Advance Direct Tax

ADVANCE DIRECT TAX
Sub Code 661
Developed by
Prof. Yogesh Ashar
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe 2. Dr. B.P. Sabale 3. Prof. Dr. Vijay Khole 4. Prof. Anuradha Deshmukh
Group Director Chancellor, D.Y. Patil University, Former Vice-Chancellor Former Director
Welingkar Institute of Navi Mumbai (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
Program Design and Advisory Team
Prof. B.N. Chatterjee Mr. Manish Pitke

Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant
Prof. Kanu Doshi Mr. Smitesh Bhosale

Dean – Finance Faculty – Media and Advertising
Welingkar Institute of Management, Mumbai Founder of EVALUENZ
Prof. Dr. V.H. Iyer Prof. Vineel Bhurke

Dean – Management Development Programs Faculty – Rural Management
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.
Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Dean – IT/Business Design Faculty – Hospitality
Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.
Prof. Sandeep Kelkar Course Editor

Faculty – IT Mr. Anuj Pandey
Welingkar Institute of Management, Mumbai Publisher
Management Books Publishing, Mumbai
Prof. Dr. Swapna Pradhan Course Coordinators

Faculty – Retail Prof. Dr. Rajesh Aparnath
Welingkar Institute of Management, Mumbai Head – PGDM (HB)
Welingkar Institute of Management, Mumbai
Prof. Bijoy B. Bhattacharyya Ms. Kirti Sampat

Dean – Banking Manager – PGDM (HB)
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
Mr. P.M. Bendre Mr. Kishor Tamhankar

Faculty – Operations Manager (Diploma Division)
Former Quality Chief – Bosch Ltd. Welingkar Institute of Management, Mumbai
Mr. Ajay Prabhu

Faculty – International Business
Corporate Consultant
Mr. A.S. Pillai

Faculty – Services Excellence
Ex Senior V.P. (Sify)
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1st Edition, March 2019

CONTENTS
Contents
Chapter No. Chapter Name Page No.
1 Definitions (Section 2) 4-39
2 Previous Year, Charge of Income, Scope of Total 40-55

Income, Residential Status (Sections 3 to 9)
3 Income Which Do Not Form Part of Total Income 56-111

(Section 10)
4 Income from Salaries (Sections 15 to 17) 112-153
5 Income from House Property (Sections 22 to 27) 154-168
6 Profits and Gains of Business or Professions (Sections 169-307

28 to 44)
7 Income from Capital Gains (Sections 45 to 55) 308-382
8 Income from Other Sources (Sections 56 to 59) 383-404
9 Clubbing of Income (Sections 61 to 64) 405-414
10 Set Off or Carry Forward and Set Off Losses (Sections 415-434
70 to 80)
11 Deductions and Rebates 435-463
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DEFINITIONS (SECTION 2)
Chapter 1
Definitions (Section 2)
Objectives
After completing this chapter, you will understand:
• Tax structure in India
• Direct and indirect tax
• The concept of dividend
• Treatment of gifts as income
• The concept of capital asset
Structure
1.1 Tax Structure in India
1.2 Income Tax
1.3 Some Important Definitions
1.4 Summary
1.5 Self Assessment Questions
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1.1 TAX STRUCTURE IN INDIA
A tax may be defined as a “pecuniary burden laid upon individuals or

property owners to support the government, a payment exacted by
legislative authority”. A tax “is not a voluntary payment or donation, but an
enforced contribution, exacted pursuant to legislative authority”. Taxes
consist of direct tax or indirect tax, and may be paid in money or as its
labour equivalent (often but not always unpaid labour). India has a well
developed taxation structure. The tax system in India is mainly a three-tier
system which is based between the Central, State Governments and the
local government organizations.
Basic scheme of taxation in India is:
a. Central Government will get tax revenue from Direct Taxes (like Income
Tax, Wealth Tax, Gift Tax, etc. (except on agricultural income)), and
Indirect Taxes (like Excise Duty (except on alcoholic drinks), Customs
Duty, and Service Tax).
b. State Government will get revenue from Sales Tax, Value Added Tax,
Excise duty on liquor and tax on agriculture.
c. Municipalities will get tax revenue from Octroi, Property Tax, and
Professional Tax.
A direct tax is a kind of charge which is imposed directly on the taxpayer

and paid directly to the government by the persons (juristic or natural) on
whom it is imposed. A direct tax is one that cannot be shifted by the
taxpayer to someone else.
The important direct taxes are:
a. Income Tax
b. Wealth Tax
An indirect tax is a tax collected by an intermediary (such as a retail store)

from the person who bears the ultimate economic burden of the tax (such
as the customer). An indirect tax is one that can be shifted by the taxpayer
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to someone else. An indirect tax may increase the price of a good so that
consumers are actually paying the tax by paying more for the products.
The important indirect taxes are:
a. Excise Duty (except on alcoholic drinks)
b. Customs Duty
c. Service Tax
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1.2 INCOME TAX
Income Tax Act, 1961 seeks to levy tax on income. It provides machinery
for:
• Charging of tax
• Computation of income/losses under different heads of income
• Deductions, rebates, and exemptions of income
• Assessment of income, appeal against assessment and for collection,

recovery of tax (Advance Tax, TDS, etc.)
• Levying interest or penalty in case of default in payment of taxes.
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How is Income Tax Law Administered?
The law of Income tax in India is an evolving law and has undergone
various changes over last many decades. Interestingly, the Income Tax Act
itself does not prescribe the rates of tax at which the income shall be
taxed.
Finance Minister every year presents the Finance Bill, also commonly
known as the Union Budget. It contains financial proposals for every new
financial year along with the rates of income tax. When the Finance Bill is
approved by both the houses of Parliament and then receives the assent of
President of India, it becomes an law and its provisions stand incorporated
in the Income Tax Act, 1961. Amendments to Income Tax Act, 1961 are,
thus, normally made by the Finance Bill.
The Ministry of Finance, through Central Board of Direct Taxes (CBDT),

would also issue Circulars, Notifications, Press Releases on various issues
relating to administration of Income tax machinery.
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1.3 SOME IMPORTANT DEFINITIONS
Agricultural Income [Section 2(1A)]
“Agricultural Income” means:
a. any rent or revenue derived from land which is situated in India and is
used for agricultural purposes;
b. any income derived from such land by:
i. agriculture or;
ii. the performance by a cultivator or receiver of rent-in-kind of any

process ordinarily employed by a cultivator or receiver of rent-in-kind
to render the produce raised or received by him fit to be taken to
market; or
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iii. the sale by a cultivator or receiver of rent-in-kind of the produce

raised or received by him, in respect of which no process has been
performed other than a process of the nature described in paragraph
(ii) of this sub-clause;
c. any income derived from any building owned and occupied by the
receiver of the rent or revenue of any such land, or occupied by the
cultivator or the receiver of rent-in-kind, of any land with respect to
which, or the produce of which, any process mentioned in paragraphs
(ii) arid (ii:) of sub-clause (b) is carried on;
In respect of such building, it is provided that:
i. such building is on or in the immediate vicinity of the land, and is a

building which the receiver of the rent or revenue or the cultivator, or
the receiver of rent-in-kind, by reason of his connection with the land,
requires as a dwelling house, or as a store-house, or other cut-
building, and
ii. the land is either assessed to land revenue in India or is subject to a
local rate assessed and collected by officers of the Government as
such or where the land is not so assessed to land revenue or subject
to a local rate, it is not 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 ten thousand according to the last
preceding census of which the relevant figures have been published
before the first day of the previous year; or
B. in any area within such distance, not being more than 8 kilometers,
from the local limits of any municipality or cantonment board
referred to in item (A), as the Central Government may, having
regard to the extent of, and scope for, urbanization of that area and
other relevant considerations, specify in this behalf by notification in
the Official Gazette.
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For these purposes, it is also explained that revenue derived from land
shall not include and shall be deemed never to have included any income
arising from the transfer of any land referred to in item (a) or item (b) of
sub-clause (ii) of clause (14) of Section 2.
Further, it needs to be borne in mind that the income derived from any
building or land referred to in (c) above arising from the use of such
building or land for any purpose (including letting for residential purpose or
for the purpose of any business or profession) other than agriculture falling
under sub-clause (a) or sub-clause (b) shall not be agricultural income.
Amalgamation [Section 2(1B)]

“Amalgamation”, in relation to companies, means the merger of one or
more companies with another company or the merger of two or more
companies to form one company. The company or companies which so
merge are referred to as the amalgamating company/companies. The
company with which they merge or which is formed as a result of the
merger shall be referred to as the amalgamated company. This shall take
place in such a manner that:
a. all the property of the amalgamating company or companies

immediately before the amalgamation becomes the property of the
amalgamated company by virtue of the amalgamation;
b. all the liabilities of the amalgamating company or companies

immediately before the amalgamation become the liabilities of the
amalgamated company by virtue of the amalgamation;
c. shareholders holding not less than seventy-five per cent in value of the
shares in the amalgamating company or companies (other than shares
already held therein immediately before the amalgamation by, or by a
nominee for, the amalgamated company or its subsidiary) become
shareholders of the amalgamated company by virtue of the
amalgamation.
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The manner of transfer of assets and liabilities as described above shall not
be:
a. as a result of the acquisition of the property of one company by

another company pursuant to the purchase of such property by the
other company, or
b. as a result of the distribution of such property to the other company

after the winding up of the first-mentioned company.
Annual Value [Section 2(2)]
“Annual value”, in relation to any property, means its annual value as

determined under Section 23.
Assessee [Section 2(7)]
Assessee means a person by whom any tax or any other sum of money is
payable under this Act; and includes:
a. every person against whom any proceeding has been taken for the
assessment of his income or the assessment of fringe benefits or of the
income of any other person in respect of which he is assessable, or of
the loss sustained by him or by such other person, or of the amount of
refund due to him or to such other person;
b. every person who is deemed to be an assessee under any provision of
this Act;
c. every person who is deemed to be an assessee in default under any

provision of this Act.
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Who is Deemed to be an Assessee?
a. Legal representatives of a deceased person u/s 159
b. Representative Assessee u/s 160:
In respect of the income Who is Representative Assessee?

of
1. A non-resident The agent of the non-resident, including a

person who is treated as an agent under section
163.
Who is agent of the non-resident?
a. employee of the non-resident; or

b. who has any business connection with the
non-resident; or
c. from or through whom the non-resident is in
receipt of any income, whether directly or
indirectly; or
d. who is the trustee of the non-resident; and
includes also any other person who, whether
a resident or non-resident, has acquired by
means of a transfer, a capital asset in India.
2. A minor, lunatic, or idiot Guardian or manager who is entitled to receive
or is in receipt of such income on behalf of such
minor, lunatic, or idiot.
3. Income which the Court of Person on whose behalf property is managed

Wards, the Administrator- and income is received
General, the Official
Trustee or any receiver or
manager who manages
property on behalf of
another
4. A Trust in writing whether The Trustee of the Trust

testamentary or otherwise
(including any ward)
5. Income of an oral trust Such trustee
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An Assessee Who is Deemed to be an Assessee in Default
The following are some instances where an assessee is deemed to be an

assessee in default:
Section 140A: For failure to pay self-assessment tax and interest thereon
u/s 140A
Section 191: For failure to deduct tax u/s 191
Section 201: For consequences of failure to deduct or pay tax at source
Section 218: For failure to pay advance tax
Section 220: For failure to pay advance tax or other demands u/s 156
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Assessment Year [Section 2(9)]
“Assessment year” means the period of twelve months commencing on the

1st day of April every year.
Block of Assets [Section 2(11)]
“Block of assets” means a group of assets falling within a class of assets

comprising—
a. tangible assets, being buildings, machinery, plant, or furniture;
b. intangible assets, being know-how, patents, copyrights, trademarks,

licenses, franchises or any other business or commercial rights of similar
nature, in respect of which the same percentage of depreciation is
prescribed.
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Business [Section 2(13)]

“Business” includes any trade, commerce or manufacture or any adventure
or concern in the nature of trade, commerce, or manufacture.
Dominant intention of assessee is relevant: To determine the nature

of the transaction, the dominant intention of the assessee has to be seen.
If the intention is to embark on a venture in the nature of trade as
distinguished from a capital investment, it would make no difference even
if the transaction is a single and isolated one.
General principles to determine whether a particular conduct can be called

carrying on business or not; whether a particular transaction is an
adventure in the nature of trade or not, must be decided on the
circumstances of each case. The following can be a broad guideline in this
respect.
1. A single transaction may also constitute an adventure in the nature of

trade. There need not be regularity or repetitiveness in the activity.
2. Whether a transaction is in the nature of trade and commerce must
be decided on the facts and circumstances of each case. No hard and
fast rules can be laid down in that behalf.
3. The activity alleged/claimed to be an adventure in the nature of trade

need not be allied to the already existing activity of the assessee.
4. The activity or the transaction said to be an adventure in the nature of

trade must be with the object of earning profit.
Capital Asset [Section 2(14)]
“Capital asset” means property of any kind held by an assessee, whether

or not connected with his business or profession, but does not include:
i. any stock-in-trade, consumable stores or raw materials held for the

purposes of his business or profession;
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ii. personal effects, that is to say, movable property (including wearing

apparel and furniture, but excluding jewellery, archaeological
collections, drawings, paintings, sculptures, and any work of art) held
for personal use by the assessee or any member of his family
dependent on him.
For the purposes of this sub-clause, “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;
iii. Agricultural land in India, not being land situate:
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 ten thousand according to the last preceding census
of which the relevant figures have been published before the first day
of the previous year; or
b. in any area within such distance, not being more than eight
kilometers, from the local limits of any municipality or cantonment
board referred to in item (a), as the Central Government may, having
the Official Gazette;
iv. 61/2% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defence
Gold Bonds, 1980, issued by the Central Government,
v. Special Bearer Bonds, 1991, issued by the Central Government,
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vi. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999
notified by the Central Government.
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Charitable Purpose [Section 2(15)]
Charitable Purpose includes relief for the poor, education, medical relief,
preservation of environment, preservation of watersheds, preservations of
forests, preservation of wildlife, and preservation of monuments or places
or objects of artistic or historic interest and advancement of any other
object of general public utility.
Further, the advancement of any other object of general public utility shall
not be a charitable purpose if it involves the carrying on of any activity in
the nature of trade, commerce or business, or any activity of rendering any
service in relation to any trade, commerce or business for a cess or fee or
any other consideration, irrespective of the nature of use or application, or
retention, of the income from such activity.
Company [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 is or was assessable or was

assessed as a company for any assessment year under the Indian
Income Tax Act, 1922 (11 of 1922), or which is or was assessable or
was assessed under this Act as a company for any assessment year
commencing on or before the 1st day of April, 1970, or
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iv. any institution, association, or body, whether incorporated or not and

whether Indian or non-Indian, which is declared by general or special
order of the Board to be a company.
Here, such institution, association, or body shall be deemed to be a

company only for such assessment year or assessment years as may be
specified in the declaration.
Company in Which the Public are Substantially Interested [Section

2(18)]
A company is said to be a company in which the public are substantially

interested:
a. - if it is a company owned by the Government or the Reserve Bank of

India or, in which not less than forty per cent of the shares are held
(whether singly or taken together) by the Government or the Reserve
Bank of India or a corporation owned by that bank, or
(aa)- if it is a company which is registered under section 25 of the

Companies Act, 1956; or
(ab) - if it is a company having no share capital and if, having regard to its
objects, the nature and composition of its membership and other relevant
considerations, it is declared by order of the Board to be a company in
which the public are substantially interested;
In this case, such a company shall be deemed to be a company in which

the public are substantially interested only for such assessment year or
assessment years (whether commencing before the 1st day of April, 1971,
or on or after that date) as may be specified in the declaration; or
(ac)- if it is a mutual benefit finance company, that is to say, a company

which carries on, as its principal business, the business of acceptance of
deposits from its members and which is declared by the Central
Government under section 620A of the Companies Act, 1956, to be a Nidhi
or Mutual Benefit Society; or
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(ad)- if it is a company, wherein shares (not being shares entitled to a

fixed rate of dividend whether with or without a further right to participate
in profits) carrying not less than fifty per cent of the voting power have
been allotted unconditionally to, or acquired unconditionally by, and were
throughout the relevant previous year beneficially held by,one or more co-
operative societies;
b. if it is a company which is not a private company as defined in the

Companies Act, 1956, and the conditions specified either in item (a) or
in item (b) are fulfilled, namely:
i. (shares in the company (not being shares entitled to a fixed rate of
dividend whether with or without a further right to participate in
profits) were, as on the last day of the relevant previous year, listed
in a recognized stock exchange in India in accordance with the
Securities Contracts (Regulation) Act, 1956, and any rules made
thereunder;
ii. shares in the company (not being shares entitled to a fixed rate of
dividend whether with or without a further right to participate in
profits) carrying not less than fifty per cent of the voting power have
been allotted unconditionally to, or acquired unconditionally by, and
were throughout the relevant previous year beneficially held by:
- the Government, or
- a corporation established by a Central, State or Provincial Act, or
- any company to which this clause applies or any subsidiary company
of such company if the whole of the share capital of such subsidiary
company has been held by the parent company or by its nominees
throughout the previous year.
By way of an explanation, it is stated that, in its application to an Indian

company whose business consists mainly in the construction of ships or in
the manufacture or processing of goods or in mining or in the generation or
distribution of electricity or any other form of power, item (b) shall have
effect as if for the words “not less than 50%”, the words “not less than
40%” had been substituted.
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Demerger [Section 2(19AA)]

“Demerger”, in relation to companies, means the transfer, pursuant to a
scheme of arrangement under sections 391 to 394 of the Companies Act,
1956, by a demerged company of its one or more undertakings to any
resulting company in such a manner that—
i. all the property of the undertaking, being transferred by the demerged

company, immediately before the demerger, becomes the property of
the resulting company by virtue of the demerger;
ii. all the liabilities relatable to the undertaking, being transferred by the
demerged company, immediately before the demerger, become the
liabilities of the resulting company by virtue of the demerger;
iii. the property and the liabilities of the undertaking or undertakings being
transferred by the demerged company are transferred at values
appearing in its books of account immediately before the demerger;
iv. the resulting company issues, in consideration of the demerger, its

shares to the shareholders of the demerged company on a
proportionate basis;
v. the shareholders holding not less than seventy five per cent in value of
the shares in the demerged company (other than shares already held
therein immediately before the demerger, or by a nominee for, the
resulting company or, its subsidiary) become shareholders of the
resulting company or companies by virtue of the demerger;
vi. otherwise than as a result of the acquisition of the property or assets of

the demerged company or any undertaking thereof by the resulting
company;
vii.the transfer of the undertaking is on a going concern basis;
viii.the demerger is in accordance with the conditions, if any, notified under

sub-section (5) of Section 72A by the Central Government in this behalf.
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It is explained at Explanation 1 that for the purposes of this clause,

“undertaking” shall include any part of an undertaking, or a unit or division
of an undertaking or a business activity taken as a whole, but does not
include individual assets or liabilities or any combination thereof not
constituting a business activity.
It is further explained at Explanation 2 that for the purposes of this clause,

the liabilities referred to in sub-clause (ii) shall include:
a. the liabilities which arise out of the activities or operations of the

undertaking;
b. the specific loans or borrowings (including debentures) raised, incurred,

and utilized solely for the activities or operations of the undertaking;
and
c. in cases, other than those referred to in clause (a) or clause (b), so

much of the amounts of general or multipurpose borrowings, if any, of
the demerged company as stand in the same proportion which the value
of the assets transferred in a demerger bears to the total value of the
assets of such demerged company immediately before the demerger.
For determining the value of the property referred to in sub-clause (iii),

any change in the value of assets consequent to their revaluation shall be
ignored.
For the purposes of this clause, the splitting up or the reconstruction of any
authority or a body constituted or established under a Central, State or
Provincial Act, or a local authority or a public sector company, into separate
authorities or bodies or local authorities or companies, as the case may be,
shall be deemed to be a demerger if such split up or reconstruction, fulfils
such conditions as may be notified in the Official Gazette, by the Central
Government.
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Demerged Company [Section 2(19AAA)]
“Demerged Company” means the company whose undertaking is

transferred, pursuant to a demerger, to a resulting company.
Dividend [Section 2(22)]
Dividend involves what we normally understand as distribution of dividend.
It also involves few artificial instances of distribution (to the

shareholders) of assets of the company to the extent the company
possesses accumulated profits (whether capitalized or not) like:
• any distribution of assets among the shareholders if such distribution

entails the release by the company to its shareholders of all or any part
of the assets of the company;
• distribution to shareholders of debentures, debenture stock, or deposit

certificates, any distribution of bonus shares to its preference
shareholders;
• any distribution made to the shareholders of a company on liquidation of

a company;
• any distribution to its shareholders by a company on the reduction of its

capital;
• in case of a closely held company (i.e., a company in which public are not
substantially interested), any payment of advance or loan to a
shareholder holding not less than ten per cent of the voting power or to
his associates. Such shareholder shall not be one who is holding shares
entitled to a fixed rate of dividend whether with or without a right to
participate in profits.
Here, even if such loans or advances are given to any concern in which
such shareholder is a member or a partner and in which he has a
substantial interest, then such shall be treated as a case of deemed
dividend.
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Even any payment by any such company on behalf of or for the individual
benefit, of any such shareholder shall be treated as a case of deemed
dividend.
For the purpose of determining whether a payment is a case of deemed

dividend, it is not necessary that the payment of advance or loan to such
shareholder, represents a part of the assets of the company. Even if
borrowed funds are advanced to shareholders, they may be treated as
deemed dividend if other conditions are satisfied.
What is Not ‘Dividend’? – Exceptions to the Definition of ‘Dividend’
However, the following payments are not included in the definition of

‘dividend’ under Section 2(22) of the Income Tax Act, 1961.
i. a distribution made upon liquidation of a company and the shares were

issued for full cash consideration, without right to participate in the
surplus assets in the event of liquidation;
ii. a distribution made in case of liquidation of a company or upon

reduction of its capital, insofar as such distribution is attributable to the
capitalized 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. where any advance or loan is 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;
iv. any dividend paid by a company which is set off by the company against
any sum previously paid by it and treated as a dividend by having
advanced as a loan;
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).
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Domestic Company [Section 2(22A)]

“Domestic company” means an Indian company, or any other company
which, in respect of its income liable to tax under this Act, has made the
prescribed arrangements for the declaration and payment, within India, of
the dividends (including dividends on preference shares) payable out of
such income.
Fair Market Value [Section 2(22B)]
“Fair market value”, in relation to a capital asset, means:
i. the price that the capital asset would ordinarily fetch on sale in the open
market on the relevant date; and
ii. where the price referred to in sub-clause (i) is not ascertainable, such
price as may be determined in accordance with the rules made under
this Act.
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“Firm”, “Partner” and “Partnership” [Section 2(23)]

“Firm”, “Partner” and “Partnership” have the meanings respectively
assigned to them in the Indian Partnership Act, 1932; but the expression
“partner” shall also include any person who, being a minor, has been
admitted to the benefits of partnership and a partner of a limited liability
partnership as defined in the Limited Liability Partnership Act, 2009 (6 of
2009).
Foreign Company [Section 2(23A)]

“Foreign company” means a company which is not a domestic company.
Fringe Benefits [Section 2(23B)]

The term “fringe benefits” shall mean any fringe benefits referred to in
Section 115WB.
Income [Section 2(24)]
Income includes:
1. Profits and gains;
2. Dividend;
3. Voluntary contributions received by—
• a religious/charitable trust, or
• by an institution established wholly or partly for such purposes, or
• by an association or institution referred to in clause (21) or clause (23)

of Section 10, or
• by a fund or trust or institution referred to in Section 10(23C)(iv) or

sub-clause (v);
4. Perquisite or profit in lieu of salary. The value of any taxable perquisite

or profit in lieu of salary taxable under clauses (2) and (3) of Section
17;
23
5. Any allowances granted to assessee either to meet his personal

expenses at the place where the duties of his office or employment of
profit are ordinarily performed by him or at a place where he ordinarily
resides or to compensate him for the increase cost of living;
6. Any benefit or perquisite obtained from a company by a director (or his

relative) or by a person who has a substantial interest in the company
(or his relative), in respect of any obligation which, but for such
payment, would have been payable by the director or other person
aforesaid;
7. Any sum chargeable u/s 28 as under:
Chargeable u/s 28(_) Nature
Clause (ii) of Section 28 Compensation/other payment for modification/

termination of management of an Indian company/
foreign company/ agency, etc.
Clause (iii) of Section 28 Income derived by a trade/professional association

from specific services performed for its members
Clause (iiia) of Section 28 Profits on sale of license granted under the Imports
(Control) Order, 1955, made under the Imports and
Exports (Control) Act, 1947
Clause (iiib) of Section 28 Cash assistance received/receivable against exports

under any scheme of the Government of India
Clause (iiic) of Section 28 Any duty of customs/excise repaid/repayable as

drawback to any person against exports under the
Customs and Central Excise Duties Drawback Rules,
1971
Clause (iv) of Section 28 Benefit/perquisite arising from business or the

exercise of a profession
Clause (v) of Section 28 Interest, salary, bonus, commission or remuneration

due to/or received by a partner of a firm from such
firm to the extent allowed as deduction u/s 40
24
Clause (va) of Section 28 Receipt for non-activity
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
b. not sharing any know-how, patent, copyright,

trade-mark, license, 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:
But what is excluded under (a) above is:
i. that which is chargeable under the head “Capital

gains” by way of right to manufacture, produce
or process any article or thing or right to carry on
any business.
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.
8. Sums chargeable u/s 41.
a. Remission or cessation of trade liabilities – Section 41(1).
b. Balancing charge in respect of any building, machinery, plant or

furniture to power generating – Section 41(2).
25
c. Profit on sale of an asset of capital nature – for use in scientific

research – Section 41(3).
d. Recovery of bad debt – Section 41(4).
e. Amount withdrawn from special reserve – Section 41(4A).
f. Set off of losses of discontinued business – Section 41(5).
• Sums chargeable u/s 59 (in relation to Section 56 as Section 41

applies to Section 28);
• Any capital gains chargeable under Section 45;
• Profits of insurance business of a mutual insurance company/by a

co-operative society. The profits and gains of any business of
insurance carried on by a mutual insurance company or by a co-
operative society, computed in accordance with Section 44 or any
surplus taken to be such profits and gains by virtue of provisions
contained in the First Schedule;
• Receipts by employer of employees' contributions to provident fund/

superannuation fund, etc. Any sum received by the assessee from
his employees as contributions to any provident fund or
superannuation fund or any fund set up under the provisions of the
Employees' State Insurance Act, 1948 (34 of 1948), or any other
fund for the welfare of such employees;
• The profit and gains of any business of banking carried by a co-

operative society with its members;
• Any winnings from lotteries, crossword puzzles, races including horse

races, card games and other games of any sort or from gambling or
betting of any form or nature whatsoever;
• Any sum received under a Keyman insurance policy including the

sum allocated by way of bonus on such policy;
26
• Any consideration received for issue of shares as exceeds the fair

market value of the shares referred to in clause 2(viib) of Section
56;
• Receipt of Gifts exceeding Rs. 50,000/- as referred to in Section

56(2)(v);
where any sum of money exceeding Rs. 50,000/- is received without

consideration by an individual or a Hindu undivided family from any
person on or after the 1st day of September, 2004, the whole of such
sum shall be treated as Income from Other Sources.
The gifts not deemed as taxable here would be any sum of money
received from:
a. 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.
The term ‘relative’ is defined in Section 56(2)(v).
Video Link 1
Video Link 2
INDIA [Section 2(25A]

India means territory of India as referred to in Article 1 of the Constitution,
its territorial waters, seabed and subsoil underlying such waters,
continental shelf, exclusive economic zone or any other maritime zone and
the air space above its territory and territorial waters.
27
Long-term Capital Asset [Section 2(29A)]

A capital asset which is not a short-term capital asset.
Short-term Capital Asset [Section 2(42A)]
A capital asset held by an assessee for not more than:
• In case of share held in a company, any other security :12 months

listed in a recognized stock exchange in India, units of a
Mutual Fund or a zero coupon bond
• In case of other assets held :36 months
The holding period of 12/36 months as mentioned above shall need certain
adjustments as mentioned below:
i. In determining the period for which any Capital asset is held by the
assessee:
Event How to Reckon/Adjust the Holding

Period?
A In the case of a share held in a Exclude the period subsequent to the

company in liquidation date on which the company goes into
liquidation
B Where a capital asset becomes Include the period for which the asset
the property of the assessee in was held by the previous owner referred
the circumstances mentioned in to in the said section
Section 49(1)
C Where the capital asset being a Include the period for which the share or
share/shares in an Indian shares in the amalgamating company
company, which becomes the were held by the assessee
property of the assessee in
consideration of a transfer
referred to in Section 47(vii)
D In case of right shares The period shall be reckoned from the

originally subscribed or by way date of allotment of right
of purchase of renouncement of
rights
28
E Where a right to subscribe to The period shall be reckoned from the

any shares/financial asset, is date of the offer of such right by the
renounced in favour of any company or institution, as the case may
other person be, making such offer
G In the case of shares in an Include the period for which the shares
Indian company, which become were held in the demerged company by
the property of the assessee in the assessee
consideration of a demerger
H Trading or clearing rights of a Include the period for which the person
recognized stock exchange in was a member of the recognized stock
India acquired by a person exchange in India immediately prior to
pursuant to demutualization or such demutualization or corporatization
corporatization of the
recognized stock exchange in
India as referred to in Section
47(xiii)
Ha Where equity shares in a Include the period for which the person
company are allotted pursuant was a member of the recognized stock
to demutualization or exchange in India immediately prior to
corporatization of a recognized such demutualization or corporatization
stock exchange in India u/s
47(xiii)
Hb Where specified security or The period shall be reckoned from the

sweat equity shares allotted or date of allotment or transfer of such
transferred, directly or specified security or sweat equity shares
indirectly, by employer free of
cost or at concessional rate to
his employees
ii. Where the capital assets other than those mentioned in clause (I) are
held, the period for which any capital asset is held by the assessee shall
be determined subject to any rules which, the Board may make in this
behalf.
For the purposes of this clause, the expression “security” shall have the
meaning assigned to it in clause (h) of Section 2 of the Securities Contracts
(Regulation) Act, 1956.
29
For the purpose of this clause, the expressions “specified security” and
“sweat equity shares” shall have the meanings respectively assigned to
them in explanation to clause (d) of sub-section (1) of Section 115WB.
Video Link 1
Short-term Capital Gain [Section 2(42B)]

“Short-term capital gain” means capital gain arising from the transfer of a
short-term capital asset.
Non-resident [Section 2(30)]

“Non-resident” means a person who is not a “resident”, and for the
purposes of Sections 92, 93 and 168, includes a person who is not
ordinarily resident within the meaning of clause (6) of Section 6.
Person [Section 2(31)]

The definition of an assessee as seen above defines an assessee as a
person who satisfies the conditions laid down in the definition. The term
‘person’ shall mean person and includes:
• an individual,
• a Hindu undivided family,
• a company,
• a firm,
• an association of persons (AOP) or a body of individuals (BOl), whether
incorporated or not,
• a local authority, and
• every other artificial juridical person not falling under any of the above
Categories (a deity).
Person Who has a Substantial Interest in the Company [Section

2(32)]
A person who has a substantial interest in the company is one 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,
30
• carrying not less than 20 per cent of the voting power.
Relative [Section 2(41)]

Relative in relation to an individual, means the husband, wife, brother or
sister, or any lineal ascendant or descendant of that individual.
Slump Sale [Section 2(42C)]

Stump sale means the transfer of one or more undertakings by sale for a
lump sum consideration without values being assigned to the individual
assets and liabilities in such sales.
Tax [Section 2(43)]

The term ‘tax’ shall mean:
In relation to Shall mean
A.Y. commencing on the 1.4.1965 and Income tax chargeable under the
any subsequent assessment year provisions of Income Tax Act, 1961
Any other assessment year Income tax and super-tax chargeable

under the provisions of this Act prior to
the aforesaid date (1.4.1965)
Assessment year commencing on the Includes the fringe benefit tax payable
1st day of April, 2006, and any under Section 115WA
subsequent assessment year
Total Income [Section 2(45)]

Total income means the total amount of income referred to in Section 5
computed in the manner said down in Income Tax Act, 1961.
Transfer [Section 2(47)]
Transfer, in relation to a capital asset, includes:
• the sale, exchange, or relinquishment of the asset, or
• the extinguishment of any rights therein, or
• the compulsory acquisition thereof under any law; or
31
• when capital asset is converted into (or treated as) stock-in-trade by the
owner thereof, in respect of a business carried on by him, such act of
conversion or treatment, or
• the maturity or redemption of a zero coupon bond;
• any transaction involving the allowing of the possession of any

immovable property; or
• any transaction which has the effect of transferring, or enabling the

enjoyment of, any immovable property (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).
For removal of doubts, it is hereby 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 characterized as being effected or dependent upon or
flowing from the transfer of a share or shares of a company registered or
incorporated outside India.
Zero Coupon Bond [Section 2(48)]

A zero coupon bond means a bond issued by any infrastructure capital
company or infrastructure capital fund or public sector company on or after
1.6.2005, in respect of which no payment and benefit is received or
receivable before maturity or redemption from such company or fund or
public sector company and which the Central Government may, by
notification in the Official Gazette, specify in this behalf.
The expression ‘infrastructure capital company’ or ‘infrastructure capital

fund’ shall have the meanings respectively assigned to them in clauses (a)
and (b) of Explanation 1 to clause (23G) of Section 10.
Video Link 1
Video Link 2
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SECTION 77A OF COMPANIES ACT, 1956
Power of Company to Purchase Its Own Securities
77A
1. Notwithstanding anything contained in this Act, but subject to the

provisions of sub-section (2) of this section and section 77B, a company
may purchase its own shares or other specified securities (hereafter
referred to as “buyback”) out of—
i. its free reserves; or
ii. the securities premium account; or
iii. the proceeds of any shares or other specified securities:
Provided that no buyback of any kind of shares or other specified

securities shall be made out of the proceeds of an earlier issue of the
same kind of shares or same kind of other specified securities.
2. No company shall purchase its own shares or other specified securities

under sub-section (1), unless:
a. the buyback is authorized by its articles;
b. a special resolution has been passed in general meeting of the

company authorizing the buyback:
Provided that nothing contained in this clause shall apply in any case
where:
a. the buyback is or less than ten per cent of the total paid-up equity
capital and free reserves of the company; and
b. such buyback has been authorized by the Board by means of a

resolution passed at its meeting:
33
Provided further that no offer of buyback shall be made within a period of

three hundred and sixty-five days reckoned from the date of the preceding
offer of buyback, if any.
Explanation – For the purposes of this clause, the expression “offer of

buyback” means the offer of such buyback made in pursuance of the
resolution of the Board referred in the first proviso;
a. the buyback is or less than twenty-five per cent of the total paid-up
capital and free reserves of the company:
Provided that the buyback of equity shares in any financial year shall
not exceed twenty-five per cent of its total paid-up equity capital in
that financial year;
b. the ratio of the debt owed by the company is not more than twice the
capital and its free reserves after such buyback:
Provided that the Central Government may prescribe a higher ratio of

the debt than that specified under this clause for a class or classes of
companies.
Explanation – For the purposes of this clause, the expression “debt”

includes all amounts of unsecured and secured debts;
a. all the shares or other specified securities for buyback are fully paid-
up;
b. the buyback of the shares or other specified securities listed on any

recognized stock exchange is in accordance with the regulations
made by the Securities and Exchange Board of India in this behalf;
c. the buyback in respect of shares or other specified securities other

than those specified in clause (I) is in accordance with the guidelines
as may be prescribed.
34
3. The notice of the meeting at which special resolution is proposed to be

passed shall be accompanied by an explanatory statement stating:
a. a full and complete disclosure of all material facts;

b. the necessity for the buyback;
c. the class of security intended to be purchased under the buyback;
d. the amount to be invested under the buyback; and
e. the time limit for completion of buyback.
4. Every buyback shall be completed within twelve months from the date
of passing the special resolution or a resolution passed by the Board
under clause (b) of sub-section (2).
5. The buyback under sub-section (1) may be:
a. from the existing security holders on a proportionate basis; or
b. from the open market; or
c. from odd lots, that is to say, where the lot of securities of a public
company, whose shares are listed on a recognized stock exchange, is
smaller than such marketable lot, as may be specified by the stock
exchange; or
d. by purchasing the securities issued to employees of the company

pursuant to a scheme of stock option or sweat equity.
6. Where a company has passed a special resolution under clause (b) of

sub-section (2) or the Board has passed a resolution under the first
proviso to clause (b) of that sub-section to buyback its own shares or
other securities under this section, it shall, before making such buyback,
file with the Registrar and the Securities and Exchange Board of India a
declaration of solvency in the form as may be prescribed and verified by
an affidavit to the effect that the Board has made a full inquiry into the
affairs of the company as a result of which they have formed an opinion
that it is capable of meeting its liabilities and will not be rendered
35
insolvent within a period of one year of the date of declaration adopted

by the Board, and signed by at least two directors of the company, one
of whom shall be the managing director, if any:
Provided that no declaration of solvency shall be filed with the Securities

and Exchange Board of India by a company whose shares are not listed
on any recognized stock exchange.
7. Where a company buys back its own securities, it shall extinguish and
physically destroy the securities so bought back within seven days of
the last date of completion of buyback.
8. Where a company completes a buyback of its shares or other specified

securities under this section, it shall not make further issue of the same
kind of shares (including allotment of further shares under clause (a) of
sub-section (1) of Section 81) or other specified securities within a
period of six months except by way of bonus issue or in the discharge of
subsisting obligations such as conversion of warrants, stock option
schemes, sweat equity or conversion of preference shares or debentures
into equity shares.
9. Where a company buys back its securities under this section, it shall
maintain a register of the securities so bought, the consideration paid
for the securities bought back, the date of cancellation of securities, the
date of extinguishing and physically destroying of securities and such
other particulars as may be prescribed.
10.A company shall, after the completion of the buyback under this
section, file with the Registrar and the Securities and Exchange Board of
India, a return containing such particulars relating to the buyback within
thirty days of such completion, as may be prescribed:
Provided that no return shall be filed with the Securities and Exchange
Board of India by a company whose shares are not listed on any
recognized stock exchange.
36
11.If a company makes default in complying with the provisions of this

section or any rules made thereunder, or any regulations made under
clause (1) of sub-section (2), the company or any officer of the
company who is in default shall be punishable with imprisonment for a
term which may extend to two years, or with fine which may extend to
Rs. 50,000/-, or with both.
Explanation — For the purposes of this section:

a. “specified securities” includes employees’ stock option or other
securities as may be notified by the Central Government from time to
time;
b. “free reserves” shall have the meaning assigned to it in clause (b) of

Explanation to Section 372A.
37
1.4 SUMMARY
Basic Indian tax structure consists of: (i) Income Tax, (ii) Excise Duty, and
(iii) Service Tax all collected by Central Government; (i) Sales Tax, (ii)
Excise on Liquor, and (iii) Tax on Agriculture collected by State
Government; and Octroi collected by Municipal Authorities.
Income and Wealth tax are known as direct taxes while Customs, Excise,
and Service tax are called indirect taxes.
Definitions of various important terms are provided in the Section 2 of the

Income Tax Act.
1.5 SELF ASSESSMENT QUESTIONS
1. Who is an assessee?
2. Explain the term ‘business’. Explain any three activities that qualify for
being called ‘business activity’.
3. What do you understand by ‘dividend’? Explain giving two instances how

the Income Tax Act 1961 does extend the meaning of ‘dividend’.
4. Name any five items that are considered as income under the Income
Tax Act, 1961.
5. To what extent are gifts considered as income?
6. Explain ‘Capital Asset’. What do you understand by personal effects? Is

jewellery a personal effect?
7. Explain the concept of ‘transfer’ in relation to capital assets.
38
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture
39
PREVIOUS YEAR, CHARGE OF INCOME, SCOPE OF TOTAL INCOME, RESIDENTIAL STATUS
(SECTIONS 3 TO 9)
Chapter 2
Previous Year, Charge Of Income, Scope Of
Total Income, Residential Status
(Sections 3 To 9)
Objectives
• Kinds of taxable income

• Resident, ordinarily resident and non-resident status
• The concept of deemed income
• Circumstances under which income is deemed to be received in India
Structure
2.1 Previous Year (Section 3)
2.2 Charge of Income Tax (Section 4)
2.3 Scope of Total Income (Section 5)
2.4 Resident in India (Section 6)
2.5 Income Deemed to be Received (Section 7)
2.6 Dividend Income (Section 8)
2.7 Income Deemed to Accrue or Arise in India (Section 9)
2.8 Incidence of Tax for Different Taxpayers
2.9 Summary
40
(SECTIONS 3 TO 9)
2.1 PREVIOUS YEAR (Section 3)
Previous year means the financial year immediately preceding the

assessment year.
Where a business or profession is newly set up, or a source of income has

newly come into existence:
New Business/Source Previous Year shall be
In the case of a business or profession The period beginning with the date of
newly set up in the said financial year setting up of the business or profession
(or a source of income has newly come (or a source of income newly so
into existence), the previous year shall arising) and ending on the following
be 31st March
The Previous year has to be seen along with the definition of assessment
year defined above. The assessment year is the following financial year to
the previous year.
Examples
1. Mr. X sets up a new business on January 01, 2009. What is the previous
year for the assessment year 2009-10? Previous year for the
assessment year 2009-10 is the period commencing on January 01,
2009 and ending on March 31, 2009.
2. Mr. A joins an Indian company on December 26, 2004. Prior to

December 26, 2003, he was not in any employment nor was he having
any other source of income. What shall be the previous years in respect
of the assessment year 2004-05 and 2005-06?
Previous years for the assessment years 2004-05, and 2005-06 will be as
under:
Assessment Year Previous Year
2004-05 December 25, 2003 to March 31, 2004

2005-06 April 01, 2004 to March 31, 2005
41
(SECTIONS 3 TO 9)
Exceptions
The rule that the income of the previous year is assessable as the income
of immediately following assessment year has certain exceptions. These
are:
1. Income of the non-resident shipping companies, if they do not have any

representative in India.
2. Income of a person and leaving India either permanently or for a long

period of time.
3. Income of a person trying to alienate his assets with a view to avoiding

tax.
4. Income of a discontinued business.
In these cases, income of a previous year may be taxed as the income of

the assessment year immediately preceding the normal assessment year at
the rate applicable to former.
2.2 CHARGE OF INCOME TAX (Section 4)
Income tax shall be charged—
• on every person
• in respect of his total income of the previous year
• for any assessment year
• at any rate or rates in force
• in accordance with and subject to the provisions of this Act
In doing so:
• income tax shall be deducted at the source; or
• paid in advance under any provision of Income Tax Act, 1961.
Section 4 is the charging section. A charging section is very sacrosanct in

defining the scope and extent of the mandate to levy tax. It is like a
Preamble to any tax law. Therefore, its ambit must be properly understood.
42
(SECTIONS 3 TO 9)
Each year is a self-contained accounting period. Ultimate destination/
utilization of income is not relevant. Liability to tax depends upon the
earning of profits by a unit and not upon the ultimate division of the
profits.
It is well-settled that tax is attracted at the point when the income is

earned. Taxability of income is not dependent upon its destination or the
manner of its utilization. It is well-settled that income attracts as soon as it
accrues. The application or destination of the income has nothing to do
with its accrual or taxability. Further, any given income cannot be taxed
twice. It is a fundamental rule of the law of taxation that, unless otherwise
expressly provided income cannot be taxed twice. Same income cannot be
taxed in two different years.
An important issue relevant in this respect is that the income which can be
taxed has to be that of the person who is sought to be assessed and no
other assessee. The income shall belong to a definite previous year. At
best, the assessing officer may make a protective assessment to protect
the interest of the revenue in that it may be assessed in respect of two or
more assessment years on protective basis. But demand can be enforced
only in respect of one of the years. However, it is a settled position of law
that protective assessment cannot be made by an assessing officer on
more than two persons on protective basis.
An assessee cannot claim that certain income cannot be taxed in his hands
because the situation demands that he is obliged under law or otherwise to
divert the income to some other person after the income is due to him or
received by him. This shall be diversion of income by overriding title in his
hands. Such an attempt shall be merely appropriation of income and
cannot escape tax in his hands. However, if it can be claimed or if the
circumstances so warrant that a particular income, before it became due to
the assessee, had to be paid to another person then in such a case, it shall
not be assessed in the hands of first mentioned person.
Then again, so far as assessment of income is concerned, what can be the

rights of the assessee? Can an assessee have right to so arrange his
financial affairs that the burden of tax on him is minimized? This has been
a contentious issue and arguably the final word on this has been said by
the Supreme Court and which is that any effort at tax planning must be
legitimate. Tax planning may be legitimate provided it is within the
43
(SECTIONS 3 TO 9)
framework of law. Colourable devices cannot be part of tax planning and it
is wrong to encourage or entertain the belief that it is honourable to avoid
the payment of tax by resorting to dubious methods. It is the obligation of
every citizen to pay taxes honestly without resorting to subterfuges
[McDowell & Co. Ltd. v. GTO [1985] 154 ITR 148 (SC)].
Court can go behind and look into substance of any transaction. It is the
duty of the Court, in every case where ingenuity is expanded to avoid
taxing and welfare legislations, to get behind the smoke-screen and
discover the true state of affairs. The Court is not to be satisfied with form
and leave well alone the substance of a transaction.
Any attempt to circumvent the law to find loophole in the fiscal laws may
be called tax avoidance which is obviously not viewed with favour. The tax
avoidance also refers to such means. For example, falsification of accounts,
exaggerated claims of expenses, etc. are some instances of tax avoidance.
The attempts to not pay tax by resorting to means that are illegal,
dishonest, and prohibited by law are known as tax evasion. Both these
attempts to avoid or evade tax are very obviously unacceptable and the
law provides mechanism to discourage these. Penal consequences and
prosecution follow for such attempts at tax avoidance and tax evasion.
Video Link 1
2.3 SCOPE OF TOTAL INCOME (Section 5)
Resident
Total income in case of a Resident shall be all income which:
• is received or is deemed to be received in India, or

• accrues or arises or is deemed to accrue or arise to him in India, or
• accrues or arises to him outside India.
44
(SECTIONS 3 TO 9)
Deemed Receipt
Deemed receipt is a statutory concept, and is not dependent on volition or
sweet will of assessee. The expression ‘deemed to be received’ only means
deemed by the provisions of the Act to be received. The phrase ‘statutory
receipt’ might be conveniently employed to cover income which is ‘deemed
to be received’. An amount cannot be ‘deemed to be received’ merely by
the volition or sweet will of an individual [Keshav Mills Ltd. v. CIT [1953]
23 ITR 230 (SC)].
The term ‘deemed’ brings within the net of chargeability income not
actually accruing but which is supposed notionally to have accrued. It
involves a number of concepts. By statutory fiction, income which can in no
sense be said to accrue at all may be considered as so accruing. Similarly,
the fiction may relate to the place, the person, or be in respect of the year
of taxability.
Accrual
An income accrues when assessee acquires right to receive it. Income may
accrue to an assessee without actual receipt of the same. If the assessee
acquires a right to receive the income, the income can be said to have
accrued to him though it may be received later, on its being ascertained
[CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675 (SC)/CIT v. Nandram
Hunatram [1976] 103 ITR 433 (On.)].
For accrual to take place, a debt must have come into existence in favour
of the assessee and he must have acquired a right to receive the payment.
Unless and until his contribution or parenthood is effective in bringing into
existence, a debt or a right to receive payment, it cannot be said that any
income had accrued to him [E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR
27 (SC)].
Accrual of income is not to be decided with reference to method of

accounting. The question of accrual or non-accrual of income and the
subsidiary question of time of accrual of income have got to be decided on
fiscal principles and on the basis of commercial prudence and not on the
basis of any given accounting method which is in vogue or which might be
practiced by the assessees.
45
(SECTIONS 3 TO 9)
The mercantile system of accounting is relevant to determine the point of
time when revenue needs to be recognized. It cannot be relied on to
determine whether the income has, in fact, resulted or materialized in
favour of the assessee. This issue has to be viewed in the context of
commercial and business realities of the situation.
Income which has been included in the total income of a person on the
basis that it has accrued or arisen or is deemed to have accrued or arisen
to him shall not again be so included on the basis that it is received or
deemed to be received by him in India.
Book Entries Not Always Relevant

Income accruing or arising outside India shall not be deemed to be
received in India within the meaning of this section by reason only of the
fact that it is taken into account in a balance sheet prepared in India.
Person Not Ordinarily Resident in India
Total income in case of a person not ordinarily resident in India shall be all
income which accrues or arises to him:
• from within India
• from outside India only if it is derived from a business controlled in or a

profession set up in India
In other words, a person who is not ordinarily resident in India is liable to

be taxed on his Indian income and also his world income if it has Indian
connection, i.e., if accrues or arises to him from outside India only if it is
derived from a business controlled in or a profession set up in India.
Non-resident
The total income of any previous year of a person who is a non-resident
includes all income from whatever source derived which is received or is
deemed to be received in India in such year by or on behalf of such
person; or accrues or arises or is deemed to accrue or arise to him in India
during such year.
Thus, in case of a non-resident, income earned outside India is not

included in his total income.
46
(SECTIONS 3 TO 9)
2.4 Resident IN INDIA (Section 6)
For the purposes of this Act, an individual is resident in India in any

previous year, if he:
a. is in India in that year for 182 days or more; or
b. been in India for 365 days out of 4 years preceding that year and is in
India for a period or periods amounting in all to 60 days or more in that
year.
A Hindu undivided family, firm or other AOP is resident in India in any

previous year in every case except where during that year the control and
management of its affairs is situated wholly outside India.
A company is resident in India in any previous year, if:
a. it is an Indian company; or
b. during that year, the control and management of its affairs is situated
wholly in India.
The affairs as used here must have some relation to income of the family/
firm or the company; it would mean affairs which are relevant for the
purpose of the Income Tax Act and which have some relation to income.
The control and management would signify de facto management. It would
connote having controlling and directive power; the head and brain as is
commonly known.
Not ordinarily resident [as amended by Finance Act, 2003 w.e.f. 1.4.2004,
i.e., A.Y. 2004-05]. A person is said to be not ordinarily resident in India in
any previous year if such person is:
a. an individual who has been a non-resident in India in 9 out of the 10

previous years preceding that year, or
b. is an individual has during the 7 previous years preceding that year

been in India for a period of 729 days or less;
47
(SECTIONS 3 TO 9)
c. an Hindu undivided family whose manager has been a non-resident in
India in 9 out of the 10 previous years preceding that year, or
Video Link 1
Video Link 2
2.5 INCOME DEEMED TO BE RECEIVED (Section 7)
i. the annual accretion in the previous year to the balance at the credit of
an employee participating in a recognized provident fund to the extent
provided in Rule 6 of Part A of the Fourth Schedule.
ii. the transferred balance in a recognized provident fund, to the extent

provided in sub-rule (4) of Rule 11 of Part A of the Fourth Schedule.
iii. the contribution made by Central Government to the account of the

employee under a pension scheme referred to in Section 8OCCD [Clause
(iii) inserted by Finance Bill (No. 2), 2004].
Rule 6 of Part A of the Fourth Schedule
Employer’s annual contributions, when deemed to be income received by

employee:
(6) That portion of the annual accretion in any previous year to the balance
at the credit of an employee participating in a recognized provident fund as
consists of—
a. contributions made by the employer in excess of 12% (twelve per cent)

of the salary of the employee, and
b. interest credited on the balance to the credit of the employee insofar as

it is allowed at a rate exceeding such rate as may be fixed by the
Central Government in this behalf by notification in the Official Gazette
(currently @ 95% p.a.), shall be deemed to have been received by the
employee in that previous year and shall be included in his total income
for that previous year, and shall be liable to income tax.
48
(SECTIONS 3 TO 9)
Sub-rule (4) of Rule 11 of Part A of the Fourth Schedule
Subject to such rules as the Board may make in this behalf, the Assessing
Officer shall make a calculation of the aggregate of all sums comprised in a
transferred balance which would have been liable to income tax if this Part
had been in force from the date of the institution of the fund, without
regard to any tax which may have been paid on any sum, and such
aggregate (if any) shall be deemed to be income received by the employee
in the previous year in which the recognition of the fund takes effect and
shall be included in the employee’s total income for that previous year,
and, for the purposes of assessment, the remainder of the transferred
balance shall be disregarded, but no other exemption or relief, by way of
refund or otherwise, shall be granted in respect of any sum comprised in
such transferred balance: provided that, in cases of serious accounting
difficulty, the Chief Commissioner or Commissioner may, subject to the said
rules, make a summary calculation of such aggregate.
Video Link 1
2.6 DIVIDEND INCOME (Section 8)
For the purposes of inclusion in the total income of an assessee:
a. any dividend declared by a company or distributed or paid by it shall be

deemed to be the income of the previous year in which it is so declared,
distributed, or paid, as the case may be;
b. any interim dividend shall be deemed to be the income of the previous

year in which the amount of such dividend is unconditionally made
available by the company to the member who is entitled to it.
This is an instance of deemed income in case of dividend.
49
(SECTIONS 3 TO 9)
2.7 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA

(Section 9)
The following incomes shall be deemed to accrue or arise in India:
• from any business connection in India, or

• from any business connection in India, or
• from any property in India, or
• from any asset or source of income in India, or
• through the transfer of a capital asset situated in India.
What is ‘Business Connection’ in India (w.e.f. 1.4.2004)?

Any business activity carried out through a person who is acting on behalf
of the non-resident and having:
a. an authority to conclude contracts on behalf of the non-resident, or
b. habitually maintains in India a stock of goods or merchandise from

which he regularly delivers goods or merchandise on behalf of the non-
resident; or
c. habitually secures orders in India, mainly or wholly for the non-resident

or for that non-resident and other non-residents controlling, controlled
by, or subject to the same common control, as that non-resident.
The expression ‘business connection’ means something more than

‘business’. A business connection involves a relation between a business
carried on by a non-resident which yields profits or gains and some activity
in the taxable territories which contributes directly or indirectly to the
earning of those profits or gains. It requires an element of continuity
between the business of the non-resident and the activity in the taxable
territories.
Business connection means a real and intimate relation between trading

activity carried on outside the taxable territories and trading activity within
the territories, the relation between the two contributing to the earning of
income by the non-resident in his trading activity. The term ‘business
connection’ would also include professional connection. Through such
50
(SECTIONS 3 TO 9)
business connection, income must accrue or arise whether directly or
indirectly to the non-resident.
1. Income which falls under the head “Salaries”, if it is earned in India.
2. Income chargeable under the head “Salaries” payable by the

Government to a citizen of India for service outside India;
3. A dividend paid by an Indian company outside India;
4. Income by way of interest payable by:
• the Government; or
• a person who is a resident, except where the interest is payable in
respect of any debt incurred, or moneys borrowed and used, for the
purposes of a business or profession carried on by such person
outside India or for the purposes of making or earning any income
from any source outside India; or
• a person who is a non-resident, where the interest is payable in

respect of any debt incurred, or moneys borrowed and used, for the
purposes of a business or profession carried on by such person in
India;
5. Income by way of royalty payable by—
• a person who is a resident, except where the royalty is payable in

respect of any right, property or information used or services utilized
for the purposes of a business or profession carried on by such
person outside India or for the purposes of making or earning any
income from any source outside India; or
• a person who is a non-resident, where the royalty is payable in

respect of any right, property or information used or services utilized
for the purposes of a business or profession carried on by such
person in India or for the purposes of making or earning any income
from any source in India.
51
(SECTIONS 3 TO 9)
However, this shall not apply in relation to such of income by way of royalty
as consists of lump sum payment made by a person, who is a resident for
the transfer of any rights (including the granting of any license) in respect
of computer software supplied by non-resident manufacturer along with
computer or computer based equipment under any scheme approved under
the policy on Computer Software Export, Software Development, and
Training, 1986 of Government of India.
6. Income by way of fees for technical services payable by:
• person who is a resident, except where the fees are payable in

respect of services utilized in a business or profession carried on by
such person outside India or for the purposes of making or earning
any income from any source outside India; or
• a person who is a non-resident, where the fees are payable in

respect of services utilized in a business or profession carried on by
such person in India or for the purposes of making or earning any

income from any source in India.
For the purposes of this clause, “fees for technical services” means any
consideration (including any lump sum consideration) for the rendering of
any managerial, technical, or consultancy services (including the provision
of services of technical or other personnel) but does not include
consideration for any construction, assembly, mining, or similar project
undertaken by the recipient or consideration which would be income of the
recipient chargeable under the head “Salaries”.
Video Link 1
52
(SECTIONS 3 TO 9)
2.8 INCIDENCE OF TAX FOR DIFFERENT TAXPAYERS
In case of Individual and Hindu Undivided Family:
Resident and Resident but Non-resident

Ordinarily Not Ordinarily in India
Resident in Resident
India in India
1. Indian Income Taxable in Taxable in India Taxable in India

India
2. Foreign Income Taxable in Taxable in India Not taxable in

- If it is business income India India
and business is
controlled wholly or
partly from India
- If it is income from Taxable in Taxable in India Not taxable in
profession which is set India India
up in India
- If it is business or Taxable in Not taxable in
professional income and India India Not taxable in
business or profession India
is set up and controlled
from outside India
- Any other foreign Taxable in Not taxable in Not taxable in
income India India India
Any other taxpayer (like Company, AOP, BOI, etc.)
Resident in India Non-resident in India

Indian Income Taxable in India Taxable in India
Foreign Income Taxable in India Not taxable in India
Video Link 1
53
(SECTIONS 3 TO 9)
2.9 SUMMARY
The year preceding the assessment year is defined as Previous Year.

Income tax is charged on every person, in respect of total income of the
previous year, for any assessment year, at the rates in force as per
provisions of the Act. Scope of total income is determined on the basis of
‘residence’ of the taxpayer. 'Residence' status depends on period for which
taxpayer stays in India. The Act also defines conditions for consideration of
Deemed Income, Dividend Income, and Income deemed to arise in India.
1. What kinds of income are taxable in the hands of ‘Resident’?
2. What kinds of income are taxable in the hands of ‘Non-resident’?
3. Give two instances of Income deemed to accrue or arise in India with

reference to Section 9 of Income Tax Act, 1961.
4. What kinds of income are taxable in the hands of ‘Resident and

ordinarily resident’?
5. Under what circumstance can the previous year be the assessment

year?
6. What do you understand by charge of income tax?
7. When can an individual be called resident under Income Tax Act, 1961?
8. Who is a non-resident?
9. When can dividend be treated as deemed income?
10.Under what circumstances the income is deemed to be received in

India?
54
(SECTIONS 3 TO 9)
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
55
INCOME WHICH DO NOT FORM PART OF TOTAL INCOME (SECTION 10)
Chapter 3
Income Which Do Not Form Part Of Total
Income (Section 10)
Objectives
• Various income categories exempt from total income
• Exemption on interest on small-scale savings schemes
• Exemption on certain payments to employees
• Exemption on incomes of research or charitable institutes
Structure
3.1 Incomes Not Included in Total Income (Section 10)
3.2 Summary
56
3.1 INCOMES NOT INCLUDED IN TOTAL INCOME (Section

10)
Various categories of income are exempt from income tax u/s 10. However,
the onus of showing that a particular class of income is exempt from
taxation lies on the assessee. To earn the exemption, the assessee has to
establish that his case clearly and squarely falls within the ambit of the
said provisions of the Act.
The items of income exempt from tax are enumerated below:
1. Section 10(1)
Agricultural income shall be excluded from one’s total income. It shall only
be taken for considering rate to tax non-agricultural income.
2. Section 10(2): Receipt by a Member of HUF

Any sum received by an individual as a member of a Hindu undivided
family out of the income of the family or out of the estate of the family.
This, however, shall be subject to the clubbing provisions contained in
Section 64(2) of the Income Tax Act, 1961.
3. Section 10(2A): Receipt by a Partner of a Firm

A partner’s share in the total income of the firm which is separately
assessed as such.
However, any salary, interest or commission paid or payable to a partner

which is deductible from the total income of the firm shall be included in
the income of the partner as his business income.
(3A) Section 10(4): Non-resident Assessees
i. Interest on notified securities/bonds: In the case of a non-resident,

any income by way of interest on such securities or bonds as the Central
Government may, by notification in the Official Gazette, specify in this
behalf, including income by way of premium on the redemption of such
bonds.
The Central Government shall not specify, for the purposes of this sub-
clause, such securities or bonds on or after the 1st day of June, 2002;
57
ii. Interest on money in NRE A/c: In the case of an individual, any

income by way of interest on monies standing to his credit in a Non-
resident (External) Account in any bank in India in accordance with the
Foreign Exchange Regulation Act, 1973 (46 of 1973), and the rules
made thereunder:
Provided that such individual is a person resident outside India as

defined in clause (q) of Section 2 of the said Act or is a person who has
been permitted by the Reserve Bank of India to maintain the aforesaid
Account.
Following second proviso to sub-clause (ii) in clause (4) of Section 10,

which was inserted by the Finance (No. 2) Act, 2004, w.e.f. 1.4.2006,
shall be omitted by the Finance Act, 2005, w.e.f. 1.4.2006:
Provided further that nothing contained in this sub-clause shall apply to

any income by way of interest paid or credited on or after the 1st day of
April, 2005 to the Non-resident (External) Account of such individual.
4. Section 10 (4B): Interest on NSC (Issued Before the 1st Day of

June, 2002) Received by Non-resident
In the case of an individual, being a citizen of India or a person of Indian

origin, who is a non-resident, any income from interest on such savings
certificates issued before the 1st day of June, 2002 by the Central
Government as that Government may, by notification in the Official
Gazette, specify in this behalf:
Here, it is necessary that the individual has subscribed to such certificates

in convertible foreign exchange remitted from a country outside India in
accordance with the provisions of the Foreign Exchange Regulation Act,
1973 (46 of 1973), and any rules made thereunder.
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5. Section 10(5): Travel Concessions
In the case of an individual, the value of any travel concession or

assistance earned (limited to expenses actually incurred) from his
employer during or preparatory to retirement.
i. During Service: From his employer for himself and his family, in
connection with his proceeding on leave to any place in India;
ii. After Retirement: From his employer or former employer for himself
and his family, in connection with his proceeding to any place in India
after retirement from service or after the termination of his service
(amount exempted under this clause shall in no case exceed the amount
of expenses actually incurred for the purpose of such travel).
This exemption is subject to conditions laid down in Rule 2B of the Income

Tax Rules, 1962 which are as under:
Rule 2B prescribes the conditions as well as quantum of exemption, which

are as follows:
Conditions to be satisfied:
• The exemption is admissible on the value of any travel concession or

assistance received by or due to an assessee from his employer or
former employer, as the case may be, for himself and his family, in
connection with his proceeding (i) on leave to any place in India, or (ii) to
any place in India after the retirement from service, or (iii) to any place
in India after the termination of his service.
• The exemption is admissible in respect of actual expenditure incurred for

journeys performed, not only by the assessee but also by his family.
For this purpose, ‘family’ means: (i) the spouse and children of the
assessee, and (ii) the parents, brothers and sisters of the assessee
provided that they are wholly or mainly dependent on the assessee. With
effect from 1.10.1997, the Central Civil Service Leave Travel Concession
Rules have been amended in this respect.
59
• The exemption can be availed only in respect of two journeys performed

in a block of four calendar years. For this purpose, the first four-year
block commenced with the calendar year 1986. Thus, the four-year
blocks will be 1986-89, 1994-97, 1998-2001 and so on.
• If an assessee has not availed travel concession or assistance during any

of the specified four-year block periods on one of the two permitted
occasions, or on both occasions, exemption can be claimed provided he
avails the concession or assistance in the calendar year immediately
following that block. This is popularly known as the ‘carry-over’
concession. In such cases, the exemption so availed will not be counted
for purposes of regulating the future exemptions allowable for the
succeeding block of four years.
Quantum of exemption: The basic rule is that the quantum of exemption

will be limited to the actual expenses incurred on the journey. This
presupposes that, without performing any journey and incurring expenses
thereon, no exemption can be claimed.
In addition to the above general limitation, the quantum of exemption will

also be subject to the following maximum limits, depending upon the mode
of transport used or available:
Journeys Performed on or After 1.10.1997

• For journeys performed by air • Air economy fare of the national
carrier (Indian Airlines or Air India)
by the shortest route to the place of
destination.
• Where place of origin of journey and • Air-conditioned first class rail fare by
destination are connected by rail and the shortest route to the place of
the journey is performed by any destination.
mode of transport other than by air
• Where place of origin of journey and i. Where a recognized public transport
destination or part thereof are not system exists, the first class or
connected by rail deluxe class fare on such transport
by the shortest route to the place of
destination.
60
ii. Where no recognized public

transport system exists, the air-
conditioned first class rail fare, for
the distance of the journey by the
shortest route, as if the journey has
been performed by rail.
Restricted concession for children: Under sub-rule (4) of Rule 213,

inserted with effect from 1.10.1997, exemption on travel concession will
not be admissible to more than two surviving children of an individual born
after 1.10.1998. This restriction will not, however, apply in respect of
children born before 1.10.1998, and also in cases where an individual,
after getting one child, begets multiple children (twins/triplets/quadruplets,
etc.) on the second occasion. The implications of this restriction will be as
follows:
In respect of journeys performed after 1.10.1998:
• the exemption will be admissible to all surviving children born before

1.10.1998;
• in addition, the exemption will be admissible to only two surviving

children born on or after 1.10.1998. In reckoning this limit of two
children, children born out of multiple birth after the first child will be
treated as ‘one child’ only.
It may be noted that Section 2(15B) of the Act defines a ‘child’ as including
‘a stepchild and an adopted child of the individual’. Hence, the aforesaid
restrictions will operate in respect of step children and adopted children,
provided they are born on or after 1.10.1998.
6. Section 10(6)(ii): Salary/Remuneration to Diplomatic Personnel

Remuneration received by an official or staff of an embassy, high
commission, legation, commission, consulate, or trade representation of a
foreign state.
61
7. Section 10(6)(vi): Salary to Foreign Enterprise/Consulate

Employees
The remuneration received by him as an employee of a foreign enterprise

for services rendered by him during his stay in India, provided the
following conditions are fulfilled:
a. the foreign enterprise is not engaged in any trade or business in India;
b. his stay in India does not exceed in the aggregate a period of ninety
days in such previous year; and
c. such remuneration is not liable to be deducted from the income of the
employer chargeable under this Act.
8. Section 10(6)(viii): Salary to Foreign National Crew Members

Any income chargeable under the head “Salaries” received by or due to
any such individual being a non-resident as remuneration for services
rendered in connection with his employment on a foreign ship where his
total stay in India does not exceed in the aggregate a period of ninety days
in the previous year.
9. Section 10(6)(xi): Remuneration Received by Him as an

Employee of the Government of a Foreign State in the Course of
Training
The remuneration received by him as an employee of the Government of a

foreign State during his stay in India in connection with his training in any
establishment or office of, or in any undertaking owned by:
i. the Government; or
ii. any company in which the entire paid-up share capital is held by the
Central Government, or any State Government or Governments, or
partly by the Central Government and partly by one or more State
Governments; or
iii. any company which is a subsidiary of a company referred to in item (ii);

or
62
iv. any corporation established by or under a Central, State or Provincial

Act; or
v. any society registered under the Societies Registration Act, 1860 (14 of
1860), or under any other corresponding law for the time being in force
and wholly financed by the Central Government, or any State
Government or State Governments, or partly by the Central
Government and partly by one or more State Governments.
10.Section 10(6A): Exemption to Foreign Companies on Certain

Incomes
Where in the case of a foreign company deriving income by way of royalty

or fees for technical services received from Government or an Indian
concern in pursuance of an agreement made by the foreign company with
Government or the Indian concern after the 31st day of March, 1976 but
before the 1st day of June, 2002 and
a. where the agreement relates to a matter included in the industrial

policy, for the time being in force, of the Government of India, such
agreement is in accordance with that policy; and
b. in any other case, the agreement is approved by the Central

Government, the tax on such income is payable, under the terms of the
agreement, by Government or the Indian concern to the Central
Government, the tax so paid.
11.Section 10(6B): Tax Paid on Behalf of Non-resident

Where in the case of a non-resident (not being a company) or of a foreign
company deriving income (not being salary, royalty or fees for technical
services) from Government or an Indian concern in pursuance of an
agreement entered into before the 1st day of June, 2002 by the Central
Government with the Government of a foreign State or an international
organization, the tax on such income is payable by Government or the
Indian concern to the Central Government under the terms of that
agreement or any other related agreement approved before that date by
the Central Government, the tax so paid.
Any allowances or perquisites paid or allowed as such outside India by the

Government to a citizen of India for rendering service outside India.
63
12.Section 10(6BB): Tax Payable on Income from Leasing of

Aircraft, etc.
In case of Government of foreign State or a foreign enterprise gives an

aircraft or an aircraft engine to an Indian company which is engaged in the
business of operation of aircraft and the tax on such income is paid by the
Indian company, then the tax so paid shall be exempt and will not be
treated as the income of foreign State or enterprise, provided the following
conditions are satisfied:
a. The agreement for lease must have been entered into after 31.3.1997
but before 1.4.1999, or entered into after 31.3.2007;
b. The agreement must be approved by the Central Government in this

behalf;
c. The payment by the Indian company should be for lease of the aircraft
and not for providing spares, facilities,Rs. or services in connection with
the operation of the leased aircraft.
13.Section 10(6C): Technical Fees Received by Notified Foreign

Companies
Any income arising to such foreign company, as the Central Government
may, by notification in the Official Gazette, specify in this behalf, by way of
royalty or fees for technical services received in pursuance of an
agreement entered into with that Government for providing services in or
outside India in projects connected with security of India.
14.India Section 10(7): Government Employees – Allowances

Outside India
Any allowances or perquisites paid or allowed as such outside India by the
Government to a citizen of India for rendering service outside India.
15.Section 10(8): Remuneration Received by Government

Employee under Co-operative Technical Assistance
In the case of an individual who is assigned to duties in India in connection
with any co-operative technical assistance programmes and projects in
accordance with an agreement entered into by the Central Government
and the Government of a foreign State (the terms whereof provide for the
exemption given by this clause):
64
a. the remuneration received by him directly or indirectly from the

Government of that foreign State for such duties, and
b. any other income of such individual which accrues or arises outside

India, and is not deemed to accrue or arise in India, in respect of which
such individual is required to pay any income or social security tax to
the Government of that foreign State.
16.Section 10(8A): Fees/Remuneration Received by Consultant

Who is Non-resident
In the case of a consultant:
a. any remuneration or fee received by him or it, directly or indirectly, out

of the funds made available to an international organization [hereafter
referred to in this clause and clause (88) as the agency] under a
technical assistance grant agreement between the agency and the
Government of a foreign State; and
b. any other income which accrues or arises to him or it outside India, and
is not deemed to accrue or arise in India, in respect of which such
consultant is required to pay any income or social security tax to the
Government of the country of his or its origin.
Explanation – In this clause, “consultant” means:
i. any individual, who is either not a citizen of India or, being a citizen of
India, is not ordinarily resident in India; or
ii. any other person, being a non-resident, engaged by the agency for
rendering technical services in India in connection with any technical
assistance programme or project, provided the following conditions are
fulfilled, namely:
a. the technical assistance is in accordance with an agreement entered

into by the Central Government and the agency; and
b. the agreement relating to the engagement of the consultant is
approved by the prescribed authority for the purposes of this clause.
65
17.Section 10(8B): Fees/Remuneration in Connection to Technical

Assistance
In the case of an individual who is assigned to duties in India in connection

with any technical assistance programme and project in accordance with an
agreement entered into by the Central Government and the agency:
a. the remuneration received by him, directly or indirectly, for such duties

from any consultant referred to in clause (BA); and
b. any other income of such individual which accrues or arises outside

India, and is not deemed to accrue or arise in India, in respect of which
such individual is required to pay any income or social security tax to
the country of his origin, provided the following conditions are fulfilled,
namely:
i. the individual is an employee of the consultant referred to in clause

(8A) and is either not a citizen of India or, being a citizen of India, is
not ordinarily resident in India; and
ii. the contract of service of such individual is approved by the

prescribed authority before the commencement of his service.
18.Section 10(9): Income of Member of Family under Technical

Assistance Programme
The income of any member of the family of any such individual as is

referred to in clause (B) or clause (BA) or, as the case may be, clause (86)
accompanying him to India, which accrues or arises outside India, and is
not deemed to accrue or arise in India, in respect of which such member is
required to pay any income or social security tax to the Government of that
foreign State or, as the case may be, country of origin of such member.
19.Section 10(10): Gratuity
Section 10(10)(i): Death-cum-retirement Gratuity by Government

Employees
Any death-cum-retirement gratuity received under:
66
• the revised Pension Rules of the Central Government, or
• the Central Civil Services (Pension) Rules, 1972, or
• any similar scheme applicable to the members of the civil services of the
Union or holders of posts connected with defence or of civil posts under
the Union (such members or holders being persons not governed by the
said Rules), or
• to the members of the all-India services or to the members of the civil

services of a State or holders of civil posts under a State or to the
employees of a local authority, or
• any payment of retiring gratuity received under the Pension Code or

Regulations applicable to the members of the defence services.
Section 10(10)(ii): Gratuity Received under the Payment of

Gratuity Act, 1972
Any gratuity received under the Payment of Gratuity Act, 1972 (39 of
1972), to the extent it does not exceed an amount calculated in
accordance with the provisions of sub-sections (2) and (3) of Section 4 of
that Act.
Section 4 [sub-sections (2) and (3)] of Payment of Gratuity Act, 1972 lay
down the following limits for this purposes:
a. For every completed year of service or part thereof in excess of six

months, the employer shall pay gratuity to an employee at the rate of
fifteen days’ wages based on the rate of wages last drawn by the
employee concerned.
b. In the case of a piece-rate employee, daily wages shall be computed on

the average of the total wages received by him for a period of three
months immediately preceding the termination of his employment, and,
for this purpose, the wages paid for any overtime work shall not be
taken into account.
c. In the case of an employee who is employed in a seasonal

establishment and who is not so employed throughout the year, the
67
employer shall pay the gratuity at the rate of seven days’ wages for
each season.
d. In the case of a monthly rated employee, the fifteen days’ wages shall
be calculated by dividing the monthly rate of wages last drawn by him
by twenty-six and multiplying the quotient by fifteen.
e. The amount of gratuity payable to an employee shall not exceed Rs.

