Hemant Bhawsar

Taxation Notes
Terminology;
Assessment Year: May be defined as year in which the income of the previous year is to be assessed. It always start on 1st April and ends on 31st of March of next year. Thus assessment year 2004-05 starts on 01st April 2004 and ends on 31st March 2005. Previous Year: Income of the previous year is taxed in immediately following assessment year. For example for assessment year 2004-05 the previous year is 2003-2004. Assessee: Means a persons by whom income tax or any other sum of money is payable under the act. It includes every person in respect of whom any proceeding under the Act has been taken for the assessment of his income or loss and the amount due to him. Person includes 1) an individual 2) Hindu undivided family 3) a company 4) a firm 5) an association of persons or body of individuals 6) a local authority 7) Every artificial juridical person. These seven categories of person are chargeable to tax under the Act. Income can be: 1) Regular source/ one time. 2) Legal/Illegal 3) Capital Receipt/ Revenue Receipt. 4) Different from reimbursement. 5) Personal gift not taxable. 6) It must be real & not fictitious 7) Income include Loss 8) Method of accounting can be Cash (receipt)/ Mercantile (Accrual) 9) Cash / Kind Income is classified as 1) Salary 2) House Property 3) Profit & Gain of Business or profession. 4) Capital Gain. 5) Income from other sources.

Hemant Bhawsar Heads Salary House Property Profit & Gain of Business or profession = Gross aTotal Income -Deduction u/s 80 Total Income Tax payable - Rebate Tax Liability

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Table For determination of Residency Status of Individual

Determination of Resident/ Non-resident. Table 1 Basic Conditions 1 2 In case of an Indian Citizen In case of an Indian citizen who leaves India during the or a person of Indian origin previous year for the (who is abroad) who comes purpose of employment or to india on a visit during in the case of an Indian previous year. citizen who leaves india as member of the crew of Indian ship 1) Presence for at least 182 1) Presence for at least 182 days in india during the days in india during previous year. previous year.

3 In case of Individual other than mentioned in column 1 and 2

1) Presence for at least 182 days in india during previous year. OR 2) Presence in india for atleast 60 days during the previous year and 365 days during 4 years immediately preceding the previous year

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Determination of Ordinary / Not Ordinary Resident. Table 2 Additional Conditions 1) Resident of India in at least 2 out of 10 years immediately preceding the previous year. AND 2) Presence of at least 730 days in India during 7 years immediately preceding the previous year. A person is deemed to be of Indian origin if he, or either of his parents of his grand parents was born in undivided India. Residential status of Hindu Undivided Family: Is said to be resident of India if the control and management of its affairs is wholly of partly situated in India. Control and management means de facto control and management and not merely the right to control or manage. A resident HUF is ordinary resident if the karta or the manager of family fulfils the condition in Table 2. Residential status of Firm: Same as HUF Residential Status of Company: An Indian company is always resident in India. A foreign company is resident only if its control and management is within India.

INCOME
The definition of term income is inclusive & not exclusive. Therefore the term income not only includes those things that are included in section 2(24) but also includes such things, which the term signifies according to its general and natural meaning. As per definition of section 2(24) income include the following: 1) Profit and gain. 2) Dividend. 3) Voluntary contribution received by trust created wholly or partly for charitable or religious purposes or by institution established wholly or partly for such purpose. 4) The value of any perquisites. 5) Any special allowance or benefit specifically granted to the assessee to meet his expenses wholly necessarily and exclusively for the performance of his duties. 6) Any allowance granted to the assessee either to meet his personal expenses at the place where he performs his duties or to compensate him for the increased cost of living. 7) Interest, salary, commission, bonus, or remuneration due to, or received by partners of the firm.

Hemant Bhawsar 8) Value of any benefit or perquisites whether convertible into money or not, arising from the business or the exercise of profession. 9) The value of any benefit or perquisite obtained by any representative assessee or beneficiary, or any amount paid by representative assessee for the benefit of the beneficiary which he would have ordinarily required to pay. 10) Any capital gain taxable under the act. 11) Insurance profit computed under the section 44. 12) Any fund received by assessee from his employee as contribution to any fund for the welfare of the employees. Contribution of employees to various funds that is deducted by employer from salaries will be taken as income of the employer. 13) Winning from lotteries, crossword puzzles, races including horse race, card game of any sort. 14) Any sum received under the Keymans insurance policy including the bonus on such policy. 15) Any sum received/ receivable for not carrying out any activity in relation of business.

Agricultural Income U/S 2(1A):

1) Any rent or revenue received in cash/ kind from use of agricultural land. 2) Any income derived by carrying out operation including agricultural operations. 3) Any income received from building on agricultural land, which is used as dwelling. Agricultural income is not taxable in Maharastra but it is added to other income to determine the tax slab. Rates Of Tax for Individual: 0-50,000 Nil 50,000-60,00010% 60,000-150,00020% 150,000 and more 30% +Surcharge @ 10% of tax payable +Education Cess @ 2% on tax + surcharge.

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Incidence Of Tax No Particulars 1 Income Received In India 2 Income deemed to be recd in India 3 Income Accruing And arising in india 4 Income deemed to accrue arise in india 5 Income accruing or arising outside India from a business setup/profession controlled in india. 6 Income accruing or arising outside india from a business/ profession outside india 7 Income remitted to India

R & OR

R but NOR

NR X

1) Income received means physically received in India. 2) Income deemed to be received in India. Employer contribution to recognised provident funds in excess of 12% of salary Interest credited to recognised provident fund in excess of 9.5%. Transfer of accumulated balance from unrecognised provident fund to recognised provident fund. Contribution of central govt to pension fund of employee as provided by Sec 80 CCD. Table 3 Income deemed to accrue in India Nature of Income Whether income is deemed to accrue in india Income from business in connection in india Yes Where activities are not conducted in India so much of the income attributable to the activities in India shall be deemed to be accrue in India. In the following cases a non resident operating through the agent in india shall be said to have business connection in india. 1) Where agent has been given the authority of conclude the contract on behalf of non-resident. 2) No expressed authority is given to the agent but he habitually secures order by non-resident. 3) The agent stores goods on behalf of non-resident or distributes or supplies same to resident of India. Income from any property, asset or source of income in india Yes

Hemant Bhawsar Capital gain or transfer of capital asset situated in India Income from salaries if services received in india Income from salaries (not being perquisite of allowance) if services rendered outside india (provided the employer is Govt of india and employee is resident of india) Dividend paid by indian company Nature of From whom Income Payer source of income Income received Interest Government of India Any Interest A person resident in Borrowed capital is used by the India payer for carrying on business/profession outside india or earning any income outside india Interest A person resident in Borrowed capital is used by payer India for any other purpose Interest A person non resident of Borrowed capital is used by the india payer for carrying on business/profession in india Interest A person non resident of Borrowed capital is used by payer India for any other purpose Royalty/ fees Govt of India Any for technical service Royalty/ fees A person resident in Payment is relatable to business or for technical India profession or any other source service carried on by payer outside india Royalty/ fees A person resident in Payment is relatable to business or for technical India profession or any other source of service income. Royalty/ fees A person non resident of Payment is relatable to business or for technical India profession or any other source service carried on by payer in india Royalty/ fees A person non resident of Payment is relatable to business or for technical India profession or any other source of service income. Yes Yes Yes Yes Yes No

