Profits and Gains of Business or Profession [Ss.

28 to 44 DB]

Under Section 28 of the Income Tax Act, the following types of incomes are
chargeable to tax under the head “Profits and Gains of Business or Profession”.
(i) Profits and gains of any business or profession which was carried on by the
assessee at any time during the previous year;
Profession [S. 2 (36)] – profession includes vocation.
(ii) Compensations due to or received:
Any compensation or other payment due to or received for termination of an
appointment or modification of its terms by –
(a) A person, managing the whole or substantially the whole of the affairs of
an Indian company;
(b) a person, managing the whole or substantially the whole of the affairs in
India of a non – Indian company;
(c) a person, holding an agency in India for any part of the activities relating to
the business of any other person;
(d) any compensation paid or due for or in connection with the vesting of the
management of any property or business in the government or a government
controlled corporation.
(iii) Income of Trade Association etc. :
Income derived by a trade, professional or similar association from specific
services performed for its members;
(iv) Receipts in connection with foreign trade:
(a) Profits on sale of a licence granted under the Imports (Control) Order, 1955
usually called as Import Entitlement Licences;
(b) Cash assistance (by whatever name called) received or receivable by any
person against exports under any scheme of the Government of India;
(c) Repayment of any Customs or Excise Duty to any person against exports
usually called as draw back of Customs or Excise Duties for exports;
(d) Any profit on the transfer of the Duty Entitlement Pass Book scheme, being
duty Remission Scheme under the Export and Import Policy;
(v) Value of any Benefit or Perquisite:
The value of any benefit or perquisite, whether convertible into money or not,
arising from business or the exercise of a profession;
(vi) Receipts of a partner from the firm:
Any interest, salary, bonus, commission or remuneration received by a partner
from firm;
Other receipts:
(vii) Any sum whether received or receivable in cash or kind under an
agreement for not carrying out any activity in relation to any business or not to
share any know how, patent, copyright, trademark, licence, franchise or any
other business or commercial right of similar nature; or information or
technique likely to assist in the manufacture or processing of goods or
provision for services.
(viii) Any sum received under Keyman Insurance Policy
(ix) Income from speculative transaction must be deemed as distinct and
separate from any other business. [Explanation 2]
Section 43(5) defines speculative transaction
CIT vs. Shantilal (P) Ltd., [1983] 144 ITR 57 (SC) - payment of damages for
breach of contract is not the same thing as settlement of contract otherwise
than actual delivery of commodities.
Business [S. 2(13)]: includes any trade, commerce, manufacture or any
adventure or concern in the nature of trade, commerce or manufacture.
Trade: State of Punjab vs. Bajaj Electricals Ltd. [1968] 70 ITR 730(SC)
observed: trade in its primary sense is the exchange of goods for goods or
goods for money.
Commerce: If a person purchases goods with a view to selling them at profit, it is
an ordinary case of trade. If such transactions are repeated on a large scale, it is
called commerce.
Manufacture:
U.o.I. vs. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791

Adventure in the nature of Trade:

