1
At last, in 1886, a separate ‘Income Tax Act’
Chapter 1.
Introduction.
1. What is Direct Tax & Indirect Tax?
‘Income Tax’ is a Direct Tax law, as the
liability to pay tax and the actual payment of tax is on
the same person. Examples of Direct Taxes are
‘Income Tax’ and ‘Wealth Tax’.
In case of Indirect tax, the tax burden is on one
person, but it is actually suffered by other person. E.g.,
in the case of Excise duty, the manufacturer is liable to
pay the duty, but ultimately, it is included in the final
bill price of the consumer. Same is the case of Sales
Tax, Customs Duty etc.
2. What do you mean by ‘Income Tax’?
‘Income Tax’ is the tax or duty on income of a
person. ‘Income Tax’ is charged when a person’s
income exceeds the specified sum during the year. On
such income, tax is levied on at the specified rate as per
the Finance Act.
Webster defines ‘Income Tax’ as “a tax upon a
person’s income, especially on income over and above
a specified sum.”
Parliament is the only authority to enact law on
‘Income Tax’. ‘Income Tax Act’ was passed in
parliament in 1961 and it came in to force with effect
from 1st April 1962.
‘Income Tax’ is one of the major revenue of
the Central Government. It tends to collect tax on
income at the specified rates applicable to the previous
year as per the ‘Finance Act’.
‘Income Tax’ is levied and administered by the
Central Government and is collected by the officers
appointed by the Central Government and the State
governments on the basis of the recommendations of
the ‘Finance Commission’.
-
3. Explain Evolution of Income Tax law in India. Stathe
the year in which the present income tax act was
passed. (2020 B.com)
In India ‘Income Tax’ was introduced for the
1st time in 1860 by Sir James Wilson in order to meet
the losses sustained by the Government on account of
the ‘Military Mutiny of 1857’. Thereafter several
amendments were made in it from time to time.
was passed. This Act remained in force up to 1917,
with various amendments from time to time. In 1918, a
new ‘Income Tax Act’ was passed & again it was
replaced by another new Act, which was passed in
1922.
The ‘Income Tax Act’ of 1922 had become
very complicated on account of innumerable
amendments. The Government of India therefore
appointed the ‘Direct Taxes Administrative Enquiry
Committee’ to suggest measures to minimize
inconveniences to assess and to prevent ‘evasion of
tax.’ This committee submitted its report in 1959. In
consultation with the ministry of law finally the
‘Income Tax Act’ - 1961 was passed.
The ‘Income Tax Act’ - 1961 has been
brought in to force with effect from 1st April 1962. It
applies to the whole of India. This Act is administered
by the board set up by the Central Government namely
CBDT (Central Board Of Direct Taxes.)
The tax rate is not specifically mentioned in
the ‘Income Tax Act’, but it is determined for each
assessment year as per the rate specified in the Annual
‘Finance Act’. (Budget)
Further for the administration & procedure
for the ‘Income Tax Act’, there is ‘Income Tax rule
1962’, which has also amended till date as per the
Annual ‘Finance Act’. Further there are a number of
judicial guidelines for the proper administration of the
Act by various courts, in decided cases. Hence the
present ‘Income Tax Act’ is the ‘Income Tax Act- 1961
as amended up to date.
‘Income Tax’ is levied and administered by the
Central Government and is collected by the officers
appointed by the Central Government and the State
governments on the basis of the recommendations of
the ‘Finance commission’.
-
4. What are the Laws relating to Income Tax in India?
(2018 M.com)
The law of ‘Income Tax’ is contained in:
1. The ‘Income Tax Act’ 1961, as amended up to date.
2. The ‘Income Tax’ Rules 1962, as amended up to
date.
3. ‘Finance Act’ passed by the Parliament every year.
‘Income Tax Act’ of 1961 came in to force
with effect from 1-4-62 and extends to the whole of
India. It is the main enactment. It contains provisions
relating to computation of total income under different
heads, procedure of assessment, appeals, penalties,
prosecution, and rectification proceeds.

‘Income Tax - Rules 1962’ have been made to
carry out the purposes of I.T. Act. Rules are framed by
Central Board of Direct Taxes (C.B.D.T.), the top most
tax authority. Rules are equal to provisions of I.T. Act
and have full legislative backing.
‘Finance Act’ is passed by the parliament
every year. It fixes the rates of ‘Income Tax’ for a
current Assessment Year and rates for ‘Deduction of
Tax at Source’ (T.D.S.) as well as ‘Advance Payment
of Tax’ for the financial year.
5. What do you mean by Assessment?
Every person who is liable to pay ‘Income
Tax’ should file return of income on prescribed dates.
These returns are processed by the ‘Income Tax’
department Officers. This processing is called
‘Assessment’.
6. Define Assessee? (2016 B.com) (2020 M.com) (2019
B.com)
Assessee means a person who is liable to pay
tax or any other sum of money payable under the act.
‘Other sum of money’ includes fine, Interest, penalty
etc.
If the assessing officer takes any proceedings
against any person, he will also become an ‘Assessee.’
Some times a person may have to pay tax not
in respect of his income, but in respect of the income
of some other person. In such a case, he is known as
‘Deemed Assessee.’
A person is deemed to be an ‘Assessee In
Default’ if he does not comply with his statutory duties.
7. Who is a ‘Deemed Assessee’ or ‘Representative
assessee’? (2020 B.com) (2018 M.com) (2020 M.com) (2003
B.com)(2007 B.com)
Sometimes a person may have to pay tax not in
respect of his income but in respect of income of some
other person. In such a case he is known as ‘Deemed
Assessee’. E.g.,
1. Legal heirs will have to pay tax for income of a
deceased person.
2. A person representing minor is treated as an
Assessee for the Income of the minor.
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8. What do you mean by ‘Assessee in Default’? (M.com -
2018
A person will become Assessee in default if he
does not comply with his statutory duties.
E.g.,
1. The Assessee shall be considered to be an ‘Assessee
in default’ if he fails to pay tax within the time
allowed originally or extended & to the person &
place mentioned in the notice.
2. A person who disburses income is liable to deduct
tax there on at prescribed rate. But if he does not
deduct tax at source, he will become an ‘Assessee in
Default’.
9. What is Assessment Year? (2017 M.com)
Assessment year means the period of 12
months commencing on the first day of April every
year. In India, the Government maintains its accounts
for a period of 12 months.
i.e., 1st April to 31st March every year. It is also
known as Financial Year. The ‘Income Tax’
Department has also selected same year for its
assessment proceeds.
The Assessment year is the financial year of
the Government of India during which income of a
person relating to the relevant previous year is assessed
to tax.
Current A. Y. is 2022 -2023 (1-4-2022 to 31-3-2023)
10. What is Previous Year?
(2020 B.com) & (2021 B.com) (M.com - 2020) (2003
M.com)
Previous year is the Financial Year preceding
the A. year. E.g., for A. year 2017-2018, the previous
year is 2017 - 2018.
Current P. Y. is 2021 -2022 (1-4-2021 to 31-3-2022)
It is the income earned during the previous
year is taxed in the Assessment year.
Previous year in the case of newly set up business
(2018 M.com)
The P.Y. in the case of a newly started business
shall be the period between commencement of business
and 31st March of the following year.
E.g., in case of newly started business
commencing its operation on 1 - 8 - 2006, the previous
year is the period between 1 - 8 - 2006 to 31 - 3 - 2007.