Yes Yes No Yes No Yes Yes No

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Income from salaries

Meaning of salary: ( sec 17(1) ) 1) Wages 2) Any annuity or pension. 3) Gratuity 4) Fees, commissions, perquisite, or profit in lieu of or addition to salary 5) Advance salary. 6) Leave salary 7) Contribution to recognised PF. 8) Transferred balance of recognised PF to the extent it is taxable. 9) Contribution of central govt to the account of an employee under the pension scheme ( sec 80CCD) Any income received by an employee from his employer by whatsoever name called is chargeable to tax under the head salary. Salary include basic salary allowances by whatever name called, retirement benefit and perquisites provided from employer to employee SECTION 15 For the chargeability to tax, salary consist of 1) Any salary due from employer/former employer to an assessee in previous year, whether actually paid or not 2) Advance salary. 3) Any arrear of salary received in previous year, which is not charged in any previous year. Sec 15 taxes salary on due or receipt basis whichever is earlier. Hence salary received in advance is chargeable to tax in year received. If any amount is donated out of salary income i.e. salary forgone is allowed as deduction U/S 80 G (If conditions fulfilled) but u/s 15 gross amount of salary is chargeable to tax. If the employer pays net amount of tax salary to the employee in such case employee has to declare the gross salary as his income them claim credit for tax deducted at source by employer. Salary paid to partners of partnership firm is not chargeable to tax under the head Salary but is chargeable under the head profit & gain from business. Profit in lieu of salary: Any amount received from employer for any modification of the terms of employment or in connection with termination of employment is treated as profit in lieu of salary and is chargeable to tax under the head of salary. Reimbursement of Expenses: Any expenses reimbursed by the employer which are incurred by the employee in performance of his office duties is not chargeable to tax since it does not result in any personal gain to the employee.

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Table 4 Contents of salaries Different Items Basic salary Dearness Allowance Advance Salary Arrear of salary Leave encashment at time of retirement Salary in lie of notice Salary to partner

Tax treatment Taxable under section 15 Taxable under section 15 Taxable in the year of receipt Taxable in the year of receipt Exempt in some cases.

Taxable on receipt basis. Chargeable under the head Profit and gain from business Fees and commission Taxable Bonus Taxable Gratuity Exempt in some cases Pension Exempt in some cases Annuity from employer Taxable Annual accretion to the 1) Excess of employers contribution over 12% of credit balance in a salary is taxable recognised provident fund 2) Excess of interest credited over the notified rate of interest is taxable. Contribution by central govt Taxable towards pension fund Remuneration for extra Taxable work

Leave salary: In case of government employee any amount received as leave salary in respect of the period of earned leave at his credit at the time of retirement is exempt from tax In case of Non government employee least of the following 1) Cash equivalent to the leave salary in respect of the period of earned leave at his credit at the time of retirement. 2) 10 months average salary. (Last 10 month before retirement). 3) The amount not chargeable to tax as specified by government. 4) Leave encashment actually received at the time of retirement.

Gratuity
In case of govt employee: Any death cum retirement gratuity received by employee of Central Govt, State govt, or local authority is wholly exempted.

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In case of Non- Govt employee: The least of following: 1) Rs 350000/2) month salary for each completed year of service or 15 days salary for every completed year of service (in excess of 6 month) if covered by payment of gratuity act. 3) Gratuity actually received. Only available on retirement or resignation. Salary for this section means Basic + DA + commission. 15 days salary means: salary last drawn / 26 X 15. day salary means month salary of average salary of past 10 month.

Provident Fund:
Statutory Provident Recognised Unrecognised Fund Provident Fund Employers Exempt From tax Exempt up to 12% Exempt from tax Contribution to of salary. Excess to provident fund it is taxable Relief under section Available Available Available 88 on employee Interest credited to Exempt From tax Exempt From tax if Exempt From tax PF the interest rate does not exceed the notified rate of interest. Lump sum payment Exempt From tax Exempt From tax in Payment received in at time of retirement some cases respect of or termination of employees own service contribution is exempted, Interest on employees contribution is taxable. Balance is taxable under the head salary

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Allowance:
Different Allowances City Compensatory allowance House Rent Allowance Entertainment allowance Tiffin allowance Special allowance Any other allowance Tax treatment Taxable Exempt in some cases Exempt in some cases Taxable Notified special allowance are exempted Taxable

House Rent Allowance: The Least of the following 1) An amount equal to 50% of salary where residential house is situated at Mumbai, Calcutta, Delhi or Madras. And amount of 40% of salary where the residential house is situated any other place. 2) HRA received by the employee in respect of the period during which the rental accommodation is occupied by employee during the previous year. 3) The excess of rent paid over 10 % of salary.

Entertainment Allowance: Entertainment allowance is first included in salary income under the head salaries and then the deduction is given on the following basis. In case of Govt Employee at least of following: 1) Rs 5000/- 2) 20% of salary. 3) The actual amount of entertainment allowance. In case of non-govt employee no deduction is available.

Sec 10(14)
1) 2) 3) 4) Transportation allowance: Is exempt upto Rs 800 p.m. Children education allowance Rs 100 p.m. Children Hostel Allowance: Rs 300 p.m. per child. Conveyance allowance: To the extent spent for office duties.

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Sec 10(7)
Any allowance given by govt of India to citizen of india rendering service outside india is exempt from tax. Sec 17(2) Medical Allowance: 1) 2) 3) 4) If medical facility is provided in hospital maintained by employer. In Govt Hospital. Medical facility in approved hospital for specified disease. Medical treatment provided in private hospital where cost of treatment does not exceed Rs 15000 per year. 5) Group Medical insurance paid by the employer for its employees. 6) Medical treatment provided outside india Cost of Medical treatment Cost of stay of patient & one attendant. Cost of travel of the patient & one attendant is exempt if gross total income before including cost of medical treatment is less than or equal to Rs 2 Lakh. Family member include spouse, children, parents and dependent brothers and sisters.

Leave Travel Allowance:

Any amount received from employer to cover cost of travel of employee or his family member to any destination in India can be claimed as exempt of following conditions. 1. If exemption is available twice in block of 4 year beginning 1/1/86. 2. One exemption which is unavailed can be carried forward to the next block but the same has to be utilised in first year of next block. Amount of exemption is equal to: 1) If journey by air Economy class fair by national carrier by the shortest route. 2) If journey by rail A/C first class fair by the shortest route 3) If journey by road- Delux of first class fair by shortest route Employee has to furnish the proof of expenses to the employer to avail this exemption. This exemption is available only in respect of travel and is not available for lodging & boarding and other expenses incurred. Family member means spouse, 2 children born after 1-Oct-1998, parents & dependent brothers and sisters.

