income_tax_2010-11

Income Tax Assessment Year 2010-11

CHAPTER-1BASIC CONCEPTS OF INCOME TAX

TAX - MEANING THEREOF - Every state needs funds to govern the country. The need of funds can be fulfilled by taking loans from their countries, grants & aids from other countries, share of profit in govt. run organizations and through taxes.

Therefore, tax is that amount which is borne by the persons and paid to the state for running the state.KINDS OF TAXES - Taxes are of two kinds:-

(1) Direct Taxes; and (2) Indirect taxes.DIRECT TAXES - These are borne and paid by the same person. For example: Income tax, Wealth tax, Gift tax (Gift tax has been abolished in India) and Interest tax.INDIRECT TAXES - These are borne by persons who are different from the payers. For example: Custom duty, Excise duty, Sales Tax, Entertainment tax, Octroi etc.INCOME TAX ACT, 1961 -

The current Income tax Act was regulated from 1.4.1961 and its rules were brought into working from 1.4.1962. Every year the finance minister of the country proposes for various changes in the Act through the Finance Bill. This bill, when gets nod in the parliament, becomes ' The Amendment Act.'SPECIFIC TERMS TO BE USED IN THE ACT-PREVIOUS YEAR (SECTION 3): It refers to the year in which a person earns his income which is taxable in the relevant assessment year. The period of previous year is normally of 12 MONTHS starting from 1st April to 31st March in the next calendar year. But in case of NEWLY SET-UP Business/profession or new source of income the period of previous year may be less than 12 months. Thus the period of previous year can be of less than 12 months in case of new source of income but afterwards the period is always equal to 12 months.ASSESSMENT YEAR [SECTION 2(9)]: It refers to the year in which income of a person (who has earned his income in the relevant previous year) is charged to tax. THIS MEANS THAT EACH PREVIOUS YEAR HAS A UNIQUE ASSESSMENT YEAR. ALSO THE ASSESSMENT YEAR ALWAYS FOLLOWS THE PREVIOUS YEAR e.g.a) PREVIOUS YEAR RELEVANT ASSESSMENT YEAR2004-05 2005-06(1.4.2004 TO 31.3.2005) (1.4.2005 TO 31.3.2006)INCOME EARNED INCOME CHARGED TO TAXb) PREVIOUS YEAR RELEVANT ASSESSMENT YEAR2009-10 2010-11(1.4.2009 TO 31.3.2010) (1.4.2010 TO 31.3.2011)INCOME EARNED INCOME CHARGED TO TAX

This also leads to the conclusion that every financial year (1st April to 31st March) is :- (1) ASSESSMENT YEAR for preceding Financial year; AND

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 1


(2) PREVIOUS YEAR for next financial year.PERSON [SECTION 2(31)]: The definition as per the act is 'INCLUSIVE' one and it includes:-(1) INDIVIDUAL (may be minor, insane or lunatic).(2) HINDU UNDIVIDED FAMILY(3) COMPANY (Indian or Foreign or an entity recognised as Company by

C.B.D.T.).(4) FIRM (a Partnership firm including a Limited Liability Partnership as per

The Limited Liability Partnership Act, 2008).(5) ASSOCIATION OF PERSONS/BODY OF INDIVIDUALS (e.g. Co-op. society)(6) LOCAL AUTHORITY (e.g. Municipal Corporation, Port Trust etc.).(7) EVERY OTHER ARTIFICIAL JURIDICAL PERSON (e.g. Indian Railways, University).ASSESSEE [SECTION 2(7)]: Assessee means a person (as referred above) who is liable to pay income tax or any other amount (interest or penalty) under the Act. It also includes a person on whom any proceeding has been taken for assessment of his income/loss or refund due to him.

It also includes a person who represents some other person who is liable to pay tax. He is called “REPRESENTATIVE ASSESSEE’ or ‘DEEMED ASSESSEE’ (e.g. Father, filing the return of his working minor child, on his behalf).

It also includes a person who has made default under any provision of the Income Tax Act. He is called ' ASSESSEE IN DEFAULT'. For example if a person was responsible to deduct the Tax at Source but has not deducted the tax or after deducting the tax he has not deposited such tax. Another example may be a person who was liable to pay advance tax but he has not paid such advance tax. INCOME [SECTION 2(24)]: The definition of 'Income’ under the Act is inclusive and not exhaustive. It includes:a) Profits and gains from business or profession;b) Dividends;c) Voluntary contributions received by a WHOLLY OR PARTLY CHARITABLE

OR RELIGIOUS TRUST/INSTITUTION EXCEPT the contribution forming part of the CORPUS of the trust;

d) Perquisites and profit in lieu of salary;e) ALLOWANCES or BENEFITS received by the assessee to meet his expenses

for PERFORMANCE OF HIS DUTIES;f) ALLOWANCES received by the assessee to meet his personal expenses at

the place of duty or compensation for increased cost of living;g) BENEFITS OR PERQUISITES enjoyed (by a Director or a person having

substantial interest or a relative of Director/such person) in a Company;h) BENEFITS OR PERQUISITES obtained by REPRESENTATIVE ASSESSEE OR

any amount paid by representative assessee for the benefits of the BENEFICIARY which is required to be paid by the beneficiary only;

i) Compensation (or similar payments) received by or due to a person under PGBP;

J) Income of Trade associations (Professional also) who provide specific



services to its members;k) BENEFITS OR PERQUISITES from BUSINESS OR PROFESSION;l) Export Incentives to Exporters;m) Any interest, salary, bonus, commission received by a partner from Firm;n) Any sum received under Key man Insurance Policy;o) Profit and Gains of Managing Agency;p) Income from speculative transaction;q) Recovery of any amount which has been allowed as deduction in any

preceding Assessment Year;r) Income from sale of any fixed asset (except land) put to scientific research

without using it for any other purpose before sale;s) Recovery of Bad debts, allowed as deduction in any preceding Assessment

Year;t) Amount transferred to Special Reserve under section 36(i) (viii);u) Recovery out of any discontinued business or profession;v) Capital gains;w) Insurance profit computed under section 44;x) Casual Income;y) Any sum received by employer from his employees as contribution to

RPF or any other approved fund and the amount not deposited with in 'DUE DATES’ as per section 43B.

z) Any sum received under a Key-man Insurance Policy.za) any gift of money received by an individual from non-specified person(s)

in excess of Rs.50000.THE POINTS TO BE NOTED:-- A REVENUE INCOME IS TAXABLE UNLESS OTHERWISE STATED IN THE

ACT.- A CAPITAL INCOME IS EXEMPTED UNLESS OTHERWISE STATED IN THE

ACT.- PERSONAL GIFTS ARE NOT INCOME IN THE HANDS OF RECIPIENT

(EXCEPT GIFT OF MONEY EXCEEDING RS. 50000 RECEIVED BYINDIVIDUAL OR HUF WITHOUT CONSIDERATION).

- PIN MONEY IS NOT INCOME OF THE HOUSEWIFE.- AWARDS RECEIVED BY A PROFESSIONAL SPORTS PERSON IS TAXABLE

BUT AWARDS RECEIVED BY AMATEURE SPORTS PERSON IS NOT TAXABLE AS INCOME.

- THE BURDEN OF PROVING THAT A RECEIPT IS TAXABLE IS ON THE INCOME TAX DEPARTMENT. BUT THE BURDEN OF PROVING THAT AN INCOME IS EXEMPT IS ON THE ASSESSEE.

CAPITAL RECEIPTS vs. REVENUE RECEIPTS:As discussed earlier, that the revenue receipts are taxable, unless

these are specifically exempted from tax under the Act and the Capital Receipts are exempted unless these are specifically charged to tax under the Act, so it becomes necessary to understand the difference between the two. We have only the cases decided by the courts with the help of which we can draw general



conclusions. These are as follows:-a) The receipt is capital or revenue is to be considered only from recipient’s

point of view. The payer's motive is to be ignored.b) Lump sum payments or payment received in Installment do not affect the

nature of the receipt. c) Compensation received lieu of source of income is CAPITAL RECEIPT

whereas the compensation received for temporary disablement is a revenue receipt.

d) Income from wasting assets (like mines and quarries are treated as revenue income).

e) Insurance receipt for loss of current asset or against loss of profit is Revenue Receipt. But Insurance claim for loss of Fixed Asset is capital Receipt. The insurance claim for loss of goods, which are not for business/profession, is Capital Receipt.

f) The receipt due to change in exchange rate of the currency on current assets is Revenue receipt. But the receipt due to change in exchange rate of the currency on FIXED ASSETS/INVESTMENTS is CAPITAL RECEIPT.

g) The subsidy received for setting up a business or completing a project is CAPITAL RECEIPT. But the subsidy received for carrying out business activities and after the commencement of production is REVENUE RECEIPT.

HEADS OF INCOME: The Income Tax is levied an income of a person. This income is divided into five heads as follows:-1) INCOME UNDER HEAD SALARY

Income due/received by an employee from his past/present/future employer is taxable under this head.

2) INCOME UNDER HEAD HOUSE PROPERTYIncome received/earned/deemed to be earned by a person from house property is charged under this head.

3) INCOME UNDER HEAD PROFITS & GAINS OF BUSINESS OR PROFESSIONIncome received/earned by a person from his business or profession is charged to tax under this head.

4) INCOME UNDER HEAD CAPITAL GAINSIncome earned /received by a person from sale/transfer of any capital asset is charged under this head.

5) INCOME FROM OTHER SOURCESIncome from all other sources which can't be covered under first four heads is charged to tax under this head.

IMPORTANT: INCOME TAX IS CHARGED ON ALL INCOMES OF A PERSON. VARIOUS INCOMES ARE NOT CHARGED TO TAX SEPARATELY. For example: Mr. X has income from:

a) Salary Rs. 10, 00,000/-; b) House property Rs. 2, 00,000/-; c) Profit from cloth business Rs. 2, 00,000/-; d) Profit from Gold business Rs. 1, 00,000/-;and e) Interest income of Rs. 50,000/-.

All these incomes will be charged to tax in only one RETURN OF INCOME i.e. of



Mr. X. All these incomes will be shown in the above said Return of Income only.METHOD OF ACCOUNTING: Under the Act only two accounting methods are allowed - a) Mercantile system and; b) Cash system.

But these two methods can only be employed for computing income under head-a) Profit & Gain of Business or profession; & b) Income from other sources.

The remaining three heads of Income i.e. a) 'Salary; b) House property and; c) Capital Gain do not recognize any method of accounting followed by the person/assessee. Under these three heads, income is calculated as per provisions given in the chapter concerned. Previous Year for Cash Credits, Investments, Money etc.1. Cash Credit (sec 68): Where any sum is found credited in the books of an assessee for any previous year for which the assessee has no satisfactory explanation then such cash credit is treated as income of the assessee of the previous year in which such income was credited.2. Unexplained Investments (sec 69): Where in any previous year the assessee has made any investments which are not recorded in the books of account maintained by him and the assessee has no satisfactory explanation about the source of investment then such unexplained investment is treated as income of the assessee of the previous year in which such investment was made.3. Unexplained Money (Sec 69A): Where in any previous year the assessee is found to be the owner of any money, bullion, Jewellery or other valuable article which is not recorded in the books of account and the assessee has no satisfactory explanation about the source of money etc. then such unexplained money etc. is treated as income of the assessee of the previous year in which the assessee was found to be the owner.4. Investments not fully disclosed in the books of account (sec 69B): Where in any previous year the assessee has made any investments which are recorded in the books of account maintained by him at an amount less than amount expended and the assessee has no satisfactory explanation about the source of excess amount expanded in investment then such excess amount is treated as income of the assessee of the previous year in which such investment was made.5. Unexplained Expenditure (Sec 69 C): Where in any previous year an assessee has incurred any expenditure and the assessee has no satisfactory explanation about the source of expenditure or part thereof then such unexplained explained expenditure or part thereof is treated as income of the assessee of the previous year in which such expenditure was incurred. Also such unexplained expenditure can not be allowed as deduction under any head of income. 6. Amount borrowed or repaid on Hundi (sec 69D): Where any amount is borrowed on a Hundi from, or any amount due thereon is repaid to, any person otherwise than through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the borrower or repayer for the previous year in which such amount was borrowed /repaid. If amount borrowed has already been taxed then there will be no tax levied at the



time of repayment of such amount.EXECPTIONS TO THE GENERAL RULE THAT INCOME OF A PREVIOUS YEAR IS CHARGED TO TAX IN THE RELEVANT ASSESSMENT YEAR:1. Non resident shipping business (sec 172) – In case of a non-resident assessee owning a ship or ship is chartered by such assessee carrying passengers, livestock, goods or mail shipped at any Indian Port then 7.5% of fare on account of such carriage is deemed to be the income of such assessee. Such income is taxable in the same year in which such fare was collected. It is immaterial whether such assessee has any agent or representative in India or not.2. Persons leaving India (sec 174) – If it appears to the Assessing Officer that an individual may leave India during the previous year or shortly thereafter and the such individual has no intention of returning back to India then the income of such individual upto the probable date of his departure from India shall be charged to tax in the same previous year itself.3. AOP/BOI/ juridicial person formed for short duration (sec174A) – If an AOP/BOI/ artificial juridicial person is formed for short duration for a particular event or purpose and if it appears to the Assessing Officer that such AOP etc. may be dissolved during the previous year or shortly thereafter then the income of such AOP etc. of the previous year shall be charged to tax in the same previous year itself.4. Person trying to alienate (transfer) his assets to avoid tax liability (sec 175) -- If it appears to the Assessing Officer that an individual may sell, transfer, dispose off or otherwise part with any of movable or immovable asset with a view to avoid payment of any liability under the Income Tax Act then the income of such individual upto date of starting proceedings under this section shall be charged to tax in the same previous year itself.5. Discontinued Business (sec 176) – If any business or profession is discontinued during the previous year then the Assessing Officer may charge the income of the previous year to tax in the previous year itself. Alternatively, the Assessing Officer may charge such income to tax in the relevant assessment year.

PERFORMA OF COMPUTATION CHART OF INCOME TAXName of person :Address :Father's Name (if applicable) :Date of Birth (if applicable) :Previous Year :Assessment year :Ward/Circle/Range :



Permanent Account Number :

PARTICULARS AMOUNT

1. INCOME UNDER HEAD 'SALARIES' + 2. INCOME UNDER HEAD 'HOUSE PROPERTY' + 3. INCOME UNDER HEAD 'PROFITS & GAINS

OF BUSINESS'+

4. INCOME UNDER HEAD 'CAPITAL GAINS’ + + 5. INCOME UNDER HEAD ‘OTHER SOURCES’

Less: Setting off of brought forward losses - GROSS TOTAL INCOME (OR G.T.I.)

Less: Deduction under Chapter VI A(Section 80C to 80U)

-

NET INCOME (OR NET TAXABLE INCOME) (OR TOTAL INCOME)

TAX LIABILITY

Tax on special Incomes (like casual Income or long term Capital Gains or undisclosed Incomes or incomes of non-residents)

Tax on Normal Income + TOTAL Add: Surcharge (if applicable) + Add: Education Cess @2% of Tax and surcharge + Add: Secondary & Higher Education Cess @1% of Tax and surcharge

+

TOTALLess: Rebate u/s 86, 89, 90 & 91 - Add: Interest u/s 234 A,234 B & 234 C + Less: Tax Deducted or collected at source - Advance Income Tax - Self Assessment Tax - NET AMOUNT PAYABLE / REFUND DUE

RATES OF TAX FOR ASSESSMENT YEAR 2010-11-A. On Normal Income - 1(a) for woman, resident in India and below 65 years of age till 31.03.2010Upto Rs. 1,90,000 Nil From Rs.1,90,010 to Rs. 3,00,000 10%



From Rs.3,00,010 to Rs. 5,00,000 20%Above Rs. 5,00,000 30%1(b) For an Individual (man or woman), resident in India who is of 65 years of age or more at any time during the previous yearUpto Rs. 2,40,000 Nil From Rs.2,40,010 to Rs. 3,00,000 10%From Rs.3,00,010 to Rs. 5,00,000 20%Above Rs. 5,00,000 30%1(c) For Individuals (other than those mentioned above), HUF, AOP/BOI (other than co-operative societies)Upto Rs. 1,60,000 Nil From Rs.1,60,010 to Rs. 3,00,000 10% From Rs.3,00,010 to Rs. 5,00,000 20%Above Rs. 5,00,000 30%1(d) For Firms (including LLP’s) – A firm’s normal income is taxable @ 30%. 1(e) (i) For Domestic Company normal income is taxable @ 30%. (ii) For Foreign Company normal income is taxable @ 40%.1(f) For Co-operative societies Upto Rs. 10,000 10% From Rs.10,010 to Rs. 20,000 20%Above Rs. 20,000 30%

1(g) For Local Authorities: A Local Authority’s normal Income is taxable @ 30%.(B) On Special Incomes:1. Short Term Capital Gain u/s 111 A is taxable @ 15%.2. Long Term Capital Gain u/s 112 is taxable @20%.3. Winning from Lotteries, crossword puzzles, card games etc. u/s 115 BB is taxable @ 30%.SURCHARGE: In case a Company (Domestic or Foreign) has a total income not exceeding Rs. 1,00,00,000 then there is no surcharge otherwise there is surcharge of 10% (in case of Domestic Company) and 2.5% in case of foreign company on income tax less rebate (if any). In above case there is marginal relief of surcharge.For other persons there is no surcharge for A.Y. 2010-11.EDUCATION CESS: Education cess is 2% of total tax (including surcharge) for all assessees.SECONDARY & HIGHER EDUCATION CESS: It is 1% of total tax (including surcharge) for all assessees.

* * *



CHAPTER-2 RESIDENTIAL STATUS

A person may earn/receive his income from a source or at a place with in India or outside India. Such income is charged to a person on the basis of Residential Status. Residential Status is different from 'Nationality’ or ‘Domicile.’ Before starting the concept of understanding different types of residential status it is necessary to understand that:1) Each and every person has a distinctive residential status for every

relevant previous year. It means that the person can be either ' ORDINARILY RESIDENT' or 'NOT ORDINARILY RESIDENT’ or ‘NON RESIDENT’:

2) Every person has to consider his residential status in every relevant previous year. It means that a person Resident in A.Y.2009-10 may be non-resident in AY 2010-11 according to the rules to be studied later on.

3) It is not necessary that a person, who is resident in India, can't be Resident in any other country in the same previous year. It simply means that a person can be Resident in more than one country in the same previous year.

4) If a person is resident in a particular previous year for one source of income then he is also resident for other sources of income for that previous year. This means that a person has same residential status for incomes of a particular previous year.

The residential status is studied by dividing the persons in following five categories:-a) Individual b) H.U.F. c) Firm/AOP or BOI.d) Company e) every other person.

A) RESIDENTIAL STATUS OF INDIVIDUAL: An individual can be: i) Resident; ii) Resident but not ordinarily resident; or iii) Non-resident.

RESIDENT & ORDINARILY RESIDENT [Sec 6(1), 6(6)(a)]: An individual is resident in India in a previous year if he fulfills at least one of the following two conditions:

a) He is in India for at least 182 days in the previous year; orb) He is in India for at least 60* days in the previous year and at least 365

days in four years preceding the relevant previous year.*This period of 60 days is to be replaced by 182 days if:i) Individual is Indian Citizen or a person of Indian origin who comes for a

visit to India; orii) Individual is Indian Citizen who leaves India during the relevant previous

year for employment purpose outside India or as a crew member of Indian Ship.

NOTE: AN INDIVIDUAL IS A PERSON OF INDIAN ORIGIN IF HE OR EITHER OF HIS PARENTS OR ANY OF HIS GRAND PARENTS (BOTH PATERNAL &



MATERNAL) WAS BORN IN UNDIVIDED INDIA. An individual, who fulfills either of 'a' or 'b' or both conditions given

above, has to fulfill both of the conditions given below to be ordinarily Resident:- a) He is resident in India for at least 2 years out of 10 years immediately

preceding the relevant previous year; &b) He is in India for at least 730 days in 7 years preceding the relevant

previous year.RESIDENT BUT NOT ORDINARILY RESIDENT [SEC6 (1), 6(6)(a)]: An individual who fulfills at least one of the Basic conditions of resident but does not fulfill both of the conditions for ordinarily resident is RESIDENT BUT NOT ORDINARILY RESIDENT.NON RESIDENT:- An individual who does not fulfill any of the basic condition of resident is called NON-RESIDENT.

B) RESIDENTIAL STATUS OF H.U.F.: Like Individual, the H.U.F. can also be i) Resident and ordinarily resident; ii) Resident but not ordinarily resident; & iii) Non resident.RESIDENT & ORDINARILY RESIDENT [Sec.6 (2)]: The H.U.F. is resident in Indian in a previous year if de-facto (actual) control and management of its affairs is situated wholly or partly in India.

The H.U.F., who is Resident, has to fulfill both of the conditions given below to be ordinarily resident:-a) The Karta (Manager) is resident in India for at least 2 years out of 10 years immediately preceding the relevant previous year; &b) The Karta is in India for at least 730 days in 7 years preceding the relevant

previous year.RESIDENT BUT NOT ORDINARILY RESIDENT: The HUF who is resident in India (i.e. the Control & Management of its affairs is in India either wholly or partly) but it does not fulfill both of the conditions for ordinarily resident is resident but not ordinarily resident.NON-RESIDENT: The H.U.F., control & management, of whose affairs, is wholly outside India is Non-resident.

C) RESIDENTIAL STATUS OF FIRM/AOP OR BOI [Sec. 6 (2)]: A firm can be either i) resident; or ii) Non resident. RESIDENT: A firm is resident in India if control and management of its affairs is situated wholly or partly with in India.NON RESIDENT: A firm/AOP or BOI is non resident in India if Control and management of its affairs is situated wholly outside India.NOTE: A Firm is not 'ordinarily' or 'not ordinarily resident’.

D) RESIDENTIAL STATUS OF A COMPANY [Sec 6(3)]: The company can be either: i) Resident; or ii) Non- residentRESIDENT: The Company, which is registered in India (Called Indian Company), is always resident in India. A foreign company is resident in India if control and



management of its affairs is situated wholly with in India.NON RESIDENT: A foreign company is non resident in India if control & management of its affairs is wholly or partly outside India.NOTE: A company is never 'ORDINARILY RESIDENT' or 'NOT ORDINARILY RESIDENT. E) RESIDENTIAL STATUS OF EVERY OTHER PERSON [SEC 6(4)]: In case of every other person, same rules are applicable as are in case of a FIRM/AOP/BOI.

TAX INCIDENCE FOR DIFFERENT RESIDENTIAL STATUS:PARTICULARS ORDINARILY

RESIDENTRESIDENT BUT NOT ORDINARILY RESIDENT

NON RESIDENT

1 Income received in India (Where ever accrued)

TAXABLE TAXABLE TAXABLE

2 Income deemed to be received in India (wherever accrued )


3 Income accrued in India(wherever received)


4 Income deemed to be accrued in India (wherever received)


5 Income accrued and received outside India, from a business controlled from India or a profession set up in India (wholly or partly)

TAXABLE TAXABLE NOT TAXABLE

6 Income accrued and received outside India, from a business controlled from outside India or a profession set up outside India

TAXABLE NOT TAXABLE NOT TAXABLE

7 Income accrued and received outside India during any preceding previous year but remitted to India during the previous year.

NOT TAXABLE NOT TAXABLE NOT TAXABLE.

INCOME DEEMED TO BE RECEIVED IN INDIA: The following are incomes which



are deemed to be received in India:-i) Annual accretion to balance in Recognised provident fund of an employee

i.e. interest credited at a rate exceeding 9.5%.ii) Contribution in excess of 12% of General Salary (to be discussed in chapter

'Salary') by the Employer towards R.P.F.iii) Transfer balance from U.R.P.F. to R.P.F.iv) Tax Deducted at source on income of payee.v) Deemed Profit u/s 41 and 59 i.e. Recovery of any deduction or bad debts or any

income after closure of business or profession or sale of any asset used for scientific research.

vi) Contribution by Central Government towards pension fund of its employees under section 80 CCD.

vii) Special Incomes like cash credits, unexplained money etc..

INCOME DEEMED TO ACCRUE OR ARISE IN INDIA: The following are incomes deemed to accrue or arise in India:-

i) Income from Business connection in India.ii) Income from property or any source of Income which is situated in India.iii) Income from Transfer of Capital Asset situated in India.iv) Salary (other than allowances and perquisites) received by Indian National

(citizen) Government employees posted outside India.v) Salary of an individual if service is rendered in India.vi) Dividend received by any person from an Indian Company.vii) Income by way of interest or royalty or fees from technical service

received by any person from Central or State Govt.viii) Income by way of interest or royalty or fees for technical service received

by any person from any other person if the fund or money or source of income from royalty is used in India.

NOTE: Business connection may be of many types i.e. an agent in India or an Indian Branch Office etc.. But in case of a Non-resident person the following are not treated as business connection in India:

a) Activities confined to purchase of goods in India for exports;b) Activities confined to collection of news and views for transmission

outside India by or on behalf of Non-resident engaged in business of news agency or publishing newspapers, magazines or journals;

c) Activities confined to shooting of cinematographic film in India if such Non-resident is:i) an individual- not an Indian citizen; orii) a firm- having no partner being Indian Citizen or Indian Resident; oriii) a company- having no shareholder being Indian Citizen or Indian Resident.

* * *



Chapter-3INCOME UNDER HEAD "SALARIES"

The first head of Income is ‘Income from Salaries’. First of all let us understand some important concepts about it:-a) EMPLOYER-EMPLOYEE RELATIONSHIP: The relationship between payer

and the payee must be that of employer and employee (i.e. master and servant relationship). Whether the relationship is of master & servant or not, is decided on case to case basis. The general rule is that a master is a person who directs the servant WHAT IS TO BE DONE, WHEN IT IS TO BE DONE, & HOW IT IS TO BE DONE. But this rule can't be applied in all cases. [for example in case of a teacher or a doctor the above rule fails].

Remuneration received by a Member of Parliament is not chargeable as salary because the relationship between him and the Government is not of employer & employee. [It is chargeable under head “Income from other sources”].

Remuneration received by a partner from his partnership firm is not chargeable as salary because the relationship between him and the firm is not of employer & employee. [It is chargeable under head "Profits & Gains of business and profession"].

b) SURRENDER OF SALARY: Any salary surrendered by the employee to the Central Government under Section 2 of The Voluntary Surrender of Salaries (Exemption from taxation) Act, 1961 is not charged to tax. The employee may be in private, public or Government service.

c) FOREGOING OF SALARY: If any salary is foregone by the employee (not surrendered as per point (b) then it is to be charged to tax.

d) PLACE OF ACCRUAL OF SALARY: The salary income is accrued where the employee renders the services. The place of receipt of salary is of NO IMPORTANCE.

* But there is one exception to this rule. The salary, received by Indian National Government Employee posted outside India, is deemed to accrue or arise in India.

e) TAX FREE SALARY: If an employee receives tax free salary from his employer then it simply means that tax has been paid by the employer. The tax paid by employer will be added back to find total salary due to the employee.

f) SALARY PAID BY FOREIGN EMPLOYER: If employee rendering service in India is paid salary by his foreign employer; it is taxable in India (unless otherwise stated to be exempt u/s 10).

g) SALARY DUE OR RECEIVED IN FOREIGN CURRENCY: If the employee earns/receives salary in foreign currency, it will be converted in Rupees by applying. TELEGRAPHIC TRANSFER BUYING RATE on the last day of the



month preceding the month in which salary is due or paid or is in arrears.h) DISTINCTION BETWEEN SALARY & WAGES NOT IMPORTANT: The Act

does not make any difference between salary and wages. Both are chargeable under 'SALARY'.

i) BASIC SALARY IN GRADE SYSTEM: Under this system, the annual increments to be given to the employee are already fixed in the grade. Let us take an example of an employee, who joins service on 1.7.2008 and is in the grade of 15000-500-20000-1000-40000. It means that in the first year of service i.e. from 1.7.2008 to 30.6.2009 he will get Rs. 15,000 per month. In the next year from 1.7.2009 to 30.6.2010, his basic salary will be Rs. 15,500 (including increment of Rs. 500). He will get annual increments of Rs. 500 till his basic is Rs. 20,000. Then his annual increments will be Rs. 1,000 till his basic is Rs. 40,000. After then there will be no increment.

j) SALARY FROM MORE THAN ONE SOURCE: If an employee gets his salary from more than one employer then all the salary is taxable under head income from 'SALARIES.'

k) SALARY FROM PAST, PRESENT OR FUTURE EMPLOYER: Any remuneration received from past, present or future employer is to be charged under head 'SALARIES'.

l) SALARY WHEN DUE: There are two approaches - i) Salary is due on the last date of month; and ii) Salary is due on the first date of next month.

m) BASIS OF ACCOUNTING IRRELEVANT: The books of accounts kept by employee (if any) and accounting method followed by him (cash or mercantile) are not relevant for calculating salary income of the employee.

MEANING OF SALARY U/S 17(1): The definition of Salary is inclusive one. It includes:-- Wages;- Any annuity or pension;- Any Gratuity;- Any fees, commissions, perquisites or profits in lieu of or in addition to any

salary or wages;- Any advance of Salary;- Any payment received by an employee in respect of any period of leave not

availed by him;- 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;

- The aggregate of all sums that are comprised in the transferred balance of an employee participating in a recognised provident fund to the extent to which it is chargeable to tax.

- The contribution made by the Central Government to the account of an employee under pension scheme referred to in section 80 CCD.

The above definition is inclusive. But in general, Salary includes all the payments made by employer to employee (including gratuitous



payments, allowances and perquisites).

PROCESS OF COMPUTING SALARY INCOME: It can be understood from the following table:-

Basic Salary + Fees and Commission + Bonus + Entertainment Allowance + Other Allowances (Taxable parts only) + Perquisites (Taxable parts only) + Retirement Benefits (taxable parts only) +

GROSS SALARYLess: Deduction for Entertainment Allowance u/s 16 (ii)

-

Less: Deduction for Professional/ Employment tax u/s 16(iii)

-

INCOME UNDER HEAD SALARY

BASIS OF CHARGE (SECTION 15): Salary is charged to tax in "due or receipt" basis whichever is earlier. But advance salary is taxable on Receipt basis. Arrears of Salary is taxable on receipt basis if not charged to tax in any previous year on due basis. Similarly Bonus is taxable on receipt basis if not charged to tax earlier on due basis. Salary in lieu of notice period is always taxable on Receipt basis.

Now we shall study all the components of salary and their taxability one by one.BASIC SALARY: It is taxable or due on receipt basis whichever is earlier.FEES & COMMISSION: It is also taxable on due or receipt basis w.e. is earlier.BONUS: It is taxable on receipt basis if not charged to tax earlier on due basis. However relief u/s 89 can be claimed if it is taxed on receipt basis.SALARY IN LIEU OF NOTICE PERIOD [Section 15]: It is taxable only on receipt

basis.ADVANCE SALARY [Section 17(1)(v)]: It is taxable on receipt basis because it is never due. However relief u/s 89 can be claimed.ARREARS OF SALARY: It is taxable on receipt/ allowed basis if it is not taxed earlier on due basis. However relief u/s 89 can be claimed.ANNUITY: It is taxable on due or receipt basis w.e. is earlier. If it is received from present employer, it is taxed as Salary. If it is received from past employer, it is taxed as profits in lieu of Salary.

RETIREMENT BENEFITS There are following types of retirement benefits:1. Gratuity2. Pension3. Leave Salary4. Retrenchment Compensation



5. Compensation on voluntary retirement.6. Provident Fund7. Approved Superannuation fund

Now we shall study these one by one: GRATUITY (DEATH-CUM-RETIREMENT)[Section 10(10)]: Gratuity is received by employee from his employer in appreciation of past services. It can be received by either:- i) The employee himself on his retirement; orii) The legal heir on the death of employee.

The Gratuity received by employee is taxable under head ' Salaries' but the Gratuity received by the Legal heir is not taxable (if employee died while in service). But some part of Gratuity is exempt u/s 10(10). For this the employees are divided into three categories:

i) Central/ State Government employees and employees of local authorities.ii) Employees covered under ' The payment of Gratuity Act, 1972’.iii) Other Employees.

EXEMPTION FOR CENTRAL/STATE GOVT. EMPLOYEES & EMPLOYEES OF LOCAL AUTHORITIES [SECTION 10(10)(i)]: Full amount of Gratuity received by the employee is EXEMPT from tax.

EXEMPTION FOR EMPLOYEES COVERED UNDER 'THE PAYMENT OF GRATUITY ACT, 1972 [SECTION 10(10)(ii)]: Least of the following three amounts is exempt from tax: a) Actual Gratuity Received;b) 15 days of salary for every completed year of service a part thereof in

excess of six months;c) Rs. 3,50,000/-.NOTE 1) In case of seasonal employee 15 days are to be replaced with 7 days. 2) The number of days in a month are taken as 26. 3) Salary means Basic salary and Dearness Allowance last drawn.4) Salary in case of a piece-rated employee is calculated on the basis of average of last three months’ wages (excluding wages for overtime work) preceding retirement.4) The payment of Gratuity Act, 1972 is applicable in case of every shop/establishment (employing more than 9 workers) and every factory, mine, oilfield, port, plantation etc.

EXEMPTION FOR OTHER EMPLOYEES (SECTION 10(10)(iii)]: Least of the following is exempt from tax:a) Actual Gratuity Received; b) ½ month’s average Salary for each completed year of service;c) Rs. 3,50,000/-.NOTE: 1) Salary means Basic Salary, Dearness Allowance (if terms of employment so provide) and commission based on fixed percentage of turnover



ACHIEVED BY THE EMPLOYEE.2) Average Salary means salary (discussed as above) for 10 months immediately

preceding the month of retirement/resignation/leaving the job.3) In case of employees not covered under The payment of Gratuity Act, 1972 themaximum amount of Gratuity exempt from tax in their lives is Rs.3,50,000 .

PENSION [SECTION 17(1) (ii)]:Pension is paid by the employer after retirement or death of employee in appreciation of his past services. It can be received by either:i) The employee himself on his retirement; orii) The legal heir on the death of the employee.

The pension received by employee is taxable under head ‘Salaries’. The pension received by the legal heirs is called 'Family Pension’ and it is taxable under head ‘Income from other sources’. Pension can be either commuted or uncommuted.Uncommuted Pension: It is received on monthly basis by the employee after retirement. It is fully in taxable in case of all employees.Commuted pension: It is received by the employee on lump-sum basis. Exemption is available as follows:- Exemption for Central or State Government or Local Authority or Statutory Corporation Employees:Commuted pension received by these employees is fully exempt from tax.Exemption in case of other employees:

a. If the employee receives gratuity also: The commuted value of 1/3rd of the pension is EXEMPT from tax.

b. If the employee does not receive gratuity: The commuted value of ½ of the pension is EXEMPT from tax.

Pension scheme for Employee Central Government or any other employer joining on or after 1st January, 2004:- The conditions to be fulfilled: 1) The assessee is an Individual.2) He is employed by the Central Government or any other employer on or

after 1st January, 2004.3) He has paid or deposited any amount not less than 10% of salary in his

account under a pension scheme notified by the Central Government in the previous year.

4) The employer also contributes an amount equal to 10% of his salary in his pension account. Such contribution is fully taxable under head Salaries.

5) Employee’s contribution as above (not exceeding 10% of his salary) plus Employer’s contribution to the above pension fund (not exceeding 10% of his salary) is deductible under section 80CCD.

6) If the employee or his nominee receives any amount on account of closure of the account or as pension during the previous year then such amount received will be taxable in the hands of the employee or his nominee, as the case may be, in the year of receipt.

7) Salary means Basic Salary plus Dearness Allowance, if the terms of



employment so provide.

LEAVE SALARY [Section 10(10)]: The Employees are entitled to various types of leaves while in service like casual leaves, medical leaves, outstation leaves etc. The employee can take all these leaves. But if he does not avail all leaves then some of the leaves may either lapse or be cancelled while some may be earned (earned leaves). These earned leaves can be encashed by the employee either in the same year or any other year while he is in service OR he may get earned leave encashed on retirement or resignation or his legal heirs may get this amount after his death. A) If leave Salary is encashed by the employee when he is in service with the

same employer then it is FULLY TAXABLE. However relief u/s 89 can be claimed.

B) If Leave Salary is encashed by the employee at the time of retirement or leaving the job then the exemption is as follows:

i) Exemption for Central or State Government Employees [SECTION 10(10AA)(i)]: Leave encashment at the time of retirement/leaving the job is FULLY EXEMPT.

ii) Exemption for other employees [SECTION 10 (10AA)(ii)]: Leave encashment at the time of retirement/ leaving the job is exempt to the least of following:(a) Leave Encashment actually received;(b) 10 months X Average Salary;(c) (Total leave entitlement by taking maximum 30 days for every completed year of service - Months of leaves availed/encashed) X Average Salary.(d) Rs 3,00,000/- (Rupees Three Lac only).NOTE:

1. Salary Means Basic Salary, Dearness Allowance (if the terms of Employment so provide) and Commission based on fixed percentage of turnover achieved by the employee.

2. Average Salary means “Salary of 10 months immediately preceding retirement/leaving the job.

3. Leave salary paid to legal heirs of the deceased employee is not taxable.4. In case of other employees, maximum amount of leave salary exempt from

tax is Rs. 3,00,000. This is applicable if the employee has more than one employer in his life.

RETRENCHMENT COMPENSATION [SEC 10(10B)]: Any compensation received by a workman at the time of his retrenchment is exempt to the least of following:a. Actual amount received;b. Amount as per section 25 F (b) of the Industrial Disputes Act, 1947;c. Rs 5,00,000/- (Rupees five Lac only).Note: Under The Industrial Disputes Act, 1947, a workman is entitled to receive

compensation equal to 15 days’ average salary for every completed year of service a part thereof in excess of six months.



COMPENSATION ON VOLUNTARY RETIREMENT [SEC 10(10C) & RULE 2 BA]: The compensation received by the employee at the time voluntary retirement is exempt if following conditions are satisfied –1. Compensation is received by the employee at the time of voluntary retirement/ separation.2. Compensation is received by an employee of the following undertakings:

a. an Authority established under a Central, State or Provincial Act;b. local Authority;c. university;d. an Indian Institute of Technology;e. the State Government;f. the Central Government;g. a notified institute having importance throughout India or any State;h. a notified institute of management;i. a public sector company;j. any company or a co-operative society.

3. Compensation is received in accordance with the scheme of voluntary retirement/ separation which is framed in accordance with prescribed guidelines as per Rule 2BA.4. Where exemption has been allowed to an employee under section 10(10C) for any assessment year, no exemption there under shall be allowed to him in relation to any other assessment year. EXEMPTION AMOUNT IS LEAST OF THE FOLLOWING.(a) Actual Compensation received; (b) Rs 5,00,000/- (Rupees five Lac only).GUIDELINES OF VOLUNTARY SCHEME [RULE 2BA]:(1) The employee must have completed at least 10 years of service

or be of at least 40 years of age.(2) The employee may be worker or executive but not Director of

Company/ Co-operative Society.(3) The voluntary retirement is to reduce the existing strength of

employees and no appointment will be made for the vacancy caused by Voluntary retirement.

(4) The retiring employee is not to be employed in other concern belonging to the same management.

(5) The amount receivable is least of –(a) Three months salary for each completed year of service.(b) Number of Months for retirement x Salary at the time of retirement.NOTE: Salary means Basic Salary, Dearness Allowance (if the terms of employment so provide) and commission (based on fixed %ge of turnover achieved by the employee) last drawn.

PROVIDENT FUND: There are four types of Provident Funds:(a) Statutory Provident fund (SPF or GPF): It is set up under the provisions of



The Provident Funds Act, 1925. This fund is for employees of Central Government, State Government, Local Authorities, Semi-Government Organisations, Railways, Universities and recognised Educational Institutions.

(b) Recognised Provident fund (RPF): It is set up under the provisions of The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952. This fund is for employees of those establishments which have employed 20 or more workers. The establishments having less than 20 workers can also join this scheme. Any establishment has two options for RPF: 1) Join scheme of the Government set up under the above Act; or 2) To have own scheme of provident fund and to get it recognised from the Commissioner of Income Tax as per rules under Part A of the IV schedule to The Income Tax Act.

(c) Unrecognised Provident fund (URPF): Any establishment having own scheme of provident fund but fails to get it recognised from the Commissioner of Income Tax as per rules under Part A of the IV schedule to The Income Tax Act then such provident fund is known as unrecognised provident fund.

(d)Public Provident Fund (PPF): The Central Government has established Public Provident Fund for general public. Any individual can be member PPF (whether employee or not) by opening PPF account at Post Office or nationalized banks. PPF is different from others because even a non–employee can have PPF Account. Thus in PPF employer does not contribute any amount.

TREATMENT FOR TAX PURPOSESPARTICULARS SPF RPF URPF

1 Employer’s Contribution

Fully Exempt Exempt up to 12% of Salary

(NOTE-1)

Ignore for the time being

2 Employee’s contribution

Deduction u/s 80C available

Deduction u/s 80C

available

Deduction u/s 80C not available

3 Interest on P.F Balance.

Fully Exempt Exempt UPTO 9.5% p. a.

Ignore for the time Being.

4. Receipt of Lump sum amount on

Retirement or Resignation

Fully Exempt Generally Exempt (Note-2)

Note-3

NOTE:1) Salary means Basic Salary, Dearness Allowance (if the terms of employment so provide) and commission based on fixed percentage turnover achieved by the employee.



2) The receipt of Lump sum amount on Retirement/ resignation on shall be exempt if: (a) The employee has completed continuous service for 5 years or more; OR(b) The employee has been terminated due to employee’s ill

health, closure of employer’s business or other reason beyond control of the employee; OR.

(c) The employee continues with same Provident fund Account with other employer.

(3) The receipt of Lump-sum amount on URPF balance shall be treated on follows:-

(a) Employer’s Contribution (total) + Interest on employer’s Contribution shall be fully taxable as Salary.

(b) Interest on Employee’s Contribution Shall be fully taxable as ‘Income from other Sources’;

(4) PPF: Annual contribution by individual/ HUF fully qualifies for Deduction u/s 80C. The annual Interest on PPF is fully exempt. The Lump sum amount received is also fully exempt.

APPROVED SUPERANNUATION FUND: Superannuation fund is also one of the schemes of retirement benefits. If such fund has been and continues to be approved by the Commissioner of Income Tax according to rules contained in Part B of IV schedule of the Income Tax Act. The tax treatment is as follows-1. Employer’s Contribution during the previous year is exempt from tax in the hands of employee upto Rs. 1,00,000. Excess contribution is charged to tax. 2. Employee’s Contribution qualifies for Deduction under section 80C.3. Interest on fund Balance is fully exempt from tax.4. Any payment from fund shall be fully exempt if-(a) It is made on the death of a beneficiary; or (b) It is made on retirement at or after specified age or employee becoming

incapacitated before such retirement; or.(c) It is made as refund of contributions on the death of beneficiary; or (d) It is made as refund of contribution of employee leaving service (other

than due to (b)) to the extent of contributions made before 1/4/1962.

TRANSFERRED BALANCE (URPF Converted in to the RPF): Whenever the URPF is converted in to the RPF, the employee may opt to transfer his URPF A/c balance (either fully or partially) to RPF A/c. Such balance transferred to RPF A/c on the date of conversion is called transferred balance. The tax treatment is as under –(a) The URPF Shall be treated as RPF from the beginning. Each year’s



Employer’s Contribution in excess of 12% Salary (10% of salary till A.Y 1997-98) is calculated. This amount is taxable in the year URPF is converted in to RPF.

(b) The Interest on RPF balance in excess of 9.5% p.a. (12% p.a. till A.Y2001-02) is calculated. This amount is taxable in the year when URPF is converted into RPF.

ALLOWANCESAllowance is fixed amount of money paid/payable by the employer

to the employee for meeting some expense-the expense may be official or personal. All allowances are taxable UNLESS OTHERWISE CLEARLY STATED TO BE EXEMPT. The taxable allowances are taxed on due or receipt basis whichever is earlier. The allowances can be studied under following heads –(a) Fully exempted allowances.(b) Allowances Exempted UPTO some Limit.(c) Entertainment allowance.(d) Fully Taxable Allowances.Now we shall study them one by one.FULLY EXEMPTED ALLOWANCES: These are:(1) Allowances (all) to Indian National Government Employees posted out

side India.(2) Allowances to High Court Judges under section 22A (2) of the High

court Judges (Conditions of service) Act, 1954. (3) Sumptuary Allowance to High court and Supreme Court Judges.(4) Allowances to UNO employees.

ALLOWANCES EXEMPT UPTO SOME LIMIT: These can be studied as: House Rent Allowance u/s 10 (13 A); & Notified Allowances u/s 10 (14).

HOUSE RENT ALLOWANCE [SEC. 10 (13 A) & RULE 2 A]:House Rent Allowance is exempt to the least of the following-(a) Actual HRA received (period of occupation of rented place only).(b) Rent Paid- 10% of Salary (period of occupation of rented place only).(c) 40 % (50% in case of rented place at Mumbai, Delhi, Calcutta or Chennai) of Salary (period of occupation of rented place only).NOTE: 1. Salary means Basic Salary, Dearness Allowance (if the terms service so include) and commission based on fixed %ge of turnover achieved by the employee. 2. Salary for this purpose is determined on DUE Basis only.3. If there is any change in Salary, Rent, Place of Residence or HRA in the year then the exemption shall be calculated in parts.

NOTIFIED ALLOWANCES U/S 10 (14) & RULE 2BB:The allowances are further sub-divided in to three categories as follows-



(A) ALLOWANCES- (AMOUNT RECEIVED OR AMOUNT SPENT WHICH EVER IS LESS IS THE AMOUNT EXEMPT):

(1) Travelling Allowance- It is given to meet cost of travel on tour or on transfer of duty.

(2) Daily allowance- It is given to meet daily ordinary charges due to absence from normal place of duty when on official tour or on transfer of duty.

(3) Conveyance Allowance – It is given to meet conveyance expenses for official purpose.

(4) Helper Allowance: It is given to meet expenditure of helper for official purpose.

(5) Academic Allowance: It is given to meet academic/ research/ training costs in Educational & Research Institutions.

(6) Uniform Allowance: It is given to meet the cost of purchase and maintenance of uniform for official purpose.

(B) ALLOWANCES–(AMOUNT RECEIVED OR LIMIT SPECIFIED WHICH EVER IS LESS IS THE AMOUNT EXEMPT): In case of following allowances actual expenditure is not considered at all:(1) Children Education allowance – Exempt up to actual amount received

per child or Rs 100 p.m. per child up to maximum of 2 children w.e. is less.(2) Hostel Expenditure Allowance- Exempt up to actual amount received

per Child or Rs 300 p.m. per child up to maximum of 2 children w. e. is less. (3) Tribal Area Allowance – Exempt up to actual amount received or Rs 200

p.m. w.e. is less.(4) High Altitude allowance (Special Composite Hill Compensatory

Allowance): Exempt from Rs. 300 p.m. to Rs.7,000 p. m. depending upon level of difficulty.

(5) Border Area/ Remote Area & Disturbed Area Allowance- Exempt from Rs. 200 p. m. to Rs 1,300 per month.

(6) Compensatory field Area Allowance- Exempt up to Rs 2,600 p.m. (7) Compensatory Modified field Area Allowance- Exempt up to Rs 1,000 p.m.(8) Counter Insurgency allowance- Exempt up to Rs 3,900 p.m.(9) Transport Allowance- It is given to meet cost of commuting between

office to home. Exempt up to Rs 800 per month (In case of Disabled persons u/s 80 U it is Rs 1,600 p.m.)

(10) Under ground Allowance – It is given to coal mine workers. Exempt up to Rs 800 p.m.

(11) High Altitude (Uncongenial climate) allowance- It is given to member of armed forces. Exempt up to Rs 1,060 p.m. (for altitude of 9000 ft to 15000 ft) and up to Rs. 1,600 p.m. (for altitude of above 15000 ft).

(12) Special Compensatory highly active field area Allowance- It is given to members of armed forces. Exempt to the extent of Rs 4,200 p.m.

(13) Island duty allowance- It is given to members of armed forces for



Andaman & Nicobar & Lakshadweep Islands. Exempt up to Rs 3,250/-p.m.

(C) TRANSPORT ALLOWANCE-(CERTAIN %GE OF AMOUNT RECEIVED OR CERTAIN LIMIT WHICH EVER IS LESS IS EXEMPT):

An employee of transportation employer receiving fixed allowance to meet his duties of running such transport from one place to another can claim exemption as follows –(a) 70% of allowance; or(b) Rs 6,000 p.m. w. e .is less.But such employee can’t get benefit of this allowance plus Daily allowance simultaneously.

ENTERTAINMENT ALLOWANCE This allowance is given to entertain various persons while

performing official duty. This is fully taxable. But in case of Central/ State Government Employees, a deduction u/s 16(ii) can be claimed to the least of the following: (a) Actual Entertainment allowance;(b) 20% of Basic Salary;(c) Rs 5,000 (Rupees five Thousand only).

ALLOWANCES WHICH ARE FULLY TAXABLE All other allowances are full taxable. Some of these are -

City Compensatory Allowance; Dearness allowance; Medical allowance; Lunch/Tiffin allowance; Over time allowance; Servant allowance ; Warden Allowance; Non practicing allowance; Family Allowance.

PERQUISITESPerquisites (or perks) are the benefits/ facilities in cash or in kind

provided by the employer to the employee either free of cost or at concessional rate. The most important feature of perk is that the employee must have a right to the same and it should not be voluntary or contingent (i.e. may or may not be) payment.

PERQUISITES AS PER SECTION 17 (2) – DEFINITION:The Act gives inclusive definition. Accordingly perquisites include-(a) The value of Rent free Accommodation provided to the employee by the

employer; (b) The Value of Concessional Rent Accommodation provided to the employee



by the employer;(c) The VALUE of any benefit or facility provided or granted either free or at

concessional rates in the case of specified employees (to be discussed later on);

(d) The obligation of employee paid by employer; (e) The amount paid/payable (on accrual basis) by the employer for Life

Insurance or Contract of Annuity of the employee (except RPF, approved superannuation fund & deposit Linked Insurance fund);

(f) The value of sweat equity shares or any specified security (like Debentures or Warrants) allotted or transferred (directly or indirectly) by the employer either free or at concessional rates to the employee;(g) The amount of employer’s contribution towards approved superannuation fund in excess of Rs. 1,00,000; (h) The value of any other benefit or amenity as may be prescribed.NOTE: The perquisites from (a), (b), (d), (e) and (h) are taxable in the hands of all employees whether specified or non-specified. In case of specified employees perquisites mentioned in (c) are also taxable. Perquisites as per (f) and (g) are taxable only if conditions mentioned therein are fulfilled.

TAXABILITY OF PERQUISITESPerks are divided into three categories as follows-

1) Perks taxable in case of all the employees.2) Perks taxable in case of specified employees only.3) Perk of sweat equity shares or any specified security (like Debentures or Warrants) allotted or transferred (directly or indirectly) by the employer either free or at concessional rates to the employee.4) Perk of employer’s contribution towards approved superannuation fund in excess of Rs. 1,00,000. 5) Tax-free or exempted perks.

PERQUISITES TAXABLE IN CASE OF ALL EMPLOYEES The following perquisites are taxable in case of all employees-

1. The Value of Rent Free Accommodation provided to the employee by the employer;

2. The Value of Concessional Rent Accommodation provided to the employee by the employer,

3. The monetary obligation of employee paid by the employer;4. The amount paid/payable (on accrual basis) by the employer for life

Insurance or Contract of Annuity of employee (except RPF, approved superannuation fund and Deposit Linked Insurance Fund);

5. The value of any other benefit or amenity (excluding the fringe benefits chargeable to tax under Chapter XII- H) as may be prescribed.