3,50,000/-.
Section 10(10)(iii): Any Other Gratuity Received
Any other gratuity received by an employee:
• on his retirement, or
• on his becoming incapacitated prior to such retirement, or
• on termination of his employment, or
• any gratuity received by his widow, children or dependents on his death
shall be exempt to the extent mentioned below.
The limits of gratuity so exempt shall be to the extent it does not exceed:
a. one-half month’s salary for each year of completed service,
b. calculated on the basis of the average salary for the ten months
immediately preceding the month in which any such event occurs,
c. subject to such limit [Rs. 3,50,000/-] as the Central Government may,

by notification in the Official Gazette, specify in this behalf having
regard to the limit applicable in this behalf to the employees of that
Government.
Meaning of Salary
In this clause, and in clause (bAA), “salary” shall have the meaning
assigned to it in clause (h) of Rule 2 of Part A of the Fourth Schedule.
It defines salary as: “Salary” includes dearness allowance, if the terms of

employment so provide, but excludes all other allowances and perquisites.
68
Gratuities from more than one employer in the same previous year:
Where any gratuities referred to in this clause are received by an employee
from more than one employer in the same previous year, the aggregate
amount exempt from income tax under this clause shall not exceed the
limit so specified.
Gratuities received in any one or more earlier previous years: Where

any such gratuity or gratuities was or were received in any one or more
earlier previous years also and the whole or any part of the amount of such
gratuity or gratuities was not included in the total income of the assessee
of such previous year or years, the amount exempt from income tax under
this clause shall not exceed the limit so specified as reduced by the amount
or, as the case may be, the aggregate amount not included in the total
income of any such previous year or years.
20.Section 10(10A): Payment in Commutation of Pension Received
a. From Central/State Government by Government Employees
b. Any payment in commutation of pension received under any scheme of

any other employer, to the extent it does not exceed:
i. in a case where the employee receives any gratuity, the commuted

value of one-third of the pension which he is normally entitled to
receive, and
ii. in any other case, the commuted value of one-half of such pension,
c. Any payment in commutation of pension received from a fund under

clause (23AAB) of Section 10.
This would mean any payment received by way of commutation of pension

received by an individual out of annuity plan of the LIC of India from a fund
set up by that corporation will be exempted.
21.Section (10AA): Leave Salary
i. For Government Employee: Any payment received by an employee of

Central/State Government as the leave salary at the time of his
retirement whether on superannuation or otherwise.
69
ii. For other than Government Employees: Any payment received by

an employee not covered by (i) above as the leave salary at the time of
his retirement whether on superannuation or otherwise.
Limits Prescribed
To the extent of the period of earned leave at his credit at the time of his
retirement:
• as does not exceed ten months’ average salary drawn by the employee
during the period of ten months immediately preceding his retirement,
• subject to limit of Rs. 3,00,000/- (limit currently specified by Central

Government).
• the entitlement to earned leave of an employee shall not exceed thirty

days for every year of actual service rendered by him as an employee.
Leave Salary Received from More than One Employer in the Same
Previous Year
Where any such payments are received by an employee from more than
one employer in the same previous year, the aggregate amount exempt
from income tax under this sub-clause shall not exceed the limit so
specified.
Leave Salary received in Any One or More Earlier Previous Years

Where Leave Salary was received in any one or more earlier previous years
also and such Leave Salary was not included in the total income of the
assessee of such earlier year/s, the amount exempt from income tax under
this sub-clause shall not exceed the limit so specified, as reduced by the
amount or, as the case may be, the aggregate amount not included in the
total income of any such previous year or years.
Meaning of Salary
In this clause, “salary” shall have the meaning assigned to it in clause (h)
of Rule 2 of Part A of the Fourth Schedule.
It defines salary as: “Salary” includes dearness allowance, if the terms of

employment so provide, but excludes all other allowances and perquisites.
70
22.Section 10(10B): Retrenchment Compensation
Any compensation received by a workman under the Industrial Disputes

Act, 1947 at the time of his retrenchment.
The amount exempt under this clause shall not exceed the least of:
i. an amount calculated in accordance with the provisions of clause (b) of

Section 25F of the Industrial Disputes Act, 1947 (14 of 1947); or
ii. such amount, not being less than Rs. 50,000/-, but not exceeding Rs.
5,00,000/
Provided that the above limits shall not apply in respect of any
compensation received by a workman in accordance with any scheme
which the Central Government may, having regard to the need for
extending special protection to the workmen in the undertaking to which
such scheme applies and other relevant circumstances, approve in this
behalf.
23.Section 10(10BB): Bhopal Gas Leak Disaster – Compensation

Any payments made under the Bhopal Gas Leak Disaster (Processing of
Claims) Act, 1985, and any scheme framed thereunder except payment
made to any assessee in connection with the Bhopal Gas Leak Disaster to
the extent such assessee has been allowed a deduction under this Act on
account of any loss or damage caused to him by such disaster.
24.Section 10(10BC): Compensation on Account of Any Disaster

It provides that any amount received or receivable from the Central
Government or State Government or a local authority by an individual or
his legal heir by way of compensation on account of any disaster shall be
exempt. However, the exemption will not be available in respect of the
amount received or receivable to the extent such individual or his legal heir
has been allowed a deduction under the Act on account of any loss or
damage caused by such disaster.
71
‑
25.Section 10(10C): Payment Received on Voluntary Retirement
Any amount received or receivable by an employee of:
i. a public sector company; or
ii. any other company; or
iii. an authority established under a Central, State or Provincial Act; or
iv. a local authority; or
v. a co-operative society; or
vi. an University established or incorporated by or under a Central, State or

Provincial Act and an institution declared to be a University under
section 3 of the University Grants Commission Act, 1956 (3 of 1956); or
vii.an Indian Institute of Technology within the meaning of clause (g) of

Section 3 of the Institutes of Technology Act, 1961 (59 of 1961); or
(vii a): any State Government; or
(vii b): the Central Government; or
(vii c): an institution, having importance throughout India or in any

State or States, as the Central Government may, by notification in
the Official Gazette, specify in this behalf; or
viii.such institute of management as the Central Government may, by

notification in the Official Gazette,
specify in this behalf, at the time of his voluntary retirement or termination

of his service, in accordance with any scheme of voluntary retirement or in
the case of a public sector company referred to in sub-clause (:), a scheme
of voluntary separation, to the extent such amount does not exceed Rs.
5,00,000/-.
72
The schemes of the said employers governing the payment of such amount
are framed in accordance with such guidelines as may be prescribed by
Government.
Where exemption has been allowed to an employee under this clause for
any assessment year, no exemption thereunder shall be allowed to him in
relation to any other assessment year.
However, in case of other companies, the scheme needs to satisfy the

prescribed conditions. Here, the Scheme has to meet the following criteria:
1. It applies to an employee who has completed ten years of service or

completed 40 years of age. This condition is not applicable in case of
amount received by an employee of a public sector company under
scheme of voluntary separation framed by the said company.
2. It applies to all employees (by whatever name called), including workers

and executives of the company/authority/co-operative society excepting
directors of the company/ co-operative society.
3. The scheme of voluntary retirement/separation has been drawn to result

in overall reduction in the existing strength of the employees.
4. The vacancy caused by voluntary retirement/separation is not to be

filled up, and the retiring employee shall not be employed in another
company or concern belonging to the same management.
5. The amount receivable on account of voluntary retirement/separation of

the employees, does not exceed the amount equivalent to three months’
salary for each completed year of service or salary at the time of
retirement multiplied by the balance months of service left before the
date of his retirement on superannuation.
• Activity A
1. Jayant Shipping Ltd. desires to release Voluntary Retirement Scheme.

Discuss points to be incorporated in the scheme to take advantage of
tax benefits available.
73
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26.Section 10(10CC): Tax on Non-monetary Perquisite Paid by His

Employer is Exempt (w.e.f. 1.4.2003)
In the case of an employee, being an individual deriving income in the
nature of a perquisite, not provided for by way of monetary payment
[within the meaning of clause (2) of Section 17], and the tax on such
income actually paid by his employer, at the option of the employer, on
behalf of such employee shall be treated as exempted income.
27.Section 10(10D): Sum Received under a Life Insurance Policy

(w.e.f. 1.4.2004)
Any sum received under a life insurance policy (including the sum allocated
by way of bonus on such policy) other than:
a. any sum received under

• sub-section (3) of Section 80DD [medical treatment of handicapped
dependent] or
• sub-section (3) of Section 80DDA [expenditure for the medical

treatment of specified disease or ailment of self and dependents]; or
b. any sum received under a Keyman insurance policy; or
c. any sum received under an insurance policy issued on or after the 1st
day of April, 2003 in respect of which the premium payable for any of
the years during the term of the policy exceeds 20% of the actual
capital sum assured [this sub-clause shall not apply to any sum received
on the death of a person].
Keyman Insurance Policy

For the purposes of this clause, “Keyman Insurance Policy” means a life
insurance policy taken by a person on the life of another person who is or
was the employee of the first-mentioned person or, is or was connected in
any manner whatsoever with the business of the first-mentioned person.
74
28.Section 10(11): Payments from Provident Fund
Any payment from a provident fund to which:
• the Provident Funds Act, 1925 applies; or
• from any other provident fund set up by the Central Government and
notified by it in this behalf in the Official Gazette.
29.Section 10(12): Payment of Accumulated Balance in Recognized

Provident Fund
The accumulated balance due and becoming payable to an employee

participating in a recognized provident fund, to the extent provided in Rule
8 of Part A of the Fourth Schedule;
Rule 8 of Part A of the Fourth Schedule to Income Tax Act, 1961 provides
for the exclusion from total income of accumulated balance as under:
The accumulated balance due and becoming payable to an employee

participating in a recognized provident fund shall be excluded from the
computation of his total income:
i. if he has rendered continuous service with his employer for a period of

five years or more, or
ii. if, though he has not rendered such continuous service, the service
has been terminated by reason of the employee’s ill-health, or by the
contraction or discontinuance of the employer’s business or other
cause beyond the control of the employee, or
If, on the cessation of his employment, the employee obtains

employment with any other employer, to the extent the accumulated
balance due and becoming payable to him is transferred to his individual
account in any recognized provident fund maintained by such other
employer.
Explanation: Where the accumulated balance due and becoming payable
to an employee participating in a recognized provident fund maintained by
his employer includes any amount transferred from his individual account
in any other recognized provident fund or funds maintained by his former
75
employer or employers, then, in computing the period of continuous

service for the purposes of clause (i) or clause (ii), the period or periods for
which such employee rendered continuous service under his former
employer or employers aforesaid shall be included.
30.Section 10(13): Superannuation Fund
Any payment from an approved superannuation fund made:
i. on the death of a beneficiary; or
ii. to an employee in lieu of or in commutation of an annuity on his

retirement at or after a specified age or on his becoming incapacitated
prior to such retirement; or
iii. by way of refund of contributions on the death of a beneficiary; or
iv. by way of refund of contributions to an employee on his leaving the

service in connection with which the fund is established otherwise than
by retirement at or after a specified age or on his becoming
incapacitated prior to such retirement, to the extent to which such
payment does not exceed the contributions made prior to the
commencement of this Act and any interest thereon.
31.Section 10(13A): House Rent Allowance
House Rent Allowance (HRA) received from the employer subject to the
following limits:
Any special allowance specifically granted to an assessee by his employer

to meet expenditure actually incurred on payment of rent in respect of
residential accommodation occupied by the assessee, to such extent as
may be prescribed having regard to the area or place in which such
accommodation is situated and other relevant considerations.
Explanation: For the removal of doubts, it is hereby declared that nothing

contained in this clause shall apply in a case where:
a. the residential accommodation occupied by the assessee is owned by

him; or
76
b. the assessee has not actually incurred expenditure on payment of rent

(by whatever name called) in respect of the residential accommodation
occupied by him.
Rule 2A to Income Tax Rules, 1962 prescribes the quantum of exemption

available which will be the least of the following:
Bombay/Calcutta/Delhi/Madras Other Cities

• Allowance actually received • Allowance actually received
• Rent paid in excess of 10% of salary • Rent paid in excess of 10% of salary
• 50% of salary • 40% of salary
It is important to note that where rent paid is 10% or less than 10% of salary,
no exemption will be admissible. Again exemption is denied where an employee
lives in his own house, or in a house for which he does not pay rent.
32.Section 10(14): Special Allowance
i. any such special allowance or benefit, not being in the nature of a

perquisite within the meaning of clause (2) of Section 17, specifically
granted to meet expenses wholly, necessarily and exclusively incurred in
the performance of the duties of an office or employment of profit, as
may be prescribed [RULE 2BB], to the extent to which such expenses
are actually incurred for that purpose;
ii. any such allowance granted to the assessee either to meet his personal
expenses at the place where the duties of his office or employment of
profit are ordinarily performed by him or at the place where he
ordinarily resides, or to compensate him for the increased cost of living,
as may be prescribed and to the extent as may be prescribed.
Provided that nothing in sub-clause (ii) shall apply to any allowance in

the nature of personal allowance granted to the assessee to remunerate
or compensate him for performing duties of a special nature relating to
his office or employment unless such allowance is related to the place of
his posting or residence.
77
Section 10(14)/Rule 2BB: Prescribed Allowances Which are Exempt

upto Prescribed Limits
Section 10(14) grants exemption on special allowances and benefits.

Clause (14) is divided into two parts.
1. Under sub-clause (i) of clause (14) of Section 10, any prescribed special
allowance or benefit, other than those in the nature of a perquisite,
specifically granted to meet expenses wholly, necessarily, and
exclusively incurred in the performance of the duties of an office or
employment of profit, is exempt to the extent to which such expenses
are actually incurred for that purpose. The allowances prescribed for this
purpose (which are fully exempt) are spelt out in Rule 2BB(1). These
allowances are as follows:
• Any allowance granted to meet the cost of travel on tour or on transfer,

including any sum paid in connection with transfer, packing, and
transportation of personal effects on such transfer.
• Any allowance, whether granted on tour or for the period of journey in

connection with transfer, to meet the ordinary daily charges incurred
by an employee on account of absence from his normal place of duty.
• Any allowance granted to meet the expenditure incurred on

conveyance in performance of duties of an office or employment of
profit, provided that free conveyance is not provided by the employer.
• Any allowance granted to meet the expenditure incurred on a helper,

where such helper is engaged for the performance of duties of an office
or employment of profit.
• Any allowance granted for encouraging the academic, research, and

training pursuits in educational and research institutions.
• Any allowance granted to meet the expenditure incurred on the

purchase or maintenance of uniform for wear during the performance
of the duties of an office or employment of profit.
78
2. Under sub-clause (ii) of Section 10(14), any prescribed allowance

granted to the assessee either to meet his personal expenses at the
place where the duties of his office or employment of profit are
ordinarily performed by him or at the place where he ordinarily resides,
or to compensate him for the increased cost of living, is exempt upto
the prescribed extent. Rule 2BB(2) enumerates these allowances and
the limits upto which they are exempt. These allowances are as follows:
Name of Allowance/Places where Exempt Extent of

Exemption
i. Any special compensatory allowance in the nature of

Special Compensatory (Hilly Areas) Allowance or High
Altitude Allowance or Uncongenial Climate Allowance
or Snow Bound Area Allowance or Avalanche
Allowance—
a. At places mentioned under Item I in Col. 3 of SI. No. Rs. 800 per month
1 of the Table in rule 2BB(2)
b. Siachen area of Jammu and Kashmir Rs. 7,000 per month
c. All other places situated at a height of 1,000 metres Rs. 300 per month
or more above sea level
ii. Any special compensatory allowance in the nature of

Border Area Allowance or Remote Locality Allowance
or Difficult Area Allowance or Disturbed Area
Allowance—
a. At places mentioned under Item I in Col. 3 of SI. No. Rs. 1,300 per month
b. Installations in the Continental Shelf of India and the Rs. 1,100 per month
Exclusive Economic Zone of India
c. At places mentioned under Item III in Col. 3 of SI. Rs. 1,050 per month
No. 2 of the Table in rule 2BB(2)
d. At places mentioned under Item IV in Col. 3 of SI. No. Rs. 750 per month
e. Jog Falls in Shimoga District in Karnataka Rs. 300 per month
f. At places mentioned under Item VI in Col. 3 of SI. No. Rs. 200 per month
79
iii. Special Compensatory (Tribal Areas/Scheduled Areas/ Rs. 200 per month
Agency Areas) Allowance in States mentioned in Col.
3 of SI. No. 3 of Table in Rule 2BB(2)
iv. Any allowance granted to an employee working in any 70% of such

transport system to meet his personal expenditure allowance upto a
during his duty performed in the course of running of maximum of
such transport from one place to another place, Rs. 10,000 per
provided that such employee is not in receipt of daily month
allowance (whole of India)
v. Children Educational Allowance (whole of India) Rs. 100 per month

per child upto a
maximum of two
children
vi. Any allowance granted to an employee to meet the Rs. 300 per month
hostel expenditure on his child (whole of India) per child, upto a
maximum of two
children
vii.Compensatory Field Area Allowance, at places Rs. 2,600 per month

mentioned in Col. 3 of SI. No. 7 of Table in Rule
2BB(2)
viii.Compensatory Modified Field Area Allowance at Rs. 1,000 per month

places mentioned in Col. 3 of SI. No. 8 of Table in
Rule 2BB(2)
ix. Any special allowance in the nature of counter- Rs. 3,900 per month
insurgency allowance granted to the members of the
armed forces operating in areas away from their
permanent locations for a period of more than 30
days (whole of India)
x. Transport allowance granted to an employee [other Rs. 800 per month

than an employee referred to in (xi)] to meet his
expenditure for the purpose of commuting between
the place of his residence and the place of his duty
(whole of India)
xi. Transport allowance granted to an employee, who is Rs. 1,600 per month
blind or orthopedically handicapped with disability of
lower extremities, to meet his expenditure for the
purpose of commuting between the place of his
residence and the place of his duty (whole of India)
80
xii.Underground allowance granted to an employee who Rs. 800 per month

is working in uncongenial, unnatural climate in
underground coal mines (whole of India)
xiii.Any special allowance in the nature of high altitude

(uncongenial climate) allowance granted to the
member of the armed forces operating in high altitude
areas
a. For altitude of 9,000 to 15,000 feet Rs. 1,060 per month
b. For altitude above 15,000 feet Rs. 1,600 per month
xiv.Any special allowance granted to the members of the Rs. 4,200 per month
armed forces in the nature of special compensatory
highly active field area allowance (whole of India)
xv.Any special allowance granted to the member of the Rs. 3,250 per month
armed forces in the nature of Island (duty) allowance
(Andaman & Nicobar and Lakshadweep Group of
Islands)
31.Section 10(15): Income by Way of Interest Premium on

Securities/Bonds
These include bonds, securities specified by the Government. Some of

these are:
i. income by way of interest, premium on redemption or other payment on

such securities, bonds, annuity certificates, savings certificates, other
certificates issued by the Central Government and deposits as the
Central Government may, by notification specify, subject to such
conditions and limits as may be specified in the said notification.
ii. in the case of an individual or a Hindu undivided family, interest on such

Relief Bonds as the Central Government may specify [6.5% Relief
Bonds, 2003].
iii. interest on such bonds, as the Central Government may, by notification

in the Official Gazette, specify, arising to—
a. a non-resident Indian, being an individual owning the bonds; or
81
b. any individual owning the bonds by virtue of being a nominee or

survivor of the non-resident Indian; or
c. any individual to whom the bonds have been gifted by the non-
resident Indian.
iv. Interest payable:
a. by various entities in India to different entities abroad is exempted

under different sub-clauses of Section 10(15)(iv).
However, in most of these cases, the sunset conditions apply

necessitating that either the money should have been borrowed or the
agreement should have been executed before specified date which is
either 31.3.2001 or 31.3.2003 as specified in each sub-clause.
b. by a scheduled bank to a non-resident or to a person who is not

ordinarily resident within the meaning of sub-section (6) of Section 6
on deposits in foreign currency where the acceptance of such deposits
by the bank is approved by the Reserve Bank of India [sub-clause (fa)
of Section 10(15)(iv)].
Explanation: For the purposes of this item, the expression “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.
The exemption given by sub-clause (fa) to Section 10(15)(v) was removed

by Finance Act, 2004 w.e.f. 1.4.2005. However, the Finance Act, 2005 has
restored this exemption w.e.f. 1.4.2005 and thus done away with the effect
of Finance Act, 2004.
(31A) Section 10(15A): Payment of Aircraft Lease to Foreign

Government
Any payment made by an Indian company engaged in the business of
operation of aircraft to acquire an aircraft or an aircraft engine (other than
payment for providing spares, facilities or services in connection with the
operation of leased aircraft) on lease from the Government of a foreign
State or a foreign enterprises under an agreement entered before the 1st
day of April 1997 and approved by the Central Government in this behalf.
82
Explanation: For the purpose of this clause, the expression “foreign

enterprises” means a person who is a non-resident.
32.Section 10(16): Scholarships
Scholarships granted to meet the cost of education:
a. Recipient can be Indian or foreigner; the whole amount need not be

spent on education.
b. Scholarship, even though income, is exempt only if it is granted to
meet cost of education.
c. Scholarship granted to meet education cost of children of employee is

exempt.
d. Scholarship received abroad for study and research is exempt, even if

it is taxable under foreign law.
33.Section 10(17): Daily Allowances to Members of Parliament
Any income by way of:
i. daily allowance received by any person by reason of his membership of

Parliament or of any State Legislature or of any Committee thereof;
ii. any allowance received by any person by reason of his membership of

Parliament under the Members of Parliament (Constituency Allowance)
Rules, 1986;
iii. any constituency allowance received by any person by reason of his

membership of any State Legislature under any Act or rules made by
that State Legislation.
83
34.Section 10(17A): Awards – Cash/Kind
Any payment made, whether in cash or in kind:
i. in pursuance of any award instituted in the public interest by the Central

Government or any State Government or instituted by any other body
and approved by the Central Government in this behalf; or
ii. as a reward by the Central Government or any State Government for
such purposes as may be approved by the Central Government in this
behalf in the public interest.
35.Section 10(18): Pension to Gallantry Award Winners
i. pension received by an individual who has been in the service of the

Central Government or State Government and has been awarded
“Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such other
gallantry award as the Central Government may, by notification in the
Official Gazette, specify in this behalf;
ii. family pension received by any member of the family or an individual

referred to in sub-clause (i).
(35A) Section 10(19): Family Pension

Family pension received by the widow or children or nominated heirs, as
the case may be, 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 such circumstances and subject to such
conditions, as may be prescribed.
This sub-section is inserted by the Finance (No. 2) Act, 2004, w.e.f.

1.4.2005. Rule 2BBA of Income Tax Rules,1962 prescribe the
circumstances and conditions for this purpose.
84
36.Section 10(19A): Former Rulers – Exemption
The annual value of any one palace in the occupation of a ruler being a
palace the annual value whereof was exempt from income tax before the
commencement of the Constitute (Twenty-sixth Amendment) Act, 1971, by
virtue of the provisions of the Merged States (Taxation Concessions) Order,
1949, or the Part B States (Taxation Concessions) Order 1950, or as the
case may be, the Jammu and Kashmir (Taxation Concessions) Order, 1958:
Provided that for the assessment year commencing on the 1st day April,
1972, the annual value of every such palace in the occupation of such ruler
during the relevant previous year shall be exempt from income tax.
37.Section 10(20): Income of Local Authority

The income of a local authority which is chargeable under the head Income
from “House Property”, “Capital gains” or “Income from other sources” or
from a trade or business carried on by it which accrues or arises from the
supply of a commodity or service (not being water or electricity) within its
own jurisdictional area or from the supply of water or electricity within or
outside its own jurisdictional area.
38.Section 10(21): Income from Scientific Research Association

Any income of a scientific research association for the time being approved
for the purpose of clause (ii) of sub-section (1) of Section 35.
39.Section 10(22B): Income of Specified News Agency

Any income of such news agency set up in India solely for collection and
distribution of news as the Central Government may, by notification in the
Official Gazette specify in this behalf:
Provided that the news agency applies its income or accumulates it for
application solely for collection and distribution of news and does not
distribute its income in any manner to its members:
Provided further that any notification issued by the Central Government

under this clause shall, at any one time, have effect for such assessment
year or years, not exceeding three assessment years (including an
assessment year or years commencing before the date on which such
notification is issued) as may be specified in the notification.
85
Provided also that where the news agency has been specified, by
notification, by the Central Government and subsequently that Government
is satisfied that such news agency has not applied or accumulated or
distributed its income in accordance with the provisions contained in the
first proviso, it may, at any time after giving a reasonable opportunity of
showing cause, rescind the notification and forward a copy of the order
rescinding the notification to such agency and to the Assessing Officer.
40.Section 10(23A): Income of Professional Institution

Any income (other than income chargeable under the head “Income from
house property” or any income received for rendering any specific services
or income by way of interest or dividends derived from its investments) of
an association or institution established in India having as its object the
control, supervision, regulation, or encouragement of the profession of:
• law, or
• medicine, or
• accountancy, or
• engineering, or
• architecture, or
• such other profession as the Central Government may specify in this
behalf, from time to time, by notification in the Official Gazette.
This exemption shall be subject to compliance with conditions prescribed

regarding application of its income, or accumulation thereof for application,
solely to the objects for which it is established and other conditions
specified from time to time.
41.Section 10(23AA): Regiment Fund

Any income received by any person on behalf of any Regimental Fund or
Non-public Fund established by the armed forces of the Union for the
welfare of the past and present members of such forces or their
dependents.
42.Section 10(23AAA): Funds Established for Welfare of Employees

Any income received by any person on behalf of a fund established, for
such purpose as may be notified by the Board in the Official Gazette for the
welfare of employee or their dependents and of which fund such employees
are members if such fund fulfils the following conditions, namely:
86
a. the fund –
i. applies its income or accumulates it for which it is established; and
ii. invests its funds and contributions and other sums received by it in
the forms or modes specified in sub-section (5) of Section 11;
b. the fund is approved by the Commissioner in accordance with the rules

made in this behalf:
Provided that any such approval shall at any one time have effect for such
assessment year or years not exceeding three assessment years as may be
specified in the order of approval.
43.Section 10(23AAB): Income of Fund Established under Pension

Scheme Any income of a fund, by whatever name called, set up
by:
• the Life Insurance Corporation of India on or after the 1st day of August,
1996 or
• any other insurer under a pension scheme,
a. to which contribution is made by any person for the purpose of

receiving pension from such fund;
b. which is approved by the Controller of Insurance or the Insurance

Regulatory and Development Authority established under sub-section
(1) of Section 3 of the Insurance Regulatory and Development
Authority Act, 1999, as the case may be.
Explanation: For the purposes of this clause, the expression “Controller of

Insurance” shall have the meaning assigned to it in clause (5B) of Section
2 of the Insurance Act, 1938 (4 of 1938).
87
44.Section 10(23B): Income of Institute and Trust Developed for

Development of Khadi and Village Industries
45.S e c t i o n 1 0 ( 2 3 B B ) : I n c o m e o f B o a r d E s t a b l i s h e d f o r
Development of Khadi and Village Industries
46.S e c t i o n 1 0 ( 2 3 B B A ) : I n c o m e f r o m S t a t u t o r y B o d y f o r
Administration of Public Charitable Trusts
47.Section 10(23BBB): Income of European Economic Community

Any income of the European Economic Community derived in India by way
of interest dividends or capital gains from investments made out of its
funds under such scheme as the Central Government may by notification in
the Official Gazette specify in this behalf.
48.Section 10(23BBC): Income of SAARC Fund

Any income of the SAARC Fund for Regional Projects set up by Colombo
Declaration issued on the 21st day of December 1991 by the heads of
State or Government of the Member Countries of South Asian Association
for Regional Co-operation established on the 8th day of December, 1985 by
the charter of the South Asian Association for Regional Co-operation.
49.Section 10(23BBD): Income of ASOSAI-SECRETARIAT

Any income of the Secretariat of the Asian Organization of the Supreme
Audit Institutions registered as “ASOSAI-SECRETARIAT” under the Societies
Registration Act, 1860 for three previous years relevant to the assessment
years beginning on the 1st day of April, 2001 and ending on the 31st day
of March, 2004.
50.Section 10(23BBE): Income of the Insurance Regulatory and

Development Authority
Any income of the Insurance Regulatory and Development Authority
established under sub-section (1) of Section 3 of the Insurance Regulatory
and Development Authority Act, 1999.
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51.Section 10(23BBF): Income of North-eastern Development

Finance Corporation Limited
Income tax exemption is available to North-eastern Development Finance

Corporation Limited, which is as under:
Assessment Year Quantum of Exemption Amount Chargeable to Tax
2006-07 80% 20%
2007-08 60% 40%
2008-09 40% 60%
2009-10 20% 80%
2010-11 onwards Nil 100%
52.Section 10(23BBG): Income of Central Electricity Regulatory

Commission
It provides exemption from income tax to any income of Central Electricity

Regulatory Commission with effect from the A.Y. 2008-09.
53.Section 10(23C): Income of Certain National Funds, Hospitals,

Universities, Institutions
Any income received by any person on behalf of:
i. the Prime Minister’s National Relief Fund; or
ii. the Prime Minister’s Fund (Promotion of Folk Art); or
iii. the Prime Minister’s Aid to Students Fund; or
(iii a):the National Foundation for Communal Harmony; or
(iii b):any university or other educational institution existing solely for

educational purposes and not for purposes of profit, and which is wholly
or substantially financed by the Government; or
89
(iii c):any hospital or other institution for the reception and treatment of
persons suffering from illness or mental defectiveness or for the
reception and treatment of persons during convalescence or of persons
requiring medical attention or rehabilitation, existing solely for
philanthropic purposes and not for purposes of profit, and which is wholly
or substantially financed by the Government; or
(iii d):any university or other educational institution existing solely for

educational purposes and not for purposes of profit if the aggregate
annual receipts of such university or educational institution do not
exceed the amount of annual receipts as may be prescribed; or
(iii e):any hospital or other institution for the reception and treatment of
philanthropic purposes and not for purposes of profit, if the aggregate
annual receipts of such hospital or institution do not exceed the amount
of annual receipts as may be prescribed; or
iv. any other fund or institution established for charitable purposes which
may be notified by the Central Government in the Official Gazette,
having regard to the objects of the fund or institution and its importance
throughout India or throughout any State or States; or
v. any trust (including any other legal obligation) or institution wholly for
public religious purposes or wholly for public religious and charitable
purposes, which may be notified by the Central Government in the
Official Gazette, having regard to the manner in which the affairs of the
trust or institution are administered and supervised for ensuring that
the income accruing thereby is properly applied for the objects thereof;
vi. any university or other educational institution existing solely for

educational purposes and not for purposes of profit, other than those
mentioned in sub-clause (iiiab) or sub-clause (iiiaa) and which may be
approved by the prescribed authority; or
90
(via):any hospital or other institution for the reception and treatment of

philanthropic purposes and not for purposes of profit, other than those
mentioned in sub-clause (iiiac) or sub-clause (iiiae) and which may be
approved by the prescribed authority.
It is provided that the 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) shall make an application in the prescribed form and manner
to the prescribed authority for the purpose of grant of the exemption, or
continuance thereof, under sub-clause (iv) or sub-clause (v) or sub-
clause (vi) or sub-clause (via).
It is further provided that the Central Government, before notifying the

fund or trust or institution may call for such documents (including
audited annual accounts) or information from the fund or trust etc. as it
thinks necessary in order to satisfy itself about the genuineness of the
activities of the fund etc. and the Central Government may also make
such inquiries as it deems necessary in this behalf.
This apart, various provisos contained in this sub-section provide for

detailed conditions for being eligible by various qualifying institutions to
avail exemption under this sub-section. These mainly relate to
application of funds of the institutions, accumulation of funds, period for
which the exemption shall be given at a time and so on.
54.Section 10(23D): Any Income of Mutual Funds
Subject to the provisions of Chapter XII-E, any income of:
i. a Mutual Fund registered under the Securities and Exchange Board of

India Act, 1992 (15 of 1992) or regulations made thereunder;
ii. such other Mutual Fund set up by a public sector bank or a public
financial institution or authorized by the Reserve Bank of India and
91
subject to such conditions as the Central Government may, by

notification in the Official Gazette, specify in this behalf.
55.Section 10(23EA): Income of Such Investor Protection Fund
Any income of such Investor Protection Fund set up by recognized stock

exchanges in India, either jointly or separately, as the Central Government
may, by notification in the Official Gazette, specify in this behalf:
Provided that where any amount standing to the credit of the Fund and not
charged to income tax during any previous year is shared, either wholly or
in part, with a recognized stock exchange, the whole of the amount so
shared shall be deemed to be the income of the previous year in which
such amount is so shared and shall accordingly be chargeable to income
tax.
56.Section 10(23EB): Income of the Credit Guarantee Fund Trust

for Small Industries
Any income of the Credit Guarantee Fund Trust for Small Industries, being
a trust created by the Government of India and the Small Industries
Development Bank of India established under sub-section (1) of Section 3
of the Small Industries Development Bank of India Act, 1989, for five
previous years relevant to the assessment years beginning on the 1st day
of April, 2002 and ending on the 31st day of March, 2007.
57.Section 10(23EC): Income of Investor Protection Fund by Way

of/from Contribution Members and Commodity Exchange [w.e.f.
1.4.2008]
Any income by way of contributions received from commodity exchange

and the members thereof of such Investor Protection Fund set up by
commodity exchange in India, either jointly or separately, as the Central
Government may, by notification in Official Gazette, specify in this behalf.
Provided that where any amount standing to the credit of the said Fund
and not charged to income tax during any previous year is shared, either
wholly or in part, with a commodity exchange, the whole of the amount so
shared shall be deemed to be the income of the previous year in which
such amount is so shared and shall accordingly be chargeable to income
tax.
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58.Section 10(23F): Dividend Income or Long-term Capital Gains of

a Venture Capital Fund or a Venture Capital Company
Any income by way of dividends or long-term capital gains of a venture

capital fund or a venture capital company from investments made by way
of equity shares in a venture capital undertaking:
Such venture capital fund or venture capital company shall be approved for
the purposes of this clause by the prescribed authority in accordance with
the rules made in this behalf and shall satisfy the prescribed conditions.
Any approval by the prescribed authority shall, at any one time, have effect
for such assessment year or years, not exceeding three assessment years,
as may be specified in the order of approval.
This clause shall not apply in respect of any investment made after the
31st day of March, 1999.
For the purposes of this clause, “infrastructure facility” means a road,

highway, bridge, airport, port, rail system, a water supply project,
irrigation project, sanitation and sewerage system, 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 specified in sub-section
(4A) of Section 80-IA.
59.Section 10(23FA): Dividend Income [Other than Dividends

Referred to in Section 115-0], or Long-term Capital Gains of a
Venture Capital Fund or a Venture Capital Company from
Investments Made by Way of Equity Shares in a Venture Capital
Undertaking
Any income by way of dividend [other than dividends referred to in Section

115-0], or long-term capital gains of a venture capital fund or a venture
capital company from investments made by way of equity shares in a
venture capital undertaking:
Such venture capital fund or venture capital company shall be approved for
the purposes of this clause by the Central Government in accordance with
the rule made in this behalf and shall satisfy the prescribed conditions.
93
Any approval by the Central Government shall, at any one time, have effect
for such assessment year or years, not exceeding three assessment years,
as may be specified in the order of approval.
This clause shall apply in respect of any investment made after the 31st
day of March, 2000.
Explanation: For the purpose of this clause:
1. “venture capital fund” means such fund, operating under a trust deed
registered under the provisions of the Registration Act, 1908 (16 of
1908), established to raise monies by, the trustees for investments
mainly by way of acquiring equity shares of a venture capital
undertaking in accordance with the prescribed guidelines;
2. “venture capital company” means such company has made investments

by way of acquiring equity shares of venture capital undertakings in
accordance with the prescribed guidelines; and
3. “venture capital undertaking” means such domestic company whose

shares are not listed in a recognized stock exchange in India and which
is engaged in the –
i. business of:
a. software;
b. Information technology.
c. production of basic drugs in the pharmaceutical sector;
d. bio-technology;
e. agriculture and allied sectors; or
f. such other sectors as may be notified by the Central Government
in the behalf; or
ii. production or manufacture of any article or substance for which

patent has been granted to the National Research Laboratory or any
other scientific research institution approved by the Department of
Science and Technology.
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60.Section 10(23FB): Income of a Venture Capital Company or

Venture Capital Fund Set up to Raise Funds for Investment in a
Venture Capital Undertaking
Any income of a venture capital company or venture capital fund set up to

raise funds for investment in a venture capital undertaking.
Explanation: For the purposes of this clause:
a. “venture capital company” means such company:
i. which has been granted a certificate of registration under the

Securities and Exchange Board of India Act, 1992, and regulations
made thereunder;
ii. which fulfils the conditions as may be specified, with the approval of
the Central Government, by the Securities and Exchange Board of
India, notification in the Official Gazette, in this behalf;
b. “venture capital fund” means such fund:
i. operating under a trust deed registered under the provisions of the

Registration Act, 1908 or operating as a venture capital scheme made
by the Unit Trust of India established under the Unit Trust of India
Act, 1963;
ii. which has been granted a certificate of registration under the
Securities and Exchange Board of India Act, 1992, and regulations
made thereunder;
iii. which fulfils the conditions as may be specified, with the approval of
the Central Government, by the Securities and Exchange Board of
India, by notification in the Official Gazette, in this behalf; and
c. “venture capital undertaking” means a domestic company:
i. whose shares are not listed in a recognized stock exchange in India;
ii. which is engaged in the business for providing services, production, or

manufacture of an article or thing but does not include such activities
or sectors which are specified, with the approval of the Central
95
Government, by the Securities and Exchange Board of India, by

notification in the Official Gazette, in this behalf.
The income of a venture capital company or venture capital fund shall

continue to be exempt if the shares of the venture capital undertaking, in
which the venture capital company or venture capital fund has made the
initial investment, are subsequently listed in a recognized stock exchange
in India.
61.Section 10(24): Income of a Registered Trade Union
Any income chargeable under the heads “Income from house property” and
“Income from other sources” of:
a. a registered union within the meaning of the Trade Unions Act, 1926 (16
of 1926), formed primarily for the purpose of regulating the relations
between workmen and employers or between workmen and workmen;
b. an association of registered unions referred to in sub-clause (a).
62.Section 10(25)
Certain Income of trustees of Provident Fund, Gratuity Fund,
Superannuation Fund, etc.
63.Section 10(25A)
Any income of the Employees’ State Insurance Fund set up under the
provisions of the Employees’ State Insurance Act, 1948.
64.Section 10(26)
Income of member of schedule tribe residing in certain specific areas.
65.Section 10(26A)
Income earned before 1.4.1988 of person residing at Ladakh.
96
66.Section 10(26AAA): Income of Sikkimese [Inserted by the

Finance Act, 2008, w.e.f. 1.4.1990].
In case of individual, being a Sikkimese, any income which accrues or arise

to him—
a. from any source in the State of Sikkim; or

b. by way of dividend or interest on securities.
It is further explained that, this should not applied to a Sikkimese woman

who, on or after the 1st day of April, 2008, marries an individual who is not
a Sikkimese.
67.Section 10(26AAB) [w.e.f.1.4.2009]: Income of Agricultural

Produce Market Committee or Board
Any income of an agricultural produce market committee or board
constituted under any law for the time being in force for the purpose of
regulating the marketing of agricultural produce.
68.Section 10(26B)
Income of corporation of government or any body wholly financed by
government for promoting interest of Schedule caste/tribe.
69.Section 10(26BB)
Income of corporation established by Central Government for promoting
interest of minority.
70.Section 10(26BBB)
Any income of a corporation established by a Central, State, or Provincial
Act for the welfare and economic upliftment of ex-servicemen being the
citizens of India.
71.Section 10(27)
Income of Cooperative societies for Schedule caste/tribe.
97
72.Section 10(29A): Income of Coffee Board/Tea Board, etc.
Any income arising or accruing to the following will be exempted:
a. Coffee Board
b. Rubber Board
c. Tea Board
d. Tobacco Board
e. Marine Products Export Development Authority
f. Agricultural and Processed Food Products Export Development Authority
g. Spices Board
h. Coir Board
73.Section 10(30)
Subsidy received from Tea Board for replantation or replacement of tea
bushes.
74.Section 10(31)
Income by way of subsidy received from Rubber/Coffee/Spices or any other
Notified Boards.
75.Section 10(32): Income of Minor Clubbed in the Hands of Parent

In the case of an assessee referred to in sub-section (1A) of Section 64,
any income includible in his total income under that sub-section to the
extent such income does not exceed Rs. 1,500 in respect of each minor
child whose income is so includible.
76.Section 10(33): Income from Transfer of Units of UTI

Any income arising from the transfer of a capital asset, being a unit of the
Unit Scheme, 1964 referred to in Schedule I to the Unit Trust of India
(Transfer of Undertaking and Repeal) Act, 2002 and where the transfer of
such asset takes place on or after the 1st day of April, 2002.
77.Section 10(34) [Inserted by the Finance Act, 2003 w.e.f.

1.4.2004]
Any income by way of dividends referred to in Section 115-0.
98
78.Section 10(35): Income in Respect of the Units
a. income received in respect of the units of a Mutual Fund specified under

clause (23D); or
b. income received in respect of units from the Administrator of the

specified undertaking; or
c. income received in respect of units from the specified company:
Provided that this clause shall not apply to any income arising from
transfer of units of the Administrator of the specified undertaking or of
the specified company or of a mutual fund, as the case may be.
79.Section 10(36): Income from Transfer of Long-term Asset
Long-term Capital Gains – eligible equity share – purchased on or after

1.3.2003 and before 1.3.2004 –
Any income arising from the transfer of a long-term capital asset, being an
eligible equity share in a company purchased on or after the 1st day of
March, 2003 and before the 1st day of March, 2004 and held for a period of
twelve months or more.
Explanation: For the purposes of this clause, “eligible equity share”

means:
i. any equity share in a company being a constituent of BSE-500 Index of

the Stock Exchange, Mumbai as on the 1st day of March, 2003 and the
transactions of purchase and sale of such equity share are entered into
on a recognized stock exchange in India;
ii. any equity share in a company allotted through a public issue on or

after the 1st day of March, 2003 and listed in a recognized stock
exchange in India before the 1st day of March, 2004 and the transaction
of sale of such share is entered into on a recognized stock exchange in
India.
99
80.Section 10(37): Income from Transfer of Agricultural Land

Exemption of Capital gains arising to individual/HUF – From transfer of
agricultural land (by way of compulsory acquisition etc.)
In the case of an assessee, being an individual or a Hindu undivided family,

any income chargeable under the head “Capital gains” arising from the
transfer of agricultural land, where:
i. such land is situated in any area referred to in item (a) or item (b) of
sub-clause (iii) of clause (14) of Section 2;
ii. such land, during the period of two years immediately preceding the
date of transfer, was being used for agricultural purposes by such Hindu
undivided family or individual or a parent of his;
iii. such transfer is by way of compulsory acquisition under any law, or a

transfer the consideration for which is determined or approved by the
Central Government or the Reserve Bank of India;
iv. such income has arisen from the compensation or consideration for such
transfer received by such assessee on or after the 1st day of April,
2004.
Explanation: For the purposes of this clause, the expression

“compensation or consideration” includes the compensation or
consideration enhanced or further enhanced by any court, Tribunal or other
authority.
81.Section 10(38): Income from Transfer of Certain Equity, Units

etc.
Income exempt u/s 10(38) which is from transfer of Long-term Capital

Asset, being securities, transacted in a recognized stock exchange in India,
on or after the date on which Chapter VII (Securities Transaction Tax) of
the Finance (No. 2) Act, 2004 comes into force (i.e., 1.10.2004) – inserted
by Finance Act, 2004.
equity share in a company or a unit of an equity-oriented fund where:
100
a. the transaction of sale of such equity share or unit is entered into on or

after the date on which Chapter VII of the Finance (No. 2) Act, 2004
comes into force (i.e., 1.10.2004); and
b. such transaction is chargeable to securities transaction tax under that

Chapter.
Explanation: For the purposes of this clause, “equity-oriented fund”

means a fund:
i. where the investable funds are invested by way of equity shares in

domestic companies to the extent of more than 50% of the total
proceeds of such fund; and
ii. which has been set up under a scheme of a Mutual Fund specified under
clause (23D):
Provided that the percentage of equity shareholding of the fund shall be
computed with reference to the annual average of the monthly averages
of the opening and closing figures.
When income is exempt u/s 10, loss from such source cannot be set off
against income chargeable to tax.
82.Section 10(39): Income Arising from International Sporting

Event
Income arising from a notified international sporting event (i.e.,
Commonwealth Games 2010) is exempt from tax from the A.Y. 2006-07 if
such event is approved by international body and has participation by more
than two countries.
83.Section 10(40): Grant Received by Subsidiary Company from

Holding Company
In the case of reconstruction or revival of an existing business of power
generation by way of transfer of business to an Indian Company [notified
under section 80IA(4)(V)(a)], if any grant is received by subsidiary
company from its Indian holding company, it is not chargeable to tax.
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84.Section 10(41): Income from Transfer of Capital Asset

Any long-term/short-term capital gain arising in the case of reconstruction
or revival of an existing business of power generation by way of transfer of
business to an Indian company [notified under section 80IA(4)(V)(a)] is
not chargeable to tax if the transfer takes place before 1.4.2006.
85.Section 10(42): Income of Notified Non-profit Body/Authority

Any specified income of a non-profit body or authority notified by the
Central Government is exempt from tax. Such body or authority should be
established, constituted or appointed under a multilateral treaty,
agreement or convention, to which the Central Government is a signatory.
86.Section 10(43): Loan in Case of Reverse Merger

Any amount received by an individual as a loan (either in lump sum or
instalment) in a transaction of reverse mortgage, is not chargeable to tax.
87.Section 10(44): New Pension System Trust

Any income received by any person for, or on behalf of, the New Pension
System Trust established on 27th day of February, 2008 under the
provisions of the Indian Trust Act, 1882.
88.Section 10(45): Allowance or Perquisite to the Chairman of

UPSC
Allowance or perquisites which are notified by the Central Government in
the Official Gazette shall be exempt in the hands of the Chairman or a
retired Chairman or any other member or retired member of the Union
Public Service Commission.
89.Section 10(46): Income Arising to a Body, Authority or Board or

Trust or Commission
Any specified income notified by the Central Government arising to a body

or authority or Board or Trust or commission which:
i. has been established or constituted by or under a Central, State or

Provincial Act, or constituted by the Central Government or a State
Government, with the object of regulating or administering any
activity for the benefit of the general public;
102
ii. is not engaged in any commercial activity; and
iii. is notified by the Central Government in the Official Gazette shall be

exempt.
90.Section 10(47): Income of an Infrastructure Debt Fund

Any income of an infrastructure debt fund, set up in accordance with the
guidelines as may be prescribed, which is notified by the Central
Government in the Official Gazette shall be exempt.
91.Section 10A: Special Provisions in Respect of Newly Established

Undertakings in Free Trade Zone
The provisions in respect of Section 10A are given below:
• It should not be formed by splitting/reconstruction of business.
• It should not be formed by transfer of old machinery.
• There must be repatriation of sale proceeds into India.
• Audit report should be submitted in Form No. 56F along with return of
income.
Following conditions must be satisfied:
• Amount of deduction: Profits of business of undertaking Export

turnover/Total turnover of business carried on by undertaking.
• Period of deduction: If the aforesaid conditions are satisfied, the

assessee can claim deduction under Section 10A from his total income,
for a period of 10 consecutive assessment years beginning with the
assessment year relevant to the previous year in which the undertaking
begins to manufacture or produce such articles or things or computer
software.
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It has begun or begins to manufacture/produce articles or things or

computer software during the following years:
Location Year
Free Trade Zone During the previous year relevant to

the assessment year 1981-82 or any
subsequent year.
Electronic hardware technology park or During the previous year relevant to

software technology park the assessment year 1994-95 or any
subsequent year.
Special economic zone During the previous year relevant to

the assessment year 2001-02 or any
subsequent year.
92.Section 10AA: Special Provisions in Respect of Newly

Established Units in Special Economic Zone
The provisions in respect of Section 10AA are given below:
• Assessee is a person who has been granted a letter of approval by

Development Commissioner to set up a unit in Special Economic Zone.
• It begins to manufacture or produce articles or things or provide services

during the financial year 2005-06 or any subsequent year.
• The assessee has income from export of articles or things or from

services from such units.
• Audit report should be submitted in Form No. 56F along with return of
income.
104
• Amount of deduction: Profits of the business of undertaking Export

turnover/Total turnover of the business carried on by the undertaking.
• Period of deduction: 100% for first 5 years and 50% for next 5 years.
93.Section 10B: Special Provisions in Respect of Newly Established

Hundred Per Cent Export-oriented Undertakings
The provisions in respect of 10B are given below:
• It must be an approved 100% export-oriented undertaking.

• It must produce or manufacture articles of things or computer software.
• Audit report should be submitted in Form No. 56G along with return of
income.
• Amount of deduction: Profits of the business of undertaking Export

turnover/Total turnover of the business carried on by the undertaking.
• Period of deduction: If the aforesaid conditions are satisfied, the

assessee can claim deduction under Section 10B from his total income,
for a period of 10 consecutive assessment years beginning with the
assessment year relevant to the previous year in which the undertaking
begins to manufacture or produce such articles or things or computer
software.
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94.Section 10BA: Special Provisions in Respect of Export of Artistic

Hand-made Woolen Articles
The provisions in respect of 10BA are given below:
• It should manufacture eligible article or things.
• It should be a new undertaking.
• It should not be formed by transfer of machinery or plant previously used

for purpose.
• 90% sale should be in overseas market.
• It should employ 20 or more workers during the previous year in the

process of manufacture or production.
• Audit report should be submitted in Form No. 56H along with return of
income.
• If assessee claim deduction under this section, then deduction under

section 10A or 10B is not available.
• Amount of deduction: Profit of the business of the undertaking Export

turnover in respect of eligible articles or things/Total turnover of the
business carried on by the undertaking.
• Period of deduction: The aforesaid profit is deductible for six

assessment years, i.e., assessment years 2004-05 to 2009-10.
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95.Section 10C: Special Provision in Respect of Certain Industrial

Undertakings in North-eastern Region
• Manufactures or produces any article or thing on or after 1.4.1998.
• Not formed by splitting up or reconstruction of the existing business or

by transferring used plant and machinery.
• No deduction u/s 80HH, 80HHA, 80-I, 80-IA, 80-IB or 80JJA in relation to

profit and gain of the industrial undertaking.
• No deduction is allowed if the return not filed by due date prescribed u/s
139(1).
Amount and period: Complete tax exemption is available in respect of 10

consecutive assessment years beginning with assessment year relevant to
the previous year in which the industrial undertaking begins to
manufacture.
96.Section 11: Income from Property Held for Charitable or

Religious Purposes
Following conditions must be satisfied for claiming exemption:
• The property from which income is derived should be held under a trust
or other legal obligation.
• The property should be held for charitable or religious purpose.
• The exemption is confined to only such portion of income which is applied

to charitable or religious purposes or is accumulated for applying to such
purposes within the limits of accumulation permitted under Sections
11(1) and (2).
• The exemption is restricted to such portion of income as is applied to

charitable or religious purposes in India.
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• The trust shall apply for registration with the Commissioner.
• The accounts of the trust should be audited for such accounting year in
which its income (without giving effect of Section 11) exceeds Rs.
50,000.
• The funds of the trust should be invested or deposited in any one or

more of modes or form mentioned in Section 11(5).
Application of income: In order to claim full tax exemption, a charitable

trust or institution has to apply at least 85% of the income to charitable or
religious purposes. Exemption under Section 11 is 15% of income derived
from property held under charitable purpose.
97.Section 13A: Special Provision Relating to Incomes of Political

Parties
The following categories of income derived by a political party are not

included in computing its total income:
a. Any income which is chargeable under the heads “Income from house
property”, “Capital gains” and “Income from other sources”; and
b. Any income by way of voluntary contributions.
For claiming exemption under Section 13A, following conditions must be

satisfied.
a. The political party keeps and maintains such books of account and other
documents as would enable the Assessing Officer to property deduce its
income therefrom;
b. The political party keeps and maintains a record of each voluntary

contribution in excess of Rs. 20,000 and of the names and addresses of
persons who have made such contributions;
c. The accounts of political party are audited by a chartered accountant or

other qualified accountants; and
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d. The treasure of political party shall in each financial year prepare a

report in respect of contribution received by the political party in excess
of Rs. 20,000 from any person/company in that year and submit it to
the Election Commission.
98.Section 13B: Special Provisions Relating to Voluntary

Contributions Received by Electoral Trust [w.e.f. 1.4.2010]
Any voluntary contributions received by an electoral trust shall not be

included in the total income of the previous year of such electoral trust, if:
a. such electoral trust distributes to any political party, registered under

Section 29A of the Representation of People Act, 1951, during the said
previous year, 95% of aggregate donations received by it during the
said previous year along with surplus, if any, brought forward from any
earlier previous year; and
b. such electoral trust functions in accordance with the rules made by the
Central Government.
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3.2 SUMMARY
Various categories of income are exempt from total income and assessee
has to establish that his case falls within ambit of this Section 10.
These categories include interest on small savings, travel concessions,

gratuity, Provident Fund contributions, retrenchment benefits, etc. paid to
employees, salaries to foreign diplomats or technicians, incomes of
research and public bodies and long-term capital gains.
The section stipulates conditions under which such exemption is granted.
1. Describe conditions under which travel concessions paid to employees

are exempt from total income.
2. State limits set for exemption of Gratuity paid.
3. Do all assesses in India enjoy same House Rent Allowance exemptions?

Why?
4. How are exemptions applicable to income from Mutual Funds and

Dividends?
5. Which long-term capital gains are exempt under Section 10?
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
111
INCOME FROM SALARIES (SECTIONS 15 TO 17)
Chapter 4
Income From Salaries
(Sections 15 To 17)
Objectives
• Tax liability on items that occur under ‘Salaries’

• Gratuity
• VRS and retrenchment compensation
• Perquisites
• House rent allowance
Structure:
4.1 Introduction
4.2 Employer-Employee Relationship
4.3 Place of Employment
4.4 Director
4.5 Arrears of Salary
4.6 Government Employees – Services Rendered Abroad
4.7 What is Taxable under ‘Salaries’? (Section 15)
4.8 Salary (Section 17)
4.9 Allowances
4.10 Leave Salary – At the Time of Retirement [Section 10(10AA)]
4.11 Gratuity [Section 10(10)]
4.12 Bonus, Advance Salary, Arrears of Salary
4.13 Retrenchment Compensation [Section 10(10b)] and Compensation at
the Time of VRS
4.14 Pension
4.15 Perquisites
4.16 House Rent Allowance from the Employer [Section 10(13A)]
4.17 Deductions from Salaries (Section 16)
4.18 Profits in Lieu of Salary [Section 17(3)]
4.19 Section 10(14) R.W. Rule 2BB
4.20 Summary
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4.1 INTRODUCTION
Income under the head ‘Salaries’ comprises of remuneration in any form

(including perquisites) due for services in the nature of employment under
an express or implied contract of employment or service. Thus, the
contractual relationship should be as between an employer and employee.
Income from “salaries” is chargeable to tax on due basis.
4.2 EMPLOYER-EMPLOYEE RELATIONSHIP
To fall under the ambit of salaries, the relationship between the payer and
payee has to be that of employer and employee. An employee is not an
agent of the employer.
Factors distinguishing servant from agent — The distinction between a

servant or an agent can be summarized as follows:
For ascertaining whether a person is a servant or an agent, a rough and

ready test is whether under the terms of his employment the employer
exercises a supervisory control in respect of the work entrusted to that
person.
A servant acts under the direct control and supervision of his master. An
agent, on the other hand, in the exercise of his work, is not subject to the
direct control or supervision of the principal, though he is bound to
exercise his authority in accordance with all lawful orders and instructions
which may be given to him from time to time by his principal.
A servant has no authority to make contracts on behalf of his master; often

an agent has the authority to make contracts on behalf of his principal.
Generally, an agent is paid commission upon effecting the result which he

has been instructed by his principal to achieve, a servant is paid wages or
salary.
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4.3 PLACE OF EMPLOYMENT
Salary accrues at the place where service is rendered. Thus, leave salary
paid abroad to a person employed in India when he proceeds on leave to a
foreign country is treated as income arising in India.
Similarly, when a person employed in India settles in a foreign country

after retirement and receives his pension abroad, the pension so paid to
him will be taken as income accruing in India and will be liable to tax even
though he may be a non-resident. This is because the pension is paid on
account of service rendered in India.
4.4 DIRECTOR
Company director is not a servant: A director of a company is not a

servant but an agent inasmuch as the company cannot act in its own
person but has only to act through the director who has relationship of an
agent with the company.
A director of a company enjoys dual capacity. He might be a director as

well as an employee.
Managing director can be a servant: Whether or not a managing

director is a servant of the company apart from his being a director can
only be determined by the articles of association and the terms of his
employment.
4.5 ARREARS OF SALARY
Salary due but not paid or taxed in earlier year is taxable as ‘arrears of
salary’ in year of payment – Salary due to an assessee in the earlier years,
which was neither paid nor was charged to tax in those years, will have to
be treated as ‘arrears of salary’ within clause (c), and will have to be
brought to tax in the year(s) in which it was paid. Here, the relief under
Section 89(1) read with Rule 21A will be available to the employee.
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4.6 GOVERNMENT EMPLOYEES – SERVICES RENDERED

ABROAD
In the case of a Government servant, who is a citizen of India and is

posted abroad, the salary paid to him abroad is deemed to accrue or arise
in India even though the service is rendered by him outside India.
However, foreign allowances and perquisites granted to such government
employees posted to a foreign country are specifically exempt under
Section 10(7). This concession is not, however, available to Indian
employees in private service who are posted abroad.
4.7 WHAT IS TAXABLE UNDER ‘SALARIES’? (Section 15)
The following income shall be chargeable to income tax under the heading
“Salaries”:
1. Any salary due from an employer or former employer to an assessee in

the previous year, whether actually paid or not.
2. Any salary paid or allowed to him in the previous year by or on behalf of

an employer or a former employer though not due or before it becomes
due to him.
This includes salary paid in advance and where it is included in the total
income of any previous year in which it is paid, it will not be again
included in the total income of the previous year in which such salary
becomes due.
3. Any arrears of salary paid or allowed to him in a previous year by or on

behalf of an employer or former employer, if not charged to income tax
and for any earlier previous years.
Taxable Only Once – When Paid or Due or Allowed

Where any salary paid in advance is included in the total income of any
person for any previous year, it shall not be included again in the total
income of the person when the salary becomes due.
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Salary, etc. Received by Partner of a Firm

Any salary, bonus, commission, or remuneration, by whatever name called,
due to, or received by a partner of a firm from the firm shall not be
regarded as “salary” for the purposes of this section.
What is ‘Due’, ‘Paid’ and ‘Allowed’?

