Accounting Examples

218 Accounting and Taxation
UNIT 1
Income From Business
Learning Objectives
After studying this unit, the student will be able to
Understand about admissible expenses and inadmissible expenses
Understand about admissible income and inadmissible income
Learn about actual profit or loss of the business
Learn about chargeble expenses under the head of business
Introduction
In the assessment of total income of an assessee, computations of
income from business become most important. Major part of income of an
assessee especially in the case of large organizations like firms and companies
comes from this head Income Tax Act has made elaborate arrangements for
the computation of income from business as there is a greater danger of
manipulating accounts by assessee.
Meaning (Section 2(13))
Business includes any trade, commerce or manufacture or any adventure
or concern in the nature of trade, commerce or manufacture. Trade implies
buying goods and selling them to make profit. If such transactions are carried
out on large scale, it is called commerce this business means rendering of
services to others, manufacturing, selling and purchasing goods.
Paper - III Taxation - II 219
Chargeability (Section 28)

The following types of incomes are chargeable to tax u/s section 28
under the head-profit and Gains of Business:
1. Profits and gains of any business.
2. Any compensation due or received by a person in connection with
termination or modification of terms and conditions relating to this
head.
3. Income derived by a trade, profession or similar association from
specific services performed for its members.
4. Profit on sale of import licences, incentives by way of cash
compensatory support and draw-back of duty.
5. The value of any benefit or perquisite convertible into money or not
arising from business or the exercise of a profession.
6. Any interest, salary, bonus, commission or remuneration received by
a partner of a firm assessed as such.
7. Any some whether received or receivable in cash or in kind under an
agreement for not carrying out any activity in relation to any business
or profession.
8. Income from speculation business.
9. Any amount (including bonus) received under a key man insurance
policy.
10. Interest on securities where such securities are held as stock in
trade.
Essential Features of Profits and Gains of Business.
1. Business carried on by the Assessee: It is a must that the business
should have been carried on by the assessee himself during the previous year. It
does not mean that an assessee should physically carry on a business. What is
more important is that he must have right to carry on the business and the business
must have been carried on in the exercise of that right by the assessee either
personally or through his agent or servant. A business may be carried on in
India or outside India. It is the residential status of an assessee which determines
the incidence of tax.
2. Business is carried on during the previous year: The business

should have been carried on during the previous year. The business may be
carried on by the assessee at any time during the previous year. Thus, it is not
necessary that the business should be carried on throughout the year. Sometimes
some of the receipts are taxable as income from business even if no business is
carried on by the assessee in the year of receipt. Following are some of the
examples:
(i) Recovery against any excess payment.
(ii) Sale of an asset used for scientific research.
(iii) Bad debts recovered (allowed as expenditure in the earlier years).
(iv) Any amount withdrawn from special reserve.
(v) Amounts received relating to a discontinued business.
3. Aggregate income of different businesses is assessed to tax:
If an assessee has different businesses, the profits of all of them will be
aggregated and put to tax.
4. Speculation Profits: Profits from speculation business are taxed
under the head Profits and Gains of Business. However, speculation loss
cannot be set-off against the legal business profits.
5. Income of previous year is put to tax in the following assessment
year.
6. Any gain arising on the transfer of a capital asset used in the business
cannot be treated as business income. It can, however, be treated to tax under
the head-Capital Gains.
7. Profit on the revaluation of capital assets is not to be taxed under the
head.
8. Anticipated or future profits are not taxable in the current year. But,
the real profits i.e. the profits received or receivable during the year are taxed in
the relevant assessment year.
9. Profits on winding up are not taxable as business income but are
liable to tax under the head-Capital Gains.
Computation of Profits and Gains {Section 29}

The profits and gains of a business or profession are to be computed in
accordance with the provisions of sections 30 to 43 D (sec 29). The list of
provisions/allowances is not exhaustive. We should apply ordinary commercial
principles while determining real and true profits of a business or profession.
Sometimes there may be an expenditure or loss which may not be covered
under the above sections 30 to 43 D. Yet such losses would have to be allowed
in order to determine true profits. Some of the usually occurring types of trading
losses are given below :
1. Loss of Stock in trade: Loss of stock- in- trade because of energy
action, freezing of stocks, leakages, by ravages of white ants, fire or negligence
etc. are allowed as deduction. However any amount recovered shall be treated
as revenue receipt.
2. Loss through embezzlement by employee or agent is allowed as
deduction in computing business income.
3. Loss by theft: If robbery or theft takes place during the normal
working hours of the business, it is allowed as expenditure. Any loss by theft
should be incidental to the operations of the business e.g. theft by a pretended
customer, or loss of cash before being deposited in the bank etc.
4. Loss incurred for standing as surety: Where a trader stands surety
for the debts of another and such guarantee is for the purpose of the trade, any
payment made as a result of such guarantee can be deducted as a business loss.
5. Loss incurred on account of insolvency of banker with which current
account is maintained by assessee.
6. Loss due to forfeiture of deposit made by the assessee for properly
carrying out of contract for supply of commodities.
7. Loss incurred due to devaluation of rupee in foreign country which is
being utilized in the course of business.
8. Loss due to exchange rate fluctuation of foreign currency held on
revenue account.
General Principles Governing Admissibility of Deductions
Following are the general principles which should be taken into
consideration while allowing deduction in respect of allowances, expenses or
losses. As has already been explained, these are not exhaustive by nature but
simply lay some guidelines which may help us arriving at a decision while allowing
or disallowing a particular deduction.
1. Expenditure must be incidental to the business.

2. Deduction must be in respect of an existing business.
3. Expenditure should relate to the previous year. This depends upon
the method of accounting. Under mercantile system of accounting expenditure
is allowed only when it is related to the previous year. However under cash
system of accounting, amount actually paid during the year is allowed. There
are certain exceptions with regard to sales tax, excise duty and bonus etc.
4. Expenditure should be in relation to ones own business.
5. Expenditure incurred should be in the commercial expendiency. An
expenditure sometimes need not be for direct and immediate benefit of the
business.
6. Expenditure once incurred may give extended benefit to the business,
i.e. benefit of expenditure may be extended beyond the year of expenditure viz.
deferred revenue expenditure.
7. No deduction of expenditure incurred before setting up of a business,
except in the case of preliminary expenses u/s 35 D.
8. Expenditure must have relationship with taxable profits.
9. Estimated losses are not allowed as deduction.
10. Expenditure incurred on wasting assets is not allowed.
11. Expenditure in relation to non-existing liability is not allowed.\
12. Expenditure incurred in defending against the breach of law is not
allowed e.g. fines and penalties.
13. Depreciation on investment is disallowed.
14. Revenue expenses are allowed in full, while capital expenses are
allowed over a period of time.
Deduction expressly Allowed
Section 30 to 37contain a list of certain expenses/ deductions which are
allowed in computing the income under this head. While considering these
deductions, the word paid means actually paid or incurred depending upon
the method of accounting. Under cash system, the word paid means actually
paid, under mercantile system the word paid means actually incurred.
The following deductions are expressly allowed:

1. Rent, rates, taxes, repairs and insurance of building used for
the business (Sec 30): The building may be own building or rented one. As a
tenant, any amount paid towards the current repairs is also deductible. However,
any premium paid towards rented house is not allowed.
2. Repairs and insurance expenses paid in relation to plant and
machinery and furniture are allowed (sec.32): Any expenditure incurred to
replace petrol engine by diesel engine in a jeep to augment the profit is allowed.
4. Site restoration fund (sec. 33 ABA): Deduction in respect of
prospecting for or extraction or production of petroleum or natural gas or both
in India and abroad is allowed. Amount of deduction is 20% of profits.
5. Expenditure on Scientific research (sec. 35) : Scientific research
means any activity for the extension of knowledge in the fields of natural or
applied science including for the extension of knowledge in the fields of natural
applied science including agriculture, animal husbandry or fisheries.
The following deductions are allowed in respect of expenditure on
scientific research:
(i) Revenue expenditure on in-house scientific research related
to business [Sec.35 (1) (i)]: Any expenditure of revenue nature incurred on
scientific research related to business is allowed in dull. Any expenditure incurred
for the payment of salaries, material within three years immediately preceding
the commencement of business is also allowed.
(ii) Contribution of outsiders [Sec 35 (1)(ii) ]: Any amount paid to
(i) scientific research association which has object of undertaking scientific
research or (ii) to a university, college, or other institution to be used for scientific
research is deductable at 175% of the sum paid. The research programme may
be related to business or not related to business.
(iii) Payment of research in social science to any approved institution,
university or college is deductible at 125 % of the sum paid u/s 35 (1) (ii) &
35(1) (iii).
(iv) Capital expenditure incurred by an assessee who carries on scientific
research himself is fully deductable u/s 35 (2) in that every year in which it is
incurred. Unabsorbed part of such expenditure will be carried forward and set
off as unabsorbed depreciation.
If the asset is sold without having been used for other purposes, the sale
proceeds or deduction allowed whichever is less is treated as business income
if the previous year in which the sale took place. The excess of sale proceeds
over deduction allowed however is taxed as capital gain.
(v) Contribution of National Laboratory [Sec.35 (2AA)]: Any
amount paid to any national laboratory will get a weighted deduction of 175%.
National Laboratory means a scientific laboratory functioning at national level
under the ageis of the Indian Council of Agricultural Research, Indian Council of
Medical Research or Council of Industrial and Scientific Research, the Defense
Research and Development Organization, the Department of Electronics, the
Department of Bio-Technology, or the Department of Atomic Energy and which
is approved by the prescribed authority for this purpose.
(vi) Any amount of expenditure incurred upto 31-3-2012 on scientific
research by a company engaged in the business of bio-technology, drugs;
pharmaceutical, electronic equipments, computers, telecommunications etc. will
get a weighted deduction of 200% (sec. 35 2AA).
(vii) Contribution to research & Development: Sec. 35 2 AB
provides for weighted deduction at the rate of 125% in respect of contribution
made to IIT, approved university college etc., towards research activities. This
weighted deduction is in addition to the special benefit available to a person for
inhouse research. In case of Biotechnology, Drugs Pharmaceutical companies
a weighted deduction of 200% is allowed.
6. Expenditure incurred on acquisition of patent rights or copy
rights (sec. 35A): Where capital expenditure is incurred by the assessee (after
1966 but before 1-4-1998) on the acquisition of patent rights, copying for the
purpose of business, the whole amount is deductiable in 14 equal instalments.
Where the right became effective in any year prior to the previous year in which
expenditure is incurred, the number of completed years which have elapsed
since commencement of the patent shall be reduced from 14 years and the
deduction is allowed in remaining years. In the case of patent rights acquired on
or after 1-4-1998, the expenditure incurred on the acquisition of such rights
shall be capitalized and depreciation u/s 32 is allowed.
7. Expenditure incurred on Technical know-how (Sec.35 AB) : Any
sum paid before 1-4-1998 on the acquisition of technical know-how for use for
the purpose of his business will be allowed as deduction by spreading it equally
over six years, namely, the year in which the lump-sum consideration is paid and
the five immediately succeeding years. Where the knowhow is developed in a
government laboratory, or a laboratory owned by a public sector company or
university, the consideration will be spread over 3 years. But the know-how
acquired after 1-4-1998 will be treated as capital expenditure and will be
depreciated u/s 32.
8. Capital expenditure to obtain licence to operate
telecommunication services (Sec. 35 ABB) : Any capital expenditure incurred
and actually paid by an assessee on the acquisition of any right to operate
telecommunication services by obtaining licence will be allowed as deduction in
equal instalments over the period starting from the year in which such payment
has been made and ending in the year in which the licence comes to an end.
9. Expenditure on eligible project or scheme (Sec. 35 AC) : 100%
deduction will be allowed from business income in respect of expenditure incurred
for an eligible projector scheme. Eligible project or scheme means such project
or scheme which is meant for promoting social and economic welfare or uplift
of the public as may be certified by the Government of India on the
recommendation of National Committee Constituted by Central Government
consisting of persons of eminence in public life.\
10. Payment of Rural Development Fund ( Sec.35 CCA) : Any
sum paid to Rural Development Fund set up and notified by the central
Government is fully deductible. This section applies to the National Poverty
Eradication Fund also. But once this deduction is claimed and allowed u/s 35
CCA, the same is not allowed as a deduction under any other provision of this
Act.
11. Amortization of preliminary expense (Sec .35 AD) : Where
any Indian Company or resident non-corporate assessee incurs after 31st March
1998 any preliminary expenditure, the assessee shall be allowed a deduction of
an amount equal to one-fifth of such expenditure of each of the five successive
previous years beginning with the previous year in which the business commences.
Expenses incurred before 1-4-1998 are to be spread over 10 years preliminary
expenses include: expenditure in connection with the preparation of feasibility
report, project report conducting marketing survey, engineering services, legal
charges for drafting agreements, Memorandum of Association, Printing of
Memorandum of Association and registration expenses. The maximum amount
eligible for deduction under this section shall not exceed 5% of the cost of the
project. But in the case of Indian companies, it is at the option of the company,
whether 5% of cost of the project or 5% of the capital employed in the business
of the company.
12. Expenditure for amalgamation or demerger of an undertaking
(sec. 35 DD) : Where an Indian Company incurred expenditure after 31-3-
1999. Wholly and exclusively for the purpose of amalgamation of demerger of

an undertaking 20% of such expenditure for each of the five successive years
beginning with the year in which amalgamation of demerger takes place shall be
allowed as deduction.
13. Expenditure on voluntary retirement (Sec. 35 DDA) : The
amount received by an assessee in consequence of an employees voluntary
retirement, the assessee shall be allowed a deduction of 20% of such expenditure
for each of the five successive previous years beginning with the year in which
such payment was made.
14. Expenditure on prospecting etc. for development of certain
minerals (Sec. 35E) : Any expenditure incurred by an Indian Company or
Indian Resident non-Corporate assessee wholly and exclusively on the
prospecting of any mineral or on the development of mines or other natural
deposit of any such minerals the assessee shall be allowed a deduction of an
amount equal to 1/10th of he such expenditure for each of the ten successive
previous years beginning with the year of commercial production.
Other Deductions (Section 36).
While computing profits and gains business or profession the following
other deduction are allowed:
1. The amount of any insurance premium paid in respect of
insurance against risk of damages or a destruction of stocks or stores used
for the business is fully deductible [Sec 36(1)(i)].
2. Insurance premium paid by a federal milk co-operative society
is fully deductible [Sec.36 (1) (ia)].
3. Insurance of health of employees [Sec.36 (1) (ib)] : Any premium
paid under a scheme framed in this behalf by the general Insurance Corporation
of India and approved by the Central Government, shall be fully deductible.
4. Bonus or commission paid to an employee [Sec.36 (1) (ii) : Any
bonus or Commission paid to an employees for services rendered shall be
deductible. But such sum should not, in any way, be paid as profit or dividend.
5. Interest on borrowed capital [Sec.36 (1) (iii) : Any interest paid in
respect of capital borrowed for the purpose of business/profession is fully
deductible. Interest on own capital is not deductible.
6. Employers contribution Provident Fund [Sec.36 (1) (iv) (v)]:
Any amount paid by an assessee as an employer by way of contribution towards
Recognized Provident Fund, or an approved super annuation Fund or approved

Gratuity Fund shall qualify for deduction .
7. Loss regarding animals [Sec.36 (1)(iv)] : In respect of animals
which have been used for the purpose of business (not as stock in trade) and
have died or become useless for such for such purpose, deduction is allowed to
the extent of the amount equal to the difference between the actual cost to the
assessee and the amount, if any, realized in respect of the carcasses of animals.
If sale proceeds are Nil then the entire cost will be allowed as loss.
8. Bad debts[Sec. 36 (1) (vii) and (2)]: Amount of any bad debts of
part thereof, which is written off as irrecoverable in the accounts of the assessee
for the previous year is allowed as deduction subject to the following conditions:
(a) The debt has been taken into account in computing the income of
the assessee of the previous year in which the amount is written off or of an
earlier previous year; or
(b) It represents money lent in the ordinary course of business of money
lending which is carried on by the assessee.
(c) There must be a debt.
(d) Debt must be incidental to the business.
(e) Debt must have been taken into account while computing business
income.
(f) Debt must have been written off in the books of account of the
assessee.
Notes:
1. If the amount of any part thereof of bad debts is recovered at a later
date, the same will be treated as business income of the previous year during
which such recovery takes place.
2. Bad debts of a discontinued business or to a successor of the business
are not deductible.
9. Provision for bad debts [Sec .36 (1) (iii a)] : Normally any provision
for bad and doubtful debts is not allowed as deduction. But the same may be
allowed in the case of rural branches of commercial banks.
10. Transfer to special reserve [Sec. 36 (1) (viii)] : The amount
transferred to a special reserve account and maintained by a financial corporation
which is engaged in providing long term finance for industrial or agricultural or
infrastructure development, in India or by a public company formed and

registered in India with the main object of carrying on the business of providing
long term finance for construction or purchase of houses in India for residential
purposes is allowed to the extent of 40% of its profits.
11. Family Planning Expenditure [Sec. 36 (1) (ix)] : Any bonafide
expenditure incurred by a company for the purpose of promoting family planning
amongst its employees is allowed as deduction. If such expenditure is of a
capital nature. It shall be allowed as a deduction in five equal annual instalments
commencing from the precious year in which the expenditure is incurred.
12. Contribution of |Exchange Risk Administration Fund [Sec. 36
(1)(x)] : The contribution made by the public financial institutions to the
Exchange Rick Administration Fund will be allowed as business deduction while
computing their income.
Expenses expressly disallowed
1. Advertisement expenses (Sec.37 (2B)]
Any expenditure incurred by an assessee on advertisement in any
souvenir, magazine, pamphlet etc. published by a political party.
2. Interest royalty, fees for technical services etc. Paid outside India
without tax has been paid or without tax deducted at source shall be disallowed
[Sec. 40 (9) (i)].
3. Any amount of income tax, arrears of income tax or advance income
tax paid is disallowed [Sec. 40 (a) (ii) ].
4. Wealth tax paid on the wealth of an assessee shall be disallowed u/s
40 (a) (ii a)].
5. Salary paid outside India without tax deducted at source shall be
disallowed u/s 40 (a) (iii).
6. Payment of provident fund of employees paid outside India without
tax deducted at source shall be disallowed.
7. Tax on prerequisites paid by employer shall be disallowed.
8. Payment to a relative by way of salary, provident fund or interest
shall be disallowed u/s40A (2) to the extent of the amount considered
unreasonable by the assessing officer.
9. Payment in cash [Sec. 40 A (3)]: Any expenditure in respect of
which payment is made exceeding Rs. 20,000 otherwise than by a correct cheque
drawn on a bank will be disallowed (Rs.35,000 in case of payment made for

plying, hiring or leasing good carriages). The ceiling of 20% penalty is withdrawn.
Now entire amount is disallowed if that is not by crossed cheque.
10. Provision for gratuity [Sec 40 A (7)]: Mere provision for the
payment of gratuity to the employees on retirement or on termination of services
will not be allowed as a deduction.
10A. Disallowance for non-compliance of TDS provisions: As per
section 40 (a) (ia) entire expenditure by way of interest, commission, brokerage,
rent, royalty and fee for professional services and technical services is disallowable
in case the tax is not deducted and remitted to Government as per the provisions
relating to TDS.
11. Other expenses: Following are some instances of expenses which
are not allowed as deduction while computing profit or gains of business.
(i) Capital expenditure
(ii) All types or provisions, reserves, funds
(iii) Salary of rent paid to proprietor
(iv) Drawings of proprietor
(v) Personal expenses of proprietor
(vi) Fines and penalties
(vii) Income tax, wealth tax and other taxes of personal nature
(viii) Charity and donations
(ix) Past losses and provision for losses
(x) Amount paid to remove competitor
(xi) Registration expenses of business assets
(xii) Legal expenses relating to capital assets
(xiii) Gifts made on personal consideration
(xiv) Expenditure on raising capital
(xv) Expenditure on shifting registered office
(xvi) Life Insurance premium paid on the life of proprietor
(xvii) Expenditure on installations of electrical work in new production

office
(xviii) Betterment charges paid to municipality.
(xix) Expenditure on constructing recreation club or a temple for the
exclusive use of employees.
(xx) Expenditure on drafting memorandum and article of association
(xxi) Compensation paid for breach of contract to purchase business
assets.
Payment by Partnership Firms [Section 40 (b)]
While computing income of firm assessed as such (FAS) the following
two payments are allowed.
1. Interest on capital : Any interest on capital paid by an FAS is
allowed u/s 40 (b) provided:
(a) The payment of interest is authorized by the instrument of partnership
(b) The rate of interest shall not exceed 12% p.a.
2. Remuneration to partners: Partnership firm is entitled to pay salary,
bonus, commission or any other remuneration to partners u/s 40 (b) provided.
(a) The payment of remuneration is authorized by the instrument of
partnership.
(b) Remuneration is payable to working partners only.
(c) Payment of remuneration must be within the limits of the provision of
Sec. 40(b) as stated below.
(A) In case of a Professional Firm
(i) On the first Rs.3,00,000 book- Rs.1,50,000 or 90% of book-

profits or in case of loss profits whichever is higher.
(ii) On the balance of book-profits 60% of such book-profits.
The following receipts will result in deemed profits:

