INCOME TAX LAW AND PRACTICES

B.COM

UNIT-I

INTRODUCTION AND IMPORTANT DEFINITIONS INTRODUCTION

Income tax is an important direct tax. It is a prominent and most significant source
of the government fund. The government needs money to maintain law and order in to
safeguard the security of the country from foreign powers and promote the welfare of
people. Since our government is wedded to the socialistic pattern of society it is the
foremost duty of the government to bring out such welfare and development programmes
which will Ige the gap between the rich and the poor. All this requires mobilisation of
funds from various rces. These sources may be direct or indirect. Income tax, being a
direct tax, is an important to achieve balanced socio-economic growth by providing
concessions and incentives in me tax for various developmental purposes.
Who is liable to pay income tax?
Every person, whose taxable income for the previous financial year exceeds the
minimum cable limit is liable to pay income tax during the current financial year on the
income of the IOUS financial year at the rates applicable during the current financial year.
BRIEF HISTORY OF INCOME TAX IN INDIA
(1) In India, this tax was introduced for the first time in 1860, by Sir James Wilson in
order meet the losses sustained by the Government on account of the Military
Mutiny of 1857.
(2) In 1886, a separate Income Tax Act was passed. This Act remained in force up to
1917, ith various amendments from time to time.
(3) In 1918, a new Income Tax Act was passed and again it was replaced by another
new " which was passed in 1922. This Act remained in force up to the assessment
year 1961-62 tfa numerous amendments.

1
(4) The Income Tax Act of 1922 had become very complicated on account of
sssinnumerable. ndments. The Government of India, therefore, referred it to the
Law Commission in 1956 in a view to simplifying and for the prevention of tax
evasion. The Law Commission submitted report in September 1958, but in the
meantime, the Government of India had appointed the set Taxes Administration
Enquiry Committee to suggest measures to minimise inconvenien-ee to assessees
and to prevent evasion of tax. This Committee submitted its report in 1959. In
osultation with the Ministry of Law finally the Income Tax Act, 1961 was passed.
(5) The Income Tax Act, 1961 has been brought into force with effect from 1st April,
1962. applies to the whole of India and Sikkim (including Jammu and Kashmir).
(6) Since 1962 several amendments of far-reaching nature have been made in the
Income a Act by the Finance Act every year.
(7) Besides this, amendments have also been made by various Amendment Acts, for -
ranee, Taxation Laws Amendment Act, 1984, Direct Taxes Amendment Act, 1987,
Direct XLS Law (Amendment) Acts of 1988 and 1989, Direct Tax Law (Second
Amendment) Act, 1989 nd at last The Taxation Law (Amendment) Act, 1991. The
amendments in the Finance Acts, 992 and 1993, are mostly based on the
recommendations of Chelliah Committee Report.
(8) As a matter of fact, the Income Tax Act, 1961, which came into force on 1st April,
1962, has been amended and re-amended widely. It has, therefore, become very
complicated both for the administering authorities and the tax-payers.
CHARACTERISTICS OF INCOME TAX
1. Direct Tax. Income is a Direct Tax. Direct Tax means such tax which is paid by a
person who bears the tax burden.
2. Central Tax. Income Tax is imposed and recovered by the Central Government.
3. Tax on Total Income. Income Tax is calculated on total income. Total income is
also called taxable income. Total income is calculated according to the provisions
of the Income Tax Act.
4. Tax-Exempted Limit. If income exceeds tax-exempt limits of income, then tax is
imposed. Tax-exempt limit of income for the Assessment Year 2019-20, are as
follows:

2
(A) Senior Citizen: Senior citizen (resident in India), who is of the age of 60 years or
more but less than 80 years? 3,00,000.
(B) Super Senior Citizen: Super senior citizen (resident in India), who is of the age of
80 years or more f 5,00,000.
(C) Other Individuals, HUF, Association of persons. Body of Individual? 2,50,000.
(D) Firm, Company, Local Body: Nil.
5. Progressive Tax Rates. Tax is not imposed at the same rate on the total income of
an individual HUF, AOP or BOI. Tax rates increase with an increase in income.
Minimum tax rate is 5% and maximum tax rate is 30%. Firms' and companies'
incomes are taxed at the rate of 30%.
6. Surcharge. Surcharge is imposed on the amount of income tax. Surcharge rates are
as follows for the Assessment Year 2019-20.
(i) For individuals, HUF, AOP or BOI: @ 10% if total income exceeds 50 lakh rupees
but does not exceed 1 crore rupees. @ 15% if total income exceeds 1 crore rupees.
(ii) For Firms: @ 12% if total income exceeds 1 crore rupees.
(iii) For Domestic Company: @ 7% if total income exceeds 1 crore rupees but does not
exceed 10 crore rupees. @ 12% if total income exceeds 10 crore rupees.
Note: In above all three conditions, provision of marginal relief will also be applicable.
7. Health and Education Cess. All assessees are liable to pay health and education
cess @ 4% on the total amount of income tax including surcharge.
8. Tax Burden. Tax is imposed at a progressive rate on the income of individual and
HUF therefore rich person bear more tax burden.
9. Administration. Tax is imposed and recovered by the income tax department.
Income Tax Department works under the control of the Central Board of Direct
Taxes (CBDT).
10. Allocation of Amount of Income Tax. The total amount of income tax recovered
by government is allocated among the Central Government and the State
Government according to the recommendation of the Finance Commission, the
State Government will not be given any share of income tax revenue from the
following amounts :
(i) Income tax amount recovered from companies.

3
 (ii) Amount of surcharge.
(iii) Amount of health and education cess.
BASIS AND PROCEDURE OF CHARGING OF INCOME TAX
The following basic principles are the basis of charging income tax:
1. Income tax is an annual tax on income.
2. Income of the previous year is taxable in the next following the assessment year at
the rate or rates applicable to that the assessment year. However, there are certain
exceptions to this rule.
3. Tax rates are fixed by the annual Finance Act.
4. Tax is charged on every person as defined in section 2(31).
5. The tax is charged on the total income of every person computed in accordance
with the provisions of this Act.
6. Income tax is to be deducted at the sources of income or paid in advance as
provided under provisions of the Act.
The total income is computed on the basis of the residential status of the assessee.

The income is classified into the following five heads:

1. Income from Salaries;
2. Income from House Property;
3. Profits of Business or Profession;
4. Capital Gains; and
5. Income from other Sources.
For computing, the total income of an assessee and the tax payable by him,
following the procedure is followed:
(1) Classify the income under each of the above five heads and then deduct from the
income under each head the deductions permissible under the Act in respect of that
head of income. The fiance of amount left under each head of income is its
assessable income.
(2) Total of the assessable income of each head and the aggregate of all these
assessable: comes is called the Gross Total Income.

4
(3) From the Gross Total Income, thus arrived at, deduct the deductions permissibly
under sections 80C to 80U of the Act for computing the total income. The balance
left after subtracting: the allowable deductions are called the Total Income.
(4) The amount of income tax payable is then calculated on this total income
according to the rates prescribed by the Finance Act for the relevant assessment
year and the rates prescribed under different sections of the Act.

I. Computation of Tax for the Assessment Year 2019-20

Rates of tax for an individual, Hindu undivided family, association of persons or
body of. individuals:
1. General rates (excluding short-term capital gains, specified in Sec. 111A, long-
term capital gains, winnings from lottery, crossword puzzle, races, etc.):
(a) Individual—Senior citizen (resident in India, who is of the age of 60 years or more
but
less than 80 years during the previous year) :
On Rs 3,00,000 (Minimum exemption limit) Nil
Next on Rs 2,00,000 5%
Next on Rs 5,00,000 20%
Next—Balance 30%
(b) Individual—Super senior citizen (resident in India, who is of the age of 80 years or
more during the previous year) :
On Rs 5,00,000 (Minimum exemption limit) Nil
Next on Rs 5,00,000 20%
Next—Balance 30%
(c) Other individuals, (Male or Female) HUF, AOP or BOI:
On Rs 2,50,000 (Minimum exemption limit) Nil
Next on Rs 2,50,000 5%
Next on Rs 5,00,000 20%
Next—Balance 30%
2. Special rates. On specified incomes the tax is charged at a specified flat rate :
(a) On short-term capital gains specified in Sec. 111A—@ 15%;

5
(b) On long-term capital gains—@ 20%;
(c) On gains from listed shares without indexing the cost of acquisition—@ 10%; (ci)
On long-term capital gains u/s 112A—@10%.
(d) On winnings from lottery, crossword puzzle, horse race, etc.—@ 30%.

Rebate of income tax. In case of an individual resident in India, whose total income does
not exceed Rs 3,50,000 shall be entitled to a deduction from the amount of income tax
payable up to Rs 2,500. (Sec. 87A)

lI. Surcharge [extra Tax]

(a) @ 10% if total income exceeds? fifty lakh but does not exceed? one crore.
(b) @ 15% if total income exceeds? one crore.
III. Marginal relief
(a) Where the total income exceeds Rs fifty lakh the total amount payable as
income-tax and surcharge on such income shall not exceed the total amount payable as
income tax on a total income of Rs fifty lakh by more than the amount of income that
exceeds f fifty lakh.
(b) Where the total income exceeds one crore rupees the total amount payable as
income-tax and surcharge on such income shall not exceed the total amount payable as
income tax on a total income of one crore rupees by more than the amount of income that
exceeds one crore rupees.
No marginal relief will be allowed on health and education cess: Example.
Marginal Relief:
Total income of Mr. X for the Assessment Year 2019-20 is Rs 1,02,00,000. The
marginal relief and tax payable shall be as under:
Tax on Rs 2,50,000
Tax on Rs 2,50,000 @ 5% 12,500
Tax on Rs 5,00,000 @ 20% 1,00,000
Tax on Rs 92,00,000 @ 30% 27,60,000
28,72,500
Add : Surcharge @ 15% 4,30,875

6
33,03,375
Less : Marginal relief 2,90,875
30,12,500
Add : Health and Education Cess @ 4% 1,20,500
Tax Payable 31,33,000
Marginal relief has been computed as under : Tax on ? 2,00,000 @ 30% (excess over one
crore rupees) 60,000
Add : Surcharge 4,30,875
4,90,875
Tax and surcharge cannot exceed the amount
of income that exceeds one crore rupees 2,00,000
Marginal relief 2,90,875
IV. Health and Education Cess
Add Health and Education Cess @ 4% on the amount of income tax and surcharge. In
brief:
Income tax on total income at the prescribed rates .........
Add : Surcharge if any (10%/15%) .........
Add : Health and Education Cess @ 4% .........
Tax Payable .........
A person born on 1st April would be considered to have attained a particular age on 31st
March, the day preceding the anniversary of his birthday.
In particular, the question of attainment of the age of eligibility for being
considered a senior/very senior citizen would the therefore be decided on the basis of the
above criteria.
[Circular No. 28/2016 (F. N. 225/182/2016/ITA. II) Dated 27.7.2016] For example, date
of birth of Mr. X (resident in India) is 1.4.1959. He will be a senior citizen 11.3.2019. He
will get tax benefit w.e.f. the Assessment Year 2019-20.
Firm : A firm is liable to pay tax for the Assessment Year 2019-20 at the following rates :
(i) On short-term capital gains specified in Sec. 111A—@ 15%;
(ii) On long-term capital gains—@ 10%/20% (Sec. 112); lia) On long-term capital gains
u/s 112A—@ 10%

7
iii) On winning from lottery, crossword puzzle, horse race, etc.—@ 30%;
iv) On other income—@ 30%.
Surcharge. If total income exceeds one crore rupees @ 12%. Marginal Relief. As
explained on the the previous page no. 4. Health and Education Cess. On the amount of
income tax and surcharge @ 4%. \otes : (1) In computing the income of the firm, whatever
deduction is allowed to the firm as interest, salary or remuneration to partners, such
amount will be treated as income of the partners under the head 'Profits and gains of
business or profession'. 21 Whatever share of profit (total income less tax paid by the firm)
from the firm is received by a partner, it is not included in the income of the partner.
Important Note : On Deemed Income (under section 68, 69, 69A, 69B, 69C or 69D) tax
shall be charged under section 115BBE as under :
Income Tax @ 60%, Surcharge @ 25%, Health and Education Cess 4%.

IMPORTANT DEFINITIONS
Under sections 2 and 3 of the Income Tax Act, 1961, definitions of important terms used
in be Act have been given, some of which are as under :
INCOME
'Income' is one of the important terms of the Income Tax Act as income tax is charged on
the income of a person. This term has not been defined in the Income Tax Act, except that
it states as - what is included in income.
Under this section income includes :
(i) profits and gains;
(ii) dividend;
(iii) voluntary contributions received by (a) a trust created for charitable or religious
purposes, or (b) by a scientific research association, or (c) by a games or sports association
or institution, or (d) any university or other educational institution, or (e) any hospital or
other institution, or (f)'an electoral trust;
(iv) the value of any perquisite or profits in lieu of salary taxable under the head 'salaries'; .
(v) any special allowance or benefit specifically granted to the assessee to meet his
expenses wholly necessarily and exclusively for the performance of his duties;

8
(vi) any allowance granted to the assessee either to meet his personal expenses at the place
where he performs his duties or compensate him for the increased cost of living, for
example, City Compensatory Allowance;
(vii) the value of any benefit or perquisite which is obtained by any representative
assessee; iii any sum chargeable to income tax under the head 'business' or 'profession';
(viii) any capital gains;
(x) the profits and gains of any business of insurance carried on by a mutual insurance
company or by co-operative society;
(xi) any winnings from lotteries, crossword puzzles, races including horse races, card-
games and other games of any sort or from gambling or betting of any form or nature
whatsoever;
Explanation :
(a) 'Lottery' includes winnings from prizes awarded to any person by draw of lots or
by chance or in any other manner whatsoever;
(b) "Card game and other game of any sort" includes any game show, an entertainment
programme on television or electronic mode, in which people compete to win
prizes or any other similar game;
(xii) any sum received by the assessee from his employees as contributions to any
provident fund or superannuation fund or any fund set-up under the Employees'
State Insurance Act or any other fund for the welfare of such employees;
(xiii) any sum received under a Keyman Insurance Policy including the sum received by
way of bonus on such policy.
Keyman insurance policy means a life insurance policy taken by a person on the
life of another person who is or was (a) an employee of the first person, or (b)
connected in any manner with the business.
The sum of keyman insurance policy is assessable as following :
(a) When the sum is received by the organisation, who has taken the policy, it is
assessable under the head profits and gains of business or profession.
(b) When the amount is received by the employee, it is assessable as profits in lieu of
salary.

9
(c) When the amount is received by a person, where an employer-employee
relationship does not subsist (Chairman or Director etc. of a company), it is
assessable under the head income from other sources.
(xiv) The profits and gains of any business of banking (including providing credit
facilities) carried on by a co-operative society with its members;
(xv) Any consideration received for issuing shares as exceeds the fair market value of
the shares.
(xvi) Any sum of money received as an advance in the course of negotiations for the
transfer of a capital asset and such negotiation fails, the amount so forfeited;
(xvii) If the assessee receives (in cash or kind) the following from the Central
Government or a the State Government or any authority or body or agency it will
be treated as income :
Subsidy or grant or cash incentive or duty drawback, or waiver or concession or
reimbursement.
However, if such subsidy or grant or reimbursement is taken into account for deter-
mination of the actual cost of the asset, it will not be treated as income. The
subsidy or grant by the the Central Government for the purpose of the corpus of a
trust or institution established by the Central Government or a the State Govern-
ment, will not be treated as income. The LPG subsidy and other welfare subsidies
received by individuals shall not be included in income. (Press Release, dated
5.5.2015)
(xviii) Any sum of money or value of property received without consideration or for
inadequate consideration by any person from any person or persons on or after
1.4.2017 (For details see chapter 12).
(xix) Compensation or other payment, due or received by any person in connection with
the termination of his employment or modification of the terms and conditions
relating thereto.
(xx) The fair market value of inventory as on the date on which it is converted into, or
treated as, a capital asset (w.e.f. the Assessment Year 2019-20).

10
 CONCEPT OF INCOME
The above definition of income is not conclusive. It includes some other receipts
also which tt rdinarily treated as income. In fact, income means a monetary income
which is derived from definite sources with some sort of regularity or expected regularity.
These definite sources: Incomes are: Salaries, Income from House Property, Profits and
Gains of Business or ression, Capital Gains and Income from Other Sources. Besides this,
there are some other important rules regarding income, which are as under:
1) There should be a definite source of income.
2) An income earned, whether legally or illegally, is taxable under the Income Tax
Act. The me Tax Act does not make any distinction between legal and illegal
income. However, any rnditure incurred to earn an illegal income is allowed to be
deducted out of such income only.
3) It is not necessary that the income should be received regularly and periodically,
say, rrkly, monthly or quarterly. Lump-sum received can also be income, provided
it is income in r v of other factors and considerations.
(4) Income should be received from outside. In an institution, if the income from
subscription m its members exceeds its expenditure on its members the excess
cannot be treated as taxable me, because the subscription was received from
amongst the members themselves and the Ecess represents the excess of income
over expenditure incurred for their own benefit or being, hence this excess is not
received from outside, and will not be income.
Similarly, excess over expenditure, received by a club from facilities provided to
members part of advantages attached to such membership, is not taxable income.
[CIT vs. Bankipur Club Ltd. (1997) 226 ITR 97 (SC)]
(5) It is not essential that the income must be received in the form of money. Receipts
in kind or service having money equivalent can also be income.
(6) Temporary or Permanent Income. Whether the income is temporary or permanent,
it is -material from the tax point of view.
(7) If an assessee has earned an income but has not actually received it, it will be
treated the income of the assessee, because he is entitled to receive it.

11
(8) Reimbursement of expenses is not income. Reimbursement of actual travelling
expenses an employee is not his income.
(9) Where under a legal obligation a charge is created on the income of a person, then
to the extent of such charge it will be deducted from his income.
(10) Receipt on account of dharmada, gaushala, etc. is not income.
(11) Pin Money received by wife for her personal expenses and small savings made by
a man out of money received from her husband for meeting household expenses is
not her income.
(12) Disputed Income. Any dispute regarding the title of income will not postpone or
held if the assessment of such income. It will be taxed in the hands of the recipient
of such income.
(13) Diversion of income vs. the Application of income. Diversion of income means that
the income is diverted to some other person under some legal obligation. If after
receiving the ocome it is given to someone else it is the application of income.
Similarly, if an income is c: verted to some other person voluntarily it is an
application of income. Where by an obligation, income is diverted before it reaches
the assessee, it is diversion of income and not taxable; but where the income is
required to be applied to discharge an obligation after such income reaches the
assessee, the same is merely an application of income and tax liability cannot be
avoided.
(14) Income may be in plus or minus. Minus income means loss, hence losses are also
in included in the term 'Income'.
GROSS TOTAL INCOME
The aggregate of the income under the following heads is known as gross total income:
(i) Income from salaries;
(ii) Income from house property;
(iii) Profit and gains of business or profession;
(iv) Capital gains; and
(v) Income from other sources.

12
 The income under each head is computed after making deductions permissible
under that head. Further, the brought forward losses shall be deducted (as provided
in the Act) to arrive at the assessable income.
TOTAL INCOME [Sec. 2(45)]
Total income means the amount left after making the deductions under sections
80C to 80U from the gross total income.
The amount so arrived is rounded off to the nearest multiple often rupees.

Difference between Gross Total Income and Total Income

Gross Total Income Total Income
1. Aggregate of various heads of income is After deductions under sections 80C to
called 80U, the
Gross Total Income. balance is called Total Income.
2. Gross Total Income is not rounded off. Total Income is rounded off to the nearest
multiple of ten rupees.
3. Tax is not levied on Gross Total Income. Tax is levied on the Total Income at the
prescribed rates.
4. Gross Total Income cannot be less than Total Income can be equal to GTI or less
Total than
Income. GTI.
5. Agricultural income is not included in If agricultural income exceeds f 5,000, it
GTI. is included in the Total Income of an
individual or HUF to determine the tax
payable by the assessee.

AGRICULTURAL INCOME [Sec. 2(1A)]

See chapter on "Agricultural Income".
CASUAL INCOME
Any receipt which is of a casual and non-recurring nature is casual income. In
other words, casual income is that income the receipt of which is accidental and without
any stipulation. It is in nature of an unexpected wind-fall.

13
 Winnings from lottery, crossword puzzles, card games and other games of any sort
or from gambling or betting of any form or nature whatsoever are casual incomes.
Receipts even from habitual betting are non-recurring receipts and assessable as casual
income.
The casual income does not include:
(i) (a) capital gains; or
(b) receipts arising from business or the exercise of a profession or occupation; or
(c) receipts, by way of addition to remuneration of an employee, such as bonus, gratuity,
perquisites, etc.
(ii) Voluntary payment received in exercise of occupation are not treated as casual income,
e.g., tips given in an ordinary way to taxi-drivers in the employ of taxi-owners are income
arising from the exercise of an occupation. Similarly, gratuities to waiters in a hotel are
taxable. A receipt may be taxable as income arising from the legal exercise of the
profession even if the amount is received as a gift from third parties to whom the legal
services were not rendered and who was ler no obligation to pay anything at all.
If an architect submitted a plan in a competition for the construction of a building,
the prize D by him, is income from profession.
(iii) A gift from a relative is not income at all. Birthday and wedding gifts are the
simplest istances in point. A gift from a relative does not become income merely because
it is repeated ar after year. Aregular allowance is given year after year purely as a
voluntary gift by a parent • a child or by a husband to his wife, or by one relation to
another, is merely a fresh gift every me it is paid and does not amount to income.
(iv) Payment by the husband to his wife under an agreement to live apart as
maintenance I wance is neither casual income nor a personal gift. Hence, it is taxable.
OTHER PROVISIONS RELATING TO CASUAL INCOME
(i) Expenses are not deductible. If expenses are incurred to receive casual income,
such expenses are not deductible from any income. For example, an individual purchases
lottery tickets, the cost of lottery tickets is not deductible from any income whatsoever.
Similarly, if stal charges have been paid for sending crossword puzzles, such charges
(expenses) are not :uctible from any income.

14
 (ii) Set-off of losses not permitted. If instead of casual income there is a casual
loss, such ss cannot be set-off from any income. For example, if a person wins in a card
game on the first day and loses the next day, he cannot set-off the loss against any income.
(iii) Tax deduction at source : If the winnings from any lottery, horse race,
crossword puzzle, :ard game and other game of any sort exceed Rs 10,000, the tax will be
deducted at source at the prescribed rate.
(iv) Rate of tax. On winning from lottery, crossword, puzzle, races, gambling,
betting, etc. tax is chargeable @ 30%.
AGRICULTURAL INCOME
AGRICULTURAL INCOME [Sec. 2(1A)]
The meaning of the term agricultural income can be explained with the help of the
following chart:
Agricultural Income
A B C
Any rent or revenue derived (i) Any income derived from Any income from a farm
from land, (ii) which is such land by agricultural house.
situated in india and (iii) is operations or (ii)any process by
used for agricultural cultivator or receiver of rent-in-
purposes. kind, which renders the produce
fit for the market or (iii) the sale
of such produce

Note: Capital Gains arising from the transfer of agricultural land shall not be treated as
agricultural income.
If the following conditions are satisfied the income from land is treated as
agricultural income:
1. The land must be situated in India. If the land is situated outside India, the income
from such land will not be treated as agricultural income.
2. Land must be used for agricultural purposes. It means, tilling of the land, watering
it, sowing of the seeds, planting and similar operations on the land must be carried
out by the assessee.

15
3. The receiver of income from the land must have an interest in the land. The
landlord or tenant or usufructuary mortgagee of the land has an interest in the land.
If a person purchases a standing crop and after cutting it, sells it and makes a
profit, the profit is not agricultural income.
4. The direct income from agriculture is treated as agricultural income. An indirect
income from agriculture is not agricultural income. For example, the salary of a
farm manager or dividend from a company engaged in agricultural activities is not
agricultural income.
KINDS OF AGRICULTURAL INCOME
(1) Rent or revenue derived from land. When one person grants to another a right
to use - and for agricultural purposes, the former receives from the latter rent or revenue
(in cash - kind) in consideration of such user. Such rent or revenue is treated as
agricultural income.
(2) Income from agricultural operations. It means cultivation of a field, tilling of
the land, storing it, sowing of the seeds, planting and similar operations on the land.
Products which grow wild on the land or are of spontaneous growth not involving any
oman labour or skill upon the land are not products of agriculture. The income derived : -
rrefrom is not agricultural income.
(3) Income from making produce fit for market. If there is no market of the
produce of the i and the cultivator or receiver of rent-in-kind performs any activity to
make the produce fit for market, any income from such activity is also agricultural
income. The process employed in curing of coffee, flue curing of tobacco, ginning of
cotton, etc., is such a process.
(4) Income from the sale of produce. Income derived by a cultivator or receiver or
rent-in-kind from the sale of produce raised or received by him is treated as agricultural
income, even if he keeps a shop for the sale of such produce.
(5) Income from a farmhouse. The income from a farmhouse is treated as
agricultural income if the following conditions are satisfied:
(i) the building is owned and occupied by the cultivator or receiver of the rent or
revenue of any such land;
(ii) it is situated on or in the immediate vicinity of the agricultural land;

16
(iii) the building is, by reason of his connection with the land, used as a dwelling house
or a store-house or an out-house by the cultivator or receiver of rent-in-kind;
(iv) the land is situated in an urban area and is either assessed to land revenue in India
or is subject to a local tax assessed and collected by the officers of the government.
If the land revenue or local tax is not payable on such land:
(i) The land is situated in the 'non-urban' area; or
(ii) The land is situated within municipality or cantonment board jurisdiction, has a
population of less than 10,000; or
(iii) The farm building is not situated within the area specified below; the income
derived from such building shall be agricultural income:
The land is not situated in any area within the distance, measured aerially:
(a) not being more than two kilometres from the local limits and which has a
population more than ten thousand but not exceeding one lakh; or
(b) not being more than six kilometres from the local limits and which has a
population of more than one lakh but not exceeding ten lakhs; or
(c) not being more than eight kilometres from the local limits and which has a
population more than ten lakh.
(6) Income from saplings or seedlings. The income derived from saplings or
seedlings grown in a nursery shall be deemed to be agricultural income.

IMPORTANT POINTS REGARDING COMPUTATION OF AGRICULTURAL

INCOME
(1) Agricultural Income by way of rent or revenue derived from land which is situated
in India and is used for agricultural purpose is computed as if it were income
chargeable to income tax under the head 'Income from Other Sources'.
(2) Agricultural Income from Agricultural building is computed as if it were income
chargeable to income tax under the head 'Income from House Property'.
(3) Any other agricultural income is computed as if it were income chargeable to
income tax under the head 'Profits and Gains of Business or Profession'.
Note: If payment exceeding? 10,000 has been made under (1) or (3) without account
payee cheque or account payee bank draft or use of electronic clearing system

17
 through a bank account, even than the whole amount shall be allowed as a
deduction.
(4) Any sum payable by the assessee on account of any tax levied by the State
Government on the agricultural income shall be deducted in computing the
agricultural income.
(5) Where in respect of any source of agricultural income there is a loss, such loss
shall be set-off against any other source of agricultural income.
(6) Where the assessee is a member of an association of persons or body of individuals
and his share in the agricultural income of the association or body is a loss, such
loss shall not be set-off against any other agricultural income of the assessee.
(7) If there is loss from agriculture, it can be carried forward and set-off against
agricultural income in the following eight years provided the return of income has
been filed and such loss has been determined by the Assessing Officer.
(8) Where the net result of the computation made in accordance with these rules is a
loss, the loss so computed is ignored and the net agricultural income is deemed to
be nil.
(9) The net agricultural income is rounded-off to the nearest multiple of rupees ten.

Non-Agricultural Incomes from Land

The following incomes are not derived from land used for agricultural purposes,
hence they ire non-agricultural incomes:
(i) Income from markets;
(ii) Income from stone quarries;
(iii) Income from mining royalties;
(iv) Income from land used for storing agricultural produce;
(v) Income from the supply of water for irrigation purposes (e.g., income from the
supply of water for irrigation from a tube-well or well, as it does not involve any
agricultural operation);
(vi) Income from self-grown grass, trees or bamboos;
(vii) Income from fisheries;
(viii) Income from the sale of the earth for brick-making;

18
(ix) Remuneration received as manager of an agricultural farm;
(x) Dividend from a company engaged in agriculture;
(xi) Income of the buyer of a ripe crop;
(xii) Income from dairy farm, poultry farming, etc.; and
(xiii) Income from interest on arrears of rent of agricultural land.

19
 RESIDENCE AND TAX LIABILITY

BASIS OF CHARGE
An assessee may earn his income in India or outside India or at both places. Which
income is assessable in India depends on the residential status of an assessee?
RESIDENCE OF ASSESSEES
The scope of the total income of an assessee along with his residential status is
determined with reference to his residence in India in the previous year. Residence and
citizenship are two different aspects. The incidence of tax has nothing to do with
citizenship. (Sec. 5)
An Indian may be non-resident and a foreigner may be resident for income tax
purposes.
The residence of a person may change from year to year but citizenship cannot be
changed every year.
A person may be a resident in more than one country for the same previous year. >
Different Types of Residents (Sec. 6)
On the basis of residence, the assessees are divided into three categories, viz. :
(1) Persons who are resident in India, popularly known as ordinarily resident.
(2) Persons who are not ordinarily resident in India.
(3) Persons who are non-resident.
Types of residents can be illustrated with the help of the following chart:
Types of Residents
Resident Non-Resident
Ordinarily Resident Not Ordinarily Resident
There are separate rules for determining the residence of different kinds of
assessees. The different kinds of assessees are individuals, Hindu undivided families,
firms, an association of persons, companies, local authorities and artificial juridical
persons.