The expression ‘due’ shows that there shall be an obligation on the part of
the employer to pay the amount and a right of the employee to claim the
same.
The expression ‘paid’ takes in every receipt by the employee from the
employer, whether it was due to him or not.
The expression ‘allowed’ is of a wider connotation and any credit made in

the employer’s account is covered thereby [CIT v. LW. Russel [1964] 53
ITR 91 (SC)].
4.8 SALARY (SECTION 17)
The word ‘Salary’ is understood as periodical payment for services

rendered by an employee to an employer. Under section 17, Salary, for the
purposes of Sections 15 and 16 shall include the following items:
i. wages;
ii.any annuity or pension;
iii.
any gratuity;
iv.any fees, commissions, perquisites, or profits in lieu of or in addition to
any salary or wages;
v. any advance of salary;
(va) any payment received by an employee in respect of any period of

leave not availed of by him;
Section 10(10AA) treats Leave Encashment at the time of retirement/prior to/

upon retirement as exempt.
Section 10(5) exempt LTC received and actually incurred subject to conditions.
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vi. the annual accretion to the balance at the credit of an employee

participating in a recognized provident fund, to the extent to which it is
chargeable to tax under Rule 6 of Part A of the Fourth Schedule;
These are:
a. The portion of annual accretion in any previous year to the balance at the
credit of an employee participating in a recognized provident fund, consisting
of employer’s contribution is excess of 12% of salary of an employee and
b. Interest credited on the balance insofar as it exceeds 9.5% per annum.
vii.transferred balance in a recognized Provident Fund, to the extent to

which it is chargeable to tax under Sub-rule (4) of Rule 11 of Part A of
the Fourth Schedule.
This is concerned with taxing as Salaries that are part of the balance in
Provident Fund do not get transferred to a newly recognized Provident
Fund.
Schedule 4 Part A Rule 11 Sub-rule (4): Treatment of Balance in

Newly Recognized Provident Fund
1. Where recognition is accorded to a provident fund with existing balances, an

account shall be made of the fund up to the day immediately preceding the
day on which the recognition takes effect, showing the balance to the credit
of each employee on such day, and containing such further particulars as the
Board may prescribe.
2. The account shall also show in respect of the balance to the credit of each
employee the amount thereof which is to be transferred to that employee’s
account in the recognized provident fund, and such amount (hereinafter
called his transferred balance) shall be shown as the balance to his credit in
the recognized provident fund on the date on which the recognition of the
fund takes effect, and sub-rule (4) of this rule and sub-rule (5) of Rule 5
shall apply thereto.
3. Any portion of the balance to the credit of an employee in the existing fund
which is not transferred to the recognized fund shall be excluded from the
accounts of the recognized fund and shall be liable to income tax in
accordance with the provisions of this Act, other than this Part.
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4. Subject to such rules as the Board may make in this behalf, the Assessing
Officer shall make a calculation of the aggregate of all sums comprised in a
transferred balance which would have been liable to income tax if this Part
had been in force from the date of the institution of the fund, without regard
to any tax which may have been paid on any sum, and such aggregate (if
any) shall be deemed to be income received by the employee in the previous
year in which the recognition of the fund takes effect and shall be included in
the employee’s total income for that previous year, and, for the purposes of
assessment, the remainder of the transferred balance shall be disregarded,
but no other exemption or relief, by way of refund or otherwise, shall be
granted in respect of any sum comprised in such transferred balance:
Provided that, in cases of serious accounting difficulty, the Chief

Commissioner or Commissioner may, subject to the said rules, make a
summary calculation of such aggregate.
5. Nothing in this rule shall affect the rights of the persons administering an
unrecognized provident fund or dealing with it, or with the balance to the
credit of any individual employee before recognition is accorded, in any
manner which may be lawful.
Any lump sum payment made gratuitously or by way of compensation or

otherwise to widow/legal heir of an employee, who dies while in service will
not be taxable under Income Tax Act (Circular No. 573 dt. 21.8.1990).
viii.the contribution made by the Central Government in the previous year,
to the account of an employee under a pension scheme referred to in
Section 80CCD. [Inserted by the Finance (No. 2) Act, 2004, w.e.f.
1.4.2004]
U/s 80CCD, the contribution made by Government upto 10% of Salary allowed
as deduction.
Inclusive Definition of Salary

The definition of ‘Salary’ is an inclusive definition. The word ‘includes’, as in
Section 17 which defines ‘Salary’, is generally used as a word of extension,
but the meaning of a word or phrase is extended when it is said to include
things that would not properly fall within its ordinary connotation. Thus,
where ‘includes’ has an extending force it adds towards the phrase a
meaning which does not naturally belong to it. Scope of inclusive definition
cannot be restricted to only those words which occur in such definition, but
inclusive definition will extend to so many other things, which are not
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talked of in the section [All India Defense Accounts Association v. Union of

India [1989] 175 ITR 494 (All.)].
4.9 ALLOWANCES
An allowance is defined as a fixed amount of money given periodically in

addition to salary for the purpose of meeting some specific requirements
connected with the service rendered by the employee or by way of
compensation for some unusual conditions of employment. These
allowances are generally taxable and are to be included in gross salary
unless a specific exemption has been provided.
A. Fully Taxable Allowances

• Dearness Allowance or Special Allowance
• Fixed Medical Allowance
• Tiffin Allowance
• Servant Allowance
• Non-participating Allowance
• Hill Allowance
• Warden/Proctor Allowance
• Deputation Allowance
• Overtime Allowance
• City Compensatory Allowance
• Field Allowance
• Service/Professional Allowance
• Furnishing Allowance
• Any other allowance not specifically exempted otherwise
B. Allowance Not Fully Taxable

• House Rent Allowance
• Special Allowance for Performance of Official Duty
• Conveyance Allowance
• Leave Travel Allowance
• Entertainment Allowance
However, such of those allowances as are notified by the Central

Government will be exempt under Section 10(14).
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Special Allowances Exempted u/s 10(14)(i)
The following allowances have been notified as exempt u/s 10(14):
a. Any allowance granted to meet the cost of travel on tour or transfer.
b. Any allowance, whether granted on tour or for the period of journey in

connection with transfer, to meet the ordinary daily charges incurred by
an employee on account of absence from his normal place of duty.
c. Any allowance granted to meet the expenditure incurred on a helper

where such helper is engaged for the performance of the duties of an
office or employment of profit.
d. Only allowance granted for encouraging the academic, research and

other professional pursuits.
e. Any allowance granted to meet the expenditure incurred on the

purchase or maintenance of uniform for wear during the performance of
the duties of an office or employment of profit.
The detailed listing of the prescribed allowances which are exempt and the
limits of exemption u/s 10(14) Rule 2BB is at the end of the notes.
4.10 Leave Salary – at the time of retirement [Section

10(10AA)]
Leave salary is taxable on the following basis:
a. Leave salary to Central/State Government employees – In the

case of Central/State Government employees, any amount received as
cash equivalent of leave salary in respect of period of earned at his
credit at the time of retirement/superannuation is exempt from tax
[Section 10(10AA)(i)].
b. Leave salary to other employees – In the case of non-Government

employee (including an employee of local authority or statutory
corporation), leave salary is exempt from tax to the extent of the least
of the following:
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i. Cash equivalent of the leave salary in respect of the period of earned

leave standing to the credit of employees at the time of retirement/
superannuation (earned leave entitlements cannot exceed 30 days
for every year of actual service rendered for the employer from
whose service he has retired), or
ii. 10 months’ “average salary”, or
iii. the amount specified by the Government, i.e., Rs. 3,00,000/- from
April 01, 1998, or
iv. the amount of leave encashment actually received at the time of

retirement.
“Average Salary” is to be calculated on the basis of average salary drawn

during the period of 10 months immediately preceding the retirement.
Salary means basic salary and includes dearness allowances if terms of
employment so provide.
It also includes commission based on a fixed percentage of turnover

achieved by an employee as per term of contract of employment
[Gestetner Duplicators (P) Ltd. v. CIT], but excludes all other allowances
and perquisites.
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4.11 GRATUITY [Section 10(10)]
The gratuity shall be given the following treatment:
1. Any death-cum-retirement gratuity received under the revised Pension

Rules of the Central Government is exempt [Section 10(10)(i)].
2. Any gratuity received under the Payment of Gratuity Act, 1972 (39 of
1972) calculated under that Act is also exempt.
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a. 15 days’ salary (7 days in the case of employees of seasonal establishments)

based on salary last drawn for every completed year of service or part
thereof in excess of six months
b. Rs. 10,00,000/- (from 24th May, 2010)
c. Gratuity actually received
3. In any other case, any gratuity received by an employee on his

retirement/becoming incapacitated/on termination of his employment/
his death,
• to the extent it does not exceed one-half month’s salary for each year of
completed service [calculated on the basis of the average salary for the
ten months immediately preceding the month]
• subject to maximum of Rs. 10,00,000/- (from 24th May, 2010)
• gratuity actually received
• least of above three is exempt from tax.
‘Salary’ shall include dearness allowance, if the terms of employment so

provide, but exclude all other allowances and perquisites
In each of the above cases, if the gratuity received is taxable under the
above limits, the employee can claim relief u/s 89.
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4.12 Bonus, Advance Salary, Arrears of Salary
The payment of bonus will be treated as salary and not as a benefit or

perquisite in the following type of cases:
a. Payment of bonus made under a service agreement between the

employer and the employee.
b. Payment made under the Payment of Bonus Act, 1965.
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c. Payment made in accordance with the decision of a trade association

which is binding on its members.
d. Bonus paid as an award by a Labour Tribunal where the award is binding

on the employer and the employees.
If the bonus is paid gratuitously without there being any legal or

contractual obligation, the payment will be in the nature of a perquisite or
benefit.
Advance Salary
Advance salary is taxable on receipt basis, in the assessment year relevant
to the previous year in which it is received. Loan taken from employer is
outside the scope of this section.
Arrears of Salary
It is taxable on receipt basis, if it is not subjected to tax earlier on due
basis. In this case, the recipient can claim relief under Section 89(1) read
with Rule 21A.
4.13 RETRENCHMENT COMPENSATION [Section 10(10B)]

AND COMPENSATION AT THE TIME OF VRS
Any compensation received by a workman under the Industrial Disputes

Act, 1947 at the time of his retrenchment:
The amount exempt under this clause shall not exceed:
a. an amount calculated in accordance with the provisions of clause (b) of

Section 25F of the Industrial Disputes Act, 1947 (14 of 1947); or
b. such amount, not being less than Rs. 50,000/- and not exceeding Rs.
5,00,000/-, whichever is less:
Here, the retrenchment compensation shall mean:
a. compensation received by a workman at the time of the closing down of

the undertaking in which he is employed, or
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b. compensation received by a workman, at the time of the transfer of the

ownership or management of the undertaking in which he is employed
to a new employer.
Compensation Received at the Time of Voluntary Retirement

[Section 10(10C)]
Any amount received or receivable by an employee at the time of his

voluntary retirement or termination of his service, in accordance with any
scheme or schemes of voluntary retirement or in the case of a public sector
company, a scheme of voluntary separation, to the extent such amount
does not exceed Rs. 5,00,000/-.
In case of a public sector company, an authority established under a

Central or State or Provincial Act, or local authority where the
compensation is received in accordance with scheme of voluntary
retirement which is framed in accordance with prescribed guidelines, no
approval is required from any authority for enabling the employees to claim
relief u/s 10(10C).
However, in case of other companies, the scheme needs to satisfy the

prescribed conditions. Here, the Scheme has to meet the following criteria:
1. It applies to an employee who has completed ten years of service or

completed 40 years of age. This condition is not applicable in case of
amount received by an employee of a public sector company under
scheme of voluntary separation framed by the said company.
2. It applies to all employees (by whatever name called), including workers

and executives of the company/authority/co-operative society excepting
directors of the company/ co-operative society.
3. The scheme of voluntary retirement/separation has been drawn to result

in overall reduction in the existing strength of the employees.
4. The vacancy caused by voluntary retirement/separation is not to be

filled up, nor, the retiring employee is to be employed in another
company or concern belonging to the same management.
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5. The amount receivable on account of voluntary retirement/separation of

the employees, does not exceed the amount equivalent to three months’
salary for each completed year of service or salary at the time of
retirement multiplied by the balance months of service left before the
date of his retirement on superannuation.
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4.14 PENSION
Pension received by a person from the employer after his retirement is

taxed as salary. The Pension can be either uncommuted or commuted.
Commuted Pension received by the government employees are wholly
exempt under Section 10(10A).
For other employees, following is exempt:
a. if employee has received gratuity, then commuted value of 1/3rd of the

pension which he is entitled to receive and
b. in any other case, commuted value of 1/2 of the pension which he is

entitled to receive.
Any payment in commutation of pension received from fund set up by LIC

is exempt u/s 10(23AAB).
4.15 PERQUISITES
The phrase perquisite signifies some additional benefit in addition to the

amount that may be legally due by way of contract for services rendered.
Perquisites may be provided in cash or in kind. Perquisites are included in
the salary only if they are received by an employee from his employer.
Perquisites received from a person other than employer are taxable under
the head “Profit and Gain of Business or Profession” or “Income from Other
Sources” as the case may be.
Under Section 17(2) of the Act, “perquisite” includes:
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i. the value of rent free accommodation provided to the assessee by his

employer;
ii. the value of any concession in the matter of rent respecting any
accommodation provided to the assessee by his employer;
iii. the value of any benefit or amenity granted or provided free of cost or
at concessional rate in any of the following cases:
a. by a company to an employee who is a director thereof;

b. by a company to an employee being a person who has a substantial
interest in the company;
c. by any employer (including a company) to an employee not included

in (a) and (b) above and whose income under the head “Salaries”
(whether due from, or paid or allowed by, one or more employers),
exclusive of the value of all benefits or amenities not provided for by
way of monetary payment, exceeds Rs. 50,000.
However, the allotment of shares, debentures or warrants, etc. under

any Employees’ Stock Option Plan or Scheme of the company issued in
accordance with the guidelines issued in this behalf by the Central
Government shall not be treated as perquisite under clause (c).
iv. any sum paid by the employer in respect of any obligation which, but for
such payment, would have been payable by the assessee;
v. any sum payable by the employer, whether directly or through a fund

[other than a recognized provident fund or an approved superannuation
fund or a Deposit-linked Insurance Fund established under Section 3G of
the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948
(46 of 1948), or, as the case may be, Section 6C of the Employees’
Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952)],
to effect an assurance on the life of the assessee or to effect a contract
for an annuity;
vi. The value of any specified security or sweat equity shares allotted or
transferred, directly or indirectly, by the employer, or former employer,
free of cost or at concessional rate to the assessee;
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vii.The amount of any contribution to an approved superannuation fund by

the employer in respect of the assessee, to the extent it exceeds one
lakh rupees; and
viii.The value of any other fringe benefit or amenity as may be prescribed.
What is Not Perquisite? Section 17(2) R.W. Proviso
1. The use of any vehicle provided by a company or an employer for

journey by the assessee from his residence to his office or other place of
work, or from such office or place to his residence, shall not be regarded
as a benefit or amenity granted or provided to him free of cost or at
concessional rate for the purposes of this sub-clause;
2. The value of any medical treatment provided to an employee or any

member of his family in any hospital maintained by the employer;
3. Any sum paid by the employer in respect of any expenditure actually

incurred by the employee on his medical treatment or treatment of any
member of his family—
a. in any hospital maintained by the Government or any local authority

or any other hospital approved by the Government for the purposes
of medical treatment of its employees;
b. in respect of the prescribed diseases or ailments, in any hospital

approved by the Chief Commissioner having regard to the prescribed
guidelines.
Here, the employee shall attach with his return of income a

certificate from the hospital specifying the disease or ailment for
which medical treatment was required and the receipt for the amount
paid to the hospital.
4. Any premium paid by an employer for an employee, to effect an health

insurance under any scheme approved by the Central Government for
the purposes of clause (ib) of sub-section (1) of Section 36;
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5. Any premium paid by an employer for an employee or his family, to

effect an health insurance under any scheme approved by the Central
Government for the purposes of Section 80D;

incurred by the employee on medical treatment of the employee or his
family up to Rs. 15,000/- in the previous year.
7. Any expenditure incurred by the employer on:
a. medical treatment of the employee, or any member of the family of

such employee, outside India;
b. travel and stay abroad of the employee or any member of the family
of such employee for medical treatment;
c. travel and stay abroad of one attendant who accompanies the patient
in connection with such treatment, subject to the condition that:
i. the expenditure on medical treatment and stay abroad shall be

excluded from perquisite only to the extent permitted by the
Reserve Bank of India; and
ii. the expenditure on travel shall be excluded from perquisite only in

the case of an employee whose gross total income, as computed
before including therein the said expenditure, does not exceed Rs.
2,00,000/-;

incurred by the employee for any of the purposes specified in (7) above
subject to the conditions specified in or under that clause if the income
under the head “Salaries” exclusive of the value of all perquisites does
not exceed Rs. 1,00,000/-.
Unauthorized advantages are not perquisites: Any unauthorized

advantage taken by the employee (like clandestine use of employer’s car
by employee) without the authority of the employer would only create a
legal obligation to restore such advantage and therefore, such an
unauthorized advantage will not amount to a benefit or advantage within
the meaning of Section 17(2)(iii) [CIT v. C. Kulandaivelu Konar [1975] 100
128
ITR 629 (Mad.)/CIT v. S.S.M. Lingappan [1981] 129 ITR 597 (Mad.)/M.M.
Mehta v. CIT [1979] 117 ITR 362 (Cal.)/CIT v. Jawaharlal Nagpal [1988]
171 ITR 136 (MP)/CIT v. C. Narayanan Nair [1989] 45 Taxman 404 (Ker.)].
Valuation of Perquisites
Perquisites are valued on the basis of their value to the employee and not
on the basis of the cost to the employer for providing such perquisites. The
value of perquisites, which is not enjoyed by the employee cannot be
included in the total income though the contract of service provided for
that perquisites. The mode of valuation of such perquisite has been
prescribed under Rule 3 of Income Tax Rules, 1962.
1. Interest-free or Concessional Loans to Employees

Loan exceeding Rs. 20,000 received from your employer (either interest-
free or at a concessional rate) is a taxable perk.
Exception: Loan given for medical treatment of specified diseases w.e.f.

1.4.2004.
The value of the benefit to the assessee resulting from the provision of
interest-free or concessional loan for any purpose made available to the
employee or any member of his household during the relevant previous
year by the employer or any person on his behalf shall be determined as
the sum equal to the interest computed at the rate charged per annum by
the State Bank of India, constituted under the State Bank of India Act,
1955 (23 of 1955), as on the 1st day of the relevant previous year in
respect of loans for the same purpose advanced by it on the maximum
outstanding monthly balance as reduced by the interest, if any, actually
paid by him or any such member of his household.
However, no value would be charged if such loans are made available for
medical treatment in respect of diseases specified in Rule 3A of these Rules
or where the amount of loans are petty not exceeding in the aggregate Rs.
20,000:
Provided that where the benefit relates to the loans made available for
medical treatment referred to above, the exemption so provided shall not
apply to so much of the loan as has been reimbursed to the employee
under any medical insurance scheme.
129
Taxed at the differential of the interest computed at these prescribed rates

as reduced by the interest, if any actually paid by the employee is treated
as taxable perquisite.
2. Free Food and Non-alcoholic Beverages

The value of free food and non-alcoholic beverages provided by the
employer to an employee shall be the amount of expenditure incurred by
such employer. The amount so determined shall be reduced by the amount,
if any, paid or recovered from the employee for such benefit or amenity:
Provided that nothing contained in this clause shall apply to free food and
non-alcoholic beverages provided by such employer during working hours
at office or business premises or through paid vouchers which are not
transferable and usable only at eating joints, to the extent the value
thereof either case does not exceed fifty rupees per meal or to tea or
snacks provided during working hours or to free food and non-alcoholic
beverages during working hours provided in a remote area or an off-shore
installation.
3. Domestic Help like Sweeper, Gardner, Watchman/Personal

Attendant
The value of benefit to the employee or any member of his household
resulting from the provision by the employer or services of a sweeper, a
gardener, a watchman or a personal attendant, shall be the actual cost to
the employer. The actual cost in such a case shall be the total amount of
salary paid or payable by the employer or any other person on his behalf
for such services as reduced by any amount paid by the employee for such
services.
4. Valuation of Rent-free Accommodation

An employer may own residential accommodation and provide it free of
rent to his employees. Even if he does not own a residential
accommodation, he may take the same on rent for providing it to his
employees. A provision of rent-free accommodations is a perquisite, which
is taxable in the hands of all employees. For this purpose, employees are
divided in three parts:
130
i. Where the accommodation is provided by Union or State Government to

their employees either holding office or post in connection with the
affairs of Union or State or serving with any body or undertaking under
the control of such Government on deputation.
ii. Where the accommodation is provided by Public Sector Employer.
iii. Where the accommodation is provided by any other employer.
Sr. Circumstances Where Accommodation Where Accommodation is

No. is Unfurnished Furnished
(1) (2) (3) (4)
(1) Where the License fee determined by Determined under column (3)
accommodation is the Central Government or and increased by 10% per
provided by the any State Government in annum of the cost of furniture
Central respect of accommodation (including television sets,
Government or any in accordance with the radio sets, refrigerators,
State Government rules framed by such other household appliances,
to the employees Government as reduced by air-conditioning plant or
either holding office the rent actually paid by equipment) or if such
or post in the employee. furniture is hired from a third
connection with the party, the actual hire charges
affairs of the Union payable for the same as
or of such State. reduced by any charges paid
or payable for the same by
the employee during the
previous year.
(2) Where the i. 15% of salary in cities The value of perquisites as

accommodation is having population determined under column (3)
provided by any exceeding 25 lakhs as and increased by 10% per
other employer and per 2001 census; annum of the cost of furniture
(including television sets,
a. where the ii. 10% of salary in cities refrigerators, other household
accommodation having population appliances, air-conditioning,
is owned by the exceeding 10 lakhs but plant or equipment or other
employer, or not exceeding 25 lakhs similar appliances or gadgets)
as per 2001 census; or if such furniture is hired
from a third party, by the
131
or if such furniture is hired
iii. 7.5% of salary in other from a third party, by the
areas, in respect of the actual hire charges payable
period during which the for the same as reduced by
said accommodation was any charges paid or payable
occupied by the for the same by the employee
employee during the during the previous year.
previous year as
reduced by the rent, if
any, actually paid by the
employee.
b. where the Actual amount of lease The value of perquisite as

accommodation rental paid or payable by determined under column (3)
is taken on lease the employer or 15% of and increased by 10% per
or rent by the salary whichever is lower annum of the cost of furniture
employer as reduced by the rent, if (including television sets,
any, actually paid by the radio sets, refrigerators,
employee. other household appliances,
air-conditioning plant or
equipment or other similar
appliances or gadgets) or if
such furniture is hired from a
third party, by the actual hire
charges payable for the same
as reduced by any charges
paid or payable for the same
by the employee during the
previous year.
(3) Where the Not applicable 24% of salary paid or payable

accommodation is for the previous year or the
provided by the actual charges paid or
employer specified payable to such hotel, which
in serial number is lower, for the period during
(1) or (2) in a which such accommodation is
HOTEL (except provided as reduced by the
where the rent, if any, actually paid or
employee is payable by the employee.
provided such
accommodation for
a period not
exceeding in
aggregate fifteen
days on his transfer
from one place to
another)
132
5. Accommodation Provided at Concessional Rent

In such a case, the valuation shall be made as if it is rent-free
accommodation. From this value, any rent paid by the employee shall be
reduced.
6. Gas, Electricity and Water Supply for Household Consumption

Here, the cost paid by employer shall be the value of perk. If employee
bears the part of the cost, this is reduced from the perquisite value.
7. Credit Card
The amount of expenses including membership fees and annual fees
incurred by the employee or any member of his household, which is
charged to a credit card (including any add-on card) provided by the
employer, or otherwise, paid for or reimbursed by such employer shall be
taken to be the value of perquisite chargeable to tax as reduced by the
amount, if any paid or recovered from the employee for such benefit or
amenity:
Provided that there shall be no value of such benefit where expenses are
incurred wholly and exclusively for official purposes and the following
conditions are fulfilled:
a. complete details in respect of such expenditure are maintained by the

employer which may, inter alia, include the date of expenditure and the
nature of expenditure;
b. the employer gives a certificate for such expenditure to the effect that
the same was incurred wholly and exclusively for the performance of
official duties.
8. Holiday Facilities – Tour Facilities

To the extent the employer bears the cost of holiday by the employee, it is
a taxable perquisite. On an official tour — for accompanying family
members, the cost incurred for the family members by the employer is a
perquisite in the hands of the employee. When an official tour is extended
for vacation, the cost incurred by employer for vacation period is taxable
perquisite.
133
9. Accident Insurance
Where the employer buys the policy and the employer is the beneficiary, it
is not a perquisite.
In case the beneficiary of such policy is any family member of employee,

then the premium paid by the employer is a taxable perquisite in the hands
of the employee.
10.Use of Movable Asset

The value of benefit to the employee resulting from the use by the
employee or any member of his household of any movable asset (other
than assets already specified in this rule and other than laptops and
computers) belonging to the employer or hired by him shall be determined
at 10% per annum of the actual cost of such asset or the amount of rent or
charge paid or payable by the employer, as the case may be, as reduced by
the amount, if any, paid or recovered from the employee for such use.
11.Transfer of Movable Asset

“Valuation of the perquisite in respect to movable assets sold by an
employer to its employees at a nominal price”.
The value of benefit to the employee arising for the transfer (directly or
indirectly) of any movable asset belonging to the employer or the
employee shall be determined as:
134
Electronics
Mode of
Items/ Motor Car Any Other Asset
Valuation
Computers
Step 1
Find out cost of the Actual cost to the Actual cost to the Actual cost to the
asset to the employer employer employer
employer
Step 2
Less: Nominal wear 50% for each 20% for each 10% for each
and tear for completed year by completed year by completed year of
completed years reducing balance reducing balance actual cost
during which the method method
assets was used for
business purpose
Step 3
Less: Amount Amount recovered Amount recovered Amount recovered
recovered from the from the employee from the employee from the employee
employee
Taxable value of Balance amount Balance amount Balance amount

the perquisite (if amount is (if amount is (if amount is
(Step 1 – Step 2) positive) – Step 3) positive) positive)
Providing to the employee such asset as TV, Music system, etc. (other than
a computer or laptop) is taxable perquisite.
The value thereof shall be at 10% per annum of the cost of the asset or
the actual hire charges paid (less amount, if any, paid by employee).
12.Car Perquisite
Car Perquisite value goes with the ownership of the car. In cases where the
car is used only for the official use, it has no element of perquisite.
The use of vehicle provided by employer for journey from employee’s

residence to his office and back is not a perquisite. Otherwise the value of
perk depends on the ownership of car, element of use for personal benefit
of the employee, the engine capacity of the car, etc.
135
The summarized table for the same is as under:
Sr. Circumstances Where Cubic Where Cubic

No. Capacity of Capacity of Engine
Engine does not Exceeds
Exceed 1.6 Liters 1.6 Liters
(1) (2) (3) (4)
(1) Where the motor car is owned

or hired by the employer and
(a) is used wholly and No value: No value:

exclusively in the Provided that the Provided that the
performance of his official documents specified documents specified
duties; in clause (B) of this in clause (B) of this
sub-rule are sub-rule are
maintained by the maintained by the
employer. employer.
(b) is used exclusively for the Actual amount of Actual amount of

private or personal purposes expenditure expenditure incurred
of the employee or any incurred by the by the employer on
member of his household and employer on the the running and
the running and maintenance running and maintenance of
expenses are met or maintenance of motor car during the
reimbursed by the employer; motor car during relevant previous
the relevant year including
previous year remuneration, if any,
including paid by the
remuneration, if employer to the
any, paid by the chauffeur as
employer to the increased by the
chauffeur as amount representing
increased by the normal wear and
amount tear of the motor car
representing normal and as reduced by
wear and tear of the any amount charged
motor car and as frorm the employee
reduced by any for such use.
amount charged
from the employee
for such use.
136
(c) is used partly in the

performance of duties and
partly for private or personal
purposes of his own or any
member of his household and
—
i - the expenses on Rs. 1,800 (plus Rs. Rs. 2,400 (plus Rs.
maintenance and running are 900, if chauffeur is 900, if chauffeur is
met or reimbursed by the also provided to run also provided to run
employer; the motor car) the motor car)
ii - the expenses on running Rs. 600 (plus Rs. Rs. 900 (plus Rs.
and maintenance for private 900, if chauffeur is 900, if chauffeur is
or personal use are fully met also provided by the also provided to run
by the assessee. employer to run the the motor car)
motor car)
(2) Where the employee owns a

motor car but the actual
running and maintenance
charges (including
remuneration of the
chauffeur, if any) are met or
reimbursed to him by the
employer and—
(i) such reimbursement is for No value: No value:
the use of the vehicle wholly Provided that the Provided that the
and exclusively for official documents specified documents specified
purposes; in clause (B) of this in clause (B) of this
sub-rule are sub-rule are
maintained by the maintained by the
employer. employer.
(ii) such reimbursement is for Subject to the Subject to the

the use of the vehicle partly provisions of clause provisions of clause
for official purposes and (B) of this sub-rule, (B) of this sub-rule,
partly for personal or private the actual amount the actual amount of
purposes of the employee or of expenditure expenditure incurred
any member of his incurred by the by the employer as
household. employer as reduced by the
reduced by the amount specified in
amount specified in Sl. No. (1)(c)(i)
Sl. No. (1)(c)(i) above.
above.
137
(3) Where the employee owns Not applicable

any other automotive
conveyance but the actual
running and maintenance
charges are met or
reimbursed to him by the
employer and
(i) such reimbursement is for No value:

the use of the vehicle wholly Provided that the
and exclusively for official documents specified
purposes; in clause (B) of this
sub-rule are
maintained by the
employer
(ii) such reimbursement is for Subject to the

the use of vehicle partly for provisions of clause
official purposes and partly (B) of this sub-rule,
for personal or private the actual amount
purposes of the employee. of expenditure
incurred by the
employer as
reduced by the
amount of Rs. 900.
Provided that where one or more motor cars are owned or hired by the
employer and the employee or any member of his household are allowed
the use of such motor car or all of any of such motor cars (otherwise than
wholly and exclusively in the performance of his duties), the value of
perquisite shall be the amount calculated in respect of one car in
accordance with Sl. No. (1)(c)(i) of Table II as if the employee had been
provided one motor car used partly in the performance of his duties and
partly for his private or personal purposes and the amount calculated in
respect of the other car or cars in accordance with Sl. No. (1)(b) of Table II
as if he had been provided with such car exclusively for his private or
personal purposes.
138
Where the employer or the employee claims that the motor car is used
wholly and exclusively in the performance of official duty or that the actual
expenses on the running and maintenance of the motor car owned by the
employee for official purposes is more than the amounts deductible in Sl.
No. 2(ii) or 3(ii) of Table II, he may claim a higher amount attributable to
such official use and the value of perquisite in such a case shall be the
actual amount attributable to official use of the vehicle provided that the
following conditions are fulfilled:
a. the employer has maintained complete details of journey undertaken for

official purpose which may include date of journey, destination, mileage,
and the amount of expenditure incurred thereon;
b. the employer gives a certificate to the effect that the expenditure was
incurred wholly and exclusively for the performance of official duties.
Explanation: For the purposes of this sub-rule, the normal wear and tear
of a motor car shall be taken at 10% per annum of the actual cost of the
motor car or cars.
• Activity A
1. Draw a circular addressed to executives using company or personal

vehicles for office and personal use regarding their tax liability on car
perquisite enjoyed by them. Only three executives are provided with
chauffeurs.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
139
13.Free or Concessional Educational Facilities

The value of benefit to the employee resulting from the provision of free or
concessional educational facilities for any member of his household shall be
determined as the sum equal to the amount of expenditure incurred by the
employer in that behalf or where the educational institution is itself
maintained and owned by the employer or where free educational facilities
for such member of employees’ household are allowed in any other
educational institution by reason of his being in employment of that
employer, the value of the perquisite to the employee shall be determined
with reference to the cost of such education in a similar institution in or
near the locality. Where any amount is paid or recovered from the
employee on that account, the value of benefit shall be reduced by the
amount so paid or recovered:
Provided that where the educational institution itself is maintained and

owned by the employer and free educational facilities are provided to the
children of the employee or where such free educational facilities are
provided in any institution by reason of his being in employment of that
employer, nothing contained in this sub-rule shall apply if the cost of such
education or the value of such benefit per child does not exceed one
thousand rupees per month.
14.Club Membership
A. The value of benefit to the employee resulting from the payment or

reimbursement by the employer of any expenditure incurred (including
the amount of annual or periodical fee) in a club by him or by a member
of his household shall be determined to be the actual amount of
expenditure incurred or reimbursed by such employer on that account.
The amount so determined shall be reduced by the amount, if any paid
or recovered from the employee for such benefit or amenity:
Provided that where the employer has obtained corporate membership

of the club and the facility is enjoyed by the employee or any member
of his household, the value of perquisite shall not include the initial fee
paid for acquiring such corporate membership.
140
B. Nothing contained in this clause shall apply if such expenditure is

incurred wholly and exclusively for business purposes and the following
conditions are fulfilled:
a. complete details in respect of such expenditure are maintained by the

employer which may inter alia, include the date of expenditure, the
nature of expenditure, and its business expediency;
b. the employer gives a certificate for such expenditure to the effect

that the same was incurred wholly and exclusively for the
performance of official duties.
C. Nothing contained in this clause shall apply for use of health club,
sports, and similar facilities provided uniformly to all employees by the
employer.
15.Contribution to Approved Superannuation Fund

The amount of any contribution to an approved superannuation fund by the
employer in respect to the assessee, to the extent it exceeds one lakh
rupees per employee.
16.Security or Sweat Equity Shares

The value of any specified security or sweat equity shares allotted or
transferred, directly or indirectly, by the employer, or former employer, free
of cost or at concessional rate to the assessee.
Explanation: For the purposes of this sub-clause,
a. specified security” means the securities as defined in clause (h) of

Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of
1956) and, where employees’ stock option has been granted under any
plan or scheme therefore, includes the securities offered under such
plan or scheme;
b. “sweat equity shares” means equity shares issued by a company to its

employees or directors at a discount or for consideration other than
cash for providing know-how or making available rights in the nature of
intellectual property rights or value additions, by whatever name called;
141
c. the value of any specified security or sweat equity shares shall be the
fair market value of the specified security or sweat equity shares, as the
case may be, on the date on which the option is exercised by the
assessee as reduced by the amount actually paid by, or recovered from
the assessee in respect of such security or shares;
d. “fair market value” means the value determined in accordance with the
method as may be prescribed;
e. “option” means a right but not an obligation granted to an employee to

apply for the specified security or sweat equity shares at a
predetermined price.
17.Any other Perquisites

The value of any other benefit or amenity, service, right, or privilege
provided by the employer shall be determined on the basis of cost to the
employer under an arm’s length transaction as reduced by the employee’s
contribution, if any.
Residue Perk Valuation
Rule 3(8) provides as under: The value of any other benefit or amenity,
service, right, or privilege provided by the employer shall be determined on
the basis of cost to the employer under an arm’s length transaction as
reduced by the employee’s contribution, if any:
Provided however, that nothing contained in this sub-rule shall apply to the
expenses on telephones including a mobile phone actually incurred on
behalf of the employee by the employer.
142
For Valuation of Perquisites, ‘Salary’ Defined [Rule 3 Explain (vi)]
‘Salary’ includes the pay, allowances, bonus, or commission payable

monthly or otherwise or any monetary payment, by whatever name called
from one or more employers, as the case may be, but does not include the
following, namely:
a. dearness allowance or dearness pay unless it enters into the

computation of superannuation or retirement benefits of the employee
concerned;
b. employer’s contribution to the provident fund account of the employee;
c. allowances which are exempted from payment of tax;
d. the value of perquisites specified in clause (2) of Section 17 of the

Income Tax Act;
e. any payment or expenditure specifically excluded under proviso to sub-

clause (iii) of clause (2) or proviso to clause (2) of Section 17.
Video Link 1
4.16 HOUSE RENT ALLOWANCE FROM THE EMPLOYER

[Section 10(13A)]
Any special allowance specifically granted to an assessee by his employer

to meet expenditure actually incurred on payment of rent in respect of
residential accommodation occupied by the assessee, to such extent as
may be prescribed is exempt from tax.
This exemption is not available when an employee lives in his own house,
or in a house for which he does not pay rent.
House Rent Allowance (HRA) received from the employer exempted subject
to the following limits:
143
Rule 2A prescribes the quantum of exemption available, which will be one

of the following:
Mumbai/Kolkata/Delhi/Chennai Other Cities

• Allowance actually received • Allowance actually received
• Rent paid in excess of 10% of salary • Rent paid in excess of 10% of salary
• 50% of salary • 40% of salary
It is important to note that where rent paid is 10% or less than 10% of
salary, no exemption will be admissible.
4.17 DEDUCTIONS FROM SALARIES (Section 16)
Standard Deduction [Section 16(i)]

Deduction under this head is not available from the assessment year
2006-07.
Entertainment Allowance [Section 16(ii)]

Entertainment allowance if first included in income under the head
‘salaries’ and thereafter a deduction is given as per following:
In case of Government Employee:
a. Rs. 5,000
b. 20% of salary
c. Amount of Entertainment Allowance granted
Least of the above three is given as deduction from salary income.
In case of other employee:
No deduction is available for Entertainment Allowance.
144
Professional Tax [Section 16(iii)]
A deduction of any sum paid by the assessee on account of tax on

employment not exceeding Rs. 2,500.
4.18 Profits in lieu of salary [SECTION 17(3)]
Salary shall also include “profits in lieu of salary”.
The “profits in lieu of salary” includes:
i. the amount of any compensation due to or received by an assessee

from his employer or former employer at or in connection with the
termination of his employment or the modification of the terms and
conditions relating thereto;
ii. any payment due to or received by an assessee from an employer or a

former employer or from a provident or other fund [but other than
specified receipts mentioned below] to the extent to which it does not
consist of:
• contributions by the assessee or
• interest on such contributions or
iii. any sum received under a Keyman Insurance Policy including the sum
allocated by way of bonus on such policy.
145
The sums referred to as specified receipts herein shall not be by way of any
payment mentioned below as referred to in Section 10 as mentioned
below:
Clause (10) Death-cum-retirement gratuity
Clause (10A) Payment in commutation of pension
Clause (10B) Compensation received by a workman under the Industrial

Disputes Act, 1947
Clause (11) Payment from a provident fund under the Provident Funds
Act, 1925
Clause (12) Accumulated balance due and becoming payable to an

employee participating in a recognized provident fund
Clause (13) Payment from an approved superannuation fund
Clause (13A) HRA received
Each of these is discussed separately earlier.
iv. any amount due to or received, whether in lump sum or otherwise, by

any assessee from any person—
a. before his joining any employment with that person; or
b. after cessation of his employment with that person.
Amount received under Voluntary Separation Scheme – Amount

received by assessee from his employer as payment under Voluntary
Separation Scheme, would be taxable under Section 17(3)(i) [G.N. Badami
v. CIT [1998] 144 CTR (Mad.) 289]. However, this shall be beyond the
limits of exemption specified under Section 10(10C) of Rs. 5,00,000/-.
146
Special bonus on retirement – Amount paid by assessee company to its

executive director, at time of his leaving company as special bonus for
exceptional services rendered by him, is profit in lieu of salary under
Section 17(3) [J.K. Helene Curtis Ltd. v. CIT [1999] 103 Taxman 162
(Bom.)].
If the object of the payment is unrelated to the relation between the

employer and the employee, it would not fall within the expression ‘profit
received in lieu of salary’ [CIT v. E.D. Sheppard [1963] 48 ITR 237 (SC)].
Video Link 1
Video Link 2
4.19 SECTION 10(14) R.W. RULE 2BB
Prescribed Allowances which are Exempt upto Prescribed Limits
Section 10(14) grants exemption on special allowances and benefits.

Clause (14) is divided into two parts.
1. Under sub-clause (i) of clause (14) of Section 10, any prescribed special
allowance or benefit, other than those in the nature of a perquisite,
specifically granted to meet expenses wholly, necessarily and exclusively
incurred in the performance of the duties of an office or employment of
profit, is exempt to the extent to which such expenses are actually
incurred for the purpose. The allowances prescribed for this purpose
(which are fully exempt) are spelt out in Rule 2BB(1). These allowances
are as follows:
• any allowance granted to meet the cost of travel on tour or on transfer,

including any sum paid in connection with transfer, packing, and
transportation of personal effects on such transfer.
147
• any allowance, whether granted on tour or for the period of journey in

connection with transfer, to meet the ordinary daily charges incurred by
an employee on account of absence from his normal place of duty.
• any allowance granted to meet the expenditure incurred on conveyance

in performance of duties of an office or employment of profit, provided
that free conveyance is not provided by the employer.
• any allowance granted to meet the expenditure incurred on a helper,

where such helper is engaged for the performance of duties of an office
or employment of profit.
• any allowance granted for encouraging the academic, research, and

training pursuits in educational and research institutions.
• any allowance granted to meet the expenditure incurred on the purchase

or maintenance of uniform for wear during the performance of the duties
of an office or employment of profit.
2.Under sub-clause (ii) of Section 10(14), any prescribed allowance

granted to the assessee either to meet his personal expenses at the
place where the duties of his office or employment of profit are ordinarily
performed by him or at the place where he ordinarily resides, or to
compensate him for the increased cost of living, is exempt upto the
prescribed extent. Rule 2BB(2) enumerates these allowances and the
limits upto which they are exempt. These allowances are as follows:
148
Extent of
Name of Allowance/Places Where Exempt
Exemption
(i) Any special compensatory allowance in the nature

of Special Compensatory (Hilly Areas) Allowance or
High Altitude Allowance or Uncongenial Climate
Allowance or Snow Bound Area Allowance or
Avalanche Allowance:
(a) At places mentioned under Item I in Col. 3 of SI. Rs. 800 per month
No. 1 of the Table in Rule 2BB(2)
(b) Siachen area of Jammu and Kashmir Rs. 7,000 per month
(c) All other places situated at a height of 1,000 Rs. 300 per month
metres or more above sea level
(ii) Any special compensatory allowance in the nature

of Border Area Allowance or Remote Locality
Allowance or Difficult Area Allowance or Disturbed
Area Allowance —
(a) At places mentioned under Item I in Col. 3 of SI. Rs. 1,300 per month
(b) Installations in the Continental Shelf of India and Rs. 1,100 per month
the Exclusive Economic Zone of India
(c) At places mentioned under Item III in Col. 3 of SI. Rs. 1,050 per month
(d) At places mentioned under Item IV in Col. 3 of SI. Rs. 750 per month
(e) Jog Falls in Shimoga District in Karnataka Rs. 300 per month
(f) At places mentioned in Item VI in Col. 3 of SI. No. Rs. 200 per month
2 of the Table in Rule 2BB(2)
(iii) Special Compensatory (Tribal Areas/Scheduled Rs. 200 per month

Areas/ Agency Areas) Allowance in States
2BB(2)
149
(iv) Any allowance granted to an employee working in 70 percent of such

any transport system to meet his personal allowance upto a
expenditure during his duty performed in the maximum of Rs.
course of running of such transport from one place 10,000 per month
to another place, provided that such employee is
not in receipt of daily allowance (whole of India)
(v) Children Educational Allowance (whole of India) Rs. 100 per month
per child upto a
maximum of two
children
(vi) Any allowance granted to an employee to meet the Rs. 300 per month
hostel expenditure on his child (whole of India) per child upto a
maximum of two
children
(vii) Compensatory Field Area Allowance, at places Rs. 2,600 per month
21313(2)
(viii) Compensatory Modified Field Area Allowance at Rs. 1,000 per month
places mentioned in Col. 3 of SI. No. 8 of Table in
Rule 21313(2)
(ix) Any special allowance in the nature of counter- Rs. 3,900 per month
insurgency allowance granted to the members of
the armed forces operating in areas away from
their permanent locations for a period of more than
30 days (whole of India)
(x) Transport allowance granted to an employee [other Rs. 800 per month
than an employee referred to in (xi)] to meet his
(whole of India)
(xi) Transport allowance granted to an employee, who Rs. 1,600 per month
is blind or orthopedically handicapped with
disability of lower extremities, to meet his
(whole of India)
(xii) Underground allowance granted to an employee Rs. 800 per month
who is working in uncongenial, unnatural climate in
underground coal mines (whole of India)
150
(xiii) Any special allowance in the nature of high altitude

(uncongenial climate) allowance granted to the
member of the armed forces operating in high
altitude areas
(a) For altitude of 9,000 to 15,000 feet Rs. 1,060 per month
(b) For altitude above 15,000 feet Rs. 1,600 per month
(xiv) Any special allowance granted to the members of Rs. 4,200 per month
the armed forces in the nature of special
compensatory highly active field area allowance
(whole of India)
(xv) Any special allowance granted to the member of Rs. 3,250 per month
the armed forces in the nature of Island (duty)
allowance (Andaman & Nicobar and Lakshadweep
Group of Islands)
Note: An assessee who claims exemption under (vii) and (viii) above, will
not be entitled to the exemption in respect of the allowance referred to at
(i).
An assessee who claims exemption under (ix) will not be entitled to the
exemption in respect of the allowance referred to at (ii) (Disturbed area
allowance).
151
4.20 SUMMARY
Salary accrues to employees at their place of work. Employees earning

salary in India may stay abroad for the work or after retirement, but
income received by them is treated as received in India and is taxed. The
term ‘salary’ includes wages, allowances, leave salary, gratuity, bonus,
contributions to employee funds, all types of perquisites and payments to
employees on retrenchment and normal or voluntary retirement.
The section provides for several exemptions from this income either to
offset extra financial burdens during employment (house rent in Metro
cities) or after they leave the employment.
1. What is taxable under the heading ‘Salaries’?
2. When is leave salary exempt from tax? To what extent?
3. How is Bonus earned by employees that are taxed?
4. Explain tax liability on House Rent Allowance earned by an employee in

Delhi.
5. State deductions permitted under Section 16.
152
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
153
INCOME FROM HOUSE PROPERTY (SECTIONS 22 TO 27)
Chapter 5
Income From House Property
(Sections 22 To 27)
Objectives
• Tax liability on Income from House Property.

• Annual value to determine this Income.
• Deductions permitted.
Structure:
5.1 Introduction
5.2 Income from House Property (Section 22)
5.3 Annual Value – How is it Determined? (Section 23)
5.4 Deductions from Income from House Property
5.5 Amounts not Deductible from Income from House Property when no
TDS Effected (Section 25)
5.6 Property Owned by Co-owners – Apportionment of Income from House

Property
5.7 Section 53A of Transfer of Property Act, 1882
5.8 How to Compute Tax on House Property?
5.9 Exemptions
5.10 Summary
154
5.1 INTRODUCTION
This head of ‘Income’ seeks to tax ‘Income from House Property’ and lays
down mechanism for the same. Section 22 to Section 27 covers this head
of ‘income’.
Section 22 of the Income Tax Act, 1961 requires that annual value of any
property consisting of any buildings or lands appurtenant thereto, of which
the assessee is the owner, shall be taxable in the manner laid down.
For being so taxed, the assessee must be the owner of such property. For
its annual value to be taxed under the ‘Income from House Property’, such
property must not be one which is occupied by him for the purposes of any
business or profession carried on by him, the profits of which are
chargeable to income tax. Thus, if a property is occupied by an assessee
for the purposes of any business or profession carried on by him, the
profits of which are chargeable to income tax, its annual value shall not be
taxable under the head ‘Income from House Property’.
So far as the ownership is concerned, in the case of tenant co-partnership

co-operative housing societies are concerned, the income from each
building should be assessed in the hands of the individual members to
whom it had been allotted. For all purposes (including attachment and
recovery of tax, etc.), the individual members should be regarded as the
legal owners of the property in question.
The levy of tax while taxing the ‘Income from House Property’ is on the
income from the property and not on the property itself [Chelmsford Club
v. CIT [2000] 243 ITR 89 (Sc)].
155
5.2 INCOME FROM HOUSE PROPERTY (Section 22)
The annual value of property consisting of any buildings or lands

appurtenant thereto of which the assessee is the owner, other than such
portions of such property as he may occupy for the purposes of any
business or profession carried on by him the profits of which are
chargeable to income tax, shall be chargeable to income tax under the
head ‘Income from House Property’.
A. The sum for which the property might reasonably be expected to let
from year to year:
Here, one needs to consider the following:
Municipal Valuation [a] (say) Rs. 1,10,000
Fair Rent of the Property [b] (say) Rs. 1,60,000
It is necessary to determine the expected valuation of the property, viz.,

the higher of [a] or [b] which is Rs. 1,60,000 but it shall be limited to:
Standard Rent [c] (say) Rs. 1,20,000

Having done this, one proceeds to next stage as under. Rs. 1,20,000
B.
Where the property or any part of the property is let and Rs. 1,50,000
the actual rent received or receivable
(say, here Rs. 1,50,000) by the owner in respect thereof is in excess of the
sum referred to in clause (a) above, the amount so received or receivable;

or receivable; or
156
C.
Where the property or any part of the property is let and Vacant for 4
was vacant during the whole or any part of the previous months
year and owing to such vacancy the actual rent received Rs. 1,00,000
or receivable by the owner in respect thereof is less than the sum referred
to in clause (A), the amount so received or receivable
Annual value in case of vacancy:
The amount of (C) is less than (A),so Annual value is Rs. 1,00,000
If vacancy were for 2 months, the actual rent received or Rs. 1,25,000
receivable would be:
Annual Value where there is no vacancy Rs. 1,50,000
Less: Unrealized rent (if any) [subject to rules prescribed] Rs. 10,000
Rs. 1,40,000
Less: Taxes levied by Municipal authority in respect of the Rs. 45,000
property and actually paid by Assessee (irrespective of the
previous year in which the liability to pay such taxes was
incurred by the owner according to the method of accounting
regularly employed by him)
[Taxes levied by a local authority in respect of any property shall be

deemed to include service taxes levied by the local authority in respect of
the property u/s 27(vi)]
Net Annual Value Rs. 1,05,000
What is charged under Section 22 is the annual value of the ownership of

the property irrespective of the fact whether or not any income was either
actually received or had accrued to the assessee [Ram Pershad & Sons v.
CIT [1995] 81 Taxman 332 (Delhi)].
The ‘owner’ is a person who is entitled to receive income from property in

his own right. Owner of structure is liable to tax even if he is not owner of
land [Tinsukia Development Corpn. Ltd. v. CIT [1979] 120 ITR 476 (Cal)].
157
In context of Section 22, ‘owner’ is a person who is entitled to receive

income from property in his own right [CIT v. Podar Cement (P.) Ltd.
[1997] 92 Taxman 541 (SC)].
What is Not Chargeable as Income from House Property?

Only when the property is used for the purposes of any business or
profession carried on by the Assessee the profits of which are chargeable
to income tax, such property is not to be considered for computing Income
from House Property. Otherwise, the purpose or user of the property is not
relevant. A property may be self-occupied, let out, i.e., rented, it may be
vacant, it shall be considered for computing Income from House Property.
Even when a property is under mortgage, it is liable to tax: When

any property is mortgaged or a loan is obtained under security of the
property, its income computed as prescribed would be liable to be taxed.
5.3 ANNUAL VALUE — HOW is it DETERMINED? (Section

23)
The determination of annual value is made in terms of Section 23 of the

Income Tax Act, 1961. The scheme of Section 23 goes as under:
The annual value of any property shall be deemed to be —

In determining the annual value, further adjustments need to be made as
follows:
1. S e l f - o c c u p i e d h o u s e o r n o n - o c c u p a t i o n b y r e a s o n o f
employment, business or profession: In working out the annual
value, it has to be further borne in mind that where the property
consists of a house or part of a house which:
a. is self-occupied by the owner for the purpose of his own residence;

or
b. cannot actually be occupied by the owner by reason of the fact

that owing to his employment, business, or profession carried
on at any other place, he has to reside at that other place in a
building not belonging to him, the annual value of such house or
part of the house shall be taken to be Nil.
158
2. Where the non-occupied house is let out: This issue of taking nil
income (in case of SOP or non-occupation for reason of employment
etc.), however, shall not apply if:
a. the house or part of the house is actually let during the whole or any
part of the previous year; or
b. any other benefit therefrom is derived by the owner.
3. Where the Assessee owns more than one house:
a. the Nil annual value rule shall apply only in respect of one of such
houses, which the assessee may, at his option, specify in this behalf;
b. the annual value of the house or houses, other than the house in
respect of which the assessee has exercised an option under clause
(a), shall be determined under sub-section (1) as if such house or
houses had been let out.
Unrealized Rent
The deduction towards unrealized rent referred to above is available if the
Assessee complies with the conditions laid down in Rule 4 of Income Tax
Rules, 1962. Only that part of the unrealized rent is available for deduction
from annual value which satisfies the prescribed conditions.
The unrealized rent shall be that amount of rent payable but not paid by a
tenant of the assessee and so proved to be lost and irrecoverable
where:
a. the tenancy is bona fide;
b. the defaulting tenant has vacated, or steps have been taken to compel
him to vacate the property;
c. the defaulting tenant is not in occupation of any other property of the

assessee;
d. the assessee has taken all reasonable steps to institute legal

proceedings for the recovery of the unpaid rent or satisfies the
Assessing Officer that legal proceedings would be useless.
159
5.4 DEDUCTIONS FROM INCOME FROM HOUSE PROPERTY
The deductions available in computing the Income from House Property are
available from the annual value under Section 24 and are determined as
discussed above.
From the annual value, one gets:
1. Standard deduction: A lump sum standard deduction of 30% of the

annual value.
2. Deduction towards interest payable in respect of the capital borrowed

where the property has been acquired, constructed, repaired, renewed,
or reconstructed with borrowed capital.
Interest payable restricted to Rs. 30,000 where:
Such deduction of interest payable shall be restricted to Rs. 30,000 where

the property is self-occupied or where the owner cannot occupy it due to
his employment, business, or profession which is carried on at any other
place and he has to reside at that other place in a building not belonging to
him.
Interest payable can extend up to Rs. 1,50,000 where:
However, one gets liberal deduction of interest payable up to Rs. 1,50,000

where:
i. such SOP/unoccupied property is acquired/constructed with borrowed

capital after the 1.4.1999 and;
ii. such acquisition/construction is completed in 3 years from the end of

the financial year in which capital was borrowed.
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Interest Payable for Period Prior to Acquisition of Property –

Deductible over 5 Years
Where the property has been acquired or constructed with borrowed
capital, the interest, if any, payable on such capital borrowed for the period
prior to the previous year in which the property has been acquired or
constructed (as reduced by any part thereof allowed as deduction under
any other provision of this Act), shall be deducted in equal installments for
the said previous year and for each of the four immediately succeeding
previous years.
Borrower to Furnish a Certificate with His Return of Income

Here, while claiming deduction of Rs. 1,50,000/-, it must be ensured w.e.f.
1.4.2003 that the borrower furnishes a certificate with his return of income
from the lender/HFC specifying the amount of interest payable by the
assessee for the purpose of such acquisition or construction of the
property. If this is not done, the higher interest deduction up to Rs.
1,50,000 shall not be available to him. This provision applies in case of
loan swapping as well in order to repay the original loan.
5.5 AMOUNTS NOT DEDUCTIBLE FROM INCOME FROM

HOUSE PROPERTY WHEN NO TDS EFFECTED (Section 25)
Section 25 provides that notwithstanding anything contained in Section 24

about deductibility of interest as seen above, in computing the income
chargeable under the head ‘Income from House Property’, any interest
chargeable under Income Tax Act,1961 which is payable outside India and
• on which tax has not been paid or deducted under the law and;
• in respect of which there is no person in India who may be treated as an

agent under Section 163;
then such interest shall not be deducted in computing the income

chargeable under the head ‘Income from House Property’.
161
Special Provision Where Unrealized Rent – Allowed as Deduction –

Realized Subsequently (Section 25A)
Where in respect of rent from property let to a tenant is unrealized and a

deduction has been made in the assessment for any year in respect of such
unrealized rent [the deduction being made u/s 24(1)(x) – (since deleted
w.e.f. 1.4.2001)] as it stood immediately before its substitution by the
Finance Act, 2001], this provision comes into picture.
Subsequent to claiming such deduction, during any following previous year,

the assessee has realized any amount in respect of such rent, the amount
so realized shall be deemed to be income chargeable under the head
‘Income from House Property’. Accordingly, it shall be charged to income
tax as the income of that previous year.
In so charging the rent now realized, no deduction under Section 23 or

Section 24 shall be allowed to him. Such charge of unrealized tax shall be
made whether the assessee is the owner of that property in that year or
not.
Unrealized Rent Received Subsequently to be Charged to Income

Tax (Section 25AA)
This Section 25AA has been inserted by the Finance Act, 2001, w.e.f.
1.4.2002 where the assessee cannot realize rent from a property let out to
a tenant and subsequently the assessee realizes any amount in respect of
such rent, the amount so realized shall be deemed to be income
chargeable under the head ‘Income from House Property’ and accordingly
charged to income tax as the income of that previous year in which such
rent is realized whether or not the assessee is the owner of that property in
that previous year.
Special Provision for Arrears of Rent Received (Section 25B)
Where the assessee:
a. is the owner of any property consisting of any buildings or lands

appurtenant thereto which has been let out to a tenant; and
162
b. has received any amount, by way of arrears of rent from such property,
not charged to income tax for any previous year, the amount so
received, after deducting a sum equal to thirty per cent of such amount,
shall be deemed to be the income chargeable under the head ‘Income
from House Property’ and accordingly charged to income tax as the
income of that previous year in which such rent is received, whether the
assessee is the owner of that property in that year or not.
5.6 PROPERTY OWNED BY CO-OWNERS –

APPORTIONMENT OF INCOME FROM HOUSE PROPERTY
Section 26 provides that where property consisting of buildings or buildings

and lands appurtenant thereto is owned by two or more persons and their
respective shares are definite and ascertainable, such persons shall not in
respect of such property be assessed as an association of persons (AOP),
but the share of each such person in the income from the property as
computed in accordance with Sections 22 to 25 shall be included in his
total income.
A flat is owned by husband and wife jointly and shares of the spouses are
definite and ascertainable, say 50% each, then the 50% share of each
spouse in the income from the house property as computed in accordance
with the foregoing discussion shall be included in his/her total income.
Here, each co-owner gets the benefit of deduction under the law.
Where the shares of the co-owners are not definite and ascertainable, the
annual value of such property shall be assessed as an association of
persons (AOP) jointly. Here, the benefit of deduction under the law is
available only to the AOP and not to each co-owner.
“Owner of House Property” Defined

The levy of ‘Income from House Property’ falls on the owner of the
property. Section 27 defines who qualifies to be the owner under various
situations.
163
For the purposes of Sections 22 to 26, the owner of the property under
various situations described below shall be:
i. an individual shall be considered as owner of the property transferred if

it is transferred to:
• his or her spouse otherwise than for adequate consideration [not being
a transfer in connection with an agreement to live apart] or
• to a minor child not being a married daughter
ii. the holder of an impartible (indivisible) estate (i.e., group of assets left
by a deceased person) shall be deemed to be the individual owner of all
the properties comprised in the estate;
iii. a member of a co-operative society, company or other association of

persons to whom a building or part thereof is allotted or leased under a
house building scheme of the society, company or association, as the
case may be, shall be deemed to be the owner of that building or part
thereof;
iv. a person who is allowed to take or retain possession of any building or

part thereof in part performance of a contract of the nature referred to
in Section 53A of the Transfer of Property Act, 1882, shall be deemed to
be the owner of that building or part thereof;
v. a person who acquires any rights (excluding any rights by way of a

lease from month to month or for a period not exceeding one year) in or
with respect to any building or part thereof, by virtue of any such
transaction as is referred to in clause (f) of Section 2691JA, shall be
deemed to be the owner of that building or part thereof.
164
5.7 SECTION 53A OF TRANSFER OF PROPERTY ACT, 1882
Part Performance
53A. Where any person contracts to transfer for consideration any

immovable property by writing signed by him or on his behalf from which
the terms necessary to constitute the transfer can be ascertained with
reasonable certainty, and the transferee has, in part performance of the
contract, taken possession of the property or any part thereof, or the
transferee, being already in possession, continues in possession in part
performance of the contract and has done some act in furtherance of the
contract, and the transferee has performed or is willing to perform his part
of the contract, then notwithstanding that where there is an instrument of
transfer, that the transfer has not been completed in the manner
prescribed therefor by the law for the time being in force, the transferor or
any person claiming under him shall be debarred from enforcing against
the transferee and persons claiming under him any right in respect of the
property of which the transferee has taken or continued in possession,
other than a right expressly provided by the terms of the contract:
Provided that nothing in this section shall affect the rights of a transferee
for consideration who has no notice of the contract or of the part
performance thereof.
5.8 HOW TO COMPUTE TAX ON HOUSE PROPERTY?
There is no special rate of tax in respect of ‘Income from House Property’.