PERQUISITES TAXABLE IN CASE OF SPECIFIED EMPLOYEES ONLYFirst of all, let us understand who is a specified employee-SPECIFIED EMPLOYEE It includes a Director of the company (Full/part time Director for full year or a single day); or An employee having substantial interest (being beneficial owner of 20% of the voting power) in the employer company; or An employee having Monetary Salary exceeding Rs 50,000. Here monetary Salary refers to all taxable Cash payments less deduction u/s 16 (ii) & 16 (iii) of Entertainment allowance and Professional tax.

All monetary obligations of employee paid by employer are taxable perquisites in the hands of ALL EMPLOYEES. But if the employer provides non- monetary benefit to the employee then they are taxable in the hands of SPECIFIED EMPLOYEES only. Some examples are-

If watchman/sweeper/gardener/personal attendant is employed by the employee and his salary is reimbursed by the employer then it’s taxable in all cases being the obligation of the employee met by the employer. But if the watchman/sweeper/gardener/personal attendant is provided by the employer then this perk is taxable only in case of specified employees.

Free or concessional use of gas/electricity/water for household consumption is taxable in all cases if the bills for above facilities are in the name of employee being the obligation of the employee met by the employer. If such bills are in the name of employer then it will be perquisite in case of specified employee only.

If the school fees of children of the employee is reimbursed to him or paid by employer on his behalf to the school then such amount shall be perquisite in case of all employees being the obligation of the employee met by the employer. If the children of employee are studying in a school maintained by employer or in a school with which the employer has an agreement then if shall be perquisite in case of specified employee only.

Free or concessional use of motor car Private journey of employee and/or any member of household provided

free of cost or at concessional rates Any other benefit provided to the employeeSo any non-monetary benefit (other than exempted perks and perks which are taxable in all cases) is taxable in case of specified employees only.

NOTE: Besides above the following perks are also taxable if conditions mentioned therein are fulfilled:(i) The perk of sweat equity shares or any specified security (like Debentures or Warrants) allotted or transferred (directly or indirectly) by the employer either free or at concessional rates to the employee;(ii) The perk of amount of employer’s contribution towards approved superannuation fund in excess of Rs. 1,00,000;



PERQUISITES TAXABLE IN CASE OF ALL EMPLOYEESRENT FREE ACCOMODATION [RULE 3 (1)]

The term ‘accommodation’ includes a house, flat, farm house (or a part thereof), or accommodation in a hotel, motel, service apartment, guest house, mobile home, ship or any other floating structure.

The accommodation provided may be unfurnished or furnished. The Employees are divided into two categories:-(a) Central and state Government Employees(b) Private Sector or other employees.The accommodation is valued as under: FOR CENTRAL & STATE GOVERNMENT EMPLOYEES:

This employee’s category includes Government employees on deputation and presently working with any undertaking under Control of Govt. However employees of foreign Government are not covered under this category.1. Where the accommodation is unfurnished – The value of perk shall be

‘Licence fee’ determined by Government in accordance with rules framed by it.

2. Where the accommodation is furnished –The value of perk shall be: Value of unfurnished accommodation plus 10% p.a. of ‘ACTUAL COST’ of furniture (if owned by the employer) plus actual hire charges paid/payable by the employer (if furniture is hired by the employer)..

FOR PRIVATE SECTOR & OTHER EMPLOYEES: This category includes those employees who are not covered under the above category. i) Where the accommodation is unfurnished. Population of City as per 2001 census

It accommodation is owned by employer

If accommodation taken on lease or rent by the employer

More than 25,00,000

15% of salary in respect of period during which the accommodation is occupied by the employee.

15% of salary OR actual rent paid/payable by the employer which ever is less.

More than 10,00,000 but up to 25,00,000

10% of salary in respect of period during which accommodation is occupied by the employee.

Same as above

Any other city 7.50% of salary in respect of period during which accommodation is occupied by the employee.

Same as above

ii) Where the accommodation is furnished:- The value of perk shall be : value of unfurnished accommodation plus 10% p.a. of actual cost of furniture (if owned by the employer) plus actual hire charges paid/payable by the employer (if furniture is hired by the employer).



SPECIAL NOTE: FOR ACCOMMODATION PROVIDED BY EMPLOYER (GOVERNMENT OR OTHER) IN A HOTELThe perk is not taxable if:-a) Such accommodation is provided for a period not exceeding 15 days; AND

b) It has been provided on transfer of the employee. In every other case it will be valued as:-

i) 24% of salary for the previous year; orii) Actual charges of such hotel whichever is less, for the period for which the

accommodation in hotel is provided. NOTE:- MEANING OF SALARY FOR RENT FREE ACCOMMODATION: For this

purpose, salary includes:- Basic salary, dearness allowance / pay (if the terms of employment

so provide), Bonus, Commission, fees, all taxable parts of allowances and all monetary payments chargeable to tax (like leave encashment, pension of current year). For this purpose salary does not include:-

Dearness allowance / pay (if the terms of employment do not so provide), employer’s contribution to PROVIDENT FUND ACCOUNT of the employee, all allowances or part of allowances exempt from tax, value of perquisites specified under section 17 (2) of the Act.

- Accommodation includes house, flat, farm house or part there of or accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure.

- Hotel includes licensed accommodation in motel, service apartment or guest house.

- Salary is to be computed an accrual basis.- Salary from all employers (in case of two or more employers) will be taken

into consideration for the period during which the accommodation is provided.

- If employee is provided accommodation is a remote area and the employee is working at mining site or onshore oil exploration site or project execution site or an offshore site of similar nature then value of such accommodation in NIL.

- If an employee is transferred from one place to other and he is provided accommodation at new place while he occupies the old accommodation also then value of perk will be only for one accommodation having lower value till first 90 days and thereafter both the accommodations will be charged to tax.

VALUATION OF ACCOMMODATION PROVIDED AT CONCESSIONAL RATE: The value calculated as Rent Free Accommodation (other than hotel accommodation) as above is reduced by actual Rent paid by the employee. In case of hotel accommodation rent paid or payable by the employee is deducted from



calculated value of Rent Free Accommodation.

VALUATION OF OBLIGATION OF EMPLOYEE MET BY EMPLOYER: If any monetary obligation of employee is met by the employer then value of such perk is equal to AMOUNT SPENT BY THE EMPLOYER in this regard. This perk is taxable in case of ALL EMPLOYEES. Some examples are :-a) Salary of watchmen/ sweeper/ gardener (engaged by the employee) paid/reimbursed by the employer; b) Gas, electricity or water bill (in the name of employee) paid/reimbursed by the employer; c) Income tax/professional tax of employee paid/reimbursed by the employer; d) Medical Expenses reimbursed in excess of Rs.15,000.VALUATION OF LIFE INSURANCE PREMIUM/DEFERRED ANNUITY: Any amount paid/payable by the employer as life Insurance premium or deferred annuity premium is a perk taxable in case of ALL EMPOYEES. The value of perk shall be AMOUNT PAID/PAYABLE (ON DUE BASIS) AS PREMIUM FOR SUCH POLICY. This is perk only if the EMPLOYEE HAS VESTED INTEREST IN THE POLICY. * ESI/ Group Insurance/ Fidelity Guarantee Premium paid by employer is NOT A PERK as such scheme is generally for the benefit of the employer. VALUATION OF FRINGE BENEFITS:The fringe benefits provided by the employer to the employees are taxable in the hands of all employees. According to rule 3(7), the following are prescribed benefits:-i) Interest free or concessional loanii) Travelling, accommodation and any other expenses paid/ borne/

reimbursed by the employer for any holiday availed of by the employee and/or any family member

iii) Free food and beveragesiv) Any gift voucher or tokenv) Expenses on credit cardsvi) Club membership and expenses in club vii) Use of any moveable Assets by the employee. viii) Transfer of any moveable assets by the employer in favour of the employee (directly or indirectly).

i) Interest free or concessional loans [Rule 3(7)(i)]:- The value of benefit from loan availed by the employee (directly or indirectly) from the employer is calculated as follows :-

Purpose of loan Period or Amount of loan Rate to be applied for valuation of perks

a) For house Up to 5 years 9.75%^ ,10.25%* Above 5 years but up to 15 years 10%^,10.50%*Above 15 years but up to 20 years 10.25%^,10.75%**,



11%***b) For Car Up to 3 years (below Rs. 7.50 Lac) 11.75%

Up to 3 years (Rs. 7.50 Lac and above)

11.50%

Above 3 years but upto 5 years 11.75%Above 3 years but up to 7 years 12%

c) For Two Wheelers

16.25%

c)For Education Loan Amount up to Rs. 4 Lac 11.75%^^Loan Amount above Rs. 4 Lac up to Rs. 7.50 Lac

13.25%^^

Loan amount above Rs. 7.50 Lac 12.50%^^d)Personal Loan

16.50%

e) ESOP Loan 14.50%^ Up to Rs. 30 Lac* Above Rs. 30 Lac** Above Rs. 30 Lac but up to Rs. 75 Lac*** Above Rs. 75 Lac

The interest shall be calculated on Maximum monthly balance outstanding. If any interest is ACTUALLY PAID by the employee (directly or indirectly) then. Value of benefit will be reduced by such interest actually paid. But In The Following Cases There Will Be No Perk: - If the amount of loans do not exceed Rs. 20,000; OR- If the loan is for medical treatment of specified diseases (as per rule 3A).

But if any amount is reimbursed by the Insurance Company to the employee then benefit shall be taxable on amount so reimbursed by Insurance Company from the month of such reimbursement.

- Maximum monthly outstanding balance means outstanding balance on last day of each month.

- The term directly means employee and ‘indirectly’ means spouse, children and their spouses, parents, servants and dependents.

ii) Valuation of Perk of Travelling, accommodation and any other expenses paid or borne or reimbursed (to employee) by employer for any holiday availed by the said employee or any member of household [Rule 3(7)(ii)]:Situation Value of perk1) If such facility (maintained by employer) is not available to all employees

Value at which such facilities are offered by other agencies to public.

2) If employee (on official tour) takes any member of his household and expenses are incurred by

Value equal to such amount of expenditure incurred



employer on such member3) If official tour is extended as vacation

Value equal to amount of expenditure incurred for vacation period

4) In any other case Value equal to amount of expenditure incurred

Note: If any amount is paid by or recovered from employee for such benefit then the value of perk will be reduced by such amount.

iii) Valuation of Perk of free food and non-alcoholic beverages [[Rule 3(7)(iii)]: Situation Value of perk1) Tea or snacks during working hours

Nil

2) free food and non-alcoholic beverages during working hours in remote area or offshore installation 3) free food and non-alcoholic beverages during working hours;a) at office or business premises; orb) through non-transferable paid vouchers usable only at eating joints

Nil

Nil if amount is up to Rs. 50 per meal. Excess amount is value of perk. Such perk is to be reduced by amount recovered from employee.

4) In any other case Value equal to amount incurred by employer. Such perk is to be reduced by amount recovered from employee.

iv) Valuation of perk of Gift, Token or Voucher [Rule 3(7)(iv)]:Situation Value of perk1) If gift is in cash or gift cheque/ voucher convertible into cash

Value equal to actual amount of cash gifted/gift cheque or voucher.

2) If gift is of other item and value of such non-cash gift, token etc is upto Rs. 5,000

Nil

2) If gift is of other item and value of such non-cash gift, token etc is above Rs. 5,000

Value equal to actual amount of gift less Rs. 5,000

v) Valuation of membership fees and expenses on credit cards [Rule 3(7)(v)]:Situation Value of perk1) If such expenses are incurred wholly and exclusively for official purposes

Nil*

2) In any other case Value equal to amount



paid/reimbursed by the employer. Such perk is to be reduced by amount recovered from employee.

*The employer: a) has to maintain a complete detail of such expenses; and b) has to give a certificate in this regard that such expenses are incurred wholly and exclusively for official purposes.

vi) Valuation of perk of Club membership and expenses incurred in a club [Rule 3(7)(vi)]:Situation Value of perk1) If such expenses are incurred wholly and exclusively for official purposes

Nil*

2) In any other case Value equal to amount paid/reimbursed by the employer. Such perk is to be reduced by amount recovered from employee.

*The employer: a) has to maintain a complete detail of such expenses; and b) has to give a certificate in this regard that such expenses are incurred wholly and exclusively for official purposes.

vii) Use of moveable assets (owned or hired by employer) [Rule 3(7)

(vii)]:Situation Value of perk 1. Use of laptops and computer Nil. 2. Movable assets except as per point (1) and already specified in the rules.

i)10% p.a. of actual cost of assets owned; andii)actual hire charges (paid/ payable) on assets hired; less amount recovered from the employee.

viii) Transfer of movable assets owned by employer [Rule 3(7)(viii)]:Asset transferred Value of benefit 1. Computers and electric items Actual cost less 50% of WDV for

each completed year less amount paid by the employee.

2. Motor cars Actual cost less 20% of WDV for each completed year less amount paid by the employee.

3. Any other assets Actual cost less 10% of original cost for each completed year less amount paid by the employee.

Note: Completed years means full number of years from date of asset put to use



till date of transfer to employee. Any part of the year is to be ignored.

ix) Valuation of any other benefit, amenity, facility etc. provided by the employer [RULE 3 (7) (ix)]: The value of such benefit (for example: sale of goods to employee at concessional rates) shall be cost to the employer under an arm’s length transaction less employee’s contribution. But this rule does not apply to perk of telephones and mobiles which is fully exempt.

PERQUISITES TAXABLE IN CASE OF SPECIFIED EMPLOYEESi) Valuation of perk of motor car and other vehicles [RULE 3 (2)]: This perk is taxable to specified employees only except when the car is owned by the employee and expenses are met by the employer (as it becomes obligation of employee met by the employer).

Circumstances Value of Perk I. If car is owned by employee a) Car expenses met by employee Nil. (not a perk)b) Car expenses are met by employer

i) Car used wholly for official purpose

ii) Car used wholly for private purpose

iii) Car used partly for official and partly for private purpose

Nil. (NOTE- I)

Actual expenditure incurred by employerActual expenditure by employer less amount (@ Rs. 1800 pm. for car upto 1.6 litres capacity and Rs. 2400 p.m. for car exceeding 1.6 litres capacity plus @ Rs. 900 p.m. if chauffeur is provided) or higher amount for official purpose (as per note -1)

II. If car is owned/hired by employer a) Car expenses are met by employee

i) Car used wholly for official purpose

Nil. (Not a perk)


10%p.a. of Actual cost of car (owned by employer) OR Actual hire charges of car (hired by employer) plus actual salary of chauffer (if provided)

iii) Car used partly for official and partly for private purpose

Rs. 600 pm. for car up to 1.6 litres capacity or Rs. 900 pm. for car more than 1.6 litres capacity plus RS. 900 pm. for chauffer (if



provided).b) Car expenses are met by the

employeri) Car used wholly for official purpose

Nil. (Note -1)


Actual expenses of running and maintenance plus actual salary of chauffer (if provided) plus 10% p.a. of actual cost (if car owned by employer) OR actual hire charges (if car hired by employer)

iii) Car used partly for official and partly for private purpose.

Rs. 1800 p.m. for car up to 1.6 litres capacity and Rs. 2400 p.m. for car exceeding 1.6 litres capacity plus Rs. 900 p.m.. for chauffer (if provided)

III If any other automotive conveyance owned by employee and running & maintenance expenses are met by employeri) Used wholly for official purpose Nil (Note -1)ii) Used partly for official and partly for private purpose

Actual expenses incurred by employer less amount @ Rs. 900 p.m. or higher amount for official purpose (as per note-1)

Note :-1. Car is used for official purpose wholly only if following conditions are fulfilled: a) Employer has maintained full detail of journey for official purpose; &b) Employer gives certificate in this regard. 2. Month means complete month as per English calendar and part of the month is ignored. 3. If employee is allowed to use more than one car then perk of one of the carswill be as if car is used partly for official and partly for private purpose and perk of other cars will be as if these are used wholly for private purpose. 4. If employee pays some amount for the perk enjoyed then such amount shall be deducted from the value of perk. But in case of car used partly for official &partly for private purpose nothing will be deducted if car is owned/leased bythe employer. 5. Use of car by employee from residence to office and back is not chargeable totax. 6. Conveyance facility to High Court Judges and Supreme Court Judges in nottaxable.



ii) Valuation of perk of Sweeper, Gardener, Watchman or Personal Attendant [RULE 3 (3)]: The value of benefit is actual cost paid / payable by the employer less any amount recovered from the employee (if any). This perk is taxable to all employees if such workman is engaged by the employee (as it becomes obligation of employee met by the employer). Otherwise it is taxable in case of specified employees only. But the method of valuation of perk is same in both situations.Note: If gardener is provided to employee along with rent free or concessional rent accommodation owned by the employer then salary of gardener is not taxable as it is not a perk.

iii) Valuation of perk of gas, electricity or water [RULE 3(4)]: If the connection is in the name of the employee than this perk is taxable is case of all employees (as it becomes obligation of employee met by the employer). Otherwise it is taxable in case of specified cases only. The value of perk is as follows:-

Situation Value of perk a) If supply is from employer’s own

source without purchasing from outside agency.

Perk @ manufacturing cost per unit. Such perk is to be reduced by amount recovered from employee.

b) In any other case Value equal to amount paid/reimbursed by the employer. Such perk is to be reduced by amount recovered from employee.

iv) VALUATION OF FREE/CONCESSIONAL EDUCATIONAL FACILITIES [RULE 3(5)]:

Situation Value of perk a) If the educational institution is

owned and maintained by the employer or employer has an agreement with the institution. i) Education facility is provided to employee’s children

Cost of such education in similar in situation in or near the locality less Rs. 1000 p.m. per child less amount recovered from the employee.

ii) Education facility is provided to any member (other than children)

Cost of education in similar institution in or near the locality less amount recovered from the employee.



b) In any other case Amount incurred by the employer less amount recovered from the employee.

Note:1. Perk of Free education covered under point (b) is taxable in case of all

employees. Perk covered under point (a) is taxable in case of is taxable in case of specified employees only.

2. Free education facility and training of employees in not taxable. 3. Fixed education allowance in exempt up to Rs. 100 p.m. per child (for

maximum of two children) and Hostel allowance is exempt up to Rs. 300 pm. per child (for maximum of two children). Excess is taxable.

4. Scholarship to children of employee by the employer solely at employer’s discretion is not a perquisite.

VALUATION OF PERK OF FREE/CONCESSIONAL JOURNEY IN CASE EMPLOYEES OF A TRANSPORTER EMPLOYER [RULE 3(6)]:

The value of benefit is amount offered by such employer to the public as reduced by amount recovered from the employee. This perk is taxable only in case of specified employees.NOTE: Privilege passes and tickets granted to Railway and Airline Employees are Tax Free perks. VALUATION OF SWEAT EQUITY SHARES [RULE 3(8)] & SPECIFIED SECURITIES [RULE 3(9)]:

The value of such specified securities or sweat equity shares shall be their fair market value on the date when the option is exercised by the employee as reduced by the amount recovered from him in respect of such security or shares. Note: The fair market value is:CASE 1: Equity Share is listed in only one recognised stock exchange:a) Average of opening price and closing price on the date when option is exercised.b) Closing price on the date closest to date of exercise of option preceding such date of exercise if no trading has been done on date of exercise. CASE 2: Equity Share is listed in more than one recognised stock exchange:a) Average of opening price and closing price on the date when option is exercised in that exchange where there is highest volume of trade on that date. b) Closing price on the date closest to date of exercise of option preceding such date of exercise in that exchange where there is highest volume of trade on that date.CASE 3: Equity Share is not listed in any recognised stock exchange:

Value determined by a merchant banker on the date of exercise of option or any date not more than 180 days earlier than date of exercise.CASE 4: Specified security not being equity share in the company:

Value determined by a merchant banker on the date of exercise of option or any date not more than 180 days earlier than date of exercise.



Employer’s contribution towards approved superannuation fund: Employer’s contribution towards approved superannuation fund in excess of Rs. 1,00,000 is taxable perquisite in the hands of the employee.

TAX FREE PERQUISITES These perks are exempted from tax in case of all (whether specified or

non-specified) employees. 1. Medical Facilities or Medical reimbursement:

a) Medical facility provided to an employee or any member of his family in hospital/ nursing home/dispensary maintained by the employer is FULLY EXEMPT.b) Medical Reimbursement of any expenditure by employee on his or any of his family member’s treatment in hospital maintained by Govt / Local Authority or any other Govt approved hospital is fully EXEMPT. c) Medical Reimbursement of any expenditure by employee on his or any of his family member’s treatment for PERSCRIBED DISEASES (as per Rule 3A of Income tax Rules, 1962) in approved hospital is Fully EXEMPT.d) Medical Reimbursement of any other expenditure by employee on his family member’s treatment is EXEMPT UPTO MAXIMUM OF Rs. 15,000.e) Group Medical Insurance (Mediclaim) obtained by employer for his employees or reimbursement of Mediclaim insurance premium (for his health or any of his family member’s health) is Fully EXEMPT.

2. Food & non- alcoholic Beverages provided by the employer during working hours:a) in the office or factory; or

b) through non-transferable paid vouchers which are usable at only the eating joints is EXEMPT up to Rs. 50 per meal;c) Tea or snacks is fully exempt;d) free food and non-alcoholic beverages during working hours inremote area or offshore installation is fully exempt.

3. Recreational facilities provided to a group of employees (not to only a few employees) is FULLY EXEMPT.

4. Interest free/ Concessional Interest Loan to Employee: a) If the loans to employee do not exceed Rs 20,000 then the value of benefit of such loan is FULLY EXEMPT.b) If the loan to employee is given for treatment of specified diseases (as per Rule 3A of the Income Tax Rules, 1962), then the value of benefit of such loan is FULLY EXEMPT.

5. Perquisites to Indian National Government Employees posted outside India are FULLY EXEMPT.6. The benefit of training of employee and cost met by the employer for refresher management course is FULLY EXEMPT.7. Rent free Accommodation and free conveyance facility given to a Judge of High Court or Supreme Court is FULLY EXEMPT. 8. Rent Free accommodation to officer of Parliament, union Minister or leader of opposition is FULLY EXEMPT.



9. Rent free/ concessional Rent accommodation provided to employee in remote area at mining site or oil exploration site (offshore), or project execution site is Fully EXEMPT.

10. Free Education provided to children of employee in educational institute (either maintained and owned by employer; or other institute) is exempt up to Rs.1000 per month per child (no limit on number of children).

11. Use of health club, sports facilities provided to Employees is Fully EXEMPT.12. USE (not ownership) of laptops/ computers by the employee or any of his

family members for official / personal purpose is FULLY EXEMPT.13. Expense on telephone/ mobile phone incurred by the employer for the employee is FULLY EXEMPT.14. Employer’s Contribution to approved superannuation fund up to Rs.

1,00,000 is exempt. Excess contribution is taxable.15. Pension or Deferred Annuity Scheme or or Deposit Linked Insurance fund

is fully exempt.16. Employer’s Contribution to Staff Group Insurance Scheme is FULLY

EXEMPT.17. Premium paid by employer on personal accident policy of employee is

FULLY EXEMPT.18. Transfer (without consideration) of a movable asset (other than computer, electronic item and car) by the employer to the employee after using it for 10 years or more is FULLY EXEMPT.19. Tax paid by the employer on non-monetary perquisites of the employee is

FULLY EXEMPT.20. Leave Travel Concession is exempt upto limits mentioned in the rules of valuation discussed later on.

Medical facility or Medical Reimbursement (a) Medical facility- Medical facility provided to an employee or any

memberof his family in hospital/ nursing home/dispensary maintained by the employer is FULLY EXEMPT.(b) Medical Reimbursement (With in India)--Medical Reimbursement of any expenditure by employee on his or any of his family member’s treatment in hospital maintained by Govt / Local Authority or any other Govt approved hospital is fully EXEMPT. -Medical Reimbursement of any expenditure by employee on his or any of his family member’s treatment for PERSCRIBED DISEASES (as per Rule 3A of Income tax Rules, 1962) in approved hospital is Fully EXEMPT.-Medical Reimbursement of any other expenditure by employee on his family member’s treatment is EXEMPT UPTO MAXIMUM OF Rs. 15,000/-(SEE NOTE-2).-Group Medical Insurance (Mediclaim) obtained by employer for his employees or reimbursement of Mediclaim insurance premium (for his health or any of his family member’s health) is Fully EXEMPT.



(c) Medical facility/Medical Exp. Reimbursement for treatment of the employee or any of his family member is exempt as follows (OUT OF INDIA TREATMENT) – -Amount Spent in Medical treatment-Exempt up to amount permitted by RBI.-Amount spent on Stay abroad of patient and one attendant-Exempt up to amount permitted by RBI.-Amount Spent on Travel of patient and one attendant – EXEMPT only if GROSS TOTAL INCOME (before this perk of travelling) does not exceed Rs, 200,000/-NOTE: 1 Family means the spouse and children of employee (dependent or non- dependent); and parents, brothers and sisters of employee, wholly or mainly dependent on the employee.1. If medical bills are in the name of the employee then these are taxable in case of ALL EMOPLOYEES and if the bills are in the name of employer, then these are taxable in the hands of Specified employees only.

LEAVE TRAVEL CONCESSION [Sec 10(5)]: (a) For all employees- The LTC received/receivable by the employee from his

present/past employer is entitled for exemption if- he proceeds on leave to any place in India; or he proceeds to any place in India after retirement/ termination of his service.AMOUNT OF EXEMPTIONIF JOURNEY IS PERFORMED BY AIR EXEMPT UPTO ECONOMY FARE OF

NATIONAL CARRIER BY SHORTEST ROUTE.

IF JOURNEY PERFORMED OTHER THAN BY AIR & ORIGIN & DESTINATION PLACES ARE CONNECTED BY RAIL

EXEMPT UPTO 1ST CLASS AC FARE BY SHOTREST ROUTE

IF ORIGIN AND DESTINATION PLACES ARE NOT CONNECTED BY RAIL

EXEMPT UPTO 1ST CLASS FAIR OF RECOGNISED PUBLIC TRANSPORT BY SHOREST POSSIBLE ROUTE.IN CASE OF NO RECOGNISED PUBLIC TRANSPORT. EXEMPT UPTO 1ST CLASS AC FARE OF RAIL BY SHORTEST ROUTE (IMAGINING JOURNEY PERFORMED BY RAIL)

NOTE: 1The Amount Exempt can never be more than actual amount spent on

Fare.1. The LTC exemption is allowed 2 times in block of 4 calendar years. If LTC

Exemption is not availed in any block then only one LTC exemption can be carried forward to first year of next block of 4 years.

2. The other expenses of journey (like boarding, lodging, conveyance) are not subject to exemption.



3. LTC is for family (including spouse and children of the employee; parents, brothers and sisters of employee wholly/mainly dependent upon him).

4. From 1st October, 1998, the benefit of LTC is for only 2 children. But children borne before 1.10.1998 as well as multiple birth after one child after 30.9.1998 are eligible for exemption.

LTC FOR FOREIGN CITIZENS Passage money received by foreign citizen is fully chargeable to tax.

PROFITS IN LIEU OF SALARY [SECTION 17 (3)]: The payments are received in lieu of or in addition to salary. These include:-1. Retrenchment compensation (taxable portion only).2. Compensation due to modification in terms of employment.3. Employer’s contribution to URPF/ unrecognised superannuation fund and

interest there on (at the time of retirement/leaving the job).4. Amount received by employee under Keyman insurance policy.5. Amount received before joining employment and after leaving the job. 6. Any other sum received by the employee form the employer like:-

a) Taxable part of gratuity.b) Taxable part of pension.c) Taxable part of RPFd) Taxable part of approved superannuation funde) Taxable part of HRA.

Therefore except terminal and other payments exempt under sec 10 (10) to sec 10 (13A), all other payments received by the employee from past/present/future employer is taxed as profit in lieu of salary.

DEDUCTIONS FROM SALARIES Till now we have learnt about taxability or exemption of various

components of salary. All these taxable components and full entertainment allowance when added become ‘GROSS SALARY’. From gross salary, the following two deductions are allowed:-1. Entertainment Allowance U/S 16 (ii).2. Professional tax/tax an employment U/S 16 (iii)

ENTERTAINMENT ALLOWANCE U/S 16(ii):In case of Central or State Government employees least of the

following is amount of deduction:a) Actual entertainment allowance;b) 20% of basic salary;c) Rs. 5,000 (Rupees five thousand only).

PROFESSIONAL TAX/TAX ON EMPLOYMENT U/S 16 (iii): Professional tax (levied by a state under article 276 of the

Constitution of India) actually paid is allowed as deduction. If professional tax is paid by employer then it is taxable perk in all



cases (as it becomes obligation of employee met by employer) then the same is deductible U/S 16 (iii).

DEDUCTION UNDER SECTION 80 C This Deduction from Gross Total Income is allowed to Individual and H.U.F. only. The deduction can be calculated in following manner:- Step 1.:- Calculate Gross qualifying amount. Step 2.:- Calculate Net qualifying amount.Step 3.:- Calculate amount of deduction U/S 80 C.STEP 1. GROSS QUALIFYING AMOUNT: Find the aggregate of the following:1. Life insurance paid (up to maximum of 20% of sum assured) by individual

to effect/keep in force an insurance on his life of spouse or any child. In case of HUF, premium paid (up to maximum of 20% of sum assured) must be on life of any member of the family.

2. Any payment by individual for non-commutable deferred annuity (except as per point 10 below).

3. Any sum deducted from salary payable by or on behalf of Government to an individual for securing him a deferred annuity OR making provision for his spouse or children. The sum deducted should not be more than 20% of salary.

4. Employee’s contribution to RPF or SPF (other than repayment of loan). 5. Contribution to 15-year PPF account (other than repayment of loan). 6. Employee’s contribution to approved superannuation fund. 7. Subscription to National Saving Scheme 1992 (discontinued with effect

from 1.11.2002).8. Subscription to National Saving Certificates. Interest accrued on these

NSC’s also qualifies for first five years. 9. Contribution to unit link insurance plan of UTI and LIC mutual fund ( i.e.

ULIP and Dhanraksha).10. Payment made to effect or keep in force notified annual plan of LIC or any

other insurer (e.g. New Jeevan Dhara, New Jeewan Akshay etc.).11. Subscription to notified units i.e. Equity Linked Saving Schemes of UTI and

approved mutual fund. 12. Contribution by Individual to a notified pension fund set up by UTI or

approved mutual fund. 13. Any sum paid ( including interest) to home loan account scheme of

national housing Bank or contribution to notified pension fund set up by the national housing Bank.

14. Any sum paid as subscription to scheme of :-a) A public sector company which is engaged in providing long termfinance for construction or purchase of houses in India for residential purposes; ORb) Any authority constituted in India by as under any law enactedeither for purpose of dealing with and satisfying the need for housing orfor the purpose of planning development or improvement of cities/villages



or both. 15. Any payment made towards cost of purchase/construction of a new

residential house property. This amount does not include interest on loan or cost of addition / renovation/repair of property. But this includes stamp duty and other expenses for purchase of such property. The Loan must be taken from Government, Bank, Co-op. Bank, LIC, National Housing Bank, assessee’s employer being Public Company/ Public Sector Company/ University/ Co-op. Society/ Authority or Board or Corporation established/ considered under a Central or State Act.

16. Any sum paid by an Individual as Tuition Fees (not being development fees/ donation/ payment of similar nature) to any university/ college/ educational institution in India for full time education of his children for a maximum of two children.

17. Amount invested in shares / debentures of a public company engaged in infrastructure (including power sector) or units of mutual funds the proceeds of which are utilised for development and maintenance of infrastructure.

18. Any sum deposited in a term deposit with a scheduled bank for a period not less than 5 years in accordance with the scheme framed and notified by the Central Government.

19. Subscription to notified bonds of NABARD.20. Any sum deposited in an account under Senior Citizen Saving Scheme.21. Any sum deposited in 5 years term deposit account in Post Office as per

the Post Office Time Deposit Rules, 1981. STEP 2. NET QUALIFYING AMOUNT The aggregate of payments from (1) to (21) above is the Gross Qualifying Amount. The Net Qualifying Amount is determined as follows:a) Gross Qualifying Amount; orb) Rs. 1,00,000 whichever is less.STEP:3 AMOUNT OF DEDUCTIONThe net qualifying amount as calculated in step 2 is the amount of deduction under section 80 C. The point to remembered is that the aggregate of deductions under section 80 C, 80 CCC and 80 CCD cannot exceed Rs. 1,00,000.

* * * * *



Chapter 4INCOME FROM HOUSE PROPERTY

CHARGEABILITY [SECTION 22]: The annual value of a property, consisting of any buildings or lands appurtenant thereto of which the assessee is the owner shall be charged to tax under the head ‘Income from house property’ after claiming deduction u/s 24 provided such property (or any portion of such property) is not used by the assessee for the purpose of any business or profession carried on by him, the profit of which are chargeable to Tax.

There are three conditions to be fulfilled for calculation of Income from house property. These are:-1) The property must consist of Buildings or lands appurtenant there to; AND 2) The assessee must be owner of such property; AND 3) The property must not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to tax.

These three conditions are discussed in detail as below:-(A) PROPERTY MUST CONSIST OF BUILDINGS OR LANDS APPURTENANT

THERETO: The term ‘building’ is not defined in the Act. But many courts have given the interpretations according to which it may be said that building is enclosure of brick or stone work or even mud walls having a roof. But for a non-residential Building (like open air stadium, open air swimming pool) roof is not necessary. The term ‘Land appurtenant thereto’ means approach road to and from public streets, courtyard, backyard, playground, kitchen garden, motor garage, stable, cattle shed etc. for Residential Buildings. In case of non-residential Buildings it means car parking space, roads connecting different departments, playgrounds etc. It is to be noted that Income from vacant plot of land is not taxable under



this head, but is taxable either under head ‘Profits & Gains of Business or Profession’ or under head ‘Income From other sources’.

(B) ASSESSEE MUST BE OWNER OF THE SAID PROPERTY: The income is taxable under this head of only if the assessee is owner of the said property. The term ‘ownership’ includes legal owner (either through Registered Deeds as per Transfer of Properties Act, 1881 or through Agreement and Power of Attorney only) and Deemed Owner. The assessee need not to be owner of the land/site on which such building stands. Ownership includes ‘Freehold’ as well as ‘Leasehold’ Rights.DEEMED OWNERSHIP (SECTION 27) : The following persons are deemed to be the owners of the house property:

a) Transfer to a spouse: If an individual transfers any house property to his/her spouse otherwise than adequate consideration, then the transferor in such case is deemed to be the owner of such property transferred. But this provision is not applied if such transfer is in connection with agreement to live apart.

b) Transfer to minor child: If an individual transfers any house property to his/her minor child otherwise than adequate consideration, then the transferor in such case is deemed to be the owner of such property transferred. But this provision is not applied if such transfer is to married minor daughter. NOTE : If the individual transfers cash to his/her spouse or minor child (as above) and the recipient of cash acquires a house property out of such cash, then transferor shall not be deemed to be owner of house property. However income from such property shall be clubbed as per provisions of Sec. 64(1) in the hands of transferor of cash.

c) Holder of impartible estate: In case of HUF, which has been discontinued /broken, if any property has not been divided among the co-parceners, then the holder of such property is deemed to be the owner.

d) Member of Co-operative Society, Company etc: A member of a Co-operative society/company/other AOP (to whom a building or a part thereof is allotted or leased under a House Building Scheme of a society/company /AOP) shall be deemed to be owner of that Building or part thereof ALTHOUGH the legal ownership is with the Co-operative Society/Company/other AOP.

e) Deemed owner as per section 53 A of Transfer of Properties Act. : As per this section if : a) there is a written contract for sale (agreement to sell); b) the sale consideration has been paid or the buyer is willing to pay to the seller; and c) the buyer has taken possession of such property, then such buyer shall be deemed to be owner of the said property even if it is not registered in his name.

f) Right in a property for a period net less than 12 years: A person who acquires any right in any building or part thereof by way of LEASE FOR NOT LESS THAN 12 YEARS shall be deemed to be the owner of that property.



C) PROPERTY MUST NOT BE OCCUPIED BY THE OWNER FOR HIS BUSINESS OR PROFESSION: When a person carries on a business or profession in his own house property, then Annual value of such house property is not chargeable under this head if such business or profession is chargeable to tax. This rule is applicable even if in any year the income of such business is NIL or is in negative (LOSS).

NOTE: There are some typical cases which are given as follows: 1) House property in foreign country: An ordinarily resident person has to pay tax on the property in a foreign country. The ‘Not ordinarily Resident’ person or ‘Non-Resident’ person has to pay tax on such property only if income from such property is received in India. When such income is taxable it will be presumed as if such property is situated in India. 2) Disputed Ownership: If the ownership of a house property is under dispute in a court of law then the Income Tax Department decides the owner for tax purpose. Generally the person enjoying the possession of house property or who receives the income is treated as owner. 3) Property held as stock in trade: If the house property is held by the assessee as stock in trade or if the assessee is engaged in the business of letting out of property on rent, the annual value of such property is chargeable under this head only. 4) Property owned by co-owners: If a house property is owned by two or more persons, then share of each co-owner in the income from house property shall be included in his total income. 5) Property let out for running the business efficiently: If the property is let out to run the business efficiently then the income from such property shall be taxed under head ‘Income from Business or Profession’. 6) Properties Let out the rent of which is inseparable (COMPOSITE RENT): When the property is let out with some other facilities also (like plant & machinery, furniture etc.) and the two lettings are inseparable (i.e. letting one is not possible without letting of the other) then such income is taxable under head ‘Profit & Gains of business or profession’ or ‘Income from other sources’. But if such lettings are separable (i.e. letting of house property and other facilities can be given to different persons) then the rental income of Building shall be taxed under this head and Rental Income of facilities shall be taxed under head 'Profits and Gains of Business or profession' or ‘Income from other sources'.

CASES WHEN INCOME FROM HOUSE PROPERTY IS NOT TAXABLEIn the following cases the income from house property is not

taxable: a) Income from farm house. b) Annual value of one palace of ex-ruler. c) Property income of a local authority.d) Property income of approved scientific research association.e) Property income of approved Educational Institution / Hospitals. f) Property income of Registered Trade Unions.



g) House property held for charitable purpose (approved). h) Property income of a political party. i) Property used for own business or profession. j) One self occupied property (only in case of individual and HUF assessee).

TYPES OF HOUSE PROPERTIES It is very important to understand that it is not the Actual Income

from house property which is charged under this head. A person may be charged to tax under this head even if he has not earned any house property income in the previous year. There are following three types of house properties: a) Actually let out housesb) One self occupied house propertyc) Deemed to be let out house property.

The let out house includes the property let out for residential as well as commercial purpose. The self occupied property means the house property used for own residence by the assessee and no other benefit is derived from such property. This also includes a house property which is not actually occupied by the owner due to employment or business carried on at any other place. If an assessee is owner of more than one self occupied house properties then only one house is treated as self occupied and other houses as Deemed to be let out houses. A) INCOME FROM LET OUT HOUSE (INCLUDING DEEMED TO BE LET OUT HOUSE PROPERTY):It is calculated as under:

Gross annual value * * *Less: Municipal taxes actually paid by owner * * *

__________

NET ANNUAL VALUE

Less: Deduction U/s 24-Standard Deduction @ 30% of Net Annual Value * * * -Interest on Borrowed capital * * *

__________INCOME FROM LET OUT / DEEMED TO BE LET OUT HOUSE: ___________

How to calculate GROSS ANNUAL VALUE (ANNUAL RENTAL VALUE): Gross annual value of let out house or deemed to be let out house is

dependent upon following values: a) Municipal valuation: It means value determined by the Local Authority of

the house for charging municipal taxes.b) Fair Rent: It means rent fetched by similar property in same or similar

locality. c) Standard Rent: It means rent of property as per Rent Control Acts (if



applicable). d) Actual rent received / receivable: It means rent of actually let out property on accrual basis for full year. e) Unrealised Rent: It means rent which could not be realized if:

(1) tenancy was bonafide; (2) the defaulting tenant has vacated or steps have been taken to vacate the house; (3) the defaulting tenant is not occupying any other property of the assessee; (4) all reasonable steps have been taken by the assessee for recovery of unpaid rent or the legal proceedings in this regard are useless (in case of death of tenant).

f) Loss of Rent due to vacancy: If, in case of let out property, the property remained vacant for some period then loss of rent due to vacancy shall be calculated on the basis of actual annual rent for vacancy period.Thus gross annual value is dependent on: Municipal valuation = (a)Fair Rent = (b)Standard Rent = (c)Actual Annual Rent = (d)Unrealised Rent = (e)Loss of Rent due to vacancy= (f)

STEP I: Expected Rent of house is (a) or (b) w.e. is higher subject to maximum of (c). If step 2 and step (3) are not applicable then expected rent is gross annual value (It will be so in case of deemed to be let out house).STEP II: Find out Actual Annual Rent less unrealized rent i.e. [d- e]. STEP III: Find out amount which is higher of amount as per Step 1 or amount as per step II.STEP IV: From the amount as per step 3 deduct Loss due to vacancy. This is Gross annual value. i.e. GAV = Amount as per Step III – (f). NOTE: If the ownership of such house property is for a period less than 12 months then values as per (a), (b), (c) and (d) shall be calculated for period of ownership only. DEDUCTION OF MUNICIPAL TAXES

The municipal taxes levied by the local authority on such house property are deducted from gross annual value only if these are borne and actually paid by the owner during the previous year.

The amount after deduction of municipal tax is called NET ANNUAL VALUE or ANNUAL VALUE. STANDARD DEDUCTION U/S 24(a): The standard deduction is 30% of Net Annual Value. INTEREST ON BORROWED CAPITAL U/S 24(b): The interest on capital borrowed (for purchase, construction, repair, renewal or re-construction of the house) is deductible on accrual basis. Interest is divided into two parts:



a) Interest on loan for pre – construction period: It is a period starting from date of borrowal till 31st March immediately preceding the date of completion of construction/date of purchase or date of repayment of loan w.e. is earlier. This is deductible in FIVE EQUAL ANNUAL INSTALMENTS STARTING FROM THE YEAR OF COMPLETION OF CONSTRUCTION / YEAR OF PURCHASE.b) Interest on post construction period: It is deductible in the year to which it belongs on ACCRUAL BASIS. Note : 1) Interest on unpaid interest is not deductible. 2) Interest on fresh loan taken to repay original housing loan is deductible. 3) It is not necessary that such property must be given as security for availing

such loan. 4) If interest on such loan is payable out of India, it is available for deduction

only if TDS has been deducted on such interest.

B) INCOME FROM SELF-OCCUPIED HOUSE (INCLUDING HOUSE NOT OCCUPIED DUE TO EMPLOYMENT REASONS):It is calculated as under:Gross Annual Value NILLess: Municipal Taxes NIL

Net Annual Value NILStandard Deduction NILInterest on borrowed capital * * *Income from Self occupied house (-)

DEDUCTION OF INTEREST ON BORROWED CAPITAL: The provisions for deduction of interest on borrowed capital are same except that maximum limit for self occupied property is fixed at Rs. 30,000*. * Rs. 30,000 is replaced with Rs. 1,50,000 if following conditions are fulfilled: a) Capital is borrowed after 31/3/1999 for acquisition / construction of house property (NOT for repair, renewal or reconstruction); AND b) Construction / acquisition should be complete within three years from the end of financial year in which the capital was borrowed; AND c) The person granting the loan certifies that such interest is on the loan given for acquisition or construction of the house. NOTE: 1. The above provisions are applicable in respect of only one self occupied House (of assessee’s choice) of the assessee in case assessee owns more than one self occupied house. 2. The above provisions are also applicable if the assessee owns a house which could not be occupied by him due to employment / business reasons and he has not derived any other benefit from such house. C) INCOME FROM HOUSE PARTLY SELF OCCUPIED PARTLY LET OUT: If assessee is the owner of one house property which consists of two or more units



one of which is self occupied and other unit(s) is (are) let out then the income is calculated as follows : 1. Unit self occupied - Calculation as per income form self occupied

house.2. Units let out - Calculation as per income from let out house.D) INCOME FROM HOUSE SELF OCCUPIED FOR PART OF THE YEAR AND LET OUT FOR PART OF THE YEAR: In this case the calculation shall be made assuming the house was let out for full year. Only difference is that in this case actual rent for let out period is taken in (d).NOTE: The ‘Individual’ and ‘H.U.F.’ are entitled to benefits of SELF OCCUPIED HOUSE. Other persons can’t occupy the house for residential purpose. UNREALISED RENT ALLOWED EARLIER BUT RECOVERED LATER ON – TAXABILITY THEREOF: a) Deduction allowed in assessment year 2001-2002 or earlier (Sec. 25A) : If unrealized rent is recovered in any previous year then it is deemed to be income of the year in which it is recovered. It is to be remembered that firstly, the unrealized rent which was not allowed as deduction earlier will be covered and balance if any is taxable. This is taxable as income from house property whether or not the assessee is owner of the said house in the year of recovery. b) Deduction allowed in assessment year 2002-2003 or subsequent year (Sec. 25AA): If the assessee cannot realize rent during previous year 2001-2002 or any subsequent year (and it is allowed as deduction in that year) and the assessee realizes such rent, the amount so realized (to the extent it has not been included in ANNUAL VALUE earlier) shall deemed to be the income of previous year in which rent is realized whether not the assessee is owner of that property in that previous year. ARREARS OF RENT RECEIVED – TAXABILITY THEREOF (SEC. 25B) If the owner of house property receives arrears of rent not charged to tax in any previous year then it is taxable in the year of receipt after standard deduction @ 30% of such amount under head ‘Income from house property’. It is immaterial whether or not the assessee is owner of that property in that previous year.

* * *



CHAPTER - 5INCOME UNDER HEAD “PROFITS AND GAINS OF BUSINESS OR PROFESSION”

BASIS OF CHARGE (SEC. 28): The following incomes shall be charged to tax under this head: a) The profits and gains of any business carried on by the assessee at any

time during the year;b) Any COMPENSATION or other payments due to or received by:

1. any person in connection with termination/modification of his agreement for managing the whole or substantially the whole of the affairs of an Indian Company or any other company;2. any person holding an agency in India for any part of the activities relating to the business of any other person at or in connection with termination / modification of the terms of the agency;3. any person for or in connection with the vesting in the Government (or in any corporation owned by or controlled by Government) under any law for the time being imposed, of the management of any property or business.

c) Income derived by a trade, professional or similar association from specific services performed for its members.

d) Exports incentives, which include: 1. profits on sales of import licences granted under imports (control) order on account of exports;2. cash assistance (by whatever name called), received or receivable against exports;3. Duty drawbacks of Customs and Central Excise Duties; 4. Profit on transfer of Duty Entitlement Pass Book Scheme;5. Profit on transfer of Duty Free Replenishment Certificate



e) the value of any benefit or perquisite whether convertible into money or not arising during the course of carrying on of any business / profession;

f) any interest, salary, bonus, commission, or remuneration due to or received by a partner of firm from the firm in which he is a partner. Such amount shall be adjusted according to provisions of Section 40 (b);

g) any sum received / receivable in cash or in kind under agreement for: 1. not carrying out activity in relation to any business; or 2. not sharing know how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. But the point g (i) above shall not apply where the amount is received / receivable for TRANSFER / SALE of rights (which is chargeable under head ‘Capital Gains’).

h) any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy;

i) where speculative transactions carried on by an assessee are of such a nature as to constitute a business then such speculative business shall be deemed to be distinct and separate from any other business.

BASIC PRINCIPLES FOR ARRIVING AT BUSINESS INCOME: The following are basic principles for arriving at business income: 1) Business includes trade, commerce, manufacture or any adventure in the nature of trade, commerce or manufacture: This head includes trade (purchase of goods for resale), commerce (trade at large scale), manufacture (selling the goods which are produced by conversion of goods purchased by applying physical labour or mechanical power) and any such transaction in the nature of trade, commerce or manufacture. There must be profit motive for business. Also business can not be carried on by entering into a transaction with himself only. 2) Business / Profession carried on by the assessee: The assessee must have right to carry on the business and the business must have been carried on in exercise of that right by the assessee either personally or through his agent or servant. It is not necessary that the assessee must carry on the business physically himself. 3) Business / Profession must be carried on during the previous year: The business or profession should be carried on by the assessee at any time during the previous year. It is not necessary that the business or profession should be carried on for whole previous year or till end of previous year. However, the following receipts are taxable even if no business or profession is carried on by the assessee during the previous year: a) Recovery of any loss, expenditure or trading liability earlier allowed as

deduction [Sec. 41(1)];b) Balancing charge in case of Electricity Companies [Sec. 41(2)];c) Sale of capital asset used for scientific research [Sec.41 (3)];d) Recovery against Bad debts [Sec.41 (4)];



e) Amount withdrawn from special reserve created under section 36 (1) (viii) [Sec. 41 (4A)];

f) Sum received after discontinuance of business or profession [Sec. 176 (3A)/4].

4. Income of previous year is taxable in relevant assessment year: General rule is that income of previous year is taxable in relevant

assessment year. But there are some exceptions as follows: a) Income of Non-resident Shipping Company;b) Income of a person leaving India for good;c) Income of bodies formed for short duration;d) Income of a person trying to dispose off his assets to avoid tax liability;e) Income of discontinued business.5. Tax incidence is on all business or professions: The tax incidence arises on all business or professions carried on by the assessee. Incomes and losses of all business professions are combined to calculate tax liability. However the business is divided into two categories- (a) speculative, (b) non-speculative. 6. Legal ownership versus beneficial ownership: The courts can go into the question of beneficial ownership and decide who should be held liable for tax. 7. Real profit versus anticipated profits: The profits or losses which may occur in future are not considered for calculating business or profession income for previous year. However there is one exception: Stock in trade is valued at cost or market price which ever is lower. 8. Real Profits versus notional profits: Real profits are charged to tax and notional profits are not taxable. So no profit can be shown on drawing of goods by the proprietor by treating them (at sale price) as sale. 9. Mode of book entry is not relevant: The mode of book entry cannot change the basic character of a transaction. So a trading receipt will remain trading receipt even if it is shown in the books as capital receipt. 10. Illegal Business: It is immaterial whether business is legal or illegal. Both businesses are taxable under the law. 11. Business loss or Loss incidental to trade: Business profit is computed after allowing deduction for business loss. Business loss should be trading loss and must fulfill following conditions: a) Loss should be real loss and not notional / fictitiousb) Loss should be revenue in nature. c) Loss should be incurred during the pervious year.d) Loss must have actually arisen and been incurred, not merely anticipated

as certain to occur in future.e) Loss should be incidental to business and profession carried on by the

assessee. f) There should not be any, direct or indirect, prohibition under the Act

against deductibility of such loss. The following losses are deductible as business loss: - Losses of stock in trade as result of enemy action.- Losses of stock in trade by an act of God.



- Losses arising out of failure on the part of assessee to accept delivery of goods.

- Losses caused by confiscation of cash from gold smuggler by custom authorities.

- Depreciation in funds kept in foreign currency for purchase of stock in trade.

- Loss due to exchange rate fluctuations of foreign currency held on revenue account.

- Loss arising from sale of short term investments. - Loss of cash and securities in bank on account of dacoity (with in or after

working hours). - Loss on realization of amount advanced in connection with business. - Loss due to embezzlement by the employee. The following losses are not deductible: - Loss of capital asset. - Loss on sale of Trade / Non-trade investment. - Depreciation of funds kept in foreign currency for capital purposes. - Loss arising from non-recovery of tax paid by an agent on behalf of the

non-resident. - Anticipated future losses. - Losses relating to any business / profession discontinued before

commencement of the relevant previous year.

CERTAIN INCOMES NOT TAXABLE UNDER HEAD “PROFITS AND GAINS OF BUSINESS” 1. Rent from house property: The income from letting of house property is always taxable under head “Income from House Property”. But if residential houses / flats are let out to the employees for efficient conduct of assessee’s business (not of letting of house property) then such income shall be taxable as business income. Also in case of Composite Rent (when the letting of house is inseparable from letting of other assets), the income is taxable either as ‘business income’ or ‘income from other sources’.2. Dividend income: An assessee who is carrying on the business of dealing in shares and securities and earns dividend income then such dividend income shall be taxable under head ‘Income from other sources’. 3. Winning from lotteries, races etc.: Any winning from lotteries, races etc. is taxable under head ‘Income from other sources’, even if it is regular business activity.

