Income Tax 2010-11

Income Tax
Assessment Year 2010-11
CHAPTER-1
BASIC CONCEPTS OF INCOME TAX
TAX - MEANING THEREOF - Every state needs funds to govern the

country. The need of funds can be fulfilled by taking loans from
their countries, grants & aids from other countries, share of profit
in govt. run organizations and through taxes.
Therefore, tax is that amount which is borne by the
persons and paid to the state for running the state.
KINDS OF TAXES - Taxes are of two kinds:-
(1) Direct Taxes; and (2) Indirect taxes.
DIRECT TAXES - These are borne and paid by the same person. For
example: Income tax, Wealth tax, Gift tax (Gift tax has been
abolished in India) and Interest tax.
INDIRECT TAXES - These are borne by persons who are different
from the payers. For example: Custom duty, Excise duty, Sales
Tax, Entertainment tax, Octroi etc.
INCOME TAX ACT, 1961 -
The current Income tax Act was regulated from 1.4.1961
and its rules were brought into working from 1.4.1962. Every year
the finance minister of the country proposes for various changes in
the Act through the Finance Bill. This bill, when gets nod in the
parliament, becomes ' The Amendment Act.'
SPECIFIC TERMS TO BE USED IN THE ACT-
PREVIOUS YEAR (SECTION 3): It refers to the year in which a
person earns his income which is taxable in the relevant assessment
year. The period of previous year is normally of 12 MONTHS starting
from 1st April to 31st March in the next calendar year. But in case of
NEWLY SET-UP Business/profession or new source of income
the period of previous year may be less than 12 months. Thus the
period of previous year can be of less than 12 months in case of new
source of income but afterwards the period is always equal to 12
months.
ASSESSMENT YEAR [SECTION 2(9)]: It refers to the year in which
income of a person (who has earned his income in the relevant
previous year) is charged to tax. THIS MEANS THAT EACH
PREVIOUS YEAR HAS A UNIQUE ASSESSMENT YEAR. ALSO THE
ASSESSMENT YEAR ALWAYS FOLLOWS THE PREVIOUS YEAR e.g.
a) PREVIOUS YEAR RELEVANT ASSESSMENT YEAR
2004-05 2005-06
(1.4.2004 TO (1.4.2005 TO 31.3.2006)
31.3.2005)
INCOME EARNED INCOME CHARGED TO TAX
Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 1

Income Tax
b) PREVIOUS YEAR RELEVANT ASSESSMENT YEAR

2009-10 2010-11
(1.4.2009 TO (1.4.2010 TO 31.3.2011)
31.3.2010)
INCOME EARNED INCOME CHARGED TO TAX
This also leads to the conclusion that every financial year
(1st April to 31st March) is :- (1) ASSESSMENT YEAR for preceding
Financial year; AND
(2) PREVIOUS YEAR for next financial year.
PERSON [SECTION 2(31)]: The definition as per the act is
'INCLUSIVE' one and it includes:-
(1) INDIVIDUAL (may be minor, insane or lunatic).
(2) HINDU UNDIVIDED FAMILY
(3) COMPANY (Indian or Foreign or an entity recognised as
Company by C.B.D.T.).
(4) FIRM (a Partnership firm including a Limited Liability
Partnership as per The Limited Liability Partnership Act, 2008).
(5) ASSOCIATION OF PERSONS/BODY OF INDIVIDUALS (e.g. Co-op.
society)
(6) LOCAL AUTHORITY (e.g. Municipal Corporation, Port Trust etc.).
(7) EVERY OTHER ARTIFICIAL JURIDICAL PERSON (e.g. Indian
Railways, University).
ASSESSEE [SECTION 2(7)]: Assessee means a person (as referred
above) who is liable to pay income tax or any other amount (interest
or penalty) under the Act.
It also includes a person on whom any proceeding has been
taken for assessment of his income/loss or refund due to him.
It also includes a person who represents some other person
who is liable to pay tax. He is called “REPRESENTATIVE ASSESSEE’
or ‘DEEMED ASSESSEE’ (e.g. Father, filing the return of his working
minor child, on his behalf).
It also includes a person who has made default under any
provision of the Income Tax Act. He is called ' ASSESSEE IN
DEFAULT'. For example if a person was responsible to deduct the
Tax at Source but has not deducted the tax or after deducting the
tax he has not deposited such tax. Another example may be a
person who was liable to pay advance tax but he has not paid such
advance tax.
INCOME [SECTION 2(24)]: The definition of 'Income’ under the Act
is inclusive and not exhaustive. It includes:
a) Profits and gains from business or profession;
b) Dividends;
c) Voluntary contributions received by a WHOLLY OR PARTLY
CHARITABLE OR RELIGIOUS TRUST/INSTITUTION EXCEPT the

Income Tax
contribution forming part of the CORPUS of the trust;

d) Perquisites and profit in lieu of salary;
e) ALLOWANCES or BENEFITS received by the assessee to meet
his expenses for PERFORMANCE OF HIS DUTIES;
f) ALLOWANCES received by the assessee to meet his personal
expenses at the place of duty or compensation for increased
cost of living;
g) BENEFITS OR PERQUISITES enjoyed (by a Director or a person
having substantial interest or a relative of Director/such
person) in a Company;
h) BENEFITS OR PERQUISITES obtained by REPRESENTATIVE
ASSESSEE OR any amount paid by representative assessee for
the benefits of the BENEFICIARY which is required to be paid
by the beneficiary only;
i) Compensation (or similar payments) received by or due to a
person under PGBP;
J) Income of Trade associations (Professional also) who provide
specific services to its members;
k) BENEFITS OR PERQUISITES from BUSINESS OR PROFESSION;
l) Export Incentives to Exporters;
m) Any interest, salary, bonus, commission received by a partner
from Firm;
n) Any sum received under Key man Insurance Policy;
o) Profit and Gains of Managing Agency;
p) Income from speculative transaction;
q) Recovery of any amount which has been allowed as deduction
in any preceding Assessment Year;
r) Income from sale of any fixed asset (except land) put to
scientific research without using it for any other purpose
before sale;
s) Recovery of Bad debts, allowed as deduction in any preceding
Assessment Year;
t) Amount transferred to Special Reserve under section 36(i)
(viii);
u) Recovery out of any discontinued business or profession;
v) Capital gains;
w) Insurance profit computed under section 44;
x) Casual Income;
y) Any sum received by employer from his employees as
contribution to RPF or any other approved fund and the
amount not deposited with in 'DUE DATES’ as per section 43B.
z) Any sum received under a Key-man Insurance Policy.
za) any gift of money received by an individual from non-specified
person(s) in excess of Rs.50000.

Income Tax
THE POINTS TO BE NOTED:-

- A REVENUE INCOME IS TAXABLE UNLESS OTHERWISE STATED
IN THE ACT.
- A CAPITAL INCOME IS EXEMPTED UNLESS OTHERWISE STATED
IN THE ACT.
- PERSONAL GIFTS ARE NOT INCOME IN THE HANDS OF
RECIPIENT (EXCEPT GIFT OF MONEY EXCEEDING RS. 50000
RECEIVED BYINDIVIDUAL OR HUF WITHOUT CONSIDERATION).
- PIN MONEY IS NOT INCOME OF THE HOUSEWIFE.
- AWARDS RECEIVED BY A PROFESSIONAL SPORTS PERSON IS
TAXABLE BUT AWARDS RECEIVED BY AMATEURE SPORTS
PERSON IS NOT TAXABLE AS INCOME.
- THE BURDEN OF PROVING THAT A RECEIPT IS TAXABLE IS ON
THE INCOME TAX DEPARTMENT. BUT THE BURDEN OF
PROVING THAT AN INCOME IS EXEMPT IS ON THE ASSESSEE.
CAPITAL RECEIPTS vs. REVENUE RECEIPTS:
As discussed earlier, that the revenue receipts are
taxable, unless these are specifically exempted from tax under the
Act and the Capital Receipts are exempted unless these are
specifically charged to tax under the Act, so it becomes necessary to
understand the difference between the two. We have only the cases
decided by the courts with the help of which we can draw general
conclusions. These are as follows:-
a) The receipt is capital or revenue is to be considered only from
recipient’s point of view. The payer's motive is to be ignored.
b) Lump sum payments or payment received in Installment do
not affect the nature of the receipt.
c) Compensation received lieu of source of income is CAPITAL
RECEIPT whereas the compensation received for temporary
disablement is a revenue receipt.
d) Income from wasting assets (like mines and quarries are
treated as revenue income).
e) Insurance receipt for loss of current asset or against loss of
profit is Revenue Receipt. But Insurance claim for loss of Fixed
Asset is capital Receipt. The insurance claim for loss of goods,
which are not for business/profession, is Capital Receipt.
f) The receipt due to change in exchange rate of the currency on
current assets is Revenue receipt. But the receipt due to
change in exchange rate of the currency on FIXED
ASSETS/INVESTMENTS is CAPITAL RECEIPT.
g) The subsidy received for setting up a business or completing a
project is CAPITAL RECEIPT. But the subsidy received for
carrying out business activities and after the commencement
of production is REVENUE RECEIPT.

Income Tax
HEADS OF INCOME: The Income Tax is levied an income of a

person. This income is divided into five heads as follows:-
1) INCOME UNDER HEAD SALARY
Income due/received by an employee from his
past/present/future employer is taxable under this head.
2) INCOME UNDER HEAD HOUSE PROPERTY
Income received/earned/deemed to be earned by a person
from house property is charged under this head.
3) INCOME UNDER HEAD PROFITS & GAINS OF BUSINESS OR
PROFESSION
Income received/earned by a person from his business or
profession is charged to tax under this head.
4) INCOME UNDER HEAD CAPITAL GAINS
Income earned /received by a person from sale/transfer of any
capital asset is charged under this head.
5) INCOME FROM OTHER SOURCES
Income from all other sources which can't be covered under
first four heads is charged to tax under this head.
IMPORTANT: INCOME TAX IS CHARGED ON ALL INCOMES OF A
PERSON. VARIOUS INCOMES ARE NOT CHARGED TO TAX
SEPARATELY. For example: Mr. X has income from:
a) Salary Rs. 10, 00,000/-; b) House property Rs. 2, 00,000/-; c)
Profit from cloth business Rs. 2, 00,000/-; d) Profit from Gold
business Rs. 1, 00,000/-; and e) Interest income of Rs.
50,000/-.
All these incomes will be charged to tax in only one RETURN OF
INCOME i.e. of Mr. X. All these incomes will be shown in the above
said Return of Income only.
METHOD OF ACCOUNTING: Under the Act only two accounting
methods are allowed - a) Mercantile system and; b) Cash system.
But these two methods can only be employed for
computing income under head-a) Profit & Gain of Business or
profession; & b) Income from other sources.
The remaining three heads of Income i.e. a) 'Salary; b)
House property and; c) Capital Gain do not recognize any method of
accounting followed by the person/assessee. Under these three
heads, income is calculated as per provisions given in the chapter
concerned.
Previous Year for Cash Credits, Investments,
Money etc.
1. Cash Credit (sec 68): Where any sum is found credited in the
books of an assessee for any previous year for which the assessee
has no satisfactory explanation then such cash credit is treated as
income of the assessee of the previous year in which such income

Income Tax
was credited.
2. Unexplained Investments (sec 69): Where in any previous
year the assessee has made any investments which are not
recorded in the books of account maintained by him and the
assessee has no satisfactory explanation about the source of
investment then such unexplained investment is treated as income
of the assessee of the previous year in which such investment was
made.
3. Unexplained Money (Sec 69A): Where in any previous year
the assessee is found to be the owner of any money, bullion,
Jewellery or other valuable article which is not recorded in the books
of account and the assessee has no satisfactory explanation about
the source of money etc. then such unexplained money etc. is
treated as income of the assessee of the previous year in which the
assessee was found to be the owner.
4. Investments not fully disclosed in the books of account
(sec 69B): Where in any previous year the assessee has made any
investments which are recorded in the books of account maintained
by him at an amount less than amount expended and the assessee
has no satisfactory explanation about the source of excess amount
expanded in investment then such excess amount is treated as
income of the assessee of the previous year in which such
investment was made.
5. Unexplained Expenditure (Sec 69 C): Where in any previous
year an assessee has incurred any expenditure and the assessee
has no satisfactory explanation about the source of expenditure or
part thereof then such unexplained explained expenditure or part
thereof is treated as income of the assessee of the previous year in
which such expenditure was incurred. Also such unexplained
expenditure can not be allowed as deduction under any head of
income.
6. Amount borrowed or repaid on Hundi (sec 69D): Where any
amount is borrowed on a Hundi from, or any amount due thereon is
repaid to, any person otherwise than through an account payee
cheque drawn on a bank, the amount so borrowed or repaid shall be
deemed to be the income of the borrower or repayer for the
previous year in which such amount was borrowed /repaid. If
amount borrowed has already been taxed then there will be no tax
levied at the time of repayment of such amount.
EXECPTIONS TO THE GENERAL RULE THAT
INCOME OF A PREVIOUS YEAR IS CHARGED TO
TAX IN THE RELEVANT ASSESSMENT YEAR:
1. Non resident shipping business (sec 172) – In case of a non-

Income Tax
resident assessee owning a ship or ship is chartered by such

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

INCOME TAX
Name of person :
Address :
Father's Name (if applicable) :
Date of Birth (if applicable) :
Previous Year :
Assessment year :

Income Tax
Ward/Circle/Range :
Permanent Account Number :
PARTICULARS AMOUNT
1. INCOME UNDER HEAD 'SALARIES' + 

2. INCOME UNDER HEAD 'HOUSE + 
PROPERTY'
3. INCOME UNDER HEAD 'PROFITS & + 
GAINS OF BUSINESS'
4. INCOME UNDER HEAD 'CAPITAL + 
GAINS’ + 
5. INCOME UNDER HEAD ‘OTHER
SOURCES’
Less Setting off of brought forward losses - 
:
GROSS TOTAL INCOME (OR G.T.I.)
Less Deduction under Chapter VI A - 

: (Section 80C to 80U)
NET INCOME (OR NET TAXABLE
INCOME) (OR TOTAL INCOME)
TAX LIABILITY
Tax on special Incomes (like casual Income 

or long term Capital Gains or undisclosed
Incomes or incomes of non-residents)
Tax on Normal Income + 
TOTAL
Add: Surcharge (if applicable) + 

Add: Education Cess @2% of Tax and + 
surcharge
Add: Secondary & Higher Education Cess + 
@1% of Tax and surcharge
TOTAL
Less: Rebate u/s 86, 89, 90 & 91 - 
Add: Interest u/s 234 A,234 B & 234 C + 
Less: Tax Deducted or collected at source - 
Advance Income Tax - 
Self Assessment Tax - 
NET AMOUNT PAYABLE / REFUND DUE

Income Tax
RATES OF TAX FOR ASSESSMENT YEAR 2010-11-

A. On Normal Income -
1(a) for woman, resident in India and below 65 years of age till
31.03.2010
Upto Rs. 1,90,000 Nil
From Rs.1,90,010 to Rs. 3,00,000 10%
From Rs.3,00,010 to Rs. 5,00,000 20%
Above Rs. 5,00,000 30%
1(b) For an Individual (man or woman), resident in India who is of 65
years of age or more at any time during the previous year
From Rs.2,40,010 to Rs. 3,00,000 10%
From Rs.3,00,010 to Rs. 5,00,000 20%
Above Rs. 5,00,000 30%
1(c) For Individuals (other than those mentioned above), HUF,
AOP/BOI (other than co-operative societies)
From Rs.1,60,010 to Rs. 3,00,000 10%
From Rs.3,00,010 to Rs. 5,00,000 20%
Above Rs. 5,00,000 30%
1(d) For Firms (including LLP’s) – A firm’s normal income is taxable
@ 30%.
1(e) (i) For Domestic Company normal income is taxable @ 30%.
(ii) For Foreign Company normal income is taxable @ 40%.
1(f) For Co-operative societies
Upto Rs. 10,000 10%
From Rs.10,010 to Rs. 20,000 20%
Above Rs. 20,000 30%
1(g) For Local Authorities: A Local Authority’s normal Income is

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

Income Tax
EDUCATION CESS: Education cess is 2% of total tax (including

surcharge) for all assessees.
SECONDARY & HIGHER EDUCATION CESS: It is 1% of total tax
(including surcharge) for all assessees.
* * *
CHAPTER-2
RESIDENTIAL STATUS
A person may earn/receive his income from a source or
at a place with in India or outside India. Such income is charged to a
person on the basis of Residential Status. Residential Status is
different from 'Nationality’ or ‘Domicile.’ Before starting the concept
of understanding different types of residential status it is necessary
to understand that:
1) Each and every person has a distinctive residential status for
every relevant previous year. It means that the person can be
either ' ORDINARILY RESIDENT' or 'NOT ORDINARILY RESIDENT’
or ‘NON RESIDENT’:
2) Every person has to consider his residential status in every
relevant previous year. It means that a person Resident in
A.Y.2009-10 may be non-resident in AY 2010-11 according to
the rules to be studied later on.
3) It is not necessary that a person, who is resident in India, can't
be Resident in any other country in the same previous year. It
simply means that a person can be Resident in more than one
country in the same previous year.
4) If a person is resident in a particular previous year for one
source of income then he is also resident for other sources of
income for that previous year. This means that a person
has same residential status for incomes of a particular
previous year.
The residential status is studied by dividing the persons
in following five categories:-
a) Individual b) H.U.F. c) Firm/AOP or BOI.
d) Company e) every other person.
A) RESIDENTIAL STATUS OF INDIVIDUAL: An individual

Income Tax
can be:
i) Resident; ii) Resident but not ordinarily resident; or iii) Non-
resident.
RESIDENT & ORDINARILY RESIDENT [Sec 6(1), 6(6)(a)]: An
individual is resident in India in a previous year if he fulfills at
least one of the following two conditions:
a) He is in India for at least 182 days in the previous year; or
b) He is in India for at least 60* days in the previous year and at
least 365 days in four years preceding the relevant previous
year.
*This period of 60 days is to be replaced by 182 days if:
i) Individual is Indian Citizen or a person of Indian origin who
comes for a visit to India; or
ii) Individual is Indian Citizen who leaves India during the relevant
previous year for employment purpose outside India or as a
crew member of Indian Ship.
NOTE: AN INDIVIDUAL IS A PERSON OF INDIAN ORIGIN IF HE
OR EITHER OF HIS PARENTS OR ANY OF HIS GRAND PARENTS
(BOTH PATERNAL & MATERNAL) WAS BORN IN UNDIVIDED
INDIA.
An individual, who fulfills either of 'a' or 'b' or both
conditions given above, has to fulfill both of the conditions given
below to be ordinarily Resident:-
a) He is resident in India for at least 2 years out of 10 years
immediately preceding the relevant previous year; &
b) He is in India for at least 730 days in 7 years preceding the
relevant previous year.
RESIDENT BUT NOT ORDINARILY RESIDENT [SEC6 (1), 6(6)
(a)]: An individual who fulfills at least one of the Basic
conditions of resident but does not fulfill both of the
conditions for ordinarily resident is RESIDENT BUT NOT
ORDINARILY RESIDENT.
NON RESIDENT:- An individual who does not fulfill any of the basic
condition of resident is called NON-RESIDENT.
B) RESIDENTIAL STATUS OF H.U.F.: Like Individual, the H.U.F.

can also be i) Resident and ordinarily resident; ii) Resident but not
ordinarily resident; & iii) Non resident.
RESIDENT & ORDINARILY RESIDENT [Sec.6 (2)]: The H.U.F. is
resident in Indian in a previous year if de-facto (actual) control and
management of its affairs is situated wholly or partly in India.
The H.U.F., who is Resident, has to fulfill both of the
conditions given below to be ordinarily resident:-
a) The Karta (Manager) is resident in India for at least 2 years out

Income Tax
of 10 years immediately preceding the relevant previous year;

&
b) The Karta is in India for at least 730 days in 7 years preceding
the relevant previous year.
RESIDENT BUT NOT ORDINARILY RESIDENT: The HUF who is
resident in India (i.e. the Control & Management of its
affairs is in India either wholly or partly) but it does not
fulfill both of the conditions for ordinarily resident is
resident but not ordinarily resident.
NON-RESIDENT: The H.U.F., control & management, of whose
affairs, is wholly outside India is Non-resident.
C) RESIDENTIAL STATUS OF FIRM/AOP OR BOI [Sec. 6

(2)]: A firm can be either i) resident; or ii) Non resident.
RESIDENT: A firm is resident in India if control and management of
its affairs is situated wholly or partly with in India.
NON RESIDENT: A firm/AOP or BOI is non resident in India if Control
and management of its affairs is situated wholly outside India.
NOTE: A Firm is not 'ordinarily' or 'not ordinarily resident’.
D) RESIDENTIAL STATUS OF A COMPANY [Sec 6(3)] : The

company can be either: i) Resident; or ii) Non- resident
RESIDENT: The Company, which is registered in India (Called Indian
Company), is always resident in India. A foreign company is resident
in India if control and management of its affairs is situated wholly
with in India.
NON RESIDENT: A foreign company is non resident in India if
control & management of its affairs is wholly or partly outside India.
NOTE: A company is never 'ORDINARILY RESIDENT' or 'NOT
ORDINARILY RESIDENT.
E) RESIDENTIAL STATUS OF EVERY OTHER PERSON [SEC
6(4)]: In case of every other person, same rules are
applicable as are in case of a FIRM/AOP/BOI.
TAX INCIDENCE FOR DIFFERENT RESIDENTIAL STATUS:

PARTICULARS ORDINARIL RESIDENT NON
Y BUT NOT RESIDENT
RESIDENT ORDINARIL
Y
RESIDENT
1 Income received in TAXABLE TAXABLE TAXABLE
India (Where ever
accrued)
2 Income deemed to be TAXABLE TAXABLE TAXABLE

Income Tax
received in India
(wherever accrued )
3 Income accrued in TAXABLE TAXABLE TAXABLE
India(wherever
received)
4 Income deemed to be TAXABLE TAXABLE TAXABLE
accrued in India
(wherever received)
5 Income accrued and TAXABLE TAXABLE NOT
received outside India, TAXABLE
from a business
controlled from India
or a profession set up
in India (wholly or
partly)
6 Income accrued and TAXABLE NOT NOT
received outside India, TAXABLE TAXABLE
from a business
controlled from
outside India or a
profession set up
outside India
7 Income accrued and NOT NOT NOT
received outside India TAXABLE TAXABLE TAXABLE.
during any preceding
previous year but
remitted to India
during the previous
year.
INCOME DEEMED TO BE RECEIVED IN INDIA: The following are

incomes which are deemed to be received in India:-
i) Annual accretion to balance in Recognised provident fund of an
employee i.e. interest credited at a rate exceeding 9.5%.
ii) Contribution in excess of 12% of General Salary (to be
discussed in chapter 'Salary') by the Employer towards R.P.F.
iii) Transfer balance from U.R.P.F. to R.P.F.
iv) Tax Deducted at source on income of payee.
v) Deemed Profit u/s 41 and 59 i.e. Recovery of any deduction or bad
debts or any income after closure of business or profession or sale
of any asset used for scientific research.
vi) Contribution by Central Government towards pension fund of its
employees under section 80 CCD.
vii) Special Incomes like cash credits, unexplained money etc..

Income Tax
INCOME DEEMED TO ACCRUE OR ARISE IN INDIA: The following

are incomes deemed to accrue or arise in India:-
i) Income from Business connection in India.
ii) Income from property or any source of Income which is
situated in India.
iii) Income from Transfer of Capital Asset situated in India.
iv) Salary (other than allowances and perquisites) received by
Indian National (citizen) Government employees posted
outside India.
v) Salary of an individual if service is rendered in India.
vi) Dividend received by any person from an Indian Company.
vii) Income by way of interest or royalty or fees from technical
service received by any person from Central or State Govt.
viii) Income by way of interest or royalty or fees for technical
service received by any person from any other person if the
fund or money or source of income from royalty is used in
India.
NOTE: Business connection may be of many types i.e. an agent in

India or an Indian Branch Office etc.. But in case of a Non-
resident person the following are not treated as business
connection in India:
a) Activities confined to purchase of goods in India for exports;
b) Activities confined to collection of news and views for
transmission outside India by or on behalf of Non-resident
engaged in business of news agency or publishing newspapers,
magazines or journals;
c) Activities confined to shooting of cinematographic film in India
if such Non-resident is:
i) an individual- not an Indian citizen; or
ii) a firm- having no partner being Indian Citizen or Indian
Resident; or
iii) a company- having no shareholder being Indian Citizen or
Indian Resident.
* * *
Chapter-3
INCOME UNDER HEAD "SALARIES"
The first head of Income is ‘Income from Salaries’. First of all let us

Income Tax
understand some important concepts about it:-

a) EMPLOYER-EMPLOYEE RELATIONSHIP: The relationship
between payer and the payee must be that of employer and
employee (i.e. master and servant relationship). Whether the
relationship is of master & servant or not, is decided on case to
case basis. The general rule is that a master is a person who
directs the servant WHAT IS TO BE DONE, WHEN IT IS TO BE
DONE, & HOW IT IS TO BE DONE. But this rule can't be applied
in all cases. [for example in case of a teacher or a doctor the
above rule fails].
• Remuneration received by a Member of Parliament is not
chargeable as salary because the relationship between him and the
Government is not of employer & employee. [It is chargeable under
head “Income from other sources”].
• Remuneration received by a partner from his partnership firm is
not chargeable as salary because the relationship between him and
the firm is not of employer & employee. [It is chargeable under head
"Profits & Gains of business and profession"].
b) SURRENDER OF SALARY: Any salary surrendered by the
employee to the Central Government under Section 2 of The
Voluntary Surrender of Salaries (Exemption from taxation) Act,
1961 is not charged to tax. The employee may be in private,
public or Government service.
c) FOREGOING OF SALARY: If any salary is foregone by the
employee (not surrendered as per point (b) then it is to be
charged to tax.
d) PLACE OF ACCRUAL OF SALARY: The salary income is
accrued where the employee renders the services. The place
of receipt of salary is of NO IMPORTANCE.
* But there is one exception to this rule. The salary, received by
Indian National Government Employee posted outside India, is
deemed to accrue or arise in India.
e) TAX FREE SALARY: If an employee receives tax free salary
from his employer then it simply means that tax has been paid
by the employer. The tax paid by employer will be added back
to find total salary due to the employee.
f) SALARY PAID BY FOREIGN EMPLOYER: If employee
rendering service in India is paid salary by his foreign
employer; it is taxable in India (unless otherwise stated to be
exempt u/s 10).
g) SALARY DUE OR RECEIVED IN FOREIGN CURRENCY: If the
employee earns/receives salary in foreign currency, it will be
converted in Rupees by applying. TELEGRAPHIC TRANSFER
BUYING RATE on the last day of the month preceding the

Income Tax
month in which salary is due or paid or is in arrears.

h) DISTINCTION BETWEEN SALARY & WAGES NOT
IMPORTANT: The Act does not make any difference between
salary and wages. Both are chargeable under 'SALARY'.
i) BASIC SALARY IN GRADE SYSTEM: Under this system, the
annual increments to be given to the employee are already
fixed in the grade. Let us take an example of an employee,
who joins service on 1.7.2008 and is in the grade of 15000-
500-20000-1000-40000. It means that in the first year of
service i.e. from 1.7.2008 to 30.6.2009 he will get Rs. 15,000
per month. In the next year from 1.7.2009 to 30.6.2010, his
basic salary will be Rs. 15,500 (including increment of Rs. 500).
He will get annual increments of Rs. 500 till his basic is Rs.
20,000. Then his annual increments will be Rs. 1,000 till his
basic is Rs. 40,000. After then there will be no increment.
j) SALARY FROM MORE THAN ONE SOURCE: If an employee
gets his salary from more than one employer then all the
salary is taxable under head income from 'SALARIES.'
k) SALARY FROM PAST, PRESENT OR FUTURE EMPLOYER:
Any remuneration received from past, present or future
employer is to be charged under head 'SALARIES'.
l) SALARY WHEN DUE: There are two approaches - i) Salary is
due on the last date of month; and ii) Salary is due on the
first date of next month.
m) BASIS OF ACCOUNTING IRRELEVANT: The books of
accounts kept by employee (if any) and accounting method
followed by him (cash or mercantile) are not relevant for
calculating salary income of the employee.
MEANING OF SALARY U/S 17(1): The definition of Salary is

inclusive one. It includes:-
- Wages;
- Any annuity or pension;
- Any Gratuity;
- Any fees, commissions, perquisites or profits in lieu of or in
addition to any salary or wages;
- Any advance of Salary;
- Any payment received by an employee in respect of any period
of leave not availed by him;
- Annual accretion to the balance at the credit of an employee
participating in a recognized provident fund to the extent to
which it is chargeable to tax;
- The aggregate of all sums that are comprised in the
transferred balance of an employee participating in a

Income Tax
recognised provident fund to the extent to which it is

chargeable to tax.
- The contribution made by the Central Government to the
account of an employee under pension scheme referred to in
section 80 CCD.
The above definition is inclusive. But in general,
Salary includes all the payments made by employer to employee
(including gratuitous payments, allowances and perquisites).
PROCESS OF COMPUTING SALARY INCOME:

It can be understood from the following table:-
Basic Salary +

Fees and Commission +

Bonus +

Entertainment Allowance +

Other Allowances (Taxable parts +
only) 
Perquisites (Taxable parts only) +

Retirement Benefits (taxable parts +
only) 
GROSS SALARY
Less: Deduction for Entertainment - 
Allowance u/s 16 (ii)
Less: Deduction for Professional/ - 
Employment tax u/s 16(iii)
INCOME UNDER HEAD SALARY
BASIS OF CHARGE (SECTION 15): Salary is charged to tax in

"due or receipt" basis whichever is earlier. But advance salary is
taxable on Receipt basis. Arrears of Salary is taxable on receipt
basis if not charged to tax in any previous year on due basis.
Similarly Bonus is taxable on receipt basis if not charged to tax
earlier on due basis. Salary in lieu of notice period is always taxable
on Receipt basis.
Now we shall study all the components of salary and their
taxability one by one.
BASIC SALARY: It is taxable or due on receipt basis whichever is
earlier.

Income Tax
FEES & COMMISSION: It is also taxable on due or receipt basis

w.e. is earlier.
BONUS: It is taxable on receipt basis if not charged to tax earlier on
due basis. However relief u/s 89 can be claimed if it is taxed on
receipt basis.
SALARY IN LIEU OF NOTICE PERIOD [Section 15]: It is taxable
only on receipt basis.
ADVANCE SALARY [Section 17(1)(v)]: It is taxable on receipt
basis because it is never due. However relief u/s 89 can be claimed.
ARREARS OF SALARY: It is taxable on receipt/ allowed basis if it is
not taxed earlier on due basis. However relief u/s 89 can be claimed.
ANNUITY: It is taxable on due or receipt basis w.e. is earlier. If it is
received from present employer, it is taxed as Salary. If it is received
from past employer, it is taxed as profits in lieu of Salary.
RETIREMENT BENEFITS
There are following types of retirement benefits:
1. Gratuity
2. Pension
3. Leave Salary
4. Retrenchment Compensation
5. Compensation on voluntary retirement.
6. Provident Fund
7. Approved Superannuation fund
Now we shall study these one by one:
GRATUITY (DEATH-CUM-RETIREMENT)[Section 10(10)]:
Gratuity is received by employee from his employer in appreciation
of past services. It can be received by either:-
i) The employee himself on his retirement; or
ii) The legal heir on the death of employee.
The Gratuity received by employee is taxable under head
' Salaries' but the Gratuity received by the Legal heir is not
taxable (if employee died while in service). But some part of
Gratuity is exempt u/s 10(10). For this the employees are
divided into three categories:
i) Central/ State Government employees and employees of local
authorities.
ii) Employees covered under ' The payment of Gratuity Act,
1972’.
iii) Other Employees.
EXEMPTION FOR CENTRAL/STATE GOVT. EMPLOYEES &

EMPLOYEES OF LOCAL AUTHORITIES [SECTION 10(10)(i)]: Full
amount of Gratuity received by the employee is EXEMPT from tax.

Income Tax
EXEMPTION FOR EMPLOYEES COVERED UNDER 'THE

PAYMENT OF GRATUITY ACT, 1972 [SECTION 10(10)(ii)]: Least
of the following three amounts is exempt from tax:
a) Actual Gratuity Received;
b) 15 days of salary for every completed year of service a part
thereof in excess of six months;
c) Rs. 3,50,000/-.
NOTE 1) In case of seasonal employee 15 days are to be replaced
with 7 days.
2) The number of days in a month are taken as 26.
3) Salary means Basic salary and Dearness Allowance last drawn.
4) Salary in case of a piece-rated employee is calculated on the
basis of average of last three months’ wages (excluding wages for
overtime work) preceding retirement.
4) The payment of Gratuity Act, 1972 is applicable in case of every
shop/establishment (employing more than 9 workers) and every
factory, mine, oilfield, port, plantation etc.
EXEMPTION FOR OTHER EMPLOYEES (SECTION 10(10)(iii)]:

Least of the following is exempt from tax:
a) Actual Gratuity Received;
b) ½ month’s average Salary for each completed year of service;
c) Rs. 3,50,000/-.
NOTE: 1) Salary means Basic Salary, Dearness Allowance (if terms
of employment so provide) and commission based on fixed
percentage of turnover ACHIEVED BY THE EMPLOYEE.
2) Average Salary means salary (discussed as above) for 10 months
immediately preceding the month of
retirement/resignation/leaving the job.
3) In case of employees not covered under The payment of Gratuity
Act, 1972 the
maximum amount of Gratuity exempt from tax in their lives is
Rs.3,50,000 .
PENSION [SECTION 17(1) (ii)]:

Pension is paid by the employer after retirement or death of
employee in appreciation of his past services. It can be received by
either:
i) The employee himself on his retirement; or
ii) The legal heir on the death of the employee.
The pension received by employee is taxable under head
‘Salaries’. The pension received by the legal heirs is called 'Family
Pension’ and it is taxable under head ‘Income from other sources’.
Pension can be either commuted or uncommuted.

Income Tax
Uncommuted Pension: It is received on monthly basis by the

employee after retirement. It is fully in taxable in case of all
employees.
Commuted pension: It is received by the employee on lump-sum
basis. Exemption is available as follows:-
Exemption for Central or State Government or Local
Authority or Statutory Corporation Employees:
Commuted pension received by these employees is fully exempt
from tax.
Exemption in case of other employees:
a. If the employee receives gratuity also: The commuted
value of 1/3rd of the pension is EXEMPT from tax.
b. If the employee does not receive gratuity: The
commuted value of ½ of the pension is EXEMPT from tax.
Pension scheme for Employee Central Government or any
other employer joining on or after 1st January, 2004:- The
conditions to be fulfilled:
1) The assessee is an Individual.
2) He is employed by the Central Government or any other
employer on or after 1st January, 2004.
3) He has paid or deposited any amount not less than 10% of
salary in his account under a pension scheme notified by the
Central Government in the previous year.
4) The employer also contributes an amount equal to 10% of his
salary in his pension account. Such contribution is fully taxable
under head Salaries.
5) Employee’s contribution as above (not exceeding 10% of his
salary) plus Employer’s contribution to the above pension fund
(not exceeding 10% of his salary) is deductible under section
80CCD.
6) If the employee or his nominee receives any amount on
account of closure of the account or as pension during the
previous year then such amount received will be taxable in the
hands of the employee or his nominee, as the case may be, in
the year of receipt.
7) Salary means Basic Salary plus Dearness Allowance, if the
terms of employment so provide.
LEAVE SALARY [Section 10(10)]: The Employees are entitled to

various types of leaves while in service like casual leaves,
medical leaves, outstation leaves etc. The employee can take
all these leaves. But if he does not avail all leaves then some of
the leaves may either lapse or be cancelled while some may be
earned (earned leaves). These earned leaves can be encashed

Income Tax
by the employee either in the same year or any other year while
he is in service OR he may get earned leave encashed on
retirement or resignation or his legal heirs may get this amount
after his death.
A) If leave Salary is encashed by the employee when he is in
service with the same employer then it is FULLY TAXABLE.
However relief u/s 89 can be claimed.
B) If Leave Salary is encashed by the employee at the
time of retirement or leaving the job then the exemption is as
follows:
i) Exemption for Central or State Government
Employees [SECTION 10(10AA)(i)]: Leave encashment at
the time of retirement/leaving the job is FULLY EXEMPT.
ii) Exemption for other employees [SECTION 10 (10AA)
(ii)]: Leave encashment at the time of retirement/ leaving the job is
exempt to the least of following:
(a) Leave Encashment actually received;
(b) 10 months X Average Salary;
(c) (Total leave entitlement by taking maximum 30 days for every
completed year of service - Months of leaves
availed/encashed) X Average Salary.
(d) Rs 3,00,000/- (Rupees Three Lac only).
NOTE:
Salary Means Basic Salary, Dearness Allowance (if the terms of
Employment so provide) and Commission based on fixed
percentage of turnover achieved by the employee.
1. Average Salary means “Salary of 10 months immediately
preceding retirement/leaving the job.
2. Leave salary paid to legal heirs of the deceased employee is
not taxable.
3. In case of other employees, maximum amount of leave salary
exempt from tax is Rs. 3,00,000. This is applicable if the
employee has more than one employer in his life.
RETRENCHMENT COMPENSATION [SEC 10(10B)]: Any

compensation received by a workman at the time of his
retrenchment is exempt to the least of following:
a. Actual amount received;
b. Amount as per section 25 F (b) of the Industrial Disputes Act,
1947;
c. Rs 5,00,000/- (Rupees five Lac only).
Note: Under The Industrial Disputes Act, 1947, a workman is
entitled to receive compensation equal to 15 days’ average
salary for every completed year of service a part thereof in

Income Tax
excess of six months.
COMPENSATION ON VOLUNTARY RETIREMENT [SEC 10(10C)

& RULE 2 BA]:
The compensation received by the employee at the time voluntary
retirement is exempt if following conditions are satisfied –
1. Compensation is received by the employee at the time of
voluntary retirement/ separation.
2. Compensation is received by an employee of the following
undertakings:
a. an Authority established under a Central, State or Provincial
Act;
b. local Authority;
c. university;
d. an Indian Institute of Technology;
e. the State Government;
f. the Central Government;
g. a notified institute having importance throughout India or
any State;
h. a notified institute of management;
i. a public sector company;
j. any company or a co-operative society.
3. Compensation is received in accordance with the scheme of
voluntary retirement/ separation which is framed in accordance with
prescribed guidelines as per Rule 2BA.
4. Where exemption has been allowed to an employee under section
10(10C) for any assessment year, no exemption there under shall be
allowed to him in relation to any other assessment year.
EXEMPTION AMOUNT IS LEAST OF THE FOLLOWING.
(a) Actual Compensation received;
(b) Rs 5,00,000/- (Rupees five Lac only).
GUIDELINES OF VOLUNTARY SCHEME [RULE 2BA]:
(1) The employee must have completed at least 10 years
of service or be of at least 40 years of age.
(2) The employee may be worker or executive but not
Director of Company/ Co-operative Society.
(3) The voluntary retirement is to reduce the existing
strength of employees and no appointment will be
made for the vacancy caused by Voluntary retirement.
(4) The retiring employee is not to be employed in other
concern belonging to the same management.
(5) The amount receivable is least of –
(a) Three months salary for each completed year of service.
(b) Number of Months for retirement x Salary at the time of

Income Tax
retirement.
NOTE: Salary means Basic Salary, Dearness Allowance (if the terms
of employment so provide) and commission (based on fixed %ge of
turnover achieved by the employee) last drawn.
PROVIDENT FUND: There are four types of Provident Funds:

(a) Statutory Provident fund (SPF or GPF): It is set up under the
provisions of The Provident Funds Act, 1925. This fund is for
employees of Central Government, State Government, Local
Authorities, Semi-Government Organisations, Railways,
Universities and recognised Educational Institutions.
(b) Recognised Provident fund (RPF): It is set up under the
provisions of The Employees’ Provident Fund and
Miscellaneous Provisions Act, 1952. This fund is for employees
of those establishments which have employed 20 or more
workers. The establishments having less than 20 workers can
also join this scheme. Any establishment has two options for
RPF: 1) Join scheme of the Government set up under the above
Act; or 2) To have own scheme of provident fund and to get it
recognised from the Commissioner of Income Tax as per rules
under Part A of the IV schedule to The Income Tax Act.
(c) Unrecognised Provident fund (URPF): Any establishment
having own scheme of provident fund but fails to get it
recognised from the Commissioner of Income Tax as per rules
under Part A of the IV schedule to The Income Tax Act then
such provident fund is known as unrecognised provident fund.
(d) Public Provident Fund (PPF): The Central Government has
established Public Provident Fund for general public. Any
individual can be member PPF (whether employee or not) by
opening PPF account at Post Office or nationalized banks.
PPF is different from others because even a non–employee
can have PPF Account. Thus in PPF employer does not
contribute any amount.
TREATMENT FOR TAX PURPOSES
PARTICULARS SPF RPF URPF
1 Employer’s Fully Exempt up Ignore for the
Contribution Exempt to 12% of time being
Salary
(NOTE-1)
2 Employee’s Deduction Deduction Deduction u/s
contribution u/s 80C u/s 80C 80C not
available available available
3 Interest on P.F Fully Exempt Ignore for the
Balance. Exempt UPTO 9.5% time Being.

Income Tax
p. a.
4. Receipt of Lump Fully Generally Note-3

sum amount on Exempt Exempt
Retirement or (Note-2)
Resignation
NOTE:
1) Salary means Basic Salary, Dearness Allowance (if the terms of
employment so provide) and commission based on fixed percentage
turnover achieved by the employee.
2) The receipt of Lump sum amount on Retirement/ resignation on
shall be exempt if:
(a) The employee has completed continuous service
for 5 years or more; OR
(b) The employee has been terminated due to
employee’s ill health, closure of employer’s business or other
reason beyond control of the employee; OR.
(c) The employee continues with same Provident fund Account
with other employer.
(3) The receipt of Lump-sum amount on URPF balance shall be
treated on follows:-
(a) Employer’s Contribution (total) + Interest on employer’s
Contribution shall be fully taxable as Salary.
(b) Interest on Employee’s Contribution Shall be fully taxable as
‘Income from other Sources’;
(4) PPF: Annual contribution by individual/ HUF fully qualifies for
Deduction u/s 80C. The annual Interest on PPF is fully exempt.
The Lump sum amount received is also fully exempt.
APPROVED SUPERANNUATION FUND: Superannuation fund is

also one of the schemes of retirement benefits. If such fund has
been and continues to be approved by the Commissioner of Income
Tax according to rules contained in Part B of IV schedule of the
Income Tax Act. The tax treatment is as follows-
1. Employer’s Contribution during the
previous year is exempt from tax in the hands of employee upto Rs.
1,00,000. Excess contribution is charged to tax.
2. Employee’s Contribution qualifies for
Deduction under section 80C.
3. Interest on fund Balance is fully
exempt from tax.
4. Any payment from fund shall be fully

Income Tax
exempt if-
(a) It is made on the death of a beneficiary; or
(b) It is made on retirement at or after specified age or employee
becoming incapacitated before such retirement; or.
(c) It is made as refund of contributions on the death of
beneficiary; or
(d) It is made as refund of contribution of employee leaving
service (other than due to (b)) to the extent of contributions
made before 1/4/1962.
TRANSFERRED BALANCE (URPF Converted in to the RPF):

Whenever the URPF is converted in to the RPF, the employee may
opt to transfer his URPF A/c balance (either fully or partially) to RPF
A/c. Such balance transferred to RPF A/c on the date of conversion is
called transferred balance. The tax treatment is as under –
(a) The URPF Shall be treated as RPF from the beginning. Each
year’s Employer’s Contribution in excess of 12% Salary
(10% of salary till A.Y 1997-98) is calculated. This amount is
taxable in the year URPF is converted in to RPF.
(b) The Interest on RPF balance in excess of 9.5% p.a. (12% p.a.
till A.Y2001-02) is calculated. This amount is taxable in the
year when URPF is converted into RPF.
ALLOWANCES
Allowance is fixed amount of money paid/payable by the
employer to the employee for meeting some expense-the expense
may be official or personal. All allowances are taxable UNLESS
OTHERWISE CLEARLY STATED TO BE EXEMPT. The taxable
allowances are taxed on due or receipt basis whichever is earlier.
The allowances can be studied under following heads –
(a) Fully exempted allowances.
(b) Allowances Exempted UPTO some Limit.
(c) Entertainment allowance.
(d) Fully Taxable Allowances.
Now we shall study them one by one.
FULLY EXEMPTED ALLOWANCES: These are:
(1) Allowances (all) to Indian National Government Employees
posted out side India.
(2) Allowances to High Court Judges under section 22A (2) of
the High court Judges (Conditions of service) Act, 1954.
(3) Sumptuary Allowance to High court and Supreme Court
Judges.
(4) Allowances to UNO employees.

Income Tax
ALLOWANCES EXEMPT UPTO SOME LIMIT: These can be studied

as:
• House Rent Allowance u/s 10 (13 A); &
• Notified Allowances u/s 10 (14).
HOUSE RENT ALLOWANCE [SEC. 10 (13 A) & RULE 2 A]:

House Rent Allowance is exempt to the least of the following-
(a) Actual HRA received (period of occupation of rented place only).
(b) Rent Paid- 10% of Salary (period of occupation of rented place
only).
(c) 40 % (50% in case of rented place at Mumbai, Delhi, Calcutta or
Chennai) of Salary (period of occupation of rented place only).
NOTE: 1. Salary means Basic Salary, Dearness Allowance (if the
terms service so include) and commission based on fixed %ge of
turnover achieved by the employee.
2. Salary for this purpose is determined on DUE Basis only.
3. If there is any change in Salary, Rent, Place of Residence or HRA
in the year then the exemption shall be calculated in parts.
NOTIFIED ALLOWANCES U/S 10 (14) & RULE 2BB:

The allowances are further sub-divided in to three categories
as follows-
(A) ALLOWANCES- (AMOUNT RECEIVED OR AMOUNT SPENT
WHICH EVER IS LESS IS THE AMOUNT EXEMPT):
(1) Travelling Allowance- It is given to meet cost of travel on
tour or on transfer of duty.
(2) Daily allowance- It is given to meet daily ordinary charges
due to absence from normal place of duty when on official tour
or on transfer of duty.
(3) Conveyance Allowance – It is given to meet conveyance
expenses for official purpose.
(4) Helper Allowance: It is given to meet expenditure of helper
for official purpose.
(5) Academic Allowance: It is given to meet academic/
research/ training costs in Educational & Research Institutions.
(6) Uniform Allowance: It is given to meet the cost of purchase
and maintenance of uniform for official purpose.
(B) ALLOWANCES–(AMOUNT RECEIVED OR LIMIT SPECIFIED

WHICH EVER IS LESS IS THE AMOUNT EXEMPT): In case of
following allowances actual expenditure is not considered at all:
(1) Children Education allowance – Exempt up to actual
amount received per child or Rs 100 p.m. per child up to
maximum of 2 children w.e. is less.