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Perquisites: Sec 17(2)

1) The value of any rent free accommodation provided by the employer to employee. 2) Value of any accommodation provided at concessional rate by employer. 3) Value of any amenity or facility provided free of cost or at concessional rate by employer in the following cases. By company to employee who has substantial interest in business of the company (a person is said to have substantial interest if he is entitled to 20% or more of profit of the employer) To it directors By any employer to employee who does not fall under the clause 1 or 2 above & whose salary income excluding value of non monetary benefits is more than 50000/ If any payment made by employer to discharge any obligation of employer. Any amount payable whether directly or indirectly through a fund other than recognised provident fund approved Super Annuation. fund or deposit insurance fund to affect an assurance on the life of the employee or to effect a contract of annuity.(clarification needed) Value of any other benefit as may be prescribed. 1) Rent free unfurnished accommodation. Location of Property Property Owned by Employer In cities have population > 10% of salary for period of 4 lac which accommodation was provided to employee Other Cities 7.5% of salary

Property taken on lease or rent by employer 10% of salary or rent paid whichever is lower Same as above

Salary means all monetory allowance. Salary includes Basic + DA and bonus, commission, all other taxable allowance, all other monetory payment by whatever name called. Salary does not include employer contribution to P.F. Dearness allowance if, it does not form part of retirement benefit. All other allowance to the extent they are exempted. Value of any other benefit. Rent Free Furnished Accomodation: Value of rent-free unfurnished accommodation + 10% of value of furniture if furniture owned by employee + hire charges paid by employer if furniture is taken on hire. Perquisite Value of accommodation provided at concessional rate: Is equal to Perquisite value of unfurnished accommodation rent paid by the employee.

Hemant Bhawsar If an employee is provided with an accommodation on one city from where he is transferred to another city and he is provided with an accommodation also in another city then for first 90 days perquisite will be calculated only in respect of one property. But beyond 90 days perquisite values of both the property shall be computed. If employee is provided with an accommodation on a motel no perquisite value shall be taxed for the first 15 days there after perquisite value shall be calculated 24% of salary. Motor car:

Supply of Gas, Electricity, water by Employeer. 1) When the employee is in the business of providing such facility: perquisite value would be manufacturing cost incurred by the employer. 2) Where employer has purchased this facility:Amount paid or reimbursed by the employer. Education Facility Provided by employer to employee or his family member, perquisite value is: 1) where education facility is provided to employees children where cost of education per month < 1000. NIL Where cost of education is > 1000- Cost of similar facility in nearby locality or Rs 1000 per month per child. 2) When education facility is not run by employer but employer pays or reimburse the fees of family member or children of employee member or children of employee perquisite value= amount paid or reimbursed by the employee. Free Transportation Facility 1) Where employer is n the business of providing transportation facility perquisite value = value at which such services are offered to any outsiders. 2) Where employer gets vehicle on hire perquisite value will be amount spent by employer Domestic Servant: Perquisite value= Cost of providing such service to the employee. Interest for the loan given to the employee either interest free or at concessional rate of interest. Perquisite Value= Interest calculated by SBI depending rate at 1st April less interest paid by employee. Interest has to be calculated o maximum monthly balance outstanding.

In Following 2 case no perquisite value shall be taxed. 1) Where the loan taken for medical treatment of specified disease.

Hemant Bhawsar 2) Where loan amount is less than 20000. Food and beverages provided by employer: Cost of food beverages or refreshment provided by employer to employee is chargeable to tax as perquisite in following cases no perquisite value shall be charged to tax. 1) Tea or snack provided during the office hour. 2) Free meal provided in office hour in remote areas. 3) Free meal provided during office hour by employer through paid voucher, which are not transferable & usable only at eating outlet of value thereof, does not exceed Rs. 500 per day.

Travel Tour, accommodation of guest house

Cost of travel and tour of the employee & his family member borne by the employer shall be chargeable to tax in hand of employee. When guest house of the employer is available to all classes of the employee no perquisite value shall be charged to tax. In other wise use of guest house by the employee and his family member will be taxed as perquisite. Perquisite value= amount charged for similar facilities by any other agencies in same locality. Gift given to employee or family member: Any gift given by employer or his family member aggregating upto Rs 5000 are not taxed as perquisite.

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Income From House Property.

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Annual Value of any property consisting any building or land apartment thereto of which assessee is owner and of which is not used for his business or profession shall be chargeable U/S 22 as income from House property. Annual Value: Step 1: If the property is not let out Gross Annual Value = 1) Municipal Tax. 2) Fare rent 3) Rent Fixed by rent control act. Higher of A or B but not exceeding C. Step 2: Rent actually received (excluding unrealised rent) Unrealised rent can be excluded by calculating rent actually received if following conditions are fulfilled. 1) If tenancy is bonafieded. 2) Steps are taken to vacate the premises occupied by defaulting tenant. 3) Defaulting tenant is not in occupation of any other premises or property owned by assessee. 4) Legal proceedings are initiated by against defaulting tenant. If property is let out for all 12 month GAV is amount under Step1 or Step 2 whichever is earlier. If property remains vacant for pert of year go to Step 3. Step 3: Rent acuatlly received (excluding unrealised rent) + Rent for vacant period. If Step 3 > step 1 GAV = Step 2 If Step 3< Step 1 GAV = Step 1. GAV -Municipal Tax =Net Annual Value -Deduct u/s 24 = Income From House property.

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Self-Occupied property u/s 23(2)(a): GAV of property which is self occupied during a whole year will be nil. Where a assessee owns more than one house property which is occupied by him for his own residential purpose GAV of only one property of his house can be taken as NIL and all other house property shall be treated as deemed let out property. The GAV of deemed let out property shall be calculated as per SEC 23(1) SEC 23(2)(b) If assessee own a house which cannot be occupied by him because of his employment, business or profession or business carried out at any other place, GAV of such property shall be considered as NIL of property is not actually let out & no other benefit derived from such property.

Deduction U/S 24:

1) Standard Deduction: Is 30% of NAV. This deduction is available irrespective of actual expenditure incurred. 2) Interest on borrowed capital: Any interest paid on money borrowed for purchase, construction, and reconstruction, of house property is allowed as the deduction. Amount of interest actually paid is allowed as deduction. In case of let out property entire amount of interest paid can be claimed as deduction. In case of self-occupied property maximum deduction available is Rs 30000/-. If money is borrowed after 1st April 1999 for purchase of House property and the acquisition & construction is completed within period of 3 years from the end of the financial year in which money is borrowed maximum deduction available is Rs 15000/- can be allowed. Interest paid on money borrowed to pay the unpaid interest is not allowed as deduction. Interest paid for money borrowed to repay the earlier loan is allowed as deduction. Pre Construction period: Pre construction period starts on the day on which loan is taken and ends on last day of the financial year preceding the year in which construction is completed. Interest paid on pre construction period as a deductible in 5 equal instalment starting from the year in which construction is completed. Sec 25: Interest on borrowed money payable outside India on which tax has not been deducted at source and there is no person in India who can be treated as an agent of the payee. Deduction will not be available on such interest paid. Sec 25 (a) When a deduction has been allowed u/s 24 (1)(x) in assessment year 2001-2002 or earlier and subsequently the assessee recover the unrealised rent the amount so recovered shall be taxed under the head Income form House Property during the year.

