Introduction To Income Tax

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TOPIC 1: ITRODUCTION TO INCOME TAX ACT, 1961
1 MEANING OF INCOME SECTION 2(24)

Income is a periodical monetary return with some sort of regularity. A
study of broad principle will be helpful for understanding the concept of
income;
• Income should be regular and definite source
• Income may be received in cash or kind
• Income arises either on due or receipt basis whichever is earlier
• Income tax act dose not make difference between legal and illegal
income
• Reimbursement of expenses is not treated as income
• Income tax dose make any difference between temporary and
permanent income.
• Lump sum receipts are also treated as income.
2. CLASSIFICATION OF TAXES
Government needs money for financing of defence, infrastructural
development such as construction of roads, dams, power projects,
railways, health services etc. Funds for all theses requirements are
collected by way of taxes.
Taxes are broadly classified into two types namely Direct Taxes and
Indirect Taxes.
TAXES
Direct Taxes
Indirect Taxes
Income Tax Wealth Tax Excise Vat Custom CST

Service
Duty Duty
Tax
Direct Taxes
Direct tax is the payment made by assessee directly to the government
after income is received.
Indirect Taxes
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Indirect tax is a tax on commodities and services. Here burden is fall

indirectly on the consumers hence it is called as Indirect tax.
Income Tax
It is a tax on income earned for e.g. Tax on salary income.
Wealth Tax
Only an Individual, Hindu Undivided Family and a company is chargeable
to Wealth tax. Net wealth in excess of Rs 15, 00,000 is chargeable to tax
@ 1%.
Excise Duty
It is a duty on goods mfg. and produced in India.
Value Added Tax

It is a tax on sale within Maharashtra state.
Custom Duty
It is a duty on Import and Export of goods.
Central Sales Tax

It is a tax on sales between two states. Present rate is 2%.
Service Tax
It is a tax on various services like Advertising, banking, Courier etc...
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3. BASIC CONCEPTS OF INCOME TAX
3A] Assessee [Section 2(7)]

Assessee means a person by whom any tax or other sum of money is
payable under this act & includes the following;
1. Every person in respect of whom any proceeding under the
Income tax act has been taken,
A) for the assessment of his income
B) to determine loss sustained by him
C) to determine the amount of refund due to him
2. Representative assessee
3. Every person who is deemed to be assessee in default under any
provision of this act. For e.g. a person paying interest to another person is
responsible for deducting tax at source on this amount and to deposit the
tax with the government, if he fails in either of these duties, he shall be
deemed to be an assessee in default.
3B] Assessment Year [Section 2(9)]

Assessment year is a year in which income is charged to tax or year in
which income tax is payable. It is a period of 12 months commencing on
1st April every year.
3C] Previous Year [Section 3]

Previous year is a year in which income is earned. It is same as Financial
Year. All assesses are required to follow a uniform previous year i.e. the
financial year ( 1st April to 31st March) as their previous year for Income tax
purpose. From the A.Y. 89-90 onwards, all assessees are required to follow
financial year (i.e. April to March) as the previous year. This uniform
previous year has to be followed for all source of income.
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Example
If Previous Year is 08-09 then,
Assessment Year is 09-10
Exception to above rule
In following cases income of PY is taxable in the same year in
which income is earned.
• Income of non resident from shipping (Sec 172)
• Income of person leaving India either permanently or for a long
period of time (Sec 174)
• Incomes of bodies formed for short duration (Sec 174A)
• Person likely to transfer property to avoid tax (Sec 175)
• Income of discontinued business (Sec 176)
3D] Person [Section 2(31)]: Person includes

 An Individual
 A Hindu Undivided Family
A Company
 A Firm
 An Association of Person or a Body of Individuals
 A Local Authority
 Every Artificial juridical person not falling within any of the preceding
sub-clauses
• An Individual means a natural person i.e. a human being. It
includes a male, female, minor child. However, however income of a
minor is now generally included in the income of parents.
• A Hindu Undivided Family has not been defined under the tax
laws. However, as per Hindu law, it means a family, which consists of
all persons lineally descended from a common ancestor including
their wives and unmarried daughter.
• A Company means a company formed and registered under the
company act, 1956.
Firm
Section 4 of the Indian Partnership Act, 1932 defines partnership as
“relationship between persons who have agreed to hare the profits
of business carried on by all or any of them acting for all”.
• Association of Persons means two or more persons who join for
common purpose with view to earn profit. Therefore, if two or more
persons join hands to carry on a business but do not constitute a
partnership, they may be assessed as an Association of Persons.
(AOP)
• Body of Individuals (BOI) it consist of Individuals only.
The basic difference between AOP & BOI
An AOP may consist of non-individuals but BOI has to consist of
individuals only. If two or more persons (like firm, company, HUF,
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individuals etc) join together, it is called as AOP. But if only

individuals join together, it is called a BOP.
Example
If X, Y, & Z join together, it is called as BOI.
IF X, ABC Ltd and PQ & Co join together for a particular venture then
they may be referred as an AOP.
• A Local Authority The expression means Panchayat, Municipality.
• Artificial Juridical persons are the entities, which are not natural
persons, but they are separate entities in the eyes of law.
Example to understand concept of Person

SR PERSONS UNDER IT ACT STATUS
1 Mr. Sunil Individual
2 A joint family consist of P, Mrs. P and HUf
their son S
3 Reliance Industries Ltd Company
4 Shri Krishna Enterprises, a firm consisting Firm
of S & K
5 Xyz Ltd & Amit AOP
6 A and B are legal heirs of C, carry BOI
business without entering into a
partnership
7 Municipal Corporation of Pune A Local Authority
8 Pune University Artificial Juridical
Person
Understanding of Status is important because Income tax rates

very according to Status.
Charge of income tax (Sec 4)
Following principles are followed while charging income tax,
• Income tax is an annual tax on income.
• Income of P.Y. is chargeable in the next following A.Y. at the tax
rate applicable for the A.Y.
• Rates fixed by Finance Act and not by Income tax act.
• Tax is charge on every person.
• Tax is charged on total income of every assessee computed in
accordance with the provisions of the act.
4. TAX RATES
TAX RATES APPLICABLE FOR DIFFERENT PERSONS
STATUS A.Y. 10-11 TAX RATES

Individual Up to Rs 160000 Nil
(Male Assessee) 160000 to 300000 10%
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300000 to 500000 20%

Above 500000 30%
Education cess on Tax 3%
Example
Income of Mr. Sunil for PY 09-10 is Rs 4, 50,000. Calculate Tax.

Individual (Female Up to Rs 190000 Nil
Assessee) 190000 to 300000 10%
300000 to 500000 20%
Above 500000 30%
Example
Income of Mrs. Anita for PY 09-10 is Rs 14, 50,000. Calculate Tax.

Individual (Male & Up to Rs 240000 Nil
Female Assessee 240000 to 300000 10%
65 years or above 300000 to 500000 20%
65) Above 500000 30%
Example
Income of Mrs. Anita (age 68) for PY 09-10 is Rs 2,00,0000.
Calculate Tax.
Partnership Firm (A.Y. 10-11)

Flat tax rate of 30%
Education cess @ 3% on Tax
Indian Company (A.Y. 10-11)

Surcharge @ 10% on income tax (if net income exceeds 1 crore)
Education Cess @ 3% on Tax plus Surcharge
Foreign Company (A.Y. 10-11)
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Surcharge @ 2.5% on income tax (if net income exceeds 1 crore)
Education Cess @ 3% on Tax plus Surcharge
Tax rates applicable for Individuals are also applicable for Hindu
Undivided Family, Association of Persons, Body of Individuals, and
Artificial Juridical Persons.
Local Authority (A.Y. 10-11)

Flat tax rate of 30%, Surcharge is not applicable
Education Cess @ 3% on Tax
Co-operative Society (A.Y. 10-11)

Up to Rs 10000 10%
Rs 10000 to Rs 20000 20%
Above Rs 20000 30%
Surcharge is not applicable.
Education Cess 3%.
Winning from Lottery or Gambling is taxable @ 30%..

Note: Deduction under sec 80C to 80U is not available for Winning
from Lottery or Gambling.
5. GROSS TOTAL INCOME

Under section 14, income of a person is computed under the
following five heads:
Income form Salary
Income from House Property
Income form Business or Profession
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Capital Gains
Income from other Sources
TOTAL INCOME AND TAX LIABILITY [SEC 2(45)]

PARTICULARS RS
Income from Salary XX
Income from House Property XX
Income from Business or Profession XX
Capital Gains XX
Income from other Sources XX
Less Set off & carry forward
___________
= GROSS TOTAL INCOME XXXXX
Less Deduction under Section 80c to 80u XX

___________
= Total Taxable Income XXXXX
XX
Computation of Tax Liability ___________
Tax on Net Income XXXXX
XX
Add Education Cess ___________
XXXXX
= Tax Liability XX
Less Rebate under section 86, 89 90 & 91 XX
Less Tax Deducted at source XX
Less Advance Tax ___________
XXXXX
= Net Tax Payable
Rounding off of Total Income [Section 288A]

The total income as computed above shall be rounded off to the nearest
multiple of ten rupees.
Income Rounded off
Rs 79464.90 Rs 79460
Rs 79478 Rs 79480
Rs 79475 Rs 79480
Rounding off of Income Tax [Section 288B]

The income tax on taxable income shall be rounded off to the nearest
multiple of ten rupees.
Income Tax Rounded off
Rs 79464.90 Rs 79460
Rs 79478 Rs 79480
Rs 79475 Rs 79480
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6. CONCEPT OF AGRICULTURE INCOME

6A) Introduction:
As per Section 10(1) agricultural income is exempt from tax. The Indian
Constitution, however, gives exclusive power to make provisions with
respect to taxes on agricultural income to the State legislatures. From the
assessment year 1974-75, agricultural income, is however, taken into
account to determine tax on non-agricultural income. It is, therefore,
necessary to study the definition and provisions regarding agricultural
income.
Definition: Section 2(1A)
The term agricultural income means:
A) Any rent or revenue derived from land, which is situated in India and is
used for agricultural purposes.
B) Any income derived from such land by agricultural operations or any
process by cultivated or receiver of rent in kind, which renders the
producer fit for market or the sale of such produce.
C) Any income from a farm house.
Explanation of the above definition:
The following three conditions have to be satisfied in order to classify
income as agricultural income
1. Rent or revenue must be derived from land. It may be in cash or in kind.
2. The land must be situated in India and
3. The land must be used for agricultural purposes.
The term 'agricultural purpose' means cultivation of a field, which implies
application of human skill and labour upon land. Agriculture includes basic
operations such as sowing the seeds, planting, pruning, harvesting etc. It
also includes all such further operations as are necessary to make the
agricultural produce marketable.
6B) Income from a Farm House:
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Income from a farm house is exempt from tax because it is treated as

agricultural income. However, the following conditions have to be satisfied
in order to claim exemption as an agricultural income:
1) The building must be occupied by the cultivator (as a landlord or as a
tenant) or receiver of rent-kind (as a landlord).
2) It should on or in the immediate vicinity of land, situated in India and
used for agricultural purposes.
3) Such farm house is by reason of its connection with the land, used as
dwelling house or a store house or an out house by the cultivator or
receiver of rent in kind.
4) Such farm house is situated on a land in 'non-urban' area.
Non-urban Area:
'Non-urban' area is an area situated may be within municipality or
cantonment board which has a population of less than 10,000 or is beyond
a distance of 8 km. from the local limits of any such municipality or
cantonment board.
6C) Examples of Agricultural Income:
The following incomes are treated as agricultural incomes:
1) Profit or sale of standing crop.
2) Rent for agricultural land received from sub-tenants by mortgages in
possession.
3) Income from growing flowers.
4) Income from use of land for grazing of cattle required for agricultural
pursuits.
5) Income from lease of land for grazing of cattle required for agricultural
pursuits.
6) Interest on capital received by a partner from a farm engaged in
agricultural operations.
6D) Examples of Non-Agricultural Income:
The following incomes are not derived from land used for agricultural
purposes. Hence, they are non-agricultural incomes.
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1) Income from markets.

2) Income from stone quarries.
3) Income from mining royalties.
4) Income from land used for storing agricultural produce.
5) Income from supply of water for irrigation purposes.
6) Income from self-grown grass, trees or bamboos.
7) Income from fisheries.
8) Income from the sale of earth for brick making.
9) Remuneration received as a manager of an agricultural farm.
10) Dividend from a company engaged in agricultural.
11) Income from dairy farm, poultry farming.
Conclusion:
Thus, the following 4 conditions have to be satisfied in order for
an item of income to qualify as agricultural income.
Income is derived from land.
Land is situated in India.
Land is used for agricultural purposes.
The assessee has interest in the land.
In addition, income derived from such land by the performance of any
process employed to render the produce marketable is also agricultural
income. Similarly, income derived from a farm a farm house, subject to
fulfillment of certain conditions is agricultural income. Agricultural income
is neither taxable nor it is included in total income except for determining
the tax on non-agricultural income.
7. DEDUCTION FROM GROSS TOTAL INCOME
Important points
1) Deduction under Sec 80c, 80ccc & 8occd cannot exceed Rs 100000.
2) The aggregate amount of deduction under sec 80C to 80U cannot
exceed gross total income ( after excluding STCG, LTCG under sec
111A, winnings from lottery, races etc & income referred to in Sec
111A, 115AB, 115AC, 115AD, 115BBA & 115D.
3) Deductions are available only on payment basis.
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SECTION 80C (for Individual & HUf)

• Life Insurance Premium including payment made by Govt. employee
to the central Govt. employees’ insurance scheme.
o Paid on his own life policy, life of the spouse or any child (child
may be dependent/ independent, male/female, major/minor or
married/unmarried)
o Deduction allowed is maximum 20% of policy value.
o If value of policy is not given then premium paid.
• Contribution to Statutory provident fund and Recognised provident fund

• Contribution towards Public provident fund (PPF)
maximum 70000 per year. Subscription should be in the name of
such individual, his spouse and child whether major or minor & in
case of HUF any member of the family
• Contribution to Unit linked insurance plan. Subscription
should be in the name of such individual, his spouse and child
whether major or minor & in case of HUF any member of the family
• Contribution to National saving certificates
• Contribution to notified Mutual funds
• Any sum paid as tuition fees to any university/college/educational
institution
• Repayment of housing loan (principal amount)
• Amount deposited under Senior citizen saving scheme
• Amount deposited as term deposit for a period of 5 yrs
or more in accordance with a scheme framed by central
government.
• Subscription to any notified bonds of NABARD.
SECTION 80CCC Deduction in respect of pension fund (for

individual)
• Deduction is available for individual only.
• The amount deposited or Rs 1, 00,000 whichever is lower is allowed
as deduction.
SECTION 80CCD Deduction in respect of contribution to notified

pension scheme of central government or any other
employer
• Deduction is available for individual only.
• He is employed by central govt. or any other employer on or after
January 1, 2004.
• Amount paid or 10% of salary (Basic + DA if applicable) whichever is
lower.
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SECTION 80D Deduction in respect of mediclaim

• Deduction is available to Individual and HUF only.
• Individual can take mediclaim policy on the health of the taxpayer,
spouse, and dependent parents or dependent children of the
taxpayer to get deduction.
• HUF can take mediclaim policy on the health of any member of
family to get deduction.
• Maximum up to Rs 15000 & Rs 20000 for senior citizens(above 65
yrs) or amount paid whichever is lower
• Deduction is available if payment is made by any mode other than
cash.
SECTION 80DD Deduction in respect of medical treatment of a

dependent being a person with disability
• Deduction is available for individual & HUF only.
• A fixed sum of Rs 50000 up to 80% disability & Rs 100000 exceeding
80% disability irrespective of amount paid.
• Here dependent being a person with disability means
o In case of individual, spouse, children, parents, brothers and
sisters of the individual or any of them
o In case of HUF any member of family.
• Disability covers following
Blindness, Low vision, hearing impairment, mental retardation etc
• Person means disability means a person having any disability stated
above of not less than 40%.
SECTION 80DDB Deduction in respect of medical treatment

• Deduction is available to Individual and HUF only.
• The deduction is available if assessee has incurred expenditure for
the medical treatment of a specified disease as prescribed by the
board.
• The expenditure is actually incurred for medical treatment of the
assessee himself or wholly or mainly dependent husband/wife,
children, parents, brothers & sisters of the taxpayer.
• In case of HUF any member of family.
• The expenditure incurred or Rs 40,000 whichever is less.
• In case of senior citizen Rs 60,000 or expenditure incurred whichever
is lower.
• Deduction under this section shall be reduced by the amount
received, if any under insurance from insurer, or reimbursed by the
employer for the medical treatment of the person referred to above.
SECTION 80E Repayment of loan taken for higher studies

• Deduction is available for individual only
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• Loan should be taken from approved financial institute.

• The loan is taken for graduate & post graduate studies. (Full time)
• Actual amount of interest paid is available for deduction.
• Deduction is available form the year from which assessee start
paying interest & 7 immediately succeeding A.Y.( or until the above
interest is paid in full whichever is earlier)
• Such amount is paid out of his income chargeable to tax.
SECTION 80G Deduction in respect of donation to certain funds,

charitable institutions etc
This deduction is available to all assessee.
SECTION 80GG Deduction in respect of rent paid

• Deduction is available to individual.
• Deduction is available if
o Assessee is not getting HRA
o The following persons should not own any residential
accommodation at the place where tax payer resides,
performs the duties of his office,
 the taxpayer
 his/her spouse
 his/her minor child
 the HUF of which the taxpayer is a member
o If he owns a residential accommodation at any other place
then he should not claim concession u/s 23(2) (a) or 23(4) (a)
o Assessee files a declaration in form no 10BA
• Amount of deduction is the least of following
o Rs 2000 per month
o 25% of total income
o Rent paid minus 10% of salary
• Here total income = GTI – LTCG – STCG –
INCOME U/S 115A – DEDUCTION U/S 80C TO 80U EXCEPT 80GG
SECTION 80QQB Deduction in respect of royalty income of authors

• Deduction is available to an individual
• Amount 0f deduction
o Rs 3, 00,000 or amount of royalty whichever is lower
SECTION 80U Deduction in case of person with disability

• Deduction is available to Individual only
• Assessee suffers 40% or more disabilities given below
o Blindness, Low vision, hearing impairment, mental retardation
etc
• Assessee need to submit certificate from medial authority
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• A fixed Deduction of Rs 50,000 available. A higher

deduction of Rs 1, 00,000 if disability exceeds 80%.
PROBLEMS ON TOTAL INCOME

Problem No 1
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Calculate total income & tax liability of Mr. Anil for A.Y. 10-11.
Income from house property Rs 92,000
Interest earned Rs 17,000
Income from Salary Rs 1, 00,000
Long term capital gain Rs 1, 20,000
He is eligible for deduction of Rs 60,000 u/s 80C.
Problem No 2
Solve above problem assuming that assessee is Mrs. Sunita.
Problem No 3
The income of Anita (age 65 yrs) is given below. Calculate her tax liability
for AY 10-11.
Income from house property Rs 92,000
Interest earned Rs 17,000
Income from Salary Rs 1, 00,000
Short term capital gain on shares u/s 111A Rs 1,
20,000
She is eligible for deduction of Rs 80,000 u/s 80C.
Problem no 4
X, aged 65 yrs, submits the following information for the previous year 09-
10.
Income from salary Rs 1, 86,000
Interest on fixed deposits with bank Rs 34,000
Long term capital gains Rs 1, 10,000
Short term capital gains Rs 10,000
Winning from lottery Rs 15,000
He pays Rs 5,000 as LIC premium on a policy of Rs 40,000 and deposits in
PPF Rs 22,000.
Problem No 5
Compute tax liability of X for AY 10-11
Income from house property Rs 1,30,000
Short term capital gain on sale of jewellary Rs 25,000.
Problem No 6
Compute tax liability of X for AY 10-11.
Winning from lotteries Rs 1,30,000
Short term capital gain on shares Rs 25,000.
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END OF TOPIC
TOPIC 2: RESIDENTIAL STATUS AND ITS EFFECT ON TAX
INCIDENCE
1. INTRODUCTION
Tax incidence on an assessee depends on his residential status. For

instance, whether an income, accrued to an individual outside India, is
taxable in India depends upon the residential status of the individual in
India. Similarly, whether an income earned by a foreign national in India or
outside India is taxable in India depends upon the residential status of the
individual, rather than on his citizenship. Therefore, the determination of
the residential status of a person is very significant in order to find out his
tax liability.
All entities are divided in the following categories for the purpose of
determining residential status:
a. an individual
b. a Hindu undivided family
c. a firm or an association of person
d. a joint stock company
e. every other person
Residential status of Individual or HUf
Resident in India (RI) Non Resident

(NR)
Resident & Resident but & not Ordinary Resident

Ordinary Resident (RNOR)
(ROR)
Residential status of all other assessee
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Resident in India (RI) Non Resident

(NR)
Basic rules for determination of Residential status of an assessee

• Residential status is determined for each category of person
separately.
• Residential status is always determined for P.Y. because we have to
determine the total income of the previous year only.
• It is to be calculated for every year because it may change from year
to year.
• A person can be resident of more than one country for any P.Y.
• Citizenship of a country and residential status of that country are
different concepts.
• It is duty of assessee to provide necessary data before assessing
officer.
• If person is resident in India in the P.Y. relevant to an A.Y. in respect
of any source of income, he shall be deemed to be resident in India
for his other source of income.
• IF an individual stays on a ship, which is in the territorial waters of
India, then it shall be treated as his presence in India.
• Where a person is in India only for a part of a day, the calculation
should be made on hourly basis. If period of stay is less than 12 hrs
it shall not be considered & if it more than 12hrs then it shall be
taken as a day.
2. RULES FOR DETERMINING THE RESIDENTIAL STATUS OF AN

INDIVIDUAL [SECTION 6 (1)]
An individual is said to be resident in India if he satisfies any one

of the following two conditions. If he dose not satisfy any
conditions he becomes Non resident in India.
• Condition 1
He is in India for a period of 182 days or more in the relevant previous
year.
• Condition 2
He is in India for 60 days or more during the relevant previous year and
has been in India for 365 day or more during four previous years
immediately preceding the relevant previous year.
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Exceptions
The period of 60days replace by 182days for the following
1. An Indian citizen who leaves India during the previous year for the
purpose of employment outside India
2. An Indian citizen who leaves India during the previous year as a
member of the crew of an Indian ship
3. Indian citizen or a person of Indian origin who comes on a visit to
India during the previous year
Additional conditions to test as to when a resident Individual is

ROR & RNOR
An individual is said to be ROR if he satisfy additional two
conditions, if he satisfy one or none of the additional two
conditions he becomes RNOR.
• Condition 1
He has been resident in India in at least 2 out of 10 pervious years
immediately preceding the relevant previous year
• Condition 2
He has been in India for a period of 730 days or more during 7 years
Important points
*A person is said to be of Indian origin if he or either of his parents or any
of his grand parents (maternal & paternal) was born in undivided India.
*It is not essential that stay should be at same place.
Example 1
X left India on 13/10/1994. After that he came India for first time on May 2,
2009 & left India on-
i) June 25, 2009 ii) December 1, 2009
Determine his residential status for the previous year 2009-10 for each of
the two cases.
Example 2
Mr. X, aged 19 years, left India for first time on May 31, 2009. Determine
his residential status the following situations for the previous year 2009-
10.
i) He left India for employment purpose ii) He left India on world
tour.
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3. RULES FOR DETERMINING THE RESIDENTIAL STATUS OF HINDU

UNDIVIDED FAMILY [SECTION 6 (2)]
When a Hindu undivided family is resident or non resident

A HUf is said to be resident in India if control and management of its affairs
is wholly or partly situated India. A HUf is non resident in India if control
and management of its affairs is wholly situated outside India.
Here place of control means where the head, the seat and the directing
power are situated.
Additional conditions to test as to when a HUf is ROR & RNOR

HUf is ROR in India if Karta or manager of the HUf satisfies
following two conditions. If Karta satisfy one or none of
the following conditions he becomes RNOR.
• Condition 1
He has been resident in India in at least 2 out of 10 pervious years
immediately preceding the relevant previous year
.
• Condition 2
He has been in India for a period of 730 days or more during 7 years
4. RULES FOR DETERMINING THE RESIDENTIAL STATUS OF FIRM &

AOP [SECTION 6 (2)]
A partnership firm and an association of persons are said to be resident in
India if control and management of its affairs is wholly or partly situated
India. They are however treated as non resident in India if control and
management of its affairs is wholly situated outside India.
Note
A firm/AOP cannot be ROR & RNOR.
Rules for determining the residential status of Company [Section

6 (3)]
Place of Control Indian Foreign

Company Company
Control & mgmt of the affairs of a
company is
Resident Resident
Situated
1. Wholly in India Resident Non-resident
2. Wholly outside India Resident Non-resident
3. Partly in India and partly outside
India
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Note
A company cannot be ROR & RNOR.
5. HOW TO DETERMINE RESIDENTIAL STATUS OF EVERY OTHER

PERSON [SEC.6 (4)]
Every other person is resident in India if control and management of its
affairs is wholly or partly situated India during the relevant previous year.
They are however treated as is non resident in India if control and
management of its affairs is wholly situated outside India.
6. RELATIONSHIP BETWEEN RESIDENTIAL STATUS AND INCIDENCE

OF TAX [SEC. 5]
In order to understand relationship between residential status & incidence

of tax it is necessary to understand meaning if Indian & Foreign income.
Indian Income
1) If income is received or deemed to be received in India but accrues
or arises or is deemed to accrue or arise in India.
2) If income is received or deemed to be received in India but accrues
or arises outside India
during the previous year.
3) If income is received outside India but accrues or arises in India
during the previous year.
Foreign Income
1) Income is not received or not deemed to be received in India.
2) Income which dose not accrue or arise in India.
INCIDENCE OF TAX FOR INDIVIDUAL & HUF
Type of Income ROR RNOR NR
Indian Taxable in India Taxable in India Taxable in India
Foreign Taxable in India Only two type of Not taxable in
Foreign income India
is taxable in
India. (Refer note
given below)
Any other foreign
is not taxable in
India.
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Note
1) Business income & business is controlled wholly or partly in India.
2) Income from profession which is set up in India.
INCIDENCE OF TAX FOR ANY OTHER ASSESSEE

Type of Income RESIDENT NON-RESIDENT
Indian Taxable in India Taxable in India
Foreign Taxable in India Not taxable in India
NOTES:
• Remittance is not an income.
• If income is accrued and received outside India in any
proceding the previous year and later on remitted to India in
current financial year is not taxable.
Examples of Income deemed to be received in India

• Employer’s contribution to RPF in excess of 12%
• Interest credited on RPF in excess of 9.5%.
• Tax deducted at source.
Examples of Income deemed to accrue or arise in India (Sec 9)
• Income from business connection in India.
• Income from any source of income in India.
• Dividend paid by Indian company.
• Capital profit on transfer of capital asset which is situated in India.
• Income from salary if service rendered in India.
• Income from salary if service rendered outside India, the employer is
govt of India & the employee is citizen of India.
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PROBLEM RESIDENTIAL STATUS

Problem 1
Ram provides following details of income, calculate the income which is liable to
be taxed in India for the A. Y. 2010-11 assuming that-
a) He is an ordinarily resident b) He is not an ordinarily resident c) He is a
non-resident.
Particulars Amount
Salary received in India from a former employer of UK 140000
Income from tea business in Nepal being controlled from India 10000
Interest on company deposit in Canada (1/3rd received in India 30000
Profit from a business in Mumbai controlled from UK 100000
Profit for the year 2000-01 from a business in Tokyo remitted to 200000
India
Income from a property in India but received in USA 45000
Income from a property in London but received in Delhi 150000
Income from a property in London but received in Canada 250000
Income from a business in Jambia but controlled from Turkey 10000
Problem 2
Mr. Abdul provides the following information regarding his income of P.Y. 2009-
10. Computer income liable to be charged in India in the following cases:
a) He is an ordinarily resident. b) He is not an ordinarily resident c) He is a
non-resident
Particulars Rs.
Business income from USSR received in India 10000
Business income earned in India received in Pakistan 20000
Salary Income from a company of UK situated in India 15000
Interest of German Development Bond (2/5th) received in India) 60000
Income from agriculture in Nepal received there but later on remitted 181000
to India
Income from property in Jakarta received outside India 86000
Income earned from business in UAE which is controlled from Delhi 65000
(Rs. 15000 received in India)
Profit from a business in Madras and managed from outside India 27000
Profit on a sale of a building in India but received in Sri Lanka 1480000
Pension from a former employer in India received in USSR 36000
Gift in foreign currency from a relative received in India 80000
END OF TOPIC
TOPIC NO 3: INCOME EXEMPT FROM TAX (SEC 10)
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1) Agricultural income (Sec 10 (1) )
2) Receipt by a member of HUF (Sec 10 (2) )
Any income received by an individual as a member of HUF is

exempt from tax because income of a HUF is taxable in its own
hard.
3) Share of profit from partnership Firm (Sec 10 (2A)) share of profit

received by a partner is exempt from tax because tax is paid by
firm.
4) Interest received by non resident on bonds or securities notifies by

the control govt. including premium on redemption of such bond is
exempt from tax
5) Leave travel concession to an Indian citizen. (Sec 10 (5) )
6) Remuneration received by a foreign diplomat & other foreign

nationals ( Sec 10 (6) (i) )
7) Tax paid on behalf of foreign Companies ( Sec 10 (6A) )
8)
9) Tax paid by govt. or an Indian concern in case of a non-resident /

Foreign company ( Sec 10 (6B) )
10) Foreign allowances granted by the govt. of India to its employees

posted abroad ( Sec 10 (7) )
11) Amount paid on life insurance policy [Sec10910D)]
Any amount received on life insurance policy including bonus is not

chargeable to tax. Exemption is not available in respect of
Sum received under a key man Insurance policy
12) Tax paid by employer on perquisite provided to employee is not

taxable in the hands of employee if tax is paid on non-monetary
benefits. ( Sec 10 (10cc) )
13) Interest exempt from Tax ( Sec 10 (15) )
14) Education Scholarship received to meet cost of education is

exempt (Sec 10 (16) )
15) Any award whether paid in cash or in kind by central /state govt. in
the public interest is exempt from tax ( Sec 10 (17A))
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16) Family pension received by the family members of armed forces

(Sec 10 (19)) applicable from AY 05-06.
17) Annual value of any one palace in the occupation of a former rather
is exempt from tax under Sec 10 (19A)
18) Income of local authority is exempt from tax (Sec 10 (20) )
E.g. Income from HP/capita gains / other source.
19) Income of scientific research association (Sec 10 (21))

20) Income of professional institutes approved by central govt. is
exempt from tax (Sec 10 (23A)) except HP income, interest or
dividend on investment.
21) Income of educational institutes (sec 10 (23C)) is exempt from tax
if
• A wholly or substantially finance by the govt.
• Existing only educational purpose
• Gross annual receipts less than l cr.
• Approved by chief commissioner of income tax.
Income of mutual fund (sec 10 (23D)) is exempt from tax if
 Registered under SEBI
 A notified mutual fond is set by a public sector bank or

public financial institute or authorised by India
22) Dividend & Interest on units (Sec 10 (34)/ (35))
• Dividend received from do mastic company is exempt from tax

( Sec 115 -0 )
• Any income in respect of units of mutual fund.
23) Long term capital gains arising on transfer of equity shares or units
of equity oriented mutual fund is not chargeable to tax from the AY
05-06 if such transaction is covered by securities transaction tax
(Sec 10 (38))
24) SPECIAL PROVISTION IN RESPET OF NEWLY ESTABLISHED

UNDERTAKINGS IN FREE TRADE Zone (Sec 10 A)
In order to get deduction on undertaking must satisfy following

conditions
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PREM - 9881679159
A) Must begin mfg or production in free trade zone during

following year.
(An article or thing or computer software)
Location Year
Free trade zone During P. Y. relevant to the AY 81-
82 or any subsequent year.
Electronic hardware technology During P. Y. relevant to the AY 94-
park or software technology 95or any subsequent year.
park
Special economic zone During P. Y. relevant to the AY 01-

02 or any subsequent year but
before April 1, 2005.
B) Should not be formed by splitting /reconstruction of business

already in existence.
However where an industrial undertaking is formed as a result of re-

establishment reconstruction or revival by the assesses of the
business of any such industrial undertaking as is referred in Sec 33f B
in the circumstances & within the period specified in that section the
same will qualify for the tax concession.
C) Such new undertaking should not be formed by machinery or

plant previously used for any purpose subject to following
exception
i) Machinery or plant used outside India but not by the assesses is

allowed
Provided
• Such machinery was not previously in India
• Such machinery or plant is imported into India
• No deduction on account of depreciation has been

allowed to any assesses before the installation of the
machinery or plant by the assesses
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PREM - 9881679159
ii Total value of plant or machinery transferred to new business

does not exceed 20% of the total value of the machinery or
plant used in that business.
D) Sale proceeds
Sale proceeds of articles or things or computer software exported

out of India must be received in India by the assessee in convertible
foreign exchange during the PY or within a period of six month from
the end of the relevant previous year.
If foreign exchange is not remitted within six months from the end of
PY then deduction under sec 10A, 10B & 10BA is not available.
E)Audit & return of Income
• The assessee should furnish audit report in form No 56 along

with the return of Income. If return is not submitted on due date
then deduction is not available.
F)Amount of deduction
Profits of the business x Export turnover
Undertaking
_______________________________________________
Total turnover of the business carried on by the

undertaking
To calculate export turnover freight telecommunication charges,

insurance charges are deductible only if the assessee recovers these
charges in addition to sale price of goods.
G) Period of deducting (Allowed up to AY 2011-12)
If above conditions are satisfied the assesses can claim deduction

u/s 10A from his total income for a period of 10 consecutive A.Y.
beginning with the AY relevant to PY in which the undertaking begins
to mfg .
The above mentioned deduction is not available to any assessee

after AY 2011-12
For first 5 yrs - 100% of profit derived from the export

business
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PREM - 9881679159
Next 2 yrs - 50% of profit derived from the export business
Last 3 yrs - 50% of profit derived from the export

business
Subjects to following conditions
1) An equivalent amount is debited to the profit & loss a/c of P.Y. &
credited to SEZ reinvestment allowance reserve account/special
reserve account. Such reserve to be utilized for
• Acquiring new plant & machinery
• Such plant & machinery should to be put to use before the

expiry of 3 yrs. From the end of the year in which the special
reserve a/c was created.
• Until the acquisition of new plant & machinery the special

reserve a/c can be utilized for business purpose other than
payment of dividend creating asset outside India, remittance
outside India as a profit.
• If SRA is not utilized within 3 yrs. Then deduction would be

taken back in the year immediately following the period of
three years.
H) Other Important points
1) In case of amalgamation the resulting company can claim

deduction u/s 10A for unexpired period of tax holiday from the
P.Y. during which amalgamation takes place (only for Indian
companies )
2) If depreciation, capital expenditure on scientific research &

expenditure on family planning could not be claimed as
deduction during the relevant P.Y. due to insufficient profit
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PREM - 9881679159
such expenses are allowed to carry forward as they belongs to

A.Y. 01-02 & onwards. Prior to AY 01-02 these were not allowed
to be carried forward. Same provision is applicable for losses
u/s 72 (1) 74 (1) & 74 (3) of such undertaking.
3) The benefits under this section are optional. If the assessee

dose not wishes to claim the benefit under Section 10A, he has
to file a declaration to this effect before the due date of filling
the return for the first AY for which the deduction under this
section is available to him.
4) The deduction under Sec 80HH, 80HHAA, 80-I, 80-IA or 80-IB

shall also not be available to such undertaking after the
expiry of tax holiday period.
5) Deduction under Sec 10A is also applicable for following income
Royalty earned from export of software
Profit on account of Foreign exchange gain
6) Profit for the undertaking shall be calculated without adjusting

losses of other undertaking.
7) Brought forward losses incurred after 1st April, 2001 cannot be

deducted from profit of the business of the undertaking claiming
deduction under Sec 10A.
8) If any undertaking which was initially located in FTZ,EPZ &

subsequently located in SEZ by reason of conversion of such
economic zone into a SEZ, the deduction under Sec 10A is
available for 10yrs from the year in which such unit begin to mfg
or produce.
25) SPECIAL PROVISONS IN RESPECT OF NEWLY ESTABLISHED

UNITS IN SEZ (SPECIAL ECONOMIC ZONE) (Sec 10 AA)
A) General
According to this section deduction of profit & gains derived from

export of articles/things /services shall be allowed from the total
income of the assesses.
B) Who is eligible for deduction?
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Deduction v/s 10AA is available to all assesses. Provided such

undertaking is engaged in the export of article or things or
providing any service.
C) Essential condition to claim deduction.
1) The unit in SEZ begins to mfg or produces articles or things or

provide services during the F.Y. 05-06 or any subsequent year.
2) It is not formed by splitting up or reconstruction of a

business already in existence. But if new undertaking is
set up in an old building deduction is allowed.
Exception
The condition will not apply where the business is re-

established, reconstructed or revived by the same assessee
after the business of any undertaking carried out on by him in
India is discontinued due to extensive damage to, or
destruction of any building, machinery, plant or furniture owned
by the assessee as a direct result of fold, typhoon, cyclone,
earthquake, riot, civil disturbance etc.
3) Such new undertaking should not be formed by

machinery or plan previously used for any purpose
subject to following exception
ii) Machinery or plant used outside India but not by the assesses is
allowed
provided
• Such machinery was not previously in India
• Such machinery or plant is imported into India
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PREM - 9881679159
• No deduction on account of depreciation has been

allowed to any assesses before the installation of the
machinery or plant by the assesses
ii Total value of plant or machinery transferred to new business

does not exceed 20% of the total value of the machinery or
plant used in that business.
4) The assesses has exported goods or provided services

out of India from the SEZ
5) Books of account of the tax paper should be audited.

The assessee should submit audit report in Form No 56
F along within the return of income
6) Amount of deduction
Undertaking
_______________________________________________

undertaking

7) Period for which deduction is available
For first 5 yrs - 100% of profit derived from the export

business
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PREM - 9881679159
Next 5 yrs - 50% of profit derived from the export

business
Next 5 yrs - 50% of profit derived from the export

business
Subjects to following conditions
1) An equivalent amount is debited to the profit & loss a/c of P.Y.