G. Venkataswami Naidu & Co. vs. C.I.T. (1959) 35 ITR 594 (SC): Tests for
determination:
1. Is the purchaser a trader and are the purchases of the commodities and its
resale, allied to his usual trade or business, incidental to it?
2. What was the nature and quantity of the commodity purchased and resold?
3. Did the purchaser by an act subsequent to the purchase improve the quality
of the commodity to make that readily resalable?
4. Were the transactions repeated?
5. In regard to purchase of commodity, did the element of pride of possession
come into the picture?
6. Dominating intention at the time of purchase whether to enjoy or to resale
Incomes though appear to be business income but not
taxable under the head “Profits and Gains of Business
or Profession”:
1. Rent of House property even if property constitutes stock – in
– trade
2. Dividends on shares in case of a dealer in shares
3. Winnings from lotteries, races etc..
4. Interests received on compensation or interest on enhanced
compensation even if it pertains to a regular business activity
5. Sums received after discontinuance of a Business or Profession
– Taxable u/s 176 (3A)
Income from letting out business asset:
C.E.P.T. vs. Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC) – Assessee doing
business of manufacturing silk cloth and dyeing silk yarn, let out his assets on
monthly rent in the relevant accounting year – held business income.
Universal Plast Ltd. vs. CIT [1999] 237 ITR 454 (SC) – held, where all the assets
of the business are let out, the period for which the assets are let out is a
relevant factor to find out whether the intention of the assessee is to go out of
business altogether or to come back and restart the same. In former case rent
will be taxable under the head Income from Other Sources, in latter case as
business income.
Income from Illegal Business:
Minister of Finance vs. Smith (1927) AC 193 (PC) – Assessee may be prosecuted
for the offence but income is taxable.
CIT vs. Kothari (1971) 82 ITR 794 (SC) – Income is taxable and not the gross
receipt
CIT vs Piara Singh (1980)124 ITR 40 (SC) – Loss sustained due to confiscation of
gold or currency in smuggling business is deductible.
T.A. Qureshi vs. CIT [2006] 287 ITR 547 (SC) - Loss
arising as a result of seizure and confiscation of illegal
stock – in – trade is allowable as a business loss against
income from illegal business. In this case heroin worth
Rs. 2 Lakh was seized. Held: Explanation to Section
37(1) has no application to this case as the claim was of
a business loss and not business expenditure.
Explanation to S. 37 (1) – says: “For the removal of
doubts, it is hereby declared that any expenditure
incurred by the assessee for any purpose which is an
offence or which is prohibited by law shall not be
deemed to have been incurred for the purpose of
business or profession and no deduction or allowance
shall be made in respect of such expenditure”.
Income from profits and gains of business or profession, how
computed [S. 29]:
Section 29 lays down that income referred to in Section 28 shall be
computed in accordance with the provisions contained in sections 30 to
43D.
Sections 30 to 36 lay down specific deductions/allowances admissible.
Section 37(1) is a residuary section which allows deductions of business
expenditures not covered under Sections 30 to 36. This is on the basis of
accepted commercial principles.
Section 38 lays down that where any building, plant, machinery or
furniture is not exclusively used for the purposes of business or
profession, deductions in respect thereof under Sections 30, 31 or 32 will
be restricted to a fair proportionate part thereof which is attributable to
the use for business or profession.
Sections 37(2B), 40, 40A and 43B cover expenses which are not
deductible, e.g. expenditures on advertisements published in souvenir,
brochure etc. published by a political party, salary, interest royalty or fee
for technical services paid outside India on which tax is not deducted at
source, payments made in a day to a person over Rs. 20,000/-
otherwise than by an account payee cheque or account payee bank
draft etc.
Section 41 deals with deemed profits in cases where loss,
expenditure, or trading liability was allowed as deduction but later
any amount or benefit in respect thereof has been received by the
assessee or his successor.
Section 42 lays down special provision for deductions in case of
business for prospecting, etc. for mineral oil.
Sections 43C and 43D lay down special provisions for computation of
cost of acquisition of certain assets and special provisions in case of
income of public financial institutions, public companies etc.
respectively.
Section 44 lays down that Profits and Gains of Insurance Business will
be computed in accordance with rules contained in the First Schedule.
Sections 44A makes special provisions for deduction in the case of
trade, professional or similar association.
Section 44AA casts a duty on certain persons carrying on
profession or business to maintain accounts. For example, those
whose income from business or profession exceeds 1 lakh 20
thousand rupees or total sales, turnover or gross receipts
exceeds ten lakh rupees in any of the three years immediately
preceding the previous year.
Sections 44AB casts a duty on certain persons carrying on
business or profession to get his accounts audited.
Sections 44 AD to 44BD lay down special provisions for
computation of profits and gains or for deductions in cases of
certain businesses or professions.
General Principles regarding admissibility of Allowances and
Deductions:
1. List of allowances is not exhaustive
2. Allowances are cumulative and not mutually exclusive
3. Expenditure and losses in unlawful business:
CIT vs. Piara Singh (1980) 124 ITR 40 (SC) = AIR 1980 SC 1271;
Dr. T.A. Quereshi vs. C.I.T (2006) 157 Taxman 514 (SC)].
4. No allowance in respect of exhaustion of capital or wasting
assets
5. Expenditure claimed should have been incurred in the previous
year. Exceptions: Ss. 41 and 176.
6. Business should be carried on during the previous year
7. Expenditure should have been incurred in connection with
assessee’s own business
8. No allowance in respect of a business set up after the date of
expenditure. Exception – S. 35D (Amortization of certain
preliminary expenses)
9. Relevance of distinction between capital and revenue expenditure
Deductions Expressly Allowed:
1. Expenses in respect of Business Premises [Section 30]
(i) Rent paid for premises
(ii) Repair charges incurred but not of capital nature
(iii) Any sums paid as land revenue, local taxes or Municipal
Taxes
(iv) Premium paid in respect of any insurance against risk of
damage or destruction of premises.
Note:
(i) Rent paid to partner by the Firm also allowed
(ii) If the assessee is a tenant and part of the premises is
used as dwelling house, deduction will be allowed
proportionately.
2. Repairs and Insurance of Machinery, Plant and Furniture
being used for business purpose: [Section 31]
(i) Current Repairs – not of capital nature
(ii) Premium paid against risk of damage or destruction
 3. Depreciation Allowance [Section 32]
Reason for Allowance:
Conditions:
(i) confined to buildings, machinery, plant or furniture being
tangible assets; or Know-how, patents, copyrights, trade
marks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets
acquired on or after 1.4.1998;
(ii) The asset must be owned by the assessee either wholly or
partly;
(iii) The asset must have been used for the purpose of business
or profession in the accounting year.
Building:
C.I.T. vs. Alps Theatre [1967] 65 ITR 377 (SC) – held cost of land
should be excluded from total cost of building.
Approach roads, drains, fences are part of building.
Machinery and Plant:
CIT vs. Mir Mohammad [1964]53 ITR 165 (SC) – both words bear the
same meaning.
S. 43 (3) defines plant as including ships, vehicles, books, scientific
apparatus and surgical equipments but does not include tea bushes
or live stocks (e.g. animals and human body).
Plant in its ordinary sense includes whatever apparatus is used by a
businessman or Professional for carrying on his business or
profession not being his stock – in – trade.
Thus plant has been held to include knives, loose tools, bottles and
shells used by the manufacturer of soft drinks, gas cylinders, sanitary
and pipeline fittings, electric fittings, ceiling and pedestal fans,
internal telephone system, air – conditioning equipments, wells,
fencing around a refinery etc. – may be in residential quarters or on
premises of a business.
Even buildings or rooms may be plant e.g. cold storage room in case
of ice-cream manufacturer.
In deciding whether a structure is building or plant, functional
test should be applied i.e. is it an apparatus with which the
business is carried on, or a part of the premises in which the
business is carried on. Former is a plant, latter is not.
Commissioner of Income Tax vs. Anand Theatres [2000] 244 ITR
192 (SC)
Hotel buildings and cinema theatres are not plants. Earlier case
CIT vs. Dr. B. Venkata Rao [2000] 243 ITR 81 where building in
which nursing home was carried on was held as a plant has been
overruled.
Recently the Supreme Court in ACIT vs. Victory Aqua Farm Ltd.
decided on Sept. 4, 2015 held that a pond designed for rearing
/breeding prawns is a “plant”.
(ii) Asset must be owned by the Assessee:
(a) So, if assessee is a lessee of the assets, he is not entitled.
(b) Assessee may be lessee of the land but he may be owner of the
building
(c) Assessee, a lessee of the building if makes any alteration or extension
of permanent nature, he can claim depreciation on that part. [Explanation
1 to S. 32 (1)
(d) Mysore Minerals Ltd. vs. CIT [1999] 239 ITR 775 (SC) – held if ownership has
been acquired under an agreement but legal title is not transferred because of
non – registration still transferee will be owner.
(e) Depreciation in Hire Purchase agreements – depends upon terms of
the agreement – if effect is immediate transfer of ownership, depreciation
may be claimed as if asset purchased on installment. In such cases
lessor under the agreement can sue for arrears of installments due but
not to recover the asset back. If the agreement is that hirer will become
owner when the last installment is paid or has option to purchase, the
installments paid will be allowed as business expenditure.
(iii) Use of asset in Accounting Year:
(a) Not necessary to be used throughout the Previous Year
(b) Trial production as well as Commercial production both amount to use
(c) Active use and passive use
(d) Use of asset for less than 180 days in the year (P.Y.) of acquisition –
Depreciation @ 50% of normal rate [Second Proviso to S.32]
(e) Additional Depreciation Allowance on Plant or Machinery [S.32(1)
(iia)]:
(i) If Plant or Machinery has been acquired or installed after 31.03.2005
by an assessee engaged in business of manufacture or production of any
article or thing or generation and / or distribution of power, additional
depreciation shall be allowed @ 20% of the actual cost.
(ii) If assessee sets up an undertaking or enterprise after 31.03.2015 but
before 1.4.2020 in notified backward area of State of Andhra Pradesh,
Bihar, Telengana or West Bengal, additional depreciation will be allowed
@ 35% of actual cost.
In the aforesaid cases if asset is put to use for less than 180 days in the
previous year in which it is acquired, additional depreciation will be 50%
i.e. 10% or 17.5% as the case may be.
S. 38 (2) provides that in cases where any asset is used for business as
well as for some other purpose (say personal use of the assessee) the
depreciation shall be proportionately reduced.
Computation of Depreciation: Two methods:
(i) Straight Line Method: Applicable in case of assets used in generation or
generation and distribution of power w.e.f. 1.4.1998 (F.A. 1998)
(ii) Written Down Value Method: In this method Depreciation is calculated as
certain percentage of the written down value of the block of the assets as is
prescribed.
There are 13 blocks of assets (Out of which 12 blocks are for tangible assets
and one block is for intangible assets) and for each block different
percentage has been prescribed as rate of depreciation. (e.g. 5%, 10%, 15%,
20%, 25%, 40%, 50%, 60%, 80%, and 100%)
Written Down Value: [S. 43 (6)]
Written down value of a block of assets means the depreciated value of that
block of assets on 1st day of the p.y. as increased by actual cost of any asset
acquired in that block during the said p.y. and reduced by the sale proceeds of
any assets disposed of during the said p.y. of that block. If the sale price of the
assets exceeds the written down value of the block, the excess will be treated as
a short term capital gain u/s 50.
S. No. BLOCKS OF ASSETS Rate of
Depreciation
Tangible Assets:
1. Buildings:
(i) Buildings which are mainly used for 5%
residential purposes except Hotels and Boarding
Houses
(ii) Buildings other than those used mainly for 10%
residential purposes and not covered by (i) and
(iii)
(iii) Buildings acquired after 31.08.2002 for 100%
installing machinery and plant forming part of
water supply project or water treatment system
and which is put to use for the purpose of
business of providing infrastructure facilities
(iv) Purely temporary erections such as wooden 100%
structure
2. Furniture and Fittings:
Furniture and fittings including electrical 10%
fittings, electric fittings include electrical
wiring, switches, sockets, other fittings and
fans, etc.
3. Machinery and Plant
A. General Rate: Applicable to all machinery 15%
or plant other than certain specified machines
and plants
B. Special Rates:
(i) Motor Buses, motor lorries and motor taxies 30%
used in a business of running them on hire
(ii) Aeroplanes and aeroengines 40%
(iii) Motor cars (other than those used in a 15%
business of running them on hire) acquired or
put to use on or after 1st April, 1990
 (iv) Books for professional use:
(a) Books being annual publication 100%
(b) Other books 60%
(v) Computers (including computer software) 60%
(vi) Life saving medical equipments 40%
(vii) Ships and boats 20%
4. INTANGIBLE ASSETS
Know–how, Patents, Copyrights, Trade– 25%
Marks, licences, franchises or any other
business or commercial rights of similar
nature
Actual Cost: [S. 43(1)] – means the actual cost of the assets to the
assessee as reduced by that portion of the cost thereof, if any, as
has been met, directly or indirectly by any other person or
authority.