20
 INDIVIDUALS
The residence of an individual is determined on the basis of the rules stated hereunder:
I. Resident (Ordinarily Resident)
An individual is said to be resident in India in any previous year if he satisfies any
one of the following basic conditions: [Sec. 6(1)]
(a) he is in India in the previous year for a period of 182 days or more, or
(b) he has been in India for at least 365 days during the four years preceding the
previous year and is in India for at least 60 days during the previous year.
Explanation 1. Exceptions to the above rules of 60 days'stay in India:
(i) An individual who is a citizen of India and leaves India in any previous year for
the purpose of employment or as a member of the crew of an Indian ship must
have stayed in India for at least 182 days during the previous year instead of 60
days;
(ii) If any citizen of India or a foreign national of Indian origin, who is living outside
India, comes on a visit to India in the previous year, he must have stayed in India
for at least 182 days during the previous year instead of 60 days. In other words, in
the case of individual covered by the above two exceptions only condition is to be
satisfied to become a resident in India and condition (b) has no significance at all.
In exception (i) 'employment' includes self employment like business or profession
taken by assessee abroad. [CIT vs. O. Abdul Razak (2012) 198 Taxman 1 (Ker.)]
For calculating number of days stay in India, days of entry and exit should be
included in the period of stay in India. (The Authority for Advance Rulings 1995 ITR 223
p. 462)
Indian origin' means that either he or either of his parents or any of his grand
parents 5 born in undivided India. Further, 'comes on a visit to India in the previous year'
means that may come to India for any purpose, whatsoever. It may be a business purpose
or personal rpose of any nature or he may come to meet his relations or he may come for a
pleasure trip
Explanation 2. An individual who is a citizen of India and a member of the crew
of a foreign md ship leaving India, the period or periods of stay in India shall, in respect of

21
such voyage, determined as may be prescribed. Stay in India for 182 days or more As per
the first basic condition, it is necessary that the individual must have stayed here in India
for at least 182 days during the previous year. It is not at all necessary that should stay at a
stretch for 182 days. His total stay for at least 182 days maybe with gaps. It ilso not
necessary that the entire stay should be in one place. It may be at different places in dia.
in India for at least 365 days during the four years preceding the previous year and for
at least 60 days or 182 days, as the case may be, during the previous year
If an individual's total stay in India during the four years preceding the previous
year is at least 365 days and rather he remains in India for at least 60 days or 182 days, as
the case ybe, during the previous year, he will become resident for that previous year.
Here again, it is not necessary that he should stay during the previous year in India
at a stretch 60 days or 182 days, as the case may be, or the entire stay need not be at one
place only.
Additional Conditions: In fact, in order that an individual may become ordinarily
resident .r.dia, he is to satisfy both the following conditions besides satisfying any one of
the above ntioned basic conditions : [Sec. 6(6)(a)]
i ) he has been resident in India in at least two out of the ten previous years
preceding the relevant previous year, and
ii) he has been in India for at least 730 days in all during the seven previous years
preceding the relevant previous year.
In condition (i) residence of two years out of ten years preceding the previous year
means it the assessee must have satisfied at least one of the basic conditions for two years
out of ten preceding the previous year. In condition (ii) the assessee must be physically
present in a for at least 730 days during the seven previous years preceding the relevant
previous year.
II. Not Ordinarily Resident
If an individual satisfies any one of the above basic conditions (a) or (b) but does
not satisfy aforesaid two additional conditions, he is said to be 'Not Ordinarily Resident'.
[Sec. 6(6)(a)]
It means that in order to be classified as not ordinarily resident an individual
resident has arove that either he has been resident in India in less than two out of ten the

22
previous years. L dmg the relevant previous year or has been in India for less than 730
days during the seven previous years preceding the relevant previous year.
In other words, an individual is said to be "Not Ordinarily Resident" in India in any
the previous year if:
(i) he has been a non-resident in India in nine out of the ten the previous years
preceding that year, or (ii) he has during the seven years preceding that year been in India
for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.
Since the incidence of tax is lesser in the case of a not ordinarily resident as compared to
an ordinarily resident it is for the assessee to prove that he does not satisfy at least one of
the additional conditions in order to be called Not Ordinarily Resident.
III. Non-resident
If an individual satisfies none of the aforesaid basic conditions (a) and (b) stated
under the head 'Resident'he is said to be Non-Resident. In this case, additional
conditions are irrelevant.

23
 UNIT-II
EXEMPTIONS FROM TAX

NON-TAXABLE INCOME
Exempted income is that income on which income tax is not chargeable. Exempted
incomes not even included in total income.

Exempted incomes can be classified in the following categories:

(a) For all assessees;
(b) For employees and for institutions.

(A) FOR ALL ASSESSEES [NOT COVERED UNDER (B) OR (C)]

(1) Agricultural Income. Such income is exempt if agricultural land is situated in
India. : details see the chapter on'Agricultural Income'. [Sec. 10(1)]
(2) Sums received from H. U.F. Any sum received by an individual as a member
of a Hindu iivided Family out of the income of the family is exempt from tax. [Sec. 10(2)]
(3) Share of income of a partner from the firm. A partner of a firm will be exempt
from tax bis share of income in the firm, which shall be computed by dividing the taxable
profits of firm in the same proportion as the profit-sharing ratio mentioned in the
partnership deed.
[Sec. 10(2A)]
(4) Payments under Bhopal Gas Leak Disaster Act, 1985. Such payments
received by a rson will be exempt from tax but any payment in this connection for which
deduction has ready been allowed will not be exempt. [Sec. 10(10BB)]
(5) Compensation of disaster. Any amount received or receivable from the Central
Govern or a State Government or a local authority by an individual or his legal heir by
way of rnpensation on account of any disaster shall be exempt. [-Sec. 10(10BC)]
However, such amount to the extent allowed as a deduction under this Act on
account of my loss or damage caused by such disaster shall not be exempt.

24
 (6) Life Insurance Money. Any sum received under a life insurance policy
including bonus . all be exempt. [Sec. 10(10D)]
Exceptions. The amount shall not be exempt in the following cases:
(i) Amount received under a Keyman insurance policy.
(ii) Any sum received under an insurance policy issued after 31.3.2003 but before
1.4.2012 in respect of which the premium payable for any of the years during the term of
the policy exceeds 20% of the actual capital sum assured.
(iia) Any sum received under an insurance policy issued after 31.3.2012 in respect
of which the premium payable for any of the years during the term of the policy exceeds
10% of the actual capital, sum assured.
(iib) Any sum received under an insurance policy issued after 31.3.2013 in respect
of which the premium payable for any of the years during the term of the policy exceeds
15% of the capital, sum assured if the policy is for insurance on the life of any person,
who is :
(a) a person with a disability or a person with a severe disability; or
(b) suffering from disease or ailment as specified under section 80 DDB.
"Actual capital sum assured" means the minimum amount assured under the policy
on happening of the insured event at any time during the term of the policy, not taking into
account:
(a) the value of any premium agreed to be returned; or
(b) any benefit by way of bonus or otherwise over and above the sum actually
assured, which is to be or may be received under the policy by any person.
However, if the sum is received on the death of a person it shall be exempt.
(7) Any payment from Sukanya Samriddhi Account. [Sec. 10(11A)]
(8) Payment from National Pension System Trust. [Sec. 10Q2A)] Any payment
from the National Pension System Trust to an assessee (w.e.f. A.Y. 2019-20) on the
closure of account or his opting out of the pension scheme (referred to in Sec. 80CCD), up
to 40% of the total amount payable to him shall be exempt.
(9) Partial withdrawal from National Pension System Trust [Sec. 10(12B)]
Partial withdrawal by an employee from National Pension System Trust (in accordance
with the terms and conditions specified under Pension Fund Regulatory Development

25
Authority Act, 2013 and regulations made thereunder) up to 25% of the amount of
contributions made by him shall be exempt.
(10) Interest of different types. The following interest incomes are fully exempt
from tax: [Sec. 10(15)]
(i) Interest and premium on redemption of notified securities, bonds or certificates.
Such as:
(a) National Defence Gold Bonds, 1980,
(b) Special Bearer Bonds, 1991,
(c) Post Office Cash Certificates (5 Years),
(d) P.O. Savings Bank Account,
(i) Individual account—Maximum exemption limit ? 3,500.
(ii) Joint account—Maximum exemption limit ? 7,000.
(e) P.O. Cumulative Time Deposit Account,
(f) Public Account of P.O. Savings Account Rules (interest up to ? 5,000), and
(g) Special Deposit Scheme, 1981 and Non-Resident (Non-Repatriable) Rupee
Deposit Scheme. [Notification No. GSR 607(E) 9.6.1989]
(11) In the case of an individual or H. U.F. Interest on 7% Capital Investment Bonds
notified in the Official Gazette by the Central Government before 1.6.2002.
(iii) Interest on such bonds which are notified before 1.6.2002 and arising to :
(a) a non-resident Indian, being an individual owning the bonds, e.g., N.R.I. Bonds,
1988 issued by the State Bank of India; or
(b) any individual owning the bonds by virtue of a nominee or survivor of the non-
resident Indian; or
(c) any individual to whom the bonds are gifted by the non-resident Indian. The above
exemption shall be allowed if the prescribed conditions are satisfied.
(iv) Interest on Securities held by the Welfare Commissioner, Bhopal Gas Victims
Bhopal in the Reserve Bank of India. The amount of compensation to be paid to the
victims of Bhopal Gas Tragedy has been deposited in the Reserve Bank of India in
the form of Central Govt. Securities in the name of the Welfare Commissioner,
Bhopal Gas Victims, Bhopal.
Interest on deposits with the Reserve Bank of India or with a notified public sector

26
bank, held for the benefit of the victims of the Bhopal gas leak disaster.
Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or
deposit certificates issued under the Gold Monetisation Scheme, 2015 notified by the
Central Government.
Interest on bonds (a) issued by a local authority or by a State Pooled Finance Entity
and (b) specified by the Central Government by notification, shall be exempt. Interest
received by a non-resident or not ordinarily resident in India on the deposit made after
31.3.2005 in an Offshore Banking Unit, shall be exempt. 11) Educational Scholarship.
Scholarships granted to meet the cost of education, whether by iTvirnment or any other
organisation are fully exempt. [Sec. 10(16)]
(12) Allowances ofM.Ps., M.L.As. and M.L.Cs.: [Sec. 10(17)]
(i) Daily allowances (Entire amount is fully exempt);
(ii) Any other allowances received by any member of Parliament (Entire amount is
fully exempt);
(iii) Any constituency allowance received by a member of any State Legislature under
any Act or rules made by that State Legislature.
(13) Awards: Any payment made, whether in cash or in kind : [Sec. 10(17A)]
i) as an award instituted in the public interest by the Central Government or any State
Government or by any other body and approved by the Central Government in this
behalf; or
ii) as a reward by the Central Government or any State Government for such purposes
as may be approved by the Central Government in the public interest is fully
exempt.
Under clause (ii) the Central Government has approved the Swatantrata Sainik
Pension Scheme, 1980.
(14) Pension of gallantry awardee. Pension received by an individual who has been in
ce of the Central or State Governments and has been awarded 'Param Vir Chakra'
or havir Chakra' or 'Vir Chakra' or such other gallantry award as the Central
Government may -: :v shall be exempt. [(Sec. 10(18)]
(15) Family pension of a member of armed forces. Family pension received by the
widow or ren or nominated heirs of a member of the armed forces (including

27
 paramilitary forces) of Union, where the death of such member has occurred in the
course of operational duties be exempt provided the prescribed conditions are
satisfied, [Sec. 10(19)]
(16) Annual value of one palace of Rulers of Indian States. The annual value of one
palace c the occupation of a Ruler of an Indian State is fully exempt. [Sec.
10(19A)]
If a portion of the palace is let out on rent, the annual value of such portion is not
exempt. [Maharaval Laxman Singh (1986) 160 ITR 103]
(17) Income of Scheduled Tribes. The following incomes of members of scheduled
tribe residing in any tribal area or in the States of Arunachal Pradesh, Manipur,
Mizoram, Nagaland, ira and Sikkim or Ladakh region of the State of J. & K. are
fully exempt: [Sec. 10(26)]
(i) which accrues or arises to them from any source in the tribal area or States aforesaid; or
ii) by way of dividend or interest on securities wherever accrues or arises.
18) Certain income of Sikkimese. [Sec. 10(26AAA)] The following incomes of an
individual being a Sikkimese (as defined in the Act) shall be rxempt:
(i) Income from any source in the State of Sikkim; or
(ii) Income by way of dividend or interest on securities.
However, if a Sikkimese woman marries on or after 1.4.2008 with a non-
Sikkimese, she will not be entitled to the exemption.
(19) Any income of an agricultural produce market committee or board constituted under
any law for the purpose of regulating the marketing of agricultural produce. [Sec.
10(26AAB)]
(20) Subsidy from Tea Board. In the case of an assessee who carries on the business of
growing and manufacturing tea in India, the amount of any subsidy received from or
through the Tea Board for the following purposes shall be exempt: [Sec. 10(30)]
(i) Replantation or replacement of tea bushes; or
(ii) For rejuvenation or consolidation of areas used for cultivation of tea.
Such exemption will be available only if the assessee furnishes to the Assessing
Officer with his return a certificate from the Tea Board as to the amount of subsidy
received by him during the previous year.

28
 (21) Subsidy received by planters. The amount of any subsidy received by an
assessee engaged in the business of growing and manufacturing rubber, coffee, cardamom
or other specified commodity in India, from or through the Rubber Board, Coffee Board,
Spices Board or any Board in respect of any other commodity for the following purposes
shall be exempt: [Sec. 10(31)]
(i) Replantation or replacement of rubber, coffee, cardamom or other plants; or
(ii) For rejuvenation or consolidation of areas used for cultivation of such
commodities.
(22) Income of a minor child. If the income of an individual includes the income
of his minor child or minor children (boy or girl whose age is below 18 years) such
individual shall be entitled to exemption of actual amount or ? 1,500 in respect of each
minor child, whichever is less. [Sec. 10(32)]
(23) Income from units of Unit Scheme, 1964. Any income from transfer of a unit
of the Unit Scheme, 1964 of the Unit Trust of India, where the transfer takes place on or
after 1.4.2002. [Sec. 10(33)]
The benefit of exemption is available to an investor and not to a person holding
units as stock-in-trade of business.
(24) Dividend Income. Dividend received by a shareholder from a domestic
company shall be exempt. [Sec. 10(34)]
However, dividend in aggregate in excess of f ten lakh shall be chargeable to tax
@ 10% in the case of all residents in India except a domestic company, [Sec. 115
BBDA]
(25) Any Income arising to a shareholder on account of buyback of shares (not
being shares listed on a recognised stock exchange) by the domestic company shall be
exempt. [Sec. 10 (34 A)]
(26) Income from units: [Sec. 10(35)]
(a) Income received in respect of units of a Mutual Fund specified u/s 10(23D); or
(b) Income received in respect of units from the Administrator of the specified
undertaking; or
(c) Income received in respect of units from the specified company.
However, the income arising from the transfer of aforesaid units shall not be exempt.

29
(27) Income from Equity Shares. Any income arising from the transfer of a long-term
capital asset, being equity shares of a company (listed in recognised stock exchange in
India) purchased after 28.2.2003 and before 1.3.2004 and held for a period of twelve
months or more. [Sec. 10(36)]
(28) Capital gains on transfer of Agricultural land. Any capital gain arising on the
transfer of agricultural land situated in an urban area shall be exempt subject to the
following conditions: [Sec. 10(37)]
(i) The agricultural land is owned by an individual or a HUF.
(ii) The agricultural land was, in the two years immediately preceding the date of transfer,
being used either by the HUF or individual or his parent for agricultural purposes.
iii) The transfer of land is by way of compulsory acquisition under any law, or a transfer
the consideration for which is determined by the Central Government or the R.B.I.
iv) Such income has arisen from the compensation or consideration (including enhanced
compensation or consideration) for such transfer.
(29) Tax incentive for the development of Capital of Andhra Pradesh. Who is entitled to
emption: An individual or HUF who was the owner of a capital asset on 2.6.2014.
Conditions for exemption of capital gains : [Sec. 10 (37A)]
(I) The assessee transfers the capital asset under the Andhra Pradesh Capital City Land
Pooling Scheme.
(ii) The reconstituted plot or land received by the assessee in lieu of capital asset under the
heme is transferred within two years from the end of the financial year in which the
possession such plot or land was handed over to him, the capital gains shall be exempt.

Capital asset: It includes

a) Land or building or both; or
b) the land pooling ownership certificate issued under the scheme to the assessee in
respect and or building or both.
(30) Long-term capital gains on transfer of an equity share or a unit. If the following □
iitions are satisfied, the capital gains shall be exempt: [Sec. 10(38)]
a) Equity shares in a company or units of an equity-oriented fund or unit of a business

30
trust is a long-term capital asset, Such a transaction is chargeable to Securities Transaction
Tax.
However, long-term capital gain of a company shall be taken into account in computing
xok-profit u/s 115JB.
Explanation: 'Equity oriented fund' means a fund: where more than 65% of the investible
funds are invested by way of equity shares in
domestic companies, and ii) which has been set-up under a scheme of a Mutual Fund
specified u/s 10(23D). If the above-mentioned assets are transferred on or after 1.4.2018,
the exemption shall not be allowed w.e.f. the Assessment Year 2019-20.
(31) Income from an international sporting event. Any specified income (notified by the
ntral Government) arising from any international sporting event held in India shall be
exempt be following conditions are satisfied: [Sec. 10(39)]
(i) The sporting event is approved by the international body regulating the international
sport relating to such an event, ii) More than two countries have participated in the
sporting event.
(32) Income of the subsidiary company. Any income of any subsidiary company by way
of ant or otherwise received from Indian holding company engaged in the business of
generation, osmission or distribution of power shall be exempt if: [Sec. 10(40)]
(i) the receipt of such income is for settlement of dues in connection with reconstruction
or revival of an existing business of power generation; i ii) the Indian company is formed
before 30.11.2005 with majority equity participation by public sector companies and
notified by the Central Government before 31.12.2005.
(33) Specified Income of a Body or Authority. Any specified income arising to a body or
an authority which: [Sec. 10(42)
(a) has been established or constituted or appointed under a treaty or an agreement entered
into by the Central Government with two or more countries or a convention signed by the
Central Government;
(b) is established or constituted or appointed not for the purposes of profit;
(c) is notified by the Central Government in the Official Gazette for the purposes of this
clause.

31
Explanation. 'Specified income' means the income, of nature and to the extent, arising to
the body or authority which the Central Government may notify in this behalf.
(34) Any amount received by an individual as a loan, either in a lump sum or in
installment, in a transaction of reverse mortgage shall be exempt. [Sec. 10(43)]
(35) Allowance or perquisite paid to the Chairman or member of the Union Public
Service Commission: [Sec. 10(45)]
Any allowance or perquisite paid to the Chairman or a retired Chairman or any other
member or retired member of the Union Public Service Commission shall be exempt,
provided it is so notified by the Central Government.
(36) Income from newly established Units in Special Economic Zones. (Sec. 10AA) Who
is entitled to deduction? An undertaking being the Unit, which fulfills the following
conditions:
(i) It begins to manufacture or produce articles or things or provide any services (including
computer software) after 31.3.2005 but before 1-4-2020 in any Special Economic Zone.
(ii) It is not formed by splitting up or the reconstruction of a business already in existence,
(iii) It is not formed by the transfer to a new business of machinery or plant (not exceeding
20% of total value) previously used for any purpose. Quantum of Deduction : (i) 100% of
profits and gains derived from the export of such articles or things or from services for
five initial the assessment years.
(ii) 50% of such profits and gains for further five assessment years.
(iii) For the next five consecutive assessment years, 50% of such profits and gains or the
amount debited to P & L A/c and credited to the 'Special Economic Zone Re-investment
Allowance Reserve Account', whichever is less.
Explanation. It is clarified that the amount of deduction u/s 10AA shall be allowed
from the total income of the assessee before giving effect to the provisions of sec. 10AA
and the deduction u/s lOAAin no case shall exceed the total income (w.e.f. the Assessment
Year 2018-19).
Where a deduction has been claimed and allowed in this section in respect of any
specified business (see Sec. 35AD) for any the assessment year, no deduction shall be
allowed under sec. 35AD in relation to such specified business for the same or any other
the assessment year.

32
 Utilisation of the amount credited to the reserve account. The amount credited to
the Reserve Account should be utilised:
(i) for acquiring machinery or plant which is first put to use before the expiry of
three years next following the previous year in which the reserve was created; and
(ii) until the acquisition of plant or machinery for the purposes of the business of
the undertaking.
However, the amount cannot be distributed by way of dividends or profits or for
remittance outside India as profits or for the creation of any asset outside India. Exceptions
regarding the period of deduction:
(i) Where the Unit has claimed exemption u/s 10A, it shall be entitled to deduction
only for the unexpired period.
(ii) Where the Unit had already availed, before the commencement of the Special
Economic "xr? Act, 2005, the deductions u/s 10A for ten consecutive the assessment
years, it shall not ^-titled to deduction under this section.
Computation of Profits for the deduction. Profits derived from the aforesaid
business shall be the amount which bears to the profits of the business of the Unit, the
same proportion as the port turnover' bears to the total turnover of the business carried on
by the undertaking.
Explanation: (i) 'Export turnover'means the consideration in respect of export by
the Unit be articles or things or services received in, or brought into, India by the assessee.
(ii) Export in relation to the Special Economic Zones' means taking goods or providing kes
out of India from a Special Economic Zone by land, sea, air or by any other mode, rther
physical or otherwise.
Withdrawal of certain benefits: (i) The unabsorbed depreciation allowance, the
unabsorbea ital expenditure on scientific research, the unabsorbed capital expenditure on
family planar relating to the relevant assessment years ending before 1.4.2006 will not be
carried forward d set-off.
ii) Unabsorbed business losses or loss under the head 'capital gains' relating to the
relevant essment year ending before 1.4.2006 will not be carried forward and set-off.

33
 iii) No deduction shall be allowed u/s 80-IAor section 80-IB in relation to such
profits. Set-off of loss. Business loss or loss under the head 'capital gains' relating to the
business the Unit shall be allowed to be carried forward or set-off.
Deduction in case of amalgamation or demerger. Where a Unit which is entitled
to the faction is transferred before the expiry of the period specified in this section to
another Unit a -cheme of amalgamation or demerger:
a) No deduction shall be allowed to the amalgamating or the demerged Unit being
a company for the previous year in which the amalgamation or the demerger
takes place;
b) The deduction shall be allowed to the other Unit for the unexpired period.

IMPORTANT EXEMPTED INCOMES: AT A GLANCE

Exempted Income Exemption Limit
Agricultural Income—if the land is situated in India Exempt
Receipt from H. U. F. Exempt
Share of income of a partner from the firm Exempt
Interest on 7% Capital Investment Bonds; 8% Relief Exempt
Bonds, 2002; 6.5% Savings Bonds, 2003; Post office Exempt
Savings Account (Individual Account Rs 3,500, Joint Exempt
Account Rs 7,000), etc. Exempt up to Rs 1,500 for
Scholarship each minor child
Apr , ed awards Exempt
Income of a minor child, which has been included in Exempt
the income of the parent Exempt
Income from units of Unit Scheme, 1964 Dividend Exempt
from a domestic company or Income from Units.
Capital gains on transfer of agricultural land Payment
from Sukanya Samriddhi Account

34
 (B) FOR EMPLOYEES
(1) Leave Travel Concession to an Employee. See the chapter on Salaries, sub-head 'Tax-
free Perquisites'. [Sec. 10(5)]
(2) Allowances or Perquisites outside India. See the chapter on 'Salaries', sub-heads
'Allowances' and 'Tax-free Perquisites'. [Sec. 10(7)]
(3)Death-cum-retirement Gratuity. See the chapter on 'Salaries', sub-head 'Different
Forms of Salary'. [Sec. 10(10)]
(4) Commutation of Pension. See the chapter on 'Salaries', sub-head 'Different Forms of
Salary'. [Sec. 10Q0A)]
(5) Leave Salary or Encashment of Earned Leave. See the chapter on 'Salaries', sub-head
'Different Forms of Salary'. [Sec. 10(10AA)]
(6) Compensation on Retrenchment. See the chapter on 'Salaries', sub-head 'Different
Forms of Salary'. [Sec. 10(1 OB)]
(7) Compensation on Voluntary Retirement. See the chapter on 'Salaries', sub-head
'Different Forms of Salary'. [Sec. 10(10C)]
(8) Tax Paid by Employer on the Value of Perquisites. See the chapter on 'Salaries'.
[Sec. 10(10CC)]
(9) Payment from Statutory Provident Fund. See the chapter on 'Salaries', sub-head
'Payments Received from Funds'. [Sec. 10(11)]
(10) Payment from Recognised Provident Fund. See the chapter on 'Salaries', sub-head
'Payments Received from Funds'. [Sec. 10(12)]
(11) Payment from Approved Superannuation Fund. See the chapter on 'Salaries', sub-
head 'Payments Received from Funds'. [Sec. 10(13)]
(12) House Rent Allowance. See the chapter on 'Salaries', sub-head 'Allowances'.
[Sec. HX13A)]
(13) Special Allowances for meeting certain expenditure. See the chapter on 'Salaries',
sub-head 'Allowances'. [Sec. 10(14)]

35
 (C) FOR INSTITUTIONS
(1) Income of a Local Authority. Following incomes of a local authority are exempt:
[Sec. 10(20)]
(1) 'Income from House Property', or
(ii) 'Capital Gains', or
(iii) 'Income from Other Sources', or
(iv) From services or business carried on by it within its own jurisdiction, or
(v) From the supply of water or electricity outside its jurisdiction.
Explanation. 'Local authority' shall mean : (i) Panchayat; or (ii) Municipality; or (iii)
Municipal Committee^and District Board, legally entitled to, or entrusted by the Govern-
ment with, the control or management of a Municipal or local fund; or (iv) Cantonment
Board.
(2) Income of Research Association. Any income of a research association approved
under section 35(l)(ii) or under section 35(l)(iii) is fully exempt. [Sec. 10(21)]
Exemption shall be available to a research association which undertakes scientific research
or research in social science or statistical research provided such research association is
approved and notified u/s 35(l)(ii) or 35(l)(iii).
(3) Income of News Agency. The income of a notified news agency set-up in India solely
for collection and distribution of news, shall be exempt if the following conditions are
satisfied: [Sec. 10(22B)]
(i) The news agency applies its income or accumulates it for application solely for
collection and distribution of news.
(ii) It does not distribute its income in any manner to its members.
(4) Income of Professional Institutes. Any income (other than 'Income from House
Property' v income received for rendering any specific services or income by way of
interest or dividends: from its investments) of an association or institution established in
India with the object of osrol. supervision, regulation or encouragement of the profession
of law, medicine, accountancy, - ring, architecture or such other profession as the Central
Government may notify from t ? time in Official Gazette. [Sec. 10(23A)]
This income is exempt only when the following conditions are satisfied:

36
The association or institution applies its income or accumulates it for application, solely
for its objects; and
The association or institution is approved for the purpose of this clause by the Central
Government.
Income of Regimental Fund or Non-Public Fund. The income derived by any
Regimental or Non-Public Fund established by the armed forces of the Union for the
welfare of their id present members and their dependants is fully exempt. [Sec. 10(23AA)]
6 Income of a Fund for Welfare of Employees or their Dependants. Income of a notified
established for the welfare of employees or their dependants, if such employees are also
ers of this fund, shall be exempt. [Sec. 1CH23AAA)]
7' Income of Pension Fund set-up by L.I. C. of India or another Insurer. The income is
exempt led the fund is set-up by: [Sec. 10(23AAB)]
i) the Life Insurance Corporation of India on or after 1st August, 1996, under a
pension scheme, or
ii) I any other insurer under a pension scheme to which contribution is made by
any person for receiving a pension from such fund and which is approved by
the Controller of Insurance/the Insurance Regulatory and Development
Authority.
8) Income ofKhadi and Village Industries. The income of an institution established as a
ist or society for the purpose of development of Khadi and Village Industries (not for
profit) he production, sale or marketing ofKhadi or products of Village Industries is fully
exempt. [Sec. 10(23B)]
9) Income of Khadi and Village Industries Board. The income of Khadi and Village I .is
tries Boards established in a State by or under a State or Provincial Act for the develop-nl
ofKhadi or Village Industries in the State is fully exempt. [Sec. 10(23BB)]
10) Income of statutory authority for the administration of Public Religious or
Charitable hufe. The income of any body or authority established under any Act for the
administrationany public religious or charitable trusts or endowments (including maths,
temples, iwaras, wakfs, churches or other places of public religious ownership or societies
for religious naritable purpose) is fully exempt. It is very clear in this provision that the

37
exemption will apply to the income of any such trust, endowment or society. [Sec.
10(23BBA)]
11) Income of the European Economic Community. Any income of the European
Economic mmunity derived in India by way of interest, dividends or capital gains from
investments out of its funds under a notified scheme is exempt. [Sec. 10(23BBB)]
112) Income of SAARC Fund. Any income of the South Asian Association for Regional -
operation Fund for Regional Projects set-up by the Colombo Plan Declaration shall be
rempt. [Sec. 10(23BBC)]
(13) Any income of the Insurance Regulatory and Development Authority shall be
exempt. [Sec. 10(23BBE)]
(14) Any income of the Central Electricity Regulatory Commission shall be exempt. [Sec.
10(23BBG)]
(15) Any income of the Prasar Bharati (Broadcasting Corporation of India) shall be
exempt. [Sec. 10 (23BBH)]
(16) Income of Specified Charitable Funds. The income of the following funds or trusts
is fully exempt: [Sec. 10(230]
(i) The Prime Minister's National Relief Fund;
(ii) The Prime Minister's Fund (Promotion of Folk Art);
(iii) The Prime Minister's Aid to Student Funds;
(iv) The National Foundation for Communal Harmony;
(v) Swachh Bharat Kosh;
(vi) Clean Ganga Fund;
(vii) The Chief Minister's Relief Fund or the Lieutenant Governor's Relief Fund;
(viii) Any university or other educational institution existing solely for educational
purposes and not for purposes of profit:
(a) which is wholly or substantially financed by the Government; or
(b) the aggregate annual receipts of such university or educational
institution do not exceed one crore rupees; or
(c) which may be approved by the Commissioner of Income Tax
(Exemptions);

38
 (ix) Any hospital or other institution for the reception and treatment of persons
suffering from illness or mental defectiveness or for the reception and treatment of
persons during convalescence or of persons requiring medical attention or
rehabilitation, existing solely for philanthropic purposes and not for purposes of
profit:
(a) which is wholly or substantially financed by the Government; or
(b) the aggregate annual receipts of such hospital or institution do not
exceed one crore rupees; or
(c) which may be approved by the Commissioner of Income Tax
(Exemptions);
(x) Any other Fund or Institution established for a charitable purpose and approved
by the Commissioner of Income Tax (Exemptions);
(xi) Any trust or institution established wholly for public religious purpose or
public religious and charitable purpose which is approved by the Commissioner of
Income Tax (Exemptions).
However, any anonymous donation shall be included in the total income.
Accumulation of Income. A trust, institution, university, other educational institution,
hospital or other medical institution can accumulate its income for the objects for which it
is established.
Where more than 15% of income is accumulated the period of accumulation of amount
exceeding 15% of its income shall not exceed five years.
(17) Income of Mutual Fund. Any income of a notified Mutual Fund set-up by a public
sector bank or a public financial institution or authorised by the SEBI or the Reserve Bank
of India, is fully exempt. [Sec. 10(23D)]
(18) Any income of a securitisation trust from the activity of securitisation shall be
exempt. [Sec. 10(23DA)]
(19) Income of Investor Protection Fund from recognised stock exchanges [Sec.
10(23EA)] The following income of such Fund set-up by recognised stock exchanges in
India, either jointly or separately, is exempt:
The income by way of contributions received from recognised stock exchanges and the
members thereof.