Tax on ‘Income from House Property’ is chargeable at the normal rates at
which income from all other sources (except capital gains) is chargeable.
Loss under ‘Income from House Property’ – Carry Forward and Set Off –
The losses under ‘Income from House Property’ are available for being set
off against income from other sources under the same head (Section 70).
The loss still remaining is eligible to be set off against other heads of
income in the same year (Section 71).
If after this, such loss still remains unabsorbed, it may be carried forward
to following years to be set off against Income from House Property of
subsequent eight years (Section 71B).
165
5.9 EXEMPTIONS
The following items of Income from House Property are exempted from
Income Tax—
• Income from house property situated in the immediate vicinity of or on

the Agriculture Land,
• Income from house property held under trust for charitable or religious
purpose,
• Income from property occupied by the owner for the purpose of his
business and profession and profits of which are chargeable to income
tax,
• Income from house property belonging to a Registered Trade Union,
• Income derived from the letting of godowns or warehouses for storage,

processing, or facilitating the marketing of commodities,
• The annual value of any one Palace in the occupation of an ex-ruler,
• Income from house property belonging to a local authority,
• Income from property of an authority constituted for the purpose of

planning, development or improvement of cities, town, and villages,
• Income from property of the approved scientific research association

subject to fulfillment of certain conditions,
• Income from property of a games association,
• Income from property in case of a person resident of Ladakh,
• Income from property of a Political Party.
166
5.10 SUMMARY
Income from house property is charged on the basis of its annual value,
irrespective of the fact whether any income was actually received. If the
owner uses his property for business purpose, this income is not
chargeable under this head. Detailed steps are provided in the Section 23
to arrive at this annual value. A few deductions are permissible and these
are explained in the Section 24. Section 25 stipulates conditions under
which interest, allowed in the Section 24 for deduction, cannot be so
deducted. Section 26 explains tax liability when property is owned by more
than one person.
1. When is income from house property taxable?
2. How is income from house property calculated?
3. Are any deductions permitted?
4. How is income from house property taxed?
167
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
168
PROFITS AND GAINS OF BUSINESS OR PROFESSIONS (SECTIONS 28 TO 44)
Chapter 6
Profits And Gains Of Business Or
Professions (Sections 28 To 44)
Objectives
• Types of income under ‘Profits and Gains of Business or Profession’

• Methods of accounting to arrive at profit
• Various deductions permitted
• How to calculate depreciation?
• Actual cost and written down value
• Difference between Revenue and Capital expense
Structure:
6.1 Introduction
6.2 Business and Profession
6.3 Profits and Gains
6.4 Business Loss – Instances of Allowance and Disallowance
6.5 Method of Accounting (Sections 145 and 145A)
6.6 Deductions against Business Income
6.7 Maintenance of Accounts by Certain Persons Carrying on Profession or
Business (Section 44AA)
6.8 Special Provisions for Computing Profits and Gains of Business of
Plying, Hiring or Leasing Goods Carriages (Section 44AE)
6.9 Special Provisions for Computing Profits and Gains of Retail Business
(Section 44AF)
6.10 Summary – Scheme of Presumptive Income and Presumptive
Taxation
6.11 Income from Undisclosed Sources – To be Added in Income
6.12 Summary
169
6.1 INTRODUCTION
The following income shall be chargeable to income tax under the head
‘Profits and 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;
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
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
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;
iii. income derived by a trade, professional or similar association from

specific services performed for its members;
(iii a) profits on sale of a license granted under the Imports (Control)

Order, 1955, made under the Imports and Exports (Control) Act,
1947 (18 of 1947);
(iii b) cash assistance (by whatever name called) received or

receivable by any person against exports under any scheme of the
Government of India;
170
(iii c) any duty of customs or excise repaid or repayable as drawback

to any person against exports under the Customs and Central Excise
Duties Drawback Rules, 1971;
(iii d) 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);
(iii e) 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);
iv. the value of any benefit or perquisite, whether convertible into money
or not, arising from business or the exercise of a profession;
v. any interest, salary, bonus, commission or remuneration, by whatever

name called, due to, or received by, a partner of a firm from such firm:
Provided that where any interest, salary, bonus, commission or

remuneration, by whatever name called, or any part thereof has not
been allowed to be deducted under clause (b) of Section 40, the income
under this clause shall be adjusted to the extent of the amount not so
allowed to be deducted;
(va) 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
b. not sharing any know-how, patent, copyright, trademark, license,

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:
171
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, 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.
a. ‘agreement’ includes any arrangement or understanding or action in

concert,—
i. whether or not such arrangement, understanding or action is formal

or in writing; or
ii. whether or not such arrangement, understanding or action is

intended to be enforceable by legal proceedings;
b. ‘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;
c. 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;
172
d. 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, if the whole of
the expenditure on such capital asset has been allowed as a deduction
under Section 35AD.
Explanation 1: [Omitted by the Direct Tax Laws (Amendment) Act, 1987,

w.e.f. 1.4.1989]
Explanation 2: Where speculative transactions carried on by an assessee

are of such a nature as to constitute a business, the business (hereinafter
referred to as “speculation business”) shall be deemed to be distinct and
separate from any other business.
Exceptions
For being taxable under Section 28 as above, such sum should not be a
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.
Speculation Business
Where any assessee undertakes any speculative transactions which are of
such a nature as to constitute a business, such speculation business shall
be deemed to be distinct and separate from any other business.
Meaning of Business
The word ‘business’ is one of wide important term in fiscal statues, it must
be construed in a broad rather than a restricted sense [Mazagaon Dock
Ltd. v. CIT [1958] 34 ITR 368 (SC)].
Generally, single transaction is not treated as business: The

expression ‘business’ in ordinary parlance means any trading activity
accompanied by regularity of transactions intended for the purpose of
making profit. In general, a single transaction is not taken as business
[Eclat Construction (P.) Ltd. v. CIT [1988] 172 ITR 84 (Pat.)].
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Activity must be real, substantial, systematic, and organized: The

expression ‘business’ is a well-known expression in income tax law. It
means some real, substantial, and systematic or organized course of
activity or conduct with a set purpose [CIT v. Distributors (Baroda) (P.) Ltd.
[1972] 83 ITR 377 (SC)/Narain Swadeshi Wvg. Mills v. CEPT [1954] 26 ITR
76E (SC)/CIT v. Admiralty Flats Motel [1982] 133 ITR 895 (Mad.)].
6.2 BUSINESS and PROFESSION
At Section 2(13), the term ‘business’ is defined to include any:
a. trade,
b. commerce,
c. manufacture, or
d. any adventure or concern in the nature commerce or manufacture.
Though the definition is not exhaustive, it covers even an occupation

carried on by a person with a view to earning profit. Production of any
thing from raw material, buying, and selling of goods to make profits and
providing services to others are some forms of ‘business’. Profits arising
from these are chargeable under the head “Profits and Gains of Business or
Profession”. The term ‘business’ is a term of wide importance and must be
understood in a broad sense rather than a restrictive or a narrow sense.
Profit motive: The word ‘business’ would mean some real, substantial,
and systematic or organized course of activity with a set purpose which
would normally be profit motive.
Trade
Trade primarily means the exchange of goods for goods or goods for
money. It would also signify that it is a kind of repeated activity in the
nature of business carried on with a profit motive. The activity of trade is
generally of manual or mercantile kind of activity, as distinguished from the
liberal arts or learned professions or agriculture.
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Commerce
If a person purchases goods with a view to sell them at profit, it is an
ordinary case of trade. If such transactions are repeated on a large scale, it
is called commerce. In determining a case of trade or commerce, the
crucial issue is that of investment. One has to take into account the nature
of the assets, the occupation of assessee, the frequency and volume of
transactions, etc. to distinguish trading from commercial activity.
Manufacture
Manufacture is the making of articles or materials by physical labour or
mechanical power. The essence of manufacturing is that something is
produced or brought into existence which is different from that out of
which it is made, in the sense that the thing produced is by itself
commercial commodity which is capable as such of being sold or supplied.
“Manufacture”, with its grammatical variations, means a change in a non-

living physical object or article or thing,—
a. Resulting in transformation of the object or article or thing having a

different name, character and use; or
b. Bringing into existence of a new and distinct object or article or thing

with a different chemical composition or integral structure.
Any Adventure in the Nature of Trade, Commerce, or Manufacture

The following guiding principles would apply while deciding as to whether a
transaction of purchase or sale forms an adventure in the nature of trade
or an investment:
• The commodity purchased plays an important role in deciding whether a

person is indulging in an adventure in the nature of trade or is making an
investment.
• Whether the transaction is an isolated one or forms part of a series of

transactions showing a tendency to indulge in trade.
• The fact that the property bought has been sold within a short time does
not by itself indicate that the transaction is in the nature of trade.
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• If land has been purchased which normally is not treated as stock-in-

trade, the presumption can be that the intention was to make an
investment and not to indulge in an adventure in the nature of trade.
• If the property purchased is capable of yielding income, then again the

inference will be that an investment was intended to earn income and is
not an adventure in the nature of trade.
Profession
The expression ‘profession’ has been defined in Section 2(36) of the Act to
include any ‘vocation’. According to generally accepted principles, the
meaning of the term ‘profession’ involves the concept of an occupation
requiring either intellectual skill or manual skill controlled and directed by
the intellectual skill of the operator.
Intellectual/manual skill must be involved: Profession involves

occupation requiring purely intellectual or manual skill [CIT v. Manmohan
Das [1966] 59 ITR 699 (SC)].
‘Profession’ is associated with intellectual/technical exercises

based on learning/service: A profession is normally associated with the
exercise of intellectual or technical equipment resulting from learning or
service [CIT v. Bhagwan Broker Agency [1993] 70 Taxman 453 (Raj.)].
Business or Profession Should be Carried on by the Assessee

For taxing any income under Section 28, as Income from Business or
Profession, such business or profession should be carried on by the
assessee. It is the person carrying on a business or profession who is
chargeable to tax. What is important here is not the ownership of business
but the fact that business is being carried on by the assessee. It is not
necessary that an assessee should physically carry on a business before he
becomes liable to pay tax. He must have the right to carry on the business
and the business must have been carried on in the exercise of that right by
the assessee either personally or through his agent or servant [Saifuddin
Alimohamed v. CIT [1954] 25 ITR 237 (Bom.)].
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Business or Profession Should be Carried on During the Previous

Year
Income from business or profession is chargeable to tax under this head
only if the business or profession is carried on by the assessee at any time
during the previous year. It is, however, not necessary that business or
profession should be carried on throughout the previous year or up to the
end of the previous year. It may be carried on at any time during the
previous year.
Exceptions
However, the following receipts are taxable even if no business or
profession is carried on by the assessee during the previous year:
• Recovery or excess recovery against a deduction claimed earlier [Section

41(1)].
• Sale of an asset used for scientific research [Section 41(3)].
• Recovery or excess recovery against bad debts claimed [Section 41(4)].
• Amount withdrawn from a reserve created under Section 36(1)(viii)

[Section 41 (4A)].
• Sum received after discontinuance of a business or profession [Section

176(3A)/(4)].
• Sale of depreciable assets by power-generating unit [Section 41(2)].
• Sum received for restrictive covenant [Section 28(va)].
Taxability of Business Income Arises in Respect of All Businesses

or Professions
Profits and gains of different businesses or professions carried on by the
assessee are not separately chargeable to tax. The tax incidence arises on
income from all businesses or professions carried on by the assessee put
together. If an assessee earns profit in one business and sustains loss in
another business, income chargeable to tax is the net balance after setting
off loss against income. However, profits and losses of a speculative
business are kept separately.
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Legal Ownership vs. Beneficial Ownership

For charging income under the head of ‘Business or Profession’, it is not
only the legal ownership but also the beneficial ownership that has to be
considered. The courts can go into the question of beneficial ownership and
decide who should be held liable for the tax after taking into account the
question as to who is, in fact, in receipt of the income which is going to be
taxed. For instance, if business is acquired for the benefit and on behalf of
a company which is going to be incorporated and the promoters earn profit
during pre-incorporation period, the company would be assessable to tax in
respect of pre-incorporation profit if it ratifies the action of the promoters
and receives profit made by them.
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6.3 PROFITS AND GAINS
Tax is on profits and not on gross receipts: ‘Gains’ is really the

equivalent of ‘profits’. The profit of a trade or business is the surplus by
which the receipts from the trade or business exceeded the expenditure
necessary for the purpose of earning those receipts. The tax is upon
income, profits or gains; it is not a tax on gross receipts [CIT v. Bokaro
Steel Ltd. (No. 1) [1988] 170 ITR 522 (Pat.)].
Real profit as against anticipated profit: The assessable profits must

be real profits. They have to be ascertained on ordinary principles of
trading and commercial accounting. Where the assessee is under a liability
or is bound to make a certain payment from the gross profits, the profits
and gains can only be the net amount after the said liability or amount is
deducted from the gross profits or receipts [Kedarnath Jute Mfg. Co. Ltd. v.
CIT [1971] 82 ITR 363 (SC)/Madeva Upendra Sinai v. Union of India
[1975] 98 ITR 209 (SC)].
As accounting year is a self-contained year, taxable profit is the profit

accrued or arising in that year. Anticipated or potential profits or losses,
which may occur in future, are not considered for arriving at taxable
income of a previous year.
This rule is, however, subject to one exception: stock-in-trade may be

valued on the basis of cost or market value, whichever is lower.
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Manner of depiction in books is not relevant: It is now well-settled

that the way in which entries are made by an assessee in his books of
account is not determinative of the question whether the assessee has
earned any profit or suffered any loss. What is necessary to be considered
is the true nature of the transaction and whether in fact it has resulted in
profit or loss to the assessee [Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR
1 (SC)].
Substance of transaction should prevail over its form: A company

formed with the specific object of acquiring properties not with the view to
leasing them as property but with a view to selling them or turning them to
account even by way of leasing them out as an integral part of its business,
cannot be treated as a landowner but as a trader. In deciding whether a
company dealt in properties, one must see not the form which it gave to
the transaction but the substance of the matter [Karanpura Development
Co. Ltd. v. CIT [1962] 44 ITR 362 (SC)].
Income from Illegal Business

The income tax law is not concerned with the legality or illegality of
business or profession. The income of illegal business or profession is not
exempt from tax.
How to Compute Business Income?
Income from Profits and Gains of Business or Profession – How

Computed (Section 29)
The income referred to in Section 28 shall be computed in accordance with

the provisions contained in Sections 30 to 43D.
The business losses can be allowed as deduction only if the following

conditions are satisfied:
• The loss should be revenue in nature;
• The losses should be incurred during the previous year;
• The loss should be incidental to the business or profession carried on by

the assessee;
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• The loss should not be notional or fictitious;
• The loss should have been actually incurred and not merely anticipated
to incur in future; and
• There should not be any, direct or indirect, restriction under the Act
against the deductibility of such loss.
Loss is not the same as expenditure: Disbursement or expenses of a

trader is something ‘which comes out of his pocket’. A loss is something
different. That is not a thing which he expends or disburses. That is a thing
‘which comes upon him as extra’ [CIT v. S.C. Kothari [1971] 82 ITR 794
(SC)].
6.4 BUSINESS LOSS – INSTANCES OF ALLOWANCE AND

DISALLOWANCE
Instances of Losses Deductible from Business Income
• Loss of stock-in-trade due to destruction by fire,
• Loss of stock-in-trade by an act of God,
• Loss of stock-in-trade due to theft,
• Loss on account of advances given to employee’s welfare co-operative

stores which becomes irrecoverable,
• Loss of cash due to theft,
• Depreciation in funds kept in foreign currency due to exchange

fluctuation,
• Loss incurred due to devaluation of rupee in foreign country which is

being utilized in course of business,
• Loss due to embezzlement by an employee,
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• Loss incurred on account of insolvency of banker with which current

account is maintained,
• Loss incurred due to sale of lands acquired from a business debtor in

satisfaction of debt,
• Loss on account of non-recovery of advances given by assessee company

to its 100% subsidiary company,
• Loss arising from sale of securities held in the regular course of business,
• Loss arising due to non-realization of the loan advanced to the importer,
• Loss of cash and securities in a banking company on account of dacoity,
• Loss incurred due to forfeiture of deposits made for residential

accommodation of employees of the assessee company.
Instances of Losses Not Deductible from Business Income
• Loss of advances made for setting up a new business which ultimately

could not be started,
• Depreciation of funds kept in foreign currency for capital purpose,
• Loss arising from non-recovery of tax paid by an agent on behalf of the

non-resident,
• Anticipated future losses,
• Loss relating to any business or profession discontinued before the

commencement of previous year,
• Loss of security deposit made to obtain selling agency,
• Provision made by assessee in respect of non-performing assets.
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6.5 METHOD OF ACCOUNTING (Sections 145 AND 145A)
Income chargeable under the head of:
• Profits and gains of business or profession or
• Income from other sources
shall be computed in accordance with either—
• Cash system of accounting or
• Mercantile system of accounting
The system of accounting adopted should be regularly employed by the

assessee.
Who chooses the system of accounting?

– The Assessee
What may guide him in doing so?

• Prudence
• Substance over form
• Materiality
• Consistency
The bottom-line being to present true and fair view of the affairs and
operations of the business, Central Government may prescribe the
accounting standards to be followed by any class of assessee or in respect
of any class of income.
Where the Assessing Officer is not satisfied about the correctness or

completeness of the accounts of the assessee, or where the method of
accounting provided in sub-section (1) or accounting standards as notified
under sub-section (2), have not been regularly followed by the assessee,
the Assessing Officer may make an assessment in the manner provided in
Section 144.
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Mandatory Method of Accounting
Method of Accounting in Certain Cases [145A]

Notwithstanding anything to the contrary contained in Section 145, the
valuation of purchase and sale of goods and inventory for the purposes of
determining the income chargeable under the head ‘Profits and Gains of
Business or Profession’ shall be—
a. in accordance with the method of accounting regularly employed by the

assessee; and
b. further adjusted to include the amount of any tax, duty, cess, or fee (by
whatever name called) actually paid or incurred by the assessee to
bring the goods to the place of its location and condition as on the date
of valuation.
Accounting Standards Prescribed
AS l: Disclosure of Accounting Policy
• All significant accounting policies adopted be disclosed.
• Such disclosure shall form part of the financial statement.
• Any change in the accounting policies having significant/material effect

on the results for the current or future years must be disclosed.
Aim of selecting the accounting policies is to present the true and fair view
of the affairs and operations of the business.
For this, the major consideration in selection of the accounting policies

must be:
• Prudence
• Substance over form
• Materiality
• Consistency
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AS II: Disclosure of Prior Period and Extraordinary Items
It prescribes the treatment of income and expenditure of prior period and

that of extraordinary items.
Prior period items are required to be separately disclosed in the profit and
loss account in the previous year together with their nature and amount so
that their impact on profit or loss in the previous year can be perceived.
Extraordinary items of the enterprise during the previous year shall be

disclosed in the profit and loss account as part of taxable income. The
nature and amount of each such item shall be separately disclosed so that
their relative significance and effect on the operating results of the
previous year can be perceived.
Any change in an accounting policy which has a material effect shall be

disclosed.
Similarly, a change in an accounting estimate that has a material effect in

previous year shall be disclosed and quantified.
“Accounting estimate” means an estimate made for the purpose of

preparation of financial statements which is based on the circumstances
existing at the time when the financial statements are prepared.
“Accounting policies” means the specific accounting principles and the

method of applying those principles adopted by the assessee in the
preparation and presentation of financial statements.
“Extraordinary items” means gains or losses which arise from events or

transactions which are distinct from the ordinary activities of the business
and which are both material and expected not to recur frequently or
regularly. Extraordinary items include material adjustments necessitated by
circumstances which though related to years preceding to the previous
years are determined in the previous year.
“Prior period items” means material charges or credits which arise in the
previous year as a result of errors or omissions in the preparation of the
financial statements of one or more previous years.
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The following accounting standards are notified, to be followed by all

assessees following mercantile system of accounting:
A. Accounting Standard I Relating to Disclosure of Accounting

Policies
1. All significant accounting policies adopted in the preparation and

presentation of financial statements shall be disclosed.
2. The disclosure of the significant accounting policies shall form part of

the financial statements and the significant accounting policies shall
normally be disclosed in one place.
3. Any change in an accounting policy which has a material effect in the

previous year or in the years subsequent to the previous years shall be
disclosed. The impact of, and the adjustments resulting, from, such
change, if material, shall be shown in the financial statements of the
period in which such change is made to reflect the effect of such
change. Where the effect of such change 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 on the financial statements for the
previous year but which is reasonably expected to have a material effect
in any year subsequent to previous year, the fact of such change shall
be appropriately disclosed in the previous year in which the change is
adopted.
4. Accounting policies adopted by an assessee should be such so as to

represent a true and fair view of the state of affairs of the business,
profession or vocation in the financial statements prepared and
presented on the basis of such accounting policies. For this purpose, the
major considerations governing the selection and application of
accounting policies are following, namely:
i. Prudence: Provisions should be made for all known liabilities and

losses even though the amount cannot be determined with certainty
and represents only a best estimate in the light of available
information;
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ii. Substance over form: The accounting treatment and presentation

in financial statements of transactions and events should be governed
by their substance and not merely by the legal form;
iii. Materiality: Financial statements should disclose all material items,

the knowledge of which might influence the decisions of the user of
the financial statements.
5. If the fundamental accounting assumptions relating to Going Concern,

Consistency, and Accrual are followed in financial statements, specific
disclosure in respect of such assumptions is not required. If a
fundamental accounting assumption is not followed, such fact shall be
disclosed.
6. For the purposes of the paragraphs (1) to (5), the expressions—
a. “Accounting policies” means the specific accounting principles and the

methods of applying those principles adopted by the assessee in the
preparation and presentation of financial statements;
b. “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 financial statements
of the periods to which they relate;
c. “Consistency” refers to the assumption that accounting policies are

consistent from one period to another;
d. “Financial Statements” means any statement to provide information

about the financial position, performance, and changes in the financial
position of an assessee and includes balance sheet, profit, and loss
account and other statements and explanatory notes forming part
thereof;
e. “Going concern” refers to the assumption that the assessee 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.
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• Activity A
1. From published accounts of any public limited company known to

you, prepare a list of its accounting policies.
.........................................................................................................
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
B. Accounting Standard II Relating to Disclosure of Prior Period

and Extraordinary Items and Changes in Accounting Policies
7. Prior period items shall be separately disclosed in the profit and loss
account in the previous year together with their nature and amount in a
manner so that their impact on profit or loss in the previous year can be
perceived.
8. Extraordinary items of the enterprise during the previous year shall be

disclosed in the profit and loss account as part of taxable income. The
nature and amount of each such item shall be separately disclosed in a
manner so that their relative significance and effect on the operating
results of the previous year can be perceived.
9. A change in an accounting policy shall be made only if the adoption of a

different accounting policy is required by statute or if it is considered
that the change would result in a more appropriate preparation or
presentation of the financial statements by an assessee.
10.Any change in an accounting policy which has a material effect shall be

disclosed. The impact of, and the adjustments resulting from such
change, if material, shall be shown in the financial statements of the
period in which such change is made to reflect the effect of such
change. Where the effect of such change 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 on the financial statements for the
previous year but which is reasonably expected to have a material effect
in years subsequent to the previous years, the fact of such change shall
be appropriately disclosed in the previous year in which the change is
adopted.
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11.A change in an accounting estimate that has a material effect in

previous year shall be disclosed and quantified. Any change in an
accounting estimate which is reasonably expected to have a material
effect in years subsequent to previous year shall also be disclosed.
12.If a question arises as to whether a change is a change in accounting

policy or a change in an accounting estimate, such a question shall be
referred to the Board for decision.
13. For the purposes of the paragraphs (7) to (12), the expressions,—
a. “Accounting estimate” means an estimate made for the purpose of

preparation of financial statements which is based on the
circumstances existing at the time when the financial statements are
prepared;
b. “Accounting policies” means the specific accounting principles and the

method of applying those principles adopted by the assessee in the
preparation and presentation of financial statements;
c. “Extraordinary items” means gains or losses which arise from events
or transactions which are distinct from the ordinary activities of the
business and which are both material and expected not to recur
frequently or regularly. “Extraordinary items” includes material
adjustments necessitated by circumstances which though related to
years preceding to the previous years are determined in the previous
year:
Provided that income or expenses arising from the ordinary activities

of the business or profession or vocation of an assessee, though
abnormal in amount or infrequent in occurrence, shall not qualify as
extraordinary item;
d. “Financial Statements” means any statement to provide information

about the financial position, performance and changes in the financial
position of an assessee and includes balance sheet, profit and loss
account and other statements and explanatory notes forming part
thereof;
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e. “Prior period items” means material charges or credits which arise in

the previous year as a result of errors or omissions in the preparation
of the financial statements of one or more previous years:
f. Provided that the charge or credit arising on the outcome of a

contingency, which at the time of occurrence could not be estimated
accurately shall not constitute the correction of an error but a change
in estimate and such an item shall not be treated as a prior period
item.
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6.6 DEDUCTIONS AGAINST BUSINESS INCOME
Income from profits and gains of business or profession, how computed:
The income referred to in Section 28 shall be computed in accordance with

the provisions contained in Sections 30 to 43D. The important ones are
outlined here.
A. Rent, Rates, Taxes, Repairs and Insurance for Buildings (Section

30)
In respect of rent, rates, taxes, repairs and insurance for premises, used
for the purposes of the business or profession, the following deductions
shall be allowed:
a. where the premises are occupied by the assessee—
i. 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;
ii. otherwise than as a tenant, the amount paid by him on account of

current repairs to the premises;
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b. any sums paid on account of land revenue, local rates or municipal

taxes;
c. the amount of any premium paid in respect of insurance against risk of

damage or destruction of the premises.
The amount paid on account of the cost of repairs/current repairs referred

to above shall not include any expenditure in the nature of capital
expenditure [w.e.f. 31.3.2004].
Current Repairs
In New Shorrock Spg. & Mfg. Co. Ltd. v. CIT [1956] 30 ITR 338 (SC),
Chagla, C.J. speaking for the Division Bench, observed that the expression
‘current repairs’ means expenditure on buildings, machinery, plant or
furniture which is not for the purpose of renewal or restoration but which is
only for the purpose of preserving or maintaining an already existing asset
and which does not bring a new asset into existence or does not give to the
assessee a new or different advantage. The Chief Justice observed that
they are such repairs as are attended to as and when need arises and that
the question when a building, machinery, etc., requires repairs and when
the need arises must be decided not by any academic or theoretical test
but by the test of commercial expediency [Bal Jimal Naval Kishore v. CIT
[1997] 90 Taxman 402/224 ITR 414 (SC)].
The expression ‘current repairs’ in Section 31 does not mean ‘petty repairs’
or repairs necessitated by wear and tear during the particular year.
Payments on account of ‘current repairs’ must be understood in
contradistinction to payments for ‘addition’ or ‘improvement’ [CIT v.
Chowgule & Co. (P.) Ltd. [1995] 81 Taxman 384/214 ITR 523 (Bom)].
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B. Repairs and Insurance of Machinery, Plant, and Furniture

(Section 31)
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:
i. the amount paid on account of current repairs;
ii. the amount of any premium paid in respect of insurance against risk of
damage or destruction thereof.
The amount paid on account of current repairs shall not include any
expenditure in the nature of capital expenditure [w.e.f. 31.3.2004].
The propositions that emerge from various decided cases on the issue of
repairs as used in Sections 30 and 31 are:
i. The amount should be paid on account of current repairs.
ii. ‘Current repairs’ means repairs undertaken in the normal course of user
for the purpose of preservation, maintenance or proper utilization or for
restoring it to its original condition.
iii. ‘Current repairs’ do not mean only petty repairs or repairs necessitated
by wear and tear during the particular year.
iv. Such repairs should not bring into existence nor obtain a new or
different advantage.
v. Neither the quantum of expenditure nor the fact that in the process of
repairs there was substantial replacement of the parts of the machine or
ship, is decisive of the true nature of the expenditure.
vi. The original cost of the asset is not at all relevant for ascertainment of
the true nature of the expenditure on repairs.
191
vii.The replacement cost of the asset may, however, at times be used as an

indicator of the true character of the expenditure. If the expenditure on
repairs added to the written down value or disposal value exceeds the
replacement cost of the asset, a presumption is possible that it is not a
revenue expenditure but expenditure of capital nature. Such a
presumption, of course, would be rebatable.
viii.The expression ‘current’ preceding ‘repairs’ appears to have been used

by the legislature with a view to restricting the allowance to expenditure
incurred for preservation and maintenance thereof in its current state in
contradistinction to that incurred on any improvement or an addition
thereto [CIT v. Chowgule and Co. (P.) Ltd. [1995] 214 ITR 523/81
Taxman 384 (Bom)].
The above may be summarized as under:
Section 30
Nature of What is Available for Deduction? Deduction Available
Expenditure to Whom?
Rent, rates, Rent paid To Tenant
taxes, repairs,
If tenant has undertaken to bear To Tenant
and insurance for
cost of repairs to the premises, the
buildings
amount paid on account of such
repairs
Payment of land revenue, local To Tenant, if tenant has
rates, or municipal taxes paid
To Owner, if owner has
paid
Cost of current repairs to the To Owner
premises
Premium for insurance against risk To Tenant, if tenant has
of damage or destruction of the paid
premises To Owner, if owner has
paid
The amount paid on account of the cost of repairs/current repairs referred to
above shall not include any expenditure in the nature of capital expenditure
[w.e.f. 31.3.2004].
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Section 31
Nature of Expenditure What is Available for Deduction?
Repairs and insurance of machinery, Amount paid on account of current
plant, and furniture (Section 31) repairs, premium paid for insurance
against risk of damage or destruction
of machinery, plant and furniture
The amount paid on account of current repairs shall not include any expenditure
in the nature of capital expenditure [w.e.f. 31.3.2004]
‘Current repairs’ means repairs undertaken in the normal course of user for
the purpose of preservation, maintenance, or proper utilization, or for
restoring it to its original condition.
‘Current repairs’ aim to restrict the allowance to expenditure incurred for

preservation and maintenance of the asset in its current state of its
working. It does not include expenditure incurred on any improvement or
an addition to the asset. It would be only the repairs for its use during the
current year and not the repairs arising for its use over past years.
‘Repair’ would include expenditure necessitated due to user over past many
years.
C. Depreciation (Section 32)

Depreciation usually means loss or decline in value which occurs gradually
over useful life of a material thing, due to physical wear, tear and decay,
and is generally limited to losses or decline in value which cannot be
restored by current repairs and maintenance.
Conditions for Claiming Depreciation

a. Asset must be owned by the assessee.
b. It must be used for the purpose of business or profession.
c. It should be used during the relevant previous year.
d. Depreciation is available on tangible as well as intangible assets.
Depreciation is allowable u/s 32, the broad scheme of depreciation is as

under:
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1. Depreciation is allowed in respect of the Assets of Business. For this

purposes, the Assets of Business are considered as follows:
i. buildings, machinery, plant or furniture, being tangible assets;
ii. know-how, patents, copyrights, trademarks, licenses, franchises, or

any other business or commercial rights of similar nature, being
intangible assets acquired on or after the 1st day of April, 1998,
The assets need to be owned by the assessee and used for the purposes of
the business or profession.
The expression ‘owner’ is a much comprehensive term which denotes the

full owner as per law. Therefore, without a valid registered document, the
right title and interest would not pass to transferee.
The expression ‘owned by the assessee’ occurring in sub-section (1) of

Section 32 means exclusive ownership and not merely a limited ownership
and a limited owner using the same for the purposes of business or
profession cannot also claim the benefit of this provision. Ordinarily, the
word ‘owned’ would mean exclusive ownership or in other words, the right
to user of the property to the exclusion of all others which obviously does
not take within this ambit a limited owner [Golcha Properties (P.) Ltd. v.
CIT [1987] 31 Taxman 341/166 ITR 259 (Raj.)].
The word ‘used’ in this section may be given a wider meaning and
embraces passive as well as active user. The ultimate test is, whether,
without the particular user of the machinery relied upon, the profits sought
to be taxed could have been made [CIT v. Viswanath Bhaskar Sathe [1937]
5 ITR 621 (Bom.)].
2. The following deductions towards depreciation 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 on straight line basis at the rates
prescribed or alternatively at its option, on WDV method on the basis
of block of assets;
ii. in case of other assessees, the case of any block of assets, such
percentage on the written down value thereof as may be prescribed.
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The expression “block of assets” for the purposes of claiming depreciation

shall mean—
Block of Assets [Section 2(11)]
“Block of assets” means a group of assets falling within a class of assets

comprising—
a. tangible assets, being buildings, machinery, plant or furniture;
b. intangible assets, being know-how, patents, copyrights, trademarks,

licenses, franchises or any other business or commercial rights of similar
nature, in respect of which the same percentage of depreciation is
prescribed.
The table for Rates of Depreciation will be as under:
Rate of
Number Nature of Asset
Depreciation
Block 1 Buildings – Residential buildings other than hotels 5%
and boarding houses
Block 2 Buildings – Office, factory, godowns or buildings 10%
which are not mainly used for residential purpose [it
covers hotels and boarding houses but does not
cover those which are covered under Blocks 1 and 3]
Block 3 Buildings – The following buildings: (a) Buildings 100%
acquired on or after September 1, 2002 for installing
machinery and plant forming part of water supply
project or water treatment system and which is put
to use for the purpose of business of providing
infrastructure facilities under Section 80-IA(4)(i)
(b) Temporary erection such as wooden structures
Block 4 Furniture – Any furniture/fittings including electrical 10%
fittings
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Block 5 Plant and machinery – Any plant or machinery [not 15%

covered by Blocks 6, 7, 8, 9, 10, 11 or 12] and Motor
cars (other than those used in a business of running
them on hire) acquired or put to use on or after April
1, 1990
Block 6 Ocean-going ships, Vessels ordinarily operating on 20%
inland waters including speed boats
Block 7 Plant and machinery – Buses, lorries and taxies used 30%
in the business of running them on hire, machinery
used in semi-conductor industry, moulds used in
rubber and plastic goods factories
Block 8 Plant and Machinery – Aeroplanes – Besides, it 40%
includes commercial vehicle which is acquired after
September 30, 1998 but before April 1,1999 and it is
put to use for any period prior to April 1, 1999,
(lifesaving medical equipment)
Block 9 Plant and Machinery – Containers made of glass or 50%
plastic used as refills and plant and machinery which
satisfy conditions of Rule 5(2) and the following—
(a) new commercial vehicle acquired during 2001-02
and put to use before March 31, 2002 for the
purpose of business or profession; and
(b) machinery/plant used in weaving, processing and
garment sector of textile industry which is purchased
under Technology Upgradation Fund Scheme during
April 1, 2001 and March 31, 2004 and put to use up
to March 31, 2004
Block 10 Plant and machinery – Computers including computer 60%
software. Besides, it includes new commercial vehicle
acquired in replacement of condemned vehicle of
15 years of age and put to use before April 1, 1999
(if acquired after September 30, 1998 but before
April 1, 2000 (if acquired during the financial year
1999-2000). It also includes books (other than
annual publication) owned by a professional. It also
includes gas cylinders; plant used in field operations
by mineral oil concerns; direct fire glass melting
furnace
196
Block 11 Plant and Machinery – Energy saving devices; 80%

renewal energy devices; rollers in flour mills, sugar
works, and steel industry
Block 12 Plant and Machinery – Air pollution control 100%
equipments; water pollution control equipments;
solid waste control equipments, recycling and
resource recovery systems; machinery acquired and
installed on or after September 1, 2002 in a water
supply project or water treatment system or for the
purpose of providing infrastructure facility; wooden
parts used in artificial silk manufacturing machinery;
cinematograph films, bulbs of studio lights; wooden
match firms; some plants used in mines, quarries
and salt works; and books (being annual
publications) owned by assessees carrying on a
business in running lending libraries
Block 13 Intangible assets (acquired after March 31, 1998) – 25%
Know-how, patents, copyrights, trademarks, licenses,
franchises and any other business or commercial
rights of similar nature
1. Where an asset is acquired by the assessee during the year and is put
to use the business purposes for less than 180 days in that year, the
deduction in respect of such asset shall be restricted to 50% of the
normal depreciation.
2. In case of succession of business entities by merger, demerger, etc., the

aggregate depreciation shall be restricted as if it would have been to the
original entity in the ratio of the number of days for which the assets
were used by them.
3. In case of buildings where the assessee holds only lease right of

occupancy and any capital expenditure is incurred by the assessee for
the construction of any structure or for renovation or extension,
improvement of the building, then the depreciation shall be allowed
thereon as if the said structure or work is a building owned by the
assessee.
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4. The expressions “Know-how” means any industrial information or

technique likely to assist in the manufacture or processing of goods or in
the working of a mine, oil-well or other sources of mineral deposits
(including searching for discovery or testing of deposits for the winning
of access thereto).
5. Additional Depreciation @ 20% (@ 15% upto A.Y. 2005-06): From A.Y.

2003-04, where any new machinery or plant, has been acquired and
installed (here, ‘put to use’ is not called for – only ‘acquired and
installed’ suffices) after the 31st day of March, 2002 by an assessee
engaged in the business of manufacture or production of any article or
thing, a further sum to the extent of 20% [@ 15% upto A.Y. 2005-06]
of the actual cost of such machinery or plant shall be allowed as
deduction by way of depreciation.
Conditions for This Allowance
It shall be allowed to:
A. a new industrial undertaking during any previous year in which such

undertaking begins to manufacture on or after the 1st day of April,
2002; or
B. any industrial undertaking existing before the 1st day of April, 2002,
during any previous year in which it achieves the substantial expansion
by way of increase in installed capacity by not less than 25% (twenty-
five per cent).
No additional depreciation if:
a. any old/used machinery or plant that was used either within or

outside India by any other person; or
b. any machinery or plant installed in any office premises or any

residential accommodation, including accommodation in the nature of
a guest house; or
c. any office appliances or road transport vehicles; or
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d. where 100% depreciation (whether by way of depreciation or

otherwise) is allowed in any one previous year.
Furnish Prescribed Particulars

To claim this additional depreciation, the Assessee shall furnish the details
of machinery or plant and increase in the installed capacity of production in
such form, as may be prescribed, along with the return of income, and the
report of Chartered Accountant as to the correctness of the claim.
W.e.f. 1.4.2006, the Finance Act, 2005 has eased conditions relating to
industrial undertaking being new or substantial expansion mentioned in of
Section 32(1)(ha) in the first proviso. The requirements of furnishing details of
machinery or plant and report of an accountant mentioned in the third proviso
of that clause (ha) shall also be omitted by Finance Act, 2005.
What is New Industrial Undertaking?
“New industrial undertaking” means an undertaking which is not formed,—
a. by the splitting up, or the reconstruction, of a business already in

existence; or
b. by the transfer to a new business of machinery or plant previously used

for any purpose;
Sale/disposal of asset during the year: Terminal allowance – Applicable

only to Power-generating/Distributing Units – Where the sales proceeds fall
short of the WDV, the shortfall is to be allowed as a deduction by way of
depreciation in the year of sale. To claim this, such deficiency should be
actually written off in the books of the assessee.
A Actual Cost of the asset 10,000

B WDV of the asset 6,000
C Amount realized on sale of asset 4,000
D Terminal allowance [B – C] 2,000
[allowed as a depreciation in the year of sale]
This sum of Rs. 2,000 should be actually written off in the books of the
assessee to avail the benefit of its write off.
199
Unabsorbed Depreciation: Where the depreciation cannot be fully

absorbed by the profits for the year, the unabsorbed part of the
depreciation is to be carried forward and is to be treated as the
depreciation for the next year and so on for the succeeding previous years.
The following illustration would explain this.
Year ended 31.3.2010 Rs. Rs.
Profit for the year before Depreciation 15,000
Less: Depreciation for the year 40,000 15,000
Depreciation absorbed during the year 15,000
Profit for the year Nil
Unabsorbed Depreciation carried forward to next year 25,000
Year ended 31.3.2011 50,000
Profit for the year before Depreciation
Less: Depreciation for the year ended 31.3.2011 35,000
Unabsorbed Depreciation of last year brought forward to 25,000 50,000

the year ended 31.3.2011
Depreciation absorbed during the year ended 31.3.11 50,000 Nil
Profit for the year
Unabsorbed Depreciation carried forward to next year 10,000
The unabsorbed depreciation of Rs. 10,000 can be thus carried forward to

be set off against profits of the subsequent years.
It is important to note that past unabsorbed depreciation gets merged into

current year’s depreciation. However, when there is unabsorbed business
loss, it gets priority over the unabsorbed depreciation.
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Claim of depreciation is not optional: From A.Y. 2002-03, the claim for
depreciation will be available to the assessee whether or not the assessee
has claimed it or not in computing his total income. It is now compulsory to
claim even in case of loss from business or profession.
Section 41(2) provides for taxing as income from business what is known
as balancing charge (applicable only to Power-generating/Distributing
Units).
The Balancing charge is so chargeable in respect of 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;
c. which was or has been used for the purposes of business; and
d. this asset is sold, discarded, demolished or destroyed
and, if the money payable (amount realized) in respect of such sale etc. is
more than its WDV (but less than its actual cost), the difference between
the amount realized and the WDV shall be chargeable as income from
business.
Rs.
A Actual cost of the asset 10,000
B WDV of the asset 6,000
C Amount realized on sale of asset 9,000
D Balancing charge (Business income) [C – B] 3,000
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It is important to note that Section 50A makes special provision for

computation of cost of acquisition in case of depreciable assets. It
prescribes that the provision of Sections 48 and 49 of the Income Tax Act
shall apply subject to modification that the WDV of the asset as adjusted
shall be taken as the cost of acquisition of the asset. This issue shall be
dealt with while dealing with the capital gains.
Meaning of the Terms ‘Actual Cost’, ‘Written Down Value’, etc.
1. Actual Cost – “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 authority.
Actual cost of the assets to the assessee Rs. 50,000

Less: Cost of asset met by any other person or authority Rs. 2,500
Net Actual Cost to the assessee Rs. 47,500
2. Actual cost — When asset is acquired by the assessee by way of

gift or inheritance (Explanation 2)
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, 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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3. Actual cost — When second-hand asset – acquired for reducing

tax liability by claiming higher depreciation – What is its actual
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 determine having regard to
all the circumstances of the case.
4. Actual cost — Asset once belonged to Assessee – Sold to third

party – Once again reacquired
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 reacquired
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, 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 reacquired by him, whichever is
less.
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5. Actual cost — When any second-hand asset is acquired by the

assessee – Seller had used it for his business earlier – and
claimed depreciation
Where before the date of acquisition by the assessee (‘the first-mentioned

person’), the assets were at any time used by any other person (‘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 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.
6. Actual cost — A building previously the property of the assessee

is brought into use for the purpose of the business or profession
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.
7. Actual cost — A capital asset is transferred by a holding

company to its subsidiary company and vice versa
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.
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8. Actual cost — Transfer in a scheme of amalgamation by the

amalgamating company to the amalgamated company
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.
9. Actual cost — Demerger – Capital asset is transferred to the

resulting Indian company
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.
Such actual cost shall not exceed the written down value of such capital
asset in the hands of the demerged company.
10.Actual cost — Interest payable on loan etc. for acquiring the

asset – upto the period the asset is first put to use is part of
actual cost.
11.Actual cost — Asset acquired on or after the 1.3.1994 – a claim of

credit of Excise duty in respect this asset has been made and allowed –
then the actual cost shall be reduced to the extent of such claim.
12.Actual cost shall be reduced to the extent of that part of the cost
which is met directly or indirectly by the Central Government or a State
Government in the form of a subsidy or grant or reimbursement.
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13.Actual cost — NRI — acquired asset outside India – asset brought

in to India and used for the purposes of his business or profession.
Where an asset which was acquired outside India by an assessee, being a
Non-resident brought by him to India and used for the purposes of his
business or profession, 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 in India for the said purposes since the
date of its acquisition by the assessee.
14.Actual cost — Stock broker — Scheme of corporatization

Where any capital asset is acquired by the assessee under a scheme for
corporatization of a recognized stock exchange in India, approved by the
Securities and Exchange Board of India established under Section 3 of the
Securities and Exchange Board of India Act, 1992 (15 of 1992), the actual
cost of the asset shall be deemed to be the amount which would have been
regarded as actual cost had there been no such corporatization.
15.Actual Cost of Capital Asset where deduction under Section

35AD has been allowed [w.e.f. 01.04.2010]
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 other case if the capital asset is acquired or received,—
• By way of gift or will or an irrevocable trust;
• On any distribution on liquidation of company; and
• By such mode of transfer as is referred in clause (i), (iv), (v), (vi),

(vib), (xiii) and (xiv) of Section 47.
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Written Down Value (WDV) [Section 43(6)]
a. WDV – in the case of assets acquired in the previous year, the WDV
shall be the actual cost to the assessee;
b. WDV – in the case of assets acquired before the previous year, the
actual cost to the assessee less all depreciation actually allowed to him
under this Act, or under the Indian Income Tax Act, 1922 (11 of 1922),
or any Act repealed by that Act, or under any executive orders issued
when the Indian Income Tax Act, 1886 (2 of 1886), was in force:
c. In the case of any block of assets,—
i. in respect of any previous year relevant to the assessment year

commencing on the 1st day of April, 1988, the aggregate of the
written down values of all the assets falling within that block of assets
at the beginning of the previous year and adjusted,—
• by the increase by the actual cost of any asset falling within that block,
acquired during the previous year;
• by the reduction of the monies payable in respect of any asset falling

within that block, which is sold or discarded or demolished or
destroyed during that previous year together with the amount of the
scrap value, if any, so, however, that the amount of such reduction
does not exceed the written down value as so increased; and
• in the case of a slump sale, decrease by the actual cost of the asset
falling within that block as reduced—
— by 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
— by 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,
207
so, however, that the amount of such decrease does not exceed the
written down value;
ii. in respect of any previous year relevant to the assessment year

commencing on or after the 1st day of April, 1989, the written down
value of that block of assets in the immediately preceding previous
year as reduced by the depreciation actually allowed in respect of that
block of assets in relation to the said preceding previous year and as
further adjusted by the increase or the reduction referred to in item
(I).
d. Succession in business – WDV of the successor shall be same as that of

his predecessor [Section 43(6) – Explanation (1)]
When in a case of succession in business or profession, an assessment is

made on the successor under sub-section (2) of Section 170 the written
down value of any asset or any block of assets, shall be the amount
which would have been taken as its written down value if the assessment
had been made directly on the person succeeded to.
e. Where block of assets transferred
• by holding company to its subsidiary company (and vice versa)
• by amalgamating company to the amalgamated company
The actual cost (of the block) to Transferee Company shall be the WDV to
Transferor Company in immediately preceding year less Depreciation
actually allowed for the current year [Section 43(6) – Explanation (2)]
208
Where in any previous year, any block of assets is transferred,—
i. by a holding company to its subsidiary company or by a subsidiary

company to its holding company and the conditions of clause (iv) or,
as the case may be, of clause (v) of Section 47 are satisfied; or
ii. by the amalgamating company to the amalgamated company in a

scheme of amalgamation, and the amalgamated company is an
Indian company, then, notwithstanding anything contained in clause
(1), the actual cost of the block of assets in the case of the transferee
company or the amalgamated company, as the case may be, shall be
the written down value of the block of assets as in the case of the
transferor company or the amalgamating company for the
immediately preceding previous year as reduced by the amount of
depreciation actually allowed in relation to the said preceding
previous year.
f. Demerger – any asset in a block of asset is transferred by a demerged

company to the resulting company [Section 43(6) – Explanation (2A)]
For Transferor Company (Demerged Company), Net block of the balance

assets in the Block shall be:
WDV of the larger Block
Less: WDV of the part of the block which is transferred to New Company.
Where in any previous year, any asset forming part of a block of assets is
transferred by a demerged company to the resulting company, then,
notwithstanding anything contained in clause (1), the written down value
of the block of assets of the demerged company for the immediately
preceding previous year shall be reduced by the written down value of the
assets transferred to the resulting company pursuant to the demerger.
g. Demerger – WDV to the resulting company – same as WDV of

transferred assets as in the books of account of the demerged company
before the demerger [Section 43(6) – Explanation (2B)]
209
Where in a previous year, any asset forming part of a block of assets is

transferred by a demerged company to the resulting company, then,
notwithstanding anything contained in clause (1), the written down value
of the block of assets in the case of the resulting company shall be the
written down value of the transferred assets as appearing in the books of
account of the demerged company immediately before the demerger.
h. Assets is transferred by a recognized stock exchange – under a scheme

for corporatization – WDV of the block of assets of such company shall
be the WDV of the transferred assets immediately before such transfer.
Where in a previous year, any asset forming part of a block of assets is

transferred by a recognized stock exchange in India to a company under a
scheme for corporatization approved by the Securities and Exchange Board
of India established under Section 3 of the Securities and Exchange Board
of India Act, 1992 (15 of 1992), the written down value of the block of
assets in the case of such company shall be the written down value of the
transferred assets immediately before such transfer.
i. Unabsorbed Depreciation carried forward under sub-section (2) of

Section 32 shall be deemed to be depreciation “actually allowed”
[Section 43(6) – Explanation (3)]
j. Section 43(6) – Explanation (4) – For the purposes of this clause, the
expressions “monies payable” and “sold” shall have the same meanings
as in the Explanation below sub-section (4) of Section 41]
“Monies payable” in respect of any building, machinery, plant or furniture

sold shall include—
a. any insurance, salvage or compensation monies payable in respect

thereof;
b. where the building, machinery, plant or furniture is sold, the price for
which it is sold.
k. Section 43(6) – Explanation 6 (w.e.f. 01.04.2003)

Where an assessee was not required to compute his total income for the
purpose of this Act for any previous year or years preceding the previous
year is relevant to assessment under consideration,—
210
i. The actual cost of an asset shall be adjusted by the amount

attributable to the revaluation of such asset, if any, in the books of
account;
ii. The total amount of depreciation on such asset, provided in the books
of account of the assessee in respect of such previous year or years
preceding the previous year relevant to the assessment year under
consideration shall be deemed to be the depreciation actually allowed
under this Act for the purpose of this clause; and
iii. The depreciation actually allowed under clause (b) shall be adjusted
by the amount of depreciation attributable to such revaluation of the
asset.
l. Section 43(6) – Explanation 7 (w.e.f. 01.04.2010)

It is further explained that where the income of the 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 depreciation so computed shall be
deemed to be the depreciation actually allowed under this Act.
D. Section 33AB – Tea/Coffee/Rubber Development Account –

Conditions
The assessee must satisfy the following conditions—
• The assessee must be engaged in Tea, Coffee, or Rubber plantation
• It must make a deposit in “special account”

• The deposit should be made within specified time limit
• The accounts of the assessee should be audited
211
Deposit
It must make the following deposit:
a. deposit with NABARD (National Bank for Agriculture and Rural

Development) any amount in accordance with the scheme approved by
the Tea Board or Coffee Board or Rubber Board; or
b. deposit any amount in the Deposit Account opened by the assessee in

accordance with, an approved scheme frame by the Tea Board or Coffee
Board or Rubber Board with the previous approval of the Central
Government
The aforesaid amount shall be deposited within six months from the end of
the previous year or before the due date of furnishing the return of income,
whichever is earlier.
Audit
The books of accounts of the taxpayer should be Audited [Audit Report in
Form No. 3AC].
The Audit report shall be filed along with the return of the relevant
assessment year.
Amount of Deduction
Amount of deduction is:
a. A sum equal to amounts deposited in special account
b. 40% of the profit of such business computed under the head – “Profits
and Gains of Business or Profession” before making any deduction under
section 33AB and before adjusting brought forward business loss under
section 72, whichever is less.
212
Withdrawal of Amount Deposited

The amount standing to the credit of the “special account” may be
withdrawn only for the purpose specified in approved scheme except in the
circumstances of closure of business, if the amount released from the
“special account” in a year is not utilized in the same previous year for the
purpose for which it is released, the amount not so utilized will be treated
as taxable profits of that year and tax accordingly.
Closure of Business
Apart from the purpose specified in the approved scheme, the amount
standing to the credit of “special account” may be allowed to be withdrawn
in the following circumstances—
When the amount can be When the amount can be withdrawn

withdrawn and it is treated as and it is not treated as income
taxation profit
Closure of business Death of the taxpayer
Dissolution of firm Partition of Hindu undivided family
Liquidation of company
Amount Withdrawn Cannot be Utilized for Certain Purpose

The amount withdrawn from special account cannot be utilized for the
purpose of purchase of any machinery or plant to be installed in any office
premises or residential accommodation including guest houses; any office
appliance (other than computers); any other plant or machinery which
either is installed in an undertaking producing low priority items specified
in the Eleventh Schedule in the Income Tax Act or is an item of plant and
machinery entitled to 100% write off by way of depreciation or for any
other reason in any one year.
Consequences if the New Asset is Transferred within 8 Years

The deduction allowed under this section shall be withdrawn if the asset
acquired out of the money withdrawn from the special account is sold or
otherwise transferred. These provisions are given below:
213
To Whom It is Transfer within 8 Transfer after 8 Years

Transferred Years from the End of
Previous Year in Which
the Asset is Acquired
Transfer to Central Deduction will not be Deduction will not be
Government, State withdrawn withdrawn
Government, local
authority, statutory
corporation or a
government company
Transfer in a scheme of Deduction will not be Deduction will not be
succession of a firm by a withdrawn withdrawn
company [see note]
Transfer in any other Deduction will be Deduction will not be
case withdrawn withdrawn
Notes: Transfer in a scheme of succession of a firm by a company should

satisfy the following points:
a. the scheme continues to apply to the company in the manner applicable

to the firm;
b. the successor company takes over all the properties and liabilities of the
firm; and
c. all the shareholders of the company were partners of the firm before
succession.
E. Section 33ABA – Site Restoration Fund Conditions
The assessee must satisfy the following conditions—
• The assessee must be engaged in production of petroleum/natural gas in

India.
• The assessee has an agreement with the Central Government.
• It must make a deposit in “special account”.
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• The deposit should be made within specified time limit.
• The accounts of the assessee should be audited.
Deposit
It must make the following deposit:
a. deposit with SBI any amount in an account maintained by the assessee

with that Bank (the amount should be deposited in accordance with a
scheme approved by the Government of India in the Ministry of
Petroleum and Natural Gas); or
b. deposit any amount in an account opened by the assessee in

accordance with, in a scheme frame by the Ministry of Petroleum and
Natural Gas.
The aforesaid amount shall be deposited before the end of previous year.
Audit
Audit Report in Form No. 3AD should be filed along with the return of the
relevant assessment year.
Amount of Deduction
Amount of deduction is:
a. A sum equal to amounts deposited in special account
b. 20% of the profit of such business computed under the head – “Profits
and Gains of Business or Profession” before making any deduction under
section 33ABA and before adjusting brought forward business loss under
Section 72, whichever is less.
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Withdrawal of Amount Deposited

The amount standing to the credit of such special account or site
restoration account may be withdrawn only for the purpose specified in
scheme or deposit scheme.
If the amount released by SBI or the amount withdrawn from site

restoration account in a year is not utilized in the same year for the
purpose for which it is released, the amount not so utilized will be treated
as taxable profits of that year and tax accordingly.
Closure of Business
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 shall be chargeable to income tax as the
income of the previous year. However, 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 reduced from the amount
chargeable to tax as stated above.
Amount Withdrawn Cannot be Utilized for Certain Purpose

The amount withdrawn cannot be utilized for the purpose of any machinery
or plant to be installed in any office premises or residential accommodation
including guest houses; any office appliance (other than computers); any
other plant or machinery which either is installed in an undertaking
producing low priority items specified in the Eleventh Schedule in the
Income Tax Act or is an item of plan and machinery entitled to 100% write
off by way of depreciation or for any other reason in any one year.
Consequences if the New Asset is Transferred within 8 Years

The deduction allowed under this section shall be withdrawn if the asset
acquired out of the money withdrawn from the special account is sold or
otherwise transferred. These provisions are given below:
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To Whom It is Transfer within 8 Transfer after 8 Years

Transferred Years from the End of
Previous Year in Which
the Asset is Acquired
Transfer to Central Deduction will not be Deduction will not be
Government, State withdrawn withdrawn
Government, local
authority, statutory
corporation or a
government company
Transfer in a scheme of Deduction will not be Deduction will not be
succession of a firm by a withdrawn withdrawn
company [see note]
Transfer in any other Deduction will be Deduction will not be
case withdrawn withdrawn
Notes: Transfer in a scheme of succession of a firm by a company should

satisfy the following points:
a. the scheme continues to apply to the company in the manner applicable

to the firm;
b. the successor company takes over all the properties and liabilities of the
firm; and
c. all the shareholder of the company were partners of the firm before
succession
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Section 35 to Section 35E: Index
Section Whether Applicable Nature

35 Currently Applicable Expenditure on scientific
research
35A Should be incurred before the 1st Expenditure on acquisition of
day of April, 1998 [see Section patent rights or copyrights
35A(1)]
35AB Relevant to the assessment year Expenditure on know-how
commencing on or before the 1st
day of April, 1998 [Section 35AB(1)]
35ABB Currently Applicable Expenditure for obtaining
license to operate
telecommunication services
35AC Currently Applicable Expenditure on eligible
projects or schemes
35B Omitted by the Direct Tax Laws Export markets development
(Amendment) Act, 1987, as allowance
amended by the Direct Tax Laws
(Amendment) Act, 1989, w.e.f.
1.4.1989
35C Omitted by the Direct Tax Laws Agricultural development
(Amendment) Act, 1987, as allowance
1.4.1989
35CC Omitted by the Direct Tax Laws Rural development
(Amendment) Act, 1987, as allowance.
1.4.1989
35CCA Currently Applicable Expenditure by way of
payment to associations and
institutions for carrying out
rural development
programmes
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35CCB Applicable if expenditure incurred on Expenditure by way of

or before the 31st day of March, payment to associations and
2002 institutions for carrying out
programmes of conservation
of natural resources
35D Currently Applicable Amortization of certain
preliminary expenses
35DD Currently Applicable Amortization of expenditure
in case of amalgamation or
demerger
35DDA Currently Applicable Amortization of expenditure
incurred under voluntary
retirement scheme
35E Currently Applicable Deduction for expenditure on
prospecting, etc. for certain
minerals
35AD Applicable from 01.04.2010 Expenditure on specified
business
F. Expenditure on Scientific Research (Section 35)
In respect of expenditure on scientific research, the following deductions

shall be allowed:
1. The following deductions for expenditure incurred on scientific research

shall be allowed against income from business or profession:
• any expenditure (not being in the nature of capital expenditure) laid out
or expended on scientific research related to the business.
• an amount equal to 1.25 times of any sum paid to a scientific research

association and other institutions engaged in approved scientific
research, university, college or other institution subject to compliance
with prescribed conditions.
• where an assessee pays any sum to a company, to be used by it for

scientific research, then there shall be allowed a deduction of 1.25 times
the sum so paid.
219
Provided that such company—
• is registered in India,
• has as its main object the scientific research and development,
• is, for the purpose of this clause, for the time being approved by the
prescribed authority in the prescribed manner, and
• fulfills such other conditions as may be prescribed.
• in respect of any expenditure of a capital nature on scientific research

related to the business of the assessee, subject to compliance with
prescribed conditions of sub-section (2).
• the whole of such capital expenditure incurred in any previous year shall
be deducted for that previous year [no deduction shall be admissible
herein which is for acquisition of any land].
• where any expenditure in the nature of salary (of persons involved in

Scientific Research) or purchase of material (for Scientific Research) 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 in the previous year in which the business is commenced.
2. 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 1.25 times the sum so paid; and
b. no deduction in respect of such sum shall be allowed under any other
provision of this Act:
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Here, the prescribed authority shall, before granting approval, satisfy

itself about the feasibility of carrying out the scientific research and shall
submit its report to the Director General in such form as may be
prescribed.
3. For companies engaged in the business of bio-technology or

manufacture or production of any drugs, pharmaceuticals, electronic
equipments, computers, telecommunication equipments, chemicals or
any other article or thing notified by the Board:
• Such company incurs any expenditure on scientific research – it may

be of revenue nature or capital nature (but not being on land or
building) on in-house research and development facility as approved by
the prescribed authority.
• Such expenditure should be incurred before 31.3.2005 [Finance Act,

2005 w.e.f. 1.4.2006 has provided that such expenditure should be
incurred before 31.3.2007]
• Activity B
1. Ajit Drugs Ltd. incurred the following expenses in the previous year:
a. Rs. 50,000/- contribution to Indian Drug Research Foundation.
b. Rs. 100,000/- donation to IIT.
c. Rs. 1,000,000/- purchase of land to construct R&D laboratory.
Determine amount deductible in the previous year’s income, then there

shall be allowed a deduction of 1.25 times of the expenditure so incurred.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
221
G. Expenditure for Obtaining License to Operate

Telecommunication Services Amortization of Telecom Licensing
Fees (Section 35ABB)
Where an Assessee incurs any expenditure which is capital expenditure for

acquiring any right to operate telecommunication services, he gets the
deduction in the following manner:
Conditions to be Satisfied
a. The expenditure should be in the nature of capital expenditure.
b. It should be for acquiring any right to operate telecommunication

services.
c. It is incurred either before the commencement of the business to

operate telecommunication services or thereafter at any time during any
previous year.
d. For this, the payment has actually been made to obtain a license.
When these conditions are satisfied, the deduction shall be available.
What Amount of Deduction is Available?
The deduction is available over the previous years over which the license
fee is paid.
The deduction starts from the year in which the license fee is actually paid
and ends in the year in which the license comes to an end.
• When such license is sold: The profit/loss on such sale is allowed/

taxed.
• When license is fully sold: Loss made on transfer – Unallowed

expenditure not fully covered by sale – such loss allowed in the year of
transfer of license.
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• When license is fully sold: Profit made (i.e., the sale proceeds are
more than the unallowed expenditure) — The expenditure that was
allowed in past shall be taxable as Business Income of the year of
transfer of license – Taxable whether the business existed or not – No
deduction in the year of transfer.
• When license is partly sold: Loss made on transfer – Unallowed

expenditure not fully covered by sale – Such loss shall be allowed over
the remaining (unexpired) life of the license.
• When license is partly sold: Profit made (i.e., sale proceeds are more
than the unallowed expenditure) – The excess upto the expenditure that
was allowed in past shall be taxable as Business Income of the year of
transfer of license – Taxable whether the business existed or not — No
deduction in the year of transfer.
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
Depreciation for the same previous year or any subsequent previous year.
H. Expenditure on Eligible Projects or Schemes (Section 35AC)

This deduction is available to any assessee. The expenditure should be
incurred to promote social or economic welfare or upliftment of the public.
The deduction is available where the payment is made of any sum to a

public sector company or a local authority or to an association or institution
approved by the National Committee for carrying out any eligible project or
scheme. The projects or schemes shall be such as are notified by Central
Government in Official Gazette.
For claiming the deduction, the assessee should furnish along with his
return of income a certificate issued by the public sector company, local
authority etc. (in any other case, from a Chartered Accountant) in such
form, manner and containing such particulars (including particulars relating
to the progress in the work relating to the eligible project or scheme during
the previous year) as may be prescribed.
223
Further when a deduction under this section is claimed and allowed for any
assessment year, it disentitled the assessee from claiming deduction in
respect of such expenditure under any other provision of this Act for the
same or any other assessment year.
I. Deduction in Respect of Expenditure on Specified Business

(Section 35AD) [w.e.f. 1.4.2010]
An assessee shall be allowed a deduction in respect of the whole of any

purposes of any specified business carried on by him during the previous
year in which such expenditure is incurred by him.
“Specified Business” means –
Any one or more of the following business, namely –
a. Setting up and operating a cold chain facility;
b. Setting up and operating a warehousing facility for storage of

agricultural produce;
c. Lying 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;
d. Building and operating, anywhere in India, new hotel of two-star or

above category as classified by Central Government;
e. Building and operating, anywhere in India, a new hospital with at least

100 beds for patients;
f. Developing and building housing project under a scheme for slum

redevelopment or rehabilitation framed by Central Government or State
Government as the case may be, and which is notified by the board in
this behalf in accordance with the guidelines as may be prescribed.
224
“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.
Deduction Available
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;
b. The amount is capitalized in the books of account of the assessee on the

date of commencement of its operations.
Conditions Need to be Fulfilled to Avail Deduction
a. The business is not set up by splitting up, or the reconstruction, of a

business already in existence;
b. The business is not set up by the transfer to the specified business of

machinery or plant previously used for any purpose;
c. Such business—
i. is owned by a company formed and registered in India under the

Companies Act, 1956;
ii. has been approved by the Petroleum and Natural Gas Regulatory
Board;
iii. has made not less than one-third of its total pipeline capacity
available for use on common carrier basis by any person other than
the assessee or an associated person; and
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iv. fulfills any other condition as may be prescribed.
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 Chapter VIA under
the heading “C – Deduction in Respect of Certain Incomes” in relation
to such specified business for the same of any other assessment
year.
Commencement of Business
The provisions of this section shall apply to the specified business, if it

commences its operations—
a. on or after the 1st day of April 2007, where the specified business is in
the nature of laying and operating a cross-country natural gas pipeline
network for distribution, including storage facilities being an integral
part of such network; and
b. on or after the 1st day of April 2010, where the specified business is in
the nature of building and operating a new hotel of 2 star or above
category as classified by Central Government;
c. on or after the 1st day of April 2010, where the specified business is in
the nature of building and operating a new hospital with at least 100
beds for patients;
d. on or after the 1st day of April 2010, where the specified business is in
the nature of developing and building housing project under a scheme
for slum redevelopment or rehabilitation framed by Central Government
or State Government as the case may be, and which is notified by the
board in this behalf in accordance with the guidelines as may be
prescribed; and on or after the 1st day of April 2009, in all other cases
not falling under clause (a), (b), (c) and (d).
226
J. Expenditure by Way of Payment to Associations and Institutions

for Carrying out Rural Development Programmes (Section
35CCA)
This deduction is available from Business Income where any sum is paid for
undertaking of any programme of rural development or for training of
persons for implementing programmes of rural development. But such
expenditure has to be paid to certain approved agencies.
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; or
d. to the National Urban Poverty Eradication Fund set up and notified by

the Central Government.
The assessee is allowed a deduction of the amount of such expenditure

incurred during the previous year.
For availing this deduction, the Assessee shall furnish a certificate from
such association or institution or the Fund with his return of Income.
Once any deduction is claimed under this section, 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.
227
K. Amortization of Certain Preliminary Expenses (Section 35D)
Where an assessee, being an Indian company or a person (other than a

company) who is resident in India, incurs any specified expenditure:
i. Before the commencement of his business, or
ii. After the commencement of his business, in connection with the

extension of his industrial undertaking or in connection with his setting
up a new industrial unit.
The assessee shall be allowed a deduction of an amount equal to 20% of

such expenditure for each of the five successive years from the business
commencement.
[Where such expenditure is incurred before 31.3.1998, 10% of it is allowed

to be deducted for each of the ten successive years from the business
commencement]
What Expenditure is Covered?
The expenditure referred to above shall be any one or more of the

following:
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.
228
The above work should be 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
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.
Ignore the Expenditure over 5% of Project Cost/Capital Employed

by Company
Where the total expenditure as above exceeds 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 shall be ignored for the purpose of computing the deduction
allowable under sub-section (1).
229
For Non-company Assessee, No Deduction without Audit Report

Where the assessee is a person other than a company or a co-operative
society, no deduction shall be admissible unless the accounts of the
assessee for the year or years in which the expenditure is incurred have
been audited by a Chartered Accountant and the assessee furnishes, with
his return of income for the first year in which the deduction under this
section is claimed, the report of such auditor in the prescribed form and
giving prescribed particulars.
Preliminary Expenses in Case of Amalgamation/Demerger

When an Indian company claiming the preliminary expenses as above is
amalgamated or demerged, then:
a. No deduction shall be allowed in the year of amalgamation/demerger to

the old company that incurred the expenditure
b. To the new/resulting company, the deduction shall be allowable as if the

amalgamation/demerger had not taken place.
No Double Deduction Allowed

Where a deduction under this section is claimed and allowed for any
assessment year in respect of any expenditure, 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.
L. Amortization of Expenditure in Case of Amalgamation or

Demerger (Section 35DD)
In case of an Indian company, the expenditure, incurred wholly and

exclusively for the purposes of amalgamation or demerger of an
undertaking shall be allowed to be written off at 20% for each of the
five successive years from the year in which the amalgamation or
demerger takes place.
No deduction shall be allowed in respect of the expenditure mentioned in

sub-section (1) under any other provision of this Act.
230
M. Amortization of Expenditure Incurred under Voluntary

Retirement Scheme (Section 35DDA)
Where an assessee incurs any expenditure in any previous year by way of

payment of any sum to an employee at the time of his voluntary
retirement, in accordance with any scheme or schemes of voluntary
retirement, 20% of the amount so paid shall be deducted against profits of
the first year, and the balance shall be deducted in equal installments for
each of the four immediately succeeding previous years [upto A.Y.
2004-05].
The Finance Act, 2005 has now provided that the whole expenditure
incurred by the assessee in making payment to the employee in connection
with his voluntary retirement either in the year of retirement or in any
subsequent year, each part payment being entitled to deduction in five
equal annual installments (at 20% p.a.) beginning from the year in which
such part payment is made to the employee.
Benefit of this is available where the company or the undertaking is

transferred before availing the full benefit of this deduction is not availed
by the original party:
• an Indian company amalgamated with another Indian company,
• in a scheme of demerger,
• in reorganization of business,
• where a firm is succeeded by a company [fulfilling the conditions laid

down in clause (xiii) of Section 47],
• where a proprietary concern is succeeded by a company [fulfilling the

conditions laid down in clause (xiv) of Section 47].
No deduction shall be allowed in respect of the expenditure mentioned here

under any other provision of this Act.
231
N. Deduction for Expenditure on Prospecting, etc. for Certain

Minerals (Section 35E)
Where the expenditure is incurred regarding:
• operations relating to prospecting for, or extraction or production of any

mineral; or
• 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.
Then, a deduction is available to the Assessee in the following manner:
a. The person claiming the deduction is an Indian company or a person

(other than a company) who is resident in India.
b. a deduction of an amount equal to one-tenth of the amount of such

expenditure shall be allowed.
c. That part of the expenditure shall be excluded from such expenditure

which is met directly or indirectly by any other person or authority.
d. Recovery by way of any sale, salvage, compensation or insurance
monies realized by the assessee in respect of any property or rights
brought into existence as a result of the expenditure shall also be
excluded.
e. For this purpose, also ignore any expenditure—
i. on the acquisition of the site of any mineral or of any rights in or over

such site;
ii. on the acquisition of the deposits of such mineral of any rights in or

over such deposits; or
232
iii. of a capital nature in respect of any building, machinery, plant or

furniture for which allowance by way of depreciation is admissible,
Quantum Allowable in Each Year
The deduction to be allowed in this respect for any relevant previous year
shall be—
a. an amount equal to one-tenth of the expenditure incurred (such one-

tenth being hereafter in this sub-section referred to as the installment);
or
b. such amount as is sufficient to reduce to nil the income, whichever

amount is less.
Unabsorbed Allowance
The amount of the installment relating to any relevant previous year, to the
extent to which it remains unallowed, shall be carried forward and added to
the installment relating to the previous year next following and deemed to
be part of that installment, and so on, for succeeding previous years, so,
however, that no part of any installment shall be carried forward beyond
the tenth previous year as reckoned from the year of commercial
production.
For non-company assessees, no deduction without Audit Report:

