied for valid amalgamation:
(a) All property of amalgamating company immediately prior to amalgamation
becomes property of amalgamated company.
(b) All liability of amalgamating company immediately prior to amalgamation
becomes property of amalgamated company.
(c) Shareholders holding ≥ 3/4th in value of shares (other than shares already held
by amalgamated company, its subsidiary / nominee) becomes shareholders of
amalgamated company by virtue of amalgamation.
2) Example: X Limited merges into Y Ltd. and following is the shareholding of X.
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Name of Share- % Shareholding Whether joining new company

holder
A 60 Yes
B 20 Yes
C 10 No
D 10 No
Total 100%
The third condition is satisfied in above scenario since shareholders holding 80% shares
have agreed to join in the new company.
3) Once the transaction is a valid amalgamation there are 2 exemptions:

(A) As per section 47(vi), there is no taxable transfer for amalgamating company.
(B) Although shareholders EXCHANGE shares of amalgamating company for shares
of amalgamated company, it will not be regarded as taxable transfer as per
Section 47(vii).
Demerger:
As per section 47(vib), any transfer, in a demerger, of a capital asset by the demerged com-
pany to the resulting company, if the resulting company is an Indian company;
As per section 47(vid) any transfer or issue of shares by the resulting company, in a scheme
of demerger to the shareholders of the demerged company if the transfer or issue is made in
consideration of demerger of the undertaking;
Important points:
1) As per section 2(19AA), for a valid demerger following conditions need to be satisfied:
(a) All property of the undertaking being demerged becomes property of resulting
company.
(b) All liabilities of undertaking being demerged become liabilities of resulting
company.
(c) The transfer is recorded at values appearing in books of accounts unless demerger
is recorded in compliance to IndAS (at fair value)
(d) Consideration for demerger must be only shares
(e) Demerger is conducted on going concern basis.
(f) Shareholders holding not less than 3/4th in value of shares (other than shares
already held by resulting company, its subsidiary or its nominee) becomes
shareholders of resulting company by virtue of demerger.
If the above conditions are satisfied then there is no taxable transfer for the
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demerged company or for shareholders.

Explanation 6––For the purposes of this clause, the reconstruction or splitting up of a
public sector company into separate companies shall be deemed to be a demerger, if such
reconstruction or splitting up has been made to transfer any asset of the demerged company
to the resulting company and the resulting company––
(i) is a public sector company on the appointed day indicated in such scheme, as may be
approved by the Central Government or any other body authorised under the provisions
18 of 2013. of the Companies Act, 2013 or any other law for the time being in force
governing such public sector companies in this behalf; and
(ii) fulfils such other conditions as may be notified by the Central Government in the Official
Gazette in this behalf;”;
2) When amalgamation occurs, cost of shares of amalgamated company = cost of shares of

amalgamating company
Further, period of holding of new shares shall be reckoned from the date from which shares
of old company were acquired.
In case of demerger, cost of shares in demerged company will be split between demerged
company and resulting company as under:
Cost of Original Shares × Net Book
Value of Assets of Demerged co
Cost of shares of resulting company =
Net worth of Demerged Company
[immediately before demerger]
3) The cost of shares of demerged company [after demerger] = cost of original shares –
cost of resulting company’s shares [arrived as per above formula] [Section 49(2D)]
4) Period of Holding for both demerged & resulting company’s shares starts from the date
when original shares were acquired.

Mr. M had purchased 500 shares of Indian company XYZ Ltd on 17th March 2017 at the
cost of Rs. 150 per share (STT paid). As per scheme of amalgamation dated 10th January,
2018 between XYZ Ltd with another Indian company PQR Ltd, Mr M received 250 shares of
PQR Ltd in lieu of his shareholding in XYZ Ltd. On 4th April 2021, Mr. M sold shares of PQR
Ltd at Rs. 325 per share (STT paid).
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Date (FMV as on) Company Fair market value per share (quoted
price on
stock exchange)
10th January 2018 XYZ Ltd Rs.160
10th January 2018 PQR Ltd Rs.320
31st January 2018 PQR Ltd Rs.360
What is the cost of acquisition for computation of capital gains on sale of shares of PQR
Ltd?
(a) Rs. 81,250
(b) Rs. 90,000
(c) Rs. 37,500
(d) Rs. 85,000
Answer: (a)
Space for working out answer:
As per section 47(viia) of the Income-tax Act, 1961 transfer of Global Depository Receipts by one
non-resident to another non-resident outside India shall not be regarded as transfer
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1) GDR is a derivative which derives its value from the underlying shares which is placed
with the overseas Custodian Bank.
Global Depository Receipt
Transfer before Transfer on

redemption redemption
Outside India by Within India at Any other The underlying share

one non-resident International case are acquired in lieu of
to another non- Financial Service GDRs redeemed and this
resident Centre It is a constitutes a transfer.
taxable The Fair Market value of
Not a taxable Not a taxable transfer consideration, Further, the
transfer (S.47(Viia)) transfer (S.47(Viia)) cost of acquisition of shares
shall be such FMV considered
as FVOC, Also the period of
holding the shares shall
commence from the date of
redemption request
2) Example:Mr. Manish a non-resident acquired 10,000 GDR at the cost of 1,00,00,000

on 1.4.2015. He made a redemption request on 27.02.2022 on which date, thefair
value of underlying shares was Rs. 2,50,00,000. The underlying shares were actually
allotted on 10th March, 2022 on which date the fair value of underlying shares was Rs.
3,00,00,000. These shares were transferred via recognized stock exchange on 31.3.2022
for Rs. 5,00,00,000. Discuss tax implications.
Answer
The threshold period to categorize GDR as LTCA / STCA is 36 months. The gain is computed
as under. Since period of holding in the above exceeds 36 months, the resultant capital
asset is long term in nature. However, as per section 115AC(iii)(c), no benefit of indexation is
available on transfer of Global Depository Receipts. The gains are computed as under:
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Full value of consideration 2,50,00,000

Cost of acquisition * (1,00,00,000)
Long term capital gains 1,50,00,000
Tax on above @ 10% 15,00,000
Capital Gain on transfer of shares
Full Value of consideration 5,00,00,000

Cost of acquisition (2,50,00,000)
STCG 2,50,00,000
Tax on above @ 15% u/s. 111A 37,50,000
3) Section 115AC defines GDR as a derivative whose underlying shares are listed on a
recognized stock exchange in India. Incase the underlying shares are unlisted then
what will be the tax treatment, is currently not provided in law.
In October, 2015, Mr. Raghav, an Indian citizen who is a non-resident,bought 500
Global Depository Receipts (GDRs) of Alpha Limited, India,issue dinaccordance with
the notified scheme of the Central Government against the company’s initial issue
of share sin foreign currency. InJanuary,2021,he sold 300 GDRs outside India to Mr.
Joe, a citizen and resident of a country outside India and 200 GDRs to Mr. Kamal, a
Resident but not ordinarily resident in India. What are thetax consequences of such
sale transaction under the Income-tax Act,1961?
(a) Capital gains arising on sale of 500 GDRs shall be subject to tax @20% with
indexation benefit inIndia
(b) No capital gains would arise on sale of 500 GDRs in India, since the GDRs are
purchased in foreign currency
(c) No capital gains would arise on sale of 300 GDRs, but capital gains arising on
sale of 200 GDRs shall be taxed in India @10%without indexation benefit
(d) No capital gains would arise on sale of 300 GDRs, but capital gains arising on
sale of 200 GDRs shall be taxed @20% with indexation benefit in India
Answer:(c)

As per section 47(viib), transfer of government securities by one Non-resident to another
non-resident outside India is not regarded as transfer.
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As per section 47(viic), transfer of Sovereign Gold Bonds at the time of redemption by an
assessee being an Individual is not regarded as transfer.
Sovereign Gold Bond
If Assessee is an Individual If Assessee is other than Individual
Transfer is taxable
Transfer on redemption Transfer before
is not taxable as per redemption is taxable in
S47 (viic) the hands of assessee*
* Benefit of indexation is allowed while computing capital gains
As per section 47(ix), Any transfer of a drawing, painting, photograph etc. to a National Art
Gallery, Museum, Government or notified place is not regarded as transfer.
As per section 47(x) any transfer by way of conversion of bonds or debentures, debenture-
stock or deposit certificates in any form, of a company into shares or debentures of that
company is NOT regarded as transfer;
As per section 47(xa) any transfer by way of conversion of bonds referred to in clause (a) of
sub-section (1) of section 115AC into shares or debentures of any company is NOT regarded
as transfer;
As per section 47(xb) any transfer by way of conversion of preference shares of a company
into equity shares of that company is NOT regarded as transfer;
1) Cost of shares = Cost at which debenture / bond / preference shares was acquired.
2) Period of Holding of shares shall include period for which debenture / bond /
preference shares were held by the assessee.
47(xiii) – Demutualization / Corporatization of stock Exchange

Stock exchange in India was formed as AOP. However, it was later recognized that a corporate
structure would be a better form to govern such entity rather than as a AOP.
Accordingly, for those stocks exchanges which demutualise by becoming a corporate entity
exemption was provided u/s 47(xiii)
Any transfer of a capital asset during such demutualization is not considered as transfer.
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Further as per section 47(xiiia) acquisition of shares in lieu of membership right is also not
considered as transfer.
47 (xiii)
BSE BSE
(AOP) (Ltd.)
Membership Shares 47 (xiiia)

relinquisheb
Member of stock
exchange
For the Members,
Cost of acquisition of shares = Cost of acquisition of original membership rights
Cost of trading / clearing right = NIL
As per Section 47(xiv) Conversion of sole proprietary into company is not regarded as transfer
subject to fulfilment of the following conditions:
(i) All assets and liabilities of the sole proprietory concern are taken over by the company.
(ii) Consideration for transfer is shares only.
(iii) Shareholding of sole proprietor is at least 50% of total voting power and it remains as such
for a period of 5 years from date of succession.
In case of Violation:
If any of the above conditions are violated, the capital gains which was not taxed earlier,
shall now be charged to tax in the hands of successor company in the year of violation.
As per Section 47(xiii), when there is a conversion of firm into a company, the transaction is not
regarded as transfer subject to following conditions:
(i) All assets & liabilities are taken over by the company.
(ii) All partners of the firm become shareholders and this shareholding is in the same ratio as
their capital accounts stood before succession.
(iii) Consideration for conversion = shares.
(iv) Aggregate shareholding of partners ≥ 50%, maintained for a period of 5 years.
In case of Violation:
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If any of the above conditions are violated, the capital gains which was not taxed earlier,
shall now be charged to tax in the hands of successor company in the year of violation.
As per section 47(xiiib), conversion of unlisted or private company into LLP, is not regarded as
transfer subject to following conditions:
(a) All assets & liabilities of the company immediately before conversion are taken over by the
LLP.
(b) All shareholders of company become partners of LLP and their [capital contribution + PSR]
remains in same proportion as their shareholding.
(c) Consideration for conversion = Capital contribution + PSR
(d) Aggregate PSR of shareholders shall not be less than 50% for 5 years.
(e) Total Turnover of company in any of the last 3 years ` 60,00,000.
(f) Total value of assets as appearing in Books of accounts in any of the last 3 years ` 5,00,00,000
(g) The accumulated reserves of the company cannot be withdrawn for 3 years from date of
conversion.
Note: Even the shareholders of such company are eligible for exemption.
Violation: u/s 47A

In case any of the above conditions are violated the capital gain shall be charged to tax in
the hands of successor LLP and shareholders of such company in the year of violation.
As per section 47(xv) transfer of shares under security lending scheme is not regarded as taxable
transfer
As per section 47(xvi), transfer of property under Reverse mortgage is NOT

Regarded as transfer
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As per Section 47(xviii), Consolidation of 2 schemes of mutual funds is not regarded as transfer.
However, such consolidation must be either of 2 equity funds / 2 funds other than equity funds.
Further as per sec 47(xix), consolidation of 2 plans (growth/dividend) within / scheme of mutual
funds is also not regarded as transfer.
Question 49
How does one compute capital gains in case the transferred asset is a depreciable asset?
Answer
As per section 50, when full value of consideration exceeds (opening WDV of Block + cost of
addition in Block) then resultant gain / loss is deemed as Short term capital gains and the gain
is computed as under:
Full Value of Consideration XXX

Expenditure incurred for transfer XXX
Net consideration XXX
Opening WDV of block XXX
(+) Cost of addition to block XXX XXX
Short Term Capital Gains XXX
Note: Also, in case there are no assets left in the block of assets, then the value of block
shall be treated as short term capital loss;
Question 50
What is Slump Sale? How to compute capital gains in case of slump sale?
Answer
Tax treatment of slump sale is covered under section 50B of the Act. Its salient
features are:
(a) Slump sale is a transaction wherein, the entire undertaking is transferred ‘LOCK,
STOCK & BARREL’ i.e. ALL assets and liabilities are transferred without assigning any
particular value to individual asset / liability. Capital asset is the entire undertaking,
whose period of holding needs to be considered while computing capital gains. Such
undertaking is transferred as a result of sale transferred by any means [words substituted
by Finance Act 2021]
For the purposes of this clause, “transfer” shall have the meaning assigned to it in Section 2
clause (47)
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Fair market value of the capital assets as on the date of transfer, calculated in the prescribed
manner, shall be deemed to be the full value of the consideration received or accruing as a
result of the transfer of such capital asset
(b) No benefit of indexation is available while computing the gains.
(c) Cost of Acquisition: Net worth of the undertaking.
 While computing net worth, we need to ignore any revaluation and the WDV of
the asset (depreciable) shall be considered as per Income Tax Act
 in the case of capital asset being goodwill of a business or profession, which has not
been acquired by the assessee by purchase from a previous owner, nil
(d) In case resultant capital gains is short term, then it is taxable at normal rates and in
case the gains are long term, then the capital gains is taxable at 20%
(e) CIT v/s Summit Securities (ITAT Mumbai – Special Bench)
In case net worth is negative, then same shall be added to the FVOC in order to arrive
at the capital Gain.
Suppose the Consideration is Rs. 100 and the net worth of undertaking is Rs. (-) 10,
then resultant capital gains shall be Rs. 110
(f) Asseessee must obtain a report from an accountant in Form 3CEA which must be
furnished on or before due date under section 44AB of the Act.
(g) Merely because asseessee assign value to individual asset / liability being land or
building for limited purpose of payment of stamp duty, it will not be considered as
violation of principle of slump sale.
Amendment by Finance Act 2021 explained

Earlier Capital Gain on slump sale transactions of an undertaking was calculated as the difference
between the actual sales consideration and the net worth (cost of acquisition + cost of improvement).
From FY 2020-21 onwards, fair market value of capital assets on slump sale transaction will be
deemed to be the full value of the consideration received by the seller of the asset. If the Capital
asset is goodwill, its value will be treated as nil if the taxpayer had not acquired it through a
purchase from a previous owner. This will increase the capital gain arising from M&A transactions.
Question 51
X Limited has transferred its Unit N to Y Limited by way of slump sale on November 30,
2021. The summarised Balance Sheet of X Limited as on that date is given below:
Liabilities Rs. Assets Rs.
Paid up capital 1700 Fixed assets
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Reserves & Surplus 620 Unit L 150

Liabilities Unit M 150
Unit L 40 Unit N 550
Unit M 110 Other assets:
Unit N 90 Unit L 520
Unit M 800
Unit N 390
Total 2560 Total 2560
Using the further information given below, compute the capital gain arising from
slump sale of Unit N and tax on such capital gain.
(1) Lump sum consideration on transfer of Unit N is ` 880 lakhs.
(2) Fixed assets of Unit N include land which was purchased at ` 60 lakhs in August 2007
and revalued at ` 90 lakhs as on March 31, 2021.
(3) Other fixed assets are reflected at Rs. 460 lakhs (i.e. Rs. 550 lakhs less value of land)
which represents written down value of those assets as per books. The written down
value of these assets under section 43(6) of the Income-tax Act, 1961 is Rs. 410 lakhs.
(4) Cost inflation index for financial year 2007-08 and financial year 2020-21 are 129 and
301, respectively.
Answer
Computation of capital gain on slump sale of Unit N under section 50B
Particulars Rs.
Sale consideration for the slump sale of Unit N 880
Less: Net worth of Unit N (Refer Note 1 below) 770
Long term capital gain arising on slump sale 110
Computation of tax liability of X Ltd. on slump sale of Unit N
Particulars Rs. In lakhs

Tax on capital gains @ 20% 22.00
Add: Surcharge @ 7% 1.54
23.54
Add: Health & Education Cess @ 4% 0.94
Total tax liability on capital gain arising on slump sale of Unit N 24.48
Notes:
1. The net worth of an undertaking transferred by way of slump sale shall be deemed to
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the cost of acquisition and cost of improvement for the purposes of section 48 and 49
[Section 50B(2)].
Computation of net worth of Unit N

(A) Book value of non-depreciable assets:
(i) Land (Revaluation is to be ignored for computing net worth) 60
(ii) Other assets 390
(B) Written down value of depreciable assets under section 43(6) 410
Aggregate value of total assets 860
Less: Value of liabilities of Unit N 90
Net worth of Unit N 770
2. Since Unit N is held for more than 36 months, the capital gains of ` 110 lacs arising
on transfer of such unit would be a long term capital gain taxable under section 112.
However, indexation benefit is not available in the case of a slump sale.
Question 52
The Balance sheet of JB Opticals Limited as on 31-03-2022 reads as under:
Paid up capital ` 2,52,00,000
Unit A Unit B
Fixed Assets 1,00,00,000 150,00,000
Debtors 1,00,00,000 75,00,000
Liabilities 28,00,000 50,00,000
Stock in Trade 50,00,000 25,00,000
Reserves 148,00,000
Share premium 22,00,000
The company acquired Unit B on 1.04.2018. They made certain capital additions in the form
of Generator set and additional building etc., for ` 25 lacs during the year 2017-18. The
members of the company have authorized the Board in their meeting held on 28.01.2022
to dispose of Unit ‘B’. The company decides to sell Unit ‘B’ by way of slump sale for ` 225
lacs as consideration. The buyer is keen on buying the unit at the earliest, preferably before
31.3.2022. JB Opticals Ltd. has offered 4% discount if the buyer closes the sale and makes
payment between 1.4.2022 and 30.4.2022, since the company would be able to avail
benefit of concessional rate of tax on long-term capital gains. Accordingly, this discount
would not be available if the sale is completed (and payment is made) before 31.03.2022.
You are required to advise the company as a measure of tax planning to determine the date
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of sale keeping in view the capital gains tax. Assume that the written down value of the
fixed assets as per section 43(6) is ` 120 lacs.
Would your answer change if the buyer is ready to accept discount of 3%, other facts
remaining the same?
Note: Total turnover for the P.Y. 2019-20 was ` 450 crore. Assume Company has not opted
for provisions of section 115BAA and 115BAB.
Solution
Determination of net worth of Unit B of M/s. J.B. Opticals Ltd.
Particulars Rs.
Written down value of fixed assets 120
Debtors 75
Stock in Trade 25
Sub-total 220
Less: Liabilities 50
Net Worth 170
Comparative calculation of chargeable capital gains

Particulars Sale before Sale after
31.03.2022 31.03.2022
Sale consideration 2,25,00,000 2,25,00,000
Less: Discount 0 9,00,000
Net sale consideration 2,25,00,000 2,16,00,000
Less: Net worth 1,70,00,000 1,70,00,000
Short term capital gain 55,00,000 NA
Long term capital gain NA 46,00,000
Tax rate 31.20% 20.80%
Tax thereon 17,16,000 9,56,800
Computation of Net cash inflow

31.03.2022 31.03.2022
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Less: Income tax 17,16,000 9,56,800

Net cash flow 2,07,84,000 2,06,43,200
Note: The assessee is advised to effect slump sale before 31.03.2022 as the net cash flow
arising from sale affected before 31.03.2022 is higher than the net cash flow arising from
sale affected after 31.03.2022, inspite of the higher rate of tax on short-term capital gains.
Alternate Situation: If the buyer is ready to accept discount of 3% offered by J.B. Opticals Ltd.
In this case, the capital gain tax and net cash flow would be as under:
Comparative calculation of chargeable capital gains

31.03.2022 31.03.2022
Less: Net worth 1,70,00,000 1,70,00,000
Short term capital gain 55,00,000 NA
Long term capital gain NA 48,25,000
Tax rate 31.20% 20.80%
Tax thereon 17,16,000 10,03,600
Computation of Net cash inflow

31.03.2022 31.03.2022
Less: Income tax 17,16,000 10,03,600
Net cash flow 2,07,84,000 2,08,21,400
Note: In case the buyer is ready to accept discount of 3%, the assessee can effect slump sale
after 31.03.2022 as the net cash flow arising from sale effected after 31.03.2022 is higher
than the net cash flow arising from sale effected before 31.03.2022.
Question 53
PQR Limited has two units - one engaged in manufacture of computer hardware and the
other involved in developing software. As a restructuring drive, the company has decided
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to sell its software unit as a going concern by way of slump sale for Rs. 385 lacs to a new
company called S Limited, in which it holds 74% equity shares.
The balance sheet of PQR limited as on 31st March 2022, being the date on which software
unit has been transferred, is given hereunder –
Balance Sheet as on 31.3.2022
Liabilities Rs. In lakhs Assets Rs. In lakhs

Paid up capital 300 Fixed assets
General Reserves 150 Hardware Unit 170
Share premium 50 Software Unit 200
Revaluation Reserves 120 Debtors
Current liabilities Hardware Unit 140
Hardware Unit 40 Software Unit 110
Software Unit 90 Inventories
Hardware Unit 95
Software Unit 35
Total 750 Total 750
Following additional information are furnished by the management:
(i) The Software unit is in existence since May, 2015.
(ii) Fixed assets of software unit includes land which was purchased at ` 40 lacs in the year
2008 and revalued at ` 60 lacs as on March 31, 2022.
(iii) Fixed assets of software unit mirrored at ` 140 lacs (` 200 lacs minus land value ` 60
lacs) is written down value of depreciable assets as per books of account. However, the
written down value of these assets under section 43(6) of the Income-tax Act, 1961 is `
90 lacs.
(a) Ascertain the tax liability, which would arise from slump sale to PQR Limited.
(b) What would be your advice as a tax-consultant to make the restructuring plan of
the company more tax-savvy, without changing the amount of sale consideration?
Answer
a) As per section 50B, any profits and gains arising from the slump sale effected in the
previous year shall be chargeable to income-tax as capital gains arising from the
transfer of capital assets and shall be deemed to be the income of the previous year in
which the transfer took place.
If the assessee owned and held the undertaking transferred under slump sale for more
than 36 months before slump sale, the capital gain shall be deemed to be long-term
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capital gain. Indexation benefit is not available in case of slump sale as per section
50B(2).
Ascertainment of tax liability of PQR Limited from slump sale of software unit
Particulars Rs.
Sale consideration for the slump sale of Software unit 385
Less: Net worth of Software (Refer Note 1 below) 185
Long term capital gain arising on slump sale 200
Computation of tax liability of PQR Ltd. on slump sale of Unit Software

Tax on capital gains @ 20% 40.000
Add: Surcharge @ 7% 2.800
42.800
Add: Health & Education Cess @ 4% 1.712
Total tax liability on capital gain arising on slump sale of Unit Software 44.512
Notes:
1. The net worth of an undertaking transferred by way of slump sale shall be deemed to
the cost of acquisition and cost of improvement for the purposes of section 48 and 49
[Section 50B(2)].
Computation of net worth of Unit N

(A) Book value of non-depreciable assets:
(i) Land (Revaluation is to be ignored for computing net worth) 40
(ii) Debtors 110
(iii) Inventories 35
(B) Written down value of depreciable assets under section 43(6) 90
Aggregate value of total assets 275
Less: Value of liabilities of Unit Software 90
Net worth of Unit Software 185
Note: For computing net worth, the aggregate value of total assets in the case of depreciable
assets shall be the written down value of the block of assets as per section 43(6).
(b) Tax advice

(i) Transfer of any capital asset by a holding company to its 100% Indian subsidiary
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company is exempt from capital gains under section 47(iv). Hence, PQR Limited should
try to acquire the remaining 26% equity shares in S Limited then make the slump sale
in the above said manner, in which case the slump sale shall be exempt from tax. For
this exemption, PQR Limited will have to keep such 100% holding in S Limited for a
period of 8 years from the date of slump sale, otherwise the amount exempt would be
deemed to be income chargeable under the head “Capital Gains” of the previous year
in which such transfer took place.
(ii) Alternatively, if acquisition of 26% share is not feasible, PQR Limited may think about
demerger plan of Software Unit to get benefit of section 47(vib) of the Income-tax Act,
1961.
Test your Knowledge:

Delta Limited has three Units – Alpha, Beta and Gamma. It transferred its Unit Gamma
to Epsilon Limited by way of slump sale on 28th February, 2022. The Balance Sheet
of Delta Limited as on that date is given below:
Rs. Rs.
Liabilities Assets
(in lakhs) (in lakhs)
Paid up capital 2,550 Fixed Assets:
Reserve & Surplus 930 Unit Alpha 225
Unit Beta 225
Liabilities: Unit Gamma 825
Unit Alpha 60 Other Assets:
Unit Beta 165 Unit Alpha 780
Unit Gamma 135 Unit Beta 1,200
Unit Gamma 585
Total 3,840 Total 3,840
Additional information:
(i) Lump sum consideration on transfer of Unit Gamma is Rs. 1,320 lakhs.
(ii) Fixed assets of Unit Gamma include land which was purchased at Rs. 90 lakhs
in March, 2019 and revalued at Rs. 135 lakhs as on March 31, 2021.
(iii) Other fixed assets are reflected at Rs. 690 lakhs (i.e. Rs. 825 lakhs less value
of land) which represents written down value of those assets as per books. The
written down value of these assets u/s 43(6) of the Income-tax Act, 1961 is Rs.
615 lakhs.
(iv) Unit Gamma was set up by Delta Limited in March, 2020.
(v) Assume that the turnover of Delta Ltd. for F.Y. 2019-20 is Rs. 1295 lakhs and
Delta Ltd. has not opted for section 115BAA.
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(vi) Book profit of Delta Ltd. computed as per section 115JB is Rs. 400 lakhs
From the information given above, choose the most appropriate answer to the fol-
lowing questions -
1. For computing capital gains on slump sale of Unit Gamma, what would be the
deemed cost of acquisition and improvement for the purposes of section 48 and
49 and the resultant capital gains?
(a) Rs. 1275 lakhs and Rs. 45 lakhs, respectively
(b) Rs. 1230 lakhs and Rs. 90 lakhs, respectively
(c) Rs. 1200 lakhs and Rs. 120 lakhs, respectively
(d) Rs. 1155 lakhs and Rs. 165 lakhs, respectively
2. What is the tax liability on capital gain arising on slump sale of Unit Gamma?
(a) Rs. 55,08,360
(b) Rs. 45,90,300
(c) Rs. 57,65,760
(d) Rs. 48,04,800
3. If Unit Gamma was set up on March, 2010 instead of March, 2020, and the sale
consideration is Rs. 3000 lakhs instead of Rs. 1320 lakhs, what would be the
capital gains arising to Delta Ltd. on slump sale and the resultant tax liability?
The CII of F.Y.2009-10 is 148 and F.Y.2021-22 is ___. Assume that there is no
change in any other information given in the case scenario.
(a) Rs. 650.98 lakhs and Rs. 135.40 lakhs, respectively
(b) Rs. 650.98 lakhs and Rs. 181.10 lakhs, respectively
(c) Rs. 1845 lakhs and Rs. 429.81 lakhs, respectively
(d) Rs. 1845 lakhs and Rs. 410.62 lakhs, respectively
4. What would be the minimum alternate tax computed under section 115JB for
A.Y.2022-23, if Delta Ltd. is located in an IFSC?
(a) Rs. 66,76,800
(b) Rs. 62,40,000
(c) Rs. 40,06,080
(d) Rs. 37,44,000
5. If Delta Ltd. is located in an IFSC and has distributed dividend of Rs. 200 lakhs
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in the P.Y.2021-22, what would be the tax implications in the hands of Delta Ltd.
and shareholders?
(a) No distribution tax in the hands of Delta Ltd. and no income-tax in the
hands of the shareholders in respect of dividend so distributed
(b) Delta Ltd. is liable to pay distribution tax; income is exempt in the hands
of shareholders
(c) No distribution tax in the hands of Delta Ltd.; shareholders liable to tax on
dividend income
(d) No distribution tax in the hands of Delta Ltd.; shareholders liable to tax on
aggregate dividend income in excess of Rs. 10 lakh
Answer Key
Question Answer
No.
1 (d) Rs. 1155 lakhs and Rs. 165 lakhs, respectively
2 (b) Rs. 45,90,300
3 (c) Rs. 1845 lakhs and Rs. 429.81 lakhs, respectively
4 (c) Rs. 40,06,080
5 (a) No distribution tax in the hands of Delta Ltd. and no income-
tax in the hands of the shareholders in respect of dividend so
distributed
Question 54
Discuss special provision for computation of capital gains in case of transfer of land or
building or both?
Answer
Special provisions for computation of capital gains in case of transfer of land or building or
both are comprised in Section 50C of the Income-tax Act, 1961:
(i) As per Section 50C in case of transfer of immovable property being land / building or
both, FVOC = Higher of Agreement Value [AV] or Stamp Duty Value [SDV].
(ii) However, as per 3rd proviso to Section 50C(1), if stamp Duty value ≤ 110% of Agreement
value then FVOC = Agreement value.
E.g. AV SDV FVOC
100 Cr. 120 Cr. 120 Cr.
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100 Cr. 115 Cr. 115 Cr.

100 Cr. 109 Cr. 100 Cr.
(iii) As per 1st proviso to sec 50C(1), if date of agreement and date of registration are not
the same, then we consider the SDV as on date of agreement.
However, 2nd proviso puts an added condition that on or before date of agreement
at least part of consideration must have been paid by account payee cheque, account
payee draft, Electronic Clearing System through Bank account or other modes as may
be prescribed;
Land / Building
Part consideration paid on / before Any other case

date of agreement by Account payee ↓
cheque / draft / ECS SDV on date of registration
↓
SDV of Date of agreement
AV SDV SDV Consideration on / SDV? AV FVOC

(Reg) (Agreement) Before Agreement
date
100 118 106 `10,000 × in cash 118 100 118
100 107 116 `1,00,000 in ECS 116 100 116
100 106 104 `3,00,000 in ECS 104 100 100
100 107 103 `3,00,000 in cross 107 100 100
cheque*
* In this scenario assessee has accepted specified sum in contravention of provisions of
section 269SS. Therefore, equivalent amount is imposable u/s 271 D.
Question 55
Discuss provisions of Section 50C(2) with regard to reference to Department
Valuation Officer [DVO]?
Answer
(i) If the assessee feels that stamp duty value is higher than fair value of the property
then it is the buyer who has the first right to challenge the stamp valuation under
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stamp duty law.

(ii) If buyer does not make such challenge then the seller may request the AO, to refer the
valuation of such property to Department Valuation Officer (DVO). The DVO will take
into account all evidences and determine fair value of the properly, so however that,
such determined value cannot exceed stamp duty value.
(iii) For the buyer of immovable property there will be exposure u/s 56(2)(x) provided value
of benefit exceeds > 50,000.
Value of Benefit = FVOC considered u/s. 50C – Agreement value
(iv) Where buyer challenges valuation under stamp duty law and stamp valuation authority
revises the SDV, then the seller’s assessment order shall be rectified to consider the
revised SDV and such rectification shall be conducted within 4 years from end of year
in which stamp valuation authority passes its order.
Question 56
Whether the Assessing Officer is bound to consider the report of Departmental Valuation
Officer (DVO) when it is available on record?
Answer
Principal CIT v. Ravjibhai Nagjibhai Thesia (2016) 388 ITR 358 (Guj)
Issue: Whether the Assessing Officer having made reference to the DVO must
consider the report of the DVO for the purpose of assessment?
High Court’s Observations: The High Court observed that when the Assessing Officer has
referred the matter to DVO, the assessment has to be completed in conformity with the
estimate given by the DVO. As the DVO has estimated the value of the capital asset at an
amount lower than the value assessed by the stamp valuation authority, as per 50C(2),
it is such valuation which is required to be taken into consideration for the purposes of
assessment.
High Court’s Decision: The High Court held that capital gains has to be computed in conformity
with the value so determined by the DVO.
Question 57
Discuss provisions of Section 51 regarding forfeiture of advance received in connection with
transfer of immoveable property?
Answer
Position where advance received before 01.04.2014: Where any capital asset was on any previous
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occasion the subject of negotiations for its transfer, any advance or other money received
and retained by the assessee in respect of such negotiations shall be deducted from the cost
for which the asset was acquired or the written down value or the fair market value, as the
case may be, in computing the cost of acquisition:
Position on or after 01.04.2014: Where any sum of money, received as an advance or otherwise
in the course of negotiations for transfer of a capital asset, has been included in the total
income of the assessee for any previous year in accordance with the provisions of clause
(ix) of sub-section (2) of section 56, then, such sum shall not be deducted from the cost for
which the asset was acquired or the written down value or the fair market value, as the case
may be, in computing the cost of acquisition.
Note:
(i) In short, on or after 01.04.2014, in case advance is received in connection with transfer
of immoveable property, which advance is later forfeited by the seller, then the forfeited
amount shall be treated as Income from Other Sources. The cost remains unaffected;
(ii) Sec 56(2) (ix) → Applies to forfieture of amount received as advance or otherwise
therefore compensation received by prospective seller by on cancellation of contract is
also covered u/s 56 (2) (ix).
(ii) Sec 51 (position prior to 1.4.2014) applies to the person who has conducted the
forfeiture Mr. A suppose acquired property for Rs. 1,00,00,000, forfeited an amount
of Rs. 1,00,000 in relation to this property then cost to him is Rs. 99,00,000, if same
property inherited by his child then cost of acquisition to child shall be Rs. 1,00,00,000.
Question 58
Hari has acquired a residential house property in Delhi on 15th April, 2002 for ` 9,00,000
and decided to sell the same on 3rd May, 2005 to Ms. Pari and an advance of ` 25,000 was
taken from her. The balance money was not paid by Ms. Pari and Hari has forfeited the
entire advance sum. On 3rd June, 2021, he has sold this house to Mr. Suri for ` 40,00,000.
In the meantime, on 4th April, 2021, he had purchased a residential house in Delhi for `
8,00,000, where he was staying with his family on rent for the last 5 years and paid the full
amount as per the purchase agreement. However, Hari does not possess any legal title till
31st March, 2022, as such transfer was not registered with the registration authority.
Hari has purchased another old house in Chennai on 14th October, 2021 from Mr. X, an In-
dian resident, by paying ` 5,00,000 and the purchase was registered with the appropriate
authority.
Determine the taxable capital gain arising from above transactions in the hands of Hari for Assess-
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ment Year 2022-23.

[Cost inflation Index - 2002-03: 105; 2005-06: 117; 2021-22: ___]
Answer
Computation of taxable capital gain of Mr. Hari for the A.Y.2022-23
Particulars Rs.
Sale Proceeds 40,00,000
Less: Indexed Cost of Acquisition (See Note 1)
Long term capital gains
Less: Exemption under section 54 in respect of house in Delhi (Note 2) 8,00,000
Less: Exemption under section 54 in respect of house in Chennai (Note 3) 5,00,000
Taxable long term capital gains
Notes
1. Computation of Indexed cost of acquisition
Particulars Rs.
Cost of acquisition 9,00,000
Less: Advance taken and forfeited 25,000
Cost for the purposes of indexation 8,75,000
Indexed cost of acquisition [875,000 X ___ / 105]
Note2: Advance received and forfeited on or after 01.04.2014 is taxable under section
56(2)(ix). Such amount would not be reduced to compute indexed cost of acquisition
while determining capital gains on sale of such property.
However, in this case, since the advance was received and forfeited in the year
2005, such advance has to be reduced for calculating indexed cost of acquisition
for the purpose of arriving at capital gains.
Note 3: In order to avail exemption of capital gains under section 54, residential house
should be purchased within 1 year before or 2 years after the date of transfer or
constructed within a period of 3 years after the date of transfer. In this case, Hari
has purchased the residential house in Delhi within one year before the date of
transfer and paid the full amount as per the purchase agreement, though he does
not possess any legal title till 31.3.2021 since the transfer was not registered with
the registration authority. However, for the purpose of claiming exemption under
section 54, holding of legal title is not necessary. If the taxpayer pays the full
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consideration in terms of the purchase agreement within the stipulated period,

the exemption under section 54 would be available. It was so held in Balraj v.
CIT(2002) 254 ITR 22 (Del.) and CIT v. Shahzada Begum (1988) 173 ITR 397 (A.P.).
Note 4: As per section 54, since the amount of capital gain does not exceeds ` 2 crore,
Mr. Hari can claim exemption thereunder in respect of investment made in two
residential houses situated in India.
However, if Mr. Hari exercises the option to claim exemption in respect of two
residential houses in Delhi and Chennai in P.Y. 2021-22, he shall not be subsequently
entitled to exercise the option for the same or any other assessment year.
Question 59
How will capital gains be computed in case consideration is indeterminate?
Answer
As per Section 50D of the Income-tax Act, 1961 in case consideration on transfer of asset is
not ascertainable or cannot be determined, then FMV of asset on date of transfer is deemed
as Full Value of Consideration.
Question 60
What is the special provision for computation of capital gains in case of transfer of
unquoted shares?
Answer
As per section 50CA, in case of transfer of unquoted shares, FVOC is higher of transfer value
or fair market value.
Question 61
Discuss provisions of Section 54 of the Income-tax Act, 1961?
Answer
Section 54 provides for an exemption from capital gains in case of transfer of long term
capital asset being a residential house property. Such capital gains must be reinvested for
purchase / construction of another residential house property within India. The salient fea-
tures are:
(i) This benefit can be availed only by an assessee being Individual and / or HUF;
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(ii) Nature of transferred asset is Long term capital asset being residential house;
(iii) The assessee must purchase or construct ONE residential house in India.
Amendment by Finance (no. 2) Act 2019
First proviso to sec 54 has been inserted, which states that if Capital Gains does not exceed
Rs. 2 crores, then the assessee will be allowed exemption for purchase / construction of 2
residential houses in India. This may be availed only once in a lifetime.
(iv) The purchase of new house must be within 1 year prior to the date of transfer or within
2 years from date of transfer. Construction must be within 3 years from date of transfer.
(v) Amount of deduction shall be lower of Cost of New House or the amount of Capital
Gains
(vi) Relevant Case laws:
(a)
D Anand Basappa (Karnataka High Court): If assessee purchases 2 residential units
adjacent to each other and the common wall is brought down, then cost of both
units together is eligible for deduction u/s 54. Since both units together constitute
one house. Similar logic applies to a Duplex apartment / flat which is connected
by way of a spiral staircase.
(b)
Gowli Mahadevappa (Karnataka High Court): It is not necessary that exact proceeds
from transfer have to be utilized for purchase / construction of new house.
(c)
CBDT Circular no. 667 of 1993: If assessee purchase plot of land for constructing
new house, then cost of such land is also eligible for such deduction provided the
construction is completed within 3 years.
(d)
T.N. Aravinda Reddy (Supreme Court): Purchase of 50% share in an existing house is
also eligible for deduction u/s 54.
(e)
PV Narsimham (Madras): In this case the assesse constructed first floor in his
existing house. It was held that cost of construction is eligible for deduction u/s
54.
(f) Mrs. Jennifer Bhide (Kar) / Kamal Wahal (Del): If the entire capital gain is utilized
for purchase / construction of new house, then deduction u/s 54 is available
irrespective of the fact that assesse has mentioned name of his / her spouse in
the new house as co-owner.
(g)
CIT v/s Seema Sobti (ITAT Delhi)
Purchase of under construction property from builder amounts to construction
for the purpose of sec 54. In short construction need not be done by assessee
himself.
(vi) Capital Gain Account Scheme: [CGAS]
As on the date of furnishing return, if assessee has not already utilized the capital gain
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for purchase / construction of new house then the assessee must place such amount in
the special account called CGAS. Such amount must be placed latest by due date for
furnishing return u/s 139(1). Based on placement of such amount in CGAS the assessee
may claim exemption u/s 54 at the time of furnishing return of income.
However, after expiry of 3 years, if the amount placed in CGAS is not utilized /
underutilized, then such amount which is not utilized shall be taxable as LTCG in the
year when period of 3 years expires.
As per CBDT Circular no. 743 / 1996, if amount is placed in CGAS and the assessee dies
then the withdrawal of such amount is not taxed in the hands of legal heir, even if new
house is not purchased.
(vii) Violation:
The new house on which deduction is claimed u/s 54 must not be transferred by the
assesee within 3 years from date of purchase. If assessee violates this principal, then
cost of new house shall be reduced by amount of exemption allowed earlier u/s 54.
Question 62
Discuss provisions of Section 54F?
Answer
This section provides exemption when the transferred capital asset is a long term capital
asset being other than a residential house property. The proceeds are reinvested in acquisition
of ONE residential house property in India. This section is same as sec 54 except or the
following differences:
(a) The asset transferred is any asset apart from residential house.
(b) As on date of transfer assessee should not be owning more than one residential house.
(c) The exemption is computed as under:
Capital Gain
x Cost of new asset
Net Consideration
(d) If amount placed in CGAS is not utilized fully within 3 years then at the end of 3 years
the taxable LTCG is computed as under:
Deduction that should
Exemption allowed u/s 54F –
Have been allowed
(e) If new house is transfer within 3 years then the exemption allowed earlier under section
54F shall be taxed as long term capital gains in the year of violation.
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Cost of new house is NOT changed.

CIT v/s Rajiv Shukla (Delhi HC): When a depreciable asset is transferred the resultant gain
is deemed to be short term. However, that does not change the nature of asset, which
continues to be long term, if held for period exceeding 12 months or 24 months or 36
months, as the case may be. Therefore, Short term capital gains arising on transfer of
depreciable asset is eligible for exemption u/s 54F if the asset is long term in nature.
Question 63
Mr. Tejasvi transferred residential house for Rs. 1,00,00,000 and Jewellery 20,00,000.
Residential house was acquired on 1.4.2001 for Rs. 20,00,000. Jewellery also acquired on
1.4.2001 for Rs. 1,00,000. Assessee has purchased new house with 2 years for `50,00,000.
Compute taxable capital gains in the hands of Mr. Tejasvi for AY 2022-23?
Answer
Under section 54, the entire amount invested in acquisition of new house property is available
as exemption. However, in case of Section 54F, it is proportionate amount based on formula
provided in the said section. Therefore, –it is always advisable to first claim exemption u/s
54 and then u/s 54F
It is noticed that both assets are held for periods exceeding 36 months and therefore, are
long term capital assets.
Computation of Capital Gains in case of transfer of house:

Particulars Rs. Rs.
FVOC 100,00,000
Capital Gain
Capital gains on transfer of Jewellary is computed as under:
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Question 64
Mr. Nikhil transferred has transferred 3 assets during the FY 2021-22 and provides you with
the following data for computation of capital gains taxable in his hands for AY 2022-23:
Original Shares Rights Issue Bonus Shares

Sale at 30.3.2022 30.3.2022 30.3.2022
No. of shares 1000 500 200
Sale price 170 170 170
Cost 10 12 0
AcquisitionDate 1.4.01 1.4.12 1.4.10
Brokerage 1% 1% 1%
CII 100 200 –
New house was purchased ` 2,60,000
Answer
In absence of information, we assume that the shares are not transferred via recognized
stock exchange and therefore, the benefit of 3rd proviso to Section 48 is not available to the
assessee. Further, it is beneficial to avail exemption u/s 54 F against that asset first where
proportion of [Capital Gains / Net Consideration] is higher.
Original Shares Rights Issue Bonus Shares

Nature LTCA LTCA LTCA
Computation of capital gain:
Particulars Capital Gain 54 F Taxable Gains Balance Cost of

House
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Question 65
Would the cost of purchase of land and cost of construction of residential house thereon
incurred by the assessee prior to transfer of previously owned residential house property,
qualify for exemption under section 54?
Answer
The above question is based on decision of C Aryama Sundaram v. CIT [2018] 407 ITR 1 (Mad)
Facts of the Case: The assessee sold a residential house property for a consideration of `12.5
crores on January 15th, 2010. Long-term capital gains arising to the assessee on sale of
such property was `10.48 crore. In May, 2007, the assessee had purchased a property with
a superstructure thereon for a total consideration of `15.96 crores and after demolishing
the existing superstructure, the assessee constructed a residential house at a cost of `18.74
crores. For the A.Y.2010-11, the assessee had claimed exemption of the entire long-term
capital gains of `10.48 crore under section 54, since it was lower than the cost of construction
of `34.70 crores.
Assessing Officer’s view: The Assessing Officer opined that only that part of the construction
expenditure incurred after the sale of the original asset was eligible for exemption under
section 54. Based on records, the Assessing Officer calculated the cost of construction
incurred after the sale of the original asset, amounting to `1.15 crores and accordingly,
allowed exemption only to that extent. The Commissioner (Appeals) upheld the view of the
Assessing Officer.
Appellate Tribunal’s view: The Tribunal held that section 54 was a beneficial provision and
had to be construed liberally on compliance with the conditions stipulated thereunder. The
Tribunal observed that the assessee had complied with the following conditions stipulated
under section 54 for claim of exemption:
(a) The assessee should have purchased one residential house in India either one year
before or two years after the date of transfer of a residential house which resulted in
capital gains or alternatively, constructed a new residential house in India within a
period of three years from the date of the transfer of the residential property which
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resulted in the capital gains.

(b) If the amount of capital gains is greater than the cost of the residential house so
purchased or constructed, the difference between the amount of the capital gains
and the cost of the new asset is to be charged under section 45 as the income of the
previous year.
(c) If the amount of the capital gains is equal to or less than the cost of the new residential
house, the capital gains shall not be charged under section 45.
Issue: The issue under consideration is whether the cost of purchase of land and cost of
construction of residential house thereon incurred by the assessee prior to transfer of
previously owned residential house property would qualify for exemption under section 54.
High Court’s Observations: The High Court opined that statutory provisions should, to the
extent feasible, be construed in accordance with the plain meaning of the language used in
those provisions.
According to section 54, capital gains exemption is available in respect of the cost of new
residential house purchased or constructed. Section 54(1) is specific and clear in that it
mentions cost of new residential house and not just the cost of construction of the new
residential house. The cost of the new residential house would necessarily include the cost
of the land, materials used in the construction, labour and any other cost relatable to
the acquisition or construction of the residential house. Also, in this case, the assessee’s
construction of new house is within the timeline stipulated in section 54(1).
Section 54 does not lay down that construction could not have commenced prior to the
date of transfer of the asset that resulted in capital gains. Also, section 54(1) does not
contemplate that the same money received from the sale of a residential house should be
used in the acquisition of new residential house. This is apparent as section 54 also provides
exemption in respect of property purchased one year prior to the transfer of residential
house property, which gave rise to the capital gains.
High Court’s Decision: The High Court, accordingly, held that, in this case, the cost of land
and cost of construction incurred thereon prior to transfer of residential house property
also have to be considered for the purpose of capital gains exemption under section 54. As
capital gains arising on transfer of previously owned house property of the assessee is less
than the cost of the new residential house in this case, the entire capital gains would be
exempt under section 54.
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Question 66
In case of a house property registered in joint names, whether the exemption under section
54F can be allowed fully to the co-owner who has paid whole of the purchase consideration
of the house property or will it be restricted to his share in the house property?
Answer
CIT v. Ravinder Kumar Arora (2012) 342 ITR 38 (Delhi)
Facts of the case: In the present case, the assessee filed the return of income showing
long-term capital gain on sale of plot of land. The assessee claimed exemption under
section 54F from such long-term capital gain on account of purchase of new residential
house property within the stipulated time period as mentioned in the aforesaid section. He
claimed exemption under section 54F taking into consideration the whole of purchase price
of the residential house property. However, after going through the purchase deed of the
house property, the Assessing Officer found that the said house property was purchased
in joint names of assessee and his wife. Therefore, the Assessing Officer allowed 50% of
the exemption claimed under section 54F, being the share of the assessee in the property
purchased in joint names.
The assessee submitted that the inclusion of his wife’s name in the sale deed was just to
avoid any litigation after his death. He further explained that all the funds invested in the
said house were provided by him, including the stamp duty and corporation tax paid at the
time of the registration of the sale deed of the said house. This fact was also clearly evident
from the bank statement of the assessee. The assessee claimed that the exemption under
section 54F is to be allowed with reference to the full amount of purchase consideration
paid by him for the aforesaid residential house and is not to be restricted to 50%. The
Assessing Officer did not deny the fact that the whole amount of purchases of the house
was contributed by the assessee and nothing was contributed by his wife. However, the
Assessing Officer opined that exemption under section 54F shall be allowed only to the
extent of assessee’s right in the new residential house property purchased jointly with his
wife, i.e. 50%.
High Court’s Decision: Considering the above mentioned facts, the Delhi High Court held that
the assessee was the real owner of the residential house in question and mere inclusion of his
wife’s name in the sale deed would not make any difference. The High Court also observed
that section 54F mandates that the house should be purchased by the assessee but it does
not stipulate that the house should be purchased only in the name of the assessee. In this
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case, the house was purchased by the assessee in his name and his wife’s name was also
included additionally. Therefore, the conditions stipulated in section 54F stand fulfilled and
the entire exemption claimed in respect of the purchase price of the house property shall be
allowed to the assessee.
Note - A similar view was taken by the Karnataka High Court in the case of DIT (IT) v. Mrs.
Jennifer Bhide (2011) 203 Taxman 208, in the context of deductions under section 54 and 54EC,
wherein the assessee had sold a residential house property. The assessee, in order to claim
exemption of the long-term capital gain, made the investment in the residential house
property and bonds jointly in her name and in the name of her husband. The Karnataka
High Court, in this case, observed that it was clear from the facts of this case that the
entire investment was done by the assessee and no contribution was made by her husband.
Therefore, in the present case, it was, held that section 54 and 54EC only stipulate that the
capital gain arising on a sale of property is to be invested in a residential house property
or in the long-term specified asset i.e., bonds. It is not mandatory in those sections that
the investment is to be made in the name of the assessee only. The name of the assessee’s
husband is shown in the sale deed as well as in the bonds, as a joint owner. However,
since the consideration for acquisition flows entirely from the assessee’s funds, the assessee
is entitled to claim deduction under section 54 and 54EC in respect of the full amount
invested. Therefore, in the present case, the exemption under section 54 and 54EC shall not
be restricted to 50%, being the share of the assessee in the ownership of the house property
and the bonds. The assessee is entitled to 100% exemption of the long-term capital gain so
invested in the residential house property and in the bonds.
Question 67
Can exemption under section 54F be denied to an assessee in respect of investment made in
construction of a residential house, on the ground that the construction was not completed
within three years after the date on which transfer took place, on account of pendency of
certain finishing work like flooring, electrical fittings, fittings of door shutter, etc?
Answer
CIT v. Sambandam Udaykumar (2012) 345 ITR 389 (Kar.)
Facts of the case: In this case, the assessee has claimed benefit of exemption under section
54F in respect of capital gain arising on sale of shares of a company by investing the
amount in construction of a house property. However, the Assessing Officer contended that
no exemption under section 54F would be available in this case, as the construction of a
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residential house was not completed on account of pendency of certain work like flooring,
electrical fittings, fittings of door shutter, etc., even after lapse of three years from the date
of transfer of the shares.
High Court’s Observations: The Karnataka High Court observed that the condition precedent
for claiming the benefit under section 54F is that capital gains realized from sale of capital
asset should have been invested either in purchasing a residential house or in constructing a
residential house within the stipulated period. If he has invested the money in the construction
of a residential house, merely because the construction was not completed in all respects
and possession could not be taken within the stipulated period, would not disentitle the
assessee from claiming exemption under section 54F. In fact, in this case, the assessee has
taken the possession of the residential building and is living in the said premises despite the
pendency of flooring work, electricity work, fitting of door and window shutters.
High Court’s Decision: The Court held that in this case the assessee would be entitled to
exemption under section 54F in respect of the amount invested in construction within the
prescribed period.
Question 68
Where the stamp duty value under section 50C has been adopted as the full value of
consideration, can the reinvestment made in acquiring a residential property, which is in
excess of the actual net sale consideration, be considered for the purpose of computation
of exemption under section 54F, irrespective of the source of funds for such reinvestment?
Answer
Gouli Mahadevappa v. ITO (2013) 356 ITR 90 (Kar.)
Facts of the case: In the present case, the assessee sold a plot of land for ` 20 lakhs and
reinvested the sale consideration of ` 20 lakhs together with agricultural income of ` 4 lakhs,
in construction of a residential house. The assessee claimed capital gains exemption under
section 54F, taking into consideration the entire investment of ` 24 lakhs. The Assessing
Officer, applying the provisions of section 50C, deemed the stamp duty value of ` 36 lakhs
as the full value of consideration since the consideration received or accruing as a result
of transfer of capital asset (i.e. ` 20 lakhs) was less than the value adopted by the stamp
valuation authority (i.e., ` 36 lakhs). The same was not disputed by the assessee before the
Assessing Officer.
Assessing Officer’s contention vis-a-vis Assessee’s contention: The Assessing Officer
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allowed exemption under section 54F, taking into consideration investment in construction of
residential house, to the extent of actual net consideration of ` 20 lakhs. He did not consider
the balance amount of ` 4 lakhs, invested in the construction of residential house, out of
agricultural income, for computation of exemption under section 54F, even though the sale
consideration adopted for the purpose of computation of capital gains i.e., stamp duty value
of ` 36 lakhs, was more than the amount of ` 24 lakhs invested in the new house.
The assessee contended that the entire investment of ` 24 lakhs made in construction of
the residential house should be considered for computation of exemption under section 54F,
irrespective of the source of funds for such reinvestment. Further, the assessee also contended
before the High Court that the registration value adopted under section 50C was excessive
and disproportionate to the market value of the property.
High Court’s Observations: On the issue of applicability of section 50C, the Karnataka High
Court observed that section 50C(2) allows an opportunity to the assessee to contend, before
the Assessing Officer, the correctness of the registration value fixed by the State Government.
Had he done so, the assessing authority would have invoked the power of appointing a
Valuation Officer for assessing the fair market value of the property. The High Court held
that when the assessee had not disputed the registration value at that point of time, it is not
permissible for the assessee to now contend, at this stage, that the registration value does
not correspond to the market value. Hence, the value of ` 36 lakhs adopted under section
50C has to be deemed as the full value of consideration.
High Court’s Decision: On the issue of exemption under section 54F, the High Court held that
when capital gain is assessed on notional basis as per the provisions of section 50C, and the
higher value i.e., the stamp duty value of ` 36 lakhs under section 50C has been adopted as
the full value of consideration, the entire amount of ` 24 lakhs reinvested in the residential
house within the prescribed period should be considered for the purpose of exemption under
section 54F, irrespective of the source of funds for such reinvestment.
Question 69
Mr. Ganesh sold his residential house in Mumbai and earned long term capital gain of 2.5
crores. He purchased two residential flats adjacent to each other on the same day vide two
separate registered sale deeds from two different persons. The builder had certified that
he had effected necessary modification to make it one residential apartment. Mr. Ganesh
sought exemption under section 54 in respect of the investment made in purchase of the
two residential flats. The Assessing Officer, however, gave exemption under section 54 to
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the extent of purchase of one residential flat only contending that since the long term
capital gain exceeds ` 2 crore, sub-section (1) of section 54 clearly restricts the benefit of
exemption to purchase one residential house only and the two flats cannot be treated as
one residential unit since –
(i) the flats were purchased through different sale deeds; and
(ii) it was found by the Inspector that, before its sale to the assessee, the residential flats
were in occupation of two different tenants.
Examine the correctness of the contention of the Assessing Officer.
Answer
This issue came up before the Karnataka High Court in CIT v. D. Ananda Basappa (2009) 309
ITR 329. The Court observed that the assessee had shown that the flats were situated side by
side and the builder had also certified that he had effected modification of the flats to make
them one unit by opening the door between the apartments. Therefore, it was immaterial
that the flats were occupied by two different tenants prior to sale or that it was purchased
through different sale deeds. The Court observed that these were not the grounds to hold
that the assessee did not have the intention to purchase the two flats as one unit. The Court
held that the assessee was entitled to exemption under section 54 in respect of purchase of
both the flats to form one residential house.
Applying the ratio of the above decision to the case on hand, Mr. Ganesh is entitled to
exemption under section 54 in respect of purchase of two flats to form one residential
house. Therefore, the contention of the Assessing Officer is not correct.
Question 70
Vijay, an individual, owned three residential houses which were let out. Besides, he and
his four brothers co-owned a residential house in equal shares. He sold one residential
house owned by him during the previous year relevant to the assessment year 2022-23.
Within a month from the date of such sale, the four brothers executed a release deed in
respect of their shares in the co-owned residential house in favour of Vijay for a monetary
consideration.
Vijay utilised the entire long-term capital gain arising out of the sale of the residential house
for payment of the said consideration to his four brothers. Vijay is not using the house, in
respect of which his brothers executed a release deed, for his own residential purposes, but
has let it out to another person, who is using it for his residential purposes.
Is Vijay eligible for exemption under section 54 of the Income-tax Act, 1961 for the assessment
year 2022-23 in respect of the long-term capital gain arising from the sale of his residential
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house, which he utilised for acquiring the shares of his brothers in the co-owned residential
house? Will the non-use of the new house for his own residential purposes disentitle him
to exemption?
Answer
The long-term capital gain arising on sale of residential house would be exempt under
section 54 if it is utilized, inter alia, for purchase of one residential house situated in India
within one year before or two years after the date of transfer. Release by the other co-
owners of their share in co-owned property in favour of Vijay would amount to “purchase”
by Vijay for the purpose of claiming exemption under section 54 [CIT v. T.N. Arvinda Reddy
(1979) 120 ITR 46 (SC)]. Since such purchase is within the stipulated time of two years from
the date of transfer of asset, Vijay is eligible for exemption under section 54. As Vijay has
utilised the entire long-term capital gain arising out of the sale of the residential house
for payment of consideration to the other co-owners who have released their share in his
favour, he can claim full exemption under section 54.
There is no requirement in section 54 that the new house should be used by the assessee
for his own residence. The condition stipulated is that the new house should be utilised
for residential purposes and its income is chargeable under the head “Income from house
property”. This requirement would be satisfied even when the new house is let out for
residential purposes.
Question 71
Discuss provisions of Section 54 EC?
Answer
The provisions of Section 54EC are applicable to any assessee. The transferred capital asset
must be long term capital asset, being land or building or both. The exemption is allowed
for Investment in specified bond. The maximum amount of exemption is Rs. 50,00,000 in a
Financial Year. The Investment must be made within 6 months from date of transfer. As per
2nd proviso to sec 54EC (1) the amount of exemption under this section for current Financial
Year and Succeeding Financial Year put together cannot exceed 50,00,000/-. Lock in period
for the bonds is 5 years.
Notified bond = Bonds issued by National (NHAI) Highway Authority of India or Rural
Electrification Corporation, Power finance Corporation, Indian Railway Finance Corporation
(IRFC)
Lock in period → 5 years → Earlier it was 3 years.
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CIT v/s V.S. Dempo (SC): Even if Capital Gain arising on transfer of depreciable asset is deemed
to be Short Term, exemption under section 54EC is allowable if nature of asset is long term.
Question 72
Can exemption under section 54EC be denied on account of the bonds being issued after six
months of the date of transfer even though the payment for the bonds was made by the
assessee within the six month period?
Answer
Hindustan Unilever Ltd. v. DCIT (2010) 325 ITR 102 (Bom.)
High Court’s Observations: In this case, the Bombay High Court observed that in order to avail
the exemption under section 54EC, the capital gains have to be invested in a long-term
specified asset within a period of six months from the date of transfer. Where the assessee
has made the payment within the six month period, and the same is reflected in the bank
account and a receipt has been issued as on that date, the exemption under section 54EC
cannot be denied merely because the bond was issued after the expiry of the six month
period or the date of allotment specified therein was after the expiry of the six month
period.
High Court’s Decision: For the purpose of the provisions of section 54EC, the date of investment
by the assessee must be regarded as the date on which payment is made. The High Court,
therefore, held that if such payment is within a period of six months from the date of
transfer, the assessee would be eligible to claim exemption under section 54EC.
Question 73
Discuss provisions of Section 54B in connection with capital gains arising on transfer of
agricultural land?
Answer
This section is same as section 54 except for the difference that the transferred capital asset
is agricultural land which was used in last 2 years for agricultural purposes by individual
or his parent(s) or by an HUF. Exemption is allowed for purchase of another agricultural
land within 2 year from date of transfer. It was held in the case of Gurnam Singh (Punjab or
Haryana) that merely because in new agricultural land name of spouse is added, that will
not lead to denial of deduction.
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Question 74
Discuss provisions of section 54D in connection Capital Gains arising on Compulsory
Acquisition of Industrial undertaking
Answer
This section is same as 54 except that transferred capital asset is land / Building, which was
forming part of industrial undertaking and transferred through compulsory acquisition. The
industrial undertaking should have been in operation for at least 2 years. The assessee acquires
new land / building for another industrial undertaking within 3 years from date of transfer.
Question 75
Discuss the exemption available to an assessee on capital gains arising on Shifting
of Industrial undertaking from Urban area to non-urban area (Rural area)?
Answer
The provisions for exemption in above scenario are comprised in Section 54G of the Income-
tax Act.
(i) The transferred capital asset is
Land
Building
Forming part of industrial undertaking
Plant
Machinery
Which are transferred in the process of shifting the industrial undertaking from urban
area to non-urban area. The same is done within 1 year prior or within 3 years after
the capital gains arises i.e. the assessee acquires a new industrial undertaking in non-
urban area by way of acquisition of land, building, plant / machinery.
Question 76
Gama Ltd, located within the corporation limits decided in December, 2021 decided to shift
its industrial undertaking to non-urban area. The company sold some of the assets and
acquired new assets in the process of shifting. The relevant details are as follows:
Rs. In lakhs
Sr. Particulars Land Building Plant & Furniture

No. Mach
1 Sale proceeds (sale effected in 8 18 16 3
March, 2022)
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2 Indexed cost of acquisition 4 10 12 2

3 WDV in terms of section 50 0 4 5 2
4 Cost of new assets purchased 4 7 17 2
in July, 2022 for the purpose of
business in the new place
Compute the capital gains of Gama Ltd for the assessment year 2022-23.
Answer
Section 54G deals with deduction in respect of any capital gain that may arise from the
transfer of an industrial undertaking situated in an urban area in the course of or in
consequence of shifting to a non-urban area.
If the assessee purchases new machinery or plant or acquires a building or land or constructs
a new building or shifts the original asset and transfers the establishment to the new area,
within 1 year before or 3 years after the date on which the transfer takes place, then,
instead of the capital gain being charged to tax, it shall be dealt with as under:
1. If the capital gain is greater than the cost of the new asset, the difference between the
capital gain and the cost of the new asset shall be chargeable as income ‘under section
45’.
2. If the capital gain is equal to or less than the cost of the new asset, section 45 is not
to be applied.
The capital assets referred to in section 54G are machinery or plant or land or building
or any rights in building or land. Capital gain arising on transfer of furniture does not
qualify for exemption under section 54G. No exemption is therefore available under
section 54G in respect of investment of ` 2 lacs in acquiring furniture.
The first step therefore is to determine the capital gain arising out of the transfer and
thereafter apply the provisions of section 54G.
Sr. No. Particulars Rs.
(a) Land – Sale proceeds (Non-depreciable asset) 8,00,000
Less: Indexed cost of acquisition 4,00,000
Long term capital gains 4,00,000
Less: Cost of new assets purchased within three year 3,00,000
after the date of transfer (under section 54G)
(See Note below)
Taxable long term capital gains 1,00,000
(b) Building – sale proceeds (depreciable assets) 18,00,000
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Less: W.D.V. is deemed as cost of acquisition under section 4,00,000

50
Short term capital gain 14,00,000
(c) Plant & machinery- sale proceeds (depreciable asset) 16,00,000
Less: WDV is deemed cost under section 50 5,00,000
Short term capital gains 11,00,000
(d) Furniture - sale proceeds (depreciable asset) 3,00,000
Less: WDV is deemed cost under section 50 2,00,000
Short term capital gains 1,00,000
Summary
Short term capital gain : Building 14,00,000
Short term capital gain : Plant & Mach 11,00,000
25,00,000
Less: Section 54G [New assets purchased] (See Note below) 25,00,000
Net Short term capital gains Nil
Total Short term capital gains 1,00,000
Note –
Total exemption available under section 54G is ` 28 lacs (` 4 lacs + ` 7 lacs + ` 17 lacs). The
exemption should first be exhausted against short term capital gain as the incidence of tax
in case of short-term capital gain is more than in case of long term capital gain. Therefore,
` 25 lacs is exhausted against short term capital gain and the balance of ` 3 lacs against
long term capital gain.
The taxable capital gains would be:
Long term capital gains ` 1,00,000 (taxable @20% under section 112)
Short term capital gains (furniture) ` 1,00,000 (taxable @30%/25%, as the case may be)
Rs. 2,00,000
Question 77
Can advance given for purchase of land, building, plant and machinery tantamount to
utilization of capital gain for purchase and acquisition of new machinery or plant and
building or land, for claim of exemption under section 54G?
Answer
Fibre Boards (P) Ltd v. CIT (2015) 376 ITR 596 (SC)
Facts of the case: The assessee-company had an industrial unit in Thane, which had been
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declared a notified urban area by notification dated September 22, 1967, issued under section
280Y(d) of the Income-tax Act, 1961 vide Notification dated 22.09.1967. The assessee, in
order to shift its industrial undertaking from an urban area to a non-urban area, sold its
land, building and plant and machinery situated at Thane and out of the capital gains so
earned, paid advances of various amounts to different persons for purchase of land, plant
and machinery, construction of factory and building in the year 1991-92. The assessee
claimed exemption under section 54G of the Income-tax Act, 1961, on the capital gains
earned from the sale proceeds of its erstwhile industrial undertaking situated in Thane in
view of the advances so made, which was more than the capital gains earned by it. The
Assessing Officer refused to grant exemption to the assessee under section 54G on the
ground that the non-urban area had not been declared to be so by any general or special
order of the Central Government and that giving advances did not amount to utilisation of
capital gains for acquiring the assets.
Appellate Authorities’ views: The CIT (Appeals) dismissed the case of the assessee while the
Appellate Tribunal allowed the appeal by stating that even an agreement to purchase is
good enough and that Explanation to section 54G is declaratory in nature and would be
retrospectively applicable.
High Court’s Decision: The High Court reversed the order of the Appellate Tribunal and
denied the exemption on the reasoning that the notification declaring Thane to be an urban
area stood repealed with the repeal of the section under which it was made. Further the
expression “purchase” in the section 54G cannot be equated with the expression “towards
purchase” and accordingly the advance for purchase of land, plant and machinery would
not entitle the assessee to claim exemption under section 54G.
Supreme Court’s Observations: The Apex Court observed that, on a conjoint reading of the
Speech of the Finance Minister introducing the Finance Bill, 1987, and the Notes on Clauses
and Memorandum explaining the provisions of the Finance Bill of 1987, it becomes clear
that the idea of omitting section 280ZA of the Income-tax Act, 1961 and introducing section
54G on the same date was to do away with the tax credit certificates scheme together with
the prior approval required by the Board and to substitute the repealed provision with the
new scheme contained in section 54G. Once section 280ZA was omitted from the statute
book, section 280Y(d) having no independent existence would for all practical purposes also
cease to exist. Section 280Y(d) which was a definition section defining “urban area” for the
purpose of section 280ZA alone was also omitted subsequently by the Finance Act, 1990.
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Apart from this, section 54G(1) by its Explanation introduces the very definition contained
in section 280Y(d) in the same terms. It is obvious that both provisions are not expected to
be applied simultaneously and it is clear that the Explanation to section 54G(1) repeals, by
implication, section 280Y(d).
Unlike section 6 of the General Clauses Act, 1897 which saves certain rights, section 24
merely continues notifications, orders, schemes, rules, etc., that are made under a Central
Act which is repealed and re-enacted with or without modification. The idea of section
24 of the 1897 Act is, as its marginal note shows, to continue uninterrupted subordinate
legislation that may be made under a Central Act that is repealed and re-enacted with or
without modification.
Section 54G gives a time limit of 3 years after the date of transfer of capital asset in the case
of shifting of industrial undertaking from urban area to any area other than urban area.
The expression used in section 54G(2) is that the amount “which is not utilized by him for all
or any of the purposes aforesaid has to be deposited in the capital gain account scheme”.
For the purpose of availing exemption, all that was required for the assessee is to “utilise”
the amount of capital gain for purchase and acquisition of new machinery or plant and
building or land. Since the entire amount of capital gain, in this case, was utilized by the
assessee by way of advance for acquisition of land, building, plant and machinery, the
assessee was entitled to avail exemption/deduction under section 54G.
Supreme Court’s Decision: To avail exemption under section 54G in respect of capital gain
arising from transfer of capital assets in the case of shifting of industrial undertaking from
urban area to non-urban area, the requirement is satisfied if the capital gain is given as
advance for acquisition of capital assets such as land, building and / or plant and machinery.
Note – In this case, two issues have been touched upon, namely, whether notification of an
area as an urban area under a repealed provision would hold good under the re-enacted
provision and whether advance given for purchase of an eligible asset would tantamount
to utilisation of capital gains for purchase of the said asset for availing exemption under
section 54G. The former issue was decided taking support from section 24 of the General
Clauses Act, 1897, which provides for uninterrupted subordinate legislation in case of repeal
and re-enactment, with or without modification. The latter issue was also decided in favour
of the assessee by holding that payment of advance for purchase of eligible asset would
tantamount to utilisation of capital gains for purchase of the said asset.
Question 78
Discuss the exemption available in case of transfer of Residential house and investment in
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a start-up
Answer
The exemption under Section 54GB is available in such cases:
Conditions u/s 54GB:

(i) The transferred capital asset must be long term capital asset being Residential house
[Transfer must be on or before 31 March 2022]
(ii) The assessee transferring such asset must be Individual or HUF
(iii) Exemption is allowed for investment in Equity shares of Eligible company.
(iv) Eligible company is a Start-up which carries out eligible business as defined in Section
80-IAC of the Act;
(v) The company must be incorporated between 1st day of April of the year in which
capital gains arises uptill the due date for furnishing return of income as provided in
section 139(1) of the Act.
(vi) The shareholding of the assessee must be at least 50 per cent post subscription of the
shares in the eligible company.
(vii) Eligible company must utilize proceeds of equity shares for acquisition of new asset
within 1 year from the date of subscription and till such time, the proceeds must be
kept in Capital Gains Scheme Account.
(viii) New Asset
Includes Excludes
→ New plant / → Second hand plant /

Machinery machinery
→ New plant / → Computer / computer

Machinery software*
*Unless company = Technologically driven start-up

(vi) Rest of the provisions are same as 54F including manner of computing the exemption.
(vii) CGAS to be created by COMPANY and not by assessee
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(viii) Lock in period

– For shares → 5 years Within which company cannot transfer the
– For new asset → 5 years acquired assets.
– For computer → 3 years
Question 79
Discuss provisions of Section 54H?
Answer
In case asset is transferred by way of compulsory acquisition then under sec 54, 54B, 54D,
54EC, 54F, the time limit for claiming exemption will commence from date of receipt of
compensation.
** If compensation of compulsory acquisition is received in parts, then there will be fresh
time limit for claiming deduction from date of receipt of each part.
Note:
CBDT circular: For all deductions from sec 54–54 GB if capital gain arises due to conversion
of capital asset into stock in trade then time limit for deduction is calculated from date of
sale of stock.
Question 80
Would sale of fertilizer bonds (issued in lieu of government subsidy) at loss be treated as a
business loss or a loss under the head “Capital gains”?
Answer
The above question is based on decision of Principal CIT v. Gujarat State Fertilizers and Chemicals
Limited [2018] 409 ITR 378 (Guj)
Facts of the Case: The assessee is engaged in manufacturing of fertilizers. The sale price of
fertilizers is fixed by the Government of India and many a times, such price is even lower
than the cost of production. Therefore, to compensate the manufacturer for the difference
between the retention price of individual unit and sale price, fertilizer subsidy is given by the
Government. Due to cash crunch, sometimes the Government of India discharges its dues of
paying the subsidy by issue of fertilizer bonds. These bonds are saleable in the open market
and the prices of such bonds are varying.
In this case, when such bonds were sold in the open market, the assessee incurred a loss of
` 91,45,000 which it treated as a business loss. The Assessing Officer disallowed the same
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treating it as a loss under the head “Capital Gains”. The Tribunal, however, allowed the
same.
Issue: The issue under consideration is whether sale of fertilizer bonds (issued in lieu of
government subsidy) at a loss should be treated as a business loss or a loss under the head
“Capital gains”.
High Court’s Observations: The High Court observed that there is no dispute that fertilizer
subsidy given to an assessee to compensate the loss on sale of fertilisers should be
treated as business income of the assessee. Due to cash crunch, the Government of India
had discharged its dues of paying the subsidy by issue of fertilizer bonds. These bonds are
saleable in the open market and the prices of such bonds are varying. In this case also, the
assessee received fertilizer bonds (in lieu of subsidy) which were sold at a loss in the open
market.
High Court’s Decision: The High Court, accordingly, held that since the subsidy would have
been treated as business income, loss on sale of fertilizer bonds issued is to be allowed as
business loss.
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PROFITS AND GAINS

FROM BUSINESS OR
PROFESSION
Question 81
Discuss provisions of Section 28(i)?
Answer
As per Section 28(i), the following income shall be chargeable to income-tax under the head “Profits
& Gains of Business or Profession”
(i) The profits and gains of any business or profession which was carried on by the assessee at
any time during the previous year;
Analysis:
1. Concept of “Income”
The term “Income” is defined in Sec.2(24). This clause provides for an inclusive definition
and states various items which are categorized as income.
The concept of income was discussed by Supreme Court in the case of Kamakshya Narain
Singh (SC) where income was equated with “fruits growing on a tree”.
This indicates that income has 2 characteristics:

(i) Every income has a source;
(ii) Income is recurring in nature;
Income generally is recurring in nature, but sometimes Income-tax Act specifically

provides that a capital receipt (one time receipt) shall also be treated as income. e.g.:
Non – compete fee
Important Case laws:

a. Piara Singh v/s ITO (Supreme Court): Whether income is legal / illegal is irrelevant.
Therefore, income from smuggling business is also taxable under PGBP. However,
as per Explanation 1 to Sec. 37(1), any expenditure which is in violation of law or
which constitutes an offense is not allowed as deduction.
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b. TV Sundaram Iyengar (Supreme Court): Sometimes a receipt which is initially capital

in nature, may change its character into a revenue receipt. For e.g.: In the above
case, assessee had received a trade deposit which was later forfeited by him. It
was held that although when the amount was received, it was capital in nature,
it became revenue receipt after assessee forfeited the same.
c. Chowringee Sales Bureau [SC]: It was held in this case that sales tax (GST) is a
recurring receipt and was to be treated as income. A corresponding deduction
may be allowed when such amount is actually paid to the Government.
Extract of Guidance Note of ICAI on Tax Audit: In case assessee follows inclusive
method of accounting, the profit / loss reflects Turnover inclusive of GST. In such
case GST forms part of such Turnover. However, if assessee follows exclusive
method of accounting then GST does not far part of turnover. (Ind-AS requires
inclusive method)
d. What is the nature of liquidated damages received by a company from the supplier
of plant for failure to supply machinery to the company within the stipulated time – a
capital receipt or a revenue receipt?
CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)
Facts of the case: The assessee, a cement manufacturing company, entered into
an agreement with a supplier for purchase of additional cement plant. One of
the conditions in the agreement was that if the supplier failed to supply the
machinery within the stipulated time, the assessee would be compensated at 5%
of the price of the respective portion of the machinery without proof of actual
loss. The assessee received ` 8.50 lakhs from the supplier by way of liquidated
damages on account of his failure to supply the machinery within the stipulated
time. The Department assessed the amount of liquidated damages to income
-tax. However, the Appellate Tribunal held that the amount was a capital receipt
and the High Court concurred with this view.
Supreme Court’s Decision: The Apex Court affirmed the decision of the High Court
holding that the damages were directly and intimately linked with the procurement
of a capital asset i.e., the cement plant, which lead to delay in coming into
existence of the profit -making apparatus. It was not a receipt in the course of
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profit earning process. Therefore, the amount received by the assessee towards
compensation for sterilization of the profit earning source, is not in the ordinary
course of business, hence it is a capital receipt in the hands of the assessee.
Question 82
What is Business?
Answer
The term Business is defined in Sec.2(13) to include the following:
• Trade;
• Commerce
• Manufacture
• Adventure in the nature of Trade, Commerce or Manufacture;
Even an isolated / one time activity qualifies as business if intention of assessee was to
conduct business.
Manufacture Sec. 2(29BA): Manufacture connotes a change in non – living physical object
which result in a distinct product or a change the chemical composition of the product.
Question 83
What is Profession?
Answer
Profession includes vocation [Sec. 2 (36)]
Therefore, under Income Tax Act vocations such as artist, musician, cricketer, and photog-
rapher qualify as profession.
Dr. K. George Thomas (Supreme Court): A religious preacher qualifies as professional under IT
Act. Therefore, donation received by such preacher is taxable under PGBP.
Note: PGBP income arises provided Business / profession is carried on at any time during the
year. However Sec.41 is an exception to this rule, where income is taxable under PGBP even
if no business / profession are carried on during the year.
Sec.41(1) - Receipt in respect of loss or expenditure or remission of trading liability.

Sec.41(2) - Sale of depreciable assets by certain assessees.
Sec.41(3) - Sale of scientific research asset.
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Sec.41(4) - Bad debt recovered.

Sec.41(4A) - Withdrawal out of special reserve.
Question 84
Anil R Dave (Gujarat High Court): As per Sec.28, PGBP arises only if business is carried on
at any time during the year. The only exception to this is Sec.41 which provides a list of
incomes which is taxable under PGBP even though receipt of many is after discontinuance
of Business. Advocate [who followed cash system of accounting] receiving Outstanding fee
after cessation of practice in not given in that list. Therefore, fee received by advocate after
cessation of practice is not taxable under the head “PGBP”;
Question 85
Discuss the conflict of provisions between Income-tax Act, Accounting Standards
and ICDS
Answer
Prior to ICDS [which was notified W.E.F. 1.4.2016], many a times a question used to arise
that, if income tax Act is silent, can assessee rely on Accounting Standards (AS) for compu-
tation of Taxable income. Supreme court most of the times has held that if IT Act is silent
then assessee may rely on General Accounting Practices / AS for compilation of Taxable
Income.
Relevant Case laws:

1. UP State Industrial Corporation (SC): In this case it was held in case of under-subscription
underwriter, reduces the underwriting commission from cost of acquisition of shares.
This is in accordance with General Accounting Practices, and therefore needs to be
upheld i.e. commission cannot be separately taxed as income.
2. Lakshmi Vilas Bank (SC): In this case, the assessee bank purchased shares on behalf
of its customers. The customers were required to place margin money with the bank.
If customer did not pay the amount margin many was forfeited. It was held that the
forfeited margin money constituted business income for the assesse since it was earned
in normal course of Business.
3. Woodward Governer India Pvt. Ltd. (SC): In this case the assessee had exchange fluctuation
loss arising on monetary items in accordance with AS 11. It was held that since IT Act
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was silent on the same, the accounting treatment given by assessee should be upheld.
4. Tuticorin Alkali Pvt. Ltd. (SC): The assessee had made a borrowing for acquiring Plant
& Machinery till the time the borrowed funds were utilised, they were placed in fixed
deposit which resulted in interest income for the assessee. The assesse reduced this
interest income from cost of plant and machinery in accordance with AS 16,
It was held, that the interest income did not have a direct and inextricable link with the
acquisition of plant and machinery, i.e. even if funds were not placed in fixed deposit,
still the plant and machinery would be constructed.
Therefore, under IT Act interest income was taxable as IFOS and not reduced from case
of acquisition.
5. Bokaro Steel Limited (SC): In this case, the assessee engaged a contractor for constructing
his factory premises at a remote location. The agreed condition was that the assesse
would provide temporary sheds for accommodation of labourers. The assessee
charged rent from this accommodation. It was held that such rental income would be
reduced from cost of acquisition of the factor premises since rental income had a direct
and inextricable link with the construction of factory, ie. if accommodation was not
provided, the factory shed could not have been constructed.
6. CIT v. K and Co. (2014) 364 ITR 93 (Del): The High Court, held that the interest income
received on funds kept as margin money for obtaining the bank guarantee would be
taxable under the head “Profits and gains of business or profession”
Question 86
Is there any scenario under which income attributed to Business Activity is taxed under any
head other than PGBP?
Answer
Generally speaking, income arising from a business activity is taxable under the head PGBP.
However, in 3 exceptional situations, income may to taxed under some other head.
Those situations are:
(i) Dividend income – IFOS
(ii) Income from activity and Running and maintaining race houses – IFOS.
(iii) House Property – HP
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Relevant cases:
New Delhi Hotels / Ansal Housing Corporation (Delhi HC): Even if a Builder gives property on
rent, the rental income is taxable under the head HP and not under PGBP.
However, there are 3 situations when rental income is taxable under the head PGBP (Ex-
ception to Exception)
(i) National Newspaper Printing Mills (SC): The assessee’s factory was situated 10 miles
away from the nearest port office. In order to make it convenient, assesseee let out a
portion of his premises to the post office. It was held the rental income earned from
the postal department was taxable under PGBP since pre-dominant intention was to
facilitate the business operations.
(ii) Vikrant Cotton Mills (SC): Letting out of factory premises during temporary suspension
of business to ensure upkeep of machinery is taxable under PGBP.
(iii) In Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673, the Supreme Court
observed that holding of the properties and earning income by letting out of these
properties is the main objective of the company. Further, in the return of income
filed by the company and accepted by the Assessing Officer, the entire income of the
company comprised of income from letting out of such properties. The Supreme Court,
accordingly, held that such income was taxable as business income. Likewise, in Rayala
Corporation (P) Ltd. v. Asst. CIT (2016) 386 ITR 500, the Supreme Court noted that the
assessee was engaged only in the business of renting its properties and earning rental
income therefrom and accordingly, held that such income was taxable as business
income. In this case, however, on account of lack of sufficient material to prove that
substantial income of the assessee was from letting out of property, the Supreme
Court held that the rental income has to be assessed as “Income from house property”..
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Test your knowledge

X Ltd. is engaged in the business of letting out of properties. As per the memorandum of
association of X Ltd., letting out of properties is its main objective. The total income of
X Ltd. comprises only of rental income from the business of letting out of properties. Y
Ltd. is engaged in the construction and sale of properties, which is also its main objective
as per its memorandum of association. Incidentally, it lets out some properties which
are held as stock-in-trade and earns rental income therefrom. Which of the following
statements is correct?
(a) Rental income from letting out of properties by X Ltd. and Y Ltd. is taxable under the
head “Income from house property”
(b) Rental income from letting out of properties by X Ltd. and Y Ltd. is taxable under the
head “Profits and gains of business or profession”
(c) Rental income from letting out of properties by X Ltd. is taxable under the head
“Income from house property” and by Y Ltd. is taxable under the head “Profits and
gains of business or profession”
(d) Rental income from letting out of properties by Y Ltd. is taxable under the head
“Income from house property” and X Ltd. is taxable under the head “Profits and gains
of business or profession”
Answer: (D)
Question 87
What do you understand by the term “Business is carried on....”?
Answer
Business is said to be carried on from the date when business is “set up”. Date of
“commencement” is generally not relevant, however, in exceptional situations, deductions
for expenses may be allowed from date of commencement.
E.g. 35 D  Preliminary Expenses
35 ABB  Telecom licenses
35 ABA  Spectrum licenses
It was held in the case of CWT v/s Ramaraju Surgical Cotton Mills (SC) that once the trial run
is conducted by manufacturing company the business is said to be set up. Business actually
commences where orders are received from customers.
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Question 88
Discuss provisions of Section 28(ii)?
As per Section 28(ii), any compensation or other payment due to or received by,—
(a) any person, by whatever name called, managing the whole or substantially the whole of the
affairs of an Indian company, at or in connection with the termination of his management or
the modification of the terms and conditions relating thereto;
(b) any person, by whatever name called, managing the whole or substantially the whole of the
affairs in India of any other company, at or in connection with the termination of his office or
the modification of the terms and conditions relating thereto ;
(c) any person, by whatever name called, holding an agency in India for any part of the activities
relating to the business of any other person, at or in connection with the termination of the
agency or the modification of the terms and conditions relating thereto ;
(d) any person, for or in connection with the vesting in the Government, or in any corporation
owned or controlled by the Government, under any law for the time being in force, of the
management of any property or business ;

(e) any person, by whatever name called, at or in connection with the termination or the
modification of the terms and conditions, of any contract relating to his business;
Analysis:
Any compensation received for termination / notification of a managing constant agency a
contract from an Indian company, any other company / government is taxable under PGBP.
Although such receipts are capital receipts, they are specifically taxable under PGBP.
Question 89
Discuss provisions governing taxability of Mutual Concerns?
Answer
Section 28(iii) states that:
“...income derived by a trade, professional or similar association from specific services performed
for its members...”
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Analysis:
Mutual concern is an entity where there is complete identity between contributors to the
concern and participants. It was held by Supreme Court in the case of the Chelmsford Club
(SC) that income earned by mutual concern is NOT TAXABLE, since no man can make profit
from himself.
In the case of Bankipur Club (Supreme Court), it was held that merely because some services
are rendered to non–members, that does not vitiate the principle of mutuality so long as
object of the entity is protection of common interest of members.
However, income from non – member is TAXABLE. As far as income from member is concerned,
the position is as under:
Income from Members
Earned by Trade / Professional Any other Mutual Concern

(E.g.: BCS, ICAI, etc.) (E.g.: Social club)
Specific General Specific General

Service Service Service Service
Surplus Deficit Surplus Deficit Surplus Deficit
Taxable allowable Not Allowable Not Not

u/s as loss Taxable subject to taxable allowed
28(iii) sec.44 A
What is Specific service?

