Income Tax Part 1

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\ Prof. Rohit Kumar Jindal \ Page No. 1 B.Com (H), M.Com, D.I.M., M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Final), M.B.A. (Finance), UGC(Net)
B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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The taxes levied by the government form a pool of resources to be used for the collective benefit of public. There are two types of taxes i.e. direct taxes and indirect taxes. Income tax, being a direct tax, is an important to achieve balanced socio-economic growth.
HISTORY
The income tax was introduced for the first time in 1860, by Sir James Wilson in order to meet the loss sustained by the govt. on account military mutiny of 1857. Thereafter, several amendments were made in it from time to time. At last in 1886, a separate income tax act was passed. In 1918 another act Income tax act 1918 was passed but it was short levied and was replaced by income tax act 1922 and it remained in existence and in operation till 31st March 1961. Finally income tax act 1961 comes into force from 1st of April 1962 in whole of the country. Income tax act 1961 is a comprehensive act and consist of 298 sections, sub-section running into thousands schedules, rules, sub-rules etc. and is supported by other acts and rules. Since the Income Tax Act 1961 is a revenue law, there are bound to be amendments from time to time in this law. Therefore the Income Tax Act has undergone innumerable changes it was originally enacted. These amendments are generally brought in annually along with Union Budget. Beside these amendments whenever it found necessary, the Govt. introduces amendments in the form of various amendments and ordinance. This act has amended by several amending acts 1961. The annual Finance Bill presented to parliament in this act every year. It gives the rate of Income Tax for various assessee for the current assessment year, e.g. The Finance Act, 2010 had given the rates of income tax for the assessment year 2010-10 and the Finance Act 2010 has given the rates of tax for the assessment year 2011-11.
THE FINANCE ACT

Every year the Finance Minister of the Government of India presents the Budget to the Parliament. a) Part A of the budget speech contains the proposed policies of the Government if fiscal areas. b) Part B of the budget speech contains the detailed tax proposals. In order to implement the above proposals the Finance Bill is introduced in the Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the President it becomes the Finance Act.
SCOPE OF THE INCOME TAX ACT

The Income Tax Act contains provisions for determination of taxable income, determination of tax liability, procedure of assessment, appeals, penalties and prosecutions. It also lays down the powers and duties of various income tax authorities.
IMPORTANT DEFINITIONS
Section 2 of the Income Tax Act gives definitions of the various terms and expressions used in the Act. In order to understand the provisions of the Income Tax Act, one must have a through knowledge of the meanings of certain key terms like Persons, Assessee, Income etc. in order to understand the meaning of any particular expression used in the Act we have to first check whether they are defined in the Act itself. If a particular definition is given in the Act itself, we have to be guided by that definition only. If, however, a term is not defined in the Act, then we may refer to the definitions given in the sister legislations. Some of the important terms defined in Section 2 are given below :-
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i)
Assessee [Sec. 2(7)]
Assessee means a person :A. B. C. D. Who is liable to pay tax or any sum of money under this act (e.g. interest, penalty etc.). In respect of whom any proceedings under this act have been taken for assessment of his income or loss. In respect whom amount of refund is due to him. Sometimes, a person become accessible in respect of the income of some other persons for which he is called deemed as assessee or representative assessee [u/s 160(2)]. Following are some of the examples of the deemed assessee or representative assessee. 1. In case of a deceased person who dies after writing his will, the executor of the property of deceased is deemed as assessee. 2. In case of a person dies intestate (without writing his will), his eldest son or legal heirs are deemed as assessee. 3. In case of minor, lunatic or idiot having taxable income, their guardian is deemed as assessee. 4. In case of non-resident having income in India, any person acting as agent on his behalf is deemed as assessee. E. Who is assessee in default i.e. u/s 201(1), if a person who fails to fulfill his statutory obligations? In case a person fails to deduct tax at source or deduct but fails to deposit it in the government treasury, like wise under section 218, if a person does not pay advance tax, he is known as assessee in default.
ii)
Person [section 2(31)]
The definition of person in this clause is inclusive and not exhaustive. A person by itself has been held to include both natural person and any artificial person. Hence any person, though not falling within seven categories aforementioned, may still be an assessee, being a person. Person includes the following :1. Individual :- Individual means only a natural human being whether male or female, minor or a person of unsound mind. However, the income of a minor is now generally included in the income of the parent. The assessment of lunatic or idiot or minor whose taxable income in his own hand is to be done in accordance with the provisions of section 161(1) on the guardian manager of the minor or lunatic, i.e. through representative assessee. In case of deceased person assessment would be made on the legal representative. 2. Hindu Undivided Family :- A H.U.F. has not been defined under the tax laws. However, as per the Hindu Law, it means a family, which consists of all persons of lineally descendent from a common ancestor and includes their wives and unmarried daughters. The managing person of H.U.F. is called as Karta and its members are called as co- parcerners. Once a family is assessed as H.U.F., it will continue to assess as such till to finding a partition is given by the assessing officer under section 171.
SPECIAL NOTE
:- So long H.U.F. exists, individual members cannot separately assessed in respect of
H.U.F. income. 3. Company :- It may be defined as an artificial person created by law with perpetual succession, a common seal and shares carrying limited liability. Company includes all types of companies such as Public Co., Private Co., Foreign Co. and Domestic Co. (Indian Co.).
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4. Firm :- A firm means a partnership firm has been defined under the Partnership Act 1932. The Income Tax Act recognises the firm as a separate entity different and distinct from the partners. It is assessed as firm u/s 184 of the act. The only condition is that it must submit its instrument of partnership i.e. partnership deed. 5. (a) Association Of Persons (AOP) :- AOP means two or more persons joining hands for a common purpose. Persons may be individuals or other persons. Where a firm not assessed as firm it is called as Association Of Person. e.g. Co-operative societies, Mark fed, Nafed, etc. (b) Body Of Individuals (BOI) :- Body of Individual is same as AOP but it comes into existence by chance and their members must be individuals. BOI means group of individuals who carry on some activities with the objective of earning some income. It would consist only of individuals. Entities like Co. or firms cannot be member of a Body of Individuals. Income Tax shall not be payable by an assessee in respect of the receipt of share of income by him, from BOI and on which tax has already been paid by Body Of Individual. 6. Local Authority :- Local authority includes Municipality, Panchayat, Cantonment Board, Body of Port Commissioners, or other authorities legally entitled to or entrusted by the government with the control or management of a municipal or local funds.
SPECIAL NOTE
:- It may be noted that Local Authority is not liable to pay tax for the income which arised from the supply of a commodity or service within its own juridical area. However, income arising from the supply of water and electricity even outside the Local Authoritys own jurisdictional area is exempt from tax. 7. Artificial Juridical Persons :- It is a public corporation, which is established under special act of legislature. An idol or deity like bar council, which is managed by persons. Similarly LIC, Universities etc. called Artificial Judicial Person. This category could cover every artificial juridical person not falling under other heads. In other words we can say that a juristic personality will also fall under this category, if they do not fall within any preceding categories of persons. (i.e. University of Punjab)
iii) Incomes: [u/s 2(24)]

The definition of term income in section 2 (24) is inclusive and not exhaustive. It is easy to explain but difficult to define. Therefore, The term include not only includes those things which are included in section 2 (24) but also includes such things which the term signifies according to its general natural income. As per the definition of section 2 (24), the term income includes: i) Profits and gains. ii) Dividend. iii) Voluntary contribution (i.e. not specific) received by a trust created wholly or partly for charitable or religious purposes. iv) The value of the perquisites or profit in lieu of salary. v) Any special allowance or benefit specifically granted to assessee to meet his expenses wholly, necessarily and exclusively for the performance of his duties. vi) Any allowance granted to the assessee either to meet his personal expenses at the place where performance of his duties or to compensate him for the increased cost of living. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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vii) The value of any benefit or perquisite obtained from a company by a director or person who has substantial interest in the company or by the relative of director or such person. viii) The value of any benefit or perquisite in the form of money or money worth obtained by any representative assessee or beneficiary or any amount paid by the representative assessee for the benefit of the beneficiary (which the beneficiary would ordinarily been required to pay). ix) Any sum chargeable under section 28 (ii), (iii), (iiia), (iiib), (iiic), (v), 41 or 59. x) The value of any benefit or perquisite whether convertible into money or not, arising from business or profession. xi) Any capital gain under section 45. xii) The profits and gains of any business of insurance carried on by a mutual insurance company or by cooperative society, computed in accordance with the section 44, or any surplus taken to be taken to be such profit and gains by virtue of provisions contained in the first schedule. xiii) Winning from lotteries, crossword puzzles, races including horse races, card games and games on any sort. xiv) Any sum receivable under Keyman Insurance Policy including bonus. xv) Any sum received by any taxpayer from his employees or contribution to any fund for the welfare of such employees. xvi) Any sum referred in section 28 (va), applicable from the assessment year 2003-04, i.e. any sum received for not carrying out any activity in relation to a business.
FEATURES OF INCOMES
1. Regular & Definite Source :- There should be a definite source of income. The existence of source for income is essential bringing a receipt within the net of taxable income. 2. Income Must Come From Outside :- No one can earn income from himself. There can be no income from transaction between head office and branch (i.e. with itself). 3. Illegal Income Or Legal Income :- Income earned legally or illegally remains income and it will be taxed according to the provisions of the act. Any expenditure incurred to earn such illegal income is allowed to deduct out of such income only. 4. Temporary And Permanent Income :- Whether the income is temporary or permanent, it is immaterial from the tax point of view. 5. Lump Sum Received :- Income, whether received in lump sum or in installments, is liable to tax. 6. Dispute Regarding The Title :- Incase a person is receiving some incomes but his title to such receipts is disputed, it will not free him from tax liabilities. The recipient of such income has to pay tax. 7. Income In Money Or Moneys Worth :- The income may be in cash or in kind. It is taxable in both cases, whether in cash or in kind. 8. Re-imbursement of expenses is not income e.g. reimbursement of actual traveling expenses of an employee by an employer is not the income of the employee. 9. Personal gifts, e.g. birthday gifts, marriage gifts etc. are not income in the hands of the recipient (i.e. from relatives), but if gifts received from outsiders then exemption limit is only upto 50000 Rs. It means if the amount of gift exceeds Rs. 50000 in aggregate then the total amount is taxable. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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10. Devaluation Of Currency :- If an assessee receives some extra money on account of devaluation of currency, it is taxable income. 11. Income includes Loss :- While income, profits and gain represents Plus income, Losses represent Minus Income. 12. Receipts on account of Dharamada, Gaushala & Pathshala etc. are not income. 13. Pin Money received by wife for her personal expenses and small savings made by a woman out of money received from her husband for meeting household expenses is not treated as Income. 14. Same income cannot be taxed twice unless otherwise expressly provided. 15. Source of income need no exist in the Assessment Year. 16. Awards received by a sportsman (who is professional) is in the nature of a benefit in exercise of his profession and, therefore, it is chargeable to tax. 17. If a person receives Tax Free Income on which tax is paid by the person making payment on behalf of the recipient, it has to be grossed up for inclusion in his total income. 18. Income arises either on accrual basis or on receipt basis. Income may accrue to a taxpayer without its actual receipt. Moreover, in some cases, income is deemed to accrue or arise to a person without its actual accrual or receipt. iii) Assessment Year U/S 2(9) :- Assessment year means the period of twelve months commencing on the 1st day of April and ended on 31st March every year. During the assessment year the income of persons relating to the relevant previous year is assessed to tax. At present the assessment year 20112012 is going on. iv) Previous Year U/S 3 :- Previous Year means the financial year immediately preceding the Assessment Year. In other words we can say that the year in which income is earned is known as previous year and the next year in which this income is taxable is known as assessment year. E.g. for assessment year 2011-2012 the previous year should be the financial year ending on 31st March of 2011.
SPECIAL NOTE
:- Although the assessee can close his books of accounts on any other date e.g. an assessee may maintain books of accounts on calendar year basis but his previous year, for Income Tax Purpose will be financial year and not the calendar year.
Previous year in case of newly set up business or profession or new source of income
In the case of newly set up source of income during the financial year the previous year will begin from the date of setting up of the new source of income will end on 31st March. In this case, the first previous year may of less than 12 months. Example 1 :- Ram starts up a new business on 01-10-2008, the first Previous Year for this business will be the period starting from 01-10-2008 to 31-03-2009. Example 2 :- Mohan joins Reliance India Ltd. On 23rd July 2008. Prior to 23rd July he was not in any employment. He has no other source of income. In this case his previous year will be from 23-09-08 to 31-03-09.
SPECIAL NOTE
:- Therefore the first previous year of a newly set up business / profession or a new source of income will be either 12 months or less than 12 months. It can never exceed a period of 12 months.
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EXCEPTION TO THE GENERAL RULE I.E. TAXATION OF PREVIOUS YEARS INCOME DURING THE SAME YEAR We have noted earlier that the income of an assessee for a previous year will be charged to income tax in the subsequent assessment year. However in a few cases, this rule does not applicable and the income of the assessee is taxed in the year in which it is earned. Thus the assessment year and the previous years are the same. These exceptions have been made to protect the revenue. The exceptions are as follows :1.
Income of non resident from shipping business, u/s (172)
Section 172 is applicable only if the following conditions are satisfied.
1. 2. 3. 4.
Assessee is a non-resident. He owns a ship or ship is chartered by the non-resident. The ship carries passengers, live stock, mail or goods shipped at port in India. The non-resident may (or may not) have any agent or representative in India.
SPECIAL NOTE :- If all
the four conditions are satisfied, 7.5% of the amount received or receivable on account of such carriage shall be deemed to be the income of the non-resident. For this purpose, the master of the ship shall submit a return of income before the departure of the ship from the Indian port. (Such return may be submitted within 30 days of the departure of the ship. If the assessing officer is satisfied that it will be difficult to submit the return before departure and if satisfactory arrangement for tax has been made.) In case of person leaving India, u/s 174 In case a person leaving India with intention to settle permanently outside India, the total income of such individual for the period between the expiry of last previous year and till the date of his departure, will be taxable in the current Assessment Year.
2.
Example :- Raju will leave India on 27-04-10 with no present intention of returning back. In this case, the Assessing Officer will make two assessments as follows : Assessment for the income of previous year 2010-11 i.e. assessment year 2011-12. st th Assessment for the income of the period 1 April, 2011 to 27 April, 2011
3.
Association or bodies formed for short duration or for a particular event u/s 174a
This section contains the following provisions :1. There is an association of person or a body of individual or an artificial judicial person, formed or established or incorporated for a particular event or purpose. 2. It appears to the assessing officer that the above-mentioned association, body etc is likely to be dissolved in the assessment year in which such association etc. established or incorporated or immediately after such assessment year. 3. The total income of such association or body etc. for the period from the expiry of the previous year for that assessment year up to the date of dissolution shall be charged to tax in that assessment year.
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4.
In case of person who are likely to transfer their assets to avoid tax, u/s 175 If it appears to the Assessing Officer that any person is likely to sell, transfer, and dispose of or to part with any of his assets with intention to avoid tax, he may commence proceeding to assess the income during the current Previous Year. Example :- Assessing Officer comes to know on 01-11-10 that Mr. Rohan is going to sell his shares in December in order to avoid payment of some liability under Income Tax Act. He issues him a notice under section 175 on 15-11-10 to submit return of income for the period from 01-04-10 to 15-11-10. In case of discontinuous business u/s 176 In case any B/P is discontinued during the Assessment Year. the income of the period from the expiry of last Previous Year. till that date of discontinuation will be assumed to tax in the same previous year.
5.
SPECIAL NOTE
It may be noted that the first four exceptions discussed earlier (i.e. shipping business of non resident, association formed for short duration, persons leaving India and Transfer of property) tax shall be charged in the previous itself, but in case of discontinued business, it at the discretion of the assessing officer. The person have to give notice of such discontinuance to the Assessing Officer within 15 days from the day of discontinuance.
GROSS TOTAL INCOME

U/S 14 the term Gross Total Income (G.T.I.) means aggregates of incomes computed under the following five heads : 1. Income from salaries, 2. Income from house property, 3. Profit and gains from business or professions, 4. Capital gains, 5. Income from other sources. After aggregating income under various heads, losses are adjusted and the resulting figure is called G.T.I. Total Income :- u/s 2(45) Total Income means Taxable Income, which is (G.T.I. Deductions u/s 80C to 80U).
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COMPUTATION OF TOTAL INCOME AND TAX LIABILITY TOTAL INCOME

SECTION Income from salaries (Section 15 to 17) Salary u/s 17(1) Perquisites u/s 17(2) Profits in lieu of salary u/s 17(3) Gross salary Deduction u/s 16 Entertainment allowance u/s 16(2) Tax on employment u/s 16(3) Taxable income under the head of Salary II Less Less Income from house property (Section 22 to 27) Annual Rental value Municipal Taxes Net Annual Value Deductions u/s 24 RS. RS. xxxx xxxx (+) xxxx xxxx xxxx (+)xxxx RS.
Less
(-) xxxx xxxx
xxxx xxxx xxxx xxxx xxxx
Taxable income under the head of Income from House Property III Add Less Less Profits and Gains of Business (Section 28 to 44D) Net profit as per P & L Account Expenses debited but not allowed under the act Expenses allowed but not debited Incomes credited but not taxable under this head
(+) or (-) xxxx (+) xxxx (-) xxxx (-) xxxx
Taxable income under the head of Profits and gains of business/profession xxxx IV Less Capital Gains (Section 45 to 55A) Short term capital gains/loss Long term capital gain/loss (Net of exemptions u/s 54, 54B, 54D, 54EC, 54F, 54G, 54GA & 54H) Taxable income under the head Capital Gains V Income From other Sources (Section 56 to 59) General incomes u/s 56(1) Special incomes u/s 56(2) Less Add Expenses allowed u/s 57
xxxx xxxx xxxx
xxxx
xxxx xxxx xxxx (-) xxxx
Income from other sources xxxx Income of other persons xxxx Gross Total Income xxxx Deductions u/s 80C to 80U (-) xxxx Total Income Or Net Income Liable To Tax xxxx B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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Add Add Less
Tax on Casual Income Tax on Long-Term Capital Gains Tax on Balance of Income Total Tax Education Cess (3 % of the Tax and Surcharge) Secondary and Higher Edcucation Cess Total Tax Advance tax already paid and tax deducted at source Net Tax Payable on Filling of Return
xxxx xxxx xxxx xxxx (+) xxxx (+) xxxx xxxx (-) xxxx xxxx
TAX RATE OF ASSESSMENT YEAR (2011-2012)

Income of previous year is chargeable in the next following assessment year at the tax rates applicable for the assessment year. Income tax is to be charged at the rates fixed for the year by the annual Finance Act and not by the Income Tax Act. If, however, on the first day of April of assessment year, the new Finance Bill has not been placed on the statute books, the provisions in force in the preceding assessment year or the provisions proposed in the Finance Bill before Parliament, whichever is more beneficial to the assessee, will apply until the new provisions become effective. Individuals / Hindu Undivided Families/ Association Of Persons / Body Of Individuals / Artificial Juridical Persons :- The tax rates applicable to individuals are also applicable to a Hindu Undivided Family, an Association of Persons, Body of Individuals or an Artificial Juridical Person. The rates applicable for the assessment year 2011-2012 are as follows :-
Tax Rates
Individual and HUF other than column 2 and 3 0 1,60,000 1,60,000 3,00,000 3,00,000 5,00,000 5,00,000 and above Nil 10% 20% 30% Women below 65 & Resident in India 0 1,90,000 1,90,000 3,00,000 3,00,000 5,00,000 5,00,000 and above Nil 10% 20% 30% Every Individual above 65 & Resident in India 0 2,40,000 2,40,000 3,00,000 3,00,000 5,00,000 5,00,000 and above Nil 10% 20% 30%
Special Rates of Taxes :i) In case of winning from lotteries, cross word puzzles, races etc. The tax rate is 30%. ii) In case of Long Term Capital Gain, the rate of tax is 20%. iii) In case of Short Term Capital Gain (111A), the rate of tax is 15%. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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:- In case the total income (excluding LTCG) of a resident individual and HUF is less than Rs. 1,60,000, then from the total income (including LTCG), Rs. 1,60,000 shall be deducted and on the balance, tax shall be charged @ 20%. In case the total income includes winning from lotteries, puzzles, races etc, then firstly calculate tax on such income @ 30%, then on the balance income tax shall be calculated at the above mentioned rates.
SPECIAL NOTE
Education Cess :- It is 2% of income-tax. It is applicable for the assessment year 2011-2012. Secondary and Higher Edcuation Cess :- It is 1% of income-tax. It is applicable for the assessment year 2011-2012
Tax rates for other persons Firm (including limited liability partnership) 30%
No surcharge shall be levied in the case of a firm Education Cess :- It is 2% of income-tax. It is applicable for the assessment year 2011-2012. Secondary and Higher Edcuation Cess :- It is 1% of income-tax. It is applicable for the assessment year 2011-2012
Company
For Domestic Companies :- 30% Surcharge - 10% where total income of the company exceeds one crore rupees. For Forgein Companies :- 40% Surcharge 2.5% where total income of the company exceeds one crore rupees. Education Cess :- It is 2% of income-tax. It is applicable for the assessment year 2011-2012. Secondary and Higher Edcuation Cess :- It is 1% of income-tax. It is applicable for the assessment year 2011-2012
ROUNDING OFF OF TOTAL INCOME (288 A)

The total income as computed above shall be rounded off to the nearest of ten rupees and for this purpose any part of a rupee consisting of paisa shall be ignored.
ROUNDING OFF OF TAX (288 B)

The amount of tax (including tax deducted at source or payable in advance) interest, penalty, fine or any other sum payable, and the amount of refund due, under the provision of Income Tax Act, shall rounded off to the nearest of ten rupees.
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MARGINAL RELIEF
In the case of the Company having a net income of exceeding Rs. 1 Crore the net amount payable as income tax and surcharge shall not exceed the total amount payable as income tax on total income of Rs. 1 Crore by more than the amount of income that exceeds Rs. 1 Crore Example :- Reliance ltd a co. has a total income of Rs. 10005000. Calculate the Tax Payable and Marginal Relief. Tax payable Add = = 30% of 10005000 Surcharge @ 10 % Tax due on Rs. 10005000 Rs. 3001500 300150 3301650
Tax payable on Rs. 10000000 Excess of Total Income over Rs. 10000000 Tax payable on Rs. 10005000 Marginal Relief Total Tax Payable ::Rs. 3301650 Rs. 3006500 Rs. 3006500 = Rs. 295150
3001500 5,000 3006500
QUESTIONS
a) Every assessee must be a person but every person must not be an assessee. Explain. Who is an assessee? Define the term in detail.
Or
b) What do you mean by previous year and assessment year? What are the exceptions of the general rule that is income of the previous is taxed in the assessment year? Or Income tax is charged on the income of the previous year. Do you fully agree with this statement? If not, what are the exceptions? Or What is previous year? Under what circumstances income of a person can be assessed in same year in which it is earned. c) Income tax is a tax on income and not on receipt. Discuss the statement and give the essential characteristics of the term income.
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Introduction
The incidence of tax any person depends on his residential status under the Income Tax Act 1961 and therefore after determining whether a particular amount is Capital or Revenue in nature, if the receipt is of a revenue in nature, chargeable to tax, it has to be seen whether the assessee is liable to tax in respect of that income. The taxability of a particular receipt would thus depend upon not only on the nature of the income and the place of its accrual or receipt but also upon the assessees residential status.
SPECIAL NOTE :- Different residential status is possible for different assessment years.
For all purposes of Income Tax, taxpayers are classified into three broad categories on the basis of their residential status, according to Section 6 of the Income Tax Act 1961. These are as follows :-
1. Resident and ordinary resident (R.O.R.) 2. Resident and nor ordinary resident (N.O.R.) 3. Non-resident Indian (N.R.I.)
RESIDENTIAL STATUS
RESIDENT [SEC 6(1)]
NON-RESIDENT [SEC 2(30)]
RESDIENT AND ORDINARILY RESIDENT [SEC 6(1), 6(6)(a)]
RESIDENT AND NOT ORDINARILY RESIDENT [SEC 6(1), (6)(b)]
In the following paragraphs the provisions for determining the Residential Status of assessee have been discussed separately for Individuals, H.U.F., Companies, Firms, A.O.P, B.O.I. and Other Persons.
RESIDENTIAL STATUS OF AN INDIVIDUAL

Resident [u/s 6(1)] An individual is said to be resident if he fulfills any one of the following two basic conditions :a) If he stays in India during the relevant previous year for period or periods of 182 days or more. OR b) If he is stay in India for 60 days or more during the relevant previous year and 365 days or more within 4 previous years preceding to the relevant previous year.
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EXCEPTIONS TO THE ABOVE RULE OF 60 DAYS 1. If any person has employment in India but he is transferred outside India. 2. An individual being a citizen of India, who leaves India in any previous year as a member of crew of an Indian ship. 3. If any citizen of India or a foreign national of Indian origin, who is living outside India, comes on visit to India during the relevant previous year. SPECIAL POINTS TO BE REMEMBERED 1) Residential status and citizenship are two different items. The incidence of tax is nothing to do with citizenship. The residential status of a person may change from year to year but citizenship cannot be changed every year. 2) The residential status of an assessee must be ascertained with reference to each Pervious Year. A person who is Resident in one year may become Non-Resident in another Previous Year or viceversa. 3) A resident or a H.U.F. has to be R.O.R., N.O.R. Therefore, an individual and a H.U.F. can either be R.O.R., N.O.R. & N.R. in India. But all other assessee (A Firm, A.O.P, B.O.I. Company and Every other person) can either be Resident or Non-Resident in India. 4) It is not necessary that a person who is Resident in India, cant become Resident in any other country for the same Assessment Year. A person may be resident in two (or more) countries at the same time. 5) Whether an assessee is a Resident or Non-Resident is a question of fact and it is the duty of the assessee to place all the relevant facts before the Income Tax Authority. 6) Residential status is ascertained for each category separately, because there are separate set of rates for determining the residential status of each type assessee. 7) Residential status is always determined for the previous year because we have to determine the total income of the Previous Year.
Resident and Ordinary Resident (R.O.R.) [u/s 6(1), 6(6)]

If an individual satisfies any one of two basic conditions given u/s 6(1) (a) and 6(1) (b), he become resident. An individual becomes ordinarily resident if he also fulfils both of the following two additional conditions given Under Section 6(6), which are as follows :1. He must be resident in India for 2 out of 11 previous years immediately preceding to the relevant previous year. (Or must satisfy in at least one of the two basic conditions given under section 6(1) in out of 11 years immediately preceding the relevant previous year.) AND 2. He must be in India for 730 days or more during the 7 previous years preceding to the relevant previous year of determination
SPECIAL NOTE :- For determining resident we have to see relevant previous year but for determining
the O.R. or N.O.R. his past 10 years or 7 years prior to the relevant pervious year are to be seen. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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Resident but Not Ordinarily Resident (NOR) [u/s 6(1), 6(6)]

If an individual satisfies one of the basic two conditions given u/s 6(1)(a) or (b) but could not satisfy the both or any one of the additional two conditions, then he is said to be resident but not ordinary resident. Or we can say that the assessee satisfies one or none of the two additional conditions given under section 6(6).
Non-Resident [u/s 2(30)]

An individual is said to be Non - Resident if he does not satisfy any of the two basic conditions. Or we can say that the assessee satisfy none of the two basic conditions given under section 6(1). IN BRIEF : RESIDENTIAL STATUS OF AN INDIVIDUAL Any one of the two basic conditions given u/s 6(1) (a) or (b)
If fulfills then become Resident
If does not fulfill then become Non- Resident
Both of the two additional conditions given u/s 6(6)
If fulfills then become R.O.R.
If does not fulfill become N.O.R.
RESIDENTIAL STATUS OF H.U.F., FIRM AND A.O.P. & B.O.I. Resident [u/s 6(2)]
H.U.F., firm and A.O.P. & B.O.I. are said to be resident in India if during the previous year, the control and management of its affairs situated wholly or partly in India.
Non-Resident [u/s 2(30)

H.U.F, Firm or A.O.P & B.O.I. shall be non-resident if control and management of its affairs is situated wholly outside India. SPECIAL POINTS TO BE REMEMBERED 1. Control and management of its affairs refers to the decisions taken regarding affairs of the H.U.F, firm and A.O.P. The control and management lies at place where decisions regarding the affairs of H.U.F, firm and A.O.P are taken. 2. For determining the residential status of Firm the residential status of its partners is immaterial.
Not Ordinarily Resident [u/s 6(6)]

It is only H.U.F. besides individual, which can claim status of NOR. A H.U.F. will be NOR if its manager i.e. Karta (the head of the family) has not fulfills both or any one of the additional conditions as given in case of individual, i.e.:B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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a) He has not resident in India in 2 out of 10 previous years preceding to the relevant previous year. OR b) He had not stayed in India for 730 days during the 7 previous years preceding to the relevant previous year. SPECIAL POINTS TO BE REMEMBERED 1. For determining whether H.U.F. is a resident or not the residential status for it Karta for the relevant previous year is of no relevance. But for determining whether H.U.F. is an O.R. in India or not Kartas status for relevant previous years become relevant. 2. Except Individual and H.U.F., all other persons are classified as Resident or Non-Resident. They are not to be further classified as O.R. or N.O.R.
RESIDENTIAL STATUS OF A COMPANY Resident [u/s 6(3)]

A company is said to be resident in any previous year if, a) It is an Indian company, or b) During the relevant previous year, the control and management of its affairs is situated wholly in India.
Non-Resident [u/s 2(30)]

A company is said to be non-resident in any previous year if, 1. It is not an Indian company; and 2. The control and management of its affairs is situated wholly or partly outside India.
RESIDENTIAL STATUS OF ANY OTHER PERSON [U/S 6(4)]

