Ch.1 BASIC CONCEPTS
Financial Year : The year starting from April 1 and ending on March 31 of the next year is known as a financial year. Assessment Year: Year: AY is a financial year in which the income earned during the preious year is taxed. !reious Year Year "sec 3#: The year in which the income is earned is called the preious p reious year. $.g.: 1. %ncome %ncome earned earned &y 'Y( )td in the year *++,-* *++,-*++ ++ will will &e taxed in the year *++-* *++-*++/ ++/.. The same would &e taxa&le irrespectie of the accounting year followed &y the assessee. %n the aforesaid the year *++,-+ is the preious year and the year *++-+/ is the assessment year. *. The income income of ' comprise comprises s of only proper property ty income income till till March March 1+0 *++. *++. 2n March March 1+0 *++ he starts a new &usiness of computer hardware. From the date gien &elow0 find out the taxa&le income of ' or the assessment years *++-+ to *++,-+. !roperty income: 4s. 5*0+++6- eery year. 7usiness income: 4s 1+0+++6- for the period ending 31 March *++ and 4s.+++6-for the period ending 31 march *++,. 8hat would &e the taxa&le income of ' for the AY +-+0 +-+,0 +,-+9 %ncome earned during the preious year is taxed during the assessment year. Therefore a year is an assessment year and preious year simultaneously. oweer in certain cases the income is taxed in the year in which it is earned. The exceptions to the rule are as under: 1. *. 3. 5.
%ncome %ncome of non-reside non-resident nt from from shipping. shipping. "sec1,*# "sec1,*# %ncome %ncome of persons leai leaing ng %ndia either either permanent permanently ly or for long long period of time time "sec1,5# "sec1,5# %ncome %ncome of &odies formed formed for short duration. duration. "sec1,5A# "sec1,5A# %ncome %ncome of persons persons trying trying to alienate alienate his his assets assets with iew iew to aoidin aoiding g payment payment of his tax. tax. "sec 1,# . income income of disco disconti ntinue nued d &usines &usiness." s."sec sec1, 1,##
;!erson ;sec *"31#: The term persons include: a# an indi ndiiidual dual &# a ind indu u undi undii ided ded fami family ly c# a co company d# a firm e# an associati association on of persons persons and a &ody &ody of indiid indiiduals uals whether whether incorp incorporate orated d or not f# a loc local al auth author oriity g# $ery $ery artificial artificial :
1
Assessee means a person &y whom any tax or any other sum of money "i.e. "i.e. penalty or interest is paya&le under the act. %t includes: 1. $ery $ery person person in respec respectt of whom any procee proceedin ding g under the the act has &een taken taken for the assessment of his income or loss or the amount of refund due to h im. *. any person person who who is deemed deemed to to &e an assessee assessee."re ."represe presentati ntatie e assessee# assessee# 3. an assessee assessee in default default " adance adance tax tax and T?@ not deducte deducted# d#
Overview of tax on income: %ncome Tax is an annual Tax charged at the tax rates applica&le for the assessment year0 which are fixed &y the annual finance act. 7asic concept of %ncome: 1. *. 3. 5. . . ,. . /. 1+. 11. 1*. 13. 15. 1. 1. 1,. 1. 1/. *+. *1.
4egu 4egula larr and and defi defini nite te sour source ce ?iffe ?ifferen rentt form form of incom income e "cash6 "cash6kin kind# d# 4ece 4eceip iptt 6s 6s accr accrua uall %lleg llegal al inco ncome ?isput sputed ed tititle tle 4elief 4elief or reim&ursem reim&ursement ent of of expense expense is not not income income ?iersio ?iersion n of income income &y oer riding riding title title 6s 6s application application of of income income @urplu @urplus s from from mutual mutual acti actiit ity y not an inco income. me. Temporar mporary y or perman permanent ent income income tax fre free e income income 4eceipt on account of dhrmada0 dhrmada0 gaushala etc etc is not an income. dealuati dealuation on of currency currency %ncome %ncome includes includes loss. loss. Appropriation of payment &etween capital capital and interest. same income income cannot cannot &e taxed taxed twice twice income income should &e real real and not fiction fictional al charge charge on on person person Award Award receipt receipt &y sports sports man man reenue reenue receipts receipts 6s capital capital receipts receipts olunt oluntary ary payment payment prie prie of winn winning ing
$xtended meaning of income sec *"*5#: 1. prof profit its s and and gai gains ns *. ?ii ?iidend dend:: diide diidend nd declare declared d &y domestic domestic compan company y is taxa&l taxa&le e in the hands of company company and not shareholders 3. Bolun Boluntar tary y contri& contri&uti ution on receie receied d &y trust. trust. 5. !erCui !erCuisit sites es in in the the hands hands of of empl employe oyee e . Any specia speciall allow allowanc ance e and and &enef &enefit its s . Dity Dity compen compensat satory ory allow allowanc ance e ,. 7enefi 7enefits ts or perCui perCuisit sites es of direct director or . 7enefit 7enefit or perCui perCuisites sites to a represent representati atie e assessee assessee /. Any sum charge chargea&l a&le e u6s u6s *0 *0 51 and / 1+. Dapit Dapital al gains gains 11. 11. %nsura %nsurance nce profit profit 1*. &anking &anking income of a cooperati cooperatie e society 13. winning winning from from lotter lottery y 15. employees contri&ution towards proided fund 1. amt receied receied under keyman keyman insurance insurance policy 1. amount amount exceeding exceeding +0+++ +0+++ &y way of gift gift
2
Assessee means a person &y whom any tax or any other sum of money "i.e. "i.e. penalty or interest is paya&le under the act. %t includes: 1. $ery $ery person person in respec respectt of whom any procee proceedin ding g under the the act has &een taken taken for the assessment of his income or loss or the amount of refund due to h im. *. any person person who who is deemed deemed to to &e an assessee assessee."re ."represe presentati ntatie e assessee# assessee# 3. an assessee assessee in default default " adance adance tax tax and T?@ not deducte deducted# d#
Overview of tax on income: %ncome Tax is an annual Tax charged at the tax rates applica&le for the assessment year0 which are fixed &y the annual finance act. 7asic concept of %ncome: 1. *. 3. 5. . . ,. . /. 1+. 11. 1*. 13. 15. 1. 1. 1,. 1. 1/. *+. *1.
4egu 4egula larr and and defi defini nite te sour source ce ?iffe ?ifferen rentt form form of incom income e "cash6 "cash6kin kind# d# 4ece 4eceip iptt 6s 6s accr accrua uall %lleg llegal al inco ncome ?isput sputed ed tititle tle 4elief 4elief or reim&ursem reim&ursement ent of of expense expense is not not income income ?iersio ?iersion n of income income &y oer riding riding title title 6s 6s application application of of income income @urplu @urplus s from from mutual mutual acti actiit ity y not an inco income. me. Temporar mporary y or perman permanent ent income income tax fre free e income income 4eceipt on account of dhrmada0 dhrmada0 gaushala etc etc is not an income. dealuati dealuation on of currency currency %ncome %ncome includes includes loss. loss. Appropriation of payment &etween capital capital and interest. same income income cannot cannot &e taxed taxed twice twice income income should &e real real and not fiction fictional al charge charge on on person person Award Award receipt receipt &y sports sports man man reenue reenue receipts receipts 6s capital capital receipts receipts olunt oluntary ary payment payment prie prie of winn winning ing
$xtended meaning of income sec *"*5#: 1. prof profit its s and and gai gains ns *. ?ii ?iidend dend:: diide diidend nd declare declared d &y domestic domestic compan company y is taxa&l taxa&le e in the hands of company company and not shareholders 3. Bolun Boluntar tary y contri& contri&uti ution on receie receied d &y trust. trust. 5. !erCui !erCuisit sites es in in the the hands hands of of empl employe oyee e . Any specia speciall allow allowanc ance e and and &enef &enefit its s . Dity Dity compen compensat satory ory allow allowanc ance e ,. 7enefi 7enefits ts or perCui perCuisit sites es of direct director or . 7enefit 7enefit or perCui perCuisites sites to a represent representati atie e assessee assessee /. Any sum charge chargea&l a&le e u6s u6s *0 *0 51 and / 1+. Dapit Dapital al gains gains 11. 11. %nsura %nsurance nce profit profit 1*. &anking &anking income of a cooperati cooperatie e society 13. winning winning from from lotter lottery y 15. employees contri&ution towards proided fund 1. amt receied receied under keyman keyman insurance insurance policy 1. amount amount exceeding exceeding +0+++ +0+++ &y way of gift gift
2
Gross total income As per section 150 the income is computed computed under fie heads: heads:
4s Com!tation of total income: %ncome from salaries %ncome from ouse properties profit and gains from &usiness and profession Dapital gains %ncome from other sources Eross Total %ncome )ess: deductions u6s + D to + Get total %ncome "rounded off#
4s
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Com!tation of Tax "ia#ilit$: Tax on total income )ess: re&ate u6s $ 7alance Add: surcharge Total Add: education cess
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Tax Tax )ess: !repaid taxes " T?@0 self assessment and Adance tax# Tax )ia&ility
4ounding off total %ncome: The total income is to &e rounded off to the nearest multiple of ten rupees.
3
Ch.% &ESI'ENTIA" STAT(S AN' ITS TA) E**ECT ?ifferent Taxa&le $ntity: 1. *. 3. 5. .
%ndiidual indu ndiided Family A firm or an association of persons a
4esidential status: 1. 4esident and ordinary resident in %ndia *. 4esident &ut not ordinary resident in %ndia 3. Gon-resident in %ndia. ?ifferent residential @tatus for different Taxa&le entity: Individual/ Hindu undivided Family Category
Firm/association of persons, joint stock company and every other person.
Category 1
2rdinary resident
4esident in %ndia
4esident %n %ndia Gon-ordinary resident Category 2
Gon resident in %ndia
Gon resident in %ndia
4esidential status is to &e d etermined for each preious year. A person can &e a resident of two countries at once. 8hether a person is a resident or non-resident is a Cuestion of fact and its duty of the assessee to place all releant fact in front of the assessing officer
4
4esidential status of indiidual "sec #: 7asic conditions: To &e an %ndian resident a person should satisfy atleast one of the two conditions as under: 1. *.
e is in %ndia in the preious year for a period of 1* days or more. e is in %ndia for + days or more during the preious year and 3 days or more during 5 years immediately preceding the preious year.
$xceptions: %n the following two cases a person will &e a resident if he satisfies only the first condition0 the second condition is not applica&le. 1. %n case of an %ndian citien who leaes %ndia for the purpose of employment or as a mem&er of the crew of an %ndian ship. *. %n the case of an %ndian citien or a person of %ndian origin who comes on a isit to %ndia in the preious year. Additional Donditions: For a resident to &e classified as an ordinary resident the following two additional conditions should &e fulfilled. %n case any one of them is not fulfilled then the person will &e under the category of resident &ut not an ordinary resident. 1. *.
e should &e resident in %ndia for at least * years out of the preceding 1+ years. e should &e in %ndia for at least ,3+ days out of the immediately preceding , years.
$g:
' foreign citien comes to %ndia for the first time on March *+0 *++. 2n @ep 10 *++ he leaes for Gepal on a &usiness trip. e comes &ack on Fe&ruary *0 *++,. ?etermine the residential status of ' for the AY *++,-+. ' left %ndia for the first time on May *+0 *++5. ?uring the FY *++,-+0 he comes &ack to %ndia on May *, for a period of 3 days. ?etermine the residential status for the AY *++-+/. ' a foreign citien leaes %ndia for the first time in the last *+ years on Go*+0 *++5. ?uring the calendar year *++0 he comes to %ndia on @ep 1 for 3+ days. ?uring the calendar year *++0 he does not isit %ndia at all &ut come on Hanuary 10 *++,. ?etermine the residential status for the AY +,-+.
4esidential @tatus of a indu undiided Family sec "*#: F is classified as a resident and non resident according to its control and management status. Dontrol and management means the de facto control and management and not
lace of control
!esidential status of H"F
#rdinary resident or not
5
Dontrol and mangt is wholly in %ndia Dontrol and mangt is wholly outside %ndia
Dontrol and mangt is partly in %ndia and partly outside %ndia
4esident
Gext ta&le
Gon-resident
--
4esident
Gext ta&le
Dondition for &eing ordinary resident: $dd condition 1
Iarta has &een resident in %ndia at least * out of 1+ preious years immediately preceding the releant preious year.
$dd condition 2 Iarta has &een present in %ndia for a period of ,3+ days or more during the , years immediately preceding the preious year.
%f karta or manager of a resident F does not satisfy the a&oe two conditions then it would &e treated as resident &ut not ordinary resident. $g:
' an indiidual0 is resident &ut not ordinary resident in %ndia for the AY +,-+. ?uring the preious year +-+,0 the affair of ' "F#0 whose Iarta is ' is partly managed from %ndia and partly from Gepal. ?etermine the residential status of ' "F# for the financial year +,-+9
4esidential status of firm and association of persons: sec "*# lace of control
!esidential status
Dontrol and management of the affairs of a firm6association of persons is8holly in %ndia 8holly outside %ndia !artly in %ndia and !artly outside %ndia • • •
4esident Gon-resident 4esident
4esidential status of a company sec "3#: lace of control
Dontrol and management of the affairs of the company is situated8holly in %ndia 8holly outside %ndia !artly in %ndia and !artly outside %ndia • • •
!esidential status Indian Company
#ther company
4esident 4esident 4esident
4esident Gon resident Gon resident
6
The term control and management refers to head and &rain that directs the affair of policy0 finance0 disposal of profits and ital things regarding the management of a company. 4esidential status of eery other person sec "5#: lace of control Dontrol and management of his affairs are situated8holly in %ndia 8holly outside %ndia !artly in %ndia and !artly outside %ndia
!esidential status
• • •
4esident Gon- resident 4esident
Inci+ence of Tax for +ifferent Taxa$ers: %ncidence of tax on taxpayers depends on his residential status and also on the place and time of accrual and receipt of his income. Tax inci+ence on In+ivi+!al an+ ,(* is as !n+er: 4esident and ordinary resident %ndian %ncome Taxa&le in %ndia Foreign %ncome 7usiness is controlled wholly or party from %ndia %ncome from profession set up in %ndia 7usiness is controlled from outside %ndia !rofession is set up outside %ndia Any other foreign %ncome
4esident &ut not ordinary resident Taxa&le in %ndia
Gon resident
Taxa&le in %ndia
Got taxa&le in %ndia
Taxa&le in %ndia
•
Taxa&le in %ndia
•
•
•
•
Got taxa&le in %ndia Taxa&le in %ndia
Taxa&le in %ndia Taxa&le in %ndia
Taxa&le in %ndia
Got taxa&le in %ndia Got taxa&le in %ndia Got taxa&le in %ndia
Got taxa&le in %ndia Got taxa&le in %ndia Got taxa&le in %ndia
Taxa&le in %ndia
7
Tax inci+ence on an$ other taxa$er -coman$ firm etc/ as !n+er: 4esident in %ndia
Gon- resident in %ndia
%ndian %ncome
Taxa&le in %ndia
Taxa&le in %ndia
Foreign income
Taxa&le in %ndia
Got Taxa&le in %ndia
Ch0. Income that is exemt from Tax
8
9
Aric!lt!re Income: Agriculture income is exempt from tax &y irtue of sec 1+"1#. 7y irtue of sec *"1A# the expression Agriculture %ncome means: 1. Any rent or reenue deried from land0 which is situated in %ndia and is used for agriculture purpose. 4ent or reenue should &e deried from land "may &e in cash or kind#. The land should &e in %ndia The land should &e for agriculture purpose. *. Any income deried from such land &y agricultural operations including processing of the agriculture produce0 raised or receied as rent-in- kind so as to render it fit for the market or sale of such produce. 3. %ncome attri&uta&le to a farmhouse su&
• • •
•
$griculture income is included for ta% rate purposes only.