Income Tax
(2) Hostel Expenditure Allowance- Exempt up to actual amount

received per Child or Rs 300 p.m. per child up to maximum of
2 children w. e. is less.
(3) Tribal Area Allowance – Exempt up to actual amount
received or Rs 200 p.m. w.e. is less.
(4) High Altitude allowance (Special Composite Hill
Compensatory Allowance): Exempt from Rs. 300 p.m. to
Rs.7,000 p. m. depending upon level of difficulty.
(5) Border Area/ Remote Area & Disturbed Area Allowance-
Exempt from Rs. 200 p. m. to Rs 1,300 per month.
(6) Compensatory field Area Allowance- Exempt up to Rs
2,600 p.m.
(7) Compensatory Modified field Area Allowance- Exempt up
to Rs 1,000 p.m.
(8) Counter Insurgency allowance- Exempt up to Rs 3,900 p.m.
(9) Transport Allowance- It is given to meet cost of commuting
between office to home. Exempt up to Rs 800 per month (In
case of Disabled persons u/s 80 U it is Rs 1,600 p.m.)
(10) Under ground Allowance – It is given to coal mine workers.
Exempt up to Rs 800 p.m.
(11) High Altitude (Uncongenial climate) allowance- It is given
to member of armed forces. Exempt up to Rs 1,060 p.m. (for
altitude of 9000 ft to 15000 ft) and up to Rs. 1,600 p.m. (for
altitude of above 15000 ft).
(12) Special Compensatory highly active field area
Allowance- It is given to members of armed forces. Exempt to
the extent of Rs 4,200 p.m.
(13) Island duty allowance- It is given to members of armed
forces for Andaman & Nicobar & Lakshadweep Islands. Exempt
up to Rs 3,250/-p.m.
(C) TRANSPORT ALLOWANCE-(CERTAIN %GE OF AMOUNT

RECEIVED OR CERTAIN LIMIT WHICH EVER IS LESS IS
EXEMPT):
An employee of transportation employer receiving fixed
allowance to meet his duties of running such transport from one
place to another can claim exemption as follows –
(a) 70% of allowance; or
(b) Rs 6,000 p.m. w. e .is less.
But such employee can’t get benefit of this allowance plus Daily
allowance simultaneously.
ENTERTAINMENT ALLOWANCE
This allowance is given to entertain various persons while

Income Tax
performing official duty. This is fully taxable. But in case of Central/

State Government Employees, a deduction u/s 16(ii) can be claimed
to the least of the following:
(a) Actual Entertainment allowance;
(b) 20% of Basic Salary;
(c) Rs 5,000 (Rupees five Thousand only).
ALLOWANCES WHICH ARE FULLY TAXABLE

All other allowances are full taxable. Some of these are -
• City Compensatory Allowance;
• Dearness allowance;
• Medical allowance;
• Lunch/Tiffin allowance;
• Over time allowance;
• Servant allowance ;
• Warden Allowance;
• Non practicing allowance;
• Family Allowance.
PERQUISITES
Perquisites (or perks) are the benefits/ facilities in cash or
in kind provided by the employer to the employee either free of cost
or at concessional rate. The most important feature of perk is that
the employee must have a right to the same and it should not be
voluntary or contingent (i.e. may or may not be) payment.
PERQUISITES AS PER SECTION 17 (2) – DEFINITION:

The Act gives inclusive definition. Accordingly perquisites include-
(a) The value of Rent free Accommodation provided to the
employee by the employer;
(b) The Value of Concessional Rent Accommodation provided to
the employee by the employer;
(c) The VALUE of any benefit or facility provided or granted either
free or at concessional rates in the case of specified employees
(to be discussed later on);
(d) The obligation of employee paid by employer;
(e) The amount paid/payable (on accrual basis) by the employer
for Life Insurance or Contract of Annuity of the employee
(except RPF, approved superannuation fund & deposit Linked
Insurance fund);
(f) The value of sweat equity shares or any specified security (like
Debentures or Warrants) allotted or transferred (directly or
indirectly) by the employer either free or at concessional rates to

Income Tax
the employee;
(g) The amount of employer’s contribution towards approved
superannuation fund in excess of Rs. 1,00,000;
(h) The value of any other benefit or amenity as may be
prescribed.
NOTE: The perquisites from (a), (b), (d), (e) and (h) are taxable in
the hands of all employees whether specified or non-specified. In
case of specified employees perquisites mentioned in (c) are also
taxable. Perquisites as per (f) and (g) are taxable only if conditions
mentioned therein are fulfilled.
TAXABILITY OF PERQUISITES
Perks are divided into three categories as follows-
1) Perks taxable in case of all the
employees.
2) Perks taxable in case of
specified employees only.
3) Perk of sweat equity shares or any specified security (like
the employee.
4) Perk of employer’s contribution towards approved
superannuation fund in excess of Rs. 1,00,000.
5) Tax-free or exempted perks.
PERQUISITES TAXABLE IN CASE OF ALL EMPLOYEES

The following perquisites are taxable in case of all employees-
1. The Value of Rent Free Accommodation provided to the
employee by the employer;
2. The Value of Concessional Rent Accommodation provided to
the employee by the employer,
3. The monetary obligation of employee paid by the employer;
4. The amount paid/payable (on accrual basis) by the employer
for life Insurance or Contract of Annuity of employee (except
RPF, approved superannuation fund and Deposit Linked
Insurance Fund);
5. The value of any other benefit or amenity (excluding the fringe
benefits chargeable to tax under Chapter XII- H) as may be
prescribed.
PERQUISITES TAXABLE IN CASE OF SPECIFIED EMPLOYEES

ONLY
First of all, let us understand who is a specified employee-
SPECIFIED EMPLOYEE

Income Tax
• It includes a Director of the company (Full/part time

Director for full year or a single day); or
• An employee having substantial interest (being
beneficial owner of 20% of the voting power) in the employer
company; or
• An employee having Monetary Salary exceeding Rs
50,000. Here monetary Salary refers to all taxable Cash payments
less deduction u/s 16 (ii) & 16 (iii) of Entertainment allowance and
Professional tax.
All monetary obligations of employee paid by employer
are taxable perquisites in the hands of ALL EMPLOYEES. But if the
employer provides non- monetary benefit to the employee then they
are taxable in the hands of SPECIFIED EMPLOYEES only. Some
examples are-
• If watchman/sweeper/gardener/personal attendant is
employed by the employee and his salary is reimbursed by the
employer then it’s taxable in all cases being the obligation of
the employee met by the employer. But if the
watchman/sweeper/gardener/personal attendant is provided
by the employer then this perk is taxable only in case of
specified employees.
• Free or concessional use of gas/electricity/water for
household consumption is taxable in all cases if the bills for
above facilities are in the name of employee being the
obligation of the employee met by the employer. If such bills
are in the name of employer then it will be perquisite in case of
specified employee only.
• If the school fees of children of the employee is reimbursed
to him or paid by employer on his behalf to the school then
such amount shall be perquisite in case of all employees being
the obligation of the employee met by the employer. If the
children of employee are studying in a school maintained by
employer or in a school with which the employer has an
agreement then if shall be perquisite in case of specified
employee only.
• Free or concessional use of motor car
• Private journey of employee and/or any member of household
provided free of cost or at concessional rates
• Any other benefit provided to the employee
So any non-monetary benefit (other than exempted perks and
perks which are taxable in all cases) is taxable in case of
specified employees only.
NOTE: Besides above the following perks are also taxable if

Income Tax
conditions mentioned therein are fulfilled:

(i) The perk of sweat equity shares or any specified security (like
the employee;
(ii) The perk of amount of employer’s contribution towards approved
superannuation fund in excess of Rs. 1,00,000;
PERQUISITES TAXABLE IN CASE OF ALL

EMPLOYEES
RENT FREE ACCOMODATION [RULE 3 (1)]
The term ‘accommodation’ includes a house, flat, farm house
(or a part thereof), or accommodation in a hotel, motel, service
apartment, guest house, mobile home, ship or any other floating
structure.
The accommodation provided may be unfurnished or
furnished. The Employees are divided into two categories:-
(a) Central and state Government Employees
(b) Private Sector or other employees.
The accommodation is valued as under:
FOR CENTRAL & STATE GOVERNMENT EMPLOYEES:
This employee’s category includes Government employees on
deputation and presently working with any undertaking under
Control of Govt. However employees of foreign Government are not
covered under this category.
1. Where the accommodation is unfurnished – The value of
perk shall be ‘Licence fee’ determined by Government in
accordance with rules framed by it.
2. Where the accommodation is furnished –The value of perk
shall be: Value of unfurnished accommodation plus 10% p.a.
of ‘ACTUAL COST’ of furniture (if owned by the employer)
plus actual hire charges paid/payable by the employer (if
furniture is hired by the employer)..
FOR PRIVATE SECTOR & OTHER EMPLOYEES: This category

includes those employees who are not covered under the above
category.
i) Where the accommodation is unfurnished.
Population It accommodation is If accommodation
of City as owned by employer taken on lease or
per 2001 rent by the
census employer
More than 15% of salary in respect of 15% of salary OR
25,00,000 period during which the actual rent

Income Tax
accommodation is paid/payable by the

occupied by the employee. employer which ever
is less.
More than 10% of salary in respect of
10,00,000 but period during which Same as above
up to accommodation is
25,00,000 occupied by the employee.
Any other city 7.50% of salary in respect
of period during which Same as above
accommodation is
occupied by the employee.
ii) Where the accommodation is furnished:- The value of

perk shall be : value of unfurnished accommodation plus 10%
p.a. of actual cost of furniture (if owned by the employer) plus
actual hire charges paid/payable by the employer (if furniture
is hired by the employer).
SPECIAL NOTE: FOR ACCOMMODATION PROVIDED BY

EMPLOYER (GOVERNMENT OR OTHER) IN A HOTEL
The perk is not taxable if:-
a a) Such accommodation is provided for a period not exceeding 15
days; AND
b) It has been provided on transfer of the employee.
In every other case it will be valued as:-
i) 24% of salary for the previous year; or
ii) Actual charges of such hotel whichever is less, for the period
for which the accommodation in hotel is provided.
NOTE:
- MEANING OF SALARY FOR RENT FREE
ACCOMMODATION: For this purpose, salary includes:-
Basic salary, dearness allowance / pay (if the terms of
employment so provide), Bonus, Commission, fees, all taxable
parts of allowances and all monetary payments chargeable to
tax (like leave encashment, pension of current year).
For this purpose salary does not include:-
Dearness allowance / pay (if the terms of employment do
not so provide), employer’s contribution to PROVIDENT FUND
ACCOUNT of the employee, all allowances or part of
allowances exempt from tax, value of perquisites specified
under section 17 (2) of the Act.
- Accommodation includes house, flat, farm house or part there
of or accommodation in a hotel, motel, service apartment,
guest house, caravan, mobile home, ship or other floating

Income Tax
structure.
- Hotel includes licensed accommodation in motel, service
apartment or guest house.
- Salary is to be computed an accrual basis.
- Salary from all employers (in case of two or more employers)
will be taken into consideration for the period during which the
accommodation is provided.
- If employee is provided accommodation is a remote area and
the employee is working at mining site or onshore oil
exploration site or project execution site or an offshore site of
similar nature then value of such accommodation in NIL.
- If an employee is transferred from one place to other and he is
provided accommodation at new place while he occupies the
old accommodation also then value of perk will be only for one
accommodation having lower value till first 90 days and
thereafter both the accommodations will be charged to tax.
VALUATION OF ACCOMMODATION PROVIDED AT

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

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

Income Tax
of the employer.
VALUATION OF FRINGE BENEFITS:
The fringe benefits provided by the employer to the employees are
taxable in the hands of all employees. According to rule 3(7), the
following are prescribed benefits:-
i) Interest free or concessional loan
ii) Travelling, accommodation and any other expenses paid/
borne/ reimbursed by the employer for any holiday availed of
by the employee and/or any family member
iii) Free food and beverages
iv) Any gift voucher or token
v) Expenses on credit cards
vi) Club membership and expenses in club
vii) Use of any moveable Assets by the employee.
viii) Transfer of any moveable assets by the employer in favour of
the employee (directly or indirectly).
i) Interest free or concessional loans [Rule 3(7)(i)]:- The

value of benefit from loan availed by the employee (directly or
indirectly) from the employer is calculated as follows :-
Purpose of Period or Amount of loan Rate to be applied
loan for valuation of
perks
a) For house Up to 5 years 9.75%^ ,10.25%*
Above 5 years but up to 15 10%^,10.50%*
years
Above 15 years but up to 20 10.25%^,10.75%
years **,
11%***
b) For Car Up to 3 years (below Rs. 11.75%
7.50 Lac)
Up to 3 years (Rs. 7.50 Lac 11.50%
and above)
Above 3 years but upto 5 11.75%
years
Above 3 years but up to 7 12%
years
c) For Two 16.25%
Wheelers
c)For Loan Amount up to Rs. 4 Lac 11.75%^^
Education
Loan Amount above Rs. 4 13.25%^^
Lac up to Rs. 7.50 Lac
Loan amount above Rs. 7.50 12.50%^^

Income Tax
Lac
d)Personal 16.50%
Loan
e) ESOP Loan 14.50%
^ Up to Rs. 30 Lac
* Above Rs. 30 Lac
** Above Rs. 30 Lac but up to Rs. 75 Lac
*** Above Rs. 75 Lac
The interest shall be calculated on Maximum monthly balance
outstanding. If any interest is ACTUALLY PAID by the employee
(directly or indirectly) then. Value of benefit will be reduced by
such interest actually paid.
But In The Following Cases There Will Be No Perk:
- If the amount of loans do not exceed Rs. 20,000; OR
- If the loan is for medical treatment of specified diseases (as
per rule 3A). But if any amount is reimbursed by the Insurance
Company to the employee then benefit shall be taxable on
amount so reimbursed by Insurance Company from the month
of such reimbursement.
- Maximum monthly outstanding balance means outstanding
balance on last day of each month.
- The term directly means employee and ‘indirectly’ means
spouse, children and their spouses, parents, servants and
dependents.
ii) Valuation of Perk of Travelling, accommodation and any

other expenses paid or borne or reimbursed (to
employee) by employer for any holiday availed by the
said employee or any member of household [Rule 3(7)
(ii)]:
Situation Value of perk
1) If such facility (maintained Value at which such facilities
by employer) is not available are offered by other agencies
to all employees to public.
2) If employee (on official Value equal to such amount of
tour) takes any member of his expenditure incurred
household and expenses are
incurred by employer on such
member
3) If official tour is extended Value equal to amount of
as vacation expenditure incurred for
vacation period
4) In any other case Value equal to amount of
expenditure incurred

Income Tax
Note: If any amount is paid by or recovered from employee for such

benefit then the value of perk will be reduced by such amount.
iii) Valuation of Perk of free food and non-alcoholic
beverages [[Rule 3(7)(iii)]:
1) Tea or snacks during Nil
working hours
2) free food and non-alcoholic Nil
beverages during working
hours in remote area or
offshore installation Nil if amount is up to Rs. 50
3) free food and non-alcoholic per meal. Excess amount is
beverages during working value of perk. Such perk is to
hours; be reduced by amount
a) at office or business recovered from employee.
premises; or
b) through non-transferable
paid vouchers usable only at
eating joints
4) In any other case Value equal to amount
incurred by employer. Such
perk is to be reduced by
amount recovered from
employee.
iv) Valuation of perk of Gift, Token or Voucher [Rule 3(7)

(iv)]:
1) If gift is in cash or gift Value equal to actual amount
cheque/ voucher convertible of cash gifted/gift cheque or
into cash voucher.
2) If gift is of other item and Nil
value of such non-cash gift,
token etc is upto Rs. 5,000
2) If gift is of other item and Value equal to actual amount
value of such non-cash gift, of gift less Rs. 5,000
token etc is above Rs. 5,000
v) Valuation of membership fees and expenses on credit

cards [Rule 3(7)(v)]:
1) If such expenses are Nil*
incurred wholly and
exclusively for official

Income Tax
purposes
paid/reimbursed by the
employer. Such perk is to be
reduced by amount recovered
from employee.
*The employer: a) has to maintain a complete detail of such
expenses; and b) has to give a certificate in this regard that
such expenses are incurred wholly and exclusively for official
purposes.
vi) Valuation of perk of Club membership and expenses

incurred in a club [Rule 3(7)(vi)]:
1) If such expenses are Nil*
incurred wholly and
exclusively for official
purposes
reduced by amount recovered
from employee.
*The employer: a) has to maintain a complete detail of such
expenses; and b) has to give a certificate in this regard that
such expenses are incurred wholly and exclusively for official
purposes.
vii) Use of moveable assets (owned or hired by employer)

[Rule 3(7)(vii)]:
1. Use of laptops and Nil.
computer
2. Movable assets except as i)10% p.a. of actual cost of
per point (1) and already assets owned; and
specified in the rules. ii)actual hire charges (paid/
payable) on assets hired;
less
amount recovered from the
employee.
viii) Transfer of movable assets owned by employer [Rule

3(7)(viii)]:
Asset transferred Value of benefit

Income Tax
1. Computers and electric Actual cost less 50% of WDV

items for each completed year
less amount paid by the
employee.
2. Motor cars Actual cost less 20% of WDV
for each completed year
less amount paid by the
employee.
3. Any other assets Actual cost less 10% of
original cost for each
completed year less amount
paid by the employee.
Note: Completed years means full number of years from date of
asset put to use till date of transfer to employee. Any part of the
year is to be ignored.
ix) Valuation of any other benefit, amenity, facility etc.

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

EMPLOYEES
i) Valuation of perk of motor car and other vehicles [RULE
3 (2)]: This perk is taxable to specified employees only except when
the car is owned by the employee and expenses are met by the
employer (as it becomes obligation of employee met by the
employer).
Circumstances Value of Perk

I. If car is owned by employee
a) Car expenses met by Nil. (not a perk)
employee
b) Car expenses are met by
employer
i) Car used wholly for Nil. (NOTE- I)
official purpose
ii) Car used wholly for Actual expenditure incurred
private purpose by employer
iii) Car used partly for Actual expenditure by

Income Tax
official and partly for employer less amount (@

private purpose Rs. 1800 pm. for car upto
1.6 litres capacity and Rs.
2400 p.m. for car exceeding
1.6 litres capacity plus @
Rs. 900 p.m. if chauffeur is
provided) or higher amount
for official purpose (as per
note -1)
II. If car is owned/hired by
employer
a) Car expenses are met by
employee
i) Car used wholly for official Nil. (Not a perk)
purpose
ii) Car used wholly for 10%p.a. of Actual cost of car
private purpose (owned by employer) OR
Actual hire charges of car
(hired by employer) plus
actual salary of chauffer (if
provided)
iii) Car used partly for official Rs. 600 pm. for car up to 1.6
and partly for private purpose litres capacity or Rs. 900
pm. for car more than 1.6
litres capacity plus RS. 900
pm. for chauffer (if
provided).
b) Car expenses are met by the
employer
i) Car used wholly for official Nil. (Note -1)
purpose
ii) Car used wholly for Actual expenses of running
private purpose and maintenance plus
actual salary of chauffer (if
provided) plus 10% p.a. of
actual cost (if car owned by
employer) OR actual hire
charges (if car hired by
employer)
iii) Car used partly for official Rs. 1800 p.m. for car up to
and partly for private 1.6 litres capacity and Rs.
purpose. 2400 p.m. for car exceeding
1.6 litres capacity plus Rs.
900 p.m.. for chauffer

Income Tax
(if provided)
III If any other automotive
conveyance owned by
employee and running &
maintenance expenses are
met by employer
i) Used wholly for official Nil (Note -1)
purpose
ii) Used partly for official and Actual expenses incurred by
partly for private purpose employer less amount @ Rs.
900 p.m. or higher amount
for official purpose (as per
note-1)
Note :-
1. Car is used for official purpose wholly only if following conditions
are fulfilled:
a) Employer has maintained full detail of journey for official purpose;
&
b) Employer gives certificate in this regard.
2. Month means complete month as per English calendar and part of
the month is ignored.
3. If employee is allowed to use more than one car then perk of one
of the cars
will be as if car is used partly for official and partly for private
purpose and perk
of other cars will be as if these are used wholly for private purpose.
4. If employee pays some amount for the perk enjoyed then such
amount shall be
deducted from the value of perk. But in case of car used partly
for official &
partly for private purpose nothing will be deducted if car is
owned/leased by
the employer.
5. Use of car by employee from residence to office and back is not
chargeable to
tax.
6. Conveyance facility to High Court Judges and Supreme Court
Judges in not
taxable.
ii) Valuation of perk of Sweeper, Gardener, Watchman or

Personal Attendant [RULE 3 (3)]: The value of benefit is actual
cost paid / payable by the employer less any amount recovered from

Income Tax
the employee (if any). This perk is taxable to all employees if such
workman is engaged by the employee (as it becomes obligation of
employee met by the employer). Otherwise it is taxable in case of
specified employees only. But the method of valuation of perk is
same in both situations.
Note: If gardener is provided to employee along with rent free or
concessional rent accommodation owned by the employer then
salary of gardener is not taxable as it is not a perk.
iii) Valuation of perk of gas, electricity or water [RULE 3(4)]:

If the connection is in the name of the employee than this perk is
taxable is case of all employees (as it becomes obligation of
employee met by the employer). Otherwise it is taxable in case of
specified cases only. The value of perk is as follows:-

a) If supply is from employer’s Perk @ manufacturing cost
own source without per unit. Such perk is to be
purchasing from outside reduced by amount
agency. recovered from employee.
b) In any other case Value equal to amount
reduced by amount
recovered from employee.
iv) VALUATION OF FREE/CONCESSIONAL EDUCATIONAL

FACILITIES [RULE 3(5)]:
a) If the educational institution
is owned and maintained by
the employer or employer
has an agreement with the
institution.
i) Education facility is Cost of such education in
provided to employee’s similar in situation in or near
children the locality less Rs. 1000
p.m. per child less amount
recovered from the
employee.
ii) Education facility is Cost of education in similar
provided to any member institution in or near the
(other than children) locality less amount
recovered from the

Income Tax
employee.
b) In any other case Amount incurred by the
employer less amount
recovered from the
employee.
Note:
1. Perk of Free education covered under point (b) is taxable in
case of all employees. Perk covered under point (a) is taxable
in case of is taxable in case of specified employees only.
2. Free education facility and training of employees in not
taxable.
3. Fixed education allowance in exempt up to Rs. 100 p.m. per
child (for maximum of two children) and Hostel allowance is
exempt up to Rs. 300 pm. per child (for maximum of two
children). Excess is taxable.
4. Scholarship to children of employee by the employer solely at
employer’s discretion is not a perquisite.
VALUATION OF PERK OF FREE/CONCESSIONAL JOURNEY IN
CASE EMPLOYEES OF A TRANSPORTER EMPLOYER [RULE
3(6)]:
The value of benefit is amount offered by such employer
to the public as reduced by amount recovered from the employee.
This perk is taxable only in case of specified employees.
NOTE: Privilege passes and tickets granted to Railway and Airline
Employees are Tax Free perks.
VALUATION OF SWEAT EQUITY SHARES [RULE 3(8)] &
SPECIFIED SECURITIES [RULE 3(9)]:
The value of such specified securities or sweat equity
shares shall be their fair market value on the date when the option
is exercised by the employee as reduced by the amount recovered
from him in respect of such security or shares.
Note: The fair market value is:
CASE 1: Equity Share is listed in only one recognised stock
exchange:
a) Average of opening price and closing price on the date when
option is exercised.
b) Closing price on the date closest to date of exercise of option
preceding such date of exercise if no trading has been done on date
of exercise.
CASE 2: Equity Share is listed in more than one recognised stock
exchange:
a) Average of opening price and closing price on the date when
option is exercised in that exchange where there is highest volume

Income Tax
of trade on that date.

b) Closing price on the date closest to date of exercise of option
preceding such date of exercise in that exchange where there is
highest volume of trade on that date.
CASE 3: Equity Share is not listed in any recognised stock exchange:
Value determined by a merchant banker on the date of
exercise of option or any date not more than 180 days earlier than
date of exercise.
CASE 4: Specified security not being equity share in the company:
Value determined by a merchant banker on the date of
exercise of option or any date not more than 180 days earlier than
date of exercise.
Employer’s contribution towards approved superannuation
fund: Employer’s contribution towards approved superannuation
fund in excess of Rs. 1,00,000 is taxable perquisite in the hands of
the employee.
TAX FREE PERQUISITES
These perks are exempted from tax in case of all (whether
specified or non-specified) employees.
1. Medical Facilities or Medical reimbursement:
a) Medical facility provided to an employee or any member
of his family in hospital/ nursing home/dispensary maintained
by the employer is FULLY EXEMPT.
b) Medical Reimbursement of any expenditure by employee
on his or any of his family member’s treatment in hospital
maintained by Govt / Local Authority or any other Govt
approved hospital is fully EXEMPT.
c) Medical Reimbursement of any expenditure by employee
on his or any of his family member’s treatment for
PERSCRIBED DISEASES (as per Rule 3A of Income tax Rules,
1962) in approved hospital is Fully EXEMPT.
d) Medical Reimbursement of any other expenditure by
employee on his family member’s treatment is EXEMPT UPTO
MAXIMUM OF Rs. 15,000.
e) Group Medical Insurance (Mediclaim) obtained by
employer for his employees or reimbursement of Mediclaim
insurance premium (for his health or any of his family
member’s health) is Fully EXEMPT.
2. Food & non- alcoholic Beverages provided by the employer
during working hours:
a) in the office or factory; or
b) through non-transferable paid vouchers which are usable
at only the eating joints is EXEMPT up to Rs. 50 per meal;
c) Tea or snacks is fully exempt;

Income Tax
d) free food and non-alcoholic beverages during working

hours in
remote area or offshore installation is fully exempt.
3. Recreational facilities provided to a group of employees (not to
only a few employees) is FULLY EXEMPT.
4. Interest free/ Concessional Interest Loan to Employee:
a) If the loans to employee do not exceed Rs 20,000 then the
value of benefit of such loan is FULLY EXEMPT.
b) If the loan to employee is given for treatment of specified
diseases (as per Rule 3A of the Income Tax Rules, 1962), then
the value of benefit of such loan is FULLY EXEMPT.
5. Perquisites to Indian National Government Employees posted
outside
India are FULLY EXEMPT.
6. The benefit of training of employee and cost met by the
employer for
refresher management course is FULLY EXEMPT.
7. Rent free Accommodation and free conveyance facility given
to a Judge
of High Court or Supreme Court is FULLY EXEMPT.
8. Rent Free accommodation to officer of Parliament, union
Minister or
leader of opposition is FULLY EXEMPT.
9. Rent free/ concessional Rent accommodation provided to
employee in remote area at mining site or oil exploration site
(offshore), or project execution site is Fully EXEMPT.
10. Free Education provided to children of employee in educational
institute (either maintained and owned by employer; or other
institute) is exempt up to Rs.1000 per month per child (no limit
on number of children).
11. Use of health club, sports facilities provided to Employees is
Fully
EXEMPT.
12. USE (not ownership) of laptops/ computers by the employee or
any of his family members for official / personal purpose is
FULLY EXEMPT.
13. Expense on telephone/ mobile phone incurred by the
employer for the
employee is FULLY EXEMPT.
14. Employer’s Contribution to approved superannuation fund up
to Rs. 1,00,000 is exempt. Excess contribution is taxable.
15. Pension or Deferred Annuity Scheme or or Deposit Linked
Insurance fund is fully exempt.
16. Employer’s Contribution to Staff Group Insurance Scheme is

Income Tax
FULLY EXEMPT.
17. Premium paid by employer on personal accident policy of
18. Transfer (without consideration) of a movable asset (other
than computer,
electronic item and car) by the employer to the employee
after using it for
10 years or more is FULLY EXEMPT.
19. Tax paid by the employer on non-monetary perquisites of the
20. Leave Travel Concession is exempt upto limits mentioned in
the rules of
valuation discussed later on.
Medical facility or Medical Reimbursement

(a) Medical facility- Medical facility provided to an employee
or any member
of his family in hospital/ nursing home/dispensary maintained by the
employer is FULLY EXEMPT.
(b) Medical Reimbursement (With in India)-
-Medical Reimbursement of any expenditure by employee on his or
any of his family member’s treatment in hospital maintained by
Govt / Local Authority or any other Govt approved hospital is fully
EXEMPT.
-Medical Reimbursement of any expenditure by employee on his or
any of his family member’s treatment for PERSCRIBED DISEASES (as
per Rule 3A of Income tax Rules, 1962) in approved hospital is Fully
EXEMPT.
-Medical Reimbursement of any other expenditure by employee on
his family member’s treatment is EXEMPT UPTO MAXIMUM OF Rs.
15,000/-(SEE NOTE-2).
-Group Medical Insurance (Mediclaim) obtained by employer for his
employees or reimbursement of Mediclaim insurance premium (for
his health or any of his family member’s health) is Fully EXEMPT.
(c) Medical facility/Medical Exp. Reimbursement for
treatment of the employee or any of his family member is
exempt as follows (OUT OF INDIA TREATMENT) –
-Amount Spent in Medical treatment-Exempt up to amount
permitted by RBI.
-Amount spent on Stay abroad of patient and one attendant-Exempt
up to amount permitted by RBI.
-Amount Spent on Travel of patient and one attendant – EXEMPT
only if GROSS TOTAL INCOME (before this perk of travelling) does
not exceed Rs, 200,000/-

Income Tax
NOTE: 1 Family means the spouse and children of employee

(dependent or non- dependent); and parents, brothers and sisters of
employee, wholly or mainly dependent on the employee.
1. If medical bills are in the name of the
employee then these are taxable in case of ALL EMOPLOYEES and if
the bills are in the name of employer, then these are taxable in the
hands of Specified employees only.
LEAVE TRAVEL CONCESSION [Sec 10(5)]:

(a) For all employees- The LTC received/receivable by the
employee from his present/past employer is entitled for
exemption if-
• he proceeds on leave to any place in India; or
• he proceeds to any place in India after retirement/
termination of his service.
AMOUNT OF EXEMPTION
IF JOURNEY IS PERFORMED BY EXEMPT UPTO ECONOMY FARE
AIR OF NATIONAL CARRIER BY
SHORTEST ROUTE.
IF JOURNEY PERFORMED OTHER EXEMPT UPTO 1ST CLASS AC
THAN BY AIR & ORIGIN & FARE BY SHOTREST ROUTE
DESTINATION PLACES ARE
CONNECTED BY RAIL
IF ORIGIN AND DESTINATION EXEMPT UPTO 1ST CLASS FAIR OF
PLACES ARE NOT CONNECTED RECOGNISED PUBLIC
BY RAIL TRANSPORT BY SHOREST
POSSIBLE ROUTE.
IN CASE OF NO RECOGNISED
PUBLIC TRANSPORT. EXEMPT
UPTO 1ST CLASS AC FARE OF
RAIL BY SHORTEST ROUTE
(IMAGINING JOURNEY
PERFORMED BY RAIL)
NOTE: 1The Amount Exempt can never be more than actual

amount spent on Fare.
1. The LTC exemption is allowed 2 times in block of 4 calendar
years. If LTC
Exemption is not availed in any block then only one LTC
exemption can be carried forward to first year of next block of
4 years.
2. The other expenses of journey (like boarding, lodging,
conveyance) are not subject to exemption.
3. LTC is for family (including spouse and children of the

Income Tax
employee; parents, brothers and sisters of employee

wholly/mainly dependent upon him).
4. From 1st October, 1998, the benefit of LTC is for only 2
children. But children borne before 1.10.1998 as well as
multiple birth after one child after 30.9.1998 are eligible for
exemption.
LTC FOR FOREIGN CITIZENS
Passage money received by foreign citizen is fully chargeable
to tax.
PROFITS IN LIEU OF SALARY [SECTION 17 (3)]: The payments

are received in lieu of or in addition to salary. These include:-
1. Retrenchment compensation (taxable portion only).
2. Compensation due to modification in terms of employment.
3. Employer’s contribution to URPF/ unrecognised superannuation
fund and interest there on (at the time of retirement/leaving the
job).
4. Amount received by employee under Keyman insurance policy.
5. Amount received before joining employment and after leaving
the job.
6. Any other sum received by the employee form the employer
like:-
a) Taxable part of gratuity.
b) Taxable part of pension.
c) Taxable part of RPF
d) Taxable part of approved superannuation fund
e) Taxable part of HRA.
Therefore except terminal and other payments exempt
under sec 10 (10) to sec 10 (13A), all other payments received by
the employee from past/present/future employer is taxed as profit in
lieu of salary.
DEDUCTIONS FROM SALARIES

Till now we have learnt about taxability or exemption of
various components of salary. All these taxable components and full
entertainment allowance when added become ‘GROSS SALARY’.
From gross salary, the following two deductions are allowed:-
1. Entertainment Allowance U/S 16 (ii).
2. Professional tax/tax an employment U/S 16 (iii)
ENTERTAINMENT ALLOWANCE U/S 16(ii):

In case of Central or State Government employees least
of the following is amount of deduction:
a) Actual entertainment allowance;

Income Tax
b) 20% of basic salary;

c) Rs. 5,000 (Rupees five thousand only).
PROFESSIONAL TAX/TAX ON EMPLOYMENT U/S 16 (iii):

Professional tax (levied by a state under article 276 of
the Constitution of India) actually paid is allowed as deduction.
If professional tax is paid by employer then it is taxable
perk in all cases (as it becomes obligation of employee met by
employer) then the same is deductible U/S 16 (iii).
DEDUCTION UNDER SECTION 80 C

This Deduction from Gross Total Income is allowed to Individual and
H.U.F. only. The deduction can be calculated in following manner:-
Step 1.:- Calculate Gross qualifying amount.
Step 2.:- Calculate Net qualifying amount.
Step 3.:- Calculate amount of deduction U/S 80 C.
STEP 1. GROSS QUALIFYING AMOUNT: Find the aggregate of
the following:
1. Life insurance paid (up to maximum of 20% of sum assured) by
individual to effect/keep in force an insurance on his life of spouse or
any child. In case of HUF, premium paid (up to maximum of 20% of
sum assured) must be on life of any member of the family.
2. Any payment by individual for non-commutable deferred
annuity (except as per point 10 below).
3. Any sum deducted from salary payable by or on behalf of
Government to an individual for securing him a deferred annuity OR
making provision for his spouse or children. The sum deducted
should not be more than 20% of salary.
4. Employee’s contribution to RPF or SPF (other than repayment
of loan).
5. Contribution to 15-year PPF account (other than repayment of
loan).
6. Employee’s contribution to approved superannuation fund.
7. Subscription to National Saving Scheme 1992 (discontinued
with effect from 1.11.2002).
8. Subscription to National Saving Certificates. Interest accrued
on these NSC’s also qualifies for first five years.
9. Contribution to unit link insurance plan of UTI and LIC mutual
fund ( i.e. ULIP and Dhanraksha).
10. Payment made to effect or keep in force notified annual plan of
LIC or any other insurer (e.g. New Jeevan Dhara, New Jeewan
Akshay etc.).
11. Subscription to notified units i.e. Equity Linked Saving Schemes
of UTI and approved mutual fund.

Income Tax
12. Contribution by Individual to a notified pension fund set up by

UTI or approved mutual fund.
13. Any sum paid ( including interest) to home loan account
scheme of national housing Bank or contribution to notified pension
fund set up by the national housing Bank.
14. Any sum paid as subscription to scheme of :-
a) A public sector company which is engaged in providing
long term
finance for construction or purchase of houses in India for
residential
purposes; OR
b) Any authority constituted in India by as under any law
enacted
either for purpose of dealing with and satisfying the need for
housing or
for the purpose of planning development or improvement of
cities/villages
or both.
15. Any payment made towards cost of purchase/construction of a
new residential house property. This amount does not include
interest on loan or cost of addition / renovation/repair of
property. But this includes stamp duty and other expenses for
purchase of such property. The Loan must be taken from
Government, Bank, Co-op. Bank, LIC, National Housing Bank,
assessee’s employer being Public Company/ Public Sector
Company/ University/ Co-op. Society/ Authority or Board or
Corporation established/ considered under a Central or State
Act.
16. Any sum paid by an Individual as Tuition Fees (not being
development fees/ donation/ payment of similar nature) to any
university/ college/ educational institution in India for full time
education of his children for a maximum of two children.
17. Amount invested in shares / debentures of a public company
engaged in infrastructure (including power sector) or units of
mutual funds the proceeds of which are utilised for
development and maintenance of infrastructure.
18. Any sum deposited in a term deposit with a scheduled bank for
a period not less than 5 years in accordance with the scheme
framed and notified by the Central Government.
19. Subscription to notified bonds of NABARD.
20. Any sum deposited in an account under Senior Citizen Saving
Scheme.
21. Any sum deposited in 5 years term deposit account in Post
Office as per the Post Office Time Deposit Rules, 1981.

Income Tax
STEP 2. NET QUALIFYING AMOUNT

The aggregate of payments from (1) to (21) above is the Gross
Qualifying Amount. The Net Qualifying Amount is determined as
follows:
a) Gross Qualifying Amount; or
b) Rs. 1,00,000 whichever is less.
STEP:3 AMOUNT OF DEDUCTION
The net qualifying amount as calculated in step 2 is the amount of
deduction under section 80 C. The point to remembered is that the
aggregate of deductions under section 80 C, 80 CCC and 80 CCD
cannot exceed Rs. 1,00,000.
*****
Chapter 4
INCOME FROM HOUSE PROPERTY

Income Tax
CHARGEABILITY [SECTION 22]: The annual value of a property,

consisting of any buildings or lands appurtenant thereto of which the
assessee is the owner shall be charged to tax under the head
‘Income from house property’ after claiming deduction u/s 24
provided such property (or any portion of such property) is not used
by the assessee for the purpose of any business or profession
carried on by him, the profit of which are chargeable to Tax.
There are three conditions to be fulfilled for calculation of
Income from house property. These are:-
1) The property must consist of Buildings or lands appurtenant there
to; AND
2) The assessee must be owner of such property; AND
3) The property must not be used by the owner for the purpose of
any business or profession carried on by him, the profits of which
are chargeable to tax.
These three conditions are discussed in detail as below:-
(A) PROPERTY MUST CONSIST OF BUILDINGS OR LANDS
APPURTENANT THERETO: The term ‘building’ is not defined
in the Act. But many courts have given the interpretations
according to which it may be said that building is enclosure of
brick or stone work or even mud walls having a roof. But for a
non-residential Building (like open air stadium, open air
swimming pool) roof is not necessary.
The term ‘Land appurtenant thereto’ means approach road to
and from public streets, courtyard, backyard, playground,
kitchen garden, motor garage, stable, cattle shed etc. for
Residential Buildings. In case of non-residential Buildings it
means car parking space, roads connecting different
departments, playgrounds etc.
It is to be noted that Income from vacant plot of land is not
taxable under this head, but is taxable either under head
‘Profits & Gains of Business or Profession’ or under head
‘Income From other sources’.
(B) ASSESSEE MUST BE OWNER OF THE SAID PROPERTY: The
income is taxable under this head of only if the assessee is owner of
the said property. The term ‘ownership’ includes legal owner (either
through Registered Deeds as per Transfer of Properties Act, 1881 or
through Agreement and Power of Attorney only) and Deemed
Owner. The assessee need not to be owner of the land/site on which
such building stands. Ownership includes ‘Freehold’ as well as
‘Leasehold’ Rights.
DEEMED OWNERSHIP (SECTION 27) : The following persons
are deemed to be the owners of the house property:
a) Transfer to a spouse: If an individual transfers any

Income Tax
house property to his/her spouse otherwise than adequate

consideration, then the transferor in such case is deemed to be
the owner of such property transferred. But this provision is
not applied if such transfer is in connection with agreement to
live apart.
b) Transfer to minor child: If an individual transfers any
house property to his/her minor child otherwise than adequate
consideration, then the transferor in such case is deemed to be
the owner of such property transferred. But this provision is
not applied if such transfer is to married minor daughter.
NOTE : If the individual transfers cash to his/her spouse or
minor child (as above) and the recipient of cash acquires a
house property out of such cash, then transferor shall not be
deemed to be owner of house property. However income from
such property shall be clubbed as per provisions of Sec. 64(1)
in the hands of transferor of cash.
c) Holder of impartible estate: In case of HUF, which has been
discontinued /broken, if any property has not been divided
among the co-parceners, then the holder of such property is
deemed to be the owner.
d) Member of Co-operative Society, Company etc: A
member of a Co-operative society/company/other AOP (to
whom a building or a part thereof is allotted or leased under a
House Building Scheme of a society/company /AOP) shall be
deemed to be owner of that Building or part thereof
ALTHOUGH the legal ownership is with the Co-operative
Society/Company/other AOP.
e) Deemed owner as per section 53 A of Transfer of
Properties Act. : As per this section if : a) there is a written
contract for sale (agreement to sell); b) the sale consideration
has been paid or the buyer is willing to pay to the seller; and c)
the buyer has taken possession of such property, then such
buyer shall be deemed to be owner of the said property even if
it is not registered in his name.
f) Right in a property for a period net less than 12 years:
A person who acquires any right in any building or part thereof
by way of LEASE FOR NOT LESS THAN 12 YEARS shall be
deemed to be the owner of that property.
C) PROPERTY MUST NOT BE OCCUPIED BY THE OWNER
FOR HIS BUSINESS OR PROFESSION: When a person
carries on a business or profession in his own house property,
then Annual value of such house property is not chargeable
under this head if such business or profession is chargeable to
tax. This rule is applicable even if in any year the income of

Income Tax
such business is NIL or is in negative (LOSS).

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

TAXABLE
In the following cases the income from house property is
not taxable:
a) Income from farm house.
b) Annual value of one palace of ex-ruler.
c) Property income of a local authority.

Income Tax
d) Property income of approved scientific research association.

e) Property income of approved Educational Institution /
Hospitals.
f) Property income of Registered Trade Unions.
g) House property held for charitable purpose (approved).
h) Property income of a political party.
i) Property used for own business or profession.
j) One self occupied property (only in case of individual and HUF
assessee).
TYPES OF HOUSE PROPERTIES

It is very important to understand that it is not the Actual
Income from house property which is charged under this head. A
person may be charged to tax under this head even if he has not
earned any house property income in the previous year. There are
following three types of house properties:
a) Actually let out houses
b) One self occupied house property
c) Deemed to be let out house property.
The let out house includes the property let out for
residential as well as commercial purpose. The self occupied
property means the house property used for own residence by the
assessee and no other benefit is derived from such property. This
also includes a house property which is not actually occupied by the
owner due to employment or business carried on at any other place.
If an assessee is owner of more than one self occupied house
properties then only one house is treated as self occupied and other
houses as Deemed to be let out houses.
A) INCOME FROM LET OUT HOUSE (INCLUDING DEEMED TO
BE LET OUT HOUSE PROPERTY):
It is calculated as under:
Gross annual value ***
Less: Municipal taxes actually paid by owner * *
*
__________
NET ANNUAL VALUE 
Less: Deduction U/s 24

-Standard Deduction @ 30% of Net Annual Value *
**
-Interest on Borrowed capital ***
__________
INCOME FROM LET OUT / DEEMED TO BE 

Income Tax
LET OUT HOUSE: ______-

_____
How to calculate GROSS ANNUAL VALUE (ANNUAL RENTAL

VALUE):
Gross annual value of let out house or deemed to be let
out house is dependent upon following values:
a) Municipal valuation: It means value determined by the Local
Authority of the house for charging municipal taxes.
b) Fair Rent: It means rent fetched by similar property in same
or similar locality.
c) Standard Rent: It means rent of property as per Rent Control
Acts (if applicable).
d) Actual rent received / receivable: It means rent of actually
let out property on accrual basis for full year.
e) Unrealised Rent: It means rent which could not be realized
if:
(1) tenancy was bonafide;
(2) the defaulting tenant has vacated or steps have been taken
to vacate the house;
(3) the defaulting tenant is not occupying any other property of
the assessee;
(4) all reasonable steps have been taken by the assessee for
recovery of unpaid rent or the legal proceedings in this regard
are useless (in case of death of tenant).
f) Loss of Rent due to vacancy: If, in case of let out property,
the property remained vacant for some period then loss of rent due
to vacancy shall be calculated on the basis of actual annual rent for
vacancy period.
Thus gross annual value is dependent on:
Municipal valuation = (a)
Fair Rent = (b)
Standard Rent = (c)
Actual Annual Rent = (d)
Unrealised Rent = (e)
Loss of Rent due to vacancy= (f)
STEP I: Expected Rent of house is (a) or (b) w.e. is higher subject to

maximum of (c). If step 2 and step (3) are not applicable then
expected rent is gross annual value (It will be so in case of deemed
to be let out house).
STEP II: Find out Actual Annual Rent less unrealized rent i.e. [d- e].
STEP III: Find out amount which is higher of amount as per Step 1
or amount as per step II.

Income Tax
STEP IV: From the amount as per step 3 deduct Loss due to
vacancy. This is Gross annual value. i.e. GAV = Amount as per Step
III – (f).
NOTE: If the ownership of such house property is for a period less
than 12 months then values as per (a), (b), (c) and (d) shall be
calculated for period of ownership only.
DEDUCTION OF MUNICIPAL TAXES
The municipal taxes levied by the local authority on such
house property are deducted from gross annual value only if these
are borne and actually paid by the owner during the previous year.
The amount after deduction of municipal tax is called NET
ANNUAL VALUE or ANNUAL VALUE.
STANDARD DEDUCTION U/S 24(a): The standard deduction is
30% of Net Annual Value.
INTEREST ON BORROWED CAPITAL U/S 24(b): The interest on
capital borrowed (for purchase, construction, repair, renewal or re-
construction of the house) is deductible on accrual basis. Interest is
divided into two parts:
a) Interest on loan for pre – construction period: It is a
period starting from date of borrowal till 31st March immediately
preceding the date of completion of construction/date of purchase or
date of repayment of loan w.e. is earlier. This is deductible in FIVE
EQUAL ANNUAL INSTALMENTS STARTING FROM THE YEAR OF
COMPLETION OF CONSTRUCTION / YEAR OF PURCHASE.
b) Interest on post construction period: It is deductible in the
year to which it belongs on ACCRUAL BASIS.
Note :
1) Interest on unpaid interest is not deductible.
2) Interest on fresh loan taken to repay original housing loan is
deductible.
3) It is not necessary that such property must be given as
security for availing such loan.
4) If interest on such loan is payable out of India, it is available for
deduction only if TDS has been deducted on such interest.
B) INCOME FROM SELF-OCCUPIED HOUSE (INCLUDING

HOUSE NOT OCCUPIED DUE TO EMPLOYMENT REASONS):
It is calculated as under:
Gross Annual Value NIL
Less: Municipal Taxes NIL
Net Annual Value NIL

Standard Deduction NIL
Interest on borrowed capital ***

Income Tax
Income from Self occupied house (-)
DEDUCTION OF INTEREST ON BORROWED CAPITAL: The

provisions for deduction of interest on borrowed capital are same
except that maximum limit for self occupied property is fixed at Rs.
30,000*.
* Rs. 30,000 is replaced with Rs. 1,50,000 if following conditions are
fulfilled:
a) Capital is borrowed after 31/3/1999 for acquisition /
construction of house property (NOT for repair, renewal or
reconstruction); AND
b) Construction / acquisition should be complete within three
years from the end of financial year in which the capital was
borrowed; AND
c) The person granting the loan certifies that such interest is on
the loan given for acquisition or construction of the house.
NOTE:
1. The above provisions are applicable in respect of only one self
occupied House (of assessee’s choice) of the assessee in case
assessee owns more than one self occupied house.
2. The above provisions are also applicable if the assessee owns
a house which could not be occupied by him due to employment /
business reasons and he has not derived any other benefit from
such house.
C) INCOME FROM HOUSE PARTLY SELF OCCUPIED PARTLY
LET OUT: If assessee is the owner of one house property which
consists of two or more units one of which is self occupied and other
unit(s) is (are) let out then the income is calculated as follows :
1. Unit self occupied - Calculation as per income form self
occupied house.
2. Units let out - Calculation as per income from let
out house.
D) INCOME FROM HOUSE SELF OCCUPIED FOR PART OF THE
YEAR AND LET OUT FOR PART OF THE YEAR: In this case the
calculation shall be made assuming the house was let out for full
year. Only difference is that in this case actual rent for let out period
is taken in (d).
NOTE: The ‘Individual’ and ‘H.U.F.’ are entitled to benefits of SELF
OCCUPIED HOUSE. Other persons can’t occupy the house for
residential purpose.
UNREALISED RENT ALLOWED EARLIER BUT RECOVERED
LATER ON – TAXABILITY THEREOF:
a) Deduction allowed in assessment year 2001-2002 or
earlier (Sec. 25A) : If unrealized rent is recovered in any previous

Income Tax
year then it is deemed to be income of the year in which it is

recovered. It is to be remembered that firstly, the unrealized rent
which was not allowed as deduction earlier will be covered and
balance if any is taxable. This is taxable as income from house
property whether or not the assessee is owner of the said house in
the year of recovery.
b) Deduction allowed in assessment year 2002-2003 or
subsequent year (Sec. 25AA): If the assessee cannot realize rent
during previous year 2001-2002 or any subsequent year (and it is
allowed as deduction in that year) and the assessee realizes such
rent, the amount so realized (to the extent it has not been included
in ANNUAL VALUE earlier) shall deemed to be the income of previous
year in which rent is realized whether not the assessee is owner of
that property in that previous year.
ARREARS OF RENT RECEIVED – TAXABILITY THEREOF (SEC.
25B) If the owner of house property receives arrears of rent
not charged to tax in any previous year then it is taxable in the year
of receipt after standard deduction @ 30% of such amount under
head ‘Income from house property’. It is immaterial whether or not
the assessee is owner of that property in that previous year.
* * *

Income Tax
CHAPTER - 5
INCOME UNDER HEAD “PROFITS AND GAINS OF BUSINESS OR
PROFESSION”
BASIS OF CHARGE (SEC. 28): The following incomes shall be

charged to tax under this head:
a) The profits and gains of any business carried on by the
assessee at any time during the year;
b) Any COMPENSATION or other payments due to or received
by:
1. any person in connection with termination/modification of
his agreement for managing the whole or substantially the
whole of the affairs of an Indian Company or any other
company;
2. any person holding an agency in India for any part of the
activities relating to the business of any other person at or in
connection with termination / modification of the terms of the
agency;
3. any person for or in connection with the vesting in the
Government (or in any corporation owned by or controlled by
Government) under any law for the time being imposed, of the
management of any property or business.
c) Income derived by a trade, professional or similar association
from specific services performed for its members.
d) Exports incentives, which include:
1. profits on sales of import licences granted under imports
(control) order
on account of exports;
2. cash assistance (by whatever name called), received or
receivable against exports;
3. Duty drawbacks of Customs and Central Excise Duties;
4. Profit on transfer of Duty Entitlement Pass Book Scheme;
5. Profit on transfer of Duty Free Replenishment Certificate
e) the value of any benefit or perquisite whether convertible into
money or not arising during the course
of carrying on of any business / profession;
f) any interest, salary, bonus, commission, or remuneration due to
or received by a partner of firm from the firm in which he is a
partner. Such amount shall be adjusted according to provisions
of Section 40 (b);

Income Tax
g) any sum received / receivable in cash or in kind under

agreement for:
1. not carrying out activity in relation to any business; or
2. not sharing know how, patent, copyright, trade mark,
licence, franchise or any other business or commercial right of
similar nature or information or technique likely to assist in
the manufacture or processing of goods or provision for
services.
But the point g (i) above shall not apply where the amount is
received / receivable for TRANSFER / SALE of rights (which is
chargeable under head ‘Capital Gains’).
h) any sum received under a Keyman Insurance Policy including
the sum allocated by way of bonus on such policy;
i) where speculative transactions carried on by an assessee are
of such a nature as to constitute a business then such
speculative business shall be deemed to be distinct and
separate from any other business.
BASIC PRINCIPLES FOR ARRIVING AT BUSINESS INCOME: The
following are basic principles for arriving at business income:
1) Business includes trade, commerce, manufacture or any
adventure in the nature of trade, commerce or manufacture:
This head includes trade (purchase of goods for resale), commerce
(trade at large scale), manufacture (selling the goods which are
produced by conversion of goods purchased by applying physical
labour or mechanical power) and any such transaction in the nature
of trade, commerce or manufacture. There must be profit motive for
business. Also business can not be carried on by entering into a
transaction with himself only.
2) Business / Profession carried on by the assessee: The
assessee must have right to carry on the business and the business
must have been carried on in exercise of that right by the assessee
either personally or through his agent or servant. It is not necessary
that the assessee must carry on the business physically himself.
3) Business / Profession must be carried on during the
previous year: The business or profession should be carried on by
the assessee at any time during the previous year. It is not
necessary that the business or profession should be carried on for
whole previous year or till end of previous year. However, the
following receipts are taxable even if no business or profession is
carried on by the assessee during the previous year:
a) Recovery of any loss, expenditure or trading liability earlier
allowed as deduction [Sec. 41(1)];
b) Balancing charge in case of Electricity Companies [Sec. 41(2)];
c) Sale of capital asset used for scientific research [Sec.41 (3)];

Income Tax
d) Recovery against Bad debts [Sec.41 (4)];

e) Amount withdrawn from special reserve created under section
36 (1) (viii) [Sec. 41 (4A)];
f) Sum received after discontinuance of business or
profession [Sec. 176 (3A)/4].
4. Income of previous year is taxable in relevant
assessment year:
General rule is that income of previous year is taxable in
relevant assessment year. But there are some exceptions as
follows:
a) Income of Non-resident Shipping Company;
b) Income of a person leaving India for good;
c) Income of bodies formed for short duration;
d) Income of a person trying to dispose off his assets to avoid tax
liability;
e) Income of discontinued business.
5. Tax incidence is on all business or professions: The tax
incidence arises on all business or professions carried on by the
assessee. Incomes and losses of all business professions are
combined to calculate tax liability. However the business is divided
into two categories- (a) speculative, (b) non-speculative.
6. Legal ownership versus beneficial ownership: The courts
can go into the question of beneficial ownership and decide who
should be held liable for tax.
7. Real profit versus anticipated profits: The profits or losses
which may occur in future are not considered for calculating
business or profession income for previous year. However there is
one exception: Stock in trade is valued at cost or market price
which ever is lower.
8. Real Profits versus notional profits: Real profits are
charged to tax and notional profits are not taxable. So no profit can
be shown on drawing of goods by the proprietor by treating them (at
sale price) as sale.
9. Mode of book entry is not relevant: The mode of book
entry cannot change the basic character of a transaction. So a
trading receipt will remain trading receipt even if it is shown in the
books as capital receipt.
10. Illegal Business: It is immaterial whether business is legal or
illegal. Both businesses are taxable under the law.
11. Business loss or Loss incidental to trade: Business profit
is computed after allowing deduction for business loss. Business
loss should be trading loss and must fulfill following conditions:
a) Loss should be real loss and not notional / fictitious
b) Loss should be revenue in nature.

Income Tax
c) Loss should be incurred during the pervious year.

d) Loss must have actually arisen and been incurred, not merely
anticipated as certain to occur in future.
e) Loss should be incidental to business and profession carried on
by the assessee.
f) There should not be any, direct or indirect, prohibition under
the Act against deductibility of such loss.
The following losses are deductible as business loss:
- Losses of stock in trade as result of enemy action.
- Losses of stock in trade by an act of God.
- Losses arising out of failure on the part of assessee to
accept delivery of goods.
- Losses caused by confiscation of cash from gold
smuggler by custom authorities.
- Depreciation in funds kept in foreign currency for
purchase of stock in trade.
- Loss due to exchange rate fluctuations of foreign
currency held on revenue account.
- Loss arising from sale of short term investments.
- Loss of cash and securities in bank on account of dacoity
(with in or after working hours).
- Loss on realization of amount advanced in connection
with business.
- Loss due to embezzlement by the employee.
The following losses are not deductible:
- Loss of capital asset.
- Loss on sale of Trade / Non-trade investment.
- Depreciation of funds kept in foreign currency for capital
purposes.
- Loss arising from non-recovery of tax paid by an agent
on behalf of the non-resident.
- Anticipated future losses.
- Losses relating to any business / profession discontinued
before commencement of the relevant previous year.
CERTAIN INCOMES NOT TAXABLE UNDER HEAD “PROFITS

AND GAINS OF BUSINESS”
1. Rent from house property: The income from letting of house
property is always taxable under head “Income from House
Property”. But if residential houses / flats are let out to the
employees for efficient conduct of assessee’s business (not of letting
of house property) then such income shall be taxable as business
income. Also in case of Composite Rent (when the letting of house
is inseparable from letting of other assets), the income is taxable

Income Tax
either as ‘business income’ or ‘income from other sources’.

2. Dividend income: An assessee who is carrying on the business
of dealing in shares and securities and earns dividend income then
such dividend income shall be taxable under head ‘Income from
other sources’.
3. Winning from lotteries, races etc.: Any winning from
lotteries, races etc. is taxable under head ‘Income from other
sources’, even if it is regular business activity.
METHOD OF ACCOUNTING [SECTION 145 & 145A]: The

accounting methods may be either 'mercantile' ‘or 'cash’. An
accounting method once followed cannot be changed in ordinary
course.
Further the profit from business and profession shall be
computed in accordance with accounting standards which may be
prescribed by Central Government from time to time. Accordingly
there two accounting standards to be followed by the assessee
maintaining books on MERCANTILE system:-
a) Accounting standard I relating to disclosure of accounting
policies.
b) Accounting standard II relating to disclosure of prior period
and extra ordinary items and changes in accounting policies.
Further valuation of purchase and sale of goods and
inventory for the purpose of determining the income chargeable
under the head “profits and gains of business or profession” shall
be:-
a) In accordance with method of accounting regularly followed
by the assessee; and
b) Further adjusted to include the amount of tax, duty, cess or
fees (by whatever name called) actually paid or incurred by
the assessee to bring the goods to the place of its location and
condition as on the date of valuation.
It may be noted that even if the assessee is allowed modvat /
cenvat credit of EXCISE DUTY or CVD of CUSTOM DUTY paid by him,
such duty shall be included in valuation of purchase and sale of
goods and inventory in determining the business income.
SCHEME OF BUSINESS DEDUCTIONS / ALLOWANCES: The
deductions are covered from section 30 to section 43D. Before
studying the deductions let us study the principles of admissibility of
deductions:-
1. Onus of proof: It is the responsibility of the assessee
to prove that a particular deduction is admissible in his case.
2. Allowances are cumulative: Deductions from
section 30 to 36 are expressive and deduction U/S 37

Income Tax
is residuary. If a particular expense is expressly dealt

with by a particular section, its admissibility under
section37 cannot be denied unless the particular
section prohibits any deduction under any other
provision.
3. Expenditure should relate to the relevant
previous year: It is self explanatory. However for
incomes under section 41 and 176 any expenditure
incurred for such income is deductible whether or not
they are incurred in the relevant previous year.
4. Business carried on during the previous year: If
business is discontinued before the commencement of
previous year, no deduction is permissible in respect
of such discontinued business.
5. Expenditure should be incurred for assessee’s
own business: Deduction is allowed only if
expenditure is incurred for assessee's own business
otherwise it is disallowed.
6. Benefit of expenditure may extend to some body
else: The benefit of expense may extend to some
body else even then it is allowed as deduction. For
example- insurance, repair of leased plant &
machinery incurred by Lessor are deductible from
income of Lessor even though the benefit may be to
the lessee.
7. Benefit of expenditure may extend beyond
relevant previous year: A revenue expenditure
incurred during the year is deductible even of benefit
of expenditure is extended beyond the year of
expenditure.
8. No allowances in respect of wasting assets: No
deduction is admissible on diminution or exhaustion of
Capital Asset from which income is derived. Wasting
assets such as mines and quarries are capital assets
and their exhaustion is capital loss which is not
allowed as deduction.
9. No allowance for non-assessable business: If
income from a business is not taxable in India then
any deduction can be claimed regarding expenditure
or losses of such business.
10. Expenditure of illegal business: The expenditure of
illegal business is deductible from business income.
However the penalty or damages paid in connection
with infringement of law are not deductible.