Every other person (Local Authority, Artificial Juridical Person, e.g., Idols) is said to be resident in India in any Previous Year in every case, except during that year the Control and Management of its affairs is situated wholly Outside India. It means the residential status of Every Other Person is determined in the same manner as of a firm or association of person u/s 6(2).
SECTION 6(5)
Is a person is resident in India in a Previous Year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the Previous Year relevant to the Assessment Year in respect of each of his other source of income. Thus, different residential status for different sources of income for the same assessment year is not possible.
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The Provisions Regarding Incidence of Tax Above Maybe Summarised in The Following Table
S. NO. PARTICULARS OF INCOME Income received or deemed to be received in India during Previous Year 1 whether earned in India (or not) or elsewhere. 2 3 4 5 Income which accrues or arises or is deemed to accrue or arise in India during the Previous Year, whether received in India (or not) or elsewhere. Income, which accrues or arises outside India and received outside from a business controlled from India. Income which accrues or arises outside India and received outside India in the Previous Year from any other source. Income which accrues or arises outside India and received outside India during the year preceding the Previous Year and remitted to India during the Previous Year.
ROR YES YES YES YES NO
NOR YES YES YES NO NO
NR YES YES NO NO NO
EXPLANATIONS
1. Income Received In India :- The receipt of income refers to the first occasion when the money comes under the control of recipient. If the money had already been received abroad as income and is later on transmitted (even through banks also) to India, it will not treat as received in India. By receipt of income is meant as primary receipt. It may be in cash or in kind, for instance, value of a free residential house provided to any employee is taxable as salary in the hands of employee though the income is not received in cash. 2. Income Deemed To Be Received In India: [u/s 7] :- The following incomes shall be deemed to receive in India in the previous year even in the absence of actual receipt. 1) Interest credited to Recognize Provident Fund (R.P.F.) in excess 9.5% of rate of interest, shall be income, which is deemed to receive in India. 2) Employers contribution to R.P.F. in excess of 12% of salary (11% of salary up to A.Y. 97-98). 3) Transferred balance in R.P.F. from U.R.P.F. to the extent specified. 4) Unexplained or not satisfactory explanation about cash, bullion, gold jewelry, investments, expenditures, cash credit or other valuable articles which had been detected during the previous year shall be treated as income deemed to receive in India. 5) Tax deducted at source is an income in the hands of the payee, which is to be treated as income deemed to be received in India.
3. Income Accrues Or Arises In India [u/s 9] :- Income accrues means income earned and arises means to have legal claim. Both these terms are used simultaneously and mean income earned or due to a person. Income shall say to be accrued or arise when the right to receive the income becomes vested in the assessee. Place of accrual is important to determined tax liability. Income shall accrue or arise at place where such income is earned, contract is performed, and services are rendered and so on. Income is said accrue or arise in India, if services are rendered in India or if contract is performed in India. 4. Income Deemed To Accrue Or Arise In India [u/s 9 (1)] a) Income From Business Connections In India :- Any income, which arises, directly or indirectly from any activity or business connections in India is deemed to be earned in India. Business connections may
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be in several forms, e.g. a branch office in India or an agent or an organization of a non-resident in India. Formation of a subsidiary company in India to carry on the business of non-resident parent company would also be a business connection in India. Any profits of the non-resident, which can reasonably be attributable to such part of operation carried out in India through business connection in India, are deemed to be earned in India.
BUSINESS CONNECTION :- Business Connection shall include any business activity carried out through a
person who, acting on behalf of the non-resident, the following activities :-
1. He has and habitually exercises in India an authority to conclude contracts on behalf of the non-resident,
unless his activities are limited to the purchase of goods or merchandise for the non-resident; or 2. He has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or 3. He habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same control, as that non-resident.
SPECIAL NOTE
:- The Business Connection shall not include cases where the non-resident carries on business through a broker, general commission agents or any other agent of an independent status, provided that such a person is acting in the ordinary course of the business. Where a broker, or general commission agent or any other agent works (mainly or wholly) on behalf of a non-resident (Principal non-resident) or other non-residents under the same management, he shall not be deemed to be a broker, general commission agent or an agent of independent status. b) Income from any property, asset or source of income situated in India: Like rent from house property situated in India. (Property may be Movable as well as Immovable & Tangible as well as Intangible.) c) Income from the transfer of any capital asset situated in India: Like gain on sale of fixes or capital asset situated in India. d) Any income that falls under the head salaries if it is earned in India: Salary earned in India means services are rendered in India. e) Dividend Paid By Any Indian Company Outside India :- Dividend paid by an Indian company outside India is deemed to accrue or arise in India. However, dividend from a domestic company is not taxable in the hands of shareholders if such dividend is declared during June 1, 1997 and March 31, 2002 or after March 31, 2003 f) Salary payable by the Government to an Indian citizen/national for services rendered outside India. Following conditions have to be satisfied before such income is treated as deemed to accrue or arise in India :a) b) c) d) Income should be chargeable under the head of Salary. The payer should be Government on India. The recipient should be an Indian Citizen whether Resident or Non-Resident. The service should be rendered outside India.
SPECIAL NOTE :- All allowances or perquisites paid outside India by the Government to the above
Indian Citizen for their rendering services outside India are exempt under section 11(7).
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g) Income by Way of Interest :a) Interest payable by the Indian Government is deemed to accrue or arise in India, whether it is paid on debts incurred or on moneys borrowed in India or Outside India. b) Interest payable by a person who is resident in India or non-resident person in respect of any debt incurred, or moneys borrowed and used, for the purpose of a business or profession carried on by such person in India is deemed to accrue or arise in India. (But if it is payable in respect of any moneys borrowed or debt incurred for the purposes of a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India, it will not be deemed to be accrue or arise in India.)
EXCEPTION :- However if fees for technical services are received under an approved agreement
made before April 1,1976, the income from this fees cannot be treated as deemed to be accrue or arise in India. Interest
(a) From Govt of India Always deemed to be due in India (i) Money Utilised in India Deemed to be due in India
(b) From any other person
(ii) Money Utilised in India Deemed to be due outside India
h) Income by Way of Royalty

1. Royalty payable by the Indian Government is deemed to accrue or arise in India, whether it is paid in respect of any right, property or information used or services utilised in India or Outside India. 2. Income from royalty payable by a person who is resident in India or by a non-resident person in respect of any right, property or information used or services utilised for the purpose of a business or profession carried on by such person in India or for making or earning any income from any source in India, is deemed to accrue or arise in India. (But if it is payable in respect of any right property or information used or services utilised for the purpose of a business or profession carried on by such person outside India or for the purposes of making or earnings any income from any source outside India, it will not be deemed to accrue or arise in India.)
EXCEPTION :- So much of the income by way of royalty as consists of lump-sum payment made by
a resident for the transfer of all or any rights (including granting a license) in respect of Computer Software supplied by a non-resident manufacturer along with Computer or Computer based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India, shall not deemed to accrue or arise in India.
i) Income by Way of Fees for Technical Services :i) Income from fees for technical services shall be deemed to accrue or arise in India, if it is payable by the Indian Government. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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ii) Income by way of fees for technical services payable by a person who is resident in India or by a person who is non-resident in India in respect of services utilised in a business or profession carried on by such a person in India or for the purpose of making or earning any income from any source in India, shall be deemed to accrue or arise in India. (But if it is payable in respect of services utilised in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India, it will not be deemed to accrue or arise in India.) j) Other Points :- Income accruing or arising in Outside India will not be deemed to be received in India, merely because it has been included in a Balance Sheet in India. Once income is included in the total income on the accrual basis, it cannot be included again on the receipt basis in the same or subsequent years. SPECIAL POINTS TO BE REMEMBERED i) In short we can say that in the above cases G, H, I if payments is to be made by the India Government of India then it is deemed to accrue or arise in India, without considering the use of those expenses. ii) But in case of any other person we have to consider the usage for which the payments were made. If the usage is within India then it is deemed to accrue or arise in India otherwise not. EXCEPTIONS TO THE ABOVE RULES OF DEEMED TO ACCRUE IN INDIA
1. In the case of non-resident no income shall be deemed to accrue or arise in India to him through or
from operations which are confined to the purchase of goods in India for the purpose of export.
2. In the case of non-resident engaged in the business of running a news agency or of publishing
newspapers or magazines or journals, no income shall be deemed to accrue or arise in India to him from activities confined to collection of news and views in India from transmission out of India. 3. Income of a non-resident individual or firm or company (where the individual or none of the partners of a firm or none of shareholders of the company is an Indian Citizen) shall not be deemed to accrue or arise in India through or from any operations which are confined to the shooting or any Cinematography film in India. 4. Pension to judges of the Federal Court or High Court who were appointed before 15-11-47 and who continued to serve on or after the commencement of the Constitution as a judge in India, shall not be deemed to accrue or arise in India, if :i) It is paid / payable outside India; or ii) Such person resides permanently outside India.
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QUESTIONS
v What are the different categories of assesses according to their residential status? How would you determine the status of them? Define the incidence of tax also. Or v What is the scope of the total income of a person under income tax act 1961?
PRACTICAL PROBLEM
Previous years 2010-11 2009-10 2008-09 2007-08 2004-07 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99 1997-98 1996-97 1995-96 1994-95 Ans 1 65 91 190 89 87 86 84 116 111 112 110 91 94 97 99 ROR 2 183 90 78 80 91 99 66 211 111 94 96 199 81 82 83 NOR 3 59 87 98 189 92 92 93 91 92 93 91 90 89 88 87 NR 4 69 111 91 196 93 95 94 93 92 91 90 89 8 87 86 ROR 5 300 97 113 111 94 99 365 362 11 311 211 92 88 84 ROR 6 70 99 114 98 95 50 46 59 99 70 78 75 55 40 NOR 7 72 94 111 97 94 111 210 91 200 88 99 94 70 65 50 ROR 8 95 92 110 96 93 110 210 92 110 77 92 96 60 75 60 ROR 9 180 91 99 95 92 99 208 91 66 94 98 50 85 70 ROR 11 93 90 98 90 110 90 80 90 110 111 120 130 110 80 60 NR
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This chapter is classified into three parts. A) Expenditure B) Receipts C) Losses. A) EXPENDITURE :-These are further classified into following two categories:1. Capital Expenditure. 2. Revenue expenditure. 1. Capital Expenditure :- These are the expenditures incurred on the creation, procurement, acquisition, purchase, installation etc. of a capital nature item. The benefit of which accrues to assessee over a period of time. Such expenditures are not of routine nature and hence cannot be Debited to assessee in Trading and Profit & Loss Account or Income & Expenditure Account relating to his business or profession. Such expenditures are always capitalized and the depreciation on the total value of such capital assets is provided as per the rates prescribed by the Relevant Finance Act. These expenditures generate capital nature items which are of durable nature and which provides benefits to the assessee over a period of time. Following are the some examples of capital expenditure: Brokerage/Commission paid on the sale/purchase of shares/debentures/such other investments. Wages paid for construction of building. Expenditure incurred on the installation of plant & machinery or such other capital asset. Custom duty paid on the imported P & M or any other capital asset. Transportation charges paid for bringing capital assets, plant & machinery in the factory or such other places where the business or profession of assessee is carried. Expenditure incurred in or outside India especially with a view to acquire/purchase some capital nature items like P & M etc. which is meant for assessees business or profession. Expenditure incurred immediately on the purchase of second hand P & M on its renovation and for its subsequent use in assessees business or profession. Heavy capital expenditure incurred on the renovation of discarded, demolished, destroyed or depleted capital asset with a view to make it a new one. Any other expenditure incurred on the creation of capital nature item is called capital expenditures.
2. Revenue Expenditure :- These are the routine nature expenditures incurred by the assessee in the normal course of his business or profession. These are also known as running expenditure. Such expenditures are debited to the assessees P & L account or income & expenditure account relating to his business or profession. These expenditures can never be capitalized. Revenue expenditures are further dividend into two categories: v Routine nature revenue expenses. v Deferred revenue expenses. v Routine Nature Revenue Expenses :Such expenses are debited to assessees P & L account or Income & Expenditure account in the same previous year when these are incurred. E.G. wages paid, rent paid, interest paid, establishment expenses, general expenses etc. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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v Deferred Revenue Expenses :These are revenue nature expenses but the benefit of these expenses spread over a period of time e.g.; advertisement, scientific research etc. Even though the benefit of such expenses accrue to assessee over a period of time. But still from income tax point of view the entire amount of such expenses is allowed as deduction in same PY in which these are incurred. In short, we can say that there is no distinction between ratio nature and deferred expenses from income tax point of view. B) RECEIPTS :- These are further classified into following two parts:1. Capital Receipts 2. Revenue Receipts. 1. Capital Receipts :- Any receipt which is of capital nature shall be treated as capital receipt whether a particular receipt is of capital or revenue receipt it will depend on facts and circumstances of each case. Any receipt which is against the substitution of sources of income shall be treated as capital receipts. Such receipts are always capitalized. Receipts on transfer of capital asset like Plant & Machinery, Land & Building, Goodwill, furniture and fixtures shall be treated as capital receipts. Such receipts are also taxable in the hands of, recipients under the Income Tax Act. There are not of routine nature. That is why such receipts are not shown in trading and Profit & Loss Account or Income & Expenses Account relating to assessees business or profession. Following are the some examples of capital receipts. Receipts on the transfer of capital assessments for purposes of assessees bal. Or Pr. Receipts on the transfer of all kinds of investments. Compensation received by an employee from the employer on account of termination of his services shall be treated as capital receipt. However, such receipt is taxable in the hands of assessee under Income Tax Act. Amount received on the surrender of Right is capital receipt because right is Treated as capital asset. Amount received on the transfer of business concerned is a capital receipt because business is treated as capital receipt. Amount received on transfer of goodwill or as the case may be. Insurance claim received from the Insurance Company on the destruction of capital asset is treated as capital receipt. A capital receipt can be in installments. If the amount is received by person in installments on the transfer of capital asset, then all such installments are treated as capital receipts. 2. Revenue Receipts :- These are the routine nature receipt or receipts of circulating nature. Such receipts keep on accruing in the normal course of assessees business or profession. Such receipts are always shown in Trading and profit & Loss Account or Income & Expenses Account. Such receipts have a direct impact on profitability or income of assessees business or profession. The following are the examples of revenue receipts: Rent, commission, interest and such other routine nature receipts in the hands of concerned person. Mount received on the transfer of stock in trade/inventory. Insurance claim received from insurance company on the loss of inventory/stock in trade. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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Any other routine nature receipts relating to assessees business profession. C) osses :- These are classified into two parts. 1. Capital Loss 2. Revenue Loss. 1. Capital Loss :- Any loss suffered by a person on the transfer of capital asset shall be treated as capital loss. Such losses are not of routine nature. Therefore, these losses cannot be debited to assessees trending and profit & Loss Account or Income & Expenses Account relating to his business or profession Following are the examples of capital losses. Loss on the transfer of investment. That is loss on sale of shares, debentures, UTI Bonds or any other loss provided the shares, debentures, bonds are held as investments by assessee. Loss on transfer of goodwill, P & M, land & building or any other capital asset meant for the purpose of assessees business or profession. Any other loss which effect the capital nature items i.e. erosion or decrease of value in regard to capital nature items. 2. Revenue Loss :- It is a routine nature loss which keeps on accruing in normal course of assessees business or profession. Such loss is always debited to assessees Trading and Profit & Loss Account or Income & Expenses Account relating to his business or profession. Such loss effects the profitability or income of assessees business or profession. It can never be capitalized. Whether the particular loss is capital loss or revenue loss we must examine the facts/circumstances in this regard. Following are the some important examples of revenue loss : Loss of stock by fire, natural calamity, theft, riots, due to white ants or any other reason. Loss of cash due to embezzlement done by the cashier or any other employee of the assessee in the normal course of his business or profession. Loss of cash due to theft, docitee in the normal course of assessees business or profession.
SPECIAL NOTE :-
Items given in point (a) and (b) are called incidental losses hence deductible while calculating profits or gains of assessees business or profession. (a) Loss due to bad debts or where it is customary to give advance to the supplier for the supply of goods or material and the supplier neither supply the goods/material nor return the money. It is revenue loss. (b) Any other loss relating to assessees business or profession and which is of routine nature.
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State whether the following are capital or revenue expenses.

Que 1 :- Expenses in connection with procuring a licence whose duration was 5 years. Ans :- Capital Expenses. Reason :- Licence is treated as an asset because without licence business cannot be possible e.g. import/export business without licence is not possible. Que 2 :-Expenses incurred by a doctor on his foreign tour to study latest techniques in surgery. Ans :- Revenue expenses (Deferred). Reason :- Benefit of study spread over a period of time. He goes to foreign in ordinary course of his profession to learn new techniques of surgery. Que 3 :- Payment made by an assessee to another person with a view to keep a competitor out of his field of business. Ans :- Capital Expenses. Reason :- Expenses incurred to increase earning capacity of business. Que 4 :- Compensation paid to Director on termination of his services in the interest of the company. Ans :- Capital Expenses. Que 5 :- Payment for the purchase of goodwill of any business. Ans :- Capital Expenses. Reason :- Expenses incurred to increase the earning capacity of business. Que 6 :-Legal expenses incurred on investigation and preparing accounts and ascertaining profits. Ans :- Revenue Expenses Reason :- It is obligatory to prepare accounts and investigate accounts for ascertaining profits.
State whether the following receipts are capital receipts or revenue receipts.
Que 1 :-Money received as consideration for not resigning from directorship of company. Ans :- Capital receipt. Que 2 :- Lump sum royalty received in advance Ans :- Revenue Receipt. Reason :- Royalty is received as consideration of writing a book/giving mine or lease. It does not matter that royalty is received in lump sum in advance or in installments. Que 3 :- Dividend, interest received from investment. Ans :- Revenue receipt.
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INTRODUCTION
All receipts, which give rise to income, are taxable under the Income-Tax Act 1961 unless it is specially provided that id does not form part of the total income. Such incomes, which do not form part of total income, may also, be called incomes exempt from tax. As per section 11 to 13A, certain incomes are either totally exempt from tax or exempt up to a certain amount. Therefore, these incomes, to the extent these are exempt, are not included in the Total Income of an assessee for computation of his total income.
INCOME WHICH DO NOT FORM PART OF THE TOTAL INCOMES

The following incomes do not form part of the total income Income not included in total income of any person (Section 11) Income of newly industrial undertaking in Free Trade Zone, etc. (Section 11A) Income of newly established 110 % Export Oriented Undertakings. (Section 11B) Profit and gains derived by an undertaking from the export of eligible article or things (Section 11BA) Income from property held for charitable or religious purpose (Section 11-13) Income of political parties (Section 13A)
INCOME NOT INCLUDED IN TOTAL INCOME OF ANY PERSON (SEC. 11)

In computing the total income of a previous of any person, any income, falling within any of the following clauses, shall not be included in computing the total income of such person. However, in order to claim exemption under this section, it is the duty of the assessee to prove that an item of receipt falls within the exempted category. 1. Agricultural income [Sec 11(1)] :- Agricultural income is fully exempted from tax (as explained later in the next chapter Agricultural Income). 2. Sum received by a member of HUF [Sec 11(2)] :- Subject to the provisions of sec 64(2), any sum received by an individual as a member of HUF shall be exempted in the hands of such member provided the following conditions are satisfied :i. Such sum has been received out of the income of the family or ii. Such income has been received out of income of impartiable estate (estate belonging to the family). The reason behind is that HUF is a separate legal assessee, which pays tax on total income. This exemption is granted with a view to avoid double taxation. SPECIAL POINTS TO BE REMEMBERED Such receipts are not chargeable to tax in the hands of an individual member even if tax is not paid or payable by the family on its total income. Only those members of a HUF can claim exemption under this clause who entitled to demand share on partition or are entitled to maintenance under the Hindu Law.
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EXCEPTION OF THE ABOVE RULE Some of the receipts from a HUF are however, taxable in the hands of the family members, which are as follows : Where an individual (being member of HUF) converts (after December 31, 1969) his self-acquired property into property belonging to the family through the act of impressing such property with the character of joint family property or throws such property into common stock of the family. When such an individual transfers his self-acquired property, directly or indirectly, to the family otherwise than for adequate consideration. In both of the cases the income from the converted property transferable, to the family less than adequate consideration is chargeable to tax in the hands of the transferor (before partition of the family.) 3. Share of profit of a person from a firm [Sec 11(2A) :- In case of a person being a partner of a firm which is separate assessed as such (i.e. partnership firm assessed as firm, PFAF), his share in the total income of the firm shall be exempt from tax. because Firm paid higher rate of taxes on its income. But remuneration in the form of salary, commission, allowance etc and interest [up to the amount given under section 40(b)] received by the partner from the firm assessed as firm shall be fully taxable in the hands of such partner under the head Profits and Gains from Business or profession. SPECIAL POINTS TO BE REMEMBERED
a) Income received by the partners from the firm in the form of Salary, Interest on Capital, Bonus,
Commission or any Remuneration, is taxable in the hands of the partners (to the extent these are allowed as deduction in the hands of the firm). b) These incomes are not taxable under the head of Salaries but Income from Business or Profession. c) Expenses incurred in order to earn such income can be claimed as a deduction from such income under section 30 to 37. (i.e. interest paid on the borrowed money for the purpose of investment in business.) 4. Interest paid on securities or bonds held by a non-resident [Sec 11(4)(i)] :- In case of any assessee who is non-resident in India, the following income shall not form part of his total income :1. Income by way of interest on such securities or bonds as the Central Government may, by notification, specify in this behalf. 2. Income by way of premium on the redemption of bonds mentioned in clause (i) above.
SPECIAL NOTE :-
No securities or bonds will be specified by the Central Government for this purpose on or after 01-07-2002. 5. Interest on non-resident external account (NRE a/c) [Sec 11(4)(ii)] :- The income from interest on deposit standing in a NRE a/c to credit of non-resident individual or such individual who is permitted by RBI to maintain such account in any bank in accordance with the FERA, 1973 is exempt from tax.
SPECIAL NOTE :-
This exemption will stand withdrawn in respect of income by way of interest paid to him or credited to his Non-Resident (External) Account of such individual in any bank in India on or after 01-04-2006.
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6. Interest on Saving Certificates of Non-Resident India Citizens, etc. [Sec 11(4B)] :- The income of an individual (non resident Indian citizen) from interest on Saving Certificates issued before 01-07-2002 by the Central Government as are notified in the Official Gazette is exempt from tax. National Saving Certificates VI and VII issues have been notified for this purpose. This exemption will be available only if the individual has subscribed to such certificates in convertible foreign exchange remitted from a foreign country. It is important to note that the exemption will be available only to the original subscribers of the Saving Certificates. 7. Leave travel concession [Sec 11(5)] :- To be discussed under the head/chapter salaries. 8. Certain payments received by an individual who is not a citizen of India [Sec 11(6)] :- The following incomes are exempt when received by an individual who is not a citizen of India (or is a foreign national):i) Remuneration of diplomatic personnel and their members of staff :- The remuneration received by him as an official of an embassy, high commission, legation, commission, consulate or the trade representation of a Foreign State, or as a member of the staff of any of these officials, for service in such capacity is fully exempt, if the corresponding Indian officials posted in that country enjoy a similar exemption. Further, that such members of the staff are subject of the country represented and are not engaged in any business or profession or employment in India otherwise than as a member of such staff. ii) Remuneration of employees of foreign enterprise :- The remuneration received by an employee of a foreign enterprise for services rendered by him during his stay in India is fully exempt, provided the following conditions are fulfilled : The foreign enterprise is not engaged in any trade or business in India. His stay in India does not exceed in aggregate a period of 90 days in such previous year Such remuneration is not liable to be deducted from the income of the employer chargeable under Act. iii) Salary of the foreign Ships crew who are foreign national and non-residents :- Salary received by or due to any foreigner, who is non-resident, as remuneration for his services on a foreign ship, if his total stay in India does not exceed 90 days in the previous year, is fully exempt. iv) Remuneration received by foreign nationals during their training period in India :- The remuneration received by employees of Foreign Governments from their respective Governments during their period of training in India in any establishment or office of the Government or any public sector undertaking is fully exempted. 9. Perquisites and allowances paid government to its employees serving outside India [Sec 11(7)] :- All types of perquisites and allowances paid by government to its employee, who is citizen of India, rendering services outside India are fully exempt from tax. 10. Income of foreign government employee under technical assistance programme [Sec. 11(8)] :- In the case an individual who is assigned duties in India under a co-operative technical assistance programme in accordance with an agreement entered into by the central government and the government of the foreign state, the following incomes shall be exempt. i) The remuneration received by him from the government of a foreign state for such duties and ii) Any other income of such individual, which accrues or arises outside India in respect of which such individual is required to pay any income tax to the government of the foreign state is exempt. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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11. Remuneration or fee received by non-resident consultants and their foreign employees [Sec (8A)] :Any Remuneration or fee received by a Consultant, directly or indirectly, out of the funds made available to an international organisation (Called as Agency) under a technical assistance grant agreement between the agency and the Government of the Foreign State shall be exempt, provided that such person is engaged by the agency for rendering technical services in India in accordance with an agreement entered into by the Central Government and the said agency. The agreement relating to the engagement of the Consultant should be approved by the prescribed authority.
WHO IS CONSULTANT :-
The expression Consultant has been defined to mean any individual who is either not a citizen of India or, being a citizen of India, is not ordinarily resident in India or any other person who is a non-resident and is engaged by the agency for rendering services in India under the programme. 12. Exemption of remuneration of an employee of the Consultant [Sec (8B)] :- The remuneration received by an employee of the Consultant mentioned in Section 11(8A) shall be exempt provided that :a) Such employee is either not a citizen of India or being a citizen of India, is not ordinarily resident in India. b) The contract of service is approved by the prescribed authority before the commencement of his service. 13. Income of any member of the family of an employee serving under Co-operative Technical Assistance [Sec 11(9)] :- The income of any member of the family of any such individual as is referred to in clause (8), (8A) or (8B) accompanying him to India which accrues or arises outside India and is not deemed to accrue or arise in India, and in respect of which such member is required to pay income tax to the Government of the Foreign State or country of his origin, is exempt from tax. 14. Gratuity [Sec 11(11)] :- Discussed under the head salaries. 15. Commuted value of pension [Sec 11(11A)] :- Discussed under the head salaries. 16. Leave encashment [Sec 11(11AA)] :- Discussed ender the head salaries 17. Compensation on retirement [Sec 11(11B)] :- Discussed under the head salaries. 18. Payment received under Bhopal Gas Leak Disaster Act 1985 [Sec 11(11BB)] :- Any payment received by victims of Bhopal Gas Leak Disaster, in accordance with the provisions of the Bhopal Gas Leak Disaster (processing of claims) 1985 (or any scheme framed there under) shall be fully exempted. But in case if compensation is received against a loss or damage for which deduction has been claimed, it shall be taxable. 19. Voluntary Retirement compensation from a public sector company or any other company [Sec 11(11C)] :- Discussed under the head salaries. 20. Tax on perquisite paid by employers [Sec 11(11CCC)] :- The amount of tax actually paid by an employer, at his option, on non-monetary perquisite on behalf of an employee, is not taxable in the hands of employee. Such tax paid by the employer shall not be treated as an allowable expenditure in the hands of the employer under section 40.
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21. Any sum received under a life insurance policy [Sec 11(11D)] :- Any sum received under life insurance policy (including any amount of bonus on such policy) is fully exempted. Exemption is, however, not available in respect to the amount received on the following policies :i) Any sum received under section 80 DD(3) or 80 DDA(3) (relates with handicapped). ii) Any sum received under a Keyman Insurance Policy. iii) Any sum received under an insurance policy (issued after 31st march 2003) in respect of which the premium payable for any of the year during the term of policy, exceeds 20% of the actual sum assured. SPECIAL POINTS TO BE REMEMBERED Any sum received under such policy on the death of a person shall continue to be exempt. The value of any premiums agreed to be returned or of any benefit by way of bonus or otherwise, over and above the sum actually assured, which is received under the policy by any person, shall not be taken into account for the purpose of calculating the actual capital sum assured under this clause. Keyman Insurance Policy means a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person. 22. Payment from Statutory Provident Fund [Sec 11(11)] :- Any amount withdrawn from Statutory Provident Fund is fully exempted from tax. This provision is also applicable in case of Public Provident Fund. Discussed under the head Salaries 23. Payment from Recognize Provident Fund [Sec 11(12)] :- The accumulated balance due to and becoming payable to an employee participating in RPF is exempt from tax to the extent provided in Rule 8 of Part A of the 5th Schedule. Discussed under the head Salaries 24. Payment from Superannuation Fund [Sec 11(13)] :- Discussed under the head Salaries 25. House rent allowance [Sec 11(13A)] :- Discussed under the head Salaries 26. Allowances given for meeting business expenses [Sec 11(14)] :- Discussed under the head Salaries 27. Interest incomes [Sec 11(15)] :- Discussed under the head Income from other sources. 28. Education scholarship [Sec 11(16)] :- Scholarship granted to meet the cost of education is exempt from the tax. In order to avail the exemption it is not necessary that scholarship should be financed by the Government. Scholarship received from any other organization is also fully exempted. 29. The term cost of education takes within its ambit not only tuition fees but also all other incidental expenses incurred for acquiring education. 30. Once it is proved that the amount received is scholarship, it will be fully exempt from tax irrespective of its terms of awards. 31. Allowances of MPs, MLAs , and MLCs [Sec 11(17)] : i) Daily allowance given to MPs or MLAs or MLCs is fully exempted. ii) Other allowances received by any member of parliament are fully exempted, and iii) Constituency allowances to MLA or MLC are fully exempted. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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32. Awards instituted by the government [Sec 11(17A)] :- Any payment made whether in cash or on kind under any awards instituted in the public interest by the central or state government, or instituted by any other body and approved by the government in this behalf shall be fully exempted. (Example Swantantrata Sainik Pension Scheme 1980)
SPECIAL NOTE :-
Any amount received as family pension by any member of the family of an individual referred above shall also be fully exempted. 33. Pension received by the gallantry award winners (Vir Charka etc.) [Sec 11(18)] :- Any amount received as pension from Central Government or State Government by the winner of Parma Vir Chakar, Maha Vir Chakar or Vir Chakra or other such gallantry awards as the central government may notify shall be fully exempted. 34. Exemption of the family pension received by the family members of armed forces (including paramilitary forces) personnel killed in action in certain circumstances [Sec 11(19)] :- Where the death of the armed forces (including para-military forces) of the Union has occurred in the course of operational duties, in such circumstances and subject to such conditions as may be prescribed, the family pension received by the widow or children or nominated heirs, as the case may be, shall be exempt from tax. 35. Annual value of one palace of the ex-ruler [Sec 11(19A)] :- The annual value in respect of any one palace which is in the occupation of an ex-ruler is exempt from tax, provided such annual value was exempt before 28-12-1971 by virtue of any law or order then prevailing. Discussed in detailed under the head House Property 36. Income of Specified news agencies [Sec 11(22B)] :- Only those news agencies which are notified by the central government and only then when some certain conditions are fulfilled (Set up on India solely for collection and distribution of news). 37. Income of professional association / institution [Sec 11(23A)] :- Only then when some certain conditions are fulfilled. (Other than income chargeable under the head Income from house property or any income received for rendering any specific services or income by way of interest or dividends derived from its investment.) 38. income of armed forces fund [Sec 11(23AA)] :- Any income received by the person on behalf of any Regimental Fund or Non-Public Fund established by the armed forces of the Union for the welfare of the past and present members of such forces or their dependents, shall be exempt from tax. 39. Income of certain funds established for the welfare of the employees and their dependents [Sec 11(23AAA)] :- Any income received by any person on behalf of a fund established, for such purpose as may be notified by the Board in the Official Gazette, for the welfare of employees or their dependants an of which fund such employees are members shall be exempt if such fund fulfils certain conditions. 40. Income of a fund set up by Life Insurance Corporation of India [Sec 11(23AAB)] :- Only those funds which are approved by the controller of Insurance or the Insurance Regulatory Development Authority on or after 01-10-96 41. Income of notified mutual funds [Sec 11(23D)] :- Subject to the provision of Chapter XIIE, any income of the following mutual funds shall be exempt from tax :B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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A mutual fund registered under the Security and Exchange Board of India Act, 1992 or regulations made thereunder. Such other notified Mutual Fund set up by a public sector bank or a public financial institution or authorised by the Reserve Bank of India and subject to such conditional as the Central Government may, by notification in the Official Gazette, specify in this behalf. 42. Income of Employees State Insurance Fund [Sec 11(25A)] :- Any income of the Employees State Insurance Fund set up under the provisions of the Employees State Insurance Act, 1948 shall be exempt. 43. Income of a member of scheduled tribe [Sec 11(26)] :- Exemption under section 11(26) is available if the following conditions are satisfied : The taxpayer is a member of a Scheduled Tribe. The taxpayer resides in any area in the State of Nagaland, Manipur, Tripura, Arunachal Pradesh, Mizoram or districts of North Cachar Hills, Mikir Hills, Khasi Hills, Jaintia Hills and Gara Hill or in the Ladakh region of the State of Jammu and Kashmir. Exemption is available in respect of income, which accrues or arise to him from any source in the areas or States specified above. Exemption is available in respect of income by way of dividend / interest on securities even if it arises from a source in the area not specified above. 44. income of an agricultural produce market committee or board constituted for the purpose of regulating the marketing of agricultural produce applicable from 2010-11 [Sec 11(26AAB)] 45. Subsidy from tea board [Sec 11(30)] :- In the case of an assessee, engaged in the business of growing and manufacturing tea in India, any subsidy from or through the Tea Board under notified scheme for replantation or replacement of tea bushes or for rejuvenation or consolidation of areas used for cultivation of tea in India is exempt from tax. The assessee must furnish to the Assessing Officer, along with his return of income, a certificate from the Tea Board as to the amount of subsidy received by the assessee during the year. 46. Subsidy from Rubber Board or Coffee Board or Spices Board or any other notified Board [Sec 11(31)] :- Subsidies received by assessee engaged in the business of growing and manufacturing rubber, coffee, cardamom (or such other commodities as the Central Government may, by notification, specify) is exempt from tax. The assessee must furnish to the Assessing Officer, along with his return of income, a certificate from the concerned board as to the amount of subsidy received by the assessee during the year. 47. Income of minor child [Sec 11(32)] :- In case of income of minor child is clubbed with the income of his either parent i.e. father or mother whose income is higher, then such parent can claim an exemption of Rs. 1,500 or actual income clubbed which ever is less in respect of each minor child whose income is included. 48. Capital gain on transfer of U64 [Sec 11(33)] :- Any income arising on the transfer of capital asset being a unit of U64 is not chargeable to tax where the transfer of such asset take place on or after 1 April 2002. This rule is applicable whether the capital asset U64 is long-term capital asset or short-term capital asset.
SPECIAL NOTE :-
If income from a particular source is exempt from tax, loss from such source cannot be set off against income from another source under the same head of income. Consequently, loss arising on transfer of units of U64 cannot be set off against any income in the same year in which it is incurred and the same cannot be carried forward. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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49. Dividend and interest on units [Sec 11(34)/(35)] :- According to Finance Act 2003 the following incomes are not chargeable to tax :i) ii) iii) iv) Any income by way of dividend from Indian company referred to in section 115-O. Any income in respect of units of mutual fund. (Covered u/s 11 23D) Income received by the Units holder of UTI. Income in respect of units of specified companies. SPECIAL POINTS TO BE REMEMBERED i) The person paying dividends on shares or interest on units will have to pay additional tax @ 12.5% on dividend / income distributed under section 115-O and 115 R ii) In the case of a unit operating in a special economic zone (which started its operation after March 31,2006) dividend tax is not payable by the payer company. Even in such a case, dividend income in the hands of the shareholders is exempt from tax. 50. Long-term capital gains on transfer of eligible equity shares [Sec 11(36)] :- Capital gains is not chargeable to tax if the following conditions are fulfilled: The asset, which is transferred is a long-term capital asset being an eligible equity share in a company. Such shares are purchased on or after March 1, 2003 but before March 1, 2004. Such shares are held by the taxpayer for the period of 12 months or more. SPECIAL POINTS TO BE REMEMBERED i) Any equity share in a company being a constituent of BSE-500 index of the Stock Exchange, Mumbai as on the 01-03-03 and the transactions of purchase and sale of such equity share are entered into on a recognised stock exchange in India. ii) Any equity share in a company allotted through a public issue on or after the 01-03-03 any listed in a recognised stock exchange in India before 01-03-04 and the transactions of sale of such share is entered into on a recognized stock exchange in India. 51. Exemption of capital gain on compensation received on compulsory acquisition of agricultural land situated within specified urban limits [Sec 11(37)] [W.r.e.f 01-04-2004] :- Any capital gain (whether short term or long term) arising to an individual or a HUF from transfer of agricultural land by way of compulsory acquisition shall be exempt provided the compensation or the enhanced compensation or consideration, as the case may be, received on or after 04-04-2004. The exemption is available only when such land has been used fore agricultural purpose during the period of two years immediately preceding the date of compulsory acquisition by such individual or a parent of his or by such HUF.
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SPECIAL POINTS TO BE REMEMBERED i) Where the compulsory acquisition has taken place before 01-04-2004 but the compensation is received after 31-03-2004, it shall be exempt. But if part of the original compensation in the above case has already received before 01-04-2004, then exemption shall not be available even though balances original compensation is received after 01-04-2004. ii) However, enhanced compensation received on or after 01-04-2004 against agricultural land compulsory acquired before 01-04-2004 shall be exempt. 52. Exemption of long term Capital gain arising from sale of shares and units [Sec 11(38)] [W.r.e.f 0104-2004] :- Any income arising on or after 01-04-2004 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 provided :a. Such equity shares are sold through recognised stock exchange, whereas units of equity oriented fund may either be sold though the recognised stock exchanged or may be sold to the mutual fund. b. Such transaction is chargeable to securities transaction tax. 53. Income from any international sporting event [Sec 11(39)] :- Income arising from an international sporting event is exempt from tax from the assessment year 2009-10 is such event is approved by the international body and has participation by more than two countries. 54. Exemption of capital gain on transfer of an asset of an undertaking engaged in the business of generation, etc. of power [Sec 11(41)] :- 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 shall be exempted where such transfer is effected on or before 31-03-07 to the Indian Company notified under Section 80-IA(4)(v)(a).
QUESTIONS
Define various Exempted Income (income which are not included in Gross Total Income) under Income Tax Act 1961.
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MEANINMG
Salary is the first head of income u/s 15 of the Income Tax Act. The meaning of the term Salary for purpose of income tax is much wider than what is normally understood. Every payment made by an employer to his employee for service rendered would be chargeable to tax as income from salaries. The term Salary for the purpose of Income Tax Act will include both monetary payments as well as non-monetary facilities like housing accommodation etc. From the above discussion we can say that the following incomes are chargeable to tax under the head SALARY :1. Any salary due from an employer or a former employer to an assessee in the previous year whether paid or not 2. Any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it become due to him.
EXPLANATION :-
From the above two points it can be say that salary will be taxable on Due or Receipt basis, whichever happen earlier.
EXAMPLE :-
Salary of 2010-11 received in advance in 2009-10, it is included in the total income for the previous year 2009-10 on receipt basis (as tax incidence matures earlier on receipt basis, due basis is not relevant. On the other hand if salary which has become due in 2009-10 but received in the previous year 2010-11 it will not included in the total income for the previous year 2010-11 because it had been included in the total income of 2009-10. 3. Any arrears of salaries paid or allowed to him in the previous year by or on behalf of an employer or a former employer if not charge to income tax for any earlier previous year.
SPECIAL NOTE
:- If any salary paid in advance is included in the total income of any person for any previous year, it shall not be included again in the total income of the person when the salary becomes due.
EXAMPLE :-
An employee X was a junior accountant drawing a salary of Rs. 6,000 per month, was made a senior accountant on July 1, 2007 at an increase salary of Rs. 6,200 per month. He made a petition for a much higher salary to the management on July 1, 2007. But the later took a decision in the matter only in June 2010 when his salary was increased with retrospectively effect from July 1st, 2007, to Rs. 6,500 per month. X drew the arrears of salary on June 30, 2010. Now this arrears is taxable in the year of receipt provided the employee had not paid tax on such arrears in the earlier year.
CHARACTERISTICS OF SALARY
For any payment to be taxable under the head salaries, it must fulfill the following essentials :1. Relationship of employer and employee :- An income can be taxed under the head Salaries only if there is relationship of employer and employee between the payer and payee (receiver). If this relation does not exist then the income would not be deemed to be income from salary. The employer and employee relationship is similar to that of a master and servant and it distinctly differs from that of a principal and agent. A master is one who not only directs what and when a thing is to be done but B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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how it is to be done, and the servant is one who is bound to carry out the instructions given to him by such master. The greater the amount of direct control exercised over the person rendering the services by the person contracting for them, the stronger the grounds for holding it to be a contract of service and similarly the greater the degree of independence of such control the greater the probability that the services rendered are of the nature of professional services and that the contract is not one of service. At the same time, the right to control the manner of work is not the exclusive test for determining the relationship of employer and employee. The servant has as such no discretion of his own in the carrying out of the instruction except such minor discretion as may be left to him by him master. In short, in all cases the correct method of approach is whether having regard to the nature of work there is due control and supervision by the employer.
Contract of Service v/s Contract for Service