Secial Provisions in resect for newl$ esta#lishe+ !n+erta2in Sec 13-A/: $ligi&ility: Any undertaking which satisfy the following conditions is eligi&le to get deduction: 1. %t must &egin manufacture or production in free trade (one *. %t should not &e formed &y splitting6 reconstruction of &usiness. 3. %t should not &e formed &y transfer of old machinery. "@econd hand imported and *+K# 5. @ale consideration should &e remitted to %ndia in conerti&le foreign exchange. . 7ooks of account should &e audited . 4eturn of income should &e su&mitted on Time.
10
Amount of deduction The deduction under sec 1+A is as under: !rofit of the &usiness of the undertaking
x
$xport turnoer . Total turnoer of the &usiness carried on &y the undertaking
$xport turnoer%t means the consideration in respect of export &y the undertaking of articles or things or computer software receied in or &ought in %ndia &y the assessee in conerti&le foreign exchange within the prescri&ed period.
!eriod of ?eduction: The assessee can claim deduction for a period of 1+ consecutie assessment years &eginning with the assessment year releant to the preious year in which the undertaking &egins to manufacture or produce. The aforesaid deduction is not aaila&le to any undertaking from the a ssessment year *+1+-11. @pecial !roisions: %ncase of an undertaking0 which &egins to manufacture or produce things or computer software &etween 1April *++* to March 31 *++ in any special economic one0 is aaila&le as follows for 1+ assessment years: First years-1++K of profit deried from the export of such articles or things or computer software. "First consecutie years#. Gext * years- +K of such profits and gains in deducti&le. Gext 3 years- a further deduction is aaila&le to the extent of +K of the profit proided an eCuialent amount is created as @pecial $conomic (one re-inestment Allowance 4esere. Charita#le an+ &eliio!s tr!sts an+ instit!tions: %ncome of a charita&le trust is exempt according to the proisions of section 110 1* and 13. The trust should &e one esta&lished in accordance with law and its o&
%ncome of the trust: %ncome means the real income0 which has &een receied &y the assessee. The amount deducted as tax at source cannot &e considered as income for this purpose. ?epreciation should &e allowed while computing income for this purpose. Boluntary contri&ution or donations are deemed to &e a part of income deried from property held under trust. • • • •
11
•
%f a oluntary contri&ution is made with a specific direction than it shall form a part of the corpus of the trust and not deemed as the income of the trust.
Application of the income of the trust: %f the income applied to charita&le or religious purposes0 during the preious year fall short of K of the income deried during the year due to &elow mentioned reasons then the trust can us the income as &elow: 4eason for less than K application of 8hen the income can &e spend income %ncome has not &een receied during the preious year
The year in which the income is receied or the following su&seCuent year.
Any other reason
?uring the preious year immediately following the year in which the income is deried.
%f the income is not applied during the extended time then the income will &e taxa&le in the next year. Accumulation of income: The trust or institution may accumulate or set apart either the whole or part of its income for future application for such purposes. @uch income so accumulated will not form the income of the trust. Forfeiture of exemption: %f the &enefits of any amenities or serices are deried &y any specified persons as per section 13 then the exemption gien to trust stand forfeited. The following income do not Cualify for exemption: 1. %ncome for priate religious purposes only *. %ncome for the &enefit of particular religious community 3. %ncome for the &enefit of interested persons 5. Funds not inested in specified securities6 deposits
$g: ?uring the preious year *++-+,0 a charita&le trust gets the following income: a. Boluntary contri&ution "with specific direction that they 4s shall form part of the corpus of trust 1*0/+0+++ &. Boluntary contri&ution "without specific direction# 103+0+++ c. %ncome from property held in trust ?uring the preious year *++-+,0 the trust spends 4s. 0/+0+++ for charita&le purpose in %ndia. 7esides it gies donation of 4s. 05+6- to the charita&le trusts. %t sets apart 4s. 150++0+++ for the purpose of construction of a charita&le hospital up to March 310*+1*.
12
Ch.4 INCO5E (N'E& T,E ,EA' SA"A&IES 5eanin of salar$ 1. *. 3. 5.
4elationship of an employer and employee @alary and wages not conceptually different @alary can &e from more than one source %t can &e in cash or kind
Salar$ Sec 16-1/: @alary under 1,"1#0 is defined to include the following: 1. wages *. any annuity or pension 3. any gratuity 5. any fees0 commission0 perCuisites0 or profits in lieu of or in addition to any salary or wages. . any adance on salary . any payment receied &y an employee in respect of any period of leae not aailed &y him. ,. the portion of the annual accretion in any preious year to the &alance at the credit of an employee participating in a recognied proident fund to the extent it is taxa&le. . the contri&ution made &y the central goernment to the account of an employee under a pension scheme. Basis of Chare Sec 17: 1. *. 3.
Any salary due from an employer whether actually receied or not. Any salary receied in the preious year whether actually due or not. Any arrears of salary paid or allowed to him in the preious year &y or on &ehalf of an employer0 if not charged to income tax for any preious year.
Com!tation of income from Salar$: 4s. ----
%ncome from @alary %ncome &y way of allowance Taxa&le alue of perCuisites
4s.
--
Eross @alary )ess: deductions u6s 1 $ntertainment Allowance !rofessional Tax %ncome from salaries
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13
"eave Salar$: )eae @alary refers to the encashment of the leae standing to the credit of an employee either at the time of his retirement6 or leaing his
(tatus of employee
)hether it is ta%a*le
)eae encashment during continuity of employment
Eoernment6 non goernment employee
Dhargea&le to Tax
)eae encashment at the time of retirement 6 leaing the
Eoernment employee
Fully exempted
)eae encashment at the time of retirement 6 leaing the
Gon goernment employee
Fully or partly exempted from tax in some cases.
Gon goernment employee getting )eae encashment at the time of retirement 6 leaing the
Grat!it$ Sec 13-13/: Eratuity is a retirement &enefit and is generally paya&le at the time of cessation of employment and on the &asis of duration of serice. (tatus of employee
+a% treatment
Eoernment $mployee
Fully exempted from Tax
Gon goernment employee coered &y the payment of Eratuity Act0 1/,*
$xempted to the )east of the following: 30+0+++6 Eratuity actually receied 1 days last drawn salary x length of serice6* $xempted to the )east of the following: 30+0+++614 Eratuity actually receied alf-month aerage salary for each
Gon goernment employee not coered &y the payment of Eratuity Act0 1/,*
Tax treatment of gratuity:
Gote: 1. %n case where the employee is coered &y gratuity Act0 1/,* then the year is to &e rounded off to the nearest whole. "a&oe months the year to &e rounded off to one.# *.
%n case where the employee is not coered &y the gratuity Act0 1/,* then the years are the completed years of serice" any fraction is to &e ignored#.
$g: 1#
'0 an employee of !N Do. )td0 receies 4s. ,0+++ as gratuity. e is coered &y the payment of gratuity Act0 1/,*. e retires on ?ecem&er 1*0 *++ after rendering serices of 3 years and months. At the time of retirement his monthly &asic salary and dearness allowance was 4s.*05++6- and 4s. ++ respectiely. Dalculate the amount of exemption. *# %n the a&oe example calculate the amount of exemption if ' was not coered &y the Eratuity Act0 1/,*. 3# Mr. ' retired on 1st April *++, after sering for 3+ years and , months. e was getting salary 4s. 0+++6- pm from 1616*++ to 3161*6*++ and thereafter 4s. 0*++6- pm. e receied ?A O 4s. 10+++ pm "forming part of salary for computation of retirement &enefits# and *Kcommission on sales achieed &y him. Turnoer achieed &y him during 1+ months "preceding the month in which he retired# 4s. 0++0+++. e receied a gratuity of 4s. 100+++. Dompute the exempted amount of gratuity.
Pension Sec 16-1/-ii/: ncommuted !ension: !eriodical payment of pension. Dommuted !ension: )ump sum payment in lieu of periodical payment. Taxa&ility of commuted pension: (tatus of employee Eoernment $mployee
Gon-Eoernment $mployee
ratuity received/ not received Eratuity may or may not &e receied
-%emption $xempted from Tax
Eratuity is receied
2ne-third of the pension0 which he is normally entitled to receie0 is exempt from tax.
Eratuity is not receied
2ne-half of the pension0 which he is normally entitled to receie0 is exempt from tax.
ncommuted !ension is always chargea&le to tax for &oth goernment and non-goernment employee.
15
$g: 1. ' retires from a priate company on 3+th April *++,. e gets a pension of 4s. *5+++6- per month. pto 3+th Hune *++,. From 1 st Huly *++, onwards he gets two-third of his pension commuted for 4s. 10+0+++6-. e was not in receipt of any gratuity at the time of retirement. Dompute the taxa&le amount of pension for the assessment year *++-+/. *. Dalculate the taxa&le pension of ' for the AY *++-+/0 in the a&oe ex. if ' was in receipt of Eratuity as per gratuity Act 1/,*. Pension Scheme for an emlo$ee 8oinin Central Government on or after 9an 1 %334 : nder the new scheme it is compulsory for an employee to contri&ute 1+K of salary eery month towards their pension account and a matching contri&ution will &e made &y the goernment. @uch contri&ution will &e deducti&le under u6s + DD?. 8hen the pension is receied out of the aforesaid amount it will &e taxa&le in the hands of recipient. 'ifferent form of Allowances: Allowances is generally defined as a fixed Cuantity of money or other su&stance gien regularly in addition to salary for the purpose of meeting some particular reCuirement connected with the serices rendered &y the employee or as compensation for unusual conditions for that serice. %t is fixed0 predetermined and gien irrespectie of actual expenditure. ,o!se rent Allowance: The least of the following amount would &e taxa&le: 1. An amount eCual to +K of the salary0 where the residential house is situated at Mum&ai0 Iolkatta0 ?elhi or Dhennai and an amount eCual to 5+K of salary where residential house is situated at any other place. *. ouse 4ent Allowance receied &y the employee. 3. The excess of rent paid oer 1+K of the salary.
@alary means &asic salary and includes dearness allowance and commission &ased on the fixed percentage of turnoer. $g:
Mr. ' is employed in a company in Agra. e is getting a &asic salary of 4s. +++6- pm0 ?earness allowance O1+K of &asic pay0 commission &ased on fixed percentage of turnoer 4s. *50+++6- pa. Actual rent paid &y the assessee 4s. *0++6- pm. Dompute the taxa&le amount of 4A.
Entertainment Allowance: $ntertainment Allowance is first included in the salary income and thereafter a deduction is gien on the following &asis: (tatus of -mployee Eoernment $mployee
-%emption $mount )east of the following is deducti&le: a# 4s. +++ &# *+K of &asic salary c# actual amount of entertainment allowance
16
Gon-goernment employee
$ntertainment allowance is not deducti&le
$.g.: '0 a goernment employee gets 4s. 5+0+++ per annum as &asic pay. %n addition0 he receies 4s. 0++ as entertainment allowance. is actual expenditure on entertainment for official purpose howeer exceeds 4s. /+++6-. 8hat would &e the amount of deduction9 Secial Allowances: 8hen exemption depends upon actual expenditure &y the employee: %n these &elow mentioned cases the amount of expenditure is the least of the Amount of allowance The amount utilied pertaining to allowance )ist of the allowances is as under: 1. Traeling Allowance6 transfer allowance *. Doneyance allowance 3. ?aily allowance 5. elper allowance . 4esearch Allowance . niform Allowance 8hen exemption does not depend upon the expenditure: These allowances are exempt to the least of the following: Amount of allowance PAmount specified in rule *77 Name of allowance
Nature of allowance
Exemption
Tri&al Area6 scheduled area allowance
Dhildren Allowance
This allowance if gien in Madhya 4s. *++ pm !radesh0 Tamil Gaidu0 ttar !radesh0 Iarnatka0 Tripura0 Assam0 8est 7engal0 7ihar0 2rrisa. $ducation Eien for children education $xemption limited for 4s. 1++6per month per child limited to a maximum of two children.
ostel $xpenditure Allowance
This allowance is granted to an employee to meet the hostel expenditure on is child
$xemption limited for 4s. 3++6per month per child limited to a maximum of two children.
Transport Allowance
%t is gien to an employee to meet his expenditure for commuting from his office to his residence.
$xempted to the extent of 4s. ++6- per month
@pecial Dompensatory " ill Areas# Allowance
%t includes any special allowance Amount exempt aries from 4s. in the nature of special 3++ per month to 4s. ,+++ per compensatory "hill areas# month. allowance or high altitude allowance or uncongenial climate
17
allowance allowance.
nderground allowance
or
aalanche
nderground allowance is granted to an employee who is working in uncongenial0 unnatural climate in underground mines.
$xemption limited to 4s.++ per month.