1. Recovery of any loss or expenditure allowed as deduction in earlier
years(s).
2. Waiver of the claim by a creditor.

3. Profit on sale of assets on which depreciation is claimed on straight
line method.
4. Sale of capital asset used for scientific research
5. Any amount withdrawn from special reserve.
6. Bad debts recovered written off earlier
Over Valuation or Under-valuation of Stock
In order to a rrive at true profit of a business stocks are to be valued
properly. In case stock is over valued or under valued they are to be adjusted
using the following formula.
Over Valuation
100
Value of the stock given x
100 + Rate
Under Valuation
100
Value of the stock given x
100 - Rate
Procedure of Computation of Business Income

In a given problem we find a pre-prepared profit and loss account in
which various items are debited and credited. While preparing the profit and
loss account, principles of accountancy are formed. Accounting principles and
provisions of Income Tax Act normally differ from each other. Thus, the profit
or loss as shown in the Income Statement may not be true. To find out the real
profit or loss, one has to give credit to the provisions of Income Tax Act. In the
process we may find various expenses that are debited to the profit and loss
amount as inadmissible and various items credited to profit and loss account
may be either not related to this head or not taxable. Further there may be some
expenses which are not at all claimed in the profit and loss account. To give an
effect to all these, the following procedure as laid down in the chart may be
followed.
Chart Showing the Computation of Business Income

Net profit / loss as per profit and loss A/c xxx
Add: Inadmissible expenses
Income tax paid xx
Charity and donation xx
House hold expenses xx
Loss on sale of fixed assets xx
Life Insurance premium of proprietor xx
Interest on capital xx
Provision for bad debts xx
Salary to proprietor xx
Fines and penalties xx
Staff welfare fund xx
Gifts and presents xx
Contribution to un-recognized provident fund xx xxx
Less : Expenses not charged to P&L account
Depreciation xx
Sales tax paid xx
Excise duty paid xx xxx
Less: Inadmissible Incomes
Rent Received xx
Interest from Bank xx
Dividend received xx
Refund of income tax xx xxx
Business Income xxx
Illustration:1
How will you deal with the following while computing profits and gains
of business ?
(a) Salary paid to proprietor A 15,000.
(b) Commission paid to X A 5,000 for securing business orders.
(c) Loss due to embezzlements by an employee A 10,000.
(d) Registration expenses of business asset A 20,000.
(e) Amount paid to keep the competitor away from the business
A 25,000.
Solution
(a) Salary paid to proprietor -- disallowed
(b) Commission paid to secure business order in the normal course of
business -- allowed.
(c) Loss due to embezzlement by an employee is incidental to the business
-- allowed.
(d) Registration expenses of a business asset is a capital expenditure
-- not allowed
(e) Amount paid to keep the competitor away is in order to increase
the earning capacity is a capital expenditure -- not allowed.
Illustration 2
State, with reasons, whether the following are allowed as deductions
under the Income Tax Act 1961.
(i) Re-roofing expenses of the factory in place of worn-out asbestos
sheets A 10,000.
(ii) Contribution paid to Government to repair to Government to repair
the approach road to factory A 40,000.
(iii) Amount deposited in staff welfare Fund A 10,000.
(iv) Legal expenses for drafting the deed of agreement A18,000.
(v) Commission paid on raising the loan A 12,000.
(vi) Goods stolen by pretended customer A 16000.
Solution
(i) Re-roofing expenditure in place of worn-out sheets is a non recurring
expenditure not resulting in current repairs -- not allowed.
(ii) Contribution paid to Government to repair the approach road to
factory -- allowable expenditure.
(iii) Deposit of staff welfare fund -- inadmissible.
(iv) Legal expenses for drafting deed of agreement is a capital expenditure
covered u/s 35 D -- not allowed in full.
(v) Any expenditure incurred on raising loans -- Allowed
(vi) Loss on theft during the normal business hours -- allowable
Illustration: 3
State the admissibility of the following items of expenditure in computing
business income of an assessee.
(a) Donations to PM National Relief Fund A 80,000.
(b) Amount spent on the construction of recreation club for the exclusive
use of employees A 1,20,000.
(c) Loss of stock by white ants A 6,000.
(d) While proceeding to deposit the daily proceeds of a business in the
bank by the cashier, the cash of A 80,000 was stolen by stranger.
(e) Compensation of A 50,000 was paid to a retrenched employee
whose continuation in service was detrimental to the interest of the
business.
(f) Lump sum consideration paid for acquiring technical know-how on
20-4-05 A 60,00,000.
(g) Legal charges paid to defend a criminal paid to defend a criminal suit
pending against the proprietor Rs,22,000.
Solution:
(a) Donations to PM National Relief Fund is inadmissible
(b) Amount spent on the construction of recreation hall is a capital
expenditure -- not allowed.
(c) Loss of stock by white ants is an allowable loss
(d) Cash stolen by strangers while proceeding to deposit in bank is a

revenue loss -- allowed.
(e) Compensation paid to retrenched employee is an expenditure.
(f) Amount paid for the acquisition of technical know-how is a capital
asset and depreciation u/s 32 is allowed @ 25 % p.a.
(g) Legal charges paid to defend the proprietor is a personal expenditure
-- not allowed.
Illustration 1.
Given below is the profit and loss account of Raj kumar for the year
ending 31-3-2013.
Dr. Rs. (A) Rs. (A) Cr

To Salaries 40,000 By Gross profit 4,00,000
To Bad Debts 10,000 By Discount 10,000
To Provision for bad debts 15,000 By Commission 10,000
To Insurance 4,000 By Bad debts recovered 20,000
To Advertising 10,000 By Rent received 30,000
To Interest on Capital 5,000
To Interest on loan 5,000
To Depreciation 25,000
To Net Profit 3,56,000
4,70,000 4,70,000
1. Allowable depreciation as per IT Rules A 30,000.

2. Insurance includes life insurance premium of the proprietor A 2,000.
Solution:
Computation of Business Income of
Raj kumar for the A.Y. 2013-14.
Rs. (A) Rs.(A)
Balance as per Profit and loss Account 3,56,000
Add : Inadmissible Expenses
Provision for bad debt 150,00
Life insurance premium 2,000
Interest on capital 5,000
Depreciation taken separately 25,000 47,000
4,03,000
Less : Inadmissible Income
Rent received 30,000
Expenses not charged to P&L A/c
Depreciation 30,000 60,000
Business Income 3,43,000
Illustration : 2
Mr. Ashaaz gives you the following particulars from his accounts for the
year ended 31-3-2013.
Rs. (A)
Net Profit as per P&L A/c 2,50,000
Various items debited to P&L A/c
Staff Salaries 40,000
Rent to proprietors house 10,000
Charity 8,000
Depreciation 40,000
Legal expenses 10,000
Bonus to employees 20,000

Gratuity to employees 30,000
Provisions for sales tax 40,000
Provision for bad debts 20,000
Travelling expenses 10,000
Scientific research expenses 20,000
Various Items credited to P&L A/c
Rent from house property 40,000
Dividends from Indian companies 10,000
Discount received 5,000
Rent from Staff quarters 15,000
Refund of sales tax 8,000
Other information
(i) Charity was given to an approved institution
(ii) Gratuity was paid on ad-hoc basis
(iii) Allowable depreciation as per IT rules Rs. 50,000
(iv) Sales tax of the year 2011-2012 paid during the year Rs.12,000
not charged to P&L A/C
(v) Scientific research expenses were paid to an approved research
institution.
Compute Business Income u/s 35(1) (iia) & (iii).
Balance as per Profit and loss Account 2,50,000

Add : Inadmissible Expenses
Rent to self 10,000
Charity 8,000
Depreciation (Separately treated) 40,000
Provision for sales tax 40,000
Provision for bad debts 20,000

Gratuity on ad-hoc basis 30,000 1,48,000
3,98,000
Less : Inadmissible Income
Rent form house property 40,000
Dividends 10,000
Less : Expenses not charged to P&L A/c
Depreciation 50,000
Sales tax of the year 2010-11 12,000
Weighted deduction for scientific
reserarch expenditure @125% of
20,000 comes to A 25,000 the
difference being 5,000 1,17,000
Business Income 2,81,000
Notes:
1. Scientific research expenses paid to any approved institution deduction
at 125% of the payment.
2. Refund of sales tax, rent from staff quarters are considered as business
incomes.
3. Sales tax is deductible on payment basis.
Problem 1.
The profit and loss account of Sri. Prasad for the year ended 31.3.2013
showed the following particulars :
Rs.
(a) Profit as per P&L A/c 2,40,000
(b) Salary to Proprietor 60,000
(c) Advertisement expenses 14,000
(d) house hold expenses 16,000
(e) Donation to an approved institution 20,000

(f) Life insurance premium (On proprietors Life) 8,000
(g) Provision for bad debts 12,000
(h) Interest on loan 14,000
(i) General expenses 18,000
(j) Depreciation (Allowable, 42,000) 38,000
(k) Staff welfare fund 12,000
Compute business income
(Ans : A 3,64,000)
Problem 2.
Given below is the Profit & Loss A/c. of Mr. Raman singh for the year
ending 31.3.2013. Compute his business income.
Dr. Profit and Loss Account Cr.
To Staff salaries 86,000 By Gross profit 4,40,000
To Rent, rates and taxes 68,000 By Rent received 60,000
To Discount 34,000 By Interest on bank 20,000
deposit
To Advertisement 43,000
By Refund of salestax 30,000
To Fire insurance premium 12,000
To Life insurance premium 6,000
To Interest on capital 8,000
To Interest on bank loan 14,000
To Gifts and presents 12,500
To Donation to PM national 10,000
relief fund
14,000
To Wealth tax
To Staff welfare fund 10,000
To Net Profit
2,22,500
5,50,000 5,50,000
Additional information:
1. Allowable depreciation A 40.000.
2. Gifts were given to relatives.
[Ans: A1,73,000]
Problem 3.
Sri Harsha is the proprietor of a general store and has prepared the
following profit and loss a/c. for the year ending 31st March, 2013. Compute
income from business for the A.Y.2013-14.
Dr. Profit and Loss Account Cr.

To Salaries and allowances 90,000 By Gross profit 3,89,000
To Rent and Taxes 60,000 By Bank interest 11,000
To Printing and Stationery 20,000 By Dividends 20,000
To Depreciation 40,000 By Bad debts recovered 10,000
To Donation 30,000 By Refund of sales tax 15,000
To Legal charges 10,000
To General expenses 22,000
To Bad debts 5,000
To Provision for bad debt 12,000
To Income tax 18,000
To Repairs and maintenance 10,000
To Interest on bank loan 24,000
To Household expenses 14,000
To Technical know-how 15,000
To General reserve 25,000
To Net Profit 34,000
4,45,000 4,45,000
Other information:
1. Depreciation as per section 32 amounts to A 22,000.
2. Rent A 40,000 was paid to the building owned by the proprietor.
3.Donations are recognized u/s 80 G of the IT Act 1961.
4. Legal charges are in relation to a trade dispute.
5. General expenses include A10,000 not allowed u/s 37.
[Ans: A 2,01,000]
Problem. 4
Shri Ram Mohan is the proprietor of a business. His profit and loss
account for the year ending 31st March,2013 is as follows.
Dr. Cr.
To Salaries and wages 62,000 By Gross profit 5,62,800
To Rent, rates and taxes 28,000 By Rent from house
property 31,200
To General charges 10,000
By Interest on govt. 20,000
To Commission 2,000 securities
To Discount 3,000 By Interst on debtors
10,000
To Brokerage 5,000 By Bad debts recovered
26,000
To Legal expenses 15,000
To Advertising 18,000
To Gift and present 12,000
To Bad debt written off 10,000
To Provision of bad debts 15,000
To Loss on sale of machinery 10,000
To Wealth tax 10,000
To Net profit 4,02,000
6,50,000 6,50,000
Table on page no 296.
Other Information:
1. Allowable depreciation A 66,000.
2. Brokerage is paid for raising a commercial loan.
3. Commission was paid to finalize a commercial loan.
4. Bad debts recovered were disallowed earlier.
5. Advertising expenses incurred for insertions in a magazine released
by a political party.
Compute business income for the A.Y.2013-14.
[Ans: A 3,73,800]
Problem 5
From the Profit and Loss Account Mr. Samuel for the ending 31 st
March 2013. Find out his business income.
Dr. Cr.
To Office Expenses 40,000 By Gross profit 4,60,000
To General expenses 10,000 By Interest on B.deposit 40,000
To Interest on loan 5,000 By Discount 5,000
To Interest on capital 15,000 By Sundry receipts 15,000
To Audit fee 8,000 By Bad debt recovered 20,000
To Rent 20,000 By Refund of sales tax 5,000
To Income tax 6,000 By Dividend 10,000
To Charity 4,000
To Legal expenses 4,000
To Compensation to worker 12,000
To Wealth tax 10,000
To Sales tax 8,000
5,55,000 5,55,000
Other information:
1. General expenses include the purchase of office equipment costing
A8,000.
2. Legal expenses are in relation to income tax proceedings.
3. Rent includes A 10,000 paid as rent of the house in which the
assessee lives.
4. Depreciation on all assets amount to A 14,000.
5. Sales tax paid was in relation to the year 2011-12
[Ans: A 4.02,000]
Problem 6 6
From the below given information compute business income of
Mr.Kishore for the A.Y. 2012-13.
Dr. Cr.
To Salaries 10,000 By Gross profit 1,72,000
To Household expenses 5,000 By Dividends 10,000
To Charity 10,000 By Interest on debtors 10,000
To Wealth tax 10,000 By Commission 15,000
To Donations 15,000 By Bad debts recovered 10,000
To Income tax 7,000
To Bad debts 3,000
To Provision for bad debt 2,000
To Discount 3,000
To Fire insurance 1,000
To Travelling 6,000
2,17,000 2,17,000
Further information:
1. Allowable depreciation A16,000.
2. General expenses include A 4,000 spent on rectifying the defective
title of a business asset.
3. Travelling expenses include A 5000 spent on pleasure trip of the
proprietor.
4. Donations are paid to an approved institution.
5. Bad debts recovered were disallowed earlier.
[Ans: A1,53,000]
Short Answer Type Questions
1. Define business.
2. Mention any four disallowed expenses
3. Mention any four disallowed incomes.
4. Write any expenses allowed under the heads of Income from business.
UNIT 2
Income From Profession
Learning Objectives
Understand about professional incomes
Understand about profession expenses
Learn about non professional income and expenses
Learn about net professional income
Introduction
A profession is an occupation requiring either purely an intellectual skill
or manual skill controlled by the intellectual skill of the operator e.g. medicine,
law, engineering, auditing, painting, etc. All professions are business but all
businesses are not profession. Only those businesses or professions where the
profits are dependent mainly upon the personal qualifications and in which no
capital expenditure is required or only capital expenditure of a comparatively
small amount is required. Profession includes vocation also u/s 2 (36).
Computation of professional income
As has been discussed earlier, profession means all such human activities
which require human skill and technical expertise. A doctor or a lawyer or an
arhitect or a chartered accountant are the persons who, if not working with any
employer, practice independently to earn their living. These include many people
like beauticians, musicians, magicians, artists, etc.
They being non-tradeing assesses, normally prepare their accounts under

cash system (Receipts and Payments account) or under mercantile system
(income and expenditure account). When they follow cash system, all receipts
actually received and all payments actually made are considered with no respect
to the year to which they belong. But when they are following mercantile system
of accounting, only those incomes and expenses are to be taken into consideration
which belongs to the current /financial year.
The following models may help us to understand the computation of
professional income of professional like, a chartered accountant, a medical
practitioner or an advocate.
(A) Professional Income of a Chartered Accountant.
Professional Receipts / Incomes
Audit fee xxx
Financial consultancy xxx
Examiners fee xxx
Gifts from clients xxx
Fees for Accountancy works xxx
Any other receipts of professional nature xxx xxx
Less: Professional payments/expenses
Office expenses xxx
Printing and stationery xxx
Books and journals xxx
Depreciation on office equipment xxx
Salaries to staff xxx
Travelling & Conveyance xxx
Membership subscription xxx
Postage and telegrams xxx
Stipend to trainees xxx
Any other expenditure xxx xxx
Professional Income xxx
(B) Medical Practitioner

Professional receipts/incomes
Consultancy fees xxx
Visiting fees xxx
Operation fees xxx
Sale of medicines xxx
Examiners fees xxx
Gifts from patients xxx
Other professional receipts xxx xxx
Less: Professional Payments/Expenses.
Staff salaries xxx
Dispensary expenses xxx
Travelling xxx
Depreciation on equipments xxx
Cost of medicines xxx
Expenditure to increase professional knowledge xxx
Other expenditures relating to the profession xxx xxx
Professional Income. xxx
(C) An advocate/Legal Practitioner/Lawyer

Professional receipts/incomes
Practicing /Legal fees xxx
Consultancy fees xxx
Special commission fees xxx
Examiners fees xxx

Gifts from clients xxx

xxx
Less: Professional payments/expenses
Office expenses xxx
Staff salaries xxx
Depreciation on office equipment xxx
Court paper and stamps xxx
Travelling expenses xxx
Postage xxx
Telephone xxx
Expenditure to increase xxx xxx
professional knowledge
Professional Income xxx
Illustration: 1
Dr. Rama Swamy a medical practitioner gives you the receipts and
payment account for the year ending 31st March 2013.
Receipts and payments account
for the year ending 31-3-2013
Receipts Rs.(A) Payments Rs. (A)
To Opening balance 40,000 By Dispensary expenses 60,000
To Consultation fees 80,000 By Staff salaries 40,000
To Interest 20,000 By Books and journals 10,000
To Dividends 10,000 By Donations 10,000
To Rent 40,000 By Income tax 12,000
To Gifts from patients 20,000 By Surgical equipment 18,000
To Examiners fees 40,000 By Medicines purchased 28,000

To Operation fees 30.000 By Shares purchased 32,000
To Royalty on medical 40,000 By Travelling 20,000
books
By Municipal taxes of let 4,000
To Visiting fees 40,000 out house
To Lecture fees 20,000 By Subscription of
2,000
medical council
To Sale of medicines 8,000
By Telephone charges 4,000
By Balance c/d 1,48,000
3,88,000 3,88,000
Other Information
1. Allowable depreciation (including on surgical equipment) A 18,000.
2. Gifts include A 12,000 received from his father.
3. Travelling expenses include A 8,000 incurred on his pilgrimage trip to
Tirupathi.
4. Salaries paid included an amount of A 10,000 paid to his domestic
servant.
5. Closing stock of medicines A 18,000.
Compute professional income of Mr. Rama swamy
for the A.Y 2013-14
Professional receipts Rs. (A) Rs. (A)
Consultation fees 80,000

Gifts (A 20,000 - A 12,000) 8,000
Examiners fees 40,000
Operation fees 30,000
Visiting fees 40,000
Sale of medicine 8,000 2,06,000
Less : Professional Payments Rs. (A) Rs. (A)
Dispensary expenses 60,000

Staff salaries (A 40,000-A10,000) 30,000
Books and journals 10,000
Travelling ( A20,000 - A8,000) 12,000
Medicines purchased (28000-18000) 10,000
Telephone charges 4,000
Subscription 2,000
Depreciation 18,000 1,46,000
Professional Income 60,000
Illustration : 2.
Below given is the Income and Expenditure A/c of Mr. Anuroop, an
advocate by profession, for the year ended 31-3-13
Income and Expenditure Account
Expenditure Rs.(A) Income Rs. (A)
To Office Expenses 60,000 By Legal fees 1,20,000
To Staff salaries 40,000 By Rent received 80,000
To Rent 30,000 By Dividends 20,000
To Printing & Stationery 10,000 By Bank interests 40,000
To Courtfee & Stamps 12,000 By Special commisison
fees 40,000
To Municipal taxes of the 4,000
property let By Gifts from clients 24,000
To Shares purchased 30,000 By Examiners fees 46,000
To Income tax paid 6,000 By Insurance claim 40,000
To Life Insurance Premium
paid (On own life) 8,000
To Books and Journals 12,000
To Travelling expenses 10,000