Income Tax
11. Revenue expenditure and capital expenditure:

Deductions from section 30 to 36 are deductible
expressively. These may include capital expenditure
also. The deduction U/S 37 is only for revenue
expenditure.
12. No deduction in respect of depreciation of
Investments: No deduction in respect of depreciation
of investment in shares and securities is allowed.
13. No allowance in respect of expenditure incurred before
setting up of a business: Except the deductions under section
35A, 35D and 35E , no expenditure which is incurred before setting
up of a business shall be allowed as deduction from income under
the head ‘Profits and Gains of Business or Profession’.
14. No allowance in respect of anticipated losses: Except
while valuing the closing stock (at cost or realisable value whichever
is less), no deduction is allowed for any anticipated loss from income
under the head ‘Profits and Gains of Business or Profession’.
EXPENSES EXPRESSLY ALLOWED AS DEDUCTION: - Section 30

to 37 cover expenses expressly allowed as deduction. There are as
follows:-
1. Rent, rates, taxes, repairs and insurance for buildings
[section 30]: The premises used for the purpose of business or
profession has entitlement of following deductions:-
a) Where the premises are occupied by the assessee as:-
i) A tenant: The rent for such premises, and if he has undertaken
to bear the cost of repairs of such premises, the amount paid
on such repairs (not being capital expenditure).
ii) Otherwise than as a tenant: The amount paid by him for
current repairs of the premises;
b) Any sum paid (whether as owner or tenant) as land revenue,
municipal taxes etc. However these are allowable subject to
provisions of section 43B (i.e. if these are claimed on due basis, the
payment of the same must be made on or before the due date of
furnishing the return of income or actual date of furnishing the
return which ever is earlier);
c) Any insurance premium paid (whether as owner or tenant) in
respect of insurance against risk of damage or destruction of the
premises.
2. Repairs and insurance of plant, machinery and furniture

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

Income Tax
3. Depreciation (sec. 32): One should satisfy the following

condition for claiming depreciation:-
A) Assessee must be the OWNER of the asset;
B) The asset must be used for business or profession;
C) The assets should be used during the previous year;
D) Depreciation is available on tangible as well as intangible
assets.
a) Asset must be used for business or profession: The
owner is the person who can exercise the rights of the owner not on
behalf of own but in his own rights. Owner needs not to be
registered owner. If the assessee carries on business or profession
from leasehold building then he is entitled to depreciation on capital
expenditure incurred by him. In any other case, the depreciation is
available to the Lessor.
b) Asset must be used for business or profession: The
depreciation is allowed only if the asset is used for business or
profession. If asset is used for business partly and partly for other
purposes then depreciation is allowed only for use for business or
profession. When residential quarters are given to employees for
efficient running of business then depreciation is allowed on such
buildings and other assets like fridge, fans etc. given to employees.
c) Asset should be used during the previous year: The
asset must be used at least for some time during the relevant
previous year for business purpose to claim normal depreciation.
However 50% of normal depreciation is allowed if following two
conditions are satisfied:-
i) Asset is acquired during the preview year; AND
ii) It is put to use for the purpose of business or profession for
less than 180 days during that year.
d) Depreciation is available on tangible assets as well as
intangible assets: i) Tangible assets mean and include building,
Machinery, plant and furniture.
ii) Intangible assets means assets acquired after 31st March, 1998
and include know-how, patents, copyright, trademarks, license,
franchises or any other business or commercial rights of similar
nature.
NOTE: From assessment year 2002-03 depreciation is available
whether the assessee has claimed deduction for depreciation in
computing his income or not.
STEPS FOR CALCULATION OF DEPRECIATION: The depreciation
is calculated on BLOCK OF ASSETS on WRITTEN DOWN METHOD as
per RATES OF DEPRECIATION PRESCRIBED UNDER THE ACT.
However from 1.04.1997 ONWARDS, an undertaking engaged in

Income Tax
generation OR generation and distribution of power can claim

depreciation on STRAIGHT LINE METHOD.
Now are shall understand the meaning of following terms:-
• BLOCK OF ASSETS
• WRITTEN DOWN VALUE
• ACTUAL COST
1. Block of assets [sec. 2 (11)]: It means a group of assets falling
with in a class of asset namely :-
a) Tangible assets being buildings, machinery, plant or furniture.
b) Intangible assets being know-how, patents, copyrights,
trademarks, licences, franchises or any other business or
commercial rights of similar nature.
There are 13 different blocks out of which 1 to 12 are in respect of
tangible assets and block13 is for intangible assets.
BLOCK NATURE OF ASSET Rate of
Depreciatio
n
1. Buildings: Residential other than Hotels and
boarding houses. 5%
2. Buildings: Office, factory etc. not being
residential buildings (it includes hotels and 10%
boarding houses but does not include block I &
3).
3. Buildings –a) Temporary wooden or other 100%
structure
b) Buildings acquired on or after 1-09-2002 for
installing plant & Machinery for water supply
project or water treatment system for providing
INFRASTRUCTURAL FACILITIES under section 80 I
A (4) (i).
4. Furniture: Any furniture including electrical 10%
fitting.
5. Plant and Machinery: Any plant or machinery 15%
(not covered from block 6 to 12) and Motor cars
(other than those used in business of running on
hire) acquired or put to use after 31-03-1990.
6. Plant & machinery: Ocean going ships, vessels 20%
ordinarily operating on inland waters including
speed boats
7. Plant & machinery: buses, lorries and taxies 30%
used in the business of running on hire,
machinery used in semi-conductor industry,
moulds used in rubber and plastic goods
factories and life saving medical equipment

Income Tax
8. Aero planes, commercial vehicle acquired after 40%

30.09.1998 but before 01.04.1999 and put to
use before 01.04.1999 for business or
profession, Specified life saving medical
equipment as per rule 5(2).
9. Plant & machinery – a) Containers of glass or 50%
plastic used as refills.
b) New commercial vehicle acquired during
2001-02 and put to use before 31.03.02 for
business or profession.
c) Machinery used in weaving processing and
garment sector of textile industry which is
purchased under TUFS (Technology up-gradation
fund scheme) during 1-04-01 to 31-03-04 and
put to use before 31-03-04.
10. Plant & machinery:
a) Computers including computer software
b) New commercial vehicle acquired in
replacement of vehicles of 15 years of age and 60%
put to use before 01-04-99 (if acquired from 1-
10-98 to 31-03-99) or before 01-04-2000 (if
acquired from 01.04.99 to 31.03.00)
c) Books of professional (other than annual
publications)
d) Gas cylinders, plants used in field operations
by mineral oil concerns, direct fire glass melting
furnaces
11. Plant & machinery: Energy saving devices; 80%
renewal energy devices; rollers in flour mills,
sugar works and steel industry.
12. Plant & machinery: Air pollution control
equipments, water pollution control equipments;
solid waste control equipments, recycling and 100%
resource recovery systems, machinery acquired
and installed after 31.08.2002 in water supply
project or water treatment system, wooden parts
of artificial silk manufacturing machines,
cinematograph films, bulbs of studio lights,
wooden match frames, Tubs, ropes and safety
lamps in mines and quarries, salt pans,
reservoirs made of earthy or sandy or clayey
material;
books (being annual publication) owned for
profession, books owned by libraries (may be

Income Tax
annual or not).
13. Intangible assets: Know how, Patents, 25%
Copyrights, Trade Marks, Licences, Franchises
and other rights acquired after 31.3.98
WRITTEN DOWN VALUE [SEC. 43 (b)] : The WDV for assessment
year 2010-11 is determined as follows :-
(a) Find out depreciated value of block of asset as on 1.04.2009.
(b) To this, add “Actual Cost” of assets falling in the same block
acquired during the previous year 2009-10.
(c) From the resultant figure deduct money received / receivable
(including scrap value) in respect of that asset falling in the same
block of assets which is sold, discarded, demolished or destroyed
during the previous year 2009-10. However the net figure can not be
negative.
This net figure is written down value of the block of assets on 31-03-
2010.
WRITTEN DOWN VALUE IN CASE OF SLUMP SALE: Slump sale
as per section 2 (42C) means the transfer of one or more
undertakings as a result of the sale for a lump-sum consideration
without values being assigned to individual assets and liabilities.
Here also first three steps are same as in the above said case. Step
(d) is added for calculation. a), b), and c) are same as in simple
cases of WDV. d) In case of slump sale, deduct actual cost of asset
falling within that block as reduced :
(i) By the amount of depreciation actually allowed to him in
respect of any previous year till 31.03.1987; and
(ii) By the amount of depreciation that would have been allowable
to the assessee from 1.04.-1987 onwards if the asset was only asset
in the relevant block of assets. However the net figure can’t be
negative. The resultant figure shall be WDV of the block of assets on
31-03-2010 after slump sale.
COMPUTATION OF NORMAL DEPRECIATION: The normal
depreciation is calculated by multiplying the WDV of block of asset
as on 31-03-10 with rate of depreciation. But this rule has following
exceptions:
1. If the WDV of the block of assets is reduced to zero (though the
block assets does not cease to exit on 31-03-2010) NO
DEPRECIATION is charged on such block.
2. If a block of assets ceases to exist (i.e. all the assets of the
block have been transferred and the block is empty on 31-03-
2010) NO DEPRECIATION is charged on such block.
3. IMPORTED CARS: a) If it is used for running it on hire for tourist
or for business or profession outside India then DEPRECIATION
IS ALLOWED AT USUAL RATE.

Income Tax
b) If it is used for business or profession in India No

depreciation is available if it is acquired from 1-03-1975 to 31-
03-2001. Otherwise usual depreciation is available.
4. In case of SUCCESSION, AMALGAMATION, BUSINESS
REORGANISATION OR DEMERGER the following points are kept
under consideration:-
a) The aggregate depreciation allowable to the predecessor
and the successor shall not exceed depreciation calculated as
if there was no succession/amalgamation/demerger; and
b) Such depreciation shall be apportioned between the
predecessor and the successor in the ratio of number of days
for which the assets were used by them.
5. If the asset is acquired during the previous year; AND it is put
to use for period of less than 180 days then depreciation shall
be restricted to 50% of the amount calculated at the
prescribed percentage . It is to be noted that this restriction is
applicable only in the year in which the asset is acquired and
not in subsequent years. This is also not applicable in case of
successor, dissolution, partition of HUF.
COMPUTATION OF ADDITIONAL DEPRECIATION ON NEW
PLANT & MACHINERY: An additional depreciation is allowed to
give a boost to the manufacturing sector. Such additional
depreciation is allowed apart from normal depreciation. It is allowed
to all kinds of persons.
1. ASSESSEES ELIGIBLE FOR ADDITIONAL DEPRECIATION: An
assessee which is an INDUSTRIAL UNDERTAKING i.e. he is engaged
in the business of manufacture or production of any article or thing,
shall only be eligible for such additional depreciation.
2. ASSETS ON WHICH ADDITIONAL DEPRECIATION IS
ALLOWED: Any new machinery or plant which has been acquired
and installed by the above said assessee after 31-03-2005 is eligible
for additional depreciation. But following assets are not eligible for
additional depreciation:
(a) Ship or aircraft;
(b) Any machinery or plant which before its installation by
the assessee was used by any other person either with in or
outside India;
(c) Any machinery or plant installed in any office premises or
any residential accommodation, including accommodation in
the nature of a guest house;
(d) Any office appliances or road transport vehicles;
(e) Any machinery or plant, the whole of the actual cost of
which is allowed as deduction (whether by way of depreciation or
otherwise) in computing the Income under head "Profits and gains of

Income Tax
business or profession” of any previous year.

(3) RATE OF ADDITIONAL DEPRECIATION: Additional
Depreciation shall be allowed @ 20% of actual cost of the eligible
asset. However if the asset is put to use for less then 180 days in
the year in which it is acquired, the rate of depreciation shall be
10%.
NOTE: 1. Additional depreciation is allowed only once i.e. in the
previous year in which asset was acquired and installed.
2. Additional Depreciation allowed is deducted while calculating
opening WDV for the next year.
MEANING OF ACTUAL COST: Actual cost means actual cost to the
assessee as reduced by that portion of the cost thereof if any, as
has been met directly or indirectly by any other person or authority.
1) INTEREST TO BE INCLUDED/ EXCLUDED IN ACTUAL COST:
(a) Interest pertaining to the period till the asset is first put
to use should be added to the actual cost of the asset.
(b) Interest incurred relatable to any period after the asset is
first put to use, cannot be included in the Actual Cost. It is to
be treated as deduction u/s 36 (i)(iii).
Note: It does not matter whether the business is new or
existing one.
2) TRAVELLING EXPENDITURE: For acquiring depreciable
assets is a part of Actual Cost.
3) NOTIONAL ACTUAL COST: In the following cases, the actual
cost shall be a notional cost as follows:
(a) Assets used in Business after it ceases to be used for Scientific
Research- NOTIONAL ACTUAL COST 'NIL'
(b) Asset acquired by gift or inheritance- Actual cost to previous
owner MINUS Depreciation actually allowed till 31.03.1987
MINUS Depreciation allowable on that asset after 31.03.1987
assuming it is only asset in the block.
(c) Asset transferred to reduce tax liability by claiming
Depreciation at enhanced cost – Actual cost determined by
Assessing officer with approval of Joint Commissioner. However
genuine cases are not covered.
(d) Assets earlier transferred re-acquired by the assessee-
Notional Actual cost will be – (Actual price for which re-
acquired) OR (original cost minus depreciation actually allowed
to him till 31.03.1987 MINUS Depreciation allowable on that
asset after 31.03.1987 assuming it is only in the block) which
ever is less.
(e) Asset previously used by any person and on which
depreciation was allowed to him is acquired by another person
but leased back to seller- NOTIONAL ACTUAL COST in the

Income Tax
hands of LESSOR shall be equal to W.D.V of the asset to the

seller at the time of transfer thereof.
(f) Buildings brought into use for business purpose subsequent to
its acquisition- NOTIONAL ACTUAL COST shall be. Original Cost
of building MINUS A DEPRECIATION that would have been
allowable had the building been used for business since
acquisition.
(g) Assets transferred by holding Company to 100% Subsidiary or
vice versa where the transferee Company is an Indian
Company – NOTIONAL ACTUAL COST to the transferee
Company shall be the same value as would have been to the
Transferor Company if it continued to hold it.
(h) Assets transferred under a scheme amalgamation- Notional
Actual cost to the Amalgamating Company shall be same value
as would have been to the Amalgamating Company, if it
continued to hold it. This rule is also applicable if the
Amalgamated Company is Indian Company.
(i) Asset transferred to the to the Resulting Company in case of
Demerger: Notional Actual cost to Resulting Company shall be
same value as would have been to the Demerged Company, if
it continued to hold it.
(j) Actual Cost of CENEVATABLE ASSET shall be Original COST
MINUS DUTY OF EXCISE/ CUSTOMS for which credit of CENVAT
has been taken.
(k) Asset acquired where position of cost met by some other
person-ORIGINAL COST MINUS COST MET BY SOME OTHER
PESON shall be Notional Actual Cost.
(l) Assets acquired by Non-Resident outside India but brought by
him to India for purpose of Business or Profession Notional
Actual Cost shall be ORIGINAL COST MINUS DEPRECIATION
THAT WOULD HAVE BEEN ALLOWABLE in India since date of
acquisition.
(m) Assets acquired by a Company under a scheme of
Corporatisation of a Recognised stock Exchange in India –
Notional Actual Cost to the Company shall be the amount
which would have been regarded as actual Cost had there
been no such Corporatisation.
(n) Capital Asset on which deduction has been allowed or
allowable under section 35 AD – Notional actual cost shall be
NIL.
UNABSORBED DEPRECIATION: The following procedure is
followed for charging depreciation:
1. Depreciation of the previous year is deductible from
income chargeable under head ‘Profit & Gains of Business or

Income Tax
Profession’.
2. If Depreciation is not fully deductible under head ‘Profit &
gains of Business or Profession’ due to absence or inadequacy of
profits it is deductible from income chargeable under other heads of
Income (except Income under head Salaries) for same previous
year.
3. If Depreciation is still not deductible, it can be carried
forward to subsequent assessment year(s) for indefinite period, if
necessary.
4. In next year(s), unabsorbed depreciation can be set off
against any income from ‘Profits and Gains of Business Profession’
or under any other head (except Income under head Salaries). The
same business may or may not be continued. In next years,
following priority order should be maintained-
• Current year’s Depreciation.
• Brought forward Business Loss.
• Unabsorbed (Brought Forward) Depreciation.
• So, if in any subsequent year(s), there is no
brought forward business Loss, unabsorbed depreciation can be
added to current depreciation for claiming the deduction u/s 32.
DEPRECIATION ON STRAIGHT LINE BASIS: An undertaking

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

Income Tax
discarded, demolished liked or destroyed in any previous year,

balancing charge is treated as Business Income. Balancing charge is
least of following two:
(i) Actual Profit on sale of such asset; OR
(ii) Accumulated Depreciation on such asset.
The above Provisions apply even if the business is not in existence
in the year when the money payable the on such asset became due.
(c) CAPITAL GAIN: When money payable including scrap value of
the asset sold, discarded etc, exceeds the cost of acquisition of such
asset such Excess shall be treated as Capital Gain.
TEA or COFFEE or RUBBER DEVELOPMENT ACCOUNT

(SECTION 33 AB): An assessee can claim deduction u/s 33 AB if he
fulfills the following conditions:-
(a) The assessee is engaged in the business of growing and
manufacturing tea or coffee or rubber in India;
(b) The assessee has, with in six months from the end of previous
year or before furnishing return of income whichever is earlier –
(i) Deposited with National Bank for Agriculture and Rural
Development (NABARD) any amount(s) in a special account
maintained by the assessee with that bank in accordance with
and for the purpose specified in a scheme approved in this
behalf by the TEA BOARD OR COFFEE BOARD OR RUBBER
BOARD; OR
(ii) Deposited any amount in TEA DEPOSIT ACCOUNT opened
by the assessee in accordance with and for the propose
specified in a scheme framed by the TEA BOARD OR COFFEE
BOARD OR RUBBER BOARD with the previous approval of
Central Government;
(c) The assessee must get its accounts audited by a CHARTERED
ACCOUNTANT and furnish the report of such audit in form 3AC along
with the return of Income.
AMOUNT OF DEDUCTION: The deduction is LEAST of:-
(a) The amount (s) deposited in schemes as above; or
(b) 40% of profits of such business under head ‘Profits and Gains
of Business or profession’ before this deduction and before adjusting
brought forward business Losses.
NOTE: If separate accounts are not maintained for growing and
manufacturing of tea or coffee or rubber IN INDIA then profits from
such tea or coffee or rubber Business will be calculated as under:
Profit from Tea (or coffee or rubber) Business=
Profit of business x Turnover of tea or coffee or rubber Business /
Total turnover.
(ii) Where deduction has been allowed u/s 33 AB, no deduction

Income Tax
shall be allowed in respect of such amount in any other previous

year.
(iii) Where a deduction has been claimed and allowed under this
section, to an Association of Persons or Body of Individuals, no
deduction shall be allowed to any member of AOP or BOI in respect
of the same deposit.
(iv) Any excess deposit made during a previous year is not
treated as a deposit made in next year or other year.
UTILISATION OF DEPOSITED AMOUNT: The amount standing to
the credit of the assessee in special account of NABARD or TEA OR
COFFEE OR RUBBER DEVELOPMENT Account is to be utilised for the
business of the assessee with respect to the points as per the
scheme. But no deduction shall be allowed for the purchase of:
1. Any machinery or plant to be installed in any office or
residential place (including guest house);
2. Any office appliances (not being computer(s));
3. Any machinery or plant, the whole of the actual cost of
which is allowed as deduction (whether by Depreciation or
otherwise) in computing Income chargeable under head ‘profit
& gains of Business or Profession' of any previous year;
4. Any new machinery or plant to be installed in an Industrial
undertaking for purpose of business of construction,
manufacture or production of any article or thing specified in
eleventh Schedule of Income tax (i. e. low priority items).
WITHDRAWAL OF DEPOSIT: Any amount deposited as above shall
not be withdrawn except for the purposes specified in the scheme.
Otherwise it is allowed to be withdrawn in following circumstances:
(i) closure of business; (ii) Death of the assessee; (iii) Partition of
HUF; (iv) Dissolution of firm; (v) liquidation of Company.
Amount withdrawn for (i) & (iv) reasons in taxable as profits in the
year of withdrawal while for remaining cases such withdrawal is not
taxable.
WITHDRAWAL OF DEDUCTION: In following cases deduction is
withdrawn:
(a) Any amount withdrawn but not utilised with in same
previous year for the specified purpose shall be treated as income of
that year;
(b) Any asset acquired to the scheme, is sold or transferred
before expiry of 8 years from end of year of purchase; the cost of
such asset relatable to deduction allowed will be income in the year
of sale of asset or transfer of asset.
However these provisions are not applicable in case of conversion of
firm into a company and sale of asset to Government, Local
Authority, Statutory Corporation or government Company.

Income Tax
SITE RESTORATION FUND [SECTION 33ABA]: An assessee can

claim deduction u/s 33ABA if he fulfills following conditions:
a) The assessee is carrying on the business of prospecting for or
extraction or production of PETROLEUM OR NATURAL GAS OR BOTH
in India and for which an agreement has been entered into with the
Central Government.
b) The assessee has before the end of the previous year:
i) Deposited with State Bank of India, any amount(s) in a
special account maintained by the assessee in a scheme
approved in this behalf by the Ministry of Natural Gas and
Petroleum of Govt. of India; OR
ii) Deposited any amount in the site Restoration Account
opened by the assessee in a scheme framed by the aforesaid
ministry (this is called as DEPOSIT SCHEME).
c) The accounts of assessee should be audited by a
Chartered Accountant and the report of auditor in FORM 3AD is
filed along with the return of relevant assessment year.
AMOUNT OF DEDUCTION: The amount of deduction is LEAST OF:
a) The amount deposited in the scheme referred to above; or
b) 20% of profit of such business computed under head 'Profits
and Gains of Business or profession' before deduction under this
section and before adjusting brought forward business loss.
NOTE: 1) Profits from business in this case are to be calculated in
the same manner as in section 33AB.
2) In case of a firm, AOP or BOI, no deduction shall be allowed in
computation of Income of any partner or member.
3) Where deduction has been claimed under this section, no
deduction shall be allowed in respect of such amount in any other
previous year.
4) Any interest credited to such special Account or Site
Restoration Fund shall be deemed to be a deposit.
UTILISATION OF DEPOSITED AMOUNT: This provision is same as
in section 33AB for TEA DEVELOPMENT ACCOUNT.
WITHDRAWL OF DEPOSIT: Any amount deposited in the
SPECIAL account maintained with State Bank of India or SITE
RESTORATION account shall not be allowed to be withdrawn EXCEPT
for the purpose specified in the scheme/Deposit scheme.
WITHDRAWL OF DEDUCTION: The provisions are same as in
section 33AB of Tea Development Account. The following extra
provision is applicable:
On closure of account by the assessee The amount so
withdrawn from the account as reduced by amount payable to
central Government as share of profit shall be deemed to be income
under head 'Profit & Gains of Business’ of that previous year (even if

Income Tax
this business is not existence in that previous year).
EXPENDITURE ON SCIENTIFIC RESEARCH [SEC.35]: The term

scientific
research means any activity for extension of knowledge in the field
of natural or
applied sciences including agriculture, animal husbandry research is
classified
as:
a) REVENUE EXPENDITURE:
(i) Incurred by the assessee himself relating to his own
business;
(ii) As contribution made to outside agencies engaged in
scientific work.
b) Capital Expenditure incurred by the assessee himself relating to
his own business.
c) Revenue or Capital Expenditure for approved in-house research.
Now we shall study these in detail.
a)(i) Revenue Expenditure incurred by Assessee himself [Sec
35(1)(i)]:
1. All revenue expenses laid out or expended on scientific research
during the previous year are fully allowed as deduction.
2. It has been further provided that following revenue expenses laid
out or expended during three years immediately preceding the date
of commencement of business shall be deemed to be the
expenditure of the previous year in which the business commences
and therefore shall be allowed in that year to the extent these are
certified by the prescribed authority:
i) Payment of salary (except perquisites) to employees
engaged in scientific research; and
ii) Purchase of material used for scientific research
NOTE: It is to be noted that the research must relate to the business
of the assessee.
a)(ii) Contribution made to outsiders [Sec 35(1)(ii), (iia) &
(iii)]:
Where the assessee does not himself carry on scientific
research but makes contribution to other the institutions for this
purpose then a weighted deduction is allowed of 125% of any sum
paid to a scientific research association or university, college or
other institution (APPROVED BY CENTRAL GOVT.)
NOTE: It is to be noted that the research may or may not relate to
the business of the assessee.
Contribution made to National Laboratory or University or IIT
[Sec 35(2AA)]: Where the assessee pays any sum to a

Income Tax
'NATIONAL LABORATORY' or 'UNIVERSITY' or ‘INDIAN

INSTITUTE OF TECHNOLOGY' or a ‘SPECIFIED PERSON'
(means a person approved by prescribed authority), then
such sum is eligible for weighted deduction of 125% of
such sum paid.
National Laboratory means a scientific laboratory functioning
at national level under the aegis of Indian Council of Agricultural
Research, Indian Council of Medical Research, The Council of
Scientific and Industrial Research, The Defence Research and
Development Organisation, The Department of Electronics, the
Department of Bio-Technology and The Department of Atomic
Energy Prescribed Authority shall be the head of a National
Laboratory or a University or an Indian Institute of Technology as the
case may be. In the case of 'specified person' the prescribed
authority shall be The Principal Scientific Advisor to the Government
of India.
NOTE: It may be noted that the research may or may not relate to
the business of the assessee.
b) Capital Expenditure incurred by assessee himself [Sec
35(1)(iv)]:
1. Where the assessee incurs any expenditure of capital nature
RELATED TO THE BUSINESS OF THE ASSESSEE, the whole of such
expenditure incurred in any previous year is allowable as deduction
for that previous year.
2. Further capital expenditure incurred during three years
immediately preceding the date of commencement of business shall
be deemed to be expenses of the previous year of the
commencement of business and allowed in that year. Capital
Expenditure may be for acquisition of plant or equipment or
construction of Building (excluding cost of Land), acquisition of
vehicles for scientific research.
NOTE: 1. No Depreciation is available on an asset used in scientific
research.
2. If the asset is sold without having been used for other purposes,
surplus (i.e. sale price) or deduction allowed under section 35
whichever is less shall be chargeable to tax as business income of
the previous year in which the sale took place. The excess of sale
price over cost of acquisition (or indexed cost of acquisition) is
chargeable to tax under head capital gain and the deficiency is
treated as capital loss under the same head.
c) Expenditure on in-house Research & Development by a
Company assessee [Section 35(2AB)]: A weighted deduction of
150% of sum incurred will be allowed to a COMPANY assessee if:
i) It is engaged in business of manufacture or production any article

Income Tax
or thing except those notified I the Eleventh Schedule; and

ii) It has incurred expenditure (except on Land and Building) on in
house scientific research and development facility approved by the
prescribed authority.
iii) It has entered into agreement with prescribed authority for co-
operation in such research and for audit of the accounts maintained
for that facility.
NOTE:1. The expenditure on Building acquisition or construction
shall be allowed @ 100%.
2. No weighted deduction @150% will be allowed to Company
assessee after 31.03.2012.
3. If capital expenditure on scientific research can not be allowed
due to absence or inadequacy of profits of the business, the
deficiency so arising is to be carried forward as if it is unabsorbed
depreciation.
4. In pursuant to an agreement of arrangement of the amalgamation
if the amalgamating company, transfers to the amalgamated
company which is an Indian company, any asset representing the
capital expenditure on scientific research, the above said provisions
of section 35 shall apply to the amalgamated company as if there is
no amalgamation.
EXPENDITURE FOR OBTAINING LICENSE TO OPERATE

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

Income Tax
proceeds of transfer shall be allowed in respect of previous

year, in which the licence has been transferred.
ii) If the sale proceeds of transfer are more than WDV of the
Licence then such excess (i.e. profit) is taxable as under:
a) Where sale proceeds are less than Original Cost of
Licence: The Sale Value of Licence as reduced by WDV
shall be income under this section.
b) Where sale proceeds are more than Original Cost of
Licence:
-The Original Cost of Licence as reduced by WDV shall be
income under this section.
-The Sale Value as reduced by Original Cost of Licence
(indexed cost in case licence is held for more than 36
months) is treated as Income under head 'Capital Gains'
is the previous year in which the licence has been
transferred.
Case b) If a part of the licence is transferred:
i) If a part of the licence is transferred for a sum less than
the WDV of the total licence, then the balance amount not yet
written off shall be allowed as deduction in balance number of
equal installments over the unexpired period.
ii) If a part of licence is transferred for a sum more than
written down value of total licence, then such excess(i.e. profit)
is taxable as under:
a) Where sale proceeds are less than Original Cost of
Licence: The Sale Value of Licence as reduced by WDV
shall be income under this section.
b) Where sale proceeds are more than Original Cost of
Licence:
-The Original Cost of Licence as reduced by WDV shall be
income under this section.
-The Sale Value as reduced by Original Cost of Licence
(indexed cost in case licence is held for more than 36
months) is treated as Income under head 'Capital Gains'
is the previous year in which the licence has been
transferred.
Note: 1. In case of amalgamation/demerger the above provisions are
applicable as if there is no amalgamation/demerger if the
amalgamated/resulting company is Indian company.
2. If a deduction is claimed under this provision it shall not be
allowed under any other provision of the Act for any year.
EXPENDITURE ON ELIGIBLE PROJECTS/SCHEMES [SEC 35AC]:

Where an assessee incurs any expenditure by way of payment of

Income Tax
any sum to:

a) Public sector company; or
b) A local authority; or
c) An association or institution approved by National Committee
for carrying out any eligible project or scheme for PROMOTING
SOCIAL AND ECONOMIC WELFARE OF OR UPLIFT OF PUBLIC as
Central Government may specify, the AMOUNT SO PAID shall be
allowed as deduction provided a certificate in form No.58A is
obtained from the said institution and furnished along with the
return of Income.
However in case of a company, the deduction of such
expenditure is allowed along with direct expenditure incurred
directly by the company on the eligible project or scheme
undertaken by it. The deduction will be allowed for direct
expenditure if a certificate from a Chartered Accountant in Form
No.58 B is
NOTE: If a deduction is claimed under this provision it shall not be
allowed under any other provision of the Act for any year.
EXPENDITURE ON SPECIFIED BUSINESS [Section 35 AD]: This

section has been introduced w.e.f. A.Y. 2010-11 for promoting
investment certain specified business. The following conditions are
to be fulfilled under this section:
1. The assessee is carrying on any of following specified business:
a) Setting up and operating a cold chain facility;
b) Setting up and operating a warehousing facility for storage
of agricultural produce;
c) Laying and operating a cross country natural gas or crude
or petroleum oil pipeline network for distribution, including
storage facilities being integral part of such network (only for
Indian Company or their Consortium or Authority set up under
any Central or State Act as approved by Petroleum and Natural
Gas Regulatory Board).
2. The above business should have commenced on or after 1st April,
2009.
3. The above business is not formed by splitting up or reconstruction
of a
business already in existence.
4. It is not formed by transfer to a new business of machinery or
plant previously used for any purpose. However any such old plant
machinery can be transferred to new industrial undertaking
provided value of such old plant or machinery does not exceed 20%
of total value of plant and machinery of new industrial undertaking.
Amount of Deduction: 100% of Capital Expenditure incurred,

Income Tax
wholly and exclusively, for the specified business is deductible in the

previous year in which such expenditure was incurred.
However, if the capital expenditure was incurred prior to
commencement of its operations and such amount is capitalized in
the books of account of the assessee then such expenditure will be
allowed as deduction for the previous year in which the operations
were commenced.
EXPENDITURE BY WAY OF PAYMENTS TO ASSOCIATIONS AND

INSTITUTIONS FOR CARRYING OUT RURAL DEVELOPMENT
PROGRAMS [SEC
35CCA]: Any assessee who is carrying on a business/profession
shall be allowed a deduction of the amount of expenditure incurred
by way of payment of any sum to:
a) An association or institution, which has as its objectives the
undertaking of any rural development programme approved by the
prescribed authority;
b) An association or institution engaged in training of persons for
implementing rural development programmes;
c) National fund for Rural Development set up by the Central
Government;
d) National Urban Poverty Eradication Fund set up and notified by
the Central Governments.
NOTE:1. For clause (a) and (b) deduction for making the payment to
an association/institution shall be allowed provided the project has
been approved by the prescribed authority before 1st March, 1983.
2. If deduction is claimed u/s 35 CCA, it shall not be allowed under
any other provision of the Act.
AMORTISATION OF PRELIMINARY EXPENSES [SEC 35D]:

Deduction under this section can be claimed by:
a) Indian Company; or
b) A RESIDENT Non-Corporate assessee.
A foreign company can't claim deduction under this section even if it
is Resident in India.
Time and Purpose of Preliminary
Expenditure
When expenses incurred Why expenses is incurred
a before commencement For setting up any undertaking or

) of business business.
b After commencement of In connection with extension of an
) business Industrial unit or in connection with
setting up a new Unit.

Income Tax
Expenses qualified for deduction:

Work carried on by assessee Work carried on by assessee
itself or by a concern itself or by any concern
approved by Board ( approved or not)
Expenses incurred in connection a) Legal charges for drafting
with preparation of a feasibility any agreement between the
report or project report, assessee and any other person
conducting survey for the relating to setting up or conduct
business of the assessee or of the business of the assessee;
engineering services relating to b) When the assessee is
the business of the assessee Company: expenditure by way of
legal charges for drafting the
Memorandum and Articles of
Association of the Company, on
printing of the same, on
Registration fees of the
company, public issue expenses
of share or debentures of the
company;
c) Any other expenditure
which is prescribed. (till now
nothing is prescribed)
AMOUNT QUALIFYING FOR DEDUCTION: The aggregate of

expenditure referred to in clauses (a) to (d) shall not exceed 5% of
cost of project in case of all assessees other than company.
In case of a company it can't exceed 5% of:
i) Cost of Project; or
ii) Capital employed in the business of company
whichever is beneficial to the company.
AMOUNT OF DEDUCTION: The qualifying amount as above shall
be allowed as a deduction in 5 equal installments beginning with the
year in which the business commences or as case may be the
previous year in which extension of undertaking is completed or
new unit starts production or operation.
NOTE:1. In case of non-corporate Assessee, the deduction under
this section is available only if Audit Report in Form 3AE is taken
from a Chartered Accountant.
2. In case of amalgamation/demerger, the provision of this section
shall apply as if no amalgamation or demerger has taken place, if
the amalgamated/resulting company is Indian company.
3. The chart given below explains how the expenditure is deductible
under various circumstances:

Income Tax
Nature of Expense Incurred by new Incurred by

concern before existing concern
commencement of after
business commencement of
business
Expense on Issue of Allowed under sec 35 Allowed under sec
bonus shares D 37(1)
Expense on Issue of Allowed under sec 35 Allowed under sec 35
shares (not being D D
Bonus Shares)
Expense on Issue of Allowed under sec 35 Allowed under sec
Debentures D 37(1)
Expense on Raising Allowed under sec 35 Allowed under sec
of Loan (long term or D 37(1)
short term)
AMORTISATION OF EXPENDITURE IN CASE OF

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

VOLUNTARY RETIREMENT SCHEME [SEC 35DDA]: Where an
assessee incurs any expenditure in any previous year by way of
payment of any sum to an employee at the time of his voluntary
retirement in accordance with any scheme(s) of voluntary
retirement, 1/5th of the amount so paid shall be deducted in
computing the profits and gains of the business for that previous
year and the balance shall be deducted in equal installments for
each of the four immediately succeeding previous years.
NOTE:1. No deduction shall be allowed in respect of such
expenditure under any other provisions of the Act.
2. Where the undertaking of Indian company entitled to
deduction for amortization of voluntary retirement expense is
transferred before the expiry of the period specified to another
Indian company in a scheme of amalgamation or demerger the
deduction shall continue to be available to the amalgamated or
resulting Company (as the case may be) as if the amalgamation or

Income Tax
demerger had not taken place.

3. Similarly in case of reorganization where a firm or proprietary
concern is succeeded by a company, the deduction shall continue to
be available to the successor company.
4. In the year of transfer, no deduction shall be available to the
amalgamating company, the Demerged Company or to the firm or
proprietary concern.
AMORTISATION OF EXPENDITURE ON PROSPECTING ETC. FOR

CERTAIN MINERALS [SEC.35E and RULE 6AB]: Where an
Assessee being Indian company or a person (other than a company)
resident in India, is engaged in any operations relating to
prospecting for or extraction or production of specified minerals
(mentioned in seventh Schedule) and incurs any specified
expenditure after 31st March, 1970, the assessee shall be allowed to
amortize such expenditure.
SPECIFIED EXPENDITURE: The expenditure should be incurred
by the assessee at any time during the year of production and any
one or more of the four years immediately preceding that year,
wholly and exclusively on any operations relating to prospecting for
any mineral or a group of associated minerals specified in part A or
part B respectively of 'seventh schedule' or on the development of a
mine or other natural deposit of any such mineral or group of
associated minerals.
EXPENSES NOT INCLUDED IN SPECIFIED EXPENDITURE: The
following are excluded in qualified expenditure:
i) Expenditure met directly or indirectly by any person or
authority;
ii) Any proceeds realised by the assessee from sale, salvage,
compensation or insurance in respect of any property or rights
brought into existence as a result of such expenditure;
iii) Expenditure on acquisition of the site of the source of any
specified minerals or group of associated minerals or of any rights in
or over such site.
iv) Expenditure on the acquisition of the deposits of any of the
specified minerals or groups of associated minerals or of any rights
in or over such deposit.
v) Expenditure of a capital nature in respect of any building,
machinery, plant or furniture for which depreciation is admissible
under section 32.
QUANTUM AND PERIOD OF DEDUCTION: The amortization of
specified expenditure is allowed in equal installments over a period
of 10 years. The amount deductible for each year (starting from year
of commercial production) is:

Income Tax
i) 1/10th of specified expenditure; or

ii) Income (before deduction u/s 35E) of the previous year arising
from commercial exploration of mine or deposit of minerals of any
other nature;
whichever is less.
NOTE:1. The assessee (not being a company) shall be allowed this
deduction only if audit report in form 3B is obtained from a
Chartered Accountant.
2. No deduction shall be allowed in respect of such expenditure
under any other provisions of the Act.
3. In case of amalgamation/demerger, the provision of this
section shall apply as if no amalgamation/demerger has taken place
if the amalgamated/resulting company is Indian company.
INSURANCE PREMIUM [SECTION 36(1)(i)]: The amount of any

premium paid in respect of insurance against risk of damage or
destruction of stocks or stores used for the purposes of business or
profession is allowed as deduction.
INSURANCE PREMIUM PAID BY A FEDERAL MILK CO-

OPERATIVE SOCIETY [SECTION 36(1)(ia)]: Insurance premium
paid by a federal milk co-operative society, on the lives of cattle
owned by the members of a primary milk co-operative society
affiliated to it is allowed as deduction.
INSURANCE ON HEALTH OF EMPLOYEES [SEC36(1)(ib)]: An

employer can claim deduction in respect of premium paid by him by
any mode other than Cash for insurance on health of his employees
in accordance with the scheme framed by the General Insurance
Corporation (and approved by the Central Government) or any other
insurer (and approved by IRDA).
BONUS OR COMMISSION TO EMPLOYEES [SEC 36(1)(ii)]:

Bonus or commission paid to an employee is allowable as deduction
subject to certain conditions:-
a) The amount payable to employees as bonus or commission
should not otherwise have been payable to them as profit or
dividend.
b) Bonus or Commission is allowed as deduction only where
payment is made: i) during the previous year; or
ii) on or before due date or actual date of filing the
return
which ever is earlier [As per provisions under section 43 B if
assessee follows accrual basis].

Income Tax
INTEREST ON BORROWED CAPITAL [SECTION 36(1)(iii)]:

Interest on borrowed capital is allowed as deduction if:
a) The assessee has borrowed money; and
b) The money so borrowed is used for business purposes; and
c) The assessee has paid the interest or is payable on borrowings
(in case mercantile basis).
NOTE:1) Interest paid to shareholders on paid up capital is not
2) Interest paid by firm to partners is deductible according to the
provisions of section 40(b). But interest paid by AOP/BOI to its
members is not deductible.
3) The Income Tax department has no right to question the need
of borrowing (in case the assessee has ample funds of own).
4) Interest on money borrowed for meeting income tax liability,
interest for late payment or non-payment of advance tax or for late
filing of returns is not allowed.
5) Interest paid/payable for capital Asset pertaining to the period
from the date of borrowal till the asset is first put to use is to be
added in actual cost of the Capital Asset. Interest on capital
borrowed pertaining to the period after the asset is first put to use is
deductible under section 36.
6) Interest paid outside India is allowed as deduction only if tax
has been paid or tax has been deducted at source.
7) Interest on money borrowed for payment of dividend is allowed
as deduction.
8) Interest on borrowings from financial Institutions and interest
on term loan from a scheduled bank is allowed as deduction only if
the payment is made during the previous year OR on or before due
date of furnishing the return of income [As per provisions under
section 43 B if assessee follows accrual basis].
9) No deduction shall be allowed in respect of any expenditure
(including interest) incurred by assessee is relation to income which
does not form part of the total income.
DISCOUNT ON ZERO COUPON BONDS [SEC 36(1)(iiia)]: The

discount on zero coupon bonds (redemption value less amount
received on issue) shall be allowed as deduction during the period of
life of Bond on pro-rata basis.
EMPLOYER'S CONTRIBUTION TO RECOGNISED PROVIDENT

FUND OR APPROVED SUPERANNUATION FUND [SEC.36(1)
(iv)]: Employer's contribution towards a recognised provident fund
and approved superannuation fund are allowed as deduction

Income Tax
(subject to limits laid down by fourth schedule and Rules 87 and 88)
[As per provisions under section 43 B if assessee follows accrual
basis].
EMPLOYER'S CONTRIBUTION TO APPROVED GRATUITY FUND

[SECTION 36(1)(v)]: Employer's contribution towards approved
gratuity fund created by him exclusively for the benefit of his
employees under an irrevocable trust is allowed as deduction [As
per provisions under section 43 B if assessee follows accrual basis].
EMPLOYEE'S CONTRIBUTION TOWARDS CERTAIN STAFF

WELFARE SCHEMES [SEC 36 (1) (va)]: Any sum deducted from
the salary of the employees as their contribution towards PF, ESI etc
is treated as income of the employer under section 2(24)(x).
However, if such contribution is actually paid on or before due dates
mentioned above, the deduction shall be allowed for the same.
WRITE OFF OF ALLOWANCE OF ANIMALS [SEC 36(I)(vi)]: In

respect of animals which are used for purpose of business or
profession (not as stock in trade) and have died or become useless,
the difference between the actual cost of the animals to the
assessee and the amount realized (if any) for carcasses or sale of
animals is allowed as deduction.
BAD DEBTS [SEC 36(1)(vii)]: The following conditions must be

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

Income Tax
BANKS AND FINANCIAL INSTITUTIONS [SEC 36(1) (viia)]

a) A scheduled bank or a non-scheduled bank (except foreign
Bank or co – operative bank) is allowed deduction for provision for
doubtful debts of:
1) Amount not exceeding 7.5% of total Income (before
deduction under this clause and chapter VI A); and
ii) Amount not exceeding 10% of aggregate average advance
made by rural branches of such bank computed in prescribed
manner.
However an option has been given to above Banks to claim further
deduction in respect of provision made by it for doubtful or loss
Assets of an amount not exceeding income derived from redemption
of securities as per scheme framed by Central Government.
b) A bank incorporated by or under any foreign laws or a public
Financial Institution or State Industrial Corporation or a State
Industrial Investment Corporation, deduction for provision for
doubtful debts is allowed of amount not exceeding 5% of the total
income (before deduction under this clause and before chapter VI
A).
SPECIAL RESERVE CREATED AND MAINTAINED BY FINANCIAL

CORPORATION ETC [SEC 36(I)(viii)]: The deduction under this
section is allowed in case of following:
Entity Eligible Business
1. a) Finance Corporation as per Engaged in providing long term
section 4A of The Companies finance for (a) Industrial or
Act, 1956 agricultural development in India;
b) Finance Corporation being a or (b) for development of
public sector company infrastructure facility in India or
c) Banking Company (c) for development of housing in
d) Co-operative Bank (other than India
primary agricultural credit
society or primary co-operative
agricultural and rural
development bank)
2. A Housing Finance Company Engaged in providing long term
finance for construction or
purchase of houses in India for
residential purposes
3. Any other financial corporation Engaged in providing long term
including public Company finance for development of
infrastructure facility in India
QUANTUM OF DEDUCTION: Least of following is deduction:

Income Tax
a) amount transferred to special reserve during the previous

year;
b) 20% of profits from such business before this deduction;
c) 200% of paid up share capital and general reserve on last day
of the previous year minus balance of special reserve account on
the first day of the previous year.
AMOUNT WITHDRAWN FROM RESERVE ACCOUNT: If in any
year any amount is withdrawn from such reserve on which
deduction was allowed under this section, it will be charged to tax in
the year in which it is withdrawn.
FAMILY PLANNING EXPENDITURE [SECTION 36(1)(ix)]:Any

bona fide expenditure incurred by a COMPANY for promoting family
planning among its employees is allowable as deduction. However, if
such expenditure is of capital nature, 1/5th of such expenditure is
allowed as deduction for the previous year in which it was incurred
and the balance is deductible in equal installments in next four
years.
REVENUE EXPENDITURE INCURRED BY ENTITIES CREATED

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

CREDIT GUARANTEE FUND TRUST FOR SMALL INDUSTRIES
[SEC 36(1)(xiv)]: Any sum paid by public financial institution as
contribution to notified credit guarantee fund trust for small
industries is allowed as deduction.
SECURITIES TRANSACTION TAX [SEC 36(1)(xv)]: Securities

transaction tax paid by the assessee during the previous year on
taxable securities transactions entered into by him in the course of
his business is allowed as deduction from income under head ‘Profits
& Gains of Business or Profession’, if income from such taxable
securities transactions is included in the income under head ‘Profits
& Gains of Business or Profession’.
EXPENSES DEDUCTIBLE UNDER SECTION 37(1): This section is

residuary in nature. The following condition must be fulfilled:
a) The Expenditure should not be covered by section 30 to
section 36.
b) It should not be of capital nature.

Income Tax
c) It should not be personal expenditure of the assessee.

d) It should have been incurred in the previous year.
e) It should be in respect of business carried on by the assessee.
f) It should have been wholly and exclusively spent for the
purpose of such business.
g) It should not have been incurred for any purpose which is an
offence or is prohibited by any law.
NOTE:1) The examples of Expenses allowed under this section are:
Salary to employees, Advertisement Expenses, Legal Expenses,
Fines or Penalty or damages (other than Fees or penalties paid for
breach of any Act), Expenses on raising of Loans (after
commencement of business), printing & stationery,
Freight & Carriage Expenses, Postage & Telephone Expenses,
Travelling & Conveyance Exp., General Expenses etc.
2) Expenses on shifting of registered office are not deductible.
3) Fees or penalties paid for breach/violation/infringement of any
Act is disallowed.
4) Diwali and Mahurat expenses are allowed as deduction.
5) Deposit for telephone or telex is treated as deduction under
this section.
6) Advertisement in any souvenir, brochure etc. of a political
party is disallowed.
7) First time expenditure on fluorescent lights is treated as fixed
asset but all replacement expenses of tubes are allowed as
deduction.
BUILDING, PLANT & MACHINERY OR FUNITURE NOT

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

Section 40, 40 A and 43B are in the nature of overriding provisions
that even if an expenditure or allowance comes within the provisions

Income Tax
of any of sections 30 to 37 (1) as well as 40, 40A or 43B, sections

40,40 A and 43 B shall prevail and the provisions of sections 30 and
38 shall have no application.
AMOUNTS NOT DEDUCTIBLE UNDER SECTION 40
A) In case of any assessee [section 40 (a)]:
i) Any interest, royalty, fees for technical services or other
similar sum chargeable under income tax act which are
payable:
a) outside India; or
b) in India to a non-resident (other than a Company) or to a
Foreign Company; on which tax has not been deducted at
source or after deduction tax has not been paid during the
previous year or in subsequent year before the expiry of time
prescribed under section 200(1).
However if in any subsequent years, the tax is paid on any
such sum or tax is deducted at source after the expiry of time
limit given in section 200(1), such sum shall be allowed as a
deduction in computing the income of the previous year in
which such sum has been paid;
ii) Any interest, commission or brokerage, fees for professional
services or fees for technical services, or amounts payable to a
contractor or sub-contractor payable to a resident on which tax
is deductible at source under Chapter XVIIB and such tax has
not been deducted or after deduction has not been paid:
a) in case Tax was deductible and was so deducted
during the last month of previous year- on or before the
expiry of time limit prescribed under section 139(1).
b) in any other case- on or before last day of the previous
year.
However if in any subsequent years, the tax is paid on any
such sum or tax is deducted at source after the expiry of time
limit given in section 200(1), such sum shall be allowed as a
deduction in computing the income of the previous year in
which such sum has been paid;
iii) Any sum paid on account of any rate or tax levied on the
profit or gains of any business or profession or assessed at a
proportion of or otherwise on the basis of, any such profits or
gains;
iv) Any sum paid on account of wealth tax under the Wealth
Tax Act and any tax of a similar character chargeable under
any law in force in any country outside India;
v) Salary payable:
a) out of India (to a resident or non-resident);
b) in India to a non-resident;

Income Tax
if tax has not been paid nor deducted at source.

vi) Any payment to provident fund or other fund established for
the benefit of employees of the assessee, unless the assessee
has made effective arrangements to secure that tax shall be
deducted at source from any payments made from the funds,
which are chargeable to tax under the head ‘Salaries’.
vii) Any tax actually paid by employer on non-monetary
perquisites provided to the employees.
B) In case of partnership firm [section 40 (b)]:-
These will be discussed in detail in the chapter
‘Assessment of partnership firms’. Interest on partners’ capital/loan
is allowed up to 12% p.a. and salary, commission etc. to a WORKING
PARTNER is allowed up to certain limits and as per terms to the
partnership Deed.
C) In case AOP/BOI [section 40 (ba)]:-
This will be discussed in detail in the chapter
‘Assessments of AOP/BOI’. Any amount paid to member of AOP/BOI
as salary, remuneration, bonus or commission is fully disallowed.
EXPENSES/PAYMENTS NOT DEDUCTIBLE UNDER SECTION

40A(2):- Any amount is disallowed under this section only if
following three conditions are fulfilled:-
i) The payment is in respect of any expenditure;
ii) The payment has been made or is to be made or a specified
person in respect of such expenditure;
iii) The payment for expenditure is considered excessive or
unreasonable having regard to :-
a) The fair market value of goods, services or facilities; or
b) The legitimate business needs of the assessee's business or
profession; or
c) The benefit derived by or accruing to the assessee from the
payment.
AMOUNT OF DISALLOWANCE: If the above conditions are fulfilled,
the assessing officer can disallow the expenditure to the extent he
considers it excessive or unreasonable by the above standards.
SPECIFIED PERSONS: The specified persons in case of various
assessees are as under:-
Assessee Specified persons
Individual a) Any relative of such individual i.e. spouse,
brother, sister, lineal ascendant or
descendant;
b) Any person in whose business or
profession the individual or his relatives has
SUBSTANTIAL INTEREST.