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Sec 25 AA: Where an assessee cant realise the rent during the assessment year 2002-03 or subsequent year and of there after he recovers the amount of unrealised rent the same shall be taxed under the head Income from House property where assessee is the owner of the house. Sec 25 B: If assessee receives any amount by the way of arrear of rent the same shall be taxed after allowing 30% standard deduction as income from house property in year in which he receives the arrear whether or not he is owner of the property. Sec 26: Where shares of the co-owner of the property are definite & ascertainable income from house property is to be taxed in the hand of each co-owner in proportion to his share in the property. If share are not determined or ascertainable Income from the house property will be taxed on all 3 constituting Association of Person. Sec 27: Deemed Owner Following persons shall be considered as deemed owner. 1) An individual who transfer house property otherwise than for adequate consideration to his or her spouse ( not being a transfer in connection of agreement to stay apart) or to a minor child (not being married daughter). 2) Holding impartible estate. 3) A member of a co-operative society or company or any other association to whom a building or a part thereof is allotted under house building scheme of society or company of any other association. 4) A person who is allowed to take or retain the possession of any building or part thereof in part performance of contract mentioned u/s 53A if transfer of property act. 5) A person who acquires any rights (excluding lease on month bases or for period less than 1 year) in house property as mentioned in sec 269 UA (f) of income tax act.

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Income From Business and profession

Calculation Format Net Profit as per P& L a/c Add: Items not allowed under Income Tax act or considered separately Less: Amount allowed or considered separately

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Sec 28(1) Following amounts are taxed under head profit and gain from business or profession 1) Profit earned by a person carrying on any business or profession. 2) Compensation due or received by the following person by whatever named called: Any person managing the whole or substantially the whole of affairs of an Indian company at or in connection of the terms relating to the management. By any person managing the whole or substantially the whole of affairs of any company in India at or in connection with termination or modification of terms of management. By any person holding an agency in India for any other person in respect of business activities carried on by the other person at or in connection with termination or modification of agency. Any person for or in connection with vesting in the govt or a corporation owned by govt of the business. 3) Any amount received from sale of import licences, duty drawback or cash credit compensation support received. 4) Any amount received by a trade or professional or similar organisation by performing specific services for their member. 5) Value of any benefit whether convertible into money or not arising from business or exercise of profession. 6) Any salary, remuneration, bonus, commission or interest on capital received by partner of partnership firm. 7) Any amount received under the Keyman Insurance Policy. 8) Any sum received speculative transaction. A transaction in which a contract for purchase or sale of any commodity including stock & share is periodically settled otherwise then by actually delivering is called speculative transaction. 9) Any income received by person for not carrying out any activity in relation to any business or not sharing any know how, patent, copyright, trade mark etc.

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Sec 30 Allows deduction for following expenses are allowed as deduction 1) If assessee occupies premises as tenant, which is used for purpose of business he will be allowed deduction of rent paid. 2) Rates & taxes for premises will be allowed as deduction. 3) If assessee occupies a premises as owner which is used for the purpose of business deduction will be allowed to him of expenditure incurred on repair if it constitutes revenue expenditure. 4) A tenant will be allowed deduction for expenditure incurred on repairs which are revenue in nature only if he has undertaken to bear cost of such repairs. 5) Amount of any premium paid in respect of insurance against risk of damage or destructions of premises is allowed as deduction.

Sec 31 Deduction is allowed in respect of expenditure incurred on repairs on plant and machinery & insurance premium paid to insure the plant and machinery. Sec32: Depreciation means loss or decline in value of an asset due to wear and tear time lay or innovation in technology. It is essential to charge depreciation due to following: 1) To arrive at realistic profit earned by business. 2) To accumulate funds to replace asset at end of useful life of the asset. Following conditions are required to be fulfilled to claim depreciation 1) The assessee must own the asset; if assessee is co-owner of asset the depreciation would be allowed in proportion to ownership right. 2) In case of asset taken on lease, leaser is entitled to get depreciation. But in case of asset taken under hire purchase will get deduction on depreciation. Table: Residential Bldg Commercial Bldg Plant and machinery Furniture Motor Car Computers Techinical Know how purchased after 1/04/1998

5% 10% 25% 15% 20% 60% 25%

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Sec 35 Deduction on expenses incurred on scientific research. Any activity for extension of knowledge in the field of natural or applied science.

Any expenditure incurred which is capital in nature excluding land for purpose of scientific research will be allowed as deduction in year in which it is incurred. Any expenditure, which is incurred during period of 3 year, immediately preceding year of commencement of business shall be considered as expenses for the year in which business commences. Where any amount donated to approved scientific research association for undertaking scientific research or to approved University for purpose of conducting research in social science or statistical research shall be eligible for weighted deduction of 125%. Sec35 (2 a a) Donation to National Laboratory: Any sum paid by an assessee to National Laboratory or Indian institute for Technology or any person approved by prescribed authority for the purpose of carrying out programme for scientific research is eligible for weighted deduction of 125%. Sec 35 (2 a b) Deduction for expenses incurred on inhouse research & development. Any amount spent by assessee before 31sr march 2005 in which is engaged in business of biotechnology, manufacturing or production of pharmaceuticals, electronic equipment or computers or inhouse research & development is eligible for deduction of 50%. Sec 35A Patent and copyright: any expenditure incurred on purchase of patent or copyright before 1/04/98. in eligible for deduction in 14 equal instalment commencing from year in they are acquired/ when business commences. Sec 35 (c a) 100% deduction is available in respect of any sum paid to 1. any association or institution which has it object of carrying out programme of rural development. 2. Any association or institution which has its objective of training of personal for carrying out programme of rural development.

Hemant Bhawsar 3. Any donation to nation urban proverty eradication fund setup by central govt. Sec 35 (D) Deduction for preliminary expenses incurred: This deduction is available to an Indian company or non-resident non-corporate entity. Expenditure incurred if following 2 stages qualify for deduction; 1) Any expenditure incurred for setting up of business. 2) Any expenditure incurred after commencement of business in connection with setting up new undertaking. Expenditure incurred for following purpose qualify for deduction: 1) Expenditure on preparation of feasibility report, project report or conducting market survey. 2) Legal expenses paid for drafting any agreement relating to business. 3) Legal charges for drafting M.O.A or A.O.A. 4) Expenses for printing M.O.A or A.O.A. 5) Legal charges & auditor fees for drafting prospectus of the company. 6) Printing charges of the prospectus. 7) Expenses incurred in connection with issue of shares & debenture including underwriter commission. 8) Registration fee of the company under company. 9) Aggregate expenditure incurred for the above purpose shall not exceed 5% of cost of project or 5% of capital employed. Cost of project = Cost of all fixed asset at last day of year in which business commence. Capital Employed= share capital + debenture + long term loan ( only for Indian company) Deduction available in equal to 1/5 (20%) of the qualifying expenditure & deduction will be available for 5 consecutive year beginning from the year in which business is setup. Sec 35 DD Where an Indian company incurs any expenses on amalgation or demerger deduction is available thereof in 5 equal instalments starting from the year which amalgamation or demerger takes place. Sec 35 DDA Where any assessee incurs any expenditure for payment of voluntary retirement compensation to employee deduction thereof is allowed in 5 equal instalments starting from the year in which VRS is offered. Sec 36(i)(i) Amount paid as insurance premium in respect of insurance taken against risk of damage of destruction of stocks or stores or supply is allowed as deduction.