To Telephone Charges 8,000
To Surplus 1,80,000
4,10,000 4,10,000
Other Information :
1. Closing Stock of court stamps A 1,000
2. Rent paid includes A 10,000 in relation to his residence.
3. Stock of stationery A 2000.
Compute professional income of Mr. Anuroop for A.Y. 2013-14.
Solution : Computation of Professional Income of Mr. Anuroop
for the A.Y 2013-14
Professional Incomes Rs. (A) Rs. (A)
Legal fees 1,20,000

Special commission fees 40,000
Gifts from clients 24,000
Examiners fees 46,000 2,30,000
Less : Professional Expenses
Office expenses 60,000
Salaries 40,000
Rent (30,000 - 10,000) 20,000
Printing & Stationery (10,000-2,000) 8,000
Court fees & Stamps (12,000-1,000) 11,000
Books and Journals 12,000
Travelling 10,000
Telephone charges 8,000 1,69,000
Professional Income 61,000
Illustration 3
From the following information computer professional income of
Mr. Pandit, a practicing chartered Accountant.
Receipt and Payments Account

for the year ending 31-03-2013
Dr. Cr.
Receipt Rs.(A) Payments Rs. (A)
To Balance b/d 48,000 By Office expenses 28,000
To Audit fee 86,000 By Staff salaries 22,000
To Fees for accounting works 44,000 By Computer purchased 20,000
To Race winnings 30,000 By Printing & Stationery 8,000
To Examiner fees 20,000 By Travelling 12,000
To Lecture fees 10,000 By Books & Journals 6,000
To Financial consultency 40,000 By Debentures purchased 14,000
To Dividends 20,000 By Income tax paid 16,000
To Bank interest 10,000 By Life insurance
4,000
premium paid
To Gifts from clients 28,000
By Balance c/d 2,06,000
3,36,000 3,36,000
Other Information
1. Gifts include A18,000 received from his relatives on the occasion
of his birthday celebration.
2. Closing stock of stationery A 2,000
3. Travelling expenses include A 4,000 in relation to his pleasure trip to
Ooty.
Solution
Computation of Professional Income of Mr. X
for the A.Y. 2013-14
Professional Receipts Rs. (A) Rs. (A)
Audit fees 86,000

Accountancy works 44,000
Examiners fee 20,000
Financial Consultancy 40,000
Gifts ( A 28,000 - A 18,000) 10,000 2,00,000
Less : Professional Payments
Office expenses 28,000
Staff Salaries 22,000
Depreciation on computer @60% 12,000
Printing & stationery (8,000-2,000) 6,000
Travelling (12,000 - 4,000) 8,000
Books and Journals 6,000 82,000
Professional Income 1,18,000
Exercise
Mr. A is a Medical practitioner. The following is the receipts and
payment account for the year ending 31-3-2013. Compute his professional
income.
Receipts and Payments Account
Dr. Cr.
To Opening balance 82,000 By Dispensary expenses 42,000
To Consultancy fees 88,000 By Staff salaries 40,000
To Visiting fees 42,000 By Cost of medicines 20,000

To Interest on bank deposits 28,000 By Surgical equipments 30,000
To Dividends 20,000 By Shares purchased 60,000
To Examiner fees 40,000 By Printing & Stationery 6,000

To Gifts from patients 30,000 By Telephone expenses 2,000
To Race winnings 12,000 By Life Insurnace 4,000
By Income Tax 6,000
By Motor car expenses 12,000
By Car driver salary 10,000
By Bal c/d 1,10,000
3,42,000 3,42,000
Other information
1. Gifts include A 12,000 received from his father in-law.
2. Stock of medicines on 31-3-2013 A 6,000.
3. 25% of motor car use is for domestic purpose.
4. Depn. On Surgical equipment @ 15%
[Ans: A 63,000]
Problem 2. Murali, a practicing chartered accountant submits you the
following income and expenditure account for the year ended 31st march 2013.
Compute his professional income.
Dr. Income and Expenditure Account Cr.
To Office rent 40,000 By Audit fees 90,000
To Office expenses 20,000 By Accountancy works 40,000
To Staff salaries 30,000 By Rent from property 20,000
To Books and journals 6,000 By Dividends 10,000
To Insurance (let out house) 40,000 By Interest on bank
deposit 22,000
To Travelling expenses 8,000 By Financial consultency 28,000

To Municpal taxes 4,000 By Examiners fees 30,000
To House hold expenses 10,000 By lottery winnings 15,000
To Donations 5,000 By Gifts from clients 10,000
To Stationery, printing 15,000
To Depreciation on office
equipment 8,000
To Surplus 69,000
2,65,000
2,65,000
Additional information
1. Gifts worth A 6,000 received from relatives.
2. Closing stocks stationery A 2,000
3. Salaries include A 10,000 paid to domestic servant.
[Ans: A 67,000]
Problem 3
Shri Ajay is a leading layer in Hyderabad. He has prepared the following
Income and Expenditure Account for the year ending 31st March, 2013. Compute
his professional income.
Dr. Cr.
To Office rent 40,000 By Practicing fees 3,40,000
To Office salaries 30,000 By Special commission fee 60,000
To Telephone expenses 10,000 By Rent on house proprety 40,000
To household expenses 15,000 By Bank Interest 10,000
To Charity 10,000 By Dividends 20,000
To Income tax 6,000 By Examiners Fees 30,000
To Life insurance premium 4,000 By Gifts from clients 12,000

To Gift to daughter 8,000
To Contribution to PPF 12,000
To Books and journals 8,000
To Motor car expenses 24,000
To Depreciation on car 12,000
To Court fee and stamps 10,000
To Rent of the chamber 4,000
To Surplus 3,19,000
5,12,000 5,12,000
Other information:
1. 50 per cent of motor car use is towards domestic purpose.
2. Charity is given to Ramakrishna mutt, Hyderabad.
3. Half of the premises where profession is carried on is used for own
residence.
4. Gifts include A 6,000 from friend and well wishers.
[Ans: A 3,36,000]
Problem 4
X is a leading tax consultant, who maintain his books of account on
each basis furnishes the following particulars for the year ending 31st march,2013.
Receipts and Payments Accounts for the year ended 31-03-2013
Receipts Rs.(A) Payments Rs. (A)
Balance b/d 16,000 Purchase of computer 30,000
Fees from clients Car expenses 20,000
2010-11 40,000 Office expenses 10,000
2011-12 1,60,000 Salary to staff
Gifts from clients 20,000 2010-11 12,000
Examiners Fees 10,000 2011-12 28,000

Repairs 5,000
Income-Tax 8,000
Life insurance 12,000
Balance c/d 1,21,000
2,46,000 2,46,000
Notes:
1. Depreciation on computers 60 %
2. Depreciation on motor car A 10,000. Car is used partly for official
and partly for private purposes. The A.O. felt that 40 % of cars use
in attributable to private purpose. Compute professional income for
the Assessment Year 2013-14.
Problem 5
Mr.X a practicing Chartered Accountant submits you the following
information. Compute Professional Income.
Receipts and Payment A/c for the year 31-03-2013
To Opening balance 1,20,000 By Staff salaries 1,20,000
To Audie fees 2,40,000 By Office expenses 1,80,000

To Dividends 60,000 By Stationery 20,000
To Interest on securities 40,000 By Books and Journals 15,000
To Financial Consultance 80,000 By Shares purchased 30,000

To Fees for accounting works 20,000 By Govt. Securities 20,000
To Gifts from clients 40,000 By Travelling 10,000
To Rent from house property 100,000 By Stipend to trainees 15,000

To Examiners fee 30,000 By General expenses 20,000
To Institute Fees 20,000 By Income tax 12,000
By Life insurance 18,000

By Membership subscription 5,000
By Closing Balance 2,85,000
7,50,000 7,50,000
Additional information:
1. Gifts include A 10,000 received from parents.
2. Closing stock of stationery A 5,000
3. Salaries include A 20,000 paid to domestic servants.
4. General expenses include A 8,000 as charity paid to poor students.
[Ans: A 68,000]
Short Answe rType Questions
1. Define profession.
2. Mention any four professional incomes to the dcotor.
3. Mention any four professional incomes to the chartered accountant.
4. Mention any four professional income to the lawyer.
5. Mention any four professional expenses.
6. Write briefly differences between business and profession.
UNIT 3
Income from Capital Gains
Learning Objectives
Understand about Capital gain
Understand about long term capital gain
Learn about cost of acquisition
Learn about taxable capital gain
Capital Gains is the fourth head of income. Under this head of income
we study the computation and taxability of gain arising from the sale or transfer
of capital assets. For the first time income was made chargeable to tax in
1947-48. This charge was abolished from 1-4-1948. But it was revived from
the assessment year 1957-58 and has continued since then. The taxability of
income under this head depends upon the following factors:
1. Capital asset
2. Nature of capital asset
3. Sale or transfer of capital asset.
Basis of charge [Section 45]
Any profit or gain arising on the transfer of a capital asset [ Sec.2 (14)]
is chargeable to tax under the head Capital Gains in the previous year in which
the transfer tool place (Sec. 45), if it is not eligible for exemption under Sections
54,54B,54D,54EC,54F,54G,54GA and 54H. Incidence of tax on capital gains,
However, depends upon whether the capital gain is short-term capital

gain or long-term capital gains [Sec. 2(42 A)]. For taxation purpose the capital
gains are classified into two (i) Long Term Capital Gain(L.T.C.G) and (ii) Short
Term Capital Gain(S.T.C.G.)Long term capital gain is taxed at a flat rate of 20%
plus 2% secondary and higher education Cess) and short term capital gain is in
included in the total income along with income under the head viz., Income from
Salary Income from House Property etc., and it is taxed on slab basis.
Thus, the essential elements of capital gains are:
1. There should be a capital asset.
2. There should be transfer or sale of capital asset.
3. Transfer or sale should have taken place during the previous year.
4. There must be profit or gain on such transfer, which will be known as
capital gain.
5. Such capital gains should not be exempt u/s 54A, 54B, 54D, 54EC,
54F, 54G and 54GA.
Capital Asset: It is defined to include, property of any kind whether
fixed or circulating, tangible or intangible, moveable or immovable. However
the following are not to be considered as capital asset.
A. Personal effects of the assessee i.e., articles which are used for
personal use by the assessee or buy his family members e.g. furniture T.V.,
refrigerator, musical instruments, motor cars, scooters etc.
The term personal effect does not include archaeological collection,
drawings, painting. Sculptures or any work of art, In other works these items
are considered as capital asset and profit on transfer of them becomes taxable
capital gain.
Note:
(i) An exception to the above rule is jewellery. The term jewellery
includes ornaments made of Gold. Silver, Platinum or any other precious metal.
Gold and Silver Coins used for religious worship of deities or ornaments are
also not considered as the items of personal use.
(ii) The house property in which assessee lives in considered as Capital
asset
B. Agricultural land situated in India.
(iii) The bonds are issued on or after 1-6-2005.

Capital Gain: Profit on transfer of capital asset is known as capital
gain if loss is there then it is treated as capital loss. If there is no profit or loss
then there is no capital gain. The difference between the consideration received
and the cost of acquisition is capital gain or loss i.e., If the sale price is more than
the cost price then the difference is known as capital gain or if the sale price is
less the cost price then the difference is known as capital loss.
Hint: Capital Gain = Selling price of the asset (-) cost of the asset.
Capital Loss = Cost of the asset (-) selling price of the asset.
Note :- If transfer expenses e.g. Selling expenses, brokerage paid etc,
are there the same is to be deducted from the sales money received.
Cost of Acquisition: Cost of acquisition means total of all the expenses
incurred by the assessee for acquiring the asset i.e., purchase price and expenses
incurred after purchase till its first use e.g. installation charges etc.
If the cost of the asset cannot be ascertained for some valid reasons the
Fair Market Value is taken as cost of acquisition.
If the assessee has constructed or manufactured the asset then all
expenses incurred by him on its construction or manufacture will be taken as
cost of acquisition
If the asset is purchased before 1st April 1981 then the cost of acquisition
is higher of the following two amounts.
(a) . Actual Cost (b) Fair Market Value on 1-4-1981.
The benefit is allowed for (i) depreciable assets i.e. assets used in the
business or profession like building and machinery and eligible for claiming the
depreciation.
(ii) Intangible assets: Good will, tenancy rights, route permit licences,
loom hours.
Indexed cost of acquisition: Indexed cost of a acquisition means
showing inflated or increased cost price, instead of actual price. The increase is
justified on account of inflation. The net result of indexed cost of acquisition is
reduction in tax liability.
Cost of improvement: Cost of improvement means expenditure of
capital nature in making any addition or addition or alteration to the capital asset
e.g. Adding one more room to the existing structure in a building, betterment
charges paid to the Municipal Corporation etc.
Expenses incurred by the assessee or previous owner before 1-4-81 is
to be ignored completely. If he assessee has not opted for F.M.V. on 1-4-81 as
the cost of acquisition then also the expenses are to be ignored.
Summary for calculating indexed cost of acquisition:
1. For all long tern assets except the debentures and Bonds indexed
cost of acquisition and indexed cost of improvement are to be calculated.
2. For Debentures and Bonds, even if they are long term capital assets
indexed cost of acquisition shall not to be calculated. It means to determine the
income from capital gain cost of acquisition is not to be considered.
3. For short term capital assets indexed cost of acquisition is not to be
calculated.
4. If assets are used by the assessee in the business, which are subject
tp depreciation even if the period of holding is more than 3 years then the gain
on transfer of such assets is always treated as short term capital gain.
Components for calculating Capital Gain The following are the
components to compute either long term of short term capital gain.
(1) Consideration (2) Transfer Expenses (3) cost of acquisition
(4) Cost of improvement.
Capital gain on Financial Assets:
According to Income Tax Act shares, debentures, Government
Securities, bonds and units of mutual funds are known as financial assets. These
financial assets may be listed or unlisted. If the financial assets are held by the
assessee for a minimum period of one year on the date of transfer then they are
considered as long term capital asset i.e. if they are held for less than one year
period then they are considered as short term capital assets.
Note: If bonds and debentures are long term capital assets even then
indexation is not made i.e. for ascertaining long term capital gain indexed cost of
acquisition is not to be calculated.
Long term capital gain- for Securities /shares etc. Sec 112
According to Sec 112 an assessee is having an option to pay tax @
20% (with indexation) or @ 10% without indexation.
This option is available. If listed securities are traded in a recognized

stock exchange and presently the securities is not subject to payment of securities
transaction tax.
For availing the option the assessee has to satisfy for the following
conditions.
(1) The securities are long term capital asset i.e. holding period is a
minimum of one year or more.
(2) Securities are listed in a recognized stock exchange in India.
Cost of acquisition in the case of Bonus Shares.
Bonus Shares: If the assessee receives bonus shares, then the cost of
acquisition is to be taken as Nil. The period of holding for such shares as short
term/long term capital asset is to be determined from the date of allotment of
bonus shares to the date of transfer. If the Bonus shares are transferred within
a period of one year, then the gain on such shares will be treated as short term
capital gain i.e., if the shares are transferred after one year from the date of
allotment, then the gain on transfer is treated as long term capital gain. The cost
of acquisition for Original shares and Bonus shares is explained as under.
1. If the Original shares are 1. The higher of the following two amounts
acquired before 1-4-1981. is the cost of acquisition.
(a) Actual cost of the share
(b) Fair Market Value on 1-4-1981.
2. If the original shares are 2. Actual amount paid for acquiring the
acquired after1-4-1981. shares is the cost of acquisition.
3. If the Bonus Shares are allotted 3. The Fair Market Value of the Shares on
before 1-4-1981. 1-4-1981 is the cost of acquisition.
4. If the Bonus Shares are allotted 4.The cost of acquisition of Bonus

after 1-4-1981. Shares in Nil.
Hint: (i) If it is a long term capital asset, indexed cost of acquisition is

to be calculated for calculating Capital Gain. (ii) If it is a short-term capital
asset, indexed cost of acquisition is not to be calculated.
Transfer of Depreciable Assets-Capital Gain [Sec 50]
Depreciable assets are Buildings, Machinery, Plant and furniture owned
by the assessee and used in his business. Or profession The profit on transfer of
these asset will be always treated as short term capital gain i..e. The period of
asset the assessee is holding shall not be considered.
If the assessee is eligible to claim depreciation on an asset then profit on
transfer of such asset is always treated as short term capital gain. In other
words on any business asset which depreciation cannot be claimed like land,
investment etc then profit on transfer of such asset can be long term (if the
period of holding is more than 3 years) or short term (if the period of holding is
less than 3 years.)
Exemption from Long term Capital Gain under Sec. 54, 54B and 54D
etc:
In order to promote investment in priority and specified areas, and to
provide financial security of the individual Income Tax Act Provides a relief to
the assessee on transferring certain long term capital assets. The net resultant is
a substantial reduction in the tax liability. Generally the following provisions are
to be observed by the assessee.
(1) Purchase or construction or investment in the permitted line of
investment with in the period of stipulation.
(2) To avail the benefit of tax, the assessee has to retain the ownership
of new asset for minimum period of 3 years i.e. not to transfer the new asset for
3 years.
(3) If the amount of Capital Gain is not utilized for purchase or for
construction or investment in specified asset before the die date of filling the
return of income, the amount can be deposited in any branch of public sector
banks in accordance with the Capital gains Accounts Scheme 1988. The
amount deposited will be given as exemption. If part of the amount is spent
for construction on purchase or for new specified investment and partly deposited
in the bank within the stipulated period, then the aggregate of amount spend for
constriction purchase etc, and amount deposited will be allowed as exemption.
Latter on he can draw the amount from the bank and can go head for purchasing/
constructing the asset as the case may be.
(4) If the new asset is transferred before the stipulated period then the
exemption availed earlier gets cancelled. The same amount shall be reduced
from the cost of acquisition of the new asset to compute capital gain of the
newly purchased asset.
Date of transfer [Section 2 (47)]
A transfer does not take place merely because an agreement has been
entered into or consideration is paid there under in whole or in part. The word
effected in the previous year in section 45 denotes that the title in the property
has passed from the transferer to transferee. No transfer can be said to be
effected till all the formalities for transferring the title to the transferee are
completed.
Computation of Capital Gains [Section 48]
Computation of capital gain depends upon the nature of capital asset
transferred viz., short -term capital asset or long term capital gain while the
gain arising from the transfer of long-term capital asset is known as long-term
capital gain.
Short term capital gain or loss shall be computed by deducting the
following amounts from the full value of sale consideration.
(i) Expenses incurred in connection with the transfer or sale of asset
(i.e.,selling expenses)
(ii) Cost of acquisition of asset.
(iii) Cost of improvement of the asset.
Long term capital gain or loss shall be computed by deducting out of full
value of sale consideration the following amounts:
(i) Expenses included in connection with the transfer or sale of asset
(selling expenses)
(ii) Indexed cost of acquisition of the asset.
(iii) Indexed cost of improvement of the asset.
Method of computation of Income From Capital Gain is as follows:
Computation of Income from Capital

Gains of Mr for the A.Y. 2013-14.
Full value of sale consideration xxx

Less: Transfer expenses xxx
Net sale consideration xxx
Less: (i) Cost of acquisition xxx
(ii) Cost of improvement xxx xxx
Income from capital gain xxx
Less: Exemption u/s 54B,54CD,54G, 54GA, xxx
Taxable STCG xxx
Illustration 1.
Mr. Ranga Rao is holding the agricultural lands in Delhi since 1970.
The FMV on 1.4.81. is at A 50,000; on 3rd Jan 2013, he sold the lands for
A 6,00,000 and paid brokerage for selling the lands A 10,000. On Feb., 2013.
He entered into a agreement to buy agricultural lands in a village and paid
A 50,000 as advance, and on the same day he deposited A10,000 in a
nationalized bank under capital gain scheme. Compute capital gain for the current
assessment year (CII for the year 2012-13=852)
Solution Computation of Mr Ranga Rao Income from Capital gain
for the A.Y. 2013-14.
Sale Consideration 6,00,000
Less : Selling Expenses 10,000