& credited to SEZ reinvestment allowance reserve
account/special reserve account. Such reserve to be utilized
for
• Acquiring new plant & machinery
• Such plant & machinery should to be put to use before the

expiry of 3 yrs. From the end of the year in which the special
reserve a/c was created.
• Until the acquisition of new plant & machinery the special

reserve a/c can be utilized for business purpose other than
payment of dividend creating asset outside India, remittance
outside India as a profit.
• If SRA is not utilized within 3 yrs. Then deduction would be

taken back in the year immediately following the period of
three years.
8) Other Important points
1) In case of amalgamation the resulting company can claim

deduction u/s 10AA for unexpired period of tax holiday from
the P.Y. during which amalgamation takes place (only for
Indian companies)
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PREM - 9881679159
2) Unabsorbed depreciation, capital expenditure on scientific

research & expenditure on family planning pertaining to AY
05-06 or earlier year are not allowed to be carried forward
and set off against the income of AY following the period of
deduction. Same provision is applicable for losses u/s 72 (1)
74 (1) & 74 (3) of such undertaking.
3) If loss is incurred by an undertaking which is otherwise

eligible for deduction under section 10AA, it can be set off
under the provisions of Sec 70 & 71 against other incomes of
the taxpayer.
4) Losses of other undertaking shall not be adjusted against

profit of a unit which is eligible for deduction under section
10AA.
5) The deduction under Sec 80-IA or 80-IB shall also not be

available to such undertaking after the expiry of tax holiday
period.
6) Brought forward losses incurred after 1st April, 2001 cannot

be deducted from profit of the business of the undertaking
claiming deduction under Sec 10AA.
26) SPECIAL PROVISIONS IN RESPECT OF NEWLY ESTABLISHED

100% EXPORT ORIENTED UNDERTAKING (SEC 10 B)
A) General
Under this section deduction is available to 100% export

oriented units.
B) Who is eligible to claim deduction?
1) It must be approved as 100% EOU by board appointed by

central govt. under section 14 of Industries act 1951 in this
behalf
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PREM - 9881679159
2) It mfg or produces any article or thing or computer

software.
Any computer programme recorded on any disc, tape, any

customized electronic data as may be notified by the board.
3) The other conditions for claiming exemption under this

section are some as given under 10 A except that the
report of an accountant shall be furnished in FORM NO 56 G
instead of 56 F. Further from the AY 06-07, return if income
should be submitted on or before due date of submission of
return of income given by the section 139(1). If return of
income is not submitted before due date then deduction
under this section is not available.
C) Amount of deduction
Undertaking
_______________________________________________

undertaking

D) Period of tax holiday
Some as given v/s 10 A
E) Other points
1. In case of amalgamation the resulting company can claim
deduction u/s 10A for unexpired period of tax holiday from the
P.Y. during which amalgamation takes place (only for Indian
companies )
2. If depreciation, capital expenditure on scientific research &
expenditure on family planning could not be claimed as deduction
during the relevant P.Y. due to insufficient profit such expenses
are allowed to carry forward as they belongs to A.Y. 01-02 &
onwards. Prior to AY 01-02 these were not allowed to be carried
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PREM - 9881679159
forward. Same provision is applicable for losses u/s 72 (1) 74 (1)

& 74 (3) of such undertaking.
3. The benefits under this section are optional. If the assessee
dose not wishes to claim the benefit under Section 10B, he has to
file a declaration to this effect before the due date of filling the
return for the first AY for which the deduction under this section is
available to him.
4. The deduction under Sec 80-IA or 80-IB shall also not be
available to such undertaking after the expiry of tax holiday
period.
5. If loss is incurred by an undertaking which is otherwise eligible
for deduction under section 10B, it can be set off under the
provisions of Sec 70 & 71 against other incomes of the taxpayer.
6. Brought forward losses incurred after 1st April, 2001 cannot be
deducted from profit of the business of the undertaking claiming
deduction under Sec 10AA.
7. If any undertaking set up in DTA, earning profit from export of
article or things or computer software mfg or produced by it. It is
subsequently converted into 100% EOU then deduction under Sec
10B is available for 10 consecutive assessment yrs, beginning
with the year in which such undertaking begins to mfg or produce
in DTA & not from the period of conversion into EOU.
8. Deduction under section 10B is not available after AY 09-10.
END OF TOPIC
TOPIC 4: INCOME FROM SALARY

[Sections 15 to 17]
1. CONCEPT OF SALARY
• Relationship between payer and payee should be that of employer
and employee or a master and servant. Following examples may
highlight this point.
• Commission received by a director from a company would be termed
as salary, if the director is an employee of that company. However, if the
director is not an employee of the company, such commission would be
chargeable either under the head 'profits and gains of business or
profession’ or ‘income from other sources’.
• Salary received by a college lecturer is a salary, but remuneration
received from University for setting or assessing papers cannot be called
as salary he is not an employee of the University.
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PREM - 9881679159
• Salary received by a partner in a partnership firm is not taxable

under the head salary, but is taxed under the head profits and gains of
business or profession, because a partner cannot be termed as an
employee of partnership firm.
• Salary and allowances received by MPs and MLAs front the
Parliament or State assembly cannot be termed as salary as they are not
the employees of these houses.
1) Salary received from former, present or prospective employer during
the previous year is taxable under the head salaries.
2) Salary income should be real and not fictitious. There should be an
intention to pay and receive salary.
3) Salary is taxable on due basis. Even if any part of salary is foregone
by the employee voluntarily, still it will be taxable in his hands.
4) Advance salary is taxable on receipt basis.
5) If employee opts to surrender his salary to the central govt. under
section 2 of the voluntary surrender of salaries act 1961, such amount is
not taxable as salary.
6) Salary is taxable on due or receipt basis whichever is earlier
7) Arrears of salary (means any increment in salary on retrospective
effect) is taxable on receipt basis, if the same has not been
subjected to tax earlier on due basis.
Calculation of Income from Salary

PARTICULARS RS RS
Basic Salary
Add: taxable allowance
Add: taxable perquisite
Add: profit in lieu of salary
= Gross Salary
Less: Standard deduction under Sec 16
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PREM - 9881679159
Entertainment allowance
Professional tax paid
= Income from salary
2. MEANING OF SALARY:
Section 17 (1) defines 'Salary' as follows:-
Salary includes –
1) Wages;
2) Any annuity or pension;
3) Any gratuity:
4) Any fees, commission, perquisites or profits in lieu of or in addition to
any salary or wages;
5) Any advance of salary;
6) Any payment received by an employee in respect of any period of leave
not availed of by him;
7) Contribution by central govt. under pension scheme referred to in sec
80CCD.
8) Annual accretion to the credit balance in provident fund
9) Amount transfer from unrecognized provident fund to recognized
provident fund
Salary means a reward or remuneration received by an individual in
respect of services rendered by him under an express or implied contract
of employment. For an income to be termed as 'Salary' there must exist a
relationship of ‘employer’ and "employee" between the payer and the
payee. Every servant is an employee but an agent is not an employee.
Different forms of salary given in the definition above and their

taxability
1) Wages: It is a form of salary paid to the workers normally on daily,

hourly or monthly basis. The difference between wages and salary, from
the accounting point of view is not recognised by Income Tax and salary
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PREM - 9881679159
includes wages.
2) Annuity or Pension: Annuity is a yearly payment or allowance or
grant of an annual sum for a specific period of annuity. The annuity may
be received from the present employer or ex-employer or even from a
person other than employer.
Annuity received is taxed as salary or as profit in lieu of salary, if received
from the past employer or as income from other sources if received from
a person other than employer. Normally, in private sector where the
employer is not paying any pension after retirement, an annuity may be
paid.
3) Pension is a periodical payment in consideration of past services of
the retired employees. The pension is payable for the remaining life of
the employee. In case of family pension, it is even paid to the surviving
spouse of the deceased employee. Employee can get pension in following
two forms
3A) Commuted pension: It is a lump sum payment in lieu of
periodical payment.
3B) Uncommuted pension: It is a monthly pension.
Tax treatment
PENSION GOVT. EMPLOYEE NON GOVT. EMPLOYEE
(Central/ state/Local
authority/
statutory corporation)
Uncommu Fully taxable Fully taxable
ted
Commute Fully exempt u/s 10(10A) a) If gratuity received then
d (i) 1/3 of total pension is exempt
from tax 10(10A) (ii)
b) If gratuity is not received
then 1/2 of total pension is
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PREM - 9881679159
exempt from tax 10(10A) (ii)
NOTES
• Pension received by widow is taxable as income from other source.
• Pension received from UNO is not taxable.
4) Gratuity [Sec. 10(10)]: Gratuity is a retirement benefit. It is

lumsum payment made by an employer to an employee in
consideration of his past services.
Tax treatment
4A) Gratuity received during continuation of service is fully
taxable in the hands of all employees.
4B) Received at the time of termination of service by

government employees
The Gratuity received by employees of Central or State Government or
Local Authority is fully exempt. (Sec. 10(10) (I)]
4C) Received at the time of termination of service by non -
government employees
(i) In case of employees covered by Payment of Gratuity Act,
1972, the amount of exemption is the least of the following:-
a) Gratuity actually received;
b) Amount specified (Rs.3,50,000 w.e.f. 24.09.97); or
c) 15 days' salary based on salary last drawn for every- completed
year of service or part thereof in excess of 6 months. (15 days salary
is calculated using the formula as Salary last drawn x 15/26 (26
working days in a months assumed)
NOTES:
• How to calculate length of service?
If the period of service is less than 6 months or less than 6 months,
shall be ignored for this purpose. If it exceeds 6 months it shall be
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PREM - 9881679159
taken as full year.

• Here salary = Basic salary + D.A.
• In case of seasonal employment period of 15 days shall be replaced by 7
days.
E.g.
Y an employee of X ltd receives Rs 78000 as gratuity. He is covered
by payment of gratuity act, 1972. He retires on December 12, 2009
after rendering service of 38yrs and 8 months. At the time of
retirement his monthly basic salary was Rs 2400 and DA Rs 800.
Find the amount of gratuity exempt.
4C) In case of other employees, the amount of exemption is
the least of the following:
a) Gratuity actually received;
b) Amount specified (Rs.3,50,000 w.e.f. 24.09.97); or
c) Half month's salary {on the basis of average salary- drawn for
last 10 months) for each completed year of service (fraction to be
ignored).
NOTES:
• Here salary = Basic salary + D.A. (if applicable) + commission
based on fixed % of turn over
• Avg. monthly salary is calculated on the basis of avg. salary for
the ten months immediately preceding the month in which the
employee has retired. For instance if employee retires on 14th may,
avg. salary will be calculated till 30 April.
E.g.
X, who is not covered by payment of gratuity act, retires on
November 20, 2009 from a ltd. and receives Rs 186000 as gratuity
after service of 38 yrs and 10 months. His salary is Rs 8000 per
month up to July 31, 2009and Rs 9000 per month from August 1,
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PREM - 9881679159
2009. Besides he gets Rs 500 per month as dearness allowance

(69% of which is part of retirement benefit) what amount of gratuity
will be exempt from tax?
4D) Gratuity Received After Death Of Employee
If gratuity becomes due before the death of the assessee (no matter
when and by whom received) it shall be taxable in the hands of
employee. Whereas if gratuity becomes due after the death of
assessee, it shall not be taxable to assessee as well as legal heir.
4 E) Other points
• While claiming the statutory deduction of Rs 3,50,000 any
amount earlier claimed as deduction shall be reduced from Rs
3,50,000.
5) Leave Salary (Sec. 10(10AA)]: Encashment of leave by
surrendering leave standing to the credit of employee is known as
leave encashment.
Tax treatment
5A) Leave encashment received during the continuity of
employment is taxable to govt. as well as non govt.
employee.
5B) Leave encashment received at the time of retirement is
fully exempt for govt. employee.
5C) other employees: In case of 'non-Government employees
(including local authority or public sector employees) leave
salary is exempt to the extent of the least of the following:
a) Period of leave ( in months) to the credit of the employee at the
time of his retirement or leaving the job X average monthly salary
b) 10 X average monthly salary;
c) Rs. 3,00,000 (w.e.f. 01.04. 1998)
d) Leave encashment actually received.
NOTES:
• How to find out period of leave earned
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PREM - 9881679159
i) Find out duration of service without any fraction

ii) Find out leave allowed as per service rule (max allowed as per
rule 30 days per year)
If period of leave credited is more than 30 days then take 30 days
for calculation & if it is less than 30 days then same can be taken.
iii) Period of leave earned = Duration X Leave earned as per above
calculation less leave taken or encashed during service time / 30
days
• Here salary means a) basic salary, b) dearness allowance if the
terms of employment so provide and c) commission based upon fixed
percentage of turnover achieved by the employee.
• Average Salary is to be calculated on the basis of average salary
drawn during 10 months immediately preceding the retirement.
• Where, cash equivalent of unutilized earned leave is received by
an employee from two or more employers in the same year, the exempted
amount is to be calculated for all such encasements,
5D) Leave salary paid to legal heir is not taxable.
6) Provident Fund: Provident fund is a retirement benefit scheme. Under

the provident fund scheme, a stipulated amount is deducted from the
salary of an employee as his contribution towards the fund. The employer
also puts his own contribution. This money is invested in the gilt-edged
securities; interest earned is also credited to the fund account. The
accumulated balance is paid to the employee at the time of his retirement.
There are three types of provident funds namely; a) Statutory Provident
Fund; b) Recognised Provident Fund; c) Unrecognized Provident Fund
Besides, there is one more scheme called as Public Provident Fund.
However, the same is not restricted only to the salaried class. Anybody
can open a P.P.F. A/c. with nationalized banks. The same is discussed
under the chapter on rebates and relief.
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a) Statutory Provident Fund: This fund is maintained by

Government and semi-government-organisations, local authorities,
railways, universities and recognised educational institutions.
b) Recognised Provident Fund: A provident fund scheme to which
the Employee's Provident Fund and Miscellaneous Provisions Act, 1952
apply is called as a Recognised Provident Fund. Any establishment
employing 20 or more employees is covered by the Act. Establishments
where the number is less can also join the scheme voluntarily. An
establishment can either join a scheme set up by Government or can have
their own scheme. If the establishment frames its own scheme, then it will
have to create a ‘Trust’ for the same. Such scheme requires an approved
of the P.P. Commissioner to become a Recognised Provident Fund.
c) Unrecognised Provident Fund: In case, if the scheme mentioned
above is not approved by the. Commissioner of Income tax, the same is
called as Unrecognised.
Tax treatment of the contributions to various provident fund schemes can
be understood as follows:
Particulars Statutor Recognised Unrecognised
y Provident Fund Provident Fund
Providen
t Fund
Employer's Exempt Exempt upto 12% of Exempt from tax
contribution from tax salary. Excess
to provident contribution over
fund 12% of salary is
taxable
Deduction Available Available Not available
U/s.80 on
employee's
contribution
Interest Exempt Exempt from tax if Exempt from tax.
credited on from tax rate of interest does
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Provident not exceed 9.5%.

Fund Excess of interest
over 9.5% is
taxable.
Lump-sum Exempt Exempt provided Exempt upto own
payment at from tax. certain conditions contribution &
the time of are fulfilled. When employer's contribution
retirement not exempt RPF will taxable as salary
etc. be treated as URPF income. Interest on
right from its employer’s and own
inception. contribution is taxable
as income from other
sources.
Here salary = Basic salary + D.A. (if applicable) + commission based on
fixes % of turnover)
7) Profit in lieu of salary : It include following
a) Amount received in connection with termination
b) Amount received in connection with the modification of the terms of
employment
c) Any sum received under key man insurance policy etc.
8) Salary received from UNO is not taxable in India.
9) Compensation received from specified employer (other than individual,
firm, Huf, AOP) at the time of voluntary retirement is exempt up to Rs 5,
00,000 or amount received whichever is lower subject to fulfillment of
certain conditions.
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3. ALLOWANCES AND THEIR TAXABILITY:

Allowance can be defined as a fixed amount either in the form of money or
otherwise, given regularly in addition to salary for the purpose of meeting
a particular requirement connected with the services rendered by the
employee or as a compensation for unusual / peculiar conditions of that
service. Following arc some 'allowances' paid to employees.
3A) fully taxable allowances
a) Dearness Allowance: Dearness allowance is paid for increased cost of

living due to inflation. While deciding the pay scales of the employees,
salaries are fixed in slabs according to the grades. Such salary slabs
cannot be changed frequently. However, keeping in mind the increasing
cost of living, salary needs to be increased. Therefore, normally,
employers give fixed basic salary with annual increments plus dearness
allowance decided from time to time on the basis of Inflation Index. This
will facilitate an employee to maintain his standard of living. Such
dearness allowance received is a part of salary and is fully taxable.
b) City Compensatory Allowance: Cost of living in big cities is often

more than in smaller towns or villages. To meet such high cost of living,
employees are normally paid with a compensator/ allowance depending
upon the size of the city to which he is posted. So when an employee is
transferred from a smaller town to a bigger city, his increased cost is
taken care of. Such allowance is fully taxable.
c) Fixed Medical Allowance: Any fixed medical allowance is fully
taxable. However, medical facilities provided by the employer form part of
perquisites and are discussed later.
d) Tiffin Allowance: This is fully taxable.
e) Servant Allowance: This is fully taxable.
f) Non-practicing allowance
g) Dress allowance
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3B) fully exempt allowances (to the extent of amount spent)

Specified allowances [Sec. 10(14) (i) and (ii)]:
Section 10(14) prescribes the special allowance which are partly or wholly
exempt. These allowances are paid by the employer due to their peculiar
nature of business conditions etc.
The allowances are exempt from tax to the extent as mentioned below:-
a) Traveling Allowance : Allowance granted to meet the cost of travel o
transfer;
b) Daily Allowance : Allowance, whether, granted on tour or for the
period connection with transfer, to meet the ordinary daily charges
incurred by an account of absence from his normal place of duty;
c) Conveyance Allowance : Allowance granted to meet the expenditure
incurred on conveyance in performance of duties of an office or
employment of profit; provided that free conveyance is not provided by
the employer,
d) Helper Allowance : Allowance granted to meet the expenditure
incurred on a helper where such helper is engaged for the performance
of the duties of an office or employment of profit;
e) Training Allowance ; Allowance granted for encouraging the
academic, research and training pursuits in educational and research
institutions;
f) Uniform Allowance : Allowance granted to meet the expenditure
incurred on the purchase or maintenance of uniform for wear during the
performance of duties
g) Allowance to Govt employee outside India [Sec 10(7)]
Any allowance paid or allowed outside India by the Govt. to an India
citizen for rendering services outside India is wholly exempt from tax.
h) Allowances received from UNO.
3C) fully or partly exempt allowances

a) House Rent Allowance [Sec. 10(13A) and Rule 2A]:
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Employees may be given an allowance to meet the cost of hiring

accommodation. House Rent Allowance. H.R.A. is partly taxable and partly
exempt from tax as this H.R.A. is to be included in the salary first and then
least of the following amounts tax:
a) an amount equal to 50% of salary, if residential house is situated
at Mumbai, Delhi, Calcutta or madras & 40% of salary, where
residential house in; other place, (like Pune);
b) House Rent Allowance received by the employee
c) The excess of rent paid over 10% of salary.
Notes:
• 'Salary’ for the purpose of this clause means basic salary plus
dearness a terms of employment so provide, and commission based
on fixed turnover achieved by an employee as per the terms of
employment of the
• Salary is to be calculated on due basis, i.e. If an employee received
any salary in advance the same is to be excluded for the purposes of
valuation.
• The basis for calculation is the location of accommodation and not
employment.
• Exemption is not available when employee is staying in his own
house.
• Exemption is not available when rent paid is less than 10% of salary.
b) Entertainment allowance [Sec16 (ii)]
EA is first included in salary income & thereafter deduction is given on as
per conditions mentioned below
a) In case of central or state Govt employee the least of the following is
deductible
• Rs 5,000
• 20% of basic salary (excludes any allowances, benefit or other
perquisites)
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• Amount of EA received during the year

ii) In case of non- Govt. employee no deduction is available.
c) Sub-Section (ii): Allowances granted to the employees either to meet
his personal expenses at the place where the duties of his office or
employment of profit are ordinarily performed by him or at the place
where he ordinarily resides, or to compensate him for the increased cost of
living to the extent prescribed.
Rule 2BB (2) prescribes various allowance and the extent to which
they are to be exempted, irrespective of whether that amount is
actually spent or not.
a) Hill Compensatory Allowance: Amount exempt from Rs 300
per month to Rs. 7,000 per month for the specified areas.
b) Border Area Allowance: Amount exempt from Rs 200 per
month to Rs. 1,300 per month for the specified areas.
c) Tribal Area Allowance: Rs. 200 per month for the tribal areas of
Madhya Pradesh, Tamil Nadu, Uttar Pradesh, Karnataka, Tripura,
Assam, West Bengal, Bihar and Orissa.
d) Daily Allowance : granted to the employees working in any
transport system to meet his personal expenditure during his duty
hours, in the course of running of such transport from one place to
another, provided that he is not receiving any daily allowance - 70%
of such allowance, up to a maximum of Rs. 6,000 per month;
whichever is lower
e) Children Education Allowance: Rs. 100 per month per child up
to a maximum of two children. Deduction is available irrespective of
actual expenditure incurred.
Example
Mr. Laloo Singh, received education allowance of Rs. 80 p.m. for his
1st child, Rs. 90 p.m. his 2nd child and Rs. 120 p.m. for his 3rd child. He
also received hostel allowance of Rs. 1000 p.m. None of his children
are studying. Find taxable Children Education Allowance and Hostel
allowance.
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f) Hostel Allowance : Rs. 300 per month per child up to a

maximum of two children,
g) Compensatory Field Area Allowance: Rs. 2,600 per month for
the specified areas.
h) Compensatory modified field area allowance: Rs. 1,000 per
month for the specified areas.
i) Counter-insurgency Allowance : granted to the members of
armed forces operating in areas away from their permanent
locations for a period of more than 30 days - Rs. 3,900 per month,
j) Transport Allowance: granted to an employee to meet his
expenditure for commuting between his residence and the place of
his duty. It is exempt up to Rs 800 per month & Rs 1600 per month
for handicapped employee. (blind or orthopaedically handicapped)
k) Underground Allowance is granted to an employee who is
working in uncongenial, unnatural climate in underground coal
mines. Exemption is Rs. 800 per month.
l) High altitude Allowance is granted to the members of Armed
Forces operating in high altitude areas. The allowance is exempt
upto Rs. 1,060 per month for altitudes of 9,000 to 15,000 feet and
Rs. 1,600 for altitudes above 15,000 feet.
m) Highly active field area Allowance Any special allowance
granted to the members of armed, forces in the nature of special
compensatory highly active field area allowance is exempt upto Rs.
4,200 per month.
n) Island duty Allowance Any special allowance granted to the
members of armed forces in the nature of Island duty allowance in
Andaman, Nicobar and Lakshadvveep islands is exempt upto Rs.3,
250 per month.
The amount exempt would be the amount of allowance received or the
limits mentioned above, whichever is less.
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4. PERQUISITES [Sec 17(2)]

Normally, employees receive salary in two forms -
a) In cash - in the form of basic salary plus various allowances,
and
B) in kind - in the form of perquisites, amenities, benefits etc.
We have already seen the taxability of salary received in cash form.
However, since perquisites are not received in cash, need to be valued for
taxation purposes. The valuation of perquisites underwent a conceptual
change from A.Y.2002-03.
Perquisites are taxable under the head 'Salaries' only if they are -
a) Allowed by an employer to his employees;
B) allowed during the continuance of employment;
c) Directly dependent upon service;
d) Resulting in the nature of personal advantage to the employee; and
e) Derived by virtue .of employee's authority.
f) Perquisite is taxable if value is positive.
It is not necessary that a recurring and regular receipt alone is a
perquisite. Even a casual and non-recurring receipt can be perquisite if the
aforesaid conditions are satisfied.
2) Concept of Specified & non specified employee
a) Specified employee [Sec.17 (2) (iii)]:- Some perquisites are taxable
only in the hands of specified employees and for non-specified employees
they are tax-exempt. The following categories are treated as
specified employees.
a) A director employee in a company
b) An employee who has substantial interest in the employer
company. (i.e. holding beneficial interest in voting power of 20% or
more at any time during the previous year)
c) An employee (not covered above) whose income chargeable
under the head 'Salaries' (excluding all amenities and benefits), by
way of monetary- payments exceeds Rs.50, 000.
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For the purpose of calculating monetary payment of Rs.50, 000, the

following are to be excluded/deducted.
i. All non-monetary benefits,
ii. Monetary benefits which are not taxable under Section 10,
iii. Deductions under Section 16 i.e. (i) Standard deduction,
(ii) Entertainment allowance and (iii) Tax on employment
(professional tax).
Note: Where salary is received from more than one employer during the
relevant previous year, the aggregate of salaries received from these
employees will have to be considered for determining the status.
b) Any employee other than specified employee is treated as non
specifies employee.
The perquisites are divided into three categories as follows:-
3A) Tax-free perquisites for all employees Proviso to Sec. 17(2)
(Specified & Non specified)
3B) Taxable perquisites for all employees Sec. 17(2), clauses (i),
(ii), (iv), (v) and (vi)
3C) Taxable perquisites only for certain categories of employees
(Specified employees) Sec. l7 (2) (iii)
3A) Tax-free perquisites for all employees [Proviso to Sec. 17(2)]:
Following perquisites are tax-free for all the employees.
1) Provision of medical facilities - Provision of medical facilities in the
following cases would be exempt from tax.
a) Medical facility in employer's hospital - Medical facility provided in
a hospital, clinic, dispensary or nursing home, maintained by the
employer is fully exempt from tax.
b) Medical facility in Government's hospital - Any reimbursement
made by the employer of any expenditure incurred by the
employee on his or his member of household's medical treatment
in any hospital including dispensary, clinic or nursing home,
maintained by Government, local authority or any hospital
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approved by the Government for its employees, is fully exempt

from tax.
c) Treatment taken in private hospital & expenditure
incurred/reimbursed by employer is exempt up to Rs 15,000.
2) Refreshment provided by an employer to all employees during
working hours in office premises.
3) Subsidised lunch or dinner provided by employer to his employee.
4) Recreational facilities.
5) Amount spent on training of employees.
6) Goods (manufactured by the employer) sold to employees at
concessional rates
7) Transport provided by employer engaged in the business of carriage
of goods or passengers either free of cost or at concessional rates.
8) Sums payable by employer for recognised provident fund, approved
superannuation fund, pension or deferred annuity scheme, staff
group insurance scheme.
9) Traveling expenses incurred for journeys undertaken for business
purposes.
10) Accommodation provided in remote area & 15days in hotel.
11) Computer or laptop provided whether to use at office or at home.
12) Any perquisite allowed outside India by Govt. to a citizen of India
for rendering services outside India.
3B) Taxable perquisites for all employees: (Specified & Non

specified)
1. Value of rent-free accommodation provided by the
employer [Sec. 17(2)(i)]
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2. Value of concession in rent in respect of

accommodation provided by the employer [Sec.I7(2)(ii)]
3. Amount paid by an employer in respect of any
obligation which, otherwise would have been payable by the
employee [Sec. 17(2)(iv)]
4. The value of any other fringe benefit or
amenity as may be prescribed [Sec.l7(2)(vi)]
1) Valuation of rent-free accommodation provided by the
employer [Sec.17 (2) (i)]:
The valuation of rent-free accommodation provided by the employer is
done in the following manner.
a. Valuation of rent-free unfurnished accommodation [rule
3(a)] &
b. Valuation of rent-free furnished accommodation [rule
3(b)]
The -accommodation provided by the employer may be a furnished one or
unfurnished one. For the purpose of making the valuation of furnished
valuation, the valuation is done as if the accommodation is unfurnished
and thereafter the a separate valuation of the furniture and fixtures is
added to it
A] Valuation of rent-free unfurnished accommodation [Rule
3(1)]: For the purpose of valuation the employees are divided into two
categories:
A. Central and State Government employees
B. Private sector employees or other employees.
A. Central and State Government employees: The value of perquisite
is equal to licence fee which would have been determined as payable by
the concerned employee in accordance with the rules framed by the
Government for allotment of houses to its officers.
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However, rent-free accommodation provided to a Judge of a High Court or

Supreme Court or an official of Parliament, a Union Minister and Leader of
Opposition in Parliament is exempt from tax.
C. Private sector employees or other employees: All the
employees not falling under the earlier category, including
employees of local authorities, fall under this category. Basis of
valuation: The valuation is done in the following manner.
City Where the Where the

accommodation is accommodation is
owned by the employer taken on lease or rent
by the employer
Having population 15% of salary in respect of Amount of lease rent
exceeding 25 the period during which the paid or payable or 15% of
lakhs as per 2001 accommodation is occupied salary, whichever is lower
census by the employee
Having population 10% of salary in respect of Same as above
exceeding 10 the period during which the
lakhs but not accommodation is occupied
exceeding 25 by the employee
lakhs as per 2001
census
Population less 7.5% of salary in respect of Same as above
than 10 lakhs period during which the
accommodation is occupied
by the employee
Notes:
• Salary for the purpose of valuation includes:-
o Basic salary;
o Dearness allowance/pay, if terms of employment so provide,
o Bonus, commission, and fees;
o All other taxable allowances (excluding amount not taxable);
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o Any monetary' payment (by whatever name called).

• Salary for the purpose of valuation does not include:-
o Dearness allowance/pay, if not taken into account while
calculating retirement benefits; or if the terms of employment
does not so provide;
o employer's contribution to provident fund account of the
employee;
o all allowances which are exempt from tax; and
o Value of perquisites [under Section 1 7(2)]
• Salary shall be taken on due basis & salary received from all
employers in respect of the period during which an accommodation is
provided will be taken into consideration.
B) Valuation of rent-free furnished accommodation [Rule 3(1)]:
The valuation of rent-free furnished accommodation is done in two stages,
first value of the accommodation as if it is unfurnished, and then add the
value of furniture and fixtures as discussed below, to get the valuation of
furnished accommodation.
For the purpose of valuation of furniture following rules shall
apply:-
1) If furniture is owned by the employer, then 1 0% p.a. of the
original cost of the furniture is to be taken as the value of the
furniture;
2) If the furniture is hired by the employer, then actual hire charges
are to be taken as the value of the furniture.
NOTES
• The above rules are applicable to govt. employees as well as non
govt employees.
• Here furniture includes TV, radio, AC and other household appliances
• Where an employee is transferred from one place to another and he
is provided with an accommodation at new place also. The value of
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PREM - 9881679159
perquisite shall be taken for only one such house having lower value
for a period not exceeding 90 days. Thereafter, the values of both
such houses are taxable.
C) Furnished accommodation in hotel
The value of perquisite is lower of the following
1) 24% of salary for the period during which accommodation was
provided during PY
2) Actual amount paid to hotel
If accommodation is provided for less than 15 days & provided to an
employee for transfer from one place to another, perquisite in not
chargeable to tax.
2) Value of concession in rent in respect of accommodation
provided by the employer [Sec. 17(2) (ii)]
Sometimes, instead of providing accommodation totally rent-free, may be
provided by charging some (concessional) rent to the employee. In that
case, the valuation is to be done as if the accommodation is provided
rent-free and then the rent charged to the employee is to be deducted
from the same.
3) Obligations of an employee met by the employer (Sec. l7(2)(iv)]

: Where any payment to an employee is met by the employer, it would be
taxable in the hands of that employee irrespective of whether he is a
specified employee, or not under Section 17(2)(iv). Any fees, expenses or
otherwise which, if the employer had not incurred, the employee would
have incurred on his own would fall under this clause.
4) Valuation of specified security or sweat equity
shares allotted or transferred to the assessee
Sweat equity shares means equity shares issued by a company to its

employees or directors at a discount or for consideration other than cash
for providing know-how or making available rights in the nature of
intellectual property rights or value additions, by whatever name called.
Tax point.
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If such shares are allotted or transferred not for above reasons (i.e.for
providing known-how, etc.), then it is not taxable as perquisite. E.g., if
such option is granted to the employee against acquisition of immovable
property by the company, then such benefit shall not be considered as
perquisite. However, employee is liable to pay tax, if any, under the head
‘Capital Gain’.
Perquisites
Value of any specified security or sweat equity shares shall be
considered as perquisites in hands of employee if the following
conditions are satisfied:
a. Such security or sweat equity shares are allotted or transferred on or
after 01-04-2009.
b. Such security or sweat equity shares are allotted or transferred by

the employer (former or present) directly or indirectly.
c. Such security or sweat equity shares are allotted or transferred free

of cost or at concessional rate to the assessee.
Valuation:
Value of such perquisite shall be computed as under.
Particulars Amou
nt
The fair market value of the specified security or sweat ***
equity shares, as the case may be, on the date on
which the option is exercised by the assessee
Less: The amount actually paid by, or recovered from ***
the assessee in respect of such security or shares.
Value of perquisite ***
Notes
a. Option means a right but not an obligation granted to an employee
to apply for the specified security or sweat equity shares at a
predetermined price.
b. Fair market value means the value determined in accordance with

the method as may be prescribed.
Example
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A company ‘X’ grants option to its employee ‘R’ on 1st April, 2004 to
apply for 100 shares of the company for making available right in the
intellectual property to the employer-company at a pre-determined
price of Rs. 50 per share with date of vesting of the option being 1st
April, 2006 and exercise period being 1st April, 2006 to 31st March,
2010. Employee ‘R’ exercises his option on 31st March, 2009 and
shares are allotted/transferred to him on 3rd April, 2009.
Fair market values of such share on different dates are as under.
01-04-2004 01-04-2006 31-03-2009 03-04-2009

Rs. 100 Rs. 180 Rs. 440 Rs. 470
Compute taxable perquisite, if any, in hands of Mr. R for A.Y. 2010-11.
5) Fringe benefits (Sec. 17(2) (vi)]: Newly inserted Section 17(2) (vi)
provides for other fringe benefits received from employer to be treated as
perquisites. Rule 3(7) prescribes the following benefits or amenities to be
treated as fringe benefits and accordingly to be brought to tax as
perquisites.
a) Interest free or concessional loans
b) Traveling, touring etc.
c) Free meals
d) Gift voucher or token
e) Credit card
f) Club fees or expenditure
g) Use of moveable assets of the employer
h) Transfer or sale of any moveable asset to an employee
a) Interest-free loan or loan at concessional rate of interest:
If the employer has provided any loan to the employee free of
interest or at concessional rate of interest, the same would
taxable. It is taxable on the following basis
Step 1: Find out aggregate monthly outstanding balance on the last day of
each month
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Step 2: Find out rate of interest charged by SBI on 1st of April of relevant
previous year
Step 3: Calculate interest (Step 1 X step 2)
Step 4: Interest calculated in step 3 minus interest recovered from
employee during PY is taxable value of perquisite.
SBI interest rates

Interest rate as on 1st
April 09
Housing loan Up to 5 yrs 9.75% (up to 30L), 10.25%
5 to 15 yrs above 30 L
15 to 25 yrs 10% (up to 30L), 10.50%
above 30 L
10.25% (up to 30L), 10.75%
above 30 L
up to 75L, 11% above 75L
Car loan for new car Up to 3 yrs ( Rs 7.5 L& 11.5%
above) 11.75%
Up to 3 yrs ( below Rs 7.5 11.75%
L) 12%
3 yrs to 5 yrs
5 yrs to 7 yrs
Two wheeler loan 16.25%
Education loan Loan up to 4 lakh 11.75%
Above 4 Lakh up to 7.5 11.75%
lakh 12.5%
Loan above 7.5L
Personal Loan 16.50%
To subscribe ESOP 14.50%
Note
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• Perquisite is not chargeable to tax if loan if taken for medical

treatment in respect of diseases specified in rule 3A .
• Perquisite in respect of interest free loan or loan at concessional rate
of interest to the employee or any members of his household is not
taxable if aggregate amount of loan given by the employer dose not
exceed Rs 20,000.
• Housing loan must be taken for purchase of house and not for
repairs.
b) Travelling/Touring/Holiday Home expenditure on Holiday [Rule

3(7)(ii)]
Valuation of perquisite in respect of travelling, touring, holiday home or

any other expenses paid for or borne or reimbursed by the employer for
any holiday availed of by the employee or any member of his household is
taxable in the hands of all employees as per the following table:
Case Taxable value of perquisite
Where such facility is Notional cost of such facility. In
maintained by employer and is other words, value at which
not available uniformly to all such facilities are offered by
employee other agencies to the public.
Where the employee is on The amount of expenditure so
official tour and the expenses incurred for the accompanying
are incurred in respect of any member of his household.
member of his household
accompanying him.
Where any official tour is The value will be limited to the
extended as a vacation. expenses incurred in relation to
such extended period of stay or
vacation.
In any other case Amount incurred by the
employer.
Notes
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1) Any amount charged from employee shall be reduced from the

above determined value.
2) The above provisions are not applicable in case of Leave Travel

Concession (discussed earlier)
Example
Himalaya Ltd. reimburses the following expenditure on medical treatment
of the son of an employee Karan. The treatment was done at UK.
1. Travelling expenses Rs. 115000.
2. Stay expenses at UK permitted by RBI Rs. 45000 (Actual expenses

Rs. 70000).
3. Medical expenses permitted by RBI Rs. 50000 (Actual expenses Rs.