Income Tax
Company, firm, a) Any director of the company, partner of

AOP or HUF. the firm or member of the AOP or HUF or any
relatives of such person;
b) Any person in whose business or
profession the assessee or director, partner
or member of assessee or any relative of
such person has substantial interest.
c) Any individual who has substantial interest
in the business or profession of the assesses;
d) A company, firm AOP or HUF having
SUBSTANTIAL INTEREST in
business/profession of the assessee or any
director, partner or member of any such
person;
e) A company, firm AOP or HUF of which a
director, partner or member has a
substantial interest in the
business/profession of the assessee or any
director, partner or member of any such
person or any relative of any such person.
Note:- Substantial interest in the business / profession means :-
a) In case of company, if such person is beneficial owner of at
least 20 percent of Equity share capital at any time during the
previous year;
b) In case of any other person, if such person is entitled to at
least 20 percent profit of such concern at any time during the
previous year;
EXPENDITURE NOT DEDUCTIBLE UNDER SECTION 40A(3)(a):

Where an assessee incurs any expenditure, in respect of which the
payment or aggregate of payments is made to a person in a day, in
a sum exceeding Rs. 20,000/Rs. 35,000* otherwise than by an
account payee cheque or account payee bank draft, 100% of such
expenditure shall not allowed as deduction.
* Rs. 35,000 in case payment is made on or after 1st October, 2009
for plying, hiring or leasing goods carriage.
However there are certain exceptions provided in rule
6DD under which the expenditure, even exceeding Rs.
20,000/35,000* shall be allowed as deduction even though the
payment is not made by a crossed cheque / draft. These are -
a) Payment made to RBI or any other Bank, life Insurance
corporation and primary agricultural credit society or primary credit
society.
b) Payment made to government, where such payment is

Income Tax
required to be made in legal tender e.g. payments of sales tax,

custom duty, excise duty etc.
c) Payment made by way of any letter of credit, telegraphic
transfer, transfer from one Bank account to another bank
account in same bank or any other bank, through bill of
exchange payable to a Bank, through use of electronic clearing
system through a bank, a credit card or a debit card.
d) Where the payment is made by way of adjustment against the
amount of any liability incurred by the payee for any goods
supplied or services rendered by the assessee to such payee.
e) Payment for purchase of:-
i) Agricultural or forest produce.
ii) The produce of animal husbandry, dairy or poultry
farming.
iii) Fish or fish products or
iv) Products of horticulture or apiculture if the payment is
made to the cultivator, grower or producer of such articles,
produce or products.
f) Payment made for purchase of products manufactured or
processed without the aid of power in a cottage industry to the
producer of such products.
g) Where the payment is made in a village or town, which is not
served by any bank to any person who ordinarily resides or is
carrying on business / profession in any village/town.
h) Payment by way of gratuity, retrenchment compensation or
similar terminal benefits made to an employee or his legal
heirs, if the aggregate of such sums payable to the employee
or his legal heir does not exceed Rs. 50000.
i) Payment by way of salary to its employees after deducting
income tax from the salary if such employee is temporarily
posted for continuous period of fifteen days or more in a place
other than his normal place of duty or on a ship and the
employee does not maintain any Bank account at such place.
j) Where the payment was required to be made on a day on
which the Banks were closed either on account of holiday or
strike.
k) Payment made by any person to his agent who is required to
make payments in cash for goods or services on behalf of such
person.
l) Where the payment is made by an authorized dealer or a
money changer against purchase of foreign currency or
travellers cheques in normal course of his business.
NOTE :- 1) If an assessee makes payment of two or more bills
(none of them exceeds Rs. 20,000) /Rs. 35,000* at the same

Income Tax
time (otherwise than by an account payee cheque or account

payee bank draft), section 40 A (3) is not applicable even if the
aggregate payment is more than Rs. 20,000/Rs. 35,000*.
2) Section 40 A (3) is not applicable if an assessee purchases a
capital asset or in respect of an expenditure which is not to
claimed as deduction under sections 30 to 37.
3) It is possible that a person may make different payments
(otherwise than by an account payee cheque or account payee
bank draft) at different time during the day to the same person
and none of the payments during the day to same party
exceeds Rs. 20,000/Rs. 35,000*.But if the aggregate payment
exceeds Rs. 20000/Rs. 35,000* then whole of such payment is
disallowed.
4) Section 40 A (3) is applicable only in computing income under
head ‘profits and gain of business or profession’ and ‘income
from other sources'.
* Rs. 35,000 in case payment is made on or after 1st October, 2009
for plying, hiring or leasing goods carriage.
DISALLOWANCE IN RESPECT OF PROVISION FOR GRATUITY

[SECTION 40A(7)] : Gratuity is allowed as deduction only if :-
a) Gratuity has actually become payable during the previous year
to the employees (if not covered as per clause (b)); or
b) Provision is made for payment of a sum by way of any
contribution towards an approved gratuity fund.
Therefore no deduction is allowed in respect of any provision made
for payment of gratuity only unless the said sum is deposited to
approved gratuity fund as per provision of sector 43 B.
DISALLOWANCE IN RESPECT OF CONTRIBUTION TO NON-

STATUTORY FUNDS [SECTION 40A(9)]: The sum contributed by
the assessee as an employer towards approved gratuity fund,
recognized provident fund or an approved superannuation fund shall
be allowed as deduction. No deduction shall be allowed in respect
sum paid towards setting up or formation of any other fund, trust,
society etc. for any other purpose which is not approved or
recognised.
DISALLOWANCE OF UNPAID LIABILITY [SEC 43B]: When the

books of accounts are maintained on mercantile basis, the deduction
of following sums is allowed only on payment during the previous
year or within the stipulated period mentioned against each of these
expenditures:
Nature of expense Stipulated time period

Income Tax
a) Any sum payable by way of Payment should be made on or

tax, duty, cess or fee, by before due date of furnishing the
whatever name called under any return of income under section
law for time being in force. 139(1) and the proof of payment
should be enclosed along with the
return of income.
However if payment is
made after due date, deduction
can be claimed in the year of
payment.
b) Any sum payable by the SAME AS ABOVE
assessee as employer as
contribution to provident fund or
gratuity fund or any other fund
for welfare of employees.
c) Any sum payable to employee SAME AS ABOVE
as bonus or commission for
service rendered.
d) Any sum payable as interest SAME AS ABOVE
on any loans or borrowing from
any public financial institution
(i.e. ICICI, IDBI, LIC, IFCI, UTI etc)
e) Any sum payable as interest SAME AS ABOVE
on any loan or advance from a
scheduled Bank including a co-
operative Bank.
f) Any sum payable as employer SAME AS ABOVE
in lieu of leave at the credit of his
employee.
NOTE: Employer’s Contribution to provident fund or gratuity fund or
any other fund for welfare of employees is covered under point
(b) above u/s 43 B. But Employee’s Contribution to provident
fund or gratuity fund or any other fund for welfare of
employees is allowed as deduction only when the payment of
the same is made on or before the due date mentioned under
respective welfare Acts. Employee’s Contribution to such fund
paid after the due date mentioned under respective welfare
Acts is not allowed as deduction u/s 36(1)(va).
DEEMED PROFITS CHARGEABLE TO TAX: The following deemed

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

Income Tax
(i) Any deduction was allowed in any previous year in respect

of Loss or Expenditure (revenue or capital) or trading liability
AND during the current previous year the assessee has
obtained refund or remission or cessation thereof then such
amount will be income of assessee under head Profits & Gains
of Business & Profession. [Section 41(1)(a)]
(ii) If in above case, instead of the assessee, the successor had
has obtained refund or remission or cessation thereof then
such amount will be income of successor under head Profits &
Gains of Business & Profession. [Section 41(1)(b)]
b) Balancing charges on assets if undertaking engaged in generation
or generation and distribution of power. [Section 41(2)]
c) Sale of scientific research capital asset without putting it for any
other use. [Section 41(3)]
d) Recovery of Bad debts allowed earlier as deduction. [Section
41(4)]
e) Amount withdrawn from special reserve created and maintained
by certain financial institutions. [Section 41(4A)]
f) Losses of previous year in which business ceased to exist can be
set off from deemed incomes under Section 41(1), (3), (4) or
(4A) even after period of 8 years has passed and even if return
of loss was not submitted in time [section 41(5)].
g) Any sum received after the discontinuation of the Business or
Profession is deemed to be the income of the recipient and is
charged to tax in the year of the receipt [section 176 (3A) and
176(4)].
NOTE: The above incomes are taxable in the year of receipt even if
in that year the business is not in existence.
UNDISCLOSED INCOME AND INVESTMENTS HOW AND WHEN

TAXED:- The tax treatment is as follows :-
a) Cash credits [section 68]:- These are taxable in the year in
which credited in the books of account of the assessee.
b) Unexplained investments [section 69]:- These are taxable
in the year in which such investments were made.
c) Unexplained money etc. [section 69A]:- These are taxable
in the year in which the assessee is found the owner of such money.
d) Investment not fully disclosed in books of accounts
[section 69B]:- The undisclosed amount is taxable in the year in
which the assessee has made such investments.
e) Unexplained expenditure [section 69C]:- These expenses
are taxable in the year in which these are incurred.
f) Amounts borrowed or repaid on Hundi [section 69D]:-
These amounts are taxable in the year of borrowal or repayment.

Income Tax
But if amount is taxed in the year of borrowal repayment shall not

be taxed again.
MAINTENANCE OF ACCOUNTS [SECTION 44AA]: To

understand compulsory maintenance of books of account it is
necessary to understand the meaning of ‘specified profession’ and
‘Non-specified profession’.
SPECIFIED PROFESSION: Specified profession includes persons
carrying on an legal, medical, engineering, architectural,
accountancy, technical consultancy or interior decoration or any
other notified profession [i.e. authorised representatives, film artists,
company secretaries and information technology professionals].
NON-SPECIFIED PROFESSION: - Non-specified profession is a
profession other than specified profession.
PRESCRIBED BOOKS OF ACCOUNT [Rule 6F]:
a) Category A :- [Persons carrying on ‘specified profession’ and
their gross receipts in profession do not exceed Rs. 1,50,000 in any
of three years immediately preceding the previous year (or in case
of newly set up profession, the gross receipts in profession for the
previous year are not likely to exceed the said amount of Rs.
1,50,000)]. These persons are required to maintain such “books of
accounts and other documents” as may enable the assessing officer
to compute their taxable income under The Income Tax Act.
b) Category B:- [Persons carrying on ‘specified profession and
their gross receipts in profession exceed Rs. 1,50,000 in ALL of three
years immediately preceding the previous year (or in case of newly
set up profession, the gross receipt in profession for the previous
year are likely to exceed Rs. 1,50,000)] These persons are required
to maintain prescribed books of accounts as per rule 6 F(2) as
follows :-
i) cash book. ii) a journal, if mercantile system is followed. iii) a
Ledger. iv) carbon copies of bills (machine numbered)
exceeding Rs. 25 issued by a person, and v) original bills
wherever issued to the person and receipts in respect of
expenditure incurred by the person (or if bills and receipts are
not issued and the expenditure incurred is not more than Rs.
50, payment vouchers prepared and signed by the person).
Apart from above a person carrying on medical profession is
required to keep following additional books :- a) A daily case
Register in form 3C; b) an inventory, on first day and last day
of the previous year, of stock of medicines and other
consumable accessories used for his profession.
c) Category C :-[Persons carrying on Non-specified profession or
any business if their from such business or profession does not

Income Tax
exceed Rs. 1,20,000 and the total sale, turnover or gross

receipt there of are not in excess of Rs. 10,00,000 in all three
years immediately preceding the previous year (or in case of
newly setup business or non-specified profession total income
and total sale, turnover or gross receipt are not likely to
exceed the said amounts)]. These persons are not required to
maintain any books of accounts.
d) Category D :- [Person carrying an ‘Non-specified profession'
or any business if their income from such profession or business
exceeds Rs. 1,20,000 or the total sale, turnover or gross receipts
there of are in excess of Rs. 10,00,000 in any of three years
immediately preceding the previous year ( or when the profession or
business in newly set up, income / total sale etc. are not likely to
exceed the said amounts)] - These persons are required to maintain
such “Books of accounts and other documents” as may enable the
assessing officer to compute their taxable income under the income
tax Act.
This category also includes assessee covered under section 44
AD or 44AE or 44AF or 44BB or 44BBB if it is claimed that
profits and gains from the business are lower than profits as
per these sections.
COMPULSORY AUDIT OF ACCOUNTS [SECTION 44 AB]:

The following persons are required to get their accounts
audited by a chartered accountant:
a) A person carrying on business, if the total sale, turnover or
gross receipts in business for the previous year exceed Rs.
40,00,000.
b) A person carrying in profession, if his gross receipts in
profession for the previous year exceed Rs. 10, 00,000.
c) A person covered under section 44AD, 44AE, 44AF, 44BB or
44BBB who claims that the profits and gains from such
business are lower than the profits and gains computed under
these sections.
DUE DATE OF GETTING BOOKS AUDITED AND FORM: The due
date of getting books audited is 30th September of the assessment
year in case of all assessees. The chartered Accountant gives his
audit report in form 3 CA (if the assessee in required to get his
accounts audited under any law) or in form 3 CB (if the assessee is
NOT required to get his accounts audited under any other law). The
details of such audit are given in form 3CD.
SUBMISSION OF AUDIT REPORT: The audit report as per section
44AB is not to be attached with new return forms. Such audit report
should not be submitted to income tax department before, on or

Income Tax
after due date of filing the return i.e. 30 th September. However, the
audit report should be obtained on or before due date.
NOTE: - If the date is extended by the income tax department then
30th September shall replaced by such date.
SPECIAL PROVISIONS FOR COMPUTING INCOME ON

ESTIMATED BASIS: These are given under section 44 AD, 44 AE,
44AF, 44B, 44BB, 44BBA and 44BBB as follows :-
PROFITS & GAINS OF CIVIL CONSTRUCTION BUSINESS
[SECTION 44 AD]: The conditions of this provision are:-
1. The assessee may be any person and may be a resident or non-
resident.
2. The assessee must be engaged in business of civil construction or
supply of labour for civil construction work.
3. The civil construction includes construction or repair of buildings,
dams, bridges or other structures or roads or canals. It also includes
electrical fitting, plumbing, landscaping work.
4. This section is applicable if gross receipts from such business
don’t exceed Rs. 40,00,000.
5. The income from such business is estimated at 8% of gross
receipt paid or payable to the assessee. The assessee can
voluntarily declare higher income in his return of income.
6. The income as above is after deduction of all expenses from
section 30 to 38 including depreciation. But in case of firm, salary
and interest on capital to partners under section 40(b) shall be
allowed from such income.
7. Such assessee is not required to maintain any books of account.
He is also not required to get his accounts audited. But in case he
carries any other business also and total gross receipts of all
business is more than Rs. 40, 00,000 then he will get his accounts
audited under section 44 AB.
8. Such assessee is eligible for deductions under chapter VI A, if
conditions therein are fulfilled.
9. Such assessee can however claim his income to be lower but he
will have maintain the books of account as per section 44AA and get
his accounts audited under section 44AB.
PROFITS & GAINS OF BUSINESS OF PLYING, LEASING OR

HIRING TRUCKS [SECTION 44AE]: The features are as follows:
resident.
2. The assessee must be engaged in business of plying, hiring or
leasing the trucks.
3. The assessee does not own more than 10 goods carriages at any

Income Tax
time during the year. For this purpose, a goods carriage taken on
hire purchase or on installments shall be deemed to be owned by
the assessee.
4. The income of a heavy goods vehicle (the unladen weight of
which is more than 12000 kilogram) is estimated at Rs. 3500/- per
month (or part of month) during which the goods carriage in owned
by the assessee.
5. The income of a good carriage other than heavy goods vehicle is
estimated at Rs. 3150/- per month (or part of a month) during which
the goods carriage owned by the assessee.
6. The assessee can voluntarily declare higher income.
7. The income as above is after deduction of all expenses from
section 30 to 38 including depreciation. But in case of firm, salary
and interest on capital to partners under section 40(b) shall be
allowed from such income.
8. Such assessee is not required to keep any books of accounts. He
is also not required to get his accounts audited.
9. Such assessee is eligible for deductions under chapter VI A, if
conditions therein are fulfilled.
PROFITS AND GAINS OF RETAIL TRADERS [SEC 44AF]: The

conditions to be
fulfilled are:
resident.
2. The assessee must be engaged in retail trade of any goods or
merchandise.
3. The turnover of the assessee from the above business does not
exceed Rs. 40,00,000.
4. The estimated income from such business is 5% of gross receipts.
The assessee may voluntarily declare higher income in his return of
income.
5. The income as above is after all deductions under section 30 t0
38 including depreciation. But in case of a firm, salary and interest
on capital to partners under section 40(b) shall be allowed from such
income.
6. The assessee is not required to maintain any books of account. He
is also not required to get his accounts audited.

Income Tax
PROFITS AND GAINS OF SHIPPING BUSINESS OF NON-

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

SUPPLYING MACHINERY ON HIRE FOR EXPLORATION ETC. OF
MINERAL OILS [SEC 44BB]: The conditions to be fulfilled are:
2. He is engaged in the business of providing services or facilities in
connection with, or supplying plant and machinery on hire which is
used or to be used in prospecting for or extraction or production of
mineral oils.
India, on account of services or facilities in connection with, or
supplying plant and machinery on hire which is used or to be used in
prospecting for or extraction or production of mineral oils in INDIA;
and he has received or deemed to received in India, any amount, on
account of services or facilities in connection with, or supplying plant
and machinery on hire which is used or to be used in prospecting for
or extraction or production of mineral oils outside India.
4. The income of such assessee from such business shall be a sum
equal to 10% of the amounts referred to in point 3 above.
PROFITS AND GAINS OF NON-RESIDENT ASSESSEE FROM

BUSINESS OF OPERATION OF AIRCRAFT [SEC 44BBA]: The
conditions to be fulfilled are:
2. He is engaged in the business of operation of aircraft.
India, on account of carriage of passengers, livestock, mail or goods

Income Tax
from any place in India; and he has received or deemed to received

in India, any amount, on account of carriage of passengers,
livestock, mail or goods from a place outside India.
PROFITS AND GAINS OF FOREIGN COMPANY FROM BUSINESS

OF CIVIL CONSTRUCTION ETC. IN CERTAIN TURNKEY POWER
PROJECTS [SEC. 44BBB]: The conditions to be fulfilled are:
1. The assessee is a foreign company.
2. Such company is engaged in the business of civil construction or
erection of plant and machinery or testing or commissioning thereof,
in connection with a turnkey power project approved by the Central
Government.
3. Any amount is received or receivable by such company in
connection with the above said business.
METHOD OF VALUATION OF CLOSING STOCK: The method of

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

Income Tax
Chapter-6
INCOME UNDER THE HEAD CAPITAL GAINS
BASIS OF CHARGE [SEC 45]: Any profits or gains arising from
transfer of capital asset effected in the previous year, shall be
chargeable to tax under the head ‘Capital Gains’ and shall be
deemed to be income of the previous year in which the
transfer took place unless such capital gain is exempt u/s
54,54B, 54D, 54EC, 54F, 54G or 54GA. Thus, the following are
essential conditions for taxing capital gains:
(a) There must be a capital Asset.
(b) The capital asset must have been ‘transferred’ by the
Assessee. (But in some cases capital gains arise even if there
is no transfer of Capital Asset).
Such transfer must have taken place during the previous year.
(But in some cases capital gain is taxable in a year other than
the year in which the capital asset is transferred).
(c)There must be profits or gains on such transfer, which is
called ‘Capital gains’.
(d) Such profit or gains should not be exempt u/s 54,54B,
54D, 54EC, 54F, 54G or 54GA.
NOTE: According to section 45 (1A), in case of profits or gains from
insurance claim due to damage or destruction of property by fire or
other calamities, there will be capital gain, although no asset is
transferred in such case.
(A) THERE MUST BE A CAPITAL ASSET: Capital Gain arises only

on transfer of a ‘Capital Asset'. Capital Asset means property of any
kind (whether FIXED OR CIRCULATING, MOVABLE OR IMMOVABLE,

Income Tax
TANGIBLE OR INTANGIBLE) held by the assessee. However, the

following are not included in the definition of Capital Asset:
(a) Any stock-in-trade, consumable store or raw material held
for the purpose of the business or profession of the assessee;
(b) Personal effects of the assessee which means movable
property including wearing apparel and furniture held for
personal use by the assessee or any member of his family
dependent upon him. However, the following assets are not
treated as personal effects even if these are held for personal
use: Jewellery, Paintings, Drawings, archaeological collections,
sculptures or any work of art.
(c) Agricultural land in India which is not urban agricultural
Land. In other words, it must be a rural agricultural Land;
(d) 6 ½ % Gold Bonds, 1977, 7% Gold Bonds 1980 or
National Defence Gold Bonds, 1980 issued by the Central
Government;
(e) Special Bearer Bonds, 1991 issued by the Central
Government;
(f) Gold Deposit Bonds issued under Gold Deposit Scheme,
1999.
NOTE: (1) The item as per (d) and (e) do not exist now.
(2) Personal effects include only movable
property. Thus personal effect does not cover the house
property in which the assessee lives.
(3) Jewellery Includes - ornaments of gold
silver, platinum or any other precious metal or any alloy
containing one or more of such precious metals, whether or
not containing any precious or semi precious stone and
whether or not worked or sewn into any wearing apparel; and
- Precious or semi precious stones, whether or not set in any
furniture, utensil or other article or worked or sewn in any
wearing apparel.
(4) Rural Agricultural Land means an agricultural Land in India-if
situated in any area which is comprised with in the jurisdiction
of a municipality then its population should be less than
10,000 as per last census.
-If situated outside the limits of municipality then it should be
situated certain kilometers away from the local limits of any
municipality as specified by the Central Government in the
official Gazette.
(5) Urban Agricultural Land is a capital asset but any capital gain
arising from the COMPULSORY ACQUISITION of such land is
exempt from tax under section 10(37).
(6) All assets like goodwill, leasehold rights, manufacturing

Income Tax
licence, route permits, shares of companies, residential or

commercial houses, patents, trade marks, Jewellery, land are
called capital Assets.
(7) Personal Effects which are movable like household utensils,
appliances, furniture, carpets, paintings, T. V. Sets, Vehicles,
Refrigerators, musical instruments are not capital assets.
TYPES OF CAPITAL ASSETS: The capital assets are of two types:

(a) Short term Capital Asset
(b) Long term Capital Asset
SHORT TERM CAPITAL ASSET [Sec 2(42A)]: A Capital asset held
by an assessee for not more than 36 months immediately preceding
the date of its transfer is known as a short term capital Asset.
However in following cases the above period of 36 months shall be
replaced by 12 months:
(a) Equity or Preference shares of a Company (quoted or not)
(b) Securities (like Debentures or Government Securities) listed
in a recognized stock exchange in India (quoted).
(c) Units of the Unit Trust of India or units of a Mutual fund
specified u/s 10 (23D) (quoted or not).
(d) Zero Coupon Bonds (quoted or not).
LONG TERM CAPITAL ASSET [Sec 2(29A)]: A Capital Asset other
then short term capital Asset is a Long term Capital Asset.
NOTE: The Depreciable Assets are always treated as short term
capital assets even if these are held for more than 36 months.
CALULATION OF PERIOD OF HOLDING: In the following five cases
the inclusion/ exclusion of period is determined as under:
CASE EXCLUSION/ INCLUSION OF
PERIOD
(a) Shares held in Company in EXCLUDE the period subsequent
Liquidation to date of Liquidation.
(b) Property acquired u/s 49(1) INCLUDE the holding period of
i.e. Gift, Will etc. Previous owner also.
(c) Shares of Amalgamated INCLUDE the holding period of
Company acquired in scheme of shares in Amalgamating Co, by
amalgamation. assessee.
(d) Shares in Indian Resulting INCLUDE the holding period of
Company acquired in case of shares in the Demerged
demerger company by the Assessee.
(e)(i) Trading or clearing rights of INCLUDE the period for which the
recognised stock exchange person was a member of the
pursuant to demutualization or recognised stock exchange in
Corporatisation India.
(e)(ii) Equity shares in a company INCLUDE the period for which the

Income Tax
acquired by a person pursuant to person was a member of the

the demutualization or recognised stock exchange in
Corporatisation of recognised India.
stock exchange.
PERIOD OF HOLDING FOR BONUS AND RIGHT SHARES: The

Holding period for the purpose of capital gains in case of shares or
securities will be determined as under:
CASE RELEVANT DATE
1. Right shares or any other Period shall be from Date of
securities (financial assets) Allotment of such financial asset.
purchased by original holder.
2. Right shares or any other Period shall be from Date of
securities (financial assets) Allotment of such financial asset.
purchased by the renouncee in
whose favour right has been
renounced by original security
holder.
3. Right renounced by original Period shall be from the date of
security holder in favour of offer to the date of
renounce. renouncement.
4. Financial Asset allotted Period shall be from Date of
without any payment (on the Allotment of such financial asset.
basis of holding of other financial
asset) e.g. Bonus Shares
5. Specific security or sweat Period shall be from Date of
equity shares allotted/transferred Allotment or transfer of such
by employer directly/ indirectly financial asset.
to employee either free of cost or
at concessional rate.
NOTE: REASON FOR DISTINCTION OF LONG TERM CAPITAL

ASSET AND SHORT TERM CAPITAL ASSET: The long term
capital gain is taxed at concessional /lower rates. Whereas
the short term capital gain is taxed at Normal Rates.
(B) CAPITAL ASSET MUST HAVE BEEN TRANSFERRED:

Capital gain arises only where there is a transfer of capital Asset. If
the capital asset is not transferred, there will be NO CAPITAL GAIN.
However, Insurance claim due to damage or destruction of property
by fire or other calamities, there will be capital gain although no
asset has been transferred in such case.
WHAT IS TRANSFER OF CAPITAL ASSET [Section 2(47)]:
Transfer includes:

Income Tax
a). the sale, exchange or relinquishment of the asset; or

b). the extinguishments of any rights in an asset; or
c). the compulsory acquisition of a capital asset under any law
[but any capital gain arising from the COMPULSORY
ACQUISITION of such land is exempt from tax under section
10(37)]; or
d). in a case where the asset is converted by the owner there of
into or is treated by him as stock in trade of business carried
on by him on or after 01.04.1984, such conversion or
treatment; or
e). the maturity or redemption of Zero Coupon Bonds;
f). any transaction involving the allowing the possession of any
immovable property to be taken or retained in part
performance of a contract of the nature referred to in Section
53A of the Transfer of properties Act, 1882; or
g). any transaction (whether by way of becoming a member of or
acquiring shares in a Co-operative Society, Company or other
Association of persons or by way of any agreement or any
arrangement or in any other manner whatsoever) which has
the effect of transferring or enabling the enjoyment of any
immovable property.
EXAMPLES OF TRANSFER: (a) Redemption of preference shares
by a Company is a transfer in the hands of share holders and they
will be liable to Capital gain for the same.
(b) Conversion of preference shares into ordinary shares amounts
to transfer in the hands of shareholders.
(c) Distribution of capital assets in kind in case of liquidation of a
Company is not transfer in the hands of company but a
transfer in case of the shareholders (regarding shares held by
them).
(d) Proprietorship business taken over by a firm.
(e) Slump sale of an undertaking of a business.
(f) Grant of mining lease at a premium.
(g) Premium or Salami received for lease of plot for 99 years.
TRANSACTIONS NOT INCLUDED IN TRANSFER [SEC 46 & 47]:
In the following cases, the transactions will not be considered as
transfer –
(i) Distribution of assets in kind by a company to its
shareholders on its liquidation shall not be transfer in the
hands of Company.
(ii)Any distribution of Capital Assets on total or partial partition
of Hindu Undivided family.
(iii) Any transfer of a Capital Asset under a Gift or will or an
irrevocable trust. (However from A.Y. 2001-02, transfer under a

Income Tax
Gift or irrevocable trust of capital asset being shares,

debentures or warrants allotted by Company, directly or
indirectly to its employees under the Employees Stock option
Plan or Scheme framed in accordance with guidelines issued
by the central Government shall be deemed as ‘TRANSFER’).
(iv) Any transfer of Capital Asset by a Company to its
WHOLLY OWNED INDIAN SUBSIDARY COMPANY.
(v)Any transfer of Capital Asset by a wholly owned subsidiary
Company to its Indian Holding Company.
NOTE: However in case of provisions as per (iv) & (v) above, if
the transfer of capital Asset is made after 29.2.1988 as stock
in trade the same will be treated as TRANSFER.
(vi) Any transfer in the scheme of amalgamation of a Capital
Asset by the amalgamating Company to the Amalgamated
Company if Amalgamated Company is Indian Company.
(vii) Any transfer in a scheme of amalgamation of shares held
in Indian Company by the amalgamating foreign Company if:
(a) At least 25% of the shareholders of the amalgamating
foreign Company continue to remain shareholders of
the amalgamated foreign Company; and
(b) Such a transfer does not attract capital gain tax in the
Country, in which such amalgamating Company is
incorporated.
(viii) Any transfer, in the scheme of amalgamation of a
Banking Company with a Banking Institution sanctioned and
brought into force by the Central Government under section
45(7) of the Banking Regulation Act, 1949, of a Capital Asset
by the Banking Company to the Banking Institution.
NOTE: Where the assessee acquires the Capital Asset by way of a
transaction as per points (ii) to (viii), then the cost of acquisition of
such asset shall be cost to the previous owner. Further in such case,
the period of asset held by previous owner shall also be included to
find whether the asset is short term capital Asset or Long term
capital Asset.
(ix) From A.Y 2000-01, any transfer, in a demerger, of a
Capital Asset by the Demerged Company to the resulting
Company provided the resulting Company is an Indian
Company.
(x)Any transfer of shares held in an Indian Company by a
Demerged foreign Company to the resulting foreign Company
if :
(a) The shareholders holding not less than 75% in the
value of shares of the Demerged foreign Company
continue to remain shareholders of the resulting

Income Tax
foreign Company; and

(b) Such transfer does not attract tax in capital gain in the
country, in which the Demerged foreign Company is
incorporated. It is further provided that provisions of
section 391 to 394 of The Companies Act, 1956 shall
not apply in such a case.
(xi) Any transfer in a business reorganisation, of a capital asset
by the predecessor co-operative bank to the successor co-
operative bank.
(xii) Any transfer by a shareholder, in a business
reorganisation, of a capital asset being share(s) held by him in
predecessor co-operative bank in consideration of the
allotment of any share(s) in the successor co-operative bank.
(xiii) Any transfer or issue of shares by the resulting company
in a scheme of demerger to the Shareholders of the Demerged
Company, if the transfer or issue is made in consideration of
Demerger of the undertaking.
(xiv) Any transfer by a Shareholder, in the scheme of
amalgamation, of share(s) held by him in an amalgamating
Company if the transfer is made in the consideration of
allotment to him of any share(s) in the amalgamated Company
and the amalgamated Company is an Indian Company.
(xv) Any transfer of urban Agricultural Land in India before 01-
03-1970.
(xvi) Any transfer of bonds or Global Depository Receipts
referred to in section 115AC(1) (i.e. bonds/GDR’s/shares of a
public sector Company) purchased in foreign currency, made
outside India by a Non-Resident to another Non- resident.
(xvii) Any transfer of Capital asset, being any work of art,
archaeological, scientific or art collection, book, manuscript,
drawing, painting, photograph or print, to the Government or a
University or the National Museum, National Art Gallery,
National Archives or any other such public museum or
institution as may be notified by the central Government.
(xviii) Any transfer by way of conversion of bonds /
debenture /debenture stock or deposit certificate in any form
of a company into shares or Debentures of that company.
(xix) Any transfer made on or before 31-12-1998 by a person
(not being a company) of a capital asset being MEMBERSHIP of
a recognized stock exchange in India to a company in
exchange of shares allotted by that company to the transferor.
Such shares must be retained by the transferor for a period of
not less then three years from the date of transfer.
(xx) Any transfer of LAND of a sick industrial company made

Income Tax
under a scheme prepared and sanctioned under section 18 of

the sick Industrial companies (SPL Provision) Act 1985 where
such sick Industrial Company is managed by its workers co-
operative.
However, the transfer should be made during the period
commencing from the previous year in which the said
company has become a sick industrial company under section
17(1) of that Act and ending with the previous year during
which the entire NET WORTH of such company becomes equal
to or exceeds the Accumulated Losses.
(xxi) Transfer of a capital asset to the company where firm is
succeeded by a company in the business carried on by it
subject to the following conditions:-
a) All assets and liabilities of the firm relating to
the business immediately before the succession shall become
the assets and liabilities of the Company.
b) All the partners of the firm immediately before
succession become shareholders in the Company in the same
proportion in which their capital accounts stood in the books of
account of the firm on the date of the succession.
c) The partners do not receive any consideration
or benefit directly or indirectly, in any form or manner other
than by way of allotment of shares in the company.
d) The aggregate of shareholding of the partners
in the Company is not less than 50% of total voting power in
the Company and shareholding shall continue to be so for a
period of five years from the date of the succession.
(xxii) Transfer of a capital asset to the company where
proprietary concern is succeeded by a company in the
business carried on by it subject to the following conditions:-
a) All assets and liabilities of the sole proprietary

concern relating to the business immediately before the
succession shall become the assets and liabilities of the
Company.
b) The shareholding of the sole proprietor in the
Company is not less than 50% of total voting power in the
Company and shareholding shall continue to be so for a period
of five years from the date of the succession.
c) The sole proprietor does not receive any
consideration or benefit directly or indirectly, in any form or
manner other than by way of allotment of shares in the
company.
(xxiii) Any transfer under ‘Security Lending Scheme, 1997’ for

Income Tax
lending of any securities under an agreement or arrangement,

which the assessee has entered into with the borrower of such
securities and witch is subject to the guidelines issued by the
SEBI or RBI. (w. e. f. A. Y 2003-04 the guidelines are issued by
RBI).
(xxiv) Any transfer of a capital asset in a transaction of reverse
mortgage under a scheme made and notified by the Central
Government.
(C). CAPITAL GAIN SHOULD ARISE IN THE PREVIOUS YEAR IN
WHICH TRANSFER TOOK PLACE: Generally capital gain arises in
the previous year which the transfer took place regarding the
Capital Asset. However there following exceptions:
(a) Conversion of Capital Asset in to stock in trade.
(b) Compulsory acquisition of asset.
(c)Damage or Destruction of any Capital Asset by fire or other
calamities from A.Y 2000-01
COMPUTATION OF CAPITAL GAIN [Section 48]: Now it has

become clear that the capital gain is of two types-Short Term Capital
Gain & Long term Capital Gain. A Performa to Calculate these Gain is
given as follows:
COMPUTATION OF SHORT TERM CAPITAL GAINS:
Full Value of Consideration ***
Less: expenditure incurred wholly and exclusively
in connection with such transfer ***
(i) Cost of acquisition ***
(ii) Cost of Improvement ***
***
Balance ***
Less: exemption u/s 54B/ 54D/54G/54GA

***
SHORT TERM CAPITAL GAIN
***
COMPUTATION OF LONG TERM CAPITAL GAINS:

Full Value of Consideration ***
Less: Expenditure incurred wholly and exclusively
In connection with such transfer ***
(ii) Indexed Cost of Acquisition ***
(iii) Indexed Cost of Improvement ***
***
Balance ***

Income Tax
Less: Exemption u/s 54/54B/54D/54EC/54F/54G/54GA

***
LONG TERM CAPITAL GAIN ***
NOTE: 1. In case of an assessee covered by Section 48 (first

proviso), 115AB, 115AC, 115 ACA, 115AD or 115D, the benefit of
Indexation is not available. The benefit of Indexation is also not
available on transfer of Capital Asset being bonds or Debenture
(except Capital Indexed Bonds issued by the Government) [Section
48, proviso 3].
2. The securities transaction tax paid on purchase of equity shares
and units of equity oriented fund shall not form part of cost of
acquisition. Similarly the securities transaction tax paid on sale of
equity shares and units of equity oriented fund shall not be treated
as expenses on transfer.
FULL VALUE OF CONSIDERATION: Full value of consideration

means what the transferor receives or is entitled to receive a
consideration of the Capital Asset. It is not always the market value
of the asset on the date of transfer.
NOTE: (1) If the consideration (received or to be received) in
transfer of land or Building or both is less than the value adopted for
the purpose of payment of stamp duty in respect of such Transfer,
the value so adapted or assessed shall be deemed to be the full
value of consideration and capital gain shall be computed
accordingly (from A.Y. 2003-04).
(2) If the full value of consideration agreed upon is received in
installments in different years, the value of Consideration has to be
taken into consideration for computing the capital gains in the year
of transfer of such Capital Asset.
DEEMED FULL VALUE OF CONSIDERATION: In the following

cases the full value of consideration shall be the deemed value:
SL N MODE OF TRANSFER DEEMED FULL VALUE OF
O. CONSIDERATION
1. Money or asset received Value of money and/or fair
from an insurer on Market value of asset on the
account of damage or date of receipt.
destruction of any asset
by fire or other
calamities from A.Y
2000-01.
2. Conversion of capital Fair Market Value of the asset
asset into stock in trade on the date of its conversion.

Income Tax
from A.Y. 1985-86

3. Introduction of Capital IN Amount recorded in the books
KIND into firm/AOP/BOI of Account of FIRM/AOP/BOI/as
by partner or member Value of Capital Asset.
4. Distribution of asset in Fair Market Value of such Asset
kind on dissolution of on the date of distribution.
FIRM/AOP/BOI.
5. Shareholder receiving Market Value of the assets on
assets from Liquidator on date of distribution LESS
Liquidation of the Amount of deemed Dividend
Company. u/s 2(22)(e).
6. Gift of shares or Fair Market Value on the date
Debentures etc. to of Gift etc.
employees under
employees stock option
plan or scheme
7. Transfer of Land or The value adopted by Stamp
building or both when Valuation Authority for the
sale consideration purpose of Stamp Duty.
declared in the
Conveyance Deed is less
than the value adopted
by Stamp Valuation
Authority for the purpose
of Stamp Duty.
EXPENSES ON TRANSFER: Expenditure incurred wholly and

exclusively in connection with transfer of capital asset is deductible
from full value of consideration. Examples of such expenses are -
brokerage or commission paid for securing a purchaser, cost of
stamp, registration fees borne by the vendor, travelling exp.
incurred in connection with transfer, litigation expenses for claiming
enhancement of compensation awarded in case of compulsory
acquisition of assets.
However, any expenses which have already been claimed as
deduction under any other provisions of the Act cannot be claimed
as deduction under this clause.
COST OF ACQUISITION [SEC 55(2)]: Cost of acquisition of asset is

the value for which it was acquired by the assessee. Expenses of
capital Nature for completing or acquiring the title to the property
are included in the cost of acquisition. The examples are:
1) Interest on money borrowed to
purchase asset is part of actual cost of asset. But in case of

Income Tax
asset being used for business or profession refer to chapter

‘Profits & Gain of Business or Profession’.
2) Litigation expenses incurred by
the assessee, who holds shares of a Company, to acquire
better voting rights, in respect of such shares, by filing suit to
get articles of association amended and expenses incurred for
compelling the company to register the shares in the name of
the assessee would from part of cost of acquisition of the
shares.
3) Where a mortgage was created
by the previous owner during his life time and the same is
subsisting on the date of his death, the successor obtains only
mortgagor’s interest in the property and by discharging the
debt he acquires the mortgagee’s interest in the property.
Therefore, the amount paid to clear off the mortgage is the
cost of acquisition.
However the estate Duty paid in respect of inherited
property can neither be treated as part of cost of acquisition nor
cost of improvement.
DEEMED COST OF ACQUISITION

I. COST TO PREVIOUS OWNER [SEC.49 (1)]: The cost to the
previous owner is deemed to be the cost of acquisition to the
assessee in cases where capital asset became the property of the
assessee under any mode of transfer as below:
a) Acquisition of property on any distribution of assets on total or
partial partition of a Hindu Undivided family; or
b) Acquisition of a property under a gift or will; or
c) Acquisition of a property by succession, inheritance or
devolution; or
d) Acquisition of a property on any distribution of assets on the
dissolution of a firm/ AOP/ BOI till 31st March, 1987; or
e) Acquisition of a property on any distribution of assets on
liquidation of a
Company; or
f) Acquisition of a property under a transfer to a revocable or an
irrevocable trust; or
g) Acquisition of a property on any transfer by a wholly owned
Indian Subsidiary Company from its holding Company; or
h) Acquisition of a property on any transfer by an Indian Holding
Company from its wholly owned subsidiary Company; or
i) Acquisition of a property on any transfer, in a scheme of
amalgamation of two Indian Companies as referred to in
Section 47 (vi ); or

Income Tax
j) Acquisition of a property on any transfer, in a scheme of

amalgamation of two foreign Companies as referred to in
Section 47 (vi a); or
k) on any transfer of a capital asset by a Banking Company to the
Banking Institution in a scheme of amalgamation of the
Banking Company with the Banking Institution; or
l) Acquisition of a property by a HUF on conversion of self
acquired property of a member of a Hindu Undivided family
into joint family property after 31-12-1969.
NOTE: 1. Previous owner means the previous owner who actually
paid for the asset.
2. If the cost for which previous owner
acquired the property cannot be ascertained, the cost of
acquisition will be FAIR MARKET VALUE of the asset on the date
on which previous owner became the owner.
3. To find out whether the capital Asset
is short term or long term in the above cases, the previous of
holding of the prevision owner shall be included.
4. The benefit of indexation will be
available from the year in which the asset was first held by the
Current owner.
(II) COST OF SHARES OF AMALGAMATED COMPANY [SEC. 49

(2)]:
Where a person holds shares in a Company which merged with an
Indian Company then in lieu of shares in the amalgamating company
he will get shares in the Amalgamated Company. In such a case, the
cost of shares of amalgamating Company will become the cost of
shares of the amalgamated Company.
NOTE: 1.To find out whether the Capital Asset is short term or long
term in the above case, the period of holding shall be
determined from date of acquisition of shares in amalgamating
company.
2. The benefit of indexation will be available from the year in
which the shares in amalgamated company were allotted.
(III) COST OF SHARES/DEBENTURES ACQUIRED ON

COVERSION OF
DEBENTURES [SEC 49 (2A)]: Where any person holds debenture/
debenture stock/ deposit certificates etc and such debentures etc
are converted into shares or Debentures of that Company. In such a
case, the cost of shares or debentures so converted shall be that
part of cost of debentures etc which has been appropriated towards
shares or debentures.

Income Tax
NOTE: 1.To find out whether or not such shares/debentures are long
term or short term capital asset the period of holding shall be
determined from the date of allotment of such new
shares/debentures.
2. The benefit of Indexation will be available from the year which
such new shares were allotted. (The benefit of Indexation is
not available in case of Debentures).
(IV) COST OF ACQUISTION OF SHARES / SECURITIES

ACQUIRED UNDER EMPLOYEES STOCK OPTION PLAN [SEC.
49(2AA)]: Where the employee holds shares/securities (issued by
his employer Company) offered to him by employer or any other
person under ESOP then cost of acquisition of such shares/ securities
shall be Amount actually paid by the employee.
Note: In case the employee has exercised the option during the
previous year 1999-2000 then cost of acquisition of such shares/
securities shall be fair market value on the date of exercise of such
option.
(V) COST OF ACQUISITION OF THE SHARES IN THE INDIAN

RESULTING COMPANY [SEC 49 (2C)]: Cost of acquisition of
shares in the Indian resulting company shall be calculated by
following formula:
(Cost of acquisition of shares held by the assessee in the Demerged
Company) X
(Net book value of the assets transferred in demerger) / (Net worth
of the Demerged
Company immediately before demerger).
NOTE: 1. Net worth means aggregate of the paid up share capital
and general reserves in the books of account of Demerged
Company immediately before demerger.
2. To find out whether or not such shares in resulting Company
are long capital asset, the period of holding shall be
determined from date of acquisition of shares in Demerged
Company.
3. The benefit of indexation will be available from the year in
which shares in resulting Company are allotted.
(VI) COST OF ACQUISITION OF ORIGINAL

SHARES OF THE DEMERGED COMPANY
[SEC 49 (2D)]: The cost of acquisition of
such shares will be COST OF ACQUISITION
OF ORIGINAL SHARES LESS COST OF
SHARES IN RESULTING COMPANY.

Income Tax
(VII) COST OF ACQUISITION OF ASSETS ACQUIRED BEFORE

01-04-1981 [SEC 55 (2) (6)]: The following cases, the assessee
may take at his option EITHER ACTUAL COST OR THE FAIR MARKET
VALUE OF THE ASSET (other than depreciable Asset) as on 01-04-
1981 as the cost of Acquisition :
(a) Where the capital asset became the property of the
assessee before 01-04-1981; or
(b) Where the capital asset became the property of the
assessee by any mode referred to in section 49 (1) and the
capital asset became the property of the previous owner
before 01-04-1981.
NOTE: 1). This option is not available in case of DEPRECIABLE
assets.
2) This option is not available in case of Goodwill of a Business,
Brand or Trademark associated with business, tenancy rights,
loom hours, route permits and right to manufacture, produce
or process any article or thing, whether self-generated or
purchased.
3) We should take cost of asset or fair market value as on 01-04-
1981 which ever is higher as Cost of acquisition.
(VIII) COST OF ACQUISITION IN CASE OF DEPRECIABLE

ASSETS [SEC 50]: The cost of acquisition in case of Depreciable
Assets is calculated only when the Block of Assets is reduced to zero
for any of the following reasons:
SITUATION ONE: The sale value of the asset sold/transferred along
with scrap value exceeds written down value of the Block in the
beginning of the year and actual cost of asset (s) acquired during
the previous year.
SITUATION TWO: All the assets in the relevant block may be sold
or transferred during the year.
The short term Capital Gain in situation one is as:
Full value of consideration of asset (s) sold or transferred
***
in connection with transfer
***
W. D. V. of the block of assets in the beginning
of the previous year
***
Actual cost of assets acquired during the year and falling in the
same block
***

Income Tax
____
***_
In situation two the net result may be short term capital Gain or loss.
It is also calculated as above.
(IX) COST OF ACQUISITION OF BONUS SHARES [SEC. 55 (2)

(aa)(iii a)] :
The cost of acquisition of any additional financial asset as Bonus
shares (or security or otherwise) which is received without any
payment by the assessee on the basis of his holding any financial
asset shall be determined as follows:
CASE COST OF ACQUISITION
1. If Bonus shares are allotted Fair Market Value as on 1-4-1981
before 01.04.1981.
2. If Bonus shares are allotted NIL.
after 31-3-1981
Note: 1) The period of holding of such shares shall be determined
from the date of allotment of BONUS SHARES.
2) The cost of acquisition of Original shares determined as follows:
a) If such original shares were acquired by the owner (or the
previous owner) before 01.04.1981 then Actual Cost or F.M.V. as on
1-4-1981 w. e. in higher.
b) If such original shares were acquired by the owner (or the
previous owner) on or after 01.04.1981 then Actual Cost.
(X) COST OF ACQUISITION IN CASE OF RIGHT SHARES [SEC.

55(2)(aa)] : The cost of acquisition of original shares, right
entitlement and right shares is as follows :

1. Original shares Actual Cost or F.M.V. as on 1-4-
a) If purchased before 1981 w. e. in higher.
01-04-1981
b) If purchased after Actual Cost.
31.03.1981
2. Right Entitlement which is NIL
renounced by the assessee
in favour of any person
3. Right shares acquired by Amount actually paid by the
the original shareholder assessee for acquiring Right
Shares.
4. Right-Shares acquired by Amount paid to the renouncer of
the person in whose favour Right entitlement plus amount paid

Income Tax
the right entitlement has to the Company for acquiring Right

been renounced shares.
(XI) COST OF ACQUISITION IN CASE OF INTANGIBLE ASSETS

[SEC 55 (2)(a)]: The cost of acquisition of goodwill of business (not
of profession), trade mark or Brand Name associated with Business,
Right to manufacture, produce or process any article/thing or right
to carry on any business, tenancy rights, route permits or loom
hours is determined as follows :

1. Such asset is purchased Actual Cost
2. Such asset is Self NIL
generated
3. Such asset is acquired in Actual Cost to Previous owner
any mode as per section 49
(1)
NOTE :(1) The transfer of self generated asset not relating to

business is not chargeable to tax . e g. Goodwill of profession, a new
formula patented by the Inventor to grow seedless oranges.
(2) If such asset is purchased before 01-04.1981 then Cost of
acquisition shall be Actual Cost. The option of F.M.V. on
01.04.1981 is not available in such case.
4. If such asset is self generated then cost of acquisition will be
NIL EVEN IF SUCH ASSET WAS ACQUIRED BEFORE 01-04-1981
(XII) COST OF ACQUISITION IN CASE OF SLUMP SALE [SEC

50B]: In case of slump sale, the cost of acquisition of capital asset
(being one or more under taking) shall be equal to 'NET WORTH' net
worth means aggregate of total assets of the undertaking as
reduced by value of liabilities as appearing in Books of Account.
NOTE:1) To find out whether capital gain is short term or long term,
the period of ownership of undertaking shall be considered.
2) The benefit of indexation shall not be available.
3) A report in form 3CEA shall be submitted along with return of
income for calculation of net worth (certified by a chartered
accountant).
(XIII) COST OF ACQUISITION OF TRADING & CLEARING

RIGHTS AND EQUITY SHARES ALLOTTED TO THE
SHAREHOLDER OF A RECOGNISED STOCK EXCHANGE IN A
SCHEME OF DEMUTUALISATION OR CORPORATISATION OF A

Income Tax
RECOGNISED STOCK EXCHANGE IN INDIA [SEC 55(2)(ab)]

a) The cost of such equity shares shall be the cost of
acquisition of his original membership of the
exchange.
b) The cost of such trading & clearing rights (who has
been allotted equity shares as per point (a)) shall
be deemed to be NIL.
Note: The period of holding shall be determined from the date of

holding of membership ticket in the old exchange.
ADJUSTMENT OF COST OF ACQUISITION IN CASE OF RECEIPT

OF ADVANCE MONEY [SEC 51]: Where any capital asset was, on
any previous occasion, subject to negotiations for its transfer, any
advance or other money received and forfeited by the assessee in
respect of such negotiations shall be DEDUCTED FROM THE COST OF
ACQUISITION. The following points should be kept in mind:
a) Advance money received by and forfeited by any previous owner
shall not be deducted.
b) Advance money received and forfeited by current owner (i.e.
assessee) shall be deducted.
c) There is no difference between advance or other money received
and forfeited by the assessee. The other money may be deposit
made by proposed purchaser (but not forming part of purchase
consideration) to guarantee the performance of contract.
COST OF IMPROVEMENT [SEC 55(1)(b)]: The cost of

improvement means:
a) Cost of improvement in relation to goodwill of a business or right
to manufacture, process or produce any article or thing is taken as
NIL;
b) Cost of improvement in relation to any other capital asset-
ii) Where the capital asset became the property of the
assessee [or the previous owner in cases specified under
section 49(1)] before 01-04-1981, means all expenses of
capital nature incurred in making any addition to alteration of
the capital asset on or after 01-04-1981 by the assessee (or
the previous owner as above);
iii) in other cases, means all expenses of capital nature
incurred in making any addition or alternation to the capital
asset by the assessee [or the previous owner in a case
specified by section 49(1)].
iv) The cost of Improvement however do not include :
expenditure incurred prior to 01-04-1981

Income Tax
b) any expenditure which is deductible in computing

the income chargeable under the heads 'Income from house
property', 'profit and gains of Business or profession' and
‘Income from other sources’. Only Expenses of CAPITAL
NATURE are to be considered as cost of improvement.
INDEXED COST OF ACQUISITION AND INDEXED COST OF

IMPROVEMENT [SEC 48, Explanation (iii)]: In case of calculation
of long term Capitol gain Indexed cost of Acquisition and Indexed
Cost of Improvement is deducted from full value of consideration.
The Indexed Cost is calculated with the help of Cost Inflation
Index. The central Government has notified 'COST INFLATION INDEX'
for long term Capital gain' as follows:
FINANCIAL COST FINANCIAL COST

YEAR INFLATION YEAR INFLATION
INDEX INDEX
1981-82 100 1996-97 305
1982-83 109 1997-98 331
1983-84 116 1998-99 351
1984-85 125 1999-00 389
1985-86 133 2000-01 406
1986-87 140 2001-02 426
1987-88 150 2002-03 447
1988-89 161 2003-04 463
1989-90 172 2004-05 480
1990-91 182 2005-06 497
1991-92 199 2006-07 519
1992-93 223 2007-08 551
1993-94 244 2008-09 582
1994-95 259 2009-10 632
1995-96 281
The Indexed Cost of Acquisition and Indexed Cost of
Improvement is calculated under Five DIFFERENT Situations as
follows:
SITUATION ONE: CAPITAL ASSET WAS ACQUIRED BY THE
ASSESSEE BEFORE 01-04-1981 [not being modes referred to
in section 49 (1)]:
(a) Indexed Cost of Acquisition:
Fair Market value of asset on Cost Inflation Index for the year
1.4.81 X in which asset is transferred
or
Actual cost of Acquisition to Cost Inflation Index for year

Income Tax
the assessee, w. e. is more 1981-82 (i. e. 100)

(b) Indexed Cost of Improvement:
Cost of improvement on or Cost Inflation Index for the year
after 01-04-1981 X in which asset is transferred
Cost Inflation Index for year in
which improvement took place.
SITUATION 2-CAPITAL ASSET WAS ACQUIRED BY THE
ASSESSEE ON OR AFTER 01-04-1981 [not being modes
referred to in Sec 49 (1)]:
(a) Indexed Cost of Acquisition :
Actual Cost of Acquisition to C.I.I for the year in which asset
the assessee was transferred
X
C.I.I for the year in which asset is
acquired

Cost of Improvement on or C.I.I for the year in which at
after 01-04-1981 asset was transferred
OR X
C.I.I for the year in which
improvement took place.
SITUATION 3: CAPITAL ASSETS ACQUIRED BY THE ASSESSEE
BY ANY MODE REFERRED TO IN SEC 49 (1) BEFORE 01-04-
1981 AND SAME WAS ORIGINALLY ACQUIRED BY PREVIOUS
OWNER BEFORE 01-04-1981:
(a) Indexed Cost Acquisition:
FMV of the asset on 1.4.1981 C.I.I for the year in which asset
OR was transferred
X
Cost of acquisition of C.I.I for 1981-82 (i.e.100)
previous owner, w. e. is more

Cost of Improvement incurred C.I.I for the year in which asset
by Assessee on or after 01- was transferred
04-1981 X
improvement took place.
SITUATION 4: CAPITAL ASSETS ACQUIRED THE ASSESSEE BY

ANY MODE REFERRED TO IN SEC 49 (1) AFTER 31-03-1981
BUT SAME WAS ORIGINALLY ACQUIRED BY PREVIOUS OWNER
BEFORE 01-04-1981:

Income Tax

FMV of the asset on 1.4.1981 C.I.I for the year in which asset was
OR transferred
X
Cost of acquisition of C.I.I for the year in which the asset

previous owner, w. e. is more was acquired by the assessee
Cost of Improvement incurred C.I.I for the year in which the asset
by the assessee and previous was transferred
owner on or after 01-04-1981 X
improvement
took place.
SITUATION 5: CAPITAL ASSETS ACQUIRED BY THE ASSESSEE

BY ANY MODE REFERRED TO IN SEC 49 (1) AFTER 31-03-1981
AND SAME WAS ORIGINALLY ACQUIRED BY PREVIOUS OWNER
ON OR AFTER 01-04-1981:
Cost of acquisition of the C.I.I for the year in which asset was
previous owner transferred
X
C.I.I for the year in which the asset

was acquired by the assessee
Cost of Improvement C.I.I for the year in which other asset
incurred by the assessee and was transferred
previous owner on or after X
1.4.1981
improvement
took place.
INDEXATION NOT ALLOWED: In the following cases, the

indexation is not allowed to find out long term Capital Gain:
-Transfer of bonds or debentures (except Capital Indexed Bonds
issued by the Government (Proviso 3 to Sec 48).
-Transfer of shares/ debentures acquired by a non-resident in
foreign currency in an India Company (Proviso 1 & 2 to Sec 48).
-Transfer of undertaking in a Slump Sale (sec 50 B).
-Transfer of units of unit Trust of India or Mutual Fund covered under
section 10 (23D) purchased in foreign currency by overseas

Income Tax
financial Organisation (also known as offshore funds) (Sec 115AB)

-Transfer of Global Depository Receipt or Bonds of an Indian
Company or share/bonds of public sector Company sold by the
Government and purchased in foreign currency by a Non-Resident
[Sec 115 AC].
-Transfer of Global Depository Receipt purchased in foreign Currency
by an Individual resident in India and employee of Indian Company
(Sec 115ACA).
-Transfer of Securities by foreign Institutional Investors (Sec 115
AD).
-Transfer of foreign exchange asset by a non-resident Indian (Sec
115 D).
NOTE: In case of Depreciable Asset, there is no question of

Indexation as there is always SHORT TERM CAPITAL GAIN in
transfer of Depreciable Assets.
COMPUTATION OF CAPTAL GAIN IN SPECIAL CASES
(1) INSURANCE CLAIM RECEIVED FOR DAMAGE OR

DESTRUCTION OF A CAPITAL ASSET [SEC 45(1A)]: The
following points are to be considered:
a) A Capital asset is damaged/ destroyed due to -
i) Flood, Typhoon, hurricane, Cyclone, earthquake or other
natural calamities; or
ii) Riot or civil disturbance; or
iii) Accidental fire or explosion; or
iv) Action by enemy.
b) The assessee has received compensation under Insurance
during the year.
c) The value of money or Fair Market value of other assets
received (on the date of receipt) shall be ‘full value of consideration'.
NOTE: Where any capital asset is destroyed and there is no
insurance or no insurance compensation is received, there will be no
Capital Loss under section 45 or 45(1A). This loss will be treated as
Dead Loss.
(2) CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE

[SEC 45(2)]: The following points are to be considered:
(a) The capital Asset must have been converted into stock in
trade on or after 01-04-1984 (before this date such Conversion
is not regarded as transfer).
(b) The Capital Gain shall be chargeable to tax in the year in
which such stock in trade (Converted) is sold.