Net Consideration 5,90,000
A 50,000 x 852
Less : Indexed cost of acquisition = 4,26,000
100
Capital Gain 1,64,000
Less : Exempted u/s 54B advance + deposit 1,00,000
Income from Capital Gain 64,000
Illustration. 2
Mr X owns a building using for commercial purpose. He purchased
the building for A 2,00,000 in 1982-83. During the previous year relevant to
the current assessment year through an order the Government has acquired this
building and paid A 20,00,000 as compensation, Immediately he acquired a
piece of land for A 3,00,000 and spent A 2,00,000 on construction and deposited
A 1,00,000 in the public sector bank under capital gain scheme. Compute
capital gain, if cost inflation index for 1982-83 is 109 and for 2011-12 it is 785
Solution
Computation of Mr. Xs Income from Capital Gain
for the Assessment Year 2013-14
Compensation Received 20,00,000

Less : Selling Expenses --
A 20,00,000 x 852
100
Less : Exempted u/s 54B
A 3,00,000 + A 2,00,000 + A 1,00,000 (Restricted to LTCG)
2,96,000
Taxable long term - Capital Gain NIL
Illustration 3.
X purchased a building for A 3,00,000 on August 31, 1988. On 1st
October, 1992, he spent A 80,000 to add 3 more rooms. During the previous
year relevant to the current assessment year, building is sold out for A 25,00,000.
He invested A 2,00,000 in the specified bonds within 3 months from the date of
transfer. (CII for 1988-89 is 161; for 1992-93 is 223;for 2011-12 is 785).
Compute the income from capital gain.
Solution
Computation of Mr Xs Income from Capital Gain for the Assessment
Year 2013-14
Sales consideration 25,00,000
Less : Selling Expenses 50,000
A 3,00,000 x 852
161
A 80,000 x 852
Less : Indexed cost of improvement = 3,05,650
223
Less : Exempted u/s 54B (A 2,00,000 or LTCG w.e.l) 2,00,000
Taxable long term - Capital Gain 3,56,772
Illustration 4
Mr.Murali Manohar purchases 1000 equity shares of Tata Steels Ltd.
at A 1000 per share on 1st April 1975. He was allotted 200 bonus shares on
31st March 1980. During the previous year relevant to the current assessment
year. He sold 500 equity shares and 200 bonus shares at A 1500 per share.
FMV on 1-4-81 was A 160 per share. Compute capital gains.
Computation of Mr. Murali Manohars Income from Capital Gains
Original Shares
Sales consideration (500 x A 1500) 7,50,000
Less : Indexed cost of acquisition 500 x 160 x (852/100) 6,81,600 6,84,00
Bonus Shares
Sale consideration (200 x A 1500) 3,00,000
Less : Indexed cost of acquisition = 200 x 160 (852/100) 2,72,640 27,360
Long-term Capital Gain 95,760
Notes :
1. Bonus shares and rights shares are long term capital assets (period of
holding is more than 12 months)
2. Cost of acquisition of Bonus shares and rights shares: Both shares
were held by the assessee, before 1-4-81 hence cost of acquisition would be
actual cost of FMV whichever is higher.
Cost of Indexing
Financial Year C.I.I Financial Year C.I.I
1981-82 100 1997-98 331
1982-83 109 1998-99 351
1983-84 116 1999-00 389
1984-85 125 2000-01 406
1985-86 133 2001-02 426
1986-87 140 2002-03 447
1987-88 150 2003-04 463
1988-89 161 2004-05 480
1989-90 172 2005-06 497
1990-91 182 2006-07 519
1991-92 199 2007-08 551
1992-93 223 2008-09 582
1993-94 244 2009-10 632
1994-95 259 2010-11 711
1995-96 281 2011-12 785
1996-97 305 2012-13 852

Option of FMV as on 1-4-1981 :

(a) If the assets were acquired before 1-4-1981
Cost of acquisition = original cost or FMV as on 1-4-81, which
ever is higher.
(b) If the assets were acquired after 1-4-1981
Cost of acquisition = the price paid for the asset (+) the
improvements made.
Questions
1. What is meant by capital gain ?
2. What is meant by shortterm capital gain ?
3. What is meant by long term capital gain ?
4. What is meant by indexing ?
5. What is cost of acquasition ?
6. Distinguish between short term capital gain and long term capital
gain.
Exercise
1. Sonaakshi sold his residential house on 14th Jan 2013 for A 10,94,850
and paid A10,000 on brokerage hehad purchased the house in November,
1985 for A 1,00,000 and spent A 14,000 on its registration and 38,500 on its
improvement. Out of the sale proceeds, he purchased another house for his
own residence for A 1,00,000 on 20th March,2013 and National Savings
Certificates VIIIth issue for A 50,000 on 31st March 2012 (1985-86 CII =
133; 2012-13=852). Compute taxable capital gain for the relevant Assessment
Year.
(Ans : Taxable capital gain A 7933)
2. Mr. Abhishek sells agricultural land situated within municipal limits
for A 30,00,000 on 1 st May 2012, which was purchased by him on 1st Oct
1987 for A 3,00,000. On 15th Aug 2012, he deposits A 10,00,000 in a bank
under capital gains Accounts Scheme 1988. He purchases another agricultural
land on 31st March, 2012 for A 7,00,000 by withdrawing from the deposit
account of capital gain (CII for 1987-88=150, 2011-12=852)
(Ans: LTCG = A12,96,000, taxable LTCG A 29,600, STCG A 3,00,000).
3. On 31st Dec 2012 Bhargav sells gold for A 11,85,000 (Cost of

acquisition on 1st March 1993 for A 1,05,000). Expenses sale are A 2000. On
1 st March 2013 he acquires bonds of NABARD (Investment being A 7,00,000).
These bonds are redeemable after 60 months. Find out the amount of exemption
under section 54EC (CII for 1992-93 is 223, 2011-12=852.)
(Ans: Exemption u/s 54EC A 7,00,000 taxable LTCG Rs. 81,834)
4. Mr. Ramesh purchased land and building for the purpose of carrying
his profession as a doctor for A 1.20,000 on 30-6-1992. These lands were
compulsorily acquired by the Govt, of A.P. on 31-12-12 in consequence of
widening roads, and paid a compensation of A 8,60,000; from the transfer
consideration A 2,60,000 were invested in similar asset before 31-3-112.
Compute taxable capital gain for the A.Y. 2012-13 (CII for the year 1992-
93=223,2011-12 852 )
(Ans: Rs. 1,41,525)
5. Mr X Purchased shares of A Ltd on 30-6-2006 for A 6,10,000
and that of B on 31-12-2011 for A1,60,000 . Shares of A Ltd and B Ltd
were sold on 30-6-2012 for A 12,50,000 and A 1,20,000 respectively. Transfer
expenses were at 2%; Compute taxable capital gain for the A.Y. 2012-13 (CII
for the year, 2011-12=852, CII 2005-06 =529)
(Ans. LTCG on shares of A Ltd A 2,42,543 short term capital loss
on shares of B Ltd A 42,400).
6. From the information given below compute taxable capital gains.
Asset Date of Cost of Date of Transfer Transfer

acquisition acquisition transfer Consideration expenses
Residential
house property 1-4-1979 1,25,000 FMV 30-06-12 15,40,000 40,000
A 1,60,000
Urban
Agricultural land 30-09-96 2,40,000 01-02-13 18,20,000 20,000
Shares of X Ltd. 31-12-08 1,20,000 01-07-12 4,80,000 5%
House hold
Furniture 30-09-92 2,40,000 01-06-12 60,000 --
Note : From the transfer consideration received on residential house

property of A 10,00,000 reinvested on another house property. Similarly
A 4,00,000. re-invested on the purchase of agricultural lands in urban areas
from the consideration of unban agricultural lands.
CII for the years 1981-82=100; 1996-97= 305; 2011-12=852.
(Ans : Nil; LTCG: A 7,92,574, STCG A 3.36,000; House hold
furniture not taxable)
7. From the information given below compute taxable capital gains.
Particular Compulsory Plant Gold and Shares of

acquisition of Machinery Jewellery X Ltd
land & building
Date of acquistion 1-6-1988 30-06-1992 1-4-79 31-12-2005

Cost of acquisition 2,40,000 10,00,000 80,000 1,20,000
(W.D.V, (FMV
6,00,000) 1,20,000)
Date of transfer 30-06-2012 1-2-2013 30-9-2012 31-12-2012

Transfer consideration 12,60,000 4,50,000 10,43,600 5,18,250
Transfer expenses 60,000 Nil 10,000 5,000
Reinvestment same in 8,00,000 Nil 2,40,000 2,00,000
the asset
CII 161 - 100 480
Note: Current year CII =852.

(Ans: Nil + Short term capital loss A 1,50,000 +
LTCG A 11,200 + A3,00,250 = A1,61,450).
UNIT 4
Income from Other Sources
Learning Objectives
Understand about securities, gross interest & Net interest
Understand about taxable and tax free securities
Learn about gross income
Learn about income from other sources
Introduction
Income from other sources is the fifth and last head of income under
the Income Tax Act,1961. An income which does not specifically fall under the
proceeding first four heads of income (viz. Income from salaries, Income from
house property, profits and gains of business or profession and capital gains) is
to be included under this head. That is called Income from other sources
The following are the some of the items of incomes which are included
under the head of Income from other sources.
1. Royalties received
2. Directors sitting fee for attending board meetings.
3. Salary on pension received from a foreign Government.
4. Income from subletting of the premises taken on lease.
5. Salary received by MPs, MLAs.

6. Examination remuneration received by teachers/lecturers/professors.
7. Ground rent received.
8. Interest on loan, saving banks or fixed deposits.
9. Agricultural income received from outside India.
10. Gratuitous payments received by a member of the family from a
company in which the family had substantial interest.
11. Income from subletting the house property.
12. Directors commission for underwriting shares of a new company.
13. Rent from a vacant piece of plot (land).
14. Insurance commission.
15. Casual incomes.
16. Annuity payable under a will, contract, trust deed.
17. Interest on securities issued by a foreign government.
18. Family pension received by family members of a deceased employee.
19. In case of retirement, interest of employees contribution if provident
fund is unrecognized.
20. Income from undisclosed sources.
21. Annuity payable to the lender of a trade mark.
22. Income from markets, fisheries, rights of ferry.
23. Income received after discontinuance of business.
24. Income of a minor clubbed with income of parents (exemption upto
A 1,500 for each child).
25. Pension received from the government as freedom fighters.
26. Income from racing establishments.
27. Commission received (eg. Chit funds commission).
28. Income from interest on securities (securities means bonds issued
by the government and debentures of a limited company).
29. Dividends received from foreign company.

30. Winning from lotteries, gambling, betting, cross word puzzles in the
nature of casual income.
Exceptions
Gifts of money received by an individual or an HUF is not taxable in the
following cases.
1. Gift received from any relative.
2. Gift received on the marriage of the individual.
3. Gift received under a will or by inheritance.
4. Gift received in contemplation of death of the donor.
Meaning of Relative
1. Spouse of the individual.
2. Brother of sister of the individual.
3. Brother or sister of the spouse of the individual.
4. Brother or sister of father/mother of the individual.
5. Any lineal assendent or descendent of the individual.
6. Any lineal assendent or descendent of the spouse of the individual.
7. Spouse of the persons referred to in clause 2 to 6.
Interest on Securities [Sec.56(2) (1d)]
Income by way of interest on securities is taxable under the head income
from other sources, if the same is not taxable as business income under section
28. But then, what is a security?
A security is a document acknowledging the debt by a specific authority
from general public. It may be names as a Debt, Loan, Paper, Debenture,
Bonds, or Security or Certificate. It is secured in some manner. A mere debt is
not a security unless and until it is secured.
Contents of Security
It contains face value of security, date of maturity rate of interest, date,
place and period of payment of interest.
Who can Issue a Security?

Securities may be issued by the following authorities:
1. The Central Government
2. State Government
3. Local Authority
4. Company
5. Statutory Corporation
Interest on Securities
According to Section 2 (28 B) Interest on Securities means:
(a) Interest on security of the Central Government or State Government;
(b) Interest on debentures or other securities for money issued by or on
behalf of a local authority or a company or a corporation established by Central
or State or Provincial Act.
When an investor invests his money in the bonds issued by Government/
Local Authority/ Corporations or Debentures issued by a Limited Company,
the interest received from them is considered as income from interest on securities.
Types of Securities
Securities are issued by Companies, Government both Central and State.
Local authorities are also eligible to raise funds by issuing securities, Following
are the types of securities which are currently in operations;
(a) Securities issued by Central Government.
(b) Securities issued by the State Government.
(c) Debentures and bonds issued by local authority.
(d) Debentures and bonds issued by corporations.
(e) Debentures issued by companies.
From the tax point of view securities are classified into three types.
They are:
1. Securities which are exempted from tax
2. Tax- Free Securities
3. Less-tax securities
Securities
Securities which are

exempted from Tax Tax-free Securities Less-Tax Securities
Government Commerical Government Commerical
Listed in Unlisted in
Stock Exchange Stock Exchange Listed in Unlisted in
Stock Exchange Stock Exchange
Securities Exempt from Tax
According to Section 10 (15) interest on these securities is fully exempt
from tax and does not form part of total income of an assessee. In other words,
it is not taken into account in computing total income. Under section 10 (15)(i)
the Central Government by notification specifies these securities, bonds etc.
The following are the securities which are exempt from tax:
1. 12 year National Savings Annuity Certificates
2. National Defense Gold Bonds 1980
3. Special Bearer Bonds 1991.
4. Treasury Savings Deposit Certificates
5. Post Office Cash Certificates (5years)
6. National Plan Certificates (10 years)
7. National Plan Savings Certificates (12 years)
8. Post Office National Savings Certificates (12 Years/7 years)
9. Post office Savings Bank (POSB) Account.
10. Public Accounts of Post Office Savings Account Rules
11. Post Office CTD (Interest upto A 5,000)
12. Fixed Deposit
13. Special Deposit Scheme 1981.

14. Non- Resident Rupee Deposit Scheme
15. Interest on 7 percent Capital Investment Bonds
16. Interest received by a Non Resident Indian from Notified Bonds
17. Interest on 9 percent Relief Bonds
18. Interest Payable to any Foreign Bank Performing Central Bank
functions outside India
19. Interest on Gold Deposit Bonds issued under Gold Deposit Scheme
1999.
20. Interest on deposit made by retired Government Employee out of
money due to him on account of retirement for lock-in-period of 3
years.
21. Interest on Securities held by the Welfare Commission, Bhopal Gas
Victims
22. Interest on notified bonds issued by a local authority/public sector
enterprises etc.
23. 10 % Secured redeemable NTPC Bonds 1986.
24. 10 % Secured irredeemable Bonds issued by Mahanagar Telephone
Nigam Ltd. Etc.
Tax-Free Securities
These securities are those which are issued by a local authority,
corporations, government or company in the form of Debentures of Bonds.
Actually these are not tax-free. But tax is paid by the issuing authority on behalf
of security holder. The person who is holder of such security is liable to pay tax
not only on the interest he is to receive but also the amount of tax which has
been deposited by the security issuing authority on his behalf. The amount of
interest actually received by holder is the net interest i.e., before deduction of
tax. To include it in the gross total income of assessee. It can be grossed up by
using the following formula:
100
Grossing up = Net interest received x
100 - Rate of Tax
Tax free securities are of two types:

1. Tax-free Government Securities
2. Tax-free Commercial Securities
Tax-free Government Securities
These securities are no longer in existence. Even if these are issued,
then no tax is deducted at source. Hence the question of grossing up does not
arise.
Tax-free Commercial Securities
As mentioned earlier, these securities are not actually tax-free. Tax is
paid by the issuing authority on behalf of the security holder has to pay tax not
only on the interest he receives but also on the amount of tax paid by the issuing
authority on his behalf. Hence, the amount received by the security holder is to
be treated as per net interest. It should be grossed up for inclusion in the total
income. The present rate of deduction in case of securities listed in the stock
exchanges is 10 % plus education cess at 3%and in case of unlisted in the
securities, also 20% plus education cess 3%. There is no surcharge. For
Government. Corporations and Local authorities tax deduction rate is always
10 %, plus Education cess of 3% on tax is included.
Rates of TDS are given in the following table for the
A.Y. 2012-13. Individual
Nature of Income Rate
1. Dividends Nil
2. Interest on units of UTI Nil
3. Bank interest if amount of interest 10 (balances 90)
exceeds A 5,000
4. Interest on securities issued by
(a) Central or State Govt. Nil
(b) Local authority or statutory 10 (balance 90)
corporation.
(c) Company
(i) Listed 10 % (balance 90%)
(ii) Unlisted 20 (balance 80)
5. Winnings from lotteries races, 30 (balance 70)
puzzels, card games
Grossing up
Interest received by the assessee is net interest and the same is to be
converted into gross interest. This practice is known as grossing up.
When face value of securities and rate of interest is given for government
securities (tax free). Less tax government securities, less-tax commercial
securities no grossing up is required.
But incase of tax free commercial securities even if face value and rate
of interest is given compulsory grossing up shall be done.
When interest amount (net) is given in the problem, interest on all securities
(except tax free government securities) must be grossed up.
Grossing up is required in the case of the following securities.
(i) 8% saving (taxable) bonds, if the amount of interest payable exceeds
A 10,000
(ii) Tax free commercial securities
(iii) Less Tax commercial securities.
Grossing up Procedure (Tax free Commercial Securities)
a. If the tax free commercial securities are listed in the stock exchange
(same rate)
100
Gross interest = Net interest x
90
b. If the tax free commercial securities are unlisted in the stock exchange:
Gross interest= Net interest x 100
90
Illustration : 1
Mr. X invested A 1,00,000 in 8% tax-free debentures of a company.
What will be his taxable interest for the previous year 2012-13
i. If securities are listed in the stock exchange.
ii. If securities are not listed in the stock exchange.
Solution:
Net interest = Face Value of investment x Interest Rate
= 1,00,000 x 8% = A 8,000.
Grossing up
In case of listed tax-free commercial securities:
100
90
100
= 8,000 x = A 8,889.
90
In case of unlisted Tax- free commercial securities:

100
90
100
= A 8,000 x = A 8,889
90
Less-Tax Securities
This is the most common form of security. Out of the amount of interest
due to security-holder, tax has to be deducted by the issuing authority before
making payment of interest to the security holder. The interest received by the
assessee in net interest and the same is to be grossed up and is to be included in
the total income. These securities can be issued both by the government and
commercial Authorities.
There can be two types of problems. They are:
(a) When rate of interest and face value of security is given (both in
Government and Commercial securities)
Rate
Gross interest = Face value of security x
100.
(b) When interest amount received is given received is net interest

and the same is to be converted into gross interest.
i. For government and listed commercial securities:
100
Gross Interest = Net Interest x
90.
ii. For unlisted commercial securities:

100
Gross Interest = Net Interest x
90
Notes:
1. If the nature of the security is not mentioned in the problems, then the
general assumption is that the security is of less-tax and unlisted nature.
2. Grossing up should be done if the net interest is more than Rs.2500.
3. In the case of tax free Government security, interest need not be
grossed up.
Deductions (Sec.57)
The following deductions are allowed in computing the income from
other sources.
1. From interest on securities and dividends [Sec.57 (i)]
In respect of interest on securities and dividends any reasonable
expenditure incurred by way of commission on remuneration to broker or to
any other person for realization of such incomes is deductable and any interest
on loan taken for purchase of such investment is also allowed as deduction.
Broadly the amounts deductible can be classified into (a) collection
charges (b) Interest on loan taken to purchase the securities. Not only the
interest paid but also interest due is allowed as deduction.
Winning from lotteries, Crossword puzzles, Horse races and Card games
etc. [Sec 56 (2) (1b)]
Winning from lotteries, crossword puzzles, races including horse races,
card games and other games of any sort or from gambling or betting or any form
or nature whatsoever is taxable under section56 under the head Income from
other sources.
Income from lottery winning, crossword puzzle and horse race winning
in subject deduction of tax at source. Tax at source is to be deducted when
winning exceed A 10,000. Hover, in the case of winnings from horse races, tax
deducted at source when the amount of winning exceeds A 5000.
In computing the taxable income from winning by way of lottery,
crossword puzzle, races including horse races. Card games and other games.
Gambling and betting etc., no deduction is allowed in respect of any expenditure
incurred in earning such income. However, an assessee is entitled to claim

deduction for any revenue expenditure incurred in owning and maintaining race
horses to be run in horse race on which wagering or betting is lawfully allowed.
Computation of Income from Interest on securities under the head
income from other sources for the assessment year 2013-14 is done
as shown below Rs. (A)
1. Interest on tax-free government securities xxx
Interest Rate
Face value of security x
100
2. Interest on tax-free commercial securities (listed) xxx