11. What are the Situations where income earned during
a P.Y. are taxed in that year itself?
a) Income of a Non - Resident from shipping
business.
Income earned by a Non - Resident from a
shipping business at a port in India, will be taxed in the
year of earning itself.
b) Income of persons leaving India
An individual who is going to leave India in any
A.Y. with the intention of not returning to India in the
near future, the income of such individual will be
assessed in the same year itself.
c) Transfer of property to avoid tax.
If in the opinion of the Assessing officer, an
Assessee is likely to transfer his property to avoid tax,
the total income of such person will be taxed in the
current year it self
d) Discontinuance of a Business or Profession.
The income of discontinued business/
profession will be taxed in the year in which such
business or profession is discontinued.
12. Define ‘Person’. (Sec. 2 (31)? (2019 B.com) (M.com –
Dec 02, Dec 2020) (2005
B.com)
The tern ‘Person’ includes:
1) An individual
2) A HUF
3) A company
4) A firm
5) An Association of persons (A.O.P) or Body of
Individuals (B.O.I)
6) A Local authority. (Panchayath, Municipality, Port
trust etc)
7) Every Artificial Juridical Person (LIC, University
Etc.)
13. What do you mean by ‘Association of persons’ (AOP)
Co-operative societies, NAFED etc are
examples of association of persons. When persons
combine together to carry on a joint enterprise & they
do not constitute partnership under the ambit of law,
they are assessable as AOP.
Receiving income jointly is not the only
feature of an AOP. There must be common purpose &
common action to achieve the common purpose. i.e. to
earn income.
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14. What are the Differences between ‘AOP’ & ‘BOI’
An A.O.P can have Firms, Companies,
Associations and individuals as its members.
But a ‘Body of Individuals’ cannot have non-
individuals as its members. Only natural human beings
can be members of a Body of individuals.
(Whether a particular group is AOP or BOI is
a question of fact to be decided in each case separately.)
15. Define ‘Income’ (Sec.2 (24)?
It includes:
1. Profits & gains
2. Voluntary contribution received by a trust created
for charitable and religious purpose
3. Any special allowance for meeting expenses for
performance of duty
4. Allowances to the Assessee to meet the increased
cost of living
5. Dividend
6. The value of any perquisite or Profit in lieu of Salary
7. Capital gains
8. Casual income namely winnings from lotteries,
crossword puzzles, races including horse races, card
games.
9. Sum received by an employer as contribution to any
fund for the welfare of employees.
16. What is Tainted Income?
Tainted income means ‘Illegal Income’.
Income earned legally or illegally remains ‘income’ &
it will be taxed according to the provisions of the act.
In addition to being taxed, the Assessee may also be
prosecuted for the offence.
But normal Expenses incurred in earning an
illegal income are deducted in computing the taxable
illegal income.
17. What is ‘Income Deemed to be received’ or what is
deemed income? (2019 M.com) (2017 M.com)
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It means that, although the income is not tax rate. E.g, Rs. 7, 80,514.99 would become Rs.
already actually received by the Assessee, it is 780,510 & Rs. 7, 80,515 becomes Rs. 780,520.
considered to have been received by him under this
Act.
21. What do you mean by rounding-off of tax?
Such incomes are:
The tax payable shall be rounded off to the
1. Income of other persons which are included in the
nearest rupee. E.g, Rs. 1,516.49 become Rs. 1,516 &
income of the Assessee
Rs. 1,516.50 become Rs. 1517.
2. Tax deducted at source
3. Annual Accretion
22. What is the Tax Rate for the A.Y.2007-08?
4. Transferred balance of any unrecognized provident
fund to a recognized provident fund
5. Transfer of income without transfer of assets will Women Senior Others Rate
be treated as the income of the transferor citizen
1. First Rs. 1, 35,000 of
1,85,000 1,00,000 -
18. What is Casual Income? (2014 B.com) (M.com - 2015) total income
(2018 B.com) (2020 M.com)
2. Next 15, 000 - 50,000 10%
Certain incomes are of casual nature. It arises
without any stipulation or contract & cannot be
calculated in advance. But they are taxable under the 3. Next 1,00,000 65,000 1,00,000 20%
head ‘income from other sources’. E.g.,
4. Balance total income Balance Balance 30%
1. Winnings from crossword puzzles
2. Races including horse races
3. Card games and other games of any sort or 23. What is Maximum Marginal Rate?
4. Betting of any nature.
It means the rate of Income tax (including
Tax @ 30.6 % (including surcharge) is surcharge on Income Tax, if any) applicable in relation
deducted at source from casual incomes. to the highest slab of income in the case of an
individual, association of persons or body of
individuals as specified in the Finance Act of the
19. What is Total Income (Sec. 2 (45)? (2018 B.com), relevant year.
(M.com - 19, (2003)
(The rate of income tax for the highest slab of
Income of a person is computed in five parts income for the assessment year 2007 – 07 is 30%. If
and each part is known as ‘head of income’. These total income exceeds Rs50,00,000 surcharge is leviable
heads are: @ 10% of tax payable.)
1. Salaries
24. What is Average Rate of Tax? (M.com - 02)(2003.
2. Income From House Property M.com) (2007 B.com)
3. Profits & Gains Of Business Or Profession Average rate of tax is defined u/s. 2 (10) to
4. Capital Gains mean the rate arrived at by dividing the amount of tax
calculated on the total income, by such Total Income.
5. Income From Other Sources
Total of incomes computed under these heads Average rate of tax = Tax payable
Total income
is called ‘GROSS TOTAL INCOME’ (G.T.I.) and
E.g. If in the case of individual, the Total
Out of this, deductions u/s 80 are allowed. The resultant
Income is Rs. 1,50,000 & the tax payable on Rs.
figure is called ‘TOTAL INCOME’ on which tax
1,50,000 is Rs. 5,000 the average rate of tax is .033 %.
rates are applied.

20. What do you mean by rounding-off of total income? 25. What is Agricultural Income? (2003, 2005. M.com)

The taxable income computed shall be rounded U/s 2(1) Agricultural income includes:
off to the nearest multiple of 10 rupees before applying Any rent or revenue derived from land, which is situated
in India and is used for Agri. Purposes.
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Any income derived from land by agriculture. 6. Add surcharge @ 10 % of tax, if total income (NAI)
exceeds Rs.10, 00,000
Income derived from the performance of a process
ordinarily employed by a cultivator or receiver of 7. Add education cess @ 2% on total of tax payable
rent-in-kind to make such produce or rent-in-kind including surcharge.
marketable 8. The total is tax payable.
Any income from sale of produces or rent in kind.
Any income from agricultural house property which is
situated on or in the vicinity of agricultural land and Chapter 2.
is used as own residence, tenant’s residence, go
down or shed for implements. (House property must Residential Status.
not be situated in city limits.)
28. How do you determine Residential Status of an
individual? (2002 B.com), (2001 B.com), (M.com - 02),
26. What is Partly Agricultural Income? (2003 B.com), (2004 B.com), (2004 M.com) (2003 M.com),
When an Assessee performs agricultural (2005 B.com)
operations & manufacturing process simultaneously, The scope of total income is determined by the
his total income would consist of agricultural income Residential Status of the Assessee. To determine
& Non-agricultural income. Agricultural income is whether an Assessee is liable to pay tax on income
exempt & non-agricultural income is taxable. earned in India, outside India or on both, we have to
E.g., 60% of the income derived from the sale determine his Residential Status.
of coffee grown & manufactured by the seller in India There can be 3 Residential Status. Viz,
is deemed to be an agricultural income & the remaining
40% is taken as business income. 1. Resident & Ordinarily Resident in India
2. Resident but not Ordinarily Resident in India.
27. How do you Integrate Agricultural Income With 3. Non- Resident in India.
Non-Agricultural Income?
Agri. Income is fully exempted from tax u/s
10(1) of the ‘income Tax Act’; but from A. Y. 1974-75 Basic conditions Additional conditions
it is integrated with ‘Non-Agricultural Income’ in
certain cases only. 1) He is in India in the P.Y. 1) He has been
1. Integration is done only in the case of: for a period or periods Resident in India in
a) Individuals amounting in all to 182 at least 2 out of 10
days or more; P.Years preceding
b) HUF
the P.Y.
c) Association of persons
d) Body of individuals 2) He has been in India for a 2) He has been in India
e) Artificial juridical persons period or periods for a period or
2. Integration is done only if non-Agricultural income amounting in all to 365 periods amounting in
of above mentioned persons exceed Rs.50, 000 in days or more during the 4 all to 730 days or
that previous year. years preceding the P.Y. more during the 7
3. Integration is done only if Agricultural income and has been in India for P.Years preceding
exceeds Rs.5, 000 in such previous year. 60 days or more in the the P.Y.
P.Y.