Specific service is that service which is not generally available to all members. (CIT v/s Bus
Operators Association (Kerala High Court)
Conditions u/s. 44A

(i) Assessee is a mutual concern, being trade, profession or similar association.
(ii) Deficit arises from general services
(iii) Maximum deficit allowable is equal to half total income or 50% of total income
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before giving effect to this section.

(iv) Deficit shall be first be adjusted against PGBP, then against any other head of income.
(v) Deficit over and above allowable u/s 44A shall lapse. (i.e. no carry forward).
Question 90
Compute total income for Trade / Professional Association:
Case 1 Case 2 Case 3
Income from specific service 1,00,000 1,00,000 1,00,000
General service +3,00,000 -80,000 -1,20,000
Non – member 1,00,000 20,000 3,00,000
Answer
Computation of Total Income
Particulars Case 1 Case 2* Case 3**
Specific service 1,00,000 40,000 ---
General service --- --- ---
Interest 1,00,000 20,000 2,80,000
*50% of (1,00,000 + 20,000)  60,000 adjusted against PGBP.

**50% of (1,00,000 + 3,00,000) is allowable i.e. 2,00,000
Entire deficit allowed of ` 1,20,000
First adjusted against PGBP  ` 1,00,000
Balance 20,000 against IFOS.
Note: Mutuality is the principal that may be observed by an entity like company, AOP or
even trust, rate of tax applicable shall depend on nature of entity.
Question 91
Whether certain receipts by co-operative societies from its members (non-occupancy
charges, transfer charges, common amenity fund charges) are exempt based on the doctrine
of mutuality?
Answer
Income-tax Officer v. Venkatesh Premises Co-operative Society Ltd. [2018] 402 ITR 670 (SC)
The Supreme Court made the following observations:
• If for convenience, part of the transfer charges were paid by the transferee, they would
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not partake of the nature of profit. The amount is appropriated only after the transferee
was inducted as a member. In the event of non-admission, the amount was returned.
The moment the transferee was inducted as a member the principles of mutuality
would apply.
• Non-occupancy charges were levied by the society and were payable by a member who
did not himself occupy the premises but let them out to a third person. The charges
were utilised only for common benefit of facilities and amenities to the members.
• Contribution to the common amenity fund taken from a member disposing of
property was utilized for meeting heavy repairs to ensure hazard-free maintenance
of the properties of the society which ultimately benefitted the members. Membership
forming a class, the identity of the individual member not being relevant, induction
into membership automatically attracted the doctrine of mutuality.
• If a society had surplus floor space index available, it was entitled to utilise it by making
fresh construction in accordance with law. Naturally, such additional construction would
entail extra maintenance charges. If the society first inducted new members who were
required to contribute to the common fund for availing of the common facilities, and
then granted only occupancy rights to them by draw of lots, the ownership remaining
with the society, the receipts could not be bifurcated into two segments of receipt and
costs, so as to hold the former to be outside the purview of mutuality classifying it as
income of the society with commerciality.
Supreme Court’s Decision: The doctrine of mutuality, is based on the common law
principle that a person cannot make a profit from himself. Accordingly, the transfer
charges, non-occupancy charges common amenity fund charges and other charges are
exempt owing to application of the doctrine of mutuality.
Question 92
Would the interest earned on surplus funds of a club deposited with institutional members
satisfy the principle of mutuality to escape taxability?
Answer
In Madras Gymkhana Club v. DCIT (2010) 328 ITR 348 (Mad.), the High Court held that interest
earned from investment of surplus funds in the form of fixed deposits with institutional
members does not satisfy the principle of mutuality and hence cannot be claimed as exempt
on this ground. The interest earned is, therefore, taxable.
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Question 93
Can transfer fees received by a co-operative housing society from its incoming and outgoing
members be exempt on the ground of principle of mutuality?
Answer
In Sind Co-operative Housing Society v. ITO (2009) 317 ITR 47 (Bom), the High Court, therefore,
held that transfer fees received by a cooperative housing society, whether from outgoing or
from incoming members, is not liable to tax on the ground of principle of mutuality since the
predominant activity of such cooperative society is maintenance of property of the society
and there is no taint of commerciality, trade or business.
Further, section 28(iii), which provides that income derived by a trade, professional or similar
association from specific services performed for its members shall be treated as business
income, can have no application since the co-operative housing society is not a trade or
professional association.
Question 94
Boat Club is an association governed by the provisions of Section 44A of the Income-tax Act,
1961.The subscription received from members for the year ended 31st March, 2022 was `
2,00,000. The expenditures in the normal course of its activities were ` 3,85,000. Its other
income taxable under the Act works out to ` 2,75,000. You are consulted as to how Boat
Club’s income would be determined for assessment year 2022-23?
Answer
As per section 44A, the deficiency arising on account of income from members by way of,
inter alia, subscriptions, falling short of the expenditure incurred solely for the protection or
advancement of the interest of its members, shall first be set off against the association’s
income under the head “Profits and gains of Business or Profession”. If there is no such
income under this head, the deficiency shall be set off against income under any other head.
Particulars `
Income from subscription 2,00,000
Less: Expenses incurred in the course of its activities 3,85,000
Deficiency (-)1,85,000
Other income 2,75,000
Less: Deficiency `1,85,000 but limited to 50% of other income 1,37,500
Income of the Association 1,37,500
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There is a ceiling on the deduction admissible by way of deficiency being that it shall not
exceed one-half of the total income of the association computed before making any allow-
ance under this section. This ceiling has been exceeded above and the deficiency hence is
limited to ` 1,37,500 being one-half of `2,75,000 [Section 44A(3)].
Question 95
The assessee, Pandey Co-operative Housing Society, is a registered co-operative housing
society, formed with the objective of maintaining the property owned by it, to effect repairs
and maintenance of the common property of the members, and to confer to the members,
the usual rights and privileges. For the assessment year 2022-23, the assessee has received
` 3 lacs as transfer fees from the transferor members and like amount from the transferees,
who at the time of transfer, were not members of the society. Discuss the exigibility to tax
the aforesaid receipts in the hands of the assessee.
Answer
Transfer fees received by a co-operative housing society, whether from outgoing or from
incoming members, is not liable to tax on the ground of principle of mutuality where the
predominant activity of such co-operative society is maintenance of property of the society.
It was so held by the Bombay High Court in Sind Co-op Housing Society v. ITO (2009) 317
ITR 47.
Further, section 28(iii), which provides that income derived by a trade, professional or simi-
lar association from specific services performed for its members shall be treated as business
income, can have no application since the co-operative housing society is not a trade or
professional association.
Therefore, ` 3 lacs received as transfer fees by Pandey Co-operative Housing Society from its
transferor members and its transferees, is not chargeable to tax.
Question 96
Discuss provisions of Section 28(iiia) to Section 28 (iiie):
Answer
The following receipts shall be considered as PGBP:
(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made
under the Imports and Exports (Control) Act, 1947 (18 of 1947);
(iiib) cash assistance (by whatever name called) received or receivable by any person against
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exports under any scheme of the Government of India;
(iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against
exports under the Customs and Central Excise Duties Drawback Rules, 1971;
(iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty
Remission Scheme under the export and import policy formulated and announced
under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of
1992);
(iiie) any profit on the transfer of the Duty-Free Replenishment Certificate, being the Duty
Remission Scheme under the export and import policy formulated and announced
under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of
1992);
In short, any export incentives, duty drawback, cash incentive is taxable under the
head PGBP.
Question 97
Discuss provisions for taxability of perquisites or benefits received in the course of Business
or Profession [Sec.28(iv)]?
Answer
Provision:
“...the value of any benefit or perquisite, whether convertible into money or not, arising from busi-
ness or the exercise of a profession..” shall be regarded as PGBP
Analysis:
1. Benefit or perquisite must be in the course of business / profession
2. Any benefit of perquisite arising in the course of business / profession is taxable as PGBP,
whether convertible into money or not, such benefit perquisite, may be contractual /
gratuitous.
3. Further it was held in case of CIT v/s Santogen Silk Mills (Bombay HC) that the benefit /
perquisite should originally be non – monetary is order to be caused v/s 28(iv).
Waiver of loan cannot be taxed u/s 28(iv).
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4. CBDT circular 486 of 1986: Player of the match award received by athletic / cricketer are
taxable u/s 28(iv) when benefit or perquisite is non – monetary.
Question 98
Is non – compete fee taxable as PGBP?
Any sum, whether received or receivable, in cash or kind, under an agreement for—
(a) not carrying out any activity in relation to any business or profession; or
(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any
other business or commercial right of similar nature or information or technique likely
to assist in the manufacture or processing of goods or provision for services:
Provided that sub-clause (a) shall not apply to—

(i) any sum, whether received or receivable, in cash or kind, on account of transfer of the
right to manufacture, produce or process any article or thing or right to carry on any
business or profession, which is chargeable under the head “Capital gains”;
(ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol
on Substances that Deplete the Ozone layer under the United Nations Environment
Programme, in accordance with the terms of agreement entered into with the
Government of India.
Explanation.—For the purposes of this clause,—

(i) “agreement” includes any arrangement or understanding or action in concert,—
(A) whether or not such arrangement, understanding or action is formal or in writing;
or
(B) whether or not such arrangement, understanding or action is intended to be
enforceable by legal proceedings;
(ii) “service” means service of any description which is made available to potential users
and includes the provision of services in connection with business of any industrial or
commercial nature such as accounting, banking, communication, conveying of news or
information, advertising, entertainment, amusement, education, financing, insurance,
chit funds, real estate, construction, transport, storage, processing, supply of electrical
or other energy, boarding and lodging;
Analysis:
Any non – compete fee received as a part of an against is taxable as PGBP. It is immaterial
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whether sale agreement is oral / written.
However, if any amount is received as part of transfer of capital assets, then such amount
is taxed under the head capital gain. Also, compensation received under Montréal Protocol
is also not taxable.
Note: Any payment of non – compete fee attracts TDS @ 10% u/s. 194J for the payer.
Question 99
For the payer of non-compete fees, is it allowable as a Business expenditure?
Answer
On account of payment of non-compete fees, the payer does not acquire any business, the
profit-making apparatus remains the same and there is no business or new source of in-
come and therefore, the expenditure has to be treated as revenue in nature. [Asianet Com-
munications Limited vs. CIT (Madras)].

However, in PCIT vs. Ferromatic Milacron India Private Limited [Gujarat High Court], it was
held that rights provided under non-compete fees protects assessee’s business interests
from competition. Hence, the same should be treated as intangible asset and depreciation
be allowed on the same.
Note: In exams, students can adopt either of the above view.
Question 100
Discuss taxation of maturity proceeds of Keyman Insurance Policy?
Answer
As per Section 28(vi):
“any sum received under a Keyman insurance policy including the sum allocated by way of bonus
on such policy.
Explanation.—For the purposes of this clause, the expression “Keyman insurance policy” shall have
the meaning assigned to it in clause (10D) of section 10;”
Analysis:
1. Any sum received by assessee [employer] under a keyman insurance policy is taxable
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as PGBP.
2. Keyman insurance is insurance in the life of such employee who plays a very important
role for the organisations.
3. Premium paid for such policy is deductible as business expense;
4. However, if such policy is assigned by the assessee employer in favour of the “Keyman”
and later he realises any amount on surrender of policy, the same is taxable in his
hands under the head “Salary”. Further, in case his family members realise the amount,
then the same is taxable under Other Sources;
Question 101
How is Income under the head PGBP computed?
Answer
As per Section 29 of the Act, once charging section 28 is attracted, PGBP is computed in ac-
cordance with section 30 to 43D.
Note: Badridas Daga (Supreme Court): Section 30 to Sec.43D discusses only about expendi-
ture (Sec.32 provides for depreciation allowance). Any losses which assessee incurs in rela-
tion to his business (loss by fire / theft) is allowable as deduction u/s. 28 itself.
Question 102
How is Rent, and repairs cost incurred on Buildings treated under Income-tax Act, 1961?
Answer
As per Section 30, Rent and Repairs cost incurred on a building for the purpose of business
or profession is allowed as deduction while computing PGBP. The salient features of this
section are:
1) Where the premises are occupied by the assessee as a tenant, the rent paid for such
premises ; and further if he has undertaken to bear the cost of repairs to the premises,
the amount paid on account of such repairs is allowed as deduction —
2) Where the premises are occupied by the assessee otherwise than as a tenant, the
amount paid by him on account of current repairs to the premises ;
3) Further, any sums paid on account of land revenue, local rates or municipal taxes is
also allowed as deduction;
4) Also, the amount of any premium paid in respect of insurance against risk of damage
or destruction of the premises.
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It has been clarified that the amount paid on account of the cost of repairs referred to
above, shall not include any expenditure in the nature of capital expenditure.
In New Shorrock Spg & Mfg Co Ltd vs. CIT (Bom) it was held that current repairs must be to
preserve and maintain existing asset and not to bring a different or new advantage;
Question 103
What is the nature of expenditure incurred on demolition and re-erection of a cell room and
expenditure incurred on purchase of pumping set, mono block pump and two transformers,
which were parts of a bigger plant – revenue or capital?
Answer
Modi Industries Ltd. (Delhi High Court)
After completely demolishing the old cell room, an entire new cell room was erected. The
money spent was not merely on repairs of the cell room, but for constructing a new cell
room. Even the nomenclature of the entry, as given by the assessee, was “fabrication and
erection charges of cell room Thus, it was nothing but a complete demolition of the old cell
room and construction/erection of a new cell room in its place. The expenditure incurred on
the cell room was capital expenditure. However, so far as purchase of pumping set, mono
block pump with HP motors and two transformers were concerned, they were not stand
alone equipment, but were part of the bigger plant. Therefore, it would be treated as re-
placement of those parts and the expenditure would be eligible for deduction under section
37(1).
Question 104
Discuss allowability of repairs and insurance cost in respect of machinery, plant and furni-
ture?
Answer
In respect of repairs and insurance of machinery, plant or furniture used for the purposes of
the business or profession, the following deductions shall be allowed—
1) the amount paid on account of current repairs is allowed as deduction;
2) the amount of any premium paid in respect of insurance against risk of damage or
destruction thereof is also allowed as deduction.
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It has been clarified that the amount paid on account of current repairs shall not include
any expenditure in the nature of capital expenditure.
Note: Rent paid for plant, machinery, furniture is allowed as deduction u/s 37.
The term ‘plant’ as defined in section 43(3) includes ships, vehicle, books, scientific apparatus
and surgical equipments used for the purpose of the business or profession but does not
include tea bushes or livestock or buildings or furniture and fittings. However, the word
‘plant’ does not include an animal, human body or stock-in-trade. Thus, plant includes
all goods and chattels, fixed or movable, which a businessman keeps for employment
in his business with some degree of durability. The expression ‘plant’ includes part of a
plant (e.g., the engine of a vehicle); machinery includes part of a machinery and building
includes a part of the building.
Question 105
Can the expenditure incurred on heart surgery of an assessee, being a lawyer by profession,
be allowed as business expenditure under section 31, by treating it as current repairs con-
sidering heart as plant and machinery, or under section 37, by treating it as expenditure
incurred wholly and exclusively for the purpose of business or profession?
Answer
The above question is based on Delhi High Court decision in the case of Shanti Bhushan v. CIT
(2011) 336 ITR 26 (Delhi).
Facts of the case: In the present case, the assessee is a lawyer by profession. The assessee
argued that the repair of vital organ (i.e. the heart) had directly impacted his professional
competence. He contended that the heart should be treated as plant as it is used for the
purpose of his professional work. He substantiated his contention by stating that after his
heart surgery, his gross receipts from profession increased manifold. Hence, the expenditure
on the heart surgery should be allowed as business expenditure either under section 31 as
current repairs to plant and machinery or section 37 as an expense incurred wholly and
exclusively for the purpose of profession. The department argued that the said expenditure
was personal in nature and was not incurred wholly and exclusively for the purpose of busi-
ness or profession, and therefore, the same should not be allowed as business expenditure.
High Court’s Observations: On this issue, the Delhi High Court observed that a healthy and
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functional human heart is necessary for a human being irrespective of the vocation or pro-
fession he is attached with. Expenses incurred to repair an impaired heart would thus add to
the longevity and efficiency of a human being which would be reflected in every activity he
does, including professional activity. It cannot be said that the heart is used as an exclusive
tool for the purpose of professional activity by the assessee.
Further, the High Court held that:-
(i) To allow the heart surgery expenditure as repair expenses to plant, the heart should
have been first included in the assessee’s balance sheet as an asset in the previous
year and in the earlier years. Also, a value needs to be assigned for the same. The
assessee would face difficulty in arriving at the cost of acquisition of such an asset for
showing in his books of account. Though the definition of “plant” as per the provisions
of section 43(3) is inclusive in nature, such plant must have been used as a business
tool which is not true in case of heart. Therefore, the heart cannot be said to be plant
for the business or profession of the assessee. Therefore, the expenditure on heart
surgery is not allowable as repairs to plant under section 31.
(ii) According to the provisions of section 37, inter alia, the said expenditure must be
incurred wholly and exclusively for the purposes of the assessee’s profession. As
mentioned above, a healthy heart will increase the efficiency of human being in every
field including its professional work. High Court’s Decision: There is, therefore, no direct
nexus between the expenses incurred by the assessee on the heart surgery and his
efficiency in the professional field. Therefore, the claim for allowing the said expenditure
under section 37 is also not tenable. Hence, the heart surgery expenses shall not be
allowed as a business expenditure of the assessee under the Income-tax Act, 1961.
Question 106
How to compute depreciation as per section 32 of the Income-tax Act, 1961?
Answer
As per Section 32 of the Income-tax Act, 1961 [‘the Act’] depreciation is allowable in respect
of BLOCK OF ASSETS of:
1) TANGIBLE ASSETS being buildings, machinery, plant or furniture;
2) INTANGIBLE ASSETS being know-how, patents, copyrights, trademarks, licences,

franchises or any other business or commercial rights of similar nature, being intangible
assets acquired on or after the 1st day of April, 1998,
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3) Such Assets must be OWNED, wholly or partly, by the assessee and USED for the purposes
of the business or profession. Such Depreciation shall be calculated on WRITTEN
DOWN VALUE AS ON LAST DAY OF THE YEAR of the BLOCK at RATES PRESCRIBED as per
Income-tax Rules.
4) Under IT Act, there is no concept of specific identification of asset, therefore, we follow

block of assets concept. Block is a group of asset which is of similar nature and for
which same rate of depreciation is prescribed under IT Act;
5) Under IT act, depreciation is provided for the entire year on the “Value of Block”.
However, if asset was acquired during the year and was put to use for a period less
than 180 days during such year, then depreciation shall be provided at half the normal
rate;
6) PRESCRIBED RATES OF DEPRECIATION

(a) Factory building 10%
(b) Any other building 5%
(c) Plant / Machinery 15%
(d) Plant / machinery being motor vehicle purchased between 30%
23.08.2019 to 31.3.2020 and put to use before 01.04.2020
(e) Plant / machinery being motor car used in hiring business 30%
(f) Plant / machinery being motor vehicle used in hiring busi- 45%
ness purchased between 23.08.2019 to 31.3.2020 was
put to use before 01.04.2020
(g) Plant / machinery being computer 40%
(h) Furniture and fittings 10%
(i) Intangible assets 25%
7) Building: It was held in the case of Indian Aluminium company (Calcutta) that drainages
/ fences constructed by the assessee form part of building block. Further compound
walls also form part of building block.
8) Machinery: Whether computer perpetual / accessory has to be created as part of

computer block. (40%) or separate plant and machinery (15%)?
It was held in the case BSES company Ltd. (Delhi High Court), that computer accessories
and peripherals such as printers, scanners and server etc. form an integral part of the
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computer system and they cannot be used without the computer. Consequently, the
High Court held that since they are part of the computer system, they would be eligible
for depreciation at the higher rate of 60% [now 40%] applicable to computers including
computer software. E.g.: Printer, CPU, Mouse etc.
The Delhi High Court, in CIT v. Orient Ceramics and Industries Ltd. [2013] 358 ITR
0049, following its own judgment in the above case, held that depreciation on UPS
is allowable @ 40%, being the eligible rate of depreciation on computers including
computer software, and not at the general rate of 15% applicable to plant and
machinery
However, fax machines and EPABX machines can be used independent of the computer
and hence shall be treated as a separate block depreciable @ 15%. [Federal Bank Ltd.
(Kerala High Court)]
9) Intangible Asset: Whether goodwill is a depreciable asset?

It was held by Supreme Court in the case of Smifs Securities that a reading of the words
‘any other business or commercial rights of similar nature’ in Explanation 3(b) indicates
that goodwill would fall under the said expression. In the process of amalgamation, the
amalgamated company had acquired a capital right in the form of goodwill because
of which the market worth of the amalgamated company stood increased.
Therefore, it was held that ‘Goodwill’ is an asset under Explanation 3(b) to section
32(1) and depreciation thereon is allowable under the said section. That goodwill is
covered within the phrase. “any other business or commercial right of similar nature”
and hence is depreciable.

AMENDMENT BY FINANCE ACT 2021

Section 2(11) of the Act has been amended to provide that goodwill of business or profession
shall not be considered as part of block of assets.
10) Ownership: An asset owned by the assesse is entitled in depreciation. The word ownership
indicates beneficial ownership and not merely registered ownership. In the case of CIT
v/s Mysore Minerals Ltd. (SC) was found that assessee had purchased motor vehicles
and was using it for his business. However, in the RTO records, the registered ownership
was not transferred in assessee’s name. It was held that assesee was entitled in
depreciation since he was the beneficial owner.
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Can depreciation on leased vehicles be denied to the lessor on the ground that the vehicles
are registered in the name of the lessee and that the lessor is not the actual user of the
vehicles?
I.C.D.S. Ltd. v. CIT (2013) 350 ITR 527 (SC)
Facts of the case: The assessee is a non-banking finance company engaged, inter alia, in
the business of leasing and hire purchase. The assessee purchasezd vehicles directly from
the manufacturers and as a part of its business, leased out these vehicles to its customers,
after which the physical possession of the vehicles was with the lessee. Further, the lessees
were registered as the owners of the vehicles in the certificate of registration issued under
the Motor Vehicles Act, 1988. The assessee-lessor claimed depreciation on such vehicles.
The Assessing Officer disallowed the depreciation claim on the ground that the assessee’s
use of these vehicles was only by way of leasing out the vehicles to others and not as
actual user of the vehicles in the business of running them on hire and secondly, the
vehicles were registered in the name of the lessee and not the assessee-lessor. Therefore,
according to the Assessing Officer, the assessee had merely financed the purchase of these
assets and was neither the owner nor the user of these assets.
High Court’s view: The High Court was also of the view that the assessee could not be
treated as the owner of the vehicles, since the vehicles were not registered in the name of
the assessee and the assessee had only financed the transaction. Therefore, the High Court
held that the assessee was not entitled to claim depreciation.
Supreme Court’s Observations: The Supreme Court observed that section 32 imposes
a twin requirement of “ownership” and “usage for business” as conditions for claim of
depreciation thereunder. The Apex Court further observed that as far as usage of the asset
is concerned, the section requires that the asset must be used in the course of business. It
does not mandate actual usage by the assessee itself. In this case, the assessee did use
the vehicles in the course of its leasing business. Hence, this requirement of section 32 has
been fulfilled, notwithstanding the fact that the assessee was not the actual user of the
vehicles. The Supreme Court further noted that section 2(30) of the Motor Vehicle Act,
1988, is a deeming provision which creates a legal fiction of ownership in favour of the
lessee only for that Act, not for the purpose of law in general. No inference could be drawn
from the registration certificate as to ownership of the legal title of the vehicles, since
registration in the name of the lessee during the period of lease is mandatory as per the
Motor Vehicles Act, 1988. If the lessee was in fact the legal owner, he would have claimed
depreciation on the vehicles which was not the case.
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The Apex Court observed that as long as the assessee-lessor has a right to retain the legal
title against the rest of the world, he would be the owner of the asset in the eyes of law.
In this regard, the following provisions of the lease agreement are noteworthy:
• The assessee is the exclusive owner of the vehicle at all points of time;
• The assessee is empowered to repossess the vehicle, in case the lessee committed a
default;
• At the end of the lease period, the lessee was obliged to return the vehicle to the
assessee;
• The assessee had a right of inspection of the vehicle at all times. It can be seen
that the proof of ownership lies in the lease agreement itself, which clearly points in
favour of the assessee.
Supreme Court’s Decision: The Supreme Court, therefore, held that assessee was entitled
to claim depreciation in respect of vehicles leased out since it has satisfied both the
requirements of section 32, namely, ownership of the vehicles and its usage in the course
of business.
Hire purchase: In the case of assets under the hire purchase system the allowance for
depreciation would under Circular No. 9 of 1943 R. Dis. No. 27(4) I.T. 43 dated 23-3-1943,
be granted as follows:
• In every case of payment purporting to be for hire purchase, production of the agreement
under which the payment is made would be insisted upon by the department.
• Where the effect of an agreement is that the ownership of the asset is at once
transferred on the lessee, the transaction should be regarded as one of purchase
by instalments and consequently no deduction in respect of the hire amount should
be made. This principle will be applicable in a case where the lessor obtains a right
to sue for arrears of installments but has no right to recover the asset back from
the lessee. Depreciation in such cases should be allowed to the lessee on the hire
purchase price determined in accordance with the terms of hire purchase agreement.
• Where the terms of an agreement provide that the asset shall eventually become
the property of the hirer or confer on the hirer an option to purchase an asset, the
transaction should be regarded as one of hire purchase. In such case, periodical
payments made by the hirer should for all tax purposes be regarded as made up of
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(i) the consideration for hirer which will be allowed as a deduction in assessment,
and
(ii) payment on account of the purchase price, to be treated as capital outlay and
depreciation being allowed to the lessee on the initial value namely, the amount
for which the hired assets would have been sold for cash at the date of the
agreement
The allowance to be made in respect of the hire should be the amount of the difference
between the aggregate amount of the periodical payments under the agreement and the
initial value as stated above. The amount of this allowance should be spread over the
duration of the agreement evenly. If, however, agreement is terminated either by outright
purchase of the asset or by its return to the seller, the deduction should cease as from the
date of termination of agreement.
For the purpose of allowing depreciation, an assessee claiming deduction in respect of the
assets acquired on hire purchase would be required to furnish a certificate from the seller
or any other suitable documentary evidence in respect of the initial value or the cash price
of the asset.
In cases where no such certificate or other evidence is furnished the initial value of the
assets should be arrived at by computing the present value of the amount payable under
the agreement at an appropriate per centum.
For the purpose of allowing depreciation the question whether in a particular case the
assessee is the owner of the hired asset or not is to be decided on a consideration of all
the facts and circumstances of each case and the terms of the hire purchase agreement.
Where the hired asset is originally purchased by the assessee and is registered in his name,
the mere fact that the payment of the price is spread over the specified period and is made
in installments to suit the needs of the purchaser does not disentitle the assessee from
claiming depreciation in respect of the asset, since the assessee would be the real owner
although the payment of purchase price is made subsequent to the date of acquisition of
the asset itself.
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11) Use: Any assesse a entitled is depreciation provided the asset is used for the purpose of
business / profession. Such use may be active use or passive use (Ready to use). Passive
use means asset is ready to be used.
It was held in case of Whittle Anderson and company (Bombay HC) that spare buses,
machinery, ready to be used are also entitled to depreciation.
12) CIT v/s Annamalai Finance Co (Madras HC)

In this case the assesse treated out his motor car and the lessee used the motor car in
the business of running on hire. Questions are whether the assesse (lessor) is entitled
to depreciation @ 15% or 30%.
It was noticed by high court that depreciations is allowed on asset “owned by the
assessee” and used for business or profession’s the words ‘by the assessee’ qualify the
word ownership and not use. Therefore, use by any other person entitles the assesse
(owner) for depreciation.
Since in the given case such asset is used in the business of hire the assesse lessor is
entitled to depreciation @ 30%.
13) Explanation 1 to Sec.32

If a tenant in a building incurs any capital expenditure then such expenditure is not
allowed as a deduction.
However, for the limited purpose of allowing depreciations it will be deemed that such
capital expenditure creates a deemed block of building on which depreciation will be
allowed.
Assessee Mr. X, incurred ` 20,00,000 on demolition and reconstruction of a factory
building in which he is a tenant. He has debited this expense to P/L. Discuss.
As per Section 30, Capital Repairs are not allowed as deduction. Therefore, Rs.
20,00,000 shall be added back to total income. However, he will be entitled to
depreciation on such capital expenditure as per Explanation 1 to Sec.32.
14) Explanation 5 to Sec.32

Depreciation is a mandatory allowance which will be allowed by Assessing Officer
even if assessee does not claim the same.
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Question 107
What are the steps to compute depreciation u/s 32?
Answer
Step 1: Identify the block of asset
Step 2: Compute the value of block as on last day of the year for the assessee.
Particulars Amount (`)
Opening WDV of assets xxx
(+) Actual cost of assets acquired during the year xxx
xxx
(-) Moneys payable in respect of assets sold, discarded, demolished, or xxx
destroyed
Value of Block (a) xxx
Depreciation on above (b) xxx
@ prescribed rate
Step 3: In the next year: Opening WDV

= Value of block of preceding year – Depreciation actually allowed in the preceding year
Note: Depreciation is allowable provided there is atleast one asset in the block and value
of block is positive
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Question 108
Discuss SECOND PROVISO TO SECTION 32(1):
Answer
As per Second proviso to Section 32(1), where an asset referred to in clause (i) or clause
(ii) or clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the
assessee during the previous year and is put to use for the purposes of business or profession
for a period of less than one hundred and eighty days in that previous year, the deduction under
this sub-section in respect of such asset shall be restricted to fifty per cent of the amount
calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause
(iia), as the case may be...”
In Short, if an asset is acquired during the year AND put to use < 180 days during that year,
then rate of depreciation shall be restricted to 50 per cent of normal rate.
Rate
Asset acquired Put to use PY 21 – 22 PY 22 – 23
1.4.21 1.9.21 Full
1.4.21 1.1.22 Half
1.4.21 1.4.22 Nil Full
1.4.21 1.1.23 Nil Full*
*Depreciation will be restricted only if other acquired during the year and put to use for less
than 180 days in the year of acquisition.
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Question 109
A Ltd. has opening WDV of Rs. 80,00,000. Asset acquired and put to use on 10.6.2021 was
Rs. 10,00,000. Moneys payable for asset sold during the year is Rs. 40,00,000. Assume rate
of Depreciation as 10%. Compute value of block and depreciation allowable?
Will your answer change if other facts remaining the same, the date of acquisition of asset
is 10.01.2022.
Answer
Opening WDV of asset 80,00,000
Actual cost of asset acquired 10,00,000
Sub-total 90,00,000
Moneys payable for asset sold (40,00,000)
Value of Block 50,00,000
Depreciation @ 10% on above (5,00,000)
In case date of acquisition of asset is 10.01.2022 then, the computation will modify as
under:
Opening WDV 80,00,000
(+) Actual Cost 10,00,000
90,00,000
(-) Moneys payable (40,00,000)
50,00,000
40,00,000 10,00,000
Op. WDV @ 10% 10% × ½
= ` 4,00,000 = ` 50,000
Depreciation ` 4,50,000
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Question 110
How to allow depreciation in case of succession of business or amalgamation of business?
Answer
As per 6th proviso to section 32, the aggregate deduction, in respect of depreciation of
buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copy-
rights, trademarks, licences, franchises or any other business or commercial rights of similar
nature, being intangible assets allowable to the predecessor and the successor in the case
of succession referred to in clause (xiii), clause (xiiib) and clause (xiv)of section 47 or section
170 or to the amalgamating company and the amalgamated company in the case of amal-
gamation, or to the demerged company and the resulting company in the case of demerger,
as the case may be, shall not exceed in any previous year the deduction calculated at the
prescribed rates as if the succession or the amalgamation or the demerger, as the case may
be, had not taken place, and such deduction shall be apportioned between the predeces-
sor and the successor, or the amalgamating company and the amalgamated company, or
the demerged company and the resulting company, as the case may be, in the ratio of the
number of days for which the assets were used by them...”
Steps:
1. Calculate depreciation for predecessor as if NO SUCCESSION HAS TAKEN PLACE.
2. Compute number of days for which asset used by predecessors (P) and successors (S).
3. Apportion depreciation in step 1 amongst P & S based on number of days asset is used
by each entity.
Question 111
X Ltd. has opening WDV of ` 10,00,000 for a block of asset depreciable @ 10%. It acquired
an asset falling in the block on 20th May 2021 for ` 5,00,000. Asset was put to use in same
day. On 29th August, 2021, the company amalgamated in Y Ltd. opening WDV of Y Ltd. is `
15,00,000. You are explained to compute depreciation and value of block for Y Ltd.
Answer
As per 6th proviso to Sec.32(1), depreciation is calculated as under:
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Question 112
How is capital gains computed in case of transfer of depreciable asset?
Answer
As per Section 50 of the Act, Capital gains on transfer of depreciable assets arises only
where
FVOC > [Opening WDV + Acquired cost + Incidental Expenses on transfer]
or
when the block ceases to exist
Further, Capital Gains is deemed as short term in nature
Question 113
Discuss provisions for calculation of ADDITIONAL DEPRECIATION – Section32 (1)(iia) of the
Act?
Answer
Additional Depreciation is allowed as per section 32(1)(iia) as under:
1. Additional Depreciation is allowed in the case of any new machinery or plant (other than
ships and aircraft), which has been acquired and installed after the 31st day of March,
2005,
2. The assessee must be engaged in the business of manufacture or production of any

article or thing or in the business of generation, transmission or distribution of power,
3. The Additional Depreciation is allowed at twenty per cent of the actual cost of such
machinery or plant shall be allowed as deduction under clause (ii) :
4. Provided that where an assessee, sets up an undertaking or enterprise for manufacture

or production of any article or thing, on or after the 1st day of April, 2015 in any
backward area notified by the Central Government in this behalf, in the State of Andhra
Pradesh or in the State of Bihar or in the State of Telangana or in the State of West
Bengal, and acquires and installs any new machinery or plant (other than ships and
aircraft) for the purposes of the said undertaking or enterprise during the period
beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020
in the said backward area, then, the provisions of clause (iia)shall have effect, as if for
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the words “twenty per cent”, the words “thirty-five per cent” had been substituted;
5. However, additional depreciation shall not be allowed in respect of—

1) any machinery or plant which, before its installation by the assessee, was used
either within or outside India by any other person; or
2) any machinery or plant installed in any office premises or any residential
accommodation, including accommodation in the nature of a guest-house; or
3) any office appliances or road transport vehicles; or
4) any machinery or plant, the whole of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise) in computing the income
chargeable under the head “Profits and gains of business or profession” of any
one previous year;..”
6. As per Second proviso to S. 32(1), where an asset is acquired by the assessee during
the previous year and is put to use for the purposes of business or profession for a
period of less than one hundred and eighty days in that previous year, then deduction
on account of additional depreciation shall be restricted to fifty per cent of the amount
calculated at the percentage prescribed;
7. Further, in such a scenario, where deduction under this sub-section in respect of

such asset is restricted to fifty per cent of the amount calculated at the percentage
prescribed for an asset under clause (iia) for that previous year, then, the deduction for
the balance fifty per cent of the amount calculated at the percentage prescribed for
such asset under clause (iia)shall be allowed under this sub-section in the immediately
succeeding previous year in respect of such asset:..”
8. It may be noted that in case of assessee’s opting for beneficial provisions of section
115BAA, Section 115BAB, Section 115BAC or Section 115BAD, additional depreciation
is not allowed to the assessee. Further, where the assessee has brought forward
losses which are attributed to brought forward unabsorbed depreciation arising due to
additional depreciation then the same shall be discarded once the opts for the afore-
mentioned provisions. However, the corresponding amount shall be adjusted to the
opening WDV of the block of assets;
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Test your knowledge

1. Mr. Akash is engaged in the business of running motor cars on hire. His brother, Mr.
Vikas, is a dentist. Mr. Akash and Mr. Vikas each purchased a motor car of the value
of Rs. 5 lakh on 1.11.2019 for their business/ profession and put the same to use
immediately. The written down value of motor cars as on 1.4.2019 may be taken as
Rs. 50 lakh for Mr. Akash and Nil for Mr. Vikas. What is the depreciation allowable
in respect of motor cars to Mr. Akash and Mr. Vikas under section 32 for A.Y.2021-
22, assuming that both of them have not opted for the special provisions of section
115BAC?
(a) Rs. 11,73,750 and Rs. 69,375, respectively
(b) Rs. 11,77,500 and Rs. 1,05,000 respectively
Answer: (D)
2. Mr. X, set up a manufacturing unit in Warangal in the State of Telangana on 01.06.2020.

It invested Rs. 30 crore in new plant and machinery on 1.6.2020. Further, it invested
Rs. 25 crore in the plant and machinery on 01.11.2020, out of which Rs. 5 crore was
second hand plant and machinery. The depreciation allowable under section 32 for
A.Y.2021-22 is -
a. Rs. 23.875 crore
b. Rs. 20.375 crore
c. Rs. 14.375 crore
d. Rs. 14.875 crore
Answer (C)
Question 114
What adjustments should be made to the block in case of transfer of depreciable asset
forming part of block transferred under SLUMP SALE?
Answer
In such case, LOWER OF the following value shall be reduced from the block
computation:
1. [Actual cost of the asset falling within that block (-) the amount of depreciation that
would have been allowable to the assessee as if the asset was the only asset in the
relevant block of assets]
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or
2. the Written Down Value of Block
Question 115.
X Ltd. has opening WDV of building `10,00,000. Actual cost of additional `25,00,000. Moneys
payable  `7,00,000. Apart from above one asset which form part of block was transferred
under slump sale. This asset acquired on 1.4.2018 for `5,00,000. Slump sale took place on
10.6.2021. Assume sale of depreciation as 10%.
What will be your answer if moneys payable was Rs. 32,00,000 instead of Rs. 7,00,000.
Answer
Computation of Value of Block of asset considering slump sale
Particulars Case 1 Case 2
Opening WDV 10,00,000 10,00,000
Add: Actual Cost of asset acquired during the year 25,00,000 25,00,000
Sub-total 35,00,000 35,00,000
Less: Moneys payable 7,00,000 32,00,000
Less: Notional WDV of asset transferred under SLUMP SALE 3,64,500 3,00,000*
Opening WDV on first day of next year 24,35,500 NIL
*Reduction cannot exceed value of block
Computation of Notional WDV of asset transferred under slump rate as if it was the only asset:
Actual cost on 1.4.18 5,00,000

(-) Depreciation @ 10% for F.Y. 2018-19 (50,000)
WDV on 1.4.2019 4,50,000
(-) Depreciation @ 10% for F.Y. 19 – 20 (45,000)
WDV on 1.4.20 4,05,000
(-) Depreciation @ 10% for F.Y. 20 – 21 (40,500)
Notional WDV 3,64,500
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Question 116
WHAT IS ACTUAL COST? (SECTION 43(1))
Answer
“Actual cost” means the actual cost of the assets to the assessee, reduced by that portion
of the cost thereof, if any, as has been met directly or indirectly by any other person or au-
thority:
SECOND PROVISO BELOW SECTION 43(1)
Where the assessee incurs any expenditure for acquisition of any asset or part thereof
in respect of which a payment or aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or
use of electronic clearing system through a bank account or through such other electronic mode
as may be prescribed, exceeds ten thousand rupees, such expenditure shall be ignored for the
purposes of determination of actual cost.
Conversion of stock in trade to capital asset
Explanation 1A.—Where a capital asset referred to in clause (via) of section 28 is used for
the purposes of business or profession, the actual cost of such asset to the assessee shall
be the fair market value which has been taken into account for the purposes of the said
clause.
Analysis:
1. When stock in trade of converted into capital asset, PGBP arises in year of conversion
= FMV of asset on date of conversion [28(via)].
2. If the converted asset is depreciable in nature, actual cost = FMV on date of conversion.
3. Period of holding of the asset shall be considered from date of conversion.
4. Cost of acquisition for computation of capital gains [if asset is not depreciable] = FMV
of asset on date of conversion
Example: Mr. Avinash acquired a house property on 10.04.2001 in his ordinary course of
business as a real estate dealer. On closure of his business, he treated the said property
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as capital asset in his books of accounts on 10.06.2010, when fair market value of land
was Rs. 1,00,00,000. This asset is sold on 31.03.2022 for Rs. 2,00,00,000.
Discuss the treatment of above transactions in case:

1. Asset is depreciable in nature
2. Asset is non-depreciable in nature
Solution: In either of the above case, PGBP arises in year of conversion i.e. fair market value
of Rs. 1,00,00,000/-.
CASE 1: Now, if asset is depreciable in nature, actual cost to be considered in block of

assets on 10.06.2010 is FMV on date of conversion i.e. Rs. 1,00,00,000/-.
On 31.03.2022, Rs. 2,00,00,000 will be reduced from the value of block as

“Moneys payable on asset sold”
CASE 2: If asset is non – depreciable in nature, then capital gains shall be computed as
under:
Period of Holding 10.06.2010 to 30.03.2022 = Long term
Full Value of Consideration 2,00,00,000
(-) Cost of Acquisition 1,00,00,000
Capital Gains (subject to Indexation) 1,00,00,000
Explanation 2 to Sec. 43(1) – Gift / inheritances

Where an asset is acquired by the assessee by way of gift or inheritance, the actual cost of
the asset to the assessee shall be the actual cost to the previous owner, as reduced by—
(a) the amount of depreciation actually allowed under this Act and the corresponding
provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of any previous
year relevant to the assessment year commencing before the 1st day of April, 1988;
and
(b) the amount of depreciation that would have been allowable to the assessee for any
assessment year commencing on or after the 1st day of April, 1988, as if the asset
was the only asset in the relevant block of assets.
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ANALYSIS:
Actual Cost for Donee = Actual Cost to (-) Depreciation that would have been
Donor allowable to donor if the gifted asset
was the only asset in the block
Example: Mr. X acquired an asset on 1st April, 2018 for Rs. 5,00,000 which did not form part
of his block. He gifted this asset to Mr. Y on 10th June, 2021. Mr. Y introduced this asset in
his block. Compute actual cost if rate of depreciation is 10%. Will your answer change if
asset did form part of block for the donor? FMV of asset is Rs. 10 lakhs on date of gift.
Solution: Explanation 2 operates only when the gifted / inherited asset was forming part of
block of asset for the donor. In the given case, this situation is not satisfied. Therefore, Ac-
tual cost for ‘Y’ = Actual cost for X, i.e. Rs. 5,00,000.
Case2: Actual cost for Y shall be the notional WDV of this asset for X [assuming that the
gifted asset was the only asset in the relevant block] which is computed as under:
Actual Cost for Mr. X 5,00,000
(-) Notional Depreciation F.Y. 18 – 19 50,000
F. Y. 19 – 20 45,000
F. Y. 20 – 21 40,500 (1,35,000)
3,64,500
Actual cost of the asset in the hands of Mr. Y = Rs. 3,64,500
Note:
The above question is silent with regard to nature of gifted asset. Suppose the gifted asset
is a building, then under section 56(2)(x), Stamp Duty Value of such asset shall be regarded
as Income from other sources = 10 lakhs.
In case, the gifted asset is anything apart from building, then there is no implication u/s
56(2)(x).
However, in either case, actual cost to be added in the block is Rs. 3,64,500.
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Explanation 3 to Sec.43 (1) – Artificial enhancement of cost

Where, before the date of acquisition by the assessee, the assets were at any time used by
any other person for the purposes of his business or profession and the Assessing Officer
is satisfied that the main purpose of the transfer of such assets, directly or indirectly to
the assessee, was the reduction of a liability to income-tax (by claiming depreciation with
reference to an enhanced cost), the actual cost to the assessee shall be such an amount
as the Assessing Officer may, with the previous approval of the Joint Commissioner, deter-
mine having regard to all the circumstances of the case.
CIT vs. Ashwin Vanaspati (Gujarat High Court)

The satisfaction of the Assessing Officer must be recorded in writing
Explanation 4 to Sec.43 (1) – Sale & re-acquisition

Where any asset which had once belonged to the assessee and had been used by him for
the purposes of his business or profession and thereafter ceased to be his property by
reason of transfer or otherwise, is re-acquired by him, the actual cost to the assessee shall
be—
(i) the actual cost to him when he first acquired the asset as reduced by—
(a) the amount of depreciation actually allowed to him under this Act or under
the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922),
in respect of any previous year relevant to the assessment year commencing
before the 1st day of April, 1988; and
(b) the amount of depreciation that would have been allowable to the assessee for
any assessment year commencing on or after the 1st day of April, 1988, as if
the asset was the only asset in the relevant block of assets; or
(ii) the actual price for which the asset is re-acquired by him,
Whichever is less;
ANALYSIS:
If the asset is sold by the assesse and later re-acquired by him then actual cost shall be
lower of:
(1) Reacquisition Price;
Or
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(2) Notional WDV as on the date of original transfer
As per CBDT Circular, it has been clarified that it is not necessary that reacquisition must be
from the same person to whom the asset was sold i.e. If Mr. A transfers the asset to Mr. B,
who again transfers the same to Mr. C and later Mr. A re-acquires the asset back from Mr.
C, even then Explanation 4 to Section 43(1) shall be attracted;
Explanation 4A to Sec. 43(1) – Sale and lease back
Where before the date of acquisition by the assessee (hereinafter referred to as the first
mentioned person), the assets were at any time used by any other person (hereinafter
referred to as the second mentioned person) for the purposes of his business or profession
and depreciation allowance has been claimed in respect of such assets in the case of the
second mentioned person and such person acquires on lease, hire or otherwise assets from
the first mentioned person, then, notwithstanding anything contained in Explanation 3,
the actual cost of the transferred assets, in the case of first mentioned person, shall be the
same as the written down value of the said assets at the time of transfer thereof by the
second mentioned person.
Depreciation is always allowable to lessor and actual cost for lessor shall be WDV of asset
at the since of transfer for lessee.
Explanation 5 to Section 43(1)
Where a building previously the property of the assessee is brought into use for the purpose
of the business or profession after the 28th day of February, 1946, the actual cost to the
assessee shall be the actual cost of the building to the assessee, as reduced by an amount
equal to the depreciation calculated at the rate in force on that date that would have
been allowable had the building been used for the aforesaid purposes since the date of its
acquisition by the assessee.
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When any capital asset is transferred by a holding company to its subsidiary company or
by a subsidiary company to its holding company, then, if the conditions of clause (iv) or, as
the case may be, of clause (v) of section 47 are satisfied, the actual cost of the transferred
capital asset to the transferee-company shall be taken to be the same as it would have
been if the transferor-company had continued to hold the capital asset for the purposes
of its business.
Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating

company to the amalgamated company and the amalgamated company is an Indian
company, the actual cost of the transferred capital asset to the amalgamated company
shall be taken to be the same as it would have been if the amalgamating company had
continued to hold the capital asset for the purposes of its own business.
Explanation 7A to Section 43(1)
Where, in a demerger, any capital asset is transferred by the demerged company to the
resulting company and the resulting company is an Indian company, the actual cost of
the transferred capital asset to the resulting company shall be taken to be the same as it
would have been if the demerged company had continued to hold the capital asset for the
purpose of its own business
Provided that such actual cost shall not exceed the written down value of such capital
asset in the hands of the demerged company.
For the removal of doubts, it is hereby declared that where any amount is paid or is
payable as interest in connection with the acquisition of an asset, so much of such amount
as is relatable to any period after such asset is first put to use shall not be included, and
shall be deemed never to have been included, in the actual cost of such asset.
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For the removal of doubts, it is hereby declared that where an asset is or has been acquired
on or after the 1st day of March, 1994 by an assessee, the actual cost of asset shall be
reduced by the amount of duty of excise or the additional duty leviable under section 3
of the Customs Tariff Act, 1975 (51 of 1975) in respect of which a claim of credit has been
made and allowed under the Central Excise Rules, 1944.
Explanation 10 to Sec.43(1)
Where a portion of the cost of an asset acquired by the assessee has been met directly or
indirectly by the Central Government or a State Government or any authority established
under any law or by any other person, in the form of a subsidy or grant or reimbursement
(by whatever name called), then, so much of the cost as is relatable to such subsidy
or grant or reimbursement shall not be included in the actual cost of the asset to the
assessee :
Provided that where such subsidy or grant or reimbursement is of such nature that it cannot
be directly relatable to the asset acquired, so much of the amount which bears to the total
subsidy or reimbursement or grant the same proportion as such asset bears to all the
assets in respect of or with reference to which the subsidy or grant or reimbursement is so
received, shall not be included in the actual cost of the asset to the assessee.
Notes:
1) As per Section 2(24)(xiii), assistance in the form of a subsidy or grant or cash incentive
or duty drawback or waiver or concession or reimbursement (by whatever name called)
by the Central Government or a State Government or any authority or body or agency
in cash or kind to the assessee other than,—
(a) the subsidy or grant or reimbursement which is taken into account for determination
of the actual cost of the asset in accordance with the provisions of Explanation 10
to clause (1) of section 43; or
(b) the subsidy or grant by the Central Government for the purpose of the corpus of a
trust or institution established by the Central Government or a State Government,
as the case may be;
2) Relevant Extract of Income Computation Disclosure Standard VII [‘ICDS VII’]
(a) Government grants are sometimes called by other names such as subsidies, cash
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incentives, duty drawbacks, waiver, concessions, reimbursements, etc.

(b) This ICDS does not deal with:— (a) Government assistance other than in the form
of Government grants; and (b) Government participation in the ownership of the
enterprise.
(c) Government grants should not be recognised until there is reasonable assurance
that (i) the person shall comply with the conditions attached to them, and (ii) the
grants shall be received.
(d) Recognition of Government grant shall not be postponed beyond the date of
actual receipt.
(e) Where the Government grant relates to a depreciable fixed asset or assets of a
person, the grant shall be deducted from the actual cost of the asset or assets
concerned or from the written down value of block of assets to which concerned
asset or assets belonged to.
(f) Where the Government grant relates to a non-depreciable asset or assets of a
person requiring fulfillment of certain obligations, the grant shall be recognised
as income over the same period over which the cost of meeting such obligations
is charged to income.
(g) Where the Government grant is of such a nature that it cannot be directly
relatable to the asset acquired, so much of the amount which bears to the total
Government grant, the same proportion as such asset bears to all the assets in
respect of or with reference to which the Government grant is so received, shall be
deducted from the actual cost of the asset or shall be reduced from the written
down value of block of assets to which the asset or assets belonged to.
(h) The Government grant that is receivable as compensation for expenses or losses
incurred in a previous financial year or for the purpose of giving immediate
financial support to the person with no further related costs, shall be recognised
as income of the period in which it is receivable.
(i) The Government grants other than covered above shall be recognised as income
over the periods necessary to match them with the related costs which they are
intended to compensate.
(j) The amount refundable in respect of a Government grant referred to in respect
of non-depreciable asset shall be applied first against any unamortised deferred
credit remaining in respect of the Government grant. To the extent that the amount
refundable exceeds any such deferred credit, or where no deferred credit exists,
the amount shall be charged to profit and loss statement.
(k) The amount refundable in respect of a Government grant related to a depreciable
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fixed asset or assets shall be recorded by increasing the actual cost or written
down value of block of assets by the amount refundable. Where the actual cost
of the asset is increased, depreciation on the revised actual cost or written down
value shall be provided prospectively at the prescribed rate.
3) Steel Authority of India Ltd. (SC)

In this case, the assesee had obtained a loan for acquisition of depreciable asset. This
loan was later waived. It was held by Supreme Court that such waived amount was
relatable to acquisition of depreciable asset and hence shall be reduced from actual
cost.
Explanation 7 to Sec.43 (6)
For the purposes of this clause, where the income of an assessee is derived, in part
from agriculture and in part from business chargeable to income-tax under the head
“Profits and gains of business or profession”, for computing the written down value
of assets acquired before the previous year, the total amount of depreciation shall
be computed as if the entire income is derived from the business of the assessee
under the head “Profits and gains of business or profession” and the depreciation so
computed shall be deemed to be the depreciation actually allowed under this Act.
The above Explanation was inserted to overrule Supreme Court decision in case of Doom
Dooma Limited (Supreme Court)
As on 01-04-2021, the following amount shall be reduced from the block value:
“...the reduction by an amount which is equal to the actual cost of the goodwill falling within that
block as decreased by—
(a) the amount of depreciation actually allowed to the assessee under this Act or under the
corresponding provisions of the Indian Income-tax Act, 1922 for such goodwill in 11 of 1922.
respect of any previous year relevant to the assessment year commencing before the 1st day
of April, 1988; and
(b) the amount of depreciation that would have been allowable to the assessee for such goodwill
for any assessment year commencing on or after the 1st day of April, 1988 as if the goodwill
was the only asset in the relevant block of assets,
in respect of the previous year relevant to the assessment year commencing on the 1st day
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of April 2021, in a case where the goodwill of a business or profession was part of the block
of assets on which depreciation was obtained by the assessee for the immediate preceding
previous year, so, however, that the amount of such reduction does not exceed the written
down value..”.
Unabsorbed Depreciation Sec.32(2)
Where, in the assessment of the assessee, full effect cannot be given to any allowance under
sub-section (1) in any previous year, owing to there being no profits or gains chargeable
for that previous year, or owing to the profits or gains chargeable being less than the
allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section
(3) of section 73, the allowance or the part of the allowance to which effect has not been
given, as the case may be, shall be added to the amount of the allowance for depreciation
for the following previous year and deemed to be part of that allowance, or if there is no
such allowance for that previous year, be deemed to be the allowance for that previous
year, and so on for the succeeding previous years.
1) If profits are inadequate to absorb entire depreciation, then, such unabsorbed portion,
shall be carried forward to future years indefinitely.
2) Such UAD can be set off against any head of income except salary.
3) Mother India Refrigeration (Supreme Court): The order of set off shall be as under:
(i) Current Year depreciation
(ii) Brought forward business loss
(iii) Unabsorbed depreciation
Question 117
Mr. Janak is proprietor of M/s. Yash Texnit which is engaged in garment manufacturing
business. The entire block of Plant & Machinery chargeable to depreciation @ 15%, has 20
different machinery items as at 31-03-2021. One of the machineries used for packing had
become obsolete and was discarded by Mr. Janak in July’ 2021.
Assessee filed its return for A.Y. 2022-23 claiming total depreciation of ` 40 lacs which
includes ` 4 lacs being the depreciation claimed on the machinery item discarded by Mr.
Janak. The A.O. disallowed the claim of depreciation of ` 4 lacs during the course of scrutiny
assessment.
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Comment on the validity of action taken by A.O. [May 2010]
Answer
The issue under consideration is whether disallowance of depreciation made by the Assessing
Officer with regard to the discarded asset, in arriving at the written down value of the block
of assets, is justified.
One of the conditions for claim of depreciation under section 32 is that the eligible asset
must have been put to use for the purpose of business or profession.
The other aspect to considered is whether merely discarding an obsolete machinery, which
is physically available, will attract the expression “moneys payable” appearing in section
43(6), so as to deduct its value from the written down value of the block.
The facts in the present case are similar to facts in the case of CIT v. Yamaha Motor India Pvt.
Ltd. (2010) 328 ITR 297, wherein the Delhi High Court observed that the expression “used for
the purposes of the business” in section 32 when used with respect to discarded machinery
would mean the use in the business, not only in the relevant financial year/previous year,
but also in the earlier financial years.
The discarded machinery may not be actually used in the relevant previous year but
depreciation can be claimed as long as it was used for the purposes of business in the earlier
years provided the block continues to exist in the relevant previous year. Therefore, the
condition for claiming depreciation in respect of the discarded machine would be satisfied if
it was used in the earlier previous years for the business.
For the purpose of section 43(6), “moneys payable” means the sale price, in case of sale, or
the insurance, salvage or compensation moneys payable in respect of the asset. In this case,
the machinery has not been sold as machinery or scrap or disposed off, and it continues
to exist. Hence, there is no “moneys payable” in this case, which alone is deductible while
computing the WDV of the block to which it belongs.
Applying the rationale of the above case, the action of the Assessing Officer in disallowing
` 4 lakhs, being the depreciation claim attributable to discarded machinery, on the ground
that the same was not put to use in the relevant previous year, is invalid, since the said
machinery was put to use in the earlier previous years.
Question 118
Compute the quantum of depreciation available under section 32 of the Income-tax Act,
1961 in respect of the following items of Plant and Machinery purchased by PQR Textile Ltd.,
by paying through account payee cheque, which is engaged in the manufacture of textile
fabrics, for the year ended 31-3-2022:
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Particulars (Rs. crores)

New machinery installed on 1-5-2021 84
New Windmill purchased and installed on 18-6-2021 22
Lorries for transporting goods to sales depots (purchased and put to use in 3
July, 2021)
Items purchased after 30th November 2021:

Fork-lift-trucks, used inside factory 4
Computers installed in office premises 1
Computers installed in factory 2
New imported machinery 12
The new imported machinery arrived at Chennai port on 30-03-2022 and was installed on
3-4-2022. All other items were installed during the year ended 31-3-2022.
The company was newly started during the year. Also, compute the WDV of the various
blocks of assets as on 1.4.2022.
Answer
Computation of depreciation allowance under section 32 for the A.Y. 2022-23
Particulars Normal Additional
Depreciation Depreciation
[u/s 32(1)(ii)] [u/s 32(1)(iia)]
(` in crores)
(A) Plant and Machinery (15% block) (Put to use for 180
days or more)
• New machinery installed on 01.05.2021 84.00 84.00
• Lorries for transporting goods to depots 3.00 -
87.00 84.00
Normal Depreciation @15% & additional deprecation 13.05 16.80
@20%
(B) Plant and Machinery (15% block) (Put to use for less
than 180 days – hence, depreciation is restricted to
7.5%, being 50% of 15%)
• Fork-lift trucks, used inside a factory 4.00 4.00
Normal Depreciation @ 7.5% & additional depreciation
@10% 0.30 0.40
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(C) Plant and Machinery (40% block) (Put to use for less
than 180 days, hence depreciation restricted to 20%,
i.e., 50% of 40%)
• Computers installed in office premises 1.00 -
• Computers installed in factory 2.00 2.00
3.00 2.00
Normal depreciation @20% & additional
depreciation@10% 0.60 0.20
(D) Plant and Machinery (40% block) (Put to use for 180
days or more) (See Note 1)
• New windmill purchased and installed on
18.06.2021 22.00 22.00
Normal Depreciation @ 40% & additional depreciation

@ 20% 8.80 4.40
Total depreciation and additional depreciation

• Plant and Machinery (15% block) (A +B) 13.35 17.20
• Plant and Machinery (40% block) (C + D) 9.40 4.60
Depreciation available under section 32 =
` 44.55 crores
Computation of Written Down Value (WDV) as on 01.04.2022

Particulars Plant & Machinery
15% 40%
(` in crores)
WDV as on 01.04.2021 (The company was started during the
year – as given in question) Nil Nil
Add: Plant and Machinery acquired during the year

• New Machinery installed on 01.05.2020 84.00
• Lorries for transporting goods to sales depots 3.00
• Fork-lift trucks, used inside factory 4.00
• New imported machinery 12.00 103.00
• New Windmill purchased and installed on 18.6.2021 - 22.00
• Computers installed in office premises - 1.00
• Computers installed in factory - 2.00
103.00 25.00
Less: Asset sold during the year Nil Nil
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WDV as on 31.3.2022 (before charging depreciation) 103.00 25.00

Less: Depreciation for the P.Y.2021-22
• Normal depreciation 13.35 9.40
• Additional depreciation 17.20 4.60
WDV as on 1.4.2022 72.45 11.00
Notes:
(1) Windmills and any specially designed devices which run on windmills installed on or
after 1.4.2014 would be eligible for depreciation @ 40%.
(2) New imported machinery was not installed during the previous year 2021-22. Hence,
it would not be eligible for additional depreciation for A.Y. 2022-23. It would also not
be eligible for normal depreciation for A.Y 2022-23, since it was not put to use in the
P.Y.2021-22 being the year of acquisition.
(3) It may be noted that investment in the following plant and machinery would not be
eligible for additional depreciation under section 32(1)(iia):
(a) Lorries for transporting goods to sales depots, being vehicles/road transport
vehicles; and
(b) Computers installed in office premises.
(4) As per section 2(28) of the Motor Vehicles Act, 1988, the definition of a “vehicle”
excludes, inter alia, a vehicle of special type adopted for use only in a factory or in any
enclosed premises. Therefore, fork-lift trucks used inside the factory would not fall
within the definition of “vehicle”. Hence, it is eligible for additional depreciation under
section 32(1)(iia).
Question 119
Explain the tax treatment of emergency spares (of plant and machinery) acquired during the
year which, even though kept ready for use, have not actually been used during the relevant
previous year.
Answer
As per ICDS V on Tangible Fixed Assets, machinery spares shall be charged to the revenue
as and when consumed. When such spares can be used only in connection with an item of
tangible fixed asset and their use is expected to be irregular, they shall be capitalised.
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Where the spares are capitalised as per the above requirement, the issue as to provision
of depreciation arises – whether depreciation can be provided where such spares are kept
ready for use or is it necessary that they are actually put to use. This issue was dealt with
by the Delhi High Court in CIT v. Insilco Ltd (2010) 320ITR 322. The Court observed that
the expression “used for the purposes of business” appearing in section 32 also takes into
account emergency spares, which, even though ready for use, yet are not consumed or used
during the relevant period. This is because these spares are specific to a fixed asset, namely
plant and machinery, and form an integral part of the fixed asset. These spares will, in all
probability, be useless once the asset is discarded and will also have to be disposed of. In
this sense, the concept of passive use which applies to standby machinery will also apply to
emergency spares. Therefore, once the spares are considered as emergency spares required
for plant and machinery, the assessee would be entitled to capitalize the entire cost of such
spares and claim depreciation thereon.
Note – One of the conditions for claim of depreciation is that the asset must be “used
for the purpose of business or profession”. In the past, courts have held that, in certain
circumstances, an asset can be said to be in use even when it is “kept ready for use”. For
example, depreciation can be claimed by a transport company on spare engines kept in
store in case of need, though they have not actually been used by the company. Hence, in
such cases, the term “use” embraces both active use and passive use for business purposes.
Question 120.
A corporation was set up by the State Government transferring all the buses owned by it for
a consideration of Rs. 75 lacs, which was discharged by the Corporation by issue of equity
shares. The Corporation in its assessment claimed depreciation. Can the depreciation be
denied in the Corporation’s hands on the ground that there was no registration of the buses
in favour of the Corporation?
Answer
The decision of the Supreme Court in Mysore Minerals Ltd v. CIT (1999) 239 ITR 775 is relevant
in the context of the facts stated. The term “asset used” in section 32 must be assigned a
wider meaning and anyone in possession of property in his own title, exercising dominion
over the property, to the exclusion of others and having the right to use and enjoy it, must
be taken to be the owner.
Registration of the buses is only a formality to perfect the title and does not bar enjoyment.
The Corporation cannot, therefore, be denied depreciation on the buses. A similar decision
was also taken in CIT v. J & K Tourism Development Corporation (2001) 248 ITR 94 (J&K).
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Question 121
Discuss provisions regarding charge of depreciation for Power Generation Company Sec.32(1)
(i)
Answer
As per Section 32(1)(1), Depreciation is chargeable in respect of depreciation of—
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business
or commercial rights of similar nature, being intangible assets acquired on or after
the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the
purposes of the business or profession, the following deductions shall be allowed—
(i) in the case of assets of an undertaking engaged in generation or generation and
distribution of power, such percentage on the actual cost thereof to the assessee
as may be prescribed;
As per Section 32(1)(iii) in the case of any building, machinery, plant or furniture in respect
of which depreciation is claimed and allowed under clause (i) and which is sold, discarded,
demolished or destroyed in the previous year (other than the previous year in which it is
first brought into use), the amount by which the moneys payable in respect of such building,
machinery, plant or furniture, together with the amount of scrap value, if any, fall short of
the written down value thereof :
Provided that such deficiency is actually written off in the books of the assessee.
(1) “moneys payable” in respect of any building, machinery, plant or furniture includes—
(a) any insurance, salvage or compensation moneys payable in respect thereof;
(b) where the building, machinery, plant or furniture is sold, the price for which it is
sold,
so, however, that where the actual cost of a motor car is, in accordance with the
proviso to clause (1) of section 43, taken to be twenty-five thousand rupees, the
moneys payable in respect of such motor car shall be taken to be a sum which
bears to the amount for which the motor car is sold or, as the case may be, the
amount of any insurance, salvage or compensation moneys payable in respect
thereof (including the amount of scrap value, if any) the same proportion as the
amount of twenty-five thousand rupees bears to the actual cost of the motor car
to the assessee as it would have been computed before applying the said proviso;
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(2) “sold” includes a transfer by way of exchange or a compulsory acquisition under any
law for the time being in force but does not include a transfer, in a scheme of
amalgamation, of any asset by the amalgamating company to the amalgamated
company where the amalgamated company is an Indian company or in a scheme
of amalgamation of a banking company, as referred to in clause (c) of section
5 of the Banking Regulation Act, 1949 (10 of 1949) with a banking institution
as referred to in sub-section (15) of section 45 of the said Act, sanctioned and
brought into force by the Central Government under sub-section (7) of section 45
of that Act, of any asset by the banking company to the banking institution.
Further, as per Section 41(2) where any building, machinery, plant or furniture,—
(a) which is owned by the assessee;
(b) in respect of which depreciation is claimed under clause (i) of sub-section (1) of
section 32; and
(c) which was or has been used for the purposes of business,
is sold, discarded, demolished or destroyed and the moneys payable in respect of such
building, machinery, plant or furniture, as the case may be, together with the amount of
scrap value, if any, exceeds the written down value, so much of the excess as does not exceed
the difference between the actual cost and the written down value shall be chargeable to
income-tax as income of the business of the previous year in which the moneys payable for
the building, machinery, plant or furniture became due.
Explanation.—Where the moneys payable in respect of the building, machinery, plant or

furniture referred to in this sub-section become due in a previous year in which the business
for the purpose of which the building, machinery, plant or furniture was being used is no
longer in existence, the provision of this sub-section shall apply as if the business is in
existence in that previous year.
Also, Section 50A contains special provision for cost of acquisition in case of depreciable
asset.
The said provision states that where the capital asset is an asset in respect of which a
deduction on account of depreciation under clause (i) of sub-section (1) of section 32 has
been obtained by the assessee in any previous year, the provisions of sections 48 and 49
shall apply subject to the modification that the written down value, as defined in clause (6)
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of section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset.
Analysis:
(i) Power generation companies have an option of either following block of asset concept
u/s 32(1)(ii) Or SLM basis 32(1)(i). However, option once exercised is irreversible.
(ii) If Sec.32(1)(i) is followed, then there is specific identification of asset. The amount of
depreciation will remain the same each year. However, if is the year of acquisition,
asset is put to use for less than 180 days, then depreciation in the first year is restricted
to half of normal rate.
(iii) The rate of depreciation under SLM basis are separately provided in the appendix to
Income – tax rules.

Mr. X, set up a manufacturing unit in Warangal in the State of Telangana on 01.06.2021.
It invested Rs. 30 crore in new plant and machinery on 1.6.2021. Further, it invested Rs. 25
crore in the plant and machinery on 01.11.2021, out of which Rs. 5 crore was second hand
plant and machinery. The depreciation allowable under section 32 for A.Y.2022-23 is -
(a) Rs. 23.875 crore
(b) Rs. 20.375 crore
(c) Rs. 14.375 crore
(d) Rs. 14.875 crore
Answer: (C)
Y Ltd. purchased computers for Rs. 10 lakhs on 5th October, 2020, installed the same in
its office and put the said computers to use on the same date. The depreciation allowable
under section 32 for A.Y.2021-22 is respect of the said computers is –
(a) Rs. 1.5 lakhs
(b) Rs. 3 lakhs
(c) Rs. 4 lakhs
(d) Rs. 2 lakhs
Answer: (D)
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Question 122
Investments Allowances Sec.32 AD
Answer
Provision:
(1) Where an assessee, sets up an undertaking or enterprise for manufacture or production
of any article or thing, on or after the 1st day of April, 2015 in any backward area notified
by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of
Bihar or in the State of Telangana or in the State of West Bengal, and acquires and installs
any new asset for the purposes of the said undertaking or enterprise during the period
beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the
said backward area, then, there shall be allowed a deduction of a sum equal to fifteen per
cent of the actual cost of such new asset for the assessment year relevant to the previous
year in which such new asset is installed.
(2) If any new asset acquired and installed by the assessee is sold or otherwise transferred,
except in connection with the amalgamation or demerger or re-organisation of business
referred to in clause (xiii)or clause (xiiib)or clause (xiv)of section 47, within a period of five
years from the date of its installation, the amount of deduction allowed under sub-section
(1)in respect of such new asset shall be deemed to be the income of the assessee chargeable
under the head “Profits and gains of business or profession” of the previous year in which
such new asset is sold or otherwise transferred, in addition to taxability of gains, arising on
account of transfer of such new asset.
(3) Where the new asset is sold or otherwise transferred in connection with the amalgamation
or demerger or re-organisation of business referred to in clause (xiii)or clause (xiiib)or clause
(xiv)of section 47 within a period of five years from the date of its installation, the provisions
of sub-section (2) shall apply to the amalgamated company or the resulting company or
the successor referred to in clause (xiii)or clause (xiiib)or clause (xiv)of section 47, as the
case may be, as they would have applied to the amalgamating company or the demerged
company or the predecessor referred to in clause (xiii)or clause (xiiib)or clause (xiv)of section
47.
(4) For the purposes of this section, “new asset” means any new plant or machinery (other
than a ship or aircraft) but does not include—
(a) any plant or machinery, which before its installation by the assessee, was used either
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within or outside India by any other person;

(b) any plant or machinery installed in any office premises or any residential accommodation,
including accommodation in the nature of a guest house;
(c) any office appliances including computers or computer software;
(d) any vehicle; or
(e) any plant or machinery, the whole of the actual cost of which is allowed as deduction
(whether by way of depreciation or otherwise) in computing the income chargeable
under the head “Profits and gains of business or profession” of any previous year.
Analysis:
(i) This deduction is allowed to any assessee
(ii) Such assessee must set up undertaking for or production is notified backward area.
(iii) Such undertaking is set up before 1st April, 2020.
(iv) Investment allowance = 15% of actual cost of new plant / machinery.
New plant / machinery does NOT include: Second hand plant / machinery, office
appliances any asset 100% cost of which is allowed as deduction.
(v) This deduction is allowed in the year of when asset is acquired and installed.
If installation is in a different year, then deduction is allowed in the year of installation.
Investment allowance is not adjusted out of the block.
(vi) Violation: Such new asset cannot be transferred for a period of 5 years from date of
installation.
Except in cases of Amalgamation. [47(xiii) / (xiii b) / (x PV)] even in such cases of
successions, the successor must hold the asset for the balance period of the 5 years.
In case of violation, the investment allowance allowed as deduction shall be chargeable
to tax as PGBP in the year of transfer.
(vii) E.g. X Ltd. sets up industrial undertaking in Vaishali District of Bihar. On 1st April, 2019,
it acquires plant & machinery worth. 110 crs. Out of which 20 crs. Is 2nd hand plant /
machinery. Discuss tax treatment if the assets are installed and put to use on.
Case 1  10th June, 2019 Will no it, meaning since your answer
Case 2  10th Oct. 2019 change if assesse = Mr. X introduced.
Case 1 Case 2
Normal Depreciation
110 × 15% 16.5 cr. 8.25
110 × 15% x ½
Additional Depreciation
(110 – 20) × 35% 31.5 cr. 15.75
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Investment Allowance
(110 – 20) × 15% 13.5 cr. 13.5 cr.
Value of Block 62 cr. 36 cr.
(110 – 16.5 – 31.5) (110 – 8.25 – 15.75)
• There is no conduction to restrict investment allowance to half of normal even if asses

is put to use < 180 days.
Question 123
Discuss provisions of Section 33AB?
Answer
As per Section 33AB:
(1) Where an assessee carrying on business of growing and manufacturing tea or coffee or
rubber in India has, before the expiry of six months from the end of the previous year
or before the due date of furnishing the return of his income, whichever is earlier,—
(a) deposited with the National Bank any amount or amounts in an account (hereafter
in this section referred to as the special account) maintained by the assessee
with that Bank in accordance with, and for the purposes specified in, a scheme
(hereafter in this section referred to as the scheme) approved in this behalf by the
Tea Board or the Coffee Board or the Rubber Board ; or
(b) deposited any amount in an account (hereafter in this section referred to as the
Deposit Account) opened by the assessee in accordance with, and for the purposes
specified in, a scheme framed by the Tea Board or the Coffee Board or the Rubber
Board, as the case may be (hereafter in this section referred to as the deposit
scheme), with the previous approval of the Central Government,
the assessee shall, subject to the provisions of this section, be allowed a deduction
(such deduction being allowed before the loss, if any, brought forward from earlier
years is set off under section 72) of—
(a) a sum equal to the amount or the aggregate of the amounts so deposited; or
(b) a sum equal to forty per cent of the profits of such business (computed under the
head “Profits and gains of business or profession” before making any deduction
under this section),
whichever is less :
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Provided that where such assessee is a firm, or any association of persons or any
body of individuals, the deduction under this section shall not be allowed in the
computation of the income of any partner, or as the case may be, any member of such
firm, association of persons or body of individuals :
Provided further that where any deduction, in respect of any amount deposited in the
special account, or in the Deposit Account, has been allowed under this sub-section
in any previous year, no deduction shall be allowed in respect of such amount in any
other previous year.
(2) The deduction under sub-section (1) shall not be admissible unless the accounts of
such business of the assessee for the previous year relevant to the assessment year for
which the deduction is claimed have been audited by an accountant as defined in the
Explanation below sub-section (2) of section 288 before the specified date referred to
in section 44AB and the assessee furnishes by that date, the report of such audit in the
prescribed form duly signed and verified by such accountant :
Provided that in a case where the assessee is required by or under any other law to get
his accounts audited, it shall be sufficient compliance with the provisions of this sub-
section if such assessee gets the accounts of such business audited under such law and
furnishes the report of the audit as required under such other law and a further report
in the form prescribed under this sub-section.
(3) Any amount standing to the credit of the assessee in the special account or the Deposit
Account shall not be allowed to be withdrawn except for the purposes specified in the
scheme or, as the case may be, in the deposit scheme or in the circumstances specified
below :—
(a) closure of business ;
(b) death of an assessee ;
(c) partition of a Hindu undivided family ;
(d) dissolution of a firm ;
(e) liquidation of a company.
(4) Notwithstanding anything contained in sub-section (3), where any amount standing to
the credit of the assessee in the special account or in the Deposit Account is released
during any previous year by the National Bank or withdrawn by the assessee from the
Deposit Account, and such amount is utilised for the purchase of—
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(a) any machinery or plant to be installed in any office premises or residential

accommodation, including any accommodation in the nature of a guest-house;
(b) any office appliances (not being computers);
(c) any machinery or plant, the whole of the actual cost of which is allowed as a
one previous year;
(d) any new machinery or plant to be installed in an industrial undertaking for the
purposes of business of construction, manufacture or production of any article or
thing specified in the list in the Eleventh Schedule,
the whole of such amount so utilised shall be deemed to be the profits and gains of
business of that previous year and shall accordingly be chargeable to income-tax as
the income of that previous year.
(5) Where any amount, standing to the credit of the assessee in the special account or
in the Deposit Account, is withdrawn during any previous year by the assessee in the
circumstance specified in clause (a) or clause (d) of sub-section (3), the whole of such
amount shall be deemed to be the profits and gains of business or profession of that
previous year and shall accordingly be chargeable to income-tax as the income of that
previous year, as if the business had not closed or, as the case may be, the firm had not
been dissolved.
(6) Where any amount standing to the credit of the assessee in the special account or in
the Deposit Account is utilised by the assessee for the purposes of any expenditure in
connection with such business in accordance with the scheme or the deposit scheme,
such expenditure shall not be allowed in computing the income chargeable under the
head “Profits and gains of business or profession”.
(7) Where any amount, standing to the credit of the assessee in the special account or in
the Deposit Account, which is released during any previous year by the National Bank
or which is withdrawn by the assessee from the Deposit Account for being utilised by
the assessee for the purposes of such business in accordance with the scheme or the
deposit scheme is not so utilised, either wholly or in part, within that previous year, the
whole of such amount or, as the case may be, part thereof which is not so utilised shall
be deemed to be profits and gains of business and accordingly chargeable to income-
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tax as the income of that previous year:
Provided that this sub-section shall not apply in a case where such amount is released
during any previous year at the closure of the account in circumstances specified in
clauses (b), (c) and (e) of sub-section (3).
(8) Where any asset acquired in accordance with the scheme or the deposit scheme is
sold or otherwise transferred in any previous year by the assessee to any person at
any time before the expiry of eight years from the end of the previous year in which
it was acquired, such part of the cost of such asset as is relatable to the deduction
allowed under sub-section (1) shall be deemed to be the profits and gains of business
or profession of the previous year in which the asset is sold or otherwise transferred
and shall accordingly be chargeable to income-tax as the income of that previous year
:
Provided that nothing in this sub-section shall apply—

(i) where the asset is sold or otherwise transferred by the assessee to Government, a
local authority, a corporation established by or under a Central, State or Provincial
Act or a Government company as defined in section 617 of the Companies Act,
1956 (1 of 1956) ; or
(ii) where the sale or transfer of the asset is made in connection with the succession
of a firm by a company in the business or profession carried on by the firm as a
result of which the firm sells or otherwise transfers to the company any asset
and the scheme or the deposit scheme continues to apply to the company in the
manner applicable to the firm.
Explanation.—The provisions of clause (ii) of the proviso shall apply only where—
(i) all the properties of the firm relating to the business or profession immediately
before the succession become the properties of the company;
(ii) all the liabilities of the firm relating to the business or profession immediately
before the succession become the liabilities of the company ; and
(iii) all the shareholders of the company were partners of the firm immediately before
the succession.
(9) The Central Government, if it considers necessary or expedient so to do, may, by

notification in the Official Gazette, direct that the deduction allowable under this
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section shall not be allowed after such date as may be specified therein.
Explanation.—In this section,—

(a) “Coffee Board” means the Coffee Board constituted under section 4 of the Coffee
Act, 1942 (7 of 1942);
(aa) “National Bank” means the National Bank for Agriculture and Rural Development
established under section 3 of the National Bank for Agriculture and Rural
Development Act, 1981 (61 of 1981);
(ab) “Rubber Board” means the Rubber Board constituted under sub-section (1) of
section 4 of the Rubber Act, 1947 (24 of 1947);
(b) “Tea Board” means the Tea Board established under section 4 of the Tea Act,
1953 (29 of 1953).
Notes:
1) As held by Kerala High Court in the case of Mahaveer Plantations, while computing
income of composite businesses following order must be maintained.
(a) First give effect to Sec.33 AB
(b) Second - Rule 7 / 7A / 8
(c) Last - Effect to brought forward losses
2) As per Rule 7, 7A & 8, the profits of Composite Businesses are divided as under:
Nature of Business PGBP Agriculture
(a) Growing & Manufacturing Tea 40% 60%
(b) Growing & Manufacturing Rubber 35% 65%
(c) Growing & Curing of Coffee 25% 75%
(d) Growing, curing, grounding and roasting 40% 60%
of coffee whether with / without mixing of
flavouring ingredients
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3) Withdrawal out of deposit account / special account