Interest Rate
Net interest = Face value x
100
100
90
3. Interest on tax-free commercial securities (unlisted) xxx
Interest Rate
Net interest = Face value x
100
100
90
4. Interest on less-tax Government securities xxx
5. Interest on less-tax Commercial securities (listed) xxx
6. Interest on less-tax Commercial securities (unlisted) xxx
7. 8% saving (Taxable bonds if the amount of interest xxx

exceeds A 10,000)
Gross Interest xxxx
Less : Deduction u/s 57
1. Collection charges xxx
2. Interest paid on loan taken to purchase the securities xxx xxx
Income from interest on securities xxxx
Illustration: 1
Sharma held the following investments:
(a) A 90,000 10 % (Tax-free ) debentures of listed company
(b) A 50,000 12% (Tax-free) Punjab Government Loan
(c) A Collection charges A 2000.
Compute his income from interest on securities for the year ending 31-3-2011.
Solution
Computation of Mr. Sharmas Income from Interest on Securities
(a) 90,000 - 10% (Tax free) Debentures (listed) 10,000
A 90,000 x 10
90,000 x 10% =
90
(b) 50,000 - 12% (Tax free) Punjab Government loan:
50,000 x 12 % = A 60,00 6,000
Gross Interest 16,000
Collection charges 2,000
Income from interest on securities 14,000
Working Notes
1. Tax-free Commercial Securities must be grossed up.
2. Tax-free Government securities should not be grossed up become
there is no TDS on a security issued by the Central and State
Government securities.
Illustration : 2
Mr. Anil holds the following securities on April 1,2012:
A 1,00,000 5% Up Government Loan (Date of payment of interest
January 1)
A 40,000 6 % Unlisted debentures of ABC ltd. (Date of payment of

interest June 1)
A 25,000 8% Debentures of Z ltd. (Date of payment of interest: June
30, December 31)
On December 1,2012 he sells 25,000 -8% debentures of Z ltd.
Calculate the taxable income of Mr, Anil for the Assessment Year 2013-14.
Business Income is A 64,000 and Collection charges A 1000.
Computation of Mr. Anils Income from Other Sources for the
Assessment Year 2012-13.
1,00,000 5% Up Government Loan 5,000
40,000 6% Debentures of ABC Ltd 2,400
25,000 8% Debentures of Z Ltd. (A 2000 x ) 1,000
Gross Interest 8,400
Less: Deductions : Collection charges 1,000
Interest on securities 7,400
Add: Income from Business 64,000
Net Taxable Income 71,400
Illustration 3
Mr. Maheshwar who draws a salary of A 20,000 p.m. received the
following gifts on or after 1/10/2012.
(i).Gifts of A 5,00,000 on 16-10-2012 from a friend.
(ii).Gift of a Jewellery fair market value of which value is A 3,00,000 in
17/10/2012 from his would be wife.
(iii).Gift of A 51,000 each received from his 4 friends on the occasion
of his marriage on 21-10-2012.
(iv). Gift of A 1,00,000 on 22-11-2012 from his mothers sister.
(v). Gift of A 60,000 on 25-11-2012 from his fathers brother.
(vi). Gift of A 50,000 from his wifes friend on 1-12-2012.
(vii). Gift of A 21,000 on 15-12-2012 from his mothers friend.
(viii). Gift of A 26,000 on 25-12-2012 from brothers father-in-law.

(ix). Gift of A 1,21,000 from his wifes brother.
(x). Gift of A 26,000 from his employer.
(xi). Scholarship of A 1,20,000 from a charitable institution registered
under section 12AA.
(xii). He has purchased an immovable property from Mr. Bhardwaj
who is not his relative for a sum of A 24,90,000 whose stamp
duty value is A 24,50,000.
Compute his total income for the A.Y. 2012-13.
Computation of Total Income of Mr.Maheshwar.
for the A.Y. 2012-13
A. Income from Salary
Salary A 20,000 x12 2,40,000
Add : Cash gifts from Employer. 26,000
2,66,000
Less : Deduction u/s 16 Nil 2,66,000
B. Income from other Sources:

(i) Gift from a friend is taxable 5,00,000
(ii) Gift of jewellary is taxable w.e.f. 1-1-2009 3,00,000
(iii) Gift received from his 4 friends are exempt as
they have been received on the occasion of
Nil
his marriage.
(iv) Gift from his mothers sister is exempt as the
donor is covered in the definition of relative Nil
(v) Gift from his fathers brother is exempt as the Nil
donor is covered in the definition of relative
(vi) Gift A 50,000 from his wifes friend on
50,000
1-12-2010 is taxable.
(vii) Gift of A 21,000 from his mothers friend is 21,000
taxable
(viii) Gift from his brothers father

in- law is taxable as the
donor is not covered in the
definition of a relative 26,000
(ix) Gift from his wifes brother is not
taxable as the donor is covered
in the definition of relative Nil
(x) Gift from employer is taxable
under income from salary Nil
(xi) Gift in the form of scholarship
from charitable institution u/s 12 Exempt
AA.
(xii) Difference between stamp duty,
value and purchase Price should
exceed 50,000 then only it is not taxable 8,97,000
taxable.
Total income. 11,63,000
Problems:
1. Vinayaka held the following investments.
(a) A 81,340 10 % (Tax free) Debentures of Limited Company.
(b) A 70,000 -12% (Tax-free Rajasthan Development Loan
(c) Collection charges A 2,000
Compute his income from interest on securities for the year ending
31-3-2012
[Ans: A 15,468]
2. Mr Naresh has the following investments as on 1st April.2012;
A 10,000 - 10% Municipal bonds
A 20,000 - 10% National Defense certificates
A 30,000 - 15% A.P. Government loan
A 40,000 - 13.5% Tax free Government securities.
A 56,492 12% Tax free debentures of Reliance energy Ltd. (unlisted)

A 60,000 -10% Tax free debentures of Nagarjuna Ltd. (listed)
A 70,000 15% Panyam Cements Ltd. Debentures (listed. Less tax)
On 1st Dec,2012 Mr. Naresh bought A 90380 -20 % tax free
debentures of XYZ Ltd., and for this purpose he took a loan at 15% and paid
brokerage A 1,000. The interest on these investment was realized through
bank and the banker charged 5% as collection charges on gross interest.
Compute income from interest on securities.
[Ans: Income from interest on securities A 39,436.]
3. Following are the particulars of investment of Mr Bhupesh Gupta for
the previous year 2012-13.
(i) A 1,00,000 2% Tax Free Kerala Government Securities.
(ii) A 2,60,000 -6% Tax Free Debentures of Birla Jute Co., Limited.
(iii) A 60,000 8.5% N.R.I. Bonds (Second Series) of S.B.I.
(iv) A 90,000 4% (Less Tax) A.P. Government Bonds.
(v) A1,80,000 10 % Fixed deposit with Indian Bank.
(vi) A 70,000 8% Preference Shares of a Company.
(vii) Bank Charges paid A 60/-
(viii) Interest paid on loan taken for the purchase of tax free Government
Securities A 850/-
(ix) Income from other heads is A 2,07,414.
Compute the income from interest on securities and tax liability.
[Ans: Income from interest on Securities A 22,023]
4. Mr. Sanmukha furnished the following particulars of his income:
i. Interest on term deposits with bank (net) 10,764

ii. Dividends (gross) from tea company (60 % of the
income of the company is agricultural income) 3,000
iii. Interim dividend at 10% on shareholding A15,000 in a
textile mill, it was declared and paid on 25-12-2012. 1,500
iv. Dividend from UTI on unit 1964 scheme 17,000
v. Dividend from a Foreign Company in UK (tax

deducted at source has not been paid by the
company to the Government of India) 4,000
vi. Directors fee. 2,000
vii. Income from letting out of plant and machinery 30,000
viii. Royalty from mining. 10,000
ix. Monthly rent received by sub-letting a house (The
house was got on rent at 200 p.m., expenses
was incurred on house repairs A 3,000 and
others 1,000) 1,000 p.m
x. Winning from Lotteries 25,000
He claims the following expenses:
a. Collection charges for UTI dividend 300
b. Interest on money borrowed to purchase
shares of Textile Mill. 1,000
c. Depreciation and other expenses in respect of 5,000
plant & machinery.
Compute Mr. Sanmukhas income under the head income from other sources.
[Ans: A 83,600; Dividends are exempted from tax.]
1. Define security.
2. Mention any four incomes under the head of income from other
sources.
3. Mention various types of securities.
4. What is grossing up ?
5. Mention any four securities are fully exempted from tax.
UNIT 5
Deductions from Gross total
Income
Learning Objectives
Identify gross total income
Understand about qualifying savings u/s 80 C
Learn about deduction u/s 80 CCD, 80 CCF, 80 D, 80 E,80 GGA
Understand about taxable income
Introduction
While computing the total income of an assessee some deductions are
allowed from the gross total income, in addition to deductions that are allowed
from the gross total income, In addition to deductions that are allowed under
different heads of income. These deductions are allowed under section 80 C
to 80 U.
Note: These deductions are not allowed from (a) Long term capital
gains (b) winning from lotteries, horse races etc., (c) Short term capital gain on
transfer of equity shares. (d) Short term capital gain on transfer of equity oriented
units of mutual funds.
The aggregate of the deductions allowable under section 80 C to 80 U
is to be limited to the gross total income i.e., deductions allowable under this
section should not result in negative income i.e. loss.
The following are some of the important deductions available to an
assessee whose status is an individual.
Sl.No Section Particulars

1. 80C Qualified Savings
2. 80CCC Payment or Deposit in respect of Pension Fund.
3. 80CCD Payment to new pension scheme for government
and for other employees.
4. 80CCE Limit on deductions
5. 80CCF Investment in infrastructure Bonds
6. 80D Medical Insurance Premium
7. 80DD Deduction in respect of medical treatment and
maintenance etc. of handicapped dependents.
8. 80DDB Medical Treatment or expenses of dependent.
9. 80E Interest on higher education loan.
10. 80G Donations.
11. 80GG Deduction for rent paid.
12. 80GGA Donation for Scientific Research & Rural
Development.
13. 80GGC Donation to political Parties.
14. 80QQB Royalty income of authors of books.
15. 80RRB Royalty income from patent.
16. 80U Handicapped Resident persons.
Gross qualifying savings under section 80 C

1. Life Insurance Premium on Life Policy(*): (Maximum Premium eligible
limited to 20% of sum assured)
2. Contribution to Statutory or Recognized PROVIDENT FUND.
3. Contribution to 15 yr PPF (public provident fund) (*). (Maximum
Rs. 70000/-)
4. NSC VIII issue (Including Accrued Interest for Ist Five Yr)
5. Contribution to ULIP of UTI or LIC Mutual Fund Contribution to
Notified units of MUTUAL FUND or UTI

6. Contribution to Notified pension fund set up by Mutual Fund or UTI,
Tution Fees : paid to University, College or Educational Inst. In
India Max. 2 Children for FULL TIME education. (Excluding
Development Fees, Donation etc.)
7. Payment towards purchase or construction of residential house
property including repayment of Loan taken for the same.
8. Investment in approved Debenture or equity share of Public Company
or Units of Mutual funds, engaged in infrastructure development.
9. Subscription to Notified BOND of NABARD.
10. Fixed Deposit for 5 or more years in Sch. Bank in accordance with
the scheme framed and notified by Central Govt.
11. Deposit in Senior Citizens Saving Scheme.
1. Qualified Savings (sec 80 C) Deduction is allowed upto A1,00,000.
2. Payment or Deposit in respect of Pension Fund (Sec.80 CCC)
The deduction is least of the following two amounts.
(a) Actual amount paid/deposited. (b) A 1,00,000.
3. Payment for Pension fund to Government and other employees
(Sec. 80 CCD):table with rama Krishna sir.
4. Limit on Deduction u/s 80C (Sec.80CCE): Deduction is least or
the following two amounts
(a) Aggregate of gross qualifying amount u/s 80 C, 80CCC and 80
CCD
(b) A1,00,000 (Excluding employers contribution to New Pension
Scheme.
5. Special Deduction u/s 80CCF: Investment in Infrastructure
Bonds Sec. 80CCF:
Deduction: The least of the following two amounts is allowed as
deduction.
(a) Actual amount invested/deposited. (b) A 20,000
6. Medical Insurance Premium (Sec. 80 D)

Deduction:-
Health Policy for Lease of the following two amounts
1. Own/spouse/dependent children (a) Actual premium paid
(+) (b) Rs.15,000.
2. Parents of the assessee (a) Actual premium paid

(dependent or not)
(b) Rs.15,000.
3. If the mediclaim policy is for senior (a) Actual premium paid

citizen or super senior citizen.
(b) Rs. 20,000
7. Deduction in respect of medical treatment and maintenance of

dependent who is a person with disability (Sec. 80DD)
Dependent Person
Deduction: normal disability severe disability

(with less than 80 % disability) (with more than 80% disability)
A 50,000 is allowed as deduction A 1,00,000 is allowed as deduction
8. Deduction in respect of medical treatment of chronic specified disease

as prescribed by the C.B.D.T. such as AIDS, Cancer etc.: (Sec. 80 DDB)
(a) Actual amount spent (b) 40,000/60,000
9. Interest on Higher Education Loan: (Sec 80E)
Deduction: Actual amount of interest paid is allowed as deduction.
10. Donations: (Sec 80 G)
(a) Donation of any amount will be allowed as deduction.
(b) Donation in kind will not be allowed as deduction

(c) Donation made out of taxable income alone qualifies for deduction,
i.e., if donations are made out of tax-free income then they are not eligible for
deduction.
Steps:
(1) First calculate gross qualifying amount (i.e, finding out individual
limit.)
(2) Finding out the overall limit.
(3) Rate of Deduction.
Step 1.Calculating the gross qualifying amount for each donation made
Donations
No Limit Donations With Limit Donations

(1) No Limit Donations: Actual amount donated will be the gross
qualifying amount. It means qualifying amount is 100 % of the amount donated
e.g. If donated amount is A 15,000 then the qualifying amount is A 15,000.
(2) With Limit Donations: the qualifying amount is least of the following
two amounts.
(a) Actual amount donated. (b) 10 % of Gross Total Adjusted income.
Note: Adjusted Gross Total Income = G.T.I. (-) Long Term Capital
gains (-) other deductions u/s 80 except 80 G.
Step 2. Finding out the overall limit i.e., Net qualifying donations.
= Take the total of the qualifying amounts with limit and without limit
(as calculated in the above step.)
Step 3: Rate of Deduction.
Note : The rate of deduction is explained in the following.
I. Qualifying Amount is 100% and deduction rate is 100%.
II. Qualifying Amount is 100% but deduction rate is 50%.
III. Qualifying Amount is limited and rate of deduction is 100%.
IV. Qualifying amount is limited and rate of deduction is 50%.
5. Deduction for Rent paid (Sec. 80 GG)

The deduction is least of the following three amounts:-
(a) Rent paid (-) 10 % Adjusted G.T.I. (b) 25% of Adjusted G.T.I
(c) A 24,000 per annum.
12. Donations for Scientific Research or Rural Development
(Sec. 80 GGA)
Deduction : Actual amount donated or contributed will be given as
deduction.
13. Donations to Political Parties u/s 80GGC:
Deduction = Actual amount donated.
II. Deduction for incomes received in India.
14. Royalty income of authors of the books (Sec. 80 QQB)
Deduction for situation 1: Royalty received in India but in
lumpsum.
(a) Actual royalty received (b) 3,00,000.
Deduction for situation 2 : Royalty received in India not in
Lumpsum.
(a) Actual royalty received (b) 15 % of value of the books sold.
Deduction for situation 3: Royalty received from foreign countries.
(a) Actual royalty received (b) Royalty amount brought to India.
Note: the amount should be brought within 6 months from the end of the
previous year relevant to the current assessment year.
15. Deduction in respect of Royalty income on Patents u/s 80 RRB.
Deduction (i):- If royalty is received in India, the least of the following
two amounts will be allowed as deduction.
(a) Actual amount of royalty received (b) A 3,00,000.
Deduction (ii) :- If royalty is received in foreign currency the deduction

is least of the following two amounts.
(a) Actual amount of royalty income brought to India. (b) A 3,00,000.
III. Deductions in special Cases
16. Blind or Physically Challenged / Handicapped Persons (Sec
80 U):
Deduction:
(i) If disability is 40% or less than 80 % A 50,000.
(ii) If disability is 80 % or more than 80% (serious disability) A 1,00,000.
Illustration: 1.
Mr. X a person with disability, submits the following information.
Compute (a) taxable income (b) the tax payable for the assessment year
2013-14.
Rs.(A)
Salary (per annum) 1,94,600
Rent (per annum) 3,500
Dividend from Co-operative Society 1,000
Interest on Bank Deposits 8,000
Interest on Government Securities 1,000
Winning from Lotteries (gross) 4,000
NSC (VIII issue) Purchased during the year 10,000
Deposit under PPF scheme 15,000
He earned a long-term Capital Gain of A 12,000 on sale of gold during
the year . Interest earned on NSC VIII issue 1,000
Solution
Computation of Total income at Miss. Varsha for the Assessment
Year 2013-14.
Rs. (A) Rs. (A)

Income from salary
Basic salary 1,94,600
Less : Deduction u/s 16 Nil 1,94,600
Income from house property
Less : Statutory deduction @30% 12,600 29,400
Capital Gains
Long term capital gains 12,000
Income from other sources
Dividend from co-operative soceity 1,000
Interest on bank deposits 8,000
Interest on Government securities 1,000
Winning from lotteries 4,000
Interest earned on NSC 1000 15,000
Gross Total Income 2,51,000
U/s 80 C Rs. 10,000 + Rs. 15,000 25,000
U/s 80 U 50,000 75,000
Total Income 1,76,000
(b) Computation of Tax on Total Income

Tax on winning from lotteries (30% of A40,00) 1,200
Tax on long term capital gain (20% of A 12,000) 2,400
Tax on balance of Total income ( A 2,00,000) Nil
3,600
Add : Education cess @20% + Additional Cess 1% 108
Total Tax Payable 3,708
Illustration:2
Seeta who is a resident in India, is a person with disability. He provides
the following particulars of his income for the year ending 31.3.2013.
Salary for working as a telephone operator in a company 5,000 p.m.
Honorarium from school for blind for giving his service 47,000
Interest on government securities (gross) 44,000
Income from Unit Trust of India (gross) 5,000
He has contributed A 2000 to Prime Ministers National Relief Fund
and donated A 1,000 to the school for blind. Which is approved as a charitable
institution. He has also paid A 3000 by cheque as premium for mediclaim
policy. His father is also a person with disability and is dependent on him for
medical treatment and rehabilitation. Seta spends A 8000 during the year on
him.
Compute his total income for the assessment year 2013-14, assuming
that he has deposited A 20,000 in Public Provident Fund Account.
Solution :
Computation of Total Income of Mrs. Seeta
Rs. (A) Rs. (A)

Income from salary
Basic salary 60,000
Less : Deduction u/s 16 --- 60,000
Honorarium 47,000
Interest on Government securities 44,000
UTI Dividend Exempt 91,000
Gross Total Income 1,51,000
Less : Deduction u/s 80 C to 80 U
U/s 80 C 20,000
U/s 80 D 3,000
U/s 80 DD 50,000
U/s 80 U 50,000
U/s 80 G
PMNRF (100% of A 2,000) 2,000
School for blind (50% of A 1,000) 500 1,25,500
Total Income
25,500
Exercises
1. Raghavas gross total income is A 50,000. He pays A 2000 by way
of contribution to Public provident fund. A 3,000 as life insurance premium
A 200 to Jawaharlal Nehru Memorial fund and A 500 to Prime Ministers
National Relief Fund. Compute his total income.
[Ans: A 44,400]
2. Mr A had a gross total income of A 4 lakhs, which included A 10,000
as 1/4th share from association of persons for the assessment year 2013-14.
During the year he has made the following donations:
(a) National Defense Fund A 60,000
(b) Prime Ministers National Relief Fund A 1,00,000
(c) Family Planning Association of India A 10,000
(d) All India Congress Committee A 1,00,000
(e) Notified charitable hospital A 50,000
In addition to the above, he paid a life insurance premium of A15,000
on a policy of A1,00,000. Compute the relief in respect of donations and life
insurance premium.
[Ans. Deductions u/s 80 G A 1,84,250]
3. Mr. Sujiya requests you to compute his total income and Tax liability
for the assessment year 2013-14 from the following:
Rs.(A)
Business profits 1,47,000