How To Integrate? Note: To be a ‘Resident’ in 2/10 years, an individual

1. Add Agricultural income with non-Agri. Income should have fulfilled at least one of the basic conditions in
each of those 2 years.
2. Compute tax on this total at current rates.
3. Add agricultural income with exempted limits i.e.,
Rs.2,50,000
a. Resident & Ordinarily Resident in India
4. Calculate tax on this total at current rates.
5. Deduct tax at (4) out of tax at (2) above An individual is said to be Resident &
Ordinarily Resident in India in any P.Y, if he
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satisfies any one basic condition and both the 1) The control & 1) The Kartha should be a
additional conditions. management of its Resident in India in at
affairs is situated at least 2 out of 10 P.Y
least partly in India. preceding the P.Y.
2) The Kartha should be in
India for a period or
periods amounting in all
b. Resident but Not ordinarily resident in India to 730 days or more
during the 7 P.Y
(2005 B.com)
preceding the P.Y.
An individual is said to be N.O.R. when he
a) Resident & Ordinarily Resident in India
satisfies any one of the basic conditions or one of the
basic conditions plus one additional condition. An H.U.F is said to be Resident &
Ordinarily Resident in India in any P.Y, if it
c. Non- Resident. (2006 B.com)
satisfies the basic condition and both the
If an individual does not satisfy any of the additional conditions.
basic conditions, he is said to be a Non - Resident.
b) Resident but Not ordinarily resident in India
An H.U.F is said to be N.O.R. when it
satisfies the basic condition, but does not satisfy
Summary
both the additional conditions
a) 1 basic + 2 - Resident & Ordinarily c) Non- Resident.
additional Resident in India
If the HUF does not satisfy the basic
b) 1 basic only or -
Resident but not ordinarily condition, it is said to be a Non - Resident.
1 basic + 1 resident
additional
- Non- Resident 31. How do you determine the Residential Status of
c) No basic Firm, Association of Person, & Body of Individuals?
(2003 B.com)
Firms, AOP, BOI may be either Resident Or Non -
29. To whom 2nd Basic Condition for determining Resident.
Residential status is not applicable?
1. They are resident in India, if control and
1. An Indian citizen who leaves India during the management of their affairs are situated wholly or
Previous year as a member of the crew of an Indian partly in India.
ship
2. They are Non - Resident in India, if control and
2. An Indian citizen who leaves India during the management of their affairs is situated wholly
previous year for the purpose of employment outside India.
outside India.
3. An Individual, Who is citizen of India or a ‘person
of Indian origin’, who being outside India, comes on
a visit to India during the Previous year.

32. How do you determine the Residence of a Company

30. How do you determine the Residential Status of H.
U. F. U/s. Sec. 6 (2)? (M.com –02)(2007 B.com)
Basic condition Additional conditions
Sec. 6(3)? (2001 B.com) (M.com 2005)
A Company can be either Resident or Non -
Resident.
1) A company is said to be Resident in any P.Y., if:
It is an Indian company or during that year the
control and management of its affairs is situated
wholly in India.
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2) If a company is neither an Indian company nor, the c) Income from a business, which is controlled from a
control and management of its affairs is situated place within India, or income is from a profession,
wholly in India, it is said to be a Non- Resident which is set up in India.
company.
(Thus it is clear that in the case of a resident & not
(Control and management of affairs are situated at ordinarily resident assessee, income is not chargeable
the place where Director’s meetings are held) to tax if it satisfies all the following conditions:
a) Income is neither received or deemed to be received
in India
b) Income is neither accrued or deemed to accrued in
India
c) Income is received from a business controlled or
33. How do you determine the Residence of Every other profession set up out side India.)
person? Sec. 6(4)?
Every other person is ‘Resident’ in India if control
3) Incidence of tax in the case of a Non-Resident:
& management of his affairs is, wholly or partly,
situated within India during the relevant Previous year. A non -resident is assessable to tax in respect of:
On the other hand every other person is ‘Non- a) Income received or deemed to be received in India
Resident’ in India if control & management of its affairs
b) Income accrued or deemed to be accrued in India
is wholly situated outside India.
The Residential Status of an assessee
determines the ‘Scope of his total income’. The
34. What is the relation ship between Residential status incidence of tax is highest on Resident and Ordinarily
& Incidence of tax? (2003 B.com) (2003 B.com) (2004 Resident, a little lower on Resident but Not Ordinarily
B.com) (M.com 2005) Resident and lowest on Non - Resident assessee.
Or
‘The incidence of income tax depends upon the
residential status of the Assessee. ’ Discuss fully. Tax Incidence in brief.
(2003 M.com)
Or Whether tax
Explain the relationship between residential status Income incidence
and tax liability. arises?
R R NR
& but
1) Incidence of tax in the case of a resident & OR not
ordinarily resident: OR
A resident & ordinarily resident is assessable 1. Income received in India Yes Yes Yes
to tax in respect of:
a) Income received or deemed to be received in India 2. Income accrued in India Yes Yes Yes

b) Income accrued or deemed to be accrued in India 3. Foreign income:

c) Income, which accrues or arises to him outside A. From an Indian
India. controlled Yes Yes No
business.

2) Incidence of tax in the case of a resident but not B. From any other Yes No No
ordinarily resident: source
A resident but not ordinarily resident is 4. Untaxed foreign Income
assessable to tax in respect of: received or accrued
outside India In earlier
a) Income received or deemed to be received in India No No No
years, but later on
b) Income accrued or deemed to be accrued in India remitted to India during
the P.Y 21-- 22
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Computation of income for an Assessment Year.