METHOD OF ACCOUNTING [SECTION 145 & 145A]: The accounting methods may be either 'mercantile' ‘or 'cash’. An accounting method once followed cannot be changed in ordinary course.

Further the profit from business and profession shall be computed in accordance with accounting standards which may be prescribed by Central Government from time to time. Accordingly there two accounting standards to be



followed by the assessee maintaining books on MERCANTILE system:-a) Accounting standard I relating to disclosure of accounting policies.b) Accounting standard II relating to disclosure of prior period and extra

ordinary items and changes in accounting policies. Further valuation of purchase and sale of goods and inventory for

the purpose of determining the income chargeable under the head “profits and gains of business or profession” shall be:-a) In accordance with method of accounting regularly followed by the

assessee; and b) Further adjusted to include the amount of tax, duty, cess or fees (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.It may be noted that even if the assessee is allowed modvat / cenvat credit

of EXCISE DUTY or CVD of CUSTOM DUTY paid by him, such duty shall be included in valuation of purchase and sale of goods and inventory in determining the business income. SCHEME OF BUSINESS DEDUCTIONS / ALLOWANCES: The deductions are covered from section 30 to section 43D. Before studying the deductions let us study the principles of admissibility of deductions:-1. Onus of proof: It is the responsibility of the assessee to prove

that a particular deduction is admissible in his case. 2. Allowances are cumulative: Deductions from section 30 to 36 are expressive and deduction U/S 37 is residuary. If a particular expense is expressly dealt with by a particular section, its admissibility under section37 cannot be denied unless the particular section prohibits any deduction under any other provision. 3. Expenditure should relate to the relevant previous year: It is self explanatory. However for incomes under section 41 and 176 any expenditure incurred for such income is deductible whether or not they are incurred in the relevant previous year. 4. Business carried on during the previous year: If business is discontinued before the commencement of previous year, no deduction is permissible in respect of such discontinued business. 5. Expenditure should be incurred for assessee’s own business: Deduction is allowed only if expenditure is incurred for assessee's own business otherwise it is disallowed. 6. Benefit of expenditure may extend to some body else: The benefit of expense may extend to some body else even then it is allowed as deduction. For example- insurance, repair of leased plant & machinery incurred by Lessor are deductible from income of Lessor even though the benefit may be to the lessee. 7. Benefit of expenditure may extend beyond relevant previous year: A revenue expenditure incurred during the year is deductible even of benefit of expenditure is extended beyond the year of expenditure.



8. No allowances in respect of wasting assets: No deduction is admissible on diminution or exhaustion of Capital Asset from which income is derived. Wasting assets such as mines and quarries are capital assets and their exhaustion is capital loss which is not allowed as deduction. 9. No allowance for non-assessable business: If income from a business is not taxable in India then any deduction can be claimed regarding expenditure or losses of such business. 10. Expenditure of illegal business: The expenditure of illegal business is deductible from business income. However the penalty or damages paid in connection with infringement of law are not deductible. 11. Revenue expenditure and capital expenditure: Deductions from section 30 to 36 are deductible expressively. These may include capital expenditure also. The deduction U/S 37 is only for revenue expenditure. 12. No deduction in respect of depreciation of Investments: No deduction in respect of depreciation of investment in shares and securities is allowed. 13. No allowance in respect of expenditure incurred before setting up of a business: Except the deductions under section 35A, 35D and 35E , no expenditure which is incurred before setting up of a business shall be allowed as deduction from income under the head ‘Profits and Gains of Business or Profession’.14. No allowance in respect of anticipated losses: Except while valuing the closing stock (at cost or realisable value whichever is less), no deduction is allowed for any anticipated loss from income under the head ‘Profits and Gains of Business or Profession’.

EXPENSES EXPRESSLY ALLOWED AS DEDUCTION: - Section 30 to 37 cover expenses expressly allowed as deduction. There are as follows:-1. Rent, rates, taxes, repairs and insurance for buildings [section 30]: The premises used for the purpose of business or profession has entitlement of following deductions:-a) Where the premises are occupied by the assessee as:-i) A tenant: The rent for such premises, and if he has undertaken to bear the

cost of repairs of such premises, the amount paid on such repairs (not being capital expenditure).

ii) Otherwise than as a tenant: The amount paid by him for current repairs of the premises;

b) Any sum paid (whether as owner or tenant) as land revenue, municipal taxes etc. However these are allowable subject to provisions of section 43B (i.e. if these are claimed on due basis, the payment of the same must be made on or before the due date of furnishing the return of income or actual date of furnishing the return which ever is earlier);c) Any insurance premium paid (whether as owner or tenant) in respect of insurance against risk of damage or destruction of the premises.



2. Repairs and insurance of plant, machinery and furniture [sec.31]: The expenditure incurred on current repairs and insurance of plant, machinery and furniture is allowed as deduction if such plant, machinery and furniture are used business purposes.

3. Depreciation (sec. 32): One should satisfy the following condition for claiming depreciation:-A) Assessee must be the OWNER of the asset;B) The asset must be used for business or profession;C) The assets should be used during the previous year; D) Depreciation is available on tangible as well as intangible assets. a) Asset must be used for business or profession: The owner is the person who can exercise the rights of the owner not on behalf of own but in his own rights. Owner needs not to be registered owner. If the assessee carries on business or profession from leasehold building then he is entitled to depreciation on capital expenditure incurred by him. In any other case, the depreciation is available to the Lessor. b) Asset must be used for business or profession: The depreciation is allowed only if the asset is used for business or profession. If asset is used for business partly and partly for other purposes then depreciation is allowed only for use for business or profession. When residential quarters are given to employees for efficient running of business then depreciation is allowed on such buildings and other assets like fridge, fans etc. given to employees.c) Asset should be used during the previous year: The asset must be used at least for some time during the relevant previous year for business purpose to claim normal depreciation. However 50% of normal depreciation is allowed if following two conditions are satisfied:-i) Asset is acquired during the preview year; ANDii) It is put to use for the purpose of business or profession for less than 180

days during that year. d) Depreciation is available on tangible assets as well as intangible assets: i) Tangible assets mean and include building, Machinery, plant and furniture. ii) Intangible assets means assets acquired after 31st March, 1998 and include know-how, patents, copyright, trademarks, license, franchises or any other business or commercial rights of similar nature. NOTE: From assessment year 2002-03 depreciation is available whether the assessee has claimed deduction for depreciation in computing his income or not. STEPS FOR CALCULATION OF DEPRECIATION: The depreciation is calculated on BLOCK OF ASSETS on WRITTEN DOWN METHOD as per RATES OF DEPRECIATION PRESCRIBED UNDER THE ACT. However from 1.04.1997 ONWARDS, an undertaking engaged in generation OR generation and distribution of power can claim depreciation on STRAIGHT LINE METHOD.Now are shall understand the meaning of following terms:- BLOCK OF ASSETS



WRITTEN DOWN VALUE ACTUAL COST1. Block of assets [sec. 2 (11)]: It means a group of assets falling with in a class of asset namely :-a) Tangible assets being buildings, machinery, plant or furniture. b) Intangible assets being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. There are 13 different blocks out of which 1 to 12 are in respect of tangible assets and block13 is for intangible assets. BLOCK NATURE OF ASSET Rate of

Depreciation1. Buildings: Residential other than Hotels and boarding

houses. 5%2. Buildings: Office, factory etc. not being residential

buildings (it includes hotels and boarding houses but does not include block I & 3).

10%

3. Buildings –a) Temporary wooden or other structureb) Buildings acquired on or after 1-09-2002 for installing plant & Machinery for water supply project or water treatment system for providing INFRASTRUCTURAL FACILITIES under section 80 I A (4) (i).

100%

4. Furniture: Any furniture including electrical fitting. 10%5. Plant and Machinery: Any plant or machinery (not

covered from block 6 to 12) and Motor cars (other than those used in business of running on hire) acquired or put to use after 31-03-1990.

15%

6. Plant & machinery: Ocean going ships, vessels ordinarily operating on inland waters including speed boats

20%

7. Plant & machinery: buses, lorries and taxies used in the business of running on hire, machinery used in semi-conductor industry, moulds used in rubber and plastic goods factories and life saving medical equipment

30%

8. Aero planes, commercial vehicle acquired after 30.09.1998 but before 01.04.1999 and put to use before 01.04.1999 for business or profession, Specified life saving medical equipment as per rule 5(2).

40%

9. Plant & machinery – a) Containers of glass or plastic used as refills.b) New commercial vehicle acquired during 2001-02 and put to use before 31.03.02 for business or profession.c) Machinery used in weaving processing and garment sector of textile industry which is purchased under TUFS (Technology up-gradation fund scheme) during 1-04-01 to 31-03-04 and put to use before 31-03-04.

50%



10. Plant & machinery:a) Computers including computer softwareb) New commercial vehicle acquired in replacement of vehicles of 15 years of age and put to use before 01-04-99 (if acquired from 1-10-98 to 31-03-99) or before 01-04-2000 (if acquired from 01.04.99 to 31.03.00)c) Books of professional (other than annual publications)d) Gas cylinders, plants used in field operations by mineral oil concerns, direct fire glass melting furnaces

60%

11. Plant & machinery: Energy saving devices; renewal energy devices; rollers in flour mills, sugar works and steel industry.

80%

12. Plant & machinery: Air pollution control equipments, water pollution control equipments; solid waste control equipments, recycling and resource recovery systems, machinery acquired and installed after 31.08.2002 in water supply project or water treatment system, wooden parts of artificial silk manufacturing machines, cinematograph films, bulbs of studio lights, wooden match frames, Tubs, ropes and safety lamps in mines and quarries, salt pans, reservoirs made of earthy or sandy or clayey material; books (being annual publication) owned for profession, books owned by libraries (may be annual or not).

100%

13. Intangible assets: Know how, Patents, Copyrights, Trade Marks, Licences, Franchises and other rights acquired after 31.3.98

25%

WRITTEN DOWN VALUE [SEC. 43 (b)] : The WDV for assessment year 2010-11 is determined as follows :-(a) Find out depreciated value of block of asset as on 1.04.2009. (b) To this, add “Actual Cost” of assets falling in the same block acquired during the previous year 2009-10.(c) From the resultant figure deduct money received / receivable (including scrap value) in respect of that asset falling in the same block of assets which is sold, discarded, demolished or destroyed during the previous year 2009-10. However the net figure can not be negative. This net figure is written down value of the block of assets on 31-03-2010. WRITTEN DOWN VALUE IN CASE OF SLUMP SALE: Slump sale as per section 2 (42C) means the transfer of one or more undertakings as a result of the sale for a lump-sum consideration without values being assigned to individual assets and liabilities. Here also first three steps are same as in the above said case. Step (d) is added for calculation. a), b), and c) are same as in simple cases of WDV. d) In case of slump sale, deduct actual cost of asset falling within that block as reduced :(i) By the amount of depreciation actually allowed to him in respect of any



previous year till 31.03.1987; and (ii) By the amount of depreciation that would have been allowable to the assessee from 1.04.-1987 onwards if the asset was only asset in the relevant block of assets. However the net figure can’t be negative. The resultant figure shall be WDV of the block of assets on 31-03-2010 after slump sale. COMPUTATION OF NORMAL DEPRECIATION: The normal depreciation is calculated by multiplying the WDV of block of asset as on 31-03-10 with rate of depreciation. But this rule has following exceptions:1. If the WDV of the block of assets is reduced to zero (though the block

assets does not cease to exit on 31-03-2010) NO DEPRECIATION is charged on such block.

2. If a block of assets ceases to exist (i.e. all the assets of the block have been transferred and the block is empty on 31-03-2010) NO DEPRECIATION is charged on such block.

3. IMPORTED CARS: a) If it is used for running it on hire for tourist or for business or profession outside India then DEPRECIATION IS ALLOWED AT USUAL RATE. b) If it is used for business or profession in India No depreciation is available if it is acquired from 1-03-1975 to 31-03-2001. Otherwise usual depreciation is available.

4. In case of SUCCESSION, AMALGAMATION, BUSINESS REORGANISATION OR DEMERGER the following points are kept under consideration:-a) The aggregate depreciation allowable to the predecessor and the successor shall not exceed depreciation calculated as if there was no succession/amalgamation/demerger; and b) Such depreciation shall be apportioned between the predecessor and the successor in the ratio of number of days for which the assets were used by them.

5. If the asset is acquired during the previous year; AND it is put to use for period of less than 180 days then depreciation shall be restricted to 50% of the amount calculated at the prescribed percentage . It is to be noted that this restriction is applicable only in the year in which the asset is acquired and not in subsequent years. This is also not applicable in case of successor, dissolution, partition of HUF.

COMPUTATION OF ADDITIONAL DEPRECIATION ON NEW PLANT & MACHINERY: An additional depreciation is allowed to give a boost to the manufacturing sector. Such additional depreciation is allowed apart from normal depreciation. It is allowed to all kinds of persons. 1. ASSESSEES ELIGIBLE FOR ADDITIONAL DEPRECIATION: An assessee which is an INDUSTRIAL UNDERTAKING i.e. he is engaged in the business of manufacture or production of any article or thing, shall only be eligible for such additional depreciation. 2. ASSETS ON WHICH ADDITIONAL DEPRECIATION IS ALLOWED: Any new machinery or plant which has been acquired and installed by the above said assessee after 31-03-2005 is eligible for additional depreciation. But following



assets are not eligible for additional depreciation: (a) Ship or aircraft;(b) Any machinery or plant which before its installation by the assessee

was used by any other person either with in or outside India;(c) Any machinery or plant installed in any office premises or any

residential accommodation, including accommodation in the nature of a guest house;

(d) Any office appliances or road transport vehicles; (e) Any machinery or plant, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing the Income under head "Profits and gains of business or profession” of any previous year.(3) RATE OF ADDITIONAL DEPRECIATION: Additional Depreciation shall be allowed @ 20% of actual cost of the eligible asset. However if the asset is put to use for less then 180 days in the year in which it is acquired, the rate of depreciation shall be 10%.NOTE: 1. Additional depreciation is allowed only once i.e. in the previous year in which asset was acquired and installed.2. Additional Depreciation allowed is deducted while calculating opening WDV for the next year.MEANING OF ACTUAL COST: Actual cost means actual cost to the assessee as reduced by that portion of the cost thereof if any, as has been met directly or indirectly by any other person or authority.1) INTEREST TO BE INCLUDED/ EXCLUDED IN ACTUAL COST:(a) Interest pertaining to the period till the asset is first put to use

should be added to the actual cost of the asset.(b) Interest incurred relatable to any period after the asset is first put to

use, cannot be included in the Actual Cost. It is to be treated as deduction u/s 36 (i)(iii). Note: It does not matter whether the business is new or existing one.

2) TRAVELLING EXPENDITURE: For acquiring depreciable assets is a part of Actual Cost.

3) NOTIONAL ACTUAL COST: In the following cases, the actual cost shall be a notional cost as follows:

(a) Assets used in Business after it ceases to be used for Scientific Research- NOTIONAL ACTUAL COST 'NIL'

(b) Asset acquired by gift or inheritance- Actual cost to previous owner MINUS Depreciation actually allowed till 31.03.1987 MINUS Depreciation allowable on that asset after 31.03.1987 assuming it is only asset in the block.

(c) Asset transferred to reduce tax liability by claiming Depreciation at enhanced cost – Actual cost determined by Assessing officer with approval of Joint Commissioner. However genuine cases are not covered.

(d) Assets earlier transferred re-acquired by the assessee- Notional Actual cost will be – (Actual price for which re-acquired) OR (original cost minus



depreciation actually allowed to him till 31.03.1987 MINUS Depreciation allowable on that asset after 31.03.1987 assuming it is only in the block) which ever is less.

(e) Asset previously used by any person and on which depreciation was allowed to him is acquired by another person but leased back to seller- NOTIONAL ACTUAL COST in the hands of LESSOR shall be equal to W.D.V of the asset to the seller at the time of transfer thereof.

(f) Buildings brought into use for business purpose subsequent to its acquisition- NOTIONAL ACTUAL COST shall be. Original Cost of building MINUS A DEPRECIATION that would have been allowable had the building been used for business since acquisition.

(g) Assets transferred by holding Company to 100% Subsidiary or vice versa where the transferee Company is an Indian Company – NOTIONAL ACTUAL COST to the transferee Company shall be the same value as would have been to the Transferor Company if it continued to hold it.

(h) Assets transferred under a scheme amalgamation- Notional Actual cost to the Amalgamating Company shall be same value as would have been to the Amalgamating Company, if it continued to hold it. This rule is also applicable if the Amalgamated Company is Indian Company.

(i) Asset transferred to the to the Resulting Company in case of Demerger: Notional Actual cost to Resulting Company shall be same value as would have been to the Demerged Company, if it continued to hold it.

(j) Actual Cost of CENEVATABLE ASSET shall be Original COST MINUS DUTY OF EXCISE/ CUSTOMS for which credit of CENVAT has been taken.

(k) Asset acquired where position of cost met by some other person-ORIGINAL COST MINUS COST MET BY SOME OTHER PESON shall be Notional Actual Cost.

(l) Assets acquired by Non-Resident outside India but brought by him to India for purpose of Business or Profession Notional Actual Cost shall be ORIGINAL COST MINUS DEPRECIATION THAT WOULD HAVE BEEN ALLOWABLE in India since date of acquisition.

(m) Assets acquired by a Company under a scheme of Corporatisation of a Recognised stock Exchange in India – Notional Actual Cost to the Company shall be the amount which would have been regarded as actual Cost had there been no such Corporatisation.

(n) Capital Asset on which deduction has been allowed or allowable under section 35 AD – Notional actual cost shall be NIL.

UNABSORBED DEPRECIATION: The following procedure is followed for charging depreciation:1. Depreciation of the previous year is deductible from income chargeable under head ‘Profit & Gains of Business or Profession’.2. If Depreciation is not fully deductible under head ‘Profit & gains of Business or Profession’ due to absence or inadequacy of profits it is deductible from income chargeable under other heads of Income (except Income under head Salaries) for same previous year.



3. If Depreciation is still not deductible, it can be carried forward to subsequent assessment year(s) for indefinite period, if necessary. 4. In next year(s), unabsorbed depreciation can be set off against any income from ‘Profits and Gains of Business Profession’ or under any other head (except Income under head Salaries). The same business may or may not be continued. In next years, following priority order should be maintained- Current year’s Depreciation. Brought forward Business Loss. Unabsorbed (Brought Forward) Depreciation. So, if in any subsequent year(s), there is no brought forward business Loss, unabsorbed depreciation can be added to current depreciation for claiming the deduction u/s 32.

DEPRECIATION ON STRAIGHT LINE BASIS: An undertaking engaged in generation OR generation and distribution of power can claim depreciation in respect of assets acquired after 31.03.1997 according to either WDV basis or straight Line Basis (the rates of Depreciation as per SLM are given in Appendix 1A of the Income Tax Rules). The option shall be exercised before due date of furnishing the return of Income. Once the option is exercised, it shall be final and shall apply to all subsequent years.(a) TERMINAL DEPRECIATION: If an asset of a power unit on which depreciation has been claimed on Straight Line Basis is sold, demolished or destroyed in any previous year; terminal depreciation can be claimed. The amount of terminal Depreciation is simply the Loss on sale of such asset. However following points are to be considered: (i) When the asset is sold, discarded etc in the previous year in which it is first put to use, any loss arising there from shall not be TERMINAL DEPRECIATION but will be SHORT TERM CAPITAL LOSS.(ii) Terminal Depreciation is allowed only if the asset is sold after using if for sometime in the year of sale.(iii) Terminal Depreciation is allowed only if it is actually written off in the books

of the assessee.(b) BALANCING CHARGE- If an asset of a POWER UNIT on which depreciation has been claimed on straight Line Basis is sold discarded, demolished liked or destroyed in any previous year, balancing charge is treated as Business Income. Balancing charge is least of following two:(i) Actual Profit on sale of such asset; OR(ii) Accumulated Depreciation on such asset.The above Provisions apply even if the business is not in existence in the year when the money payable the on such asset became due.(c) CAPITAL GAIN: When money payable including scrap value of the asset sold, discarded etc, exceeds the cost of acquisition of such asset such Excess shall be treated as Capital Gain.

TEA or COFFEE or RUBBER DEVELOPMENT ACCOUNT (SECTION 33 AB): An



assessee can claim deduction u/s 33 AB if he fulfills the following conditions:- (a) The assessee is engaged in the business of growing and manufacturing tea or coffee or rubber in India;(b) The assessee has, with in six months from the end of previous year or before furnishing return of income whichever is earlier –

(i) Deposited with National Bank for Agriculture and Rural Development (NABARD) any amount(s) in a special account maintained by the assessee with that bank in accordance with and for the purpose specified in a scheme approved in this behalf by the TEA BOARD OR COFFEE BOARD OR RUBBER BOARD; OR (ii) Deposited any amount in TEA DEPOSIT ACCOUNT opened by the assessee in accordance with and for the propose specified in a scheme framed by the TEA BOARD OR COFFEE BOARD OR RUBBER BOARD with the previous approval of Central Government;

(c) The assessee must get its accounts audited by a CHARTERED ACCOUNTANT and furnish the report of such audit in form 3AC along with the return of Income.AMOUNT OF DEDUCTION: The deduction is LEAST of:-(a) The amount (s) deposited in schemes as above; or (b) 40% of profits of such business under head ‘Profits and Gains of Business or profession’ before this deduction and before adjusting brought forward business Losses. NOTE: If separate accounts are not maintained for growing and manufacturing of tea or coffee or rubber IN INDIA then profits from such tea or coffee or rubber Business will be calculated as under:

Profit from Tea (or coffee or rubber) Business=Profit of business x Turnover of tea or coffee or rubber Business / Total turnover.(ii) Where deduction has been allowed u/s 33 AB, no deduction shall be allowed in respect of such amount in any other previous year.(iii) Where a deduction has been claimed and allowed under this section, to an Association of Persons or Body of Individuals, no deduction shall be allowed to any member of AOP or BOI in respect of the same deposit.(iv) Any excess deposit made during a previous year is not treated as a deposit made in next year or other year.UTILISATION OF DEPOSITED AMOUNT: The amount standing to the credit of the assessee in special account of NABARD or TEA OR COFFEE OR RUBBER DEVELOPMENT Account is to be utilised for the business of the assessee with respect to the points as per the scheme. But no deduction shall be allowed for the purchase of:

1. Any machinery or plant to be installed in any office or residential place (including guest house);2. Any office appliances (not being computer(s));3. Any machinery or plant, the whole of the actual cost of which is allowed as deduction (whether by Depreciation or otherwise) in computing Income chargeable under head ‘profit & gains of Business or Profession' of



any previous year; 4. Any new machinery or plant to be installed in an Industrial undertaking for purpose of business of construction, manufacture or production of any article or thing specified in eleventh Schedule of Income tax (i. e. low priority items).

WITHDRAWAL OF DEPOSIT: Any amount deposited as above shall not be withdrawn except for the purposes specified in the scheme. Otherwise it is allowed to be withdrawn in following circumstances: (i) closure of business; (ii) Death of the assessee; (iii) Partition of HUF; (iv) Dissolution of firm; (v) liquidation of Company.Amount withdrawn for (i) & (iv) reasons in taxable as profits in the year of withdrawal while for remaining cases such withdrawal is not taxable.WITHDRAWAL OF DEDUCTION: In following cases deduction is withdrawn:(a) Any amount withdrawn but not utilised with in same previous year for the specified purpose shall be treated as income of that year;(b) Any asset acquired to the scheme, is sold or transferred before expiry of 8 years from end of year of purchase; the cost of such asset relatable to deduction allowed will be income in the year of sale of asset or transfer of asset.However these provisions are not applicable in case of conversion of firm into a company and sale of asset to Government, Local Authority, Statutory Corporation or government Company. SITE RESTORATION FUND [SECTION 33ABA]: An assessee can claim deduction u/s 33ABA if he fulfills following conditions:a) The assessee is carrying on the business of prospecting for or extraction or production of PETROLEUM OR NATURAL GAS OR BOTH in India and for which an agreement has been entered into with the Central Government.b) The assessee has before the end of the previous year:

i) Deposited with State Bank of India, any amount(s) in a special account maintained by the assessee in a scheme approved in this behalf by the Ministry of Natural Gas and Petroleum of Govt. of India; ORii) Deposited any amount in the site Restoration Account opened by the assessee in a scheme framed by the aforesaid ministry (this is called as DEPOSIT SCHEME).c) The accounts of assessee should be audited by a Chartered Accountant and the report of auditor in FORM 3AD is filed along with the return of relevant assessment year.

AMOUNT OF DEDUCTION: The amount of deduction is LEAST OF:a) The amount deposited in the scheme referred to above; orb) 20% of profit of such business computed under head 'Profits and Gains of Business or profession' before deduction under this section and before adjusting brought forward business loss.NOTE: 1) Profits from business in this case are to be calculated in the same manner as in section 33AB.2) In case of a firm, AOP or BOI, no deduction shall be allowed in computation of Income of any partner or member.



3) Where deduction has been claimed under this section, no deduction shall be allowed in respect of such amount in any other previous year.

4) Any interest credited to such special Account or Site Restoration Fund shall be deemed to be a deposit.UTILISATION OF DEPOSITED AMOUNT: This provision is same as in section 33AB for TEA DEVELOPMENT ACCOUNT.WITHDRAWL OF DEPOSIT: Any amount deposited in the SPECIAL account maintained with State Bank of India or SITE RESTORATION account shall not be allowed to be withdrawn EXCEPT for the purpose specified in the scheme/Deposit scheme. WITHDRAWL OF DEDUCTION: The provisions are same as in section 33AB of Tea Development Account. The following extra provision is applicable:

On closure of account by the assessee The amount so withdrawn from the account as reduced by amount payable to central Government as share of profit shall be deemed to be income under head 'Profit & Gains of Business’ of that previous year (even if this business is not existence in that previous year).

EXPENDITURE ON SCIENTIFIC RESEARCH [SEC.35]: The term scientificresearch means any activity for extension of knowledge in the field of natural orapplied sciences including agriculture, animal husbandry research is classifiedas:a) REVENUE EXPENDITURE:

(i) Incurred by the assessee himself relating to his own business;(ii) As contribution made to outside agencies engaged in scientific work.

b) Capital Expenditure incurred by the assessee himself relating to his own business.c) Revenue or Capital Expenditure for approved in-house research. Now we shall study these in detail.a)(i) Revenue Expenditure incurred by Assessee himself [Sec 35(1)(i)]:1. All revenue expenses laid out or expended on scientific research during the previous year are fully allowed as deduction. 2. It has been further provided that following revenue expenses laid out or expended during three years immediately preceding the date of commencement of business shall be deemed to be the expenditure of the previous year in which the business commences and therefore shall be allowed in that year to the extent these are certified by the prescribed authority:

i) Payment of salary (except perquisites) to employees engaged in scientific research; andii) Purchase of material used for scientific research

NOTE: It is to be noted that the research must relate to the business of the assessee.a)(ii) Contribution made to outsiders [Sec 35(1)(ii), (iia) & (iii)]:

Where the assessee does not himself carry on scientific research but makes contribution to other the institutions for this purpose then a weighted deduction is allowed of 125% of any sum paid to a scientific research association



or university, college or other institution (APPROVED BY CENTRAL GOVT.)NOTE: It is to be noted that the research may or may not relate to the business of the assessee. Contribution made to National Laboratory or University or IIT [Sec 35(2AA)]: Where the assessee pays any sum to a 'NATIONAL LABORATORY' or 'UNIVERSITY' or ‘INDIAN INSTITUTE OF TECHNOLOGY' or a ‘SPECIFIED PERSON' (means a person approved by prescribed authority), then such sum is eligible for weighted deduction of 125% of such sum paid.

National Laboratory means a scientific laboratory functioning at national level under the aegis of Indian Council of Agricultural Research, Indian Council of Medical Research, The Council of Scientific and Industrial Research, The Defence Research and Development Organisation, The Department of Electronics, the Department of Bio-Technology and The Department of Atomic Energy Prescribed Authority shall be the head of a National Laboratory or a University or an Indian Institute of Technology as the case may be. In the case of 'specified person' the prescribed authority shall be The Principal Scientific Advisor to the Government of India.NOTE: It may be noted that the research may or may not relate to the business of the assessee.b) Capital Expenditure incurred by assessee himself [Sec 35(1)(iv)]:1. Where the assessee incurs any expenditure of capital nature RELATED TO THE BUSINESS OF THE ASSESSEE, the whole of such expenditure incurred in any previous year is allowable as deduction for that previous year. 2. Further capital expenditure incurred during three years immediately preceding the date of commencement of business shall be deemed to be expenses of the previous year of the commencement of business and allowed in that year. Capital Expenditure may be for acquisition of plant or equipment or construction of Building (excluding cost of Land), acquisition of vehicles for scientific research.NOTE: 1. No Depreciation is available on an asset used in scientific research.2. If the asset is sold without having been used for other purposes, surplus (i.e. sale price) or deduction allowed under section 35 whichever is less shall be chargeable to tax as business income of the previous year in which the sale took place. The excess of sale price over cost of acquisition (or indexed cost of acquisition) is chargeable to tax under head capital gain and the deficiency is treated as capital loss under the same head.c) Expenditure on in-house Research & Development by a Company assessee [Section 35(2AB)]: A weighted deduction of 150% of sum incurred will be allowed to a COMPANY assessee if:i) It is engaged in business of manufacture or production any article or thing except those notified I the Eleventh Schedule; andii) It has incurred expenditure (except on Land and Building) on in house scientific research and development facility approved by the prescribed authority.iii) It has entered into agreement with prescribed authority for co-operation in such research and for audit of the accounts maintained for that facility.



NOTE:1. The expenditure on Building acquisition or construction shall be allowed @ 100%.2. No weighted deduction @150% will be allowed to Company assessee after 31.03.2012.3. If capital expenditure on scientific research can not be allowed due to absence or inadequacy of profits of the business, the deficiency so arising is to be carried forward as if it is unabsorbed depreciation.4. In pursuant to an agreement of arrangement of the amalgamation if the amalgamating company, transfers to the amalgamated company which is an Indian company, any asset representing the capital expenditure on scientific research, the above said provisions of section 35 shall apply to the amalgamated company as if there is no amalgamation.

EXPENDITURE FOR OBTAINING LICENSE TO OPERATE TELECOMMUNICATION SERVICES [SECTION 35 ABB]: Where any capital expenditure is incurred by the assessee for acquiring any right to operate telecommunication services either before the commencement of the business to operate telecom service or thereafter any time during any previous year and for which payment has been actually made to obtain a licence, a deduction will be allowed in equal installments over the period for which the license remains in force subject to following:1. If the fees is paid for acquiring any right to operate telecommunication services before the commencement of such business - the deduction shall be allowed for the previous years beginning with the previous year in which such business commenced.2. If the fees is paid for acquiring such rights AFTER commencement of such business - the deduction shall be allowed for the previous years beginning with the previous year in which the licence fees is actually paid.Sale or Transfer of Licence:Case a) the entire licence is transferred:

i) If the sale Proceeds of transfer are less than WDV of the licence, a deduction equal to such WDV as reduced by the proceeds of transfer shall be allowed in respect of previous year, in which the licence has been transferred.ii) If the sale proceeds of transfer are more than WDV of the Licence then such excess (i.e. profit) is taxable as under:

a) Where sale proceeds are less than Original Cost of Licence: The Sale Value of Licence as reduced by WDV shall be income under this section.b) Where sale proceeds are more than Original Cost of Licence: -The Original Cost of Licence as reduced by WDV shall be income under this section.-The Sale Value as reduced by Original Cost of Licence (indexed cost in case licence is held for more than 36 months) is treated as Income under head 'Capital Gains' is the previous year in which the licence



has been transferred. Case b) If a part of the licence is transferred:

i) If a part of the licence is transferred for a sum less than the WDV of the total licence, then the balance amount not yet written off shall be allowed as deduction in balance number of equal installments over the unexpired period. ii) If a part of licence is transferred for a sum more than written down value of total licence, then such excess(i.e. profit) is taxable as under:

a) Where sale proceeds are less than Original Cost of Licence: The Sale Value of Licence as reduced by WDV shall be income under this section.b) Where sale proceeds are more than Original Cost of Licence: -The Original Cost of Licence as reduced by WDV shall be income under this section.-The Sale Value as reduced by Original Cost of Licence (indexed cost in case licence is held for more than 36 months) is treated as Income under head 'Capital Gains' is the previous year in which the licence has been transferred.

Note: 1. In case of amalgamation/demerger the above provisions are applicable as if there is no amalgamation/demerger if the amalgamated/resulting company is Indian company.2. If a deduction is claimed under this provision it shall not be allowed under any other provision of the Act for any year.

EXPENDITURE ON ELIGIBLE PROJECTS/SCHEMES [SEC 35AC]: Where an assessee incurs any expenditure by way of payment of any sum to: a) Public sector company; orb) A local authority; or c) An association or institution approved by National Committee for carrying out any eligible project or scheme for PROMOTING SOCIAL AND ECONOMIC WELFARE OF OR UPLIFT OF PUBLIC as Central Government may specify, the AMOUNT SO PAID shall be allowed as deduction provided a certificate in form No.58A is obtained from the said institution and furnished along with the return of Income.

However in case of a company, the deduction of such expenditure is allowed along with direct expenditure incurred directly by the company on the eligible project or scheme undertaken by it. The deduction will be allowed for direct expenditure if a certificate from a Chartered Accountant in Form No.58 B is NOTE: If a deduction is claimed under this provision it shall not be allowed under any other provision of the Act for any year.

EXPENDITURE ON SPECIFIED BUSINESS [Section 35 AD]: This section has been introduced w.e.f. A.Y. 2010-11 for promoting investment certain specified business. The following conditions are to be fulfilled under this section:1. The assessee is carrying on any of following specified business:



a) Setting up and operating a cold chain facility;b) Setting up and operating a warehousing facility for storage of agricultural produce;c) Laying and operating a cross country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being integral part of such network (only for Indian Company or their Consortium or Authority set up under any Central or State Act as approved by Petroleum and Natural Gas Regulatory Board).

2. The above business should have commenced on or after 1st April, 2009.3. The above business is not formed by splitting up or reconstruction of a business already in existence. 4. It is not formed by transfer to a new business of machinery or plant previously used for any purpose. However any such old plant machinery can be transferred to new industrial undertaking provided value of such old plant or machinery does not exceed 20% of total value of plant and machinery of new industrial undertaking.Amount of Deduction: 100% of Capital Expenditure incurred, wholly and exclusively, for the specified business is deductible in the previous year in which such expenditure was incurred.However, if the capital expenditure was incurred prior to commencement of its operations and such amount is capitalized in the books of account of the assessee then such expenditure will be allowed as deduction for the previous year in which the operations were commenced.

EXPENDITURE BY WAY OF PAYMENTS TO ASSOCIATIONS AND INSTITUTIONS FOR CARRYING OUT RURAL DEVELOPMENT PROGRAMS [SEC 35CCA]: Any assessee who is carrying on a business/profession shall be allowed a deduction of the amount of expenditure incurred by way of payment of any sum to:a) An association or institution, which has as its objectives the undertaking of any rural development programme approved by the prescribed authority;b) An association or institution engaged in training of persons for implementing rural development programmes;c) National fund for Rural Development set up by the Central Government;d) National Urban Poverty Eradication Fund set up and notified by the Central Governments.NOTE:1. For clause (a) and (b) deduction for making the payment to an association/institution shall be allowed provided the project has been approved by the prescribed authority before 1st March, 1983.2. If deduction is claimed u/s 35 CCA, it shall not be allowed under any other provision of the Act.

AMORTISATION OF PRELIMINARY EXPENSES [SEC 35D]: Deduction under this section can be claimed by:a) Indian Company; or



b) A RESIDENT Non-Corporate assessee. A foreign company can't claim deduction under this section even if it is Resident in India. Time and Purpose of Preliminary Expenditure

When expenses incurred Why expenses is incurred

a) before commencement of business

For setting up any undertaking or business.

b) After commencement of business

In connection with extension of an Industrial unit or in connection with setting up a new Unit.

Expenses qualified for deduction: Work carried on by assessee itself or by a concern approved by Board

Work carried on by assessee itself or by any concern ( approved or not)

Expenses incurred in connection with preparation of a feasibility report or project report, conducting survey for the business of the assessee or engineering services relating to the business of the assessee

a) Legal charges for drafting any agreement between the assessee and any other person relating to setting up or conduct of the business of the assessee;b) When the assessee is Company: expenditure by way of legal charges for drafting the Memorandum and Articles of Association of the Company, on printing of the same, on Registration fees of the company, public issue expenses of share or debentures of the company;c) Any other expenditure which is prescribed. (till now nothing is prescribed)

AMOUNT QUALIFYING FOR DEDUCTION: The aggregate of expenditure referred to in clauses (a) to (d) shall not exceed 5% of cost of project in case of all assessees other than company.In case of a company it can't exceed 5% of:i) Cost of Project; orii) Capital employed in the business of company whichever is beneficial to the company.AMOUNT OF DEDUCTION: The qualifying amount as above shall be allowed as a deduction in 5 equal installments beginning with the year in which the business commences or as case may be the previous year in which extension of undertaking is completed or new unit starts production or operation.NOTE:1. In case of non-corporate Assessee, the deduction under this section is available only if Audit Report in Form 3AE is taken from a Chartered Accountant.



2. In case of amalgamation/demerger, the provision of this section shall apply as if no amalgamation or demerger has taken place, if the amalgamated/resulting company is Indian company.3. The chart given below explains how the expenditure is deductible under various circumstances:Nature of Expense Incurred by new

concern before commencement of business

Incurred by existing concern after commencement of business

Expense on Issue of bonus shares

Allowed under sec 35 D Allowed under sec 37(1)

Expense on Issue of shares (not being Bonus Shares)

Allowed under sec 35 D Allowed under sec 35 D

Expense on Issue of Debentures


Expense on Raising of Loan (long term or short term)


AMORTISATION OF EXPENDITURE IN CASE OF AMALGAMATION or DEMERGER [SEC 35 DD]: Where an assessee, being an Indian Company incurs any expenditure, an or after 01.04.1999 wholly and exclusively for the purpose of amalgamation or demerger of an undertaking the assessee shall be allowed a deduction of amount equal to 1/5th of such expenditure for each of five successive previous years beginning with the previous year in which the amalgamation or demerger takes place. Note: No deduction shall be allowed in respect of the expenditure mentioned above under any other provisions of the Act.

AMORTISATION OF EXPENDITURE INCURRED UNDER VOLUNTARY RETIREMENT SCHEME [SEC 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(s) of voluntary retirement, 1/5th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and the balance shall be deducted in equal installments for each of the four immediately succeeding previous years.NOTE:1. No deduction shall be allowed in respect of such expenditure under any other provisions of the Act.2. Where the undertaking of Indian company entitled to deduction for amortization of voluntary retirement expense is transferred before the expiry of the period specified to another Indian company in a scheme of amalgamation or demerger the deduction shall continue to be available to the amalgamated or resulting Company (as the case may be) as if the amalgamation or demerger had



not taken place.3. Similarly in case of reorganization where a firm or proprietary concern is succeeded by a company, the deduction shall continue to be available to the successor company.4. In the year of transfer, no deduction shall be available to the amalgamating company, the Demerged Company or to the firm or proprietary concern.

AMORTISATION OF EXPENDITURE ON PROSPECTING ETC. FOR CERTAIN MINERALS [SEC.35E and RULE 6AB]: Where an Assessee being Indian company or a person (other than a company) resident in India, is engaged in any operations relating to prospecting for or extraction or production of specified minerals (mentioned in seventh Schedule) and incurs any specified expenditure after 31st March, 1970, the assessee shall be allowed to amortize such expenditure.SPECIFIED EXPENDITURE: The expenditure should be incurred by the assessee at any time during the year of production and any one or more of the four years immediately preceding that year, wholly and exclusively on any operations relating to prospecting for any mineral or a group of associated minerals specified in part A or part B respectively of 'seventh schedule' or on the development of a mine or other natural deposit of any such mineral or group of associated minerals.EXPENSES NOT INCLUDED IN SPECIFIED EXPENDITURE: The following are excluded in qualified expenditure:i) Expenditure met directly or indirectly by any person or authority;ii) Any proceeds realised by the assessee from sale, salvage, compensation or insurance in respect of any property or rights brought into existence as a result of such expenditure;iii) Expenditure on acquisition of the site of the source of any specified minerals or group of associated minerals or of any rights in or over such site. iv) Expenditure on the acquisition of the deposits of any of the specified minerals or groups of associated minerals or of any rights in or over such deposit.v) Expenditure of a capital nature in respect of any building, machinery, plant or furniture for which depreciation is admissible under section 32.QUANTUM AND PERIOD OF DEDUCTION: The amortization of specified expenditure is allowed in equal installments over a period of 10 years. The amount deductible for each year (starting from year of commercial production) is: i) 1/10th of specified expenditure; orii) Income (before deduction u/s 35E) of the previous year arising from commercial exploration of mine or deposit of minerals of any other nature; whichever is less.NOTE:1. The assessee (not being a company) shall be allowed this deduction only if audit report in form 3B is obtained from a Chartered Accountant.2. No deduction shall be allowed in respect of such expenditure under any



other provisions of the Act.3. In case of amalgamation/demerger, the provision of this section shall apply as if no amalgamation/demerger has taken place if the amalgamated/resulting company is Indian company.

INSURANCE PREMIUM [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 business or profession is allowed as deduction.

INSURANCE PREMIUM PAID BY A FEDERAL MILK CO-OPERATIVE SOCIETY [SECTION 36(1)(ia)]: Insurance premium paid by a federal milk co-operative society, on the lives of cattle owned by the members of a primary milk co-operative society affiliated to it is allowed as deduction.

INSURANCE ON HEALTH OF EMPLOYEES [SEC36(1)(ib)]: An employer can claim deduction in respect of premium paid by him by any mode other than Cash for insurance on health of his employees in accordance with the scheme framed by the General Insurance Corporation (and approved by the Central Government) or any other insurer (and approved by IRDA).

BONUS OR COMMISSION TO EMPLOYEES [SEC 36(1)(ii)]: Bonus or commission paid to an employee is allowable as deduction subject to certain conditions:-a) The amount payable to employees as bonus or commission should not otherwise have been payable to them as profit or dividend.b) Bonus or Commission is allowed as deduction only where payment is made: i) during the previous year; or

ii) on or before due date or actual date of filing the returnwhich ever is earlier [As per provisions under section 43 B if assessee follows accrual basis].

INTEREST ON BORROWED CAPITAL [SECTION 36(1)(iii)]: Interest on borrowed capital is allowed as deduction if:a) The assessee has borrowed money; and b) The money so borrowed is used for business purposes; andc) The assessee has paid the interest or is payable on borrowings (in case mercantile basis).NOTE:1) Interest paid to shareholders on paid up capital is not allowed as deduction.2) Interest paid by firm to partners is deductible according to the provisions of section 40(b). But interest paid by AOP/BOI to its members is not deductible.3) The Income Tax department has no right to question the need of borrowing (in case the assessee has ample funds of own).4) Interest on money borrowed for meeting income tax liability, interest for late payment or non-payment of advance tax or for late filing of returns is not allowed.



5) Interest paid/payable for capital Asset pertaining to the period from the date of borrowal till the asset is first put to use is to be added in actual cost of the Capital Asset. Interest on capital borrowed pertaining to the period after the asset is first put to use is deductible under section 36. 6) Interest paid outside India is allowed as deduction only if tax has been paid or tax has been deducted at source.7) Interest on money borrowed for payment of dividend is allowed as deduction.8) Interest on borrowings from financial Institutions and interest on term loan from a scheduled bank is allowed as deduction only if the payment is made during the previous year OR on or before due date of furnishing the return of income [As per provisions under section 43 B if assessee follows accrual basis].9) No deduction shall be allowed in respect of any expenditure (including interest) incurred by assessee is relation to income which does not form part of the total income.

DISCOUNT ON ZERO COUPON BONDS [SEC 36(1)(iiia)]: The discount on zero coupon bonds (redemption value less amount received on issue) shall be allowed as deduction during the period of life of Bond on pro-rata basis.

EMPLOYER'S CONTRIBUTION TO RECOGNISED PROVIDENT FUND OR APPROVED SUPERANNUATION FUND [SEC.36(1)(iv)]: Employer's contribution towards a recognised provident fund and approved superannuation fund are allowed as deduction (subject to limits laid down by fourth schedule and Rules 87 and 88) [As per provisions under section 43 B if assessee follows accrual basis].

EMPLOYER'S CONTRIBUTION TO APPROVED GRATUITY FUND [SECTION 36(1)(v)]: Employer's contribution towards approved gratuity fund created by him exclusively for the benefit of his employees under an irrevocable trust is allowed as deduction [As per provisions under section 43 B if assessee follows accrual basis]. EMPLOYEE'S CONTRIBUTION TOWARDS CERTAIN STAFF WELFARE SCHEMES [SEC 36 (1) (va)]: Any sum deducted from the salary of the employees as their contribution towards PF, ESI etc is treated as income of the employer under section 2(24)(x). However, if such contribution is actually paid on or before due dates mentioned above, the deduction shall be allowed for the same.

WRITE OFF OF ALLOWANCE OF ANIMALS [SEC 36(I)(vi)]: In respect of animals which are used for purpose of business or profession (not as stock in trade) and have died or become useless, the difference between the actual cost of the animals to the assessee and the amount realized (if any) for carcasses or sale of animals is allowed as deduction.



BAD DEBTS [SEC 36(1)(vii)]: The following conditions must be fulfilled:a) There must be a Debt;b) The debt must be incidental to the Business or profession of the assessee. It includes money lent in ordinary course of business of banking or money lending carried on by the assessee.c) Such debt must have been taken into account in computing the income of the assessee or it is money lent in ordinary course.d) The Debt must have been written off in the books of account of the assessee for the previous year. Such Bad Debt is fully allowed as deduction in the previous year in which it is written off.NOTE:1)Provision for bad debts is not deductible in case of non-banking concern.2) No debts can be claimed as bad in respect of business which has been discontinued before the commencement of previous year.3) Bad debt allowed earlier and recovered in subsequent years is treated as income of the previous year in which such amount is recovered.

PROVISION FOR BAD AND DOUBTFUL DEBTS OF CERTAIN BANKS AND FINANCIAL INSTITUTIONS [SEC 36(1) (viia)]a) A scheduled bank or a non-scheduled bank (except foreign Bank or co – operative bank) is allowed deduction for provision for doubtful debts of:

1) Amount not exceeding 7.5% of total Income (before deduction under this clause and chapter VI A); and ii) Amount not exceeding 10% of aggregate average advance made by rural branches of such bank computed in prescribed manner.

However an option has been given to above Banks to claim further deduction in respect of provision made by it for doubtful or loss Assets of an amount not exceeding income derived from redemption of securities as per scheme framed by Central Government. b) A bank incorporated by or under any foreign laws or a public Financial Institution or State Industrial Corporation or a State Industrial Investment Corporation, deduction for provision for doubtful debts is allowed of amount not exceeding 5% of the total income (before deduction under this clause and before chapter VI A).

SPECIAL RESERVE CREATED AND MAINTAINED BY FINANCIAL CORPORATION ETC [SEC 36(I)(viii)]: The deduction under this section is allowed in case of following:Entity Eligible Business1. a) Finance Corporation as per section 4A of The Companies Act, 1956b) Finance Corporation being a public sector companyc) Banking Companyd) Co-operative Bank (other than

Engaged in providing long term finance for (a) Industrial or agricultural development in India; or (b) for development of infrastructure facility in India or (c) for development of housing in India



primary agricultural credit society or primary co-operative agricultural and rural development bank)2. A Housing Finance Company Engaged in providing long term finance

for construction or purchase of houses in India for residential purposes

3. Any other financial corporation including public Company

Engaged in providing long term finance for development of infrastructure facility in India

QUANTUM OF DEDUCTION: Least of following is deduction:a) amount transferred to special reserve during the previous year; b) 20% of profits from such business before this deduction;c) 200% of paid up share capital and general reserve on last day of the previous year minus balance of special reserve account on the first day of the previous year.AMOUNT WITHDRAWN FROM RESERVE ACCOUNT: If in any year any amount is withdrawn from such reserve on which deduction was allowed under this section, it will be charged to tax in the year in which it is withdrawn.

FAMILY PLANNING EXPENDITURE [SECTION 36(1)(ix)]: Any bona fide expenditure incurred by a COMPANY for promoting family planning among its employees is allowable as deduction. However, if such expenditure is of capital nature, 1/5th of such expenditure is allowed as deduction for the previous year in which it was incurred and the balance is deductible in equal installments in next four years.

REVENUE EXPENDITURE INCURRED BY ENTITIES CREATED UNDER ACT OF PARLIAMENT [SEC 36(1)(xii)]: Any revenue expenditure incurred by such notified entity (having no profit motive) is allowed as deduction in calculating income under head Profits & Gains of Business or Profession.

CONTRIBUTION BY FINANCIAL INSTITUTIONS TO NOTIFIED CREDIT GUARANTEE FUND TRUST FOR SMALL INDUSTRIES [SEC 36(1)(xiv)]: Any sum paid by public financial institution as contribution to notified credit guarantee fund trust for small industries is allowed as deduction.

SECURITIES TRANSACTION TAX [SEC 36(1)(xv)]: Securities transaction tax paid by the assessee during the previous year on taxable securities transactions entered into by him in the course of his business is allowed as deduction from income under head ‘Profits & Gains of Business or Profession’, if income from such taxable securities transactions is included in the income under head ‘Profits & Gains of Business or Profession’.

EXPENSES DEDUCTIBLE UNDER SECTION 37(1): This section is residuary in



nature. The following condition must be fulfilled:a) The Expenditure should not be covered by section 30 to section 36.b) It should not be of capital nature.c) It should not be personal expenditure of the assessee.d) It should have been incurred in the previous year.e) It should be in respect of business carried on by the assessee.f) It should have been wholly and exclusively spent for the purpose of such business.g) It should not have been incurred for any purpose which is an offence or is prohibited by any law.NOTE:1) The examples of Expenses allowed under this section are: Salary to employees, Advertisement Expenses, Legal Expenses, Fines or Penalty or damages (other than Fees or penalties paid for breach of any Act), Expenses on raising of Loans (after commencement of business), printing & stationery, Freight & Carriage Expenses, Postage & Telephone Expenses, Travelling & Conveyance Exp., General Expenses etc.2) Expenses on shifting of registered office are not deductible.3) Fees or penalties paid for breach/violation/infringement of any Act is

disallowed.4) Diwali and Mahurat expenses are allowed as deduction.5) Deposit for telephone or telex is treated as deduction under this section.6) Advertisement in any souvenir, brochure etc. of a political party is

disallowed.7) First time expenditure on fluorescent lights is treated as fixed asset but all

replacement expenses of tubes are allowed as deduction.

BUILDING, PLANT & MACHINERY OR FUNITURE NOT EXLUSIVELY USED FOR BUSINESS OR PROFESSION [SEC. 38(1) & (2)]:1. Where a part of any premises occupied as a tenant is used as dwelling house by the assessee, the deduction of rent, repairs, land revenue, local rates and municipal tax under section 30 shall be only for the part of the premises used for the purpose of the business or profession.2. Where any building (occupied otherwise as a tenant), plant and machinery, furniture is not exclusively used for the purpose of the business or profession, the deduction on account of current repairs and insurance premium and depreciation in respect of these assets shall be only a fair proportionate part thereof with regard to the use of such assets for the purposes of business or profession.