70000).
Compute the taxable perquisites for the assessment year 2010-11 in the
hands of Karan, if his annual income from salary before considering
medical facility perquisite was (i) Rs. 150000, (ii) Rs. 200000.
C) Free lunch, refreshment etc. provided by the employer: The

valuation of perquisite shall be done in the following manner.
a) If the employer provides free meals to an employee, the value shall
be the amount of expenditure incurred by the employer, if any amount
is recovered from the employee towards the provision of food; the same
shall be deducted from the value of the perquisite.
However, if the cost of meals does not exceed Rs.50 per meal the
same shall be exempted,
b) If tea or other non-alcoholic beverages and snacks are provided
during the office hours, the same shall not be considered as a
perquisite.
c) Free meals provided in a remote area (located at least 40 kilometers
away from a town having a population of 20,000 or more), or in an
offshore installation, shall be exempted.
D) Gift, Voucher or token:
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• The value of any gift, voucher or token given to employee or any

member of his family shall be taxable. However it is exempt up to Rs
5,000
• Any gift in excess of Rs 5,000 is taxable.
• Gift is cash is always taxable even if it is below Rs 5,000.
Example
Determine taxable perquisite in the following cases:
1. Miss Shradha received a wrist-watch of Rs. 3000 on 17/7/2009 and a
golden chain with Rs. 12000 on 18/8/09 from her employer, Mr. Raju.
2. Miss Rakhi received Rs. 11000 cash-gift from her employer, Dipu Ltd.
3. Mr. Anirudha is working with X & Co. a partnership firm. During the
year, the employer firm gifted a diamond ring worth Rs. 80000 to
wife of Mr. Anirudha.
E) Credit cards: If the employer provides any credit card to the employee
and any expenditure is incurred thereon including the membership fees or
annual fees, by the employee or any member of his family, the amount
paid by the employer for such credit card shall be considered as a
perquisite.
Value of perquisite
Exp. Incurred by employer in respect of credit card used by the
employee or his family member
(Less) Amount recovered from employee
= Value of taxable perquisite (if positive)
However, if the credit card is used by the employee wholly and exclusively
for official purposes, then the value shall be 'nil' provided following
conditions are fulfilled.
a) The employer maintains complete details in respect of such
expenditure.
b) The employee certifies that the expenditure was incurred wholly
and exclusively for official purposes.
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c) The supervising authority' of such employee certifies that such

expenditure was incurred wholly and exclusively for the official
purposes.
d) If the expenditure incurred is in the nature of entertainment
expenditure, full details of such expenditure including the nature and
purpose of such expenditure, the persons entertained etc. are
maintained by the employee.
F) Club Expenditure: If the employer reimburses or incurs any

expenditure in a club for an employee or any members of household of
such employee, the amount spent including the annual or periodical
membership fees shall be the value of perquisite.
Value of perquisite
Exp. Incurred by employer in respect of club facility used by the
employee or his family member
(Less) Amount recovered from employee
= Value of taxable perquisite (if positive)
Initial fees for obtaining corporate membership shall not be a
taxable perquisite.
However, if the expenditure is incurred by the employee wholly and
exclusively for official purposes, then the value shall be 'nil' provided
following conditions are fulfilled.
e) The employer maintains complete details in respect of such
expenditure.
f) The employee certifies that the expenditure was incurred wholly
and exclusively for official purposes.
g) The supervising authority of such employee certifies that such
expenditure was incurred wholly any exclusively for the official
purposes,
h) If the expenditure incurred is in the nature of entertainment
expenditure, full details of such expenditure including the nature and
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purpose of such expenditure, the persons entertained etc., are

maintained by the employee.
The perquisite value shall also be taken as 'nil' in respect of health club,
sports or similar facilities provided uniformly to all employees by the
employer.
G) Use of moveable assets of the employer : Other than computers,
laptops, car
Owned by the Taken on rent by the

employer employer
A) Find out cost to 10% per year of actual Actual amount of rent
employer cost paid
B) Less: Amount Amount recovered from Amount recovered from

recovered from employee employee
employee
C) Taxable value of (A) – (B) if positive (A) – (B) if positive

perquisite
H) Transfer or sale of any moveable asset to an employee:
Electronics/ Motor car Any other asset

Computers
A) Find out cost to Actual cost to Actual cost to Actual cost to

employer employer employer employer
B) Less normal 50% for each 20% for each 10% for each
wear & tear for completed year by completed year by completed year of
completed yrs of reducing balance reducing balance actual cost
use by employer method method
C) Less: Amount Amount recovered Amount recovered Amount recovered

recovered from from employee from employee from employee
employee
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D) Taxable value (A) – (B) – (C) if (A) – (B) – (C) if (A) – (B) – (C) if
of perquisite positive positive positive
• Here electronic products dose not include household appliances.
• No depreciation shall be charged for a part of the year.
3C) Taxable perquisites only for certain categories of employees

(specified employees) (Sec.17 (2) (iii)]
Following perquisites are taxable only in the hands of specified employees,
if an employee is not a specified employee and is in receipt of the
following perquisites, the same would be exempt in his hands.
A) Free use of Motor Car (Rule 3(2)]:

Motor-car facility provided by an employer is taxable in the hands of
employee on the following basis:
Care is Car is Used by Taxable value Who is

owned Maintaine employee Chargeable
by d by for
Office Not a perquisite Not
Emplo purpose applicable
Personal M +D1 2
yer
purpose
Both Rs. 1800 or Rs. Specified
purpose 2400 p.m.3 Employee
purpose applicable
Employ Employee Personal D
er purpose
Bothe Rs. 600/Rs.900 Specified
purpose p.m.4 employee
purpose applicable
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Personal M
purpose
Actual
expenditure
incurred by the
Employ Employer
employer as
ee
reduced by Rs.
All
Both 1800/2400 p.m. 3
employee
purpose (further
deduction of Rs.
900 p.m. for
driver) or a
higher deduction
if prescribed
conditions are
satisfied
Employ Any Not a perquisite Not
ee purpose applicable
1. M = Maintenance cost
2. D = Depreciation @ 10% of actual cost of the car. However, if the

car is not owned by employer then actual hire charge incurred by
employer shall be considered.
3. Rs. 2400 p.m. in case of higher capacity car# and Rs. 1800 p.m. for
lower capacity car.
4. Rs. 900 p.m. in case of higher capacity car# and Rs. 600 p.m. for
lower capacity car. #higher capacity car means a car whose cubic
capacity of engine exceeds 1.6 litres.
5. Conditions to be fulfilled for claiming higher deductions:
The employer has maintained complete details of journey

undertaken for official purpose, which may include date of journey,
destination, mileage, and the amount of expenditure incurred
thereon; and
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The employer gives the certificate to the effect that the expenditure
was incurred wholly and exclusively for the performance of official
duties.
Chauffeur/Driver
If chauffeur is also provided, then salary of chauffeur is further to be added
to the value of perquisite (as computed above). However, if car is used for
both i.e. official and personal purpose then Rs. 900 p.m. (irrespective of
higher or lower capacity of car) is to be taken as value of chauffeur
perquisite.
Notes
a) If motor car is provided at a concessional rate then charges paid by
employee for such car, shall be reduced from the value of perquisite.
b) The word “month” denotes complete month. Any part of the month
shall be ignored.
c) When more than one car is provided to the employee, otherwise

than wholly and exclusively for office purpose, the value or
perquisite for-
One car shall be taken as car is provided partly for office and partly
for private purpose i.e. Rs. 1800 or Rs. 2400 p.m. (plus Rs. 900 p.m.
for chauffeur, if provided); and
For other car(s), value shall be calculated as car(s) are provided
exclusively for private purpose.
d) Further reminded, conveyance facility to the judges of High Court or
Supreme Court is not taxable.
e) Use of any vehicle provided to an employee for journey from

residence to work place or vice versa shall not be a taxable
perquisite.
Example 1
Miss Sonia, has been provided a car (1.7 ltr) by his employer Yogesh
Ltd. The cost of car to the employer was Rs. 350000 and maintenance
cost incurred by the employer Rs. 30000 p.a. Chauffeur salary paid by
the employer Rs. 3000 p.m. Find taxable value of perquisite for Miss
Sonia for the A.Y.2010-11, if the car is used for:
a) Office purpose b) Personal purpose c) Both purpose
In case (b) and (c), employee is being charged Rs. 15000 p.a. for such
facility.
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Example 2
Mr. Piyush has been provided a car (1.5 ltr.) on 15/7/09. The cost of car
to the employer was Rs. 600000 and maintenance cost incurred by
employer Rs. 20000 p.a. Chauffeur salary paid by employer (Mr. Ratan)
Rs. 4000 p.m. The car is 40% used for office and 60% for personal
purpose. Charges paid by employee for such facility Rs. 5000 p.a. Find
taxable value of perquisite.
Example 3
Mr. Vikram being a Government employee has a car (1.7 ltr.) used for
office as well as for personal purpose. During the year, he incurred Rs.
40000 on maintenance and Rs. 20000 on driver’s salary. The entire cost
is reimbursed by employer. Find taxable perquisite.
Example 4
Wasim has a car (1.5 ltr.) used for office as well as for personal
purpose. During the year car is used 80% for business purpose being
certified by the employer. During the year, he incurred Rs. 50000 on
maintenance and running of such car. The entire cost is reimbursed by
the employer. Find taxable perquisite if assessee wish to claim higher
deduction, when-
a) A proper log book is maintained; b) A proper log book is not
maintained.
Example 5
Amit is provided with two cars, to be used official and personal work, by
his employer Raj. The following information is available from the
employer records for computing taxable value of perk (assuming car 1,
is exclusively used by Amit)
Particulars Car 1 Car 2
Cost of the car 600000 400000
Running and maintenance (borne by the 40800 28000
company) 24000 24000
Salary of Driver (borne by the company)
B) Free domestic servants (Rule 3(3) :

a) If the employee is getting a fixed servant allowance, it is fully
taxable irrespective of whether the employee is incurring any
expenditure on servants or not.
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b) If the employer provides any servant, like sweeper, watchman,

gardener or any other domestic servant, value of the perquisite will
be actual cost to the employer in the form of salary paid to such
servants. The amount would be reduced by the amount paid by the
employee to the employer, if any, for providing such services.
c) If an employee has been-provided a rent free accommodation
(owned by the employer), then the expenses incurred on
maintenance of garden and ground attached to the house including
salary paid to the gardener is not taxable separately.
d) Exception : If a domestic servant is engaged by the employee
and salary is paid or reimbursed by the employer, the value of
perquisite to the extent of salary paid or reimbursed is taxable in the
hands of both specified as well as non-specified employees,
being an obligatory payment under Section 1 7(2)(iv).
Example
Mr. X and Mr. Y are working for M/s Gama Ltd. As per salary fixation norms,
the following perquisites were offered.
a) For Mr. X, who engaged a domestic servant for Rs. 500 per month,
his employer reimbursed the entire salary paid to the domestic
servant i.e. Rs. 500 per month.
b) For Mr. Y, he was provided with a domestic servant @ Rs. 500 p.m.
as part of remuneration package.
You are required to comment on the taxability of the above in the hands of
Mr. X and Mr. Y, who are not specified employees.
C) Supply of Gas, Electricity and Water [Rule 3(4)]:

Supply from own sources : Where the employer himself is providing
these amenities out of his own sources, without purchasing from outside,
the value of the perquisite would be determined on the basis of
manufacturing cost per unit incurred by the employer less amount
recovered from employee.
Supply after purchasing from outside : The value of the benefit to the
employee resulting from the supply of gas, electricity or water for his
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household consumption shall be determined as the sum equal to the

amount paid by the employer to the outside agency supplying the same.
If any amount is charged to the employee for supply of such services, the
same would be deducted from the value of perquisite.
If facility is in the name of the employee then it is taxable to
specified as well as non-specified employees & if it is in the name
of employer then it is taxable to specified employees only.
D) Free or concessional educational facilities (Rule 3(5)]: The value

of benefit resulting to the employee from the provision of free or
concessional education for any member of family shall be calculated as
under.
a) Reimbursement/Payment of school fees of employee’s
children or of family members of the employee directly to
school is taxable perquisite to specified as well a non-
specified employees & in any other case(mentioned below)
it is taxable to specified employees only.
b) Educational facility to employee’s children
If the educational institution is maintained and owned by the
employer, the value of benefit shall be the cost of such education in
a similar institution in or near the locality. If the cost of such
education does not exceed Rs. 1,000 per month, per child,
then the value shall be taken as 'nil'. (No restriction on no.
of children). But if the cost of such education exceeds Rs
1,000 per month then
value of taxable perquisite =
Cost of such education in a similar institute
Less: Rs 1,000 per month per child
Less: Amount recovered from employee
c) Educational facility to employee’s household member &
grand children
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Cost of such education in a similar institute

= value of taxable perquisite
NOTE
• Here child means adopted or step child of assessee only but
dose not include grandchild.
E) Free Transport facility (Rule 3(6)] :

a) Free transport facility provided to employees of railways & airlines is
tax free perquisite.
b) For employees of ant other transport undertaking
Cost of such benefit allowed to employee
= value of taxable perquisite
F) Medical facilities
a) Fixed medical allowance is fully taxable.
b) Here family means spouse & children, parents, brothers, sisters of the
individual wholly or mainly dependent on him.
c) If hospital maintained by the employer then any medial expenditure
incurred on family is not chargeable to tax.
d) If hospital maintained by central/state govt., local authority then any
medial expenditure incurred or reimbursed by employer is not chargeable
to tax.
e) Medical insurance premium paid or reimbursed by the employer is not
chargeable to tax.
F) Expenditure incurred in private hospital & paid or reimbursed by
employer is exempt up to Rs 15,000 per year.
G) If bills are issued in the name of the employee and reimbursed
by the employer then it is taxable to all employees.
g) Medical facilities outside India
PERQUISITE CONDITIONS
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a)Medical treatment of employee or a) Exempt to the extent permitted

family member of employee by RBI.
outside India
b) Cost of travel of the employee/ b) Expenditure is exempted if gross
any member of his family and one total income with out including
attendant who accompanies the expenditure on traveling, dose not
patient in connection with medical exceeds Rs 2, 00,000.
treatment outside India.
c) Cost of stay abroad of the c) Exempt to the extent permitted
employee/ any member of his by RBI.
family and cost of stay of one
attendant who accompanies the
patient in connection with medical
treatment outside India.
4. DEDUCTIONS FROM SALARY INCOME
1) Standard Deduction U/S.l6 (i): Omitted w.e.f. 2006-07
2) Entertainment Allowance U/Sl6 (ii)

If an employee is receiving any entertainment allowance from his
employer, then such allowance is allowed as a deduction U/s. 16(ii) to the
extent specified below:
2A) In case of Government employees [State or Central], least of the
following amounts is deductible
a) a sum equal to 20% of his salary (exclusive of any allowance,
benefit or other perquisite),
b) five thousand rupees,
c) Amount of entertainment allowance granted during the year.
2B) In case of any other employee, deduction is not available from
A.Y. 2002-03 onwards. Actual amount spent out of the entertainment
allowance is not considered while granting the deduction.
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3) Tax on employment U/s. l6 (iii) - Profession Tax

Employer deducts a certain amount from the salary of the employees as
Professional Tax and deposits the same with the Government. This tax is
collected by State Government. The rates of taxes differ from State to
State. The amount which is deducted by the employer from the salary of
the employee is allowed as a deduction U/S.l6 (iii) of the Act.
Following points should be considered while availing deduction under this
section.
a) Deduction is available only in the year in which professional tax is paid.
b) If the employer on behalf of the employee pays the professional tax,
the same is to be first included in the employees salary [specified or
otherwise, being in the nature of an obligation of an employee] as a
perquisite and then deduction under this section-would be available.
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PROBLEMS ON INCOME FROM SALARY

Problem 1
Mr. X retired on 31st January 2010 after a continuous service of 35 years
and 8 months with ABC Ltd. He received gratuity of Rs.4, 40,000. His
monthly salary was Rs. 11,700 since June, 2009 prior to which the same
was Rs. 11,400 p.m. Compute the taxable gratuity of Mr. X if (a) He is
covered by Payment of Gratuity Act, 1972 and (b) He is not covered by
Payment of Gratuity Act, 1972.
Problem 2
An employee of ABC (P) Ltd. received Rs.5, 59,000 as leave salary at the
time of his retirement on December 31, 2009. Determine the amount of
taxable leave salary from the following information:
Salary at the time of retirement (per month ) Rs. 23,000
Average salary received during 10 months ending on
31.12.2009 Rs 22,600
From March 1 2006 to July 31, 2009 (per month) Rs 23,000
From August 1,2006 to December 31, 2009 (per month) 20.75 years
Duration of Service 45 days
Leave entitlement for every year of service 90 days
Leave availed while in service 5,59,000
Leave salary paid at the time of retirement
Problem 3
Mr. Datta is an Accountant in Govt Company at Pune. He furnished the
following details of his salary for the financial year ending 31st March,
2010.
a) Basic Salary Rs. 10,000 p.m.
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b) Dearness Allowance 40% of basic salary (not

admissible for retirement benefits)
c) Entertainment Allowance Rs. 1,000 p.m.
d) City Compensatory Allowance Rs.200 p.m.
e) Medical Allowance Rs. 5,000 p.a.
f) Employers' and his own contribution to the
Recognised Provident Fund is 15% of basic salary,
g) He is provided with a car of 2.0 Ltr. engine
capacity by his factory. All the expenses including driver's salary' are
met by the factory. The car is used for official as well as for private
purposes.
h) He is also provided with unfurnished
accommodation for which employer charges Rs.500 per month.
i) Interest on the accumulated balance of R.P.F. at
13% p.a. is Rs.26, 000.
j) He paid professional tax at Rs.225 p.m.
His qualifying savings are:
L. I.C. Premium Rs. 14,250
National Savings Certificate Rs. 10,000
Public Provident Fund Rs.5, 000
Repayment of housing loan --Principal Rs.22,
000.
Compute the taxable income from salary and tax rebates for the A.Y.
2010-11.
Problem 4
Mrs. Narayani working as an Accountant in Super India Limited, Pune has
given you the following details of her emoluments for the financial year
2009-10.
a) Basic Salary Rs. 1, 80,000
b) D.A. 40% of Basic Salary
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c) H.R.A. 10% of Basic

Salary
d) C.C.A. 5% of Basic Salary
e) Educational Allowance 2%
of Basic Salary
f) Conveyance Allowance (for going to office and back to residence) Rs.
12.000
g) Mrs. Narayani has got one son studying in Vth standard. She stays in
a rented flat by paying monthly rent of Rs.3, 000.
h) On March 10, 2010 she gets a wrist watch ( cost Rs 8610) from the
employer as a gift.
i) She is provided with a car of 1.2 c.c. for official and personal use.
The entire expenditure of the car is borne by the employer. A chauffeur
is also provided with the car. A medical expenditure of Rs. 12,500 is
reimbursed by the employer.
j) Mrs. Narayani has contributed Rs.35, 000 to the Recognised
Provident Fund. An equal amount is contributed by the employer also.
Interest @. 15% has been credited to her Recognised Provident Fund
Account amounting to Rs. 13,500.
You are required to compute income taxable under salary of Mrs. Narayani
for the Assessment Year 10-11
Problem 5
Mr. Taxman is employed in Tax plan Ltd., Pune as an Accountant. During
the Previous Year 2009-10, he has received the following emoluments.
b) Dearness Allowance 30% of basic salary
(Applicable for retirement benefits)
c) City Compensatory Allowance Rs.850 p.m.
d) Children Education Allowance Rs.300 p.m.
(Mr. Taxman is having two sons and one -daughter)
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e) House Rent Allowance Rs. 1,500 p.m.

f) He contributed Rs.2, 000 p.m. towards his recognised provident fund
and an equal amount is contributed by the employer. He has paid Rs.3,
300 as Profession Tax.
g) Interest free loan for purchasing home appliances (amount Rs
1,20,000, date of taking loan : March 1, 2006. Amount outstanding on
1st April 09 Rs 76,000 and on 1st November 09 Rs 50,000) The SBI
lending rate for similar loan on 1st April 09 is 16.50%.
h) During the year, the interest credited to his recognised provident
A/c. @-12% p.a. amounted to Rs. 14,400.
i) He received Rs. 18,000 by way of reimbursement of the hospital bill in
respect of his wife.
j) He has taken a life insurance policy of Rs. 1, 00,000 in respect of his
wife by paying an annual premium of Rs. 14,800.
k) He stays in a rented house at Pane by paying rent of Rs. 3,000 p.m.
You are required to compute the taxable income from Salary of Mr.
Taxman for the A.Y.2010-11.
Problem 6
Mr. Akshay has submitted the following data regarding his income.
Compute his total taxable income & tax liability for AY 10-11.
a) Basic salary Rs. 10,000 per month.
b) Dearness Allowance Rs. 2,000 per month.
c) Contribution to R.P.F. 12% of salary (by employees).
d) City Compensatory Allowance Rs. 100 per month.
e) Interest on R.P.F. @ 12% is Rs.2, 400.
f) H.R.A. Rs. 1,000 per month,
g) Entertainment Allowance Rs. 200 per month,
h) Traveling Allowance Rs. 2,000 (unspent amount.Rs.200).
i) He has been provided with an 1800 cc car for both official and private
purposes.
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j) The assessee pays for the running and maintenance for the personal use
of the car.
k) The assessee’s two children are studying in the school run by the
employer. The cost of education in similar institution per student is Rs.
1,000 per annum.
l) The assessee is supplied with free gas, water and electricity for
which the employer pays Rs,1,000 per annum to an outside agency.
m) The assessee is provided with free lunch during working days, (in all 300
lunches Rs.60 each).
n) Rent paid by the assessee for the house is Rs. 2,500 per month.
o) Life insurance Premium paid Rs.10, 000 on a policy of Rs.1, 20,000
which were taken on the life of his wife and children.
p) Contribution to P.P.F. Rs. 1,500.
q) U.L.I.P. premium paid Rs.6, 000.
r) Contribution to R.P.F. @12% of salary
s) Purchased National Savings Certificate VIH Issue for Rs. 1,200.
Problem 7
Mr. Jambhulkar is an employee of a gas supply company at Bangalore. He
gives you the following information for the previous year 2009-10:
a) Basic Salary Rs. 14,000 per month.
b) D. A. Rs. 1,000 per month (not forming part of pay for retiring benefits)
c) Family allowances Rs. 300 per month.
d) City Compensatory Allowance Rs. 200 per month.
e) Education Allowances for two children at Rs. 200 per month per child.
f) Entertainment Allowance Rs. 700 per month.
g) House Rent Allowance Rs. 1,200 per month but he pays Rs. 4,000 per
month as rent for the accommodation secured by him.
h) Company has provided a free telephone at his residence by meeting
the expenses, Rs. 5,000 per annum.
i) He is allowed to use one motorcar of 16 H.P. for all official purpose.
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j) Reimbursement of medical expenses incurred for his wife's treatment

abroad Rs. 70,000 and their traveling and stay expenses Rs. 50,000.
k) The company has paid his income tax Rs. 3,000 during the previous year.
l) Conveyance allowances of Rs. 5,000 per annum for visiting branches.
m) Provisions of the following domestic servants who are paid by the
company: Watchman Rs. 1,750 per month, Sweeper Rs. 1,600 per
month, Gardener Rs. 1600 per month, Cook Rs. 1000 per month.
n) Company has contributed to his recognised provident fund account
14% of Jambhulkar's salary and has credited interest at 9.5% per
annum.
o) Tuition Fees paid Rs. 15,000/- for two children by Mr. Jambhulkar.
Mr. Jambhulkar has provided the following details in respect of his
investments
• Life Insurance Premium (Policy amt. Rs. 1,00,000)
30,000
• Provident Fund 10,000
• P.P.F. 20,000
Compute the taxable income from salary of Mr. Jambhulkar for the
Assessment Year 2010-11.
Problem 8
a) Mr. Manoj (age 67) is an Accountant in Shriram Sugar Factory of
Satara He furnishes the following details of his salary for the financial
year ending 31st March, 2010.
b) Basic salary Rs. 11,400 p.m after deducting TDS of Rs 600.
c) Dearness Allowance 25% of basic salary (not admissible for
retirement benefits)
d) Entertainment Allowance Rs. 1000 p.m.
e) City compensatory allowance Rs. 200 p.m.
f) Medical Allowance Rs. 5080 per annum.
g) Employer's and his own contribution to the Recognized provident
fund is 15% of basic salary.
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h) He is also provided with unfurnished accommodation for which

employer charges Rs. 500 p.m. The fair rent of house is Rs. 24,000 per
annum. The house is owned by the employer.
i) Interest on accumulated balance of Recognised provident fund at
13% p.a. Rs. 26000.
j) He paid professional tax at Rs. 200 p.m.
k) Tuition fees paid for two children Rs. 30,000/-.
l) His qualifying savings are :
a)L.I.C. Premium Rs. 10,600 b) National Saving Certificate Rs. 10,000 c)
Public Provident Fund Rs. 15,000 d) Repayment of housing loan
principal Rs. 22,000.
Kindly compute the taxable income from salary and tax liability also tax
rebates for the Assessment Year 2010-11.
Problem 9
Mr. Sharma was an IAS officer working with Central Government and
he is retired at the end of the year. From the following information,
find out the taxable income for A. Y. 2010-11.
Basic Salary (Rs. 25,000 x 12) 3,00,000
Dearness Allowance (2,500 x 12) 30,000
Bonus 30,000
Leave Encashment received 40,000
Commuted Pension received 1,00,000
Gratuity received (Avg. salary Rs.
20,000 for last 10 months and 3,00,000
completed service of 12 years)
Education Allowance (for three children) 9,000 p.a.
Entertainment Allowance 10,000 p.a.
Problem 10
Mr. Ajay is Accounts Manager retired from Sharp Prakashan Ltd.,
Pune at the end of this year March 10. For last previous year his
income from salary was as follows:
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Basic Salary 60,000 p.m.

Dearness Allowance 5,000 p.m.
Bonus 2,00,000
p.a.
Entertainment Allowance 70,000
Medical Allowance 80,000
Gratuity received as per Gratuity Act 3,60,000
1972. (Completed service of 20 years.)
He invested in following savings
LIC Premium (LIC Policy amount is Rs. 25,000
1,00,000)
National Saving Certificates 10,000
Public Provident Fund 25,000
Repayment of housing loan 40,000
Tuition fees paid for two children 15,000
Calculate the taxable salary and income
tax payable.
Problem 11
Mr. Milind is employed in a firm of Mumbai and he furnished the following
particulars of income for the previous year 2009-10.
b) Dearness Allowance Rs. 6,000 p.m.
(Out of this Rs. 2,000 p.m. consider for retirement benefits)
c) Bonus Rs. 40,000.
d) Entertainment Allowance Rs. 1,000 p.m.
e) Interest on R.P.F. at 13% Rs. 39,000.
f) Employer's contribution to R.P.F. is 15% salary.
g) He is provided with furnished accommodation at Mumbai by the employer,
cost of
furniture of Rs. 50,000. Rent paid for accommodation by Mr. Milind is
Rs 2,000 P.M.
h) Hospital Bill reimbursed by the employer Rs. 12,000.
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i) He has been provided with the facility of sweeper, watchman and

servant, who are paid by the employer Rs. 1,500 p.m. Rs. 1,800 p.m.
and Rs. 1,700 p.m. respectively.
j) He has been provided with an 1800 C.C. car for both official and
private purpose, running and maintenance expenses are borne by the
employer.
k) Gas, electricity and water bills paid by employer Rs. 12,000.
l) Professional tax paid Rs. 2,500.
Compute his taxable income from salary for the assessment year
2010-11.
Problem 12
Discuss the tax treatment of following transactions.
a) Income tax received by assessee Rs 3,000 including interest of Rs 400.
b) Medical loan of Rs 25,000 taken from employer for disease specified in
rule 3A.
c) The employer has provided club facility for personal use of assessee
( expenditure of the employer Rs 52,000).
d) Interest received on NSE Rs 5,000.
e) Investment in shares of a company engaged in operating an
approved infrastructure facility Rs 60,000.
f) Employer is a corporate member of a club of which initial fees is Rs
1,00,000 and annual expenditure of Rs 30,000, paid by the employer.
The membership is enjoyed by the assessee.
g) Assessee has been provided with a television set of Rs 50,000 used
for personal purpose, WDV of the same is Rs 30,000.
h) X ltd sold computer to Anil. Compute taxable perquisite from the following
information.
Date of purchase 1st June 2006 at Rs 2,00,000
Date of sale 18 August, 2009 for Rs 20,000.
i) Calculate basic salary from the following information
j) Basic salary received Rs 94,500 after adjusting TDS Rs 5,000,
contribution to RPF 15% of basic salary & Professional tax Rs 2,500
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k) Grade system 5000-1000-8000.

l) Cash gifted by employer to employee Rs 2,500.
m) After joining X Ltd. from 1-4-2009, Raj, an engineer, resigned from Y
Ltd. (after serving for 10 years) and received Rs. 15000 as balance
of recognized provident fund. Raj joined X Ltd. with the following
salary structure:
Problem 13
Basic salary received after adjusting- Rs. 94500
-Tax Deducted at Source Rs. 5000
-Contribution to RPF (employer contributes same amount) 15% of
basic
-Professional tax Rs. 2500
Dearness Pay 25% of
basic
Transport allowance (actual expenditure Rs. 500 p.m.) Rs. 1000
p.m.
Arrear bonus Rs. 10000
Entertainment allowance Rs. 2000
p.m.
Holiday trip allowance Rs. 5000
Rend free accommodation at Delhi (owned by employer) Fair Rs. 24000
rent Rs. 2000 p.m.
Repair expenditure on above house incurred by employer Rs. 25000
Expenditure incurred by Raj on books and periodicals Rs. 1200
relating to his job.
Raj acquired 1000 shares of employer-company under an
specified employee stock scheme at concessional rate of Rs.
45 (Market price of share is Rs. 60)
On 31-10-2009, X Ltd. sold a furniture (original cost Rs.
100000 purchased on 1-4-2001) to Raj for Rs. 5000.
n) Compute taxable salary for the A.Y. 2010-11.
END OF TOPIC
TOPIC 5: INCOME FROM HOUSE PROPERTY
1. CHARGEABILITY (SECTION 22)

The annual value of property consisting of any buildings or lands
appurtenant thereto of which assessee is the owner shall be subject to
income tax under the head ‘Income from house property’ after claming
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deduction under section 24. The basis for calculating income from house
property is annual value. This is the inherent capacity of the property to
earn income.
Here appurtenant means approach road to and from public streets,

compound, courtyard, backyard, playground, motor garage etc
2. ESSENTIAL CONDITIONS FOR CHARGING INCOME UNDER THIS

HEAD
1. The property must consist of buildings and lands appurtenant
thereto.
Here buildings include residential buildings, building let out for office or
for storage or for a use a dance hall, lecture hall and public auditorium
used for cinema and stage shows.Roof is not necessary but structure
should be permanent in nature.
2. The assessee must be owner of house property. Owner includes legal

owner as well as deemed owner. The annual value of property is taxed
in the hands of owner even if he is not in receipt of income. Section 27
provides that the following persons are to be treated as deemed owner;
• The person who transfer property to spouse or minor child
• Holder of impartiable estate
• Property held by member of Co-operative
Society/Company/AOP
• A person who has acquired property under a power of attorney
transaction
• A person who has acquired a right in a building under section
269UA (f)
3. Property should not be occupied by the owner for his own business or
profession.
Important Notes
• Vacate plot can not be treated as HP. Income from vacate plot
treated as income from other source.
• House property in foreign country is taxable in India for RNOR
& NR provided that income is received in India during the
previous year.
• If title of ownership of a house property is under dispute in a
court of law, IN such case person who is in receipt of income or
who enjoys the possession of the property is assessable to tax.
• Property held as stock in trade is not taxable under his head.
• If assessee is engaged in the business of letting out house
property on rent.
• If property owned by co-owners then income is chargeable to
each owner according to their respective share (Section 26)
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• Income from subletting is taxable as business income or

income from other source.
• When HP is provided by employer to his employees in the
interest of his business then rent received from such HP is
treated as business income & not HP income.
• Composite rent
Sometimes along with rent assessee gets additional rent for
furniture & other services given. The tax treatment of
composite rent is as under
a) Such composite rent will be splited & rental income will be
taxable under HP income & rent attributable for providing
additional services will be treated as income from business or
profession or income from other source.
b) If letting of HP is not possible without letting out of other
assets then such total income will be treated as income from
business or profession or income from other source.
• Rent from paying guest is generally, taxable under the
head income from other source
• If property is let out to Govt. agencies for locating branch
of a nationalized bank, post office for the purpose of running
the business of assessee more efficiently, such rent shall be
chargeable under head profits & gains of business or
profession.
3. IMPORTANT CONCEPTS
Annual value
As per section 23(1)9a) the annual value of any property shall be the sum
for which the property might reasonably be expected to be let out from
year to year. It is something like notional rent.
Municipal value
This is value as determined by the municipal authorities for levying
municipal taxes on house property.
Fair rent
Fair rent is the rent which a similar property can fetch in the same or
similar locality.
Standard Rent
The standard rent is the maximum rent which can be collected by landlord.
This is fixed under rent control act.
Unrealised Rent
Rent due from tenant but not received
Vacancy allowance
Period for which house remain vacate
Computation of income from house property
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PARTICULARS RS RS
Gross annual value [sec 23(1)] XXX
Less: municipal taxes, water tax , sewerage XXX
tax
XXX
= Net annual value
Less: deduction u/s 24 XXX
30% of net annual value [sec 24(a) ] XXX XXX
Interest on housing loan [sec 24(b) ]
XXX
= Income from house property
4. HOW TO CALCULATE GROSS ANNUAL VALUE

1. The GAV is determined for different type of house property
a) House property which is self occupied
b) House property which is let out throughout the previous year.
c) House property which is partly let out & partly self occupied.
Calculation of GAV is shown below
A) Self Occupied Property

GAV of one self occupied (not let out during the whole or any part of the
previous year) property is taken as nil. If assessee is using more than one
house property for his residence then GAV of one house property as per
his choice (maximum municipal value) is taken as nil & other is deemed to
be let out. It means calculation for second HP will be like let out property.
B) Let out property

Under this category four situations exist, accordingly GAV is to be
calculated.
Situation 1: When HP is let out for the year & no unrealized rent &
no vacancy allowance
(House was let out for 12 months, & rent for 12 month received)
Step 1. Calculate expected rent

a) Fair rent
b) Municipal value
c) Standard rent
Therefore expected rent = Higher of a or b subject to maximum of
c
Step 2.
a) Expected rent
b) Annual rent
Therefore GAV = Higher of a or b
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Example
Calculate GAV for the following House properties
Rs in thousand
PARTICULARS H1 H2 H3 H4 H5
Municipal value 105 105 105 105 105
Fair rent 107 107 107 107 107
Standard rent NA 88 88 135 135
Annual rent 102 110 85 112 96
Period of let out (months 12 12 12 12 10
)
Situation 2: When HP is let out for the year & no vacancy

allowance but Unrealised rent is there (House was let out for 12
months, & rent received for less than 12 months)
a) Fair rent
b) Municipal value
c) Standard rent
c
Step 2.
a) Expected rent
b) Annual rent – Unrealised rent
Therefore GAV = Higher of a or b
Example
Rs in thousand
PARTICULARS H1 H2 H3 H4 H5
Municipal value 60 60 60 112 117
Fair rent 68 68 68 117 117
Standard rent 62 62 70 115 115
Annual rent 66 66 72 120 110
Unrealised rent 2 6 5 50 40
Period of let out (12
months for all HP
Situation 3: When HP is let out for the year & no Unrealised rent
but vacancy allowance is there (House was let out for less than12
months, & rent received for that period)

a) Fair rent
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b) Municipal value
c) Standard rent
c
Step 2.
a) Expected rent
b) Actual rent receivable (ARR) = Annual rent – vacancy
allowance
Therefore GAV =
a) If ARR is less only due to vacancy then GAV = ARR
b) If ARR is less not only due to vacancy but other reasons then
GAV =expected rent
Example
Rs in thousand
PARTICULARS H1 H2 H3 H4 H5 H6 H7
Municipal value 200 300 400 500 80 300 300
Fair rent 300 600 750 180 78 200 400
Standard rent 300 180 280 225 76 250 240
Annual rent 600 900 300 240 NA 216 240
Vacancy period ( in 1 3 2 1 12 2 1
months)
Situation 4: When HP is let out for the year & there is unrealised
rent & vacancy allowance is there (House was let out for less than12
months, & rent received for less than let out that period)
a) Fair rent
b) Municipal value
c) Standard rent
c
Step 2.
a) Expected rent
b) Annual rent – Unrealised rent – vacancy allowance = Actual
rent
Therefore GAV =
a) If actual rent + vacancy allowance > expected rent then GAV
= actual rent
b) If actual rent + vacancy allowance < expected rent then GAV
= expected rent
Example
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Calculate GAV for the following House properties Rs in

thousand
PARTICULARS H1 H2 H3
Municipal value 150 180 120
Fair rent 140 140 240
Standard rent 120 240 300
Annual rent 180 300 150
Unrealised rent 25 40 20
Vacancy allowance ( months ) 3 1 0
C) House property which is partly let out & partly self occupied
Calculation of GAV depends upon
Area wise division: (for e.g. 60% SO & 40% LO)
In this case, a house property consist of two or more independent units

and one or more of which are self occupied and remaining are let out.
Treatment
SO unit & LO unit are treated as separate units.

M.taxes, fair rent, standard rent, municipal value shall be proportionately
divided.
Example:
Miss Nita has a house property having two separate residential units (unit
A 40% SO & unit B 60% LO). Unit B is let out on a monthly rent of Rs
3,000. With the following further information, compute her taxable income
from house property.
Municipal value Rs 1, 00,000
Fair rent Rs 1, 20,000
Standard rent Rs 2, 00,000
Municipal tax 10%
Interest on loan Rs 30,000
ii) Time wise division: (for e.g. 9 months SO & 3 months LO)
Treatment
• Such property will be treated as let out throughout the year.