1. Income from salary

Basic x
Allowances x
Perquisites x
Gross Salary x
(-) Deduction u/s. 16:
16 (ii) Entertainment Allowance x
16 (iii) Professional Tax x x
Income from Salary x

2. Income from house property

Gross annual value x
(-) Municipal Taxes x
Net annual value x
(-) Deduction u/s. 24: x
1. Standard deduction - 30% of net annual value. x
2. Interest on borrowed Capital x x
Income / Loss from house property x

3. Profits & gains of business

Net profit as per profit & loss a/c x
(+) Expenses debited to profit & loss a/c ; but not allowed as per income tax x
(+) Incomes which are not credited to profit & loss a/c ; but to be credited in the profit x
& loss a/c
(-) Incomes credited to profit & loss a/c ; but to be shown under other heads x
(-) Incomes credited to profit & loss a/c ; but which are exempt from tax x
(-) Expenses not debited to profit & loss a/c; but are allowable as deduction under the x
act
Profits & gains of business x

4. Capital gain
Full value of consideration x
(-) Expenses for sale x
Net consideration x
(-) Indexed cost of acquisition x
(-) Indexed cost of improvement x x
Capital gain/ loss x
(-) Exemption for long term capital gain u/s. 54 x
Taxable capital gain x

5. Income from other sources x

Gross total income x

(-) Deduction u/s. 80 C to 80 U x
Total income/ net income (rounded off in multiples of Rs. 10) x

Computation tax liability

Tax on total income x
(+) Surcharge x
(+) Education cess
(-) Relief u/s. 86, 89, & 91 x x
Tax payable x
(-) Prepaid taxes x
(-) Tax paid on self assessment x
 9
(-) Tax deducted at source x
(-) Tax paid in advance x x
Tax liability (rounded off in multiples of Rs. 1) x

15. Profits of newly - All assessees

established 100% export
oriented undertakings.
16. Dividend from Indian - All assessees
Company

Chapter 3.
Incomes, which are exempt
from Tax
Chapter 4.
35. List any 15 incomes, which are exempt from tax?
Income from Salary.
(2001 B.com, 2003 B.com) (2003 B.com) (2007 B.com) (2006
B.com) (2004 B.com) (2005 B.com) (M.com 2005)f

Who is entitled to
Incomes
exemption 36. Define ‘Salary’
1. Agricultural income - All assessees ‘Salary’ is the first head of income while
2. Share of income from - Member of H.U.F computing the taxable income of an individual .Any
H.U.F remuneration paid by an employer to his employee in
3. Share of income of a - Partners consideration of his services.
partner from his firm U/s. 17(1) Salary includes:
4. Payment under Bhopal - Individual Wages, Annuity, Pension, Gratuity,
Gas leak Disaster act commission, fee paid to employee, Profit in lieu of
5. Life insurance policy - All assessees Salary; leave Salary, Advance Salary and also amount
money transferred to Recognized Provident Fund.
6. Educational scholar ship - Individual
37. What are the essential requirements to treat an
7. Daily allowances - Member of income under the head ‘Salary’?
parliament or
legislature 1. There must be an employer-employee relation. The
8. Awards made by the - All assessees employee has to provide personal services to the
Govt. in public interest employer.
9. Annual value of 1 palace - Individual 2. There may be more than one employer from whom
of rulers of Indian states the Salary may be due or received. All such amount
is to be considered under this head.
10. Income of housing - Housing authority 3. Salary from former, present or prospective
authority e.g. State Housing employers is taxable.
Board
4. ‘Gross Salary’ is taxable. I.e., tax free Salary
11. Income of Scientific - Scientific research
received + the tax paid & amount deducted by the
research association association
employer is the Gross Salary which is taxable.
12. Income of news agency - News agency

13. Income of scheduled - Individual 38. How do you Compute Salary income?
tribes 1. Basic Salary x
14. Income of newly - All assessees
established industries in 2. Allowances x
free trade zone
3. Perquisites x

4. Profit in lieu of Salary x Gross Salary, and then deduction is allowed under this
Gross Salary x
Deduction u/s 16: 16 1. std deduction rs. 50000
16 (ii) Entertainment Allowance X b) 1/5th of (Basic) Salary
16 (iii) Profession tax X x
Taxable Salary
x
43. State any 12 Allowances & explain its treatment
39. What is Profit in lieu of Salary Sec.17 (3)? (2001
B.com) (2004 B.com) (2005 B.com)
‘Salary’ includes Profits in lieu of Salary. It includes the
following
: In big cities, the cost of living will be high. To
1. Amount of compensation received by an Assessee
from his employer or former employer in connection
with -
a) The termination of his employment; or
b) Modification of terms and conditions.
2. Any payment due to or received bay an Assessee
from an employer or former employer or from
provident fund or any other fund or any sum
received under ‘keyman insurance policy’
3. Any amount due to or received by an Assessee from
any person before joining any employment with that
person or after cessation of his employment with
that person.
40. What are the Deductions u/s. 16 From Gross Salary?
(2005 B.com)
There are 2 deductions from gross salary.
16 (ii) Entertainment Allowance
16 (iii) Employment Tax.
41. How will you treat Employment Tax paid by an
employee? 16 (iii)
Employment tax levied under any law and paid
by any employee during the P.Y. will be allowed as
deduction from gross salary.
42. Explain deduction for Entertainment Allowance.16
(ii)
This deduction is allowed only to central &
state government employees. E.A. is first included in
10
section to the following extent:
Least is allowed as deduction:
a) Actual E.A. Received
c) Rs.5000
under the income tax act?
1) Dearness Allowance (D.A)
This allowance is given by an employer to
employee to meet the high cost of living on account of
inflation. This is included in Salary income and always
taxable.
2) City Compensatory Allowance. (C.C.A)
compensate this employer allows this allowance. This is
fully taxable.
3) Helper Allowance.
Is exempted up to actual amount spent on
engaging a helper required to perform the official duties
4) Uniform Allowance.
It is also exempted up to actual expenditure
incurred on acquiring or maintaining of the official
uniform. Excess, if any, will be taxable
5) Academic Research Allowance
It is exempted up to actual expenditure incurred
for research. Excess if any, is taxable
6) Conveyance Allowance
It is exempted up to actual expenditure incurred
in performance of official duties. In case amount
received is more than actual expenditure, excess, if any,
will be taxable
7) Traveling allowance
It is also exempted up to actual expenditure
incurred for the purposes of employment. Excess if any,
will be taxable
Any allowance (by whatever name it may be
called) granted to meet the cost of travel on tour or on
transfer shall be exempted
 11
Any allowance granted to employee (while on children in India, it shall be exempted up to a maximum
tour or for the period of journey in connection with of Rs. 100 p.m. per child for 2 children only.
transfer) to meet the ordinary daily charges incurred by
such employee on account of absence from his normal
place of employment shall also be exempted (such 11) Hostel expenditure allowance.
allowance shall include any sum paid in connection Any allowance granted by employer to meet the
with transfer, packing & transportation of personal hostel expenditure of employee’s children, it shall be
effects on such transfer.) exempted up to a maximum of Rs. 300 p.m. per child for
2 children only
8) Transport allowance
Any allowance given under the name of 12) Foreign Allowance.
Transport allowance to any employee whether Govt or If given by Govt to it’s employees posted
private shall be exempted up to Rs. 800 p.m. excess if abroad, under whatsoever name, it is fully exempted
any, shall be taxable (But in the case of handicapped
with disability of lower extremities or a blind employee
it shall be exempted up to Rs 1,600 p.m.)
9) House Rent Allowance. (H.R.A)
Employee will have to incur expenses relating 44. What is Annual Accretion?
to housing accommodation. In big cities rents are
generally high. To compensate this, employer allows Annual Accretion is taxable under the head ‘salary’
HRA to employees. HRA is exempt u/s.10 (13 A) to Annual Accretion will consist of:
some extent: 1. Employer’s contribution to R.P.F in excess of 12%
1. Employees living in Least is of the 3 is of employee’s ‘Salary’
rented house: exempt: (Salary = Basic + D.A (if enters in to pay)
1. Actual H.R.A +commission on turnover basis)
Received 2. Interest credited to RPF in excess of 9.5 % of the
2. Rent paid by the balance standing to the credit of employee.
employee – 10% of
‘salary’
45. What is Transferred Balance? (2003 M.com)
3. 40% of ‘salary’
An organization maintains unrecognized
(50% of ‘salary’ in the provident fund. The organization has obtained
case of Delhi, Chennai, recognition to its P.F. with existing balances during the
Mumbai & Kolkata.) previous year. The amount transferred from U.R.P.F to
2. Employees living in their H.R.A received is fully R.P.F is ‘Transferred Balance’.
own houses or in a house taxable How much of the Transferred balance is taxable?
for which they are not
paying any rent. It will be assumed that U.R.P.F was R.P.F
since the time it was created. If the employer’s
3. H.R.A received by judges Fully exempted contribution towards PF was in excess of 12% of
of High Court and salary & or interest credited was in excess of 9.5% p.a,
Supreme Court.
for all those years, then the excess amount shall be
taxable in the year in which U.R.P.F is accorded
recognition. Out of the ‘Transferred Balance’, the
1. Basic
aforesaid amount is taxable.
2. D.A (which enters in to pay for
Definition of
= service or retirement benefits)
‘Salary’
3. Commission as fixed % on
turnover.