EXPENSES NOT DEDUCTIBLE Section 40, 40 A and 43B are in the nature of overriding provisions that even if an expenditure or allowance comes within the provisions of any of sections 30 to 37 (1) as well as 40, 40A or 43B, sections 40,40 A and 43 B shall prevail and the provisions of sections 30 and 38 shall have no application. AMOUNTS NOT DEDUCTIBLE UNDER SECTION 40



A) In case of any assessee [section 40 (a)]:i) Any interest, royalty, fees for technical services or other similar sum chargeable under income tax act which are payable:a) outside India; orb) in India to a non-resident (other than a Company) or to a Foreign Company; on which tax has not been deducted at source or after deduction tax has not been paid during the previous year or in subsequent year before the expiry of time prescribed under section 200(1). However if in any subsequent years, the tax is paid on any such sum or tax is deducted at source after the expiry of time limit given in section 200(1), such sum shall be allowed as a deduction in computing the income of the previous year in which such sum has been paid; ii) Any interest, commission or brokerage, fees for professional services or fees for technical services, or amounts payable to a contractor or sub-contractor payable to a resident on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or after deduction has not been paid:

a) in case Tax was deductible and was so deducted during the last month of previous year- on or before the expiry of time limit prescribed under section 139(1).b) in any other case- on or before last day of the previous year.

However if in any subsequent years, the tax is paid on any such sum or tax is deducted at source after the expiry of time limit given in section 200(1), such sum shall be allowed as a deduction in computing the income of the previous year in which such sum has been paid; iii) Any sum paid on account of any rate or tax levied on the profit or gains of any business or profession or assessed at a proportion of or otherwise on the basis of, any such profits or gains; iv) Any sum paid on account of wealth tax under the Wealth Tax Act and any tax of a similar character chargeable under any law in force in any country outside India; v) Salary payable:

a) out of India (to a resident or non-resident); b) in India to a non-resident;if tax has not been paid nor deducted at source.

vi) Any payment to provident fund 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 funds, which are chargeable to tax under the head ‘Salaries’. vii) Any tax actually paid by employer on non-monetary perquisites provided to the employees.

B) In case of partnership firm [section 40 (b)]:-These will be discussed in detail in the chapter ‘Assessment of

partnership firms’. Interest on partners’ capital/loan is allowed up to 12% p.a.



and salary, commission etc. to a WORKING PARTNER is allowed up to certain limits and as per terms to the partnership Deed. C) In case AOP/BOI [section 40 (ba)]:-

This will be discussed in detail in the chapter ‘Assessments of AOP/BOI’. Any amount paid to member of AOP/BOI as salary, remuneration, bonus or commission is fully disallowed.

EXPENSES/PAYMENTS NOT DEDUCTIBLE UNDER SECTION 40A(2):- Any amount is disallowed under this section only if following three conditions are fulfilled:-i) The payment is in respect of any expenditure;ii) The payment has been made or is to be made or a specified person in

respect of such expenditure; iii) The payment for expenditure is considered excessive or unreasonable

having regard to :-a) The fair market value of goods, services or facilities; or b) The legitimate business needs of the assessee's business or profession; or c) The benefit derived by or accruing to the assessee from the payment.

AMOUNT OF DISALLOWANCE: If the above conditions are fulfilled, the assessing officer can disallow the expenditure to the extent he considers it excessive or unreasonable by the above standards. SPECIFIED PERSONS: The specified persons in case of various assessees are as under:- Assessee Specified persons Individual a) Any relative of such individual i.e. spouse, brother,

sister, lineal ascendant or descendant; b) Any person in whose business or profession the individual or his relatives has SUBSTANTIAL INTEREST.

Company, firm, AOP or HUF.

a) Any director of the company, partner of the firm or member of the AOP or HUF or any relatives of such person;b) Any person in whose business or profession the assessee or director, partner or member of assessee or any relative of such person has substantial interest. c) Any individual who has substantial interest in the business or profession of the assesses; d) A company, firm AOP or HUF having SUBSTANTIAL INTEREST in business/profession of the assessee or any director, partner or member of any such person;e) A company, firm AOP or HUF of which a director, partner or member has a substantial interest in the business/profession of the assessee or any director,



partner or member of any such person or any relative of any such person.

Note:- Substantial interest in the business / profession means :-a) In case of company, if such person is beneficial owner of at least 20

percent of Equity share capital at any time during the previous year;b) In case of any other person, if such person is entitled to at least 20 percent

profit of such concern at any time during the previous year;

EXPENDITURE NOT DEDUCTIBLE UNDER SECTION 40A(3)(a): Where an assessee incurs any expenditure, in respect of which the payment or aggregate of payments is made to a person in a day, in a sum exceeding Rs. 20,000/Rs. 35,000* otherwise than by an account payee cheque or account payee bank draft, 100% of such expenditure shall not allowed as deduction. * Rs. 35,000 in case payment is made on or after 1st October, 2009 for plying, hiring or leasing goods carriage.

However there are certain exceptions provided in rule 6DD under which the expenditure, even exceeding Rs. 20,000/35,000* shall be allowed as deduction even though the payment is not made by a crossed cheque / draft. These are -a) Payment made to RBI or any other Bank, life Insurance corporation and

primary agricultural credit society or primary credit society. b) Payment made to government, where such payment is required to be

made in legal tender e.g. payments of sales tax, custom duty, excise duty etc.

c) Payment made by way of any letter of credit, telegraphic transfer, transfer from one Bank account to another bank account in same bank or any other bank, through bill of exchange payable to a Bank, through use of electronic clearing system through a bank, a credit card or a debit card.

d) Where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee.

e) Payment for purchase of:-i) Agricultural or forest produce.ii) The produce of animal husbandry, dairy or poultry farming.iii) Fish or fish products or iv) Products of horticulture or apiculture if the payment is made to the cultivator, grower or producer of such articles, produce or products.

f) Payment made for purchase of products manufactured or processed without the aid of power in a cottage industry to the producer of such products.

g) Where the payment is made in a village or town, which is not served by any bank to any person who ordinarily resides or is carrying on business / profession in any village/town.

h) Payment by way of gratuity, retrenchment compensation or similar terminal benefits made to an employee or his legal heirs, if the aggregate



of such sums payable to the employee or his legal heir does not exceed Rs. 50000.

i) Payment by way of salary to its employees after deducting income tax from the salary if such employee is temporarily posted for continuous period of fifteen days or more in a place other than his normal place of duty or on a ship and the employee does not maintain any Bank account at such place.

j) Where the payment was required to be made on a day on which the Banks were closed either on account of holiday or strike.

k) Payment made by any person to his agent who is required to make payments in cash for goods or services on behalf of such person.

l) Where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travellers cheques in normal course of his business.

NOTE :- 1) If an assessee makes payment of two or more bills (none of them exceeds Rs. 20,000) /Rs. 35,000* at the same time (otherwise than by an account payee cheque or account payee bank draft), section 40 A (3) is not applicable even if the aggregate payment is more than Rs. 20,000/Rs. 35,000*.

2) Section 40 A (3) is not applicable if an assessee purchases a capital asset or in respect of an expenditure which is not to claimed as deduction under sections 30 to 37.

3) It is possible that a person may make different payments (otherwise than by an account payee cheque or account payee bank draft) at different time during the day to the same person and none of the payments during the day to same party exceeds Rs. 20,000/Rs. 35,000*.But if the aggregate payment exceeds Rs. 20000/Rs. 35,000* then whole of such payment is disallowed.

4) Section 40 A (3) is applicable only in computing income under head ‘profits and gain of business or profession’ and ‘income from other sources'.

* Rs. 35,000 in case payment is made on or after 1st October, 2009 for plying, hiring or leasing goods carriage.

DISALLOWANCE IN RESPECT OF PROVISION FOR GRATUITY [SECTION 40A(7)] : Gratuity is allowed as deduction only if :-a) Gratuity has actually become payable during the previous year to the

employees (if not covered as per clause (b)); orb) Provision is made for payment of a sum by way of any contribution

towards an approved gratuity fund. Therefore no deduction is allowed in respect of any provision made for payment of gratuity only unless the said sum is deposited to approved gratuity fund as per provision of sector 43 B. DISALLOWANCE IN RESPECT OF CONTRIBUTION TO NON-STATUTORY



FUNDS [SECTION 40A(9)]: The sum contributed by the assessee as an employer towards approved gratuity fund, recognized provident fund or an approved superannuation fund shall be allowed as deduction. No deduction shall be allowed in respect sum paid towards setting up or formation of any other fund, trust, society etc. for any other purpose which is not approved or recognised.

DISALLOWANCE OF UNPAID LIABILITY [SEC 43B]: When the books of accounts are maintained on mercantile basis, the deduction of following sums is allowed only on payment during the previous year or within the stipulated period mentioned against each of these expenditures: Nature of expense Stipulated time period a) Any sum payable by way of tax, duty, cess or fee, by whatever name called under any law for time being in force.

Payment should be made on or before due date of furnishing the return of income under section 139(1) and the proof of payment should be enclosed along with the return of income. However if payment is made after due date, deduction can be claimed in the year of payment.

b) Any sum payable by the assessee as employer as contribution to provident fund or gratuity fund or any other fund for welfare of employees.

SAME AS ABOVE

c) Any sum payable to employee as bonus or commission for service rendered.

SAME AS ABOVE

d) Any sum payable as interest on any loans or borrowing from any public financial institution (i.e. ICICI, IDBI, LIC, IFCI, UTI etc)

SAME AS ABOVE

e) Any sum payable as interest on any loan or advance from a scheduled Bank including a co-operative Bank.

SAME AS ABOVE

f) Any sum payable as employer in lieu of leave at the credit of his employee.

SAME AS ABOVE

NOTE: Employer’s Contribution to provident fund or gratuity fund or any other fund for welfare of employees is covered under point (b) above u/s 43 B. But Employee’s Contribution to provident fund or gratuity fund or any other fund for welfare of employees is allowed as deduction only when the payment of the same is made on or before the due date mentioned under respective welfare Acts. Employee’s Contribution to such fund paid after the due date mentioned under respective welfare Acts is not allowed as deduction u/s 36(1)(va).

DEEMED PROFITS CHARGEABLE TO TAX: The following deemed profits



chargeable to tax as income under head business or profession:a) Recovery against any allowance or deduction allowed as deduction:

(i) Any deduction was allowed in any previous year in respect of Loss or Expenditure (revenue or capital) or trading liability AND during the current previous year the assessee has obtained refund or remission or cessation thereof then such amount will be income of assessee under head Profits & Gains of Business & Profession. [Section 41(1)(a)](ii) If in above case, instead of the assessee, the successor had has obtained refund or remission or cessation thereof then such amount will be income of successor under head Profits & Gains of Business & Profession. [Section 41(1)(b)]

b) Balancing charges on assets if undertaking engaged in generation or generation and distribution of power. [Section 41(2)]

c) Sale of scientific research capital asset without putting it for any other use. [Section 41(3)]

d) Recovery of Bad debts allowed earlier as deduction. [Section 41(4)]e) Amount withdrawn from special reserve created and maintained by certain

financial institutions. [Section 41(4A)]f) Losses of previous year in which business ceased to exist can be set off from

deemed incomes under Section 41(1), (3), (4) or (4A) even after period of 8 years has passed and even if return of loss was not submitted in time [section 41(5)].

g) Any sum received after the discontinuation of the Business or Profession is deemed to be the income of the recipient and is charged to tax in the year of the receipt [section 176 (3A) and 176(4)].

NOTE: The above incomes are taxable in the year of receipt even if in that year the business is not in existence.

UNDISCLOSED INCOME AND INVESTMENTS HOW AND WHEN TAXED:- The tax treatment is as follows :-a) Cash credits [section 68]:- These are taxable in the year in which

credited in the books of account of the assessee. b) Unexplained investments [section 69]:- These are taxable in the year in

which such investments were made. c) Unexplained money etc. [section 69A]:- These are taxable in the year in

which the assessee is found the owner of such money.d) Investment not fully disclosed in books of accounts [section 69B]:-

The undisclosed amount is taxable in the year in which the assessee has made such investments.

e) Unexplained expenditure [section 69C]:- These expenses are taxable in the year in which these are incurred.

f) Amounts borrowed or repaid on Hundi [section 69D]:- These amounts are taxable in the year of borrowal or repayment. But if amount is taxed in the year of borrowal repayment shall not be taxed again.



MAINTENANCE OF ACCOUNTS [SECTION 44AA]: To understand compulsory maintenance of books of account it is necessary to understand the meaning of ‘specified profession’ and ‘Non-specified profession’. SPECIFIED PROFESSION: Specified profession includes persons carrying on an legal, medical, engineering, architectural, accountancy, technical consultancy or interior decoration or any other notified profession [i.e. authorised representatives, film artists, company secretaries and information technology professionals].NON-SPECIFIED PROFESSION: - Non-specified profession is a profession other than specified profession.PRESCRIBED BOOKS OF ACCOUNT [Rule 6F]:a) Category A :- [Persons carrying on ‘specified profession’ and their gross

receipts in profession do not exceed Rs. 1,50,000 in any of three years immediately preceding the previous year (or in case of newly set up profession, the gross receipts in profession for the previous year are not likely to exceed the said amount of Rs. 1,50,000)]. These persons are required to maintain such “books of accounts and other documents” as may enable the assessing officer to compute their taxable income under The Income Tax Act.

b) Category B:- [Persons carrying on ‘specified profession and their gross receipts in profession exceed Rs. 1,50,000 in ALL of three years immediately preceding the previous year (or in case of newly set up profession, the gross receipt in profession for the previous year are likely to exceed Rs. 1,50,000)] These persons are required to maintain prescribed books of accounts as per rule 6 F(2) as follows :- i) cash book. ii) a journal, if mercantile system is followed. iii) a Ledger. iv) carbon copies of bills (machine numbered) exceeding Rs. 25 issued by a person, and v) original bills wherever issued to the person and receipts in respect of expenditure incurred by the person (or if bills and receipts are not issued and the expenditure incurred is not more than Rs. 50, payment vouchers prepared and signed by the person).Apart from above a person carrying on medical profession is required to keep following additional books :- a) A daily case Register in form 3C; b) an inventory, on first day and last day of the previous year, of stock of medicines and other consumable accessories used for his profession.

c) Category C :-[Persons carrying on Non-specified profession or any business if their from such business or profession does not exceed Rs. 1,20,000 and the total sale, turnover or gross receipt there of are not in excess of Rs. 10,00,000 in all three years immediately preceding the previous year (or in case of newly setup business or non-specified profession total income and total sale, turnover or gross receipt are not likely to exceed the said amounts)]. These persons are not required to maintain any books of accounts.

d) Category D :- [Person carrying an ‘Non-specified profession' or any business if their income from such profession or business exceeds Rs.



1,20,000 or the total sale, turnover or gross receipts there of are in excess of Rs. 10,00,000 in any of three years immediately preceding the previous year ( or when the profession or business in newly set up, income / total sale etc. are not likely to exceed the said amounts)] - These persons are required to maintain such “Books of accounts and other documents” as may enable the assessing officer to compute their taxable income under the income tax Act. This category also includes assessee covered under section 44 AD or 44AE or 44AF or 44BB or 44BBB if it is claimed that profits and gains from the business are lower than profits as per these sections.

COMPULSORY AUDIT OF ACCOUNTS [SECTION 44 AB]: The following persons are required to get their accounts audited by a chartered accountant:a) A person carrying on business, if the total sale, turnover or gross receipts

in business for the previous year exceed Rs. 40,00,000.b) A person carrying in profession, if his gross receipts in profession for the

previous year exceed Rs. 10, 00,000. c) A person covered under section 44AD, 44AE, 44AF, 44BB or 44BBB who

claims that the profits and gains from such business are lower than the profits and gains computed under these sections.

DUE DATE OF GETTING BOOKS AUDITED AND FORM: The due date of getting books audited is 30th September of the assessment year in case of all assessees. The chartered Accountant gives his audit report in form 3 CA (if the assessee in required to get his accounts audited under any law) or in form 3 CB (if the assessee is NOT required to get his accounts audited under any other law). The details of such audit are given in form 3CD.SUBMISSION OF AUDIT REPORT: The audit report as per section 44AB is not to be attached with new return forms. Such audit report should not be submitted to income tax department before, on or after due date of filing the return i.e. 30th

September. However, the audit report should be obtained on or before due date. NOTE: - If the date is extended by the income tax department then 30th

September shall replaced by such date.

SPECIAL PROVISIONS FOR COMPUTING INCOME ON ESTIMATED BASIS: These are given under section 44 AD, 44 AE, 44AF, 44B, 44BB, 44BBA and 44BBB as follows :-PROFITS & GAINS OF CIVIL CONSTRUCTION BUSINESS [SECTION 44 AD]: The conditions of this provision are:-1. The assessee may be any person and may be a resident or non-resident.2. The assessee must be engaged in business of civil construction or supply of labour for civil construction work. 3. The civil construction includes construction or repair of buildings, dams, bridges or other structures or roads or canals. It also includes electrical fitting, plumbing, landscaping work. 4. This section is applicable if gross receipts from such business don’t exceed Rs.



40,00,000. 5. The income from such business is estimated at 8% of gross receipt paid or payable to the assessee. The assessee can voluntarily declare higher income in his return of income.6. The income as above is after deduction of all expenses from section 30 to 38 including depreciation. But in case of firm, salary and interest on capital to partners under section 40(b) shall be allowed from such income. 7. Such assessee is not required to maintain any books of account. He is also not required to get his accounts audited. But in case he carries any other business also and total gross receipts of all business is more than Rs. 40, 00,000 then he will get his accounts audited under section 44 AB. 8. Such assessee is eligible for deductions under chapter VI A, if conditions therein are fulfilled. 9. Such assessee can however claim his income to be lower but he will have maintain the books of account as per section 44AA and get his accounts audited under section 44AB.

PROFITS & GAINS OF BUSINESS OF PLYING, LEASING OR HIRING TRUCKS [SECTION 44AE]: The features are as follows:1. The assessee may be any person and may be a resident or non-resident.2. The assessee must be engaged in business of plying, hiring or leasing the trucks. 3. The assessee does not own more than 10 goods carriages at any time during the year. For this purpose, a goods carriage taken on hire purchase or on installments shall be deemed to be owned by the assessee. 4. The income of a heavy goods vehicle (the unladen weight of which is more than 12000 kilogram) is estimated at Rs. 3500/- per month (or part of month) during which the goods carriage in owned by the assessee. 5. The income of a good carriage other than heavy goods vehicle is estimated at Rs. 3150/- per month (or part of a month) during which the goods carriage owned by the assessee. 6. The assessee can voluntarily declare higher income. 7. The income as above is after deduction of all expenses from section 30 to 38 including depreciation. But in case of firm, salary and interest on capital to partners under section 40(b) shall be allowed from such income. 8. Such assessee is not required to keep any books of accounts. He is also not required to get his accounts audited.9. Such assessee is eligible for deductions under chapter VI A, if conditions therein are fulfilled. 10. Such assessee can however claim his income to be lower but he will have maintain the books of account as per section 44AA and get his accounts audited under section 44AB.

PROFITS AND GAINS OF RETAIL TRADERS [SEC 44AF]: The conditions to befulfilled are:



1. The assessee may be any person and may be a resident or non-resident.2. The assessee must be engaged in retail trade of any goods or merchandise.3. The turnover of the assessee from the above business does not exceed Rs. 40,00,000. 4. The estimated income from such business is 5% of gross receipts. The assessee may voluntarily declare higher income in his return of income.5. The income as above is after all deductions under section 30 t0 38 including depreciation. But in case of a firm, salary and interest on capital to partners under section 40(b) shall be allowed from such income. 6. The assessee is not required to maintain any books of account. He is also not required to get his accounts audited.7. Such assessee can however claim his income to be lower but he will have maintain the books of account as per section 44AA and get his accounts audited under section 44AB.

PROFITS AND GAINS OF SHIPPING BUSINESS OF NON-RESIDENT ASSESSEE [SEC 44B]: The conditions to be fulfilled are:1. The assessee is a non-resident person.2. He is engaged in the business of operation of ships.3. He has earned any amount, paid or payable whether in or out of India, on account of carriage of passengers, livestock, mail or goods shipped at any port in India; and he has received or deemed to received in India, any amount, on account of carriage of passengers, livestock, mail or goods shipped at any port outside India. 4. The income of such assessee from operation of ships shall be a sum equal to 7.5% of the amounts referred to in point 3 above.

PROFITS AND GAINS OF NON-RESIDENT ASSESSEE SUPPLYING MACHINERY ON HIRE FOR EXPLORATION ETC. OF MINERAL OILS [SEC 44BB]: The conditions to be fulfilled are:1. The assessee is a non-resident person.2. He is engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire which is used or to be used in prospecting for or extraction or production of mineral oils.3. He has earned any amount, paid or payable whether in or out of India, on account of services or facilities in connection with, or supplying plant and machinery on hire which is used or to be used in prospecting for or extraction or production of mineral oils in INDIA; and he has received or deemed to received in India, any amount, on account of services or facilities in connection with, or supplying plant and machinery on hire which is used or to be used in prospecting for or extraction or production of mineral oils outside India. 4. The income of such assessee from such business shall be a sum equal to 10% of the amounts referred to in point 3 above.5. Such assessee can however claim his income to be lower but he will have maintain the books of account as per section 44AA and get his accounts audited



under section 44AB.

PROFITS AND GAINS OF NON-RESIDENT ASSESSEE FROM BUSINESS OF OPERATION OF AIRCRAFT [SEC 44BBA]: The conditions to be fulfilled are:1. The assessee is a non-resident person.2. He is engaged in the business of operation of aircraft.3. He has earned any amount, paid or payable whether in or out of India, on account of carriage of passengers, livestock, mail or goods from any place in India; and he has received or deemed to received in India, any amount, on account of carriage of passengers, livestock, mail or goods from a place outside India. 4. The income of such assessee from such business shall be a sum equal to 5% of the amounts referred to in point 3 above.

PROFITS AND GAINS OF FOREIGN COMPANY FROM BUSINESS OF CIVIL CONSTRUCTION ETC. IN CERTAIN TURNKEY POWER PROJECTS [SEC. 44BBB]: The conditions to be fulfilled are:1. The assessee is a foreign company.2. Such company is engaged in the business of civil construction or erection of plant and machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government.3. Any amount is received or receivable by such company in connection with the above said business.4. The income of such assessee from such business shall be a sum equal to 10% of the amounts referred to in point 3 above.5. Such assessee can however claim his income to be lower but he will have maintain the books of account as per section 44AA and get his accounts audited under section 44AB.

METHOD OF VALUATION OF CLOSING STOCK: The method of valuation of stock of goods is not prescribed under The Income Tax Act or The Income Tax Rules. The assessee may value its stock at cost or net realizable value (market value) whichever is less (as is normal practice in financial accounting). Such valuation can be as per individual method or as per global method. Both opening and closing stock should be valued on same basis. Further value of closing stock should include any tax, duty, cess or fee paid or incurred to bring the goods to the place of its location and condition on the date of its valuation.

* * *



Chapter-6 INCOME UNDER THE HEAD CAPITAL GAINSBASIS OF CHARGE [SEC 45]: Any profits or gains arising from transfer of capital asset effected in the previous year, shall be chargeable to tax under the head ‘Capital Gains’ and shall be deemed to be income of the previous year in which the transfer took place unless such capital gain is exempt u/s 54,54B, 54D, 54EC, 54F, 54G or 54GA. Thus, the following are essential conditions for taxing capital gains:(a) There must be a capital Asset.(b) The capital asset must have been ‘transferred’ by the Assessee. (But in

some cases capital gains arise even if there is no transfer of Capital Asset).(c) Such transfer must have taken place during the previous year. (But in

some cases capital gain is taxable in a year other than the year in which the capital asset is transferred).

(d) There must be profits or gains on such transfer, which is called ‘Capital gains’.

(e) Such profit or gains should not be exempt u/s 54,54B, 54D, 54EC, 54F, 54G or 54GA.

NOTE: According to section 45 (1A), in case of profits or gains from insurance claim due to damage or destruction of property by fire or other calamities, there will be capital gain, although no asset is transferred in such case.

(A) THERE MUST BE A CAPITAL ASSET: Capital Gain arises only on transfer



of a ‘Capital Asset'. Capital Asset means property of any kind (whether FIXED OR CIRCULATING, MOVABLE OR IMMOVABLE, TANGIBLE OR INTANGIBLE) held by the assessee. However, the following are not included in the definition of Capital Asset:(a) Any stock-in-trade, consumable store or raw material held for the

purpose of the business or profession of the assessee; (b) Personal effects of the assessee which means movable property

including wearing apparel and furniture held for personal use by the assessee or any member of his family dependent upon him. However, the following assets are not treated as personal effects even if these are held for personal use: Jewellery, Paintings, Drawings, archaeological collections, sculptures or any work of art.

(c) Agricultural land in India which is not urban agricultural Land. In other words, it must be a rural agricultural Land;

(d) 6 ½ % Gold Bonds, 1977, 7% Gold Bonds 1980 or National Defence Gold Bonds, 1980 issued by the Central Government;

(e) Special Bearer Bonds, 1991 issued by the Central Government;(f) Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.NOTE: (1) The item as per (d) and (e) do not exist now.(2) Personal effects include only movable property.

Thus personal effect does not cover the house property in which the assessee lives.

(3) Jewellery Includes - ornaments 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; and- Precious or semi precious stones, whether or not set in any furniture, utensil or other article or worked or sewn in any wearing apparel.

(4) Rural Agricultural Land means an agricultural Land in India-if situated in any area which is comprised with in the jurisdiction of a municipality then its population should be less than 10,000 as per last census.-If situated outside the limits of municipality then it should be situated certain kilometers away from the local limits of any municipality as specified by the Central Government in the official Gazette.

(5) Urban Agricultural Land is a capital asset but any capital gain arising from the COMPULSORY ACQUISITION of such land is exempt from tax under section 10(37).

(6) All assets like goodwill, leasehold rights, manufacturing licence, route permits, shares of companies, residential or commercial houses, patents, trade marks, Jewellery, land are called capital Assets.

(7) Personal Effects which are movable like household utensils, appliances, furniture, carpets, paintings, T. V. Sets, Vehicles, Refrigerators, musical instruments are not capital assets.



TYPES OF CAPITAL ASSETS: The capital assets are of two types:(a) Short term Capital Asset (b) Long term Capital Asset SHORT TERM CAPITAL ASSET [Sec 2(42A)]: A Capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer is known as a short term capital Asset. However in following cases the above period of 36 months shall be replaced by 12 months:(a) Equity or Preference shares of a Company (quoted or not)(b) Securities (like Debentures or Government Securities) listed in a recognized stock exchange in India (quoted).(c) Units of the Unit Trust of India or units of a Mutual fund specified u/s 10 (23D) (quoted or not). (d) Zero Coupon Bonds (quoted or not).LONG TERM CAPITAL ASSET [Sec 2(29A)]: A Capital Asset other then short term capital Asset is a Long term Capital Asset.NOTE: The Depreciable Assets are always treated as short term capital assets even if these are held for more than 36 months.CALULATION OF PERIOD OF HOLDING: In the following five cases the inclusion/ exclusion of period is determined as under:

CASE EXCLUSION/ INCLUSION OF PERIOD(a) Shares held in Company in Liquidation

EXCLUDE the period subsequent to date of Liquidation.

(b) Property acquired u/s 49(1) i.e. Gift, Will etc.

INCLUDE the holding period of Previous owner also.

(c) Shares of Amalgamated Company acquired in scheme of amalgamation.

INCLUDE the holding period of shares in Amalgamating Co, by assessee.

(d) Shares in Indian Resulting Company acquired in case of demerger

INCLUDE the holding period of shares in the Demerged company by the Assessee.

(e)(i) Trading or clearing rights of recognised stock exchange pursuant to demutualization or Corporatisation

INCLUDE the period for which the person was a member of the recognised stock exchange in India.

(e)(ii) Equity shares in a company acquired by a person pursuant to the demutualization or Corporatisation of recognised stock exchange.

INCLUDE the period for which the person was a member of the recognised stock exchange in India.

PERIOD OF HOLDING FOR BONUS AND RIGHT SHARES: The Holding period for the purpose of capital gains in case of shares or securities will be determined as under:

CASE RELEVANT DATE1. Right shares or any other securities (financial assets) purchased by original holder.

Period shall be from Date of Allotment of such financial asset.

2. Right shares or any other securities Period shall be from Date of Allotment



(financial assets) purchased by the renouncee in whose favour right has been renounced by original security holder.

of such financial asset.

3. Right renounced by original security holder in favour of renounce.

Period shall be from the date of offer to the date of renouncement.

4. Financial Asset allotted without any payment (on the basis of holding of other financial asset) e.g. Bonus Shares

Period shall be from Date of Allotment of such financial asset.

5. Specific security or sweat equity shares allotted/transferred by employer directly/ indirectly to employee either free of cost or at concessional rate.

Period shall be from Date of Allotment or transfer of such financial asset.

NOTE: REASON FOR DISTINCTION OF LONG TERM CAPITAL ASSET AND SHORT TERM CAPITAL ASSET: The long term capital gain is taxed at concessional /lower rates. Whereas the short term capital gain is taxed at Normal Rates.

(B) CAPITAL ASSET MUST HAVE BEEN TRANSFERRED: Capital gain arises only where there is a transfer of capital Asset. If the capital asset is not transferred, there will be NO CAPITAL GAIN. However, Insurance claim due to damage or destruction of property by fire or other calamities, there will be capital gain although no asset has been transferred in such case.WHAT IS TRANSFER OF CAPITAL ASSET [Section 2(47)]: Transfer includes:a). the sale, exchange or relinquishment of the asset; or b). the extinguishments of any rights in an asset; or c). the compulsory acquisition of a capital asset under any law [but any capital

gain arising from the COMPULSORY ACQUISITION of such land is exempt from tax under section 10(37)]; or

d). in a case where the asset is converted by the owner there of into or is treated by him as stock in trade of business carried on by him on or after 01.04.1984, such conversion or treatment; or

e). the maturity or redemption of Zero Coupon Bonds;f). any transaction involving the allowing the possession of any immovable

property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of properties Act, 1882; or

g). any transaction (whether by way of becoming a member of or acquiring shares in a Co-operative Society, Company or other Association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of any immovable property.

EXAMPLES OF TRANSFER: (a) Redemption of preference shares by a Company



is a transfer in the hands of share holders and they will be liable to Capital gain for the same. (b) Conversion of preference shares into ordinary shares amounts to transfer

in the hands of shareholders.(c) Distribution of capital assets in kind in case of liquidation of a Company is

not transfer in the hands of company but a transfer in case of the shareholders (regarding shares held by them).

(d) Proprietorship business taken over by a firm.(e) Slump sale of an undertaking of a business.(f) Grant of mining lease at a premium.(g) Premium or Salami received for lease of plot for 99 years.TRANSACTIONS NOT INCLUDED IN TRANSFER [SEC 46 & 47]: In the following cases, the transactions will not be considered as transfer –(i) Distribution of assets in kind by a company to its shareholders on its

liquidation shall not be transfer in the hands of Company.(ii) Any distribution of Capital Assets on total or partial partition of Hindu

Undivided family. (iii) Any transfer of a Capital Asset under a Gift or will or an irrevocable

trust. (However from A.Y. 2001-02, transfer under a Gift or irrevocable trust of capital asset being shares, debentures or warrants allotted by Company, directly or indirectly to its employees under the Employees Stock option Plan or Scheme framed in accordance with guidelines issued by the central Government shall be deemed as ‘TRANSFER’).

(iv) Any transfer of Capital Asset by a Company to its WHOLLY OWNED INDIAN SUBSIDARY COMPANY.

(v) Any transfer of Capital Asset by a wholly owned subsidiary Company to its Indian Holding Company.NOTE: However in case of provisions as per (iv) & (v) above, if the transfer of capital Asset is made after 29.2.1988 as stock in trade the same will be treated as TRANSFER.

(vi) Any transfer in the scheme of amalgamation of a Capital Asset by the amalgamating Company to the Amalgamated Company if Amalgamated Company is Indian Company.

(vii) Any transfer in a scheme of amalgamation of shares held in Indian Company by the amalgamating foreign Company if:

(a) At least 25% of the shareholders of the amalgamating foreign Company continue to remain shareholders of the amalgamated foreign Company; and

(b) Such a transfer does not attract capital gain tax in the Country, in which such amalgamating Company is incorporated.

(viii) Any transfer, in the scheme of amalgamation of a Banking Company with a Banking Institution sanctioned and brought into force by the Central Government under section 45(7) of the Banking Regulation Act, 1949, of a Capital Asset by the Banking Company to the Banking Institution.



NOTE: Where the assessee acquires the Capital Asset by way of a transaction as per points (ii) to (viii), then the cost of acquisition of such asset shall be cost to the previous owner. Further in such case, the period of asset held by previous owner shall also be included to find whether the asset is short term capital Asset or Long term capital Asset. (ix) From A.Y 2000-01, any transfer, in a demerger, of a Capital Asset by the

Demerged Company to the resulting Company provided the resulting Company is an Indian Company.

(x) Any transfer of shares held in an Indian Company by a Demerged foreign Company to the resulting foreign Company if :

(a) The shareholders holding not less than 75% in the value of shares of the Demerged foreign Company continue to remain shareholders of the resulting foreign Company; and

(b) Such transfer does not attract tax in capital gain in the country, in which the Demerged foreign Company is incorporated. It is further provided that provisions of section 391 to 394 of The Companies Act, 1956 shall not apply in such a case.

(xi) Any transfer in a business reorganisation, of a capital asset by the predecessor co-operative bank to the successor co-operative bank.

(xii) Any transfer by a shareholder, in a business reorganisation, of a capital asset being share(s) held by him in predecessor co-operative bank in consideration of the allotment of any share(s) in the successor co-operative bank.

(xiii) 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.

(xiv) Any transfer by a Shareholder, in the scheme of amalgamation, of share(s) held by him in an amalgamating Company if the transfer is made in the consideration of allotment to him of any share(s) in the amalgamated Company and the amalgamated Company is an Indian Company.

(xv) Any transfer of urban Agricultural Land in India before 01-03-1970.(xvi) Any transfer of bonds or Global Depository Receipts referred to in

section 115AC(1) (i.e. bonds/GDR’s/shares of a public sector Company) purchased in foreign currency, made outside India by a Non-Resident to another Non- resident.

(xvii) Any transfer of 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 other such public museum or institution as may be notified by the central Government.

(xviii) Any transfer by way of conversion of bonds / debenture /debenture stock or deposit certificate in any form of a company into shares or Debentures of that company.

(xix) Any transfer made on or before 31-12-1998 by a person (not being a



company) of a capital asset being MEMBERSHIP of a recognized stock exchange in India to a company in exchange of shares allotted by that company to the transferor. Such shares must be retained by the transferor for a period of not less then three years from the date of transfer.

(xx) Any transfer of LAND of a sick industrial company made under a scheme prepared and sanctioned under section 18 of the sick Industrial companies (SPL Provision) Act 1985 where such sick Industrial Company is managed by its workers co-operative.

However, the transfer should be made during the period commencing from the previous year in which the said company has become a sick industrial company under section 17(1) 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.

(xxi) Transfer of a capital asset to the company where firm is succeeded by a company in the business carried on by it subject to the following conditions:-

a) All assets and liabilities of the firm relating to the business immediately before the succession shall become the assets and liabilities of the Company.

b) All the partners of the firm immediately before succession become shareholders in the Company in the same proportion in which their capital accounts stood in the books of account of the firm on the date of the succession.

c) The partners 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.

d) The aggregate of shareholding of the partners in the Company is not less than 50% of total voting power in the Company and shareholding shall continue to be so for a period of five years from the date of the succession.

(xxii) Transfer of a capital asset to the company where proprietary concern is succeeded by a company in the business carried on by it subject to the following conditions:-

a) All assets and liabilities of the sole proprietary concern relating to the business immediately before the succession shall become the assets and liabilities of the Company.

b) The shareholding of the sole proprietor in the Company is not less than 50% of total voting power in the Company and shareholding shall continue to be so for a period of five years from the date of the succession.

c) The sole proprietor does 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.

(xxiii) Any transfer under ‘Security Lending Scheme, 1997’ for lending of any



securities under an agreement or arrangement, which the assessee has entered into with the borrower of such securities and witch is subject to the guidelines issued by the SEBI or RBI. (w. e. f. A. Y 2003-04 the guidelines are issued by RBI).

(xxiv) Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government.

(C). CAPITAL GAIN SHOULD ARISE IN THE PREVIOUS YEAR IN WHICH TRANSFER TOOK PLACE: Generally capital gain arises in the previous year which the transfer took place regarding the Capital Asset. However there following exceptions: (a) Conversion of Capital Asset in to stock in trade. (b) Compulsory acquisition of asset.(c) Damage or Destruction of any Capital Asset by fire or other calamities

from A.Y 2000-01

COMPUTATION OF CAPITAL GAIN [Section 48]: Now it has become clear that the capital gain is of two types-Short Term Capital Gain & Long term Capital Gain. A Performa to Calculate these Gain is given as follows:COMPUTATION OF SHORT TERM CAPITAL GAINS:Full Value of Consideration ***Less: expenditure incurred wholly and exclusively in connection with such transfer ***(i) Cost of acquisition ***(ii) Cost of Improvement *** ***

Balance ***

Less: exemption u/s 54B/ 54D/54G/54GA ***SHORT TERM CAPITAL GAIN ***

COMPUTATION OF LONG TERM CAPITAL GAINS:Full Value of Consideration ***Less: Expenditure incurred wholly and exclusively In connection with such transfer ***(ii) Indexed Cost of Acquisition ***(iii) Indexed Cost of Improvement *** ***

Balance ***

Less: Exemption u/s 54/54B/54D/54EC/54F/54G/54GA ***LONG TERM CAPITAL GAIN ***

NOTE: 1. In case of an assessee covered by Section 48 (first proviso), 115AB, 115AC, 115 ACA, 115AD or 115D, the benefit of Indexation is not available. The benefit of Indexation is also not available on transfer of Capital Asset being bonds or Debenture (except Capital Indexed Bonds issued by the Government) [Section 48, proviso 3].



2. The securities transaction tax paid on purchase of equity shares and units of equity oriented fund shall not form part of cost of acquisition. Similarly the securities transaction tax paid on sale of equity shares and units of equity oriented fund shall not be treated as expenses on transfer.

FULL VALUE OF CONSIDERATION: Full value of consideration means what the transferor receives or is entitled to receive a consideration of the Capital Asset. It is not always the market value of the asset on the date of transfer.NOTE: (1) If the consideration (received or to be received) in transfer of land or Building or both is less than the value adopted for the purpose of payment of stamp duty in respect of such Transfer, the value so adapted or assessed shall be deemed to be the full value of consideration and capital gain shall be computed accordingly (from A.Y. 2003-04).(2) If the full value of consideration agreed upon is received in installments in different years, the value of Consideration has to be taken into consideration for computing the capital gains in the year of transfer of such Capital Asset.

DEEMED FULL VALUE OF CONSIDERATION: In the following cases the full value of consideration shall be the deemed value: SL N O. MODE OF TRANSFER DEEMED FULL VALUE OF

CONSIDERATION1. Money or asset received from

an insurer on account of damage or destruction of any asset by fire or other calamities from A.Y 2000-01.

Value of money and/or fair Market value of asset on the date of receipt.

2. Conversion of capital asset into stock in trade from A.Y. 1985-86

Fair Market Value of the asset on the date of its conversion.

3. Introduction of Capital IN KIND into firm/AOP/BOI by partner or member

Amount recorded in the books of Account of FIRM/AOP/BOI/as Value of Capital Asset.

4. Distribution of asset in kind on dissolution of FIRM/AOP/BOI.

Fair Market Value of such Asset on the date of distribution.

5. Shareholder receiving assets from Liquidator on Liquidation of the Company.

Market Value of the assets on date of distribution LESS Amount of deemed Dividend u/s 2(22)(e).

6. Gift of shares or Debentures etc. to employees under employees stock option plan or scheme

Fair Market Value on the date of Gift etc.

7. Transfer of Land or building or both when sale consideration declared in the

The value adopted by Stamp Valuation Authority for the purpose of Stamp Duty.



Conveyance Deed is less than the value adopted by Stamp Valuation Authority for the purpose of Stamp Duty.

EXPENSES ON TRANSFER: Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from full value of consideration. Examples of such expenses are - brokerage or commission paid for securing a purchaser, cost of stamp, registration fees borne by the vendor, travelling exp. incurred in connection with transfer, litigation expenses for claiming enhancement of compensation awarded in case of compulsory acquisition of assets. However, any expenses which have already been claimed as deduction under any other provisions of the Act cannot be claimed as deduction under this clause.

COST OF ACQUISITION [SEC 55(2)]: Cost of acquisition of asset is the value for which it was acquired by the assessee. Expenses of capital Nature for completing or acquiring the title to the property are included in the cost of acquisition. The examples are:1) Interest on money borrowed to

purchase asset is part of actual cost of asset. But in case of asset being used for business or profession refer to chapter ‘Profits & Gain of Business or Profession’.

2) Litigation expenses incurred by the assessee, who holds shares of a Company, to acquire better voting rights, in respect of such shares, by filing suit to get articles of association amended and expenses incurred for compelling the company to register the shares in the name of the assessee would from part of cost of acquisition of the shares.

3) Where a mortgage was created by the previous owner during his life time and the same is subsisting on the date of his death, the successor obtains only mortgagor’s interest in the property and by discharging the debt he acquires the mortgagee’s interest in the property. Therefore, the amount paid to clear off the mortgage is the cost of acquisition.

However the estate Duty paid in respect of inherited property can neither be treated as part of cost of acquisition nor cost of improvement.

DEEMED COST OF ACQUISITION I. COST TO PREVIOUS OWNER [SEC.49 (1)]: The cost to the previous owner is deemed to be the cost of acquisition to the assessee in cases where capital asset became the property of the assessee under any mode of transfer as below:a) Acquisition of property on any distribution of assets on total or partial

partition of a Hindu Undivided family; or b) Acquisition of a property under a gift or will; or



c) Acquisition of a property by succession, inheritance or devolution; ord) Acquisition of a property on any distribution of assets on the dissolution of

a firm/ AOP/ BOI till 31st March, 1987; or e) Acquisition of a property on any distribution of assets on liquidation of a

Company; or f) Acquisition of a property under a transfer to a revocable or an irrevocable

trust; or g) Acquisition of a property on any transfer by a wholly owned Indian

Subsidiary Company from its holding Company; or h) Acquisition of a property on any transfer by an Indian Holding Company

from its wholly owned subsidiary Company; or i) Acquisition of a property on any transfer, in a scheme of amalgamation of

two Indian Companies as referred to in Section 47 (vi ); orj) Acquisition of a property on any transfer, in a scheme of amalgamation of

two foreign Companies as referred to in Section 47 (vi a); or k) on any transfer of a capital asset by a Banking Company to the Banking

Institution in a scheme of amalgamation of the Banking Company with the Banking Institution; or

l) Acquisition of a property by a HUF on conversion of self acquired property of a member of a Hindu Undivided family into joint family property after 31-12-1969.

NOTE: 1. Previous owner means the previous owner who actually paid for the asset.2. If the cost for which previous owner

acquired the property cannot be ascertained, the cost of acquisition will be FAIR MARKET VALUE of the asset on the date on which previous owner became the owner.

3. To find out whether the capital Asset is short term or long term in the above cases, the previous of holding of the prevision owner shall be included.

4. The benefit of indexation will be available from the year in which the asset was first held by the Current owner.

(II) COST OF SHARES OF AMALGAMATED COMPANY [SEC. 49 (2)]:Where a person holds shares in a Company which merged with an Indian Company then in lieu of shares in the amalgamating company he will get shares in the Amalgamated Company. In such a case, the cost of shares of amalgamating Company will become the cost of shares of the amalgamated Company.NOTE: 1.To find out whether the Capital Asset is short term or long term in the

above case, the period of holding shall be determined from date of acquisition of shares in amalgamating company.

2. The benefit of indexation will be available from the year in which the shares in amalgamated company were allotted.

(III) COST OF SHARES/DEBENTURES ACQUIRED ON COVERSION OF



DEBENTURES [SEC 49 (2A)]: Where any person holds debenture/ debenture stock/ deposit certificates etc and such debentures etc are converted into shares or Debentures of that Company. In such a case, the cost of shares or debentures so converted shall be that part of cost of debentures etc which has been appropriated towards shares or debentures.NOTE: 1.To find out whether or not such shares/debentures are long term or

short term capital asset the period of holding shall be determined from the date of allotment of such new shares/debentures.

2. The benefit of Indexation will be available from the year which such new shares were allotted. (The benefit of Indexation is not available in case of Debentures).

(IV) COST OF ACQUISTION OF SHARES / SECURITIES ACQUIRED UNDER EMPLOYEES STOCK OPTION PLAN [SEC. 49(2AA)]: Where the employee holds shares/securities (issued by his employer Company) offered to him by employer or any other person under ESOP then cost of acquisition of such shares/ securities shall be Amount actually paid by the employee.Note: In case the employee has exercised the option during the previous year 1999-2000 then cost of acquisition of such shares/ securities shall be fair market value on the date of exercise of such option.

(V) COST OF ACQUISITION OF THE SHARES IN THE INDIAN RESULTING COMPANY [SEC 49 (2C)]: Cost of acquisition of shares in the Indian resulting company shall be calculated by following formula: (Cost of acquisition of shares held by the assessee in the Demerged Company) X (Net book value of the assets transferred in demerger) / (Net worth of the DemergedCompany immediately before demerger).NOTE: 1. Net worth means aggregate of the paid up share capital and general

reserves in the books of account of Demerged Company immediately before demerger.

2. To find out whether or not such shares in resulting Company are long capital asset, the period of holding shall be determined from date of acquisition of shares in Demerged Company.

3. The benefit of indexation will be available from the year in which shares in resulting Company are allotted.

(VI) COST OF ACQUISITION OF ORIGINAL SHARES OF THE DEMERGED COMPANY [SEC 49 (2D)]: The cost of acquisition of such shares will be COST OF ACQUISITION OF ORIGINAL SHARES LESS COST OF SHARES IN RESULTING COMPANY.

(VII) COST OF ACQUISITION OF ASSETS ACQUIRED BEFORE 01-04-1981 [SEC 55 (2) (6)]: The following cases, the assessee may take at his option EITHER ACTUAL COST OR THE FAIR MARKET VALUE OF THE ASSET (other than



depreciable Asset) as on 01-04-1981 as the cost of Acquisition :(a) Where the capital asset became the property of the assessee before 01-

04-1981; or(b) Where the capital asset became the property of the assessee by any

mode referred to in section 49 (1) and the capital asset became the property of the previous owner before 01-04-1981.

NOTE: 1). This option is not available in case of DEPRECIABLE assets. 2) This option is not available in case of Goodwill of a Business, Brand or

Trademark associated with business, tenancy rights, loom hours, route permits and right to manufacture, produce or process any article or thing, whether self-generated or purchased.

3) We should take cost of asset or fair market value as on 01-04-1981 which ever is higher as Cost of acquisition.

(VIII) COST OF ACQUISITION IN CASE OF DEPRECIABLE ASSETS [SEC 50]: The cost of acquisition in case of Depreciable Assets is calculated only

when the Block of Assets is reduced to zero for any of the following reasons: SITUATION ONE: The sale value of the asset sold/transferred along with scrap value exceeds written down value of the Block in the beginning of the year and actual cost of asset (s) acquired during the previous year.SITUATION TWO: All the assets in the relevant block may be sold or transferred during the year.The short term Capital Gain in situation one is as: Full value of consideration of asset (s) sold or transferred ***Less: Expenditure incurred wholly and exclusively in connection with transfer ***W. D. V. of the block of assets in the beginning of the previous year ***Actual cost of assets acquired during the year and falling in the same block ***

____SHORT TERM CAPITAL GAIN ***_

In situation two the net result may be short term capital Gain or loss. It is also calculated as above.

(IX) COST OF ACQUISITION OF BONUS SHARES [SEC. 55 (2) (aa)(iii a)] : The cost of acquisition of any additional financial asset as Bonus shares (or security or otherwise) which is received without any payment by the assessee on the basis of his holding any financial asset shall be determined as follows: CASE COST OF ACQUISITION1. If Bonus shares are allotted

before 01.04.1981.Fair Market Value as on 1-4-1981

2. If Bonus shares are allotted after 31-3-1981

NIL.

Note: 1) The period of holding of such shares shall be determined from the date of allotment of BONUS SHARES.



2) The cost of acquisition of Original shares determined as follows:a) If such original shares were acquired by the owner (or the previous owner) before 01.04.1981 then Actual Cost or F.M.V. as on 1-4-1981 w. e. in higher. b) If such original shares were acquired by the owner (or the previous owner) on or after 01.04.1981 then Actual Cost.

(X) COST OF ACQUISITION IN CASE OF RIGHT SHARES [SEC. 55(2)(aa)] : The cost of acquisition of original shares, right entitlement and right shares is as follows : CASE COST OF ACQUISITION1. Original shares

a) If purchased before 01-04-1981b) If purchased after 31.03.1981

Actual Cost or F.M.V. as on 1-4-1981 w. e. in higher.

Actual Cost.

2. Right Entitlement which is renounced by the assessee in favour of any person

NIL

3. Right shares acquired by the original shareholder

Amount actually paid by the assessee for acquiring Right Shares.

4. Right-Shares acquired by the person in whose favour the right entitlement has been renounced

Amount paid to the renouncer of Right entitlement plus amount paid to the Company for acquiring Right shares.

(XI) COST OF ACQUISITION IN CASE OF INTANGIBLE ASSETS [SEC 55 (2)(a)]: The cost of acquisition of goodwill of business (not of profession), trade mark or Brand Name associated with Business, Right to manufacture, produce or process any article/thing or right to carry on any business, tenancy rights, route permits or loom hours is determined as follows :

CASE COST OF ACQUISITION1. Such asset is purchased Actual Cost 2. Such asset is Self generated NIL3. Such asset is acquired in any

mode as per section 49 (1)Actual Cost to Previous owner

NOTE :(1) The transfer of self generated asset not relating to business is not chargeable to tax . e g. Goodwill of profession, a new formula patented by the Inventor to grow seedless oranges. (2) If such asset is purchased before 01-04.1981 then Cost of acquisition shall

be Actual Cost. The option of F.M.V. on 01.04.1981 is not available in such case.

5. If such asset is self generated then cost of acquisition will be NIL EVEN IF SUCH ASSET WAS ACQUIRED BEFORE 01-04-1981



(XII) COST OF ACQUISITION IN CASE OF SLUMP SALE [SEC 50B]: In case of slump sale, the cost of acquisition of capital asset (being one or more under taking) shall be equal to 'NET WORTH' net worth means aggregate of total assets of the undertaking as reduced by value of liabilities as appearing in Books of Account.NOTE:1) To find out whether capital gain is short term or long term, the period of ownership of undertaking shall be considered.2) The benefit of indexation shall not be available.3) A report in form 3CEA shall be submitted along with return of income for calculation of net worth (certified by a chartered accountant).

(XIII) COST OF ACQUISITION OF TRADING & CLEARING RIGHTS AND EQUITY SHARES ALLOTTED TO THE SHAREHOLDER OF A RECOGNISED STOCK EXCHANGE IN A SCHEME OF DEMUTUALISATION OR CORPORATISATION OF A RECOGNISED STOCK EXCHANGE IN INDIA [SEC 55(2)(ab)] a) The cost of such equity shares shall be the cost of acquisition of his original membership of the exchange. b) The cost of such trading & clearing rights (who has been allotted equity shares as per point (a)) shall be deemed to be NIL.

Note: The period of holding shall be determined from the date of holding of membership ticket in the old exchange.