• Expected rent shall be taken for the full year but rent should be taken for
let period period only.
Example:
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Mr. Amit used his house property for self occupation till 01/08/2009 and let
out the same for remaining period for rent Rs 6,000 per month. Compute
his taxable income from house property from the following data
Municipal value Rs 1, 00,000
Fair rent Rs 80,000
Standard rent Rs 96,000
Municipal tax 16%
Interest on loan Rs 10,000
5. MUNICIPAL TAXES (includes fire tax, water tax, sewerage tax,

levied by a local authority)
Municipal taxes allowed as a deduction if
• M. Tax is paid during the P.Y.
• M. Tax is paid by landlord.
• If property is situated in a foreign country, tax paid to
foreign local authority shall be allowed as a deduction.
• Refund of municipal tax paid is not taxable.
• Advance municipal tax paid is not allowed as deduction.
6. DEDUCTION UNDER SECTION 24
a. Standard deduction u/s 24 (a) is 30 % of net annual value

b. Interest on borrowed capital is allowed if capital is borrowed for
purchase, construction, repair, renewal or reconstruction of the house
property.
Interest on self occupied HP

If capital is borrowed before 1.4.99 then Rs 30000 per year
If capital is borrowed on or after 1.4.99 Rs 150000 subject to following
condition
• The acquisition or construction should be completed within 3
yeas from the end of financial year in which the capital was
borrowed.
Interest on let out HP

For let out property interest paid/payable during the P.Y, is allowed a
deduction irrespective of the amount.
If capital is borrowed for any other purpose (reconstruction, repairs

or renewals of a house property), then maximum of deduction on account
of interest is Rs 30000 for SO property & for LO no restriction.
NOTE
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• In any case, deduction of interest on loan of self occupied

property cannot exceed Rs 1, 50,000 in a year.
Pre construction period

It is a period commencing on the date of commencement of construction
or the day of borrowing whichever is later and ending on (a)31 March
immediately prior to the date of completion of construction or (b) date of
repayment of loan whichever is earlier.
Example
Calculate pre-construction period from the following information.
Date of loan Date of Constructed Date of Pre
taken construction completion repayment construction
period
01/06/2001 15/05/2000 15/10/2006 10/01/2012
01/06/2001 02/02/2001 27/01/2005 20/04/2003
01/04/2009 01/04/2009 28/03/2010 25/04/2012
Pre construction Interest

Pre construction interest is deductible in 5 equal installment commencing
from the previous year in which the house is acquired or constructed.
Important Notes
• Interest is allowed as deduction on accrual basis.
• Interest on unpaid interest is not deductible.
• No deduction is allowed for any brokerage for arranging loan
• Interest on afresh loan, taken to pay the original loan is
allowed a deduction.
• Interest payable out of India is allowed as deduction if tax is
deducted at source.
• If capital is borrowed for the purpose of purchasing a plot of
land, interest liability is deductible even if construction is
finance out of own funds.
7. OTHER POINTS FOR CONSIDERATION
Recovery of unrealised rent allowed as deduction up to P.Y. 2001-

02 [Section 25A]
Where a deduction has been allowed in respect of unrealised rent in
assessment year 2001-02 or prior to that & subsequently the assessee
realise any amount in respect of such rent, the amount so received is
chargeable as income of P.Y. irrespective of the fact whether the assessee
is the owner of the property or not. No deduction is allowed on such
income.
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Amount to be added in HP income = Recovery of unrealized rent - ( earlier

deduction claimed – earlier deduction allowed)
Example
C owns a house property which is given on rent. For the PY 2000-01, he
claims a deduction of Rs 78000 on account of unrealised rent, out of which
the assessing officer allows only Rs 62,000 as deduction. What are the tax
consequences if X recovers on June 19, 2009 from the defaulting tenant
(a) Rs 10000 (b) Rs 16000 (c) Rs 35000 as full and final paymenet?
Unrealised rent belonging to the PY 2001-2002 onwards [Section

25AA]
Where the assessee cannot realise rent from a property let to tenant and
subsequently the assessee has realised any amount so realised shall be
deemed to be income chargeable under this and accordingly charged to
income tax as an income of P.Y.
Special provisions for arrears of rent received [Section 25B]

Where assessee receives any amount, by way of arrears of rent (like
enhancement in rent with retrospective effect) from such property, not
charged to income-tax for any P.Y., the amount so received, after
deducting a sum equal to 30 % of such amount. Shall be deemed to be the
income chargeable under the head income from house property. Such
income is taxable on receipt basis. No other deduction is allowed.
Example
Mr. Lucky owns a house property let out since 01/04/05 to a school for
monthly rent of Rs 10,000.
There was no change in rent till 31/03/2010. On 01/04/2010, as per court
decision rent was increased to Rs 12,000pm with retrospective effect
from01/04/2007 and duly paid by school in the same year. Legal
expenditure incurred for such suit is Rs 30,000. Discuss tax treatment u/s
25B.
When property income is not charged to tax

For the following cases rental income is not charged to tax
1. Income from farm house
2. Property income of a local authority
3. One self occupied property
4. House property held for charitable purpose
5. Property used for own business
6. Property income of trade union
7. Property income of an educational institute & hospital [Sec 10(23)]
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PROBLEMS ON INCOME FROM HOUSE PROPERTY

Problem 1:
Calculate interest deduction for AY 2010-11.
• Loan taken by X Rs 1, 00,000 @ 12% on 1-4-98 & amount as well as
interest is unpaid.
• Loan taken by Y Rs 10,00,000@ 12% on 1-4-2000 & amount as well as
interest is unpaid.
Construction completed on 12-4-2002.
c) Loan taken by Z Rs 1,80,000 @15% on 1-4-98 and further borrowed Rs
10,00,000 @ 10% on
7-08-1999 for construction of the house property and such amount is
still unpaid. Construction completed on 10-02-2000.
d) Loan taken for repairs of property Rs 5,00,000 @ 12%
e) Loan taken by mortgaging H1 & funds utilized for construction of H2.
Interest paid Rs 10,000.State which HP can claim deduction?
Problem 2:
Calculate GAV for the following let out house properties.
Annual rent Rs Municipal Fair rent Rs
valuation Rs
House 1 80000 70000 60000
House 2 60000 80000 50000
House 3 20000 48000 60000
Rent control act is not possible.
Problem 2:
Calculate GAV for the following properties.
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Annual rent Municipal Fair rent Rs Standard

Rs valuation Rs rent Rs
House 1 120000 100000 112000 80000
House 2 80000 60000 68000 100000
House 3 132000 140000 112000 160000
Problem 4:
Ashutosh own three houses for his residential purposes. The following are
the details of these houses:
House I House House III
II
(1 Municipal valuation 82,000 50,000 70,000
)
(2 Fair Rent 75,000 60,000 65,000
)
(3 Standard Rent (as per Rent 70,000 70,000 65,000
) Control Act.)
(4 Municipal Taxes 8,200 6,000 7,000
)
(5 Repairs 8,000 6,000 -
)
(6 Ground Rent is paid @ 10% of Net Annual Value in Respect of
) each house.
(7 Interest paid on Capital borrowed for renewal of house property
) No. I and III amounting to Rs. 28,000 and Rs. 32,000
respectively. The loan was taken on 1st June, 2000.
You are required to determine taxable income from house property of Mr.
Ashutosh, for the A.Y. 2010-11.
Problem 5:
Mr. Dilip has occupied two houses for his residential purposes, particulars
of which are as follows:
House House No. II
No. I
Rs. Rs.
Municipal Valuation 60,000 30,000
Fair Rent 85,000 32,000
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Standard Rent 65,000 36,000

Municipal Taxes paid 10% 10%
Fire Insurance 600 360
Interest on capital borrowed for 141600 nil
construction
The amount of loan was Rs. 9, 44,000 @ 15% p.a. taken on 10 th April,
2009, construction was completed on March 10, 2010 and loan is yet to be
repaid.
Compute his income from House Property for the P.. Y. 2009-10.
Problem 6:
Mr. Suresh owns a residential house property. It has two equal residential
units. Unit I and Unit II. While Unit I is self-occupied by Mr. Suresh for his
residential purpose. Unit II is let (rent being Rs. 6000 per month, rent of
two months could not be recovered.) Municipal value of the property is Rs.
1, 30,000, Standard Rent is Rs. 1, 25,000 and fair rent is Rs. 1, 40,000.
Municipal tax is imposed @ 12% which is paid by Mr. Suresh. Other
expenses for the previous year 2009-10 being repairs Rs. 250, insurance
Rs. 600, interest on capital (borrowed during 1995) for construction the
property is Rs. 63,000.
Find out the income of Mr. Suresh for the previous year 2009-10 on
the assumption that income of Mr. Suresh from other sources is Rs. 1,
80,000.
Problem 7:
X (age 67 yrs) owns two houses. Relevant details are given below.
PARTICULARS HOUSE 1 HOUSE2
Let out April 1, 2009 to June 30, July 1, 2009 to 31 March,
2009 rent Rs 6000 pm 2010, rent Rs 13000 pm
Self occupied July 1, 2009 to March 31, April 1, 2009 to June 30,
2010 2009
MV 60000 100000
FR 70000 95000
SR 66000 110000
Rent of let out 18000 117000
period
Interest on 2000 40000
borrowed capital
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Municipal tax paid 10000 17000
Assuming that income of X from business is Rs 12,00,000 and he deposits

Rs 70,000 in PPF find out his net income and tax liability for the AY 2010-
11.
Problem 8:
Bali owns a property; it is given on rent (being Rs 12,000 p.m.) to Sachin.
Municipal value of the property is Rs 1, 60,000, fair rent is Rs 1, 75,000
and standard rent is Rs 1, 64,000. Municipal tax paid by Bali is as follows –
Rs 10,000 on March 31st 2009 and Rs 3,000 on June 30, 2009. During the
PY 2009-10, rent is increased from Rs 12,000 p.m. to Rs 15,000 p.m. with
retrospective effect from April 1, 2008. Arrears of rent of PY 2008-09 are
paid on June 30, 2009. Compute income chargeable to tax for AY 09-10 &
10-11.
Problem 9:
X (age 66yrs) has occupied three houses for his residential purposes,
particulars of which are as follows:
PARTICULARS H1 H2 H3
Standard rent 15000 20000
Municipal valuation 10000 30000 30000
Fair rent 18000 18000 35000
Municipal taxes paid 1200 2400 3600
Repairs 200
Ground rent 1800 7000 400
X borrows Rs 30,000 @ 20% per annum for construction of house III ( date
of borrowing June 1, 2002, date of repayment of loan : May 10,2011).
Construction of all the houses is completed in May 2007. X is a salaried
employee, drawing Rs 12,40,000 per annum as salary. Determine the
taxable income and tax liability of X for the AY 10-11on the assumption
that he contributes Rs 24,000 towards RPF.
Problem 9:
Mr. Ajanabi has a house property in Cochin. The HP has two equal
dimension residential unit. Unit 1 is self occupied through out the year and
unit 2 is let out for 9 month for Rs 10000 pm and for remaining 3 month it
was self occupied. Compute his taxable income form the following data.
MV Rs 200000, Fr Rs 160000, SR Rs 300000 , municipal tax 10% ( 60%
paid by the assessee).
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Interest on loan Rs 40000, expenditure on repairs Rs 20000. Calculate

income from HP for AY 2010-11.
END OF TOPIC
TOPIC 6:INCOME FROM BUSINESS AND PROFESSION
1. INTRODUCTION
This is the third head of income. Under this head profit and gains of
business or profession are chargeable to tax. The term business includes
any trade, commerce, manufacture. Though the definition is not
exhaustive, it covers every activity carried out with view to earn profit. The
term profession involves attainment of specific skills for specific task. Such
skills can be acquired after patient study and application.
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2. BASIS OF CHARGE [SEC 28]

Under sec 28 following income is chargeable to tax
A. Profits or gains of any business or profession
B. Income from speculative transaction
C. Any sum received under a key man insurance policy
D. Export incentive available to exporter
E. Value of any benefits arising from a business or exercise of a
profession
F. Interest, salary, bonus, commission received by a partner from
such firm.
G. If an assessee deals in lottery tickets and some of the tickets
remained unsold, any winning form such unsold lottery tickets shall
be treated as business income.
Income not chargeable under the head profits and gains of business or
profession
A. If assessee is engaged in business of letting of HP then such income
is HP income.
B. Dividend on shares is taxable under income from other source even
though the assessee deals in share and such shares are held as
stock in trade. The provision is not applicable in case on interest on
securities held as stock in trade.
3. BASIC RULESFORARRIVING AT BUSINESS INCOME

A. Business or profession must be carried out by assessee
B. Tax is chargeable on the total income from all businesses or
profession carried out on by the assessee.
C. Business or profession should be carried out during the previous
year
D. Actual profit is considered for tax purpose. Anticipated profit is
not important.
E. Any sum recovered by assessee during the previous year in
respect of an amount or expenditure which was earlier allowed as
deduction, is taxable as business income of the year in which it is
recovered.
F. It is not concern with legality of business. Therefore legal as well
as illegal income is taxable.
4. METHODS OF ACCOUNTING
Income form business or profession and Income from other sources will
be calculated in accordance with method of accounting followed.
A. Mercantile method of accounting
Under this method profit or loss is to be calculated by considering all
incomes and expenditures of a particular year irrespective of the fact
that whether income is received or not and whether expenditure is paid
or not.
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B. Cash system of accounting

Under this method, a record is kept of actual receipts and actual
payments of a particular year. Under this system income collected
during the previous year is taxable whether it relates to the previous
year or not. Similarly, expenditure actually paid during the previous
year is deductible irrespective of the fact whether it relates to the
previous year or some other year.
5. GENERAL PRINCIPLE TO BE FOLLOWED IN COMPUTATION OF

PROFIT
A. Profit must be computed according to accounting method followed
by the oganisation.
B. Expenses incurred during the previous year are allowed as
deduction.
C. Expenses allowed as deduction must be related to business.
D. Deduction can be made from the income of that business only for
which the expenses were incurred.
6. HOW TO CALCULATE BUSINESS INCOME
Statement showing computation of business of …….. For the A.
Y…………………
Profit as per profit & loss a/c .................
Add : Disallowed Expenses (Amount debited to
...
Profit & Loss A/c but not allowed)
1. All provision and reserves
2. Income tax, wealth tax .................
...
3. All capital expenses (except on scientific research) .................
...
4. All capital losses .................
...
5. All charity and donations .................
...
6. All expenses relating to other heads of income .................
(e.g. taxes on house property, etc.) ...
7. All personal expenses .................
...
8. Any depreciation, if wrongly debited. .................
...
9. Gifts and present (Non advertisement) .................
...
10 Any type of fine or penalty .................
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. ...
11 Losses from earlier years .................
. ...
12 Any other expenditure which is not incurred .................
. according to the provisions of law or which is ...
beyond the admissible limits
Add : Amount not credited though taxable under this head
1. Chargeable income but not credited, deemed .................
profits, Unexplained investments ...
Less : Expenses allowed but not debited to Profit & Loss A/c.
1. Allowed depreciation .................
...
2. Capital expenditure on scientific research .................
...
3. Capital expenditure in family planning to the .................
extent 1/5th only for company assesses ...
4. Expenses of earlier years but disallowed then .................
because of non-payment ...
5.. Actual bad debts (not charged to Profit & Loss A/c. .................
...
6. Difference due to under debiting of stock .................
...
7. Any other expenditure incurred according to .................
provisions of law ...
Less : Income not taxable under this head
1. Interest on securities .................
...
2. Rental income .................
...
3. Dividends, Bank-interest, winning from lotteries, .................
etc. ...
4. Capital gains .................
...
5. Refund of income-tax, etc. .................
...
6. bad debts recovered disallowed earlier .................
...
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7. Agricultural receipts .................

...
8. Life insurance maturity amount .................
...
9. Withdrawal from PPF .................
...
10 Gifts from relatives .................
. ...
Add : Income from any other business (legal or .................
illegal) ...
Taxable profit from business or profession .................
...
7) EXPENSES ALLOWED AS DEDUCTION [SEC 30 TO 37]
7A) Rent, rates, taxes, repairs and insurance for building (sec 30)
• Rent paid for premises used for business or profession is allowed as
a deduction.
• Rent paid to proprietor is disallowed but rent paid by firm to its
partner is allowed as a deduction.
• Only current repairs are allowed as a deduction but capital repairs
are not allowed as a deduction.
7B. Repairs and insurance of machinery, plant and furniture but
not capital
expenditure (sec 31)
7C. Depreciation allowance (Sec 32)

Conditions to claim depreciation
• Asset must be owned by the assessee.
• It must be used for the purpose of business,
• Used during relevant previous year.
• Depreciation is available on tangible as well as intangible assets.
Block of asset
• Block of assets means group of asset falling within a class of asset.
How to calculate depreciation

• Find out the depreciated value of the block on the April 1.
• Add assets acquired during the year
• Less Assets sold/ discarded/ demolished or destroyed including
scrap value during the PY.
• The balance amount is the value if relevant block on 31st March.
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Exception to above rules
a) If WDV is reduced to zero though the block is

not empty
No depreciation is admissible.
• Excess of sale consideration over the value of block
will be treated as short term capital gain.
Example 1
On April 1, 2009 WDV is Rs 50,000(dep 15%). It consist of plants C& D.
The assessee purchase plant of Rs 25,000 (dep rate 15%) during PY 09-
10 and sells plant C for Rs 85,000.
Calculate depreciation & capital gain.
b) If all assets of the block have been transferred

and block is empty on the last day of previous year
No depreciation is admissible.
• If closing WDV if positive then it will be treated as short term
capital loss & if it is negative it will be treated as short term capital
gain.
Example 2
X ltd owns two plant A & B. On April 1, 2009 (rate 15%), depreciated
value on April 1, 2009 was Rs 2, 37,000. The company purchased plant
C on May 31, 2009 for Rs 20,000.Calcuate depreciation & capital gain if
all plants were sold on 30 March, 2010 for (a) Rs 55,000 (b) Rs
3,25,000.
c) When an asset is put to use for less than 180 days in the
year of acquisition.
• If any asset is acquired during the PY and put to use for less than
180 days then depreciation shall be restricted to 50% of the amount
calculated at the percentage prescribed.
• Here use means ready to use.
• These rules are applicable in the first year, in which an asset is a
acquired. In subsequent year if the asset is put to use for sometimes
(may be less than 180days) usual depreciation is available.
Example 3
Calculate depreciation form the following information.
Date of purchase Date of put to Dep rate How much can be
use (%) claimed?
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01/04/2009 01/04/2009 15%

01/04/2009 30/09/2009 20%
05/05/2009 31/12/2009 20%
31/12/2009 31/03/2010 10%
31/12/2009 01/04/2010 10%
Unabsorbed Depreciation (Sec 32(2))

• It means depreciation which could not be fully deducted from
profit of current year of business due to insufficient profit.
• The unabsorbed depreciation can be deducted from income under
any head except casual income and salaries & it can be carried
forward for indefinite period.
• For set-off purpose following order should be followed
o Current year depreciation
o Brought forward business loss
o Unabsorbed depreciation
7D. Tea/ coffee/ rubber development account [Sec 33AB]
An assessee can claim deduction under section 33AB as follows
• The assessee must be engaged in tea, coffee, or rubber plantation.
• It must make a deposit in special account (With NABARD).
• The deposit should be made within specified time-limit. (6 month
from the end of PY or date of furnishing return whichever is earlier)
• The accounts of the assessee should be audited.
Exemption limit
• Amount deposited in special account
• 40% of the profit of such business before deduction under sec
33AB and before adjusting b/f business loss under sec 72.
Whichever is lower.
Note
The amount deposited in scheme can be withdrawn for the purpose
specified in the scheme (closure of the business / dissolution of
firm).The amount if not so utilized will be treated as taxable profits
of that year & taxed accordingly.
7E. Site restoration fund [Sec 33ABA]

An assessee can claim deduction under section 33ABA as follows
• The assessee must be engaged in production of petroleum/ natural
gas in India
• It must make a deposit in special account (With SBI).
• The deposit should be made within specified time-limit. (6 month
from the end of PY or date of furnishing return whichever is earlier)
• The assessee has an agreement with the central govt.
• The accounts of the assessee should be audited.
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Exemption limit
• Amount deposited in special account
• 20% of the profit of such business before deduction under sec
33AB and before adjusting b/f business loss under sec 72.
Whichever is lower.
Note
The amount deposited in scheme can be withdrawn for the purpose
specified in the scheme (closure of the business / dissolution of
firm).The amount if not so utilized will be treated as taxable profits
of that year & taxed accordingly.
7F. Expenditure on scientific research (sec 35)

There are two types of research
A) In-House research
REVENUE EXPENDITURE
1) Revenue research expenditure incurred by assessee related to his
business after commencement is allowed as deduction in the year
in which it is incurred.
2) Revenue expenditure incurred before the commencement of
business (but within 3 yrs immediately before commencement of
business) on scientific research is deductible in the PY in which
business is commenced.( expenditure on salary to an employee
engaged in scientific research excluding perquisite and materials
used for scientific research)
CAPITAL EXPENDITURE
1) Capital expenditure incurred after commencement on scientific
research is deductible at the rate 100% in the year in which
expenditure is incurred even though relevant asset not put to use
for R &.D.
2) Capital expenditure incurred before the commencement of
business (but within 3 yrs immediately before commencement of
business) on scientific research is deductible in the PY in which
business is commenced.
3) Asset which is used for scientific research is not eligible to claim
depreciation.
In house research not related to assessee business shall not be allowed as
deduction.
B) Research through outside institutes
• If the payment is made to national laboratory,

university, Indian institute of technology or specified person notified
by govt. then deduction available is 125% of contribution.
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C) In-House research & development expenses incurred by certain

companies (Sec 35(2AB)
• Company engaged in the business of bio-
technology or any business of manufacture or production of any
article, weighted deduction of 150% of expenditure incurred on in-
house research and development facility shall be allowed.
D) If such asset is sold without use then cost of such asset will be treated
as business income in the year of sale & excess of sale consideration
over cost or indexed cost shall be treated as capital gain.
7G. Expenses incurred on acquisition of patent and copyrights

(sec 35A)
Any capital expenditure incurred (before 1-4-98) on acquiring patent
rights or copyrights used for the purpose of the business
allowable as business expenditure in equal installments over a period of
14 years. If capital expenditure incurred after 1-4-98 then one can claim
depreciation under section 32 @ 25%. Revenue expenditure allowed as
deduction under section 37(1).
7H. Expenditure on know-how (sec 35AB)

If expenditure on acquisition of know-how is incurred after 31st march,
1998 depreciation is available under section 32. Now days no deduction
is available under sec 35AB.
7I. Amortization of preliminary expenses (sec 35D)

1) Deduction is available to Indian company or resident non- corporate
assessee.
2) Preliminary expenses are the expenses incurred at the formation
stage may be during the commencement stage or thereafter.
Preliminary expenses includes
• Preparation of feasibility report
• Preparation of project report
• Legal charges
• Printing expenses of MOA & AOA
• Registration fees
• Expenses in connection with issue of shares or debentures of
company
k) Amount of deduction
In case of corporate assessee:
5% of cost of project or 5% of capital employed whichever is more
In case non corporate assessee:

5% of cost of project
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1/5th of the qualifying expenditure is allowable as deduction in each of

the five successive years beginning with the year in which the business
commences or the PY in which extension of the undertaking is
completed.
7J. Amortisation of expenditure in the case of amalgamation/

demerger [Sec 35DD]
• Deduction is available to an Indian company.
• 1/5th of the qualifying expenditure is allowable as deduction in each
of the five successive years beginning with the year in which the
amalgamation or merger takes place.
7K. Expenditure on voluntary retirement [Sec 35DDA]

Whole expenditure related with VRS being allowed as deduction in 5
equal installment beginning from the year in which the expenditure is
incurred.
7L. Family planning expenditure

Any expenditure incurred by company for the purpose of promoting
family planning among its employee, is allowable as deduction. If,
however, such expenditure is of capital nature, one fifth of such
expenditure is as deduction. In case revenue expenditure full
deduction is available in the year in which it is incurred.
7M. other deduction

• Insurance premium on property
• Mediclaim of employee other than by way of cash is allowed as a
deduction.
• Bonus or commission is allowed as deduction only when payment
is made during the previous year or on or before the due
date of filling of return under section 139.
• Interest on loan taken for business.
o If borrowed money is utilized in earning non-assessable
income, no deduction is available.
o Interest paid outside India is allowed as deduction only if tax
has been deducted at source.
o Brokerage & commission for arranging loan paid to an agent is
not allowed as deduction.
o Interest on money borrowed to pay income tax is not allowed
• Contribution to approved gratuity fund. Employee’s contribution

must be deposited before relevant due date otherwise it is treated
as business income of the assessee.
• Bad debts is allowed as deduction subject to following
conditions
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o There must be debt related to the business.

o Such debt must have been taken into account in computing
assessable income.
o Debt must have been written off in the books of assessee.
o Debt should be revenue in nature.
o Bad debt is discontinued business is not allowed as deduction
even though the assessee has any other business continued.
o Bad debt is not allowed as deduction to the assessee who
maintains accounts on cash basis.
o Recovery of bad debts (sec 41(4))
1) Recovery of bad debts is taxable if it was allowed as
deduction earlier.
2) Taxable recovery of bad debts = Amount recovered – (bad
debt claimed – bad debt allowed as deduction)
3) Such recovery is taxable whether the business is continued
or not.
• Advertisement other than incurred by assessee on advertisement in

any souvenir, brochure published by political party
• Traveling expenditure
• Expenditure on maintenance of guest house
• STT paid by assessee during previous year shall be allowed as
deduction provided income arising from such transaction is included
in the business income.
7N. Deduction under sec 37(1)

• Litigation expenses incurred in order to defend or maintained an
existing title to the assets is allowed but if it for curing any defect in
the title of asset shall not be allowed(as because it is of capital
nature).
• Legal charges(stamp duty, registration fee) incurred for obtaining a
loan
• Damage paid to worker to dismiss him in the interest of the
business.
• Professional tax
• Annual listing fees paid to stock exchange
• Donation to specific funds
• Royalty paid
• Expenditure on issue of bonus shares
• Premium paid for keyman insurance policy is allowed.
• Expenses on registration of trade mark is allowed.
• Deposit made under Tatkal Telephone Deposit scheme is allowed.
• Forfeiture of security deposit for breach of contract.
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• Expenses on registration of trademark.

• Penalty which is compensatory in nature & and which is paid for the
breach of the contract is deductible.
8. EXPENSES DISALLOWED FOR COMPUTATION OF PROFIT AE PER

INCOME TAX
• Litigation expenses for issue of share capital & to protect trade mark
• Penalty, interest and fine paid under direct taxes is not deductible.
• Fees paid for increase share capital
• Payments made for acquisition of goodwill
• Interest, Royalty, fees for technical services outside India without
deducting TDS [Sec 40 (a) (i)]
• Fringe benefit tax [Sec 40 (a) (ic)]
• Income tax [Sec 40 (a) (ii)]
• Wealth tax [Sec 40 (a) (iia)]
• Salary payable outside India without tax deduction [Sec 40 (a) (iii)]
• Salary & interest paid to proprietor.
• Excessive Payment to relative [Sec 40A (2) ]
• Expenditure the payment of which made in cash or by a bearer
cheque or by a crossed cheque exceeding Rs 20000 [Sec 40 A (3)].
In such case 100% of expenditure is disallowed.
o Sec 40A (3) is applicable when the amount of bill & payment
exceeds Rs 20,000.
o Provision of Sec 40A (3) dose not apply in respect of an
expenditure which is not to be claimed as deduction under Sec
30 to 37.
9. AMOUNT NOT DEDUCTIBLE IN RESPECT OF CERTAIN UNPAID

LIABILITIES [SEC43B]
Sec 43(B) is applicable only if taxpayer maintains books of account on
the basis of mercantile basis. Following expenses are deductible on paid
basis
• Sales tax, Excise duty, custom duty, cess or fees by whatever name
called
• Contribution to RFP, Superannuation fund , gratuity fund for the
welfare of the employee
• Bonus, commission to employees
• Interest on loan from bank
• Municipal tax
Exception to above rule
Above mentioned expenditure are allowed as deduction if they
are paid before the due date filling return.
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10. CONCEPT OF DEEMED PROFITS

Following deemed profits are chargeable to tax
• Amount recovered against any deduction
• Sale of assets used for scientific research
Where any capital asset used for scientific research is sold
without having been used for any purpose other than scientific
research then sale price of such asset or deduction allowed under
Sec 35 whichever is lower is treated as business income.
• Recovery of bad debts
• Recover after discontinuance of business or profession.
11. COMPULSORY MAINTENANCE OF BOOKS OF ACCOUNTS [SEC 44

AA]
To understand provisions of compulsory maintenance of books of accounts
by certain person, it is necessary to understand concept of Specified
profession & Non-specified profession.
Specified person means accountancy, legal interior decoration, technical
consultancy, engineering, architectural, or ant other notified profession
(authorised representative, film artist, company secretary etc)
A non specified profession means any profession other than specified.
CATEGOR WHO COMES UNDER THIS BOOKS OF

Y CATEGORY ACCOUNTS
A Person carrying on specified Required to maintain
profession, if their gross receipts in books of accounts to
the profession do not exceeds Rs enable assessing
1,50,000 in any of the three year officer to compute
immediately preceding the previous taxable income.
year (same condition for newly set
up profession during previous year )
B Person carrying on specified Required to maintain
profession, if their gross receipts in books of accounts as
the profession exceeds Rs 1,50,000 prescribed by rule 6F to
in any of the three year immediately enable assessing
preceding the previous year (same officer to compute
condition for newly set up taxable income.
profession during previous year )
C Person carrying on non-specified Not required to
profession or any business if their maintain any books of
income from business or profession account.
dose not exceeds Rs 1,20,000 and
the total sales, turnover or gross
receipts are not in excess of Rs
10,00,000 in all the three year
immediately preceding the previous
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year (same condition for newly set

up profession during previous year )
D Person carrying on non-specified Required to maintain
profession or any business if their books of accounts to
income from business or profession enable assessing
exceeds Rs 1,20,000 and the total officer to compute
sales, turnover or gross receipts are taxable income.
in excess of Rs 10,00,000 in all the
three year immediately preceding
the previous year (same condition
for newly set up profession during
previous year )
12. WHEN AUDIT OF CERTAIN PERSON IS COMPULSORY [SEC 44AB]
If total sales turnover of business exceeds Rs 40lakhs in the PY then audit

is compulsory.
• In case of profession if total gross receipts exceeds Rs 10lakh in PY
then audit is compulsory.
• A person covered under sec 44AD, 44AE, 44AF
If such person claims that profit & gains from the business are lower
than computed under these section, then audit is compulsory.
13. SECTION 44AD (Person engaged in the business of civil

construction)
A) When sec 44AD is applicable?
• Tax payer may be any assessee.
• Engaged in the business of civil construction
• Gross receipts from the above business dose not exceed Rs 40 lakh.
B) Rate of income
If above conditions are satisfied then income is to be calculated at 8% of
the gross receipts.
C) Deduction
Deduction under sec 30 to 38 including depreciation & unabsorbed
depreciation are deemed to have been allowed and no further deduction is
allowed under this section except in case of partnership firm deduction in
respect of salary & interest to partner is allowed.
D) Books of accounts
Assessee is not required to maintained books of accounts & he is not
required to get his books of accounts audited.
E) IF income declare is lower than 8%
Assessee is required to maintained books of accounts & required to get his
books of accounts audited irrespective of turnover.
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F) Deduction under chapter VIA shall be available to the assessee as

usual.
G) Brought forward loss if any shall be subtracted from such estimated
income as per the provision of this act.
14. SECTION 44AF (Computation of profits & gains of retail

traders)
A) When sec 44AF is applicable?
• Tax payer may be any assessee.
• Engaged in the business of retail trade in any goods or merchandise
• Gross receipts from the above business dose not exceeds Rs 40 lakh.
B) Rate of income
If above conditions are satisfied then income is to be calculated at 5% of
the gross receipts.
C) Deduction
Deduction under sec 30 to 38 including depreciation & unabsorbed
depreciation are deemed to have been allowed and no further deduction is
allowed under this section except in case of partnership firm deduction in
respect of salary & interest to partner is allowed.
D) Books of accounts
Assessee is not required to maintained books of accounts & he is not
required to get his books of accounts audited.
E) IF income declare is lower than 5%
Assessee is required to maintained books of accounts & required to get his
books of accounts audited irrespective of turnover.
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PROBLEMS ON BUSINESS INCOME
Problem 1:
The following is the Profit and Loss Account of Mr. Anil for the previous
year 09-10.
Rs. Rs.
To Rates and Taxes 450 By Gross Profit 14,623
To Establishment 1,75 By Interest on Personal 577
(Staff) 0 Deposits
To Rent 600
To Household 1,45
expenses 0
To Discount 250
To Advertisement 200
To Income Tax 480
To Postage, Stationery 810
To Fire Insurance 150
To Gift and Presents 160
To Charity and 1,14
Donations (to 0
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approved institutions
To Purchase of Plant 1,50
and Machinery (not 0
yet installed)
To Repairs to furniture 50
To Interest on loan 1,00
0
To Life Insurance 600
Premium
To Reserve for 700
doubtful debts
To Interest on capital 250
To Net Profit 3,66
0
15,2 15,200
00
Computer Business Income of Mr. Anil.
Problem 2:
Mr. Mahalingam furnishes the following particulars. Compute his
income from business for the assessment year 2010-2011.
(a) Legal expenses to the extent of Rs. 5,000 represent the amount
spent for curing the defect in the title of business asset and
balance amount on acquiring the asset.
(b) Know-how was developed in a laboratory financed by the State
Government.
(c) Actual bad debts amounted to Rs. 3,000 only.
(d) Advertisement expenditure was paid in cash.
Profit and Loss Account for the year ended March 31, 2010
Rs. Rs.
To Trade expenses 1,500 By Gross Profit 1,00,0
00
To Wages and Salaries 33,00 By Refund of Income tax 22,15
0 penalty levied earlier 0
To Advertisement 20,00
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expenses 0
To Income-tax 7,500
To Contribution to Staff 1,000
Welfare Fund
To Donation to Rural 2,000
Development
Fund(Approved)
To Life Insurance 750
premium on own life
To Provision for doubtful 5,000
debts
To Interest on Capital 3,550
To Provision for sales 2,500
tax
To Expenditure on know 18,00
how 0
To Wealth-tax 5,000
To Gift-tax 1,500
To Gift to 20-customers 2,000
To Fire Insurance 850
Premium
To Legal expenses 8,000
To Net Profit 10,00
0
1,22, 1,22,
150 150
Problem 3:
The following is the Profit and Loss Account of Mr. Sathe for the year ended
31st March, 2010.
Compute his taxable income from business for that year:
Rs. Rs.
To Opening Stock 15,000 By Sale 80,000
To Purchases 40,000 By Closing 20,000
Stock
To Wages 20,000 By Gift from 10,000
Father
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To Rent 6,000 By Sale of Car 17,000

To Repairs of car 3,000 By Income Tax 3,000
Refund
To Wealth Tax paid 2,000
To Medical Expenses 3,000
To General Expenses 10,000
To Depreciation of car 4,000
To Advance Income Tax paid 1,000
To Profit for the year 26,000
1,30,00 1,30,0
0 00
The following further information is given:
(i) Mr. Sathe carries on his business from rented premises 1/2 of
which is used as his residence.
(ii) Mr. Sathe bought a car during the year for Rs. 20,000. He charged
20% depreciation on the value of car. The car was sold during the
year for Rs. 17,000.
The use of the car was 3/4th for the business and 1/4th for personal
purposes.
(iii) Medical expenses were incurred during sickness of Mr. Sathe for his
treatment.
(iv) Wages include Rs. 2,500 on account of Sathe's driver.
Problem 4:
Shri. Patil is the proprietor of a business. His Profit and Loss Account for
the year ended 31st March, 2010, is as follows:
Particulars Rs. Particulars Rs.
Establishment Expenses 4,800 Gross Profit 50,8
40
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Rent Rates and taxes 2,900 Interest on Govt. 5,40

Securities 0
General Charges 750 Rent from House 5,40
Property 0
Household Expense 1,730
Commission 1,500
Discount and Allowances 450
Provision for Bad Debts 1,200
Postage and Telegrams 270
Law Charges 450
Advertising 1,550
Gifts and Presents to 150
employees
Fire Insurance premium 360
(For goods)
Sale Tax Paid 1,450
Repairs and Renewals 480
(not for business
premises
Loss on Sale of Motor-car 1,800
(used for private
purpose)
Life Insurance premium 1,790
Wealth Tax 740
Interest on Capital 350
Audit Fees 300
Interest on Bank Loan 1,380
Provision for depreciation 2,500
Provision for Income tax 3,900
Net Profit transferred to 30,840
Capital A/c
61,640 61,6
40
Following further information is given:
a) Actual Bad Debts written-off during the year amount to Rs. 550.
b) Amount of Income tax actually paid during the year is Rs. 4,200.
c) Depreciation allowable is Rs. 1,700 as per Income tax rules.
d) Advertising Expenses include Rs. 550 spent on special advertising
campaign to open a new shop in the market.
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e) Law charges are in connection with protection of trademark.

f) Shri. Patil carries on his business from rented premises, half of
which is used as his residence. Rent, Rates and Taxes include Rs.
2,400 paid as rent of the premises during the year.
g) Bank loan is taken for business purposes.
Compute the business of Shri. Patil and his total Income for the A.Y.
2010-11.
Problem 5:
Dr. Deepak is a registered medical practitioner. He has prepared the
following Income and Expenditure Account for the year ending 31 st march,
2010. You are required to prepare a statement showing his income from
profession.
To Household 1,20,00 By Consultation fees 1,10,00
Expenses 0 0
To Car Purchased 1,30,00 By Visiting fees 1,20,00
0 0
To Traveling Exp. 4,000 By Gains on Race 10,000
(Personal) (gross)
To Charity & 1,000 By Share in sale
Donations proceeds
To Income tax 2,000 Of an ancestral house 34,000
To Salaries 8,000 By Profit on sale of 6,000
Securities
To Gifts to daughter 7,000 By Dividend on shares 5,000
To Establishment 1,000 By Interest from P.O.
Expenses Savings
To Surgical 4,000 By Bank 600
Equipments
To Books 1,200 By Gifts from Father-in- 2,000
Law
To Life Insurance 2,000 By Bad Debt recovered
Premium (not allowed in earlier 2,000
years)
To Wealth tax 1,000 By Int. on Fixed 1,300
Deposit (Gross)
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To Surplus 8,700
2,90,90 2,90,9
0 00
Rate of Depreciation allowable on car is 15% and on surgical equipments it
is @ 15%.
Problem 6:
From the following Profit and Loss Account of a business for the
period ended 31st March 2010 ascertain the taxable profits from
business.
Office Salaries 10,00 Gross Profit 1,57,5
Proprietor's Salary 0 Profit on Sale of 00
Int. on Proprietor's 5,000 residential house
Capital 2,000 Bad debts recovered 20,00
General Expenses 5,000 (not allowed as deduction 0
Bad debts 2,000 by Assessing Officer in
Advertisements 4,500 earlier previous year for
Fire Insurance Premium 2,000 lack of proof)
Depreciation 4,000 Interest from govt. 3,000
Reserve for future losses 8,000 securities
Custom Duty 2,000 Dividends from Indian 5,000
Income tax on last 4,000 Agricultural Companies
assessment 2,000 Interest from Post Office 2,500
Advance Income Tax paid Saving Bank A/c
Donations to Delhi Govt. 1,000 Refund of penalty on 2,000
to provide medical relief Custom duty paid in an
to the poor earlier year
Legal charges for 500 2,000
defending suit for alleged 1,000
breach of trading 1,39,0
contract 00
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Motor-car expenses
Net-Profit
1,92, 1,92,
000 000
Additional Information:
1) General expenses include Rs. 1,000/- paid as compensation to
and old employee whose services were terminated, as his
continuance was considered detrimental to the conduct of the
business and Rs. 200/- by way of help to poor university student.
2) The depreciation is found to be in excess by Rs. 1,800/-.
3) The advertisement cost includes on wooden showcase of Rs.
500/- calendars and diaries Rs. 1,500/-
4) Motor car expenses include Rs. 500/- as motor car expenses for
private use of car.
5) The Assessee has received demand notices of sale tax amounting
to Rs. 8,000/- and he has not disputed this liability. Reserve for
the future losses is meant for this liability.
6) The net consideration received on the sale of residential house of
Rs. 1, 50,000/-.
Problem 7:
Shri Paresh runs Mini Cement Plant. His profit and loss account for the
financial year 2009-10 is as under:
To Opening Stock 50,000 By Sales of Cement 10,00,
To Purchase of Material 2,38,0 By Car sold 000
To Purchase of Cement 00 By Dividend on shares of 80,000
To Preliminary Expenses 1,12,0 a Company 20,000
To Royalty 00 By Refund of Excise 12,500
To manager's Salary 42,000 Duty
To Excise Duty 25,000
To Interest on Loan 35,000
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To Depreciation on Car 26,300