Income Tax
(c)The full value of consideration of such capital asset shall be

the fair Market Value (on the date of such Conversion) of such
capital asset.
(d) Exemption u/s 54 EA, 54 EB or 54EC can be claimed if
specified investment is made with in 6 months from the date of
sale of stock in trade.
(3) CAPITAL GAIN ON TRANSFER OF CAPITAL ASSET BY A

PARTNER/MEMBER TO FIRM/ AOP/BOI [SEC 45(3)]: The
following points are to be considered:
a) A person is partner in a firm or member of a AOP/ BOI;
b) He transfers a capital asset to such firm/AOP /BOI;
c) The amount recorded in the books of account of the
firm/AOP/BOI as value of such asset shall be taken as full value
of consideration.
4. CAPITAL GAIN ON TRANSFER OF A CAPITAL ASSET BY

WAY OF DISTRIBUTION ON THE DISSOLUTION OF A
FIRM/AOP/BOI [SEC 45(4)]: The following points are to be
considered:
a) The transferor is a firm/AOP/BOI;
b) Such firm/AOP/BOI transfers a capital asset to its
partner/member on its dissolution;
c) For computing capital Gain ‘the fair market value’ of the asset
on the date of transfer is taken as full value of consideration.
NOTE: The partner/member receiving such capital asset shall take
actual cost of asset at the value at which it was transferred to him.
5. CAPITAL GAIN ON COMPULSORY ACQUISITION OF ASSET

[SEC 45(5)]: The following points are to be considered:
a) This provision is applicable in case of- i) transfer of a capital
asset by way of compulsory acquisition under any law; or ii) a capital
asset is transferred and consideration is approved or determined by
the Central Government/RBI;
b) The Capital Gain will be taxed in the year in which the
compensation or part there of is first received. The capital gain as
calculated by taking ' INITIAL COMPENSATION' as full value of
consideration.
c) The enhanced compensation is taxed in the year in which such
enhanced compensation is received. In such a case cost of
acquisition and improvement are taken as NIL. The legal expenses
for getting the compensation enhanced are treated as expenses on
transfer.
NOTE: Where the amount of compensation or consideration is

Income Tax
subsequently reduced by any court, Tribunal or other authority, the

capital gain of that year, in which the compensation was taxed, shall
be recomputed by the Assessing Officer with in 4 years from the end
of the year in which such order for reduction of compensation was
passed.
6. SHARES/DEBENTURES ACQUIRED ON COVERSION OF

DEBENTURES [SEC 49(2A)]: Where any person holds
debenture/ debenture stock/ deposit certificates etc and
such debentures etc are converted into shares or
Debentures of that Company. In such a case, the cost of
shares or debentures so converted shall be that part of cost
of debentures etc which has been appropriated towards
shares or debentures.
NOTE: 1.To find out whether or not such shares/debentures are long
term or short term capital asset the period of holding shall be
determined from the date of allotment of such new
shares/debentures.
2. The benefit of Indexation will be available from the year which
such new shares were allotted. (The benefit of Indexation is
not available in case of Debentures).
3. If preference shares are converted into equity shares, it will be
regarded as transfer of preference shares and capital gain on
such transfer shall be on the date of allotment of equity
shares. The full value of consideration shall be fair market
value of the equity shares on the date of allotment of such
equity shares.
7. CAPITAL GAIN ON DISTRIBUTION OF CAPITAL ASSET BY
COMPANY IN LIQUIDATION [SEC 46]: The following points are to
be considered:
a) The Company is under liquidation;
b) Such company distributes capital Assets to its shareholders;
c) Calculate the market value of assets received and add cash
received to this figure;
d) From the amount as per point(c) deduct value of dividend (to
the extent of accumulated profit of the company). This net
value is ' Full value of consideration ' on transfer of shares.
e) If such capital asset received by the shareholder as in point (b)
above is subsequently transferred then the Market value of
asset on the date of distribution shall be the cost of acquisition
of such asset.
8. TRANSFER OF INTANGIBLE ASSETS [SEC 55 (2)(a)]: The
cost of acquisition of goodwill of business (not of profession), trade
mark or Brand Name associated with Business, Right to

Income Tax
manufacture, produce or process any article/thing or right to carry

on any business, tenancy rights, route permits or loom hours is
determined as follows :
1. Such asset is purchased Actual Cost
2. Such asset is Self NIL
generated
3. Such asset is acquired in Actual Cost to Previous owner
any mode as per section 49
(1)
NOTE :(1) The transfer of self generated asset not relating to

business is not chargeable to tax . e g. Goodwill of profession, a new
formula patented by the Inventor to grow seedless oranges.
(2) If such asset is purchased before 01-04.1981 then Cost of
acquisition shall be Actual Cost. The option of F.M.V. on
01.04.1981 is not available in such case.
5. If such asset is self generated then cost of acquisition will be
NIL EVEN IF SUCH ASSET WAS ACQUIRED BEFORE 01-04-1981
9. TRANSFER OF DEPRECIABLE ASSETS [SEC 50]: The

capital gain in case of Depreciable Assets is calculated only when
the Block of Assets is reduced to zero for any of the following
reasons:
SITUATION ONE: The sale value of the asset sold/transferred along
with scrap value exceeds written down value of the Block in the
beginning of the year and actual cost of asset (s) acquired during
the previous year.
SITUATION TWO: All the assets in the relevant block may be sold
or transferred during the year.
The short term Capital Gain in situation one is as:
Full value of consideration of asset (s) sold or transferred
***
in connection with transfer
***
W. D. V. of the block of assets in the beginning
of the previous year
***
Actual cost of assets acquired during the year and falling in the
same block
***
____

Income Tax
***_
In situation two the net result may be short term capital Gain or loss.
It is also calculated as above.
10. CAPITAL GAIN IN CASE OF SLUMP SALE [SEC 50B]: In

case of slump sale, the cost of acquisition of capital asset (being one
or more under taking) shall be equal to 'NET WORTH' net worth
means aggregate of total assets of the undertaking as reduced by
value of liabilities as appearing in Books of Account.
NOTE:1) To find out whether capital gain is short term or long term,
the period of ownership of undertaking shall be considered.
2) The benefit of indexation shall not be available.
3) A report in form 3CEA shall be submitted along with return of
income for calculation of net worth (certified by a chartered
accountant).
11. CAPITAL GAIN IN CASE OF LAND AND BUILDING [SEC

50C]: The following conditions must be fulfilled:
a) There is transfer of land or building or both. Such asset may be
long term or short term capital asset. It may be depreciable or non-
depreciable asset.
b) The sale consideration is less than the value adopted for the
purpose of payment of stamp duty in respect of such transfer of land
or building or both.
If the above conditions are satisfied then there can be
following three situations:
Situation 1: If the assessee accepts the value adopted for
payment of the Stamp duty then full value of consideration will be
equal to the value adopted for payment of the Stamp duty.
Situation 2: If the assessee disputes the value adopted for
payment of the Stamp duty then full value of consideration will be
equal to the value finally accepted for payment of the Stamp duty.
Situation 3: If the assessee claims before the Assessing
Officer that the value adopted for payment of the Stamp duty is
more than the Fair market value then full value of consideration will
be equal to the value adopted for payment of the Stamp duty or Fair
market value which ever is less (In this case the assessee has not
disputed the value while stamp duty proceedings).
12. CAPITAL GAIN PURCHASE BY A COMPANY OF ITS OWN

SHARES OR OTHER SECURITIES [SEC 46A]: Any consideration
received by a shareholder (or holder of other specified securities)
from any company of purchase of its own shares (or other specified
securities) held by such shareholder (or holder of other specified

Income Tax
securities) shall be chargeable to tax. The difference between cost

of acquisition (or indexed cost of acquisition as the case may be)
and full value of consideration shall be treated as capital gains.
13. CAPITAL GAIN ON TRANSFER OF SHARES/ SECURITY BY

AN EMPLOYEE RECEIVED AS STOCK OPTION / SWEAT EQUITY
PLAN [SEC 49(2AA)]: The different situations are discussed as
under:
Situation 1: If the option was exercised by the employee in
the previous year 1999-2000: a) The perquisite of allotment of
shares / securities is taxable in A.Y. 2000-01 (the perk being Fair
market value minus cost of acquisition paid by the employee).
b) If such shares or securities are transferred by the employee
(other than by gift or under irrevocable transfer) then capital gain
shall be sale value of such shares or securities minus fair market
value on the date of acquisition (or indexed cost as the case may
be).
c) If such shares or securities are transferred by gift or under
irrevocable transfer then capital gain shall be fair market value of
such shares or securities on the date of such transfer minus fair
market value on the date of acquisition (or indexed cost as the case
may be).
Situation 2: If the option was exercised by the employee in a
previous year other than 1999-2000: a) The perquisite of
allotment of shares / securities is not taxable.
b) If such shares or securities are transferred by the employee
(other than by gift or under irrevocable transfer) then capital gain
shall be sale value of such shares or securities minus actual cost of
acquisition (or indexed cost as the case may be).
c) If such shares or securities are transferred by gift or under
irrevocable transfer then capital gain shall be fair market value of
such shares or securities on the date of such transfer minus actual
cost of acquisition (or indexed cost as the case may be).
14. CAPITAL GAIN ON TRANSFER OF SECURITY IN DEMAT

FORM [SEC 45(2A)]: The following conditions must be fulfilled:
a) The shares or securities are transferred in DEMAT form.
b) The beneficial owner of such shares or securities shall be charged
tax under head capital gain.
c) The cost of acquisition and period of holding shall be determined
on the basis of First-in-first-out method.
NOTE: With effect from 1st October, 2004 securities transaction tax
is applicable if the equity shares or units of equity oriented mutual
fund are transferred in a recognised stock exchange in India.

Income Tax
15. WITHDRAWL OF EXEMPTION GIVEN IN CERTAIN CASES

[SEC 47A]:
The following three transactions are not regarded as transfer for
the purpose of capital gain when certain conditions are satisfied:
a) Transfer of a capital asset by a holding company to its
wholly owned Indian Company or vice versa [Sec 47(iv)
and (v)];
b) Transfer by a person other than a company of
membership of a recognised stock exchange to a
Company in exchange of shares allotted [Sec 47 (ix)];
c) Transfer where a firm / proprietary concern is succeeded
by a Company [Sec 47 (xiii) and (xiv)].
If the conditions mentioned under above respective sections are not
complied with then the exemption allowed earlier shall be withdrawn
as per section 47A.
a) Transfer of a capital asset by a holding company to its
wholly owned Indian Company or vice versa [Sec 47A(1)]:
Any transfer of capital Asset by a Company to its wholly owned
Indian subsidiary Company or by a wholly owned Subsidiary
Company to its Indian Holding Company is not treated as transfer by
virtue of section 47 (iv)/(v). But in the following cases, the
exemption shall be other withdrawn:
(a) If at any time before the expiry of eight years from the
date of transfer of a capital asset referred to in section 47 (iv)/
(v), such capital asset is converted by the transferee company
into stock in trade of its business.
(b) The holding company ceases to hold whole of the share
capital of the subsidiary Company before expiry of eight years
as aforesaid.
In above cases the capital gain shall be calculated for
transferor Company by treating sale price of the asset as full value
of consideration. The same amount shall be treated as cost of
acquisition of Transferee Company.
b) Transfer by a person other than a company of
membership of a recognised stock exchange to a Company in
exchange of shares allotted: Where the shares allotted by a
company to the transferor in exchange of membership of stock
exchange are transferred with in 3 years from the date of transfer of
membership, the capital gain not charged to tax earlier shall be
deemed to be the income chargeable under head Capital Gains of
the previous year in which such shares are transferred.
c) Transfer where a firm / proprietary concern is succeeded
by a Company: Where the aggregate of the shareholding of the

Income Tax
partners or the shareholding of the sole proprietor, as the case may

be, in the company does not continue to remain 50% of the total
voting power for a period of five years from the date of succession,
the capital gain not charged to tax earlier shall be deemed to be the
income of the SUCCESSOR COMPANY chargeable under head Capital
Gains of the previous year in which such requirement is not
complied with.
16. CAPITAL GAIN IN CASE OF TRANSFER OF SHARES/

DEBENTURES BY NON-RESIDENT [PROVISO 1 TO SEC 48 AND
RULE 115A]: The following procedure is adopted:
a) The tax payer is non-resident (may be Indian or Foreign citizen,
or a Corporate or non-corporate assessee but must not be
covered under sec 115 AC or 115 AD).
b) The capital asset is ' Shares/Debentures' in an Indian
Company purchased by utilising foreign currency (may be
short term or long term capital asset).
c) The full value of consideration and expenses on transfer are
converted into same foreign currency by applying Average
Exchange Rate on the date of transfer.
d) The cost of acquisition is converted into same foreign currency
by applying Average exchange Rate on the date of purchase of
such shares/debentures.
e) The capital gain calculated in foreign currency shall be
converted into Indian currency by applying buying Exchange
Rate on the date of transfer.
NOTE: If a non-resident Indian transfers such capital asset and then
invests the whole or any part of net consideration in any of following
asset with in six months from date of such transfer -
- Shares in Indian company, debentures of/ deposits in Indian
Public Limited Company, Central Government Securities or National
Saving Certificates VI & VII issues, the exemption u/s 115 F is
allowed as follows:
Amount invested in specified securities
Long term Capital Net consideration of foreign currency
Gain X asset (being shares/debentures of Indian
Company)
It is to be noted that exemption u/s 115 F is allowed only on long

term capital gain of Foreign Currency Asset Such asset being
specified securities should not be transferred or converted into
money with in 3 years from the date of acquisition, otherwise the
exemption u/s 115 F shall be treated as long term capital gain of the
year in which such new asset is transferred or converted into

Income Tax
money.
17. CAPITAL GAIN IN CASE OF TRANSFER OF ZERO COUPON

BONDS:
In case of Zero coupon Bonds, the Maturity or Redemption is treated
as transfer. If the period of holding of such bonds does not exceed
12 months then there is Short Capital Gain on these on bonds. But if
the period of holding is more than 12 months then there is Long
Term Capital Gain.
In case of Long Term Capital Gain on such Bonds the tax
liability will be least of: i) 20% of Long Term Capital Gain (after
Indexation); or
ii) 10% of Short Term Capital Gain (without Indexation).
VALUATION OF A CAPITAL ASSET REFERRED TO VALUATION

OFFICER [SEC 55A]: In following cases the Assessing officer may
refer valuation of capital asset to the valuation officer:-
a) Where the value of asset, as claimed by the assessee is in
accordance with estimate made by Registered Valuer and the
Assessing officer is of opinion that the value so claimed is less
than the market value; or
b) Where Assessing officer is of opinion that the fair market value
of the asset exceeds value of asset as claimed by the assessee
by more than 15% of value of asset or by Rs.25001/- or more;
or
c) Where the Assessing officer is of the opinion that having
regard to nature of asset and relevant circumstances, it is
necessary to do so.
EXEMPTIONS FROM CAPITAL GAIN

These exemptions are of two types:
(A) Exemptions of capital gains under various sub-clauses of section
10;
(B) Exemptions u/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G and 54H.
These are discussed in detail as follows:
(A) Exemptions of capital gains under various sub-clauses of
section 10
1. CAPITAL GAIN ON TRANSFER OF UNITS OF US 64 ON OR

AFTER 01.04.2002 [SEC 10(33)]: Any income arising from the
transfer of a capital asset, being a unit of US 1964 shall be exempt
if such transfer takes place on or after 01.04.2002.

Income Tax
2. LONG TERM CAPITAL GAIN ON ELIGIBLE EQUITY SHARES

EXEMPT IF THE SHARES ARE ACQUIRED WITH IN A CERTAIN
PERIOD [SEC 10(36)]: Any income arising from the transfer of a
long term capital asset, being an eligible equity share in a company
shall be exempt if such shares are acquired on or after 01.03.2003
but before 01.3.2004 and held for a period of 12 months or more.
NOTE: Eligible equity share means –
a) any equity share in a company being a constituent of BSE-500
Index of the Stock Exchange, Mumbai as on 01.03.2003 and
the transactions of purchase and sale of such equity share are
entered into on a recognised stock exchange in India;
b) any equity share in a company allotted through a public issue
on or after 01.03.2003 and listed in a recognised stock
exchange in India before 01.03.2004 and the transactions of
sale of such equity share are entered into on a recognised
stock exchange in India;
3. CAPITAL GAIN ON COMPENSATION RECEIVED ON

COMPULSORY ACQUISITION OF AGRICULTURAL LAND
SITUATED WITH IN SPECIFIED URBAN LIMITS [SEC 10(37)]:
Any capital gains (may be short term or long term) arising to an
Individual or a Hindu Undivided Family from transfer of agricultural
land situated in specified urban limits by way of compulsory
acquisition shall be exempt if:
a) The compensation and enhanced compensation is received on or
after 01.04.2004;
b) Such land has been used for agricultural purpose during
preceding two years by such individual or his parent or by such HUF;
c) The land may have been compulsorily acquired before
01.04.2004.
NOTE: If a part of original compensation has been received before
01.04.2004 then exemption on original compensation will not be
available but enhanced compensation received on or after
01.04.2004 shall be exempt.
4. LONG TERM CAPITAL GAIN ON SALE OF SHARES AND

UNITS ON OR AFTER 01.10.2004 [SEC 10 (38)]: Any income on
or after 01.10.2004 from the transfer of a long term capital asset
being an equity share in a company or a unit of an equity oriented
fund shall be exempt if:
a) Such equity shares are sold through a recognised stock exchange,
whereas the units of an equity oriented fund may be sold through a
recognised stock exchange or may be sold to the Mutual fund.
b) Such transaction is chargeable to securities transaction tax.

Income Tax
5. CAPITAL GAIN ON TRANSFER OF AN ASSET OF A POWER

GENERATING UNDERTAKING: Any income arising from transfer of
a Capital Asset, being an asset of an undertaking engaged in the
business of generation, transmission or distribution of power is
exempt if such transfer is made to an Indian Company notified under
section 80 IA(4)(v)(a) before 1.4.2006.
(B) Exemptions u/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G and
54H.
TRANSFER OF RESIDENTIAL HOUSE PROPERTY [SEC 54]: The

following conditions should be satisfied:
a) The capital asset must be residential house property (whether
self occupied or let out) and must be long term capital asset.
b) The assessee (transferor) must be an individual or Hindu
Undivided family.
c) The assessee (transferor) has purchased a residential house
(within a period of one year before the transfer or within 2 years
from the date of transfer) or has constructed a residential house
property (within a period of 3 years after date of transfer).
AMOUNT OF EXEMPTION: The cost of new house property (up
to maximum of capital gain) is exemption under section 54.
NOTE:1) If such new house property is sold with in 3 years from the
date of acquisition/completion of construction then exemption
allowed u/s 54 shall be deducted from cost of acquisition of new
house property.
2) Where the capital gain is not utilised by the assessee for the
purchase/construction of new house property before due date
of furnishing the return, it shall be deposited by him in
'CAPITAL GAIN DEPOSIT ACCOUNT'.
3) Exemption is not limited to one house property.
4) In case of compulsory acquisition of a residential house, the
limit of 1 year/2 years/3 years is calculated from the date of
receipt of compensation.
5) If the amount deposited in 'Capital Gain Deposit Account' is not
utilised with in the stipulated period then such amount not
utilised shall be treated as long term Capital Gain of the
previous year in which the period of three years from the date
of transfer of original asset expires.
TRANSFER OF AGRICULTURAL LAND [SEC 54B]: The following

conditions should be satisfied:
1. The capital assets must be agricultural land and may be

Income Tax
short term or long term capital asset.

2. The assessee (transferor) must be an individual.
3. The agricultural land was used by the assessee or his
parents for agricultural purpose for at least two years
before the date of transfer.
4. The assessee (transferor) has purchased new agricultural
land within a period of 2 years from the date of such
transfer.
AMOUNT OF EXEMPTION: The cost of new agricultural land (up to
maximum of capital Gain) is exemption under section 54 B.
NOTE:1) If such new agricultural land is sold with in 3 years from
the date of acquisitions then exemption allowed u/s 54 B shall be
deducted from cost of acquisition of new land.
2) Where the capital gain is not utilised by the assessee for
purchase of new agricultural land before due date of furnishing
the return, it shall be deposited by him in 'CAPITAL GAIN
DEPOSIT ACCOUNT'.
3. In case of compulsory acquisition of agricultural land the time
limit of 2 years shall be calculated from date of receipt of
compensation.
4. If the amount of deposit in 'Capital Gain Deposit Account' is not
utilised with in the stipulated period, then such amount not
utilised shall be treated as short term long term or capital gain
(as original gain) of the previous year in which the period of
two years from the date of transfer of original asset expires.
COMPULSORY ACQUISITION OF LAND & BUILDING FORMING

PART OF INDUSTRIAL UNDERTAKING [SEC 54D]: The following
conditions should be satisfied:
a) The capital asset must be land or building which forms part of
the Industrial undertaking. The capital asset may be short term
or long term capital asset.
b) The assessee (transferor) may be any person.
c) The above said Capital Asset was used by the assessee for
purpose of Industrial undertaking for at least two years before
the date of COMPULSORY ACQUISITION.
d) The assessee (transferor) has purchased any land or building
or constructed a building within a period of three years from
the date of receipt of compensation.
e) The newly acquired Land or building is used for shifting or re
establishing the said undertaking or setting up another
industrial undertaking.
AMOUNT OF EXEMPTION: The cost of new land or building (up to
maximum of capital gain) is exemption u/s 54D.

Income Tax
NOTE:1) If such new land or building is sold/transferred within 3

years from the date of acquisition/completion of construction
then exemption allowed u/s 54D shall be deducted from the
cost of acquisition of new land or buildings.
2. Where the Capital Gain is not utilised by the assessee for
purchase/construction before the due date of furnishing the
return, it shall be deposited by him in Capital Gain Deposit
Account'.
3) If the amount deposited in Capital Gain Deposit Account is not
utilised within the stipulated period, then such amount not
utilised shall be treated as short term/long term capital gain
(as original gain) of the previous year in which the period of
three years from the date of transfer of original asset expires.
LONG TERM CAPITAL GAIN INVESTED IN CERTAIN BONDS [Sec

54 EC]: The following conditions must be satisfied:
a) There must be a long term Capital Asset.
c) The assessee (transferor) has invested in following securities
within six months from the date of transfer of the asset -
i) Bonds of National Bank for Agriculture & Rural Development;
or
ii) Bonds of National Highways Authority of India; or
iii) Bonds of Rural electrification Corporation Ltd; or
Bonds of National Housing Bank; or
Bonds of Small Industries Development Bank of India.
AMOUNT OF EXEMPTION: The cost of above securities (up to
maximum of capital gain) is exemption u/s 54 EC.
NOTE:1) If such securities are transferred/converted into
money/loan taken on security of such securities with in 3 YEARS
from the date of their acquisition then the amount exempted earlier
shall be treated as long term Capital Gain of the previous year in
which such new securities are transferred.
2) The cost of specified securities considered for exemption u/s
54EC shall not be eligible for deduction u/s 80C.
LONG TERM CAPITAL GAIN OF CERTAIN LISTED SECURITIES/

UNITS/INVESTED IN SPECIFIED EQUITY SHARES [SEC 54 ED]:
The following conditions must be fulfilled:
a) The long term capital Asset must be either a security listed in
any recognised stock exchange in India or a unit of UTI or a
mutual fund (whether listed or not).
b) The assessee may be any person.
c) The assessee (transferor) has invested in shares issued by a

Income Tax
public company registered in India to the public with in six

months from the date of transfer of asset.
AMOUNT OF EXEMPTION: Cost of new shares (up to maximum of
Capital Gains) is exemption u/s 54 ED.
NOTE:1) For this section securities include shares also.
2) The new shares must be equity shares only.
3) If the new equity shares are transferred with in one year from
the date of acquisition then the amount exempted earlier shall
be treated as long term capital Gain of the previous year in
which such securities are transferred.
4) The cost of new shares considered for exemption u/s 54ED
shall not be eligible for the deduction u/s 80C.
5) With effect from 1st October, 2004 securities transaction tax is
applicable if the equity shares or units of equity oriented
mutual fund are transferred in a recognised stock exchange in
India. In such case long term capital gain on transfer of these
assets is exempt from tax u/s 10 (38).
LONG TERM CAPITAL GAIN INVESTED IN RESIDENTIAL HOUSE
PROPERTY [SEC 54F]: The following conditions must be fulfilled:
a) There is long term Capital Asset other than residential House
property.
b) The assessee is an individual or Hindu undivided family.
c) The assessee (transferor) does not own more than one
residential house (other than new house) on the date of
transfer of original asset.
d) The assessee has purchased with in one year before the date
of transfer or two years after the date of transfer or
constructed within 3 years after the date of transfer a
residential house.
AMOUNT OF EXEMPTION:
a) If cost of new house is not less than net consideration of above
said Capital asset then entire capital gain is exempt.
b) In all other cases exemption is equal to
Long term capital Cost of new asset

Gain X Net consideration of capital asset
transferred
NOTE:
1) If such new residential house property is transferred with in 3
years from date of purchase or completion of construction or
the assessee purchases a new residential house with 2 years
from transfer of original asset or constructs a new residential
house with 3 years from transfer of original asset then long

Income Tax
term capital gain exempted earlier shall be treated as long

term capital Gain in the year of transfer/purchase of new
house.
2) The scheme of capital Gain deposit is same as in section 54.
3) If the amount deposited in 'Capital Gain Deposit Account' is not
utilised with in 3 years from the date of transfer of original
assets then proportionate amount as below shall be treated as
long term capital gain:-
Unutilised amount of capital X Original Capital Gain

Gain deposit Account Net Sale consideration
CAPITAL GAIN ON TRANSFER OF ASSETS OF INDUSTRIAL

UNDERTAKING FOR SHIFTING FROM URBAN AREA [SEC 54G]:
The following conditions must be fulfilled:-
a) The capital asset is plant, machinery, land or building or any
right in land or building situated in Urban Area and used for
Industrial undertaking.
c) The assessee has transferred above assets due to shifting to
any area other than urban area.
d) The assessee has with in one year before or 3 years after date
of transfer-
i) purchased new plant or machinery; or
ii) acquired land or building or constructed building; or
iii) shifted original assets; or
iv) incurred expenses on purposes specified in a scheme framed
by Central Government.
AMOUNT OF EXEMPTION: The total amount invested as per point
(d) above (upto maximum of Capital Gain) is exemption u/s 54 G.
NOTE:1) If such new asset is transferred with in 3 years from the
date of acquisition/construction then exemption allowed u/s 54G
shall be deducted from cost of acquisition of such new asset
2) The scheme of Capital Gain Deposit Account is same as in
section 54D.
3) The treatment of unutilised amount of capital Gain Deposit
Account is same as in section 54D.
CAPITAL GAIN ON TRANSFER OF ASSETS OF INDUSTRIAL

UNDERTAKING FOR SHIFTING FROM URBAN AREA TO SPECIAL
ECONOMIC ZONE [SEC 54GA]: The following conditions must be
fulfilled:-

Income Tax
a) The capital asset is plant, machinery, land or building or any

right in land or building situated in Urban Area and used for
Industrial undertaking.
c) The assessee has transferred above assets due to shifting to
SPECIAL ECONOMIC ZONE.
d) The assessee has with in one year before or 3 years after date
of transfer-
i) purchased new plant or machinery for industrial undertaking at
SEZ; or
ii) acquired land or building or constructed building for industrial
undertaking at SEZ; or
iii) shifted original assets to industrial undertaking at SEZ; or
v) incurred expenses on purposes specified in a scheme framed
by Central Government.
AMOUNT OF EXEMPTION: The total amount invested as per point
(d) above (upto maximum of Capital Gain) is exemption u/s 54 GA.
NOTE:1) If such new asset is transferred with in 3 years from the
date of acquisition/construction then exemption allowed u/s 54GA
shall be deducted from cost of acquisition of such new asset
2) The scheme of Capital Gain Deposit Account is same as in
section 54D.
3) The treatment of unutilised amount of capital Gain Deposit
Account is same as in section 54D.
EXTENSION OF TIME LIMIT IN CASE OF COMPULSORY

ACQUISITION (SEC 54H): In case of compulsory acquisition the
time limit under sections 54, 54B, 54D, 54EC and 54F shall be
calculated from dates of receipts of compensation (both initial as
well as enhanced).
TAX RATE ON LONG TERM CAPITAL GAIN [SEC 112]: The long
term capital gain is charged to tax @ 20%.
NOTE: Deductions under chapter VIA are not allowed from long
term capital gain. But rebate under section 88 E is allowed from
Long term capital gain.
OPTIONS FOR TAX ON LONG TERM CAPITAL GAIN ON LISTED

SECURITIES & UNITS: The following conditions must be
fulfilled:
a) The long term capital asset is listed shares/ securities in any
recognised stock exchange in India or unit of UTI or a mutual
fund.
b) The assessee may be any person.

Income Tax
c) The assessee has two options

OPTION I
The assessee may take benefit of indexation of cost of
acquisition and the tax rate shall be 20%.
OPTION II
The assessee may not take benefit of Indexation of cost of
acquisition and the tax rate shall be 10%.
The assessee should opt for that option where the tax
incidence is lower.
NOTE: With effect from 1st October, 2004 securities transaction tax
is applicable if the equity shares or units of equity oriented
mutual fund are transferred in a recognised stock exchange in
India. In such case long term capital gain on transfer of these
assets is exempt from tax u/s 10 (38).
TAX ON SHORT TERM CAPITAL GAIN IN CASE OF EQUITY

SHARES AND UNITS OF EQUITY ORIENTED FUND
TRANSFERRED ON OR AFTER 01.10.2004[ SEC 111A]: The
following conditions must be fulfilled:
a) The assessee may be any person;
b) Such assessee has short term capital gain from transfer of equity
shares and units of equity oriented fund on or after 01.10.2004
through a recognised stock exchange in India or to a mutual fund;
c) Such transaction is charged to securities transaction tax.
In such case, such short term capital gain is taxable @ 10%
(plus surcharge plus education cess). No deduction under chapter VI
A shall be available. However the benefit of NIL slab can be utilised
in some cases.
*****
Chapter-7
INCOME FROM OTHER SOURCES
As per section 56(1), the following conditions must be
satisfied to tax any income under the head ‘Income from other
sources':-
1. There must be an income;
2. Such income is not exempt under the provisions of this Act;
3. Such income is not chargeable to tax under any first four heads of

Income Tax
income.
Thus this head ‘income form other sources’ is residuary head of
income.
METHOD OF ACCOUNTING: Income chargeable under this head is

calculated according to method of accounting regularly employed by
the assessee. The method of accounting may be ‘Cash system’ or
‘mercantile system’. HOWEVER in case of dividends, the method of
accounting has no significance as dividends are taxed on certain
specified basis.
SPECIFIED INCOMES INCLUDED UNDER ‘INCOME FROM

OTHER SOURCES’:-As per section 56 (2), the following incomes are
charged to tax under this head:-
a) dividends (other than dividend referred to in section 115 O);
b) any winnings from lotteries, crossword puzzles, races
including horse races, card games and other games of any sort
or from gambling or betting of any form or nature whatsoever;
c) any sum received by the assessee from his employees as
contribution to any staff welfare scheme (if not taxable under
head 'profits and gains of Business or profession')
d) interest an securities (if not charged to tax under the head
‘profits & gains of business or profession);
e) income from machinery, plant or furniture let out on hire (if
not charged to tax under head profits & gains of business or
profession);
f) income from letting of plant, machinery or furniture along
with building and letting of building is inseparable from letting
of plant, machinery or furniture (if not charged to tax under
head ‘profits & gains of business or profession').
g) any sum received under a key man insurance policy
including bonus (if not taxed as salary or business income).
h) where any sum of money exceeding Rs.25000 is received
without consideration by an individual or a Hindu Undivided
Family from any person after 31.08.2004, the whole of such
sum.
OTHER INCOMES NORMALLY INCLUDED UNDER HEAD INCOME
FROM OTHER SOURCES:- The following incomes are also
chargeable under this head :-
a) Income from sub-letting of a house property by a tenant;
b) Interest on bank deposit and deposit with companies;
c) Interest on loans;
d) Income from royalty (if not charged to tax under head ‘profits
& gains of business or profession');

Income Tax
e) Director’s fee;
f) Director’s commission for standing guarantor to bankers;
g) Director’s commission for underwriting shares of new
company;
h) Ground rent of the plot;
i) Agricultural income from a place out side India;
j) Examination fees received by a teacher from a person other
than employer;
k) Insurance commission received by agent;
l) Mining rent and royalties;
m) Casual income;
n) Annuity received as per will, contract or trust deed
(excluding annuity payable by employer which is charged to
tax under the head ‘Salaries’);
o) salary received by a member of parliament;
p) interest on securities issued by foreign government;
q) family pension received by family members of a deceased
employee;
r) interest on employee’s contribution to unrecognized
provident fund (at the time of retirement or leaving the job
etc.).
s) income from undisclosed sources;
t) gratuity paid to a director who is not employee of the
company;
u) income form racing establishment;
v) compensation received for use of a business asset;
w) annuity received by lender of trade mark;
x) income form granting grazing rights;
y) interest received on refund of income tax.
NOTE: - 1. The Supreme Court has held that interest received by
the assessee from bank on a fixed deposit is income in the hands of
the assessee and there could be no deduction there from unless
there is a law permitting such deduction. The interest on loan taken
by the assessee on the security of fixed deposits did not go to
reduce the income by way of interest on the Fixed Deposits as there
was no provision for deduction of such interest on loan.
2. The interest earned on short term investment of funds
borrowed for setting up of factory during construction of factory
before commencement of business has to be assessed as income
from other sources and it cannot be held to be non-taxable on the
ground that it would go to reduce interest liability on borrowed
amount which could be capitalised.
TAXABILITY OF DIVIDEND [SECTION 56 (2) (i)]:-Dividends can

Income Tax
be of three types:-
a) Dividends declared by a domestic company;
b) Dividends or any other income distributed by unit trust of
India ;
c) Dividends declared by a foreign company.
Any amount declared distributed or paid by a domestic company by
way of dividends as per section 115 O (interim or final) on or after
01.04.2003 (whether out of current or accumulated profits) shall be
exempt in the hands of shareholders.
Similarly income received (other than Capital Gain on transfer of
such units) in respect of units from the Administrator of the specified
undertaking or the specified company or a Mutual Fund specified
under section 10(23D) shall be exempt.
Dividend from a Foreign Company or deemed dividend shall be
TAXABLE under the head ‘Income from other sources’.
NOTE: 1. The dividend from a Domestic Company which is exempt
under section 10(34) includes deemed dividend but shall not include
deemed dividend under section 2(22) (e), i.e. loan or advance given
by a closely held company to a specified shareholder or concern.
2. Since dividends from a domestic company is exempt, no
deduction of any expense shall be allowed for such dividends from
other taxable incomes under head ‘income from other sources.
3. The domestic company is liable to pay corporate dividend tax on
such dividend @ 12.5% plus surcharge @ 10% plus education cess
@ 2%.
DIVIDEND-MEANING THERE OF: - Dividend in its common

parlance means any sum paid to or received by a shareholder
proportionate to his shareholding in a company out of the total sum
distributed. As per section 2 (22), dividend includes the following
disbursements by the company to the shareholders, to the extent of
accumulated profits.
a) Any distribution by a company to the extent of
accumulated profits involving the release of the assets of
the company [Section2 (22) (a)]:- Any distribution by a company
to the extent of accumulated profit whether capitalised or not, if
such a distribution entails the release by a company to its
shareholders of all or any part of the assets of the company.
However only capitalization of accumulated profits by
issue of bonus shares to equity shareholders does not entail the
release of assets of the company and hence shall not be deemed as
dividend.
Two conditions are essential for treating a distribution as deemed
dividend:

Income Tax
i) the company should possess accumulated profit;

ii) such accumulated profits are distributed in cash or in kind.
Where the distribution is in kind, the market value of the asset (and
not the book value) shall be deemed dividend in the hands of
shareholders.
NOTE:- The provisions of section 2(22) (a) are not attracted in case
where a company merges into another company is scheme of
amalgamation.
b) Distribution of debentures/deposit certificates to
shareholders and bonus shares to preference shares [section
2 (22) (b)]:-
i) Any distribution to shareholders (equity or preference) by a
company of debentures, debenture stock or deposit it certificates in
any form, with or without interest to the extent of accumulated
profit whether capitalised or not; and
ii) any distribution to its preference shareholders of shares by
way of bonus, to the extent to which the company possesses
accumulated profit, whether capitalized or not.
c) Distribution to shareholders on liquidation of the
company [section 2(22) (c)]:- Any distribution made to the
shareholder of a company on its liquidation, to the extent to
which the distribution is attributable to the accumulated profits
of the company immediately before its liquidation whether
capitalized or not.
NOTE:-The provisions of section 2(22) (c) are not attracted in case
where a company merges into another company in a scheme
of amalgamation.
d) Distribution on reduction of share capital [sec. 2(22)
(d)]:- Any distribution to its shareholders by a company on
reduction of its capital to the extent of accumulated profits of the
company immediately before date of resolution permitting reduction
of capital, whether capitalized or not.
NOTE:- Under sub clause (c) and (d) above, deemed dividend shall
not include any distribution to shareholders on liquidation or
reduction of capital of the company:
a) in respect of any shares issued for full cash consideration,
where the holder of the share is not entitled, in the event of
liquidation to participate in the surplus assets.
b) in so far as such distribution is attributable to capitalized
profits of the company representing bonus shares allotted to
equity shareholders in previous year 1964-65.
e) Loans /advances to certain shareholders/concerns [sec.
2(22) (e)]:- Any payment by a company, (other than a
company in which the public is substantially interested), of any

Income Tax
sum (whether representing a part of assets of the company or

otherwise) by way of advance or loan to the extent of
accumulated profits (excluding capitalized profits) to:-
i) an equity shareholder who is beneficial owner of shares
holding not less than 10% of voting power; or
ii) any concern in which such shareholder (holding not less than
10% voting power) is a member /partner and has substantial
interest (holding not less then 20% voting power/profit) in that
concern.
iii) any person on behalf, or for the individual benefits, of any such
shareholders (holding not less than 10% voting power).
Dividend does not include the following:
(a) any advance or loan to a shareholder or such concern by a
company in ORDINARY COURSE OF BUSINESS, where lending
of money is substantial part of business of the company.
(b) Any dividend paid by a company which is set off by the
company against the whole or any part of loan or advance
previously paid by it and which has been treated as deemed
dividend under section 2 (22) (e).
(c) Any distribution to shareholders on liquidation or reduction of
capital of the company under clause (c) or (d) of section 2(22)
in respect of any shares issued for full cash consideration,
where the holder of the share is not entitled, in the event of
liquidation to participate in the surplus assets
(d) Any payment made by a company on purchase of its own
shares from a shareholder in accordance with provision of
section 77A of the Companies Act 1956.
(e) Any distribution of shares pursuant to demerger by resulting
company to the shareholders of demerged company.
BASIS OF CHARGE OF DIVIDEND [SECTION 8]:- Method of
accounting does not affect the basis of charge dividend income.
Different types of dividends are taxable as follows:-
a) Normal Dividend: - Dividend declared at annual general
meeting is income of previous year in which it is declared.
b) Deemed Dividend: - Notional dividend under section 2(22) is
treated as income of previous year in which it is paid.
c) Interim Dividend: - Interim dividend is deemed to be income
of previous year in which the amount of such dividend is
unconditionally made available by the company to its
shareholders (i.e. date of issue of dividend warrant).
PLACE OF ACCRUAL [SECTION 9(1) (iv)]:- Dividend paid by
Indian company is deemed to accrue or arise in India.
GROSSING UP OF DIVIDEND: - Dividend is taxable in the hands of
a person whose name appear in the register of members and is

Income Tax
taxed on gross amount where gross amount is calculated as:

= Net Dividend x 100
(100-rate of T.D.S.)
DEDUCTIONS FOR EXPENSES FROM DIVIDEND INCOME
[SECTION 57(i) & 57 (iii)]:- The following expenses are allowed as
deduction from dividend income:-
a) Collection charges: - Any reasonable sum paid by way of
commission or remuneration to bank or any other person for
the purpose of realizing the dividend.
b) Interest on loan: - Interest on money borrowed for
purchasing the shares can be claimed as deduction. The
interest can be claimed even if no income is earned as
dividend on such shares.
Note:- If interest is payable outside India, it shall be allowed as
deduction only if tax has been deducted at source.
c) Any other expenditure: - Any other expenditure wholly and
exclusively for earning such income can be claimed as
deduction. For example legal and traveling expenses incurred
for protecting dividend income would be deductible.
NOTE:- 1. Dividend is chargeable to tax even if the company has
declared dividend out of exempted income.
2. The shareholder is liable to pay tax on entire dividend income
whether or not he was shareholder for entire period for which
dividend is declared.
WINNING FROM LOTTERIES, CROSSWORD PUZZLES, HORSE

RACES AND CARD GAMES [SEC 56(2)(ib)] :- Any winning from
lotteries, crossword puzzles, races including, horse races, card
games and other games of any sort, gambling or betting of any form
or nature whatsoever are taxable under the head income from other
sources.
NOTE:-1. No deduction in respect of any expenditure in connection
with such income shall be allowed.
2.. Winnings from lottery does not include amount foregone in
favour of government agency conducting lotteries.
3. Income of agent/ trader in respect of prize on unsold/unclaimed
lottery tickets in possession of agent/trader is business
income.
GROSSING UP OF LOTTERY INCOME ETC.:- The tax is to be
deducted from income from winning from lotteries, horse races and
crossword puzzles. The net winning is to be grossed as follows:-
(Net winning from lotteries/horse races/Crossword puzzles)X 100
(100-rate of
T.D.S.)

Income Tax
NOTE:- 1. No T.D.S. is deducted at source of income from

lottery/crossword puzzles does not exceed Rs. 5,000 ( in case of
horse race income this amount is Rs. 2,500).
2.The rate of T.D.S. is 30% plus surcharge (if applicable) plus
education cess @ 2%.
RATE OF TAX ON WINNINGS FROM LOTTERIES ETC.
(SEC.115BB):-This income is taxable @30% plus surcharge (if
applicable) plus education cess @ 2% on gross winnings.
NOTE:-1. No deduction under sections 80C to 80U is allowed from
such income.
INTEREST ON SECURITIES [SEC. 56(2) (id)]:- The securities

refer to debt which is secured. The securities may be divided into
four categories:-
a) securities issued by Central/State Government;
b) debentures/bonds issued by local authority;
c) debentures/bonds issued by companies;
d) debentures/bonds issued by a corporation established by a
central, State or Provincial Act. (i.e. statutory corporations).
CHARGEABILITY OF INTEREST ON SECURITIES: - Interest
securities is charged on cash basis or due basis as the books of
accounts are maintained. But in case, no system of accounting is
followed then it shall be taxable on due basis.
DUE DATE OF INTEREST:-Interest as securities does not accrue
every day as per period of holding of security. It becomes due on
dates specified on securities. The person who is registered owner of
the security on the due date shall be entitled to receive interest for
the period irrespective of his period of holding.
INTEREST ON SECURITIES EXEMPT FROM TAX [SEC.10 (15)]:-
Interest on following securities is exempt from tax:-
a) 12 year national saving annuity certificates; national defence
gold bonds 1980; special bearer bonds 1991; treasury deposit
(saving) certificate; P.O. cash certificates (5 years); National
plan certificates (10 years / 12 Years); P.O. national saving
certificates (12 years / 7 years); P.O. saving bank account;
public account of post office saving account rules (interest
upto Rs. 5000); P.O. cumulative time deposit; special deposit
scheme 1981; and Non-resident (Non-repartriable) rupee
deposit scheme.
b) Interest on 7% capital investment bonds (for individual and
H.U.F.).
c) Interest on 9% relief bonds (for individual and H.U.F.).
d) Interest on notified bonds/ debentures of public sector

Income Tax
company.
e) Interest received by non-resident Indian from notified bonds
purchased in foreign currency.
f) Interest on deposits made by a retired government or public
sector employee out of money due to him on retirement in
such scheme for a lock in period of three years.
g) Interest on securities held by the welfare commissioner,
Bhopal gas victim, Bhopal.
h) Interest a gold deposit bonds, 1999.
i) Interest on notified bonds issued by a local authority.
GROSSING UP OF INTEREST:- Gross interest on securities is
chargeable to tax. If net interest (after deducting T.D.S.) in given
then it has to be grossed up.
In case of government securities, no grossing up is required as
there is no T.D.S. however in case of following securities grossing up
is required :-
i) tax free non-government securities.
ii) less tax non-government securities.
100
Gross interest = Net interest X (100- rate of TDS)
The rates of T.D.S. are as under :-
a) In case of listed non-government securities – 10% plus
surcharge (if applicable) plus education cess @ 2%.
b) In case of unlisted Non-government securities -20% plus
surcharge. (if applicable) plus education cess @ 2%.
DEDUCTIONS FOR EXPENSES FROM INTEREST ON
SECURITIES:-The deductions for interest on securities are same as
in case of dividend.
AVOIDANCE OF TAX [SEC. 94]:- If an assessee tries to avoid tax

on interest on securities, he will be taxed as per section 94(1) and
94(2) as follows:-
Bond washing Transaction [sec. 94(1)]:- If the owner of any
securities sells/transfers any securities and buys back or re-acquires
the same or similar securities and if the interest on such securities is
receivable by any other person, such interest shall be deemed to be
income of transferor and not of the transferee.
Sale-Cum interest [sec. 94 (2)]:- If an assessee having beneficial
interest in securities during the previous year, sells them in such a
way that either no income is received or income received is less
than the sum he would have received if interest had accrued from
day to day, then income from such securities for such year shall be
income of transferor and not of the transferee.
NOTE:-The above provisions under section 94(1) or 94(2) are not

Income Tax
applicable if the owner proves that:-

a) There has been no avoidance of income tax; or
b) The avoidance of income tax was EXCEPTIONAL and NOT
SYSTEMATIC and that there was no avoidance of income tax by
such a transaction in any of three preceding years.
LOSS FROM PURCHASE AND SALE OF SECURITIES NOT

ALLOWED U/S 94(7): Where –a) any person buys or acquires any
security or unit with in a period of 3 months before the record date;
b) such person sells or transfers such securities with in a period of
3 months after such record date; OR
sells or transfers such units with in a period of 9 months after
such record date;
c) the dividend or income on such securities or unit is exempt
from tax;
then, the loss, if any, arising to him on account of such purchase and
sale of securities or unit (subject to maximum of dividend or income
received/ receivable) shall be ignored for computing his income
chargeable to tax.
BONUS STRIPPING U/S 94(8): Where –a) any person buys or
acquires any unit with in a period of 3 months before the record
date;
b) such person is allotted or is entitled to additional units on the
basis of such units acquired with making any payment;
c) such person sells or transfers such units (while continuing to
hold all or any of additional units) with in a period of 9 months
after such record date;
then, the loss, if any, arising to him on account of such purchase and
sale of units shall be ignored for computing his income chargeable
to tax.
Further, the amount of loss so ignored shall be deemed to be the
cost of acquisition of such additional units as are held by him on the
date of such sale or transfer.
INCOME FROM LETTING OUT MACHINERY, PLANT OR

FURNITURE [SEC. 56(2) (ii)]:- Income from machinery, plant or
furniture belonging to the assessee and let on hire is taxable as
income from other sources if the same is not taxable under the
head’ Profits and gain of business or profession’.
INCOME FROM LETTING OF BUILDING WITH MACHINERY,

PLANT OR FURNITURE [SEC. 56(2) (iii)]:- If letting of building is
inseparable from letting of machinery, plant or furniture then
income from such letting is taxable under the head ‘income from

Income Tax
other sources’ if the same is not taxable under head ‘profits and
gains of business or profession’.
DEDUCTIONS ALLOWED FOR LETTING OF MACHINERY, PLANT
OR FURNITURE WITH/WITHOUT BUILDING [SEC. 57 (ii) and
(iii)]:- The following deductions are allowed:-
a) Current repairs to the premises owned [as per section 30 (a)
(ii)].
b) Insurance premium of the premises owned [as per sec. 30
(c)].
c) Repair and insurance of machinery, plant or furniture [as
per section 31].
d) Depreciation [as per section 32].
e) Any other revenue expenditure [as per section 37].
INCOME TO INCLUDE GIFT OF MONEY FROM UNRELATED

PERSONS ON OR AFTER 01.09.2004 [SEC. 56 (2) (v)]: The
following conditions must be fulfilled:
a) The assessee is an Individual or Hindu Undivided Family (may
be resident or non-resident);
b) Such assessee has received any sum of money exceeding
Rs.25000 without consideration on or after 01.09.2004;
c) The sum so received does not fall in the exception list.
If all of the above conditions are fulfilled then whole of such sum
received will be taxable in the hands of the assessee under head
‘Income from other sources’.
EXCEPTION LIST: Amounts received under following circumstances
are not treated as income: a) Sum of money received from a
relative; or
b) Sum of money received on occasion of marriage of the
individual; or
c) Sum of money received under a will or by way of inheritance;
or
d) Sum of money received in contemplation of death of the payer.
RELATIVE: It covers: 1) spouse of the individual;
2) brother or sister of the Individual;
3) brother or sister of the spouse of the Individual;
4) brother or sister of either of the parents of the Individual;
5) any lineal ascendant or descendant of the individual;
6) any lineal ascendant or descendant of the spouse of the
individual;
7) spouse of a person referred to in points 2 to 6 above.
FAMILY PENSION RECEIVED BY LEGAL HEIRS OF DECEASED

EMPLOYEE: - The family pension received by legal heirs of

Income Tax
deceased employee is taxable under head income from other

sources. From this family pension standard deduction @33⅓% of
such pension or Rs. 15,000 w.e. is less is allowed under section 57
(iia).
EMPLOYEES CONTRIBUTION TO STAFF WELFARE FUND (SEC

56(2) (ic)]:- Employee’s contribution to staff welfare schemes is
taxable under this head if it is not taxable under head ‘profit and
gains of business or profession’. If such sum is deposited by the
assessee in the relevant fund account on or before due dates then
such sum shall be allowed as deduction under section 57 (ia).
ANY OTHER INCOME TAXABLE UNDER THIS HEAD: - If there is

any income taxable under this head (other than those discussed
above) then deduction will be allowed for any revenue expenditure
(as per section 37).
AMOUNTS NOT DEDUCTIBLE FROM INCOME FROM OTHER

SOURCES [SEC. 58]:- The following amounts are not deductible:-
a) Personal expenses of the assessee.
b) Interest paid outside India on which tax has not been deducted
at source.
c) Salaries paid outside India on which tax has not been deducted
at source.
d) Any expenditure referred to in section 40 A. like excess
payment to relatives, cash payment in excess of Rs. 20,000.
e) Income tax/wealth tax paid.
f) Expenses incurred for earning casual income. However the
expenses on owing and maintaining race horses shall be
DEEMED INCOME CHARGEABLE TO TAX [SEC. 59]:- The section

59 has same provisions as per section 41 (1). Accordingly where any
deduction/allowance is allowed in any year under this head and is
recovered later on, then such amount recovered shall be taxable in
the year of recovery under head ‘Income form other sources'.
*****

Income Tax
CHAPTER 8
CLUBBING OF INCOME
Generally, an assessee is taxed in respect of his own
income. But there are cases where the assessee makes an attempt
to reduce his tax bill by transferring his asset to family member or
by arranging his sources of income in such a manner that tax
incidence falls on other but benefit of income is derived by him
directly or indirectly. So the provisions under section 60 to 64 are
provided to counteract these practices of tax avoidance which are
as following:
(a) Income of other persons included in an assessee's total Income
(Sec 60 to63); or
(b) Income of other persons included in the Individual’s Total Income
(Sec 64).
(A) INCOME OF OTHER PERSONS INCLUDED IN THE
ASSESSEE'S TOTAL INCOME
(1) Transfer of Income where there is no
transfer of Assets (Sec.60): Where there is
transfer of an income by a person to another
person, without the transfer of the asset from
which the income arises, such income shall be
included in the total Income of the transferor.
(2) Revocable Transfer of Assets (Sec .61):
Where there is revocable transfer of assets by a
person to another person, any income
arisen/derived from such assets shall be
included in the total income of the transferor.
Revocable transfer of asset-Meaning (Sec. 63): A transfer of

Income Tax
asset is revocable if-

a) it contains any provision re-transfer (directly or indirectly) of the
whole or any part of income or asset to the transferor during the life
of beneficiary or transferee as the case may be; or
(b) it gives the transferor a right to re-assume power directly or
indirectly over the whole or any part of the income or assets
during the life time of the beneficiary or the transferee as
the case may be.
NON-APPLICATION OF SEC 61 (SEC.62): In the following cases
the provision of sec 61 shall not apply:
(a) In case of transfer by way of trust, the transfer is not
revocable during the life time of the beneficiary.
(b) In case of any other transfer, the transfer is not revocable
during the life time of the transferee;
(c)In case the transfer is made before 01-04-1961, the transfer
is not revocable for a period exceeding 6 years.
These provisions of exception to section 61 are applicable if the
transferor derives NO DIRECT OR INDIRECT BENEFIT FROM SUCH
INCOME.
(B) INCOME OF OTHER PERSONS INCLUDED ONLY IN