ADJUSTMENT OF COST OF ACQUISITION IN CASE OF RECEIPT OF ADVANCE MONEY [SEC 51]: Where any capital asset was, on any previous occasion, subject to negotiations for its transfer, any advance or other money received and forfeited by the assessee in respect of such negotiations shall be DEDUCTED FROM THE COST OF ACQUISITION. The following points should be kept in mind: a) Advance money received by and forfeited by any previous owner shall not be deducted.b) Advance money received and forfeited by current owner (i.e. assessee) shall be deducted.c) There is no difference between advance or other money received and forfeited by the assessee. The other money may be deposit made by proposed purchaser (but not forming part of purchase consideration) to guarantee the performance of contract. COST OF IMPROVEMENT [SEC 55(1)(b)]: The cost of improvement means:a) Cost of improvement in relation to goodwill of a business or right to manufacture, process or produce any article or thing is taken as NIL;b) Cost of improvement in relation to any other capital asset- ii) Where the capital asset became the property of the assessee [or the

previous owner in cases specified under section 49(1)] before 01-04-1981,



means all expenses of capital nature incurred in making any addition to alteration of the capital asset on or after 01-04-1981 by the assessee (or the previous owner as above);

iii) in other cases, means all expenses of capital nature incurred in making any addition or alternation to the capital asset by the assessee [or the previous owner in a case specified by section 49(1)].

iv) The cost of Improvement however do not include :a) expenditure incurred prior to 01-04-1981b) any expenditure which is deductible in computing the income chargeable

under the heads 'Income from house property', 'profit and gains of Business or profession' and ‘Income from other sources’. Only Expenses of CAPITAL NATURE are to be considered as cost of improvement.

INDEXED COST OF ACQUISITION AND INDEXED COST OF IMPROVEMENT [SEC 48, Explanation (iii)]: In case of calculation of long term Capitol gain Indexed cost of Acquisition and Indexed Cost of Improvement is deducted from full value of consideration.

The Indexed Cost is calculated with the help of Cost Inflation Index. The central Government has notified 'COST INFLATION INDEX' for long term Capital gain' as follows:

FINANCIAL YEAR

COST INFLATION INDEX

FINANCIAL YEAR COST INFLATION INDEX

1981-821982-831983-841984-851985-861986-871987-881988-891989-901990-911991-921992-931993-941994-951995-96

100109116125133140150161172182199223244259281

1996-971997-981998-991999-002000-012001-022002-032003-042004-052005-062006-072007-082008-092009-10

305331351389406426447463480497519551582632

The Indexed Cost of Acquisition and Indexed Cost of Improvement is calculated under Five DIFFERENT Situations as follows: SITUATION ONE: CAPITAL ASSET WAS ACQUIRED BY THE ASSESSEE BEFORE 01-04-1981 [not being modes referred to in section 49 (1)]: (a) Indexed Cost of Acquisition: Fair Market value of asset on 1.4.81 Cost Inflation Index for the year in



or X which asset is transferred Actual cost of Acquisition to the assessee, w. e. is more

Cost Inflation Index for year 1981-82 (i. e. 100)

(b) Indexed Cost of Improvement:Cost of improvement on or after 01-04-1981 X

Cost Inflation Index for the year in which asset is transferred Cost Inflation Index for year in which improvement took place.

SITUATION 2-CAPITAL ASSET WAS ACQUIRED BY THE ASSESSEE ON OR AFTER 01-04-1981 [not being modes referred to in Sec 49 (1)]:(a) Indexed Cost of Acquisition :Actual Cost of Acquisition to the assessee

X

C.I.I for the year in which asset was transferred

C.I.I for the year in which asset is acquired

(b) Indexed Cost of Improvement: Cost of Improvement on or after 01-04-1981 OR

X

C.I.I for the year in which at asset was transferred

C.I.I for the year in which improvement took place.

SITUATION 3: CAPITAL ASSETS ACQUIRED BY THE ASSESSEE BY ANY MODE REFERRED TO IN SEC 49 (1) BEFORE 01-04-1981 AND SAME WAS ORIGINALLY ACQUIRED BY PREVIOUS OWNER BEFORE 01-04-1981:(a) Indexed Cost Acquisition: FMV of the asset on 1.4.1981

ORX


Cost of acquisition of previous owner, w. e. is more

C.I.I for 1981-82 (i.e.100)

(b) Indexed Cost of Improvement:Cost of Improvement incurred by Assessee on or after 01-04-1981

X



SITUATION 4: CAPITAL ASSETS ACQUIRED THE ASSESSEE BY ANY MODE REFERRED TO IN SEC 49 (1) AFTER 31-03-1981 BUT SAME WAS ORIGINALLY ACQUIRED BY PREVIOUS OWNER BEFORE 01-04-1981:(a) Indexed Cost Acquisition: FMV of the asset on 1.4.1981 C.I.I for the year in which asset was



OR X

transferred

Cost of acquisition of previous owner, w. e. is more

C.I.I for the year in which the asset was acquired by the assessee

(b) Indexed Cost of Improvement:Cost of Improvement incurred by the assessee and previous owner on or after 01-04-1981 X

C.I.I for the year in which the asset was transferred


SITUATION 5: CAPITAL ASSETS ACQUIRED BY THE ASSESSEE BY ANY MODE REFERRED TO IN SEC 49 (1) AFTER 31-03-1981 AND SAME WAS ORIGINALLY ACQUIRED BY PREVIOUS OWNER ON OR AFTER 01-04-1981:(a) Indexed Cost Acquisition: Cost of acquisition of the previous owner X


C.I.I for the year in which the asset was acquired by the assessee

(b) Indexed Cost of Improvement:Cost of Improvement incurred by the assessee and previous owner on or after 1.4.1981 X

C.I.I for the year in which other asset was transferred


INDEXATION NOT ALLOWED: In the following cases, the indexation is not allowed to find out long term Capital Gain:-Transfer of bonds or debentures (except Capital Indexed Bonds issued by the Government (Proviso 3 to Sec 48).-Transfer of shares/ debentures acquired by a non-resident in foreign currency in an India Company (Proviso 1 & 2 to Sec 48).-Transfer of undertaking in a Slump Sale (sec 50 B).-Transfer of units of unit Trust of India or Mutual Fund covered under section 10 (23D) purchased in foreign currency by overseas financial Organisation (also known as offshore funds) (Sec 115AB)-Transfer of Global Depository Receipt or Bonds of an Indian Company or share/bonds of public sector Company sold by the Government and purchased in foreign currency by a Non-Resident [Sec 115 AC].-Transfer of Global Depository Receipt purchased in foreign Currency by an Individual resident in India and employee of Indian Company (Sec 115ACA).



-Transfer of Securities by foreign Institutional Investors (Sec 115 AD).-Transfer of foreign exchange asset by a non-resident Indian (Sec 115 D).

NOTE: In case of Depreciable Asset, there is no question of Indexation as there is always SHORT TERM CAPITAL GAIN in transfer of Depreciable Assets.

COMPUTATION OF CAPTAL GAIN IN SPECIAL CASES

(1) INSURANCE CLAIM RECEIVED FOR DAMAGE OR DESTRUCTION OF A CAPITAL ASSET [SEC 45(1A)]: The following points are to be considered:a) A Capital asset is damaged/ destroyed due to -i) Flood, Typhoon, hurricane, Cyclone, earthquake or other natural calamities; orii) Riot or civil disturbance; oriii) Accidental fire or explosion; oriv) Action by enemy.b) The assessee has received compensation under Insurance during the year.c) The value of money or Fair Market value of other assets received (on the date of receipt) shall be ‘full value of consideration'.NOTE: Where any capital asset is destroyed and there is no insurance or no insurance compensation is received, there will be no Capital Loss under section 45 or 45(1A). This loss will be treated as Dead Loss.

(2) CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE [SEC 45(2)]: The following points are to be considered:(a) The capital Asset must have been converted into stock in trade on or

after 01-04-1984 (before this date such Conversion is not regarded as transfer).

(b) The Capital Gain shall be chargeable to tax in the year in which such stock in trade (Converted) is sold.

(c) The full value of consideration of such capital asset shall be the fair Market Value (on the date of such Conversion) of such capital asset.

(d) Exemption u/s 54 EA, 54 EB or 54EC can be claimed if specified investment is made with in 6 months from the date of sale of stock in trade.

(3) CAPITAL GAIN ON TRANSFER OF CAPITAL ASSET BY A PARTNER/MEMBER TO FIRM/ AOP/BOI [SEC 45(3)]: The following points are to be considered:a) A person is partner in a firm or member of a AOP/ BOI; b) He transfers a capital asset to such firm/AOP /BOI;c) The amount recorded in the books of account of the firm/AOP/BOI as

value of such asset shall be taken as full value of consideration.

4. CAPITAL GAIN ON TRANSFER OF A CAPITAL ASSET BY WAY OF



DISTRIBUTION ON THE DISSOLUTION OF A FIRM/AOP/BOI [SEC 45(4)]: The following points are to be considered:a) The transferor is a firm/AOP/BOI;b) Such firm/AOP/BOI transfers a capital asset to its partner/member on its

dissolution;c) For computing capital Gain ‘the fair market value’ of the asset on the date of transfer is taken as full value of consideration.NOTE: The partner/member receiving such capital asset shall take actual cost of asset at the value at which it was transferred to him.

5. CAPITAL GAIN ON COMPULSORY ACQUISITION OF ASSET [SEC 45(5)]: The following points are to be considered:a) This provision is applicable in case of- i) transfer of a capital asset by way of compulsory acquisition under any law; or ii) a capital asset is transferred and consideration is approved or determined by the Central Government/RBI;b) The Capital Gain will be taxed in the year in which the compensation or part there of is first received. The capital gain as calculated by taking ' INITIAL COMPENSATION' as full value of consideration.c) The enhanced compensation is taxed in the year in which such enhanced compensation is received. In such a case cost of acquisition and improvement are taken as NIL. The legal expenses for getting the compensation enhanced are treated as expenses on transfer.NOTE: Where the amount of compensation or consideration is subsequently reduced by any court, Tribunal or other authority, the capital gain of that year, in which the compensation was taxed, shall be recomputed by the Assessing Officer with in 4 years from the end of the year in which such order for reduction of compensation was passed.

6. SHARES/DEBENTURES ACQUIRED ON COVERSION OF DEBENTURES [SEC 49(2A)]: Where any person holds debenture/ debenture stock/ deposit certificates etc and such debentures etc are converted into shares or Debentures of that Company. In such a case, the cost of shares or debentures so converted shall be that part of cost of debentures etc which has been appropriated towards shares or debentures.NOTE: 1.To find out whether or not such shares/debentures are long term or

short term capital asset the period of holding shall be determined from the date of allotment of such new shares/debentures.

2. The benefit of Indexation will be available from the year which such new shares were allotted. (The benefit of Indexation is not available in case of Debentures).

3. If preference shares are converted into equity shares, it will be regarded as transfer of preference shares and capital gain on such transfer shall be on the date of allotment of equity shares. The full value of consideration shall be fair market value of the equity shares on the date of allotment of such equity shares.



7. CAPITAL GAIN ON DISTRIBUTION OF CAPITAL ASSET BY COMPANY IN LIQUIDATION [SEC 46]: The following points are to be considered:a) The Company is under liquidation;b) Such company distributes capital Assets to its shareholders;c) Calculate the market value of assets received and add cash received to this

figure;d) From the amount as per point(c) deduct value of dividend (to the extent of

accumulated profit of the company). This net value is ' Full value of consideration ' on transfer of shares.

e) If such capital asset received by the shareholder as in point (b) above is subsequently transferred then the Market value of asset on the date of distribution shall be the cost of acquisition of such asset.

8. TRANSFER OF INTANGIBLE ASSETS [SEC 55 (2)(a)]: The cost of acquisition of goodwill of business (not of profession), trade mark or Brand Name associated with Business, Right to manufacture, produce or process any article/thing or right to carry on any business, tenancy rights, route permits or loom hours is determined as follows :CASE COST OF ACQUISITION1. Such asset is purchased Actual Cost 2. Such asset is Self generated NIL3. Such asset is acquired in any

mode as per section 49 (1)Actual Cost to Previous owner

NOTE :(1) The transfer of self generated asset not relating to business is not chargeable to tax . e g. Goodwill of profession, a new formula patented by the Inventor to grow seedless oranges. (2) If such asset is purchased before 01-04.1981 then Cost of acquisition shall

be Actual Cost. The option of F.M.V. on 01.04.1981 is not available in such case.

6. If such asset is self generated then cost of acquisition will be NIL EVEN IF SUCH ASSET WAS ACQUIRED BEFORE 01-04-1981

9. TRANSFER OF DEPRECIABLE ASSETS [SEC 50]: The capital gain in case of Depreciable Assets is calculated only when the Block of Assets is reduced to zero for any of the following reasons: SITUATION ONE: The sale value of the asset sold/transferred along with scrap value exceeds written down value of the Block in the beginning of the year and actual cost of asset (s) acquired during the previous year.SITUATION TWO: All the assets in the relevant block may be sold or transferred during the year.The short term Capital Gain in situation one is as: Full value of consideration of asset (s) sold or transferred ***Less: Expenditure incurred wholly and exclusively in connection with transfer ***W. D. V. of the block of assets in the beginning of the previous year ***



Actual cost of assets acquired during the year and falling in the same block ***____

SHORT TERM CAPITAL GAIN ***_In situation two the net result may be short term capital Gain or loss. It is also calculated as above.

10. CAPITAL GAIN IN CASE OF SLUMP SALE [SEC 50B]: In case of slump sale, the cost of acquisition of capital asset (being one or more under taking) shall be equal to 'NET WORTH' net worth means aggregate of total assets of the undertaking as reduced by value of liabilities as appearing in Books of Account.NOTE:1) To find out whether capital gain is short term or long term, the period of ownership of undertaking shall be considered.2) The benefit of indexation shall not be available.3) A report in form 3CEA shall be submitted along with return of income for calculation of net worth (certified by a chartered accountant).

11. CAPITAL GAIN IN CASE OF LAND AND BUILDING [SEC 50C]: The following conditions must be fulfilled:a) There is transfer of land or building or both. Such asset may be long term or short term capital asset. It may be depreciable or non-depreciable asset.b) The sale consideration is less than the value adopted for the purpose of payment of stamp duty in respect of such transfer of land or building or both.

If the above conditions are satisfied then there can be following three situations:

Situation 1: If the assessee accepts the value adopted for payment of the Stamp duty then full value of consideration will be equal to the value adopted for payment of the Stamp duty.

Situation 2: If the assessee disputes the value adopted for payment of the Stamp duty then full value of consideration will be equal to the value finally accepted for payment of the Stamp duty.

Situation 3: If the assessee claims before the Assessing Officer that the value adopted for payment of the Stamp duty is more than the Fair market value then full value of consideration will be equal to the value adopted for payment of the Stamp duty or Fair market value which ever is less (In this case the assessee has not disputed the value while stamp duty proceedings).

12. CAPITAL GAIN PURCHASE BY A COMPANY OF ITS OWN SHARES OR OTHER SECURITIES [SEC 46A]: Any consideration received by a shareholder (or holder of other specified securities) from any company of purchase of its own shares (or other specified securities) held by such shareholder (or holder of other specified securities) shall be chargeable to tax. The difference between cost of acquisition (or indexed cost of acquisition as the case may be) and full value of consideration shall be treated as capital gains.

13. CAPITAL GAIN ON TRANSFER OF SHARES/ SECURITY BY AN EMPLOYEE



RECEIVED AS STOCK OPTION / SWEAT EQUITY PLAN [SEC 49(2AA)]: The different situations are discussed as under:Situation 1: If the option was exercised by the employee in the previous year 1999-2000: a) The perquisite of allotment of shares / securities is taxable in A.Y. 2000-01 (the perk being Fair market value minus cost of acquisition paid by the employee). b) If such shares or securities are transferred by the employee (other than by gift or under irrevocable transfer) then capital gain shall be sale value of such shares or securities minus fair market value on the date of acquisition (or indexed cost as the case may be).c) If such shares or securities are transferred by gift or under irrevocable transfer then capital gain shall be fair market value of such shares or securities on the date of such transfer minus fair market value on the date of acquisition (or indexed cost as the case may be).Situation 2: If the option was exercised by the employee in a previous year other than 1999-2000: a) The perquisite of allotment of shares / securities is not taxable. b) If such shares or securities are transferred by the employee (other than by gift or under irrevocable transfer) then capital gain shall be sale value of such shares or securities minus actual cost of acquisition (or indexed cost as the case may be).c) If such shares or securities are transferred by gift or under irrevocable transfer then capital gain shall be fair market value of such shares or securities on the date of such transfer minus actual cost of acquisition (or indexed cost as the case may be).

14. CAPITAL GAIN ON TRANSFER OF SECURITY IN DEMAT FORM [SEC 45(2A)]: The following conditions must be fulfilled:a) The shares or securities are transferred in DEMAT form.b) The beneficial owner of such shares or securities shall be charged tax under head capital gain.c) The cost of acquisition and period of holding shall be determined on the basis of First-in-first-out method.NOTE: With effect from 1st October, 2004 securities transaction tax is applicable if the equity shares or units of equity oriented mutual fund are transferred in a recognised stock exchange in India.

15. WITHDRAWL OF EXEMPTION GIVEN IN CERTAIN CASES [SEC 47A]: The following three transactions are not regarded as transfer for the purpose of capital gain when certain conditions are satisfied:

a) Transfer of a capital asset by a holding company to its wholly owned Indian Company or vice versa [Sec 47(iv) and (v)];

b) Transfer by a person other than a company of membership of a recognised stock exchange to a Company in exchange of shares allotted [Sec 47 (ix)];



c) Transfer where a firm / proprietary concern is succeeded by a Company [Sec 47 (xiii) and (xiv)].

If the conditions mentioned under above respective sections are not complied with then the exemption allowed earlier shall be withdrawn as per section 47A.a) Transfer of a capital asset by a holding company to its wholly owned Indian Company or vice versa [Sec 47A(1)]: Any transfer of capital Asset by a Company to its wholly owned Indian subsidiary Company or by a wholly owned Subsidiary Company to its Indian Holding Company is not treated as transfer by virtue of section 47 (iv)/(v). But in the following cases, the exemption shall be other withdrawn: (a) If at any time before the expiry of eight years from the date of transfer

of a capital asset referred to in section 47 (iv)/(v), such capital asset is converted by the transferee company into stock in trade of its business.

(b) The holding company ceases to hold whole of the share capital of the subsidiary Company before expiry of eight years as aforesaid.

In above cases the capital gain shall be calculated for transferor Company by treating sale price of the asset as full value of consideration. The same amount shall be treated as cost of acquisition of Transferee Company. b) Transfer by a person other than a company of membership of a recognised stock exchange to a Company in exchange of shares allotted: Where the shares allotted by a company to the transferor in exchange of membership of stock exchange are transferred with in 3 years from the date of transfer of membership, the capital gain not charged to tax earlier shall be deemed to be the income chargeable under head Capital Gains of the previous year in which such shares are transferred.c) Transfer where a firm / proprietary concern is succeeded by a Company: Where the aggregate of the shareholding of the partners or the shareholding of the sole proprietor, as the case may be, in the company does not continue to remain 50% of the total voting power for a period of five years from the date of succession, the capital gain not charged to tax earlier shall be deemed to be the income of the SUCCESSOR COMPANY chargeable under head Capital Gains of the previous year in which such requirement is not complied with.

16. CAPITAL GAIN IN CASE OF TRANSFER OF SHARES/ DEBENTURES BY NON-RESIDENT [PROVISO 1 TO SEC 48 AND RULE 115A]: The following procedure is adopted:a) The tax payer is non-resident (may be Indian or Foreign citizen, or a

Corporate or non-corporate assessee but must not be covered under sec 115 AC or 115 AD).

b) The capital asset is ' Shares/Debentures' in an Indian Company purchased by utilising foreign currency (may be short term or long term capital asset).

c) The full value of consideration and expenses on transfer are converted into same foreign currency by applying Average Exchange Rate on the date of transfer.



d) The cost of acquisition is converted into same foreign currency by applying Average exchange Rate on the date of purchase of such shares/debentures.

e) The capital gain calculated in foreign currency shall be converted into Indian currency by applying buying Exchange Rate on the date of transfer.

NOTE: If a non-resident Indian transfers such capital asset and then invests the whole or any part of net consideration in any of following asset with in six months from date of such transfer -- Shares in Indian company, debentures of/ deposits in Indian Public Limited Company, Central Government Securities or National Saving Certificates VI & VII issues, the exemption u/s 115 F is allowed as follows:

Long term Capital Gain XAmount invested in specified securitiesNet consideration of foreign currency asset (being shares/debentures of Indian Company)

It is to be noted that exemption u/s 115 F is allowed only on long term capital gain of Foreign Currency Asset Such asset being specified securities should not be transferred or converted into money with in 3 years from the date of acquisition, otherwise the exemption u/s 115 F shall be treated as long term capital gain of the year in which such new asset is transferred or converted into money.

17. CAPITAL GAIN IN CASE OF TRANSFER OF ZERO COUPON BONDS:In case of Zero coupon Bonds, the Maturity or Redemption is treated as transfer. If the period of holding of such bonds does not exceed 12 months then there is Short Capital Gain on these on bonds. But if the period of holding is more than 12 months then there is Long Term Capital Gain.

In case of Long Term Capital Gain on such Bonds the tax liability will be least of: i) 20% of Long Term Capital Gain (after Indexation); or ii) 10% of Short Term Capital Gain (without Indexation).

VALUATION OF A CAPITAL ASSET REFERRED TO VALUATION OFFICER [SEC 55A]: In following cases the Assessing officer may refer valuation of capital asset to the valuation officer:-a) Where the value of asset, as claimed by the assessee is in accordance with

estimate made by Registered Valuer and the Assessing officer is of opinion that the value so claimed is less than the market value; or

b) Where Assessing officer is of opinion that the fair market value of the asset exceeds value of asset as claimed by the assessee by more than 15% of value of asset or by Rs.25001/- or more; or

c) Where the Assessing officer is of the opinion that having regard to nature of asset and relevant circumstances, it is necessary to do so.

EXEMPTIONS FROM CAPITAL GAINThese exemptions are of two types:



(A) Exemptions of capital gains under various sub-clauses of section 10;(B) Exemptions u/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G and 54H. These are discussed in detail as follows: (A) Exemptions of capital gains under various sub-clauses of section 10

1. CAPITAL GAIN ON TRANSFER OF UNITS OF US 64 ON OR AFTER 01.04.2002 [SEC 10(33)]: Any income arising from the transfer of a capital asset, being a unit of US 1964 shall be exempt if such transfer takes place on or after 01.04.2002.

2. LONG TERM CAPITAL GAIN ON ELIGIBLE EQUITY SHARES EXEMPT IF THE SHARES ARE ACQUIRED WITH IN A CERTAIN PERIOD [SEC 10(36)]: Any income arising from the transfer of a long term capital asset, being an eligible equity share in a company shall be exempt if such shares are acquired on or after 01.03.2003 but before 01.3.2004 and held for a period of 12 months or more.NOTE: Eligible equity share means –

a) any equity share in a company being a constituent of BSE-500 Index of the Stock Exchange, Mumbai as on 01.03.2003 and the transactions of purchase and sale of such equity share are entered into on a recognised stock exchange in India;

b) any equity share in a company allotted through a public issue on or after 01.03.2003 and listed in a recognised stock exchange in India before 01.03.2004 and the transactions of sale of such equity share are entered into on a recognised stock exchange in India;

3. CAPITAL GAIN ON COMPENSATION RECEIVED ON COMPULSORY ACQUISITION OF AGRICULTURAL LAND SITUATED WITH IN SPECIFIED URBAN LIMITS [SEC 10(37)]: Any capital gains (may be short term or long term) arising to an Individual or a Hindu Undivided Family from transfer of agricultural land situated in specified urban limits by way of compulsory acquisition shall be exempt if: a) The compensation and enhanced compensation is received on or after 01.04.2004; b) Such land has been used for agricultural purpose during preceding two years by such individual or his parent or by such HUF; c) The land may have been compulsorily acquired before 01.04.2004.NOTE: If a part of original compensation has been received before 01.04.2004 then exemption on original compensation will not be available but enhanced compensation received on or after 01.04.2004 shall be exempt.

4. LONG TERM CAPITAL GAIN ON SALE OF SHARES AND UNITS ON OR AFTER 01.10.2004 [SEC 10 (38)]: Any income on or after 01.10.2004 from the transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented fund shall be exempt if:a) Such equity shares are sold through a recognised stock exchange, whereas the



units of an equity oriented fund may be sold through a recognised stock exchange or may be sold to the Mutual fund.b) Such transaction is chargeable to securities transaction tax.

5. CAPITAL GAIN ON TRANSFER OF AN ASSET OF A POWER GENERATING UNDERTAKING: Any income arising from transfer of a Capital Asset, being an asset of an undertaking engaged in the business of generation, transmission or distribution of power is exempt if such transfer is made to an Indian Company notified under section 80 IA(4)(v)(a) before 1.4.2006.

(B) Exemptions u/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G and 54H.

TRANSFER OF RESIDENTIAL HOUSE PROPERTY [SEC 54]: The following conditions should be satisfied:a) The capital asset must be residential house property (whether self

occupied or let out) and must be long term capital asset.b) The assessee (transferor) must be an individual or Hindu Undivided family.c) The assessee (transferor) has purchased a residential house (within a period of one year before the transfer or within 2 years from the date of transfer) or has constructed a residential house property (within a period of 3 years after date of transfer).AMOUNT OF EXEMPTION: The cost of new house property (up to maximum of capital gain) is exemption under section 54.NOTE:1) If such new house property is sold with in 3 years from the date of acquisition/completion of construction then exemption allowed u/s 54 shall be deducted from cost of acquisition of new house property.2) Where the capital gain is not utilised by the assessee for the

purchase/construction of new house property before due date of furnishing the return, it shall be deposited by him in 'CAPITAL GAIN DEPOSIT ACCOUNT'.

3) Exemption is not limited to one house property.4) In case of compulsory acquisition of a residential house, the limit of 1

year/2 years/3 years is calculated from the date of receipt of compensation.

5) If the amount deposited in 'Capital Gain Deposit Account' is not utilised with in the stipulated period then such amount not utilised shall be treated as long term Capital Gain of the previous year in which the period of three years from the date of transfer of original asset expires.

TRANSFER OF AGRICULTURAL LAND [SEC 54B]: The following conditions should be satisfied:

1. The capital assets must be agricultural land and may be short term or long term capital asset.

2. The assessee (transferor) must be an individual.



3. The agricultural land was used by the assessee or his parents for agricultural purpose for at least two years before the date of transfer.

4. The assessee (transferor) has purchased new agricultural land within a period of 2 years from the date of such transfer.

AMOUNT OF EXEMPTION: The cost of new agricultural land (up to maximum of capital Gain) is exemption under section 54 B.NOTE:1) If such new agricultural land is sold with in 3 years from the date of acquisitions then exemption allowed u/s 54 B shall be deducted from cost of acquisition of new land.2) Where the capital gain is not utilised by the assessee for purchase of new

agricultural land before due date of furnishing the return, it shall be deposited by him in 'CAPITAL GAIN DEPOSIT ACCOUNT'.

3. In case of compulsory acquisition of agricultural land the time limit of 2 years shall be calculated from date of receipt of compensation.

4. If the amount of deposit in 'Capital Gain Deposit Account' is not utilised with in the stipulated period, then such amount not utilised shall be treated as short term long term or capital gain (as original gain) of the previous year in which the period of two years from the date of transfer of original asset expires.

COMPULSORY ACQUISITION OF LAND & BUILDING FORMING PART OF INDUSTRIAL UNDERTAKING [SEC 54D]: The following conditions should be satisfied:a) The capital asset must be land or building which forms part of the

Industrial undertaking. The capital asset may be short term or long term capital asset.

b) The assessee (transferor) may be any person.c) The above said Capital Asset was used by the assessee for purpose of

Industrial undertaking for at least two years before the date of COMPULSORY ACQUISITION.

d) The assessee (transferor) has purchased any land or building or constructed a building within a period of three years from the date of receipt of compensation.

e) The newly acquired Land or building is used for shifting or re establishing the said undertaking or setting up another industrial undertaking.

AMOUNT OF EXEMPTION: The cost of new land or building (up to maximum of capital gain) is exemption u/s 54D. NOTE:1) If such new land or building is sold/transferred within 3 years from the

date of acquisition/completion of construction then exemption allowed u/s 54D shall be deducted from the cost of acquisition of new land or buildings.

2. Where the Capital Gain is not utilised by the assessee for purchase/construction before the due date of furnishing the return, it shall be deposited by him in Capital Gain Deposit Account'.



3) If the amount deposited in Capital Gain Deposit Account is not utilised within the stipulated period, then such amount not utilised shall be treated as short term/long term capital gain (as original gain) of the previous year in which the period of three years from the date of transfer of original asset expires.

LONG TERM CAPITAL GAIN INVESTED IN CERTAIN BONDS [Sec 54 EC]: The following conditions must be satisfied:a) There must be a long term Capital Asset.b) The assessee (transferor) may be any person.c) The assessee (transferor) has invested in following securities within six

months from the date of transfer of the asset - i) Bonds of National Bank for Agriculture & Rural Development; orii) Bonds of National Highways Authority of India; oriii) Bonds of Rural electrification Corporation Ltd; orv) Bonds of National Housing Bank; orvi) Bonds of Small Industries Development Bank of India.AMOUNT OF EXEMPTION: The cost of above securities (up to maximum of capital gain) is exemption u/s 54 EC.NOTE:1) If such securities are transferred/converted into money/loan taken on security of such securities with in 3 YEARS from the date of their acquisition then the amount exempted earlier shall be treated as long term Capital Gain of the previous year in which such new securities are transferred.2) The cost of specified securities considered for exemption u/s 54EC shall not be eligible for deduction u/s 80C.

LONG TERM CAPITAL GAIN OF CERTAIN LISTED SECURITIES/ UNITS/INVESTED IN SPECIFIED EQUITY SHARES [SEC 54 ED]: The following conditions must be fulfilled:a) The long term capital Asset must be either a security listed in any

recognised stock exchange in India or a unit of UTI or a mutual fund (whether listed or not).

b) The assessee may be any person.c) The assessee (transferor) has invested in shares issued by a public

company registered in India to the public with in six months from the date of transfer of asset.

AMOUNT OF EXEMPTION: Cost of new shares (up to maximum of Capital Gains) is exemption u/s 54 ED.NOTE:1) For this section securities include shares also.2) The new shares must be equity shares only.3) If the new equity shares are transferred with in one year from the date of

acquisition then the amount exempted earlier shall be treated as long term capital Gain of the previous year in which such securities are transferred.

4) The cost of new shares considered for exemption u/s 54ED shall not be eligible for the deduction u/s 80C.



5) With effect from 1st October, 2004 securities transaction tax is applicable if the equity shares or units of equity oriented mutual fund are transferred in a recognised stock exchange in India. In such case long term capital gain on transfer of these assets is exempt from tax u/s 10 (38).

LONG TERM CAPITAL GAIN INVESTED IN RESIDENTIAL HOUSE PROPERTY [SEC 54F]: The following conditions must be fulfilled:a) There is long term Capital Asset other than residential House property.b) The assessee is an individual or Hindu undivided family.c) The assessee (transferor) does not own more than one residential house

(other than new house) on the date of transfer of original asset.d) The assessee has purchased with in one year before the date of transfer or

two years after the date of transfer or constructed within 3 years after the date of transfer a residential house.

AMOUNT OF EXEMPTION:a) If cost of new house is not less than net consideration of above said Capital

asset then entire capital gain is exempt.b) In all other cases exemption is equal to

Long term capital Gain X Cost of new assetNet consideration of capital asset transferred

NOTE: 1) If such new residential house property is transferred with in 3 years from

date of purchase or completion of construction or the assessee purchases a new residential house with 2 years from transfer of original asset or constructs a new residential house with 3 years from transfer of original asset then long term capital gain exempted earlier shall be treated as long term capital Gain in the year of transfer/purchase of new house.

2) The scheme of capital Gain deposit is same as in section 54.3) If the amount deposited in 'Capital Gain Deposit Account' is not utilised

with in 3 years from the date of transfer of original assets then proportionate amount as below shall be treated as long term capital gain:-

Unutilised amount of capital Gain deposit Account

X Original Capital Gain Net Sale consideration

CAPITAL GAIN ON TRANSFER OF ASSETS OF INDUSTRIAL UNDERTAKING FOR SHIFTING FROM URBAN AREA [SEC 54G]: The following conditions must be fulfilled:-a) The capital asset is plant, machinery, land or building or any right in land

or building situated in Urban Area and used for Industrial undertaking.b) The assessee (transferor) may be any person.c) The assessee has transferred above assets due to shifting to any area other



than urban area.d) The assessee has with in one year before or 3 years after date of transfer-i) purchased new plant or machinery; orii) acquired land or building or constructed building; oriii) shifted original assets; or iv) incurred expenses on purposes specified in a scheme framed by Central

Government.AMOUNT OF EXEMPTION: The total amount invested as per point (d) above (upto maximum of Capital Gain) is exemption u/s 54 G.NOTE:1) If such new asset is transferred with in 3 years from the date of acquisition/construction then exemption allowed u/s 54G shall be deducted from cost of acquisition of such new asset2) The scheme of Capital Gain Deposit Account is same as in section 54D.3) The treatment of unutilised amount of capital Gain Deposit Account is same as in section 54D.

CAPITAL GAIN ON TRANSFER OF ASSETS OF INDUSTRIAL UNDERTAKING FOR SHIFTING FROM URBAN AREA TO SPECIAL ECONOMIC ZONE [SEC 54GA]: The following conditions must be fulfilled:-a) The capital asset is plant, machinery, land or building or any right in land

or building situated in Urban Area and used for Industrial undertaking.b) The assessee (transferor) may be any person.c) The assessee has transferred above assets due to shifting to SPECIAL

ECONOMIC ZONE.d) The assessee has with in one year before or 3 years after date of transfer-i) purchased new plant or machinery for industrial undertaking at SEZ; orii) acquired land or building or constructed building for industrial

undertaking at SEZ; oriii) shifted original assets to industrial undertaking at SEZ; or v) incurred expenses on purposes specified in a scheme framed by Central

Government.AMOUNT OF EXEMPTION: The total amount invested as per point (d) above (upto maximum of Capital Gain) is exemption u/s 54 GA.NOTE:1) If such new asset is transferred with in 3 years from the date of acquisition/construction then exemption allowed u/s 54GA shall be deducted from cost of acquisition of such new asset2) The scheme of Capital Gain Deposit Account is same as in section 54D.3) The treatment of unutilised amount of capital Gain Deposit Account is same as in section 54D.

EXTENSION OF TIME LIMIT IN CASE OF COMPULSORY ACQUISITION (SEC 54H): In case of compulsory acquisition the time limit under sections 54, 54B, 54D, 54EC and 54F shall be calculated from dates of receipts of compensation (both initial as well as enhanced).



TAX RATE ON LONG TERM CAPITAL GAIN [SEC 112]: The long term capital gain is charged to tax @ 20%.NOTE: Deductions under chapter VIA are not allowed from long term capital gain. But rebate under section 88 E is allowed from Long term capital gain.

OPTIONS FOR TAX ON LONG TERM CAPITAL GAIN ON LISTED SECURITIES & UNITS: The following conditions must be fulfilled:a) The long term capital asset is listed shares/ securities in any recognised

stock exchange in India or unit of UTI or a mutual fund.b) The assessee may be any person.c) The assessee has two optionsOPTION I

The assessee may take benefit of indexation of cost of acquisition and the tax rate shall be 20%.OPTION II

The assessee may not take benefit of Indexation of cost of acquisition and the tax rate shall be 10%.

The assessee should opt for that option where the tax incidence is lower.

NOTE: With effect from 1st October, 2004 securities transaction tax is applicable if the equity shares or units of equity oriented mutual fund are transferred in a recognised stock exchange in India. In such case long term capital gain on transfer of these assets is exempt from tax u/s 10 (38).

TAX ON SHORT TERM CAPITAL GAIN IN CASE OF EQUITY SHARES AND UNITS OF EQUITY ORIENTED FUND TRANSFERRED ON OR AFTER 01.10.2004[ SEC 111A]: The following conditions must be fulfilled:a) The assessee may be any person;b) Such assessee has short term capital gain from transfer of equity shares and units of equity oriented fund on or after 01.10.2004 through a recognised stock exchange in India or to a mutual fund;c) Such transaction is charged to securities transaction tax.

In such case, such short term capital gain is taxable @ 10% (plus surcharge plus education cess). No deduction under chapter VI A shall be available. However the benefit of NIL slab can be utilised in some cases.

* * * * *

Chapter-7INCOME FROM OTHER SOURCES



As per section 56(1), the following conditions must be satisfied to tax any income under the head ‘Income from other sources':-1. There must be an income;2. Such income is not exempt under the provisions of this Act;3. Such income is not chargeable to tax under any first four heads of income. Thus this head ‘income form other sources’ is residuary head of income.

METHOD OF ACCOUNTING: Income chargeable under this head is calculated according to method of accounting regularly employed by the assessee. The method of accounting may be ‘Cash system’ or ‘mercantile system’. HOWEVER in case of dividends, the method of accounting has no significance as dividends are taxed on certain specified basis.

SPECIFIED INCOMES INCLUDED UNDER ‘INCOME FROM OTHER SOURCES’:-As per section 56 (2), the following incomes are charged to tax under this head:-a) dividends (other than dividend referred to in section 115 O);b) 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;

c) any sum received by the assessee from his employees as contribution to any staff welfare scheme (if not taxable under head 'profits and gains of Business or profession')

d) interest an securities (if not charged to tax under the head ‘profits & gains of business or profession);

e) income from machinery, plant or furniture let out on hire (if not charged to tax under head profits & gains of business or profession);

f) income from letting of plant, machinery or furniture along with building and letting of building is inseparable from letting of plant, machinery or furniture (if not charged to tax under head ‘profits & gains of business or profession').

g) any sum received under a key man insurance policy including bonus (if not taxed as salary or business income).

h) where any sum of money exceeding Rs.25000 is received without consideration by an individual or a Hindu Undivided Family from any person after 31.08.2004, the whole of such sum.

OTHER INCOMES NORMALLY INCLUDED UNDER HEAD INCOME FROM OTHER SOURCES:- The following incomes are also chargeable under this head :-a) Income from sub-letting of a house property by a tenant; b) Interest on bank deposit and deposit with companies; c) Interest on loans;d) Income from royalty (if not charged to tax under head ‘profits & gains of

business or profession');e) Director’s fee; f) Director’s commission for standing guarantor to bankers;g) Director’s commission for underwriting shares of new company;



h) Ground rent of the plot;i) Agricultural income from a place out side India;j) Examination fees received by a teacher from a person other than

employer;k) Insurance commission received by agent;l) Mining rent and royalties;m) Casual income;n) Annuity received as per will, contract or trust deed (excluding annuity

payable by employer which is charged to tax under the head ‘Salaries’);o) salary received by a member of parliament;p) interest on securities issued by foreign government; q) family pension received by family members of a deceased employee; r) interest on employee’s contribution to unrecognized provident fund (at

the time of retirement or leaving the job etc.).s) income from undisclosed sources; t) gratuity paid to a director who is not employee of the company;u) income form racing establishment;v) compensation received for use of a business asset; w) annuity received by lender of trade mark; x) income form granting grazing rights;y) interest received on refund of income tax. NOTE: - 1. The Supreme Court has held that interest received by the assessee from bank on a fixed deposit is income in the hands of the assessee and there could be no deduction there from unless there is a law permitting such deduction. The interest on loan taken by the assessee on the security of fixed deposits did not go to reduce the income by way of interest on the Fixed Deposits as there was no provision for deduction of such interest on loan. 2. The 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 the ground that it would go to reduce interest liability on borrowed amount which could be capitalised.

TAXABILITY OF DIVIDEND [SECTION 56 (2) (i)]:-Dividends can be of three types:-a) Dividends declared by a domestic company;b) Dividends or any other income distributed by unit trust of India ;c) Dividends declared by a foreign company. Any amount declared distributed or paid by a domestic company by way of dividends as per section 115 O (interim or final) on or after 01.04.2003 (whether out of current or accumulated profits) shall be exempt in the hands of shareholders. Similarly income received (other than Capital Gain on transfer of such units) in respect of units from the Administrator of the specified undertaking or the specified company or a Mutual Fund specified under section 10(23D) shall be



exempt.Dividend from a Foreign Company or deemed dividend shall be TAXABLE under the head ‘Income from other sources’.NOTE: 1. The dividend from a Domestic Company which is exempt under section 10(34) includes deemed dividend but shall not include deemed dividend under section 2(22) (e), i.e. loan or advance given by a closely held company to a specified shareholder or concern.2. Since dividends from a domestic company is exempt, no deduction of any expense shall be allowed for such dividends from other taxable incomes under head ‘income from other sources.3. The domestic company is liable to pay corporate dividend tax on such dividend @ 12.5% plus surcharge @ 10% plus education cess @ 2%.

DIVIDEND-MEANING THERE OF: - Dividend in its common parlance means any sum paid to or received by a shareholder proportionate to his shareholding in a company out of the total sum distributed. As per section 2 (22), dividend includes the following disbursements by the company to the shareholders, to the extent of accumulated profits. a) Any distribution by a company to the extent of accumulated profits involving the release of the assets of the company [Section2 (22) (a)]:- Any distribution by a company to the extent of accumulated profit whether capitalised or not, if such a distribution entails the release by a company to its shareholders of all or any part of the assets of the company.

However only capitalization of accumulated profits by issue of bonus shares to equity shareholders does not entail the release of assets of the company and hence shall not be deemed as dividend.Two conditions are essential for treating a distribution as deemed dividend: i) the company should possess accumulated profit;ii) such accumulated profits are distributed in cash or in kind. Where the distribution is in kind, the market value of the asset (and not the book value) shall be deemed dividend in the hands of shareholders. NOTE:- The provisions of section 2(22) (a) are not attracted in case where a company merges into another company is scheme of amalgamation. b) Distribution of debentures/deposit certificates to shareholders and bonus shares to preference shares [section 2 (22) (b)]:-i) Any distribution to shareholders (equity or preference) by a company of debentures, debenture stock or deposit it certificates in any form, with or without interest to the extent of accumulated profit whether capitalised or not; and ii) any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profit, whether capitalized or not. c) Distribution to shareholders on liquidation of the company [section

2(22) (c)]:- Any distribution made to the shareholder of a company on its liquidation, to the extent to which the distribution is attributable to the



accumulated profits of the company immediately before its liquidation whether capitalized or not.

NOTE:-The provisions of section 2(22) (c) are not attracted in case where a company merges into another company in a scheme of amalgamation.

d) Distribution on reduction of share capital [sec. 2(22) (d)]:- Any distribution to its shareholders by a company on reduction of its capital to the extent of accumulated profits of the company immediately before date of resolution permitting reduction of capital, whether capitalized or not. NOTE:- Under sub clause (c) and (d) above, deemed dividend shall not include

any distribution to shareholders on liquidation or reduction of capital of the company:a) in respect of any shares issued for full cash consideration, where the holder of the share is not entitled, in the event of liquidation to participate in the surplus assets. b) in so far as such distribution is attributable to capitalized profits of the company representing bonus shares allotted to equity shareholders in previous year 1964-65.

e) Loans /advances to certain shareholders/concerns [sec. 2(22) (e)]:- Any payment by a company, (other than a company in which the public is substantially interested), of any sum (whether representing a part of assets of the company or otherwise) by way of advance or loan to the extent of accumulated profits (excluding capitalized profits) to:-

i) an equity shareholder who is beneficial owner of shares holding not less than 10% of voting power; or

ii) any concern in which such shareholder (holding not less than 10% voting power) is a member /partner and has substantial interest (holding not less then 20% voting power/profit) in that concern.

iii) any person on behalf, or for the individual benefits, of any such shareholders (holding not less than 10% voting power).

Dividend does not include the following:(a) any advance or loan to a shareholder or such concern by a company in

ORDINARY COURSE OF BUSINESS, where lending of money is substantial part of business of the company.

(b) Any dividend paid by a company which is set off by the company against the whole or any part of loan or advance previously paid by it and which has been treated as deemed dividend under section 2 (22) (e).

(c) Any distribution to shareholders on liquidation or reduction of capital of the company under clause (c) or (d) of section 2(22) in respect of any shares issued for full cash consideration, where the holder of the share is not entitled, in the event of liquidation to participate in the surplus assets

(d) Any payment made by a company on purchase of its own shares from a shareholder in accordance with provision of section 77A of the Companies Act 1956.

(e) Any distribution of shares pursuant to demerger by resulting company to the shareholders of demerged company.



BASIS OF CHARGE OF DIVIDEND [SECTION 8]:- Method of accounting does not affect the basis of charge dividend income. Different types of dividends are taxable as follows:-a) Normal Dividend: - Dividend declared at annual general meeting is

income of previous year in which it is declared.b) Deemed Dividend: - Notional dividend under section 2(22) is treated as

income of previous year in which it is paid. c) Interim Dividend: - Interim dividend is deemed to be income of previous

year in which the amount of such dividend is unconditionally made available by the company to its shareholders (i.e. date of issue of dividend warrant).

PLACE OF ACCRUAL [SECTION 9(1) (iv)]:- Dividend paid by Indian company is deemed to accrue or arise in India. GROSSING UP OF DIVIDEND: - Dividend is taxable in the hands of a person whose name appear in the register of members and is taxed on gross amount where gross amount is calculated as: = Net Dividend x 100

(100-rate of T.D.S.) DEDUCTIONS FOR EXPENSES FROM DIVIDEND INCOME [SECTION 57(i) & 57 (iii)]:- The following expenses are allowed as deduction from dividend income:-a) Collection charges: - Any reasonable sum paid by way of commission or

remuneration to bank or any other person for the purpose of realizing the dividend.

b) Interest on loan: - Interest on money borrowed for purchasing the shares can be claimed as deduction. The interest can be claimed even if no income is earned as dividend on such shares.

Note:-If interest is payable outside India, it shall be allowed as deduction only if tax has been deducted at source.

c) Any other expenditure: - Any other expenditure wholly and exclusively for earning such income can be claimed as deduction. For example legal and traveling expenses incurred for protecting dividend income would be deductible.

NOTE:- 1. Dividend is chargeable to tax even if the company has declared dividend out of exempted income.

2. The shareholder is liable to pay tax on entire dividend income whether or not he was shareholder for entire period for which dividend is declared.

WINNING FROM LOTTERIES, CROSSWORD PUZZLES, HORSE RACES AND CARD GAMES [SEC 56(2)(ib)] :- Any winning from lotteries, crossword puzzles, races including, horse races, card games and other games of any sort, gambling or betting of any form or nature whatsoever are taxable under the head income from other sources. NOTE:-1. No deduction in respect of any expenditure in connection with such income shall be allowed. 2.. Winnings from lottery does not include amount foregone in favour of



government agency conducting lotteries. 3. Income of agent/ trader in respect of prize on unsold/unclaimed lottery tickets

in possession of agent/trader is business income. GROSSING UP OF LOTTERY INCOME ETC.:- The tax is to be deducted from income from winning from lotteries, horse races and crossword puzzles. The net winning is to be grossed as follows:- (Net winning from lotteries/horse races/Crossword puzzles)X 100

(100-rate of T.D.S.)

NOTE:- 1. No T.D.S. is deducted at source of income from lottery/crossword puzzles does not exceed Rs. 5,000 ( in case of horse race income this amount is Rs. 2,500).2.The rate of T.D.S. is 30% plus surcharge (if applicable) plus education cess @ 2%.RATE OF TAX ON WINNINGS FROM LOTTERIES ETC. (SEC.115BB):-This income is taxable @30% plus surcharge (if applicable) plus education cess @ 2% on gross winnings. NOTE:-1. No deduction under sections 80C to 80U is allowed from such income.

INTEREST ON SECURITIES [SEC. 56(2) (id)]:- The securities refer to debt which is secured. The securities may be divided into four categories:-

a) securities issued by Central/State Government;b) debentures/bonds issued by local authority;c) debentures/bonds issued by companies;d) debentures/bonds issued by a corporation established by a central, State or Provincial Act. (i.e. statutory corporations).CHARGEABILITY OF INTEREST ON SECURITIES: - Interest securities is charged on cash basis or due basis as the books of accounts are maintained. But in case, no system of accounting is followed then it shall be taxable on due basis. DUE DATE OF INTEREST:-Interest as securities does not accrue every day as per period of holding of security. It becomes due on dates specified on securities. The person who is registered owner of the security on the due date shall be entitled to receive interest for the period irrespective of his period of holding.INTEREST ON SECURITIES EXEMPT FROM TAX [SEC.10 (15)]:- Interest on following securities is exempt from tax:-a) 12 year national saving annuity certificates; national defence gold bonds

1980; special bearer bonds 1991; treasury deposit (saving) certificate; P.O. cash certificates (5 years); National plan certificates (10 years / 12 Years); P.O. national saving certificates (12 years / 7 years); P.O. saving bank account; public account of post office saving account rules (interest upto Rs. 5000); P.O. cumulative time deposit; special deposit scheme 1981; and Non-resident (Non-repartriable) rupee deposit scheme.

b) Interest on 7% capital investment bonds (for individual and H.U.F.).c) Interest on 9% relief bonds (for individual and H.U.F.).d) Interest on notified bonds/ debentures of public sector company.



e) Interest received by non-resident Indian from notified bonds purchased in foreign currency.

f) Interest on deposits made by a retired government or public sector employee out of money due to him on retirement in such scheme for a lock in period of three years.

g) Interest on securities held by the welfare commissioner, Bhopal gas victim, Bhopal.

h) Interest a gold deposit bonds, 1999. i) Interest on notified bonds issued by a local authority. GROSSING UP OF INTEREST:- Gross interest on securities is chargeable to tax. If net interest (after deducting T.D.S.) in given then it has to be grossed up. In case of government securities, no grossing up is required as there is no T.D.S. however in case of following securities grossing up is required :-i) tax free non-government securities.ii) less tax non-government securities.

100(100- rate of TDS)

The rates of T.D.S. are as under :-a) In case of listed non-government securities – 10% plus surcharge (if

applicable) plus education cess @ 2%.b) In case of unlisted Non-government securities -20% plus surcharge. (if

applicable) plus education cess @ 2%. DEDUCTIONS FOR EXPENSES FROM INTEREST ON SECURITIES:-The deductions for interest on securities are same as in case of dividend.

AVOIDANCE OF TAX [SEC. 94]:- If an assessee tries to avoid tax on interest on securities, he will be taxed as per section 94(1) and 94(2) as follows:-Bond washing Transaction [sec. 94(1)]:- If the owner of any securities sells/transfers any securities and buys back or re-acquires the same or similar securities and if the interest on such securities is receivable by any other person, such interest shall be deemed to be income of transferor and not of the transferee.Sale-Cum interest [sec. 94 (2)]:- If an assessee having beneficial interest in securities during the previous year, sells them in such a way that either no income is received or income received is less than the sum he would have received if interest had accrued from day to day, then income from such securities for such year shall be income of transferor and not of the transferee. NOTE:-The above provisions under section 94(1) or 94(2) are not applicable if the owner proves that:-a) There has been no avoidance of income tax; or b) The avoidance of income tax was EXCEPTIONAL and NOT

SYSTEMATIC and that there was no avoidance of income tax by such a transaction in any of three preceding years.

LOSS FROM PURCHASE AND SALE OF SECURITIES NOT ALLOWED U/S 94(7):


Gross interest = Net interest X


Where –a) any person buys or acquires any security or unit with in a period of 3 months before the record date;

b) such person sells or transfers such securities with in a period of 3 months after such record date; OR sells or transfers such units with in a period of 9 months after such record date;

c) the dividend or income on such securities or unit is exempt from tax;then, the loss, if any, arising to him on account of such purchase and sale of securities or unit (subject to maximum of dividend or income received/ receivable) shall be ignored for computing his income chargeable to tax.BONUS STRIPPING U/S 94(8): Where –a) any person buys or acquires any unit with in a period of 3 months before the record date;

b) such person is allotted or is entitled to additional units on the basis of such units acquired with making any payment;c) such person sells or transfers such units (while continuing to hold all or any of additional units) with in a period of 9 months after such record date;

then, the loss, if any, arising to him on account of such purchase and sale of units shall be ignored for computing his income chargeable to tax.Further, the amount of loss so ignored shall be deemed to be the cost of acquisition of such additional units as are held by him on the date of such sale or transfer.