Per!isites: !erCuisites can &e defined as any casual emolument or &enefit attached to an office or position in addition to salary or wages. Therefore a perCuisite to &e taxa&le under the head salaries: a. allowed &y an employer to an employee &. allowed during the continuance of his employment c. directly dependent upon serice d. resulting in the nature of personal adantage to the employee e. deried &y irtue of employers authority !erCuisites: @ec 1,"*# The term perCuisite is defined to include the following: 1. The alue of rent Qfree accommodation proided to the assessee &y his employer. *. The alue of any concession in rent for accommodation proided &y the employee 3. Balue of any &enefit or amenity granted or proided free of cost or at concessional rate in any of the &elow cases: a# &y a company to an employee who is a director thereof &# &y a company to an employee0 haing an su&stantial interest in the company c# any person not included in any of the a&oe two categories haing a cash salary of more than +0+++65. any sum paid &y the employer in respect of any o&ligation which &ut for such payment would hae &een paya&le &y the assessee . any sum paya&le &y the employer0 to effect an assurance on the life of the assessee or to effect a contract for an annuity . the alue of any other fringe &enefits or amenity as may &e prescri&ed. Taxa&ility of perCuisites: 8hen it is an o&ligation of $mployee: %f the employer meets an o&ligation of an employee then the perCuisite is always chargea&le to tax. %f the employer0 pays any &ills which are in the name of employee0 then they are taxa&le in the hands of employee. 8hen not an o&ligation of employee: %n any other case0 where it is not an o&ligation of an employee0 the &elow ta&le list all perCuisites which are taxa&le in the hands of the employee0 4emaining perCuisites are not taxa&le in employees hands regardless of the expenditure incurred &y the employer. Taxable Perquisites in the hands of the employee
Exceptions
18
Furnished6 unfurnished house without rent or at concessional rent
$xceptions are: A rent free house in a remote area, hotel accommodation in case of transfer for not exceeding 15 das!
@erices of a sweeper0 gardener0 watchman or Taxa&le in the hands of @pecified personal attendant person only @upply of gas0 electricity or water for household purpose
Taxa&le in the hands of @pecified person only
$ducation Facility to employeeRs family mem&ers
Taxa&le in the hands of @pecified person only
)eae trael Doncession
$xempted if it is gien twice in a &lock of four years.
Amount paya&le &y an employer directly or Any contri&ution to recognied indirectly to effect an assurance on the life of proident fund or super annuation employee or to effect a contract of an annuity fund is exempted. %nterest free or concessional loan Following are exempted: "oan not exceeding 20,000, "oan for medical treatment !roiding use of moa&le asset Transfer of moa&le asset
!roiding use of computer6 laptop or motor car Gone
Medical expenditure reim&ursement in excess of Following are exempted: 4s. 10+++ #n em$loer% go&t hos$ital 'x$enditure in case of s$ecified treatment (ealth insurance $remium )edical facilities outside #ndia @pecified6 Gon specified $mployee: The following are specified employees: a# An employee who is a director &# An employee0 haing a su&stantial interest in the company: *+K or more oting power in the employer-company. c# any person not included in any of the a&oe two categories haing a salary "excluding the alue of all &enefits6 amenities not proided &y way of monetary payment# of more than +0+++6-. ;al!ation of rent
a# Dentral and @tate Eoernment $mployees: The alue of such accommodation proided to employee is eCual to the license fee0 which would hae &een determined &y the central or state goernment. &# !riate sector or other employees: Balue of the perCuisite depends on salary of the employee and lease rent of the accommodation.
19
opulation of city as per )here the accommodation is 21 census here oned *y the employer accommodation is provided $xceeding * lakhs
$xceeding 1+ )akhs &ut not exceeding * lakhs
Any other
)here the accommodation is taken on lease or rent *y the employer 1K of salary in respect of )ower of amount of lease the period for which the rent paid6 paya&le or 1K accommodation is occupied of the salary &y the employee 1+K of salary in respect of )ower of amount of lease the period for which the rent paid6 paya&le or 1K accommodation is occupied of the salary &y the employee ,.K of salary in respect of )ower of amount of lease the period for which the rent paid6 paya&le or 1K accommodation is occupied of the salary &y the employee
@A)A4Y: For the purpose of aluation the salary includes a# 7asic salary &# ?earness allowance0 if terms of employment so proide c# 7onus d# Dommission e# Fees f# All other taxa&le allowance "excluding amount not taxa&le# g# Any monetary payment which is chargea&le to Tax $g: '0 an employee of A7D"!# )td is posted in A
20
a# *5K of salary paid or paya&le for the period during which such accommodation is proided in the preious year. &# Actual charges paid or paya&le &y the employer to the hotel. $g: ' receied during the preious year ending March 310*++,0 emolument consisting of &asic pay: 4s. 1*0+++: special allowance: 4s 1,0+++ and reim&ursement of medical expenditure: 4s. 3++6-. is employer has also proided a rent-free furnished flat in Mum&ai. )ease rent of the unfurnished flat is 4s. +0+++. @ome of the household appliance proided to ' "with effect from Hune1 0*++# are owned &y the employer " cost price 4s. 3+++#. $mployer pays 4s. 1+0+++ as hire purchase charges for the three air conditioners installed. Dompute the alue of perCuisite if: a# ' is a @ecretary in the ministry of )aw and 4s. 5+++ is the license fee of unfurnished flat as per the Dentral Eoernment rules. &# ' is the managing director of A7D"!# )td. 8hat difference would it make if ' was proided a hotel accommodation through out the year "tariff &eing 4s. 1*+0+++ per annum#
;al!ation rovi+e+ at concessional rent: The &elow rules will apply for furnished as well as unfurnished accommodation: Find out the alue of perCuisites on the assumption that no rent is charged &y the employer. From the alue so arried deduct the rent charged &y the employer from the employee. ;al!ation of er!isite in resect of free +omestic servant: The alue of &enefit to the employee "or any mem&er of his household# resulting from the proision &y the employer for serices of a sweeper0 a gardener0 a watchman or a personal attendant0 shall &e the actual cost to the employer0 that is0 the total amount of the salary paid or paya&le &y the employer "or any other person on his &ehalf# for such serices as reduced &y the amount paid &y the employee for such serices. ;al!ation of er!isite in resect of as electricit$ or water rovi+e+ free of cost : This perCuisite is taxa&le in the hands of specified employees only proided the connection is in the name of employer. %f in the name of employee then the employer would &e paying on &ehalf of the employee and is taxa&le in all cases. 0ode of valuation
If purchased from outside
If supplied *y the employer from on sources
Dost to employer "A#
Amount p aid 6 paya&le & y the employer to the outside agency
Manufacturing cost per incurred &y the employer
@u&: Amount recoered from the employee "7#
4ecoery from the employee
4ecoery from the employee
Taxa&le Balue perCuisite "A-7#
of 7alancing amount
unit
7alancing amount
21
;al!ation in resect of free e+!cation: This perCuisite is taxa&le in the hands of a specified employee only and only in those cases where the educational institute is owned and maintained &y the employer or where such education facility is proided in any institute &y reason of employeeRs employment with the employer. The aluation of the facility would &e as under: ifferent (ituations
$mount chargea*le to ta%
8here the education facility is proided to employees children 8here the cost6 alue of &enefit does not exceed 4s. 1+++ per child per month 8here such amount exceeds 4s. 1+++6-
G%)
•
•
Dost of education in a similar instituted in a similar locality Q 4s 1+++ Q amount recoered &y employee
8here education facility is proided to other Dost of education in a similar instituted in a similar locality Q amount recoered &y employee mem&ers of the household
%f the fee is paid &y the employer for employees children then there is no exemption aaila&le for &oth specified and non-specified employees. @imilarly reim&ursement of school fees is also taxa&le in the hands of &oth specified and non-specified employees. ;al!ation in resect of rovi+in !se of mova#le assets: The alue of &enefit to the employee resulting from the use &y the employee "or any mem&er of his household# of any moa&le asset "other than car0 computer and laptop# &elonging to the employer shall &e determined at 1+K per annum of the actual cost of such asset. %t is taxa&le in the hands of all employees i.e. specified and non specified. The taxa&le amount shall &e reduced &y the amount0 if any0 recoered &y the employee.
0ode of aluation
A. Find the cost to the employer
er3uisite in respect of mova*le asset
#ned *y employee
+aken on hire *y employee
1+K p.a of actual cost
Amount of rent paid or paya&le
22
7. Amount recoered from the employee Taxa&le Balue perCuisite "A-7#
4ecoery from the employee
of 7alancing amount "if positie#
4ecoery from the employee
7alancing amount "if positie#
;al!ation in resect of Transfer of mova#le Asset : The aluation will &e done as follows: 0ode of aluation
er3uisite in respect of sale of mova*le assets to employee -lectronic computers
Items/ 0otor car
$ny other asset
Find out the cost to the Actual cost to the Actual cost to the Actual cost employer "A# employer employer employer Gormal wear and tear for completed years for which the asset was used &y the employer for his &usiness. "7# Amount recoered &y the employee "D# Taxa&le Balue "A-7-D#
+K for each completed year &y reducing &alance method
*+K for each completed year &y reducing &alance method
to
the
1+K for each completed year of actual cost.
!aid &y employee for !aid &y employee for !aid &y employee for acCuiring such asset acCuiring such asset acCuiring such asset 7alancing amount "if 7alancing amount "if 7alancing amount "if positie# positie# positie#
$lectronic %tems refer to data storage and handling deices like computer0 digital diaries and printers. They do not include household appliances. ;al!ation of 5e+ical *acilities: Fixed medical Allowance is always chargea&le to tax. 7ut Medical expenditure reim&ursed in excess of 4s. 10+++ is chargea&le to tax. The following are the exemptions to the rule that is in the following cases there is no monetary ceiling: %n employer hospital goernment hospital $xpenditure in case of specified treatment ealth insurance premium Medical facilities outside %ndia
Foreign Medical Facility: For medical treatment outside of the employee or any mem&er of the employee shall &e excluded to the extent it is permitted &y the 4esere 7ank of %ndia. oweer the cost of trael of the employee6 any mem&er of his family and his one attendant shall &e excluded only for those employee whose gross total income excluding such traeling expenditure does not exceed 4s. *++0+++6-. "eave travel concession:
23
The leae trael concession is exempted twice in a &lock of four years. And the exemption is aaila&le to &oth %ndian citien and foreign citien. $xemption is &ased on actual expenditure and is aaila&le only in respect of fare. %f the
Provi+ent *!n+: !roident Fund scheme is a retirement &enefit scheme. nder this scheme0 stipulated sum of money is deducted from the employeeRs salary and an eCual matching contri&ution is made &y the employer. The contri&ution is inested in gilt-edged securities and interest is earned thereon. Thus the &alance of proident fund consist of: a# $mployers contri&ution &# %nterest on employers contri&ution c# $mployees contri&ution d# %nterest on employees contri&ution =in+s of Provi+ent *!n+: $mployees proident fund ca &e diided into three a# @tatuary !roident Fund: %t is set up under the proisions of !roident Fund Act0 1/,*. This fund is maintained &y the Eoernment0 semi goernment organiation0 local authority0 railway0 uniersity and recognied educational institutions. &# 4ecognied !roident Fund: A proident fund to which the proident Fund Act01/,* applies is a recognied proident fund. This fund is recognied &y the commissioner of %ncome Tax. c# nrecognied !roident Fund: %f the commissioner of %ncome Tax does not recognie a proident fund then it will &e under the category of unrecognied proident fund. !u&lic !roident Fund: The central goernment has esta&lished a pu&lic proident fund with a iew to &enefit the general pu&lic and mo&ilie saing. Any person whether salaried or self employed can inest in the same. Taxa&ility of contri&ution to !roident fund.
24
(tatutory Fund $mployers contri&ution proident fund
provident !ecogni4ed rovident Fund
$xempt from tax to
"nrecogni4ed rovident Fund
$xempt upto1*K of $xempt from tax salary. $xcess is taxa&le
?eductions u6s +D Aaila&le on employees contri&ution
Aaila&le
%nterest credited to proident fund
$xempt from tax up $xempt from tax to /.KS excess of interest oer this is taxa&le
$xempt from tax
)ump sum payment $xempt from tax at the time of retirement
Gote: 1.
*.
$xempt from tax in some cases0 when not exempt proident fund will &e treated as unrecognied proident fund
Got Aaila&le
'm$loees contri*ution exem$t #nterest on em$loee contri*ution taxa*le under income from other sources 'm$loer+s contri*ution and interest thereon is taxa*le under the head income form salaries!
@alary includes &asic salary0 dearness allowance6 dearness pay0 if terms of employment so proide and commission if receied as fixed percentage of turnoer achieed &y employee. The accumulated &alance due and &ecoming paya&le to an employee participating in a recognied proident fund will &e excluded from his total %ncome in the following cases: %f he has rendered continuous serice with his employer for a period of years or more. %f the employee is not a&le to fulfill the conditions of such continues serice due to his serice haing &een terminate &y reason of his ill health or &y reason of the contraction or discontinuance of the employers &usiness or any other reason &eyond the control of assessee. %f on the occasion of his retirement0 the employee o&tains employment0 to the extent the accumulated &alance d ue is transferred to another recognied proident fund maintained &y such employer.
$g:
25
For the preious year *++-+,0 ' su&mits the following information- 7asic @alary: 1*+0+++S dearness allowance: 5+0+++ "5K forming part of salary for retirement &enefits#S commission: +++ "i.e. 1K of turnoer ++0+++ achieed &y him# and children education allowance for his * children 4s. ,*++. The employer contri&utes 4s. *+0+++ towards proident fund to which a matching contri&ution is made &y '. %nterest credited in the proident fund account on March 10 *++, O 11Kcomes to /30++. %ncome of ' from other source is 4s. 0+++. Find the net income of ' for the assessment year *++,-+ if the proident fund is "a# statutory proident fund0 "&# recognied proident fund0 "c# unrecognied proident fund. 'e+!ction !>s ?3C: @ection +D is introduced from assessment year *++-+, and it proides deduction in respect of specified Cualifying amount paid or deposited &y the assesses in the preious year. • • •
•
?eduction would &e aaila&le from gross total income %t is aaila&le for indu undiided family and indiiduals ?eduction is aaila&le on the &asis of specified Cualifying inestment6 contri&ution6 deposit6 payment made &y the assessee during the preious year. Maximum amount deducti&le is 4s. 1++0+++ under sec +D0 +DDD and + DD?.