Contract of Service :- Income is taxable under the head salary, if there is a Contract of Service i.e. the relationship is that of employer-employee. In other words, the employee does the work for his master. Control and supervision vests in the master. Contract for Service :- A Contract for Service on the other hand, is one, in which a person offers his services to any person who is willing to pay the prescribed charges. He has discretion to do the work in his own way. He is entitled to the fruits of his labour and liable for its losses. Such receipts constitute income from business in his hands.
EXAMPLE :-
Bipasha, an actress, is employed in B.R. Films. She is paid a monthly remuneration of Rs. 2 Lacs. She acts in various films. The remuneration for acting in such films is directly paid to B.R. Films by the different producers. In this case, Rs. 2 Lacs will constitute salary in the hands of Bipasha. On the other hand if Bipasha acts in various films and gets fees from different producers, the same income will be chargeable as income from profession since the relationship of employer and employee does not exist between Bipasha and the film producers. Following are some cases under which relationship of employer and employee does not exist a) Salary received as Member of Parliament :- A member of parliament is not a government employee or we can say that relation between him and the government is not that of a servant and master therefore remuneration or salary received by him is not taxable as salary income but taxable under the head income from other sources. Any allowance received by Member of Parliament is fully exempted from tax u/s 11(17). b) Receipt from person other than employer :- Perks or benefits or any other remuneration received from persons other than employer, would not be taxable under the head salary but under the head income from other sources.
EXAMPLE :-
Amount received by a professor of a college from a university for acting as an examiner (Paper Setter) is not taxable under the head Salary. As it is not received from the employer and is taxable under the head Income From Other Sources. (Because University is not the employer of that professor.)
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c) Salary as partner from firm :- Any salary, commission or remuneration received by a working partner from a firm assessed as firm u/s 184, shall not be taxable under the head Salaries as there is no employer employee relationship. It is taxable under the Profit and Gains from Business or Profession. d) Commission received by the director :- Commission received by the director is from the company is salary if the director is the employee of the company. If, however, the director is not an employee of the company, commission cannot be termed as salary and, consequently, it will be taxable under the head Profit and Gains from Business or Profession or Income from Other Sources. e) Payment made after cessation of employment : Payment made by an employer to his employee after the cessation of employment is taxable under the head salaries. Because it represents remuneration for the services rendered by him in past But ex-gratia payment given to the widow or legal heirs of a deceased employee who dies during services is not taxable under the head salaries but taxable under the income from other sources, because such widow or legal heir is not the employee of the employer.
EXCEPTION
Lump-sum payment made gratuitously or by way of compensation or otherwise to the widow or other legal heirs of an employee, who dies while still in active service, will not be taxable as income. Where a person or his heirs receives ex-gratia payment from the Central Government / State Government / Local Authority / Public Sector Undertaking, consequent upon injury to the person / death of family member, while on duty is not liable to income tax or exempted from tax. 2. Salary paid tax-free :- If salary is paid tax-free by the employer, the employee has to include in his taxable income not only salary received but also amount of tax paid by the employer, except under the provisions of Section 11(11ccc). It does not make any difference whether tax is paid under terms of contract by the employer or voluntarily. 3. Deduction made by the employer :- For computing income taxable under the head salaries, the gross salary due to the employee should be taken as the basis. If any tax deduction or deductions on account of provident fund, insurance premium or any other deduction made by employer from the salary income, should be added back to the net salary received by the employee. Compulsory deductions from salary are also instances of mere application of income. The fact that a portion of the salary has to be devoted compulsorily to some purpose under a contractual obligation dos not prevent it for being assessable as income under the head salary.
EXAMPLE :-
An assessee was engaged on fixed salary upon the obligatory condition that the employer should provide him with board, lodging etc., for which he should pay an amount which was deducted from his gross salary before payment. In this case, the tax is chargeable on the gross salary without deducting the compulsory deduction made by the employer. 4. Place of accrual :- Under section 9(1)(ii), salary earned in India is deemed to accrue or arise in India even if it is paid outside India or it is paid or payable after the contract of employment in India comes to end. If an employee gets pension paid abroad in respect of services rendered in India, the same will be deemed to accrue in India. Similarly, leave salary paid abroad in respect of leave earned in India is deemed to accrue or arise in India. (In other words we can say that if salary is in relation to services rendered in India, it will be deemed to be accrued in India irrespective of the place where it is received.) But there is an exception to this rule, which is when salary paid by the government to an Indian citizen for their services outside India will be deemed to accrue in India. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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5. Salary or pension received by UNO employee :- It is fully exempted from tax. 6. Voluntary foregoing or application of salary :- Once salary accrues, the subsequent waiver by the employee does not absolve him from liability of Income Tax. Such waiver is only an application and hence chargeable. 7. Surrender of Salary :- However, if an employee surrenders his salary to the Central Government Under Section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would be exempt while computing his taxable income. Voluntary forgoing is different from voluntary surrender of salaries. Voluntary surrender means salaries not due on the name of employee.
EXAMPLE :-
a person of missionary spirit agrees to work without accepting any salary is voluntary surrender. The benefit is available to all the employee whether government or private. 8. Salary when due :- In case of Govt. and semi-government employee salary or monthly pension due on the 1st day of next month. In case of private employee salary or monthly pension become due at the end of same month. However if some specific are given in the problem in this regard, then we have to follow it. 9. Computation of salary in grade system :- Some time an employee is appointed on a salary fixed in grade system. Under this system, the employee is entitled to normal increments fixed in the grade. Example :- If an employee joins the service on 1-7-2007 and is placed in the grade of Rs. 2,000-502,600-100-3,500. This means that, he will get a basic salary of Rs. 2,000, w.e.f. 1-7-2007. He will get an annual increment of Rs. 50 w.e.f. 1-7-2010 and onwards till his salary reaches Rs. 2,600. Thereafter, he will get annual increment of Rs. 100 till his salary reaches Rs. 3,500. 10. Salary from more than one source :- If an individual receives salary from more than one employer during the same previous year (may be due to change of employment or due to employment with more than one employer simultaneously), salary from each source is taxable under the head of salaries. 11. Family pension :- Any family pension received by the widow or legal heirs of a deceased employee is taxable under the head Other Sources (no employer employee relationship exists.) Deduction is available on such family pension which is equal to 1/3rd of amount received or Rs. 15,000 whichever is less.
SPECIAL NOTE :-
12. Dearness pay v/s Dearness allowance :- Dearness allowance is given to an employee to compensate him for increase in prices and it is generally allowed as certain percentage of basic pay and it is linked to consumer price index and it is revised on quarterly basis. If it is mentioned that it is given under the terms of employment or it is considered for calculating retirement benefit then it can be considered as entered into service benefits (or Enter). But on the other if nothing is mentioned about the dearness allowance then it is to be assumed that Not Enter. Dearness pay is the entered part of the dearness allowance.
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13. Salary paid by foreign government / Enterprise :- Salary paid by foreign government / enterprises to its employees serving in India is taxable under the head of Salaries, unless it is specifically exempt from tax. 14. Voluntary payments :- Whether the payment from an employer is based on a contract or not, it constitutes salary in the hands of the employee. Example :- Wristwatch given to the employee who completed 20 years of their services. 15. Arrears of salary :- Normally speaking, salary arrears must be charged o the due basis. However there are circumstances when it may not be possible to bring the same to charge on due basis. For example :If the salary is to be revised with retrospective effect from some previous dates then arrears received in that connection will be chargeable to tax on receipt basis.
DEFINITION OF WORD SALARY : [SECTION 17(1)]

Section 17(1) gives an inclusive definition of salary. Salary includes :Wages, Any annuity or pension Any gratuity, Any fees, commission, perquisites or profit in lieu of or in addition to any salary or wages, Any advance salary, Any leave encashment, 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. Out of the above mentioned some are either fully exempted or exempt upto a certain limit. The aggregate of above incomes, after the exemption(s) available, if any, is known as gross salary. From the gross salary following three deductions are allowed u\s. 16 :1. Deduction for entertainment allowance{u/s.16 (ii)} and. 2. Deductions on account of any sum paid towards tax on employment {u/s.16 (iii)} After allowing the above deductions, the resultant amount is income under the head salaries. The following chart illustrate the Computation of Taxable Salary Salary Basis Salary + Allowances + Perquisites + Profits in Lieu of Salary + Retirement Benefits Less Entertainment Allowances 16(ii) + Employment Tax 16(iii) 1. 2. 3. 4. 5. 6. 7.
TREATMENT OF VARIOUS INCOMES, WHICH ARE TO BE INCLUDED IN GROSS SALARY

1. Wages :- There is no difference between salary and wages therefore wages are treated just like salary and are taxable on the same basis as salary. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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2. Any commissions :- Any commission given by employer to employer is fully taxable. Any commission received by director as sitting fees not as an employee; is taxable under the head Other sources. Incase commission is given to an employee and it is based upon turn over achieved by such employee, such also be treated as part of the salary for all practical purposes 3. Any bonus :- bonus is fully taxable under the head salaries on receipt basis. In case arrears of bonus received in the previous year, these are fully taxable. Bonus can be of two types, i.e., i) statuary bonus and ii) gratuitous bonus. 4. Overtime payments :- Any payment made by the employer to the employee for working beyond the office hours or for any extra work done by the employees is taxable and therefore, included in Gross Salary. 5. Annuity :- Annuity is an annual grant and when made by an employer falls under the head Salaries. It may be paid by the employer voluntarily or on account of a contractual agreement. When annuity is payable by a present employer, it is taxable as salary. If it is received from a former employer then it is taxable as profits in lieu of salary. 6. Death-cum-retirement gratuity [section 11(11)] :Gratuity is payment made by the employer to an employee in appreciation of past services rendered by the employee. Gratuity received by the employee on his retirement of employee is taxable under the head salary but if gratuity received by legal heirs of deceased employee is not taxable under the head salary but under income from other sources as per guidelines given by CBDT. Gratuity is exempted up to amount given u/s 11(11), explained as under. For the purpose of exemption of gratuity under section 11(11), the employees are divided into 3 categories :a) Government employees and employees of local authority (But not Statutory Corporation). b) Employees covered under the Payment of Gratuity Act, 1972. c) Employees not covered under the Payment of Gratuity Act, 1972.
Gratuity
(a) Govt. Employees Fully Exempted (b) Covered under Gratuity Act
Non-Govt. Employees
(c) Not Covered under Gratuity Act
a) Government employees :- It is fully exempted where received by government employees or their legal heirs. b) In case of non-government employee covered under Gratuity Act 1972 :- The payment of Gratuity Act 1972 applies to a concern in which 11 or more employees are employed or were employed, on any day of the preceding 12 months. As per section 4(1) of the Payment of Gratuity Act 1972, gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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service for not less than 5 years. However, the completion of continuous 5 years shall not be necessary where the termination of the employment of any employee is due the death or disablement. As per the payment of Gratuity Act 1972, Gratuity is exempted up to the least of the following :(whether received by employee or legal heirs of deceased employee) i. Actual amount of Gratuity received. ii. Rs. 10,00,000 Statutory Limit (during whole life of the employment) iii. 15/26 x Last Months Salary x No. of completed years of services SOME SPECIAL POINTS TO BE REMEMBERED Taxable gratuity = Actual gratuity less exempted limit. Here salary means basic salary + DA (whether enter or not). 7 days in case of employees of seasonal establishment inspite of 15 days. In case employee receives wages according to piece rate then last drawn salary wages will be average wage for the last three months immediately preceding the termination of employment and the wages paid for any over time work shall not be included. For purpose of calculating completed years of services, more then 6 months shall be taken as completed year. A period of 6 months or less then 6 months shall be ignored. c) In case non-government employee not covered under payment of gratuity act 1972 :- Gratuity is exempted up to the least of the following in case gratuity received by the employee or legal heirs of deceased employee :i. Actual amount of Gratuity received. ii. Rs. 10,00,000 Statutory Limit (during whole life of the employee). iii. x Average Salary x No. of completed years of services SOME SPECIAL POINTS TO BE REMEMBERED Taxable Gratuity = Actual amount gratuity less exempted limit. Each year of completed services means months are to be ignored, whether more than 6 months or not. Here salary means basic salary + DA which enters + commission on turnover. Gratuity is taxable in the year in which the employee retire or death occur and not in the year of receipt, because is taxable when it become due or received which ever is earlier. 11 months salary upto the month of retirement. Means the month of the retirement is to be ignored.
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SOME MORE SPECIAL POINTS TO BE REMEMBERED Where an employee had received gratuity in any earlier year(s) and had claimed exemptions under sec 11(11) in respect of the gratuity, the statutory limit is reduced by the amount of exemption(s) availed in earlier years. If gratuity received from more then one employers in the same previous year, by an employee, the limit of Rs. 350000 would apply to the total gratuity received from the all the employers. Gratuity is exempt, if the relationship of employer and employee exist between the payer and the payee otherwise not. (Example gratuity received by LIC Agent from the LIC is not exempt) The word Completed Years of Services means an employees total service under different employers including the employer other than the one from whose services he retired provided he was not paid gratuity by the former employers. Any gratuity paid to an employee, while he continues to remain in service with the same employer is taxable under the head salaries because gratuity is exempt only on retirement or on the termination of employment. In case employee retired but employed by the same employer under a fresh agreement, exemption shall be allowed. 7. Treatment of Pension [section 11(11A)] :Pension is payable to an employee after retirement. Where family pension received by the legal heirs of deceased employee, then it is treated under the head income from other sources. There are two types of pensions, 1) Uncommuted pension or Periodical Pension 2) Commuted value of pension. Pension
(1) Uncommuted Pension Fully Taxable (a) Govt Employee Fully Exempted (i) Gratuity Received
(2) Commuted Pension
(b) Non-Govt. Employee
(ii) Gratuity not Received
1) Uncommuted pension or periodical pension :- It is taxable in the hands of all employee whether government or non-government employee. 2) Commuted value of pension :- It is a lump sum payment made to the employee in lieu of periodical payment. Commuted value of pension is exempted as per the limits given below: [section 11(11A)] a) In case of government employees :- Commuted amount of the pension is fully exempted in case of government employees. (It includes Central Govt., State Govt., Local Authority and of Statutory Corporation)
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b) In case of non-government employees :- Commuted value of pension is exempted up to the amount given below: i) If employee receives gratuity, then it is exempted up to 1/3 of gross total pension. ii) If employee does not receive gratuity, then it is exempted up to 1/2 of gross total pension. SOME SPECIAL POINTS TO BE REMEMBERED Taxable amount of commuted value of pension = actual amount received less exempted amount. Gross total pension = Commuted value of pension / % of the total pension commuted. Any payment received by an individual in commutation of pension from a fund set-up by Life Insurance Corporation of India since 1st August, 1996 or any other insurer under a pension scheme to which contribution is made by the individual receiving pension, would be exempt from income tax. 8. Treatment of Leave salary [section 11(11AA)] :An employee is entitled to different types of leaves under the contract of service, i.e. casual leaves, medical leaves etc. If these leaves are not availed then these are accumulated and some times employee is given to encash these leaves due to him. The treatment of such leave encashment is as under :Leave Salary
(a) During Service Fully Taxable (i) Govt. Employees Fully Exempt
(b) At Retirement
(ii) Non-Govt. Employees Exempt Minimum of 4
a) Encashment of leave during the tenure of services :- If leaves are encashed during the period of employment then the amount is fully taxable in case of all employees i.e. whether government or nongovernment employees. b) Encashment of leaves at the time retirement :- If the leaves are encashed at the time of retirement by the employee, it is exempted as follows: i. In case of government employees :- Fully exempted. ii. In case of non-government employees :- It is exempted up to the least of the following: a) Actual amount received; b) Statutory limit, Rs. 3,00,000 (during whole life of the employment). c) Amount calculated at average salary for 11 months i.e. average salary 11 months. [Average salary means average of salary for last 11 months preceding to the date of retirement or death]. d) Numbers of leaves unavailed at the time or retirement or on the name of his credit at the time of retirement Average Salary.
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SOME SPECIAL POINTS TO BE REMEMBERED Numbers of unavailed leaves are calculated by taking 30 days or one month leave for every completed year of service for the employer from whose service he has retired (it is immaterial that how many leaves are allowed by the employer), and out this leaves which are already encashed or availed are to deducted, then the balance leaves are unavailed leaves or leaves to the credit of employees name Taxable amount of leave encashment = actual amount received exempted amount. SOME MORE SPECIAL POINTS TO BE REMEMBERED If the employee had received leave encashment in any one or more earlier previous years also and had availed of the exemption in respect of such amount, then the statutory limit is reduced by the exemption already availed. If leave encashment received from more then one employers in the same previous year, by an employee, the limit of Rs. 300000 would apply to the total gratuity received from the all the employers. In case leave encashment is given to the legal heir of deceased employee, it will be fully exempted. 9. Treatment of retrenchment compensation [section 11(11B)] :Where retrenchment compensation is received by a workman in accordance with any scheme which the central government having regard to such need or government has approved such retrenchment, the entire amount of compensation so received shall be exempted u/s 11(11B). Any compensation received by a workman at the time of his retirement, under the Industrial Dispute Act, 1947 or under any award, contract of services or otherwise, shall be exempted up to minimum amount of the following : a) Actual amount received; b) Amount calculated according to the provision of section 25F(b) of the Industrial Dispute Act, 1947, which is equal to 15 days average salary for every completed year of service or part thereof in excess of six months. c) Statutory limit Rs. 5,00,000. SOME SPECIAL POINTS TO BE REMEMBERED Taxable compensation = actual amount received exempted limit. Here salary mean basic salary + DA (enter or not) 10. Treatment of compensation received on voluntary retirement [section 11(11C)] :The compensation received by the employee under voluntary retirement under golden hand-shake scheme, it is exempted if the following conditions are fulfilled :1 2 The compensation received at voluntary retirement. It applies to all employees (by whatever name called) including workers and executives of a company or authority or co-operative society excepting directors of a company or co-operative society. 3 The employee must have reached 40 years of age or he must have rendered at least 11 years of services. (This condition is, however not applicable in the case of an employee of a public sector company at the time of VRS) 4 The object of the scheme is overall reduction in staff. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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Retiring employee shall not give any job in same company or any other company of same management.
If the above-mentioned conditions are satisfied the compensation on voluntary retirement is exempted up to the minimum amount of the following :a) Actual amount received; b) Statutory limit of Rs. 5,00,000; SOME SPECIAL POINTS TO BE REMEMBERED Taxable amount of compensation = Actual amount received Exempted limit. The exemption is available to employee only once and if it has been availed for an assessment year it shall not be allowed to him for any other assessment year. The assessee shall not be eligible for relief under section 89 in case he has claimed exemption under section 10(10C). Even if the compensation is received in instalments, the exemption shall be allowed.
ALLOWANCES {SECTION 17(3)}