39
Where any amount standing to the credit of the Fund and not charged to income tax during
any previous year is shared, either wholly or in part, with a recognised stock exchange, the
so shared shall be deemed to be the income of the previous year in which such amount -
lared and shall accordingly be chargeable to income tax.
Income of Investor Protection Fund from commodity exchanges. Any income, by way
",:ributions received from commodity exchanges and the members thereof, of such
Investor ion Fund set-up by the commodity exchanges in India, either jointly or separately
as the A Government may notify shall be exempt. [Sec. 10(23EC)]
Where, any amount standing to the credit of the Fund and not charged to income tax
during ne previous year is shared, either wholly or in part, with a commodity exchange,
the whole amount so shared shall be deemed to be the income of the previous year in
which such mt is so shared and shall accordingly be chargeable to income tax.
21I Any income by way of contributions received from a depository, of such Investor tion
Fund set up by a depository shall be exempt, there any amount in the Fund and not
charged to income tax during any previous year is i (Wholly or partly) with a depository,
the amount so shared shall be deemed to be the icome of the previous year in which the
amount so shared and chargeable to income tax. [Sec. 10(23ED)]
The following new clauses are inserted in Sec. 10 w.e.f. the Assessment Year 2016-17:
A) Any specified income of Core Settlement Guarantee Fund, set-up by a recognised
clearing corporation, shall be exempt. [Sec. 10(23EE)]
B) Any income of an investment fund (other than the income chargeable under the head
"Profits and gains of business or profession") shall not be included in the total income of
such fund. [Sec. 10(23FBA)]
C) Any income of a person accruing or arising to, or received by, a unitholder of an
investment fund, being that proportion of income, which is of the nature as income
chargeable under the head "Profits and gains of business or profession" shall not be
included in the total income of such person. [Sec. 10(23FBB)]
D) Any income of a business trust, being a real estate investment trust, by way of renting
or leasing or letting out any real estate asset owned directly by such business trust, shall
not be included in total income. [Sec. 10(23FCA)]

40
22) Income of Venture Capital Fund or Venture Capital Company. Any income of a
venture al company or venture capital fund from investment in a venture capital
undertaking shall mpt. [Sec. 10(23FB)]
23) Income of Business Trust. Income of a Business Trust by way of (i) interest received
rceivable from a special purpose vehicle or (ii) dividend from a specified company (u/s
150(7).
"Special purpose vehicle" means an Indian Company in which the business trust holds :fic
percentage of shareholding or interest as may be required by the regulations under ich
such trust is granted registration. [Sec. 10(23FC)]
"Business trust" means a trust registered as : (i) an Infrastructure Investment Trust, or
ii) a Real Estate Investment Trust, the units of which are required to be listed on a
recognised stock exchange in India. [Sec. 2(13A)]
(24) Income of Registered Trade Unions. Any income chargeable under the head 'Income
:.. House Property' and 'Income from Other Sources' of (i) a registered trade union; and (ii)
association of registered trade unions would be exempt. [Sec. 10(24)]
(25) Income of Provident Funds, etc. The following incomes are fully exempt under this
base : [Sec. 10(25)]
(i) Interest on securities held by a Statutory Provident Fund and Capital Gains arising from
the sale of such securities; or
(ii) The income received by the trustees on behalf of a Recognised Provident Fund or an
Approved Superannuation Fund or an Approved Gratuity Fund; or
(iii) The income received by the Board of Trustees constituted under the Coal Mines
Provident Fund Act, 1948; or
(iv) Income received by the trustees under the Employees' Provident Fund Act, 1952, on
behalf of the Deposit-linked Insurance Fund.
(26) Income of the Employees' State Insurance Fund is exempt. [Sec. 10(25A)]
(27) Income of a body for promoting the interest of Scheduled Castes or Scheduled
Tribes. The income of a corporation established by a Central, State or Provincial Act or
any other body, institution or association wholly financed by government, which is formed
for promoting the interests of the members of the Scheduled Castes or the Scheduled
Tribes or backward classes, is fully exempt. [Sec. 10(26B)]

41
(28) Income of Corporation set-up for the benefit of Minority Community. Any income
of a corporation set-up by the Central Government or any State Government for promoting
the interest of the members of a minority community shall be exempt. [Sec. 10(26BB)]
Minority communities are (i) Muslims, (ii) Christians, (iii) Sikhs, (iv) Buddhists and (v)
Parsis. [Notification No. 613(E) dated 5.7.1995]
(29) Income of a Corporation. Any income of a corporation established by a Central,
State or Provincial Act for the welfare and economic upliftment of ex-servicemen being
the citizens of India shall be exempt. [Sec. 10(26BBB)]
(30) Income of a Co-operative Society formed for Promoting the Interests of Scheduled
Castes or Scheduled Tribes. The income of a co-operative society formed for promoting
the interests of Scheduled Castes or Scheduled Tribes is fully exempt. [Sec. 10(27)]
(31) Income of Board, etc. Any income accruing or arising to the following shall be
exempt: [Sec. 10(29A)]
(a) The Coffee Board; (b) The Rubber Board; (c) The Tea Board; (d) The Tobacco Board;
(e) The Marine Products Export Development Authority; (f) The Agricultural and
Processed Food Products Export Development Authority; (g) The Spices Board; (h) The
Coir Board.
(32) Any Income by way of distributed income received before 1-6-2016 from a
securitisation trust by an investor of the said trust shall be exempt. [Sec. 10 (35A)]
(33) Income of New Pension System Trust. Any income received by any person for, or on
behalf of, the New Pension System Trust, shall be exempt. [Sec. 10(44)]
(34) Income of a body or authority or Board or Trust or Commission: [Sec. 10(46)]
Specified income of the above-mentioned person shall be exempt, if:
(a) It has been established or constituted by or under a Central, State or Provincial Act or
constituted by the Central Government or State Government, with the object of regulating
or administering any activity for the benefit of the general public.
(b) It is not engaged in any commercial activity.
(c) It is notified by the Central Government for the purpose of this clause.
"Specified income" means the income of nature and to the extent arising to it, as notified
by the Central Government.

42
(35) Income of Infrastructure Debt Fund : [Sec. 10(47)] Any income of Infrastructure
Debt Fund shall be exempt provided it is set up in accordance with the prescribed
guidelines notified by the Central Government.
Income received in India in Indian currency : [Sec. 10(48)]
ncome received in India in Indian currency by a foreign company on account of sale oil or
any other goods or rendering of services, as may be notified by the central ment, to any
person in India, shall be exempt if the following conditions are satisfied. Receipt of such
income in India by the foreign company is pursuant to an agreement entered into by the
Central Government or approved by the Central Government. Having regard to the
national interest, the agreement or arrangement is notified by the (Jovernment.
The foreign company is not engaged in any activity other than receipt of such income

Income of a foreign company from the storage of crude oil in India. [Sec. 10(48A)]
Income to a foreign company on account of storage of crude oil in a facility in India and
its therefrom to a person resident in India as per agreement approved by the Central rmient
shall be exempt.
Income of a foreign company from sale of leftover stock of crude oil (w.e.f. the
assment Year 2018-19). Income to a foreign company on account of sale of leftover stock
of il from the facility in India after the expiry of the agreement [u/s 10 (48A)] or
termination, agreement, subject to such conditions as may be notified by the Central
Government, shall exempt. [Sec. 10(48B)]
9) Income of a Political Party. Income of a political party which is chargeable under the
irr-ii Income from House Property1 or 'Capital Gain' or 'Income from Other Sources' or
any income ay of voluntary contributions received by a political party from any person
shall not be included total income of the previous year of such political party; provided
that: (Sec. 13A)
a) Such political party keeps and maintains such books of account and other
documents as would enable the Assessing Officer to properly deduce its income; b1
in respect of each such voluntary contribution (other than the contribution by way
of electoral bond) in excess of 20,000, such political party keeps and maintains a

43
 record of such contributions; and the name and address of the person who has
made such contribution;
b) the accounts of such political party are audited by a Chartered Accountant, d)
No donation exceeding 2,000 is received by such political party otherwise than by
an account payee cheque or an account payee bank draft or use of electronic
clearing the system through a bank account or through an electoral bond. If the
treasurer of such political party/authorised person fails to submit a report to the
:ion Commission for a financial year exemption shall not be available for such the
financial
Further, the political party furnishes a return of income for the previous year as per isions
of Sec. 139(4B) to claim exemption.
40) Income of Electoral trust. Any voluntary contributions received by an electoral trust
dl not be included in the total income of the previous year of the trust, if: (Sec. 13B)
ii) it distributes to any registered political party during the previous year. 95% of the
aggregate donations received by it during the previous year along with the surplus, if any
brought forward from any earlier previous year; and (ii) it functions in accordance with the
rules made by the Central Government.

44
 INCOME FROM SALARIES
All kinds of taxable income of an assessee fall under any of the following five heads of
me. Those incomes which do not find a place under any of the next four heads are taxable
fall under the first head of income i.e., Income from Salaries. In order to calculate the
taxable, me under each head, certain deductions have to be made from the gross income of
that head.
These deductions are different for each head. There are separate sections in the Income
Tax Act niputing the taxable income under each head, which is as under:
(i) Salaries—Sections 15 to 17,
(ii) Income from House Property—Sections 22 to 27,
(iii) Profits and Gains of Business or Profession—Sections 28 to 44,
(iv) Capital Gains—Sections 45 to 55, and
(v) Income from Other Sources—Sections 56 to 59. (Sec. 14)

SALARIES (Sections 15 to 17)

Any remuneration paid by an employer to his employee in consideration of his
services is i salary. It includes the monetary value of those benefits and facilities provided
by the employer which are taxable.
Under section 15, the following incomes are taxable under the head 'Salaries':
(a) The salary due from an employer or former employer to an assessee in the previous
year, whether paid or not;
(b) The salary paid or allowed to him in the previous year by or on behalf of an employer
or a former employer though not due or before it becomes due to him;
(c) Any arrear of salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer, if not charged to income tax for any earlier previous year.
Explanation 1. If any salary paid in advance is included in the total income of any person
ay the previous year, it shall not be included again in the total income of the person when
the salary becomes due.

45
Explanation 2. Any salary, bonus, commission or remuneration due to or received by a
partner of a firm from the firm shall not be regarded as salary for the purposes of section
15.
Place of Accrual of Salary [Sec. 9(l)(ii)]
(i) If any income taxable under the head 'Salaries' is earned in India, it is deemed to accrue
rise in India.
(ii) If a person employed in India goes on to leave outside the country and draws his salary
he leave period there, the leave salary shall be deemed to have been earned in India.
(iii) If a person, after having served in India, retires from service and settles outside India,
the pension drawn by him in the foreign country will be deemed to have been earned in
India and will be treated as Indian income.
(iv) In the case of a citizen of India, who is a government employee and is transferred to
one of its offices outside India will be liable to pay tax to the Indian Government on his
salary which he earns and receives outside India. Allowances and perquisites received by
him in the foreign country from the Indian Government is exempt from tax.
SOME IMPORTANT POINTS REGARDING SALARIES
(1) Salaries. Every kind of remuneration of every kind of servant, public or private, and
however highly or lowly placed he may be, is covered under the scope of this term used in
the Income Tax Act. It means that for the purposes of the Income Tax Act, there is no
distinction between the wages of labourer and salaries of high officials.
(2) Foreign Salary and Pension. Salary and pension received from a foreign government
are taxable under the head 'Salaries'.
(3) Relationship of employer and employee. It is very essential for payment to fall under
the head 'salaries' that the relationship of employer and employee must exist between the
payer and the payee.
Every servant is an employee but an agent may or may not be an employee.
For example, a director of a company holds an office under the company but as a director
he is not a servant or an employee of the company and therefore the fees he receives are
taxable under the head 'Income from Other Sources' and not under the head 'Salaries'.
Similarly, whether the remuneration paid to selling agents is assessable as business profits
or as salary, depends upon the facts and circumstances of each case. The remuneration

46
paid by a mill in their discretion to the selling agents for running and managing a retail
cloth shop which was owned by the mill and profit from which belonged to the mill, was
held to be assessable as salary; but on the other hand, the profits derived from the selling
agency of a manufacturing concern are taxable as business profits if they are not subject to
the control of the mill in the matter of the establishment and organization to be maintained
by them.
If an employee does any work for his employer which is not connected with his service;
then the remuneration for such work will not be treated as salary. For example, examiner's
remuneration received by a University teacher from his University.
(4) Salaries and professional income. Where the employment is merely incidental to the
exercise of a profession the income from such employment would be professional income,
taxah-under the head 'Profit and gains of business or profession'. For instance, a
professional law may be engaged in a case, his remuneration from this engagement will be
taxable as profession earnings. If he is employed by a company as its legal adviser and
also to work as standing coun -for the company, the remuneration received by him would
be taxable under the head 'Salarit -When a person occupies a regular post or office
amounting to service, it is employment as dist i □ from mere engagement in the course of
the profession.
(5) Receipts from a person other than an employer. Perquisites or profits or any
remuneration received from a person other than the employer would be taxable under the
head 'Incor from Other Sources' even if they accrue to the employee by reason of his
employment. For exam; remuneration received by a professor of a college for acting as an
examiner in a University or Boa i
(6) Payment made after cessation of employment. Payment made by an employer to h
employee after the cessation of his employment is also taxable under the head 'Salaries'. It
taxable under this head because it represents remuneration for services rendered in the
past.
(7) Payments made to an employee or to the widow or legal heirs, (a) Lump-sum paymer
made gratuitously or by way of compensation or otherwise to the widow or other legal
heirs an employee, who dies while still in active service, will not be taxable as income.

47
(b) Where a person or his heir receives exgratia payment from the Central Govern-e
Government/Local Authority/Public Sector Undertaking, consequent upon injury to
n/death of a family member, while on duty is not liable to income tax.
(Circular No. 776, dated 8.6.1999)
(8) Pension. Pension received by an employee after his retirement is taxable as salary.
(9) Application of salary—Voluntary foregoing. The voluntary foregoing by an employee
of due to him is normally mere application of the income and the salary is nonetheless It
will be taxable on the further ground that salary is taxable if it is due, whether paid or not
But where in reality there is an agreement not to pay any salary, the apparent foregoing of
a fictional salary would not attract tax. For example, where a person out of missionary
spirit work as Principal in an institution without accepting any salary from the institution,
it of salary would be taxable in this case, because it has never become due.
(10) Tax-free salary. When a salary is paid tax-free, the employee has to include in his
total e gross salary, i.e., the aggregate of the net salary received plus the amount of tax
paid half by the employer, except under the provisions of Sec. lOQOCC).
(11) Deductions by an employer. Compulsory deductions from salary are also instances of
more application of income. The fact that a portion of the salary has to be devoted
compulsorily V purpose under a contractual obligation does not prevent it from being
assessable as under the head 'Salary', for it is only a case of application of income. For
example, an as engaged on fixed salary upon the obligatory condition that the employer
should provide him with board and lodging, etc., for which he should pay an amount
which was deducted from his gross salary before payment. In this case, the tax is
chargeable on the gro'ss salary without deducting the compulsory deductions made by the
employer.
(12) Salary of a Member of Parliament. This is not chargeable under the head 'Salaries',
as of Parliament is not an employee of the Government. The relation between him and
rnment is not that of a servant and master. It is taxable under the head 'Income from other
Sources'.
(13) Salary of a Partner. Any salary received by a partner from the firm in which he is a
partner is not chargeable under the head 'Salaries'. It is taxable under the head 'Profits and
Gains of Business or Profession'.

48
(14) Family Pension. Any family pension received by the widow or legal heirs of a
deceased ee is taxable under the head 'Income from Other Sources'.
(15) Salary grade or Scale of Pay. Salary grade means that at what starting salary any ee
is to be appointed and during the entire service period (if there is no revision of grade :
motion), what will be his increment per year and what will be his maximum salary bich
there will be no increment. Here salary means basic salary. For example, if a person inted
in the grade Rs 2,200-100-3,000-200-5,000-300-8,000, it means that his starting will be Rs
2,200 p.m. after one year of service he will get an increment of Rs 100 p.m. i.e., ry will
become Rs 2,300 p.m., and similarly he will get an annual increment of Rs 100 p.m. salary
reaches Rs 3,000 p.m. Thereafter, he will get an annual increment of Rs 200 p.m. till lary
becomes Rs 5,000 and thereafter he will get an annual increment of Rs 300 p.m. till his
reaches the maximum amount of Rs 8,000 in this grade. After this, there will be no •it and
he will continue to draw Rs 8,000 p.m. This will be his maximum salary. This is salary
grade.
Due date of Salary. Following are the general rules regarding this: a In the case of
employees of the government and semi-government. Salary for a particular. is due on the
first of the next month. Thus, in such a case, salary for the month of March receding
financial year up to the salary for the month of February of the current financial taken into
account.
In the case of employees of banks and non-government bodies. Salary for a particular: s
due on the last date of the same month. Thus, in such a case salary for April of the
financial year up to the salary for the month of March of the current financial year is into
account.

Definitions
Under section 17 of the Act the following have been defined:
(1) Salary, (2) Perquisites and (3) Profits in lieu of salary. [Sec. 17(1)]
SALARY
Salary includes:
(i) wages;
(ii) any annuity or pension;
(iii) any gratuity;

49
 (iv) any fees, commission, perquisites or profit in lieu of or in addition to any
salary or wages;
(v) any advance of salary, but not loan for purchasing a car, cycle, scooter or a
house, etc.
(vi) any payment received by an employee in respect of any period of leave not
availed of by him;
[Note : Encashment of earned leave at the time of retirement whether on
superannuation or otherwise is exempt subject to the provisions of Sec. lO(lOAA).]
(vii) the annual accretion to the balance at the credit of any employee participating
in a recognised provident fund i.e., employer's contribution in excess of 12% of the
employee's salary and interest on the provident fund in excess of 9.5% (w.e.f. the
Assessment Year 2002-03) rate;
(viii) taxable portion of the transferred balance;
(ix) the contribution made by the Government or other employer, in the previous
year, to the account of an employee, under a pension scheme notified by the
Central Government. Computation of Taxable Salary can be illustrated with the
help of the following chart:
Salary
Basic +DA + Allowances + Perquisites + Profits injieu of Salary
Gross Salary
Less (Deductions u/s 16)
Standard = Entertainment + Employment Tax
Deduction Allowance = Taxable Salary

Different Forms of Salary

Different forms of salary are: Leave salary, compensation for retrenchment, fees
and commissior bonus, death-cum-retirement gratuity, commutation of pension, receipts
by employees of public sectc and other companies at the time of voluntary retirement,
annuity, salary and pension from UNO another foreign pension.

50
 (1) Leave Salary. It is also called encashment of the earned leave. If an employee
does nc avail his earned leave and receives payment in respect of any period of leave,
while he continues to remain in service, it is taxable in full. [Section 10(10AA
If he encashes it after retirement or leaving the job, it is exempt up to a specified
limit. (Se next Chapter).
(2) Death-cum-retirement Gratuity:
(a) In the case of Government Employees. Any death-cum-retirement gratuity
received by a categories of Government employees or employees of a local authority is
exempt from income tax n full. [Sec. 10i 1
(b) In the case of non-government employees. It is exempt up to a specified limit.
(See nex Chapter)
(3) Pension: (i) Whatever pension is received by an employee (Government or
non-govern-: after retirement, it is chargeable under the head "Salaries", ii Other foreign
pension. If the pension is received in India by persons living in India for .-s rendered
abroad it will be taxable on receipt basis. If it is received outside India and ifcoi remitted
to India it will be taxable in the case of ordinarily residents only.
iii) Salary and Pension from U.N.O. Salary and pension received from the United
Nations ization is totally exempt in India.
iv Pension of gallantry awardee. Pension received by an individual who has been
in service ±e Central or State Government and has been awarded 'Param Vir Chakra' or
'Mahavir Chakra or Vir Chakra' or such other gallantry award as the Central Government
may notify shall be exempt. [Sec. 10(18)]
Commuted Value of Pension. It is exempt up to a specified limit. (See next Chapter)
(4) Transferred Balance. When an unrecognised provident fund is recognised for the first
the balance standing to the credit of employee's PR A/c at the time of its recognition is
called Transferred Balance'.
Taxable portion of the transferred balance. The taxable portion of the transferred
balance le employee will be the aggregate of annual accretions chargeable to tax for each
year of the sentence of unrecognised provident fund deeming this fund to be recognised
from the very r-rming. This annual accretion forms part of the transferred balance of the
employee.

51
 INCOME FROM SALARIES – RETIREMENT
Retirement Benefit

When an employee retires from service or leaves a job and joins the other or he is retrenc:
-: he receives some special payments from the employer, e.g.:
(1) Gratuity [Sec. 10 (10)]
(2) Pension and Commuted Value of pension [Sec. 10 (10A)]
(3) Earned leave salary [Sec. 10 (10AA)]
(4) Compensation on retrenchment 10 (10B)]
(5) Compensation on voluntary retirement 10 (10C)]
(6) Amount from provident fund 10 (11)(12)]
The aforesaid receipts are treated as income from salaries. However, these are
exempt up to specified limits. In this connection the provisions of the Income Tax Act are
as under:
Chart showing Government or Non-Government Employees for certain Exemptions
Leave Salary Gratuity Commuted Persion
1. Central/State Government Employees G.E. N.G.E. N.G.E. N.G.E. G.E. G.E
2. Local Authority Employees G.E. G.E
3. Statutory Corporations Employees N.G.E. G.E
4. Other Employees N.G.E. N.GI
G.E. = Government Employee N.G.E. = Non-Government Employee.

GRATUITY [Sec. 1
For exemption of death-cum-retirement gratuity, employees have been classified into
categories:
(A) Government employees [Sec. 10(10)(i)]. Any death-cum-retirement gratuity receiv all
categories of Government employees or employees of a local authority is exempt from ir.
tax in full. Even if after retirement he takes up an appointment in a private organisatic
gratuity received by him from the government will be exempt from tax.
(B) Non-Government employees covered by the Payment of Gratuity Act, 1972.
[Sec. 10(1)

52
Employees covered by the Payment of Gratuity Act, 1972
The Payment of Gratuity Act applies to those employees who are working in any
establishment, factory, mine, oilfield, plantation, port, railway or shop to do any skilled,
semi-skilled or unskilled, manual, supervisory, technical or clerical work, and whether or
not such p is employed in a managerial or administrative capacity, but does not include :
(i) Employees of the Central or State Governments.
(ii) Employees governed by any other Act or any other rules in this respect.
The Payment of Gratuity Act applies to a concern in which 10 or more employees
are employed re employed, on any day of the preceding 12 months.
Where to a concern this Act has become applicable shall continue to be governed
by this Act o the number of employees therein at any time after it has become so
applicable falls below ten.
Exempted Amount. Least of the following shall be exempt:
(i) 15 days' salary (7 days in the case of employees of a seasonal establishment)
based on salary last drawn for every completed year of service and part thereof in excess
of six months; or
(ii) Rs 20,00,000 (w.e.f. 29.3.2018); or iii) Gratuity actually received.
Meaning of Salary. It includes:
(i) Monthly basic salary last drawn;
ii) Dearness allowance (whether as per terms of employment or not).

Computation of 15 days' salary. It is computed by the following formula :

Last Month Salary x 15
26
In the case of piece-rated employee, 15 days' salary would be computed on the
basis of age of total salary (excluding overtime salary) received for a period of three
months ediately preceding the termination of or retirement from service. For example, if a
--rated employee retires on 20th July, 2018 (salary received from 21st April to 20th July, 3
may be assumed to be Rs 39,000). In this case, 15 days' salary would be Rs 7,500. i.e.,
.000 H- 3 x 15 divided by 26.
(C) In the case of Non-government employees not covered by the Payment of
Gratuity Act, [Sec. 10(10(iii)]. Any gratuity received by him on his retirement or on his

53
becoming pacitated prior to such retirement or on termination of his employment, or any
gratuity :ved by his widow, children or dependents on his death is exempt up to the least
of the .lowing amounts :
(i) One-half month average salary for each year of completed service; or
(ii) Rs 20,00,000 (Notification No. 16/2019 Applicable w.e.f. 29-3-2018) or iii) Actual
amount of gratuity received.
In order to compute the number of completed years of service, only the complete
years will be taken into account and the service for a part of the year will be ignored. For
example, if the J service of an employee is for 30 years 8 months and 20 days, only 30
years will be taken account for the purpose and the remaining 8 months and 20 days will
be ignored.
Average Salary. It shall be computed on the basis of salary for ten months
immediately eding the month in which the event occurs.
Meaning of Salary. It includes:
(i) Basic Salary;
(ii) Dearness allowance, if it is given as per terms of employment;
(iii) Commission based upon a fixed percentage of turnover achieved by the employee.
Gratuity from more than one employer. Where gratuity is received by the
employee from re than one employer in the same previous year, the aggregate amount of
exemption shall t exceed the maximum absolute limit. Further, where the employee has
received gratuity in earlier year from his former employer and receives gratuity from
another employer in a r year, the maximum absolute limit will be reduced by the amount
of gratuity which has -n exempted earlier.
This provision is applicable in both the cases [(B) and (C)].
Rules of Death-cum-Retirement Gratuity: At A Glance
Government or Non-Government Employees
Local Authority Covered by the Payment of Not covered by the Payment of
Employees Gratuity Act, 1972 Gratuity Act, 1972
Any amount Least of the following amounts is Least of the following amounts is
received by such exempt: exempt:
employees is exempt (i) 15 days' salary for every (i) one-half month's salary for each

54
from tax in full. completed year of service (7 days year of completed service or
in case of seasonal esta- (ii) f 20,00,000 (Applicable w.e.f.
blishments) or 29-3-2018): -
(ii) f 20,00,000 (w.e.f. 29.3.2018) (iii) Gratuity actually received.
(iii) Gratuity actually received. Notes:
Notes: (1) Calculation of 1/2 month's
(1) Calculation of 15 days' salary salary wi! based on the average
will be : 15/26 of salary last salary of last 11 months preceding
drawn. the retirement or deat:. as the case
(2) For calculating period of may be.
service, a period of more than 6 (2) For calculating period of
months will be taken as one year. service, no part a year shall be
Maternity leave of 26 weeks will considered.
be treated as a period of service. (3) Salary here means : (i) basic
(3) Salary here means : pay;
(i) basic pay; (ii) dearness allowance, if given
(ii) dearness allowance; under : terms of employment;
(iii) commission at a fixed
percentage of; over.