Practical Problems: Mrs. ' "age 1 years# is a part time college lecturer in ?elhi. ?uring the year *++-+,. she gets &asic salary of 4s. 1*3++ up to Hune 3+0*++ and 4s. 1*0,++ afterwards. 7esides she gets 3+K of 7asic salary as house rent allowance0 4s. 13+ per month as dearness allowance ",1K of it forming part of salary for computation of retirement &enefits and 4s. ++ per month as coneyance allowance which is entirely for personal purpose. 2n Huly 1+0*++ the employer transfer a music system to Mrs. ' on her completing 1+ years of serice" cost of music system purchased on sep 10 *++: **5,+# for 4s. ,++. @he is a mem&er of statuary proident fund to which &oth the employer and employee contri&utes O 1*K of &asic salary. Apart from the minimum contri&ution0 she makes an additional contri&ution of 4s. ++ per month to the proident fund. ?uring the preious year *++-+,0 4s. / is paid to her for checking answer sheet for different uniersities. ?etermine the taxa&le income and tax lia&ility on the assumption that she is paying a rent of 4s. 5+++6- per month. '" age *# is an employee of a cooperatie society at Baranasi. ?uring the preious year *+++,0 he gets 4s. ++ per month as &asic salary0 4s0 ++ per month as &onus and 4s. 5+ per month as dearness allowance" 3*K is forming part of the salary for computation of retirement &enefits# and 4s. *++ per month as medical allowance " medical expense is howeer more than 4s *++ per month#. e is a mem&er of a recognied proident fund to which the employer contri&utes 1101* "' also makes a matching contri&ution#. ' gets an interest free loan "repaya&le within years# of 4s. *033+ from the employer for purchasing a house. 7esides he gets 4s. 1+03+0,+ as interest on company deposits from a priate sector undertaking. ?etermine the taxa&le income and tax lia&ility of ' for the assessment year *++,-+. Ch.7 INCO5E *&O5 ,O(SE P&OPE&T@ This chapter deals with any income falling under the head income from house property. Basis of Chare -Sec %%/ %ncome is taxa&le under this head ;%ncome from ouse propertyJ if the following three conditions are satisfied: 1. The property should consist of any &uilding or land appurtenant thereto. *. The assessee should &e the owner of the property
26
3. he property should not &e used &y the owner for the purpose of any &usiness or profession carried on &y him0 the profit of which are chargea&le to income tax. All the a&oe conditions should &e satisfied for a property income to &e made taxa&le under the head income from house property. $xceptions: %n the &elow mentioned cases rental income is not charged to Tax: a. %ncome from farmhouse. &. Annual alue of ay one palace of any ex-ruler. c. !roperty income of any local authority. d. !roperty income of an approed scientific research association. e. !roperty income of any educational institution and hospital f. !roperty income of a trade union. g. ouse property held for charita&le purposes. h. !roperty income of a political party i. !roperty income used for own &usiness or profession <. 2ne self occupied property. 7asis of computing income for a let out house property: %ncome under the head house !roperty
4s.
Eross Annual Balue )ess Municipal Taxes
------------
Get Annual Balue )ess: ?eduction u6s *5 @tandard ?eduction %nterest on &orrowed capital %ncome under the head house property
----------
Gross Ann!al ;al!e: Sec %0-1/ Tax under the head income from house property is a tax on the inherent capacity of the &uilding to yield income and not a tax on rent. The standard selection of the measure of the income is the annual alue. Eross annual alue depends upon the following factors: a# Municipal Baluation &# Fair rent c# @tandard rent d# Annual 4ent "i.e. rent for the preious year or that part of the preious year when the property is aaila&le for letting out and there is no acancy and unrealied rent# e# nrealied rent f# )oss of rent &ecause of acancy g# Actual rent receied6 receia&le "d-e-f#
27
@teps for determining the gross Annual Balue: .1
?etermine the reasona&le expected rent as a# or &# whicheer is higher. %f the amount so determined is higher then the amount in c# limit the amount to c#. .* %f Annual rent less unrealied rent is higher then the amount specified under step 1 then Annual rent less unrealied rent is su&stituted for the alue in step 1. .3 %n case of acancy the gross annual alue so determined is ad
E.g.:
Particular
B
5!s. In thousand6 E !
C
A Municipal aluation "a# Fair rent "&# @tandard rent "c# Annual rent if property is let out through the year +-+, "d# nrealied rent "e# !eriod for which property remains acant )oss due to acancy "f#
15+ 15 15*
1+ 1 1,
1+ 1 1,
15+ 15 15*
*31 ** *51
15+ 1+ 1*+
1 15
1 -
1 1
1 ,+
** 5*
/ --
1 ,
-
15
3 5*
1+
1+ +
8hen unrealied rent shall &e excluded: nrealied rent shall &e excluded from rent receied6 receia&le only if the following conditions are satisfied: 1. The tenancy is &ona fide. *. The defaulting tenant has acated0 or steps hae &een taken to compel him to acate the property. 3. The defaulting tenant is not in occupation of any other property of the assessee. 5. The assessee has taken all reasona&le steps to institute legal proceedings for the recoery of the unpaid rent or satisfies the assessing officer that legal proceeding would &e useless. ?educt municipal taxes: From the gross annual alue municipal taxes hae to &e deducted to arrie at net annual alue. Municipal alue are deducti&le only if 1. these taxes are &orne &y the owner. *. are actually paid &y him during the preious year.
'e+!ctions !>s %4: The list of deductions u6s *5 is exhaustie that is no other deduction is allowed except whateer are explicitly mentioned. The following two deductions are allowed:
28
1. @tandard deduction *. %nterest on &orrowed capital
@tandard deduction: 3+K of net annual alue is deducti&le irrespectie of any expenditure incurred &y the taxpayer. %nterest on &orrowed capital: %nterest on &orrowed capital is allowa&le as deduction0 if capital is &orrowed for the purpose of purchase0 construction0 repair0 renewa&le or reconstruction of the house property. Interest of pre7construction period : %nterest of pre-construction period is allowed as deduction in fie eCual installments.
Interest of the current period : a. Dapital is &orrowed on or after April 10 1///: %nterest on &orrowed capital is allowed as deduction to the extent of 4s. 1+0+++6proided the loan is taken for the acCuisition or construction of the property. oweer the loan is taken for the any other purpose "e.g. 4econstruction0 repair etc# the maximum amount deducti&le is 4s. 3+0+++.
&. Dapital is &orrowed &efore April 10 1///: The interest on &orrowed capital is allowed as deduction up to 4s. 3+0+++6#nterest on *orro-ed ca$ital is allo-ed as deduction e&en in those cases -hen the annual &alue of the house $ro$ert is nil!
Taxa#le income from self
29
%n computing the income in the aforesaid situation the fair rent attri&uta&le to the self- occupied period6 portion should &e excluded in determining the annual alue. @imilarly the house tax and interest in loan attri&uta&le to Uelf-occupied period6 portion should &e ignored. %t means the house tax and interest on loan attri&uta&le to self-occupied portion6period cannot &e deducted to arrie at income from house property. $.g.: From the following information0 compute the annual alue of the house for AY +,-+ Municipal Balue- 4s. /+0+++ Municipal taxes paid- 4s. *+0+++ ouse was occupied for the first six months and for remaining six months it was let out O 4s. +++ p.m. @pecial proisions when unrealied rent is recoered su&seCuently: 8hen a deduction has &een allowed to the assessee for any unrealied rent during the preious year and realied su&seCuently then that amount shall &e deemed to &e the income of the preious year and shall &e chargea&le to tax under the head ;income from house propertyJ as pe r the proisions of the act whether the assessee is an owner of that property or not.
!ro&lems: 1.
From the information gien &elow0 find out the income under the head ; %ncome under the house propertyJ for the assessment year *++,-+ and *++-+/. ' "4s# Municipal aluation Fair rent @tandard rent Annual rent nrealied rent for the preious year *++-+, nrealied rent for the preious year *++,-+V nrealied rent of *++-+, realied during *++,-+ %nterest on &orrowed capital
Y "4s#
1S+0+++ 10+++ 1,+0W++ *10+++ 3+0+++ G%) *0+++
1/+0+++ 1/0+++ 1,+0+++ 1,0+++ 3+0+++ Gil *0+++
30+++
3+++
The a&oe properties hae &een let out throughout the preious years *++-+, and *++,-+. Municipal taxes are paid at the rate of *+K.
30
Ch. Income !n+er the hea+ B!siness Profession This head is coered &y sec * to sec 55?. This chapter deals with proisions which hae a &earing on the computation of taxa&le income. Basis of chare -sec %?/: The following income is chargea&le to tax under the head ;!rofit and gains from &usiness and professionJ: 1. !rofit and gain of any &usiness and profession *. any compensation or other payment due or receied &y any person specified in sec *"ii# any compensation receied on termination of a managing agency of a foreign company any compensation receied on termination of a managing agency of a %ndian company Any compensation receied on termination of any agency or modification of terms of agency. Any compensation receied from goernment or a corporation on taking oer of management of property or &usiness. •
•
•
•
*. %ncome deried &y a trade0 professional or similar association from specific serices performed for its mem&ers. 3. The alue of any &enefit or perCuisites0 whether conerti&le into any money or not0 arising from the &usiness or the exercise of any profession. 5. !rofit on sale of license "export6 import license# . Dash assistance "su&sidy receied &y any person against exports under any scheme of goernment . Any draw&ack of any duty of customs or excise. ,. Any interest0 salary0 &onus0 commission or remuneration receied &y a partner from firm. . Any sum receied for not carrying out any actiity in relation to any &usiness or not to share any know-how0 patents0 copyrights0 trademarks etc. /. income from a speculatie transaction 1+. !rofits from an illegal &usiness.
31
Meaning of term &usiness: The term &usiness refers to any economic actiity carried out with a iew to earn profit. As per section *"13# term &usiness is defined as ;any trade0 commerce0 manufacture or any adenture in the nature of trade0 commerce or manufactureJ. The definition coers eery facet of an occupation carried on &y a person with a iew to earn profit. The term &usiness is a word of wide import and in terms of fiscal statue it must &e construed in a &road rather than in a restricted sense. Thus !roduction of goods from raw material0 &uying and selling of goods to make profits and proiding serices to others are different form of &usiness. !rofession and Bocation: As per sec *"3# profession includes ocation. The term profession is an occupation of reCuiring purely intellectual skill or manual skill attained in special knowledge. 8hile the term ocation implies natural a&ility of a person for some work. The distinction &etween the term &usiness0 profession or ocation is not important for the purpose of income tax. Basic Princiles for arrivin at #!siness Income: 2ne has to keep in mind the following general principles for arriing at &usiness income: 1. 7usiness or profession should &e carried on &y assessee. *. 7usiness or profession should &e carried on during the preious year. 3. %ncome of the preious year is taxa&le during the following assessment year. 5. Tax incidence arises in respect of all &usiness or profession. . )egal ownership 6s &eneficial ownership. . 4eal profit 6s anticipated profit ,. 4ecoery of sum already allowed as deduction. . Mode of &ook entries not releant. )oses incidental to &usiness: Eeneral commercial principles hae to &e kept in iew while determining the real and true profits of a &usiness and profession. Dapital receipts are not taxa&le. !rofits can only arise out of the trading receipts and only the profit element of such receipt can &e made taxa&le. 7usiness losses can &e allowed as deduction if the following conditions are sa tisfied: 1. )osses are reenue in nature. *. )osses should &e incurred during the preious year. 3. )osses should &e incidental to the &usiness and profession carried on &y assessee. 5. %t should not &e notional or fictitious . %t should hae &een actually incurred and not merely anticipated to incur in future. . There should not &e any direct or indirect restriction under the act against the deducti&ility of such loss.
"pecific deductions under the #ct : @ection 3+ to 3, coer expenses which are expressly allowed as deduction while computing &usiness income0 section 5+0 5+A and 537 coer expenses which are not deducti&le. &ent rates taxes reairs an+ ins!rance for #!il+in -Sec 03/: nder this section following deductions are allowed for premises u sed for &usiness or profession:
32
1. The rent of premises0 the amount of repair "not &eing capital expenditure#0 if he has undertaken to &ear the cost of repair. *. Any sum on account of land reenue0 local rates or municipal taxes. XX 3. Amount of any premium in respect of insurance against risk of damage or destruction of the premises. XX The amount is deducti&le as per the proision of sec 537. &eairs an+ ins!rance of machiner$ lant an+ f!rnit!re -sec01/: The expenditure incurred on current repair "not &eing capital expenditure# and insurance in respect of plant0 machinery and furniture used for &usiness purpose is allowed as deduction u6s 31. 'ereciation Allowance -Sec 0%/ %n order to aail depreciation u6s 3*0 the following conditions need to &e satisfied: 1. Asset must &e owned &y the assessee. *. %t must &e used for the purpose of &usiness or profession 3. %t should &e used for the releant preious year 5. ?epreciation is aaila&le on tangi&le as well as intangi&le asset. se of the asset in the preious year: The asset in respect of which depreciation is claimed must hae &een used for the purpose of the &usiness. Gormal depreciation "i.e. full year depreciation# is aaila&le if an asset is used is put to use at least for sometime during the preious year. ?epreciation allowance is limited to +K of normal depreciation0 if the following two conditions are satisfied: 8here an asset is acCuired during the preious year %t is used for the purpose of &usiness or profession for less than 1+ days during that preious year. %f the a&oe conditions are satisfied0 the assessee would &e entitled to +K of normal depreciation0 een if the asset is used for a single day. • •
?epreciation Aaila&le: nder the %ndian %ncome Tax0 one can claim depreciation on the following assets: Tangi&le Asset
7uilding0 !lant0 machinery or furniture
%ntangi&le Assets acCuired after March 310 1//
Inow-how0 patents0 copyrights0 trade marks0 licenses0 franchise0 or any other &usiness or commercial rights of similar nature.
8lock of $ssets sec 251169 The term &lock of assets means a group of assets falling within a class of assets comprising of: Tangi&le assets0 &eing &uilding0 machinery0 plant or furniture %ntangi&le assets0 &eing know-how0 patents0 copyrights0 trade marks0 licenses0 franchise0 or any other &usiness or commercial rights of similar nature %n respect of which the same percentage of depreciation is prescri&ed. • •
)ritten don alue sec :;5<69 8ritten down alue for the year is determined as under:
33
Find out the depreciated alue at the &eginning of the year as on 1st of April. To this alue add actual cost of the asset acCuired during the year. From the resultant year0 deduct money receied6 receia&le "together with scrap alue# in respect of that asset which is sold0 discarded0 demolished or destroyed during that year. 5. The resulting amount is the written down alue of the &lock for that year. . The amount of reduction under step 3 cannot exceed the alue of asset computed under step 1 and step *. 1. *. 3.
Computation of depreciation ?epreciation is calculated at the prescri&ed rate on the written down alue. oweer the following exceptions are there for the aforesaid: -%ception 19 )hen the ritten don value of a *lock of assets is reduced to 4ero. Go depreciation is admissi&le where written down alue has &een reduced to ero0 though the &lock of assets does not cease to exist on the last day. -%ception 29 If the *lock of asset ceases to e%ist %f a &lock of assets ceases to exist or if all assets of the &lock hae &een transferred and the &lock of assets is empty on the last day of the preious year0 no depreciation is admissi&le in such case.