Where the Assessee is a person other than a company or a co-operative
society, no deduction shall be admissible here unless the accounts of the
assessee for the year or years in which the expenditure is incurred have
been audited by a Chartered Accountant and the assessee furnishes, with
his return of income for the first year in which the deduction under this
section is claimed, the report of such auditor in the prescribed form and
giving prescribed particulars.
233
Prospecting Expenses in Case of Amalgamation/Demerger
When an Indian company claiming these expenses as above is

amalgamated or demerged, then:
a. No deduction shall be allowed in the year of amalgamation/demerger to

the old company that incurred the expenditure.
b. To the new/resulting company, the deduction shall be allowable as if the

amalgamation/ demerger had not taken place.
O. Other Deductions (Section 36)
36.(1)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—
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;
a. 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;
b. the amount of any premium paid by cheque 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 the General
Insurance Corporation of India formed under Section 9 of the General
Insurance Business (Nationalization) Act, 1972 (57 of 1972) and
approved by the Central Government;
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;
234
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 for extension of existing business or
profession (whether capitalized 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 subscribers in Mutual Benefit Societies which fulfill such conditions as
may be prescribed, shall be deemed to be capital borrowed within the
meaning of this clause;
a. 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:
a. “discount” means the difference between the amount received or

receivable by the infrastructure capital company or infrastructure
capital fund or public sector company issuing the bond and the
amount payable by such company or fund or public sector company
on maturity or redemption of such bond;
b. “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;
c. “infrastructure capital company” and “infrastructure capital fund”

shall have the same meanings respectively assigned to them in
clauses (a) and (b) of Explanation 1 to clause (23G) of Section 10;
235
iv. any sum paid by the assessee as an employer by way of contribution

towards a recognized provident fund or an approved superannuation
fund, subject to such limits as may be prescribed for the purpose of
recognizing 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;
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;
a. 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 assessee 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 thereunder or under any standing order,
award, contract of service or otherwise;
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,
realized in respect of the carcasses or animals;
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:
236
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.
Explanation: 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;
(vii a) 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, an amount not
exceeding seven-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.
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:
237
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
VIA); 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 VIA):
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.
Explanation: For the purposes of this clause,—
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;
a. “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;
238
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), but does not include a co-
operative bank;
iii. “Public financial institution” shall have the meaning assigned to it in

Section 4A of the Companies Act, 1956 (1 of 1956);
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.In respect of any special reserve created and maintained by a specified

entity, an amount not exceeding 20 per cent of the profits derived from
eligible business computed under the head ‘Profits and Gains of
Business or Profession’ (before making any deduction under this
clauses) 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.
239
Explanation: In this clause—
a. “Specified entity” means—
i. A financial corporation specified in Section 4A of the Companies Act,

1956;
ii. A financial corporation which is Public Sector Company;
iii. A banking company;
iv. A co-operative bank other than primary agricultural credit society or

a primary co-operative agricultural and rural development bank;
v. An housing finance company;
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), (II),

(III) or (IV) of clause (a), the business of providing long-term finance
for—
• Industrial or agricultural development;
• Development of infrastructure facility in India; or
• 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 purpose;
and
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.
240
viii.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 incurred; and the balance thereof shall be deducted in
equal installments 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:
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 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;
ix. Any sum paid by a public financial institution by way of contribution

towards any Exchange Risk Administration Fund set up by public
financial institutions, either jointly or separately.
Explanation: For the purposes of this clause, “public financial institutions”

shall have the meaning assigned to it in Section 4A of the Companies Act,
1956 (1 of 1956);
x. Any expenditure incurred by the assessee, on or after the 1st day of

April, 1999 but before the 1st day of April, 2000, wholly and exclusively
in respect of a non-Y2K compliant computer system, owned by the
assessee and used for the purposes of his business or profession, so as
to make such computer system Y2K compliant computer system:
Provided that no such deduction shall be allowed in respect of such

expenditure under any other provisions of this Act:
Provided further that no such deduction shall be admissible unless the

assessee furnishes in the prescribed form, along with the return of income,
241
the report of an accountant, as defined in the Explanation below sub-

section (2) of Section 288, certifying that the deduction has been correctly
claimed in accordance with the provisions of this clause.
a. “computer system” means a device or collection of devices including

input and output support devices and excluding calculators which are
not programmable and capable of being used in conjunction with
external files, or more of which contain computer programmes,
electronic instructions, input data and output data, that performs
functions including, but not limited to, logic, arithmetic, data storage
and retrieval, communication and control;
b. “Y2K compliant computer system” means a computer system capable of

correctly processing, providing or receiving data relating to date within
and between the twentieth and twenty-first century;
xi. Any expenditure (not being in the nature of capital expenditure)

incurred by a corporation or a body corporate, by whatever name called,
constituted or established by a Central, State or Provincial Act for the
objects and purposes authorized by the Act under which such
corporation or body corporate was constituted or established.
xii.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 transaction tax” and “taxable banking transaction” shall have the
same meanings respectively assigned to them under Chapter VII of the
Finance Act, 2005.
xiii.Any sum paid by a public financial institution by way of contribution to

such credit guarantee fund trust for small industries as the Central
behalf.
242
Explanation: For the purpose of this clause, “public financial institution”

shall have the meaning assigned it in Section 4A of the Companies Act,
1956.
xiv.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 purpose 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
Act, 2004.
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;
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;
243
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.
Stock or Stores/Damage/Destruction [Section 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 is allowed as a deduction from profits of business.
The stocks or stores would have its ordinary meaning. The ‘damage’ would
mean injury or harm that impairs the value of any property. Destruction of
property would take place where the injury caused thereto is beyond repair
or reduces the utility of the property to nil or results in complete ruination
of the property [CIT v. Khodidas Motiram Panchal [1986] 161 ITR 99
(Guj.)].
Insurance Premium Paid by Federal Milk Co-operative Society

[Section 36(1)(ia)]
Deduction allowed for Insurance Premium of the cattle owned by members
of primary societies is available for deduction.
Insurance Premium on Health of Employees [Section 36(1)(ib)]

Only from A.Y. 1987-88, allowed if premium paid under an approved
scheme by General Insurance Corporation of India. It is essential that
premium must be paid by cheque only.
244
Bonus/Commission to Employees [Section 36(1)(ii)]

These are fully deductible provided the sum paid as bonus of commissions
to employees should not be as profit/dividend if it had not been paid as
bonus/commission.
Year of Claiming Deduction

From A.Y. 1989-90, Section 43B covers bonus/commission also. It means
the bonus is allowable in the year of actual payment only. Bonus accrued is
not deductible on due basis.
Interest on Borrowed Capital [Section 36(1)(iii)]
Assessing Officer can examine genuineness of interest claimed: Any

and every payment, in garb of expense (as mentioned at no. (iv) above) in
the nature of interest is not allowable in certain circumstances. While
claiming a deduction towards interest, the ITO is undoubtedly entitled to
examine whether the amount paid as interest is really ‘interest’, and if he
finds that it is not wholly interest but partly interest and partly payment for
extra commercial consideration, to allow only that part of the so-called
interest which in his opinion is ‘interest’, and disallow the balance which is
for extraneous commercial considerations.
The expenditure claimed u/s 36 must be incurred ‘for the purpose of

business’. This ‘purpose of business is wider in scope than the expression
“for the purpose of making or earning income”. Therefore, the scope for
allowing a deduction under Section 36 is much wider [CIT v. Dalmia
Cement (B.) Ltd. [2002] 254 ITR 377 (Delhi)].
Borrower and lender must be two different entities: Words

‘borrowed’ and ‘paid’ for allowing interest expenditure claimed clearly
postulate two different entities, one which lends capital and the other
which borrows and pays interest. The same entity cannot be its own lender
and borrower nor interest can be paid to self.
Therefore, interest paid by one unit of assessee to its another unit cannot
be allowable because it is paid and received by the same person and not by
one person to another. This would be so even where separate accounts
were maintained for the two units [Malwa Mills Karamchari Parasper
Sahakari Sanstha Ltd. v. CIT [1983] 140 ITR 379 (MP)].
245
Borrowal on revenue account: For allowing interest expenditure claimed

u/s 36(1)(iii), it is not necessary that borrowing has to be on revenue
account. It can also be on capital account [Dy. CIT v. Core Healthcare Ltd.
[2001] 251 ITR 61 (GuI.)].
Interest for the Period before Acquisition of the Asset till the Date
on Which Such Asset was First Put to Use
However, w.e.f. 1.4.2004, any amount of the interest paid, in respect of
capital borrowed for acquisition of an asset for extension of existing
business or profession (whether capitalized 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.
Utilization in particular branch of business is not a pre-requisite: It

is not necessary to show for the purpose of deduction of interest, that the
money borrowed was utilized for a particular branch of his business [Birla
Gwalior (P.) Ltd. v. CIT [1962] 44 ITR 847 (MP)].
Necessity for borrowal need not be shown: It is not the requirement

of the provision that the assessee must show that the borrowing of the
capital was necessary for the business so that if at the time of borrowing
the assessee had sufficient amount of its own, the deduction could not be
allowed [CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 (Bom.)/Amma
Bai Hajee Issa v. CIT [1964] 51 ITR 835 (Mad.)].
Test of reasonableness cannot be applied: From the very language of

clause (iii) of Section 36(1) for allowing interest expenditure claimed, there
is no scope for the application of the test of reasonableness to a case of
payment of interest [Banshidhar Onkarmal v. CIT [1965] 58 ITR 462
(On.)].
Asset acquired out of borrowal need not have been used during
relevant year: For allowing interest expenditure claimed [under section
36(1)(iii], it is not necessary that the assessee must have used the
business asset for doing business in the relevant accounting year [C.T.
Desai v. CIT [1979] 120 ITR 240 (Kar.)].
246
For allowing interest expenditure claimed under Section 36(1)(iii) to the

assessee, what is necessary to examine is whether the assessee has used
the borrowed capital for the purpose of business. If that is found to be
true, then one need not examine further as to whether the asset purchased
with the borrowed capital has been in fact used by the assessee [CIT v.
Insotex (P.) Ltd. [1984] 150 ITR 195 (Kar.)].
Where machinery was purchased out of borrowed amount for purpose of

business and it was treated as business assets merely because such
machinery had not been actually used in business at time when
assessment was made, interest paid on amount borrowed could not be
disallowed [CIT v. Associated Fiber & Rubber Industries (P.) Ltd. [1999]
102 Taxman 700 (SC)].
Some general propositions in case of deductibility of interest expenditure

are as follows:
1. Interest paid by firm to partner – Not allowed in excess of 18% p.a.
2. Interest paid by AOP to member – Not allowed Section 40b(a)
3. Interest paid by HUF to member – Allowed (No disallowance)
The loan/borrowing must be used for business, i.e.,
a. for purchase of fixed assets or,
b. for working capital requirements,
c. for other expenses of business (Business purpose is taken in very

wide meaning) if used for proprietor’s/partner’s/director’s/personal
use, interest is not allowed.
1. It is not necessary for allowing interest, that business should yield

profits only.
2. It is not necessary for allowing interest, that AO should be satisfied that

there was need to borrow money (Bombay Samachar Pvt. Ltd.).
3. The interest on loan borrowed for payment of dividend is allowed.
247
4. Interest payable for delayed payment of tax duty etc. is allowable, if the
tax or duty itself is allowable, i.e., allowed in case of purchase tax, sales
tax, excise duty, etc.
5. Interest paid on loan borrowed for purchase of fixed assets is treated as

under:
a. If paid for the period before starting business, it should be
capitalized.
b. If paid for the period after starting business, and after installation of
asset, allowed as revenue expenses.
c. If paid for the period after starting business, but before installation of
assets, it is either capitalized or allowed as revenue expenditure, at
the option of the assessee.
Discount on Zero Coupon Bonds [Section 36(1)(iiia)]

The pro rata amount of discount on a zero coupon bond having regard to
the period of life of such bond calculated in the manner as may be
prescribed.
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 schedule bank issuing the bond and
the amount payable by such company or fund or public sector company
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;
iii. “infrastructure capital company” and “infrastructure capital fund” shall

have the same meanings respectively assigned to them in clauses (a)
and (b) of Explanation 1 to clause (23G) of Section 10;
248
Employers’ Contribution to RPF and Approved Superannuation

FUND etc. [Section 36(1)(iv)]
It is allowed only if, actually paid during previous year or within 15 days or
by due date under the respective law as per Section 43B.
Employers’ Contribution to Notified Pension Scheme [Section 36(1)

(iva)]
This section has been inserted from A.Y. 2012-13, so as to provide that any
sum paid by an assessee as an employer by way of contribution towards a
pension scheme on account of employee shall be allowed as deduction.
However, the deduction will be limited to the extent 10 per cent of salary of
the concerned employee in the previous year. Salary for this purpose
means basic salary and includes dearness allowance.
Contribution towards Approved Gratuity Fund [Section 36(1)(v)]

Contribution towards approved gratuity fund created under irrevocable
trust, for the benefit of the employees would be allowed as follows:
Total employers’ contribution = NOT TO EXCEED 8.33% of employers’

salary.
Some limit in case of initial contribution also. It is subject to Section 43B.
Employers’ Contribution to Staff Welfare Scheme [Section 36(1)

(va)]
The amount is added to employers’ income u/s 2(24)(x) as income.
Payment is allowed subject to Section 43B, i.e., provided it is paid during
previous year or by due date under respective law.
Write Off Allowance for Animals [Section 36(1)(vi)]

In respect of animals which are used for the purpose of business or
profession (not as stock-in-trade) and have died or become permanently
useless, the difference between the actual cost of the animals to the
assessee and the amount realized (if any) in respect of carcasses or sale of
animals is allowable as deduction.
249
Bad Debts [Section 36(1)(vii)]
Allowed subject to the following:
a. There must be a debt.
b. Debt must be incidental to business or profession of the assessee.
c. Debt must have been considered in computing business income allowed

only if, debt considered as income of previous year or earlier year, in
case of Mercantile system. Under cash system, there is no question of
bad debts. For money lending business, bad debts are allowed, under
cash as well as mercantile system.
d. Debt must have been written off in books of accounts of the assessee.
e. Bad debt recovered. If ultimate recovery of debt is more than the

estimated bad debt, the difference is charged to tax. If it is less, the
difference is allowed in the year of recovery.
f. Bad debt discontinued business not allowed.
g. Bad debt allowable in the hands of successor in certain cases.
h. Bad debt in case of commercial banks to be debited to provisions of bad

debt account, if Section 36(1)(viia) is applicable.
i. All that is required is the honest assessment of bad debt by the person
claiming the same.
The scope of the provision to Section 36(1)(vii) has been expanded to

cover any assessee and not only banks. This amendment is effective from
A.Y.1992-01993.
250
Transfer to Special Reserve by Approved Financial Institution or

Company [Section 36(1)(viii)]
Applicable to:
a. Approved financial corporation (including Public Company and

Government Company) providing long-term finance for industrial or
agricultural development or development of infrastructural facility in
India.
b. Approved public company providing long-term finance for construction

or purchase of residential houses.
Amount of Deduction: An amount not exceeding 2% of the profits

derived from the aforesaid business of providing long-term finance
(computed under Section 28 before making this deduction) carried to a
special reserve account created (and maintained) by the aforesaid financial
corporation/public company is deductible. Where, however, the aggregate
of the amounts carried to such reserves from time to time exceeds twice
the paid-up share capital and general reserves, no allowance is made in
respect of such excess.
Expenses on Promotion of Family Planning [Section 36(1)(ix)]
• No deduction is available to Non-corporate Assessee.
• Revenue expenses is fully allowed.
• Capital Expenses is allowed as 1/5 in the previous year.
• Balance in equal installments in 4 subsequent years.
• Unabsorbed portion carried forward to next year and set off like
unabsorbed depreciation allowance.
251
Deduction towards Public Financial Institution – Contribution

towards Exchange Risk Administration Fund [Section 36(1)(x)]
Any sum paid by a public financial institution by way of contribution
towards any Exchange Risk Administration Fund set up by public financial
institutions, will be allowed as a business deduction in computing their
income only up to A.Y. 2007-08.
Expenditure Which is Statutorily Authorized [Section 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,
constituted, or established by a Central, State or Provincial Act for the
objects and purposes authorized by the Act under which such corporation
or body corporate was constituted or established.
Deduction for Banking Cash Transaction Tax [Section 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.
Deduction to Public Financial Institution – Contribution to Credit

Guarantee Fund Trust [Section 36(1)(xiv)]
Any sum paid by a public financial institution by way of contribution to such
guarantee fund trust for small industries as the Central Government may,
by notification in the Official Gazette, specify in this behalf.
Deduction for Security Transaction Tax [Section 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”.
252
[P] GENERAL DEDUCTIONS (Section 37)
(1)Any expenditure (not being expenditure of the nature described in

Sections 30 to 36 and not being in the nature of capital expenditure or
personal expenses of the assessee), laid out or expended wholly and
exclusively for the purposes of the business or profession shall be
allowed in computing the income chargeable under the head “Profits and
Gains of Business or Profession”.
Explanation: For the removal of doubts, it is hereby declared 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 or profession and no deduction or allowance shall
be made in respect of such expenditure.
(2B) Notwithstanding anything contained in sub-section (1), 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.
Comments
Under residual head, the deduction of business expenditure is allowed in

the following manner:
a. It is not an expenditure of the nature described in Sections 30 to 36 of

the Act.
b. It is not in the nature of capital expenditure or personal expenses of the

assessee.
c. It is laid out or expended wholly and exclusively for the purposes of the
business.
d. 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 or profession and no deduction or
allowance shall be made in respect of such expenditure.
253
e. 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.
Here, we need to understand some terminology—
1. Capital Expenditure
There is no definition of the expression ‘capital expenditure’ in the Income
Tax Act, 1961 and it must be construed in a normal business sense.
The word ‘capital’ connotes permanency and capital expenditure is,

therefore, closely akin to the concept of securing something, tangible or
intangible property, corporeal or incorporeal right so that they could be of a
lasting or enduring benefit to the enterprises in issue. Revenue nature
expenditure, on the other hand, is operational in its perspective and solely
intended for the furtherance of the enterprise [CIT v. Wolkem (P.) Ltd. Co.
[2002] 258 ITR 350 (Raj.)].
The words ‘permanent’ and ‘enduring’ are only relative terms and not
synonymous with perpetual or everlasting. Although an enduring benefit
need not be of an everlasting character, it should not, at the same time, be
so transitory and ephemeral that it can be terminated at any time at the
volition of any of the parties.
Any expenses/initial expenses incurred for acquiring or bringing into

existence an asset or advantage of enduring nature, or for substantial
replacement of an existing, asset is a capital expenditures.
Features of Capital expenditure:
i. For acquisition of asset.
ii. Produces benefits for several previous year.
iii. It improves earning capacity of business.
iv. It is not recurring expenditure.
v. It may be a lump sum payment or periodic payment.
254
2. Wholly and Exclusively
The words ‘wholly and exclusively’ signify that the expenditure should be
completely devoted to the business.
The word ‘wholly’ refers to quantum of expenditure. The word ‘exclusively’

refers to the motive, objective and purpose of the expenditure and gives
jurisdiction to the taxing authorities to examine these matters.
3. For the Purpose of Business
The words ‘for the purpose of business’ would mean for the purpose of
keeping the trade going and making it pay.
The expression ‘for the purpose of business’ is wider in scope than the
expression ‘for the purpose of earning profits’. Its range is wide; it may
take in not only the day-to-day running of a business but also the
rationalization of its administration and modernization of its machinery.
It would also include:
• measures for the preservation of the business;
• for the protection of its assets and property;
• payment of statutory dues and taxes imposed as a precondition to

commence or for carrying on of a business;
• all expenses that are incidental to the carrying on of a business.
255
4. Business Expenditure
I. General:
a. Whenever statutory impost is paid by an assessee as interest, damages

or penalty, the Assessing Officer should examine scheme of the relevant
statute, notwithstanding the nomenclature of the impost. If impost is
found to be of composite nature, the Assessing Officer should bifurcate
the two components and give deduction to the component, which is
compensatory in nature [Prakash Cotton Mills Pvt. Ltd. v. CIT [1993]
201 TR 684)].
b. Interest u/s 36(2) of the BST Act, held to be of a composite nature.

Hence, Compensatory element held allowable [Standard Batteries Ltd.
v. CIT [1995] 211 ITR 444).
II.Following Allowed as Business Expenditure:
i. Under mercantile system of accounting, expenditure due but not

provided in the accounts [Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82
ITR 363)].
ii. Interest on borrowings for acquiring tax-free securities held to be

allowable [CIT v. Indian Bank Ltd. [1965] 56 ITR 77] [Refer also case at
paragraph 2(xx) below].
iii. Interest on loan for purchase of capital asset [Bombay Steam

Navigation Co. (P). Ltd. v. CIT [1965] 56/TR 52] [Also refer amendment
by Finance Act, 2003, w.e.f. 1.14.12004 – disallowing interest till the
capital asset is first put to use].
iv. Legal expenses for defending civil litigation [Sree Meenakshi Mills Ltd. v.
CIT [1967] 63 ITR 207].
v. Remuneration to Karta/Members of HUF [Jitmal Bhuramal v. CIT [1962]

44 ITR 887; Jugal Kishore Baldeo Sahai v. CIT [1967] 63 ITR 238].
vi. Royalty paid under mining lease agreement [Gotan Lime Syndicate v.
CIT [1966] 59 ITR 718].
256
vii.Expenditure for use of technical research and patents of foreign

collaborators [CIT v. CIBA of India Ltd. [1968] 69 ITR 692].
viii.Lump sum payment, once for all, for acquisition of know-how for
improving or updating process so as to result in higher yield of product
already being manufactured [Alembic Chemical Works Co. Ltd. v. CIT
[1989] 177 ITR 377].
ix. Expenditure incurred for raising loans [India Cements Ltd. v. CIT [1966]
60 ITR 52].
x. Expenditure on replacement of certain parts [CIT v. Mahalakshmi Textile

Mills Ltd. [1967] 66 ITR 710].
xi. Contribution for development of roads owned by Government [Lakshmiji

Sugar Mills Co. P. Ltd. [1971] 82 ITR 376, L.H. Sugar Factory and Oil
Mills v. CIT [1980] 125 ITR 293; Contrary decision in Travancore Cochin
Ltd. v. CIT [1977] 106 ITR 900 and Arvind Mills Ltd. v. CIT [1992] 197
ITR 422].
xii.Amount paid for use of goodwill of a firm [Devidas Vithaldas & Co. v.
CIT [1972] 84 ITR 277].
xiii.Amount paid under a short-term agreement to avoid competition [CIT

v. Coal Shipment Pvt. Ltd. [1971] 82 ITR 902].
xiv.Municipal property tax paid in foreign country [Mitsui Steamship Co.

Ltd. v. CIT [1975] 99 ITR 7].
xv.Payments to employees on grounds of commercial expediency. The

expression “wholly and exclusively” does not mean “necessarily”
[Sassoon J. David & Co. Pvt. Ltd. v. CIT [1979] 118 ITR 261].
xvi.Expenditure on renovation of building, reconditioning of machinery etc.

after derequisitioning of a colliery [Kalyanji Mavji & Co. v. CIT [1980]
122 ITR 49].
xvii.Amount paid for purchase of “loom hours” [Empire Jute Co. Ltd. v. CIT
[1980] 124 ITR 1].
257
xviii. Successor of a business entitled to claim bad debts in respect of an

amount receivable by predecessor. Legal expenses for takeover of
business allowable [CIT v. T. Veerabhadra Rao [1985] 155 ITR 152].
xix.Where assessee has an existing right to carry on a business, any

expenditure incurred during the course of business for purpose of
removal of any restriction or obstruction or disability provided no capital
asset is acquired [Bikaner Gypsums Ltd. v. CIT [1991] 187 ITR 39].
xx.In the case of indivisible business, entire expenditure will be permissible

even if some of the activities may yield tax-free income [Rajasthan
State Warehousing Corp. v. CIT [2000] 242 ITR 450]. [Finance Act,
2001 has inserted Section 14A w.e.f. 1.4.1962 to disallow expenditure
in relation to exempt income].
xxi.Provision for liability towards leave encashment held allowable [Bharat

Earth Movers v. CI T [2000] 245 ITR 428]. [Finance Act, 2001 has
amended Section 43B so as to allow deduction only on payment basis].
xxii.Expenses on acquisition of goodwill are a capital expenditure. Expenses

on right to use the goodwill are revenue expenses [Devidas Vithaldas &
Co. v CIT (1972) 84 ITR 11(SC)].
• Activity C
1. Prepare performance trial balance of Ajay Automotives for year ended

March 31, 20XX. Ensure six items from above allowed expenses are
appearing in it duly underlined.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
2. In applying the test of commercial expediency for determining whether

expenditure was wholly and exclusively laid out for the purpose of the
business, reasonableness of the expenditure has to be adjudged from
the point of view of the business and not of the revenue [CIT v.
Walchand & Co. (P.) Ltd. [1967] 65 ITR 381; J.K. Woollen Manufacturers
v. CIT [1969] 72 ITR 612 and CIT v. Edward Keventer (Pvt.) Ltd. [1978]
115 ITR 149].
258
3. Remuneration to Managing Agents allowable only in the year in which it

is sanctioned by the Central Government [Nonsuch Tea Estate Ltd. v.
CIT [1975] 98 ITR 189]. This principle will extend to cases where
sanction for payment of remuneration to directors, selling agents etc.
needs to be obtained under Companies Act.
4. Following not allowed as Business Expenditure:
i. Penalty or fines levied for contravention of statutory provisions [Hail

Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350]; Payments
opposed to public policy and/or against any law [Maddi Venkataraman
& Co. (P.) Ltd. v. CIT [1998] 229 ITR 534].
ii. Interest paid on monies borrowed to meet assessee’s personal

obligations [CIT v. Madhav Prasad Jatia [1979] 118 ITR 200].
5. Accumulated gratuity amount appurtenant to employees of a division

transferred to the successor company was held allowable expenditure
[W.T. Suren & Co. Ltd. v. CIT [1998] 230 ITR 643].
6. Amount paid for use of patents and designs for a definite period with
secrecy clause was held deductible expense being a payment in the
nature of license fees [CIT v. I.A.E.C. (Pumps) Ltd. [1998] 232 ITR
316].
7. Expenditure which substitutes for revenue expenditure should be

considered as revenue expenditure [CIT v. Madras Auto Services (P.)
Ltd. [1998] 233 ITR 468].
8. Where expenditure incurred has definite and continuing benefits over

specified years, deduction is to be allowed on proportionate basis in
each year [Madras Industrial Investment Corp. Ltd. v. CIT [1997] 225
ITR 802].
9. Payment made to the workmen under a settlement agreement upon

closure of some of the units of the assessee held as allowable revenue
expenditure [K. Ravindranathan Nair v. CIT [2001] 247 ITR 178].
259
10.Some other judicial rulings Re. Section 37: Expenses which are Held to
be Revenue
Expenses
• Interest paid on amount borrowed by transport company owner to

acquire share in another company is a revenue expense.
• Expenses incurred to avoid a business liability is a revenue expense.
• Annual sum paid to take over the control and management of entire
business to the original owner is revenue payment.
• Contribution paid to Government to repair the road to assessee factory

is revenue expenses.
• Amount paid to competitor for not quoting lower rate/not bidding in an

auction is revenue expenses. [V. Damodarn v. CIT (1967) 64 ITR 26
(Ker.)].
Issue: Is guarantee commission paid to a bank for assuring due payment

of installments, a capital or revenue expenditure?
Decision: The Supreme Court affirmed the decision of the High Court that
the guarantee commission paid to the bank was revenue expenditure [CIT
v. Sivakami Mills Ltd. (1997) 227 ITR 465 (S.C.)].
Issue: Is sales tax refund received by the assessee which remained not
refunded to customers revenue receipt liable to tax?
Decision: The sales tax collected by assessee had to be treated as its

income. Any payment of sales tax made by that assessee was equally liable
to be deducted from the profits made by the assessee. If any deduction
was given from that income and later the same was refunded back to the
assessee, the refund would have the character of revenue receipt. It had to
be treated as a receipt on the revenue account and had to be assessed as
such. The amount of sales tax refunded would be liable to tax under
express provision of Section 41(1). The assessee, however, would be
entitled to claim deduction of sales tax refunded when such refund was
260
made to customers [CIT v. Thirumalaiswamy Naidu & Sons (1998) 98

Taxman 57 (SC)].
Expenses should not be personal expenses: Expenses on treatment of

illness caused by professional activities are personal expenses.
Expenses should have been incurred in previous year
• It include amounts actually spent under mercantile system, it includes

both amount expended as well to be expended [Calcutta Co. Ltd. v. CIT
(1959) 37 ITR 1 (SC)].
Expenses must have been wholly for business/profession
• For a company engaged in the business of colonization, expenses

incurred in constructing a school building in a colony, established by it, to
boost up a sale of flats in that colony, is a revenue expenses.
Issue: Can remuneration paid to directors in excess of ceiling under the

Companies Act be allowed as business expenditure?
Decision: The expenditure incurred in payment of managerial

remuneration to the directors of the subsidiary companies cannot be said
to be expenditure incurred in carrying on the business of the assessee
company of holding its investments [CIT v. Amalgamations Pvt. Ltd. (1997)
226 ITR 188 (SC)].
Issue: Can interest paid for delayed payment of advance tax be

considered as wholly and exclusively for business to be allowable as
business expenditure?
Decision: It was to be held that deduction of interest levied under

Sections 139 and 215 would not be allowable under Section 37 [Bharat
Commerce & Industries Ltd. v. CIT [1998] 98 Taxman 151 (SC)].
261
Expenses should be commercially expedient
• The test of commercial expediency must be applied from the viewpoint of

assessee and not revenue. It is not so that salary can increase, only if
profit increase [CIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381 (SC)].
• Expenses deductible if incurred as a businessman. Hence, penalty for

contravention of any specific provision, not allowed but expenses of civil
and criminal litigation are allowed [CIT v. Dhanrajgiriji Raja Narasingiriji
[1973] 91 ITR 544 (SC)].
• Expenses incurred on retrenchment compensation to workers to save

further losses on Government taking over of business or to reduce wage
bill can be allowed. [CIT v. Ambala Cantt. Elec. Supply Corpn. Ltd.
[1981] 7 Taxman 398 (P&H); CIT v. Geoge Oakes Ltd. [1979] 118 ITR
261 (SC)].
• Expenses can be claimed as a deduction even if it is for promoting

business and there is no compelling necessity for the expenses [Sasson
J. in David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC)].
• Burden of proof is on the assessee.
• The onus of proving necessary facts, in order to avail deduction u/s 37(1)
is on the assessee; therefore, if assessee fails to establish the facts,
expenditure is not admissible [CIT v. Calcutta Agency Ltd. [1951] 19 ITR
191 (SC)].
• Expenses on issue of shares raised to finance new project is capital

expenditure. Whereas expenses on issue of shares for making payments
to resolve internal dispute was of revenue nature [Shree Ram Mills Ltd. v.
CIT (1992) 101 CTR 356 (Bom.)].
Note: A new company is incorporated under a scheme of amalgamation to

take over the business of two companies. Legal expenses incurred in
connection with amalgamation by the new company is not deductible under
Section 37(1), as such expenses are connected with the creation of the
company and are clearly capital in nature [Raza Buland Sagar Co. Ltd. v.
262
(1980) 122 CTR 817 (All.); CIT v. Godfrey Philips India Ltd. (1993) 116
CTR 1 (Bom.)].
• Expenses on issue of Bonus shares are capital expenditure [Shree

Digvijay Cement Co. Ltd. v. CIT (1982) 26 CTR 184 (Guj.); CIT v. Ajit
Mills Ltd. (1995) 124 CTR 13 (Guj.)].
• Commission paid to sole selling agent when there is no material to show

that agent has rendered by actual service or payment was legitimate
payment [Modi Industries Ltd. v. CIT (1993) ITR 341 (Del.)].
11.Capital Expenditure
• Expenses incurred for shifting factory – Expenditure relating to shifting of

machinery is capital expenditure while expenditure relating to shifting of
employees is revenue expenditure [India Pistons Repco Ltd. v. CIT
(1983) 143 ITR 424 (Mad.); CIT v. Bimetal Bearings Ltd. (1995) 124 CTR
189 (Mad.)]
• Purchase price paid by incoming partner for a share of profit in the firm is
capital expenses, even if partnership firm is only for a single venture or
short duration [R. Guruswamy Naidu v. CIT (1952) 21 ITR 188 (Mad.)].
• Amount paid to outgoing director in consideration of the director

convenient not to compete with the company is capital expenditure
[Association Portland Cement Mfg. Ltd. v. Kerr. (1945) 27 TC 103 (CA)].
• Expenses incurred on maintenance of reputation of assessee business are

capital expenditures [CIT v. Homi M. Mehta (1943) ITR 142 (Bom.)].
• Bank guarantee commission for purchasing is a capital expenditure [CIT

v. Bharat Sarvodaya Mill Co. Ltd. (1993) 202 ITR 942 (Guj.)].
• Payment made to rival to ward off competition in business is a capital

expenditure [CIT v. Coal Shipments (P) Ltd. (1971) 82 1TR 902 (SC)].
In short, there are scores of judicial rulings to determine whether a

particular expenditure is a revenue expenditure allowable u/s 37 or not.
Each is based on facts of the particular case.
263
Expenses Which are Commercially Expedient

Some expenses are considered commercially expedient based on type of
assessee’s business, prevailing traditions etc., to assure smooth running of
business or to avoid bottlenecks in carrying out of the business in most
beneficial/convenient manner. These types of expenses may have indirect
effect of enhancing assessee’s prestige as a businessman. In short, all
expenses which are paid to be commercially expedient are allowed as
deduction u/s 37(1) considering nature/status of the business and other
circumstances of the case. Some examples are as under:
i. Expenses on special advertisement comparing, on business survey, on

distribution of samples on exhibition on investigation, research and
feasibility study, etc.
ii. Demurrage charged by port authority on inadvertent, unauthorized

import.
iii. Salary/bonus/pension paid for managing business or to maintain

industrial peace, to motivate employees to work hard, to enhance
production, to raise productivity etc. or to comply with provisions of law.
iv. Expenses on new unit/division where new unit is only an extension of

existing business and there is complete unity and interlacing between
existing and new units/divisions.
v. Fees paid for technical survey, annual listing on stock exchange and fees
paid to approved value for valuation of assets.
vi. Interest in connection with liability taken over from the predecessor
firm, interest refunded to Income Tax department when excess amount
was treated as income of the assessee.
vii.Expenditure incurred for lying down water pipes for uninterrupted water
supply and to get exemption from municipal taxes for certain years.
Expenditure in connection with construction or railway platform up to
factory.
viii.Expenditure incurred, by film producer, assessee, for providing carpets/

screens in cinema theatre, expenditure on films, which were given up on
ground of commercial expediency.
264
Expenditure Not Allowed u/s 37

Some expenses are not allowed as deduction u/s 37(1) because either they
are of personal, capital or lavish in nature or they are not commercially
expedient or have no link with carrying on of business. Some expenses are
in nature of penalty for infringement of provisions of law or are specifically
disallowed under any other provisions of law. In short, expenses which do
not satisfy any of the parameters laid down u/s 37(1) are not allowed as
such.
Some Case Laws
• Expenses having no link with business: Contribution to political party

where there is no direct nexus between contribution and the business of
the assessee [J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. CIT (1966) 62 ITR
813 (All.)].
• Social welfare expenses having no nexus with business are not allowable.
Payment to the occupier of land for getting vacant possession enhances
the value of land. Hence, it is a capital expenditure and cannot be
allowable as a deduction [Standard Mills Co. Ltd. v. CIT (1994) 209 ITR
85 (Bom.)].
• Capital Expenditure not allowed u/s 37: Expenditure incurred for boring
tubewell (water obtained from tubewell was not suitable as it was
blackish) should be regarded as capital expenditure, as it was spent for
bringing into existence an asset of enduring nature. Although asset was
ultimately not useful, the intention behind the expenditure should be
considered [CIT v. Shree Digvijay Woollen Mills Ltd. (1993) 204 ITR 398
(Guj.)].
• Acquisition of a capital asset (i.e., manufacturing rights, drawings,

designs, specification and export rights) may be payable lump sum at
one time or in installment remains capital expenditure only [CIT v.
Devidas Vithaldas & Co. (1992) 84 ITR 277 (SC); CIT v. Kirloskar Oil
Engs. Ltd. (1994) 206 ITR 13 (Bom.)].
• Expenditure incurred for modernizing machinery (installation of new

machinery) is capital nature [CIT v. Madras Spinners Ltd. (1994) 207 ITR
35 (Ker.)].
265
• Legal charges paid in connection with dilution of shareholding was for

augmentation of capital base of the company. Hence, capital expenditure
and not allowable u/s 37. Expenditure on presentation of wristwatches to
employees with a view to encourage their timely attendance and also to
keep good relation with them is deductible [CIT v. Heyward Waldia
Refinery Ltd. (1994) 209 ITR 159 (Cal.)].
• Personal expenses not allowed: Premium on deferred annuity policy on

lives of director’s ownership of policy with company. Company having
discretion to pay the amounts, hence no obligation to pay amounts —
Premium not deductible u/s 37 [Gujarat Steel Tubes Ltd. v. CIT (1994)
210 ITR 358 (Guj.)].
• Expenses for subsidiary not allowed: Expenses incurred by assessee for

calling general body meeting of its subsidiary company. (Under section
186 of Companies Act) [United Breweries Ltd. v. CIT (1986) 24 Taxman
677 (Kar.)].
• Interest paid on borrowings from banks, which were fully given to its
100% subsidiary company as interest-free loan, was held disallowable u/
s 36(1)(iii) [CIT v. Phaltan Sugar Works Ltd. (1993) 72 Taxman 325
(Bom.)].
• Expenses lavish in nature not allowed: Payments made by continuing

partners to retiring partners towards appreciation of value of firm’s
assets [CIT v. General Auto Parts Co. (1980) 4 Taxman 201 (Del.)].
• Provision in respect of a contingent liability [Indian Molasses Co. (P.) Ltd.

v. CIT (1959) 37 ITR 66 (SC)].
• Expenses not allowed u/s 37, but allowed u/s 30: By carrying out the
major repairs, the assessee was able to avoid the notice of demolition
which was served by municipality. Hence, expenditure was to maintain
the building for business use and the expenditure was allowable u/s 30
[Dewars Garage India Pvt. Ltd. v. CIT (1993) 204 ITR 763 (Cal.)].
266
Q. Amounts Not Deductible (Section 40)

Notwithstanding anything to the contrary in Sections 30 to 38, the
following amounts shall not be deducted in computing the income
chargeable under the head “Profits and Gains of Business or Profession”—
in the case of any assessee — in the following cases of expenditure
incurred where liability to deduct tax at source is also attracted but the
Assessee has failed to deduct tax at source or after deducting has failed to
pay tax so deducted at source to the credit of Government, the following
consequences take place:
Nature of Nature of When Not When

Section
Expenditure Default Allowable Allowable
A B C D E
40(a)(i) Any interest, Tax is deductible Expenditure If the TDS is paid
royalty, fees for at source but not in any
technical services not been allowable in subsequent year
or other sum deducted or, the year in after the expiry
chargeable under after deduction, which the of the prescribed
this Act, payable: not paid during expenditure time, such
(A) outside the previous is incurred expenditure shall
India; or year, or in the be allowed
(B) in India to a subsequent year against the
non-resident, not before the income of the
being a company expiry of the previous year in
or to a foreign time prescribed which such tax
company u/s 200(1) has been paid
267
40(a) Interest, Such TDS is not Expenditure If the TDS is paid

(ia) commission, deducted or, not in any
brokerage, rent, after deduction, allowable in subsequent year
royalty, fees for is not paid the year in after the expiry
professional during the which the of the prescribed
services or fees for previous year, expenditure time, such
technical services – or in the is incurred expenditure shall
payable to a subsequent year be allowed
resident, or before the against the
amounts payable expiry of the income of the
to a resident prescribed time previous year in
contractor/sub- u/s 200(1) which such tax
contractor for any has been paid
work (including
supply of labour for
any work), on
which tax is
deductible at
source under
Chapter XVII-B
In the case of any assessee, in the following cases of expenditure incurred,

the expenditure is not allowable:
Section Nature of Expenditure What When Not When

Triggers Allowable Allowable
Disallow
ance
A B C D E
Section 40(a) Any sum paid on account Fact of Not Never
(ib) of securities transaction payment allowable
tax under Chapter VII of at all
the Finance (No. 2) Act,
2004
Section Any sum paid on account Fact of Not Never
40(a)(ic) [by of fringe benefit tax under payment allowable
the Finance Chapter Xll-H at all
Act, 2005 w.e.f.
1.4.2006]
268
Section 40(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;
Section 40(ii a): Any sum paid on account of wealth tax.
Section 40(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.
Section 40(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”.
Section 40(v): Any tax actually paid by an employer referred to in clause

(10CC) of Section 10.
Section 40(b): In the case of any firm assessable as such,—
i. any payment of salary, bonus, commission or remuneration, by

whatever name called (hereinafter referred to as “remuneration”) to any
partner who is not a working partner; or
ii. any payment of remuneration to any partner who is a working partner,

or of interest to any partner, which, in either case, is not authorized by,
or is not in accordance with, the terms of the partnership deed; or
iii. any payment of remuneration to any partner who is a working partner,

or of interest to any partner, which, in either case, is authorized by, and
is in accordance with, the terms of the partnership deed, but which
relates to any period (falling prior to the date of such partnership deed)
for which such payment was not authorized by, or is not in accordance
269
with, any earlier partnership deed, so, however, that the period of
authorization for such payment by any earlier partnership deed does not
cover any period prior to the date of such earlier partnership deed; or
iv. any payment of interest to any partner which is authorized by, and is in
accordance with, the terms of the partnership deed and relates to any
period falling after the date of such partnership deed insofar as such
amount exceeds the amount calculated at the rate of 12% simple
interest per annum; or
v. any payment of remuneration to any partner who is a working partner,

which is authorized by, and is in accordance with, the terms of the
partnership deed and relates to any period falling after the date of such
partnership deed insofar as the amount of such payment to all the
partners during the previous year exceeds the aggregate amount
computed as hereunder:
On the first Rs. 3,00,000 of the book Rs. 1,50,000 or at the rate of 90% of
profit or in case of loss the book profit, whichever is more
On the balance of the book profit At the rate of 60%
Provided that in relation to any payment under this clause to the partner
during the previous year relevant to the assessment year commencing on
the 1st day of April, 1993, the terms of the partnership deed may, at any
time during the said previous year, provide for such payment.
Explanation 1: Where an individual is a partner in a firm on behalf, or for

the benefit, of any other person (such partner and the other person being
hereinafter referred to as “partner in a representative capacity” and
“person so represented”, respectively),—
i. interest paid by the firm to such individual otherwise than as partner in

a representative capacity, shall not be taken into account for the
purposes of this clause;
ii. interest paid by the firm to such individual as partner in a

representative capacity and interest paid by the firm to the person so
represented shall be taken into account for the purposes of this clause.
270
Explanation 2: Where an individual is a partner in a firm otherwise than

as partner in a representative capacity, interest paid by the firm to such
individual shall not be taken into account for the purposes of this clause, if
such interest is received by him on behalf, or for the benefit, of any other
person.
Explanation 3: For the purposes of this clause, “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: For the purposes of this clause, “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;
Section 40(ba) in the case 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], any
payment of interest, salary, bonus, commission or remuneration, by
whatever name called, made by such association or body to a member of
such association or body.
Explanation 1: Where interest is paid by an association or body to any

member thereof who has also paid interest to the association or body, the
amount of interest to be disallowed under this clause shall be limited to the
amount by which the payment of interest by the association or body to the
member exceeds the payment of interest by the member to the association
or body.
Explanation 2: Where an individual is a member of an association or body

on behalf, or for the benefit, of any other person (such member and the
other person being hereinafter referred to as “member in a representative
capacity” and “person so represented”, respectively),—
i. interest paid by the association or body to such individual or by such

individual to the association or body otherwise than as member in a
271
representative capacity, shall not be taken into account for the purposes
of this clause;
ii. interest paid by the association or body to such individual or by such

individual to the association or body as member in a representative
capacity and interest paid by the association or body to the person so
represented or by the person so represented to the association or body,
shall be taken into account for the purposes of this clause.
Explanation 3: Where an individual is a member of an association or body

otherwise than as member in a representative capacity, interest paid by
the association or body to such individual shall not be taken into account
for the purposes of this clause, if such interest is received by him on
behalf, or for the benefit, of any other person.
Note: Remuneration to working partners
For the assessment years, subsequent to the assessment year 1996-97, 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 (Circular No. 739, dated 25.3.1996 of CBDT).
R. Expenses or Payments Not Deductible in Certain Circumstances

(Section 40A)
Section 40A of the Income Tax Act provides for certain items as being not
deductible in certain specified circumstances. The major features of these
are as follows:
1. These restrictions override all other provisions of the Act relating to the
computation of income under the head “Profits and Gains of Business or
Profession”.
2. Where the assessee incurs any expenditure which is payable to any

relative or associate concerns, 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,
272
so much of the expenditure as is so considered by him to be excessive

or unreasonable shall not be allowed as a deduction;
3. The relative/associates would include the following persons:
i. where the assessee is an individual or any relative of the assessee;
ii. where the assessee is a company, any director of the company, partner
of firm, association of persons or the firm, or member of the
association, Hindu undivided family or family, or any relative of such
director, partner or member;
iii. any individual who has a substantial interest in the business or

profession of the assessee, or any relative of such individual;
iv. 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;
v. a company, firm, association of persons or Hindu undivided family of

which a director, partner or member, as the case may be, has
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;
vi. any person who carries on a business or profession,—
a. where the assessee being an individual, or any relative of such

assessee, has a substantial interest in the business or profession of
that person; or
b. where the assessee being a company, firm, association of persons or

Hindu undivided family, or any director of such company, partner of
such firm or member of the association or family, or any relative of
such director, partner or member, has a substantial interest in the
business or profession of that person.
273
Expenditure Incurred in Cash in Excess of Rs. 20,000/- [Section

40A(3)]
Where any expenditure incurred and payment is made, in excess of Rs.

20,000/- otherwise than by a crossed cheque drawn on a bank or by a
crossed bank draft, no deduction of such expenditure shall not be allowed
as a deduction.
However, no disallowance under this sub-section shall be made where any

payment in a sum exceeding twenty thousand rupees is made otherwise
than by a crossed cheque drawn on a bank or by a crossed bank draft, in
such cases and under such circumstances as may be prescribed, having
regard to the nature and extent of banking facilities available,
considerations of business expediency and other relevant factors.
Rule 6DD of Income Tax Rules, 1962 prescribes for cases and
circumstances in which payment in a sum exceeding Rs. 20,000/- may be
made otherwise than by a crossed cheque drawn on a bank or by a crossed
bank draft.
However, in case of payment made for plying, hiring or leasing goods

carriages, the provisions of sub-section (3) and (3A) shall effect, for
amount exceeding thirty-five thousand rupees and not twenty thousand.
Section 40A(3)/Rule 6DD: Business Disallowance – Cash Payments

exceeding prescribed limit – Prescribed cases and circumstances in which
payment in sum exceeding – prescribed limit may be made otherwise than
by cheque—
1. Where payment is made to banking and other credit institutions like

RBI/SBI/Scheduled Banks/Commercial Banks in public and private
sector/LIC/UTI/ICICl/IFCl/IDBI/Co-operative bank or land mortgage
bank/Primary agricultural credit society/Primary credit society etc.
2. Payments to Central and State Governments, if the rules framed by

such a Government provides for payment in legal tender, such as
payment of direct taxes, customs or excise duties, sales tax, railway
freight, etc. Thus, in case of payments made to railways on account of
railway freight charges or for booking wagons, Section 40A(3) will not
apply.
274
3. Payments made by book adjustment by an assessee in the account of

payee against money due to assessee for any goods supplied or services
rendered by him to payee.
4. Payments through the banking system, like letters of credit, mail

transfers, telegraphic transfers, book adjustment in the same bank or
between one bank and another, and bills of exchange including hundies
made payable to a bank.
5. Payments to a cultivator, grower or producer towards purchase of

agricultural or forest produce or produce of animal husbandry (including
hides and skins) or dairy or poultry farming or fish or fish products or
products of horticulture or apiculture, whether processed or not.
6. Payments to a producer towards purchase of his products if they are

manufactured or processed without the aid of power in a cottage
industry.
7. Payments made to a person who ordinarily resides or carries on

business in a village which is not served by any bank. However, if
payment is made to such a villager in a town having banking facilities,
the exception will not operate.
8. Payments of terminal benefits like gratuity/retrenchment compensation,

etc., to employees drawing salary not exceeding Rs. 7,500/- per annum.
9. Salary paid to an employee (after deducting tax at source under Section

192) when such employee is temporarily posted for a continuance
period of 15 days or more in a place other than his normal place of duty
or on a ship, and he does not maintain any account in any bank at such
place or ship.
10.Payments required to be made on a day on which the banks are closed

either on account of holiday or strike.
11.Payment made by any person to his agent who is required to make

payment in cash for goods or services on behalf of such person.
275
12.Payment made by an authorized dealer/money changer against

purchase of foreign currency or travellers’ cheque in normal course of
his business.
Relevant Circulars
Section 40A(3) would not apply to repayment of loans or payment towards

the purchase price of capital assets like plant and machinery not for resale
[Circular No. 34, dated 5th March 1970].
No disallowance under this section shall be made—
Where payment is made by cash where a letter is produced from the seller
giving the full particulars of his address, sales tax number, permanent
account number, if any, to the effect that—
• Assessee (purchaser) is new to the seller; or
• Transactions are made at a place where the assessee or seller does not
have any bank account; or
• Transaction and payment are made on a bank holiday; or
• Seller is refusing to accept the payment through bank; or
• The assessee being commission agent is required to make cash payment

to the seller from whom he has purchased the goods; or
• Specific discount is given by the seller for payment to be made by way of

cash [Circular No. 220, dated 31.5.1977: 108 ITR (St) 8].
276
Payment of Gratuity to His Employees Only, When/Except by Way

of Any Contribution towards an Approved Gratuity Fund as
Prescribed [Section 40A(7)]
Here, no deduction shall be allowed in respect of any provision (whether
called as such or by any other name) made by the assessee for the
payment of gratuity to his employees on their retirement or on termination
of their employment for any reason.
However, the above shall not apply in relation to any provision made by the
assessee for the purpose of payment of a sum by way of any contribution
towards an approved gratuity fund, or for the purpose of payment of any
gratuity, that has become payable during the previous year.
Thus, what is not allowed is—

The provision made for payment of gratuity to his employees on their
retirement or on termination of their employment for any reason.
What is allowed is–

Only the provision made for payment by way of any contribution towards
an approved gratuity fund, or for the purpose of payment of any gratuity,
that has become payable during the previous year.
Only Payments by the way of–
• contribution to recognized provident fund or
• approved superannuation fund or
• to contribution to approved gratuity fund
shall be allowed as deduction against business income.
277
S. Certain Profits Chargeable to Tax (Section 41)
1. Remission or Cessation of Trade Liabilities [Section 41(1)]
a. Where an allowance or deduction has been made in the assessment

year in respect of loss, expenditure or trading liability incurred by the
assessee (‘the first-mentioned person’) and subsequently during any
previous year; 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
b. Where the benefit received after business is discontinued:
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.
Explanation 1: 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
278
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.
Explanation 2: 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.
Comments
General conditions: In order to apply Section 41(1), the following points

are to be kept in view: (1) in the course of assessment for an earlier year,
allowance or deduction has been made in respect of trading liability
incurred by the assessee; (2) subsequently, a benefit is obtained in respect
of such trading liability by way of remission or cessation thereof during the
year in which such event occurred; (3) in that situation the value of the
benefit accruing to the assessee is deemed to be the profit and gains of
business which otherwise would not be his income; (4) such value of the
benefit is made chargeable to income tax as the income of the previous
year wherein such benefit was obtained [Chief CIT v. Kesaria Tea Co. Ltd.
(2002) 254 ITR 434 (SC)].
The question whether a trading liability that was once incurred ceases to
exist for the purpose of Section 41(1) has to be decided in the light of the
provisions of the Income Tax Act and the statute if any governing such
liability [CIT v. Agarpara Co. Ltd. (1986) 158 ITR 78 (Cal.)].
System of accounting is not relevant: For considering the taxability of

an amount coming within the mischief of Section 41(1), the system of
accounting followed by the assessee is of no relevance or consequence
[CIT v. Bharat Iron & Steel Industries (1993) 199 ITR 67 (Guj.) (FB)].
279
Burden of Proof — What the IT Department and the Assessee has to

Prove?
Burden is on department to prove that allowance/deduction has

been given earlier: A benefit obtained by the assessee will attract Section
41(1) only if an allowance or deduction had been given for this amount in
the earlier assessment years. The burden lies upon the department to
prove that an allowance or deduction had been given for this amount to the
assessee in the earlier assessment years [Steel & General Mills Co. Ltd. v.
CIT (1974)] 96 ITR 438 (Delhi)].
Burden is on assessee to prove that liability subsists: Whether the

liability of the assessee has been fully discharged is within the special
knowledge of the assessee. He has to prove that in fact the liability
subsists. Where the conduct and surrounding circumstances demonstrate
that the amount has been remitted or forgone or the sum has ceased to be
claimable against the assessee, it would be a clear case of remission or
cessation of the liability of the assessee [Kesoram Industries & Cotton Mills
Ltd. v. CIT (1992) 196 ITR 845 (Cal.)].
Time-barred Debts
Time-barred debts are not covered: When a debt becomes barred by

time, the creditor would not be able to recover the amount by enforcing his
right in Court. But the right will not come to an end nor will the liability
cease. Section 41(1) is not attracted in such a case [Liquidator, Mysore
Agencies (P.) Ltd. v. CIT (1978])114 lTfl 853 (Kar.)].
The liability of an assessee does not cease merely because the liability has
become barred by limitation. The liability ceases when it has become
barred by limitation and the assessee has unequivocally expressed its
intention not to honour the liability even when demanded [CIT v. Chase
Bright Steel Ltd. (No. 2) (1989)177 ITR 128 (Bom.)].
1. Balancing Charge in Respect of Any Building, Machinery, Plant,

or Furniture [Section 41(2)]
Where any building, machinery, plant, or furniture:
280
b. in respect of which depreciation is claimed under clause (l) 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:
the excess of its WDV upto the original cost of acquisition shall be
treated as business income of the previous year in which the sale etc.
took place. Thus, the benefit of depreciation availed stand withdrawn in
such cases.
2. Sale of Capital Asset Used for Scientific Research [Section

41(3)]
Where an asset representing expenditure of a capital nature on scientific
research [within the meaning of clause (iv) of sub-section (1), or clause (c)
of sub-section (213) of Section 35] is sold, without having been used for
other purposes, and the proceeds of the sale [together with the total
amount of the deductions made under clause (i) or, as the case may be,
the amount of the deduction under clause (ía) of sub-section (2), or clause
(c) of sub-section (213) of Section 35] exceed the amount of the capital
expenditure, the excess or the amount of the deductions so made,
whichever is the less, shall be chargeable to income tax as income of the
business or profession of the previous year in which the sale took place.
Explanation: Where the monies payable in respect of any asset referred

to in this sub-section become due 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.
Comments
Under this Section, any amount realized on transfer of an asset used for
scientific research is taxable as business income to the extent of deduction
allowed under Section 35 in the year in which the transfer takes place.
It may be noted that Section 41(3) is applicable only if an asset is sold

without having been used for other purposes. In other words, if an asset
which is initially purchased for the purpose of scientific research is utilized
for business purposes on completion of scientific research, and later on it is
sold or transferred then Section 41(3) is not applicable.
281
1. Recovery of Bad Debt [Section 41(4)]

Bad debt written off (also allowed earlier) and subsequently recovered – is
treated as income of the previous year in which the amount actually
recovered.
Where a deduction has been allowed in respect of a bad debt or part of

debt under the provisions of clause (vii) of sub-section (1) of Section 36,
then, if the amount subsequently recovered on any such debt or part is
greater than the difference between the debt or part of debt and the
amount so allowed, the excess shall be deemed to be profits and gains of
business or profession, and accordingly chargeable to income tax as the
income of the previous year in which it is recovered, whether the business
or profession in respect of which the deduction has been allowed is in
existence in that year or not.
Comment
Recovery of bad debts: Continued existence of the business is not a
condition for applying Section 41(4). The only basis for applying the
provision is the identity of the assessee being the same [CIT v. P.K. Kaimal
(1980) 123 ITR 755 (Mad.)].
2. Amount Withdrawn from Special Reserve [Section 41(4A)]

Where a deduction has been allowed in respect of any special reserve
created and maintained under clause (viii) of sub-section (1) of Section 36,
any amount subsequently withdrawn from such special reserve shall be
deemed to be the profits and gains of business or profession and
accordingly be chargeable to income tax as the income of the previous
year in which such amount is withdrawn.
Comment
Section 41(4A) has been inserted (with effect from the assessment year
1998-99) to provide that any amount withdrawn from such special reserve
shall be deemed to be the profits and gains of business or profession and
accordingly be chargeable to income tax as the income of the previous
year in which such amount is withdrawn from the special reserve. Where
any amount is withdrawn from the special reserve in a previous year in
which the business is no longer in existence in that provisions shall apply
as if the business is in existence in that previous year.
282
3. Set Off of Losses of Discontinued Business [Section 41(5)]

Where the business or profession referred to in this section is no longer in
existence and there is income chargeable to tax under sub-section (1) or
sub-section (3) or sub-section (4) in respect of that business or profession
any loss not being a loss sustained in speculation business which arose in
that business or profession during the previous year in which it ceased to
exist and which could not be set off against any other income of that
previous year shall so far as may be, be set off against the income
chargeable to tax under the sub-section aforesaid.
Certain Deductions to be Allowed Only on Actual Payment (Section

43B)
Notwithstanding anything contained in any other provision of this Act, a

deduction otherwise allowable under this Act in respect of the following
expenditure 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 an Assessee:
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
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 (e.g., lFCl, IDBI, LIC, ICICI Bank,
UTI etc.) 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
e. any sum payable by the assessee as interest on any term loan from a
scheduled bank in accordance with the terms and conditions of the
agreement governing such loan or advances, or
283
f. any sum payable by the assessee as an employer in lieu of any leave at

the credit of his employee.
Payment Made Before Due Date of Filing the Return

Nothing contained in this section shall apply in relation to any sum referred
to in clause (a) or clause (c) or clause (d) or clause (e) or clause (f) which
is actually paid by the assessee on or before the due date applicable in his
case for 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.
Contribution to Any Provident Fund or Superannuation Fund or

Gratuity Fund
No deduction shall, in respect of any sum referred to in clause (b) above,
be allowed unless such sum has actually been paid in cash or by issue of a
cheque or draft or by any other mode on or before the due date as defined
in the Explanation below clause (va) of sub-section (1) of Section 36, and
where such payment has been made otherwise than in cash, the sum has
been realized within fifteen days from the due date.
Relevant Circular
Circular No. 674, dated 29th December, 1993: It has been brought to
the notice of the Board that some State Governments, instead of amending
the Sales Tax Act, have issued Government orders notifying schemes under
which sales tax is deemed to have been actually collected and disbursed as
loans. The Board are of the opinion that such deferral schemes notified by
the State Governments through Government orders meet the requirements
of the afore cited circular. Accordingly, the amount of sales tax liability
converted into loans may be allowed as deduction in the assessment for
the previous years in which such conversion has been permitted by or
under Government orders.
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6.7 MAINTENANCE OF ACCOUNTS BY CERTAIN PERSONS

CARRYING ON PROFESSION OR BUSINESS (Section 44AA)
1. Every person carrying on legal, medical, engineering or architectural

profession or the profession of accountancy or technical consultancy or
interior decoration or any other profession as is notified by the Board in
the Official Gazette shall keep and maintain such books of account and
other documents as may enable the Assessing Officer to compute his
total income in accordance with the provisions of this Act.
2. Every person carrying on business or profession not being a profession

referred to in sub-section (1) shall:
i. if his income from business or profession exceeds one lakh twenty

thousand rupees or his total sales, turnover or gross receipts, as the
case may be, in business or profession exceed or exceeds ten lakh
rupees in any one of the three years immediately preceding the
previous year; or
ii. where the business or profession is newly set up in any previous year,
if his income from business or profession is likely to exceed one lakh
twenty thousand rupees or his total sales, turnover or gross receipts,
as the case may be, in business or profession are or is likely to
exceed ten lakh rupees, during such previous year; or
iii. where the profits and gains from the business are deemed to be the
profits and gains of the assessee under Section 44AD or Section 44AE
or Section 44AF or Section 44BB or Section 44BBB, as the case may
be, and the assessee 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, during such previous year, keep and maintain
such books of account and other documents as may enable the
Assessing Officer to compute his total income in accordance with the
provisions of this Act.
3. The Board may, having regard to the nature of the business or

profession carried on by any class of persons, prescribe, by rules, the
books of account and other documents (including inventories, wherever
necessary) to be kept and maintained under sub-section (1) or sub-
section (2), the particulars to be contained therein and the form and the
285
manner in which and the place at which they shall be kept and
maintained.
4. Without prejudice to the provisions of sub-section (3), the Board may

prescribe, by rules, the period for which the books of account and other
documents to be kept and maintained under sub-section (1) or sub-
section (2) shall be retained.
Rule 6F
Rule 6F of the Income Tax Rules, 1962 lay down certain rules for
maintenance of accounts. They are as follows:
1. Every person carrying on legal, medical, engineering or architectural

profession or the profession of accountancy or technical consultancy or
interior decoration or authorized representative or film artist shall keep
and maintain the books of account and other documents specified in
sub-rule (2):
However, nothing in this sub-rule shall apply in relation to any previous

year in the case of any person if his total gross receipts in the profession
do not exceed Rs. 1,50,000 (one lakh fifty thousand rupees) in any one
of the three years immediately preceding the previous year, or, where
the profession has been newly set up in the previous year, his total gross
receipts in the profession for that year are not likely to exceed the said
amount.
[Where in one of three years preceding previous years in question

assessee’s income did not exceed Rs. 60,000, assessee in terms of Rule
6F would be exempt from requirement of maintenance of accounts [A.
Keshava Bhat v. ITO [2001] 247 ITR 83/115 Taxman 208 (Karjj.)].
2. The books of account and other documents referred to above shall be

the following, namely:
i. a Cash book;
ii. a journal, if the accounts are maintained according to the mercantile

system of accounting;
286
iii. a ledger;
iv. carbon copies of bills, whether machine numbered or otherwise

serially numbered, wherever such bills are issued by the person, and
carbon copies or counterfoils of machine numbered or otherwise
serially numbered receipts issued by him:
Provided that nothing in this clause shall apply in relation to sums not
exceeding Rs. 25/- (twenty-five rupees);
v. original bills wherever issued to the person and receipts in respect of

expenditure incurred by the person or, where such bills and receipts
are not issued and the expenditure incurred does not exceed fifty
rupees, payment vouchers prepared and signed by the person:
Provided that the requirements as to the preparation and signing of

payment vouchers shall not apply in a case where the cash book
maintained by the person contains adequate particulars in respect of
the expenditure incurred by him.
In this rule:
“film artist” means any person engaged in his professional capacity in

the production of a cinematograph film whether produced by him or by
any other person, as:
a. an actor;
b. a cameraman;
c. a director, including an assistant director;
d. a music director, including an assistant music director;
e. an art director, including an assistant art director;
f. a dance director, including an assistant dance director;
g. an editor;
h. a singer;
i. a lyricist;
j. a story writer;
k. a screenplay writer;
l. a dialogue writer; and
m. a dress designer.
287
3. A person carrying on medical profession shall, in addition to the books

of account and other documents specified in sub-rule (2), keep and
maintain the following, namely:
i. a daily case register in Form No. 3C;
ii. an inventory under broad heads, as on the first and the last day of
the previous year, of the stock of drugs, medicines and other
consumable accessories used for the purpose of his profession.
4. The books of account and other documents specified in sub-rule (2) and
sub-rule (3) other than those relating to a previous year which has
come to an end shall be kept and maintained by the person at the place
where he is carrying on the profession or, where the profession is
carried on in more places than one, at the principal place of his
profession:
Provided that where the person keeps and maintains separate books of
account in respect of each place where the profession is carried on, such
books of account and other documents may be kept and maintained at
the respective places at which the profession is carried on.
5. The books of account and other documents specified in sub-rules (2)

and (3) shall be kept and maintained for a period of six years from the
end of the relevant assessment year:
Provided that where the assessment in relation to any assessment year

has been reopened under section 147 of the Act within the period
specified in Section 149 of the Act, all the books of account and other
documents which were kept and maintained at the time of reopening of
the assessment shall continue to be so kept and maintained till the
assessment so reopened has been completed.
6. Notwithstanding anything contained in sub-rules (1) to (3), it shall not

be necessary for any person carrying on any of the professions specified
in sub-rule (1) to keep and maintain the books of account and other
documents specified in sub-rule (2) or sub-rule (3) in relation to any
previous year commencing before the first day of March, 1983.
288
Audit of Accounts of Certain Persons Carrying on Business or

Profession (Section 44AB)
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 Rs. 1 crore (one
crore rupees) in any previous year; or
b. carrying on profession shall, if his gross receipts in profession exceed

Rs. 25,00,000/- (twenty-five 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 44AD [Special provision for computing profits and gains of

business of civil construction, etc.] or
• Section 44AE [Special provision for computing profits and gains of

business of plying, hiring or leasing goods carriages] or
• Section 44AF [Special provisions for computing profits and gains of

retail business] or
• Section 44BB [Special provision for computing profits and gains in

connection with the business of exploration, etc., of mineral oils] or
• Section 44BBB [Special provision for computing profits and gains of

foreign companies engaged in the business of civil construction, etc., in
certain turnkey power projects], 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, get his accounts of such previous year audited by
a chartered accountant before the specified date (as specified under
Section 139(1) for furnishing of Return) 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:
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Provided that this section shall not apply to the person, who derives
income of the nature referred to in:
Section 44B [Special provision for computing profits and gains of shipping
business in the case of non-residents] or
Section 44BB [Special provision for computing profits and gains in

connection with the business of exploration, etc., of mineral oils] or
Section 44BBA [Special provision for computing profits and gains of the
business of operation of aircraft in the case of non-residents] or
Section 44BBB [Special provision for computing profits and gains of foreign
companies engaged in the business of civil construction, etc., in certain
turnkey power projects],
on and from the 1st day of April, 1985 or, as the case may be, the date on
which the relevant section came into force, whichever is later:
Where 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.
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 the 31st day of
October of the assessment year.
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When the Audit Report Should be Submitted?