Payments in cash made by the employer to his employee monthly, other than salary, is called an allowance. It is a fixed monetary amount paid by the employer to the employee for meeting some particular requirement connected with the services rendered by the employee. From income tax point of view, there are three types of allowances, which are as follows :i. ii. iii. Fully exempted allowance. Fully taxable allowance. Partially taxable allowance.
Allowances
(i) Fully Exempted Allowances
(ii) Fully Taxable Allowances
(iii) Partly Taxable Allowances
1. House Rent Allowances
2. Allowances Covered u/s 11 (14)
(A) Exempt upto Actual Expenditure
(B) Exempt upto Certain Limit
i.
Full exempted allowances :-
1. Foreign allowance :- The government usually pays this allowance to an Indian citizen outside India for rendering service abroad. It is not taxable at all. There may be several types of foreign allowances which all are fully exempted U/S 11(7). This exemption is not available to non-government employees and to those who are not citizens of India. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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2. Sumptuary allowance to high court or Supreme Court judges :- These are fully exempted. 3. Allowance received by an employee of UNO from his employer. ii.
Fully taxable allowances :-
1. Dearness allowance, additional dearness allowance or dearness pay :- This allowance is paid on account of high prices. Sometimes it given under the term of employment and some time without it, but it is taxable in both cases. In case, when it is given under the term of employment or when it is enter into pay for service benefit then it is also known as dearness pay, in such case it will be treated as part of salary for all practical purposes like, for the determination of exempted limit of hose rent allowance, recognize provident fund, gratuity, bonus, rent free accommodation etc. 2. Lunch, marriage, family, wardenship, project, fixed medical allowance :- All these allowances are fully taxable. 3. Non practicing allowance :- It is generally given to those medical doctors who are in government service and they are banned from doing private practice. It is to compensate them from this ban. 4. City compensatory allowance (C.C.A.) :- This allowance is given to compensate for the high cost of living in particular big cities. This is fully taxable. (It is just like D.A. but cant be calculated as D.A.) 5. Hill allowance :- It is given to employees working in hilly areas on account of high cost of living in hilly areas as compared to plains. It is fully taxable, if the place is located at less then, 1100 meter height from sea level. 6. Deputation allowance :- When an employee is sent from his permanent place of service to some other place or institution or organisation on deputation for a temporary period, his is given this allowance. 7. Overtime allowance :- When an employee works for extra hours over an above his normal hours of duty he is given overtime allowance as extra wages. 8. Entertainment Allowance :- Entertainment allowance is fully taxable under the head salary. W.E.F. assessment year 2002-03 in case of Government employee it is allowable as deduction from gross salary u/s 16(ii) at the rate least of the following : a) Actual amount of Entertainment Allowance; b) 20% (1/5) of basic salary; c) Rs. 5,000. There is no deduction for semi-government and private employees. It is first added in the salary income irrespective of amount spent and then deduction u/s 16(ii) for government employee out of gross salary is given. iii.
Partially taxable allowances :-
1. Hose rent allowance (H.R.A.) :- HRA is given to employee in relief to compensate the employee in the matter of high rent payment for the house. It is exempted up to the limit given u/s 11(13A) and rule 2A. These limits are given below :B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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In case employee living in rented house :- HRA is exempted at the rate least of the following: a) Actual amount of HRA received by the employee during the P.Y. in respect of the relevant period. b) Rent paid (-) 11% of salary due to him for the relevant period. c) 50% of salary in case of four metro cities and 40% of salary in case house situated in other cities SOME SPECIAL POINTS TO BE REMEMBERED Taxable HRA = Actual HRA received Exempted limit. Salary means basic salary + D.A. which enters into pay for service benefit + Commission on turnover achieved by the employee. Salary is to be taken on due basis in respect of the period during which the rented accommodation is occupied by the employee. The exemption shall be available even if employee is living in a rented house at place other than the place of employment. Relevant period means the period during which such said accommodation was occupied by the assessee during the relevant previous year. In case employee living in his own house or any other house for which the rent is not paid, during the relevant previous year or part of it then full HRA for the previous year or part of it is taxable. The exemption is based on the following four factors :- Salary, Place of Residence, Rent Paid, HRA Received. Since there is a possibility of change in any of the above factors during the previous year, exemption for HRA should not always be calculated on annual basis. However if there is not any change in any of the above factor it can be calculated for the whole year also. 2. Allowances covered u/s 11(14) :Beside HRA, there are certain specific allowances, which are exempt either in full or upto a certain limit provided these allowances are not in the nature of a perquisite within the meaning of sec 17(2). All these allowances are covered under section 11(14). These allowances are of two types :( A ) Allowances exempted upto actual amount of expenditure for the purpose for which these are received. ( B ) Allowances exempted upto a certain limit. ( A ) Allowances exempted upto actual amount of expenditure for the purpose for which these are received :- These allowances are given to employee for meeting these expenses. These are exempted up to the amount spent by employee for employment purposes, excess if any will be taxable. If it is not mention in the question that what amount spent by the employee then it is assumed that nothing spent by the employee, hence total amount of such allowance is fully taxable. 1. Helper allowance :- Allowance granted to meet the expenditure incurred on a helper, which is engaged for the performance of the duties. 2. Uniform allowance :- Allowance granted to meet the expenditure incurred on the purchase or maintenance of the uniform for wear during the performance of the duty. 3. Traveling allowance :- Allowance granted to meet the cost of travel on tour due to transfer of duty. It also includes packing and transportation of personal effects on such transfer.
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4. Conveyance allowance :- Allowance granted to meet the expenditure incurred on conveyance in performance of the duties. (provided that the free conveyance is not provided by the employer) 5. Daily allowance :- Allowance granted to meet the daily charges incurred by an employee on account of absence from his normal place of duty. 6. Research allowance :- Allowance granted to encouraging academic, research and training pursuits in educational and research institutes. SOME SPECIAL POINTS TO BE REMEMBERED In all the above 5 allowances the amount must be expended during the previous year only but in the 6th allowance the amount can be expended in the next year also. If nothing is given about the expenditure then we can assume that nothing is expended or the whole amount is expended with appropriate notes.
(B)
Allowances exempted upto a certain limit :-
1. Children education allowance :- Exempted up to actual amount received per child or Rs. 110 p.m. per child up to maximum of two children, whichever is less. Excess shall be taxable. Child means real child or step child or adopted child but does not include grand child or other relative. For claim of such exemption children must be studying in India. 2. Hostel Expenditure Allowance :- Exempted up to actual amount received per child or Rs. 300 p.m. per child up to maximum of two children which ever is less. Hostel shall not include day boarding. Rest of the detail is same as explained in children education allowance. 3. Transport Allowance :- Any allowance given under the name of transport allowance to any employee for the purpose of commuting between the place of his residence to place of his duty whether received by government or semi government or private employee shall be exempted up to Rs. 800 p.m., excess if any shall be taxable, But in case of handicapped with disability of lower extremities or a blind employee, it shall be exempted up to Rs. 1,600 p.m. 4. Tribal Area Allowance or Scheduled Area Allowance or Agency Area Allowance :- It is exempted upto Rs. 200 P.M. or actual amount received whichever is less. 5. Special Compensatory (Hill Area) Allowance :- It includes any special compensatory allowance in nature of special compensatory (hill areas) allowance or high altitude allowance or uncongenial climate allowance or snow bound area allowance. Amount exempt from tax varies from Rs. 300 per month to Rs. 7,000 per month 6. Border Area Allowance :- It includes any special compensatory allowance in the nature of border area or remote locality allowance or difficult area allowance or disturbed area allowance. The amount of exemption varies from Rs. 200 P.M. to Rs. 1,300 P.M. 7. Compensatory Field Area Allowance :- Exemption is limited up to Rs. 2,600 P.M. If exemption, no exemption can be taken in respect of border area allowance. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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8. Compensatory Modified Area Allowance :- Exemption is limited up to Rs. 1,000 P.M. If this exemption is taken employee cannot take the exemption of border area allowance. 9. Counter insurgency allowance :- It includes any special allowance in the nature of counter-insurgency allowance granted to the members of armed forces operating in areas away from the permanent location for a period of more than 30 days. Exemption is limited to Rs. 3,900 P.M. if an exemption is claimed in respect of this allowance then no exemption can be clamed in respect of disturbed area allowance. 10. Under ground allowance :- Under ground allowance is given to employee who is working in unnatural climate in underground coal mines. Exemption is limited to Rs. 800 P.M. 11. High altitude allowance :- It is granted to the members of armed forces operating in high altitude areas. It is exempt from tax up to Rs. 1170 P.M. (for altitude of 9,000 to 15,000 feet) or Rs. 1,600 P.M. (for altitude above 15,000 feet). 12. Highly Active Field Area Allowance :- Any special allowance granted to the members of armed forces in the nature of special compensatory highly active field area allowance is exempt from tax to Rs. 4200 P.M. 13. Island duty allowance :- Any special allowance granted to the members of armed forces in the nature of island (duty) allowance in Andaman and Necobar and Lakshadweep group of island is exempt up to Rs. 3,250 P.M. 14. Running or flight allowance :- This allowance is granted to an employee who engaged in transport business to meet his personal expenses during the duty performed in the course of running such transport, it is exempted up to 70% of such allowance or Rs. 6,000 p.m. whichever is less, provided that such employee is not in receipt of any daily allowance.
PERQUISITES
The term perquisite means any benefit, attached to an office or position in addition to salary or wages. Perquisite denotes a personal advantage. It may be given in cash or in kind. If it is given in kind it should be capable of being measured in terms of money. For income tax purpose we limit the scope of perquisites to the benefits received in kind and which are convertible in terms of money. Perquisites received in cash are termed as allowances for income tax purpose. The following facts can be withdrawn from the above discussion :1 2 3 It denotes something that benefits a man by going into his own pocket, reimbursement of expenses is not covered in the perquisites. It is allowed by the employer to the employee during the employment for the personal advantage of the employee. It needs not to be recurring in nature a single receipt can also be perquisite provided all the conditions are fulfilled.
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SOME SPECIAL POINTS TO BE REMEMBERED Perquisites are included in salary income only if they are received by an employee from his employer (may be former, present or prospective). Perquisites received from a person other than employer, are taxable under the head of Profits and Gains of Business or Profession or Income from Other Sources A benefit or advantage would be taxable as perquisite only if it has a legal origin. As unauthorised advantage taken by an employee without his employers authority cant be termed as perquisite.
TAXABILITY OF PERQUISITES
For income tax purpose, perquisites may be divided into three categories :I. II. III. Perquisites which are taxable in the hands of all categories of employees. Perquisites, which are taxable only in the hands of, specified employees. Tax free perquisites. Perquisites
Fully Taxable Perquisites
(III) Tax Free Perquisites
(I) Taxable in the hands of all Employee I. 1 2 3 4 5
(II) Taxable in the hands of Specified Employees
Perquisites which are taxable in the hands of all categories of employee :Rent free accommodation provided by the employer to the employee. Such accommodation may be furnished or unfurnished. Any concession in the matter of rent in respect of the accommodation provided or granted by the employer to the employee. Any sum paid by the employer in discharging the monetary obligation of the employee which otherwise would have been payable by the employee e.g. the school fees of the children of the employee paid by the employer or the income tax of the employee paid by the employee. Any sum payable by the employer whether directly or through a fund (other than RPF, Approved Superannuation Fund or Deposit Linked Insurance Fund) to effect an assurance on the life of the assessee or to effect a contract for an annuity. The value of any other fringe benefit or unit as may be prescribed.
1. Valuation of rent-free unfurnished accommodation [section 17(2)(i)] :- In this case employer provided accommodation to the employee at free of rent. It is taxable as follows.
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Perquisites
Unfurnished House
Furnished House = Unfurnished House + Value of Furniture
A. In case of Government employees :- This category includes the central and state government employees. Following conditions should be satisfied to come in this category: Employees of a local authority or a foreign government are however not covered by this category but in the residual category, i.e. other employees. a) The accommodation is provided by the union or a state government; and b) Such accommodation is provided to their employees either holding office or post in connection with the affairs of the union or state government. Valuation of rent-free unfurnished accommodation :In this case taxable value of rent free unfurnished accommodation is equal to license fee which would have been determined by the central or state government in accordance with the rules framed by the government for allotment of houses to its officers. Exception :- It may be mentioned that rent free official residence provided to a judge of a high court under section 22A(1) of the high court judges (conditions of service) Act, 1954, or to a judge of the supreme court under section 23(1) of the supreme court judges (conditions of service) Act, 1958 is exempt from tax. A similar exemption is available to an official of parliament, a union minister and a leader of opposition in parliament. B. In case of semi government or private employees :- Under this category are covered those employees who do not fall under the first category. Basis of valuation of Rent Free Accommodation is given below Population of the city as per 2001 census where accommodation is provided Upto 10 Lakhs Where the accommodation is owned by employer 7.5% of salary in respect of the period during which the accommodation is occupied by the employee 10% of salary in respect of the period during which the accommodation is occupied by the employee Where the accommodation is taken on rent or lease by the employer Actual lease rent paid or payable OR 15% of salary, which ever is less. Same as above
Exceeding 10 Lakh but not exceeding 25 Lakh
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Exceeding 25 Lakhs
15% of salary in respect of period during which the accommodation is occupied by the employee.
Same as above
C. Valuation of rent-free furnished accommodation :- In the case of furnished accommodation, first presume that the accommodation is unfurnished and then work out the valuation according to the method explained above. To the figure, so arrived at, added :a) 10% P.A of the original cost of furniture, if furniture is owned by the employer. b) Actual hire charges payable (whether paid or payable), if the employer hires furniture. Meaning of Furniture :- Here furniture means radio set, television set, refrigerator, air conditioner and other household appliances. D. In case Accommodation provided in a hotel (Whether Government or private employees) :- In case of accommodation provided in a hotel, the perquisite shall be calculated @ 24% of salary paid or payable for the previous year or actual charges paid or payable to such hotel, which ever is lower, for the period during which such accommodation is provided. However accommodation provided in a hotel is not treated as a taxable perquisite if the following two conditions are satisfied :a) The hotel accommodation is provided for a total period of not exceeding in aggregating 15 days in a previous year, and b) Such accommodation is provided on an employees transfer from one place to another place. E. Accommodation provided at the time of transfer :- Where on account of transfer of the employee from one place to another place, he is provided accommodation at new place of posting while retaining the accommodation at other place, the value of the perquisite shall be determined with reference to only one such accommodation which has lower value for a period not exceeding 90 days and thereafter the value of the perquisite shall be chargeable for both accommodation. F. Accommodation provided at site Where the accommodation is provided to an employee working at a mining site or an onshore oil exploration site or a project execution site (upto the stage of commissioning the project) or a dam site or a power site or an off-shore site which : Being temporary nature and having plinth are not exceeding 800 square feet, is located not less than eight kilometer away from the local limits of any municipality or cantonment board or Is located in a remote area.
SPECIAL NOTE
:- The value of such accommodation shall be taken as Nil.
For this meaning of salary, it does not include :- D.A. or D.P., which does not, enters into pay for service benefit, employers contribution to provident fund, all allowances which, are exempted from tax and value of perquisite u/s 17(2), any advance salary or arrears of salary. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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SALARY FOR RENT-FREE ACCOMMODATION INCLUDES Basic salary; Dearness allowance/pay, which enters into pay for service benefit. Bonus, i.e. statutory bonus; Commission, any from employer Fees All other taxable allowances. Any monetary payment, which is chargeable to tax not as perquisite, like Leave Encashment pertaining to the current year & Un-commuted Pension (not being a perquisite) taken into consideration.
SOME SPECIAL POINTS TO BE REMEMBERED WHILE CALCULATING RFA While calculating salary for RFA, basic salary, D.A. which enters, bonus etc. are taken on accrual basis. For instance advance salary of a period other than previous year is not included even if the same is received in the previous year. Similarly salary due in the previous year is included even if the same is received after the end of the previous year. Salary from all employers in respect of the period during which accommodation provided will be taken into consideration. (But this is not happened in case of House Rent Allowance.) The perquisite in respect of accommodation located in remote area provided to an employee working in mining site or an onshore oil exploration site or an accommodation provided in an offshore site of similar nature is not chargeable to tax. Accommodation includes a house, flat, farm house or pert thereof, or accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure. Hotel also includes licensed accommodation in the nature of motel, service apartment or guest house. If nothing is given about the population then we can assume that it is a city having population more than 25 lacs (Vadda City). He is provided with a rent-free accommodation in Delhi. The cost of the furniture provided is Rs.1,00,000 and two air-conditioners, which have been taken on hire by the company have also been provided in the accommodation. Compute the value of the rent-free accommodation if the accommodation is provided by: (i) The Government and the value of the accommodation as per government rules is Rs. 500 p.m. (ii) Reserve Bank of India and the accommodation has been taken on rent by RBI at Rs. 5.000 p.m. (iii) XYZ Ltd. and the accommodation has been taken on rent by the company at Rs. 5.000 p.m. Solution :(i) Accommodation provided by Government to its employee :- The perquisite value shall be the e value of the accommodation as per government rules which in this case is Rs. 500 p.m. Therefore, the value of the accommodation shall be :Value of furnished accommodation (500 x 12) 10% of the cost of furniture of Rs. 110000 Hire charges of two Acs :::6,000 11,000 4,000 14,000 20,000
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(ii)
Accommodation provided by RBI or XYZ Ltd :- In this case, the perquisite value shall be 15% of the salary or rent paid by RBI/ the company, whichever is less. Salary for this purpose shall include the following :Basic Salary Dearness allowance (Enter Lunch Allowance Medical Allowance City Compensatory Allowance Children Education Allowance (460-200) Monthly Salary for the purpose of RFA :::::::12,000 400 200 500 300 260 13,660
The perquisite value of unfurnished accommodation shall be Rs. 2049 (13660 x 15%) or Rs. 5,000 whichever is less. Therefore, the perquisite value of the furnished accommodation shall be as under: Perquisite value of unfurnished accommodation (2049 x12) Perquisite value of furniture (as calculated in the case of Govt. Employees) :::24,588 14,000 38,588
Illustration :- A, is working as a General Manager of P Company Limited. Particulars of his salary for the financial year 2011-12 are as under: Salary Bonus Conveyance allowance (70% spent on official duties) Medical Allowance Employers contribution to Recognized provident fund :::::11,000 p.m. 19,200 p.m. 2,000 p.m. 500 p.m. 20% of salary
He has been provided with a rent free accommodation in Delhi. Compute the value of rent free accommodation to be included in the salary income of A for the assessment year 2010-10, if :(a) The accommodation is owned by the company; (b) The accommodation has been taken on rent by the company at Rs.7,000 p.m.
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Solution :Calculation of Salary for valuation of rent free accommodation Basic Salary Bonus Taxable conveyance allowance (24,000-16,800) Medical Allowance Total Salary for the RFA 15% of salary Rent paid by the company :::::::1,52,400 1,20,000 19,200 7,200 6,000 152400 :- 22,860 84,000
(a) The value of unfurnished accommodation in this case shall be 15% of the salary i.e. Rs. 22,860. (b) The value of unfurnished accommodation in this case shall be 15% of the salary i.e. Rs. 22,860 or the rent paid by the company i.e. Rs. 84,000 whichever is less. The perquisite value shall thereof, be Rs. 22,860. Illustration :- R submits following information regarding his salary income for the year 2011-12. Basic Salary D.A. (40% of salary fully enter) CCA Children education allowance Transport allowance :::::15,000 p.m. 300 p.m. 200 p.m. (per child for 2 Children) 1,000 p.m.
He is provided with a rent free unfurnished accommodation which is owned by the employer. The fair rental value of the house is Rs.24,000 p.m. Compute the gross salary assuming :(a) Accommodation is provided in a city having population is less than 11,00,000 as per 2001 census. (b) Accommodation is provided in a city having population is between 11,00,000 and 25,00,000 as per 2001 census. (c) Accommodation is provided in a city having population exceeding 25,00,000 as per 2001 census. Solution Computation of gross salary (for the assessment year 2011-12) If accommodation is in city where Population does not Population is Population exceed 10,00,000 between 10,00,000 exceeds & 25,00,000 25,00,000 1,80,000 1,80,000 1,80,000 72,000 72,000 72,000 3,600 3,600 3,600 2,400 2,400 2,400
Basic Salary DA CCA Children Education Allowance
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(4,800-2,400) Transport Allowance [12,000-9,600] Salary for RFA Value of rent-free unfurnished Accommodation Gross salary
2,400 2,60,400 19,530 (7.5% of 2,60,400) 2,79,930
2,400
2,400
2,60,400 2,60,400 26,040 39,060 (10% of 2,60,400) (15% of 2,60,400) 2,86,440 2,99,460
2. Valuation of accommodation provided at concessional rent [section 17(2)(ii)] :- In the case an accommodation provided to an employee at concessional rent, the valuation will be made as if the employee had been provided rent-free accommodation and the amount so computed will be reduced by the rent payable by the employee. 3. Valuation of monetary obligation of the employee discharged by the employer :- As stated earlier, wherever any monetary obligation of the employee is discharged by the employer which otherwise would have been payable by the employee, it is considered as perquisite and is taxable in the hands of all employees, e.g. if the employee engages a watchman and the salary of the watchman is paid by the employer then it is perquisite taxable in the hands of employee. The value of these perquisites is the actual expenditure incurred by the employer in this regard. Few other examples of monetary obligations are given below: a) b) c) d) Gas, electricity bill paid or reimbursed; Children education expenses paid or reimbursed; Medical expenses reimbursed in excess of Rs. 15,000; Income tax or professional tax paid by employer;
In all the above cases, the value of such monetary obligation shall be the actual amount spent by employer in this regard and it shall be taxable whether the employee is specified employee or any other employee. 4. Valuation of life insurance premium/deferred annuity premium paid/payable by the employer :On the life of employee or any member of his family is paid by employer is fully taxable. But accident insurance premium paid by employer for his own benefit is not taxable. ULIP paid by the employer is also fully taxable. SOME SPECIAL POINTS TO BE REMEMBERED Only Life Insurance, Ulip or Deferred Insurance is fully taxable. Any other insurance as Group Insurance, Mediclaim Insurance, Accidental Insurance is not taxable. Once the amount of insurance is included in the salary as perquisite, this amount is also eligible for the deduction u/s 80(C). It may be noted that in this case the amount become taxable as soon as it becomes due for payment. Actual payment during the year is not necessary. For example, if as per the terms of employment, the life insurance premium of A is to be paid by his employer and the premium become due on 25-032011 but is paid on 11-04-2011 it shall be a taxable perquisite for the previous year 2010-2011. 5. Valuation of fringe benefit or amenities [new rule 3(7)] :- With effect from assessment year 2010-11, a new section 115WM is inserted to abolish the Fringe Benefit Tax. Following are the Fringe Benefits which are taxable in the hands of all employee. 1. Benefit resulting from the provisions of interest free or concessional loan. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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2. Use of moveable assets. 3. Transfer of any moveable assets. 4. Motor Car 5. Automatic conveyance 6. The value of traveling, touring, accommodation 7. Value of free meals, tea and snacks [rule 3(7)(iii)] 8. Value of any gift, voucher or token [rule 3(7)(iv)] 9. Expenses on credit card [rule 3(7)(v)] 10. Club membership and expenses incurred in a club [rule 3(7)(vi)] 11. Any other perquisite 1. Interest free or concessional loans :1. Interest free loan taken by the employee for any purposes is taxable and taxable value will be the amount calculated at rates prescribed by the State Bank Of India for its loans as on 1-4-2010. 2. In case loan is taken at concessional rate of interest for any purposes, the taxable value shall be the amount at the rate, which is difference between the rate prescribed by SBI for its loan as on 1-4-2010 and actual rate of interest charged by employer. 3. If loan is taken for medical treatment or notified illness, the interest is fully exempted. But if any amount is received from insurance company, such amount is treated, as loan and it shall be taxable as per the above manner. 4. If total amount of loan does not exceed Rs. 20,000 then also the interest is fully exempted. 5. Interest shall be calculated at maximum outstanding monthly balance and shall be reduced by any amount of interest paid by employee (or any such member of his household). 6. Even outstanding loan taken earlier will be covered under this provision. 7. SBI lending rates as on 1-4-2010, for the assessment year 2011-2012 are as follows: Type of Loan Housing Loan Duration Up to 5 years Above 5 but up to 11 years Above 11 but up to 15 years Above 15 but up to 25 years Up to 3 years (Rs. 7.5 Lacks & above) Up to 3 years (below Rs. 7.5 Lacks) Above 3 years but up to 5 years Above 5 years but up to 7 years Loan amt. up to Rs. 4 lacs Loan amt. above Rs. 4 lacs Rate Applicable 8% p.a. 8% p.a. 8% p.a. 8% p.a. 8% p.a. 8% p.a. 8% p.a. 8% p.a. 15.75% p.a. 11.25% p.a. 12.75% p.a., 11.75% p.a. 16% p.a. 14% p.a.
Car Loan
Two Wheeler Loan Education Loan Personal Loan Loans to Employees to subscribe ESOP
2. Use of moveable assets [rule 3(7)(vii)] :The value of the benefit resulting from the use by the employee or any member of his household of any moveable assets belonging to the employer or hired by him shall be determined as under :-
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Circumstances Value of the benefit NIL a) Use of laptops and computers. b) Moveable assets other than i. 10 % P.A. of the actual cost of asset Or laptops and computers ii. The amount of rent charges paid or payable by the employer, as the case may be. SOME SPECIAL POINTS TO BE REMEMBERED The amount mentioned in clause (b) shall be reduced by the amount, if any paid by the employee to the employer. The value of perquisite for an asset used for more than ten years would be taken as Nil.
3. Transfer of moveable assets :- The value of the benefit to the employee arising from the transfer of any moveable asset belonging to the employer directly or any member of his household shall be Determined as under :Assets transferred Value of benefit a) Computer and Actual cost of such asset to the employer as reduced by 50% of the WDV to the electronic items # employer for each completed year during which such asset was put to use by the employer, on the basis of reducing balance method b) Motor cars Actual cost of such asset to the employer as reduced by 20% of the WDV to employer for each completed year during which such asset was put to use by the employer, on the basis of reducing balance method. c) Any other asset Actual cost of such asset to the employer as reduced by 10 % of the cost to employer for each completed year during which such asset was put to use by the employer, on the basis of straight-line method. SOME SPECIAL POINTS TO BE REMEMBERED The amount mentioned in clause (a), (b) and (c) above shall be reduced by the amount, if any paid by the employee being the consideration for such transfer. Telephone sets are always exempted perks. If the employer has given any moveable asset to the employee free of cost/as gift, it will not be taxable in the hands of the employee rather employer has to pay fringe benefit tax. # Electronics items in this case means data storage and handling devices like computer, digital diaries and printers. They do not include house-hold appliances like washing machines, microwave ovens, Example for the above mentioned point Asset Original Cost Date of Purchase by the employer Date of putting to use Date of sale of asset to the Furniture 75,000 08-03-2005 31-03-2005 01-08-2010 Microwave oven 25,000 01-07-2007 01-07-2007 01-04-2010 Motor Car 2,40,000 11-08-2006 11-08-2006 01-08-2010 Washing Machine 20,000 01-11-1998 01-11-1998 31-12-2010 Computer 55,000 01-01-2006 11-01-2006 10-01-2011
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employee Payment made by the employee Perquisite value 4. MOTOR CAR :-
25,000 20,000
Gift to employee 15,000
95,000 79960
1,000 Nil
30,000 Nil
Value of Perquisite (A) If Car is owned or hired by the employer (A1) All expenses are borne by the employer (A2) Expenses for Personal Use are borne by the employee (B) If Car is owned or hired by the employee (B1) All expenses are borne by the employer (B2) Expenses for Personal Use are borne by the employee
(A) If car is owned or hired by the employer :(A1) All expenses are borne by the employer :a) If the car is used exclusively for employment purposes :- Fully exempted. b) If the car is used only for private purposes :- Then actual expenditure on running and maintenance of the car incurred by the employer are fully taxable. This also includes driver / chauffeurs salary if provided by the employer and normal depreciation of the car, i.e. @ 11% p.a. on actual cost of the car to the employer or hire charges, if car is taken on hire.
SPECIAL POINTS TO BE REMEMBERED
From the above value, if any amount paid/payable by the employee to the employer it shall reduced and balance shall be the taxable value of the perk. In case of hired car, depreciation cannot be considered, as the replacement of the same is not the responsibility of the employer. c) If the car is used both for employment as well as personal purposes and note book is not maintained, then the taxable value is as under :Expenses met By the employer If Chauffer is also provided Up to 1.6 lt. or 1600 CC Cubic capacity engine Rs. 1,800 per month. Rs. 900 per month. More than 1.6 Lt. or 1600 CC cubic capacity Rs. 2,400 per month. Rs. 900 per month.
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SOME SPECIAL POINTS TO BE REMEMBERED
Nothing is deductible in respect of any amount recovered from the employee. If car is provided for part of the month, nothing is taxable for that month.
(A2) Expenses for Personal Use are borne by the employee :a) If the car is used exclusively for employment purposes :- Fully exempted. b) If the car is used only for private purposes :- Normal depreciation of the car, i.e. @ 11% p.a. on actual cost of the car to the employer or hire charges, if car is taken on hire.
From the above value, if any amount paid/payable by the employee to the employer it shall reduced and balance shall be the taxable value of the perk. In case of hired car, depreciation cannot be considered, as the replacement of the same is not the responsibility of the employer.
c) If the car is used both for employment as well as personal purposes and note book is not maintained, then the taxable value is as under :Expenses met By the employer If Chauffer is also provided Up to 1.6 lt. or 1600 CC Cubic capacity engine Rs. 600 per month. Rs. 600 per month. More than 1.6 Lt. or 1600 CC cubic capacity Rs. 900 per month. Rs. 600 per month.
Nothing is deductible in respect of any amount recovered from the employee. If car is provided for part of the month, nothing is taxable for that month. (B) If car is owned or hired by the employee :(B1) All expenses are borne by the employer :a) If the car is used exclusively for employment purposes :- Fully exempted.
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b) If the car is used only for private purposes :- Then actual expenditure on running and maintenance of the car incurred by the employer are fully taxable.
It will be fully taxable in case of all employees i.e. whether specified or non-specified. (Because personal obligation of employee met by employer) From the above value, if any amount paid/payable by the employee to the employer it shall reduced and balance shall be the taxable value of the perk. This also includes driver / chauffeurs salary if provided by the employer In case of hired car, depreciation cannot be considered, as the replacement of the same is not the responsibility of the employer. c) If the car is used both for employment as well as personal purposes and note book is not maintained, then the taxable value is as under :Actual expenditure by the employer Less :Amount calculated at the rates as above (Like up to 1600 CC or more than 1600 CC) Any amount recovered from the employee Taxable value of perquisite ::::xxxx xxxx xxxx xxxx xxxx
(B2) Expenses for Personal Use are borne by the employee :Fully Exempted Perquisite
Car facility between office and residence :- The use of motor car by an employee for the purpose of going from his residence to the place where the duties of employment are to be performed or from such place back to his residence is not chargeable to tax. Where more than one cars are provided :- Where more than one car are provided for official as well as private purposes one car will be taxable as per table given above and for that other car taxable value will be the actual expenses incurred by employer. Employers which are covered for this perquisite :- This perquisite is taxable only in the case of the following employer which are as follows :- Individual, Hindu Undivided Family, Government, Political Party, Charitable Institute. (It means in case of Company and Firm this perquisite is not taxable because these employers has to pay the Fringe Benefit Tax) Car is taxable in case of specified employees only when car is owned by employer. But in case the car is owned by employee then (if it is taxable) taxable in case of all employees, whether specified or non-specified.
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5. AUTOMATIC CONVEYANCE :A. When employee owns any automatic conveyance (other than motor car) and running and maintenance expenses are met or reimbursed by the employer :a) If it is used wholly for official purposes :- Fully exempted. b) If it is used wholly for private purposes :- Fully taxable. c) If it is used partly for official and partly for personal purpose :- Actual expenditure incurred by the employer as reduced by Rs. 600 per month or higher amount, if the employee claim attributable to the official duty is more than Rs. 600. Also deduct amount recovered from employee. 6. The value of traveling, touring, accommodation and any other expenses paid for or borne or reimbursed by the employer for holiday availed of by the employee or any member of his household [section 3(7)(ii)] :Circumstances Value of the benefit a) Where such facility is maintained by the It will be the value at which such facilities are employer, and is not available uniformly to all offered by other agencies to the public. employees. b) Where the employee is on official tour and the expenses are incurred in respect of any member of his household accompanying him. c) Where any official tour is extended as a vacation The amount of expenditure so incurred only for the family members, and not for the employees.
The value will be limited to the expenses incurred in relation to such extended period of stay or vacation d) In any other case, where such facility is given to A sum equal to the amount of expenditure incurred the employee or any member of his household. by the employer.
SPEICAL NOTE :-
However in the above all cases, the amount determined should be reduced by the amount, if any paid by the employee for such benefit or amenity. The above rule shall not be applicable in case of LTC. 7. Value of free meals, tea and snacks [rule 3(7)(iii)] :Circumstances a) Tea or snacks provided during office hours b) Free meals during office hours provided in a remote area or an offshore area c) Free meals provided by the employer during office hours at office or business premises or through paid vouchers which are not transferable and usable at eating joints d) In any other case Value of benefit NIL NIL NIL, if the value thereof in either case is up to RS. 50 per meal, and excess will be taxable Actual amount of expenditure incurred by the employer as reduced by the amount, if any paid be the employee for such benefit.
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8. Value of any gift, voucher or token [rule 3(7)(iv)] : Remote areaof any gift orlocated at or token in lieu of whichasuch gift may be population of 20,000 of The value means area voucher least 40 km away from town and has a received by the employee less or offshore installation. or member of his household on ceremonial occasion or otherwise shall be determined as sum equal to the Tea and similar non-alcoholic beverages and snacks in the form of light refreshment during working amount of such gift. hours are not charges as perquisite. gift or voucher or token, as the case may be, is below Rs. 5,000 in However where the value of such aggregate as regards free meals, expenditure onof perquisite shall meals by the nil. If the in excess is in Further, during the previous year, the value provision of free be taken as employer amount of the 50 should only be treated as excess shall reduced by excess of Rs. 5,000 then only the perquisite, as be taxable. recoveries made from the employer. Working hours include extended office hours. (like working on holidays, overtime) If the NOTE :- Gift must be in kind, i.e. if the gift is init will be very difficult to or cash voucher then SPECIAL employer runs a canteen on a permanent basis, the form of cash, cheque work out whether the cost per meal is Rs. it will be fully taxable. 50 or more so in such cases it will be right to assume that there will be no perk. Lunch or tiffin or refreshment allowance is always fully taxable. 9. Expenses on credit card [rule 3(7)(v)] :Circumstances Value of benefit a) Where expenses including membership fees and annual fees are incurred by The amount paid for or the employee or any member of his household, which is charged to a credit reimbursed by the card including and add-on-card), provided by the employer or otherwise, or employer paid or reimbursed by the employer and such expenses are incurred for any purposes other than mentioned under clause (b) below b) Where such expenses are incurred wholly and exclusively for official NIL purposes
SPECIAL NOTE
:- The amount so determined under clause (a) shall be reduced by the amount, if any paid or recovered from the employee for such benefit. Specified conditions to be fulfilled to claim that expenses have been incurred wholly and exclusively for official purposes : Complete details in respect of such expenditure is maintained by the employer which may, inter alia, include the date of expenditure and the nature of expenditure. The employer gives a certificate to the effect that the expenditure was incurred wholly and exclusively for the performance e of official duties. 10. Club membership and expenses incurred in a club [rule 3(7)(vi)] :Value of the benefit Circumstances a) The payment or reimbursement by the employer of any expenditure incurred (including amount of annual or NIL periodical fees) in a club by the employee or any member of his household, exclusively for official purposes of employer b) Where such expenses are for purposes other than official The actual amount of expenditure purpose incurred or reimbursed by the employer B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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Where the employer has obtained corporate membership of the club and the facility is enjoyed by the employee or any member of his household, the value of the perquisite shall not include the initial fees paid for acquiring such corporate membership. There shall be no perquisite value for the use of health club, sports and similar facilities provided uniformly to all employees by the employer. The amount so determined in clause (b) shall be reduced by the amount paid by the employee for such benefit. 11. Any other perquisite ;- Any other benefit or amenity, serice, right or privilege provided by any employer (whether subject to the fringe benefit tax or not) will be chargeable to tax from the assessment year 2011-12. However, nothing is taxable in respect of expenses on telephones including a mobile phone actually incurred on behalf of the employee by the employer. The value of benefit, amenity, service, right or privilege shall be determined on the basis of cost to the employer under an arms length transaction as reduced by the employees contribution. II. Perquisites which are taxable only in the hands of specified employees :-
All monetary obligations of the employee discharged by the employer are perquisites which are taxable in the hands of all employees. But sometimes the employer, instead of making the payment in respect of such monetary obligations or reimbursing such amount to the employee, provides the perquisites in the form of a facility to the employees mentioned in section 17(2)(iii). For example, if a motor car is owned by the employee and expenses of running and maintenance for personal use of the car by the employee is met or reimbursed by the employer, it is a perquisite for all employees as it was a duty of the employee to meet his own expenses. On the other hand, if the care is provided by the employer, it will be a perquisite for the specified employee as in this case, a facility of motor car is provided. In other words we can say that any benefit / amenity in the form of a facility (other than rent free accommodation, concession in the matter of rent or fringe benefits or amenities as may be prescribed) provided by the employer, which is not tax-free, shall be taxable only in the hand of specified employees. Some examples are as follows : Service of Sweeper, Gardner, Watchman or Personal Attendant. Free of Concessional use of Gas, Electric Energy and Water for Household Consumption. Free or Concessional Education Facility. Free or Concessional Personal or Private Journey. Who is Specified employee ? Now the question arises that who is specified employee? An employee will be termed as specified employee if he falls under any of the following three categories :A. Directors employee :- An employee of a company who is also a director of the company is specified employee. It is immaterial whether he is a full time director or part time director. It also does not matter whether he is a nominee of the management, workers, financial institutions or the Government. It is also not material whether or not he is a director throughout the previous year. B. An employee who has substantial interest in the company :- An employee of a company who has substantial interest in that company is a specified employee. A person has a substantial interest in a B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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company, if he is a beneficial owner of equity shares carrying 20% or more of the voting power in the company. Beneficial and legal ownership :- In order to determine whether a person has a substantial interest in a company, it is rather the beneficial ownership of equity shares carrying 20% or more of the voting power that is relevant rather than the legal ownership. Example :- A, Karta of a HUF, is a registered shareholder of Avon Ltd. The amount for purchasing the shares is financed by the HUF. The dividend is also received by the HUF. Supposing further that a is the director in Avon Ltd., the question arises whether he is a specified employee. In this case, he cannot be called, a specified person since he has no beneficial interest in the shares registered in his name. It is only for the purpose of satisfying the statutory requirements that the shares are registered in the name of A. All the benefits arising from the shareholding goes to the HUF. Conversely, it may be noted that an employee who is not a registered shareholder will be considered as a specified employee if he has beneficial interest in 20% or more of the equity shares in the company. C. Employee monetary earnings in excess of Rs. 50,000 :- If the income of the employee under the head salaries (whether due from or paid or allowed by the one or more employer), excluding the value of all benefits or amenities not provided for by way of monetary payment exceeds Rs. 50,000. Income, for this purpose shall include all taxable monetary payments like, Basic salary, dearness allowances, bonus, commission, taxable allowances/perquisites but shall not include the value of any non-monetary benefits/perquisites. The standard deduction and deduction for entertainment allowance and deduction towards professional tax are also to be deducted from salary for this purpose. SOME SPECIAL POINTS TO BE REMEMBRED Ram is a director in A Ltd. but not in B Ltd. then he is a specified person for A Ltd and not for B Ltd. Ram holds 20% shares in A Ltd but not in B Ltd. then he is a specified person for A Ltd and not for B Ltd. Ram gets 35,000 monetary salary from A Ltd. and 25,000 monetary salary from B Ltd now he become specified for both the companies because though the individual salary does not exceed from 50,000 from any company but the sum total of the salary from both of the companies become more than 50,000. (35,000 + 25,000 = 60,000)
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Specified Employee
Director of Co. Director may be whole time or part time. Director may be even for a single day. Example :A Ltd. :- Director B Ltd. :- Not Director In this case person is specified for A Ltd. but not for B Ltd.
Substantial Interest in Co The assessees must have owned 20% equity shares (Which have voting right) in the company. For this purpose the shares owned by all the relatives have to be considered. Example :Own :- 15% in A Ltd. Spouce. :- 17% in A Ltd. In this case person is specified for A Ltd. Example :A Ltd. :- 15% B Ltd. :- 17% In this case person is specified neither for A Ltd. nor for B Ltd.
Monetary Salary Exceeds 50000 Assessees salary in cash (not in kind) is to be more than 50000. Salary from all employers has to be considered. Example :A Ltd. :- 30000 B Ltd. :- 40000 In this case person is specified for both A Ltd. and B Ltd.
12. Free services of sweeper, a gardener, a watchman or personal attendant :When employer pays/reimburses wages of servant employed by employee (perquisite for all employees) Sweeper, Actual wages paid is taxable Domestic Actual wages paid is taxable When servant is provided by the employer (perquisite only for employees) Actual wages paid is taxable Actual wages paid is taxable
Gardner, Watchman Any other Servant
13. Free Gas, electricity or water supply :Circumstances Value of Perquisite Where such supply is made from resources owned by the Manufacturing cost per unit incurred employer (without purchasing from any other outside agency) by the employer In any other case Amount paid by the employer
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SOME SPECIAL POINTS TO BE REMEMBERED If gas, electricity or water supply connection is taken on the name of employee and bills for these are paid or reimbursed by the employer, perquisite is taxable with the amount so paid by the employer in case of all employee i.e. u/s 17(2)(iv). However in both cases if employee is paying any amount in respect of such services, the amount so paid shall be deducted from the aforesaid values. 14. Valuation of perquisite in respect of free education :- Basis of valuation is explained below -: Circumstances Training of employee Fixed education allowance Value of Perquisite Fully exempt from tax. As discussed earlier
Where the education Cost of education in a similar institution in or near locality. institution is itself maintained and owned by Note :- But if education facility provided to the children of the the employer. employee the there will be exemption of Rs. 1000 per month per child. In any other case Amount of expenditure incurred by the employer. SOME SPECIAL POINTS TO BE REMEMBERED If bills are issued in the name of the employee and paid by the employer then the perquisite is taxable in the hands of all employees whether specified or non- specified. However from each of the above case if any amount paid by employee to the employer will be reduced out of the value of perquisite. 15. Scholarship :- Scholarship given by the employer company to the children of employee solely at its discretion without reference to terms of employment is not as assessable as perquisite in the hand so employees so it will be fully exempted. III. Tax free perquisites. 1. Free medical facilities or reimbursement of medical expenditure :Circumstances Hospital owned and maintained by the employer Hospital owned, maintained or approved by the Govt. or local authority Hospital approved by the Chief Commissioner Employer paid medical insurance premium of the employee paid under a scheme approved by the government In case a private or unrecognized hospital Value of Perquisite Fully exempted all types of the diseases. Fully exempted all types of the diseases. Fully exempted only specified diseases. Fully exempted from tax. Exempt upto Rs. 15,000 per annum.
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Medical facility outside India ;Circumstances Value of Perquisite In case treatment taken Then expenses on stay and treatment of the patient and expenses on the stay from outside India of one attendant is exempted up to the amount allowed by the RBI, and excess if any shall be taxable Expenses on travel of These shall be exempted if gross total income of employee does not exceed patient and attendant Rs. 2,00,000 p.a. otherwise taxable. SOME MORE SPECIAL POINTS TO BE REMEMBERED While calculating gross total income of Rs. 2,00,000 p.a. the total income of all the five heads is to be clubbed before making any deduction u/s 80(c) to 80(u) The taxable part of the expenses relating to stay and treatment will not be considered while calculating salary income for the above purpose. SOME MORE SPECIAL POINTS TO BE REMEMBERED Any medical allowance given by the employer is fully taxable irrespective of the actual expenses which might have been incurred by the employee on medical treatment. Family for this purposes means the spouse, the children, of the employee, children may be dependent or independent, married or unmarried, but parents, brothers and sisters of the employee who are wholly dependent of such employee. If expenditure has been incurred by the employer on the treatment of any other person like mother in law, father in law, independent father etc. then this facility is fully taxable. Hospital includes dispensary, a clinic, a nursing home. Example for the above mentioned point Particulars Mr. A Mr. B Son Mother 2,000 7,000 20,000 5,000 2,000 3,000 20,000 10,000 4,000 23,000
Treatment of
Medical Allowance Expenditure on treatment through a private doctor Expenditure of Govt. Hospital for the treatment of self Reimbursement of Medical Expenditure in a Private Hospital for treatment of Self Taxable value of Perquisite
Mr. C Mr. D Son-InDependent Law Brother 4,000 1,000 10,000 2,000 9,000 6,000 7,000 14,000 15,000 2,000
2. Refreshments :- Fully exempt in the hands of employee 3. Recreational facilities :- Any recreational facility provided to a group of employees by the employer is not taxable. 4. Loans to employees :- In the following case the value of benefits to the assessee resulting from the provisions of interest free or concessional loans shall be nil: a) Where the amount of loan are petty, not exceeding in the aggregate Rs. 20,000; B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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b) Loans made available for medical treatment in respect of decreases specified in Rule 3A of the Income tax Rule. However, the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme. 5. Perquisites provided outside India :- Perquisites provided by the government to its employees, who are the citizens of India for rendering services outside India are not taxable u/s 10(7). 6. Training of employees :- Any expenditure incurred by the employer, for providing training to the employees or by way of payment of fees of refresher courses attended by the employee, would not be taxable, because these enable the employees to perform their services more efficiently. Such expenses may include boarding and lodging expenses of the employees for such purposes. 7. Rent-free house/conveyance facility :- Rent free official residence and conveyance facility provided to a judge of supreme court/high court is not taxable perquisite. 8. Residence to official of parliament, etc :- rent free furnished residence (including maintenance thereof) provided to an officers of the parliament, a union minister or leader of opposition in parliament, is not taxable perquisite. 9. Accommodation in remote area :- there would be no perquisite value in respect of any accommodation located in a remote area provided to an employee working at a mining sites or an onshore oil exploration site, or a project executing site or an accommodation provided in an offshore site in similar nature. 10. Education facility for children of employee :- Where the educational institution itself is maintained and owned by the employer and free educational facilities are provided to the children of the employee or where such free educational facilities are provided in any institution by reasons of his being in employment of that employer, there shall be no perquisite value if the cost such education or the value of such benefit or child does not exceed Rs. 1,000 per month. 11. Use of health club, sports and similar facility provided uniformly to all employees by the employer. 12. Use by the employee or any member of his household of laptops and computer belonging to the employer or hired by him. 13. Expenses on telephone, including a mobile phone, actually incurred on behalf of the employee by the employer. 14. Employers contribution :- Employers contribution to pension, deferred annuity scheme and staff group insurance scheme of employee, is not taxable perquisites in the hands of employees. 15. Leave Travel Concession (LTC): [u/s 10(5)] :- Sometimes the employer may permit the employee or his family members to go to ant place in India and traveling expenditure are incurred by the employer, such facility is called Leave Travel Concession or Leave Fare Concession.
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Computation of Exemption :Circumstances If journey performed by air If the journey is performed by rail If journey performed by road Amount of Exemption Amount of air economy fair of the national carrier by the shortest route or actual amount spent which ever is less. Amount of first class A.C. slipper fair by the shortest route or actual amount spent which ever is less. Bus fair of first class or deluxe bus fair on such transport by shortest route or the actual amount spent which ever is less.
Ceiling on number of journeys :The exemption shall be available to an individual two times in a block of four calendar years starting from calendar year 1986. Carry forward of leave travel concession :If the employee has not availed any leave travel concession or has availed only one LTC during a particular block, carry forward shall be allowed but only for one LTC and such leave travel concession must be availed during very first year of the next block otherwise LTC shall lapse. Meaning of family :Family, shall include :P The spouse and children of the individual and P The parents, brothers and sisters of the individual and sisters of the individual or any of them, wholly or mainly dependent on such individual. P The exemption shall no be available to more than two surviving children of an individual after 1st October, 1998, but this rule is not applicable in respect of children born before 1st October, 1998. P Multiple birth is treated a single child. Calculation of the taxable amount out of leave travel concession :Total Amount Received Actual Exp. or Exp. by Shortest Route (Whichever is Less) Taxable Value of LTC :::xxxx xxxx xxxx
Less
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The quantum of exemption is limited to the actual expenses incurred on the journey. In other words, without performing any journey and incurring expenses thereon, no exemption can be claimed. The exemption can be availed for the journey undertaken while on leave during the tenure of service or even after retirement/termination of service. It is not necessary that the family members of the employee should perform journey along with the employee concerned. The exemption is strictly limited to expenses on air fare, rail fare, bus fare only. No other expenses, like scooter charges at both ends, porterage expenses during the journey and lodging/boarding expenses will qualify for exemption. Where the journey is performed by a circuitous route, the exemption is limited to what is admissible by the shortest route. Likewise, where the journey is performed in a circular form touching different places, the exemption will be limited to what is admissible for the journey from the place of origin to the farthest point reached, by the shortest route. The amount of exemption under this section cannot exceed actual expenses incurred by the employee or assessee on undertaking this journey while availing the facility of LTC. 16. The premium paid by the employer on an accident policy taken out by it in respect of the employee would not be a perquisite. Because it is for the benefit of the employers. 17. Allotment of shares or debentures under any employees stock plan or scheme of the company when these are offered to employee in accordance with the guidelines issued in this behalf by the central government. 18. Goods manufactured by the employer sold to his employee at concessional rate. 19. Privilege passes and privilege tickets granted to employees of Railway and Airlines are still not taxable in the hands of the employees. 20. The facility of conveyance provided by the employer from residence to place of employment and viceversa. 21. Free rations to Armed Personnel :- The value of free rations given to the armed forces personnel is exempted from tax. 22. Family planning expenses :- The amount spent by an employer on the promotion of family planning among its employees. 23. Gifts in kind of the value of Rs. 5,000 during the previous year. 24. Transfer without consideration to an employee of a moveable asset (other than computer electronic items and motor car) by the employer after using it for a period of ten years or more. 25. Periodicals and journals required for discharge of work.
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PROFITS IN LIEU OF SALARY [SECTION 17(3)]