Chellapalli Sugar Mlls Ltd. vs. CIT (1975) 98 ITR 167 (SC) – held
actual cost includes all expenditure necessary to bring such
assets into existence and to put them in working conditions, e.g.
interest paid before production started, Excise Duty, Sales Tax,
Octroi, railway freight, insurance, transport charge, preliminary
expenses e.g. stamp duty, registration fee, visit of employees to
foreign country in respect to installation of plant or machinery
etc.
Cases in which Actual Cost is taken at a notional figures:
Various explanations to S. 43 –
1. Where asset is used in business after it ceases to be used for scientific
research – as reduced by the amount of any deduction allowed (e.g. u/s 35)
[Explanation 1]
2. Where an asset is acquired by Gift or inheritance – Actual cost to
assessee will be actual cost to the previous owner as reduced by amount of
depreciation deemed to have been allowed on such asset. [Explanation 2]
3. Where before the date of acquisition by the assessee, the assets were
used by any other person for the purpose of his business or profession and
the A. O. is satisfied that the main purpose of transfer of such asset to the
assessee is the reduction of tax liability, the actual cost of the assets will be
such amount as the A.O. may, with previous approval of Dy. Commr.
determine having regard to all circumstances of the case. [Explanation 3]
4. Where a business asset is transferred by the assessee to another person
and is subsequently reacquired by him, the actual cost would be the actual
cost to the assessee when he first acquired it as reduced by the amount of
depreciation deemed to have been allowed in respect of such asset or
actual cost at the time of reacquisition whichever is less. [Explanation 4]
5. Where a building, previously the property of the assessee, is brought
into use for the purpose of business or profession, the actual cost of the
asset to the assessee will be actual cost of the building to the assessee as
reduced by depreciation which would have been allowable had the
building been used for business or profession since the date of its
acquisition by the assessee. [Explanation 5]
6. Where a parent company transfers any asset to its 100% subsidiary
Indian Company or vice versa, the actual cost of the asset to transferee
company will be the same as it would have been in the hands of transferor
company. [Explanation 6]
7. Where an asset is transferred in a scheme of amalgamation to an
Indian Company, the actual cost of asset to the amalgamated company
will be the same as it would have been to the amalgamating company
[Explanation 7]
8. Explanation 8 makes it clear that any interest paid or payable in
connection with acquisition of an asset which relates to a period after the
asset is first put to use shall not form part of actual cost of the asset.
[Explanation 8]
 Set off and carry Forward of unabsorbed depreciation
[Section 32 (2)]
(i) The unabsorbed depreciation has to be set off against the profits and
gains (if any) of any business or profession carried on by the assessee. If
the amount yet remains unabsorbed, it can be set off against any other
income (except income under the head “Salaries”) of the taxpayer for the
same year.
(ii) If the unabsorbed depreciation cannot be wholly set off, the amount of
allowance not set off shall be carried forward to the following assessment
year. No time limit is fixed for the purpose of carrying forward of
unabsorbed depreciation. It can be carried forward for indefinite period, if
necessary.
(iii) In the subsequent year(s), unabsorbed depreciation can be set off against
any income whether chargeable under the head “Profits and Gains of
Business or Profession” or under any other head [Except income under
the head “Salaries”].
In the matter of set off, the following order of priority is
followed in the subsequent year(s).
(a) Current depreciation;
(b) Brought forward business loss;
(c) Unabsorbed depreciation.
 Investment Allowance: [Section 32 AC]
(i) A company engaged in the business of manufacture or production
of any article or thing acquires a new plant or machinery (excluding
ship or aircraft) and installed after 31.3.2013 but before 1.4.2015 and
actual cost of new asset exceeds one hundred crore rupees,
Investment Allowance will be allowed at the rate of 15% of the actual
cost for A.Y. 2014 – 15 and 15% of the actual cost as reduced by
Investment allowance allowed (for A.Y. 2014 – 15) in the A.Y. 2015 –
16. No deduction will be allowed after A.Y. 2015 – 16 (i.e. from A.Y.
2016 – 17).
(ii) If a company acquires and installs such new assets after 31.3.2014
but before 1.4.2017, Investment Allowance @ 15% will be available
for the A.Y. relevant to the P.Y. in which asset is installed, if actual cost
exceeds 25 crore rupees. No deduction will be allowed from A.Y. 2018
– 19.
Withdrawal of Investment Allowance:
If the assessee sells or transfers the new asset within a period of 5
years from the date of installation, the amount of deduction
allowed shall be deemed to be the income from business of the P.Y.
in which the asset is sold or transferred . Such income shall be
taxable in addition to taxability of Capital Gains which arises u/s 45.

However, if transfer is as a result of amalgamation or demerger,

then tax liability will not arise provided that the Amalgamated
Company or Demerged Company should not transfer the new asset
within 5 years.
(iii) Investment Allowance (for investment in new plant or
machinery) w.e.f. A.Y. 2016 – 17) [S. 32 AD]

Any assessee who sets up an undertaking or enterprise for

manufacture or production of any article or thing after 31.3.2015
but before 1.4.2020 in a notified backward area of State of Andhra
Pradesh, Bihar, Telengana or West Bengal, 15% of the actual cost
will be allowed as Investment Allowance for the A.Y. relevant to the
P.Y. in which such new asset is installed.