INDIVIDUAL'S TOTAL INCOME
(1) REMUNERATION OF SPOUSE FROM A CONCERN IN
WHICH OTHER SPOUSE HAS SUBSTANTIAL INTEREST (SEC: 64
(1) (ii)): Any remuneration (Salary, Commission, fees or any other
form of remuneration) derived by a spouse from a concern in which
the other spouse has a substantial interest shall be clubbed in the
hands of the spouse who has a substantial interest in that concern.
However, remuneration which is solely attributable to the
application of technical or professional knowledge and experience of
the spouse shall not be clubbed.
NOTE :(1) Substantial Interest means if the assessee (individually
along with his relatives) beneficially holds at least 20% of voting
power in a company or at least 20% of profits in a concern company
at any time during the previous year.
(2) Relatives means husband, wife, brother, sister or any lineal
ascendant/ descendant of that individual
(3) Where both the husband and wife have a substantial interest
in the concern and both receive the remuneration from such
concern, the remuneration shall be included in total income of
husband or wife whose total income, excluding such
remuneration, is greater. Once the income is included in total
income of other spouse it shall be clubbed as such in
subsequent years unless the assessing officer is satisfied that

Income Tax
it is necessary to do so.
(2) Income from assets transferred to the spouse (Sec 64

(i)(iv)) : Any income arising directly or indirectly to the spouse
of such individual from assets (other than house property)
transferred directly or indirectly to the spouse of such
individual otherwise than for adequate consideration or in
connection with agreement to live apart shall be included in
the income of such individual.
NOTE :1. This provision is not applicable to house property as in
that case individual is deemed owner of such house property.
2. The income from transferred assets shall not be clubbed if:
(a) the transfer is for adequate consideration; or
(b) the transfer is to live apart (as agreed), or
(c ) the relationship of husband and wife does not exist, either at the
time of transfer of such asset or at the time of accrual of income.
(3) If any property is acquired by the wife out of an allowance
given by her husband for her personal exp (i. e. pin money)
then the above provision of clubbing shall not apply.
(4) If the asset transferred as above has changed shape and
identification then the income from such changed asset shall also be
clubbed.
3. INCOME FROM ASSETS TRANSFERED TO SON'S WIFE

(SEC .64 (i) (vi)) : Any income which arises from assets transferred
directly or indirectly by an individual to his son's wife after 01-06-
1973, otherwise than for adequate consideration, shall be included
in the income of the transferor.
NOTE : If the asset transferred directly or indirectly an individual to
his spouse or son's wife are invested by such transferee :-
(i) in a firm as capital as capital contribution of partner,
them amount to be clubbed in transferor's hand is :
Amount invested by transferee
Interest on capital out of assets transferred with out
from firm X adequate consideration on first
day of previous year
--------------------------------------------------------------------------------
-
Total investment by the transferee as on first day of
previous year.
ii) in any business (except as point (i) above), then the

income to be included in the hands of transferor is :

Income Tax
Income of from Amount invested by transferee

Business X out of assets transferred with out
adequate consideration on first
day of previous year
-----------------------------------------------------------------------------------------------
Total investment by the transferee as on first day of previous year.
4. INCOME FROM ASSETS TRANSFERRED TO ANY PERSON

FOR BENEFIT OF SPOUSE (SEC. 64 (i) (vii)) : Where an asset is
transferred by the individual to some other person or Association of
persons, without adequate consideration, for the benefit of the
spouse of such individual (as well as for other persons), income on
such asset to the extent of benefit accruing to the spouse shall be
included in total in come of such individual.
5. INCOME FROM ASSETS
TRANSFERRED TO ANY PERSON
FOR BENEFIT OF SON'S WIFE
(SEC. 64 (i) (viii)) : Where an
individual transfers any assets after
01.06.1973 to any person or
association of persons otherwise
then for adequate consideration for
the benefit of son's wife (as well as
other persons), in come from such
asset to the extent of benefit
accruing to the son's wife shall be
included in total income of such
individual.
6. INCOME OF MINOR CHILD (SEC-
64 (IA)) : All income arising or
accruing to the minor child shall be
clubbed in the income of that parent
whose total income excluding
income of minor child is greater.
Where, however, the marriage of the
parents does not subsist, the income
of minor child will be included in the
income of that parent who maintains
the child in the previous year.
NOTE :1. The clubbing is not done if minor child is suffering from
disabilities specified under section 80 U or minor child earns in come
from his skill, talent or manual labour.
2. The income arising to minor married daughter is clubbed.
3. There is exemption upto Rs 1500 per minor child under

Income Tax
section 10(32).
(7) INCOME FROM SELF ACQUIRED PROPERTY CONVERTED
TO PROPERTY OF H.U.F. (SEC.64 (2)) : Where an individual
after 31.12.1969 (a) converts his separate property as property of H.
U. F; or
(b) throws the property into common stock o the family; or
(c) transfers his individual property to the family;
otherwise than for adequate consideration then the income from
such property shall continue to be included in the total income of
the individual.
If such property has been subject matter of partition either
(another partial or total) among the members of the family, the
income from such converted property as received by the spouse on
partition shall be deemed to arise to the transferor.
NOTE : 1. Income is to be clubbed as per above provision but
income on in come can not be clubbed in the hands of transferor.
2. Clubbing of Income means clubbing of loss also.
*****
CHAPTER 9
SET OFF OR CARRY FORWARD & SET OFF OF LOSSES
Income tax is charged on total Income of a person during the
previous year. Such person may have income under 'FIVE' different
heads of Income. He may have income from different sources but
under same head of Income. There may be cases where 'NET
INCOME' from a particular source or head of Income may be a Loss.
This loss may be set off against other sources or head as per
provisions given under section 70 to 80 of Income Act.
This process can be covered in following three steps:

(a) STEPI : 1 Inter source adjustment under same head of
Income
(b) STEPI : 2. Inter head adjustment in the same assessment
year.
(c) STEPI : 3. Carry forward of a loss and set off in next
assessment year (s).
(A) INTER-SOURCE ADJUSTMENT (SEC. 70) : If net result for

any assessment year in respect of any source under any head of

Income Tax
income is a loss, then the assessee is entitled to have the amount of

such loss set off against his income from any other source under
SAME HEAD OF INCOME. This may also be called INTRA HEAD
ADJUST MENT. But there are certain EXCEPTIONS as follows:
(a) Loss from speculation Business: Loss from speculation
Business can be set off only against profit from speculation
business.
(b) Long Term Capital Loss: From assessment year 2003-04,
long term Capital Loss can be set off only from long term
Capital Gain.
(c)Loss from business of owning and maintaining race horses:
Loss incurred in the business of owning and maintaining race
horses. Can be set off only from profits from business of owing
and maintaining race horses.
(d) Loss cannot be set off from winnings from lotteries: No
loss can be set off from winnings from lotteries, crossword
puzzles etc.
NOTE:
(1) Inter source adjustment can be made even in case of clubbing
of Income under section 64.
(2) If income from particular source is EXEMPT then loss
from such source cannot be set off against income chargeable
to tax.
(B) INTER HEAD ADJUSTMENT (SEC. 71) : If net result of

computation made for any assessment year in respect of any head
of income is Loss, then the same can be set off against income from
other heads. But there are certain EXCEPTIONS as follows:
(a) Loss from speculation Business: Loss from speculation
Business cannot be adjusted from any income under other
head (It can be adjusted only from profit from speculation
Business).
(b) Loss under head Capital Gains: Loss under head 'Capital
gains' cannot be adjusted from any income under other
head. (Long term capital Loss can be adjusted from long
term capital gains. Short term capital Loss can be adjusted
from Long term as well as short term capital gain).
(c) Loss from business of owning and maintaining race
horses: Loss from business of owning and maintaining race
horses cannot be adjusted from any income under other
head. (It can be adjusted only from profit from business of
owning and maintaining race houses).
(d) Loss cannot be set off from wining from lotteries etc:

Income Tax
No loss under any head can be adjusted from lotteries,

crossword puzzles etc.
(e) Business or Profession Loss cannot be set off against
Salary Income: With effect from A.Y. 2005-06, loss from business
or profession cannot be set off against income under head ‘Salaries’.
NOTE :(1) Before making inter head adjustment, the assessee must
make inter-source adjustment.
(2) As No order of priority is given in the Act, the
assessee should try to first set off those losses which cannot
be carried forward next year.
(C) CARRY FORWARD AND SET OFF OF LOSSES: If a Loss

cannot be set off under same head or under different head (s) in the
same assessment year. Then such loss can be carried forward and
set off against income of subsequent assessment year (s).
ONLY FOLLOWING LOSSES CAN BE CARRIED FORWARD:
(a) House Property Loss (from assessment year 1999-2000);
(b) Business Loss (Speculative or Non-speculative);
(c) Capital Loss (Short term or Long term);
(d) Loss from owing and maintaining race horses.
NOTE: Such losses can be carried forward only if loss has been
determined by the Assessing officer from a return of loss submitted
by the Assessee on or before due date of filing the return under
section 139 (1). But Loss under head House property' and
Unabsorbed depreciation can be carried forward return even if
return of Loss is not submitted on or before due date.
CARRY FORWARD AND SET OFF OF LOSS FROM HOUSE

PROPERTY (SEC.71 B) : A Loss under the head house property, if
could not be set off in the same assessment year from other heads
of income, will be allowed to be carried forward for EIGHT
assessment years and set off from income from house property. But
such loss must belong to assessment year 1999-2000 or afterwards.
CARRY FORWARD AND SET OFF OF BUSINESS LOSS OTHER
THAN SPECULATION LOSS (SEC-72): The right of carry forward
and set off of loss arising from a business or profession is subject to
following restrictions:
1. Loss can be set off only against
Business Income: A loss can be carried forward and set off
against the profits of any business or profession in a
subsequent year (not necessarily same business/profession in
which loss has been incurred). For this purpose, business profit
would include profit derived from business activity but

Income Tax
assessable under head other then 'Profits and Gains of

business or profession. Example: Dividend Income from shares
held as stock in trade.
2. Losses can be carried forward by the
person who incurred the loss: The loss can be carried
forward and set off against the profits of the assessee who
incurred the loss. However, this rule has following exceptions :
(a) Accumulated business loss of an amalgamating company
(under section 72 A);
(b) Accumulated business loss of a demerged company ;
(c)Accumulated business loss of a proprietary concern or a firm
when its business is taken over by a company by satisfying
condition of section 47(xii)/(xiv);
(d) Loss of business acquired by inheritance.
(3) Loss can be carried forward for EIGHT years: The Loss
cannot be carried forward for more than eight years. But the
following can be carried forward for indefinite period as these
are not Business Losses as per Income Tax Law:
• Unabsorbed Depreciation;
• Unabsorbed capital expenditure on Scientific Research;
• Unabsorbed expenditure on family Planning.
(4) Return of Loss should be submitted in time: The return
of loss should be submitted on or before due date under
section 139 (1) for carrying forward business loss.
(5) Continuity of Business is not necessary: From assessment
year 2000-01, the Loss from a particular business or profession
can be carried forward even if such particular business is
discontinued.
(6) Order of set off: The order of set off from profits from
business is as follows:
(a) Current year Depreciation ;
(b) Current year capital exp-on Scientific research and
current year expenditure on family Planning'
(c) Brought forward Business/ Profession Loss;
(d) Unabsorbed Depreciation;
(e) Unabsorbed capital Exp on scientific Research;
(f) Unabsorbed expenditure on family planning.
CARRY FORWARD AND SET OFF OF SPECULATIVE BUSINESS

LOSS
(SEC-73):- If a speculative business loss could not be set off from
income from another speculation business in the same assessment
year then it is allowed to be carried forward and set off in
subsequent assessment year from income of speculation business

Income Tax
only. Such loss can be carried forward for four Assessment years
(EIGHT Assessment years till previous year 2004-05) immediately
succeeding the assessment year in which the loss was first
computed. It is not necessary that same speculative business must
continue in the year of set off of loss. But filing of return on or before
due date is necessary for carry forward of such loss.
NOTE :
1. The loss from Illegal /Banned speculative business cannot be
carried forward to subsequent year.
2. In case of a company (other than investment company and a
company involved in Banking or granting loans / advances) the
business of purchase and sale of shares (with actual delivery or
not) shall be treated as speculative loss.
CARRY FORWARD AND SET OFF OF CAPITAL LOSS (SEC.

74 ) :-
Where in respect of any assessment year the net result of
the computation under the head capital gains is a loss, the loss shall
be carried forward to the following assessment year and set off from
income under head 'Capital gains' Such loss can be carried forward
for EIGHT assessment years immediately succeeding the
assessment year in which the loss was first computed. But filing of
return on or before due date is necessary for carry forward of such
loss.
NOTE : From Assessment year 2003-04, long term capital loss can
be set off only from long term capital Gains. But short term capital
loss can be set off against short term as well as long term capital
Gains.
CARRY FORWARD AND SET OFF OF LOSS FROM BUSINESS OF

OWNING AND MAINTAINING RACE HORSES (SEC 74A):-
If any loss from business of owning and maintaining race
horses could not be set off in the same assessment year, then it
shall be carried forward and set off only from income from owning
and maintaining race horses in subsequent assessment years. Such
loss can be carried forward for a maximum of FOUR Assessment
years immediately succeeding the assessment year in which the
loss was first computed. Such loss can be carried forward only if the
activity of owning and maintaining race horses is carried on by the
assessee in the previous year. Filing of return on or before due date
is necessary for carry forward of such loss.
NOTE :1) The losses which are eligible to be carried forward must

Income Tax
be set off from income of immediately succeeding year and if there

is any balance still to be set off, it should be set off in immediately
next succeeding year(S) with in the time allowed.
2) Where any person carrying on any business/profession has
been succeeded in such capacity by another person
OTHERWISE THAN BY INHERITANCE, then such other person is
not entitled to carry forward and set off such loss against his
income. But if there is succession of firm by a company as per
section 47(xiii), the carry forward and set off of loss is allowed
to such company.
3) The profits of a partnership firm are shared by partners and
are exempt in the hands of partners but losses of a firm are
not shared among partners. The firm can only set off and carry
forward and set off its own losses (not the partners). If there is
change in constitution of a firm, the firm shall not be entitled
to carry forward and set off so much of the loss proportionate
to the share of retired /deceased partner as exceeds his share
of profits, if any in the firm in respect of previous year.
*****

Income Tax
CHAPTER 10
DEDUCTIONS TO BE MADE IN COMPUTING TOTAL
INCOME
The aggregate of income computed under each of five heads after
giving effect to provisions for clubbing of incomes and set off losses
is called ‘GROSS TOTAL INCOME. From G.T.I. certain deductions are
made under sections 80 C to 80U to find out ‘TOTAL INCOME’.
However these deductions are not allowed from following incomes
although these incomes are part of ‘gross total income’:-
a) Long term capital gain;
b) Short term capital gain on transfer of equity shares and
units of equity oriented fund on or after 01.10.2004 through a
recognised stock exchange under section 111 A;
c) Winning from lotteries, races etc.;
d) Income referred to in section 115A, 115AB, 115AC, 115ACA,
115AD, 115BBA and 115D.
These deductions are of two types:-
a) Deductions on certain payments and investments (from section
80C to 80GGC).
b) Deductions on certain incomes included in G.T.I. (from section 80-
IA to 80U).
BASIC RULES OF DEDUCTIONS:-

1. The deduction from section 80C to 80U cannot
exceed the gross total income (exclusive of long term capital
gain, winning from lotteries etc. and incomes referred to in
sections 115A to 115AD, 115BBA and 115D) of the assessee.
2. The deduction should be claimed by the assessee.
3. The burden is on the assessee to prove that his case
falls within particular provision claimed by him.
4. Where, in computing the total income of an
A.O.P./B.O.I. any deduction allowed under this chapter, then
deduction for same cannot be allowed to the members of
AOP/BOI.
DEDUCTIONS FOR CERTAIN PAYMENTS

DEDUCTION UNDER SECTION 80 C: This Deduction from Gross
Total Income is allowed to Individual and H.U.F. only. The deduction
can be calculated in following manner:-
Step 1.:- Calculate Gross qualifying amount.
Step 2.:- Calculate Net qualifying amount.

Income Tax
Step 3.:- Calculate amount of deduction U/S 80 C.

STEP 1. GROSS QUALIFYING AMOUNT: Find the aggregate of
the following:
1. Life insurance paid (up to maximum of 20% of sum assured) by
individual to effect/keep in force an insurance on his life of
spouse or any child. In case of HUF, premium paid (up to
maximum of 20% of sum assured) must be on life of any
member of the family.
2. Any payment by individual for non-commutable deferred
annuity (except as per point 10 below).
3. Any sum deducted from salary payable by or on behalf of
Government to an individual for securing him a deferred annuity OR
making provision for his spouse or children. The sum deducted
should not be more than 20% of salary.
4. Employee’s contribution to RPF or SPF (other than repayment
of loan).
5. Contribution to 15-year PPF account (other than repayment of
loan).
6. Employee’s contribution to approved superannuation fund.
7. Subscription to National Saving Scheme 1992 (discontinued
with effect from 1.11.2002).
8. Subscription to National Saving Certificates. Interest accrued
on these NSC’s also qualifies for first five years.
9. Contribution to unit link insurance plan of UTI and LIC mutual
fund ( i.e. ULIP and Dhanraksha).
10. Payment made to effect or keep in force notified annual plan of
LIC or any other insurer (e.g. New Jeevan Dhara, New Jeewan
Akshay etc.).
11. Subscription to notified units i.e. Equity Linked Saving Schemes
of UTI and approved mutual fund.
12. Contribution by Individual to a notified pension fund set up by
UTI or approved mutual fund.
13. Any sum paid ( including interest) to home loan account
scheme of national housing Bank or contribution to notified pension
fund set up by the national housing Bank.
14. Any sum paid as subscription to scheme of :-
a) A public sector company which is engaged in providing
long term
finance for construction or purchase of houses in India for
residential
purposes; OR
b) Any authority constituted in India by as under any law
enacted
either for purpose of dealing with and satisfying the need for

Income Tax
housing or
for the purpose of planning development or improvement of
cities/villages
or both.
15. Any payment made towards cost of purchase/construction of a
new residential house property. This amount does not include
interest on loan or cost of addition / renovation/repair of
property. But this includes stamp duty and other expenses for
purchase of such property. The Loan must be taken from
Government, Bank, Co-op. Bank, LIC, National Housing Bank,
assessee’s employer being Public Company/ Public Sector
Company/ University/ Co-op. Society/ Authority or Board or
Corporation established/ considered under a Central or State
Act.
16. Any sum paid by an Individual as Tuition Fees (not being
development fees/ donation/ payment of similar nature) to any
university/ college/ educational institution in India for full time
education of his children for a maximum of two children.
17. Amount invested in shares / debentures of a public company
engaged in infrastructure (including power sector) or units of
mutual funds the proceeds of which are utilised for
development and maintenance of infrastructure.
18. Any sum deposited in a term deposit with a scheduled bank for
a period not less than 5 years in accordance with the scheme
framed and notified by the Central Government.
19. Subscription to notified bonds of NABARD.
20. Any sum deposited in an account under Senior Citizen Saving
Scheme.
21. Any sum deposited in 5 years term deposit account in Post
Office as per the Post Office Time Deposit Rules, 1981.
STEP 2. NET QUALIFYING AMOUNT
The aggregate of payments from (1) to (21) above is the Gross
Qualifying Amount. The Net Qualifying Amount is determined as
follows:
a) Gross Qualifying Amount; or
b) Rs. 1,00,000 whichever is less.
STEP:3 AMOUNT OF DEDUCTION
The net qualifying amount as calculated in step 2 is the amount of
deduction under section 80 C. The point to remembered is that the
aggregate of deductions under section 80 C, 80 CCC and 80 CCD
cannot exceed Rs. 1,00,000.
Deduction in respect of pension fund [sec. 80CCC]:-
Conditions to be fulfilled:-
i) The assessee is individual (may be resident or non-resident).

Income Tax
ii) Such individual has paid/deposited any amount in the previous

year under annuity plan of life insurance corporation of India or
any other insurer for receiving pension from the fund set up
by LIC /any other insurer referred to in section 10(23AAB).
iii) The above amount is paid out of his income chargeable to tax.
Amount of deduction:- The actual amount paid/deposited or
Rs. 1,00,000 whichever is less.
NOTE:
a) If the assessee or his nominee receives any amount on
account of surrender of annuity plan or as pension during the
hands of the assessee or his nominee, as the case may be, in
b) When deduction has been allowed U/S 80CCC, deduction U/S
80C will not be available for the same amount.
Deduction in respect of contribution to pension scheme of
Central Government (Sec. 80CCD) :- The conditions to be
fulfilled:
1) The assessee is an Individual.
2) He is employed by the Central Government or any other
employer on or after 1st January, 2004.
3) He has paid or deposited any amount not less than 10% of
salary in his account under a pension scheme notified by the
Central Government in the previous year.
4) The employer also contributes an amount equal to 10% of his
salary in his pension account. Such contribution is fully taxable
under head Salaries.
Amount of deduction: Employee’s contribution as above
(not exceeding 10% of his salary) plus Employer’s contribution
(i.e. Central Govt.) to the above pension fund (not exceeding
10% of his salary).
NOTE:
a) If the assessee or his nominee receives any amount on
account of closure of the account or as pension during the
hands of the assessee or his nominee, as the case may be, in
b) When deduction has been allowed U/S 80CCD, deduction U/S
80C will not be available for the same amount.
c) Salary means Basic Salary plus Dearness Allowance, if the
terms of employment so provide.
Limits on deductions under sections 80C, 80CCC and
80CCD[sec 80CCE]: The aggregate amount of deduction under
section 80 C, 80 CCC and 80 CCD cannot exceed Rs. 1,00,000.

Income Tax
Deduction in respect of medical insurance premia (sec.80D):-

The conditions to be fulfilled:-
i) The assessee is individual or H.U.F. (may be resident or non-
resident).
ii) Such assessee has paid any sum toward MEDICAL INSURANCE
PREMIUM to general insurance corporation or any other insurer
on the health of following:-
a) in case of individual –
1)-on health of assessee, spouse (dependent or independent),
dependent children; and
2) on health of parents (dependent or independent) of the
assessee.
b) in case of HUF – on health of any member of the family.
iii) The premium is paid by any mode other than cash.
iv) The premium is paid out of income chargeable to tax.
Amount of deduction :
a) in case of individual –
1)-on health of assessee, spouse (dependent or independent),
dependent children- Actual premium paid or Rs.15,000*
whichever is less; and
2) on health of parents (dependent or independent) of the
assessee- Actual premium paid or Rs.15,000* whichever is
less.
b) in case of HUF – on health of any member of the family- Actual
premium paid or Rs.15,000* whichever is less.
NOTE: In case of senior citizen additional deduction of amount not
exceeding Rs. 5000 is allowed. Senior citizen means a person
of at least 65 years of age and Resident in India.
Deduction in respect of maintenance including medical

treatment of Handicapped Dependent [sec. 80DD]:- The
conditions to be fulfilled:-
i) The assessee is a ‘Resident’ individual or a Resident H.U.F.
ii) Such assessee has during the previous year:-
a) incurred any expenditure for medical treatment (including
nursing), training and rehabilitation of a handicapped
dependent; or/and
b) Paid /deposited any amount under a scheme framed in this
behalf by the life insurance corporation or any other insurer or
U.T.I. and approved by the CBDT, for maintenance of
handicapped dependent.
iii) The expenditure is incurred or amount is paid/ deposited out of
eligible assessee's income chargeable to tax.

Income Tax
Amount of deduction:- Rs.50,000 irrespective of actual

expenditure incurred/amount deposited. A higher deduction of
Rs.1,00,000 shall be allowed where such dependant is a
person with severe disability having any disability of 80% or
over.
NOTE:
a) Dependant for an individual means the spouse, children,
parents, brothers and sisters of the individual or any of them.
Dependent for a H.U.F. means a member of H.U.F.
Handicapped dependent means a person who is relative of the
individual or as the case may be, is a member of the H.U.F and
is not dependent on any person other than such individual or
H.U.F. for his support or maintenance; and
b) He is suffering from a permanent physical disability ((including
blindness) or is subject to mental retardation, being a permanent
physical disability or mental retardation specified in the rules made
by the CBDT for purpose of section 80DD; and
c) Such disability is certified by a physician, a surgeon, an oculist
or a psychiatrist, as the case may be, working in a government
hospital; and
d) Such disability should have the effect of reducing considerably
such person's capacity for normal work or engaging in a gainful
employment or occupation.
e). If the handicapped dependent predeceases the individual or
the member of H.U.F. in whose name money has been
deposited, an amount equal to the amount paid/deposited
under the scheme shall be deemed to be income of the
assessee of the previous year in which such amount is
received by the assessee and shall be charged to tax in that
year.
DEDUCTION IN RESPECT OF MEDICAL TREATMENT [SE.

80DDB]: The Conditions to be fulfilled:-
1. The assessee is a ‘Resident’ individual or a Resident
H.U.F.
2. The assessee has incurred any expenditure for medical
treatment of a specified disease or ailment as per rule 11D.
3. Such assessee has incurred medical expenses for
himself or any dependent relative (in case of individual) or for
any member of the family (in case of H.U.F.).
4. Such assessee furnishes a certificate in form 10-I from
a post graduate doctor registered with Indian medical
association.
Amount of deduction: Rs. 40,000* or Actual Expenditure

Income Tax
incurred by the assessee whichever is less.

* Rs. 60,000 if the person receiving medical treatment is senior
citizen.
NOTE :1.Relative has same meaning as in section 80DD.
2.Senior citizen has same meaning as in section 80D.
3.If any amount is received under an insurance from the
insurer or reimbursed by the employer, the amount so
received shall be reduced from the deduction allowable
under this section.
DEDUCTION IN RESPECT OF LOAN TAKEN FOR HIGHER

EDUCATION (SEC. 80E): The conditions to be fulfilled:-
1. The assessee is an individual.
2. Such assessee had taken loan from a financial institution or
approved charitable institution.
3. The loan was taken for pursuing higher education of the
assessee or any of his relatives.
4. The assessee has repaid such loan including interest on
such loan.
5. Such amount is paid out of his income chargeable to tax.
Amount of deduction :- Actual amount of interest repaid
during the year (only interest, principal repayment is
excluded).
Period of deduction :- Deduction is allowed for 8 years
starting from the year in which loan/interest was first repaid or
till amount is repaid in full w.e. is earlier.
NOTE:1. Financial institution means a Banking company or
any other notified financial institution.
2.Approved charitable institution means an institution under
section 10(23C) or 80G(2)(a).
3.Higher Education means studies of any course of study after
passing Senior Secondary Examination or its equivalent.
4. Relative means spouse, children or the individual for whom
the assessee is legal guardian.
DEDUCTIONS IN RESPECT OF DONATIONS TO CERTAIN
FUNDS, CHARITABLE INSTITUTIONS ETC. [SE. 80G]: The
conditions to be fulfilled:
1. The Assessee may be any person.
2. Such assessee has made donation to specified funds or
institutions.
3. Donation is a sum of money. It should not be ‘IN KIND’.
4. The assessee must produce the proof of payment to get
deduction under this section.
STEPS TO BE FOLLOWED FOR CALCULATION OF DEDUCTION:-

Income Tax
This deduction is calculated under three steps as follows :-

a) Gross qualifying amount.
b) Net qualifying amount.
c) Amount of deduction.
STEP I. Gross qualifying amount:- It is aggregate of the
donations made to any of the institutions/funds given in the chart
below (as per column I).
STEP II. Net qualifying amount:- Net qualifying amount is limited
to 10% of gross total income less :-
a) Amount of long term capital gain;
b) Short term capital Gain on transfer of equity shares through a
recognised stock exchange under section 111 A;
c) Such income on which tax is not payable (i.e. share of profit
from A.O.P./BOI.
d) All deductions under sections 80C to 80U (except sec. 80G);
e) Income referred to in section 115A, 115AB, 115AC, 115ACA or
115AD.
These ceilings apply only to donations of point (C) and (D) in the
chart given below.
STEP III. Net qualifying amount is eligible for deduction as

per column 3 of the chart below:-
Name/Type of charitable Maximu DEDUTIO
funds/Institution m limit N (AS
PERCENT
OF NET
QUALIFYI
NG
AMOUNT
)
(A) a) National Defence fund set up Not 100%
by central Govt. applicable
b) Prime Minister’s national relief Not 100%
fund applicable
c) Prime Minister’s Armenia Not 100%
earthquake relief FUND applicable
d) Africa (Public contribution – Not 100%
Indian) fund applicable
e) National foundation for Not 100%
commercial harmony applicable
f) An approved Not 100%
university/education institution applicable
g) Maharashtra chief Minister’s Not 100%
earthquake relief fund applicable

Income Tax
h) Any fund set up by Not 100%

Government of Gujarat for applicable
providing relief to earthquake
victims in Gujarat
i) Zila Saksharta Samiti Not 100%
applicable
j) National/State Blood Not 100%
transfusion council applicable
k) Fund set up by State Not 100%
Government for medical relief to applicable
the poor.
l) Army /Air force central welfare Not 100%
fund and India naval benevolent applicable
fund.
m) Andhra Pradesh Chief Not 100%
Minister’s cyclone relief fund applicable
n) National illness assistance Not 100%
fund applicable
o) Chief Minister/Lieutenant Not 100%
Governor’s Relief fund applicable
p) National sports fund set up by Not 100%
central Govt. applicable
q) National cultural fund set up Not 100%
by central Govt. applicable
r) Fund for technology Not 100%
development and application applicable
s) National trust for welfare of Not 100%
persons with autism, cerebral applicable
palsy, mental retardation and
multiple disabilities
(B) a) Jawaharlal Nehru Memorial Not 50%
fund applicable
b) Prime Minister’s Drought Not 50%
Relief fund applicable
c) National children fund. Not 50%
applicable
d) Indira Gandhi Memorial Trust Not 50%
applicable
e) Rajiv Gandhi foundation Not 50%
applicable
(C) a) Government/approved local As given 100%
authority or below
institution/association for
promotion of family planning.

Income Tax
b) Indian Olympic association / As given 100%

notified institution for i) below
Development of infrastructure
for sports and games in India; or
ii) The sponsorship of sports and
games in India (DONOR BEING
COMPANY)
(D) a) Any other fund/Institution As given 50%
which satisfies conditions of below
section 80G (5).
b) Government/approved local As given 50%
authority or institution below
/association for any charitable
purpose other than promoting
family planning.
c) Any corporation specified in As given 50%
section 10(26BB) for promoting below
interest of minority community
d) Any notified temple, mosque, As given 50%
Gurdwara, Church or other place below
(for renovation or repair)
e) Any authority constituted in As given 50%
India by any law enacted either below
for dealing with and satisfying
need for housing
accommodation or for planning
development or improvement of
cities, lawns and villages or for
both.
MAXIMUM AMOUNT: It the aggregate of sums mentioned in (C)
and (D) above exceeds 10% of adjusted gross total income (as per
step II), then the amount in excess of 10% of adjusted gross total
income will be ignored while computing the aggregate of the sums
in respect of which deduction is to be allowed.
DEDUCTION IN RESPECT OF RENT PAID [SEC. 80 GG]:- The

1. The assessee is an individual;
2. Such assessee has paid rent for his residential
accommodation;
3. The assessee is either self-employed or an employee neither
entitled to house rent allowance nor a rent-free
accommodation.
4. Such assessee, his spouse or minor child or his H.U.F. (of which

Income Tax
he is a member) does not own any residential accommodation

at the place where such assessee ordinarily resides or works or
carries his business.
5. If such assessee owns any residential accommodation at any
place, other than as mentioned above, then such property
should not be assessed as self occupied property in the hand
of such individual assessee.
6. The assessee files a declaration in form-10BA along with his
return.
AMOUNT OF DEDUCTION: Least of following is deductible :-
a) 25% of adjusted total income;
b) Rent paid-10% of adjusted total income;
c) Rs. 2000 per month.
NOTE: Adjusted total income means ‘Gross total income less
( a)Long term capital gain’ and b) Short term Capital Gain on
transfer of equity shares through a recognised stock exchange
under section 111 A and c) all deductions under section 80C to 80U
(except deduction U/S 80GG) and d) incomes referred to in sec.
115A to 115D).
DEDUCTION IN RESPECT OF DONATIONS FOR SCIENTIFIC

RESEARCH OR RURAL DEVELOPMENT [SEC. 80GGA]: The
1. The assessee may be any person;
2. Such assessee does not have income under ‘Profits gains of
business or profession’;
3. Such assessee has made donation/payments to :-
a) Approved scientific research association or approved
University College or other institution to be used for scientific
research;
b) Approved University, College or other institution for
research in social science or statistical research;
c) Approved association or institution undertaking rural
development (provided the assessee furnishes certificates as
required in sec. 35CCA);
d) Approved public sector company or local authority or
association or institution for carrying out any eligible project or
scheme (provided the assessee furnishes certificate as
required in sec. 35AC (2) (a);
e) National Urban Poverty eradication fund;
AMOUNT OF DEDUCTION: 100% of sum paid as above.

NOTE: 1. Where deduction under this section is claimed and
allowed, deduction will not be allowed for same amount under any

Income Tax
other provision of the Act for same or any other assessment year.
2. If approval granted to any of the above institution is withdrawn
even then the deduction for payment made earlier by the assessee
cannot be denied.
DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN BY
INDIAN COMPANIES TO POLITICAL PARTIES [SEC 80GGB]: Any
sum contributed by an Indian Company in the previous year to any
political party shall be allowed as deduction while computing its
total income.
DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN BY ANY

PERSON TO POLITICAL PARTIES [SEC 80GGC]: Any sum
contributed by an assessee being any person (except Local
Authority and every Artificial Juridicial Person wholly or partly funded
by the Government) to any political party shall be allowed as
deduction while computing its total income.
DEDUCTIONS IN RESPECT OF CERTAIN INCOMES

DEDUCTION IN RESPECT OF PROFITS AND GAINS FROM
BUSINESS OF INFRASTRUCTURE DEVELOPMENT [SEC.80-IA]:
The deduction under this section is available to an assessee
whose gross Total Income includes any profits and gains derived by:
a) any enterprise carrying on the business of infrastructure
facility; or
b) an undertaking which is engaged in the business of
telecommunication services etc.;
c) an undertaking which develops, maintains etc. an Industrial
park or special economic zone; or
d) an undertaking which is engaged in generation, transmission,
distribution of power etc;
e) an undertaking owned by an Indian Company and set up for
reconstruction or revival of a power generating plant.
A) CONDITIONS FOR BUSINESS OF INFRASTRUCTURE
FACILITY
1) The enterprise should carry on the business of:
a) developing; or
b) operating and maintaining; or
c) developing, operating and maintaining any infrastructure
facility;
2) The enterprise is owned by an Indian company or a consortium
of such companies or by an authority or a Board or a
Corporation or any other body established or constituted under
any Central or State Act;
3) The enterprise has entered into an agreement with

Income Tax
central/State Government or local authority or any other

statutory body for such business;
4) The enterprise has started or starts such business on or after
01.04.1995.
B) CONDITIONS FOR BUSINESS OF TELECOMMUNICATION
SERVICES.
1) The undertaking should have started or starts providing
telecommunication service whether basic or cellular, including
radio paging, domestic satellite services or network of
trunking, broadband network and internet services;
2) It is allowed to all assessees;
3) It should start providing such services on /after 01.04.1995 but
before 31.03.2005.
4) Such undertaking should not be formed by splitting up or the
reconstruction of a business already in existence. (But this
condition is not applicable if circumstances of sec 33B are
fulfilled.)
5) It should not be formed by transfer of any plant or machinery
previously used for any purpose to it. However such old plant
or machinery can be used to the extent of 20% of total value of
plant and machinery of such new undertaking.
C) CONDITIONS FOR BUSINESS OF DEVELOPMENT OF
INDUSTRIAL PARK OF ECONOMIC ZONE
1) The undertaking should develop, develop and operate or
maintain and operate an industrial park or special economic
Zone notified by the Central Government in accordance with
scheme framed for such purpose.
2) The industrial park should begin to operate, develop etc, at
any time on or after 01.04.1997 but before 01.04.2011.
(D) CONDITIONS FOR BUSINESS OF POWER GENERATION:
1) The undertaking is set up in any part of India for generation or
generation and distribution of power if it begins to generate
power at any time during the period beginning on 01-04-1993
and ending on 31-03-2011.
2) It start transmission or distribution by laying a network of new
transmission or distribution lines at any time during the period
beginning on 01-04-1999 and ending on 31-03-2011.
3) It undertakes substantial renovation and modernization of the
existing transmission or distribution lines (i.e. at least 50%
increase in book value of such plant and machinery as on
01.04.2004) at any time during 1.4.2004 to 31.3.2011.
4) Such undertaking should not be formed by splitting up or the
reconstruction of a business already in existence. (But this
condition is not applicable if circumstances of sec 33B are

Income Tax
fulfilled.)
4) It should not be formed by transfer of any plant or machinery
previously used for any purpose to it. However such old plant
or machinery can be used to the extent of 20% of total value of
plant and machinery of such new undertaking.
E) CONDITIONS FOR UNDERTAKING SET UP FOR
RECONSTRUCTION OR REVIVAL OF A POWER
GENERATING PLANT:
1) Such undertaking must be owned by an Indian Company.
2) Such Indian Co. is formed before 30.11.2005 with public sector
companies as majority of equity shareholders for the purpose
of enforcing the security interest of the lenders to the
company.
3) Such Indian Co. is notified before 31.12.2005 by the Central
Govt. for this purpose.
4) Such undertaking begins to generate or transmit or distribute
power before 31.3.2011.
AMOUNT OF DEDUCTION
a) FOR BUSINESS OF TELECOMMUNICATION SERVICES:
For first five successive years @ 100% of profits and for next
FIVE successive years @30% of the profits [out of 15 years
beginning with the year of starting provision of
telecommunication services].
b) FOR BUSINESS OTHER THAN (a) ABOVE:
100% of Profits of such business for 10 successive years (out of
15 years beginning with the year of start of such business).
* In case of infrastructure facilities other than PORT, AIRPORT,
INLAND WATERWAY OR INLAND PORT this period is 20 years .
NOTE:
1) For getting/claiming deduction under this section audit of
accounts and submission of a Report in Form 10CCB duly certified
by a chartered Accountant along with the return of income is
compulsory.
2) The Central Government may in official Gazette, notify that the
deduction under this section not to apply to any class of industrial
undertaking or enterprise with effect from any notified date.
3) Deduction is allowed if and if only if the return of income is
submitted on or before due date of filing the return u/s 139 (1).
DEDUCTION IN RESPECT OF PROFITS AND GAINS BY AN
UNDERTAKING OR ENTERPRISE ENGAGED IN DEVELOPMENT
OF SPECIAL ECONOMIC ZONE (SEC 80 IAB): If a Special
Economic Zone is notified on or after 1.4.2005 then it is not eligible
for deduction u/s 80 IA. These undertakings will be allowed
deduction under section 80 IAB.

Income Tax
The deduction under this section is available if the Gross Total

Income of an Assessee, being the developer, includes any profit
derived by an undertaking or an enterprise from any business of
developing of a Special Economic Zone, notified on or after 1.4.2005
under the Special Economic Zones Act, 2005.
AMOUNT OF DEDUCTION: 100% of the profits and gains from such
business for 10 consecutive years out of 15 years beginning from
the year in which the special economic zone has been notified by
the Central Govt.
NOTE:
1) For getting/claiming deduction under this section audit of
accounts and submission of a Report in Form 10CCB duly certified
by a chartered Accountant along with the return of income is
compulsory.
2) The Central Government may in official Gazette, notify that the
deduction under this section not to apply to any class of industrial
undertaking or enterprise with effect from any notified date.
3) Deduction is allowed if and if only if the return of income is
submitted on or before due date of filing the return u/s 139 (1).
DEDUCTION IN RESPECT OF PROFITS & GAINS FROM CERTAIN

BUSINESSES OTHER THAN INFRASTRUCTURE DEVELOPMENT
(SEC.80-IB): This section applies if the assessee is engaged in the
business of:
a) an industrial undertaking including cold storage;
b) a ship;
c) a hotel;
d) multiplex Theatres;
e) convention centre;
f) scientific and industrial research and development;
g) commercial production and refining of mineral oil;
h) developing and building housing projects;
i) handling, storage and transportation of food grains;
j) operating and maintaining a hospital in a rural area;
k) Five year tax holiday to hospitals in certain areas.
A. CONDITIONS FOR INDUSTRIAL UNDERTAKING
1) The industrial undertaking is not formed by splitting up or
reconstruction of a business already in existence. (However
this clause is not applicable if conditions u/s 33B are fulfilled).
2) It is not formed by transfer to a new business of machinery or

Income Tax
3) It manufactures or produces any article or thing other than

articles specified in ELEVENTH SCHEDULE or operates one or
more cold storage plant or operates cold chain facility in any
part of India. However a Small Scale Industrial undertaking or
Industrial Undertaking located in an industrially backward state
can produce article/thing specified in ELEVENTH SCHEDULE
and can claim this deduction..
4) Such industrial undertaking employs ten or more workers in a
manufacturing process carried on with the aid of power or
employs twenty or more workers in a manufacturing process
carried on without the aid of power.
5) The Industrial undertakings begin to manufacturer or to
operate cold storage plant or cold chain facility as per table
given below
INDUSTRIAL UNDERTAKING PERIOD TO START
PRODUCTION
a) Any eligible industrial undertaking 01.04.1991 to
other than those given in clause (b) to 31.03.1995
(f) below
b) Eligible Small Scale Industrial 01.04.1991 to
undertakings other than those given 31.03.2002
in clauses (c) to (f)
c) Industrial undertaking set up in an 01.04.1993 to
Industrially backward state 31.03.2004 (till
31.3.2012 in case of
Jammu & Kashmir)
d) Industrial undertaking set up in 01.10.1994 to
notified industrially backward districts 31.03.2004
of category A
e) Industrial undertaking set up in 01.10.1994 to
notified backward District of category 31.03.2004
B
f) Industrial undertaking set up and 01.04.1999 to
operating cold chain facility for 31.03.2004
agricultural produce
AMOUNT OF DEDUCTION
ASSESSEE PERIOD OF %AGE OF

DEDUCTIO PROFIT AS
N DEDUCTIO
N
1 A Industrial undertaking
.

Income Tax
i) in an industrially backward
state
ii) in districts of category A (BUT
NOT NORTH EASTERN REGION)
iii) operating a cold chain facility
a) Owned by a Company First 5 100%
years
Next 5 30%
years
b) Owned by a co-operative First 5 100%
Society years
Next 7 25%
years
c) Owned by any other assessee First 5 100%
years 25%
Next 5
years
B) Notified Industries in North First 10 100%
Eastern Region years
2 Industrial Undertaking in
. Industrially backward districts
of category 'B'
i) owned by a Company First 3 100%
years
Next 5 30%
years
ii) Owned by a Co-operative First 3 100%
Society years
Next 9 25%
yeas
iii) Owned by other assessee First 3 100%
years
Next 5 25%
years
3 Industrial undertaking other
. than those specified above
i) Owned by a Company First 10 30%
years
ii) Owned by a Co-operative First 12 25%
society years
iii) Owned by any other assessee First 10 25%
years

Income Tax
B CONDITIONS FOR OPERATION OF A SHIP

1) It is owned by an Indian Company and it is wholly used for the
purpose of business carried on by it.
2) It was not owned or used in Indian Territorial Waters by a
person resident in India before its acquisition by the Indian
company.
3) It was brought into use by Indian company with in from
01.04.1991 to 31.03.1995.
AMOUNT OF DEDUCTION: 30% of eligible profits for 10 years
starting from initial assessment year.
C. CONDITIONS FOR BUSINESS OF ANY HOTEL
1) The business of hotel is owned and carried on by an Indian
Company with a paid up capital of not less than Rs.5,00,000.
2) Such business of hotel is not formed by splitting up or
reconstruction of the business already in existence or by
transfer to a new business of a building previously used as a
Hotel or of any machinery or plant previously used for any
purpose.
3) The Hotel is for the time being approved by the prescribed
authority.
4) The hotel must start functioning during period and in area as mentioned below:
TYPE OF HOTEL PERIOD WITHIN
WHICH HOTEL
MUST START
a) i) Hotel located in a hilly area/rural 01.04.1990 to
area or place of pilgrimage or any 31.03.1994
other place notified by Central
Government
ii) Hotel located in a hilly area or rural 01.04.1997 to
area or a place of pilgrimage or such 31.03.2001
other place as notified by the
Central Govt But such Hotel should
not be located within Municipal limits
of Calcutta, Delhi, Mumbai and
Chennai
b) Any other hotel 01-04-1991to 31-03-
i) 1995
ii) Any other hotel located in a place 01.04.1997 to
other than with in Municipal limits of 31.03.2001
Calcutta, Chennai, Delhi and Mumbai
AMOUNT OF DEDUCTION
Assessee Period of %ge of profit
Deduction as deduction

Income Tax
a) Hotel located in hilly/rural 10 years 50%

area or notified place of
pilgrimage
b) Any other Hotel 10 years 30%
D. CONDITIONS FOR MULTIPLEX THEATRE

1) The assessee should derive profits and gains from the business
of building, owning and operating a multiplex theatre.
2) Such multiplex theatre should have been constructed at any
time during the period 01.04.2002 to 31.03.2005 .
3) The business of multiplex theatre should not be formed by
splitting up or reconstruction of a building already in existence.
4) It should not be formed by the transfer to a new business of
any building or of any machinery or of plant previously used
for any purpose.
5) The multiplex theatre should not be located at a place with in
the municipal limits of Kolkatta, Chennai, Delhi or Mumbai.
6) The assessee should furnish along with return of income, the
report of an audit in such form and containing such particulars
as may be prescribed duly certified by a prescribed.
AMOUNT OF DEDUCTION: 50% of the profits such business for a
period of five successive years starting from initial assessment year.
E. CONDITIONS FOR CONVENTION CENTRE
1) The assessee should derive profits and gains from the business
of building, owning and operating a convention centre.
2) The convention centre should be constructed at any time
during the period 01.04.2002 to 31.03.2005.
3) The business of convention centre should not be formed by
splitting up or the reconstruction of a business already in
existence.
4) It should not be formed by transfer to a new business of any
building or any machinery or plant previously used for any
purpose.
5. The assessee should obtain a report of an audit in such form
and containing such particulars as may be prescribed from a
Chartered Accountant certifying that deduction has been
correctly claimed and submitted along with the return of
income.
AMOUNT OF DEDUCTION: 50% of the profits and gain from such
business for a period of FIVE SUCCESSIVE years beginning from
initial assessment year.
F. CONDITIONS FOR ENTERPRISES CARRYING ON
SCIENTIFIC AND INDUSTRIAL RESEARCH AND DEVELOPMENT:
1) The enterprises must be a Company registered in India;

Income Tax
2) The company has main object of scientific and industrial

research and development;
3) The company is for the time being, approved by the prescribed
authority.
4) The deduction is available from assessment year 1997-98 and
if it starts at a later date, the deduction is available from the
year of start of business.
AMOUNT OF DEDUCTION:
a) If Company was approved before 1st April, 1999: 100% of
eligible profits for FIVE YEARS commencing from initial assessment
year.
a) If Company was approved on or after 1st April, 2000 but
before 1st April, 2007: 100% of eligible profits for TEN YEARS
commencing from initial assessment year.
G. UNDERTAKING ENGAGED IN BUSINESS OF REFINING OF

MINERAL OIL
1) The assessee is industrial undertaking which begins
commercial production of mineral oil in any part of India.
2) Where Industrial undertaking is situated in North Eastern
Region it has begun production of mineral oil BEFORE OR
AFTER 01.04.97. But if it is situated in any other part of India it
begins commercial production ON or AFTER 01.04.1997.
AMOUNT OF DEDUCTION: 100% OF ELIGIBLE PROFITS FOR SEVEN
YEARS starting from initial assessment year.
H. UNDERTAKING ENGAGED IN DEVELOPING AND BUILDING
HOUSING PROJECTS:
1) The assessee may be any person.
2) It is allowed on account of housing project approved by local
authority before 31.03.2008 and the area of plot is minimum of
one acre.
3) The residential unit has a build up area of not exceeding 1000
square feet for residential unit in Delhi or Mumbai or within 25
kms of Municipal limits of these cities and 1500 square feet at
any other place.
4) The undertaking commences development and construction of
the housing project on or after 01.10.1998 and completes the
same
a) in case the housing project has been approved by the local
authority before 01.04.2004, it should complete the same
before 31.03.2008;
b) in case the housing project has been approved by the local
authority on or after 01.04.2004, it should complete the same
with in 4 years form the end of financial year in which the

Income Tax
housing project has been approved by the local authority.

AMOUNT OF DEDUCTION: 100% of profits from such project.
I. UNDERTAKING ENGAGED IN INTEGRATED BUSINESS OF
HANDLING, STORAGE AND TRANSPORTATION OF FOOD
GRAINS
2) Such assessee starts the integrated business of handling and
transportation of food grains on or after 1.04.2001
AMOUNT OF DEDUCTION
%AGE OF
PERIOD PROFIT
ASSESSEE OF AS
DEDUCTION DEDUCTION.
a) Owned by a Company First 5 years 100

Next 5 years 30
b) Owned by any other First 5 years 100
person
Next 5 years 25
J. UNDERTAKING OPERATING AND MAINTAINING A HOSPITAL

IN A RURAL AREA
1) Such hospital is constructed at any time during the period from
01.10.2004 to 31.03.2008;
2) The hospital has at least 100 beds for patients;
3) The construction of the hospital is in accordance with the
regulations, for the time being in force, of the local authority;
4) The report from a Chartered Accountant regarding correct claim
of deduction is furnished along with the return of income.
Amount of deduction: 100% of profits and gains of such business
for a period of 5 consecutive assessment years beginning with the
K. FIVE YEAR TAX HOLIDAY TO HOSPITALS IN CERTAIN
AREAS:
1) The hospital is located in any area except the excluded area.
2) The hospital is constructed at any time during 1st April, 2008 to
31st March, 2013 and starts functioning within above said period.
3) The hospital has at least 100 beds for patients;
4) The construction of the hospital is in accordance with the
regulations, for the time being in force, of the local authority;
5) The report from a Chartered Accountant regarding correct claim
of deduction is furnished along with the return of income.
Amount of deduction: 100% of profits and gains of such business
for a period of 5 consecutive assessment years beginning with the

Income Tax
DEDUCTION IN RESPECT OF PROFITS & GAINS OF CERTAIN

UNDERTAKINGS IN CERTAIN SPECIAL CATEGORY OF STATES
[SEC 80-IC]:-
Where the gross total income of an assessee includes any profits
and gains derived by an undertaking or an enterprise from any:
a) business of manufacturing or producing any article or
thing (not being an article or thing mentioned in Schedule
XIII ) in any notified specified area in the states of
Sikkim, Himachal Pradesh, Uttaranchal or the North-
Eastern States, or
b) business of manufacturing or producing any article or
thing or operates a service mentioned in Schedule XIV in
any area in the said states,
a deduction from such profits and gains shall be allowed under this
section provided certain conditions are satisfied as follows:
1) It is not formed by splitting up or the reconstruction, of a
business already in existence. (However this clause is not
applicable if conditions u/s 33B are fulfilled).
2) It is not formed by transfer to a new business of machinery or
3) It has begun or begins to manufacture or produce any article or
thing or undertakes substantial expansion during the period-
i) from 23.12.2002 to 31.03.2012 in the state of Sikkim; or
ii) from 07.01.2003 to 31.03.2012 in the states of Himachal Pradesh
or Uttaranchal; or
iii) from 24.12.1997 to 31.03.2007 in any of the North-Eastern
states.
Amount of Deduction: The deduction shall be-

1) in the case of any undertaking in the state of Sikkim or North-
eastern states – 100% of such profits and gains for ten assessment
years commencing from the initial assessment year.
2) in the case of any undertaking in state of Himachal Pradesh or
Uttaranchal - 100% of such profits and gains for five assessment
years commencing from the initial assessment year and thereafter
25% (30% in case of a company assessee) of such profits and gains
for next five assessment years.
NOTE: 1) The Initial Assessment year means the assessment year

Income Tax
relevant to the previous year in which the undertaking begins to

manufacture or produce articles or things or commences operation
or completes substantial expansion.
2) The total period of deduction shall not 10 assessment years.
3) The provisions of Computation of profits of eligible business, audit
of accounts, restriction on double deduction, adjustment of loss and
effects of merger or demerger are same as in section 80-IA.
DEDUCTION IN RESPECT OF PROFITS & GAINS FROM

BUSINESS OF COLLECTING AND PROCESSING BIO
DEGRADABLE WASTE (SEC. 80 JJA):
2) The assessee is engaged in business of collecting and
processing or treating of bio-degradable waste for
a) generating power; or
b) producing, bio fertilisers, bio pesticides or other biological
agents; or
c) providing bio-gas; or
d) making pellets or briquettes for fuel; or
e) organic manure.
AMOUNT OF DEDUCTION: 100% of profits from such business for
FIVE SUCCESSIVE YEARS starting from the year of commencement
of business.
DEDUCTION IN RESPECT OF EMPLOYMENT OF NEW

WORKMEN (SEC.80JJAA)
1) The assessee is an Indian Company.
2) The company assessee is engaged as industrial undertaking.
3) The Industrial undertaking is not formed by splitting up or
reconstruction of an existing Industrial undertaking or
amalgamation in the another industrial undertaking.
4) The company employs new regular workman in the previous
year..
5) The company furnishes along with return of income a report in
form 10DA duly certified by a chartered Accountant.
AMOUNT OF DEDUCTION: 30% of the additional wages paid to
new regular workers employed in the previous year.
NOTE: Additional wages means wages paid to new regular workman
in excess of 100 workmen employed during the previous year.
DEDUCTION IN RESPECT OF INCOMES OF OFF-SHORE

BANKING UNITS [SEC.80LA]:-
1) The assessee is a scheduled Bank.

Income Tax
2) It has a branch in India located in a Special Economic Zone.