Section 17(3) gives an inclusive definition of Profit in lieu of salary as the name suggests, these payments are received by the employee in lieu of or in addition to salary, and these payments include the following :1. The amount of any compensation due or received by an assessee from his employer or former employer in connection with the termination of his employment or the modification of the terms and conditions relating thereto. 2. Any payment made from unrecognized provident fund or other fund would be included only to the extent of employers contribution and interest thereon. 3. Any payment under Keyman Insurance Policy including the sum allocated by way of bonus on such policy. 4. All other payments made by an employer to employee would be brought under the head profit in lieu of salary, i.e. the household allowance paid to an employee living in his own house. Exceptions :- The following shall not be termed as profit in lieu of salary. a) b) c) d) e) f) g) h) Death-cum-retirement gratuity, u/s10 (10). Commuted value of pensions, u/s 10(10A). Compensation, u/s 10(10B). Compensation or voluntary retirement u/s 10(10C). Payment from SPF, u/s 10(10). Payment from RPF, 10(12). Payment from approved Superannuation fund, u/s 10(13). House rent allowance, u/s 10(13A).
PROVIDENT FUNDS
To encourage the saving for the social security of employee, the government has set up various kinds of provident funds. The employee contributes a fixed percentage of his salary towards these funds and in many cases employer also contributes to the same fund. The whole contribution along with interest is credited to employees account. He will get payment out of this fund at the time of retirement and at some other important occasions. If the employee dies, his heirs will get the full payment. Provident Funds are of four types. These are explained as below :A. B. C. D. E. Statutory provident fund Recognised provident fund Unrecognised provident fund Public provident fund Approved superannuation fund
A. Statutory Provident Fund [SPF] :- It is that provident fund to which the Indian Provident Fund act, 1925 applies. Generally this fund is set up for government and semi-government employees like employee of railway, RBI, college, universities, local bodies, insurance companies etc. B. Recognized Provident Fund [RPF] :- It is a fund to which the Provident Fund Act, 1952 applies. Under this scheme, any person who employs 20 or more employees is under an obligation to register his firm or organisation under the Provident Fund Act, 1952, and start a provident fund scheme for the B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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employees in his organisation. It is after 3 years of its establishment, that the registration should be done under this Act. There is one alternative also. The funds which are not established under E.P.F. Act of 1952 have to be expressly recognised by the Chief Commissioner of Income Tax.
C. Unrecognised provident fund [URPF] :- It is that provident fund which is neither statutory not
recognised. Any institution or organisation can maintain this fund. It is approved by the Provident Fund Commissioner but not by the Commissioner of Income Tax. This is maintained in private sector organisation. D. Public provident fund [PPF] :- Any member of the public, whether in employment or not may contribute to this fund. Therefore even self-employed person may contribute to this fund. The employee can deposit money under PPF account in addition to the contribution to other provident fund scheme. In this scheme there is no employers contribution. E. Approved Superannuation fund :- Like provident fund, Superannuation fund is also a scheme of retirement benefits for the employee. These are funds usually established under trusts by an undertaking, for the purpose of providing annuities, etc., to the employee of the undertaking on the retirement at or after a specified age, or on their becoming incapacitated prior to such retirement, or for the widows, children, dependents of the employees in case of the any employees earlier death. The trust invests the money contributed to the fund in the form and mode prescribed. Income earned on these investments shall be exempt, if any such fund is an Approved Superannuation Fund. Tax Treatment :- Same as in case of Statutory Provident Fund.
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Table Showing Tax Treatment of Different Types of Provident Funds Particulars SPF Employees Eligible / Assessees for contribution deduction u/s 80(c) Employers Fully contribution Exempted RPF URPF PPF Eligible for deduction u/s Not Eligible for deduction u/s Eligible for deduction 80(c) 80(c) u/s 80(c) It is exempted up to 12% of salary and excess shall be taxable. [Here salary means Basic Salary + D.A. (Enter) + Commission on turnover achieved by such employee] It is exempted up to 9.5% rate of interest and excess shall be taxable Fully Exempted u/s 10(10) Ignore at the time of contribution. Not applicable as there is only assessees own contribution Ignore at the time of interest Fully credited Exempted P Accumulated employees Fully contribution is not taxable. Exempted P Accumulated employers contribution + interest on employers contribution is taxable as profit in lieu of salary. P Interest on employees contribution is taxable as income from other sources
Interest on provident fund Repayment of lump-sum amount on retirement/ resignation/ termination
Fully Exempted Fully Exempted u/s 10(10)
SPECIAL POINTS TO BE REMEMBERED If question is silent about the contribution of employer and employee in case of URPF then lump sum money received will be treated as 50% as employers total contribution (including interest) and remaining 50% as employees contribution (Including interest). Transferred balance of URPF to RPF :- In such case fund will be treated as RPF from the day of its commencement as URPF and exemption will be allowed in same manner. Only the excess amount transferred to RPF over exempted amount shall form taxable portion of transferred balance.
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DEDUCTION FROM THE GROSS SALARY (SECTION 16)

There are mainly two deductions, which are allowed under section 16 from gross salary. Theses are a) Deduction for entertainment allowance to government employee under section 16(ii), b) Deduction for employment tax under section 16(iii). a) Deduction for entertainment allowances u/s 16(ii) :- [only in case of government employees] given as follows: a) Actual Entertainment allowance received; or b) 1/5th of basic salary; or c) Rs. 5000 b) Tax on employment (professional tax) u/s 16(iii) :As per section 276(2) the State government/local authorities are empowered to make law and collect tax on profession, trades and employment. As per section 16(iii), the deduction of any sum paid by the assessee or the employer of the assessee, on account of tax on employment shall be allowed. The following points should be remembered for this purpose :SOME SPECIAL POINTS TO BE REMEMBERED The deduction will be allowed in the year in which the tax is actually paid. If professional tax is paid by the employer of behalf of the employee than firstly it is to be included in the salary of the employee as a Perquisite and then the same amount is allowed as deduction. Whichever is less
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SOME MORE SPECIAL POINTS TO BE REMEMBERED There are three types of meanings of salary which are used in the whole salary which are as follows
NAMES OF CASES
EXCEPTIONAL CASE
ALLROUNDER CASE
LONGEST CASE
P Exceptional Case means Basic Salary and Dearness allowance (whether enter or not). P It is applicable only at two places which are (a) Employees covered under Gratuity Act 1972 and (b) Retrenchment Compensation.
P All-rounder Case means Basic Salary and Dearness allowance (enter) and commission on turnover achieved by him. P It is applicable to all other place except the other two cases.
P Longest Case is the case which is applicable only in the calculation of Rent Free Accommodation.
QUESTIONS
What do you mean by Allowances. Explain the different allowances and their tax treatment. What do you mean by Perquisites. Explain the different Perquisites and their tax treatment. What are the deductions permitted under the Income Tax Act 1961, in the computation of income under the head Salaries ? Discuss. Write a note on taxability of Gratuity. Write a note on taxability of Pension. Write a note on taxability of Leave Encashment. Write a note on taxability of Retrenchment Compensation. Discuss the provisions relating to taxability of Provident Fund. Write a short note on Deduction u/s 80C. The question whether a particular income is Income from Salaries or is Income from Business depends upon whether the contracts is Contract of Service or is a Contract for Service. Discuss. Write a short note on Specified Employee. Difference between Surrender of Salary and Foregoing of Salary.
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CHARGEABILITY (SECTION 22)

The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner shall be subject to Income tax under the head of Income From House Property after claiming deduction under Section 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 profits of which are chargeable to Income Tax.
BASIS OF CHARGE
Income from house property is the 2nd head of income under which income from of letting of houses and buildings and bungalows and godowns etc. is assessed to tax. This is the only head of income under which the notional income may be charged instead of the real income. The computation of which is given under section 22 to 27. The charge is not because of the receipt of the income but is on the inherent potential of the house property to generate income.
ESSENTIALS CONDITIONS FOR INCOME TO BE ASSESSED UNDER THIS HEAD

Income is assessed under the head Income From House Property if the following three conditions are satisfied :1. The property should consist of any building or lands appurtenant thereto. 2. The assessee should be owner of the property. 3. The property should 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 Income tax. Unless, therefore, all the aforesaid conditions are satisfied, the property income cannot be charged to tax under the head Income From House Property. 1. Property should consist of any building or land appurtenant thereto :- The scope of this head of income is limited to the income from buildings or lands appurtenant (attached) to building only. Land, which is not appurtenant to any building, does not come within the scope this section; it is taxable under the head income from other sources. Land appurtenant includes approach road to and from public streets, compound, playground, garden, motor garage etc. Definition of building :- The work Building is not defined in the Act. Many courts have given judicial interpretation of the work Building. Which are as follows : Building is an enclosure which may even consists of four walls. An incomplete house or a house which is in ruins without a roof and without doors cannot be called a building. The existence of roof is not always necessary for a structure to be regarded as a building. Residential buildings ordinarily have roofs but there can be a non-residential building for which a roof is not necessary. Thus building may be includes residential buildings, let out for office use, auditorium, stadium, open air theaters, dance hall, music or lecture hall, cinema hall etc., but temporary hutments with vacant land are not included in building, its income is taxable under the head income from other sources. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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The building may be located in India or aboard but taxable under the head income from house property. Foreign house property income is taxable only in the case of ordinary resident. But income received in India is taxable incase of non-resident and not ordinary resident also. 2. The assessee should be the owner of the property :- It is only the owner of the house property who is liable to pay tax under this head of income. The owner may be legal or deemed owner of the house property. He may or may not be beneficiary owner. The income under this is in respect of the ownership and not the occupation or possession. Where the assessee is the lessee of a building and he derives an income form sub-letting or re-letting, it will be taxable under the head Income From Other Sources and not under the head Income From House Property. Unless the house property used by him purposes of his own business or profession, because it is to be assessed under the head Business or Profession.
SPECIAL NOTE :-
The person who owns the building need not also be the owner of the land upon which
it stands.
The question of ownership may be noted in the following cases : If the land was taken on lease and a superstructure constructed, the person who takes land on lease will be treated as its owner. Where the property is mortgage, it is the mortgager alone and not the mortgagee who can be treated as owner. Where assessee takes a building on lease and he is deriving some income by sub letting or re-letting, this income is to be taxable under the head income from other sources and not under the head income from house property. In case houses are constructed by co-operative building society and allotted or leased out to its members, the members shall be deemed to be the owner of the building or part thereof as the case
DEEMED OWNER
The following are the deemed owner of the property (Section 27) :- As per section 27, the following persons though not legal owner of a property are deemed to be owner for the purposes of section 22 to 26. 1. Transfer to a spouse [section 27(i)] :- If an individual transfers any house property to his or her spouse otherwise than for adequate consideration, the transferor in this case is deemed to be the owner of property so transferred. This would, however, not cover cases where a property transferred to a spouse in connection with an agreement to live apart. 2. Transfer to a minor child [section 27(i)] :- If an individual transfer any house property to his or her minor child otherwise than for adequate consideration, the transferor in this case is deemed to be the owner of the house property so transferred. This would, however, not covered case where a property is transferred to a minor married daughter.
SPECIAL NOTE :-
Where the individual transfers cash to his / her spouse or minor child and the transferee acquires a house property out of such cash, the transferor shall not be treated as deemed owner of the house property. Such transactions will however, attract clubbing provisions.
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3. Holder of impartible estate [Section 27(ii)] :- The holder of an impartible estate shall be deemed to be the individual owner of all properties comprises in the estate. The impartible estate as the word itself suggests, is property, which is not legally divisible. 4. Member of co-operative society [section 27(iii)] :- A member of co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a housebuilding scheme of a cooperative company / association shall be deemed to be owner of that building or part thereof allotted to him although the co-operative society / company / association is the legal owner of that building. 5. Person in possession of a property with part performance of transfer act [section 27(iiia)] :- A person who is allowed to take or retain the possession of any building or part thereof in part performance of a contract of the natural referred to in section 53A of the Transfer Of Property Act shall be deemed owner of that house property. This would cover cases where the (a) possession of property has been handed over to the buyer, (b) sale consideration has been paid or promised to be paid to the seller by the buyer, (c) sale deed has not been executed in fever of the buyer, although certain other document like power attorney/agreement to sell/will etc. have been executed. The buyer would be deemed to be the owner of the property although it is not registered in his name. 6. Person having right in a property for a period not less than years [section 27(iiib)] :- A person who acquires any right in or with respect to any building or part thereof, by virtue of any transaction as his referred to in section 269UA(f) i.e. transfer by way of lease for not less than 12 years shall be deemed to be the owner of that building or part thereof. This will not cover the case where any right by way of a lease is acquired for month-to-month basis for a period not exceeding one year. A person is allowed to retain possession of any building in part performance of a contract of the nature referred to in the Transfer of Property Act, shall be deemed to be owner of that building. If the following conditions are satisfied : The contract is to transfer an immovable property. The contract is for consideration. The contract is in writing a signed by the transferor or on his behalf. The transferee has taken possession of the property.
USE OF HOUSE PROPERTY