The provisions relating to sale or transfer of new plant or

machinery are the same as u/s/32AC.
Deduction in respect of Deposit in Tea Development Account, Coffee
Development Account and Rubber Development Account: [S. 33 AB]
This deduction is available for assessees growing and manufacturing tea, coffee
or rubber if deposit is made in a Special Account with the National Bank for
Agriculture and Rural Development in accordance with the scheme approved by
the Tea Board, or the Coffee Board or the Rubber Board. The amount of
deduction will be least of the following:
(i) actual amount so deposited; or
(ii) 40% of the profits of such business.
The deposit should be made within a period of 6 months from the end of the P.Y.
or before furnishing return whichever is earlier.
The amount standing to the credit of Special Account may be withdrawn only for
the purpose specified in approved scheme. If amount withdrawn in any P.Y. is not
utilized for specified purpose, the amount not so utilized will be treated as
taxable profit of the said year.
However, if the amount is withdrawn on closure of the business because of death
of the assessee or on dissolution of the Firm or because of partition of HUF or
liquidation of the Company, the amount will not be treated as income.
Deduction in respect of Prospecting for, or extraction or production of
Petroleum or natural gas or both in India [S. 33ABA]
If the assessee is engaged in any of the aforesaid business under an agreement
with the Central Govt. of India for such business and deposits in the P.Y. any sum in
a Special Account or in a Site Restoration Account with SBI in accordance with the
scheme approved by the Ministry of Petroleum and Natural Gas then he shall be
allowed deduction as under:
(i) a sum equal to the amount deposited; or
(ii) 20% of the profits of such business
Whichever is less.
Thus the aforesaid amount should be deposited before the end of the P.Y. The
amount standing to the credit of such Special Account or Site Restoration Account
may be withdrawn only for the purpose specified in the Scheme (e.g. for removal
of equipments and installations, to restore the site and to prevent hazards to life,
property or environment consequent to such removal.) else the amount will be
treated as income of the P.Y. in which it is withdrawn.
 Expenditure on Scientific Research [S. 35]
Following deductions are allowed in respect of Scientific Research:
(i) Revenue Expenditure incurred by the assessee himself if he carries on
Scientific Research in relation to his own business. 100% expenditure is
deductible.
(ii) Contributions made to outsiders: Where assessee contributes any
sum to a Research Association, University, College or Institution approved
for scientific research, a deduction of 175% of the amount so paid will be
allowed as deduction. It is immaterial whether the Scientific Research is
related or not to the assessee’s business.
(iii) Sums paid for Social or Statistical Research to a Research Association,
University, College or Institution approved for such research: Deduction
will be allowed 125% of the sum paid whether the research is related or
not with the assessee’s business.
(iv) Capital Expenditure on scientific Research
Capital Expenditure incurred on scientific research in the P.Y. by the assessee
himself related to his business is allowed in full as deduction except the
expenditure for acquisition of any land. If the expenditure could not be
absorbed owing to insufficiency of profit, the unabsorbed part can be carried
forward as unabsorbed depreciation.
(v) Sums paid to a National Laboratory or a recognized University or an Indian
Institute of Technology for approved Scientific Research Programme: 200% of
the sum so paid is allowed as deduction. National Laboratory means scientific
laboratory functioning at national level under Indian Council of Agricultural
Research or the Indian Council of Medical Research or the Council of Scientific
and Industrial Research and approved by prescribed authority as National
Laboratory.
(vi) Expenditure on in-house Research: This deduction is available only to a
company equal to 200% of expenditure incurred provided that expenditure is
not incurred on land or building. This deduction shall not be allowed for
expenditures incurred after 31.03.2017.
(vii) Sums paid for Scientific Research to a Company registered in India and its
main object is Scientific Research and Development: 125% of the sum paid is
allowed as deduction.
Capital Expenditure to obtain Licence to operate Telecommunication
Services: [S. 35ABB]
Any capital expenditure incurred on the acquisition of any right to operate
telecommunication services either before the commencement of the business or
thereafter is allowed as deduction in equal installments over the period starting
from the year in which such payment has been actually made and ending in the
year in which licence comes to an end. If the licence fee is actually paid before
commencement of the business, amount is deductible from the P.Y. in which the
business is commenced.
Expenditure on eligible Project or Scheme: [S. 35AC]
100% deduction is allowed.
Deduction in respect of Expenditure on Specified Business: [S.35AD]
Whole of any expenditure of capital nature excluding expenditure incurred on
acquisition of land or good will is allowed to be deducted in the P.Y. in which the
expenditure is incurred. For example, setting up and operating warehousing
facility for storage of agricultural produce, Developing and building a housing
project, Production of fertilizer in India etc.
Payment in Rural Development Fund: [S. 35CCA] 100% deduction.
Amortization of certain preliminary expenses: [S. 35D]
For example, expenditure in connection with –
(i) Preparation of Project Report;
(ii) Conducting market survey
(iii) Legal charges for drafting of any agreement, Memorandum of
Association; Articles of Association etc.
Other Deductions: [S. 36] – Examples:
(i) Insurance Premium paid:
(a) against destruction or damage to stock or stores used for purposes of
business;
(b) for cattle by a Federal Milk Cooperative Society
(c) for health of employees;
(ii) Bonus or commission paid to employee
(iii) Interest on borrowed capital
(iv) Contribution to P.F. of the employee by the employer
(v) Bad debts subject to certain conditions;
(vi) Expenditure on Family Planning
 General Deduction [S.37]
S.37(1) Any expenditure (not being expenditure of the nature described in Ss. 30
to 36 and not being in the nature of capital expenditure or personal expenses of
the assessee), laid out or expended wholly and exclusively for the purposes of the
business or profession shall be allowed in computing the income chargeable
under the head “Profits and Gains of Business or Profession”.
Further implied Conditions:
(i) Expenditure Should have been incurred in the P.Y.
(ii) Expenditure should be in respect of business or profession carried on by the
assessee.
1. Not of the nature described in Ss. 30 to 36:
(i) Rationale behind the condition is that if a particular expenditure is covered
under any of the sections 30 to 36 it should not be claimed under residuary
section because an allowance granted under specific section may be subject to
certain express or implied conditions and those conditions should not be nullified
by claiming deduction under this section.
2. Not being in the nature of Capital Expenditure:
Points of Distinctions:
(I) Acquisition of fixed assets or routine expenditure
(ii) Benefit for several years or for one Previous Year
(iii) Improvements or Maintenance
Capital expenditure improves the earning capacity of a business.
Revenue expenditure maintains the profit making capacity of a
business.
(iv) Recurring or non recurring expenditure
Some Judicial Rulings on Capital and Revenue Expenditures:
(i) Removal of defect in title:
In V. Jagamohan Rao vs. C.I.T. [1970] 75 ITR 373 (SC) – held where money is paid
to perfect a title or remove defects in title, the expenditure is capital expenditure.
(ii) Acquisition of Goodwill:
In Devidas Vithaldas & Co. vs. CIT [1972] 84 ITR 277 (SC) – held expenditure on
acquisition of goodwill is a capital expenditure irrespective of the fact whether
payment is made in a lump sum at one time or in installments. However, where
transaction is not one for acquisition of goodwill but the right to use it, the
expenditure will be revenue expenditure.
(iii) Mining Lease:
In R.B. Seth Moolchand Suganchand vs. CIT [1972] 86 ITR 647 (SC) – held
expenditure for acquiring right over or in the land to extract mineral would be of a
capital nature. Where, however, mineral is on surface and assessee purchases the
same to use as raw material, it will be expenditure for acquisition of stock – in –
trade which is revenue expenditure.
(iv) Expenditure on renovation of premises:
New Shorrock Spinning and Manufacturing CompanyLtd. Vs. C.I.T.
[1956] 30 ITR 338 (SC); in M/s. Ballimal Naval Kishore vs. C.I.T [1997]
224 ITR 414 (SC) – If the assessee is owner of the premises, renovation of
the premises will be capital expenditure.
CIT vs. Madras auto Services (P.) Ltd. [1998]233 ITR 468 (SC) - If assessee
is lessee of the premises and under the lease agreement whatever
construction will be done on the lease premises will belong to the lessor
from the day of construction, expenditure incurred by the lessee will be
revenue expenditure.
(v) Contribution made for construction of roads:
Building includes roads, bridges, culverts, wells and tube-wells. Hence,
construction of roads inside the factory or surrounding the factory is
capital expenditure on which depreciation can be claimed.
Lakshmiji Sugar Mills Co. (P.) Ltd. vs. C.I.T. [1971] 82 ITR 376 (SC) –
Contribution made by sugar mill under a statutory obligation towards
development of Govt. owned roads which was to facilitate supply of
sugarcane to the Mill was held revenue expenditure.
Travancore – Cochin Chemical Ltd. vs. CIT [1977] 106 ITR 900 (SC) – The assessee
along with three other public undertakings approached the Govt. of Kerala to
construct new road and under agreement to meet certain percentage of the cost
of construction paid the amount. Held that since the road to be constructed was
new and contribution was made under the agreement and not under a
statutory obligation, the expenditure was capital in nature.
In L.H. Sugar Factory & Oils Mills (P.) Ltd. vs. CIT [1980] 125 ITR 293 (SC) – The
assessee made two contributions on request of Collector, one was for
construction of a dam and road connecting to dam and another contribution was
for construction of roads around its factory. It was found that construction of
dam and road connecting the dam was nothing to do with assessee’s business
and not advantageous to assessee’s business, hence that amount was not
deductible. But construction of road in the area around the factory of the
assessee was advantageous to the assessee’s business and relying on Lakshmiji
Sugar Mills case the expenditure was held revenue expenditure.