INCOME FROM LETTING OUT MACHINERY, PLANT OR FURNITURE [SEC. 56(2) (ii)]:- Income from machinery, plant or furniture belonging to the assessee and let on hire is taxable as income from other sources if the same is not taxable under the head’ Profits and gain of business or profession’.

INCOME FROM LETTING OF BUILDING WITH MACHINERY, PLANT OR FURNITURE [SEC. 56(2) (iii)]:- If letting of building is inseparable from letting of machinery, plant or furniture then income from such letting is taxable under the head ‘income from other sources’ if the same is not taxable under head ‘profits and gains of business or profession’. DEDUCTIONS ALLOWED FOR LETTING OF MACHINERY, PLANT OR FURNITURE WITH/WITHOUT BUILDING [SEC. 57 (ii) and (iii)]:- The following deductions are allowed:-a) Current repairs to the premises owned [as per section 30 (a) (ii)].b) Insurance premium of the premises owned [as per sec. 30 (c)].c) Repair and insurance of machinery, plant or furniture [as per section 31].d) Depreciation [as per section 32].e) Any other revenue expenditure [as per section 37].

INCOME TO INCLUDE GIFT OF MONEY FROM UNRELATED PERSONS ON OR AFTER 01.09.2004 [SEC. 56 (2) (v)]: The following conditions must be fulfilled:

a) The assessee is an Individual or Hindu Undivided Family (may be resident or non-resident);



b) Such assessee has received any sum of money exceeding Rs.25000 without consideration on or after 01.09.2004;

c) The sum so received does not fall in the exception list.If all of the above conditions are fulfilled then whole of such sum received will be taxable in the hands of the assessee under head ‘Income from other sources’.

EXCEPTION LIST: Amounts received under following circumstances are not treated as income: a) Sum of money received from a relative; or

b) Sum of money received on occasion of marriage of the individual; orc) Sum of money received under a will or by way of inheritance; ord) Sum of money received in contemplation of death of the payer.

RELATIVE: It covers: 1) spouse of the individual;2) brother or sister of the Individual;3) brother or sister of the spouse of the Individual;4) brother or sister of either of the parents of the Individual;5) any lineal ascendant or descendant of the individual;6) any lineal ascendant or descendant of the spouse of the individual;7) spouse of a person referred to in points 2 to 6 above.

FAMILY PENSION RECEIVED BY LEGAL HEIRS OF DECEASED EMPLOYEE: - The family pension received by legal heirs of deceased employee is taxable under head income from other sources. From this family pension standard deduction @33⅓% of such pension or Rs. 15,000 w.e. is less is allowed under section 57 (iia).

EMPLOYEES CONTRIBUTION TO STAFF WELFARE FUND (SEC 56(2) (ic)]:- Employee’s contribution to staff welfare schemes is taxable under this head if it is not taxable under head ‘profit and gains of business or profession’. If such sum is deposited by the assessee in the relevant fund account on or before due dates then such sum shall be allowed as deduction under section 57 (ia).

ANY OTHER INCOME TAXABLE UNDER THIS HEAD: - If there is any income taxable under this head (other than those discussed above) then deduction will be allowed for any revenue expenditure (as per section 37).

AMOUNTS NOT DEDUCTIBLE FROM INCOME FROM OTHER SOURCES [SEC. 58]:- The following amounts are not deductible:- a) Personal expenses of the assessee.b) Interest paid outside India on which tax has not been deducted at source. c) Salaries paid outside India on which tax has not been deducted at source. d) Any expenditure referred to in section 40 A. like excess payment to

relatives, cash payment in excess of Rs. 20,000. e) Income tax/wealth tax paid.f) Expenses incurred for earning casual income. However the expenses on

owing and maintaining race horses shall be allowed as deduction.



DEEMED INCOME CHARGEABLE TO TAX [SEC. 59]:- The section 59 has same provisions as per section 41 (1). Accordingly where any deduction/allowance is allowed in any year under this head and is recovered later on, then such amount recovered shall be taxable in the year of recovery under head ‘Income form other sources'.

* * * * *

CHAPTER 8

CLUBBING OF INCOME

Generally, an assessee is taxed in respect of his own income. But there are cases where the assessee makes an attempt to reduce his tax bill by transferring his asset to family member or by arranging his sources of income in such a manner that tax incidence falls on other but benefit of income is derived by him directly or indirectly. So the provisions under section 60 to 64 are provided to counteract these practices of tax avoidance which are as following:(a) Income of other persons included in an assessee's total Income (Sec 60 to63); or (b) Income of other persons included in the Individual’s Total Income (Sec 64).

(A) INCOME OF OTHER PERSONS INCLUDED IN THE ASSESSEE'S TOTAL INCOME

(1) Transfer of Income where there is no transfer of



Assets (Sec.60): Where there is transfer of an income by a person to another person, without the transfer of the asset from which the income arises, such income shall be included in the total Income of the transferor.(2) Revocable Transfer of Assets (Sec .61): Where there is revocable transfer of assets by a person to another person, any income arisen/derived from such assets shall be included in the total income of the transferor. Revocable transfer of asset-Meaning (Sec. 63): A transfer of asset is revocable if-a) it contains any provision re-transfer (directly or indirectly) of the whole or any part of income or asset to the transferor during the life of beneficiary or transferee as the case may be; or (b) it gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets during the life time of the beneficiary or the transferee as the case may be.NON-APPLICATION OF SEC 61 (SEC.62): In the following cases the provision of sec 61 shall not apply: (a) In case of transfer by way of trust, the transfer is not revocable during

the life time of the beneficiary. (b) In case of any other transfer, the transfer is not revocable during the

life time of the transferee; (c) In case the transfer is made before 01-04-1961, the transfer is not

revocable for a period exceeding 6 years. These provisions of exception to section 61 are applicable if the transferor derives NO DIRECT OR INDIRECT BENEFIT FROM SUCH INCOME.

(B) INCOME OF OTHER PERSONS INCLUDED ONLY IN INDIVIDUAL'S TOTAL INCOME(1) REMUNERATION OF SPOUSE FROM A CONCERN IN WHICH OTHER SPOUSE HAS SUBSTANTIAL INTEREST (SEC: 64 (1) (ii)): Any remuneration (Salary, Commission, fees or any other form of remuneration) derived by a spouse from a concern in which the other spouse has a substantial interest shall be clubbed in the hands of the spouse who has a substantial interest in that concern. However, remuneration which is solely attributable to the application of technical or professional knowledge and experience of the spouse shall not be clubbed. NOTE :(1) Substantial Interest means if the assessee (individually along with his relatives) beneficially holds at least 20% of voting power in a company or at least 20% of profits in a concern company at any time during the previous year.(2) Relatives means husband, wife, brother, sister or any lineal ascendant/

descendant of that individual(3) Where both the husband and wife have a substantial interest in the

concern and both receive the remuneration from such concern, the remuneration shall be included in total income of husband or wife whose total income, excluding such remuneration, is greater. Once the income is



included in total income of other spouse it shall be clubbed as such in subsequent years unless the assessing officer is satisfied that it is necessary to do so.

(2) Income from assets transferred to the spouse (Sec 64 (i)(iv)) : Any income arising directly or indirectly to the spouse of such individual from assets (other than house property) transferred directly or indirectly to the spouse of such individual otherwise than for adequate consideration or in connection with agreement to live apart shall be included in the income of such individual.

NOTE :1. This provision is not applicable to house property as in that case individual is deemed owner of such house property.2. The income from transferred assets shall not be clubbed if: (a) the transfer is for adequate consideration; or (b) the transfer is to live apart (as agreed), or (c ) the relationship of husband and wife does not exist, either at the time of transfer of such asset or at the time of accrual of income.(3) If any property is acquired by the wife out of an allowance given by her

husband for her personal exp (i. e. pin money) then the above provision of clubbing shall not apply.

(4) If the asset transferred as above has changed shape and identification then the income from such changed asset shall also be clubbed.

3. INCOME FROM ASSETS TRANSFERED TO SON'S WIFE (SEC .64 (i) (vi)) : Any income which arises from assets transferred directly or indirectly by an individual to his son's wife after 01-06-1973, otherwise than for adequate consideration, shall be included in the income of the transferor. NOTE : If the asset transferred directly or indirectly an individual to his spouse or son's wife are invested by such transferee :-(i) in a firm as capital as capital contribution of partner, them amount to be clubbed in transferor's hand is : Interest on capital from firm X

Amount invested by transferee out of assets transferred with out adequate consideration on first day of previous year

--------------------------------------------------------------------------------- Total investment by the transferee as on first day of previous year.

ii) in any business (except as point (i) above), then the income to be included in the hands of transferor is : Income of from Business

XAmount invested by transferee out of assets transferred with out adequate consideration on first day of previous year



-----------------------------------------------------------------------------------------------Total investment by the transferee as on first day of previous year.

4. INCOME FROM ASSETS TRANSFERRED TO ANY PERSON FOR BENEFIT OF SPOUSE (SEC. 64 (i) (vii)) : Where an asset is transferred by the individual to some other person or Association of persons, without adequate consideration, for the benefit of the spouse of such individual (as well as for other persons), income on such asset to the extent of benefit accruing to the spouse shall be included in total in come of such individual. 5. INCOME FROM ASSETS TRANSFERRED TO ANY PERSON FOR BENEFIT OF SON'S WIFE (SEC. 64 (i) (viii)) : Where an individual transfers any assets after 01.06.1973 to any person or association of persons otherwise then for adequate consideration for the benefit of son's wife (as well as other persons), in come from such asset to the extent of benefit accruing to the son's wife shall be included in total income of such individual.6. INCOME OF MINOR CHILD (SEC-64 (IA)) : All income arising or accruing to the minor child shall be clubbed in the income of that parent whose total income excluding income of minor child is greater. Where, however, the marriage of the parents does not subsist, the income of minor child will be included in the income of that parent who maintains the child in the previous year.NOTE :1. The clubbing is not done if minor child is suffering from disabilities specified under section 80 U or minor child earns in come from his skill, talent or manual labour.2. The income arising to minor married daughter is clubbed. 3. There is exemption upto Rs 1500 per minor child under section 10(32). (7) INCOME FROM SELF ACQUIRED PROPERTY CONVERTED TO PROPERTY OF H.U.F. (SEC.64 (2)) : Where an individual after 31.12.1969 (a) converts his separate property as property of H. U. F; or (b) throws the property into common stock o the family; or (c) transfers his individual property to the family; otherwise than for adequate consideration then the income from such property shall continue to be included in the total income of the individual.

If such property has been subject matter of partition either (another partial or total) among the members of the family, the income from such converted property as received by the spouse on partition shall be deemed to arise to the transferor.NOTE : 1. Income is to be clubbed as per above provision but income on in come can not be clubbed in the hands of transferor.2. Clubbing of Income means clubbing of loss also.

* * * * *



CHAPTER 9

SET OFF OR CARRY FORWARD & SET OFF OF LOSSES

Income tax is charged on total Income of a person during the previous year. Such person may have income under 'FIVE' different heads of Income. He may have income from different sources but under same head of Income. There may be cases where 'NET INCOME' from a particular source or head of Income may be a Loss. This loss may be set off against other sources or head as per provisions given under section 70 to 80 of Income Act.

This process can be covered in following three steps:(a) STEPI : 1 Inter source adjustment under same head of Income (b) STEPI : 2. Inter head adjustment in the same assessment year. (c) STEPI : 3. Carry forward of a loss and set off in next assessment year (s).

(A) INTER-SOURCE ADJUSTMENT (SEC. 70) : If net result for any assessment year in respect of any source under any head of income is a loss, then the assessee is entitled to have the amount of such loss set off against his income from any other source under SAME HEAD OF INCOME. This may also be called INTRA HEAD ADJUST MENT. But there are certain EXCEPTIONS as follows:(a) Loss from speculation Business: Loss from speculation Business can be

set off only against profit from speculation business. (b) Long Term Capital Loss: From assessment year 2003-04, long term

Capital Loss can be set off only from long term Capital Gain.(c) Loss from business of owning and maintaining race horses: Loss

incurred in the business of owning and maintaining race horses. Can be set off only from profits from business of owing and maintaining race horses.

(d) Loss cannot be set off from winnings from lotteries: No loss can be set off from winnings from lotteries, crossword puzzles etc.

NOTE:(1) Inter source adjustment can be made even in case of clubbing of Income

under section 64.(2) If income from particular source is EXEMPT then loss from such

source cannot be set off against income chargeable to tax.

(B) INTER HEAD ADJUSTMENT (SEC. 71) : If net result of computation made for any assessment year in respect of any head of income is Loss, then the same can be set off against income from other heads. But there are certain EXCEPTIONS as follows: (a) Loss from speculation Business: Loss from speculation Business cannot be adjusted from any income under other head (It can be adjusted only



from profit from speculation Business). (b) Loss under head Capital Gains: Loss under head 'Capital gains' cannot be adjusted from any income under other head. (Long term capital Loss can be adjusted from long term capital gains. Short term capital Loss can be adjusted from Long term as well as short term capital gain). (c) Loss from business of owning and maintaining race horses: Loss from business of owning and maintaining race horses cannot be adjusted from any income under other head. (It can be adjusted only from profit from business of owning and maintaining race houses).(d) Loss cannot be set off from wining from lotteries etc: No loss under any head can be adjusted from lotteries, crossword puzzles etc.(e) Business or Profession Loss cannot be set off against Salary Income: With effect from A.Y. 2005-06, loss from business or profession cannot be set off against income under head ‘Salaries’.NOTE :(1) Before making inter head adjustment, the assessee must make inter-source adjustment. (2) As No order of priority is given in the Act, the assessee should

try to first set off those losses which cannot be carried forward next year.

(C) CARRY FORWARD AND SET OFF OF LOSSES: If a Loss cannot be set off under same head or under different head (s) in the same assessment year. Then such loss can be carried forward and set off against income of subsequent assessment year (s). ONLY FOLLOWING LOSSES CAN BE CARRIED FORWARD:(a) House Property Loss (from assessment year 1999-2000);(b) Business Loss (Speculative or Non-speculative);(c) Capital Loss (Short term or Long term);(d) Loss from owing and maintaining race horses.

NOTE: Such losses can be carried forward only if loss has been determined by the Assessing officer from a return of loss submitted by the Assessee on or before due date of filing the return under section 139 (1). But Loss under head House property' and Unabsorbed depreciation can be carried forward return even if return of Loss is not submitted on or before due date.

CARRY FORWARD AND SET OFF OF LOSS FROM HOUSE PROPERTY (SEC.71 B) : A Loss under the head house property, if could not be set off in the same assessment year from other heads of income, will be allowed to be carried forward for EIGHT assessment years and set off from income from house property. But such loss must belong to assessment year 1999-2000 or afterwards.CARRY FORWARD AND SET OFF OF BUSINESS LOSS OTHER THAN SPECULATION LOSS (SEC-72): The right of carry forward and set off of loss arising from a business or profession is subject to following restrictions:1. Loss can be set off only against Business Income:



A loss can be carried forward and set off against the profits of any business or profession in a subsequent year (not necessarily same business/profession in which loss has been incurred). For this purpose, business profit would include profit derived from business activity but assessable under head other then 'Profits and Gains of business or profession. Example: Dividend Income from shares held as stock in trade.

2. Losses can be carried forward by the person who incurred the loss: The loss can be carried forward and set off against the profits of the assessee who incurred the loss. However, this rule has following exceptions :

(a) Accumulated business loss of an amalgamating company (under section 72 A);(b) Accumulated business loss of a demerged company ; (c) Accumulated business loss of a proprietary concern or a firm when its

business is taken over by a company by satisfying condition of section 47(xii)/(xiv);

(d) Loss of business acquired by inheritance. (3) Loss can be carried forward for EIGHT years: The Loss cannot be

carried forward for more than eight years. But the following can be carried forward for indefinite period as these are not Business Losses as per Income Tax Law:

Unabsorbed Depreciation; Unabsorbed capital expenditure on Scientific Research; Unabsorbed expenditure on family Planning.(4) Return of Loss should be submitted in time: The return of loss should

be submitted on or before due date under section 139 (1) for carrying forward business loss.

(5) Continuity of Business is not necessary: From assessment year 2000-01, the Loss from a particular business or profession can be carried forward even if such particular business is discontinued.

(6) Order of set off: The order of set off from profits from business is as follows:(a) Current year Depreciation ;(b) Current year capital exp-on Scientific research and current year

expenditure on family Planning' (c) Brought forward Business/ Profession Loss;(d) Unabsorbed Depreciation;(e) Unabsorbed capital Exp on scientific Research;(f) Unabsorbed expenditure on family planning. CARRY FORWARD AND SET OFF OF SPECULATIVE BUSINESS LOSS(SEC-73):- If a speculative business loss could not be set off from income from another speculation business in the same assessment year then it is allowed to be carried forward and set off in subsequent assessment year from income of speculation business only. Such loss can be carried forward for four Assessment



years (EIGHT Assessment years till previous year 2004-05) immediately succeeding the assessment year in which the loss was first computed. It is not necessary that same speculative business must continue in the year of set off of loss. But filing of return on or before due date is necessary for carry forward of such loss.

NOTE :1. The loss from Illegal /Banned speculative business cannot be carried

forward to subsequent year.2. In case of a company (other than investment company and a company

involved in Banking or granting loans / advances) the business of purchase and sale of shares (with actual delivery or not) shall be treated as speculative loss.

CARRY FORWARD AND SET OFF OF CAPITAL LOSS (SEC. 74 ) :- Where in respect of any assessment year the net result of the

computation under the head capital gains is a loss, the loss shall be carried forward to the following assessment year and set off from income under head 'Capital gains' Such loss can be carried forward for EIGHT assessment years immediately succeeding the assessment year in which the loss was first computed. But filing of return on or before due date is necessary for carry forward of such loss.

NOTE : From Assessment year 2003-04, long term capital loss can be set off only from long term capital Gains. But short term capital loss can be set off against short term as well as long term capital Gains.

CARRY FORWARD AND SET OFF OF LOSS FROM BUSINESS OF OWNING AND MAINTAINING RACE HORSES (SEC 74A):-

If any loss from business of owning and maintaining race horses could not be set off in the same assessment year, then it shall be carried forward and set off only from income from owning and maintaining race horses in subsequent assessment years. Such loss can be carried forward for a maximum of FOUR Assessment years immediately succeeding the assessment year in which the loss was first computed. Such loss can be carried forward only if the activity of owning and maintaining race horses is carried on by the assessee in the previous year. Filing of return on or before due date is necessary for carry forward of such loss.NOTE :1) The losses which are eligible to be carried forward must be set off from income of immediately succeeding year and if there is any balance still to be set off, it should be set off in immediately next succeeding year(S) with in the time allowed. 2) Where any person carrying on any business/profession has been

succeeded in such capacity by another person OTHERWISE THAN BY INHERITANCE, then such other person is not entitled to carry forward and



set off such loss against his income. But if there is succession of firm by a company as per section 47(xiii), the carry forward and set off of loss is allowed to such company.

3) The profits of a partnership firm are shared by partners and are exempt in the hands of partners but losses of a firm are not shared among partners. The firm can only set off and carry forward and set off its own losses (not the partners). If there is change in constitution of a firm, the firm shall not be entitled to carry forward and set off so much of the loss proportionate to the share of retired /deceased partner as exceeds his share of profits, if any in the firm in respect of previous year.

* * * * *

CHAPTER 10DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME

The aggregate of income computed under each of five heads after giving effect to provisions for clubbing of incomes and set off losses is called ‘GROSS TOTAL INCOME. From G.T.I. certain deductions are made under sections 80 C to 80U to find out ‘TOTAL INCOME’. However these deductions are not allowed from



following incomes although these incomes are part of ‘gross total income’:-a) Long term capital gain;b) Short term capital gain on transfer of equity shares and units of equity

oriented fund on or after 01.10.2004 through a recognised stock exchange under section 111 A;

c) Winning from lotteries, races etc.; d) Income referred to in section 115A, 115AB, 115AC, 115ACA, 115AD,

115BBA and 115D. These deductions are of two types:-a) Deductions on certain payments and investments (from section 80C to

80GGC). b) Deductions on certain incomes included in G.T.I. (from section 80-IA to 80U).

BASIC RULES OF DEDUCTIONS:-1. The deduction from section 80C to 80U cannot exceed the gross

total income (exclusive of long term capital gain, winning from lotteries etc. and incomes referred to in sections 115A to 115AD, 115BBA and 115D) of the assessee.

2. The deduction should be claimed by the assessee. 3. The burden is on the assessee to prove that his case falls within

particular provision claimed by him. 4. Where, in computing the total income of an A.O.P./B.O.I. any

deduction allowed under this chapter, then deduction for same cannot be allowed to the members of AOP/BOI.

DEDUCTIONS FOR CERTAIN PAYMENTS DEDUCTION UNDER SECTION 80 C: This Deduction from Gross Total Income is allowed to Individual and H.U.F. only. The deduction can be calculated in following manner:- Step 1.:- Calculate Gross qualifying amount. Step 2.:- Calculate Net qualifying amount.Step 3.:- Calculate amount of deduction U/S 80 C.STEP 1. GROSS QUALIFYING AMOUNT: Find the aggregate of the following:

1. Life insurance paid (up to maximum of 20% of sum assured) by individual to effect/keep in force an insurance on his life of spouse or any child. In case of HUF, premium paid (up to maximum of 20% of sum assured) must be on life of any member of the family.

2. Any payment by individual for non-commutable deferred annuity (except as per point 10 below).

3. Any sum deducted from salary payable by or on behalf of Government to an individual for securing him a deferred annuity OR making provision for his spouse or children. The sum deducted should not be more than 20% of salary.

4. Employee’s contribution to RPF or SPF (other than repayment of loan). 5. Contribution to 15-year PPF account (other than repayment of loan).



6. Employee’s contribution to approved superannuation fund. 7. Subscription to National Saving Scheme 1992 (discontinued with effect

from 1.11.2002).8. Subscription to National Saving Certificates. Interest accrued on these

NSC’s also qualifies for first five years. 9. Contribution to unit link insurance plan of UTI and LIC mutual fund ( i.e.

ULIP and Dhanraksha).10. Payment made to effect or keep in force notified annual plan of LIC or any

other insurer (e.g. New Jeevan Dhara, New Jeewan Akshay etc.).11. Subscription to notified units i.e. Equity Linked Saving Schemes of UTI and

approved mutual fund. 12. Contribution by Individual to a notified pension fund set up by UTI or

approved mutual fund. 13. Any sum paid ( including interest) to home loan account scheme of

national housing Bank or contribution to notified pension fund set up by the national housing Bank.

14. Any sum paid as subscription to scheme of :-a) A public sector company which is engaged in providing long termfinance for construction or purchase of houses in India for residential purposes; ORb) Any authority constituted in India by as under any law enactedeither for purpose of dealing with and satisfying the need for housing orfor the purpose of planning development or improvement of cities/villagesor both.

15. Any payment made towards cost of purchase/construction of a new residential house property. This amount does not include interest on loan or cost of addition / renovation/repair of property. But this includes stamp duty and other expenses for purchase of such property. The Loan must be taken from Government, Bank, Co-op. Bank, LIC, National Housing Bank, assessee’s employer being Public Company/ Public Sector Company/ University/ Co-op. Society/ Authority or Board or Corporation established/ considered under a Central or State Act.

16. Any sum paid by an Individual as Tuition Fees (not being development fees/ donation/ payment of similar nature) to any university/ college/ educational institution in India for full time education of his children for a maximum of two children.

17. Amount invested in shares / debentures of a public company engaged in infrastructure (including power sector) or units of mutual funds the proceeds of which are utilised for development and maintenance of infrastructure.

18. Any sum deposited in a term deposit with a scheduled bank for a period not less than 5 years in accordance with the scheme framed and notified by the Central Government.

19. Subscription to notified bonds of NABARD.20. Any sum deposited in an account under Senior Citizen Saving Scheme.



21. Any sum deposited in 5 years term deposit account in Post Office as per the Post Office Time Deposit Rules, 1981.

STEP 2. NET QUALIFYING AMOUNT The aggregate of payments from (1) to (21) above is the Gross Qualifying Amount. The Net Qualifying Amount is determined as follows:a) Gross Qualifying Amount; orb) Rs. 1,00,000 whichever is less.STEP:3 AMOUNT OF DEDUCTIONThe net qualifying amount as calculated in step 2 is the amount of deduction under section 80 C. The point to remembered is that the aggregate of deductions under section 80 C, 80 CCC and 80 CCD cannot exceed Rs. 1,00,000.Deduction in respect of pension fund [sec. 80CCC]:- Conditions to be fulfilled:-i) The assessee is individual (may be resident or non-resident).ii) Such individual has paid/deposited any amount in the previous year under

annuity plan of life insurance corporation of India or any other insurer for receiving pension from the fund set up by LIC /any other insurer referred to in section 10(23AAB).

iii) The above amount is paid out of his income chargeable to tax.Amount of deduction:- The actual amount paid/deposited or Rs. 1,00,000 whichever is less.

NOTE:a) If the assessee or his nominee receives any amount on account of

surrender of annuity plan or as pension during the previous year then such amount received will be taxable in the hands of the assessee or his nominee, as the case may be, in the year of receipt.

b) When deduction has been allowed U/S 80CCC, deduction U/S 80C will not be available for the same amount.

Deduction in respect of contribution to pension scheme of Central Government (Sec. 80CCD) :- The conditions to be fulfilled:

1) The assessee is an Individual.2) He is employed by the Central Government or any other employer on or

after 1st January, 2004.3) He has paid or deposited any amount not less than 10% of salary in his

account under a pension scheme notified by the Central Government in the previous year.

4) The employer also contributes an amount equal to 10% of his salary in his pension account. Such contribution is fully taxable under head Salaries.Amount of deduction: Employee’s contribution as above (not exceeding 10% of his salary) plus Employer’s contribution (i.e. Central Govt.) to the above pension fund (not exceeding 10% of his salary).

NOTE:a) If the assessee or his nominee receives any amount on account of closure

of the account or as pension during the previous year then such amount received will be taxable in the hands of the assessee or his nominee, as the case may be, in the year of receipt.



b) When deduction has been allowed U/S 80CCD, deduction U/S 80C will not be available for the same amount.

c) Salary means Basic Salary plus Dearness Allowance, if the terms of employment so provide.

Limits on deductions under sections 80C, 80CCC and 80CCD[sec 80CCE]: The aggregate amount of deduction under section 80 C, 80 CCC and 80 CCD cannot exceed Rs. 1,00,000.

Deduction in respect of medical insurance premia (sec.80D):- The conditions to be fulfilled:-

i) The assessee is individual or H.U.F. (may be resident or non-resident).ii) Such assessee has paid any sum toward MEDICAL INSURANCE PREMIUM

to general insurance corporation or any other insurer on the health of following:-

a) in case of individual –1)-on health of assessee, spouse (dependent or independent), dependent children; and 2) on health of parents (dependent or independent) of the assessee.

b) in case of HUF – on health of any member of the family.iii) The premium is paid by any mode other than cash.iv) The premium is paid out of income chargeable to tax.

Amount of deduction : a) in case of individual –1)-on health of assessee, spouse (dependent or independent), dependent children- Actual premium paid or Rs.15,000* whichever is less; and 2) on health of parents (dependent or independent) of the assessee- Actual premium paid or Rs.15,000* whichever is less.

b) in case of HUF – on health of any member of the family- Actual premium paid or Rs.15,000* whichever is less.

NOTE: In case of senior citizen additional deduction of amount not exceeding Rs. 5000 is allowed. Senior citizen means a person of at least 65 years of age and Resident in India.

Deduction in respect of maintenance including medical treatment of Handicapped Dependent [sec. 80DD]:- The conditions to be fulfilled:-i) The assessee is a ‘Resident’ individual or a Resident H.U.F. ii) Such assessee has during the previous year:-a) incurred any expenditure for medical treatment (including nursing),

training and rehabilitation of a handicapped dependent; or/and b) Paid /deposited any amount under a scheme framed in this behalf by the

life insurance corporation or any other insurer or U.T.I. and approved by the CBDT, for maintenance of handicapped dependent.

iii) The expenditure is incurred or amount is paid/ deposited out of eligible assessee's income chargeable to tax.Amount of deduction:- Rs.50,000 irrespective of actual expenditure



incurred/amount deposited. A higher deduction of Rs.1,00,000 shall be allowed where such dependant is a person with severe disability having any disability of 80% or over.

NOTE:a) Dependant for an individual means the spouse, children, parents, brothers

and sisters of the individual or any of them. Dependent for a H.U.F. means a member of H.U.F. Handicapped dependent means a person who is relative of the individual or as the case may be, is a member of the H.U.F and is not dependent on any person other than such individual or H.U.F. for his support or maintenance; and

b) He is suffering from a permanent physical disability ((including blindness) or is subject to mental retardation, being a permanent physical disability or mental retardation specified in the rules made by the CBDT for purpose of section 80DD; and

c) Such disability is certified by a physician, a surgeon, an oculist or a psychiatrist, as the case may be, working in a government hospital; and

d) Such disability should have the effect of reducing considerably such person's capacity for normal work or engaging in a gainful employment or occupation.

e). If the handicapped dependent predeceases the individual or the member of H.U.F. in whose name money has been deposited, an amount equal to the amount paid/deposited under the scheme shall be deemed to be income of the assessee of the previous year in which such amount is received by the assessee and shall be charged to tax in that year.

DEDUCTION IN RESPECT OF MEDICAL TREATMENT [SE. 80DDB]: The Conditions to be fulfilled:- 1. The assessee is a ‘Resident’ individual or a Resident H.U.F. 2. The assessee has incurred any expenditure for medical treatment of a

specified disease or ailment as per rule 11D. 3. Such assessee has incurred medical expenses for himself or any dependent

relative (in case of individual) or for any member of the family (in case of H.U.F.).

4. Such assessee furnishes a certificate in form 10-I from a post graduate doctor registered with Indian medical association. Amount of deduction: Rs. 40,000* or Actual Expenditure incurred by the assessee whichever is less. * Rs. 60,000 if the person receiving medical treatment is senior citizen.

NOTE :1.Relative has same meaning as in section 80DD. 2.Senior citizen has same meaning as in section 80D.3.If any amount is received under an insurance from the insurer or reimbursed by the employer, the amount so received shall be reduced from the deduction allowable under this section.

DEDUCTION IN RESPECT OF LOAN TAKEN FOR HIGHER EDUCATION (SEC.



80E): The conditions to be fulfilled:-1. The assessee is an individual.2. Such assessee had taken loan from a financial institution or approved

charitable institution. 3. The loan was taken for pursuing higher education of the assessee or any of

his relatives. 4. The assessee has repaid such loan including interest on such loan. 5. Such amount is paid out of his income chargeable to tax.

Amount of deduction :- Actual amount of interest repaid during the year (only interest, principal repayment is excluded). Period of deduction :- Deduction is allowed for 8 years starting from the year in which loan/interest was first repaid or till amount is repaid in full w.e. is earlier. NOTE:1. Financial institution means a Banking company or any other notified financial institution. 2.Approved charitable institution means an institution under section 10(23C) or 80G(2)(a). 3.Higher Education means studies of any course of study after passing Senior Secondary Examination or its equivalent. 4. Relative means spouse, children or the individual for whom the assessee is legal guardian.

DEDUCTIONS IN RESPECT OF DONATIONS TO CERTAIN FUNDS, CHARITABLE INSTITUTIONS ETC. [SE. 80G]: The conditions to be fulfilled:1. The Assessee may be any person. 2. Such assessee has made donation to specified funds or institutions. 3. Donation is a sum of money. It should not be ‘IN KIND’. 4. The assessee must produce the proof of payment to get deduction under

this section. STEPS TO BE FOLLOWED FOR CALCULATION OF DEDUCTION:- This deduction is calculated under three steps as follows :-a) Gross qualifying amount.b) Net qualifying amount. c) Amount of deduction. STEP I. Gross qualifying amount:- It is aggregate of the donations made to any of the institutions/funds given in the chart below (as per column I).STEP II. Net qualifying amount:- Net qualifying amount is limited to 10% of gross total income less :-a) Amount of long term capital gain;b) Short term capital Gain on transfer of equity shares through a recognised

stock exchange under section 111 A;c) Such income on which tax is not payable (i.e. share of profit from

A.O.P./BOI.d) All deductions under sections 80C to 80U (except sec. 80G);e) Income referred to in section 115A, 115AB, 115AC, 115ACA or 115AD. These ceilings apply only to donations of point (C) and (D) in the chart given



below.

STEP III. Net qualifying amount is eligible for deduction as per column 3 of the chart below:-

Name/Type of charitable funds/Institution

Maximum limit

DEDUTION (AS

PERCENT OF NET

QUALIFYING

AMOUNT)(A) a) National Defence fund set up by

central Govt. Not

applicable100%

b) Prime Minister’s national relief fund Not applicable

100%

c) Prime Minister’s Armenia earthquake relief FUND

Not applicable

100%

d) Africa (Public contribution – Indian) fund

Not applicable

100%

e) National foundation for commercial harmony

Not applicable

100%

f) An approved university/education institution

Not applicable

100%

g) Maharashtra chief Minister’s earthquake relief fund

Not applicable

100%

h) Any fund set up by Government of Gujarat for providing relief to earthquake victims in Gujarat

Not applicable

100%

i) Zila Saksharta Samiti Not applicable

100%

j) National/State Blood transfusion council

Not applicable

100%

k) Fund set up by State Government for medical relief to the poor.

Not applicable

100%

l) Army /Air force central welfare fund and India naval benevolent fund.

Not applicable

100%

m) Andhra Pradesh Chief Minister’s cyclone relief fund

Not applicable

100%

n) National illness assistance fund Not applicable

100%

o) Chief Minister/Lieutenant Governor’s Relief fund

Not applicable

100%

p) National sports fund set up by central Govt.

Not applicable

100%



q) National cultural fund set up by central Govt.

Not applicable

100%

r) Fund for technology development and application

Not applicable

100%

s) National trust for welfare of persons with autism, cerebral palsy, mental retardation and multiple disabilities

Not applicable

100%

(B) a) Jawaharlal Nehru Memorial fund Not applicable

50%

b) Prime Minister’s Drought Relief fund

Not applicable

50%

c) National children fund. Not applicable

50%

d) Indira Gandhi Memorial Trust Not applicable

50%

e) Rajiv Gandhi foundation Not applicable

50%

(C) a) Government/approved local authority or institution/association for promotion of family planning.

As given below

100%

b) Indian Olympic association / notified institution for i) Development of infrastructure for sports and games in India; or ii) The sponsorship of sports and games in India (DONOR BEING COMPANY)

As given below

100%

(D) a) Any other fund/Institution which satisfies conditions of section 80G (5).

As given below

50%

b) Government/approved local authority or institution /association for any charitable purpose other than promoting family planning.

As given below

50%

c) Any corporation specified in section 10(26BB) for promoting interest of minority community

As given below

50%

d) Any notified temple, mosque, Gurdwara, Church or other place (for renovation or repair)

As given below

50%

e) Any authority constituted in India by any law enacted either for dealing with and satisfying need for housing accommodation or for planning development or improvement of cities, lawns and villages or for both.

As given below

50%



MAXIMUM AMOUNT: It the aggregate of sums mentioned in (C) and (D) above exceeds 10% of adjusted gross total income (as per step II), then the amount in excess of 10% of adjusted gross total income will be ignored while computing the aggregate of the sums in respect of which deduction is to be allowed.

DEDUCTION IN RESPECT OF RENT PAID [SEC. 80 GG]:- The Conditions to be fulfilled:- 1. The assessee is an individual; 2. Such assessee has paid rent for his residential accommodation; 3. The assessee is either self-employed or an employee neither entitled to

house rent allowance nor a rent-free accommodation. 4. Such assessee, his spouse or minor child or his H.U.F. (of which he is a

member) does not own any residential accommodation at the place where such assessee ordinarily resides or works or carries his business.

5. If such assessee owns any residential accommodation at any place, other than as mentioned above, then such property should not be assessed as self occupied property in the hand of such individual assessee.

6. The assessee files a declaration in form-10BA along with his return. AMOUNT OF DEDUCTION: Least of following is deductible :-a) 25% of adjusted total income;b) Rent paid-10% of adjusted total income;c) Rs. 2000 per month. NOTE: Adjusted total income means ‘Gross total income less ( a)Long term capital gain’ and b) Short term Capital Gain on transfer of equity shares through a recognised stock exchange under section 111 A and c) all deductions under section 80C to 80U (except deduction U/S 80GG) and d) incomes referred to in sec. 115A to 115D).

DEDUCTION IN RESPECT OF DONATIONS FOR SCIENTIFIC RESEARCH OR RURAL DEVELOPMENT [SEC. 80GGA]: The Conditions to be fulfilled:-1. The assessee may be any person;2. Such assessee does not have income under ‘Profits gains of business or

profession’; 3. Such assessee has made donation/payments to :-

a) Approved scientific research association or approved University College or other institution to be used for scientific research; b) Approved University, College or other institution for research in social science or statistical research; c) Approved association or institution undertaking rural development (provided the assessee furnishes certificates as required in sec. 35CCA);d) Approved public sector company or local authority or association or institution for carrying out any eligible project or scheme (provided the assessee furnishes certificate as required in sec. 35AC (2) (a);e) National Urban Poverty eradication fund;



AMOUNT OF DEDUCTION: 100% of sum paid as above.NOTE: 1. Where deduction under this section is claimed and allowed, deduction will not be allowed for same amount under any other provision of the Act for same or any other assessment year. 2. If approval granted to any of the above institution is withdrawn even then the deduction for payment made earlier by the assessee cannot be denied.DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN BY INDIAN COMPANIES TO POLITICAL PARTIES [SEC 80GGB]: Any sum contributed by an Indian Company in the previous year to any political party shall be allowed as deduction while computing its total income.

DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN BY ANY PERSON TO POLITICAL PARTIES [SEC 80GGC]: Any sum contributed by an assessee being any person (except Local Authority and every Artificial Juridicial Person wholly or partly funded by the Government) to any political party shall be allowed as deduction while computing its total income.

DEDUCTIONS IN RESPECT OF CERTAIN INCOMESDEDUCTION IN RESPECT OF PROFITS AND GAINS FROM BUSINESS OF INFRASTRUCTURE DEVELOPMENT [SEC.80-IA]: The deduction under this section is available to an assessee whose gross Total Income includes any profits and gains derived by:a) any enterprise carrying on the business of infrastructure facility; orb) an undertaking which is engaged in the business of telecommunication

services etc.;c) an undertaking which develops, maintains etc. an Industrial park or

special economic zone; ord) an undertaking which is engaged in generation, transmission, distribution

of power etc;e) an undertaking owned by an Indian Company and set up for

reconstruction or revival of a power generating plant.A) CONDITIONS FOR BUSINESS OF INFRASTRUCTURE FACILITY1) The enterprise should carry on the business of: a) developing; or b) operating and maintaining; orc) developing, operating and maintaining any infrastructure facility;2) The enterprise is owned by an Indian company or a consortium of such

companies or by an authority or a Board or a Corporation or any other body established or constituted under any Central or State Act;

3) The enterprise has entered into an agreement with central/State Government or local authority or any other statutory body for such business;

4) The enterprise has started or starts such business on or after 01.04.1995.B) CONDITIONS FOR BUSINESS OF TELECOMMUNICATION SERVICES.1) The undertaking should have started or starts providing



telecommunication service whether basic or cellular, including radio paging, domestic satellite services or network of trunking, broadband network and internet services;

2) It is allowed to all assessees;3) It should start providing such services on /after 01.04.1995 but before

31.03.2005.4) Such undertaking should not be formed by splitting up or the

reconstruction of a business already in existence. (But this condition is not applicable if circumstances of sec 33B are fulfilled.)

5) It should not be formed by transfer of any plant or machinery previously used for any purpose to it. However such old plant or machinery can be used to the extent of 20% of total value of plant and machinery of such new undertaking.

C) CONDITIONS FOR BUSINESS OF DEVELOPMENT OF INDUSTRIAL PARK OF ECONOMIC ZONE

1) The undertaking should develop, develop and operate or maintain and operate an industrial park or special economic Zone notified by the Central Government in accordance with scheme framed for such purpose.

2) The industrial park should begin to operate, develop etc, at any time on or after 01.04.1997 but before 01.04.2011.

(D) CONDITIONS FOR BUSINESS OF POWER GENERATION:1) The undertaking is set up in any part of India for generation or generation

and distribution of power if it begins to generate power at any time during the period beginning on 01-04-1993 and ending on 31-03-2011.

2) It start transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on 01-04-1999 and ending on 31-03-2011.

3) It undertakes substantial renovation and modernization of the existing transmission or distribution lines (i.e. at least 50% increase in book value of such plant and machinery as on 01.04.2004) at any time during 1.4.2004 to 31.3.2011.

4) Such undertaking should not be formed by splitting up or the reconstruction of a business already in existence. (But this condition is not applicable if circumstances of sec 33B are fulfilled.)

4) It should not be formed by transfer of any plant or machinery previously used for any purpose to it. However such old plant or machinery can be used to the extent of 20% of total value of plant and machinery of such new undertaking.

E) CONDITIONS FOR UNDERTAKING SET UP FOR RECONSTRUCTION OR REVIVAL OF A POWER GENERATING PLANT:

1) Such undertaking must be owned by an Indian Company.2) Such Indian Co. is formed before 30.11.2005 with public sector companies

as majority of equity shareholders for the purpose of enforcing the security interest of the lenders to the company.

3) Such Indian Co. is notified before 31.12.2005 by the Central Govt. for this



purpose.4) Such undertaking begins to generate or transmit or distribute power

before 31.3.2011. AMOUNT OF DEDUCTIONa) FOR BUSINESS OF TELECOMMUNICATION SERVICES:

For first five successive years @ 100% of profits and for next FIVE successive years @30% of the profits [out of 15 years beginning with the year of starting provision of telecommunication services].

b) FOR BUSINESS OTHER THAN (a) ABOVE: 100% of Profits of such business for 10 successive years (out of 15 years beginning with the year of start of such business).

* In case of infrastructure facilities other than PORT, AIRPORT, INLAND WATERWAY OR INLAND PORT this period is 20 years .

NOTE:1) For getting/claiming deduction under this section audit of accounts and submission of a Report in Form 10CCB duly certified by a chartered Accountant along with the return of income is compulsory.2) The Central Government may in official Gazette, notify that the deduction under this section not to apply to any class of industrial undertaking or enterprise with effect from any notified date.3) Deduction is allowed if and if only if the return of income is submitted on or before due date of filing the return u/s 139 (1).DEDUCTION IN RESPECT OF PROFITS AND GAINS BY AN UNDERTAKING OR ENTERPRISE ENGAGED IN DEVELOPMENT OF SPECIAL ECONOMIC ZONE (SEC 80 IAB): If a Special Economic Zone is notified on or after 1.4.2005 then it is not eligible for deduction u/s 80 IA. These undertakings will be allowed deduction under section 80 IAB. The deduction under this section is available if the Gross Total Income of an Assessee, being the developer, includes any profit derived by an undertaking or an enterprise from any business of developing of a Special Economic Zone, notified on or after 1.4.2005 under the Special Economic Zones Act, 2005.AMOUNT OF DEDUCTION: 100% of the profits and gains from such business for 10 consecutive years out of 15 years beginning from the year in which the special economic zone has been notified by the Central Govt.NOTE:1) For getting/claiming deduction under this section audit of accounts and submission of a Report in Form 10CCB duly certified by a chartered Accountant along with the return of income is compulsory.2) The Central Government may in official Gazette, notify that the deduction under this section not to apply to any class of industrial undertaking or enterprise with effect from any notified date.3) Deduction is allowed if and if only if the return of income is submitted on or before due date of filing the return u/s 139 (1). DEDUCTION IN RESPECT OF PROFITS & GAINS FROM CERTAIN BUSINESSES



OTHER THAN INFRASTRUCTURE DEVELOPMENT (SEC.80-IB): This section applies if the assessee is engaged in the business of: a) an industrial undertaking including cold storage;b) a ship;c) a hotel;d) multiplex Theatres;e) convention centre;f) scientific and industrial research and development;g) commercial production and refining of mineral oil;h) developing and building housing projects;i) handling, storage and transportation of food grains;j) operating and maintaining a hospital in a rural area;k) Five year tax holiday to hospitals in certain areas.A. CONDITIONS FOR INDUSTRIAL UNDERTAKING1) The industrial undertaking is not formed by splitting up or reconstruction

of a business already in existence. (However this clause is not applicable if conditions u/s 33B are fulfilled).

2) It is not formed by transfer to a new business of machinery or plant previously used for any purpose. However any such old plant machinery can be transferred to new industrial undertaking provided value of such old plant or machinery does not exceed 20% of total value of plant and machinery of new industrial undertaking.3) It manufactures or produces any article or thing other than articles

specified in ELEVENTH SCHEDULE or operates one or more cold storage plant or operates cold chain facility in any part of India. However a Small Scale Industrial undertaking or Industrial Undertaking located in an industrially backward state can produce article/thing specified in ELEVENTH SCHEDULE and can claim this deduction..

4) Such industrial undertaking employs ten or more workers in a manufacturing process carried on with the aid of power or employs twenty or more workers in a manufacturing process carried on without the aid of power.

5) The Industrial undertakings begin to manufacturer or to operate cold storage plant or cold chain facility as per table given below

INDUSTRIAL UNDERTAKING PERIOD TO START PRODUCTION

a) Any eligible industrial undertaking other than those given in clause (b) to (f) below

01.04.1991 to 31.03.1995

b) Eligible Small Scale Industrial undertakings other than those given in clauses (c) to (f)

01.04.1991 to 31.03.2002

c) Industrial undertaking set up in an Industrially backward state

01.04.1993 to 31.03.2004 (till 31.3.2012 in case of Jammu & Kashmir)

d) Industrial undertaking set up in notified 01.10.1994 to



industrially backward districts of category A 31.03.2004e) Industrial undertaking set up in notified

backward District of category B01.10.1994 to 31.03.2004

f) Industrial undertaking set up and operating cold chain facility for agricultural produce

01.04.1999 to 31.03.2004

AMOUNT OF DEDUCTION

ASSESSEE PERIOD OF DEDUCTION

%AGE OF PROFIT AS DEDUCTION

1.

A Industrial undertaking

i) in an industrially backward stateii) in districts of category A (BUT NOT

NORTH EASTERN REGION)iii) operating a cold chain facilitya) Owned by a Company First 5 years 100%

Next 5 years 30%b) Owned by a co-operative Society First 5 years 100%

Next 7 years 25%c) Owned by any other assessee First 5 years

Next 5 years100% 25%

B) Notified Industries in North Eastern Region

First 10 years 100%

2.

Industrial Undertaking in Industrially backward districts of category 'B'

i) owned by a Company First 3 years 100%Next 5 years 30%

ii) Owned by a Co-operative Society First 3 years 100%Next 9 yeas 25%

iii) Owned by other assessee First 3 years 100%Next 5 years 25%

3.

Industrial undertaking other than those specified above

i) Owned by a Company First 10 years 30%ii) Owned by a Co-operative society First 12 years 25%iii) Owned by any other assessee First 10 years 25%

B CONDITIONS FOR OPERATION OF A SHIP1) It is owned by an Indian Company and it is wholly used for the purpose of

business carried on by it.2) It was not owned or used in Indian Territorial Waters by a person resident



in India before its acquisition by the Indian company.3) It was brought into use by Indian company with in from 01.04.1991 to

31.03.1995.AMOUNT OF DEDUCTION: 30% of eligible profits for 10 years starting from initial assessment year.C. CONDITIONS FOR BUSINESS OF ANY HOTEL1) The business of hotel is owned and carried on by an Indian Company with

a paid up capital of not less than Rs.5,00,000.2) Such business of hotel is not formed by splitting up or reconstruction of

the business already in existence or by transfer to a new business of a building previously used as a Hotel or of any machinery or plant previously used for any purpose.

3) The Hotel is for the time being approved by the prescribed authority.4) The hotel must start functioning during period and in area as mentioned below:

TYPE OF HOTEL PERIOD WITHIN WHICH HOTEL MUST START

a) i) Hotel located in a hilly area/rural area or place of pilgrimage or any other place notified by Central Government

01.04.1990 to 31.03.1994

ii) Hotel located in a hilly area or rural area or a place of pilgrimage or such other place as notified by the Central Govt But such Hotel should not be located within Municipal limits of Calcutta, Delhi, Mumbai and Chennai

01.04.1997 to 31.03.2001

b) i) Any other hotel 01-04-1991to 31-03-1995

ii) Any other hotel located in a place other than with in Municipal limits of Calcutta, Chennai, Delhi and Mumbai

01.04.1997 to 31.03.2001

AMOUNT OF DEDUCTIONAssessee Period of

Deduction%ge of profit as deduction

a) Hotel located in hilly/rural area or notified place of pilgrimage

10 years 50%

b) Any other Hotel 10 years 30%

D. CONDITIONS FOR MULTIPLEX THEATRE 1) The assessee should derive profits and gains from the business of building,

owning and operating a multiplex theatre.2) Such multiplex theatre should have been constructed at any time during



the period 01.04.2002 to 31.03.2005 .3) The business of multiplex theatre should not be formed by splitting up or

reconstruction of a building already in existence.4) It should not be formed by the transfer to a new business of any building

or of any machinery or of plant previously used for any purpose.5) The multiplex theatre should not be located at a place with in the

municipal limits of Kolkatta, Chennai, Delhi or Mumbai.6) The assessee should furnish along with return of income, the report of an

audit in such form and containing such particulars as may be prescribed duly certified by a prescribed.

AMOUNT OF DEDUCTION: 50% of the profits such business for a period of five successive years starting from initial assessment year.E. CONDITIONS FOR CONVENTION CENTRE1) The assessee should derive profits and gains from the business of building,

owning and operating a convention centre.2) The convention centre should be constructed at any time during the period

01.04.2002 to 31.03.2005.3) The business of convention centre should not be formed by splitting up or

the reconstruction of a business already in existence.4) It should not be formed by transfer to a new business of any building or

any machinery or plant previously used for any purpose.5. The assessee should obtain a report of an audit in such form and

containing such particulars as may be prescribed from a Chartered Accountant certifying that deduction has been correctly claimed and submitted along with the return of income.

AMOUNT OF DEDUCTION: 50% of the profits and gain from such business for a period of FIVE SUCCESSIVE years beginning from initial assessment year.F. CONDITIONS FOR ENTERPRISES CARRYING ON SCIENTIFIC AND INDUSTRIAL RESEARCH AND DEVELOPMENT:1) The enterprises must be a Company registered in India;2) The company has main object of scientific and industrial research and

development;3) The company is for the time being, approved by the prescribed authority.4) The deduction is available from assessment year 1997-98 and if it starts at

a later date, the deduction is available from the year of start of business.AMOUNT OF DEDUCTION:a) If Company was approved before 1st April, 1999: 100% of eligible profits for FIVE YEARS commencing from initial assessment year.a) If Company was approved on or after 1st April, 2000 but before 1st April, 2007: 100% of eligible profits for TEN YEARS commencing from initial assessment year.

G. UNDERTAKING ENGAGED IN BUSINESS OF REFINING OF MINERAL OIL1) The assessee is industrial undertaking which begins commercial

production of mineral oil in any part of India.



2) Where Industrial undertaking is situated in North Eastern Region it has begun production of mineral oil BEFORE OR AFTER 01.04.97. But if it is situated in any other part of India it begins commercial production ON or AFTER 01.04.1997.