10) Children Education Allowances.

If any amount is given by employer to employee
as education allowance for the education of own
 12
46. Explain tax treatment of Gratuity. Sec 10 (10)?
It is the lump sum amount paid by the employer to the employee for the service rendered by the latter. It is paid at the
time of retirement or death of the employee whichever is earlier.
Gratuity is exempt u/s. 10(10) to the extent of the following:

For Govt., Semi. Govt. For employees covered under payment For other employees
Employees or employees of of Gratuity Act-1972
local authority
Least of the following 3 is exempt. Least of the following 3 is exempt.

Amount of gratuity received is 1. Actual gratuity received 1. Actual gratuity received.

exempt. 2. Rs.3, 50,000 2. Rs. 3,50,000
3. 15/26 x ‘salary’ x years of service 3. ½ x ‘Average Salary’ x completed
year of service (months to be
ignored)

‘Salary’ means last drawn salary

‘Salary’ includes basic, D.A & a) ‘Salary’ includes basic, D.A &
Commission on turnover basis Commission on turnover basis
• If he had worked for more than 6 b) ‘Average Salary’ means 10 month’s
months, it should be taken as 1 year. average Salary preceeding the month
of retirement.
• 15 days will be substituted by 7 days in
the case of employees working in
seasonal factories

47. Explain treatment of leave encashment 10 (10 AA)

Govt Private sector employee
employee

1. If received during service - Full taxable Full taxable

2. If received at the time of - Fully Least of the following 4 is exempt.

retirement exempted
Actual amount received
Rs. 3,00,000
10 months x Average salary
(1 month’s leave for every 1 years of service - leave already availed
of) x Average salary
Note:
a) ‘Average Salary’ means last 10 month’s average Salary
(including the month of retirement)
b) ‘Salary’ includes:
Basic.
D.A. (if it enters)
Commission on turnover basis
 13
48. How do you treat Pension received by an employee Sec. 10 (10 A)?
Pension is the monthly payment made by the employer after retirement. It is taxable under the head Salary.
1. Un commuted pension (monthly pension) received per month is fully taxable in the hands of both govt. and non-govt.
employees
2. Sometimes, the employee may commute whole or part of his periodical pension and receive a lump sum amount. It is
called ‘commuted pension’.
Commuted pension is exempt as per Sec. 10(10 A).
Exemption of commuted pension u/s. 10 (10 A)
a) Government employees, employees of local authorities & b) Other employees:
employees of statutory corporations:
1) Who receives gratuity:
1/3 of the commuted value of pension, which he is
‘normally entitled to receive’ is exempt
Commuted pension received is fully exempted.

2) Who does not receive gratuity:

1/2 of the commuted value of pension, which he is
‘normally entitled to receive’ is exempt

49. Who is a Specified Employee? (M.com - 02) (M.com 2005)

The employees who fulfill any of the following 3 conditions are called ‘Specified Employee.’
1. An employee, who is also a director in the employer Company.
2. Employee having ‘Substantial Interest’ in the employer Company. (M.com - 02)
(An employee is said to have ‘substantial interest’ in the employer Company if he is the owner of Equity shares
carrying not less than 20% of voting power.)
3. Any other employee whose income under the head “salary” exceeds Rs. 50,000 p.a.
• ‘Salary’ for this purpose, shall include all taxable monetary payments like Basic Salary, D.A., Bonus,
Commission, Taxable Allowances etc.)
• For determining the limit of Rs. 50,000 p.a., the deductions which are allowable u/s. 16 will be deducted and
the balance only will be considered.

50. Define Perquisites? (M.com – 02)

Perquisite means monetary benefits, facilities or other advantages provided by the employer to the employee in
addition to the Salary.
It may be a casual emolument, fee or profit attached to a position or employment. It is something, which goes in
to employee’s own pocket.
Perquisites may be provided either in cash or in kind. Examples are free accommodation, free education of
children, free car for personal use etc.
 14
51. How do you find out the perquisite value of Rent Free Accommodation (M.com 2005) (2007 B.com)
Or
Accommodation provided at concessional rate.

Unfurnished accommodation Valuation

Accommodation provided by The ‘ Annual License Fees’ determined as per Govt rules as reduced by the rent
the Govt actually paid by the employee

Accommodation provided by 1. If the accommodation is owned by the employer:

any other employer
1. if the population in the city exceeds 25,00,000 – 15 % of ‘salary’
2. ‘’ is between 10,00,000 & 25,00,000 – 10% of ‘salary’
3. ‘’ is below 10,00,000 – 7.5 % of salary

2. If the accommodation is taken on rent by the employer:

Furnished accommodation
Hotel accommodation
Actual amount of rent paid by the employer or 15 % of salary, whichever is
less.
If employer deducts an amount from employee’s salary, perquisite value should
be reduced by that amount & balance is called ‘accommodation provided at
concessional rate.’
Determine the value as if the accommodation is unfurnished accommodation. Such
value shall be increased by 10% of the cost of the Furniture.
If the furniture is hired from a 3rd party, the hire charges shall be added. The value
shall be reduced by any charges paid for the furnishing by the employee.
(‘Furniture’ includes TV, radio, refrigerator, air conditioner & other household
appliances)
Least is perquisite:
1. 24% of salary or
2. Actual bill paid to that hotel
(If the following 2 conditions are satisfied, hotel accommodation is not chargeable
to tax:
a) If it is provided for a period not exceeding 15 days in aggregate &
b) Such accommodation is provided in connection with transfer of employee from
one place to another place.)