For the purposes of charge under the head income from house property, the crucial words are buildings or land appurtenant thereto. The purpose for which land is used is immaterial. Thus the property may be let by the assessee for residential purposes or commercial purposes. The income derived from letting out of such property will always be taxable under this head. It will remain so even if property is held by the assessee as stock in trade of a business or if the assessee is engaged in the business of letting out of property on rent. However the following are the exceptions to the above rule: 1. The annual value of the house property/portion of the house property which is used for purposes of the business or profession carried on by the assessee does not fall under this head, provided profits of such business are chargeable to income tax. 2. Similarly, where the premises are given to any government agency for locating a branch of a bank, police station, excise office etc. for the purposes of running the business of the assessee more efficiently, the rental income from such building would be taxable as business income, and not as house property B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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income, provided that the dominant purpose of letting out the building is to enable the assessee to carry on his business more efficiently and smoothly.
SPECIAL NOTE :- Letting
is not the main business but it is subservient / incidental to the main business.
3. Where the letting of the property is inseparable from letting of other assets like machinery, furniture etc. the entire income would be taxable as profits or gains of business or profession or Income from other Sources. 4. Where the assessee is carrying on his business or profession in his own house or building or in portion of it then the annual value of such property or part thereof is not to be taxable under the head income from house property, but expenses related to such building or part thereof are to be allowed as expenditure under the head business or profession. 5. Quarters let to employees of assessees own business or profession :- In case the employees residence is necessary for the assessees business or profession then the rent from such quarters is treated as business income and hence taxable under the head business or profession. In case the employees residence is not necessary for the assessees business or profession then rent from such quarters is taxable under the head income from house property.
DISPUTE ABOUT BUILDING

It is the owner who is liable to pay tax on the income earned from house property. But if the ownership of the house property is disputed then the decision about who is the owner rests with the Income Tax Authority. Thus mere existence of dispute as to title cannot hold up an assessment even if a suit has been filed. Generally in this case, the person who receives the rent or enjoys the possession of the property shall be liable to pay tax till the dispute about ownership is settled.
TREATMENT OF COMPOSITE RENT Where composite rent includes rent of building and charges for different services (like lift, air conditioning) :- Apart from recovering rent of the building, in some cases the owner gets rent of other
assets (like furniture) or he charges for different services provided in the building (for instance, charges for lift, security, air conditioning etc.). The amount so recovered is known as Composite Rent. If owner of a house property gets composite rent for property as well as for services rendered to the tenants, composite rent to be split up and the portion of the rent attributable to the letting of the premises shall be assessable as income from house property. The other portion of the composite rent received for rendering services shall be assessable as income from other sources or business or profession. Where composite rent of letting of building and letting out of other assets (like furniture, machinery or plant) and rent cannot be separable :- If the letting of the property is inseparable from the letting of other assets like machinery, furniture, the entire income would be taxable as Profits and gains from business or profession or Income from other sources. Where composite rent of letting out of building and letting out of other assets and the two lettings are separable :- If there is letting out of building and letting of other assets and the two lettings are separable then the potion of the rent attributable to the letting of the premises shall be assessable as Income from house property and the other portion of the composite rent for letting such assets shall be assessable under the head Income from other sources or Profits and gains of business or profession.
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JOINT OWNERSHIP OF HOUSE PROPERTY OR CO-OWNERSHIP

If a house property is owned by two or more than two persons jointly and the share of each person is not definite then the rental income derived from such H.P. shall be treated as taxable under this head and it will be assessed as the income of AOP/BOI. However if the share of each joint owner is definite then the rental income derived by the assessee from such H.P. will be apportioned among the joint owners as per there respective share and it will be treated as taxable income of each individual under the head Income from house property. If such house property is used by the co-owner for the purposes of their own residence then the value of such house property will be taken as nil, and each of the co-owner shall be entitled for deduction of Rs. 30,000 or Rs. 1,50,000 as the case may be for interest on borrowed money under section 24(b).
HOUSE PROPERTY SITUATED OUTSIDE INDIA

In case resident in India (individual and HUF resident and ordinary resident in India), income from house property situated outside India is taxable whether amount received in India or outside India. However assessee is non-resident in India or resident but not ordinary resident in India, income from house property situated outside India is taxable only when it is received in India during the relevant previous year.
EXEMPTED HOUSE RPOPERTIES

1. As per section 10 where the property is held for charitable or religious purposes the income from such property is exempted from tax. 2. Farm House :- Income from any building owned or occupied by an agriculturists or received rent revenue of such land provided that the building is in the immediate vicinity of agricultural land is used as a dwelling house or as a store house. 3. Every assessees income is exempted from one house property, which is self-occupied for his own residence. 4. Any property held by the registered trade unions or local authority is not taxable at all for income tax purposes. 5. The annual value of any one palace in the occupation of an ex-ruler shall be exempted from tax. 6. Property income of an educational institution and hospital. 7. Property income of political party. 8. Property used for own business profession.
DETERMINATION OF ANNUAL VALUE OR NET ANNUAL VALUE Annual Value :- As per section 23(i) the annual value of any property shall be the sum, which the property
might reasonably be expected to be let from year to year. However it will neither be the actual rent derived nor the market rent of the property. It is something like notional rent which could have been derived had property been let. In other word even if the property neither let nor self-occupied, there will still be annual value of the house property taxable under the head.
For determining the annual value following four items are taken into consideration :1. Actual rent received or receivable :- Annual rent is the actual rent paid or payable by the tenants during the previous year. It cannot be taken as sole determinant of annual value. In this step we have to find out the de facto rent. And for determining the de facto rent of the property the following points have to be taken into consideration :B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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1. If the landlord has taken any obligation of the tenant the annual rental value will be reduced by the amount of such charges or in words we can say that actual rent received minus the cost of providing such facilities may be called de facto. The obligation can be lift or pump maintenance, lighting of common stairs, swimming pool or garden maintenance charges and salary of gardener or watchman. 2. If tenant bears any liability of the landlord besides paying rent, the amount of the annual rent shall be increased by such payment. EXCEPTIONS It may be however observed that the municipal taxes of the house property are to borne by the occupier who in the case of let out property is the tenant. Therefore, if such municipal taxes borne by the tenant the rent receivable or received should not be stepped up to calculate de facto rent. If the tenant has undertaken to bear the cost of repairs, the amount spent by the tenant cannot be added to rent received or receivable Any deposit received from the tenant for property is a capital receipt and thus, it cannot be treated as income. Further while determining the actual rent, no notional interest on such deposit should be considered. 2. Municipal Value :- For collecting municipal taxes, local authorities make a periodical survey of all buildings in their jurisdiction. Such valuation may be taken as strong evidence representing the earning capacity of a building. 3. Fair Rental Value :- Fair rental value of the property can be determined on the basis of a rent fetched by a similar property in the same or similar locality. (Though two properties cannot be alike in every aspect, the evidence afforded by transactions of other parties in the matter of other properties in the neighborhood, more or less comparable with the property in question, is relevant in arriving at reasonable expected rent.)
SPECIAL NOTE :-
In case if Fair Rental Value is not given then we can find out it with the help of Actual Rent of that property. (Actual rent per month x 12) 4. Standard Rent :- It is rent determined under the Rent Control Act, if the act is applicable to the place where the property situated. Where the standard rent of building is fixed under the Rent Control Act the landlord cannot reasonably expect to receive any thing more than the standard rent from a hypothetical tenant and the annual value of building can not exceed the standard rent.
SPECIAL NOTE :-
If property completed or acquired during the previous year then period of previous year will be started from the date completion to 31-3-2006. It means Actual Rental Value, Municipal Value, Fair Rental Value and Standard rent will be taken for the same period.
GROSS ANNUAL VALUE (GAV) There are two steps to calculate the Gross Annual Value which are as follows :STEP - 1. Calculate the Expected Rental Value (ERV) STEP - 2. Calculated the Gross Annual Value (GAV)
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STEP I :- CALCULATION OF EXPECTED RENTAL VALUE [ERV] This is to be calculated as follows :a) Fair Rental Value or Municipal Value which ever is higher. b) Standard rent (if property covered under Standard Rent Control Act)
Least of (a) and (b) will be Expected Rental Value i.e. ERV
STEP II :- COMPUTATION OF GROSS ANNUAL VALUE [GAV] For computation of Gross Annual Value of house property, we should have to first compute gross annual value. It is to be calculated as follows :Expected Rental Value or Actual Rent received or receivable (De Facto Rent) whichever is higher. This case can be presented with the following table
Fair rental value
Municipal Rental Value
Whichever is higher
Standard Rent
Whichever is Lower
(Expected Rental Value)
Actual Rent
(Defacto Rent)
Whichever is Higher
(Gross Annual Value)
EXAMPLE :-
Particulars
M. R. V. (Annual) F. R. V. (Annual) S. R. (Annual) A. R. (Annual) G. A. V.
I
25000 29000 N.A. 23000 29000
II
29000 29000 29000 41000 41000
III
41000 45000 55000 53000 53000
IV
47000 47000 35000 41000 41000
V
53000 55000 N.A. 59000 59000
VI
50000 55000 53000 47000 53000
COMPUTATION OF GROSS ANNUAL VALUE IN DIFFERENT CASES AS FOLLOWS

CASE - 1. CASE - 2. CASE - 3. CASE - 4. If there is neither vacancy nor unrealised rent If there is not any vacancy but unrealised rent If there is vacancy but not any unrealised rent If there is vacancy as well as unrealised rent B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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CASE - 1. If there is no vacancy and no unrealized rent :- In this case GAV will be ERV or Actual Rental Value which ever is higher. CASE - 2. If there is not any vacancy but unrealised rent :- In this case Actual Rent received or receivable (De Facto Rent) is reduced by the amount of Unrealised Rent and then this resulted figure is to be compared with the ERV. The higher value is the GAV. CASE - 3. If there is vacancy but not unrealised rent :- In this case we have to compare the Actual Rent received or receivable (de facto rent) [before deducting the rent for the vacancy period] with the value of ERV and select the higher and from the resulted figure we have to deduct the rent for the vacancy period. In other words we can say that :CASE - 4. If there is vacancy as well as other factors [like property let out at lower rate or unrealized rent] :- In this case Actual Rent received or receivable (de facto rent) is reduced by the amount of Unrealised Rent but not by the amount of Rent for vacancy period and then this resulted figure is to be compared with the ERV. The higher value minus the rent for the vacancy period is the amount of GAV. (In other words we have to consider rent before vacancy but after unrealised rent.)
SPECIAL NOTE :-
In case the property remains vacant throughout the previous year, the Gross Annual Value of such property shall always be Nil provided the property was kept ready to be let out and could not be actually let out as no suitable tenant could be found. EXAMPLE :-
Particulars
M. R. V. (p.m.) F. R. V. (p.m.) S. R. (p.m.) A. R. (p.m.) Vacancy (p.m.) Unrealised Rent (p.m.) G. A. V.
I
10000 10000 12000 7000 NIL 1 Month 132000
II
12000 10000 10000 10500 2 Months NIL 105000
III
13000 8000 7000 20000 1 Month 3 Months 160000
IV
15000 17000 16000 16000 3 Months 1 Month 144000
V
10000 10000 8000 NIL 12 Months NIL 96000
VI
8000 9000 6000 10000 2 Months 2 Months 88000
RULES FOR UNREALISED RENT

The actual rent received or receivable mentioned in section 23(1)(b) and (c) shall not include the amount of rent which the owner cannot realise, subject to the rules made in this behalf. The Unrealised Rent can be excluded only if the following conditions are fulfilled :The tenancy is Bona Fide. The defaulting tenant has vacated the house or steps have been taken to compel him to vacate the house. The defaulting tenant is not in occupation of any other house property of the same assessee. The assessee has taken all reasonable steps to institute legal proceedings for the recovery of unpaid rent or satisfying the Assessing Officer that legal preceding would be useless. 5. Unrealized for current previous year can be deducted. 1. 2. 3. 4.
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COMPUTATION OF NET ANNUAL VALUE [SECTION 23(1)]

Gross annual value Municipal taxes Net Annual value xxxxx xxxxx xxxxx
Less
Taxes levied by the local authority in respect of the property i.e. Municipal Taxes (including services taxes) to be deducted from GAV. Municipal taxes are deducted only if the following conditions are fulfilled :a) The municipal taxes have been borne by the owner. b) These have been paid during the previous year. SPECIAL POINTS TO BE REMEMBERED P Municipal taxes are allowed if actually paid during the previous year and these may be related to past year or future year. In other words we can say that it can be deducted on the accrual basis. P Even where the property situated outside India, taxes levied by local authority in that country are deductible in deciding the annual value of the property. P Taxes levied by a local authority in respect of any property shall include services taxes (like education tax, sanitation taxes) levied by the local authority in respect of the property. P If municipal taxes are paid by the tenant then neither this can be deducted from GAV nor can it be included in the Actual Rent received or receivable (de facto rent). P Taxation of refund of municipal tax :- It was held that there was no provision in computation of property income corresponding to section 41(1) which is available for taxing remission or waiver of liability, in respect of business income and as such it cannot be brought to tax either under this head or any other head.
DEDUCTIONS FROM NET ANNUAL VALUE OF HOUSE PROPERTY [SEC 24]

Before allowing any deduction, we have to calculate Net Annual Value of the house property then deductions are allowed. Deductions are allowed as follows: A. In case of let out house property :- There are two deductions available in case of let out house property or deemed to be let out house property. These are explained as follows: a) Standard Deduction :- From the net annual value computed, the assessee shall be allowed a statutory deduction of a sum equal to 30% of net annual value. This deduction is allowed every year irrespective of any expenditure. b) Interest on Loan :- Any amount of interest paid or payable during the relevant previous year (i.e. 200709) related to the let house property is allowed as deduction, if the following conditions are satisfied :1. Loan must be taken for the renovation or repair or purchase or for reconstruction. 2. Interest on mortgage of house property is not allowed for deduction unless purpose of loan is connected with house. 3. Interest for the pre-construction period is allowed for 1/5 of total interest. Pre-construction interest mean interest related to period prior to the previous year in which the construction of the house had been B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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completed. Total interest for this pre-construction period is divided in five parts and first part of this interest is allowed as deduction from the previous year in which the construction was completed and up to five continue previous year including the previous year in which the construction had been completed. 4. Interest on borrowed capital is allowable as deduction on accrual basis. That is, it should be claimed as deduction even if the interest for the previous year is still payable. SPECIAL POINTS TO BE REMEMBERED P Interest on unpaid amount of interest is not allowed as deduction. The assessee can claim deduction only for the interest paid on the capital borrowed. P No deduction is allowed for any brokerage or commission for arraigning such loan. P If any amount interest paid outside India, it is allowed as deduction only if Tax had been deducted at source. P Where a fresh loan has been raised to repay the original loan if the second borrowing has really been used merely to repay the original loan and this fact is proved to the satisfaction of the ITO, the interest paid on the second loan would also be allowed as deduction under section 24(1). P The assessee shall not be allowed any other deduction on account of any expenses incurred in relation to such house property. B. In case house property is fully utilized through out the previous year for own residence [section 23(2)(a)] :- Where the property consists of one house in the occupation of the owner for his own residence the Net Annual Value of such house be taken as Nil, If the following conditions are satisfied: a) The property (or part thereof) is not actually let during whole (or any part) of the previous year; and b) No other benefit is derived there from. In this case one property (which is neither let-out nor put to any other use) used throughout the previous year by the owner for his residential purposes, income shall be determined as follows :Gross Annual Value Municipal Taxes Net Annual Value Deductions under (section 24) a) Standard deduction b) Interest on borrowed capital Loss From House Property a) Standard Deduction :- Not Availed b) Deduction for interest on borrowed capital in case self occupied house :- In case of self-occupied house the Net Annual Value is NIL. And the assessee will not entitle to the Statutory deduction of 30%. So there is only one deduction out of such NAV i.e. for interest on loan, which is allowed as follows : 1. Actual interest paid or payable in the previous year + 1/5 of pre-construction interest. OR Rs. 30,000 p.a., which ever is less, is allowed as deduction. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof. NIL NIL NIL NIL xxxx
Less Less
xxxx xxxx
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2. When the property acquired or constructed with the capital borrowed on or after 1st April, 1999 and such construction or acquisition is completed within 3 years of the end of the financial year in which the capital was borrowed. The deduction is allowed up to amount of interest paid or payable during the previous year + 1/5 of pre-construction interest OR Rs. 1,50,000 whichever is less with effect from the assessment year 2002-03. 3. In case loan is taken to reconstruction, repair or renovation the property after 1-04-1999 interest on such allowed up to actual interest paid or payable during the previous year + 1/5 of the pre-construction interest or Rs. 30,000 p.a. whichever is less is allowed as deduction.
MAXIMUM AMOUNT OF DEDUCTION U/S 24(B)
LET OUT PROPERTY
SELF OCCUPIED PROPERTY
No Limit
Loan taken before 01-04-99 Maximum upto 30000 Loan taken for Repair & Renovation Maximum upto 30000
Loan taken on or after 01-04-99
Loan taken for Acquisition & Construction Maximum upto 150000
SPECIAL NOTE :-
It may be noted that the total interest (pre-construction and post-construction interest) is to be compared with the maximum limit given above. EXAMPLE :-
Situations
Date of Loan Amount of Loan Rate of Interest Date of Completion / Date of Purchase Date of Repayment
A
01-08-05 500000 6% 31-03-08 01-04-06 Pre = 4000 Post = Nil Total = 4000
B
01-08-05 500000 6% 31-03-06 01-04-09 Pre = Nil Post = 30000 Total = 30000
C
01-08-04 500000 6% 01-01-07 01-01-09 Pre = 4000 Post = 22500 Total = 26500
D
01-04-06 500000 6% 01-08-07 01-12-08 Pre = 6000 Post = 20000 Total = 26000
E
01-03-07 500000 6% 01-04-07 NIL Pre = 500 Post = 30000 Total = 30500
Answers
C. House property, which is part of the year let and part of the year, self occupied :- Where a house property is part of the year is occupied for own residence, its Net Annual Value shall be determined as per the provisions of section 23(1) [as discussed above] relating to let out property. In this case period of self-occupation is irrelevant and the annual value of such property shall be determined as B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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if it is let out. Hence expected rental value shall be taken for full year but actual rent received or receivable shall be taken only for the period let. Which Ever is Higher is taken Gross Annual Value. Example :- R has a property in Delhi whose municipal value is Rs. 1,00,000 and the fair rental value is Rs. 1,20,000. It was self-occupied by R from 1-4-2009 to 31-7-2009. W.E.F. 1-8-2009 it was let out at rent Rs. 9,000 P.M. Municipal taxes paid during the year were Rs. 20,000. In this annual value will be Rs. 1,00,000. Try yourself. D. In case part of the property is let out and part of the self occupied :- If a hose property consists of two or more independent unit. One of which is self-occupied and other(s) are let out then these are treated as different house property. And in this case the let portion will be taxable and self-occupied portion will be exempted. E. In case house property which is not actually occupied by the owner owing to employment or business or profession carried on at another place [Section 23(2)(b)] :- It is treated in the same manner as in case self occupied house under section 23(2)(a), (in other words we can say that the Annual Value of this house property shall be nil.), provided the following conditions are fulfilled :P The taxpayer owns a house property, which cannot actually be occupied by him by reason of the fact that owing to his business employment or profession carried on at another place. P He has to reside at another place in the building, which not owned by him. P The property mentioned above is not actually let during whole or part of the previous year. P No other benefit is derived from the property.
IF ASSESSEE HAS MORE THAN ONE HOUSE UNDER SELF- OCCUPATION

Annual value of one house (as per the choice of assessee) is taken as Nil and other houses are treated as deemed to be let out. However if an assessee has a house property which consists of two or more residential units and all such units are self occupied, the annual value of entire house property shall be taken as NIL as there is only one house property though it has more than one residential units.
RECOVERY OF UNREALISED RENT OF SOME EARLIER YEARS [SEC 25A & 25AA]
Where the assessee could not realise rent during the previous years from a property let to tenant and subsequently, the assessee has realised any amount in respect of such rent. Then it shall be deemed to be income chargeable under the head income from house property to the extent it has not been included in annual value earlier. it has to be added in the last when all the calculations have already been made. It will be chargeable to tax even if the assessee is not the owner of the property in the year of recovery of such rent.
ARREARS OF RENT RECEIVED

1. Where the assessee is the owner of the property consisting of any building or lands appurtenant thereto which has been let to a tenant; and 2. He has received any amount by way of arrears of rent from such property, not charged to Income tax for any previous year. 3. The sum so received (after deduction a sum equal to 30% of such amount) shall be deemed to be the income chargeable under the head Income From House Property. 4. It is taxable in the previous year in which it is received. 5. It is taxable even if the assessee is not the owner of that property in that year. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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JOINT EXPENSES
Some time combined or joint expenses are given incase of two or more house property in that case these are to be divided in different houses according to the ratio of MRV or Municipal taxes or Fire Insurance Premium whichever is given in order of preference.
LOSS FROM HOUSE PROPERTY

If there is loss from house property then it can be set off from the income from other house property or any other head of income but if the loss still unadjusted then it shall be carried forward for eight succeeding assessment years and can set off from house SOME SPECIAL POINTS TO BE REMEMBERED 1. If property remains with assessee only a part of the year (e.g. he sold away the property) then we have to take the M.R.V., F.R.V and S.R. only for that part of the year. 2. If property is let out at different rates of rent for the same year then the vacancy is to be calculated with the higher value. 3. If any amount is received for any amenity as well as expenses are incurred for these amenities then the difference is to be considered under the head Income From Other Sources but one thing should be remembered that the expenses covered under the Standard Deduction have not to be deducted. 4. Any interest payable outside India on which tax has not been paid or deducted at source and in respect of which there is no person in India, who may be treated as an agent, shall not be deducted from N.A.V. If any property has more then one residential parts some of which are on rent and some of are self occupied then scheme of deemed to be let out is not applicable
QUESTIONS
Write a note on income chargeable to tax under the head House Property. Discuss the treatment of unrealized rent and its recovery in subsequent years. Write a short note on deduction under section 24(b). Write a note on composite rent. Discuss the taxability of in respect of arrears of rent. Write a note on taxability of the income from subletting of house property.
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Depreciation u/s 32
The income tax act 1961 does not define the word depreciation. In general, depreciation is decrease in the value of an asset due to wear and tear and passage of time.
Objects of depreciation :- Depreciation is calculated with the following three objectives :1. To arrive the real business profits by charging the monetary value of decrease in the value of any asset used for the business. 2. To know the book value of the assets at any time so as to assess the net worth of the business. 3. To know the real position about the asset and to arrange for its replacement or renewal by setting aside a specified sum out of years profit.
CONDITIONS FOR DEPRECIATION

1. Depreciation allowed in respect of capital asset only :- The capital assets include building, machinery, plant, and furniture as tangible asset whereas intangible assets include know-how, patents, copyright, trademarks, licenses, franchises or any other business or commercial rights. The explanation of these assets is as follows :a) Building :- Building means any structure on the land. The expression building does not include the cost of land. The buildings include roads, bridges, wells, houses, godowns, offices, factory or any other structure or erection on the land. Depreciation can be claimed on building constructed on a piece of land taken on lease or rent. SPECIAL POINTS TO BE REMEMBERED 1. Machinery and plant includes pipes needed for delivery from the source of supply of raw water to the plant and from the plant to the storage facility. 2. Plant shall not include buildings, furniture and fittings and as such the building, electric fittings etc. cannot be treated as plant. b) Machinery :- Machinery means any installment use to convert raw material into products for producing desired result. It includes an engine, heating and cooling system, pollution control equipments, energy saving devices, flourmills, furnaces, rollers etc. c) Plant :- under section 40(3) of the I.T. act 1961 the word plant includes ships, vehicles and books, scientific apparatus, surgical equipments, cable, pipefitting and sanitary fitting in a hotel etc.
SPECIAL NOTE :-
Some time building is taken as plant: If a building has been so planned and constituted as to serve an assessees special requirement, it will qualify to treated as plant. For instance nursing home building equipped with a facility to sterilize surgical instruments and bandages and also with operation theatre is treated as plant for depreciation purposes. Like wise if an assessees generating station building is so constructed as to be integral part of its generating system, it will be a plant for assessee.
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d) Furniture :- The term furniture includes all articles of convenience or decoration used with object of furnishing or decorating some premises. It may be made of wood, steel or any other material. e) Intangible assets :- with effect from 1-04-98, even intangible assets are eligible for depreciation; these assets are know-how, copyrights, trademarks, licenses, franchises etc. According to section 32(1), the word know-how means any industrial information techniques likely to assist in the manufacturer or processing goods. The word patents, copyrights etc are not defined and shall mean same, which is under stood for commercial purposes by business world. 2. Assets must be owned wholly or partly by assessee :- For claim of depreciation, assets must be owned by the assessee. Owner is that person who can exercises the right of ownership on his own behalf and he is entitled to income from such assets. In case of hire-purchase agreement, it is essential to know the time at which ownership is transferred to buyer from seller. In case agreement provides for the transfer of ownership at the time of agreement itself, the assessee (buyer) can debit full depreciation on such asset but cannot debit hire charges to Profit And Loss Account. In case the ownership in the property has not passed to the buyer, the buyer cannot charge depreciation. It can debit hire charges to its Profit And Loss Account. 3. Assets must be used for business or profession :- It is necessary that assessee should use assets for his own business or profession. If any asset commonly used for business as well as personal purposes then proportionate amount of depreciation on asset related to business use is charged to P&L A/C. According to the act where assets (like fan, refrigerator etc.) provided by the employer to employee should be considered to have been used for business purposes and full depreciation allowed. 4. Use of asset during the previous year:a) In case any asset falling within a block used for a period of less than 180 days in the relevant previous year for the business or profession, depreciation shall be allowed at the rate of 50% of amount of depreciation calculated at prescribed rate. b) In case asset used for 180 days or more during the relevant previous year then depreciation for full year shall be charged on such asset. SPECIAL POINTS TO BE REMEMBERED 1. It is to be noted that restriction of 50% of the depreciation applies only to the year when asset is put to use first time in the previous year of acquisition and not for any subsequent year. 2. If an asset is kept ready to use for more than 180 days before the end of the previous year but actually used for less than 180 days, it will be treated as useable for more than 180 days, so depreciation for full year will be charged. 5. Depreciation allowance to assessees carrying on their business in lease or rented premises :- No depreciation is allowable in respect of building taken on lease or rent and used for the purposes of his business as the assessee is not the owner of such building. However, where an assessee incurs capital expenditure on the construction of any structure or renovation or extension of or improvement to any building held by him under a lease or other right of occupancy and used for purpose of his business or profession, he will be eligible for the grant of depreciation in respect of such capital expenditure, as if the structure or work is a building owned by the assessee. 6. No depreciation in the year of sale of such asset :- Depreciation is only a book entry, which is passed on the last day of the year. If any sold or transferred during the relevant previous year, such asset will not B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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be with the business at the time of charging depreciation, so depreciation will not charged on the asset which is not in existence at the time of charging depreciation. 7. Depreciation is allowed on block of assets :- Depreciation is not allowed on each and individual asset but on the basis of block of assets. The term block of assets mean a group of assets falling within a class of assets comprising :a) Tangible assets being building, machinery, plant or furniture. b) Intangible assets being know-how, patents, copyrights. In respect of which same percentage of depreciation provided.
FOLLOWING ARE THE BLOCKS OF ASSETS AND RATE OF DEPRECIATION ON WRITTEN DOWN VALUE BASIS
Number Block 1 Block 2 Block 3 NATURE OF ASSET Buildings: Residential building other than hotels and boarding houses. Buildings: Office, factory, godown or building which are used for residential purposes [it covers hotels and boarding houses but does not cover those which are covered under block 1 and 3] Buildings: Buildings acquired on or after September 1, 2002 for installing machinery and plant forming part of water supply project or water treatment system and which is put to use for the business of providing infrastructure facilities. Temporary erection such as wooden structure Furniture and fitting including electrical fitting Not covered under the following blocks Motor car [other than those used running for hire] acquired or put to use on or after April, 1, 1990 Ocean going ships, vessels ordinarily operating on inland water including speed boats. Buses and lorries and taxies used in the business of running them on hire. Machinery used in semi-conductor industry. Moulds used in rubber and plastic goods factories and lie saving medical equipments. Aeroplanes Aero engines. It also includes commercial vehicle acquired after September 30,1998 but before April 1,1999. Life saving medical equipment and plant and machinery which satisfy conditions of rule 5(2) Containers made of glass or plastic used as refills. New commercial vehicle acquired during 2001-02 and put to use before March 31, 2002 for the purposes of business or professions; and Machinery used in weaving, processing and garment sector of textile industry which is purchased under technology up gradation fund scheme during April 1, 2001 and March 31, 2004 and put to use before March 31, 2004 Rates of Dep 5% 10%
100%
Block 4 Block 5
10% 15%
Block 6 Block 7
20% 30%
Block 8
40%
Block 9
50%
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Block 10 Computers including computers software. Books (other than annual publication) owned by professional. Gas cylinders, plant used in field operations by mineral oil concern, direct fire glass melting furnaces. New commercial vehicles acquired in replacement of condemned vehicles of 15 years of age which is put to use, Before April 1, 1999 [if acquired during October 1, 1998 and March 31, 1999] Before April 1, 2000 [if acquired during 1999-2000]. Block 10 Energy saving devices, renewal energy devices, rollers of flourmills, sugar works and steel industry. Block 12 Air pollution control equipment, Water pollution control equipments, solid waste control equipments, recycling and resources recovery system etc. Machinery acquired and installed on or after September 1, 2002 in a water supply project or water treatment system or for the purpose of providing infrastructure facility; wooden parts used in artificial silk manufacturing machinery. Cinematograph films, bulbs of studio lights. Wooden match frames; some plants used in mines, quarries and salt works. Books (being annual publications) owned by the assessee carrying on profession or books (may or may not be annual publication) owned by person carrying on business in running lending libraries. Block 13 Know-how, acquired after 31-3-1998 Block 14 Patents, acquired after 31-3-1998 Block 15 Copyrights, acquired after 31-3-1998 Block 16 Trade marks, acquired after 31-3-1998 Block 17 Licenses, acquired after 31-3-1998 Block 18 Franchises, acquired after 31-3-1998 Block 19 Other rights, acquired after 31-3-1998 8. Methods of depreciation :- There are two methods of charging depreciation. A) Written down value method. B) Straight-line method.
60%
80%
100%
25% 25% 25% 25% 25% 25% 25%
A) Written down value method :- Under this method written down value of the block of assets is calculated on the date 31st March on which depreciation is calculated. Written Down Value of block of assets is to be calculated as follows :Written down value of such block at the beginning of the previous year ADD :- The actual cost of any asset falling within the block acquired during the previous year LESS :- Amount received or receivable in respect of any asset of the same block, which is sold, discharged or destroyed during the previous year together with amount of scrap value or claim, if any Written down value on which depreciation shall be charged xxxxx xxxxx
(xxxxx) xxxxx
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9. Car manufactures outside India and imported into India after 28-02-1975 but before 1-04-2001 :No depreciation was allowed on motorcar manufactured outside India and acquired by an India assessee after 28-02-1975 but before 1-04-2001. However depreciation at prescribed rates shall continued to be allowed if such car is used for hire or taxi purposes or when such car is used out side India by the assessee for his business or profession. Depreciation on motor car imported in India after 1-04-2001 is allowed at prescribed rate as per the amendment made by finance act 2001. 10. In case of succession or amalgamation :- Depreciation will be calculated for full year and shall be apportioned between the predecessor and successor or the amalgamating company and the amalgamated company as the case may be in the ratio of number of days in which the assets were used by them. 11. Depreciation on actual cost basis :- According to section 32(1)(i) in the case of assets of an undertaking engaged in generating and distribution of power, depreciation is calculate on actual cost basis at the rates prescribed under the act. 12. Computation of additional depreciation :- With effect from assessment year 2006-07 (i.e. after 31-032006) an additional depreciation of 20% of actual cost of the plant and machinery is allowed (10% in case asset is used for less than 180 days), if the following conditions are fulfilled :a) The assessee is engaged in the business of manufacturing or production of any articles or a thing or goods. b) The plant and machinery is new and it has not been used earlier either in India or outside India. c) The plant and machinery not eligible to written of @ 100% of its actual cost. d) The plant and machinery is not in the nature of office appliances or road transport vehicles or and residential accommodation including accommodation in the nature of guest house. e) The return of income must be accompanied by a report by the Chartered Accountant that the deduction has been correctly claimed.
ACTUAL COST OF ASSETS [SECTION 43(1)]