(A) Withdrawal on account of dissolution / closure
- Death of assesse
- Closure of business
- Partition of HUF
- Dissolution of Firm
- Liquidation of company
Withdrawal not taxable Amount withdrawal

chargeable
Under PGBP
Upto 40%*
* 40% Tea, 35% Rubber
25% / 40%  Coffee.
(B) Withdrawal during running of Business
Withdrawal in accordance Not in accordance with the

with the scheme scheme
Withdrawal and Withdrawal

utilised in the but utilised in
Same year. Different year.
Taxed
Revenue expense Capital expense
Such expense Depreciation on such In case of violation, the amount

again not allowed Capex shall be allowed # of withdrawal shall in taxable to
is deduction. # Such capital asset the extent of 40% in the year of
should not be transferred violation, apart from capital gain
for a minimum period of arising on of such new asset.
8 years.
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Question 124
G Ltd., a company in which public are substantially interest, is engaged in the business of
growing and manufacturing tea in India. For the previous year ended 31.03.2021, its com-
posite business profits before allowing deduction u/s 33AB is ` 60,00,000. On 01.09.2021,
it deposited a sum of ` 11,00,000 in the Tea Development Account. During the previous
year 2019-20, G Ltd. Had incurred a business loss of ` 14,00,000 which has been carried
forward. On 25.01.2022, it withdrew ` 10 lakhs, from deposit account which is utilized as
under:
Rs. 6,00,000 for purchase on non-depreciable asset as per the scheme specified.
Rs. 3,00,000 for purchase of machinery to be installed in the office premises.
Rs. 1,00,000 was spent for the purpose of scheme on 5.4.2022.
(i) You are required to determine business income of G Ltd. and the tax consequences that
may arise from the above transactions in the relevant assessment year.
(ii) What will be the consequence if the asset which was purchased for ` 6,00,000 is sold
for ` 8,00,000 in April, 2022.
Answer
(i) Computation of Business Income of G Ltd. for the A.Y. 2022-23
`
` 10,00,000 being the amount withdrawn from Tea Development
Account has to be utilized in the prescribed manner, otherwise, the
withdrawn amount would be chargeable to tax as business income.
In the given case, the taxability of withdrawal amount based on their
utilization is as follows:
• ` 6,00,000, out of the amount withdrawn from the deposit
account, utilised for purchase of non-depreciable asset as per
the specified scheme. Not
[As per section 33AB(6), no deduction would be allowed under taxable
section 33AB since amount is spent out of ` 11 lakh deposited in
Tea Development Account, which has already been allowed as
deduction in A.Y.2021-22 (See Working Note below)].
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• ` 3,00,000, being the amount utilized for purchase of machinery

to be installed in the office premises is not a permissible
utilization. Hence, the amount would be deemed as profits and
gains of business of the previous year 2021-22 as per section
33AB(4). 3,00,000
• ` 1,00,000 was spent for the purpose of scheme on 05.04.2022.
As per section 33AB(7), this amount would be taxable since the
same is not utilized during the same previous year (i.e., P.Y.
2021-22) in which the amount is withdrawn from the deposit
1,00,000
account.
When any part of withdrawal amount becomes taxable, the agricultural and non-
agricultural portions of income must be segregated.
Accordingly, ` 1,60,000, being 40% of ` 4,00,000 (` 3,00,000 + ` 1,00,000) would be
chargeable to tax as business income and the balance ` 2,40,000, being 60% of `
4,00,000 would be agricultural income exempt from tax.
Working Note:
Computation of Business Income of G Ltd. for the A.Y. 2021-22
Particulars `
Composite business profits before allowing deduction under section 33AB
Less: Deduction under section 33AB(1) would be the lower of: 60,00,000
• Amount deposited in Tea Development Account on or before
30.9.2020 [i.e., ` 11,00,000]
• 40% of profits of such business [i.e., ` 24,00,000, being 40% of
` 60,00,000] 11,00,000
49,00,000
Less: 60% of ` 49,00,000, being agricultural income [as per Rule 8] 29,40,000
Business income 19,60,000
Less: Brought forward business loss of A.Y.2020-21 set-off as per section 14,00,000
72
Business income chargeable to tax 5,60,000
(ii) Consequences, if asset purchased out of deposit account is sold during the previous
year 2022-23
As per section 33AB(8), if the asset is sold before the expiry of eight years from the
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end of the previous year in which it was acquired, then, the cost of such asset shall be
deemed to be the profits and gains from business or profession of the previous year in
which asset is sold.
Therefore, ` 6,00,000 would be deemed to be the business income (composite) for the
A.Y.2023-24. However, since the full cost of the asset was deducted in the assessment
year 2021-22 (being part of ` 11 lakh deposited in Tea Development Account) before
segregation of agricultural income and non-agricultural income, the agricultural and
non-agricultural portions of income should be segregated in the year in which such
amount becomes taxable on account of sale of asset before the expiry of eight years.
Therefore, ` 3,60,000, being 60% of ` 6,00,000 would represent agricultural income.
The balance ` 2,40,000 being 40% of ` 6,00,000 would be chargeable to tax as business
income.
Moreover, the difference between the sale consideration and purchase price of the
asset would be chargeable to tax as “Short term capital gains”, which is computed as
follows:

Sales consideration 8,00,000
Less: Cost of acquisition 6,00,000
Short term capital gain 2,00,000
Question 125
Discuss provisions of Section 33ABA concerning Site Restoration Fund?
Answer
The provisions of Section 33ABA states as under:
(1) Where an assessee is carrying on business consisting of the prospecting for, or extraction
or production of, petroleum or natural gas or both in India and in relation to which
the Central Government has entered into an agreement with such assessee for such
business, has before the end of the previous year—
(a) deposited with the State Bank of India any amount or amounts in an account
(hereafter in this section referred to as the special account) maintained by the
assessee with that Bank in accordance with, and for the purposes specified in,
a scheme (hereafter in this section referred to as the scheme) approved in this
behalf by the Government of India in the Ministry of Petroleum and Natural Gas;
or
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(b) deposited any amount in an account (hereafter in this section referred to as the
Site Restoration Account) opened by the assessee in accordance with, and for the
purposes specified in, a scheme framed by the Ministry referred to in clause (a)
(hereafter in this section referred to as the deposit scheme),
the assessee shall, subject to the provisions of this section, be allowed a deduction
(such deduction being allowed before the loss, if any, brought forward from earlier
years is set off under section 72) of—
(i) a sum equal to the amount or the aggregate of the amounts so deposited; or
(ii) a sum equal to twenty per cent of the profits of such business (computed under the
head “Profits and gains of business or profession” before making any deduction
under this section),
whichever is less:
Provided that where such assessee is a firm, or any association of persons or any body of
individuals, the deduction under this section shall not be allowed in the computation of
the income of any partner or, as the case may be, any member of such firm, association
of persons or body of individuals:
Provided further that where any deduction, in respect of any amount deposited in the
special account, or in the Site Restoration Account, has been allowed under this sub-
section in any previous year, no deduction shall be allowed in respect of such amount
in any other previous year :
Provided also that any amount credited in the special account or the Site Restoration
Account by way of interest shall be deemed to be a deposit.
(2) The deduction under sub-section (1) shall not be admissible unless the accounts of
such business of the assessee for the previous year relevant to the assessment year for
which the deduction is claimed have been audited by an accountant as defined in the
Explanation below sub-section (2) of section 288 62[before the specified date referred
to in section 44AB and the assessee furnishes by that date] the report of such audit in
the prescribed form duly signed and verified by such accountant :
Provided that in a case where the assessee is required by or under any other law to get
his accounts audited, it shall be sufficient compliance with the provisions of this sub-
section if such assessee gets the accounts of such business audited under such law and
furnishes the report of the audit as required under such other law and a further report
in the form prescribed under this sub-section.
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(3) Any amount standing to the credit of the assessee in the special account or the Site
Restoration Account shall not be allowed to be withdrawn except for the purposes
specified in the scheme or, as the case may be, in the deposit scheme.
(4) Notwithstanding anything contained in sub-section (3), no deduction under sub-section

(1) shall be allowed in respect of any amount utilised for the purchase of—
(a) any machinery or plant to be installed in any office premises or residential
accommodation, including any accommodation in the nature of a guest-house;
(b) any office appliances (not being computers);
(c) any machinery or plant, the whole of the actual cost of which is allowed as a
one previous year;
(d) any new machinery or plant to be installed in an industrial undertaking for the
purposes of business of construction, manufacture or production of any article or
thing specified in the list in the Eleventh Schedule.
(5) Where any amount standing to the credit of the assessee in the special account or in the
Site Restoration Account is withdrawn on closure of the account during any previous
year by the assessee, the amount so withdrawn from the account, as reduced by the
amount, if any, payable to the Central Government by way of profit or production
share as provided in the agreement referred to in section 42, shall be deemed to be the
profits and gains of business or profession of that previous year and shall accordingly
be chargeable to income-tax as the income of that previous year.
Explanation.—Where any amount is withdrawn on closure of the account in a previous

year in which the business carried on by the assessee is no longer in existence, the
provisions of this sub-section shall apply as if the business is in existence in that
previous year.
(6) Where any amount standing to the credit of the assessee in the special account or in the
Site Restoration Account is utilised by the assessee for the purposes of any expenditure
in connection with such business in accordance with the scheme or the deposit scheme,
such expenditure shall not be allowed in computing the income chargeable under the
head “Profits and gains of business or profession”.
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(7) Where any amount, standing to the credit of the assessee in the special account or in
the Site Restoration Account, which is released during any previous year by the State
Bank of India or which is withdrawn by the assessee from the Site Restoration Account
for being utilised by the assessee for the purposes of such business in accordance with
the scheme or the deposit scheme is not so utilised, either wholly or in part, within that
previous year, the whole of such amount or, as the case may be, part thereof which
is not so utilised shall be deemed to be profits and gains of business and accordingly
chargeable to income-tax as the income of that previous year.
(8) Where any asset acquired in accordance with the scheme or the deposit scheme is
sold or otherwise transferred in any previous year by the assessee to any person at
any time before the expiry of eight years from the end of the previous year in which
it was acquired, such part of the cost of such asset as is relatable to the deduction
allowed under sub-section (1) shall be deemed to be the profits and gains of business
or profession of the previous year in which the asset is sold or otherwise transferred
and shall accordingly be chargeable to income-tax as the income of that previous year
:
Provided that nothing in this sub-section shall apply—

(i) where the asset is sold or otherwise transferred by the assessee to Government, a
local authority, a corporation established by or under a Central, State or Provincial
Act or a Government company as defined in section 617 of the Companies Act,
1956 (1 of 1956); or
(ii) where the sale or transfer of the asset is made in connection with the succession
of a firm by a company in the business or profession carried on by the firm as a
result of which the firm sells or otherwise transfers to the company any asset
and the scheme or the deposit scheme continues to apply to the company in the
manner applicable to the firm.
Explanation.—The provisions of clause (ii) of the proviso shall apply only where—
(i) all the properties of the firm relating to the business or profession immediately
before the succession become the properties of the company;
(ii) all the liabilities of the firm relating to the business or profession immediately
before the succession become the liabilities of the company; and
(iii) all the shareholders of the company were partners of the firm immediately before
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the succession.
(9) The Central Government may, if it considers necessary or expedient so to do, by

notification in the Official Gazette, direct that the deduction allowable under this
section shall not be allowed after such date as may be specified therein.
Explanation.—For the purposes of this section,—
(a) “State Bank of India” means the State Bank of India constituted under the State
Bank of India Act, 1955 (23 of 1955);
(b) the expression “amount standing to the credit of the assessee in the special account
or the Site Restoration Account” includes interest accrued to such accounts.
Question 126
What kind of deduction is allowed for research and development cost incurred by the as-
sessee?
Answer
As per Section 35(1) in respect of expenditure on scientific research, the following deductions
shall be allowed—
(1) As per Section 35(1)(i) of the Act, any expenditure (not being in the nature of capital
expenditure) laid out or expended on scientific research related to the business.
Where any such expenditure has been laid out or expended before the commencement
of the business on payment of any salary to an employee engaged in such scientific
research or on the purchase of materials used in such scientific research, the aggregate
of the expenditure so laid out or expended within 3 years immediately preceding the
commencement of the business shall be deemed to have been laid out or expended in
the previous year in which the business is commenced
(2) As per Section 35(1)(iv) of the Act, in respect of any expenditure of a capital nature on
scientific research related to the business carried on by the assessee, for expenditure
other than on land, the whole of such capital expenditure incurred in any previous year
shall be deducted for that previous year;
Where any capital expenditure has been incurred before the commencement of the
business, the aggregate of the expenditure so incurred within the three years immediately
preceding the commencement of the business shall be deemed to have been incurred
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in the previous year in which the business is commenced.

Where a deduction is allowed for any previous year under this section in respect of
expenditure represented wholly or partly by an asset, no deduction shall be allowed
under clause (ii) of sub-section (1) of section 32 for the same or any other previous year
in respect of that asset;
Where the asset mentioned above is used in the business after it ceases to be used
for scientific research related to that business, depreciation shall be admissible under
clause (ii) of sub-section (1) of section 32.
However, as per Explanation 1 to Section 43(1), where an asset is used in the business
after it ceases to be used for scientific research related to that business and a deduction
has to be made under clause (ii) of sub-section (1) of section 32 in respect of that asset,
the actual cost of the asset to the assessee shall be the actual cost to the assessee as
reduced by the amount of any deduction allowed under clause (iv) of sub-section (1)
of section 35.
(3) As per Section 35(1)(ii), deduction of 100 per cent of any sum paid to a research
association which has as its object the undertaking of scientific research or to a
university, college or other institution to be used for scientific research;
Provided that such association, university, college or other institution for the purposes
of this clause—
(A) is for the time being approved, in accordance with the guidelines, in the manner
and subject to such conditions as may be prescribed; and
(B) such association, university, college or other institution is specified as such, by
notification in the Official Gazette, by the Central Government:
(4) As per Section 35(1)(iia) any sum paid to a company to be used by it for scientific
research:
Provided that such company—
(A) is registered in India,
(B) has as its main object the scientific research and development,
(C) is, for the purposes of this clause, for the time being approved by the prescribed
authority in the prescribed manner, and
(D) fulfils such other conditions as may be prescribed;
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(5) As per Section 35(1)(iii) any sum paid to a research association which has as its object
the undertaking of research in social science or statistical research or to a university,
college or other institution to be used for research in social science or statistical
research;
Provided that such association, university, college or other institution for the purposes
of this clause—
(A) is for the time being approved, in accordance with the guidelines, in the manner
and subject to such conditions as may be prescribed;
and
(B) such association, university, college or other institution is specified as such, by
notification in the Official Gazette, by the Central Government.
Explanation.—The deduction, to which the assessee is entitled in respect of any sum

paid to a research association, university, college or other institution to which clause
(ii) or clause (iii) to which clause (ii) or clause (iii) applies, shall not be denied merely on
the ground that, subsequent to the payment of such sum by the assessee, the approval
granted to the association, university, college or other institution referred to in clause
(ii) or clause (iii) has been withdrawn;
Provided that the research association, university, college or other institution referred to
in clause (ii) or clause (iii) shall make an application in the prescribed form and manner
to the Central Government for the purpose of grant of approval, or continuance thereof,
under clause (ii) or, as the case may be, clause (iii) :
Provided further that the Central Government may, before granting approval under
clause (ii) or clause (iii), call for such documents (including audited annual accounts) or
information from the research association, university, college or other institution as it
thinks necessary in order to satisfy itself about the genuineness of the activities of the
research association, university, college or other institution and that Government may
also make such inquiries as it may deem necessary in this behalf :
Provided also that every notification under clause (ii) or clause (iii) in respect of the
research association, university, college or other institution or under clause (iia) in
respect of the company issued on or before the date on which this proviso has come
into force, shall be deemed to have been withdrawn unless such research association,
university, college or other institution referred to in clause (ii) or clause (iii) or the
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company referred to in clause (iia) makes an intimation in such form and manner, as
may be prescribed, to the prescribed income-tax authority within three months from
the date on which this proviso has come into force, and subject to such intimation the
notification shall be valid for a period of five consecutive assessment years beginning
with the assessment year commencing on or after the 1st day of April, 2022:
Provided also that any notification issued by the Central Government under clause (ii)
or clause (iia) or clause (iii), after the date on which the Taxation and Other Laws
(Relaxation and Amendment of Certain Provisions) Bill, 2020 receives the assent of the
President, shall, at any one time, have effect for such assessment year or years, not
exceeding five assessment years as may be specified in the notification.
As per Section 35(1A) Notwithstanding anything contained in sub-section (1), the

research association, university, college or other institution referred to in clause (ii)
or clause (iii) or the company referred to in clause (iia) of sub-section (1) shall not be
entitled to deduction under the respective clauses of the said sub-section, unless such
research association, university, college or other institution or company—
(i) prepares such statement for such period as may be prescribed and deliver or
cause to be delivered to the said prescribed income-tax authority or the person
authorised by such authority such statement in such form, verified in such manner,
setting forth such particulars and within such time, as may be prescribed:
Provided that such research association, university, college or other institution or

the company may also deliver to the prescribed authority a correction statement
for rectification of any mistake or to add, delete or update the information
furnished in the statement delivered under this sub-section in such form and
verified in such manner as may be prescribed;
(iii) furnishes to the donor, a certificate specifying the amount of donation in such
manner, containing such particulars and within such time from the date of receipt
of sum, as may be prescribed.
(6) As per Section 35(2AA) Where the assessee pays any sum to a National Laboratory or
a University or an Indian Institute of Technology or a specified person with a specific
direction that the said sum shall be used for scientific research undertaken under a
programme approved in this behalf by the prescribed authority, then—
(a) there shall be allowed a deduction of a sum equal to 100% of the sum so paid ;
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and
(b) no deduction in respect of such sum shall be allowed under any other provision
of this Act :
The deduction, to which the assessee is entitled in respect of any sum paid to a
National Laboratory, University, Indian Institute of Technology or a specified person for
the approved programme referred to in this sub-section, shall not be denied merely on
the ground that, subsequent to the payment of such sum by the assessee, the approval
granted to,—
(a) such Laboratory, or specified person has been withdrawn; or
(b) the programme, undertaken by the National Laboratory, University, Indian

Institute of Technology or specified person, has been withdrawn.
“National Laboratory” means a scientific laboratory functioning at the national level

under the aegis of the Indian Council of Agricultural Research, the Indian Council of
Medical Research, the Council of Scientific and Industrial Research, the Defence Research
and Development Organisation, the Department of Electronics, the Department of Bio-
Technology or the Department of Atomic Energy and which is approved as a National
Laboratory by the prescribed authority in such manner as may be prescribed ;
“Indian Institute of Technology” shall have the same meaning as that of “Institute” in
clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961);
“specified person” means such person as is approved by the prescribed authority.
(7) As per Section 35(2AB) where a company engaged in the business of bio-technology
or in any business of manufacture or production of any article or thing, not being an
article or thing specified in the list of the Eleventh Schedule incurs any expenditure on
scientific research (not being expenditure in the nature of cost of any land or building)
on in-house research and development facility as approved by the prescribed authority,
then, there shall be allowed a deduction of a sum equal to 100% of the expenditure
so incurred:
For the purposes of this clause, “expenditure on scientific research”, in relation to drugs
and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining
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approval from any regulatory authority under any Central, State or Provincial Act and
filing an application for a patent under the Patents Act, 1970 (39 of 1970).
No deduction shall be allowed in respect of the expenditure mentioned in Section

35(2AB) under any other provision of this Act.
No company shall be entitled for deduction under clause (1) unless it enters into
an agreement with the prescribed authority for co-operation in such research and
development facility and fulfils such conditions with regard to maintenance of accounts
and audit thereof and furnishing of reports in such manner as may be prescribed.
The prescribed authority shall submit its report in relation to the approval of the said
facility to the Principal Chief Commissioner or Chief Commissioner or Principal Director
General or Director General in such form and within such time as may be prescribed.
Note:
1. As per Section 41(3), where asset used for scientific purposes is sold by the assessee,
the sale price [uptill the actual cost of asset] shall be regarded as PGBP. The excess
over and above actual cost to be regarded as capital gains;
Question 127
Discuss provisions of Section 35ABB and Section 35ABA?
Answer
35ABB is deduction allowed on account of telecommunication license and Section 35ABA is
deduction allowed on account of spectrum license cost. The salient features are:
(1) In respect of any expenditure, being in the nature of capital expenditure, incurred
for acquiring any right to operate telecommunication services either before the
commencement of the business to operate telecommunication services or thereafter
at any time during any previous year and for which payment has actually been made
to obtain a licence, there shall, subject to and in accordance with the provisions of this
section, be allowed for each of the relevant previous years, a deduction equal to the
appropriate fraction of the amount of such expenditure.
For the purposes of this section,—

(i) “relevant previous years” means,—
(A) in a case where the licence fee is actually paid before the commencement
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of the business to operate telecommunication services, the previous years

beginning with the previous year in which such business commenced;
(B) in any other case, the previous years beginning with the previous year in
which the licence fee is actually paid,
and the subsequent previous year or years during which the licence, for which the
fee is paid, shall be in force;
(ii) “appropriate fraction” means the fraction the numerator of which is one and the
denominator of which is the total number of the relevant previous years;
(iii) “payment has actually been made” means the actual payment of expenditure
irrespective of the previous year in which the liability for the expenditure was
incurred according to the method of accounting regularly employed by the
assessee.
(2) Where the licence is transferred and the proceeds of the transfer (so far as they
consist of capital sums) are less than the expenditure incurred remaining unallowed, a
deduction equal to such expenditure remaining unallowed, as reduced by the proceeds
of the transfer, shall be allowed in respect of the previous year in which the licence is
transferred.
(3) Where the whole or any part of the licence is transferred and the proceeds of the transfer
(so far as they consist of capital sums) exceed the amount of the expenditure incurred
remaining unallowed, so much of the excess as does not exceed the difference between
the expenditure incurred to obtain the licence and the amount of such expenditure
remaining unallowed shall be chargeable to income-tax as profits and gains of the
business in the previous year in which the licence has been transferred.
Explanation.—Where the licence is transferred in a previous year in which the business

is no longer in existence, the provisions of this sub-section shall apply as if the business
is in existence in that previous year.
(4) Where the whole or any part of the licence is transferred and the proceeds of the transfer
(so far as they consist of capital sums) are not less than the amount of expenditure
incurred remaining unallowed, no deduction for such expenditure shall be allowed
under sub-section (1) in respect of the previous year in which the licence is transferred
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or in respect of any subsequent previous year or years.
(5) Where a part of the licence is transferred in a previous year and sub-section (3) does
not apply, the deduction to be allowed under sub-section (1) for expenditure incurred
remaining unallowed shall be arrived at by—
(a) subtracting the proceeds of transfer (so far as they consist of capital sums) from
the expenditure remaining unallowed; and
(b) dividing the remainder by the number of relevant previous years which have
not expired at the beginning of the previous year during which the licence is
transferred.
(6) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise

transfers the licence to the amalgamated company (being an Indian company),—
(i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the
amalgamating company; and
(ii) the provisions of this section shall, as far as may be, apply to the amalgamated
company as they would have applied to the amalga-mating company if the
latter had not transferred the licence.
(7) Where, in a scheme of demerger, the demerged company sells or otherwise transfers
the licence to the resulting company (being an Indian company),—
(i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the
demerged company; and
(ii) the provisions of this section shall, as far as may be, apply to the resulting
company as they would have applied to the demerged company if the latter had
not transferred the licence.
(8) Where a deduction for any previous year under sub-section (1) is claimed and allowed
in respect of any expenditure referred to in that sub-section, no deduction shall
be allowed under sub-section (1) of section 32 for the same previous year or any
subsequent previous year.
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Question 128
“Easy Call Ltd.”, to provide telecom services in Mumbai, obtained a licence on 1.4.2019 for
a period of 10 years ending on 31.3.2029 against a fee of ` 27 lacs to be paid in 3 install-
ments of ` 9 lacs each by April, 2019, April, 2020 and April, 2021, respectively. The compa-
ny has commenced business on 1.5.2020.
Explain, how the payment made for licence fee shall be dealt with under the Income-tax
Act, 1961 and the amount, if any, deductible for A.Y. 2022-23.
Answer
The payment made for acquiring the licence to operate telecom services in Mumbai shall be
subject to deduction as per the scheme in section 35ABB. As per section 35ABB, any amount
actually paid for obtaining licence to operate telecommunication services shall be allowed
as deduction in equal instalments during the number of years for which the license is in
force.
If the payment is made before the commencement of business: The deduction shall be allowed
beginning with the year of commencement of business.
In any other case: It will be allowed commencing from the year of payment. Deduction shall
be allowed up to the year in which the license shall cease to be in force.
The amount of deduction available for A.Y. 2022-23 is worked out below:-
(1) (2) (3) (4) = (3)/(2)
Previous year of Unexpired Instalment paid (`) Deduction in respect
payment period of license of each instalment
(`)
2019-20 9 years 9,00,000 1,00,000
2020-21 9 years 9,00,000 1,00,000
2021-22 8 years 9,00,000 1,12,500
27,00,000 3,12,500
The deduction under section 35ABB from assessment year 2022-23 shall be Rs. 3,12,500.
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Question 129
Discuss provisions of Section 35AD concerning deduction allowed to Specified Business?
Answer
Provisions of Section 35AD state as under:
1. An assessee shall, if he opts, be allowed a deduction in respect of the whole of any
expenditure of capital nature incurred, wholly and exclusively, for the purposes of any
specified business carried on by him during the previous year in which such expenditure
is incurred by him;
However, any expenditure of capital nature shall not include any expenditure in respect
of which the payment or aggregate of payments made to a person in a day, otherwise
than by an account payee cheque drawn on a bank or an account payee bank draft
or use of electronic clearing system through a bank account or through such other
electronic mode as may be prescribed, exceeds ten thousand rupees or any expenditure
incurred on the acquisition of any land or goodwill or financial instrument.
Provided that the expenditure incurred, wholly and exclusively, for the purposes of any
specified business, shall be allowed as deduction during the previous year in which he
commences operations of his specified business, if—
(a) the expenditure is incurred prior to the commencement of its operations; and
(b) the amount is capitalised in the books of account of the assessee on the date of
commencement of its operations.
This section applies to the specified business which fulfils all the following conditions,
namely:
(i) it is not set up by splitting up, or the reconstruction, of a business already in
existence;
(ii) it is not set up by the transfer to the specified business of machinery or plant
previously used for any purpose;
Where in the case of a specified business, any machinery or plant or any part thereof
previously used for any purpose is transferred to the specified business and the total
value of the machinery or plant or part so transferred does not exceed twenty per cent
of the total value of the machinery or plant used in such business, then the condition
specified above therein shall be deemed to have been complied with.
Any machinery or plant which was used outside India by any person other than the
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assessee shall not be regarded as machinery or plant previously used for any purpose,
if—
(i) such machinery or plant was not, at any time prior to the date of the installation
by the assessee, used in India;
(ii) such machinery or plant is imported into India from any country outside India;
and
(iii) no deduction on account of depreciation in respect of such machinery or plant
has been allowed or is allowable under the provisions of this Act in computing
the total income of any person for any period prior to the date of installation of
the machinery or plant by the assessee;
2. Specified business means any one or more of the following business, namely:—
a. setting up and operating a cold chain facility;

Cold chain facility means a chain of facilities for storage or transportation of
agricultural and forest produce, meat and meat products, poultry, marine and
dairy products, products of horticulture, floriculture and apiculture and processed
food items under scientifically controlled conditions including refrigeration and
other facilities necessary for the preservation of such produce;
b. setting up and operating a warehousing facility for storage of agricultural produce;
c. laying and operating a cross-country natural gas or crude or petroleum oil pipeline
network for distribution, including storage facilities being an integral part of such
network;

The conditions for the above business are:
(a) is owned by a company formed and registered in India under the Companies
Act, 1956 (1 of 1956) or by a consortium of such companies or by an
authority or a board or a corporation established or constituted under any
Central or State Act;
(b) has been approved by the Petroleum and Natural Gas Regulatory Board
established under sub-section (1) of section 3 of the Petroleum and Natural
Gas Regulatory Board Act, 2006 (19 of 2006) and notified by the Central
Government in the Official Gazette in this behalf;
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(c) has made not less than such proportion of its total pipeline capacity as
specified by regulations made by the Petroleum and Natural Gas Regulatory
Board established under sub-section (1) of section 3 of the Petroleum and
Natural Gas Regulatory Board Act, 2006 (19 of 2006) available for use
on common carrier basis by any person other than the assessee or an
associated person; and
(d) fulfils any other condition as may be prescribed;
d. building and operating, anywhere in India, a hotel of two-star or above category

as classified by the Central Government;

Where the assessee builds a hotel of two-star or above category as classified by
the Central Government and subsequently, while continuing to own the hotel,
transfers the operation thereof to another person, the assessee shall be deemed
to be carrying on the specified business.
e. building and operating, anywhere in India, a hospital with at least one hundred
beds for patients;
f. developing and building a housing project under a scheme for slum redevelopment
or rehabilitation framed by the Central Government or a State Government, as
the case may be, and notified by the Board in this behalf in accordance with the
guidelines as may be prescribed;
g. developing and building a housing project under a scheme for affordable housing
framed by the Central Government or a State Government, as the case may be,
and notified by the Board in this behalf in accordance with the guidelines as may
be prescribed;
h. production of fertilizer in India;
i. setting up and operating an inland container depot or a container freight station

notified or approved under the Customs Act, 1962 (52 of 1962);
j. bee-keeping and production of honey and beeswax;
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k. setting up and operating a warehousing facility for storage of sugar;
l. laying and operating a slurry pipeline for the transportation of iron ore;
m. setting up and operating a semi-conductor wafer fabrication manufacturing unit

notified by the Board in accordance with such guidelines as may be prescribed;
n. developing or maintaining and operating or developing, maintaining and operating

a new infrastructure facility;

Infrastructure facility means—
(i) a road including toll road, a bridge or a rail system;
(ii) a highway project including housing or other activities being an integral
part of the highway project;
(iii) a water supply project, water treatment system, irrigation project,
sanitation and sewerage system or solid waste management system;
(iv) a port, airport, inland waterway, inland port or navigational channel in
the sea;
In respect of Infrastructure business:
(A) is owned by a company registered in India or by a consortium of such
companies or by an authority or a board or corporation or any other body
established or constituted under any Central or State Act;
(B) entity referred to in sub-clause (A) has entered into an agreement with
the Central Government or a State Government or a local authority or
any other statutory body for developing or operating and maintaining or
developing, operating and maintaining, a new infrastructure facility.
3. Where a deduction under this section is claimed and allowed in respect of the specified
business for any assessment year, no deduction shall be allowed under the provisions of
section 10AA and Chapter VI-A under the heading “C.—Deductions in respect of certain
incomes” in relation to such specified business for the same or any other assessment
year.
4. No deduction in respect of the expenditure referred to in sub-section (1) shall be

allowed to the assessee under any other section in any previous year or under this
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section in any other previous year if the deduction has been claimed or opted by the
assessee and allowed to him under this section.
5. As per Section 35AD(7A), any asset in respect of which a deduction is claimed and
allowed under this section shall be used only for the specified business, for a period
of eight years beginning with the previous year in which such asset is acquired or
constructed.
6. As per Section 35AD(7B) Where any asset, in respect of which a deduction is claimed
and allowed under this section, is used for a purpose other than the specified business
during the period specified in sub-section (7A), otherwise than by way of a mode referred
to in clause (vii) of section 28, the total amount of deduction so claimed and allowed
in one or more previous years, as reduced by the amount of depreciation allowable in
accordance with the provisions of section 32, as if no deduction under this section was
allowed, shall be deemed to be the income of the assessee chargeable under the head
“Profits and gains of business or profession” of the previous year in which the asset is
so used.
7. As per Section 35AD(7C), nothing contained in sub-section (7B) shall apply to a company
which has become a sick industrial company under sub-section (1) of section 17 of the
Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), during the period
specified in sub-section (7A).
8. As per Section 28 (vii) any sum, whether received or receivable, in cash or kind, on
account of any capital asset (other than land or goodwill or financial instrument)
being demolished, destroyed, discarded or transferred, shall be treated as PGBP, if the
whole of the expenditure on such capital asset has been allowed as a deduction under
section 35AD.
9. Further as per Explanation 13 to Section 43(1), the actual cost of any capital asset on
which deduction has been allowed or is allowable to the assessee under section 35AD,
shall be treated as ‘nil’,—
(a) in the case of such assessee; and
(b) in any other case if the capital asset is acquired or received,—
(i) by way of gift or will or an irrevocable trust;
(ii) on any distribution on liquidation of the company; and
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(iii) by such mode of transfer as is referred to in clauses (i), (iv), (v), (vi), (vib), (xiii),
(xiiib) and (xiv) of section 47:
Provided that where any capital asset in respect of which deduction or part of deduction
allowed under section 35AD is deemed to be the income of the assessee in accordance
with the provisions of sub-section (7B) of the said section, the actual cost of the asset
to the assessee shall be the actual cost to the assessee, as reduced by an amount
equal to the amount of depreciation calculated at the rate in force that would have
been allowable had the asset been used for the purpose of business since the date of
its acquisition;
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PQ Ltd. is a company having two units – Unit P carries on specified business of setting up
and operating warehousing facility for storage of agricultural produce and Unit Q carries
on specified business of setting up and operating warehousing facility for storage of edible
oil. Unit P commenced operations on 1.4.2020 and claimed deduction of Rs. 120 lakhs
incurred in April, 2020 on purchase of two buildings for Rs. 70 lakhs and Rs. 50 lakhs (for
operating warehousing facility for storage of agricultural produce) under section 35AD for
A.Y.2021-22. However, in March, 2022, Unit P transferred its building costing Rs. 70 lakhs
to Unit Q. What are the tax implications of such transfer in the hands of PQ Ltd.?
(i) Rs. 70 lakhs would be deemed as business income in the hands of PQ Ltd. for A.Y.2021-
22.
(ii) Rs. 63 lakhs would be deemed as business income in the hands of PQ Ltd. for A.Y.2021-
22.
(iii) Actual cost of building for computing depreciation for P.Y.2020-21
(iv) would be Rs. 70 lakhs.
(v) Actual cost of building for computing depreciation for P.Y.2020-21 would be Rs. 63
lakhs.
Which of the above statements are correct?
(a) (i) and (iii) above
(b) (i) and (iv) above
(c) (ii) and (iii) above
(d) (ii) and (iv) above
Answer: D
Question 130
Can an assessee setting up a hotel claim deduction under section 35AD for the relevant
previous year, on the basis that it had commenced its operations and made an application
for three-star category classification in beginning of the said previous year, even though
the same was granted by the authority only in the next year due to the requirement of
completion of inspection?
Answer
In CIT v. Ceebros Hotels Private Limited [2018] 409 ITR 423 (Mad), the High Court upheld the
Tribunal’s view that the assessee is entitled to claim the deduction under section 35AD for
the relevant previous year, opining that the provision which was introduced to encourage
the establishment of hotels of a particular category is a beneficial provision, and hence,
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should be read and interpreted liberally.
Question 131
Discuss provisions of Section 35CCA allowing deduction for expenditure by way of payment
to associations and institutions for carrying out rural development programmes.
Answer
As per Section 35CCA:
1. Where an assessee incurs any expenditure by way of payment of any sum—
(a) to an association or institution, which has as its object the undertaking of any
programme of rural development, to be used for carrying out any programme of
rural development approved by the prescribed authority; or
(b) to an association or institution, which has as its object the training of persons for
implementing programmes of rural development; or
(c) to a rural development fund set up and notified by the Central Government in this
behalf; or
(d) to the National Urban Poverty Eradication Fund set up and notified by the Central
Government in this behalf,
the assessee shall, be allowed a deduction of the amount of such expenditure incurred
during the previous year.
2. The association or institution referred to above shall provide a certificate to the assessee
to the effect that—
(a) the programme of rural development had been approved by the prescribed
authority before the 1st day of March, 1983; and
(b) where such payment is made after the 28th day of February, 1983, such programme
involves work by way of construction of any building or other structure (whether
for use as a dispensary, school, training or welfare centre, workshop or for any
other purpose) or the laying of any road or the construction or boring of a well
or tube-well or the installation of any plant or machinery, and such work has
commenced before the 1st day of March, 1983.
(c) the training of persons for implementing any programme of rural development
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had been started by the association or institution before the 1st day of March,
1983.
The deduction, to which the assessee is entitled in respect of any sum paid to an
association or institution for carrying out the programme of rural development
referred to above, shall not be denied merely on the ground that subsequent to the
payment of such sum by the assessee, the approval granted to such programme
of rural development, or as the case may be, to the association or institution has
been withdrawn.
3. Where a deduction under this section is claimed and allowed for any assessment year
in respect of any expenditure referred to in sub-section (1), deduction shall not be
allowed in respect of such expenditure under section 35C or section 35CC or section
80G or any other provision of this Act for the same or any other assessment year.
Question 132
Discuss provisions of Section 35CCC concerning expenditure incurred on Agricultural Extension
Project?
Answer
Where an assessee incurs any expenditure on agricultural extension project notified by the
Board in this behalf in accordance with the guidelines as may be prescribed, then, there
shall be allowed a deduction of a sum equal to 100% of such expenditure.
Where a deduction under this section is claimed and allowed for any assessment year in
respect of any expenditure referred to in this section, deduction shall not be allowed in
respect of such expenditure under any other provisions of this Act for the same or any other
assessment year.
Question 133
Discuss provisions of Section 35CCD concerning deduction for expenditure on skill development
project?
Answer
As per Section 35CCD(1), where a company incurs any expenditure (not being expenditure
in the nature of cost of any land or building) on any skill development project notified by
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the Board in this behalf in accordance with the guidelines as may be prescribed, then, there
shall be allowed a deduction of a sum equal to 100% of such expenditure;
Where a deduction under this section is claimed and allowed for any assessment year in
respect of any expenditure referred to in this section, deduction shall not be allowed in
respect of such expenditure under any other provisions of this Act for the same or any other
assessment year.
Question 134
Amortisation of certain preliminary expenses.
Answer
The following preliminary expenses are allowed as deduction:
1. The expenditure referred to in this section shall be the expenditure specified in any one
or more of the following clauses, namely :—
(a) expenditure in connection with—
(i) preparation of feasibility report;
(ii) preparation of project report;
(iii) conducting market survey or any other survey necessary for the business of
the assessee;
(iv) engineering services relating to the business of the assessee:
Provided that the work in connection with the preparation of the feasibility report
or the project report or the conducting of market survey or of any other survey
or the engineering services referred to in this clause is carried out by the assessee
himself or by a concern which is for the time being approved in this behalf by the
Board;
(b) legal charges for drafting any agreement between the assessee and any other
person for any purpose relating to the setting up or conduct of the business of the
assessee;
(c) where the assessee is a company, also expenditure—

(i) by way of legal charges for drafting the Memorandum and Articles of
Association of the company;
(ii) on printing of the Memorandum and Articles of Association;
(iii) by way of fees for registering the company under the provisions of the
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Companies Act, 1956 (1 of 1956);

(iv) in connection with the issue, for public subscription, of shares in or debentures
of the company, being underwriting commission, brokerage and charges for
drafting, typing, printing and advertisement of the prospectus;
(d) such other items of expenditure (not being expenditure eligible for any allowance
or deduction under any other provision of this Act) as may be prescribed.
2. The deduction is allowed to an assessee, being an Indian company or a person (other

than a company) who is resident in India;
3. The expenses must be incurred:

(i) before the commencement of his business, or
(ii) after the commencement of his business, in connection with the extension of his
undertaking or in connection with his setting up a new unit,
the assessee shall, in accordance with and subject to the provisions of this section, be
allowed a deduction of an amount equal to 1/5th of such expenditure for each of the
10 successive previous years beginning with the previous year in which the business
commences or, as the case may be, the previous year in which the extension of the
undertaking is completed or the new unit commences production or operation:
4. Where the aggregate amount of the expenditure referred to above exceeds an amount
calculated at 5%—
(a) of the cost of the project, or
(b) where the assessee is an Indian company, at the option of the company, of the
capital employed in the business of the company,
the excess expenditure shall be ignored for the purpose of computing the deduction:
5. The term Cost of the project means the actual cost of the fixed assets, being land,
buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including
expenditure on development of land and buildings), which are shown in the books
of the assessee as on the last day of the previous year in which the business of the
assessee commences or which are shown in the books of the assessee as on the last
day of the previous year in which the extension of the undertaking is completed;
6. The term “capital employed in the business of the company” means, the aggregate of
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the issued share capital, debentures and long-term borrowings as on the last day of
the previous year in which the business of the company commences or as on the last
day of the previous year in which the extension of the undertaking is completed;
7. Where the assessee is a person other than a company or a co-operative society,

no deduction shall be admissible under sub-section (1) unless the accounts of the
assessee for the year or years in which the expenditure specified in sub-section (2)
is incurred have been audited by an accountant as defined in the Explanation below
sub-section (2) of section 288, before the specified date referred to in section 44AB
and the assessee furnishes for the first year in which the deduction under this section
is claimed, the report of such audit by that date in the prescribed form duly signed and
verified by such accountant and setting forth such particulars as may be prescribed.
8. Where the undertaking of an Indian company which is entitled to the deduction under
sub-section (1) is transferred, before the expiry of the period of 5 years specified in
sub-section (1), to another Indian company in a scheme of amalgamation/demerger—
(i) no deduction shall be admissible under sub-section (1) in the case of the
amalgamating / demerged company for the previous year in which the
amalgamation / demerger takes place; and
(ii) the provisions of this section shall, as far as may be, apply to the amalgamated /
resulting company as they would have applied to the amalgamating / demerged
company if the amalgamation / demerged had not taken place.
Question 135
Whether “premium” on subscribed share capital is “capital employed in the business of the
company” under section 35D to be eligible for a deduction?
Answer
Berger Paints India Ltd v. CIT [2017] 393 ITR 113 (SC)
Facts of the case: The assessee is a company engaged in the manufacture of paints. For
the relevant assessment years, the assessee claimed deduction under section 35D of a sum
representing share premium as being a part of the capital employed. The said deduction
was disallowed by the Assessing Officer.
Issue: Whether “premium” on subscribed share capital is “capital employed in the business
of the company” under section 35D to be eligible for a deduction?
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Supreme Court’s Observations: The Supreme Court observed that the share premium
collected by the assessee on its subscribed issued share capital could not be part of “capital
employed in the business of the company” for the purpose of section 35D(3)(b). If it were
the intention of the legislature to treat share premium as being “capital employed in the
business of the company”, it would have been explicitly mentioned. Moreover, column III of
the form of the annual return in Part II of Schedule V to the Companies Act, 1956 under
Section 159 dealing with capital structure of the company provides the break-up of “issued
share capital” which does not include share premium at the time of subscription. Hence,
in the absence of the reference in section 35D, share premium is not a part of the capital
employed. Also, section 78 of the Companies Act, 1956 requires a company to transfer the
premium amount to be kept in a separate account called “securities premium account”.
Supreme Court’s Decision: Affirming the decision of the High Court, the Supreme Court held
that the assessee is not entitled to claim deduction in relation to the premium amount
received from shareholders at the time of share subscription.
Note – Under the Companies Act, 2013, Serial No. IV(i) of Form MGT-7 (Annual Return)
read with section 92 relates to the capital structure of a company, including break-up of
issued share capital and section 52 deals with securities premium. Thus, the rationale of
the Supreme Court ruling in the above case would hold good in the Companies Act, 2013
regime.
Question 136
A Limited has merged with B Limited. For the merger and related procedure, various expenses
are incurred. Will this expense be allowed as deduction? If yes, then to whom?
Answer
Where an assessee, being an Indian company, incurs any expenditure wholly and exclusively
for the purposes of amalgamation or demerger of an undertaking, the amalgamated
company shall be allowed a deduction of an amount equal to 1/5th of such expenditure
for each of the 5 successive previous years beginning with the previous year in which the
amalgamation or demerger takes place.
Question 137
X Limited faces severe liquidity crisis due to on-going COVID-19 Pandemic Lockdown. It is
contemplating laying off employees by providing them with the option to take voluntary
retirement from services. It requests you to provide opinion where such cost of VRS is
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allowable as deduction?
Answer
Section 35DDA of the Act provides for amortisation of expenditure incurred under voluntary
retirement scheme.
1) Where an assessee incurs any expenditure in any previous year by way of payment of
any sum to an employee in connection with his voluntary retirement, in accordance
with any scheme or schemes of voluntary retirement, one-fifth of the amount so paid
shall be deducted in computing the profits and gains of the business for that previous
year, and the balance shall be deducted in equal instalments for each of the four
immediately succeeding previous years.
2) Where the assessee, being an Indian company, is entitled to the deduction under sub-
section (1) and the undertaking of such Indian company entitled to the deduction under
sub-section (1) is transferred, before the expiry of the period specified in that sub-
section, to another Indian company in a scheme of amalgamation, the provisions of
this section shall, as far as may be, apply to the amalgamated company as they would
have applied to the amalgamating company if the amalgamation had not taken place.
3) Where the undertaking of an Indian company entitled to the deduction under sub-
section (1) is transferred, before the expiry of the period specified in that sub-section,
to another company in a scheme of demerger, the provisions of this section shall, as
far as may be, apply to the resulting company, as they would have applied to the
demerged company, if the demerger had not taken place.
4) Where there has been reorganisation of business, whereby a firm is succeeded by a

company fulfilling the conditions laid down in clause (xiii) of section 47 or a proprietary
concern is succeeded by a company fulfilling the conditions laid down in clause (xiv)
of section 47, the provisions of this section shall, as far as may be, apply to the
successor company, as they would have applied to the firm or the proprietary concern,
if reorganisation of business had not taken place.
5) Where there has been reorganisation of business, whereby a private company or

unlisted public company is succeeded by a limited liability partnership fulfilling the
conditions laid down in the proviso to clause (xiiib) of section 47, the provisions of this
section shall, as far as may be, apply to the successor limited liability partnership, as
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they would have applied to the said company, if reorganisation of business had not
taken place.
6) No deduction shall be allowed in respect of the expenditure mentioned in sub-section

(1) in the case of the amalgamating company referred to in sub-section (2), in the case
of demerged company referred to in sub-section (3), in the case of a firm or proprietary
concern referred to in sub-section (4) and in the case of a company referred to in sub-
section (4A) of this section, for the previous year in which amalgamation, demerger or
succession, as the case may be, takes place.
7) No deduction shall be allowed in respect of the expenditure mentioned in sub-section

(1) under any other provision of this Act.
Question 138
Discuss provisions of Section 35E?
Answer
Section 35E provides deduction for expenditure incurred on prospecting etc. for certain
minerals.
1) Where an assessee, being an Indian company or a person (other than a company) who is
resident in India, is engaged in any operations relating to prospecting for, or extraction
or production of, any mineral and incurs, any expenditure wholly and exclusively on
any operations relating to prospecting for any mineral or group of associated minerals
specified in Part A or Part B, respectively, of the Seventh Schedule or on the development
of a mine or other natural deposit of any such mineral or group of associated minerals,
the assessee shall, in accordance with and subject to the provisions of this section, be
allowed for each one of the relevant previous years a deduction of an amount equal
to one-tenth of the amount of such expenditure.
2) The expenditure must be incurred at any time during the year of commercial production
and any one or more of the four years immediately preceding that year;
3) However, expenditure which is met directly or indirectly by any other person or authority
and any sale, salvage, compensation or insurance moneys realised by the assessee in
respect of any property or rights brought into existence as a result of the expenditure
shall be excluded.
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4) Any expenditure—
(a) on the acquisition of the site of the source of any mineral or group of associated
minerals referred to in sub-section (2) or of any rights in or over such site;
(b) on the acquisition of the deposits of such mineral or group of associated minerals
or of any rights in or over such deposits; or
(c) of a capital nature in respect of any building, machinery, plant or furniture for
which allowance by way of depreciation is admissible under section 32,
shall not be deemed to be expenditure incurred by the assessee for any of the purposes
specified above.
5) The deduction to be allowed for any relevant previous year shall be—
i. an amount equal to one-tenth of the expenditure [such one-tenth being hereafter
in this sub-section referred to as the instalment];
ii. such amount as is sufficient to reduce to nil the income (as computed before
making the deduction under this section) of that previous year arising from the
commercial exploitation [whether or not such commercial exploitation is as a
result of the operations or development referred to in sub-section (2)] of any
mine or other natural deposit of the mineral or any one or more of the minerals
in a group of associated minerals as aforesaid in respect of which the expenditure
was incurred,
whichever amount is less:
6) The amount of the instalment relating to any relevant previous year, to the extent to
which it remains unallowed, shall be carried forward and added to the instalment
relating to the previous year next following and deemed to be part of that instalment,
and so on, for succeeding previous years, so, however, that no part of any instalment
shall be carried forward beyond the tenth previous year as reckoned from the year of
commercial production.
7) For the purposes of this section,—

(a) “operation relating to prospecting” means any operation undertaken for the
purposes of exploring, locating or proving deposits of any mineral, and includes
any such operation which proves to be infructuous or abortive;
(b) “year of commercial production” means the previous year in which as a result of
any operation relating to prospecting, commercial production of any mineral or
any one or more of the minerals in a group of associated minerals specified in
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Part A or Part B, respectively, of the Seventh Schedule, commences;

(c) “relevant previous years” means the ten previous years beginning with the year of
commercial production.
8) Where the assessee is a person other than a company or a co-operative society,

no deduction shall be admissible under sub-section (1) unless the accounts of the
assessee for the year or years in which the expenditure specified in sub-section (2)
is incurred have been audited by an accountant as defined in the Explanation below
sub-section (2) of section 288, 69[before the specified date referred to in section 44AB
and the assessee furnishes for the first year in which the deduction under this section is
claimed, the report of such audit by that date] in the prescribed form duly signed and
verified by such accountant and setting forth such particulars as may be prescribed.
9) Where the undertaking of an Indian company which is entitled to the deduction under
sub-section (1) is transferred, before the expiry of the period of ten years specified in
sub-section (1), to another Indian company in a scheme of amalgamation—
(i) no deduction shall be admissible under sub-section (1) in the case of the
amalgamating company for the previous year in which the amalgamation takes
place; and
(ii) the provisions of this section shall, as far as may be, apply to the amalgamated
company as they would have applied to the amalgamating company if the
amalgamation had not taken place.
10) Where the undertaking of an Indian company which is entitled to the deduction under
sub-section (1) is transferred, before the expiry of the period of ten years specified in
sub-section (1), to another Indian company in a scheme of demerger,—
(i) no deduction shall be admissible under sub-section (1) in the case of the demerged
company for the previous year in which the demerger takes place; and
(ii) the provisions of this section shall, as far as may be, apply to the resulting company as
they would have applied to the demerged company, if the demerger had not taken place.
11) Where a deduction under this section is claimed and allowed for any assessment year in
respect of any expenditure specified in sub-section (2), the expenditure in respect of which
deduction is so allowed shall not qualify for deduction under any other provision of this Act for
the same or any other assessment year.
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Question 139
Discuss various deductions which are enumerated in Section 36?
Answer
The deductions provided for in the following clauses shall be allowed in respect of the matters dealt
with therein, in computing the income referred to in section 28:
S.36(1)(i) the amount of any premium paid in respect of insurance against risk of damage
or destruction of stocks or stores used for the purposes of the business or
profession;
S.36(1)(ia) the amount of any premium paid by a federal milk co-operative society to effect
or to keep in force an insurance on the life of the cattle owned by a member of
a co-operative society, being a primary society engaged in supplying milk raised
by its members to such federal milk co-operative society;
S.36(1)(ib) the amount of any premium paid by any mode of payment other than cash by
the assessee as an employer to effect or to keep in force an insurance on the
health of his employees under a scheme framed in this behalf by—
(A) the General Insurance Corporation of India formed under section 9 of the
General Insurance Business (Nationalisation) Act, 1972 (57 of 1972) and
approved by the Central Government; or
(B) any other insurer and approved by the Insurance Regulatory and
Development Authority established under sub-section (1) of section 3 of
the Insurance Regulatory and Development Authority Act, 1999 (41 of
1999);
S.36(1)(ii) any sum paid to an employee as bonus or commission for services rendered,
where such sum would not have been payable to him as profits or dividend if it
had not been paid as bonus or commission;
1) As per S.43B (c) any amount ALLOWABLE u/s 36 (1) (ii) shall be disallowed unless such
amount has actually paid on or before the due date of furnishing return of income u/s
139 (1).
2) Bonus paid over and above the mandatory bonus as per payment of Bonus Act is also
covered u/s 36 (1) (ii).
E.g.: Production bonus, performance bonus etc.
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3) In a case where payment of bonus due to employees is paid to a trust and such amount
is subsequently paid to the employees before the stipulated due date, would the same
be allowable under section 36(1)(ii) while computing business income?
Shasun Chemicals & Drugs Ltd v. CIT (2016) 388 ITR 1 (SC)
Facts of the case: The assessee-company and its employees union had a dispute
as regard the quantum of bonus which led to labour unrest. Due to this reason, the
workers refused to accept the bonus offered to them. However, in order to comply with
the requirement of section 43B (i.e., deduction in respect of bonus would be allowable
only if actual payment is made) the assessee made payment to a trust. The dispute
with the workers was settled well in time and the bonus was paid to the workers on
the very next day of deposit of the said amount in the trust that too, before the ‘due
date’ by which such payment is supposed to be made in order to claim deduction under
section 36. The Assessing Officer, however, took a view that since the payment was
made from the trust and not made by the assessee directly to the employees, it is not
allowable in view of the provisions of section 40A(9) of the Act.
Appellate Authorities views: The Commissioner (Appeals) and the Appellate Tribunal
did not accept the Assessing Officer’s view but the High Court concurred with the
Assessing Officer’s view and denied deduction under section 36(1)(ii) to the assessee.
Supreme Court’s decision: The Apex Court held that section 36(1) contains various
kinds of expenses which are allowable as deduction while computing the business
income. The amount paid by way of bonus is one such expenditure which is allowable
as deduction under section 36(1)(ii). It also held that the embargo contained in section
43B(b) or section 40A(9) does not come in the way of the assessee’s claim, since the
bonus was ultimately paid to the employees before the due date as per the statutory
requirement. Therefore, the payment in respect of bonus is allowable as deduction,
as there is no dispute that the amount was paid by the assessee to its employees
before the due date by which such payment is supposed to be made in order to claim
deduction under section 36(1)(ii).
Note – In this case, the Supreme Court has held that the bonus was allowable as
deduction under section 36(1)(ii), even though it was initially remitted to the trust
created for this purpose, from which the payment was ultimately made to the employees
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before the due date. The Supreme Court has applied the concept of “substance over
form” in allowing the deduction of bonus paid under section 36(1)(ii) by considering
that the payment of bonus was ultimately made to employees before the stipulated
due date. Applying the same concept, the intermittent process of creation of trust
for remittance of bonus and subsequent payment therefrom to the employees, which
formed the basis of disallowance of bonus by the Assessing Officer on the basis of the
provisions of section 40A(9) has been ignored. However, had the payment to employees
not been made before the stipulated due date, deduction under section 36(1)(ii) would
not be allowable merely because the amount was remitted to the trust before the
stipulated due date. It may be noted that as per section 43B(c), actual payment before
the due date of filing of return of income under section 139(1) is a prerequisite for
claiming deduction under section 36(1)(ii)
S.36(1)(iii) the amount of the interest paid in respect of capital borrowed for the
purposes of the business or profession :
Provided that any amount of the interest paid, in respect of capital borrowed for
acquisition of an asset (whether capitalised in the books of account or not); for any
period beginning from the date on which the capital was borrowed for acquisition of
the asset till the date on which such asset was first put to use, shall not be allowed
as deduction.
Explanation.—Recurring subscriptions paid periodically by shareholders, or subscrib-
ers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall
be deemed to be capital borrowed within the meaning of this clause;
1) As per Section 2(28A) “Interest” means interest payable in any manner in respect of
any moneys borrowed or debt incurred (including a deposit, claim or other similar right
or obligation) and includes any service fee or other charge in respect of the moneys
borrowed or debt incurred or in respect of any credit facility which has not been utilised;
2) Section 36(1)(iii) covers interest on moneys borrowed for the purpose of business /
profession. Interest on debt incurred for business / profession is allowable u/s 37.
Eg. Interst paid on working capital loan is allowable u/s. 36 (1) (iii)
Interest paid to creditors on delayed payments allowed u/s. 37
3) SA Builders vs. ACIT [288 ITR 1] [Supreme Court]
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The assessee had made interest bearing borrowings and advanced the same without
charging interest to third parties. The question arose whether such interest expenses
could be allowed as deduction u/s. 36(1)(iii) of the Act.
The Supreme Court interpreted the expression “for purposes of business or profession” in
section 36(1)(iii) as being wider in scope than the expression “for the purpose of earning
income, profits or gains”. Accordingly, expenditure voluntarily incurred and meeting
the “commercial expediency” test is to be allowed as a deduction. The expression
“commercial expediency” is of wide import and is satisfied once it is established that
there was a connection and nexus between the interest paid (claimed as expenditure)
and the assessee’s business.
The High Court observed that merely because non-interest bearing advances were
given to third parties, that would not justify a finding that the test of “commercial
expediency” was not satisfied.
Interest-free advances were advanced to the parties connected with the business of
the assessee. Money taken on loan was not diverted for non-business purpose. The
unsecured loans were not used for personal purpose. Therefore, according to section
36(1)(iii), interest paid on capital borrowed for the purpose of business had to be
allowed as a deduction.
Further, the High Court opined that the Revenue cannot assume the role and occupy
the armchair of a businessman to decide whether expenditure was reasonable. The
Revenue cannot look at the matter from its own standpoint, but the opinion and
decision of a businessman on “business expediency” matters.
4) Taparia Tools Ltd. v. JCIT (2015) 372 ITR 605 [SC]

In a case where debentures are issued with maturity at the end of five years, and the
debenture holders are given an option of upfront payment of interest in the first year
itself, can the entire upfront interest paid, be claimed as deduction by the company in
the first year or should the same be deferred over a period of five years; and would
the treatment of such interest as deferred revenue expenditure in the books of account
have any impact on the tax treatment.
It was observed that under section 36(1)(iii), the amount of interest paid in respect of
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capital borrowed for the purposes of business or profession, is allowable as deduction.

The moment the option for upfront payment was exercised by the subscriber, the
liability of company to make the payment in that year had arisen. Not only had the
liability arisen in the previous year in question, it was even quantified and discharged
as well in that very year. When the deduction of entire upfront payment of interest is
allowable as per the Income-tax Act, 1961, the fact that a different treatment was
given in the books of account could not be a factor which would bar the company from
claiming the entire expenditure as a deduction. The company is eligible to claim the
entire amount of interest paid upfront as deduction under section 36(1)(iii).
5) Interest paid to public financial institutions, state Industrial investment corporation,

NBFC and Scheduled or Cooperative Banks are covered within the provisions of Section
43B i.e. such interest will be allowed as deduction only on actual payment of the
amount.
S.36(1)(iiia) the pro rata amount of discount on a zero coupon bond having regard
to the period of life of such bond calculated in the manner as may be
prescribed.
Explanation—For the purposes of this clause, the expressions—
(i) “discount” means the difference between the amount received or receivable by
the infrastructure capital company or infrastructure capital fund or public sector
company or scheduled bank issuing the bond and the amount payable by such
company or fund or public sector company or scheduled bank on maturity or
redemption of such bond;
(ii) “period of life of the bond” means the period commencing from the date of issue
of the bond and ending on the date of the maturity or redemption of such bond;
Example: Suppose ABC Limited has issued Zero Coupon Bond worth Rs. 100,00,000 for issue
price of Rs. 80,00,000. The said bonds are issued on 1 January 2021 and the maturity date
is 31 August 2022. Discuss tax treatment of discount on Zero Coupon Bond. Also discuss tax
treatment for Mr. Mahesh who has acquired bonds worth Rs. 100,000 face value from ABC
Limited. Does ABC Limited have any withholding tax liability at the time of payment during
maturity of Zero Coupon Bond?
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S.36(1)(iv) any sum paid by the assessee as an employer by way of contribution towards
a recognised provident fund or an approved superannuation fund, subject to
such limits as may be prescribed for the purpose of recognising the provident
fund or approving the superannuation fund, as the case may be; and subject
to such conditions as the Board may think fit to specify in cases where the
contributions are not in the nature of annual contributions of fixed amounts
or annual contributions fixed on some definite basis by reference to the
income chargeable under the head “Salaries” or to the contributions or to
the number of members of the fund;
S.36(1)(iva) any sum paid by the assessee as an employer by way of contribution towards
a pension scheme, as referred to in section 80CCD, on account of an employee
to the extent it does not exceed ten per cent of the salary of the employee in
the previous year.
Explanation.—For the purposes of this clause, “salary” includes dearness allowance, if
the terms of employment so provide, but excludes all other allowances and perquisites;
S.36(1)(v) any sum paid by the assessee as an employer by way of contribution towards
an approved gratuity fund created by him for the exclusive benefit of his
employees under an irrevocable trust;
S.36(1)(va) any sum received by the assessee from any of his employees to which the
provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is
credited by the assessee to the employee’s account in the relevant fund or
funds on or before the due date.
Explanation.—For the purposes of this clause, “due date” means the date by which the as-
sessee is required as an employer to credit an employee’s contribution to the employee’s
account in the relevant fund under any Act, rule, order or notification issued there-under
or under any standing order, award, contract of service or otherwise;
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1) Contribution to Welfare Funds:

Contribution to Welfare Fund
Employer contribution Employee contribution

(i) Recognised PF 36(1)(iv) Any welfare fund S.36(1)(va)
(ii) Approved Superannuation Fund
(iii) Pension Scheme u/s 80 CCD 36(1)(iva)
(National Pension Scheme)
(iv) Approved Gratuity Fund 36(1)(v)
As per S.40 (a) (iv) assesse employer must make Employer withholds contribution
effective arrangements for withholding tax@ from employee, salary and
source at the time of making payment of benefits these pays the same to govt.
to the employee. As per S.2 (24) (x), sum amount
withhold by employer is treated
As per Section 40A(9), only contribution to PF, as income of employer.
gratuity, pension, recognised superannuation fund
is allowed as deduction. No other contribution is
allowable as deduction.
Eg. Employer’s contribution to Welfare Trust not

allowed.
Then he gets a corresponding
deduction when the contribution
As per S.40A (7), deduction is allowable in respect
credits such amount to relevant
of unapproved gratuity fund when the amount
fund on or before due date under
becomes payable to the employee
such relevant law.
S.36(1)(iva): NPS scheme, maximum deduction

allowed is 10% of salary*.
*Salary - Basic + DA (term)
Example: Mr. X pays contribution to NPS @ 20% of basic Salary, Basic Salary for the
year Rs. 100,00,000. DA is 40% of basic salary & 50% of such DA forms part of terms
of retirement. What will be the disallowed amount?
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Ans. Calculation of allowance u/s. 36(1)(iva)

Actual contribution by employer 20,00,000
[1,00,00,000 X 20%]
1,00,00,000
Basic 100,00,000
DA (40% of 100 Lakhs) X 50% 20,00,000
Salary 120,00,000
10% of above u/s 36(1) (iva) (12,00,000)
Excess disallowed u/s 40A(9) 8,00,000
As far as employers’ contribution to welfare funds is concerned, the same is covered under
section 43B(b) i.e. deduction is not allowed unless the contribution is actually paid on or
before due date provided under section 139(1) of the Income-tax Act, 1961. Finance Act 2021
has clarified retrospectively that employees’ contribution to welfare funds are not covered
under section 43B. Therefore, the word “due date” mentioned in Section 36(1)(va) shall mean
the due date under relevant labour laws.

Note:
For pensions scheme u/s 80 CCD, tax treatment for employee is as under:
Employee contribution to NPS Self - Contribution to NPS
(a) This is first added to salary u/s (a) Self – contribution to the extent of 10% of
17 salary is allowed as deduction u/s 80 CCD
(1).
However, 80C + 80CCC + 80CCD
(1) < 1,50,000 (Maximum limit)
(b) Corresponding deduction is (b) Therefore, in order to incentivise NPS a
allowed u/s 80 CCD (2) (Max separate deduction `50,000 over and
10% of salary) above 80CCD (1) is allowed u/s 80CCD (1B).
(c) Salary: Basic + DA (terms)
S.36(1)(vi) in respect of animals which have been used for the purposes of the business
or profession otherwise than as stock-in-trade and have died or become
permanently useless for such purposes, the difference between the actual
cost to the assessee of the animals and the amount, if any, realised in respect
of the carcasses or animals;
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S.36(1)(vii) subject to the provisions of sub-section (2), the amount of any bad debt
or part thereof which is written off as irrecoverable in the accounts of the
assessee for the previous year:
Provided that in the case of an assessee to which clause (viia) applies, the amount of the
deduction relating to any such debt or part thereof shall be limited to the amount by
which such debt or part thereof exceeds the credit balance in the provision for bad and
doubtful debts account made under that clause:
Provided further that where the amount of such debt or part thereof has been taken into
account in computing the income of the assessee of the previous year in which the amount
of such debt or part thereof becomes irrecoverable or of an earlier previous year on the
basis of income computation and disclosure standards notified under sub-section (2) of
section 145 without recording the same in the accounts, then, such debt or part thereof
shall be allowed in the previous year in which such debt or part thereof becomes irre-
coverable and it shall be deemed that such debt or part thereof has been written off as
irrecoverable in the accounts for the purposes of this clause.
Explanation 1.—For the purposes of this clause, any bad debt or part thereof written off as
irrecoverable in the accounts of the assessee shall not include any provision for bad and
doubtful debts made in the accounts of the assessee;
Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of
the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account
referred to therein shall be only one account in respect of provision for bad and doubtful
debts under clause (viia) and such account shall relate to all types of advances, including
advances made by rural branches;
S.36(2) In making any deduction for a bad debt or part thereof, the following provisions
shall apply—
(i) no such deduction shall be allowed unless such debt or part thereof has been taken
into account in computing the income of the assessee of the previous year in which
the amount of such debt or part thereof is written off or of an earlier previous year,
or represents money lent in the ordinary course of the business of banking or money-
lending which is carried on by the assessee;
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(ii) if the amount ultimately recovered on any such debt or part of debt is less than the
difference between the debt or part and the amount so deducted, the deficiency shall
be deductible in the previous year in which the ultimate recovery is made;
(iii) any such debt or part of debt may be deducted if it has already been written off
as irrecoverable in the accounts of an earlier previous year (being a previous year
relevant to the assessment year commencing on the 1st day of April, 1988, or any
earlier assessment year), but the Assessing Officer had not allowed it to be deducted
on the ground that it had not been established to have become a bad debt in that
year;
(iv) where any such debt or part of debt is written off as irrecoverable in the accounts of
the previous year (being a previous year relevant to the assessment year commencing
on the 1st day of April, 1988, or any earlier assessment year) and the Assessing
Officer is satisfied that such debt or part became a bad debt in any earlier previous
year not falling beyond a period of four previous years immediately preceding the
previous year in which such debt or part is written off, the provisions of sub-section
(6) of section 155 shall apply;
(v) where such debt or part of debt relates to advances made by an assessee to which
clause (viia) of sub-section (1) applies, no such deduction shall be allowed unless the
assessee has debited the amount of such debt or part of debt in that previous year
to the provision for bad and doubtful debts account made under that clause.
1) For allowance of Bad Debt, following 2 conditions need to be fulfilled:

The amount should be actually written off in the Books of Accounts
(i) The amount of Bad debt represents such income which has been offered to tax in
the Current Year or any preceding year.
2) The second condition given above does not apply to assessee engaged in Banking /
moneylending business.
3) 2nd Proviso to Sec.36 (1) (vii) – ICDS – 1 does not recognise conservatism as a concept,
consequently a particular amount may have to be recognised as income in accordance
with ICDS but the same amount may not be recognised as income as per AS. (i.e. Books
of account). In such situation, since the amount is not recognised in books of accounts,
the same cannot be within off in amounts.
For this purpose, 2nd proviso states, that if income is recognised as per ICDS without
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recording the same in books of accounts, then deduction for bad debts shall be
allowed, in the year when amount becomes irrecoverable and it shall be deemed as if
the amount is written off as bad.
4) Q) Ravi succeeded to his father’s business in the year 2018. In the previous year
ended 31.3.2022, Ravi has written off the balance in the name of ‘Y’ which relates
to supply made by his father, when he carried on business. Ravi desires to know
whether the write off could be eligible for deduction.
A) The deduction of bad debt is allowed if it is written off in the books of account
of the assessee. In this case, Ravi has succeeded to the business carried on by his
father. Under clause (vii) of section 36(1) the amount has been written off in the
books of account as irrecoverable is eligible for deduction provided the debt has
been taken into account in computing the income of the business in an earlier
previous year [vide section 36(2)]. Therefore, Ravi is eligible for deduction in respect
of the amount due in the name of Y which is written off in the books of account
as bad debt, even though the debt represents the amount due for the supplies
made by previous owner viz. deceased father of Ravi.[CIT v. T. Veerabhadra Rao,
K. Koteswara Rao and Co (1985) 155 ITR 152 (SC)]
5) The CBDT has, clarified vide Circular no. 12/2016, dated 30-05-2016, that claim for
any debt or part thereof in any previous year, shall be admissible under section 36(1)
(vii), if it is written off as irrecoverable in the books of accounts of the assessee for that
previous year and it fulfills the conditions stipulated in section 36(2). However, no such
requirement is there in law that the assessee has to establish that the debt has, in fact,
become irrecoverable.

S.36(1)(viia) in respect of any provision for bad and doubtful debts made by—
(a) a scheduled bank [not being a bank incorporated by or under the laws of a
country outside India] or a non-scheduled bank or a co-operative bank other
than a primary agricultural credit society or a primary co-operative agricultural
and rural development bank, an amount not exceeding eight and one-half
per cent of the total income (computed before making any deduction under
this clause and Chapter VIA) and an amount not exceeding ten per cent of the
aggregate average advances made by the rural branches of such bank computed
in the prescribed manner:
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Provided that a scheduled bank or a non-scheduled bank referred to in this sub-

clause shall, at its option, be allowed in any of the relevant assessment years,
deduction in respect of any provision made by it for any assets classified by the
Reserve Bank of India as doubtful assets or loss assets in accordance with the
guidelines issued by it in this behalf, for an amount not exceeding five per cent
of the amount of such assets shown in the books of account of the bank on the
last day of the previous year:
Provided further that for the relevant assessment years commencing on or after
the 1st day of April, 2003 and ending before the 1st day of April, 2005, the
provisions of the first proviso shall have effect as if for the words “five per cent”,
the words “ten per cent” had been substituted :
Provided also that a scheduled bank or a non-scheduled bank referred to in

this sub-clause shall, at its option, be allowed a further deduction in excess
of the limits specified in the foregoing provisions, for an amount not exceeding
the income derived from redemption of securities in accordance with a scheme
framed by the Central Government:
Provided also that no deduction shall be allowed under the third proviso unless
such income has been disclosed in the return of income under the head “Profits
and gains of business or profession.”
Explanation.—For the purposes of this sub-clause, “relevant assessment years”

means the five consecutive assessment years commencing on or after the 1st
day of April, 2000 and ending before the 1st day of April, 2005;
(b) a bank, being a bank incorporated by or under the laws of a country outside
India, an amount not exceeding five per cent of the total income (computed
before making any deduction under this clause and Chapter VI-A);
(c) a public financial institution or a State financial corporation or a State industrial

investment corporation, an amount not exceeding five per cent of the total
income (computed before making any deduction under this clause and Chapter
VI-A):
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Provided that a public financial institution or a State financial corporation or a

State industrial investment corporation referred to in this sub-clause shall, at its
option, be allowed in any of the two consecutive assessment years commencing
on or after the 1st day of April, 2003 and ending before the 1st day of April,
2005, deduction in respect of any provision made by it for any assets classified
by the Reserve Bank of India as doubtful assets or loss assets in accordance
with the guidelines issued by it in this behalf, of an amount not exceeding ten
per cent of the amount of such assets shown in the books of account of such
institution or corporation, as the case may be, on the last day of the previous
year;
(d) a non-banking financial company, an amount not exceeding five per cent of
the total income (computed before making any deduction under this clause and
Chapter VI-A).
(i) “non-scheduled bank” means a banking company as defined in clause (c) of section
5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled
bank;
(ia) “rural branch” means a branch of a scheduled bank or a non-scheduled bank

situated in a place which has a population of not more than ten thousand
according to the last preceding census of which the relevant figures have been
published before the first day of the previous year;
(ii) “scheduled bank” means the State Bank of India constituted under the State
Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State
Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new
bank constituted under section 3 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or
any other bank being a bank included in the Second Schedule to the Reserve
Bank of India Act, 1934 (2 of 1934);
(iii) “public financial institution” shall have the meaning assigned to it in section 4A
of the Companies Act, 1956 (1 of 1956);
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(iv) “State financial corporation” means a financial corporation established under

section 3 or section 3A or an institution notified under section 46 of the State
Financial Corporations Act, 1951 (63 of 1951);
(v) “State industrial investment corporation” means a Government company within

the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in
the business of providing long-term finance for industrial projects and eligible
for deduction under clause (viii) of this sub-section;
(vi) “co-operative bank”, “primary agricultural credit society” and “primary co-
operative agricultural and rural development bank” shall have the meanings
respectively assigned to them in the Explanation to sub-section (4) of section
80P;
(vii) “non-banking financial company” shall have the meaning assigned to it in clause
(f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934);
1) Generally, PFDD is not allowed as deduction except in case of following of 4 assessees:

(a) Indian bank
(b) Foreign bank
(c) Public financial institution / State financial Corporation / State Industrial
Investment Corporation.
(d) Non – Banking Financial Company (NBFC)
2) The prescribed rate of PFDD is as under:
Indian Bank  8.5% of Total income + 10% of aggregate average rural advances
Others  5% of Total Income
3) If there is any actual bad debt, then such bad debt is deductible to the extent it exceeds
credit balance of PFDD amount. For this purpose, assessee can maintain only one
combined account of PFDD.
4) Recovery of Bad Debts
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When amount is recovered against bad debts, we first need to find out:

Total debt – Allowed u/s 36 (1) (vii) = Unallowed portion.
Now there are 3 possibilities:
(a) Recovery > un allowed portion  Such excess will be taxed u/s 41(4)
(b) Recovery < an allowed portion = The deficiency shall be allowed as deduction in
the year of final / ultimate recovery.
(c) Recovery = un allowed portion  No tax treatment.
5) Example:
Total debt Allowed u/s 36 Unallowed Recovery Taxable
(1) (vii) portion
100 100 0 10 10
100 60 40 45 5
100 85 65 65 0
100 40 60 50 ----*
*36(2)(ii): Rs. 10 will be allowed as bad debt in the year of total income
6) PK Kaimal (Madras HC)

If bad debt was claimed by predecessor and recovery is made by successors then such
recovery is not taxable in the hands of successor.

S.36(1)(viii) in respect of any special reserve created and maintained by a specified
entity, an amount not exceeding twenty per cent of the profits derived from eligible
business computed under the head “Profits and gains of business or profession” (be-
fore making any deduction under this clause) carried to such reserve account:
Provided that where the aggregate of the amounts carried to such reserve account
from time to time exceeds twice the amount of the paid up share capital and of the
general reserves of the specified entity, no allowance under this clause shall be made
in respect of such excess.
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Explanation.—In this clause,—

(a) “specified entity” means,—
(i) a financial corporation specified in section 4A of the Companies Act, 1956
(1 of 1956);
(ii) a financial corporation which is a public sector company;
(iii) a banking company;
(iv) a co-operative bank other than a primary agricultural credit society or a
primary co-operative agricultural and rural development bank;
(v) a housing finance company; and
(vi) any other financial corporation including a public company;
(b) “eligible business” means,—

(i) in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii)
or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing
long-term finance for—
(A) industrial or agricultural development;
(B) development of infrastructure facility in India; or
(C) development of housing in India;
(ii) in respect of the specified entity referred to in sub-clause (v) of clause
(a), the business of providing long-term finance for the construction or
purchase of houses in India for residential purposes; and
(iii) in respect of the specified entity referred to in sub-clause (vi) of clause
(a), the business of providing long-term finance for development of
infrastructure facility in India;
(c) “banking company” means a company to which the Banking Regulation Act,
1949 (10 of 1949) applies and includes any bank or banking institution referred
to in section 51 of that Act;
(d) “co-operative bank”, “primary agricultural credit society” and “primary co-
respectively assigned to them in the Explanation to sub-section (4) of section
80P;
(e) “housing finance company” means a public company formed or registered in India
with the main object of carrying on the business of providing long-term finance
for construction or purchase of houses in India for residential purposes;
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(f) “public company” shall have the meaning assigned to it in section 3 of the
Companies Act, 1956 (1 of 1956);
(g) “infrastructure facility” means—

(i) an infrastructure facility as defined in the Explanation to clause (i) of sub-
section (4) of section 80-IA, or any other public facility of a similar nature
as may be notified by the Board in this behalf in the Official Gazette and
which fulfils the conditions as may be prescribed;
(ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause
(vi) of sub-section (4) of section 80-IA; and
(iii) an undertaking referred to in sub-section (10) of section 80-IB;
(h) “long-term finance” means any loan or advance where the terms under which
moneys are loaned or advanced provide for repayment along with interest
thereof during a period of not less than five years;
1) Deduction is LOWEST of the following:

(a) Actual transfer to reserve
(b) 20% of Profits from eligible business
(c) [2 X (Paid up share capital + General Reserve)] – Opening balance of special
reserve
2) Any withdrawal out of special reserve is taxable as PGBP is u/s 41 (4A).