To income - tax 28,000
To General Expenses 30,000
To Salary and Wages 20,000
To Sales Tax 84,000
To patent Purchased 88,000
To Entertainment 37,000
Expenses 35,000
To Net Profit 16,700
2,18,0
00
11,12, 11,12,
500 500
Additional information’s:
1) Opening stock is valued 20% under cost.
2) Wages include Rs. 5,000 paid to domestic servant
3) General expenses include Rs. 4,000 for clearing machine.
4) Preliminary expenses were made before production started.
5) Shri. Paresh is manager of factory himself.
6) During the previous year he purchased a car for Rs. 1, 50,000
which was sold for Rs. 80,000 on 1st January, 2008.
7) General expenses include following :
a) Donation to a public hospital Rs. 2,000.
b) Special advertising campaign undertaken in respect of new
product placed recently in the market Rs. 40,000.
c) Registration expenses for trade mark registration are Rs.
8,000.
d) Employee's family planning expenditure Rs. 7,000.
e) Subscription to Cement Syndicate Rs. 600.
Problem 8:
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The following is the Profit and Loss A/c for the year ended on 31st March
2010, furnished by Mr. Abhishek:
To Salary 78,00 By Gross Profit 2,00,0
To Advertisement 0 By Sundry Receipts 00
To Fire Insurance 8,000 By Bad Debts Recovered 8,400
To Office Expenses 3,500 (not allowed as deduction
To Depreciation 4,500 earlier) 5,400
T Bonus 15,80 By Gift from Father 25,00
To Income Tax 0 By Interest on Bank 0
To Sales Tax 12,80 Deposit 6,000
To Interest bank Loan 0
To. R.D.D. 8,600
To Net Profit 4,500
5,600
3,500
1,00,0
00
2,44, 2,44,
800 800
Other Information:
i) Salary includes Rs. 4,200 paid to a domestic servant.
ii) Advertisement includes Rs. 550 as expenditure incurred on it for
selling household furniture.
iii) Allowable depreciation as per I. T. Act is Rs. 14,000.
(iv) Sales Tax includes Rs. 500 as penalty for not filling returns in time.
(v) Bank Loan is for business purposes.
(vi) During the last year he comes to know that his former employee
had embezzled cash of Rs 5,000 on 31-03-10.
You are required to compute taxable income from business for the
assessment year 2010-11 of Mr. Abhishek.
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Problem 9:
The following is the Profit and Loss Account of Mr. Universe, Pune for the
year ending on 31st March, 2010:
Profit & Loss Account
Debit Rs. Credit Rs.
To Salary 1,60,0 By Gross Profit 4,20,0
To Rent and Taxes 00 By Commission 00
To Commission 60,00 By Sundry receipts 42,00
To Advertisement 0 By Interest on Fixed 0
To R.D.D. 16,00 Deposits 4,200
To Depreciation 0 By Gift from a Friend 35,00
To Conveyance 15,00 0
To Stationery 0 2,900
To Bonus 8,000
To Contribution to R.P.F. 22,00
To Interest on Capital 0
To Net Profit 8,400
15,20
0
16,00
0
12,50
0
13,00
0
1,58,0
00
5,04, 5,04,
100 100
a) Depreciation allowable under Income Tax Rules is amounted to
Rs. 18,000.
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b) Rent and taxes include Rs. 8,000 as property tax on residential

house of Mr. Universe.
c) Advertisement includes Rs. 12,000 as the cost of permanent sign
board fixed on the premises.
d) Sundry receipts Rs. 4,000 are in respect of recovery of personal
loan given to a friend of Mr. Universe.
assessment year 2010-11.
Problem 10:
The following is the profit and Loss Account for the year ended on 31 st
March, 2010 furnished by Mr. Vijay:
Profit & Loss Account
Rs. Rs.
To Salary 39,00 By Gross Profit 1,00,0
To Advertisement 0 By Sundry Receipts 00
To Fire Insurance 4,000 By Gift from father 4,200
To Office Expenses 1,750 By Bank interest 12,50
To Depreciation 2,250 By Bad debts recovered 0
To Bonus 7,900 (not allowed as deduction 3,000
To Income Tax 6,400 earlier) 2,000
To Sale Tax 4,300 By gift from supplier
To Interest on bank loan 2,250 700
To R.D.D. 2,800
To Net Profit 1,750
50,00
0
1,22, 1,22,
400 400
(i) Salary includes Rs. 2,100 paid to a domestic servant.
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(ii) Advertisement includes Rs. 275 as expenditure incurred for

selling household furniture.
(iii) Allowable depreciation as per income tax rules is Rs. 7,000.
(iv) Sake tax includes Rs. 250 as penalty for not filing return in time.
(v) Interest on loan paid outside India without deducting TDS.
(vi) Gift received was given by supplier for achieving target sale.
(vii) Bonus of Rs 4000 was paid before the due date of filling return.
assessment year 2008-09.
Problem 11.
Suggest right answers for the following cases given below.
1) Interest on non payment of sales tax duty Rs 5,000.
2) Penalty for evading sales tax 10,000.
3) Payment to an approved scientific research association for carrying on
scientific research Rs 1, 00,000 debited to P & L a/c.
4) Legal expenses in respect of income tax matters Rs 5,000,
5) Salary paid to employee Rs 22.000 in cash.
6) Medical premium of employee Rs 5,500 paid in cash.
7) Company deposits Rs 10,000 in PPF.
8) During PY 08-09 company has given advance Rs 50,000 to Toyato on
Jan 1, 2009 to purchase innova. Delivery is scheduled on April 10;
2009.The above amount is not debited to P & L account.
9) Find out excise duty deductible in PY 09-10 from the following
information.
Excise duty payable during the year Rs 1,00,000
Paid on 15-05-2009 Rs 26,000, Paid on 15-12-2009 Rs 24,000 Paid on 24-
04-10 Rs 20,000 & balance paid on 15-11-2010.
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10) Employer’s contribution to RPF Rs 12,000. One-half of the

amount is paid after due dates as per relevant Act but before 31-03-
2010.
11) Employees contribution to RPF Rs 12,000. One-half of the
amount is paid after due dates as per relevant Act .
12) Interest on late refund from Income tax dept Rs 500.
13) Sales include sale to Raj Rs 10,000. (cost of such goods Rs
8,000, market value of such goods Rs 12,000)
14) Recovery of bad debts Rs 10000 (out of which Rs 8000 was
allowed as deduction during AY 2006-2007)
END OF TOPIC
TOPIC 7: CAPITAL GAIN
1. MEANING & BASIS OF CHARGE [SEC 45]
Meaning:
As per sec 45(1) profits or gain arising on transfer of a capital
asset shall be chargeable under the head capital gains. Any gain
arising on the transfer of a capital asset is treated as capital gain. Such
gain is taxable under sec 45 if it is not eligible for exemption under sec
54, 54B, 54D, 54EC, 54ED, 54F, 54G and 54GA.
Basis of charge:
Capital gain’s tax liability arises only when the following conditions are
satisfied
A) There should be capital asset
Capital asset is defined to include property of any kind, whether fixed or
circulating, movable or immovable, tangible or intangible. The following
assets are, however, excluded from the definition of “capital assets”
1) Any stock-in-trade, consumable stores or raw material
held for the purposes of business or profession.
2) Personal effects that is to say, movable property
(including wearing apparel and furniture held for personal use
excluding Jewellery), held for personal use by the assessee or any
member of his family dependent on him.
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3) Agricultural land in rural provided it is not situated in

any area within the territorial jurisdiction of a municipality or a
cantonment board having population of 10000 or more or in any
notified area(less than 8km from the local limits)
4) 6.5% gold bonds, 1977, 7% gold bonds. 1980 or
National defence gold bonds, 1980 issued by central government.
5) Special bearer bonds, 1991 issued by central
government.
6) Gold deposit bonds issued under the gold deposit
scheme 1999.
From AY 08-09 jewellery, archaeological collection, drawings, paintings, sculptures or any
art work will not be taken as personal effects, consequently it will attract capital gain.
Types of capital assets
SHROT TERM CAPITAL ASSET

• Short term capital asset means a capital assets head by an assessee
for not more than 36 month, immediately prior to its date of transfer.
• When such period is taken as 12 months;
o For shares, mutual fund units of UTI, Zero coupon bounds,
o Any security e.g. debenture, government securities etc listed
in recognized stock exchange in India
o As per Sec 50 any gain on transfer of depreciable asset shall
be taxable as short term capital gain irrespective of their
period of holding.
LONG TERM CAPITAL ASSETS

• When a capital asset had by an assessee for more than 36 months
immediately prior to its date of transfer them it is treated as long
term capital asset.
• For shares mutual fund, units UTI if period of holding is more than 12
months them treated as long term capital assets
NOTES
• Capital assets divided into short term & long term because
different tax rates are applicable.
• For calculating the period of holding of a capital asset, the
date on which the asset is transferred is to be excluded.
Example
State whether the following assets are short-term capital assets or
long-term capital assets:
1. Jewellery purchased on 1/7/2005 and sold on 7/3/2010.
2. Shares in X Ltd. purchased on 7/7/2007 and sold on 15/9/2009.
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3. Personal car purchased on 18/8/1989 and sold on 17/8/2009.
4. A residential house used for own occupation constructed on

17/7/1977 and sold on 15/4/2009.
5. Units of UTI purchased on 15/5/2009 and sold on 1/1/2010.
6. Zero coupon bonds purchased on 6/6/2009 and sold on 11/11/2010.
7. Drawings purchased on 1/1/2003 and sold on 12/12/2009.
B) The Capital Assets is Transferred By the Assesses
Capital gain arises only when there is a transfer on capital asset.

Transfer u/s 2(4) means.
a) The Sale, exchange or relinquishment (to withdraw) of the asset.
b) The compulsory acquisition of asset under any law.
c) Conversion of asset into stock-in-trade.
d) Redemption of Zero coupon bonds.
e) Possession of property under pant performance of contact of the
nature refereed in section 53A of the transfer of property Act
1882.
f) Any transaction by which has the effect of transferring of any
immovable property.
Sale
The term sale has not defined in the income tax act, As per its meaning
can be applied as
In case of movable property As per sale of Goods act, 1930
In case of Immovable property As per Transfer of property Act ,
1992
Transactions not treated as transfer

Transactions not regarded as transfer [Sections 46 and 47. The
meaning transfer is given in section 2(47), whereas transactions not
regarded as transfer are covered u/s 46 and 47. In the following
transactions although there is a transfer, but these are not considered
to be transfer for purposes of capital gains:
(i) Where the assets of a company are distributed to its shareholders on
liquidation of a company, such distribution shall not be regarded as
transfer in the hands of the company [Section 46(1)];
(ii) Any distribution of capital assets on the total or partial partition of
Hindu Undivided Family [Section 47(i)];
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(iii) Any transfer of a capital asset under a gift or will or an irrevocable

trust [Section47 (iii)]
This clause shall not apply to transfer under a gift or an irrevocable
or an irrevocable trust of a capital assets being shares, debentures
or warrants allotted by a company directly or indirectly to is
employees under the Employees Stock Option Plan or Scheme of the
company offered to such employees in accordance with the
guidelines issued by the Central Government in this behalf;
(iv) Any transfer of a capital asset by a company to its 100% subsidiary
company provided the subsidiary company is an. Indian company
[Section 47(iv)];
(v) Any transfer of a capital asset by a 100% subsidiary company to
its Holding company, if the holding company is an India a company
[Section 47(V)];
In other words, under item (iv) and (v), there must be a transfer of
an asset by a holding company to a subsidiary company or vice
versa provided the following conditions are satisfied:
(a) the subsidiary company is a wholly owned subsidiary company
(b) The transferee company is an Indian company.
Further, it may be noted that in the above two cases, if the transfer
of capital asset is made offer 29-2-1988 & as a stock in trade the
same will be regarded as transfer and subject to capital gain;
(vi) Any transfer in a scheme of amalgamation of a capital asset by the
amalgamating company to the amalgamated company, if the
amalgamated company is an Indian company [Section 47(vi')]
(vii) Any transfer in a scheme of amalgamation of shares held in an
Indian company by the amalgamating foreign company to the
amalgamated foreign company if—
(a) At least 25% of the shareholders of the amalgamating foreign
company continue to remain shareholder of the amalgamated
foreign company, and
(b) Such a transfer does not attract capital gains tax in the
country, in which the amalgamating company is, incorporated
[Section 47(via)];
(viii) Any transfer, in a demerger, of a capital asset by the demerged
company to the resulting company, if the resulting company is an
Indian company [Section 47(vib)];
(ix) any transfer in a demerger, of a capital asset, being a share or
shares held in it an Indian company, by the demerged foreign
company to the resulting foreign company, if—
(a) the shareholders holding not less than three-fourth in value of
the share of the demerged foreign company continue to
remain shareholders of the resulting foreign company; and
(b) Such transfer does not attract tax on capital gains in the
country, in which the demerged foreign company is
incorporated:
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(x) Any transfer by a shareholder, in a scheme of amalgamation, of

shares held by him in the amalgamating company if—
a) The transfer is made in consideration of the allotment to him
of any share or shares in the amalgamated company, and
(b) The amalgamated company is an Indian company [Section
47(vii)];
The consideration received by the shareholder should only be
shares. If the consideration includes anything in addition to shares
then it will be treated as a transfer and there will be a capital gain.
(xi) Any transfer of urban agricultural land in India before 1-3-1970
[Section 47(viii)]
(xii)` any transfer of a capital asset, being any work of art, archaeological,
scientific or "art collection, book, manuscript, drawing, painting,
photograph or print, to the Government or a University or the
National Museum, National Art Gallery, National Archives or any such
other public museum or institution, as may be notified by the Central
Government in the Official Gazette to be of national importance, or
to be of renown throughout any State or States [Section 47(ix)];
(xiii) Any transfer by way of conversion of bonds or debentures,
debenture- stock or deposit certificates in any form, of a company
into shares or debentures of that company [Section 47(x)];
(xiv) Any transfer of a capital asset being land of a sick industrial
company made under a scheme prepared and sanctioned under
section 18 of the Sick industrial Companies (Special Provisions) Act,
1985 where such sick industrial company is being managed by its
workers' co-operative. [Section 47(xii)].
However, the transfer should be made during the period
commencing from the previous year in which the said company has
become a sick industrial company under section 17(1) of that Act
and ending with the previous year during which the entire net worth
of such company become equal to or exceeds the accumulated
losses.
Conditions to be satisfied
1. The company is a sick Industrial Company
2. It transfers land and it is transferred under a scheme prepared
and sanctioned u/s 18 of SIC Act 1985.
3. The land is transferred during the period commencing from the
previous year in which the said company has become a Sick
Industrial Company and ending with the previous year during
which the entire net worth of such company becomes equal to
or exceeds the accumulated losses.
4. Such Sick Industrial Company is managed by its Workers
Cooperative.
IF all the above conditions are satisfied, the transfer of such land may not
be regarded as a transfer for capital gain purposes;
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(xviii) Any transfer of a capital asset or intangible asset by a firm to a

company as a result of succession of the firm by a company in the
business carried on by the firm, provided the following conditions are
satisfied:
(a) Any the assets and liabilities of the firm or AOP/BOI as the case
may be, relating to the business immediately before the
succession becomes the assets and liabilities of the company;
(b) All the partners of the firm immediately before the succession
become tin-shareholders of the company in the same
proportion in which their capital accounts stood in the books of
the firm on the date of the succession;
(c) The partners of the firm do not receive any consideration or
benefit, directly or indirectly, in any form or manner, other
than by way of allotment of shares in the company; and
(d) The aggregate of the shareholding in the company of the
partners of the firm is not less than 50% of the total voting
power in the company and their shareholding continues to be
as such for a period of 5 years from the date of the succession
[Section 47(xiii)];
(xv) Where a sole proprietary concern is succeeded by a company in the
business carried on by it as a result of which the sole proprietary
concern sells or otherwise transfers any capital asset or intangible
asset to the company provided the following conditions are satisfied:
(a) All the assets and liabilities of the sole proprietor concern
relating to the business immediately before the succession
become the assets and liabilities of the company;
(b) the shareholding of the sole proprietor in the company is not
less than 50%, of the total voting power in the company and
his shareholding continues in remain as such for a period of 5
years from the date of the succession; and
(c) The sole proprietor does not receive any consideration or
benefit, directly or indirectly, in any form or manner, other
than by way of allotment of shares in the company [Section
47(xiv)];
C) Such transfer takes place during the previous year
Capital gain is taxable in the year in which capital asset is transferred even
if consideration for the transfer is received or realized in a later year.
2) CAPITAL GATN [SECTION 48]
Computation of capital gain depends upon ratio of capital asset

transferred viz, short term capital asset or long term capital asset.
Computation of Short term Capital Gain
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Particular Rs.
Full value of consideration xxx
(-) Expenditure on transfer xxx
(-) Cost of acquisition xxx
(-) Cost of improvement xxx
= Short term capital gain xxx
(-) Ded u/s 54B, 54D, 54G and xxx
54 GA xxx
= Taxable short term capital
gain
Computation of Long term capital Gain

Particular Rs.
Full value of consideration xxx
(-) Expenditure on transfer xxx
(-) Indexed Cost of acquisition xxx
(-) Indexed Cost of xxx
improvement xxx
= Long term capital gain xxx
(-) Ded u/s 54, 54B, 54D, 54EC,
54F 54G, and 54GA xxx
= Taxable short term capital
gain
Note: No deduction will be allowed in respect payment of securities

transaction tax in competing income order the head "Capital Gain."
2A) what is a full value of consideration (Sec. 48)

(a) It is a full value of consideration received or receivable or
receivable by the transferor.
(b) If consideration received in kind them fair market value of
asset is considered as full value of consideration.
(c) Full value of consideration dose not means FMV of asset.
(d) Even if a consideration received in installments in different
years full value of consideration is important.
(e) Deemed full value of consideration. In some cases, instead
of actual consideration, the full value of consideration shall be
the deemed value. Such cases have summarized in the table
given below:
Summarized Table of deemed value of consideration
SI Mode of Transfer Deemed full value Relevant Section

No of consideration applicable
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1. Money or asset Value of money and/or F. See. 45(1 A)

received from an M.V. of asset on the date
insurer on account of receipt
of damage or
destruction of any
Capital Asset.
2 Conversion into or F.M.V. of the asset as on
treatment of capital the date of its conversion Sec. 45(2)
asset as stock-in- or treatment.
trade
3. Introduction of Amount recorded in the Sec. 45(3)

capital in kind into books of account of the
Firm or AOP/BOI Firm or AOP/BOI as the
by partner/member value of the Capital Asset
4. Distribution of asset F.M.V. as on the date of Sec. 45(4)
in kind on dissolution distribution
of Firm or AOP or
BO1
5. Shareholders Market value of the Sec. 46(2)
receiving assets from assets on the date of
the liquidator on the distribution minus
liquidation of the amount assessed as
company deemed dividend u/s
2(22)(e)
6. Gift, etc. of shares or Market value on the Proviso 4 to Sec.
debentures allotted date of gift, etc. 48
under ESOP
2B) Expenses on Transfer

Expenses on transfer include any expenditure incurred whether
directly or indirectly for the purpose of transfer like advertisement
expenses, brokerage, and stamp duty. Registration fees, legal
expenses etc. However any expenses which have been claimed as a
deduction order any other provision of the act cannot be claimed as
a deduction under this clause.
2C) Cost of Acquisition [Sec. 55(2)]

Cost of acquisition of an asset is the value for which it was acquired by the
assessee. Following points should be considered.
• Cost of acquisition includes expenses incurred in acquiring the
assets or completing the title.
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• Interest on money borrowed for acquiring capital asset will form part
of cost of asset. But after acquisition it will be treated as revenue
expenditure.
• Interest paid by firm to its partner capital contribution for the
purchase of capital asset cannot be treated as part of acquisition.
A) Sum paid for discharge of mortgage:

Where the property has been mortgage by the previous owned during his
lifetime and the assessee after inheriting the same has discharge the
mortgage being the amount paid by him for the propose of clearing off the
mortgage shall be regarded as cost of acquisition.
B) Deemed Cost of Acquisition (Section 49(1)].

Cost to the previous owner [Section 49(1)]:
Where the capital asset became the property of the assessee in any of the
manner mentioned below, the cost of acquisition of the asset shall be
deemed to be cost for which the previous owner of the property acquired
it:
(a) On the distribution of the assets on total/partial partition of
Hindu Undivided Family;
(b) Under a gift or will;
(c) By succession, inheritance or devolution;
(d) On any distribution of assets on the liquidation of a company;
(e) Under a transfer to a revocable or irrevocable trust;
(f) On a transfer by a wholly owned Indian subsidiary company
to its holding company or vice versa;
(g) On any transfer in a scheme of amalgamation of two Indian
companies subject to certain conditions u/s 47(vi);
(h) on any transfer in a scheme of amalgamation of two foreign
companies subject to certain conditions;
(i) On any transfer of a capital asset by the banking company to
the banking institution in a scheme of amalgamation of a
banking company with a banking institution;
(j) On conversion of self acquired property of a member of a
Hindu Undivided Family to the joint family property.
C) Cost of acquisition of assets acquired before 1-4-1981 [Section

55(2) (b)]
Acquired by Cost of acquisition

Assessee himself Cost of acquisition or fair market
value as on 01-04-1981
whichever is more
Acquired under section 49(1) Cost of acquisition to previous
mentioned above owner or fair market value as on
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01-04-1981 whichever is more
NOTES
• The option in the above case is not available for depreciable
assets.
• The option is not available in case of self generated assets
other than bonus shares.
Example: (i) Where a house property has been purchased by X on 1-1-

1975 for Rs. 30,000 and the fair market value of the house as on 1-4-1981
is Rs. 1, 20,000, the assessee at to adopt Rs. 1, 20,000 as the cost of
acquisition.
(ii) Where certain shares of a company were purchased by X on 1-1-1975
at the rate of Rs. 200 per share and the market value of the shares as on
1-4-1981 is Rs. 120 per share the assessee may not opt for market value
and adopt Rs. 200 per share as the cost of acquisition.
What is fair market value [Section 2(22B)] Fair market value in

relation to the capital market means—
(i) the price which the capital asset would ordinary fetch if sold in
the open market on the relevant date; and
(ii) Where the price referred to in (i) is not ascertainable, such price
as may be determined in accordance with the rules made under
the Income-tax Act.
D) Indexed cost of acquisition (Explanation (iii) to section 48)

As already mentioned, in the case of short-term capital gain, cost of
acquisition and cost of improvement are deducted from the full value of
consideration for computation of capital gain. On the other hand, in the
case of long-term capital gain, indexed cost of acquisition and indexed
cost of improvement are deducted instead of cost of acquisition cost of
improvement.
The cost of acquisition and cost of improvement are indexed on the basis
of certain percentage of the consumer price index, which is determined
keeping in view the rise in prices due to inflation.
Indexed cost of acquisition means an amount which bears to the cost of
acquisition the same proportion as cost inflation index for the year in
which the asset is transferred bears to the cost inflation index for the first
year in which the asset was held by the assessee or for the year beginning
on 1 -4.-1981 whichever is later.
Cost inflation index (CII) as notified by the Central Government is as under
financial Cost Inflation Financial Year Cost Inflation

Year Index (CII) Index (CII)
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1981-82 100 1995-96. 281

1982-83 109 1996-97 305
1983-84 116 1997-98 331
1984-85 125 1998-99 351
1985-86 133 1999-00 389
1986-87 140 2000-01 406
1987-88 150 2001-02 426
1988-89 161 2002-03 447
1989-90 172 2003-04 463
1990-91 182 2004-05 480
1991-92 199 2005-06 497
1992-93 223 2006-07 519
1993-94 244 2007-08 551
1994-95 259 2008-09 582
2009-10 632
E) Cost of improvement:
Cost of improvement means expenditure incurred to increase the
productive quality of the asset. It includes all expenditures of a capital
nature incurred in making any additions or alteration to the capital asset.
Indexed cost of improvement
It is a amount, which bears to the cost of improvement the same
proportion as cost inflation index for the year in which the asset is
transferred bears to the cost inflation index for the year in which the
improvement to the asset took place.
NOTES
• Amy improvement expenditure incurred before 1981 is to be ignored
while computing capital gain.
• Cost of improvement does not include any expenditure which is
deductible in computing the income chargeable under the head
'Income from house property', 'Profits and gains of business or
profession", or 'Income from other sources'. Only capital expenditure
is considered as a cost of improvement. Routine expenses on repairs
and maintenance do not form part of cost of improvement.
Computation of indexed cost of acquisition: As per the definition of

Indexed cost of acquisition given above, it is the cost of acquisition which
has to be indexed. An analysis of the definition would indicate that for
indexation of cost of acquisition there are 3 important points:
(i) Cost of acquisition
(ii) CII of the previous year in which the asset is transferred;
(iii) CII of the year in which the asset was first held by the assessee
or 1-4-1981 which ever is later.
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There are two modes in which the asset can be acquired by the assessee
and therefore, the indexation of the cost of acquisition will be done as
under;
(Mode a) Assets acquired directly by the assessee himself: the

cost of acquisition shall be the amount which the assessee has
paid to acquire that asset. Indexation in this case will be done as
under:
If asset is acquired on or after 1 -4 1981
Cost of acquisition
X CII of the year in which asset is
transferred
CII of the year in which was acquired
Indexed cost of improvement will be determined as under

Cost of improvement incurred by the
assessee
transferred
CII of the year in which was improvement
Took place
Example
X sells the following capital assets during the previous year during the
year 2009-10.
Particulars Non listed House
shares Rs property Rs
Sale consideration 2,40,0000 6,80,000
Year of acquisition 1992-93 85-86
Cost of acquisition 2,90,000 18,000
Cost of improvement incurred in 1991-92 70,000.
If the asset is acquired by the assessee before 1-4-1981,

He may opt for the market value as on 1-4-1981 to be the cost of
acquisition. In this case indexation will be done as under:
Cost of acquisition or Fair Market Value
As on 1-4-1981, whichever is more
transferred
100 i.e. CII of the previous year1981-82
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assessee after 1-4-1981
transferred
Took place
Example
X purchased of Land on 4-01-1977 for Rs 60,000. This land was sold by
him on 02-09-2009 for Rs 8, 00,000. The market value of the land as on
01-04-1981 was Rs 1, 20,000. Expenses on transfer were 2% of Sale price.
Compute the capital gain for AY 10-11..
(Mode b) Asset acquired from the previous owner in any mode

given u/s 49(1)
IF asset acquired by previous owner on or before 1-4-1981 &

acquired by assessee after 1-4-1981
Cost of acquisition to previous owner
or Fair Market Value as on 1-4-1981,
Whichever is more
transferred
CII of the year for the first year in which
the asset was held by the assessee

Assessee & previous owner after 1-4-1981
transferred
Took place
If asset acquired by previous owner before 1-4-1981 & acquired by

assessee before 1-4-1981
or Fair Market Value as on 1-4-1981,
Whichever is more
transferred
100 i.e. CII of the previous year1981-82
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assessee after 1-4-1981

transferred
Took place
Example
X acquired a land in 1977-78 for Rs 2, 00,000 & gifted it to his major son Y
on 16-01-1980. When the market value of the land was Rs 2, 50,000. The
FMV of land on 01-04-19881 was Rs 3, 00,000. Y sold the land on 15-09-
2009 for Rs 20, 00,000. Compute the capital gain for PY 2009-10 assuming
that the expenses on transfer were Rs 1, 00,000.
If asset acquired by previous owner on or after 1-4-1981 &

acquired by assessee on or after 1-4-1981

transferred
CII of the year for the first year in which
the asset was held by the assessee
Assessee & previous owner after 1-4-1981
transferred
Took place
Example
1)X purchased a house on 28-06-1990 for Rs 1, 10,000 & paid Rs 10,000
for getting the property registered in his name. On 15-06-1991, he spent
Rs 80,000 on improvement of the house. The house was sold on 21-07-
2009 for Rs 7, 00,000. Commission of Rs 4,000 was paid on the sale of the
house. Compute the capital gain for AY 10-11.
2) X acquired the property in the PY 82-83 for Rs 5, 00,000 & paid Rs
18,000 as registration charges. X died on 15-0-04 & the property was
transferred to his son Y through inheritance. The market value of property
as on 15-09-04 is Rs 10, 00,000. Y sold this property for Rs 12, 00,000.
Compute the capital gain for AY 10-11.
Indexation of cost not allowed in certain cases: In the following

cases, indexation of cost & improvement shall not be allowed for
the assets specified therein—
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1. Transfer of bonds and debentures other than capital indexed bonds

issued by the Government
2. Transfer of an undertaking or division in a slum sale.
3. Certain transaction by non-resident.
4. Transfer of global depository receipts.
Note.—In case of depreciable assets, there is no question of any

indexation as capital gain arising from the transfer of depreciable
asset shall always be short-term capital gain.
Tax rates applicable to STCG & LTCG
1) Tax on STCG in certain cases [sec111A]

Above section is applicable if following conditions are satisfied
• Tax payer is an Individual, HUf, Firm, company or any other person.
• He has generated STCG on transfer of equity shares or units in
equity oriented mutual fund
• The transaction of transfer takes place on or after 01-10-2004.
• STT is paid at the time of transfer.
• If above conditions are satisfied then STCG is chargeable at the rate
of 15% + education cess
• Deduction u/s 80C to 80U is not available.
• If total income as reduced by STCG is less than exempted limit then
such STCG can be reduced by the amount by which the total income
falls short of such exempted income & balance chargeable at 15%.
Example
Following information is provided by X for PY 09-10
STCG on transfer of share on which STT is paid Rs 1, 40,000
Other income Rs 96,000.
Calculate tax liability assuming that (a) STT is paid (b) STT is not paid
For other capital assets other than above mention securities STCG
is chargeable to tax at normal rate. For e.g. For Firm STCG is
chargeable to tax @ 30%.
2) Tax on LTCG [sec 112]

• LTCG is taxable at 20% if STT is not paid & if it paid then exempt
from tax.
• Deduction u/s 80C to 80U is not available.
• If total income as reduced by LTCG is less than exempted limit then
such LTCG can be reduced by the amount by which the total income
falls short of such exempted income & balance chargeable at 20%.
Example
Compute tax liability from the following information for PY09-10.
LTCG Rs 1, 40,000
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Other income Rs 96,000.

Calculate tax liability assuming that (a) LTCG is of land (b) LTCG of shares
on which STT has been paid.
SUMMARY
IF STT PAID AT THE IF STT NOT PAID AT THE TIME

TIME OF TRANSFER OF TRANSFER
LTCG
CAPITAL
Withou With
ASSET LTC
STCG t indexatio STCG
G
indexat n
ion
Equity shares NIL 15% 10% 20% NORMAL
listed
Equity shares NA NA NA 20% NORMAL
not listed
Debentures NA NA 10% NA NORMAL
listed
Debentures NA NA 20% NA NORMAL
Non-listed
Govt. NA NA 10% 20% NORMAL
Securities
3) COMPUTATION OF CAPITAL GAIN IN CERTAIN CASES
A) Treatment of advance money received [Section 51]

Where any capital asset, was on any previous occasion, the subject of
negotiations transfer, any advance or other money received and retained
by the assessee in respect of such negotiations, shall be deducted from
the cost for which the asset was acquired or the written down value or the
fair market value, as the case may be, in computing the cost of
acquisition.
Advance money received by

Current owner Subtracted from the cost of
acquisition
Previous owner Not to be subtracted
Advance money received & forfeited Subtracted from the cost of
before 01-04-81 acquisition
NOTES
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• In case, advance money received exceeds cost of acquisition, the

excess will be a capital receipt, hence not taxable.
• Forfeiture of advance money by the transferor due to default of
transferee is not allowed as capital loss in the hands of transferee.
Example
Mr. Sandeep has a house property acquired on 17/7/71 for Rs. 400000.
He entered into a contract with Mr. Sarabhai for transfer of such house
property for Rs. 1000000 as on 7/8/76, Mr. Sarabhai refused to
purchase the property. So his caution money as well as advance money
was forfeited by Mr. Sandeep. On 7/8/2009 Mr. Sandeep sold such asset
for Rs. 5500000. Brokerage @ ½ % of sale value yet to be paid by him.
Market value of the property as on 1/4/81 is Rs. 350000. Compute
capital gain in hands of Mr. Sandeep in the previous year 1976-77 and
2009-10.
B) Capital gain in case of insurance claim received on damage or

destruction of capital asset
[Sec 45(1A)]
As per provision of this section, any compensation received from an
insurance company for the specified damage is treated as transfer. Such
transfers are liable to capital gain in the year of the receipt.
Here specified damages means fold, cyclone, earthquake, riot, civil
disturbance, accidental fire etc
Computation of capital gain

CONDITION TREATMENT
Sale consideration Compensation received or if it is
received in kind then FMV as on the
date of the receipt
Cost of acquisition/ cost of As usual
improvement/expenses on
transfer
Indexation benefit Available till the year of destruction
Taxable In the year of receipt of
compensation
NOTES
• Compensation received for any damages to capital asset
shall be treated as capital receipt and shall not be taxable.
Example
Lucky has a house property acquired on 18/81987 for Rs. 600000. He
used the house for his own residential purpose. On 18/8/03 he incurred
capital expenditure on re-construction of house Rs. 300000. On 15/5/09,
he brought office goods (inflammable) worth Rs. 100000 at home to be
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delivered to a party staying near to his home. At the night of that day
accidential fire took place and damaged the whole house property,
furniture worth Rs. 500000 and business stock.
Insurance claim received on 18/8/09-
1. for the house Rs. 100000 in cash and a new house allotted to him
(fair market value of which is Rs. 3000000 on 18/8/09);
2. for house-hold furniture Rs. 200000; and
3. for stock Rs. 80000.
State-
- Tax-treatment under the head Capital gains.
- How shall your answer differ if such compensation is received by the

assessee on 15/4/2010.
C) Conversion of capital asset into stock in trade [Section 45 (2)]

• From A.Y. 1985-86 onwards the conversion of capital asset into
stock-in-trade is treated as transfer.
CONDITION TREATMENT
Sale consideration FMV on the date of conversion
transfer
Indexation benefit Available till the year of conversion
Taxable In the year in which asset is sold
Difference between actual sale Treated as business income.
value & Fair value a on the date
of conversion
.
• Indexed cost of acquisition shall be calculated as under
Cost of acquisition X CII of the year in which conversion took
place
CII of the year of the acquisition
• Examples
1) X converts his capital asset (acquired on June 10, 1967 for Rs
70,000, fair market value on
April 1, 1981 Rs 1, 80,000) into stock in trade March 10, 1984 (FMV
Rs 4, 80, 000) & subsequently sells the stock-in-trade so converted
for Rs 7,30,000 on June 10, 2009. Determine the amount of
assessable profits.
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2) Calculate capital gain assuming that conversion takes place

during PY 86-87.
3) X invested Rs 1, 00,000 on the purchase of gold ornaments on 1-
4-1989. He holds the gold ornaments as investments. On 12-1-2006
he started a business of dealing in jewellery and converts his holding
into his stock-in-trade. The market value of gold ornaments as on the
date of conversion was Rs 4, 00,000. These gold ornaments were
sold in the previous year 2009-10 for a sum of Rs 5, 00,000.
D) Capital gain on depreciable assets [Sec 50]
• Capital gain arise on sale of depreciable asset shall always be a
short-term capital gain irrespective of period of holding.
Example
X ltd owns the following assets on April 1, 2009:
Assets Rate of depreciation Value as on 1st April
2009
Plant A 15% 4,05,000
Plant B 15% 1,95,000
Plant C 15% 7,05,700
On June 10,2009, it acquires plant D for Rs 20,000(15%). Plant D is not

eligible for additional depreciation. The company sells following assets
during PY 09-10.
Assets Sale consideration Expenses on transfer

Plant A 2,12,000 12,000
Plant B 6,17,000 --
Plant C 4,30,000 --
Plant D 95,000 200
Determine the amount of depreciation & capital gain for AY 10-11.
F) Transfer of securities by depository [Sec 45(2A)]

CONDITION TREATMENT
Sale consideration Value at which shares sold
Cost of acquisition Cost of acquisition & period of
holding of any securities shall be
determined on the basis of the FIFO
method. This method is applicable
to dematerialized form. Securities
held in physical forms shall be dealt
separately.
Indexation benefit As usual
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expenses on transfer As usual
G) Capital gain on transfer of capital asset by a partner/member to a firm/

AOP/BOI as capital contribution to a firm (Section 45(3)] :

CONDITION TREATMENT
Sale consideration The amount recorded in the books
of accounts of the Firm/AOP/BOI as
value of such assets
transfer
FMV of such asset is irrelevant to decide sale consideration.
Example
R acquired a property by way of gift from his father in the PY 92-93
when its FMV was Rs
3, 00,000. The father had acquired the property in the PY 83-84 for Rs 2,
00,000. This property was introduced as capital contribution to a
partnership firm in which R became a partner on 05-06-2009. The market
value on that date was Rs 10, 00,000 but it was recorded in the books of
account of the firm as Rs 7, 00,000. Is there any capital gain chargeable in
the hands of R?
H) Capital gain on transfer of capital asset on its dissolution

(Section 45(4)] :

CONDITION TREATMENT
Sale consideration FMV on the date of transfer
transfer
I) Compulsory acquisition of asset [Section 45(5)]