According to section 43(1), Actual cost means the actual cost of assets to the assessee, reduced by that portion of the cost as has been met directly or indirectly by any other person or authority i.e.
Actual Cost = Cost of Acquisition + Pre-Acquisition or Pre Use Expenses Portion of the cost met by other.
Pre-acquisition or pre use expenses :- These expenses include the following expenses: a) b) c) d) Cost of installation or erection cost. Freight and cartage on purchase of the assets and unloading expenses. Interest, amount paid as registration and stamp duty incurred on mortgage loan etc to acquire such assets. Expenses on modification, repair incurred before the actual use of assets.
Portion of the cost met by other :- In case any subsidy or grant received by the assessee, which is directly related to the acquisition of such asset, then such subsidy or grant shall be reduced of actual cost. In case any B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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subsidy does not relate to any particular asset but to many assets, amount of subsidy shall be apportioned in the ratio of cost of each assets.
MEANING OF ACTUAL COST IN DIFFERENT SITUATION

1. Motor car imported in India on or before 28-02-1975 :- During 1-04-1967 to 28-02-1975 depreciation on imported motor car was allowed but in case actual cost of the car exceeded RS. 25000 in that case depreciation were allowed on Rs. 25000 as actual cost. After 28-02-1975, depreciation on such car was not allowed except in case of car used for taxi or hire purposes or used abroad. But from 01-04-2001, depreciation at prescribed rate on actual cost of car becomes allowed. 2. Assets acquired by way of gift or inheritance :- In this case actual cost of the assessee shall be actual cost to the previous owner less depreciation claimed up to 31-3-88 and any depreciation claimed after 104-1988 on such asset as if it was only one of the assets of the block. 3. Assets transferred to reduce the tax liability :- where before the date of acquisition by the assessee the assets were used by any other person for the purposes of his business or profession and the assessing officer is satisfied that the main purposes of transfer of such asset was the reduction of tax liability (by claiming excess depreciation with reference to enhance cost), the actual cost to the assessee shall be such an amount as determined by the assessing officer. Example :- An asset which had been used by R for several years was transferred to G his brother, for Rs. 3,00,000 although the market value of the asset at the time of transfer was Rs. 1,20,000. In this case the assessing officer is entitled to estimate actual cost of the asset at Rs. 1,20,000 if he satisfies the main purposes of transfer was reduction of tax liability of G. 4. Assets re-acquired :- Where assets, which had been, belong to the assessee and had been used by him for the purposes of his business or profession and thereafter cease to his property by reason of transfer or otherwise are re-acquired by him, the actual cost to the assessee shall be: a) Actual cost as reduced by any depreciation claimed up to 31-03-1988; or b) Any depreciation claimed on such asset after 31-03-1988 if it was only one asset of the block; or c) The actual price of asset at which it is re-acquired; which ever is less. 5. Building brought in to use for business or profession subsequent to its acquisition :- Where building previously owned by the assessee is brought into use for the purposes of his business or profession, the actual cost to the assessee shall be the actual cost of the building to the assessee, as reduced by an amount equal to the depreciation calculated at the rate enforce at that time. 6. On partition of HUF :- In case an assessee as acquired an asset on partition of HUF, the cost of such asset to the assessee will be the cost at that time of partition and not the cost at which it was acquired by HUF. 7. Actual cost of asset owned by a non-resident and brought into India [section 43(1)] :- Any asset which was acquired outside India by a non-resident is brought into India and is used for the purposes of Business or Profession, the actual cost of such asset shall be calculated by deducting out of cost an amount of depreciation that would have been allowable at the rate applicable in India since the date of acquisition. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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UNABSORBED DEPRECIATION [section 32(2)]

Depreciation allowances for a particular previous year is first deductible from the profits and gains of business or profession. If the profits and gains of the same business or profession are insufficient for this purpose, the balance of the amount of current depreciation allowances is deductible from the profits of any other business or profession of the assessee. If the profits of any other business or profession are also unable to absorb the whole amount of depreciation allowances, the balance of such allowances, which remains unabsorbed, can be set-off against any other taxable income of the same year. If, still the whole amount of current depreciation allowances is not deductible on account of the insufficiency of the other taxable income, the remaining unabsorbed amount is called, unabsorbed depreciation. Such unabsorbed depreciation shall be added to the depreciation allowances of the following previous year or for the succeeding previous year till such time it is fully deducted. In other word unabsorbed depreciation shall be treated as part of the current year depreciation. However, if there is any carried forward of business loss or speculation loss, the set off to the succeeding previous year shall be done in the following order :a) Set off current year depreciation (Except Salary) b) Set off brought forward business loss or speculation loss (Except Salary) c) Set off brought forward unabsorbed depreciation (For unlimited number of years)
COMPUTATION OF CAPITAL GAIN/LOSS OF DEPRECIABLE ASSET A. On written down value basis [section 50] :a) Transfer of one or more asset in the block of assets [section 50(1)] :- Where a part of the block is sold and full sale consideration of the asset sold, discarded or demolished etc, is more than the value of the block (i.e. opening WDV of block + cost of asset acquired during the P.Y.) then such excess is known as short term capital gain (STCG) and WDV of the block is taken as NIL, therefore no depreciation is charged. When the sale value or the consideration is less than the value of the block, then the remaining amount is WDV of the block on which depreciation shall be charged. b) Transfer of all assets within the same Block [section 50(2)] :- In such event the WDV of such block + cost of any new asset(s) acquired during the year is taken as actual cost and if it is less than the full consideration received, the income if any as a result of such transfer shall be deemed to be short term capital gain (STCG). In case the WDV of the block + cost of new asset acquired during the P.Y. is more than the total consideration received; the difference is called short-term capital loss (STCL). Block (Written Down Value) Block exist Block doesnt exist
+ve balance Balance
-ve balance S.T.C.G
+ve balance S.T.C.L
-ve balance S.T.C.G
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B. Incase depreciation claimed on actual cost basis (Straight Line Method):a) Terminal Depreciation :- In case any asset is sold, demolished or discarded during the P.Y and money realized is less than the WDV of the asset, the difference can be fully debited to P&L A/C of the same year as terminal depreciation or balance depreciation. (STCL in case of other cases) b) Balancing Charge :- In case money realized is more than WDV, the excess amount shall be deemed to be as business profits. In no case the profit shall exceed the amount of depreciation charge so for. In case the money realized is more than cost, capital shall be computed as per provisions as per section 48. (STCG in case of other cases) Benefits of Terminal Depreciation :- STCL can be carried forward for 8 years and in the next years can be set off only against capital gains, whether STCG or LTCG. However, if the loss is treated as Terminal Depreciation then it can be claimed s deduction u/s 32 and if unabsorbed, it can be carried forward for any number of years to be set off against any head of income except income from salary and income covered by sec 56(2)(ib).
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Definition of Business :Business simply means an economic activity carried on earning profits. Section 2(13) has defined the term business as, any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce, manufacture or any adventure. Any adventure or concern in the nature of trade, commerce, manufacturer means even an isolated or single transaction may fall in the term of business if some of the element of trade, commerce, manufactures are presented in such transaction. For example, when a person acquires land with a view to sell it later; developing it, the activity can be described as a business activity.
Definition of Profession :Section 2(36) defines profession means the activities for earning livelihood which require intellectual skill or manual skill, it implies natural ability of a person for some particular work, e.g., the work of lawyer, doctor, auditor, engineer and so on, are in the nature of profession. Profession includes vocation. Vocation means activities which are performed in order to earn livelihood, e.g., brokerage, insurance agency, music, dancing, etc. as the rules for the assessment of business, profession or vocation are the same, there is no importance of making any distinction them for income tax purpose.
Speculation as Business :Speculation is also a distinct business. It means settlement of transaction without delivery of any goods. However, hedging contract or forwarded contract entered into by stock broker or jobber or merchant or manufacturer in respect of shares, raw materials etc., to guard against the loss are not speculation.
Business income not taxable under the head profits and Gains from Business or profession :In the following cases income from trading or business is not taxable under section 28, under the head B/P :P Rent from house property is taxable under the head house property even if the building constitutes stock-in-trade. P Dividends on shares are taxable under the head Income from Other Sources, even if the shares are held as stock-in-trade. P Winning from lotteries, races etc., are taxable under the head Income from Other Sources, even if derived from regular business.
CALCULATION OF BUSINESS INCOME

Profits as per Profit and Loss A/C ADD :- i) Expenses and losses disallowed but charged to profit and loss account xxxxx ii) Incomes taxable as business income but not credited to the xxxxx Profit and Loss A/C iii) Under valuation of closing stock or over valuation of opening stock xxxxx LESS :- i) Expenses or losses allowed but not charged to Profit and Loss A/C xxxxx ii) Income exempted or taxable under other head but credited to xxxxx Profit and Loss A/C. iii) Overvaluation of closing stock and under valuation of opening stock xxxxx Taxable business income xxxxx
xxxxx xxxxx
xxxxx xxxxx
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Therefore while computing taxable business income we have to know that, which expenses are allowed and which are disallowed, which incomes are allowed and which are not allowed.
EXPRESSLY ALLOWED EXPENSES [SECTION 30 TO 36]

1. Rent, rates, taxes, repair and insurance of business premises [section 30] :- All these expenses if related to the premises used for business or professions are fully allowed as deduction, like repair, land revenue, local taxes, municipal taxes or insurance premium. Assessee is the owner Where the assessee is doing business in a building owned by him. Current Repair :- Refers to Allowed as deduction u/s 30 small repair like white wash and other similar expenditure to maintain the building. Capital Repair :- Extensive Will be added to the Actual repairs. For example re- Cost, in the Block of Building, per Sec 43(1) and roofing, however no new as asset or structure comes into depreciation shall be allowed as a deduction. existence. Capital Expenditure :- Will be added to the Actual Where the incurring of the Cost, in the Block of Building, expenditure results in the as per Sec 43(1) and creation of a new asset or depreciation shall be allowed as structure for example a deduction. construction of a store room or the Ist floor. Assessee is the tenant Where the assessee is doing business in a building taken on rent. Allowed as deduction u/s 30
Allowed as deduction u/s 30
Not allowed u/s 30. generally under the income tax act, only the owner can claim depreciation, thus as a general rule depreciation is not allowed to a tenant or lessee. However as per explanation 1 to Sec. 32 :- in respect of building the lessee or tenant can claim depreciation on capital expenditure incurred by such person.
2. Repair and maintenance of machinery, plant and furniture [section 31] :- The expenditure incurred on current repair and insurance in respect of plant, machinery and furniture used for the business purposes is allowed as deduction under this section (repair should not be of capital nature). 3. Depreciation allowance [section32] :- As discussed in other chapter. 4. Deduction for expenditure on scientific research [section 35] :- It includes all expenditure incurred for the prosecution or the provisions of facility for the prosecution of scientific research but do not include any expenditure incurred in the acquisition of rights in or arising out of scientific research. The following deductions shall be allowed :A. Revenue expenditures :- Where the assessee himself if carries own scientific research in relation to his own business, any revenue expenditure (e.g. salary paid to the staff engaged in scientific research, but excluding any perquisite provided to such staff) made by the assessee during the P.Y. shall be allowed. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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Further any such expenditure incurred during the three years immediately preceding the commencement of the business, shall be deemed to have been incurred in the previous year in which the business commenced and shall be deductible in that P.Y. However deduction is limited to the extent certified by the prescribed authority. B. Contribution to outsiders :- Paid to an approved scientific research association or a University, college or other specified institutions or any other specified person, in such a case deduction is allowed @ 175% of the amount so paid, whether it is related or unrelated to the business of the assessee. Contribution to a company to be sued by such company for scientific research Sec 35 (1)(iia) :- This section is applicable from the assessment year 2009-10 if the following conditions are satisfied. 1. The taxpayer is any person. 2. The taxpayer has paid any sum to a company to be used by the payee company for scientific research. 3. The scientific research may or may not be related to the business of the taxpayer. 4. The payee company must be registered in India. 5. The payee company has as its main object the scientific research and development. 6. The payee company is for the time being approved by the prescribed authority. 7. The payee company fulfils such other conditions as may be prescribed.
SPECIAL NOTE :-
Rate mentioned in point (a) as 175% is applicable only for scienetific research otherwise for (i) approved bodies to be used for social science or statistical research. (ii) any national laboratory or university for an approved programme. (iii) an approved Indian company, whose main object is scientific research and development.(point 4) it will remain 125%. This amendment was made to: a. incentivise the corporate sector to invest in house research and b. to further encourage research and development across all sectors of the economy C. Capital expenditure on scientific research incurred by the assessee self :i) Any expenditure of a capital nature on scientific research is related to the business carried by the assessee is allowed in full for the relevant previous year. If an assessee incurs capital expenditure on scientific research related to his business then deduction is available even if the relevant asset is not put to use for research and development purposes during the previous year. For instance deduction u/s 35 is allowable on capital expenditure for research purposes for construction of a building (which is under construction) even if it is not put to use for research and development during the previous year. ii) No deduction shall be admissible in respect of any expenditure on the acquisition of any land after 29-02-1984.
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iii) If any capital expenditure has been incurred during the three years immediately preceding the commencement of the business, the aggregate of the expenditure so incurred shall be deemed to have been incurred in the P.Y. in which the business commenced. iv) Capital expenditure on scientific research, which can not be absorbed on account of insufficiency of profits under the business head or any other head, the unabsorbed part will be C/F and treated in the same manner as unabsorbed depreciation. v) Use of asset for some other purposes :- The capital used for scientific research purposes can be used in the business for some other purposes. In such a case, the same will be added in the value of block of assets in which it belong with value as NIL, because already full deduction claimed by the assessee as allowable expenditure. If such assets sold after use then its sale value will be deducted from such block, like section 50(1) and 50(2). But if such asset sold without any use then, if sale value is less than the amount already deducted then such sale value will be treated as business income. But if sale value is more than its cost then such up to cost it will be treated as business income and excess will be treated under the head Capital Gain. vi) Capital expenditure on research for prescribed things [section 35(2AB) :- In case any capital expenditure (not on land and building) is incurred by a company engaged in manufacture or production of Drugs, Pharmaceuticals, Helicopters, Computers, Telecommunication equipment, Electronic equipments, Aircrafts, Computer Software, Bio Technology, Chemicals or any other articles or things notified by the Board, a deduction of 150% of such expenses shall be allowed but Building (excluding cost of land) is eligible only for 100%.
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SCIENTIFIC RESEARCH
In House Research (The research must be related to the business)
Outside Contribution 175 % of the amount contributed (The research may or may not related to the business)
Sec 35(1) & (2)
Sec 35 2(AB) Revenue Exp :- 200% Capital Exp :- 200% Building :- 100% Land :- Nil
Pre Commencement Period (3 years before the date of commencement)
Post Commencement Period
5. Expenditure by way of payment to associations and institutions for carrying out rural development program [section 35 CCA] :- Under this section 100% deduction shall be allowed to assessee who pays Revenue Capital Revenue Capital any amount Expenditure to any institution which is approved by the central government in the field of Rural Expenditure Expenditure Expenditure Development. Fully allowed On material input Capital Expenditure On material 6. On salaries made to associations or institutions carrying on program of conservation ofLand) Payment (other than natural (Other than Land) input resources Perks) [Section 35CCB] :- 100% of the amount paidsalaries is allowed as deduction if the association or (Excluding On institution is approved for the purposes of conservation of natural resources by the prescribed authority (Including i.e. Secretary, department of environment, govt. of India. No condition of approval Perks) By Prescribed Authority Electricity Allow ability of Fully allowed but For Capital Expenditure Water Revenue Expenditure in the year of is limited to the commercial production amount approved Allow ability of by Prescribed No limit of approved by Revenue Expenditure Authority Prescribed Authority is limited to the amount approved by Prescribed Authority 5. Expenditure incurred on the acquisition of patents and copyrights [section 35A] :- Any capital expenditure incurred (after 28-02-1966 but before 1-04-1998) on the acquisition of patents rights or copy rights used for the business shall be allowed as deduction in 14 equal installments over 14 previous years from the previous year in which expenditure is incurred. If these rights were acquired in any previous year prior to the previous year in which expenditure were incurred the deduction shall be B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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allowed in equal installments in as many years as are left after deduction from 14 years that have been elapsed before the year in which such expenditure were incurred. Deduction under section 35AB is available only in case of lump sum consideration paid or payable for acquiring know-how. Any other consideration for know-how is not covered by this section. Where such expenditure was incurred before the commencement of business, the 14 years shall begin with the P.Y. in which the business commenced. Example :- The assessee purchased a copyright for Rs. 14,000 in the year 1997-98. a deduction of Rs. 1,000 for 14 years will be allowed beginning from the previous year 1997-98. Supposing the right is acquired in the year 1997-98 but the payment for the same was made after the lapse of 7 years, the expenditure will be divided in seven equal installments and a deduction of Rs. 2000 for seven years will be allowed. Sales of patent right or copy right : If the rights are come to an end or are sold and sale proceeds are less than the cost of acquisition there of not charged so for, a deduction equal to such cost remaining is allowed or as the case may be, such cost remaining not-allowed as reduced by the sale proceed shall be allowed in respect of the previous year in which the right comes to an end or as the case may be are sold. Example :- Where a patent which were acquired for Rs. 70,000 and for which deduction for three years i.e. Rs. 15,000 had been allowed, is sold for Rs. 30,000 in the forth year then the deficiency [Rs. 30000 + Rs. 15000 Rs. 70000] of Rs. 25,000 Shall be allowed as deduction in the forth year. Subsequently no further deduction will be allowed. If sale proceeds are more than the amount of not-allowed cost of acquisition, the excess part shall; be the business income of the previous year in which the right is sold. In case loss on sale of right then such loss shall be spread over remaining years of life of the right. The excess cost of over amount of actual cost shall be taxable as capital gain to be computed according to the provisions given u/s 48. Example :- In the above example if the patent right was sold for Rs. 80,000 then the total profit is Rs. 25,000 (i.e. Rs. 80,000 + Rs. 15,000 Rs. 70,000) out of which Rs. 15,000 would be treated as business income and Rs. 10,000 will be treated under the head Capital Gains. In case where only part of the right is sold and the capital sum received on sale falls short of the cost of acquisition of the rights remaining unallowed, the deduction to be allowed in respect of the year in which such sale taken place and each of the subsequent year for which the allowance is otherwise due will be taken to be the sum arrives by dividing the amount of shortfall by the number such years. 7. With effect from assessment year 1996-97, the National Urban Poverty Eradication Fund set up by the central government also covered under this section. 8. Expenditure on Know-How [section 35AB] :a) When technical know-how is acquired before 1-04-1998 the lump sum consideration shall be allowed to be deducted in 6 equal installments commencing from the previous year in which such consideration was paid. Incase amount paid to specify institutions then expenditure are allowed in B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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three equal installments in three previous years commencing from the year in which such expenditure were incurred. (Now this provison is not applicable) b) In case expenditure on know-how incurred after 1-04-1998 then depreciation at the rate of 25% shall be allowed. (u/s section 32) 9. Expenditure on Telecom Licence Fees [section 35ABB] :- Deducttion under this section is available if the following conditions are satisfied : The expenditure is in the capital nature. It is incurred for acquiring any right to operate telecommunication services. The expenditure is incurred either before the commencement of the business or thereafter at any time during any previous year. The payment for the above has been actually made to obtain licence.
Amount of Deduction :- The total amount of payment shall be allowed as deduction in equal installments over the period starting from the year in which such payment has been made and ending in the year in which the licence comes to an end. 10. Expenditure on eligible projects or schemes [section 35AC] :- Deduction is available is available if tax-payers incur any expenditure by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme. 11. Payment to association and institution for carrying out rural development programmes [section 35 CCA] :- Section 35cca provides deduction of sums paid by an assessee to : Any association or institution to be used for carrying out any programme or rural development approved before march 1st 1983. Any association or institution which has its object the training of persons for implementation of a rural development programme approved before march 1st 1983. The National Fund for Rural Development set up by the Government. The National Urban Poverty Eradication Fund set up by and notified by the Central Government.
12. Preliminary expenses [Section 35D] :- An Indian company or other resident persons are allowed in respect of expenses incurred before the commencement of the business. In case of a corporate assessee 5% of cost of project or 5% of capital employed, whichever is more In case of a non-corporate assessee 5% of cost of project
Rate of deduction :- Deduction is allowed @ 1/5 of total expenses incurred after 01-04-1998 or 5% of cost of project or capital employed (as the case may be) whichever is less. In case preliminary expenses incurred before 01-04-1998 the limit was 1/10 of total expenses or 2.5% of cost of project or capital employed (as the case may be) whichever is less was allowed as deduction.
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Cost of project means :a) In the case of expenditure incurred before the commencement of business, the actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railways sidings, which are shown in the books of the assessee as on the last day of the previous year in the business of the assessee commence. b) In the case of expenditure incurred after the commencement of the business in connection with the expansion of his industrial undertaking or in connection with his setting of a new industrial unit the actual cost of additional fixed assets acquired or developed in connection with the extension of the industrial undertaking or the setting up of the new industrial unit of the assessee, and which are shown in the books of the assessee as on the last day of the previous year in which the extension in completed or the new industrial unit commences production or operation. Capital employed in the business of the company means :a) In case the expenditure incurred before the commencement of the business of the company the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the business of the company commence. b) In case the expenditure incurred after the commencement of the business of the company in connection with the extension of its industrial undertaking or the setting up of a new industrial unit, additional capital raised by it for this purpose in the form of issued share capital, debentures and long term borrowings as on the last day of the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation. For the purpose of capital employed long term borrowings means :P Any money borrowed by the company from the government or the Industrial Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution or any banking institution. P Any money borrowed or debt incurred by the company in a foreign country in respect of the purchase outside India of capital plant and machinery, where the terms of repayment thereof is not less than seven years. Preliminary expenses include :P If the work on following expenses is carried on by the assessee himself or by an approved concern i) ii) iii) iv) Preparation of feasibility report Project reports Conducting market survey Engineering services related to the assessees business.
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P The work on following expenses in incurred by any person. i) Legal charges for drafting any agreement between the assessee and any other persons to setting up the new business of the assessee. ii) Printing expenses on Memorandum or Article iii) Registration of Company iv) Expenses on issue of shares or debentures v) Any other prescribed expenses.
SPECIAL NOTE :-
The benefit of amortisiation of preliminary expenses for the extension of an undertaking or the setting up of a new unit shall be allowed to all sectors (including service sector) 12. Contribution towards Exchange Risk Administration Fund :- Contribution paid by a public financial institution towards Exchange Risk Administration Fund is deductible. But from the assessment year 2008-09 it has been discontinued. 13. Banking Cash Transaction Tax (from Assessment Year 2008-09) :- Banking Cash Transaction Tax paid by an assessee during the previous year on taxable banking transactions entered into by him will be allowed as deduction while calculating his income from B/P. SPECIAL POINTS TO BE REMEMBERED The rate applicable is 0.01% on withdrawals of cash on any single day exceeding the permissible limits. Permissible limits :- Rs. 25000 in case of HUF from any of his account other than saving bank account. And Rs 100000 in case of any other person from any of his account other than saving bank account. It is also applicable on a transaction being receipt of cash from any scheduled bank on any single day.
14. Amortization of expenditure under voluntary retirement scheme [section 35DDA] :- Section 35DDA provides that 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 under any scheme of voluntary retirement, 1/5th of the amount so paid shall be deducted in computing the profit sand 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. (In case of termination the expenses is allowed 100%)
OTHER DEDUCTIONS UNDER SECTION 36(1)

1. Bonus and commission to employee :- Bonus or Commission paid to an employee is allowed as deduction subject to certain conditions :i) One of the condition is that the amount payable to employees as bonus commission should not otherwise have been payable to them as profits or dividend. This is provides to check employer from avoiding tax by distributing his profits by way of bonus among the member-employees of his concern instead of distributing the sum as dividend or profits.
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ii) Bonus or commission is allowed as deduction only where payment is made during the previous year or on or before the due date of filling return of income under section 139. 4. Employees contribution to RPF or approved superannuation fund, gratuity fund etc :- The sum paid by the assessee as an employer by way of contribution towards these funds is allowed as deduction. The deduction is allowed only when the payment is actually made on or before the due date mention under the respective welfare act like P.F. act, ESI act etc. If the payment is made by cheque the same must be realized within 15 days of the due date. If payment is made after the due date, no deduction shall be allowed to employer for such contribution. For this purposes due date means the date by which the assessee is required as an employer to crediting such contribution to the employees account in the relevant fund under the provisions of any law or term of contract of service or otherwise. 5. Employers contribution to RPF or approved superannuation fund, gratuity fund etc :- The sum paid by the employer towards contribution to the provident fund or any other recognized fund is allowed as deduction only if the aforesaid amount is deposited in the funds before the filing date of return. 6. Expenditure promoting family planning amongst the employees [Sec 36(1)]:- This deduction is allowed only to the company assessee. Where such expenditure or part thereof is of capital nature, 1/5th of such expenses deducted in the previous year in which it was incurred and the balance shall be deducted in 4 installments in next 4 P.Y. EXPENDITURE ON FAMILY PLANNING
Incurred by Company
Incurred by any other Asseessee
Capital Expenditure 1/5th every year allowed as deduction
Revenue Expenditure 100% allowed in the year in which it is incurred
Capital Expenditure Not allowed as deduction Depreciation can be claimed
Revenue Expenditure These are 100% allowed u/s 37(1)
7. Expenses deductible from commission earned by the insurance agent, UTI agents, post office or government agents, and agents of notified mutual fund :- There is ad hoc deduction given for these agents. The agents are to be divided in the following categories. a) Where the commission earned is less than Rs. 60,000 :- The benefit of the ad hoc deduction is available to agents who do not maintain detailed accounts for expenses incurred by them and has aggregate commission from all sources as specified above is less than Rs. 60,000 during the previous year. Then amount of ad hoc deduction is calculated as follows :Commission 1. Agents of LIC :1.1 First year commission. 1.2 Renewal commission. Ad hoc deduction Maximum deduction
50% of first year commission. 15% of the renewal commission.
Rs.
20,000
in
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1.3 First year commission and renewal commission where separate figures are not available. 1.4 Bonus commission 2. Agents of UTI :2.1 commission received by authorized agent. 3. Agents of specified securities. 4. Agents of notified Mutual Fund.
33 1/3 % of first year commission and renewal commission. No deduction.
respect of 1.1, 1.2 and 1.3.
50% of such commission. 50% of such commission. 50% of such commission.
b) Where the commission is more than or equal to Rs. 60,000 :- The benefit of ad hoc deduction is not available for those agents whose aggregate commission from al resources mentioned above exceeding Rs. 60,000. Such agents should have maintained the accounting records of all expenses and can claim deduction according to section 30 to 43B. 8. Bad debts :- The amount of any bad debts written off as irrecoverable during the previous year shall be allowed as deduction. According to section 36(2) of the act, the debt must be a business debt and has been taken in to account in computing the income of the assessee. If the bad debts represent any money lent by the assessee, then such lending must be ordinary course of the business of banking or money lending carried on by the assessee. SPECIAL POINTS TO BE REMEMBERED P Provision for Bad and Doubtful Debts is not allowed. P Bad debts are allowed in year such debts are to be written off as bad in the books of accounts. Even successor of the business can get the benefit of bad debts deduction. P No allowance of bad debts can be claimed of a business, which has been discontinued before the commencement of the previous year. Such bad debts cannot be deducted even from profits of separate existing business. P In the years of recovery of such bad debts, than these are treated s business income up to the amount allowed as bad debt in the earlier year, (i.e. it allowed as amount so recovered amount of bad debt disallowed earlier). 9. Interest on borrowed capital :- The amount of interest paid or payable [as per the method of accounting] in respect of capital borrowed for the purposes of business or profession shall be allowed as deduction. 10. Insurance premium :- Premium paid in respect of insurance against the risk of damages of stock or share or machinery etc. used for the purposes of business or profession shall be allowed. 11. Premium for insurance on the health of employees :- An employer can claim a deduction in respect of premium paid by him by any mode other than cash for insurance on the health of his employees in accordance with the scheme framed by the General Insurance Corporation and approved by the central government. 12. Write off allowance for animals :- In respect of animals which are become useless, the difference between the actual cost of the animals to the assessee and the amount realized (if any) in respect of carcasses or sale of animals, is allowable as deduction. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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GENERAL DEDUCTIONS U/S 37(1)