$x: ' owns the following assets on April 10 *++: Assets
Furniture 7uilding !lant and Machinery !lant and Machinery !lant and Machinery
8ritten down alue on April 10 *++ "4s.# *+01,+ /++0++ *1+0+++ 5++0+++ *+0+++
4ate of depreciation "K#
1+ 1+ *+ 1 5+
?uring the preious year *++-+,0 the following assets are purchased &y ': ?ate !urchase
of ?ate when the asset is put to use
161+6*++ *+6+6*++ 3+6116*++ 61*6*++
/61+6*++ **6+6*++ 161*6*++ 1+61*6*+
Asset Trade Mark !lant Furniture 7ooks for professional use
Dost 4s. 10+++ 1/+0+++ 15+0+++ *,++
4ate of depreciation "K# * 5+ 1 1++
?etermine the amount of depreciation for the assessment year *++,-+. (na#sor#e+ 'ereciation: 8hen in the assessment of the assessee full effect cannot &e gien to depreciation allowance in any preious year owing to there &eing no profit6 gain or there &eing insufficient profit6 gain0 the &alance of depreciation allowance is called una&sor&ed depreciation. @teps for dealing with una&sor&ed depreciation:
34
@tep 1
?epreciation allowance of the preious year is first deducti&le from the income under the head ;!rofit gains from &usiness and !rofessionJ.
@tep *
%f depreciation cannot &e fully deducted under the head ;!rofit gains from &usiness and !rofessionJ &ecause of inadeCuate or no profit0 it is deducti&le from income chargea&le under the other head of income "except income from salary# for the same assessment year.
@tep 3
%f depreciation allowance0 is still una&sor&ed then it can &e carried forward to the su&seCuent assessment year"s#.
There is no time limit for the purpose of carrying forward of una&sor&ed depreciation0 it can &e carried forward for indefinite period. The following priority order is to &e followed when the una&sor&ed depreciation is to &e set off in su&seCuent year: a. Durrent depreciation &. 7rought forward &usiness loss c. na&sor&ed depreciation For the a&oe setoff continuity of the &usiness is not necessary. $x: ' su&mits the following details !reious years *++-+, %ncome from salaries 7usiness !rofit "&efore depreciation# Durrent depreciation %ncome from other sources
1++0+++ 10+++ 1350+++ 1+0+++
*++,-+ *++0+++ 10+++ 13*0+++ +0+++
?etermine the taxa&le income of ' for the assessment year *++,-+ and *++-+/.
Tea> coffee> r!##er +eveloment acco!nt -Sec00AB/ To claim the deduction under this section the following conditions need to &e satisfied: 1. The assessee must &e engaged in tea0 coffee or ru&&er plantation. *. %t must make a deposit in special Account opened with GA7A4?" Gational &ank for Agriculture and rural deelopment# 3. The amount has to &e deposited within months from the end of the preious year or &efore the due date of furnishing the return of income0 whicheer is earlier. 5. The accounts of the assessee should &e audited. Amount of deduction: The least of following is allowed as deduction: 1. A sum eCual to the amount deposited in the special account as discussed a&oe. *. 5+K of profit of such &usiness computed under the head ;profit and gains of &usiness and professionJ &efore making any deduction under section 33A7 and also &efore ad
35
*.
8hen a deduction is allowed and claimed under this section to an association of persons or &ody of indiiduals no deduction shall &e allowed to any mem&er of the association or &ody in respect of the same. 3. Any excess deposit in special account made during the preious year is not treated as deposit in any other year. 8ithdrawal of amount: The amount standing to the credit of the special account may &e withdrawn only in case of: 1. closure of &usiness *. dissolution of firm 3. death of an assessee 5. partition of F . liCuidation of company Amount cannot &e utilied for certain purpose: Go deduction can &e claimed in respect of any amount utilied for the purpose of 1. Any machinery or plant installed in the residential houses or a guest house. *. Any office appliances except computer 3. Any plant or machinery whose full cost is allowed to &e de&ited to ! ) account. 5. Any new plant or machinery to &e installed for setting up of a new unit to produce any article included in eleenth schedule. Site restoration f!n+ -Sec 00ABA/: An assessee can claim deduction u6s 33A7A if he satisfies following conditions: 1. The assessee must &e engaged in production of petroleum6 natural gas in %ndia. *. The assessee has an agreement with the agreement with the central goernment. 3. %t must make a deposit in special account to &e opened with @7% or deposited in an account named site restoration fund to &e opened in accordance with Eoernment of %ndia with the ministry of !etroleum. 5. The deposit should &e made within specified time limit i.e. &efore the end of preious year. . The accounts of assessee should &e audited. Amount of ?eduction: a# @um eCual to amount deposited in the special account. &# *+K of the profit of the &usiness as computed under the head profit and gains from &usiness and profession &efore this deduction. 8hicheer is less is allowed as deduction. The &elow points are also to &e kept in mind: 1. 8hen a deduction is claimed under this section0 no deduction shall &e allowed in respect of such amount in any other year. *. 8hen a deduction is allowed and claimed under this section to an association of persons or &ody of indiiduals no deduction shall &e allowed to any mem&er of the association or &ody in respect of the same.
8ithdrawal of amount: The amount can &e withdrawn only for the purpose specified in the scheme or deposit scheme.
Amount cannot &e utilied for certain purpose: Go deduction can &e claimed in respect of any amount utilied for the purpose of . Any machinery or plant installed in the residential houses or a guest house. . Any office appliances except computer ,. Any plant or machinery whose full cost is allowed to &e de&ited to ! ) account.
36
.
Any new plant or machinery to &e installed for setting up of a new unit to produce any article included in eleenth schedule.
&eserve for shiin #!siness -Sec 00AC/: Go deduction under section 33AD is aaila&le from the assessment year *++-+. The Cuantum of deduction is an amount not exceeding 1++K of the total income " computed &efore making any deduction under this section and u6s +# as is de&ited to the profit and loss account of the preious year in respect of which the deduction shall &e allowed shall &e admissi&le. The amount of deduction to &e claimed must &e transferred to a resere account. The amount to &e credited to such resere account must not exceed twice the amount of the paid up share capital "excluding the amount capitalied from reseres# of the assessee company. %n the year in which the resere exceeds this limit deduction u6s 33AD will &e restricted to the amount which is sufficient to reach this limit. The amount credited to the resere account shall &e utilied &y the assessee company &efore the expiry of succeeding preious yrs for a. AcCuiring a ship for the purpose of &usiness of assessee. &. ntil the acCuisition of a new ship0 such resere may &e utilied for the &usiness of the assessee &ut not for distri&ution &y way of diidends or profits or remittance outside %ndia as profits or for the creation of any asset outside %ndia.
%n case amount of resere is not utilied in the aforesaid manner the amount of resere shall &e treated in the following manner: a. %n case amount of resere is utilied for a purpose other than as gien a&oe0 the amount so utilied for other purpose shall &e deemed as profit of the preious year in which it is so utilied. &. %n case amount of resere is not utilied to acCuire a ship within exceeding preious0 the amount so unutilied shall &e deemed as income of the preious year next following the period of succeeding preious years. c. %n case ship is acCuired within succeeding preious years0 it cannot &e sold or otherwise transferred for succeding preious years from the preious year in which it s acCuired. %n case it is sold or transferred &efore the expiry of succeeding preious years0 the amount of resere utilied in acCuiring the ship shall &e deemed as profit of preious year in which ship is sold or transferred. Exen+it!re on Scientific &esearch -Sec 07/: @cientific research means any actiities for the extension of knowledge in the fields of natural or applied science including agriculture0 animal hus&andry or fisheries. nder this section amount deducti&le in respect of scientific research may &e classified as under: $xpenditure on research carried on &y Dontri&ution to outsiders assessee 1. 4eenue expenditure 1. Dontri&ution to an approed *. Dapital expenditure scientific research association. 3. $xpenditure on an approed in-house *. !ayment to Gational )a&oratory research 4eenue expenditure incurred &y assessee: 4eenue expenditure incurred &y assessee himself on scientific research0 a deduction is allowed only if the research is related to the &usiness.
37
!re-commencement period expense: Any pre-commencement expenditure &eing reenue in nature "other than expenditure proiding perCuisites to employee# incurred &efore the commencement of &usiness on scientific research related to the &usiness are deducti&le in the preious year in which the &usiness is commenced. Dapital expenditure incurred &y assessee himself: 8here the assessee incurs any expenditure of a capital nature on scientific research related to his &usiness0 the whole of such expenditure incurred in any preious year is allowa&le as deduction for that year. The deduction is aaila&le een if the releant asset is not put to use for research and deelopment in that particular year. The aforesaid deduction is not aaila&le in respect of capital expenditure incurred on the acCuisition of any land. And no depreciation is allowa&le on such capital asset. $xpenditure on approed in-house research: A weighted deduction is allowed in respect of expenditure on in-house research and deelopment expense incurred &y the assessee. oweer the following points need to &e kept in iew: 1. The taxpayer is a company *. %t is engaged in the &usiness of &io-technology or in the &usiness of manufacture or production of articles or things notified &y the &oard. 3. The research and deelopment facility is approed &y the prescri&ed authority and sufficient proision for audit is done for the accounts maintained &y the facility. Amount of deduction A sum eCual to one-one half times of expenditure so incurred shall &e allowed as deduction. Darry forward and set off deficiency shall &e done in the same manner as for the una&sor&ed depreciation.
Dontri&ution made to outsiders: 8here the assessee does not himself carry on scientific research &ut makes contri&utions to other institutions for this purpose0 a weighted deduction is allowed. The amount of deduction is eCual to one and one fourth times of any sum paid to a scientific research association or to a uniersity0 college or other institution or to a national la&oratory. @cientific research carried on a&oe may or may not &e related to the &usiness of the assessee. AmortiDation of telecom license fees -sec 07ABB/: ?eduction under this section is aaila&le if the following conditions are satisfied: 1. The expenditure is capital in nature. *. %t is incurred for acCuiring any right to operate telecommunication serices. 3. The expenditure is incurred either &efore the commencement of &usiness or thereafter at any time during any preious year. 5. The payment for the a&oe has &een actually made to o&tain license. The payment will &e allowed as deduction in eCual installment oer the period for which the license is alid. Any profit or loss on sale of telecom license is to &e taken into consideration while computing &usiness income.
Exen+it!re on elii#le ro+!ct or scheme Sec. 07AC: ?eduction is aaila&le under this section for promoting social and economic welfare. Any taxpayer can claim deduction &y making a payment of any sum to a pu&lic sector company or a local authority or to an association or institution approed &y a national committee for carrying out eligi&le pro
38
Pa$ment to associations an+ instit!tions for carr$in o!t r!ral +eveloment rorammes: This section proides deduction of sums paid &y assessee to: 1. Any association or institution which has its o&
•
•
• •
Maximum ceiling: The aggregate expenditure cannot exceed the followingIn the case of corporate $ssessee
In the case of non7corporate $ssessee
K of the cost of pro
Amount of deduction: 2ne fifth of the Cualifying expenditure is allowa&le as deduction in each of the fie successie years &eginning with the year in which the &usiness commences. AmortiDation of exen+it!re in the case of amalamation > +emerer -Sec 07''/ The proisions of the section are as under: 1. The taxpayer is an %ndian company. *. The expenditure is incurred for the purpose of amalgamation or demerger. 3. The expenditure is allowed as deduction in fie successie years in fie eCual installments. 5. The first installment is deducti&le in the year in which amalgamation or demerger takes place. AmortiDation of exen+it!re !n+er vol!ntar$ retirement scheme -Sec 07 ''A/
39
1. $xpenditure is incurred in any preious year &y way of payment of any sum to an employee in connection with his oluntary retirement. *. @uch expenditure is allowed as deduction in fie eCual installments &eginning with the year in which the expenditure was incurred. 8here the undertaking of an %ndian company entitled to deduction for amortiation of oluntary retirement expenses is transferred &efore the expiry of years in a scheme of amalgamation or demerger0 the deduction for the remaining period shall &e aaila&le to the resulting company. @imilar proisions are applica&le in the case of succession of firm or proprietary concern. oweer0 in the year of transfer and su&seCuent years0 no deduction will &e aaila&le to the amalgamating company0 demerged company0 firm or proprietary concern. Amortisation of Exen+it!re on rosectin etc for certain minerals -Sec07E/: This section proides for the amortisation of expenditure incurred wholly and exclusiely on any operation relating to prospecting for the minerals or group of associated minerals or on the deelopment of a mine or other natural deposit of any such minerals or group of associated minerals as specified in the seenth schedule. The expenditure which is incurred during the 5 years prior to the commercial production is allowed as deduction in 1+ eCual installments oer a period of 1+ years. %n case where the installment of amortied expenditure relating to a gien year cannot &e wholly a&sor&ed &y the profit against which the amortisation is to &e allowed0 the una&sor&ed amount is to &e carried forward to the su&seCuent year. @uch carry forward is permitted till the tenth year from the commercial production after which it will lapse.
Other +e+!ctions -Sec 0/: The following deductions are proided under this section: 1. %nsurance premium: The amount of any premium paid in respect of insurance of stock or stores used for the purpose of &usiness or profession is allowed as deduction. *. %nsurance premium &y federal milk cooperatie society: %nsurance on the life of cattle owned &y the mem&ers are allowed as deduction. 3. !remium on the health of employee %nsurance premium paid on the health of employee is allowa&le as deduction. 5. 7onus or commission to employee Any &onus or commission paid to employee is allowa&le as deduction on payment &asis and the amount gien should not &e otherwise paya&le as profit or diidend. . %nterest on &orrowed capital %f the money is &orrowed for the purpose of &usiness or profession then the interest thereon is allowed as deduction. . ?iscount on ero coupon &onds ?iscount on ero coupon &onds "&eing the difference &etween the amount receied and amount paya&le on the redemption6 maturity of &onds# is allowed as deduction on prorata &asis oer the life of &ond. These are issued &y any infrastructure capital company or a pu&lic sector company on or after Hune 10 *++. ,. $mployer contri&ution to !roident Fund and @uperannuation fund: The deduction is allowed as per the limits laid down for the same. . Dontri&ution towards approed gratuity fund. /. $mployees contri&ution towards staff welfare scheme Any sum receied from employee towards contri&ution for !roident fund or staff welfare scheme is allowed as deduction proided it is paid on or &efore date. 1+. 8rite off allowance for animals !roided the animals are used for &usiness or profession then loss on sale. Theft or death is allowed as deduction.