• Where a capital asset has been compulsorily acquired (other than
urban agricultural land) under any law, it will be treated as a
transfer of the previous year in which the asset is compulsorily
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acquired. Indexation, if required, will be done till the previous year

of compulsory acquisition. However, the capital gain will be taxable
in the previous year in which the compensation is received.
• Similarly, if there is a transfer of capital asset &, the consideration
for which was determined or approved by the Central Government
or the Reserve Bank of India, it will be treated as transfer of the
previous year in which the consideration is determined but capital
gain will be taxable in the previous year in which such consideration
is received.
• Initial compensation/consideration:
Initial compensation/consideration, as the case may be, shall be
taken to be the sale consideration of the asset and the capital gain
shall be computed accordingly. This capital gain shall be the income
of the assessee of that previous year in which either whole or a part
of the compensation/ consideration is actually received and not the
year of compulsory acquisition/ determination of consideration by
Central Government RBI.
Computation of capital gain when initial compensation received

CONDITION TREATMENT
Sale consideration Total compensation received or
receivable
transfer
Indexation benefit Till the year of acquisition
Taxable In the year in which initial
compensation is received
Computation of capital gain when enhanced compensation

received
CONDITION TREATMENT
Sale consideration Total enhanced compensation
received
Cost of acquisition/ cost of NIL
improvement
Indexation benefit NIL
Taxable In the year in which the
compensation is received & treated
as STCG OR LTCG depending upon
original gain
Interest on enhanced Income from other source
compensation
Expenditure on transfer Litigation expenses incurred for
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receiving enhanced compensation
• It is possible that the person may die before the enhanced

compensation/ consideration is received and the enhanced
compensation/consideration is received by his legal heirs. Such
enhanced compensation/ consideration will be taxable in the hands
of the person who receives the same.
• Indexed cost of acquisition shall be calculated as under
Cost of acquisition X CII of the year in which asset acquired by
the government
CII of the year of the acquisition
Example
X acquired a house for Rs 20,000 in 1977-78. On his death in
October 1986 the house acquired by his son Y. The market value of
the house as on 1-4-1981 was Rs 80,000. This house was acquired
by the government on 15-3-2006 for Rs 3, 00,000 & a compensation
of Rs 2, 20,000 is paid to him on 25-3-2010 & the balance Rs 80,000
on 15-4-2010. Y filed a suit against the government challenging the
amount of compensation and the court ordered for giving additional
compensation of Rs 1, 00,000. He incurred an expenditure of Rs
2,000 in connection with the suit. The additional compensation is
received on 14-3-2011. Compute capital gain for various AY.
J) Capital gains on distribution of assets by companies in

liquidation [Section 46]:
• As already discussed, as per section 46(1), where the assets of a
company are distributed to its shareholder on its liquidation, such
distribution shall not be regarded as a transfer by the company.
Therefore, there will be no capital gain to the company. However,
where a shareholder on the liquidation of a company, receives any
money or other asset from the company in lieu of the shares held by
him, such a shareholder shall be chargeable" to income-tax under
the head 'Capital gains' in respect of the money and the asset so
received.
• In this case, the consideration price for capital gain purposes shall be
money received and/or the market value of the other assets on the
date of distribution minus deemed dividend within the meaning of
section 2(22)(c).
• From the consideration calculated above deduct, cost of
acquisition/indexed cost of acquisition, expenditure on sale to find
out capital gain.
• In determining whether the capital gain in the above case is short
term or long term, the period subsequent to the date on which the
company goes into liquidation shall not be considered.
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K) Capital gain on buy back of own shares [sec 46A]

CONDITION TREATMENT
Sale consideration Amount received from the
shareholder
transfer
Taxable In the year in which securities
purchased by the company
L) Transfer in case of total or partial partition of HUF

Above transfer is not treated as transfer but when such assets are further
transferred by its member then tax treatment shall be as under
CONDITION TREATMENT
Sale consideration As usual
Cost of acquisition Cost of acquisition in the hands of
HUF
Indexation benefit It will be available from the year
when member hold such assets
Improvement benefit It will be available from the year
when the actual expenditure is
incurred
Determination of LTCG/STCG Period of holding of Karta shall be
considered
M) Capital gains on transfer of shares in amalgamated company

[Sec 49(2)]
• Cost of shares will be the cost of shares in amalgamating company.
• To find out whether capital gain is long term or short term period of
holding shall be considered from the date of acquisition of shares in
the amalgamating company.
• The indexation will start from the date of allotment of shares in the
amalgamating company
Example
X ltd an Indian company takes over the business of Y ltd , in a
scheme of amalgamation of two companies. Z has purchased 100 shares
in Y ltd in 1995 for Rs 60 per share. As per the scheme of amalgamation,
he gets 50 shares in X ltd in a lieu of 100 shares of Y ltd. Consequently
cost of share in X ltd will be taken as Rs 120 per share, (i.e., Rs 6000,
being cost of 100 shares in Y ltd / 50 shares in X ltd)
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N) Capital gain when debentures are converted into shares [Sec

49(2A)]
Capital gain will not be attracted at the time of conversion but it will be
attracted at the time of sale of such shares received on conversion.
Computation of capital gain when converted shares sold
CONDITION TREATMENT
Cost of acquisition Cost of convertible debentures
Indexation benefit It will be available from the year
when member hold such assets
Holding period It will be available from the date of
allotment of new asset (shares)
• Benefit of indexation is not available to debentures.
Example
R acquired 200 listed debentures of Rs. 100 each on 15-5-2003. 50%
value of the debentures was converted into 4 listed equity shares of the
face value of Rs. 10 each on 20-8-2008. R therefore, received 800 shares
of face value of Rs. 10 each and left with 200 debentures of Rs. 50 each.
The shares were sold on 15-6-2009 @ Rs. 100 per share through
recognized stock exchange and R paid Rs. 80 as securities transaction tax.
Compute the capital gain chargeable for the assessment year 2010-11.
Solution
Rs.
Sale consideration of 800 shares 80,000
Less: Cost of acquisition (200 x 50) = Rs. 10,000
Cost of acquisition 10,000
Short-term capital gain 70,000
The date of acquisition of the shares shall be the date on which such
shares are allotted to the assessee. In this case, the shares were allotted
on 20-8-2008 and were sold on 15-6-2009. As these were held for a period
of not exceeding 12 months, they have been treated as short-term capital
assets. Securities transaction tax of Rs. 80 will not be allowed as deduction
as per fifth proviso to section 48.
Example
Ratna has 100 partly convertible debentures of X ltd of Rs 120 each
acquired on 15/12/1997. On 17/07/08 company allotted 1000 shares (FV
10 each) against 40% of such debenture. Ratna sold 75 debentures @ Rs
113 & 800 shares @ Rs 25 each. Compute capital gain.
O) Special provisions for computation of capital gains in case of

slump sale [Section 5OB]:
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'Slump sale' means the transfer of one or more undertakings as a result of

the sale for a lump sum consideration without value being assigned to the
individual assets and liabilities in such sales. In other words, it is sale were
the assessee transfers one or more undertaking as a whole including all
the liabilities as a going concern. The consideration is fixed for the whole
undertaking and received by the transferor. It is not fixed for each of the
asset of the undertaking. The assessee may also transfer a division instead
of the undertaking as whole by way of such sale. Thus it may be noted that
the undertaking as a whole or the division transferred shall be a capital
asset.
P)Cost of acquisition of goodwill of a business or a trade mark or

brand name associated with business or right to manufacture,
produce or process any article or things or right to carry on any
business, tenancy rights, stage carriage permits or loom hours
[Section 55(2)(a)] It shall be as under:
• Self generated assets
o Full value of consideration will be the actual amount of
sale.
o Cost of acquisition is nil & cost of improvement shall be
taken as nil except in case of tenancy rights, stage carriage
permits, loom hours, trade mark, brand name cost of
improvement shall be considered.
o Expenses on transfer are allowed as deduction while
computing capital gain.
• If goodwill, right or mfg are purchased and transfer latter on, then
purchase price will be taken as cost of acquisition & cost of
improvement is taken as nil.
• When any other asset is purchased then purchase price will be
taken as cost of acquisition & cost of improvement is also taken
into consideration.
• Even if the above assets are purchased before 1-4-1981 then
option of FMV is not available.
• If acquired under 49(1), it will be the cost to previous owner if the
previous owner paid for it but where it was self generated by the
previous owner it will be taken as nil.
• Following self –generated assets dose not amount to capital gain
Transfer of goodwill of a profession
Transfer of trees grown spontaneously
• Problems for practice
1) X transfers following assets on May 15, 2009.
PARTICULARS COST RS FMV ON Sale
1-4-1981 considerati
on Rs
Land acquire in 1968 20,000 45,000 2,85,000
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Goodwill of a business 10,000 1,75,000

Tenancy rights 30,000 2,00,000
Goodwill & tenancy rights are self generated. Calculate capital
gain for PY 09-10. Dose it make any difference if the goodwill is of
a profession?
2) Y commenced a business on 20-5-91. The said business is sold
by Y on 18-4-2009 & he received Rs 8, 00,000 towards
goodwill.
3) What will be your answer in the above case if Y had acquired
the goodwill for his business for Rs 2, 00,000?
4) R has been living in a rented accommodation since June 1995
& he is paying rent of Rs 500 per month. The landlord got the
house vacated from R on 12-03-2010 & paid a sum of Rs 5,
00,000 for vacating the house.
5) A is chartered accountant practicing in Pune since January
1983, he transfers the practice to another CA ‘V’ on 20-07-
2009 & charges Rs 5,45,000 towards goodwill.
6) R purchased tenancy rights on 01-04-1980 for Rs 1, 50,000 the
same was sold by him on 15-03-2010 for Rs 15, 00,000. FMV of
tenancy rights as on 1-04-1981 was Rs 2, 60,000.
7) Compute capital gain of Mr. Anil, a businessman who sold the
following assets on 31/03/2010.
Cost of
Sales Exp. On FMV on 01-
Asset improvemen
value transfer 04-1981
t
Brand 20000(84-
5 lacs 2000 1lac
name 85)
Tenancy
2 lacs nil 5000(90-91) Nil
right
20000(93-
Goodwill 1 lacs 5000 Nil
94)
Q) Cost of acquisition of bonus shares or any other financial asset

allotted without payment [Section. 55(2) (aa) (iiia)]
Capital gain on transfer of bonus shares shall be calculated as follows
SITUTATIONS COST OF ACQUISITION
Bonus shares allotted before April Original cost or FMV as on April 1,
1, 1981 1981 whichever is higher
Bonus shares allotted on or after Zero
April 1, 1981
Expenditure on transfer As usual
Period of holding The period of holding will be
considered from the date of allotment
of bonus shares.
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R) Cost of acquisition of right shares [Section 55(2) (aa)] Where an

assessee, by virtue of holding certain shares, becomes entitled to
subscribe to any additional shares then:
(a) The cost of acquisition of the original shares shall be the amount
actually paid for acquiring the original shares;
(b) The cost of acquisition of the right shares, when the assessee
subscribes to the shares on the basis of the said entitlement, shall
be the amount actually paid for acquiring the right shares;
(c) The cost of acquisition of the right to acquire such shares, when such
a right is renounced in favour of any other person, shall be taken to
be nil;
(d) As regards, the person in whose favour the right to subscribe to the
shares has been renounced; the cost of acquisition shall be the
amount paid by him to the company for acquiring the shares plus
the amount paid to the person renouncing the right.
Example:
1. R holds 100 shares of ABC Ltd., which were acquired by him in 1996 for
Rs. 10 per share. The market value of the shares as on 1-6-2006 is Rs. 250
per share. The company offers him a right to subscribe to 100 additional
shares at the rate of Rs. 100 per share. If he subscribes to the shares then
his cost of acquisition will be as under:
(a) For the original 100 shares Rs. 10 per share
(b) For the additional 100 right shares Rs. 100 per. share
2. In the above example, if R does not subscribe to the additional shares
but renounces the right in favour of Y at the rate of Rs. 50 per share, then
the entire amount of Rs. 5,000 received by him would be treated as short
term capital gain, as the cost of acquisition of the right is nil.
3. If Y, in favour of whom the right was renounced, subscribes to the 100
shares then his cost of acquisition will be as under:
Rs
.
(a) amount paid to the company 10,000
(b) Amount paid to X for acquiring the right to subscribe
to the shares 5,000
Total
15,000
Example
X holds 1000 equity shares in A ltd since 1979 (cost of acquisition Rs
10,000, FMV on 01-04-1981 Rs 14,000). A ltd offers 2000 right shares of Rs
10 each to X on June 1st, 2009 at a premium of Rs 50. X subscribed for 800
rights shares & renounces 1200 shares in favour of D by transferring the
right entitlement for a consideration of Rs 6,000. X sells 1800 shares in A
ltd on March 13, 2010 @ Rs 90 per share.
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S) Capital gain on transfer of shares/security by an employee

received as stock option/sweat equity plan [Sec. 49(2AA)] – The
provisions of section 49(2AA) and other related issues are given
below-
Different situations Allotment of shares/ securities by

the employer-company to its
employees without charging
anything or at concessional rate
Tax on perquisite in respect of If the option is exercised by the
allotment of shares/securities by concerned employee during 1999-
the employer in the employer- 2000 or on or after April 1,2009,
company without charging anything then the perquisite is chargeable to
or at concessional rate. tax (the value of being fair market
value on the date of exercise of
option minus acquisition cost paid
by the employee.)
Transfer of these shares/securities
by the employees. Capital gains would be taxable in
the year in which shares/securities
are transferred. Cost of acquisition
will be as follows-
- If shares are allotted during
1999-2000 or on or after April
1,2009, fair market value on
the date of exercise of option.
- If shares are allotted before
April 1, 2007 (not being
during 1999-2000), the
amount actually paid to
acquire shares.
- If shares are allotted on or
after April 1, 2007 but before
April 1, 2009, fair market
value on the date of vesting of
Transfer of these shares/securities option (purchase price paid to
by the employees by gift or under the employer or FBT paid to
an irrevocable transfer. employer shall not be
considered)
Capital gains would be taxable in

the year in which these
shares/securities are gifted (how to
calculate sale consideration is not
specifically given in the law. Cost of
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acquisition would be taken as given

above.
T) Capital gains in the case of slump sale [Sec. 50B] – The

provisions of section 50B, applicable for computation of capital
gains in the case of slump sale, are given below:
* Any profits or gains arising from the slump sale effected in the previous
year shall be chargeable as long-term capital gains and shall be deemed to
be the income of the previous year in which the transfer took place.
Where, however, an undertaking owned and held by the assessee for not
more than 36 months is transferred under the slump sale, then capital
gain shall be deemed to be short-term capital gain.
• In the case of slump sale of an undertaking, the “net worth” of the
undertaking shall be taken as cost of acquisition and cost of
improvement.
• “Net worth” for this purpose is the aggregate value of total assets of
the undertaking or division as reduced by the value of liabilities of
such undertaking or division as appearing in the books of account.
However, the following points should be noted-
1. Any Change in the value of assets on account of revaluation of

assets shall be ignored for the purpose of computing the net worth.
2. In the case of depreciable asset, the aggregate value of assets of

such undertaking or division shall be the written down value of block
of assets determined in accordance with the provisions contained in
sub-item (C) of section 43 (6)(c)(i).
3. In the case of non-depreciable assets, book value shall be taken.
4. Net worth cannot be negative.
The benefit of indexation will not be available.

Every assessee, in the case of slump sale, shall furnish along with the
return of income, a report of a chartered accountant in Form No. 3CEA
indicating the computation of the net worth of the undertaking or
division, as the case may be, and certifying that the net worth of the
undertaking or division, as the case may be, has been correctly arrived
at.
4) Capital gain exempt under sec 10

1) Capital gain on transfer of Us64 [Sec 10(33)] on or after April 1, 2002
whether capital asset is short term or long term.
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2) Long term capital gain on transfer of securities on which security

transaction tax has been paid. [Sec 10(38)]
• Taxpayer is an Individual, HUF, Firm, company or any other
person
• The asset transfer is long term capital asset
• Such transfer takes place after 1st Oct 2004.
• STT has been paid on such transaction.
If the above conditions are satisfied then LTCG is exempt from tax.
3) Capital gain on compensation received on compulsory acquisition of
agricultural land situated within specified urban limits [Sec 10(37)]
• Exemption is available to Individual or a HUF
• Long term & short term both capital gains are exempt.
• The exemption is available only when such land has been used
for agricultural purposes during the preceding two yrs by such
Individual or a HUF.
• Such compensation is received on or before 1-4-2004.
• If compulsory acquisition has taken place before 1-4-2004 but the
compensation is received after 31-03-2004 it shall be exempt. But
if part of the original compensation is received before 31-03-2004
& balance received after 31-03-2004, exemption is not available.
• Enhanced compensation received on or after 1-04-2004 against
such land shall be exempt.
4) Capital gain on transfer of an asset of an undertaking engaged in the
business of generation etc. of power [Sec10 (41)]
• Transfer effected on or before 31-03-2006
• Asset transfer to the Indian company notified under section 80-
IA(4)(v)(a)
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5) Deduction under capital gain

Capital gain arising from the transfer of Residential house property [sec 54]
SITUATION PROVISION
Who can claim exemption? An individual or a HUF
Which asset is qualified for Residential house property (SO & LO)
exemption?
Which capital asset is Long term
eligible for exemption?
Which asset should be Residential house property
purchased to claim ( purchased or constructed, old or new)
exemption?
What is the time limit for a)For purchase: 1 year backward or 2 year
acquiring the new asset? forward from the date of transfer of old
property
b)For construction: 3 yrs from the date of
transfer
c) In case compulsory acquisition above
period will start from the date of receiving
initial compensation.
What is capital gain a) If the new asset is not acquired up to the
scheme? date of submission of return of income, then
taxpayer will have to deposit the money in
“capital gain deposit account” with a
nationalised bank. If amount is not
deposited then capital gain will be taxed in
that particulars year.
b) Even if amount deposited in the scheme,
period of acquiring the new asset will be
applicable as above.
c) If amount deposited in scheme is not
utilised within the time period mentioned
above then unutilized amount at the end of
specified period shall be treated as
STCG/LTCG depending upon original gain.
How much is exempt? Amount invested or capital gain whichever
is lower
When exemption will be If new asset is transferred within 3 yrs from
taken back? the date of its acquisition
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What will be tax treatment if In such case, the capital gain on transfer of
exemption is taken back? the new residential property will be
calculated as follows
Sale consideration of new HP
Less: Original cost of acquisition minus
exemption claimed u/s 54 earlier
= Short term capital gain
Example:
G sold a residential house on 28-6-2008 for Rs. 11, 50,000. He had purchased
this house on 1-10-1985 for Rs. 1, 20,000 and had spent Rs. 70,000 on
improvement of the house during the year 1986-87. He purchased a new house
on 21-10-2008 for Rs. 3, 50,000. This house was also sold by him on 16-7-2009
for Rs. 6, 00,000. He purchased another house on 21-11-2009 for Rs. 8, 00,000.
Compute the capital gains for the assessment year 2009-10 and 2010-11.
Capital gain arising from the transfer of land used for agricultural purpose [sec 54B]
SITUATION PROVISION
Who can claim exemption? An individual
Which asset is qualified for Agricultural land
exemption?
Which capital asset is Long term as well as short term provided
eligible for exemption? the agricultural land was used by the
taxpayer or his parents, for agricultural
purposes for a period of two years
immediately preceding the date of transfer
Which asset should be Agricultural land (rural or urban)
purchased to claim
exemption?
What is the time limit for a) 2 year from the date of transfer of
acquiring the new asset? agricultural land
b) In case compulsory acquisition above
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is lower
exemption is taken back? the new agricultural land will be calculated
as follows
Sale consideration of new land
exemption claimed u/s 54B earlier
Example:
X sells agricultural land situated within the municipal limits of Calcutta for
Rs 36lacs. On July 4, 2009, which was purchased by him on March 1, 1986
for Rs 4, 00,000. On July 15, 2010, he purchases agricultural land in rural
area for Rs 4, 30,000 and deposits Rs 10, 80,000 in a deposit scheme. He
purchases another agricultural land (situated within the limit of Delhi
Municipal Corporation) on June 30, 2011 for Rs 8, 47,000 by withdrawing
from the deposit account. Amount left in the deposit scheme is withdrawn
on July 10, 2011. The agricultural land in rural area is transferred on April1,
2012 for Rs 4, 90,000 and land in Delhi is transferred on July17, 2012 for
Rs 8, 70,000. Determine amount of capital gains.
Capital gains on compulsory acquisition of land and building forming part of industrial
undertaking [sec 54D]
SITUATION PROVISION
Who can claim exemption? Any assessee
Which asset is qualified for Land & Building forming part of industrial
exemption? undertaking
Which capital asset is Long term as well as short term provided
eligible for exemption? industrial undertaking which was
compulsory acquired by the government
was used by the taxpayer for agricultural
purposes for a period of two years
immediately preceding the date of
acquisition.
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Which asset should be Land or Building for industrial purpose

purchased to claim
exemption?
What is the time limit for a) 3 year from the date of date of receiving
acquiring the new asset? initial compensation.
is lower
as follows
exemption claimed u/s 54D earlier
.
Example:
Mr daga has a land used for industrial purpose acquired on 7/7/95 on
partition of his HUF. The HUF acquired such property for Rs 200000 on
7/7/88 and incurred Rs 300000 on improvement of such land in the
previous year 92-93. Mr daga incurred improvement expenditure Rs
200000 on 7/7/07. Such land is compulsory acquired by the government
for Rs 1800000 on 9/1/09. Expenditure incurred on such transfer Rs
150000 and the whole amount received on 9/2/09. Mr Daga deposited Rs
200000 in capital gain deposit scheme on 31/03/09. On further litigation
expenditure of Rs 250000 the compensation being enhanced by Rs
500000. The enhanced compensation was received on 1/2/10. On 31/03/10
he withdrew amount from capital gain deposit account and invested Rs
350000 on acquisition of a land for industrial purpose. On 7/5/10 assessee
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sold such new land for Rs 700000. Compute capital gain for AY 09-10, 10-
11 & 11-12.
Capital gains not to be charged on investment in certain bonds [sec 54EC]
SITUATION PROVISION
Who can claim exemption? Any assessee
Which asset is qualified for Any long term capital asset transferred after
exemption? March 31,2000
Which capital asset is Long term capital asset
Which asset should be Bonds of National Highways Authority of
purchased to claim India OR
exemption? Rural Electrification Corporation
Note: The investment made on or after 1
April, 2007 in the long term specified asset
noted above by an assessee during any
financial year cannot exceed Rs 50lakhs.
What is the time limit for a) 6 months from the date of transfer of
acquiring the new asset? long term asset
b) In case compulsory acquisition above
What is capital gain Not applicable
scheme?
is lower
When exemption will be If new asset is transferred or converted into
taken back? money within 3 yrs from the date of its
acquisition
What will be tax treatment if In such case, the capital gain arising on
exemption is taken back? transfer of original asset which was not
charged to tax, will be treated of long term
capital gain of the respective year.
Example
R acquired shares of G Ltd., on 15-12-1998 for Rs.5.00.000 which was
sold on 15-5-2009 for Rs. 14.00.000. Expenses of transfer were Rs. 20.000.
He invests Rs. 6.00.000 in the bonds of Rural Electrifications Corporation
Ltd. on 16-10-2009.
(a) Compute the capital gain for the assessment year 2010-11.
(b) State the period for which the bonds should be held by the assessee.
What will be the consequences if such bonds are sold within the specified
period.
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(c) What will be the consequences if R takes a loan against the security
of such bonds?
Example
On November 2, 2009, X sells gold for Rs 11, 85,000 (cost of acquisition on
March 10,1993 Rs 1,05,000). Expenses on purchases and transfer are Rs
100 & Rs 200 respectively. On May 1, 2010, he acquires bonds on National
Highways Authority of India Rs 5,00,000. These bonds are redeemable
after 42 months. Find out the amount of exemption under section 54 EC.
Capital gains on transfer of a long term capital asset other than a house property [sec
54F]
SITUATION PROVISION
Who can claim exemption? An Individual or HUF
Which asset is qualified for Any long term capital asset other than a
exemption? residential house property provided on the
date of transfer the taxpayer dose not own
more than one residential house property
Which capital asset is Long term
Which asset should be Residential house property
purchased to claim ( purchased or constructed, old or new)
exemption?
acquiring the new asset? forward from the date of transfer of old
property
b)For construction: 3 yrs from the date of
transfer
c) In case compulsory acquisition above
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specified period shall be treated as LTCG
which will be calculated as under
Unutilised amount X Amount of original
capital gain
Net sale
consideration
How much is exempt? Cost of new house X Capital gains
Net sale
consideration
When exemption will be Case 1) If new asset is transferred within
taken back? 3 yrs from the date of its acquisition or
construction
Case 2) If the assessee purchases, within a
period of two yrs of the transfer of original
asset or constructs within a period of three
years of the transfer of such asset, a
residential house other than new house
What will be tax treatment if Case 1 mention above
exemption is taken back? Capital gains which arise on the transfer of
the new house will be taken as STCG &
exemption which was allowed earlier shall
be treated as LTCG of the year in which the
new asset is transferred.
Case 2 mention above
exemption which was allowed earlier shall
be treated as LTCG of the year in which the
new asset is purchased or constructed.
Example
X and Y give the following information (they do not own any residential
house property)-
Transfer of gold X Y
Rs. Rs.
Date of transfer May 10, 2009
Feb. 15, 2010
Date of purchase June 23, 1982

June 18,1981
Sale consideration 36, 55,000

13,14,000
Cost of acquisition 3,00,000 77,000

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Expenses on transfer 55,000 14,000
To get the exemption under section 54F,

the following residential house properties
are purchased by X and Y at Pune-
Date of purchase May 12, 2009
January 3, 2010
Cost of acquisition 27,00,000

6,50,000
X and Y transfer their house properties
at Pune as follows-
Sale consideration 30,00,000

14,70,000
Date of transfer June 29,2011

January 1, 2013
Find out the capital gain chargeable to tax in the hands of X for
different assessment years.
Example
X sells (non-listed) shares in a private sector company on July 10, 2009
for Rs. 8,05,000 (cost of acquisition on June 15, 1984 : Rs. 60,000,
expenses on sale : Rs. 5,000). On July 10, 2009, he owns one residential
house property. To get the benefit of exemption under section 54F, X
deposits on May 30, 2010 Rs. 6,00,000 in Capital Gains Deposit Account
Scheme. By withdrawing from the Deposit Account, he purchases a
residential house property at Delhi on July 6, 2011 for Rs. 4,80,000.
Ascertain-
a. the amount of capital gain chargeable to tax for the assessment year
2010-11.
b. tax treatment of the unutilized amount;
c. when can he withdraw the unutilized amount; and
d. what X has to do to ensure that the exemption under section 54F is
never taken back.
Capital gains on transfer of assets in cases of shifting of industrial undertaking [sec 54G]
SITUATION PROVISION
Who can claim exemption? Any person
Which asset is qualified for Land, Building, plant or machinery in order
exemption? to shift an industrial undertaking from urban
area to rural area
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Which capital asset is Short term / Long term

Which asset should be Land, Building, plant or machinery in order
purchased to claim to shift an industrial undertaking to rural
exemption? area
acquiring the new asset? forward from the date of transfer
STCG/LTCG depending upon original gain
is lower
as follows
exemption claimed u/s 54G earlier
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Example
X Ltd. owns an industrial undertaking at Kanpur which is situated in urban
area. As per policy of the State Government, the industrial undertaking is
shifted to a rural area. In the process of shifting, the company sells the
following assets:
PARTICULARS PLANT & BUILDING FURNITUR LAND
MACHINER E
Y
Rate of deprecation 15 10 10
(%)
Year of acquisition 1977 1978 1976 1975
Written down value of 9,50,000 10,75,00 25,000 -
the block on April 0
1,2009
Cost of acquisition of 20,000
land (fair market
value on April,
1,1981 :Rs. 60,000)
Sale proceeds (date of 47,92,000 88,90,00 17,32,000 60,00,0
sale June 25,2009 0 00
Cost of assets 30,50,000 4,00,000 3,70,000 50,70,0
acquired during April- 00
May 2010 for the
purpose of shifting the
undertaking to a rural
area.
Assuming the industrial undertaking is transferred to rural area by June

15,2010 ascertain the capital gains chargeable to tax for the
assessment year 2010-11. Does it make any difference if the assets are
acquired by March 31,2010?
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Capital gains on transfer of assets in cases of shifting of industrial undertaking from

urban area to any SEZ [sec 54GA]
SITUATION PROVISION
Who can claim exemption? Any person
Which asset is qualified for Land, Building, plant or machinery in order
exemption? to shift an industrial undertaking from urban
area to SEZ
Which capital asset is Short term / Long term
Which asset should be Land, Building, plant or machinery in order
purchased to claim to shift an industrial undertaking to SEZ
exemption?
acquiring the new asset? forward from the date of transfer
STCG/LTCG depending upon original gain
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is lower
as follows
exemption claimed u/s 54GA earlier
PROBLEMS ON CAPITAL GAIN

Problem 1
During the previous year 2009-10, X (33 years) sells the following assets :
Non-listed bonds Gold Shares
Debentures
(Non-listed) (Non-
listed)
Date of sale March 31,2010 April 10,2009 May 17,2009
March 5, 2010
Date of acquisition April 10, 2009 June 3, 1978 April 10,
1991 April 10, 1962
Rs. Rs. Rs. Rs.
Sale consideration 50,000 8, 15,000 2, 60,000
70,000
Cost of acquisition 44,000 60,000 55,000
40,000
Fair market value on April 1, 1981 -- 69,000 ---
34,000
Income from other sources is Rs. 6, 18, 000. Donation to on approved
charitable trust is Rs. 78,000. The assessee deposits Rs. 50,000 in public
provident fund.
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Problem 2
X, a resident Hindu undivided family, has the following income for the
previous year 2009-10:
Rs.
Business income (-) 15,000
Short-term capital gain 63,000
Long-term capital gain on sale of land
8,21,000
Find out the tax liability for the assessment year 2010-11, assuming that
the family pays life insurance premium of Rs. 65,000 (sum assured : Rs.
4,00,000).
Problem 3
On June 30, 2009, X (31 years) sells the following assets –
Equity shares in A Equity shares in B
Shares in C Ltd.
Ltd. (listed) Ltd. (listed) (non-listed)
Rs. Rs. Rs.
Sale consideration 5,00,000 6,25,000 6,89,000
Cost of acquisition 26,000 1,10,000 20,000
Date of acquisition May 10, 1982 June 6, 1983
April 6, 1984
Income of X from other sources if Rs. 7,86,000. X deposits Rs. 50,000 in
public provident fund. Find out the net income and tax liability for the
assessment year 2010-11 under the following situations –
Situation (a) – The shares are transferred outside a stock exchange.
Situation (b) – The shares in A Ltd. and B Ltd. are transferred in a
recognized stock exchange.
Problem 4
On April 20, 2009, X (29 years) sells the following assets –
Sale
consideration
Rs.
1. Self-generated goodwill of a business (long-term)
14,00,000
2. Bonus shares in A Ltd. (listed) (being long-term capital assets)

6,00,000
3. Bonus shares in B Ltd. (non-listed) (being short-term capital assets)

8,00,000
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4. Listed debentures of C Ltd. (acquired on March 6, 1984 for Rs.

40,000) 1,00,000
Find out the tax liability of X for the assessment year 2010-11 on the
assumption that his business income is Rs. 6,000 in the following two
situations :
(a) when shares are transferred outside a recognized stock exchange.
(b)when shares in A Ltd. are transferred through a recognized stock

exchange.
Problem 5
The following information is given by X (29 years) and Y (31 years) for the
assessment year 2010-11-
X Y
Rs. Rs.
Sale consideration on transfer of equity shares
2,00,000 1,90,000
Indexed cost of acquisition (purchased in 1981-82)
1,43,000 1,35,000
Other incomes 7,50,000
7,70,000
PPF contribution 20,000 10,000
Find out net income and tax liability of X for the assessment year 2010-11
firstly on the assumption that equity shares are transferred privately to a
friend on April 10,2009 and, secondly, on the assumption that equity
shares are transferred on October, 10,2009 in the Bombay Stock
Exchange.
Problem 6
During the previous year ending on March 31, 2010, X sells the following :
Assets Date of Sale Cost of Year of Fair
sale proceeds acquisition purchase market
value on
Rs. Rs. April 1,
1981
Rs.
Shares April 10, 6,50,000 1,70,000 1989-90 1,80,000
(non- 2009
listed)
Agricultur
al land in
rural area
(outside May 25,
the 2009 17,00,000 2,30,000 1973-74 3,40,000
municipal
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limits)
Agricultur
al land in June 10,
urban area 2009 17,50,000 2,50,000 1979-80 2,00,000
Debenture April
s (non- 10,2009 2,90,000 1,70,000 1990-91 1,80,000
listed)
Personal July 1, 1,25,000 70,000 1991-92 NA
car 2009
On July 31, 2010 (being the due date of furnishing return of income), X
deposits Rs. 1,00,000 under section 54B for claiming exemption in future
by purchasing agricultural land. By withdrawing from the deposit account,
he purchases agricultural land for Rs. 40,000 till June 9, 2011. Assuming
that the income of X from the other sources for the previous years 2009-
10 and 2011-12 is Rs. 2, 86,000 and Rs. 2,92,000. respectively, find out
the taxable income of X for the assessment years 2010-11 and 2012-13.
Problem 7
X enters into a partnership with three other persons on July 1, 2009 to
start a manufacturing business. The following capital assets are
contributed by X as his capital contribution :
Land Gold Shares
Date of May 1, 1944 June 10, 2007 November 2,
acquisition Rs. Rs. 2008
Rs.
Fair market
value on the
date of transfer
by X to the firm 17,00,000 6,00,000 3,00,000
(i.e. July 1, 2009
Amount
recorded in 16,00,000 5,90,000 3,50,000
books of the firm
Cost of 1,500 2,10,000 2,70,000
acquisition
Fair market
value on April 1, 52,220 --- ---
1981
On July 31, 2010 he deposits Rs. 12,00,000 in a bank account for purpose
of availing exemption under section 54F (he owns one residential house).
Construction of a residential house at Bombay is completed on June 21,
2012. Rs. 9,50,000, being the amount of investment, is financed by
withdrawing from the deposit account. Assuming that income of X from
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other sources (except capital gain) for the previous years 2009-10 and
2012-13 is Rs. 90,000 and Rs. 2,10,000, respectively, determine the net
income of X for the assessment years 2010-11 and 2013-14.
Problem 8
X owns two houses (at Amritsar and Pune). He transfers the following
long-term capital assets during 2009-10-
Residential Gold Silver
house property
at Pune
Date of sale April 10,2009 April 11, 2009 April 12, 2009
Rs. Rs. Rs.
Sale 10,00,000 8,00,000 6,00,000
consideration
Indexed cost of
acquisition 4,00,000 7,00,000 2,50,000
X purchases the following assets-
Date of purchase Amount invested
Rs.
Residential house at October 11, 2009 7,00,000
Bombay
Bonds of National
Highways Authority of
India for the purpose of October 10,2009 2,50,000
section 54EC
Ascertain the amount of capital gain chargeable to tax for the assessment
year 2010-11. Can he claim exemption under sections 54, 54EC and 54F.
END OF TOPIC
TOPIC 8: INCOME FROM OTHER SOURCES

1. INTRODUCTION
This is the last head of income. Any income which is not salary income,
house property income, business income, capital gain is treated as income
from other source.
2. GENERAL PROVISION [SEC 56(1)]
The following income is chargeable under this section
A. Income from subletting
B. Interest on bank deposit and loans
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C. Director’s fees
D. Agricultural income outside India
E. Rent of a plot of land
F. Insurance commission
G. Family pension received by members of deceased employee
H. Income from undisclosed sources
Casual Income [sec 56(2) (ib)]

• Winnings from lotteries, crossword puzzles, races including horse races , gambling &
betting of any nature or form, card game, entertainment program are taxable under this
head.
• Tax rate [sec 115BB] : tax is charged at a flat rate of 30%.
• Deduction u/s 80C to 80U is not available from such income.
• Winning from lottery to an agent or trader out its unsold stock shall be treated as
incidental to business and taxed under head “profit & gains of business or profession”.
• While calculating lottery income TDS is to be added to find out gross income.
• TDS is not deducted in the following cases
o If the amount of lottery income is not more than Rs 5,000.
o If the amount of winning from horse races is not more than Rs 2,500.
Income from machinery, plant or furniture let out on hire [sec 56(2) (ii)]
• Income from above is taxed under this head.
• If assets are let out as a part of business activity then shall be taxable as business
income.
Income from machinery, plant or furniture let out on hire along with building [sec 56(2)
(iii)]
• Generally income from letting of building is taxable under the head income from
house property, but if such letting is inseparable from letting of machinery, plant or
furniture, then income form such letting is charged to tax under the head income from
other sources.
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Deduction allowed against income u/s 56(2)(ii) & 56(2)(iii)

• Current repairs
• Insurance premium paid for machinery, plant , furniture or building
• Depreciation and unabsorbed depreciation
• Any other revenue expenditure in relation to above mentioned income.
Family pension
• Family pension received by the family member of a deceased employee is taxable as
• Assessee can claim standard deduction u/s 57(iia) which is minium of the following
• 1/3rd of such pension or Rs 15,000.
• Relief u/s 89 is available on arrears of family pension received by the family of a
deceased employee, as in the case of arrears/advance salary.
Gift i.e. any sum of money received without consideration [sec 56 (2)(vi)][applicable up
to 30-09-2009]
• Where any sum of money, the aggregate value of which exceeds Rs 50,000 is received
without consideration by an individual or an HUF from any person/persons, the whole
of aggregate value will be taxable under income from other sources.
• Gift in kind is not taxable.
• Gift received from relative is not taxable. Here relative means spouse of the individual,
brother or sister of the individual, brother or sister of the spouse of the individual, etc.
• Gift received on the occasion of the marriage of the individual is not taxable.
Income by way of interest received on compensation or on enhanced compensation [sec
56(2)(viii)]
It is taxable under the head income from other sources after allowing standard deduction of
50% of such income.
Interest on securities [sec 56(2) (id)]
As per sec 2(28B) “interest on securities” means
a) Interest on any security of the Central Government or a state Government
b) Interest on debentures or other securities issued by or on behalf of
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o A local authority
o A company
o A corporation established by a central or state government
Expenditure allowed as deduction

• Collection expenditure
• Interest on loan
Avoidance of tax by certain transaction in securities [sec 94]