Deduction under this section is to be allowed if the following conditions are fulfilled :i) ii) iii) iv) The expenses are not of the nature stated under section 30 to 36. The expenses are not capital in nature. The expenses are not personal expenses of the assessee. Such expenses are incurred wholly and exclusively for purposes of business or profession of the assessee.
EXAMPLES OF ALLOWED EXPENDITURES UNDER SECTION 37(1)

1. Legal expenses or litigation expenses incurred by the assessee to protect the assets or for saving such assets from destruction, dissipation or wasting in the interest and for the benefit of assessees business. 2. Litigation expenses incurred in order to defend or maintain an existing title to the business assets. 3. Expenses on litigation (whether civil or criminal) if incurred wholly and exclusively for the purposes of the business. 4. Damages or penalty incurred for breach or non-fulfillment of contract. 5. Damages paid to workers in order to dismiss him from the business. 6. Demurrage paid to railways, airport for not lifting goods in time. 7. Brokerage or stamp duty or lawyer fees etc. paid to obtain loan. 8. Salaries, perquisites, gift or compensation etc. to employees. 9. Contribution to a trade syndicate with a view to preventing uneconomic competition. 10. Initial expenditure on the first installation of fluorescent lights is treated as capital expenditures and all subsequent expenditure for replacement of tubes is treated as revenue expenditure. 11. Loss by fire, white ants, theft, natural calamities etc. 12. Expenses on Diwali, mahourat, inauguration, festival, annual day celebration, silver jubilee etc. 13. Expenses incurred in obtaining use of trademark, technical information, training of apprentices technician. 14. Deposit made under OYT (Own your telephone) scheme for securing telephone, security deposit for fax, telex connection, deposit under Tatkal Telephone Deposit Scheme. 15. Insurance premium for emergency risks insurance, premium paid on loss of profit policy. 16. Periodical payments for the use of goodwill, trademark or royalty paid of patents, mine etc. 17. Discount rebate, discount and concession to debtors or customers. 18. Income tax appeal, advice or expenses incurred for preparing income tax return etc. 19. Subscription to journals, institutes, unions, associations etc. membership fee to institute or association etc. 20. Expenses related to entitlement, traveling and advertisement and incurred for maintenance of guesthouse. 21. Professional - taxes paid by a person carrying on business or trade. 22. Expenses incurred on registration of trade - marks. 23. Amount paid to third party in order to use his quota right. 24. Penalty levied for supply of food grain not confirming to the contract quality. 25. Entertainment expenses incurred on opening of new branch at different places. 26. Cash shortages found in business at the end of the day, if there is proper FIR in this connection. 27. Donation contribution made by an assessee to any relief fund, such as Chief Minister Drought Relief Fund or District Welfare Fund established by District Collector for the benefit of public with a view to securing benefit to assessees business. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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28. Expenditure incurred by the assessee on plantation in factory premises and residential quarters of company in order to making atmosphere pollution free. 29. Software programme once developed by the assessee cannot be said to be of enduring benefit and expenses in developing such software programme will be allowable as revenue expenditure. 30. Amount paid by the assessee company for Flag Day Fund on Governments appeal. 31. Contribution made by the assessee, running the refinery, to railway department for construction of railway track and siding which are necessary for the smooth running of business in a profitable and advantageous manner (only expenditure incurred in relevant year of assessment alone is to be allowed). 32. Expenditure incurred by the assessee-company on foreign visit of director and his wife in connection with medical treatment of director. 33. Penalty which is compensatory in nature and which is paid for the breach of a contract of goods is deductible. If something more is payable, then it is not deductible. 34. Banking Cash Transaction Tax is allowed 100%. 35. Deduction of Discout on Zero Coupon Bond 36. Security Transaction Tax is fully disallowed.
EXPENSES DISALLOWED U/S 37(1)

1. Legal or litigation expenses for protecting or curing any defect in the title of assets or completing the title, legal expenses in criminal cases. 2. Damages paid for breach of contract for purchase of capital asset etc. 3. Fine or penalty for violation of law, importing goods without valid license etc. 4. Salary or other remuneration, interest on capital etc. to proprietor or members of AOP. 5. Expenditure on shifting the premises. 6. Any type of provisions or reserves. 7. Personal expenses like drawings, gifts and presents, house hold expense, income tax, wealth tax, gift tax etc. 8. Donation and contribution if not related to the purposes of business, like donation to the political party etc. 9. Insurance premium on the life of proprietor, partners or members of AOP. 10. Betterment charges paid to local authority in case building etc. of the assessee improved or renovated. 11. Past losses or anticipated losses as those losses did not pertain to the previous year. 12. Cash shortage is disallowed but cash theft or embezzlement of cash is allowed expenditure. 13. Capital losses on destruction, sale, and transfer of capital assets, as these are to be treated under the head capital gain. 14. Expenditure on raising equity shares or preference shares capital (may be redeemable or not) 15. Expenses incurred on installation of a neon sign board or other sign board is treated as advertisement expenses, but with effect from 1-04-1998 the cost of signboard being capital expenditure shall qualify for depreciation @ 10% and cost of neon sign board @ 15% (being electric installation). 16. Fringe Benefit Tax is fully disallowed.
EXPENSES DISALLOWED [SECTION 37(4), 40 AND 43B]

1. Expenditure on advertisement in political souvenir etc. 2. Payment made outside India without TDS. Any interest, royalty, fees or other sum chargeable under the act, which is payable outside India on which tax has not been deducted or paid shall be disallowed. 3. Remuneration, interest etc. to partner of firm [section 40(b)] :- In case of any partnership firm assessed as firm [PFAF], any remuneration (salary, bonus, commission etc) or interest to partners allowed as follows :B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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a) Remuneration payable to any partner who is not a working partner shall be disallowed. b) Any payment of remuneration to working partner or interest to any partner is not allowed if not authorized by partnership deed. c) Interest paid to any partner as authorized by partnership deed in excess of simple interest of 12% p.a. shall be disallowed. d) Remuneration to working partners as authorized by the partnership deed in excess of the following shall be disallowed :In case of both Professional & Non Professional firms :a) On the first Rs. 3,00,000 of book profit or in Rs. 1,50,000 or 90% of book profit which ever is case of loss. higher. b) On the balance of book profit @ 60% of book profit 4. Payments to relative etc. [Section 40A(2)] :- Any expenditure in respect of which payment has been or is to be made to any relative of the assessee or any person who has substantial in the business of the assessee or relative of such person shall be disallowed to the extent it is excessive or unreasonable. The term relative in relation to an individual means the husband, wife, brothers, sisters or any lineal ascendant of that individual. Here substantial interest means, in case of company, it means any person who has not less than 20% voting power in the company and in case of any other person it means, any person who has at least 20% share in profits. 5. Cash payment exceeding Rs. 35,000 [Section 40A(3)] :- Any expenditure in respect of which payment in excess of Rs. 35,000 is made other wise than by an account payee cheque or account payee draft, 100 % of such expenditure or payment shall be disallowed. Even payment for purchase of goods falls within the expression expenditure occurring in this section.
EXCEPTIONS TO THE RULE OF CASH PAYMENT:

a) b) c) d) e) f) Payment to Banks, LIC, UTI, State Financial Corporation, IDBI, ICICI etc. Payment to government. Payment under contract entered into before 1st April 1969. Payment to producer for the purchase of products produced without the aid of power in cottage industry. Payment made by book adjustment by an assessee in the account of payee against money due to the assessee for any goods supplied or services rendered by him to the payee. Payment to a cultivator, grower or producer in respect of purchase of agricultural or forest produce or product of animal husbandry or diary or poultry farming or fish or fish product (even if these product have been subjected to some processing, provided the process has been done by the cultivator, grower or the producer of the product. Payment made to any person resides and carries on business in a village served by any bank. Payment of terminal benefit such as gratuity, retrenchment compensation etc. in respect of employees drawing salary not exceeding Rs. 7,500 per year in the year of retirement or in the preceding year. Payment required to be made on a day on which the banks were closed either on account of holiday or strike. Payment made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
g) h) i) j)
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k) If assessee makes payment at different time during the day and he has no idea that he has to pay the same person on more than one occasion, he cannot be subject to the statutory provision of section 40A(3). l) Section 40A(3) is not applicable if an assessee purchase a capital asset. m) The provisions of section 40A(3) are applicable in computing income under the head business or profession and income from other sources. Special Note :- M.B.D. = 1 MAN, 1 BILL, 1 DAY CANNOT COME TOGETHER 6. Amount not deductible in respect of provision for unapproved gratuity [section 40A(7)] :- Provision for gratuity fund is deductible only if such gratuity fund is approved gratuity fund. In other words, any provision for unapproved gratuity fund is not deductible. But if an employee retires during the current year, gratuity paid to him during the current year. It is deductible during the current year during which gratuity paid, if no deduction was claimed earlier. 7. Provision for payment or contribution of employer to non-statutory fund :- Employers contribution to unrecognized provident fund, staff welfare fund etc. being non-statutory, and shall be disallowed. But expenditure incurred on the welfare of the employees is allowed expenditure. 8. Disallowance of expenses not actually paid [Section 43B] :a) Tax, duty, cess or fee under any law, e.g. sales tax, excise duty :- Allowed In the previous year if paid on or before due date of filling return of income u/s 139(1), otherwise is allowed in the year of payment. b) Interest on any loan or borrowing from any public financial institution like, ICICI, UTI, IFCI, LIC, IDBI etc. or loan from schedule bank or Bonus Or Commission to employees: Allowed in the previous year if paid on or before due date of filling return of income u/s 139(1), otherwise is allowed in the year of payment. c) Employers contribution to RPF, Superannuation Fund, Gratuity Fund etc. :- Allowed in the previous year if paid on or before the due date of return otherwise it is never allowed. d) Any sum payable by employer in lieu of leave at the credit of his employee.
SPECIAL POINTS TO BE REMEMBERED If payment is made by account payee cheque or cross cheque or draft then same must be realized within 15 days from the due date. If payment is made by a bearer cheque then it will be treated like cash payment. If payment is made after the due date of filling return then it will be allowed in the next previous year, for a), b) and d) and not for c) It has been clarified that where a deduction in respect of the aforesaid sum is allowed in computing the income of an earlier year on accrual basis, the same will not again be allowed as deduction under this section on payment basis.
Deduction for various types of taxes paid or payable by the assessee

1 2 3 Sales Tax, Road Tax, Excise Duty, Custom Duty, Service Tax or other similar Tax Municipal Tax Banking Cash Transaction Tax Allowed Allowed Allowed
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4 6 7 8
Fringe Benefit Tax Income Tax Wealth Tax Corporate Dividend Tax
Not Allowed Not Allowed Not Allowed Not Allowed
ALLOWED BUSINESS INCOMES

1. Profits and Gains from Business or Profession [Section 28(i)] :- Any receipt in the course of business or profession carried on by the assessee in India or abroad is chargeable to tax. 2. Any compensation [section 28(ii)] :- Any compensation or other payment due to or received by any person in connection with the following is chargeable to tax. Any compensation received on termination or modification of terms and conditions of managing agency of an Indian company or any other company in India or agency of any other person. Any compensation received from Govt. on taking over of management of any property business. 3. Income of trade or professional association u/s 28(iii) :- Trade association is an association of traders, businessman, manufacturers, professional etc. for the protection and advancement of their common interest. Under this section if the income derived by such association from rendering specific services to its members is business income. But any receipt on account of subscription entrance fees is not taxable. Specific services may include rendering service by providing office clerks, acting as an arbitrator etc. 4. Export Incentives [Section 28 (iiia) to (iiic)] :- export incentives of following nature are taxable as business profits. Profits on sale of import licenses or import entitlements. Cash assistance for subsidy received or receivable by any person against export under any scheme of the government of India. Any duty of customs or excise repaid or repayable as draw back to any person against export under Duty Draw Back Rule 1971. 5. Value of benefits or perquisites [Section 28(iv)] :- The value of any benefit or perquisite, whether convertible into money or not, arising from business for the exercise of profession is taxable. 6. Interest and remuneration of partners {Section 28(v)} :- Any interest, salary, bonus, commission or remuneration, whatever name called, due or received by a partner of a firm from such firm to the extent it is allowed u/s 40(b) of the Act is business income chargeable to tax. 7. Sum received as key man insurance policy [section 28(vi)] :- Any sum received by a business man or professional under Key Man Insurance policy including the sum allocated by way of bonus on such policy is taxable as business income. It is a policy taken by the B/P on the life of a person who is or was his employee or connected with his business with any manner, in order to protect the business loss, which may occur due to premature death of the employee etc. It is to be noted that premium paid shall be allowed as business expenses. 8. Profits earned from illegal business :- If an assessee earns any income from illegal business, it is to be computed in ordinary manner and chargeable to tax along with income earned from a legal business.
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DEEMED INCOMES/PROFITS
1. Sale of depreciable assets :- When depreciation is charged on actual cost basis [in the business of generation and distribution of power], if the sale of such asset exceeded to its WDV then such excess shall be deemed as business income. 2. Sale of assets used for scientific research :- Where an asset representing expenditure of a capital nature on scientific research within the meaning of section 35 is sold and the sale proceed together with the total deduction exceed the amount of the capital expenditure, the excess or amount of deduction whichever is less shall be chargeable to tax in the previous year in which the sale took place. But sale value in excess of its actual cost shall be chargeable to tax under the head capital gain. Example :- An asset costing Rs. 1,00,000 used for scientific research related to the business of the assessee. Rs. 80,000 was allowed as deduction u/s 35 on account of such expenditure. Subsequently asset was sold for Rs. 1,50,000. The amount chargeable to tax under the head B/P is Rs. 80,000 and balance gain of Rs. 50,000 shall be taxable under the head Capital Gain. ASSET FOR SCIENTIFIC RESEARCH SUBSEQUENTLY TRANSFERRED
After using it for assessees own business 1. Actual cost is added to the Block 2. Actual Cost as per Explanation 1 to Sec 43(1) is the Original Cost of the asset Less :- Deduction claimed u/s 35 = Nil
Without using for business 1. Deduction claimed earlier will be reserved u/s 41(3) and taxed as business income whether the business is in existence or not. 2. Capital gains shall be computed separately for transfer of the capital asset u/s 48 as non depreciable capital asset
3. Recovery of bad debts :- recovery of bad debts is charged to tax to the extent it is allowed earlier as deduction of bad debts, i.e. adjusting the value of the bad debts out of bad debts recovered which were not allowed earlier. Where any business or profession is discontinued by reason of the retirement or death of person carrying on such business or profession, any sum received after the discontinuance of the business or profession is deemed to be the income of the recipient and charged to tax in the year of receipt. 4. Other business incomes :- Other business may include the following incomes: Examiner remuneration received by a professional. Interest on debtor. Liability forgone by creditors. Penalty received on account of short supply or defective supply of material. Income from letting out building to the employees, if there residence is incidental to the business. Interest on drawings paid by the partner to the firm. Income from sale of security held by bank or financial institution held as stock in trade. Amount collected by assessee on account of sales tax. Subsidy received as calculated per unit of production or sale. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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Damages received for breach of contract.
DISALLOWED INCOMES WHICH ARE EXEMPTED OR TAXABLE UNDER OTHER HEADS OF INCOME
A. Incomes which are taxable under other heads but credited to profit to loss account: Rent from house property. Pension from former employer. Profit on sale of capital assets. Dividend, interest on securities, NSC, post office deposits. Bank interest. Winning from lotteries, card games, etc.
B. Incomes which are exempted from tax but credited to Profit and Loss a/c: Agricultural receipt. Receipt from PPF a/c, other P.F. etc. Receipt from LIC, not being received under key man insurance policy. Gifts and presents from relatives or friends. Income tax refund. Interest on PPF etc. Goods withdrawn for personal use and credited to sale a/c in excess of its cost price. Bad debts recovered but disallowed earlier.
METHODS OF COMPUTATION OF PROFESSIONAL INCOME

Professional receipts Professional expenses Professional gain xxxxx (-) xxxxx xxxxx
LESS :-
METHODS ACCOUNTING [SECTION 145]

There are three methods of accounting. These are as follows :A) Cash system :- In this method, incomes and expenses are recorded on realization and payment basis. All types of expenses or incomes are allowed in the previous year, which are actually received or paid whether these are related to any year. B) Mercantile System :- In this method, incomes and expenses are recorded on accrual or due basis, incomes are deemed to be realize at the time these arises or tight to receive it. C) Hybrid System :- In this method, incomes are recorded on cash basis but expenditures are recorded on accrual basis.
IN SOME CASES THERE IS NO NEED TO PREPARE BOOKS OF ACCOUNTS

F. If assessee is engaged in the business of civil construction (Section 44AD) B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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If the following conditions are satisfied then 8% of the gross receipts is treated as income for income tax purpose. The taxpayer may be Individual, HUF, AOP, BOI, Firm, Company, Co-operative society or any other person. He may be resident or non resident. Gross receipt from the above business do not exceeds Rs. 40 Lakhs
SPECIAL NOTE :-
Gross receipts are the amount received from the clients for the contract and will not include the value of material supplied by the client. G. If assessee is engaged in the business of plying, leasing or hiring trucks (Section 44AE) If the following conditions are satisfied then income for income tax purpose is as follows :Heavy goods vehicle Other than Heavy goods vehicle Rs. 3500 P.M. (or part of month) during which the goods carriage is owned by the taxpayer. Rs. 3150 P.M. (or part of month) during which the goods carriage is owned by the taxpayer.
SPECIAL NOTE :- Heavy
weight vehicle of more than 12000 kgs.
The taxpayer may be Individual, HUF, AOP, BOI, Firm, Company, Co-operative society or any other person. He may be resident or non resident. The taxpayer does not own more than 10 goods carriages at any time during the previous year.
SPECIAL NOTE :-
For this purpose, a taxpayer, who is in possession of a goods carriage, whether taken on hire purchase or on installments and for which the whole or part of the amount payable is still due, shall be deemed to be the owner of such goods.
METHODS OF VALUATION OF STOCK

There is no particular method of valuation of stock. An assessee can value its stock at cost or market - value whichever is less. Once a particular method is adopted then it cannot be changed without the permission of income tax authority. But if stock is under valued or overvalued then it is to be treated as follows :In case undervalued stock Actual cost of stock = Stated value of stock X 100 / 100 Rate In case overvalued stock Actual value of stock = stated values of stock X 100 100 + rate.
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FOR CA STUDENTS ONLY

Section 33AB :- Tea/Coffee/Rubber Development Account
For claiming deduction u/s 33AB the assessee should satisfy all the conditional mentioned below. 1. The assessee must be engaged in the business of growing and manufacturing tea/coffee/rubber in India. 2. Deposit :- The assessee deposit the amount in NABARD (National Bank for Agricultural and Rural Development) I accordance with the provisions of Tea Board / Coffee Board / Rubber Board as approved by the Central Government. 3. Time limit for Deposit :- This deposit in the bank should be deposited within 6 months from the end of relevant previous year or Due Date of filing return of income whichever is earlier. 4. Audit :- The books of account should b e audited by a Chartered Accountant. However if the accounts are already audited under any law then a prescribed certificate Form No. 3AC should be certified only by that Chartered Accountant. 5. Amount of deduction :- Deduction is least of the following is the amount of deduction : 40% of income of such business (Both agricultural and non-agricultural) An amount deposited in NABARD or other specified deposit account.
6. Withdrawn of deposit and its utilization :- It should be utislised only for the specified purpose in the same year in which amount is withdrawn. However if the amount is withdrawn but not used in the same year, then it shall be taxable in the same year. The amount withdrawn should be utilized for Business Purpose only (e.g. purchase of plant and machinery). It should not be utillised for the following purpose : Plant and machinery installed in Office and Residential Accommodation. Any office appliances except computer. Low priority items.
7. Transfer of assets with 8 years :- If the assets purchased is transferred with in 8 years fro the end of Relevant Previous Year in which asset is acquired, then the deduction shall be withdrawn. It shall be taxable in the year of sale as below ;Business Income :- Deduction earlier allowed (60% is Agricultural Income) Capital Gain :- Sales (-) Cost of Acquisition 8. However in the following cases deduction shall not be withdrawn : Conversion of Firm into Company.
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Transfer to Central Government, State Government, Local Authority, Statutory Corporation, Government Company.
Section 33ABA :- Site Restoration Fund

If an assessee is engaged in production of prospecting, extracting, production of petroleum or natural gas in Indian and Central Government has entered in Agreement with assessee for such business. For claiming deduction under this section the assessee should satisfy all the conditions as mention in this section. 1. Deposit :- The amount should be deposited in the account as specified by the Central Government and also is should be deposited as per the scheme notified by the Ce3ntral Government in this respect (Site Restoration Fund). This deposit in the bank should be deposited before the end of the Relevant Previous Year. 2. Audit :- The books of account should b e audited by a Chartered Accountant. However if the accounts are already audited under any law then a prescribed certificate Form No. 3AD should be certified only by that Chartered Accountant 3. Amount of deduction :- Deduction is least of the following is the amount of deduction : 40% of income of such business income. Deposited with the bank in specified deposit account.
4. Withdrawn of deposit and its utilization :- It should be utislised only for the specified purpose in the same year in which amount is withdrawn. However if the amount is withdrawn but not used in the same year, then it shall be taxable in the same year. The amount withdrawn should be utilized for Business Purpose only (e.g. purchase of plant and machinery). It should not be utillised for the following purpose ; Plant and machinery installed in Office and Residential Accommodation. Any office appliances except computer. Low priority items.
5. Transfer of assets with 8 years :- If the assets purchased is transferred with in 8 years fro the end of Relevant Previous Year in which asset is acquired, then the deduction shall be withdrawn. It shall be taxable in the year of sale as below ;Business Income :- Deduction earlier allowed (60% is Agricultural Income) Capital Gain :- Sales (-) Cost of Acquisition 6. However in the following cases deduction shall not be withdrawn : Conversion of Firm into Company. Transfer to Central Government, State Government.
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Section 44AA (Requirement of maintaining of Books of Accounts)

1. Specified profession
Persons carrying on Specified Profession And If there Gross Receipts does not exceed Rs. 1,50,000 in any of the three previous years. Or If it is newly set up then it is not likely to exceed. Persons carrying on Specified Profession And If there Gross Receipts exceeds Rs. 1,50,000 in any of the three previous years. Or If it is newly set up then it is not likely to exceed.
Such person is required to maintain books of accounts. However such books of accounts are not prescribed by the Government yet not. So the assessee should maintain such books of accounts, which may enable the Assessing Officer to compute their Taxable Income. Such persons are required to maintain the following books of accounts :-
Prescribed Books
Cash Book, Journal, Ledger Bill > Rs. 25, Carbon Copy with Machine No. Exp. > Rs. 50, Original Bill & Receipt Exp. Rs. 50, Voucher Prepared & Signed
Medical Profession
All Above & Daily Register (Form No.3C) Inventory Record 1st & Last day of Previous Year 2. Non Specified Profession and Businessman Persons carrying on Non Specified Profession Such person is not required to maintain books of or any business accounts. And If there Income does not exceed Rs. 1,20,000 in the three previous years. And The Total Sales or Gross Receipts does not exceed Rs. 10,00,000 Or If it is newly set up then it is not likely to exceed. Persons carrying on Non Specified Profession Such persons are required to maintain the books or any business of accounts. However such books of accounts are And not prescribed by the Government yet now. So If there Income exceeds Rs. 1,20,000 in the three the assessee should maintain such assessee should maintain such books of accounts, which previous years. may enable the Assessing Officer to computer And The Total Sales or Gross Receipts exceeds Rs. their Taxable Income. 10,00,000 Or If it is newly set up then it is not likely to exceed. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindals Math World & Jindals Theory Point. A Complete Range of Subjects under a Single Roof.
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SPECIAL NOTE :- Persons
cover U/S 44AD, AE, AF. If such assessee claims his income is lower, then he shall maintain such books of accounts as may enable to Assessing Officer to compute his Income. Penalty U/S 271A :- If the person fails to maintain such books of accounts as required u/s 44AA, then Assessing Officer or Commissioner of Income Tax may direct to pay a penalty of RS. 25,000 u/s 271A. Specified Profession :- It means Legal, Medical, Engineering, Architectural, Accountancy, Technical Consultancy, Interior Decoration, Company Secretary, Information Technology, Film Artist (Film Artist means an actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screen play writer, dialog director, and dress designer), Authorised Representative (A person who represents himself on behalf of another person, not being employee.)
Section 44AB [Tax Audit (Compulsory)]

The following person is required to get his accounts to be audited by a Chartered Accountant Any person who is carrying on any business Any person who is carrying on any profession Any person covered under section 44AD 44AE 44AF 44BB, 44BBB
SPECIAL NOTE :-
If the total sales in the Business exceeds Rs. 60 Lakhs during the previous year. If his Gross Receipts in the Profession exceeds Rs. 15 Lakhs during the previous year. If such person claims that the profits and gains from the Business are lower than the profits computer under the respective sections.
The assessee should get his accounts to be audited before the specified Due Date (30th September) by a Chartered Accountant and should submit his Audited Tax Report along with Return of Income to Income Tax Department on or before the Due Date of Filing Return of Income.
Audit Forms Particulars If the assessee is required under any law to get Audit of Accounts Others
Audit Report 3 CA 3 CB
Statement 3 CD 3 CD
Penalty u/s 271B :- If any assessee fails to get his accounts audited or fails to furnish the report within Due Date of filing Return of Income, then a Penalty % of Total Turnover, subject to Maximum Rs. 1,00,000 shall be levied u/s 271B
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QUESTIONS
Write the income which are chargeable to tax under the head Business Profession. Write a note on additional depreciation. Write a detailed on Scientific Research, Preliminary Exp., Family Planning Exp. & Patent Right.(V. Imp) Write short note on estimate of income of assesses engaged in Civil Construction. Write short note on Compulsory Preparation of Account and Compulsory Audit. Write a note on Actual Cost. Write a note on Section 43B. Write a note on payment to Relative / Related Person.

Income Tax Part 1

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Income Tax Part 1

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THE FINANCE ACT

SCOPE OF THE INCOME TAX ACT

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Assessee [Sec. 2(7)]

Person [section 2(31)]

:- So long H.U.F. exists, individual members cannot separately assessed in respect of

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iii) Incomes: [u/s 2(24)]

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Income of non resident from shipping business, u/s (172)

Section 172 is applicable only if the following conditions are satisfied.

SPECIAL NOTE :- If all

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GROSS TOTAL INCOME

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COMPUTATION OF TOTAL INCOME AND TAX LIABILITY TOTAL INCOME

(-) xxxx xxxx

xxxx xxxx xxxx xxxx xxxx

(+) or (-) xxxx (+) xxxx (-) xxxx (-) xxxx

xxxx xxxx xxxx

xxxx xxxx xxxx (-) xxxx

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Add Add Less

TAX RATE OF ASSESSMENT YEAR (2011-2012)

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ROUNDING OFF OF TOTAL INCOME (288 A)

ROUNDING OFF OF TAX (288 B)

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3001500 5,000 3006500

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RESIDENT [SEC 6(1)]

NON-RESIDENT [SEC 2(30)]

RESDIENT AND ORDINARILY RESIDENT [SEC 6(1), 6(6)(a)]

RESIDENT AND NOT ORDINARILY RESIDENT [SEC 6(1), (6)(b)]

RESIDENTIAL STATUS OF AN INDIVIDUAL

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Resident and Ordinary Resident (R.O.R.) [u/s 6(1), 6(6)]

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Resident but Not Ordinarily Resident (NOR) [u/s 6(1), 6(6)]

Non-Resident [u/s 2(30)]

If fulfills then become Resident

If does not fulfill then become Non- Resident

Both of the two additional conditions given u/s 6(6)

If fulfills then become R.O.R.

If does not fulfill become N.O.R.

Non-Resident [u/s 2(30)

Not Ordinarily Resident [u/s 6(6)]

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RESIDENTIAL STATUS OF A COMPANY Resident [u/s 6(3)]

Non-Resident [u/s 2(30)]

RESIDENTIAL STATUS OF ANY OTHER PERSON [U/S 6(4)]

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ROR YES YES YES YES NO

NOR YES YES YES NO NO

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person who, acting on behalf of the non-resident, the following activities :-

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(b) From any other person