Interest on company deposits 10,000
Winnings from state lotteries 55,000
Long-term Capital gains from sale of jewellery(25 years)2,00,000
[Ans. A 4,35,000,Tax liability A 56,195]
4. The following are the income particulars of Mr.yakub Ali. Compute
his total income for the A.Y. 2013-14.
Rs.(A)
Salary (gross) 75,000
Income from house property (computed) 25,000
Casual income 16,000
Tamil Nadu lottery prize 80,000
His payments are as follows:
Life Insurance premium 10,000
Donation to National Defense Fund 3.000
Tax advocate fee 1,000
Interest on money borrowed for payment of tax 500
[Ans. A1,95,000: Deduction u/s 80 G A 3,000]
1. What is grosstotal income ?
2. What is Net total income ?
3. Write the following
(a) 80 D (b) 80 E (c) 80 CCD (d) 80 E
Long Answer Type Questions
1. What are the deductions under section 80 GGA ?
2. Mention any six items in qualifying savings u/s 80 C.
UNIT 6
Assessment of Individual
Learning Objectives
Understand about procedure for computing net income
Learn about gross total income
Learn about net total income
Learn about tax liability
Introduction
An individual means a natural person. Individual would include a male,
female, minor child and a lunatic. In case of a minor child and lunatic, the
guardian or legal representative is liable to pay the tax. An individual has to pay
income tax on his total income at a graded scale of rates according to the
amount of his total income.
Procedure for computing total income
1. First ascertain the residential status of an individual.
2. Computing the income under different heads e.g:- Income from Salary,
Income from House Property etc.
3. Aggregation of incomes.
4. Setting off the losses of the current year and the brought forward
losses and lastly unabsorbed allowances of last year if any.
5. Computing Gross Total Income and deducting the deductions from

Gross Total Income.
6. Rounding off of the total income.
7. Calculating tax liability.
8. Calculating tax due or refund of tax.
Gross Total Income and Total income.
According to the provisions of section 14 of the Income Tax Act, the
terms Gross Total Income (GTI) means the aggregate of the income compound
as per the respective provisions of the following heads.
(i) Income from Salaries
(ii) Income from House Property
(iii) Profits and Gains of Business or Profession
(iv) Capital Gains
(v) Income from Other Sources
In these heads of income, the income arising to other persons, such as
wife, minor child, son;s wife, etc., shall also be included. The aggregate value of
all these heads of income is called as the GTI.
According to the provisions of section 2(45) of the Income Tax Act, the
term Total Income (TI) means the total amount of income specified as per section
5 and calculated as per the provisions of the Act.
A specimen Performa for calculation of Total Income and Tax Liability
is given below:
Particulars Rs. Rs. Rs.
1. Income from Salaries
(a) Basic Salary xxx
(b) Taxable Allowances xxx
(c) Taxable value of Perquisites xxx
(d) Taxable value of Profits in lieu of salary xxx
Gross Salary xxx
Less: Deduction u/s 16

(i) Entertainment allowance xxx

(ii) Tax on employment/Professional Tax (+)xxx
(-) xxx
Net Taxable Salary xxx

2. Income from House Property
(a) Self-occupied Property Nil
Less: Deductions u/s 24 for interest on loans (-) xxx
Loss from self-occupied Property (-) xxx
(b) Let out Property
Gross Annual Value xxx
Less: Municipal Taxes xxx
Net annual Value. xxx
Less: Deductions u/s 24 xxx
Income from let out property xxx
Net Income from House Property xxx
3. Profits and Gains of Business or Profession
Net Profit as per P&L account xxx
Add / Less : Adjustments required to be
made in the profit as per the
provisions of the Act. xxx
Net Business Income xxx
4. Capital Gains
a. Short Term capital gain
b. Short term capital loss
c. Long term capital gain
d. Sale consideration xxx
Less : Transfer expenses (-) xxx
Net consideration (-) xxx
Indexed Cost of acquisition (-) xxx

Indexed Cost of improvement (-) xxx
Gross LTCG. xxx
Less: Exemptions under sections 54,54B,54D,
54EC,54ED,54F, 54H (-) xxx
Net Long Term Capital Gains (+) xxx
Total Capital Gain xxx
Less: Carried forward Capital Loss (-) xxx
Taxable Capital Gains xxx

5. Income from Other Sources
General income u/s 56(1) xxx
Specific income u/s 56(2) (+) xxx

xxx
Less: expenses allowed u/s 57 (-) xx
Income from other sources xxx

Add: Income from other persons xxx
Aggregate of Incomes xxx
Less: Adjustment for set off and carry forward
of losses and allowances (-) xxx
Gross Total Income xxx
Less: Deductions u/s 80C to 80 U
(a) xxx
(b) xxx
(c) xxx
(-) xxx
Total Taxable Income xxx
(Rounded off to nearest rupees ten)
Computation of Tax Liability

Tax on casual incomes xxx
Tax on Long term capital gains xxx
Tax on regular income xxx
Total Tax xxx
Add: Education Cess 3% (+) xxx
xxx
Less: Relief u/s 89 (1) and rebate u/s 86 (-) xxx
Net Tax Payable xxx
Add: Interest payable, if any, for delay in filing
of return (u/s 234 A) or short payment
/deferment of advance tax (u/s 234 B &
234 C) (+) xxx
xxx
Less : Advance tax paid xxx
Tax Deducted at Source (TDS) (+) xxx
(-) xxx
Balance Tax Payable /Balance Refundable (+/-) xxx
Rounding off of Total Income [Section 288 A]

As per the provisions of section 288 A of the Income tax Act, the total
income computed as above, should be rounded off to the nearest multiple of
rupees ten and for this purpose any part of a rupee consisting of paise shall be
ignored. For example. If the total income is A 97,547, it shall be rounded off to
A 97,550 and if it is A 97,544.90, it shall be rounded off to A 97540.
Rounding off of Tax [Section 288 B]
As per the provisions of the Income tax Act, the amount of tax, including
tax deductible at source or payable in advance, interest, penalty, fine or any
other sum payable and the amount of refund due, etc., shall be rounded off to
the nearest multiple of ten rupees. For example, if the tax payable is A 10,558.65,
it shall be rounded off to A 10,660 and if it is A 10552.45, it shall be rounded off
to A 10,550.
Illustration 1.
Mr. Sriram is a Senior Citizen gives you the following income particulars.
Compute his Tax Liability for the A.Y. 2013-14.
1. Pension from Government A 3,30,000
2. Long term capital Gain A 50,000
3. Short term capital Gain A 30.000
4. Interest on fixed deposit A 10,000
5. Winning from Lottery A 1,00,000
6. Deposited in NSC. VIII issue
A 15,000. Pension scheme u/s 80CCC
A 30,000.
Solution
Computation of Total Income
1. Salary- pension 3,30,000
2. Capital Gain
a. LTCG A 50,000
b. STCG A 30,000 80,000
3. Other Sources
a. Fixed Deposit Interest A 10,000
b.Winning from Lottery A1,00,000 1,10,000
Gross Total income 5,20,000
Less: Deduction u/s 80 C & 80 CCC to
the maximum extent of 1,00,000 45,000
Computation of Tax Liability Rs.
Tax on total income 4,75,000
Senior citizen basic exemption Limit 2,50,000
Taxable income 2,25,000

20% Tax on long term Capital Gain ( A50,000) 10,000
30 % Tax on Lottery income ( A1,00,000) 30,000
On balance income Rs 75,000, Normal rate 10% 7,500
47,500
Add; Education Cess at 3% 1,425
Tax payable 48,925
Illustration 2
Mr. Sriharsha submits the Following income particulars. Compute the
Total income and Tax liability for the A.Y. 2013-14.
(a) Short Term Capital gain A 50,000
(b) Long term Capital gain A 1,80,000
He has deposited Rs. 20,000 in PPF
Solution
Computation of Total Income of Mr. Sriharsha
Capital gain
Short term Capital gain A 50,000
Long term capital gain A 1,80,000
Gross Total Income A 2,30,000
Deduction u/s 80C to 80 U Nil
Total Income A 2,30,000
Tax Liability
Tax on long term capital gain at 20 %
after allowing basic exemption
Limit(A 2,30,000- Rs.1,80,000 = 50,000) 10,000
Add : Education Cess at 2% + 1% additional cess 300
Tax Payable 10,300
Illustration 3
From the below given information compute total income of Mr.Rahul
for the Assessment year 2013-14.
(i) Interest on Government. Securities A 10,000 (gross).
(ii) Interest on Tax-freeGovt. Securities A15,000 (Net)
(iii) Interest on less-tax debenture of X Ltd A 9,000 (net)
(iv) Interest on less-tax debenture of Y Ltd A 9,000 (net) (unlisted)
(v) Interest on less-tax debenture of Z Ltd A 4,500(listed) (net)
(vi) Lottery winning received A 69,100 (net)
(vii) Interest on Bank Deposits A 16,000 (gross)
(viii) Rent from open lands A 46,000.
(ix) Medical insurance premium paid A 18,000
(x) Life insurance premium paid A 28,000
Solution
Computation of Total Income of Mr. Rahul
(i) Interest on Govt. Securities 10,000
(ii) Interest on tax-free Govt. Securities 15,000
(iii) Interest on Less-tax debentures of
100
X Ltd A 9,000 x 10,000
90
(iv) Interest on tax free debentures of Y Ltd.
100
A 9,000 x 10,000
90
(v) Interest on tax-free debentures of Z ltd

5,000
100
A 4,500 x
90
100
(vi) Lottery winning A 69,100 x 1,00,000
90
(vii) Interest on bank deposits 16,000
(viii) Rent from open lands 46,000

Gross total income 2,12,000
Less: Deduction u/s 80 D (Max) 15,000
Deduction u/s 80 C 28,000 43,000
Note : Interest on tax-free Govt., Securities need not be grossed.up

Illustration: 4
Mr. Amar submits you the following particulars. Compute total income
for the Assessment Year 2013-14.
(a) Salary received A 1,80,000
(b) Rent received A,90,000
(c) Rent from letting of plant & machinery, building etc. A 80,000
(d) Agricultural income from Indian lands A 60,000
(e) Agricultural income from Srilankan lands A 80,000
(f) Business profits Rs,1,20,000 after charging depreciation A 30,000
income-tax A 30,000 donation of PM National Relief Fund
A 20,000
(g) Share of income from HUF A 81,000
(h) Share of income from Association of persons A 70,000
(i) Medical insurance Premium paid A 16,000
Solution
Computation of Total Income of Mr. Amar
for the A.Y. 2013-14.
Income from Salary
Salary received 1,80,000
Less deduction u/s 16. Nil 1,80,000
Income from House Property

Less: Standard deduction u/s 24 (a) 30% 27,000 63,000
Business Income
Profit as per P&L Account 1,20,000
Add : Inadmissible expenses
Income tax 30,000
Donations 20,000 1,70,000
Share of income from HUF exempt u/s 10 (2) NT
Share of income from AOP 70,000
2,40,000
Rent for letting of plant etc. 80,000
Indian agricultural income exempt u/s 10 (1) NT
Foreign agricultural income 80,000 1,60,000
Gross total income
Income from salary 1,80,000
Income from house property 63,000
Business income 2,40,000
Other income 1,60,000 6,43,000
Less: Deduction u/s D (Max) 15,000
Deduction u/s 80 G (full) 20,000 35,000
Problems
1. Compute total income from the following information;
(i) Salary received 1,60,000
(ii) Rent received 1,20,000
(iii) Municipal taxed paid on let out house 10,000

(iv) Business profit A 2,40,000 after charging
depreciation A 26,000, donations to National
Defense funds A15,000, income tax A 20,000.
(v) Long term Capital loss 60,000
(vi) Short term capital loss 40,000
(vii) Interest on bank deposits 16,000
(viii) Interest on Govt. Securites 14,000
(ix) Medical claim paid 18,000
(x) Life insurance premium paid 24,000
(Ans: GTI A 5,82,000; Deduction u/s 80C A 24,000,
80D A15,000, u/s 80G A15,000; Long term loss A 60,000 c/f to next year
to be set off from next year long term capital gain.)
2. Information relating to Sanju is given below:
(a) Income from house property A 75,000
(b) Salary received A 1.50,000
(c) Interest on Govt. Securities A 40,000
(d) Commission as LIC agents A 50,000
(e) Directors remuneration A 60,000
(f) Rent from letting of plant, machinery, building etc.A 80,000
(g) Lottery winnings A 69,100 (net)
(h) Long term capital gains A 80,000
(i) Short term capital loss A 20,000
(j) Share of income from Hindu Undivided family A 40,000.
(k) Half share of income from Association of persons A 48,000.
(l) Dividends from Indian Companies A60,000
(m) Donation to an approved Institution A 10,000.
Compute total income for the A.Y. 2012-13.
(Ans: A 6,10,000 [Hint GTI A 6,15,000 deduction u/s 80 G A

5,000, Dividends form Indian companies exempt u/s 1- 934) share if income
from HUF exempt u/s 10 (2)]. Income from H.U.F.& AOP is not included in
the income of an individual.)
3. Amresh submits the following information regarding his income for
the previous year 2011-12.
Rs.
1. Salary (per month) 30,000
2. Rent Received from House property in Delhi (per month)8,000
3. Winning from lottery (Gross) 1,00,000
He makes following deposits during the year
1. Contribution towards PPF 40,000
2. Premium paid in cash on Mediclaim policy
for his dependent father 10,000
He has a son being a person with disability, depended on him, for whom
he incurred expenses for his medical treatment and rehabilitation. He also
deposited a sum of A 25,000 for the benefit of his son under a scheme framed
by the UTI for such a purpose. (a) Compute Amresh Total income and tax
liability for the assessment year 2013-14.
[Ans: Total Income A 4,37,200, Tax Liability A47,092.]
4. From the following particulars compute total income of Mr. Raj
Kumar. Rs.(A)
(i) Income from Salary 2,08,000
(ii) Income from house property 76,000
(iii) Income from long-term capital gains on shares
A 81,000 and on building A1,90,000
(iv) Income from other sources 24,000
(v) Winning from Horse races (gross) 68,000
Deductions allowable as per I.T. Act.
(1) A 86,000 u/s 80 C (2) A 5,000 u/s 80 D (3) A 10,000 u/s 80 G.
[Ans: 4,65,000]
5. Mr.Sri Ramulu submitted his particulars of income and payments for

the previous year 2012-13. Compute total income and tax liability for the
assessment year 2012-13.
Rs.(A)
(i) Income from salary 5,00,000
(ii) Income from House property (let out) 18,000
(iii) Loss from house property (self occupied) 3,400
(iv).Income from other sources 50,000
(v).Qualified savings 1,20,000
(vi). Medical Insurance premium 16,000
(vii). Interest on Higher education loan 15,000
[Ans: 4,34,600]
1. What is Gross total income ?
2. Define total income.
3. Mention any four heads of incomes.
4. Compute the tax liability of Mr. Shekar.
Total Income A 5,25,000
UNIT 7
Service Tax
Learning Objectives
Understand about meaning of service tax
Understand about features of service tax
Learn about service provider and service receiver
Learn about procedure for registration
7.1 Introduction
Service Tax is a form of indirect tax imposed on specified services
called taxable services. Service tax is a part of Central Excise in India. It is a
tax levied on services provided in India, except the State of Jammu and Kashmir.
The responsibility of collecting the tax lies with the Central Board of Excise and
Customs(CBEC).
Service tax cannot be levied on any service which is not included in the
list of taxable services. Over the past few years, service tax been expanded to
cover new services. The objective behind levying service tax is to reduce the
degree of intensity of taxation on manufacturing and trade without forcing the
government to compromise on the revenue needs. The intention of the
government is to gradually increase the list of taxable services until most services
fall within the scope of service tax. For the purpose of levying service tax, the
value of any taxable service should be the gross amount charged by the service
provider for the service rendered by him.
7.2 Service Tax in India

Service Tax was first brought into force with effect from 1 July 1994.
All service providers in India, except those in the state of Jammu and Kashmir,
are required to pay a Service Tax in India. Initially only three services were
brought under the net of service tax and the tax rate was 5%. Gradually more
services came under the ambit of Service Tax. The rate of tax was increased
from 5% to 8% w.e.f 14 May 2003. From 10 September 2004 the rate of
Service Tax was enhanced to 10% from 8%. Besides this 2% education cess
on the amount of Service Tax was also introduced. In the Union Budget of India
for the year 2006-2007, service tax was increased from 10% to 12%. On
February 24, 2009 in order to give relief to the industry reeling under the impact
of economic recession, The rate of Service Tax was reduced from 12 per cent
to 10 per cent.
7.3 Silent features of Service Tax
1.Scope: It is leviable on taxable services provided or to be provided
byaserviceprovider.Theservicestobeprovidedinfuturearetaxedonlyif
payment in its respect is received in advance.
Two separate persons required Payment to employees not
covered: For charge of service tax, it is necessary that the service provider
and service recipient should be two separate persons acting on principal to
principal basis. Services provided by an employee to his employer are not
covered service tax and, therefore, salaries or allowances paid to them cannot
be charged to service tax.
2.Rate: It is leviable @ 12% of the value of taxable services. Education
Cess @ 2% and Secondary and Higher Education Cess @ 1 % are chargeable
on the amount of service tax, thus, making the effective rate of service tax at
12.36% of the value of taxable service.
3.Taxableservices: Service tax is leviable only on the taxable services.
Taxable services mean the services taxable under section 65(105) of the
Finance Act, 1994.
4.Value: For the levy of the service tax, the value shall be computed in
accordance with section 67 read with Service Tax (Determination of Value)
Rules, 2006.
5.Freeservicesnottaxable: No service tax is leviable upon the
services provided free of cost.
6.Paymentofservicetax: The person providing the service (i.e. the

service provider) has to pay service tax in such manner and within such period
as is prescribed in the Service Tax Rules, 1994. The service tax is to be paid
only on the receipt of payment towards the value of taxable services.
7. Procedures: Provisions have been made for registration,
assessmentincludingselfassessment,rectifications,revisions,appealsand
penalties on the service provider.
8.CENVATcredit: The credit of service tax and excise duty across
goods and services is allowable in accordance with the CENVAT Credit Rules,
2004.
Accordingly, output service provider (i.e. provider of any taxable
service) can avail credit not only of the service tax paid on any input service
consumed for rendering any output service but also of the excise duty paid on
any inputs and capital goods used for rendering output service. CENVAT credit
so availed can be utilized for payment of service tax on taxable output service.
9.Servicesprovidedbyanunincorporatedassociation/body
toitsmembersalsotaxable
[Explanation to Sec. 65] : Taxable service includes any taxable
service provided or to be provided by any unincorporated association or
bodyofpersonstoamemberthereof,forcash,deferredpaymentorany
othervaluableconsideration.Hence,theservices(fallingunderanycategory
of taxable service) provided or to be provided by any unincorporated association/
body to member thereof shall be liable to service tax. This provision is an
exception to the principle of mutuality.
10. Performance of statutory activities/duties, not service: An
activityperformedbyasovereign/publicauthorityunderprovisionsoflaw
does not constitute provision of taxable service to a person and, therefore, no
service tax is leviable on such entities.
11. Import/Export of services: While import of services is chargeable
to tax u/s 66A, the export of services has been made exempt from tax. Import/
export provisions are discussed separately.
7.4 Definition of Person
The term person in not specifically defined under service tax laws. Since
the word person has not been specifically defined under the Act for the purposes
of service tax, we can resort to the definition under the General Clauses Act,
1897. Under Section 3(42) of the GCA, Person shall include any company
or association or body of individuals, whether incorporated or not being whom