Bond washing transaction [sec 94(1)]
Where the assessee transfers the securities before the due date of interest and reacquires the
same, then the interest received by the transferee will be deemed to be the income of the
transferor.
Bonus stripping [sec 94(8)]
Where
a) Any person buys or acquires any units within period of 3 months prior to
the record date
b) Such person is allotted additional units without any payment on the basis
of holding of such units on such date.
c) Such person sells or transferred all or any of the units referred to in clause
(a) within a period of 9 months after such date, while continuing to hold all
or any of the additional units referred to in clause (b)
Tax treatment
a) Loss if any arising to him on account of such purchase and sale of all or
any of such units shall be ignored for the purpose of computing his income
chargeable to tax.
Dividend [sec 2(22)]

• Dividend means amount received by a shareholder in proportion to his shareholding.
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• Dividend received from domastic company is exempt from tax u/s 10(34)
• Dividend received from a co-operative society & non- domastic company is taxable as
3. EXPENSES DISALLOWED
A. Personal expenses
B. Interest payable outside India on which tax has not been deductible
C. Salary payable outside India on which tax has not been deductible
D. Wealth tax
E. Expenditure in respect of winnings from lottery etc
PROBLEMS ON INCOME FORM OTHER SOURCE

PROBLEM 1
From the following information of Mr. Kishore Kumar, compute his
taxable income and tax liability for A. Y. 10-11.
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(a) He is in service in ABC Ltd. Mumbai and his monthly salary is Rs.
18,000 p.m. He has received bonus of Rs. 18,000. he paid
professional tax Rs. 2,400/-
(b) He has his own business and the net income of that business is
Rs. 20,500.
(c) He has given one of his houses on rental basis at Rs. 2,000 p.m.
Municipal value of the same house is Rs. 30,000. He paid
municipal tax Rs. 3,000, Ground rent Rs. 1,000 and Insurance
premium Rs. 500 on that house.
(d) His investments are as follows :
(i) Rs. 15,000 in 9% debentures.
(ii) Bank Fixed Deposits Rs. 20,000 at 10% rate of interest for 5
years in Bank of Maharashtra, Aundh.
(e) During the previous year he makes the following investments :
(1)Contribution to R.P.F. Rs. 21,600.
(2) Payment of life insurance premium on the life of his
child Rs. 5,100.
(3) Contribution to P.P.F. Rs. 10,000.
(4) NS Certificate Rs. 13,300.
PROBLEM 2
From the following particulars calculate the tax liability of Mr. Anil for the
A. Y. 10-11
Basic salary Rs 160000
Bonus Rs 8000
Commission Rs 24.000
House rent allowance Rs 10000
Employer’s contribution to providend fund Rs 19200
Mr. Ravikant owns a house property which is used by him for his
residential purposes. Municipal valuation of the house property is Rs
50000.
During the year he has paid professional tax Rs 2700. He has received Rs
35000 as dividend (gross).
During the year he has made following investments
Contribution to ULIP Rs 2000
LIC paid Rs 12000
Contribution to RPF Rs 19200
Invested in fixed deposit with SBI for 5 yrs Rs 15000
PROBLEM 3
Mr. Vikas Rahane has given the following particulars of his income and
saving for the financial year ending on 31-3-10.
Gross salary Rs 203000
Profits from business Rs 50000
Interest on government securities Rs 3800
Dividend received from an Indian company Rs 5600
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Income from house property Rs 15000

Professional tax paid Rs 2500
Investments
LIC premium Rs 10200
PPF Rs 10000
NSC Rs 5000
F.D. with SBI for 5yrs Rs 50000
Calculate total income for A.Y. 2008-09.
PROBLEM 4
Mrs. Punekar a computer engineer working with IBM ltd has provided you
the following details in respect of the PY 09-10.
Basic salary Rs 20000 p.m.
Dearness allowance Rs 5000 p.m.
Transport allowance Rs 1500 p.m.
City compensatory allowance Rs 750 p.m.
During the year he has contributed Rs 3500 p.m. to the unrecognized
providend fund. An equal amount is contributed by the company.
She has been provided with a rent free accommodation at Pune by the
company.
During the year, she has received interest on government securities Rs
24000 and family pension from software ltd. Rs 2400 p.m.
She owns a flat at Satara for which she had borrowed Rs 50000 on 31st
march 1999. During the year, she has paid Rs 38000 and repaid the
principle amount Rs 52000.
She has taken life insurance policy for her son living at Satara by paying
Rs14000 as premium. She has invested 15000 in NSC and Rs 10000 in
PPF.
The company has deducted tax at source Rs 50000 and profession tax Rs
3300.
Compute tax liability of Mrs. Punekar for A. Y. 10-11
PROBLEM 5
Mr. Ganesh, a resident of Delhi submits the following details of his income
for the financial year 09-10
Salary Rs 8000 p.m.
D.A. Rs 100 p.m.
Entertainment allowance Rs 100 p.m.
City compensatory allowance Rs 50 p.m.
Bonus Rs 5000 p.a.
Employer’s contribution to R.P.F. Rs 15000 p.a
His own contribution to R.P.F Rs 20000 p.a.
He has a house property at Agra which is let out @ Rs 3000 p.m. It was
completed in 2000 and Rs 3000 paid for municipal tax and paid Rs 8000
for interest on borrowed capital and principal amount Rs 10000 Mr.
Ganesh has incurred expenses foe medical treatment of his wife
(handicapped dependents) Rs 25000
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During the year Mr. Ganesh has received dividend from Indian company
amounting Rs 3800 and interest from fixed deposit with SBI Rs 1200 and
interest from govt. securities Rs 3000. He also wins from play with lottery
Rs 5000 and horse races Rs 1000.
Compute his total income and tax liability for the A. Y. 10-11
PROBLEM 6
Mr. Rajesh who is doctor in Pune, whose age is 68yrs, furnishes the
following information of his income for A. Y. 10-11
1) Pension from medical college Rs 15000 p.m.
2) Income from profession Rs 8800000
3) He stays in his own house. The municipal value of house is Rs
60000. He had paid municipal tax Rs 5000. He has taken a loan for
construction for which he had paid interest of Rs 8000 and loan repaid
is Rs 15000
4) Winnings from lottery Rs 75000
5) Dividend from Indian company 6000, interest from bank fixed
deposit 4000
6) He has deposited Rs 30000 in P.P.F. and LIC deposits Rs 10000.
7) He has donated Rs 2500 towards Gujarat Earthquake relief Fund.
8) Repayment of Loan taken from bank for Higher studies of his son Rs
16000
Compute taxable income of Mr. Rajesh for A.Y. 2010-11.
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END OF TOPIC
TOPIC 9 : THOERY
ADVANCE TAX
A) When advance tax payable?

Every person whose tax liability exceeds Rs 10,000 is liable to pay advance tax.
B) Installments of advance tax and due dates (Section 211]
In the case of non-company assessee, advance tax has to be paid in three installments.
However, in the case of a company assessee, advance tax is payable in four installments. The
relevant due dates of installments are given below:
TABLE 1
For Company Assessee (Company)
Due date of installments Amount Payable
1. On or before the 15th June Not less than 15% of advance tax liability.
2. On or before the 15th September. Not less than 45% of advance tax liability,
as reduced by the amount, if any, paid in the
earlier installment.
3. On or before the 15th December Not less than 75% of advance tax
liability, as reduced by the amount(s)
if any, paid in the earlier installment(s)
4. On or before the 15th March The whole amount of advance tax liability
as reduced by the amount(s) if any,
paid in the earlier installment(s)
TABLE 2
For Non-company Assessee

Due date of installments Amount Payable
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1. On or before the 15th September. Not less than 30% of advance tax liability;
2. On or before the 15th December. Not less than 60% of advance tax liability,
as reduced by the amount, if any, paid in the
earlier installment.
3. On or before the 15th March The whole amount of advance tax liability as
reduced by the amount(s) if any, paid in the
earlier installments.
Compute the Advance Tax payable by R from the following estimated income submitted for
the financial year 2009-10:
Rs.
(1) Income from Salary 1, 64,000
(2) Rent from house property (per annum) 90,000
(3) Interest on Government securities 5,000
(4) Interest on bank deposits 3,000
(5) Receipt from horse race (net) 13,820
(6) Agricultural income 90,000
(7) Contribution towards PPF 10,000
Tax deducted at source by the employer on salary is Rs. 2,400
C) Payment of advance tax in case of capital gains/casual income [Provision to section

234C]
As already discussed, advance tax is payable on all types of income, including capital gains
and
Winnings of lotteries, crossword puzzles, etc. However, it is not normally possible for an
assessee to estimate his capital gains or winnings from lotteries, etc. which are generally
unexpected. Therefore, in such cases, it is provided that if any such income arises after the due
date of any installment, then, the entire amount of tax payable (after deduction of tax at
source, if any) on such capital gain or casual income should be paid in remaining installments
of advance tax which are due or where no such installment is due, by 31st March of the
relevant Financial Year. If the entire amount of tax payable is so paid, then no interest on late
payment will be leviable.
Illustration: The estimated Gross Total Income of X Co. Ltd. is Rs. 3, 00,000 which includes
Rs. 1.00,000 on account of LTCG earned on 16-9-2009. Compute the Advance Tax Payable
by the company, assuming Rs. 11,000 has been deducted at source during the financial year
2009-10.
Solution
Estimated Tax Liability with LTCG Rs.
On Rs. 2, 00, 000 @ 30% 60,000
on LTCG of Rs 1, 00,000 @ 20% 20,000
80,000
Add: Surcharge Nil
80,000
Add: Education cess @ 2% 1,600
Add: SHEC @ 1% 800
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82,400
Less: TDS 11,000
Tax payable 71,400
Estimated Tax Liability without LTCG
Tax on Rs. 2, 00,000 @ 30% i.e. 60,000 + 1,200 + 600 61,800
Less: TDS 11,000
Tax payable 50,800
Tax payable on 1st installment i.e. by 15-6-2009 - 15% of Rs. 50,800 7,620
Tax payable on 2nd installment i.e. by 15-9-2009
45% of Rs. 50,800 = 22,860 - 7,620 (paid on 1st installment) 15,240
Tax payable on 3rd installment i.e. by 15-12-2009 (by including LTCG)
75% of Rs. 71,400= 53,550-[Rs. 7,620+ 15,240] 30,690
Tax payable on 4th installment i.e. by 15-3-2010
100% of Rs. 71,400 - [Rs. 7,620 + 15,240 + 30,690] 17,850
INTEREST
UNDER WHAT CIRCUMSTANCES IS INTEREST U/S 234A CHARGEABLE?

Applicability/situation (a) the return of income is not filed within the due date u/s 139(1)
or within the time allowed by the notice u/s 142(1)
(b) the return of income is not furnished
Rate of interest Period 1% for every month or part of the month
of interest (a) where return of income is filed: from the due date of filing the
return till the date of furnishing the return of income
(b) where the return of income is not filed: from the due date of
filing return of income upto the date of completion of assessment
Computation of (A) Tax payable u/s 143(1)/143(3)/144 or the first assessment is
income on which made u/s 147/153A
interest is payable (B) Less: TDS,TCS and Advance Tax paid, Relief u/s 90 or 90A,
Deduction u/s 91, MAT credit u/s 115JAA
(C) Amount on which interest is payable [A-B]
Amount on which interest is payable x 1% per month x no. of
Computation of
months Less: interest paid u/s 234A at the time of self-assessment
interest
u/s 140 A
INTEREST U/S 234B

When interest is Amount on Rate of interest Period for which interest is
payable which payable
interest is
payable
The assessee fails Interest payable Simple interest From 1St April of the
to pay advance on assessed tax @ 1% for every assessment year to the date of
tax month or part of determination of income under
month sec 143(1) and where a regular
assessment is made to the date
of such regular assessment
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The advance tax Interest payable Simple interest From 1St April of the
paid by the on assessed tax @ 1% for every assessment year to the date of
assessee minus advance month or part of determination of income under
is less than 90% tax month sec 143(1) and where a regular
of the assessed assessment is made to the date
tax. of such regular assessment
Tax means tax determined under self assessment or regular assessment as reduced by
Tax deducted at source
Relief allowed u/s 90 or 90A or 91
Credit allowed u/s 115JAA (MAT credit)
WHEN & HOW IS INTEREST U/S 234C COMPUTED?

Interest is payable under Sec 234C if an assessee has not paid advance tax or underestimated
installments of advance tax. Interest is calculated on following manner
FOR CORPORATE ASSESSEE

When interest is Rate of interest Period of Amount on which interest is
payable interest payable
If advance tax Simple interest 3 months 30% (a-b)-c
paid on or before @ 1% for every
Sept 15 is less month or part of
than 30% (a-b) month
If advance tax Simple interest 3 months 60% (a-b)-d
December 15 is month or part of
less than 60% (a- month
b)
If advance tax Simple interest 1 months 100% (a-b)-e
March 15 is less month or part of
than 100% (a-b) month
Notes:
a = tax on total income declared in the return filed by the assessee
b= tax deducted at source
c= amount of advance tax paid before 15th Sept
d= amount of advance tax paid before 15th December
e= amount of advance tax paid before 15th March
FOR NON CORPORATE ASSESSEE

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When interest is Rate of interest Period of interest Amount on which

payable interest is payable
If advance tax paid on Simple interest @ 3 months 15% (a-b)-c
or before June 15 is less 1% for every
than 12% (a-b) month or part of
month
If advance tax paid on Simple interest @ 3 months 45% (a-b)-d
or before September 15 1% for every
is less than 36% (a-b) month or part of
month
If advance tax paid on Simple interest @ 3 months 75% (a-b)-e
or before December 15 1% for every
is less than 75% (a-b) month or part of
month
If advance tax paid on Simple interest @ 1 month 100% (a-b)-f
or before March 15 is 1% for every
less than 100% (a-b) month or part of
month
Notes:
a = tax on total income declared in the return filed by the assessee

b= tax deducted at source
c= amount of advance tax paid before 15th June
d= amount of advance tax paid before 15th Sept
e= amount of advance tax paid before 15th December
f= amount of advance tax paid before 15th March
No Interest:
(a) Shortfall due to: If shortfall in payment of tax due on the returned income is on
account of under-estimation or failure to estimate:
* Capital gains
* Winnings from lotteries, crossword puzzles, races (including horse races), card games and
any other activity in the nature of gambling, betting etc.
(b) Payment before 31st March: The assessee has paid the amount of tax payable in
respect of such income as part of the remaining installments of advance tax which are due or
where no such installments are due, by the 31st March of the financial year, no interest shall
be leviable in respect of such shortfall.
PROCEDURE TO BE FOLLOWED IN CALCULATING INTEREST [RULE 119A]

In calculating the interest payable by the assessee, the following procedures are to be
followed–
1. Calculation of interest:
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Where the interest is to be calculated on annual basis

• Period shall be rounded off to whole month
• Fractions shall be ignored

Where interest is to be calculated for every month or part of a month
• Fractions shall be rounded off to full month.
2. Rounding off: The amount of tax, penalty or other sum in respect of which the interest is to
be calculated shall be rounded off to nearest multiple and for this purpose any fraction of 100
shall be ignored.
INTEREST PAYABLE AN EXCESS REFUND. [SECTION 234D]

1 Applicability: Refund must have been granted to the assessee u/s 143(1)
2 Condition: No refund is due or it is reduced on Regular Assessment u/s 143(3). Note:
Regular assessment includes assessment made for the first time u/s 147 or 153A.
3 Amount of Interest-Excess refund made u/s 143(1) x 0.5% x No. of months or part thereof.
4 Reduction in interest: The interest charged under this section may be reduced by giving
effect to the order u/s 154/245D/250/260/262/264.
WAIVER OF INTEREST
Power to Waive: The CBDT has empowered the CCIT and DGIT to reduce or waive interest
charged u/s 234A / 234B / 234C for the following cases or classes of income for the period
and to the extent they deem fit -
Cases / Class of Persons (a) Where, in the course of search and seizure Interest Waived
operations u/s 132 -• Books of account have been seized by the Interest u/s 234A
Department, and • Assessee was not able to furnish the return of income only
for the previous year in which such operation took place, and • The
delay furnishing such return cannot reasonably be attributed to the
Assessee.
(b) Any income other than ‘capital gains’ which was received or Interest u/s
accrued after the date of the first or subsequent installment of advance 234Conly
tax, which was neither anticipated nor contemplated by the taxpayer and
on which advance tax was paid by the tax payer after the receipt of such
income
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TAX DEDUCTED AT SOURCE

SEC 192: TDS ON SALARIES
Person responsible to deduct tax All assesses who are employers
Employees having taxable salary, Including non-
Category of the payee
residents
Rate of deduction of tax Rates of tax as applicable to the individual as per Part
III of the Finance Act
Exemption limit No TDS if income under the head Salaries does not
exceed Rs.
160000 /190000/240000
Time for deduction of tax At the time of payment i.e. as and when salary is paid
and not when it is due
Time for deposit of TDS (a) in case of deduction by or on behalf of Government,
on the same day (b) in case of others, within one week
from the last day of the month in which the deduction
was made. The Assessing Officer may In special cases,
within the approval of JCIT, permit the payment of
TDS quarterly, i.e., 15th June, 15th Sep, 15th Dec and
15th March
SEC 193: TDS ON INTEREST ON SECURITIES

Central or state government, Local authority, Company
or corporation established by the Central or State
Person responsible to deduct tax
Government Category of the payee. Any person being
resident. Resident Nor-corporate Assessee
Rate of deduction (a) Listed Debentures: 10% Plus Surcharge Plus
Education Cess Plus SHEC,
(b) Non-listed Debentures: 20% Plus Surcharge Plus
Education Cess Plus SHEC if recipient is non resident
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corporate assessee & for Domestic Company 20% Plus

Surcharge Plus Education Cess Plus SHEC.
(a) Exempted for certain listed

securities u/s 193. No TDS
(b) In case of Debentures issued by a company in

which public is substantially interested and listed in a
recognised stock “change in India and the Interest is
paid by account payee cheque and the interest paid
during the financial year does not exceed Rs. 2,500
At the time of credit to the account of the payee or

Time for deduction payment whichever is tax earlier. In case of deduction
by or on behalf of the Government, on the same day.
(a) If the amount is credited on the last day of the

Time for deposit of TDS accounting year-within 2 months from end of the
month in which it is credited
(b) Other cases- within 1 week from the last day of the
month of tax deduction.
INCOME FROM WHICH TDS NEED NOT BE DEDUCTED U/S 193:

Section 193 provides that no tax shall be deducted at source in the following cases:
1) Interest on 4 1/4 % National Defence Bonds, 1972, except if held by a non-resident
individual.
2) Interest payable to an individual on 4 1/4% National Defence Loan, 1968, or 43/4%
National
Defence Loan, 1972, or
3) Interest payable on National Development Bonds, or
4) Interest payable on 7-Year National Savings Certificates (IV Issue), or
5) Interest payable on Debentures, issued by any notified Institution or authority, or any
6) Public Sector. Company, or any Co-operative Society (including a Co-operative Land

Mortgage Bank or a Co-operative Land Development Bank)
7) Interest payable on 6 1/2 % Gold Bonds, 1977, or 7% Gold Bonds, 1980, if
8) (a) These are held by an individual not being a non-resident, and
9) (b) The holder thereof makes a written declaration that the total nominal value of the
bonds held by him (including such bonds, if any, held on his behalf by any other
person) did not exceed Rs.10, 000 at any time during the period to which the interest
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relates.
10) Interest payable on any security of the Central Government or State Government, other
than interest exceeding Rs.10, 000 on 8% Savings (Taxable) Bonds 2003.
11) Interest payable to a resident individual, on listed Debentures issued by a Company in
which the public is substantially interested, if
(a) The interest is paid by the Company by an account payee cheque, and
(b) The amount of such interest or, as the case may be, the aggregate of the
amounts of such interest paid or likely to be paid during the financial year by
the Company to such Individual does not exceed Rs. 2,500.
12) Interest payable to LIC, GIC or any of its subsidiaries, or any other Insurer in respect
of any Securities owned by it or in which it has full beneficial Interest.
SEC.194: TDS FROM DIVIDENDS

Person responsible for tax Principal Officer of (a) an Indian Company or (b) or Company
deduction Category of which has made the prescribed arrangements for declaration
Payee and payment of dividends u/s 2(22) (e) within India other than
dividend u/s 115-0. Any person who is resident in India.
No TDS No deduction shall be made in respect of dividends referred u/s
115-0.
Time for deduction of tax Before making any payment in cash or cheque or warrant, or
any distribution or payment to a shareholder
Time of deposit of TDS Within seven days from the date off deduction.
Certificate of TDS and Form 16A to be issued within 1 month from the end of the
time of issue month during which tax has been deducted
10%.
Rate of TDS
SEC.194A: TDS ON INTEREST OTHER THAN INTEREST ON SECURITIES

Person responsible to All assesses other than individual and HUF whose accounts are
deduct tax not-subject to audit u/s 44AB of the Act during the preceding
financial year
Category of payee Any resident in India.
Rate of deduction of Non-corporate assessee -10% -Plus Surcharge as applicable Plus
Tax Education Cess Plus SHEC
Domestic Companies - 20% Plus Surcharge as applicable Plus
Education Cess Plus SHEC
If aggregate amount of interest credited or paid does not exceed

No TDS (a) Where the payer is (i)) Banking Company or (ii) a Co-
operative Society engaged in banking business or (iii) in respect
of Deposit with Post Office Notified by the Central Government -
Rs. 10,000. (b) In any other case - Rs.5000.
Time for deduction of At the time of credit or-payment whichever is earlier.
Tax
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In case of deduction by or on behalf of the Government, on the

same day. In all other cases: (a) If the amount is credited on the
last day of the accounting year-within 2 months from end of the
month in which it is credited. (b) Other cases -within 1 week from
Time for deposit of the last day of the month of w deduction (c) Assessing Officer
TDS may in special cases, with the approval of JCIT, permit the
payment of TDS quarterly. i.e. 15th July, 15th Oct, 15th Jan, 15th
April
.
SEC.194B: TDS ON PAYMENT TOWARDS WINNINGS FROM HORSE RACES
Person responsible to Any person being Licensed by the Government or a Licensed
deduct tax Bookmaker
Category of payee All Assessees
Rate of deduction of
30%
tax
No TDS If the payment does not exceed Rs. 5,000
Time for deduction of At the time of payment.
tax
Time for deposit of In case of deduction by or on behalf of Government, on the same
TDS day. Other cases : Within One week from the end of the month in
which deduction was made
SEC.194 C: TDS FROM PAYMENT TO CONTRACTORS
Person responsible to Payment made by Specified Person other than Individual or HUF,
deduct tax who are not subject to tax audit u/s 44AB of the Act during the
preceding financial year.
Category of payee Any person resident in India.
Advertisement Contracts: 1% Other Contracts:
(a) For Contractors - 2%
Rate of deduction of b) For Sub-contractors - 1%
tax
(a) Contracts, the consideration for which does not exceed Rs.20,
000. (b) If the sum credited or paid or likely to be credited or paid
No TDS does not exceed Rs.20, 000 for single contract, but the aggregate
of such sum credited during the financial year exceeds Rs.50,
000, and then this section shall apply.
Time for deduction of At the time of credit or payment, whichever is earlier.
tax
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same day. Other cases: (a) If the amount is credited on the last
day of the accounting year -within 2 months from end of the
Time for deposit of
month in which credited. (b) Other cases - within I week from the
TDS
last day of the month of tax deduction.
Surcharge: If payee is Individual / HUF - 10% if the payment exceeds Rs.10 Lacs. For Firms
and Companies -10% on the whole payment if the payment exceeds Rs.1 Crore. For AJP -
10% on whole payment. Education Cess: Education Cass @ 2% of the Tax Payable after
including Surcharge. Secondary and Higher Education Cess: Secondary and Higher Education
Cass @ 1% of the tax payable after including Surcharge.
“Contract” for the purpose of TDS u/s 194C.
1 The term ‘work’ includes advertising, broadcasting and telecasting including
production of programmes for such broadcasting and telecasting.
2 Service Contract means a service contract other than those specifically covered u/s 194
3 Material contract means a contract for supply of materials where the principal contract
is for work and labour and not for sale of materials.
4. Transport contract for carriage of goods and passengers by any mode of transport other
than by railways.
5. Catering contract.
“SPECIFIED PERSONS” for deduction of tax at source u/s 194C

1 The Central Government or any State Government, or
2 Any Local Authority, or
3 Any Corporation established by or under a Central, State or Provincial Act, or
4 Any Company, or
5 Any Co-operative Society, or
6 Any Authority constituted in India by or under any law, engaged either for the purpose
of dealing with and satisfying the need for housing accommodation or the purpose of
planning, development or improvement of cities, towns and villages, or for both, or
7 Any trust, university, society, or
8 Any firm
9 Individual and HUF who are subject to tax audit u/s 44AB of the Act during preceding
financial year.
SEC.194D: TDS FROM PAYMENT OF INSURANCE COMMISSION
Person responsible to Insurance Companies

Deduct tax
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Category of payee Rate 10%

of deduction of tax
Exemption limit Amount of payment in aggregate not exceeding Rs. 5,000 during
financial year.
Time limit for At the time of credit or payment which is earlier.
deduction of tax
same day In all other cases: • If the amount is credited on the last
day of the amounting year -within 2 months from end of the
month in which it is credited. • Other cases - within 1 week from
Time for deposit of
the last day of the month of tax deduction. • Assessing Officer
TDS
may in special cases, with the approval of JCIT, permit the
payment of TDS quarterly. i.e. 15th July, 15th Oct, 15th Jan, 15th
April
SEC.194 I: TDS ON Rent
Person responsible to All assesses, except individual and HUF who are are not subject
deduct tax to tax audit u/s44AB, in the preceding financial year
Category of payee Any person being resident
Rate of deduction of 10%
tax for use of land or
building or furniture or
fittings
Rate of deduction of 2%
tax for use of
machinery or plant or
equipment
No TDS • Aggregate amount of rent paid or credited does not exceed Rs.
1,20,000 during the financial year • The payee is the Government
or Local Authority
Time for deduction of At the time of credit or payment whichever is earlier. In case of
tax Time for deposit of deduction by or on behalf of Government, on the same day. In all
TDS other cases: (a) If the amount is credited on the last day of the
amounting year-within 2 months from end of the month in which
it is credited. (b) Other cases - within 1 week from the last day of
the month of tax deduction
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SEC.194 J: TDS ON FEES FOR PROFESSIONAL TECHNICAL SERVICES
Person responsible to All assessees except individual and HUE, who are not subject to
Deduct tax tax audit u/s 44AB of the Act during the receding financial year.
Category of payee Any person resident in India.
(a) Fees for Professional Services or (b) Fees for Technical
Service- or (c) Royalty or (d) Payments referred u/s 28(1)(va) i.e.
Payment Covered sum received for not carrying out any activity or not sharing any
know-how, patent etc.
Rate of deduction of
10%
tax
(a) Aggregate of payments does not exceed Rs.20, 000 in a
financial year, for each of the nature of payment referred above
No TDS
separately. (b) Sum paid by Individual j HUF towards
professional service exclusively for their personal purposes
Time for deduction of At the time of credit or payment whichever is earlier.
tax
Professional Services means services rendered by a person in the course of carrying on any of
the following professions:
1 Legal
2 Medical
3 Engineering
4 Architectural
5 Accountancy
6 Technical Consultancy
7 Interior decoration, or
Profession as notified by the Board for the purposes of Section 44AA. i.e. Film Artists,
Authorized Representatives, Information Technology Professionals etc.
These services are governed by Section 194J and not by Section 194c.
Sec.201: CONSEQUENCES OF FAILURE TO DEDUCT TAX AT SOURCE OR

FURNISH RETURNS IN TIME
A. INTEREST:
1) Any person responsible for deducting tax at source shall be deemed to be assessee in
default and is liable to pay interest if he -
(a) does not deduct the whole or part of the tax
(b) after deducting the tax, falls to remit the tax to the Government.
2) Rate of Interest: Simple interest @ 1% for every month or part of a month.

3) Period of interest: Date on which tax was deductible to the date on which such tax is
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actually paid.
4) Time limit for payment: It shall be paid before furnishing the quarterly statement for each
quarter.
5) Failure to remit: Failure to pay tax deducted along with interest shall be a charge upon all
the assets of the Person or the Company who is liable to deduct and remit tax (w.e.f.
01.06.2007)
B. PENALTY:
Section Nature of default Penalty

271C Failure to deduct the whole or Sum equal to the amount of tax which he failed
272A(2) any part of tax at source to deduct Rs.100 for every day during which
272A(2) Failure to file the return of the failure continues but the penalty shall not
220 272 TDS/Tax collected at source exceed the amount of tax deductible Rs. 100 for
A(2) Failure to issue TDS every day during which the failure continues
certificates Failure to deduct or but the penalty shall not exceed the amount of
pay tax at source Failure to tax deductible Interest @ 12% p.a. on the
deliver declaration in Form amount of tax from the date on which such tax
15F/H u/s 197A was deductible to the date on which the tax is
actually paid Rs.100 for every day during
which-the failure continues but the penalty
shall not exceed the amount of tax deductible.
C. PROSECUTION:
U/s 276B- failure to pay tax deducted at source- punishable with rigorous imprisonment for
Minimum: 3 months; maximum- 7 years.
D. EXPENDITURE CLAIMED IS DISALLOWED:
1. PAYMENT TO NON-RESIDENTS:
(a) Disallowed Expenditure: U/s 40(a) (i), the following expenditure will be
disallowed if TDS is not made or no tax has been paid on them:
• Interest,
• Fees for Technical Services or
• Royalty,
• Other similar sum payable
(b) To whom payable: Such sums should be payable outside India or in India to non-
resident not being a Company or Foreign Company.
2. PAYMENTS TO OTHERS:
(a) Disallowed Expenditure: Section 40(a) (ia) provides that the following expenditure
shall not be allowed as a deduction:
• Interest (TDS u/s 194A)
• Commission or Brokerage (TDS u/s 194H)
• Rent (TDS u/s 1941)
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• Royalty
• Fees for Professional Services or Technical Services (TDS u/s 194J)
• Amounts paid to a contractor or sub-contractor for carrying out any work
(including supply of labour for carrying out any work).
(b) When Disallowed: The above expenditure will not be allowed as deduction if:
TDS has not been deducted, or
TDS has been deducted but not paid within the time limit u/s 200(1) and in
accordance with Chapter XVII-B.
(c) When Allowed: The above expenditure will be allowed as a deduction in
computing the income of the previous year in which such TDS has been paid.
ASSESSMENT PROCEDURE
1) RETURN OF INCOME
1. Voluntary Return: [Section 139(1)]
Assessee Due date for filling

return
(a) Company
(b) Non-corporate assessees whose accounts are required to 30th September
be audited under the Act or under any other law
c) Working partner of a firm whose accounts are required
to be audited
(d) Any other assessee 31st July
Forms Applicability
ITR - Return of Income for Individuals having salary and interest income and no other
1 Income
ITR-2 Return of income for Individuals and HUFs having income from any source
except from business or profession
ITR-3 Return of income for Individuals and HUFs being partners in Firms and not
having Proprietary business or profession
Return of Income for Individuals and HUFs having Proprietary business or
ITR -4
profession
ITR-5 For frims, AOPs and BOIs
ITR-6 For companies other than companies claiming exemption under section 11
ITR-7 For person including companies required to furnish return under section 139(4A)/
(4B)/(4C)/(4d)
ITR-8 Stand alone form for Return of Fringe Benefits for persons who are not liable to
file Return of income but are liable to file Return of Fringe -Benefits
Return of Income/Fringe Benefits transmitted electronically without digital
ITR-V
signatures
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FILING OF RETURNS WITH EMPLOYERS - Section 139(1A)

1 Applicability: Individual, who Is in receipt of Income chargeable under the head
“Salaries”
2 Option: Return of Income of any previous year may be furnished to the employer, in
accordance with the scheme prescribed by the Board.
3 Duty of Employer: The employer shall furnish all returns of Income received by him on or
before the due date, in such form (including on a floppy diskette, magnetic cartridge tape,
CD-ROM or any other computer readable media) and manner as may be specified in that
scheme.
4 Compliance: In such case, any employee who has flied a return of his income to his
employer shall be deemed to have furnished a return of income u/s 139(1).
FILING OF RETURN IN A COMPUTER MEDIA [SECTION139B]

1 The assessee may at his option furnish a return of income in computer media as per
scheme prescribed try the Board within due date u/s 139(1) and such return shall be
deemed to be a return furnished u/s 139(1).
2 It is mandatory for Companies and Firms subject to tax audit to file returns in electronic
form only. For others, filing return in electronic format is optional.
3. Electronic filing for Companies can be done in any of the following manner
(a) Electronic Form plus Paper Form: The Assessees are required to file return online in
electronic form in the prescribed format using an XML File before the due date u/s 139(1)
and follow the same by a paper return within 15 days from the date of submission of
return online.
(b) Electronic Form using Digital Certificate: Assessees can file their return of income online
as above digitally signing them using a Digital Signature Certificate. After which they are
not required to file any paper returns at all.
4. Date of Filing Return of Income: Using Digital Signature: Date on which filed using
Digital Signature Without using Digital Signature:
(a) Date on which return submitted online, if—
Paper return is submitted within 15 days of online submission,
and Paper return tallies with the re-return.
(c) Date of furnishing of Paper Return.
5. Other Consideration:
(a) No Attachments: The return filed under the above mode does not require any attachment /
annexure i.e. the taxpayers need not enclose the following
• Computation of Income
• Financial Statements.
• TDS/TCS Certificate Proof of payment of Advance Tax / Self Assessment Tax
• Audit Reports Including report u/s 44AB.
(b) Exception: However, the Assessees are required to furnish audit report u/s 92E I.e.
Auditor’s Report on Arms Length Price in International Transactions (wherever
applicable).
Sec.139 (3): NECESSITY TO FILE THE LOSS RETURNS BEFORE THE DUE DATE
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1. Bar on Carry Forward of Losses: A loss sustained by the assessee In any previous year
under the head “Profits and gains of business or profession or “Speculation business” or
“owning and maintaining of home races” or “Capital Gains’ can be carried forward only if the
return is furnished within the time allowed u/s 139(1).
Exception: Unabsorbed depreciation u/s 32(2) or Loss under the head “Income from house
property” u/s 71B can be carried forward even if the return of income is filed within the
belated period.
Sec 139(4): BELATED RETURN:

1 Belated Return: [Section 139(4)]: This is applicable to any person who has not
furnished his return of income within the time allowed u/s 139(1) or in response to a notice
issued u/s 142(1).
2. Time limit: The belated return can be filed either before:
(a) The expiry of one year from the end of the relevant Assessment Year, or
(b) Completion of assessment, whichever is earlier?
2 Invalid Return: Return of income flied after belated period will be treated as invalid.
Sec.139 (5): REVISED RETURN

1. Conditions:
(a) There should be an omission or wrong statement in the original return Filed.
(b) The original return should have been filed within the due date u/s 139(1) or within the
time limit specified in the notice issued u/s 142(1).
2. Time limit: The revised return shall be filed before

(a) The expiry of one year from the end of the relevant Assessment Year, or
(b) Completion of assessment whichever is earlier.
3. Significance of Revised Return:

(a) The revised return will be considered as having been flied when the original return
was flied.
(b) The effective return for the purposes of assessment is the return ultimately filed by the
assessee.
(c) A revised return replaces the original return.
(d) The assessee is entitled to furnish a second revised return if the assessee discovers any
omission or wrong statement in the revised return, provided such second revised return is filed
within the time prescribed above.
(e) A return flied in response to notice u/s 158BC cannot be revised.
(f) Intimation made u/s 143(1) will not be treated as assessment for the purpose of this
Section.
SEC.139 (6): DETAILS TO BE FURNISHED BY AN ASSESSES IN THE RETURN OF

INCOME
The following details are to be furnished by all assessees in the return of income
1 Income exempt from tax.
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2 Assets belonging to the assessee of prescribed nature and value.

3 Bank Accounts of the assessee.
4 Credit cards held by the assessee.
5. Expenditure incurred by the assessee under prescribed heads exceeding the prescribed
limits.
6. Such other outgoings as may be prescribed.
SEC.139 (6A): DETAILS ARE TO BE FURNISHED BY PERSON ENGAGED IN
BUSINESS OR PROFESSION
Assessee engaged in business or profession shall furnish the following additional particulars
1 Audit Report u/s 44AB, if applicable.
2 Where report has been furnished prior to the furnishing of the return, a copy of such report
and the proof of furnishing the report.
3 Particulars of the location and style of the principal place of business and the branches.
4 Names and addresses of the partners, members as the case may be.
5 Extent of share of all such partners/ members in the profits and gains of the business or
profession.
SEC.139 (9): DEFECTIVE OR INCOMPLETE RETURN:

A return of income shall be regarded as defective in the following cases
1 The annexure, statements and columns in the return of income has not been duly filled in.
2 The return is not accompanied by the following:
(a) General:
Computation Statement: Statement showing the computation of tax,
• Audit Reports u/s 44AB: Audit report u/s 44AB or where audit report has been
furnished before furnishing the return, copy of such report and proof of furnishing the
report,
• Proof of Tax Payment: Proof of TDS and TCS, advance tax or self-assessment tax
paid,
• Proof of Deposit: Proof of the compulsory deposit made under Compulsory Deposit
Scheme,
• Audited Financial Statements: Audited Profit and Loss account, Balance Sheet and
Auditor’s Report if the accounts of the assessee have been audited,
• Audit Report under other Law: If accounts are audited under any other law, then such
audit report.
CONSEQUENCES OF NON FILLING OF RETURN
1. Consequences for not filing within due date U/s 139(1):
(a) Interest u/s 234A shall be charged at 1% per month or part thereof on tax payable on self
assessment,
(b) The benefit of carry forward of losses u/s 72/73/74/74A is lost,
(c) The right to revise the return of income u/s 139(5) is lost.
2. Consequences when return is not filed:
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(a) Where the assessee is required to file return of income u/s 139(1) or proviso to section
139(1) and the same is not filed before the end of the relevant Assessment Year, he is liable to
pay a penalty of Rs.5, 000 u/s 271F.
(b) Best Judgment Assessment can be made u/s 144.
(c) Prosecution u/s 276CC is also attracted in the following manner–
Tax evaded/payable after TDS/TCS Punishment

Less than Rs.3,000/- or if return filed No prosecution can be initiated.
before end of relevant Assessment Year
Greater than Rs.3,000/- upto Rs.1 Lakh Minimum: 3 months, Maximum: 3 years
rigorous imprisonment with fine
Minimum: 6 months Maximum: 7 years with
More than Rs.1 Lakh
fine.
SEC.139A: PERMANENT ACCOUNT NUMBER (PAN)

1. Persons required making application for allotment of Permanent Account Number:
(a)Total Income: Any person whose total income exceeds the maximum amount not
chargeable to tax before given exemptions u/s 1OA / 10AA / 1OB / 10BA and deductions
under Chapter VI-A.
(b) Business Assessee: Any person carrying on business or profession whose turnover /gross
receipts exceeds Rs.5, 00,000/- in any previous year.
(c)Trust/ Society: Any person who is required to furnish a return of income of a Trust or
Society u/s 139(4A).
(d) Fringe Benefits: Any Person who is liable to file a return of Fringe Benefits if he was not
allotted a PAN earlier.
(e)Obligation to Pay Tax/Duty: Any person by whom tax is payable under Income Tax Act, or
any tax or duty is payable under any other law, including importers and exporters whether
any tax is payable by them or not.
(f) AO’s Discretion: The Assessing Officer may allot to any other person (W.e.f. 01.06.2006)
whether or not tax is payable by him, even without an application.
(g) Collection of information: w.e.f. 01.06.2006, any person or class of persons, notified by
the Central Government in its Official Gazette for collecting any information.
2. The PAN should be quoted in the following transactions:
(a)Matters relating to Interest of Revenue: Return / Correspondence / Tax Challan / any other
matter in the interest of Revenue.
(b) All Quarterly returns of TDS / TCS (w.e.f. 01.06.2006)
(c)Transactions in Assets:
• Sale or Purchase of immovable property involving amounts in excess of Rs.5,
00,000.
• Sale or purchase of Motor Vehicle other than Two Wheeler.
(d) Transactions with Banks:
• Opening of a Bank Account.
(e) Transaction in Securities / Bonds / Units:
• Sale or Purchase of Securities
• Purchase of shares from company (public offer)
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• Purchase of mutual funds.