S.36(1)(ix) any expenditure bona fide incurred by a company for the purpose of
promoting family planning amongst its employees :
Provided that where such expenditure or any part thereof is of a capital nature, one-
fifth of such expenditure shall be deducted for the previous year in which it was in-
curred; and the balance thereof shall be deducted in equal instalments for each of
the four immediately succeeding previous years :
Provided further that the provisions of sub-section (2) of section 32 and of sub-section
(2) of section 72 shall apply in relation to deductions allowable under this clause as
they apply in relation to deductions allowable in respect of depreciation :
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Provided further that the provisions of clauses (ii), (iii), (iv) and (v) of sub-section (2)
and sub-section (5) of section 35, of sub-section (3) of section 41 and of Explanation
1 to clause (1) of section 43 shall, so far as may be, apply in relation to an asset
representing expenditure of a capital nature for the purposes of promoting family
planning as they apply in relation to an asset representing expenditure of a capital
nature on scientific research;
S.36(1)(xii) any expenditure (not being in the nature of capital expenditure) incurred
by a corporation or a body corporate, by whatever name called, if,—
(a) it is constituted or established by a Central, State or Provincial Act;
(b) such corporation or body corporate, having regard to the objects and purposes of
the Act referred to in sub-clause (a), is notified by the Central Government in the
Official Gazette for the purposes of this clause; and
(c) the expenditure is incurred for the objects and purposes authorised by the Act
under which it is constituted or established;
S.36(1)(xiii) any amount of banking cash transaction tax paid by the assessee during
the previous year on the taxable banking transactions entered into by
him.
Explanation.—For the purposes of this clause, the expressions “banking cash trans-
action tax” and “taxable banking transaction” shall have the same meanings respec-
tively assigned to them under Chapter VII of the Finance Act, 2005;
S.36(1)(xiv) any sum paid by a public financial institution by way of contribution

to such credit guarantee fund trust for small industries as the Central
Government may, by notification in the Official Gazette, specify in this
behalf.
Explanation.—For the purposes of this clause, “public financial institution” shall have
the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);
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S.36(1)(xv) an amount equal to the securities transaction tax paid by the assessee in
respect of the taxable securities transactions entered into in the course
of his business during the previous year, if the income arising from such
taxable securities transactions is included in the income computed under
the head “Profits and gains of business or profession”.
Explanation.—For the purposes of this clause, the expressions “securities transaction
tax” and “taxable securities transaction” shall have the meanings respectively
assigned to them under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004);
If shares are held as capital asset then STT is not allowed as deduction while computing
Capital Gains. However, if shares are held as stock in trade then STT is allowed as
deduction while computing PGBP.
S.36(1)(xvi) an amount equal to the commodities transaction tax paid by the assessee
in respect of the taxable commodities transactions entered into in the
course of his business during the previous year, if the income arising
from such taxable commodities transactions is included in the income
computed under the head “Profits and gains of business or profession”.
Explanation.—For the purposes of this clause, the expressions “commodities

transaction tax” and “taxable commodities transaction” shall have the meanings
respectively assigned to them under Chapter VII of the Finance Act, 2013;

(xvii) the amount of expenditure incurred by a co-operative society engaged in the
business of manufacture of sugar for purchase of sugarcane at a price which is
equal to or less than the price fixed or approved by the Government;
Sugar cane factories generally pay a price higher than the statutory minimum price
[SMP] fixed by the government. This price which passes as a % profit to sugarcane
factory is called as Fixed cane price [FCP]. Sec. 36(1)(xvii) states that this fixed cane
price is eligible for deduction.
(xviii) marked to market loss or other expected loss as computed in accordance with
the income computation and disclosure standards notified under sub-section (2)
of section 145.
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Question 140
Discuss General Section for deduction of expenses incurred by assessee as stated in Section
37?
Answer
As per section 37(1), any expenditure –
- Which is not covered from sections 30 to 36;
- Which is not a capital expenditure;
- Which is not a personal expenditure;
- Which is laid out or expended wholly and exclusively in connection with business or
profession;
Shall be allowed as deduction while computing PGBP
Explanation 1 to section 37(1)

However, as per Explanation 1 to section 37, it is declared that any expenditure incurred for
any purpose which is an offence or which is prohibited by law, shall NOT be deemed to have
been incurred for the purposes of business or profession and no deduction shall be allowed
for such expenses.
Case laws:
1. Neelavathi & Others (Karnataka High Court)
If the assessee had incurred expenditure for the purpose of security, the same would
have been allowed as deduction. However, in the instant case, since the payment has
been made to the police and gundas to keep them away from the business premises,
such a payment is illegal and hence, not allowable as deduction.
2. Millennia Developers (P) Ltd (Karnataka High Court)
The amount paid to compound an offence is obviously a penalty and hence, does not
qualify for deduction under section 37. Merely describing the payment as a compounding
fee would not alter the character of the payment.
3. Khemchand Motilal Jain Tobacco Products Co (MP HC)
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Ransom paid to secure release of director who had gone on market survey and
captured by Maoists is an expenditure incurred wholly and exclusively for the purposes
of business. The fact that assessee had approached police who were unable to secure
release of such director proves the fact that assessee had not committed any offence
but acted in accordance with law.
4. Dr. TA Quereshi (SC)
Assessee was a Doctor who also dealt in drugs. The entire drugs of the assessee was
confiscated by Narcotics Department. It was held that such ‘loss’ was allowable under
section 28 and not section 37 and therefore, the explanation to section 37(1) did not
prohibit deduction for such ‘loss’
5. Circular No 5 of 2012 / Confederation of Indian Pharmaceutical Industry (SSI) v. CBDT (2013)

353 ITR 388 (H.P.)
Pharmaceuticals company are prohibited by Medical Council of India to give freebies /

gifts to doctors. Such gifts are against public policy and hence, such expenses shall be
disallowed for pharma companies.
6. Kap Scan & Diagonistics (P&H)
Referral fees paid by pathology centres to doctors are not legal and hence, disallowed
u/s. 37
[Note: It makes no difference that pathology centre has deducted tax at source on such
payments]
7. Malwa Vanaspati & Co (SC)
Penalty paid for breach of contract is allowed as deduction under section 37 since
breach of contract is not a violation of law;
Explanation 2 to section 37(1)
As per this Explanation, it is hereby declared that for the purposes of sub-section (1), any
expenditure incurred by an assessee on the activities relating to corporate social responsibility
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referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to
be an expenditure incurred by the assessee for the purposes of the business or profession.
Note: It is observed that CSR expenses are disallowed “for the purposes of section 37(1)”.
If such expenses are otherwise allowable under other sections like 35CCA etc. then such
deduction shall be allowed. Further, there is no prohibition to claim deduction u/s. 80G if
such CSR expenses are in the form of donations (except in case of Swacch Bharat Kosh and
Clean Ganga Fund).
Donation to Political Party

As per section 37(2B), no allowance shall be made in respect of expenditure incurred by an
assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published
by a political party.
However, such expenses shall be allowed as deduction u/s. 80GGB (for companies) and
section 80GGC (for others) if such expenses are incurred otherwise than through cash.
Miscellaneous Issues u/s. 37:

1. Is expenditure towards raising share capital / loan allowable u/s. 37:
It was held in the case of India Cements (SC) that loans are repayable in nature
and therefore, any expenses incurred for raising a loan (like processing fees etc) are
allowable under section 37;
However, if expenses are incurred towards raising share capital then the same are
not allowable (Brooke Bond (SC)). Further, in the case of Punjab State Industrial
Development Corporation (SC) it was held that expenses incurred for the purposes
of raising authorized capital of the company is also not allowed as deduction under
section 37. However, if bonus issue is made, then expenses incurred in connection
therewith are allowable since bonus issue does not entail inflow of resources (General
Insurance Corporation (SC)).
It was held in the case of Mascon Technical Services (Madras) that if expenditure is
incurred for share issue which was later aborted then such expenses are also disallowed.
Also, in the case of ITC Limited (Karnataka HC) it was held that expense towards raising
debentures is allowable even if such debentures are compulsorily convertible into
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equity at a future point in time.
Legal charges incurred for amendment of articles of association is allowable as

deduction (Modi Spinning & Weaving (Alla.))
Is interest income from share application money deposited in bank eligible for set-off
against public issue expenses or should such interest be subject to tax under the head
‘Income from Other Sources’?
CIT v. Sree Rama Multi Tech Ltd. [2018] 403 ITR 426 (SC)
Facts of the Case: The assessee-company is engaged in the manufacture of multi-
layer tubes and other speciality packaging and plastic products. It came out with an
initial public issue of shares during the relevant assessment years and deposited the
share application money received in banks. The interest of ` 1,71,30,202 earned on
the deposits was shown in the return of income originally filed under the head ‘Income
from Other Sources’. Subsequently, the assessee-company raised an additional
ground before the Tribunal for allowing the set off of such interest against the public
issue expenses.
Issue: The issue under consideration is whether the interest income from share
application money is taxable under the head ‘Income from Other Sources’, or can the
same be set-off against public issue expenses.
Supreme Court’s Observations: The Supreme Court observed that the assessee-
company was statutorily required to keep share application money in a separate
account till the allotment of shares was completed. Part of the share application
money would normally have to be returned to unsuccessful applicants, and therefore,
the entire share application money would not ultimately be appropriated by the
company. The interest earned was inextricably linked with the requirement of raising
share capital. Any surplus money deposited in the bank for the purpose of earning
interest is liable to be taxed as “Income from Other Sources”. Here, the share application
money was deposited with the bank not to make additional income but to comply
with the statute. The interest accrued on such deposit is merely incidental. Moreover,
the issue of shares relates to capital structure of the company and hence, expenses
incurred in connection with the issue of shares are to be capitalized. Accordingly, the
accrued interest is not liable to be taxed as “Income from Other Sources”; the same
is eligible to be set-off against public issue expenses.
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Supreme Court’s Decision: The Supreme Court concurred with the High Court’s view
that the interest accrued on deposit of share application money with bank is eligible
for set off against the public issue expenses; such interest is, hence, not taxable as
“Income from Other Sources”.
2. Education expenses of director’s child:

In the case of Echjay Forgings Ltd (Bombay High Court) it was held that if there was no
nexus between the education expenditure incurred abroad for the director’s son and
the business of the assessee company then such expenditure was not deductible.
3. Membership expenses to Clubs / health clubs:
Many a times, corporates incur expenses towards the social club membership for their
senior executives / management. It has been held in the case of OTIS Elevators (Bom.
HC) that such expenses shall be allowed as deduction;
4. Guarantee fees provision:
In the case of Rotork Controls (SC), it was observed by the assessee that 3 per cent of
their products are generally returned by the customers as being defective. Therefore,
for the year under consideration, the assessee made a provision for expenses towards
“defect liability” which was 3 per cent of current year sales. The AO observed that the
liability was not crystallised and therefore, the expenditure could not be deducted.
However, SC observed that the assessee had reasonably predicted the sales return and
hence, such expenses were “ascertained”. Therefore, deduction shall be allowable for
such expenses;
5. Expenditure on travel of spouses:
Many times, spouses of directors travel along with directors during business visits.
Whether such expenses are allowable? It has been held in the case of Glaxo Smith Kline
(Del) that if spouse accompanies the directors to accompany him for social gathering
at specific invitation of customer / client of the company, then such expenses are
allowable. However, in TS Hajee Moosa (Bom) it was held that if spouse accompanies
director to take care of his health, then such expenditure is not allowable.
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6. Sasoon David and Co P Ltd (SC)
Retrenchment compensation paid to employees are deductible as expenses u/s. 37;
7. Circular No 16/2015:
If a feature film is abandoned, then expenses incurred for such film is allowed as
deduction;
Expenses for feature film
Film Releases Film abandoned
Rule 9A Circular No 16/2015:

Expenses deductible
Film releases Film released for less than

Atleast 90 days 90 days
Prior to year end
Entire expense Expense uptill revenue collection

Allowed allowed in year of release;
Balance expenses allowed next year
8. Expenses towards new project, which is later abandoned:

It was held in the case of Priya Village Roadshows Ltd (Del) that if such new project was
in connection with existing business then such expenses are revenue in nature and
therefore, allowable;
However, if such project was in connection with new proposed business, then such
expense on abandoned project is capital in nature and therefore, not allowable.
(Note: If such expense is deductible u/s. 35D, then such expenses shall not be considered
u/s. 37)
9. Insurance premium for keyman policy is deductible u/s. 37 (CBDT Circular 762 of 1998)
10. Secret Commission is prohibited by law and hence, not allowable;
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11. Sometimes, Construction contractors create infrastructure projects on BOT basis (i.e.
Built, operate, Transfer). In such cases, the contractors are allowed to collect their
costs by operating toll booths for certain number of years. In such cases, the costs
shall be amortised over the period of toll (Circular No 9 of 2014)
12. CIT v. Orient Ceramics and Industries Ltd. (2013) 358 ITR 49 (Delhi)
The High Court held that expenditure incurred by assessee on display of glow sign
board at Dealer shops was revenue in nature as:
(i) The expenditure incurred by the assessee on glow sign boards does not bring into
existence an asset or advantage for the enduring benefit of the business, which is
attributable to the capital.
(ii) The glow sign board is not an asset of permanent nature. It has a short life.
(iii) The materials used in the glow sign boards decay with the effect of weather.
Therefore, it requires frequent replacement. Consequently, the assessee has to

incur expenditure on glow sign boards regularly in almost each year.
(iv) The assessee incurred expenditure on the glow sign boards with the object of
facilitating the business operation and not with the object of acquiring asset of
enduring nature.
13. Can expenditure incurred on alteration of a dam to ensure adequate supply of water for the
smelter plant owned by the assessee be allowed as revenue expenditure?
CIT v. Hindustan Zinc Ltd. (2010) 322 ITR 478 (Raj.)
Facts of the case: The assessee company owned a super smelter plant which requires
large quantity of water for its day-to-day operation, in the absence of which it would
not be able to function. The assessee, therefore, incurred expenditure for alteration of
the dam (constructed by the State Government) to ensure sharing of the water with
the State Government without having any right or ownership in the dam or water. The
assessee’s share of water is also determined by the State Government. The assessee
claimed the expenditure as deduction under section 37, which was disallowed by the
Assessing Officer on the ground that it was of capital nature.
Tribunal view: The Tribunal, however, was of the view that since the object and effect of
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the expenditure incurred by the assessee is to facilitate its trade operation and enable
the management to conduct business more efficiently and profitably, the expenditure
is revenue in nature and hence, allowable as deduction.
High Court’s Observations & Decision: The High Court observed that the expenditure
incurred by the assessee for commercial expediency relates to carrying on of business.
The expenditure is of such nature which a prudent businessman may incur for the purpose
of his business. The operational expenses incurred by the assessee solely intended for
the furtherance of the enterprise can by no means be treated as expenditure of capital
nature
Question 140
Discuss provisions of Section 40: Amounts not deductible:
Answer
Section 40 provides conditions for disallowances of expenses which are otherwise allowable
under law:
1) As per S.40(a)(i) any interest, royalty, fees for technical services or other sum chargeable
under this Act, which is payable—
(A) outside India; or
(B) in India to a non-resident, not being a company or to a foreign company,

on which tax is deductible at source under Chapter XVII-B and such tax has not been
deducted or, after deduction, has not been paid on or before the due date specified in
sub-section (1) of section 139, then 100% of the expenses shall be disallowed:
Provided that where in respect of any such sum, tax has been deducted in any
subsequent year, or has been deducted during the previous year but paid after the
due date specified in sub-section (1) of section 139, such sum shall be allowed as a
deduction in computing the income of the previous year in which such tax has been
paid.
Provided further that where an assessee fails to deduct the whole or any part of the
tax in accordance with the provisions of Chapter XVII-B on any such sum but is not
deemed to be an assessee in default under the first proviso to sub-section (1) of section
201, then, for the purposes of this sub-clause, it shall be deemed that the assessee
has deducted and paid the tax on such sum on the date of furnishing of return of
income by the payee referred to in the said proviso.
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2) As per Section 40(a)(ia), 30 per cent of any sum payable to a resident, on which tax
is deductible at source under Chapter XVII-B and such tax has not been deducted or,
after deduction, has not been paid on or before the due date specified in sub-section
(1) of section 139 shall be disallowed:
Provided that where in respect of any such sum, tax has been deducted in any
subsequent year, or has been deducted during the previous year but paid after the due
date specified in sub-section (1) of section 139, thirty per cent of such sum shall be
allowed as a deduction in computing the income of the previous year in which such tax
has been paid :
Provided further that where an assessee fails to deduct the whole or any part of the
tax in accordance with the provisions of Chapter XVII-B on any such sum but is not
deemed to be an assessee in default under the first proviso to sub-section (1) of section
201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has
deducted and paid the tax on such sum on the date of furnishing of return of income
by the 38[resident] payee referred to in the said proviso.
3) Example: [Expenses incurred for FY 2021-22]

TDS deduction TDS deposited Expense allowed
date on FY 21-22 FY 22-23 FY 23-24
28.02.2022 02.03.2022 100% ---- ----
28.02.2022 10.10.2022 70% 30%
01.04.2022 02.04.2022 70% 30%
01.04.2022 10.10. 2022 70% 30%
28.02.2022 01.04.2022 70% ---- 30%
01.04.2022 01.04.2023 70% ---- 30%
4) CIT v. Maruti Suzuki India Limited [2018] 407 ITR 165 (Del)
Can payments made by an assessee to a non-resident agent who does not have any
income assessable in India be disallowed under section 40(a)(i) for non-deduction of
tax at source on the ground that no application was made by the assessee under
section 195(2) for making deduction of tax at source at nil rate?
Ans: The High Court observed that the non-resident agent who operated outside India did
not have any income arising in India. The High Court, accordingly, held that where
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the assessee has made payment to a non-resident agent where such income is not
chargeable to tax in India, section 40(a)(i) could not be invoked to disallow deduction
of such payment for non-deduction of tax at source, while computing the business
income of the assessee.
5) CIT v/s Hindustan Thompson Association (ITAT Bom)
The assessee was required to withhold tax @ 10%. However, the assessee actually
deducted tax at a lower rate  2%. It was held by ITAT Bombay that S.40(a)(ia), is
attracted in case of non – deduction and NOT short deduction.
these shall be no disallowance.
6) Whether section 40(a)(ia) is attracted when amount is not ‘payable’ to a sub-contractor

but has been actually paid?
Palam Gas Service v. CIT [2017] 394 ITR 300 (SC)
Facts of the case: The assessee, Palam Gas Service, is engaged in the business of
purchase and sale of LPG cylinders. The assessee had arranged for the transportation
to be done through three sub-contractors within the meaning of section 194C. During
the relevant assessment year, when the assessee made freight payments of `20,97,689
to the sub-contractors, it did not deduct tax at source. The Assessing Officer disallowed
the freight expenses as per section 40(a)(ia) on account of failure to deduct tax. The
assessee contended that section 40(a)(ia) did not apply as the amount was not ‘payable’
but had been actually paid.
Issue: Whether the provisions of Section 40(a)(ia) would be attracted when the amount
is not ‘payable’ to a sub-contractor but has been actually paid? Would the obligation
to deduct tax depend on the method of accounting followed by an assessee?
Supreme Court’s Observations: The Supreme Court noted the difference in opinion
amongst the various High Courts. On the one hand, the High Courts of Punjab &
Haryana, Madras, Calcutta and Gujarat held that Section 40(a)(ia) extended to amounts
actually paid. The Allahabad High Court had, however, held otherwise. The Supreme
Court agreed with the observations of the majority High Courts and held that section
40(a)(ia) covers not only those cases where the amount is payable but also when it is
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paid. Accordingly, the judgment of the Allahabad High Court in CIT v. Vector Shipping
Services (P.) Ltd. [2013] 357 ITR 642 stands overruled. The Supreme Court reaffirmed
that the obligation to deduct tax at source is mandatory and applicable irrespective
of the method of accounting adopted. If the assessee follows the mercantile system
of accounting, then, the moment amount was credited to the account of the payee on
accrual of liability, tax was required to be deducted at source. If the assessee follows
cash system of accounting, then, tax is required to be deducted at source at the time
of making payment.
Supreme Court’s Decision: The Supreme Court, accordingly, upheld the decision of the
majority High Courts that section 40(a)(ia) would be attracted for failure to deduct tax
in both cases i.e., when the amount is payable or when the amount is paid, as the case
may be, depending on the system of accounting followed by the assessee.
The Apex Court affirms its decision in Shree Choudhary Transport Company vs. CIT
[2020] 426 ITR 0289
7) As per S.40(a)(ib) any consideration paid or payable to a non-resident for a specified

service on which equalisation levy is deductible under the provisions of Chapter VIII of
the Finance Act, 2016, and such levy has not been deducted or after deduction, has not
been paid on or before the due date specified in sub-section (1) of section 139 shall be
disallowed:
Provided that where in respect of any such consideration, the equalisation levy has
been deducted in any subsequent year or has been deducted during the previous year
but paid after the due date specified in sub-section (1) of section 139, such sum shall
be allowed as a deduction in computing the income of the previous year in which such
levy has been paid;
8) As per Section 40(a)(ic) any sum paid on account of fringe benefit tax under Chapter
XIIH shall be disallowed;
9) As per Section 40(a)(ii) any sum paid on account of any rate or tax levied on the profits
or gains of any business or profession or assessed at a proportion of, or otherwise on
the basis of, any such profits or gains shall be disallowed.
Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes
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of this sub-clause, any sum paid on account of any rate or tax levied includes and shall
be deemed always to have included any sum eligible for relief of tax under section 90
or, as the case may be, deduction from the Indian income-tax payable under section
91.

Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes
of this sub-clause, any sum paid on account of any rate or tax levied includes any sum
eligible for relief of tax under section 90A;
Mewar Motors (Rajasthan HC)

Interest is in the nature of tax which has been paid.
Note:
Tax
Direct tax Indirect tax
Tax Interest Penalty Tax Interest Penalty

     
Allowed Disallowed Disallowed Allowed Allowed Disallowed
u/s u/s u/s37 u/s37
40(a)(ii) 40(a)(ii)
10) As per Section 40(a)(iia) any sum paid on account of wealth-tax shall be disallowed.
Explanation.—For the purposes of this sub-clause, “wealth-tax” means wealth-tax

chargeable under the Wealth-tax Act, 1957 (27 of 1957), or any tax of a similar
character chargeable under any law in force in any country outside India or any tax
chargeable under such law with reference to the value of the assets of, or the capital
employed in, a business or profession carried on by the assessee, whether or not the
debts of the business or profession are allowed as a deduction in computing the amount
with reference to which such tax is charged, but does not include any tax chargeable
with reference to the value of any particular asset of the business or profession;
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11) As per Section 40(a)(iib) any amount—

(A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any
other fee or charge, by whatever name called, which is levied exclusively on; or
(B) which is appropriated, directly or indirectly, from,
a State Government undertaking by the State Government.
Explanation.—For the purposes of this sub-clause, a State Government undertaking

includes—
(i) a corporation established by or under any Act of the State Government;
(ii) a company in which more than fifty per cent of the paid-up equity share capital
is held by the State Government;
(iii) a company in which more than fifty per cent of the paid-up equity share capital
is held by the entity referred to in clause (i) or clause (ii) (whether singly or taken
together);
(iv) a company or corporation in which the State Government has the right to appoint
the majority of the directors or to control the management or policy decisions,
directly or indirectly, including by virtue of its shareholding or management rights
or shareholders agreements or voting agreements or in any other manner;
(v) an authority, a board or an institution or a body established or constituted by

or under any Act of the State Government or owned or controlled by the State
Government;
12) As per Section 40(a)(iii) any payment which is chargeable under the head “Salaries”, if
it is payable—
(A) outside India; or
(B) to a non-resident,
and if the tax has not been paid thereon nor deducted therefrom under Chapter
XVII-B shall be disallowed;
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13) As per Section 40(a)(iv) any payment to a provident or other fund established for
the benefit of employees of the assessee, unless the assessee has made effective
arrangements to secure that tax shall be deducted at source from any payments
made from the fund which are chargeable to tax under the head “Salaries” shall be
disallowed;
14) As per Section 40(a)(v) any tax actually paid by an employer referred to in clause
(10CC) of section 10 shall be disallowed;
Question 141
Discuss provisions of Section 40A(2)?
Answer
Expenses or payments not deductible in certain circumstances.
1) As per Section 40A(1), the provisions of this section shall have effect notwithstanding
anything to the contrary contained in any other provision of this Act relating to the
computation of income under the head “Profits and gains of business or profession”.
2) As per Section 40A(2)(a) where the assessee incurs any expenditure in respect of which
payment has been or is to be made to any person referred to below, and the Assessing
Officer is of opinion that such expenditure is excessive or unreasonable having regard to
the fair market value of the goods, services or facilities for which the payment is made
or the legitimate needs of the business or profession of the assessee or the benefit
derived by or accruing to him therefrom, so much of the expenditure as is so considered
by him to be excessive or unreasonable shall not be allowed as a deduction:
Provided that for an assessment year commencing on or before the 1st day of April,
2016 no disallowance, on account of any expenditure being excessive or unreasonable
having regard to the fair market value, shall be made in respect of a specified domestic
transaction referred to in section 92BA, if such transaction is at arm’s length price as
defined in clause (ii) of section 92F.
3) As per Section 40A(2)(b) the following persons shall be treated as specified persons:
Sr. No. Nature of Assessee Specified Person
1. where the assessee is an any relative of the assessee;
individual
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2. where the assessee is a any director of the company, partner of

company, firm, association the firm, or member of the association
of persons or Hindu or family, or any relative of such director,
undivided family partner or member;
3. Any assessee any individual who has a substantial
interest in the business or profession of the
assessee, or any relative of such individual;
4. Any Assessee a company, firm, association of persons or
Hindu undivided family having a substantial
interest in the business or profession of
the assessee or any director, partner or
member of such company, firm, association
or family, or any relative of such director,
partner or member or any other company
carrying on business or profession in
which the first mentioned company has
substantial interest;
5. Any Assessee a company, firm, association of persons or
Hindu undivided family of which a director,
partner or member, as the case may be,
has a substantial interest in the business or
profession of the assessee; or any director,
partner or member of such company, firm,
association or family or any relative of such
director, partner or member;
6. Any assessee who carries individual, or any relative of such assessee,
on business or profession has a substantial interest in the business or
where the assessee being profession of that person
an individual
7. Any assessee who carries any director of such company, partner of
on business or profession such firm or member of the association
where the assessee being a or family, or any relative of such director,
company, firm, association partner or member, has a substantial
of persons or Hindu interest in the business or profession of
undivided family that person
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4) A person shall be deemed to have a substantial interest in a business or profession, if—

(a) in a case where the business or profession is carried on by a company, such person
is, at any time during the previous year, the beneficial owner of shares (not being
shares entitled to a fixed rate of dividend whether with or without a right to
participate in profits) carrying not less than twenty per cent of the voting power;
and
(b) in any other case, such person is, at any time during the previous year, beneficially
entitled to not less than twenty per cent of the profits of such business or
profession.

United exports v/s CIT (Delhi HC): Discount allowed to related person is not
covered u/s 40A(2), since discount is not “expenditure for which payment has
been made”.
5) As per Section 40A(3), where the assessee incurs any expenditure in respect of which a
payment or aggregate of payments made to a person in a day, otherwise than by an
account payee cheque drawn on a bank or account payee bank draft, or use of electronic
clearing system through a bank account or through such other electronic mode as may
be prescribed, exceeds ten thousand rupees, no deduction shall be allowed in respect
of such expenditure.
6) As per Section 40A(3A) where an allowance has been made in the assessment for
any year in respect of any liability incurred by the assessee for any expenditure and
subsequently during any previous year (hereinafter referred to as subsequent year)
the assessee makes payment in respect thereof, otherwise than by an account payee
cheque drawn on a bank or account payee bank draft, or use of electronic clearing
system through a bank account or through such other electronic mode as may be
prescribed], the payment so made shall be deemed to be the profits and gains of
business or profession and accordingly chargeable to income-tax as income of the
subsequent year if the payment or aggregate of payments made to a person in a day,
exceeds ten thousand rupees:
7) Cases and circumstances in which a payment or aggregate of payments exceeding ten

thousand rupees may be made to a person in a day, otherwise than by an account payee
cheque drawn on a bank or account payee bank draft or use of electronic clearing system
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through a bank account or through such other electronic mode as prescribed in rule 6ABBA IS
STILL ALLOWED AS DEDUCTION.
6DD. No disallowance under sub-section (3) of section 40A shall be made and no
payment shall be deemed to be the profits and gains of business or profession under
sub-section (3A) of section 40A where a payment or aggregate of payments made
to a person in a day, otherwise than by an account payee cheque drawn on a bank
or account account payee bank draft or use of electronic clearing system through a
bank account or through such other electronic mode as prescribed under rule 6ABBA,
exceeds ten thousand rupees
(a) where the payment is made to—
(i) the Reserve Bank of India or any banking company as defined in
clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of
1949);
(ii) the State Bank of India or any subsidiary bank as defined in section
2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of
1959);
(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society or any primary credit society
as defined under section 56 of the Banking Regulation Act, 1949
(10 of 1949);
(v) the Life Insurance Corporation of India established under section 3
of the Life Insurance Corporation Act, 1956 (31 of 1956);
(b) where the payment is made to the Government and, under the rules framed
by it, such payment is required to be made in legal tender;
(c) where the payment is made by—
(i) any letter of credit arrangements through a bank;
(ii) a mail or telegraphic transfer through a bank;
(iii) a book adjustment from any account in a bank to any other account
in that or any other bank;
(iv) a bill of exchange made payable only to a bank;
(v) to [ *** ]
3
(vii)
Explanation.—For the purposes of this clause and clause (g), the term
“bank” means any bank, banking company or society referred to in sub-
clauses (i) to (iv) of clause (a) and includes any bank [not being a banking
company as defined in clause (c) of section 5 of the Banking Regulation
Act, 1949 (10 of 1949)], whether incorporated or not, which is established
outside India;
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(d) where the payment is made by way of adjustment against the amount
of any liability incurred by the payee for any goods supplied or services
rendered by the assessee to such payee;
(e) where the payment is made for the purchase of—
(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat, hides
and skins) or dairy or poultry farming; or
(iii) fish or fish products; or
(iv) the products of horticulture or apiculture,
to the cultivator, grower or producer of such articles, produce or products;
(f) where the payment is made for the purchase of the products manufactured
or processed without the aid of power in a cottage industry, to the producer
of such products;
(g) where the payment is made in a village or town, which on the date of such
payment is not served by any bank, to any person who ordinarily resides,
or is carrying on any business, profession or vocation, in any such village
or town;
(h) where any payment is made to an employee of the assessee or the heir of
any such employee, on or in connection with the retirement, retrenchment,
resignation, discharge or death of such employee, on account of gratuity,
retrenchment compensation or similar terminal benefit and the aggregate
of such sums payable to the employee or his heir does not exceed fifty
thousand rupees;
(i) where the payment is made by an assessee by way of salary to his
employee after deducting the income-tax from salary in accordance with
the provisions of section 192 of the Act, and when such employee—
(i) is temporarily posted for a continuous period of fifteen days or
more in a place other than his normal place of duty or on a ship;
and
(ii) does not maintain any account in any bank at such place or ship;
(j) where the payment was required to be made on a day on which the banks
were closed either on account of holiday or strike.
(k) where the payment is made by any person to his agent who is required to
make payment in cash for goods or services on behalf of such person;
(l) where the payment is made by an authorised dealer or a money changer
against purchase of foreign currency or travellers cheques in the normal
course of his business.
Explanation.—For the purposes of this clause, the expressions “authorised
dealer” or “money changer” means a person authorised as an authorised
dealer or a money changer to deal in foreign currency or foreign exchange
under any law for the time being in force.
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8) However, in the case of payment made for plying, hiring or leasing goods carriages,
the provisions of sub-sections (3) and (3A) shall have effect as if for the words “ten
thousand rupees”, the words “thirty-five thousand rupees” had been substituted.
9) Also, notwithstanding anything contained in any other law for the time being in force
or in any contract, where any payment in respect of any expenditure has to be made
by an account payee cheque drawn on a bank or account payee bank draft or use of
electronic clearing system through a bank account or through such other electronic
mode as may be prescribed in order that such expenditure may not be disallowed as
a deduction under sub-section (3), then the payment may be made by such cheque
or draft or electronic clearing system 75[or such other electronic mode as may be
prescribed]; and where the payment is so made or tendered, no person shall be allowed
to raise, in any suit or other proceeding, a plea based on the ground that the payment
was not made or tendered in cash or in any other manner.
10) Section 40A(3) v/s Section 40A(2)

Suppose your pay `60,000 is paid as advertisement expenses to a related person in
cash. Now since 40A(2) appears first, we give effect first to that sub-section. So, if
`52,000 is excessive it is disallowed u/s 40A(2) and balance `8,000 is disallowed u/s
40A(3).
Question 142
Sec.41 (1): Benefit in respect of loss, expenditure or trading liability
Answer
1) Where an allowance or deduction has been made in the assessment for any year in
respect of loss, expenditure or trading liability incurred by the assessee (hereinafter
referred to as the first-mentioned person) and subsequently during any previous year—
(a) the first-mentioned person has obtained, whether in cash or in any other manner
whatsoever, any amount in respect of such loss or expenditure or some benefit
in respect of such trading liability by way of remission or cessation thereof, the
amount obtained by such person or the value of benefit accruing to him shall
be deemed to be profits and gains of business or profession and accordingly
chargeable to income-tax as the income of that previous year, whether the
business or profession in respect of which the allowance or deduction has been
made is in existence in that year or not; or
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(b) the successor in business has obtained, whether in cash or in any other manner
whatsoever, any amount in respect of which loss or expenditure was incurred
by the first-mentioned person or some benefit in respect of the trading liability
referred to in clause (a) by way of remission or cessation thereof, the amount
obtained by the successor in business or the value of benefit accruing to the
successor in business shall be deemed to be profits and gains of the business
or profession, and accordingly chargeable to income-tax as the income of that
previous year.
2) For the purposes of this sub-section, the expression “loss or expenditure or some
benefit in respect of any such trading liability by way of remission or cessation thereof”
shall include the remission or cessation of any liability by a unilateral act by the first-
mentioned person under clause (a) or the successor in business under clause (b) of that
sub-section by way of writing off such liability in his accounts.
3) For the purposes of this sub-section, “successor in business” means,—

(i) where there has been an amalgamation of a company with another company,
the amalgamated company;
(ii) where the first-mentioned person is succeeded by any other person in that
business or profession, the other person;
(iii) where a firm carrying on a business or profession is succeeded by another firm,
the other firm;
(iv) where there has been a demerger, the resulting company.
4) JK Synthetics (Supreme Court)

The assessee received a demand notice from the Sales Tax department raising a demand
by 100 crores. Assessee challenged this in High court but did not pay any amount to
the Government. However the expense was debited to the P/L as a trading liability.
High Court decided the matter in favour of assessee. However, sales tax department
challenged the order in Supreme Court.
Question arose whether such amount is taxable in the hands of assesseee.
SC need that in respect of trading liability 41(1) case be invoked only when there is a
remission or cessation. This indicates of finality on the matter to final clauses.
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Since sales tax dept. had appealed to Supreme Court, these was no finality on the
nature and 41(1) cannot be invoked.
5) Polyflex India (Supreme Court)

Facts were similar to JK synthetics, the only difference being that demand was raised by
excise dept. and assessee deposited this amount with the department under PROTEST.
After HC decision assessee received a refund, but excise department challenged this
order in Supreme Court.
It was held the moment assessee deposited the amount it was no longer a trading
liability but became expenditure.
In respect of expenditure the moment any amount is received, section 41(1) is attracted.
Finality of matter is irrelevant.
6) Is waiver of loan obtained for business purpose a taxable amount under PGBP?
It was held by Supreme Court in Mahindra & Mahindra Limited that benefit arising due
to waiver cannot be taxed u/s 41(1). This is because there was no deduction obtained
in respect of such amount. However, such waiver being an incidental business benefit
is taxable u/s 28(i).
Similarly trade advances or business deposits received which are other forfeited or which
have because time barred are business benefit taxable u/s 28 (i) – (Solid Containers
Caselaw).
Question 143
Discuss provisions of Section 43B of the Act?
Answer
Certain deductions to be only on actual payment:
1) As per Section 43B of the Act, notwithstanding anything contained in any other provision
of this Act, a deduction otherwise allowable under this Act in respect of—
(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever
name called, under any law for the time being in force, or
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(b) any sum payable by the assessee as an employer by way of contribution to any
provident fund or superannuation fund or gratuity fund or any other fund for the
welfare of employees, or
(c) any sum referred to in clause (ii) of sub-section (1) of section 36, or
(d) any sum payable by the assessee as interest on any loan or borrowing from any
public financial institution or a State financial corporation or a State industrial
investment corporation, in accordance with the terms and conditions of the
agreement governing such loan or borrowing , or
Following clause (da) shall be inserted after clause (d) of section 43B by the Act No. 23 of
2019, w.e.f. 1-4-2020 :
(da) any sum payable by the assessee as interest on any loan or borrowing from a
deposit taking non-banking financial company or systemically important non-
deposit taking non-banking financial company, in accordance with the terms and
conditions of the agreement governing such loan or borrowing, or
(e) any sum payable by the assessee as interest on any loan or advances from a
scheduled bank or a co-operative bank other than a primary agricultural credit
society or a primary co-operative agricultural and rural development bank in
accordance with the terms and conditions of the agreement governing such loan
or advances, or
(f) any sum payable by the assessee as an employer in lieu of any leave at the credit
of his employee, or
(g) any sum payable by the assessee to the Indian Railways for the use of railway
assets,
shall be allowed (irrespective of the previous year in which the liability to pay such sum
was incurred by the assessee according to the method of accounting regularly employed
by him) only in computing the income referred to in section 28 of that previous year in
which such sum is actually paid by him:
Provided that nothing contained in this section shall apply in relation to any sum which
is actually paid by the assessee on or before the due date applicable in his case for
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furnishing the return of income under sub-section (1) of section 139 in respect of the
previous year in which the liability to pay such sum was incurred as aforesaid and the
evidence of such payment is furnished by the assessee along with such return.
Explanation 1.—For the removal of doubts, it is hereby declared that where a deduction
in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in
computing the income referred to in section 28 of the previous year (being a previous
year relevant to the assessment year commencing on the 1st day of April, 1983, or
any earlier assessment year) in which the liability to pay such sum was incurred by
the assessee, the assessee shall not be entitled to any deduction under this section in
respect of such sum in computing the income of the previous year in which the sum is
actually paid by him.
Explanation 2.—For the purposes of clause (a), as in force at all material times, “any
sum payable” means a sum for which the assessee incurred liability in the previous
year even though such sum might not have been payable within that year under the
relevant law.
Explanation 3.—For the removal of doubts it is hereby declared that where a deduction
in respect of any sum referred to in clause (c) or clause (d) of this section is allowed in
computing the income referred to in section 28 of the previous year (being a previous
year relevant to the assessment year commencing on the 1st day of April, 1988, or
any earlier assessment year) in which the liability to pay such sum was incurred by
the assessee, the assessee shall not be entitled to any deduction under this section in
respect of such sum in computing the income of the previous year in which the sum is
actually paid by him.
Explanation 3A.—For the removal of doubts, it is hereby declared that where a deduction
in respect of any sum referred to in clause (e) of this section is allowed in computing
the income referred to in section 28 of the previous year (being a previous year relevant
to the assessment year commencing on the 1st day of April, 1996, or any earlier
assessment year) in which the liability to pay such sum was incurred by the assessee,
the assessee shall not be entitled to any deduction under this section in respect of such
sum in computing the income of the previous year in which the sum is actually paid by
him.
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Following Explanation 3AA shall be inserted after Explanation 3A to section 43B by the Act
No. 23 of 2019, w.e.f. 1-4-2020 :
Explanation 3AA.—For the removal of doubts, it is hereby declared that where a
deduction in respect of any sum referred to in clause (da) is allowed in computing the
income referred to in section 28, of the previous year (being a previous year relevant
him.
Explanation 3B.—For the removal of doubts, it is hereby declared that where a deduction
in respect of any sum referred to in clause (f) of this section is allowed in computing the
income, referred to in section 28, of the previous year (being a previous year relevant
him.
Explanation 3C.—For the removal of doubts, it is hereby declared that a deduction of

any sum, being interest payable under clause (d) of this section, shall be allowed if
such interest has been actually paid and any interest referred to in that clause which
has been converted into a loan or borrowing shall not be deemed to have been actually
paid.
Following Explanation 3CA shall be inserted after Explanation 3C to section 43B by the Act
No. 23 of 2019, w.e.f. 1-4-2020 :
Explanation 3CA.—For the removal of doubts, it is hereby declared that a deduction of
any sum, being interest payable under clause (da), shall be allowed if such interest has
been actually paid and any interest referred to in that clause which has been converted
into a loan or borrowing shall not be deemed to have been actually paid.
Explanation 3D.—For the removal of doubts, it is hereby declared that a deduction of

any sum, being interest payable under clause (e) of this section, shall be allowed if
such interest has been actually paid and any interest referred to in that clause which
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has been converted into a loan or advance shall not be deemed to have been actually
paid.
Explanation 4.—For the purposes of this section,—

(a) “public financial institutions” shall have the meaning assigned to it in section 4A
of the Companies Act, 1956 (1 of 1956);
(aa) “scheduled bank” shall have the meaning assigned to it in the Explanation to
clause (iii) of sub-section (5) of section 11;
(b) “State financial corporation” means a financial corporation established under
section 3 or section 3A or an institution notified under section 46 of the State
Financial Corporations Act, 1951 (63 of 1951);
(c) “State industrial investment corporation” means a Government company within
the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in
the business of providing long-term finance for industrial projects and eligible for
deduction under clause (viii) of sub-section (1) of section 36;
(d) “co-operative bank”, “primary agricultural credit society” and “primary co-
respectively assigned to them in the Explanation to sub-section (4) of section 80P.
Following clauses (e) to (g) shall be inserted after clause (d) of Explanation 4 to section 43B
by the Act No. 23 of 2019, w.e.f. 1-4-2020:
(e) “deposit taking non-banking financial company” means a non-banking financial
company which is accepting or holding public deposits and is registered with the
Reserve Bank of India under the provisions of the Reserve Bank of India Act, 1934
(2 of 1934);
(f) “non-banking financial company” shall have the meaning assigned to it in clause
(f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934);
(g) “systemically important non-deposit taking non-banking financial
Explanation 5.––For the removal of doubts, it is hereby clarified that the provisions of this
section shall not apply and shall be deemed never to have been applied to a sum received by
the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24)
of section 2 applies [Added by Finance Act 2021]
2) Deduction is allowed in the year in which expense is incurred if actual payment is made
during the year or after end of the year but before due date of furnishing return of
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income u/s 139 (1).
3) Suppose, the expense is disallowed due to Sec.43B then it will be allowed as deduction
in the year in which such amount is actually paid.
4) Warana Sahakri Sakhar Karkhana (Bombay HC): Audit fee is not covered u/s 43B. The
word fee appearing in Sec.43B(a) has to be read in the context of tax, duty or cess i.e.
it must be payable to Government.
Rule of Ejusdem Generis: When specific words are followed by a generic word then this
generic word takes the colour of the specific word.
5) CBDT Circular No.7 of 2006:

As clarified in the Memorandum Explaining the provisions in the Finance Bill, 2006 (Page
3 thereof), the interest converted into loan or borrowing or advance shall be allowed
if such interest has been ‘actually paid’ and any interest which has been converted into
a loan or borrowing or advance, shall not be deemed to have been ‘actually paid’ on
account of its conversion into loan, etc. The unpaid interest whenever actually paid to
the bank or financial institution will be in the nature of revenue expenditure deserving
deduction in the computation of income. Therefore, the converted interest, by whatever
name called, in the wake of its conversion into a loan or borrowing or advance, will
be eligible for deduction in the computation of income of the previous year in which
the converted interest is ‘actually paid’. In other words, nomenclature of the sum of
converted interest will make no difference as the sum of converted interest whenever is
actually paid will not represent repayment of the principal. The following Illustrations
will enable the Assessing Officers and assessees to allow or to claim correct amount
of deduction, in terms of section 43B, on account of actual payment of interest:
I. Name of the assessee : M/s. ABC

Loan taken from Bank on 31-03-2003 : Rs.2,00,00,000/-
Interest unpaid upto 31-03-2005 : Rs.40,00,000/-
In the restructuring arrangement entered into in this case, the unpaid interest of the
above amount of Rs.40,00,000 has been converted into a Funded Interest Term Loan
(FITL) which has been shown separately from the original loan and no interest is
chargeable on FITL. This converted interest (i.e. FITL) is to be paid in ten instalments
from 01-04-2010. Each instalment worked out to an amount of Rs. 4,00,000/-. In
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this case, deduction to the extent of the amount actually paid against the payment
of instalment of FITL of Rs. 4,00,000/- under section 43B shall be allowed in the
relevant assessment year when it is actually paid. Needless to add that the interest on
the original principal of Rs.2,00,00,000/-, if any, actually paid will be independently
allowable under section 43B.
IV. Name of the assessee: M/s. XYZ

Loan taken by the assessee from a Term Lending Institution: Rs.100 crores
Rate of interest: 11%
Interest unpaid for three years, i.e., upto 31-03-2006: Rs.33 crores
Certain banks and financial institutions during interaction with them clarified that
restructuring arrangements do not generally provide for merger of interest with the
original principal and both continue to retain their separate identities. However, they
did not rule out a restructuring arrangement providing for merger of interest with the
principal. In the light of the possibility of merger of interest with the principal, the
repayment instalment will comprise of payment of interest as well as repayment of
part of the principal. In such situations, the amount of deduction on account of actual
payment of interest will have to be calculated on a proportionate basis. For example,
out of the aforesaid amount of merged interest and the principal of Rs.133crores, Rs.20
crores is repaid in the first year and the amount of interest comprised therein is not
distinguishable. The amount of deduction in the computation of income on account of
actual payment of interest will be worked out in the following manner:
20x33 = 4.962 Cr.
133
Out of the repayment of Rs.20 crores in the first year, deduction of Rs.4.962 crores will
be admissible in terms of the provisions of section 43B as deduction, as Rs.4.962 crores
out of Rs.20 crores actually paid represents interest component. Balance Rs.15.039
crores representing repayment of the principal shall not be admissible as deduction in
the computation of income.
6) Minda Wirelinks (Del):

Conversion of sales tax demand into a fresh loan does amount to actual payment.
7) Udaipur Distillery (SC)

Furnishing of Bank guarantee does not amount to actual payment.
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8) Mewar Motors (Rajasthan HC)

Tax is covered u/s 43 B interest on tax is also covered u/s 43B.
9) XYZ Limited had unpaid working capital loan of `5,00,000 and unpaid interest on the
`2,00,000. Bank waived off this entire amount of `7,00,000 and assessee credited
7,00,000 to P/L. Discuss how this amount will be treated while computing total income.
Ans:
Amount already or to P/L 7,00,000
Waiver of Working Capital loan taxable u/s 28 (1) 5,00,000
[Solid Containers (Bom.)]
Interest not taxable u/s 41(1) since interest was unpaid in earlier
years this would have been disallowed ----
Amount to be taxed 5,00,000
Since higher amount offered to tax earlier we now reduce from
total income `2,00,000
10) A Ltd. paid IDBI (a public financial institution) a lump sum pre-payment premium of
` 1.2 lacs on 7.4.2019 for restructuring its debts and reducing its rate of interest. It
claimed the entire sum as business expenditure for the P.Y.2019-20. The Assessing
Officer, however, held that the pre-payment premium should be amortised over a
period of 10 years (being the tenure of the restructured loan), and thus, allowed only
10% of the pre-payment premium in the P.Y.2019-20. Discuss, with reasons, whether
the contention of A Ltd. is correct or that of the Assessing Officer.
Ans: This issue came up before the Delhi High Court in CIT v. Gujarat Guardian Ltd (2009) 177
Taxman 434. The Court observed that the assessee company’s claim for deduction has
to be allowed in one lump sum keeping in view the provisions of section 43B(d), which
provide that any sum payable by the assessee as interest on any loan or borrowing from
any financial institution shall be allowed to the assessee in the year in which the same
is paid, irrespective of the periods, in which the liability to pay such sum is incurred by
the assesse according to the method of accounting regularly followed by the assessee.
The High Court concurred with the Tribunal’s view supporting the assessee that in
terms of section 36(1)(iii) read with section 2(28A), the deduction for pre-payment
premium was allowable. Since there was no dispute that the pre-payment premium
was nothing but interest and that it was paid to a public financial institution i.e. IDBI,
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the Court held that, in terms of section 43B(d), the assessee’s claim for deduction has
to be allowed in the year in which the payment has actually been made.
Therefore, applying the ratio of the above case, the contention of A Ltd. is correct and
not that of the Assessing Officer.
Note – Section 36(1)(iii) provides for deduction of interest paid in respect of capital
borrowed for the purposes of business or profession. Section 2(28A) defines interest
to include, inter alia, any other charge in respect of the moneys borrowed or debt
incurred.
Section 43B provides for certain deductions to be allowed only on actual payment.
From a combined reading of these three sections, it can be inferred that –
(i) pre-payment premium represents interest as per section 2(28A);
(ii) such interest is deductible as business expenditure as per section 36(1)(iii);
(ii) such interest is deductible in one lump-sum on actual payment as per section
43B(d).
Special provision for full value of consideration for transfer of assets other than capital
assets in certain cases.
43CA. (1) Where the consideration received or accruing as a result of the transfer by
an assessee of an asset (other than a capital asset), being land or building or both,
is less than the value adopted or assessed or assessable by any authority of a State
Government for the purpose of payment of stamp duty in respect of such transfer,
the value so adopted or assessed or assessable shall, for the purposes of computing
profits and gains from transfer of such asset, be deemed to be the full value of the
consideration received or accruing as a result of such transfer:
Provided that where the value adopted or assessed or assessable by the authority
for the purpose of payment of stamp duty does not exceed 110 per cent of the
consideration received or accruing as a result of the transfer, the consideration so
received or accruing as a result of the transfer shall, for the purposes of computing
profits and gains from transfer of such asset, be deemed to be the full value of the
consideration.
Provided further that in case of transfer of an asset, being a residential unit, the provisions
of this proviso shall have the effect as if for the words “one hundred and ten per cent.”, the
words “one hundred and twenty per cent.” had been substituted, if the following conditions
are satisfied, namely:––
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(i) the transfer of such residential unit takes place during the period beginning from the
12th day of November, 2020 and ending on the 30th day of June, 2021;
(ii) such transfer is by way of first time allotment of the residential unit to any person; and
(iii) the consideration received or accruing as a result of such transfer does not exceed two
crore rupees.’;
(2) The provisions of sub-section (2) and sub-section (3) of section 50C shall, so far
as may be, apply in relation to determination of the value adopted or assessed
or assessable under sub-section (1).
(3) Where the date of agreement fixing the value of consideration for transfer of the
asset and the date of registration of such transfer of asset are not the same, the
value referred to in sub-section (1) may be taken as the value assessable by any
authority of a State Government for the purpose of payment of stamp duty in
respect of such transfer on the date of the agreement.
(4) The provisions of sub-section (3) shall apply only in a case where the amount of
consideration or a part thereof has been received by way of an account payee
cheque or an account payee bank draft or by use of electronic clearing system
through a bank account or through such other electronic mode as may be
prescribed on or before the date of agreement for transfer of the asset.
Explanation.––For the purposes of this section, “residential unit” means an independent
housing unit with separate facilities for living, cooking and sanitary requirement, distinctly
separated from other residential units within the building, which is directly accessible from
an outer door or through an interior door in a shared hallway and not by walking through
the living space of another household.
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Question 144
Discuss provisions for maintenance of Books of accounts u/s. 44AA?
Required to maintain books of A/c’s
(1) Notified Profession: (2) Any other profession or any business if:
* Medical legal
* architect accountant
* technical consultancy Individual / HUF Any other
* interior designing
* CS, Industrialisation PGBP > ` 2,50,000 OR PGBP > ` 1,20,000 OR
IT professional Sales > ` 25,00,000 Sales > ` 10,00,000 in
 is any / out of last 3 year any one out of last 3
Books prescribed under Rule 6F years
Cash Book, Journal, Ledger,
Carbon copy + Original copy No specific books prescribed but assesse required to
maintain such books as enables assessing officer to
Also, if assessee = Medical compute total income.
Professional Books to be maintained uptil 6 years from end of
then additionally assessment year.
 Daily case register If books not maintained: Penalty ` 25,000 u/s 271 A
 Inventory records
Note:However, if T/O < 1,50,000

then the provision is not
applicable
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Question 145
Discuss provisions regarding furnishing of Tax Audit Report?
Answer
Provisions for furnishing of Tax Audit Report are contained in Section 44AB of the Income-tax
Act
(1) Every person,—
(a) carrying on business shall, if his total sales, turnover or gross receipts, as the
case may be, in business exceed or exceeds one crore rupees in any previous year;
Provided that in the case of a person whose—
(a) aggregate of all amounts received including amount received for sales, turnover
or gross receipts during the previous year, in cash, does not exceed five per cent
of the said amount; and
(b) aggregate of all payments made including amount incurred for expenditure, in
cash, during the previous year does not exceed five per cent of the said payment,
this clause shall have effect as if for the words “one crore rupees”, the words “ten
crore rupees” had been substituted; or]
Provided further that for the purposes of this clause, the payment or receipt, as the case
may be, by a cheque drawn on a bank or by a bank draft, which is not account payee,
shall be deemed to be the payment or receipt, as the case may be, in cash
(b) carrying on profession shall, if his gross receipts in profession exceed fifty lakh
rupees in any previous year; or
(c) carrying on the business shall, if the profits and gains from the business are
deemed to be the profits and gains of such person under section 44AE or section
44BB or section 44BBB, as the case may be, and he has claimed his income to
be lower than the profits or gains so deemed to be the profits and gains of his
business, as the case may be, in any previous year; or
(d) carrying on the profession shall, if the profits and gains from the profession are
deemed to be the profits and gains of such person under section 44ADA and he
has claimed such income to be lower than the profits and gains so deemed to
be the profits and gains of his profession and his income exceeds the maximum
amount which is not chargeable to income-tax in any previous year; or
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(e) carrying on the business shall, if the provisions of sub-section (4) of section 44AD
are applicable in his case and his income exceeds the maximum amount which is
not chargeable to income-tax in any previous year,
get his accounts of such previous year audited by an accountant before the specified
date and furnish by that date the report of such audit in the prescribed form duly
signed and verified by such accountant and setting forth such particulars as may be
prescribed :
(2) This section shall not apply to the person, who declares profits and gains for the
previous year in accordance with the provisions of sub-section (1) of section 44AD and
his total sales, turnover or gross receipts, as the case may be, in business does not
exceed two crore rupees in such previous year:
(3) In a case where such person is required by or under any other law to get his accounts
audited, it shall be sufficient compliance with the provisions of this section if such
person gets the accounts of such business or profession audited under such law before
the specified date and furnishes by that date the report of the audit as required under
such other law and a further report by an accountant in the form prescribed under this
section.
(4) Explanation.—For the purposes of this section,—

(i) “accountant” shall have the same meaning as in the Explanation below sub-
section (2) of section 288;
(ii) “specified date”, in relation to the accounts of the assessee of the previous year
relevant to an assessment year, means 91[date one month prior to] the due date
for furnishing the return of income under sub-section (1) of section 139.
(5) As per Section 271B, If any assessee fails to furnish report by the date mentioned in
Section 44AB, then penalty of 0.50% of turnover subject to maximum penalty of Rs.
150,000 shall be imposed.
(6) Surajmal Purshuram Todi (Guwahati HC):

If assessee has not maintained books of accounts penalty may be levied u/s 271A. The
assessee cannot be penalised again for non – conduct of Tax audit which is a natural
consequence of non – maintenance of books.
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(7)
Form of Tax Audit
Assessee required to be Assessee is not required to be

audited under any other law. audited under any other law.
Form 3CA – 3CD 3CB – 3CD
(8) Revision of Tax Audit Report:

It can be revised in exceptional situations. However, in the revised report Tax auditor
has to give reference of the original report and clearly specify reasons for revision.
Question 146
Discuss provisions of Section 44AD?
Answer
As per Section 4AD:
(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case
of an eligible assessee engaged in an eligible business, a sum equal to eight per cent
of the total turnover or gross receipts of the assessee in the previous year on account
of such business or, as the case may be, a sum higher than the aforesaid sum claimed
to have been earned by the eligible assessee, shall be deemed to be the profits and
gains of such business chargeable to tax under the head “Profits and gains of business
or profession” :
(2) However, the minimum rate of presumptive income shall be “six per cent”, in respect of
the amount of total turnover or gross receipts which is received by an account payee
cheque or an account payee bank draft or use of electronic clearing system through
a bank account or through such other electronic mode as may be prescribed] during
the previous year or before the due date specified in sub-section (1) of section 139 in
respect of that previous year.
(3) Any deduction allowable under the provisions of sections 30 to 38 shall, for the
purposes of sub-section (1), be deemed to have been already given full effect to and
no further deduction under those sections shall be allowed.
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(4) The written down value of any asset of an eligible business shall be deemed to have
been calculated as if the eligible assessee had claimed and had been actually allowed
the deduction in respect of the depreciation for each of the relevant assessment years.
(5) Where an eligible assessee declares profit for any previous year in accordance with the
provisions of this section and he declares profit for any of the five assessment years
relevant to the previous year succeeding such previous year not in accordance with
the provisions of sub-section (1), he shall not be eligible to claim the benefit of the
provisions of this section for five assessment years subsequent to the assessment year
relevant to the previous year in which the profit has not been declared in accordance
with the provisions of this section.
(6) Notwithstanding anything contained in the foregoing provisions of this section, an

eligible assessee to whom the provisions of sub-section (4) are applicable and whose
total income exceeds the maximum amount which is not chargeable to income-tax,
shall be required to keep and maintain such books of account and other documents
as required under sub-section (2) of section 44AA and get them audited and furnish a
report of such audit as required under section 44AB.
(7) The provisions of this section, notwithstanding anything contained in the foregoing
provisions, shall not apply to—
(i) a person carrying on profession as referred to in sub-section (1) of section 44AA;
(ii) a person earning income in the nature of commission or brokerage; or
(iii) a person carrying on any agency business.

(a) “eligible assessee” means,—
(i) an individual, Hindu undivided family or a partnership firm, who is a resident,
but not a limited liability partnership firm as defined under clause (n) of
sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6
of 2009); and
(ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B,
10BA or deduction under any provisions of Chapter VIA under the heading
“C. - Deductions in respect of certain in-comes” in the relevant assessment
year;
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(b) “eligible business” means,—

(i) any business except the business of plying, hiring or leasing goods carriages
referred to in section 44AE; and
(ii) whose total turnover or gross receipts in the previous year does not exceed
an amount of two crore rupees.
Question 147
Discuss provisions of Section 44ADA?
Answer
Section 44ADA is applicable for professionals mentioned in section 44AA (1)
1. In case of an assessee, being an individual or a partnership firm other than a limited liability
partnership as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability
Partnership Act, 2008, who is a resident in India, referred to in sub – section (1) of section
44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year,
a sum equal to 50% of the total gross receipts of the assesse in the previous year on
account of such profession or, sum higher than the aforesaid sum claimed to have been
earned by the assesse, shall be deemed to be the profits, and gains of such profession
chargeable to tax under the head “Profits and gains of business or profession”.
2. Any deduction allowable under the provisions of sections 30 to 38 shall, for the
purposes of sub – section (1), be deemed to have been already given full effect to and
no further deduction under those sections shall be allowed. [No deduction allowed for
partners’ remuneration / interest].
3. The written down value of any asset used for the purposes of profession shall be
deemed to have been calculated as if the assesse had claimed and had been actually
allowed the deduction in respect of the depreciation for each of the relevant assessment
year.
4. Notwithstanding anything contained in the foregoing provisions of this section, in

assesse who claims that his profits and gains from the profession are lower than the
profits and gains specified in sub – section (1) and whose total income exceeds the
maximum amount which is not chargeable to income – tax, shall be required to keep
and maintain such books of account and other documents as required under sub –
section (1) of section 44AA and get them audited and furnish a report of such audit as
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required under section 44AB.
Note: For assesses opting for provisions of section 44AD and Section 44ADA, the entire ad-
vance tax has to be paid on or before 15th March of the Previous year. That is to say, the
earlier 3 instalments are not applicable to such assesses.

The turnover of Mr. Aarav, engaged in wholesale trading business, for the P.Y.2021-22 is
Rs. 2 crore and the gross receipts of Mr. Vishal, engaged in legal profession is Rs. 50 lakhs.
Mr. Aarav has been regularly following mercantile system of accounting and Mr. Vishal
regularly follows cash basis of accounting. Out of the turnover of Mr. Aarav, he receives Rs.
1.20 crores through ECS through bank account during the P.Y.2021-22. He receives another
Rs. 60 lakhs through ECS through bank account on or before 31.7.2022. Mr. Vishal receives
Rs. 30 lakhs by account payee bank draft and Rs. 20 lakhs by crossed cheque during the
P.Y.2021-22. What would be the income chargeable to tax under the head “Profits and
Gains of Business and Profession”, if they want to minimize their tax liability? Both of them
maintain books of account as per section 44AA. Income computed as per the regular
provisions of Income-tax Act, 1961 is Rs. 11,50,000 and Rs. 24,75,000 in the hands of
Aarav and Vishal, respectively. However, they have not got the books of account audited
and do not intend to do so in future.
a. Rs. 16,00,000 and Rs. 25,00,000, respectively
b. Rs. 13,60,000 and Rs. 25,00,000, respectively
c. Rs. 11,50,000 and Rs. 24,75,000, respectively
d. Rs. 12,40,000 and Rs. 25,00,000, respectively
Answer: (D)
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Test your knowledge

1. M/s TPS, a partnership firm, is engaged in the trading business of electrical appliances.
Its turnover for the previous year 2021-22 is Rs. 1,10,00,000. It follows mercantile
system of accounting. It has received the amount of its turnover in the following
manner-
Amount of Mode of Receipt
turnover (Rs.)
70,00,000 Account payee cheques (Rs. 5,00,000 received on 30.4.2022)
10,00,000 Cash (whole amount received during the P.Y. 2022-22)
15,00,000 Crossed cheques (whole amount received during the P.Y. 2021-
22)
10,00,000 RTGS (Rs. 2,00,000 received on 15.5.2022)
Rs. 5,00,000 is not received by the firm till the due date of filing return of income for
the current previous year. The profits and gains as per the books of account maintained
as per section 44AA is Rs. 6,80,000. What would be the total income of the firm for
A.Y.2022-23, if it wishes to make maximum tax savings without getting its books of
accounts audited?
(a) Rs. 7,34,000
(b) Rs. 6,80,000
(c) Rs. 7,20,000
(d) Rs. 6,90,000
Answer: (C)
Test your Knowledge:

1. Mr. Rajesh is engaged in the profession of technical consultancy and his gross receipts
for the P.Y.2021-22 is Rs. 45 lakhs. He does not maintain books of account. He is also
a partner of a firm, M/s. Rajesh & Co., which carries on the profession of technical
consultancy. The gross receipt of the firm during the P.Y.2021-22 is Rs. 48 lakhs.
Which of the following statements is correct?
(a) Mr. Rajesh and M/s. Rajesh & Co. have to pay entire advance tax on or before
15th March, 2022
(b) Mr. Rajesh does not have to pay advance tax. However, M/s. Rajesh & Co. has to
pay the entire advance tax on or before 15th March
(c) Mr. Rajesh does not have to pay advance tax. However, M/s. Rajesh & Co. has to
pay advance tax in four instalments
(d) Mr. Rajesh has to pay entire advance tax on or before 15th March and M/s.
Rajesh & Co. has to pay advance tax in four instalments
Answer: (A)
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Question 148
Section 44AE: Plying, hiring and leasing goods carriages
Answer
1. In the case of an assessee, who owns < 10 goods carriages at any time during the
previous year and who is engaged in the business of plying, hiring or leading such
goods carriages, the assesse can opt for presumptive taxation u/s 44AE.
2. How to compute the income:

(i) For heavy goods vehicle* - `1000 / ton of gross vehicle weight or un laden weight,
as the case may be, for every month or part of a month during which the heavy
goods vehicle is owned by the asseseee in the previous year or an amount claimed
to have been actually earned from such vehicle, whichever is higher ;
(ii) For other than heavy goods vehicle - ` 7,500 for every month or part of a month
during which the goods carriage is owned by the assesse in the previous year
or an amount claimed to have been actually earned from such goods carriage,
whichever is higher.
“heavy goods vehicle” means any goods carriage, the gross vehicle weight of
which exceeds 12000 kilograms.
3. Any deduction allowable under the provisions of sections 30 to 38 shall, for the
purposes of sub – section (1), be deemed to have been already given full effect to and
no further deduction under those sections shall be allowed.
4. However, in case of firm, partner remuneration / interest can be deducted subject to

the conditions and limits specified in clause (b) of section 40.
5. The written down value of any asset used for the purpose of the business referred to
in sub – section (1) shall be deemed to have been calculated as if the assesse had
claimed and had been actually allowed the deduction in respect of the depreciation for
each of the relevant assessment year.
6. The provisions of sections 44AA and 44AB shall not apply in so far as they relate to the
business referred to in sub – section (1) and in computing the monetary limits under
those sections, the gross receipts or, as the case may be, the income from the said
business shall be excluded.
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7. Notwithstanding anything contained to the foregoing provisions of this section, an

assessee may claim lower profits and gains than the profits and gains specified in
sub – section (1) and (2), if he keeps and maintains such books of account and other
documents as required under sub – section (2) of section 44AA and gets his accounts
audited and furnishes a report of such audit as required under section 44AB.
8. For this section, an assessee, who is in possession of a goods carriage, whether taken
on hire purchase or on instalments and for which the whole or part of the amount
payable is still due, shall be deemed to be the owner of such goods carriage.
9. Any person making payment to a contractor who is in the business of plying, hiring of
goods carriage is not required to withhold tax u/s 194C provided such contractor does
not own more than 10 goods carriages.
Question 149
Mr. X commenced business of operating goods vehicles on 1.4.2021. He purchased the
forwarding vehicles during the P.Y. 2021-22. Compute the income under section 44AE for
A.Y. 2022-23.
Gross Vehicle Weight Number Date of Purchase
(in kilograms)
(1) 7,000 2 10.04.2021
(2) 8,500 1 15.03.2022
(3) 10,000 3 16.07.2021
(4) 11,000 1 02.01.2022
(5) 15,000 2 29.08.2021
(6) 15,000 1 23.02.2022
Would your answer change if the two goods vehicles purchased in April, 2021 were put to
use only in July, 2021?
Answer
Since Mr. X does not own more than 10 vehicles at any time during the previous year 2021-
22 to is eligible to opt for presumptive taxation scheme under section 44AE `1,000 per ton
of gross vehicle weight or un laden weight per month or part of the month for each heavy
goods vehicle and `7,500 per month or part of month for each goods carriage other than
heavy goods vehicle owned by him would be deemed as his profits and gross from such
goods carriage.
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Heavy goods vehicle means any goods carriage, the gross vehicle weight at which exceeds
12,000 kg.
1 2 3 4
Number of Vehicles Date of Purchase No. of months for No. of months, No. of
which vehicle is owned vehicles *(1) x (3)
Heavy goods vehicles

2 29.08.2021 8 16
1 23.02.2022 2 2
18
Goods vehicle other than heavy goods vehicle
2 10.04.2021 12 24
1 15.03.2022 1 1
3 16.07.2021 9 27
1 02.01.2022 3 3
55
The presumptive income of Mr. X under section 44 AE for A.Y. 2022-23 would be: Rs. 6,82,500
i.e.
55 x `7,500, [for other than heavy goods vehicle]
18 x `1,000 x 15 ton [for heavy goods vehicle]
The answer would remain the same even if the two vehicles purchased in April, 2021 were
put to use only in July, 2021, since the presumptive income has to be calculated per month
or part of the month for which the vehicle is owned by Mr. X.
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Test your knowledge

Which of the following individuals would be entitled to opt for presumptive taxation
schemes under the Income-tax Act, 1961 for A.Y.2022-23?
(i) A retail trader having turnover of Rs. 2 crore during the previous year 2020-21.
(ii) A practising chartered accountant having gross receipts of Rs. 92 lakhs during the
previous year 2020-21.
(iii) A wholesale trader having turnover of Rs. 1.96 crore during the previous year 2020-
21.
(iv) A doctor having gross receipts of Rs. 50 lakhs during the previous year 2020-21.
(v) An individual owning 8 goods carriages as on 1.4.2020. He sold 2 goods carriages on
1.5.2020 and purchased 4 goods carriages on 1.7.2020.
The correct answer is -
(a) Only (iii)
(b) (iii) & (v)
(c) (i), (iii), (iv) & (v)
(d) (i), (ii), (iii), (iv) & (v)
Answer: (C)
Question 150
Section 44B - Shipping Business of Non – Residents
Answer
1. This presumptive provision is available only for a Non – resident engaged in the business
of shipping.
2. Presumptive Income = 7.50% X Specified Sum
3. Specified Sum:
(a) The amount* paid or payable (whether in or out of India) to the assesse or to any
person on his behalf on account of the carriage of passengers, livestock, main or
goods shipped at any port in India; and
(b) The amount* received or deemed to be received in India by or on behalf of the
assesse on account of the carriage off passengers, livestock, mail or goods
shipped at any port outside India.
*Includes demurrage charges or handling charges or any other amount of similar
nature.
Note:
Section 172 is a recovery mechanism. Whereas section 44 B is a computation mechanism. As
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per section 172, every time ships leaves India, assesse has to pay tax on income equivalent to
7.50% on amount received by non – resident for shipping to a port in India (whether such
amount is received in India or outside). At this stage, the Assessing Officer is only interest in
recovery of taxes. Therefore, he does not know the juristic status of the assesse. Therefore, he
recovers the tax at maximum rate applicable to foreign company i.e.40%. This is illustrated
as under:
Let us say, Mr. X is a non – resident engaged in the business of shipping. During the year, Mr.
X receives an amount of 1 crore for shipping goods from Newyork to Kandla. Now, before
the ship leaves Kandla, the assessing officer will recovery tax from Mr. X under section 172
as under:
Income = 7.50% of 1,00,00,000 = 7,50,000

Tax @ 40% on above = 3,12,000 (including cess)
Now, in reality the assesse is an individual, therefore, he will furnish his return of income
computing income under section 44B as under:
Income = 7.50% of 1,00,00,000 = 7,50,000
Tax on above (slab rates) = 65,000
Therefore, assesse will claim refund of 3,12,000 – 65,000 = 2,47,000*
It was held by Supreme Court in the case of AS Glittre that such refund will be entitled to interest
u/s 244A as if tax paid in accordance with section 172 is advance tax.
Question 151
Section 44BBA - Aircraft Business of Non – residents
Answer
1. This presumptive provision is available only for a Non – resident engaged in the business
of operating aircraft;
2. Presumptive income = 5% X Specified Sum
3. Specified Sum:
(a) The amount paid or payable (whether in or out of India) to the assesse or to any
person on his behalf on account of the carriage of passengers, livestock, mail or
goods from any place in India; and
(b) The amount received or deemed to be received in India by or on behalf of the
assesse on account of the carriage of passengers, livestock, mail or goods from
any place outside India.
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Note:
Unlike other presumptive taxation provisions, there is no provision in section 44B and 44BBA
to offer lower than prescribed income.
Test your knowledge
A Inc. and B Inc., incorporated in Country A and Country B, respectively, whose place of
effective management is also in the said countries, are engaged in the business of operation
of ships and aircraft, respectively. The details of receipts etc. during the P.Y.2021-22 are
as follows –
Particulars A Inc. B Inc.
Amount paid/payable in Mumbai on account of
carriage of passengers:
Shipped from Mumbai port to port in Country A Rs. 20 lakhs
From Mumbai airport to airport in Country B Rs. 15 lakhs
Amount paid/payable in Country A/B on account
of carriage of passengers:
Shipped from Mumbai port to port in Country A Rs. 5 lakhs
From Mumbai airport to airport in Country B Rs. 4 lakhs
Amount received/deemed to be received in India on
account of carriage of passengers: Shipped from Rs. 7 lakhs
port in Country A to Mumbai port Rs. 8 lakhs
From airport in Country B to Mumbai airport
Amount received/deemed to be received in Country
A/B on account of carriage of passengers: Shipped
from port in Country A to Mumbai port Rs. 22 lakhs
From airport in Country B to Mumbai airport Rs. 18 lakhs
Profit (pertaining to Indian operations) computed
as per books of account maintained by A Inc. and Rs. 2.20 lakhs Rs. 1.20 lakhs
B Inc., after providing the deductions under the
Income- tax Act, 1961
The profits and gains of business of A Inc. and B Inc. chargeable to tax in India under the
Income-tax Act, 1961 for A.Y.2022-23 is –Rs. 2.20 lakhs and Rs. 1.20 lakhs, respectively,
provided the books of accounts are audited under section 44AB of the Income-tax Act,
1961
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(c) Rs. 2.70 lakhs and Rs. 3.375 lakhs, respectively
Answer: (B)
Mr. Ram Mohan, a non-resident, operates an aircraft between Malaysia and Cochin. He
received the following amounts while carrying on the business of operation of aircrafts for
the year ended 31.3.2022:
(i) Rs. 2 crores in India on account of carriage of passengers from Cochin.
(ii) Rs. 1 crore in India on account of carriage of goods from Cochin.
(iii) Rs. 3 crores in India on account of carriage of passengers from Malaysia.
(iv) Rs. 0.50 crore in Malaysia on account of carriage of passengers from Cochin.
(v) Rs. 1.30 crores in Malaysia on account of carriage of passengers from Malaysia.
(vi) Rs. 1.20 crore in Malaysia on account of carriage of goods from Malaysia.
(vii) Rs. 0.50 crore in Malaysia on account of carriage of goods from Cochin
The total expenditure incurred by Mr. Ram Mohan for the purposes of the business during
the year ending 31.3.2022 was Rs. 3 crores. What is the income of Mr. Ram Mohan
chargeable to tax in India under the head “Profits and gains of business or profession” for
the A.Y.2022-23?
(a) Rs. 35 lakh
(b) Rs. 30 lakh
(c) Rs. 20 lakh
(d) Rs. 47.50 lakh
Answer: (A)
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M/s. Atlanta Airlines, incorporated as a company in USA, operated its flights to India and
vice versa during the year 2020-21 and collected charges of Rs. 280 crores for carriage
of passengers and cargo, out of which Rs. 100 crores were received in US Dollars for the
passenger fare from Atlanta to Delhi. Out of Rs. 100 crores, US dollars equivalent to Rs.
40 crores is received in India. The total expenses for the year on operation of such flights
were Rs. 11 crores. The effective rate of income- tax applicable on total income of M/s.
Atlanta Airlines is -
(a) 42.432%
(b) 43.68%
(c) 41.6%
(d) 44.512%
Answer: (B)
Question 152
Section 44BB: Special provision for computing profits and gains in connection with the
business of exploration, etc., of mineral oils
Answer
1. This provision applies to a non – resident, engaged in the business of providing services
or facilities in connection with, or supplying plant and machinery on hire used, or to be used,
in the prospecting for, or extraction or production of, mineral oils.
2. Presumptive Income = 10% X Specified Sum
3. Specified Sum
(a) The amount paid or payable (whether in or out of India) to the assesse or to any
person on his behalf on account of the provision of services and facilities in
connection with, or supply of plant and machinery on hire used, or to be used, in
the prospecting for, or extraction or production of, mineral oils in India; and
(b) The amount received or deemed to be received in India by or on behalf of the

assesse on account of the provision of services and facilities in connection with,
or supply of plant and machinery on hire used, or to be used, in the prospecting
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for, or extraction or production of mineral oils outside India.
4. The assesse may claim lower profits and gains than the profits and gains specified in
this section, if he keeps and maintains such books of account and other documents
as required under sub – section (2) of section 44AA and gets his accounts audited and
furnishes a report of such audit as required under section 44AB, and thereupon the
Assessing Officer shall proceed to make an assessment of the total income or loss of
the assesse under sub – section (3) of section 143 and determine the sum payable by,
or refundable to, the assesse.
5. Sedco Forex International Inc. vs. CIT (SC): Mobilisation fee receives is subject to tax
under section 44BB.
Question 153
Section 44BBB: Special provision for computing profit and gains of foreign companies
engaged in the business of civil construction, etc., in certain turnkey power projects.
Answer
1. This presumptive Taxation applies to a foreign company, engaged in the business
of civil construction or the business of erection of plant or machinery or testing or
commissioning thereof, in connection with a turnkey power project approved by the
Central Government in this behalf.
2. Presumptive Income = 10% X amount paid or payable (whether in or out of India) to

the said assesse or to any person on his behalf on account of such civil construction,
erection, testing or commissioning.
Question 154
Examine the taxability and/ or allowability of the following receipts or expenditures under
the provisions of the Income-tax Act, 1961, for the assessment year 2022-23:
(A)
(i) S Ltd. receives a sum of ` 10 lakhs from K Ltd. on 3rd January, 2022 for agreeing not to
carry on any business relating to computer software in India for the next three years.
(ii) Secret commission was paid during the previous year 2021-22.
(iii) P Ltd. paid dollars equivalent to ` 50 lakhs as sales commission for the year ended
31.03.2022, without deducting tax at source, to Mr. Rodrigues, a citizen of UK and
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non-resident who acted as agent for booking orders, from various customers who are
outside India.
(B) Can the following transactions be covered under section 43B for disallowance?
(i) A bank guarantee given by a company towards disputed tax liabilities.
(ii) Interest payable to Goods and Services Tax Department but not paid before the
due date specified in section 139(1).
Answer
(A) (i) As per section 28(va), any sum received under an agreement for not carrying
out any activity in relation to any business/ profession (i.e., non-compete fee)
is chargeable to income-tax under the head “Profits and gains of business or
profession”.
Accordingly, ` 10 lakhs received by S Ltd. from K Ltd. for agreeing not to carry
on any business relating to computer software in India for the next three years
is chargeable to income-tax under the head “Profits and gains of business or
profession”.
The amount shall be allowed as deduction in the hands of K Ltd. provided tax has
been deducted at source under section 194J on the payment so made to S Ltd. If
tax is not deducted at source, 30% of the expenditure shall be disallowed under
section 40(a)(ia).

(ii) Secret commission is one of the forms of commission payment generally made
by business organizations. Secret commission is a payment for obtaining business
orders or contracts from parties and /or customers and paid to employees and /
or officials of those parties and / or customers or companies from whom business
orders are obtained by the assessee.
Explanation 1 below section 37(1) of Income-tax Act, 1961 provides that any
expenditure incurred by an assessee for any purpose which is an offence or which
is prohibited by law, shall not be deemed to have been incurred for the purpose
of business and no deduction or allowance shall be made in respect of such
expenditure. In view of the Explanation, any expenditure incurred for a purpose
which is an offence and prohibited by law cannot be allowed as expenditure.
Therefore, if secret commission payment could be established as a payment for
an offence prohibited by law, the same cannot be allowed as deduction.
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(iii) A foreign agent of an Indian exporter operates in his own country and no part of
his income accrues or arises in India. His commission is usually remitted directly to
him and is, therefore, not received by him or on his behalf in India. The commission
paid to the non-resident agent for services rendered outside India is, thus, not
chargeable to tax in India.
Since commission income for booking orders by non-resident who remains outside
India is not subject to tax in India, disallowance under section 40(a)(i) is not
attracted in respect of payment of commission to such non-resident outside India
even though tax has not been deducted at source. Thus, the amount of ` 50 lakhs
remitted to Mr. Rodrigues outside India in foreign currency towards commission
would not attract disallowance under section 40(a)(i) for non-deduction of tax at
source.
(B) (i) For claiming deduction of any expense enumerated under section 43B, the
requirement is, the actual payment and not deemed payment. Furnishing of bank
guarantee cannot be equated with actual payment. Actual payment requires
that money must flow from the assessee to the public exchequer as specified
in section 43B. Therefore, deduction of an expense covered under section 43B
cannot be claimed by merely furnishing a bank guarantee [CIT v. McDowell & Co
Ltd (2009) 314 ITR 167 (SC)]
(ii) Interest payable to Goods and Services Tax department is part of Goods and
Services Tax.
Therefore, interest payable to Goods and Services Tax department, which is not
paid before the “due date” of filing of return of income, would attract disallowance
under section 43B [Mewar Motors v. CIT (2003) 260 ITR 218 (Raj)]
Question 155
ILT Limited is engaged in manufacturing of pipes and tubes. The profit and loss account
of the company for the year ended 31st March, 2022 shows a net profit of ` 405 lacs. The
following information and particulars are furnished to you. You are required to compute
total income of the company for Assessment Year 2022-23 indicating reasons for treatment
of each item.
(i) A group free air ticket was provided by a supplier for reaching a certain volume of
purchase during the financial year 2021-22. The same is encashed by the company for
` 10 lacs in April 2022 and credited to General Reserve Account.
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(ii) A regular supplier of raw materials agreed for settlement of ` 8 lacs instead of ` 10
lacs for poor quality of material supplied during the previous year which was not given
effect in the running account of the supplier.
(iii) Andhra Bank sanctioned and disbursed a term loan in the financial year 2018-19 for
a sum of ` 50 lacs. Interest of ` 8 lacs was in arrears. The bank has converted the
arrear interest into a new loan repayable in 10 equal instalments. During the year,
the company has paid 2 instalments and the amount so paid has been reduced from
Funded Interest in the Balance Sheet.
(iv) The company remitted ` 5 lacs as interest to a company incorporated in USA on a

loan taken 2 years ago. Tax deducted under section 195 from such interest has been
deposited by the company on 15th July, 2022. The said interest was debited to profit
and loss account.
(v) Sandeep, a sales executive stationed at HO at Delhi, was on official tour in Bangalore
from 31st May, 2021 to 18th June, 2021 and 28th September, 2021 to 15th October,
2021 for the business development. The company has paid Sandeep’s salary in cash,
from its local office at Bangalore for the month of May, 2021 (payable on 1st June)
and September 2021 (payable on 1st October), amounting to ` 45,000 and ` 47,000
respectively (net of TDS and other deduction), as Sandeep has no bank account at
Bangalore. These were included in the amount of “salary” debited to Profit and Loss
Account.
(vi) The company has contributed ` 50,000 by account payee cheque to an electoral trust
and the same stands included under the head “General Expenses”.