(vi) Compensation for breach of a contract to purchase capital asset:

Swadeshi Cotton Mills Co. Ltd. vs. CIT [1967] 63 ITR 65 (SC) – held capital
expenditure.
3. Not being personal expenses of assessee:
Personal expenses means to satisfy personal needs e.g; food, cloth,
shelter, medical expenditure, defending oneself from prosecution or
penalty paid for violation of law etc.
M. Subramaniam Bros. vs. CIT [2001] 250 ITR 769 (Mad.) - Where in a
partnership firm comprising father and his three sons as partners, the
father sent one of the sons abroad for higher studies under an
agreement with the firm that on return he will serve the firm for 5 years
– Expenses incurred by the firm on education of son was not allowed as
business expenditure.
However, on similar facts contrary opinion had been expressed in CIT vs.
Kohinoor Paper Products [1997] 226 ITR 220 (M.P.) relying on C.I.T. vs.
Southern Leather Industries [1987] 164 ITR 194 (Mad) wherein three
partners of a firm undertook foreign tours for attending the
International Trade Fair with intent to advance business which was held
as business expenditure.
4. Expenditure should have been laid out wholly and exclusively for
the purpose of business or profession
Guidelines:
(i) Incurred as trader or House holder
(ii) Voluntary expenditure without compelling need
CIT vs. Dhanarajgiri Raja Narasingiriji [1973] 91 ITR 544 (SC) - Assessee
company lodged a complaint with police alleging misappropriation of the
company’s funds by its managing agent. Consequently Govt. instituted a
criminal case against the Managing Agent. The assessee also employed
his own lawyer to prosecute the case. Held the expenditure was
deductible although Govt. was conducting prosecution and assessee had
no need to engage his own lawyer.
It was also held that it is not open to the department to prescribe what
expenditure an assessee should incur and in what circumstances he
should incur that expenditure. Every businessman knows his interest
better.
Similarly fixing remuneration of employee is the businessman’s concern
and not of the Income tax department.
(iii) Direct concern and Direct purpose:
One has to look at direct purpose of expenditure and not remote or
indirect results, e.g. in Malayala Manorama Co. vs. CIT [2006] 150
Taxman 505 (Ker) – assessee company engaged in business of printing
and publishing newspapers and periodicals contributed a sum of money to
a trust which undertook work of rehabilitation of victims of earthquake –
held not related to business of assessee – not deductible though indirectly
would have impact on readers of its journals etc.
Similarly donations to political party for non – business consideration was
held not deductible. [CIT vs. Scindia Steam Navigation Co. Ltd. [1980]
125 ITR 118 (Bom).
However, such donations are now deductible under Sections 80GGB and
80GGC (inserted in 2003) if donations are made by companies or any
other persons respectively.
(iv) Unremunerative expenditure:
Expression ‘for the purpose of business’ is wider in scope than expression
‘for the purpose of earning profit.’ Business or commercial expediency
may require providing facilities like schools, hospitals for employees/ex-
employees/their children, expenditure for protection of assets from
expropriation.
(v) Embezzlement Loss
Badridas Daga vs. C.I.T. [1958] 34 ITR 10 (SC); Associated Banking Corpn. Of
India Ltd. vs CIT [1965] 56 ITR 1 (SC) – held losses arising from misappropriation
of money by the employee cannot be claimed as deduction under Section 37 (1)
but if the amount is irrecoverable, it can be claimed as loss incidental to carrying
on the business. Such loss can be claimed of the P. Y. in which amount becomes
irrecoverable.
Same will apply for losses occurred due to theft, robbery, dacoity, loss due to non
– recovery of advances etc.
(vi) Other examples of Business expenditures
Legal and accountancy expenses, Fees paid for prosecuting appeals, taking
proceedings for reducing tax liabilities, legal expenditures relating to breach of
trading contract, termination of disadvantageous trading relationship, to defend
title to business assets such as land, buildings, shares, goodwill etc. (should be
distinguished from expenses for perfecting title which is capital expenditure).
Expenses incurred by an individual assessee in defending himself in a criminal
proceeding (even if ended in acquittal) e.g. selling goods on excessive price – are
not allowable. However, legal expenses incurred by a company to protect the
good name of its business, defending directors, officers and other employees
against criminal charges relating to transaction of company’s business would be
allowable.
Explanation to S. 37 (1) – says “For the removal of doubts, it is
hereby declared that any expenditure incurred by the assessee for
any purpose which is an offence or which is prohibited by law shall
not be deemed to have been incurred for the purpose of business
or profession and no deduction or allowance shall be made in
respect of such expenditure”.
Section 37 (2B) – Notwithstanding anything contained in sub –
section (1), no allowance shall be made in respect of expenditure
incurred by an assessee on advertisement in any souvenir,
brochure, tract, pamphlet or the like published by a political party.
 Expenses Expressly Disallowed under Section 40
Section 40 expressly disallows many expenses. For example –
(a) Payment outside India of any salary, interest, royalty, fee for technical
services etc. on which tax has not been deducted at source;
(b) Payments to residents if tax is not deducted at source – 30% of such
sum shall be disallowed u/s 40A.
(c) Excessive payments [S. 40A] – Payments to relatives or to an associate
concern if A.O. considers it to be excessive or unreasonable.
(d) Payment in cash: in a day made to a person over Rs. 20,000/-
otherwise than by an account payee cheques or account payee bank draft
subject to certain exceptions e.g., payment made to a person living in
rural area where no banking facility is available; payments made to
cultivator , grower of agricultural produce, forest produce or produce of
animal husbandry on purchase of products from them; Payments to Bank
or LIC etc.
 Capital Gains {Ss. 45 to 55]
Meaning:
Any profit or gain arising from the transfer of a capital asset is
known as capital gain.
Chargeability: [S. 45 (1)]
By virtue of Section 45 (1) of the Income Tax Act any profit or gain
arising from the transfer of a capital asset is chargeable to tax
under the head “Capital Gains” and is deemed to be income of
the previous year in which the transfer takes place.
Essentials for chargeability:
1. There must be a Capital Asset. 2. Capital Asset must have been
transferred in the previous year. 3. Any Profit or Gain should arise
from such transfer. 4. The Profit or Gain should not be exempt
under Sections 54, 54B, 54D, 54E, 54EA, 54EB, 54EC, 54F, 54G,
54GA and 54H.
Meaning of Capital Asset: [S.2 (14)]: means –
property of any kind held by an assessee, whether or not connected with
his business or profession, but does not include:

(i) any stock – in – trade, consumable stores or raw materials held for
the purposes of his business or profession;