• Purchase of bonds or debentures of company
• Purchase of RBI bonds
(f) Specific Expenses, Applications and Other Documents:
• All TDS Certificates.
• All TCS Certificates.
• All Sales Tax Registrations.
• Application for credit cards
SEC.140A:SELF-ASSESSMENT
1. Applicability:
(a) Filing of Return of income u/s 139 or in response to a notice u/s 142 / 153A / 158BC
as the case may be after taking into account the amount of tax, if any, already paid under any
provision of this Act
(b) Filing of Return of Fringe Benefits u/s 115WD or 115WH
Notes:
1. Proof of Payment of Tax: The return of income should be accompanied by the proof of
payment of tax and interest.
2. Interest:
(a) Section 234A: Interest shall be computed on the amount of the tax on the total income as
declared in the return as reduced by -Advance tax, if any, paid
Any Tax Deducted or Collected at Source.
Relief of Tax u/s 90 or 90A or Deduction u/s 91 on account of tax paid in a country/specified
territory outside India.
Tax Credit u/s 115/AA.
(b) Section 115WK: Interest shall be computed on the amount of tax on the value of the fringe
benefits as declared in the return as reduced by the advance tax, paid if any.
(c) Section 234B: Interest shall be computed on assessed tax as reduced by advance tax paid.
3. Consequence of failure to pay whole or part of self-assessment tax:

(a) Interest u/s 220: The assessee Is liable to pay Interest @ 1 % per month or part of the
month on the tax amount remaining unpaid commencing from the day immediately following
30 days of filing of the return upto the date of payment.
No interest shall be levied if the assessee proves to the satisfaction of the Assessing
Officer that the default was for good and sufficient reasons.
The above Interest is in addition to any other Interest charged u/s 234A, 234B, and 234C.
(b) Penalty u/s 221: Subject to a maximum penalty of the tax arrears.
4. Where there is shortfall in payment u/s 140A the amount paid shall be first adjusted
towards Interest payable and balance shall be adjusted towards tax payable.
ASSESSMENT Sec.142:
1. Inquiry before assessment:
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(a) Notice for filing return of income [Section 142{1)]: Notice is issued to any person
requiring him to furnish return of Income If the said person has not filed the return of income
-Within the time allowed u/s 139(1) or u/s 115WD or before the end of the relevant
assessment year.
(b) Notice for Inquiry: The Assessing Officer may serve notice on any person, who has
furnished a return u/s 139 /115WD requiring him to-Produce required accounts and
documents: Books should not relate to a period more than three years prior to the previous
year. Furnish such information in writing including a statement of assets and liabilities as may
be required by the Assessing Officer: Prior approval of the Joint Commissioner is necessary
before requiring the assessee to furnish a statement of assets and liabilities not included in the
books of accounts
Inquiries [Section 142(2)]: The Assessing Officer can make such inquiries necessary for
obtaining full information regarding income or loss of any person.
2. Audit of accounts: [Section 142(2A)]
(a) If the Assessing Officer is of the opinion that having regard to the nature and
complexity of the accounts and in the interest of revenue, the accounts should be audited once
again.
(b) Prior approval of the Chief Commissioner or Commissioner should be obtained.
(c) Assessing Officer can direct the assessee to get his accounts audited under this section
even if the accounts are already audited under this Act or under any other law.
(d) The Chief Commissioner I Commissioner shall nominate the auditor.
(e) The assessee shall be given reasonable opportunity of being heard before an order for
such audit.
3. Audit Report:
(a) The Audit Report containing prescribed particulars must be furnished in the prescribed
Form No. 6B duly signed and verified by such accountant.
(b) The audit report shall be furnished within the period specified by the Assessing
Officer.
(c) The Assessing Officer can grant extension of time limit, on an application made by the
assessee.
(d) The Total Time limit (including such extended time) should not exceed 180 days from
the date on which the assessee received the direction for audit.
(e) Expenses incidental to audit including remuneration shall be determined by the Chief
Commissioner or Commissioner and shall be paid by the assessee.
(f) Default on payment of fees shall be recovered from the assessee as arrears of land
revenue.
(g) Opportunity: The Assessee shall be given a reasonable opportunity of being heard in
respect of any material gathered on inquiry and proposed to be used in the assessment,
Consequence of non-compliance of notice u/s 142(1) or direction u/s 142(2A):
(a) Best judgment assessment u/s 144,
(b) Penalty u/s 271(1) (b) of Rs.10, 000,
(c) Prosecution u/s 276D with rigorous imprisonment which may extend to 1 year or with
fine which will not be less than Rs.4 or more than Rs.10 for every day of continuing default,
Sec.143: Summary Assessment:
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Where the assessee has furnished a return u/s 139 or in response to notice
issued u/s 142(1) and on the basis of the return of the income
Situation Intimation
Any tax or interest is payable by the
assessee after adjusting towards TDS, Intimation shall be sent specifying amount
return u/s 139 or in response to notice payable.
issue
(b) Such intimation shall be deemed to be notice
Advance tax and self-assessment tax
of
Demand u/s 156. Intimation of refund shall be sent
Refund is due to the assessee to the assessee
No sum is payable by the assessee or Acknowledgement of the return of income shall be

refund is due to him deemed to be intimation u/s 143(1).
Time Limit: No intimation shall be sent after the expiry of 1 year from the end of the financial
year in which the return is made.
2. Issue of notice [Section 143(2)]:
(a) Situation: To ensure that the assessee has not
• Understated the income
• Computed excessive loss underpaid the tax the Assessing Officer may serve a notice
on the assessee requiring him to:
(i) Attend his office, or
(ii) Produce evidence on which the assessee may rely in support of the return.
(b) Time limit: No notice shall be served after the expiry of 12 months from the end of the
month in which the return is filed.
3. Assessment: [Section 143(3)] - Regular Assessment

(a) The Assessing Officer shall take into account all relevant materials gathered by him
and also the evidence produced by the assessee.
(b) On this basis, he shall make an assessment of the total income or loss of the assessee.
(c) On the basis of such assessment, he shall determine the sum payable by the assessee or
refund due to him.
(d) Where a regular assessment u/s 143(3) or 144 is made:
Any tax or Interest paid by the assessee shall be deemed to have been paid towards such
regular assessment.
If no refund is due on regular assessment or the amount refunded exceeds the amount
refundable on regular assessment, the whole or excess amount so refunded shall be deemed to
be tax payable by the assessee and the provisions of the Act shall apply accordingly.
Sec 154: RECTIFICATION OF MISTAKES
Sub-Sec Provisions
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1 • Error should be apparent from record. It may be a mistake of fact or law but
Not disputable one.
- Only the Income Tax Authority u/s 116 shall rectify the mistake.
• It may be any order passed or an intimation u/s 143(1),
1A The matters, which are not considered or decided in appeal or revision, may be
Rectified.
• The Income Tax Authority can make the rectification (a) on its own motion
2
or
(b) On an application made by the Assessee.
• CIT (Appeals) can rectify mistake in case it is brought to his notice by the
Assessing officer
Officer.
3 Order prejudicial to the interests of the assessee shall not be passed without
Giving him opportunity of being heard.
4 Rectification order shall be in writing.
5 The authority may make any refund order if so applicable.
6 In case demand is raised then provisions of section 156 shall apply.
Rectification order shall be passed within four years from the end of the
7
financial
Year in which order sought to be amended is assed.
REFUNDS
ELIGIBILITY FOR CLAIMING REFUND

An assessee is eligible for refund if he has paid higher tax than what he is liable to pay.
Refund [Section 237]:
Amount paid by an assessee or on his behalf or treated as paid by him xxx
Less: Tax payable on assessed income xxx
= Refund, if the assessee satisfied the Assessing Officer xxx
TIME LIMIT FOR CLAIMING REFUND [SECTION 239]
Prescribed Form for claiming Refund [Section 239(1)] : Form No. 30
Time-limit [Section 239 (2)] : The claim of refund should be within 1 year from the last day
of the relevant assessment year
Time Limit for Refund of Fringe Benefit Tax : The claim of refund should be made within
one year from the last day of the relevant assessment year
Sec 244 A: PROVISIONS RELATING TO INTEREST ON REFUND DUE TO THE

ASSESSES
1 Applicability: If the refund is out of any tax paid u/s 115WJ or by way of TDS or TCS
u/s 206C or advance tax during the financial year, the assessee shall be entitled to interest on
refund.
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2 Exception: No interest shall be payable if the refund is less than 10% of the amount of
tax determined u/s 143(1) / 115WE(1) or on regular assessment.
3 Rate of Interest: Interest @ 1/2 % per month or part of a month.
4. Period of Interest:
(a) For advance tax and TDS / TCS/ FBT - For every month or part of a month from 1st April
of the assessment year to the date on which refund is granted.
(b) For all other taxes / penalties - From date of payment of tax/penalty to the date on which
refund is granted.
4 Period to be excluded: If the delays in the refund proceedings are due to reasons
attributable to the assessee, wholly or in part, such period of delay shall be excluded from the
period of interest. The decision shall be made by the CCIT/ CIT and the decision shall be
final.
5 Increase or reduction in interest: If the amount on which interest was payable is
increased or reduced by an order u/s 115WE(3) / 115WF / 115WG / 143(3) /144 /147 /154/
155 /250/ 254 /262 /263 /264 /245D(4), the interest shall also be increased or reduced
accordingly.
6 Income from Interest on Refunds: The interest u/s 244A is to be treated as income of
the previous year fin which it is allowed and is, therefore required to be declared in the return
of income for the corresponding assessment year,
ASSESSMENT OF COMPANIES
A) Definitions .
1. Company: As per section 2(17), company means:
(i) Any Indian company, or
(ii) Any body corporate incorporated by or under the laws of a country outside India, or
(iii) Any institution, association or body which was assessed as a company for any
assessment year under the Income-tax Act, 1922 or was assessed under this Act as a
company for any assessment year commencing on or before 1-4-1970, or
(iv) Any institution, association or body, whether incorporated or not and whether Indian or
Non Indian, which is declared by a general or special order of CBDT to be a company.
2. Company in which the public are Substantially interested: Section 2(18) of the
Income-tax Act, has defined “a company in which the public are substantially interested". It
includes:
(i) A company owned by Government or Reserve Bank of India.
(ii) A company having Govt. participation i.e. A company in which not less than 40% of the
shares are held by Government or the RBI or a corporation owned by the RBI.
(iii) Companies registered under section 25 of the Indian Companies Act, 1956: Companies
registered under section 25 of the Companies Act, 1956 are companies which are
promoted with special object such as to promote commerce, art, science, charity or
religion or any other useful object and these companies do not have profit motive.
However, if at any time these companies declare dividend they would loose the status
of a company in which the public are substantially interested.
(iv) A company declared by the CBDT: It is a company without share capital and which
having regard to its object, nature and composition of its membership or other relevant
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consideration is declared by the Board to be a company in which public are

substantially interested.
(v) Mutual benefit finance company, where principal business of the company is
acceptance of deposits from its members and which has been declared by the Central
Government to be a Nidhi or a Mutual Benefit Society.
(vi) A company having co-operative society participation: It is a company in which at least
50% or more equity shares have been held by one or more co-operative societies.
(vii) A public limited company: A company is deemed to be a public limited company if it is
not a private company as defined by the Companies Act, 1956 and is fulfilling either of
the following two conditions:
(a) Its equity shares were listed on a recognised stock exchange, as on the last day of the
relevant previous year; or .
(b) Its equity shares carrying at least 50% of the voting power (in the case of an industrial
company the limit is 40%) were beneficially held throughout the relevant previous year
by Government, a statutory corporation, a company in -which the public is substantially
interested or a wholly owned subsidiary of such a company.
An industrial company means a company whose business consists mainly of the construction
of ships or the manufacturing or processing of goods or in mining or in the generation or
distribution of electricity or any other form of
Power.
3. Widely held company: It is a company in which the public are substantially interested.
4. Closely held company: It is a company in which the public are not substantially interested.
5. Indian company [Section 2(26)1: 'Indian Company' means a company formed and
registered under the Companies Act, 1956 and includes
(i) a company formed and registered under any law relating to companies formerly in force
in any part of India (other than the State of Jammu and Kashmir and the union
territories.
(ia) a corporation established by or under a Central, State or Provincial Act;
(ib) any institution, association or body which is declared by the Board to be a company.
(ii) in the case of the State of Jammu and Kashmir, a company formed and registered under
any law for the time being in force in that State;
(iii) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa, Daman and
Diu, and Pondicherry, a company formed and registered under any law for the time
being in force in that Union territory.
Provided that the registered or, as the case may be, principal office of the company,
corporation, institution, association or body, in all cases is in India.
6. Domestic company [Section 2(22A)]: A domestic company means an Indian company
or any other company which in respect of its income, liable to tax under the Income-tax Act,
has made the prescribed arrangements for the declaration and payment within India, of the
dividends (including dividends on preference shares) payable out of such income.
7. Foreign company (Section 2(23A): Foreign company means a company which is not a
domestic company.
8. Investment company: Investment Company means a company whose gross total
income consists mainly of income which is chargeable under the heads Income from house
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property, Capital gains and Income from other sources.

14.17b Residence of a Company (Section 6(3): A company is said to be a resident in
India during the relevant previous year if: (a) it is an Indian Company, or (b) if it is not an
Indian company then, the control and the management of its affairs is situated wholly in India.
The company is said to be non-resident in India if it is not an Indian company and some
part of the control and management of its affairs is situated outside India.
B) Deemed income relating to certain companies - Also known as Minimum Alternative
Tax (MAT)
1) Provisions of MAT for payment of tax by certain companies (Section 115JB]
Tax payable for any assessment year cannot he less than 15% of book profit: Where in the
case of a company, the income-tax payable on the total income as computed under the
Income-tax Act, is less than15% of its book profit, such book profit shall be deemed to be the
total income of the assessee and the tax payable by the assessee on such total income (book
profit) shall be the amount of the income-tax at the rate of 15%.
Example: Suppose the book profits of a company for the assessment year 2010-11 are Rs.
10,00,000, whereas its total income as per provisions of Income-tax Act is Rs. 3,00,000. The
tax shall be payable as under:
Rs.
(I) Tax on total income as computed under Income-tax Act 30% of Rs. 3,00,000 90,000
(2) Tax @ 15% on book profits of Rs.10, 00, 000 1, 50,000
In the above case tax payable on total income i.e. Rs. 90,000 is less than 15% of the book
profits i.e. Rs. 1, 50,000. Hence in this case, deemed total income shall be Rs. 10, 00,000 and
the tax payable shall be as under:
Rs
Tax payable 1, 50,000
Add: Surcharge @ 10% Nil*
____________
1, 50,000
Add: Education cess @ 2% 3,000
Add: SHEC @ 1% 1,500
___________
Total tax payable 1, 54,500
* For assessment year 2010-11, surcharge is payable only when the total income of the company
exceeds Rs. 1 crore. Wherever MAT provisions apply, the book profits are deemed to be the
total income of the assessee, hence surcharge will be payable only when the book profit of the
company exceeds Rs. 1 crore. In the above case, the book profit which has been treated as
deemed total income of the assessee, is only Rs. 10 lakhs.
2) Allowing tax credit in respect of tax paid on deemed income under MAT provisions
against tax liability in subsequent years (Section 115JAA]
Where any amount of tax is paid under section 115J B (1) by a company for any
assessment year beginning on or after 1-4-2006, credit in respect of the taxes so paid for such
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assessment year shall be allowed on the difference of the tax paid under section 115J8 and the
amount of tax payable by the company on its total income computed in accordance with the
other provisions of the Act.
The amount of tax credit so determined shall be allowed to be carried forward and set off
in a year when the tax becomes payable on the total income computed under the regular
provisions. However, no carry forward shall be allowed beyond the seventh assessment year
immediately succeeding the assessment year in which the tax credit becomes allowable. The
set off in respect of the brought forward tax credit shall be allowed for any assessment year to
the extent of the difference between the tax on the total income and the tax which would have
been payable under section 115JB for that assessment year. No credit will be allowed in
respect of MAT paid in any assessment year prior to 2006-07.
However, no interest shall be allowed on the amount of tax credit available under section
115JAA.
How to compute book-profits [Explanation to l15JB (1) and (2)]
Step 1: The net profit as shown in the profit and loss account (prepared as per Part II and III
of Schedule VI) for the relevant previous year, shall be increased by the following, if debited
to the Profit and Loss Account:
(a) the amount of income-tax paid or payable, and the provision therefore or
(b) the amounts carried to any reserves by whatever name called; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than
ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to which section 10
(excluding the income referred to in clause (38) thereof, relating to long-term capital
gain on transfer of shares through a recognised stock exchange), 11 or 12 applies (i.e.
incomes which are exempt from tax);
or
(g) the amount of depreciation.
Step 2: The profit as per the Profit and Loss Account shall be reduced by the following:
(i) the amount withdrawn from any reserves or provisions, if any, such amount is credited
to the profit and loss account.
However, the amount withdrawn from any reserve, credited before 1-4-1997, shall not
be reduced from the net profit unless the same was debited to the profit and loss account
at the time when such reserve was created.
Similarly, the amount withdrawn from the reserve created on or after 1-4-1997 and
credited to the profit and loss account shall not be deducted while computing book profit
unless the book profit in the year of creation of such reserve was increased by such
reserve at that time; or
(ii) the amount of income to which any of the provisions section 10 (excluding the income
referred to in section 10(38)), II or 12 or 80-IAB applies, if any such amount is credited
to the profit and loss account; or
(iii) the amount of depreciation debited to the profit and loss account (excluding the
depreciation on account of revaluation of assets); or
(iv) the amount withdrawn from revaluation reserve and credited to the profit and loss
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account, to the extent it does not exceed the amount of depreciation on account of
revaluation of assets referred to in clause (iii) above; or
(v) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per
books of account. The loss shall, however, not include depreciation. Further the
provision of this clause shall not apply if the amount of brought forward loss or
unabsorbed depreciation is Nil; or
(vi) the amount of profits of sick industrial company for the assessment year commencing
from the assessment year relevant to the previous year in which the said company has
become a sick industrial company under sub-section (1) of section 17 of the Sick
Industrial Companies (Special Provisions) Act, 1985 and ending with the assessment
year during which the entire net worth of such company becomes equal to or exceeds the
accumulated losses.
Net worth means the sum total of the paid up capital and free reserves.
"Free reserve" means all reserve credited out of the profits and share premium account but
does not include reserves credited out of revaluation of assets, write back of depreciation
provisions and amalgamations.
(vii) the amount of profit derived from the activities of a tonnage tax company [Section
115YO].
(viii) the amount of deferred tax, if any such amount is credited to the profit and loss account
(inserted by the Finance Act, 2008)
The amount computed after increasing or decreasing the above in Step I and Step 2,
respectively, is known as Book-profit.
3) How much brought forward loss/unabsorbed depreciation are deductible from book
profits: As per clause (v) above, the amount of loss brought forward or unabsorbed
depreciation as per books of accounts whichever is less is to be deducted from the book
profits. It has been however clarified that loss however shall not include depreciation. In this
case brought forward loss and unabsorbed depreciation as per income-tax shall have no
relevance.
It has been clarified that where the value of the amount of either loss brought forward or
unabsorbed depreciation is 'nil', no amount on account of such loss brought forward or
unabsorbed depreciation would be reduced from the book profit.
Furnishing of Report of an Accountant (Section 115JB (4))
Every company to which this section applies, shall furnish a report in Form No. 29B from
a chartered accountant certifying that the book profit has been computed in accordance with
the provisions of this section along with the return of income filed under section 139(1),
section 139(4) or section 142(1 )(i).
Unabsorbed depredation or Losses which can be carried forward (Section 115JB (3))
Although, the assessee is liable to pay tax @ 10% (plus surcharge as applicable) of the
book profits if
its total income computed as per Income-tax Act is less but it is entitled to determine
unabsorbed depreciation U/S 32(2), business loss U/S 72(1), speculation loss U/S 73 and
capital loss u/s 74 and loss u/s 74A and shall be allowed to carry forward such unabsorbed
depreciation or losses to the subsequent years(s) for claiming set off as per the normal
provisions of income-tax Act.
4) Other provisions of the Act shall continue to apply to such companies
(Section 115JB (5)
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As otherwise provided in section 115JB, all other provisions of the Income-tax Act shall
apply to such companies. Hence, all other provisions relating to Advance tax, interest under
sections 234A, 234B and 234C penalty, etc. shall apply to such companies also.
The provisions of this section shall not apply to the income accrued or arising on or after 1-4-
2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in
a Unit or Special Economic Zone, as the case may be. [Section 115JB (6)]
Special provisions relating to tax on distributed profits of domestic companies

5) Tax on distributed profits of domestic companies (Section 115-0): The Domestic
Company shall, in addition to the income-tax chargeable in respect of its total income, be
liable to pay additional income-tax on any amount declared, distributed or paid by such
company by way of dividend (whether interim or otherwise) on or after 1-4-2003, whether out
of current or accumulated profits. Such additional income-tax shall be payable @ 15% plus
surcharge @ 15% plus education cess @ 2% plus SHEC @ 1 % of the amount so declared,
distributed or paid. This additional tax shall be payable even if no income-tax is payable by
such company on its total income.
No tax will be charged on distributed profits by an undertaking or enterprise engaged in

developing, operating and maintaining is Special Economic Zone [Section 115-0(6)]
6) Amendment made by the Finance Act, 2008

Amendment of provisions relating to dividend distribution tax [Section 115-0] [W.e.f.
A.Y. 2008-09]
With a view to help domestic companies to efficiently structure their business, it has been
decided to mitigate the cascading effect of dividend distribution tax upto one level.
Accordingly, the Finance Act has provided that the amount of dividend referred to in sub-
section (1) will be reduced by the amount of dividend received by the domestic company from
its subsidiary, if
(a) the subsidiary has paid tax under section 115-O on such dividend, and
(b) the domestic company is not a subsidiary of any other company.
It is also provided that the same amount of dividend shall not be taken into account for
such reduction, more than once. For the purpose of the section, a company shall be a
subsidiary of another company, if such other company holds more than half in nominal value
of the equity share capital of the company. .
Time limit for deposit of additional income-tax: Such additional tax will have to be paid by
the principal officer of the domestic company and the company within 14 days from the date
of:
(a) Declaration of any dividend; or
(b) Distribution of any dividend; or
(c) Payment of any dividend,
Whichever is earliest.
7) Tax on distributed profits not allowed as deduction: The company or the shareholder
shall not be allowed any deduction in respect of the amount which has been charged to tax or
the tax thereon under any provisions of the Income-tax Act.
8) Interest payable for non-payment of tax by the domestic companies (Section 115P):
Where the principal officer of a domestic company and the company fail to pay the whole or
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any part of the tax on distributed profits referred to in section 115-O( I) within the time, he or
it shall be liable to pay simple interest @ 1 % for every month or part thereof on the amount
of such tax for the period beginning on the date immediately after the last date on which such
tax was payable and ending with the date on which the tax is actually paid.
9) When companies deemed to be in default (Section 115Q]: If the principal officer of a
domestic company and the company does not pay tax on distributed profits in accordance
with' the provisions of section 115-0, then he or it shall be deemed to be an assessee in default
in respect of the amount of tax payable by him or it and all the provisions of the Income-tax
Act for the collection and recovery of income-tax shall apply.
10) Penalty under section 271C: If any person fails to pay the whole or any part of the tax
as required under section 115-0(2), then such person shall be liable to pay, by way of penalty,
a sum equal to
the amount of tax which such person failed to pay as aforesaid. The penalty is, however,
not applicable, if the assessee proves that there was reasonable cause for failure.
11) Prosecution under section 276B: If a person fails to pay to the credit of the Central
Government the tax payable by him under section 115-0(2), he shall be punishable with
rigorous imprisonment for a term which shall not be less than three months but which may
extend to seven years and with fine. However, no person will be punishable if he proves that
there was a reasonable cause for the default/failure
The expression 'dividend', used above, shall have the same meaning as is given in section
2(22) but shall not include deemed dividends under section 2(22) (e), i.e. a loan or an advance
given by a closely held company to a substantial shareholder.
12)Exemption of dividend in the hands of shareholders [Section 10(34)]: In view of the

income-tax now payable by the domestic company, any dividends declared, distributed or
paid by such company, on or after 1-4-2003 shall be exempt in the hands of the shareholders
under section 10(34).
1. Where the income is distributed by a money market 25% + 10% SC + 2% EC + 1% SHEC
mutual fund or a liquid fund.
2. Where the income is distributed by a money market mutual fund or a liquid fund
Where the income is distributed by a fund other than a money market mutual fund or a liquid
fund and such income is distributed to
(a) Individual or HUF 12.5% + SC (if applicable) + 2% EC + 1% SHEC
(b) Any person other than individual or HUF 20% + SC (if applicable) + 2% EC + 1%
SHEC
1. "Money market mutual fund" means a money market mutual fund as defined in sub-clause
(p) of clause 2 of the
Securities and Exchange Board of India (Mutual Funds) Regulations, 1996;
2. "Liquid fund" means a scheme or plan of a mutual fund which is classified by the
Securities and Exchange Board of India as a liquid fund in accordance with the guidelines
issued by it in this behalf under the SEBI Act, 1992 or regulations made there under.
13) Tax on the income received from venture capital companies/venture capital funds
[Section 115U]
(1) Notwithstanding anything contained in any other provisions of this Act, any income
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received by a person out of investments made in a venture capital company or venture capital
fund shall be chargeable to income-tax in the same manner as if it were the income received
by such person had he made investments directly in the venture capital undertaking.
(2) The person responsible for making payment of the income on behalf of a venture
capital company or a venture capital fund and the venture capital company or venture capital
fund shall furnish, by 30th November of the Financial Year following the previous year
during which such income is distributed, to the person receiving such income and to the
jurisdictional Chief Commissioner/Commissioner, a statement in Form No. 64 and duly
verified by an accountant in the manner indicated therein, giving details of the nature of the
income paid during the previous year and such other relevant details as may be prescribed.
(3) The income paid by the venture capital company and the venture capital fund shall be
deemed to be of the same nature and in the same proportion in the hands of the person
receiving such income as it had been received by, or had accrued to, the venture capital
company or the venture capital fund, as the case may be, during the previous year.
(a) "Venture capital Company" means such company
(I) which has been granted a certificate of registration under the Securities and
Exchange Board of India Act, 1992 and regulations made there under;
(ii) which fulfils the conditions as may be specified, with the approval of the Central
Government, by the Securities and Exchange Board of India, by notification in the
Official Gazette, in this behalf;
(b) "Venture capital fund" means such fund
(I) operating under a trust deed registered under the provisions of the Registration
Act, 1908;
(ii) which has been granted a certificate of registration under the Securities and
Exchange Board of India Act, 1992 and regulations made there under;
(iii) which fulfils the conditions as may be specified, with the approval of the Central
Government, by the Securities and Exchange Board of India, by notification in the
Official Gazette, in this behalf; and
(c) "Venture capital undertaking" means a domestic company
(i) whose shares are not listed in a recognised stock exchange in India;
(ii) which is engaged in the business for providing services, production or manufacture
of an article or thing but does not include such activities or sectors which are specified,
with the approval of the Central Government, by the Securities and Exchange Board of
India, by notification in the Official Gazette, in this behalf.
SET OFF AND CARRY FORWARD OF LOSSES
1) When set off is available?

When these is a loss in one or more sources under one or more
heads of income, the provisions of set off and carry forward are
applicable as under.
• Inter Source Adjustment (Sec 70)
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• Inter Source Adjustment (Sec 71)

• Carry forward of losses.
1A) Inter Source Adjustment (See 70)

Under this section loss from any source of income can be set off
against same head of income for the same assessment year.
For e.g.
A has two house properties H & F. While property H earns Rs. 2,
00,000 and F incurs loss of Rs. 60,000 which can be set off against
income of Rs. 2, 00,000.
NOTE
Assessee does not have any option to set off or not to set off.
S
NATURE OF LOSS SET OFF AVAILABLE U/S 70
R
1 Speculation business loss Profit from speculation business
2 Profit from speculative & non –speculative
Non speculation loss
business
3 Short term capital loss Long term & short term capital gain
4 Long term capital loss Long term capital gain
5 House property loss House property income
6 Losses from activity of
Income from such business
maintaining race losses
7 Winnings from lotteries,
Crossword puzzles, card Cannot be set off against any income.
games, gambling or
betting
8 Income from other source (except activity
Loss form other source of maintaining race losses Winnings from
except 6 & 7 lotteries, Crossword puzzles, card games,
gambling or betting )
9 Loss from Income which Cannot be set off against any income.
is exempt u/s 10
Important point
1. Loss has to be set first off against same head of Income. Assessee
dose not have any option to set off or not.
For e.g.
(A) Anil has the following source of income.
House property Income Rs. 1, 96,000
LTCC Rs. 60,000
Short term capital loss Rs. 20,000
In above e.g. Rs. 20,000 being short term capital loss has to be set
off against LTCC of Rs. 60,000.
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(B) Following information is given regarding P& Q.
Business P Q
Speculative Non-speculative Speculative

Non-speculative
A 1, 90,000 - 1, 00,000 -
B 50,000 - (1,
20,000) -
C (70,000)
30,000
D 3, 00,000
40,000
---------- -------------- ---------- ---------

2, 40,000 2, 30,000 20,000
70,000
Find out set off available or not.
(C) P.Q.R. provides following information regarding income

under capital gain.
i) P ---- STCC 60,000

LTCC (20,000)
ii) Q ---- STCC (90,000)

LTCC 15,000
Find out set off available or not.
1B) inter source adjustment (sec 71)
Sec. 71 is appliance if loss can not be set off against Sec. 70.
For e.g.
If as loss from business is Rs. 4, 00,000 and income from house

property Rs. 6, 00,000.
In such case business loss can be set off against HP income.
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LOSSES AND SET OFF AVAILABLE
S
NATURE OF LOSS SET OFF AVAILABLE U/S 71
R
1 Speculation business loss Profit from speculation business
2 Any income other than salary, lottery, card
Non speculation loss games, crossword puzzles, gambling or
betting
3 Any income other than lottery, card
House property loss games, crossword puzzles, gambling or
betting
4 Losses from activity of
Income from such business
maintaining race losses
5 Winnings from lotteries,
Crossword puzzles, card Cannot be set off against any income.
games, gambling or
betting
6 Any income (except winnings from
Loss from other source
lotteries, Crossword puzzles, card
except 6 & 7
games, gambling or betting )
1C) Carry Forward of Losses
If loss cannot be set off as per provision of sec 70 & sec 71 then it is
to be carry forward under the act. The following losses can be
carried forward.
(a) Business Loss (Non Speculative)
(b) Business Loss (speculative)
(c) Loss under Capital Gain (Short term and Long term)
(d) Losses from the activity of owning and maintaining race
horses.
(e) HP loss
A) Carry forward and set off of business loss other than

speculation loss. (Sec 72)
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S CONDITIONS EXPLAINATION
R
1 Against which income loss
can be set off
a) On account of a) Any income
unabsorbed
depreciation, capital
expenditure on
scientific research b) Against business income only. It is not
and family planning necessary that it should be set off
b) Other remaining against income from the same business.
business loss
2 Who can carry forward It can be carry forward by person who

losses has incurred loss subject to following
exception
a) Accumulated business loss of an
amalgamation co.
U/s 72A or 72AA.
b) Accumulated business loss of a
demerged company
c) Accumulated business loss of a
proprietary concern or a firm when its
business is taken over by company (Sec
47 xiii)/xiv)
d) Loss of business acquired by
inheritance.
3 Period of forward carried
c) On account of a) no limit (filling of return in time not
unabsorbed necessary)
depreciation, capital
expenditure on
scientific research
and family planning
d) Other remaining b) 8 yrs immediately succeeding the AY
business loss for which the loss was first computed
4 Return of loss (sec 80) A) If assessee fails to file his return of
loss on or before the due date filling
return u/s 139
then following losses of A.Y. for which
return is not submitted in time cannot be
carried forward. (a) Loss of a
speculative and non speculative
business.
(b) Short or long term capital loss
(c) Loss from the activity of owning &
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maintaining race horses.

B) Right to carry forward the a foresaid
losses will be lost if return is not field in
time for the year in
which loss was incurred.
5 Continuity of business Not necessary.
B) Carry forward and set off of speculation loss. (Sec 73)
R
1 Meaning of speculative - Speculation transaction is one which is
transaction business settled without actual delivery.
It is a transaction in which a contract for
the purchase or sale of commodity
including stocks and shares periodically
settled otherwise than
by an actual delivery or transfer of the
commodity.
2 Condition for applicability Tax payer in company.
of Sec 73 It is a company whose main business is
other than that of banking or granting of
loans and advances.
3 Against which income loss Speculation business

can be set off
4 Period of carry forward 4yrs immediately succeeding the AY for
which the loss was first computed
6 Return of income As per sec 72
Important Notes
1) To set off losses no priority is given therefore one should try to set
off such losses which can not be carried forward.
2) No option is available to set off or not to set off loss.
3) Loss from Income from other source cannot be carry forward to next
year.
C) Carry forward and set off of capital loss
R
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1 Against which income loss Long term capital loss against LTCG
can be set off Short term capital loss against LTCG &
STCG
2 Period of forward carried 8 yrs immediately succeeding the AY for

which the loss was first computed.
3 Return of loss (sec 80) As per Sec 72
d) Carry forward & set off of loss from activity of owning &
maintaining race horses (Sec 74A)
R
1 Against which income loss Income from the business of owning &
can be set off maintaining race horses.

3 Return of loss (sec 80) As per Sec 72
5 Continuity of business Necessary.
e) Carry forward & set off of loss from House property (Sec 71BA)
R
1 Against which income loss Income house property
can be set off (Applicable
from AY 1999-2000)

3 Return of loss (sec 80) Not necessary to submit in time
5 Continuity of business Necessary.
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Page | 215

Introduction To Income Tax

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Introduction To Income Tax

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TOPIC 1: ITRODUCTION TO INCOME TAX ACT, 1961

1 MEANING OF INCOME SECTION 2(24)

Income Tax Wealth Tax Excise Vat Custom CST

Indirect tax is a tax on commodities and services. Here burden is fall

Value Added Tax

Central Sales Tax

3. BASIC CONCEPTS OF INCOME TAX

3A] Assessee [Section 2(7)]

3B] Assessment Year [Section 2(9)]

3C] Previous Year [Section 3]

3D] Person [Section 2(31)]: Person includes

individuals etc) join together, it is called as AOP. But if only

Example to understand concept of Person

Understanding of Status is important because Income tax rates

TAX RATES APPLICABLE FOR DIFFERENT PERSONS

STATUS A.Y. 10-11 TAX RATES

300000 to 500000 20%

Education cess on Tax 3%

STATUS A.Y. 10-11 TAX RATES

Education cess on Tax 3%

STATUS A.Y. 10-11 TAX RATES

Education cess on Tax 3%

Partnership Firm (A.Y. 10-11)

Indian Company (A.Y. 10-11)

Foreign Company (A.Y. 10-11)

Flat tax rate of 40%

Local Authority (A.Y. 10-11)

Co-operative Society (A.Y. 10-11)

Winning from Lottery or Gambling is taxable @ 30%..

5. GROSS TOTAL INCOME

TOTAL INCOME AND TAX LIABILITY [SEC 2(45)]

Less Deduction under Section 80c to 80u XX

Rounding off of Total Income [Section 288A]

Rounding off of Income Tax [Section 288B]

6. CONCEPT OF AGRICULTURE INCOME

Income from a farm house is exempt from tax because it is treated as

1) Income from markets.

SECTION 80C (for Individual & HUf)

• Contribution to Statutory provident fund and Recognised provident fund

SECTION 80CCC Deduction in respect of pension fund (for

SECTION 80CCD Deduction in respect of contribution to notified

SECTION 80D Deduction in respect of mediclaim

SECTION 80DD Deduction in respect of medical treatment of a

SECTION 80DDB Deduction in respect of medical treatment

SECTION 80E Repayment of loan taken for higher studies

• Loan should be taken from approved financial institute.

SECTION 80G Deduction in respect of donation to certain funds,

SECTION 80GG Deduction in respect of rent paid

SECTION 80QQB Deduction in respect of royalty income of authors

SECTION 80U Deduction in case of person with disability

• A fixed Deduction of Rs 50,000 available. A higher

PROBLEMS ON TOTAL INCOME

Tax incidence on an assessee depends on his residential status. For

Residential status of Individual or HUf

Resident in India (RI) Non Resident

Resident & Resident but & not Ordinary Resident

Residential status of all other assessee

Resident in India (RI) Non Resident

Basic rules for determination of Residential status of an assessee

2. RULES FOR DETERMINING THE RESIDENTIAL STATUS OF AN

An individual is said to be resident in India if he satisfies any one