40
11. 7ad ?e&t. A &ad de&t is allowa&le as deduction su&
• • •
Adertising $xpense ?eduction is not aaila&le in respect of expenditure incurred &y an assessee on adertising in any souenir0 &rochure0 tract0 pamphlet or the like pu&lished &y political party. General 'e+!ction -Sec06/ This is a residuary section in order to claim deduction under this sectionS the following conditions need to &e satisfied: 1. The expenditure should not &e in the nature prescri&ed &y section 3+ to 3. *. %t should not &e in the nature of capital expenditure. 3. %t should not &e personal expenditure of the assessee. 5. %t should hae &een incurred in the preious year. . %t should hae &een incurred with respect to the &usiness carried on &y the assessee. . %t should hae &een expended wholly and exclusiely for the purpose of &usiness. ,. %t should not hae &een incurred for any purpose which is an offence or prohi&ited &y law.
"pecific disallowances under the #ct: The following expenses gien &y sections 5+05+A and 537 are expressly disallowed under the act. Amo!nt not +e+!cti#le !n+er sec 43 The following amounts are not deducti&le from the income as per this section: 1. Any sum paid for which T?@ was deducti&le &ut was not deducted or was deducted &ut paid to the goernment within the preious year or in su&seCuent year within the prescri&ed time.
41
oweer if the tax is paid su&seCuently then the deduction is allowed in the year in which it is paid. *. @ecurities transaction tax 3. Fringe 7enefit Tax 5. %ncome tax . 8ealth Tax . Tax on non monetary perCuisites paid &y the employer. Amo!nt not +e+!cti#le !n+er sec 43A 1. Any payment made &y an assessee to a relatie or a person haing su&stantial interest in the company is disallowed to the extent it is excessie or un reasona&le. ence if the expenditure is excessie or unreasona&le haing regard to the fair market alue of the goods0 serices0 facilities etc0 then the excessie portion shall &e disallowed. *. Amounts not deducti&le in respect of the expenditure exceeding 4s.*+0+++6%f an assessee makes any payment in respect of any expenditure for an amount exceeding 4s. *+0+++6- &y way of cash or &y a &earer cheCue then *+K of the said payment will &e disallowed as deduction. oweer0 in some cases payment in excess of 4s. *+0+++6- is allowed as deduction like when the payment is to goernment or &ank0 or in a place where no &anking facility exist0 payment made for agriculture produce0 horticulture or animal hus&andry etc. 3. Amount not deducti&le in respect of contri&utions to non-statuary funds.
Amo!nt not +e+!cti#le !n+er -sec 40B/ The following expenses are allowed as deduction only on payment &asis: 1. any sum paya&le &y way of tax0 cess0 duty or fees *. Any sum paya&le &y an employer &y way of contri&ution to proident fund or superannuation fund or any other fund for the welfare of employee. 3. Any sum paya&le as &onus or commission to employee for serice rendered. 5. Any sum paya&le as interest on any loan or &orrowing from a pu&lic financial institution or a state financial corporation or a state industrial inestment corporation. . %nterest on any loan or adance taken from a scheduled &ank including co-operatie &ank. . Any sum paya&le &y an employer in lieu of leae at the credit of his employee. The a&oe expenses are deducti&le in the year in which the payment is made. oweer if payment is made &efore the due date of filing of return then the deduction will &e allowed in the year in which the expense is incurred.
eemed profits and their chargeability: The following receipts are chargea&le to tax as &usiness income: 1. !ecovery against deduction %n any earlier years a deduction was allowed to the taxpayer in respect of loss of expenditure or against trading lia&ility incurred &y the assessee will &e taxa&le in the current year if he has o&tained a refund of such trading lia&ility whether the concerned &usiness is &eing carried on or not. 2. (ale of assets used for scientific use9 8here any capital asset used in scientific research is sold without haing &een used for other purposes and the sale proceeds to the extent of deduction earlier allowed u6s3 will &e chargea&le to tax as profits from &usiness and profession whether the &usiness for which the deduction was allowed is in existence or not. 3. !ecovery of 8ad e*ts:
42
@imilarly any &ad de&ts allowed as deduction which was recoered su&seCuently will &e assessed as income to the extent of deduction allowed whether the &usiness is in existence or not. :. !ecovery after discontinuance of *usiness or profession9 8here any &usiness or profession is discontinued &y reason o f the retirement or death of the person carrying on such &usiness0 any sum recoered after the discontinuance of the &usiness or profession will &e deemed to &e the income of the recipient and charged to tax in the year of receipt.
Taxability of undisclosed $ncome % $n&estment: 1.
%.
0.
4.
7.
.
Cash Cre+it -Section ?: / nder the section unexplained cash credit in the &ooks of the assessee for which the assessee is una&le to offer any explanation or if the explanation offered is not to the satisfaction of the assessing officer0 the same will &e treated as income of the preious year in which such credit appears in the &ooks of accounts of assessee. (nexlaine+ Investment -Section : / nder section / unexplained inestment for which the assessee is not a&le to offer satisfactory explanation or which is not recorded in the &ooks of the assess will &e deemed to the income of the assessee in the financial year. (nexlaine+ mone$ -Section A/: Any unexplained money0 &ullion or
Section 44 A For the purpose of this section specified profession means a profession of medicine0 engineering0 architecture0 film artiest0 accountancy0 authoried representatie0 company secretaries. %n the case of specified profession if the gross receipt from profession do not exceed 4s 10+0+++ no specified &ooks hae &een p rescri&ed and the assessee has to maintain such &ooks to ena&le the assessing officer to assess the income of the assessee. %n case of specified profession if the gross receipt from profession exceeds 4s 10+0+++ prescri&ed &ooks like a. Dash 7ook &. Hournal if accrual @ystem of accounting is followed c. )edger
43
d. e.
@erially num&ered receipt for any receipt exceeding 4s * 2riginal &ill and receipt for any payment exceeding 4s + to &e maintained
%n the case of non specified profession or &usiness where the gross income do not exceed 4s 10*+0+++ or gross receipt do not exceed 4s 1+0++0+++ no reCuirement for maintaining any &ooks of accounts %n the case of non specified profession or &usiness where the income exceeds 4s 10*+0+++ or gross receipt exceeds 4s 1+0++0+++ such &ooks which may ena&le the assessing offices to compute the income should &e maintained
Section 44 AB Following person are reCuired to get their accounts Audited ifferent Tax payers 'hen they are co&ered by the pro&isions of compulsory audit under section ((#B. A person carrying on %f the total sales0 turnoer or gross receipt in &usiness for the &usiness preious year"s# releant to the assessment year exceed or A person carrying on exceeds 4s 5+ )akhs. profession %f his gross receipt in profession for the preious year"s# releant to the assessment year exceeds 4s 1+ )akhs.
A person coered under %f such person claims that the profits and gains from the &usiness section 55A?0 55 A$0 are lower than the profits and gains computed under this section 55AF0 5577 or 55777 "irrespectie of his turnoer#.
"pecial Pro&isions for computing income on estimated basis Taxa$ers enae+ in the #!siness of civil constr!ction -Sec44A'/ 1. Any Taxpayer who is an indiidual0 F0 A2!0 72%0 firm0 Dompany0 Dooperatie @ociety or any other person who is engaged in the &usiness of ciil construction or supply of la&or for ciil construction work is coered under the section. *. Any person whose gross receipt from 7usiness does not exceed 4s 5+ )ac. 3. %ncome from a&oe mentioned &usiness is estimated at K of the gross receipt and all deduction under section 3* to 3 including depreciation is deemed to hae &een already allowed and no further deduction is allowed. 5. %f he so assessed than he is not reCuired to maintain &ooks of accounts as per section 55 AA and is also not reCuired to get his &ooks of accounts audited under section 55 A7. . A tax payer can declare his income to &e lower than the deemed profit &ut than he has to maintain &ooks of accounts as per section 55 AA and is also reCuired to get his &ooks of accounts audited under section 55 A7.
Taxa$er enae+ in the #!siness of l$in leasin or hirin tr!c2s -Sec 44AE/ 1. Any Taxpayer who is an indiidual0 F0 A2!0 72%0 firm0 Dompany0 Dooperatie @ociety or any other person who is engaged in the &usiness of plying0 hiring or leasing goods carriages. The taxpayer owns not more than 1+ goods carriage at any time during the preious year.
44
*.
%ncome from a&oe mentioned &usiness is calculated as &elow: Type of goods Darriage eay goods Behicle 2ther than Behicle
3. 5.
.
heay
goods
$stimated %ncome 4s 3++ for eery month "or part of a month# during which the goods carriage is owned &y the tax payer. 4s 3*+ for eery month "or part of a month# during which the goods carriage is owned &y the tax payer.
All deduction under section 3* to 3 including depreciation is deemed to hae &een already allowed and no further deduction is allowed. %f he so assessed than he is not reCuired to maintain &ooks of accounts as per section 55 AA and is also not reCuired to get his &ooks of accounts audited under section 55 A7. A tax payer can declare his income to &e lower than the deemed profit &ut than he has to maintain &ooks of accounts as per section 55 AA and is also reCuired to get his &ooks of accounts audited under section 55 A7.
Taxa$ers enae+ in the #!siness of retail tra+ers -Sec44A*/ 1. Any Taxpayer who is an indiidual0 F0 A2!0 72%0 firm0 Dompany0 Dooperatie @ociety or any other person who is engaged in the &usiness of retail trade of any goods or merchandise is coered under the section. *. Any person whose gross receipt from 7usiness does not exceed 4s 5+ )ac. 3. %ncome from a&oe mentioned &usiness is estimated at K of the gross receipt and all deduction under section 3* to 3 including depreciation is deemed to hae &een already allowed and no further deduction is allowed. 5. %f he so assessed than he is not reCuired to maintain &ooks of accounts as per section 55 AA and is also not reCuired to get his &ooks of accounts audited under section 55 A7. . A tax payer can declare his income to &e lower than the deemed profit &ut than he has to maintain &ooks of accounts as per section 55 AA and is also reCuired to get his &ooks of accounts audited under section 55 A7. $.g.: @ri Ge&ukumar is the proprietor of a &usiness. is profit and loss account for the year ended March 310 *++3 is as follows. Partic!lars Amo!nt To esta&lishment 50++ To 4ent0 rates and taxes *0/++ To Eeneral charges ,+ To ousehold expenses 10,3+ To Dommission 10++ To discount and allowance 5+ To proision for &ad de&ts 10*++ To !ostage and telegrams *,+ To )aw Dharges 5+ To adertisement 1+ To Eifts and !resents 1+ To Fire %nsurance !remium "for 3+ goods# To @ale Tax 105+ To 4epairs and renewals "not for 5+ &usiness premises#
Partic!lars 7y Eross profit 7y %nterest on got securities 7y 4ent from house property
Amo!nt 10+05+ 05++ 05++
45
To )oss on sale of motor car "used for priate purpose# To life %nsurance !remium on life of his grandson To 8ealth tax To %nterest on Dapital To Audit Fee To %nterest on 7ank )oan To proision for depreciation To proision for %ncome Tax To Get profit transferred to Dapital Total
10++ 10,/+ ,5+ 3+ 3++ 103+ *0++ 30/++ +05+ 1105+
1105+
Following further information is gien: "a# Actual 7ad de&ts written off during the year amount to 4s +. "&# Amount of income tax actually paid during the year is 4s 50*++. "c# Adertisement expenses include 4s + spent on special adertisement campaign to open a new shop in the market. "d# ?epreciation allowa&le is 4s 10,++ as per %ncome Tax 4ules. "e# )aw Dharges are in connection with a Trademark. "f# @ri Ge&ukumar carries on his &usiness from rented premises0 half of which is used as his residence. 4ent0 rates and taxes include 4s *05++ paid as rent of the premises during the year. Dompute the 7usiness %ncome of @ri Ge&ukumar. 8orking notes are to form part of your answer. Mr. ' gies you the following particulars from his account for the year ended 31 st March0 *++3. All items except "iii# hae &een de&ited to ! ) A6c. Partic!lar "1# Get profit s per !rofit and )oss A6c
Amo!nt *++0+++
"*# Dontri&ution to un recognied proident fund
5+0+++
"3# )ump sum consideration paid during 1//,-/ For acCuiring know Q how0 nothing has &een deducted To ! ) account this year on this account
1*+0+++
"5# !roision for %ncome Tax and 8ealth Tax
+0+++
"# Adertisement expenses "This includes 4s 50+++ on Adertisement in a souenir pu&lished &y a political party#
*+0+++
"# !roision for excise duty
3+0+++
",# Amount paid to am&edkar uniersity for research in 1+0+++ @ocial science. The research does not relate to the &usiness of assessee. "# oliday home $xpenses
30+++
"/# !remium paid to the general insurance corporation 1+0+++ 2f %ndia &y cheCue for the %nsurance of health of employees "1+# !enalty imposed &y costumes authority for &reach of law *0+++
46
"11# %nterest on late payment of sale tax
10+++
Dompute income from 7usiness
Dh., %GD2M$ G?$4 T$ $A? DA!%TA) EA%G Any profit and gain arising on Transfer of a capital asset is chargea&le under sec 5. @ec 50 5, gies such transactions which are not considered as Transfer. 8hile @ec 50 5 70 5 ?0 5 $D0 5 F0 5 E0 5 EA 5 gies the list of exemptions. Basis of chare sec 47: Dapital gainRs gain tax lia&ility arises only when the following conditions are satisfied: There should &e a capital asset The capital asset is transferred &y the assessee @uch Transfer takes place during the preious year Any profit or gain arises as a result of transfer @uch profit or gain is not exempt from tax under @ec 50 570 5?0 5$D0 5F0 5E0 5EA. • • • • •
Caital Assets: A capital asset is defied to include property of any kind0 whether fixed or circulating0 moa&le or immoa&le0 tangi&le or intangi&le. The following assets are0 howeer0 excluded from the definition of ;Dapital AssetsJ. 1. Any stock and Trade0 consuma&le or raw material held for the purpose of 7usiness or profession. *. Moa&le property including wearing apparels and furniture held for his personal use or for the use of any mem&er of is family. 3. Agricultural land in %ndia0 which is situated in rural area. 5. .K Eold 7onds0 1/,, or ,K Eold 7onds0 1/+ or national defense 7onds0 1/+ issued &y Dentral Eoernment. . @pecial &earer &onds0 1//1. . Eold ?eposit 7onds issued under Eold ?eposit @cheme0 1///. Short term > "on Term Caital Asset: @hort Term capital assets means a capital asset held &y an assessee for not more than 3 months immediately prior to its date of Transfer. Any asset which is held &y assessee for more than 3 month is known as )ong Term Dapital Asset. $xception: %n the following cases an asset held for not more than 1* months is treated as short term capital asset. $Cuity or preference share in a Dompany. @ecurities "like de&entures0 goernment securities# nits of T% nits of a mutual fund specified under section 1+"*3?# (ero Doupon &onds Transfer of Caital Assets: • • • • •
Transfers in relation to capital assets include sale0 exchange or relinCuishment of asset or the extinguishment of any rights therein or the compulsory acCuisition thereof under any law Z@ec * "5,#[.