(ii) Personal effects of the assessee, that is to say, movable property

including wearing apparel and furniture, held for personal use by the
assessee or any member of his family dependent on him but excluding
jewellery, archaeological collections, drawings, paintings, sculptures or
any work of art.
Thus jewellery etc. are treated as capital asset, even though they are
meant for personal use of the assessee.
(iii) Agricultural land in India provided it is not situated:
(a) in any area within the jurisdiction of a Municipality or a Cantonment
Board having a population of 10,000 or more; or
(b) within a distance of 2 Kms from the local limits of a Municipality or a
Cantonment Board having a population of more than 10,000 but not more
than one Lakh; or
(c) within a distance of 6 Kms from the local limits of a Municipality or a
Cantonment Board having a population of more than one Lakh but not
more than ten Lakh; or
(d) within a distance of 8 Kms from the local limits of a Municipality or a
Cantonment Board having a population of more than ten Lakh.]
(iv) 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence
Gold Bonds 1980 issued by the Central Government;
(v) Special Bearer Bonds, 1991 issued by the Central Govt. and
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999.
Explanation: Property includes any rights in or in relation to an Indian Co.
including rights of management or control or any other rights whatsoever.
Personal Effects:
Personal effects are not capital assets under section 2 (14), if the following
conditions are satisfied:
1. It should be movable property;
2. It should be held for personal use by the assessee or any member of his family
dependent on him;
3. it should not be jewellery, archaeological collections, drawings, paintings,
sculptures or any work of art.
Car, cycle, scooter, motor – cycle owned and used by the assessee are personal
effects.
Jewellery:
Jewellery is a capital asset. Jewellery includes the following:
(i) ornaments made of silver, gold, platinum or any other precious metal or any
alloy containing one or more of such precious metals, whether or not containing
any precious or semi precious stones and whether or not stitched in any wearing
apparel.
(ii) precious or semi precious stones, whether or not set in any furniture, utensil
or wearing apparel.
Types of Capital Assets: There are two types of capital assets:
1. Long – term capital asset [Section 2 (29A)]; and
2. Short – term capital asset [Section 2 (42A)].
Short – term Capital Asset:
According to Section 2 (42A) a short – term capital asset means capital
asset held by an assessee for not more than 36 months immediately prior
to its date of transfer.
However, in the case of shares held in a company, listed securities, units
of UTI or units of mutual funds specified under Section 10 (23D), the asset
is treated as short term capital asset if the share, security or unit as the
case may be is held by the assessee for not more than 12 months
immediately prior to its transfer and not 36 months.
Long – term Capital Asset:
According to Section 2 (29A) asset other than short – term capital asset is
regarded as long – term capital asset.
Period of Holding:
In determining the period for which any capital asset is held by the
assessee –
(a) In the case of a share held in a company in liquidation, the period subsequent
to the date on which the company goes into liquidation is excluded.
(b) In the case of a capital asset which becomes the property of the assessee in
the circumstances mentioned in Section 49 (1) of the Act for example, by way of
inheritance, gift, partition etc. the period for which the asset was held by the
previous owner should be included.
(c) In the case of a share in an Indian Company, which becomes the property of
the assessee in a scheme of amalgamation, the period for which the share in the
amalgamating company was held by the assessee should be included.
(d) In case of issue of shares by the resulting company in a scheme of demerger
to the shareholder of the demerged company, the period of holding shares in
demerged company will be included in total period of holding of share in
resulting company.
Transfer of Capital Asset [Section 2 (47)]
Transfer in relation to a capital asset includes:
(i) the sale, exchange or relinquishment of the asset;
(ii) the extinguishment of any rights therein.
(iii) the compulsory acquisition thereof under any law;
(iv) the conversion of an asset into stock – in – trade or the treatment of
it as such;
(v) Allowing possession of an immovable property to be taken in part
performance of a contract. [Section 53A of the Transfer of Property Act,
1882.
(vi) Any transaction (whether by way of becoming a member of, or
acquiring shares in a co – operative society, company or other
association of persons or by way of agreement or any arrangement or in
any other manner whatsoever) which has the effect of transferring or
enabling the enjoyment of any immovable property.
Capital Gains from Insurance Claim on Destruction of Capital Asset: [S. 45 (1A)]
By virtue of Section 45 (1A) profits or gains arising from any compensation
(whether in terms of money or in kinds) received by any person under an
insurance from an insurer in the previous year on account of damage to or
destruction of any capital asset is chargeable to Capital Gains tax, if the damage
or destruction occurs as a result of:
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature;
or
(ii) riot or civil disobedience;
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy (whether with or
without a declaration of war).
The profits or gains will be deemed to be the income of the previous year in
which the compensation is received.
In Vania Silk Mills Ltd. vs. C.I.T. (1991) 191 ITR 647 (SC) the Supreme Court had
held that insurance claim received on account of destruction of asset is not
chargeable to tax as destruction does not amount to transfer. The effect of this
judgment has been nullified to some extent by inserting sub section (1A) in
section 45 w.e.f. Assessment Year 2000 – 01.
Capital Gains on conversion of Capital Asset into Stock – in –
Trade: [S. 45 (2)]
By virtue of Section 45 (2) the notional profit arising from transfer by
way of conversion of capital asset into stock – in – trade is chargeable
to tax in the year in which stock – in – trade is sold.
For the purpose of computing the capital gain in such cases, the fair
market value of the capital asset on the date on which it was
converted or treated as stock – in –trade is deemed to be the full value
of the consideration received or accruing as a result of such transfer.
The sub-Section was earlier added by the Finance Act, 1962, then it
was omitted by Finance Act, 1966 and re – inserted by the Taxation
Law (Amendment) Act, 1984 w.e.f. A.Y. 1985 – 86 nullifies the
judgment of the Supreme Court in C.I.T vs. Bai Shirinbai Kooka (1962)
46 ITR 86 (SC).
Capital Gain on Transfer of Security by Depository: [S. 45
(2A)]
By virtue of Section 45 (2A) where any person has beneficial
interest in the securities deposited with a depository, profits
or gains arising from transfer of such securities will be deemed
to be the income of such person (i.e. the beneficial owner)
and not that of the depository who is deemed to be the
registered owner of such securities.
The cost of acquisition and period of holding of such securities
will be determined on the basis of first – in – first – out
method.
Capital Gains on Transfer of Capital Asset by a Partner to a firm etc. [S.
45 (3)]
By virtue of Section 45 (3) profits or gains arising from the transfer of a
capital asset by a person to a firm or other association of persons or
body of individuals (not being a company or a co – operative society) in
which he is or becomes a partner or member, by way of capital
contribution or other wise, shall be chargeable to tax as his income of
the pervious year in which such transfer takes place.
For the purpose of computation of the profit or gains in such cases the
amount recorded in the Account Book of the firm, association or body as
the value of the capital asset will be deemed to be the full value of the
consideration received or accruing on the transfer of such capital asset.
Earlier these transactions were not regarded as transfer because firm,
co-operative society etc. were not separate persons in eye of law. [C.I.T.
vs. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj); Malabar Fisheries
Co. vs C.I.T. [1979] 120 ITR 49 (SC)
Capital Gains on distribution of Capital Assets by a firm
etc. [S. 45 (4)]
By virtue of Section 45 (4) profits or gains arising from the transfer
by way of distribution of capital assets by a firm, or other association
of persons or body of individuals (not being a company or a co –
operative society) to its partner or member on its dissolution or
otherwise will be chargeable to tax as income of the firm,
association or body as the case may be, of the previous year in which
such transfer takes place.
For the purpose of computation of profit or gains in such cases the
market value of the asset on the date of such transfer shall be
deemed to be the full consideration received or accruing as a result
of such transfer.
Capital Gains on Compulsory acquisition of Capital Asset: [S.
45 (5)]
Where an asset is compulsorily acquired under any law the capital gains
in such a case will be determined as follow:
(i) The initial compensation will be taken as sale consideration and
capital gains will be computed accordingly. It will be chargeable as
income of the previous year in which such compensation (or part
thereof) is first received and not of the year in which the Capital Asset is
transferred.
(ii) When the compensation is enhanced by a court, tribunal or any
authority then –
(a) it will be taxable as capital gain of the previous year in which
enhanced compensation is received by the assessee;
(b) In this case the cost of acquisition and the cost of improvement of
the capital asset will be taken as nil.
(c) Litigation expenses for getting the compensation enhanced
are deductible as expenses on transfer;
(d) If the enhanced compensation is received by any other person
(because of the death of the transferor or for any other reason),
it will be taxable as income of the recipient.
(e) Enhanced compensation can be short – term capital gains or
long – term capital gains depending upon the nature of original
capital gains.
The amount of compensation received is chargeable to capital
gains tax even though it may be a subject matter of dispute by
the Govt. However, if the compensation is subsequently reduced
by the court, tribunal or other authority, the capital gains has to
be recomputed and refund may be made.
Capital Gains on Units of UTI, Mutual Funds etc. [S.45 (6)]
An assessee who purchases units of Mutual Fund, UTI or Equity Linked
Saving schemes and after the scheme is over, the same is repurchased by
the Mutual Fund, UTI etc. the assessee will be liable to pay Capital Gains
Tax on Profits or Gains arising from such repurchase.