55
 UNIT-III
INCOME FROM HOUSE PROPERTY

BASIS OF CHARGE
Under the head 'Income from House Property' the basis of charge is the annual value of
property. The property:
(i) consists of any buildings or lands appurtenant thereto,
(ii) of which the assessee is the owner, and
(iii) which is not used for purposes of assessee's business or profession. (Sec. 22 The
following are the important points in the above definition:
(1) Buildings or lands appurtenant thereto
Under the head 'Income from House Property' income is computed on buildings and lan
appurtenant thereto. Aland which is not appurtenant to any building does not come within
the scope of this section. Income from such land is taxable under the head 'Income from
Other Sources'. The lands appurtenant to the building includes compound, play-ground,
kitchen-garden, courtyard, etc. In the case of non-residential building, car parking spaces,
drying ground; play grounds, connecting roads in the factory area shall be lands
appurtenant to buildings.
The following are the exceptions to the general rule that income from house property
taxable under the head 'Income from House Property'.
Exceptions:
(a) Building or staff quarters let out to employees and others. If the assessee lets out ft
building or staff quarters to the employees of business whose residence there is a necessity
for th-efficient conduct of business, the rent collected from such employees is assessable
as income fron business and not as income from house property. (CIT vs. Delhi Cloth &
General Mills Ltd. 59 ITR u.
(b) If a building is let out to authorities for locating bank, post office, police station, et
income from such building will be assessable as income from business and not as income

56
fit i house property, provided the dominant purpose of letting out the building is to enable
th assessee to carry on his business more efficiently and smoothly.
[CIT vs. National Newspaper and Paper Mills Ltd. (1978) 114 ITR 3
(c) Composite letting of building with other assets. Where the assessee lets on h:
machinery, plant or furniture belonging to him and also buildings for a composite rent and
t rent of the buildings is inseparable from the rent of the said machinery, plant or the
furnitur the income from such letting is not chargeable to income tax under the head
'Income from Hou-Property' but it is taxable under the head 'Income from Other Sources'
or under the he 'Business or Profession', if such letting is his business. [Sec. 56(2)(hi
(d) Paying-guest accommodation. It is assessable as business income.
Where in terms of a memorandum of association, the main object of the assessee compa
was to acquire properties and earn income by letting out same, said income was brought to
I as business income and not as income from house property.
IChennai Properties & Investment Ltd. vs. CIT (2016) 231 Taxman 456 (S
2) The assessee should be the owner of the house property
It is only the owner of the house property, who is liable to pay tax, under this head of
income. where the assessee is the lessee of a building and he derives an income from
subletting or erring, it will be taxable under the head 'Income from Other Sources' and not
under the head kome from House Property'.
The following are the owners of house property :
The person in whose name the property is registered, ii) In case of a mortgage, it is
the mortgagor and not the mortgagee.
Deemed Owners (Sec. 27). The following are deemed to be the owners of the property: aI
An individual who transfers any house property to his or her spouse, without adequate -.
deration or not being a transfer in connection with an agreement to live apart, or to a minor
: not being a married daughter shall be deemed to be the owner of the house property so -
inferred.
b) A member of a Co-operative Society, Company or an Association of persons to whom a
ling or its part is allotted or leased under a house building scheme of the society, company
-sociation shall be deemed to be the owner of that property.

57
c) A person who is allowed to retain possession of any building in part performance of a:
act (referred to in the Transfer of Property Act) shall be deemed to be the owner of that
building
d) A person having lease rights in the property under a lease extending to 12 years or more
he aggregates including the term for which the lease may be extended shall be deemed to
be wner of the property.
e) If a person takes land on lease and constructs a house upon it, he will be deemed to be :
owner.
(f) Disputed Ownership. If the title of ownership is disputed in a court of law, the
recipient I rental income or the person who is in possession of the property as the
owner is treated as Ae owner.
(3) It is not used for purposes of assessee's business or profession
If the property or a portion of it is occupied by the assessee for the purpose of his
own isiness or profession and the profits of such business or profession are assessable to
tax, the -.nual value in respect of such property or portion of it is not taxable as income
from house perty and also nothing will be deductible as expenditure on rent of these
premises in nputing the profits of business or profession.
EXEMPTIONS REGARDING INCOME FROM HOUSE PROPERTY
There are two kinds of exemptions regarding income from house property: (1)
Income is: included in gross total income (i.e., fully exempt), and (2) Income is included
in assessee's >?s total income but the deduction is allowed from gross total income.
1. Fully Exempted Incomes
(1) Income from farm house (See details in chapter Agricultural Income). [Sec. 2(lA)(c)]
(2) Annual Value of one palace of ex-Indian Ruler. [Sec. 10(19A)J
(3) Income from property owned by: (i) Local Authority; (ii) Scientific Research
Association; (iii) Trade Union; (iv) Charitable Trust; (v) Political Party, (vi) University or
other educational institution existing for educational purposes and not for purposes of
profit; (vii) Hospital or medical institution existing for philanthropic purposes and not for
purposes of profits.
(4) Income from property used for assessee's own business or profession.
(5) Income from one self-occupied house.

58
(6) Income from the house meant for self-residence but could not be occupied throughout
the previous year on account of his service business or profession at any other place.

2. Deductible from Gross Total Income

(1) Income of a co-operative society from the letting of godowns or warehouses for
storage of commodities meant for sale. [Sec. 80P(2)]
(2) Income of a co-operative society from house property, provided its gross total income
does not exceed ? 20,000 and the society is not a housing society, urban consumers' co-
operative society, transport society or society manufacturing goods with the aid of power.

Other Important Points regarding Income from House Property

(1) Income from house property situated abroad. Income from House Property situated in
a foreign country is taxable only in the case of residents. If a foreign property is taxed in
India it will be taxable under the head 'Income from House Property' and its annual value
shall be computed as if the property is situated in India.
(2) Property owned by co-owners. Where a property is owned by two or more persons
jointly and their respective shares are definite and ascertainable, income from such
property shall not be assessed on such persons as an association of persons, but the share
of each such person from the property shall be included in his respective total income. If
any portion of the house belonging to a co-owner is occupied by him for his own
residence, that portion will be treated as self-occupied house and its annual value will be
Nil, i.e., it will be exempt from tax.
(Sec. 26
(3) Composite Rent. If a building is let out to a person along with other facilities (e.g..
electricity, cooler, lift, water pump, water tax, etc.) for a composite rent and if the rent of
the building can be separated from the rent of such facilities, the two rents will be
separated and that belonging to the building only will be taxed under the head 'House
Property' and that which belongs to other facilities will be taxed under the head 'Other
Sources'. If the composite rent cannot be split up it will be taxed under the head 'Other
Sources'.

59
ANNUAL VALUE (Sec. 23)

(A) BUILDINGS LET OUT [Sec. 23( 1)

Income from house property does not mean rental income; but it means the sum for which
th-building might reasonably be expected to be let from year to year. An assessee's income
from house property is computed on the basis of its annual value. Hence, it is very
important to understan properly the method of determining the annual value of the house
property. If the annual value ii not determined correctly, the taxable income from house
property will be wrong.
Definition of the annual value
The annual value of a house property let out shall be deemed to be :
(a) the sum for which the property might reasonably be expected to be let from year I year;
or
(b) where the property or any part of property is let and the actual rent received receivable
by the owner is in excess of the sum referred to in (a), the amount of re: received or
receivable; or
(c) where the property or any part of the property is let and was vacant during the wh or
any part of the previous year and owing to such vacancy the actual rent received
receivable by the owner in respect thereof is less than the sum referred to in (a), th amount
so received or receivable.
Deduction of Municipal Taxes
From the value determined under (a) or (b) or (c) the taxes (including service taxes) lev:
by any local authority and paid by the owner during the previous year (irrespective of :
previous year to which such taxes relate) shall be deducted in determining the annual
value the property.
Generally, service taxes include fire tax, water tax, conservancy tax, education cess, etc.
Explanation. For the purposes of clause (b) or clause (c) the amount of actual rent receiv
or receivable by the owner shall not include, subject to such rules as may be made in this
ben., the amount of rent which the owner cannot realise.

60
Unrealised rent shall not form part of annual value if the following conditions are satis:
(Rule 4) : (i) the tenancy is bonafide; (ii) the defaulting tenant has vacated, or steps have
be taken to compel him to vacate the property; (iii) the defaulting tenant is not in
occupation of any :her property of the assessee; (iv) the assessee has taken all reasonable
steps of instituting zal proceedings for the recovery of the unpaid rent or satisfies the
Assessing Officer that legal : roceedings would be useless.

[Relevant portion of Form No. ITR2 for the Assessment Year [2019-20 ]
SCHEDULE HP: DETAILS OF INCOME FROM HOUSE PROPERTY
"\ Details OT Income from House Property (Please Refer Inst ructions) (Drop down to
be by the tenant and have actually been paid during the year, (ii) In item 3a, arrears of rent
received and the amount of unrealised rent realised subsequently are to be mentioned after
deduction @ 30% of such arrears of rent and unrealised rent realised.
Determination of Expected Rent [Sec. 23(l)(a)]
(a) Where standard rent has not been fixed. One of the following (whichever is greater)
shall be the expected rent of the building:
(i) Municipal value determined by the local authority for charging house tax, etc.; or
(ii) Fair Rent—Rent of similar properties in the same locality.
(b) Where standard rent has been fixed. One of the following (whichever is less) shall be
the expected rent of the building:
(i) The value as determined under (a); or
(ii) The standard rent fixed under the Rent Control Act of a State.
Note: The expected rent cannot be more than the standard rent but it can be less than the
standard rent.
[Balbir Singh vs. MCD (1985) 152 ITR 388 (SC)
Determination of Actual Rent [Sec. 23(l)(b)]
Sometimes the owner takes upon himself under an agreement the burden of providing
certain facilities to the tenant, e.g., lift, water pump, electricity, vehicle parking, gardener,
etc. In such a case, the actual rent received/receivable minus the cost of providing such
facilities will be the actual rent.

61
If the tenant has undertaken the obligations of the landlord, e.g., the tenant will pay
electricity bills of the portion occupied by the landlord, the amount so paid will be added
in rent received/receivable to arrive at the actual rent.
However, no adjustment will be made in the determination of actual rent regarding the
following:
(i) Tax paid by the tenant to the local authority regarding the building occupied by him
(ii) Repairs charges borne by the tenant.
(iii) Notional interest on deposit taken from the tenant.

PROFITS AND GAINS OF BUSINESS OR PROFESSION

The provisions regarding income chargeable under the head 'Profits and Gains of
Business or Profession' are contained in sections 28 to 44D of the Income Tax Act, 1961.
Before study, these provisions it is necessary to understand the meaning of certain terms.
Business. Business means the purchase and sale or manufacture of a commodity
with. view to make profit. It includes any trade, commerce or manufacture or any
adventure or cone in the nature of trade, commerce or manufacture. It is not necessary that
there should be a ser: of transactions in a business and that it should be carried on
permanently. Neither repetit: nor continuity of similar transactions is necessary. Profit of
an isolated transaction is all taxable under this head, provided that it is a venture in the
nature of business or trade. In : connection, it is important that the intention of purchase or
manufacture should be to sell al
Profession. Profession means the activities for earning livelihood which requires
inteh tual skill or manual skill, e.g., the work of a lawyer, doctor, auditor, engineer and so
on, art the nature of the profession. The profession includes vocation. Vocation means
activities wh are performed in order to earn a livelihood, e.g., brokerage, insurance
agency, music, danci etc. As the rules for the assessment of business, profession or
vocation are the same, there i Rs importance of making any distinction between them for
income tax purposes. [Sec. 2

62
Demerger. In relation to a company, demerger means the transfer by a demerged comp; of
its one or more undertakings to any resulting company which fulfils the prescribed
conditic [Sec. 2(19A]
Demerged Company. It means the company whose undertaking is transferred, pursuar. a
demerger, to a resulting company. [Sec. 2(19AA
Resulting Company. It means (i) one or more companies (including a wholly owi
subsidiary thereof) to which the undertaking of the demerged company is transferred:
demerger; [Sec. 2(4).
(ii) the resulting company in consideration of such transfer of undertaking issues shar the
shareholders of the demerged company; and
(iii) includes any authority or body or local authority or public sector company or a con:
established, constituted or formed as a result of demerger.
The following incomes are chargeable to income tax under the head 'Profits and Gaii
Business or Profession':
(1) Revenue profits from business or profession: The profits and gains of any business a
profession which was carried on by the assessee at any time during the pi year;
(2) Any compensation due to or received by: (a) any person, managing the whole or
substantially the whole of the affairs of a Company in connection with the termination of
his management or the modi B i of the terms and conditions relating thereto;
(b) any person, managing the whole or substantially the whole of the affairs in India, of
any other company in connection with the termination of his office or the modification of
the terms and conditions relating thereto;
(c) any person, holding an agency in India for any part of the activities relating to the
business or any person in connection with the termination of an agency or the modification
of the terms and conditions relating thereto;
(d) any person, for or in connection with the vesting in the Government, or in any
corporation owned or controlled by the Government, under any law for the time being in
force, of the management of any property or business.
The compensation received by the person on cancellation of consultancy agreement
is a capital receipt and not assessable u/s 28(ii)(c).
[CITvs. Seshasayee Bros. (P.) Ltd. (1999) 239 ITR 471 (Mad.)]

63
(e) Any person at or in connection with the termination or the modification of the terms
and conditions, of any contract relating to his business, (w.e.f. A.Y. 2019-20)
(3) Income of trade association etc.: Income derived by a trade, professional or similar
association from specific services performed for its members; 4) Receipts in connection
with foreign trade:
(a) Profit on sale of a licence granted under the Imports Control Order, 1955;
(b) Cash assistance received or receivable by any person against exports under any scheme
of the Government of India;
(c) Repayment of any customs or excise duty to any person against exports.
(d) Any profit on the transfer of the Duty Entitlement Pass Book Scheme, being Duty
Remission Scheme, under the export and import policy;
(e) Any profit on the transfer of the Duty-Free Replenishment Certificate, being the Duty
Remission Scheme, under the export and import policy;
(5) Value of any benefit or perquisite : The value of any benefit or perquisite whether
convertible into money or not, arising from business or the exercise of a profession, e.g.,
where a lawyer in consideration of his services to a company gets free accommodation, the
value will be assessable in the hands of the assessee as his income under the head 'Profits
and Gains of Business or Profession'.
(6) Receipts of a partner from the firm: Any interest, salary, bonus, commission or
remuneration due to or received by a partner of a firm from the firm provided that it has
been allowed as a deduction in computing the taxable profits of such firm.
(7) Interest on securities: Interest on securities, if the business of the assessee is to invest
insecurities, otherwise interest on securities shall be chargeable to income tax under the
head 'Income from Other Sources'.
(8) Any sum received under a Keyman Insurance Policy including bonus. (8A) The fair
market value of inventory as on the date on which it is converted into, or treated as, a
capital asset, (w.e.f. A.Y. 2019-20).
(9) Any sum, whether received or receivable in cash or kind, under an agreement for:
(a) not carrying out any activity in relation to any business or profession; or
(b) not sharing any know-how, patent, copyright, trademark, licence, franchise or
any other business or commercial right of similar nature or information or

64
 technique likely to assist in the manufacture or processing of goods or provision of
services.
(10) Any sum, whether received or receivable, in cash or kind, on account of any capital
asset (other than land or goodwill or financial instrument) being demolished, destroyed,
discarded or transferred, if the whole of the expenditure on such capital asset has been
allowed as a deduction u/s 35AD.
(11) Income from speculative transactions.
However, any sum, whether received or receivable, in cash or kind, on account of transfer
of the right to manufacture, produce or process any article or thing or right to carry on any
business or profession, which is chargeable under the head 'Capital Gains' shall not be
treated as income under this clause.
For the purpose of (3) above; trade association means an association of businessmen for
the protection and advancement of their common interest, e.g., a Chamber of Commerce,
section 28(iii) does not apply to other social associations, e.g., a sports club, or cricket
club and so on.
Where speculative transactions carried on by an assessee are of such a nature as U
constitute a business, the business shall be called 'Speculation Business' and it shall be
deemed to be distinct and separate from any other business.
'Speculative transactions' means transactions in which a contract for the purchase or sale
of any commodity, including stocks and shares is settled otherwise than by the actual
delivery or transfer of the commodity or scrips. [Sec. 43(5)

IMPORTANT RULES REGARDING ASSESSMENT OF PROFITS AND GAINS

OF BUSINESS OR PROFESSION
(1) Business or Profession carried on by the assessee. Tax is chargeable from the person
wh carries on the business or profession. It is immaterial if the assessee (owner of the
business carries on the business through a manager or other servant, or any other agent
duly authorizec by him.
(2) Tax is chargeable on the aggregate income from all businesses or professions carrii
on by an assessee. The profits and gains of different businesses or professions carried on

65
by ar assessee are not taxable separately; but tax is chargeable under one head on the
aggregate income from all businesses or professions carried on by the assessee.
(3) Profits and Losses of speculation business are kept separate. Profits and losses o:
speculation business carried on by an assessee are kept separate, i.e., if there is a loss in i
speculation business it can be set-off only against profits of speculation business.
(4) The business or profession is carried on by an assessee for any time during the
previa* year. The assessee should have carried on the business or profession for any time
during I business year, i.e., whether for a full year or for a part of the previous year only.
(5) Profits on the sale of assets on the winding up of a business. Profits made in wind: ;
up of a business by the sale of assets in one lot are not taxable as business profit but as a
cap:: gain.
(6) No tax is payable on anticipated or notional profits. Tax is levied on the actual pr of
the previous year and not on the anticipated profits. If in a business there is an expectat: of
earning some profits in the near future no tax can be levied on such profits.
(7) Expenses of an isolated transaction. An isolated transaction of purchase and sale is
the nature of trade. For determining the profit earned by the assessee in such a transaction.
It expenses incurred by him in respect of that transaction during the years prior to the year
account shall be allowed as a deduction.
(8) Income of illegal business or profession. Tax is payable on the income of every busir.
or profession whether legal or illegal. The expenses incurred to earn income from an illeg
business which are incidental to such business are to be allowed as deduction out of the
incc-earned from illegal business. However, penalties levied for infraction of law and
expe: -incurred in defence of criminal proceedings are not allowed. Loss computed under
an ilh business cannot be set-off against the profits of legal business.
(9) Expenses incurred before setting up a business. These expenses are not admissible a
the case of a company expenses incurred before incorporation are not allowable but th:-*-
incurred after incorporation but before the commencement of business are allowable.
Howe specified preliminary expenses incurred by an Indian Company or any other
resident per? allowed under section 35D.

66
(10) General commercial principles to be kept in view while determining the real profit-
i a business. It is essential to keep in view the general commercial principles while
determ: the real profits of a business.
(11) Deductible Business Losses. Business losses which are not of a capital nature and v.
have been sustained during the previous year and which are incidental to the business car-
on by the assessee are deductible while computing income under the head "Business or
Profes-
(12) Sums previously allowed as deduction are taxable if recovered during the prei\ m
year. If an assessee receives during the previous year any sum connected with the busir.
: during any preceding year was allowed as a deduction (being in the nature of loss, -
r.diture or a liability) then while computing the taxable profits of that year, it will be
taxable usiness income during the previous year in which they are recovered. 113)
'Dharmada collected from customers is not a trading receipt and hence not liable to tax.
14) The underwriting commission earned by the assessee on the shares subscribed by the
r lie is assessable as business income whereas the underwriting commission on snares
scribed by the underwriter himself reduces the cost of shares and is not taxable.

COMPUTATION OF PROFITS OF BUSINESS OR PROFESSION

The profits and gains of business or profession are computed in accordance with the sions
contained in sections 30 to 43D. (Sec. 29) sections 30 to 37 contain those deductions h are
expressly allowed while computing profits of business or profession. Section 40 ides those
expenses which are expressly disallowed. Besides these, there are some other •tions which
are allowed on the basis of general commercial principles while computing fits of business
or profession. It is necessary to know those principles before studying the actions
expressly allowed while computing profits of business or profession.
The general commercial principles are as under:
(1) Profits should be computed according to the method of accounting regularly employed
he assessee, provided that actual profit can be ascertained by this method.
(2) Only those expenses and losses are allowed as deductions which were incurred or
ained during the relevant previous year.

67
(3) These losses and expenses should be incidental to the operation of the business. For
pie, embezzlement by an employee during the course of business is a loss incidental to the
mess. Similarly, loss from dacoity in a bank is also a loss incidental to the business of a
bank.
(4) Only the expenses incurred in connection with the business of the assessee are allowed
deductions.
(5) If a business has been discontinued before the commencement of the previous year, its
expenses not be allowed as a deduction against the income of any other running business
of the assessee.
(6) There are some essential expenses, though neither expressly allowed nor disallowed, rt
are deductible while computing the profits of business or profession on the basis of
general nimercial principles provided that these are not expenses or losses of a capital
nature or rsonal nature.
(7) Any expenditure incurred in consideration of commercial expediency is allowed as
induction.
(8) A deduction can be made from the income of that business only for which the expenses
were . curred. The expenses of one business cannot be charged against the income of any
other business.

RULES FOR ADJUSTMENT OF PROFIT AND LOSS ACCOUNT PREPARED BY

THE ASSESSEE
The Profit and Loss Account prepared by the assessee is not correct from the income tax
point f view as (i) several such expenses are charged to it which are wholly or partly
inadmissible under the Income Tax Act, (ii) some admissible expenses are omitted from it,
(iii) some taxable incomes ire not credited to it, and (iv) some such incomes are credited
which are either not taxable under •he head Trofits and Gains of Business or Profession' or
are not taxable at all. Hence, this Profit and Loss Account has got to be adjusted from the
income tax point of view so that the profit taxable under the head 'Business or Profession'
is determined correctly. The following are the rules for adjustment of the Profit and Loss
Account:

68
(i) Those expenses or losses which are charged to the Profit and Loss Account but are not
allowed under the Income Tax Act, should be added to the profit, as shown by the Profit
and Loss Account prepared by the assessee. If any expense is partly disallowed, only the
disallowed part of it shall be added to the profit.
(ii) If any admissible expenses are omitted from the Profit and Loss Account, they should
be deducted from the above profit.
(iii) If some taxable incomes are omitted from the Profit and Loss Account they should be
added to the above profit.
(iv) If some such incomes have been credited to the Profit and Loss Account which are
either not taxable under the head 'Business or Profession' or are not taxable at all, they
should be deducted from the above profits.
Note: If instead of profit there is a loss as per the Profit and Loss Account, the above rules
shall be reversed, i.e., items to be added shall be deducted and those to be deducted shall
be added. If after making some adjustments the profi: is converted into loss, the above
rules shall be reversed for subsequent adjustments. The above rules can well be illustrated
with the help of the following statement: Profit as per P & L A/c ...
Add: (i) Expenses or losses disallowed but charged in P. & L. A/c ....
(ii) Incomes taxable as business income but not credited to the .... P & L. A/c
(iii) Expenses in excess of the allowed amount charged in P. & L. A/c ....
(iv) Under-valuation of closing stock or over-valuation of opening stock ....
Deduct: (i) Expenses or losses allowed but not debited to P. & L. A/c ....
(ii) Incomes not taxable as business income but credited to the .... P. & L. A/c
(iii) Incomes exempt from tax but credited in P. & L. A/c ....
(iv) Over-valuation of closing stock and under-valuation of opening stock . . . . . . ..
Taxable Income from Business Notes: 1. For loss as per P. & L. A/c the above rules will
be reversed.
2. The same rules will apply to Income and Expenditure Account.
3. In the case of Receipts and Payments Account or Cash Book, the following statement is
prepared to fii out profits and gains from profession:
Incomes from Profession —
Less: All admissible expenses relating to the profession

69
Income from Profession
Second Method of Computing the Taxable Profits or Losses of Business or Professio-
In this method a fresh Profit and Loss Account or Income and Expenditure Account
prepared to determine the profit or loss. The format of this method may be as under :
(1) Add together all taxable incomes under this head which relate to the previous year
concerned
(2) (i) Deduct all admissible expenses under this head which relate to ....
the previous year concerned (ii) Deduct admissible business losses ....
Taxable Profits or Losses of Business or Profession Note : The second method is generally
used in case of professions.

DEDUCTIONS EXPRESSLY ALLOWED

While computing profits of business or profession the following deductions are expre
allowed by sections 30 to 37:
1. Expenses in respect of business premises. The following deductions are allowed:
premises used for the purpose of the business or profession. (Sec
(a) Where the premises are occupied by the assessee as a tenant:
(i) Rent paid for such premises.
(ii) If he has undertaken to bear the cost of repairs to the premises, the amount pa: account
of such repairs.
Explanation. The amount paid on account of repairs shall not include any exp ture in the
nature of capital expenditure.
(iii) Any sums paid on account of land revenue, local taxes or municipal taxes.
(iv) The amount of any premium paid in respect of insurance against the risk of dan. _ or
destruction of the premises.
(b) Where the premises are occupied by the assessee as owner:
(i) Repairs charges.
(ii) The amount of land revenue, local taxes or municipal taxes.
(iii) Insurance premium regarding the building.

70
Please note:
(i) If the business premises belong to the assessee no deduction in respect of rent will be
allwed to him.
(ii) If the assessee is a partnership firm and the business premises belongs to a partner of
firm, the rent payable to the partner will be an allowable deduction.
[(iii) If the assessee is a tenant in that premises and a part of the premises is used by him -
dwelling-house and the other part is used for his business, the amount of deduction in
respect xpenses shall be allowed proportionately. (Sec. 38)]
2. Repairs and insurance of machinery, plant and furniture. In respect of machinery,
plant. i.g. furniture used for the purposes of the business or profession the following
deductions are.) \vable: (Sec. 31)
(i) Amount of expenditure incurred on current repairs of machinery, plant or furniture.
Explanation. The amount paid on account of current repairs shall not include any expen-
bture in the nature of capital expenditure.
(ii) The amount of any premium paid in respect of insurance against the risk of damage or
traction of these assets.
3. Depreciation and Investment Allowance. See chapter on 'Depreciation and Investment
Allowance'.
4. Tea Development Account, Coffee Development Account and Rubber Development
Account. This deduction is allowed to assessees who are growing and manufacturing tea
or coffee: r rubber in India. The salient features of this section are as under : (Sec. 33AB)
(1) The assessee should deposit in a special account with the National Bank for
Agriculture and Rural Development in accordance with the scheme approved by the Tea
Board or the Coffee 3oard or the Rubber Board or deposit any amount in an account
opened by the assessee (known AS Deposit Account) in accordance with the deposit
scheme framed by the Tea Board or the Coffee Board or the Rubber Board, as the case
may be.
(2) The deposit should be made within a period of six months from the end of the previous
year or before furnishing the Return of his income, whichever is earlier.
(3) In computing the taxable profits from the above business, the following deduction will
be allowed in respect of the above deposit:

71
(a) a sum equal to the amount so deposited; or
(b) 40% of the profits of such business (before making a deduction under this section and
before setting off brought forward business losses),
whichever is less.
5. Deduction will be allowed in respect of prospecting for, or extraction or production of
petroleum or natural gas or both in India. The main provisions of this section are as
under: (Sec. 33ABA)
(1) A deduction will be allowed if the Central Government has entered into an agreement
which the assessee.
(2) The assessee has before the end of the previous year has deposited the amount:
(a) in a special account with the State Bank of India, for the specified purposes in a
scheme approved in this behalf by the Government of India in the Ministry of Petroleum
and Natural Gas; or
(b) in an account—Site Restoration Account (S.R.A.) for the purposes specified in a
scheme framed by the Ministry aforesaid.
(3) Quantum of deduction:
(a) A sum equal to the amount or the aggregate of the amounts so deposited; or
(b) 20% of the profits of such business (computed under the head 'Profits and gains of
business or profession') before making any deduction under this section; whichever is less.
6. Expenditure on Scientific Research. The following deductions shall be allowed in
respect of expenditure on scientific research. (Sec. 35)
(i) Revenue expenditure incurred by the assessee himself. Where the assessee himself
carries on scientific research in relation to his own business any revenue expenditure made
by the assessee on scientific research during the previous year shall be allowed in full.
[Sec. 35(l)(i)]
(ii) Contribution made to outsiders. Sums paid for Scientific Research to an approved
Research Association or a University, College or other Institution. Where the assessee
contributes any sum to an approved research association or to an approved university,
college or other institution to be used for scientific research it is allowed as a deduction
150% (w.e.f. AY. 2018-19) of the amount so paid, whether it is related or unrelated to the
business of the assessee.