3) the gross total income of the assessee includes (a) any income
from the aforesaid branch in the special economic zone; (b) from the
business referred to in section 6(1) of the Banking Regulation Act,
1949, with an undertaking located in a special economic zone or any
other undertaking which develops, develops and operates and
maintains a special economic zone; (c ) any income received in
foreign exchange in accordance with the regulations made under the
Foreign Exchange Management Act, 1999.
4) The report from a Chartered Accountant in prescribed form
certifying that the deduction has been correctly claimed in
accordance with the provisions of the section should be submitted
along with the return of income.
5) A copy of permission obtained under section 23(1)(a) of the
Banking Regulation Act, 1949 should be submitted along with the
return of income.
Amount of Deduction: 100% of such income for 3 consecutive
years beginning from the assessment year relevant to the previous
year in which permission under section 23(1)(a) of the Banking
Regulation Act, 1949 was obtained; and thereafter 50% of such
income for two consecutive assessment years.
DEDUCTION IN RESPECT OF INCOME OF CO-OPERATIVE

SOCIETY [SEC.80P]: The deduction is allowed as follows-
1) 100% of the profits from following activities:
a) Carrying on business of banking or providing credit facilities to
its members;
b) a cottage industry;
c) the marketing of the agricultural produce grown by its
members;
d) the purchase of agricultural implements, seeds, livestock or
other articles intended for agriculture for the purpose of
supplying them to its members;
e) the processing, without aid of power, of agricultural produce of
its members;
f) the collective disposal of labour of is members;
g) fishing or allied activities.
2) 100% of profits from following activities:
Supplying milk, oil seeds, fruit, vegetables grown by its
members to
a) a federal co-operative society;
b) the Government or local authority;
c) a Government company or a statutory corporation.
3) In case of other activities deduction is limited to Rs. 50,000

Income Tax
(Rs. 1,00,000 in case of consumers Co-operative Society).

4) 100% of profits as interest or dividend from another co-
operative society.
5) 100% of profits from letting of Godowns or warehouse for
storage/processing or facilitating marketing of commodities.
6) 100% of interest income from securities and property (upto
maximum of Rs.20,000) in case of co-operative society NOT BEING
housing society or urban consumers society or Society carrying
transport business or manufacturing with the aid of power.
DEDUCTION IN RESPECT OF ROYALTY INCOME, ETC., OF

AUTHORS OF CERTAIN BOOKS OTHER THAN TEXT BOOKS
[SEC. 80QQB]:-
Conditions to be fulfilled:
1. The assessee is Individual who is resident in India and is an author
of a book.
2. The book should be a work of literary, artistic or scientific nature.
3. The income must be derived by him in the exercise of his
profession.
4. The income must be either:
a) on account of any lump sum consideration for the assignment or
grant of any of his interests in the copyright of such book; or
b) of royalty or copyright fees (whether receivable in lump sum or
otherwise).
5. A certificate in Form 10CCD duly verified by any person
responsible for making such payment to the assessee should be
enclosed along with the return of income of the assessee.
6. A certificate in Form 10H from the prescribed authority (in case of
any such income earned from any source outside India) should be
enclosed along with the return of income of the assessee.
Amount of deduction: 100% of such income or Rs.3,00,000
whichever is less.
However, where the income by way of such royalty or the copyright
fee is not a lump sum consideration in lieu of all rights of the
assessee in the book, then such royalty, etc. before allowing
expenses, in excess of 15% of the value of such books sold during
the previous year, shall be ignored.
Further, where any income is earned from any source outside India,
only so much of the income shall be taken into account for the
purpose of this section as is brought into India by, or on behalf of ,
the assessee in convertible foreign exchange with in a period of six
months from the end of the previous year in which such income is
earned or within such further period as the competent authority may
allow in this behalf.

Income Tax
DEDUCTION IN RESPECT OF ROYALTY ON PATENTS [SEC.

80RRB]:
Conditions to be fulfilled:
i. The deduction is available to an Individual who is
resident in India and is Patentee.
2) The patent should be registered on or after 01.04.2003 under the
Patents Act, 1970.
3) His gross total income of the previous year includes royalty in
respect of such patent.
2) A certificate in Form 10CCD duly verified by any person
responsible for making such payment to the assessee should
be enclosed along with the return of income of the assessee.
. 5) A certificate in Form 10H from the prescribed authority (in case
of any such income earned from any source outside India) should
be enclosed along with the return of income of the assessee.
Amount of deduction: 100% of such royalty income or Rs.
3,00,000 whichever is less.
However, where a compulsory licence is granted in respect of any
patent under the Patents Act, 1970, the income by way of royalty for
the purpose of allowing deduction under this section shall not
exceed the amount of royalty under the terms and conditions of a
licence settled by the Controller under that Act.
Further, where any income is earned from any source outside India,
only so much of the income shall be taken into account for the
purpose of this section as is brought into India by, or on behalf of ,
the assessee in convertible foreign exchange with in a period of six
months from the end of the previous year in which such income is
earned or within such further period as the competent authority may
allow in this behalf. DEDUCTION IN RESPECT OF PERMANENT
PHYSICAL DISABILITY [SEC80U]:
1) The assessee is individual who is resident in India and is a
person with disability as per Sec 2(i) of The persons with Disabilities
(Equal opportunities, protection of Rights and full participation) Act,
1995.
2) He is certified by the Medical Authority (i.e. any hospital or
institution specified as per section 2(p) of for the purpose of The
persons with Disabilities (Equal opportunities, protection of Rights
and full participation) Act, 1995) to be a person with disability, at
any time during the previous year.
3) The assessee furnishes the above said certificate along with
the return of income under section 139, in respect of the
assessment year for which the deduction is claimed.
Amount of deduction: Rs. 50,000* in case of a person with
disability.

Income Tax
* Rs.75,000 in case the assessee suffers 80% or more of one or

more disabilities.
*****
Chapter -11
AGRICULTURAL INCOME & ITS TAX TREATMENT
Section 10(1) of the Income-tax Act, 1961 exempts agricultural

income from income-tax. The reason for keeping the agricultural
income outside the purview of Income-Tax Act is the Constitution of
India gives exclusive powers to the State Legislature to make laws
with respect to taxes on agricultural income. However, from
assessment year 1974-75 and onwards, net agricultural income is
added to the total non-agricultural income computed as per Income-
tax Act, for the purpose of determining the income-tax on non
-agricultural income, although the agricultural income will remain
fully exempt.
Summarised definition of Agricultural Income as given in
section 2 (1A) of the Income-tax Act includes the following
incomes as agricultural income provided the land is situated
in India and is used for agricultural purposes:
(i) any rent or revenue derived from land;
ii) any income derived from such land by agriculture or from
processing of agricultural produce;
(iii) any income from farm building.
The above three types of income shall be treated as '
agricultural income' only when the following conditions are
satisfied:
(i) Income should be derived from land: The expression derived
from land would mean springing from land or arising from land.
It points to a source from out of which the income springs. But
such source should be the immediate and effective source and
not any secondary or remote source; that is, the proximate
source and not the source to which it may ultimately be
referable has to be considered.
Some instances where income held as not derived from land:
a) Mutation fees paid by tenant on succession to a holding

Income Tax
by inheritance.
b) Fees paid by tenants for renewal of leases (as well as
fees paid for recognizing the distribution of holding on a
partition) would not be income derived from land, since they
are payments made for administrative services rendered by
the landlord, just like registration fees.
c) Receipts from the supply of water (with water tank) in an
agricultural land.
(ii) Land should be situated in India: Land should be situated
anywhere in India, though, it may or may not be subject to
land revenue or any local rate. The land may be situated in an
urban area or in a rural area. If the land is located outside
India, any agricultural income derived from such land will not
be deemed to be agricultural income and the same will not
enjoy any exemption u/s 10(1). In the case of a person residing
in India, such income from agricultural land situated outside
India will be included in his total income and would be liable to
tax.
(iii) Land should be used for agricultural purpose: The Supreme
Court [in CIT v Raja Benoy Kumar Sahas Roy (1975)] has held
that the land is said to be used for agricultural purpose where
the following two types of operations are carried out on such
land:
(a) Basic Operations: These involve cultivation of the ground, in
the sense of tilling of the land, sowing of the seeds, planting
and similar operations on the land. Such basic operations
demand the expenditure of human labour and skill upon the
land itself and further they are directed to make the crop
sprout from the land.
(b) Subsequent Operations: After the crop sprouts from the land,
there are subsequent operations which have to be performed
the agriculturists for the efficient production of the crop such
as weeding, digging the soil around the growth, removal of
undesirable growths, prevention of the crop from insects and
pests and from damage by cattle and attention, pruning,
cutting, etc.
Both the basic and the subsequent operations together
form the integrated activity of the agriculturist. The
performance of the subsequent operation on the produce of
the land would not be enough to invest the subsequent
operations with agricultural character. They should be in
combination with, and in carry-over of, the basic operation
which is end result of an agricultural operation. In other words,
basic operations must be performed before any income is

Income Tax
called agricultural income.

The basic operation need not necessarily be tilling of the
land, sowing of the seeds or planting; it may be an operation of
a similar kind. Instead of tilling (involving the use of a plough)
the soil may be broken with the aid of a shovel where the soil
is loamy. A crowbar and spade would be enough for digging
pits in the soil to plant a sapling. Ploughing is mostly necessary
for sowing of seeds and not for planting.
Income from Nurseries [Explanation 3 to section 2(1A)]:
Any income derived from saplings or seedlings grown in
nursery is treated as agricultural income.
The above three types of agricultural incomes have been
defined u/s 2(1A) (a), 2(1A) (b) and 2(1A) (c) respectively. The
definition is being discussed in detail as under:
1(a). Any rent or revenue derived from land which is situated
in India and
is used for agricultural purposes [Section 2(1A)(a)]: The
following conditions
must be satisfied to treat income derived from land as 'agricultural
income':
(i) rent or revenue should be derived from land.
(ii) such land should be situated in India.
(iii) the land should be used for agricultural purposes.
(ia) Rent from land: Rent should be a payment in cash or
in kind (or in money or in money's worth), by one person
to another in respect of a grant of a right to use land. To
treat any income or revenue in the nature of rent, there
should be an established relationship of a landlord and
tenant (or Lessor and lessee) between the parties. For
example, the share of agricultural produce received by a
landlord is though in kind but it is rent and thus
agricultural income.
(ib) Revenue from Land: The expression 'revenue' would
mean income of every kind derived from agricultural
land, other than:
(a) rent; or
(b) the income which falls under section 2(1A) (b) and (c).
(ic) Rent or revenue should be derived from land: This
would mean that such rent or revenue should be
generated from land or arise from land. If the immediate
and effective source is not land, the income will not be
agricultural income. The following are not agricultural
income as these are not derived from land.
• Dividend received by shareholder from a company

Income Tax
carrying on agricultural operations is not agricultural

income in his hands. The shareholder receives the
dividend not by virtue of any activity of agriculture
carried on by him, but by virtue of the investment of his
funds in the company in buying up its shares.
• Loan obtained by a shareholder out of accumulated
profits of a company having only agricultural income,
which is liable to be treated as 'deemed dividend', is not
agricultural income in the hands of the recipient.
• Interest on arrears of cess or rent payable by a tenant
to his landlord is revenue but it is not revenue derived
from land and hence it is not agricultural income.
• Commission earned by a broker for selling agricultural
produce of an agriculturist is not agricultural income.
• Salami or Nazarana paid shall not be agriculture income
in the hands of the recipient (unless it is a payment of
rent in advance).
1(b) Any income derived from such land by agricultural
operations including processing of the agricultural produce,
raised or received as rent in kind, so as to render it fit for
the market, or sale of such produce [Section 2 (1A)(b)]:
Section 2(1A)(b) gives the following three instances of agricultural
incomes:
(1) Any income derived by agriculture from land situated in
India and used for agricultural purpose. The following will be
treated as income derived from agricultural land:
(i) standing crop or the raw produce after harvest, sold by the
agriculturist himself.
(ii) crop used by the cultivator for his own consumption;
(iii) crop used as raw material by the cultivator in his business.
(2) Any income derived by a cultivator or receiver of rent in
kind of any process ordinarily employed to render the produce
raised or received by him to make it fit to be taken to market.
The produce raised from the land may not have a market in its
original form. It may become necessary to perform a process
on the produce to make it marketable or saleable. Such
process may be called 'marketing process’ or ‘agricultural
process' for the sake of convenience. The gain in the value of
the produce by such marketing process or agricultural process
is also classified as income from agriculture. If marketing
process is performed on agricultural produce, which could be
sold without such process, shall not be agricultural income.
e.g. sugarcane can be generally sold as such; therefore the
process of conversion of sugarcane into gur (jiggery) shall not

Income Tax
be a process necessary to be applied where there is a market

for sugarcane being sold as such. [Brihan Maharashtra Sugar
Syndicate Ltd. v CIT (1946) 14 ITR 611 (Bom)]. However,
conversion of coconut into copra and drying the leave of
tobacco by the grower shall be treated as process ordinarily
employed to make it fit for market and hence shall be
(3) Any income derived from the sale by a cultivator or
receiver of rent in kind of the produce raised or received by
him in respect of which no process has been performed other
than a process of the nature as referred in (2) above. Income
from sale of agricultural produce is exempt from tax to the
extent to which no process has been performed on the
produce, except the marketing process, discussed above. If
any other processes have been performed, the sale proceeds
will have to be disintegrated to find out that part of it which
constitutes agricultural income, so as to exempt that part
alone from Income-tax.
1(c). Any Income attributable to a building (farm house) is
treated as
agricultural income provided the following conditions are
satisfied [Section
2(1A)(c)]: If all the conditions given below from (i) to (iv) are
satisfied then the income from farm building is exempt from
tax.
(i) Building should be owned by owner of agricultural land and
occupied by the owner or cultivator of such land.
(ii) Building should be on or in the immediate vicinity of land
situated in India which is used for agricultural purpose.
(iii) Building should be required by the occupier (i.e. receiver of
rent or revenue or the cultivator) by reason of his connection
with the agricultural land as:
(a) dwelling house;
(b) store house;
(c) other out building.
(iv) The land should be assessed to land revenue or a local
rate. However, if it is not assessed to land revenue or local rate
then such land should be situated outside urban area.
Urban area means an area:
(a) if the land is situated within the jurisdiction of a
municipality or a Cantonment Board the population of that
municipality, etc. is 10,000 or more.
(b) if the land is situated in any other area - it is situated within
notified distance (upto maximum 8 kms.) from the limits of

Income Tax
such municipality or Cantonment Board.

Use of building or land for purpose other than
agriculture shall not constitute agricultural income:
Explanation 2 to section 2(1A) has been inserted to clarify that
income derived from any building or land referred to in sub-
clause ( c) above arising from the use of such building or land
for any purpose (including letting for residential purpose or for
the purpose of any business or profession) other than
agriculture shall not be agricultural income.
What does agriculture include?
Agricultural would include horticulture, floriculture, arboriculture and
sylviculture. It would include the raising of grooves, plantations,
raising of grass or pastures. It would extend to cultivation of all
commodities of food value like sugarcane, coffee, mangoes, etc.
Artistic and decorative value like flowers and creepers, housing
value like bamboo, timber, fuel value medicinal and health value.
Agriculture income would, however, cover only those incomes which
are derived by human effort.
Agricultural income: Following incomes have been held to be
agricultural income:
(a) Income from toddy is agricultural income when it is received
by the actual cultivator of the trees.
(b) Where the owner himself performs slaughter tapping and then
sells the rubber, the income is agricultural income.
(c) Lease income derived by a Lessor from lease of a coconut
garden, to a lessee who pays rent and takes the coconuts from
the trees during the term of the lease and has to deliver
possession of the coconut garden back to the Lessor at the end
of the term, would be treated as agricultural income in the
hands of the Lessor.
(d) Where the requisitioned lands were used by the assessee for
agricultural purposes in the accounting year and also in the
earlier years, and those lands were under cultivation at the
time of their requisition by the Government, the compensation
paid for the requisitioned lands which were used for
agricultural purposes by the assessee was held to be
(e) If the grass is grown by human effort, by tilling, sowing,
planting of any particular kind of seed or cutting, or by any
similar operations, basic operations would have been
performed. Consequently, the crop would be agricultural and
any income by sale of grass would be agricultural income.
(f) Income from growing flowers and creepers would be

Income Tax
(g) Interest on capital and share of profit received by a partner

from a firm which is engaged in agricultural operations is
(h) Lease rent received for leasing out land for grazing of cattle
required for agricultural pursuits, is agricultural income.
(i) Compensation received from an insurance company on
account of damaged caused to the crop is an agricultural
income.
(j) Seeds are clearly a product of agriculture and the income
derived from the sale of seeds derived on account of
cultivation by the assessee is an agriculture income.
Non-agricultural income: Following incomes have been held to be
non-agricultural income, hence taxable:
(a) Income from sale of forests, trees, wild grass, fruit and flowers
grown spontaneously and without human effort.
(b) Income from salt produced by flooding the land with sea water
and then extracting salt there from.
(c) Income from stone quarries.
(d) Income from breeding of livestock.
(e) Income from dairy farming, butter and cheese making.
(f) Income from poultry farming.
(g) Income from fisheries.
(h) Preservation of potatoes by refrigeration as it is not a process
ordinarily employed by a cultivator.
(i) Income from brick making.
(j) Income from supplying surplus water to other agriculturists.
(k) Interest on arrears of rent in respect of agricultural land.
(l) Profit on sale of standing crops/agricultural produce purchased
by the assessee.
(m) Income derived from letting out of land/ Godowns for storing
crops.
(n) Royalty income of mines.
(o) Annuity payable to vendor of agriculture land or payable to a
person giving up his claims to piece of agricultural land.
(p) Harvest Crop on purchased land.
(q) Compensation/ damages paid for loss of agricultural income
due to late payment of installments of the consideration price
of rubber plantation site.
(r) Registration fee collected from the contractor who is bidding at
the auction conducted for sale of plantation is not an
agricultural income as such registration fee had no nexus with
land.
(s) Hire charges received for use of the garden for shooting films
could not be treated as agricultural income, as it has no nexus

Income Tax
with the land, except that it was carried out on the agricultural
land.
Computation of Net Agricultural Income
Although the agricultural income is exempt from income-tax, but it
is included in non-agricultural income of an individual or HUF etc. for
purpose of determining the Income-tax on non-agricultural income.
Hence, agricultural income will have to be computed. The
computation of net agricultural income is done as per Rules given in
Part IV of Schedule 1 of the relevant Finance Act. These have been
summarized as under:
(1) Rent or revenue derived from land is computed under the head
‘Income from Other Sources’ and the provisions of sections 57
to 59 of this Act, so far as may be, apply accordingly. Thus,
any expenditure (not being in the nature of capital expenditure
or personal expenses of the assessee) laid out or expended
wholly and exclusively for the purpose of earning rent or
revenue will be allowed as deduction is computing the rent or
revenue from agricultural land. However, the provisions of
section 40A (other than the provision of sections 40A (3) and
(4) relating to payment exceeding Rs. 20,000 in cash) which
are applicable for income from other sources also, shall be
applicable in this case. [Rule 1]
(2) Income by way of agriculture or processing of agricultural
produce, etc. as discussed already will be computed under the
head ‘profit and gains of business or profession’ and therefore,
all the provisions of sections 30,31,32,36,37,38, 40, 40A
[excluding 40A (3) and (4)], 41, 43, 43A, 43B, 43C of that
Chapter will be applicable. [Rule 2] It may be noted that
provisions of section 35 will not apply in the computation of
such income and hence no deduction shall be allowed in
respect of expenditures on scientific search in computing such
income. Depreciation will, however, be admissible in respect of
the assets used for purpose of earning such agricultural
income.
(3) Income derived from any building which is used as a dwelling
house by the receiver of the rent or revenue or cultivator or
receiver of rent in kind would be computed as if it was income
from House Property and the provisions of sections 23 to 27 of
the Act shall, so far as may be, apply accordingly. [Rule 3] On
the other hand, agricultural house property which is used as
store house or other out building will be treated in the same
manner as house property used for the purpose of business.
Income which is partially agricultural and partially from

Income Tax
business
(A) Income from growing and manufacturing of any product
other than tea, rubber and coffee [Rule 7]: An assessee
may have composite business income which is partially
agricultural and partially non-agricultural, for example, where
XYZ Ltd. grows potatoes and further process its produce to sell
them as wafers. In this case the company has composite income
i.e. from agriculture and from business. The composite income
has to be disintegrated and for computing business income the
market value of any agricultural produce raised by the assessee
or received by him as rent in kind and utilized as raw material in
his business is deducted. No further deduction is permissible in
respect of any expenditure incurred by the assessee as a
cultivator or receiver of rent in kind. For computing agricultural
income the market value of agricultural produce will be total
agricultural receipt on account of potatoes. From such
agricultural receipts, expenses such as cultivation expenses etc.
incurred in connection with such receipt will be deducted and
balance will be agricultural income, which will be exempt.
For example, in the above case, if the market value of the
potatoes grown by the company, which have been used for the
purpose of making its own wafers, is Rs. 5 lakhs and the cost of
cultivation of such potatoes is Rs. 4 lakhs. From the business income
of wafers Rs. 5 lakhs i. e. the market value, shall be deducted and
no other expense shall be allowed for such potatoes. On the other
hand, the agricultural income shall be Rs. 1 lakh (5 lakhs-4 lakhs).
This agricultural income of Rs. 1 lakh shall be exempt.
(B) Income from growing and manufacturing of rubber (Rule
7A):
(1) Income derived from the sale of centrifuged latex or cenex or
latex based crepes (such as pale latex crepe) or brown crepes (such
as estate brown crepe, re-milled crepe, smoked blanket crepe or flat
bark crepe) or technically specified block rubbers manufactured or
processed from field latex or coagulum obtained from rubber plants
grown by the seller in India shall be computed as if it were income
derived from business, and 35% of such income shall be deemed to
be income liable to tax.
(2) In computing such income, an allowance shall be made in
respect of the cost of planting rubber plants in replacement of plants
that have died or become permanently useless in an area already
planted, if such area has not previously been abandoned, and for
the purpose of determining such cost, no deduction shall be made in
respect of the amount of any subsidy which, under the provisions of
section 10(31), is not includible in the total income.

Income Tax
(C) Income from growing and manufacturing of coffee (Rule

7B):
(1) (a) Income derived from the sale of coffee grown and cured by
the seller in India, shall be computed as if it were income derived
from business, and 25% of such income shall be deemed to be
income liable to tax.
(b) Income derived from the sale of coffee grown, cured, roasted
and grounded by the seller in India, with or without mixing chicory
or other flavorings ingredients shall be computed as if it were
income derived from business, and 40% of such income shall be
deemed to be income liable to tax.
(2) In computing such income, an allowance shall be made in
respect of the cost of planting coffee plants in replacement of plants
that have died or become permanently useless in an area already
planted, if such area has not previously been abandoned, and for
the purpose of determining such cost, no deduction shall be made in
respect of the amount of any subsidy which, under the provisions of
section 10(31), is not includible in the total income.
(D) Income from growing and manufacturing of tea (Rule 8):
Where the assessee has a business of growing tea leaves and then
processing it (or manufacturing the same), the procedure adopted to
disintegrate is given under Rule 8 which is as under:
Step 1 Compute the income of growing as well as manufacturing
tea under the head 'profits and gains of business or profession' after
claiming the deductions available under that head. In computing
such income an allowance shall be made in respect of the cost of
planting bushes in replacement of bushes that have died or become
permanently useless in an area already planted, if such area has not
previously been abandoned and for the purpose of determining such
cost, no deduction shall be made in respect of the amount of any
subsidy which under the provisions of sections 10(30), is not
includible in the total income.
Step 2 60% of the income computed in Step 1 will be treated as net
agricultural income and 40% of such income, so arrived at, is
treated as business income.
Tax on non-agricultural income (if the assessee earns

agricultural income also): As already discussed, there is no tax
on agricultural income but if an assessee has non-agricultural
income as well as agricultural income, such agricultural income is
included in his Total Income for the purpose of computation of
Income-tax on non-agricultural income. This is also known as partial
integration of agricultural income with non-agricultural income or
indirect way of taxing agricultural income. Such partial integration is

Income Tax
done only in the case of :

(i) Individual;
(ii) HUF
(iii) AOP/BOI;
(iv) Artificial Juridicial Person
The agricultural income is not to be added in Non-agricultural
Income for computing tax on Non-Agricultural income in the case of :
(i) Firm;
(ii) Company;
(iii) local authority;
(iv) Co-operative society.
The partial integration is done to compute the tax on non-
agricultural income only when the following two conditions are
satisfied:
(i) non-agricultural income of the assessee exceeds the maximum
exemption limit (which for assessment year 2010-11 is Rs. 2,40,000
in the case of an resident individuals at least 65 years old;
Rs.1,90,000 in case of resident women less than 65 years old; and
Rs.1,60,000 in case of other individuals and HUF’s); and
(ii) the Net Agricultural Income exceeds Rs. 5,000.
In other words, if the non-agricultural income is less than
the maximum limit or Net Agricultural Income is Rs. 5,000 or less, no
partial integration is required.
Computation of Tax where there is agricultural income also:
The following steps should be followed to calculate the tax:
Step 1: Add agricultural income and non-agricultural income and
calculate tax on the aggregate as if such aggregate income is the
Total Income.
Step 2: Add agricultural income to the maximum exemption limit
available in the case of the assessee and compute tax on such
amount as if it is the Total Income.
Step 3: Deduct the amount of Income-tax as computed under Step
2 from the tax computed under Step 1.
The amount so arrived at shall be total Income-tax payable by the
assessee.
Step 4: Add education cess @ 2% and Secondary and higher
education cess @1% on tax.
******

Income Tax
Chapter-12
ASSESSMENT OF COMPANIES
A company has been defined as a juristic person having

an independent and separate legal entity from its shareholders.
Income of the company is computed and assessed separately in the
hands of the company. The company is liable to pay tax at a flat rate
like a firm. In addition to such tax, if the company is a domestic
company, it shall be liable to pay tax under section 115-O on the
amount distributed as profits to its shareholders. However, the
income of the company which is distributed to its shareholders as
dividends is exempt under section 10(34) in the hands of the
shareholders, unless it is in the nature of dividends other than the
dividends referred to in section 115-O. Such distribution of income is
not treated as an expenditure in the hands of company, the income
so distributed is an appropriation out of the profits of the company.
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. A Company in which the public are substantially
interested: Section 2 (18) of the Income-tax Act, has defined
" a company in which the public are substantially interested". It
includes:
(i) A company owned by Government or Reserve Bank of India.
(ii) A company having Govt. participation i.e. A company in which
not less than 40% of the shares are held by Government or the
RBI or a corporation owned by the RBI.
(iii) Companies registered under section 25 of the Indian
Companies Act, 1956: Companies registered under section 25

Income Tax
of the Companies Act, 1956 are companies which are

promoted with special object such as to promote commerce,
art, science, charity or religion or any other useful object and
these companies do not have profit motive. However, if at any
time these companies declare dividend they would loose the
status of a company in which the public are substantially
interested.
(iv) A company declared by the CBDT: It is a company without
share capital and which having regard to its object, nature and
composition of its membership or other relevant consideration
is declared by the Board to be a company in which public are
substantially interested.
(v) Mutual benefit finance company, where principal business of
the company is acceptance of deposits from its members and
which has been declared by the Central Government to be a
Nidhi or a Mutual benefit Society.
(vi) A company having co-operative society participation: It is a
company in which at least 50% or more equity shares have
been held by one or more co-operative societies.
(vii) A public limited company: A company is deemed to be a
public limited company if it is not a private company as
defined by the Companies Act, 1956 and is fulfilling either of
the following two conditions:
(a) Its equity shares were listed on a recognized stock
exchange, as
on the last day of the relevant previous year; or
(b) Its equity shares carrying at least 50-% of the voting
power (in the case of an industrial company the limit is 40%)
were beneficially held throughout the relevant previous year
by Government, a statutory corporation, a company in which
the public is substantially interested or a wholly owned
subsidiary of such a company.
3. Widely held company: It is a company in which the public
are substantially interested.
4. Closely held company: It is a company in which the public
are not substantially interested.
Burden of proof. The onus is on the revenue to establish
that the public are not substantially interested in a company.
[Jayantilal Amritlal Ltd. v CIT (1965) 55 ITR (SC)]. In other
words, the onus is on the department to establish that the
company is a closely-held company. On the other hand, the
Bombay High Court had earlier held that the burden of proving
that a company is one in which the public are substantially
interested is on the company. [P.M. Hutheesingh & Sons Ltd. v

Income Tax
CIT (1946) 14 ITR 653 (Bom)].

5. Indian company [Section 2(26))]: 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 property, Capital
gains and Income from other sources.
Residence of a Company [Section 6 (3) ]
A company is said to be a resident in India during the
relevant previous year if: (a) it is an Indian company, or (b) if it is not
an Indian company then, the control and the management of its
affairs is situated wholly in India.
The company is said to be non-resident in India if it is not
an Indian company and some part of the control and management
of its affairs is situated outside India.
Computation of Total Income
The total income of a company is also computed in the

Income Tax
manner in which income of any other assessee is computed. The

first and the foremost step in this direction is to ascertain Gross
Total Income. Income computed under four heads (salary head is
not applicable), is aggregated. While aggregating the income,
section 60 and 61 shall be applicable. Further, effect to set off of
losses and adjustment for brought forward losses will also be done.
From the gross total income so computed, the following deductions
of Chapter VIA should be allowed:
1.80G Donations to certain funds/ charitable institutions,
etc.
2.80GGA Certain donations for scientific research or rural
development.
3.80GGB Contributions given by companies to political parties.
4.80-IA profits and gains of new industrial undertaking or
enterprises engaged in infrastructural development, etc.
5.80-IB Profits gains from certain industrial undertakings other
than infrastructure development undertakings.
6.80-IC Deduction in respect of certain undertaking or
enterprises in certain special category States (W.e.f.
assessment year 2004-05).
7.80JJA Deduction in respect of profits and gains from business of
collecting and processing of bio-degradable waste.
8.80JJAA Deduction in respect of employment of new workmen.
Carry forward and set off of losses in case of certain
companies
[Section 79]
In the case of closely held companies, no loss incurred in
any year prior to the previous year shall be carried forward and set
off against the income of the previous year unless on the last day of
the previous year in which loss is set off and on the last day of the
previous year in which the loss was incurred, the shares of the
company carrying not less than 51% of the voting power were
beneficially held by the same persons.
Where a change in voting power of more than 49% of the
shareholding of a closely held company has taken place between
two relevant dates (viz., the last day of previous year in which set
off is claimed and the last date of the previous year in which the loss
was incurred), the assessee will not be entitled to claim set off of
such losses.
This provision shall not apply to a change in the vot8ing power
consequent upon:
(a) the death of a shareholder, or
(b) on account of transfer of shares by way of gifts to any relative
of the shareholder making such gift.

Income Tax
Further, section 79 shall not apply to any change in the

shareholding of an Indian company which is subsidiary of a foreign
company arising as a result of amalgamation or demerger of a
foreign company subject to the condition that 51 per cent of the
shareholders of the amalgamating or the demerged foreign
company continue to remain the shareholders of amalgamated
resulting foreign company.
Assessment of Companies
This principal officer of the company is required to file the
return of total income of the company on or before 31st October of
the assessment year. A company is assessed like any other
assessee. However, its liability differs in two respects:
1. No exemption limit: A company does not enjoy any exemption
limit.
2. Flat Rate of Tax: A company pays income -tax at a flat rate
instead of slab rate.
Rates of income-tax for the assessment year 2009-10 are as
under:
1. Short-term capital gain on equity shares in a company or units
of an equity oriented fund where the transaction is chargeable
to securities transaction tax.
10%
2. Tax on long-term capital gains
20%
(where the long-term capital gain is covered by section 115AB,
115AC or 115 AD, it is taxable at 10%)
3. Tax on winnings from lotteries, cross word puzzles, races
including horse races, etc.
30%
4. Tax or any other income
(a) Domestic company
30%
(b) Foreign company
(i) for all income other than given under (ii) below:
40%
(ii) Royalty received from Government or an Indian concern
in pursuance of an agreement made by it with the Indian
concern after March 31, 1961 but before April 1,1976 or fees
for rendering technical services in pursuance of an agreement
made by it after February 29, 1964 but before Ist April, 1976
and where such agreement has in either case been approved
by the Central Government
50%
The amount of income-tax computed as above shall be

Income Tax
increased by a surcharge of 10% in case of domestic

companies and 2.5% in case of foreign companies, if net
income exceeds Rs 1 crore.
Education cess: Education cess @ 2% and Secondary and higher
education cess @1% shall be levied on the total tax (including
surcharge) payable by the assessee.
Provisions of MAT for payment of tax by certain companies
[Section 115JB]
Tax payable (before adding surcharge and cess) for any
assessment year cannot be less than 10% of book
profit: Where in the case of a company, the income
-tax payable on the total income as computed under the
Income-tax Act, is less than 10% of its book profit shall be
deemed to be the total income of the assessee and the tax
payable by the assessee on such total income (book profit)
shall be the amount of the income-tax at the rate of 10%.
Allowing tax credit in respect of tax paid on deemed income
under MAT provisions against tax liability in subsequent
years [sec 115JAA]:
With effect from assessment year 2006-07, where any tax is paid
under section 115JB(1) by a company for any assessment year
beginning on or after 1.04.2006, the credit in respect of taxes
so paid for such assessment year shall be allowed on the
difference of the tax paid under section 115 JB and the amount
of tax payable by the company on its total income as per other
provisions of the Act.
The amount of tax credit shall be allowed to be carried
forward and set off in a year when tax becomes payable on the
total income computed under the regular provisions. But such
tax credit can be carried forward only upto 5 assessment
years. Also no credit will be allowed for MAT paid in any
assessment year before 2006-07.
Profit and loss Account of the company to be prepared as
per provisions of
the Companies Act[Section 115JB (2)]
Every company shall for the purpose of this section,
prepare its profit and loss account for the relevant previous
year in accordance with the provisions of Parts II and III of
Schedule VI to the Companies Act, 1956. In other words, if the
company does not prepare its profit and loss account
according to Part II + III of Schedule VI of the Companies Act,
the Assessing Officer can recalculate the net profit as per profit
and loss account prepared in accordance with the said
Schedule.

Income Tax
Profits and loss account prepared for section 115JB(2) and

annual
accounts including profit and loss account prepared and
placed before
AGM should have same accounting policies, standards, etc.
[Provisos to
section 115JB(2)]: While preparing the annual accounts including
profit and loss account:
(i) the accounting policies of the company
(ii) the accounting standards followed by the company for
preparing such accounts including profit and loss account;
(iii) the method and rates adopted for calculating the depreciation
by the company shall be the same as have been adopted for
the purpose of preparing such accounts including profit and
loss account as laid before the company at its annual general
meeting in accordance with on the provisions of section 210 of
the Companies Act, 1956[Proviso 1].
Further, where the company has adopted or adopts the
financial year under the Companies Act, 1956 which is
different from the previous year under the Income-tax Act, the
above three (i.e. accounting policies, accounting standards and
method of calculating depreciation) shall correspond to the
accounting policies, accounting standards and the method and
rates for calculating the depreciation which have been adopted
for preparing such accounts including profit and loss account
for such financial year or part of such financial year falling
within the relevant previous year[Proviso 2]
When an Assessing Officer has power to alter the
net profit: In the following cases, the Assessing Officer shall
have power to rework or rewirte the profit and loss account:
(1) Where the profit and loss account submitted is not as per
Part II and III of the Schedule VI of the Companies Act.
(2) Where the accounting policies or accounting standards or
rate of depreciation adopted are different from those adopted
for the profit and loss prepared for the annual genral meeting.
Assessing Officer has no power to scrutinize profit
and loss account: Where the profit and loss account has been
prepared in accordance with Part II and III of Schedule VI to the
Companies Act and which has been scrutinized and certified by the
statutory auditors and relevant authorities, the Assessing Officer has
no power to scrutinize net profit in profit and loss account except to
the extent provided in Explanation to 115J. [Apollo Tyres Ltd. v CIT
(2002) 255 ITR 273 (SC)].
How to compute book-profits [Explanation to 115JB(1) and

Income Tax
(2)]
Step 1: The net profit as shown in the profit and loss account
(prepared as per Part II and III of Schedule VI) for the relevant
previous year, shall be increased by the following, if debited to the
Profit and Loss Account:
(a) the amount of income-tax paid or payable, and the
provision therefore; or
(b) the amounts carried to any reserves by whatever name
called (other than a reserve specified under section 33AC,
inserted as per the Finance Act, 2002, w.e.f. assessment
year 2003-04); or
(c) the amount or amounts set aside to provisions made for
meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary
companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any
income to which section 10, 10A, 10B, 11 or 12 applies (i.e.
incomes which are exempt from tax).
W.e.f. assessment year 2005-06 expenses of
infrastructure capital fund or company referred to in
section 10(23G) shall not be added back.
Step 2: The profit as per the Profit and Loss Account shall be
reduced by the following:
(i) the amount withdrawn from any reserves or provisions, if
any, such amount is credited to the profit and loss account.
A clarificatory amendment has been made by the Finance
Act, 2002 w.r.e.f assessment year 2001-2002 to section 115JB
to provide that the amount withdrawn from the reserve or
provision, created not out of profits before 1-4-1997, if credited
to the profit and loss Account shall not be deducted while
computing book profit. In other words, the amount withdrawn
from any reserve, credited before 1-4-1997, shall not be
reduced from the net profit unless the same was debited to the
profit and loss account at the time when such reserve was
created. Similarly, the amount withdrawn from the reserve
created on or after 1-4-1997 and credited to the profit and loss
account shall not be deducted while computing book profit
unless the book profit in the year of creation of such reserve
was increased by such reserve at that time.
Example: R Ltd. transferred a sum of Rs. 40 lakhs to Reserve
for bad and doubtful debt account in the financial year 2001-
2002. It withdrew a sum of Rs. 15 lakhs out of the reserve
during the financial year 2004-2005 by debiting the reserve

Income Tax
account and crediting the profit and loss account of that year.
In this case, Rs. 40 lakhs must have been added back to net
profit for computing the book profits of financial year ending
31-3-2002. Hence, Rs. 15 lakhs credited back to profit and loss
account of year ended 31-3-2005 shall be reduced to calculate
the book profits of that year.
(ii) the amount of income to which any of the provision section
10, 10A, 10B, 11 or 12 applies (i.e. incomes which are exempt
from tax), if any such amount is credited to the profit and loss
account; or
W.e.f. assessment year 2005-06 exempted income of
infrastructure capital fund or company referred to in
section 10 (23G) shall not be deducted.
(iii) the amount of loss brought forward or unabsorbed
depreciation, whichever is less as per books of account. The
loss shall, however, not include depreciation. Further the
provision of this clause shall not apply if the amount of brought
forward loss or unabsorbed depreciation is Nil; or
(iv) the amount of profits of sick industrial company for the
assessment year commencing from the assessment year
relevant to the previous year in which the said company has
become a sick Industrial company under sub-section (1) of
section 17 of Sick Industrial.Companies (Special Provisions)
Act, 1985 and ending with the assessment year during which
the entire net worth of such company becomes equal to or
exceeds the accumulated losses.
(v) the amount of profits eligible for deduction under section
80HHC (for direct exporter and /or supporting manufacturer),
subject to the conditions specified in that section;
(vi) the amount of profits eligible for deduction under section
80HHE (for direct exporter and /or supporting manufacturer),
subject to the conditions specified in that section;,
(vii) the amount of profits eligible for deduction under section
80HHF, subject to the conditions specified in that section;
The amount computed after increasing or decreasing the above in
Step 1 and
Step2, respectively, is known as Book-profit.
How much brought forward loss/unabsorbed depreciation
are deductible from book profits: As per clause (iii) above, the
amount of loss brought forward of unabsorbed depreciation as per
books of account whichever is less is to be deducted from the book
profits. It has been however clarified that loss however shall not
include depreciation In this case brought forward loss and
unabsorbed depreciation as per income-tax shall have no relevance.

Income Tax
It has been clarified that where the value of the amount

of either loss brought forward or unabsorbed depreciation is 'nil', no
amount on account of such loss brought forward or unabsorbed
depreciation would be reduced from the book profit. This
amendment will be effective from assessment year 1997-98 in case
of section 115JA and from assessment year 2001-2002 in case of
section 115JB.
Furnishing of Report of an Accountant [Section 115 JB (4)
and Rule 40B]
Every company to which this section applies, shall furnish
a report in Form No. 29B from a chartered accountant certifying that
the book profit has been computed in accordance with the
provisions of this section along with the return of income filed under
section 139(1) or along with the return of income furnished in
response to a notice under section 142(1)(i).
It may, however be noted the company shall have to file
such report even if it furnishes the return of Income under section
139 (4) instead of section 139(1) or in response to a notice under
section 142 (1) (i).
Unabsorbed depreciation or losses which can be carried
forward [Section 115JB (3)]
Although, the assessee is liable to pay tax @ 10% (plus
surcharge and cess as applicable) of the book profits if its total
income computed as per Income-tax Act is less but it is entitled to
determine unabsorbed depreciation u/s 32(2), business loss u/s
72(1), speculation loss u/s 73 and capital loss u/s 74 and loss u/s
74A and shall be allowed to carry forward such unabsorbed
depreciation or losses to the subsequent year (s) for claiming set off
as per the normal provisions of Income-tax Act.
Are the provisions of section 115JB applicable to foreign
companies?
In the connection of old section 115J (the provisions of
section 115JB are similar in this case) the Authority for Advance
Rulings held that such provisions are applicable to foreign
companies also and the foreign companies shall calculate its Indian
profits separately for the purpose of minimum alternate tax
Other provision of the Act shall continue to apply to such
companies [Section 115JB(5)]
Save as otherwise provided in section 115JB, all other
provisions of the Income-tax Act shall apply to such companies.
Hence, all other provisions relating to Advance tax, interest under
sections 234A, 234B and 234C penalty, etc. shall apply to such
companies also.

Income Tax
*****
Chapter-13
BUSINESS REORGANISATION
The business and economic environment of the country has

thrown up the need for rationalization of laws relating to business
reorganization for restructuring of production system and better
utilization of resources which have become necessary with a view to

Income Tax
enable the Indian industry to rearrange itself to become globally

competitive. It was in this back ground that tax concessions to
conversion of proprietary concern/firms into company were provided
for in The Finance (No. 2) Act, 1998.
With the same end in view, the Finance Act, 1999 introduced
the following new provisions which relate to:
(a) demerger of a company;
(b) sale or transfer of business as a going concern through slump
sale.
In addition, the existing provisions of amalgamation have also been
rationalized.
The Income-tax Act now provides for tax concessions in the
following cases of business reorganization:
(1) Amalgamation/merger of companies;
(2) Conversion of proprietary concern/firm into a company;
(3) Demerger of a company;
(4) Slump sale.
33.1 Some important terms as used in financial management
(1) Merger: Merger is a combination of two or more companies
into one company. It may involve either absorption or consolidation.
A merger, in which one of the companies loses its identity and
assets and liabilities of this company are taken over by the other
(acquiring) company, is referred to as absorption. A merger, in which
all the participating companies go out of existence to form a new
company, is referred to as Amalgamation.
Examples for absorption variety includes the merger of Tata Oil
Mills Company (TOMCO) with Hindustan Lever Limited (HLL), Merger
of Reliance Petrochemicals with Reliance Industries and merger of
Renusagar Power Supply with Hindalco Industries.
Examples for the amalgamation consolidation variety include
the merger of Tetrapak and Alfa Laval to form Tetra Level; the
merger of the two Tata Group of companies-Forbes Campbell with
Gokak Patel Volkart to form a new company Forbes Gokak; the
merger of the three S.K. Birla group of companies- Oriental Carpets,
Digvijay Woolen Mills and Universal Electric to form VXL India
Limited; and the merger of the two advertising agencies owned by
Mudra Communication Interact Communication and Vision
Advertising to form a new company Interact Vision.
(2) Acquisition/takeover: Acquisition/ Takeover involve the
transfer of controlling interest in a company from one management
group to another. Typically it involves the bidding company making
a tender offer directly to the shareholders of the target company.
The tender offer is an offer to purchase the share of the target
company at a fixed price per share from shareholders who "tender"

Income Tax
their shares. To induce the shareholder of the target to sell their

shares, the tender price is usually set significantly above the current
market price. Use of tender offer allows the acquiring company to
bypass the management of the company it wishes to acquire. The
term 'takeover' is also used to refer to this process.
Examples include acquisition of controlling interest: (a) in
Chloride India by the S.K. Birla Group; (b) in Harrison Malayalam
Plantation by the R.P.Goenka groups; (c) in Rallis India by Tata Tea;
and (d) in Consolidated Coffee by Tata Tea.
Mergers and acquisitions distinguished: In merger
transactions, the consideration is paid for and received in shares
and both the merging partners receive money in future periods of
time in the form of future dividends on yields. No money transaction
is usually implied at the time of entering into a merger agreement.
Whether share capital is pooled or assets are pooled, so long as a
share for share exchange takes place between the contracting
parties, the transaction is a merger.
In an acquisition, the consideration is in the form of cash.
The person or the corporation intending to control another
corporation pays cash for the number for shares that give him the
control. Thus the seller of the share receives money in the current
period of the transaction and the buyer of the share also pays in
'today's values'.
(3) Demerger: The term "demerger" signifies spinnings of or
hiving off the existing divisions of the company into a separate
company. Thus, demerger is a split or a division of the company.
The division hived off could be transferred to the new company or it
can be sold to an existing company.
The demerger may take place due to various reasons like
internal restructuring or family settlements. It may also be
undertaken as a tool of tax-planning.
(4) Slump sale: Slump sale refers to the sale of the
undertaking as a whole including all the assets and liabilities as a
going concern. In this case the consideration is not fixed for each
and every asset separately but a lump sum consideration is
determined for the undertaking/division as a whole.
Legal aspects of amalgamation/merger as per Companies Act
The term amalgamation has not been defined under the
Companies Act but as per section 394 of the Companies Act and
various judicial decisions, amalgamation includes absorption and the
meaning of term amalgamation and absorption is same as described
above. The amalgamation under the company law may be by order
of court or by the Central Government if it is in public interest.
The legal procedure to be followed for the amalgamation

Income Tax
of the companies is as follows:

Procedure:
1. Provision in the object clause: There must be a provision in the
Memorandum of Association of both the Companies to amalgamate
with any other company.
2. Obtaining Government Approval: Under sections 391 and 394
of the Companies Act, 1956, the Central Government's approval of
the merger proposal is necessary for filing petition before the High
Court for the approval of the merger.
RBI's approval is also necessary under section 29 of the
Foreign Exchange Regulation Act, 1973 for transfer of share
involving NRI's or foreign nationals.
3. Intimation to Stock Exchange: The information on the proposal
of the merger should be given to the Stock Exchange in whose
jurisdiction the listed companies proposing to merger are located. All
notices and other resolutions in the connection are to be sent to the
Stock Exchange for their record.
4. High Court's Approval: Under section 391 of the Companies
Act, 1956 and Companies (court) Rules, 1959, each company has to
make separate applications in High Court seeking summons to
convene the meeting of the members of the two companies.
Separate meeting of equity and preference shareholders are
required to be convened. Under section 394 of the Companies Act,
the court may sanction a proposed amalgamation. However, the
court would do so after hearing all the parties concerned, e.g.,
shareholders, creditors, tax authorities, etc. It would also see that
the scheme of amalgamation is reasonable, workable, fair keeping in
view the general conditions, background and object of
amalgamation.
Section 396 also gives power to the Central Government
to provide for amalgamation of two or more companies if it is
satisfied that it is essential in public interest.
Amalgamation Under Income-tax Act

Meaning of Amalgamation [Section 2 (1B)]
The Act has defined amalgamation under section 2 (1B).
The purpose of giving such definition is that the benefits/
concessions under income-tax shall be available to both
amalgamating and amalgamated companies only when all the
conditions, mentioned in the said section, are satisfied. Further, if
the amalgamated company wishes to set off the losses and
unabsorbed depreciation of the amalgamating company with its
profits, the conditions mentioned in section 72A of the Income-tax
Act shall also have to be fulfilled.

Income Tax
According to section 2(1B) 'amalgamation' in relation to

companies means the merger of one or more companies with
another company of the merger of two or more companies to form
one company (the company or companies which so merge being
referred to as the amalgamating company or companies and the
company with which they merge or which is formed as a result of
the merger, as the amalgamated company) in such a manner that-
(i) All the property of the amalgamating company or companies
immediately before the amalgamation becomes the property
of the amalgamated company by virtue of amalgamation.
(ii) All the liabilities of the amalgamating company or companies
immediately before the amalgamation become the liabilities of
the amalgamated company by virtue of amalgamation.
(iii) Shareholders holding not less than ¾th in value of the shares in
amalgamating company or companies (other than shares held
therein immediately before the amalgamation or by a nominee for
the amalgamated company or its subsidiary) become shareholders
of the amalgamated company by virtue of the amalgamation,
otherwise than as a result of the acquisition of the property of one
company by another company pursuant to the purchase of such
property by the other company or as a result of distribution of such
property to the other company after the winding up of first
mentioned company.
Therefore, due to amalgamation the following situations may
emerge:-
(i) R Ltd. merges with G Ltd. Thus R Ltd. goes out of existence.
(ii) R Ltd. and G Ltd. both merge and form a new company say T
Ltd. Thus both R Ltd. and G Ltd. go out of existence, and a new
company is formed.
In the above case, the companies which go out of
existence are known as amalgamating companies and the 'merged'
company or the newly formed company will be known as
amalgamated company.
Thus, in order that an amalgamation may fall under the
above definition, the following conditions must necessarily be
fulfilled:
(i) All the property of the amalgamating company should be
vested in the amalgamated company.
(ii) All the liabilities of the amalgamating company should be
vested in the amalgamated company.
(iii) Shareholders holding not less than ¾th in value of the share in
the amalgamating company should become the shareholders of
the amalgamated company. However, shares already held by or by
a nominee for the amalgamated company or its subsidiary

Income Tax
immediately before the amalgamation shall be excluded.

Example: Where "A" merges with another company "B" in a
scheme of amalgamation, and immediately before the
amalgamation, company "B" held 20 per cent of the shares in
company "A", the above-mentioned condition, will be satisfied if
shareholders holding not less than ¾th in value of the remaining 80
per cent of share in company "A" i.e. 60 per cent thereof ( ¾ th of
80), become shareholders of company "B" by virtue of the
amalgamation.
Merger which will not be called an amalgamation: The last
paragraph of this definition excepts the following two cases where
the element of merger exists, but yet there is no ' amalgamation'
within the meaning of this clause:
(a) where the property of the company say 'A' which merges is
sold to the other company say 'B' and the amalgamation
comes about by virtue of a transaction of sale;
(b) where the company 'A' which merges is wound-up in
liquidation and the liquidator distributes the property of company 'A'
to the company 'B' and the amalgamated company 'B' receives the
property of company 'A' (the amalgamating company) from the
liquidator as on liquidation.
Tax concessions/incentives in case of amalgamation
If any amalgamation takes place within the meaning of
section 2(1B) of the income-tax, the following tax concession shall
be available:
(1) Tax concession to amalgamating company.
(2) Tax concession to shareholders of the amalgamating company.
(3) Tax concession to amalgamated company.
a) Tax concession to amalgamating company
(i) Capital Gains tax not attracted: According to section 47(vi),
where there is a transfer of any capital asset in the scheme of
amalgamation, by an amalgamating company to the amalgamated
company, such transfer will not be regarded as a transfer for the
purpose of capital gain provided the amalgamated company, to
whom such assets have been transferred, is an Indian company.
(ii) Tax concession to a foreign amalgamating company [Section
47 (via)]: Where a foreign company holds any shares in an Indian
company and transfers the same, in the scheme of amalgamation,
to another foreign company, such transaction will not be regarded
as transfer for the purpose of capital gain under section 45 of the
Income-tax Act if the following conditions are satisfied:
1. Atleast 25% of the shareholders of an amalgamating Foreign
company should continue to remain shareholders of amalgamated
foreign company, and

Income Tax
2. Such transfer does not attract tax on capital gains in the

country, in which the amalgamating company is incorporated.
b) Tax concessions to the shareholders of a amalgamating
company [Section 47(vii)]: Where a shareholder of an
amalgamating company transfers his shares, in a scheme of
amalgamation, such transaction will not be regarded as a transfer
for capital gain purposes, if following conditions are satisfied:
(i) the transfer of shares is made in consideration of the allotment
to him of any share or shares in the amalgamated company, and
(ii) the amalgamated company is an Indian company.
c) Tax concessions to the amalgamated company: The

amalgamated company shall be eligible for tax concessions
only if the following two conditions are satisfied:
(i) The amalgamation satisfies all the three conditions laid down
in section 2(1B); and
(ii) The amalgamated company is an Indian company.
(1) Expenditure on Scientific research [Section 35 (5)]:
Where an amalgamating company transfers any asset represented
by capital expenditure on the scientific research to the
amalgamated Indian company in a scheme of amalgamation, the
provisions of section35 which were applicable to the
amalgamating company shall become applicable to the
amalgamated company consequently:-
(i) Unabsorbed capital expenditure on scientific research of the
amalgamating company will be allowed to be carried forward
and set off in the hands of the amalgamated company.
(ii) if such asset ceases to be used in a previous year for scientific
research related to the business of amalgamated company and is
sold by the amalgamated company without having being used
for other purposes, the sale price, to the extent of the cost of the
asset shall be treated as business income of the amalgamated
company. The excess of the sale price over the cost of the
asset shall be subject to the provisions of the capital gains.
(2) Expenditure for obtaining license to operate
telecommunication services [Section 35ABB(6)]: Where in a
scheme of amalgamation, company sells or otherwise transfer its
license to the amalgamated company (being an Indian company),
the provisions of section 35ABB whichwe4re applicable to the
amalgamating company shall become applicable in the same
manner to the amalgamated company, consequently:
(i) The expenditure on acquisition of licence, not yet written off,
shall be allowed to the amalgamated company in the same number
of balance installments.