47
gain.
gain.
Cost of Ac!isition -Sec 4/: Dost of AcCuisition of an asset is the alue for which it was acCuired &y the assessee. $xpenses in the capital nature for completing the title for the property are included in the cost of acCuisition. Dost of asset for the preious owner @ec 5/"1#: The cost of preious owner is deemed to &e the cost of acCuisition to the assessee in cases where capital asset &ecomes the property of assessee under any of the mode descri&ed &elow: 1. AcCuisiti AcCuisition on of property property in in case of partial partial or total parti partition tion of F F *. AcCuisiti AcCuisition on of property property in case case of gift or will will 3. AcCuis AcCuisit ition ion of of prope property rty in case case of of : @uccession or inheritance Any distri&ution distri&ution of assets on the dissolution dissolution of a firm0 firm0 72% or A2! ?istri&ution of assets on the liCuidation of a company nder a transfer of reoca&le trust or an irreoca&le trust. Any transfer from from a wholly owned owned su&sidiary to its its holding company or ice ersa. nder any scheme of amalgamation. The holding period of the preious owner is also counted for determining whether the amount is short term or long term capital asset nut indexation will &e allowed from the time when the asset is acCuired &y the assessee. • • • • • •
Dost of AcCuisition &eing the fair market alue as on April10 April10 1/1: %n the following cases0 the assessee may take at his option0 either actual cost or the fair market alue of the asset " other than a deprecia&le asset# as on April April 10 1/1 as cost of acCuisition: a# 8here the the capital capital asset &ecame &ecame the propert property y of the assessee assessee &efore &efore April April 10 1/1. 1/1. &# 8here the the capital capital asset asset &ecame &ecame the propert property y of the assessee assessee &y any any mode referr referred ed to in sec 5/"1# and the property was originally acCuired &efore Aril 10 1/1. %n case of deprecia&l deprecia&le e asset cost of acCuisition acCuisition is taken as the 8?B at the end of the preious year along with any expenses on transfer of the asset. Any such capital gain is treated as short term capital gain. 'etermination of in+exe+ cost of Ac!isition> in+exe+ cost of imrovement: %ndexed Dost of AcCuisitionL Dost of AcCuisition AcCuisition Dost inflation index for the year in which the asset is acCuired61/+-1
x
Dost inflation index for the year in which the asset is sold6 transferred
%ndexed cost of improementL
Dost of improement incurred x Dost inflation index for the year in Dost inflation inflation index for for the the year in which which the asset asset is is sold6 sold6 transferred transferred the improement took place $.g.: 1. From the followi following ng informatio information n compute the the capital gains gains for the assessme assessment nt year*++year*+++/ )ouse $
)ouse $$
49
?ate of !urchase Dost of AcCuisition Dost of Add Donstruction in 1/+ Fair market alue on 1-5-1/1 cost of add construction in 1//3-/5 @ale of property in *++-+, Dost inflation index are: 1/1-*L 1++ 1//3-/5L *55 *++-+,L 1/
May 1/, 1/+0+++ 1+0+++ 1,0+++ 50++ 1++0+++
?ec 1/,/ *+0+++ *0+++ 3+0+++ ,30*++ 1/0++0+++
' )td owns the following assets: nits of T% ouse !roperty Dost of AcCuisition 15+0+++ ,+0+++ ?ate of AcCuisi AcCuisition tion March1+0 March1+0 *++5 March March 1+0 *++5 These capital assets "no depreciation is claimed# are transferred &y ' )td to its wholly owned su&sidiary company @ )td on April 10 *++. 2n Huly ,0 *++ these assets are transferred &y @ ltd for a consideration of 4s. 5+0++ "i.e. units 4s.*1,++0 house property 4s.*350++#. Dompute the capital gain chargea&le to tax in the case of @ )td for the assessment year *++,-+. Dapital Eain in case of conersion of capital asset into stock in trade: The fair market alue of the capital asset on the date on which it was conerted or treated as stock in trade shall &e deemed to &e full alue of the consideration receied or accruing as a result of the transfer of the capital asset. Transfer of capital asset &y a !artner to a firm: %n case an asset is transferred &y a partner to a firm then the capital gain is chargea&le to tax in the preious year in which such transfer takes place and the amount recorded in the &ooks of account of the firm as the alue of asset shall &e taken as full alue of consideration receied as a result of such transfer. ?istri&ution of capital asset on dissolution: %n case a firm is dissoled and the asset is gien6sold to a partner than the capital gain will &e calculated as taxa&le in the hands of firm and it is taxa&le as income in the year it is transferred. For computing capital gain the fair market alue is taken of the asset is taken as the full alue of consideration. Dapital gain in case of self generated assets: %f any self generated assets like goodwill or right to carry on &usiness0 tenancy right route permit etc is sold then the cost of acCuisition is taken as nil. 2nly the cost of transfer is allowed as deduction. Dapital Eain on transfer of 7onus share:
ifferent "ituations Dost of AcCuisition of &onus shares allotted &efore April 10 1/1 Dost of AcCuisition of &onus shares allotted on or after April 10 1/1
"pecial Pro&isions Fair market alue on April10 April10 1/1 is taken as cost of acCuisition Dost of AcCuisition AcCuisition is taken as (ero
50
!eriod of holding &onus shares
The period of holding shall &e determined from the date of allotment of &onus shares "and not from the date of acCuisition of original shares#
C#P$T#* +#$N, E-EPT$/N" Caital Gain arisin form the transfer of the resi+ential Proert$ -Sec 74/ $xemptions under following conditions are met. 1. 2nly and indiidual and F can claim exemption under this section. *. $xemption is aaila&le only if the capital asset which is transferred is a residential house property0 whose income is taxa&le under the head %ncome from house property. 3. ouse property should &e a long term Assets. 5. A new house property should &e purchased 6 acCuired within a specified time limit. !articular Time limit For purchasing a new residential property 8ithin 2ne year &efore or within * years after date of Transfer of house property. For constructing a new residential property The Donstruction should &e Domplete within 3 years from the date of Transfer of house property. . Amount of $xemption: The amount of capital gain generated on Transfer of 4esidential house property. The amount inested in purchasing o r constructing new residential property0 8hich eer is lower. *. %f the amount is not utilied for purchase 6 construction of the new property till the due date of su&mission of 4eturn of %ncome than it should &e deposited in capital gain deposit account scheme. 3. %f the new residential property is transferred within a period of three years from the date of acCuisition or completion of construction the amount of assumption gien earlier will &e taken &ack. $xample: From the following information compute the capital gains lia&le to tax in the A.Y *++3-+5. "A# Dost of acCuisition of residential house in 1/3 -5 -35+++ "7# @ale consideration on *-+-*++* - 1,0++0+++ " D# Dost of Donstruction of the new residential house &y - 3++0+++ The due date of filing the return for AY *++3-+5 The cost of inflation %ndex in 1/3-5 was 11 and *++*-+3 it was 55,.
Caital Gain arisin form the transfer of Aric!lt!ral lan+ -Sec 74B/ $xemption under this section are aaila&le if following proisions are met: 1. The tax payer is an indiidual *. he transfers an agricultural land it may &e a long term 6 short term capital assets 3. Agricultural land was used &y the taxpayer or his parents for agricultural purpose for a period of two years immediately preceding the date of Transfer. 5. The tax payer has purchased another land of agricultural purpose within a period of two years from the date of transfer. . )and may &e in ur&an or rural area. . Amount of exemption: a. The amount of capital gain generated on Transfer of agricultural land. &. The amount inested in purchasing a new agricultural land.
51
8hich eer is lower. %f the amount is not utilied for purchase of the new agricultural land till the due date of su&mission of 4eturn of %ncome than it should &e deposited in capital gain deposit account scheme. 3. %f the new agricultural land is transferred within a period of three years from the date of acCuisition the amount of exemption gien earlier will &e taken &ack. $xample: Agricultural land purchased in 1/5- for 4s 5++ is sold for 4s 3++++ on +1-+*++*. The assessee purchased another piece agricultural land on 1-+-*++3 for 4s ,++++ and deposited 4s 3++++ on *5-+-*++3 in capital gain account scheme 1//.Dalculate capital gain chargea&le to tax in to tax for AY *++3-+5. The cost %nflation %ndex in 1/5 Q was 1* and *++3-+5 was 55,. *.
Caital Gain !n+er com!lsor$ ac!isition of lan+ an+ #!il+in formin art of in+!strial !n+erta2in -section 74'/ $xemption under this section is aaila&le if following proisions are met: 1. The taxpayer may &e an indiidual0 F0 Firm0 Dompany or any other person *. The asset may &e short term 6 long term 3. Dapital gain arises on transfer &y way of compulsory acCuisition of land or &uilding which forms a part of an industrial undertaking &elonging to the taxpayer. 5. @uch land or &uilding was used &y the assessee for the purpose of the industrial undertaking for at least two years preceding the date of compulsory acCuisition. . Assessee has purchased nay other land or &uilding within a period of three years from the date of receipt of compensation or constructed a &uilding within such period. . Gewly acCuired land or &uilding should &e used for the purpose of shifting or reesta&lishing the said undertaking or setting up another industrial undertaking. ,. Amount of $xemption: a. The amount of capital gain generated on Transfer &y way of Dompulsory acCuisition of land or &uilding. &. The amount inested in new land of &uilding. 8hich eer is lower. *. %f the amount is not utilied for purchase 6 construction of the new land of &uilding till the due date of su&mission of 4eturn of %ncome than it should &e deposited in capital gain deposit account scheme. 3. %f the new land or &uilding is transferred within a period of three years from the date of its acCuisition or completion of construction the amount of exemption gien earlier under section 5 ? would &e taken &ack. Caital Gain not to #e chare+ on investment in certain #on+s -sec 74 EC/ The salient features of section are as under: 1. The taxpayer may &e an indiidual0 Firm0 Dompany or any other person *. A long term capital asset is transferred &y an assessee during the preious year. 3. 8ithin six month from the date of transfer of the assets the assessee should inest the whole or any part of the capital gain in long term specified assets. 5. from the assessment year *++-+, this specified assets are any &onds redeema&le after three years issued after march 310 *++ &y Gational highway authority of %ndia 4ural $lectrification Dorporation )td. . Amount of $xemption: i. The amount of capital gain generated on Transfer of capital asset. ii. The amount inested in specified asset as discussed a&oe. 8hich eer is lower. *. The cost of specified assets shall not &e eligi&le under section and deduction under section +D. 3. The inestment made on or after +1-+5-*++, can not exceed 4s + lacs.
52
5. %f the specified asset is transferred 6 conerted into money or any loan or adance is taken on the security of specified asset within 3 year f rom the date of acCuisition than the exemption gien will &e charged to tax in the year in which it was so transferred 6 conerted into money or any loan or adance is taken
Caital Gain on transfer on a lon term caital asset other than a ho!se roert$ -Sec 74 */: $xemption under this section is aaila&le if following proisions are met: 1. 2nly and indiidual and F can claim exemption under this section. *. $xemption is aaila&le only if the capital asset which is transferred is a long term capital asset &ut other than a residential house property "e.g. a plot of land0 gold0 share etc# 3. A new house property should &e purchased 6 acCuired within a specified time limit.
!articular For purchasing a new house
Time limit 8ithin 2ne year &efore or within * years after date of Transfer of original asset. For constructing a new house The Donstruction should &e Domplete within 3 years from the date of Transfer of house p roperty. 5. The exemption is aaila&le only if on the date of transfer of the original asset0 the taxpayer does not own more than one residential house other than the new house. . Amount of exemption will &e calculated as under: Dost of new house x Dapital gain Get sales consideration . %f the amount is not utilied for purchase 6 construction of the new property till the due date of su&mission of 4eturn of %ncome than it should &e deposited in capital gain deposit account scheme. ,. %f the new residential property is transferred within a period of three years from the date of acCuisition or completion of construction the amount of assumption gien earlier will &e taken &ack. . %f the assessee purchases a new house0 within a period of two years of the date of transfer of original asset0 or construct within a period of 3 years of the transfer of such asset0 a residential house other than the new house then the exemption will &e withdrawn.
Caital Gain on transfer of assets in cases of shiftin of in+!strial !n+erta2in from !r#an area -Sec 74G/: To claim exemption under this section following conditions need to &e fulfilled: 1. A capital asset used for the purpose of an industrial undertaking situated in an ur&an area is transferred. *. The transfer is effected in the course of0 or in conseCuence of0 the shifting of such industrial undertaking to any area other than an ur&an area. 3. The assessee has within a period of one year &efore or 3 years after the date on which the transfer took place: a# !urchased a new machinery or plant for the purpose of &usiness of the industrial undertaking in the area to which the said undertaking has shifted. &# AcCuired &uilding or land or constructed &uilding for the purpose of his &usiness in the said area. c# @hifted the original asset and transferred the esta&lishment of such undertaking to such area. d# %ncurred expenses on such other purposes as may &e specified in a scheme framed &y the central goernment. 5. The amount of exemption is eCual to-
53
The amount of capital gain generated on transfer of capital assets in case of shifting of an industrial undertaking The cost and expenses incurred in relation to all or any of the purposes mentioned in point 3. 8hicheer is lower. . %f the amount is not utilied for purchase 6 construction 6acCuisition of the new asset till the due date of su&mission of 4eturn of %ncome than it should &e deposited in capital gain deposit account scheme. . %f the new asset is transferred within a period of three years from the date of its purchase6construction6acCuisition the amount of exemption gien earlier under section 5 E would &e taken &ack. •
•
$.g.: The following information is gien &y Mrs. ' "* years# and Mrs. Y "3* years# for the assessment year *++,-+
@ales consideration of eCuity shares %ndexed cost of acCuisition of eCuity shares @ales consideration of Eold %ndexed cost of acCuisition of gold 2ther income !!F contri&ution
Mrs. ' "4s# ,+0+++ 3+0+++
Mrs. Y "4s# /0+++ 150+++
++0+++ +0+++ 5*+0+++ *+0+++
++0+++ 5+0+++ ++0+++ 1+0+++
Find out the net income and tax lia&ility of Mrs. ' for the assessment year *++,-+ firstly on the assumption that eCuity shares are transferred on 2cto&er 310*++outside a recognied stock exchange and secondly on the assumption that eCuity shares are transferred on Fe&ruary *,0*++,in the G@$.
Ch.8 Income from other sources
;%ncome from other sourcesJ is the last head of income specified under sec 15. @ection gies the scope of income chargea&le under this headS section , and specifies the &asis of computation of such income. 7esides this the chapter deals with all the proisions of the act which hae a &earing on the computation of income taxa&le as income from other sources.