Particulars ` (in lacs)
Profits and gains from business or profession
Net profit as per profit and loss account 405.00
Add : Items debited to profit and loss account, but to be disallowed
and items not considered in accounts but to be taxed
Value of group free air ticket provided by a supplier is taxable
as business income under section 28(iv), as the value of any
benefit, whether convertible into money or not, arising from 10
business is taxable as business income.
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Amount waived by the supplier of raw materials is a deemed

income under section 41(1), as the expenditure was allowed
as deduction in the last year and there is a benefit by way
of remission or cessation of a trading liability. The fact that
effect was not given in the running account of supplier is
not relevant. 2
Interest payable outside India to a foreign company is
allowable (See Note 1 below) -
Contribution to electoral trust is not an allowable
expenditure while computing business income. Hence, the
same has to be added back, since it is included in general
expenses. 0.50
Salary paid to employee Sandeep is eligible for deduction.
Disallowance under section 40A(3) will not apply [See Note 12.50
2 below] -
417.50
Notes:
1. Since tax has been deducted on interest payable outside India to a foreign company
during the previous year 2019-20 and the same has been deposited before the due
date of filing return of income under section 139(1), disallowance under section 40(a)
(i) is not attracted.
Since the interest has already been debited to profit and loss account, no further
adjustment is required.
2. In respect of payment of salary to sales executive in cash, no disallowance under

section 40A(3) is to be made as the payments fall within the scope of Rule 6DD(i).
Salary paid to him in cash is allowable as the executive was temporarily posted for
a continuous period of more than 15 days in Bangalore which is not the place of his
normal duty. Further tax was deducted from such salary under section 192 and he
does not maintain any bank account in Bangalore. No disallowance under section
40A(3) is attracted in respect of such salary.
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Question 156
The trading and profit and loss account of Pingu Trading Pvt. Ltd. having business of agri-
cultural produce, consumer items and other products for the year ended 31.03.2022 is as
under:
Particulars ` Particulars `
Opening Stock 3,75,000 Sales 1,55,50,000
Purchases 1,25,75,000 Closing Stock 4,50,000
Freight & Cartage 1,26,000
Gross profit 29,24,000
1,60,00,000 1,60,00,000
Profit and Loss Account

Bonus to staff 47,500 Gross profit 29,24,000
Rent of premises 53,500 Income-tax refund 20,000
Advertisement 5,000 Warehousing charges 15,00,000
Bad Debts 75,000
Interest on loans 1,67,500
Depreciation 71,500
Goods and Services tax
demand paid 1,08,350
Miscellaneous expenses 5,25,650
Net profit of the year 33,90,000
44,44,000 44,44,000
On scrutiny of records, the following further information and details were extracted/ gath-
ered:
(i) There was a survey under section 133A on the business premises on 31.3.2022 in
which it was revealed that the value of closing stocks of 31.3.2020 was ` 8,75,000
and a sale of ` 75,000 made on 13.3.2022 was not recorded in the books. The value of
closing stocks after considering these facts and on the basis of inventory prepared by
the department as on 31.3.2022 worked out at ` 12,50,000, which was accepted to be
correct and not disputed.
(ii) Income-tax refund includes amount of ` 4,570 of interest allowed thereon.
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(iii) Bonus to staff includes an amount of ` 7,500 paid in the month of December 2021,
which was provided in the books on 31.03.2021.
(iv) Rent of premises includes an amount of ` 5,500 incurred on repairs. The assessee was
under no obligation to incur such expenses as per rent agreement.
(v) Advertisement expenses include an amount of ` 2,500 paid for advertisement published
in the souvenir issued by a political party. The payment is made by way of an account
payee cheque.
(vi) Miscellaneous expenses include:

(a) Amount of ` 15,000 paid towards penalty for non-fulfillment of delivery conditions
of a contract of sale for the reasons beyond control,
(b) Amount of ` 1,00,000 paid to the wife of a director, who is working as junior
lawyer for taking an opinion on a disputed matter. The junior advocate of High
Courts normally charge only ` 25,000 for the same opinion,
(c) Amount of ` 1,00,000 paid to an Electoral Trust by cheque.
(vii) Goods and Services Tax demand paid includes an amount of ` 5,300 charged as penalty
for delayed filing of returns and ` 12,750 towards interest for delay in deposit of tax.
(viii) The company had made an investment of ` 25 lacs on the construction of a warehouse in
rural area for the purpose of storage of agricultural produce. This was made available
for use from 15.09.2021 and the income from this activity is credited in the Profit and
Loss account under the head “Warehousing charges”.
(ix) Depreciation under the Income-tax Act, 1961 works out at ` 65,000.
(x) Interest on loans includes an amount of ` 80,000 on which tax was not deducted.
Compute the income chargeable to tax for assessment year 2022-23 of Pingu Trading Pvt.
Ltd, ignoring MAT and provisions of section 115BAA. Support your answer with working
notes.
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Answer
Computation of Income of Pingu Trading Pvt. Ltd. chargeable to tax for the A.Y.2022-23
Particulars `
Net profit as per profit and loss account 33,90,000
Add: Difference in the value of stocks detected on survey under S.
133A on 31.03.2022 chargeable as income (See Note 1) 3,75,000
37,65,000
Less: Income-tax refund credited in the p&l account out of which
interest is to be considered separately under the head “Income from
other sources” 20,000
37,45,000
Add: Expenses either not allowable or to be considered separately but charged
in the profit & loss account –
Repair expenses on rented premises where assessee is under
obligation to incur such expenses are not allowable as per section
30(a)(i). However, if such expenses are required for carrying on the
business efficiently, the same are allowable under section 37. In
this case, assuming that such expenses are required for carrying on
business efficiently, the same are allowable under section 37.
- Advertisement in the souvenir of political party not allowable as
per section 37(2B) (See Note 3) 2,500
Payment made to the wife of a director examined as per section
40A(2) and the excess payment made to be disallowed (See Note 5) 75,000
Payment made to electoral trust by cheque (See Note 6) 1,00,000
Penalty levied by the Goods and Services tax department for delayed
filing of returns not allowable as being paid for infraction of law
(See Note 7) 5,300
Depreciation as per books 71,500
30% of interest paid on loan without deduction of tax at source not
allowable as per section 40(a)(ia) 24,000
40,23,300
Less: Depreciation allowable as per Income-tax Act, 1961 65,000
39,58,300
Less: Income from specified business (warehousing charges) credited to
profit and loss account, to be considered separately (See Note 8) 15,00,000
Income from business (other than specified business) 24,58,300
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Computation of income/ loss from specified business (See Note 8)

Income from specified business 15,00,000
Less: Deduction under section 35AD @ 100% of `25 lakhs ` 25,00,000
Loss from specified business to be carried forward as
per section 73A ` (10,00,000)
Income from Other Sources
Interest on income-tax refund 4,570
Gross Total Income 24,62,870
Less: Deduction under section 80GGB
Contribution to political party (See Note 3) ` 2,500
Contribution to an Electoral trust (See Note 3) ` 1,00,000 1,02,500
Total Income 23,60,370 `
Notes:
(1) The business premises were surveyed and differences in the figures of opening and
closing stocks and sales were found which have not been disputed and accepted by the
assessee.
Therefore, the trading account for the year is to be re-cast to arrive at the correct
amount of the gross profit/ net profit for the purpose of return of income to be filed for
the previous year ended on 31.3.2022.
Revised Trading Account

Opening Stock 8,75,000 Sales 1,56,25,000
(` 1,55,50,000 +`
75,000)
Purchases 1,25,75,000 Closing Stock 12,50,000
Freight and Cartage 1,26,000
Gross Profit 32,99,000
1,68,75,000 1,68,75,000
The difference of gross profit of ` 32,99,000 - ` 29,24,000 = ` 3,75,000 is to be added

as income of the business for the year.
(2) Bonus for the previous year 2020--21 paid after the due date for filing return for that
year would have been disallowed under section 43B for the P.Y.2020-21. However,
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when the same has been paid in December 2021, it should be allowed as deduction
in the P.Y.2021- 22 (A.Y.2022-23). Since it is already included in the figure of bonus to
staff debited to profit and loss account of this year, no further adjustment is required.
(3) The amount of ` 2,500 paid for advertisement in the souvenir issued by a political party
attracts disallowance under section 37(2B). However, such expenditure falls within the
meaning assigned to “contribute” under section 293A of the Companies Act, 1956, and
is hence, eligible for deduction under section 80GGB. Any contribution to the political
party or electoral trust made by way of cash is not allowed as deduction under section
80GGB.
Since in the present case, the payment to the political party is made by way of an
account payee cheque, it is allowed as deduction under section 80GGB.
(4) The penalty of ` 15,000 paid for non-fulfilment of delivery conditions of a contract
for reasons beyond control is not for the breach of law but was paid for breach of
contractual obligations and therefore, is an allowable expense.
(5) It has been assumed that ` 25,000 is the reasonable payment for the wife of Director,
working as a junior lawyer, since junior advocates of High Courts normally charge only `
25,000 for the same opinion and therefore, the balance ` 75,000 has been disallowed.
(6) Payment to an electoral trust qualifies for deduction under section 80GGB since the
payment is made by way of a cheque. However, since the amount has been debited
to profit and loss account, the same has to be added back for computing business
income.
(7) The interest of ` 12,750 paid on the delayed deposit of goods and services tax is for
breach of contract and hence, is allowable as deduction. However, penalty of ` 5,300
for delay in filing of returns is not allowable since it is for breach of law.
(8) Deduction @ 100% of the capital expenditure is available under section 35AD in respect
of specified business of setting up and operating a warehouse facility for storage of
agricultural produce which commences operation on or after 1.04.2012. It is presumed
that ` 25 lacs does not include expenditure on acquisition of any land.
The loss from specified business under section 35AD (warehousing) should be segregated
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from the income from other businesses, since, as per section 73A(1), any loss computed
in respect of any specified business referred to in section 35AD shall not be set off
except against profits and gains, if any, of any other specified business.
In view of the provisions of section 73A(1), the loss of ` 10 lacs from the specified
business cannot be set-off against income from other businesses. Such loss has to
be carried forward to be set-off against profit from specified business in the next
assessment year. The return should be filed on or before the due date under section
139(1) for carry forward of such losses.
Question 157
Alpha Ltd., a manufacturing company, has disclosed a net profit of ` 12.50 lacs for the
year ended 31st March, 2022. You are required to compute the taxable income (ignore the
provisions of section 115BAA) of the company for the Assessment year 2022-23, after con-
sidering the following information, duly explaining the reasons for each item of adjustment:
(i) Advertisement expenditure debited to profit and loss account includes the sum of `
60,000 paid in cash to the sister concern of a director, the market value of which is `
52,000.
(ii) Repairs of plant and machinery debited to profit and loss account includes ` 1.80 lacs
towards replacement of worn out parts of machineries. Such expenditure does not
increase the future benefit from the asset beyond its previously assessed standard of
performance.
(iii) A sum of ` 6,000 on account of liability foregone by a creditor has been taken to
general reserve. The original purchase was debited to the Profit & Loss Account in the
A.Y.2015-16.
(iv) Sale proceeds of import entitlements amounting to ` 1 lac has been credited to Profit
& Loss Account, which the company claims as capital receipt not chargeable to income
-tax.
(v) Being also engaged in the biotechnology business, the company incurred the following
expenditure on in-house research and development as approved by the prescribed
authority:
(a) Research equipments purchased ` 1,50,000.
(b) Remuneration paid to scientists ` 50,000.
The total amount of ` 2,00,000 is debited to the profit and loss account.
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Answer
Computation of taxable income of Alpha Ltd. for the A.Y.2022-23
Particulars `
Net profit as per profit and loss account 33,90,000
Add: Items debited to profit and loss A/c but not deductible or income to be
taxed
1. Payment of advertisement expenditure of `60,000
(i) ` 8,000, being the excess payment to a relative disallowed
under section 40A(2) 8,000
(ii) As the payment is made in cash and since the remaining amount
of ` 52,000 exceeds ` 10,000, 100% shall be disallowed under
section40A(3) 52,000
2. Under section 31, expenditure relatable to current repairs regarding

plant, machinery or furniture is allowed as deduction.
The test to determine whether replacement of parts of machinery
amounts to repair or renewal is whether the replacement is one
which is in substance replacement of defective parts or replacement
of the entire machinery or substantial part of the entire machinery
[CIT v. Darbhanga Sugar Co. Ltd. [1956] 29 ITR 21 (Pat)].
Here expenditure on repairs does not bring in any new asset into
existence. Such replacement can only be considered as current
repairs.
Hence, no adjustment is required.
Further, as per ICDS V on Tangible Fixed Assets, only an expenditure
that increases the future benefits from the existing asset beyond its
previously assessed standard of performance has to be added to
the actual cost.
3. Liability foregone by creditor chargeable as business income but not
credited to profit and loss account [taxable under section 41(1)] 6,000
4. Sale proceeds of import entitlements. The sale of the rights gives
rise to profits or gains taxable under section 28(iiia). As the amount
has already been credited to profit and loss account, no further
adjustment is necessary.
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Less: Amount not debited to profit and loss account but allowable as Deduction
5. Expenditure on in-house research and development is entitled to
a deduction of 100% of the expenditure (both capital and revenue)
so incurred under section 35(2AB)(1) = `2 lacs x 100% = `2 lacs
Expenditure of ` 2,00,000 has already been debited to Profit & Loss
Account, therefore only additional deduction of ` NIL lacs further to
be allowed 0
Taxable Income 13,16,000
Question 158
XYZ Ltd. is engaged in the manufacture of textile since 01-04-2009. Its Statement of Profit
& Loss shows a profit of ` 700 lakhs after debit/credit of the following items:
(1) Depreciation calculated on the basis of useful life of assets as per provisions of the
Companies Act, 2013 is ` 50 lakhs.
(2) Employer’s contribution to EPF of ` 2 lakhs and Employees’ contribution of ` 2 lakhs for
the month of March, 2021 were remitted on 8th May 2021.
(3) The company appended a note to its Income Statement that industrial power tariff
concession of ` 2.5 lakhs was received from the State Government and credited the
same to Statement of P & L.
(4) The company had provided an amount of ` 25 lakhs being sum estimated as payable to
workers based on agreement to be entered with the workers union towards periodical
wage revision once in 3 years. The provision is based on a fair estimation on wage and
reasonable certainty of revision once in 3 years.
(5) The company had made a provision of 10% of its debtors towards bad and doubtful
debts.
Total sundry debtors of the company as on 31-03-2022 was ` 200 lakhs.
(6) A debtor who owed the company an amount of ` 40 lakhs was declared insolvent and
hence, was written off by debit to Statement of Profit and loss.
(7) Sundry creditors include an amount of ` 50 lakhs payable to A & Co, towards supply of
raw materials, which remained unpaid due to quality issues. An agreement has been
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made on 31-03-2022, to settle the amount at a discount of 75% of the outstanding.

The amount waived is credited to Statement of Profit and Loss.
(8) The opening and closing stock for the year were ` 200 lakhs and ` 255 lakhs, respectively.
They were overvalued by 10%.
(9) Provision for gratuity based on actuarial valuation was ` 500 lakhs. Actual gratuity
paid debited to gratuity provision account was ` 300 lakhs.
(10) Commission of ` 1 lakhs paid to a recovery agent for realization of a debt. Tax has been
deducted and remitted as per Chapter XVIIB of the Act.
(11) The company has purchased 500 tons of industrial paper as packing material at a
price of ` 30,000/ton from PQR, a firm in which majority of the directors are partners.
PQR’s normal selling price in the market for the same material is ` 28,000/ton.
Additional Information:
(1) There was an addition to Plant & Machinery amounting to ` 50 lakhs on 10-06-2021,
which was used for more than 180 days during the year. Additional depreciation has
not been adjusted in the books.
(2) Normal depreciation calculated as per Income-tax Rules, 1962 is ` 80 lakhs.
(3) The company had credited a sub-contractor an amount of ` 10 lakhs on 31-03-2020

towards repairing a machinery component. The tax so deducted was remitted on 31-
12-2021.
(4) The company has collected ` 7 lakhs as GST from its customers and paid the same on
the due dates. However, on an appeal made, the High Court directed the Department
to refund ` 3 lakhs to the company. The company in turn refunded ` 2 lakhs to the
customers from whom the amount was collected and the balance of ` 1 lakh is still
lying under the head “Current Liabilities”.

Compute total income and tax payable for A.Y. 2022-23. Ignore MAT provisions and the
provisions of section 115BAA.
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Note - The turnover of XYZ Ltd. for the P.Y.2019-20 was ` 405 crore. Ignore provisions
of Section 115BAA and Section 115BAB
Answer
Computation of Total Income of XYZ Ltd. for the A.Y.2022-23
Particulars Amount Amount
(`) (`)
Profits and Gains from Business and Profession
Profit as per Statement of profit and loss 7,00,00,000
Add: Items debited but to be considered separately or to
be disallowed
(a) Depreciation as per Companies Act, 2013 50,00,000
(b) Employees’ contribution to EPF [See Note 1 below] 2,00,000
[Since employees’ contribution to EPF has not been
deposited on or before the due date under the PF Act,
the same is not allowable as deduction as per section
36(1)(va).
Since the same has been debited to Statement of
profit and loss, it has to be added back for computing
business income].
(c) Employer’s contribution to EPF Nil
[As per section 43B, employers’ contribution to EPF
is allowable as deduction since the same has been
deposited on or before the ‘due date’ of filing of
return under section 139(1). Since the same has been
debited to Statement of profit and loss, no further
adjustment is necessary]
(d) Provision for wages payable to workers Nil
[The provision is based on fair estimate of wages
and reasonable certainty of revision, the provision
is allowable as deduction, since ICDS X requires
‘reasonable certainty for recognition of a provision,
which is present in this case. As the provision has been
debited to Statement of profit and loss, no adjustment
is required while computing business income]
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(e) Provision for doubtful debts [10% of ` 200 lakhs] 20,00,000

[Provision for doubtful debts is allowable as deduction
under section 36(1)(viia) only in case of banks, public
financial institutions, state financial corporations,
state industrial investment corporations and non-
banking financial corporations. Such provision is not
allowable as deduction in the case of a manufacturing
company. Since the same has been debited to
Statement of profit and loss, it has to be added back
for computing business income]
(f) Bad debts written off Nil
[Bad debts write off in the book of account is allowable
as deduction under section 36(1)(vii). Since the same
has already been debited to Statement of profit and
loss, no further adjustment is required]
(g) Provision for gratuity 2,00,00,000
[Provision of ` 500 lakhs for gratuity based on actuarial
valuation is not allowable as deduction as per section
40A(7). However, actual gratuity of ` 300 lakhs paid
is allowable as deduction. Hence, the difference has
to be added back]
(h) Commission paid to recovery agent for realization of Nil
a debt.
[Commission of ` 1 lakh paid to a recovery agent for
realisation of a debt is an allowable expense under
section 37 as per DCIT v. Super Tannery (India) Ltd.
(2005) 274 ITR 338 (All). Since the same has been
debited to Statement of profit and loss, no further
adjustment is required]
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(i) Purchase of paper at a price higher than the fair 10,00,000

market Value [As per section 40A(2), the difference
between the purchase price (` 30,000 per ton) and the
fair market value (` 28,000 per ton) multiplied by the
quantity purchased (500 tons) has to be added back
since the purchase is from a related party, a firm in
which majority of the directors are partners, at a price
higher than the fair market value]
(j) Sales tax not refunded to customers out of sales tax 1,00,000 2,83,00,000
refund
[The amount of sales tax refunded to the company
by the Government is a revenue receipt chargeable to
tax under section 41(1). Deduction can be claimed of
amount refunded to customers
[CIT v. Thirumalaiswamy Naidu & Sons (1998) 230 ITR
534 (SC)]. Hence, the net amount of ` 1,00,000 (i.e.,
` 3,00,000 minus ` 2,00,000) would be chargeable to
tax]
9,83,00,000
Less: Items credited but to be considered separately/
permissible expenditure and allowances
(k) Industrial power tariff concession received from State Nil
Government
[Any assistance in the form of, inter alia, concession
received from the Central or State Government would
be treated as income as per section 2(24)(xviii). Since
the same has been credited to Statement of profit
and loss, no adjustment is required.
(l) Discount given by Sundry Creditors for supply of raw Nil
materials
[Discount of 75% given by Sundry Creditors for supply
of raw materials is taxable under section 41(1). Since
the same has already been credited to Statement of
profit and loss, no further adjustment is required]
(m) Depreciation as per Income-tax Act, 1961 80,00,000
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(n) Over-valuation of stock [` 55 lakhs × 10/110] 5,00,000

[The amount by which stock is over-valued has to be
reduced for computing business income. ` 50 lakhs,
being the difference between closing and opening
stock, has to be adjusted to remove the effect of over-
valuation]
(o) Additional Depreciation [See Note 2 below] 10,00,000
[Additional depreciation @ 20% is allowable on ` 50
lakhs, being actual cost of new plant & machinery
acquired on 10.06.2020, as the same was put to use
for more than 180 days in the P.Y.2020-21.]
(p) Payment to a sub-contractor where tax deducted 3,00,000
last year was remitted after the due date of filing of
return [See Note 3 below]
[30% of ` 10 lakhs, being payment to a sub-contractor, 98,00,000
would have been disallowed under section 40(a)(ia)
while computing the business income of A.Y.2021-22,
since tax deducted was remitted after the due date of
filing of return.
However, the same is allowable in A.Y.2022-23, since
the remittance has been made on 31.12.2021]
Total Income 8,85,00,000
Computation of tax liability of XYZ Ltd. for A.Y.2022-23

Tax @ 30% on the above total income 2,65,50,000
(since the turnover exceeded ` 400 crore in the P.Y. 2019-20)
Add: Surcharge @ 7% (since total income exceeds ` 1 crore but less than
Rs. 10 crores)
18,58,500
2,84,08,500
Add: Health and Education cess @ 4% 11,36,340
Total tax liability 2,95,44,840
Notes:
(1) Employees contribution to PF deposited after the due date mentioned under the PF
Act is not allowable as deduction as per section 36(1)(va). The same has also been
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affirmed by the Gujarat High Court in CIT v. Gujarat State Road Transport Corporation
(2014) 366 ITR 170. Hence, in the above solution, employees’ contribution to PF has
been disallowed while computing business income.
The CBDT has, vide Circular No. 22/2015, dated 17.12.2015, clarified that the employer
contribution to provident fund remitted on or before due date of filing of return under
section 139(1), is allowable as deduction while computing Business Income. Further,
it has also clarified that the circular does not apply to claim of deduction relating to
employee’s contribution welfare funds which are governed by section 36(1)(va) of the
Act.
Alternate View - An alternate view has, however, been expressed in CIT v. Kiccha Sugar
Co. Ltd. (2013) 356 ITR 351 (Uttarakhand), CIT v. AIMIL Ltd (2010) 321 ITR 508 (Del) and
CIT v. Nipso Polyfabriks Ltd (2013) 350 ITR 327 (HP) that employees contribution to
PF, deducted from the salaries of the employees of the assessee, shall be allowed as
deduction from the income of the employer-assessee, if the same is deposited by the
employerassessee with the provident fund authority on or before the due date of filing
of return for the relevant previous year. If this view is considered, then no disallowance
would be attracted in this case, since the employees’ contribution has been remitted
before the due date of filing of return of income.
As per Amendment by Finance Act 2021, provisions of Section 43B is not applicable to
employees contributions to welfare funds
(2) ` 50 lakhs, being the addition to plant and machinery on 10.6.2021 qualifies for
additional depreciation @ 20% under section 32(1)(iia). Since only the normal
depreciation as per Income-tax Rules, 1962, has been debited to profit and loss
account, additional depreciation of ` 10 lakhs (being 20% of ` 50 lakhs) has to be
deducted while computing business income.
(3) Since the tax deducted during the P.Y.2020-21 was remitted only on 31.12.2021, i.e.,
after the due date of filing of return for A.Y. 2021-22 ` 3,00,000, being 30% of ` 10
lakh would have been disallowed while computing the business income of that year.
Since the tax deducted has been remitted on 31.12.2021, ` 3,00,000 would be allowed
as deduction while computing the business income of the A.Y.2022-23.
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Question 159
Parik Hospitality Limited is engaged in the business of running hotels of 3-star category.
The company’s Statement of Profit and Loss for the previous year ended 31st March, 2022
shows a profit of ` 152 lakhs after debiting or crediting the following items:
(a) Payment of ` 0.25 lakh and ` 0.30 lakh in cash on 3rd December, 2020 and 10th
December, 2021, respectively, for purchase of crab, lobster and squid to Mr. Raja, a
fisherman, and Mr. Khalid, a middleman for these products, respectively.
(b) Contribution towards employees’ pension scheme notified by the Central Government
under section 80CCD for a sum of ` 3 lakhs calculated at 12% of basic salary and
Dearness Allowance payable to the employees.
(c) Payment of ` 6.50 lakhs towards transportation of various materials procured by one
of its hotels to M/s. Bansal Transport, a partnership firm, without deduction of tax at
source. The firm opts for presumptive taxation under section 44AE and has furnished a
declaration to this effect. It also furnished its Permanent Account Number in the tender
document.
(d) Profit of ` 12 lakhs on sale of a plot of land to Avimunya Limited, a domestic company,
the entire shares of which are held by the assessee company. The plot was acquired by
Parik Hospitality Limited on 1st June, 2020.
(e) Contribution of ` 2.50 lakhs to Indian Institute of Technology with a specific direction
for use of the amount for scientific research programme approved by the prescribed
authority.
(f) Expense of ` 10 lakhs on foreign travel of two directors for a collaboration agreement
with a foreign company for a brewery project to be set up. The negotiation did not
succeed and the project was abandoned.
(g) Fees of ` 1 lakh paid to independent directors for attending Board meeting without
deduction of tax at source under section 194J.
(h) Depreciation charged ` 10 lakhs.
(i) ` 10 lakhs, being the additional compensation received from the State Government
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pursuant to an interim order of Court in respect of land acquired by the State Government
in the previous year 2015-16.
(j) Dividend received from a foreign company ` 5 lakhs.
(i) As a corporate debt restructuring, the bank has converted unpaid interest of ` 10
lakhs upto 31st March, 2021 into a new loan account repayable in five equal annual
installments. The first installment of ` 2 lakhs was paid in March, 2022 by debiting new
loan account.
(ii) Depreciation as per Income-tax Act, 1961 ` 15 lakhs.
(iii) The company received a bill for ` 2 lakhs on 31st March 2022 from a supplier of
vegetables for supply made in March, 2022. The bill was omitted to be recorded in the
books in March, 2022. The bill was paid in April, 2022 and the necessary entry was
made in the books then.

Compute total income of Parik Hospitality Limited for the Assessment Year 2022-23
indicating the reason for treatment of each item. Ignore the provisions relating to minimum
alternate tax and the provisions of section 115BAA.
Answer
Computation of Total Income of Parik Hospitality Ltd. for the A.Y.2022-23
Particulars Amount Amount

(`) (`)
Profit as per Statement of profit and loss 1,52,00,000
Add: Items debited but to be considered separately or to
be disallowed
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(a) Payment to middleman for purchase of crab etc. in an 30,000

amount exceeding ` 10,000
[Under section 40A(3), disallowance is attracted
in respect of expenditure for which cash payment
exceeding ` 10,000 is made on a day to a person.
Payment of ` 25,000 to fishermen for purchase of crab
etc. is covered by exception under Rule 6DD. However,
payment of ` 30,000 to middlemen for purchase of
crab etc. is not covered under the exception - CBDT
Circular 10/2008 dated 5/12/2008].
(b) Contribution towards employees’ pension scheme 50,000
in excess of 10% of salary disallowed under section
40A(9)
[Contribution to the extent of 10% of salary (basic
salary + dearness allowance, if it forms part of pay for
retirement benefits) is allowable as deduction under
section 36(1)(iva). In this case, it is presumed that
dearness allowance forms part of pay for retirement
benefits]
(c) Payment to transport contractor without deduction of -
tax at source
[Since the contractor opts for presumptive taxation
under section 44AE and furnished a declaration
to this effect, tax is not required to be deducted at
source under section 194C in respect of payment to
transport contractor].
(f) Expenses on foreign travel of two directors for a 10,00,000
collaboration agreement which failed to materialize
[Where expenditure is incurred for a project not related
the existing business and the project was abandoned
without creating a new asset, the expenses are capital
in nature as per Mc Gaw - Ravindra Laboratories (India)
Ltd. v. CIT (1994) 210 ITR 1002 (Guj.). Brewery project
is not related to the existing business of running three
star hotels]
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(g) Fees paid to directors without deducting tax at source 30,000 11,10,000
[30% of ` 1 lakh]
[Disallowance @ 30% would be attracted under
section 40(a)(ia) for non-deduction of tax at source
from director’s remuneration on which tax is deductible
under section 194J]
1,63,10,000
Less: Items credited but to be considered separately/
Expenditure to be allowed
(d) Profit on sale of plot of land to 100% subsidiary 12,00,000
[Short-term capital gains arise on sale of plot of land
held for less than 24 months. However, in this case,
since the transfer is to a 100% subsidiary company
and the subsidiary company is an Indian company,
the same would not constitute a transfer for levy
of capital gains tax as per section 47(iv). Since this
amount has been credited to the statement of profit
and loss, the same has to be deducted for computing
business income].
(e) Contribution to IIT for scientific research 0
[Contribution to IIT for scientific research programme
approved by the prescribed authority qualifies for
deduction @ 100% under section 35(2AA) Since the
amount is already debited to the profit and loss
account, no further adjustment is required.
(h) Depreciation 5,00,000
[Depreciation allowable under the Income-tax Act,
1961 is ` 15 lakhs whereas the depreciation as per
books of account debited to the statement of profit
and loss is ` 10 lakhs. Hence, the additional amount
of ` 5 lakhs has to be deducted while computing
business income]
307
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(i) Additional compensation received from State 10,00,000

Government
[Since the additional compensation has been received
pursuant to an interim order of the Court, the same
would be deemed as income chargeable to tax under
the head “Capital Gains” in the year of final order as
per section 45(5). Since the compensation has been
credited to the statement of profit and loss, the same
has to be deducted while computing business income]
(j) Dividend received from foreign company 5,00,000
[Dividend received from foreign company is taxable
under the head “Income from other sources”. Since the
said dividend has been credited to the statement of
profit and loss, the same has to be deducted while
computing business income]
(i) Interest paid during the year 2,00,000
[Conversion of unpaid interest into loan shall not be
construed as payment of interest for the purpose
section 43B. The amount of unpaid interest converted
into a new loan will be allowable as deduction only
in the year in which such converted loan is actually
paid. Since ` 2 lakhs has been paid in the P.Y. 2020-
21, the same is allowable as deduction]
(ii) Interest paid during the year 2,00,000
[Conversion of unpaid interest into loan shall not be
construed as payment of interest for the purpose
section 43B. The amount of unpaid interest converted
into a new loan will be allowable as deduction only
in the year in which such converted loan is actually
paid. Since ` 2 lakhs has been paid in the P.Y. 2020-
21, the same is allowable as deduction]
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(iii) Purchases omitted to be recorded in the books 2,00,000 36,00,000

[Since the purchase is made in March, 2022 (i.e., P.Y.
2021-22), in respect of which bill of ` 2 lakhs received
on 31.3.2022 has been omitted to be recorded in the
books in that year, it has to be deducted to compute
the business income [Kedarnath Jute Manufacturing
Company Ltd. v. CIT (1971) 82 ITR 363 (SC)]. It is logical
to assume that the company is following mercantile
system of accounting.].
Income under the head “Profits and Gains of Business 1,24,00,000
or Profession”
Income from Other Sources 5,00,000
Dividend received from foreign company
[Dividend received from a foreign company is
chargeable to tax under the head “Ïncome from other
sources”.]
Gross Total Income 1,29,00,000
Less: Deduction under Chapter VI-A Nil
Total Income 1,29,00,000
Question 160
Mr. Harish, aged 66, running business as a proprietor furnishes the particulars of his income
for the year ended 31.03.2022 as under:
(a) Net Profit of ` 3,65,500 from the wholesale business of textiles and fabrics arrived at
after charge of following expenses in the Profit & Loss Account:
(i) Personal travelling expenses of ` 12,750.
(ii) Purchase of furniture items for shop on 13.6.2019 of ` 25,000 but charged in shop expenses.
(b) He owns a house with two floors constructed with the financial assistance of HDFC,
out of which ground floor is used by him for self-use and first floor was let out on rent
for ` 8,500 p.m. from April, 2020. The municipal tax paid for the whole house was of
` 2,500 and interest paid on housing loan for the construction was ` 52,000. Both the
floors of the house are identical.
(c) He deposited insurance premium on the life of self of ` 12,500, wife ` 13,500, son and
daughter of ` 28,000, repaid housing loan of ` 50,000 and paid ` 55,000 by credit card
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for health insurance of himself and his family.

Compute taxable income and the amount of tax payable by Mr. Harsh on such income for
the Assessment Year 2022-23.
Answer
Computation of total income of Mr. Harish for the A.Y.2022-23
Particulars ` `
Income from house property
Self-occupied portion (50%)
Annual Value under section 23(2) Nil
Less: Deduction under section 24(b)
Interest on housing loan [` 52,000 × 50%] 26,000 (26,000)
Let-out portion (50%)
Income of let out portion being rent of ` 8,500 p.m. received
for 12 months (Rent received has been taken as the GAV in the
absence of other information).
Gross Annual Value under section 23(1) (` 8,500 × 12) 1,02,000
Less: 50% of municipal taxes paid allowable in respect of
rented
out portion (i.e., 50% of ` 2,500) 1,250
Net Annual Value (NAV) 1,00,750
Less: Deduction under section 24
30% of NAV under section 24(a) 30,225
Interest on housing loan under section 24(b) 26,000 44,525
18,525
Profits and gains of business or profession
Net profit as per profit and loss account of wholesale
business of
textiles and fabrics 3,65,500
Add: Expenses charged in profit and loss account either
not allowable or to be considered separately -
Personal travelling expenses of proprietor 12,750
Purchase of furniture wrongly debited to shop expenses 25,000
4,03,250
Less: Depreciation on furniture @ 10% on ` 25,000 2,500 4,00,750
Less: Deduction under Chapter VI-A
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Under section 80C

 Life insurance premium
Self 12,500
Wife 13,500
Son and daughter 28,000
 Housing loan repaid 50,000
1,04,000
Under section 80D [Medical insurance premium]
Mediclaim insurance premium of ` 55,000 [maximum de-
ductible is ` 50,000 where it covers a resident senior citi- 50,000 1,54,000
zen]
Total Income 2,65,275
Total Income (rounded off) 2,65,280
Tax on total income of ` 2,65,280 Nil
(The basic exemption limit for senior citizen is ` 3,00,000
for A.Y. 2020-21)
Question 161
The following are the details relating to four resident entities, AB & Co., LM & Co., PQ & Co.
and XY & Co. for the P.Y.2021-22 –
Particulars AB & Co. (Firm) LM & Co. PQ & Co. (LLP) XY & Co. (Firm)
(Firm)
(1) Natureof Retail trading Business Wholesale Interior
business/ of plying, trading decoration
profession hiring or
leasing goods
carriages
(2) Systemof Mercantile Cash Mercantile Cash
accounting
(3) Turnover/ Rs. 200 lakhs Rs. 101 lakhs Rs. 100 lakhs Rs. 50 lakhs
Gross receipts
(4) Amount Rs. 150 lakhs Rs. 80 lakhs Rs. 70 lakhs Rs. 45 lakhs
received by
way of RTGS/
NEFTinthe
P.Y.2021-22
[included in
(3) above]
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(5) Amount Rs. 30 lakhs Rs. 21 lakhs Rs. 10 lakhs Rs. 5 lakhs
received by
way of cash in
the P.Y.2021-
22 [included in
(3) above]
(6) Amount Rs. 20 lakhs - Rs. 20 lakhs -
received by
way of RTGS/
NEFT between
1.4.2021&
31.7.2021
(7) Working Rs. 5 lakhs Rs. 1.50 lakhs Rs. 3 lakhs Rs. 5 lakhs
partners’
salary
(8) Interest on Rs. 1 lakh Rs. 0.50 lakh - Rs. 2 lakhs
capital@12%
paid to
partners
(9) Profit as Rs. 5.60 lakhs Rs. 4.10 lakhs Rs. 4.50 lakhs Rs. 20 lakhs
per books
of account
maintained as
per section
44AA [after
deducting
working
partners’
salaryand
Interest on
capital]
(10) No. of vehicles - 10 (See - -
owned Note 2 below
for details)
(1) It may be assumed that partners’ salary and interest are authorised by the partnership
deed, relates to a period after the partnership deed and is within the permissible limits
laid down under section 40(b).
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(2) The details of vehicles owned by M/s. LM & Co. are as follows –
Gross Vehicle Number Date of purchase Date when first put
Weight (in kgs) to use
(1) 8,000 3 28.5.2021 1.6.2021
(2) 9,000 2 31.7.2021 1.8.2021
(3) 10,000 1 17.8.2021 20.8.2021
(4) 11,000 1 30.9.2021 1.10.2021
(5) 12,000 1 11.11.2021 13.11.2021
(6) 13,000 2 31.12.2021 1.1.2022
questions –
1. Which of the four entities are eligible to declare income on presumptive basis under the
Income-tax Act, 1961 for A.Y.2022-23?
(a) Only AB & Co and LM & Co.
(b) Only AB & Co and XY & Co.
(c) AB & Co, PQ & Co and XY & Co.
(d) AB & Co, LM & Co and XY & Co.
2. What is the business income to be declared by AB & Co. and PQ & Co. for A.Y.2022-23,
assuming that the entities wish to make maximum tax savings without getting their
books of account audited?
(c) Rs. 5.60 lakhs and Rs. 4.50 lakhs, respectively
(d) Rs. 13 lakhs and Rs. 6.60 lakhs, respectively
3. What is the business income to be declared by LM & Co. for A.Y.2022-23, assuming that
the firm wishes to make maximum tax savings without getting its books of account
audited?
(a) Rs. 4,48,000
(b) Rs. 6,36,500
(c) Rs. 4,36,500
(d) Rs. 4,10,000
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4. What is the income to be declared by XY & Co. under the head “Profits and gains
of business or profession” for A.Y.2022-23, assuming that the firm wishes to make
maximum tax savings, without getting its books of account audited?
(a) Rs. 18 lakhs
(b) Rs. 20 lakhs
(c) Rs. 25 lakhs
(d) Rs. 22.50 lakhs
5. Would your answer to questions 3.3 and 3.4 change, if the firms decide to get their
books of accounts audited?
(a) No, there would be no change in the answer to either questions 3.3 and 3.4
(b) Yes, there would be change in the answer to both question 3.3 and 3.4
(c) There would be a change in the answer to question 3.3 but not in the answer to
question 3.4
(d) There would be a change in the answer to question 3.4 but not in the answer to
question 3.3
Answer Key
Question No. Answer
1 (d) AB & Co, LM & Co and XY & Co.
2 (a) Rs. 12.60 lakhs and Rs. 4.50 lakhs, respectively
3 (c) Rs. 4,36,500
4 (c) Rs. 25 lakhs
5 (b) Yes, there would be change in the answer to both question 3.3 and
3.4
Question 162
Wellness Pvt Ltd, an Indian company incorporated on 1st April, 2021 offers multi-disciplinary
marketing services in print and digital media to Indian businesses. To carry on its business,
the company has engaged local advertising specialists in the field of print and digital media.
These specialists attend to clients of the company by doing required consultancy, execution
and also perform analysis of results. Depending upon the service request of the client –
whether print or digital mode, specialists perform relevant tasks. The specialists employ
their individual skills and exercise discretion, judgement while performing the duties. The
policies of the company regarding working hours, annual leave applicable to the staff do
not apply to these specialists. The remuneration of specialists varies every month depending
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upon type of service, seniority of specialist, skills involved etc.

During the year 2021-2022, Wellness Pvt Ltd recorded a turnover of Rs. 1.10 crores in its
books of accounts. Inspired by the Government’s Digital India initiative, the company provided
electronic payment facilities to customers. Most of the billed amount was collected through
digital means, except from Customer X (Bill no. 15, dated 26th June, 2021 of Rs. 5,50,000).
Customer X paid the amount in cash to the company in 4 installments on different dates -
Rs. 1,50,000, Rs. 75,000, Rs. 1,75,000 and Rs. 1,50,000.
The details of payments made by the company during the year 2021- 2022 are as under:
Particulars Mode of Amount (Rs.)
payment
Remuneration to 20 specialists Net-banking 35,00,000
Salary to staff (HR, junior co- ordinators) (Each person has Net-banking 20,00,000
total income more than Rs. 5 lakh)
Wages to 1 security guard, 2 housekeeping (wages of Rs. Cash 5,40,000
15,000 p.m. each)
Computers purchased on 15th May, 2020 and put to use A/c payee 3,50,000
from 15th October, 2021 Cheque
Interest for P.Y. 2021-22 on loan availed on 15th April, 2021 A/c payee 34,500
from SBI for purchase of computers Cheque
Other administration expenses (Each expense is of less than Cash 70,000
Rs. 8,000)
Advance given to suppliers, specialists etc. Cash 90,000
The company could recruit a qualified finance and accounts professional only on 21st March,
2022. Post his appointment, necessary income tax statutory compliances were undertaken
and the default with respect to non-deduction of tax on expenses from April, 2021 to March,
2022 was corrected in the month of April, 2022. The company withheld tax on expenses
liable for withholding tax and paid such tax to the credit of Government in the same month.
Being the first year of operation, all transactions of the company are with Indian resident
parties. The company has chosen to follow mercantile system of accounting for tax purposes.
questions -
1. Is Wellness Pvt. Ltd. required to get its books of account audited under section 44AB
for A.Y.2022-23?
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(i) No, since turnover of company is less than Rs. 5 crore.

(ii) Yes, since the turnover of the company is more than Rs. 1 crore.
(iii) No, since the turnover of the company is less than Rs. 2 crore.
(iv) No, as aggregate cash receipts during the year do not exceed 5% of total amount
received.
(v) Yes, as cash payments during the year exceed 5% of aggregate payments.
(vi) Yes, as the company is not eligible for presumptive taxation.
The correct answer is -
(a) No, due to reasons stated in (i) and (iv) above
(b) Yes, due to reasons stated in (ii) and (v) above
(c) No, due to reason stated in (iii) above
(d) Yes, due to reasons stated in (ii) and (vi) above
2. What is the amount to be disallowed for non-deduction of tax at source while computing
profits and gains of business or profession?
(a) Nil, since the entire amount of tax has been deducted and remitted on or before
the due date of filing of return u/s 139(1)
(b) Rs. 10,50,000
(c) Rs. 16,50,000
(d) Rs. 18,12,000
3. What is the amount of depreciation allowable u/s 32(1) for the P.Y. 2021-22 on the
computers purchased?
(a) Rs. 73,600
(b) Rs. 70,000
(c) Rs. 73,450
(d) Rs. 76,900
4. What is the total income of Wellness Pvt Ltd. for the A.Y. 2022-23?
(a) Rs. 69,89,900
(b) Rs. 69,75,500
(c) Rs. 53,39,900
(d) Rs. 47,99,900
5. Is any penalty imposable on the company for cash receipts from Customer X and if yes,
how much?
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(a) No, since each receipt is less than Rs. 2,00,000

(b) Yes, Rs. 5,50,000
(c) No, since amount exceeding Rs. 2,00,000 is not received on a single day
(d) No, since amount received is not in the nature of loan or advance
Answer Key
Question No. Answer
1 (b) Yes, due to reasons stated in (ii) and (v) above
2 (c) Rs. 16,50,000
3 (a) Rs. 73,600
4 (a) Rs. 69,89,900
5 (b) Yes, Rs. 5,50,000
Question 163
Beta Ltd., a company engaged in bio-technology business, has disclosed a net profit of
Rs. 33 lakh for the year ended 31st March, 2022, after debiting the following items of
expenditure:
(i) Depreciation as per the Companies Act, 2013 Rs. 15,20,000.
(ii) Interest paid in dollars to X Inc., a foreign company, without deduction of tax at source
Rs. 1,50,000. Such tax was, however, deducted on 10.4.2021 and remitted on 7.5.2021.
(iii) Expenditure on in-house scientific research and development:
(a) Research equipments purchased Rs. 2,20,000.
(b) Remuneration paid to scientists Rs. 80,000.
(iv) Contribution to National Laboratory for scientific research Rs. 5,00,000
Additional information
The company purchased a new plant and machinery for Rs. 40,00,000 on 2nd September,
2021 and put the same to use on 1st November, 2021. For this purpose, it borrowed Rs.
30,00,000 on 1st September, 2021 and paid interest@10% p.a. The company also purchased
a motor car for Rs. 7,00,000 on 2nd October, 2019, which was put to use on the same date.
Written down value of block of plant and machinery (15%) as on 1st April, 2021 is Rs.
95,00,000.
questions –
1. What would be the depreciation allowable u/s 32 in respect of block of plant and
machinery (15%) and motor car for A.Y.2022-23? Assume that motor car is the only
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asset in the block.

(a) Rs. 28,42,500 and Rs. 2,10,000, respectively
2. What is the quantum of disallowance, if any, attracted for non- deduction of tax at
source on interest paid to X Inc. during the P.Y.2021-22?
(a) Nil, since the tax was deducted and deposited on or before the due date of filing
of return of income
(b) Rs. 30,000
(c) Rs. 45,000
(d) Rs. 1,50,000
3. What would be the deduction allowable u/s 35, if the company opts for the special
provisions under section 115BAA?
(b) Nil
(b) Rs. 80,000
(c) Rs. 3,00,000
(d) Rs. 8,00,000
4. What would be the income under the head “Profits and gains of business and profession”
of Beta Ltd. for A.Y.2022-23, if the company does not opt for the special provisions
under section 115BAA?
(a) Rs. 18,89,250
(b) Rs. 26,35,000
(c) Rs. 25,64,250
(d) Rs. 26,89,250
5. What would be the income chargeable under the head “Profits and gains of business
and profession” of Beta Ltd. for A.Y.2022-23, if the company opts for the special
provisions under section 115BAA?
(a) Rs. 30,94,250
(b) Rs. 34,69,250
(c) Rs. 37,89,250
(d) Rs. 38,94,250
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Final ca Direct tax
Answer Key
Question Answer
No.
1 (c) Rs. 21,33,750 and Rs. 1,47,000, respectively
2 (d) Rs. 1,50,000
3 (c) Rs. 3,00,000
4 (c) Rs. 25,64,250
5 (b) Rs. 34,69,250
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INCOME FROM OTHER

SOURCES
Question 164
Discuss definition of dividend?
Answer
The term dividend has been defined in section 2(22) of the Income-tax Act, 1961 to include
the following items:
(a) any distribution by a company of accumulated profits, whether capitalised or not, if
such distribution entails the release by the company to its shareholders of all or any
part of the assets of the company;
(b) any distribution to its shareholders by a company of debentures, debenture-stock, or
deposit certificates in any form, whether with or without interest, and any distribution
to its preference shareholders of shares by way of bonus, to the extent to which the
company possesses accumulated profits, whether capitalised or not;
(c) any distribution made to the shareholders of a company on its liquidation, to the extent
to which the distribution is attributable to the accumulated profits of the company
immediately before its liquidation, whether capitalised or not;
(d) any distribution to its shareholders by a company on the reduction of its capital, to
the extent to which the company possesses accumulated profits which arose after the
end of the previous year ending next before the 1st day of April, 1933, whether such
accumulated profits have been capitalised or not ;
(e) any payment by a company, not being a company in which the public are substantially
interested, of any sum (whether as representing a part of the assets of the company
or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a
shareholder, being a person who is the beneficial owner of shares (not being shares
entitled to a fixed rate of dividend whether with or without a right to participate in
profits) holding not less than ten per cent of the voting power, or to any concern in
which such shareholder is a member or a partner and in which he has a substantial
interest (hereafter in this clause referred to as the said concern) or any payment by
any such company on behalf, or for the individual benefit, of any such shareholder,
to the extent to which the company in either case possesses accumulated profits ; but
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Final ca Direct tax
“dividend” does not include—

(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect
of any share issued for full cash consideration, where the holder of the share is
not entitled in the event of liquidation to participate in the surplus assets;
(ii)
a distribution made in accordance with sub-clause (c) or sub-clause (d) in so
far as such distribution is attributable to the capitalised profits of the company
representing bonus shares allotted to its equity shareholders after the 31st day
of March, 1964, and before the 1st day of April, 1965 ;
(iii) any advance or loan made to a shareholder or the said concern by a company in
the ordinary course of its business, where the lending of money is a substantial
part of the business of the company ;
(iv) any dividend paid by a company which is set off by the company against the
whole or any part of any sum previously paid by it and treated as a dividend
within the meaning of sub-clause (e), to the extent to which it is so set off;
(v) any payment made by a company on purchase of its own shares from a shareholder
in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of
1956);
(vi) any distribution of shares pursuant to a demerger by the resulting company to
the shareholders of the demerged company (whether or not there is a reduction
of capital in the demerged company).
Explanation 1.—The expression “accumulated profits”, wherever it occurs in this clause, shall
not include capital gains arising before the 1st day of April, 1946, or after the 31st day of
March, 1948, and before the 1st day of April, 1956.
Explanation 2.—The expression “accumulated profits” in sub-clauses (a), (b), (d) and (e),
shall include all profits of the company up to the date of distribution or payment referred to
in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the
date of liquidation, but shall not, where the liquidation is consequent on the compulsory
acquisition of its undertaking by the Government or a corporation owned or controlled
by the Government under any law for the time being in force, include any profits of the
company prior to three successive previous years immediately preceding the previous year
in which such acquisition took place.
Explanation 2A.—In the case of an amalgamated company, the accumulated profits, whether
capitalised or not, or loss, as the case may be, shall be increased by the accumulated profits,
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whether capitalised or not, of the amalgamating company on the date of amalgamation.

Explanation 3.—For the purposes of this clause,—
(a) “concern” means a Hindu undivided family, or a firm or an association of persons or a
body of individuals or a company ;
(b) a person shall be deemed to have a substantial interest in a concern, other than a
company, if he is, at any time during the previous year, beneficially entitled to not less
than twenty per cent of the income of such concern ;
Building & Machinery Depreciation fund not to be included in accumulated profits. - CIT v.
Jaldu Rama Rao (1983) 140 ITR 168 (Andhra Pradesh)
Question 165
Can the loan or advance given to a shareholder by the company, in return for an advantage
conferred on the company by the shareholder, be deemed as dividend under section 2(22)
(e)?
Answer
Pradip Kumar Malhotra v. CIT (2011) 338 ITR 538 (Cal.)
Facts of the case: In the present case, the assessee, a shareholder holding substantial voting
power in the company, permitted his property to be mortgaged to the bank for enabling
the company to take the benefit of loan. The shareholder requested the company to release
the property from the mortgage. On failing to do so and for retaining the benefit of loan
availed from bank, the company gave advance to the assessee, which was authorized by a
resolution passed by its Board of Directors. Issue: The issue under consideration is whether
the advance given by the company to the assessee-shareholder by way of security deposit
for keeping his property as mortgage on behalf of company to reap the benefit of loan, can
be treated as deemed dividend within the meaning of section 2(22)(e).
High Court’s Observations: In the above case, the Calcutta High Court observed that, the
phrase “by way of advance or loan” appearing in section 2(22)(e) must be construed to
mean those advances or loans which a shareholder enjoys simply on account of being a
person who is the beneficial owner of shares (not being shares entitled to a fixed rate of
dividend whether with or without a right to participate in profits) holding not less than
10% of the voting power. In case such loan or advance is given to such shareholder as a
consequence of any further consideration which is beneficial to the company received from
such a shareholder, such advance or loan cannot be said to a deemed dividend within the
meaning of the Act. Thus, gratuitous loan or advance given by a company to a shareholder,
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Final ca Direct tax
who is the beneficial owner of shares holding not less than 10% of the voting power, would
come within the purview of section 2(22)(e) but not to the cases where the loan or advance
is given in return to an advantage conferred upon the company by such shareholder.
High Court’s Decision: In the present case, the advance given to the assessee by the company
was not in the nature of a gratuitous advance; instead it was given to protect the interest
of the company. Therefore, the said advance cannot be treated as deemed dividend under
section 2(22)(e).
Question 166
Would the provisions of deemed dividend under section 2(22)(e) be attracted in respect of
financial transactions entered into in the normal course of business?
Answer
CIT v. Ambassador Travels (P) Ltd. (2009) 318 ITR 376 (Del.)
Under section 2(22)(e), loans and advances made out of accumulated profits of a company
in which public are not substantially interested to a beneficial owner of shares holding
not less than 10% of the voting power or to a concern in which such shareholder has
substantial interest is deemed as dividend. However, this provision would not apply in the
case of advance made in the course of the assessee’s business as a trading transaction. The
assessee, a travel agency, has regular business dealings with two concerns in the tourism
industry dealing with holiday resorts.
High Court’s Observations & Decision: The High Court observed that the assessee was involved
in booking of resorts for the customers of these companies and entered into normal business
transactions as a part of its day-to-day business activities. The High Court, therefore, held
that such financial transactions cannot under any circumstances be treated as loans or
advances received by the assessee from these concerns for the purpose of application of
section 2(22)(e).
Question 167
Can repair and renovation expenses incurred by a company in respect of premises leased
out by a shareholder having substantial interest in the company, be treated as deemed
dividend?
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Answer
CIT v. Vir Vikram Vaid (2014) 367 ITR 365 (Bom)
Facts of the case: The assessee holds more than 75% of equity shares in a company and is
the executive director of the company. In his personal capacity, he is the owner of certain
premises in which he was carrying on a proprietary business. Subsequently, the assessee
ceased to carry on the business of proprietary concern and hence, let out the premises to
the company. The company incurred ` 2.51 crores towards construction and improvement
of factory premises, which it continued to use otherwise than as the owner of the premises.
The Assessing Officer held that the amounts spent by the company towards repair and
renovation is taxable as deemed dividend. In the alternative, the said amount was to be
treated as a perquisite taxable in the hands of the assessee.
Appellate Authorities’ Views: The Commissioner (Appeals) noted the assessee’s submission
that he had leased out the said premises for a rent lower than the prevailing market rate
with an understanding that all expenditure for its upkeep and maintenance would be spent
by the company on account of the assessee having stopped business activities. According to
the Commissioner (Appeals), the assessee failed to substantiate his claim. The Commissioner
(Appeals) was of the view that all the conditions provided under section 2(22)(e) for deemed
dividend were satisfied. On the other hand, the Tribunal concluded that the payment was
neither a deemed dividend nor a perquisite chargeable to tax.
High Court’s Observations: The challenge before the High Court by the Revenue was only
with regard to applicability of section 2(22)(e) in this case. The High Court observed that no
money had been paid by way of advance or loan to the shareholder who has substantial
interest in the company. Further, the amount spent was towards repairs and renovation of
the premises owned by the assessee but occupied by the company as lessee. There is no
dispute that the company had taken on rent the aforesaid premises. The High Court observed
that the expenditure incurred by virtue of repairs and renovation on the premises cannot be
brought within the definition of advance or loan given to the shareholder having substantial
interest in the company, though he is the owner of the premises. It cannot be treated as
payment by the company on behalf of the shareholder or for the individual benefit of such
shareholder. If held in such manner, it is a mere assumption not tenable in law.
High Court’s Decision: The High Court, accordingly, held that the repair and renovation
expenses in respect of premises owned by the assessee and occupied by the company cannot
be treated as deemed dividend.
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Question 168
What are the tests for determining “substantial part of business” of lending company for the
purpose of application of exclusion provision under section 2(22)?
Answer
CIT v. Parle Plastics Ltd. (2011) 332 ITR 63 (Bom.)
High Court’s Observations: Under section 2(22), “dividend” does not include, inter alia,
any advance or loan made to a shareholder by a company in the ordinary course of its
business, where the lending of money is a substantial part of the business of the company.
The expression used in the exclusion provision of section 2(22) is “substantial part of the
business”. Sometimes a portion which contributes a substantial part of the turnover, though it
contributes a relatively small portion of the profit, would be termed as a substantial part of
the business. Similarly, a portion which is relatively small as compared to the total turnover,
but generates a large portion, say, more than 50% of the total profit of the company would
also be a substantial part of its business. Percentage of turnover in relation to the whole as
also the percentage of the profit in relation to the whole and sometimes even percentage of
manpower used for a particular part of the business in relation to the total manpower or
work force of the company would be required to be taken into consideration for determining
the substantial part of business. The capital employed for a specific division of a company
in comparison to total capital employed would also be relevant to determine whether the
part of the business constitutes a substantial part. In this case, 42% of the total assets
of the lending company were deployed by it by way of loans and advances. Further, if the
income earned by way of interest is excluded, the other business had resulted in a net loss.
These factors were considered in concluding that lending of money was a substantial part
of the business of the company.
High Court’s Decision: Since lending of money was a substantial part of the business of the
lending company, the money given by it by way of advance or loan to the assessee could
not be regarded as a dividend, as it had to be excluded from the definition of “dividend” by
virtue of the specific exclusion in section 2(22).
Question 169
Is loan to HUF who is a shareholder in a closely held company chargeable to tax as deemed
dividend?
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Answer
Gopal & Sons (HUF) v. CIT (2017) 391 ITR 1 (SC)
Facts of the case: The assessee is a HUF which holds 37.12% shares in M/s. G.S. Fertilizers
(P.) Ltd., a closely held company. During the relevant previous year, it received loans and
advances from the company. Its return was scrutinized by the Assessing Officer who treated
the loans and advances as deemed dividend under section 2(22)(e). The company declared
in its annual return that the advances were given to the HUF but the share certificates were
issued in the name of the HUF’s Karta, Shri Gopal Kumar Sanei.
Appellate Authorities’ views: The CIT (Appeals) confirmed the order of the Assessing Officer.
The Tribunal, however, observed that since a HUF cannot be a registered or beneficial
shareholder of a company, the amount cannot be taxed as deemed dividend. The High
Court restored the order of the Assessing Officer by observing that the assessee did not
dispute that the karta is a member of HUF which has taken the loan from the company and,
therefore, the case is covered by section 2(22)(e).
Issue: Whether loan given by a closely held company to a HUF is chargeable to tax as
deemed dividend under section 2(22)(e) despite the stated position of law being that a HUF
cannot be a shareholder in a company?
Supreme Court’s Observations: When a loan is given by a closely held company, it is

chargeable to tax as deemed dividend if the loan was given to a shareholder (having more
than 10% shares in the company) or to a concern in which the shareholder has substantial
interest (having more than 20% share in the concern). ‘Concern’ includes HUF. In the instant
case, loans were given to the HUF. There was some dispute as to who was the shareholder
- the Karta or the HUF as share certificates were issued in the name of the former but the
annual return mentioned the latter. The Court observed that in either scenario, section 2(22)
(e) would be attracted. If the HUF was the shareholder, as it held more than 10% shares,
situation was covered. If the Karta was the shareholder, the HUF would be the concern
in which the Karta has substantial interest. Further, on the issue whether a HUF can be a
shareholder or not, it was observed that on account of Explanation 3 to section 2(22)(e), a
concern includes a HUF.
Supreme Court’s Decision: The Supreme Court, accordingly, held that the loan amount is to
be assessed as deemed dividend under section 2(22)(e).
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Question 170
Can a trade advance be treated as deemed dividend?
Answer
Clarification regarding trade advance not to be treated as deemed dividend under section 2(22)(e)
– [Circular No. 19/2017, dated 12.06.2017]
Section 2(22)(e) provides that “dividend” includes any payment by a company in which public
are not substantially interested, of any sum by way of advance or loan to a shareholder
who is the beneficial owner of shares holding not less than 10% of the voting power, or
to any concern in which such shareholder is a member or a partner and in which he has a
substantial interest or any payment by any such company on behalf, or for the individual
benefit, of any such shareholder, to the extent to which the company in either case possesses
accumulated profits. The CBDT observed that some Courts in the recent past have held that
trade advances in the nature of commercial transactions would not fall within the ambit of
the provisions of section 2(22)(e) and such views have attained finality. Some illustrations /
examples of trade advances/commercial transactions held to be not covered under section
2(22)(e) are as follows:
(i) Advances were made by a company to a sister concern and adjusted against the dues
for job work done by the sister concern. It was held that amounts advanced for business
transactions do not to fall within the definition of deemed dividend under section 2(22)
(e) [CIT vs. Creative Dyeing & Printing Pvt. Ltd. [NJRS] 2009-LL-0922-2, ITA No. 250 of
2009, Delhi High Court].
(ii) Advance was made by a company to its shareholder to install plant and machinery at
the shareholder’s premises to enable him to do job work for the company so that the
company could fulfil an export order. It was held that as the assessee proved business
expediency, the advance was not covered by section 2(22)(e) [CIT vs Amrik Singh, [NJRS]
2015-LL-0429-5, ITA No. 347 of 2013, P & H High Court]
(iii) A floating security deposit was given by a company to its sister concern against the
use of electricity generators belonging to the sister concern. The company utilised gas
available to it from GAIL to generate electricity and supplied it to the sister concern
at concessional rates. It was held that the security deposit made by the company to
its sister concern was a business transaction arising in the normal course of business
between two concerns and the transaction did not attract section 2(22)(e) [CIT, Agra vs
Atul Engineering Udyog, [NJRS] 2014-LL-0926-121, ITA No. 223 of 2011, Allahabad
High Court]
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In view of the above, the CBDT has, vide this circular, clarified that it is a settled position
that trade advances, which are in the nature of commercial transactions, would not
fall within the ambit of the word ‘advance’ in section 2(22)(e) and therefore, the same
would not to be treated as deemed dividend.
Question 171
MNO (P) Ltd. is a company in which the public are not substantially interested. K is a
shareholder of the company holding 15% of the equity shares. The accumulated profits
of the company as on 1.10.2021 amounted to ` 10,00,000. The company lent ` 1,00,000
to K by an account payee bank draft on 1.10.2021. The loan was not connected with the
business of the company. K repaid the loan to the company by an account payee bank draft
on 30.3.2021. Examine the effect of the borrowal and repayment of the loan by K on the
computation of his total income for the assessment year 2022-23
Answer
As per section 2(22)(e), any payment by a company, in which the public are not substantially
interested, by way of advance or loan to a shareholder, being a person who is the beneficial
owner of shares holding not less than 10% of the voting power, shall be treated as dividend
to the extent to which the company possesses accumulated profits. In the instant case, MNO
(P) Ltd. is a company in which the public are not substantially interested. The company has
accumulated profits of ` 10,00,000 on 1.10.2021. The loan given by the company to K was
not in the course of its business. K holds more than 10% of the equity shares in the company.
Therefore, assuming that K has voting power equivalent to his shareholding, section 2(22)
(e) comes into play. Deemed dividend of ` 1,00,000 under section 2(22)(e) would be taxable
in the hands of Mr. K at normal rate of tax. Under section 2(22)(e), the liability arises the
moment the loan is borrowed by the shareholder and it is immaterial whether the loan is
repaid before the end of the accounting year or not. Therefore, the repayment of loan by
K to the company on 30.3.2022 will not affect the taxability of the sum of ` 1,00,000 as
deemed dividend.
Question 172
Discuss important aspects concerning taxation of dividend income in the hands of
shareholder?
Answer
As per Section 56(2)(i), dividend is chargeable to tax under the head “Income from Other
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Sources”. However, as per Section 115-O(8) no tax on distributed profits shall be chargeable
in respect of the total income of a company, being a unit of an International Financial
Services Centre, deriving income solely in convertible foreign exchange, for any assessment
year on any amount declared, distributed or paid by such company, by way of dividends
(whether interim or otherwise) on or after the 1st day of April, 2017, out of its current
income or income accumulated as a unit of International Financial Services Centre after
the 1st day of April, 2017, either in the hands of the company or the person receiving such
dividend.
Further, no deduction shall be allowed from the dividend income, or income in respect of
units of a Mutual Fund specified under clause (23D) of section 10 or income in respect of
units from a specified company defined in the Explanation to clause (35) of section 10, other
than deduction on account of interest expense, and in any previous year such deduction
shall not exceed twenty per cent of the dividend income, or income in respect of such units,
included in the total income for that year, without deduction under this section.
As per The Finance Act 2021, advance tax liability on dividend income shall arise only after receipt
of dividend income. This will help taxpayers in saving interest on late payment of advance tax due
to incorrect estimation of dividend income. However, this will not include deemed dividend under
Section 2(22)(e).
Question 173
Discuss provisions for taxation of receipt by a shareholder in the event of liquidation of a
company?
Answer
As per Section 2(22)(c), any distribution made to the shareholders of a company on its
liquidation, to the extent to which the distribution is attributable to the accumulated profits
of the company immediately before its liquidation, whether capitalised or not.
Where a shareholder on the liquidation of a company receives any money or other assets
from the company, he shall be chargeable to income-tax under the head “Capital gains”,
in respect of the money so received or the market value of the other assets on the date of
distribution, as reduced by the amount assessed as dividend within the meaning of section
2(22)(c) and the sum so arrived at shall be deemed to be the full value of the consideration
for the purposes of section 48.
In short, FVOC = Amount received by shareholder – Dividend u/s. 2(22)(c)
Further, as per section 2(42A), period of holding of shares shall be considered till such time
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when company goes into liquidation (i.e. period after liquidation to be ignored)
Also, if shareholder receives asset on liquidation, then cost of such asset shall be FMV of
asset considered for the purposes of Capital Gains;
In the case of N Bagavathy Ammal (SC), it was held that even rural agricultural land received
on liquidation of company shall be chargeable under the head Capital Gains because sec-
tion 46 uses the words “Asset” and not “Capital asset”
Also, in Brahmi Investments (Gujarat), it was held that if a subsidiary company goes into
liquidation and distributes its assets to holding company, then exemption u/s. 47(iv)/(v)
cannot be claimed.
Question 174
Aries Tubes Private Ltd. went into liquidation on 01.06.2020. The company was seized and
possessed of the following funds prior to the distribution of assets to the shareholders:
Particulars Rs.
Share capital (issued on 01.04.2013) 5,00,000
Reserves prior to 01.06.2019 3,00,000
Excess realisation in the course of liquidation 5,00,000
Total 13,00,000
There are 5 shareholders, each of whom received ` 2,60,000 from the liquidator in full set-
tlement. The shareholders desire to invest the resultant element of capital gain in long term
specified assets as defined in section 54EC. You are required to examine the various issues
and advice the shareholders about their liability to income tax.
Answer
Under section 46(1), where the assets of a company are distributed to its shareholders on its
liquidation, such distribution shall not be regarded as transfer in the hands of the company
for the purpose of section 45.
However, under section 46(2), where the shareholder, on liquidation of a company, receives
any money or other assets from the company, he shall be chargeable to income-tax under
the head “capital gains”, in respect of the money so received or the market value of the
other assets on the date of distribution as reduced by the amount of dividend deemed
under section 2(22)(c) and the sum so arrived at shall be deemed to be the full value of the
consideration for the purposes of section 48.
As per section 2(22)(c), dividend includes any distribution made to the shareholders of a
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company on its liquidation, to the extent to which the distribution is attributable to the
accumulated profits of the company immediately before its liquidation, whether capitalized
or not.
In this case, the accumulated profits immediately before liquidation is ` 3,00,000. The share
of each shareholder is ` 60,000 (being one-fifth of ` 3,00,000). An amount of ` 60,000 is
the deemed dividend under section 2(22)(c). The same is exempt under section 10(34) in the
hands of the shareholder, since the company is liable to dividend distribution tax in respect
of the same.
Therefore, ` 2,00,000 [i.e. ` 2,60,000 minus ` 60,000, being the deemed dividend under
section 2(22)(c)] is the full value of consideration in the hands of each shareholder as per
section 46(2). Against this, the investment of ` 1,00,000 by each shareholder is to be deducted
to arrive at the capital gains of ` 1,00,000 of each shareholder. The benefit of indexation is
available to the shareholders (since the shares are held for more than 24 months and hence
long-term capital asset), but could not be computed in the absence of required information.
Since the equity shares are not listed, it would not be liable for securities transaction tax
and hence, the capital gain (long term) would be taxable under section 112. The benefit of
concessional rate of tax @10% without indexation would also not be available. Hence, such
long term capital gain would be taxable @20% with indexation benefit.
Exemption under section 54EC is available only where there is an actual transfer of capital
assets and not in the case of deemed capital gain as per the decision rendered in the case
of CIT v. Ruby Trading Co (P) Ltd (2003) 259 ITR 54 (Raj). Therefore, exemption under section
54EC will not be available in this case since it is deemed transfer and not actual transfer.
Furthermore, with effect from A.Y. 2019-20, exemption under section 54EC is available only
on transfer of long-term capital asset, being land or building or both.
Question 175
Discuss provisions of Section 80M?
Answer
As per Section 80M;
1) Where the gross total income of a domestic company in any previous year includes any
income by way of dividends from any other domestic company or a foreign company
or a business trust, there shall, in accordance with and subject to the provisions of
this section, be allowed in computing the total income of such domestic company, a
deduction of an amount equal to so much of the amount of income by way of dividends
received from such other domestic company or foreign company or business trust as
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does not exceed the amount of dividend distributed by it on or before the due date.
2) Where any deduction, in respect of the amount of dividend distributed by the domestic
company, has been allowed under sub-section (1) in any previous year, no deduction
shall be allowed in respect of such amount in any other previous year.
Explanation.—For the purposes of this section, the expression “due date” means the
date one month prior to the date for furnishing the return of income under sub-section
(1) of section 139.
Question 176
Discuss taxability of dividend received from a foreign company?
Answer
As per Section115BBD(1), where the total income of an assessee, being an Indian company,
includes any income by way of dividends declared, distributed or paid by a specified foreign
company, the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on the income by way of such dividends, at the
rate of 15 per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had
its total income been reduced by the aforesaid income by way of dividends.
Further, as per Section 115BBD(2), notwithstanding anything contained in this Act, no
deduction in respect of any expenditure or allowance shall be allowed to the assessee
under any provision of this Act in computing its income by way of dividends referred to in
sub-section (1).
Specified foreign company means a foreign company in which the Indian company holds
twenty-six per cent or more in nominal value of the equity share capital of the company.
Question 177
Discuss provisions of TDS on dividend?
Answer
An Indian company is required to withhold tax at source under section 194 and a Mutual
Fund is required to withhold tax under section 194K:
1) The principal officer of an Indian company or a company which has made the prescribed
arrangements for the declaration and payment of dividends (including dividends on
preference shares) within India, shall, before making any payment by any mode in
respect of any dividend or before making any distribution or payment to a shareholder,
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who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-
clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section
2, deduct from the amount of such dividend, income-tax at the rate of ten per cent:
2) Provided that no such deduction shall be made in the case of a shareholder, being an
individual, if—
(a) the dividend is paid by the company by any mode other than cash; and
(b) the amount of such dividend or, as the case may be, the aggregate of the amounts
of such dividend distributed or paid or likely to be distributed or paid during the
financial year by the company to the shareholder, does not exceed five thousand
rupees:
3) Provided further that the provisions of this section shall not apply to such income
credited or paid to—
(a) the Life Insurance Corporation of India established under the Life Insurance
Corporation Act, 1956 (31 of 1956), in respect of any shares owned by it or in
which it has full beneficial interest;
(b) the General Insurance Corporation of India (hereafter in this proviso referred to as
the Corporation) or to any of the four companies (hereafter in this proviso referred
to as such company), formed by virtue of the schemes framed under sub-section
(1) of section 16 of the General Insurance Business (Nationalisation) Act, 1972 (57
of 1972), in respect of any shares owned by the Corporation or such company or
in which the Corporation or such company has full beneficial interest;
(c) any other insurer in respect of any shares owned by it or in which it has full
beneficial interest.
4) As per Section 194K, any person responsible for paying to a resident any income in
respect of—
(a) units of a Mutual Fund specified under clause (23D) of section 10; or
(b) units from the Administrator of the specified undertaking; or
(c) units from the specified company,
shall, at the time of credit of such income to the account of the payee or at the time of
payment thereof by any mode, whichever is earlier, deduct income-tax thereon at the
rate of ten per cent:
5) Provided that the provisions of this section shall not apply—
(i) where the amount of such income or, as the case may be, the aggregate of the
amounts of such income credited or paid or likely to be credited or paid during the
financial year by the person responsible for making the payment to the account
of, or to, the payee does not exceed five thousand rupees; or
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(ii) if the income is of the nature of capital gains.

6) Explanation 1.—For the purposes of this section,—
(a) “Administrator” means the Administrator as referred to in clause (a) of section 2
of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of
2002);
(b) “specified company” means a company as referred to in clause (h) of section 2
of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of
2002);
(c) “specified undertaking” shall have the meaning assigned to it in clause (i) of
section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002
(58 of 2002).
7) Explanation 2.—For the removal of doubts, it is hereby clarified that where any income
referred to in this section is credited to any account, whether called “suspense account”
or by any other name, in the books of account of the person liable to pay such income,
such crediting shall be deemed to be the credit of such income to the account of the
payee and the provisions of this section shall apply accordingly.
Question 178
Let us assume that XYZ Limited has received a dividend of Rs. 10,00,000 during the FY
2021-22. It has distributed entire Rs. 10,00,000 as dividend to its shareholders. Now, you
are required to compute deduction under section 80M in the following scenarios:
Particulars Case – 1 Case – 2 Case – 3 Case – 4

Gross Total Income 12,00,000 12,00,000 12,00,000 23,00,000
Dividend received from Domestic Co Domestic Co Domestic Co Foreign Co
Date of distributing dividend 31.03.2021 28.09.2021 31.10.2021 28.06.2021
Expenses Incurred for earning Nil 20,000 Nil Nil
Dividend
Answer
Case – 1: Deduction u/s. 80M shall be lower of:
Income by way of dividends from any other domestic company 10,00,000

Amount of dividend distributed by it on or before the due date 10,00,000
Lower 10,00,000
Total Income [GTI – 80M] 2,00,000
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Income by way of dividends* from any other domestic company 9,80,000

Lower 9,80,000
* Apex Court in Distributors Baroda (P.) Ltd. v. Union of India [1985] 155 ITR 120, held
that the deduction required to be allowed under Section 80M(1) of the IT Act is liable to
be calculated with reference to the amount of dividend computed in accordance with the
provisions of the Act, and forming part of the gross total income, and not with reference to
the full amount of dividend received by the assessee.

Amount of dividend distributed by it on or before the due date* Nil
Lower Nil
*Due date for return filing is 31.10.2021. Hence, distribution was required to be made on or
before 30.09.2021

Lower 10,00,000
Total Income [GTI – 80M] 13,00,000*
*Although deduction u/s. 80M is allowable on dividend from foreign company, but s.
115BBD(2) specifically bars a deduction against dividend income from foreign company. This
leads to an absurd situation as under:
Total Income (as above) 13,00,000

Break-up of the above:
Dividend from foreign co 10,00,000
Balance Income 3,00,000
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Dividend will be taxed at 15% u/s. 115BBD and balance income at normal rates
applicable
Note: This is an absurd consequence of not amending provisions of section 115BBD(2). The
deduction u/s. 80M has been computed having regard to the amount of foreign dividend but
deduction is allowed against income other than foreign dividend. This position requires an
amendment in law.
Question 179
Is share premium taxable in the hands of issuer company?
Answer
Share premium is a capital receipt and therefore, generally not regarded as income. However,
it was noticed that several companies issued shares at inflated values in order to receives
cash inflows with having to pay tax on the same. Accordingly, provisions of section 56(2)
(viib) was inserted.
1. Where a company, not being a company in which the public are substantially interested,
receives, in any previous year, from any person being a resident, any consideration for
issue of shares that exceeds the face value of such shares, the aggregate consideration
received for such shares as exceeds the fair market value of the shares shall be regarded
as Income from Other Sources;
2. There are 2 methods prescribed in Rule 11UA for determination of Fair Market Value of
Shares:
(a) Net Asset Value Method [‘NAV’]
The fair market value of unquoted equity shares for the purposes of sub-clause
(i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56
shall be the value, on the valuation date, of such unquoted equity shares as
determined in the following manner under clause (a) or clause (b), at the option
of the assessee, namely:—
A – L X PV
PE
A stands for book value of the assets in the balance-sheet as reduced by any
amount of tax paid as deduction or collection at source or as advance tax payment
as reduced by the amount of tax claimed as refund under the Income-tax Act
and any amount shown in the balance-sheet as asset including the unamortised
amount of deferred expenditure which does not represent the value of any asset
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L stands for book value of all liabilities shown in the balance sheet but not
including the following amounts:
1. the paid-up capital in respect of equity shares
2. the amount set apart for payment of dividends on preference shares and
equity shares where such dividends have not been declared before the date
of transfer at a general body meeting of the company
3. reserves and surplus, by whatever name called, even if the resulting figure is
negative, other than those set apart towards depreciation
4. any amount representing provision for taxation, other than amount of tax
paid as deduction or collection at source or as advance tax payment as
reduced by the amount of tax claimed as refund under the Income-tax Act,
to the extent of the excess over the tax payable with reference to the book
profits in accordance with the law applicable thereto
5. any amount representing provisions made for meeting liabilities, other than
ascertained liabilities
6. any amount representing contingent liabilities other than arrears of dividends
payable in respect of cumulative preference shares
PE stands for total amount of paid up equity share capital as shown in the
balance-sheet
PV stands for the paid up value of such equity shares
(b) Discounted Cash Flow Method [‘DCF’]
The valuation can be conducted as per DCF method by a merchant banker or an
accountant [omitted w.e.f. 24-05-2018]
3. The provisions of Section 56(2)(viib) shall not apply where the consideration for issue of
shares is received—
(i) by a venture capital undertaking from a venture capital company or a venture
capital fund 67[or a specified fund]; or
(ii) by a company from a class or classes of persons as may be notified by the Central
Government in this behalf.
Question 180
Discuss taxability of interest received on compensation or enhanced compensation?
Answer
As per Section 56(2)(viii) income by way of interest received on compensation or on enhanced
compensation referred to in is taxable under the head “Income from Other Sources”.
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Further, irrespective of method of accounting followed by the assessee, the interest received
on any compensation or on enhanced compensation, as the case may be, shall be deemed
to be the income of the previous year in which it is received;
Question 181
Discuss tax treatment of forfeiture of money received in the course of transfer of a capital
asset on or after 01.04.2014?
Answer
As per Section 56(2)(ix) any sum of money received as an advance or otherwise in the course
of negotiations for transfer of a capital asset, is taxable as Income from Other Sources if,—
(a) such sum is forfeited; and
(b) the negotiations do not result in transfer of such capital asset;
Question 182
Discuss taxability of compensation received in connection with termination or modification
of terms of employment?
Answer
As per Section 56(2)(xi), any compensation or other payment, due to or received by any
person, by whatever name called, in connection with the termination of his employment or
the modification of the terms and conditions relating thereto.
Question 183
Discuss taxability of casual income in the nature of winnings from lottery, crossword puzzle
etc.
Answer
Casual Income (Section 56(2)(ib)) Casual income means income in the nature of winning from
lotteries, crossword puzzles, races including horse races, card games and other games of
any sort, gambling, betting etc. Such winnings are chargeable to tax at a flat rate of 30%
under section 115BB and tax is deductible at source@30% under section 194B on such
income in case it exceeds ` 10,000
Question 184
Can winnings of prize money on unsold lottery tickets held by the distributor of lottery
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tickets be assessed as business income and be subject to normal rates of tax instead of the
rates prescribed under section 115BB?
Answer
CIT v. Manjoo and Co. (2011) 335 ITR 527 (Kerala)
High Court’s Observations: On the above issue, the Kerala High Court observed that winnings
from lottery is included in the definition of income by virtue of section 2(24)(ix). Further, in
practice, all prizes from unsold tickets of the lotteries shall be the property of the organising
agent. Similarly, all unclaimed prizes shall also be the property of the organising agent
and shall be refunded to the organising agent. The High Court contended that the receipt of
winnings from lottery by the distributor was not on account of any physical or intellectual
effort made by him and therefore cannot be said to be “income earned” by him in business.
The said view was taken on the basis that the unsold lottery tickets cease to be stock-in-
trade of the distributor because, after the draw, those tickets are unsaleable and have no
value except waste paper value and the distributor will get nothing on sale of the same
except any prize winning ticket if held by him, which, if produced will entitle him for the prize
money. Hence, the receipt of the prize money is not in his capacity as a lottery distributor
but as a holder of the lottery ticket which won the prize. The Lottery Department also
does not treat it as business income received by the distributor but instead treats it as
prize money paid on which tax is deducted at source. Further, winnings from lotteries are
assessable under the special provisions of section 115BB, irrespective of the head under
which such income falls. Therefore, even if the argument of the assessee is accepted and the
winnings from lottery is taken to be received by him in the course of his business and as such
assessable as business income, the specific provision contained in section 115BB, namely,
the special rate of tax i.e. 30% would apply.
High Court’s Decision: The High Court, therefore, held that the rate of 30% prescribed under
section 115BB is applicable in respect of winnings from lottery received by the distributor.
Note: The Hon’ble Guwahati High Court in the case of Director of State Lotteries Assam v.
ACIT [(1999) 238 ITR 1 (Gau)] had held that the assessee in the said case was not liable
for non-deduction of tax u/s 194B of the I.T.Act in respect of unclaimed / undisbursed
prize money. The assessee in the case considered by the Hon’ble Guwahati High Court had
contended that unclaimed/ undisbursed prize money was not winning from lottery and as
such the provisions of section 194B of the I.T.Act for deduction of income tax at source was
not applicable in respect thereof. The Court held that there are no “wining from lotteries”
as the petitioner had not participated in the draw intending for a prize. Any income which
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is incidental to the business activities carried on by the assessee is a business income and
cannot be treated as income from other sources as one of the necessary ingredients of
lottery is that the winner should be a participant in the lottery, and that the organizing
agent does not participate in lottery draw with an intention to win prize, but derives income
from selling lottery tickets.
Question 185
Discuss provisions of Section 56(2)(x)?
Answer
Any sum of money or value of property received without consideration or for inadequate
consideration to be subject to tax in the hands of the recipient [Section 56(2)(x)]
In order to prevent the practice of receiving sum of money or the property without
consideration or for inadequate consideration, section 56(2)(x) brings to tax any sum of
money or the value of any property received by any person without consideration or the
value of any property received for inadequate consideration.
(a) Sum of Money:
If any sum of money is received without consideration and the aggregate value of
which exceeds ` 50,000, the whole of the aggregate value of such sum is chargeable
to tax.
(b) Immovable property [Land or building or both]:
I. If an immovable property is received
(a) Without consideration: the stamp duty value of such property would be
taxed as the income of the recipient, if it exceeds ` 50,000.
(b) For Inadequate consideration: If consideration is less than the stamp duty
value of the property and the difference between the stamp duty value and
consideration is more than the higher of –
(i) ` 50,000 and
(ii) 10% of consideration, the difference between the stamp duty value and the
consideration shall be chargeable to tax in the hands of the assessee as
“Income from other sources”.
Note: The above limit shall be considered for each property separately.
II. Value of property to be considered where the date of agreement is different from date
of registration: Taking into consideration the possible time gap between the date
of agreement and the date of registration, the stamp duty value may be taken
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as on the date of agreement instead of the date of registration, if the date of the
agreement fixing the amount of consideration for the transfer of the immovable
property and the date of registration are not the same, provided whole or part
of the consideration has been paid by way of an account payee cheque or an
account payee bank draft or by use of electronic clearing system (ECS) through a
bank account or through such prescribed electronic mode on or before the date
of agreement.
The prescribed electronic modes notified are credit card, debit card, net banking,
IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real
Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM
(Bharat Interface for Money) Aadhar Pay as other electronic modes of payment
[CBDT Notification No. 8/2020 dated 29.01.2020].
III. If the stamp duty value of immovable property is disputed by the assessee, the
Assessing Officer may refer the valuation of such property to a Valuation Officer.
In such a case, the provisions of section 50C and section 155(15) shall, as far as
may be, apply for determining the value of such property. As per section 50C,
if such value is less than the stamp duty value, the same would be taken for
determining the value of such property, for computation of income under this
head in the hands of the buyer.
(c) Movable Property [Property other than immovable property]: If movable property is
received
(i) Without consideration: The aggregate fair market value of such property on the
date of receipt would be taxed as the income of the recipient, if it exceeds `
50,000.
(ii) For inadequate consideration: If the difference between the aggregate fair market
value and such consideration exceeds ` 50,000, such difference would be taxed as
the income of the recipient.
(d) Applicability of section 56(2)(x): The provisions of section 56(2)(x) would apply only to
the specified property which is the nature of a capital asset of the recipient and not
stock-intrade, raw material or consumable stores of any business of the recipient.
Therefore, only transfer of a specified capital asset, without consideration or for
inadequate consideration would attract the provisions of section 56(2)(x).
Question 186
Mr. A, a dealer in shares, received the following without consideration during the P.Y.2021-
22 from his friend Mr. B, -
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(1) Cash gift of ` 75,000 on his anniversary, 15th April, 2021.

(2) Bullion, the fair market value of which was ` 60,000, on his birthday, 19th June, 2021.
(3) A plot of land at Faridabad on 1st July, 2021, the stamp value of which is ` 5 lakh on
that date. Mr. B had purchased the land in April, 2009.
Mr. A purchased from his friend Mr. C, who is also a dealer in shares, 1000 shares of X Ltd.
@ ` 400 each on 19th June, 2021, the fair market value of which was ` 600 each on that
date. Mr. A sold these shares in the course of his business on 23rd June, 2021.
Further, on 1st November, 2021, Mr. A took possession of property (building) booked by him
two years back at ` 20 lakh. The stamp duty value of the property as on 1st November, 2021
was ` 32 lakh and on the date of booking was ` 23 lakh. He had paid ` 1 lakh by account
payee cheque as down payment on the date of booking. On 1st March, 2022, he sold the
plot of land at Faridabad for ` 7 lakh.
Compute the income of Mr. A chargeable under the head “Income from other sources” and
“Capital Gains” for A.Y.2022-23.
Answer:
Computation of Income from Other Sources for Mr. A for AY 2022-23:
1 Cash gift is taxable under section 56(2)(x), since it exceeds ` 50,000 75,000
2 Since bullion is included in the definition of property, therefore, when 60,000
bullion is received without consideration, the same is taxable, since the
aggregate fair market value exceeds ` 50,000
3 Stamp value of plot of land at Faridabad, received without consider- 5,00,000
ation, is taxable under section 56(2)(x)
4 Difference of ` 2 lakh in the value of shares of X Ltd. purchased from
Mr. C, a dealer in shares, is not taxable as it represents the stock-in-
trade of Mr. A. Since Mr. A is a dealer in shares and it has been men-
tioned that the shares were subsequently sold in the course of his
business, such shares represent the stock-in-trade of Mr. A. -
5 Difference between the stamp duty value of ` 23 lakh on the date of 3,00,000
booking and the actual consideration of ` 20 lakh paid is taxable under
section 56(2)(x) since the difference exceeds ` 1 lakh being, the higher
of ` 50,000 and 10% of consideration.
Income from Other Sources 9,35,000
Computation of Capital Gains of Mr. A for the AY 2022-23
Particulars Rs.
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Sale Consideration 7,00,000

Less: Cost of acquisition [deemed to be the stamp value charged to tax under 5,00,000
section 56(2)(x) as per section 49(4)]
Short-term capital gains 2,00,000
Question 187
State the treatment of Interest from non-SLR Securities of Banks: Whether chargeable un-
der the head “Profits and gains of business or profession” or “Income from other sources”?
Answer
Circular No. 18, dated 2.11.2015:
The issue addressed by this circular is whether in the case of banks, expenses relatable to
investment in non-SLR securities need to be disallowed under section 57(i), by considering
interest on non-SLR securities as “Income from other sources.” Section 56(1)(id) provides that
income by way of interest on securities shall be chargeable to incometax under the head
“Income from Other Sources”, if the income is not chargeable to income-tax under the head
“Profits and Gains of Business and Profession”. The CBDT clarified that the investments made
by a banking concern are part of the business of banking. Therefore, the income arising from
such investments is attributable to the business of banking falling under the head “Profits
and Gains of Business and Profession”.
Question 188
Discuss tax treatment of income from family pension?
Answer
In the case of income in the nature of family pension: A deduction of a sum equal to 33- 1/3
percent of such income or ` 15,000, whichever is less, is allowable.
For the purposes of this deduction “family pension” means a regular monthly amount pay-
able by the employer to a person belonging to the family of an employee in the event of his
death.
Exemption in respect of family pension

1. The family pension received by the widow or children or nominated heirs, of a member of
the armed forces (including para-military forces) of the Union, where the death of such
member has occurred in the course of operational duties, in specified circumstances
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would, however, be exempt under section 10(19).