AMOUNT OF DEDUCTION: 100% OF ELIGIBLE PROFITS FOR SEVEN YEARS starting from initial assessment year.H. UNDERTAKING ENGAGED IN DEVELOPING AND BUILDING HOUSING PROJECTS:1) The assessee may be any person.2) It is allowed on account of housing project approved by local authority

before 31.03.2008 and the area of plot is minimum of one acre.3) The residential unit has a build up area of not exceeding 1000 square feet

for residential unit in Delhi or Mumbai or within 25 kms of Municipal limits of these cities and 1500 square feet at any other place.

4) The undertaking commences development and construction of the housing project on or after 01.10.1998 and completes the samea) in case the housing project has been approved by the local authority before 01.04.2004, it should complete the same before 31.03.2008;b) in case the housing project has been approved by the local authority on or after 01.04.2004, it should complete the same with in 4 years form the end of financial year in which the housing project has been approved by the local authority.

AMOUNT OF DEDUCTION: 100% of profits from such project.I. UNDERTAKING ENGAGED IN INTEGRATED BUSINESS OF HANDLING, STORAGE AND TRANSPORTATION OF FOOD GRAINS1) The assessee may be any person.2) Such assessee starts the integrated business of handling and

transportation of food grains on or after 1.04.2001AMOUNT OF DEDUCTION

ASSESSEEPERIOD OF DEDUCTION

%AGE OF PROFIT AS DEDUCTION.

a) Owned by a Company First 5 years 100Next 5 years 30

b) Owned by any other person First 5 years 100Next 5 years 25

J. UNDERTAKING OPERATING AND MAINTAINING A HOSPITAL IN A RURAL AREA1) Such hospital is constructed at any time during the period from 01.10.2004 to 31.03.2008;2) The hospital has at least 100 beds for patients;3) The construction of the hospital is in accordance with the regulations, for the time being in force, of the local authority;



4) The report from a Chartered Accountant regarding correct claim of deduction is furnished along with the return of income.Amount of deduction: 100% of profits and gains of such business for a period of 5 consecutive assessment years beginning with the initial assessment year. K. FIVE YEAR TAX HOLIDAY TO HOSPITALS IN CERTAIN AREAS:1) The hospital is located in any area except the excluded area.2) The hospital is constructed at any time during 1st April, 2008 to 31st March, 2013 and starts functioning within above said period.3) The hospital has at least 100 beds for patients;4) The construction of the hospital is in accordance with the regulations, for the time being in force, of the local authority;5) The report from a Chartered Accountant regarding correct claim of deduction is furnished along with the return of income.Amount of deduction: 100% of profits and gains of such business for a period of 5 consecutive assessment years beginning with the initial assessment year.

DEDUCTION IN RESPECT OF PROFITS & GAINS OF CERTAIN UNDERTAKINGS IN CERTAIN SPECIAL CATEGORY OF STATES [SEC 80-IC]:- Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any:a) business of manufacturing or producing any article or thing (not being an article or thing mentioned in Schedule XIII ) in any notified specified area in the states of Sikkim, Himachal Pradesh, Uttaranchal or the North-Eastern States, orb) business of manufacturing or producing any article or thing or operates a service mentioned in Schedule XIV in any area in the said states,a deduction from such profits and gains shall be allowed under this section provided certain conditions are satisfied as follows:1) It is not formed by splitting up or the reconstruction, of a business already in

existence. (However this clause is not applicable if conditions u/s 33B are fulfilled).

2) It is not formed by transfer to a new business of machinery or plant previously used for any purpose. However any such old plant machinery can be transferred to new industrial undertaking provided value of such old plant or machinery does not exceed 20% of total value of plant and machinery of new industrial undertaking.3) It has begun or begins to manufacture or produce any article or thing or undertakes substantial expansion during the period-i) from 23.12.2002 to 31.03.2012 in the state of Sikkim; orii) from 07.01.2003 to 31.03.2012 in the states of Himachal Pradesh or Uttaranchal; oriii) from 24.12.1997 to 31.03.2007 in any of the North-Eastern states.

Amount of Deduction: The deduction shall be-1) in the case of any undertaking in the state of Sikkim or North-eastern states –



100% of such profits and gains for ten assessment years commencing from the initial assessment year.2) in the case of any undertaking in state of Himachal Pradesh or Uttaranchal - 100% of such profits and gains for five assessment years commencing from the initial assessment year and thereafter 25% (30% in case of a company assessee) of such profits and gains for next five assessment years.

NOTE: 1) The Initial Assessment year means the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or commences operation or completes substantial expansion.2) The total period of deduction shall not 10 assessment years.3) The provisions of Computation of profits of eligible business, audit of accounts, restriction on double deduction, adjustment of loss and effects of merger or demerger are same as in section 80-IA.

DEDUCTION IN RESPECT OF PROFITS & GAINS FROM BUSINESS OF COLLECTING AND PROCESSING BIO DEGRADABLE WASTE (SEC. 80 JJA):1) The assessee may be any person.2) The assessee is engaged in business of collecting and processing or

treating of bio-degradable waste fora) generating power; orb) producing, bio fertilisers, bio pesticides or other biological agents; or c) providing bio-gas; ord) making pellets or briquettes for fuel; ore) organic manure.AMOUNT OF DEDUCTION: 100% of profits from such business for FIVE SUCCESSIVE YEARS starting from the year of commencement of business.

DEDUCTION IN RESPECT OF EMPLOYMENT OF NEW WORKMEN (SEC.80JJAA)1) The assessee is an Indian Company.2) The company assessee is engaged as industrial undertaking.3) The Industrial undertaking is not formed by splitting up or reconstruction

of an existing Industrial undertaking or amalgamation in the another industrial undertaking.

4) The company employs new regular workman in the previous year..5) The company furnishes along with return of income a report in form 10DA

duly certified by a chartered Accountant.AMOUNT OF DEDUCTION: 30% of the additional wages paid to new regular workers employed in the previous year.NOTE: Additional wages means wages paid to new regular workman in excess of 100 workmen employed during the previous year.

DEDUCTION IN RESPECT OF INCOMES OF OFF-SHORE BANKING UNITS [SEC.80LA]:-



Conditions to be fulfilled:-1) The assessee is a scheduled Bank.2) It has a branch in India located in a Special Economic Zone.

3) the gross total income of the assessee includes (a) any income from the aforesaid branch in the special economic zone; (b) from the business referred to in section 6(1) of the Banking Regulation Act, 1949, with an undertaking located in a special economic zone or any other undertaking which develops, develops and operates and maintains a special economic zone; (c ) any income received in foreign exchange in accordance with the regulations made under the Foreign Exchange Management Act, 1999.4) The report from a Chartered Accountant in prescribed form certifying that the deduction has been correctly claimed in accordance with the provisions of the section should be submitted along with the return of income.5) A copy of permission obtained under section 23(1)(a) of the Banking Regulation Act, 1949 should be submitted along with the return of income.Amount of Deduction: 100% of such income for 3 consecutive years beginning from the assessment year relevant to the previous year in which permission under section 23(1)(a) of the Banking Regulation Act, 1949 was obtained; and thereafter 50% of such income for two consecutive assessment years.

DEDUCTION IN RESPECT OF INCOME OF CO-OPERATIVE SOCIETY [SEC.80P]: The deduction is allowed as follows-1) 100% of the profits from following activities:a) Carrying on business of banking or providing credit facilities to its members; b) a cottage industry;c) the marketing of the agricultural produce grown by its members;d) the purchase of agricultural implements, seeds, livestock or other articles

intended for agriculture for the purpose of supplying them to its members;e) the processing, without aid of power, of agricultural produce of its members;f) the collective disposal of labour of is members;g) fishing or allied activities.2) 100% of profits from following activities:

Supplying milk, oil seeds, fruit, vegetables grown by its members to a) a federal co-operative society;b) the Government or local authority;c) a Government company or a statutory corporation.3) In case of other activities deduction is limited to Rs. 50,000 (Rs. 1,00,000

in case of consumers Co-operative Society).4) 100% of profits as interest or dividend from another co-operative society.5) 100% of profits from letting of Godowns or warehouse for storage/processing or facilitating marketing of commodities.6) 100% of interest income from securities and property (upto maximum of Rs.20,000) in case of co-operative society NOT BEING housing society or urban



consumers society or Society carrying transport business or manufacturing with the aid of power.

DEDUCTION IN RESPECT OF ROYALTY INCOME, ETC., OF AUTHORS OF CERTAIN BOOKS OTHER THAN TEXT BOOKS [SEC. 80QQB]:-Conditions to be fulfilled:1. The assessee is Individual who is resident in India and is an author of a book.2. The book should be a work of literary, artistic or scientific nature.3. The income must be derived by him in the exercise of his profession.4. The income must be either:a) on account of any lump sum consideration for the assignment or grant of any of his interests in the copyright of such book; orb) of royalty or copyright fees (whether receivable in lump sum or otherwise).5. A certificate in Form 10CCD duly verified by any person responsible for making such payment to the assessee should be enclosed along with the return of income of the assessee.6. A certificate in Form 10H from the prescribed authority (in case of any such income earned from any source outside India) should be enclosed along with the return of income of the assessee.Amount of deduction: 100% of such income or Rs.3,00,000 whichever is less.However, where the income by way of such royalty or the copyright fee is not a lump sum consideration in lieu of all rights of the assessee in the book, then such royalty, etc. before allowing expenses, in excess of 15% of the value of such books sold during the previous year, shall be ignored.Further, where any income is earned from any source outside India, only so much of the income shall be taken into account for the purpose of this section as is brought into India by, or on behalf of , the assessee in convertible foreign exchange with in a period of six months from the end of the previous year in which such income is earned or within such further period as the competent authority may allow in this behalf.

DEDUCTION IN RESPECT OF ROYALTY ON PATENTS [SEC. 80RRB]:Conditions to be fulfilled:

i. The deduction is available to an Individual who is resident in India and is Patentee.2) The patent should be registered on or after 01.04.2003 under the Patents Act, 1970.3) His gross total income of the previous year includes royalty in respect of such patent.2) A certificate in Form 10CCD duly verified by any person responsible for making such payment to the assessee should be enclosed along with the return of income of the assessee.

i. 5) A certificate in Form 10H from the prescribed authority (in case of any such income earned from any source outside India) should be enclosed along with the return of income of the assessee.



Amount of deduction: 100% of such royalty income or Rs. 3,00,000 whichever is less.

However, where a compulsory licence is granted in respect of any patent under the Patents Act, 1970, the income by way of royalty for the purpose of allowing deduction under this section shall not exceed the amount of royalty under the terms and conditions of a licence settled by the Controller under that Act. Further, where any income is earned from any source outside India, only so much of the income shall be taken into account for the purpose of this section as is brought into India by, or on behalf of , the assessee in convertible foreign exchange with in a period of six months from the end of the previous year in which such income is earned or within such further period as the competent authority may allow in this behalf. DEDUCTION IN RESPECT OF PERMANENT PHYSICAL DISABILITY [SEC80U]:1) The assessee is individual who is resident in India and is a person with disability as per Sec 2(i) of The persons with Disabilities (Equal opportunities, protection of Rights and full participation) Act, 1995.2) He is certified by the Medical Authority (i.e. any hospital or institution specified as per section 2(p) of for the purpose of The persons with Disabilities (Equal opportunities, protection of Rights and full participation) Act, 1995) to be a person with disability, at any time during the previous year. 3) The assessee furnishes the above said certificate along with the return of

income under section 139, in respect of the assessment year for which the deduction is claimed.

Amount of deduction: Rs. 50,000* in case of a person with disability.* Rs.75,000 in case the assessee suffers 80% or more of one or more disabilities.

* * * * *

Chapter -11 AGRICULTURAL INCOME & ITS TAX TREATMENT

Section 10(1) of the Income-tax Act, 1961 exempts agricultural income from income-tax. The reason for keeping the agricultural income outside the purview of Income-Tax Act is the Constitution of India gives exclusive powers to the State Legislature to make laws with respect to taxes on agricultural income. However, from assessment year 1974-75 and onwards, net agricultural income is added to the total non-agricultural income computed as per Income-tax Act, for the purpose of determining the income-tax on non -agricultural income, although the agricultural income will remain fully exempt.



Summarised definition of Agricultural Income as given in section 2 (1A) of the Income-tax Act includes the following incomes as agricultural income provided the land is situated in India and is used for agricultural purposes:(i) any rent or revenue derived from land;ii) any income derived from such land by agriculture or from processing of

agricultural produce;(iii) any income from farm building.

The above three types of income shall be treated as ' agricultural income' only when the following conditions are satisfied:

(i) Income should be derived from land: The expression derived from land would mean springing from land or arising from land. It points to a source from out of which the income springs. But such source should be the immediate and effective source and not any secondary or remote source; that is, the proximate source and not the source to which it may ultimately be referable has to be considered. Some instances where income held as not derived from land:a) Mutation fees paid by tenant on succession to a holding by inheritance.b) Fees paid by tenants for renewal of leases (as well as fees paid for recognizing the distribution of holding on a partition) would not be income derived from land, since they are payments made for administrative services rendered by the landlord, just like registration fees.c) Receipts from the supply of water (with water tank) in an agricultural land.

(ii) Land should be situated in India: Land should be situated anywhere in India, though, it may or may not be subject to land revenue or any local rate. The land may be situated in an urban area or in a rural area. If the land is located outside India, any agricultural income derived from such land will not be deemed to be agricultural income and the same will not enjoy any exemption u/s 10(1). In the case of a person residing in India, such income from agricultural land situated outside India will be included in his total income and would be liable to tax.

(iii) Land should be used for agricultural purpose: The Supreme Court [in CIT v Raja Benoy Kumar Sahas Roy (1975)] has held that the land is said to be used for agricultural purpose where the following two types of operations are carried out on such land:

(a) Basic Operations: These involve cultivation of the ground, in the sense of tilling of the land, sowing of the seeds, planting and similar operations on the land. Such basic operations demand the expenditure of human labour and skill upon the land itself and further they are directed to make the crop sprout from the land.

(b) Subsequent Operations: After the crop sprouts from the land, there are subsequent operations which have to be performed the agriculturists for the efficient production of the crop such as weeding, digging the soil



around the growth, removal of undesirable growths, prevention of the crop from insects and pests and from damage by cattle and attention, pruning, cutting, etc.

Both the basic and the subsequent operations together form the integrated activity of the agriculturist. The performance of the subsequent operation on the produce of the land would not be enough to invest the subsequent operations with agricultural character. They should be in combination with, and in carry-over of, the basic operation which is end result of an agricultural operation. In other words, basic operations must be performed before any income is called agricultural income.

The basic operation need not necessarily be tilling of the land, sowing of the seeds or planting; it may be an operation of a similar kind. Instead of tilling (involving the use of a plough) the soil may be broken with the aid of a shovel where the soil is loamy. A crowbar and spade would be enough for digging pits in the soil to plant a sapling. Ploughing is mostly necessary for sowing of seeds and not for planting. Income from Nurseries [Explanation 3 to section 2(1A)]: Any income derived from saplings or seedlings grown in nursery is treated as agricultural income.

The above three types of agricultural incomes have been defined u/s 2(1A) (a), 2(1A) (b) and 2(1A) (c) respectively. The definition is being discussed in detail as under:

1(a). Any rent or revenue derived from land which is situated in India andis used for agricultural purposes [Section 2(1A)(a)]: The following conditions must be satisfied to treat income derived from land as 'agricultural income':

(i) rent or revenue should be derived from land.(ii) such land should be situated in India.(iii) the land should be used for agricultural purposes.

(ia) Rent from land: Rent should be a payment in cash or in kind (or in money or in money's worth), by one person to another in respect of a grant of a right to use land. To treat any income or revenue in the nature of rent, there should be an established relationship of a landlord and tenant (or Lessor and lessee) between the parties. For example, the share of agricultural produce received by a landlord is though in kind but it is rent and thus agricultural income.(ib) Revenue from Land: The expression 'revenue' would mean income of every kind derived from agricultural land, other than:(a) rent; or(b) the income which falls under section 2(1A) (b) and (c).

(ic) Rent or revenue should be derived from land: This would mean that such rent or revenue should be generated from land or arise from land. If the immediate and effective source is not land, the income will not be agricultural income. The following are not agricultural income as these are not derived from land.

Dividend received by shareholder from a company carrying on



agricultural operations is not agricultural income in his hands. The shareholder receives the dividend not by virtue of any activity of agriculture carried on by him, but by virtue of the investment of his funds in the company in buying up its shares.

Loan obtained by a shareholder out of accumulated profits of a company having only agricultural income, which is liable to be treated as 'deemed dividend', is not agricultural income in the hands of the recipient.

Interest on arrears of cess or rent payable by a tenant to his landlord is revenue but it is not revenue derived from land and hence it is not agricultural income.

Commission earned by a broker for selling agricultural produce of an agriculturist is not agricultural income.

Salami or Nazarana paid shall not be agriculture income in the hands of the recipient (unless it is a payment of rent in advance).

1(b) Any income derived from such land by agricultural operations including processing of the agricultural produce, raised or received as rent in kind, so as to render it fit for the market, or sale of such produce [Section 2 (1A)(b)]: Section 2(1A)(b) gives the following three instances of agricultural incomes:

(1) Any income derived by agriculture from land situated in India and used for agricultural purpose. The following will be treated as income derived from agricultural land:(i) standing crop or the raw produce after harvest, sold by the agriculturist

himself.(ii) crop used by the cultivator for his own consumption;(iii) crop used as raw material by the cultivator in his business.(2) Any income derived by a cultivator or receiver of rent in kind of any process ordinarily employed to render the produce raised or received by him to make it fit to be taken to market. The produce raised from the land may not have a market in its original form. It may become necessary to perform a process on the produce to make it marketable or saleable. Such process may be called 'marketing process’ or ‘agricultural process' for the sake of convenience. The gain in the value of the produce by such marketing process or agricultural process is also classified as income from agriculture. If marketing process is performed on agricultural produce, which could be sold without such process, shall not be agricultural income. e.g. sugarcane can be generally sold as such; therefore the process of conversion of sugarcane into gur (jiggery) shall not be a process necessary to be applied where there is a market for sugarcane being sold as such. [Brihan Maharashtra Sugar Syndicate Ltd. v CIT (1946) 14 ITR 611 (Bom)]. However, conversion of coconut into copra and drying the leave of tobacco by the grower shall be treated as process ordinarily employed to make it fit for market and hence shall be agricultural income.(3) Any income derived from 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 as referred in (2) above. Income from sale of agricultural produce is exempt from tax to the extent to which no process has been performed on the produce, except the marketing process, discussed above. If any other processes have been performed, the sale proceeds will have to be disintegrated to find out that part of it which constitutes agricultural income, so as to exempt that part alone from Income-tax.

1(c). Any Income attributable to a building (farm house) is treated asagricultural income provided the following conditions are satisfied [Section2(1A)(c)]: If all the conditions given below from (i) to (iv) are satisfied then the

income from farm building is exempt from tax.(i) Building should be owned by owner of agricultural land and occupied by the owner or cultivator of such land.(ii) Building should be on or in the immediate vicinity of land situated in India which is used for agricultural purpose.(iii) Building should be required by the occupier (i.e. receiver of rent or revenue or the cultivator) by reason of his connection with the agricultural land as:(a) dwelling house;(b) store house;(c) other out building.(iv) The land should be assessed to land revenue or a local rate. However, if it is not assessed to land revenue or local rate then such land should be situated outside urban area.Urban area means an area:(a) if the land is situated within the jurisdiction of a municipality or a Cantonment Board the population of that municipality, etc. is 10,000 or more.(b) if the land is situated in any other area - it is situated within notified distance (upto maximum 8 kms.) from the limits of such municipality or Cantonment Board.Use of building or land for purpose other than agriculture shall not constitute agricultural income: Explanation 2 to section 2(1A) has been inserted to clarify that income derived from any building or land referred to in sub-clause ( 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 shall not be agricultural income.

What does agriculture include?Agricultural would include horticulture, floriculture, arboriculture and sylviculture. It would include the raising of grooves, plantations, raising of grass or pastures. It would extend to cultivation of all commodities of food value like sugarcane, coffee, mangoes, etc. Artistic and decorative value like flowers and creepers, housing value like bamboo, timber, fuel value medicinal and health



value.Agriculture income would, however, cover only those incomes which are derived by human effort.Agricultural income: Following incomes have been held to be agricultural income:(a) Income from toddy is agricultural income when it is received by the actual

cultivator of the trees.(b) Where the owner himself performs slaughter tapping and then sells the

rubber, the income is agricultural income.(c) Lease income derived by a Lessor from lease of a coconut garden, to a

lessee who pays rent and takes the coconuts from the trees during the term of the lease and has to deliver possession of the coconut garden back to the Lessor at the end of the term, would be treated as agricultural income in the hands of the Lessor.

(d) Where the requisitioned lands were used by the assessee for agricultural purposes in the accounting year and also in the earlier years, and those lands were under cultivation at the time of their requisition by the Government, the compensation paid for the requisitioned lands which were used for agricultural purposes by the assessee was held to be agricultural income.

(e) If the grass is grown by human effort, by tilling, sowing, planting of any particular kind of seed or cutting, or by any similar operations, basic operations would have been performed. Consequently, the crop would be agricultural and any income by sale of grass would be agricultural income.

(f) Income from growing flowers and creepers would be agricultural income.(g) Interest on capital and share of profit received by a partner from a firm

which is engaged in agricultural operations is agricultural income.(h) Lease rent received for leasing out land for grazing of cattle required for

agricultural pursuits, is agricultural income. (i) Compensation received from an insurance company on account of

damaged caused to the crop is an agricultural income. (j) Seeds are clearly a product of agriculture and the income derived from the

sale of seeds derived on account of cultivation by the assessee is an agriculture income.

Non-agricultural income: Following incomes have been held to be non-agricultural income, hence taxable:

(a) Income from sale of forests, trees, wild grass, fruit and flowers grown spontaneously and without human effort.

(b) Income from salt produced by flooding the land with sea water and then extracting salt there from.

(c) Income from stone quarries. (d) Income from breeding of livestock.(e) Income from dairy farming, butter and cheese making. (f) Income from poultry farming.(g) Income from fisheries.



(h) Preservation of potatoes by refrigeration as it is not a process ordinarily employed by a cultivator.

(i) Income from brick making.(j) Income from supplying surplus water to other agriculturists. (k) Interest on arrears of rent in respect of agricultural land. (l) Profit on sale of standing crops/agricultural produce purchased by the

assessee. (m) Income derived from letting out of land/ Godowns for storing crops.(n) Royalty income of mines.(o) Annuity payable to vendor of agriculture land or payable to a person

giving up his claims to piece of agricultural land.(p) Harvest Crop on purchased land. (q) Compensation/ damages paid for loss of agricultural income due to late

payment of installments of the consideration price of rubber plantation site.

(r) Registration fee collected from the contractor who is bidding at the auction conducted for sale of plantation is not an agricultural income as such registration fee had no nexus with land.

(s) Hire charges received for use of the garden for shooting films could not be treated as agricultural income, as it has no nexus with the land, except that it was carried out on the agricultural land.

Computation of Net Agricultural IncomeAlthough the agricultural income is exempt from income-tax, but it is included in non-agricultural income of an individual or HUF etc. for purpose of determining the Income-tax on non-agricultural income. Hence, agricultural income will have to be computed. The computation of net agricultural income is done as per Rules given in Part IV of Schedule 1 of the relevant Finance Act. These have been summarized as under:(1) Rent or revenue derived from land is computed under the head ‘Income

from Other Sources’ and the provisions of sections 57 to 59 of this Act, so far as may be, apply accordingly. Thus, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of earning rent or revenue will be allowed as deduction is computing the rent or revenue from agricultural land. However, the provisions of section 40A (other than the provision of sections 40A (3) and (4) relating to payment exceeding Rs. 20,000 in cash) which are applicable for income from other sources also, shall be applicable in this case. [Rule 1]

(2) Income by way of agriculture or processing of agricultural produce, etc. as discussed already will be computed under the head ‘profit and gains of business or profession’ and therefore, all the provisions of sections 30,31,32,36,37,38, 40, 40A [excluding 40A (3) and (4)], 41, 43, 43A, 43B, 43C of that Chapter will be applicable. [Rule 2] It may be noted that provisions of section 35 will not apply in the computation of such income and hence no deduction shall be allowed in respect of expenditures on



scientific search in computing such income. Depreciation will, however, be admissible in respect of the assets used for purpose of earning such agricultural income.

(3) Income derived from any building which is used as a dwelling house by the receiver of the rent or revenue or cultivator or receiver of rent in kind would be computed as if it was income from House Property and the provisions of sections 23 to 27 of the Act shall, so far as may be, apply accordingly. [Rule 3] On the other hand, agricultural house property which is used as store house or other out building will be treated in the same manner as house property used for the purpose of business.

Income which is partially agricultural and partially from business(A) Income from growing and manufacturing of any product other than tea,

rubber and coffee [Rule 7]: An assessee may have composite business income which is partially agricultural and partially non-agricultural, for example, where XYZ Ltd. grows potatoes and further process its produce to sell them as wafers. In this case the company has composite income i.e. from agriculture and from business. The composite income has to be disintegrated and for computing business income the market value of any agricultural produce raised by the assessee or received by him as rent in kind and utilized as raw material in his business is deducted. No further deduction is permissible in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent in kind. For computing agricultural income the market value of agricultural produce will be total agricultural receipt on account of potatoes. From such agricultural receipts, expenses such as cultivation expenses etc. incurred in connection with such receipt will be deducted and balance will be agricultural income, which will be exempt.

For example, in the above case, if the market value of the potatoes grown by the company, which have been used for the purpose of making its own wafers, is Rs. 5 lakhs and the cost of cultivation of such potatoes is Rs. 4 lakhs. From the business income of wafers Rs. 5 lakhs i. e. the market value, shall be deducted and no other expense shall be allowed for such potatoes. On the other hand, the agricultural income shall be Rs. 1 lakh (5 lakhs-4 lakhs). This agricultural income of Rs. 1 lakh shall be exempt.(B) Income from growing and manufacturing of rubber (Rule 7A):(1) Income derived from the sale of centrifuged latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, re-milled crepe, smoked blanket crepe or flat bark crepe) or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India shall be computed as if it were income derived from business, and 35% of such income shall be deemed to be income liable to tax.(2) In computing such income, an allowance shall be made in respect of the cost of planting rubber plants in replacement of plants that have died or become permanently useless in an area already planted, if such area has not previously



been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of section 10(31), is not includible in the total income.(C) Income from growing and manufacturing of coffee (Rule 7B):(1) (a) Income derived from the sale of coffee grown and cured by the seller in India, shall be computed as if it were income derived from business, and 25% of such income shall be deemed to be income liable to tax.(b) Income derived from the sale of coffee grown, cured, roasted and grounded by the seller in India, with or without mixing chicory or other flavorings ingredients shall be computed as if it were income derived from business, and 40% of such income shall be deemed to be income liable to tax.(2) In computing such income, an allowance shall be made in respect of the cost of planting coffee plants in replacement of plants that have died or become permanently useless in an area already planted, if such area has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of section 10(31), is not includible in the total income.(D) Income from growing and manufacturing of tea (Rule 8):Where the assessee has a business of growing tea leaves and then processing it (or manufacturing the same), the procedure adopted to disintegrate is given under Rule 8 which is as under:Step 1 Compute the income of growing as well as manufacturing tea under the head 'profits and gains of business or profession' after claiming the deductions available under that head. In computing such income an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, if such area has not previously been abandoned and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which under the provisions of sections 10(30), is not includible in the total income.Step 2 60% of the income computed in Step 1 will be treated as net agricultural income and 40% of such income, so arrived at, is treated as business income.

Tax on non-agricultural income (if the assessee earns agricultural income also): As already discussed, there is no tax on agricultural income but if an assessee has non-agricultural income as well as agricultural income, such agricultural income is included in his Total Income for the purpose of computation of Income-tax on non-agricultural income. This is also known as partial integration of agricultural income with non-agricultural income or indirect way of taxing agricultural income. Such partial integration is done only in the case of :(i) Individual;(ii) HUF (iii) AOP/BOI;(iv) Artificial Juridicial Person

The agricultural income is not to be added in Non-agricultural Income for



computing tax on Non-Agricultural income in the case of : (i) Firm;

(ii) Company;(iii) local authority;(iv) Co-operative society.

The partial integration is done to compute the tax on non-agricultural income only when the following two conditions are satisfied:(i) non-agricultural income of the assessee exceeds the maximum exemption limit (which for assessment year 2010-11 is Rs. 2,40,000 in the case of an resident individuals at least 65 years old; Rs.1,90,000 in case of resident women less than 65 years old; and Rs.1,60,000 in case of other individuals and HUF’s); and (ii) the Net Agricultural Income exceeds Rs. 5,000.

In other words, if the non-agricultural income is less than the maximum limit or Net Agricultural Income is Rs. 5,000 or less, no partial integration is required.Computation of Tax where there is agricultural income also: The following steps should be followed to calculate the tax:Step 1: Add agricultural income and non-agricultural income and calculate tax on the aggregate as if such aggregate income is the Total Income.Step 2: Add agricultural income to the maximum exemption limit available in the case of the assessee and compute tax on such amount as if it is the Total Income.Step 3: Deduct the amount of Income-tax as computed under Step 2 from the tax computed under Step 1.The amount so arrived at shall be total Income-tax payable by the assessee.Step 4: Add education cess @ 2% and Secondary and higher education cess @1% on tax.

******

Chapter-12ASSESSMENT OF COMPANIES

A company has been defined as a juristic person having an independent and separate legal entity from its shareholders. Income of the



company is computed and assessed separately in the hands of the company. The company is liable to pay tax at a flat rate like a firm. In addition to such tax, if the company is a domestic company, it shall be liable to pay tax under section 115-O on the amount distributed as profits to its shareholders. However, the income of the company which is distributed to its shareholders as dividends is exempt under section 10(34) in the hands of the shareholders, unless it is in the nature of dividends other than the dividends referred to in section 115-O. Such distribution of income is not treated as an expenditure in the hands of company, the income so distributed is an appropriation out of the profits of the company.Definitions1. Company: As per section 2(17), company means:(i) any Indian company, or (ii) any body corporate incorporated by or under the laws of a country outside

India, or(iii) any institution, association or body which was assessed as a company for

any assessment year under the Income-tax Act, 1922 or was assessed under this Act as a company for any assessment year commencing on or before 1-4-1970, or

(iv) Any institution, association or body, whether incorporated or not and whether Indian or Non-Indian, which is declared by a general or special order of CBDT to be a company.

2. A Company in which the public are substantially interested: Section 2 (18) of the Income-tax Act, has defined " a company in which the public are substantially interested". It includes:

(i) A company owned by Government or Reserve Bank of India.(ii) A company having Govt. participation i.e. A company in which not less than

40% of the shares are held by Government or the RBI or a corporation owned by the RBI.

(iii) Companies registered under section 25 of the Indian Companies Act, 1956: Companies registered under section 25 of the Companies Act, 1956 are companies which are promoted with special object such as to promote commerce, art, science, charity or religion or any other useful object and these companies do not have profit motive. However, if at any time these companies declare dividend they would loose the status of a company in which the public are substantially interested.

(iv) A company declared by the CBDT: It is a company without share capital and which having regard to its object, nature and composition of its membership or other relevant consideration is declared by the Board to be a company in which public are substantially interested.

(v) Mutual benefit finance company, where principal business of the company is acceptance of deposits from its members and which has been declared by the Central Government to be a Nidhi or a Mutual benefit Society.

(vi) A company having co-operative society participation: It is a company in which at least 50% or more equity shares have been held by one or more co-operative societies.



(vii) A public limited company: A company is deemed to be a public limited company if it is not a private company as defined by the Companies Act, 1956 and is fulfilling either of the following two conditions:(a) Its equity shares were listed on a recognized stock exchange, as

on the last day of the relevant previous year; or (b) Its equity shares carrying at least 50-% of the voting power (in the case of an industrial company the limit is 40%) were beneficially held throughout the relevant previous year by Government, a statutory corporation, a company in which the public is substantially interested or a wholly owned subsidiary of such a company.

3. Widely held company: It is a company in which the public are substantially interested.

4. Closely held company: It is a company in which the public are not substantially interested.

Burden of proof. The onus is on the revenue to establish that the public are not substantially interested in a company. [Jayantilal Amritlal Ltd. v CIT (1965) 55 ITR (SC)]. In other words, the onus is on the department to establish that the company is a closely-held company. On the other hand, the Bombay High Court had earlier held that the burden of proving that a company is one in which the public are substantially interested is on the company. [P.M. Hutheesingh & Sons Ltd. v CIT (1946) 14 ITR 653 (Bom)].

5. Indian company [Section 2(26))]: Indian Company' means a companyformed and registered under the Companies Act, 1956 and includes-

(i) a company formed and registered under any law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir and the Union Territories);

(ia) a corporation established by or under a Central, State or Provincial ACt;(ib) any institution, association or body which is declared by the Board to be a

company;(ii) In the case of the state of Jammu and Kashmir, a company formed and

registered under any law for the time being in force in that State;(iii) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa,

Daman and Diu, and Pondicherry, a company formed and registered under any law for the time being in force in that Union Territory.

Provided that the registered or, as the case may be, principal office of the company, corporation, institution, association or body, in all cases is in India.6. Domestic company [Section 2(22A)]: A domestic company means an Indian company or any other company which in respect of its income, liable to tax under the Income-tax Act, has made the prescribed arrangements for the declaration and payment within India, of the dividends (including dividends on preference shares) payable out of such income.7. Foreign company [Section 2(23A)]:Foreign company means a company which is not a domestic company.8. Investment company: Investment company means a company whose



gross total income consists mainly of income which is chargeable under the heads Income from house property, Capital gains and Income from other sources.Residence of a Company [Section 6 (3) ]

A company is said to be a resident in India during the relevant previous year if: (a) it is an Indian company, or (b) if it is not an Indian company then, the control and the management of its affairs is situated wholly in India.

The company is said to be non-resident in India if it is not an Indian company and some part of the control and management of its affairs is situated outside India.Computation of Total Income

The total income of a company is also computed in the manner in which income of any other assessee is computed. The first and the foremost step in this direction is to ascertain Gross Total Income. Income computed under four heads (salary head is not applicable), is aggregated. While aggregating the income, section 60 and 61 shall be applicable. Further, effect to set off of losses and adjustment for brought forward losses will also be done. From the gross total income so computed, the following deductions of Chapter VIA should be allowed:1.80G Donations to certain funds/ charitable institutions, etc.2.80GGA Certain donations for scientific research or rural development.3.80GGB Contributions given by companies to political parties.4.80-IA profits and gains of new industrial undertaking or enterprises

engaged in infrastructural development, etc.5.80-IB Profits gains from certain industrial undertakings other than

infrastructure development undertakings.6.80-IC Deduction in respect of certain undertaking or enterprises in certain

special category States (W.e.f. assessment year 2004-05).7.80JJA Deduction in respect of profits and gains from business of collecting

and processing of bio-degradable waste.8.80JJAA Deduction in respect of employment of new workmen.Carry forward and set off of losses in case of certain companies[Section 79]

In the case of closely held companies, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless on the last day of the previous year in which loss is set off and on the last day of the previous year in which the loss was incurred, the shares of the company carrying not less than 51% of the voting power were beneficially held by the same persons.

Where a change in voting power of more than 49% of the shareholding of a closely held company has taken place between two relevant dates (viz., the last day of previous year in which set off is claimed and the last date of the previous year in which the loss was incurred), the assessee will not be entitled to claim set off of such losses.This provision shall not apply to a change in the vot8ing power consequent upon:(a) the death of a shareholder, or(b) on account of transfer of shares by way of gifts to any relative of the



shareholder making such gift.Further, section 79 shall not apply to any change in the shareholding

of an Indian company which is subsidiary of a foreign company arising as a result of amalgamation or demerger of a foreign company subject to the condition that 51 per cent of the shareholders of the amalgamating or the demerged foreign company continue to remain the shareholders of amalgamated resulting foreign company.Assessment of Companies

This principal officer of the company is required to file the return of total income of the company on or before 31st October of the assessment year. A company is assessed like any other assessee. However, its liability differs in two respects:1. No exemption limit: A company does not enjoy any exemption limit.2. Flat Rate of Tax: A company pays income -tax at a flat rate instead of slab

rate.Rates of income-tax for the assessment year 2009-10 are as under:1. Short-term capital gain on equity shares in a company or units of an equity

oriented fund where the transaction is chargeable to securities transaction tax. 10%

2. Tax on long-term capital gains 20%(where the long-term capital gain is covered by section 115AB, 115AC or 115 AD, it is taxable at 10%)

3. Tax on winnings from lotteries, cross word puzzles, races including horse races, etc. 30%

4. Tax or any other income(a) Domestic company 30%(b) Foreign company(i) for all income other than given under (ii) below: 40%(ii) Royalty received from Government or an Indian concern in pursuance of an agreement made by it with the Indian concern after March 31, 1961 but before April 1,1976 or fees for rendering technical services in pursuance of an agreement made by it after February 29, 1964 but before Ist April, 1976 and where such agreement has in either case been approved by the Central Government

50%The amount of income-tax computed as above shall be increased by a surcharge of 10% in case of domestic companies and 2.5% in case of foreign companies, if net income exceeds Rs 1 crore.

Education cess: Education cess @ 2% and Secondary and higher education cess @1% shall be levied on the total tax (including surcharge) payable by the assessee.

Provisions of MAT for payment of tax by certain companies [Section 115JB]Tax payable (before adding surcharge and cess) for any assessment year

cannot be less than 10% of book profit: Where in the case of a company, the income -tax payable on the total income as computed under



the Income-tax Act, is less than 10% of its book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income (book profit) shall be the amount of the income-tax at the rate of 10%.

Allowing tax credit in respect of tax paid on deemed income under MAT provisions against tax liability in subsequent years [sec 115JAA]:

With effect from assessment year 2006-07, where any tax is paid under section 115JB(1) by a company for any assessment year beginning on or after 1.04.2006, the credit in respect of taxes so paid for such assessment year shall be allowed on the difference of the tax paid under section 115 JB and the amount of tax payable by the company on its total income as per other provisions of the Act.

The amount of tax credit shall be allowed to be carried forward and set off in a year when tax becomes payable on the total income computed under the regular provisions. But such tax credit can be carried forward only upto 5 assessment years. Also no credit will be allowed for MAT paid in any assessment year before 2006-07.

Profit and loss Account of the company to be prepared as per provisions ofthe Companies Act[Section 115JB (2)]

Every company shall for the purpose of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. In other words, if the company does not prepare its profit and loss account according to Part II + III of Schedule VI of the Companies Act, the Assessing Officer can recalculate the net profit as per profit and loss account prepared in accordance with the said Schedule.

Profits and loss account prepared for section 115JB(2) and annualaccounts including profit and loss account prepared and placed beforeAGM should have same accounting policies, standards, etc.[Provisos tosection 115JB(2)]: While preparing the annual accounts including profit and

loss account:(i) the accounting policies of the company(ii) the accounting standards followed by the company for preparing such

accounts including profit and loss account;(iii) the method and rates adopted for calculating the depreciation by the

company shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account as laid before the company at its annual general meeting in accordance with on the provisions of section 210 of the Companies Act, 1956[Proviso 1].

Further, where the company has adopted or adopts the financial year under the Companies Act, 1956 which is different from the previous year under the Income-tax Act, the above three (i.e. accounting policies, accounting standards and method of calculating depreciation) shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been



adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year[Proviso 2]

When an Assessing Officer has power to alter the net profit: In the following cases, the Assessing Officer shall have power to rework or rewirte the profit and loss account:(1) Where the profit and loss account submitted is not as per Part II

and III of the Schedule VI of the Companies Act.(2) Where the accounting policies or accounting standards or rate of depreciation adopted are different from those adopted for the profit and loss prepared for the annual genral meeting.

Assessing Officer has no power to scrutinize profit and loss account: Where the profit and loss account has been prepared in accordance with Part II and III of Schedule VI to the Companies Act and which has been scrutinized and certified by the statutory auditors and relevant authorities, the Assessing Officer has no power to scrutinize net profit in profit and loss account except to the extent provided in Explanation to 115J. [Apollo Tyres Ltd. v CIT (2002) 255 ITR 273 (SC)].How to compute book-profits [Explanation to 115JB(1) and (2)]

Step 1: The net profit as shown in the profit and loss account (prepared as per Part II and III of Schedule VI) for the relevant previous year, shall be increased by the following, if debited to the Profit and Loss Account:

(a) the amount of income-tax paid or payable, and the provision therefore; or

(b) the amounts carried to any reserves by whatever name called (other than a reserve specified under section 33AC, inserted as per

the Finance Act, 2002, w.e.f. assessment year 2003-04); or(c) the amount or amounts set aside to provisions made for meeting

liabilities, other than ascertained liabilities; or(d) the amount by way of provision for losses of subsidiary

companies; or (e) the amount or amounts of dividends paid or proposed; or(f) the amount or amounts of expenditure relatable to any income to

which section 10, 10A, 10B, 11 or 12 applies (i.e. incomes which are exempt from tax).W.e.f. assessment year 2005-06 expenses of infrastructure capital fund or company referred to in section 10(23G) shall not be added back.

Step 2: The profit as per the Profit and Loss Account shall be reduced by the following:

(i) the amount withdrawn from any reserves or provisions, if any, such amount is credited to the profit and loss account.A clarificatory amendment has been made by the Finance Act, 2002

w.r.e.f assessment year 2001-2002 to section 115JB to provide that the amount withdrawn from the reserve or provision, created not out of profits



before 1-4-1997, if credited to the profit and loss Account shall not be deducted while computing book profit. In other words, the amount withdrawn from any reserve, credited before 1-4-1997, shall not be reduced from the net profit unless the same was debited to the profit and loss account at the time when such reserve was created. Similarly, the amount withdrawn from the reserve created on or after 1-4-1997 and credited to the profit and loss account shall not be deducted while computing book profit unless the book profit in the year of creation of such reserve was increased by such reserve at that time.Example: R Ltd. transferred a sum of Rs. 40 lakhs to Reserve for bad and doubtful debt account in the financial year 2001-2002. It withdrew a sum of Rs. 15 lakhs out of the reserve during the financial year 2004-2005 by debiting the reserve account and crediting the profit and loss account of that year. In this case, Rs. 40 lakhs must have been added back to net profit for computing the book profits of financial year ending 31-3-2002. Hence, Rs. 15 lakhs credited back to profit and loss account of year ended 31-3-2005 shall be reduced to calculate the book profits of that year.

(ii) the amount of income to which any of the provision section 10, 10A, 10B, 11 or 12 applies (i.e. incomes which are exempt from tax), if any such amount is credited to the profit and loss account; orW.e.f. assessment year 2005-06 exempted income of infrastructure capital fund or company referred to in section 10 (23G) shall not be deducted.

(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. The loss shall, however, not include depreciation. Further the provision of this clause shall not apply if the amount of brought forward loss or unabsorbed depreciation is Nil; or

(iv) the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick Industrial company under sub-section (1) of section 17 of Sick Industrial.Companies (Special Provisions) Act, 1985 and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

(v) the amount of profits eligible for deduction under section 80HHC (for direct exporter and /or supporting manufacturer), subject to the conditions specified in that section;

(vi) the amount of profits eligible for deduction under section 80HHE (for direct exporter and /or supporting manufacturer), subject to the conditions specified in that section;,

(vii) the amount of profits eligible for deduction under section 80HHF, subject to the conditions specified in that section;

The amount computed after increasing or decreasing the above in Step 1 andStep2, respectively, is known as Book-profit.How much brought forward loss/unabsorbed depreciation are deductible



from book profits: As per clause (iii) above, the amount of loss brought forward of unabsorbed depreciation as per books of account whichever is less is to be deducted from the book profits. It has been however clarified that loss however shall not include depreciation In this case brought forward loss and unabsorbed depreciation as per income-tax shall have no relevance.

It has been clarified that where the value of the amount of either loss brought forward or unabsorbed depreciation is 'nil', no amount on account of such loss brought forward or unabsorbed depreciation would be reduced from the book profit. This amendment will be effective from assessment year 1997-98 in case of section 115JA and from assessment year 2001-2002 in case of section 115JB.Furnishing of Report of an Accountant [Section 115 JB (4) and Rule 40B]

Every company to which this section applies, shall furnish a report in Form No. 29B from a chartered accountant certifying that the book profit has been computed in accordance with the provisions of this section along with the return of income filed under section 139(1) or along with the return of income furnished in response to a notice under section 142(1)(i).

It may, however be noted the company shall have to file such report even if it furnishes the return of Income under section 139 (4) instead of section 139(1) or in response to a notice under section 142 (1) (i).Unabsorbed depreciation or losses which can be carried forward [Section 115JB (3)]

Although, the assessee is liable to pay tax @ 10% (plus surcharge and cess as applicable) of the book profits if its total income computed as per Income-tax Act is less but it is entitled to determine unabsorbed depreciation u/s 32(2), business loss u/s 72(1), speculation loss u/s 73 and capital loss u/s 74 and loss u/s 74A and shall be allowed to carry forward such unabsorbed depreciation or losses to the subsequent year (s) for claiming set off as per the normal provisions of Income-tax Act.Are the provisions of section 115JB applicable to foreign companies?

In the connection of old section 115J (the provisions of section 115JB are similar in this case) the Authority for Advance Rulings held that such provisions are applicable to foreign companies also and the foreign companies shall calculate its Indian profits separately for the purpose of minimum alternate tax Other provision of the Act shall continue to apply to such companies [Section 115JB(5)]

Save as otherwise provided in section 115JB, all other provisions of the Income-tax Act shall apply to such companies. Hence, all other provisions relating to Advance tax, interest under sections 234A, 234B and 234C penalty, etc. shall apply to such companies also.

*****



Chapter-13BUSINESS REORGANISATION

The business and economic environment of the country has thrown up the need for rationalization of laws relating to business reorganization for restructuring of production system and better utilization of resources which have become necessary with a view to enable the Indian industry to rearrange itself to become globally competitive. It was in this back ground that tax concessions to conversion of proprietary concern/firms into company were provided for in The Finance (No. 2) Act, 1998.

With the same end in view, the Finance Act, 1999 introduced the following



new provisions which relate to:(a) demerger of a company;(b) sale or transfer of business as a going concern through slump sale.In addition, the existing provisions of amalgamation have also been rationalized.The Income-tax Act now provides for tax concessions in the following cases of business reorganization:(1) Amalgamation/merger of companies;(2) Conversion of proprietary concern/firm into a company;(3) Demerger of a company;(4) Slump sale.33.1 Some important terms as used in financial management(1) Merger: Merger is a combination of two or more companies into one company. It may involve either absorption or consolidation. A merger, in which one of the companies loses its identity and assets and liabilities of this company are taken over by the other (acquiring) company, is referred to as absorption. A merger, in which all the participating companies go out of existence to form a new company, is referred to as Amalgamation.

Examples for absorption variety includes the merger of Tata Oil Mills Company (TOMCO) with Hindustan Lever Limited (HLL), Merger of Reliance Petrochemicals with Reliance Industries and merger of Renusagar Power Supply with Hindalco Industries.

Examples for the amalgamation consolidation variety include the merger of Tetrapak and Alfa Laval to form Tetra Level; the merger of the two Tata Group of companies-Forbes Campbell with Gokak Patel Volkart to form a new company Forbes Gokak; the merger of the three S.K. Birla group of companies- Oriental Carpets, Digvijay Woolen Mills and Universal Electric to form VXL India Limited; and the merger of the two advertising agencies owned by Mudra Communication Interact Communication and Vision Advertising to form a new company Interact Vision.(2) Acquisition/takeover: Acquisition/ Takeover involve the transfer of controlling interest in a company from one management group to another. Typically it involves the bidding company making a tender offer directly to the shareholders of the target company. The tender offer is an offer to purchase the share of the target company at a fixed price per share from shareholders who "tender" their shares. To induce the shareholder of the target to sell their shares, the tender price is usually set significantly above the current market price. Use of tender offer allows the acquiring company to bypass the management of the company it wishes to acquire. The term 'takeover' is also used to refer to this process.

Examples include acquisition of controlling interest: (a) in Chloride India by the S.K. Birla Group; (b) in Harrison Malayalam Plantation by the R.P.Goenka groups; (c) in Rallis India by Tata Tea; and (d) in Consolidated Coffee by Tata Tea.Mergers and acquisitions distinguished: In merger transactions, the consideration is paid for and received in shares and both the merging partners receive money in future periods of time in the form of future dividends on yields.



No money transaction is usually implied at the time of entering into a merger agreement. Whether share capital is pooled or assets are pooled, so long as a share for share exchange takes place between the contracting parties, the transaction is a merger.

In an acquisition, the consideration is in the form of cash. The person or the corporation intending to control another corporation pays cash for the number for shares that give him the control. Thus the seller of the share receives money in the current period of the transaction and the buyer of the share also pays in 'today's values'. (3) Demerger: The term "demerger" signifies spinnings of or hiving off the existing divisions of the company into a separate company. Thus, demerger is a split or a division of the company. The division hived off could be transferred to the new company or it can be sold to an existing company.

The demerger may take place due to various reasons like internal restructuring or family settlements. It may also be undertaken as a tool of tax-planning.(4) Slump sale: Slump sale refers to the sale of the undertaking as a whole including all the assets and liabilities as a going concern. In this case the consideration is not fixed for each and every asset separately but a lump sum consideration is determined for the undertaking/division as a whole.Legal aspects of amalgamation/merger as per Companies Act

The term amalgamation has not been defined under the Companies Act but as per section 394 of the Companies Act and various judicial decisions, amalgamation includes absorption and the meaning of term amalgamation and absorption is same as described above. The amalgamation under the company law may be by order of court or by the Central Government if it is in public interest.

The legal procedure to be followed for the amalgamation of the companies is as follows:Procedure:1. Provision in the object clause: There must be a provision in the Memorandum of Association of both the Companies to amalgamate with any other company.2. Obtaining Government Approval: Under sections 391 and 394 of the Companies Act, 1956, the Central Government's approval of the merger proposal is necessary for filing petition before the High Court for the approval of the merger.

RBI's approval is also necessary under section 29 of the Foreign Exchange Regulation Act, 1973 for transfer of share involving NRI's or foreign nationals.3. Intimation to Stock Exchange: The information on the proposal of the merger should be given to the Stock Exchange in whose jurisdiction the listed companies proposing to merger are located. All notices and other resolutions in the connection are to be sent to the Stock Exchange for their record.4. High Court's Approval: Under section 391 of the Companies Act, 1956 and



Companies (court) Rules, 1959, each company has to make separate applications in High Court seeking summons to convene the meeting of the members of the two companies. Separate meeting of equity and preference shareholders are required to be convened. Under section 394 of the Companies Act, the court may sanction a proposed amalgamation. However, the court would do so after hearing all the parties concerned, e.g., shareholders, creditors, tax authorities, etc. It would also see that the scheme of amalgamation is reasonable, workable, fair keeping in view the general conditions, background and object of amalgamation.

Section 396 also gives power to the Central Government to provide for amalgamation of two or more companies if it is satisfied that it is essential in public interest.

Amalgamation Under Income-tax ActMeaning of Amalgamation [Section 2 (1B)]

The Act has defined amalgamation under section 2 (1B). The purpose of giving such definition is that the benefits/ concessions under income-tax shall be available to both amalgamating and amalgamated companies only when all the conditions, mentioned in the said section, are satisfied. Further, if the amalgamated company wishes to set off the losses and unabsorbed depreciation of the amalgamating company with its profits, the conditions mentioned in section 72A of the Income-tax Act shall also have to be fulfilled.

According to section 2(1B) 'amalgamation' in relation to companies means the merger of one or more companies with another company of 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 or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that-(i) All the property of the amalgamating company or companies

immediately before the amalgamation becomes the property of the amalgamated company by virtue of amalgamation.

(ii) All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of amalgamation.