Hemant Bhawsar Sec 36 (i) (ib) Any amount paid on insurance premium by employer to keep in force insurance on the health of employee is allowed as deduction. Sec 36 (i)(ii) Deduction is allowed for bonus or commission paid by employer to employee. Sec 36 (i) (iii) Deduction in respect of interest paid on capital borrowed for the purpose of the business any interest paid on capital borrowed for the purpose of purchase of capitalisation the date the asset is first put to use. Sec 36 (i) (iv) Employers contribution to employees P.F. O approved super annuation fund is allowed as deduction. Sec 36 (i) (v) Employer contribution toward approved gratuity fund created exclusively for benefit of employee is allowed as deduction. Sec 36 (i) (v)(a) Deduction in respect of any sum received as contribution from the employee toward any welfare fund of the employee in is allowed as deduction to employer is allowed as such amount is credited by employer to employees a/c of welfare fund on or before due date prescribed. Sec 36 (i) (v ii) Any amount written off as bad debt in the book of account shall be allowed as bad debt only if 1 of the following condition is fulfilled 1) Debt has bee taken into account of computing income of any previous year. 2) Debt represent money lend in the ordinary course of money lending business carried on by the assessee.

Sec 37:
Any expenditure which is not covered by sec 30 to 36 and which is not capital in nature, which is not incurred for personal benefit but incurred wholly & exclusively for purpose of business is allowed as deduction while computing business income. Sec 37 ( 2B) Any expenditure incurred by assessee on advertisement in any souvenir or brochure brought out by political party is not allowed as deductible.

Hemant Bhawsar Sec 40 : Sec 40(a) (i) Any interest royalty or fees for technical services or any other sum payable outside India to any non-resident in India will not be allowed as deduction of tax has not been deducted at source there from or after deduction has not been paid into government treasury. Deduction for the said amount paid will be available in subsequent year when tax is deducted & paid into govt treasury. Sec 40 (a) (2a) Any wealth tax paid will not be allowed as deduction. Sec 40 (a) (3) Any salary payable outside or to non resident in India will not be allowed as deduction if tax has not deducted at source or after deduction not deposited in govt treasury within prescribed time.

Sec 40 (B) Salary paid to the partners of will be allowed only if: 1) Salary is paid only to working partners. 2) Payment of salary is authorised by partnership deal. 3) Salary should not pertain to the period prior to partnership deal. 4) Salary should be within permissible limit laid down in the Act. Example In case of firm engaged in profession: Book profit is Rs 800000/Particular Max Limit Book profit upto Rs 50000/- or 90% of book 100000/profit whichever is higher Book profit of next Rs 60% of Book Profit 100000/Balance book profit 40% of Book profit Total In case firm engaged in any other business: Particular Book profit upto Rs 75000/Book profit of next Rs 75000/Balance book profit Max limit 50000/- or 90% of book profit whichever is higher 60% of Book Profit 40% of Book profit Amount 90000/60000/140000/390000/-

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Book profit is equal to profit as per P& L a/c + remuneration payable or paid to partner if debited to P&L a/c = or all adjustment prescribed under sec 28 to 33 + or u/s 40 (b). Sec 40 (b) second part: Interest payable to the partner is allowed as deduction only in following: 1) Payment of interest should be authorised by partnership deal. 2) Interest should not pertain to period prior to partnership deal. 3) Maximum rate of interest can be 12 %. Sec 40 (a) (2) Any expenditure by way of payment to person mentioned in section is liable to be disallowed to the extent such expenditure is considered as excessive by the assessing officer having regard to fair market value of such good or services. Persons referred to in section are as under: 1) Where the assessee is an individual: payment made to any relative of that individual. 2) Where assessee is firm, company, AOP, BOI, or HUF payment made to any director of company or partner of firm or member of AOP, BOI, or HUF, or any relative of director or partners or member. 3) Payment made to any individual who has substantial interest in business of the assessee or to any relatives of the individual. 4) Payment made to any company firm or AOP, BOI, or HUF, who has substantial interest in the business of the assessee or to any director, partner or member of such company, firm, AOP, BOI, or HUF or to any relative of such director partner of member. 5) Payment made to any company, firm, or AOP, BOI, or HUF of whose director partner or member has substantial interest in business of assessee or to any other director partner or member or relative of such director partner or member. 6) Payment made to any person who carries on any business or profession where assessee being an individual or any relative of such individual or any relative of such individual or has substantial interest in the business of the person. Where the assessee being company, firm, AOP, BOI, or HUF, any director member or partner or any relative of such director member or partner has substantial interest in business of that person. For purpose of this section relative means, spouse brother, sister or any linear ascendant or descendent. A person is said to have substantial interest if he is entitled to 20% or more of the profit of the company.

Hemant Bhawsar 40(a) (3) Where assessee incurs any expenditure on respect of which payment in excess of Rs 50000/- is made otherwise done b cross cheque or draft 20% of such expenditure will be disallowed. Exception: 1) Payment made to central or state govt. 2) Payment made to banking institution 3) Payment made through banking channels. 4) Payment made by the way of book adjustment. 5) Any payment made to cultivator, grower or producer of agricultural products for purchase of such products. 6) Any payment made for cottage industry products. 7) Any payment required to be made on the day when banks are closed. 8) Payment made to any employee who is temporarily posted other than his place of duty for more than 15 days and where he does not maintain bank account.

Sec 40 (a) (7) Gratuity is deductible only in following 2 cases 1) When amount of gratuity is actually paid during year 2) Any provision is made by the way of contribution to approved gratuity fund. Sec 43 (b) In following cases deduction shall be allowed only in payment basis. 1) Any sum payable by way of tax, duty, cess, or by whatever name called. 2) Any sum payable by employer by way of contribution on to P.F, super-annuation fund any other fund maintained for welfare of the employers. 3) Any sum payable as bonus or commission to the employee for services rendered. 4) Interest payable on any loan or borrowing from a public financial institution or state financial corporation or state industrial investment corporation. 5) Interest on any loan or advance payable to any scheduled bank including co-operative bank. 6) Any sum payable by employee in lien leave at the credit of the employee. Deduction for the above sum is allowed only if paid during the year in which liability arises or if it is paid before the due date of filing a return of income of the year in which the liability has arisen otherwise deduction would be available in the year in which payment is actually made.

Hemant Bhawsar Sec 41 (1) Where any allowance or deductions has been made in any previous year in respect of any loss expenditure or trading liability and subsequently any amount is received by the assessee in cash or in kind n respect of such trading liability by way of remission there of the amount received by the assessee shall be taxed as business income irrespective of whether business is in existence or not. Sec 41 (4) Where any deduction has been allowed for bad debt written off in any of previous year and the assessee amount in respect of such debt written off the said amount recovered will be taxed as business income irrespective of whether the business is in existence or not.