2. The family pension received by any member of the family of an individual who had
been in the service of Central or State Government and had been awarded “Param Vir
Chakra” or “Vir Chakra” or “Vir Chakra” or other notified gallantry awards would be
exempt under section 10(18)(ii).
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CLUBBING OF INCOME
Question 189
What do you mean by Clubbing of Income?
Answer
Under the Income-tax Act, 1961, an assessee is generally taxed in respect of his own income.
However, there are certain cases where an assessee has to pay tax in respect of income of
another person. The provisions for the same are contained in sections 60 to 65 of the Act.
These provisions have been enacted to counteract the tendency on the part of the tax-
payers to dispose off their property or transfer their income in such a way that their tax
liability can be avoided or reduced.
Note: In the case of individuals, income-tax is levied on a slab system on the total income.
The tax system is progressive i.e. as the income increases, the applicable rate of tax increases.
Some taxpayers in the higher income bracket have a tendency to divert some portion of their
income to their spouse, minor child etc. to minimize their tax burden. In order to prevent
such tax avoidance, clubbing provisions have been incorporated in the Act, under which
income arising to certain persons (like spouse, minor child etc.) have to be included in the
income of the person who has diverted his income for the purpose of computing tax liability.
Question 190
Discuss provisions of Section 60 and 61?
Answer
Transfer of income without transfer of asset [Section 60]
(i) If any person transfers the income from any asset without transferring the asset itself,
such income is to be included in the total income of the transferor.
(ii) It is immaterial whether the transfer is revocable or irrevocable and whether it was
made before the commencement of this Act or after its commencement.
Example: Mr. A confers the right to receive rent in respect of his house property on his
wife, Mrs. A, without transferring the house itself to her. In this case, the rent received
by Mrs. A will be clubbed with the income of Mr. A.
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Income arising from revocable transfer of assets [Section 61]

All income arising to any person by virtue of a revocable transfer of assets is to be included
in the total income of the transferor.
Meaning of revocable transfer [Section 63]
Transfer is deemed to be revocable if—
(i) it contains any provision for the retransfer, directly or indirectly, of the whole or any
part of the income or assets to the transferor, or
(ii) it gives, in any way to the transferor, a right to reassume power, directly or indirectly,
over the whole or any part of the income or the assets.
This clubbing provision will operate even if only part of income of the transferred asset
had been applied for the benefit of the transferor. Once the transfer is revocable, the entire
income from the transferred asset is includible in the total income of the transferor.
Exceptions where clubbing provisions are not attracted even in case of revocable transfer
[section 62]
Section 61 will not apply to any income arising to any person in the following two cases –
(i) Transfer not revocable during the life time of the beneficiary or the transferee –
If there is a transfer of asset which is not revocable during the life time of the transferee,
the income from the transferred asset is not includible in the total income of the
transferor provided the transferor derives no direct or indirect benefit from such income.
If the transferor receives direct or indirect benefit from such income, such income is to
be included in his total income even though the transfer may not be revocable during
the life time of the transferee.
(ii) Transfer made before April 1, 1961 and not revocable for a period exceeding six years -
Income arising from the transfer of an asset before 1.4.61, which was not revocable
for a period exceeding six years, is not includible in the total income of the transferor
provided the transferor does not derive direct or indirect benefit from such income.
In both the above cases, as and when the power to revoke the transfer arises, the
income arising by virtue of such transfer will be included in the total income of the
transferor.
Question 191
Discuss Clubbing of income arising to spouse
Answer
(I) Income by way of remuneration from a concern in which the individual has substantial
interest [Section 64(1)(ii)]
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(i) Remuneration in cash or kind to spouse from a concern in which the individual
has a substantial interest is to be clubbed:
In computing the total income of any individual, all such income which arises,
directly or indirectly, to the spouse of such individual by way of salary, commission,
fees or any other form of remuneration, whether in cash or in kind, from a concern
in which such individual has a substantial interest shall be included.
Clubbing provisions will not apply where remuneration is received on account of
technical or professional qualifications: Clubbing provisions, however, does not
apply where the spouse of the said individual possesses technical or professional
qualifications and the income to the spouse is solely attributable to the application
of his/her technical or professional knowledge or experiences. In such an event,
the income arising to such spouse is to be assessed in his/her hands.
Both husband and wife have substantial interest in a concern: Where both husband
and wife have substantial interest in a concern and both are in receipt of income
by way of salary etc. from the said concern, such income will be includible in the
hands of that spouse, whose total income, excluding such income is higher.
Where any such income is once included in the total income of either spouse,
income arising in the succeeding year shall not be included in the total income of
the other spouse unless the Assessing Officer is satisfied, after giving that spouse
an opportunity of being heard, that it is necessary to do so.
Question 192
Mr. Arun holds shares carrying 55% voting power in MNO Ltd. Mrs. Anamika, wife of Mr. Arun
is working as a computer software programmer in MNO Ltd. at a salary of ` 35,000 p.m.
She is, however, not qualified for the job. The other income of Mr. Arun & Mrs. Anamika are
` 7,30,000 & ` 4,20,000, respectively. Compute the gross total income of Mr. Arun and Mrs.
Anamika for the A.Y.2022-23.
Answer
Circumstances when an individual is deemed to have substantial interest in a concern
Mr. Arun holds shares carrying 55% voting power in MNO Ltd i.e. a substantial interest in the
company. His wife is working in the same company without any professional qualifications
for the same. Thus, by virtue of the clubbing provisions of the Act, the salary received by
Mrs. Anamika from MNO Ltd. will be clubbed in the hands of Mr. Arun.
Computation of Gross total income of Mr. Arun
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Particulars Rs. Rs.

Salary received by Mrs. Anamika [35,000 X 12] 4,20,000
(-) Standard Deduction u/s. 16 50,000 3,70,000
Other Income 7,30,000
The gross total income of Mrs. Anamika is ` 4,20,000.
Question 193
Will your answer be different if Mrs. Anamika was qualified for the job?
Answer
If Mrs. Anamika possesses professional qualifications for the job, then the clubbing provi-
sions shall not be applicable.
Gross total income of Mr. Arun = ` 7,30,000 (other income)
Gross total income of Mrs. Anamika = Salary received by Mrs. Anamika [` 35,000×12] less `
50,000, being the standard deduction under section 16(ia) plus other income [` 4,20,000] =
` 7,90,000
Question 194.
Mr. Binu holds shares carrying 33% voting power in Yamma Ltd. Mrs. Babita is working as
an accountant in Yamma Ltd. getting income from salary (computed) of ` 3,60,000 without
any qualification in accountancy. Mr. Binu also receives ` 32,000 as interest on securities.
Mrs. Babita owns a house property which she has let out. Rent received from tenants is `
6,500 p.m. Compute the gross total income of Mr. Binu and Mrs. Babita for the A.Y. 2022-23.
Answer
Since Mrs. Babita is not professionally qualified for the job, the clubbing provisions shall be
applicable.
Computation of Gross total income of Mr. Binu
Particulars Rs.
Income from Salary of Mrs. Babita (computed) 3,60,000
Income from Securities 32,000
3,92,000
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Computation of Gross total income of Mrs. Babita
Particulars Rs.
Income from Salary (clubbed in hands of Binu) 0
Net Annual Value (-) Standard deduction @ 30%
78,000 – 23,400 54,600
Gross Total Income 54,600
Question 195
Discuss provision for clubbing of Income arising to the spouse from an asset transferred
without adequate consideration [Section 64(1)(iv)]
Answer
(i) Transfer of asset (other than house property):
Where there is a 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-spouse from the
transferred asset, either directly or indirectly, shall be included in the total income of
the transferor-spouse.
(ii) Transfer of house property:
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) Income from accretion of the transferred asset:
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. The income arising on transferred assets
alone has to be clubbed. However, income earned by investing such income (arising
from transferred asset) cannot be clubbed.
(iv) Meaning of adequate consideration:
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.
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(v) Transferred asset invested in business:

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 or
by way of capital contribution in a firm as a partner, as the case may be, by the transferee as
on that day.
Question 196
Mr. Rahul started a proprietary business on 01.04.2020 with a capital of ` 6,00,000. He in-
curred a loss of ` 3,00,000 during the year 2020-21. To overcome the financial position, his
wife Mrs. Radha, a software engineer, gave a gift of ` 7,00,000 on 01.04.2021, which was
immediately invested in the business by Mr. Rahul. He earned a profit of ` 5,00,000 during
the year 2021-22. Compute the amount to be clubbed in the hands of Mrs. Radha for the
Assessment Year 2022-23. If Mrs. Radha gave the said amount as loan, what would be the
amount to be clubbed?
Answer
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. Rahul received a gift of ` 7,00,000 on 1.4.2021 from his wife Mrs. Radha,
which he invested in his business immediately. The income to be clubbed in the hands of Mrs.
Radha for the A.Y. 2022-23 is computed as under:
Particulars Mr. Rahul’s capi- Capital contri- Total

tal contribution bution out of gift
from Mrs. Radha
Capital as on 01.04.2021 3,00,000 7,00,000 10,00,000
[6,00,000 –
3,00,000]
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Profit for P.Y.2021-22 to be apportioned 1,50,000 3,50,000 5,00,000

on the basis of capital employed on the
first day of the previous year i.e. as on
1.4.2021 (3:7)
Therefore, the income to be clubbed in the hands of Mrs. Radha for the A.Y.2022-23 is `
3,50,000. In case Mrs. Radha gave the said amount of ` 7,00,000 as a bona fide loan, then,
clubbing provisions would not be attracted.
Note: The provisions of section 56(2)(x) would not be attracted in the hands of Mr. Rahul,
since he has received a sum of money exceeding ` 50,000 without consideration from a
relative i.e., his wife.
Question 197
Discuss provisions relating to transfer of assets for the benefit of spouse [Section 64(1)(vii)]
Answer
All income arising directly or indirectly to any person or association of persons, from the
assets transferred, directly or indirectly, to such person or association of persons by an
individual without adequate consideration is includible in the income of the transferor to
the extent such income is used by the transferee for the immediate or deferred benefit of the
transferor’s spouse.
Question 198
Discuss Clubbing of income arising to son’s wife
Answer
(I) Income arising to son’s wife from the assets transferred without adequate consideration by
the father-in-law or mother-in-law [Section 64(1)(vi)]
(i) Asset transferred without adequate consideration: Where an asset is transferred, directly
or indirectly, by an individual to his or her son’s wife without adequate consideration,
the income from such asset is to be included in the total income of the transferor.
(ii) Asset transferred invested in the business: For this purpose, where the assets transferred
directly or indirectly by an individual to his or her son’s wife 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, the proportionate interest on capital will be clubbed with the income of the
transferor.
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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 or by way of capital contribution in a firm as a partner, as the case may be,
by the transferee as on that day.
(II) Transfer of assets for the benefit of son’s wife [Section 64(1)(viii)]
All income arising directly or indirectly, to any person or association of persons from
the assets transferred, directly or indirectly, without adequate consideration, to such
person or association of persons by an individual will be included in the total income
of the individual to the extent such income is used by the transferee for the immediate
or deferred benefit of the transferor’s son’s wife.
Note: Where any asset is transferred by any person to any person without consideration
or for inadequate consideration, the provisions of 56(2)(x) would get attracted in the
hands of transferee, if conditions specified thereunder are satisfied.
Question 199
Mrs. Komal transferred her immovable property to TPS Co. Ltd. subject to a condition that
out of the rental income, a sum of ` 42,000 per annum shall be utilized for the benefit of
her son’s wife. Mrs. Komal claims that the amount of ` 42,000 (utilized by her son’s wife)
should not be included in her total income as she no longer owned the property. Examine
with reasons whether the contention of Mrs. Komal is valid in law.
Answer
The clubbing provisions under section 64(1)(viii) are attracted in case of transfer of any asset,
directly or indirectly, otherwise than for adequate consideration, to any person to the extent
to which the income from such asset is for the immediate or deferred benefit of son’s wife.
Such income shall be included in computing the total income of the transferor-individual.
Therefore, income of ` 42,000 meant for the benefit of daughter-in-law is chargeable to tax
in the hands of transferor i.e., Mrs. Komal in this case. Hence, the contention of Mrs. Komal
is not valid in law.
Note - In order to attract the clubbing provisions under section 64(1)(viii), the transfer should
be otherwise than for adequate consideration. In this case, it is presumed that the transfer
is otherwise than for adequate consideration and therefore, the clubbing provisions are
attracted. Moreover, the provisions of section 56(2)(x) will also get attracted in the hands
of TPS Co Ltd., if the conditions specified thereunder are satisfied. If it is presumed that the
transfer was for adequate consideration, the provisions of section 64(1)(viii) would not be
attracted.
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Question 200
Discuss provisions relating to Clubbing of minor’s income
Answer
The provisions are as under:
(i) All income of a minor is to be included in the income of his parent.
(ii) However, the income derived by the minor from manual work or from any activity
involving his skill, talent or specialized knowledge or experience will not be included in
the income of his parent.
(iii) The income of the minor will be included in the income of that parent, whose total
income is greater.
(iv) Once clubbing of minor’s income is done with that of one parent, it will continue to
be clubbed with that parent only, in subsequent years. The Assessing Officer, may,
however, club the minor’s income with that of the other parent, if, after giving the
other parent an opportunity to be heard, he is satisfied that it is necessary to do so.
(v) Where the marriage of the parents does not subsist, the income of the minor will be
includible in the income of that parent who maintains the minor child in the relevant
previous year.
(vi) However, the income of a minor child suffering from any disability of the nature specified
in section 80U shall not be included in the hands of the parent but shall be assessed in
the hands of the child.
(vii) It may be noted that the clubbing provisions are attracted even in respect of income of
minor married daughter.
Child in relation to an individual includes a step-child and an adopted child of that
individual. [Section 2(15B)]
Exemption in respect of clubbed income of minor [Section 10(32)]

In case the income of an individual (i.e. the parent) includes the income of his/her minor
child in terms of section 64(1A), such parent shall be entitled to exemption of ` 1,500 in re-
spect of each minor child. However, if income of any minor so includible is less than ` 1,500,
then the entire income shall be exempt.
Question 201
Discuss provisions relating to CROSS TRANSFERS
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Answer
In the case of cross transfers also (e.g., A making gift of ` 50,000 to the wife of his brother
B for the purchase of a house by her and a simultaneous gift by B to A’s minor son of
shares in a foreign company worth ` 50,000 owned by him), the income from the assets
transferred would be assessed in the hands of the deemed transferor if the transfers are
so intimately connected that they form part of a single transaction, and each transfer
constitutes consideration for the other by being mutual or otherwise. Thus, in the instant
case, the transfers have been made by A and B to persons who are not their spouse or
minor child so as to circumvent the provisions of this section, showing that such transfers
constituted consideration for each other.
The Supreme Court, in case of CIT v. Keshavji Morarji [1967] 66 ITR 142, observed that if two
transactions are inter-connected and are parts of the same transaction in such a way that it
can be said that the circuitous method was adopted as a device to evade tax, the implication
of clubbing provisions would be attracted. Accordingly, the income arising to Mrs. B from the
house property should be included in the total income of B and the dividend from shares
transferred to A’s minor son would be taxable in the hands of A. This is because A and B
are the indirect transferors to their minor child and spouse, respectively, of income-yielding
assets, so as to reduce their burden of taxation.
Question 202
Mr. Madan gifted a sum of ` 6.5 lakhs to his brother’s wife on 14-6-2021. On 12-7-2021,
his brother gifted a sum of ` 5.2 lakhs to Mr. Madan’s wife. The gifted amounts were invested
as fixed deposits in banks by Mrs. Madan and wife of Mr. Madan’s brother on 01-8-2021 at
9% interest. Discuss the consequences of the above under the provisions of the Income-tax
Act, 1961 in the hands of Mr. Madan and his brother.
Answer
In the given case, Mr. Madan gifted a sum of ` 6.5 lakhs to his brother’s wife on 14.06.2021
and simultaneously, his brother gifted a sum of ` 5.2 lakhs to Mr. Madan’s wife on 12.07.2021.
The gifted amounts were invested as fixed deposits in banks by Mrs. Madan and his brother’s
wife. These transfers are in the nature of cross transfers. Accordingly, the income from the
assets transferred would be assessed in the hands of the deemed transferor because the
transfers are so intimately connected to form part of a single transaction and each transfer
constitutes consideration for the other by being mutual or otherwise.
If two transactions are inter-connected and are part of the same transaction in such a way
that it can be said that the circuitous method was adopted as a device to evade tax, the
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implication of clubbing provisions would be attracted. It was so held by the Apex Court in
CIT vs. Keshavji Morarji (1967) 66 ITR 142.
Accordingly, the interest income arising to Mrs. Madan in the form of interest on fixed deposits
would be included in the total income of Mr. Madan and interest income arising in the hands
of his brother’s wife would be taxable in the hands of Mr. Madan’s brother as per section
64(1), to the extent of amount of cross transfers i.e., ` 5.2 lakhs.
This is because both Mr. Madan and his brother are the indirect transferors of the income to
their respective spouses with an intention to reduce their burden of taxation.
However, the interest income earned by his spouse on fixed deposit of ` 5.2 lakhs alone
would be included in the hands of Mr. Madan’s brother and not the interest income on the
entire fixed deposit of ` 6.5 lakhs, since the cross transfer is only to the extent of ` 5.2 lakhs.
Question 203
CONVERSION OF SELF-ACQUIRED PROPERTY INTO THE PROPERTY OF A HINDU UNDIVIDED
FAMILY [SECTION 64(2)]
Answer
Section 64(2) deals with the case of conversion of self-acquired property into property of a
Hindu undivided family.
(1) Where an individual, who is a member of the HUF, converts at any time after 31-12-
1969, his individual property into property of the HUF of which he is a member or
throws such property into the common stock of the family or otherwise transfers such
individual property, directly or indirectly, to the family otherwise than for adequate
consideration, the income from such property shall continue to be included in the total
income of the individual.
(2) Where the converted property has been partitioned, either by way of total or partial
partition, the income derived from such converted property as is received by the spouse
on partition will be deemed to arise to the spouse from assets transferred indirectly by
the individual to the spouse and consequently, such income shall also be included in
the total income of the individual who effected the conversion of such property.
(3) Where income from the converted property is included in the total income of an
individual under section 64(2), it will be excluded from the total income of the family
or, as the case may be, of the spouse of the individual.
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Question 204
INCOME INCLUDES LOSS
Answer
It is significant to note that as per the Explanation 2 to section 64, ‘income’ would include
‘loss’. Accordingly, where the specified income to be included in the total income of the in-
dividual is a loss, such loss will be taken into account while computing the total income of
the individual. It is significant to note that this Explanation applies to clubbing provisions
under both sections 64(1) and 64(2).
Question 205
What is the DISTINCTION BETWEEN SECTION 61 AND SECTION 64
Answer
It may be noted that the main distinction between the two sections is that section 61 ap-
plies only to a revocable transfer made by any person while section 64 applies to revocable
as well as irrevocable transfers made only by individuals.
Question 206
What is the LIABILITY OF PERSON IN RESPECT OF INCOME INCLUDED IN THE INCOME OF
ANOTHER PERSON [SECTION 65]
Answer
Sections 61 to 64 provide for clubbing of income of one person in the hands of the other
in circumstances specified therein. However, service of notice of demand (in respect of tax
on such income) may be made upon the person to whom such asset is transferred (i.e. the
transferee). In such a case, the transferee is liable to pay that portion of tax levied on the
transferor which is attributable to the income so clubbed.
Similar provision will be applicable in case of deemed ownership of house property under
section 27 i.e., transfer of house property otherwise than for adequate consideration to
spouse, not being in connection with agreement to live apart or to minor child not being a
minor married daughter.
Question 207
Mr. Ravi has gifted his only house property to his wife, Mrs. Ravi, and his married daughter,
Mrs. Divya. The Assessing Officer has served a notice of demand on Mr. Ravi for payment of
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tax for the income derived from the said house property. Examine the validity of the Assess-
ing Officer’s action.
Answer
As per section 27(i), an individual who transfers otherwise than for adequate consideration
any house property to his spouse, not being a transfer in connection with an agreement
to live apart, or to a minor child not being a married daughter shall be deemed to be the
owner of the house property so transferred.
Mr. Ravi, in this case, would be the deemed owner only in respect of the share of house
property transferred to his wife Mrs. Ravi without consideration and not for the share of the
house property transferred to his married daughter Mrs. Divya.
Since Mr. Ravi is the deemed owner of the share of house property transferred to his wife
without consideration, the income derived from the house property, to the extent attribut-
able to the share of property transferred to his wife without consideration, would be taxable
in his hands under the head “Income from house property”.
However, as per section 65, the notice of demand can be served on Mrs. Ravi for payment of
that portion of tax levied on Mr. Ravi attributable to the income derived [by virtue of section
27(i)], from the share of house property transferred to Mrs. Ravi, and standing in her name.
However, the income derived from house property, attributable to the share of property
transferred to his married daughter without consideration, would be taxable in the hands
of his daughter. Such income would not be taxable in the hands of Mr. Ravi. Mr. Ravi will not
be responsible for the payment of tax attributable to aforesaid share of income of daughter
from house property.
Thus, the action of the Assessing Officer in serving notice of demand on Mr. Ravi for payment
of tax for the entire income derived from the said house property is not valid.
Question 208
Mrs. E, wife of Mr. F, is a partner in a firm. Her capital contribution to the firm as on 01-
04-2021 was ` 5 lacs, out of which ` 3 lacs was contributed out of her own sources and `
2 lacs was contributed out of gift from her husband. As further capital was needed by the
firm, she further invested ` 2 lacs on 01.05.2021 out of the funds gifted by her husband.
The firm paid interest on capital of ` 80,000 and share of profit of ` 60,000 for the financial
year 2021-22. Advise Mr. F as to the applicability of the provisions of section 64(1)(iv) and
the manner thereof in respect of the above referred transactions.
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Answer
As per section 64(1)(iv), in computing the total income of any individual, there shall be in-
cluded all such income as arises, directly or indirectly, subject to the provisions of section
27(i), to the spouse of such individual from assets transferred directly or indirectly to the
spouse by such individual otherwise than for adequate consideration or in connection with
an agreement to live apart.
In this instant case, Mr. F has gifted money to his wife, Mrs. E. Mrs. E, in turn, invested such
gifted money in the capital of a partnership firm, of which she is a partner. Mrs. E has also
contributed a sum of ` 3 lacs out of her own resources to the capital of the firm.
As per Explanation 3 to section 64(1), for the purpose of clubbing under section 64(1)(iv),
where the assets transferred, directly or indirectly, by an individual to his spouse are invested
by the transferee in the nature of contribution of capital as a partner in a firm, 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 by way of capital contribution as a partner
in the firm as on that day.
In view of the above provision, interest received by Mrs. E from the firm shall be included in
total income of Mr. F to the extent of ` 32,000 i.e., ` 80,000 x ` 2,00,000/ ` 5,00,000.
Share of profit amounting to ` 60,000 is exempt from income-tax under the provisions of
section 10(2A). The provisions of section 64 will not apply, if the income from the transferred
asset itself is exempt from tax.
Note: It is assumed that rate of interest on capital contributed by Mrs. E does not exceed
12% p.a.
Question 209
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 his son, husband of Mrs. C?
Answer
As per section 27(i), an individual who transfers otherwise than for adequate consideration
any house property to his spouse, not being a transfer in connection with an agreement to
live apart, shall be deemed to be the owner of the house property so transferred.
Therefore, in this case, Mr. A would be the deemed owner of the house property transferred
to his wife Mrs. B without consideration.
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As per section 64(1)(vi), income arising to the son’s wife from assets transferred, directly
or indirectly, to her by an individual otherwise than for adequate consideration would be
included in the total income of such individual.
Income from let-out property is ` 2,10,000 [i.e., ` 3,00,000, being the actual rent calculated
at ` 25,000 per month less ` 90,000, being deduction under section 24 @30% of ` 3,00,000]
In this case, income of ` 2,10,000 from let-out property arising to Mrs. C, being Mr. A’s son’s
wife, would be included in the income of Mr. A, applying the provisions of section 27(i) and
section 64(1)(vi). Such income would, therefore, not be taxable in the hands of Mrs. C.
In case the property was gifted to Mr. A’s son, the clubbing provisions under section 64
would not apply, since the son is not a minor child. Therefore, the income of ` 2,10,000 from
letting out of property gifted to the son would be taxable in the hands of the son.
It may be noted that the provisions of section 56(2)(x) would not be attracted in the hands
of the recipient of house property, since the receipt of property in each case was from a
“relative” of such individual. Therefore, the stamp duty value of house property would not
be chargeable to tax in the hands of the recipient of immovable property, even though the
house property was received by her or him without consideration.
Note - The first part of the question can also be answered by applying the provisions of
section 64(1)(vi) directly to include the income of ` 2,10,000 arising to Mrs. C in the hands
of Mr. A. [without first applying the provisions of section 27(i) to deem Mr. A as the owner of
the house property transferred to his wife Mrs. B without consideration], since section 64(1)
(vi) speaks of clubbing of income arising to son’s wife from indirect transfer of assets to her
by her husband’s parent, without consideration. Gift of house property by Mr. A to Mrs. C,
via Mrs. B, can be viewed as an indirect transfer by Mr. A to Mrs. C.
Question 210
Mr. Korani transferred 2,000 debentures of ` 100 each of Wild Fox Ltd. to his wife Mrs.
Rekha Korani on 3.10.2020 without consideration. The company paid interest of ` 30,000
in September, 2021 which was deposited by Mrs. Korani with Kartar Finance Co. in October,
2021. Kartar Finance Co. paid interest of ` 3,000 upto March, 2022. How would both the
interest income be charged to tax in A.Y. 2022-23?
Answer
As per section 64(1)(iv), income arising from assets transferred without adequate consideration
by an individual to his spouse is liable to be clubbed in the hands of the individual. It may
be noted that income on the asset transferred has to be clubbed but if there is accretion to
the asset, any further income derived on such accretion should not be clubbed.
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Therefore, applying the provisions of section 64(1)(iv), ` 30,000, being the interest on
debentures received by Mrs. Rekha Korani in September, 2021 will be clubbed with the
income of Mr. Korani, since he had transferred the debentures of the company without
consideration to her in October, 2020.
However, the interest of ` 3,000 upto March, 2022 earned by Mrs. Rekha Korani on the
interest on the debentures deposited by her with Kartar Finance Company shall be taxable
in her individual capacity and will not be clubbed with the income of Mr. Korani.
Question 211
Mr. Rose, out of his own funds, had taken an FDR for ` 10,00,000 bearing interest @10% p.a.
payable half-yearly in the name of his wife Lilly. The interest earned during the financial
year 2021 - 22 of ` 1,00,000 was invested by Mrs. Lilly in the business of packed spices
which resulted in a net profit of ` 55,000 for the year ended 31.03.2022. How shall the
interest on FDR and income from business be taxed for the Assessment Year 2022-23?
Answer
Section 64(1)(iv) specifies that the income derived by the spouse of an assessee from the
assets transferred directly or indirectly without adequate consideration or intention to live
apart shall be clubbed with the income of the transferor. Therefore, the interest income of
` 1 lac on the FDR of ` 10 lacs for the F.Y.2021-22 shall be clubbed with the income of Mr.
Rose.
When Mrs. Lilly invested the interest income in a business and earned profits therefrom,
such profits shall not be clubbed with the income of her husband but shall be taxable in
her individual capacity. This is so because the income from the accretion of the transferred
assets is not to be clubbed with the income of the transferor [CIT v. M. S. S. Rajan (2001) 252
ITR 126 (Mad)].
Question 212
Naresh is a fashion designer having lucrative business. His wife is a model. Naresh pays
her monthly salary of ` 10,000. The Assessing Officer while admitting that the salary is an
admissible deduction, in computing the total income of Naresh had applied the provisions
of section 64(1) and had clubbed the income (salary) of his wife in Naresh hands. Discuss the
correctness of the action of the Assessing Officer.
Answer
This question is based on the principles laid down by Madras High Court in the case of CIT
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v. Smt. R. Bharati (1999) 240 ITR 697 where the interpretation of the terms “professional
qualifications” and “knowledge” came up for consideration as per proviso to section 64(1).
These words do not necessarily connote a qualification conferred by a recognized university
after examining the candidate who has undergone a course of study in a technical subject
or course of study preparing him for a profession of law, accountancy etc. Accordingly, the
term “qualification” must be given a wide meaning as referring to the qualities which are
required to be possessed by a person performing the work that he does, so long as that
work is capable of being regarded as technical or professional.
The word “professional” is a term capable of very broad meaning and would encompass
a variety of occupations. A large number of occupations are being practiced which form
a source of livelihood and are capable of being regarded, as professions as long as they
require certain degree of skill. A person having skill, experience and competence in a line of
work can be regarded as professionally qualified for the purpose of section 64(1)(ii).
Applying the rationale of the Madras High Court ruling, a model, having skill, competence
and experience in her line can be considered as a professional. Hence, the action of the
Assessing Officer is not correct.
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SECTION 14 A
Question 213
Discuss treatment of expenditure incurred in relation to income not includible in total income.
Answer
As per Section 14A of the Act:
(1) For the purposes of computing the total income under this Chapter, no deduction shall
be allowed in respect of expenditure incurred by the assessee in relation to income
which does not form part of the total income under this Act.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to
such income which does not form part of the total income under this Act in accordance
with such method as may be prescribed, if the Assessing Officer, having regard to
the accounts of the assessee, is not satisfied with the correctness of the claim of the
assessee in respect of such expenditure in relation to income which does not form part
of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee
claims that no expenditure has been incurred by him in relation to income which does
not form part of the total income under this Act:
Provided that nothing contained in this section shall empower the Assessing Officer
either to reassess under section 147 or pass an order enhancing the assessment or
reducing a refund already made or otherwise increasing the liability of the assessee
under section 154, for any assessment year beginning on or before the 1st day of April,
2001.
Question 214
What is the Method for determining amount of expenditure in relation to income
not includible in total income.
Answer
The method to determine expenditure to be disallowed u/s. 14A is provided in Rule 8D.
(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous
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year, is not satisfied with—

(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred,in relation
to income which does not form part of the total income under the Act for such
previous year, he shall determine the amount of expenditure in relation to such
income in accordance with the provisions of sub-rule (2).
(2) The expenditure in relation to income which does not form part of the total income
shall be the aggregate of following amounts, namely:—
(a) the amount of expenditure directly relating to income which does not form part
of total income; and
(b) an amount equal to one per cent of the annual average of the monthly average
of the opening and closing balances of the value of investment, income from
which does not or shall not form part of total income:
Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the
total expenditure claimed by the assessee.
Question 215
Clarification regarding disallowance of expenses under section 14A in cases where
corresponding exempt income has not been earned during the financial year [Circular No.
5/2014, dated 11.2.2014]
Answer
Section 14A provides that no deduction shall be allowed in respect of expenditure incurred
relating to income which does not form part of total income. A controversy has arisen as
to whether disallowance can be made by invoking section 14A even in those cases where
no income has been earned by an assessee, which has been claimed as exempt during the
financial year.
The CBDT has, through this Circular, clarified that the legislative intent is to allow only that
expenditure which is relatable to earning of income. Therefore, it follows that the expenses
which are relatable to earning of exempt income have to be considered for disallowance,
irrespective of the fact whether such income has been earned during the financial year or
not.
The above position is clarified by the usage of the term “includible” in the heading to section
14A [Expenditure incurred in relation to income not includible in total income] and Rule 8D
[Method for determining amount of expenditure in relation to income not includible in total
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income], which indicates that it is not necessary that exempt income should necessarily be
included in a particular year’s income, for triggering disallowance. Also, the terminology
used in section 14A is “income under the Act” and not “income of the year”, which again
indicates that it is not material that the assessee should have earned such income during
the financial year under consideration.
In effect, section 14A read along with Rule 8D provides for disallowance of expenditure even
where the taxpayer has not earned any exempt income in a particular year.
Question 216
Whether section 14A is applicable in respect of deductions, which are permissible and
allowed under Chapter VI-A?
Answer
CIT v. Kribhco (2012) 349 ITR 0618 (Delhi)
Facts of the case: In the present case, the assessee is a co-operative society engaged in
marketing of fertilizers and purchase and processing of seeds. The assessee had claimed
deduction under section 80P(2)(d) on dividend income received from NAFED and co - operative
bank and also on interest on deposits made with co-operative banks. The Assessing Officer,
relying upon section 14A, contended that the aforesaid income were not included in the
total income of the assessee and therefore, expenditure with respect to such income should
be disallowed.
High Court’s Observations: The High Court observed that section 14A is not applicable for
deductions, which are permissible and allowed under Chapter VIA. Section 14A is applicable
only if an income is not included in the total income as per the provisions of Chapter III of
the Income-tax Act, 1961. Deductions under Chapter VIA are different from the exclusions/
exemptions provided under Chapter III. The words “do not form part of the total income
under this Act” used in section 14A are significant and important. Income which qualifies
for deductions under section 80C to 80U has to be first included in the total income of the
assessee and then allowed as a deduction. However, income referred to in Chapter III do
not form part of the total income and therefore, as per section 14A, no deduction shall be
allowed in respect of expenditure incurred by the assessee in relation to such income which
does not form part of the total income.
High Court’s Decision: The Delhi High Court, therefore, held that no disallowance can be
made under section 14A in respect of income included in total income in respect of which
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deduction is allowable under section 80C to 80U.

Note – The Department’s Special Leave Petition against the above Delhi High Court judgement
was dismissed on 15/2/2013.
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ASSESSMENT OF FIRM
Question 217
Discuss the terms normally used in this chapter?
Answer
1. Under section 2(23) of the Income-tax Act, a firm shall have the meaning assigned
to it under the Indian Partnership Act, 1932 and shall also include a Limited Liability
Partnership as defined in the Limited Liability Partnership Act, 2008.
2. Further, the terms ‘partner’ and ‘partnership’ also, shall have the same meanings
respectively, as have been assigned to them under the Indian Partnership Act, 1932;
but the expression ‘partner’ includes any other person who being a minor, has been
admitted to the benefits of an existing partnership and also partner of a Limited
Liability Partnership.
3. Similarly, partnership shall, in addition to the meaning assigned to it under Indian
Partnership Act, also include a Limited Liability partnership.
4. A partnership firm though not a legal person or juridical entity, is chargeable to tax
as a separate entity distinct from the partners and the partners are assessable as
individuals and not as an association persons or body of individuals. The term ‘firm’ as
used in the Act covers both registered and unregistered firms.
5. A limited liability partnership is a separate body corporate under the Limited Liability
Partnership Act, 2008. Still all the provisions of the Income Tax Act, 1961 are applicable
equally to partnership firms as well as limited liability partnerships.
Judicial Decisions:
1. Firm cannot be a partner: The word person in section 4 of Partnership Act contemplates
only natural or artificial i.e., legal persons. Therefore only individuals or companies can
be partners. A firm is not a person and as such is not entitled to enter into partnership
with another firm or Hindu undivided family or an individual. However, a partner can
become a partner in another firm on behalf of his firm. [Dulichand Laxminarayan v CIT
(1956) 29 ITR 535 (SC)]
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2. HUF is not like a corporation or limited company, and it has, therefore, no legal entity
different from, and separate from the members who comprise the Hindu undivided
family. Hence it is not entitled to enter into partnership with another firm or Hindu
undivided family or an individual. However, a Karta can become a partner in a firm on
behalf of his HUF. [Ram Laxman Sugar Mills v CIT (1967) 66 ITR 613 (SC)]
Question 218
What is the rate of tax in the case of a firm [Section 167A]
Answer
1. In the case of a firm tax shall be charged on its total income at the rate as specified in
the Finance Act of the relevant year, The Finance Act has specified 30% as the tax rate
for the firms.
2. However, this is subject to special rates of tax given in the Income Tax Act. Example
Long term capital gains will be chargeable to tax under section 112 at the rate of 20%.
3. The amount of income-tax shall be increased by a surcharge at the rate of 12% of such
income-tax in case of a firm having a total income exceeding one crore rupees.
4. Health & Education cess @ 4% is also leviable.
Question 219
Assessment as a firm [Sec. 184]
Answer
a) A firm shall be assessed as a firm, only when the following conditions are satisfied:
i) The partnership is evidenced by an instrument in writing;
ii) The shares of each partner are specified in such instrument;
iii) A copy of the partnership instrument as certified by all the partners is enclosed
with the return of income in respect of the first assessment year for which the
status of firm is claimed;
b) Where once the firm is assessed as a firm by complying with the above mentioned
conditions, it shall continue to be assessed as a firm for subsequent assessment years
so long as there is no change in the constitution of the firms or in profit sharing ratio.
c) Where any such change had taken place in the previous year, the firm shall furnish a
certified copy of the revised instrument of partnership along with the return of income for
the assessment year relevant to such previous year so that it can be assessed as a firm.
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d) The firm does not commit any default-as mentioned in sec.144 (empowering the
Assessing Officer to make a best judgment assessment).
What is a “certified copy”

1. A copy of the instrument of partnership should be certified in writing by all partners
(other than minors) If, however, the return is made after the dissolution of the firm, it
should be certified by all partners (other than minors) who were partners in the firm
immediately before dissolution and by legal representative of any such partner who is
deceased.
2. As per rule 12, no document should be attached with return of income. Therefore, the
certified copy of the instrument evidencing the firm may be submitted separately to the
Assessing Officer.
Question 220
Assessment when Sec.184 is not complied with [Sec.185]
Answer
1. Where a firm does not comply with any of the provisions of sec.184 for any assessment
year, the firm shall be continued to be assessed as firm for that assessment year.
2. However, in such cases, no deduction shall be allowed in respect of payment of any
interest, salary, bonus, commission or remuneration to partners.
3. The amount of interest or salary etc. so disallowed in the hands of the firm shall not be
chargeable to tax in the case of respective partners.
Judicial Decision:
1. Once a default is made by not filing a return u/s. 139(1) or 139(4), it will attract
disallowance of deductions of interest and salary to partners under section 184(5).
Filing of return against notice issued u/s 148 is not same as filing a return u/s 139.
In other words, if a firm defaults in filing a return u/s. 139(1) or 139(4) and notice is
issued u/s. 148, then even if the firm files a return in response to notice u/s. 148, it has
committed a default as mentioned in Section 144 and hence, as per Section 184(5) the
deductions of interest and salary to partners shall be denied. [Radha Picture Palace v.
Dy. CIT [2011] 196 TAXMAN 534 (Ker.)]
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Question 221
Change in constitution [Sec.187]
Answer
a) Where at the time of making an assessment u/s.143 or u/s.144, it is found that a
change has occurred in the constitution of a firm, the assessment shall be made on the
firm as constituted at the time of making the assessment. (i.e., single assessment shall
be made).
b) For the purpose of assessment of a firm “change” in constitution of firm would mean
the following:
i) If one or more partners cease to be partners or one or more new partners are
admitted, in such circumstances that one or more of the persons who were
partners of the firm before the change, continue as partner(s) after the change;
or
ii) All the partners continue with a change in their respective shares or in the shares
of some of them.
Where the firm is dissolved on the death of any of its partners it will not be considered
as a change in the constitution of the firm as per point (i) given above. It will be covered
under section 189 (discussed later).
Question 222
Succession of a firm [Sec.188]
Answer
Where a firm carrying on a business or profession is succeeded by another firm and the case
is not covered by sec.187 (i.e., not a change in constitution) then separate assessments shall
be made in the following manner:
a) The predecessor firm shall be liable to be assessed in respect of income of previous
year in which the succession took place up to the date of succession. The successor firm
shall be liable to tax in respect of the income of that previous year derived after the
date of succession.
b) Liability of successor firm is same as stipulated in sec. 170.
Question 223
Joint and several liability of partners for the tax payable by the firm [Section 188A]?
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Answer
Where any tax, penalty or any other sum payable by a firm for any assessment year is due,
then every person who was the partner of the firm during the relevant previous year and the
legal representative of any such person who is deceased shall be jointly and severally liable
in respect of such sum payable by the firm.
Note: The liability of the legal representative of a deceased partner cannot exceed the value
of estate inherited by him from such deceased partner - Sec. 159(6).
Question 224
Dissolution of firm (or) discontinuance of business or profession [Sec. 189]
Answer
a) Where a firm is dissolved or the business or profession is discontinued, for the purpose
of any proceeding pending under the Income-tax Act, the firm shall be deemed to be
in existence and the proceedings shall be continued accordingly.
b) For the purpose of initiating any proceeding against such firm, the firm shall be deemed
to be in existence.
c) In respect of any tax, interest, penalty or any other sum payable by the firm, all persons
who were partners, together with the legal heirs of any deceased partner, during the
previous year when dissolution or the discontinuance took place shall be jointly and
severally liable to pay any such amount.
d) In the course of any proceeding, if the Assessing Officer or the Commissioner (Appeals)
is satisfied that the firm was guilty of any of the acts attracting levy of penalty, he may
impose or direct the imposition of a penalty according to the relevant provisions of law.
Judicial Decisions :
1. The firm will be dissolved on the death of any of its partner, unless there is a specific
provision in the partnership deed, that the firm would not be dissolved on the death
of a partner. Thus, there will be two separate assessments. [CIT v Ayyanarappan & Co.
(1999) 236 ITR 410 (SC)]
2. Where the firm is dissolved and reconstituted, it was merely a change in constitution of
the firm under section 187 and not a case of succession under section 188. It was held
that no separate assessment has to be made on two returns filed by the firm, instead
only one assessment has to be made. [CIT v Hindustan Motors Finance Co. (2005) 276
ITR 382 (All)]
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Question 225
Disallowance in the case of firm [Section 40(b)]
Answer
(i) Interest paid to a partner by a firm is not deductible unless the following conditions are
fulfilled:
(1) It should be authorized by and in accordance with the partnership deed.
(2) It should relate to a period falling after the date of the partnership deed.
(3) It should not be exceeding 12% p.a. simple rate of interest
Further, the disallowance of interest is subject to the following Explanations:
Explanation 1: If a person is a partner in his representative capacity in the firm and if
he receives interest in his individual capacity from the firm, such interest should not be
disallowed.
Explanation 2: If a person who is a partner in his individual capacity receives interest
for and on behalf of someone else from the firm in which he is a partner, such interest
should not be disallowed.
(ii) Any amount paid by way of salary, bonus, commission or remuneration by a firm to a
partner is not deductible in the computation of income of the firm unless the following
conditions are fulfilled:
(1) It should be authorised by and in accordance with partnership deed.
(2) It should relate to a period falling after the date of the partnership deed.
(3) It should be within the prescribed limits, The prescribed limits are as follows:
BOOK PROFITS REMUNERATION
As a % of Book Profits
On the first `3 lakhs or in case of a loss `1,50,000 or 90% whichever is higher
On the balance book profit 60%
(4) It should be paid to a working partner.

For the purpose of remuneration paid to a working partner by a firm the following
Explanations are relevant:
Explanation 3: “Book Profit” means the net profit, as shown in the profit and loss account
for the relevant previous year, computed in the manner laid down in Chapter IV-D as
increased by the aggregate amount of the remuneration paid or payable to all the
partners of the firm if such amount has been deducted while computing the net profit.
Explanation 4: “Working partner” means an individual who is actively engaged in
conducting the affairs of the business or profession of the firm of which he is a partner.
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Meaning of the expression “authorised by and in accordance with partnership deed:

No deduction under section 40(b)(v) will be admissible unless the partnership deed
either specifies the amount of remuneration payable to each individual working partner
or lays down the manner of quantifying such remuneration.
Judicial Decisions:
1. Payment of remuneration to partners cannot be allowed, if same has not been specified
in the Deed, but has been left to be determined by partners at end of accounting
period. [Sood Bhandari & Co. v. CBDT (2012) 204 Taxman 340 (Punj. & Har.)]
2. Remuneration to partners within the limit of sec. 40(b) can not be disallowed u/s
40A(2) considering it to be excessive or unreasonable. [CIT v. Great City Manufacturing
Co. (2013) 351 ITR 156(All.)]
1. Remuneration paid to individual who is a partner in representative capacity:
Where a person is a partner in a partnership firm in his representative capacity as
the karta of a HUF, he occupies a dual position. Qua the partnership, he functions in
the personal capacity; qua the third parties, in his representative capacity. As regards
the firm, such a partner does not act in his representative capacity but only in his
personal capacity like any other partner. If any remuneration is paid or commission is
given to such a partner, the provisions of sec. 40(b) shall apply. The partner may be
under an obligation to hand over the money received by him to the person whom he
is representing. That will not change the character of the payment by the firm to its
partner or the status of the partner in the firm. The provisions of sec. 40(b) shall clearly
apply to such payment – Rashik Lal and Co., vs. CIT, 229 ITR 458 (SC).
2. Interest on Loan – Where the partners themselves raise loans on the insurance policies
from LIC and put it in their capital account, interest paid by the firm (whether to partners
or to the LIC), can be held as having been paid to the partners. Hence Section 40(b) shall
apply. [CIT v. Agra Tannery [1989] 179 ITR 44 (P & H)]. Where, however, the partners
merely lend their signatures for raising the loan and the loan is taken by the firm for
business purposes, interest paid by the firm to the LIC cannot be held as payment of
interest to partners and accordingly section 40(b) is not applicable – Damodar Dass Jai
Chand Aggarwal v. ITO [1982] 1 ITD 767 (Asr. Trib)
3. Only net amount paid by firm to a partner after adjusting interest paid by him to firm,
should be disallowed u/s 40(b) [Keshavji Ravji & Co. v. CIT (1990) 183 ITR 1 (SC.)]
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4. Payments to partners for specific services can also be disallowed u/s 40(b). E.g. an
engineer is a partner in a firm and he looks after only the production functions. Salary
paid to him for this specific function is also subject to the limits of Section 40(b).
[CIT vs. Srinath Productions (2007) 161 Taxman 52 (Mad)]
Question 226
Change in constitution [Section 78(1)]
Answer
1. Where a change has occurred in the constitution of a firm, any loss (whether under the
head PGBP or otherwise) attributable to the share of deceased or retired partner in
excess of his share of profit shall not be allowed to be carried forward by the firm.
2. The restriction shall not apply to unabsorbed depreciation.
Question 227
Liability of partners of limited liability partnership in liquidation [Sec. 167C]
1. Section 167C is applicable in the following two situations:
i) Any tax due from a limited liability partnership in respect of any income of any
previous year cannot be recovered or
ii) any tax due from any other person in respect of any income of any previous year
during which such other person was a limited liability partnership cannot be
recovered.
In the above two situations, every person who was a partner of the limited liability
partner¬ship at any time during the relevant previous year, shall be jointly and severally
liable for the payment of such tax.
2. The above provisions shall apply notwithstanding anything contained in the Limited
Liability Partnership Act, 2008.
3. However, if such person proves that the non-recovery cannot be attributed to any
gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the
limited liability partnership, he shall not be liable for the tax dues of LLP.
4. For the purposes of this section, the expression “tax due” includes penalty, interest or
any other sum payable under the Act.
Question 228
Share of profits received by a partner [Section 10(2A)]
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Answer
In the case of a person being a partner of a firm which is separately assessed as such, his
share in the total income of the firm shall be exempt u/s 10(2A).
A & Co. is a firm consisting of two partners A & B. A part of the share income of B from A &
Co. diverts at source to C. Question arises whether C can claim exemption in respect of this
share?
In Radha Krisha Jalan vs. CIT (2007) 294 ITR 28 (Gau), it was held that a sub-partnership
which is in receipt of the share of profit of a partner in the main partnership has to be
deemed to be a partner in the main partnership for the limited purpose of S.10(2A), hence
eligible for exemption under that section.
Question 229
Discuss provisions of Section 45(3), 45(4) and 9B?
Answer
Refer Answers to Q43. To Q.46 of this book
Question 230
Examine the tax consequences of the following issues in the case of a firm:
A partnership consisting of three partners A, B and C was dissolved and for settlement of
the accounts of the partners on dissolution the closing stock of goods was taken over by one
of the partners at cost. The Assessing officer revalued the stock at market value, which was
higher than the cost, in order to arrive at the true profits of the firm. Is his action correct?
Answer
1. The terms of the partnership do not bind the department and they cannot override the
general principles of taxation.
2. While during the continuance of a business the valuation of stocks at cost or market price
whichever is less may be considered permissible, on dissolution there is a disruption of
the business and the settlement of accounts cannot be carried out on a notional basis.
Every asset of the partnership must be converted into money and the settlement of
accounts made on that basis.
3. In a continuing business it makes no difference to the profits even if the stocks are valued
at cost, because profits would accrue on disposal in the following year. However, on
dissolution of a firm the same principle will not hold good.
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4. The Supreme Court has held in ALA Firm v CIT (1991) 189 ITR 285, that the valuation of
stock at the time of dissolution of a Firm has to be taken at the market value and not
at cost or market value whichever is lower or on any other basis. There can be no doubt
that in taking accounts for the purposes of dissolution, the Firm and the partners being
commercial men would value the assets only on a real basis and not at cost or any
other value appearing in the books. The real rights of the partners cannot be mutually
adjusted on any other basis.
5. Further, the Income Computation and Disclosure Standard (ICDS) -2 on Valuation of
Inventories, notified u/s. 145(2) provides that on dissolution of a firm, inventory shall be
valued at market price only.
6. In view of this position, the action of the Assessing officer was justified.
Question 231
A firm consisting of four partners was dissolved consequent to the death of one of the part-
ners. The remaining partners reconstituted the firm immediately, without discontinuance
of the business, and carried on the business as before. The inventory of stocks on the date
of dissolution was valued at cost, which was lower than the market value of transfer to
the reconstituted firm. The Assessing Officer, while arriving at the total income of the firm
as constituted prior to dissolution, valued the stocks at market value. You are required to
comment on the correctness of the Assessing Officer’s action.
Answer
1. Where a firm gets dissolved, the value of closing stock is required to be determined
at market value as held by Supreme Court in the case of ALA Firm Vs CIT, 189 ITR 285.
Therefore, if the stock of the firm is taken over by a partner at cost, the value of stock
should be adopted at market price to determine the correct profit taxable in the case
of the firm.
2. However, if there is no discontinuance of business on account of dissolution and the
remaining partners reconstitute to continue the business, the stock need not be valued
at market price. The stock has to be valued at cost or market price whichever is less.
This view has been upheld by the Supreme Court in Sakthi Trading Co. vs. CIT 250 ITR 871.
3. However, the Income Computation and Disclosure Standard (ICDS) -2 on Valuation of
Inventories, notified u/s. 145(2) provides that on dissolution of a firm, inventory shall be
valued at market price only.
4. In view of this position, the action of the Assessing officer was justified.
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Question 232
X, Y and HUF of Z (represented by Z) are partners with equal shares in profits and losses of a
firm, M/s Popular Cine Vision, which is engaged in the production of TV serials and telefilms.
In the previous year 2020-21, one partner ‘A’ retired, but his dues have been settled in the
previous year 2021-22.
The earlier partnership deed did not authorise payment of remuneration or interest to
partners. The partnership deed was revised by the partners on 1st June, 2021 to authorise
payment of remuneration of ` 1 lac per month to each working partner and simple interest
at 15% per annum on partners’ capital.
X, Y and Z are actively associated with the affairs of the firm.
The Profit & Loss Account of the firm for the year ended 31st March, 2022 shows a net profit
of ` 10 lacs after debiting/crediting the following:
(a) Interest amounting to ` 5 lacs each was paid to partners on the balances standing to
their capital accounts from 1stJune, 2021 to 31st March, 2022.
(b) Remuneration to the partners including partner in representative capacity ` 30 lacs.
(c) Interest amounting to ` 2 lacs paid to Z on loan provided by him in his individual
capacity at 16% interest.
(d) Royalty of ` 5 lacs paid to partner X, who is a professional script writer, for use of his
scripts as per agreement between the firm and X. The same is authorized by partnership
deed.
(e) Two separate payments of ` 18,000 and ` 15,000 made in cash on 1st February, 2022
to Altaf, a hairdresser, against his bill for services rendered in January, 2022 and two
payments of ` 19,000 and ` 10,000 made in cash on 1st February and 2nd February,
2022, respectively, to Priyam, an assistant cameraman, against her bill for services
provided in January, 2022.
(f) Amount of ` 5 lacs provided in the books on 31st March 2022 as liability for remuneration
to Shreya, a film artist and a non-resident. Tax deducted at source under section 195
from the amount so credited was paid on 3rd June, 2022.
(g) Amount of ` 6 lacs provided as gratuity for the year on the basis of actuarial valuation.
Gratuity actually paid to one retired employee during the year is ` 1.50 lacs.
(h) Interest of ` 1.20 lacs received on income-tax refund under section 244(1A) in respect
of A.Y. 2017-18.
The firm has also provided the following additional information:
The amount due to A, an ex-partner, was ` 15 lacs which was settled on 30th September,
2021 by transferring a plot of land purchased one year back having book value of ` 10 lacs.
The difference of ` 5 lacs was credited to partners’ capital accounts in their profit-sharing
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ratio. The value of plot for stamp duty valuation on the date of transfer was ` 16 lacs.
Compute the total income of the firm for the assessment year 2022-23 stating the reasons
for treatment of each item.
Answer
Computation of Total Income of M/s. Popular Cine Vision for the A.Y.2022-23
Particulars ` `
Profits and Gains from Business or Profession
Net Profit as per Profit & Loss A/c 10,00,000
Add: Expenses disallowed or considered separately:
Interest to partners in excess of 12% (Note 1) 3,00,000
Disallowance under section 40A(3) for aggregate cash 52,000
payment exceeding ` 10,000 in a single day (Note 5)
Provision for gratuity (Note 7) 4,50,000
Partners’ Remuneration 30,00,000
Royalty paid to Partner X (Note 4) 5,00,000 43,02,000
53,02,000
Less: Interest on income-tax refund (Note 8) 1,20,000
Book Profit 51,82,000
Less: Partners’ remuneration allowable under section 40(b)(v)
(i) As per limit prescribed in section 40(b)
On first ` 3,00,000 90% 2,70,000
On the balance ` 48,82,000 60% 29,29,200
31,99,200
(ii) Remuneration actually paid or payable
(` 1,00,000 × 10 months × 3 partners) + (Royalty ` 5
Lacs)
(i) or (ii) whichever is less, is deductible 35,00,000 31,99,200
19,82,800
Capital Gain
Short-term capital gain on transfer of land (Note 9) 6,00,000
Income from other sources
Interest on income-tax refund 1,20,000
Deductions under Chapter VI-A Nil
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Notes:
1. As per section 40(b), simple interest at 12% p.a. to partners relating to the period after
the date of partnership deed is allowable. Excess interest @ 3% paid from 1st June,
2021 to 31st March, 2022 is to be disallowed. Excess interest of 3% being ` 15,00,000
x 3/15 = ` 3,00,000.
2. Even though Z is a partner in a representative capacity, he is still a partner. Therefore,
remuneration to Z should also be subject to the limits prescribed in section 40(b). This
view finds support from the decision of the Supreme Court in the case of Rashik Lal &
Co. vs CIT (1998) 229 ITR 458 (SC).
3. As per Explanation 1 to section 40(b), where an individual is a partner in a firm in
representative capacity, the provisions of section 40(b) shall not apply to any interest
payable by the firm to such individual in his personal capacity. Z represents his HUF
in the firm. However, Z gave the loan in his individual capacity. Hence, assuming that
the provisions of section 40A(2) do not get attracted in this case, such interest shall be
allowed as deduction in full even though the interest rate is more than 12% p.a.
4. It may be noted that the limits specified under section 40(b)(v) are applicable in case
of payment of salary, bonus, commission, or remuneration, by whatever name called,
to a working partner.
From a plain reading of the section, it is clear that any remuneration, by whatever
name called, paid to a working partner, is subject to the limits laid down in section
40(b)(v). Therefore, the royalty of ` 5 Lacs paid to partner X would also be subject
to the limits laid down in section 40(b)(v). Hence, the same has to be added back for
computing book profits.
5. Section 40A(3) provides for disallowance of any expenditure in respect of which the
actual payment exceeding ` 10,000 is made otherwise than by an account payee
cheque, account payee bank draft or use of ECS through bank account or through such
other electronic mode as may be prescribed in a single day to a person. Hence, the
payments of ` 18,000 and ` 15,000 in cash on 1.2.2022 to Altaf, a hairdresser, shall be
disallowed, since the aggregate payment of ` 33,000 exceeds the limit of ` 10,000.
The payment of bill of the assistant cameraman of ` 19,000 on 1st February is also
liable for disallowance under section 40A(3) since the aggregate payment in cash on a
single day has exceeded ` 10,000.
6. As per section 40(a)(i), any sum payable to a non-resident shall not be allowed as
deduction, if tax has not been deducted at source or after deduction, has not been
paid on or before the due date specified under section 139(1). Tax deducted from the
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amount of remuneration credited to payee’s account on 31st March 2022 has to be

deposited latest by 31st July 2021/ 30th September, 2022 (as the case may be). The
firm has paid the tax on 3rd June, 2022 and hence, the remuneration shall be allowed.
Since the same is already debited to profit and loss account, no further adjustment is
made.
7. As per section 40A(7), any provision made for payment of gratuity to employees on their
retirement or on termination of employment for any reason is disallowed. However,
gratuity of ` 1.50 lacs paid to retired employees is allowable as deduction. Hence, the
balance provision of ` 4.50 lacs (i.e., ` 6 lacs – ` 1.50 lacs) is to be disallowed.
8. Interest on income-tax refund is assessable under the head “Income from other sources”.
9. Distribution of a capital asset by a firm to its partner on dissolution or otherwise
attracts capital gains tax liability as per the provisions of section 45(4) and the fair
market value of the asset on the date of transfer is deemed to be the full value of
consideration received or accruing as a result of the transfer. The words “or otherwise”
includes within its scope, cases of distribution of capital assets on retirement of a
partner also. [CIT vs. A. N. Naik Associates (2004) 265 ITR 346 (Bom.)]. Therefore,
distribution of a plot of land on retirement of a partner would attract section 45(4).
` 16 lacs, being the fair market value of the plot on the date of transfer, is deemed to
be the full value of consideration. Therefore, the short-term capital gain would be ` 6
lacs (i.e., ` 16 lacs – ` 10 lacs).
Question 233
Profit and Loss Account R & Co. (a partnership firm) for the year ending 31.3.2022 is as fol-
lows:
` `
Cost of goods sold 10,00,000 Sales 16,00,000
Remuneration to partners 1,45,000 Rent of house property 60,000
Interest to partners 40,000
Municipal tax of house Property 25,000
Other expenses 2,40,000
Net Profit 2,10,000
16,60,000 16,60,000
Other information:
i) Out of interest paid to partners, `10,000 is not deductible by virtue of section 40(b).
ii) Out of other expenses, `18,400 is not deductible under sections 36, 37(1) and 43 B.
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iii) On 15-1-2022, the firm pays an outstanding sales tax of `54,700 of the previous
year 2017-18. As this amount pertains to the previous year 2017-18, it has not been
debited to the aforesaid profit and loss account.
iv) Brought forward losses and unabsorbed depreciation are as follows:
Previous years
2020-21 ` 2019-20 ` 2018-19 `
Business loss 1,64,000 31,000 15,000
Capital loss 18,000 19,000 -
Unabsorbed depreciation 1,13,000 28,000 19,000
Show the computation of book profit and the maximum amount deductible on account
of remuneration to partners. Also calculate taxable income of the firm.
Answer
Statement showing book profits
Particulars ` `
Net Profit as per P&L A/c 2,10,000
Add : Expenses debited to P & A/c but disallowed or considered
separately
Remuneration to partners 1,45,000
Interest to partners disallowed u/s 40(b) 10,000
Municipal tax of house property 25,000
Other expenses not allowable u/s 36, 37(1) and 43B 18,400 1,98,400
Less : Income credited to P/L A/c but taxable under different
head or not taxable
Rent of house property (60,000)
Less: Allowable expenses not debited to P/L A/c
Sales tax of F.Y. 2016-17 paid during P.Y. 2020-21
(allowable u/s 43B) (54,700)
PGBP before remuneration, b/fd loss and unabsorbed
Depreciation 2,93,700
Less : B/fd business loss notionally set-off u/s 72 (164+31+15) (2,10,000)
PGBP before remuneration and b/fd unabsorbed depreciation 83,700
Less : B/fd unabsorbed depreciation set-off u/s 32(2) 1,60,000
(113 + 28 + 19)
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But maximum restricted to…….. (83,700)

PGBP before remuneration but after set-off of b/fd loss & Nil
unabsorbed depreciation
Add: B/fd business loss 2,10,000
Statement showing remuneration allowable
Particular ` `
Lower of :
Remuneration to working partners as per deed Or 1,45,000
Maximum limit u/s 40 (b)
(i) First 3,00,000 of book profit (90% of 2,10,000 or 1,89,000
1,50,000,whichever is higher)
\ Allowable Remuneration 1,45,000
Statement showing Net taxable income
Particulars ` ` `
GAV. being actual rent 60,000
Less: Municipal taxes paid and borne by owner (25,000)
Net Annual Value 35,000
Less: Deductions u/s 24
(a) 30% of NAV (10,500)
(b) Interest on loan NIL (10,500) 24,500
PGBP
Profit before remuneration, b/fd loss and
unabsorbed depreciation 2,93,700
Less: Allowable remuneration to partners (1,45,000)
Current Year’s PGBP 1,48,700
Less: B/fd loss set off u/s 72
AY 19-20 15,000
AY 20-21 31,000
AY 21-22 1,64,000
2,10,000
But restricted to 1,48,700 NIL
24,500
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Less: Unabsorbed depreciation (24,500)

Total Income NIL
Balance unabsorbed depreciation c/fd to next year 1,35,500
Balance business loss of AY 2021-22 c/fd to AY
2023-24 61,300
B/fd capital loss c/fd to AY 2023-24 37,000
Question 234
In a case where the partnership deed does not specify the remuneration payable to each
individual working partner but lays down the manner of fixing the remuneration, would the
assessee-firm be entitled to deduction in respect of remuneration paid to partners?
CIT v. Anil Hardware Store (2010) 323 ITR 368 (HP)
Facts of the case: The partnership deed of the assessee-firm provided that in case the book
profits of the firm are up to ` 75,000, then the partners would be entitled to remuneration
up to ` 50,000 or 90% of the book profits, whichever is more. In respect of the next ` 75,000,
it is 60% and for the balance book profits, it is 40%. Thereafter, it is further clarified that the
book profits shall be computed as defined in section 40(b) of the Incometax Act, 1961, or
any other provision of law as may be applicable for the assessment of thepartnership firm.
It has also been clarified that in case there is any loss in a particular year, the partners shall
not be entitled to any remuneration. Clause 7 of the partnership deed laid down that the
remuneration payable to the partners should be credited to the respective accounts at the
time of closing the accounting year and clause 5 stated that the partners shall be entitled
to equal remuneration.
High Court’s Decision: The High Court held that the manner of fixing the remuneration of the
partners has been specified in the partnership deed. In a given year, the partners may decide
to invest certain amounts of the profits into other ventures and receive less remuneration
than that which is permissible under the partnership deed, but there is nothing which
debars them from claiming the maximum amount of remuneration payable in terms of the
partnership deed. The method of remuneration having been laid down, the assesseefirm is
entitled to deduct the remuneration paid to the partners under section 40(b)(v).
Notes:
(1) Payment of remuneration to working partners is allowed as deduction if it is authorized
by the partnership deed and is subject to the overall ceiling limits specified in section
40(b)(v). The limits for partners’ remuneration under section 40(b)(v) has revised
upwards and the differential limits for partners’ remuneration paid by professional
firms and non-professional firms have been removed. On the first ` 3 lakh of book
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profit or in case of loss, the limit would be the higher of ` 1,50,000 or 90% of book
profit and on the balance of book profit, the limit would be 60%.
(2) The CBDT had, vide Circular No. 739 dated 25-3-1996, clarified that no deduction
under section 40(b)(v) will be admissible unless the partnership deed either specifies
the amount of remuneration payable to each individual working partner or lays down
the manner of quantifying such remuneration.
In this case, since the partnership deed lays down the manner of quantifying such
remuneration, the same would be allowed as deduction subject to the limits specified
in section 40(b)(v).
Question 235
LPG, a partnership firm, is engaged in the business of manufacturing of garments. It fur-
nishes you the following data for the year ended 31.3.2022.
Profit & Loss Account
Particulars Rs. Particulars Rs.

Expenses 2,36,00,000 Gross Turnover 2,55,00,000
Interest to partners (including Rs. 5,40,000
1,20,000 paid to Gopal for loan
given by Gopal HUF)
Salary to Partners:
Jay (Rs. 30,000 p.m.)
Gopal (Rs. 28,000 p.m.)
Madhav (Rs. 16,000 p.m.) 8,88,000
Net Profit 4,72,000
2,55,00,000 2,55,00,000
Other Information:
- The partners share profits and losses equally.
- During the P.Y. 2020-21, the firm had incurred a business loss of Rs. 3,00,000 and
unabsorbed depreciation of Rs. 1,50,000.
- On 01.04.2021, Mr. Jayesh, a partner died and his legal heir Mr. Jay got admitted on
same date. Another partner, Mr. Raj, also retired on the same date.
- Mr. Madhav is not actively engaged in conducting the affairs of the business of the
firm while Mr. Jay and Mr. Gopal are actively engaged in conducting the affairs of the
business.
- Interest@16% p.a. for the first time on partner’s capital was paid from 01.07.2021.
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The clause for the same was, however, entered in the partnership deed on 01.01.2022.
Salary paid to partners is authorized by the partnership deed since inception.
- Mr. Gopal relinquished his title in a land in the name of LPG for a consideration of Rs.
18 lakhs, which was duly recorded in the books of accounts of LPG on 31.10.2020. The
stamp duty value of the land on that date was Rs. 20 lakhs.
questions –
1.1 How much interest can the firm claim as deduction for A.Y.2022-23?
(a) Rs. 5,40,000
(b) Rs. 4,35,000
(c) Rs. 2,25,000
(d) Rs. 1,05,000

1.2 How much salary can the firm claim as deduction for A.Y.2022-23?
(a) Rs. 10,05,000
(b) Rs. 8,88,000
(c) Rs. 8,70,000
(d) Rs. 6,96,000

1.3 The business loss and unabsorbed depreciation allowed to be set off while computing
total income of the firm for A.Y.2022-23 are -
(a) Rs. 3,00,000 and Rs. 1,50,000, respectively

1.4 What would be the total income of the firm for A.Y.2022-23?
(a) Rs. 6,30,250
(b) Rs. 4,12,000
(c) Rs. 6,04,000
(d) Rs. 5,29,000
1.5 What would be the capital gains in the hands of LPG assuming that the land acquired
from Gopal was sold on 28.02.2022 for Rs. 25 lakhs to Mr. Jack, fair market value
and stamp duty value on the date of transfer being Rs. 30 lakhs and Rs. 28 lakhs,
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respectively?
(a) Rs. 10,00,000
(b) Rs. 12,00,000
(c) Rs. 8,00,000
(d) Rs. 7,00,000
Answer Key
Question No. Answer

1.1 (c) Rs. 2,25,000
1.2 (d) Rs. 6,96,000
1.3 (b) Rs. 2,25,000 and Rs. 1,50,000, respectively
1.4 (c) Rs. 6,04,000
1.5 (c) Rs. 8,00,000
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ASSESSMENT OF AOP
Question 236
Discuss the concept of AOP in Income-tax Act?
Answer
Section 2(31) defines “person” as including “association of persons” or a body of individuals.
The expression association of persons is to be understood in its ordinary sense meaning
there by a group or congregation of persons. The expression association of persons is of a
wider connotation and scope than that of a body of individuals. An association of persons
may have as its members not only individuals (including minors) but also companies,
firms, joint families and other associations. When there is a group of persons formed for
the promotion of an enterprise or when co-adventures join together in a common action
they are assessable as an association of persons provided they did not in law constitute
a partnership. Ordinarily, there can be no association of persons in business unless the
members of the group join together out of their own volition or will.
In order to constitute an association of persons the members thereof must join any common
purpose or common action and the object of the association must be to produce income.
Mere receipt of income by a group of members in common will not make it an association
unless income is earned by its own effort in common. For this reason appointing of a common
agent, manager or lessee will not make the owners assessable as an association of persons.
Thus, where the income does not arise to the group of members from any joint venture or
joint activities the group of persons cannot be assessed as an association of persons. The
most important features of an association of persons are that -
(i) The number of members is not restricted and
(ii) The shares of each member or group of members is not definite and ascertainable.
For the purpose of assessment, it is not necessary that the association should be legally
constituted. In other words, it is not necessary that there must be mutual rights and obligations
amongst the members enforceable in law. The illegality, invalidity or incorrectness in the
constitution of an association does not in any way affect its liability to tax or its chargeability
as a unit of assessment. A partnership which is illegal or otherwise void will have to be
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assessed as an association of persons. The question whether there is an association of

persons or not depends upon the facts and circumstances of each case.
Question 237
Where land inherited by three brothers is compulsorily acquired by the State Government,
whether the resultant capital gain would be assessed in the status of “Association of Persons”
(AOP) or in their individual status?
Answer
CIT v. Govindbhai Mamaiya (2014) 367 ITR 498 (SC)
The High Court found that the parties inherited the property and there was no material on
record to suggest consensus ad idem between the brothers for formation of AOP. It referred
to CWT v. Chander Sen (1986) 161 ITR 370 (SC) to hold that as per section 4 of the Hindu
Succession Act, 1956, income from the asset inherited by a son from his father has to be
assessed as income of the son individually. Further, as per section 8 of the Hindu Succession
Act, 1956, the property of the father devolves on his son in his individual capacity and not
as karta of HUF. Thus, it was held that the income is chargeable to tax in their individual
status and not as AOP.
Supreme Court’s Observations: The Supreme Court referred to its earlier decision in the case of
Meera & Co v. CIT (1997) 224 ITR 635 in which the earlier precedent in the case of CIT v. Indira
Balakrishna (1960) 39 ITR 546 (SC) was followed. The Apex Court noted that “Association of
Persons” means an association in which two or more persons join in a common purpose or
common action.
The Supreme Court also referred to its judgment in G. Murugesan & Bros. v. CIT (1973) 4 SCC
211. In that case, it was held that an association of persons could be formed only when two
or more persons voluntarily combined together for certain purposes.
In this case, the property in question came to the assessees’ possession through inheritance
i.e., by operation of law. It is not a case where any ‘association of persons” was formed by
volition of the parties. Further, even the income earned in the form of interest is not because
of any business venture of the three assessees, but is the result of the act of the Government
in compulsorily acquiring the said land. Thus, the basic test to be satisfied for making an
assessment in the status of AOP is absent in this case. The Apex Court, accordingly, held
that the income from asset inherited by the legal heirs is taxable in their individual hands
and not in the status of AOP
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Question 238
Discuss the Computation of total income of AOP/BOI?
Answer
Computation of total income in the case of an association of persons or body of individuals
will be done in the same manner as in the case of any other assessee.
In computing the total income, salary, bonus, commission, remuneration or interest paid to
partners/members will not be allowed.
However in the case of payment of interest the following provisions will apply:
Explanation 1: If interest is paid by an AOP/BOI to any member who was also paid interest to
the AOP/BOI then only that amount of interest paid by the AOP/BOI will be disallowed in its
assessment which is in excess of the interest paid by the member to the AOP/BOI.
Explanation 2: If an individual is a member of an AOP/BOI in a representative capacity, on behalf

of or for the benefit of another person, then interest paid by the AOP/BOI to such individual
in his personal capacity will not be taken into account for the purpose of disallowance. But
interest paid by the AOP/BOI to such individual or vice-versa or representative member or
interest paid by the AOP/BOI directly to the beneficiary will be taken into account for the
purpose of disallowance.
Explanation 3: If interest is paid to a member who is not a member in a representative

capacity but such interest is received by him on behalf of or for the benefit of another person
the interest payment will be allowed.
Question 239
Discuss tax rates applicable to AOP/BOI?
Answer
The tax rates provided in Section 167B are as under:
1. Where the individual shares of the members of an association of persons or body of
individuals (other than a company or a co-operative society or a society registered
under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding
to that Act in force in any part of India) in the whole or any part of the income of such
association or body are indeterminate or unknown, tax shall be charged on the total
income of the association or body at the maximum marginal rate:
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Provided that, where the total income of any member of such association or body is
chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall
be charged on the total income of the association or body at such higher rate.
2. Where in the case of an association of persons or body of individuals as aforesaid [not

being a case falling under sub-section (1)]:
a. the total income of any member thereof for the previous year (excluding his
share from such association or body) exceeds the maximum amount which is
not chargeable to tax in the case of that member under the Finance Act of the
relevant year, tax shall be charged on the total income of the association or body
at the maximum marginal rate;
b. any member or members thereof is or are chargeable to tax at a rate or rates
which is or are higher than the maximum marginal rate, tax shall be charged on
that portion or portions of the total income of the association or body which is or
are relatable to the share or shares of such member or members at such higher
rate or rates, as the case may be, and the balance of the total income of the
association or body shall be taxed at the maximum marginal rate.
Explanation.—For the purposes of this section, the individual shares of the members
of an association of persons or body of individuals in the whole or any part of the
income of such association or body shall be deemed to be indeterminate or unknown if
such shares (in relation to the whole or any part of such income) are indeterminate or
unknown on the date of formation of such association or body or at any time thereafter.
Question 240
Discuss tax treatment for share of income received by members of AOP?
Answer
As per Section 86, where the assessee is a member of an association of persons or body of
individuals (other than a company or a co-operative society or a society registered under
the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that
Act in force in any part of India), income-tax shall not be payable by the assessee in respect
of his share in the income of the association or body computed in the manner provided in
section 67A:
Provided that,—
(a) where the association or body is chargeable to tax on its total income at the maximum
marginal rate or any higher rate under any of the provisions of this Act, the share of a
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member computed as aforesaid shall not be included in his total income;

(b) in any other case, the share of a member computed as aforesaid shall form part of his
total income :
Provided further that where no income-tax is chargeable on the total income of the
association or body, the share of a member computed as aforesaid shall be chargeable
to tax as part of his total income and nothing contained in this section shall apply to
the case.
Further, as per Section 67A, In computing the total income of an assessee who is a
member of an association of persons or a body of individuals wherein the shares of the
members are determinate and known, whether the net result of the computation of the
total income of such association or body is a profit or a loss, his share (whether a net
profit or net loss) shall be computed as follows, namely :—
(a) any interest, salary, bonus, commission or remuneration by whatever name
called, paid to any member in respect of the previous year shall be deducted
from the total income of the association or body and the balance ascertained and
apportioned among the members in the proportions in which they are entitled to
share in the income of the association or body;
(b) where the amount apportioned to a member under clause (a) is a profit, any
interest, salary, bonus, commission or remuneration aforesaid paid to the member
by the association or body in respect of the previous year shall be added to that
amount, and the result shall be treated as the member’s share in the income of
the association or body;
(c) where the amount apportioned to a member under clause (a) is a loss, any interest,
salary, bonus, commission or remuneration aforesaid paid to the member by the
association or body in respect of the previous year shall be adjusted against that
amount, and the result shall be treated as the member’s share in the income of
the association or body.
The share of a member in the income or loss of the association or body, as computed
under sub-section (1), shall, for the purposes of assessment, be apportioned under
the various heads of income in the same manner in which the income or loss of the
association or body has been determined under each head of income.
Any interest paid by a member on capital borrowed by him for the purposes of
investment in the association or body shall, in computing his share chargeable under
the head “Profits and gains of business or profession” in respect of his share in the
income of the association or body, be deducted from his share.
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Explanation.—In this section, “paid” has the same meaning as is assigned to it in clause
(2) of section 43.
Where there is included in the total income of an assessee any income on which no
income-tax is payable under the provisions of this Act, the assessee shall be entitled
to a deduction, from the amount of income-tax with which he is chargeable on his
total income, of an amount equal to the income-tax calculated at the average rate of
income-tax on the amount on which no income-tax is payable.
Question 241
JK Associates is an Association of Persons (AOP) consisting of two members, J and K. Shares
of the members are: 60%(J) and 40%(K). Income of the AOP for the previous year 2021-22
is ` 6 lacs. Compute tax liability of the AOP and the members in the following situations:
(i) J and K have their income, other than income from AOP, amounting to ` 1 lac and ` 2.7
lacs, respectively.
(ii) J and K’s income, other than income from AOP, amount to ` 1 lac and ` 1.20 lacs,
respectively.
Question 242
T and Q are individuals, who constitute an Association of Persons, sharing profit and losses
in the ratio of 2:1. For the accounting year ended 31st March, 2022, the Profit and Loss ac-
count of the business was as under:
Figures are in ` ‘000s

Cost of goods sold 4,250 Sales 4,900
Remuneration to: Dividend from Indian companies 25
T 130 Capital gains-Long term
Q 170 (computed) 640
Employees 256
Interest to:
T 48.3
Q 35.7
Other expenses 111.7
Sales-tax penalty due 39
Net profit 524.3
5,565 5,565
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Additional information furnished:

(i) Other expenses included:
(a) Wrist watches costing ` 2,500 each were given to 12 dealers, who had exceeded
the sales quota prescribed under a sales promotion scheme;
(b) Employer’s contribution of ` 6,000 to the Provident Fund was paid on 14th
January, 2022.
(c)
` 30,000 was paid in cash to an advertising agency for publicity.
(ii) Outstanding sales tax penalty was paid on 15th October, 2022. The penalty was
imposed by the Sales-tax Officer for non-filing of returns and statements by the due
dates.
T and Q had, for this year, income from other sources of ` 3,60,000 and ` 2,32,000
respectively.
Required to:
(i) Compute the total income of the AOPs for the assessment year 2022-23; and
(ii) Discuss the tax implication for that year in the hands of the individual members.
Answer
(i) Computation of total income of the AOP for A.Y.2022-23
Particulars `
Profit & gains of business (See Working Note below) 3,12,300
Long term capital gain 6,40,000
Income from other sources [Dividend is exempt under section 10(34)] -
Total income 9,52,300
Working Note - Computation of profits and gains of business
Particulars ` `
Net profit as per profit & loss account
Add: Inadmissible payments
Interest to members T & Q (` 48,300 + ` 35,700) 84,000
Advertising [Disallowance under section 40A(3) (100% of `
30,000 being a cash payment)] 30,000
Remuneration to members T & Q
(` 1,30,000 + ` 1,70,000) 3,00,000
Sales tax penalty (See Note 3 below) 39,000 4,53,000
9,77,300
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Less: Income not taxable under this head

Dividend from Indian companies 25,000
Long term capital gain 6,40,000 6,65,000
Profits and gains of business 3,12,300
Notes:
1. Since the employer’s contribution to PF has been paid during the previous year itself, it
is allowable as deduction.
2. Penalty imposed for delay in filing sales tax return is not deductible since it is on
account of infraction of the law requiring filing of the return within the specified period.
– CIT v. Ratanchand Bholanath (S.S) (1986) 160 ITR 500 (M.P.)
(ii) Tax implication in the hands of members T & Q for the A.Y.2022-23
Members of the AOPs have to pay tax on their total income taking into account savings/
investments etc.
Since one of the members has individual income more than the basic exemption limit,
the AOPs will be assessed at the maximum marginal rate.
Since the AOPs is taxed at maximum marginal rate, the share income of members is
not taxable in their hands individually.
Question 243
Prakash, a member in two AOPs, namely, “AOP & Co.” and “Prakash & Akash”, provides the
following details of his income for the year ended 31.3.2022:
(a) “AOP & Co.”, assessed at normal rates of tax, had credited in his account, amount of `
2,10,000 as interest on capital, ` 4,96,000 as salary and ` 20,000 as share of profit.
(b) A house property located at Jaipur was purchased on 1.7.2010 with the borrowed
capital in “Prakash & Akash” jointly shared equally and occupied by both of them for
self-residential purposes. Total interest paid for the year 2021-22 on the borrowed
capital was ` 4,10,000.
Compute the income and the tax liability thereon for the A.Y. 2022-23 and support your
answer with brief reasons and the provisions of the Act.
Answer
Mr. Prakash is a member in two AOPs, namely, AOP & Co. and Prakash & Akash. Though
Prakash & Akash is an AOPs, the income from the house property will not be assessed as
income of the AOPs, but will be included in the hands of the individual members as per
section 26, since the share of each member is definite and ascertainable. Hence, Prakash’s
share of income from house property would be assessed in his individual hands.
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Since AOP & Co., has been taxed at normal rates of tax, Mr. Prakash’s share income from the
AOPs (i.e. salary, interest on capital and his share of profit) would be included in his total
income.
Mr. Prakash, however, would be entitled to a relief under section 86 read with section 110
in respect of this income which has been included in his total income but on which tax
has already been paid by the AOPs. As per section 110, the relief shall be allowed at the
average rate of tax calculated on the total income inclusive of such income.
Hence, the tax liability in the hands of Mr. Prakash would be as under:-
Particulars ` `
Annual Value (½ share in house property used for own resi- Nil
dence);
Less: Interest on loan [½ share in ` 4,10,000] – Since the loan 2,00,000
is borrowed on or after 1.4.1999 and is used for acquiring prop-
erty within 5 years, deduction would be available upto a max-
imum of ` 2,00,000. This limit of ` 2,00,000 applies for each
member separately.
Loss from house property (-) 2,00,000
Share income from AOP & Co.
 Interest on capital 2,10,000
 Salary 4,96,000
 Share of profit 20,000 7,26,000
Particulars `
Tax on ` 5,26,000 17,700
Add: Health and Education Cess @ 4% 708
Tax Liability 18,408
Less: Rebate under section 86 read with section 110 = ` 18,408 x 100/
` 5,26,000
Rebate available ` 7,26,000 x 3.5% = ` 25,410
Restricted to 18,408
Tax payable Nil
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ASSESSMENT OF
COMPANIES
Question 244
What do you mean by the terms “Company”, “Indian company”, “Domestic Company” and
“Foreign Company”?
Answer
As per Section 2(17), company means:
(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country outside India, or
(iii) any institution, association or body which was assessed as a company for any
assessment year under the Income Tax Act, 1922 or was assessed under this Act as a
company for any assessment year commencing on or before 1.4.1970, or
(iv) any institution, association or body, whether incorporated or not and whether Indian or
non-Indian, which is declared by a general or special order of CBDT to be a company.
Indian Company [Section 2(26)]