72
[Sec. 35(l)(ii)]
Note : W.e.f. the Assessment Year 2021-22, the deduction shall be allowed 100%
instead of 150%.
(iia) Sum paid for scientific research to a company. 100% (w.e.f. the Assessment Year
2018-19) of the sum paid to a company shall be allowed as a deduction if such company:
(a) is registered in India;
(b) its main object is scientific research and development;
(c) it is approved by the prescribed authority; and
(d) it fulfils such other conditions as may be prescribed.
(iii) Sums paid for Social or Statistical Research. 100% (w.e.f. the Assessment Year
2018-19) of the sum paid to an approved research association or to a university, college or
other institution to be used for research in social science or statistical research is allowed
as a deduction, whether it is related or unrelated to the business of the assessee. [Sec.
35(l)(iii
(iv) Capital Expenditure on Scientific Research incurred by the assessee himself. The
salient features regarding such expenditure are as under : [Sec. 35(l)(i\
(1) Any expenditure of a capital nature on scientific research related to the busine.--carried
on by the assessee is allowed in full for the relevant previous year. No deduction shall be
admissible in respect of any expenditure on the acquisition of any Ian Capital expenditure
on scientific research which cannot be absorbed on account insufficiency of profits under
the business head or any other head, the unabsorbed par will be carried forward and
treated in the same manner as unabsorbed depreciation
(v) Sums paid to a 'National Laboratory'or a recognised University or an Indian Institut
of Technology for an approved scientific research programme. The sum paid by an
assessee I a 'National Laboratory* or a recognised University or an Indian Institute of
Technology or a approved person for carrying out scientific research programmes, which
are approved by th prescribed authority, will be eligible as a deduction @ 150% (w.e.f. the
Assessment Year 2018-1 of the sum so paid. [Sec. 35(2AA Note : W.e.f. the Assessment
Year 2021-22, the deduction shall be allowed 100% instead of 150%.
'National Laboratory' means a scientific laboratory functioning at the national level una the
Indian Council of Agricultural Research or the Indian Council of Medical Research or the

73
Council of Scientific and Industrial Research and which is approved by the prescribed
author.-as a National Laboratory.
(vi) Expenditure on in-house research. A deduction of an amount equal to 150% (w.e.f. A
2018-19) of expenditure incurred by a company on in-house research and development
facilil shall be allowed. However, the deduction is not admissible if the expenditure is
incurred c: land or building. [Sec. 35(2AP Note: W.e.f. Assessment Year 2021-22, the
deduction shall be allowed 100% instead of 150%.
6A. Capital Expenditure to obtain the right to use spectrum for telecommunicati
(Sec. 35AE -
The provisions are the same as discussed in point 7. (Sec. 35ABB)
Capital Expenditure to obtain a licence to operate telecommunication services. Any
mxtal expenditure incurred on the acquisition of any right to operate telecommunication -
ces either before the commencement of the business to operate telecommunication
services ereafter at any time during any previous year and for which payment has actually
been - ie to obtain a licence will be allowed as a deduction in equal installments over the
relevant n-rvious years. (Sec. 35ABB)
Relevant the previous years' means:
A) in a case where the licence fee is actually paid before the commencement of the
business to operate telecommunication services, the previous years beginning with the
previous year in which such business commenced;
B) in any other case, the previous years beginning with the previous year in which the
licence fee is actually paid,
and the subsequent previous years during which the licence, for which the fee is paid, shall
in force.

74
 DETERMINATION OF INCOME OF CERTAIN BUSINESS OR PROFESSION
ON A PRESUMPTIVE BASIS

In case of certain business or profession, it has been provided that the assessee car.
determine his income either on a presumptive basis or on the basis of normal provisions of
the Act.
The provisions relating to the determination of income on a presumptive basis are
as under
1. DETERMINATION OF PROFITS AND GAINS OF ELIGIBLE BUSINESS
(Sec. 44AD
The provisions of section 44AD are applicable to an eligible assessee who is
engaged eligible business.
The income from such business shall be presumed to be:
(i) 6% of total turnover or gross receipts which is received by an account payee
cheque i an account payee bank draft or use of electronic clearing system through a bank
account during the previous year or before the due date of furnishing the return of income
u/s 139(1) in respec*. of that previous year.
(ii) 8% of total turnover or gross receipt during the previous year which is not
received at provided in (i).
However, an eligible assessee may declare a sum higher than the aforesaid sum as
incon actually earned from the eligible business.
Explanation :
(a) "Eligible assessee" means:
(i) an individual, HUF or partnership firm, who is a resident but not a limited liabili:
partnership firm; and
(ii) who has not claimed deduction under any of the sections 10AA, 80IA, 80IAB, 80IE
80IBA, 80IC, 80IE, 80JJA, 80JJAA, 80LA, 80QQB, 80RRB.
(b) "Eligible business" means :
(i) Any business except the business of plying, hiring or leasing goods carriage -referred to
in section 44AE; and

75
(ii) Whose total turnover or gross receipts in the previous year does not exceed, tv. crore
rupees.
Some other provisions are as under :
(1) When the income is presumed u/s 44AD no deduction under sections 30 to 38 shall be
allowed against the presumed income as it is presumed that all such deductions have
ahead;, been allowed.
(2) It shall be presumed that the assessee had claimed the depreciation on the assets use for
the purposes of the above business and it had been actually allowed, and the written-dov.
the value will be calculated accordingly.
(3) Where an eligible assessee declares profit for any the previous year in
accordance wit] the provisions of this section and he declares profit for any of the five
assessment years relevant previous year succeeding such the previous year not in
accordance with the presumptive -he shall not be eligible to claim the benefit of the
provisions of this section for five & essment years subsequent to the assessment year
relevant to the previous year in which the profit has not been declared in accordance with
the presumptive basis.
4) An eligible assessee to whom the provisions mentioned in (3) are applicable and
whose income exceeds the maximum amount which is not chargeable to income-tax, he
has to t ain proper account books, get these audited and the report of the audit must be
furnished ronically
5) The provisions of this section shall not apply to :
(i) a person carrying on profession as mentioned in Sec. 44AA;
ii) a person earning income in the nature of commission or brokerage; or
iii) a person carrying on any agency business.
Important notes regarding presumptive income under Section 44AD and under
Section
1. The provisions of Sections 28 to 43C shall not be applicable when income is computed
on esumptive basis. (See Chapter 8)
2. Current year losses and brought forward losses can be set-off against presumptive dc
Dme. (See Chapter 14)
3. Deductions under sections 80C to 80GGC, under sections 80TTA, 80TTB and 80U can
be acted from presumptive income. (See Chapter 15)

76
DEPRECIATION AND INVESTMENT ALLOWANCE

Depreciation means a decrease in the value of assets by wear and tear, caused by
their use in the business over a period of time. Its cost is spread over its anticipated life by
charging iepreciation every year against the profits of the business.

SOME IMPORTANT POINTS REGARDING DEPRECIATION

(1) Assets eligible for depreciation [Sec. 32(1)]
A. Tangible assets: (i) Building, (ii) Machinery or Plant, and (iii) Furniture.
B. Intangible assets: (i) Know-how, (ii) Patents, (iii) Copyrights, (iv) Trademarks, (v)
Licen-s. (vi) Franchises, (vii) Any other business or commercial rights of similar nature.
Other assets such as investments, goodwill, etc., do not qualify for depreciation allowance.
Building means only the superstructure and does not include the land on which it is
constructed, as the land does not depreciate by use. The building includes roads, bridges,
culverts, wells and tubewells. Building need not be a full compact and independent
building. It . ay be a part of a building also.
The term 'plant'includes ships, vehicles, books, scientific apparatus and surgical
equipment -sed for the purpose of the business or profession. Plant does not include
animals, tea bushes, furniture or fittings.
(2) Conditions for allowance of depreciation
The two essential conditions to be fulfilled for claiming depreciation allowance are :
(i) Asset should be owned, wholly or partly by the assessee.
(ii) It should be used for the purpose of assessee's business or profession.
(3) Block of Assets [Sec. 2(11)]
The term 'Block of Assets' means a group of assets falling within a class of assets
comprising:
(a) tangible assets, being buildings, machinery, plant or furniture,
(b) intangible assets, being know-how, patents, copyrights, trademarks, licences,
franchises or any other business or commercial rights of similar nature, acquired on or
after 1.4.1998,

77
in respect of which the same percentage of depreciation is prescribed.

(4) Methods of Depreciation

(i) In the case of assets of an undertaking engaged in generation or generation and -
tribution of power, depreciation may be claimed at the prescribed rates on the actual cost
reof, i.e., on the basis of Straight Line Method, (w.e.f. the Assessment Year 1998-99)
(ii) In any other case on any block of assets at the prescribed rates on the written-down lue
of such block of assets.
(5) Assets acquired and put to use during the previous year
In the case of an asset acquired and put to use in the business during the previous year
only 50% of the normal depreciation will be allowed if it is used in the business for less
than 18 days during the previous year. (This provision is applicable in both the methods of
depreciati i.e., Straight Line Method and W.D.V. Method.)
(6) Compulsory deduction for depreciation
The amount of depreciation shall be deducted in computing income, whether or not t
assessee has claimed the deduction in respect of depreciation.
(7) Motor Car Manufactured outside India
If a motor car manufactured outside India is acquired after 31.3.2001 and used for busine-
or profession of the assessee in India, depreciation shall be allowed on such car w.e.f. :
Assessment Year 2002-03.
(8) Depreciation Allowance to assessees carrying on their business in lease or rente-:
premises
No depreciation is allowable in respect of building taken on lease or rent and used for : b
purposes of his business as the assessee is not the owner of such building. However, where
assessee incurs capital expenditure on the construction of any structure or renovation -
extension of or improvement to any building held by him under a lease or other right of
occupa:. and used for purposes of his business or profession, he will be eligible for the
grant of depreciat i in respect of such capital expenditure.

78
ADDITIONAL DEPRECIATION ON PLANT OR MACHINERY [Sec. 32(1)
On new plant or machinery (other than ships and aircraft), which has been acquired an
installed by an assessee engaged in the business of manufacture or production of any
article i thing or in a business of generation, transmission or distribution of power,
additional depre tion shall be allowed @ 20% or (@ 10% if the asset is put to use for less
than 180 days in the ye in which it is acquired) of the actual cost of it.
Additional depreciation shall also be allowed if: (i) An assessee sets up an
undertaking enterprise for the manufacture or produce an article or thing after 31.3.2015.
(ii) It should set up in notified backward area of the State of Andhra Pradesh or Bihar or
Telangana or Wi Bengal, (iii) It should acquire and install any new machinery or plant
(other than ship aircraft) after 31.3.2015 but before 1.4.2020. (iv) The additional
depreciation shall be allowe 35%. (v) If the new machinery or plant is acquired during the
previous year and is put to use i less than 180 days during that previous year, the
additional depreciation shall be allowed ; 17.5%
However, the deduction shall not be allowed in respect of: (a) any machinery or
plant whit: before it's installation by the assessee was used either within or outside India
by any ot: person; or (b) any machinery or plant installed in any office premises or any
resident: accommodation, including accommodation in the nature of a guest house; or (c)
any of: appliances or road transport vehicles; or (d) any machinery or plant, the whole of
the actual c of which is allowed as a deduction (whether by way of depreciation or
otherwise) in comput:: . the income chargeable under the head "Profits and Gains of
Business or Profession" of any previous year.
Deduction regarding disallowed part of additional depreciation. Where a new
plant machinery is acquired during the previous year and put to use for less than 180 days
during t: previous year, the additional depreciation is allowed @ 50% of the prescribed
rate.
The balance 50% of additional depreciation shall be allowed in the immediately
succeed: . previous year.
Actual cost of an asset [Sec. 43 1
Actual cost of an asset means the actual cost of the asset reduced by that portion of
the ci -if any, as has been met directly or indirectly by any other person or authority. For

79
example, it asset is purchased for Rs 1,00,000 and the government gives a subsidy of Rs
20,000 to acquire I asset, the actual cost to the assessee will be Rs 80,000.
Where the assessee incurs any expenditure for acquisition of any asset in respect of
which ayment or aggregate of payments made to a person in a day, otherwise than by an
account ee cheque drawn on a bank or an account payee bank draft or use of the electronic
system throutgh a bank account, exceeds Rs 10,000. such expenditure shall be ignored for
the purposes termination of the actual cost of the asset, (w.e.f. the Assessment Year 2018-
19)
Where inventory is converted into capital asset and it is used for business or
profession, actual cost of such asset shall be the fair market value of inventory on the date
of conversion, e.f. the Assessment Year 2019-20) [Sec. 43(1) Explanation 1A]

Cases when Actual Cost is a deemed figure or notional figure

(1) Asset is acquired by the assessee by way of gift or inheritance. The actual cost to the
lessee shall be determined as under :
Actual Cost to the previous owner .........
Less : Depreciation allowed/allowable on such asset
from the date of acquisition till transfer .........
Actual Cost for the assessee (transferee) .........
Market Value of the asset on the date of acquisition will not be considered for determining
actual cost' in such cases.

80
 CAPITAL GAINS
'Capital Gains' is the fourth head of income.
Basis of Charge [Sec. 45(1)]
The basis of the charge is the profits or gains arising from the transfer of a capital asset in
previous year. It is taxable under the head 'Capital Gains'. Thus, the essential elements of
capital gains are :
(A) Capital Asset,
(B) Transfer of Capital Asset,
(C) Computation of Capital Gain.

(A) CAPITAL ASSET [Sec. 2(14)]

Capital asset means: (a) Property of any kind held by an assessee, whether connected with
his business, profession or not. (b) Any securities held by a Foreign Institutional Investor
which is invested in such securities in accordance with the regulations made under the
Securities ad Exchange Board of India Act, 1992.
Capital asset may be movable or immovable, tangible or intangible, fixed or floating.
Capital asset includes land, building, plant, machinery, investments, goodwill, leasehold
_hts, jewellery, shares, a manufacturing licence, etc.
Property includes any right in or in relation to an Indian company, including rights of
management or control or any other rights whatsoever.
Exception. The term capital asset does not include the following :
(i) Commercial goods. Any stock-in-trade [other than the securities mentioned in (b)],
consumable stores or raw materials held for the purposes of his business or profession.
(ii) Movable assets for personal use. Movable assets (including wearing clothes and
furniture) held for personal use by the assessee or any member of his family dependent on
him. Thus, a car or any other vehicle, refrigerator, television or laptop or other electrical
appliances are included in this.
Exceptions. The following assets will not be treated as a personal effect and liable to tax :
(a) archaeological collections, (b) drawings, (c) paintings, (d) sculptures, (e) any work of
art, (f) jewellery for personal use. Jewellery includes :

81
(A) Ornaments made of gold, silver, platinum or any other precious metal, whether or not
worked or sewn into any wearing apparel.
(B) Precious or semi-precious stones, whether or not set in any furniture, utensil or other
article or worked or sewn into any wearing apparel.
(iii) Agricultural land. Agricultural land in India, provided it is not situated:
(a) within the limits of any municipality or a cantonment board, having a population of
10,000 or more; or
(b) within the area measured aerially specified below,
(1) Not being more than two Kilometres from the local limits and which has a popula tion
of more than ten thousand but not exceeding one lakh; or
(2) Not being more than six kilometers from the local limits and which has a population of
more than one lakh but not exceeding ten lakh; or
(3) Not being more than eight kilometers from the local limits and which has i population
of more than ten lakh.
(iv) Gold Bonds. 6V2% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence
Go! Bonds, 1980 issued by the Central Government.
(v) Special Bearer Bonds, 1991.
(vi) Gold Deposit Bonds. Gold Deposit Bonds issued under the Gold Deposit Scheme, 199
or deposit certificate issued under the Gold Monetisation Scheme, 2015 notified by tin
Central Government.
Self-generated Assets
Some self-generated assets are treated as capital assets :
(1) Self-generated goodwill of a business.
(2) Self-generated tenancy rights, stage carriage permits and loom hours.
(3) Right to manufacture, produce or process any article or thing.
(4) Right to carry on any business or profession.

KINDS OF CAPITAL ASSETS

Capital assets are divided into two categories:
(1) Short-term Capital Asset, and (ii) Long-term Capital Asset.

82
Short-term Capital Asset. [Sec. 2 (42A)]
Short-term Capital Asset means a capital asset held by an assessee for not more than S3 -
months immediately preceding the date of its transfer.
Capital gains arising from the transfer of the short-term capital asset is called Short-tern
Capital Gain.
Exceptions. (1) In the case of a financial asset being (a) security (other than a unit) listed
in recognised stock exchange in India, or (b) a unit of the Unit Trust of India, or (c) a unit
of an equi-oriented fund or (d) zero coupon bond, the short-term capital asset will mean
security or unit or z coupon bond held by the assessee for not more than 12 months instead
of 36 months as in cas other assets.
In the case of a financial asset, as aforesaid, which is allotted without any payment (Lfl
bonus shares) on the basis of holding of any other financial asset, the period of its holding
sha be reckoned from the date of the allotment of such financial asset.
(2) If unlisted share (not listed in a recognised stock exchange in India) of a company i
land or building or both, is held by the assessee for not more than twenty-four mon:.
immediately preceding the date of its transfer, it will be treated as Short-Term Capital A?-
(3) Assets used for business or profession, on which depreciation is allowed on the basi?
WDV method is treated always as a short-term capital assets.
Long-term Capital Asset. [Sec. 2(29A)]
Long-term Capital Asset means a capital asset held by an assessee for more than 36 mon:
immediately preceding the date of transfer.
Capital gain arising from the transfer of the long-term capital asset is called Long-u
Capital Gain.
Exceptions. (1) In the case of listed securities or units of U.T.I, or units of equity orien:
fund or zero coupon bond held by the assessee, the long-term capital asset will mean such
ass held by the assessee for more than 12 months.
(2) If unlisted shares of a company or land or building or both are held by the asses-the
long-term capital asset will mean such asset held by the assessee for more than 24 month
(3) In case of Land or Building or both : (i) Transferred up to 31.3.2017—36 months, (ii)
If transferred on or after 1.4.2017—24 months.

83
 (B) TRANSFER OF CAPITAL ASSET [Sec. 2(47)]
'Transfer' in relation to a capital asset includes :
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) its compulsory acquisition under any law; or
(iv) where the asset is converted by the owner into stock-in-trade of a business carried on
by him; or
(v) the maturity or redemption of a zero coupon bond; or
(vi) conversion of a business into a limited company; or
(vii) any transaction involving the allowing of the possession of any immovable property
to be taken or retained in part performance of a contract of nature referred to in the
Transfer of Property Act, 1882; or
(viii) any transaction (whether by way of becoming a member of, or acquiring shares in, a
co-operative society, a company, etc.) which has the effect of transferring the enjoyment
of any immovable property.
Certain transactions not regarded as transfer. The following transactions are not
regarded as a transfer for the purpose of capital gains tax : (Sec. 47)
(i) Any distribution of capital assets on the total or partial partition of a Hindu undivided
family.
(ii) Any transfer of a capital asset under a gift or Will or an irrevocable trust.
Exception. If shares or debentures or warrants, allotted by a company directly or indirectly
to its employees under the Employees' Stock Option Plan or Scheme of the company are
transferred under a gift or irrevocable trust, it will be deemed to be a transfer.
(iii) Any transfer of a capital asset by a company to its subsidiary company, if:
(a) the parent company holds the whole of the share capital of the subsidiary company,
and
(b) the subsidiary company is an Indian Company.
(iv) Any transfer of a capital asset by a subsidiary company to the holding company, if:
(a) the whole of the share capital of the subsidiary company is held by the holding
company; and
(b) the holding company is an Indian company.

84
Any transfer of a capital asset as per clause (iii) or (iv) above shall be treated as transfer if
the transfer is made as Stock-in-trade.
(v) Any transfer, in a scheme of an amalgamation, of a capital asset by the amalgamating
company to the amalgamated company if the amalgamated company is an Indian
company.
(vi) Any transfer, in a scheme of amalgamation of a banking company with a banking
institution sanctioned and brought into force by the Central Government, of a capital asset
by the banking company to the banking institution.
(vii) Any transfer of shares of an Indian company by a foreign company to another foreign
company in pursuance of a scheme of amalgamation between the two foreign companies,
if:
(a) at least 25% of the shareholders of the amalgamating company continue to remain
shareholders of the amalgamated foreign company; and
(b) such transfer does not attract tax on capital gains in the country in which the
amalgamating company is incorporated.
(viii) Any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being
a share or shares held by him in the amalgamating company, if:
(a) the transfer is made in consideration of the allotment to him of any share or shares in
the amalgamated company except where the shareholder itself is the amalgamated
company; and
(b) the amalgamated company is an Indian company.
(ix) Any transfer of a capital asset, being any work of art, archaeological, scientific or a:
collection, book, manuscript, drawing, photograph or print, to the Government or
University or the National Museum, National Art Gallery, National Archives or an such
other public museum or institution as may be notified by the Central Governme: in
Official Gazette to be of national importance or to be of renown throughout any Stat or
States, (e.g., Indira Gandhi National Centre for Arts).
(x) Any transfer by way of conversion of debentures, debenture-stock or deposit certificate
-in any form, of a company into shares or debentures of that company.

85
(xi) Any transfer of foreign currency bonds or Global Depository Receipts (specified u
section 115AC) held by a non-resident to another non-resident, where the transfer -made
outside India.
(xii) Any transfer of land [under a scheme prepared and sanctioned u/s 18 of the Sick
Industn Companies (Special Provisions) Act, 1985] by a Sick Industrial Company which is
manag by its Workers' Co-operative. The exemption will be allowed if the land is
transferred. the period commencing from the previous year in which the company
becomes a Si Industrial Company and ending with the previous year in which the entire
net worth the company becomes equal to or exceeds the accumulated losses.
(xiii) Where a firm is succeeded by a Company in the business carried on by it as a result
of which the firm sells or otherwise transfers any capital asset or intangible asset in the
company. It will not be regarded as transfer provided the prescribed conditions an
satisfied.
(xiv) Where any capital asset is transferred to a company in the course of corporatisatior.
or demutualisation of a recognised stock exchange in India as a result of which an AOl or
BOI is succeeded by such company, it shall not be regarded as transfer provided the
corporatisation or demutualisation of the exchange is carried out in accordance wi: a
scheme approved by the SEBI.
Note: Demutualisation is a process that changes a mutual or co-operative association into
a public company converting the interest of members into shareholdings.
(xv) Any transfer of a capital asset being a membership right held by a member of
recognised stock exchange in India for the acquisition of shares and trading or clearing
rights acquired by such member in that exchange in accordance with a scheme
demutualisation or corporatisation which is approved by the SEBI, it shall not I regarded
as transfer.
(xvi) Where a sole proprietary concern is succeeded by a company in the business carried
on by him as a result of which the concern sells or otherwise transfers any capital ass< or
any intangible asset to the company, it will not be regarded as transfer provided tl
prescribed conditions are satisfied.
(xvii) Any transfer in a scheme for the lending of any securities under an agreement or an
arrangement which the assessee has entered into with the borrower of such securitie-The

86
transfer should be as per the guidelines issued by the Securities and Exchang Board of
India or the Reserve Bank of India.
(xviii) Any transfer of a capital asset in a demerger by the demerged company to the
resulting company, if the resulting company is an Indian company.
(xix) Any transfer of shares held in an Indian company in a demerger, by the demerged
foreign company to the resulting foreign company, if:
(a) the shareholders holding not less than 75% in value of shares of the demerged foreign
company continue to remain shareholders of the resulting foreign company; and
(b) such transfer does not attract tax on capital gains in the country, in which th demerged
foreign company is incorporated.
(xx) Any transfer or issue of shares by the resulting company, in a scheme of demerger to
the shareholders of the demerged company, if the transfer or issue is made in consider a of
demerger of the undertaking.
(xxi) Any transfer of a capital asset by the predecessor co-operative bank to the successor
co-operative bank in a business reorganisation, i xxii) Any transfer of a capital asset being
shares held by the shareholder in the predecessor
co-operative bank in lieu of shares allotted to him in the successor co-operative bank in a
business reorganisation. • xxiii) Any transfer by way of conversion of bonds purchased in
foreign currency into shares or debentures of any company, xxiv) Any transfer of a capital
asset in a transaction of a reverse mortgage under a scheme notified by the Central
Government. (xxv) Where a private company or unlisted public company is converted into
a limited liability partnership and as a result of which the company transfers its capital
asset or intangible asset to the partnership or shareholder transfers shares held in such
company, it will not be regarded as transfer provided the prescribed conditions are
satisfied.
xxvi) Any transfer of Government Security carrying a periodic payment of interest made
outside India through an intermediary dealing in settlement of securities by a nonresident
to another non-resident.
xxvii) Any transfer of a share of a special purpose vehicle to a business trust in exchange
of units allotted by that trust to the transferor.

87
xxviii) Any transfer of Sovereign Gold Bond issued by the Reserve Bank of India, by way
of redemption by an individual.
xxix) Any transfer by a unit holder of a capital asset, being a unit or units held by him in
the consolidating plan of a mutual fund scheme, made in consideration of the allotment to
him of a capital asset, being a unit or units in the consolidated plan of that scheme of the
mutual fund.
xxx) Any transfer made outside India of a capital asset being rupee denominated bond of
an Indian company issued outside India, by a non-resident to another non-resident.
xxxi) Any transfer by way of conversion of preference shares of a company into equity
shares of that company.

(C) COMPUTATION OF CAPITAL GAINS (Sec. 48)

The income chargeable under the head 'Capital Gains' shall be computed as under :
(a) Computation of short-term capital gains. Deduct from the full value of the
consideration eceived or accruing as a result of the transfer of the capital asset the
following amounts :
(i) the cost of acquisition of the capital asset;
(ii) the cost of any improvement thereto; and
(iii) expenditure incurred wholly and exclusively in connection with such transfer. This
may be explained in the form of the equation as under:
Capital Gain = Full value of consideration - (Cost of acquisition + Cost of improvement +
Selling expenses).
However, the amount paid as securities transaction tax shall not be allowed as a deduction.
Set-off of short-term capital loss. If there is a short-term capital loss on the transfer of a
nort-term capital asset, such loss can be set-off against any other short-term capital gain or
: ng-term capital gain.
(b) Computation of long-term capital gains. Deduct from the full value of consideration:
(i) indexed cost of acquisition of the asset;
(ii) indexed cost of any improvement of the asset; and
(iii) expenditure incurred in connection with the transfer of the asset.
However, the amount paid as securities transaction tax shall not be allowed as a deduction.

88
Exception. The provisions relating to indexed cost of acquisition and indexed cost of
improvement will not apply to the long-term capital gains arising from the transfer of
long-term capital isset:
(a) being bonds or debentures. However, the benefit of indexation will be available on (i)
ndexed bonds issued by the Government (ii) Sovereign Gold Bond.
(b) being an equity share in a company or a unit of an equity-oriented fund or a unit of a
business trust referred to in Sec. 112A.
Set-off of long-term capital loss. If there is a long-term capital loss on the transfer of; long-
term capital asset, such loss can be set-off only against any other long-term capital gain
Explanation :
(1) Indexed cost of acquisition shall be computed as under :
Cost of acquisition x Cost inflation index for the year in which the asset is sold Cost
inflation index for the first year in which the asset was held or cost inflation index on
1.4.2001, whichever is later
(2) Indexed cost of improvement shall be computed as under : Cost of improvement x Cost
inflation index for the
year in which the asset is sold Cost inflation index for the year in which the improvement
to asset took place If the expenditure is incurred for improvement prior to 1.4.2001, it shall
not be deducted
(3) 'Cost inflation index' in relation to Previous Year means the index as the Central
Government may, having regard to 75% of the average rise in the consumer price inde?
(urban) for the immediate preceding the Previous Year, notify in this behalf.
The Government have notified the following 'Cost Inflation Index':
SI. No. Financial Year Cost Inflation Index
1. 2001-02 100
2. 2002-03 105
3. 2003-04 109
4. 2004-05 113
5. 2005-06 117
6. 2006-07 122
7. 2007-08 129

89
8. 2008-09 137
9. 2009-10 148
10. 2010-11 167
11. 2011-12 184
12. 2012-13 200
13. 2013-14 220
14. 2014-15 240
15. 2015-16 254
16. 2016-17 264
17. 2017-18 272
18. 2018-19 280
(c) Computation of Capital gains in Case of depreciable assets on which depreciation is
allowed on the basis of the written-down method: (Sec. 5C
(1) The capital gains on depreciable assets shall be computed as under:
(i) Find out the written-down value on the first day of the previous year of all thos-
depreciable assets on which the depreciation is allowed at the same rate. All such asset a
are known as 'block of assets'.
(ii) If any new asset of the same block is purchased during the previous year, the cost t:
such an asset should be included in (i).
(iii) If any asset is sold out of such block during the previous year, the net consideration
should be deducted from the balance under (ii).
(iv) On the balance under (iii) compute the depreciation at the prescribed rate and deduc: it
from the balance under (iii).
(v) The balance under (iv) shall be the written-down value of the 'block of assets' for the
next year.
(2) If the net consideration of an asset out of the block is less than the balance under (ii),
here would be no capital gain. If the net consideration of an asset is more than the balance
_nder (ii) (the value of all assets in the block), the excess shall be deemed to be short-term
capital tain. If all the assets of the block are sold in the previous year and the net
consideration is less m the balance under (ii), the loss shall be deemed to be a short-term
capital loss.

90
Consideration for transfer of asset ..........
Less : (i) Expeneses in connection with transfer ..........
(ii) W.D.V. on 1st April ..........
(iii) Cost of the new asset purchased during the year
S.T.C.G.
Consideration for transfer of all assets Less : (i) Expenses in connection with transfer
(ii) W.D.V. on 1st April
(iii) Cost of the new asset purchased during the year
Balance
If the balance is positive S.T.C.G. If the balance is negative S.T.C.L.