Sec 44 AA Requirement of maintenance of book of accounts: Following person are required to maintain their books of accounts to enable the assessing officer to determine the income. 1) Person carrying on legal, engineering, medical, architechural, accountancy, technical consultancy, or interior decoration, profession, or interior decorator, or any other persons notified by central board of Direct taxes. 2) Any person engaged in business & profession other than one mentioned above is required to maintain the books of accounts if its net income during the previous year or in any 3year preceeding the previous years exceeds Rs 120000/- or his total turnover or gross receipt during the year or any of the 3 year preceeding previous year exceeds Rs 10,00,000/-. 3) A person having income of nature reffered to in section 44A, 44AE, 44AF, has declared income less than amount prescribed in this section. Sec 44 AB: Compulsory Audit if Books of Accounts: In following cases compulsory audit of accounts has to be considered: 1) Assessee engaged in any business whose turn over/gross sale exceeds Rs 40 lakh. 2) Assessee engaged in profession whose total receipt exceeds Rs 10 lakh. 3) Any assessee having income referred to in section 44AD, 44AE, 44AF of the act and has declared income less than amount prescribed under these section. 44 AD: Income for civil construction Notwithstanding any provision of the chapter of business income. In case of an assessee engaged in business of civil construction or supply of labour for civil construction, a sum equal 8% of gross receipt earned that shall be considered as his income chargeable to tax under the head profit & gain of business. If his turnover exceeds 40 lakh during the year provisions for this section shall not apply him.

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Depreciation u/s 30(2) shall also be deemed to be allowed and WDV of the asset shall be reduced accordingly. The only deduction available is salary and interest paid to the partners of partnership firms. Any assessee can declare income less than prescribed provided he maintains the books of accounts as provided u/s 44AA of the act and gets them audited u/s 44AB of the act. Sec 44 AE: Notwithstanding any provision of the chapter of business income. An assessee who own not more than 10 goods vehicle at any point of time during year the income of the business shall be calculated at a sum given hereunder or any sum higher than that 1) Incase of heavy goods vehicle an amount equals to Rs 35580 p.m or part of the month during which vehicle is owned by assessee. 2) In case of vehicle other than heavy goods vehicle 3150 p.m. or part of the month during which vehicle is owned by assessee. Sec 44 AF: Notwithstanding any provision of the chapter of business income. Incase of an assessee engaged in the business of retail trade of any goods a sum equal to 5% if the total turnover or any sum higher than the same shall be considered as income chargeable to tax as profit & gain of business.

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Capital Gain
Sec 45: Any profit or gain arising on transfer of a capital asset is chargeable to tax under the land capital gain in the year in which transfer takes place. Sec 2(14) Capital Asset Means property of any kind movable or immovable held by the assessee does not involve the following: 1) Stock in trade 2) Personal effects (excluding jewellery) 3) Agricultural land in India provided it is not situated within the jurisdiction of municipality or cantonment board having population of 10000 or more. 4) 6 or 7% gold bond. 5) Gold deposit bond. 6) Special bearer bond. Classification of capital asset 1) Long term: held for less > 36 month 2) Short Term: Held for < 36 month. For Equity shares, pref. Shares, debentures held for < 12 month.

Sec 2(47): Transfer Transfer in relation to capital asset means sale, exchange, relinquishment of the asset or extinguishments of any right there in and also include compulsory acquisition under the law. Following transaction do not constitute transfer Sec 46(1): Distribution of capital asset in kind by a company to its shareholder on liquidation Sec 47 (i): Any distribution of capital asset in kind by HUF to its member at time of time of partition.

Hemant Bhawsar Sec 47(iii): Transfer by gift or will Any asset transferred by the way of gift or under will. Sec 47 (iv): transfer of capital asset by wholly owned subsidiary to its Indian holding company. Sec 47 (v) : Transfer of capital asset by wholly owned subsidiary to its Indian holding company. The exemption granted u/s 47(iv) & 47 (v) shall be withdrawn i) If the holding company ceases to hold 100 % share of the capital of subsidiary company within the period of 8 years from the date of transfer of the capital asset. ii) If within period of 8 years from date of transfer the transferee company convert capital asset into stock in trade. Sec 47 (vi) Transfer of capital asset by amalgamating company to amalgamated company. Sec 47 (via): Transfer of shares held in Indian company by a foreign company to another foreign company in pursuance of scheme of amalgamation between 2 companies if at least 25% share holder of the company continue to remain share holder of amalgamated company. If such transfer does not attract capital gain tax in country in which amalgamating company is incorporated. 47(vib): Transfer of capital asset by demerged company in pursuance to scheme of demerger. 47 (vi c): transfer of shares held in an Indian company by a demerged foreign company to resulting foreign company if following conditions fulfilled: 1) share holder holding value of shares remain share holder of resulting company & such transfer does not attract capital gain tax in country which demerged company is incorporated. 47 ( vi d ): Issue of shares by the resulting company in the scheme of demerger to the shareholder of demerged company. 47 (vii) Issue of shares by amalgamated company to the share holder of amalgamating company for exchange of share held by them in amalgamating company in pursuance of amalgamation. 47 (ix) Transfer of capital asset being any work of art or work of archaeological importance to the govt of national museum. 47 (x): Transfer by way of conversion of debenture or bond into shares or debentures. 47 (xiii): Transfer of capital asset from a partnership firm to a company when firm is succeeded by company shall not be regarded as transfer if following conditions are fulfilled; 1) All asset & liabilities are transferred to company.

Hemant Bhawsar 2) All partners become shareholder in the company & share proportion as in the firm. All partner hold minimum of 50% of total voting power in company & continue to hold such share for period of 5 years from date of transfer. 47 (xiv): Where a proprietary concern is succeeded by a company. Transfer of capital asset by proprietary concern to the company shall not be regarded as transfer of following. 1) All asset & liabilities of proprietary concern are transferred to the company. 2) Properitor becomes share holder in company & hold at least 50% of the total voting power in company & continues the same for 5 year from date of transfer. Calculation of capital gain Short term capital gain Full value of consideration ( gross consideration) Less: Expenses incurred wholly & exclusively for the purpose of transfer Net Consideration Less cost of acquisition Less cost of inprovement = Short term capital gain XX XX XXX XX XX XXXX Long term Capital Gain Full value of consideration ( gross consideration) Less: Expenses incurred wholly & exclusively for the purpose of transfer Net Consideration Less Indexed cost of acquisition Less Indexed cost of Improvement Long term capital gain XX XX XXX XX XX XXXX

Indexed cost of acquisition/improvement = Cost of Acquisition/Improvement X Cost of Inflation Index of the year of sale Cost inflation index of the year of acquisition or improvement Sec 49(i): In the following cases cost of acquisition for an assessee shall be cost to the previous owner; 1) Where the property become property of the assessee by any of the modes prescribed u/s 46(i), 47 (i), 47 (i), 47(iii), 47 (iv), 47(v), 47(vi), 47(vi a). 2) In case of shares received in amalgamated company u/s 47(iii) cost of acquisition is equal to cost of acquisition of share held in amalgamating company. 3) In case of share or debenture received on conversion of debenture or bond u/s 47 (x) is equal to cost of acquisition for original debenture or bond. 4) Cost of acquisition of share held in resulting company = Cost of acquisition of share held in demerged company X Net asset value of resulting company/net asset value of demerged company immediately before demerger. Cost of acquisition of shares of demerged company= original cost paid cost fo acquisition of share held in resulting company as computed above.