the law regards as capable of rights and duties. Any being that is so capable is a
person, whether a human being or not, and no being that is not so capable is a
person, even though he be a man.
A detailed analysis of meanings attributed to the term person in various
statutes / judicial pronouncements / dictionaries is set out hereafter for ready
reference:
Section 11 of the Indian Penal Code (Act 45 of 1960), read with the
General Clauses Act, reads: The word person includes any Company or
Association or body of persons, whether incorporated or not.
Section 2(31) of the Income Tax Act, 1961 reads: Person includes:(i)
an individual; (ii) a Hindu undivided family; (iii) a company; (iv) a firm; (v) an
association of persons or body of individuals whether incorporated or not; (vi)
a local authority, and; (vii) every artificial juridical person, not falling without any
of the preceding clauses.
Thus, though the term Person has not been defined for the purposes of
levy of Service Tax, the term person can be construed to be of a very wide
connotation in terms of definition under the General Clauses Act and other judicial
pronouncements/definitions in other statutes discussed. The term person could
include the Government viz the Central Govt. / State Govt etc since the definition
of person under many statutes specifically includes the Government.
7.4.1 Service Provider
Service provider is the person who provides the taxable service on
receipt of charges and is responsible for paying the Service tax to the
Government. If the service provider is a Non Indian resident or who does not
have any establishment in India, in that case the service receiver is liable to pay
Service Tax.
Service tax is levied on taxable services only and not on the service
provider. The service provider is only an instrument to deposit the service tax to
the credit of Central Government who has been made as a person liable. As per
Section 68, every person providing taxable services to any person or persons
notified under sub-section (2) shall pay service tax. The terms service provider
has not been defined.
Various definitions suggest that service provider is bound to have different
meanings for different taxable services. The definitions use the words like any
person, any commercial concern, any agency, any establishment etc. as is
illustrated in some of the services mentioned below-
Anypersonairtravelagent,architect,CA,CS,mandapkeeper,
C & F agent, courier, broker, tour operator, cargo, cable operator
etc.
Anycommercialconcernadvertising,aircraftoperator,business
auxiliary services, manpower recruitment, drycleaner, convention etc.
Anyagencybroadcasting,commissioning&installation,manpower
recruitment etc.
Anyestablishmentbeautyparlour,coachingcentre
Othersbankingcompany,port,AAI,financialinstitution,body
corporate etc.
Newservicesthetermusedisanypersoninallservices.
7.4.3 Service Receiver
Service receiver is a person who receives or avail the service provided
by the service provider. Service receiver has also not been defined and for
service receiver, various terms have been used such as any person, policy
holder, subscriber, customer, client, exhibitor, franchisee, shipping line etc.
However, Finance Act, 2008 has substituted any person in all the taxable
services in place of client or customer as service tax is levied on services and
status of service recipient should not determine the tax treatment.
Service tax is payable only when a taxable service is rendered or
provided to the service receiver. While generally, in case of sale, receiver is the
buyer or customer, in case of a service, service receiver is the client. There
should exist a relationship of service provider and service receiver between the
two parties to a service. Services are rendered to the client who can be called a
policy holder (as defined in Insurance laws) or a subscriber (as defined in
Telegraph Laws) or shipping line or franchisee or a customer or just a client, as
the case may be. Oxford English Dictionary defines client to mean a person or
organisation using the services of a lawyer or other professional person or
company. Clients collectively are clientele.
7.5 Registration Procedure
Section 69 of the Finance Act, 1994 read with Rule 4 of the Service
Tax Rules, 1994 prescribe the manner and form for registration as an assessee,
of any person liable to pay service taxin accordance with the provisions of Section
68 of the Finance Act, 1994. Below set, in brief is the procedure for registration:
1. Fill the Form ST-1 in duplicate. (Form ST-1 is available on the

departmental website ( www.cbec.gov.in ) Enclose photocopy of PAN card
and proof of address to be registered.
2.CopyofPANcardisnecessaryasaPANbasedcode(Service
Tax Code) is allotted to every assessee.
3.TheseformsarerequiredtobesubmittedtothejurisdictionalCentral
Excise office ( in case of six Service Tax Commissionerates, to the jurisdictional
Division office. There are separate service tax commissionerates in Mumbai,
Chennai, Delhi, Kolkata, Bangalore and Ahmedabad)
4.Apersonliabletopayservicetaxshouldfileanapplicationfor
registration within thirty days from the date on which the service tax on particular
taxable service comes into effect or within thirty days from the commencement
of his activity.
5. Where a person, liable for paying service tax on a taxable service,
(i) provides such service from more than one premises or offices; or
(ii) receives such service in more than one premises or offices; or,
(iii)ishavingmorethanonepremisesoroffices,whichareengaged
in relation to such service in any other manner, making such person liable for
paying service tax, and has centralised billing system or centralised accounting
system in respect of such service, and such centralised billing or centralised
accounting systems are located in one or more premises, he may, at his option,
register such premises or offices from where centralised billing or centralised
accounting systems are located.
5.1 Theregistration undersub-rule (2),shall begranted bythe
Commissioner of Central Excise in whose jurisdiction the premises or offices,
from where centralised billing or accounting is done, are located, provided that
nothing contained in this sub-rule shall have any effect on the registration granted
to the premises or offices having such centralised billing or centralised accounting
systems, prior to the 2nd day of November, 2006.
6.Asingle registration is sufficient even when an assessee is providing
more than one taxable services. However, he has to mention all the services
being provided by him in the application for registration and the field office shall
make suitable entries/endorsements in the registration certificate.
7. An assessee should get the registration certificate (registration
number) within 7 days from the date of submission of form S.T.1, under normal
circumstances.
8.Afreshregistrationisrequiredtobeobtainedincaseoftransferof
business to another person.
9. Any registered assessee when ceases to provide the taxable service
shall surrender the registration certificate immediately.
10. In case a registered assessee starts providing any new service
from the same premises, he need not apply for a fresh registration. He can
simply fill in the Form S.T.1 for necessary amendments he desires to make in his
existing information. The new form may be submitted to the jurisdictional
Superintendent for necessary endorsement of the new service category in his
Registration certificate.
1. Define Service tax.
2. Define person as per service tax.
3. Who is Service provider.
4. Who is Service receiver.
5. What is meant by CENVAT credit.
1. Explain the silent features to service tax.
2. Explain about registration procedure as per service tax rules 1994.
3. Write briefly about Service provider and Service receiver.
UNIT 8
Value Added Tax
Learning Objectives
Understand about VAT
Understand about history of VAT
Learn about objectives, advantages and disadvantages
Learn about list of goods tax rates.
8.1 Definition
VAT is a tax on consumer spending. It is collected by VAT-registered
traders on their supplies of goods and services effected within the State, for
consideration, to their customers. Generally, each such trader in the chain of
supply from manufacturer through to retailer charges VAT on his or her sales
and is entitled to deduct from this amount the VAT paid on his or her purchases.
Value added tax is not only a simple taxation system, but also is the
mostcommonmodelusedintheworldtoday..Fromeconomicpointofview,
the value added is the difference between the worth of outputs and inputs. But
in compilation of the law, it is defined according to the accounting standards
and by relaying on invoice method. By considering the above point, the value
added is defined as the difference between the value of the goods and services
supplied and value of the goods and services bought by a person in a specific
period of time.
By considering the above definition, the value added tax is a kind of

multiphase tax, which is calculated and collected according a percentage of
value added of the goods and services produced and supplied in the process of
production and distribution cycle. This tax in fact, is a kind of tax on multiphase
sales, which exempts the purchase of intermediate goods and services from tax
payment.
8.2 History of VAT
The value added tax system was first introduced by Von Siemens in
1951. In fact, it was designed in order to solve the financial problems of German
government. But in spite of the intense inclination and tendency of some countries
such as Argentina and France to know about its structure; the
VATwasntimplementedbyanycountryuntil1954.After1954,Brazil,Denmark
and Germany; were among the first countries which introduced the VAT in their
taxation systems. In Asia; South Korea was the first Asian country, which in
1977 with the help of International Monetary fund (IMF), succeeded to implement
the VAT in its taxation system. Subsequently, other countries such as Turkey,
Pakistan, Bangladesh and Lebanon used the VAT as their taxation system. At
present; more than 120 countries are using VAT as their taxation system.
In order to implement this kind of taxation model in Iran, the bill of VAT
was first presented to the Islamic Consultative Assembly (Parliament) of Iran in
January of 1987 by the government of that time. The VAT bill was reviewed by
the Economic Committee of the Parliament and after making necessary
revisions,itwaspresentedtotheParliamentforvoting.Afterapproving6Articles,
due to government request and for the reason of stabilizing the prices (economic
adjustment policies) it was returned to the government.
In 1991, the financial department of the International Monetary Fund, for
the purpose of reforming Iranian taxation system, proposed the use of VAT
policy as one of the main factors for increasing the efficiency and reforming
taxation system of Iran. Following suggestions of the IMF experts; several studies
on this subject have been made in the Ministry of Economic Affairs and Finance
andimplementationoftheVATinIranwasdiscussedandagreedbymajorityof
the internal and external experts, but it wasnt implemented in practice. The
Ministry of Economic Affairs and Finance, in accordance with its plan for
economic mobilization of the country started the projects of reforming the taxation
system and omission of different kinds of exemptions and duties by substituting
the larger tax basis. The feasibility studies of the above project have also been
carried out. Due to importance of expanding of tax basis, as one of the main
principles of the policy of economic stabilization, the taxation Deputy of the Tax
Revenue Department of the Ministry of Economic Affairs and Finance, since
1997 has carried out a number of scientific researches on socio-economic and

cultural impacts of implementing the VAT in Iran. The bill of the value added tax
(new version) after considering the economic effects of implementing VAT, and
after several revisions, has been presented to the Parliament.
8.3 Objectives of VAT
The primary objective of VAT must be to enhance competitiveness while
removing the cascading effect of taxes and levies. While ensuring that this primary
objective is in the forefront of the evolution of VAT law, the State must ensure
that barriers to inter-state trade should be eliminated inorder to create a unified
national market. All of us will agree that the VAT regime must be simple,
transparent, consistent in structure and approach, ensure revenue neutrality and
mechanism must be self regulated.
One of the most important criteria for implementation of VAT by the
State will be to design and maintain a suitable mechanism to carefully monitor
the revenues under VAT and a comparative study of the same with the present
scenario to ensure current revenue levels.
Following are the objectives in brief
1. Increase in government revenue
2. Developing stable source of government revenue
3. To make the tax system more transparent
4. To avoid cascading effect.
5. To reduce tax evasion practices
6. To increase in exports.
8.4 Advantages and Disadvantages of VAT
8.4.1 Advantages of VAT
During the last 40 years that the value added tax system has been used,
the number of countries which added to the user of this kind of taxation system
increased to more than 120 countries. This taxation system which was used at
the beginning only by European countries, gradually with an increasing rate used
by many developed and under development countries.
By reviewing the reports of those countries which has been using the
value added tax system, all of them demonstrate their satisfaction of using it.
The advantages counted for the value added tax system are as follows:
Income generator for covering the government expenses

Stability
Minimizing the tax evasion
The ease of auditing control
Disciplined trade
Improving foreign trade
Rebuilding the economy
Effective support
The minimum negative effect on allocation of resources
Facilitating the entrance to regional protocols
Resolving the negative effects of taxation on economy
Etc...
1. Income generator for covering the government expenses
Due to the vastness of tax basis of value added tax system which usually
includes the majority of goods and services, this kind of taxation called by
governments as a money producing engine. The reason of using this metaphor
is the tax basis in this model which includes the vast groups of goods and services
and also the large and floating incomes which it generates for the governments.
Taxes which were collected by the objective of balancing the distribution of
incomes or achieving economic efficiency usually has the smaller tax basis and
higher tax rates. On the other hand, increasing the tax rates due to the fact that
decreases the investment and production motivation causes the black-market
and prepares the situation for tax evasion and ultimately decreases the
government income. But due to the vastness of tax basis in value added tax
system, the governments can use the lower rates of taxes on all the final sales
related to all economic sectors and as a result can generate more income for
covering their expenses without decreasing the investment motivation.
2. Minimizing the Tax evasion
In the value added tax model due to the lower rates of taxes in
comparison to other type of taxation system with the limited tax basis, the tax
evasion decreases and as a result the a reliable source of income made for
governments. On the other hand if one firm (seller) cheats it means another
firm ( the buyer) loses, because both firms have to report their transactions and
they have opposing interests, the system is selfenforcing and that makes evasion
difficult.
3. Facilitating the entrance to regional protocols
Some of the regional protocols due to the reasons such as: The necessity
of unified model of taxation system in economical relations between the members
of protocols, creation of unified tax screw, motivating the members toward
efficiency, development of industries, using the benefit of neutralization and
increasing the internal competition, made the admission of the value added tax
as one of the criteria for acceptance of the members in protocol.
4. Restructuring and improving the taxation system
As the structure of economy growth and become more complicated,
the necessity of keeping accounts in different small and big size business units
increases. Thus, in value added tax system, each business unit required to keep
its account in a comprehensive manner, so the use of computers for record
keeping and processing data in order to produce timely information is more than
the traditional tax system models and thus it will result the renewal and deep
change in old and traditional taxation system and a dramatic improvement in
times and jobs of tax system personnel.
5. The ease of auditing control
Due to the fact that in value added tax system, the invoices of sales are
the base of tax calculation and the amount of sales of goods and services recorded
in the specified columns of invoice and according to that value added tax
calculated and collected and also because the invoices recorded in the general
journal and ledgers of the firms, so (especially in the case of unique tax rate) the
system of auditing is simple and effective.
6. The minimum negative effect on allocation of resources
From economical point of view, value added tax is a neutral tax; because
it has no effects on production factors ( investment, employment and etc..) and
also has the minimum negative effects on economical decisions of the business
units. The reason is because in value added tax system the tax calculated on
value added generated by production factors in production cycle and thus it
hasnt any bias to an any kind of production method. According to the above
mentioned points, It is said that the value added tax has not any distortion on
market forces in relation of optimized allocation of resources. The neutrality of
value added tax is one of the key reasons of acceptance of it by the central and
eastern European countries.
8.4.2 Disadvantages of value added tax

Usually the governments and their policy maker who have the value
added tax system in their agenda , due to the following reasons are worry about
the implementation of it as their taxation system:
1. The diminution effects of value added tax
As the value added tax in practice is a tax on consumption and usually
calculated with a fix rate on predetermined commodities, therefore the screw of
taxes on low income peoples is greater than the other groups of income. So it is
why those countries that starting to use VAT for the first time are worry about
the diminution nature of it.
There is an answer to above critics and that is as follows:
(1) value added tax is not following the social equity objective and the
inequity of tax rates by implementing other supporting polices of governments
from low income groups can be justified.
(2) It can be asked the same question from the opposition of VAT, Do
the traditional tax systems really completely fulfill their social equity objectives ?
and finally because a portion of governments incomes are indirect taxes , the
effects of diminution of VAT in comparison to the other kind of taxation especially
tax on sales in different stages is significantly lower.
2. The effects of value added tax on increases of prices level
Some times the above mentioned sentence appear as a criticism against
VAT, but the experience of those countries which implement and used the VAT
shows that there is not any thing to be worry about, because first of all the
opposition of VAT cant propose any rational reasons for increasing the general
price levels and secondly using the VAT system cause a deflation on economy
and as a result has a deflation effects on economy.
8.5 Difference between VAT and Sales TAX
The following are the differences between VAT and sales tax
1. The current Sales Tax is not applicable to all goods and services. For
example, raw materials purchased for manufacturing goods in Hyderabad are
not subject to tax, nor are many food items and most building materials. Similarly,
some services are excluded from the scope of the tax - construction services
and bar/restaurant services, for example. VAT will apply to virtually all goods
and services.
2. Most local enterprises pay Sales Tax at the time of importation. This
tax is then recovered, like any other business expense, through the prices fixed
by businesses for the goods and services they sell. At present, businesses are
not required to issue special invoices or to identify the sales tax paid or payable
on invoices or till slips. Enterprises engaged in manufacturing activities in Botswana
with a turnover above Rs. 75,000 per annum are required to register for sales
tax and must charge and account for 10% sales tax on all sales. These
manufacturing enterprises are exempt from Sales Tax on their main raw material
purchases.
3. For those services which are covered by Sales Tax, there is no

registration threshold. Therefore, all enterprises have to collect and account for
10% tax on their sales. Moreover, service providers do not qualify for any relief
in respect of sales tax paid on any inputs.
4. With VAT, all enterprises making taxable supplies above a value of

Rs. 250,000 per annum must register and are therefore obliged to apply VAT
on all sales of taxable supplies. This means that wholesalers and retailers will be
required to register if they have a turnover of more then Rs. 250,000 per annum.
On the other hand, small service providers will drop out of the tax net. However,
the net effect of the change from Sales Tax to VAT should be a significant increase
in the taxpayer base.
5. Under Sales Tax, most imports are assessed for tax at the time of
importation and no further liability arises as the goods go through wholesalers
and retailers to final consumers. Under VAT, however, all imports will be assessed
for VAT at the time of importation and the VAT payable on imports will be
allowed as a deduction against the output tax charged on sales made by importers
who are registered for VAT purposes.
6. As the VAT will apply all the way through from importation/production
to the final sale to consumer, VAT will generally apply to the full price payable by
consumers. This should mean a significantly improved value base compared to
the Sales Tax which applies tax only to the value of imports or the ex-factory
value of goods.
8.6 VAT rates in Andhra Pradesh

List of goods Exempt from tax Under Section 7
Sl.No. Name of the Commodity
1. Agricultural implements manually operated or animal driven
2. Aids and implements used by handicapped persons
3. Aquatic feed, poultry feed and cattle feed including grass, hay and straw
4. Betel leaves
5. Books, periodicals and journals
6. Charkha, Ambar Charkha and Gandhi Topi
7. Charcoal
8. Jowar, Maize, Ragi, Bajra, Kodan, Kutki, Barley, Varigalu or variga
rice, Korralu or Korra Rice.
9. Condoms and contraceptives
10. Cotton yarn in hank and silk yarn in hank
11. Curd, Lussi, Butter Milk and separated milk
12. Earthen pot
13. Electrical energy
14. Firewood other than asuarinas poles, eucalyptus logs and cut sizes
there of.
15. Fishnet and fishnet fabrics
16. Fresh milk and pasteurized milk other than UHT milk and skimmed
milk powder
17. Fresh plants, saplings and fresh flowers
18. Vegetables and fruits other than those cured, frozen, preserved,
processed, dried, dehydrated or canned.
19. Garlic and Ginger
20. Bangles made of shell, Glass, Lac or Plastic
21. Handlooms, parts and accessories thereof and goods produced from
handlooms
22. Human blood and blood plasma

23. Kumkum, Bindi, alta and Sindur
24. Meat, Fish, Chicken, prawn, prawn seed and other aquatic products
when not cured or frozen, and eggs, livestock and animal hair
25. National Flag
26. Organic manure
27. Non-judicial stamp paper sold by Government Treasuries; postal items
like envelope, post card etc. Sold by Government; rupee note, when
sold to the Reserve Bank of India and cheques, loose or in book form
28. Raw wool
29. Semen including frozen semen
30. Silk worm laying, cocoon and raw silk
31. Slate and slate pencils
32. Tender green coconut
33. Toddy, Neera and Arak
34. Unbranded bread
35. Unprocessed and unbranded Salt
36. Water other than-(i) aerated, mineral, distilled, medicinal, ionic, battery,
de-mineralised water, and (ii) Water sold in sealed container
37. Prasadam, Bhog or Maha Bhog by Religious Institutions
38. Plantain Leaves , Bamboo Matting
39. Puffed Rice, Parched Rice, Murmuralu and Atukulu
40. Husk of pulses, paddy, groundnut and wheat bran
41. Leaf plates and leaf cups-pressed or stitched and loose and unstitched
vistarakulu
42. Unbranded broomsticks
43. Seeds for sowing and gardening puposes.
44. Cotton Fabrics., man made fabrics and woolen fabrics
45. Sugar , Tobacco
Schedule III
List of goods taxable @ 1%
S.No Name of the Commodity

1. Bullion and Specie
2. Articles and Jewellery made of bullion or specie or both and

Jewellery embedded with precious stones and semi-precious
stones and gold coated or gold covered jewellery
3. Precious stones, that is to say, Diamonds, Emeralds, Rubees,