Rate of Taxation: [S. 112]

From Assessment Year 1998 – 99 Long Term Capital Gains are taxable at
a flat rate of 20% in hands of all kinds of assessees.
Previously the rate was for individual 20%, companies 40% and other
assessees 30%
When liability to tax arises only because of inclusion of long term capital
gains in total income, tax will be levied on excess over the minimum
exemption limit.
Computation of Capital Gains: [S. 48]
Capital Gains is computed by deducting from full value of consideration
received or accruing as a result of transfer the following amount:
(i) Expenditure incurred wholly and exclusively in connection with such transfer
(e.g. brokerage or commission for securing a purchaser, registration fee,
travelling expenses in connection with transfer); and
(ii) the cost of acquisition of the capital asset and cost of improvement thereto.
However, in case of transfer of a long term capital asset after deducting the
expenditure incurred wholly and exclusively in connection with such transfer,
the indexed cost of acquisition and indexed cost of improvement has to be
deducted.
Indexed Cost of Acquisition: is the amount which bears to the cost of
acquisition the same proportion as the cost inflation index for the year in which
the asset is transferred bears to the cost inflation index for the year in which the
asset was acquired by the assessee or for the year beginning on April 1, 1981
whichever is later. Thus:
Indexed Cost of Acquisition / Cost of Acquisition = Cost Inflation Index for the
Year in which the asset is transferred / Cost Inflation Index for the Year in which
asset was acquired or for the year beginning on April 1, 1981 which ever is later.
Indexed Cost of Improvement: is the amount which bears to the
cost of improvement the same proportion as the cost inflation index
for the year in which the asset is transferred bears to the cost
inflation index for the year in which the improvement to the asset
took place.
Thus:
Indexed Cost of Improvement / Cost of Improvement = Cost
Inflation Index for the Year in which the asset is transferred / Cost
Inflation Index for the Year in which improvement to the asset took
place.
S. 46:
By virtue of Section 46 distribution of assets in kind of a company to
its shareholders on its liquidation is not considered as transfer for
the purposes of S. 45 (1).
Financial Cost Inflation Financial Cost Inflation
Year Index Year Index
1981-82 100 1998-99 351
1982-83 109 1999-2000 389
1983-84 116 2000-2001 406
1984-85 125 2001-2002 426
1985-86 133 2002-2003 447
1986-87 140 2003-2004 463
1987-88 150 2004-2005 480
1988-89 161 2005-2006 497
1989-90 172 2006-2007 519
1990-91 182 2007-2008 551
1991-92 199 2008-2009 582
1992-93 223 2009-2010 632
1993-94 244 2010-2011 711
1994-95 259 2010-2012 785
1995-96 281 2010-2013 852
1996-97 305 2010-2014 939
1997-98 331 2010-2015 1024
Capital Gains exempt from Tax
(A) Only Long Term Capital Gains:
(i) Capital Gains arising from transfer of residential house [S.54]:
If assessee has within a period of one year before or two years after the
date of transfer purchased residential house in India or within a period
of 3 years from the date of transfer constructed a residential house in
India. The amount of exemption will be to the extent of the cost of new
residential house purchased or constructed.
If the amount of capital gains could not be utilized for acquisition or
construction of the new house before the date of furnishing the return,
the amount not so utilized should be deposited in Capital Gains Account
Scheme, 1988 with any specified bank authorized by Central
Government.
If the new house purchased or constructed is transferred within a period
of 3 years of its purchase or construction, the exemption given earlier
will be withdrawn.
 (ii) Capital Gains arising from the transfer of Agricultural Land [S.
54B]:
If the assessee has purchased within a period of 2 years from the date
of transfer any other agricultural land for agricultural purposes.
Provisions of deposit in Capital Gains Account Scheme, 1988 and
consequence of transfer of the new acquired agricultural land within 3
years will be the same as in S. 54.
(iii) Capital Gains on Compulsory acquisition of Land or building used
as Industrial Undertaking by the assessee: [S. 54D]
If the assessee within a period of 3 years purchased any land or
building or constructed any building for shifting or re - establishing the
Industrial Undertaking.
Provisions of deposit in Capital Gains Account Scheme, 1988 and
consequence of transfer of the new acquired land or building within 3
years will be the same as in S. 54.
(iv) Exemption on investment of Long Term Capital Gains in Specified
Long Term Assets i.e. in certain Bonds [S. 54EC]
If investment is made within 6 months from the date of transfer.
Maximum for investment which qualifies exemption is 50 lakh rupees.
Here deposit in Capital Gains Account Scheme, 1988 does not apply
but consequence of transfer of the Bond within 3 years or taking loan
against such bond within 3 years is the same i.e. exemption allowed
will be withdrawn.
(v) Exemption on investment of Long Term Capital Gains for
purchase or construction of residential house in India [S. 54F]
This exemption is available to individuals and HUFs. The residential
house should have been purchased 1 year before or 2 years after or
constructed within 3 years.
Provisions of deposit in Capital Gains Account Scheme, 1988 and
consequence of transfer of the new acquired/constructed residential
house within 3 years will be the same as in S. 54.
(B) Long Term Capital Gains or Short Term Capital Gains:
(i) Exemption of Capital Gains arising on transfer of assets in cases of
shifting of Industrial Undertaking from Urban Area to Rural Area
[S.54G]
Capital asset transferred should be any land, building plant or
machinery. New asset in the rural area should be purchased within 1
year before or 3 years after the date of transfer.
Provisions of deposit in Capital Gains Account Scheme, 1988 and
consequence of transfer of the new asset within 3 years will be the
same as in S. 54.
(ii) Exemption of Capital Gains on transfer of Assets in cases of shifting
of Industrial Undertaking from Urban Area to any Special Economic
Zone [S. 54 GA]: Conditions are the same as in S. 54 G
Section 54H simply extends time for investment to qualify for
exemption in cases where capital asset is compulsorily acquired in any
P.Y. but payment is made not on the date of compulsorily acquisition of
the asset. In such cases time limit for investment will be reckoned form
the date of receipt of the amount by the assessee.
 Income from other sources [Ss. 56 to 59]
S. 56 (1) – Any income not exempted from taxation and not chargeable under
any head specified in S. 14 from A to E is chargeable to income tax under the
head Income from Other Sources.
Without prejudice to the generality of provisions of S. 56 (1) by virtue of S. 56
(2) following income are also chargeable under the head Income from Other
Sources:
(i) Dividends
(ii) any winnings from lotteries, crossword puzzles, races including horse races,
card games and other games of any sort or from gambling or betting;
(iii) any sum received by assessee form his employees as contributions to any
Provident fund or Superannuation Fund or any fund set up under Employees’
state Insurance Act, 1948, or any other Fund for the welfare of such employees,
if the same is not taxable as Profits and Gains of Business or Profession.
(iv) Income by way of interest on securities if the same is not taxable as Profits
and Gains of Business or Profession.
(v) Income from letting out of machinery, plant or furniture, if the same in not
taxable as Profits and Gains of Business or Profession.
(vi) Income from letting out of machinery, plant or furniture along with
building where letting out of building is inseparable from letting out of
machinery, plant or furniture if the same is not chargeable as Profits and
Gains of Business or Profession.
(vii) Any sum received under a Keyman’s Insurance Policy, if the same in not
taxable as Profits and Gains of Business or Profession.
(viii) Money or property exceeding Rs. 50,000/- received without