‘Salary’ includes: ‘Salary’ does not include:

 15
a. Basic salary a. D.A., if not taken in to A/c while calculating retirement benefits,
like provident fund, gratuity etc or terms of employment so provide
b. D.A., if terms of employment so provide
b. Employer’s contribution to P.F. A/c of the employee
c. Bonus
c. All allowances which are exempt from tax
d. Commission
d. Value of perquisites.
e. Fees
e. Arrears of salary
f. All other taxable allowances (excluding
amount not taxable) f. Advance salary received
g. Any monetary payment which is
chargeable to tax (by whatever name
called)

52. What are the different Types of Provident Funds?

1. Statutory P.F. (2003 B.com) (2004 M.com) (2006 B.com)
It is that P.F. to which the Indian P.F. Act – 1925 applies. Generally, this P.F. is maintained by Govt or Semi-
Govt offices, like local authorities, universities & other recognized educational institutions

2. Recognized P.F.
It is that P.F. which is recognized by the chief commissioner of income tax. He recognizes this fund
only if he is satisfied that this fund fulfills the conditions set out in Para 4 of part A of Schedule iv of the
income tax act – 1961.
It includes that P.F. also which is established under a scheme framed under the Employee’s P.F. act
– 1952. Generally, scheduled banks, factories & several business houses maintain this fund.
3. Un - recognized P.F.
It is that P.F. which is neither statutory nor recognized. Any institution or organization can maintain this fund.

4. Public P.F.
This is a scheme, which is covered under P.P.F act 1968. Any member of the public, whether in employment
or not, may contribute to this fund. In other words, it is a scheme where there is assessee's own contribution only.
The employee can deposit money under PPF A/c in addition to his contribution to other P.F schemes. The
contributions made to the scheme along with interest are repayable after 15 years, unless extended.

53. Explain the tax treatment of different Types of Provident Funds.

Name of Employee’s Employer’s Interest What qualifies Tax liability of the accumulated
fund contribution contribution credited to the for rebate under balance payable to the Assessee
fund section 88
1. S.P.F. Included in Not included in the Not included Own Not included in the salary
the salary salary income in the salary contribution income
income income

2. R.P.F. Included in Only excess over Only excess Own Not included in the salary
the salary 12% of the salary 9.5 % of the contribution provided the employee was in
income included in the rate included continuous service with the
salary income in the salary employer for 5 years
income
 16
3. U.R.P.F Included in Not included in the Not included Own Only employer’s contribution
the salary salary income year in the salary contribution is interest there on is included in
income to year income year to taxable nothing the salary income but interest on
year qualifies for employee’s contribution is
rebate taxable under the head ‘income
from other sources’
4. P.P.F Included in Question does not Not included Own Not included in the total income
the total arise in the total contribution
income income

54. List any 10 allowances, which are fully taxable.

55. List any 10 allowances, which are partially taxable.

1. Fully exempted allowances:

1. Allowance to government employees outside India
2. Foreign allowance given by govt to it’s employees posted abroad
3. HRA given to judges of high court and supreme court
4. Sumptuary allowance given to judges of high court and Supreme Court.

2. Fully taxable allowances: (M.com 2005) (2004 B.com)

1. Dearness allowance
2. City compensatory allowance
3. Medical allowance
4. Lunch/Tiffin allowance
5. Overtime allowance
6. Servant allowance
7. Wardenship allowance
8. Non – practicing allowance
9. Family allowance
10. High cost of living allowance.
11. marriage allowance
12. deputation allowance
13. project allowance
14. water and electricity allowance
15. entertainment allowance (if non - govt employees)

3. partially taxable allowances:

1. HRA
2. Entertainment allowance (if govt employees)
 17
4. Specific or special allowances – Section 10 (14)

1. When exemptions depends upon actual expenditure by the employee:

1. Traveling allowance- to meet cost of travel on tour
2. Transfer allowance – to meet cost of travel on transfer
3. Daily allowance – to meet expenditure on tour
4. Conveyance allowance – to meet expenditure on conveyance in performance of duties of an office.
5. Helper allowance
6. Academic allowance
7. Uniform allowance
8. Research allowance

2. When exemptions does not depends upon actual expenditure by the employee:
1. Children education allowance - 100 p.m. per child up to a maximum of 2 children
2. Hostel expenditure allowance - 300 p.m. per child up to a maximum of 2 children.
3. Tribal area allowance - 200 p.m.
4. Composite hill compensatory allowance or high altitude allowance etc - Exemption varies from Rs. 300 to Rs. 7,000 p.m.
5. Border area, remote area, disturbed area allowance - Exemption varies from Rs. 200 to Rs. 1,300 p.m
6. Transport allowance - If for the purpose of commuting between the place of his residence & the place of his duty, exempt up
to Rs. 800 p.m. (If the employee is blind or orthopaedically handicapped with disability of lower extremities, is exempted up
to Rs. 1,600)
7. Underground allowance - 800 p.m.
8. Allowance allowed to employees working in any transport system -70% of such allowance or Rs. 6,000 p.m. whichever is less

56. List any 10 tax-free perquisites. (2001 B.com), (2002 B.com),( 2003 B.com)
1. Free refreshments
2. Free recreational facilities
3. Cost of refresher course attended by employee met by employer
4. Provision of free subsidized food if given to all employees
5. Payment of telephone bills by the employer for telephone installed at the residence of the employees
6. Free use of lap top/ computer
7. Free ration received by members of armed forces
8. Perquisites allowed by govt to its employees posted abroad
9. Free conveyance provided by employer to employees for going to or coming from place of employment
10. Conveyance facilities to judges of Supreme Court and high court
11. Scholarship paid by employer to the children of employees
12. Employer’s contribution to staff group insurance scheme or pension scheme
13. Shares or debentures issued under ‘stock option plan’

57. List perquisites, which are taxable for all employees. (2007 B.com)
1. Rent free accommodation provided by employer to employees
2. Residential accommodation provided by employer to employee at concessional rate.
3. Any obligation of the employee met by employer e.g. employee’s club bill paid by employer
 18
4. Any life insurance premium on the life of the employee or any member of his family paid by employer.

58. List any 10 perquisites, which are taxable for specified employees only. (2003 M.com)
1. Domestic servants (watchman, gardener, sweeper, personal assistant)
2. Supply of gas, electricity or water for household consumption
3. Education facility
4. Transport facility allowed by transport undertakings (other than railway employees)
5. Medical facility
6. Any other perquisites If bills are not issued in the name of employee, and paid by employer

9) Income from property used for assessee’s own

Chapter 5. business or profession
Income from House 10) Income from self-occupied house

Property. 11) Income from house property of a mutual

concern (club)

61. How do you treat property occupied by the owner

59. What are the important points to be remembered
before including an income under the head ‘income
from house property’?
1. The property should consist of any building or land
appurtenant there to.
2. The Assessee should be the owner of the property.
3. For the tax incidence actual receipt of the income
by the Assessee is not required.
4. If the House Property is used by the owner for the
purpose of his business or profession, it is not
taxable under this head.
60. When income from house property is not taxable?
1. Income from agricultural building
for his own business or profession?
Annual value of property, occupied by the owner
for the purpose of his own business or profession, is
not assessable under the head income from house
property, if profit of such business or profession is
chargeable to tax. This rule is applicable even if in a
particular year, income from business or profession is
nil or there is loss.
62. How do you treat income from a house property in
a foreign country?
A resident & ordinarily resident Assessee is
taxable under the head income from house property in
respect of annual value of a property situated in a
foreign country.