Hemant Bhawsar Sec 55 (2): In the following cases assessee may at his option subtitute the cost of acquisition by fair market value as on /4/81. 1) When assessee has acquired the asset before 1/4/81. 2) Where the capital asset has become property of the assessee by any modes referred to in section 49(1) and capital asset become property of previous owner before 1/4/81. Sec 51: Where any capital asset was at any previous occasion subject to negotiation for transfer, any advances received and forfeited by the assessee in respect of such negotiation shall be reduced from the cost of acquisition. Sec 45(1a): Where any amount is received during the previous year from an insurance company on account of damage or destruction of capital asset as result of Flood, Earthquake, Cyclone any other natural calamities b) riots or civil disturbance c) Accidental fire or war then any profit or gain arising, from receipt of such money will be chargeable to tax under the head Income from capital gain. The amount of money received or market value shall be considered as full value of consideration. Sec 45 (2) Capital asset Year Of Purchase 87-88 Cost 6,00,000 Stock in trade Asset Sold

95-96 Fair market Value 9,00,000

05-06 Sale Price 15,00,000

Capital Gain 9-5 lakh = 4 Lakh

Business Income 15-9 lakh= 6 lakh

Capital gain= FMV at date of conversion Cost of acquisition. Business Income= Sale price- FMV as on sale date of conversion. Tax on capital gain & business income shall be paid in the year in which stock in trade is sold.

Transfer of capital asset to the partnership firm full value of consideration= amount recorded in the books of a/c of the firm as the value of capital asset. (capital gain is in the hand of transferer)

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45(4): Distribution of capital asset on dissolution of partnership firm full value of consideration = fair market value as on date of transfer. Capital gain should be chargeable to tax in the hands of partnership firm. 45(5): Capital gain in case of compulsory acquisition: Full value of consideration = Compensation determined by the acquiring body. Capital gains are chargeable to tax in the year in which compensation is received by assessee. In case of enhance compensation received same shall be taxed in year in which enhance compensation is actually received by assessee in such case full value of consideration =amount of additional compensation received, cost of acquisition shall be considered Nil, expenses incurred to acquire additional compensation will be allowed as deduction. If compensation is subsequently reduced then capital gain already offered for tax shall be re computed in that year in which capital gain are already offered for tax. 46(a): Computation of capital gain in case of buy back of share: full value of consideration = amount paid by company to repurchase its own shares. Sec 50 (1): Capital gain in case of depreciable asset: where block of asset does not cease to exist: Sale proceed FVC -Exp on transfer -WDV at beginning of the year -Cost of asset purchase during year = Short term capital gain There will be no depreciation charged when during the year STCG arise u/s 50(1) If sale proceeds are less than WDV at the beginning of the year + cost of asset purchased during the year. Depreciation shall be charged on the balance amount. Sec 50 (2): Where block of asset cease to exist: Here we can have STCG or STCL. No depreciation could be charge during the year since block of asset is not in existence at end of year. Sec 55(1) Computation of capital gain in case of self generated asset: Cost of acquisition of following self genereated asset should be considered nil. 1) Goodwill of business. 2) Tenenancy rights. 3) Rights to manufacture/produce or process any article or right to carry on business. 4) Trademarks or brand name. If the assets mentioned above are purchased then cost of acquisition shall be amount paid to acquire this asset.

Hemant Bhawsar Cost of right share purchase= price paid to purchase right shares. Cost of Acquisition of right shares to the renounce = prise paid to acquire right entitlement + price paid to purchase right share. Particular Exemption available to Old Asset 54 Individual Huf LT Cap Asset being residential house 54 B Individual ST or Lt Cap asset being agricultural land used for agricultural 54 D Any assessee 54 EC Any 54 ED Individual Huf 54F Individual Huf 54 G Any LT or ST Cap Asset Bldg, Mach forming part of Ind Undertaking situated in urban area

New asset purchase

Time limit to purchase new asset

Amount of Exemption

Any Lt Cap Asset other than res house provided on date of transfer the assessee does not own more than 1 Residential house New Agricultura Land & Bonds of Purchase Residential Residential l land building NABARD, of equity house house forming part NHAI, share of of industrial REC, company undertaking NHB, SIDBI Should be New Asset 3 yr from Period of 6 Period of Same as sec purchased should be date from mth from 6 mth 54 within 1 yr purchased transfer date of from date before date within 2 yr transfer of transfer of transfer from of old asset transfer or within 2 date years after date of transfer or new house to be constructed within 3 yr from date of transfer Cost of Same as 54 Same as 54 Same as Same as Capital gain new asset 54 54 X cost of >= Capital new asset/ gain entire net capital consideration gain is

ST or Lt Cap Any Lt Any Lt asset being Cap Asset Cap Asset land & bldg forming part of industrial undertaking which is compulsorily acquired

L & bld mach forming part of Ind undertaking in rural area Within period of 1 yr before date of transfer of old asset

Same as 54

Hemant Bhawsar exempted If the new Same as 54 asset is transferred withib period of 3 yr from date of acquisition

When exemption is withdrawn

Same as 54

If new asset is transferred or converted in money or loan is taken on security of such bond within 3 yr from date of its acquisition

If new asset is transferred within period of 1 yr from date of transfer

New asset is transferred within 3 yr from date of acquisition or if another Res. House is purchased within 2 yr or another residential house os constructed within 3 yr form date of purchase of new asset

If new asset is transferred within period of 3 yr from dated of acquisition.

Tax treatment in case of exemption is withdrawn u/s 54, 54b, 54d, 54g. While calculating capital gain on sale of new asset the cost of acquisition for new asset shall be reduced by the amount of exemption claimed earlier. U/s 54ec, 54 ED, 54F. LTGC claimed earlier shall be brought to tax in the year in which the new asset is sold or transferred. Capital Gain Deposit Account Scheme. Capital gain arising on sale of any assets, which is not utilized for purchase of any new asset within the due date of filing the returns income can be deposited in Capital gain deposit a/c maintained with nationalised bank. Amount deposited in such a/c shall deemed to be cost of new asset and exemption shall be accordingly calculated. Amount deposited in CG Deposit a/c can be withdrawn only for the purpose of purchase or construction of new asset. Amount unutilised at the end of specified period shall be chargeable to tax as short term or long term capital gain depending on the nature of original asset sold. In case of Sec 54F taxable amount = Capital gain X Amount utilized on which exemption is Claimed u/s 54F Net Consideration The proof of amount being deposited in CG Deposit a/c should be attached with returns of income to claim exemption. Benefit of capital gain deposit scheme cannot be availed in case where exemption is claimed u/s 54 EC & 54 Ed.