consideration by an individual or HUF on or after 1.10.2009 other than
money or property received from:
(a) any relative or (b) on the occasion of marriage of individual; or (c) under
a will or inheritance; or (d) in contemplation of death of the payer; or (e)
from any fund, foundation, university, educational institution, hospital,
medical institution or trust referred to in S. 10 (23) (c).
Relative means (i) spouse of the individual; (ii) brother or sister of the
individual (iii) brother or sister of either of the parent of individual, (iv)
brother or sister of the spouse of individual, (v) any lineal ascendant or
descendent of the individual, (vi) any lineal ascendant or descendant of
the spouse of the individual, (vii) spouse of the persons referred to in
cl. (ii) to (vi).
Other incomes: Apart from aforesaid 8 incomes which are specified by S. 56
(2) other incomes which do not fall under any of the other heads of income
are taxable u/s 56 (1).
Though it is not possible to enlist all such incomes, some examples are as
follow:
(i) Income from subletting of House Property;
(ii) Income from letting or subletting of vacant land;
(iii) Director’s fee;
(iv) Agricultural Income received from outside India;
(v) Fee, commission, remuneration etc. received by an employee from a
person other than his employer;
(vi) Insurance Commission;
(vii) Salaries payable to M.Ps., and M.L.As.
Deductions: [S. 57] – Income chargeable under the head Income from
Other Sources is computed after making following deductions:
(i) In the case of dividend income and interest on securities:
(a) any reasonable sum paid by way of remuneration or commission for
the purpose of realizing dividend or interest;
(b) Interest on borrowed capital if it is used for investing in shares or
securities
(ii) In the case of income from machinery, plant or furniture let on hire:
(a) Current repairs to building as under S. 30 (a) (ii);
(b) Current repairs to machinery, plant or furniture and insurance
premium as u/s 31;
(c) Depreciation and unabsorbed depreciation on building, plant or
furniture as u/s 32
(iii) Any other expenditure (not being a capital expenditure) expended
wholly and exclusively for the purposes of earning such income.
(iv) In the case of income in the nature of family pension – Rs. 15,000/- or
33 and one 3rd % of such income whichever is less;
(v) In the case of [income specified in Section 2 (24) (x) i.e.,] amount
received as contribution from employer towards any welfare fund if such
amount is credited by the taxpayer to the employee’s account in the
relevant fund on or before the due date.
Amounts not deductible: The following amounts are not deductible while
computing income under the head “Income from Other Sources: [S. 58]
(i) any personal expenses of the assessee;
(ii) any interest chargeable under the Act which is payable outside India,
on which tax has not been paid or deducted;
(iii) any amount chargeable under the head ‘salaries’, if it is payable
outside India, unless tax has been paid thereon or deducted at source
(iv) any amount not allowable by virtue of Section 40A (For example,
excessive expenditure paid to relative, payment exceeding Rs. 20,000/-
paid otherwise than by crossed cheques or bank drafts;
(v) in the case of assessees being foreign companies, any expenditure in
respect of income by way of royalties and technical service fees received
under agreement made after March 31, 1976;
(vi) any expenditure or allowance in connection with any income by way of
winnings from lotteries, crossword puzzles, races, card games and other
games of any sort or from gambling or betting of any form.
However, disallowance is not applicable in computing the income of an
assessee being the owner of horses maintained by him for running in horse
races.
S. 59 lays down that while computing income under S. 56, provisions of S. 41 (1)
shall apply as they apply for computing income under Profits and Gains of Business
or Profession.
S. 41 lays down that where any deduction or allowance has been made in respect of
loss, expenditure and subsequently the amount is obtained by the assessee or his
successor, the same will be treated income of the P.Y. in which it is received and will
be taxable under the head Profits and Gains of Business or Profession irrespective
of the fact as to whether in such P.Y. such business or profession continues or not.
 Set off and carry forward of losses [Ss. 70 to 80]
Meaning
Set off means adjustment of losses against income of the same year
from a different source or head of income
Carry forward means carrying the loss which could not be set off in
the preceding year for adjusting the same against the income of the
subsequent year.
Modes of Set off and carry forward – The process may be divided
into Three steps:
1. Inter-source adjustment under the same head of income [S.70]
2. Inter head adjustment in the same A.Y. [S.71] – This is applied only
when inter – source adjustment is not possible.
3. Carry forward of loss [Ss. 72 to 79] – This is applied only when
inter – source adjustment is not possible in the P.Y. because of
inadequacy of income.
Inter-source Adjustment under the same head of Income [S.70]
If the assessee has incurred any loss from any source of income in any P.Y.,
he can set off such loss against the income from any other source under the
same head of income.
Exceptions:
(i) Loss from Speculation business cannot be set off against income of other
non-speculation business. [S. 73(1)]
(ii) Loss of specified business u/S. 35AD cannot be set off against income
from other business. This loss can be set off only against income from other
specified business.
(iii) Loss from the business of owning and maintaining race horses;
(iv) Long Term Capital Loss cannot be set off against Short Term Capital
Gains;
(v) Losses from Lottery, Crossword Puzzles, gambling, card games or betting
etc. cannot be set off against such income or any other income. [S. 58(4)]
(vi) Loss from exempted source of income cannot be set off against any
taxable income.
Speculative transaction [S.43 (5)] – means a transaction in which contracts
for sale or purchase of commodities including stocks and shares are settled
without actual delivery of commodities or scrips.
Inter-head Adjustments in the same A.Y. [S.71]
Exceptions:
(i) Loss from speculation business [S.73(1)]
(ii) Loss of specified business u/S. 35AD
(iii) Loss from the business of owning and maintaining race horses;
(iv) Long Term Capital Loss cannot be set off only against income from Long
Term Capital Gains;
(v) Loss under the head Profits and Gains of Business or Profession cannot be
set off against income from salary.
(vi) Losses from Lottery, Crossword Puzzles, gambling, card games or betting
etc. cannot be set off against such income or any other income. [S. 58(4)]
(vii) Loss from exempted source of income cannot be set off against any
taxable income
Note: Unabsorbed depreciation is not treated as a loss from business or
profession. Hence, unabsorbed depreciation can be set off against
income under the head “Salaries”.
 Carry forward of Losses:
Only following losses can be carried forward:
(i) Loss under the head “Income from House Property” can be carried
forward for maximum 8 following A.Ys. and can be set off only against
Income from House Property.
(ii) Loss under the head “Profits and Gains of Business or Profession”
whether of speculative or non speculative Business. Loss of non-
speculative business can be carried forward for maximum 8 A. Ys. and
can be set off against income of speculative or non – speculative
business. Loss of speculative business can be carried forward for 4 A. Ys.
and can be set off only against income of speculative business.
(iii) Loss of Specified Business can be carried forward for any number of A.Ys.
without limit but it can be set off only against income from Specified
Business.
(iv) Long Term and Short Term Capital Losses can be carried forward for 8 A.
Ys. However, Long Term Capital Loss can be set off only against Long
Term Capital Gain.
(v) Losses from owning and maintaining race horses can be carried forward
for 4 A.Ys. And can be set off against such income only.