It is obligatory for a taxpayer covered under section 44AB to not only get
his accounts audited by the specified date but also furnish the audit report
on or before “specified date” mentioned above. Tax audit report shall be
furnished by the “specified date” irrespective of the fact whether or not
return of income is filed by that date. If return of income is submitted after
submission of tax audit report, then the following should be submitted
along with the return of income:
a. copy of tax audit report; and
b. a proof of filing tax audit report before the “specified date”.
Consequences of Failure to Get Accounts Audited (Section 271B)
If any person fails:
a. to get his accounts audited in respect of any previous year or years

relevant to an assessment year or
b. furnish a report of such audit as required under Section 44AB, the

Assessing Officer may direct that such person shall pay, by way of
penalty, a sum equal to one-half per cent of the total sales, turnover or
gross receipts, as the case may be, in business, or of the gross receipts
in profession, in such previous year or years or a sum of one hundred
thousand rupees, whichever is less.
• Activity D
1. Write a detailed note from Tax Department of Ganesh Software to their

Financial Accountant requesting for the audit report discussed above.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
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Special Provisions for Computing Profits and Gains of Business on

Presumptive Basis (Section 44AD)
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. 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:
Provided that where the eligible assessee is a firm, the salary and
interest paid to its partners shall be deducted from the income
computed under sub-section (1) subject to the conditions and limits
specified in clause (b) of Section 40.
3. 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.
4. The provisions of Chapter XVII-C shall not apply to an eligible assessee

insofar as they relate to the eligible business.
5. Notwithstanding anything contained in the foregoing provisions of this

section, an eligible assessee who claims that his profits and gains from
the eligible business 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 (2) of Section 44AA and get them audited and furnish a
report of such audit as required under section 44AB.
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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 2008); and
ii. who has not claimed deduction under any of the Sections 10A, 10AA,
10B and 10BA or deduction under any provisions of Chapter VIA under
the heading “C – Deductions in Respect of Certain Incomes” in the
relevant assessment year;
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 Rs. 60,00,000/- [sixty lakh rupees].
6.8 SPECIAL PROVISION FOR COMPUTING PROFITS AND

GAINS OF BUSINESS OF PLYING, HIRING OF LEASING
GOODS CARRIAGES (SECTION 44AE)
1. Notwithstanding anything to the contrary contained in Sections 28 to

43C, in the case of an assessee, who owns not more than ten goods
carriages at any time during the previous year and who is engaged in
the business of plying, hiring or leasing such goods carriages, the
income of such business chargeable to tax under the head “Profits and
Gains of Business or Profession” shall be deemed to be the aggregate of
the profits and gains, from all the goods carriages owned by him in the
previous year, computed in accordance with the provisions of sub-
section (2).
2. For the purposes of sub-section (1), the profits and gains from each
goods carriage:
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i. being a heavy goods vehicle, shall be an amount equal to Rs. 5,000

(five thousand rupees) for every month or part of a month during which
the heavy goods vehicle is owned by the assessee in the previous year
or, as the case may be, an amount higher than the aforesaid amount as
declared by him in his return of income;
ii. other than a heavy goods vehicle, shall be an amount equal to Rs.
4,500 (four thousand five hundred rupees) for every month or part of a
month during which the goods carriage is owned by the assessee in the
previous year or, as the case may be, an amount higher than the
aforesaid amount as declared by him in his return of income.
3. No further deductions u/s 30 to 38: 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:
Salary and interest paid to its partners shall be additionally allowed.
Where the assessee is a firm, the salary and interest paid to its partners
shall be deducted from the income computed under sub-section (1)
subject to the conditions and limits specified in clause (b) of Section 40.
4. WDV of the assets: 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 assessee had claimed and had been
actually allowed the deduction in respect of the depreciation for each of
the relevant assessment years.
5. The provisions of Sections 44AA and 44AB shall not apply insofar 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.
6. Nothing contained in the foregoing provisions of this section shall apply,

where the assessee claims and produces evidence to prove that the
profits and gains from the aforesaid business during the previous year
relevant to the assessment year commencing on the 1st day of April,
1997 or any earlier assessment year, are lower than the profits and
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gains specified in sub-sections (1) and (2), and thereupon the Assessing
Officer shall proceed to make an assessment of the total income or loss
of the assessee and determine the sum payable by the assessee on the
basis of assessment made under sub-section (3) of Section 143.
7. Notwithstanding anything contained in the foregoing provisions of this

section, an assessee may claim lower profits and gains than the profits
and gains specified in sub-sections (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.
i. the expressions “goods carriage” and “heavy goods vehicle” shall have
the meanings respectively assigned to them in Section 2 of the Motor
Vehicles Act, 1988;
ii. an assessee, who is in possession of a goods carriage, whether taken on

hire purchase or on installments 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.
Notes:
a. In above both cases if higher income is returned by the assessee, then

such income too so returned will be taken.
b. No separate deduction will be allowed u/s 30 to 38.
c. No depreciation will be allowed separately and WDV will be deemed to

have been calculated after allowance of depreciation.
d. Provision of Sections 44AA and 44AB shall have no application, so far as

they related to the business referred to aforesaid and in computing
monetary limits under those section, the gross receipts/higher income
will be excluded.
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6.9 SPECIAL PROVISIONS FOR COMPUTING PROFITS AND

GAINS OF RETAIL BUSINESS (SECTION 44AF)
Section 44AF is not applicable from the assessment year 2011-12. Retail
trader (or any other businessman) is covered from the assessment year
2011-12 by Section 44AD.
6.10. SUMMARY – SCHEME OF PRESUMPTIVE INCOME AND

PRESUMPTIVE TAXATION
In the following instances, the income of specified category of Assessee

shall be presumed to be as mentioned below and such Assessee shall not
be required to maintain books of account as may be required by other
Assessee. The accounts shall also not be required to get audited u/s 44AB
of the Act.
Section Category Presumptive Limit of Conditions

Income Turnover Applicable
44AD Special provision @ 8% of total Rs. 60 # 1, 2 and 3
for computing turnover or gross lakhs
profits and gain of receipt
business on
presumptive basis
44AE Business of plying, For heavy vehicles — # 1, 2 and 3
hiring or leasing @ Rs. 5,000/- per
goods carriages month
Carriages up to 10 For light vehicles @
vehicles per year Rs. 4,500/- per
month
44B Shipping business @ 7.5% of Gross — Sections 28 to
in the case of Non- Receipt 43A – Not
residents applicable
44BB Business of @ 10% of Gross — Sections 28 to
exploration, etc. of Receipt 43A – Not
Mineral Oils applicable
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44BBA Business of @ 5% of Gross — Sections 28 to

operation of aircraft Receipt 43A – Not
in the case of Non- applicable
residents
44BBB Foreign companies @ 10% of Gross — Sections 28 to
in business of civil Receipt 44AA – Not
construction/ applicable
erection of plants
etc. in turnkey
power projects
44C Deduction of Head @ 5% of the — —
Office expenditure adjusted total
in case of non- income; OR
residents Expenditure (HO
Expenses) incurred
attributable to the
business in India
whichever is less
44D Royalties and fees Entire expenses if — Sections 28 to
for technical TDS deducted 44AC – Not
services in case of thereon applicable
foreign companies
44DA Royalties and fees Entire expenses if — Sections 28 to
for technical TDS deducted 44AC – Not
services in case of thereon applicable
Non-residents
Conditions Applicable
1. No Deduction u/s 30 to 38 – In case of firms, salary to working partner/

interest to partners to be allowed.
2. No books of account required to be maintained – No Audit required u/s

44AB.
3. If lower income or profit is claimed by assessee than specified by these

presumptive sections, then books of account to be maintained u/s 44AA
and Audit to be done under Section 44AB.
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Special Provision for Computing Deductions in the Case of Business

Reorganization of Co-operative Banks (Section 44DB) [w.e.f.
1.4.2008]
1. In case of business reorganization of a co-operative bank has been

taken place during the financial year, the deduction under Sections 32,
35D, 35DD or 35DDA shall be allowed in accordance with this section.
2. The amount of deduction allowable to the predecessor co-operative

bank under Sections 32, 35D, 35DD or 35DDA shall be determined in
accordance with the formula—
A * B/C
where,
A = the amount of deduction allowable to the predecessor co-operative

bank if the business reorganization had not taken place;
B = the number of days comprised in the period beginning with the 1st
day of the financial year and ending on the day immediately preceding the
date of business reorganization; and
C = the total number of days in the financial year in which the business
reorganization has taken place.
3. The amount of deduction allowable to the successor co-operative bank

under Sections 32, 35D, 35DD or 35DDA shall be determined in
accordance with the formula—
A * B/C
where,
A = the amount of deduction allowable to the predecessor co-operative

bank if the business reorganization had not taken place;
B = the number of days comprised in the period beginning with the date
of business reorganization and ending on the last day of the financial year;
and
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C = the total number of days in the financial year in which the business
reorganization has taken place.
The provisions of Sections 35D, 35DD or 35DDA shall, in case where an

undertaking of the predecessor co-operative bank entitled to the deduction
under the said section is transferred before the expiry of the period
specified therein to a successor co-operative bank on account of business
reorganization, apply to the successor co-operative bank in the financial
years subsequent to the year of business reorganization as they would
have applied to the predecessor co-operative bank, as if the business
reorganization.
Speculative Transaction
“Speculative transaction” means a transaction in which a contract for the
purchase or sale of any commodity, including stocks and shares, is
periodically or ultimately settled otherwise than by the actual delivery or
transfer of the commodity or scrips:
Provided that
a. a contract in respect of raw materials or merchandise entered into by a

person in the course of his manufacturing or merchanting business to
guard against loss through future price fluctuations in respect of his
contracts for actual delivery of goods manufactured by him or
merchandise sold by him; or
b. a contract in respect of stocks and shares entered into by a dealer or

investor therein to guard against loss in his holdings of stocks and
shares through price fluctuations; or
c. a contract entered into by a member of a forward market or a stock

exchange in the course of any transaction in the nature of jobbing or
arbitrage to guard against loss which may arise in the ordinary course of
his business as such member;
d. an eligible transaction in respect of trading in derivatives referred to in

clause (aa) of Section 2 of the Securities Contracts (Regulation) Act,
956 (42 of 1956) carried out in a recognized stock exchange [w.e.f.
1.4.2006 by Finance Act, 2005] shall not be deemed to be a speculative
transaction.
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For the purposes of (d) above, the expressions—
i. “eligible transaction” means any transaction,—
a. carried out electronically on screen-based systems through a stock

broker or sub-broker or such other intermediary registered under
Section 12 of the Securities and Exchange Board of India Act, 1992 (15
of 1992) in accordance with the provisions of the Securities Contracts
(Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange
Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22
of 1996) and the rules, regulations or bye-laws made or directions
issued under those Acts or by banks or mutual funds on a recognized
stock exchange; and
b. which is supported by a time stamped contract note issued by such

stock broker or sub-broker or such other intermediary to every client
indicating in the contract note the unique client identity number allotted
under any Act referred to in sub-clause (A) and permanent account
number allotted under this Act;
iii. “recognized stock exchange” means a recognized stock exchange as

referred to in clause (f) of Section 2 of the Securities Contracts
(Regulation) Act, 1956 (42 of 1956) and which fulfills such conditions as
may be prescribed and notified by the Central Government for this
purpose.
6.11 INCOME FROM UNDISCLOSED SOURCES – TO BE

ADDED IN INCOME
Cash Credit (Section 68)

Where any sum is found credited in the books of account maintained by
the assessee, the assessee is required to give to the Assessing Officer an
explanation about the nature and source of such amount credited.
If the assessee offers no explanation as to its nature and source of such

sum credited or the explanation offered by the assessee is not found
satisfactory in the opinion of the Assessing Officer, then such sum credited
may be charged to Income Tax as income of the assessee of that previous
year.
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Unexplained Investment (Section 69)
Where in a financial year an investment is made but not recorded in the

books of account, if any, maintained by the assessee and
i. the assessee offers no explanation about its nature and source or
ii. such explanation is not satisfactory in the opinion of the Assessing

Officer
then value of such investment may be deemed to be income of the

assessee for that financial year.
Unexplained Money, etc. (Section 69A)

Where in a financial year, the assessee is found to be the owner of any
money, bullion, jewellery on other valuable, and such asset is not recorded
in the books of account, if any maintained by the assessee and he offers no
explanation about its nature and source or the explanation offered is not
satisfactory in the opinion of the Assessing Officer, then such asset may be
deemed to be the income of assessee for such financial year.
Investment, etc., Not Fully Disclosed in Books of Account (Section

69B)
In a financial year, the assessee has made investments or is found to be its
owner, and the Assessing Officer finds that it is not fully recorded in the
books of account and the assessee offers no Explanation regarding such
excess investment which is not recorded in books of account or the same
Explanation is not satisfactory in the opinion of the Assessing Officer, then
the excess may be deemed as income of assessee for that financial year.
Unexplained Expenditure (Section 69C)
In a financial year where an assessee incurs any expenditure and—
• offers no explanation regarding its source or the explanation offered is

not found satisfactory in the opinion of the Assessing Officer then
• the amount of expenditure may be deemed to be income for that

financial year and
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• such expenditure shall not be allowed as a deduction under any head of

Income.
Amount Borrowed or Repaid in Hundies (Section 69D)

The amounts borrowed or repaid on Hundies or bills of exchange are
required to be borrowed or repaid through an account payee cheque drawn
on a bank only.
Where an amount is borrowed or repaid in respect of a Hundi – otherwise

than through an account payee cheque drawn on a bank, such borrowing
or repayment shall be deemed to be income of that person for the previous
year in which it was borrowed/repaid.
If borrowing is so treated as income once, it shall not be assessed again

when repaid. The repayment for these purposes shall also include Interest.
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6.12 SUMMARY
Section 28 describes in details, types of income chargeable to tax under

the head ‘Profits and Gains of Business or Profession’. Term business is
defined under section 2(13) to cover trade, commerce, manufacture or any
concern in the nature of commerce or manufacture. Tax is on profits and
not on gross gains. Several guidelines are provided to determine what
profit and loss is. The Act, further, prescribes methods of accounting to
arrive at profits. Accounting policies adopted are to be defined and
disclosed.
Several deductions are allowed from gross earnings to arrive at profit.

These are explained in great details. Special directions are available to
determine deductions for depreciation including definitions of actual cost
and written down value. Specific provisions are there for treatment of
expenses on scientific research, stores damages, interest on borrowed
capital, etc.
Specific instructions with case laws are provided to determine, what are
revenue expenses which are deductible and capital expenditure which is
not.
Retail trade or leasing of carriages is peculiar businesses and hence special

guidelines are there for arriving at profit.
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1. What is the charging section in respect of Income from Business and

Profession? Mention any three kinds of income that are taxable under
this section.
2. Remuneration to a working partner is taxable under the head ‘Salaries’

or under ‘Income from Business and Profession’? Why?
3. Explain the term ‘Business’.
4. (a) What is (a) trade?

(b) What is commerce?
(c) What is manufacture?
(d) What is Profession?
(e) Explain ‘any adventure or concern in the nature commerce or
manufacture’.
5. Explain nature of speculative transactions in the context of Income from

Business and Profession.
6. Explain the issue of business losses. Under what circumstances can it be

allowed as deduction against business income?
7. What do you understand by method of accounting? Who chooses the

method of accounting?
8. What issues may guide an assessee in choosing a method of

accounting?
9. What are the Accounting Standards prescribed under the Income Tax
Act, 1961?
10.To what extent and in what manner the expenditure incurred on repairs
of premises used for business is available for deduction in determining
the Income from Business and Profession.
11.Explain the distinction between repairs and current repairs?
304
12.What are the methods of depreciation permissible under the Income Tax
Act, 1961? Under what situation, which method of depreciation may be
used?
13.Explain ‘Additional Depreciation’. What are the conditions to be complied

with to avail the Additional Depreciation?
14.Is the claim of Depreciation optional under Income Tax Act, 1961? Why?
15.What do you understand by ‘actual cost’?
16.What is the actual cost of an asset when it is acquired by the assessee

by way of gift or inheritance?
17.When a second-hand asset is acquired for reducing tax liability by

claiming higher depreciation, what shall be its Actual Cost?
18.An asset that once belonged to Assessee and after having been sold to
a third-party, it is once again reacquired by the assessee for use in his
business. What shall be the actual cost of such an asset?
19.What is the actual cost of an asset where any second-hand asset is

acquired by the assessee such that the seller had used it for his
business earlier and had claimed depreciation in respect thereof?
20.When a building that was previously the property of the assessee, is

brought into use for the purpose of his business or profession, what is
the actual cost of such an asset?
21.In case a capital asset is transferred by a holding company to its

subsidiary company and vice versa, what is supposed to be the actual
cost of such asset? In such a case, what mandatory conditions would
apply?
22.What shall be the actual cost of an asset in case of transfer of an asset

by a subsidiary company to its holding company?
23.In a scheme of amalgamation, where there are transfer of assets by the

amalgamating company to the amalgamated company, what implication
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it shall have on the actual cost of assets transferred in a scheme of

amalgamation?
24.A non-resident Indian acquired asset outside India. These assets have
been brought in to India and used for the purposes of his business or
profession. What shall be the actual cost of such asset?
25.“Depreciation of assets is worked out with reference to written down

value of assets under the Income Tax Act, 1961”. State whether true or
false?
26.In the case of assets acquired in the previous year, what shall be the
WDV? On which value shall the depreciation be provided?
27.In case of any block of assets, how is the WDV determined?
28.What do you understand by ‘written down value’?
29.If a Doctor attends a medical conference abroad, what issues shall be

considered for allowability of expenditure incurred in this respect?
30.Discuss briefly the Block of assets and Depreciation allowable on the

Block of assets.
31.Explain the concept of capital and revenue expenditure.
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
307
INCOME FROM CAPITAL GAINS (SECTIONS 45 TO 55)
Chapter 7
Income From Capital Gains
(Sections 45 To 55)
Objectives
• Capital asset
• Short-term and long-term capital gains
• Mode of calculating capital gains
• Cost inflation index
• Rebates on capital gains
Structure
7.1 What is a Capital Asset?

7.2 Short-term Capital Gain [Section 2(47)]
7.3 Capital Gains (Section 45)
7.4 Buyback of Shares (Section 46A)
7.5 Transactions Not Regarded as Transfer (Section 47)
7.6 Mode of Computation of Capital Gains (Section 48)
7.7 Cost with Reference to Certain Modes of Acquisition (Section 49)
7.8 Sale of Asset Where Depreciation Claimed (Section 50)
7.9 Forfeiture of Advance Received (Section 51)
7.10 Concessional Tax Treatment (Section 54)
7.11 Meaning of the Cost of Improvement (Section 55)
7.12 Relevant Provisions of Section 10 Affecting Capital Gains [Section
10(33)]
7.13 Summary
308
Sections 45 to 55A of the Income Tax Act, 1961 deal with capital gains.
Section 45 provides that any profits or gains arising from the transfer of a
capital asset effected in the previous year shall be chargeable to tax under
the head “Capital Gains” and shall be deemed to be the income of the
previous year in which the transfer took place.
So, the following are very pre-requisites of a charge to income tax, of

capital gains under Section 45:
• There must be a Capital Asset.

• The capital asset must have been transferred.
• The transfer must have been effected in the previous year.
• There must be a gain arising on such transfer of a capital asset.
The study of Capital Gains requires certain basic terms to be appreciated.

Capital Gain is leviable in relation to a ‘capital asset’. The term ‘capital
asset’ is defined in Section 2(14) of the Income Tax Act, 1961.
7.1 WHAT IS A CAPITAL ASSET?
Section 2(14) of the Income Tax Act, 1961 defines ‘capital asset’ as any
property of any kind held by an assessee, whether or not connected with
his business or profession, but does not include:
i. any stock-in-trade, consumable stores or raw materials held for the

purposes of his business or profession
ii. 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.
Explanation: For the purposes of this sub-clause, “jewellery” includes—
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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;
iii. 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 according to the last preceding census of
which the relevant figures have been published before the first day of
the previous year; or
b. in any area within such distance, not being more than eight
kilometers, from the local limits of any municipality or cantonment
board referred to in item (a), as the Central Government may, having
the Official Gazette.
iv. 6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defense
Gold Bonds, 1980 issued by the Central Government;
v. Special Bearer Bonds, 1991, issued by the Central Government;
vi. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999
notified by the Central Government;
Thus, in a nutshell, a capital asset is any property whether or not

connected with his business or profession, but does not include—
• any stock-in-trade held in business
• all movable personal effects (wearing apparel, furniture, but excluding

jewellery) held for personal use
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• agricultural land in India beyond eight kilometers of urban area limits
• Gold Bonds, Special Bearer Bonds etc.
Certain terms used in this respect need consideration:
Property
The word ‘property’, used in Section 2(14), is a word of the widest
amplitude and the definition has re-emphasized this by use of the words ‘of
any kind’. Thus, any right which can be called property will be included in
the definition of ‘capital assets’. A contract for sale of land is capable of
specific performance. It is also assignable. A right to obtain conveyance of
immovable ‘property’ is clearly a ‘property’ as contemplated by Section
2(14) [CIT v. Tata Services Ltd. [1980] 122 ITR 594 (Bom.)].
‘Capital asset’ has been defined in Section 2(14) to mean property of any
kind held by an assessee, whether or not connected with his business or
profession, except those specifically excluded. It is clear from the above
definition that for the purpose of this clause, property is a word of the
widest importance and signifies every possible interest which a person can
hold or enjoy except those specifically excluded [Bafna Charitable Trust v.
CIT [1 998] 230 ITR 864 (Bom.)].
Personal Effects
The expression ‘personal effects’ pertain to only those effects which can
legitimately be said to be personal for assessee’s person. In other words,
an intimate connection between the effects and the person of the assessee
must be shown to exist to render them ‘personal effects’. The articles like:
• wearing apparel,
• jewellery,
• furniture.
are some instances of ‘personal effects’. The law intended only those
articles to be included in the definition which were intimately and
commonly used by the assessee [H.H. Maharaja Rana Hemant Singhji v.
CIT [1976] 103 ITR 61 (SC)].
311
‘Agricultural land’ should comprise the following characteristics:
a. It must be a land;
b. It must pertain to or be connected with cultivation;
c. It must involve expenditure of human labour and skill for the purpose
of cultivation or for keeping it in a cultivable state [Tea Estates India
(P.) Ltd. v. CIT [1966] 59 ITR 428 (Cal.)].
Land was held as non-agricultural land where: (i) the assessee purchased 5
acres of land with a hotel building situated in heart of Madras city in 1950;
(ii) two more buildings were built by assessee which were used for
business purposes; (iii) until rest of land was sold in 1967 to various
companies for commercial use, assessee had been raising bananas and
vegetables in land; (iv) land stood recorded in municipal record as
urban land, and (v) land in question was surrounded on all sides by
industries and commercial buildings [CIT v. Gemini Pictures Circuit (P) Ltd.
(1996) 85 Taxman 594 (SC)].
The following guiding factors to be considered while determining the nature

and character of the land:
i. Where the land was classified in the revenue record as agricultural and
whether it was subject to the payment of land revenue, but this factor
alone will not be conclusive.
ii. Whether the land was actually or ordinarily used for agricultural
purposes at or about the relevant time.
iii. Whether such user of the land was for a long period or whether it was of
a temporary character or by way of stop-gap arrangement.
iv. Whether the income derived from the agricultural operations carried on
in the land bore any rational proportion to the investment made in
purchasing the land.
v. Whether the permission under Section 65 of the Bombay Land Revenue

Code was obtained for the non-agricultural use of the lands; if so, when
and by whom; whether such permission was in respect of the whole or a
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portion of the land and if the permission was in respect of a portion of

the land and if it was obtained in past, what was the nature of the user
of the said portion of the land on the material date.
vi. Whether the land on the relevant date, had ceased to be put to the
agricultural use; if so, whether it was put to an alternative use: such
caesar and/or alternative use was of a permanent or temporary nature.
vii.Whether the land, though entered in revenue record, had never been
actually used for agriculture, whether the owner meant or intended to
use it for agricultural purposes.
viii.Whether the land was situated in a developed area; whether its

physical characteristics, surrounding situation and use of the lands in
the adjoining area were such as would indicate that the land was
agricultural.
ix. Whether the land itself was developed by plotting and providing roads
and other facilities.
x. Whether there were any previous sales of portions of the land for non-
agricultural use [CIT v. Siddharth J. Desai (1982) 10 Taxman 1 (Guj.)].
Long-term Capital Asset [Section 2(29A)]

A capital asset which is not a short-term capital asset.
Short-term Capital Asset [Section 2(42A)]
A capital asset held by an assessee for not more than
• In case of share held in a company, any other security listed in a

recognized stock exchange in India units of a Mutual Fund or a
zero coupon bond : 12 months
• In case of other assets held : 36 months
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Thus, the holding period shall be 12/36 months as mentioned above. This
holding period shall need certain adjustments as mentioned below:
i. In determining the period for which any capital asset is held by the
assessee:
How to Reckon/Adjust the Holding

Event
Period?
A In the case of a share held in a Exclude the period subsequent to the
company in liquidation date on which the company goes into
liquidation.
B Where a capital asset becomes Include the period for which the asset
the property of the assessee in was held by the previous owner referred
the circumstances mentioned in to in the said section.
Section 49(1)
C Where the capital asset being a Include the period for which the share or
share or shares in an Indian shares in the amalgamating company
company, which becomes the were held by the assessee.
property of the assessee in
consideration of a transfer
referred to in Section 47(vii)
D In case of right shares originally The period shall be reckoned from the
subscribed or by way of date of allotment of right.
purchase of renouncement of
rights
E Where a right to subscribe to The period shall be reckoned from the
any shares/financial asset, is date of the offer of such right by the
renounced in favour of any other company or institution, as the case may
person be, making such offer.
F In case of a financial asset, The period shall be reckoned from the
allotted without any payment date of the allotment of such financial
and on the basis of holding of asset. Holding period shall be from the
any other financial asset date of the allotment of Bonus shares.
[generally Bonus shares]
G In the case of shares in an Include the period for which the shares
Indian company, which became were held in the demerged company by
the property of the assessee in the assessee.
consideration of a demerger.
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H Trading or clearing rights of a Include the period for which the person
recognized stock exchange in was a member of the recognized stock
India acquired by a person exchange in India immediately prior to
pursuant to demutualization or such demutualization or corporatization.
corporatization of the recognized
stock exchange in India as
referred to in Section 47(xiii)
H-a Where equity shares in a Include the period for which the person
company are allotted pursuant was a member of the recognized stock
to demutualization or exchange in India immediately prior to
corporatization of a recognized such demutualization or corporatization.
stock exchange in India u/s
47(xiii)
H-b Where specified security or The period shall be reckoned from the
sweat equity shares are allotted date of allotment or transfer of such
or transferred by employer specified security or sweat equity
either free of cost or at a shares.
concessional rate, to his
employee
ii. Where the capital assets other than those mentioned in clause (i) are
held, the period for which any capital asset is held by the assessee shall
be determined subject to any rules which the Board may make in this
behalf.
For the purposes of this clause, the expression “security” shall have the
meaning assigned to it in clause (h) of Section 2 of the Securities Contracts
(Regulation) Act, 1956.
For the purpose of this clause, the expressions “specified security” and
“sweat equity shares” shall have the meanings respectively assigned to
them in Explanation to clause (d) of sub-section (1) of Section 115WB.
Video Link 1
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7.2 SHORT-TERM CAPITAL GAIN [Section 2(47)]
“Short-term capital gain” means capital gain arising from the transfer of a
short-term capital asset.
Transfer [Section 2(47)]
Transfer, in relation to a capital asset, includes:
• sale, exchange, or relinquishment of the asset, or
• extinguishment of any rights therein, or
• compulsory acquisition thereof under any law; or
• when capital asset is converted into (or treated as) stock-in-trade by the
owner thereof, in respect of a business carried on by him, such act of
conversion or treatment, or
• the maturity or redemption of zero coupon bond; or
• any transaction involving the allowing of the possession of any

immovable property; or
• any transaction which has the effect of transferring, or enabling the

enjoyment of, any immovable property (by becoming a member of, or
acquiring shares in a co-operative society, company or other AOP or by
way of any agreement or any arrangement or in any other manner).
This definition of ‘Transfer’ is applicable only in relation to a capital asset.

The definition of the expression ‘capital asset’ occurring in Section 2(14) as
well as the extended definition of Transfer occurring in Section 2(47), have
reference only to the assessment of capital gains arising on the transfer of
capital assets [CIT v. Suresh Chandra Jam [1989] 178 ITR 241 (AP)].
Then again, the definition of ‘transfer’ under Section 2(47) is merely

inclusive and does not exhaust other kinds of transfer [Sunil Siddharthbhai
v. CIT/Kartikeya v. Sarabhai v. CIT [1985] 156 ITR 509 (SC)].
316
This definition does not exclude the contextual or the ordinary meaning of
the word ‘transfer’. There are different shades of meaning of the word
‘transfer’, viz., ‘to make over possession of to another’, ‘a delivery of title or
property from one person to another’, ‘to displace from one surface to
another’, ‘removal’ and ‘displace’. Definition of ‘transfer’ in Section 2(47) is
an inclusive one and does not exclude the contextual or the ordinary
meaning of the word ‘transfer’ [CIT v. Narang Dairy Products [1996] 85
Taxman 375/219 ITR 478 (SC)].
Exchange
Transfer of ownership must be mutual – An exchange involves the transfer
of property by one person to another and reciprocally the transfer of
property by the other to the first person. There must be a mutual transfer
of ownership of one thing for the ownership of another [CIT v. Rasiklal
Maneklal (HUF) [1989] 177 ITR 198/43 Taxman 259 (SC)].
Relinquishment
Relinquishment is included within the meaning of the word ‘transfer’ only
for the purpose of levying capital gain tax – Relinquishment is included
within the meaning of the word ‘transfer’ only for the purpose of
assessment to be made for levying Capital gain tax and not for other
purposes [Tamil Nadu Civil Supplies Corporation Ltd. v. CIT [1997] 228 ITR
399 (Mad.)].
Property must continue to exist — A relinquishment takes place when the

owner withdraws himself from the property and abandons his rights
thereto; it presumes that the property continues to exist after the
relinquishment [CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198/43
Taxman 259 (SC)].
Extinguishment of Right
Insurance money received by assessee from insurance company in respect
of loss of a trawler in deep sea was not chargeable to tax as capital gains,
as it could not be said that there was any transfer of capital asset involved
in the complete destruction of the trawler [Union Carbide India Ltd. v. CIT
[1995] 80 Taxman 197 (Cal.)].
As held by the Supreme Court in Vania Silk Mills (P.) Ltd. v. CIT [1991] 191
ITR 647, in cases where an insurance company pays for total loss or
damage of property and takes over property or whatever is left of it, there
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is no transfer for purposes of capital gain under Section 45 [Nullify by

insertion of Section 45(1A)].
Therefore, excess sum of compensation over cost of asset destroyed,

received from insurance company, could not be taken as capital gains
[Marybong & KyeI Tea Industries Ltd. v. CIT [1997] 91 Taxman 11/224 ITR
589 (SC)].
7.3 CAPITAL GAINS (Section 45)
Section 45 is a charging section for capital gains.
Notes:
Section 45(1):
The basic tenets of chargeability of Capital Gains are as under:
• There should be a capital asset.
• The capital asset is transferred by the assessee.
• Such transfer takes place during the previous year.
• Any profit or gain arises as a result of such transfer.
• Such profit or gain is not exempt from tax u/s 54, 54B, 54D, 54EA, 54F,
54G and 54H.
The sections referred to above under which the Capital Gain is exempt are
as under:
Section 54 : Profit on sale of property used for residence
Section 54B : Capital gain on transfer of land used for agricultural

purposes not to be charged in certain cases
Section 54D : Capital gain on compulsory acquisition of lands and

buildings not to be charged in certain cases
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Section 54E : Capital gain on transfer of capital assets not to be charged

in certain cases
Section 54EA : Capital gain on transfer of long-term capital assets not to

be charged in case of investment in specified securities
Section 54F : Capital gain on transfer of certain capital assets not to be
charged in case of investment in residential house
Section 54G : Exemption of capital gains on transfer of assets in cases of

shifting of industrial undertaking from urban area
Section 54H : Extension of time for acquiring new asset or depositing or

investing amount of capital gain
• Activity A
1. Provide live examples of three items each of short-term and long-term

capital gains in company you are familiar with.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
Overview of exemptions from Capital Gains under the above sections is

given later in this chapter.
The terms ‘capital asset’ and ‘transfer’ are explained in the beginning of
this Chapter. The Capital Gain can be levied only with respect to the capital
asset and only upon its transfer by the Assessee.
Section 45(1A): Insurance Claim Received for Damage or

Destruction of a Capital Asset
It is provided that the profits and gains arising from the receipts of an
insurance claim on account of destruction or damage of a capital asset as a
result of fire, flood, earthquake, civil disturbance, war etc. shall be deemed
to be capital gains for the purpose of Section 45 and taxed in the year or
receipt. This amendment is intended to nullify the decision of the Supreme
Court in the case of Vania Silk Mills, 191 ITR 647, which held that there is
no transfer where the asset is destroyed.
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Certain Transactions are Taxed Fictionally
Section 45(2): Converting a Capital Asset into Stock-in-trade
Often a person holds an asset as his capital asset. This is at times

converted into his stock-in-trade. This may be done in order to carry out
business in such asset. Converting a piece of land into stock-in-trade is an
example.
Conversion by the owner of a capital asset into 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.
What is the Full Value of the Consideration in Such Case?

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.
This sub-section has sought to negate the effect of Supreme Court decision
in CIT v. Bai Shirinbai Kooka [46 ITR 86]. The Assessee converted her
capital asset in the stock-in-trade and thereafter its sale was effected as
stock-in-trade. Held by Supreme Court that such conversion of capital
asset to stock-in-trade would not amount to transfer [Bal Shirinbal Kooka
46 ITR 86]. Thus, to discourage this kind of practice, Section 45(2) was
enacted from A.Y. 1985-86. The effect of decision given in the case of Bal
Shirinbai Kooka – 1 (1962) 46 ITR 86 (SC) is reversed from A.Y. 1985-86,
by introduction of Section 45(2).
Section 45(2A): Demat Transactions through Depository
Who is liable to pay tax in case of dematerialized shares?
Not Depository or DP (Depository Participant) but the Beneficiary/

Shareholder is liable to pay Capital Gains on sale of dematerialized shares
– Shares to be treated on FIFO basis.
This provision seeks to address the issues arising out of transactions in

securities in a demat account.
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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.
It shall be chargeable as Capital Gain of the previous year in which such

transfer took place. It shall not be regarded as income of the depository
who is deemed to be the registered owner of securities.
For the purposes of—
i. Section 48 (for computation of capital gains), and
ii. Determining the holding period of shares and securities [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. This would mean
that the security which was acquired first shall be deemed to have been
sold first.
Section 45(3)
Transfer of a capital asset by a person to a firm or other association of
persons or body of individuals 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.
What is the full value of the consideration in such case?
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.
Sub-section (3) provides for charging to tax on the profits or gains arising
from the transfer of a capital asset by a partner to a firm or by a member
to an association of persons or body of individuals or vice versa. Thus, in a
case of transfer of a capital asset by a partner to a firm, or by a member to
an association of persons or a body of individuals, the amount recorded in
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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 as a
result of such transfer. Capital gains will, thus, be amount recorded in the
books less cost of the asset.
Section 45(4): Transfer on the Dissolution of a firm, AOP, BOI etc.
The profits or gains arising from:
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.
What is the full value of the consideration in such case?

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.
In the case of transfer by way of distribution of capital assets by a firm, an

association of persons or a body of individuals, the fair market value of the
asset as on the date of transfer shall be deemed to be the full value of the
consideration as a result of such transfer. Capital gains will, thus, be fair
market value on date of distribution less cost of asset to the partnership.
Section 45(5)
Where the capital gain arises from:
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:
322
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.
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.
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.
Section 45(6): Repurchase Price of the Units Referred to in Sub-

section (2) of Section 80CCB
Notwithstanding anything contained in sub-section (1), the difference

between the repurchase price of the units referred to in sub-section (2) of
Section 80CCB and the capital value of such units shall be deemed to be
the capital gains arising to the assessee in the previous year in which such
repurchase takes place or the plan referred to in that section is terminated
and shall be taxed accordingly.
For the purposes of this sub-section, “capital value of such units” means
any amount invested by the assessee in the units referred to in sub-section
(2) of Section 80CCB.
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Capital Gains on Distribution of Assets by Companies in Liquidation

(Section 46)
Taxable not in the hands of the company under liquidation but in the hands
of shareholder
1. Where the assets of a company are distributed to its shareholders on its

liquidation, such distribution shall not be regarded as a transfer by the
company for the purposes of Section 45.
2. 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 sub-clause (c) of clause (22) of Section 2 and the sum so
arrived at shall be deemed to be the full value of the consideration for
the purposes of Section 48.
7.4 Buyback of Shares (SECTION 46A)
Buyback of shares by a company – Shareholders shall have to pay the tax

on Capital Gains.
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.
A classificatory amendment is made to the effect that on buyback of shares

by a company from its shareholders, the payment made by the company
for the shares will not be taxed as dividend, but will be considered for
taxation of capital gains. Capital gains will be value of consideration
received less cost of acquisition.
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7.5 TRANSACTIONS NOT REGARDED AS TRANSFER

(Section 47)
This section provides for exceptions to the charging Section, i.e., to Section
45. Thus, the instances of transfers listed here do not attract capital gains
under Section 45. Thus, nothing contained in Section 45 shall apply to the
following transfers:
• Any distribution of capital assets on partition of a HUF [Section 47(i)];
• Any transfer of a capital asset under a gift or will or an irrevocable trust

[Section 47(iii)];
• However, the transfer under a gift or an irrevocable trust of a capital

asset being shares, debentures or warrants allotted by a company
directly or indirectly 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 Government in this behalf is not
exempt; it is taxable transfer.
• Any transfer of a capital asset by a company to its 100% Indian

subsidiary company (Such transfer shall not be considered as exempted
transfer if it is transfer of a capital asset made after the 29th day of
February, 1988, as stock-in-trade) [Section 47(iv)];
• Any transfer of a capital asset by a 100% subsidiary company to its

holding company (where the holding company is an Indian company)
[Such transfer shall not be considered as exempted transfer if it is
transfer of a capital asset made after the 29th day of February, 1988, as
stock-in-trade] [Section 47(v)];
• 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 [Section 47(vi)];
• Any transfer, in a scheme of amalgamation, of a capital asset being a

share or shares held in an Indian company, by the amalgamating foreign
company to the amalgamated foreign company, if—
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a. at least 25% of the shareholders of the amalgamating foreign

company continue to remain shareholders of the amalgamated
foreign company, and
b. such transfer does not attract tax on capital gains in the country, in
which the amalgamating company is incorporated [Section 47(via)];
Section 47A prescribes lock-in period for transactions referred u/s

47(iv) and (v). The benefit under Clause (iv) and (v) shall be
withdrawn if the underlying asset is transferred/sold by the Transferee
company within 8 years of such asset being transferred.
As per Section 47(iv) and (v), any transfer of a capital asset by company to its
100% Indian subsidiary company or by subsidiary company to its Indian holding
company is not treated as a transfer and therefore, the profit or gain arising
from such transfer is not charged as capital gains. However, Section 47A
provides that the exemption granted shall be withdrawn in the following
circumstances:
i. If before the expiry of a period of eight years from the date of transfer of the
capital asset referred to in Section 47(iv) or (v), such a capital asset is
converted by the transferee company into by it as, stock-in-trade of its
business or the parent company ceases to hold the whole of the share capital
of the subsidiary company.
ii. Section 47A(ii) is inserted by the Finance Act 1997 with effect from 1.4.1998
whereby capital assets referred by clause (xi) [i.e., membership of
recognized stock exchange] is transferred before expiry of 3 years from the
date of the transfer of a capital asset referred to in the amount received on
transfer is deemed to be capital gain in the year in which such transfer takes
place.
iii. Section 47 has been amended to provide that Section 47 shall not be
applicable in such cases if the stipulated conditions are satisfied. Therefore,
newly inserted sub-Section (3) in Section 47A provides that if the condition
stipulated regarding the succession of proprietary concern of firm by the
company whereby capital gains tax is not levied are not complied with, the
amount of profits and gains arising from the transfer of such capital asset or
intangible asset not charged under Section 47(xiii) or (xiv), shall be deemed
to be profits and gains of the successor company chargeable to tax in the
year in which the infringement takes place. This provision will take effect
from 1st April, 1999.
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• Any transfer in a scheme of Amalgamation of a banking company with a

banking institution sanctioned and brought into force by Central
Government under Section 45(7) of Banking Regulation Act, 1949, of a
capital asset by the banking company to banking institution [Section
47(viaa)];
• Any transfer, in a demerger, of a capital asset by the demerged company

to the resulting company, if the resulting company is an Indian company
[Section 47(vib)];
• Any transfer in a demerger of shares held in Indian company by the

demerged foreign company to the resulting foreign company, if—
a. the shareholders holding 75% in value of both the companies remain

same and
b. such transfer does not attract tax on capital gains in the country in
which the transferee company is incorporated [Section 47(vic)];
• Any transfer in a business reorganization, of a capital asset by the

predecessor co-operative bank to the successor co-operative bank
[Section 47(vica)];
• Any transfer by a shareholder, in a business reorganization, of a capital

asset being a share or shares held by him in the predecessor co-
operative bank if the transfer is made in consideration of the allotment to
him of any share or shares in the successor co-operative
bank.
Explanation: For the purposes of clauses (vica) and (vicb), the

expressions “business reorganization”, “predecessor co-operative bank”
and “successor co-operative bank” shall have the meanings respectively
assigned to them in Section 44DB];
Shares received upon amalgamation/demerger
• 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 [Section
47(vid)];
327
• 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, and
b. the amalgamated company is an Indian company [Section 47(vii)];
Transfer of bonds or GDR by a non-resident to another non-

resident
• Any transfer of a capital asset, being bonds or Global Depository Receipts

referred to in sub-section (1) of Section 115AC, made outside India by a
non-resident to another non-resident [Section 47(viia)];
• Any transfer of agricultural land in India effected before the 1st day of
March, 1970 [Section 47(viii)];
• Any transfer of a capital asset, being any work of art, archaeological,

scientific or art collection, book, manuscript, drawing, painting,
photograph or print, to the Government or a University or the National
Museum, National Art Gallery, National Archives or any such other public
museum or institution as notified by the Central Government in the
Official Gazette to be of national importance or to be re-known
throughout any State or States [Section 47(ix)];
• 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 [Section 47(xa)];
Any transfer of a capital asset, being land of a sick industrial

company, where such sick industrial company is being managed by
its workers’ co-operative in an approved scheme:
• Any transfer of a capital asset, being land of a sick industrial company,

made under a scheme prepared and sanctioned under Section 18 of the
Sick Industrial Companies (Special Provisions) Act, 1985 where such sick
industrial company is being managed by its workers’ co-operative:
328
This shall be so if such transfer is made during the period commencing

from the previous year in which the said company has become a sick
industrial company under sub-section (1) of Section 17 of that Act and
ending with the previous year during which the entire net worth of such
company becomes equal to or exceeds the accumulated losses.
For the purposes of this clause, “net worth” shall have the meaning
assigned to it in clause (ga) of sub-section (1) of Section 3 of the Sick
Industrial Companies (Special Provisions) Act, 1985 [Section 47(xii)];
Transfer by way of conversion of bonds of a company into shares or

debentures of that company:
• 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 [Section 47(x)];
• Any transfer of a capital asset or intangible asset by a firm to a company

as a result of succession of the firm by a company in the business carried
on by the firm, or any transfer of a capital asset to a company in the
course of demutualization or corporatization of a recognized stock
exchange in India as a result of which an association of persons or body
of individuals is succeeded by such company where a sole proprietary
concern is succeeded by a company in the business carried on by it as a
result of which the sole proprietary concern sells or otherwise transfers
any capital asset or intangible asset to the company where:
a. all assets/liabilities are transferred;
b. shares are allotted for this;
c. all the partners of the firm immediately before the succession

become the shareholders of the company in the same proportion in
which their capital accounts stood in the books of the firm on the
date of the succession;
d. the partners of the firm do not receive any consideration or benefit,

directly or indirectly, in any form or manner, other than by way of
allotment of shares in the company;
329
e. the aggregate of the shareholding in the company of the partners of

the firm is not less than 50% of the total voting power in the
company and their shareholding continues to be as such for a period
of five years from the date of the succession;
f. the corporatization of a recognized stock exchange in India is carried

out in accordance with a scheme for demutualization or
corporatization which is approved by the Securities and Exchange
Board of India established under Section 3 of the Securities and
Exchange Board of India Act, 1992 [Section 47(xii)];
Transfer of membership right by member of a recognized stock

exchange in a scheme for demutualization or corporatization of
that Exchange:
• Any transfer of a capital asset being a membership right held by a

member of a recognized stock exchange in India for acquisition of shares
and trading or clearing rights acquired by such member in that
recognized stock exchange in accordance with a scheme for
demutualization or corporatization which is approved by the Securities
and Exchange Board of India established under Section 3 of the
Securities and Exchange Board of India Act, 1992 [Section 47(xiiia)];
• Any transfer of a capital asset or intangible asset by a private

company or unlisted public company (hereafter in this clause
referred to as the company) to a limited liability partnership or any
transfer of a share or shares held in the company by a shareholder as a
result of conversion of the company into a limited liability partnership in
accordance with the provisions of Section 56 or Section 57 of the Limited
Liability Partnership Act, 2008 (6 of 2009):
Provided that—
a. all the assets and liabilities of the company immediately before the
conversion become the assets and liabilities of the limited liability
partnership;
b. all the shareholders of the company immediately before the conversion
become the partners of the limited liability partnership and their capital
contribution and profit sharing ratio in the limited liability partnership
330
are in the same proportion as their shareholding in the company on the

date of conversion;
c. the shareholders of the company do not receive any consideration or

benefit, directly or indirectly, in any form or manner, other than by way
of share in profit and capital contribution in the limited liability
partnership;
d. the aggregate of the profit sharing ratio of the shareholders of the

company in the limited liability partnership shall not be less than fifty
per cent at any time during the period of five years from the date of
conversion;
e. the total sales, turnover or gross receipts in the business of the

company in any of the three previous years preceding the previous year
in which the conversion takes place does not exceed sixty lakh rupees;
and
f. no amount is paid, either directly or indirectly, to any partner out of

balance of accumulated profit standing in the accounts of the company
on the date of conversion for a period of three years from the date of
conversion.
Explanation: For the purposes of this clause, the expressions “private

company” and “unlisted public company” shall have the meanings
respectively assigned to them in the Limited Liability Partnership Act, 2008
(6 of 2009) [Section 47(xiiib)];
Sole proprietary concern – succeeded by a company – SIP transfers

capital asset or intangible asset to the company:
• Where a sole proprietary concern is succeeded by a company in the

business carried on by it as a result of which the sole proprietary concern
sells or otherwise transfers any capital asset or intangible asset to the
company:
Conditions to be fulfilled for this:
331
a. all the assets and liabilities of the sole proprietary concern relating to
the business immediately before the succession become the assets and
liabilities of the company;
b. the shareholding of the sole proprietor in the company is not less than
50% of the total voting power in the company and his shareholding
continues to remain as such for a period of five years from the date of
the succession; and
c. the sole proprietor does not receive any consideration or benefit,

allotment of shares in the company [Section 47(xiv)].
• Transfer in a scheme for lending of securities – made under agreement/

arrangement – scheme/agreement with the borrower – which is subject
to the guidelines issued by the SEBI or RBI:
Any transfer in a scheme for lending of any securities under an

agreement or arrangement, which the assessee has entered into with
the borrower of such securities and which is subject to the guidelines
issued by the Securities and Exchange Board of India, established
under section 3 of the Securities and Exchange Board of India Act,
1992 or the Reserve Bank of India constituted under sub-section (1) of
Section 3 of the Reserve Bank of India Act, 1934, in this regard
[Section 47(xv)].
• Any transfer of a capital asset in a transaction of reverse mortgage under

a scheme made and notified by the Central Government [Section
47(xvi)].
332
Section 47A
Withdrawal of exemption given u/s 47 in certain cases
As per Section 47(iv) and (v), any transfer of a capital asset by company
to its 100% Indian subsidiary company or by subsidiary company to its
Indian holding company is not treated as a transfer and therefore, the
profit or gain arising from such transfer is not charged as capital gains.
However, Section 47A provides that the exemption granted shall be
withdrawn in the following circumstances:
i. if before the expiry of a period of eight years from the date of transfer
of the capital asset referred to in Section 47(iv) or (v) such a capital
asset is converted by the transferee company into by it as, stock-in-
trade of its business or the parent company ceases to hold the whole of
the share capital of the subsidiary company.
ii. Section 47A(ii) is inserted by the Finance Act 1997 with effect from
1.4.1998 whereby capital assets referred by clause (xi) [i.e.,
membership of recognized stock exchange] is transferred before expiry
of three years from the date of the transfer of a capital asset referred to
in the amount received on transfer is deemed to be capital gain in the
year in which such transfer takes place.
iii. Section 47 has been amended to provide that Section 47 shall not be
applicable in such cases if the stipulated conditions are satisfied.
Therefore, newly inserted sub-section (3) in Section 47A provides that if
the condition stipulated regarding the succession of proprietary concern
of firm by the company whereby capital gains tax is not levied are not
complied with, the amount of profits and gains arising from the transfer
of such capital asset or intangible asset not charged under Section
47(xiii) or (xiv), shall be deemed to be profits and gains of the
successor company chargeable to tax in the year in which the
infringement takes place. This provision will take effect from 1st April,
1999.
iv. Where any of the conditions laid down in the proviso to clause (xiiib) of
Section 47 are not complied with, the amount of profits or gains arising
from the transfer of such capital asset or intangible assets or share or
shares not charged under Section 45 by virtue of conditions laid down in
333
the said proviso shall be deemed to be the profits and gains chargeable
to tax of the successor limited liability partnership or the shareholder of
the predecessor company, as the case may be, for the previous year in
which the requirements of the said proviso are not complied with. This
provision has been inserted from 01.04.2011.
7.6 MODE OF COMPUTATION OF CAPITAL GAINS (Section

48)
The income chargeable under the head “Capital gains” shall be computed,
by deducting from the full value of the consideration received or accruing
as a result of the transfer of the capital asset the following amounts,
namely:
i. expenditure incurred wholly and exclusively in connection with such

transfer;
ii. the cost of acquisition of the asset and the cost of any improvement
thereto.
However, in the 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 utilized 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:
Provided further that where long-term capital gain arises from the transfer
of a long-term capital asset, other than capital gain arising to a non-
resident from the transfer of shares in, or debentures of, an Indian
company referred to in the first proviso, the provisions of clause (ii) shall
have effect as if for the words “cost of acquisition” and “cost of any
improvement”, the words “indexed cost of acquisition” and “indexed cost of
any improvement” had respectively been substituted:
334
Provided also that nothing contained in the second proviso shall apply to
the long-term capital gain arising from the transfer of a long-term capital
asset being bond or debenture other than capital indexed bonds issued by
the Government:
Provided also that where shares, debentures or warrants referred to in the

proviso to clause (iii) of Section 47 are transferred under a gift or an
irrevocable trust, the market value on the date of such transfer shall be
deemed to be the full value of consideration received or accruing as a
result of transfer for the purposes of this section:
Provided also that no deduction shall be allowed in computing the income

chargeable under the head “Capital gains” in respect of any sum paid on
account of securities transaction tax under Chapter VII of the Finance (No.
2) Act, 2004.
Explanation: For the purposes of this section,—
i. “foreign currency” and “Indian currency” shall have the meanings

respectively assigned to them in Section 2 of the Foreign Exchange
Regulation Act, 1973 (46 of 1973);
ii. the conversion of Indian currency into foreign currency and the
reconversion of foreign currency into Indian currency shall be at the rate
of exchange prescribed in this behalf;
iii. “indexed cost of acquisition” means an amount which bears to the cost
of acquisition the same proportion as Cost Inflation Index for the year in
which the asset is transferred bears to the Cost Inflation Index for the
first year in which the asset was held by the assessee or for the year
beginning on the 1st day of April, 1981, whichever is later;
iv. “indexed cost of any improvement” means an amount which bears to

the cost of improvement the same proportion as Cost Inflation Index for
the year in which the asset is transferred bears to the Cost Inflation
Index for the year in which the improvement to the asset took place;
v. “Cost Inflation Index”, in relation to a previous year, means such Index

as the Central Government may, having regard to 75% of average rise
in the Consumer Price Index for urban non-manual employees for the
335
immediately preceding previous year to such previous year, by

notification in the Official Gazette, specify, in this behalf.
Video Link 1
Video Link 2
Working of Capital Gains – The Broad Structure
1 Gross Consideration for Sale of old asset XXXX

2 Less: Expenses incurred to effect the transfer
• Transfer charges X
• Brokerage/Commission expenses X
• Legal fees, etc. X
3 Net Consideration for Sale of old asset XXX
4 Less:
5 (a) Indexed Cost of Old Asset XXXX
6 (b) Indexed Cost of Improvements to the Asset XXXX
7 Total Indexed Cost (5 + 6) XXXX
8 Capital Gains (3 – 7) XX
Some Concepts Relevant to Section 48

Cost of improvement – To bring an expenditure within the meaning of ‘cost
of improvement’, the expenditure in making the addition and alteration to
the capital asset has to be an expenditure of capital nature [Industrial
Credits and Development Syndicate Ltd. v. CIT [2001] 251 ITR 720].
Deductions for Expenditure

Expenditure on removing encumbrance to transfer is deductible – Where
the assessee paid a certain sum to his son who had instituted a suit
seeking injunction restraining the assessee from selling a property, so as to
remove the encumbrance prior to selling that property, the said sum was
deductible [CIT v. Abrar Alvi [2001] 247 ITR 312 (Bom.)].
336
Payments to tenants for vacating premises are deductible – Expenditure

incurred by the assessee towards amounts paid to tenants for vacating the
premises which is sold has nexus with the transaction of sale, since without
the tenants vacating the premises the building cannot be sold. The said
expenditure would hence be allowable as deduction in the computation of
capital gains [Naozar Chenoy v. CIT [1998] 234 ITR 95 (AP)].
Legal expenses in compulsory acquisition cases are deductible – Legal

expenses incurred for obtaining compensation in compulsory acquisition
cases are deductible [CIT v. R. Ranga Setty (supra)]. Also, see CIT v. Dr. P.
Rajendran [1981] 127 ITR 810 (Ker.)/CIT v. Smt. M. Subaida Beevi [1986]
160 ITR 557 (Ker.)/V.A. Vasumathiv v. CIT [1980] 123 ITR 94 (Ker.).
Where a landlord entered into agreement for sale with third parties in
respect of lands owned by him which were in possession of tenants, and
the vendees insisted on getting vacant, possession amounts paid by the
landlord to the tenants for getting the land vacated are deductible in the
computation of capitals gains [CIT v. A. Venkataraman [1982] 137 ITR
846 (Mad.)].
Proviso (I)
Scheme of determining the Capital Gain in case of a non-resident assessee
earned from transfer of shares/debentures in an Indian company:
For a non-resident assessee – capital gains from transfer of shares/

debentures in 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 utilized 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.
337
The above scheme of determining the Capital Gain in case of a non-

resident assessee earned from transfer of shares/debentures in an Indian
company would go as under:
Amount of consideration XXXX All these figures converted into

foreign currency in which
shares were originally
purchased
Less: Expenses incurred wholly and XX At the rates prescribed by the
exclusively for the transfer government for this purpose
Less: Cost of shares XXX
.=Capital Gain in Foreign Currency XXXX
The Capital Gain arrived at as above, in foreign currency are to be

reconverted into Indian Currency. The aforesaid conversion and
reconversion is applicable to subsequent reinvestment of sale proceeds and
subsequent sale also.
Notes:
1. The benefit of deduction of indexed cost of acquisition is not available in

the aforesaid case.
2. The aforesaid procedure is applicable even in the case of short-term

capital gain.
Proviso (ii):
Long-term capital asset – when transferred – and Long-term capital
gain arises [other than capital gain arising to a non-resident from the
transfer of shares in, or debentures of, an Indian company discussed above
in the provisions of clause (ii)] for computing the long-term capital
gain:
“Cost of acquisition” means “indexed cost of acquisition”
And
“Cost of any improvement” means “indexed cost of any improvement”.
338
Simply stated, for working of long-term capital gains, indexing

shall be applied. In other words, indexing shall not be available for
Short-term Capital Gain.
Proviso (iii):
Provided also that nothing contained in the second proviso shall apply to
the long-term capital gain arising from the transfer of a long-term capital
asset being bond or debenture other than capital indexed bonds issued by
the Government.
Thus, in respect of long-term bond or debenture (other than capital

indexed bonds issued by the Government), indexing shall not apply.
Proviso (iv):
Provided also that where shares, debentures, or warrants referred to in the
proviso to clause (iii) of Section 47 are transferred under a gift or an
irrevocable trust, the market value on the date of such transfer shall be
deemed to be the full value of consideration received or accruing as a
result of transfer for the purposes of this section.
Certain Important Terms under Section 48
Explanation:
i. Foreign Currency and Indian Currency: Same meaning as per FERA,

1973.
ii. Conversion and Reconversion into Foreign Currency. This

conversion would be made at the rate of exchange prescribed by the
Government in this behalf.
iii. “Indexed Cost of Acquisition”

Cost Inflation Index in the year of transfer
= Cost of Acquisition ×
Cost Inflation Index in the year of purchase of asset or
Assessment Year 1981- 82 whichever is later
339
iv. “Indexed Cost of Improvement”

Cost Inflation Index in the Year of Transfer
= Cost of Improvement ×
Cost Inflation Index in the Year of Im provement
v. Cost Inflation Index
It is the index which the Central Government may notify in the Official
Gazette, having regard to seventy-five per cent of average rise in the
consumer price index for urban non-manual employees for that year.
Indexed Cost of Acquisition
“Indexed cost of acquisition” means an amount which bears to the cost

of acquisition the same proportion as Cost Inflation Index for the year in
which the asset is transferred bears to the Cost Inflation Index for the first
year in which the asset was held by the assessee or for the year beginning
on the 1st day of April, 1981, whichever is later.
“Cost Inflation Index”, in relation to a previous year, means such Index

as the Central Government may, having regard to 75% of average rise in
the Consumer Price Index for urban non-manual employees for the
immediately preceding previous year to such previous year, by notification
in the Official Gazette, specify, in this behalf.
Financial Year Cost Inflation Index

1981-82 100
1982-83 109
1983-84 116
1984-85 125
1985-86 133
1986-87 140
1987-88 150
1988-89 161
1989-90 172
1990-91 182
340
1991-92 199
1992-93 223
1993-94 244
1994-95 259
1995-96 281
1996-97 305
1997-98 331
1998-99 351
1999-2000 389
2000-2001 406
2001-2002 426
2002-2003 447
2003-2004 467
2004-2005 480
2005-2006 497
2006-2007 519
2007-2008 551
2008-2009 582
2009-2010 632
2010-2011 711
2011-2012 785
341
7.7 COST WITH REFERENCE TO CERTAIN MODES OF

ACQUISITION (SECTION 49)
1. Where the capital asset became the property of the assessee
i. on any distribution of assets on the total or partial partition of a

Hindu undivided family;
ii. under a gift or will;
iii. (a) by succession, inheritance or devolution, or
(b)on any distribution of assets on the dissolution of a firm, body of

individuals, or other association of persons, where such
dissolution had taken place at any time before the 1st day of
April, 1987, or
(c)on any distribution of assets on the liquidation of a company, or
(d)under a transfer to a revocable or an irrevocable trust, or
(e)under any such transfer as is referred to in clause (iv) or clause

(v) or clause (vi) or clause (via)] or clause (viaa) of Section 47;
iv. such assessee being a Hindu undivided family, by the mode referred to
in sub-section (2) of Section 64 at any time after the 31st day of
December, 1969,
the cost of acquisition of the asset shall be deemed to be the cost for which
the previous owner of the property acquired it, as increased by the cost of
any improvement of the assets incurred or borne by the previous owner or
the assessee, as the case may be.
Explanation: In this sub-section, the expression “previous owner of the

property” in relation to any capital asset owned by an assessee means the
last previous owner of the capital asset who acquired it by a mode of
acquisition other than that referred to in clause (i) or clause (ii) or clause
(iii) or clause (iv)] of this sub-section.
342
2. Where the capital asset being a share or shares in an amalgamated

company which is an Indian company became the property of the
assessee in consideration of a transfer referred to in clause (vii) of
Section 47, the cost of acquisition of the asset shall be deemed to be
the cost of acquisition to him of the share or shares in the
amalgamating company.
(2A) Where the capital asset, being a share or debenture in a

company, became the property of the assessee in consideration of a
transfer referred to in clause (x) of Section 47, the cost of acquisition of
the asset to the assessee shall be deemed to be that part of the cost of
debenture, debenture stock or deposit certificates in relation to which
such asset is acquired by the assessee.
(2AA) Where the capital gain arises from the transfer of the shares,
debentures or warrants, the value of which has been taken into account
while computing the value of perquisite under clause (2) of Section 17,
the cost of acquisition of such shares, debentures or warrants shall be
the value under that clause.
(2AAA) Where the capital asset, being rights of a partner referred to in

Section 42 of the Limited Liability Partnership Act, 2008 (6 of 2009),
became the property of the assessee on conversion as referred to in
clause (xiiib) of Section 47, the cost of acquisition of the asset shall be
deemed to be the cost of acquisition to him of the share or shares in the
company immediately before its conversion.
(2AB) Where the capital gain arises from the transfer of specified
security or sweat equity shares, the cost of acquisition of such security
or shares shall be the fair market value which has been taken into
account while computing the value of fringe benefits under clause (ba)
of sub-section (1) of Section 115WC.
(2C) The cost of acquisition of the shares in the resulting company shall
be the amount which bears to the cost of acquisition of shares held by
the assessee in the demerged company 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.
343
(2D) The cost of acquisition of the original shares held by the

shareholder in the demerged company shall be deemed to have been
reduced by the amount as so arrived at under sub-section (2C).
Explanation: For the purposes of this section, “net worth” shall mean
the aggregate of the paid-up share capital and general reserves as
appearing in the books of account of the demerged company
immediately before the demerger.
(2E) The provisions of sub-section (2), sub-section (2C) and sub-section

(2D) shall, as far as may be, also apply in relation to business
reorganization of a co-operative bank as referred to in Section 44DB.
3. Notwithstanding anything contained in sub-section (1), where the

capital gain arising from the transfer of a capital asset referred to in
clause (iv) or, as the case may be, clause (v) of Section 47 is deemed to
be income chargeable under the head “Capital gains” by virtue of the
provisions contained in Section 47A, the cost of acquisition of such asset
to the transferee company shall be the cost for which such asset was
acquired by it.
4. Where the capital gain arises from the transfer of a property, the value
of which has been subject to income tax under clause (vii) [or clause
(viia)] of sub-section (2) of Section 56, the cost of acquisition of such
property shall be deemed to be the value which has been taken into
account for the purposes of the said clause (vii) or clause (viia)].
Notes:
In each of the cases referred to in Section 49(1)(i) to (iv), the assessee
who holds and then sells the capital asset is not likely to have spent money
for acquiring the asset. The person from whom he acquired the asset must
have paid for that asset. Again, in respect of the cost of improvement, if
any, either that person or the assessee himself might have paid. So, the
cost of acquisition in such cases shall be deemed to be:
• cost for which the previous owner of the property acquired the asset
PLUS
• the cost of any improvement of the assets incurred or borne by the

previous owner or the assessee.
344
The previous owner of the property in relation to any capital asset owned
by an assessee means the last previous owner of the capital asset who
acquired it by paying for it.
Other instances in such category are:
Event Deemed Cost of Acquisition

Section 49(2):
Where the share or shares in an The cost of acquisition to him of the
amalgamated company (which is an share or shares in the amalgamating
Indian company) became the property company.
of the assessee in consideration of a
transfer referred to in Section 47(vii).
Section 47(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, and
b. the amalgamated company is an

Indian company.
Section 49(2A):
Where a share or debenture in a That part of the cost of debenture,
company, became the property of the debenture stock or deposit certificates
assessee in consideration of a transfer in relation to which such asset is
referred to in Section 47(x). acquired by the assessee.
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.
345
Section 49(2AA):
Where the capital gain arises from the The cost of acquisition of such security
transfer of specified security or sweat or shares shall be the fair market value
equity share referred to in Section which has been taken into account for
17(2)(vi). that clause, i.e., Section 17(2)(vi).
Section 49(2AB):
Where the capital gain arises from the The cost of acquisition of such security
transfer of specified security or sweat or shares shall be the fair market value
equity share referred to in Section which has been taken into account for
115WC(1)(ba). that clause, i.e., Section 115WC(1)
(ba).
Section 49(2C):
Demerger – Shares acquired in The cost of acquisition of the shares in
resulting company upon demerger. the resulting company shall be the
amount which bears to the cost of
acquisition of shares held by the
assessee in the demerged company
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.
Section 49(2D):
Original shares held by the shareholder The cost of acquisition of the original
in the demerged company. shares held by the shareholder in the
demerged company shall be deemed to
have been reduced by the amount as
so arrived at under sub-section (2C).
Fiction of Section 49 applies only to specified situations – The legal

fiction created by Section 49 applies only to the situations set out therein.
If the situation is not contemplated in terms by Sections 49 or 55, the
actual cost of acquisition alone could be taken into account. If the actual
cost was nil, the nil figure must be taken into account [CIT v. Trikamlal
Maneklal (HUF) [1987] 168 ITR 733 (Bom.)].
346
Assets received under gift – Where A acquired agricultural lands in

1961, and after converting them into non-agricultural use in 1962 gifted
the lands to B in 1966, and later B sold them, the cost of acquisition under
section 49(1)(ii) would be the amount originally paid by A, and not the
value on the date of conversion or on the date of gift [B.N. Vyas v. CIT
[1986] 159 ITR 141 (Guj.)].
Assets received under family settlement – In a partition, the

consideration for the partition is the mutual relinquishment of the rights of
the parties in the joint family properties in which each has a share. The
fact that the daughters have a right to maintenance and marriage
expenses and would have been entitled to a share at a partition does not
render the value of the shares allotted to them under a settlement deed,
the price for which they had sold or relinquished their right over the
properties of the family. The family settlement in this context is analogous
to a partition. Therefore, where the assessee received certain shares under
a settlement effected by her father, and subsequently sold the shares, it is
the cost to the previous owner (father) that is to be taken into account as
the cost of acquisition of the shares and not the amount mentioned in the
family settlement deed by the settler [CIT v. Shanthi Chandran [2000] 241
ITR 371 (Mad.)].
7.8 SALE OF ASSET WHERE DEPRECIATION CLAIMED