Income Tax
(ii) Where such licence is sold by the amalgamated company, the

treatment of the deficiency /surplus will be same as would have
been in the case of amalgamating company.
(3) Treatment of preliminary expenses [Section 35D(5)]:
Where an amalgamating company merges in a scheme of
amalgamation with the amalgamated company, the amount of
preliminary expenses of the amalgamating company, which are not
yet written off, shall be allowed as deduction to the amalgamated
company in the same manner as would have been allowed to the
amalgamating company.
(4) Amortisation of expenditure in case of amalgamation
{Section 35DD] :
(1) Where an assessee, being an Indian company, incurs any
expenditure, on or after the 1st day of April, 1999, wholly and
exclusively for the purposes of amalgamation or demerger of an
undertaking, the assessee shall be allowed a deduction of an
amount equal to one-fifth of such expenditure for each of the five
successive previous years beginning with the previous year in which
the amalgamation or demerger takes place.
(2) No deduction shall be allowed in respect of the expenditure
mentioned in sub-section (1) under any other provision of this Act.
(5) Treatment of expenditure on prospecting etc. of certain
minerals [Section 35E(7A: Where an amalgamating company
merges in a scheme of amalgamation with the amalgamated
company, the amount of expenditure on prospecting, etc. of certain
minerals of the amalgamating company, which are not yet written
off, shall be allowed as deduction to the amalgamated company in
the same manner as would have been allowed to the amalgamating
company.
(6) Treatment of capital expenditure on family planning
[Section 36(1)(ix)]: Where the asset representing the capital
expenditure on family planning is transferred by the amalgamating
company to the Indian amalgamated company, in a scheme of
amalgamation, the provisions of section 36(1)(ix) to the
amalgamating company shall become applicable, in the same
manner, to the amalgamated company consequently:
(i) The capital expenditure on family planning not yet written off
shall be allowable to the amalgamated company in the same
number of balance instalments.
(ii) Where such assets are sold by amalgamated company, the
treatment of the deficiency/surplus will be same as would have
been in the case of amalgamating company.
(7) Treatment of bad debts [Section 36(1) (vii)]: Where due
to amalgamation, the debts of amalgamating company have been

Income Tax
taken over by the amalgamated company and subsequently such

debt or part of the debt becomes bad, such bad debt will be allowed
as a deduction to the amalgamated company. [CIT v T. Veerabhadra
Rao, K.Koteswara Rao & Co. (1985) 155 ITR 152 (SC)].
(8) Deduction available under section 80-1A or 80-1B or 80-
IC: Where an undertaking which is entitled to deduction under
section 80-IA/80-IB/80-IC is transferred in the scheme of
amalgamation before the expiry of the period of deduction under
section 80-IA or 80-IB or 80-IC, then-
(i) no deduction under section 80-IA/80-IB/80-IC shall be available
to the amalgamating company for the previous year in which
amalgamation takes place; and
(ii) the provisions of section 80-IA/80-IB/80-IC shall apply to the
amalgamated company in such manner in which they would have
applied to the amalgamating company.
(9) Carry forward and set off of business losses and
unabsorbed depreciation of the amalgamating company: In
addition to the above benefit/concessions, the amalgamated
company shall be allowed to carry forward and set off the business
losses and unabsorbed depreciation of the amalgamating company
if all the conditions mentioned in section 72A are satisfied. For
details of the conditions refer to Chapter on set off and carry forward
of losses.
Tax planning in case of amalgamation
1. The benefit of tax concession is allowed to the amalgamating
and amalgamated company only when the amalgamation satisfies
the conditions provided under section 2(1B) of the Income-tax Act.
One of the conditions laid down is that all the assets and liabilities of
the amalgamating company, as on the date of amalgamation should
be taken over by the amalgamated company. Therefore if some
assets or liabilities of the amalgamated company are not proposed
to be taken over by the amalgamated company the same should be
disposed off or discharged by the amalgamating company before
the amalgamation takes effect.
2. Similarly there is a condition that at least 75% of the
shareholders of the amalgamating company should become
shareholders of the amalgamating company. If more than 25% of
the shareholders of the amalgamated company are not willing to
become shareholders of the amalgamated company, then so much
shares of such shareholders may be purchased by the other
shareholders or by the amalgamated company, before the
amalgamation, so that at the time of amalgamation the condition of
75% of the shareholders becoming shareholders of the
amalgamated company is satisfied.

Income Tax
3. As per section 72A the amalgamated company can carry

forward the business loss and unabsorbed depreciation of the
amalgamating company only when certain conditions, are satisfied.
Where it is not possible to satisfy such conditions the
companies may opt for a Reverse merger i.e. instead of the loss
making company merging with the profit making company the profit
making company may merge with the loss making. In this case, the
amalgamated company, which was the loss making company will be
able to carry forward its own business loss and unabsorbed
depreciation and set it off against the profits of the business which
has merged with it, in the scheme of amalgamation.
4. As already discussed, the benefit under section 47(viii) shall be
allowed only when the shareholders of the amalgamating company
are allowed only shares of the amalgamated company in lieu of
shares held by them in the amalgamating company. If the
shareholders are allotted something more than shares in the
amalgamated company viz. bonds or debentures, etc. no benefit wil
be available under section 47(viii)
*****
Chapter-14

Income Tax
Concepts of Tax-Planning and Specific Management

Decisions
Taxes are what even an honest citizen despises the most as

human being by very nature is selfish. He would like to have first of
all every good thing for himself and he would hardly like that the
fruits of his labour are enjoyed by others and particularly by those
with whom he has no relationship. He will try his best to see to it
that his hard earned money is not taken away by others forcibly
whether it is by snatching or by the rule of law. But it is also a duty
of the individual to save legally from payment of taxes so that the
same may be available with him to make him and his dependants to
be good and honorable citizens. On the other hand, the practical
concept of taxation laws is to realize the revenue by way of tax to
the maximum. Therefore, the perceptions of the tax payer and the
tax collector are different. The tax payer spares no efforts in
maximizing his profits and attracting the least incidence. The tax-
collector, on the other hand, tries to maximize revenue within the
framework of law. It is here that the tax planning has assumed far-
reaching importance in the confounded complexities of the taxation
laws. The primary objective of tax planning is to save the hard
labour of the taxpayer in enjoying the fruits of his income and
wealth to the maximum possible extent.
Methods commonly used by tax payers to minimize tax
liability
As discussed above, the goal of the tax payers is to minimize his tax
liability. To achieve this goal the following three methods are
commonly used by him:
1. Tax evasion
2. Tax avoidance
3. Tax planning
Tax evasion
Unscrupulous citizens evade their tax liability by dishonest means.
Some of which are:
(a) Concealment of income;
(b) Inflation of expenses to suppress income;
(c) Falsification of accounts
(d) Conscious violation of rules.
These devices are unethical and have to be condemned.
The courts also do not favour such unethical means. Evasion, once
proved, not only attracts heavy penalties but may also lead to
prosecution.
Such an evader of tax is not a good citizen and tax
evasion as a means to reduce tax liability cannot be advocated by

Income Tax
any one.
Tax avoidance
Tax avoidance is minimizing the incidence of tax by
adjusting the affairs in such a manner that although it is within the
four corners of the taxation laws but the advantage is taken by
finding out loopholes in the laws. The shortest definition of tax
avoidance is that it is the art of dodging tax without breaking the
law.
In the case of tax avoidance, the tax payer apparently
circumvents the law, without giving rise to a criminal offence, by the
use of a scheme, arrangement or device, often of a complex nature
but where the main purpose is to defer, reduce or completely avoid
the tax payable under the law.
In the words of Justice O. Chinnappa Reddy of Supreme
Court in McDowell & Co. Ltd. v CTO (1985) 154 ITR 148 (SC) at p.
160 the evil consequences of tax avoidance are manifold and may
be summarized as under:
(a) Substantial loss of much needed public revenue, particularly in
a welfare State like ours.
(b) Serious disturbance caused to the economy of the country by
piling up of mountains of black money directly causing inflation
(c) Large hidden loss to the community by some of the best brains
in the country being involved in the perpetual war waged
between tax avoider and his expert team of advisers, lawyers and
accountants on one side, and the Tax Officer and his perhaps not
so skillful advisers on the other side.
(d) Sense of injustice and inequality which tax avoidance arouses
in the breasts of those who are unwilling or unable to profit by
it.
(e) Ethics (or lack of it) of transferring the burden of tax liability to
the shoulders of the guideless, good citizens from those of artful
dodgers.
As to the ethics of taxation, the learned judge observed:
We now live in a welfare State whose financial needs, if backed by
the law, have to be respected and met. We must recognize that
there is behind taxation laws as much moral sanction as behind any
other welfare legislation and it is pretence to say that avoidance of
taxation is not unethical and that it stands on no less moral plane
than honest payment of taxation.
Tax planning
Tax planning is the arrangement of financial activities in
such a way that maximum tax benefits are enjoyed by making use
of all beneficial provisions in the tax laws. It entitles the assessee to
avail certain exemptions, deductions, rebates and relief's, so as to

Income Tax
minimize his tax liability. This is permitted and not frowned upon.
Tax planning is permissible even after McDowell's case. There might
be a difference of opinion in various quarters in respect of tax
avoidance, as these days Judges have started thinking in the
interest of the State with a firm determination to leave the age-old
accepted thinking of 1936 and to look into future. But tax planning is
still not touched by these judgments and in the words of Ranganath
Mishra, J. of Supreme Court in McDowell's case itself, it is
permissible provided it is within the frame work of law. He observes:
Tax planning may be legitimate provided it is within the
framework of law. Colourable devices cannot be part of tax planning
and it is wrong to encourage or entertain the belief that it is
honorable to avoid the payment of tax by resorting to dubious
methods. It is the obligation of every citizen to pay taxes honestly
without resorting to subterfuges.
Distinction between tax planning, tax avoidance and tax
evasion:Tax planning, tax avoidance and tax evasion are three
different approaches to the same objective viz., to reduce tax
liability. However, they have different characteristics. Tax planning
is perfectly legal as the object of tax reduction is achieved by
making use of the beneficial provisions in the tax laws. On the other
hand, tax avoidance is also legal though technically satisfying the
requirements of law. Tax evasion is a method of evading tax liability
by dishonest means like suppression, conscious violation of rules,
inflation of expenses, etc.
Tax planning imply compliance with the taxing provisions
in such a manner that full advantage is taken of all exemptions,
deductions, concessions, rebates and relief's permissible under the
Act so that the incidence of tax is the least. Tax planning, therefore
cannot be equated to tax evasion or tax avoidance. Tax planning
may be regarded as a method of intelligent application of expert
knowledge of planning corporate affairs with a view to securing
consciously provided tax benefits on the basis of the national
priorities in keeping with the interest of the State and the public.
The cases covered under "Tax avoidance' are those
where the tax payer has apparently circumvented the law, without
giving rise to a critical offence by the use of a scheme arrangement
or device often of a complex nature whose sole purpose is to defer
reduce or completely avoid the tax payable under the law. In other
words tax avoidance is a method of reducing incidence of tax by
taking advantage of certain loopholes in tax laws.
Tax evasion is a dubious way of attempting to solve tax
problems by suppression of income, conscious violation of rules
inflation of expenses, etc. Tax evasion, therefore, cannot be

Income Tax
construed as tax planning because it amounts to breaking of law

whereas tax planning is devised within the legal framework by
availing of what the legislature intended.
There is no dispute in accepting tax avoidance is different
from tax planning but the subtle difference between tax avoidance
and tax planning is often over looked.
Thus, any legitimate step taken by an assessee towards
maximising tax benefits keeping in view the intention of law will
not only help him but the society also. All those who do the tax
planning could help themselves in efficient and economic conduct of
their business affairs without getting entangled in the controversy of
tax avoidance or evasion.
35.4b Tax Management:
Tax management refers to the compliance with the
statuary provisions of law. While tax planning is optional, tax
management is mandatory. It includes maintenance of accounts,
filing of return, payment of taxes, deduction of tax at source, timely
payment of advance tax, etc. Poor tax management may lead to
levy of interest, penalty, prosecution, etc. In some cases it may lead
to heavy financial loss if proper compliance is not made, e.g. if a loss
return is not filed in time it will result in a financial loss because such
loss will not be allowed to be carried forward.
35.5 Objectives of tax planning
The prime objectives of tax planning may be summarized as follows:
(i) Reduction of tax liability.
(ii) Minimisation of litigation.
(iii) Productive investment
(iv) Healthy growth of economy.
(v) Economic stability
(i) Reduction of tax liability: One of the supreme objectives of
tax planning is the reduction of the tax liability of the taxpayer and
the resultant saving of the earnings for a better enjoyment of the
fruits of the hard labour. By proper tax planning, a taxpayer can
oblige the administrators of the taxation laws to keep their hands off
from his earnings.
(ii) Minimisation of litigation: Where a proper tax planning is
resorted to by the taxpayer in conformity with the provisions of the
taxation laws, the chances of unscrupulous litigation are certainly to
be minimized and the tax-payer may be saved from the hardships
and inconveniences caused by the unnecessary litigations which
more often than not even knock the doors of the supreme judiciary.
(iii) Productive investment: The planning is a measure of
awareness of the taxpayer to the intricacies of the taxation laws and
it is the economic consciousness of the income-earner to find out

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the ways and means of productive investment of the earnings which

would go a long way to minimize his tax burden. The taxation laws
offer large avenues for the productive investment of the earning
granting absolute or substantial relief from taxation. A taxpayer has
to be constantly aware of such legal avenues as are designed to
open floodgates of his well-being, prosperity and happiness. When
earnings are invested in the avenues recognized by law, they are
not only relieved of the brunt of taxation but they are also converted
into means of further earnings.
(iv) Healthy growth of economy: The saving of earnings is the
only basement upon which the economic structure of human life is
founded. A saving of earnings by legally sanctioned devices is the
prime factor for the healthy growth of the economy of a nation and
its people. An income saved and wealth accumulated in violation of
law are the scours on the economy of the people. Generation of
black money darkens the horizons of national economy and leads
the nation to avoidable economic destruction. In the suffocating
atmosphere of black money, a nation sinks with its people. But tax
planning is the generator of a superbly white economy where the
nation awakens in the atmosphere of peace and prosperity, a
phenomenon undreamt of otherwise.
(v) Economic stability: Under tax planning, taxes legally due are
paid without any headache either to the taxpayer or to the tax
collector. Avenues of productive investments are largely availed of
by the taxpayers. Productive investments increase contours of the
national economy embracing in itself the economic prosperity of not
only the taxpayers but also of those who earn the income not
chargeable to tax. The planning thereby creates economic stability
of the nation and its people by even distribution of economic
resources.
Types of Tax planning

Tax planning can be broadly divided into two heads:
(a) Short-term tax planning
(b) Long-term tax planning
A short-term tax planning is normally for a period upto a
year and it is done from year to year to achieve some particular
objective. On the other hand, the long-term planning will be for a
longer period and it may not pay off immediately.
Factors on the basis of which Tax planning is done
The following factors are helpful for effective tax planning:
(i) Residential status and citizenship of the assessee.
(ii) Heads of income/Assets to be included in computing net
wealth.

Income Tax
(iii) Latest legal position.

(iv) Form v Substance.
(i) Residential status: As we know that non-resident in India is
not liable to pay income-tax on incomes which accrue or arise and
also received outside India, whereas a resident in India is liable to
pay income-tax on such incomes. Therefore, every assessee would
like to be a non-resident in India, if he has any income which
accrues or arises outside India.
If any individual wishes to be a non-resident in India, he should
be careful about the facts given below:-
1. If an individual is a citizen of India and visits India in any
previous yeas, he should not stay in India for more than 181 days in
that previous year. Where he wishes to stay in India for more than
181 days at a stretch, he should plan his stay in such a manner that
his stay in one previous year does not exceed 181 days.
For example he can stay from 2 nd October of a particular previous
year to 28th September of next previous year aggregating to 362
days at a stretch, still he will be called non-resident in India as the
period of stay in each year will not exceed 181 days.
The above also hold good in case of a person of India Origin.
Notes: One should however, in the above case be careful
regarding leap year as the number of days for the month of
February in that case shall be 29 instead of 28.
2. The citizen of India, who wishes to leave India in any previous
year for employment abroad, should leave India by 28th
September so that his stay in India does not exceed 181 days
and he may be called non- resident in India for that previous year.
3. A citizen of India, who does not leave India for employment
abroad, should leave India by 29th May of the previous year if
he had been in India for 365 days or more in the 4 preceding
previous years.
4. Foreign national can stay in India-for 181 days in the previous
year and he will still be non-resident in India provided his stay
in India during the 4 preceding previous years immediately
preceding the relevant previous year does not exceed 364
days. If it exceeds 364 days, then, in such a case, he can not
stay in India for more than 59 days in that previous year.
However, he can stay at a stretch of 59+59 days if these fall in
two previous years. Thus such person can come to India in the
first week of February and stay up to May 29th of the next year.
If an individual can not become non resident in India, he
can still escape the liability of tax on all foreign incomes which
accrue or arise and received outside India except if such incomes
accrue or arise from a business or profession set up or controlled

Income Tax
from India provided he is not ordinarily resident in India.

The HUF will be non- resident in India only when entire
control and management of its affairs is situated outside India. If it is
not possible, HUF can claim the status of not ordinarily resident in
India provided the karta of HUF satisfies both or any of the two
additional conditions.
There can not be any planning of residential status in
case of an Indian company because it is always resident in India
irrespective of its control and management. However, a non-Indian
company can be non-resident in India if any part of the control and
management of its affairs is situated outside India.
A non-resident in India can bring his income to India,
which accrued or arose to him outside India in any previous year,
after the previous year of accrual because in that case it will not be
treated as received in India. It will be called as remitted to India.
The same holds good in case of not ordinarily resident in
India provided such income is not from the business or profession
which is set up or controlled from India.
(ii) Heads of Income: Before the tax-planner goes in for his
task, he has to have a full picture of the sources of income of the
taxpayer and the members of his family. Though total income
includes all income from whatever source derived, the scope of tax
planning is not similar in respect of all sources of income. The
assessee can avail the benefits of exemption and deduction under
each head of income. Further, he can avail the benefit of rebate and
relief under the Act. A consolidated tax planning may be attempted
only after the tax-planning in respect of the different heads of
income and a failure to do so may jeopardize the tax planning and
may not achieve the desired result. Similarly, the tax-planner should
know which assets are liable to Wealth tax and what are the
exemptions allowable in case of such assets to avail the maximum
benefit and reduce the Wealth tax liability.
(iii) Latest legal position: It is the foremost duty of a tax-planner
to keep himself fully conversant with the latest position of the
taxation laws along with the allied laws and also the judicial
pronouncements in respect thereof. For this purpose, he must have
a thorough and up-to-date understanding of the annual Finance
Acts, the Taxation law Amendments, the amendments, if any, of the
other allied laws, the latest judicial pronouncements of the High
Courts and the Supreme Court, various Circulars of the Central
Board of Direct Taxes which seek to clarify the legal position in so
far as the Revenue is concerned. A successful tax planning can be
attempted only if the tax-planners knowledge of legal principles is
up-to-date.

Income Tax
(iv) Form v Substance: A tax-planner will have to thoroughly

understand the true nature of any transaction which relates to
income- plus or minus. In this connection, he will have to bear in his
mind the following principles enunciated by the Courts on the
question as to whether form or substance of a transaction should
prevail in Income-tax matters:
(a) Form of transaction: When a transaction is arranged in one
form known to law, it will attract tax liability while, if it is entered
into another form which is equally lawful, it may not. In considering,
therefore, whether a transaction attracts tax or not, the form of the
transaction put through by the taxpayer is to be considered and not
the substance thereof. But this rule applies only to genuine
transactions. Where statutorily the parties have to reduce a certain
transaction into writing, it is not open to Courts or any other
authority to permit oral evidence to be adduced by the parties or to
entitle them to go behind the statement document. A citizen can not
be taxed merely with a view to swell the revenues, ignoring the
legal position by regarding the substance of the transaction. It is not
open to the Income Tax Authorities to deduce the nature of
document from the purported intention by going behind the
document or to consider the substance of the matter or to accept it
in part and reject it in part or to rewrite the documents merely to
suit the purpose of the revenue. [CIT v Motors & General Stoeres (P)
Ltd. (1967) 66 ITR 692 (SC)].
(b) Genuineness transaction: In deciding whether the transaction
is a genuine or colorable one because in such a situation, it is not
the question of form and substance but of appearance and truth it
will be open to the authorities to pierce the corporate veil and look,
behind the legal façade, at the reality of the transaction. The taxing
authority is entitled and indeed bound to determine true legal
relation resulting from a transaction. If the parties have chosen to
conceal by a device the legal relation, it is open to the taxing
authority to unravel the device and determine the true character of
the relationship. But the legal effect of a transaction cannot be
displaced by probing into the substance of the transaction. The true
legal relation arising from a transaction alone determines the
taxability of a receipt arising from the transaction. [CIT v
B.M.Kharwar(1969) 72 ITR 603 (SC)].
(c) Expenditure: In the case of an expenditure, the mere fact that
the payment is made under an agreement does not preclude the
department from enquiring into the actual nature of the payment.
[Swadeshi Cotton Mills Co. Ltd. v CIT (1967) 63 ITR 57 (SC)]. In order
to determine whether a particular item of expenditure is of revenue
or capital nature, the substance and not merely the form should be

Income Tax
looked into. [Assam Bengal Cement Co. Ltd.v CIT (1955) 27 ITR 37
(SC)].
Areas of tax planning
Tax planning may be effective in every area of business
management. Some of the important areas where planning may be
attempted are:
(i) Location of business.
(ii) Nature and size of business.
(iii) Form of business organization and the pattern of its ownership.
(iv) Specific management decisions like make or buy, own or lease,
capital structure, renew or replace, etc.
(v) Employees remuneration.
(vi) Mergers/Amalgamation of companies.
(vii) Double Taxation Relief.
(viii) Non-residents.
(ix) Advance Ruling.
Location of Business
Tax planning is relevant from location point of view.
There are certain locations which are given special tax treatment.
Some of these are as under:-
1. Full exemption under section 10B for ten years in the case of a
newly established 100% export oriented industrial undertaking
in free trade zones, etc.
2. Full exemption under section 10A for ten years in the case of a
newly established industrial undertaking in free trade zones,
etc.
3. Full exemption under section 10BA for 10 years in the respect
of profits from the export of eligible article or things.
4. Deduction under section 80-IB in the case of newly set up
industrial undertaking in an industrially backward State or district.
5. Deduction under section 80-IC in case of newly set up
industrial undertaking or substantial expansion of an existing
undertaking in certain special category States.
Nature of business
Tax planning is also relevant while deciding upon the nature of
business. There are certain businesses which are granted special tax
treatment. Some of them are as follows:
1. Newly established industrial undertaking in free trade zones,
etc.[Section 10A].
2. Newly established hundred per cent export-oriented
undertakings [Section 10B].
3. Tea Development Account, coffee Development Account and
Rubber Development Account [Section 33AB].
4. Site restoration fund [Section 33ABA].

Income Tax
5. Amortisation of certain preliminary expenses [Section 35D].

6. Deduction for expenditure on prospecting for certain minerals
[Section 35E].
7. Deduction for special reserve created by a financial
corporation under section 36(1)(viii).
8. Special provision for deduction in the case of business for
prospecting for mineral oil [Sections 42 and 44BB].
9. Special provisions for computing profits and gains of business
of civil construction [Section 44AD].
10. Special provisions in the case of business of plying, hiring or
leasing goods carriages [section 44AE].
11. Special provisions for computing profits and gains of retail
business [Section 44AF].
12. Special provisions in the case of shipping business [Section
44B].
13. Special provisions in the case of business of operation of
aircraft [Section 44BBA].
14. Special provisions in the case of certain turnkey power projects
[Section 44BBB].
15. Special provisions in the case of royalty income of foreign
companies [Section44D].
16. Profits and gains of industrial undertakings or enterprises
engaged in infrastructure development, etc. [Section 80-IA].
17. Profits and gains from certain industrial undertaking other than
infrastructure development undertaking [Section 80-IB].
18. Special provisions in respect of certain undertaking or
enterprises in certain special category States [Section 80-IC].
19. Profits and gains from the business of collecting and
processing of bio- degradable waste [Section 80JJA].
20. Employment of new workmen [Section 80JJAA].
21. Special tax rate under sections 115A, 115AB, 115AC, 115AD,
115B, 115BB, 115BA and 115D.
Form of ownership
The form of ownership is an important tool of tax
planning. There are different forms of organizations having different
tax incidences at a given level of operation. The form of ownership
may be sole proprietorship, partnership, company, co-operative
society, etc. It is the form of ownership which determines the
sharing of profits, responsibilities of the activities to third parties,
etc.
There are different tax treatments under different forms
of ownership which are given different status under tax laws. These
forms of ownership are also allowed different tax concession and
rebates under tax laws. Therefore, the tax implication on the project

Income Tax
under different forms of ownership at a certain level of profit are to

be analyzed and a form of ownership suitable to those
circumstances is selected.
1. Sole proprietorship: The most common form of
ownership found in the business world is sole proprietorship. In this
form of organization, the proprietor is the only owner of the business
assets and he is solely responsible for the affairs of the business.
The merits and demerits of a sole proprietary form of organization
may be summarized as under:
Merits
(a) A sole proprietorship is easy to establish because of little
interference of government regulations.
(b) The cost of adopting this form of organization is small because
of there being no legal requirement
(c) All the profits of the business go in the hands of proprietor
himself.
(d) In case of persons carrying on business on small scale and
having small income from other sources, this form of organization
would be suitable because the proprietor can avail of the ceiling of
exempt income i.e. Rs. 1,50,000 for the assessment year 2009-10
and his tax liability will be minimum as the individual is subject to
income-tax at slab rate and the maximum marginal rate of income
tax in his case is 30% plus surcharge as applicable + education cess
@ 2%+ secondary & higher education cess@1%
(e) Besides the deduction which are allowed to all assesses under
Chapter VIA, a sole proprietor, being assessed as individual, is
entitled to get certain deductions under sections 80C, 80CCC,
80CCD, 80DD, 80DDB, 80E, 80GG, 80GGC, 80QQB, 80RRB and 80U.
Demerits
(a) The liability of the proprietor is unlimited and it can extend
even to his personal assets. When the proprietor incurs losses and
business assets are not sufficient enough to meet the liabilities of
business, his personal assets can be used for discharging the
business liabilities.
(b) The proprietor does not get deduction on account of
remuneration payable to him attributable to the rendering of
services. It is felt that it is the capital contributed and risk taken by
the proprietor for which he is rewarded in profits and that he must
be given remuneration for the service rendered by him which should
be allowed as deductible expenditure. But this is not so in income-
tax law.
(c) Another main drawback of this form of organization is that it
does not provide opportunities to finance the expanding business
activities. In the case of a partnership firm, on the other hand,

Income Tax
finance can be raised by the existing partners or by entering another

partner.
(d) In case of a business growing at a high speed, and yielding
higher profits, a sole proprietary organization may not be beneficial.
As the salary paid to the proprietor, and interest paid on capital are
not allowable, the profits become higher and tax incidence goes
high. In case of other entities, on the other hand, remuneration
payable to partners/managing director, interest paid to partners are
allowed as admissible expenditure to the extent specified in the Act.
2. Hindu Undivided Family: A joint Hindu family pays tax on its
total income at prescribed rates on the basis of slab system. The
family can pay reasonable remuneration to the Karta and other
family members for their services to the business and it is allowed
as a deduction in computing the business income. However, interest
on capital contributed by HUF for business is not deductible in
computing business income. The member of the family, who has
received the remuneration from the family will include it in his
income under the head Salaries.
A Hindu undivided family will also get a basic exemption
of Rs. 1,50,000. Besides the deductions which are allowed to all
assesses, it is allowed certain deductions under sections 80D, 80DD,
80DDB, 80GG and 80GGC like individuals. The tax rates in case of
HUF are same as applicable to individual.
The demerits of HUF, however, are similar to that of
individuals.
3. Partnership firm
Merits of partnership
1. A partnership form of organization is also easy to establish.
The only procedure for the formation of partnership is to draw up a
partnership deed and a nominal charge in terms of cost of
stamps for the deed is to be incurred.
2. The decision making on important business matter is quick as
compared to a company form of organization because partners
meet frequently together. Therefore, decision on any
important business matter cannot be delayed.
3. The chances of getting involved in risky activities is very less
because every important decision is made with the concurrence of
all the partners.
4. As compared to sole proprietorship, the problem of raising
additional resources is much less. Whenever the business
expands and it is necessary to raise finance, it will be easy to
raise it by admitting a new partner or raising it by way of
borrowing because of number of partners and their joint and
several liabilities to pay the debts of the firm, the lenders will

Income Tax
be more interested in lending.

5. The firm can pay interest on capital and loan to partners at the
maximum rate of 12% p.a. Further it can also give
remuneration to its working partners subject to the limits
mentioned in section 40(b).
6. This form of organization is suitable from income-tax point of
view in such cases where the amount of profit is not large and
the partners of the firm do not have any other additional
income except by way of remuneration and interest from the
partnership firm. In such a case the profit of the firm shall be
lower and the individual partners can also avail of the
maximum ceiling of income exempt under Income-tax Act.
7. The share in the profit of the partnership firm is exempt from
tax under section 10(2A) of the Income-tax Act.
8. The risk as to losses and liability incurred is divided amongst
the partners.
9. As in the case of company form of organization where the
change of business requires a long procedure, there is no tedious
procedure in the partnership form of organization. The business
can be changed only with the consent of partners.
10. The firm is taxable at a flat rate of 30% + surcharge @ 10% +
education cess @ 2%+ secondary & higher education cess @
1%, after allowing interest and remuneration to working
partners (if provided in the partnership deed and subject to
section 40 (b) of the Income-tax Act.
Demerits of partnership
1. The risk taking capacity of the partners becomes limited. Every
decision relating to important business matters is made with
the consultation of other partners, which restricts the risk
taking activities which may yield much higher profits.
2. As far as the operations of business are limited to small or
medium scale, there is no problem in financing the expansion
of business operation. But when business gets expanded to a
large scale, then it will be suitable to adopt a company form of
organization because partnership can be formed up to
maximum number of 20 partners.
3. One of the main drawbacks is that one partner becomes liable
for the acts of another. Therefore, a partner is liable for the
wrongs of another partner if it is done within the legal limits.
4. In the new scheme of assessment of partnership firms, the
share of partners is exempt from tax under section 10(2A) but
the partners cannot claim standard deduction in respect of
remuneration receivable by them from the firm. Also, the firm
cannot claim deduction in respect of interest payable to

Income Tax
partners in excess of 12% per annum.

5. Where the partnership firm does not comply with the
requirements of section 184 of the Income Tax Act, it can be
assessed in the status of an association of persons, as a
consequence of which it shall not be allowed any deduction on
account of interest and remuneration to its partners. However,
in some cases, if the firm is assessed as AOP it can result into
less tax liability as the AOP is taxable at the maximum rate of
30% + surcharge + education cess whereas the firm is
charged tax flat rate @ 30% + surcharge + education and
SHEC.
6. A partnership firm may come to a sudden closure of business
on account of death, lunacy or insolvency. In the case of a
business running efficiently and profitably, such a happening
will cause a great loss. Also, dissolution will attract section
45(4) which imposes tax liability in respect of capital gain
arising on transfer of capital assets from the firms to partners.
4. Company
Benefits
1. The corporate sector presents itself as a good medium of
investment before the modern lending financial institutions.
These financial institutions are in search of good medium in
which the savings of the public can be invested. They make
investment in the shares and debentures of these companies.
In this way this sector also helps in mobilizing saving of public.
2. This form of organization has also gained society's attention.
Since the capital of these companies comprises a big amount
divided into a large number of shares of small value, a person
with limited resources also takes interest in investing in such
shares. This social recognition also thus helps in promoting the
industrialization of the country.
3. The activities carried on by a corporate entity are generally on
large scale. This puts complexities in the day-to-day affairs.
Also, the scattered ownership of the company makes it a
difficult task to handle these activities by all the related
people. This requires managerial professionals having special
skills, techniques, etc. A company form of organization,
therefore, helps in developing managerial professionals.
4. This form of organization has also received social recognition
because of the disclosure of some information, for example,
publishing of final accounts, etc. This social recognition helps
in boosting the industrialization of an economy, as is being
experienced nowadays in India.
5. The company is subject to income-tax at the flat rate of 30% +

Income Tax
surcharge of 10%(if net income exceeds Rs.1 crore).

Disadvantages
Some of the demerits of this form of organization which are
generally felt are
as under:
1. The first main disadvantage is the formation of company which
requires a long procedure to be adopted. In addition to
complying with certain legal requirement, a large amount on
account of fees on share capital with which company is being
incorporated and many other expenses have to be incurred.
2. The stringent legal requirements to be complied with are also a
major drawback. The management has to face, at every step,
legal provisions as are to be complied with.
3. Lack of profit motive mindset amongst the persons handling
the affairs of the company is also one of the drawbacks. Since
the company is not managed by the real owner, in most of the
cases, but by the managerial professional who do not have
financial stake in the company, the degree of interest and
enthusiasm, as found in the proprietor and partners, cannot be
expected in a company form of organization. Nevertheless, it
does not mean that paid officials are devoid of initiative,
however, there are many officials who do lack initiative.
4. Despite strict legal requirements, the chances of defrauding
the innocent public are quite real. In many cases the
management indulges in manipulating the figures of the
results and invites public to invest therein.
5. Decisions on important business matters cannot be taken
immediately. For this, the meeting of the Board of Directors
has to be convened which takes some time. Delayed decisions
happen to be one of the drawbacks of this form of
organization.
6. Many times, it is found that there may be clash in the interest
of two class of shareholders, viz, equity shareholders and
preference shareholders or group shareholders.
Lease or buy decisions: In recent years, leasing has become
a popular source of financing in India. From the lessee’s point
of view, leasing has the attraction of eliminating immediate
cash outflow, and the lease rentals can be claimed as
admissible expenditure against the business income. On the
other hand, buying has the advantages of depreciation
allowance and interest on borrowed capital being tax-
deductible. Thus, an evaluation of the two alternatives is to be
made in order to take a decision.
Disadvantages of lease finance: Before opting for a lease

Income Tax
decision one has to

keep in mind the following disadvantages:
(i) Leased assets are not owned assets and therefore, the asset
cover to equity comes down due to increased dependence on
lease finance.
(ii) Financial ratios are also distorted due to greater dependence
on lese finance.
(iii) Lease rent payments are made out of working capital funds
which mean that fixed assets are financed out of short-term
funds.
(iv) The asset taken on lease is taken back by the lessor at the
expiry of lease period. Thus, he will be bothered about finding
alternative asset at the expiry of lease period.
Make or buy decision: The leasing or buying decision is
taken only when it is finalized that a particular asset is to be
acquired. In most of the industries, the conception of
establishing a new project itself involves acquisition of fixed
assets. In assembling industry different components are
assembled to make a product. Now a decision regarding the
manufacturing of these components is to be taken. It is
decided whether the product/ part/component of product
should be bought from the market or should be manufactured
by having necessary manufacturing facilities. The main
consideration affecting such a decision is cost. In a make or
buy decision, the variable cost of making the product or
part/component of product is compared with its purchase price
prevailing in the market.
In this decision making process, it may be possible that
the decision to manufacture does not result in increasing the
fixed cost, and the existing manufacturing facilities cannot be
otherwise utilized profitably. Thus, where no fixed costs are
incurred for producing the product or component, the main
criterion is that it would be more profitable to manufacture
than to purchase, if the variable cost is lower than the
purchase price.
For example, if a particular component can be acquired
at a cost of Rs. 20 from the market then it will be profitable for
the project to produce that component if the variable cost is
below Rs. 20. Here it is assumed that no extra fixed costs are
to be incurred on the manufacturing of these components.
However, where the component manufacturing involves
additional fixed expenditure, purchase of any plant and
machinery or establishment of a new separate unit, then total
cost will have to be considered. In such special situations the

Income Tax
following tax consideration must be kept in mind:

1. Where the manufacturing of the product requires additional
fixed cost also: Since in this case, the assessee will have to
incur the additional fixed cost it will form part of the cost of
manufacturing of the product.
2. Where the manufacturing of the product requires the purchase
of additional plant & machinery.
3. Where the manufacturing of the product requires
establishment of a new unit: in this case, although, there will
be cash outflow for establishing a new unit, but the tax
incentives shall be as under:-
(i) Exemption under section 10A: If the product to be
manufactured is for exports, there will be full exemption of
income till assessment year 2009-10,if the unit is established
in a free trade zone and certain conditions are satisfied.
(ii) Exemption under section 10B: If the product to be
manufactured is for exports, there will be full exemption of
income till assessment year 2009-10 if the unit is an Export
Oriented unit and certain conditions are satisfied.
(iii) Depreciation under section 32: Since a new unit will be
established, it will acquire building, plant and machinery,
furniture and certain intangible assets, the assessee, in this
case, shall be eligible for depreciation on such assets.
(iv) Deduction of Interest on money borrowed for acquisition of
such capital assets: If the money is borrowed for the
acquisition of above capital assets, the assessee will be eligible
to claim interest as deduction.
(v) Deduction under section 80-IB: if the unit established is a new
unit, it shall be eligible for deduction under section 80-IB if the
assessee cannot claim exemption under section 10A and 10B.
4. if the facilities for production are existing & the assessee
wishes to discontinue the manufacturing of such product: It is
possible that buying of such product is cheaper than
manufacturing and it is is to be continued for a very long time,
the assessee may have to sell the existing plant and
machinery etc. In this case, there will be short term capital
gain/loss if the entire block of assets is sold or there will be
short term capital gain if the part of the block is sold for a price
more than the W.D.V. of the block.
Repair/Renewal or Replacement of an asset: The old and
worn out assets need to be either repaired/renewed or
replaced at regular intervals. Sometimes, even a good machine
requires up gradation or replacement so as to compete in the
market. The main tax consideration in these cases shall be

Income Tax
whether the assessee, while computing his business income,

shall be allowed deduction on account of such expenditure or
not.
Repairs/Renewal: Deduction for expenditure on repairs/renewal will
be
allowed as revenue expenditure in computation of business income
ass under:
If the building is a rented building, any expenditure on
repairs shall be allowed as deduction. On the other hand, if the
building is owned, only current repairs shall be allowed as
deduction.
As regards plant & machinery, only current repairs shall
be allowed as deduction.
However, the accumulated repairs in the above cases can
be claimed under section 37(1).
For detailed discussion of what is current repairs refer to
sections 30, 31 and 37(1).
It may be noted that if the repairs expenditure are of
capital nature it shall not be allowed as deduction either under
section 30,31,or 37.
Replacement of assets: If the asset has to be replaced,
the expenditure incurred on replacement shall be capital
expenditure and the asessee shall only be entitled to depreciation
on such assets and as such, the entire expenditure cannot be
claimed as deduction which was allowed in case of repairs. The
capital expenditure incurred on construction of super structure on
rented building is also eligible for depreciation under section 32.
Tax planning in case of employee's remuneration

This requires consideration from the point of view of -
(a) Employer: While calculating the business income of the
employer, the remuneration payable to the employee, in whatever
form, should be fully deductible otherwise the employer will have to
pay tax on such remuneration also as the same will not be allowed
as deduction while computing his business income.
(b) Employee: The salary received by the employee, whether in
cash or kind, should attract minimum income-tax liability. He should
be in a position to avail maximum exemption/concession in respect
of such salary received by him. Some of the exemptions/concession
available to employee under Income-tax Act are as under:
1. Section 10(10) Exemption in case of death-cum -retirement
gratuity.
2. Section 10(10A) exemption of commuted pension.
3. Section 10(10B) exemption of retrenchment compensation.

Income Tax
4. Section 10(10C) exemption of compensation on voluntary

retirement.
5. Section 10(13A) exemption of House Rent Allowance
6. Section 10(14) exemption of specified/notified special
allowance.
7. Tax free perquisites, like medical facility, reimbursement of
medical expenses, telephone at the residence of employee, free
lunch or dinner/free refreshment, leave travel concession, etc.
8. Contribution by the employer to the provident fund or other
welfare fund of the employee.
9. Perquisites taxable at concessional rate, like rent free
accommodation, motorcar, etc.
*****
Chapter-15
Double Taxation Relief
Double taxation means taxation of same income of a person in

more than one country. This results due to countries following
different rules for income taxation. There are two main rules of
income taxation i.e. (a) Source of income rule and (b)
residence rule.
As per source of income rule, the income may be subject to tax
in the country where the source of such income exists (i.e. where
the business establishment is situated or where the asset/property is
located) whether the income earner is a resident in that country or
not.
On the other hand, the income earner may be taxed on the
basis of his residential status in that country. For example if a
person is resident of a country, he may have to pay tax on any
income earned outside that country as well.
Further, some countries may follow a mixture of the above two
rules
Thus problem of double taxation arises if a person is taxed in

Income Tax
respect of any income on the basis of source of income rule in one

country and on the basis of residence in another country or on the
basis of mixture of above two rules.
In India, the liability under the Income-tax Act arises on the
basis of the residential status of the assessee during the previous
year. In case the assessee is resident in India, he also has to pay tax
on the income, which accrues or arises outside India, and also
received outside India. The position in many other countries being
also broadly similar, it frequently happens that a person may be
found to be a resident in more than one country or that the same
item of his income may be treated as accruing, arising or received in
more than one country with the result that the same item becomes
liable to tax in more than one country. It is to prevent this hardship
that the provisions in the present Chapter are primarily intended.
Relief against such hardship can be provided mainly in two
ways: (a) Bilateral relief, (b) Unilateral relief.
Bilateral relief
The Governments of two countries can enter into double taxation
avoidance agreement to provide relief against such Double
Taxation, worked out on the basis of mutual agreement
between the two concerned sovereign states. This may be
called a scheme of ‘bilateral relief’ as both concerned powers
agree as to the basis of the relief to be granted by either of
them.
Agreement for ‘bilateral relief’ may be of following two
kinds-
(a) Exemption method: Agreement, where two
countries agree that income from various specified sources
which are likely to be taxed in both the countries should either
by taxed only in one of them or that each of the two countries
should tax only a particular specified portion of the income so
that there is no overleaping. Such an agreement will result in
a complete avoidance of double taxation of the same income
in the two countries. This is known as exemption method of
relief.
(b) Tax credit method: The agreement that does not
envisage any such scheme of single taxability but merely
provides that, if any item of income is taxed in both the
countries, the assess should get relief in a particular manner.
Under this type of agreement, the assessee is liable to have his
income taxed in both the countries but is given a deduction,
from the tax payable by him in India of a part of the taxes paid
by him thereon, usually the lower of the two taxes paid. This is
known as tax credit method of relief.

Income Tax
In practice the former type of agreement also works in the same

way as the later. Bilateral agreements ensure that either
country is to refrain from taxing the whole or part of the
income only if the other country has kept to its part of the
bargain. This can be only proved by producing the assessment
order in that country which will, naturally, take time. Moreover,
even in these agreements, there is a provision that if any item
(not being covered by specific provisions) is chargeable to tax
in both countries, each country should allow abatement to the
doubly taxed income. Thus, even in an avoidance agreement,
generally, the income may get taxed in both places but the
assessee is able to get the benefit of the collection of the
appropriate tax being kept in abeyance or by way of relief in
the form of deductions later, on proving that he has paid tax
thereon in the other country as well. The relief under either of
these types of agreement depends on an agreement between
the countries concerned.
Unilateral relief
The above procedure for granting relief will not be
sufficient to meet all cases. No country will be in a position to arrive
at such agreement as envisaged above with all the countries of the
world for all time. The hardship of the taxpayer, however, is a
crippling one in all such cases. Some relief can be provided even in
such cases by home country irrespective of whether the other
country concerned has any agreement with India or has otherwise
provided for any relief at all in respect of such double taxation. This
relief is known as unilateral relief.
Double Taxation Relief Provision In India
In India the relief against the double taxation is provided
under sections 90 and 91 or the Income –tax Act.
Where there is agreement with foreign countries [Section 90]
[Bilateral relief]
The Central Government may enter into an agreement with the
Government of any country outside India to provide for the
following:
(a) granting of relief in respect of –
(i) income on which income-tax has been paid both in India and in
that country; or
(ii) income –tax chargeable in India and under the corresponding
law in force in that country to promote mutual economic
relations, trade and investment, or
(b) the type of income which shall be chargeable to tax in either
country so that there is avoidance of double taxation of income
under this Act and under the corresponding law in force in that

Income Tax
country.
In addition the Central Government may enter into an
agreement to provide:
(i) for exchange of information for the prevention of evasion or
avoidance of income-tax chargeable under this Act or under
the corresponding law in force in that country, or investigation
of cases of such evasion or avoidance, or
(ii) for recovery of income-tax under this Act and under the
corresponding law in force in that country
In the above cases, the Central Government may, by notification in
the Official Gazette, make such provisions as may be necessary for
implementing the agreement.
Provisions of income-tax laws are subject to provision of DTAA: The
liability to tax arising under provisions of sections 4 and 5 of Income
–tax Act are subject to provisions of Double Taxation Avoidance
Agreements between India and foreign country. Thus Treaty
provisions shall prevail over income-tax provisions. [CIT v P.V.A.L.
KULANDAGAN Chettiar (2004) 137 Taxman 460]
But, situations could arise where due to subsequent
amendments, the statute law is more beneficial than the provision in
the treaty. Since the tax treaties are intended to grant tax relief and
not to put residents of a contracting country at a disadvantage, vis-
à-vis other taxpayers, sub-section (2) was inserted by the Finance
(No.2) Act, 1991 with retrospective effect from Ist April, 1972, to
clarify that any beneficial provision in the law will not be denied to a
resident of a contracting country merely because the corresponding
provision in the tax treaty is less beneficial.
Effect of double taxation avoidance agreement: If an
agreement is entered into under this section, the effect of the same
shall be as under:
(i) If no tax liability is imposed under our Act, the question of

resorting to the agreement would not arise. An agreement
cannot impose any tax liability where the liability is not
imposed by the Act. [CIT v R.M. Muthaiah (1993) 202 ITR 508
(Kar) affirmed in UOI v Azadi bachao Andolan (2003) 263 ITR
706 (SC)].
(ii) If a tax liability is imposed under one Act, the agreement may
be resorted to for negating or reducing it.
(iii) In case of difference between the provision of the Act and of an
agreement under section 90, the provisions of agreement
prevail over the provisions of the Act and can be enforced by
the appellate authorities and the court. However, as per sub-
section 2, the provisions of this Act apply to the assessee in

Income Tax
the event these are more beneficial to the assessee.

(iv) Where there is no specific provision in the agreement, it is the
basic law i.e. Income-tax Act which will govern to taxation of
income.
(v) Where the Government of State certified that a person is a
resident of that state or has a permanent establishment in the
State, the certificate is binding on the other Government [UOI
v Azadi Bachao Andolan (2003) 263 ITR 706 (SC) and Arabian
Express Line Ltd., V UOI (1995) 212 ITR 31 (Guj)].
Method of giving relief from double taxation: Relief from
double taxation is provided by abatement on the basis of mutual
agreement between two states concerned whereby the assessee is
given relief by credit/ refund in a particular manner even though he
is taxed in both countries. Relief may be in the form of credit for tax
payable in another country or by charging tax at lower rate.
The procedure to be adopted by the authorities for
granting relief is to determine in the first place, the total income of
the person liable to tax in India in accordance with the provisions of
the Income-tax Act, and then allow relief as per the terms of the tax
treaty entered with the other contracting country where the income
has suffered double taxation.
Almost every treaty provides that the tax paid in the
contracting country should be deducted from the tax payable by the
assessee in the assessing country on the income taxable in both the
countries. The treaty generally stipulates which country will grant
relief and the manner and extent of the relief on the various heads
of income. For example income from immovable property is taxed in
the source country where it is situated, but the country of residence
of the owner can also tax the same income unless the tax treaty
between the countries expressly provides for exclusion of the
property income from being taxed in the country of residence of the
assessee. Relief can however be claimed and given in terms of tax
treaty on providing proof of payment or at least proof of
assessment.
Relief cannot be granted unless the income which has
been taxed in one of the contracting countries has also suffered tax
in the other contracting country. Proof has to be provided of the
income having suffered double taxation. If there is no tax treaty with
the country levying double tax, then relief can be granted
unilaterally under section 91.
Various models of treaties: Although treaties entered into by
various countries cannot be exactly identical, a certain amount of
uniformity is desirable in its framework: with this in view, tax
treaties have been based on models such as:

Income Tax
OECD model (Organisation of Economic Co-operation and

Development).
U.N. Models Double Taxation Convention between developed and
developing countries, 1980.
Most of India’s treaties are based on OECD models
Concept of business connections and permanent
establishment: The liability to tax in the source country generally
arises out of “ business connection” or through what is called
“Permanent establishment”. Most of the agreements spell out what
they regard as “Permanent Establishment” as this is of utmost
importance while fixing the tax liability. These agreements also lay
down maximum limits of tax that can be levied or withheld and the
manner which it can be levied.
The term “business connection” has not been defined in the
Act. It admits of no precise definition and a solution to the problem
whether there is any business connection would depend upon facts
of each case.
Types of agreements: Agreements can be divided into two main
categories-
(1) Limited agreements
(2) Comprehensive agreements
Limited agreements are generally entered into to avoid double
taxation relating to income derived from operation of aircraft, ships,
carriage of cargo and freight.
Comprehensive agreements, on the other hand are very
elaborate documents which lay down in detail how incomes under
various heads may be dealt with.
Limits under various heads like income from immovable
property, capital gains, dividends, interest, royalties, fees for
technical services, etc. and the manner of taxing the same are
generally laid down in the comprehensive agreements. Some of the
agreements provide for taxation of annuities and pensions.
Countries with which no agreement exists [Section 91]
[Unilateral Relief]
If any person who is resident in India in any previous year
proves that, in respect of his income which accrued or arose during
that previous year outside India (and which is not deemed to accrue
or arise in India), he has paid in any country with which there is no
agreement under section 90 for the relief or avoidance of double
taxation, income-tax, by deduction or otherwise, under the law in
force in that country, he shall be entitled to the deduction from the
Indian income-tax payable by him of a sum calculated on such
doubly taxed income at the Indian rate of tax or the rate of tax of
the said country, whichever is the lower, or at the Indian rate of tax

Income Tax
if both the rates are equal.

In other words, where section 90 does not apply, unilateral relief will
be available, if the following conditions are satisfied:
(1) The assessee in question must have been resident in India in
the previous year.
(2) That some income must have accrued or arisen to him outside
India during the previous year and it should also be received
outside India. Such income must not be deemed to accrue or
arise in India.
(3) The income should be taxed both in India and in a foreign
country and there should be no reciprocal arrangement for
relief or avoidance from double taxation with the country
where income has accrued or arisen.
(4) In respect of that income, the assessee must have paid by
deduction or otherwise tax under the law in force in the foreign
country in question in which the income outside India has
arisen.
If all the above conditions are satisfied, such person shall be entitled
to deduction from the Indian income-tax payable by him of a sum
calculated on such doubly taxed income-
(a) at the average Indian rate of tax or the average rate of tax of
the said country, whichever is the lower, or
(b) at the Indian rate of tax if both the rates are equal.
Average rate of tax means the tax payable o total income, after
deduction of any relief due under the provisions of this Act but
before deduction of any relief due under this Chapter, divided by the
total income.
Steps for calculating relief under this section
Step 1 Calculate tax on total income inclusive of the foreign
income on which relief is available. Claim any relief
allowable under the provision of this Act including
rebates available under section 88E but before relief due
under sections 90 and 91.
Step II Calculate average rate of tax by dividing the tax
computed under step 1 with the total income
(inclusive of such foreign income).
Step III Calculate average rate of tax of the foreign country by
dividing income-tax actually paid in the said country after
deduction of all relief due but before deduction of any
relief due in the said country in respect of double
taxation by the whole amount of the income as assessed
in the said country.
Step IV Claim the relief from the tax payable in India at the rate

Income Tax
calculated at Step II or Step III whichever is less.
*****

Income Tax 2010-11

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Income Tax

Assessment Year 2010-11

TAX - MEANING THEREOF - Every state needs funds to govern the

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

b) PREVIOUS YEAR RELEVANT ASSESSMENT YEAR

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 2

contribution forming part of the CORPUS of the trust;

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THE POINTS TO BE NOTED:-

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HEADS OF INCOME: The Income Tax is levied an income of a

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 5

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 6

resident assessee owning a ship or ship is chartered by such

PERFORMA OF COMPUTATION CHART OF

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 7

1. INCOME UNDER HEAD 'SALARIES' + 

Less Deduction under Chapter VI A - 

Tax on special Incomes (like casual Income 

Add: Surcharge (if applicable) + 

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 8

RATES OF TAX FOR ASSESSMENT YEAR 2010-11-

1(g) For Local Authorities: A Local Authority’s normal Income is

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 9

EDUCATION CESS: Education cess is 2% of total tax (including

A) RESIDENTIAL STATUS OF INDIVIDUAL: An individual

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B) RESIDENTIAL STATUS OF H.U.F.: Like Individual, the H.U.F.

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 11

of 10 years immediately preceding the relevant previous year;

C) RESIDENTIAL STATUS OF FIRM/AOP OR BOI [Sec. 6

D) RESIDENTIAL STATUS OF A COMPANY [Sec 6(3)] : The

TAX INCIDENCE FOR DIFFERENT RESIDENTIAL STATUS:

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INCOME DEEMED TO BE RECEIVED IN INDIA: The following are

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INCOME DEEMED TO ACCRUE OR ARISE IN INDIA: The following

NOTE: Business connection may be of many types i.e. an agent in

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 14

understand some important concepts about it:-

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 15

month in which salary is due or paid or is in arrears.

MEANING OF SALARY U/S 17(1): The definition of Salary is

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 16

recognised provident fund to the extent to which it is

PROCESS OF COMPUTING SALARY INCOME:

BASIS OF CHARGE (SECTION 15): Salary is charged to tax in

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FEES & COMMISSION: It is also taxable on due or receipt basis

EXEMPTION FOR CENTRAL/STATE GOVT. EMPLOYEES &

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 18

EXEMPTION FOR EMPLOYEES COVERED UNDER 'THE

EXEMPTION FOR OTHER EMPLOYEES (SECTION 10(10)(iii)]:

PENSION [SECTION 17(1) (ii)]:

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Uncommuted Pension: It is received on monthly basis by the

LEAVE SALARY [Section 10(10)]: The Employees are entitled to

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RETRENCHMENT COMPENSATION [SEC 10(10B)]: Any

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excess of six months.

COMPENSATION ON VOLUNTARY RETIREMENT [SEC 10(10C)