2. Annual Value of 1 palace of the Ex- Indian Ruler
3. Income from house property owned by:
1) Local authority
2) Development authority
3) Scientific research association
4) Games or sports association
5) Register Trade union
6) Trust wholly for Charitable & religious
purpose
7) Political party
8) Income of a statutory authority set up for
marketing of commodities, from letting of
godowns or ware houses for storage etc of the
commodities meant for sale.
A resident but not ordinarily resident or a non-
resident is however, chargeable to tax under this head
in respect of income of a house property situated
abroad, provided income is received in India during
the Previous year.
63. How do you treat ‘income from subletting’?
Income from subletting is not taxable as income
from house property. For instance, X owns a house
property. He lets it out to Y (rent being Rs. 10,000
p.m.). Y sublets it to Z on monthly rent of Rs. 40,000.
Rental income of X is taxable under the head ‘income
from house property.’
Since Y is not the owner of the house, his rental
income from Z is not taxable under the head ‘income
from house property,’ but is taxable as business
income u/s. 28 or as income from other sources u/s.
56.
 19
64. Define Annual Value? (2003 B.com) (2003 B.com) (2004 higher
B.com) (2004 M.com)
(-) loss due to vacancy
The subject matter of computing income
under this head is the ‘Annual Value’ of the property. = GAV
The expression ‘Annual Value’ has been defined in
Section 23 (1) of the Income tax as:
The sum for which property might
reasonably be expected to let from year to year, or
Where the property or any part of property is
let & the actual rent received or receivable by the 66. How do you compute income from house property?
owner is in excess of the reasonable rent, the amount What is the standard deduction allowed for a let out
of rent received or receivable; or house. (2006 B.com)
Where the property or any part of the Gross annual value (GAV) xx
property is let & was vacant during the whole or any
(-
part of the P.Y. & Owing to such vacancy the actual Municipal tax paid xx
)
rent received or receivable by the owner in respect
there of is less than the sum referred in (a), the amount Net Annual Value xx
as received or receivable
(-
Deductions u/s. 24:
)
65. How do you compute Gross Annual Value? 1. 30% of the Net Annual Value(std
xx
While computing the Annual Value of a house deduction)
property, the following 4 factors are to be considered. 2. Interest on loan xx xx
1. Rent received or Receivable Income from house property xx
2. Municipal valuation of the house property.
3. Fair rental value (i.e., Rent received or 67. What is unrealized rent? How is it treated for
receivable for similar property in the same or income tax act purpose ? (2007 B.com) (M.com
similar locality.) 2005.)
4. Standard rent (i.e., Rent fixed according to rent The amount of rent which the owner cannot
control act.) realise from the tenant is called unrealized rent. It is
deducted from rent receivable for determining gross
Abbreviation:
annual value.
1. M.R.V = Municipal Rental
Value Where the assessee cannot realise rent from a
property let to a tenant and subsequently the assessee
2. F.R.V = Fair Rental Value has realized any amount in respect of such rent, the
3. S.R. = Std Rent amount so realized shall be deemed to be income
chargeable under the head “Income from house
4. E.R.V = Expected rental property” and accordingly charged to income-tax as
value the income of that previous year in which such rent is
5. A.R.V. = Annual rental realized whether or not the assessee is the owner of
value that property in that previous year.
6. U.R. = Unrealized rent
7. G.A.V = Gross Annual
Value

M.R. F.R.V
V
68. What are the deductions allowed u/s. 24 in
higher S.R computing income from house property? (2001
. B.com) (2002 B.com) (2003 M.com)
(a) Standard deduction
Lowe A.R. _ (U.R. &
r V rent for 30 % of net annual value is deductible
(E.R. the period irrespective of any expenditure incurred by the
V) of self taxpayer
occupatio
n) (b) Interest on borrowed Capital
 20
Interest on borrowed Capital is allowed as renovation But if the following 3
deduction on accrual basis, if Capital is of the conditions are satisfied it is
borrowed for the purpose of purchase, house deductible up to Rs. 1, 50,000
construction, repair, renewal or reconstruction
1. Capital is borrowed on or
of the house property.
after 1.4.99
2. Construction or acquisition is
69. How do you treat Interest for Pre- Construction or completed between 1-4-99 &
Pre- Acquisition Period? (2001 B.com) (2004 M.com) 31-3-2002.
Pre-construction period’ means the period 3. Capital is borrowed for
commencing on the date of borrowing & ending on - acquisition or construction
only (not for reconstruction,
1. March 31 immediately prior to the date of
repairs or renewals etc. )
completion of construction / date of acquisition or
2. Date of repayment of loan,
Whichever is earlier.
72. What is Real Rental Value?
Interest for pre-construction period is
deductible in 5 equal installments. The first Some times the owner takes upon himself the
installment is deductible in the year in which burden of providing certain facilities to the tenant,
construction of property is completed or in e.g.,
which property is acquired. a) Lift and pump maintenance
b) Salary of common gardener and watchman,
70. What are the Deductions from net annual value in c) Vehicle parking
the case of a let out house? (Sec: 24)? (2003 M.com)
d) Lighting of common stairs and corridors
1. Standard - 30% of the net annual value
e) Payment of Water and electricity bills. (Only if it
deduction every year whether claimed
is 0mentioned that rent includes them)
or not
f) Swimming pool expenses
Such costs can be deducted out of actual rent
2. Interest on loan - Interest on borrowed
received and the balance is called ‘Real Rental
taken to Capital (Total of current
Value’. Then to find out Gross Annual Value instead
purchase, year & pre-construction
of ‘rent received’, ‘real rental value’ is considered.
construct or period) is deductible (there is
But in case the cost of facilities is charged
repair or no maximum limit).
separately by owner i.e. over & above the rent, it is
renovation of
Interest on mortgage is treated as a separate source of income. The expenses
the house
not allowed as deduction incurred on such facilities are deducted out of amount
unless purpose of loan is so collected & balance (income of loss) is taxable
connected with house. under the head ‘Income from other sources’

71. What is the treatment of house property used for

own residence? And What are the Deductions from
Net Annual value in the case of a Self occupied
house: (Sec: 24)?
The net annual value of a self-occupied house is taken
as nil. Deductions are:
1. Standard -
deduction 73. What are the important points to be remembered
nil
while calculating Income from house property?