(SECTION 50)
Special Provision for Computation of Capital Gains in Case of

Depreciable Assets
Notwithstanding anything contained in clause (42A) of Section 2, where the

capital asset is an asset forming part of a block of assets in respect of
which depreciation has been allowed under this Act or under the Indian
Income Tax Act, 1922 (11 of 1922), the provisions of Sections 48 and 49
shall be subject to the following modifications:
1. where the full value of the consideration received or accruing as a result

of the transfer of the asset together with the full value of such
consideration received or accruing as a result of the transfer of any
other capital asset falling within the block of the assets during the
previous year, exceeds the aggregate of the following amounts, namely:
347

transfer or transfers;
ii. the written down value of the block of assets at the beginning of the
previous year; and
iii. the actual cost of any asset falling within the block of assets acquired
during the previous year, such excess shall be deemed to be the
capital gains arising from the transfer of short-term capital assets;
2. where any block of assets ceases to exist as such, for the reason that all
the assets in that block are transferred during the previous year, the
cost of acquisition of the block of assets shall be the written down value
of the block of assets at the beginning of the previous year, as increased
by the actual cost of any asset falling within that block of assets,
acquired by the assessee during the previous year and the income
received or accruing as a result of such transfer or transfers shall be
deemed to be the capital gains arising from the transfer of short-term
capital assets.
Where the capital asset is an asset forming part of a block of assets in

respect of which depreciation has been allowed under this Act, the
excess over WDV shall be the short-term capital gains.
In such a situation, the provisions of Sections 48 and 49 shall be subject

to the following modifications:
• Where all the assets in the block are not sold/transferred during
the year [Section 50(1)]:
Where the full value of the consideration received or accruing as a result of

the transfer of the asset together with the full value of such consideration
received or accruing as a result of the transfer of any other capital asset
falling within the block of the assets during the previous year, exceeds the
aggregate of the following amounts, namely:

transfer or transfers;
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ii. the written down value of the block of assets at the beginning of the
previous year; and
iii. the actual cost of any asset falling within the block of assets acquired
during the previous year, such excess shall be deemed to be the capital
gains arising from the transfer of short-term capital assets;
• Where all the assets in the block are sold/transferred during the
year [Section 50(2)]:
Where any block of assets ceases to exist as such, for the reason that all
the assets in that block are transferred during the previous year, the cost
of acquisition of the block of assets shall be the written down value of the
block of assets at the beginning of the previous year, as increased by the
actual cost of any asset falling within that block of assets, acquired by the
assessee during the previous year; and the income received or accruing as
a result of such transfer or transfers shall be deemed to be the capital
gains arising from the transfer of short-term capital assets.
Section 50(1): Where One of the Assets in the Block Sold
a. Where selling price > cost of block of asset, short-term capital gain =
Selling price of Asset x x
Less: WDV of block on 1st day of previous year x x
Less: Cost of additional assets acquired in that during

previous year x x
Less: Expenses in connection with transfer, i.e., brokerage,

commission, legal expenses, etc. x x
Short-term Capital Gain x x
b. When selling price < cost of block of asset, there is no question of

capital gains. It shall give rise to Capital loss.
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Section 50(2): When the Entire Blocks is Sold
a. Selling price > cost of block of assets, short-term capital gain calculated
above.
b. Selling price < cost of block of assets, short-term capital loss will be
allowed. It can be worked out in the same manner as show above.
Special Provision for Cost of Acquisition in Case of Depreciable

Asset – Power Generating/Distribution Units (Section 50A)
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) of Section 43, of the asset, as
adjusted, shall be taken as the cost of acquisition of the asset.
The recently inserted Section 50A (with effect from 1st April, 1998)
provides that the provisions of Sections 48 and 49 shall apply subject to
the modification that the written down value as defined in clause (6) of
Section 43 of the asset, as adjusted, shall be taken as the cost of
acquisition of the asset in respect of which a deduction on account of
depreciation under Section 32(1)(i) has been obtained by the assessee in
any previous year.
Slump Sale of Business (Section 50B)
Special provision for computation of capital gains in case of slump sale.
1. Any profits or 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 long-term capital assets and shall be deemed to be the
income of the previous year in which the transfer took place:
Provided that any profits or gains arising from the transfer under the
slump sale of any capital asset being one or more undertakings owned
and held by an assessee for not more than thirty-six months immediately
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preceding the date of its transfer shall be deemed to be the capital gains
arising from the transfer of short-term capital assets.
2. In relation to capital assets being an undertaking or division transferred

by way of such sale, the “net worth” of the undertaking or the division,
as the case may be, shall be deemed to be the cost of acquisition and
the cost of improvement for the purposes of Sections 48 and 49 and no
regard shall be given to the provisions contained in the Second proviso
to Section 48.
3. Every assessee, in the case of slump sale, shall furnish in the prescribed
form along with the return of income, a report of an accountant as
defined in the Explanation below sub-Section (2) of Section 288,
indicating the computation of the net worth of the undertaking or
division, as the case may be, and certifying that the net worth of the
undertaking or division, as the case may be, has been correctly arrived
at in accordance with the provisions of this Section.
Explanation 1: For the purposes of this section, “net worth” shall be the
aggregate value of total assets of the undertaking or division as reduced by
the value of liabilities of such undertaking or division as appearing in its
books of account:
Provided that any change in the value of assets on account of revaluation

of assets shall be ignored for the purposes of computing the net worth.
Explanation 2: For computing the net worth, the aggregate value of total
assets shall be—
a. in the case of depreciable assets, the written down value of the block of
assets determined in accordance with the provisions contained in sub-
item (C) of item (,) of sub-clause (c) of clause (6) of Section 43;
b. in the case of capital assets in respect of which the whole of the

expenditure has been allowed or is allowable as a deduction under
Section 35AD, nil; and
c. in the case of other assets, the book value of such assets.
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Discussion:
• Any profits from the slump sale are chargeable long-term capital gain.
• If business is held for less than 36 months, then it shall be taxable as

Short-term Capital Gain (STGC).
The concept of slump sale is sought to be recognized by proposing that the

profit arising on sale of one or more undertakings would be chargeable to
tax as long-term capital gains in the year of transfer, if the undertaking(s)
have been owned and held by the assessee for at least 36 months before
the date of transfer, or as short-term capital gains if held for a shorter
period.
A slump sale has been defined as a sale of one of more undertaking for a
lump sum consideration without values being assigned to individual assets
and liabilities. Determination of value of any asset or liability for the
purpose of stamp duty, registration fee, or similar tax or fee would not be
regarded as assignment of values to individual assets.
The net worth of the undertaking transferred would be regarded as the

cost of acquisition and improvement. No indexation would be allowed in
respect of such cost. The computation of the net worth has to be certified
by a Chartered Accountant.
The definition “net worth” has been borrowed from Section 3(1)(ga) of the
Sick Industrial Companies (Special Provisions) Act, 1985.
For Calculating Net Worth

The written down value of the block of assets would have to be reduced by
the cost less depreciation allowable (effectively WDV determined for each
asset separately) of the assets transferred, such deduction being restricted
to the written down value.
The WDV in case of capital assets in respect of which the whole of the
expenditure has been allowed or allowable as a deduction under Section
35AD would be taken as NIL.
And in case of other assets, book value will be considered.
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A Special Provision for Full Value of Consideration in Certain Cases

(Section 50C)
Section 50C is applicable if the following conditions are satisfied—
1. There is transfer of land or building or both. The asset may be long-

term capital asset or short-term capital asset. It may depreciable or
non-depreciable asset.
2. The sale consideration is less than value adopted by any authority of a

State Government for the purpose of payment of stamp duty in respect
of such transfer.
Consequences if the above conditions are satisfied—
If the above conditions are satisfied, the value adopted by the stamp duty
authority shall be taken as full value of consideration for the purpose of
computation of capital gains. The ‘full value of consideration’ in different
situations will be—
Different Situations Full Value of Consideration for the

Purpose of Capital Gain
Where the assessee accepts the value Value adopted by stamp duty authority
adopted by stamp duty authority. is taken as full value of consideration.
Where the assessee has disputed value The stamp duty valuation as finally
adopted by stamp duty authority under accepted for stamp duty purpose is
Stamp Act (i.e., stamp duty taken as full value of consideration.
proceedings).
Where the assessee claims that value • Fair market value determined by the
adopted by stamp duty authority is Department Valuation Officer (if it is
more than the fair market value (but less than stamp duty valuation) is
he has not disputed such valuation in taken as full value of consideration.
stamp duty proceedings).
• Stamp duty valuation (if fair market
value determined by Department
Valuation Officer is more than stamp
duty valuation) is taken as full value
of consideration.
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7.9 FORFEITURE OF ADVANCE RECEIVED (SECTION 51)
Advance Money Received
Where any capital asset was on any previous 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.
It may be observed that only when the advance money has been: (a)
received and (b) retained or forfeited by the assessee, then only it has to
be deducted from the cost of the asset. If such an advance was received
and retained by any previous owner, the same shall not be deducted from
the cost of the asset.
Video Link 1
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7.10 CONCESSIONAL TAX TREATMENT (SECTION 54)
In the following cases, the Capital Gains are not chargeable to tax if the
conditions regarding reinvestment of net proceeds/capital gains are
satisfied.
Sections
Section 54 Profit on sale of property used for residence
Section 54B Capital gain on transfer of land used for agricultural

purposes not to be charged in certain cases
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Section Asset Assessee Holding Whether Other Quantum

Period Reinvestment Conditions
of Necessary – Incidents
Original Time Limit
Assets
54 Residential Individual 3 years Yes — In Refer The amount of
House / HUF Residential Notes 1, 2, gains, or the
Property House, within 10, 11 and cost of new
1 year before, 12 asset,
or 2 years whichever is
after the date lower.
of transfer (if
purchased) or
3 years after
the date of
transfer (if
constructed).
54B Agricultural Individual Use for Yes — In Must have As above
Land / 2 years Agricultural been used
except HUF (see Land, within by
those Note 17) 2 years after assessee or
the date of his parents
transfer. for
agricultural
purposes
Refer Notes
1, 2 and
10.
54D Industrial Any Use for Yes — In Must have As above
Land or Assessee 2 years Industrial been
Building or Land, Building, compulsoril
any right or any right y acquired.
therein therein within Refer
3 years after Notes, 1, 2,
the date of 3 and 10.
transfer.
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54EC Any Long- Any Shares, Yes — Whole Refer Notes The amount of
term Assessee Listed or any part of 10, 14 and gain or the
Capital Securiti capital gain in 15. cost of new
Asset es, bonds asset
(LTCA) Units of redeemable whichever is
UTI/ after 3 years lower subject
Mutual and issued on to Rs.
Fund or after 50,00,000 per
covered 1.4.2006 by assessee
u/s NHAI or REC during any
10 and notified by financial year
(23D): the for
1 year Government investments
Others: within made on or
3 years 6 months from after
the date of 1.4.2007. Also
transfer. investment in
bonds notified
before
1.4.2007
would be
subject to
conditions laid
down in
notification
including
limiting
conditions.
54F Any Capital Individual Shares, Yes — In Refer If the cost of
Asset (not / HUF Listed Residential Notes 2, 4, the specified
being a Securiti House, within 5, 10, 11, asset is not
residential es, 1 year before, 12 and 16. less than net
house) Units of or 2 years consideration
UTI/ after the date of the original
Mutual of transfer (if asset, the
Fund purchased), or whole of the
covered 3 years after gains. If the
u/s the date of cost of the
10(23D transfer (if specified asset
): 1 constructed). is less than
year the net
Others: consideration,
3 years the
proportionate
amount of the
gains.
356
54G Industrial Any — Yes — In Refer The amount of

land or Assessee similar assets Notes 1, 2 gains, or the
building or and expenses and 6. aggregate cost
plant or on shifting of of new asset
machinery original asset, and shifting
within 1 year expenses,
before, or whichever is
3 years after lower.
the date of
transfer.
54GB Residential Individual 5 years Yes — In Refer If the cost of
property / subscription of Note 18. the specified
being a HUF equity shares asset is not
house or a before due less than net
plot of land date of filing consideration
return of an of the original
eligible asset, the
company and whole of the
the company gains. If the
within 1 year cost of the
utilize the specified asset
amount for is less than
purchase of the net
new asset. consideration,
the
proportionate
amount of the
gains.
54GA Industrial Any — Yes — In Refer The amount of
land or Assessee similar assets Notes 1, 2 gains, or the
building or and expenses and 7. aggregate cost
plant or on shifting of of new asset
machinery original assets and shifting
to a Special expenses,
Economic whichever is
Zone – within lower.
1 year before
or 3 years
after the date
of transfer.
357
115F Foreign Non- Shares, Yes — In Refer Same as u/s

Exchange resident Listed ‘Specified Notes 8, 9 54F above.
Asset Indian Securiti Assets’ or and 13.
(Individu es, Specified
al) Units of Savings
UTI/ Certificates of
Mutual Central
Fund Government,
covered within
u/s 6 months after
10(23D the date of
): 1 transfer.
year
Others:
3 years
Notes:
If the new asset is transferred, within a period of three years from the date
of purchase/construction, the cost shall be reduced, in the year of transfer,
by the gains exempted earlier.
1. If the gains are not reinvested as specified, before the due date of filing
the return u/s 139(1), then the amount not so reinvested is required to
be deposited on or before that date in an account in a specified bank/
institution and utilized for the purchase/ construction of the relevant
asset in accordance with the notified scheme within specified time limit
in order to continue availing of the benefit of exemption [For the notified
scheme, see 172 ITR (St.) 91].
2. Industrial land or building must have been used for the purposes of the
business of the undertaking. New asset must be purchased/constructed
for the purposes of shifting/ reestablishing/setting up industrial
undertaking.
3. The assessee must not own more than one residential house other than
the new house on the date of the transfer of the original asset.
4. The assessee must neither purchase within two years after or construct
within three years after the day of transfer, any other residential house
other than the one in which reinvestment is made nor transfer the new
asset within three years from the date of its acquisition/construction,
otherwise the amount of gains earlier exempted shall be deemed to be
LTCG in the year of such transfer.
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5. The industrial undertaking must have been situated in an urban area

and the transfer must have been effected as a result of shifting to a
non-urban area.
6. The industrial undertaking must have been situated in an urban area

and the transfer must have been effected as a result of shifting to a
Special Economic Zone as defined in clause (za) of the Special Economic
Zones Act, 2005.
7. ‘Foreign Exchange Asset’ means any of the assets listed in Note 9 below
which assessee has acquired or purchased with, or subscribed to in
convertible foreign exchange.
8. A ‘Specified Asset’ u/s 115F means:
i. Shares in an Indian company;
ii. Debentures issued by Indian company which is not a private

company;
iii. Deposits with an Indian company; which is not a private company;
iv. Any security of the Central Government as defined in Section 2(2) of

the Public Debt Act;
v. Other notified assets.
9. In case of compulsory acquisition of asset under any law, time for

reinvestment or deposit in specified assets, of sale proceeds or capital
gains as the case may be, as prescribed by Sections 54, 54B, 54D, 54EC
and 54F shall be reckoned from the date of receipt of compensation as
per provisions of Section 54H.
10.Board Cir. No. 471 dtd. 15.10.1986 (162 ITR (St) 41) has clarified that
cases of allotment of flats under the self-financing scheme of the Delhi
Development Authority (DDA) should be treated as cases of
‘construction’ for the purposes of Sections 54 and 54F.
Similarly, the Board Cir. No. 672 dtd. 16.12.1993 (205 ITR (St) 47) has
clarified that allotment of flats/houses by co-operative societies and
359
other institutions, whose schemes of allotment and construction are

similar to those of DDA (as mentioned in paragraph 2 of aforesaid Cir.
No. 471), would be treated as ‘construction’ for the purposes of Sections
54 and 54F.
11.Board Cir. No. 667 dt. 18.10.1993 (204 ITR (St) 103) has clarified that
for the purpose of computing exemption u/s 54 or 54F, the cost of the
plot together with cost of the building will be considered as cost of new
asset, provided the acquisition of the plot and also the construction
thereon are completed within the period specified in these sections.
12.Where new asset is transferred within three years from date of its
acquisition, or converted into money or any loan/advance is taken on
securities of specified bond, the amount of gains earlier exempted shall
be deemed to be LTCG in the year of such transfer or conversion.
13.Cost of specified asset shall not be considered for:
– rebate u/s 88 up to Assessment Year 2005-06;
– deduction u/s 80C from Assessment Year 2006-07.
14.Where new asset is transferred within three years from date of its
acquisition or converted into money or any loan/advances is taken on
the security of specified assets, amount of gains earlier exempted shall
be deemed to be LTCG in year of such transfer or conversion.
15.Where new asset is transferred within one year from date of its
acquisition, amount of gains earlier exempted shall be deemed to be
LTCG in the year of such transfer.
16.The benefit of exemption under Section 54B extended to HUF with

effect from 1st April, 2013.
17.Under Section 54GB—
17.1 “Eligible company” means a company which fulfills the following

conditions, namely—
360
i. it is a company incorporated in India during the period from the 1st

day of April of the previous year relevant to the assessment year in
which the capital gain arises to the due date of furnishing of return
of income under sub-section (1) of Section 139 by the assessee;
ii. it is engaged in the business of manufacture of an article or a thing;
iii. it is a company in which the assessee has more than 50% share
capital or more than 50% voting rights after the subscription in
shares by the assessee; and
iv. it is a company which qualifies to be a small or medium enterprise

under the Micro, Small and Medium Enterprises Act, 2006;
17.2 “New asset” means new plant and machinery but does not include—
i. any machinery or plant which, before its installation by the

assessee, was used either within or outside India by any other
person;
ii. any machinery or plant installed in any office premises or any

residential accommodation, including accommodation in the nature
of a guest house;
iii. any office appliances including computers or computer software;
iv. any vehicle; or
v. 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 previous year.
17.3 As per the section, the amount of the net consideration, which has
been received by the company for issue of shares to the assessee, to the
extent it is not utilized by the company for the purchase of the new asset
before the due date of furnishing of the return of income by the assessee
under Section 139, shall be deposited by the company, before the said
due date in an account in any such bank or institution as may be
specified and shall be utilized in accordance with any scheme which the
361
Central Government may, by notification in the Official Gazette, frame in

this behalf and the return furnished by the assessee shall be
accompanied by proof of such deposit having been made.
17.4 If the equity shares of the company or the new asset acquired by
the company are sold or otherwise transferred within a period of five
years from the date of their acquisition, the amount of capital gain
arising from the transfer of the residential property which was not
charged to tax, shall be deemed to be the income of the assessee
chargeable under the head “capital gains” of the previous year in which
such equity shares or such new asset are sold or otherwise transferred,
in addition to taxability of gains, arising on account of transfer of shares
or of the new asset, in the hands of the assessee or the company, as the
case may be.
However, if the amount so deposited in bank is not utilized, wholly or

partly, for the purchase of the new asset within the period specified then,
—
i. the amount by which—
a. the amount of capital gain arising from the transfer of the

residential property not charged under Section 45 on the basis of
the cost of the new asset as provided in sub-section (1) of Section
54GB, exceeds—
b. the amount that would not have been so charged had the amount
actually utilized for the purchase of the new asset within the
period specified in sub-section (1) been the cost of the new asset,
shall be charged under Section 45 as income of the assessee for
the previous year in which the period of one year from the date of
the subscription in equity shares by the assessee expires; and
ii. the company shall be entitled to withdraw such amount in accordance

with the scheme.
17.5 The exemption is available in case of any transfer of residential

property made on or before 31st March, 2017.
362
17.6 Section 54GB shall be effective from 1st April, 2013 and would
accordingly apply from A.Y. 2013-14 and subsequent year.
Section 54D Capital gain on compulsory acquisition of lands and buildings

not to be charged in certain cases.
Section 54E Capital gain on transfer of capital assets not to be charged in

certain cases.
Section 54EA Capital gain on transfer of long-term capital asset not to be

charged in case of investment in specified securities.
Section 54EB Capital gain on transfer of long-term capital asset not to be

charged in certain cases.
Section 54EC Capital gain on transfer of long-term capital assets not to be

charged in case of investment in certain bonds.
Section 54ED Any long-term capital asset being units, listed shares,
securities etc.
Section 54F Capital gain on transfer of certain capital assets not to be

charged in case of investment in residential house.
Section 54G Exemption of capital gains on transfer of assets in cases of

shifting of industrial undertaking from urban area.
Section 54GA Exemption of capital gains on transfer of assets in cases of

shifting of industrial undertaking from urban area to Special Economic
Zone.
Section 54H Extension of time for acquiring new asset or depositing or
investing amount of capital gain.
363
Meaning of “Adjusted”, “Cost of Improvement”, and “Cost of

Acquisition” (Section 55)
1. For the purposes of Sections 48 and 49,
a. “cost of any improvement”,—
1. in relation to a capital asset being goodwill of a business or a right to

manufacture, produce or process any article or thing or right to carry
on any business shall be taken to be nil; and
2. in relation to any other capital asset,
i. where the capital asset became the property of the previous owner
or the assessee before the 1st day of April, 1981, means all
expenditure of a capital nature incurred in making any additions or
alterations to the capital asset on or after the said date by the
previous owner or the assessee, and
ii. in any other case, means all expenditure of a capital nature

incurred in making any additions or alterations to the capital asset
by the assessee after it became his property, and, where the
Capital asset became the property of the assessee by any of the
modes specified in sub-section (1) of Section 49, by the previous
owner,
but does not include any expenditure which is deductible in

computing the income chargeable under the head “Interest on
Securities”, “Income from House Property”, “Profits and Gains of
Business or Profession”, or “Income from Other Sources”, and the
expression “improvement” shall be construed accordingly.
2. For the purposes of Sections 48 and 49, “cost of acquisition”,—
a. in relation to a capital asset, being goodwill of a business or a

trademark or brand name associated with a business or a right to
manufacture, produce or process any article or thing or right to carry
on any business, tenancy rights, stage carriage permits or loom
hours,
364
i. in the case of acquisition of such asset by the assessee by purchase

from a previous owner, means the amount of the purchase price;
and
ii. in any other case [not being a case falling under sub-clauses (i) to
(iv) of sub-section (1) of Section 49], shall be taken to be nil;
(aa) [in a case where, by virtue of holding a capital asset, being a share or
any other security, within the meaning of clause (h) of Section 2 of the
Securities Contracts (Regulation) Act, 1956 (hereafter in this clause
referred to as the financial asset), the assessee.
(A) becomes entitled to subscribe to any additional financial asset; or
(B) is allotted any additional financial asset without any payment, then
subject to the provisions of sub-clauses (i) and (ii) of clause (b),
i. in relation to the original financial asset, on the basis of which the

assessee becomes entitled to any additional financial asset, means the
amount actually paid for acquiring the original financial asset;
ii. in relation to any right to renounce the said entitlement to subscribe to

the financial asset, when such right is renounced by the assessee in
favour of any person, shall be taken to be nil in the case of such
assessee;
iii. in relation to the financial asset, to which the assessee has subscribed
on the basis of the said entitlement, means the amount actually paid by
him for acquiring such asset;
(iii a) in relation to the financial asset allotted to the assessee without

any payment and on the basis of holding of any other financial asset,
shall be taken to be nil in the case of such assessee; and
iv. in relation to any financial asset purchased by any person in whose

favour the right to subscribe to such asset has been renounced, means
the aggregate of the amount of the purchase price paid by him to the
person renouncing such right and the amount paid by him to the
company or institution, as the case may be, for acquiring such financial
asset;
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(ab) in relation to a capital asset, being equity share or shares allotted to

a shareholder of a recognized stock exchange in India under a scheme for
demutualization or corporatization approved by the Securities and
Exchange Board of India established under Section 3 of the Securities and
Exchange Board of India Act, 1992 (15 of 1992), shall be the cost of
acquisition of his original membership of the exchange;
Provided that the cost of a capital asset, being trading or clearing rights of
the recognized stock exchange acquired by a shareholder who has been
allotted equity share or shares under such scheme of demutualization or
corporatization, shall be deemed to be nil;
b. in relation to any other capital asset,
i. where the capital asset became the property of the assessee before the
1st day of April, 1981, means the cost of acquisition of the asset to the
assessee or the fair market value of the asset on the 1st day of April,
1981, at the option of the assessee;
ii. where the capital asset became the property of the assessee by any of
the modes specified in sub-section (1) of Section 49, and the capital
asset became the property of the previous owner before the 1st day of
April, 1981, means the cost of the capital asset to the previous owner or
the fair market value of the asset on the 1st day of April, 1981, at the
option of the assessee;
iii. where the capital asset became the property of the assessee on the
distribution of the capital assets of a company on its liquidation and the
assessee has been assessed to income tax under the head “Capital
gains” in respect of that asset under Section 46, means the fair market
value of the asset on the date of distribution;
iv. where the capital asset, being a share or a stock of a company, became
the property of the assessee on—
a. the consolidation and division of all or any of the share capital of

the company into shares of larger amount than its existing shares,
b. the conversion of any shares of the company into stock,
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c. the reconversion of any stock of the company into shares,
d. the subdivision of any of the shares of the company into shares of

smaller amount, or
e. the conversion of one kind of shares of the company into another

kind, means the cost of acquisition of the asset calculated with
reference to the cost of acquisition of the shares or stock from
which such asset is derived.
3. Where the cost for which the previous owner acquired the property
cannot be ascertained, the cost of acquisition to the previous owner
means the fair market value on the date on which the capital asset
became the property of the previous owner.
Intangible/Self-generated Assets
The following are the instances of Intangible/Self-generated assets:

• Goodwill of a business, or
• A trademark, or
• Brand name associated with a business, or
• A right to manufacture, produce or process any article or thing, or
• Right to carry on any business, or
• Tenancy rights, or
• Stage carriage permits or loom hours etc.
Intangible/Self-generated Assets – How Cost of Acquisition is

Determined?
i. in the case of acquisition of such asset by the assessee by purchase

from a previous owner, means the amount of the purchase price; and
ii. in any other case, shall be taken to be nil Capital Gains to be worked
out accordingly.
Cost of Acquisition is What Previous Owner Paid for

There are instances where the Assessee did not pay for acquiring an asset
but his previous owner paid for this. In such cases, the cost of acquisition
is what the previous owner paid for the asset. Such situation would arise in
the following cases:
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• on any distribution of assets on partition of a Hindu undivided family

• under a gift or will
• by succession, inheritance or devolution
• on any distribution of assets on the dissolution of a firm, BOI/AOP
• on any distribution of assets on the liquidation of a company
• under a transfer to a revocable or an irrevocable trust etc.
7.11 MEANING OF THE COST OF IMPROVEMENT (Section

55)
Only capital expenditure is considered as a Cost improvement. Routine

expenses on repairs and maintenance do not form a part of cost of
improvement. Expenses incurred to complete the title of the property are
also regarded as a part of cost of improvement.
Determination of Cost of Improvement
i. Where capital asset consists of goodwill of a business, or a right to

manufacture, product or process any article or thing, then cost of
improvement is taken as nil.
ii. In case of any other assets
a. where the capital asset became the property of the previous owner or
the assessee before 1.4.1981, it will be all capital expenditure
incurred in making any additions or alterations to the capital asset on
or after 1.4.1981 by the assessee or the previous owner.
b. In other cases, i.e., assets acquired after 1.4.1981, all capital

expenditure incurred in making any additions or alterations to the
capital asset by the assessee or the previous owner after it became
his property, or the property of the previous owner.
Cost of Acquisition Goodwill of Business/Right to Manufacture,

Produce or Process Any Article [Section 55(2)(a)]
Cost of acquisition is the price which the assessee has paid, or the amount
which the assessee has incurred, for acquisition of the assets. Expenses
incurred for completing the title are a part of the cost of acquisition:
368
a. where these assets are self-generated, cost of acquisition shall be taken

to be nil.
b. when these assets are purchased from someone, the cost of acquisition
shall be the price paid for acquiring these assets.
Cost of acquisition includes deemed cost of acquisition.
Cost of Acquisition of Right Shares [Section 55(2)(aa)]
With effect from 1.4.1996, i.e., assessment year 1996-97, it has been
provided that the cost of acquisition in relation to the financial assets
(including shares) allotted to the assessee without any payment and on the
basis of holding of any other financial asset, shall be taken to be nil.
Therefore, the cost of bonus shares shall be taken to be nil and the entire
sale consideration received on the transfer of the bonus shares shall be
treated as capital gains.
Where an assessee, by virtue of holding certain shares, becomes entitled

to subscribe to any additional shares then:
1. the cost of acquisition of the original shares shall be the amount actually
paid for acquiring the original shares;
2. the cost of acquisition of the right shares, when the assessee subscribes
to the shares on the basis of the said entitlement shall be the amount
actually paid for acquiring the right shares;
3. the cost of acquisition of the right to acquire such shares, when such a
right is renounced in favour of any other person, shall be taken to be
nil.
4. As regards, the person in whose favour the right to subscribe to the

shares has been renounced, the cost of acquisition shall be the amount
paid by him to the company for acquiring the shares plus the amount
paid to the person renouncing the right.
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Cost of Acquisition of Assets Acquired before 1.4.1981 [Section

55(2)(b)]
In the following cases, the assessee has an option to take either the actual
cost of acquisition or the fair market value of the asset as on 1.4.1981 to
be the cost of acquisition for computation of capital gains:
a. where an asset has been acquired by the assessee himself before April
1, 1981, he has an option to take either the actual cost of acquisition or
the fair market value of the asset as on 1.4.1981 to be cost of
acquisition for computation of capital gain. (For availing the option, the
assessee will obviously opt for that value which is more).
The option in the above case is not available for depreciable assets.
b. Where the assets were acquired by the assessee through a mode given
under Section 49(1) and the previous owner acquired that asset before
1.4.1981. In this case also, the assessee has an option to take the cost
of acquisition as the cost to the previous owner or the fair market value
of that asset as on 1.4.1981 for the purpose of the computation of
capital gain.
Reference to Valuation Officer (Section 55A)
With a view to ascertaining the fair market value of a capital asset for the
purposes of this Chapter, the Assessing Officer may refer the valuation of
capital asset to a Valuation Officer—
a. in a case where the value of the asset as claimed by the assessee is in

accordance with the estimate made by a registered valuer, if the
Assessing Officer is of opinion that the value so claimed is less than its
fair market value;
b. in any other case, if the Assessing Officer is of opinion:
i. that the fair market value of the asset exceeds the value of the asset
as claimed by the assessee by more than such percentage of the
value of the asset as so claimed or by more than such amount as
may be prescribed in this behalf; or
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ii. that having regard to the nature of the asset and other relevant
circumstances, it is necessary so to do.
Video Link 1
7.12 RELEVANT PROVISIONS OF SECTION 10 AFFECTING

CAPITAL GAINS [Section 10(33)]
Any income arising from the transfer of a capital asset, being a unit of the
Unit Scheme, 1964 referred to in Schedule I to the Unit Trust of India
(Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002) and where
the transfer of such asset takes place on or after the 1st day of April, 2002.
Section 10(36): Long-term Capital Gains – Eligible Equity Share –

Purchased on or after 1.3.2003 and before 1.3.2004
eligible equity share in a company purchased on or after the 1st day of
March, 2003 and before the 1st day of March, 2004 and held for a period of
twelve months or more.
Explanation: For the purposes of this clause, “eligible equity share”

means,
i. any equity share in a company being a constituent of BSE-500 Index of

the Stock Exchange, Mumbai as on the 1st day of March, 2003 and the
transactions of purchase and sale of such equity share are entered into
on a recognized stock exchange in India;
ii. any equity share in a company allotted through a public issue on or

after the 1st day of March, 2003 and listed in a recognized stock
exchange in India before the 1st day of March, 2004 and the transaction
of sale of such share is entered into on a recognized stock exchange in
India.
Section 10(37) [Inserted by the Finance (No. 2) Act, 2004, w.e.f.

1.4.2005]
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Exemption of capital gains arising to individual/HUF – From

transfer of agricultural land (by way of compulsory acquisition etc.)
In the case of an assessee, being an individual or a Hindu undivided family,

any income chargeable under the head “Capital gains” arising from the
transfer of agricultural land, where—
i. such land is situated in any area referred to in item (a) or item (b) of
sub-clause (iii) of clause (14) of Section 2;
ii. such land, during the period of two years immediately preceding the
date of transfer, was being used for agricultural purposes by such Hindu
undivided family or individual or a parent of his;
iii. such transfer is by way of compulsory acquisition under any law, or a

transfer the consideration for which is determined or approved by the
Central Government or the Reserve Bank of India;
iv. such income has arisen from the compensation or consideration for such
transfer received by such assessee on or after the 1st day of April,
2004.
Explanation: For the purposes of this clause, the expression

“compensation or consideration” includes the compensation or
consideration enhanced or further enhanced by any court, Tribunal or other
authority.
Section 10(38): Re: Income exempt u/s 10(38) which is from

transfer of Long-term Capital Asset, being securities, transacted in
a recognized stock exchange in India, on or after the date on which
Chapter VII (Securities Transaction Tax) of the Finance (No. 2) Act,
2004 comes into force (i.e., 1.10.2004) Inserted by Finance Act,
2004
equity share in a company or a unit of an equity-oriented fund where—
comes into force (i.e., 1.10.2004); and
372

Chapter.
Explanation: For the purposes of this clause, “equity-oriented fund”

means a fund—
i. where the investible funds are invested by way of equity shares in

domestic companies to the extent of more than 50% of the total
proceeds of such fund; and
ii. which has been set up under a scheme of a Mutual Fund specified under
clause (23D):
Provided that the percentage of equity shareholding of the fund shall be

computed with reference to the annual average of the monthly averages
of the opening and closing figures.
When income is exempt u/s 10, loss from such source cannot be set off
against income chargeable to tax.
Section 111A: Tax on Short-term Capital Gains in Certain Cases

[Inserted by the Finance (No. 2) Act, 2004, w.e.f. 1.4.2005]
1. Short-term capital gains on Equity Shares and unit of an equity-oriented

fund – after 1.10.2004 – Taxable @ 15% – Other Income including
other Short-term capital gains taxable at normal rates—
Where the total income of an assessee includes any income chargeable

under the head “Capital gains”, arising from the transfer of a short-term
capital asset, being an equity share in a company or a unit of an equity-
oriented fund and—

comes into force; and

Chapter, the tax payable by the assessee on the total income shall be
the aggregate of—
373
i. the amount of income tax calculated on such short-term capital gains

at the rate of 15% or 10%; and
ii. the amount of income tax payable on the balance amount of the total
income as if such balance amount were the total income of the
assessee:
Provided that in the case of an individual or a Hindu undivided family, being

a resident, where the total income as reduced by such short-term capital
gains is below the maximum amount which is not chargeable to income
tax, then such short-term capital gains shall be reduced by the amount by
which the total income as so reduced falls short of the maximum amount
which is not chargeable to income tax and the tax on the balance of such
short-term capital gains shall be computed at the rate of 15%.
2. Ch. VI-A Deductions allowed on Other Income but not on Short-term

capital gains where the gross total income of an assessee includes any
short-term capital gains referred to in sub-section (1), the deduction
under Chapter VI-A shall be allowed from the gross total income as
reduced by such capital gains.
3. No deduction is available under Sections 80C to 80U on such exempted

short-term gains – Where the total income of an assessee includes any
short-term capital gains referred to in sub-section (1), the rebate under
Section 88 shall be allowed from the income tax on the total income as
reduced by such capital gains.
Explanation: For the purposes of this section, the expression “equity-

oriented fund” shall have the meaning assigned to it in the Explanation to
clause (38) of Section 10.
Tax on Long-term Capital Gains (Section 112)

Where the long-term capital asset is transferred which is chargeable under
the head “Capital gains”, the tax payable by the assessee on the total
income shall be as under:
The taxable income shall have to be segregated between:
a. Tax on Income other than long-term capital gains
374
b. Tax on long-term capital gains
Tax payable on long-term capital gains shall be:

On resident individual or a resident Hindu undivided family @20%
Domestic Company @20%
Non-resident (not being a company) or a foreign company @20%
Any other case of a resident @20%
Long-term capital gains on sale of listed @ 10% without giving

shares units in case of long-term capital benefit
asset, being listed securities, units or zero
coupon bonds
Here, on rates of either 20% or 10% or 15%, Surcharge and Education

Cess are applicable at current rates.
Where shares, securities or units of Mutual Funds are sold, the long-term
capital gains shall be computed at the option of the Assessee under any
one of the two options as under:
Here, the conditions to be satisfied shall be:
• It shall be available to any assessee – whether an Individual, HUF, a

Company, or any assessee.
• The asset shall be a long-term capital asset.
• Such long-term capital asset shall be listed securities or unit of Mutual

Fund.
The tax on long-term capital gains here shall be the lower of Option I or
Option II as worked here:
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Option I Option II
1. Sale Consideration 1. Sale Consideration
Less: Less:
2. (a) Indexed Cost of acquisition 2. (a) Cost of acquisition
(b) Indexed Cost of improvement (b) Cost of improvement
Total Indexed cost (2a + 2b) Total cost (2a + 2b)
3. Surplus is LTGG [1 – 2] 3. Surplus is LTGG [1 – 2]
4. Tax on LTCG is @ 20% on LTCG 4. Tax on LTCG is @ 10% on LTCG
[plus surcharge for A.Y. 2013-14] [plus surcharge for AY 2013-14]
Some other instances of rates of tax on capital gains are as under:
Tax
Section Who Earns Income? Nature of Income
Rate
115ACA A resident individual – and Long-term capital gains 10%
employee of an Indian arising from the transfer of
company engaged in Global Depository Receipts
specified knowledge based
industry or service or its
subsidiary so engaged
115AD Income of Foreign No deduction shall be 10%
Institutional Investors from allowed to the assessee
capital gains arising from under Chapter VI-A.
transfer of securities No benefit of Indexing (u/s
48 –Proviso (ii) shall be
available.
115D LTCG to Non-resident Indians Long-term capital gains of @ 20%
non-specified assets
Long-term capital gains of @ 10%
specified assets
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115E LTCG to Non-residents LTCG from transfer of a No LTCG

Exchange Asset foreign in proportion to the
reinvestment of net
consideration in specified
asset reinvested in specified
assets within 6 months
115F LTCG to Non-resident Lock-in of 3 years over
specified asset shall apply.
In respect of the above table, Section 115C gives some relevant definitions
—
Clause (b) “foreign exchange asset” means any specified asset which the
assessee has acquired or purchased with, or subscribed to in, convertible
foreign exchange;
Clause (f) “Specified asset” means any of the following assets, namely:
i. shares in an Indian company;
ii. debentures issued by an Indian company which is not a private

company as defined in the Companies Act, 1956 (1 of 1956);
iii. deposits with an Indian company which is not a private company as

defined in the Companies Act, 1956 (1 of 1956);
iv. any security of the Central Government as defined in clause (2) of

Section 2 of the Public Debt Act, 1944 (18 of 1944);
v. such other assets as the Central Government may specify in this behalf
by notification in the Official Gazette.
Equity Shares – Mutual Funds
Capital Gains – Tax Rates Applicable
Capital Losses – Carry forward and Set off (w.e.f. A.Y. 2005-06)
377
Section Nature Taxability of Nature of How Set off?

Gains Losses
Section Long-term Not taxable NA from A.Y. NA
10(38) capital asset, 2005-06 – Past
being an losses of these
equity share would lapse –
in a company as gains from
or a unit of them are no
an equity- more taxable
oriented fund
Section Debt Mutual First can be set off STCL In same year against
112 R.W. Fund against loss (if any STCG or LTCG
Section any) under any [Section 70(2)]
70(2)-74 other head LTCL In next 8 years
Short-term [Section 71(2)] – against any STCG or
Capital Gain and balance to be LTCG [Section 74(1)
taxed. At normal (a)]
rates (Section In same year against
Long-term 112) first can be any LTCG (only)
Capital Gain set off against loss [Section 70(3)]
(if any) under any In next 8 years
other head against any LTCG
[Section 71(2)] [Section 74(1)(b)]
and balance to be
taxed:
@ 20% with index
@ 10% without
index
Section STCGs on IT @ 15% STC Loss on Can be set off and
111A also carry forward and
— Equity — Equity set off like any other
Shares Shares STCL because Section
111 is silent on this
— Units of and there is no charge
Equity- in Section 70-74A with
oriented respect this, i.e., in
Funds same year against any
STCG or LTCG [Section
70(2)]
In next 8 years
against any STCG or
LTCG [Section 74(1)
(a)]
378
Section @ 20% — Units of In same year against

112 Equity-oriented Long-term Capital
Funds Gain (only) [Section
70(3)]
In next 8 years set off
against only Long-
— LTCL term Capital Gain of
subsequent eight
years [Section 74(1)
(b)]
1. Set off or Carry forward and Set off of Losses Relating to Capital
Gains (Section 70) – In a particular Assessment Year in which the
relevant loss is incurred:
This Can be set off against

Short-term Capital Loss Short-term Capital Gain
[Section 70(2)] OR
Long-term Capital Gain
Long-term Capital Loss Long-term Capital Gain (only)
[Section 70(3)]
2. Set off of loss from one head against income from another head
(Section 71) – In a particular Assessment Year:

[Section 71(1)] Income from any other head
Loss under any Head (other
than Capital Gains)
And there is no Income under

the head “Capital Gains”
3. Section 71(2) – In a particular Assessment Year (where the assessee

has income assessable under the head “Capital gains”)
379

Loss Under any Head other Income under any head of
than “Capital Gains” income including Income under
Capital Gains
And there is income under the

head “Capital Gains”
4. Section 71(3) – Thus, in a particular Assessment Year:
This Cannot be set off against

Loss under the head of Capital Income under any head of
Gains income
5. Losses under the head Capital Gains (Section 74)
a. The unabsorbed Loss of Capital Gains can be carried forward to next 8

years.
b. In the next years, such unabsorbed Loss of Capital Gains shall be

treated as under:

Unabsorbed Short-term Short-term Capital Gain
Capital Loss OR
[Section 74(1)(a)] Long-term Capital Gain
of subsequent eight years
Unabsorbed Long-term Capital Set off against only Long-term
Loss Capital Gain of subsequent
[Section 74(1)(b)] eight years
380
7.13 SUMMARY
Any property of any kind held by an assessee is defined as a capital asset.

The term is further explained by defining what not a capital asset is and by
citing cases of specific assets. There is a capital gain or loss whenever a
capital asset is transferred by the assessee in a previous year. Income
arising to a shareholder on buyback of shares is not treated as dividend but
capital gains. Mode of calculation of capital gains is provided in the Section
48. Cost inflation index is to be used in calculation of gains to nullify effects
of inflation.
Section 54 provides exemptions from capital gains in certain cases.

Difference between repairs, maintenance and cost of improvement is
explained in the Section 55. Rebates available on capital gains in Section
10 are reproduced for ready reference.
1. Briefly explain any two instances of fictional chargeability of Capital

Gain.
2. Mr. A held certain shares in a non-listed company. In December 2004,

he sold 500 shares, which were acquired by him in October 2001. The
cost of acquisition of the shares was Rs. 187/- per share and the same
were sold for Rs. 240/- per share. The bonus shares received in respect
of these shares are not sold (Index: 2001-02: 426 and for 2004-05:
480). You are required to determine the capital gains earned.
3. Mr. Seth sold off his shares on 10th March, 2004 for Rs. 26,00,000/-. He
was charged brokerage of 1% on the sale. These shares were acquired
by him for Rs. 17,00,000/-on 15th October, 2002. Hitherto, he did not
have his own house. On 26th December, 2003, he acquired a house at
the cost of Rs. 20,50,000/-. Determine the capital gains tax payable by
Mr. Seth for the A.Y. 2004-05.
381
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
382
INCOME FROM OTHER SOURCES (SECTIONS 56 TO 59)
Chapter 8
Income From Other Sources (Sections 56
To 59)
Objectives
• Income from other sources
• Deductible expenses
Structure
8.1 Income from Other Sources
8.2 Deductions from Income from Other Sources (Section 57)
8.3 Conditions to be Fulfilled for Claiming the Deductions
8.4 Certain Amounts Not Deductible (Section 58)
8.5 Profits Chargeable to Tax (Section 59)
8.6 Summary
383
8.1 INCOME FROM OTHER SOURCES
1. Income of every kind which is not to be excluded from the total income
under this Act shall be chargeable to income tax under the head
“Income from other sources”, if it is not chargeable to income tax under
any of the heads specified in Section 14, items A to E.
2. In particular, and without prejudice to the generality of the provisions of

sub-section (1), the following incomes, shall be chargeable to income
tax under the head “Income from other sources”, namely:
i. dividends;
Dividends as defined u/s 2(22) to the extent not exempt from tax is
taxable.
However, dividends distributed by a domestic company on or after 1.6.97

and subjected to additional income tax u/s 115-0 is exempt in the hands of
recipient u/s 10(33), however, this exemption is deleted from 1.42003.
U/s 10(34), w.e.f. 1.4.2004
Any income by way of dividends referred to in Section 115-0 shall be

exempt in the hands of shareholders.
U/s 115-0: Tax on distributed profits
Additional income tax u/s 115-0 is payable by a domestic company 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, 2003,
whether out of current or accumulated profits at the rate of twelve-and-
one-half per cent.
(ia) income referred to in sub-clause (vii) of clause (24) of Section 2;
This clause is since deleted.
(ib) income referred to in sub-clause (ix) of clause (24) of Section 2;
This covers:
384
Any winnings from:

• lotteries
• crossword puzzles
• races including horse races,
• card games and other games of any sort or
• from gambling or betting of any form or nature whatsoever.
(ic) income referred to in sub-clause (x) of clause (24) of Section 2, if

such income is not chargeable to income tax under the head “Profits and
Gains of Business or Profession”.
This covers:
Any sum received by the assessee from his employees as contributions

to any provident fund or superannuation fund or any fund set up under
the provisions of the Employees’ State Insurance Act, 1948 (34 of 1948),
or any other fund for the welfare of such employees.
However, 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 is available for
deduction u/s 36(1)(va).
(id) income by way of interest on securities, if the income is not

chargeable to income tax under the head “Profits and Gains of Business
or Profession”.
ii. income from machinery, plant or furniture belonging to the assessee

and let on hire, if the income is not chargeable to income tax under the
head “Profits and Gains of Business or Profession”;
iii. where an assessee lets on hire machinery, plant, or furniture belonging

to him and also buildings, and the letting of the buildings is inseparable
from the letting of the said machinery, plant, or furniture, the income
from such letting, if it is not chargeable to income tax under the head
“Profits and Gains of Business or Profession”;
iv. income referred to in sub-clause (xi) of clause (24) of Section 2, if such
income is not chargeable to income tax under the head “Profits and
Gains of Business or Profession” or under the head “Salaries”.
385
This covers:
Any sum received under a Keyman insurance policy including the sum
allocated by way of bonus on such policy if such income is not
chargeable to income tax under the head “Profits and Gains of
Business or Profession” or under the head “Salaries” [Section 56(iv)].
v. where any sum of money exceeding Rs. 25,000 is received without

consideration by an individual or a Hindu undivided family from any
person on or after the 1st day of September, 2004, the whole of such
sum:
Provided that this clause shall not apply to any sum of money received—
a. from any relative; or
d. in contemplation of death of the payer.
e. from any local authority as defined in the explanation to the 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 any trust or institution registered under Section 12AA.
Explanation: For the purposes of this clause, “relative” means—
i. spouse of the individual;
ii. brother or sister of the individual;

iii. brother or sister of the spouse of the individual;
iv. brother or sister of either of the parents of the individual;
386
v. any lineal ascendant or descendant of the individual;
vi. any lineal ascendant or descendant of the spouse of the individual;
vii.spouse of the person referred to in clauses (ii) to (vi).
Section 56(2)(vi) Gifts Exceeding Rs. 50,000 [w.e.f. 1.4.2007]
Where any some of money, the aggregate value of which exceeds Rs.
50,000, is received without consideration, by an individual or a Hindu
undivided family, in any previous year from any person or persons on or
after the 1st day of April, 2006 but before the 1st day of October, 2009,
the whole of the aggregate value of such sum:
Provided that this clause shall not apply to any some of money received—
d. in contemplation of death of the payer; or
e. from any local authority as defined in the Explanation to clause (20)

of Section 10; or

Explanation: For the purpose of this clause, “relative” means—
i. spouse of the individual;
ii. brother or sister of the individual;
iii. brother or sister of the spouse of the individual;
387
iv. brother or sister of either of the parents of the individual;
v. any lineal ascendant or descendant of the individual;
vi. any lineal ascendant or descendant of the spouse of the individual;
vii. spouse of the person referred to in clauses (ii) to (vi).
Section 56(2)(vii): Gift in Cash or Kind Exceeding Rs. 50,000 [w.e.f.

1.10.2009]
Where an individual or Hindu undivided family receives, in any previous

year, from any person or persons on or after the 1st day of October, 2009,
—
a. Any sum of money, without consideration, the aggregate value of which
exceeds Rs. 50,000, the whole of the aggregate value of such sum;
b. Any immovable property,—
i. Without consideration, the stamp duty value of which exceeds Rs.

50,000, the stamp duty value of such property;
ii. For a consideration which is less than the stamp duty value of the
property by an amount exceeding Rs. 50,000, the stamp duty value
of such property as exceeds such consideration;
c. Any property, other than immovable property,––
i. Without consideration, the aggregate fair market value of which

exceeds Rs. 50,000, the whole of the aggregate fair market value of
such property;
ii. For a consideration which is less than the aggregate fair market value
of the property by an amount exceeding Rs. 50,000, the aggregate
fair market value of such property as exceeds such consideration:
Provided that where the stamp duty value of immovable property as

referred to in sub-clause (b) 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
388
provisions of Section 50C and sub-section (15) of Section 155 shall, as far
as may apply in relation to the stamp duty value of such property for the
purpose of sub-clause (b) as they apply for valuation of capital asset under
those sections:
Provided further that this clause shall not apply to any sum of money or
any property received
d. in contemplation of death of the payer; or
e. from any local authority as defined in the Explanation to clause (20) of

Section 10; or

Explanation: For the purposes of this clause,––
a. “assessable” shall have the meaning assigned to it in the Explanation 2

to sub-section (2) of Section 50C;
b. “fair market value” of a property, other than an immovable property,

means the value determined in accordance with the method as may be
prescribed;
c. “jewellery” shall have the meaning assigned to it in the Explanation to

sub-clause (ii) of clause (14) of Section 2;
d. “property” means—
389
i. immovable property being land or building or both;

ii. shares and securities;
iii. jewellery;
iv. archaeological collections;
v. drawings;
vi. paintings;
vii.sculptures; or
viii.any work of art;
e. “relative” shall have the meaning assigned to it in the Explanation to

clause (vi) of sub-section (2) of this section;
f. “Stamp duty value” means the value adopted or assessed or assessable

by any authority of the Central Government or a State Government for
the purpose of payment of stamp duty in respect of an immovable
property.
Section 56(2)(viii): Interest Received on Compensation or

Enhanced Compensation [w.e.f. 1.4.2010]
Income by way of interest received on compensation or on enhanced

compensation referred to in clause (b) of Section 145A.
What is Includible under Income from Other Sources?
Income of every kind which is not to be excluded from the total income
under this Act shall be chargeable to income tax under the head “Income
from Other Sources”, if it is not chargeable to income tax under any of the
heads specified in Section 14, items A to E.
Thus, to qualify for being included as Income from Other Sources:
• the income shall not to be excluded from the total income under this Act,
i.e., it shall not be income of the exempt category.
• it is not chargeable to income tax under any of the heads specified in

Section 14, items A to E, i.e., it shall not be falling under:
390
– Income from Salaries,
– Income from House Property,
– Profits and Gains of Business or Profession, or
– Income from Capital Gains.
Residuary Head of Income

The provision of this head of income applies only if none of the other heads
are applicable – Section 56 being the residuary head of income can be
resorted to only if none of the specified heads is applicable to the income in
question; it comes into operation only after the preceding heads are
excluded.
The interest or other income can be assessed under the head “Income
from Other Sources”, only if it cannot be brought within one or the other of
the specific head of charge.
Some Instances
Interest earned prior to commencement of business – Where a

company, invested its share capital in banks pending commencement of
business, interest received was taxable as its income from other sources
and not as business income.
Interest earned on short-term investment of funds borrowed for setting up

of factory during construction of factory before commencement of business
has to be assessed as income from other sources and it cannot be held to
be non-taxable on ground that it would go to reduce interest on borrowed
amount which would be capitalized.
Gross interest income is taxable – Funds borrowed against Deposits

made with bank – Where the assessee, carrying on business, took loan
against fixed deposits kept in banks and utilized a major portion of the loan
on the construction of a house (which was not a business asset), the gross
interest from the deposits in banks is to be taxed without any set off
towards interest attributable to the loan portion utilized for the
construction of the house.
391
Tax on salary – Tax on salary of assessee borne by payer, for whom

assessee was working under a contract, under a legal obligation, was
assessable as income of payee under “other sources”.
Income from hoardings on business premises – Where the business of

the assessee consisted of letting out on hire cinema hall, service charges
received from various house properties and share dealing, the income
derived by the assessee on account of display of hoardings of various
concerns on top of the assessee’s building for advertisement purposes is
not assessable as income from house property, since hoardings cannot be
treated as part of the building). The said income is assessable as “Income
from Other Sources” only [Mukherjee Estate (P.) Ltd. v. CIT [2000] 244 ITR
1 (Cal.)].
Income of company in winding-up – Where the liquidator realized

certain amounts by way of sale of the assets of the company in liquidation
and invested the amounts in interest-bearing deposits, he was merely
realizing the assets of the company and could not be considered as
carrying on any business of the company; hence, interest earned on the
deposit would be assessable as “Income from Other Sources” [Vijaya Laxmi
Sugar Mills Ltd. v. CIT [1991] 191 ITR 641 (SC)].
Gratuity – Gratuity received by a director who, under the relevant

contract, is not an employee or servant of the company, is assessable as
income from other sources [CIT v. Lady Navajbai R.J. Tata [1947] 15 ITR 8
(Bom.)].
Interest – It is well settled that interest can be assessed under the head
“Income from Other Sources” only if it cannot be brought within one or the
other of the specific heads of charge [CIT v. Govinda. Choudhury & Sons
[1993] 203 ITR 881 (SC).
Interest on tax refunds – Interest received from Government under

Section 214 is taxable under the head “Income from Other Sources” [Smt.
B. Seshamma v. CIT [1979] 119 ITR 314 (Mad.)].
Interest on PP contribution – Interest received by an employee on his

own contributions to an unrecognized provident fund is assessable under
the head “Income from Other Sources” [CIT v. G. Hyatt [1971] 80 ITR 177
(SC)].
392
Interest earned on short-term investment of funds borrowed for setting up

of factory during construction of factory before commencement of business
has to be assessed as “Income from Other Sources” and it cannot be held
to be non-taxable on ground that it would go to reduce interest on
borrowed amount which would be capitalized [Tuticorin Alkali Chemicals &
Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC)].
Gross interest income is taxable – Where the assessee-HUF, carrying

on business, took loan against fixed deposits in banks and utilized a major
portion of the loan on the construction of a house (which was not a
business asset), the gross interest from the deposits in banks is to be
taxed without any set off towards interest attributable to the loan portion
utilized for the construction of the house [Kaviraj Mahipat Singh v. CIT
[2002] 255 ITR 470 (Raj.)].
Winnings from lotteries – Even if winnings from lotteries accrue or arise

outside India, they have to be taken notice of while calculating the total
income of a resident assessee in view of Section 5(1)(c) and such income
has to be treated as income derived from other sources as provided by
Section 56(2)(ib) [CIT v. Chaman Lal [1985] 156 ITR 245 (P&H)].
Tax on salary – Tax on salary of assessee borne by payer, for whom

assessee was working under a contract, under a legal obligation, was
assessable as income of payee under “other sources” [Emil Webber v. CIT
[1993] 200 ITR 483 (SC)].
Sale receipts prior to commencement of business – Where the

assessee’s business has not commenced, amounts realized by assessee by
sale of tender forms and empty bags would be capital receipts and cannot
be brought to tax in the assessee’s hands as “Income from Other Sources”
[CIT v. Rassi Cement Ltd. [1998] 232 ITR 554 (AP)].
393
Composite Letting of Premises
Letting of machinery/plant/furniture, etc. must be inseparable

from letting of building – The inseparability referred to in Section 56(2)
(iii) is an inseparability arising from the intention of the parties. That
intention may be ascertained by framing the following questions: Was it in
the intention in making the lease – and it matters whether it is one lease
or two – that the two should be enjoyed together? Was it the intention to
make the letting of the two practically one letting? Would one have been let
alone and a lease of it accepted without the other? If the answers to the
first two questions are in the affirmative, and the last in the negative, then
it has to be held that it was intended that the letting would be inseparable
[Sultan Bros. (P.) Ltd. v. CIT [(1964) 51 ITR 353 (SC)].
Composite rent must be split up – Where the assessee received

composite rent from its tenant towards building as well as services/
amenities, such rent should be split up and the portion of rent attributable
to the building should be assessed as “Income from House Property” and
the other portion attributable to services/amenities should be assessed as
“Income from Other Sources” [CIT v. Kanak Investments (P.) Ltd. [1974]
95 ITR 419 (Cal.)].
Lease of Business Assets

When business is wholly let, rental income is assessable as income from
other sources – The letting out of business as a whole is distinct from
letting out commercial assets of the business. If business is as a whole let
out, the rental income is assessable as income from other sources and not
as income from business [CIT v. Bishwanath Roy [1985] 156 ITR 217
(Pat.)].
Nature of arrangement is relevant factor – It is the nature of

arrangement and the reasons therefore that are relevant for the purpose of
determining whether one has let out the property for business purposes or
merely for enjoying the rent. This is the type of test which is common to all
cases [CIT v. Super Fine Cables (P.) Ltd. [1985] 154 ITR 532 (Del)/CIT v.
Prem Chand Jute Mills Ltd. [1978] 114 ITR 769 (Cal)/Everest Hotels Ltd. v.
CIT [1978] 114 ITR 779 (Cal.)/Dharak Ltd. v. CIT [1987] 163 ITR 734
(Kar.)].
394
8.2 DEDUCTIONS FROM INCOME FROM OTHER SOURCES

(SECTION 57)
The income chargeable under the head “Income from Other Sources” shall
be competed after making the following deductions:
Nature of Income Extent of Deduction Available
Section 57(i)
In the case of:

Any reasonable sum paid by way of
• dividends (other than dividends referred commission/remuneration to a banker or
to in Section 115-0), or any other person for the purpose of
realizing such dividend or interest on
• interest on securities behalf of the assessee.
Section 57(i a) Deductions to the extent (and if) such

In case of any sum received by the sum is credited by the assessee to the
assessee from his employees as employee's account in the provident fund
contributions to any provident fund or or funds on or before the due date [i.e.,
superannuation fund (or any fund set up under Section 36(1)(va)].
under the provisions of the Employees’
State Insurance Act, 1948, or any other
fund for the welfare of such employees
which is chargeable to income tax under
the head “Income from Other Sources” [u/
s sub-clause (x) of clause (24) of Section
2]
Section 57(ii) The deductions, so far as may be, of the

In case of: following kind shall be allowable in respect
of the premises and the Plant and
a. income from machinery, plant or Machinery used for earning the Income
furniture belonging to the assessee and from Other Sources:
let on hire, if the income is not
chargeable to income tax under the
head “Profits and Gains of Business or
Profession” [as referred to in Section
56(2)(ii)] and
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b. where an assessee lets on hire 1. In respect of rent, rates, taxes, repairs

machinery, plant, or furniture belonging and insurance for premises, used for
to him and also buildings, and the the purposes of the business or
letting of the buildings is inseparable profession, the following deductions
from the letting of the said machinery, shall be allowed—
plant, or furniture, the income from
such letting if it is not chargeable to a. where the premises are occupied by the
income tax under the head Profits and assessee as a tenant: the rent paid for
gains of business or profession [as such premises and further if he has
referred to in Section 56(2)(iii)]; undertaken to bear the cost of repairs
to the premises, the amount paid on
where the building/machinery is partly account of such repairs otherwise than
used for earning the income: as a tenant: the amount paid by him on
account of current repairs to the
premises plus
b. the amount of any premium paid in

respect of insurance against risk of
damage or destruction of the premises.
However, the amount paid on account
of the cost of repairs and the amount
paid on account of current repairs shall
not include any expenditure in the
nature of capital expenditure.
[Deduction equivalent to and in

accordance with the provisions of sub-
clause (ii) of clause (a) and clause (c) of
Section 30]
2. In respect of repairs and insurance of

machinery, plant or furniture used, the
following deductions shall be allowed—
i. the amount paid on account of current

repairs thereof;
ii. the amount of any premium paid in

respect of insurance against risk of
damage or destruction thereof
The amount paid on account of current

repairs shall not include any expenditure
in the nature of capital expenditure [in
accordance with the provisions of Section
31]
396
3. Depreciation and carry forward of

depreciation of such property used for
earning the income [under Section
32(1) and (2)].
Where the building in respect of which the

expenses of current repairs, insurance,
depreciation etc. is claimed but such
building etc. is used partly for earning the
income from other sources and partly for
assessee’s residence (or is not exclusively
used for earning the income), then only
the proportionate expenses used for
earning the Income from Other Sources
shall be allowable as deduction [equivalent
of Section 38].
Section 57(iia) A deduction of
In the case of income in the nature of
family pension • 33.33% (thirty-three and one-third per
cent) of such income or
• Rs. 15,000/- (fifteen thousand rupees)

whichever is less shall be allowable.
Section 57(iii) Such deduction of expenditure (not being

Deduction of Residuary Category: in the nature of capital expenditure) laid
Any other expenditure incurred out or expended wholly and exclusively for
the purpose of making or earning such
income
Section 57(iv) A deduction of 50% of such income

Income by way of interest received on
compensation or enhanced compensation
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8.3 CONDITIONS TO BE FULFILLED FOR CLAIMING THE

DEDUCTIONS
While claiming deductions against “Income from Other Sources”, the

following conditions must be fulfilled:
• The expenditure must have been incurred solely and exclusively for the
purpose of earning income or making profit.
• The expenditure should not be in the nature of a capital expenditure.
• The amount in question should not be in the nature of personal expenses

of the assessee.
• The expenditure should be incurred in the accounting year.
• There must be a clear nexus between the expenditure incurred and the
income sought to be earned.
The dominant purpose of the expenditure incurred must be to earn income.

The connection between the expenditure and the earning of income need
not be direct; even an indirect connection could prove the nexus between
the expenditure incurred and the income.
Interest on loan taken on fixed deposit – Where an assessee had

invested money in a fixed deposit in a bank on interest, and had taken a
loan on the security of that deposit from the same bank on interest, the
interest paid by the assessee on the loan would not go to diminish his
income from interest on the fixed deposit paid by the bank. Such
diminution is not covered by any provisions in the law.
However, if it were other way round, i.e., the loan was taken to acquire the
fixed deposit, then interest on loan would be deductible against the interest
on the fixed deposit paid by the bank.
398
8.4 CERTAIN AMOUNTS NOT DEDUCTIBLE (Section 58)
The following amounts shall not be deductible in computing the income

chargeable under the head “Income from other sources”,
1. In the case of any assessee,
i. any personal expenses of the assessee;
ii. any interest chargeable under this Act which is payable outside India
on which tax has not been paid or deducted under the Income Tax
Act, 1961;
iii. any payment which is chargeable under the head “Salaries”, if it is

payable outside India, unless tax has been paid thereon or deducted
therefrom under Chapter XVII-B of Income Tax Act, 1961 [Section
58(1)].
2. Any sum paid on account of wealth tax shall not be allowed as deduction
in computing the Income from Other Sources [Section 58(1A)].
That is to say that the provisions of sub-clause (i/a) of clause (a) of

Section 40 shall, so far as may be, apply in computing the income
chargeable under the head “Income from Other Sources” as they apply
in computing the income chargeable under the head “Profits and Gains
of Business or Profession”.
3. The provisions of Section 40A shall, so far as may be, apply in

computing the income chargeable under the head “Income from Other
Sources” as they apply in computing the income chargeable under the
head “Profits and Gains of Business or Profession” [Section 58(2)].
The major disallowances among these would be:
a. Excessive or unreasonable expenditure
Where the assessee incurs any expenditure by making payment to a

relative or a closely connected person as defined and the Assessing
Officer is of opinion that such expenditure is excessive or unreasonable
having regard to:
399
• the fair market value of the goods, services or facilities for which the
payment is made or
• the legitimate needs for earning the income by 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.
b. Expenditure in cash (i.e., otherwise than by account payee crossed

cheque) in excess of Rs. 20,000/-
Any expenditure for which payment is made of a sum exceeding Rs.