Indian company means a company formed and registered under Companies Act, 1956 and
includes-
(i) a company formed and registered under any law relating to companies formerly in
force in any part of India (other than the State of Jammu and Kashmir and the union
territories mentioned below)
(ia) a corporation established by or under a central, State or Provincial Act;
(ib) any institution, association or body which is declared by the Board to be a
company,
(ii) in the case of the State of Jammu and Kashmir, a company formed and registered
under any law for the time being in force in that State:
(iii) in the case of any of the Union Territories of Dadra and Nagar Haveli, Daman and Diu
and Pondicherry and State of Goa, a company formed and registered under any law
for the time being in force in that Union Territory or in that State.
Provided that the registered or, as the case may be, principal office of the company,
corporation, institution, association or body, in all cases is in India.
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Domestic Company [Section 2(22A)]

A domestic company means an Indian company or any other company which in respect of
its income, liable to tax under the Income Tax Act, has made the prescribed arrangements
for the declaration and payment of dividend within India.
Arrangements for declaration and payment of dividend within India [Rule 27]
Three requirements are to be satisfied cumulatively by a company before it can be said to
be a company which has made the necessary “arrangements for declaration and payment
of dividends in India”, within the meaning of section 194:
1. The share register of the company for all shareholders should be regularly maintained
at its principal place of business in India, in respect of any assessment year, at least
from April 1 of the relevant assessment year.
2. The general meeting for passing of accounts of the relevant previous year and for
declaring dividends in respect thereof should be held only at a place within India.
3. The dividends declared, if any, should be payable only within India to all shareholders.
Foreign Company [Section 2(23A)]

Foreign Company means a company which is not a domestic company.
Note: Apart from the above various types of company, company can also be categorized
as “Widely Held Company” [It is a company in which the public are substantially interested]
and “Closely Held Company” [It is a company which is not a widely held company].
Question 245
Section 79 creates restrictions with regard to carry forward and set off of losses in case of
change in shareholding of a company. Discuss the provisions of this Section?
Answer
I. Closely held company other than an eligible start-up referred to in section 80-IAC:
1. Notwithstanding anything contained in chapter VI of Income-tax Act, where a
change in shareholding has taken place during the previous year in the case of a
company, not being a company in which the public are substantially interested,
no loss incurred in any year prior to the previous year shall be carried forward
and set off against the income of the previous year, unless on the last day of
the previous year, the shares of the company carrying not less than 51% of the
voting power were beneficially held by persons who beneficially held shares of the
company carrying not less than 51% of the voting power on the last day of the year
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or years in which the loss was incurred;

2. However, the above condition for carry forward and set off of losses shall not
apply:
(a) to a case where a change in the said voting power and shareholding takes place
in a previous year consequent upon the death of a shareholder or on account of
transfer of shares by way of gift to any relative of the shareholder making such
gift;
(b) to any change in the shareholding of an Indian company which is a subsidiary of a
foreign company as a result of amalgamation or demerger of a foreign company
subject to the condition that fifty-one per cent shareholders of amalgamating or
demerged foreign company continue to be the shareholders of the amalgamated
or the resulting foreign company;
(c) to a company where a change in the shareholding takes place in a previous year
pursuant to a resolution plan approved under the Insolvency and Bankruptcy
Code, 2016 (31 of 2016), after affording a reasonable opportunity of being heard
to the jurisdictional Principal Commissioner or Commissioner;
(d) to a company, and its subsidiary* and the subsidiary of such subsidiary, where,—
(i) the Tribunal, on an application moved by the Central Government under section
241 of the Companies Act, 2013 (18 of 2013), has suspended the Board of Directors
of such company and has appointed new directors nominated by the Central
Government, under section 242 of the said Act; and
(ii) a change in shareholding of such company, and its subsidiary and the subsidiary
of such subsidiary, has taken place in a previous year pursuant to a resolution
plan approved by the Tribunal under section 242 of the Companies Act, 2013
(18 of 2013) after affording a reasonable opportunity of being heard to the
jurisdictional Principal Commissioner or Commissioner.
* a company shall be a subsidiary of another company, if such other company holds
more than half in nominal value of the equity share capital of the company;
II. Closely held company being an eligible start-up referred to in section 80-IAC:
In the case of a company in which public are not substantially interested but being an
eligible start-up as referred to in section 80-IAC, the loss incurred in any year prior
to the previous year shall be carried forward and set off against the income of the
previous year, if, all the shareholders of such company who held shares carrying voting
power on the last day of the year or years in which the loss was incurred,—
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(i) continue to hold those shares on the last day of such previous year; and
(ii) such loss has been incurred during the period of seven years beginning from the year
in which such company is incorporated:
Judicial Decision
The provisions of Section 79 are applicable only in the case of carry forward of losses (
losses under any head of income). As carry forward of unabsorbed depreciation is covered
by Section 32(2), its carry forward and set off is not affected by Section 79. [CIT v. Concord
Industries Ltd. 247 ITR 800 (SC)]
Question 246
How is residential status of company determined? [Section 6(3)]
Answer
A company is said to be resident in India in any previous year, if,—
(i) it is an Indian company; or
(ii) its place of effective management in that year, is in India.
Explanation.—For the purposes of this clause “place of effective management” means a
place where key management and commercial decisions that are necessary for the conduct
of the business of an entity as a whole are, in substance made.
Question 247
Special provision for Foreign Company said to be resident in India [Section 115JH]
Answer
Where a foreign company is said to be resident in India in any previous year for the first time
then, the Government has issued notification so as to modify or relax the provisions of this
Act relating to the computation of total income, treatment of unabsorbed depreciation, set
off or carry forward and set off of losses, collection and recovery and special provisions
relating to avoidance of tax for the said previous year.
Where the Foreign Company is treated as resident for the first time in the assessment
proceedings, then the above mentioned notification shall also apply in respect the previous
year succeeding such previous year and which ends before the assessment of such previous
year is completed.
Where the conditions subject to which such relaxation was given in the notification has not
been complied with then, it shall be deemed that such relaxations have been wrongly allowed
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and the AO shall re-compute the income of such assessee. Time limit for rectification u/s
154 in such cases shall be reckoned from the end of the previous year in which the failure
takes place.
Extract of Notification:
1) Determination of opening WDV
If the foreign company is assessed to tax in the foreign jurisdiction Where depreciation
is required to be taken into account for the purpose of computation of its taxable
income, the WDV of the depreciable asset as per the tax record in the foreign country
on the 1 st day of the previous year shall be adopted as the opening WDV for the
said previous year. Where WDV is not available as per tax records, the WDV shall be
calculated assuming that the asset was installed, utilised and the depreciation was
actually allowed as per the provisions of the laws of that foreign jurisdiction. The WDV
so arrived at as on the 1st day of the previous year shall be adopted to be the opening
WDV for the said previous year. If the foreign company is not assessed to tax in the
foreign jurisdiction WDV of the depreciable asset as appearing in the books of account
as on the 1st day of the previous year maintained in accordance with the laws of that
foreign jurisdiction shall be adopted as the opening WDV for the said previous year.
2) Brought forward loss and unabsorbed depreciation

If the foreign company is assessed to tax in the foreign jurisdiction Brought forward
loss and unabsorbed depreciation as per the tax record shall be determined year wise
on the 1st day of the said previous year. If the foreign company is not assessed to
tax in the foreign jurisdiction Brought forward loss and unabsorbed depreciation as
per the books of account prepared in accordance with the laws of that country shall
be determined year wise on the 1st day of the said previous year. Other provisions
Such brought forward loss and unabsorbed depreciation shall be deemed as loss
and unabsorbed depreciation brought forward as on the 1st day of the said previous
year and shall be allowed to be set off and carried forward in accordance with the
provisions of the Act for the remaining period calculated from the year in which they
occurred for the first time taking that year as the first year. However, the losses and
unabsorbed depreciation of the foreign company shall be allowed to be set off only
against such income of the foreign company which has become chargeable to tax in
India on account of it becoming resident in India due to application of POEM. In cases
where the brought forward loss and unabsorbed depreciation originally adopted in
India are revised or modified in the foreign jurisdiction due to any action of the tax or
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legal authority, the amount of the loss and unabsorbed depreciation shall be revised
or modified for the purposes of set off and carry forward in India
3) Period of profit and loss account and balance sheet in cases where accounting year of foreign
company does not end on 31st March
The foreign company is required to prepare profit and loss account and balance sheet for
the period starting from the date on which the accounting year immediately following
said accounting year begins, upto 31st March of the year immediately preceding the
period beginning with 1st April and ending on 31st March during which the foreign
company has become resident. The foreign company is also required to prepare profit
and loss account and balance sheet for succeeding periods of twelve months, beginning
from 1st April and ending on 31st March, till the year the foreign company remains
resident in India on account of its POEM. Examples:
Example 1: If the accounting year of the foreign company is a calendar year and
the company becomes resident in India during P.Y. 2020-21 for the first time due to its
POEM being in India, then, the company is required to prepare profit and loss account
and balance sheet for the period 1st January, 2020 to 31st March, 2020. It is also
required to prepare profit and loss account and balance sheet for the period 1st April,
2020 to 31st March, 2021. For the purpose of carry forward of loss and unabsorbed
depreciation in this case, since the period 1st January, 2020 to 31st March, 2020 is
less than 6 months, it is to be included in the accounting year immediately preceding
the accounting year in which the foreign company is held to be resident in India for the
first time. Accordingly, the profit and loss and balance sheet of the fifteen (15) month
period from 1st January, 2019 to 31st March, 2020 is to be prepared.
Example 2: If the accounting year of the foreign company is from 1st July to 30th
June and the company becomes resident in India during P.Y. 2020-21 for the first time
due to its POEM being in India, then, the company is required to prepare profit and loss
account and balance sheet for the period 1st July, 2019 to 31st March, 2020. It is also
required to prepare profit and loss account and balance sheet for the period 1st April
2020 to 31st March 2021. For the purpose of carry forward of loss and unabsorbed
depreciation in this case, since the period is more than 6 months, it is to be treated as
a separate accounting year. The loss and unabsorbed depreciation as per tax record or
books of account, as the case may be, of the foreign company shall, be allocated on
proportionate basis
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4) Applicability of provisions of Chapter XVII-B (TDS provisions)

Where more than one provision of Chapter XVII-B of the Act applies to the foreign
company as resident as well as foreign company, the provision applicable to the foreign
company alone shall apply. Compliance to those provisions of Chapter XVII-B of the
Act as are applicable to the foreign company prior to it becoming Indian resident shall
be considered sufficient compliance to the provisions of said Chapter. The provisions of
section 195(2) relating to application to Assessing Officer to determine the appropriate
proportion of sum chargeable to tax shall apply in such manner so as to include
payment to the foreign company.
5) Availability of deduction under section 90 or 91 (Foreign tax credit)

The foreign company shall be entitled to relief or deduction of taxes paid in accordance
with the provisions of section 90 or section 91 of the Act. Where income on which
foreign tax has been paid or deducted, is offered to tax in more than one year, credit
of foreign tax shall be allowed across those years in the same proportion in which the
income is offered to tax or assessed to tax in India in respect of the income to which it
relates and shall be in accordance with the provisions of rule 128 of the Income-tax
Rules, 1962.
6) Non applicability of the notification

The above exceptions, modifications and adaptations shall not apply in respect of such
income of the foreign company which otherwise would have been chargeable to tax in
India, even if the foreign company had not become Indian resident.
7) Applicability of the notification where foreign company becomes resident in the subsequent
previous year also
In a case where the foreign company is said to be resident in India during a previous year,
immediately succeeding a previous year during which it is said to be resident in India;
the exceptions, modifications and adaptations shall apply to the said previous year
subject to the condition that the WDV, the brought forward loss and the unabsorbed
depreciation to be adopted on the 1st day of the previous year shall be those which
have been arrived at on the last day of the preceding previous year in accordance with
the provisions of this notification.
8) No effect on other transactions
Any transaction of the foreign company with any other person or entity under the Act
shall not be altered only on the ground that the foreign company has become Indian
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resident.
9) Applicability of other provisions relating to foreign company
Subject to the above exceptions, modifications and adaptions specifically provided
vide this notification, the foreign company shall continue to be treated as a foreign
company even if it is said to be resident in India and all the provisions of the Act shall
apply accordingly. Consequently, the provisions specifically applicable to —
(i) a foreign company, shall continue to apply to it;
(ii) non-resident persons, shall not apply to it; and
(iii) the provisions specifically applicable to resident, shall apply to it
10) Applicability of tax rate on foreign company
In case of conflict between the provision applicable to the foreign company as resident
and the provision applicable to it as foreign company, the later shall generally prevail.
Therefore, the rate of tax in case of foreign company i.e., 40% shall remain the same,
i.e., rate of income-tax applicable to the foreign company even though residency status
of the foreign company changes from non-resident to resident on the basis of POEM.
Question 248
Special Rate of Tax for certain manufacturing domestic Company [Section 115BA]
Answer
Income-tax payable in respect of the total income of a domestic company for any AY
beginning on or after the 1st day of April, 2017 [other than those mentioned under section
115BAA and section 115BAB] shall be computed @ 25% at the option of the company, if, -
(i) the company has been setup and registered on or after 1st day of March, 2016;
(ii) the company is not engaged in any business other than the business of manufacture
or production of any article or thing and research in relation to, or distribution of,
such article or thing manufactured or produced by it and is not engaged in any other
business;
(iii) the total income of the company has been computed,—
(a) without any deduction under the provisions of section 10AA or section 32(1)(iia)
or section 32AC or section 32AD or section 33AB or section 33ABA or sub-clause
(ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or
sub-section (2AB) of section 35 or section 35AC or section 35AD or section 35CCC
80JJAA;
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(b) without set off of any loss carried forward from any earlier assessment year if
such loss is attributable to any of the deductions referred to in the above items(a)
(c) depreciation u/s. 32 shall be computed in the prescribed manner.
(iv) Option is exercised in the prescribed manner before the due date of furnishing of first of
the return of income. Once the option is so exercised in one PY, then the same cannot
be withdrawn in the same or subsequent PY’s.
Loss if any shall as specified in (b) above be deemed to have been given full effect to
and no further deduction of such loss shall be given for any subsequent year.
Note: STCG u/s 111A and LTCG u/s 112 shall be taxed at the rates given in those
sections only.
Question 249
Tax on income of certain domestic companies [Section 115BAA]?
Answer
As against the rates of taxation provided for domestic companies in the Finance Act each
year, the said assessees can opt for beneficial tax rates provided in section 115BAA and
Section 115BAB. The option can be chosen anytime. However, the option once exercised,
cannot be withdrawn in any subsequent years. The assessees opting for section 115BAA
must furnish Form 10-IC along with the return of income, which indicates their willingness
to opt for the said scheme. This Form is 10-ID in cases of Section 115BAB. The salient
provisions of section 115BAA are:
1. Notwithstanding anything contained in this Act but subject to the provisions of this
Chapter, other than those mentioned under section 115BA and section 115BAB, the
income-tax payable in respect of the total income of a person, being a domestic
company, for any previous year relevant to the assessment year beginning on or after
the 1st day of April, 2020, shall, at the option of such person, be computed at the
rate of 22%, [plus surcharge of 10% and cess 4%]if the conditions contained below are
satisfied:
2. Provided that where the person fails to satisfy the conditions contained in sub-section (2)
in any previous year, the option shall become invalid in respect of the assessment year
relevant to that previous year and subsequent assessment years and other provisions
of the Act shall apply, as if the option had not been exercised for the assessment year
relevant to that previous year and subsequent assessment years.
3. Conditions: For the purposes of sub-section (1), the total income of the company shall
be computed,—
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(i) without any deduction under the provisions of section 10AA or clause (iia) of
sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA
or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-
section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC
80JJAA or Section 80M;
(ii) without set off of any loss carried forward or depreciation from any earlier
assessment year, if such loss or depreciation is attributable to any of the deductions
referred to in clause (i);
(iii) without set off of any loss or allowance for unabsorbed depreciation deemed
so under section 72A, if such loss or depreciation is attributable to any of the
deductions referred to in clause (i); and
(iv) by claiming the depreciation, if any, under any provision of section 32, except
clause (iia) of sub-section (1) of the said section, determined in such manner as
may be prescribed.
4. The loss and depreciation referred to in clause (ii) and clause (iii) of sub-section (2)
shall be deemed to have been given full effect to and no further deduction for such loss
or depreciation shall be allowed for any subsequent year:
5. Provided that where there is a depreciation allowance in respect of a block of asset
which has not been given full effect to prior to the assessment year beginning on the
1st day of April, 2020, corresponding adjustment shall be made to the written down
value of such block of assets as on the 1st day of April, 2019 in the prescribed manner,
if the option under sub-section (5) is exercised for a previous year relevant to the
assessment year beginning on the 1st day of April, 2020.
6. In case of a person, having a Unit in the International Financial Services Centre, as
referred to in sub-section (1A) of section 80LA, which has exercised option under
sub-section (5), the conditions contained in sub-section (2) shall be modified to the
extent that the deduction under section 80LA shall be available to such Unit subject to
fulfilment of the conditions contained in the said section.
7. Nothing contained in this section shall apply unless the option is exercised by the
person in the prescribed manner on or before the due date specified under sub-section
(1) of section 139 for furnishing the returns of income for any previous year relevant
to the assessment year commencing on or after the 1st day of April, 2020 and such
option once exercised shall apply to subsequent assessment years:
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8. Provided that in case of a person, where the option exercised by it under section 115BAB
has been rendered invalid due to violation of conditions contained in sub-clause (ii) or
sub-clause (iii) of clause (a), or clause (b) of sub-section (2) of said section, such person
may exercise option under this section:
9. Provided further that once the option has been exercised for any previous year, it cannot
be subsequently withdrawn for the same or any other previous year.
Question 250
Tax on income of new manufacturing domestic companies [Section 115BAB]
Answer
1. Notwithstanding anything contained in this Act but subject to the provisions of this
Chapter, other than those mentioned under section 115BA and section 115BAA, the
income-tax payable in respect of the total income of a person, being a domestic
company, for any previous year relevant to the assessment year beginning on or after
the 1st day of April, 2020, shall, at the option of such person, be computed at the rate
of 15% [plus surcharge 10% and cess 4%], if the conditions contained below are satisfied:
2. Provided that where the total income of the person, includes any income, which has
neither been derived from nor is incidental to manufacturing or production of an article
or thing and in respect of which no specific rate of tax has been provided separately
under this Chapter, such income shall be taxed at the rate of 22% and no deduction or
allowance in respect of any expenditure or allowance shall be allowed in computing
such income:
3. Provided also that the income-tax payable in respect of income being short term capital
gains derived from transfer of a capital asset on which no depreciation is allowable
under the Act shall be computed at the rate of twenty-two per cent:
4. Provided also that where the person fails to satisfy the conditions contained below in
any previous year, the option shall become invalid in respect of the assessment year
relevant to that previous year and subsequent assessment years and other provisions
of the Act shall apply to the person as if the option had not been exercised for the
assessment year relevant to that previous year and subsequent assessment years.
5. Conditions: For the purposes of sub-section (1), the following conditions shall apply,
namely:—
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(i) the company has been set-up and registered on or after the 1st day of October,
2019, and has commenced manufacturing or production of an article or thing on
or before the 31st day of March, 2023 and,—
(ii) the business is not formed by splitting up, or the reconstruction, of a business
already in existence:
Provided that this condition shall not apply in respect of a company, business of
which is formed as a result of the re-establishment, reconstruction or revival by
the person of the business of any such undertaking as is referred to in section 33B,
in the circumstances and within the period specified in the said section;
(iii) does not use any machinery or plant previously used for any purpose.
Explanation 1.—For the purposes of sub-clause (ii), any machinery or plant which
was used outside India by any other person shall not be regarded as machinery
or plant previously used for any purpose, if the following conditions are fulfilled,
namely:—
(A) such machinery or plant was not, at any time previous to the date of the
installation used in India;
(B) such machinery or plant is imported into India from any country outside
India; and
(C) no deduction on account of depreciation in respect of such machinery or
plant has been allowed or is allowable under the provisions of this Act in
computing the total income of any person for any period prior to the date of
the installation of machinery or plant by the person.
Explanation 2.—Where in the case of a person, any machinery or plant or any
part thereof previously used for any purpose is put to use by the company
and the total value of such machinery or plant or part thereof does not
exceed twenty per cent of the total value of the machinery or plant used
by the company, then, for the purposes of sub-clause (ii) of this clause, the
condition specified therein shall be deemed to have been complied with;
(iv) does not use any building previously used as a hotel or a convention centre, as
the case may be, in respect of which deduction under section 80-ID has been
claimed and allowed.
Explanation.—For the purposes of this sub-clause, the expressions “hotel” and
“convention centre” shall have the meanings respectively assigned to them in
clause (a) and clause (b) of sub-section (6) of section 80-ID;
(v) the company is not engaged in any business other than the business of manufacture
or production of any article or thing and research in relation to, or distribution of,
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such article or thing manufactured or produced by it.

Explanation.—For the removal of doubts, it is hereby clarified that the business
of manufacture or production of any article or thing referred to in clause (b) shall
not include business of,—
(i) development of computer software in any form or in any media;
(ii) mining;
(iii) conversion of marble blocks or similar items into slabs;
(iv) bottling of gas into cylinder;
(v) printing of books or production of cinematograph film; or
(vi) any other business as may be notified by the Central Government in this
behalf; and
(vi) the total income of the company has been computed,—
(a) without any deduction under the provisions of section 10AA or clause (iia)
of sub-section (1) of section 32 or section 32AD or section 33AB or section
33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section
(1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD
or section 35CCC or section 35CCD or under any provisions of Chapter VI-A
under the heading “C.—Deductions in respect of certain incomes” other than
the provisions of section 80JJAA or Section 80M;
(b) without set-off of any loss or allowance for unabsorbed depreciation deemed
so under section 72A where such loss or depreciation is attributable to any
of the deductions referred to in sub-clause (i).
Explanation.—For the removal of doubts, it is hereby clarified that in case
of an amalgamation, the option under sub-section (7) shall remain valid in
case of the amalgamated company only and if the conditions contained in
sub-section (2) are continued to be satisfied by such company; and
(c) by claiming the depreciation under the provision of section 32, except clause
(iia) of sub-section (1) of the said section, determined in such manner as may
be prescribed.
(vii) Explanation.—For the purposes of clause (b), the “business of manufacture or
production of any article or thing” shall include the business of generation of
electricity.
(viii) The loss referred to in sub-clause (ii) of clause (c) of sub-section (2) shall be
deemed to have been given full effect to and no further deduction for such
loss shall be allowed for any subsequent year.
(ix) If any difficulty arises regarding fulfilment of the conditions contained in
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sub-clause (ii) or sub-clause (iii) of clause (a) of sub-section (2) or clause (b)
of said sub-section, as the case may be, the Board may, with the approval
of the Central Government, issue guidelines for the purpose of removing the
difficulty and to promote manufacturing or production of article or thing
using new plant and machinery.
(x) Every guideline issued by the Board under sub-section (4) shall be laid before
each House of Parliament, and shall be binding on the person, and the income-
tax authorities subordinate to it.
6. Where it appears to the Assessing Officer that, owing to the close connection between
the person to which this section applies and any other person, or for any other reason,
the course of business between them is so arranged that the business transacted
between them produces to the person more than the ordinary profits which might be
expected to arise in such business, the Assessing Officer shall, in computing the profits
and gains of such business for the purposes of this section, take the amount of profits
as may be reasonably deemed to have been derived therefrom:
Provided that in case the aforesaid arrangement involves a specified domestic
transaction referred to in section 92BA, the amount of profits from such transaction
shall be determined having regard to arm’s length price as defined in clause (ii) of
section 92F:
Provided further that the amount, being profits in excess of the amount of the profits
determined by the Assessing Officer, shall be deemed to be the income of the person.
[In such cases, tax shall be computed at the rate of thirty per cent]
7. Nothing contained in this section shall apply unless the option is exercised by the
person in the prescribed manner on or before the due date specified under sub-section
(1) of section 139 for furnishing the first of the returns of income for any previous year
relevant to the assessment year commencing on or after 1st day of April, 2020 and
such option once exercised shall apply to subsequent assessment years:
8. Provided that once the option has been exercised for any previous year, it cannot be
subsequently withdrawn for the same or any other previous year.
Question 251
Special provision for payment of tax by certain companies (Minimum Alternate Tax) [Sec.
115JB]?
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Answer
1. In the case of a company, it has been provided that where 15% of book profit exceeds
tax on total income, the book profit shall be deemed to be the total income and the
tax payable on such total income shall be 15% thereof. Surcharge at 7% (2% in case of
foreign company) shall be added to such amount if the book profit exceeds ` 1 crore. If
the book profit exceeds ` 10 crore, surcharge at 12% (5% in case of foreign company)
shall be added to such amount. Health and Education cess @ 4% shall be added on
the aggregate of Income-tax and surcharge.
2. For the purpose of computation of book profit u/s 115JB, every company assessee shall
prepare its statement of profit and loss for the relevant previous year in accordance with
the provisions of Schedule III to the Companies Act, 2013. While preparing the annual
accounts including statement of profit and loss, the accounting policies, accounting
standards, method and rates of depreciation shall be the same as have been adopted
for preparing such accounts including profit and loss laid before the Annual General
Meeting u/s.129 of the Companies Act. This requirement applies even if the company
adopts a financial year which is different from the previous year under the Income-tax
Act.
3. However, certain companies to which second proviso to Sec. 129(1) of Companies Act
applies, are not required to prepare statement of Profit & Loss in accordance with the
provisions of schedule III to the Companies Act, 2013 (insurance, banking or electricity
companies.) It is therefore, provided that such companies are required to prepare
statement of Profit & Loss in accordance with the provisions of the Act governing such
company.
4. It is also provided that the provisions of this Section shall not apply to any income
accruing or arising to a company from life insurance business referred to in Sec. 115B.
Calculation of Book Profits:

The Book Profit shall be computed by making the following adjustments contemplated u/s
115JB to the profit shown in the statement of profit and loss for the relevant previous year.
The profit as shown in the statement of profit and loss shall be increased by-
a) the amount of income-tax (see note below*) paid or payable, and the provision
therefore; or
b) the amounts carried to any reserves by whatever name called (other than reserves for
shipping business as specified under section 33AC); or
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c) the amount or amounts set aside to provisions made for meeting liabilities other than
ascertained liabilities; or
d) the amount by way of provision for losses of subsidiary companies; or
e) the amount or amounts of dividends paid or proposed; or
f) the amount or amounts of expenditure relatable to any income to which Sec.10, Sec.
11 or 12 apply [other than the provisions contained in sec.10(38)];
g) The depreciation on revaluation of assets.
h) The amount of deferred tax and the provision there for
i) The amount or amounts set aside for diminution in the value of any asset
j) The amount or amounts of expenditure relatable to the amount of income, being the
share of income of an assessee in income of AOP, on which no income-tax is payable in
accordance with the provisions of section 86
k) expenditures, if any, debited to the profit loss account, corresponding to Capital gains
from transfer of securities, interest, royalty and FTS accruing or arising to foreign
company, if tax payable on such income is less than 15%
l) notional loss resulting from transfer of shares of SPV to a business trust in exchange of
units allotted by that trust
m) expenditure, if any, debited to statement of profit and loss and relatable to income by
way of royalty in respect of patent taxable u/s 115BBF
n) notional loss resulting from any change in carrying amount of said units
o) actual loss from transfer of said units
The above adjustments are called for only if any of the amounts referred to above are
debited to the statement of profit and loss. However, the amount of loss from transfer
of such units shall be recomputed by taking into account the cost of shares of SPV or
the carrying amount of shares at time of exchange where such shares are carried at a
value other than cost through statement of profit and loss. Such reworked loss shall
be reduced from the book profit.
p) The amount standing in revaluation reserve relating to revalued asset on retirement or
disposal of such asset. This addition is to be made only if such amount is not credited
to the statement of profit and loss.
Note: The amount of income tax in clause (a) above will include the following:
i. any tax on distributed profits u/s 115-O or distributed income u/s 115-R
ii. any interest charged under this Act
iii. surcharge, if any, as levied by the Central Acts from time to time
iv. secondary & higher education cess on income tax, if any, as levied by the Central
Acts from time to time.
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Further, the following shall be reduced from the profit as per the statement of profit
and loss:
i) the amount withdrawn from any reserve or provision (other than revaluation
reserve) if any such amount is credited to the statement of profit and loss; or
ii) the amount of income to which Sec.10, Sec. 11 or 12 apply, if any such amount
is credited to the statement of profit and loss; (however, the amount of income
referred to in sec.10(38) shall not be reduced) or
iii) the amount of loss brought forward or unabsorbed depreciation, whichever is
less as per books of account (for this purpose loss shall not include depreciation);
or
Note: In computation of book profit, the amount of loss brought forward or unabsorbed
depreciation, whichever is less as per books of account is allowable as deduction. For
this purpose, loss shall not include depreciation loss. It is clarified that if either the loss
brought forward or unabsorbed depreciation is NIL, then nothing shall be allowed as
deduction.
iv) The amount of profits of sick industrial company for the years commencing from
the year in which the said company has become a sick industrial company under
the relevant Act & ending with the year in which the entire net worth of such
company becomes equal to or exceeds the accumulated losses.
v) Amount withdrawn from revaluation reserve & credited to Profit & Loss A/c to the
extent it does not exceed the amount of depreciation on revaluation of assets.
vi) The amount of profit or loss from the activities of a tonnage tax company.
vii) The amount of deferred tax, if any such amount has been credited to the statement
of profit and loss.
viii) the amount of income, being the share of income of an assessee in income of AOP
on which no income-tax is payable in accordance with the provisions of section
86, if any such amount is credited to the statement of profit and loss
ix) Capital gains from transfer of securities, interest, royalty and FTS accruing or
arising to foreign company, if tax payable on such income is less than 18.5% and
if any such amount is credited to the statement of profit and loss,
x) notional gain resulting from transfer of shares of SPV to a business trust in
exchange of units allotted by that trust, if any such amount is credited to the
statement of profit and loss,
xi) notional gain resulting from any change in carrying amount of said units, if any
such amount is credited to the statement of profit and loss,
xii) actual gains from transfer of said units, if any such amount is credited to the
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statement of profit and loss. However, the amount of gain from transfer of such
units shall be recomputed by taking into account the cost of shares of SPV or the
carrying amount of shares at time of exchange where such shares are carried at
a value other than cost through statement of profit and loss. Such reworked gain
shall be added to the book profit.
xiii) amount of income by way of royalty in respect of patent chargeable to tax u/s
115BBF.
xiv) the aggregate amount of unabsorbed depreciation and loss brought forward in
case of a—
a. company, and its subsidiary and the subsidiary of such subsidiary, where,
the Tribunal, on an application moved by the Central Government under
section 241 of the Companies Act, 2013 (18 of 2013) has suspended the
Board of Directors of such company and has appointed new directors who
are nominated by the Central Government under section 242 of the said Act;
b. company against whom an application for corporate insolvency resolution
process has been admitted by the Adjudicating Authority under section 7 or
section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016 (31 of
2016).
5. The determination of the amounts in relation to the relevant previous year to be carried
forward to the subsequent years under sections 32(2) or 72 or 73 or 74 or 74A shall
not be affected by the application of section 115JB(1). In other words, for computation
of total income for future years, losses etc. shall be set off and carried forward in the
normal manner.
6. All other provisions of the Income-Tax Act, except to the extent otherwise provided in
this section, shall apply to every company mentioned in this section.
7. The provision of section 115JB is not applicable to a Foreign Company if:

a. the Foreign Company is a resident of a country with whom India has entered into
DTAA and such company does not have a Permanent Establishment in India as
per the said DTAA or
b. the Foreign Company is a resident of a country with whom no agreement has
been entered into and such company is not required to seek registration under
any law for time being in force.
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8. In respect of a unit located in an International Financial Services Centre and which

derives its income solely in foreign exchange, such company shall pay MAT @ 9%.
9. In case assessee has opted for provisions of Section 115BAA, then MAT does not continue to
apply to such companies. Further, for new companies opting for section 115BAB, provisions of
MAT are not applicable;
10. Judicial Decisions

a. Assessing Officer’s power:
The basis for computation of the book profit is the statement of profit and loss prepared
in accordance with Part II of Schedule VI to the Companies Act. The Company is obligated
to maintain its accounts in a manner provided under the Companies Act and the same
to be scrutinized and certified by statutory auditors and approved by the company
in a general meeting and thereafter to be filed before the Registrar of Companies
who has a statutory obligation also to examine and be satisfied that the accounts
are in accordance with the Companies Act. Once the requirements of Schedule VI are
complied with, the Assessing Officer cannot embark upon a fresh enquiry in regard
to the entries made in the books of account of the company. The Assessing Officer
cannot recompute the profit in the profit & loss account by excluding provisions made
for arrears of depreciation. Adjustments can be made only to the extent permitted u/s
115JB – Apollo Tyres Ltd. Vs. CIT (2002) 255 ITR 273 (SC).
b. An assessee is eligible to deduct prior period expenses while computing book profit
under section 115JA irrespective of as to whether such prior period expenses are shown
separately or not in the P&L A/c. [Tamil Nadu Cements Corporation Ltd. v. JCIT (2012)
209 Taxman 58(Mad.)]
c. Where the assessee company was consistently charging depreciation in its books of
accounts at the rates prescribed in the Income Tax Rules, which were higher than the
rates prescribed in Schedule XIV of the Companies Act, it was held by the Apex court
that ITO has no jurisdiction to rework the book profit u/s 115J by substituting the rates
of depreciation prescribed in Schedule XIV. [Malayala Manorama Co. Ltd v. CIT (2008) 300
ITR 251 SC]
However, in Dynamic Orthopaedics (P.) Ltd. v. CIT (2010) 321 ITR 300, the Supreme court
has held that for computation of book profits, depreciation has to be computed at the
rates specified in Schedule XIV to Companies Act, 2013 and not as per Income Tax
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Rules. Therefore, the law laid down in Malayala Manorama Co. Ltd. has been referred
to a larger bench for reconsideration.
d. Assessing Officer cannot discard the accounts prepared in accordance with requirements
of Part II of Schedule VI to the Companies Act and certified by chartered accountants,
on ground that same had not been approved at annual general meeting of company.
[DCIT v. Arvind Mills Ltd. [2009] 314 ITR 251 (Guj.)]
e. If at the time of creation of reserve, it was not added to the profit as per P & L A/c, it
cannot be reduced from the profit in subsequent year when it is written back to the P
& L A/c. [Indo Rama Synthetics (I) Ltd. v. CIT [2011] 196 TAXMAN 539 (SC)]
f. The assessee has to include capital gains for computing the book profit u/s 115JB.
Even under clause 3(xii)(b) of Part II of Schedule VI to the Companies Act, 2013, profits
or losses in respect of transactions or transactions of an exceptional or non-recurring
nature are to be disclosed. This shows clearly that capital gains should be included for
the purposes of computing book profit. [CIT vs. Veekaylal Investment Co. P. Ltd. (2001)
249 ITR 597 (Bom).] [Rain Commodities Ltd. v. DCIT (2010) 40 SOT 265 (Hyd.)(SB)].
However, if on sale of asset, profit is directly taken to balance sheet (reserves) and not
through statement of profit and loss, adjustment to book profit cannot be made, if
auditors and ROC have not found fault with Accounts. [CIT .v. Forver Diamonds Pvt. Ltd.
(Bom.)(HC)].
g. As per clause (a) above, only income-tax has to be added back. Hence, any tax, penalty
or interest paid or payable under Wealth-tax, Gift-tax, or any penalty paid or payable
under income-tax, if debited to statement of profit and loss should not be added back
to such net profits. Further FBT paid u/s 115WB should not be added back. Further no
adjustment is to be done in respect of income tax refund, if any, credited to the profit
and loss amount.
h. Any provision made to meet unascertained liabilities like provisions of gratuity
provisions for future losses, etc. should be added back to such net profit. However,
if the provisions for gratuity has been made on the basis of actuarial valuation, it
becomes an ascertained liability and hence should not be added back. [CIT v. Echjay
Forgings (P) Ltd. (2001) 116 Taxman 322 (Bom)].
i. Any expense other than mentioned in clause (f) above should not be added back for
computing book profit even if such expense is not allowable under the Income-tax Act.
[CIT v Echjay Forgings (P.) Ltd. (201) 116 Taxman 322 (Bom)].
j. Interest u/s 234B or 234C is also leviable in respect of MAT liability u/s 115J. [Jt. CIT v.
Rolta India Ltd. [2011] 196 TAXMAN 594 (SC)]
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k. Additional depreciation debited to P&L A/c due to retrospective change in the method
of depreciation cannot be added back by the A.O. [Kinetic Motors Co. Ltd. v. DCIT 262
ITR 330 (Bom.)]
l. In case of a company incorporated under section 25 of Companies Act, 1956, whose
surplus is not liable to tax on the principles of mutuality, the provisions of MAT do not
apply. [Travel Agents Association of India v. A.C.I.T. (2009) 118 ITD 285 (Mum.)]
m. An amount retained by way of providing for a known liability is not a reserve within
meaning of clause (b) of Explanation 1 to section 115JB. Therefore, amount set apart
as a Debenture Redemption Reserve (DRR) is not a reserve within meaning of clause (b)
of Explanation 1 to section 115JB and therefore, is not required to be added back to
compute book profit u/s 115JB. [CIT v. Raymond Ltd. [2012] 209 Taxman 65 (Bom.)
Question 252
Allowing tax credit in respect of tax paid on deemed income under MAT provisions against
tax liability in subsequent years [Section 115JAA]
Answer
1. Section 115JAA provides that where any amount of tax is paid under sub-section (1)
of section 115JB by a company for any assessment year credit in respect of the taxes
so paid for assessment year shall be allowed on the difference of the tax paid under
section 115JB and the amount of tax payable by the company on its total income
computed in accordance with the other provisions of the Act.
MAT CREDIT = TAX u/s 115 JB – Tax payable under normal provisions
2. Further, if the Foreign tax credit (FTC) allowed under section 90 or 90A or 91 against MAT,
is more than the FTC admissible against the regular tax liability (tax liability under normal
provisions – i.e. other than section 115JB), such excess amount of FTC shall be ignored for the
purpose of calculating MAT credit to be carried forward.
3. The amount of tax credit so determined shall be allowed to be carried forward and set
off in a year when the tax becomes payable on the total income computed under the
regular provisions.
4. However, no carry forward shall be allowed beyond the fifteenth assessment year
immediately succeeding the assessment year in which the tax credit becomes allowable.
5. The set off in respect of the brought forward tax credit shall be allowed for any
assessment year to the extent of the difference between the tax on the total income
and the tax which would have been payable under section 115JB for that assessment
year.
415
Final ca Direct tax
Set off = Tax payable under normal provisions – Tax u/s 115JB
6. However, no interest shall be allowed on the amount of tax credit available under
section 115JAA.
7. In case of conversion of private company or unlisted public company into a limited
Liability Partnership under the Limited Liability Partnership Act, 2008, no credit under
this section shall be allowed to be carried forward by the successor LLP.
8. CBDT has clarified that in case of companies opting for provisions of section 115BAA /
Section 115BAB, the brought forward MAT credit shall lapse
Report of a Chartered Accountant u/s 115JB
Every company to which the provisions of Sec. 115JB are applicable shall furnish a
report in Form 29B from a Chartered accountant certifying that the book profit has
been computed in accordance with the provisions of Sec. 115JB.
Question 253
Framework for computation of book profit for Ind AS compliant companies in the year of
adoption and thereafter
Division II in Schedule III is applicable for companies required to comply with Companies
(Indian Accounting Standards) Rules, 2015 – Ind AS. The Division II of Schedule III provides
instructions for preparation of financial statements and additional disclosure requirements
for companies, which includes separate disclosure of items falling in ‘Other Comprehensive
Income’ (“OCI”). Further, the items of OCI are required to be disclosed in the Statement
of Profit and Loss after the amount of ‘Profit / (loss) for the period’ is determined which
is considered as the base for determining ‘book profit’ for section 115JB. Para 7 of Ind
AS 1 – Presentation of Financial Statements, provides the list of items to be included as
components of OCI. Further, as per para 6 of the General Instructions for Preparation of
Statement of Profit and Loss as per Division II of Schedule III, the OCI needs to be classified
into the following.
(A) Items that will not be reclassified to profit or loss;
a) Changes in revaluation surplus;
b) Remeasurements of the defined benefit plans;
c) Equity Instruments through Other Comprehensive Income;
d) Fair value changes relating to own credit risk of financial liabilities designated at
fair value through profit or loss;
e) Share of Other Comprehensive Income in Associates and Joint Ventures, to the
extent not to be classified into profit or loss; and
f) Others (specify nature).
416
Final ca Direct tax
(B) Items that will be reclassified to profit or loss

In the light of above backgrounds, the provisions of section 115JB have been amended by
inserting new sub-sections (2A) to (2C) which are made applicable for the companies which
are required to prepare its financial statements in accordance with the Ind AS.
1) Section 115JB(2A) provides that any of the above items credited or debited to OCI being
‘items that will not be reclassified to profit or loss’ should be added to or subtracted
from the ‘book profit’ as computed in accordance with Explanation 1 to sub-section 2
of section 115JB of the Act, respectively. However, it provides that the following two
items will not be added to or subtracted from the book profit, though included in OCI;
rather it will be added to or subtracted from ‘book profit’ in the year of realization /
disposal / retirement or otherwise transfer of such assets or investments. However,
following items to be ignored:
i) Revaluation surplus for assets in accordance with Ind AS 16 and Ind AS 38;
ii) Gains or losses from investment in equity instruments designated at fair value
through OCI as per Ind AS 109
2) Sub-section (2A) further provides for addition to or reduction from the book profit
of any amount or aggregate of the amounts debited or credited respectively to the
Statement of Profit and Loss on distribution of non-cash assets to shareholders in a
demerger as per Appendix A of the Ind AS 10.
3) Sub-section (2B) provides that in the case of resulting company, if the property and
liabilities of the undertaking(s) being received by it are recorded at values different
from values appearing in the books of account of the demerged company immediately
before the demerger, any change in such value shall be ignored for the purpose of
computing of book profit of the resulting company.
4) Sub-section (2C) provides that the ‘book profit’ in the year of convergence and subsequent
four previous years shall be increased or decreased by 1/5th of transition amount.
The term ‘transition amount’ is defined to mean the amount or the aggregate of the
amounts adjusted in Other Equity (excluding equity component of compound financial
instruments, capital reserve and securities premium reserve) on the convergence date
but does not include the following.
i) Amounts included in OCI being ‘items that will be reclassified to profit or loss;
ii) Revaluation surplus for assets as per Ind AS 16 and Ind AS 38;
iii) Gains or losses from investment in equity instruments designated at fair value as
per Ind AS 109;
iv) Adjustments relating to items of property, plant and equipment and intangible
assets recorded at fair value as deemed cost as per para D5 and D7 of Ind AS 101;
417
Final ca Direct tax
v) Adjustments relating to investments in subsidiaries, joint ventures and associates

recoded at fair value as deemed cost as per para D15 of Ind AS 101;
vi) Adjustments relating to cumulative translation differences of a foreign operation
as per para D13 of Ind AS 101.
5) The proviso to sub-section (2C) further provides that the effect of the items listed at
sr, no. (ii) to (v) above shall be given to the book profit (increased or decreased) in
the year in which such asset or investment is retired, disposed, realised or otherwise
transferred. Further, the effect of item listed at sr. no. (vi) shall be given to the book
profit (increased or decreased) in the year in which such foreign operation is disposed
or otherwise transferred.
6) The term ‘year of convergence’ means the previous year within which the convergence
date falls. The term ‘convergence date’ means the first day of the first Ind AS reporting
period as per Ind AS 101.
Question 254
Rathi Paints Ltd., a closely held Indian company, is engaged in the business of manufacture
of paints in India. A profit or loss account for the year ending 31.3.2022 is given below.
Profit and Loss Account (Figure in lakhs)
` `
Salary and wages 7.50 Sales 50.00
Postage 0.40 Amount withdrawn from
Traveling and Conveyance 0.50 General Reserve 3.00
Exp. on royalty 0.20 Royalty chargeable u/s 115BBF 1.00
Depreciation 5.00
Income-tax 4.00
Wealth tax 0.10
Excise duty due 1.00
Provisions for future losses 0.60
Proposed dividend 0.80
Loss of subsidiary company 0.50
Audit fee 0.28
Deferred Tax 0.30
Provision for DDT 0.13
Director Remuneration 8.00
Net profit 24.69
Total 54.00 54.00
418
Final ca Direct tax
1. The excise duty due on 31.3.2022 was paid on 2.12.2022.
2. Custom duty of ` 1,20,000 which was due on 31.3.2010 was paid during the financial
year 2021-22.
3. Depreciation as per income tax is ` 11.43 lakhs.
4. Deferred Tax A/c represents a deferred tax liability created on account of differences
in the rates of depreciation.
5. Income Tax of ` 4.00 lacs includes FBT paid of ` 0.75 lacs
6. The company wants to set off the following losses / allowances:
For tax Purposes ` For accounting

Purposes `
Brought forward loss of assessment year 12,00,000 10,00,000
2020-21
Unabsorbed depreciation 3,00,000 3,00,000
Compute the total income of the assessee and the tax liability for the assessment year
2022-23.
Question 255
The accounts of a public company have been prepared in accordance with provisions of
Schedule III to the Companies Act and its Statement of profit and loss laid before the Annual
General Meeting for the previous year ending 31.3.2022 shows a net profit of `15 lakhs. The
following information relevant for the purpose of computing its assessable income has been
extracted from a scrutiny of the Statement of profit and loss:
Credits in Statement of profit and loss:
Credits to the profit and loss account:

1 Profit from a new industrial undertaking qualifying for deduction under 17,00,000
sec.80IA(net)
2 Profits from a new industrial undertaking qualifying for deduction under 10,00,000
section 10AA (Gross)
3 Long-term Capital Gains (on sale of unlisted debentures) 3,00,000
Debits to the profit and loss account
1 Expenditure relating to industrial undertaking qualifying for deduction 7,00,000
under section 10AA
2 Depreciation relating to P.Y. 2019-20 brought forward 10,00,000
419
Final ca Direct tax
3 Business loss relating to P.Y. 2019-20 brought forward 12,00,000

4 Current year’s depreciation 10,00,000
5 Penalty for infraction of law 1,00,000
6 Provision for Sales-tax 3,00,000
7 Dividend proposed 2,00,000
Depreciation admissible under the Income-tax Act and Rules for the previous year is `
19,50,000. The capital gain has been invested in specified assets under section 54EC. Sales
tax provided in the accounts has been remitted before the due date. There is no loss or
unabsorbed depreciation to be carried forward and adjusted as per income-tax assessment.
You are required to compute the total tax liability of the company for the assessment year
2022-23.
Question 256.
A private limited company has share capital in the form of equity share capital. The shares
were held until 31st March, 2021 by four members A, B, C & D equally. The company made
losses / profits for the past three assessment years as follows:
Asst. year Business Loss (`) Unabsorbed Dep. (`) Total (`)
2019-20 Nil 15,00,000 15,00,000
2020-21 Nil 12,00,000 12,00,000
2021-22 10,00,000 9,00,000 19,00,000
The above figures have been accepted by the tax department
During the previous year 31.3.2022, A sold his shares to Y and during the previous year
ended 31.03.2023, B sold his Shares to Z. The profits for the past two previous years are as
follows :
31.03.2022 ` 18,00,000 (before depreciation ` 9,00,000)
31.03.2023 ` 45,00,000 (before depreciation ` 7,50,000)
Compute taxable income. Working must from part of your answer.
Soln.
Statement showing computation of taxable income for A.Y. 2022-23
Particulars Rs. Rs.

PGBP
Profits before depreciation 18,00,000
Less: Depreciation for the year (9,00,000)
420
Final ca Direct tax
Current year PGBP 9,00,000

Less: Unabsorbed business loss of P.Y. 2021-22 set-off u/s 72 (9,00,000)
Taxable PGBP for the year Nil
Unabsorbed business loss to be c/fd 1,00,000
Unabsorbed depreciation to be c/fd
A.Y. Amount
2019-20 15,00,000
2020-21 12,00,000
2021-22 9,00,000
Statement showing computation of taxable income for A.Y. 2023-
24
PGBP
Profits before depreciation 45,00,000
Less : Depreciation for the year (7,50,000)
Current year’s PGBP 37,50,000
Less: Unabsorbed depreciation set-off u/s 32 (2)
A.Y. 2019-20 (15,00,000)
A.Y. 2020-21 (12,00,000)
A.Y. 2021-22 (9,00,000) (36,00,000)
Taxable PGBP 1,50,000
Note:
Unabsorbed business loss of Rs.1 lakh cannot be set-off against profits of the Previous Year
2022-23 since percentage change in shareholding as on 31.3.2021 and as on 31.3.2023 is
more than 49%. Hence, as per the restriction contained in Sec. 79, the aforesaid loss shall
not be adjusted. However, the restriction does not apply to unabsorbed depreciation.
Question 257
Hyper Ltd., engaged in diversified activities, earned a profit of ` 14,25,000 after debit/credit
of the following items to its statement of profit and loss for the year ended on 31.3.2022:
(a) Items debited to Statement of Profit and Loss `

Provision for loss of subsidiary 70,000
Provision for income-tax demand 1,05,000
Expenses on purchase/sale of equity shares 15,000
Depreciation 3,60,000
421
Final ca Direct tax
Interest on deposit credited to buyers on 31.3.2022 for advance received 1,00,000

from them, on which TDS was deducted in April 2022 and was deposited
on 31.7.2022
(b) Items credited to Statement of Profit and Loss
Long term capital gain on sale of equity shares on which securities trans- 3,60,000
action tax was paid at the time of acquisition and sale
Income from units of UTI 75,000
The company provides the following additional information:
(i) Depreciation includes ` 1,50,000 on account of revaluation of fixed assets
(ii) Depreciation allowable as per Income-tax Rules is ` 2,80,000
(iii) Brought forward Business Loss/ Unabsorbed Depreciation:
F.Y. Amount as per books Amount as per Income-tax

Loss ` Depreciation ` Loss ` Depreciation `
2018-2019 2,50,000 3,00,000 2,00,000 2,50,000
2019-2020 Nil 2,70,000 1,00,000 1,80,000
2020-2021 3,50,000 3,15,000 1,20,000 2,10,000
You are required to:
(i) Compute the total income of the company for the assessment year 2022-23 giving the
reasons for treatment of items and
(ii) Examine the applicability of section 115JB of the Income-tax Act, 1961, and compute
book profit and the tax credit to be carried forward.
Assume the tax rate applicable to Hyper Ltd for the P.Y. 2021-22 is 30%. Ignore the
provisions of section 115BAA.
Answer
Computation of total income of M/s Hyper Ltd. for the A.Y. 2022-23
Particulars ` `
Profit as per Statement of Profit & Loss 14,25,000
Add: Items disallowed/ considered separately
Provision for loss of subsidiary [since it is not wholly and exclusively 70,000
for the purpose of business of the assessee]
Provision for income-tax [disallowed under section 40(a)(ii)] 1,05,000
422
Final ca Direct tax
Expenses on transfer of shares [not deductible from business income. 15,000

It is to be deducted from gross sale consideration while computing
capital gains]
Interest on deposit credited on 31.3.2022 and tax deducted in April 30,000
2022 which was deposited on 31.7.2022 [30% disallowed under sec-
tion40(a)(ia) since, tax is deducted only in the next year].
Depreciation debited to statement of profit and loss [only depreci- 3,60,000 5,80,000
ation calculated as per the Income-tax Rules, 1962 is allowable as
deduction]
20,05,000
Less: Items credited but not includible under business income or
are exempt under the provisions of the Act
Long-term capital gain on sale of equity shares on which securities 3,60,000

transaction tax was paid, since it is not a business income.
Income from units of UTI, since it is not a business income. 75,000 4,35,000
15,70,000
Less: Depreciation (allowable as per the Income-tax Rules, 1962) 2,80,000
12,90,000
Less: Set-off of b/f business loss and unabsorbed Depreciation
Brought forward business loss u/s. 72 4,20,000
Brought forward depreciation u/s. 32 6,40,000 10,60,000
Income from business 2,30,000
Capital Gains
Long term capital gain on sale of equity shares on which securities 3,60,000
transaction tax was paid at the time of acquisition and sale
Income from Other Sources
Income from units of UTI 75,000
75,000 75,000
Tax on LTCG exceeding ` 1 lakh @ 10% 26,000
Tax on other income of ` 3,05,000 @ 30% 91,500
117,500
Add: Health and Education cess @ 4% 4,700
Tax Payable as per the Income-tax Act, 1961 1,22,200
423
Final ca Direct tax
Computation of Book Profit under section 115JB
Particulars ` `
Profit as per Statement of Profit & Loss 14,25,000
Add: Net Profit to be increased by the following amounts as per
Explanation 1 below section 115JB(2)
Provision for loss of subsidiary 70,000
Provision for income-tax 1,05,000
Depreciation debited to statement of profit and loss 3,60,000 5,35,000
19,60,000
Less: Net Profit to be reduced by the following amounts as per Ex-
planation 1 below section 115JB(2)
Depreciation debited to statement of profit and loss (excluding 2,10,000
depreciation on account of revaluation of fixed assets)
(i.e., ` 3,60,000 – ` 1,50,000)
Brought forward business loss or unabsorbed deprecation as per 6,00,000 8,10,000
books of account, whichever is less, taken on cumulative basis
15% of book profit 1,72,500
Add: Health and Education cess @ 4% 6,900
1,79,400
In case of a company, it has been provided that where income-tax payable on total income
computed as per the provisions of the Act is less than 15% of book profit, the book profit
shall be deemed as the total income and the tax payable on such total income shall be
15% thereof plus health and education cess @ 4%.
Accordingly, in this case, since income-tax payable on total income computed as per the
provisions of the Act is less than 15%` of book profit, the book profit of ` 11,50,000 is
deemed to be the total income and income-tax is payable @ 15% thereof plus health and
education cess @ 4%. The tax liability, therefore, works out to be ` 1,79,400.
Section 115JAA provides that where tax is paid in any assessment year in relation to the
deemed income under section 115JB(1), the excess of tax so paid, over and above the tax
payable under the other provisions of the Income-tax Act, 1961, will be allowed as tax
credit in the subsequent years.
424
Final ca Direct tax
The tax credit is, therefore, the difference between the tax paid under section 115JB(1) and
the tax payable on the total income computed in accordance with the other provisions of
the Act. This tax credit is allowed to be carried forward for 15 assessment years succeeding
the assessment year in which the credit became allowable.
Such credit is allowed to be set off against the tax payable on the total income in an
assessment year in which the tax is computed in accordance with the provisions of the Act,
other than section 115JB, to the extent of excess of such tax payable over the tax payable
on book profits in that year.
Particulars `
Tax on book profit under section 115JB 1,79,400
Less: Tax on total income computed as per the other provisions of the Act 1,22,200
Tax credit to be carried forward under section 115JAA 57,200
Question 258
The profit as per the statement of profit and loss of XYZ Ltd., a resident company, for the
year ended 31.3.2022 is ` 190 lacs arrived at after making the following adjustments:
Particulars `
(i) Depreciation on assets 100
(ii) Reserve for currency exchange fluctuation 50
(iii) Provision for tax 40
(iv) Proposed dividend 120
Following further information are also provided by company:
(a) Profit includes ` 10 lacs, being dividend received from an Indian subsidiary company.
(b) Provision for tax includes ` 16 lacs of tax payable on distribution of profit and of ` 2
lacs of interest payable on income-tax.
(c) Depreciation includes ` 40 lacs towards revaluation of assets.
(d) Amount of ` 50 lacs credited to statement of P & L was drawn from revaluation reserve.
(e) Balance of statement of profit and loss shown in balance sheet at the asset side as at
31.3.2021 was ` 30 lacs which includes unabsorbed depreciation of ` 10 lakhs.
Compute the book profit for the year ended 31.3.2022.
Answer
Computation of book profit of XYZ Ltd. for the year ended 31.3.2022
425
Final ca Direct tax
Particulars ` `
Profit as per Statement of Profit & Loss 1,90,00,000
Add: Net profit to be increased by the following amounts as
per Explanation 1 below section 115JB(2)
Depreciation on assets debited to Statement of P&L 1,00,00,000
Reserve for currency exchange fluctuation, since the amount 50,00,000
carried to any reserve, by whatever name called, is to be added
back
Provision for tax (See Note below) 40,00,000
Proposed dividend 1,20,00,000 3,10,00,000
5,00,00,000
Less: Net profit to be decreased by the following amounts as per
Explanation 1 below section 115JB(2)
Depreciation other than depreciation on revaluation of assets 60,00,000
(` 100 lacs - ` 40 lacs)
Withdrawal from revaluation reserve restricted to the extent of
depreciation on account of revaluation of assets (` 50 lacs or
` 40 lacs, whichever is less) 40,00,000
Unabsorbed depreciation or brought forward business loss,
whichever is less, as per the books of account. Unabsorbed
depreciation ` 10 lakhs and brought forward business loss ` 20
lakhs – whichever is less 10,00,000
1,10,00,000
Book profit 3,90,00,000
Note – For the purpose of section 115JB, book profit means the profit as per the statement
of profit and loss prepared in accordance with Schedule III to the Companies Act, 2013, as
adjusted by certain additions/deductions as specified. One of the adjustments is to add back
income-tax paid or payable, and the provisions therefor. Explanation 2 after sub-section
(2) of section 115JB clarifies that income-tax includes, inter alia, dividend distribution tax/
tax on distributed income and interest. Therefore, the entire provision of ` 40 lacs for in-
come-tax is added back for computing book profit for levy
Question 259
Can long-term capital gain exempted by virtue of erstwhile section 54EC be included in the
book profit computed under erstwhile section 115JB?
426
Final ca Direct tax
Answer
N.J. JOSE AND CO. (P.) LTD. V. ACIT (2010) (KER.)
As long as long-term capital gains are part of the profits included in the Statement of Profit
and Loss prepared in accordance with the provisions of Schedule III o the Companies Act,
2013, capital gains cannot be excluded. Long term capital gains exempt under section 54EC
are part of books profits under section 115JB and are liable to MAT. Recently a divergent
view has been adopted by Madras High Court in the case of CIT v. Metal and Chromium
Plater (P) Ltd. [2019] 415 ITR 123 (Mad) wherein the High Court affirmed the decision of the
Tribunal holding that capital gains which forms part of the net profit in the statement of
profit and loss of the assessee company, in respect of which exemption under section 54EC
is available while computing total income under the regular provisions of the Income-tax
Act, 1961, should not be taken into account for calculation of minimum alternate tax on
book profits under section 115JB. It is respectfully submitted that this view requires recon-
sideration;
Question 260
The following are the particulars relating to two Indian companies, namely, Alpha Ltd. and
Beta Ltd. which are subject to tax audit u/s 44AB, for A.Y.2022-23 –
Particulars Alpha Ltd. Beta Ltd.

Date of setting up/ registration 1.4.2019 1.11.2021
Main object Manufacture of steel Manufacture of leather
Place Vaishali, Bihar Ranipet, Tamil Nadu
Turnover of P.Y. 2019-20 Rs 251 crores -
Turnover of P.Y. 2020-21 Rs 401 crores -
Turnover of P.Y. 2021-22 Rs 270 crores Rs 120 crores
Value of new plant and ma- Rs. 8 crore Rs 5 crore
chinery installed and put to
use on 1.11.2021
Gross Total Income of Rs5 crore Rs 3 crore
P.Y.2021-22
No. of new employees em- 750 750
ployed on the
date of setting up/registration
the company
427
Final ca Direct tax
Monthly emoluments to em-

ployees by ECS
through bank account:
250 employees Rs 20,000 per employee Rs 21,000 per employee

From the above details –
(i) Compute the tax liability of Alpha Ltd. and Beta Ltd. for A.Y.2022-23, assuming that
they avail the beneficial tax rates under the special provisions inserted by the Taxation
Laws (Amendment) Act, 2019 in the Income-tax Act, 1961 by fulfilling the conditions
specified thereunder. Assume that the gross total income reflects the computation
under the special provisions.
(ii) Would it be beneficial for Alpha Ltd. to opt for the special provisions inserted by the
Taxation Laws (Amendment) Act, 2019 instead of opting for the regular provisions of
the Income-tax Act, 1961? Examine.
Answer
(i) Computation of tax liability of Alpha Ltd. and Beta Ltd. under the special provisions of
the Income-tax Act, 1961
Particulars Alpha Ltd (Rs) Beta Ltd. ( Rs)

Gross Total Income 5,00,00,000 300,00,000
Less: Deduction u/s 80JJAA
Alpha Ltd - [(Rs. 20,000 x 12 x 250) + ( Rs. 25,000 x 12 x 4,05,00,000
250)] x 30%
Beta Ltd – [(Rs. 21,000 x 5 x 250) + (Rs. 25,000 x 5 x 250)] 1,72,50,000
x 30%
Total Income 95,00,000 1,27,50,000
Computation of tax liability
Tax@22% on Rs. 95,00,000 [As per section 115BAA] 20,90,000
Tax@15% on Rs.1,27,50,000 [As per section 115BAB] 19,12,500
Add: Surcharge@10% 2,09,000 1,91,250
22,99,000 21,03,750
428
Final ca Direct tax
Add: Health and Education cess@4% 91,960 84,150

Total tax liability 23,90,960 21,87,900
Notes –
(1) Alpha Ltd. is eligible to opt for special provisions under section 115BAA, as per which
the rate of tax would be 22% plus surcharge@10% and HEC@4%. It is not eligible to
opt for section 115BAB, since it has been set up before 1.10.2019.
Beta Ltd. is a manufacturing company set up on or after 1.10.2019, hence, it would be

eligible to opt for section 115BAB, and avail benefit of concessional rate of tax@15%
plus surcharge@10% and HEC@4%.
(2) Both Alpha Ltd. and Beta Ltd. are eligible to claim deduction u/s 80JJAA, which is
a permissible Chapter VI-A deduction while computing total income under section
115BAA and 115BAB.
Since new employees are employed on 1.4.2018 in case of Alpha Ltd., it can claim 30%
of additional employee cost for three years, namely, P.Y.2019-20, P.Y.2020-21 and
P.Y.2021-22. Accordingly, it would be entitled to deduction u/s 80JJAA for P.Y.2021-22.
250 employees whose emoluments are Rs. 20,000 p.m. and 250 employees whose
emoluments are Rs. 25,000 p.m. qualify as additional employees. 250 employees
whose emoluments exceed Rs. 25,000 p.m. do not qualify as additional employees.
Beta Ltd. is engaged in manufacture of leather, and hence it would be entitled to

benefit of deduction u/s 80JJAA, since the eligible employees have been employed for
more than 150 days in that year. 250 employees whose emoluments are Rs. 21,000
p.m. and 250 employees whose emoluments are Rs. 25,000 p.m. qualify as additional
employees. 250 employees whose emoluments exceed Rs. 25,000 p.m. do not qualify
as additional employees.
(ii) Computation of tax liability of Alpha Ltd. as per the regular provisions of the Act
Particulars Alpha Ltd.

Gross Total Income (computed under the special provision) 5,00,00,000
Less: Additional Depreciation [10% of Rs.8 crore, since the plant and ma-
chinery has been put to use for less than 180 days in the P.Y.2021-22] 80,00,000
Gross Total Income (computed under the regular provisions of the Act) 4,20,00,000
429
Final ca Direct tax
Less: Deduction u/s 80JJAA

[(Rs. 20,000 x 12 x 250) + (Rs. 25,000 x 12 x 250)] x 30% 4,05,00,000
Computation of tax liability
Tax@25% on Rs.15,00,000 [Since turnover of P.Y.2019-20 is less than Rs. 3,75,000
400 crore]
Add: Surcharge (Not applicable, since total income is less than Rs 1 crore) Nil
3,75,000
Add: Health and Education cess @4% 15,000
Since the tax liability under the regular provisions of the Act is Rs. 3,90,000 vis-à-vis
tax liability of Rs. 23,90,960 computed under section 115BAA, it is not beneficial for
Alpha Ltd. to opt for the special provisions under section 115BAA for A.Y.2022-23.
Hence, Alpha Ltd. should not opt for the special provisions under section 115BAA for
A.Y.2022-23.
Question 261
Alpha and Beta Tyres Limited, an Indian Company engaged in the manufacture of Tyres in
Andhra Pradesh, has adopted Ind-AS from 1-4-2017. The following particulars are provid-
ed for the year ended 31.3.2022:
Net profit as per statement of profit and loss is Rs. 20 crores after debit and credit of the
following items:
Items Debited:
(i) Depreciation Rs. 18 crores. Included in depreciation is Rs.3 crores, being amount
provided on revalued assets.
(ii) Interest charged for delay in remittance of tax deducted at source Rs. 20 lakhs.
Items Credited:
(i) Share Income from Association of Persons in which the company is a member Rs.50
lakhs. (The AOP is charged to tax at Maximum Marginal Rate)
(ii) Amount of Rs.6 crores withdrawn from revaluation reserves on account of revaluation
of assets.
Other Information:
1. The application of a financial creditor for corporate insolvency resolution process has
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been admitted by the Hyderabad Bench of the National Company Law Tribunal under
section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Brought forward business loss and depreciation.
Assessment Year Business Loss Depreciation

2016-17 Rs. 3 Crores Rs. 1 Crores
2017-18 Rs. 5.5. Crores Rs. 2 Crores
3. Items credited to other comprehensive income which will not be reclassified to profit or
loss:
(i) Re-measurement of defined employee retirement benefits plan Rs. 50 lakhs.
(ii) Revaluation surplus of property, plant and equipment Rs.1 crore.
4. The transition amount as on convergence date 1-4-2017 stood at Rs.5 crores including
capital reserve of Rs.50 lakhs (credit balance).
5. Tax payable under the regular provisions of the Income-tax Act, 1961 is Rs. 0.73 crores.
(i) Compute Minimum Alternate Tax payable by the company for the Assessment
Year 2022-23.
(ii) Compute the amount of MAT credit eligible for carried forward.
Answer
(a)
(i) Computation of MAT payable by Alpha and Beta Tyres Limited under section 115JB for
A.Y.2022-23
Particulars Rs. Rs.

Net profit as per statement of profit and loss 20,00,00,000
Add: Net profit to be increased by the following amounts
as per Explanation 1 to section 115JB(2):
 Depreciation 18,00,00,000
 Interest charged for delay in remittance of TDS
20,00,000
[As per Explanation 2 to section 115JB, income- tax
shall include, inter alia, any interest charged under the
Act. Therefore, interest on delay in remittance of TDS has
to be added back] 18,20,200,000
38,20,00,000
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Less: Net profit to be decreased by the following amounts

as per Explanation 1 to section 115JB(2):
 Depreciation other than depreciation on revaluation

of assets [ Rs.18 crore – Rs.3 crore]
 Share income from Association of Persons [Share 15,00,00,000
income of company in AOP has to be reduced while
computing the book profit, since no income-tax is
payable by the company on share income in AOP, as
the AOP is chargeable to tax at Maximum Marginal
Rate]
 Amount withdrawn from revaluation reserve [ Rs.6
crore] to the extent it does not does not exceed 50,00,000
depreciation on revaluation of assets [ Rs.3 crore]
 Brought forward business loss of Rs. 8.5 crore [ Rs.3
crore + Rs.5.5 crore] and unabsorbed depreciation of
Rs 3 crore [ Rs.1 crore + Rs. 2 crore]
3,00,00,000
[Since Alpha and Beta Tyres Limited is a company against
which an application for corporate insolvency resolution
process has been admitted by NCLT under section 7 of the
Insolvency and Bankruptcy Code, 2016, the amount of to- 11,50,00,000
tal loss brought forward (including unabsorbed deprecia-
tion) is allowed to be reduced from the book profit for the
purposes of levy of MAT under section 115JB].
30,00,00,000
Book profit computed in accordance with Explanation 1 to
section 115JB(2) 8,20,00,000
Add: Items credited to OCI that will not be reclassified to
profit or loss:
Re-measurement of defined employee benefit plan 50,00,000
Revaluation surplus of property, plant and equipment Rs. 1
crore [Book profit not to be increased by revaluation sur-
plus for assets]
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Add: One-fifth of Transition amount [Credit Balance]

Transition amount 5,00,00,000
Less: Amounts to be excluded from transition amount
Capital Reserve 50,000,00
One-fifth of Rs.4,50,00,000 90,00,000
Book Profit for levy of MAT 9,60,00,000
MAT on book profit under section 115JB = 15% of 1,44,00,000

Rs.9,60,00,000
Add: Surcharge@7% 10,08,000

(since book profit exceeds Rs.1 crore)
1,54,08,000
Add: Health and education cess@4% 6,16,320
MAT liability for A.Y.2022-23 1,60,24,320
ii) Computation of MAT credit to be carried forward
Particulars Rs.
MAT liability for A.Y. 2022-23 (rounded off) 1,60,24,320
Income-tax computed as per the normal provisions of the Act for 73,00,000
A.Y.2022-23
Since the income-tax liability computed as per the regular provisions of
the Income-tax Act, 1961 is less than the Mat payable, the book profit
of ` 9,60,00,000 would be deemed to be the total income and tax is levi-
able @ 15%: The total tax liability (rounded off) is Rs.1,60,24,320.
Computation of tax credit to be carried forward:

Tax payable for A.Y.2022-23 on deemed total income 1,60,24,320
Less: Income-tax payable as per the normal provisions of the Act 73,00,000
Tax credit in respect of tax paid on deemed income 87,24,320
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TAXATION OF BUSINESS
TRUST
Question 262.
What is Business Trust?
Answer
As per section 2(13A), Business Trust can be:
Real Estate Investment Trust (REIT)
or;
Infrastructure Investment Trust (Inv IT)
The SEBI has notified the regulations relating to two categories of investment vehicles
namely, the Real Estate Investment Trust (REIT) & Infrastructure Investment Trust (Invit).
The SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”) provide a
framework for registration and regulation of Real Estate Investment Trusts (“REIT’s”).
It may be noted that units of Business Trust are listed on recognised stock exchange;
Question 263
What is Special Purpose Vehicle?
Answer
REIT shall invest in commercial real estate assets, on a freehold or leasehold basis, either
directly or through a holding company or through a special purpose vehicles (SPVs).
In case of investment through a holding company, REIT shall hold or propose to hold not
less than 50% of the equity share capital or interest in such holding company. Such holding
company in turn would make investments in other SPVs, which ultimately hold the prop-
erties. Holding company should not be engaged in any activity other than holding of the
underlying SPVs, holding of real estate properties and any other activities pertaining to and
incidental to such holdings.
In such SPVs, a REIT or the holding company shall hold or propose to hold not less than 50%
of the equity share capital or interest. Further, such SPVs shall hold not less than 80% of its
assets directly in properties and shall not invest in other SPVs. Such SPVs should also not be
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engaged in any activity other than holding and developing property and any other activity
incidental to such holding or development.
Question 264
Exemption u/s. 10(23FC) and 10(23FCA)
Answer
Exemption of certain income to business trust [Section 10(23FC)]
Section 10(23FC) exempts any income of a business trust by way of -
1. Interest received or receivable from a Special Purpose Vehicle (SPV). Thus, the business
trust enjoys a pass-through status in respect of interest received or receivable from a
SPV; or
2. Dividend received from SPV. Such dividend income is also exempt in the hands of the
unit-holder. Such dividend will be taxable in the hands of unit holders.
Exemption of Rental income of REIT from directly owned real estate asset [Section 10(23FCA)]
Any income of a business trust, being a REIT, by way of renting or leasing or letting out any
real estate asset owned directly by such business trust is exempt in the hands of the busi-
ness trust.
Question 265
What is Pass through status?
Answer
As per Chapter XII – FA, whatever income is taxable in the hands of Business Trust is exempt
in the hands of unit holders and vice-versa. Therefore,
Nature of Income For Business Trust For Unitholder
Rent Exempt Taxable
Interest from SPV Exempt Taxable
Dividend received from SPV Exempt Taxable*
Any other Income Taxable Exempt
*provided SPV has exercised option under section 115BAA;
As per section 10(23FD), the following income is exempt in the hands of unit holders:
“any distributed income, referred to in section 115UA, received by a unit holder from the
business trust, not being that proportion of the income which is of the same nature as the
income referred to in sub-clause (a) of clause (23FC) or sub-clause (b) of said clause (in a
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case where the special purpose vehicle has exercised the option under section 115BAA) or
clause (23FCA)”;
Question 266
Tax rate applicable for Business Trust?
Answer
Section 115UA(2) provides that subject to the provisions of sections 111A and 112, the total
income of a business trust shall be chargeable to tax at the maximum marginal rate.
Question 267
Miscellaneous provisions applicable for Business Trust?
Answer
1. Section 115UA (3) provides that distributed income or any part thereof, which is in
the nature of interest income received by the business trust from the SPV [referred to
in sub-clause (a) of section 10(23FC)] or rental income from real estate assets owned
directly by the REIT [referred to in section 10(23FCA)] is deemed to be the income of the
unit holder in the previous year of distribution and subject to tax in the hands of the
unit holder in that year.
2. Any person responsible for making payment of income distributed on behalf of the
business trust to a unit holder is required to furnish a statement to the unit holder and
the prescribed authority within the prescribed time.
3. The statement should be in the prescribed form and manner. It should contain the
particulars of the nature of income paid during the previous year as well as the other
details as may be prescribed [Section 115UA(4)].
4. Rule 12CA provides that the statement of income distributed by a business trust to
its unit holder has to be furnished to the Principal Commissioner or the Commissioner
of Income-tax within whose jurisdiction the principal office of the business trust is
situated, by 30th November of the financial year following the previous year during
which such income is distributed.
5. Further, the statement of income distributed also has to be furnished to the unit holder
by 30th June of the financial year following the previous year during which the income
is distributed.
6. Under section 139(4E), a business trust is mandatorily required to furnish a return of
its income or loss in every previous year. All the provisions of the Income-tax Act, 1961
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would apply as if it were a return required to be furnished under section 139(1).

7. If Unit holder is a domestic company and it receives dividend from a business trust,
then provisions of Section 80M shall apply to such dividend income.
Question 268
Discuss TDS provisions applicable when Income is distributed by Business Trust to Unithold-
er?
Answer
The TDS provisions are contained in Section 194LBA of the Income-tax Act as under:
1. Where any distributed income is proportionate share in rental income, interest from
SPV or Dividend received from SPV, is payable by a business trust to its unit holder
being a resident, the TDS rate is of 10%.
2. Where any distributed income is payable by a business trust to its unit holder, being a
non-resident (not being a company) or a foreign company, the TDS rate shall be
a. 5% in case of Interest from SPV;
b. 10% in case of dividend received from SPV;
c. rates in force in case of rental income
3. However TDS shall be deducted on dividend only if the special purpose vehicle referred
to in the said clause has exercised the option under section 115BAA.
Question 269
Discuss taxability on transfer of units for unitholders?
Answer
For the unit holders, the units held in business trust are a “capital asset”. Accordingly, when
units of business trust are transferred, it gives rise to capital gains for the unit holders.
The threshold period of holding for considering the same as long term / short term capital
asset is 36 months. Further, when the units are transferred via recognised stock exchange,
provisions of section 111A [for STCA] and 112A [for LTCA] shall apply.
However, when the sponsor of business trust exchanges his shares in company for units in
business trust, the same is not regarded as a transfer.
Question 270.
A business trust, registered under SEBI (Real Estate Investment Trusts) Regulations, 2014,
gives particulars of its income for the P.Y.2021-22:
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1. Interest income from Beta Ltd. – ` 4 crore;

2. Dividend income from Beta Ltd. – ` 2 crore;
3. Short-term capital gains on sale of listed shares of Beta Ltd. – ` 1.5 crore;
4. Short-term capital gains on sale of developmental properties – ` 1 crore
5. Interest received from investments in unlisted debentures of real estate companies – `
10 lakh;
6. Rental income from directly owned real estate assets – ` 2.50 crore
Beta Ltd. is an Indian company in which the business trust holds 100% of the
shareholding. Beta Limited has opted for provisions of section 115BAA of the Act;
Discuss the tax consequences of the above income earned by the business trust in the hands
of the business trust and the unit holders, assuming that the business trust has distributed
` 10 crore to the unit holders in the P.Y. 2021-22.
Answer
Tax consequences in the hands of the business trust and its unit holders
(1) Interest income of ` 4 crore from Beta Ltd.: There would be no tax liability in the hands of
business trust due to pass-through status enjoyed by it under sub-clause (a) of section
10(23FC) in respect of interest income from Beta Ltd., being the special purpose vehicle.
Therefore, Beta Ltd. is not required to deduct tax at source on interest payment to the
business trust.
The distributed income or any part thereof, received by a unit holder from the REIT,
which is in the nature of interest income received or receivable from a SPV is deemed
income of the unit holder as per section 115UA(3).
The business trust has to deduct tax at source under section 194LBA –
- @ 10%, on interest component of income distributed to resident unit holders; and
- @ 5%, on interest component of income distributed to non-corporate non-resident
and foreign companies unit holders.
- @ 10% on dividend component
Interest component of income distributed to unit holders is taxable in the hands of the
unit holders – @ 5%, in case of unit holders, being non-corporate non-residents or
foreign companies; and at normal rates of tax, in case of resident unit holders.
The interest component of income received from the business trust in the hands of
each unit-holder would be determined in the proportion of 4/11.1, by virtue of section
115UA(1).
(2) Dividend income of ` 2 crore from Beta Ltd.: The dividend distributed by the SPV to the
business trust is exempt by virtue of section 10(23FC), since the SPV is a specified
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domestic company in which the business trust has become the holder of whole of the
nominal value of equity share capital of the company. Further, there would be no tax
liability in the hands of the business trust, due to specific exemption provided under
sub-clause (b) of section 10(23FC).
However, the said dividend income is taxable in the hands of unit holders since Beta
Limited has opted to be governed by provisions of section 115BAA. The Business Trust
will have to withhold tax at source @ 10%.
(3) Short-term capital gains of ` 1.50 crore on sale of listed shares of Beta Ltd.: As per section
115UA(2), the business trust is liable to pay tax @ 15% under section 111A in respect
of short-term capital gains on sale of listed shares of special purpose vehicle. There
would, however, be no tax liability on the capital gain component of income distributed
to unit holders, by virtue of the exemption contained in section 10(23FD).
(4) Short-term capital gains of ` 1 crore on sale of developmental properties: It is taxable at
maximum marginal rate of 42.744% in the hands of the business trust as per section
115UA(2). There would be no tax liability in the hands of the unit holders on the capital
gain component of income distributed to them, by virtue of the exemption contained in
section 10(23FD).
(5) Interest of ` 10 lakh received in respect of investment in unlisted debentures of real estate
companies: Such interest is taxable @ 42.744%, being the maximum marginal rate,
in the hands of the business trust, as per section 115UA(2). However, there would be
no tax liability in the hands of the unit holders on the interest component of income
distributed to them, by virtue of section 10(23FD).
(6) Rental income of ` 2.50 crore from directly owned real estate assets: Any income of a
business trust, being a REIT, by way of renting or leasing or letting out any real estate
asset owned directly by such business trust is exempt in the hands of the trust as per
section 10(23FCA).
Where the income by way of rent is credited or paid to a business trust, being a REIT, in
respect of any real estate asset held directly by such REIT, no tax is deductible at source
under section 194-I.
The distributed income or any part thereof, received by a unit holder from the REIT,
which is in the nature of income by way of renting or leasing or letting out any real
estate asset owned directly by such REIT is deemed income of the unit holder as per
section 115UA(3). The business trust has to deduct tax at source @ 10% under section
194LBA in case of distribution to a resident unit holder and at rates in force in case of
distribution to a non-resident unit holder.
The rental income component received from the business trust in the hands of each
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unit-holder would be determined in the proportion of 2.5/11.1, by virtue of section

115UA(1).
Question 271.
Discuss MAT provisions applicable in case the sponsor / Unitholder is a company?
Answer
In case the unit holder is a company, then provisions of MAT shall apply to it. Accordingly,
while computing book profit following amounts will be added to the Book profits:
(a) the amount representing notional loss on transfer of a capital asset, being share of
a special purpose vehicle, to a business trust in exchange of units allotted by the
trust referred to in clause (xvii) of section 47 or the amount representing notional loss
resulting from any change in carrying amount of said units or the amount of loss on
transfer of units referred to in clause (xvii) of section 47; or
(b) the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed
by taking into account the cost of the shares exchanged with units referred to in the
said clause or the carrying amount of the shares at the time of exchange where such
shares are carried at a value other than the cost through statement of profit and loss,
as the case may be;
Further, the following amounts shall be reduced from Book profits:
(1) the amount representing,—
(A) notional gain on transfer of a capital asset, being share of a special purpose
vehicle to a business trust in exchange of units allotted by that trust referred
to in clause (xvii) of section 47; or
(B) notional gain resulting from any change in carrying amount of said units; or
(C) gain on transfer of units referred to in clause (xvii) of section 47,
if any, credited to the statement of profit and loss; or
(2) the amount of loss on transfer of units referred to in clause (xvii) of section 47
computed by taking into account the cost of the shares exchanged with units
referred to in the said clause or the carrying amount of the shares at the time of
exchange where such shares are carried at a value other than the cost through
statement of profit and loss, as the case may be;
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Question 273
Taxation of Alternate Investment Fund / Investment Fund: [115UB]
Answer
1. The concept of “pass through status” applies here as well. That is, whatever income is
taxable in the hands of AIF is exempt for Unitholders [UH] and vice versa;
2. Any income accruing or arising to, or received by, a person, being a unit holder of an
investment fund, out of investments made in the investment fund shall be chargeable
to income-tax in the same manner as if it were the income accruing or arising to, or
received by, such person had the investments made by the investment fund, been made
directly by him
3. The income in the nature of profits and gains of business or profession shall be taxable
in the hands of the investment fund. All other income is taxable only in the hands of
UH;
4. The total income of the investment fund shall be charged to tax—
(i) at the rate or rates as specified in the Finance Act of the relevant year, where such
fund is a company or a firm; or
(ii) at maximum marginal rate in any other case.
5. Investment fund has to deduct tax at source on any income (other than the proportion
of income which is of the same nature as income chargeable under the head “Profits
and gains of business or profession” which is taxable at investment fund level) payable
by the investment fund to a unit holder
 @ 10% in case of payable to a resident unit holder
 At rates in force in case of payable to a non-corporate non-resident or foreign
company unit holder
6. Pass - through status for current year losses:
If in any year, there is a loss under any head of income at the fund level and such loss
cannot be or is not wholly set-off against income under any other head of income of
the said previous year, then out of such losses,
(i) The loss arising to the Investment Fund under the head “Profits & Gains of Business
or Profession” shall not be allowed to be passed through to the investors but has
to be carried over at fund level to be set off against income of the next year in
accordance with the provisions of Chapter VI
(ii) Loss other than loss under the head “profits and gains from business or profession”
would not be allowed be passed through to the investors if such loss has arisen
in respect of a unit which has not been held by the unit holder for a period of at
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least 12 months [Section 115UB(2)].