91
 UNIT-IV
INCOME FROM OTHER SOURCES

This is the last and residuary head of income. Any income which is taxable under
the A but does not find a place under any of the first four heads of income (i.e., Salaries,
Income fir House Property, Profits and Gains of Business or Profession and Capital Gains)
will assessable under this residuary head 'Income from Other Sources'.
Incomes from other sources can be classified into two:
(A) Incomes specified u/s 56(2) or specific incomes chargeable under this head of income
(B) Other incomes are chargeable under the head income from other sources.
(A) SPECIFIC INCOMES CHARGEABLE UNDER THIS HEAD OF INCOME
[Sec. 56(2)
The following incomes shall be chargeable to income tax under the head 'Income from Ot :
Sources':
(1) Dividends.
(2) Income from winnings from lotteries, crossword puzzles, races including horse races, c
games and other games of any sort or from gambling or betting of any form or nature
whatsoever
(3) Any sum received by the assessee from his employees as contributions to any provid
fund or superannuation fund or any fund set-up under Employees' State Insurance Act, 194
(4) Income by way of interest on securities.
(5) Income from machinery, plant or furniture let on hire if the income is not chargeable:
income tax under the head 'Profits and Gains of Business or Profession'.
(6) Income from letting on hire machinery, plant or furniture and also buildings, and
letting of the buildings is inseparable from the letting of the said machinery, plant or fur
nit if it is not chargeable to income tax under the head 'Profits and Gains of Business or
Profess:
(7) Income received under a Keyman insurance policy including bonus on such polic; such
income is not chargeable to income tax under the head 'Profits and Gains of Busines -
Profession' or under the head 'Salaries'.

92
(8) Any person receives, in any Previous Year from any person or persons:
Asset
(a) Any sum of money, without consideration, the aggregate value of which exceeds Rs
50,000
(b) Any immovable property:
(i) without consideration, the stamp duty value of which exceeds Rs 50,000;
(ii) for a consideration
Amount to be included in the income
The whole of the aggregate value of su sum.
The stamp duty value of such property.
The stamp duty value of such property exceeds such consideration, if the amount such
excess is more than the higher of t following amounts :
(a) the amount of Rs 50,000; and
(b) the amount equal to 5% of the considerate
(c) Any property other than immovable property :
(i) without consideration, the aggregate fair The whole of the aggregate fair market market
value of which exceeds Rs 50,000; value of such property.
(ii) for a consideration which is less than the The aggregate fair market value of such
aggregate fair market value of the property property as exceeds such consideration.
by an amount exceeding Rs 50,000.
But the above provisions shall not apply to any sum of money or any property received :
(a) from a relative; or
(b) under a will or by way of inheritance; or
(c) on the occasion of the marriage of the individual; or
(d) in contemplation of death of the payer, donor; or
(e) from any local authority; or
(f) from any trust or institution registered u/s 12A or 12AA; or
(g) from any fund or foundation or university or other educational institution or hospital or
other medical institution or any trust or institution referred to in Sec. 10(23C); or
(h) where the transfer is not regarded as transfer u/s 47 in the cases of amalgamation,
demerger or business reorganisation; or

93
(i) from an individual by a trust created or established solely for the benefit of relative of
the individual.
Explanation. (A) Property means the following capital asset of the assessee, namely :
(a) immovable property being land or building or both;
(b) shares and securities;
(c) jewellery;
(d) archaeological collections;
(e) drawings;
(f) paintings;
(g) sculptures;
(h) any work of art; or
(i) Bullion.
(B) Relative, means :
(a) In case of an individual:
(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the individual;
(vii) spouse of the person referred to in (ii) to (vi).
(b) In case of HUF, any member of the family.
Suppose Mr. Ramesh is the recipient of the gift (sum of money), the gift received from the
blowing relatives shall be exempt:
(i) Wife of Ramesh;
(ii) Brother or sister of Ramesh;
(iii) Brother or sister of the wife of Ramesh;
(iv) (a) Brother or sister of the father of Ramesh; (b) Brother or sister of the mother of
Ramesh;
(v) (a) Great grandfather, grandfather and father of Ramesh; (b) Son, grandson and great
grandson of Ramesh;

94
(vi) Great grandfather, grandfather and father of the wife of Ramesh;
(vii) (a) Brother's wife or sister's husband of Ramesh;
(b) Brother's wife or sister's husband of the wife of Ramesh;
(c) Brother's wife or sister's husband of the father of Ramesh;
(d) Brother's wife or sister's husband of the mother of Ramesh;
(e) Great grandmother, grandmother and mother of Ramesh;
(f) Son's wife, grandson's wife, great grand son's wife of Ramesh;
(g) Great grandmother, grandmother and mother of the wife of Ramesh.
(9) Interest received on compensation or on enhanced compensation shall be deemed to I
the income of the previous year in which it is received.
(10) Where a closely held company issues shares to a resident person for a considerate :
exceeding the face value of such shares, the deemed income shall be considered received
less fair market value of the shares. The tax leviable on such income popularly known as
"Angel Tax."
However, this provision shall not apply where the consideration for the issue of share.- . -
received (i) by a venture capital undertaking from a venture capital company or a venture
capit a. fund; or (ii) by a company from a class or classes of persons as may be notified by
the Central Government.
Explanation. Fair market value of the shares shall be the value : (i) as determined in
accordance with prescribed method; or
(11) as determined on the basis of assets, including intangible assets being goodwill,
know-h< patents, copyrights, trademarks, licences, franchises or any other business or
commerc: rights of similar nature, on the date of issue of shares, whichever is higher.
(11) Any sum of money received as an advance in the course of negotiations for the transit
of a capital asset and such negotiation fails, the amount so forfeited.
(12) Any compensation or other payment due to or received by any person in connect with
the termination of his employment or the modification of the terms and conditions relating
thereto shall be chargeable to income-tax under the head "Income from other sources".
Other incomes chargeable under the head Income from Other Sources
(1) All interest e.g., interest on securities, interest on bank deposits, interest on loar.
interest received on delayed refund of income tax, etc.

95
(2) Income of a tenant from sub-letting the whole or a part of the house property.
(3) Remuneration received by a teacher or a lawyer for doing examination work.
(4) Income of Royalty.
(5) Director's fees.
(6) Rent of land not appurtenant to any building.
(7) Agricultural Income from land situated outside India.
(8) Income from markets, ferries and fisheries, etc.
(9) Income from leasehold property.
(10) Remuneration received for writing articles in Journals.
(11) Income from undisclosed sources :
(i) Cash credits which are unexplained. (Sec. 68
(ii) Unexplained Investments. (Sec. 69
(iii) Unexplained Money. (Sec. 69A
(iv) Unexplained Expenditure. (Sec. 69C
(v) Amount borrowed or repaid on Hundi otherwise than through an account payee cheque
drawn on a bank.
(12) Interest received by an employee on his own contributions to an unrecognized
provident fund.
(13) Salary of a Member of Parliament, Member of Legislative Assembly or Council.
(14) Insurance Commission not chargeable under the head 'Profits and Gains of Business
or Profession'.
51 Rent of trademark.
I 61 Director's Commission for giving guarantee to the bank.
17) Director's Commission for underwriting shares of a new company.
18) Gratuity received by a director who is not an employee of the company.
19) Family pension received by the widow and heirs of deceased employees. However, the
following family pensions are exempt :
(i) Pension received by the widow of an employee of the U.N.O.
(ii) Family pension received by any member of the family of gallantry awardee. [Sec.
10(18)]
'Family' means:

96
(a) the spouse and children of the individual; and
(b) the parents, brothers and sisters of the individual, wholly or mainly dependent on the
individual.
(iii) Family pension received by the widow or children or nominated person of a member
of the armed forces (including para-military forces) of the union, where the death of such
member occurred in the course of operational duties shall be exempt provided the
prescribed conditions are satisfied. [Sec. 10(19)]
20) Amount withdrawn from deposit in National Savings Scheme, 1987 on which
deduction u/s 80CCA has been allowed including interest thereon.
21) Receipts by Cricketers selected to play for India :
(a) Test Matches in India. Amount actually received by the player from the Cricket
Control Board is taxable after allowing a deduction of an amount equal to 75% of such
receipt in respect of reasonable expenses incurred to earn such income.
(b) Other Matches in India. Generally, the entire receipts by the player (from the Board)
will be deemed to have been spent for earning such income and hence not taxable.
(c) Matches outside India. A player will be allowed a deduction of 50% of the amount
received for playing in foreign countries and the balance will be taxable.
22) Tips received by a waiter or taxi-driver, not being given by his employer.

97
 TOTAL INCOME
CLUBBING OF INCOMES AND DEEMED INCOMES
(AGGREGATION OF INCOMES)
To find out the total income of an assessee the following incomes are aggregated:
1. Incomes of the assessee (already discussed).
2. Income of other persons includible in the income of the assessee. This is known as the
clubbing of incomes.
3. Deemed incomes.
4. Share of a member in the association of persons or body of individuals.
5. Income from the firm.

CLUBBING OF INCOMES/TOTAL INCOME

There is a growing tendency on the part of the tax-payers either not to disclose certain - ets
or investments in the records maintained by them or to disclose it at a figure lower than
ost. Further, they dispose off their property or income in such a way that tax liability may
be reduced. To counteract such practices, special visions relating to clubbing of incomes
have been made in sections 60 to 65. As per these tions, the income of other persons shall
be included in the assessee's total income. Such fusion of income of other person in the
income of the assessee is called 'Clubbing of Income', ome of Other Persons included in
the Assessee's Total Income: (Sees. 60 to 65)
(1) Transfer of income without transfer of assets. If a person transfers to another person
is income from an asset without transferring the ownership of the asset, the income from
such -set shall be deemed to be the income of the transferor and shall be included in his
total income. (Sec. 60)
(2) Revocable transfer of assets. Income arising to any person as a result of the revocable
ransfer of assets shall be deemed to be the income of the transferor and shall be included
in his tal income. (Sec. 61)
'Revocable transfer' for this purpose means:
(i) a transfer containing any provision for the re-transfer directly or indirectly of the whole
or any part of the income or assets to the transferor; or

98
(ii) a transfer which in any way, gives the transferor a right to re-assume power directly or
indirectly over the whole or any part of the income or assets. (Sec. 63)
It may be noted that even if an insignificant part of the income out of the transferred asset
ensures to the benefit of the transferor, the whole of the income shall be included in the
income of the transferor.
(3) Income of spouse. The following incomes of the spouse of an individual shall be
include-in the total income of the individual:
(a) Income of the spouse by way of salary, commission, fees or any other form of
remuneration from a concern in which such individual has a substantial interest. [Sec.
64(1 N)
Exception. If the payment of the above type of remuneration is purely due to the technica.
or professional qualification of the spouse, the remuneration paid to the spouse shall not be
clubbed with the income of the individual. [Sec. 64(l)(ii) Provi?
Substantial interest, (i) In Case of Company. An individual is deemed to have substantia.
interest if he along with his relatives beneficially owns equity shares carrying at least 20%
vot i n ^ power in the company at any time during the previous year.
(ii) In any other case. If the concern is not a company, he along with his relatives is entit
to at least 20% of the profits of the concern at any time during the previous year.
The word 'spouse' means husband or wife.
The income referred to in sub-clause (a) above, shall be included in the total income of th
spouse who has the greater income [exclusive of income under clause (a)].
(b) If an asset (excluding house property) is transferred by an individual to his or her
spousr directly or indirectly, neither for adequate consideration nor in connection with an
agreenu to live apart, the income from such asset to the spouse, will be included in the
income of: transferor. [Sec. 64(1):
If the consideration is inadequate proportionate income shall be included in the income the
transferor. As regards the question of an agreement to live apart, the separation may
judicial or voluntary.
Note: The income from house property transferred to the spouse shall be computed under
the head 'Income from h property' in the hands of the transferor and not in the hands of the
transferee.

99
(4) Income of daughter-in-law. If an individual transfers asset after 31st May, 191
without adequate consideration, to his daughter-in-law (Son's wife), any income arising &
such assets will be included in the total income of the transferor. [Sec. 64(1)
(5) Transfer of assets to other persons or association of persons for the benefit of the
spou-If an individual transfers assets, without adequate consideration, to some other
person association of persons for the immediate or deferred benefit of his or her spouse,
any inn arising from such assets to that person or association will be included in the total
income of I transferor to the extent is for the benefit of the spouse. For instance, suppose
the income fir the transferred assets are 10,000 and half of this is reserved for the benefit
of the spouse ot I transferor, then, ? 5,000 shall be included in the income of the transferor.
[Sec. 64(1) *
(6) Income from assets transferred to a person or association of persons for the benefit i
his son's wife. Any income arising, to any person or association of persons from assets
transfer: to it by an individual, after 31.5.1973, except for adequate consideration, shall, to
the extenl which the income from such assets is for the immediate or deferred benefit of
his son's wife included in the total income of such individual or the transferor. [Sec.
64(lXvi
(7) Income from Business. If the individual transfers any asset directly or indirectly to I
spouse or son's wife and such assets are invested by the transferee:
(i) in any business, but not as capital contribution as a partner in a firm or being admi -to
the benefits of partnership in a firm, the amount calculated as under will be included: in
the income of transferor:
Value of the assets transferred by
transferor on the 1st day of P. Y
x the profit share of transferee from business
Ibtal investment on the 1st day
of P. Y. by the transferee
(ii) in the nature of capital contribution as a partner in a firm, the interest receivec
receivable from the firm on such capital contribution will be included in the incom-
transferor.

100
Example: Mr. Atransfers Rs 10,00,000 to Mrs. Aand she started a business with this
amount. She incurred a loss of Rs 3,00,000 during the Previous Year 2018-19. The loss of
Rs 3,00,000 shall be deducted from the income of Mr. A.
(8) Income of a Minor Child. The income of a minor child (including a minor married
daughter) shall be included in the income of his or her parent. However, the income of a
physically or mentally handicapped minor child shall not be included in the income of
either of his parents. In such a case the total income of such minor child shall be computed
separately.
The following are the provisions for the inclusion of income of the minor child in the
income :a parent:
(i) where the marriage of his parents subsists, in the income of that parent whose total
income is greater;
(ii) where the marriage of his parents does not subsist, in the income of the parent who
maintains the minor child in the previous year.
Exceptions. The following incomes of a minor child shall not be included in the income of
the parent:
(i) income from manual work done by the minor;
(ii) income from activity involving the application of his skill, talent knowledge and
experience.
Minor Child. A Minor child includes a step-child and an adopted child.
When the income of a minor child is included in the income of a parent, the parent
concerned is entitled to exemption on the income so included or Rs 1,500 per minor child,
whichever is less - s 10(32).
Example : X, a minor, earns a taxable income of Rs 50,000 from interest. His father Y had
two independent businesses of cloth and iron from which his taxable incomes are Rs
60,000 and Rs 2,40,000 respectively. His mother has no income. The marriage of his
parents subsists. In this . ase, X's income of? 50,000 less Rs 1,500 [exempt u/s 10(32)]
shall be clubbed with the income of as father, i.e., Rs 3,00,000 and the total income of
father shall be Rs 3,48,500.
(9) Transfer of separate individual property or self-acquired property to Hindu
undivided •'amily of which he is a member or conversion of property. If, after 31-12-

101
1969, an individual ransfers for inadequate consideration or converts his self-acquired
property into the property f the Hindu undivided family of which he is a member, then the
income from such property -hall be deemed to be the income of the individual and not of
the H.U.F. It will be included in le total income of the individual. [Sec. 64(2)(a) and (b)]
Where such converted property is subsequently partitioned, the income from the converted
: roperty received by the spouse of the individual will be includible in the income of the
individual ho has converted the property, even after partition. [Sec. 64(2)(c)]
(10) Benami transactions. When a person enters into a transaction in the name of a person
ner than the real person in order to avoid tax, it is called a benami transaction, and the
person whose name the transaction is effected is called benamidar. If, in the opinion of the
Assessing "leer, a transfer is benami, he will treat the income of that transaction as the
income of the real person and tax shall be levied on him for that transaction. No tax shall
be levied on the •lamidar for a benami transaction.
Treatment of Loss
The income of specified persons is liable to be included in the total income of the
individual . certain circumstances specified u/s 64. Where there is a loss to a specified
person in specified rcumstances, the individual will be entitled to set-off such loss. It
means 'income' will also :lude a 'loss'.
Income from Accretion of Property Transferred
Income arising to the transferee from the property transferred is taxable in the hands : the
transferor. Income arising to the transferee from the accretion of such property or from t b
accumulated income of such property is, however, not includible in the total income of tr
transferor; but it will be taxed in the hands of the transferee.
Recovery of Tax (Sec. 6"
The tax on the income of the other person which has been included in the income of th
assessee can either be recovered from the assessee or from the other person. However, th
liability of the other person is limited to the portion of the tax levied on the assessee which
; attributable (on the basis of the average rate of tax) to the income so included. The
liability other person arises after the service of the notice of demand by the Assessing
Officer in th behalf.

102
 Where the transferred asset is held jointly by two or more persons they shall be
jointly anc severally liable to pay such tax.
Example 1. For the Previous Year 2018-19 minor son of A incurred a loss of? 50,000
unde: the head 'Income from House Property'. The loss shall be deducted from the income
of Mr. A -Mrs. A, whosoever has higher income.
Example 2. A transfers his self-acquired property to his HUF. Annual income from tht
property is ? 80.000. It shall be assessable in hands of A and not in the hands of HUF.
Suppose HUF consisting of A, Mrs. A, minor son X and major son Y, partitions the proper
aforesaid. Hence, A, Mrs. A, X, Y get ? 20,000 each from the partitioned property. Income
out o the converted property will be taxable as under :
Particulars A Mrs. A Minor Major Sc.
Son X Y
Rs Rs Rs Rs
Share out of converted property 20,000 20,000 20,000 20,000
Share of Mrs. A [clubbed with husband u/s 20,000 (20,000)
64(2)]
Share of minor son clubbed u/s 64(1 A) 20,000 (20,000)
Less : Exemption u/s 10(32) (1,500)
Taxable Income 58,500 — — 20,000

103
 SET-OFF AND CARRY FORWARD OF LOSSES

SET-OFF OF LOSSES
Set-off of losses means setting-off losses against income of the same year. The provisic:
regarding set-off of losses are as under :
(1) Set-off under the same head. If the net result for any assessment year in respect of an
source falling under any head of income is a loss, the assessee shall be entitled to have
amount of such loss set-off against the income from any other source under the same head.
Tin is also called inter-source adjustment. (Sec. 7
However, the following are the exceptions to the above general rule :
(a) Loss from speculation business cannot be set-off against income from other business
profession. This loss can be set-off only against the income from another speculation
busine
(b) Loss of specified business (See Sec. 35AD Profits and Gains of Business or Professk i
cannot be set-off against income from other business. This loss can be set-off or., against
income from other specified business.
(c) Long-term capital loss cannot be set-off against short-term capital gain. This loss cai be
set-off only against long-term capital gain.
(d) Loss from the activity of owning and maintaining race horses shall be set-off agair.-
income from owning and maintaining race horses only and not against any othe income
under the head other sources.
(e) Losses of the lottery, crossword puzzles, gambling, card games or betting etc. cam. be
set-off against such income or any other income. Further, no loss under any hea can be set-
off against such incomes.
(f) Loss from an exempted source of income cannot be set-off against any taxable incon.
(2) Set-off against income under other heads. If after setting-off a loss under the same
hea of income there still remains some loss, the remaining loss shall be set-off against his
incomr under any other head. [Sec. 71( 1
Restriction regarding set off of loss under the head "Income from house property"
again -any other head of income (w.e.f. the Assessment Year 2018-19) [Sec. 71 (3A

104
Set off of loss under the head "Income from house property" against any other head of
incor. shall be restricted to two lakh rupees for any assessment year. However, the
unabsorbed loss can be carried forward for eight subsequent years for set-off under the
head income from housr property.
However, the following losses cannot be set-off against income under other heads : (a)
Speculation losses; (aa) Loss from specified business; (b) Loss from the activity of own in.
and maintaining race horse; (c) Loss under the head 'Capital Gains'; (d) Loss under the
heac 'Business or Profession' cannot be set-off against income under the head 'Salaries'; (e)
Any loss is not allowed to be set-off against winning from races, lotteries, etc.
(3) Loss from Business or Profession. Any loss from business (other than speculatk i
business) or profession can be set-off against any other income falling under the same
heac (including speculation income) as well as under any other head of income except
Salaries.
Unabsorbed depreciation is not treated as a loss from business or profession. In the case of
unabsorbed depreciation the provisions of Sec. 32(2) are applicable. Hence, unabsorbed
depreciation, can be set-off against income under the head 'Salaries'.
(4) Speculation Loss. Losses in respect of speculation business can be set-off only against
profits and gains, if any, of another speculation business, carried on by the assessee.
Losses from House property, losses of non-speculation business or profession and losses
under the head Income from Other Sources' can, however, be set-off against the profits of
speculation business. [Sec. 73(1)]
(4A) Loss of specified business. Any loss of a specified business can be set-off against
profits f any other specified business only. [Sec. 73A(1)]
(5) Losses from the activity of owning and maintaining race horses. Losses from the
activity :f owning and maintaining race horses in any assessment year shall be set-off only
against income from owning and maintaining race horses, and not against any other
income. [Sec. 74A(3)]
(6) Capital Losses : (a) Short-term. Such losses can be set-off against any other short-term
apital gains or long-term capital gains only.
(b) Long-term. Long-term capital loss can be set-off against long-term capital gains only.

105
(7) Losses of the lottery, crossword puzzles, gambling, card games or betting, etc. These
osses cannot be set-off against any income.
(8) Loss of Association of Persons or Body of Individuals or Firm. The loss of A.O.P. or
B.O.I. IT a Firm, which could not be set-off intra headwise and inter headwise as per the
provisions rxplained earlier, cannot be apportioned among the members/partners and the
mem-oers/partners are not entitled to set-off their share of loss from their personal
incomes.
Set-off of Losses : At A Glance
Loss Set-off
1. Loss from house property (a) Income from any other house property
(b) Any other head of income up to ?
2,00,000
2. Loss from business or profession (a) Income from any other business or
profession
(b) Any other head of income except
salaries
3. Loss from speculation Income from speculation
3A. Loss from specified business Income from any other specified business
4. Short-term capital loss (a) Short-term capital gains
(b) Long-term capital gains
5. Long-term capital loss Long-term capital gain
6. Loss from the activity of owning and Income from the activity of owning and
maintaining race horses maintaining race horses
i. Loss of lottery, crossword puzzles, Cannot be set-off against any income.
gambling, card games or betting, etc.
Note : No loss can be set-off against winnings from races, lotteries, etc.
CARRY-FORWARD AND SET-OFF OF LOSSES
If it is not possible to set-off the losses during the same assessment year in which they :-
ccurred, so much of the loss as has not been so set-off out of the following losses can be
carried forward for being set-off against his income in the succeeding years provided the

106
losses have been determined in pursuance of a return filed by the assessee within the time
allowed u/s 139(1) and it is the same assessee who sustained the loss :
(1) Loss under the head 'Income from House Property'.
(2) Loss of non-speculation business or profession.
(3) Loss of speculation business.
(3A) Loss of specified business.
(4) Short-term capital loss or Long-term capital loss.
(5) Loss from the activity of owning and maintaining race horses.
Any loss other than mentioned above cannot be carried forward and set-off in succeeding
year
(1) Loss from House Property. The unabsorbed loss under the head 'Income from
Hou.Property' shall be carried forward and set-off in subsequent the assessment years up
to a maximum of eight assessment years against income from house property. (Sec. 7 IB
(2) Carry-forward and set-off of non-speculation business losses. If for any assessment
yeaJ the net result under the head 'Profits and Gains of Business or Profession' is a loss to
the assessee (not being a loss of speculation business), so much of the loss as has not been
so set-off shall be carried forward to the following assessment year and it shall be set-off
against the income under the head 'Profits and Gains of Business or Profession'. If the loss
cannot be wholly set-off in the following year, it shall be carried forward for a maximum
period of eight assessment year? immediately succeeding the assessment year for which
the loss was first computed. [Sec. 72( 1
If the business or profession has been discontinued loss can be carried forward and set-' ::
against profits and gains of business or profession.
Other important points regarding carry-forward of business losses :
(i) Losses of discontinued business of an industrial undertaking after re-establishment
revival. If on account of natural calamities, like flood, cyclone, earthquake, riot, fire or
enemy action etc., the business of the industrial undertaking is discontinued; but revived
within 3 years thereafter, the unabsorbed losses of the undertaking shall be carried forward
and set-off against the profit of the revived business or any other business up to a
maximum period of 8 years as reckonec from the year in which the business is re-started.

107
(ii) Treatment of Losses after succession takes place by inheritance. The loss incurred by
thi father in the course of carrying on his business can be carried forward and set-off by
his son. if he succeeds to the business of his father on account of his death.
(3) Losses of speculation business. If for any assessment year any loss computed in
respect speculation business has not been wholly set-off in the same assessment year
against profits and gains of any other speculation business, so much of the loss as is not so
set-off shall be carried forwarc to the following assessment year and it shall be set-off
against the profits and gains, if any, of an;, speculation business, carried on by him. If the
loss cannot be wholly set-off in the following year.:: shall be carried forward for a
maximum period of four assessment years immediately succeeding the assessment year for
which the loss was first computed. [Sec. 73(2)14
(3A) Carry-forward and set-off of loss of specified business. The brought forward loss
specified business shall be set-off against the profits and gains, if any, of any specified
business carried on by the assessee. The loss can be carried forward and set-off till it is
fully set-off. [Sec. 73A(2
(4) Carry-forward and set-off of Capital Losses : (a) Short-term Capital Loss. Short-ter:
the capital loss which cannot be wholly set-off in the same assessment year, against
incom-under the head capital gains shall be carried forward to the following assessment
year and shal! be set-off against income, under the head capital gains. If the entire amount
of carried forwar: capital loss cannot be set-off in the following assessment year, the
amount remaining unabsorbe; shall be carried forward to be set-off against capital gains in
subsequent years up to a maximum of eight assessment years immediately succeeding the
assessment year for which the loss was first computed. [Sees. 74(1) and 12
(b) Long-term Capital Loss. The long-term capital loss which cannot be wholly set-off in
th same assessment year against long-term capital gain shall be carried forward to the
following assessment year to be set-off against long-term capital gain if any. This loss can
be carried forward for a maximum period of eight assessment years immediately
succeeding the assess ment year for which the loss was first computed.

108
(5) Loss from owning and maintaining race horses. Owners of race horses are allowed to
r\ -forward and set-off the loss incurred by them on the maintenance of race horses against
ir income from the same source (i.e., income from the activity of owning and maintaining
-ice horses in a subsequent year). This loss can be carried forward for four assessment
years wing the assessment year when the loss was computed. [Sec. 74A(3)(b)]
(6) Accumulated non-speculative business loss and unabsorbed depreciation in cases of
algamation. If a company : [Sec. 72A (1)]
(i) owning an industrial undertaking or a ship or a hotel amalgamates with another .ipany,
or
(ii) a banking company amalgamates with a specified bank, or
(iii) one or more public sector company or companies engaged in the business of operation
: aircraft amalgamates with one or more public sector company or companies engaged in a
alar business, the accumulated loss and the unabsorbed depreciation of the amalgamating
:npany shall be deemed to be the loss or depreciation of the amalgamated company of the
vious year in which the amalgamation was effected. Thus, the amalgamated company will
be entitled to carry-forward and set-off the loss and unabsorbed depreciation of the
amalgamat-g company.
Conditions for set-off:
(1) The amalgamating company fulfils the following conditions :
(a) It has been engaged in the business in which the accumulated loss occurred or
depreciation remains unabsorbed, for three or more years.
(b) It has held continuously as on the date of amalgamation at least three-fourth of the
book-value of fixed assets held by it two years prior to the date of amalgamation.
(2) The amalgamated company fulfils the following conditions :
(a) The amalgamated company holds at least 75% of the book value of fixed assets, of the
amalgamating company acquired as a result of amalgamation, for five years from the
effective date of amalgamation.
(b) The amalgamated company continues the business of the amalgamated company for at
least five years from the date of amalgamation.
(7) Accumulated non-speculative business losses and unabsorbed depreciation in case
of Demerger. Where there has been a demerger of an undertaking, the accumulated loss

109
and the ^absorbed depreciation transferred by the demerged company to the resulting
company shall be allowed to be carried forward and set-off in the hands of the resulting
company. [Sec. 72A(4)]
The resulting company can carry-forward and set-off such loss for the balance period for
*hich it can be carried forward and set-off by the demerged company if there is no
demerger.
(8) Accumulated non-speculative business losses and unabsorbed depreciation in cases of
Succession. Where a firm is succeeded by a company/a proprietary concern is succeeded
by a company, which fulfils the prescribed conditions, the accumulated loss and
unabsorbed lepreciation of predecessor firm/proprietary concern shall be deemed to be the
loss and ^absorbed depreciation of the successor company for the previous year in which
business -eorganisation was effected. The provisions of the Act relating to set-off and
carry-forward loss ind unabsorbed depreciation shall apply accordingly. [Sec. 72A(6)]
The above provisions shall also apply in a case where a private company or unlisted public
ampany is converted into a limited liability partnership. \ote : For carry-forward and set-
off of unabsorbed depreciation see the chapter on 'Depreciation'.
(9) Accumulated non-speculative business losses and unabsorbed depreciation in case
of the Amalgamation of a Banking Company. Where a banking company amalgamates
with any :ther banking institution under a scheme sanctioned and brought into force by the
Central jovernment, the accumulated non-speculative business loss and the unabsorbed
depreciation rf such banking company shall be deemed to be the loss or unabsorbed
depreciation of such banking institution for the previous year in which the scheme of
amalgamation was brought into force.
Notes : (1) Definition of amalgamation given in Sec. 2(1B) shall not apply in this case. (2)
Conditions are given in Sec. 72A shall not apply in this case.
(10) Carry-forward and set-off of accumulated non-speculative business losses and una
sorbed depreciation in case of business reorganisation of the co-operative bank. For I
purposes of this section business reorganisation includes : (Sec. 72A
(I) Amalgamation of a co-operative bank with another co-operative bank.
(11) Demerger of a co-operative bank with another co-operative bank.