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Rates of taxation of capital gain: Type Before 1/10/2004 After 1/10/04 STGC Taxable at normal rate as per In case of Equity Share & slab unit of equity oriented mutual fund on which security transaction tax is paid at time of sale STGC is taxed at 10% in all other cases STCG normal rate as per the slab. LTGC In case of listed securities or In cas of Equity share & unit unit of mutual fund LTGC are of equity oriented mutual taxable at 10% if no fund LTGC id fully exempt. indexation benefit is In all other cased same as considered. In all other cases LTGC is taxed at 20% Sec 2 (47) Transfer conversion of capital asset into stock in trade: Transaction allowing taking or retain possession of an immovable property as specified in section 53A of transfer of property act. Any transaction by way of becoming member or acquiring share of Co-Op society or company or AOP by the way of agreement or in any other manner which has effect of transferring or allowing enjoyment of immovable property.

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Income from other Sources

Income from other sources is residual section of income tax. Any income with sec 2(24) which cannot be classified under specific heads of income shall e taxed under the head income from other source. Sec 56 Following amount interalia shall be charged to tax as income. 1) Dividend. 2) Interest on securities/deposit. 3) Winning from lotteries, crossword puzzles, races, any other game of gambling or betting. 4) Composite rent received from letting out of house property along with various facilities, which is not separable, shall be taxed as Income from other source if the same is not taxed as Business income. 5) Income from letting out plant & Machinery if same is not taxed as business income. 6) Income from Subletting 7) Income from Family Pension. Deemed dividend Sec 2(22) Following payment or distribution by company shall be considered deemed dividend to the extent of accumulated profit of company. 1) Sec 2(22)(a): any distribution resulting in release of companys asset. 2) Sec 2(22)(b): Any distribution of debenture deposit certificate, bonus, to preference shareholder. 3) Sec 2(22)(c): Distribution by a company at time of its liquidation. 4) Sec 2(22)(d): any distribution by company on reduction on its capital. 5) Sec 22(22)(e): Any payment by way of loan or advance by company in which a public are not substantially interested to share holder holding more than 10 % share capital of the company or payment by way of loan or advance to a concern in which such share holder is substaintially interested or any payment on behalf or for benefit of such share holder. This sec 22 (e) will not applied in case of money lend in ordinary course of money lending business. Sec 57 amount allowed as deduction In case of family pension 120000 or 1/3 of amount of family pension received which ever is lower is allowed as deduction. Any expenses incurred wholly & exclusively for purpose of earning income which is taxed u/s 56 will be allowed as deduction. Sec 58:- Amount not deductible 1) Any expenses which is capital in nature.

Hemant Bhawsar 2) Any expenditure of personal nature. 3) Wealth tax payable. 4) Any Interest or amount payable outside India or which tax has not been deducted at source. 5) Any exemption incurred in respect of winning from lotteries.

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Set Off & Carry forward Of Loss:

1) Inter source set-off. 2) Inter Head Set-Off. 3) Carry Forward of losses. Inter source set-off: Where net result for any assessment year in respect of any source of income under any head of income is a loss then the assessee is entitled to set of loss against his income from another source under the same head of income. Exceptions: 1) Loss from speculation business can be set off only against profit from such business. 2) Loss from owning & maintaining race horse can be set off only against profit from such business 3) Loss cannot be set-off against winning lotteries, crosswords, puzzles or any other game of betting or gambling. 4) Long term capital loss can be against long term capital gain. 5) If as assessee purchase any securities shares or units with period of 3 month prior to record date & transfer the same within period of 3 month after the record date dividend earned there on if claimed exempt then this shall not be entitled to set off the loss arising on transfer to the extent of dividend income claim exempt. (Record date is date on which dividend is declared & paid to share holder). Sec 11: Inter Head Set-off Where in respect of any assessment year net result of computation under any head of income is loss subject to provision of this section shall be set off against income under any other head of the same year. Loss under the head capital gain against income under any other head. Carry forward of losses: Loss for the year which cannot be set off due to no availability is inadequacy of profit during the year then loss can be carried forwarded. Following Loss can be carried forward: 1) Lost under the head house property 2) Capital losses 3) Business Losses. 4) Loss under the head income from other sources to the extent loss from owning & maintaining race horses. Sec 72: Set off & carry forward of Business loss The brought forward business loss can be set off against business income of subsequent year.

Hemant Bhawsar The unabsorbed business loss can be carried forward for 8 years immediately following the year in which loss in first computed. Brought forwarded business loss can be set off against business income derived from any source. The business in which loss is made & carried forwarded need not be continued to enable the assessee to set of such loss. In case of amalgamation of company the period of 8 year shall be calculated in which amalgamation or demerger takes place subject to fulfilment of certain conditions. Loss can be set off only against income of the person who has suffered losses. Following are exemption: 1) Losses of amalgamating company can be set off against income of amalgamated company subject to fulfilment of certain conditions. 2) Losses of demerged company can be set of against income of demerged company. 3) Where a sole proprietary or partnership firm can be set off against income of the company. Sec 73: Loss from speculative business. Any loss from speculative business can be set off only against profit from speculative business can be set off against profit from speculative business. If loss cannot be set off then it can be carried forward for period of 8-assessment year immediately succeeding assessment year for which loss is computed. The brought forwarded speculative loss can be set off only against speculation income. It is not necessary to continue the business in which loss is suffered to enable the assessee to set of such loss. Sec 74 Long term capital loss can be set off only against long term capital gain. Loss under the head capital gain cab be set off only against capital gain. The loss which cannot be set off can be carried forwarded for period of 8 year in which the loss is first computed.. B/F capital loss can be set off only against capital gain. Sec 74 (a): Loss from the activity of owning and maintaining race horses. Losses are equal to expenses incurred for maintaining horses- stakes money received loss from such activity. If the loss cannot be set off the same can be carried for ward for 4 assessment year in which loss is first computed B/F loss from such activity can be set off only against profit from such activities.

Hemant Bhawsar Sec 75: Since partnership fir, is separate legal entity under IT act losses shall be set off and carried forwarded in hands of partnership firm as per provision of section 70 to 74. Sec 78: Set off and carry forward of loss in case of change in constitution of partnership firm. When there is change in the constitution of partnership firm due to death or retirement of any of the partner then the firm shall not be entitled to carry forward so much of the loss as it is attributable to profit sharing ration of the outgoing partner. This section does not apply in case of change in constitution apply in case of change of constitution due to admission of partners or internal change in profit sharing ration the entire of unabsorbed depreciation will be allowed to be carried forwarded. Sec 79: Set off an carry forward of losses in cases of certain companies in case of companies in case of a company in which public are not substantially interested, loss incurred in any previous year shall be carried forwarded and set off against the income of the year only if share holder holding more than 51% of share capital as on last date of the year in which loss is suffered continue to hold 51% of share capital as on last day of the year in which loss is to be set-off. The above section does not apply when change in share holding take place due to gift or inheritance. Unabsorbed depreciation can be set off against income from any other source or income from any other head of the same year. The brought forward depreciation can be set-off against income from an y other head of subsequent year . The unabsorbed depreciation can be carried forwarded for unlimited period. Sec 80: The return of income should be filed before due date under the act to enable assessee to carry forward losses of the year.