2. Interest on - Interest on borrowed Capital

loan taken (Total of current year & pre-
to construction period) is deductible
purchase, up to Rs. 30,000
construct
or repair
or
 21
a) The assessee has only - The net annual
one Self occupied value of the self Chapter 6.
property occupied house
shall be taken as
Profits & Gains of Business.
nil if the following
conditions are full
filled:
House is used by 74. What are the incomes taxable under the head
an individual ‘Business Income.’?
for the
residential This is the third head of income of the
purpose only Assessee. The business may be trading,
manufacturing, service-providing business. It may be
House or any part registered, unregistered, legal, illegal etc. Even
of the house is though, the profits and gains are taxable under this
not actually head.
let during the
P.Y. or part of Here profit mans the income earned from
that P.Y. main activities or main object of the business. Gain
means any other revenue income generated during the
No other benefit is business.
derived from
such a house Under this head, the profits and gains of any
type of business or profession and also from vocation
b) If the assessee has More - Annual value of 1 is taxable.
than 1 house under own house is taken as
occupation nil & other house/
houses are 75. Why Capital & Revenue items are differentiated
deemed as let out while calculating business income?
c) House property consists - Annual value of 1 The total business transactions may be
of various independent unit is taken as nil classified in to transactions of capital nature or
units & 1 is under own & other unit / revenue nature according to their characteristics.
occupation & others are units are treated Capital transactions may be further classified in to:
let out as let out
• Capital expenditure
d) If the house property is - It will be deemed
self-occupied for a part to be let out for • Capital receipts (M.com 2005)
of the year & let out for the whole year. Capital expenditure means expenditure for
remaining part of the purchasing fixed assets and long-term securities.
year
Capital receipts means the amount realized on sale,
e) If the House property is - It is not treated transfer etc of the capital or fixed assets.
used for own business under the head
or profession house property While computing the business income of an
Assessee, the capital expenditure and capital receipts
are not to be considered.
f) If the house property is - It will be treated
not actually occupied as a self occupied
by the owner owing to house & net 76. What is capital expenditure? State any 4 examples
employment or annual value is of capital expenditures: - (2002 Dec. M.com) (2005
business/profession, nil. Only one B.com) (2007 B.com) (2006 B.com)
carried on at any other deduction i.e.
place Interest on • Any expenditure incurred to acquire a fixed asset
Capital is or in connection with the installation off fixed
allowed. asset. E.g., purchase of land & amount spent for
registration are Capital expenditures.
• A payment made by a person to discharge a capital
liability. E.g, amount paid to a contractor for
cancellation of contract to construct a factory
building
• Expenditure incurred to acquire a source of income
E.g, purchase of patent to produce picture tubes of
TV sets.
• Amount spent on increasing the earning capacity
of an asset. E.g, acquisition of additional plants.

77. What are Revenue transactions? (2003 Dec. M.com)
While computing the business income all
revenue income (i.e., the income from day to day
activities of the business) to be considered as income
and from which all revenue expenses are to be
deducted.
78. What are the Deductions Expressly Allowed While
Computing Income from Business?
1. Expenditure in respect of business premises; it’s
rent, repairs, insurance, land revenue, local taxes,
Depreciation etc.
2. Expenditure in respect of machinery, plant &
furniture: its repairs, insurance, Depreciation etc.
3. Expenditure on acquisition of patent rights
4. Expenditure on acquisition of know-how
5. Expenditure to obtain license to operate
telecommunication services
6. Payments to associations for approved rural
development programmes
7. Amortization of preliminary expenses
8. Payment to associations for carrying out
programmes of conservation of natural resources
79. What are the Deductions Expressly Disallowed
While Computing Income from Business? (2001
B.com, 2003 B.com) (2003 B.com) (2006 B.com)
1. Expenditure for advertisement in any souvenir etc
published by a political party.
2. Wealth tax
3. Tax on profits & gains e.g. income tax
4. Salaries payable outside India (if tax has not been
deducted at source)
5. Payments to P.F. (unless it is ensured that tax shall
be deducted at source from any payments from
such fund.)
80. What is ‘Block of assets’ or what is ‘block system’
of Depreciation? (2001 B.com) (2003 M.com) (2003
M.com) (M.com 2005)
According to Income Tax rules the Depreciation is
to be computed on ‘Block of Assets’.
‘Block of assets’ means a group of assets falling
within a class of assets comprising:
1. Tangible assets, being buildings,
machinery, plant or furniture
2. Intangible assets, being patents, copy
rights, trade marks, licenses,
22
in respect of which the same % of
depreciation is prescribed.
81. How do you compute business income if you are
given a Profit & Loss A/c?
Net Profit As Per P & L A/C. xx
(+) Inadmissible expenses (recorded in Profit & xx
Loss A/c)
(-) Expenses allowed (not recorded in Profit & xx
Loss A/c)
(+) Incomes not recorded in Profit & Loss A/c xx
(-) Incomes to be shown under any other head xx
(-) Income exempted from tax xx
Profits From Business xx
82. What is the treatment of expenditure on technical
know- how?
Expenditure incurred on or before 1-4-98 for
acquisition of any know-how for the purpose of
business will be allowed as deduction in 6 equal annual
installments commencing from the year in which such
expenditure is incurred.
If such know-how is developed in a lab owned or
financed by the government or a university, deduction
will be allowed in 3 equal annual installments.
83. Explain the treatment of patent right: - (2002
M.com.)
Any expenditure, incurred in acquiring patent
rights used for the purpose of the business, is
allowable as business expenditure in equal
installments over a period of 14 years. If this
expenditure is incurred on or after April 1, 1998, then
one can claim depreciation @ 25%.
84. How do you Compute Business Income?
Net profit as per Profit & Loss A/c x
Add: Expenses debited to Profit & Loss A/c,
but not allowed:
1. All provisions & reserves except x
creation of reserve by financial
corporations u/s. 36
2. All taxes (i.e. income tax, advance x
income tax, wealth tax etc.) except
sales tax, excise duty & local taxes
of premises used for business.
3. Rent paid to self x
4. All Capital expenses except on x
scientific research
 23
5. All Capital losses x
6. All charities & donations x Less: Expenses not debited to Profit & Loss
A/c but allowed:
7. All expenses relating to other heads x
of income (e.g. taxes on house 1. Actual bad debts (not charged in x
property) Profit & Loss A/c)
8. Cultivation expenses x 2. Depreciation (not charged in Profit x
9. Any Interest on Capital unless the & Loss A/c)
x
amount is borrowed 3. Any other expenditure incurred x
according to provision of law
10. All personal expenses (drawings etc) x
4. Difference due to under debiting of x x
11. Any depreciation if wrongly debited x
stock
12. Gifts & presents (non advertisement) x
13. Any type of fine or penalty x
Less: Incomes credited to Profit & Loss A/c
14. Any payment to a partner (in case of x but exempted from tax
firms only by way of salary, Interest,
bonus, commission or remuneration 1. Post office savings bank Interest x
excess over specified limits) 2. Agricultural receipts x
15. Any salary or Interest payable x 3. Gifts from relatives x
outside India unless tax is deducted
4. Income tax refund x
at source or is paid according to the
law 5. Bad debts recovered – disallowed x
earlier
16. Past losses (loss of the past years) x
6. Life insurance maturity amount x
17. Any other expenditure which is not x
incurred according to the provisions 7. Any Capital receipt x
of law
8. Withdrawal from P.P.F x x
18. Salary paid to self or any other x
member of family for casual help
Less: Incomes credited to Profit & Loss A/c
19. Personal life insurance premium x
but taxable under other heads
20. Any amount invested in savings such x
1. Part time salary x
as NS, NSC, PPF etc
2. Interest on securities x
21. Rent for residential portion x
3. Rent from house property let x
22. Speculation loss x
4. Capital gain x
23. Bad debt still recoverable x
5. Dividend, bank Interest, winnings x x
24. Legal expenses on criminal case or a x
from lotteries, racings etc
personal case of employee
25. Legal expenses on acquiring an asset x Income from business x

26. Legal expenses on curing title of x

asset
27. Loss by theft from residence
28. Expenses on illegal business
29. Employer’s contribution to URPF
30. Difference in Trial Balance
31. Difference due to under crediting of x
stock
32. Cost of patent rights being Capital x
expenditure
33. Cost of technical know-how being x
Capital expenditure
34. Preliminary expenses being Capital x x
expenses
x
x
Chapter 7.
x Capital Gains
x
85. What is a Capital Asset? (2002 B.com) (M.com - Dec02)
(2003 B.com) (2004 B.com)
Capital asset means property of any kind held
by an assessee whether or not connected with his
business or profession.
Thus any asset whether used for business or
not, whether tangible or intangible, movable or
immovable, is capital asset. For example, land,