110
The provisions relating to set-off of accumulated non-speculative business loss and
unabsorb depreciation are the same as discussed under "Accumulated non-speculative
business losse-unabsorbed depreciation in case of amalgamation and demerger"— except
the following :
(1) The set-off shall be allowed to the successor co-operative bank as if the amalgam . had
not taken place.
(2) The period commencing from the beginning of the previous year and ending on t date
immediately preceding the date of business reorganisation, and the pea commencing from
the date of such business reorganisation and ending with I previous year shall be deemed
to be two different previous years for the purpose-set-off and carry-forward of loss and
depreciation allowance.
Treatment of Carried Forward Losses of certain Assessees
(1) Losses of the firm. The share of loss from a firm cannot be set-off by a partner again.-:
incomes. However, the firm can carry-forward and set-off its losses as per the provisions
diseu-above.
(2) Losses of a firm in the case of a change in its constitution. If a change has occunv the
constitution of a firm, the firm cannot carry-forward the share of loss of the retirir._
deceased partner. [Sec. 7 8
(3) (a) Losses of closely-held companies. Such a company shall be allowed to carry-forv.
and set-off its losses of earlier years against the income of the previous year provided I
shares carrying at least 51% of the voting power are held by the same persons at the end oi
previous year as they were held at the end of the year when loss was incurred.
(b) Losses of an eligible Startup Company : A closely held company, being a start-up S
80-IAC) the loss incurred in any year prior to the previous year shall be carried forward
and s. off against the income of the previous year, if all the shareholders of such company
who h shares carrying voting power on the last day of the year or years in which the loss
was incu t
(I) Continue to hold shares on the last day of such the Previous Year; and
(II) such loss has been incurred during the period of seven years beginning from the ye in
which such company is incorporated, (w.e.f. the Assessment Year 2018-19.)

111
Exceptions, (a) Where a change in the said voting power takes place in a previous year d
to the death of a shareholder or on account of transfer by way of gift to any relative of :
shareholder making such gift.
(b) Where a change in the shareholding, of an Indian company which is subsidiary foreign
company, takes place as a result of amalgamation or demerger of a foreign com] subject to
the condition that 51% of the shareholders of the amalgamating or demerged fore,
company continue to remain the shareholders of the amalgamated or resulting foreign
comp
(c) Where a change in shareholding takes place in a previous year pursuant to a resolution
pb approved under the Insolvency and Bankruptcy Code, 2016, after being heard to the
JURISDICTK : Principal Commissioner or Commissioner. (Sec.
If there is a change in shareholders, the company is not entitled to carry-forward and set-
the losses; but unabsorbed depreciation, unabsorbed capital expenditure on scientific
resear and family planning are deductible. [CIT. vs. Kalpaka Enterprises CP.) Ltd. (1986)
157 ITR 658
Filing of return of Loss. Unless the assessee files the Return of Income within the peri
specified under section 139(1) and gets the loss determined by the Assessing Officer he is
D entitled to carry-forward and set-off the loss. However, this condition does not apply in
case loss under the head "Income from House Property".
Carry-forward of Unabsorbed Capital expenditure on Scientific Research and Family
anning. Capital expenditure on scientific research and family planning which cannot be
sorbed in the assessment year because of insufficiency of profits can be carried forward
like .absorbed depreciation.
Order of Set-off
If an assessee is entitled to claim depreciation, capital expenditure, etc., as well as carried
:ward business losses, the sequence of allowing deduction will be as under :
(i) Current depreciation;
(ii) Capital expenditure on scientific research and family planning;
(iii) Carried forward business losses;
(iv) Unabsorbed depreciation;
(v) Unabsorbed capital expenses on scientific research and family planning.

112
Carry-Forward and Set-off of Losses : At A Glance
Loss Set-off
1. Loss from house property In the following eight years, income from
house
property.
2. Loss from business or profession In the following eight years, income from
business or
profession.
3. Loss from speculation In the following four years, income from
speculation.
3A Loss from specified business Income from the specified business. No time
. limit is
prescribed for carry-forward and set-off.
4. Short-term capital loss In the following eight years :
(a) Short-term capital gain
(b) Long-term capital gain
5. Long-term capital loss In the following eight years, long-term capital
gain.
6. Loss from the activity of owning and In the following four years, income from
main- owning and
taining race horses maintaining race horses.

113
 DEDUCTIONS TO BE MADE FROM GROSS TOTAL INCOME WHILE
COMPUTING TOTAL INCOME

GENERAL PRINCIPLES FOR DEDUCTIONS FROM INCOMES (Sec. 80A)

From gross total income, deductions shall be allowed under sections 80C to 80U. The
aggregate amount of deductions under sections 80C to 80U shall not exceed the gross total
income.
However, deductions are not allowed against short-term capital gains specified in Sec
111A and long-term capital gains.
If an association of persons or a body of individuals is entitled to any of the deduction?
referred to in sections 80G, 80GGA, 80GGC, 80IA, 80IB, 80IC and 80IE a member of the
association is not again entitled to claim such deduction in his own assessment in respect
of his share in the income of the association. This is to prevent duplication of deductions
Where deductions under sections 10AA or 80IA to 80RRB have been claimed and allowed
against the income specified in these sections for any assessment year, the deduction in
respect of such profits and gains shall not be allowed under any other provisions of the
Act.
Where the assessee fails to make a claim in his return of income for any deduction ir.
sections mentioned in 4, no deduction shall be allowed to him thereunder.

DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS

(I) Deduction in respect of Life Insurance Premium, Contribution to Provident Fund,
etc.
(Sec. 80C
(A) Assessees entitled to deduction :
(a) an individual; or (b) a Hindu undivided family.
(B) Quantum of deduction : Up to ? 1,50,000.
(C) Eligible payments and deposits :
(a) In case of an Individual
Any sums paid or deposited in the previous year by an individual:

114
(1) to effect or to keep in force an insurance on the life of self, spouse or his or her
children.
(i) The qualifying amount of any premium or other payment made on an insurance policy
issued before 1.4.2012 shall not exceed 20% of the actual capital sum assured.
(ii) The qualifying amount of life insurance premium on an insurance policy issued on or
after 1.4.2012 shall not exceed 10% of the actual capital sum assured.
(iii) The qualifying amount of life insurance premium on an insurance policy issued on or
after 1.4.2013 shall not exceed 15% of the actual capital sum assured if it is on the life of a
person who is (a) a person with a disability or a person with severe disability; or (b)
suffering from disease or ailment specified u/s 80DDB.
(2) to effect or to keep in force a contract of annuity on the life of self, spouse or his or her
children; Provided that such contract does not contain a provision for the exercise by the
insured of an option to receive a cash payment in lieu of the payment of the annuity;
(3) by way of deduction from the salary (up to 20% of salary) payable by or on behalf of
the Government for the purpose of securing a deferred annuity;
(4) as contribution by an individual to any provident fund to which the Provident Funds
Act, 1925 applies;
(5) as a contribution to public provident fund, where such contribution is to an account
standing in the name of self, spouse or his or her child;
Note : An individual can deposit maximum ? 1,50,000 in a financial year in PPF in Self-
Account and Account(s) on behalf of a minor(s), taken all the accounts together. If a
person deposits the amount in excess of the prescribed limit, no interest shall be payable
on the amount of deposits found in excess of the prescribed limit.
(6) as a contribution by an employee to a recognized provident fund;
(7) as a contribution by an employee to an approved superannuation fund;
(8) as the subscription to any such security of the Central Government or any such deposit
scheme as that Government may, by notification in the Official Gazette, specify in this
behalf;
(9) as the subscription to NSC VIII Issue and IX Issue;
(10) as a contribution, in the name of self, spouse or his or her child for participation in the
Unit-linked Insurance Plan, 1971 of the Unit Trust of India;

115
(11) as a contribution in the name of self, spouse or his or her child for participation in any
such Unit-linked Insurance Plan of the LIC Mutual Fund referred to in Sec. 10(23D), as
the Central Government may, by notification in the Official Gazette, specify in this behalf
(Dhanraksha has been notified in this behalf);
(12) sum paid to effect or to keep in force a contract for such annuity plan of LIC of India
or any other insurer as the Central Government may notify (New Jeevan Dhara, New
Jeevan Dhara Plan I, New Jeevan Akshay, New Jeevan Akshay Plan I, Plan II and Plan III
of LIC of India has been notified);
(13) sum paid as the subscription to any unit of Mutual Fund or from the Administrator or
specified company under any plan formulated in accordance with such scheme as the
Central Government may notify;
(14) sum paid as contribution by an individual to any pension fund set-up by any Mutual
Fund or by the Administrator or specified company as the Central Government may notify
(UTI—Retirement Benefit Pension Fund has been notified);
[Notification dated 3.11.2005]
(15) as the subscription to any such deposit scheme of or as a contribution to any such
pension a fund set up by the National Housing Bank, as the Central Government may, by
notification in the Official Gazette, specify in this behalf (Home Loan Account Scheme
has been notified);
(16) as the subscription to any such deposit scheme of: (a) a public sector company which
is engaged in providing long-term finance for construction or purchase of houses in India
for residential purposes; or (b) any statutory authority formed for satisfying the need of
housing accommodation, or for planning and development of cities, towns or villages or
for both, as the Central Government notify in this behalf;
(17) tuition fees (excluding any payment towards any development fees or donation or
payment of similar nature) paid at the time of admission or thereafter : (a) to any
university, college, school or other educational institution situated within India; (b) for the
purpose of full-time education of his two children;
(18) payment of installment under self-financing scheme or installment for repayment of a
loan is taken from prescribed authorities/institutions for the purpose of purchase or

116
construction of a residential house property, the income from which is chargeable to tax
under the head 'Income from House Property';
(19) sum paid as the subscription to equity shares or debentures of a public company or a
public financial institution forming part of any eligible issue of capital approved by the
Board; 'Eligible issue of Capital' means an issue made by a public company formed and
registered in India or a public financial institution and the entire proceeds of the issue are
utilised wholly and exclusively for the purposes of any business referred to in Sec.
80IA(4), i.e., iI developing, maintaining and operating an infrastructure facility, or (ii)
providing basic or cellular telecommunication services; or (iii) developing industrial park
or special economic zone, or (iv) generation or generation and distribution of power.
(20) sum paid as the subscription to any unit (approved by the Board) of any mutual fund
[Specified in Sec. 10(23D)] provided the subscription to these units is subscribed only in
the eligible issue of capital of any company;
(21) interest due on the National Savings Certificates (VIII Issue) and (LX Issue);
(22) the term deposit for a fixed period of not less than five years with a scheduled bank in
accordance with a scheme framed and notified by the Central Government;
(23) as the subscription to such bonds issued by the National Bank for Agriculture and
Rural Development, as the Central Government may notify;
(24) deposit in Five Year Post Office Time Deposit Account;
(25) deposit in Senior Citizen Savings Scheme, 2004;
(26) deposit in Sukanya Samriddhi Account.
Notes : 1. The deduction is available in respect of premia paid on life insurance policies
on the lives of major children also including a married daughter. (Circular No. 574 dated
22.8.1990)
2. 'Contribution' to any fund shall not include any sums in repayment of loan-taken from
that fund.
3. In the 5th year interest accrued on NSC VIII Issue is not re-invested, hence, interest for
5th year will not be eligible for deduction.
(b) In the case of Hindu Undivided Family
Deduction shall be allowed in respect of the following sums paid in the previous year by
the family :

117
(1) Premium paid for insurance on the life of any member of the family.
(i) The qualifying amount of any premium or other payment made on an insurance policy
issued before 1.4.2012 shall not exceed 20% of the actual capital sum assured.
(ii) The qualifying amount of life insurance premium on an insurance policy issued on or
after 1.4.2012 shall not exceed 10% of the actual capital sum assured.
(iii) The qualifying amount of life insurance premium on an insurance policy issued on or
after 1.4.2013 shall not exceed 15% of the actual capital sum assured if it is i □ the life of
a person who is (a) a person with disability or a person with severe disability; or (b)
suffering from disease or ailment specified u/s 80DDB.
(2) Contribution given to Public Provident Fund in the name of any member of the family.
(3) Subscription to the notified securities of the Central Government or a notified deposit
scheme.
(4) Contribution for participation in the Unit Linked Insurance Plan, 1971 of the Unit
Trust of India.
(5) Contribution for participation in notified Unit Linked Insurance Plan of the LIC
Mutual Fund.
(6) Sum paid to effect or to keep in force a contract for such annuity plan of LIC of India
or any other insurer as the Central Government may notify.
(7) Sum paid as the subscription to any unit of Mutual Fund or from the Administrator or
specified company under any plan formulated in accordance with such scheme Sis the
Central Government may notify.
(8) Sum paid to notified deposit scheme or pension fund set-up by the National Housing
Bank.
(9) Subscription to notified deposit scheme of:
(a) a public sector company which is engaged in providing long-term finance for
construction or purchase of houses for residential purposes; or
(b) any statutory authority formed for satisfying the need of housing accommodation, or
for planning and development of cities, towns or villages or for both.
(10) Payment of installment under self-financing scheme or installment for repayment of
loan taken from prescribed authorities/institutions for purposes of purchase or construction
of a residential house.

118
However, the deduction will not be allowed till the house is completed. The income from
such house should be chargeable to tax under the head 'Income from House Property'.
(11) Subscription to the eligible issue of capital by a public company registered in India or
a public financial institution.
(12) Subscription to any unit of Mutual Fund [Specified in Sec. 10(23D)] provided the
fund utilises the amount of subscription to subscribe to the eligible issue of capital of any
company.
(13) The term deposit for a fixed period of not less than five years with a scheduled bank
in accordance with a scheme framed and notified by the Central Government.
(14) Subscription to such bonds issued by the National Bank for Agriculture and Rural
Development, as the Central Government may notify.
(15) Deposit in Five Year Post Office Time Deposit Account.
Notes : (1) HUF cannot open a new PPF A/c after 12.5.2005. Further, the extension of
existing accounts shall not be allowed.
(2) HUF cannot invest in NSC VIII Issue or NSC IX Issue.
The accrued interest on NSC VIII issue is deemed to be re-invested every year for the
benefit of section 80C.

119
 COMPUTATION OF TOTAL INCOME OF INDIVIDUALS

Under the Income Tax Act the assessees are of the following types:
(1) Individual,
(2) Hindu undivided family,
(3) Firm,
(4) Association of persons or Body of individuals,
(5) Company,
(6) Local authority, and
(7) Artificial juridical person.
A study of the provisions of the Income Tax Act regarding the assessment of the aforesaid
Bsessees have been done in this and the following chapters.
INDIVIDUALS
An individual means a woman, man, minor child or any human being. An individual has :
pay income tax on his total income at a graded scale of tax rates ruling during the
concerned --sessment year. In addition to his own income under different heads, an
individual may also pet a share of income from his membership in the following
institutions and some incomes of thers are also to be included in his total income.
(1) As a member of Hindu Undivided Family
Share of income received by an individual as a member of a Hindu undivided family out
of e income of the family is neither taxable nor it is included in his total income, whether
or not the family has paid tax on its income; but if a member of the family makes some
personal mings of his own, they are taxable in the hands of that member as an individual.
But, under section 64(2), where an individual converts his separate individual property
into the property of the Hindu undivided family, of which he is a member, then the income
derived rrom such converted property is to be included in the individual's total income and
not in the niily's total income.
(2) As a member of an Association of Persons or Body of Individuals
The income received by its members from the Association of Persons or Body of
Individuals shall all be dealt with as under :

120
(a) Where the Association of Persons or Body of Individuals is taxed at the maximum
r.arginal rate or any higher rate, the share of a member shall not be included in his total
income it all.
(b) Where no income tax is chargeable on the total income of the Association or Body, the
.are of a member in that shall be chargeable to tax as part of his total income.
(c) Where tax has been paid by the Association or Body at normal rates, income tax shall
lot be payable in respect of such share although it shall form part of the total income of the
-ember. It means on such share income tax rebate shall be allowed at an average rate of
tax.
(3) As a member (shareholder) of a Company
The dividend [discussed u/s 2(22) (a) to (e)] received as a shareholder from a don.
company is exempt.
Income of others to be included in his Total Income or Clubbing of Incomes. The inco:
others is included in the total income of an individual in the following circumstances :
(a) Where a person transfers his income from an asset to another person without transft the
asset itself, such income shall be included in the total income of the transferor.
(b) Where there is a revocable transfer of assets the income from such assets shall be inc.
in the total income of the transferor. There are, however, certain exceptions of this r_
(c) Under certain circumstances, the income of the spouse of an individual is incluci his
(individual's) total income.
(d) The income of a minor child is included in the total income of his or her parent en
mother or father, as the case may be.
(e) Income from assets transferred to other persons is included in the total income i :
transferor if such a transfer results directly or indirectly, in a benefit to the spou-the
transferor.
Note : The detailed description of the aforesaid items (a) to (e) is given in the Eleventh
Chapter on 'Clubbing of In::: -Deemed Income, etc.'.
Procedure for Computing Total Income
(1) First of all ascertain the various incomes which are to be included in total inco: the
basis of residence.

121
(2) These incomes will be computed according to the various sections of the Act una heads
salaries, income from house property, profits and gains of business or profession, ca gains
and income from other sources.
The income of others will also be included u/ss 60 to 65 in the appropriate heads
computing the income under various heads.
(3) Then the effect will be given to the unabsorbed losses and allowances brought for* ar:
from earlier years.
(4) From the gross total income (2 minus 3) deductions allowed under sections 80C t will
be deducted.
(5) The balance (under 4) will be the total income. This will be rounded off as under
Rounding off of Total Income. The amount of total income computed in accordance wi I
provision of the Act shall be rounded off to the nearest multiple of ten rupees. (Sec. 2 -
Chart Showing Computation of Total Income of an Individual
Income as computed under the following heads after set-off of losses :
1. Income from Salaries
2. Income from House Property
3. Profits and Gains of Business or Profession
4. Capital Gains :
(a) Long-term capital gains ............
(b) Short-term capital gains ............
5. Income from other Sources :
(a) Casual incomes (e.g., Lottery,
card game, horse race, betting, etc.) ............
(b) Other incomes ............
Gross Total Income
Less : Deductions under sections 80C to 80U
Total Income Rounded off?................
Note : Deductions under sections 80C to 80U are not available against short-term capital
gains specified in sec ( and long-term capital gains.

122
 COMPUTATION OF TAX LIABILITY OF INDIVIDUALS

Rates of Income Tax

The following are the rates of income tax for the Assessment Year 2019-20: In the case of
every individual or Hindu undivided family or association of persons or body of
individuals :
(a) Individual—Senior citizen (resident in India, who is of the age of 60 years or more but
less than 80 years during the previous year) :
On Rs 3,00,000 Nil
Next on Rs 2,00,000
Next on Rs 5,00,000 2(T
Next—Balance 30r
(b) Individual—Super senior citizen (resident in India, who is of the age of 80 years or
more during the previous year) :
On Rs 5,00,000 Ni
Next on Rs 5,00,000 20
Next—Balance 30
(c) Other individuals, HUF, AOP or BOI :
On Rs 2,50,000 Ni
Next on Rs 2,50,000
Next on Rs 5,00,000 20
Next—Balance 30
Rebate of income tax. In the case of an individual resident in India, whose total income
doe* not exceed Rs 3,50,000, shall be entitled to a deduction from the amount of income
tax payaKr up to Rs 2,500. (Sec. 87A
Surcharge—(a) @ 10% if total income exceeds Rs fifty lakh but does not exceed ? one
cror-(b) @ 15% if total income exceeds Rs one crore.
Marginal relief: (a) where total income exceeds Rs fifty lakh, the total amount payable as
incor tax and surcharge on such income shall not exceed the total amount payable as

123
income tax on the tota. income of Rs fifty lakh by more than the amount of income that
exceeds Rs fifty lakh.
(b) Where the total income exceeds ? one crore, the total amount payable as income tax an
surcharge on such income shall not exceed the total amount payable as income tax on a the
tota income of? one crore by more than the amount of income that exceeds Rs one crore.
Health & Education Cess. On the amount of income tax and surcharge, @ 4% shall be
levit
Rounding off any amount payable and refund due (section 288B). Any amount payai
(tax, interest, penalty, fine, etc.) and the amount of refund due shall be rounded off to the
nearer multiple of ten rupees
Tax on Short-term Capital Gains arising from equity share in a company or unit of
an equity oriented fund (Sec. 111A)
See chapter on 'Capital Gains'.
*• Tax on Long-Term Capital Gains (Sec. 112 & 112A)
See chapter on 'Capital Gains'.
Tax on Winnings from Lotteries, Crossword Puzzles, etc. (Sec. 115BB)
Where the income of an assessee includes any income by way of winnings from any
lottery :r crossword puzzle or race including horse race (not being income from the
activity of owning and maintaining race horses) or card game and other game of any sort
or from gambling or tting of any form or nature whatsoever, the income tax payable shall
be the aggregate of:
(i) on aforesaid income @ 30%, and
(ii) the amount of income tax with which the assessee would have been chargeable had his
total income has been reduced by the amount of income referred to in (i) above.
Surcharge. For surcharge and marginal relief see Ante. Health & Education Cess. On the
amount of income tax and surcharge @ 4%. Tax on dividends received from domestic
companies (Sec. 115BBDA)
Who is liable to pay tax. All resident persons except:
(i) a domestic company;
(ii) a fund or institution or trust or any university or other educational institution or any
rospital or other medical institution mentioned in Sec. 10(23C).

124
(iii) a trust or institution registered under Sec. 12A or 12AA of the Income-Tax Act.
Quantum of dividends declared distributed or paid. In aggregate exceeding Rs ten lakh.
Rate of taxation : (i) On the amount of dividends exceeding Rs ten lakh @ 10%.
(ii) On the balance of total income as per other provisions of the Act. Certain deductions
not allowed. From the amount of dividends, any expenditure or allowance r set-off of
losses shall not be allowed. \otes : 1. Dividends shall not include the amount of dividends
falling in Sec. 2(22)(e).
2. For Surcharge, marginal relief and health & education cess see Rates of Income Tax.
Tax on Income from Transfer of Carbon Credit (w.e.f. the Assessment Year 2018-19)
(Sec. 115BBG)
Who is liable to pay tax. All assessees.
Rate of taxation : (i) Income from transfer of Carbon Credits @ 10%, and (ii) on the
balance of total income as per other provisions of the Act.
Certain deductions not allowed. From such income, any expenditure or allowance shall
not allowed.
Explanation. Carbon Credit can be traded in the market at its prevailing market price.
Sote : For a surcharge, marginal relief and health & education cess see Rates of Income
Tax.
ALTERNATE MINIMUM TAX ON PERSONS OTHER THAN A COMPANY
(Sections 115 JC to 115 JF)
1. Who is liable to pay alternate minimum tax (AMT) Persons other than a company are
liable to pay AMT if:
(i) he has claimed deduction under sections 80IA, 80IAB, 80IAC, 80IB, 80IBA, 80IC,
80IE, SOJJA, 80JJAA, 80LA, 80QQB, 80RRB 10AA and 35AD.
(ii) Income tax payable by him on his total income for a previous year in accordance with
:he provisions of the Income Tax Act is less than the AMT payable for such previous year.
Exception. An individual or a HUF or an AOP or a BOI. (Whether incorporated or not) or
an artificial juridical person shall not be liable to AMT if adjusted total income does not
exceed twenty lakh rupees.

125
2. Tax Liability. Adjusted total income shall be deemed to be the total income. On the
adjusted total income, the assessee shall be liable to pay tax @ 18.5% + Surcharge if any +
Health & Education Cess @ 4%.
3. Computation of adjusted total income . [Sec. 115JC(2 Total income of the person
Add : (a) Deductions claimed from gross total income in respect of certain incomes (under
sections 80-IA, 80 TAB, 80IAC, 80IB, 80IBA, 80IC, 80IE, 80JJA, 80JJAA, 80LA,
80QQB or 80RRB)
(b) Deduction claimed u/s 10AA regarding newly established units in Special Economic
Zones
(c) Deduction claimed u/s 35AD as reduced by the amount of depreciation allowable u/s
32 .
Adjusted Total Income
4. Tax credit in respect of tax paid on adjusted total income (Sec. 115JD Tax credit will
be allowed to the person in subsequent years as under:
(1) The tax credit shall be the difference between the tax paid under AMT and the tax
payable on the total income computed under other provisions of the Act. Suppose t.e
payable on total income is Rs 20,000 and tax has been paid under AMT Rs 50,000. T tax
credit will be allowed Rs 50,000 - 20,000 = Rs 30,000.
(2) The tax credit will be allowed to be carried forward for a maximum of fifteen
assessment years (w.e.f. the Assessment Year 2018-19) succeeding the assessment year in
whicl the credit becomes allowable. Suppose credit is allowable in the Assessment Yea
2018-19, it can be carried forward and set-off up to the Assessment Year 2033-34.
(3) The tax credit will be allowed in the year in which the tax payable on total income is
more than the tax payable under AMT (u/s 115 JC).
(4) The set-off will be allowed to the extent of an amount equal to the difference be twee r.
the tax payable on the total income and the tax payable under AMT (u/s 115JC Suppose
c/f tax credit (the Assessment Year 2018-19) is Rs 40,000. The tax payable it: Assessment
Year 2019-20) on total income is Rs 1,00,000 and tax payable under AMI (u/s 115JC) is
Rs 80,000. Rs 20,000 can be set-off in the Assessment Year 2019-20 and t: assessee will
pay ? 80,000 only.
(5) No interest shall be payable on the tax credit.

126
(6) Where as a result of the assessment, reassessment, the rectification of mistake
settlement, appeal or revision, the amount of tax payable is reduced or increased, t: amount
of tax credit shall also be increased or reduced accordingly.
5. Audit report. Every person who is liable to AMT shall obtain a report in the prescr:
form from C.A. certifying that the adjusted total income and AMT have been computed ii
accordance with the provisions of this chapter.
The person shall furnish such report electronically on or before the due date of filing t b
return of income u/s 139(1).
COMPUTATION OF ASSESSMENT FOR THE ASSESSMENT YEAR 2019-20
The computation of the assessment of an assessee is done in the following manner:
(1) Compute the gross total income of the assessee.
(2) Deduct therefrom the deductions admissible under sections 80C to 80U. The balance; -
is called total income.
(3) The total income is rounded off to the nearest multiple of Rs 10.
(4) Where the assessee is an individual or H.U.F. or a body of individuals or other
association of persons whose total income exceeds exemption limit and the net agric tural
income, if any, exceeds Rs 5,000, the net agricultural income and total income EU

aggregated.
(5) Calculate income tax on the aggregate other income at the specified rates and or. short-
term capital gains specified in section 111A and on long-term capital gains u 112, or u/s
112A, as if such aggregate income were the total income.
(6) Calculate income tax on the net agricultural income as increased by exemption limit, as
if such increased net agricultural income were the total income.
(7) The amount of income tax determined under (6) above will be deducted from the
amount of the income tax determined under (5) above.
(8) The balance of amount of income tax left as per (7) above will be the income tax in
respect of the total income.
(9) Find out the average rate of income tax by dividing the income tax determined under
(8) above by the total income.
(10) Ascertain the amounts included in total income which are exempt from income tax at
the average rate.

127
(11) Calculate the amount of rebate to be granted on the exemptions at the average rate of
income tax (share of a member from an association of persons or body of individuals) and
deduct it from income tax calculated under (8) above.
(12) Add surcharge, if any, and health & education cess on the amount of income tax and
surcharge.
(13) Deduct the following from the amount of tax calculated under No. (12) above :
(i) Tax deducted and collected at the source.
(ii) Advance tax paid.
(iii) Double taxation relief.
(iv) Amount of tax paid under section 140A (Self-assessment).
(14) The balance of amount left after deduction of items given in No. (13) above, shall be
the net tax payable by the assessee or if the aggregate of the amount to be deducted under
item (13) above, exceeds the aggregate amount of tax determined in No. (12) above, the
excess shall be the amount refundable to the assessee.
(15) Along with the amount of net tax payable, the assessee shall have to pay penalties or
fines, if any, imposed on him under the Income Tax Act.
Chart Showing Computation of Tax of an Individual Neither A Senior citizen nor a
Super Senior citizen resident in India (Assessee does not have Agricultural Income)
(A) Tax on income liable to tax at special rates :
(a) Casual income (Lottery, card game, betting, horse race etc.) @ 30% ...........
(b) Short-term capital gains u/s 111A@ 15% ...........
(c) Long-term capital gains u/s 112.
(i) On listed securities excluding units or zero coupon bonds :
Computed without indexing the cost of acquisition @ 10% ...........
(ii) Other LTCG @ 20%
(d) LTCG u/s 112A@10%
(B) Tax on other income (Normal rates):
on first ? 2,50,000 Nil
on next ? 2,50,000 @ 5% ...........
on next ? 5,00,000 @ 20% ...........
on balance @ 30% ........... ...........