Sapphires and semi-precious stones and pearls
Schedule IV
List of goods taxable @ 4%
S.No Name of the Commodity
1. Agricultural implements not operated manually or not driven by animal
2. All intangible goods including copyright, patent, rep license, DEPB
3. All kinds of bricks including fly ash bricks, refractory bricks
4. Asphaltic roofing sheets
5. Earthen tiles other than ceramic and glazed tiles
6. All types of yarn and sewing thread other than cotton yarn in hank and
silk yarn in hank.
7. Aluminium utensils and enameled utensils
8. Arecanut, betel nut and betel nut powder
9. Bamboos, Casuarina poles, eucalyptus logs and cut sizes thereof
10. Bearings of all kinds
11. Beedi leaves
12. Transmission rubber belts
13. Bicycles, tricycles, cycle rickshaws & parts and accessories thereof
14. Bitumen
15. Branded bread
16. Bulk Drugs
17. Centrifugal, monobloc and submersible pumps.
18. Coffee beans and seeds, cocoa pod, green tea leaf and chicory
19. Chemical fertilizers and Bone Meal including mixtures or Nurient
elements such as Iron, Zinc, Copper and biological derivatives such as
Enzymes, Co-enzymes and Aucines
20. Pesticides, Insecticides, fungicides, herbicides, weedicides and other
plant protection equipment and accessories thereof
21. Coir and Coir products excluding coir mattresses
22. Cotton waste and Cotton yarn waste
23. Crucibles
24. Electrodes including welding electrodes and welding rods
25. Exercise Note books including Graph books and laboratory note books,
Office stationery including computer stationery, writing pads and
Account Ledgers
26. Fibres of all types and fibre waste
27. Ferrous and non-ferrous metals and alloys and extrusions thereof
28. Flour, Atta, Maida, Suji, Besan and Ravva
29. Parched and fried grams or dhalls
30. Jaggery
31. Hand Pumps, parts and fittings thereof
32. Herb, bark, dry plant, dry root, commodity known as jari booti and
dry flower
33. Hose Pipes
34. Hosiery goods of all kinds
35. Rice bran including de-oiled rice bran
36. Ice
37. Incense Sticks commonly known as, Agarbathi, dhupkathi or dhupati

38. Industrial cables, (High voltage cables, XI. PE Cables, Jelly filled
cables, optical fibre cables)
39. IT Products (with HSN Codes), that is to say
(1) Word Processing Machines and Electronic Typewriters (84.69)
(2) Electronic Calculators (84.70)
(3) Computer Systems and Peripherals, Electronic Diaries (84.71)
(4) Parts and Accessories of HSN 84.69,84.70 and 84, 71 for items
listed above (84.73)
(5) DC Micromotors / Stepper motors of an output not exceeding
37.5 Watts (85.01)
(6) Parts of HSN 85.01 for items listed above (85.03)
(7) Uninterrupted Power Supplies (UPS) and their parts (85.04)
(8) Permanent magnets and articles intended to become permanent
magnets (Ferrites) (85.05)
(9) Electrical Apparatus for line telephony or line telegraphy, including
line telephone sets with cordless handsets and telecommunication
apparatus for carries-current line systems or for digital line systems;
videophones (85.17)
(10) Microphones, Multimedia Speakers, Headphones, Earphones
and Combined Microphone / Speaker Sets and their part
(85.18)
(11) Telephone answering machines (85.20)
(12) Parts of Telephone answering machines (85.22)
(13) Prepared unrecorded media for sound recording or similar
recording of other phenomena (85.23)
(14) IT software on any media (85.24)
(15) Transmission apparatus other than apparatus for radio
broadcastingor TV broadcasting, transmission apparatus
incorporating reception apparatus, digital still image video
cameras (85.25)
(16) Radio communication receivers, Radio pagers (85.27)

(i) Aerials, antennas and their parts (85.29)
(ii) Parts of items at 85.25 and 85.27 listed above (85.29)
(17) LCD Panels, LED Panels and parts thereof (85.31)
(18) Electrical capacitors, fixed, variable or adjustable (Pre-set) and
parts thereof (85.32)
(19) Electrical resistors (including rheostats and potentiometers), other
than heating resistors (85.33)
(20) Printed circuits (85.34)
(21) Switches, Connectors and Relays for upto 5 AMPS at voltage not
exceeding 250 Volts, Electronic fuses (85.36)
(22) Data/Graphic Display tubes, other than TV Picture tubes and parts
thereof (85.40)
(23) Diodes, transistors and similar semi-conductor devices;
Photosensitive semi-conductor devices, including photovoltaic cells
whether or not assembled in modules or made up into panels; Light
emitting diodes; Mounted piezo-electric crystals (85.41)
(24) Electronic Integrated Circuits and Micro assemblies (85.42)
(25) Signal generators and parts thereof (85.43)
(26) Optical fibre cables (85.44)
(27) Optical fibre and optical fibre bundles and cables (90.01)
(28) Liquid Crystal Devices, Flat Panel display devices and parts thereof
(90.13)
(29) Cathode ray oscilloscopes, Spectrum Analysers, Cross-talk meters,
Grain measuring instruments, Distortion factor meters,
Psophometers, Network & Logic analyzer and Signal analyzer
40. Kerosene sold through public distribution system
41. Nawar
42. Napa Slabs (Rough and polished flooring stones)
43. Ores and minerals
44. Paper of all kinds and news print

45. Pipes of all varieties including G.I. Pipes, C.I. Pipes, ductile pipes and
PVC Pipes
46. Plastic footwear
47. Printed material like diary, calendar etc.,
48. Printing Ink excluding toner and cartridges
49. Processed and branded salt
50. Pulp of bamboo, wood, waste paper and bagasse
51. Rail coaches, engines and wagons
52. Readymade Garments
53. Renewable energy devices and spare parts
54. Safety Matches
55. Sewing Machines and parts and accessories thereof
56. Ships and other vessels
57. Silk fabrics other than Handloom silk fabrics
58. Skimmed Milk Powder and UHT Milk
59. Spices of all varieties and forms including cumin seed, aniseed, turmeric
and dry chillies
60. Sports goods excluding apparels and footwear
61. Starch and Sago
62. Tamarind, Tamarind seed, dhall, kernel, powder and husk
63. Tractors and Threshers, Harvesters and attachments and parts thereof
64. Transmission towers
65. Umbrellas
66. Vanaspathi, Hydrogenated Vegetable Oil.
67. Vegetable Oils All kinds of vegetable Oils including solvent oils and
Coconut Oil
68. Writing Instruments
69. Coal Including coke in all its forms, but excluding charcoal
70. Iron and steel, that is to say:
(i) Pig Iron, Sponge Iron, and cast iron including ingot moulds, and
bottom plates.
(ii) Steel semis, ingots, slabs, blooms and billets of all qualities, shapes
and sizes.
(iii) Skelp bars, tin bars, sheet bars, hoe-bars and sleeper bars;
(iv) Steel bars, rounds, rods, squares, flats, octagons and hexagons;
plain and ribbed or twisted, in coil from as well as straight length
(v) Steel structurals, angles, joints, channels, tees, sheet piling sections,
Z sections or any other rolled sections
(vi) Sheets, hoops, strips and skelp, both black and galvanized, hot
and cold rolled, plain and corrugated in all qualities, in straight
lengths and in coil form as rolled and in revitted condition.
(vii) Plates, both plain and chequered in all qualities
(viii) Discs, rings, forgings and steel castings;
(ix) Tool, alloy and special steels of any of the above categories
(x) Steel tubes, both welded and seamless, of all diameters and lengths
including tube fittings
(xi) Tin-plates, both hot dipped and electrolytic and tin free plates
(xii) Fish plate bars, bearing plate bars, crossing sleeper bars, fish
plates, bearing plates, crossing sleepers and pressed steel sleepers,
rails heavy and light crane rails;
(xiii) Wheels, tyres, axies and wheel sets
(xiv) Wire rods and wires rolled, drawn, galvanized, aluminized, tinned
or coated such as by copper
71. Iron and Steel scrap, that is to say
(i) Iron scrap, cast-iron scrap, runner scrap and iron skull scrap
(ii) Steel melting scrap in all forms including steel skull, turnings and
borings
(iii) Defectives, rejects, cuttings or end pieces of any of the categories

of item (i) to (xiv) of entry 71
72. Oil Seeds, that is to say
(i) Sesamum or Til (orientale)
(ii) Soyabeen (Glycine seja)
(iii) Rape seed and mustard 1. Toria (Brassica campestris vartoria)
2. Rai (Brassica Juncea) 3. Jamba Taramira (Eruca satiya)
4. Sarcon yellow and brown (brassica compestris varsarson)
5. Banarasi Rai or True mustard (Brassica nigra)
(iv) Linseed (linum usitatissimum)
(v) Sunflower (Helianthus annus)
(vi) Nigar seed (Guizotia abyssinica)
(vii) Neem, vepa (Azadi rachta indica)
(viii) Mahua, illupai, ippe (Madhuca indica, M. Latifolia), Bassia,
Latifolia and Madhuca Longifolia Syn. M. Longifolia)
(ix) Karanja, Pongam, Honga (Pongamia pinnata syn. P Glabra)
(x) Kusum (Schleichera Oleosa, syn. S. Trijuga)
(xi) Punna undi(Calophyllum, inophyllum)
(xii) Kokum (Carcinia indica)
(xiii) Sal (Shorea robusta);
(xiv) Tung (Aleurite Jordi and A.Montana)
(xv) Red Palm (elaeis guinenisis)
(xvi) Safflower (corthanus tinctorius)
73. Castor (Ricinus communis)
74. Coconuts other than tender coconuts (cocos nucifera)
75. Copra
76. Groundnut or peanut (hypogea)
77. Cotton seeds
78. Jute, Cotton, Crude Oil
79. Hides and Skins, Tanned or Un-Tanned

80. All kinds of Pulses and Dhalls
81. Wheat
82. Paddy (Oryza sativa L)
83. Rice (Oryza sativa L.)
84. P.V.C. cloth, Waterproof cloth, Tarpaulin and Rexine
85. Oil cakes and Deoiled cakes
86. Drugs & Medicines
87. Veterinary medicines including Poultry Feed supplements
88. All kinds of packing material including Hessian cloth and jute twine but
excluding storage tanks made of any materials.
Schedule VI ( Goods subjected to tax at special rates) of 12.5%

Description Point of levy Rate of tax
1. All liquors, bottled and packed as

per the provisions of the A.P. Excise
Act,1968 (including imported liquor)
but excluding toddy and arrack
(a) Where cost of such liquor is more At the point of first 90%
than A 700/-per case. sale in the State.
(b) Where cost of such liquor is At the point of first 70%

A700/- or below per case sale in the State.
2. Petrol At the point of first 32.55%

sale in the State
3. Aviation motor spirit and any othe At the point of first 32.55%
motor spirit. sale in the State
4. Aviation turbine fuel At the point of first 32.55%

sale in the State
5. Diesel Oil At the point of first 21.33%
a Longifolia Syn. M. Longifolia)
sale in the State
Explanation I
For the purpose of item (1) when any distillery or brewery or any dealer
sells liquor to the Andhra Pradesh Beverages Corporation Limited, or Canteen
Stores Department, the sale by the Andhra Pradesh Beverages Corporation
Limited or Canteen Stores Department shall be deemed to be the first sale.
Explanation II:-
For the purpose if item (1) sale of liquor by any distillery or brewery or
anydealer to Andhra Pradesh Beverages Corporation Limited or Canteen Stores.
Department shall be exempt from tax under this Act.
Explanation III
For the purpose of item(1) , a case means 12 number of 1000ml; 12
numbers of 750 ml; 24 numbers of 375ml; 48 numbers of 150ml; 90 numbers
of 100 ml bottles of IML/Wine and 12 number of bottles of Beer.
Explanation IV
For the purpose of items 2,3,4 and 5 a sale by one oil company to
another oil company shall not be deemed to be the first sale in the State.
Accordingly any sale by one oil company to any other person (not being an oil
company) shall be deemed to be the first sale in the State.
Note: The expression oil company in this explanation means:
(a)HindustanPetroleumCorporationLimited
(b)IndianOilCorporationLimited
(c)BharatPetroleumCorporationLimited
(d)Indo-BurmaPetroleumCompanyLimited
(e)ChennaiPetroleumCorporationLimitedand
(f)RelianceIndustries
(g)ReliancePetroMarketingPrivateLtd
(h)ReliancePetroleumPrivateLtd.,
(i)OilNaturalGasCommission
(j)SuchotheroilcompanyastheGovernmentmay,fromtimeto
time, by notification in the Gazette specify in this behalf.
8.6 Registration Procedure under AP VAT Act, 2005

(1) Every dealer other than a casual trader shall be liable to be registered
in accordance with the provisions of the Act.
(2) Every dealer commencing business and whose estimated taxable
turnover for twelve consecutive months is more than Rs.40,00,000/- (Rupees
forty lakhs only) shall be liable to be registered as a VAT dealer before the
commencement of business.
(3) Every dealer whose taxable turnover in the preceding three months
exceeds A10,00,000/- (Rupees ten lakhs only) or in the twelve preceding months
exceeds A 40,00,000/- (Rupees forty lakhs only ) shall be liable to be registered
as a VAT dealer.
(4) Every dealer whose taxable turnover during the period from 1st
January 2004 to 31st December 2004 is more than Rs.40,00,000/- (Rupees
forty lakhs only), shall be liable to be registered as a VAT dealer.
(5) Notwithstanding anything contained in sub-sections (2), (3) and (4),
the following classes of dealers shall be liable to be registered as VAT dealers
irrespective of their taxable turnover namely.
(a) Every dealer importing goods in the course of business from outside
the territory of India;
(b) Every dealer registered or liable to be registered under the Central
Sales Tax Act 1956, or any dealer making purchases or sales in the course of
interstate trade or commerce or dispatches any goods to a place outside the
State otherwise than by way of sale;
(c) Every dealer residing outside the State but carrying on business within
the State and not having any permanent place of business;
(d) Every dealer liable to pay tax on goods listed in Schedule VI;
(e) Every commission agent, broker, delcredere agent, auctioneer or
any other mercantile agent by whatever name called, who carries on the business
of buying, selling, supplying or distributing goods on behalf of any non resident
principal.
(f) Every dealer availing sales tax deferment or sales tax holiday;
(g) Every dealer executing any works contract exceeding Rs.5,00,000/
- (Rupees five lakhs only) for the Government or local authority or every dealer
opting to pay tax by way of composition on works contract;
(h) every dealer liable to pay tax under sub-section (9) of section 4 of
the Act; (Clause (h) is inserted by Act No 10 of 2006, dated 4th January 2006,
w.e.f 1-12-2005.)
(6) (a) Any dealer effecting sale of goods liable to tax under the Act and
who is not otherwise liable to register may also opt for registration as a VAT
dealer and such registration shall be subject to such conditions as may be
prescribed
(b) Any dealer intending to effect sale of goods liable to tax under the
Act, and who is not otherwise liable to register, may also opt for registration as
a VAT dealer and such registration shall be subject to such conditions as may be
prescribed.
(7) Every dealer not registered or not liable for registration as VAT
dealer and who sells any goods and has a taxable turnover exceeding A 5,00,000/
- (Rupees five lakhs only) in a period of twelve consecutive months or has
reason to believe that his taxable turnover in a period of twelve consecutive
months will exceed A 5,00,000/- (Rupees five lakhs only), shall apply for
registration as TOT dealer in the manner prescribed.
(8) Subject to the provisions contained in sub-section (5), every dealer
who held a registration certificate under the Andhra Pradesh General Sales Tax
Act 1957 shall be deemed to be registered as TOT dealer under the Act provided
the dealer had a taxable turnover exceeding A 5,00,000/- (Rupees five lakhs
only ) but below A 40,00,000/- (Rupees forty lakhs only) during the period
from 1st January, 2004 to 31st December, 2004 and had not discontinued his
business or his Registration Certificate had not been cancelled during that period.
(9) Where a registered dealer dies or transfers or otherwise disposes of
his business in whole, the successor or the transferee, unless already in possession
of registration shall be liable to be registered under the Act.
(10) An application for registration shall be made to the authority
prescribed in such manner and within such time as may be prescribed.
(11) If the authority to whom an application is made under sub-section
(10) is satisfied that the application is bonafide and is in order and in conformity
with the provisions of the Act and the rules made thereunder, he shall register the
applicant and grant him a certificate of registration in the prescribed form.
18. (1) The authority prescribed shall issue a registration identification
number known as:
(a) Taxpayer Identification Number (TIN) to a dealer registered as VAT

dealer;
(b) General Registration Number (GRN) to a dealer registered as TOT
dealer.
(2) Every VAT dealer or TOT dealer who is allotted a Taxpayer
Identification Number (TIN) or General Registration Number (GRN) shall
indicate such number on all returns, forms, tax invoices or any other documents
used for the purposes of the Act.
19. (1) Any VAT dealer or TOT dealer registered under Section 17 of
the Act shall apply for cancellation or amendment of registration, in such
circumstances as may be prescribed.
(2) The authority prescribed may, for good and sufficient reasons cancel,
modify or amend any certificate of registration issued by him: provided that no
order shall be passed under this sub-section without giving the dealer a reasonable
opportunity of being heard.
Short Answe rType Questions
1. Define VAT.
2. Mention any four exempted goods from tax under Sec. 7.
3. Mention any four goods which are taxable at 1%.
4. Mention any four goods which are taxable @4%.
1. Explain the objectives of VAT.
2. Explain the advantages and disadvantages of VAT.
3. Explain the differences between VAT and Salestax.
4. Mention any 10 exempted goos from tax u/s 7.
5. Mention any 10 list of goods which are taxable @ 4%.
6. What is the registration procedure under AP VAT Act 2005.

Accounting Examples

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Accounting Examples

Hochgeladen von

Copyright:

Verfügbare Formate

218 Accounting and Taxation

Chargeability (Section 28)

2. Business is carried on during the previous year: The business

Computation of Profits and Gains {Section 29}

1. Expenditure must be incidental to the business.

The following deductions are expressly allowed:

1999. Wholly and exclusively for the purpose of amalgamation of demerger of

Recognized Provident Fund, or an approved super annuation Fund or approved

infrastructure development, in India or by a public company formed and

drawn on a bank will be disallowed (Rs.35,000 in case of payment made for

(xvii) Expenditure on installations of electrical work in new production

(i) On the first Rs.3,00,000 book- Rs.1,50,000 or 90% of book-

The following receipts will result in deemed profits:

2. Waiver of the claim by a creditor.

Procedure of Computation of Business Income

Chart Showing the Computation of Business Income

(d) Cash stolen by strangers while proceeding to deposit in bank is a

Dr. Rs. (A) Rs. (A) Cr

1. Allowable depreciation as per IT Rules A 30,000.

Bonus to employees 20,000

Balance as per Profit and loss Account 2,50,000

Provision for bad debts 20,000

(e) Donation to an approved institution 20,000

Dr. Profit and Loss Account Cr.

They being non-tradeing assesses, normally prepare their accounts under

(B) Medical Practitioner

(C) An advocate/Legal Practitioner/Lawyer

Consultancy fees xxx

Special commission fees xxx

Examiners fees xxx

Gifts from clients xxx

To Examiners fees 40,000 By Medicines purchased 28,000

Professional receipts Rs. (A) Rs. (A)

Consultation fees 80,000

Less : Professional Payments Rs. (A) Rs. (A)

Dispensary expenses 60,000

To Travelling expenses 10,000

Professional Incomes Rs. (A) Rs. (A)

Legal fees 1,20,000

Receipt and Payments Account

Audit fees 86,000

Professional Income 1,18,000

To Visiting fees 42,000 By Cost of medicines 20,000

To Dividends 20,000 By Shares purchased 60,000

To Examiner fees 40,000 By Printing & Stationery 6,000

To Travelling expenses 8,000 By Financial consultency 28,000

To Life insurance premium 4,000 By Gifts from clients 12,000

Examiners Fees 10,000 2011-12 28,000

To Opening balance 1,20,000 By Staff salaries 1,20,000

To Audie fees 2,40,000 By Office expenses 1,80,000

To Financial Consultance 80,000 By Shares purchased 30,000

To Rent from house property 100,000 By Stipend to trainees 15,000

By Life insurance 18,000

However, depends upon whether the capital gain is short-term capital

(iii) The bonds are issued on or after 1-6-2005.

This option is available. If listed securities are traded in a recognized

4. If the Bonus Shares are allotted 4.The cost of acquisition of Bonus

Hint: (i) If it is a long term capital asset, indexed cost of acquisition is

Computation of Income from Capital

Full value of sale consideration xxx

Sale Consideration 6,00,000

Less : Selling Expenses 10,000

Compensation Received 20,00,000

1982-83 109 1998-99 351