(iii) Shareholders holding not less than ¾th in value of the shares in amalgamating company or companies (other than shares held therein immediately before the amalgamation or by a nominee for the amalgamated company or its subsidiary) become shareholders of the amalgamated 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 distribution of such property to the other company after the winding up of first mentioned company.Therefore, due to amalgamation the following situations may emerge:-(i) R Ltd. merges with G Ltd. Thus R Ltd. goes out of existence.(ii) R Ltd. and G Ltd. both merge and form a new company say T Ltd. Thus

both R Ltd. and G Ltd. go out of existence, and a new company is formed.



In the above case, the companies which go out of existence are known as amalgamating companies and the 'merged' company or the newly formed company will be known as amalgamated company.

Thus, in order that an amalgamation may fall under the above definition, the following conditions must necessarily be fulfilled:(i) All the property of the amalgamating company should be vested in the

amalgamated company.(ii) All the liabilities of the amalgamating company should be vested in the

amalgamated company.(iii) Shareholders holding not less than ¾th in value of the share in the

amalgamating company should become the shareholders of the amalgamated company. However, shares already held by or by a nominee

for the amalgamated company or its subsidiary immediately before the amalgamation shall be excluded.Example: Where "A" merges with another company "B" in a scheme of amalgamation, and immediately before the amalgamation, company "B" held 20 per cent of the shares in company "A", the above-mentioned condition, will be satisfied if shareholders holding not less than ¾th in value of the remaining 80 per cent of share in company "A" i.e. 60 per cent thereof ( ¾ th of 80), become shareholders of company "B" by virtue of the amalgamation.Merger which will not be called an amalgamation: The last paragraph of this definition excepts the following two cases where the element of merger exists, but yet there is no ' amalgamation' within the meaning of this clause:(a) where the property of the company say 'A' which merges is sold to the

other company say 'B' and the amalgamation comes about by virtue of a transaction of sale;

(b) where the company 'A' which merges is wound-up in liquidation and the liquidator distributes the property of company 'A' to the company 'B' and the amalgamated company 'B' receives the property of company 'A' (the amalgamating company) from the liquidator as on liquidation.Tax concessions/incentives in case of amalgamation

If any amalgamation takes place within the meaning of section 2(1B) of the income-tax, the following tax concession shall be available:(1) Tax concession to amalgamating company.(2) Tax concession to shareholders of the amalgamating company.(3) Tax concession to amalgamated company.a) Tax concession to amalgamating company(i) Capital Gains tax not attracted: According to section 47(vi), where there is a transfer of any capital asset in the scheme of amalgamation, by an amalgamating company to the amalgamated company, such transfer will not be regarded as a transfer for the purpose of capital gain provided the amalgamated company, to whom such assets have been transferred, is an Indian company.(ii) Tax concession to a foreign amalgamating company [Section 47 (via)]: Where a foreign company holds any shares in an Indian company and transfers the same, in the scheme of amalgamation, to another foreign company, such



transaction will not be regarded as transfer for the purpose of capital gain under section 45 of the Income-tax Act if the following conditions are satisfied:1. Atleast 25% of the shareholders of an amalgamating Foreign company should continue to remain shareholders of amalgamated foreign company, and 2. Such transfer does not attract tax on capital gains in the country, in

which the amalgamating company is incorporated.b) Tax concessions to the shareholders of a amalgamating company [Section 47(vii)]: Where a shareholder of an amalgamating company transfers his shares, in a scheme of amalgamation, such transaction will not be regarded as a transfer for capital gain purposes, if following conditions are satisfied:(i) the transfer of shares is made in consideration of the allotment to him of

any share or shares in the amalgamated company, and (ii) the amalgamated company is an Indian company.

c) Tax concessions to the amalgamated company: The amalgamated company shall be eligible for tax concessions only if the following two conditions are satisfied:

(i) The amalgamation satisfies all the three conditions laid down in section 2(1B); and

(ii) The amalgamated company is an Indian company.(1) Expenditure on Scientific research [Section 35 (5)]: Where an

amalgamating company transfers any asset represented by capital expenditure on the scientific research to the amalgamated Indian company

in a scheme of amalgamation, the provisions of section35 which were applicable to the amalgamating company shall become applicable to the amalgamated company consequently:- (i) Unabsorbed capital expenditure on scientific research of the

amalgamating company will be allowed to be carried forward and set off in the hands of the amalgamated company.

(ii) if such asset ceases to be used in a previous year for scientific research related to the business of amalgamated company and is sold by the amalgamated company without having being used for other purposes, the

sale price, to the extent of the cost of the asset shall be treated as business income of the amalgamated company. The excess of the sale price over the cost of the asset shall be subject to the provisions of the capital gains.(2) Expenditure for obtaining license to operate telecommunication services [Section 35ABB(6)]: Where in a scheme of amalgamation, company sells or otherwise transfer its license to the amalgamated company (being an Indian company), the provisions of section 35ABB whichwe4re applicable to the amalgamating company shall become applicable in the same manner to the amalgamated company, consequently:(i) The expenditure on acquisition of licence, not yet written off, shall be allowed to the amalgamated company in the same number of balance installments. (ii) Where such licence is sold by the amalgamated company, the treatment of



the deficiency /surplus will be same as would have been in the case of amalgamating company.(3) Treatment of preliminary expenses [Section 35D(5)]: Where an amalgamating company merges in a scheme of amalgamation with the amalgamated company, the amount of preliminary expenses of the amalgamating company, which are not yet written off, shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company.(4) Amortisation of expenditure in case of amalgamation {Section 35DD] : (1) Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place.(2) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act.(5) Treatment of expenditure on prospecting etc. of certain minerals [Section 35E(7A: Where an amalgamating company merges in a scheme of amalgamation with the amalgamated company, the amount of expenditure on prospecting, etc. of certain minerals of the amalgamating company, which are not yet written off, shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company.(6) Treatment of capital expenditure on family planning [Section 36(1)(ix)]: Where the asset representing the capital expenditure on family planning is transferred by the amalgamating company to the Indian amalgamated company, in a scheme of amalgamation, the provisions of section 36(1)(ix) to the amalgamating company shall become applicable, in the same manner, to the amalgamated company consequently:(i) The capital expenditure on family planning not yet written off shall be

allowable to the amalgamated company in the same number of balance instalments.

(ii) Where such assets are sold by amalgamated company, the treatment of the deficiency/surplus will be same as would have been in the case of

amalgamating company.(7) Treatment of bad debts [Section 36(1) (vii)]: Where due to amalgamation, the debts of amalgamating company have been taken over by the amalgamated company and subsequently such debt or part of the debt becomes bad, such bad debt will be allowed as a deduction to the amalgamated company. [CIT v T. Veerabhadra Rao, K.Koteswara Rao & Co. (1985) 155 ITR 152 (SC)].(8) Deduction available under section 80-1A or 80-1B or 80-IC: Where an undertaking which is entitled to deduction under section 80-IA/80-IB/80-IC is transferred in the scheme of amalgamation before the expiry of the period of deduction under section 80-IA or 80-IB or 80-IC, then-(i) no deduction under section 80-IA/80-IB/80-IC shall be available to the



amalgamating company for the previous year in which amalgamation takes place; and (ii) the provisions of section 80-IA/80-IB/80-IC shall apply to the amalgamated company in such manner in which they would have applied to the amalgamating company.(9) Carry forward and set off of business losses and unabsorbed depreciation of the amalgamating company: In addition to the above benefit/concessions, the amalgamated company shall be allowed to carry forward and set off the business losses and unabsorbed depreciation of the amalgamating company if all the conditions mentioned in section 72A are satisfied. For details of the conditions refer to Chapter on set off and carry forward of losses.Tax planning in case of amalgamation1. The benefit of tax concession is allowed to the amalgamating and amalgamated company only when the amalgamation satisfies the conditions provided under section 2(1B) of the Income-tax Act. One of the conditions laid down is that all the assets and liabilities of the amalgamating company, as on the date of amalgamation should be taken over by the amalgamated company. Therefore if some assets or liabilities of the amalgamated company are not proposed to be taken over by the amalgamated company the same should be disposed off or discharged by the amalgamating company before the amalgamation takes effect.2. Similarly there is a condition that at least 75% of the shareholders of the amalgamating company should become shareholders of the amalgamating company. If more than 25% of the shareholders of the amalgamated company are not willing to become shareholders of the amalgamated company, then so much shares of such shareholders may be purchased by the other shareholders or by the amalgamated company, before the amalgamation, so that at the time of amalgamation the condition of 75% of the shareholders becoming shareholders of the amalgamated company is satisfied.3. As per section 72A the amalgamated company can carry forward the business loss and unabsorbed depreciation of the amalgamating company only when certain conditions, are satisfied.

Where it is not possible to satisfy such conditions the companies may opt for a Reverse merger i.e. instead of the loss making company merging with the profit making company the profit making company may merge with the loss making. In this case, the amalgamated company, which was the loss making company will be able to carry forward its own business loss and unabsorbed depreciation and set it off against the profits of the business which has merged with it, in the scheme of amalgamation.4. As already discussed, the benefit under section 47(viii) shall be allowed only when the shareholders of the amalgamating company are allowed only shares of the amalgamated company in lieu of shares held by them in the amalgamating company. If the shareholders are allotted something more than shares in the amalgamated company viz. bonds or debentures, etc. no benefit wil



be available under section 47(viii)

*****

Chapter-14Concepts of Tax-Planning and Specific Management Decisions

Taxes are what even an honest citizen despises the most as human being by very nature is selfish. He would like to have first of all every good thing for himself and he would hardly like that the fruits of his labour are enjoyed by others and particularly by those with whom he has no relationship. He will try his best to see to it that his hard earned money is not taken away by others forcibly whether it is by snatching or by the rule of law. But it is also a duty of the individual to save legally from payment of taxes so that the same may be available with him to make him and his dependants to be good and honorable citizens. On the other hand, the practical concept of taxation laws is to realize the revenue by way of tax to the maximum. Therefore, the perceptions of the tax payer and the tax collector are different. The tax payer spares no efforts in maximizing his profits and attracting the least incidence. The tax-collector, on the other hand, tries to maximize revenue within the framework of law. It is here that the tax planning has assumed far-reaching importance in the confounded complexities of the taxation laws. The primary objective of tax planning is to save the hard labour of the taxpayer in enjoying the fruits of his income and wealth to



the maximum possible extent.Methods commonly used by tax payers to minimize tax liabilityAs discussed above, the goal of the tax payers is to minimize his tax liability. To achieve this goal the following three methods are commonly used by him:1. Tax evasion2. Tax avoidance3. Tax planningTax evasionUnscrupulous citizens evade their tax liability by dishonest means. Some of which are:(a) Concealment of income;(b) Inflation of expenses to suppress income;(c) Falsification of accounts (d) Conscious violation of rules.

These devices are unethical and have to be condemned. The courts also do not favour such unethical means. Evasion, once proved, not only attracts heavy penalties but may also lead to prosecution.

Such an evader of tax is not a good citizen and tax evasion as a means to reduce tax liability cannot be advocated by any one.Tax avoidance

Tax avoidance is minimizing the incidence of tax by adjusting the affairs in such a manner that although it is within the four corners of the taxation laws but the advantage is taken by finding out loopholes in the laws. The shortest definition of tax avoidance is that it is the art of dodging tax without breaking the law.

In the case of tax avoidance, the tax payer apparently circumvents the law, without giving rise to a criminal offence, by the use of a scheme, arrangement or device, often of a complex nature but where the main purpose is to defer, reduce or completely avoid the tax payable under the law.

In the words of Justice O. Chinnappa Reddy of Supreme Court in McDowell & Co. Ltd. v CTO (1985) 154 ITR 148 (SC) at p. 160 the evil consequences of tax avoidance are manifold and may be summarized as under:(a) Substantial loss of much needed public revenue, particularly in a welfare

State like ours.(b) Serious disturbance caused to the economy of the country by piling up of mountains of black money directly causing inflation(c) Large hidden loss to the community by some of the best brains in the

country being involved in the perpetual war waged between tax avoider and his expert team of advisers, lawyers and accountants on one side, and the Tax Officer and his perhaps not so skillful advisers on the other side.

(d) Sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it.

(e) Ethics (or lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of artful dodgers.



As to the ethics of taxation, the learned judge observed: We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation.Tax planning

Tax planning is the arrangement of financial activities in such a way that maximum tax benefits are enjoyed by making use of all beneficial provisions in the tax laws. It entitles the assessee to avail certain exemptions, deductions, rebates and relief's, so as to minimize his tax liability. This is permitted and not frowned upon.Tax planning is permissible even after McDowell's case. There might be a difference of opinion in various quarters in respect of tax avoidance, as these days Judges have started thinking in the interest of the State with a firm determination to leave the age-old accepted thinking of 1936 and to look into future. But tax planning is still not touched by these judgments and in the words of Ranganath Mishra, J. of Supreme Court in McDowell's case itself, it is permissible provided it is within the frame work of law. He observes:

Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable 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.Distinction between tax planning, tax avoidance and tax evasion:Tax planning, tax avoidance and tax evasion are three different approaches to the same objective viz., to reduce tax liability. However, they have different characteristics. Tax planning is perfectly legal as the object of tax reduction is achieved by making use of the beneficial provisions in the tax laws. On the other hand, tax avoidance is also legal though technically satisfying the requirements of law. Tax evasion is a method of evading tax liability by dishonest means like suppression, conscious violation of rules, inflation of expenses, etc.

Tax planning imply compliance with the taxing provisions in such a manner that full advantage is taken of all exemptions, deductions, concessions, rebates and relief's permissible under the Act so that the incidence of tax is the least. Tax planning, therefore cannot be equated to tax evasion or tax avoidance. Tax planning may be regarded as a method of intelligent application of expert knowledge of planning corporate affairs with a view to securing consciously provided tax benefits on the basis of the national priorities in keeping with the interest of the State and the public.

The cases covered under "Tax avoidance' are those where the tax payer has apparently circumvented the law, without giving rise to a critical offence by the use of a scheme arrangement or device often of a complex nature whose sole purpose is to defer reduce or completely avoid the tax payable under the law. In other words tax avoidance is a method of reducing incidence of tax by



taking advantage of certain loopholes in tax laws.Tax evasion is a dubious way of attempting to solve tax problems by

suppression of income, conscious violation of rules inflation of expenses, etc. Tax evasion, therefore, cannot be construed as tax planning because it amounts to breaking of law whereas tax planning is devised within the legal framework by availing of what the legislature intended.

There is no dispute in accepting tax avoidance is different from tax planning but the subtle difference between tax avoidance and tax planning is often over looked.

Thus, any legitimate step taken by an assessee towards maximising tax benefits keeping in view the intention of law will not only help him but

the society also. All those who do the tax planning could help themselves in efficient and economic conduct of their business affairs without getting entangled in the controversy of tax avoidance or evasion.35.4b Tax Management:

Tax management refers to the compliance with the statuary provisions of law. While tax planning is optional, tax management is mandatory. It includes maintenance of accounts, filing of return, payment of taxes, deduction of tax at source, timely payment of advance tax, etc. Poor tax management may lead to levy of interest, penalty, prosecution, etc. In some cases it may lead to heavy financial loss if proper compliance is not made, e.g. if a loss return is not filed in time it will result in a financial loss because such loss will not be allowed to be carried forward.35.5 Objectives of tax planningThe prime objectives of tax planning may be summarized as follows:(i) Reduction of tax liability.(ii) Minimisation of litigation.(iii) Productive investment(iv) Healthy growth of economy.(v) Economic stability(i) Reduction of tax liability: One of the supreme objectives of tax planning is the reduction of the tax liability of the taxpayer and the resultant saving of the earnings for a better enjoyment of the fruits of the hard labour. By proper tax planning, a taxpayer can oblige the administrators of the taxation laws to keep their hands off from his earnings.(ii) Minimisation of litigation: Where a proper tax planning is resorted to by the taxpayer in conformity with the provisions of the taxation laws, the chances of unscrupulous litigation are certainly to be minimized and the tax-payer may be saved from the hardships and inconveniences caused by the unnecessary litigations which more often than not even knock the doors of the supreme judiciary.(iii) Productive investment: The planning is a measure of awareness of the taxpayer to the intricacies of the taxation laws and it is the economic consciousness of the income-earner to find out the ways and means of productive investment of the earnings which would go a long way to minimize his tax



burden. The taxation laws offer large avenues for the productive investment of the earning granting absolute or substantial relief from taxation. A taxpayer has to be constantly aware of such legal avenues as are designed to open floodgates of his well-being, prosperity and happiness. When earnings are invested in the avenues recognized by law, they are not only relieved of the brunt of taxation but they are also converted into means of further earnings.(iv) Healthy growth of economy: The saving of earnings is the only basement upon which the economic structure of human life is founded. A saving of earnings by legally sanctioned devices is the prime factor for the healthy growth of the economy of a nation and its people. An income saved and wealth accumulated in violation of law are the scours on the economy of the people. Generation of black money darkens the horizons of national economy and leads the nation to avoidable economic destruction. In the suffocating atmosphere of black money, a nation sinks with its people. But tax planning is the generator of a superbly white economy where the nation awakens in the atmosphere of peace and prosperity, a phenomenon undreamt of otherwise.(v) Economic stability: Under tax planning, taxes legally due are paid without any headache either to the taxpayer or to the tax collector. Avenues of productive investments are largely availed of by the taxpayers. Productive investments increase contours of the national economy embracing in itself the economic prosperity of not only the taxpayers but also of those who earn the income not chargeable to tax. The planning thereby creates economic stability of the nation and its people by even distribution of economic resources.

Types of Tax planningTax planning can be broadly divided into two heads:

(a) Short-term tax planning(b) Long-term tax planning

A short-term tax planning is normally for a period upto a year and it is done from year to year to achieve some particular objective. On the other hand, the long-term planning will be for a longer period and it may not pay off immediately.Factors on the basis of which Tax planning is done

The following factors are helpful for effective tax planning:(i) Residential status and citizenship of the assessee.(ii) Heads of income/Assets to be included in computing net wealth.(iii) Latest legal position.(iv) Form v Substance.(i) Residential status: As we know that non-resident in India is not liable to pay income-tax on incomes which accrue or arise and also received outside India, whereas a resident in India is liable to pay income-tax on such incomes. Therefore, every assessee would like to be a non-resident in India, if he has any income which accrues or arises outside India.

If any individual wishes to be a non-resident in India, he should be careful about the facts given below:-



1. If an individual is a citizen of India and visits India in any previous yeas, he should not stay in India for more than 181 days in that previous year. Where he wishes to stay in India for more than 181 days at a stretch, he should plan his stay in such a manner that his stay in one previous year does not exceed 181 days.For example he can stay from 2nd October of a particular previous year to 28th

September of next previous year aggregating to 362 days at a stretch, still he will be called non-resident in India as the period of stay in each year will not exceed 181 days.The above also hold good in case of a person of India Origin.Notes: One should however, in the above case be careful regarding leap year as the number of days for the month of February in that case shall be 29 instead of 28.2. The citizen of India, who wishes to leave India in any previous year for

employment abroad, should leave India by 28th September so that his stay in India does not exceed 181 days and he may be called non-resident

in India for that previous year.3. A citizen of India, who does not leave India for employment abroad, should

leave India by 29th May of the previous year if he had been in India for 365 days or more in the 4 preceding previous years.

4. Foreign national can stay in India-for 181 days in the previous year and he will still be non-resident in India provided his stay in India during the 4 preceding previous years immediately preceding the relevant previous year does not exceed 364 days. If it exceeds 364 days, then, in such a case, he can not stay in India for more than 59 days in that previous year. However, he can stay at a stretch of 59+59 days if these fall in two previous years. Thus such person can come to India in the first week of February and stay up to May 29th of the next year.

If an individual can not become non resident in India, he can still escape the liability of tax on all foreign incomes which accrue or arise and received outside India except if such incomes accrue or arise from a business or profession set up or controlled from India provided he is not ordinarily resident in India.

The HUF will be non- resident in India only when entire control and management of its affairs is situated outside India. If it is not possible, HUF can claim the status of not ordinarily resident in India provided the karta of HUF satisfies both or any of the two additional conditions.

There can not be any planning of residential status in case of an Indian company because it is always resident in India irrespective of its control and management. However, a non-Indian company can be non-resident in India if any part of the control and management of its affairs is situated outside India.

A non-resident in India can bring his income to India, which accrued or arose to him outside India in any previous year, after the previous year of accrual because in that case it will not be treated as received in India. It will be called as remitted to India.



The same holds good in case of not ordinarily resident in India provided such income is not from the business or profession which is set up or controlled from India.(ii) Heads of Income: Before the tax-planner goes in for his task, he has to have a full picture of the sources of income of the taxpayer and the members of his family. Though total income includes all income from whatever source derived, the scope of tax planning is not similar in respect of all sources of income. The assessee can avail the benefits of exemption and deduction under each head of income. Further, he can avail the benefit of rebate and relief under the Act. A consolidated tax planning may be attempted only after the tax-planning in respect of the different heads of income and a failure to do so may jeopardize the tax planning and may not achieve the desired result. Similarly, the tax-planner should know which assets are liable to Wealth tax and what are the exemptions allowable in case of such assets to avail the maximum benefit and reduce the Wealth tax liability.(iii) Latest legal position: It is the foremost duty of a tax-planner to keep himself fully conversant with the latest position of the taxation laws along with the allied laws and also the judicial pronouncements in respect thereof. For this purpose, he must have a thorough and up-to-date understanding of the annual Finance Acts, the Taxation law Amendments, the amendments, if any, of the other allied laws, the latest judicial pronouncements of the High Courts and the Supreme Court, various Circulars of the Central Board of Direct Taxes which seek to clarify the legal position in so far as the Revenue is concerned. A successful tax planning can be attempted only if the tax-planners knowledge of legal principles is up-to-date.(iv) Form v Substance: A tax-planner will have to thoroughly understand the true nature of any transaction which relates to income- plus or minus. In this connection, he will have to bear in his mind the following principles enunciated by the Courts on the question as to whether form or substance of a transaction should prevail in Income-tax matters:(a) Form of transaction: When a transaction is arranged in one form known to law, it will attract tax liability while, if it is entered into another form which is equally lawful, it may not. In considering, therefore, whether a transaction attracts tax or not, the form of the transaction put through by the taxpayer is to be considered and not the substance thereof. But this rule applies only to genuine transactions. Where statutorily the parties have to reduce a certain transaction into writing, it is not open to Courts or any other authority to permit oral evidence to be adduced by the parties or to entitle them to go behind the statement document. A citizen can not be taxed merely with a view to swell the revenues, ignoring the legal position by regarding the substance of the transaction. It is not open to the Income Tax Authorities to deduce the nature of document from the purported intention by going behind the document or to consider the substance of the matter or to accept it in part and reject it in part or to rewrite the documents merely to suit the purpose of the revenue. [CIT v Motors & General Stoeres (P) Ltd. (1967) 66 ITR 692 (SC)].



(b) Genuineness transaction: In deciding whether the transaction is a genuine or colorable one because in such a situation, it is not the question of form and substance but of appearance and truth it will be open to the authorities to pierce the corporate veil and look, behind the legal façade, at the reality of the transaction. The taxing authority is entitled and indeed bound to determine true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authority to unravel the device and determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the substance of the transaction. The true legal relation arising from a transaction alone determines the taxability of a receipt arising from the transaction. [CIT v B.M.Kharwar(1969) 72 ITR 603 (SC)].(c) Expenditure: In the case of an expenditure, the mere fact that the payment is made under an agreement does not preclude the department from enquiring into the actual nature of the payment. [Swadeshi Cotton Mills Co. Ltd. v CIT (1967) 63 ITR 57 (SC)]. In order to determine whether a particular item of expenditure is of revenue or capital nature, the substance and not merely the form should be looked into. [Assam Bengal Cement Co. Ltd.v CIT (1955) 27 ITR 37 (SC)].Areas of tax planning

Tax planning may be effective in every area of business management. Some of the important areas where planning may be attempted are:(i) Location of business.(ii) Nature and size of business.(iii) Form of business organization and the pattern of its ownership.(iv) Specific management decisions like make or buy, own or lease, capital

structure, renew or replace, etc.(v) Employees remuneration.(vi) Mergers/Amalgamation of companies.(vii) Double Taxation Relief.(viii) Non-residents.(ix) Advance Ruling.Location of Business

Tax planning is relevant from location point of view. There are certain locations which are given special tax treatment. Some of these are as under:-1. Full exemption under section 10B for ten years in the case of a newly

established 100% export oriented industrial undertaking in free trade zones, etc.2. Full exemption under section 10A for ten years in the case of a newly

established industrial undertaking in free trade zones, etc.3. Full exemption under section 10BA for 10 years in the respect of profits

from the export of eligible article or things.4. Deduction under section 80-IB in the case of newly set up industrial

undertaking in an industrially backward State or district.5. Deduction under section 80-IC in case of newly set up industrial



undertaking or substantial expansion of an existing undertaking in certain special category States.

Nature of businessTax planning is also relevant while deciding upon the nature of business.

There are certain businesses which are granted special tax treatment. Some of them are as follows:1. Newly established industrial undertaking in free trade zones, etc.[Section 10A].2. Newly established hundred per cent export-oriented undertakings

[Section 10B].3. Tea Development Account, coffee Development Account and Rubber

Development Account [Section 33AB].4. Site restoration fund [Section 33ABA].5. Amortisation of certain preliminary expenses [Section 35D].6. Deduction for expenditure on prospecting for certain minerals [Section

35E].7. Deduction for special reserve created by a financial corporation under

section 36(1)(viii).8. Special provision for deduction in the case of business for prospecting for mineral oil [Sections 42 and 44BB].9. Special provisions for computing profits and gains of business of civil

construction [Section 44AD].10. Special provisions in the case of business of plying, hiring or leasing

goods carriages [section 44AE].11. Special provisions for computing profits and gains of retail business

[Section 44AF].12. Special provisions in the case of shipping business [Section 44B].13. Special provisions in the case of business of operation of aircraft [Section 44BBA].14. Special provisions in the case of certain turnkey power projects [Section

44BBB].15. Special provisions in the case of royalty income of foreign companies

[Section44D].16. Profits and gains of industrial undertakings or enterprises engaged in

infrastructure development, etc. [Section 80-IA].17. Profits and gains from certain industrial undertaking other than

infrastructure development undertaking [Section 80-IB].18. Special provisions in respect of certain undertaking or enterprises in

certain special category States [Section 80-IC].19. Profits and gains from the business of collecting and processing of bio-

degradable waste [Section 80JJA].20. Employment of new workmen [Section 80JJAA].21. Special tax rate under sections 115A, 115AB, 115AC, 115AD, 115B,

115BB, 115BA and 115D.Form of ownership



The form of ownership is an important tool of tax planning. There are different forms of organizations having different tax incidences at a given level of operation. The form of ownership may be sole proprietorship, partnership, company, co-operative society, etc. It is the form of ownership which determines the sharing of profits, responsibilities of the activities to third parties, etc.

There are different tax treatments under different forms of ownership which are given different status under tax laws. These forms of ownership are also allowed different tax concession and rebates under tax laws. Therefore, the tax implication on the project under different forms of ownership at a certain level of profit are to be analyzed and a form of ownership suitable to those circumstances is selected.1. Sole proprietorship: The most common form of ownership found in the business world is sole proprietorship. In this form of organization, the proprietor is the only owner of the business assets and he is solely responsible for the affairs of the business. The merits and demerits of a sole proprietary form of organization may be summarized as under:Merits(a) A sole proprietorship is easy to establish because of little interference of

government regulations.(b) The cost of adopting this form of organization is small because of there

being no legal requirement(c) All the profits of the business go in the hands of proprietor himself.(d) In case of persons carrying on business on small scale and having small income from other sources, this form of organization would be suitable because the proprietor can avail of the ceiling of exempt income i.e. Rs. 1,50,000 for the assessment year 2009-10 and his tax liability will be minimum as the individual is subject to income-tax at slab rate and the maximum marginal rate of income tax in his case is 30% plus surcharge as applicable + education cess @ 2%+ secondary & higher education cess@1%(e) Besides the deduction which are allowed to all assesses under Chapter VIA, a sole proprietor, being assessed as individual, is entitled to get certain deductions under sections 80C, 80CCC, 80CCD, 80DD, 80DDB, 80E, 80GG, 80GGC, 80QQB, 80RRB and 80U.Demerits(a) The liability of the proprietor is unlimited and it can extend even to his personal assets. When the proprietor incurs losses and business assets are not sufficient enough to meet the liabilities of business, his personal assets can be used for discharging the business liabilities.(b) The proprietor does not get deduction on account of remuneration payable to him attributable to the rendering of services. It is felt that it is the capital contributed and risk taken by the proprietor for which he is rewarded in profits and that he must be given remuneration for the service rendered by him which should be allowed as deductible expenditure. But this is not so in income-tax law.(c) Another main drawback of this form of organization is that it does not



provide opportunities to finance the expanding business activities. In the case of a partnership firm, on the other hand, finance can be raised by the existing partners or by entering another partner.(d) In case of a business growing at a high speed, and yielding higher profits, a sole proprietary organization may not be beneficial. As the salary paid to the proprietor, and interest paid on capital are not allowable, the profits become higher and tax incidence goes high. In case of other entities, on the other hand, remuneration payable to partners/managing director, interest paid to partners are allowed as admissible expenditure to the extent specified in the Act.2. Hindu Undivided Family: A joint Hindu family pays tax on its total income at prescribed rates on the basis of slab system. The family can pay reasonable remuneration to the Karta and other family members for their services to the business and it is allowed as a deduction in computing the business income. However, interest on capital contributed by HUF for business is not deductible in computing business income. The member of the family, who has received the remuneration from the family will include it in his income under the head Salaries.

A Hindu undivided family will also get a basic exemption of Rs. 1,50,000. Besides the deductions which are allowed to all assesses, it is allowed certain deductions under sections 80D, 80DD, 80DDB, 80GG and 80GGC like individuals. The tax rates in case of HUF are same as applicable to individual.

The demerits of HUF, however, are similar to that of individuals. 3. Partnership firmMerits of partnership1. A partnership form of organization is also easy to establish. The only

procedure for the formation of partnership is to draw up a partnership deed and a nominal charge in terms of cost of stamps for the deed is to be

incurred.2. The decision making on important business matter is quick as compared

to a company form of organization because partners meet frequently together. Therefore, decision on any important business matter cannot be delayed.

3. The chances of getting involved in risky activities is very less because every important decision is made with the concurrence of all the partners.

4. As compared to sole proprietorship, the problem of raising additional resources is much less. Whenever the business expands and it is necessary to raise finance, it will be easy to raise it by admitting a new partner or raising it by way of borrowing because of number of partners and their joint and several liabilities to pay the debts of the firm, the lenders will be more interested in lending.

5. The firm can pay interest on capital and loan to partners at the maximum rate of 12% p.a. Further it can also give remuneration to its working partners subject to the limits mentioned in section 40(b).

6. This form of organization is suitable from income-tax point of view in such cases where the amount of profit is not large and the partners of the firm



do not have any other additional income except by way of remuneration and interest from the partnership firm. In such a case the profit of the firm shall be lower and the individual partners can also avail of the maximum ceiling of income exempt under Income-tax Act.

7. The share in the profit of the partnership firm is exempt from tax under section 10(2A) of the Income-tax Act.

8. The risk as to losses and liability incurred is divided amongst the partners.

9. As in the case of company form of organization where the change of business requires a long procedure, there is no tedious procedure in the partnership form of organization. The business can be changed only with the consent of partners.

10. The firm is taxable at a flat rate of 30% + surcharge @ 10% + education cess @ 2%+ secondary & higher education cess @ 1%, after allowing interest and remuneration to working partners (if provided in the partnership deed and subject to section 40 (b) of the Income-tax Act.

Demerits of partnership1. The risk taking capacity of the partners becomes limited. Every decision

relating to important business matters is made with the consultation of other partners, which restricts the risk taking activities which may yield much higher profits.

2. As far as the operations of business are limited to small or medium scale, there is no problem in financing the expansion of business operation. But when business gets expanded to a large scale, then it will be suitable to adopt a company form of organization because partnership can be formed up to maximum number of 20 partners.

3. One of the main drawbacks is that one partner becomes liable for the acts of another. Therefore, a partner is liable for the wrongs of another partner if it is done within the legal limits.

4. In the new scheme of assessment of partnership firms, the share of partners is exempt from tax under section 10(2A) but the partners cannot claim standard deduction in respect of remuneration receivable by them from the firm. Also, the firm cannot claim deduction in respect of interest payable to partners in excess of 12% per annum.

5. Where the partnership firm does not comply with the requirements of section 184 of the Income Tax Act, it can be assessed in the status of an association of persons, as a consequence of which it shall not be allowed any deduction on account of interest and remuneration to its partners. However, in some cases, if the firm is assessed as AOP it can result into less tax liability as the AOP is taxable at the maximum rate of 30% + surcharge + education cess whereas the firm is charged tax flat rate @ 30% + surcharge + education and SHEC.

6. A partnership firm may come to a sudden closure of business on account of death, lunacy or insolvency. In the case of a business running efficiently and profitably, such a happening will cause a great loss. Also, dissolution



will attract section 45(4) which imposes tax liability in respect of capital gain arising on transfer of capital assets from the firms to partners.

4. CompanyBenefits1. The corporate sector presents itself as a good medium of investment

before the modern lending financial institutions. These financial institutions are in search of good medium in which the savings of the public can be invested. They make investment in the shares and debentures of these companies. In this way this sector also helps in mobilizing saving of public.

2. This form of organization has also gained society's attention. Since the capital of these companies comprises a big amount divided into a large number of shares of small value, a person with limited resources also takes interest in investing in such shares. This social recognition also thus helps in promoting the industrialization of the country.

3. The activities carried on by a corporate entity are generally on large scale. This puts complexities in the day-to-day affairs. Also, the scattered ownership of the company makes it a difficult task to handle these activities by all the related people. This requires managerial professionals having special skills, techniques, etc. A company form of organization, therefore, helps in developing managerial professionals.

4. This form of organization has also received social recognition because of the disclosure of some information, for example, publishing of final accounts, etc. This social recognition helps in boosting the industrialization of an economy, as is being experienced nowadays in India.

5. The company is subject to income-tax at the flat rate of 30% + surcharge of 10%(if net income exceeds Rs.1 crore).

DisadvantagesSome of the demerits of this form of organization which are generally felt areas under:1. The first main disadvantage is the formation of company which requires a

long procedure to be adopted. In addition to complying with certain legal requirement, a large amount on account of fees on share capital with which company is being incorporated and many other expenses have to be incurred.

2. The stringent legal requirements to be complied with are also a major drawback. The management has to face, at every step, legal provisions as are to be complied with.

3. Lack of profit motive mindset amongst the persons handling the affairs of the company is also one of the drawbacks. Since the company is not managed by the real owner, in most of the cases, but by the managerial professional who do not have financial stake in the company, the degree of interest and enthusiasm, as found in the proprietor and partners, cannot be expected in a company form of organization. Nevertheless, it does not mean that paid officials are devoid of initiative, however, there are many



officials who do lack initiative.4. Despite strict legal requirements, the chances of defrauding the innocent

public are quite real. In many cases the management indulges in manipulating the figures of the results and invites public to invest therein.

5. Decisions on important business matters cannot be taken immediately. For this, the meeting of the Board of Directors has to be convened which takes some time. Delayed decisions happen to be one of the drawbacks of this form of organization.

6. Many times, it is found that there may be clash in the interest of two class of shareholders, viz, equity shareholders and preference shareholders or group shareholders.Lease or buy decisions: In recent years, leasing has become a popular source of financing in India. From the lessee’s point of view, leasing has the attraction of eliminating immediate cash outflow, and the lease rentals can be claimed as admissible expenditure against the business income. On the other hand, buying has the advantages of depreciation allowance and interest on borrowed capital being tax-deductible. Thus, an evaluation of the two alternatives is to be made in order to take a decision.

Disadvantages of lease finance: Before opting for a lease decision one has tokeep in mind the following disadvantages:(i) Leased assets are not owned assets and therefore, the asset cover to equity

comes down due to increased dependence on lease finance.(ii) Financial ratios are also distorted due to greater dependence on lese

finance.(iii) Lease rent payments are made out of working capital funds which mean

that fixed assets are financed out of short-term funds.(iv) The asset taken on lease is taken back by the lessor at the expiry of lease

period. Thus, he will be bothered about finding alternative asset at the expiry of lease period.Make or buy decision: The leasing or buying decision is taken only when it is finalized that a particular asset is to be acquired. In most of the industries, the conception of establishing a new project itself involves acquisition of fixed assets. In assembling industry different components are assembled to make a product. Now a decision regarding the manufacturing of these components is to be taken. It is decided whether the product/ part/component of product should be bought from the market or should be manufactured by having necessary manufacturing facilities. The main consideration affecting such a decision is cost. In a make or buy decision, the variable cost of making the product or part/component of product is compared with its purchase price prevailing in the market.

In this decision making process, it may be possible that the decision to manufacture does not result in increasing the fixed cost, and the existing manufacturing facilities cannot be otherwise utilized profitably. Thus, where no fixed costs are incurred for producing the product or



component, the main criterion is that it would be more profitable to manufacture than to purchase, if the variable cost is lower than the purchase price.

For example, if a particular component can be acquired at a cost of Rs. 20 from the market then it will be profitable for the project to produce that component if the variable cost is below Rs. 20. Here it is assumed that no extra fixed costs are to be incurred on the manufacturing of these components.

However, where the component manufacturing involves additional fixed expenditure, purchase of any plant and machinery or establishment of a new separate unit, then total cost will have to be considered. In such special situations the following tax consideration must be kept in mind:

1. Where the manufacturing of the product requires additional fixed cost also: Since in this case, the assessee will have to incur the additional fixed cost it will form part of the cost of manufacturing of the product.

2. Where the manufacturing of the product requires the purchase of additional plant & machinery.

3. Where the manufacturing of the product requires establishment of a new unit: in this case, although, there will be cash outflow for establishing a new unit, but the tax incentives shall be as under:-

(i) Exemption under section 10A: If the product to be manufactured is for exports, there will be full exemption of income till assessment year 2009-10,if the unit is established in a free trade zone and certain conditions are satisfied.

(ii) Exemption under section 10B: If the product to be manufactured is for exports, there will be full exemption of income till assessment year 2009-10 if the unit is an Export Oriented unit and certain conditions are satisfied.

(iii) Depreciation under section 32: Since a new unit will be established, it will acquire building, plant and machinery, furniture and certain intangible assets, the assessee, in this case, shall be eligible for depreciation on such assets.

(iv) Deduction of Interest on money borrowed for acquisition of such capital assets: If the money is borrowed for the acquisition of above capital assets, the assessee will be eligible to claim interest as deduction.

(v) Deduction under section 80-IB: if the unit established is a new unit, it shall be eligible for deduction under section 80-IB if the assessee cannot claim exemption under section 10A and 10B.

4. if the facilities for production are existing & the assessee wishes to discontinue the manufacturing of such product: It is possible that buying of such product is cheaper than manufacturing and it is is to be continued for a very long time, the assessee may have to sell the existing plant and machinery etc. In this case, there will be short term capital gain/loss if the entire block of assets is sold or there will be short term capital gain if the part of the block is sold for a price more than the W.D.V. of the block.



Repair/Renewal or Replacement of an asset: The old and worn out assets need to be either repaired/renewed or replaced at regular intervals. Sometimes, even a good machine requires up gradation or replacement so as to compete in the market. The main tax consideration in these cases shall be whether the assessee, while computing his business income, shall be allowed deduction on account of such expenditure or not.

Repairs/Renewal: Deduction for expenditure on repairs/renewal will beallowed as revenue expenditure in computation of business income ass under:

If the building is a rented building, any expenditure on repairs shall be allowed as deduction. On the other hand, if the building is owned, only current repairs shall be allowed as deduction.

As regards plant & machinery, only current repairs shall be allowed as deduction.

However, the accumulated repairs in the above cases can be claimed under section 37(1).

For detailed discussion of what is current repairs refer to sections 30, 31 and 37(1).

It may be noted that if the repairs expenditure are of capital nature it shall not be allowed as deduction either under section 30,31,or 37.

Replacement of assets: If the asset has to be replaced, the expenditure incurred on replacement shall be capital expenditure and the asessee shall only be entitled to depreciation on such assets and as such, the entire expenditure cannot be claimed as deduction which was allowed in case of repairs. The capital expenditure incurred on construction of super structure on rented building is also eligible for depreciation under section 32.

Tax planning in case of employee's remunerationThis requires consideration from the point of view of -(a) Employer: While calculating the business income of the employer, the remuneration payable to the employee, in whatever form, should be fully deductible otherwise the employer will have to pay tax on such remuneration also as the same will not be allowed as deduction while computing his business income.(b) Employee: The salary received by the employee, whether in cash or kind, should attract minimum income-tax liability. He should be in a position to avail maximum exemption/concession in respect of such salary received by him. Some of the exemptions/concession available to employee under Income-tax Act are as under: 1. Section 10(10) Exemption in case of death-cum -retirement gratuity.2. Section 10(10A) exemption of commuted pension.3. Section 10(10B) exemption of retrenchment compensation.4. Section 10(10C) exemption of compensation on voluntary retirement.5. Section 10(13A) exemption of House Rent Allowance6. Section 10(14) exemption of specified/notified special allowance.7. Tax free perquisites, like medical facility, reimbursement of medical



expenses, telephone at the residence of employee, free lunch or dinner/free refreshment, leave travel concession, etc.

8. Contribution by the employer to the provident fund or other welfare fund of the employee.

9. Perquisites taxable at concessional rate, like rent free accommodation, motorcar, etc.

*****

Chapter-15Double Taxation Relief

Double taxation means taxation of same income of a person in more than one country. This results due to countries following different rules for income taxation. There are two main rules of income taxation i.e. (a) Source of income rule and (b) residence rule.As per source of income rule, the income may be subject to tax in the

country where the source of such income exists (i.e. where the business establishment is situated or where the asset/property is located) whether the income earner is a resident in that country or not.

On the other hand, the income earner may be taxed on the basis of his residential status in that country. For example if a person is resident of a country, he may have to pay tax on any income earned outside that country as well.

Further, some countries may follow a mixture of the above two rulesThus problem of double taxation arises if a person is taxed in respect of

any income on the basis of source of income rule in one country and on the basis of residence in another country or on the basis of mixture of above two rules.

In India, the liability under the Income-tax Act arises on the basis of the residential status of the assessee during the previous year. In case the assessee is resident in India, he also has to pay tax on the income, which accrues or arises outside India, and also received outside India. The position in many other countries being also broadly similar, it frequently happens that a person may be found to be a resident in more than one country or that the same item of his income may be treated as accruing, arising or received in more than one country with the result that the same item becomes liable to tax in more than one country. It is to prevent this hardship that the provisions in the present Chapter



are primarily intended.Relief against such hardship can be provided mainly in two ways: (a)

Bilateral relief, (b) Unilateral relief.Bilateral reliefThe Governments of two countries can enter into double taxation avoidance

agreement to provide relief against such Double Taxation, worked out on the basis of mutual agreement between the two concerned sovereign states. This may be called a scheme of ‘bilateral relief’ as both concerned powers agree as to the basis of the relief to be granted by either of them.

Agreement for ‘bilateral relief’ may be of following two kinds-(a) Exemption method: Agreement, where two countries agree that income

from various specified sources which are likely to be taxed in both the countries should either by taxed only in one of them or that each of the two countries should tax only a particular specified portion of the income so that there is no overleaping. Such an agreement will result in a complete avoidance of double taxation of the same income in the two countries. This is known as exemption method of relief.

(b) Tax credit method: The agreement that does not envisage any such scheme of single taxability but merely provides that, if any item of income is taxed in both the countries, the assess should get relief in a particular manner. Under this type of agreement, the assessee is liable to have his income taxed in both the countries but is given a deduction, from the tax payable by him in India of a part of the taxes paid by him thereon, usually the lower of the two taxes paid. This is known as tax credit method of relief.

In practice the former type of agreement also works in the same way as the later. Bilateral agreements ensure that either country is to refrain from taxing the whole or part of the income only if the other country has kept to its part of the bargain. This can be only proved by producing the assessment order in that country which will, naturally, take time. Moreover, even in these agreements, there is a provision that if any item (not being covered by specific provisions) is chargeable to tax in both countries, each country should allow abatement to the doubly taxed income. Thus, even in an avoidance agreement, generally, the income may get taxed in both places but the assessee is able to get the benefit of the collection of the appropriate tax being kept in abeyance or by way of relief in the form of deductions later, on proving that he has paid tax thereon in the other country as well. The relief under either of these types of agreement depends on an agreement between the countries concerned.

Unilateral reliefThe above procedure for granting relief will not be sufficient to

meet all cases. No country will be in a position to arrive at such agreement as envisaged above with all the countries of the world for all time. The hardship of the taxpayer, however, is a crippling one in all such cases. Some relief can be provided even in such cases by home country irrespective of whether the other



country concerned has any agreement with India or has otherwise provided for any relief at all in respect of such double taxation. This relief is known as unilateral relief.Double Taxation Relief Provision In India

In India the relief against the double taxation is provided under sections 90 and 91 or the Income –tax Act.Where there is agreement with foreign countries [Section 90] [Bilateral relief]The Central Government may enter into an agreement with the Government of any country outside India to provide for the following:(a) granting of relief in respect of –(i) income on which income-tax has been paid both in India and in that

country; or (ii) income –tax chargeable in India and under the corresponding law in force

in that country to promote mutual economic relations, trade and investment, or

(b) the type of income which shall be chargeable to tax in either country so that there is avoidance of double taxation of income under this Act and under the corresponding law in force in that country.In addition the Central Government may enter into an agreement to provide:

(i) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or

(ii) for recovery of income-tax under this Act and under the corresponding law in force in that country

In the above cases, the Central Government may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.Provisions of income-tax laws are subject to provision of DTAA: The liability to tax arising under provisions of sections 4 and 5 of Income –tax Act are subject to provisions of Double Taxation Avoidance Agreements between India and foreign country. Thus Treaty provisions shall prevail over income-tax provisions. [CIT v P.V.A.L. KULANDAGAN Chettiar (2004) 137 Taxman 460]

But, situations could arise where due to subsequent amendments, the statute law is more beneficial than the provision in the treaty. Since the tax treaties are intended to grant tax relief and not to put residents of a contracting country at a disadvantage, vis-à-vis other taxpayers, sub-section (2) was inserted by the Finance (No.2) Act, 1991 with retrospective effect from Ist April, 1972, to clarify that any beneficial provision in the law will not be denied to a resident of a contracting country merely because the corresponding provision in the tax treaty is less beneficial.Effect of double taxation avoidance agreement: If an agreement is entered into under this section, the effect of the same shall be as under:



(i) If no tax liability is imposed under our Act, the question of resorting to the agreement would not arise. An agreement cannot impose any tax liability where the liability is not imposed by the Act. [CIT v R.M. Muthaiah (1993) 202 ITR 508 (Kar) affirmed in UOI v Azadi bachao Andolan (2003) 263 ITR 706 (SC)].

(ii) If a tax liability is imposed under one Act, the agreement may be resorted to for negating or reducing it.

(iii) In case of difference between the provision of the Act and of an agreement under section 90, the provisions of agreement prevail over the provisions of the Act and can be enforced by the appellate authorities and the court. However, as per sub-section 2, the provisions of this Act apply to the assessee in the event these are more beneficial to the assessee.

(iv) Where there is no specific provision in the agreement, it is the basic law i.e. Income-tax Act which will govern to taxation of income.

(v) Where the Government of State certified that a person is a resident of that state or has a permanent establishment in the State, the certificate is binding on the other Government [UOI v Azadi Bachao Andolan (2003) 263 ITR 706 (SC) and Arabian Express Line Ltd., V UOI (1995) 212 ITR 31 (Guj)].

Method of giving relief from double taxation: Relief from double taxation is provided by abatement on the basis of mutual agreement between two states concerned whereby the assessee is given relief by credit/ refund in a particular manner even though he is taxed in both countries. Relief may be in the form of credit for tax payable in another country or by charging tax at lower rate.

The procedure to be adopted by the authorities for granting relief is to determine in the first place, the total income of the person liable to tax in India in accordance with the provisions of the Income-tax Act, and then allow relief as per the terms of the tax treaty entered with the other contracting country where the income has suffered double taxation.

Almost every treaty provides that the tax paid in the contracting country should be deducted from the tax payable by the assessee in the assessing country on the income taxable in both the countries. The treaty generally stipulates which country will grant relief and the manner and extent of the relief on the various heads of income. For example income from immovable property is taxed in the source country where it is situated, but the country of residence of the owner can also tax the same income unless the tax treaty between the countries expressly provides for exclusion of the property income from being taxed in the country of residence of the assessee. Relief can however be claimed and given in terms of tax treaty on providing proof of payment or at least proof of assessment.

Relief cannot be granted unless the income which has been taxed in one of the contracting countries has also suffered tax in the other contracting country. Proof has to be provided of the income having suffered double taxation. If there is no tax treaty with the country levying double tax, then relief can be granted unilaterally under section 91.



Various models of treaties: Although treaties entered into by various countries cannot be exactly identical, a certain amount of uniformity is desirable in its framework: with this in view, tax treaties have been based on models such as:OECD model (Organisation of Economic Co-operation and Development).U.N. Models Double Taxation Convention between developed and developing countries, 1980.

Most of India’s treaties are based on OECD modelsConcept of business connections and permanent establishment: The liability to tax in the source country generally arises out of “ business connection” or through what is called “Permanent establishment”. Most of the agreements spell out what they regard as “Permanent Establishment” as this is of utmost importance while fixing the tax liability. These agreements also lay down maximum limits of tax that can be levied or withheld and the manner which it can be levied.

The term “business connection” has not been defined in the Act. It admits of no precise definition and a solution to the problem whether there is any business connection would depend upon facts of each case.Types of agreements: Agreements can be divided into two main categories-(1) Limited agreements(2) Comprehensive agreements

Limited agreements are generally entered into to avoid double taxation relating to income derived from operation of aircraft, ships, carriage of cargo and freight.

Comprehensive agreements, on the other hand are very elaborate documents which lay down in detail how incomes under various heads may be dealt with.

Limits under various heads like income from immovable property, capital gains, dividends, interest, royalties, fees for technical services, etc. and the manner of taxing the same are generally laid down in the comprehensive agreements. Some of the agreements provide for taxation of annuities and pensions.Countries with which no agreement exists [Section 91] [Unilateral Relief]

If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.In other words, where section 90 does not apply, unilateral relief will be available, if the following conditions are satisfied:(1) The assessee in question must have been resident in India in the previous

year.



(2) That some income must have accrued or arisen to him outside India during the previous year and it should also be received outside India. Such income must not be deemed to accrue or arise in India.

(3) The income should be taxed both in India and in a foreign country and there should be no reciprocal arrangement for relief or avoidance from double taxation with the country where income has accrued or arisen.

(4) In respect of that income, the assessee must have paid by deduction or otherwise tax under the law in force in the foreign country in question in which the income outside India has arisen.

If all the above conditions are satisfied, such person shall be entitled to deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income-(a) at the average Indian rate of tax or the average rate of tax of the said

country, whichever is the lower, or(b) at the Indian rate of tax if both the rates are equal.Average rate of tax means the tax payable o total income, after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this Chapter, divided by the total income.Steps for calculating relief under this sectionStep 1 Calculate tax on total income inclusive of the foreign income on

which relief is available. Claim any relief allowable under the provision of this Act including rebates available under section 88E but before relief due under sections 90 and 91.

Step II Calculate average rate of tax by dividing the tax computed under step 1 with the total income (inclusive of such foreign income).

Step III Calculate average rate of tax of the foreign country by dividing income-tax actually paid in the said country after deduction of all relief due but before deduction of any relief due in the said country in respect of double taxation by the whole amount of the income as assessed in the said country.

Step IV Claim the relief from the tax payable in India at the rate calculated at Step II or Step III whichever is less.

*****


Date post:	25-Nov-2014
Category:	Documents
Upload:	kavita-rani
View:	118 times
Download:	2 times

income_tax_2010-11

Documents