54
Basis of charge: @pecial !roisions @ec "*#: The following incomes are always chargea&le under the head %ncome from other sources: 1. diidend *. Any winning from lotteries0 crossword pules0 races including horse races0 card games and other games of any sort or from gam&ling or &etting of any form or nature whatsoeer. 3. Any sum receied &y the assessee from his employees as contri&ution to any staff welfare scheme. 5. %nterest on securities. . %ncome from machinery. !lant or furniture let out on hire. . 8here any sum of money receied during a preious year without consideration &y an indiidual or a F from any person or persons exceed 4s. +0+++0 the whole of such sum. Eeneral !roisions @ec "1#: %ncome from other sources is the last and residual head of income. A source of income which does not fall under any of the other four heads of income is to &e computed and &rought to charge under section . For e.g.: income from su&letting0 interest on &ank deposit and loans0 interest on royalty0 directors fees0 ground rent0 agricultural income from outside %ndia etc.
Dividend and its taxability : Any diidend declared0 distri&uted or paid &y a company to its shareholders is chargea&le to taxed under the head ;%ncome from other sourcesJ irrespectie of the fact whether the shares are held &y the assessee as inestment or stock in trade. %f diidends are distri&uted after March 310 *++3: For diidend declared &y a domestic company any diidend declared and distri&uted or paid after March 310 *++30 then it is not taxa&le in the hands of shareholders. 2n such diidends the company declaring diidend will pay diidend tax under section 112. %f a loan or adance gien is deemed as diidend under sec *"**# "e# then such loan or adance is taxa&le u6s a diidend in the hands of recipient. oweer the a&oe exemption is not applica&le in the hands of non-domestic company and conseCuently0 such diidend is chargea&le to tax in the hands of recipient.
Interest on securities Sec 56(2) (id): %ncome &y way of interest on security is taxa&le under the head ;%ncome from other sourcesJ0 if the same is not taxa&le as &usiness income under section *. %nterest on securities sec *"*7#: %nterest on securities means: 1. interest on any security of the central goernment or state goernment *. %nterest on de&entures or other securities for money issued &y or on &ehalf of a local authority or a company or a corporation. 7asis of Dharge: %nterest on security is charged to tax on cash &asis if the assessee maintains his &ooks of account on cash &asis. %t is taxa&le on due &asis if the assessee maintains his &ooks of account on mercantile &asis. %nterest exempt from Tax:
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%nterest on the following is exempt from Tax: %nterest on notified securities0 &onds or certificates. %nterest on ,K Dapital %nestment 7onds in the hands of indiidual and F. %nterest receied &y a non resident %ndian from notified 7onds. %nterest paya&le to any foreign &ank performing central &anking functions outside %ndia. %nterest on deposit made &y a retired goernment employee or an employee of a pu&lic sector company out of money due to him on retirement. %nterest on securities held &y welfare commissioner0 7hopal gas ictim. %nterest on gold deposit &onds issued under the gold deposit @cheme0 1///.
Grossing u of Interest: Eross %nterest "i.e. net interest plus tax deducted at source# is taxa&le. Get %nterest is grossed up in the hands of recipient if tax is deducted at source &y the payer. Eross %nterest L net interest x 1++ 1++- 4ate of T?@ ?eduction u6s +): Go deduction is aaila&le u6s +) from the assessment year *++-+,. !voidance of "ax (Sec #$) %nterest on security does not accrue from day to day &ut on certain fixed dates. %f0 on the ee of due date of payment of interest0 a person transfers security to another person and reacCuires the same or similar securities after interest has &een receied &y the transferee. The transferor would &e a&le to eade tax in respect of such tax. To stop such malpractice the &elow two sections are introduced. 72G? 8A@%GE T4AG@ADT%2G "@ec /5 "1## A transaction which consist of selling securities some time &efore the due date and acCuiring the same6 similar after the due date of interest is oer is called 7ond washing transaction. This is done generally &y the high income class assessee to eade the tax while transferring securities to low income class assessee on the ee of getting the interest as interest is charged in the hands of legal owner of securities on the due date of payment of interest. To preent this sec /5"1# proides that when such transaction takes place then the income will &e included in the hands or transferor and not of the transferee. @A)$@ DM %GT$4$@T @ec "/5 "*## %f an assessee haing &eneficial interest in securities during the preious year sells them in such a way that either no income is receied or income receied is less than the sum he would hae receied if interest had accrued from day to day0 then income from such security for such year would &e deemed as income of such person.
Deductions %er&issible: The income is computed after making the following deductions: 1. Dommission or remuneration for realiing diidend or interest on securities. *. @tandard deduction in case of family !ension to the tune of 4s. 10+++6- or 33163 K whicheer is less. 3. Any other expense for earning income. Seci'c Disalloances: 1. !ersonal $xpenses *. %nterest and salary paya&le outside %ndia on which T?@ is not deducted 3. 8ealth Tax 5. Amount specified &y sec 5+A
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$x: ' holds the following securities on April 10 *++: K ! goernment loan "date of payment of interest: Hanuary 1# 4s.1+++0+++ K Gon listed de&enture of A7D )td. "dates of payment of interest: Hune 11 and ?ecem&er 11 eery year# 4s.5+0 +++. K de&enture of !N4 )td. "dates of payment of interest: Hune 1 and ?ecem&er 1 eery year# 2n ?ecem&er 10 *++0 ' sells 4s. *0+++ K de&entures of !N4 )td. Dalculate the taxa&le income of ' for the assessment year *++,-+ on the assumption that his &usiness income is 4s.50+++ and he has receied a gift of 4s.1++0+++ in foreign currency from a friend on ?ecem&er 10 *++on his marriage anniersary.
Chater : Cl!##in of income Eenerally a person is taxed in respect of his own income. %n some cases0 howeer0 the income tax deiates from this principle and a person is taxed under section + to 50 in respect of income which legally &elongs to some other person. These sections hae &een introduced to counteract the practices of tax aoidance. Transfer of Income witho!t transfer of asset -sec 3/: @ection + is applica&le if f ollowing conditions are satisfied:
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1. The taxpayer owns an asset which is not transferred &y him. *. The income from such asset is transferred &y him to any other person. 3. The a&oe transfer may &e reoca&le or irreoca&le. %f the a&oe conditions are satisfied0 the income from the asset would &e taxa&le in the hands of transferor. &evoca#le Transfer of Asset -Section 1/ 7y irtue of section 10 if an asset is transferred under a reoca&le transfer0 income from such asset is taxa&le in the hands of the transferor. 4eoca&le transfer: 1. A transfer containing any proision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor *. A transfer which in anyway gies the transferor a right to re-assume power directly or indirectly oer the whole or any part of the income or assets. hen an in+ivi+!al is assessa#le in resect of rem!neration of so!se: The proisions of section 5 are gien &elow: 1. The taxpayer is an indiidual and has a su&stantial interest in a concern. *. @pouse of the taxpayer is employed in the a&oe mentioned concern... 3. @pouse is employed in the concern without any professional or technical knowledge or experience. 5. %f the aforementioned conditions are satisfied then salary income of the spouse will &e taxa&le in the hands of the taxpayer. hen an in+ivi+!al is assessa#le in resect of income from asset transferre+ to so!se -sec4 -1/ -i&// The following conditions should &e satisfied: 1. The taxpayer is an indiidual. *. e6 she hae transferred an asset "other than a house property#. 3. The asset is transferred to his6 her spouse. 5. The transfer may &e direct6 indirect. . The asset is transferred otherwise than For adeCuate consideration. %n connection with an agreement to lie apart. . The asset may &e held &y the transferee- spouse in the same form or in a different form. %f the a&oe conditions are satisfied0 any income from such asset shall &e deemed to &e the income of the taxpayer who has transferred the asset. hen an in+ivi+!al is assessa#le in resect of income from asset transferre+ to sonFs wife -sec4 -1/ -&i // 1. The taxpayer is an indiidual. *. e6 she has transferred an asset after May 310 1/,3 3. The asset is transferred to his6 her sonRs wife. 5. The transfer may &e direct6 indirect. . The asset is transferred otherwise than for adeCuate consideration. . The asset may &e held &y the transferee in the same form or in a different form. %f the a&oe conditions are satisfied0 any income from such asset shall &e deemed to &e the income of the taxpayer who has transferred the asset. hen an in+ivi+!al is assessa#le in resect of income from asset transferre+ to a erson for the #enefit of so!se -sec4 -1/ -&ii // 1. The taxpayer is an indiidual. *. e6 she has transferred an asset. 3. The transfer may &e direct6 indirect. 5. The asset is transferred to a person or an association of persons.
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. %t is transferred for the immediate or deferred &enefit of his6 her spouse. . The transfer is without adeCuate consideration. %f the a&oe conditions are satisfied0 then income from such asset to the extent of such &enefit is taxa&le in the hands of the taxpayer who has transferred the asset. hen an in+ivi+!al is assessa#le in resect of income from asset transferre+ to a erson for the #enefit of sonFs wife -sec4 -1/ -&iii // 1. The taxpayer is an indiidual. *. e6 she has transferred an asset after May 310 1/,3. 3. The transfer may &e direct6 indirect. 5. The asset is transferred to a person or an association of persons. . %t is transferred for the immediate or deferred &enefit of his6 her sonRs wife. . The transfer is without adeCuate consideration. %f the a&oe conditions are satisfied0 then income from such asset to the extent of such &enefit is taxa&le in the hands of the taxpayer who has transferred the asset.
Aroriation when transferre+ asset is investe+ in a #!siness: An asset "whether in cash or kind# is transferred to a spouse or to a sonRs wife directly or indirectly without adeCuate consideration and such asset is inested in the &usiness. Then the amount of income that will &e clu&&ed in the hands of the transferor will &e as under: 1. %f the amount is inested in the &usiness &ut as a capital contri&ution in the partnership firm the amount shall &e calculated as under: Balue of the assets transferred &y Transferor on the first day of !Y Total inestment on the 1st day 2f !Y &y transferee *.
x the profit share of transferee from &usiness
%f the inestment is in the nature of capital contri&ution as a partner in a firm the interest receied or receia&le from the firm on such capital contri&ution will &e included in the income of the transferor. oweer the profit will not &e included in the income of the transferor.
Income of a minor chil+ -Sec 4 -1A//: All income which arises or accrues to the minor child shall &e clu&&ed in the hands of his parents. Dlu&&ing in the hands of parent: 1. The income of the minor will &e included in the income of that parent whose total income is greater. *. 8here the marriage of the parent does not su&sist0 the income of minor will &e included in the income of that parent who maintains the minor child in the releant preious year. 8hen clu&&ing is not attracted: 1. %ncome of a minor child "from all sources# suffering from any physical disa&ility. *. %ncome of a minor child on account of any manual work. 3. %ncome of a minor child on account of any actiity inoling application of his skill0 talent or specialied knowledge and experience. %n case the income of an indiidual includes the income of his or her minor child then such indiidual is entitled to exception of 4s. 1++ in respect of each minor child as per section 1+ "3*#.
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Cross
(nexlaine+ Exen+it!re -Section C/: Any unexplained expenditure in any financial year for which the assessee offers no satisfactory explanation a&out the source is taxa&le as income in the financial year where such unexplained expenditure is incurred. Amo!nt #orrowe+ or reai+ on h!n+i -Section '/: Money &orrowed &y hundi and repayment of it otherwise through an account payee cheCue or &ank draft will &e treated as income in the preious year in which such &orrowing or repayment is made otherwise than through account payee cheCue. $.g.: The income of a family is as under: 1. Mr. 4am "from &usiness#
4s.
*. Mrs. 4am " salary from a school computed# 15+0+++ 3. Minor son " from interest from a company# the amount for inestment receied from grand father 1+0+++ 5. Minor son Y "from acting in films# . Minor daughter ( " from lottery# The lottery ticket was gifted to her &y her maternal uncle 0+++
*+0+++
+0+++
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.
%ncome of mentally handicapped minor child 4s. 5+0+++. The amount for inestment receied from his father0 grand father and maternal uncle. ?iscuss in whose hands the incomes are assessa&le and to what extent9
Chater 13. SET O** AN' CA&&@ *O&A&' Tax is leied on assessee total income. To calculate total income0 loss under any source or head of income is to &e ad
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*. 3.
)ong term capital loss can &e set off only against long term capital gain. )oss from owing and maintain race horses can &e set off only against income from such &usiness. 5. )oss cannot &e setoff against winning from lotteries0 crossword pules etc. Inter< hea+ A+8!stment: 8here the net result of computation made for assessment year in respect of any head of income is a loss0 the same can &e set off against the income from other heads. $xceptions: 1. )oss from a speculation &usiness can &e set off only against profit from a speculation &usiness. *. )osses under the head capital gain cannot &e set off against any income except income under the head capital gain. 3. )ong term capital loss can &e set off only against long term capital gain. 5. )oss from owing and maintain race horses can &e set off only against income from such &usiness. . )oss cannot &e setoff against winning from lotteries0 crossword pules etc. . 7usiness losses cannot &e set off against salary income.
Carr$ forwar+ of losses: nder the act following losses can &e carried forward: 1. )osses under the head income from house property. *. )oss under the head ;!rofit and gains of &usiness and professionJ 3. )oss under the head capital gain 5. )oss from the actiity of owing and maintaining race horses. 2ther remaining losses cannot &e carried forward. Darry forward and set off &usiness loss other than speculation loss: 1. )oss can &e set off only against &usiness income. *. )oss can &e carried forward &y the person who incurred the loss. 3. )oss can &e carried forward for years. 5. 4eturn of loss should &e su&mitted in time prescri&ed. . Dontinuity of &usiness not necessary. . The a&oe limit of years is not applica&le on una&sor&ed depreciation0 capital expenditure on scientific research and family planning expenditure. Darry forward and set off speculation loss: A @peculation transaction is that transaction in which a contract for the purchase or sale of any commodity0 including stocks shares0 is periodically settled0 otherwise than &y actual deliery or transfer of the commodity or scrip. 1. )oss can &e set off only against speculation income. *. )oss can &e carried forward &y the person who incurred the loss. 3. )oss can &e carried forward for 5 years " up to assessment year *++-+ yrs# 5. 4eturn of loss should &e su&mitted in time prescri&ed. . Dontinuity of &usiness not necessary. . The a&oe limit of years is not applica&le on una&sor&ed depreciation0 capital expenditure on scientific research and family planning expenditure. Darry forward and set off capital loss: 1. )ong term capital loss can &e set off only against income of long term capital gain. *. @hort term capital loss can &e set off against short-term or long term capital gain. 3. @uch loss can &e carried forward for eight assessment years immediately succeeding the assessment year in which the loss was first computed.
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