Note –
By implication, losses other than those referred to in (i) and (ii) above, which cannot be
wholly set-off against current year income, would be passed on to the unit holders to
be carry forward and set-off in their individual hands in accordance with the provisions
of Chapter VI.
7. Pass - through status for losses accumulated as on 31.3.2019:

Losses, other than loss under the head “profits and gains from business or profession”,
if any, accumulated at the level of investment fund as on 31.3.2019, shall be
 Deemed to be the loss of a unit holder who held the unit as on 31.3.2019 in respect of
the investment made by him in the investment fund in the same manner as it were the
loss incurred by him had he made such investments directly and
 Shall be allowed to be passed through to the investors for the remaining period
calculated from the year in which the loss has occurred for the first time taking that
year as the first year and set off against their income in accordance with the provisions
of Chapter VI.
Further, such accumulated losses shall not be available to the investment fund on or
after 1.4.2019.
Note –
Even capital loss on sale of units held for less than 12 months, accumulated as on
31.3.2019, would be allowed to be carry forward and set-off by the unit holders.
8. The income paid or credited by the investment fund shall be deemed to be of the same
nature and in the same proportion in the hands of the unit holder as if it had been
received by, or had accrued or arisen to, the investment fund during the previous year.
[Section 115UB(3)].
Deemed credit on the last day of the previous year:

9. If the income accruing or arising to, or received by, an investment fund, during a
previous year is not paid or credited to the unit-holders, it shall be deemed to have
been credited to the account of the unit-holder on the last day of the previous year
in the same proportion in which such person would have been entitled to receive the
income had it been paid in the previous year [Section 115UB(6)].
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Question 274
The following are the particulars of income of three investment funds for P.Y.2021-22:
Particulars A B C
Business Income 0 2 -2
Capital Gains 16 14 -6
Other Sources 4 4 8
Compute the total income of the investment funds and unit-holders for A.Y.2022-23, as-
suming that:
(1) Each investment fund has 20 unit holders each having one unit; and
(2) Income from investment in the investment fund is the only income of the unit-holder.
If Investment Fund C has the following income components for A.Y. 2022-23, what
would be the total income of the fund and the unit holder for that year?
Business Income ` 2 lakh
Capital Gains
` 9 lakh
Income from Other Sources ` 8 lakh
Answer
Computation of Total Income in the case of Investment Fund for AY 2022-23:
Particulars A B C
Business Income 0 2,00,000 0
Total Income 0 2,00,000 0
Computation of Total Income in the case of Unitholder for AY 2022-23:
Particulars A B C
Capital Gains 80,000 70,000 0
Income from Other Sources 20,000 20,000 30,000
Total 1,00,000 90,000 30,000
1. The total income of Investment Fund B would be chargeable to tax @30% if the fund is
a firm and @ 30%/25%, as the case may, if the fund is a company and at the maximum
marginal rate, in any other case.
2. In case of Investment Fund C, the business loss of ` 2 lakh is set-off against income
from other sources of ` 8 lakh. Loss of ` 6 lakh under the head “Capital gains” cannot
be set-off against income under any other head. The same can be carried forward
by the Unit-holder for set-off in the subsequent years since, the units are held for a
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period of 12 months or more.

3. For A.Y.2022-23, the brought forward capital loss of ` 30,000 [` 6 lakh/20] can be
set-off against capital gains of ` 45,000 [` 9 lakh/20] by the unit-holder since, the
period of holding of units is 12 months or more. Business income of ` 2 lakh would be
taxable in the hands of the Investment Fund. Income from other sources of ` 40,000 (`
8 lakh/20) would be taxable in the hands of the unit-holders
Question 275
Taxation of Securitization Trust: [Section 115TCA]
1. The income of securitisation trust from the activity of securitisation shall continue to
be exempt under section 10(23DA).
2. Section 115TCA(1) provides that the income accruing or arising to, or received by, a
person, being an investor from the securitisation trust, out of investments made in the
securitisation trust, shall be taxable in the hands of investor in the same manner as if
the investor had made investment directly in the underlying assets and not through the
trust.
3. The income paid or credited by the securitisation trust shall be deemed to be of the
same nature and in the same proportion in the hands of the investor of the securitisation
trust, as if it had been received by, or had accrued and arisen to, the securitisation trust
during the previous year.
4. If the income accruing or arising to, or received by, the securitisation trust, during a
previous year has not been paid or credited to the investor, the same shall be deemed
to have been credited to the account of the said person on the last day of the previous
year in the same proportion in which such person would have been entitled to receive
the income had it been paid in the previous year.
5. TDS rates applicable [Section 194LBC]
Where any income is payable to an investor, being a resident, in respect of an investment
in a securitisation trust specified in clause (d) of the Explanation occurring after section
115TCA, the person responsible for making the payment shall, at the time of credit of
such income to the account of the payee or at the time of payment thereof in cash or by
issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-
tax thereon, at the rate of—
(i) twenty-five per cent, if the payee is an individual or a Hindu undivided family;
(ii) thirty per cent, if the payee is any other person.
Where any income is payable to an investor, being a non-resident (not being a company)
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or a foreign company, in respect of an investment in a securitisation trust specified in

clause (d) of the Explanation occurring after section 115TCA, the person responsible for
making the payment shall, at the time of credit of such income to the account of the
payee or at the time of payment thereof in cash or by issue of a cheque or draft or by
any other mode, whichever is earlier, deduct income-tax thereon, at the rates in force.

(a) “investor” shall have the meaning assigned to it in clause (a) of the Explanation
occurring after section 115TCA;
(b) where any income as aforesaid is credited to any account, whether called
“suspense account” or by any other name, in the books of account of the person
liable to pay such income, such crediting shall be deemed to be the credit of such
income to the account of the payee, and the provisions of this section shall apply
accordingly.
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BUYBACK DISTRIBUTION
TAX
Question 276
Discuss provisions of Section 115QA?
Answer
Section 115QA - Tax on distributed income to shareholders
(1) Notwithstanding anything contained in any other provision of this Act, in addition to
the income-tax chargeable in respect of the total income of a domestic company for
any assessment year, any amount of distributed income by the company on buy-back
of shares from a shareholder shall be charged to tax and such company shall be liable
to pay additional income-tax at the rate of twenty per cent on the distributed income:
Provided that the provisions of this sub-section shall not apply to such buy-back of
shares (being the shares listed on a recognised stock exchange), in respect of which
public announcement has been made on or before the 5th day of July, 2019 in
accordance with the provisions of the Securities and Exchange Board of India (Buy-
back of Securities) Regulations, 2018 made under the Securities and Exchange Board
of India Act, 1992 (15 of 1992).
(i) “buy-back” means purchase by a company of its own shares in accordance with
the provisions of any law for the time being in force relating to companies;
(ii) “distributed income” means the consideration paid by the company on buy-back
of shares as reduced by the amount, which was received by the company for issue
of such shares, determined in the manner as may be prescribed.
(2) Notwithstanding that no income-tax is payable by a domestic company on its total
income computed in accordance with the provisions of this Act, the tax on the distributed
income under sub-section (1) shall be payable by such company.
(3) The principal officer of the domestic company and the company shall be liable to pay
the tax to the credit of the Central Government within fourteen days from the date of
payment of any consideration to the shareholder on buy-back of shares referred to in
sub-section (1).
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(4) The tax on the distributed income by the company shall be treated as the final payment
of tax in respect of the said income and no further credit therefor shall be claimed by
the company or by any other person in respect of the amount of tax so paid.
(5) No deduction under any other provision of this Act shall be allowed to the company
or a shareholder in respect of the income which has been charged to tax under sub-
section (1) or the tax thereon.
Question 277
Discuss provisions of Section 115QB?
Answer
1. Section 115QB - Interest payable for non-payment of tax by company.
Where the principal officer of the domestic company and the company fails to pay the
whole or any part of the tax on the distributed income referred to in sub-section (1) of
section 115QA, within the time allowed under sub-section (3) of that section, he or it
shall be liable to pay simple interest at the rate of one per cent for every month or part
thereof on the amount of such tax for the period beginning on the date immediately
after the last date on which such tax was payable and ending with the date on which
the tax is actually paid.
2. Section 115QC - When company is deemed to be assessee in default.

If any principal officer of a domestic company and the company does not pay tax on
distributed income in accordance with the provisions of section 115QA, then, he or it
shall be deemed to be an assessee in default in respect of the amount of tax payable
by him or it and all the provisions of this Act for the collection and recovery of income-
tax shall apply.
Note: Section 46A - Capital gains on purchase by company of its own shares or other
specified securities.
Where a shareholder or a holder of other specified securities receives any consideration
from any company for purchase of its own shares or other specified securities held by
such shareholder or holder of other specified securities, then, subject to the provisions of
section 48, the difference between the cost of acquisition and the value of consideration
received by the shareholder or the holder of other specified securities, as the case may
be, shall be deemed to be the capital gains arising to such shareholder or the holder of
other specified securities, as the case may be, in the year in which such shares or other
specified securities were purchased by the company.
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Explanation.—For the purposes of this section, “specified securities” shall have the
meaning assigned to it in Explanation to section 77A of the Companies Act, 1956 (1 of
1956).
As per Section 10(34A), any income arising to an assessee, being a shareholder, on

account of buy back of shares by the company as referred to in section 115QA;
Analysis:
1. In case of buy back of shares, there is a “transfer” of “shares”. Therefore, capital gains
/ loss arose to the shareholders. However, it was found that many a times promoters
used this device to conduct buy back and book losses. Therefore, government introduced
BBDT u/s. 115QA. Once company pays BBDT, resultant gain is exempt in the hands of
shareholders u/s. 10(34A).
2. As per amendment made by the Finance No 2 Act 2019, BBDT now applies to buy back
of both listed and unlisted shares. Provided on listed shares, if announcement of buy
back was made prior to 05.07.2019, then BBDT will not apply.
3. Notwithstanding anything contained in any other provision of this Act, in addition to

the income-tax chargeable in respect of the total income of a domestic company for
any assessment year, any amount of distributed income by the company on buy-back
of shares from a shareholder shall be charged to tax and such company shall be liable
to pay additional income-tax at the rate of 20 per cent on the distributed income.
[Effective rate = 23.296%]
4. Provided that the provisions of this sub-section shall not apply to such buy-back of
shares (being the shares listed on a recognised stock exchange), in respect of which
public announcement has been made before 5th day of July, 2019 in accordance with
the provisions of the Securities and Exchange Board of India (Buy-back of Securities)
Regulations, 2018 made under the Securities and Exchange Board of India Act, 1992
(15 of 1992) as amended from time to time.
5. “buy-back” means purchase by a company of its own shares in accordance with the
provisions of any law for the time being in force relating to companies;
6. “distributed income” means the consideration paid by the company on buy-back of
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shares as reduced by the amount, which was received by the company for issue of such
shares, determined in the manner as may be prescribed.
7. Notwithstanding that no income-tax is payable by a domestic company on its total

income computed in accordance with the provisions of this Act, the tax on the distributed
income under sub-section (1) shall be payable by such company.
8. The principal officer of the domestic company and the company shall be liable to pay
the tax to the credit of the Central Government within fourteen days from the date of
payment of any consideration to the shareholder on buy-back of shares referred to in
sub-section (1).
9. The tax on the distributed income by the company shall be treated as the final payment
of tax in respect of the said income and no further credit therefor shall be claimed by
the company or by any other person in respect of the amount of tax so paid.
10. No deduction under any other provision of this Act shall be allowed to the company
or a shareholder in respect of the income which has been charged to tax under sub-
section (1) or the tax thereon.
11. Rule 40BB.

(1) For the purposes of clause (ii) of the Explanation to sub-section (1) of section
115QA, the amount received by a company in respect of the share issued by it,
being the subject matter of buy-back referred to in the said section, shall be
determined in accordance with this rule.
(2) Where the share has been issued by a company to any person by way of
subscription, amount actually received by the company in respect of such share
including any amount actually received by way of premium shall be the amount
received by the company for issue of such share.
(3) Where the company had at any time, prior to the buy-back of the share, returned
any sum out of the amount received in respect of such share the amount as
reduced by the sum so returned shall be the amount received by the company for
issue of said share:
Provided that if the sum or any part of it so returned was chargeable to additional
income-tax under section 115-O and the company has paid such additional income
tax then such sum or part thereof, as the case may be, shall not be reduced.
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(4) Where the share has been issued by a company under any plan or scheme under
which an employees’ stock option has been granted or as part of sweat equity
shares, the fair market value of the share as computed in accordance with sub-
rule (8) of rule 3, to the extent credited to the share capital and share premium
account by the company shall be deemed to be the amount received by the
company for issue of said share:
Explanation.— For the purposes of this sub-rule the expression “sweat equity
shares” shall have the meaning assigned to it in clause (b) of the Explanation to
sub-clause (vi) of clause (2) of section 17.
(5) Where the share has been issued by a company being an amalgamated company,
under a scheme of amalgamation, in lieu of the share or shares of an amalgamating
company, then, the amount received by the amalgamating company in respect of
such share or shares determined in accordance with this rule, shall be deemed to
be the amount received by the amalgamated company in respect of the share so
issued by it.
(6) The amount received by a company, being a resulting company in respect of
shares issued by it under a scheme of demerger, shall be the amount which
bears the amount received by the demerged company in respect of the original
shares determined in accordance with this rule in the same proportion as the net
book value of the assets transferred in a demerger bears to the net worth of the
demerged company immediately before such demerger.
(7) The amount received by the demerged company in respect of the original shares
in the demerged company shall be deemed to have been reduced by the amount
as so arrived under sub-rule (6).
(8) Where the share has been issued or allotted by the company as part of
consideration for acquisition of any asset or settlement of any liability then the
amount received by the company for issue of such share shall be determined in
accordance with the following formula—
Amount received = A/B
Where,
A = an amount being lower of the following amounts-
(a) The amount which bears to the fair market value of the asset or the liability, as
determined by a merchant banker, the same proportion as the part of consideration
being paid by issue of shares bears the total consideration;
(b) The amount of consideration for acquisition of the asset or settlement of the
liability to be paid in the form of shares, to the extent credited to the share
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capital and share premium account by the company;

B = the number of shares issued by the company as part of consideration:
Explanation.— For the purposes of this sub-rule, the term “merchant banker”
shall have the meaning assigned to in sub-clause (b) of clause (iv) of sub-rule (8)
of rule 3.
(9) Where the shares have been issued or allotted by a company on succession or
conversion, as the case may be, of a firm into the company or succession of sole
proprietary concern by the company, then the amount received by the company
for issue of shares shall be determined in accordance with the following formula—

Amount received = A-B
C
A = book value of the assets in the balance-sheet as reduced by any amount
of tax paid as deduction or collection at source or as advance tax payment as
reduced by the amount of tax claimed as refund under the Income-tax Act and
any amount shown in the balance-sheet as asset including the unamortized
amount of deferred expenditure which does not represent the value of any asset;
Explanation.—For determining book value of the assets, any change in the value
of the assets consequent to their revaluation shall be ignored.
B = book value of liabilities shown in the balance-sheet, but does not include the
following amounts, namely:—
(a) Capital, by whatever name called, of the proprietor or partners of the firm, as the
case may be;
(b) Reserves and surpluses, by whatever name called, including balance in profit and
loss account;
(c) Any amount representing provision for taxation, other than amount of tax paid,
as deduction or collection at source or as advance tax payment as reduced by the
amount of tax claimed as refund under the Income-tax Act, if any, to the extent
of the excess over the tax payable with reference to the book profits in accordance
with the law applicable thereto;
(d) Any amount representing provisions made for meeting liabilities, other than
ascertained liabilities;
(e) Any amount representing contingent liabilities,
C = number of shares issued on conversion or succession.
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(10) Where the share has been issued or allotted, without any consideration, on the
basis of existing shareholding in the company, the consideration in respect of such
share shall be deemed to be “Nil”.
(11) Where the shares have been issued on conversion of preference shares or bond
or debenture, debenture-stock or deposit certificate in any form or warrants or
any other security issued by the company, the amount received by the company
in respect of such instrument as so converted.
(12) Where the share being bought back is held in dematerialised form and the same
cannot be distinctly identified, the amount received by the company in respect
of such share shall be the amount received for the issue of share determined in
accordance with this rule on the basis of the first-in-first-out method.
(13) In any other case, the face value of the share shall be deemed to be the amount
received by the company for issue of the share.
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INCOME COMPUTATION
AND DISCLOSURE
STANDARDS
Question 278
Income Computation and Disclosure Standard I relating to accounting policies
Answer
Preamble
This Income Computation and Disclosure Standard is applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or “Income from
other sources” and not for the purpose of maintenance of books of accounts.
In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and
this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to
that extent.
Scope
This Income Computation and Disclosure Standard deals with significant accounting
policies.
Fundamental Accounting Assumptions

The following are fundamental accounting assumptions, namely: —
Going Concern
“Going concern” refers to the assumption that the person has neither the intention nor the
necessity of liquidation or of curtailing materially the scale of the business, profession or
vocation and intends to continue his business, profession or vocation for the foreseeable
future.
Consistency
“Consistency” refers to the assumption that accounting policies are consistent from one
period to another;
Accrual
“Accrual” refers to the assumption that revenues and costs are accrued, that is, recognized
as they are earned or incurred (and not as money is received or paid) and recorded in the
previous year to which they relate.
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Accounting Policies
The accounting policies refer to the specific accounting principles and the methods of ap-
plying those principles adopted by a person.
Considerations in the Selection and Change of Accounting Policies

Accounting policies adopted by a person shall be such so as to represent a true and fair
view of the state of affairs and income of the business, profession or vocation. For this
purpose, the treatment and presentation of transactions and events shall be governed by
their substance and not merely by the legal form; and marked to market loss or an expected
loss shall not be recognised unless the recognition of such loss is in accordance with the
provisions of any other Income Computation and Disclosure Standard.
An accounting policy shall not be changed without reasonable cause.
Disclosure of Accounting Policies

All significant accounting policies adopted by a person shall be disclosed.
Any change in an accounting policy which has a material effect shall be disclosed. The
amount by which any item is affected by such change shall also be disclosed to the extent
ascertainable. Where such amount is not ascertainable, wholly or in part, the fact shall
be indicated. If a change is made in the accounting policies which has no material effect
for the current previous year but which is reasonably expected to have a material effect in
later previous years, the fact of such change shall be appropriately disclosed in the previous
year in which the change is adopted and also in the previous year in which such change has
material effect for the first time.
Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate

treatment of the item.
If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are
followed, specific disclosure is not required. If a fundamental accounting assumption is not
followed, the fact shall be disclosed.
Transitional Provision
All contract or transaction existing on the 1st day of April, 2016 or entered into on or
after the 1st day of April, 2016 shall be dealt with in accordance with the provisions of
this standard after taking into account the income, expense or loss, if any, recognised in
respect of the said contract or transaction for the previous year ending on or before the 31st
March,2016.
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Question 279
Income Computation and Disclosure Standard II relating to valuation of inventories
Answer
Preamble
chargeable under the head “Profits and gains of Business or profession” or “Income from
In the case of conflict between the provisions of Income Tax Act, 1961 (‘the Act’) and this
Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that
extent.
Scope
This Income Computation and Disclosure Standard shall be applied for valuation of
inventories, except:
Work-in-progress arising under ‘construction contract’ including directly related service
contract which is dealt with by the Income Computation and Disclosure Standard on
construction contracts;
Work-in-progress which is dealt with by other Income Computation and Disclosure Standard;
Shares, debentures and other financial instruments held as stock-in-trade which are dealt
with by the Income Computation and Disclosure Standard on securities;
Producers’ inventories of livestock, agriculture and forest products, mineral oils, ores and
gases to the extent that they are measured at net realisable value;
Machinery spares, which can be used only in connection with a tangible fixed asset and their
use is expected to be irregular, shall be dealt with in accordance with the Income Compu-
tation and Disclosure Standard on tangible fixed assets.
Definitions
2(1) The following terms are used in this Income Computation and Disclosure Standard
with the meanings specified:
“Inventories” are assets:
held for sale in the ordinary course of business;
in the process of production for such sale;
in the form of materials or supplies to be consumed in the production process or in the ren-
dering of services.
“Net realisable value” is the estimated selling price in the ordinary course of business less
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the estimated costs of completion and the estimated costs necessary to make the sale
2(2) Words and expressions used and not defined in this Income Computation and Disclosure
Standard but defined in the Act shall have the meanings assigned to them in that Act.
Measurement
Inventories shall be valued at cost, or net realisable value, whichever is lower.
Cost of Inventories
Cost of inventories shall comprise of all costs of purchase, costs of services, costs of
conversion and other costs incurred in bringing the inventories to their present location and
condition.
Costs of Purchase
The costs of purchase shall consist of purchase price including duties and taxes, freight
inwards and other expenditure directly attributable to the acquisition. Trade discounts,
rebates and other similar items shall be deducted in determining the costs of purchase.
Costs of Services
The costs of services shall consist of labour and other costs of personnel directly engaged in
providing the service including supervisory personnel and attributable overheads.
Costs of Conversion
The costs of conversion of inventories shall include costs directly related to the units of
production and a systematic allocation of fixed and variable production overheads that are
incurred in converting materials into finished goods. Fixed production overheads shall be
those indirect costs of production that remain relatively constant regardless of the volume
of production. Variable production overheads shall be those indirect costs of production
that vary directly or nearly directly, with the volume of production.
The allocation of fixed production overheads for the purpose of their inclusion in the costs
of conversion shall be based on the normal capacity of the production facilities. Normal
capacity shall be the production expected to be achieved on an average over a number of
periods or seasons under normal circumstances, taking into account the loss of capacity
resulting from planned maintenance. The actual level of production shall be used when
it approximates to normal capacity. The amount of fixed production overheads allocated
to each unit of production shall not be increased as a consequence of low production or
idle plant. Unallocated overheads shall be recognised as an expense in the period in which
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they are incurred. In periods of abnormally high production, the amount of fixed produc-
tion overheads allocated to each unit of production is decreased so that inventories are not
measured above the cost. Variable production overheads shall be assigned to each unit of
production on the basis of the actual use of the production facilities.
Where a production process results in more than one product being produced simultaneously
and the costs of conversion of each product are not separately identifiable, the costs shall
be allocated between the products on a rational and consistent basis. Where by-products,
scrap or waste material are immaterial, they shall be measured at net realisable value and
this value shall be deducted from the cost of the main product.
Other Costs
Other costs shall be included in the cost of inventories only to the extent that they are in-
curred in bringing the inventories to their present location and condition
Interest and other borrowing costs shall not be included in the costs of inventories, unless
they meet the criteria for recognition of interest as a component of the cost as specified in
the Income Computation and Disclosure Standard on borrowing costs.
Exclusions from the Cost of Inventories

In determining the cost of inventories in accordance with paragraphs 4 to paragraphs 11,
the following costs shall be excluded and recognised as expenses of the period in which they
are incurred, namely:—
• Abnormal amounts of wasted materials, labour, or other production costs;
• Storage costs, unless those costs are necessary in the production process prior to a
further production stage;
• Administrative overheads that do not contribute to bringing the inventories to their
present location and condition;
• Selling costs.
Cost Formulae
• The Cost of inventories of items that are not ordinarily interchangeable; and goods
or services produced and segregated for specific projects shall be assigned by specific
identification of their individual costs.
• ‘Specific identification of cost’ means specific costs are attributed to identified items of
inventory.
• Where there are a large numbers of items of inventory which are ordinarily
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interchangeable, specific identification of costs shall not be made.
First-in First-out and Weighted Average Cost Formula

Cost of inventories, other than the inventory dealt with in paragraph 13, shall be assigned
by using the First-in First-out (FIFO), or weighted average cost formula. The formula used
shall reflect the fairest possible approximation to the cost incurred in bringing the items of
inventory to their present location and condition.
The FIFO formula assumes that the items of inventory which were purchased or produced
first are consumed or sold first, and consequently the items remaining in inventory at the
end of the period are those most recently purchased or produced. Under the weighted
average cost formula, the cost of each item is determined from the weighted average of the
cost of similar items at the beginning of a period and the cost of similar items purchased or
produced during the period. The average shall be calculated on a periodic basis, or as each
additional shipment is received, depending upon the circumstances.
Techniques for the Measurement of Cost

18(1) Techniques for the measurement of the cost of inventories, such as the standard cost
method or the retail method, may be used for convenience if the results approximate the
actual cost. Standard costs take into account normal levels of consumption of materials
and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if
necessary, revised in the light of the current conditions.
18(2) The retail method can be used in the retail trade for measuring inventories of large
number of rapidly changing items that have similar margins and for which it is impractica-
ble to use other costing methods. The cost of the inventory is determined by reducing from
the sales value of the inventory, the appropriate percentage gross margin. The percentage
used takes into consideration inventory, which has been marked down to below its original
selling price. An average percentage for each retail department is to be used.
Net Realisable Value

Inventories shall be written down to net realisable value on an item-by-item basis. Where
‘items of inventory’ relating to the same product line having similar purposes or end uses
and are produced and marketed in the same geographical area and cannot be practica-
bly evaluated separately from other items in that product line, such inventories shall be
grouped together and written down to net realisable value on an aggregate basis.
Net realisable value shall be based on the most reliable evidence available at the time of
valuation. The estimates of net realisable value shall also take into consideration the purpose
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for which the inventory is held. The estimates shall take into consideration fluctuations of
price or cost directly relating to events occurring after the end of previous year to the extent
that such events confirm the conditions existing on the last day of the previous year.
Materials and other supplies held for use in the production of inventories shall not be written
down below the cost, where the finished products in which they shall be incorporated are
expected to be sold at or above the cost. Where there has been a decline in the price of
materials and it is estimated that the cost of finished products will exceed the net realisable
value, the value of materials shall be written down to net realisable value which shall be
the replacement cost of such materials.
Value of Opening Inventory

The value of the inventory as on the beginning of the previous year shall be the cost of
inventory available, if any, on the day of the commencement of the business when the
business has commenced during the previous year; and the value of the inventory as on the
close of the immediately preceding previous year, in any other case.
Change of Method of Valuation of Inventory

The method of valuation of inventories once adopted by a person in any previous year shall
not be changed without reasonable cause.
Valuation of Inventory in Case of Certain Dissolutions

In case of dissolution of a partnership firm or association of person or body of individuals,
notwithstanding whether business is discontinued or not, the inventory on the date of
dissolution shall be valued at the net realisable value.
Transitional Provisions
Interest and other borrowing costs, which do not meet the criteria for recognition of interest
as a component of the cost as per para 11, but included in the cost of the opening inventory
as on the 1st day of April, 2016, shall be taken into account for determining cost of such
inventory for valuation as on the close of the previous year beginning on or after 1st day
of April, 2016 if such inventory continue to remain part of inventory as on the close of the
previous year beginning on or after 1st day of April, 2016.
Disclosure
The following aspects shall be disclosed, namely:—
• the accounting policies adopted in measuring inventories including the cost formulae
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used. Where Standard Costing has been used as a measurement of cost, details of such
inventories and a confirmation of the fact that standard cost approximates the actual
cost; and
• the total carrying amount of inventories and its classification appropriate to a person.
Question 280
Income Computation and Disclosure Standard III relating to construction contracts
Answer
Preamble
In the case of conflict between the provisions of the Income-tax Act, 1961(‘the Act’) and this
extent.
Scope
This Income Computation and Disclosure Standard should be applied in determination of
income for a construction contract of a contractor.

Definitions
“Construction contract” is a contract specifically negotiated for the construction of an asset
or a combination of assets that are closely interrelated or interdependent in terms of their
design, technology and function or their ultimate purpose or use and includes:
• contract for the rendering of services which are directly related to the construction of
the asset, for example, those for the services of project managers and architects;
• contract for destruction or restoration of assets, and the restoration of the environment
following the demolition of assets.
“Fixed price contract” is a construction contract in which the contractor agrees to a fixed
contract price, or a fixed rate per unit of output, which may be subject to cost escalation
clauses.
“Cost plus contract” is a construction contract in which the contractor is reimbursed for
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allowable or otherwise defined costs, plus a markup on these costs or a fixed fee.
“Retentions” are amounts of progress billings which are not paid until the satisfaction of
conditions specified in the contract for the payment of such amounts or until defects have
been rectified.
“Progress billings” are amounts billed for work performed on a contract whether or not they
have been paid by the customer.
“Advances” are amounts received by the contractor before the related work is performed.
Standard but defined in the Act shall have the meaning respectively assigned to them in the
Act.
A construction contract may be negotiated for the construction of a single asset. A
construction contract may also deal with the construction of a number of assets which are
closely interrelated or interdependent in terms of their design, technology and function or
their ultimate purpose or use.
Construction contracts are formulated in a number of ways which, for the purposes of this
Income Computation and Disclosure Standard, are classified as fixed price contracts and
cost plus contracts. Some construction contracts may contain characteristics of both a fixed
price contract and a cost plus contract, for example, in the case of a cost plus contract with
an agreed maximum price.
Combining and Segmenting Construction Contracts

The requirements of this Income Computation and Disclosure Standard shall be applied
separately to each construction contract except as provided for in paragraphs 6, 7 and
8 herein. For reflecting the substance of a contract or a group of contracts, where it is
necessary, the Income Computation and Disclosure Standard should be applied to the
separately identifiable components of a single contract or to a group of contracts together.
Where a contract covers a number of assets, the construction of each asset should be
treated as a separate construction contract when:
• separate proposals have been submitted for each asset;
• each asset has been subject to separate negotiation and the contractor and customer
have been able to accept or reject that part of the contract relating to each asset; and
• the costs and revenues of each asset can be identified.
A group of contracts, whether with a single customer or with several customers, should be
treated as a single construction contract when:
• the group of contracts is negotiated as a single package;
• the contracts are so closely interrelated that they are, in effect, part of a single project
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with an overall profit margin; and

• the contracts are performed concurrently or in a continuous sequence.
Where a contract provides for the construction of an additional asset at the option of the
customer or is amended to include the construction of an additional asset, the construction
of the additional asset should be treated as a separate construction contract when:
• the asset differs significantly in design, technology or function from the asset or assets
covered by the original contract; or
• the price of the asset is negotiated without having regard to the original contract price.
Contract Revenue
Contract revenue shall be recognised when there is reasonable certainty of its ultimate
collection.
Contract revenue shall comprise of:
the initial amount of revenue agreed in the contract, including retentions; and
variations in contract work, claims and incentive payments:
to the extent that it is probable that they will result in revenue; and they are capable of
being reliably measured.
Where contract revenue already recognised as income is subsequently written off in the
books of accounts as uncollectible, the same shall be recognised as an expense and not as
an adjustment of the amount of contract revenue.
Contract Costs
Contract costs shall comprise of:
• costs that relate directly to the specific contract;
• costs that are attributable to contract activity in general and can be allocated to the
contract;
• such other costs as are specifically chargeable to the customer under the terms of the
contract; and
• allocated borrowing costs in accordance with the Income Computation and Disclosure
Standard on Borrowing Costs.
These costs shall be reduced by any incidental income, not being in the nature of interest,
dividends or capital gains, that is not included in contract revenue.
Costs that cannot be attributed to any contract activity or cannot be allocated to a contract
shall be excluded from the costs of a construction contract.
Contract costs include the costs attributable to a contract for the period from the date
of securing the contract to the final completion of the contract. Costs that are incurred in
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securing the contract are also included as part of the contract costs, provided
• they can be separately identified; and
• it is probable that the contract shall be obtained.
When costs incurred in securing a contract are recognised as an expense in the period in
which they are incurred, they are not included in contract costs when the contract is obtained
in a subsequent period.
Contract costs that relate to future activity on the contract are recognised as an asset. Such
costs represent an amount due from the customer and are classified as contract work in
progress.
Recognition of Contract Revenue and Expenses

Contract revenue and contract costs associated with the construction Contract should be
recognised as revenue and expenses respectively by reference to the stage of completion of
the contract activity at the reporting date.
The recognition of revenue and expenses by reference to the stage of completion of a con-
tract is referred to as the percentage of completion method. Under this method, contract
revenue is matched with the contract costs incurred in reaching the stage of completion,
resulting in the reporting of revenue, expenses and profit which can be attributed to the
proportion of work completed.
The stage of completion of a contract shall be determined with reference to:
• the proportion that contract costs incurred for work performed upto the reporting date
bear to the estimated total contract costs; or
• surveys of work performed; or
• completion of a physical proportion of the contract work.
Progress payments and advances received from customers are not determinative of the
stage of completion of a contract.
When the stage of completion is determined by reference to the contract costs incurred upto
the reporting date, only those contract costs that reflect work performed are included in
costs incurred upto the reporting date.
Contract costs which are excluded are:
• contract costs that relate to future activity on the contract; and
• payments made to subcontractors in advance of work performed under the subcontract.
During the early stages of a contract, where the outcome of the contract cannot be estimated
reliably contract revenue is recognised only to the extent of costs incurred. The early stage
of a contract shall not extend beyond 25 % of the stage of completion.
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Changes in Estimates
The percentage of completion method is applied on a cumulative basis in each previous year
to the current estimates of contract revenue and contract costs. Where there is change in
estimates, the changed estimates shall be used in determination of the amount of revenue
and expenses in the period in which the change is made and in subsequent periods.
Contract revenue and contract costs associated with the construction contract, which
commenced on or after 1st day of April, 2016 shall be recognised in accordance with the
provisions of this standard.
Contract revenue and contract costs associated with the construction contract, which
commenced on or before the 31st day of March, 2016 but not completed by the said date,
shall be recognised based on the method regularly followed by the person prior to the
previous year beginning on the 1st day of April, 2016.
Disclosure
A person shall disclose:
• the amount of contract revenue recognised as revenue in the period; and
• the methods used to determine the stage of completion of contracts in progress.
A person shall disclose the following for contracts in progress at the reporting date, namely:—
• amount of costs incurred and recognised profits (less recognised losses) upto the
reporting date;
• the amount of advances received; and
• the amount of retentions
Question 281
Income Computation and Disclosure Standard IV relating to revenue recognition
Preamble
that extent.
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Scope
1(1) This Income Computation and Disclosure Standard deals with the bases for recognition
of revenue arising in the course of the ordinary activities of a person from
• the sale of goods;
• the rendering of services;
• the use by others of the person’s resources yielding interest, royalties or dividends.
1(2) This Income Computation and Disclosure Standard does not deal with the aspects
of revenue recognition which are dealt with by other Income Computation and Disclosure
Standards.
Definitions
2(1) The following term is used in this Income Computation and Disclosure Standard with
the meanings specified:
“Revenue” is the gross inflow of cash, receivables or other consideration arising in the
course of the ordinary activities of a person from the sale of goods, from the rendering of
services, or from the use by others of the person’s resources yielding interest, royalties or
dividends. In an agency relationship, the revenue is the amount of commission and not the
gross inflow of cash, receivables or other consideration.
2(2) Words and expressions used and not defined in this Income Computation and Disclo-
sure Standard but defined in the Act shall have the meanings assigned to them in that Act.
Sale of Goods
In a transaction involving the sale of goods, the revenue shall be recognised when the seller
of goods has transferred to the buyer the property in the goods for a price or all significant
risks and rewards of ownership have been transferred to the buyer and the seller retains no
effective control of the goods transferred to a degree usually associated with ownership.
In a situation, where transfer of property in goods does not coincide with the transfer of
significant risks and rewards of ownership, revenue in such a situation shall be recognised
at the time of transfer of significant risks and rewards of ownership to the buyer.
Revenue shall be recognised when there is reasonable certainty of its ultimate collection.
Where the ability to assess the ultimate collection with reasonable certainty is lacking at the
time of raising any claim for escalation of price and export incentives, revenue recognition in
respect of such claim shall be postponed to the extent of uncertainty involved.
Rendering of Services
Subject to Para 7, revenue from service transactions shall be recognised by the percentage
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completion method. Under this method, revenue from service transactions is matched with
the service transaction costs incurred in reaching the stage of completion, resulting in the
determination of revenue, expenses and profit which can be attributed to the proportion
of work completed. Income Computation and Disclosure Standard on construction contract
also requires the recognition of revenue on this basis. The requirements of that Standard
shall mutatis mutandis apply to the recognition of revenue and the associated expenses for
a service transaction. However, when services are provided by an indeterminate number of
acts over a specific period of time, revenue may be recognised on a straight line basis over
the specific period.
Revenue from service contracts with duration of not more than ninety days may be recognised
when the rendering of services under that contract is completed or substantially completed.
The Use of Resources by Others Yielding Interest, Royalties or Dividends
(1) Subject to sub paragraph (2), interest shall accrue on the time basis determined by the
amount outstanding and the rate applicable.
(2) Interest on refund of any tax, duty or cess shall be deemed to be the income of the
previous year in which such interest is received.
Discount or premium on debt securities held is treated as though it were accruing over the
period to maturity.
Royalties shall accrue in accordance with the terms of the relevant agreement and shall be
recognised on that basis unless, having regard to the substance of the transaction, it is more
appropriate to recognise revenue on some other systematic and rational basis.
Dividends are recognised in accordance with the provisions of the Act.
The transitional provisions of Income Computation and Disclosure Standard on construction
contract shall mutatis mutandis apply to the recognition of revenue and the associated
costs for a service transaction undertaken on or before the 31st day of March, 2016 but not
completed by the said date.
Revenue for a transaction, other than a service transaction referred to in Para 10,
undertaken on or before the 31st day of March, 2016 but not completed by the said date
shall be recognised in accordance with the provisions of this standard for the previous year
commencing on the 1st day of April, 2016 and subsequent previous year. The amount of
revenue, if any, recognised for the said transaction for any previous year commencing on
or before the 1st day of April, 2015 shall be taken into account for recognising revenue for
the said transaction for the previous year commencing on the 1st day of April, 2016and
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subsequent previous years.
Disclosure
Following disclosures shall be made in respect of revenue recognition, namely—
• in a transaction involving sale of good, total amount not recognised as revenue during
the previous year due to lack of reasonably certainty of its ultimate collection along
with nature of uncertainty;
• the amount of revenue from service transactions recognised as revenue during the
previous year;
• the method used to determine the stage of completion of service transactions in
progress; and
• for service transactions in progress at the end of previous year, amount of costs incurred
and recognised profits (less recognized losses) upto end of previous year;
• the amount of advances received; and
• the amount of retentions.
Question 282
Income Computation and Disclosure Standard V relating to tangible fixed assets
Preamble
that extent.
Scope
This Income Computation and Disclosure Standard deals with the treatment of tangible
fixed assets.
Definitions
“Tangible fixed asset” is an asset being land, building, machinery, plant or furniture held
with the intention of being used for the purpose of producing or providing goods or services
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and is not held for sale in the normal course of business.

“Fair value” of an asset is the amount for which that asset could be exchanged between
knowledgeable, willing parties in an arm’s length transaction.
Standard but defined in the Act shall have the meanings assigned to them in that Act.
Identification of Tangible Fixed Assets

The definition in clause (a) of sub-paragraph (1) of paragraph 2 provides criteria for
determining whether an item is to be classified as a tangible fixed asset.
Stand-by equipment and servicing equipment are to be capitalised. Machinery spares shall
be charged to the revenue as and when consumed. When such spares can be used only in
connection with an item of tangible fixed asset and their use is expected to be irregular, they
shall be capitalised.
Components of Actual Cost

The actual cost of an acquired tangible fixed asset shall comprise its purchase price,
import duties and other taxes, excluding those subsequently recoverable, and any directly
attributable expenditure on making the asset ready for its intended use. Any trade discounts
and rebates shall be deducted in arriving at the actual cost.
The cost of a tangible fixed asset may undergo changes subsequent to its acquisition
or construction on account of price adjustment, changes in duties or similar factors; or
exchange fluctuation as specified in Income Computation and Disclosure Standard on the
effects of changes in foreign exchange rates.
Administration and other general overhead expenses are to be excluded from the cost of
tangible fixed assets if they do not relate to a specific tangible fixed asset. Expenses which
are specifically attributable to construction of a project or to the acquisition of a tangible
fixed asset or bringing it to its working condition, shall be included as a part of the cost of
the project or as a part of the cost of the tangible fixed asset.
The expenditure incurred on start-up and commissioning of the project, including the
expenditure incurred on test runs and experimental production, shall be capitalised. The
expenditure incurred after the plant has begun commercial production, that is, production
intended for sale or captive consumption, shall be treated as revenue expenditure.
Self- constructed Tangible Fixed Assets

In arriving at the actual cost of self-constructed tangible fixed assets, the same principles
shall apply as those described in paragraphs 5 to 8. Cost of construction that relate directly
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to the specific tangible fixed asset and costs that are attributable to the construction activity
in general and can be allocated to the specific tangible fixed asset shall be included in
actual cost. Any internal profits shall be eliminated in arriving at such costs.
Non- monetary Consideration

When a tangible fixed asset is acquired in exchange for another asset, the fair value of the
tangible fixed asset so acquired shall be its actual cost.
When a tangible fixed asset is acquired in exchange for shares or other securities, the fair
value of the tangible fixed asset so acquired shall be its actual cost.
Improvements and Repairs

An Expenditure that increases the future benefits from the existing asset beyond its previ-
ously assessed standard of performance is added to the actual cost.
The cost of an addition or extension to an existing tangible fixed asset which is of a capi-
tal nature and which becomes an integral part of the existing tangible fixed asset is to be
added to its actual cost. Any addition or extension, which has a separate identity and is
capable of being used after the existing tangible fixed asset is disposed of, shall be treated
as separate asset.
Valuation of Tangible Fixed Assets in Special Cases

Where a person owns tangible fixed assets jointly with others, the proportion in the actual
cost, accumulated depreciation and written down value is grouped together with similar
fully owned tangible fixed assets.
Where several assets are purchased for a consolidated price, the consideration shall be
apportioned to the various assets on a fair basis.
The actual cost of tangible fixed assets, acquisition or construction of which commenced on or
before the 31st day of March, 2016 but not completed by the said date, shall be recognised in
accordance with the provisions of this standard. The amount of actual cost, if any, recognised
for the said assets for any previous year commencing on or before the 1st day of April, 2015
shall be taken into account for recognising actual cost of the said assets for the previous year
commencing on the 1st day of April, 2016 and subsequent previous years.
Depreciation
Depreciation on a tangible fixed asset shall be computed in accordance with the provisions
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of the Act.
Transfers
Income arising on transfer of a tangible fixed asset shall be computed in accordance with
the provisions of the Act.
Disclosures
Following disclosure shall be made in respect of tangible fixed assets, namely:-
• description of asset or block of assets;
• rate of depreciation;
• actual cost or written down value, as the case may be;
• additions or deductions during the year with dates; in the case of any addition of an
asset, date put to use; including adjustments on account of—
 Central Value Added Tax credit claimed and allowed under the CENVAT Credit
Rules, 2004;
 change in rate of exchange of currency;
 subsidy or grant or reimbursement, by whatever name called;
 depreciation Allowable; and
 written down value at the end of year
Question 283
Income Computation and Disclosure Standard VI relating to the effects of changes in foreign
exchange rates
Preamble
that extent.
Scope
This Income Computation and Disclosure Standard deals with:
 treatment of transactions in foreign currencies;
 translating the financial statements of foreign operations;
 treatment of foreign currency transactions in the nature of forward exchange contracts.
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Definitions
(1) The following terms are used in this Income Computation and Disclosure Standard with
“Average rate” is the mean of the exchange rates in force during a period.
“Closing rate” is the exchange rate at the last day of the previous year.
“Exchange difference” is the difference resulting from reporting the same number of
units of a foreign currency in the reporting currency of a person at different exchange
rates.
“Exchange rate” is the ratio for exchange of two currencies.
“Foreign currency” is a currency other than the reporting currency of a person.
“Foreign operations of a person” is a branch, by whatever name called, of that person,
the activities of which are based or conducted in a country other than India.
“Foreign currency transaction” is a transaction which is denominated in or requires
settlement in a foreign currency, including transactions arising when a person:—
 buys or sells goods or services whose price is denominated in a foreign currency;
or
 borrows or lends funds when the amounts payable or receivable are denominated
in a foreign currency; or
 becomes a party to an unperformed forward exchange contract; or
 otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated
in a foreign currency.
“Forward exchange contract” means an agreement to exchange different currencies at
a forward rate, and includes a foreign currency option contract or another financial
instrument of a similar nature;
“Forward rate” is the specified exchange rate for exchange of two Currencies at a
specified future date;
“Indian currency” shall have the meaning as assigned to it in section 2 of the Foreign
Exchange Management Act, 1999 (42 of 1999);
“Monetary items” are money held and assets to be received or liabilities to be paid in
fixed or determinable amounts of money. Cash, receivables, and payables are examples
of monetary items;
“Non-monetary items” are assets and liabilities other than monetary items. Fixed assets,
inventories, and investments in equity shares are examples of non-monetary items;
“Reporting currency” means Indian currency except for foreign operations where it shall
mean currency of the country where the operations are carried out.
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(2) Words and expressions used and not defined in this Income Computation and Disclosure
Standard but defined in the Act shall have the meaning assigned to them in the Act.
Foreign Currency Transactions

Initial Recognition
3(1) A foreign currency transaction shall be recorded, on initial recognition in the reporting
currency, by applying to the foreign currency amount the exchange rate between the reporting
currency and the foreign currency at the date of the transaction.
An average rate for a week or a month that approximates the actual rate at the date of
the transaction may be used for all transaction in each foreign currency occurring during
that period. If the exchange rate fluctuates significantly, the actual rate at the date of the
transaction shall be used.

Conversion at Last Date of Previous Year
At last day of each previous year:—
foreign currency monetary items shall be converted into reporting currency by applying the
closing rate;
where the closing rate does not reflect with reasonable accuracy, the amount in reporting
currency that is likely to be realised from or required to disburse, a foreign currency monetary
item owing to restriction on remittances or the closing rate being unrealistic and it is not
possible to effect an exchange of currencies at that rate, then the relevant monetary item
shall be reported in the reporting currency at the amount which is likely to be realised from
or required to disburse such item at the last date of the previous year; and
non-monetary items in a foreign currency shall be converted into reporting currency by
using the exchange rate at the date of the transaction.
non-monetary item being inventory which is carried at net realisable value denominated in
a foreign currency shall be reported using the exchange rate that existed when such value
was determined.
Recognition of Exchange Differences

(i) In respect of monetary items, exchange differences arising on the settlement thereof or
on conversion thereof at last day of the previous year shall be recognised as income or
as expense in that previous year.
In respect of non-monetary items, exchange differences arising on conversion thereof

at the last day of the previous year shall not be recognised as income or as expense in
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that previous year.

Exceptions to Paragraphs 3, 4 and 5
Notwithstanding anything contained in paragraph 3, 4 and 5; initial recognition, conversion
and recognition of exchange difference shall be subject to provisions of section 43A of the
Act or Rule 115 of Income-tax Rules, 1962, as the case may be.
Financial Statements of Foreign Operations

The financial statements of a foreign operation shall be translated using the principles and
procedures in paragraphs 3 to 6 as if the transactions of the foreign operation had been
those of the person himself.
Forward Exchange Contracts

8(1) Any premium or discount arising at the inception of a forward exchange contract
shall be amortised as expense or income over the life of the contract. Exchange differences
on such a contract shall be recognised as income or as expense in the previous year in which
the exchange rates change. Any profit or loss arising on cancellation or renewal shall be
recognised as income or as expense for the previous year.
The provisions of sub-para (1) shall apply provided that the contract:
 is not intended for trading or speculation purposes; and
 is entered into to establish the amount of the reporting currency required or available
at the settlement date of the transaction.
The provisions of sub-para (1) shall not apply to the contract that is entered into to hedge
the foreign currency risk of a firm commitment or a highly probable forecast transaction. For
this purpose, firm commitment, shall not include assets and liabilities existing at the end
of the previous year.
The premium or discount that arises on the contract is measured by the difference between
the exchange rate at the date of the inception of the contract and the forward rate specified
in the contract. Exchange difference on the contract is the difference between:
 the foreign currency amount of the contract translated at the exchange rate at the last
day of the previous year, or the settlement date where the transaction is settled during
the previous year; and
 the same foreign currency amount translated at the date of inception of the contract
or the last day of the immediately preceding previous year, whichever is later.
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Premium, discount or exchange difference on contracts that are intended for trading or
speculation purposes, or that are entered into to hedge the foreign currency risk of a firm
commitment or a highly probable forecast transaction shall be recognised at the time of
settlement.
9(1) All foreign currency transactions undertaken on or after 1st day of April, 2016 shall
be recognised in accordance with the provisions of this standard.
Exchange differences arising in respect of monetary items or non-monetary items, on the
settlement thereof during the previous year commencing on the 1st day of April, 2016 or on
conversion thereof at the last day of the previous year commencing on the 1st day of April,
2016, shall be recognised in accordance with the provisions of this standard after taking
into account the amount recognised on the last day of the previous year ending on the 31st
March, 2016 for an item, if any, which is carried forward from said previous year.
The financial statements of foreign operations for the previous year commencing on the 1st
day of April, 2016 shall be translated using the principles and procedures specified in this
standard after taking into account the amount recognised on the last day of the previous
year ending on the 31st March, 2016 for an item, if any, which is carried forward from said
previous year.
All forward exchange contracts existing on the 1st day of April, 2016 or entered on or
after 1st day of April, 2016 shall be dealt with in accordance with the provisions of this
standard after taking into account the income or expenses, if any, recognised in respect of
said contracts for the previous year ending on or before the 31st March,2016.
Question 284
Income Computation and Disclosure Standard VII relating to government grants
Preamble
other sources” and not for the purpose of maintenance of books of account.
In case of conflict between the provisions of the Income Tax Act, 1961 (‘the Act’) and this
extent.
Scope
This Income Computation and Disclosure Standard deals with the treatment of Government
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grants. The Government grants are sometimes called by other names such as subsidies,
cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc.
This Income Computation and Disclosure Standard does not deal with:—
Government assistance other than in the form of Government grants; and
Government participation in the ownership of the enterprise.

Definitions
3(1) The following terms are used in the Income Computation and Disclosure Standard
“Government” refers to the Central Government, State Governments, agencies and similar
bodies, whether local, national or international.
“Government grants” are assistance by Government in cash or kind to a person for past or
future compliance with certain conditions. They exclude those forms of Government assistance
which cannot have a value placed upon them and the transactions with Government which
cannot be distinguished from the normal trading transactions of the person.
Recognition of Government Grants

4(1) Government grants should not be recognised until there is reasonable assurance that
(i) the person shall comply with the conditions attached to them, and (ii) the grants shall be
received.
4(2) Recognition of Government grant shall not be postponed beyond the date of actual
receipt.
Treatment of Government Grants

Where the Government grant relates to a depreciable fixed asset or assets of a person, the
grant shall be deducted from the actual cost of the asset or assets concerned or from the
written down value of block of assets to which concerned asset or assets belonged to.
Where the Government grant relates to a non-depreciable asset or assets of a person
requiring fulfillment of certain obligations, the grant shall be recognised as income over the
same period over which the cost of meeting such obligations is charged to income.
Where the Government grant is of such a nature that it cannot be directly relatable to the
asset acquired, so much of the amount which bears to the total Government grant, the
same proportion as such asset bears to all the assets in respect of or with reference to which
the Government grant is so received, shall be deducted from the actual cost of the asset or
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shall be reduced from the written down value of block of assets to which the asset or assets
belonged to.
The Government grant that is receivable as compensation for expenses or losses incurred
in a previous financial year or for the purpose of giving immediate financial support to the
person with no further related costs, shall be recognised as income of the period in which
it is receivable.
The Government grants other than covered by paragraph 5, 6, 7, and 8 shall be recognised
as income over the periods necessary to match them with the related costs which they are
intended to compensate.
The Government grants in the form of non-monetary assets, given at a concessional rate,
shall be accounted for on the basis of their acquisition cost.
Refund of Government Grants

The amount refundable in respect of a Government grant referred to in paragraphs 6, 8 and
9 shall be applied first against any unamortised deferred credit remaining in respect of the
Government grant. To the extent that the amount refundable exceeds any such deferred
credit, or where no deferred credit exists, the amount shall be charged to profit and loss
statement.
The amount refundable in respect of a Government grant related to a depreciable fixed as-
set or assets shall be recorded by increasing the actual cost or written down value of block
of assets by the amount refundable. Where the actual cost of the asset is increased, depre-
ciation on the revised actual cost or written down value shall be provided prospectively at
the prescribed rate.
All the Government grants which meet the recognition criteria of para 4 on or after 1st day
of April, 2016 shall be recognised for the previous year commencing on or after 1st day of
April, 2016 in accordance with the provisions of this standard after taking into account the
amount, if any, of the said Government grant recognised for any previous year ending on or
before 31st day of March,2016.
Disclosures
Following disclosure shall be made in respect of Government grants, namely:—
nature and extent of Government grants recognised during the previous year by way of de-
duction from the actual cost of the asset or assets or from the written down value of block
of assets during the previous year;
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nature and extent of Government grants recognised during the previous year as income;
nature and extent of Government grants not recognised during the previous year by way
of deduction from the actual cost of the asset or assets or from the written down value of
block of assets and reasons thereof; and
nature and extent of Government grants not recognised during the previous year as income
and reasons thereof.
Question 285
Income Computation and Disclosure Standard VIII relating to securities
Preamble
that extent.
Part A
Scope
This part of Income Computation and Disclosure Standard deals with securities held as
stock-in-trade.
This part of Income Computation and Disclosure Standard does not deal with:
 the bases for recognition of interest and dividends on securities which are covered by
the Income Computation and Disclosure Standard on revenue recognition;
 securities held by a person engaged in the business of insurance;
 securities held by mutual funds, venture capital funds, banks and public financial
institutions formed under a Central or a State Act or so declared under the Companies
Act, 1956 (1 of 1956) or the Companies Act, 2013 (18 of 2013).
Definitions
3(1) The following terms are used in this part of Income Computation and Disclosure
Standard with the meanings specified:
“Fair value” is the amount for which an asset could be exchanged between aknowledgeable,
willing buyer and a knowledgeable, willing seller in an arm’s length transaction.
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“Securities” shall have the meaning assigned to it in clause (h) of Section 2 of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956) and shall include share of a company in which
public are not substantially interested but shall not include derivatives referred to in sub-
clause (ia) of that clause (h).
3(2) Words and expressions used and not defined in this part of Income Computation and
Disclosure Standard but defined in the Act shall have the meaning respectively assigned to
them in the Act.
Recognition and Initial Measurement of Securities

 A security on acquisition shall be recognised at actual cost.
 The actual cost of a security shall comprise of its purchase price and include acquisition
charges such as brokerage, fees, tax, duty or cess.
 Where a security is acquired in exchange for other securities, the fair value of the
security so acquired shall be its actual cost.
 Where a security is acquired in exchange for another asset, the fair value of the security
so acquired shall be its actual cost.
 Where unpaid interest has accrued before the acquisition of an interest-bearing security
and is included in the price paid for the security, the subsequent receipt of interest is
allocated between pre-acquisition and post-acquisition periods; the pre-acquisition
portion of the interest is deducted from the actual cost.
Subsequent Measurement of Securities

At the end of any previous year, securities held as stock-in-trade shall be valued at actual
cost initially recognised or net realisable value at the end of that previous year, whichever
is lower.
For the purpose of para 9, the comparison of actual cost initially recognised and net realis-
able value shall be done categorywise and not for each individual security. For this purpose,
securities shall be classified into the following categories, namely:-
 shares;
 debt securities;
 convertible securities; and
 any other securities not covered above.
The value of securities held as stock-in-trade of a business as on the beginning of the
previous year shall be:
 the cost of securities available, if any, on the day of the commencement of the business
when the business has commenced during the previous year; and
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 the value of the securities of the business as on the close of the immediately preceding
previous year, in any other case.
Notwithstanding anything contained in para 9, 10 and 11, at the end of any previous year,
securities not listed on a recognised stock exchange; or listed but not quoted on a recognised
stock exchange with regularity from time to time, shall be valued at actual cost initially
recognised.
For the purposes of para 9, 10 and 11 where the actual cost initially recognised cannot
be ascertained by reference to specific identification, the cost of such security shall be
determined on the basis of first-in-first-out method or weighted average cost formula.
Part B
Scope
This part of Income Computation and Disclosure Standard deals with securities held by a
scheduled bank or public financial institutions formed under a Central or a State Act or
so declared under the Companies Act, 1956 (1 of 1956) or the Companies Act, 2013 (18 of
2013).
Definitions
2(1) The following terms are used in this part of Income Computation and Disclosure
Standard with the meanings specified:
“Scheduled Bank” shall have the meaning assigned to it in clause (ii) of the Explanation to
clause (viia) of sub-section (1) of section 36 of the Act.
“Securities” shall have the meaning assigned to it in clause (h) of Section 2 of the Securities
Contract (Regulation) Act, 1956 (42 of 1956) and shall include share of a company in which
public are not substantially interested;
2(2) Words and expressions used and not defined in this part of Income Computation and
Disclosure Standard but defined in the Act shall have the meaning respectively assigned to
them in the Act.
Classification, Recognition and Measurement of Securities

Securities shall be classified, recognised and measured in accordance with the extant
guidelines issued by the Reserve Bank of India in this regard and any claim for deduction in
excess of the said guidelines shall not be taken into account. To this extent, the provisions of
Income Computation and Disclosure Standard VI on the effect of changes in foreign exchange
rates relating to forward exchange contracts shall not apply.”
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Que4stion 286
Income Computation and Disclosure Standard IX relating to borrowing costs
Preamble
that extent.
Scope
(1) This Income Computation and Disclosure Standard deals with treatment of borrowing
costs.
(2) This Income Computation and Disclosure Standard does not deal with the actual or
imputed cost of owners’ equity and preference share capital.
Definitions
(1) The following terms are used in this Income Computation and Disclosure Standard with
“Borrowing costs” are interest and other costs incurred by a person in connection with the
borrowing of funds and include:
 commitment charges on borrowings;
 amortised amount of discounts or premiums relating to borrowings;
 amortised amount of ancillary costs incurred in connection with the arrangement of
borrowings;
 finance charges in respect of assets acquired under finance leases or under other similar
arrangements.
“Qualifying asset” means:
land, building, machinery, plant or furniture, being tangible assets;
know-how, patents, copyrights, trade marks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets;
inventories that require a period of twelve months or more to bring them to a saleable
condition.
(2) Words and expressions used and not defined in this Income Computation and Disclosure
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Recognition
Borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset shall be capitalised as part of the cost of that asset. The amount
of borrowing costs eligible for capitalisation shall be determined in accordance with this
Income Computation and Disclosure Standard. Other borrowing costs shall be recognised in
accordance with the provisions of the Act.
For the purposes of this Income Computation and Disclosure Standard, “capitalisation” in the
context of inventory referred to in item (iii) of clause (b) of sub-paragraph (1) of paragraph
2means addition of borrowing cost to the cost of inventory.
Borrowing Costs Eligible for Capitalisation

Subject to paragraph 8, the extent to which funds are borrowed specifically for the purposes
of acquisition, construction or production of a qualifying asset, the amount of borrowing
costs to be capitalised on that asset shall be the actual borrowing costs incurred during the
period on the funds so borrowed.
“6. Subject to Para 8, in respect of borrowing other than those referred to in Para 5, if any,
the amount of borrowing costs to be capitalised shall be computed in accordance with the
following formula namely :—
B
Ax
C
Where
A = borrowing costs incurred during the previous year except on borrowings referred to in
Para 5 above;
B = the average of costs of qualifying asset as appearing in the balance sheet of a person
on the first day and the last day of the previous year;
(i) in case the qualifying asset does not appear in the balance sheet of a person on the
first day, half of the cost of qualifying asset; or
(ii) in case the qualifying asset does not appear in the balance sheet of a person on the
last day of the previous year, the average of the costs of qualifying asset as appearing
in the balance sheet of a person on the first day of the previous year and on the date
of put to use or completion, as the case may be, excluding the extent to which the
qualifying assets are directly funded out of specific borrowings;
C = the average of the amount of total assets as appearing in the balance sheet of a
person on the first day and the last day of the previous year, other than assets to the extent
481
Final ca Direct tax
they are directly funded out of specific borrowings;

Explanation — For the purpose of this paragraph, a qualifying asset shall be such asset that
necessarily require a period of twelve months or more for its acquisition, construction or
production.
Commencement of Capitalisation
The capitalisation of borrowing costs shall commence:
 in a case referred to in paragraph 5, from the date on which funds were borrowed;
 in a case referred to in paragraph 6, from the date on which funds were utilised.
Cessation of Capitalisation
Capitalisation of borrowing costs shall cease:
 in case of a qualifying asset referred to in item (i) and (ii) of clause (b) of sub- paragraph
(1) of paragraph 2, when such asset is first put to use;
 in case of inventory referred to in item (iii) of clause (b) of sub-paragraph (1) of
paragraph 2, when substantially all the activities necessary to prepare such inventory
for its intended sale are complete.
 When the construction of a qualifying asset is completed in parts and a completed part
is capable of being used while construction continues for the other parts, capitalisation
of borrowing costs in relation to a part shall cease:—
in case of part of a qualifying asset referred to in item (i) and (ii) of clause (b) of sub-
paragraph (1) of paragraph 2, when such part of a qualifying asset is first put to use;
in case of part of inventory referred to in item (iii) of clause (b) of sub-paragraph of paragraph
2, when substantially all the activities necessary to prepare such part of inventory for its
intended sale are complete.
All the borrowing costs incurred on or after 1st day of April, 2016 shall be capitalised
for the previous year commencing on or after 1st day of April, 2016 in accordance with
the provisions of this standard after taking into account the amount of borrowing costs
capitalised, if any, for the same borrowing for any previous year ending on or before 31st
day of March,2016.
Disclosure
The following disclosure shall be made in respect of borrowing costs, namely:—
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Final ca Direct tax
 the accounting policy adopted for borrowing costs; and

 the amount of borrowing costs capitalised during the previous year.
Question 287
Income Computation and Disclosure Standard X relating to provisions, contingent liabilities
and contingent assets
Preamble
that extent.
Scope
This Income Computation and Disclosure Standard deals with provisions, contingent liabilities
and contingent assets, except those:
 resulting from financial instruments;
 resulting from executory contracts;
 arising in insurance business from contracts with policyholders; and
 covered by another Income Computation and Disclosure Standard.
This Income Computation and Disclosure Standard does not deal with the recognition of
revenue which is dealt with by Income Computation and Disclosure Standard - Revenue
Recognition.
The term ‘provision’ is also used in the context of items such as depreciation, impairment of
assets and doubtful debts which are adjustments to the carrying amounts of assets and are
not addressed in this Income Computation and Disclosure Standard.
Definitions
“Provision” is a liability which can be measured only by using a substantial degree of
estimation.
“Liability” is a present obligation of the person arising from past events, the settlement of which
is expected to result in an outflow from the person of resources embodying economic benefits.
483
Final ca Direct tax
“Obligating event” is an event that creates an obligation that results in a person having no
realistic alternative to settling that obligation.
“Contingent liability” is:
a possible obligation that arises from past events and the existence of which will be
confirmed only by the occurrence or nonoccurrence of one or more uncertain future events
not wholly within the control of the person; or
a present obligation that arises from past events but is not recognized because:
it is not reasonably certain that an outflow of resources embodying economic benefits will
be required to settle the obligation; or
a reliable estimate of the amount of the obligation cannot be made.
“Contingent asset” is a possible asset that arises from past events the existence of which
will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future
events not wholly within the control of the person.
“Executory contracts” are contracts under which neither party has performed any of its
obligations or both parties have partially performed their obligations to an equal extent.
“Present obligation” is an obligation if, based on the evidence available, its existence at the
end of the previous year is considered reasonably certain.
Standard but defined in the Act shall have the meaning respectively assigned to them in the Act.
Recognition Provisions
A provision shall be recognised when:
 a person has a present obligation as a result of a past event;
 it is reasonably certain that an outflow of resources embodying economic benefits will
be required to settle the obligation; and
 a reliable estimate can be made of the amount of the obligation. If these conditions
are not met, no provision shall be recognised.
 No provision shall be recognised for costs that need to be incurred to operate in the
future.
 t is only those obligations arising from past events existing independently of a person’s
future actions, that is the future conduct of its business, that are recognised as provisions
 Where details of a proposed new law have yet to be finalised, an obligation arises only
when the legislation is enacted.
Contingent Liabilities
A person shall not recognise a contingent liability.
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Final ca Direct tax
Contingent Assets
A person shall not recognise a contingent asset.
Contingent assets are assessed continually and when it becomes reasonably certain that
inflow of economic benefit will arise, the asset and related income are recognised in the
previous year in which the change occurs.
Measurement Best Estimate

The amount recognised as a provision shall be the best estimate of the expenditure required
to settle the present obligation at the end of the previous year. The amount of a provision
shall not be discounted to its present value.
The amount recognised as asset and related income shall be the best estimate of the value
of economic benefit arising at the end of the previous year. The amount and related income
shall not be discounted to its present value.
Reimbursements
Where some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party, the reimbursement shall be recognised when it is reasonably
certain that reimbursement will be received if the person settles the obligation. The amount
recognised for the reimbursement shall not exceed the amount of the provision.
Where a person is not liable for payment of costs in case the third party fails to pay, no
provision shall be made for those costs.
An obligation, for which a person is jointly and severally liable, is a contingent liability to
the extent that it is expected that the obligation will be settled by the other parties.
Review
Provisions shall be reviewed at the end of each previous year and adjusted to reflect the
current best estimate. If it is no longer reasonably certain that an outflow of resources
embodying economic benefits will be required to settle the obligation, the provision should
be reversed.
An asset and related income recognised as provided in para 11 shall be reviewed at the
end of each previous year and adjusted to reflect the current best estimate. If it is no longer
reasonably certain that an inflow of economic benefits will arise, the asset and related
income shall be reversed.
Use of Provisions
A provision shall be used only for expenditures for which the provision was originally
485
Final ca Direct tax
recognised.
All the provisions or assets and related income shall be recognised for the previous year
commencing on or after 1st day of April, 2016 in accordance with the provisions of this
standard after taking into account the amount recognised, if any, for the same for any
previous year ending on or before 31st day of March,2016.
Disclosure
21(1) Following disclosure shall be made in respect of each class of provision, namely:-
 a brief description of the nature of the obligation;
 the carrying amount at the beginning and end of the previous year;
 additional provisions made during the previous year, including increases to existing
provisions;
 amounts used, that is incurred and charged against the provision, during the previous
year;
 unused amounts reversed during the previous year; and
 the amount of any expected reimbursement, stating the amount of any asset that has
been recognised for that expected reimbursement.
21(2) Following disclosure shall be made in respect of each class of asset and related
income recognised as provided in para 11, namely:—
 a brief description of the nature of the asset and related income;
 the carrying amount of asset at the beginning and end of the previous year;
 additional amount of asset and related income recognised during the year, including
increases to assets and related income already recognised; and
 amount of asset and related income reversed during the previous year.
486
Final ca Direct tax
ASSESSMENT OF START-
UPS
Question 288
Section 79: Carry forward and set-off of losses in case of closely held company being an
eligible start-up referred to in section 80-IAC:
Answer
In case of a company in which the public are not substantially interested but being an
eligible start-up as referred to in section 80-IAC, any unabsorbed loss of the company shall
be allowed to be carried forward and set off against the income of the previous year if either
of the conditions are satisfied –
a. on the last day of the previous year, the shares of the company carrying not less than
51% of the voting power were beneficially held by persons who beneficially held shares
of the company carrying not less than 51% of the voting power on the last day of the
year or years in which the loss was incurred; or
b. all the shareholders of such company who held shares carrying voting power on the
last day of the previous year or years in which the loss was incurred continue to hold
those shares on the last day of such previous year in which the loss is to be set-off
and such loss has been incurred during the period of 7 years beginning from the year
of incorporation of such company.
Question 289
80-IAC: Special provision in respect of specified business
Answer
1. Where the gross total income of an assessee, being an eligible start- up, includes any
profits and gains derived from eligible business, there shall, in accordance with and
subject to the provisions of this section, be allowed, in computing the total income of
the assessee, a deduction of an amount equal to one hundred per cent of the profits
and gains derived from such business for three consecutive assessment years.
2. The deduction specified in sub-section (1) may, at the option of the assessee, be claimed
by him for any three consecutive assessment years out of seven ten years beginning
from the year in which the eligible start-up is incorporated.
487
Final ca Direct tax
3. This section applies to a start-up which fulfils the following conditions, namely:—
a. it is not formed by splitting up, or the reconstruction, of a business already in
existence:
Provided that this condition shall not apply in respect of a start-up which is
formed as a result of the re-establishment, reconstruction or revival by the
assessee of the business of any such undertaking as referred to in section 33B, in
the circumstances and within the period specified in that section;
b. it is not formed by the transfer to a new business of machinery or plant previously
used for any purpose.
4. Explanation 1.—For the purposes of this clause, any machinery or plant which was
used outside India by any person other than the assessee shall not be regarded as
machinery or plant previously used for any purpose, if all the following conditions are
fulfilled, namely:—
a. such machinery or plant was not, at any time previous to the date of the
installation by the assessee, used in India;
b. such machinery or plant is imported into India;
c. no deduction on account of depreciation in respect of such machinery or plant
has been allowed or is allowable under the provisions of this Act in computing
the total income of any person for any period prior to the date of the installation
of the machinery or plant by the assessee.
5. Explanation 2.—Where in the case of a start-up, any machinery or plant or any part
thereof previously used for any purpose is transferred to a new business and the total
value of the machinery or plant or part so transferred does not exceed twenty per cent
of the total value of the machinery or plant used in the business, then, for the purposes
of clause (ii) of this sub-section, the condition specified therein shall be deemed to
have been complied with.
6. The provisions of sub-section (5) and sub-sections (7) to (11) of section 80-IA shall
apply to the start-ups for the purpose of allowing deductions under sub-section (1).
7. “Eligible business” means a business carried out by an eligible start-up engaged in
innovation, development or improvement of products or processes or services or a
scalable business model with a high potential of employment generation or wealth
creation;
8. “Eligible start-up” means a company or a limited liability partnership engaged in
eligible business which fulfils the following conditions, namely:—
a. it is incorporated on or after the 1st day of April, 2016 but before the 1st day of
April, 2021;
488
Final ca Direct tax
b. the total turnover of its business does not exceed twenty-five one-hundred crore
rupees in the previous year relevant to the assessment year for which deduction
under sub-section (1) is claimed; and
c. it holds a certificate of eligible business from the Inter-Ministerial Board of
Certification as notified in the Official Gazette by the Central Government;
9. “limited liability partnership” means a partnership referred to in clause (n) of sub-
section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009).
Question 290
A (P) Ltd. was incorporated on 1.4.2021 and it holds a certificate of eligible business from
the notified Inter Ministerial Board of Certification. It is engaged in innovation of new prod-
ucts. Its total turnover and profits and gains from such business for the P.Y.2021-22 to
P.Y.2030-31 are as follows:
Particulars Turnover Profit / loss
P.Y. 2021-22 15.42 (2.52)
P.Y. 2022-23 18.36 (1.37)
P.Y. 2023-24 20.21 6.52
P.Y. 2024-25 22.72 8.13
P.Y. 2025-26 24.95 9.87
P.Y. 2026-27 23.52 7.59
P.Y. 2027-28 24.68 9.42
P.Y. 2028-29 26.31 11.50
P.Y. 2029-30 31.80 12.46
P.Y. 2030-31 46.50 3.46
Is A (P) Ltd. eligible for any tax benefit under the provisions of the Income-tax Act, 1961 for
A.Y. 2022-23? If yes, what is the benefit available?
Answer:
A (P) Ltd. is an eligible start-up, since –
1) it is a company engaged in eligible business of innovation of new products.
2) it is incorporated during the period 1.4.2016 to 31.3.2021.
3) its total turnover does not exceed ` 100 crores in the relevant previous years for which
deduction is to be claimed
4) it holds a certificate of eligible business from the notified IMBC
Therefore, A (P) Ltd., being an eligible start-up, is eligible for deduction under section 80-
IAC of 100% of the profits and gains derived by it from an eligible business for any three
489
Final ca Direct tax
consecutive assessment years out of ten years beginning from the year in which the eligible
start up is incorporated i.e., P.Y.2021-22. In the first and second year i.e., P.Y.2021-22 and
P.Y.2022-23, A (P) Ltd. has incurred a loss. In the previous year i.e., P.Y.2023-24, A (P) Ltd. has
earned profits from eligible business and can hence, claim 100% of its profits as deduction
for any three consecutive assessment years under section 80-IAC from the P.Y.2023-24 to
P.Y.2025-26. However, for P.Y.2023-24, the profits eligible for deduction would be the profits after
set-off of brought forward losses of P.Y.2021-22 and P.Y. 2022-23.
Question 291
Discuss applicability of provisions of section 56(2)(viib) to eligible start ups
Answer
As per section 56(2)(viib) where a company, not being a company in which the public are
substantially interested, receives, in any previous year, from any person being a resident, any
consideration for issue of shares that exceeds the face value of such shares, the aggregate
consideration received for such shares as exceeds the fair market value of the shares shall
be treated as Income from Other Sources;
Provided that this clause shall not apply where the consideration for issue of shares is
received—
(i) by a venture capital undertaking from a venture capital company or a venture capital
fund or a specified fund; or
(ii) by a company from a class or classes of persons as may be notified by the Central
Government in this behalf.
Provided further that where the provisions of this clause have not been applied to a company
on account of fulfilment of conditions specified in the notification issued under clause (ii)
of the first proviso and such company fails to comply with any of those conditions, then,
any consideration received for issue of share that exceeds the fair market value of such
share shall be deemed to be the income of that company chargeable to income-tax for the
previous year in which such failure has taken place and, it shall also be deemed that the
company has under-reported the income in consequence of the misreporting referred to in
sub-section (8) and sub-section (9) of section 270A for the said previous year.
(a) The fair market value of the shares shall be the value—
(i) as may be determined in accordance with such method as may be prescribed; or
(ii) as may be substantiated by the company to the satisfaction of the Assessing
Officer, based on the value, on the date of issue of shares, of its assets, including
490
Final ca Direct tax
intangible assets being goodwill, know-how, patents, copyrights, trademarks,

licences, franchises or any other business or commercial rights of similar nature,
whichever is higher;
(aa) “specified fund” means a fund established or incorporated in India in the form of
a trust or a company or a limited liability partnership or a body corporate which
has been granted a certificate of registration as a Category I or a Category II
Alternative Investment Fund and is regulated under the Securities and Exchange
Board of India (Alternative Investment Fund) Regulations, 2012 made under the
Securities and Exchange Board of India Act, 1992 (15 of 1992);
(ab) “trust” means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or
under any other law for the time being in force;
(b) “venture capital company”, “venture capital fund” and “venture capital undertaking”
shall have the meanings respectively assigned to them in clause (a), clause (b) and
clause (c) of Explanation to clause (23FB) of section 10;
As per provisions of this section, in case a company issues shares for a value which is in excess
of its fair market value, then such excess shall be treated as Income from Other Sources.
This poses a problem for start-ups since in their case, the investment is generally made
based on innovative idea, for which determination of fair market value may be extremely
difficult. Therefore, in order to provide relief to such start-up, a notification was issued by
Department for Promotion of Industry and Internal Trade. The extract of this notification is as
under:
“Definitions
1. In this notification—
(a) An entity shall be considered as a Startup:
i. Upto a period of ten years from the date of incorporation/ registration, if it is
incorporated as a private limited company (as defined in the Companies Act, 2013)
or registered as a partnership firm (registered under section 59 of the Partnership
Act, 1932) or a limited liability partnership (under the Limited Liability Partnership
Act, 2008) in India.
ii. Turnover of the entity for any of the financial years since incorporation/ registration
has not exceeded one hundred crore rupees.
iii. Entity is working towards innovation, development or improvement of products
or processes or services, or if it is a scalable business model with a high potential
of employment generation or wealth creation. Provided that an entity formed by
splitting up or reconstruction of an existing business shall not be considered a
‘Startup’.
491
Final ca Direct tax
Explanation: An entity shall cease to be a Startup on completion of ten years from the
date of its incorporation/ registration or if its turnover for any previous year exceeds
one hundred crore rupees.
Exemption for the purpose of clause (viib) of sub-section (2) of section 56 of the Act
2. A Startup shall be eligible for notification under clause (ii) of the proviso to clause
(viib) of sub-section (2) of section 56 of the Act and consequent exemption from the
provisions of that clause, if it fulfils the following conditions:
(i) it has been recognised by DPIIT under para 2(iii)(a) or as per any earlier notification
on the subject
(ii) aggregate amount of paid up share capital and share premium of the startup
after issue or proposed issue of share, if any, does not exceed, twenty five crore
rupees:
Provided that in computing the aggregate amount of paid up share capital, the amount of
paid up share capital and share premium of twenty five crore rupees in respect of shares
issued to any of the following persons shall not be included-
(a) a non-resident; or
(b) a venture capital company or a venture capital fund;
Provided further that considerations received by such startup for shares issued or proposed
to be issued to a specified company shall also be exempt and shall not be included in
computing the aggregate amount of paid-up share capital and share premium of twenty
five crore rupees.
(iii) It has not invested in any of the following assets,-
(a) building or land appurtenant thereto, being a residential house, other than that
used by the Startup for the purposes of renting or held by it as stock-in-trade, in
the ordinary course of business;
(b) land or building, or both, not being a residential house, other than that occupied
by the Startup for its business or used by it for purposes of renting or held by it
as stock-in trade, in the ordinary course of business;
(c) loans and advances, other than loans or advances extended in the ordinary
course of business by the Startup where the lending of money is substantial part
of its business;
(d) capital contribution made to any other entity;
(e) shares and securities;
(f) a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost
of which exceeds ten lakh rupees, other than that held by the Startup for the
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Final ca Direct tax
purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of

business;
(g) jewellary other than that held by the Startup as stock-in-trade in the ordinary
course of business;
(h) any other asset, whether in the nature of capital asset or otherwise, of the nature
specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of
sub-section (2) of section 56 of the Act.
Provided the Startup shall not invest in any of the assets specified in sub-clauses (a)
to (h) for the period of seven years from the end of the latest financial year in which
shares are issued at premium;
Explanation- For the purposes of this paragraph,-
(i) “specified company” means a company whose shares are frequently traded within the
meaning of Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 2011 and whose net worth on the last date of financial
year preceding the year in which shares are issued exceeds one hundred crore rupees
or turnover for the financial year preceding the year in which shares are issued exceeds
two hundred fifty crore rupees.
(ii) the expressions “venture capital company” and “venture capital fund” shall have the
same meanings as respectively assigned to them in the explanation to clause (viib) of
sub Section( 2) of Section 56 of the Act
Question 292
Discuss taxation of EMPLOYEE STOCK OPTIONS for employees of an eligible start-up?
Answer
Tax on ESOP received (i.e. Perquisite) by employees of eligible start-up deferred from year
of exercise of option to earliest of after expiry of 5 years or year of ceases to be an
employee or year of sale
 Applicable w.e.f 01-Apr-2020
 Since tax on perquisite is required to be paid at the time of exercise of option, which
may lead to cash flow problem for an employee as the ESOP benefit is in kind and not
in cash;
 In view of the above and to ease the burden of taxes on employees, tax on perquisite
deferred by amending provisions of section 17
 Below table summarizes tax implications before amendment vs post amendment;
493
Final ca Direct tax
Nature Year of
Year of taxation W.e.f.
of taxation
S. No Section 01-Apr2020
income Till FY
2019-20
1. Perquisite 17(2) r.w Rule Year of Within 14 days of earliest of;
3(8)(iii) New exercise
subsection(1C) of option • After expiry of 48 months
inserted u/s from the end of assessment
192 for defer- year relevant to previous
ment of year in which ESOP allotted
tax or
• Date of sale
or
• Date on which ceases to be
an employee
At rates applicable for the year in
which such shares are allotted or
transferred
2. Capital 45 Year of Year of sale (no change)
gain sale
494

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FINAL CA

The coaching is well-planned, systematic, time bound and totally

I wish you a very happy study time.

Prof. J.K. Shah.

Profits and Gains from Business or

Income from Other Sources 320-344

CLUBBING OF INCOME 345-361

ASSESSMENT OF FIRM 366-385

ASSESSMENT OF AOP 386-394

10 TAXATION OF BUSINESS TRUST 434-445

INCOME COMPUTATION AND DISCLOSURE 453-486

ASSESSMENT OF START-UPS 487-494

Central Board of Direct Taxes [Apex Body]

Total Income Tax rate

Total Income Tax rate

CBDT Circular No. 28 of 27.07.2016:

(B) New rates of taxes: [Section 115BAC]

Total Income Tax rate

Conditions for availing new scheme under section 115BAC:

Sr. No Section/ Deductions/Exemptions Head of income

9. 24(b) Interest on housing loan (Self occupied House Property

28. 80DDB Medical treatment of specified diseases

39. 80-IAC Eligible Start-up

4. However, exemptions in respect of following allowances notified under section

on account of absence from his normal place of duty

5. Income-tax Department has launched a mobile app to help assessees make an

Add: Surcharge @ 10% 2,03,250

Tax + Surcharge 2,62,500

The same is calculated as under:

Particulars [tax + surcharge on 50 lakhs] Rs.

Tax + Surcharge 13,12,500

Person Tax rate Surcharge Health &

Existing Scheme New Scheme

(B) Foreign Company:

Surcharge = 2% if total income exceeds INR 1 crore

3. Agricultural land in India, not being land situated —

(b) In any area within the distance, measured aerially—

more than 10,000 but not exceeding 1,00,000; or

Rural agricultural land (RAL)

Population of city / Distance of land from nearest municipality

Analysis of Amendment by Finance Act 2021:

2. There are 2 elements which are essential to constitute a transfer:

(a) Existence of 2 parties – Transferor and Transferee

3. Relinquishment v/s Extinguishment

5. Sec 53A of Transfer of Property Act

if possession of immovable property is given in part performance of contract, it is

Nature of asset STCA LTCA

2. Asset Threshold Period

3. Rama Rani Kalia (Allahabad high court)

Indexed Cost inflation index of the year in which

Indexed Cost inflation index of the year in which

2. The transferred capital asset is shares or debentures of Indian company

Computation of Capital gain U/R 115A:

Computation mechanism for capital gains under Rule 115A :

Particulars INR Working USD

Particulars INR Working USD

Long term capital gains

If Listed Shares If unlisted shares

Transfer Via Transfer not As per section 112(1)© (iii),

Particulars INR Working USD

(-) Cost of acquisition 4,00,000 4,00,000 ÷ 56 7,142=86

Short capital gains =

If listed shares and transferred via In any other case

The same is computed as under:

Restricted to CG _ (__)