20,000/- otherwise than by a crossed cheque drawn on a bank or by a
crossed bank draft, then 20% of such expenditure shall not be allowed
as a deduction. This rule shall have prescribed exemptions like non-
availability of banking facilities at the place where the transaction took
place, urgency or exigency of the situation etc.
The exceptions in respect of such cash expenditure enumerated at

Section 40A(3) shall apply with respect to Income from Other Sources as
well.
c. Provision for Gratuity not allowed
No deduction shall be allowed in respect of any provision made by the

assessee for the payment of gratuity to his employees on their
retirement or on termination of their employment for any reason except
where such provision is made by the assessee for the purpose of
payment of a sum by way of any contribution towards an approved
gratuity fund, or for the purpose of payment of any gratuity, that has
become payable during the previous year.
d. Expenditure towards certain funds

No deduction shall be allowed towards any sum paid by the assessee as
an employer towards the setting up or formation of, or as contribution to
any Funds other than any
400
• recognized provident fund or
• an approved superannuation fund or
• an approved gratuity fund for the exclusive benefit of his employees

under an irrevocable trust;
4. No deduction against lotteries, crossword puzzles, races including horse

races, card games:
No deduction in respect of any expenditure or allowance shall be allowed

under any provision of this Act in computing the income by way of any
winnings from lotteries, crossword puzzles, races including horse races,
card games, and other games of any sort or from gambling or betting of
any form or nature whatsoever.
However, the above shall not apply in computing the income of an

assessee, being the owner of horses maintained by him for running in
horse races, from the activity of owning and maintaining such horses.
Video Link 1
8.5 PROFITS CHARGEABLE TO TAX (Section 59)
The provisions of Section 41(1) shall apply, to extent relevant in computing

the income of an assessee under Section 56, as they apply in computing
the income of an assessee under the head “Profits and Gains of Business or
Profession”.
This would mean the following income would be treated as Income under
the head “Income from Other Sources” under appropriate circumstances
just as they would be treated as business income while computing “Profits
and Gains of Business or Profession” under Section 41 of the Act:
1. Remission or cessation of trade liabilities.
2. Successor of a business obtaining any benefit in respect of deduction

availed by the predecessor.
401
3. In case of power-generating/distributing units, the balancing charge in

respect of any building, machinery, plant or furniture,—
b. in respect of which depreciation is claimed under clause (;) 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:
The excess of its WDV upto the original cost of acquisition shall be
treated as business income of the previous year in which the sale took
place. Thus, the benefit of depreciation availed stand withdrawn in such
cases.
4. Bad debt written off (and allowed) and subsequently recovered is

treated as income of the previous year in which the sale took place.
5. Remission or cessation of trade liabilities of discontinued business is

taxable as profits chargeable to tax.
402
8.6 SUMMARY
All types of income which are a part of total income and not in the form of
income from salary, house property or business/profession are included in
“Income from Other Sources”. Winnings in lotteries, interest received
before starting business, recovery of bad debts after closure of business
are some examples. Expenditure incurred solely or earning this income is
allowed for deduction under certain conditions.
1. List a few items appearing under income from other sources.
2. When is expense incurred to earn this income deductible?
403
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
404
CLUBBING OF INCOME (SECTIONS 61 TO 64)
Chapter 9
Clubbing Of Income (Sections 61 To 64)
Objectives
• Transfer of income without transfer of asset
• Treatment of income of spouse
Structure
9.1 Transfer of Income Where There is No Transfer of Assets (Section 60)
9.2 Income of Individual to include Income of Spouse, Minor Child, etc.

(Section 64)
9.3 Summary
405
9.1 TRANSFER OF INCOME WHERE THERE IS NO

TRANSFER OF ASSETS (Section 60)
All income arising to any person by virtue of a transfer
• whether revocable or not and
• whether effected before or after the commencement of this Act
shall, where there is no transfer of the assets from which the income
arises, be chargeable to income tax as the income of the transferor and
shall be included in his total income. Only where the income is transferred
but not the asset, then Section 60 is applicable.
Section 60 has no application in a case where the corpus or the asset itself
is transferred.
406
Transfer
For the purpose of understanding the word ‘transfer’ occurring here, one
need not limit to its strict meaning as given in the ‘Transfer of Property Act
or other Acts’. A beneficial transfer would be just sufficient.
The transfer may be here revocable or irrevocable and it may be effected

before or after the commencement of this Act.
For the purpose of construing the word ‘transfer’ occurring in Sections 60

to 63, one is not limited to its connotation and meaning as given in the
Transfer of Property Act or other Acts [S.P. Jaiswal v. CIT [1981] 130 ITR
643 (Punjab and Haryana)].
Some Instances
‘A’ instructs his bank to pay interest on his Fixed Deposit to his friend to
help him out in difficult times. The FD always vests with A. This is a case of
transfer of income where there is no transfer of the assets from which the
income arises. The income from FD will be taxable in A’s hands and not in
that of his friend.
Where the assessee, holding 10% share in a partnership firm, transferred

50% of his right, title, and interest to share profits/losses in the firm by
means of a trust deed. Here, the assessee has divested himself of the
income-producing apparatus or assets in favour of the beneficiaries. The
income would continue to be taxed in the hands of the Assessee.
Revocable Transfer of Assets (Section 61)

All income arising to any person by virtue of a revocable transfer of assets
shall be chargeable to income tax as the income of the transferor and shall
be included in his total income.
407
A revocable transfer is revocable upon happening of some event (it may be

mere wish of the transferor). ‘A’ transfers a house by revocable transfer to
‘B’. Income from rent of the house arising to ‘B’ shall be included in total
income of ‘A’.
Revocable Transfer
The expression ‘revocable transfer’ has been used u/s 61 to 63 in the
sense it is understood in the legal world, subject only to the enlargement
of its scope by the deeming provision contained in Section 63 [CIT v. Mr. &
Mrs. Govind B.C. Ghanekar [1994] 206 ITR 438 (Bom.)].
Transfer Irrevocable for a Specified Period (Section 62)
1. The provisions of Section 61 shall not apply to any income arising to any
person by virtue of a transfer
i. by way of trust which is not revocable during the lifetime of the

beneficiary, and,
ii. in the case of any other transfer, which is not revocable during the
lifetime of the transferee;
In such a case as above, the transferor shall not derive any direct or
indirect benefit from such income in either case.
Section 62(1)
The provisions of Section 61 shall not apply to:
any income arising to any person by virtue of a transfer
408
2. When the power to revoke the transfer arises.
However, notwithstanding anything contained in (1) above, all income

arising to any person by virtue of any such transfer shall be chargeable to
income tax as the income of the transferor as and when the power to
revoke the transfer arises, and shall then be included in his total income.
What is “Transfer” and “Revocable Transfer”? (Section 63)
For the purposes of Sections 60, 61, 62 and 63:
a. a transfer shall be deemed to be revocable if
i. it contains any provision for re-transfer directly or indirectly of the

whole or any part of the income or assets to the transferor, or
ii. it, in any way, gives the transferor a right to re-assume power
directly or indirectly over the whole or any part of the income or
assets;
409
b. “transfer” includes any settlement, trust, covenant, agreement, or

arrangement.
The term ‘Revocable transfer’ must be understood in its legal sense and
not in any loose general sense.
9.2 INCOME OF INDIVIDUAL TO INCLUDE INCOME OF

SPOUSE, MINOR CHILD, ETC. (Section 64)
1. In computing the total income of any individual, there shall be included

all such income as arises directly or indirectly—
Income shall be Nature of Income Who Pays the Income –

Received by Other Conditions
Section 64(1)
Spouse of such Salary, commission, fees A concern in which such
individual in whose or any other form of individual has a substantial
hands the clubbing remuneration whether in interest.
takes place: cash or in kind. Substantial Interest:
In the hands of the Exception: (i) If company: Beneficial owner
spouse whose total No clubbing where the of shares (with relatives) of not
income (excluding the spouse possesses technical less than 20% of the voting
income referred to or professional power (shares not entitled to a
here) is greater qualifications and the fixed rate of dividend whether
income so arising to the with or without a further right to
spouse is solely participate in profits) at any time
attributable to the during the previous year
application of his or her (ii) If non-company: Entitled
technical or professional (with relatives) to not less than
knowledge and experience 20% of the profits in the concern.
Spouse of such Income from assets Payer of the income may be any
individual transferred directly or one. Any Income from assets
indirectly to the spouse by transferred directly or indirectly
such individual otherwise to the spouse.
than, for adequate Note:
consideration or in When invested in Partnership
connection with an business by spouse as capital
agreement to live apart contribution or otherwise, the
proportionate income attribute
able to the investment shall be
clubbed.
410
Son’s wife of such a. from assets transferred Payer of the income may be any
individual [Daughter- directly or indirectly on one.
in-law] or after the 1st day of Note:
June, 1973 When invested in Partnership
b. from assets transferred business by Daughter-in-law as
directly or indirectly her capital contribution or
otherwise than for otherwise, the proportionate
adequate consideration income attributable to the
investment shall be clubbed.
Any person or AOP who Income arises from assets Payer of the income may be any
received the income transferred directly or one. But the income shall arise
(to the extent to which indirectly otherwise than from assets so transferred.
the income from such for adequate consideration
assets) for the to the person or AOP
immediate or deferred clubbing limited to the
benefit of his or her extent to which the
spouse income from such assets is
for the immediate or
Any person or AOP who deferred benefit of his or
received the income her spouse.
(to the extent to which
the income from such Income arises from assets Payer of the income may be any
assets) for the transferred directly or one. But the income shall arise
immediate or deferred indirectly on or after the from assets so transferred.
benefit of his son’s wife 1st day of June, 1973,
otherwise than for
adequate consideration OR
to the extent to which the
income from such assets is
for the immediate or
deferred benefit of his
son’s wife.
Section 64(1A) Any income arising to Payer of the income may be any
Income as arises or minor child – whether one. To be clubbed with that
accrues to his minor from asset transferred by parent’s income whose income is
child not being a minor parent or otherwise higher.
child suffering from
any disability of the If marriage of parents does not
nature specified in subsist, then to be clubbed with
Section 80U ignoring that parent’s income who
Minors independent maintains the child.
income from: manual
work done by him; or
any activity involving
application of his skill,
talent or specialized
knowledge and
experience
411
Transfer through Income from the Payer of such income may be any
HUF Section 64(2) converted property one.
clubbed with the
Individual – His individual's income – It is
separate property – not HUF’s Income.
transfers after the 31st
day of December, 1969 Upon Partition of HUF:
to his HUF otherwise If spouse received the
than for adequate converted property, then
consideration income therefrom as
received by the spouse to
be clubbed as if it is from
assets transferred
indirectly by the individual
to the spouse.
• Activity A
1. Champakial pays Rs. 25,000/- p.m. as salary to his wife who is a home-
maker of his family with two sons. He wants to know from you as a tax
advisor, whether he can reduce his tax liability by showing this as
business expense.
Provide him your written advice and your invoice for professional fees.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
……………
“Income” includes Loss

For the purposes of clubbing u/s 64, the term “income” includes loss.
Therefore, just as the income is to be clubbed, the losses arising to the
transferee are also to be clubbed in the hands of the transferor.
412
9.3 SUMMARY
If income is transferred without transfer of asset, income is chargeable at

the hands of transferor. Income of spouse or minor child from assets
transferred by a person continues to be that person’s income.
1. Does transfer of income make transferee chargeable for tax? Why?
2. Minor received a FD from his father. Who is liable to pay tax?
413
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
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SET OFF OR CARRY FORWARD AND SET OFF OF LOSSES (SECTIONS 70 TO 80)
Chapter 10
Set Off Or Carry Forward And Set Off Of
Losses (Sections 70 To 80)
Objectives
• How can losses from one source under a particular head of income are
set off against income from another source under same head?
• How can losses under a particular head of income are set off against
income from another head of income?
Structure:
10.1 Introduction
10.2 Set Off of Loss from One Source against Income from Another Source
under the same Head of Income (Section 70)
10.3 Set Off of Loss from One Head against Income from Another Head
(Section 71)
10.4 Carry Forward and Set off of Business Loss (Section 72)
10.5 Losses in Speculation Business (Section 73)
10.6 Losses under the Head Capital Gains (Section 74)
10.7 Losses of Firm (Section 78)
10.8 Carry Forward and Set Off of Losses in the Case of Certain
Companies (Section 79)
10.9 Submission of Return for Losses (Section 80)
10.10 Summary
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10.1 INTRODUCTION
It is seen in earlier chapters how income from various heads of income is

computed. When an assessee has positive income under each head, it is
aggregated and after applying the deductions available under Chapter VI-
A, in each case, the tax rate is applied.
It may so happen that an assessee has more than one source of income in
each head of Income. He may have positive income under one source and
negative income under other source. For instance, an assessee owns three
houses, one of which is his self-occupied house and other two are rented.
Based on the computations made, he may have positive income from one
house and negative income from other house. SOP will have Nil Income if
there is no interest payable on loan borrowed to acquire, reconstruct/repair
the house.
Similarly, an assessee may be having income from say two different

businesses of which he is the proprietor. He may have Income from Capital
Gains from sale of four assets. These are the cases of having income from
various sources falling under the same head of income.
The computation of income under each source/head of income is to be

done as per the rules of computation applicable to that head. The Income
Tax Act, 1961 provides for rules of set off of loss under various heads.
These are discussed in this chapter.
10.2 SET OFF OF LOSS FROM ONE SOURCE AGAINST

INCOME FROM ANOTHER SOURCE UNDER THE SAME HEAD
OF INCOME (Section 70)
1. Set off of loss from one source against income from other source under
the same head of Income in the following manner:
Where the net result for any assessment year in respect of any source
falling under any head of income (other than “Capital gains”) is a loss,
the assessee shall be entitled to have the amount of such loss set off
against his income from any other source under the same head.
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Thus, in a particular Assessment Year:
This Can be Set Off Against

Net result of one source which is loss Income under other source (in the
applicable to each head of Income same head)
(other than “Capital gains”)
2. Where the result of the computation made for any assessment year
under Sections 48 to 55 in respect of any short-term capital asset is a
loss, the assessee shall be entitled to have the amount of such loss set
off against the income, if any, as arrived at under a similar computation
made for the assessment year in respect of any other capital asset.
Then, where in respect of any long-term capital asset there is a loss, the
assessee shall be entitled to have the amount of such loss set off against
the income, if any, as arrived at under a similar computation made for
the assessment year in respect of any other long-term capital asset.
This can be summarized as under:

Short-term Capital Loss Short-term Capital Gain
OR
Long-term Capital Gain
Long-term Capital Loss Long-term Capital Gain (only)
10.3 SET OFF OF LOSS FROM ONE HEAD AGAINST INCOME

FROM ANOTHER HEAD (Section 71)
1. Where in respect of any assessment year the net result of the

computation under any head of income, other than “Capital Gains”, is a
loss and the assessee has no income under the head “Capital Gains”, he
shall, subject to the provisions of this Chapter, be entitled to have the
amount of such loss set off against his income, if any, assessable for
that assessment year under any other head.
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Loss under any Head (other than Income from any other head
Capital Gains) and there is no Income
under the head ‘Capital Gains’
2. Where in respect of any assessment year, the net result of the

computation under any head of income, other than “Capital Gains”, is a
loss and the assessee has income assessable under the head “Capital
Gains”, such loss may, subject to the provisions of this Chapter, be set
off against his income, if any, assessable for that assessment year under
any head of income including the head “Capital Gains” (whether relating
to short-term capital assets or any other capital assets).
Thus, in a particular Assessment Year (where the assessee has income

assessable under the head “Capital Gains”):

Loss under any Head (other than Income under any head of income
Capital Gains) and there is no Income including income under Capital Gains
under the head ‘Capital Gains’
Section 71(2A)
W.e.f. 1.4.2005, where in respect of any assessment year, the net result of
computation under the ‘Income from Business and Profession’ is a loss,
and the assessee has income under the head ‘Salaries’, the assessee shall
not be entitled to have such loss set off against such income.
Thus, in a particular Assessment Year w.e.f. A.Y. 2005-06:
This Cannot be Set Off Against

Loss under the head of ‘Salaries’ Income under the head of ‘Income
from Business and Profession’
Section 71(3)
Where in respect of any assessment year, the net result of the computation
under the head “Capital Gains” is a loss and the assessee has income
assessable under any other head of income, the assessee shall not be
entitled to have such loss set off against income under the other head.
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This Cannot be Set Off Against

Loss under the head of ‘Capital Gains’ Income under any head of income
Carry Forward and Set Off of Loss under Income from House
Property (Section 71B)
It is possible that there is loss under the head ‘Income from House
Property’ and this cannot be set off against Income under other any heads
under the forgoing provisions of set off.
The unabsorbed loss from house property can be carried forward to next
years and be set off only against Income from House Property in that year.
It shall be so carried forward to next eight years.
10.4 CARRY FORWARD AND SET OFF OF BUSINESS LOSS

(Section 72)
1. The net result of computation under the head ‘Profits and Gains of
Business or Profession’ is loss.
2. This loss is not the loss in speculation business (for speculation

business, there are separate provisions).
3. Such loss cannot be set off against income from any other heads as
permissible in the same year. This loss is called ‘unabsorbed business
loss’.
4. Such unabsorbed business loss can be carried forward to next eight

assessment years.
5. In the subsequent years, the treatment of such unabsorbed business

loss shall go as under:
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6. In the matter of set off, priority is given to past unabsorbed losses u/s
72 over:
- Unabsorbed Depreciation u/s 32(2) and
- Capital Expenditure on Scientific Research u/s 35(4)
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Provisions Relating to Carry Forward and Set Off of Accumulated

Loss and Unabsorbed Depreciation Allowance in Amalgamation or
Demerger, etc. (Section 72A)
It is necessary to know what ‘amalgamation’ is. Section 2(1B) of the

Income Tax Act, 1961 explains the amalgamation as under:
“Amalgamation”, in relation to companies, means
a. the merger of one or more companies with another company or
b. the merger of two or more companies to form one company
The company or companies which so merge being referred to as ‘the

amalgamating company’ (Transferor Company or the old company).
The company with which they merge or which is formed as a result of the
merger, is being referred to as ‘the amalgamated company’ (or the
Transferee Company or the new company).
This process of Amalgamation has to happen in such a manner that
i. all the property of the amalgamating (old) company or companies

immediately before the amalgamation becomes the property of the
amalgamated (new) company by virtue of the amalgamation;
ii. all the liabilities of the amalgamating (old) company or companies

immediately before the amalgamation become the liabilities of the
amalgamated (new) company by virtue of the amalgamation;
iii. shareholders holding not less than 75% in value of the shares in the
amalgamating (old) company or companies (other than shares already
held therein immediately before the amalgamation by, or by a nominee
for, the amalgamated company or its subsidiary) become shareholders
of the amalgamated (new) company by virtue of the amalgamation,
otherwise than as a result of the acquisition of the property of one
company by another company pursuant to the purchase of such
property by the other company or as a result of the distribution of such
property to the other company after the winding up of the first-
mentioned company.
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Now, we see how the past unabsorbed losses of old amalgamating

company can be availed by the new amalgamated company in case of
amalgamation.
1. Where there has been an amalgamation of a company which owns

• an industrial undertaking or
• a ship or
• a hotel with another company or
There is an amalgamation of a banking company referred to in clause (c) of

Section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified
bank, then:
• the accumulated loss and

• the unabsorbed depreciation
of the amalgamating company shall be deemed to be the loss or, as the

case may be, allowance for depreciation of the amalgamated company for
the previous year in which the amalgamation was effected, and other
provisions of this Act relating to set off and carry forward of loss and
allowance for depreciation shall apply accordingly.
2. Now, it must be borne in mind that the accumulated loss shall not be
set off or carried forward and the unabsorbed depreciation shall not be
allowed in the assessment of the amalgamated company unless:
a. the amalgamating (old) company
i. has been engaged in the business, in which the accumulated loss

occurred or depreciation remains unabsorbed, for three or more
years;
ii. has held continuously as on the date of the amalgamation at least

75% of the book value of fixed assets held by it two years prior to
the date of amalgamation;
b. the amalgamated (new) company
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i. holds continuously for a minimum period of five years from the date
of amalgamation at least 75% of the book value of fixed assets of the
amalgamating company acquired in a scheme of amalgamation;
ii. continues the business of the amalgamating company for a minimum

period of five years from the date of amalgamation;
iii. fulfills such other conditions as may be prescribed to ensure the

revival of the business of the amalgamating company or to ensure
that the amalgamation is for genuine business purpose.
3. In a case where any of the conditions laid down in paragraph 2 above

are not complied with, the set off of loss or allowance of depreciation
made in any previous year in the hands of the amalgamated company
shall be deemed to be the income of the amalgamated company
chargeable to tax for the year in which such conditions are not complied
with.
4. Demerger:
In the case of a demerger, the accumulated loss and the allowance for
unabsorbed depreciation of the demerged company shall—
a. where such loss or unabsorbed depreciation is directly relatable to the

undertakings transferred to the resulting company, be allowed to be
carried forward and set off in the hands of the resulting company;
b. where such loss or unabsorbed depreciation is not directly relatable to

the undertakings transferred to the resulting company, be apportioned
between the demerged company and the resulting company in the same
proportion in which the assets of the undertakings have been retained
by the demerged company and transferred to the resulting company,
and be allowed to be carried forward and set off in the hands of the
demerged company or the resulting company, as the case may be.
5. Where there has been reorganization of business, whereby,
a. a firm is succeeded by a company fulfilling the conditions laid down in

clause (xiii) of Section 47
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[where any transfer of a membership right which is held by a member of a

recognized stock exchange in India for acquisition of shares and trading or
clearing rights acquired by such member in that recognized stock exchange
in accordance with a scheme for demutualization or corporatization which
is approved by the Securities and Exchange Board of India] or
b. a proprietary concern is succeeded by a company fulfilling the conditions

laid down in clause (xiv) of Section 47
[where a sole proprietary concern is succeeded by a company in the

business carried on by it as a result of which the sole proprietary concern
sells or otherwise transfers any capital asset or intangible asset to the
company], then the accumulated loss and the unabsorbed depreciation of
the predecessor firm or the proprietary concern, as the case may be, shall
be deemed to be the loss or allowance for depreciation of the successor
company for the purpose of previous year in which business reorganization
was effected.
The other provisions of this Act relating to set off and carry forward of loss
and allowance for depreciation shall apply accordingly:
Here, it shall be necessary that if any of the conditions laid down in the
proviso to clause (xiii) or the proviso to clause (xiv) to Section 47 are not
complied with, the set off of loss or allowance of depreciation made in any
previous year in the hands of the successor company, shall be deemed to
be the income of the company chargeable to tax in the year in which such
conditions are not complied with.
The conditions laid down in the proviso to clause (xiv) to Section 47 go as

under:
a. all the assets and liabilities of the sole proprietary concern relating to
the business immediately before the succession become the assets and
liabilities of the company;
b. the shareholding of the sole proprietor in the company is not less than
50% of the total voting power in the company and his shareholding
continues to remain as such for a period of five years from the date of
the succession; and
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c. the sole proprietor does not receive any consideration or benefit,

allotment of shares in the company;
Section 72AA: Provisions relating to carry forward and set off of

accumulated loss and unabsorbed depreciation allowance in scheme of
amalgamation of banking company in certain cases [Introduced by Finance
Act, 2005 w.e.f. 1.4.2005].
Notwithstanding anything contained in sub-clauses (I) to (iii) of clause (1B)

of Section 2 or Section 72A, where there has been an amalgamation of a
banking company with any other banking institution under a scheme
sanctioned and brought into force by the Central Government under sub-
section (7) of Section 45 of the Banking Regulation Act, 1949 (10 of 1949),
the accumulated loss and the unabsorbed depreciation of such banking
company shall be deemed to be the loss or, as the case may be, allowance
for depreciation of such banking institution for the previous year in which
the scheme of amalgamation was brought into force and other provisions
of this Act relating to set off and carry forward of loss and allowance for
depreciation shall apply accordingly.
Explanation: For the purposes of this section,
i. “accumulated loss” means so much of the loss of the amalgamating

banking company under the head “Profits and Gains of Business or
Profession” (not being a loss sustained in a speculation business) which
such amalgamating banking company, would have been entitled to carry
forward and set off under the provisions of Section 72 if the
amalgamation had not taken place;
ii. “banking company” shall have the same meaning assigned to it in

clause (c) of Section 5 of the Banking Regulation Act, 1949 (10 of
1949);
iii. “banking institution” shall have the same meaning assigned to it in sub-
section (15) of Section 45 of the Banking Regulation Act, 1949 (10 of
1949);
iv. “unabsorbed depreciation” means so much of the allowance for

depreciation of the amalgamating banking company which remains to
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be allowed and which would have been allowed to such banking

company if amalgamation had not taken place.
10.5 LOSSES IN SPECULATION BUSINESS (Section 73)
This can be explained as thus:
1. Speculation Loss incurred during the year can be set off only against
Speculation Profit
2. Unabsorbed Speculation Loss carried forward to next year
3. Past Speculation Loss can be set off only against speculation profit of
next years
4. Carry forward allowed up to next four years (immediately succeeding

the assessment year for which the loss was first computed) [w.e.f.
1.4.2006, Finance Act, 2005 has restricted the period of carry forward
of loss to eight years]
5. Priority to be given in set off to Speculation Loss over:
- Past Unabsorbed Depreciation u/s 32(2)
- Past Capital Expenditure of Scientific Research u/s 35(4)
It may be observed that a ‘Speculative transition’ is defined under the Act

at Section 43(5) as:
In Sections 28 to 41 and in this section, (unless the context otherwise

requires):
“speculative transaction” means a transaction in which a contract for the

purchase or sale of any commodity, including stocks and shares, is
periodically or ultimately settled otherwise than by the actual delivery or
transfer of the commodity or scrips:
But for this purposes, the following shall not be deemed to be a speculative
transaction:
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


a. a contract in respect of raw materials or merchandise entered into by a

person in the course of his manufacturing or merchanting business to
guard against loss through future price fluctuations in respect of his
contracts for actual delivery of goods manufactured by him or
merchandise sold by him; or
b. a contract in respect of stocks and shares entered into by a dealer or

investor therein to guard against loss in his holdings of stocks and
shares through price fluctuations; or
c. a contract entered into by a member of a forward market or a stock

exchange in the course of any transaction in the nature of jobbing or
arbitrage to guard against loss which may arise in the ordinary course of
his business as such member.
Carry Forward and Set Off of Losses by Specified Business (Section

73A) [w.e.f. 1.4.2010]
1. Any loss of specified business referred to in Section 35AD shall not be

set off except against profit and gain of specified business.
2. Where for any assessment year any loss of specified business referred
to in sub-section (1) has not been wholly set off under sub-section (1),
so much of the loss as is not set off or the whole loss where the
assessee has no income from any other specified business, shall,
subject to other provisions of this Chapter be carried forward to the
following assessment year, and—
i. It shall be set off against the profits and gains, if any, of any specified
business carried on by him assessable for that assessment year; and
ii. If the loss cannot be wholly so set off, the amount of loss not so set
off shall be carried forward to the following assessment year and so
on.
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10.6 LOSSES UNDER THE HEAD CAPITAL GAINS (Section

74)
1. The Unabsorbed Loss of Capital Gains can be carried forward to next

eight years.
2. In the next years, such unabsorbed Loss of Capital Gains shall be

treated as under:

Unabsorbed Short-term Capital Loss Short-term Capital Gain
OR Long-term Capital Gain
of subsequent eight years
Unabsorbed Long-term Capital Loss Set off against only Long-term Capital
Gain of subsequent eight years
Loss from Owning and Maintaining Race Horses (Section 74A)
For the purposes of allowing and set off of losses, the activity of owning
and maintaining Race Horses [The Activity] are given separate treatment.
This activity should not be treated at as with other business activity.
Such loss can be set off in the same year in which it is incurred only
against income, if any, from the same source, i.e., from owning and
maintaining Race Horses.
The unabsorbed loss from this activity can be carried forward to

subsequent years and be set off in next four years only against the same
activity, i.e., that of owning and maintaining Race Horses.
In doing so, the activity/business of owning and maintaining Race Horses

must be carried on when the loss is set off.
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10.7 LOSSES OF FIRM (Section 78)
Carry forward and set off of losses in case of change in constitution of firm
or on succession.
1. Where a change has occurred in the constitution of a firm, nothing in

this Chapter of carry forward and set off of losses shall entitle the firm
to have carried forward and set off so much of the loss proportionate to
the share of a retired or deceased partner as exceeds his share of
profits, if any, in the firm in respect of the previous year.
2. Where any person carrying on any business or profession has been

succeeded in such capacity by another person otherwise than by
inheritance, nothing in this Chapter shall entitle any person other than
the person incurring the loss, to have it carried forward and set off
against his income.
i. Thus, Firm – Having Losses – Change in constitution of firm or

succession
– When retirement of partner/death of partner
Firm cannot carry forward and set off
Loss proportionate to the share of Retired/Deceased Partner, i.e.,

proportionate to the share of the Outgoing Partner.
ii. Any person Carrying on any Business
Succession takes Otherwise then by New person not entitled

place inheritance to carry forward and set
off past losses of
business
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10.8 CARRY FORWARD AND SET OFF OF LOSSES IN THE

CASE OF CERTAIN COMPANIES (Section 79)
Where a change in shareholding has taken place in a 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:
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.
b. nothing contained in the foregoing shall apply to a case where a change

in the said voting power 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.
c. Nothing contained in this section shall apply 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 51% shareholders of the amalgamating or
demerged foreign company continue to be the shareholders of the
amalgamated or the resulting foreign company.
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The above may be graphically explained as under:
Company Public not substantially interested

Change in shareholding in previous Previous year is important
year
Unabsorbed losses incurred in past Cannot be set off against income of
years prior to their previous year this previous year
UNLESS
on the last date of the previous year (year-end date)
Shares carrying 51% of Present shareholding by

voting power of New same persons
Company
Beneficially held Death Transfer excluded
Who were beneficial
holders of shares when
the loss was incurred in
past
Also allowed if
Indian Company Change in shareholding
Indian Company is Subsidiary of a Foreign Foreign Company is
subsidiary Company amalgamated or
demerged
51% shareholders of old
Foreign Company
51% shareholders of new
Foreign Company
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10.9 SUBMISSION OF RETURN FOR LOSSES (Section 80)
Notwithstanding anything contained in the Chapter of losses, no loss which

has not been determined in pursuance of a return filed in accordance with
the provisions of sub-section (3) of Section 139, shall be carried forward
and set off under sub-section (1) of Section 72 or sub-section (2) of
Section 73 or sub-section (1) or sub-section (3) of Section 74 or sub-
section (3) of Section 74A.
In short, the return of income having losses shall not enable an assessee
to claim such losses if the same is not filed in time permitted under Section
139(3).
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10.10 SUMMARY
Loss against any source of income from any head of income, other than
capital gains, can be set off against income from any other source under
the same head. In case of short- term capital loss, it can be set off against
any capital gains, but long-term loss can be set off only against long-term
gains.
Loss under the head of ‘salaries’ cannot be set off against income from
business and loss under the head of capital gains cannot be set off against
income under any head of income.
1. Discuss briefly the clubbing provisions in respect of income earned by a

lady from the amount invested in her personal business where such
investment came from the money received as gift from her husband.
The lady is a professionally qualified fashion designer of repute having
her own business. The amount gifted and invested in the fashion
designing business constitutes 43% of the average capital employed in
the business.
2. Set off and carry forward of losses in respect of House Property.
3. Describe how losses in respect of one source of income is set off against
income under the same head.
4. Describe how losses under one head is set off against income from
other heads of income.
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
434
DEDUCTIONS AND REBATES
Chapter 11
Deductions And Rebates
Objectives
• Deductions from income allowed under Section 80.
• Rebates in tax allowed under Section 88
Structure
11.1 Deductions
11.2 Deductions under (Section 80)
11.3 Rebates under (Section 88)
11.4 Taxability of Items Allowed as Deductions in Earlier Years
11.5 Summary
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11.1 DEDUCTIONS
Chapter VI-A of the Income Tax Act, 1961 contain deductions to be made
in computing total income. Section 80A prescribes that in computing the
total income of an assessee, there shall be allowed from his gross total
income the deductions specified in Sections 80C to 80U. However, the
aggregate amount of the deductions under this Chapter shall not, in any
case, exceed the gross total income of the assessee.
Further, where, in computing the total income of an association of persons

or a body of individuals, any deduction is admissible under Section 80G,
Section 80GGA, Section 80GGC, Section 80HH, Section 80HHA, Section
80HHB, Section 80HHC, Section 80HHD, or Section 80-I, Section 80-IA,
Section 80-lB or Section 80J or Section 80JJ, then no deduction under the
same section shall be made in computing the total income of a member of
the association of persons or body of individuals in relation to the share of
such member in the income of the association of persons or body of
individuals.
11.2 DEDUCTIONS UNDER (Section 80)
The deductions are summarized as under:
1. Section 80C
Assessee Individual/HUF
Qualifying Payments/ Income Payment made out of taxable income to

Life Insurance Premium, deferred annuity,
contributions to provident fund, Units of
UTI, NSC Housing Loan Repayment,
Tuition Fees of children, Term Deposit in 5
years, Time deposit with Post Offices
Conditions/Incidents The maximum amount deductible under

Sections 80C, 80CCC and 80CCD cannot
exceed Rs. 1 lakh
Qualifying Amount of Deduction Rs. 1,50,000
Quantum Least of amount paid or Rs. 1,00,000
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2. Section 80CCC
Assessee Individual
Qualifying Payments/ Income Payment made out of taxable income to

LIC or to any other approved insurer
under approved Pension Plan
Conditions/Incidents Rebate is not allowable u/s 88

Pension received or amount withdrawn is
taxable in the year of receipt
Qualifying Amount of Deduction Rs. 1,00,000 (covered by limit of Section

80C)
Quantum Least of amount paid or Rs. 1,00,000
3. Section 80CCD
Assessee [Inserted by the Finance (No. 2) Act, 2004,
w.e.f. 1.4.2004]
Individual who is an employee employed on or
after 1.1.2004/any individual (self-employed)
w.e.f. F.Y. 2009-10
Qualifying Payments/ Income Amount paid or deposited in his account under

a pension scheme notified by the Government
Conditions/Incidents 1. Rebate is not allowable u/s 88

2. Pension received or amount withdrawn by
the assessee or his nominee is taxable in the
year of receipt
Qualifying Amount of Lower of: (a) amount paid or deposited or (b)

Deduction 10% of Salary
Quantum Lower of 100% of qualifying amount or Rs.

1,00,000/-
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4. Section 80CCF
Qualifying Payments/ Income Amount paid/deposited as subscription to

notified long-term Infrastructure Bonds
Conditions/Incidents Deduction under this section is available from

A.Y. 2011-12 to A.Y. 2012-13
Qualifying Amount of Deduction Amount paid/deposited
Quantum Rs. 20,000 OR amount actually paid/

deposited whichever is lower
5. Section 80D
Qualifying Payments/ Premium paid out of taxable income to approved

Income scheme of GIC (Mediclaim, Bhavishya Arogya) or
any other approved insurer to health of his family
and parents.
Payment for Preventive Health Check-up of family
and parents.
Conditions/Incidents Family means spouse and children. Payment must

be made by any other mode than cash payment.
For preventive health check-up payment, cash is
valid. Senior citizen means age of 60 years or
more.
Qualifying Amount of Rs. 15,000 for Self and Family, Rs. 15,000 for
Deduction Parents (Rs. 50,000 if parents are senior citizens),
Rs. 5,000 for preventive health check-up.
Quantum 100% of premium paid OR Rs. 15,000 for Self and

Rs. 15,000/Rs. 20,000 for Parents, whichever is
less.
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6. Section 80DD
Assessee Individual/HUF (Resident)
Qualifying 1. Expenses incurred for Medical Treatment (including Nursing), Training

Payments/ and Rehabilitation of a dependent with disability (severe/ordinary).
Income
2. Amount paid/deposited to any scheme framed by LIC/UTI approved

insurer/administrator (now known as Specified Company), for
payment of annuity or lump sum amount for the benefit of dependent
person with disability.
Conditions/ 1. For meaning of the word ‘disability’, reference is to be made to

Incidents Section 2(i) of the Persons with Disabilities (Equal Opportunities,
Protection of Rights and Full Participation) Act, 1995 (PDEOPRFP), and
Sections 2(a), (c) and (h) of the National Trust for Welfare of Persons
with Autism, Cerebral Palsy, Mental Retardation and Multiple
Disabilities Act, 1999 (NTWPACPMR MD Act). Disabilities covered are
blindness, low vision, leprosy-cured, hearing impairment, locomotor
disability, autism, cerebral palsy, multiple disability, mental retardation
and mental illness (defined in Explanation (f) to Section 80DD).
2. Under PDEOPRFP Act, a person with disability means a person

suffering from not less than 40% of any disability and severe disability
means 80% of one or more of such disability.
3. A certificate in prescribed form and manner from medical authority as

defined in Explanation (e) to Section 8ODD, stating the extent of
disability and the validity of period, is required to be submitted with
the Return of Income. On expiry of the certificate, a reassessment of
the condition of disability is required to be done.
4. Nomination can be either in favour of disabled dependent or any other

person or a trust in case of investment in scheme.
5. If the disabled dependent predeceases the individual, or the member

of HUF in whose name subscription is made, then the entire amount
paid/deposited in scheme will be treated as taxable income in the year
of receipt.
6. Handicapped dependent has been defined in Explanation (b) to

Section 8ODD.
7. “Person with disability” is defined in Explanation (f) and “Person with

severe disability” is defined in Explanation (g) to Section 8ODD.
Qualifying –
Amount of
Deduction
439
Quantum Rs. 50,000 for ordinary disability

Rs. 1,00,000 for severe disability
7. Section 80DDB
Assessee Individual/HUF (Resident)
Qualifying Payments/ Income Amount actually paid for medical treatment of

such disease or ailments as may be specified.
Conditions/Incidents 1. Deduction available for expenses on self,

dependent or a member of HUF
2. Assessee is required to furnish a certificate

in prescribed form from a neurologist, an
oncologist, a urologist, a haematologist, an
immunologist or such other specialist as
may be prescribed, working in a
Government Hospital.
Qualifying Amount of Deduction Rs. 40,000 (Rs. 60,000 for senior citizen)
Quantum 1. Least of amount paid or Rs. 40,000 (Rs.

60,000 for senior citizens).
2. Amount received from an insurer of

reimbursed by employer for the medical
treatment is to be reduced.
440
8. Section 80E
Assessee Individual
Qualifying Interest paid on (out of taxable income) loan taken for

Payments/ pursuing higher education [From A.Y. 2006-07, deduction for
Income repayment of principal amount is not available].
Conditions/ 1. The loan should be from an approved charitable institution

Incidents notified u/s 10(23C)/referred to in Section 80G(2)(a)/a
banking company/notified financial institution.
2. Higher education means full-time studies for any graduate/

post-graduate course in engineering, medicine,
management, architecture or for post-graduate course in
applied sciences or pure sciences including mathematics and
statistics
3. Available for a maximum of 7 A.Ys. after initial assessment

year in which the loan repayment/interest payment starts or
loan along with interest is paid in full whichever is earlier
Qualifying Payment of Interest on loan for higher education

Amount of
Deduction
Quantum The entire amount of Interest is deductible without any limit
9. Section 80G
Assessee Any Assessee [except u/s 80G(2)(c)]
Qualifying Payments/ Donations for charitable purposes specified in Section

Income 80G(2)
Conditions/Incidents 1. Donations should not be in kind.

2. If paid out of another year’s income or out of income
not includible in the assessment of the current year
the deduction still available (Lt. F. No. 45/313/66-
ITJ(61) dt. 2.12.1966.
3. Time for application and/or transfer of funds to PMRF
on account of Gujarat Earthquake relief extended till
31.03.2004.
441
Qualifying Amount of Amount of donations, not exceeding 10% of GTI (as

Deduction reduced by other deductions). In certain cases, this
limit does not apply. Please see Section 80G(4).
Quantum 1. 50% generally; and

2. 100% in cases of PM’s Relief Funds, Gujarat
Earthquake Relief Funds etc. [i.e., to the preferred
category of Institutions] [Ref. Section 80G(1)(i)]
The various institutions to whom donations may be given have been

enumerated in Section 80G(2) and may be categorized as under:
Clause Nature of Donation Category
(a) (i) National Defence Fund set up by the Central Government A
(a) (ii) Jawaharlal Nehru Memorial Fund referred to in the Deed B

of Declaration of Trust adopted by the National
Committee at its meeting held on the 17th day of
August, 1964
(a) (iii) Prime Minister’s Drought Relief Fund B
(a) (iiia) Prime Minister’s National Relief Fund A
(a) (iiiaa) Prime Minister’s Armenia Earthquake Relief Fund A
(a) (iiiab) Africa (Public Contributions – India) Fund A
(a) (iiib) National Children’s Fund B
(a) (iiic) Indira Gandhi Memorial Trust, the deed of declaration in B

respect whereof was registered at New Delhi on the 21st
day of February,1985
(a) (iiid) Rajiv Gandhi Foundation, the deed of declaration in B

respect whereof was registered at New Delhi on the 21st
day of June, 1991
(a) (iiie) National Foundation for Communal Harmony A

A University or any educational institution of national A
eminence as may be approved by the prescribed
authority in this behalf
442
(a) (iiif) Maharashtra Chief Minister’s Relief Fund during the A

period beginning on the 1st day of October, 1993 and
ending on the 6th day of October, 1993 or to the Chief
Minister’s Earthquake Relief Fund, Maharashtra
(a) (iiig) Any fund set up by the State Government of Gujarat A

exclusively for providing relief to the victims of
earthquake in Gujarat
(a) (iiiga) Any Zila Saksharta Samiti constituted in any district A

under the chairmanship of the Collector of that district
for the purposes of improvement of primary education in
villages and towns in such district and for literacy and
post-literacy activities
(a) (iiih) National Blood Transfusion Council or to any State Blood A

Transfusion Council which has its sole object, the control,
supervision, regulation or encouragement in India of the
services related to operation and requirements of blood
banks
(a) (iiiha) Any fund set up by a State Government to provide A

medical relief to the poor
(a) (iiihb) Army Central Welfare Fund or the Indian Naval A

Benevolent Fund or the Air Force Central Welfare Fund
established by the armed forces of the Union for the
welfare of the past and present members of such forces
or their dependents
(a) (iiihc) Andhra Pradesh Chief Minister’s Cyclone Relief Fund, A

1996
(a) (iiihd) National Illness Assistance Fund A
(a) (iiihe) The Chief Minister’s Relief Fund or the Lieutenant A

Governor’s Relief Fund in respect of any State or Union
territory, as the case may be
(a) (iiihi) National Sports Fund to be set up by the Central A

Government
(a) (iiihg) National Cultural Fund set up by the Central Government A
(a) (iiihh) Fund for Technology Development and Application set up A

by the Central Government
443
(a) (iiihj) National Trust for Welfare of Persons with Autism, A

Cerebral Palsy, Mental Retardation and Multiple
Disabilities constituted under sub-section (1) of Section
3 of the National Trust for Welfare of Persons with
Autism, Cerebral Palsy, Mental Retardation and Multiple
Disabilities Act, 1999
(a) (iv) Any other fund or any institution to which this section B
applies
(a) (v) Amount donated to the Government or any local B

authority, to be utilized for any charitable purpose [other
than the purpose of promoting family planning]
(a) (vi) An authority constituted in India by or under any law B

enacted either for the purpose of dealing with and
satisfying the need for housing accommodation or for
the purpose of planning, development or improvement of
cities, towns and villages, or for both
(a) (via) Any corporation referred to in clause (26BB) of Section B

10
(a) (vii) The Government or to any such local authority, A+B

institution or association as may be approved in this
behalf by the Central Government, to be utilized for the
purpose of promoting family planning
(b) Any sums paid by the assessee in the previous year as B

donations for the renovation or repair of any such
temple, mosque, gurdwara, church, or other place as is
notified by the Central Government in the Official
Gazette to be of historic, archaeological or artistic
importance or to be a place of, public worship of renown
throughout any State or States
444
(i) Any sums paid by the assessee, being a company, in the A+B
previous year as donations to the Indian Olympic
Association or to any other association or institution
established in India, as the Central Government may, A
having regard to the prescribed guidelines, by
notification in the Official Gazette, specify in this behalf
for—
i. the development of infrastructure for sports and
games or
ii. the sponsorship of sports and games, in India
(d) Any sums paid by the assessee, during the period A

beginning on the 26th day of January, 2001 and ending
on the 30th day of September, 2001, to any trust,
institution or fund to which this section applies for
providing relief to the victims of earthquake in Gujarat
In case of Category A donations, 100% of the amount donated shall be

allowed as a deductions.
In case of Category B donations, the aggregate of the amount donated

shall be restricted to the qualifying amount of 10% of Gross Total Income
(as reduced by any portion thereof on which income tax is not payable
under any provision of this Act and by any amount in respect of which the
assessee is entitled to a deduction under any other provision of this
Chapter) of the assessee.
The amount donated in excess of the 10% of Gross Total Income shall be
ignored. This qualifying amount shall be allowed to the extent of 50% of
the qualifying amount.
445
10.Section 80GG
Assessee Individual
Qualifying Payments/ Expenditure incurred towards payment of rent in

Income respect of furnished or unfurnished
accommodation occupied for his own residence
Conditions/Incidents 1. This section does not apply where residential

accommodation is owned by assessee, his
spouse, minor child or by HUF at a place
where assessee ordinarily resides or carries on
business or profession
2. This section does not apply where the
assessee owns residential accommodation at
any other place which is in occupation of the
assessee
3. Assessee to submit a declaration in Form No.
10BA
Qualifying Amount of Expenditure in excess of 10% of his total income.

Deduction (Total income is the income before allowing
deduction for Chap VIA)
Quantum Rs. 2,000 per month 25% of total income

The excess of actual rent paid over 10% of total
income whichever is lower.
11.Section 80GGA
Assessee Any Assessee
Qualifying Donations for Scientific Research or research in social

Payments/ Income sciences or Rural Development or Conservation of
Natural Resources or to National Urban Poverty
Eradication Fund or for eligible project/ scheme
Conditions/Incidents 1. Assessee should not have income under the head

‘Profits and Gains of Business or Profession’
2. Donee should be approved u/s 35 or 35CCA or 35AC
Qualifying Amount of Amount of Donations

Deduction
Quantum 100%
446
• Activity A
1. Ajit Tours and Travels cater to Indian and Overseas Tourists. Their
director learns that income from their overseas tourists attracts tax
benefits.
Send a report to him describing deductions available and precautions to be

exercised to have them accepted by the ITO at the time of assessment.
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
12.Section 80IAB
Assessee Developer of Special Economic Zone
Qualifying Payments/ Profit from development of Special Economic Zone

Income
Conditions/incidence a. the gross total income includes profits and gains

derived by undertaking from business of developing
a special economic zone
b. Such special economic zone is notified after April 1,
2005
Qualifying Amount of 100% of profit

Deduction
Quantum 100% of profit for 10 consecutive years out of 15

years
13.Section 80JJA
Assessee Any Assessee
Qualifying Payments/ Profits and gains derived from business of collecting and
Income processing or treating of biodegradable waste for
generating power or producing bio-fertilizers, bio-
pesticides or other biological agents or for producing
biogas making pellets or briquettes for fuel or organic
manure
Conditions/Incidents –
447
Qualifying Amount of Such profits and gains

Deduction
Quantum Whole of such profits and gains for first 5 consecutive

A.Ys.
14.Section 80P: Co-operative Society

Eligible Undertaking Amount of Deduction
1. Profits arising to a co-operative society engaged in 100% of profits

the business of banking or providing credit attributable to such
facilities to its members; cottage industry; activities
marketing, of agricultural produce grown by its
members; purchase of agricultural implements
seeds, livestock or other articles intended for
agriculture for the purpose of supplying them to
its members; processing, without the aid of power
of the agricultural produce of its members;
collective disposal of the labour of its members;
fishing or allied activities, purchase of materials
and equipment in connection with fishing or allied
activities for the purposes of supplying them to its
members
2. Primary Co-operative Society engaged in 100% of profit and gains

supplying milk, oil seeds, fruits, or vegetables of such business
grown by its member to specified bodies
3. Co-operative Society engaged in activities other Maximum amount of—

than those specified in (1) and (2) above (either
independent of or in addition to all or any of the
activities so specified)— Rs. 1,00,000
(a) if such co-operative society is a Consumer Co- Rs. 50,000
operative
Society;
(b) in any other case
4. Income by way of interest or dividends derived 100% of such income

from investments with any other Cooperative
Societies
5. Income derived from letting godowns and 100% of such income

warehouses for storage, processing or facilitating
the marketing of commodities
448
15.Section 80U
Qualifying Payments/ Interest on Deposits (not being time deposits) in a

Income saving account with—
A. Banking Company
B. Co-operative Society carrying business of
Banking
C. A post office
Qualifying Amount of Whole of the amount of Interest

Deduction
Quantum Lower of—

(a) Qualifying amount, or
(b) Rs. 10,000
However, substantially all the above deductions represented by Section 88

have been reintroduced as Section 800 by the Finance Act, 2005, w.e.f.
1.4.2006. The said Section 80C as reintroduced by the Finance Act, 2005,
w.e.f. 1.4.2006 is reproduced below:
Section 80C: Deduction in Respect of Life Insurance Premium,

Deferred Annuity, Contributions to Provident Fund, Subscription to
Certain Equity Shares or Debentures, etc.
1. In computing the total income of an assessee, being an individual or a

Hindu undivided family, there shall be deducted, in accordance with and
subject to the provisions of this section, the whole of the amount paid or
deposited in the previous year, being the aggregate of the sums referred
to in sub-section (2), as does not exceed one lakh rupees.
2. The sums referred to in sub-section (1) shall be any sums paid or

deposited in the previous year by the assessee—
i. to effect or to keep in force an insurance on the life of persons

specified in sub-section (4);
ii. to effect or to keep in force a contract for a deferred annuity, not

being an annuity plan referred to in clause (xii), on the life of persons
specified in sub-section (4):
449
Provided that such contract does not contain a provision for the
exercise by the insured of an option to receive a cash payment in lieu
of the payment of the annuity;
iii. by way of deduction from the salary payable by or on behalf of the

Government to any individual being a sum deducted in accordance
with the conditions of his service, for the purpose of securing to him a
deferred annuity or making provision for his spouse or children,
insofar as the sum so deducted does not exceed one-fifth of the
salary;
iv. as a contribution by an individual to any provident fund to which the

Provident Funds Act, 1925 (19 of 1925) applies;
v. as a contribution to any provident fund set up by the Central

Government and notified by it in this behalf in the Official Gazette,
where such contribution is to an account standing in the name of any
person specified in sub-section (4);
vi. as a contribution by an employee to a recognized provident fund;
vii. as a contribution by an employee to an approved superannuation

fund;
viii.as subscription to any such security of the Central Government or

any such deposit scheme as that Government may, by notification in
the Official Gazette, specify in this behalf;
ix. as subscription to any such savings certificate as defined in clause (c)

of Section 2 of the Government Savings Certificates Act, 1959 (46 of
1959), as the Central Government may, by notification in the Official
Gazette, specify in this behalf;
x. as a contribution, in the name of any person specified in sub-section

(4), for participation in the Unit-linked Insurance Plan, 1971
(hereafter in this section referred to as the Unit-linked Insurance
Plan) specified in Schedule II of the Unit Trust of India (Transfer of
Undertaking and Repeal) Act, 2002 (58 of 2002);
450
xi. as a contribution in the name of any person specified in sub-section

(4) for participation in any such unit-linked insurance plan of the LIC
Mutual Fund notified under clause (23D) of Section 10, as the Central
behalf;
xii.to effect or to keep in force a contract for such annuity plan of the Life
Insurance Corporation or any other insurer as the Central Government
may, by notification in the Official Gazette, specify;
xiii.as subscription to any units of any Mutual Fund notified under clause
(23D) of Section 10 or from the Administrator or the specified
company under any plan formulated in accordance with such scheme
as the Central Government may, by notification in the Official Gazette,
specify in this behalf;
xiv.as a contribution by an individual to any pension fund set up by any

Mutual Fund notified under clause (23D) of Section 10 or by the
Administrator or the specified company, as the Central Government
may, by notification in the Official Gazette, specify in this behalf;
xv.as subscription to any such deposit scheme of, or as a contribution to

any such pension fund set up by, the National Housing Bank
established under Section 3 of the National Housing Bank Act, 1987
(53 of 1987) (hereafter in this section referred to as the National
Housing Bank), as the Central Government may, by notification in the
Official Gazette, specify in this behalf;
xvi.as subscription to any such deposit scheme of—
a. public sector company which is engaged in providing long-term

finance for construction or purchase of houses in India for
residential purposes; or
b. any authority constituted in India by or under any law enacted

either for the purpose of dealing with and satisfying the need for
housing accommodation or for the purpose of planning,
development or improvement of cities, towns and villages, or for
both, as the Central Government may, by notification in the Official
Gazette, specify in this behalf;
451
xvii.as tuition fees (excluding any payment towards any development

fees or donation or payment of similar nature), whether at the time of
admission or thereafter,—
a. to any university, college, school or other educational institution

situated within India;
b. for the purpose of full-time education of any of the persons

specified in sub-section (4);
xviii.for the purposes of purchase or construction of a residential house

property the income from which is chargeable to tax under the head
“Income from House Property” (or which would, if it had not been
used for the assessee’s own residence, have been chargeable to tax
under that head), where such payments are made towards or by way
of—
a. any installment or part payment of the amount due under any self-
financing or other scheme of any development authority, housing
board or other authority engaged in the construction and sale of
house property on ownership basis; or
b. any installment or part payment of the amount due to any company

or co-operative society of which the assessee is a shareholder or
member towards the cost of the house property allotted to him; or
c. repayment of the amount borrowed by the assessee from—
• the Central Government or any State Government, or
• any bank, including a co-operative bank, or
• the Life Insurance Corporation, or
• the National Housing Bank, or
• any public company formed and 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
452
purposes which is eligible for deduction under clause (viii) of sub-

section (1) of Section 36, or
• any company in which the public are substantially interested or any

co-operative society, where such company or co-operative society is
engaged in the business of financing the construction of houses, or
• the assessee’s employer where such employer is an authority or a

board or a corporation or any other body established or constituted
under a Central or State Act, or
• the assessee’s employer where such employer is a public company

or a public sector company or a university established by law or a
college affiliated to such university or a local authority or a co-
operative society; or
d. stamp duty, registration fee, and other expenses for the purpose of
transfer of such house property to the assessee, but shall not include
any payment towards or by way of—
• the admission fee, cost of share and initial deposit which a

shareholder of a company or a member of a co-operative society has
to pay for becoming such shareholder or member; or
• the cost of any addition or alteration to, or renovation or repair of,

the house property which is carried out after the issue of the
completion certificate in respect of the house property by the
authority competent to issue such certificate or after the house
property or any part thereof has either been occupied by the
assessee or any other person on his behalf or been let out; or
• any expenditure in respect of which deduction is allowable under the

provisions of Section 24;
xix.as subscription to equity shares or debentures forming part of any

eligible issue of capital approved by the Board on an application made
by a public company or as subscription to any eligible issue of capital by
any public financial institution in the prescribed form.
453
Explanation: For the purposes of this clause,—
• “eligible issue of capital” means an issue made by a public company

formed and registered in India or a public financial institution and the
entire proceeds of the issue are utilized wholly and exclusively for the
purposes of any business referred to in sub-section (4) of Section 80-IA;
• “public company” shall have the meaning assigned to it in Section 3 of

the Companies Act, 1956 (1 of 1956);
• “public financial institution” shall have the meaning assigned to it in

Section 4A of the Companies Act, 1956 (1 of 1956);
xx.as subscription to any units of any mutual fund referred to in clause

(23D) of Section 10 and approved by the Board on an application made
by such mutual fund in the prescribed form:
Provided that this clause shall apply if the amount of subscription to such
units is subscribed only in the eligible issue of capital of any company.
Explanation: For the purposes of this clause, “eligible issue of capital”

means an issue referred to in clause (I) of the Explanation to clause (xix)
of sub-section (2).
3. The provisions of sub-section (2) shall apply only to so much of any

premium or other payment made on an insurance policy other than a
contract for a deferred annuity as is not in excess of 20% of the actual
capital sum assured.
Explanation: In calculating any such actual capital sum assured, no

account shall be taken—
i. of the value of any premiums agreed to be returned, or
ii. of any benefit by way of bonus or otherwise over and above the sum
actually assured, which is to be or may be received under the policy by
any person.
454
4. The persons referred to in sub-section (2) shall be the following,

namely:—
a. for the purposes of clauses (i), (v), (x) and (xi) of that sub-section,
i. in the case of an individual, the individual, the wife or husband

and any child of such individual, and
ii. in the case of a Hindu undivided family, any member thereof;
b. for the purposes of clause (ii) of that sub-section, in the case of an

individual, the individual, the wife or husband and any child of such
individual;
c. for the purpose of clause (xvii) of that sub-section, in the case of an

individual, any two children of such individual.
5. Where, in any previous year, an assessee—
i. terminates his contract of insurance referred to in clause (i) of sub-

section (2) by notice to that effect or where the contract ceases to be
in force by reason of failure to pay any premium, by not reviving
contract of insurance,—
a. in case of any single premium policy, within two years after the date
of commencement of insurance; or
b. in any other case, before premiums have been paid for two years;
or
ii. terminates his participation in any unit-linked insurance plan referred

to in clause (x) or clause (xi) of sub-section (2), by notice to that
effect or where he ceases to participate by reason of failure to pay
any contribution, by not reviving his participation, before
contributions in respect of such participation have been paid for five
years; or
iii. transfers the house property referred to in clause (xviii) of sub-section

(2) before the expiry of five years from the end of the financial year in
which possession of such property is obtained by him, or receives
455
back, whether by way of refund or otherwise, any sum specified in

that clause, then,—
a. no deduction shall be allowed to the assessee under sub-section (1)

with reference to any of the sums, referred to in clauses (I), (x),
(xi) and (xviii) of sub-section (2), paid in such previous year; and
b. the aggregate amount of the deductions of income so allowed in

respect of the previous year or years preceding such previous year,
shall be deemed to be the income of the assessee of such previous
year and shall be liable to tax in the assessment year relevant to
such previous year.
6. If any equity shares or debentures, with reference to the cost of which a

deduction is allowed under sub-section (1), are sold or otherwise
transferred by the assessee to any person at any time within a period of
three years from the date of their acquisition, the aggregate amount of
the deductions of income so allowed in respect of such equity shares or
debentures in the previous year or years preceding the previous year in
which such sale or transfer has taken place shall be deemed to be the
income of the assessee of such previous year and shall be liable to tax
in the assessment year relevant to such previous year.
Explanation: A person shall be treated as having acquired any shares or

debentures on the date on which his name is entered in relation to those
shares or debentures in the register of members or of debenture-
holders, as the case may be, of the public company.
7. For the purposes of this section,—
i. the insurance, deferred annuity, provident fund and superannuation

fund referred to in clauses (i) to (vii);
ii. unit-linked insurance plan and annuity plan referred to in clauses (xii)
to (xiiia);
iii. pension fund and subscription to deposit scheme referred to in

clauses (xiic) to (xiva);
456
iv. amount borrowed for purchase or construction of a residential house

referred to in clause (xv), of sub-section (2) of Section 88 shall be
eligible for deduction under the corresponding provisions of this
section and the deduction shall be allowed in accordance with the
provisions of this section.
8. In this section,—
i. “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);
ii. “contribution” to any fund shall not include any sums in repayment of
loan;
iii. “insurance” shall include—
a. a policy of insurance on the life of an individual or the spouse or the

child of such individual or a member of a Hindu undivided family
securing the payment of specified sum on the stipulated date of
maturity, if such person is alive on such date notwithstanding that
the policy of insurance provides only for the return of premiums paid
(with or without any interest thereon) in the event of such person
dying before the said stipulated date;
b. a policy of insurance effected by an individual or a member of a

Hindu undivided family for the benefit of a minor with the object of
enabling the minor, after he has attained majority to secure insurance
on his own life by adopting the policy and on his being alive on a date
(after such adoption) specified in the policy in this behalf;
iv. “Life Insurance Corporation” means the Life Insurance Corporation of

India established under the Life Insurance Corporation Act, 1956 (31 of
1956);
v. “public company” shall have the same meaning as in Section 3 of the

vi. “security” means a Government security as defined in clause (2) of

Section 2 of the Public Debt Act, 1944 (18 of 1944);
457
vii.“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);
viii.“transfer” shall be deemed to include also the transactions referred to

in clause (f) of Section 269UA.
11.3 REBATES UNDER (SECTION 88)
88D. An assessee, being an individual resident in India,—
a. whose total income does not exceed Rs. 1,00,000, shall be entitled to a
deduction from the amount of income tax (as computed before allowing
the deductions under this Chapter) on his total income with which he is
chargeable for any assessment year, of an amount equal to hundred per
cent of such income tax;
b. whose total income exceeds Rs. 1,00,000 and the income tax payable
on such total income (as computed before allowing the deductions
under this Chapter) exceeds the amount by which such total income is
in excess of Rs. 1,00,000, shall be entitled to a deduction from the
amount of income tax on his total income, of an amount equal to the
amount by which the income tax payable on such total income is in
excess of the amount by which the total income exceeds Rs. 1,00,000.
Where the income was below Rs. 1,00,000:

This section sought to provide that if the Income of an individual resident
in India for A.Y. 2005-06 was less than Rs. 1,00,000, an amount equal to
100% of such income tax shall be available to deduction from the income
tax payable by him.
Where the income exceeded Rs. 1,00,000:

To the extent the income of an individual resident in India exceeded Rs.
1,00,000, and the income tax payable on such total income (as computed
before allowing the deductions under this Chapter) exceeded the amount
by which such total income is in excess of Rs. 1,00,000, then he shall be
entitled to a deduction from the amount of income tax on his total income,
of an amount equal to the amount by which the income tax payable on
458
such total income is in excess of the amount by which the total income
exceeds Rs. 1,00,000.
Section 88E is introduced by Finance Act, 2004 [Applicable w.e.f.
A.Y. 2005-06]
Section 88E – Rebate in Respect of Securities Transaction Tax
Assessee Individual, HUF, Firm, or any other person
Conditions/incidence His income includes any income chargeable under the

head “Profit and Gain of Business or Profession” arising
from taxable securities transactions
Quantum of Rebate Equal to securities transaction tax paid by assessee in

respect of taxable securities transactions
Deduction in Respect of Interest on Loan Taken for Higher

Education
80E. (1) In computing the total income of an assessee, being an

individual, there shall be deducted, in accordance with and subject to the
provisions of this section, any amount paid by him in the previous year, out
of his income chargeable to tax, by way of interest on loan taken by him
from any financial institution or any approved charitable institution for the
purpose of pursuing his higher education.
(2)The deduction specified in sub-section (1) shall be allowed in computing

the total income in respect of the initial assessment year and seven
assessment years immediately succeeding the initial assessment year or
until the interest referred to in sub-section (1) is paid by the assessee in
full, whichever is earlier.
(3)For the purposes of this section,—
a. “approved charitable institution” means an institution specified in, or,

as the case may be, an institution established for charitable purposes
and notified by the Central Government under clause (23C) of
Section 10 or an institution referred to in clause (a) of sub-section
(2) of Section 80G;
459
b. “financial institution” means a banking company to which the Banking

Regulation Act, 1949 (10 of 1949) applies (including any bank or
banking institution referred to in Section 51 of that Act); or any other
financial institution which the Central Government may, by
notification in the Official Gazette, specify in this behalf;
c. “higher education” means full-time studies for any graduate or post-

graduate course in engineering, medicine, management or for post-
graduate course in applied sciences or pure sciences including
mathematics and statistics;
d. “Initial assessment year” means the assessment year relevant to the

previous year, in which the assessee starts paying the interest on the
loan.
11.4 TAXABILITY OF ITEMS ALLOWED AS DEDUCTIONS IN

EARLIER YEARS
1. Section 80CCA
What Triggers Tax a. Withdrawal of principal and/or interest on NSS Account
Incidence/Taxable Year in which taxable
Event P.Y. in which withdrawn
Amount taxable
Whole of the amount withdrawn/received
Repayment of NSS is subject to TDS u/s 194EE except
when made to the heirs of the assessee
b. Bonus received on annuity plans of LIC notified u/s
80CCA
Year in which taxable
P.Y. in which received
Amount taxable
c. Annuity or surrender value received in respect of such
notified annuities
P.Y. in which received
Amount taxable
Note: Amount paid after the death of an individual to the

legal heirs is not taxable (Cir. No. 532 – dt. 17.3.89).
460
2. Section 80CCB
What Triggers Tax Receipt of whole or part of amount invested either on

Incidence/Taxable repurchase of notified units or on termination of the
Event plan
P.Y. in which amount is so received
Amount Taxable to the extent of original investment
Amount received in excess of original investment is
taxable as capital gains u/s 45(6)
Note: Amount is subject to TDS u/s 194F @ 20%
461
11.5 SUMMARY
Section 80 specifies certain amounts paid by assessee for health,

retirement, education, housing, charitable purposes, etc. that can be
deducted from total income on fulfillment of conditions laid down in this
section.
Section 88 specifies certain rebates in tax available to female and old

assessees.
1. Provide examples of two deductions permitted under Section 80. What

is maximum limit for the deduction?
2. What is quantum of rebate for assessee who is 70 years old?
3. What is rebate available to a woman resident assessee whose age is 50?
462
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
463

Advance Direct Tax

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ADVANCE DIRECT TAX

Sub Code 661

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Prof. Kanu Doshi Mr. Smitesh Bhosale

Prof. Dr. V.H. Iyer Prof. Vineel Bhurke

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Prof. Sandeep Kelkar Course Editor

Prof. Dr. Swapna Pradhan Course Coordinators

Prof. Bijoy B. Bhattacharyya Ms. Kirti Sampat

Mr. P.M. Bendre Mr. Kishor Tamhankar

Mr. Ajay Prabhu

Mr. A.S. Pillai

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

1st Edition, March 2019

Chapter No. Chapter Name Page No.

1 Definitions (Section 2) 4-39

2 Previous Year, Charge of Income, Scope of Total 40-55

3 Income Which Do Not Form Part of Total Income 56-111

4 Income from Salaries (Sections 15 to 17) 112-153

5 Income from House Property (Sections 22 to 27) 154-168

6 Profits and Gains of Business or Professions (Sections 169-307

7 Income from Capital Gains (Sections 45 to 55) 308-382

8 Income from Other Sources (Sections 56 to 59) 383-404

9 Clubbing of Income (Sections 61 to 64) 405-414

11 Deductions and Rebates 435-463

After completing this chapter, you will understand:

• Tax structure in India

• Direct and indirect tax

• The concept of dividend

• Treatment of gifts as income

• The concept of capital asset

1.1 Tax Structure in India

1.2 Income Tax

1.3 Some Important Definitions

1.5 Self Assessment Questions

1.1 TAX STRUCTURE IN INDIA

A tax may be defined as a “pecuniary burden laid upon individuals or

Basic scheme of taxation in India is:

A direct tax is a kind of charge which is imposed directly on the taxpayer

The important direct taxes are:

An indirect tax is a tax collected by an intermediary (such as a retail store)

a. Excise Duty (except on alcoholic drinks)

1.2 INCOME TAX

• Computation of income/losses under different heads of income

• Deductions, rebates, and exemptions of income

• Assessment of income, appeal against assessment and for collection,

• Levying interest or penalty in case of default in payment of taxes.

How is Income Tax Law Administered?

The Ministry of Finance, through Central Board of Direct Taxes (CBDT),

1.3 SOME IMPORTANT DEFINITIONS

Agricultural Income [Section 2(1A)]

“Agricultural Income” means:

b. any income derived from such land by:

ii. the performance by a cultivator or receiver of rent-in-kind of any

iii. the sale by a cultivator or receiver of rent-in-kind of the produce

In respect of such building, it is provided that:

i. such building is on or in the immediate vicinity of the land, and is a

A. in any area which is comprised within the jurisdiction of a

Amalgamation [Section 2(1B)]

a. all the property of the amalgamating company or companies