128
Add : Surcharge
Add : Health & Education Cess @ 4%
Less : (i) Tax deducted at Source (ii) Tax paid in advance
Rounded off Rs
Chart Showing Computation of Tax of an Individual Neither a Senior citizen nor a
Super Senior Citizen resident in India (Assessee has Agricultural Income)
Total Income
Add : Agricultural Income
Aggregate Income
Tax on Aggregate Income :
(A) Tax on income liable to tax at special rates :
(a) Casual income @ 30%
(b) Tax on STCG u/s 111A@ 15%
(c) Tax on LTCG u/s 112 @ 20%/10%
(d) Tax on LTCG u/s 112A@ 10%
(B) Tax on balance of income
(Aggregate income - income in (A) at normal rates)
Less : Tax on agricultural income + ? 2,50,000 at normal rates
Add : Surcharge
Add : Health & Education Cess @ 4%
Gross Tax
Less : (i) Tax deducted at Source ...........
(ii) Tax paid in advance ........... ™
Net Tax Payable ™.
Rounded off?...........

129
 REBATE AND RELIEF OF TAX

REBATE OF TAX
When in the total income of an assessee such income is included on which tax had already
been paid, then from the amount of tax on total income some deduction is allowed to him.
It is known as a rebate of tax. In this connection the provisions of the Income Tax Act are
as under :
Rebate of tax to a member of an Association of Persons or Body of Individuals
(Sec. 86 and Sec. 110 I
When AOP or BOI has paid tax on its total income at normal rates, the share of member?
in the total income of the AOP or BOI shall be included in the total income of the
members. On such share the member shall be entitled to a rebate of income-tax at an
average rate of tax. Note : When the total income of any member of the AOP or BOI does
not exceed exemption limit but the total income
of AOP or BOI exceeds exemption limit, it is liable to pay tax at normal rates on its total
income.

130
 PREPARATION AND FILING OF RETURN OF INCOME

(A) VOLUNTARY RETURN OF INCOME

(1) Return by an individual, HUF, AOP, BOI or an artificial juridical person [Sec.
139(1)] Every individual, HUF, AOP, BOI or an artificial juridical person shall file the
return on or before the due date, of his total income or the total income of any person (in
respect of which he is assessable), if the income without giving effect to the provisions of
sections 80C to 80U exceeded the maximum amount which is not chargeable to income
tax.
(2) Return by a Company or a Firm
Every company or a firm shall furnish on or before the due date the return in respect of its
income or loss in every previous year.
(3) Return by ordinarily Resident person having assets located outside India
An ordinarily resident person (who is not required to furnish the return otherwise), who at
any time during the previous year (a) holds, as a beneficial owner or otherwise any asset
(including financial interest in any entity) located outside India or has signing authority in
any account located outside India or (b) a beneficiary of an asset (including any financial
interest in any entity) located outside India, shall furnish on or before due date a return in
respect of income or loss for the previous year.
(4) Return on behalf of a Charitable Trust, etc.
If the total income of a charitable or religious trust (without deducting exempted incomes
under sections 11 and 12) exceeds the non-taxable maximum limit, it shall furnish a return
of income for the previous year on or before the due date.
(5) Return on behalf of a Political Party
The Chief Executive Officer of every political party, if the total income of the party
(without deducting exempted incomes under section 13A) exceeds the maximum amount
which is not chargeable to tax, furnish a return of income of the previous year on or before
the due date.
(6) Return by other Persons

131
If the total income of a person (without giving exemption under section 10) exceeds the
maximum amount which is not chargeable to tax, furnish a return of income of the
previous year on or before the due date.
(7) Return of Loss [Sec. 139(3)]
If any person who has sustained a loss in any previous year under the head 'Profits and
Gains of Business or Profession' [Non-speculative business (Sec. 72), speculative business
(Sec. 73), Specified business (Sec. 73A)] or 'Capital Gains' (Sec. 74) or owning and
maintaining race horses (Sec. 74A) and claims that the loss should be carried forward, he
should furnish a return of loss on or before the due date. If the return of loss is not filed up
to due date, the loss cannot be carried forward and set-off.
However, loss from House Property (Sec. 71B), unabsorbed depreciation [Sec. 32(2)],
unabsorbed capital expenses on scientific research (Sec. 35) and unabsorbed capital
expenses on family planning [Sec. 36(l)(ix)] can be carried forward and set-off even the
return has not been filed.
Due Date for filing return
(a) Where the assessee is (i) a company, or (ii) a person (other than a company) whose
accounts are required to be audited or (iii) a working partner of a firm whose accounts are
required to be audited, under this Act or any other law—30th September of the AY;
(b) Assessee who is required to furnish a report from C.A. regarding international
transaction (u/s 92E)—30th November of the A.Y.;
(c) In any other case—31st July of the A.Y.

(B) COMPULSORY RETURN OF INCOME [Sec. 142(1)]

Where any person is assessable either in respect of his income or income of any other
person and he has not furnished the return of income on or before the due date of
furnishing the return [u/s 139(1)] the Assessing Officer may serve a notice on such person
requiring him to furnish the return. Such return should be furnished within the time
allowed in the notice.
Such a person remains liable to pay interest u/s 234A for late furnishing of return from the
due date of furnishing the return till the return is furnished.

132
Forms of Return of Income for the Assessment Year 2019-20 (1) ITR-1 : For
Individual who is ordinarily resident having Income from (i) Salary/Pension, (SAHAJ)
(ii) Income from one House Property, (iii) Income from Other Sources (excluding
winnings from Lottery and Income from Race Horses). Having total income up to Rs 50
lakh.
However, an individual cannot file return in ITR-1 (SAHAJ) in the following cases : Who:
(1) is a director in a company;
(2) has held any unlisted equity shares at any time during the previous year;
(3) has (i) assets (including financial interest in any entity) located outside India; or (ii)
signing authority in any account located outside India; or (iii) has income from any source
outside India.
(4) Who has :
(a) Income from more than one house property; or
(b) Income from business or profession; or
(c) Capital gains; or
(d) Income from winnings from lottery or income from Race horses; or
(e) Income taxable u/s 115BBDA; or
(f) Income taxable u/s 115BBE; or
(g) Agricultural income exceeding Rs 5,000; or
(h) Income to be apportioned u/s 5A.
(5) Who has any claim of loss/deductions/relief/tax credit etc. of the following nature :
(a) any brought forward loss or loss to be carried forward under the head 'Income from
house property';
(b) loss under the head 'Income from other sources';
(c) any claim of relief under section 90 and/or section 91;
(d) any claim of deduction under section 57, other than a deduction under clause (iia)
thereof (relating to family pension); or
(e) any claim of credit of tax deducted at source in the hands of any other person.
(2) ITR-2 : For Individuals/HUFs not eligible to file return in ITR-1 and not having
Income under the head Business or Profession.
(3) ITR-3 : For Individuals/HUFs having income from business or profession.

133
(4) ITR-4 : For individuals or HUFs ordinarily resident or a firm (other than LLP) which
(SUGAM) is resident, whose total income does not exceed f 50 lakh and who has income
from :
(a) Eligible Business (Sec. 44AD) or Eligible Profession (Sec. 44ADA) or for presumptive
income Business of Plying, Hiring or Leasing Goods Carriages (Sec. 44AE); or
(b) Salary/Pension; or
(c) Income from one House Property (excluding cases where loss is brought forward or
loss to be carried forward under this head); or
(d) Income from Other Sources (excluding winning from Lottery and Income from Race
Horses).
However, a person cannot file a return in ITR-4 (SUGAM) in the following cases :
Assessee :
(1) (a) is a director in a company;
(b) has held any unlisted equity shares at any time during the previous year;
(c) has income from any source outside India; or
(d) has (i) assets (including financial interest in any entity) located outside India; or (ii)
signing authority in any account located outside India.
(2) Who has :
(a) Business income is other than specified in Sec. 44AD or Sec. 44ADA or Sec. 44AE or
income from an agency business or income in the nature of commission or brokerage; or
(b) Income from more than one house property; or
(c) Capital Gains; or
(d) Agricultural income exceeding ? 5,000; or
(e) Income from winnings from lottery or income from Race horses; or
(f) Income from speculative business; or
(g) Income to be apportioned u/s 5A; or
(h) Income taxable u/s 115BBDA; or
(i) Deemed incomes u/ss 68, 69, 69A, 69B, 69C or 69D, taxable u/s 115BBE.
(3) Who has any claim of loss/deductions/relief/tax credit etc. of the following nature :
(a) any brought forward loss or loss to be carried forward under any head of income;
(b) loss under the head 'Income from other sources';

134
(c) any claim of relief under section 90, 90A or section 91;
(d) any claim of deduction under section 57, other than a deduction under clause (iia)
thereof (relating to family pension); or
(e) any claim of credit of tax deducted at source in the hands of any other person.
: For persons other than (i) individual, (ii) HUF, (iii) company and (iv) persons filing Form
ITR-7.
: For Companies other than companies claiming an exemption under section 11. : For
persons including companies required to furnish return u/ss 139(4A) or 139(4B) or
139(4C) or 139(4D) or 139(4E) or 139(4F), e.g., for charitable institutions, religious trusts,
political parties and persons claiming exemption under Sec. 10.
»- Preparation of Return Manually
The assessee should choose the return of income keeping in view in which category
(Individual, Firm, Company etc.) he falls and the sources of his income. If he is not
required to file his return electronically, he can prepare his return manually, verify it and
deposit it in the Income Tax Office.
If the assessee is required to file his return electronically, it is suggested that he should fill
the return form manually so that at the time of filling the form on-line, there is no hustle.

MANNERS OF FURNISHING THE RETURN OF INCOME

The return of income shall be furnished by a person mentioned in column (ii) of the Table
below to whom the conditions specified in column (iii) apply, in the manner specified in
column (iv) thereof : [Notification No. SO 1006(E) Dated 30.3.2017 (Rule 12)]
Table
SI. Person Condition Manner of furnishing return of
income
(i) (ii) (iii) (iv)
1. Individual or (a) Accounts are required to be Electronically under digital signa-
Hindu un- audited under section 44AB of ture
divided the Act;
family

135
 (b) An individual resident of (A) Electronically under digital
India and of the age of 80 years signature; or
or more at any time during the (B) Transmitting the data in the
previous year; who furnishes the return electronically under
return in Form No. ITR-1 electronic verification code; or
(SAHAJ) or Form No. ITR-4 (C) Transmitting the data in the
(SUGAM). return electronically and there-
after submitting the verification of
the return in Form ITR-V; or
(D) Paper form.
(c) In any other case (A) Electronically under digital
signature; or
(B) Transmitting the data in the
return electronically under
electronic verification code; or
(C) Transmitting the data in the
return electronically and there-
after submitting the verification of
the return in Form ITR-V.
2. Company In all cases. Electronically under digital
Form ITR-6 signature;
3. A person re- (a) In case of a political party Electronically under digital
quired to fur- signature;
nish the (b) In any other case (A) Electronically under digital
return in signa-
Form ITR-7 ture; or
(B) Transmitting the data in the
return electronically under
electronic verification code; or
(C) Transmitting the data in the
return electronically and there-

136
 after submitting the verification of
the return in Form ITR-V.

4. Firm or (a) Accounts are required to be Electronically under digital signa-

limited liabi- audited under section 44AB of ture;
lity partner- the Act.
ship or any (b) In any other case. (A) Electronically under digital
person (other signature; or
than a person (B) Transmitting the data in the
mentioned in return electronically under
SI. 1 to 3 electronic verification code; or
above) who is (C) Transmitting the data in the
required to return electronically and there-
file return in after submitting the verification of
Form ITR-5 the return in Form ITR-V.

STEPS FOR E-FILING OF INCOME TAX RETURN

1. Visit www.incometaxindiaefiling.gov.in
2. Select the required ITR Form and download Return Preparation Software for the
selected Form.
3. Prepare your return offline at your convenience and follow simple steps to upload your
Return.
4. On successful upload take the print of the acknowledgement form if the Return is
digitally signed or under electronic verification code.
5. In case the Return is not digitally signed, or under electronic verification code, take the
print of ITR-V Form (two copies).
6. Send one copy ITR-V Form duly signed and verified by Ordinary Post or Speed Post
within 120 days from the date of filing of the Return at the following address :
Income Tax Department, CPC Post Bag No. 1, Electronic City Post Office, Bengaluru-
560100 (Karnataka).

137
Facilities provided by the Department for e-filing of I. T. Return :
1. Calculation of tax and interest through Return Preparation Software.
2. View Tax Credit Statement (26AS) of all taxes paid and deducted, without registration.
3. Check processing status of your e-filed Returns online.
4. Get refund through Refund Banker Scheme.
Advantages of e-filing of Return :
1. Convenient and secure online transaction.
2. Available anytime, anywhere.
3. Higher Data accuracy.
4. Faster processing of Returns and Quicker Refunds.
5. E-filing of Return is paperless. It saves trees and environment.
Note : On-line filling of return of income, digital signature and digital verification code,
will be taught in the practical class.

ON-LINE FILLING OF RETURN OF TAX DEDUCTED AT SOURCE

If a person paying the amount (in cash, through banking channel, by crediting in an
account or by any other mode) on which tax is deductible at source, he will deduct tax at
the prescribed rate and pay the balance to the deductee.
Time limit for depositing the sum deducted at source {Rule 30)
Time limit for depositing the sum deducted at source from various categories of payments
are as under:
1. Where the tax deduction is made by or on behalf of the Government:
(i) Where the tax is paid without the production of an income-tax challan—on the same
day.
(ii) Where tax is paid accompanied by an income-tax challan—within seven days from the
end of the month in which the tax is deducted.
2. Other deductors :
(i) Where the income or amount is credited or paid in the month of March—up to 30th
April.

138
(ii) In any other case—within seven days from the end of the month in which the tax is
deducted.
Exceptions: The Assessing Officer may with the approval of the Joint Commissioner
allow the payment of TDS in the following cases quarterly:
Salaries, Interest other than interest on securities, insurance commission, commission or
brokerage (u/ss 192, 194A, 194D, 194H)—7th July, 7th October, 7th January and 30th
April.
The tax deductor shall furnish electronically quarterly statement of deduction of tax in the
following form:
1. In respect of Salary—Form No. 24Q
2. In respect of any other income—Form No. 26Q
3. In respect of the purchase of immovable property (excluding agricultural land)—Chal-
lan-cum Statement in Form No. 26QB. In this case, the amount of TDS shall be paid to the
credit of the Central Government within Thirty days from the end of the month in which
the deduction is made. [Rule 30(2A)]
Due date of furnishing the quarterly statement of TDS :, (Rule 31A)
S. No Quarter ending Due date
1. 30th June 31st July
2. 30th September 31st October
3. 31st December 31st January
4 31st March 31st May
Note : On-line filling of TDS Statement will be taught in the practical class.

139
 ASSESSMENT PROCEDURE
OTHER PROVISIONS REGARDING FILING OF INCOME TAX RETURN >• (1)

Belated Return [Sec. 139(4)]

Any person who has not furnished a return of income within the time allowed to him may
furnish the return for any previous year at any time before the end of the relevant
assessment year or before the completion of the assessment, whichever is earlier.
(2) Revised Return of Income [Sec. 139(5)]
If any person having furnished a return discovers any omission or any wrong statement
therein, he may furnish a revised return at any time before the assessment is completed or
the end of the relevant assessment year, whichever is earlier. Conditions for filing revised
return :
(i) The assessee has filed the return voluntarily [u/s 139(1)] or belated return [u/s 139(4)].
(ii) The omission or wrong statement has not been made deliberately.
(3) Defective Return of Income [Sec. 139(9)]
When the Assessing Officer considers that the return of income furnished by the assessee
is defective, he may intimate the defect to the assessee and give him an opportunity to
rectify the defect within a period of 15 days from the date of such intimation. On an
application by the assessee, the Assessing Officer may extend the period of 15 days. If the
defect is not rectified within the said period of 15 days or further period allowed by the
Assessing Officer, then the return shall be treated as invalid and it will be deemed as if the
assessee had failed to furnish the return. However, where the assessee rectifies the defect
after the expiry of the aforesaid period but before the assessment is made, the Assessing
Officer may condone the delay and treat the return as a valid return.
A return of income shall be regarded as a defective return unless all the following
conditions are fulfilled :
(a) The annexures, statements and columns in the return of income relating to computation
of income chargeable under each head of income, computation of gross total income and
total income has been duly filled in.
(b) The return is accompanied by a Statement showing the computation of tax payable on
the basis of the return.

140
(bb) The return is accompanied by the audit report (section 44AB).
(c) The return is accompanied by proof of the tax, if any, claimed to have been deducted or
collected at source, the advance tax and tax on self-assessment if any, claimed to have
been paid.
However, the return of income shall not be treated as a defective return, where the return
is not accompanied by a proof of tax deducted or collected at source if:
(i) a certificate for TDS or TCS is not furnished to him (u/s 203)/(u/s 206C)
(ii) such a certificate is produced before the Assessing Officer within two years from the
end of the assessment year in which such income is assessable.
(d) Where regular books of account are maintained by the assessee, the return is accom-
panied by the copies of:
(i) manufacturing account, trading account, profit and loss account or income and
expenditure account any similar account and balance sheet;
(ii) in the case of proprietary business or profession, the personal account of the proprietor;
in the case of a firm, an association of persons or body of individuals, personal accounts of
the partners or members; and in the case of a partner or member of a firm, an association
of persons or body of individuals, also his personal account in the firm, an association of
persons or body of individuals.
(e) Where the accounts of the assessee have been audited, the return is accompanied by
copies of the audited profit and loss account and balance sheet and audit report.
(f) Where regular accounts are not maintained by the assessee, the return is accompanied
by a statement indicating (i) the amount of turnover or gross receipts, (ii) gross profit,
expenses and net profits of the business or profession and the basis on which such amounts
have been computed, (iii) disclosing the amounts of total sundry debtors, creditors, stock-
in-trade and cash balance as at the end of the previous year.
Exemption from filing a return of income [Sec. 139(1Q]
The Central Government may, by notification, exempt any class or classes of persons from
the requirement of filing the return of income having regard to such conditions as may be
specified in the notification.
Power of the Board to dispense with furnishing documents, etc. with the return
(Sec. 139C)

141
The Board may make rules providing for a class or classes of persons who may not be
required to furnish documents, statements, receipts, certificates, report of an audit or any
other documents, which are otherwise under any other provisions of this Act, except
section 139D, required to be furnished, along with the return but on demand to be
produced before the Assessing Officer.
Scheme for submission of Returns of Income through Tax Return Preparers (Sec.
139B)
1. For the purpose of enabling any specified class or classes of persons in preparing and
furnishing returns of income, the Board may frame a scheme providing that such persons
may furnish their returns of income through a Tax Return Preparer authorised to act as
such.
2. Every TRP shall assist the persons furnishing the return of income and affix his
signature on such return.
3. (a) 'TRP' means any individual who has been authorised to act as a TRP under the
scheme.
(b) "Specified class or classes of persons" means any person (other than a company or a
person, whose accounts are required to be audited u/s 44AB or under any other law) who
is required to furnish a return of income.
Return by whom to be verified (Sec. 140)
The return under section 139 shall be verified as under :
(a) Individual:
(i) by the individual concerned;
(ii) where the individual is absent from India by some person duly authorised by him in
this behalf;
(iii) where the individual is mentally incapacitated from attending to his affairs, by his
guardian or by any other person competent to act on his behalf; and
(iv) where, for any other reason, it is not possible for the individual to verify the return, by
any person duly authorised by him in this behalf.
(b) Hindu undivided family.
(i) by the Karta,

142
(ii) where the Karta is absent from India or is mentally incapacitated from attending to his
affairs, by any other adult member of such family.
(c) Company. By the managing director thereof, or where for any unavoidable reason such
managing director is not able to verify the return, or where there is no managing director,
by any director thereof.
(d) Firm. By the managing partner thereof, or where for any unavoidable reason such
managing partner is not able to verify the return, or where there is no particular managing
partner by any partner thereof, not being a minor.
(e) Limited liability partnership. By the designated partner thereof, or where for any
unavoidable reason such designated partner is not able to verify the return, or where there
is no designated partner as such, by any partner thereof.
(f) Local authority. By the principal officer thereof.
(g) Political party. By the chief executive officer of such party (e.g., Secretary, etc.).
(h) Any other association. By any member of the association or the principal officer
thereof.
(i) Any other person. By that person or by some person competent to act on his behalf, (j)
If an application of a company has been admitted by the Adjudicating Authority under
the Insolvency and Bankruptcy Code, 2016—By the insolvency professional appointed by
Adjudicating Authority.
PERMANENT ACCOUNT NUMBER (Sec. 139A)
The Income Tax Department issues a permanent account number (PAN) to every tax-
payer borne on its records. The permanent account number is meant to identify the returns,
tax payment challans and the correspondence received from the assessees and link these to
their assessment records to facilitate quick disposal of their refund claims or assessments.
Cases under which PAN is compulsory :
(i) His income exceeds the exemption limit.
(ii) He is liable to pay tax on behalf of other person as a representative assessee.
(iii) If he is carrying on a business or profession and his total sales, turnover or gross
receipts are likely to exceed f 5,00,000 in any financial year.
(iiia) Charitable trust.

143
(iiib) Person being a resident other than an individual, which enters into a financial
transaction of an amount aggregating to ? 2,50,000 or more in a financial year.
(iiic) The managing director, director, partner, trustee, author, founder, Karta, chief execu-
tive officer, principal officer or office bearer of the person mentioned in (iiib), or any
person competent to act on behalf of the person mentioned in (iiib).
(iv) If he is importer or exporter.
(v) If he is an assessee under the Central Excise Rules, 1944.
(vi) If he issues invoices under rule 57AE of the Central Excise Rules, 1944 and he is
registered.
(vii) If he is an assessee under the Service Tax Act.
(viii) If he is an assessee under the Central Sales Tax Act or Value Added Tax Act of a
State or Union Territory.
(ix) If he is entitled to receive any sum or income or amount on which tax is deductible at
source.
Further, the Central Government may, for collecting any information which may be useful
for or relevant to the purposes of the Act, by notification specify any class or classes of
persons who shall apply to the A.O. for allotment of PAN?
Such persons shall apply for allotment of PAN within such time as mentioned in that
notification.
Application for PAN. If he has not been allotted a Permanent Account Number he must
apply for it in Form No. 49A within the prescribed time. The Assessing Officer has also
got power to allot to any other person a Permanent Account Number if tax is payable by
such person.
Quoting PAN. Once a Permanent Account Number has been allotted, such number must
be quoted in all Returns, correspondence with Income Tax Authorities, challans for
payment and in all documents prescribed by the Board. He must intimate the Assessing
Officer about any change in the address, name or nature of business carried on by him.
OTHER PROVISION RELATING TO PAN
(1) Quoting PAN is compulsory in the following transactions : (Rule 114B)
1. Immovable property : (i) Sale/purchase exceeding ? 10 lakh; (ii) Properties valued by
Stamp Valuation Authority at an amount exceeding f 10 lakh.

144
2. Motor vehicle (Other than two wheelers) : All sales/purchases.
3. Time deposit : Deposits with the bank, Co-op. bank, Post Office, Nidhi, NBFC : [(i) Ex-
ceeding f 50,000 or (ii) Deposits aggregating to more than ? 5 lakh during the year].
4. Sale or purchase of securities (other than shares) : Contract for sale/purchase of a value
exceeding ? 1 lakh per transaction.
5. Opening an account (other than time deposit) with a banking company or Co-
operative banks : Basic Savings Bank Deposit Account excluded (no PAN requirement
for opening these accounts);
6. Hotel/restaurant bill(s) at any one time : Cash payment exceeding f 50,000.
7. Cash purchase of bank drafts/pay orders/banker's cheques : Exceeding ? 50,000 on
any one day.
8. Cash deposit with a banking company or co-operative bank : Cash deposit exceeding ?
50,000 in a day
9. Foreign travel: Cash payment in connection with foreign travel or purchase of foreign
currency of an amount exceeding ? 50,000 at any one time (including fare, payment to a
travel agent).
10. Credit card or Debit card : Application to banking company/any other company/in-
stitution/co-operative bank.
11. Mutual fund units : Payment exceeding ? 50,000 for purchase.
12. Opening a Demat account.
13. Purchase or sale of shares of an unlisted company : For an amount exceeding ? 1
lakh per transaction.
14. Debentures/Bonds : Payment exceeding ? 50,000.
15. RBI bonds : Payment exceeding ? 50,000.
16. Life insurance premium : Payment exceeding ? 50,000 in a financial year.
17. Cash cards/prepaid instruments issued under the Payment and Settlement Act: Cash
payment aggregating to more than ? 50,000 in a year.
18. Purchases or sales of goods or services other, than specified in 1 to 17 : Exceeding ?
2 lakh per transaction.

145
If a minor enters into any aforesaid transaction and does not have any income chargeable
to tax, he shall quote PAN of his father or mother or guardian, as the case may be, in the
relevant document.
If a person does not have PAN and enters into any aforesaid transaction, he shall make a
declaration in Form No. 60, giving there in the particulars of such transaction.
The provisions of this Rule shall not apply to the following class or classes of persons :
(1) the Central Government, the State Governments; (ii) the consular offices.
(2) Every person receiving any sum or income or amount from which tax has been
deducted at source shall intimate his PAN to the person responsible for TDS.
(3) Where any sum or income or amount has been paid after TDS, every person deducting
tax shall quote the PAN of the person to whom such sum or income or amount has been
paid by him in the following documents :
(i) the statement issued [u/s 192(2Q] regarding perquisites and profits is lieu of salary;
(ii) all certificates furnished in accordance with the provisions of Sec. 203;
(iii) all return delivered in accordance with the provisions of Sec. 206 to any income-tax
authority;
(iv) all statements prepared and delivered [u/s 200(3)] regarding T.D.S.
(4) Every buyer or licensee or lessee referred to in Sec. 206C will intimate his PAN to the
person collecting tax at source.
(5) Every person collecting tax at source u/s 206C shall quote PAN of every buyer or
licensee or lessee referred to in Sec. 206C in the following documents :
(i) all certificates furnished to the buyers or licensee or lessee in accordance with the
provisions of Sec. 206C;
(ii) all returns delivered in accordance with the provisions of Sec. 206C to any income-tax
authority;
(iii) all statements prepared and delivered (u/s 206C) regarding tax collection at source.
Penalty. If a person, without reasonable cause, fails to apply for the allotment of
Permanent
Account Number within the prescribed time or fails to quote it on the relevant documents,
the Assessing Officer shall impose a penalty of a sum ? 10,000. (Sec. 272B)

146
QUOTING OF AADHAAR NUMBER (Sec. 139AA)
(1) Every person who is eligible to obtain Aadhaar number shall, on or after the 1st day of
October, 2019, quote Aadhaar number : (Notification No. 31/2019, Dated 31.3.2019)
(1) in the application form for allotment of permanent account number, (ii) in the return of
income.
Where the person does not possess the Aadhaar Number, the Enrolment ID of Aadhaar
application form issued to him at the time of enrolment shall be quoted in the application
for permanent account number and in the return of income furnished by him.
(2) Every person who has been allotted permanent account number as on the 1st day of
October, 2019, and who is eligible to obtain Aadhaar number, shall intimate his Aadhaar
number to such authority in such form and manner as may be prescribed, on or before a
date to be notified by the Central Government in the Official Gazette.
In case of failure to intimate the Aadhaar number, the permanent account number allotted
to the person shall be deemed to be invalid and the other provisions of this Act shall apply,
as if the person had not applied for allotment of the permanent account number,
(3) The provisions of this section shall not apply to such person or class or classes of
persons or any State or part of any State, as may be notified by the Central Government in
this behalf, in the Official Gazette.
The quoting of Aadhaar or enrolment ID shall not apply to the following individuals if
they do not possess the Aadhaar or enrolment ID : (1) an individual who is residing in the
States of Assam, Jammu and Kashmir and Meghalaya; (2) an individual who is a non-
resident as per the Income Tax Act, 1961; (3) an individual of the age of 80 years or more
at any time during the previous year; (4) an individual who is not a citizen of India.
(Notification dated 11.5.2017)
Interest for default in furnishing return of income (Sec. 234A)
If the assessee fails to file the return till the due date, he is liable to pay interest for the
following period :
(i) Where a belated return is furnished the period commencing on the date immediately
following the due date and ending on the date of furnishing the return.
(ii) Where no return has been furnished, the interest shall be charged from the due date to
the date of completion of best judgment assessment (u/s 144).

147
Rate of Interest. Simple interest @ 1% for every month or part of a month.
If the return of income is not filed till the due date of filing the return or not filed at all but
the amount payable on self-assessment has been paid before the due date of filing of return
of income interest shall not be charged u/s 234A.
Procedure to be followed in Calculating Interest (Rule 119A)
(a) Where interest is to be calculated on an annual basis, the period for which such interest
is to be calculated shall be rounded off to a whole month or months and for this purpose
any fraction of a month shall be ignored; and the period so rounded off shall be deemed to
be the period in respect of which the interest is to be calculated;
(b) Where the interest is to be calculated for every month or part of a month comprised in
a period, any fraction of a month shall be deemed to be a full month and the interest shall
be so calculated;
(c) The amount of tax, penalty or other sums in respect of which such interest is to be
calculated shall be rounded off to the nearest multiple of one hundred rupees and for this
purpose any fraction of one hundred rupees shall be ignored.

148